10% Capital Gains Tax on the Sale of Unlisted Shares

August 27, 1990 BIR RULING NO. 163-90 24 (e) (2) (A) 046-90 163-90 Gentlemen : This refers to your letter dated July 25, 1990 stating that you are a manufacturer of matches and disposable lighters; that you are likewise a manufacturer of flexible packaging materials until August 31, 1989 when your decision to spin-off your Packaging Division was approved by the Board of Investments; that incorporation of said Packaging Division into a new corporation with the registered name of Akerlund & Rausing (Phils.) Inc. was approved by the Securities and Exchange Commission on November 23, 1989; that when you spun-off your Packaging Division, what was done was to transfer the machinery and equipment to the new corporation based on the appraised value of said machinery and equipment amounting to about P145 Million with a book value of about P85 Million; that in exchange for such machinery and equipment amounting to about P145 Million, Akerlund and Rausing (Phils.) Inc. issued shares of stock in favor of Phimco Industries, Inc.; and that Phimco Industries, Inc. has now decided to dispose off the unlisted shares of Akerlund & Rausing (Phils.) Inc. aisadc In connection therewith, you now request confirmation of your opinion to the effect that gains realized from your sale of your unlisted shares in Akerlund and Rausing (Phils.) Inc. shall be subject to the 20% capital gains tax pursuant 24 (e)(2)(A) of the Tax Code, as amended. In reply thereto, I have the honor to inform you that your opinion is hereby confirmed. Section 24 (e)(2)(A) of the Tax Code, as amended, provides, viz: "(2) Capital gains from sales of shares of stock. Capital gains realized from the sale, exchange or disposition of shares of stocks in any domestic corporation shall be taxed as follows: "(A) Net capital gains as defined in Section 33 (a)(2) realized during each taxable year from sale or exchange or other disposition of shares of stock not traded through a local stock exchange: Not over P100,000 10% Over P100,000 20% "(B) . . . Such being the case, capital gains realized from your sale of your unlisted shares in Akerlund and Rausing (Phils.) Inc. shall be subject to 10% if the capital gain is not over P100,000 and 20% if the capital gain is over P100,000. Moreover, for purposes of determining the selling price in the case of sale, transfer or exchange of shares not listed in the stock exchange, the same shall be valued at their book value nearest the valuation date. The book value of the unlisted shares of stock shall be prima facie considered as their fair market value. However, if there have been previous bonafide sales/exchanges of the unlisted shares of stock, the price at which these shares exchanged hands should be taken/considered as its fair market value. (Sec. 6 (a)(3), Revenue Regulations No. 2-82) Furthermore, under Section 6(b) of Revenue Regulations No. 2-82, the cost basis for determining the capital gains or losses shall be the basis as determined in accordance with the provisions of Section 35 (now Section 34) of the Tax Code, as amended, and its implementing regulations applied in the following manner: cdt (1) If the stocks can be identified, then the cost shall be the actual purchase price plus all costs of acquisition such as commission, documentary tax, transfer fees, etc. (2) If the stocks cannot be properly identified, then the cost to be assigned shall be computed on the basis of the first-in, first-out (FIFO) method. However, (3) If books of accounts are maintained by the seller where every transaction of a particular stock is recorded, then the moving average method shall be applied rather than the first-in, first-out (FIFO) method. (4) In all cases, stock dividend received must be assigned a corresponding cost by allocating the original cost of acquisition to the total number of shares composed of the original shareholdings plus the number of shares of stocks received as stock dividend. In other words, the gain or loss from a sale or other disposition of property is measured by the difference between the amount realized and the adjusted basis of the property disposed of. (par. 1703, p. 425, Chap. 17, (1989) U.S. Master Tax Guide) Thus, the difference between your selling price per share and the original acquisition cost or adjusted cost basis of said share shall constitute the net capital gain subject to the capital gains tax imposed under Section 24 (e)(2)(A) of the Tax Code, as amended. This ruling is without prejudice to this Office looking into the tax consequence of the spin-off of your Packaging Division. cdta Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner