Internal Revenue Case of the Estate of the Late Orestes Hermosura

November 3, 1959 BIR RULING NO. 568-59 1st Indorsement Returned to the Regional Director, B.I.R. Regional District No. 3, Manila, the docket of the internal revenue case of the estate of the late Orestes Hermosura. prcd It appears that Orestes Hermosura died on September 21, 1955 in the City of Manila leaving real and personal properties to his heirs, Benita Martinez Vda. de Hermosura and Ciriaca Hermosura Angela. On the basis of the returns filed by the heirs, the amounts of P14,941.33 as estate tax and P25,639.95 as inheritance tax were assessed and paid for. Upon reinvestigation, it was discovered that the 3,715 shares of stock of the decedent in the Gomba and Hermosura, Inc. were returned only at par value of P100.00 and not at the fair market value of P118.25 per share as determined by the examiner concerned. The aforesaid valuation of the 3,715 shares made by the examiner was arrived at after including the surplus arising from the appraisal of the fixed assets and the free surplus to the book or par value of said shares of stock. The question, therefore, to be resolved in this case is whether or not, in the determination of the value of shares of stock for purposes of the estate and inheritance taxes, the par value and not the fair market value thereof should be considered. In accordance with section 91 of the Tax Code, the estate shall be appraised at its fair market value at 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. The value of stocks and bonds is the fair market value per share or bond in the applicable valuation date. If there had been no sale of stock during the valuation date nor during a reasonable length of time thereafter, and as in this case, the other facts shown by the records do not afford fair and proper criteria, we may look into the fair market value of the assets underlying the stocks to ascertain the value thereof and consider the fair market value of stock as equivalent to the fair market value of its underlying assets. It is to be noted, in this connection, that there is a distinction between value for estate tax purposes and value for income tax purposes, for while in the determination of the latter, the assets must be sold to ascertain if there was gain or profit, in the determination of the former, gain need not be ascertained. It is enough that there is value. The claim of the taxpayer, therefore, that the capital surplus acquired by revaluation of the landholdings cannot be considered as part of the assets because said lands have not been sold is not tenable. Likewise, to exclude the free surplus from the assets in the determination of the fair market value of the shares of stock for the reason that it is the policy of the corporation not to declare dividend unless there remains an amount equivalent to not less than 5% of the paid-up capital in the surplus account is not tenable, for the true fact is that there is available surplus for future distribution which necessarily increases the value of the shares of stock. He is, therefore, advised to be guided accordingly. As prescription for the assessment of the deficiency taxes is fast approaching, he is further advised to expedite action hereon and to cause the taxpayers to accomplish the required waiver. cdtech (SGD.) MELECIO R. DOMINGO Commissioner of Internal Revenue