TAXATION II

TRANSFER TAXATION
JUSTIFICATIONS ON THE IMPOSITION OF ESTATE TAX

Transfer Taxation: taxes imposed upon the gratuitous disposition of properties 1. Benefit Received Theory
 State can collect taxes because of the services rendered by government in the distribution of
What are gratuitous disposition of properties? the estate
 Donation  For the performance of services and other benefits that accrue to the estate and the heirs,
 Succession the State can collect taxes.

Is it the same as capital gains tax? 2. State Partnership Theory

 NO. Capital gains tax is not a transfer tax, as it is imposed on sale of real properties.  State is a passive and silent partner in the accumulation of the properties by the estate.
Sale is not an onerous disposition of properties.
3. Ability to pay theory
Types of Transfer Taxation:  The receipt of inheritance, which is in the nature of unearned wealth, places assets in the
1. Estate Tax: imposed upon the privilege of transferring property gratuitously or the hands of the heirs, thereby creating an ability to pay the tax and thus to contribute to
privilege to succeed of receive property at or after the death of the decedent governmental income.
 It is in the nature of an excise tax: a tax on privilege
4. Redistribution of wealth
2. Donor’s Tax: imposed upon gratuitous transfer of property during lifetime of transferor  The receipt of inheritance is a contributing factor to the inequalities in wealth and
income. The imposition of tax reduces the property received by the successor, thus
Note: At the present time, we do not have donee’s tax and inheritance tax. Donee’s Tax is imposed helping bring about a more equitable economic environment
to the privilege of receiving gift. Inheritance Tax is imposed on the privilege of receiving
inheritance. 5. Back tax
 Taxes than should have been imposed by the government for the services it had
Kinds of Transfer Subject to Transfer Taxes: rendered.
1. Succession  Taxes that were not imposed upon the accumulation of the property.
2. Donation
 Intervivos: effective during the lifetime of the transferor Difference between Back Tax and State Partnership Theory:
 Mortis Causa: effective upon or after death of the transferor.  Tax imposed in state partnership theory is in the nature of a privilege tax. The tax
imposed in the back tax theory is in the nature of a back tax (should have been imposed
but was not)
ESTATE TAXATION
GENERAL PRINCIPLES
Estate: mass of property left by the decedent  Death is not a mode of transferring ownership. Death is the generating source of power
Extension of the personality of the decedent; c to impose and collect the tax.
 Pursuant to Art 777 of Civil Code, the transfer of property occurs at the time of death by
Estate Tax: tax on the right to transmit property at death and on certain transfers which are made operation of law.
by the statute the equivalent of testamentary dispositions
When will estate tax accrue?
NATURE OF ESTATE TAX  At the time of death.
When will the obligation to pay accrue?
 Excise or privilege tax  Within 6 months from the date of death.
 The object of estate tax is to tax the shifting of economic benefits and enjoyment of What is the governing law?
property from the dead to the living  Law effective at the time of death.

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 GROSS ESTATE  Intangible personal properties of non-resident decedent located within the Philippines
shall not be subject to tax if the domiciliary country of non-resident decedent grants an
Section 85, NIRC absolute exemption from transfer taxes in favor of Filipino citizens not residing therein.
 All property, real or personal, tangible or intangible, wherever situated existing at the
time of death Elements:
1. Property: Intangible personal properties
Will a co-owned property form part of the gross estate? 2. Location: Within the Philippines
3. Ownership of the estate: By non-resident decedent
Example: 4. Domiciliary country: of the non-resident decedent  grants FULL exemption

X and Y co-own a parcel of land. If this land has fair market value (FMV) of 5m at X’s death, will  If the domiciliary country grants exemption to Filipino citizens not residing therein,
you include the entire amount of 5m in his gross estate? Philippine shall likewise not impose tax on these personal intangible properties of the
 NO. Include the value of the interest of X, which is only 2.5M. non-resident decedent

NOTE:
The story will be different if X and Y are married and that the property is conjugal or community. Illustration
In this case, the entire value of 5M will be included. In a case, the domiciliary country of non-resident decedent grants exemption from estate
tax but not from inheritance tax. The Philippines is imposing estate tax on the property of the non-
Kinds of Decedents: resident decedent.
1. Resident Decedent
 Resident or Citizen of the Philippines. The exemption granted to Filipino citizens must be in the nature of an absolute tax
 Resident Citizen, Non-resident Citizen, Resident Alien exemption. It must cover both inheritance tax and estate tax.
 They are taxed for properties wherever situated
In this case, the domiciliary country of the non-resident decedent was merely a partial
2. Non-Resident Decedents exemption. Hence, reciprocity rule does not apply. His properties shall be subject to tax.
 Decedents who are not residents or citizens of the Philippines
 Non-resident Aliens Inclusions on the Gross Estate
 Taxed for properties located in the Philippines. 1. Decedents interest
 Interests not yet possessed at the time of death but the decedent already acquires right
NOTE: compare this with income taxation. over such property at the time of death
In income taxation: only resident citizens are taxed worldwide. All others are taxed as to income
sourced from within the Philippines. Illustration:
In estate taxation: Resident citizens, Non-resident citizens, and Resident aliens are taxed X owns shares of stocks. The corporation will distribute portion of its earnings in the nature of
worldwide. Non-resident aliens are taxed on properties located within the Philippines. dividends.

Mobilia sequitur persona/Mobilia sequuntur persona There are two dates to consider: the date of declaration and the date of distribution.
 The situs of personal properties is the domicile of the owner The date of declaration is when it has been resolved that dividends shall be distributed. The date
 Movables follow the domicile of owner of distribution may happen in a later time.

 Shall not apply to the following: Date of declaration: December 26 2016

Date of distribution: February 14 2017
1. Shares of stocks of domestic corporations
2. Shares of stock of foreign where atleast 85% of business operations is located in the X died Feb 1 2017. Since there was already a declaration of dividends prior to X’s death, his shares
Philippines. shall form part of gross estate. He already has a right over it at the time of death.
3. Shares, obligations or bonds that accrued business situs in the Philippines
4. Franchises exercised in the Philippines At the date of declaration, shareholders already have the right over the shares. Moreover, tax will
5. Shares and rights in any partnership established in the Philippines accrue at the date of declaration.
 All these are considered as properties within the Philippines
2. Transfer in contemplation of death
Reciprocity Rule  The thought of death is the controlling motive why the decedent transferred the
 an exception to the rule that non-resident decedents are subject to tax as to properties property.
within the Philippines  The death induces the decedent to transfer the prop during his lifetime to avoid the
payment of estate tax.

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General Rule: The thought of Death is controlling motive.
Exceptions: If premium payment is given by employer in favor of the employee, it depends on beneficiary.
 If beneficiary is employee, it forms part of the taxable income of employee.
a. Transfer with retention of interest  If beneficiary is the employer, it does not form part of the taxable income of the
 Shall be classified under transfer in contemplation of death. employee.
 There would be retention of possession or enjoyment or the power to
designate who may enjoy the property Will the premium payment be a deductible expense in the part of the employer?
 If beneficiary is employee, yes
b. Donacion mortis causa  If beneficiary is employer, no.
 Donation take effects after death
Now to estate tax:
c. Transfer with reversionary interest Proceeds of life insurance are not part of gross income regardless of the beneficiary.
 Decedent shall have the power to reacquire any right that had been
transferred Will it form part of the Gross Estate?
 It depends on the designation of beneficiary.
3. Revocable Transfer
 Any transfer made by the decedent during his lifetime where the decedent expressly If revocable, the decedent has control over the beneficiary. The proceeds of life insurance shall
reserved the right to alter, amend, revoke or terminate. form part of the gross estate.
 Depends on the power vested upon the seller or the decedent Power to alter the If irrevocable, the proceeds shall not form part of the gross estate
provision of contract, revoke or relinquish any right of the buyer Except:
 Even if there is failure of the seller to give notice to buyer, it will be considered as if the  Beneficiary is himself, his estate, or administrator or executor in their official
power to alter, amend, relinquish or revoke has been exercised. capacity.
 Even if there was a stipulated period when the revocation shall be exercised and the
period already lapsed without the transferor revoking the transfer, it will be considered What if designation is silent?
as if the power to alter, amend, relinquish or revoke has been exercised.  The presumption is that it is revocable

Common denominator between transfers in contemplation of death and revocable The following proceeds are excluded from gross estate:
transfer: decedent has control
a. Accident insurance proceeds
b. Group insurance taken out by the company for its employees
4. Property passing under GPA c. Proceeds from GSIS or SSS policies

Power of Appointment: right to designate the person/s who shall enjoy or possess certain property 6. Prior interest
from the estate of a prior decedent  Interest accruing prior to the death of decedent

General Power of Appointment: authorizes the donee with the power to appoint any person he 7. Transfers for insufficient consideration
pleases, including himself, his spouse, his estate, his executor/administrator and his creditor thus  Transfer with consideration in money or money's worth but is not a bona fide sale for an
having full dominion over the property as though he owned it. adequate and full consideration
 Only applies if transfer is after death.
Illustration:  If during lifetime of the transferor, it is subject not to estate tax but to donor
A transferred property to B with a general power of appointment. B can appoint himself, or he can tax.
appoint C to enjoy A’s property.  The amount shall be equivalent to the definite fair market value of the property at the
time of death and the consideration
Since GPA is given, B can appoint anyone who can enjoy the properties of A. Properties will be
included in the gross estate of A. Reason why congress included this provision
 To run after tax payers who had evaded their taxes during their lifetime.
Special Power of Appointment: Donee can only appoint among a restricted or designated class of  Simulated sale: gross selling price is undervalued.
persons other than himself.  This will never apply to sale of real property classified as Capital Asset under Section
24d
5. Proceeds of life insurance
 Must be taken out by the decedent upon his own life.

Recall in income tax:

Life insurance proceeds are excluded from income tax.

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Exclusions from gross estate If celebrated in 1986 (conjugal partnership would apply)

1. Exclusive property of surviving spouse 2m (Reynold’s property)

 Effectivity of Family Code: August 3 1988 5m (Community property)
Absolute community property regime applies if spouses do not have marriage settlement 7m
agreement.

 Absolute Community Property Why is it important to know what comprises conjugal or community property and exclusive
The community of property shall consist of all the property owned by the property?
spouse at the time of the celebration of the marriage or acquired thereafter.  Share of surviving spouse is 50% of the conjugal or community property and not
including the exclusive property.
Properties excluded from community property
a. Property acquired during the marriage by gratuitous title by either spouse, and the
fruits as well as the income thereof, if any, unless it is expressly provided by the donor, (ii) Anton acquired property before marriage in the amount of 5M. Ina acquired property in the
testator or grantor that they shall form part of the community property; amount of 2M. During existence of marriage, they accumulated property amounting to 10M.
b. Property for personal and exclusive use of either spouse.
 However, jewelry shall form part of the community property; Anton accumulated property worth 1M.
c. Property acquired before the marriage by either spouse who has legitimate descendants Ina inherited 3M.
by a former marriage, and the fruits as well as the income, if any, of such property;
d. Property redeemed using exclusive properties or its income. Anton died.

 Conjugal Partnership of Gains What shall form part the gross estate of Anton?
The husband and wife place in a common fund the proceeds, products, fruits and income Assume that marriage is celebrated after effectivity of family code. Thus, community
from their separate properties and those acquired by either or both spouses through their efforts or property is the property regime.
by chance, and, upon dissolution of the marriage or of the partnership, the net gains or
benefits obtained by either or both spouses shall be divided equally between them, unless Community:
otherwise agreed in the marriage settlements. 5m (Anton’s property before marriage)
1m (Anton’s accumulated property during marriage)
Exclusive properties of spouses: 10m (Community property during marriage)
a. That which is brought to the marriage as his or her own; 2m (Ina’s property before marriage)
b. That which each acquires during the marriage by gratuitous title 18m
c. That which is acquired by right of redemption, by barter or by exchange with property
belonging to only one of the spouses; and  50% is share of surviving spouse with the presumption that there are no ordinary
d. That which is purchased with exclusive money of the wife or of the husband deductions.

Illustrations: Quiz reminder: have a good grip on the rules of conjugal and community property.

(i) Yanne and Reynolds are married in 2014

Yanne was already a lawyer. She had accumulated property worth 10M. 2. Merger of usufruct and the owner of the naked title
Reynolds, also a lawyer, accumulated 2m worth of property.
After marriage, they accumulated property worth 5M. Usufructuary: person who has the right of enjoying the use and the fruits of the property belonging
to another
Reynolds died first.
Owner of Naked Title: person vested with the ownership or title of the property.
During marriage, Yanne inherited property with FMV of 5M.
Illustration:

What comprises the Gross Estate of Reynolds? The transfer of naked title from A to B is in written in the will of A. In the said will, A also gives
the right to use the property to C. He also manifested the intention to transfer the right to use to
2m (Reynold’s property) B if C dies.
5m (Community property)
10m (Accumulated property of Yanne before marriage)  The transfer from A to B is subject to estate tax.
17m  If C dies, property will transfer to B. In this case, no estate tax will be imposed anymore.
The transfer from C to B is a transfer still included in the first transfer.

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 (1) Incurred during Burial or Interment
3. Transmission or delivery of inheritance or legacy by the fiduciary heir to fideicommissary Must be incurred up the date of interment
 Relationship between fiduciary and fideicommissary shall be one degree. (2) The deduction shall be limited to the actual amount of the expense or 5% of the gross estate,
whichever is lower, but not to exceed 200k.
Illustration:
C is the son of B. Rr 2-2003: enumeration of deductions under funeral expenses
 Even telecommunication costs are deductible.
A transfer to B the title to A’s property. In case B dies, it now goes to c.  Mourning apparel (of the unmarried minor children, and of the spouse)
 All these expenses must be substantiated by receipts of documents
 The transfer from A to B is subject to estate tax
 Transfer from B to C is no longer subject to estate tax. This is already included in the b. Judicial expenses
first transfer tax.  Expenses in relation to:
 Inventory taking of assets
4. Transmission from the first heir, legatee or donee in favor of another beneficiary in  Administration of the assets
accordance with the desire of the predecessor.  Payment of debts of the estate
 Similar to the above rules, except that the relationship between the first heir, legatee or  Distribution of the estate among the heirs
donee and the other beneficiary need not be one degree.
 It must be incurred during the settlement of the state but not beyond the last day
5. Transfer to social welfare cultural and charitable institution prescribed by law or extension thereof for the filing of the estate tax return.
Requirement: not more than 30% should be used for administrative purposes.
Last day of filing of estate tax return: 6 months from date of death
6. Reciprocity Rule Extension: 30 days
 This is applied if estate involves intangible personal property owned by nonresident
citizen and the property is located in the Philippines, and the domiciliary country of the What if settlement of estate is extrajudicial in nature?
nonresident decedent grants an absolute exception in favor of Filipino citizens not  Notarial fees are covered. This is also used for the settlement of the estate.
residing therein.
 Attorney's fees for the protection of the interest of the heirs are not included.
If the expense is for the interest of the heirs and not to the settlement of estate, it is not deductible.
NET ESTATE AND DEDUCTIONS
CIR VS. PAJONAR
Computation of Net Estae
The notarial fee paid for the extrajudicial settlement is clearly a deductible expense
Gross estate since such settlement effected a distribution of Pedro Pajonar's estate to his lawful
Less Ordinary Deductions (Expenses, Loses, Indebtedness, Taxes, Transfer from heirs. Similarly, the attorney's fees paid to PNB for acting as the guardian of Pedro
Public use, RA 4017, Vanishing Deduction Pajonar's property during his lifetime should also be considered as a deductible
Net Estate Before Share of Surviving Spouse administration expense. PNB provided a detailed accounting of decedent's property
Less Share of Surviving Spouse and gave advice as to the proper settlement of the latter's estate, acts which
Net Estate After Share of Surviving Spouse contributed towards the collection of decedent's assets and the subsequent settlement
Less Special Deductions (Family home, standard deduction, medical expense of the estate.
NET ESTATE
Judicial expenses are expenses of administration. Administration expenses, as an
Ordinary Deductions allowable deduction from the gross estate of the decedent for purposes of arriving at
the value of the net estate, have been construed by the federal and state courts of the
1. Expenses United States to include all expenses "essential to the collection of the assets, payment
of debts or the distribution of the property to the persons entitled to it. In other words,
 Funeral Expenses and Judicial Expenses the expenses must be essential to the proper settlement of the estate. Expenditures
Medical expense is a special deduction. It is not an ordinary deduction. incurred for the individual benefit of the heirs, devisees or legatees are not deductible.

Why is it important to know if a deduction is ordinary or special?

 A non-resident decedent cannot avail of special deductions. Only resident decedents can
avail of such.

a. Funeral expense
Requisites:

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 2. Loss  This asset is considered a deduction since it cannot be collected anymore for the
Requisites: failure of the insolvent person to pay the estate.
a. In the nature of a casualty loss  In income taxation, this is the called bad debt expense.
Casualty loss: If loss arose from theft, robbery, embezzlement, and other casual sudden  Another requirement: To be deductible item, it must first form part of the gross
occurrences estate.
b. Not compensated by insurance
c. Not claimed as deduction for income tax purposes.
d. Must have been incurred than the last day for the payment of the estate tax. Illustration:
 Last day of payment of estate tax: 6 months from date of death
The decedent has claims against his cousin equal to 100k.
3. Indebtedness The cousin’s asset is 20k. His liability is 100k.
Requisites:
a. Valid and legally enforceable obligation With this information, we can readily presume that the only liability of the cousin is his debt to the
b. Existing at the time of death decedent.
c. Reasonable in amount
d. Contracted in good faith How much shall be included in the Gross Estate of the decedent?
 The entire 100k— receivable from the cousin.

RR 2-2003 How much shall be claimed as a Deduction?

 Indebtedness or claims against the estate must not be in the nature of a funeral or  80k. This is the only indebtedness of cousin since the 20k can already be paid through
judicial expense. the remaining assets of the cousin.

Illustration: Unpaid Mortgage

(i) A owes B 1M, which is due in the year 2001. Bar Question:
A died 2015. The estate is claiming for a deduction of 10M representing an unpaid mortgage. The BIR
disallowed since the administrator of the estate did not include fair market value as part of the
Is the debt deductible? gross estate.
 No. The obligation has already prescribed. The claim must be valid and legally
enforceable. Rule on the disallowance.

(ii) What if it was due in 2015.  The disallowance is proper. If the deduction is in the nature of unpaid mortgage, an
A died in 2016. additional requisite is that the fair market value must first form part of gross estate.
B condoned obligation of A. Otherwise, it is not a deduction against the estate.

Is the debt deductible? Accomodation Loan

 YES. 1M is still considered as existing obligation at time of A’s death. The condonation is
a post-death development which is immaterial.
What if the debt was condoned before the death of A?
 It is no longer deductible. At the time of death of A, the obligation no longer exists.
A, the deceased, obtains a loan from B but proceeds will be delivered to C.
Between A and B, A is the debtor while B is the creditor.
Can admin of A’s estate deduct the amount of loan from the gross estate?

Types of Indebtedness:  YES.

a. Claims against the estate (payable)
 The estate is the debtor
 There can be an unpaid mortgage such that the obligation is secured by a property.
 If the claims against the estate is in the nature of an unpaid mortgage, there is an
additional requisite of deductibility: The fair market value of the property mortgage
must be included as part of the gross estate, otherwise it cannot be deducted.
 If C does not pay, B can file case against A since C is not a party in the loan agreement
(eventhough he is actually the one to receive the proceeds).
 Obligation is considered a deduction from gross estate.
Additional requisite: the receivable from the accommodated party must be included as part of the
gross estate. His receivable from C is considered an asset in his part.

b. Claims against insolvent persons (receivable) If the amount of accommodated loan is not part of Gross Estate of the deceased, the proceeds of
 The estate is the creditor. The insolvent is the debtor accommodation loan is not treated as deduction from gross estate.
 It is an asset of the estate since it is a collective/receivable

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Illustration: 6. Amount Received under RA 4917
 Retirement benefits can also be a deduction,
X and Y owns a property. X and Y secured obligation in amount of 2M. To secure this loan, they Requirement: amount must be included as part of the gross estate.
executed a real estate mortgage over the property worth 5M.
7. Vanishing deduction
X died without the loan being paid. Purpose: to reduce the harshness of taxation

Admin of estate of X paid 2M to the creditor. Requisites:

a. Second decedent dies within 5 years from the date of death of the transferor or from the
How much is the amount of gross estate assuming X has cash of 3M in the bank? date of gift of the donor.
 The first transfer may be a donation or succession
3M b. Estate tax or donor’s tax should have been paid
2.5M (Since X and Y are co-owners, only half of the 5M is considered the interest of X) c. Property is located in the Philippine
5.5M d. No vanishing deduction was claimed on the first transfer
e. Property is included in the gross estate or gross gifts of the first transferor
How much can be claimed a deduction? f. Property is identified as the one coming from the donor or the prior decedent
 His interest on the unpaid mortgage = 1M
 This contemplates two transfers that occurred within a period of 5 years. The first
It does not matter that the administrator of the estate paid the 2m after X’s death. Post-death transfer could be done through succession or donation. The second transfer should be
developments are not material. through succession.
 There is no vanishing deduction in donor’s tax. It is only applicable on estate tax.
4. Unpaid taxes
Requisites: 2012 Bar Exam
a. Taxes are unpaid at the time of death Jose is the son of Pedro and Asunta. They were travelling to Baguio when they met an accident in
b. Taxes must have accrued before the death of the decedent NLEX.

Illustrations: Jose died first. Hours after Jose’s death, Asunta died.
(i) X died in June. Before June, the incomes earned shall be subjected to tax, to be paid by X.
Asunta and Jose have properties. Some are conjugal while other are exclusive.
If X died in June without having paid his taxes, this amount is considered an unpaid tax, which Jose’s property was purely exclusive equal to 1.2M.
could be claimed as a deduction.
There are two transfers involved here:
What about the estate tax? Can it be deducted? 1st transfer – Jose to Asunta and Pedro
 No. Estate tax is accrued after death. Hence non-deductible. 2nd transfer – Asunta to Pedro

(ii) A transferred property to himself (A) , B and C. A died. His share was transferred to A1 (his
heir). The problem is that when he transferred the properties prior to his death, he merely issued
the title without paying the transfer tax.
The transfer tax was paid after his death.
Can estate of Asunta avail of vanishing deduction?
 Requisite no. 2 (letter b) is the problem here. Was the estate tax or donor’s tax paid?
Note that Jose’s estate may be exempt from estate tax. A standard deduction of 1M can be
deducted from his gross estate without the requirement of substantiation.

Can the transfer tax be claimed as a deduction? 1,200,000

 YES. The tax accrued before A’s death even if it was unpaid at the time of his death. Less 1,000,000 (Standard Deduction)
What is material is that the tax accrued before his death even if the payment of such 200,000
comes after the death.  Net estate in amount of 200k or less is exempt from tax.

Suggested Answers:
5. Transfer for public use
Requisites: VP: There can be vanishing deduction because filing of return is considered payment of tax. The
a. Transfer must be for the use if the government or its political subdivision administrator of the estate of Jose can still file for the estate tax return within 6 months from
b. Transfer must take effect upon death death. Even if the estate is exempt from tax, the filing of return is deemed as payment of tax.
c. Property must be for public use
d. Transfer must be testamentary in character. Atty Tin: There can be no availment of vanishing deduction because the main reason of the grant
of such deduction is to reduce the harshness of taxation. If the estate is exempt from tax, there is

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no purpose to be achieved. Vanishing Deduction is an ordinary deduction. Thus, the principle of Limitation: Fair market value of the property or the decedent’s interest, whichever is lower, not
Strictissimi Juris shall be applied. The grant of deduction is construed against the taxpayer. exceeding 1M.

Illustration:
Concepts Property is a community property and family home worth 1.5M
 Value taken of property previously taxed: It is the lower amount between the fair market FMV of the property: 1.5M
value during the first transfer and the fair market value during the second transfer.
 Initial basis: difference between the value of property previously taxed and the paid Decedents interest: 50% (since it is a community property) or 750,000
mortgage Decedent’s interest is lower. Hence, family home deduction is 750,000
 Final basis: deducting the paid mortgage the expenses, loses, indebtedness, taxes and
transfer for public use (ELIT plus T) based on the percentage of the initial basis that If family home is exclusive property of decedent
bears over the value of the Gross Estate of the present decedent from the value of the FMV: 1.5M
properly previously taxed Decedent’s interest: 1.5M
Limitation is that family home should not be exceeding 1M. Hence, family home deduction is 1M.
Vanishing Deduction is based on time lapse between the two transfers

Time Lapse Percentage of Deduction

Within 1 year 100% 3. Medical Expenses
More than 1 year to 2 years 80% Requisites:
More than 2 years to 3 years 60% a. Must be duly substantiated with receipts
More than 3 year to 4 years 40% b. Must have been incurred within 1year before death
More than 4 years to 5 years 20% c. Amount does not exceed 500k

Valuation: fair market value at the time of death both for real or personal properties.
Illustration:
 Exception: shares of stocks
Donation from A to B was on January 1 2000
 Valuation in shares of stocks would depend if the stocks are listed in stock
A died on May 5 2001
exchange or not
B died on May 5 2004

Jan 1 2000 is the first mode of transfer, which is through a donation/gift. It is not the right of  Listed in stock exchange
 Arithmetic mean bet highest and lower quotation at a date nearest the date of death
succession in 2001 that is the mode of transfer.
or at the date of death
The time lapse between January 2000 and the death in 2004 is more than 4 years  so percentage
of deduction is 20% Example:
Highest quotation at time of death: 100
Lowest quotation: 80
8. Share of Surviving Spouse
Arithmetic mean: 90
 Constitutes 50% of the community property after deducting all ordinary deductions
 Valuation: 90 pesos per share
SPECIAL DEDUCTIONS
 If not listed in stock exchange
 Depends on the type of shares
1. Standard deduction
 No required substantiation.
Unlisted preferred shares: valuation is equivalent to par value of the share
 The deduction is equal to 1M provided that the decedent is a a resident decedent
Unlisted common shares: valuation is equivalent to the book value of the share
2. Family Home
TAX CREDIT
Requisites:
 deduction from the tax liability.
a. Must be the dwelling house of the decedent
b. Decedent must secure certification from Punong Barangay that he resides in such barangay
In income taxation, tax payments to foreign country can be considered as a tax credit. If the
c. There must only be one family home
taxpayer did not indicate in its return that it avails of tax credit, it will already be considered a tax
d. Defendant must be husband, wife, or head of the family
deduction.
e. Fair market value of family home must be included as part of gross estate

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In estate taxation, foreign tax payments can only be used as a tax credit. No provision indicates
that lack of signifying of intention would automatically make it a tax deduction.
Limitation: net estate outside the Philippines that bears over the worldwide gross estate
Net Estate Outside based on Philippine Estate Tax Due
Worldwide Gross Estate
 If administrator did not indicate the properties sourced from outside the Philippines, he
cannot deduct ELIT. But the administrator can still deduct Transfer from public use,
Vanishing deduction and Share of surviving spouse (TVS) since these are not dependent
on the ratio PGE over WGE.
ADMINISTRATIVE REQUIREMENTS

Who can avail of Tax Credits? Section 84 of Tax Code

Tax base of the estate tax is the net estate.
In income taxation: resident citizens
In estate taxation: non-resident decedents If the value of the net estate is between 0-200k: exempt from tax
Lowest rate is 5%  Highest rate is 25%
DEDUCTIONS THAT A NONRESIDENT DECEDENT CAN AVAIL OF
1. Expenses, loses, indebtedness, taxes, transfer for public use, vanishing deductions,
shares of surviving spouse (ELIT TVS) DOCUMENTS TO BE FILED:
2. With respect to expenses, loses, indebtedness, taxes (ELIT), such ELIT can only be  Notice of death
deducted based on the percentage of the Philippine Gross Estate that bears over the  Estate tax return
worldwide gross estate  Statement of a certified public accountant

Example:
Document Gross Estate Exceeds Due Date
Judicial expenses: 100k Notice of Death 20k 2 months
Funeral expense: 50k from the date of death; or
Medical expense: 400k from the date when the
Claims against estate: 500k administrator or executor
TOTAL: 1,050,000 has been qualified
Estate Tax Return 200k; or 6 months from date of death
The decedent is nonresident. What deductions can he claim? includes a registered or wherein 1 month is equivalent to
registrable property 30 days
 Judicial expense 100k regardless of the amount.
 Funeral expense 50k Statement of Certified Public 2M 6 months from date of death
 Medical expense? Accountant Extension: 30 days
(No; it is a special deduction which
a non-resident decedent cannot caim)
 Claims against estate 500k
TOTAL: 650k
Failure to file a Notice of Death:
 Compromise Penalty (1k)
Can the estate avail of this total amount as the deduction from the gross estate?
 No. It is subject to a limitation. The limitation shall be based on the percentage of
Statement of a certified public account must contain:
Philippine Gross Estate that bears over Worldwide Gross Estate.
Itemized asset
Itemized deduction
Assume that 40% of gross estate was sourced from the Philippines. Hence, only 40% of the gross
Estate tax due
estate that had been sourced from the Philippines can be subject of deduction. This is because only
the properties located within the Philippine can be taxed in the first place.
PLACE OF FILING OF THE RETURN
3rd requisite of deductibility: Gross estate sourced from outside the Philippines must be declared
 At the place where the decedent resides at the time of death
in the return.
If certification of death indicates that decedent died in Baguio, [resumption is that he died in his
Even if the law says that property outside the Philippines cannot be taxed if the decedent is non-
residence. But if you prove with documents that he resides in Ilocos Sur, then you can file it in
resident, his estate tax return shall still include the properties located outside the Philippines.
Ilocos Sur
These properties will not be taxed; but they are required to be indicated in the return so that the
BIR can compute the ratio of the Philippine Gross Estate over the Worldwide Gross Estate.

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Note: If you don’t comply with the proper place of filing, the tax would be subject to a 25%
surcharge.
What if the decedent has no legal residence in the Philippines? Where is place of filing?
 RR 2-2003: Filing of estate tax return depends on whether or not the decedent has
administrator
 If yes, it must be filed at the place where the administrator or executor is
registered.
If admin or executor is not registered, then file at place of his residence
 If no, file in the office of commissioner of internal revenue
PAYMENT
 at time of filing of return, which is 6 months from death
If this is not complied with, the estate is subject to
 20% interest per annum
 25% surcharge
Can it be extended?
If estate is under judicial settlement: payment can be extended up to 5 years
If under extrajudicial settlement: payment can be extended up to 2 years
 There must be application of extension of time to file the return and pay the tax
 Application of extension is filed at revenue district office where the estate is required to
file the return.
If application is granted, the commission has option to require the posting of a bond not
exceeding double the amount of tax.
LIABILITIES
Who is primarily liable?
 The executor or administrator
 The heir or beneficiary has subsidiary liability for the payment of the tax which his
distributive share bears to the value of the total net estate
Illustration:
Net Distributable Estate: 500k
Surviving heirs are the Spouse and 4 LCDs.
Under intestate succession, they will equally divide the estate among themselves. They receive
100k per person.
What if tax liability is 100k? Can it be collected from the surviving spouse alone?
 Yes. The Government has the option either to collect from all heirs up to the extent of his
share or to collect from one heir alone.
 Surviving spouse can be liable to pay the entire tax liability but subject to her right of
reimbursement from all other heirs,
 Condition: Extent of liability of the heir shall not exceed his distribute share.
What if liability is 700k?
 The state cannot collect the entire tax liability from one heir alone.
MARCOS II vs. CA
Nature of the Process of Estate Tax Collection
The assessment of an inheritance tax does not directly involve the administration of a
decedent's estate, although it may be viewed as an incident to the complete settlement of an
estate, and, under some statutes, it is made the duty of the probate court to make the amount of
the inheritance tax a part of the final decree of distribution of the estate. It is not against the
property of decedent, nor is it a claim against the estate as such, but it is against the interest or
property right which the heir, legatee, devisee, etc., has in the property formerly held by
decedent.
Enforcement and Collection of Estate Tax: Executive in Nature
The enforcement and collection of estate tax, is executive in character, as the
legislature has seen it fit to ascribe this task to the Bureau of Internal Revenue.
The Approval of the Probate Court is not a requirement sine qua non for the collection of estate
taxes
The approval of the court, sitting in probate, or as a settlement tribunal over the
deceased is not a mandatory requirement in the collection of estate taxes There is nothing in
the Tax Code, and in the pertinent remedial laws that implies the necessity of the probate or
estate settlement court's approval of the state's claim for estate taxes, before the same can be
enforced and collected.
On the contrary, under Section 87 of the NIRC, it is the probate or settlement court
which is bidden not to authorize the executor or judicial administrator of the decedent's estate
to deliver any distributive share to any party interested in the estate, unless it is shown a
Certification by the Commissioner of Internal Revenue that the estate taxes have been paid.
CIR vs. Pineda
16 heirs involved. Each heir received 2500 worth of inheritance.
BIR Final Assessment of Tax Liability: 760
Manuel Pineda alleges that he shall only be liable to his proportionate share out of the 760.
The Government has two ways of collecting the tax in question.
1. One, by going after all the heirs and collecting from each one of them the amount of
the tax proportionate to the inheritance received.
2. Another remedy, pursuant to the lien created by Section 315 of the Tax Code upon all
property and rights to property belonging to the taxpayer for unpaid income tax, is by
subjecting said property of the estate which is in the hands of an heir or transferee to
the payment of the tax due, the estate. This second remedy is the very avenue the
Government took in this case to collect the tax. The Bureau of Internal Revenue
should be given, in instances like the case at bar, the necessary discretion to avail
itself of the most expeditious way to collect the tax as may be envisioned in the
particular provision of the Tax Code above quoted, because taxes are the lifeblood of
government and their prompt and certain availability is an imperious need. And as
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 afore-stated in this case the suit seeks to achieve only one objective: payment of the
tax. The adjustment of the respective shares due to the heirs from the inheritance, as Therefore, the claims existing at the time of death are significant to, and should be made the
lessened by the tax, is left to await the suit for contribution by the heir from whom the basis of, the determination of allowable deductions.
Government recovered said tax.

GABRIEL vs. CA
LORENZO vs. POSADAS
Whether probate court can order the payment of taxes to the heirs
When inheritance tax accrues The probate court can rightfully take cognizance of the unpaid taxes of the estate of the
 From the moment of death of the decedent. deceased; if the estate is found liable, the probate court has the discretion to order the payment
 Successional rights are transmitted on the death of decedent. of the said taxes.

The date of payment of tax is dictated under the law. It is not the same with the date of accrual
of the tax, which is the date of death.

When should the valuation of the estate be done as basis of the inheritance tax?
 Upon the death of the decedent
 Principle of date of death valuation. Any post-death developments will be immaterial.
GIFT TAXATION

Is the net value of the estate tax subject to deduction of the compensation being claimed by the NATURE OF GIFT TAX
trustee?  Excise tax: the subject matter is the privilege of transferring a property gratuitously
 NO. during lifetime of transferor
 The compensation of a trustee, earned, not in the administration of the estate, but in
CONCEPT OF GIFTS
the management thereof for the benefit of the legatees or devises, does not come
(Section 98)
properly within the class or reason for exempting administration expenses.
 To determine whether deductible: determine “who will benefit?”
Two Types:
 If it would be in favor of the heirs, not deductible.
1. Direct Gifts
Trust expense: benefit is to the heirs rather than the estate.
 Presence of animus donandi: donative intent.
What is the governing law?
Requisites for a taxable donation:
 ACT 3031 is the governing law as it is the law effective at the time of death.
a. Capacity of the donor
b. Intent to donate
c. Delivery of gift
DIZON vs. CTA  Under RR 2-2003, it is not only necessary that a gift be perfected; it must also be
completed.
Whether the actual claims of th creditors may be fully allowed as deductions from the gross d. Acceptance
estate of Jose despite the fact that the said claims were reduced or condoned through  It is an elementary principle that before a donation can be valid, it is required that
compromise agreements entered into by the Estate with its creditors the gift be accepted. Without this, gift is not perfected.
We express our agreement with the date-of-death valuation rule. Problems:
(i) A gift was given by a wife to a husband amounting to 1M.
First. There is no law, nor do we discern any legislative intent in our tax laws, which disregards
the date-of-death valuation principle and particularly provides that post-death developments Is the gift taxable?
must be considered in determining the net value of the estate. It bears emphasis that tax  NO. The requisites presuppose that the gift must be a valid gift.
burdens are not to be imposed, nor presumed to be imposed, beyond what the statute expressly
and clearly imports, tax statutes being construed strictissimi juris against the government. Any Take into consideration the validity of gifts under civil code. The following are restrictions under
doubt on whether a person, article or activity is taxable is generally resolved against taxation. the Civil Code:
o Gift to paramour: void
Second. Such construction finds relevance and consistency in our Rules on Special Proceedings o Gift to husband and wife: prohibited
wherein the term "claims" required to be presented against a decedent's estate is generally o Gift involving real property: must be in a public instrument
construed to mean debts or demands of a pecuniary nature which could have been enforced
against the deceased in his lifetime, or liability contracted by the deceased before his death. (ii) In a donation contract, A was forced to sign.

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  Subject to Donor’s Tax
Is the gift taxable?
 YES. What is involved here is merely a vice of consent, which makes the contract Bar Question:
voidable. A voidable contract is considered valid until annulled. Such contract being
valid, it is subject to donor’s tax. X died leaving a house and lot worth 2M. After his death, the surviving spouse renounced all her
 Void gifts are the ones which you cannot subject to gift tax. interest over the property in favor of her 4 children.

Would the renunciation be subject to donor's tax?

(iii) Your boyfriend gave you 5k as a gift. He wrote a love letter informing you about this gift.  Partly.

Is it taxable? X’s property is worth 2M. 1M of this is the interest of X while the other 1M pertains to the interest
 YES. It is subject to donor’s tax. of Y, the Surviving Spouse.
 Under the Civil Code, donations worth 5k or more shall be made in writing. In this case,
the donation was made in writing (not necessarily in a public instrument). X’s interest of 1M is to be divided to 5 Heirs. 1/5 belongs to the Surviving Spouse, equivalent to
200k. She renounces this 200k in favor of her children. She is actually donating her entire interest
What is the tax rate? of 200k.
 30% if in favor of a stranger
 This donation is not subject to tax.
2. Indirect Gifts
 Have no donative intent The other 1M constitutes the Surviving Spouse’s own interest which she also donates to her
children. This is not her distributive share so the renunciation rules would not apply.
CONDONATION
Mode of Condonation Tax Implication  This donation may be subject to tax.
By pure generosity Donor’s Tax
Remuneratory donation Income Tax FACTORS AFFECTING LIABILITY FOR GIFT TAXES
Obligation of a stockholder Declaration of Dividends 
condoned by the corporation Final Withholding Tax 1. Relationship of donor and donee
 If relatives: tax rates would be based on schedular tax table ranging from 2% to 15%.
 If strangers: tax rate would be fixed 30%.
TRANSFER FOR INSUFFICIENT CONSIDERATION
 Transfer for consideration in money or money’s worth but is not a bona fide sale Who are relatives within contemplation of donor taxation?
 The difference between selling price and fair market value will be subject to estate tax or a. Spouses
donors tax depending when transfer takes effect b. Ascendants
c. Descendants
If at the time of death of decedent: subject to estate tax d. Brothers
If during lifetime of the transferor: subject to donor’s tax. e. Sisters
f. Relatives within 4th civil degree of consanguinity
 This concept does not include sales under sec 24d: sale of real property classified as (SADBroS4c)
capital asset subject to capital gains tax
Note: it does not include relative in affinity
WAIVER
 Through a particular document not denominated as deed of donation, the transferor Bar Question:
relinquishes right in favor of another individual Husband and wife donated 400k in favor of daughter (d) and daughter's husband (dh)
 It is still considered as a gift; therefore subject to donors tax
What is the tax implication of the transaction/s?
RENUNCIATION
 Husband and wife are considered as separate donors. Thus there are two donors in this
2 Types: problem. Husband donated 200 to d and dh. Wife donated 200 also to d and dh.
1. General Renunciation: An heir renounces his distributive share in favor of all other  If the donation to a relative is 100k or less, it is exempt from tax. In this case, D receives
remaining heirs 100k from Husband and 100k from Wife. Since these are separate donations and not
 Not subject to Donor’s Tax cumulative, the two donations are exempt from tax.
 As to the donations received by DH, the tax rate of 30% shall be used as the donor and
2. Specific Renunciation: Renunciation of distributive share of inheritance in favor of one or the donee are not relatives of each other. They are mere in-laws.
some but not all of the heirs

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 Husband Wife  Computation is cumulation. The 100k donation in January was donated on the same
D: 100 DH: 100 D: 100 DH: 100 taxable year. In totality, the donation is already 200, so the second donation is already
Not subject to tax Subject to tax (30%) Not subject to tax Subject to tax (30%) subject to tax.

 However, any tax payments made in previous donation could be used as tax credit

DEDUCTIONS OR EXEMPTIONS Splitting of donations: option not to donate entire gift during the same taxable year
(Sec 101 of Tax Code)
In the example above, X can split the donation. He can donate 100k in 2016 and the other half in
1. Dowry 2017. The second donation will be exempt because it covers another taxable period.

Requisites: TAX TREATMENT OF POLITICAL CONTRIBUTIONS

a. Donee must be the child whether legitimate or illegitimate
b. Donor must be a resident donor  Exempt, provided that there is compliance with reportorial requirements under the
Resident donor: a resident or a citizen of the Philippines. Omnibus Election Code
c. Gift must be given in celebration of marriage.
d. Gift shall be given before marriage or 1 year after marriage.
*** Apply the 1 year period only if the gift is given after marriage ABELLO vs. CIR
e. Amount shall not exceed 10k per donor.
Three elements for a transfer to be a gift:
Problems 1. Decrease in the patrimony of the donor
(i)H and W donate 420k to D and DH who are getting married. 2. Increase in the patrimony of the donee
3. Animus donandi or donative intent
What is the best mode of disposition of the gift?
H to D: 100 (so that it will be exempt from tax) Donative intent is a creature of the mind. It cannot be perceived except by the material and
H to DH: 110 tangible acts which manifest its presence. This being the case, donative intent is presumed
present when one gives a part of ones patrimony to another without consideration.
W to D: 100 (exempt from tax)
W to DH: 110 Second, donative intent is not negated when the person donating has other intentions, motives
or purposes which do not contradict donative intent. This Court is not convinced that since the
(ii) Kiko is a muslim. purpose of the contribution was to help elect a candidate, there was no donative intent.
Kiko and A were married in 2010 Petitioners’ contribution of money without any material consideration evinces animus donandi.
Kiko and B were married in 2011 The fact that their purpose for donating was to aid in the election of the donee does not negate
Kiko and C were married in 2012 the presence of donative intent.

H and W donates to Kiko and A: exempt
Donation to Kiko and B: also exempt. These are different weddings. Deduction has not been
previously availed of since it is a different marriage.
2. Donations in favor of national government, political subdivisions and GOCCS
Condition: Must be for public purpose
3. In favor of Social Welfare Institutions
Condition: Not more than 30% should be used for administrative purpose.
VALUATION
 FMV at the time of donation
Manner how to compute tax liability: Cumulative basis
Problem:
X donated 100k to his daughter in January 2016 – exempt
In June 2016: X donated 100k again to his daughter since the latter is getting married – Taxable
By virtue of RA 7166: Political contributions are considered gifts that are not subject to donor’s
tax.
Requirement: The contribution must be properly reported to COMELEC.
RR 8-2009
 Mandates political parties or candidates to withhold creditable withholding tax from the
income payments made to suppliers, if such income payment were sourced from political
contributions
 Failure to comply shall make the political candidate party liable as a withholding agent.
Illustration:
Rodney is running for Congressman. He received 100k to purchase t-shirts for his campaign.
He shall be required to withhold taxes from the income payments to be made to the suppliers of t-
shirt.
If not, BIR will run after Rodney for the creditable withholding tax he failed to withhold. Failure to
comply will still not make the contribution taxable.

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Problem:
2013 RR: Commissioner mentioned that unused and unreturned political contributions shall be
subject to income tax on the part of the recipient (political candidate)

Is this a valid RR?

 NO
 Using the case of Abello, political contributions are in the nature of gifts.

If gifts are given to an individual, should we treat it as an income?

 NO.
Section 32(b) provides that gifts, bequests and devises are excluded from gross income.

ADMINISTRATIVE PROVISIONS

Filing of notice of donation

 Required only if the taxpayer utilizes the donation as an allowable deduction and if the
gift is atleast 50k.

Filing of donor's tax return.

 When: 30 days from date of donation.
 Same period of filing of capital gains tax return

When is the payment of tax?

 Within the same period of 30 days, pursuant to the pay-as-you-file system

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