Request for Exemption from Capital Gains Tax on Sale of Shares of Bulletin Publishing Corp. to U.S. Automotive Co., Inc.

October 17, 1986 BIR RULING NO. 221-86 21 (d) 000-00 221-86 Gentlemen : This refers to your letters dated July 10, 1985 and September 10, 1986 requesting exemption from the capital gains tax on the sale of 154,472 shares of the Bulletin Publishing Corporation made by the Estate of Brig. Gen. Hans M. Menzi in favor of the U.S. Automotive Company, Inc. It appears that the deceased died on June 27, 1984; that on February 1, 1985, the Regional Trial Court of Manila in Special Proceedings No. 84-25244 granted the Motion for Confirmation of the sale of said 154,472 shares of stock of the Bulletin Publishing Corporation registered in the name of the deceased to the U.S. Automotive Company, Inc. which motion was filed by the Special Administrator, Mr. Manuel G. Montecillo; that the shares of stock were sold at their book value of P127.45 per share; that the valuation of the shares at book value is in accordance with the provision in the Articles of Incorporation of the Bulletin Publishing Corporation to the effect that the selling price of the shares shall not be more than the book value thereof based on the balance sheet at the end of the preceding year of the corporation which has been approved by the Board of Directors; that the said shares are not listed and traded in the stock exchange, and that as of June 28, 1985, full payment for the aforementioned sale was received by the Administrator of the Estate and properly deposited with the account of the Estate of Hans M. Menzi which is in custodia legis of the probate court. You contended that the sale is exempt from the capital gains tax because the sole and ultimate beneficiary of the Estate of Brig. Gen. Hans M. Menzi is the Menzi Trust Fund, Inc., a corporation organized for purely scientific purposes which is exempt from the payment of income tax and the filing of the corresponding income tax return under Section 27(e) of the Tax Code; that assuming for the sake of argument that the Menzi Trust Fund, Inc., as sole beneficiary of the estate is tax exempt and the Estate of Hans M. Menzi as a separate and independent taxable entity is subject to income tax nevertheless "the taxable income on the sale of the Bulletin shares would only be the excess of the selling price received by the administrator over the cost basis of the shares in the hands of the Administrator at P127.45 which is exactly the same amount approved by the probate court as the selling price of the shares, it follows that no taxable income was derived by the Estate of Hans M. Menzi from the aforementioned sale." In reply, thereto, I have the honor to inform you that income received by the estates of deceased persons during the period of administration or settlement of the estate or by any kind of property held in trust are subject to income tax imposed on individuals pursuant to Section 54(a) of the Tax Code, as amended. Under Section 34(g) of the Tax Code (now section 21(d) (1) of the Tax Code, as amended by Executive Order No. 37) net capital gains realized during each taxable year from the sale or exchange of shares of stock not traded through a local stock exchange shall be subject to a tax of 10%, if the gain is not over P100,000.00 and 20% if the gain is over P100,000.00. In the case of unlisted shares, the 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. (Revenue Regulations No. 2-82). Such being the case, and since the stocks in question were sold during the period of administration or settlement of the Estate of Brig. Gen. Hans M. Menzi, said Estate is subject to the capital gains tax on the net capital gains, if any, derived from said sale. In this connection, where prior to the settlement of the estate, the executor or administrator sells property of a decedent's estate for more than the appraised value placed upon it at the death of the decedent, the excess is income, taxable to the estate. (Sec. 211, Revenue Regulations No. 2). Moreover, in computing the gain or loss from the sale or other disposition of property acquired by devise, bequest, or inheritance, the basis shall be the fair market price or value of such property at the time of the death of the decedent. (Sec. 139. Ibid ). In short, the net capital gain derived by the estate of a deceased individual subject to capital gains tax consists of the excess of the selling price over the value of property at the time of death. In the instant case, the selling price of the shares of stock is the book value thereof based on the balance sheet at the end of the preceding year of the corporation which has been approved by the Board of Directors. In other words, the selling price of the stocks is the book value thereof based on the balance sheet as of December 31, 1984 which is P127.45 per share. Accordingly, since the deceased died on June 27, 1984 and the book value of the shares as of June 30, 1984 is P123.74, there is therefore a capital gain of P3.71 per share or P573,091.12 (154,472 shares sold) which is subject to the 20% capital gains tax pursuant to Section 21(d) (1) of the Tax Code, as amended by Executive Order No. 37. cdtech Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner of Internal Revenue