BIR Ruling No. 234-61

July 3, 1961 BIR RULING NO. 234-61 1st Indorsement Referred to the Chief, Income Tax Division, thru the Revenue Operations Executive (Assessment), the docket of the transfer tax case of the estate or the late John William Howells, for appropriate action. The records of the case show that Mr. John Williams Howells died in Manila on December 28, 1958. The executor then filed with this Office the notice of death and estate and inheritance tax returns, wherein the assets left by the deceased were declared to be valued at P319,416.70. As stated in his report by Examiner Villanueva who investigated the case, "the shares of stock listed in the return, with the exception of the Ker & Co., Ltd. stocks, were found correctly stated at fair market value". Mr. Villanueva stated further that as the preferred and ordinary shares of stock of Ker & Co., Ltd. are not listed in the stock exchange, the net book value method of appraising the valuation of the said stocks was used" by him and that as a result thereof, the amount of P107,830.50 as deficiency estate and Inheritance taxes was found due from the estate. The records of the case further show that the executor of the estate objected to the assessment by interposing the defense that the shares of stock of Ker & Co., Ltd. should not be considered, for transfer tax purposes, at book value but instead at par value because the said stocks contain a restrictive clause in which the shareholder or his heirs desiring to dispose of his shares of the Ker & Co., Ltd. must first offer the same to his fellow stockholders or to officers of the issuing company at the face value as shown on the certificate. Pertinent portion of Section 91 of the Tax Code states: "The estate shall be appraised at its fair market value as of the time of death, or as of six months thereafter, at the election of the executor or administrator in the case of the estate tax or the heirs in the case of the inheritance tax . . ." In view of the aforementioned restriction on the decedent's right of ownership, the stocks could not have been sold at the time of his death or as of six months thereafter except to officers or stockholders of the company and only at par value . There was no sale at the time of the death of the decedent nor of six months thereafter, but as stated in the letter dated February 3, 1960 of Ross, Selph and Carrascoso, counsel of Antonio F. Carrascoso, Jr. special administrator of the estate, pursuant to the aforementioned restriction with regard to the sale of shares, the Court of First Instance of Manila, in an Order dated December 28, 1959, which is exactly one year from the death of decedent, granted the Administrator's Petition for the sale of the decedent's shares in the Ker & Co., Ltd. to said company at par value. Said shares were actually bought at par value by the Ker & Co. "on behalf of its officers and employees" and new certificates were immediately issued to the corresponding purchasers as indicated in the certificate dated March 28, 1961 by J.T. del Castillo, Secretary of Ker & Co., Ltd. aisadc "Fair market value" has been defined as "the price at which property would change hands in a transaction between a willing buyer and a willing seller, neither being under compulsion to buy nor sell and both being reasonably informed as to all relevant facts". In the instant case, because of the restrictive clause, regarding the disposition of shares, the fair market value of the shares at the time of the death of the decedent or at any time thereafter is its par value for restrictive agreement repairing the stockholders of his estate to sell stock to the corporation at a certain price are held determinative of value for estate tax purposes. (Est. of Albert E. Salt, 17 TC SE, Worcester County Tr. Co. et al. Exes., (Est. of James Smith) vs. Comm. (1943) 134 F. (2nd) 378, rev.'g and remanding in part (1942) is DTA 337.) In fact, as represented by counsel for taxpayer, the shares of stock in question were actually sold at par value. It is, therefore, requested that the tax liability of the estate be properly adjusted and assessment notices sent to the special administrator within a reasonable time. cdta (SGD.) MELECIO R. DOMINGO Commissioner of Internal Revenue