Exemption of "Appraisal Surplus" from Income Tax

June 28, 1988 BIR RULING NO. 276-88 21 & 24 000-00 276-88 Gentlemen : This refers to your letter dated April 11, 1988 stating that you are a government agency attached with the Department of Trade and Industry; that one of your main functions is to issue licenses to construction contractors, after a thorough evaluation of their financial qualifications; that in the course of your evaluation of financial statements, one of the accounts that you sometime encounter is "appraisal surplus" which represents the increment in value of properties subjected to appraisal by an independent appraiser; and that said account is being reported as a separate item in the stockholders equity portion of the audited balance sheet. In connection therewith, you now request a ruling as to whether said "appraisal surplus" is subject to income tax. In reply, please be informed that appraisal surplus is defined as the excess of estimated depreciated replacement cost, or other basis of measurement, of fixed or other assets over their cost or book value. It is given expression as a credit on books of accounts when appraisal values are recorded and thus may find its way into financial statements. It is sometimes referred to as an unrealized profit. Under the laws of most states in the United States, appraisal surplus is generally not available for cash or property dividends to stockholders; at the time of its creation it is essentially a valuation account rather than retained income. (A Dictionary for Accountants, Eric L. Kahler, fifth edition, p. 31). Moreover, a taxpayer is deemed to have received items of gross income which have been credited to or set apart for him without restriction. On the other hand, appreciation in value of property is not even an accrual of income to a taxpayer prior to the realization of such appreciation through sale or conversion of the property. (Sec. 38, Revenue Regulations No. 2). Such being the case, "appraisal surplus" account which is being reported as a separate item in the stockholders equity portion of audited balance sheet is not subject to income tax. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner