Atty. Cesar D. De Asis

August 22, 1991 Atty. Cesar D. De Asis 84 Sarimanok St., Mira-Nila Tandang Sora Avenue Diliman, Quezon City S i r : This refers to your letter dated July 4, 1991 requesting opinion on the queries posed therein. cdlex As stated, on July 17, 1990, your client, PDM Press, Inc., acquired a parcel of land containing an area of 166.05 square meters situated in A. Roces Avenue, Quezon City, from its sister company, Davao A & M Co., Inc. in consideration for the issuance of 1,000 shares with the total par value of P100,000.00. The issuance of said shares was exempted from registration and approved by the Securities and Exchange Commission on August 10, 1990. When the Deed of Conveyance was registered with the Bureau of Internal Revenue for purposes of getting a tax clearance, the BIR assessed the property being transferred at P2,000.00 per square meter, or a total of P332,100.00 as the basis for the assessment of the capital gains tax. Consequently, PDM Press, Inc. had to pay the capital gains tax for the amount of P232,100.00, in excess of the value of the shares of stock stated in the Deed of Conveyance. Based on the aforementioned facts, you would like to request for opinion on the following: 1. Whether PDM Press, Inc. can enter in its books the amount of P232,100.00 as a valuation surplus. 2. If it is so allowed, whether it can declare a stock dividend from said valuation surplus for the purpose of increasing its authorized capital stock. The amount of P232,100.00 cannot be entered in the books as valuation surplus since the covering deed of assignment has already transferred the property at P100,000.00. However, if the valuation of the property is supported by an appraisal report rendered and certified by a licensed real estate appraiser, the excess of appraised value over cost may be recorded in the books as appraisal surplus. However, the same cannot be declared as stock dividend since the same is considered unrealized until the property is sold at the value it was appraised. Such reappraisal, even if apparently justified and accurate for the time being are conjectural and are subject to market fluctuations and therefore are mere anticipatory of future profits and may never be actually realized as an asset of the company. (Fletcher Corp. Vol. 11) Hence, it cannot be a basis for declaration of stock dividend in payment to an increase of capital stock. Such prohibition, however, is not absolute as the Commission allows certain exceptions making revaluation increment or appraisal surplus available for cash and stock dividends. Where a fixed asset is being depreciated based on its appraisal value, and the depreciation on the appraisal increment is charged against operations, the earnings from operations in that period are diminished by the amount of such depreciation. This amount of depreciation, therefore, is actual income shifted to and lodged in another account. Whether such amount is restituted to retained earnings or not is of no consequence. In such event, the portion of increase in the value of fixed asset as a result of revaluation thereof may be declared as dividends, provided the following conditions exist: LexLib 1. That the company has sufficient income from operations from which the depreciation on the appraisal increase was charged; 2. That the company has no deficit at the time the depreciation on the appraisal increase was charged to operations; and 3. That such depreciation on appraisal increase previously charged to operations has not been erased or impaired by subsequent losses; otherwise, only that portion not impaired by subsequent losses is available for dividend. ( SEC letter dated October 2, 1981 addressed to Lourdes Romero ) Please be advised accordingly. Very truly yours, (SGD.) ROSARIO N. LOPEZ Chairman