BIR Ruling [UN-402-95]

November 15, 1995 BIR RULING [UN-402-95] Sycip Gorres Velayo & Co. 6760 Ayala Avenue Makati City Attention: Atty . E . C . Alcantara Gentlemen : This refers to your letter dated August 28, 1995 representing that your client, Sta. Cruz Island Corporation (SCIC) is an owner of Equities Land, Inc. (ELI) shares of stock; and that ELI shares are not listed shares of stock. cdtech You now request in effect for a ruling to confirm your opinion that the net capital gain from the disposition of the ELI shares shall be computed as follows: 1. Since the ELI shares of stock are not listed in the stock exchange the fair market value of these shares shall be based on their book value nearest the valuation date; and 2. The accumulated and current equity, as well as the appraisal surplus, in ELI'S net earnings are not income and therefore, should not be included in the determination of the book value of the ELI shares for purposes of the capital gains tax on the sale or other disposition of said shares. In reply, please be informed that for purposes of determining the selling price in the case of sale, transfer or exchange of shares not listed in the stock exchange, the same shall be valued at their book value nearest the valuation date. The book value of the unlisted shares of stock shall be prima facie considered as their fair market value. However, 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. (Sec. 6(a)(3), Revenue Regulations No. 2-82) Thus, your opinion that since ELI shares of stock are not listed in the stock exchange, the fair market value of these shares shall be based on their book value nearest the valuation date, is hereby confirmed. [BIR Ruling No. 046-90 dated March 29, 1980.] Moreover, appreciation in value of property is not 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, the "accumulated and current equity in the investees net earnings" i.e., the imputation but without dividend declaration of the earnings of the subsidiary or sister corporation to the parent or stockholder corporation, and the "share in revaluation increment" (appraisal surplus) i.e., increase in value of property because of reappraisal thereof at current value without sale or exchange are not considered as income and should not therefore be included in the determination of the book value of the ELI shares for purposes of the capital gains tax on the sale or other disposition of said shares. Thus, your opinion that the accumulated and current equity, as well as the appraisal surplus, in ELI's net earnings are not income and therefore, should not be included in the determination of the book value of the ELI shares for purposes of the capital gains tax on the sale or other disposition of said shares is also hereby confirmed. [Pangilinan et. al vs. Commissioner of Internal Revenue, C.T.A. Case No. 4828 promulgated August 23, 1994; BIR Ruling No. 117-89 dated June 5, 1989.] cdt Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)