Valuation of unlisted shares of stock in estate and donors tax

“The question is whether the Adjusted Net Asset Method is likewise applicable to determine FMV of unlisted shares transferred due to death or donation.”

With the issuance of Revenue Regulations 12-2018 (Rev. Regs. 12-2018), the Bureau of Internal Revenue (BIR) finally clarified the applicable rules in determining the fair market value (FMV) of unlisted shares of stock in computing estate and donor’s tax.

The confusion on the applicable method of valuing unlisted shares arose when then Commissioner Kim-Jacinto Henares issued Revenue Regulations No. 6-2013 (Rev. Regs. 6-2013) on 11 April 2013 which prescribed the “Adjusted Net Asset Method” in valuing shares of stock.

Prior to Rev. Regs. 6-2013, it was a settled rule that the FMV of unlisted shares of stock is based on its book value which follows the following formula: total assets minus total liabilities, as reflected in the corporation’s audited financial statements (AFS). This method of valuation of unlisted shares is prescribed in Revenue Regulations 02-2003 (Rev. Regs.

02-2003), the consolidated BIR rules specifically for computing estate and donor’s tax.

On the other hand, the Adjusted Net Asset Method requires that the value of the assets, as reflected in the corporation’s AFS, be adjusted to reflect the market value of real properties, as determined by an independent appraiser. Considering that most real properties are booked by corporations at cost and the value of real properties usually increases over time, the real property asset valuation of independent appraisers is usually higher than the value of such asset as reported in the AFS. As such, the Adjusted Net Asset Method of Rev. Regs. 6-2013 would increase the value of the unlisted shares and, consequently, would increase the amount of computed taxes, such as capital gains tax (now at 15 percent of the net capital gains on sale of shares).

To illustrate, let us discuss the situation of Corporation X. The assets of Corporation X consist of only one parcel of land. Under its AFS, the value of the parcel of land is P1,000, which is the amount paid for by Corporation X to purchase said property. Assuming the total liability of Corporation X as reported in its AFS is P500, the FMV of Corporation X is P500 under Rev. Regs. 02-2003 which prescribes that the FMV of unlisted shares is equivalent to its book value (total assets less total liabilities).

However, under the Adjusted Net Asset Method of Rev. Regs. 6-2013, the appraised value of the real property owned by Corporation X should be considered in determining the FMV of its shares. Thus, if the independent appraiser determines the current market value of the land increased to P1,500, the assets of Corporation X would be equivalent to the appraised value instead of the amount reflected in its AFS. Consequently, under Rev. Regs. 6-2013, the FMV of Corporation X is P1,000 (adjusted amount of assets less total liabilities). Clearly, the Adjusted Net Asset Method would result in increase in taxes.

However, the question posed by many taxpayers for almost five years is whether the Adjusted Net Asset Method is likewise applicable to determine FMV of unlisted shares transferred due to death or donation.

“Both estate and donor’s tax is fixed at six percent of the value of the net estate or donation.”

Rev. Regs. 6-2013 stated its scope is limited only to provisions of the Tax Code referring to capital gains tax. In fact, the BIR did not identify Rev. Regs. 02-2003 as among the regulations amended by Rev. Regs. 6-2013. In practice, however, some BIR examiners have taken the conservative position and applied the Adjusted Net Asset Method to compute estate and donor’s tax.

Recently, the BIR addressed this confusion by issuing Rev. Regs. 12-2018 which prescribes the latest rules on estate and donor’s taxes. Under this recent regulation, unlisted common shares are valued based on their book value while unlisted preferred shares are valued at par value. Notably, Rev. Regs. 12-2018 merely replicates the relevant provisions on Rev. Regs. 02-03 on the method of valuing unlisted shares.

In fact, the BIR further clarified that, in determining the book value of unlisted shares for estate and tax purposes, appraisal surplus shall not be considered and that it shall be exempt from Rev. Regs. 6-2013. Clearly, the BIR has taken the position that unlisted shares are valued at book value in computing estate and donor’s taxes, instead of applying the Adjusted Net Asset Method.

Additionally, the BIR likewise reiterated the valuation of listed shares prescribed in Rev. Regs. 02-03 which is the arithmetic mean between the highest and lowest quotation at a date nearest the date of death or donation, if none is available on the date of death or donation itself.

On a final note, with the enactment of Republic Act 10963, otherwise known as the Tax Reform for Acceleration and Inclusion, both estate and donor’s tax is fixed at six percent of the value of the net estate or donation. Transfers of shares through death and donation are still not subject to documentary stamp tax.

Hopefully, this issuance will be sufficient to clarify both taxpayers and BIR examiners in computing the proper estate and donor’s taxes.

For comments and questions, please send email to nilo.divina@divinalaw.com