Valuation of Shares of Stocks for Transfer Tax Purposes

March 15, 1982 REVENUE AUDIT MEMORANDUM ORDER NO. 1-82 SUBJECT : Valuation of Shares of Stocks for Transfer Tax Purposes TO : All Internal Revenue Officers and Others Concerned To provide consistency of action and efficiency in administering the transfer of shares of stock, this Revenue Audit Memorandum is hereby promulgated to provide the guidelines in the valuation of shares of stocks that are transferred by inheritance or by donation. aisa dc A. Kinds of Shares of Stocks There are three kinds of shares of stocks that present problems of valuation for purposes of transfer taxes, to wit: 1. Common shares of stock which are quoted or traded in the stock market. 2. Unlisted stock or those which are not quoted or traded in the stock market. 3. Preferred shares of stocks. B. Basis of Valuation of Shares of Stocks 1. Stocks quoted or traded in the stock market In the case of shares of stocks which are quoted or traded in the stock exchange or in an over-the-counter market or otherwise, the following rules of valuation shall be observed: a) The selling price shall be used where there are sales made on the valuation date. The mean between the highest and lowest selling prices on valuation dates shall be the fair market value per share. b) If there were no sales on the valuation date, but there were sales on dates within a reasonable period both before and after the valuation date, the fair market value is determined by taking the weighted average of the mean between the highest and lowest sales on the nearest trading date before and the nearest trading date after the valuation date. The average is to be weighted inversely by the respective number of trading days between the selling dates and the valuation date. The reasonable period of valuation must not exceed six months before or after the valuation date. For example: The valuation date is January 15, Friday. Sales of stock occurred on January 13, Wednesday or two trading days before valuation date at P10.00 and on Wednesday, January 20, three days after valuation date at P15.00. The fair market value of the shares to be taken is P12.00 computed as follows: cd (3 x 10) + (2 + 15) = 30 + 30 = 60 = P12.00 ________________ _________ ______ 5 5 5 c) If actual sales of the shares are not available during a reasonable period beginning before and ending after the valuation date, the fair market value may be determined by taking the mean between the bonafide bid and asked prices on the valuation date, or if none, by taking the weighted average of the mean between the bonafide bid and asked prices on the nearest trading date before and after the valuation date within a reasonable period in accordance with the formula in the preceding paragraph. d) If there are no sales or bonafide bid and asked prices available on a date within a reasonable period before the valuation date, but such prices are available on a date within a reasonable period after the valuation date, or vice versa, then the mean between the highest and lowest available sale prices or bid and asked prices nearest the valuation date may be taken as the value of the shares. e) If it is established that the selling or bid and asked prices as provided in the foregoing paragraphs, do not reflect the fair market value thereof, some reasonable modification of that basis or other relevant facts and element of value may be considered. In certain exceptional cases, the size of the block of the stock to be valued in relation to the number of shares changing hands in sales may affect adversely the fair market value of the stocks to be valued. 2. Unlisted stocks or stocks not quoted or traded in the stock market In the valuation of unlisted stocks or stocks of closely held corporations, the following rules shall be observed: a) In general, the unlisted 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. cd b) In case the shares are valued on a basis lower than their book values, a justification for the deviation from the book value, together with the evidences in support thereof, should be submitted. The following factors are considered relevant in the valuation of shares of stock of closed corporations. 1) The nature of the business and the financial history of the enterprise, from the date of incorporation 2) The economic outlook in general and the business condition and outcome of the specific industry in particular 3) The financial condition of the business 4) The earning capacity of the company 5) The dividend paying capacity 6) Goodwill 7) Sales of stocks and size of the block of stock to be valued 8) Market price of stocks of corporations engaged in the same or similar line of business to be valued 9) Existence of corporate debts in favor of the family of the principal shareholder 10) Restrictive agreements impairing the alienability of the stock 11) Investments in business or property maintained at a deficit 12) Dividend arrearages 13) Voting rights of stockholders 14) Difficulty in liquidating the assets If such lower fair market valuation is not clearly established and documented, the book value of the unlisted shares of stock shall be adopted. 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/s. 3. Preferred shares of stocks shall always be valued at par All concerned are enjoined to strictly observe the foregoing guidelines in the valuation of shares of stocks for transfer tax purposes. RUBEN B. ANCHETA Acting Commissioner