Computation of Capital Gains Tax

September 7, 1989 BIR RULING NO. 193-89 21 (d) (1) 000-00 193-89 Gentlemen : This refers to your letter dated June 21, 1988 stating that your company is at present owned by a majority of its employees, its policy is to keep its shares of stock within the group employed by the company; that its shares are not traded in any stock exchange houses; that when shares of stock of the company have been acquired from past employees, these shares are then offered to current employees to buy at par value, P100.00 per preferred share and P5.00 per ordinary share with the exception of the one on 19th July 1973 wherein the ordinary share was sold at P7.50 per share; that upon the employee's death or upon any termination or conclusion of his employment in the company, the company is obligated to buy back and the employee-stockholder is obligated to sell back his accumulated share holdings including any stock dividend thereon at par value, i.e., P100.00 per preferred share and P5.00 per ordinary share; that upon repurchase of the shares from the employee-stockholder, the company computes the net capital gain (proceeds of sale less acquisition cost) derived by the employee-stockholder from his sale of the Ker shares back to the company. In connection therewith, you now request a ruling as to whether in the computation of capital gains tax arising from the aforementioned sale of shares of stock the tax base should be its book value or par value. cdtech In reply thereto, I have the honor to inform you that pursuant to Section 6 (a)(3) of Revenue Regulations No. 2-82 in determining the tax base in case of sale, transfer or exchange of shares not listed in the stock exchange, the following rules shall be observed in determining the selling price: 1) In general, the unlisted shares shall be valued at their book value nearest the valuation date. The book value of these unlisted shares of stock shall be prima facie considered as their fair market value. 2) In case the shares are valued on a basis lower than their book values, a justification for the deviation from the book value, together with the evidence in support thereof, should be submitted. If such lower fair market valuation is not clearly established and documented, the book value of the unlisted shares of stock shall be adopted. 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/s. Such being the case, and since you have clearly established by documentary evidence presented your justification for the deviation of valuation of the aforementioned shares of stock sold from their book value to their par value, this Office is of the opinion as it hereby holds that in computing the capital gains tax arising from the aforementioned sale of shares of stock the selling price of said shares should be based on their par value instead of their book value. cdt Very truly yours, (SGD.) JOSE U. ONG Commissioner