TAXATION 2 NOTES
January 18, 2016
Estate and Trust can be considered as a taxpayer.
When will we treat Trust as a separate taxpayer?
-When the trust is classified as an irrevocable trust.
Hence, if the designation of the beneficiary is
irrevocable then the trust is considered as an
irrevocable trust in which case the income shall be
reflected by the trust as a taxpayer BUT if the
designation of the beneficiary is revocable then the
trust shall be classified as revocable trust and by being
a revocable trust the income shall be reflected by the
trustor.
Q: If there is an estate, who shall report the income
that had accrued after the death of the decedent?
A: It depends on the settlement of the estate. If the
estate is being judicially settled then the income shall
be reported by the estate as the taxpayer however, if
the estate is being extra judicially settled then the
income shall be reported by the heirs. But if the heirs
will report an unregistered partnership then the
unregistered partnership shall report the income
subject to Normal Corporate Income Tax.
Under the tax Code, Estate as the Taxpayer and Trust
as the Taxpayer can avail of personal exemptions but
not basic personal exemptions since they can’t have
qualified dependents and under the Tax code the
Basic Personal Exemption that a trust or an estate can
avail of shall be equivalent to 20,000 pesos which is
the Basic Personal Exemption granted in favor of
single individuals.
Upon the advent of RA 9504, this Basic Personal
Exemption had been increased to 50,000 pesos
regardless of the status of the taxpayer.
Q: Would it automatically mean that Estate and Trust
can now avail of 50,000 pesos Basic Personal
Exemption?
A: NO. Why? Because RA 9504 had amended the
provision on the grant of Basic Personal Exemption
and additional exemptions in favor of individual
taxpayers; this particular law had not amended the
provision which granted Basic Personal Exemptions in
favor of Estates and Trusts.
Q: That being said shall we conclude that Basic
Personal Exemptions of Estates and Trusts shall
remain at 20K pesos?
A: YES.
Principle under Trusts:
There is a special deduction available to Trusts as a
taxpayer.
What is the special deduction?
This special deduction refers to the distribution of the
income to the beneficiaries because if the Trust
distributed income or a portion of that income to the
beneficiary the distributed income to the beneficiary
shall be treated as a special deduction from the
income of the trust.
Example:
Paulo has a property located in Baguio. Paulo asked
me to manage the property. In addition to that, there
has been a stipulation that 10% of the monthly income
shall be distributed to Claire. In the taxable year 2014,
the property earned an income in the amount of
100,000 pesos and 10% thereof has been given to
Claire.
Q: How much is the taxable income that must be
reported or reflected by the taxpayer? (asked in the
2013 or 2014 Bar Exams)
A: 70,000 pesos.
Computation:
100,000 (Income earned)
---20,000 (Basic Personal Exemption)
---------------
80,000
---10,000 (Special deduction- amount distributed to
the beneficiary 10% of the income)
*This is if the taxpayer is the trust
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 TAXATION 2 NOTES
Assignment:
Read the case of Ossorio Pension Foundation, Inc. v.
CA
This particular case pertains to the taxability of
employee’s trust and the Supreme Court held that an
employee’s trust shall be exempt from income tax.
-In reading the case, you have to know the details of
employee’s trust.
*When will the trust be treated as an employee’s
trust?
This is because before you can conclude that the
income is exempt from tax you need to know first if
the trust is an employee’s trust.
TRANSFER TAXATION
Is a tax on transfers but not all transfers are covered
by transfer taxation ONLY GRATUITOUS transfers are
covered by transfer taxation. Therefore, if I sold a real
property classified as a capital asset in favor of
another individual, will that transaction be subject to
transfer tax? NO, because it is not a gratuitous
transfer rather it is an onerous transfer.
What is the tax implication of that transaction?
It is subject to capital gains tax at the rate of 6% based
on the gross selling price or market value whichever is
higher.
2 TYPES OF TRANSFER TAXES:
1. Donor’s Tax
2. Estate Tax
*The imposition of donee’s tax and inheritance tax
had been deleted in the present Tax Code.
Donor’s Tax is a tax on the privilege of transferring
property gratuitously during the lifetime of the
transferor.
Estate Tax is a tax on the privilege of transferring
property gratuitously after the death of the
transferor.
Types of Taxes based on Subject matter:
1. Property Tax
2. Person’s tax/Poll tax/Capitation Tax
3. Excise Tax
Donor’s tax and Estate Tax are classified as excise tax
because these taxes are being imposed on the
privilege.
Case of LLadoc v. CIR
At the time of the case, donee’s tax was being
imposed upon the privilege of receiving gifts.
Argument of the Parish: It should not be subject to
donee’s tax because under the Constitution, religious
institutions are exempt from tax.
-The argument is NOT CORRECT because under the
Constitution, the exemption pertains to property tax
and donee’s tax is not in the nature of property tax
but an excise tax. In this particular case, the SC had
discussed the nature of a donee’s tax and that it held
that it is in the nature of an excise tax.
Can we apply the same concept to donor’s tax? YES,
because donor’s tax remains to be an excise tax.
Kinds of Transfers subject to Transfer Taxes:
1. Donation –kind of gratuitous transfer
2. Succession – kind of gratuitous transfer
Will this transfer be subject to transfer taxes? YES. In
fact, donation is subject to Donor’s tax and succession
is subject to Estate tax.
For Recitation:
Read Revenue Regulations 2-2003
2 types of Donation:
Donation inter vivos
Donation mortis causa
The difference between these two types of donation
is the effectivity of the transfer.
If we talked about donation inter vivos the transfer
will take effect during the lifetime of the transferor on
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 TAXATION 2 NOTES
the other hand, in donation mortis causa, it will take
effect after the death of the transferor.
Q: If we talked about donation inter vivos knowing
the effectivity of the transfer, will it be subject to
donor’s tax or estate tax? Donor’s tax
What about donation mortis causa? Estate Tax
*this is the difference between donor’s tax and estate
tax.
ESTATE TAXATION
It is in the nature of an excise tax.
Reasons/ Doctrines supporting the imposition of
estate tax (For recitation)
1. Benefits-received principle
2. Ability to pay principle
3. State Partnership Principle
4. Redistribution of Wealth Principle
5. Back-tax Theory
GROSS ESTATE
What is an Estate? (Succession)
It is a mass of properties left by the decedent
2 concepts of an Estate in Taxation:
a. Mass of properties left by the decedent
b. Taxpayer is the estate itself
This is the reason why if we talked about donor’s tax,
the taxpayer is the donor, if we talked about estate
tax, the taxpayer is the estate.
Example:
If A left properties worth 10 M but has incurred tax
liabilities in the amount of 15M then there is a deficit
of 5M, can the government collect the deficit of 5M
from the heirs? NO, because the heirs cannot inherit
the liability of the decedent. The heirs cannot be made
liable for the liabilities of the estate.
What if the gross estate is valued at 10M tax liability at
5M so there is a net distributable estate of 5M and
then we have Nadia getting 1M, Lucille getting 1M,
Paulo getting 1M, Von getting 1M, Chesty getting 1M.
The government had reassessed the liability of the
decedent and it had computed an additional tax
liability of 3M. Now the government would like to
collect from Nadia, Lucille and Paulo 1M each. Paulo
argued that he shall only be liable for 1/5 of the 3M, is
that argument correct?
Analysis:
Sino ulit ang Taxpayer – Estate
Ano ulit ang Estate? – mass of properties
Ito bang nakuha ni Paulo part ng mass of properties?
Yes
So part pa rin ba to ng Estate? Yes
So, pwede bang kolektahin ni government yung 1M
pesos na buong buo from Paulo? Yes.
What would be the effect if the three of them will pay
the amount of 3M? They can collect their share from
the co-heirs. (Subrogation)
What shall comprise the gross estate? (Sec. 85, NIRC)
The gross estate shall comprise of all the properties,
rights and interest of the decedent existing at the
time or date of death of the decedent.
Example:
A has a property worth 5M. A leases this out to
different individuals and A earns around 1oo,000
pesos per month. A died on June 12, 2015. The rental
income accrues at the end of the month.
Q: How much is the gross estate of A if A died on June
12, 2015?
A: 5.5 M because these are the properties, rights and
interest of the decedent existing at the time of his
death.
Q: Will the income accrued after death form part of
the gross estate?
A: NO, because this income did not exist at the time of
death.
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When it comes to income taxation: Differences between Resident and non-resident

Who will report the income prior to death? A
Who will report the income that would accrue after
death? It depends on the type of settlement of estate.
If the estate is being judicially settled, then the income
would be reported by the estate through the
administrator or executor but if the estate is being
extra judicially settled then the income shall be
reported by the heirs.
If the heirs had formed an unregistered partnership
then the unregistered partnership shall report the
income to be subject to income tax.
DATE OF DEATH VALUATION RULE
-States that all properties forming part of the gross
estate shall be valued depending on its fair market
value at the time of death. Any post-death
developments are immaterial meaning no matter
what happens after death, it will not be considered in
valuing the gross estate.
decedent:
1. If a decedent is classified as a resident
decedent all properties wherever situated
(whether the property is located within the
Philippines or outside the Philippines) shall
form part of the gross estate. However, if the
decedent is classified as a non-resident
decedent then only those properties located
within the Philippines shall form part of the
gross estate.
2. A non-resident decedent cannot avail of
standard deduction and family home however
a resident decedent can avail of all types of
deductions both ordinary and special.
INCLUSIONS IN THE GROSS ESTATE
These are properties that the decedent did not
physically possess at the time of his death but such
properties are still treated as part of the gross estate.

KINDS OF DECEDENT 1. Decedent’s Interest

1. Resident decedent 2. Transfers in contemplation of death
2. Non-resident decedent 3. Revocable transfers
4. Property passing under a general power of
Resident Decedent is a resident or a citizen of the appointment
Philippines 5. Proceeds of life insurance
Non-resident Decedent is one who is not a resident or 6. Prior interest
not a citizen of the Philippines. 7. Transfers for insufficient consideration

Kinds of Individual Kinds of Decedent DECEDENT’S INTEREST

Taxpayer Refers to the rights that had accrued prior to the
Resident Citizen Resident Decedent death of the decedent.
Non-resident Citizen Resident Decedent
Resident Alien Resident Decedent
Example:
Non-resident Alien Non-resident Decedent
The decedent is the stockholder of San Miguel
whether engaged in
business or not engaged Corporation. This stockholder died on January 15,
in business 2015. San Miguel declared dividends on January 1, 2015
in the amount of 100,000 pesos per stockholder;
however, this cash dividend has been distributed on
February 14, 2015. So if we would take a look at the
concept of physical possession the decedent does not

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yet physically possess the cash dividend because it has For recitation:
not been distributed to him before his death rather If the designation of the beneficiary is irrevocable, will
the dividend income has already been distributed to the proceeds form part of the gross estate?
the heirs. If the designation of the beneficiary is revocable, will
Q: Will the dividend income form part of the gross the proceeds of life insurance form part of the gross
estate? estate?
A: yes. Why? Because the decedent acquires a right
not on the date of distribution but rather on the date PRIOR INTEREST
of declaration in which case the 100,000 pesos shall It is the same as decedent’s interest. It is an interest
be treated as decedent’s interest which shall form that exists prior to the death of the decedent.
part of the gross estate.
TRANSFERS FOR INSUFFICIENT CONSIDERATION
For recitation: For recitation:
TRANSFERS IN CONTEMPLATION OF DEATH Elements before transfer for insufficient
Should death be imminent so that the transfer shall consideration will be treated as part of the gross
be treated as transfer in contemplation of death? estate.

REVOCABLE TRANSFER Q: Will gross inadequacy of price invalidate sale? NO,

What is the difference between transfer in unless the Court finds that the price is shocking to the
contemplation of death and revocable transfer? conscience of man.

PROPERTY PASSING UNDER A GENERAL POWER OF
APPOINTMENT
What is a general power of appointment?
Differentiate it with special power of appointment.
PROCEEDS OF LIFE INSURANCE
Will proceeds of life insurance form part of the gross
income of the recipient or the beneficiary? No, it is
exclusion under Section 32B.
What if the beneficiary is the employer who paid the
premiums of the insurance policy, would it be
considered as part of the gross income of the
employer?
No, all proceeds of life insurance are excluded from
the gross income because it remains to be an
indemnity for the loss of life of a family member or a
valuable employee as the case may be.
If we talked about the gross estate we need to know
the designation of the beneficiary whether the
designation is considered as irrevocable or revocable.
If we talked about transfers for insufficient
consideration, are we referring to simulated
contracts?
2 types of simulated contract:
1. Absolute simulated contract– no
consideration at all
2. Relatively simulated contract – there is an
agreement but the intention has been
simulated. Example: They had really intended
to donate but they entered a contract of sale
For recitation:
Whether a transfer for insufficient consideration is
considered as simulated contract under the concept
of obligations and contracts
Different types of property regime under family code
Conjugal partnership of gains
Absolute community
Legal separation of properties

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How do you know the type of property regime that
you will apply in the problem?
It depends on the date of celebration of marriage. If
the marriage has been celebrated after the effectivity
of the family code then there is no agreement as to
the property regime. Absolute community will apply.
If the marriage is celebrated prior to the effectivity of
the Family Code, the property regime that would
apply is conjugal partnership of gains.
August 3, 1988 – effectivity of Family Code
*this is important in order to know if the property will
form part of the gross estate.
January 20, 2016
Justifications of Estate Tax
Benefits Received Theory
 2 aspects:
o The benefit that had been received by
the taxpayer by reason of the services
rendered by the government in
protecting the properties/estate
(Benefits during the lifetime); and
o The distribution of the estate (Benefits
for the distribution).
Ability to Pay Principle
State Partnership Principle (Privileged Theory)
 Protection given to the decedent at the time
he was still accumulating all his wealth.
Redistribution of Wealth
 In order to distribute the discrepancy between
the original state of the wealth of a person
who accumulated such wealth during his
lifetime, the government will collect a
particular amount from such wealth in order
to redistribute it, because as we all know,
taxes shall form part of the funds of the
government and these funds shall be used for
the basic necessities of the people.
Back Tax Theory
 The government should have imposed a tax
upon the privilege of accumulating huge
amount of wealth but the government did
not. Thus, in order to collect the tax upon the
privilege of accumulating such wealth, the
government will collect it through the
imposition of estate tax.
Gross Estate of a non-resident decedent vs. resident
decedent
Resident Decedent
Will a resident decedent be taxed for real properties
wherever situated? Yes.
Will a resident decedent be taxed for tangible &
intangible personal properties wherever situated?
Yes.
Non-resident Decedent
 Shall only be taxed for properties situated in
the Philippines.
 If the tangible personal property is located
within the Philippines, it shall also be subject
to tax.
 If the intangible property is located in the
Philippines, it will also be subject to tax but
subject to reciprocity rule.
Reciprocity Rule
 (Quits!)
 Domiciliary country grants personal
exemption in favor of Filipino citizens not
residing therein, then the Philippine
government will also grant the same
exemption provided that it won’t exceed the
exemptions granted in favor citizens or
residents of the Philippines. (Reciprocity Rule
in Income Taxation)
 In Estate Taxation, if the Domiciliary country
of the non-resident decedent will grant
exemption in favor of Filipino citizens not
residing in that domiciliary country, then the
Philippine government shall grant the same
exemption in favor of the non-resident
decedent. (You have to state it in this manner
if the question involves estate taxation).
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 Requisites:
1. Estate of a non-resident decedent.
2. Property is an intangible personal
property located within the Philippines.
 If it does not fall within such requisites, there
is no need for you to check the domiciliary
country.
 Such principle also applies in donor’s tax
because there are also 2 types of donor: a
resident donor and a non-resident donor. For
non-resident donor, you apply the same
principle.
Example: Amor, an alien not residing in the
Philippines, is married to Claire (Filipina), and they had
a son, Von. Amor had acquired a car which is in the
Philippines being used by Von which is worth 3M, a
cash deposit worth 6M, and shares of stocks of P&G
Phils. worth 1M. Claire predeceased Amor. Amor died
2 months from the date of death of Claire because of
depression (true love daw).
Q: How much is the gross estate subject to Philippine
tax?
Q: Will the 3M car be part of the gross estate of Amor?
Yes because it is located in the Philippines despite that
it is being used by Von.
Q: What about the 6M cash deposit in the BPI bank?
Yes because it is located in the Philippines.
Q: What about the shares of stocks? It will follow the
principle mobilia sequuntur personam – movable
follows the domicile of the owner. The movable
specifically refers to intangible movable property.
However, the shares of stocks were issued by P&G
Phils. which is considered to be a domestic
corporation, hence, it shall be considered as sourced
from within notwithstanding the fact that Amor is not
residing in the Philippines.
Q: will you apply the reciprocity rule with respect to
the shares of stock? Amor is a Non-resident decedent,
the shares of stocks are intangible personal property
located within the Philippines. Thus, we shall look at
the domiciliary country of Amor such that if USA
grants exemption in favor of Fil. Citizens not residing
therein (why Fil. Citizens not residing therein? Because
they are considered as aliens in US; they are
considered as non-resident decedent in the US), then
Fil. Government will grant tax exemption In favor of
Amor.
Q: What if USA grants estate tax exemption in favor
of Fil. Citizens not residing therein, will it be included
in the gross estate? No. Apply reciprocity rule. But if
the US government is not granting estate tax
exemptions in favor of Filipino citizens not residing
therein, then it will form part of the gross estate
subject to estate tax.
#Case: Domiciliary country of the non-resident
decedent granted exemption from inheritance tax but
the laws of the domiciliary country does not grant
exemption from estate tax. The non-resident
decedent has properties located in the Philippines and
most are in the nature of intangible personal
properties. They had raised that the domiciliary
country grants exemption from inheritance tax, the
Phil. Government must also grant exemption in favor
of the non-resident decedent. SC: The intangible
personal property is not excluded in the gross estate
because the reciprocity rule contemplates full tax
exemption. The domiciliary country grants partial tax
exemption in this case because it only grants
exemption from inheritance tax. Reciprocity rule will
only be applicable if there is tax exemption from all
types of taxes (full tax exemption).
Note: inheritance tax is still considered as transfer tax
through the mode of succession.
Exceptions to the principle of mobilia sequuntur
personam (MSP):
1. If it involves shares of stocks and the shares of
stocks are issued by a domestic corporation, it
will be considered as sourced from within
notwithstanding the fact that the owner is
residing outside the Philippines. E.g. If the
shares of stocks are owned by Amor (refer to
the example above), and he is not residing in
the Philippines, MSP will not be followed
because the shares have been issued by a
domestic corporation.
2. Shares issued by a foreign corporation where
85% or more of the operations of this foreign
corporation is located within the Philippines,
the shares shall be considered situated within.
3. If it involves franchise or royalties, it will be
considered as situated within the Philippines if
this intangible personal property has been
exercised within the Philippines.
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 TAXATION 2 NOTES
Death is the Generating Source of Power
Death is the generating source on the part of the
government in imposing estate tax. Without death,
the government will not collect estate tax. If the
question is, when will estate tax accrue?It would
accrue upon the death. But if we talk about the
obligation to pay the tax, it would depend upon the
law mandating the payment.
Example: When will capital gains tax accrue? Upon the
sale or disposition. Meaning, at the moment real
property classified as capital asset has been sold, CGT
already accrued. However, the taxpayer need not to
pay CGT at the time of the accrual of the tax
obligation. The law mandates that CGT can be paid
within 30 days from the date of the sale.
With regard to estate tax, it would accrue at the time
of death of the decedent but it would be paid within 6
months from the date of death.
Inclusions in the Gross Estate
 The reason why we include inclusions as
inclusions and not part of the general rule is
that these are properties which are no longer
in the name of the decedent. Thus, if we apply
the general rule, they should be excluded. We
only include all properties, rights, and
interests existing at the time of death as a
general rule. These properties appears to be
non-existing at the time of death because they
were already transferred under the name of
another individual and yet, it is included as
part of the gross estate. Hence, if we talk
about the decedent’s interest, why shall we
include it as part of the gross estate? For
example, yung dividend income. Nung time
nanamataysi decedent, meronnabayansa
properties nya? Wala pa kasihindi pa
nadidistribute eh. Nadistributelang after
namatay that will lead it to be part of the
gross estate because he has a right over it.
Transfers in Contemplation of Death (TCD)
Q: Is the imminence of death is important in
determining of there is transfer in contemplation of
death.
A: No. It is the thought of death that is considered as a
determining factor in classifying whether the transfer
is considered as TCD. The imminence of death will only
provide a convincing evidence that the transfer is
indeed a TCD.
E.g. A has 10M worth of properties. He transferred 5M
to his son kasi mas Malaki ang tax effect nyan kapag
iniwan ko yung 10M. So yung 5M, iniwan nya para sa
estate tax. In 2 months time, mamamatay na sya.
Q: Is it a TCD? Yes because in that particular sense,
there is actually no consideration. He only transferred
it in order to avoid the impact of estate tax. That is
why even if the properties are already registered in
the name of the heirs, it will still form part of the gross
estate. If we apply the general rule, hindi na kasama
yung 5M kasi natransfer na sa mga heirs eh. But it is
included in the computation of gross estate because it
is a TCD.
Q: Will we consider transfer with retention of rights as
TCD?
A: Aside from the thought of dying, the reason for the
transfer is not really to vest ownership upon the
transferees but rather just avoiding the payment of
tax. TCD, decedent has still interest over these
properties, it’s just that the naked title has already
been transferred in favor of the transferees. With
respect to transfer with retention of rights, that is
also the basic essence; the property would be
transferred in favor of the named transferees but the
economic benefits is being retained by the transferor-
decedent during his lifetime. Economic benefit
pertains to the possession of the property, the
enjoyment of the property, the power to designate
the persons who would benefit from the properties.
In that case, the decedent has still control over the
properties notwithstanding the fact that the title has
already been transferred in favor of several
transferees. Thus, it will form part of the gross estate
because the decedent has still control over these
properties notwithstanding the fact that the title has
already been transferred to another individual. Thus,
transfer with retention is a sub-classification of TCD.
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 TAXATION 2 NOTES
Transfer with retention of rights
 Sub-classification of transfer in contemplation
of death.
 One where the title has already been
transferred to an individual but the transferor-
decedent still has control over it or that he still
possesses the property during his lifetime.
Revocable Transfer
 Refers to a transfer where the decedent has a
reserved power to alter, amend, revoke or
terminate any right granted to another
individual.
Q: What is the difference between transfer with
retention of rights (which is classified as transfer in
contemplation of death) with revocable transfer?
A: The difference is that transfer with retention of
rights has no explicit stipulation that the right can be
revoked or that any benefits granted by the decedent
can be revoked, on the other hand, a revocable
transfer, there is actually a reserved power (the
parties had stipulated that the transferor decedent
has the power to alter, amend, revoke or terminate).
Q: What if the agreement states that if the decedent
would revoke any right indicated in the agreement, he
must serve a notice within a 30-day period (serve it
upon the transferee) but the transferor did not
comply with such requirement, will it be considered as
revoked?
E.g. Ran transferred a property I favor of Titus. The
agreement has a stipulation that Ran has the power
to revoke granted in that agreement. However, if Ran
would revoke the right granted to Titus, he shall be
required to furnish a notice within 30 days prior to the
effectivity of the revocation. Ran had manifested to
revoke the right he granted to Titus but did not
comply with the notice requirement. Ran died.
Q1: Do we consider the property as part of Ran’s gross
estate? Will we consider it as a revocable transfer? In
the book of De Leon, he mentioned that non-
compliance with certain conditions in the agreement
would we considered as complied with upon death.
Thus it is as if Ran has complied with the notice
requirement at the time of his death notwithstanding
the fact that he did not serve notice upon Titus.
Therefore, the property shall form part of Ran’s gross
estate but not under the classification of revocable
transfer kasi narevoke na nya eh; it would seem that
Ran revoked the right upon his death. At the time of
his death, bumalik na sa kanya yung right. Pero part
pa rin yun ng kanyang gross estate kasi nirevoke nya.
Q2: What if Ran did not revoke or that he did not
exercise his power to revoke, will it still form part of
Ran’s gross estate? If he did not revoke, the transfer
remains to be a revocable transfer. Nung namatay
sya, meron pa rin syang power to revoke. Kung hindi
nya yun inexercise, it that does mean that he no
longer has the power to revoke. It remains to be a
fact that at the time of his death, Ran has still the
power to revoke. Thus, it will still form part of the
gross estate under inclusions through revocable
transfer. In the 1st question, it is not under inclusion
but part na talaga sya ng gross estate kasi right nya na
yun eh (narevoke nya na eh). In the 2nd question,
under the general rule, it is no longer a part of the
gross estate anymore however, even if Ran did not
revoke, the transfer remains to be a revocable
transfer, hence it will form part of the gross estate of
Ran under inclusions.
January 23, 2016
Property passing under the General Power of
Appointment (GPA)
What is a General Power of Appointment?
Example:
X has a property and appointed A, A now has the
power to designate himself or other persons who
would benefit from the property. X in this case is the
prior decedent.
Was the ownership of the property to X transferred to
A? No.
If ownership will be transferred to A, it will no longer
be considered as general power of appointment
otherwise it shall be considered as conveyance. In a
general power of appointment, the ownership
remains to be with X. However if it was stated in the
last will and testament of X that X has appointed A to
designate the individuals who would enjoy the
properties of X after X’s death.
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 TAXATION 2 NOTES
At the time of A’s death are these properties
considered as properties existing at the time of death
of A? No, because in the first place these properties
remain to be properties of X. It’s just that A has the
power to designate individuals that would benefit
from the properties.
Will we consider the properties of X as part of the
gross estate of A? YES, because this is a property that
had passed through a General power of appointment.
The logic is: Does A has control over the property of X,
at the time of A’s death? YES, because A can just
choose himself as the beneficiary of the property of X.
If A would choose himself as the beneficiary of the
property of X will that form part of A’s gross estate?
YES.
Now, if he did not choose himself, will it still form part
of his gross estate? YES, because this is still a property
that had passed through a GPA.
How would we differentiate it with property passing
under SPA?
If X has designated A in his will as the one who would
designate the individuals who would enjoy the
properties but the choice shall be limited to B, C or D.
Does A have control over the properties of X at the
time of A’s death? NO, while it is true that he has the
power to appoint, he does not have any free will
because his choice shall only be limited to B,C or D.
Therefore, will the property of X form part of A’s
gross estate? NO, because this is not a property that
had passed through a GPA.
PROCEEDS OF LIFE INSURANCE
Under Income taxation, this is excluded from the
gross income under Section 32B.
Rationale: because proceeds are in the form of
indemnity for the loss of life.
What if the employer had received the life insurance
proceeds of the employee and it was the employer
who paid the premium of the life insurance policy, will
the proceeds form part of the gross income of the
employer who had received the proceeds of the life
insurance? No. it will not form part of the gross
income. Why? because the proceeds are still in the
nature of life insurance proceeds; it is an indemnity for
the loss of life of a valuable employee.
** The only time that you should qualify the answer
depending on who the beneficiary is--- when the
Question delves into the taxability of premium
payments paid by the employer for the benefit of the
employee because if the employer had paid the
premium payments for the life insurance of the
employee, the question will be - Will the premium
payments be considered as a taxable income on the
part of the employee?
If the beneficiary is the employee then the premium
payments shall form part of the taxable income of the
employee because it would redound to his benefit
BUT if the beneficiary is the employer then the
premium payments paid by the employer for the life
insurance of the employee will not be considered as a
taxable income on the part of the employer.
BUT for taxation II the question would be- will the
proceeds of life insurance form part of the gross
estate of the decedent?
A: It depends.
The determination whether the proceeds of life
insurance would form part of the gross estate would
depend on the designation of the beneficiary such
that if the designation of the beneficiary is revocable
then the proceeds of life insurance shall form part of
the Gross Estate; if the designation of the beneficiary
is irrevocable then the proceeds of life insurance will
no longer form part of the gross estate except if the
designated beneficiary is the estate, the decedent or
10
 TAXATION 2 NOTES
the executor or administrator in their capacity as
executor or administrator.
Logic behind transfer in contemplation of death and
revocable transfer
Why do we need to include these transfers as part of
the gross estate?
Because at the time of the decedent’s death, the
decedent has control over these properties
notwithstanding the fact that the naked ownership
had already been transferred to another individual.
If we talked about proceeds of life insurance, if the
designation is revocable, at the time of the decedent’s
death, does the decedent has control over this life
insurance policy? YES. Can he change it anytime
before his death? YES.
We have to include it as part of the gross estate
because at the time of death, the decedent still has
control over this policy.
IRREVOCABLE DESIGNATION OF THE BENEFICIARY
If the decedent irrevocably designated another
individual as the beneficiary, does the decedent have
control over life insurance policy at the time of his
death? NO, basically the decedent already transferred
the interest in that particular proceeds in favor of the
beneficiary prior to his death and that is the reason
why it will not form part of the Gross estate.
But why do we have this exception? Because logic
would dictate that it will go back to the gross estate.
Example:
If the decedent A had designated himself as the
beneficiary and the designation is irrevocable, does
the decedent have control over the designation at the
time of his death? NONE, bec. the designation is
irrevocable. Ngayon, pag siya ang namatay kanino
mapupunta yung proceeds? Sa estate niya kasi siya
ang beneficiary.
Because even if the designation is irrevocable, but the
beneficiary is the estate then it will still form part of
the gross estate. If the decedent is the beneficiary
then of course it will go back to the gross estate.
Now, if the beneficiary is the executor or
administrator in their capacity as executor or
administrator and the designation is irrevocable, san
mapupunta yung proceeds? Sa gross estate.
*This particular rule will ONLY apply if it involves a life
insurance if the insurance policy pertains to an
accident insurance policy then don’t apply these rules
and the proceeds would not form part of the gross
estate.
PRIOR INTEREST
Are interest accruing to the decedent at the time of
his death. Actually the same as decedent’s interest.
TRANSFER FOR INSUFFICIENT CONSIDERATION
-Transfer with consideration in money but it is not a
bona fide sale for an adequate or full consideration.
Example:
I bought a real property classified as an ordinary asset;
I bought this property for 1M. After 3 years, I sold it
for 1M but at the time of sale, the fair market value is
3M. Can we consider it as transfer for insufficient
consideration?
What if the sale has been entered into an arm’s
length?
A transfer with inadequate price is not automatically
considered as transfer for insufficient consideration.
Why? Because, we will only consider it as transfer for
insufficient consideration if the sale is not a bona fide
sale. If the sale has been entered into in arm’s length
notwithstanding the fact that the actual consideration
is actually less than the FMV of the property there is
still no transfer for IC.
2 types of simulated contracts:
1. Absolutely simulated contract – contract
where there is no consent, object and
consideration;
11
 TAXATION 2 NOTES
2. Relatively simulated contract – there has really
an agreement between the parties but the
document does not speak of the real intention
of the parties.
Example:
The document speaks of a sale but the
intention was really to donate.
Can a relatively simulated agreement be
covered by the concept of transfer for
Insufficient Consideration? Yes, but transfer
for Insufficient Consideration will only be
applicable if it does not involve sale under
Section 24D of the Tax Code which is capital
gains tax- 6% of the gross selling price or Fair
market value whichever is higher.
Reason behind this particular rule excluding
real property classified as capital asset:
because a taxpayer will always pay tax under
24D because the gain has already been
dictated by operation of law that is why we
call it as presumptive realization of gain, the
law had dictated that the gain will be
equivalent to the Gross Selling Price or the
market value whichever is higher.
Example:
If there is a real property classified as a capital asset
which has been bought for 1 M and has been sold
after 3 years for 1M at the time when the real property
has fair market value of 5M, will the taxpayer incur a
liability?
If we talk about net income, does the seller has a net
income? NONE. Why? He had bought the property for
1M but sold it for 1M so there is no income; so there is
no tax liability.
But since the sale involves a property classified as a
capital asset will there be a tax liability on the part of
the seller? Yes it would be 6% of the GSP of 1M or the
FMV of 5M whichever is higher; the taxability would
be 6% of 5M, kahit wala siyang kinita nagbayad parin
siya ng tax.
What if we change the object of sale, what if a car has
been sold what is the tax implication, the tax is
normal tax. Now if this transaction is subject to
normal tax, what is the tax base? Net income. The car
was bought for 1M has been sold at 1M but at the time
it has been sold it has a value of 5M because it
appears that it a collectible car.
Q: is there a net income? NONE. Why? Because this
involves a sale of personal property in which case the
tax implication is normal tax; normal tax is based on
the net income in this case the property has been
bought for 1M and sold for 1M. Will there be a tax
liability? NONE.
This particular provision address the possible situation
that taxpayer would try to undervalue the Gross
Selling Price in order to avoid the tax liability. For
example: Kapag ako ay nagbebenta ng car,
iuundervalue ko yun. ilalagay ko sa deed of sale na
binenta ko lang siya for 1M or less than 1M. if I had
done that will I pay a tax obligation? NONE, because
ang tax ko dyan ay based on the net income.
Congress had addressed it by imposing transfer for
insufficient consideration.
Is this considered as bona fide sale? NO. because the
gross selling price is undervalued. So in this case will
the difference in actual consideration and fair market
value be subject to tax? Yes. It will either be subject to
estate tax or donor’s tax.
If the transfer will take effect at the time of death of
the transferor then the difference will be subject to
estate tax but if the transfer would take effect during
the lifetime of the transferor then the difference will
be subject to donor’s tax.
Paano kapag real property classified as ordinary asset?
Covered ba ng concept na ito? YES. Kasi sale of real
12
 TAXATION 2 NOTES
property classified as an ordinary asset is subject to
normal tax.
Pano kung gusto ko lang ibenta ng mas mababa? Will
it be considered as transfer for insufficient
consideration? No, because it remains to be a bona
fide sale.
If we talked about the assessment made by the BIR,
the BIR will assume that the disparity was by reason
of the undervaluation of the Gross Selling Price, but it
is a matter of proof that the sale has been entered at
arm’s length.
EXCLUSIONS IN THE GROSS ESTATE
1. Exclusive property of the surviving spouse
Is considered as an exclusion from the gross estate
Different types of property regimes:
Absolute Community
Conjugal Partnership of Gains
Separation of property
How would you know the property regime to apply?
It depends on the celebration of the marriage.
If the marriage has been celebrated prior to the
effectivity of the Family Code and there is no
agreement to the contrary then we will apply the
conjugal partnership of gains, if the marriage has been
celebrated after the effectivity of the Family Code
then we will apply the absolute community.
If there is a pre-nuptial agreement then we will apply
the separation of property
Effectivity of the Family Code – Aug. 3, 1988
Example:
Claire and Amor got fell in love and after 2 months of
their relationship, they got married in 1981, prior to
the marriage, Claire was able to acquire several
properties worth 10M, Amor has able to acquire
properties amounting to 1M. After getting married,
their joint efforts were able to accumulate wealth in
the amount of 10M. Amor died. Will we include 1M as
part of the gross estate of Amor?
Under Conjugal Partnership of Gains, properties
acquired prior to marriage shall be considered as
exclusive property. Under Absolute Community, all
properties acquired prior to the marriage shall be the
community property.
“what is yours is ours; what is mine is ours” – absolute
community
1M – exclusive property of Amor; property acquired
prior to the marriage;
10M – conjugal property
Q: Will we consider 1M as part of the gross estate of
Amor? YES
10M? YES, because Amor has interest over the
property, so entire of the community property will
form part of the gross estate but the share of the
surviving spouse will be deducted in order to arrive at
the net estate.
10M of Claire, will it form part of the Gross estate of
Amor?, because this is the exclusive property of the
surviving spouse and so it will not form part of the
gross estate.
Example no. 2:
Kathleen is an auditor working at Bermuda island and
she has acquired properties in the Philippines worth
10M and she has a bank account in the amount of 5M.
When she was in the Philippines, she was introduced
to Donwill. Donwill at that time is a law student and
has an asset in the amount of 100K. They fell in love
and got married. During the marriage they have
acquired additional 6M. Donwill died.
Q: Will the 100K form part of the gross estate,
assuming that they got married in 2012?
YES.
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 TAXATION 2 NOTES
What about the 6M pesos? Community property; will
it form part of the gross estate of D? Yes.
What about the 10M acquired by Kathleen prior to the
marriage, will it form part of the gross estate of
Donwill? Yes because the property regime is absolute
community.
What about the 5M acquired by Kathleen prior to the
marriage? Yes, because it is a community property. It’s
just that the estate of donwill can deduct the share of
surviving spouse or Kathleen.
Properties acquired in donation? Is it exclusive
property? It depends on when the property has been
donated.
January 25, 2016
(continuation of transfers for insufficient
consideration)
When would we consider it as transfer for
insufficient consideration? The element that I
highlighted, it should not be a bona fide sale. If there
appears to be an evidence that the value of the gross
selling price was undervalued, then this is considered
as a transfer for insufficient consideration. Bakit
kapagi-underdeclare eh hindi bona fide sale. Kasi in
the first place, kung hindi yan inunderdeclare,
magkano dapat yung gross selling price nya?
Malamang binenta nya yan ng 5M. So magkano dapat
ang income nya? 5M- book value of 1M = 4M dapat.
But because of the fact that this taxpayer had
undervalued the property he was not able to reflect a
taxable income of 4M because he just undervalued
the gross selling price from 5M to 1M.
A question in the bar examination regarding
transfer for insufficient consideration will typically
involve its elements. So it’s just a matter of explaining
whether all those elements exists just like in criminal
law. If all the elements exist, then it shall be
considered as transfer for insufficient consideration. If
it is a transfer in insufficient consideration, then it may
be subject to donor’s tax or estate tax as the case
maybe depending on the effectivity of the transfer.
2. Merger of usufruct in the owner of the naked
title
 Example: When A had executed his will, he
had mentioned that the naked title would
belong to B, the usufruct belongs to C. A had
also mentioned in his will that in the event C
dies, the usufruct shall belong to B. If A and C
die, there is a merger of the usufruct in the
owner of the naked title (it shall be considered
as the 2nd transfer).
 Transfer must occur after the death because if
it was given during the lifetime of the
decedent, it should have been subjected to
either Capital Gains Tax if it was a sale, Normal
Tax if the sale involves personal property, or
Donor’s Tax if it was donated. Thus, the
transfer must take effect after the prior
decedent.
 There were actually 2 transfers: (1) The first
transfer to the usufruct and owner of the
naked title are subject to estate tax because
there was passing of property through
succession; and (2)The transfer of the usufruct
to the owner of the naked title will not be
subject to estate tax because it is part and
parcel of the first transfer. It is considered
part and parcel of the first transfer because of
the fact that the usufruct was transferred to
the owner of the naked title by reason of A’s
will since if A did not stipulate in his will that
the usufruct will belong to B, and C dies, then,
the heirs of C would enjoy the right.
 The transfer from C to B was by reason of the
will of A because if A had not indicated that
particular wish in his last will and testament,
the right to use the property would belong to
C’s heirs. That is why several authors would
state that the 2nd transfer is just part of the 1st
transfer because the 2nd transfer has been
made pursuant to the will or desire of the
prior decedent, in this case, A. Hence, the
transfer from C to B will not be subject to
estate tax because it is in the nature of the
merger of the usufruct in the owner of the
naked title.
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 TAXATION 2 NOTES
3. Transmission or delivery of the inheritance or
legacy by the fiduciary heir or legatee to the
fideicommissary heir.
 Review: the fiduciary heir has the obligation to
preserve the property to be transferred to the
fideicommissary heir. The relationship of the
fiduciary heir to the fideicommissary heir must
be within 1 degree.
 The transfer to the fiduciary heir (1st transfer)
shall be subject to estate tax but the transfer
from the fiduciary heir to the fideicommissary
heir (2nd transfer) shall not be subject to
estate tax because the 2nd transfer was made
pursuant to the will of the prior decedent
since the property would not have been
transferred from the fiduciary to the
fideicommissary through the wish of the
decedent. And that is the reason why the 2nd
transfer is considered part of the 1st transfer
wish was already subjected to estate tax.
E.g.1: Ran had wished that his car would be
transferred to Titus upon his death. But he also
included that upon Titus’ death, it would be
transferred to MJ (Titus’ daughter).
Q: Do we consider the 2nd transfer as part of the 2nd
transfer?
A: Yes because the property could not have been
transferred to MJ if Ran did not wish for it because of
Titus’ would die and there is no stipulation to the
contrary in the last will and testament of Ran, then
the Car would have been transferred to MJ and her
siblings but that didn’t happen. What happened in this
particular set up was it was transferred merely to MJ.
Why is that so? Because Ran said so. Got the point?
The 2nd transfer was only made pursuant to the wish
of the prior decedent. So shall we consider that as
part of the 1st transfer? Yes. And that is the reason
why the 2nd transfer is no longer subject to estate tax.
Will the 1st transfer be subject to estate tax? Of course
– it is a transfer after the death. Would the 2nd transfer
be subject to estate tax? While it is true that Titus died
and the property has been transferred to MJ, the
transfer made by Titus to MJ was made pursuant to
the wish of Ran which was already subject to tax.
E.g.2: Ran had wished that his car would be
transferred to Titus upon his death. Ran said that “this
property shall be transferred to Titus and in the event
Titus dies, it will be transferred to MJ (Titus’ cousin).
Q: Will the 2nd transfer be subject to estate tax despite
that the degree between Titus and MJ is not within 1
degree?
A: It is exempt from tax. Class, ang rason kung bakit
ko lagging sinasabi yung reason behind the provision
so that you could learn how to know the crooks of
that provision. So the 2nd transfer is exempt from
estate tax because it is still made pursuant to the wish
of Ran. The only difference in relation to the first
example is the degree of relationship. The same logic
in the 1st example would apply. The 3rd exclusion – the
transfer from the 1st heir to another beneficiary – does
not necessary mean that they must be one degree
relationship. What is the reason behind the 3rd
exclusion? Same. The 2nd transfer was made pursuant
to the wish of the prior decedent. And that is the
reason why the 2nd transfer shall still be considered as
part of the 1st transfer. If you do not know the logic
behind it, you would automatically conclude that the
2nd transfer is subject to tax simply because the
degree of relationship was has not been complied
with where in the first place, that is not the reason
behind the exclusion. The reason behind the inclusion
behind the 1st 3 exclusion is because the 2nd transfer
was made pursuant to the wish of the prior decedent
which would make it part of the 1st transfer which has
already been subjected to estate tax.
4. Transfer to social welfare, cultural and
charitable institutions
 Can you remember charitable contributions?
Under income taxation, it is part of allowable
deductions. Is charitable contribution
deductible? Yes provided that it has been
made in favor of a qualified donee.
o It will be deductible in full if the
donation was made in favor of:
 Government in cases of
priority projects;
 Accredited NGOs;
 Gift given pursuant to a treaty.
o It will not be deductible in full but it
shall be deducted subject to the
limitation if it has been given in favor
of:
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 TAXATION 2 NOTES
 Domestic Corporation or
Association engaged in
religious, educational, cultural
projects;
 Institutions established for the
rehabilitation of war veterans;
 Social Welfare institutions.
Q: Will the inheritance received by social welfare
institutions or charitable institutions be subject to
estate tax?
A: Yes. Provided that not more than 30% must be used
for administrative purpose.
 If the social welfare institution received a cash
gift of 300k, and that particular gift has been
entirely used in order to pay the salaries of
employees, it will not be exempt from Donor’s
tax because 100% was used for administrative
purpose. So if it was in the nature of an
inheritance, then it will not also be exempt
from estate tax.
5. Reciprocity Rule
 When would reciprocity rule apply? If there is
an intangible personal property owned by a
non-resident decedent and the intangible
personal property must be located within the
Philippines. In which case, we would take a
look at the laws of the domiciliary country of
the non-resident decedent and if the
domiciliary country grants tax exemption from
transfer taxes with respect to such
inheritance/estate in favor of Filipino citizens
not residing in that domiciliary country, then
the Philippine government will grant the same
tax exemption provided that the tax
exemption must be absolute or total,
meaning, the tax exemption must be for both
inheritance tax and estate tax.
COMPUTATION OF THE NET ESTATE
 The tax liability of the estate will not be based
on the gross estate. The tax due will be
computed based on the net estate. In which
case, for estate tax purposes, the tax base is
your net estate. How do we compute the net
estate? From the gross estate, deduct
ordinary deductions to arrive at the net estate
after ordinary deductions, deduct special
deductions which can be enjoyed by resident
decedents to arrive at the net estate after
special deductions. The net estate after
special deductions shall be the tax base in the
computation of estate tax.
Gross Estate – Ordinary Deductions =
Net estate after ordinary deductions
Net estate after ordinary deductions – special
deductions = Net estate after special deductions
*Note: Net estate after special deductions shall be the
tax base in the computation of estate tax.
Ordinary Deductions
A. Expenses
 There are two types of expenses covered by
expenses under ordinary deductions and
these are:
o Funeral Expense.
o Judicial Expense.
* Note: Ma’am did not include medical expense. She
only mentioned the two types of expenses
abovementioned.
1. Funeral Expense
 Requisites for deductibility:
i. The purpose - Funeral expenses must be
incurred in relation to the interment or
burial of the deceased;
ii. The limitation – The actual amount of
expense must not exceed 5% of the Gross
Estate and not exceed P200,000. Most
examinees would forget 5% of the Gross
Estate and remember the P200,000 only
which is wrong bakit? Paano kung may
funeral expenses in the amount of
P200,000 (Got that?) at ang 5% ng Gross
Estate ay P100,000. How much is the
deductible expense? Would you
automatically conclude that the funeral
expense is P200,000 because that is the
ceiling amount? No because 5% of the
Gross Estate is lower. So how much is the
deductible expense? P100,000. So kindly
16
 TAXATION 2 NOTES
don’t forget the 5% of the Gross Estate.
Under RR 2-2003, it contains the list of
Funeral Expenses which can be deducted
on the Gross Estate. Meron ba dun yung
telephone communication expense? So
tinawagan mo yung relatives mo abroad,
pwede ba yun ideduct as funeral expense?
During the lamay. Under the
requirements, it must be substantiated by
receipts. If there are no receipts which
would substantiate these expenses, then
it would not be deducted. Yung 40 days
(pasyam) diba may pakaindun? Yung
expense in purchasing those foods, can it
be deducted? No because it was already
incurred after burial. Paano yung cornick
at kape nung lamay? Yes but again, it can
only be deducted if these are
substantiated by receipts.
2. Judicial Expense
 Requisites for deductibility:
i. It must be incurred in relation to the
collection of the assets, administration
of the estate, payment of the debts, as
well as the settlement or the
distribution of the estate.
ii. The period when it has been incurred
– it must be incurred not later than the
last day prescribed by law or the
extension thereof to file an estate tax
return. Under the law, an estate tax
return must be filed within 6 months
from the date of death extendible for
a period of 30 days. So dapat ba yung
judicial expenses must be incurred
within that 6 months period? Yes.
Pwede ba within the extension of 30
days? Yes as long as the extension has
been granted. Notarial Fee in the
execution of the deed of extrajudicial
settlement, can we classify that as a
judicial expense? Yes notwithstanding
the fact that it was related to an
extrajudicial expense, it shall still be
considered as judicial expense.
Situation: May client ako nung 2012, gusto na nyang
ibenta yung (something) which was registered under
the name of her husband na namatay noong 1991 but
she cannot sell it without the payment of estate tax.
At that time, she already approached the BIR and had
been assessed of more than P400,000 so she
approached us because she wanted us to help her to
reduce the amount of tax liability because it appears
that the amount of more than P400,000, she will get
from the value of the selling price (20% of the selling
price). So, we said that we would charge her an
amount for the leg work and an amount for the study
of the documents in order to reduce her tax liability.
Q: Can I consider my fee as a judicial expense in order
to reduce the gross estate of the decedent kahit na
may resibo naman?
A: No. 2012 na yan mga kapatid eh. Kailan dapat ma-
incur yung judicial expense? Within 6 months from the
date of death. But she didn’t file an estate tax return.
Under the tax code, it is not at the time of the
settlement. The tax code is very explicit – judicial
expense must be incurred not later than the last date
prescribed by law for the filing of the estate tax return
by the estate. Ang sabi dyan, date prescribed by law
and what is the date prescribed by law? 6 months
from the date of death. Therefore, it cannot be
deducted because it is beyond that period.
…(cont. of the story) part of the P400,000 was
because of the 20% interest. Diba class, kapag late
nagbayad, ano ang babayaran? 20% interest per
annum. So kung per annum yun, yung years from 1991
to 2012. Plus 25% surcharge. Plus compromise penalty.
Ganito ang nangyari dito class kaya naging
P400,000.So how did I compute this? It appears that
the net estate is more than P200,000 based from my
computation. If you read the tax code, net estate
amounting to more than P200,000 shall be subject to
tax. Net estate in the amount of exactly P200,000 or
less shall be exempt. Sabi ng BIR, malidaw yung
computation ko apparently because they had used
the zonal value at the time that we had filed the
return, eh ang zonal value nung 1991 eh iba nung 2012
obviously kasi nga mas mahal na ang mga lupa
ngayon. Ano ang gagamitin natin, zonal value nung
1991 o zonal value nung 2012? Zonal value nung 1991
because estate tax shall accrue at the time of death
and therefore, the property must be valued at the
time of death. So if the zonal value in 2012 was 3,000k
17
 TAXATION 2 NOTES
per square meter, but it has a zonal value of 1k per
square meter in 1991, what will we use? The zonal
value in 1991 because that is the date of death that is
why we call that date of death valuation rule. In 1991,
RA 98424 was not yet in effect, therefore, will we
apply the provisions of RA 98424 with respect to the
tax exemption of 200k or less? No because we will
also apply the governing law at the time of death
notwithstanding the fact that it was settled years
later. So will we apply the laws existing in 1991? Yes.
And under the tax code existing at that time, it
provides that net estate in the amount of 300k or less
shall be exempt from tax. So yung computation kona
more than 200k, will it be exempt from tax? Yes. If the
estate tax due is 0, how much is the interest? The
interest is 20% of the tax liability per annum. If there is
no tax liability, will there be an amount of interest? No
– 0. Surcharge is 25% of the amount of tax liability.
How much is the surcharge? 0. Compromise penalty
was at 20k because it is based on the gross estate not
on the net estate but can be reduced by the revenue
officer and at that time, sabi ko wala akong pera, sabi
ko 1k na lang kasi walang pera yung client at wala pa
nga syang pangbayad sa akin. Ayun. Binabanya ng 1k.
Is that legal? Yes because compromise penalties can
be reduced. From the 400k tax liability to 1k.
February 3, 2016
Q: A borrowed money from B in the amount of 1
million pesos. A died without paying the said
obligation thereafter, B had informed the heirs that
he is no longer collecting the 1 million pesos. Can the
estate of A deduct the 1 million pesos as claims
against the estate?
A: YES because the obligation is existing at the time of
death. The condonation happened after death. Post-
death developments are immaterial in the
computation of the estate.
UNPAID MORTGAGE
Requisites for the deductibility of unpaid mortgage:
1. The fair market value of the property
mortgaged must have been included as part
of the gross estate.
2. The mortgage indebtedness must be
contracted in good faith.
3. There must be a verification as to who was
the beneficiary of the loan proceeds because
if the beneficiary of the loan proceeds is
another individual then it will be treated as an
accommodation loan which has an additional
requisite.
In a mortgage contract, two agreements would stand
because a mortgage contract is a merely an auxiliary
contract or an accessory contract meaning for it to
stand there has to be a principal contract which is the
loan agreement.
Q: Ran borrowed money from Titus in the amount of 1
million pesos In order to secure this particular
obligation Ran had mortgaged his property with a fair
market value of 5 million pesos. Ran died. How much
is the gross estate of Ran?
DISCUSSION OF ANSWER:
We would only include properties, rights or interests
of the decedent that are existing at the time of death.
Is the 1 million pesos considered as Ran’s property?
NO, it is a loan obligation; it is a liability.
Therefore, will we include that as part of the Gross
Estate?
NO, what about the property worth 5 million?
YES, because this property is existing at the time of
Ran’s death.
Now, with respect to deduction, can the estate of Ran
deduct 1 million pesos as an unpaid mortgage?
Consider the requisites for the deductibility of unpaid
mortgage:
Most important requisite- that the fair market value of
the property mortgaged must have formed part of
the gross estate.
In this particular case, did we already include the fair
market value of the property mortgaged as part of
the gross estate? YES. Therefore can we already
18
 TAXATION 2 NOTES
deduct the 1 million pesos as an unpaid mortgage?
YES.
You always need to remember that as a requisite for
deductibility the fair market value of the property
mortgaged must have formed part of the gross
estate of the decedent for it to be considered as an
ordinary deduction
However, what if the example was Ran borrowed
money from Titus in the amount of 1 million pesos.
Ran secured the obligation by mortgaging his
property worth 5 million pesos however, Ran was not
the beneficiary of the proceeds rather it was MJ so
after receipt of the 1 million pesos from Titus, Ran
immediately delivered the same to MJ. How do you
call this particular transaction? Accomodation. There is
an accommodated party- MJ; accommodating party-
Ran.
Who shall be responsible for the principal amount
indicated in the negotiable instrument? It is the
accommodating party because the maker is the
person who has executed the negotiable instrument.
Now, will we apply the same concept in taxation such
that who will be responsible for the loan obligation
that Ran had obtained from Titus? Would it be ran or
MJ? It would still be Ran because the agreement is
between Ran and Titus.
With respect to Ran and MJ, will we treat that as a
separate agreement? Yes, who is the debtor in this
case? Between Ran and Titus (first transaction)? Ran,
between Ran and Mj (second transaction)? MJ, so Ran
in this case is the creditor.
In the first transaction, will we treat the that(1 million)
as liability of Ran or as a receivable of Ran? Liability of
Ran.
With respect to Ran and MJ, will we treat that as a
receivable or as liability of Ran? Receivable because it
is collectible. Now, how do we treat a receivable?
Properties or rights. These are assets.
How much is the Gross Estate of Ran in this case? Will
we include the 1 million as part of Ran’s Gross Estate?
Yes, because it is a property existing at the time of
death.
Will we include 1 million pesos as part of the gross
estate? Yes because it is a collectible; it is a receivable
existing at the time of death so, how much is the
gross estate of Ran?
Now, if we would consider the deduction can Ran
deduct an unpaid mortgage? And up to how much?
*If there is an accommodation loan there is an
additional requisite: the value of the receivable must
form part of the Gross Estate of the decedent along
with the fact that the fair market value of the
property mortgaged must also form part of the gross
estate of the decedent in addition to the two other
requisites that had been mentioned.
So in this case, does it involve an accommodation
loan? Yes.
So what is the additional requisite? The receivable
must form part of the gross estate. If we would take a
look at the gross estate of 6 million, did we already
include the receivable? Yes. Therefore, can Ran deduct
1 million pesos as claims against the estate? Yes.
If the estate of Ran will not include the 1 million pesos
receivable, can the estate of Ran deduct 1 million
pesos? No, because it is an accommodation loan.
Example no. 2
Krshzia (a foreigner-national and resident of UK) has a
car located in the Philippines and has a market value
of 3 million pesos. When she visited the Philippines,
she met a friend Ran and she borrowed 1 million pesos
from Ran. In order to secure the obligation of 1
million, Krshzia has mortgaged her property located
at Indonesia. The value of the property located at
Indonesia is 5 million pesos.
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 TAXATION 2 NOTES
How much is the gross estate of Krshzia? 3 million
Why? Because a non-resident citizen shall only be
subject to tax for her properties located within the
Philippines. In this case the only property located in
the Philippines is the car.
Can Krshzia deduct the 1 million pesos as an unpaid
mortgage?
Discussion of answer:
Take note: if we would consider this particular
example, it has an unpaid mortgage because there is
mortgage between them.
So, can Krshzia deduct the 1 million as an unpaid
mortgage? No, because the fair market value of the
property mortgage has not been included as part of
the gross estate. And that is the reason why if we read
the revenue regulation 2-2003, it states that non-
resident decedent cannot deduct unpaid mortgage if
the property is located outside the Philippines.
What is the reason behind it? Because that property
does not from part of the gross estate. And one of the
requisites of deductibility is that the Fair Market Value
of the property mortgaged must have form part of
the gross estate.
Now if you are the lawyer of Krshzia and you wanted
to reduce the amount of gross estate? What would
you do?
I would not show the mortgage agreement, I would
only present the loan agreement because if I would
only present the loan agreement then it would be
treated not as an unpaid mortgage but rather as a
liability and if it would be treated as a liability of the
estate then it would be classified as claims against the
estate. And there are only four requisites of
deductibility of claims against the estate:
a. Valid and enforceable obligation – is it a valid
and enforceable obligation? Yes.
b. It is existing at the time of death. – is it
existing at the time of death? Yes.
c. Reasonable in amount – yes.
d. Contracted in good faith – of course, this is
presumed.
So, if this four requisites exist then I can consider it as
claims against the estate. So, can the estate of Krshzia
deduct the 1 million pesos if it is a claim or a simple
loan obligation? YES.
Your only problem is if the loan agreement had
indicated or had referred to the mortgage agreement
kasi siyempre babasahin yun ng revenue officer diba?
Pag sa loan agreement nakasulat na “this obligation is
secured by a property subject of a mortgage contract
which is hereto attached as annex a” may lusot ka pa
ba? wala na.
Problem no. 3
X and Y own a parcel of land worth 5 million pesos.
During the lifetime of X and Y, they obtained a loan
obligation in the amount of 1 million pesos. And in
order to secure this particular loan obligation, both of
them had mortgaged this particular property in favor
of the creditor. X died. The executor of X paid the
entire amount of 1 M.
Q: How much is the amount of claims against the
estate?
Discussion:
A former student answered in this manner:
The entire amount of 1M can be deducted as claims
against the estate provided that a receivable of Y
(500,000) would be added as part of the gross estate.
So basically the student was applying the concept on
accommodation loan. Would that answer be correct?
Is it seemingly correct? Seeming correct but is it
correct? No. Why is it incorrect?
Is it proper for us to include the 500,000 receivable of
Y as part of the gross estate? Well, basically she is
actually applying the concept of subrogation. Since
the estate of X paid the entire amount of the
obligation then the entire estate now can collect the
share of Y because if the obligation is silent or if there
is no stipulation as to the type of obligation then it
would be considered as joint. Meaning X would only
be liable for 500,000 pesos and yet the estate of X
paid the entire amount of 1 million pesos correct? So
the estate of X would be subrogated correct?
20
 TAXATION 2 NOTES
Q: is it proper for us to include the 500,000 receivable
of Y as part of the gross estate?
What would form part of the gross estate?
Properties, rights or interests existing at the time of
death. Now if we would consider the receivable, is
that existing at the time of death? It’s not. Who paid
the obligation? The executor. Meaning that receivable
had existed after death. The subrogation occurred
after death. Therefore, it is not proper for us to
include the receivable as part of the gross estate
because it is not a property existing at the time of
death.
How much is the gross estate?
*it was not stated in the problem na they were
married.
Therefore, the interest of X over the property would
only be 2.5 million pesos. Is this the property of X
existing at the time of his death? Yes. So how much is
the gross estate? 2.5 million.
How much is the ordinary deduction? Ano na nga ulit
tong obligation na to? Joint. So magkano lang ang
utang ni X? 500,000. Is that existing at the time of
death? Yes. Is that an unpaid mortgage? Yes. Then
what is the requisites of an unpaid mortgage?
a. The Fair Market Value of the property must
form part of the gross estate – did we already
include the fair market value of the property
as part of the gross estate? Yes. The interest
which is 2.5 million. So can we deduct the
500,000 obligation of X? Yes.
TAXES
What are the requisites of deductibility of taxes?
1. It must be unpaid at the time of death.
2. It must have accrued before the death of the
decedent.
(Problem under Tax 1)
The property earned an income on monthly basis. It
earned an income from January to June. June is the
month that A died. Who will be the taxpayer?
The decedent A.
From June to December who will be the taxpayer? It
depends on the settlement of the estate. If it is under
judicial settlement, the estate of A. if it is extra-
judicial, it shall be the heirs.
Now, of course, income taxes would be imposed upon
this income. What if income taxes with respect to the
income earned within this period had been unpaid.
Can it be treated as an ordinary deduction from the
gross estate? Dalawa lang ang requisites diba?
Is it unpaid? Yes. Does it accrued before death? Yes.
Therefore, can we deduct that under ordinary
deductions? Yes.
What if it is under judicial settlement and there is an
income earned after the death of the decedent, it
remains to be unpaid. Can that be treated as an
ordinary deduction? No. Why? Because the income
taxes accrued after death. For it to be considered as
ordinary deduction, the taxes must have accrued
before the death of the decedent.
What if the taxes accrued UPON THE DEATH OF THE
DECEDENT? Still not considered as an ordinary
deduction because there is a requirement that taxes
must have accrued BEFORE the death of the
decedent.
TRANSFER FOR PUBLIC USE
What are the requisites?
1. The transfer must take effect after the death
of the decedent or upon the death of the
decedent for the use of the government or
any of its political subdivision
2. The property must be exclusively for public
use.
3. The transfer must be testamentary in
character meaning there must be a WILL
Q: Should the value of the property being transferred
to the government form part of the gross estate of
the decedent?
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 TAXATION 2 NOTES
It will formed part of the gross estate of the decedent
if it is a property, rights or obligation existing at the
time of death.
Now if we would consider this particular property
(refer to the previous problem) to be transferred to
the government, is that a property existing at the
time of death?
Kailan ba ulit nagtatake effect ang transfer? Upon
death. So is that existing at the time of death? Yes.
Therefore, should the market value of this property
transferred for public use form part of the gross
estate of the decedent? YES.
So iaadd mo siya sa gross estate tapos imiminus mo
nalang siya under ordinary deduction so ang net
effect niya is zero but still it formed part of the gross
estate. Why? Because it is a property existing at the
time of death.
AMOUNT RECEIVED UNDER R.A. 4917
What is R.A. 4917? It enforced retirement benefits.
What are the requisites so that retirement benefits
will not be subject to tax?
1. The employee must be at least 50 years of age
2. Have rendered at least 10 years of service
3. Must have availed of the exemption only
once.
Q: Will the retirement benefits form part of the gross
estate?
Is that a property existing at the time of death? Yes.
However, will that be considered as an ordinary
deduction? Yes. Under amounts received under R.A.
4917.
Requisites for deductibility of amount received under
R.A. 4917:
1. The amount received must have been included
as part of the gross estate of the decedent
because it is a property existing at the time of
death.
2. The benefit must have been received from the
decedent’s employer.
So iaadd mo ba siya sa gross estate tapos imiminus
mo ulit under Ordinary Deduction? Yes.
February 6, 2016
VANISHING DEDUCTIONS
What is vanishing deductions?
 It is the amount allowed to reduce the taxable
estate because the second decedent dies
within five (5) years after the death of the
prior decedent or in the case of a gift, the
decedent donee dies within the same period
(5 years) after the date of gift.
The grant of this deduction is to reduce the harshness
or burden of taxation.
Based on the definition, it contemplates two possible
scenarios:
1. Where there are two decedents: the prior
decedent and the present decedent and the
gap between the first transfer and the second
transfer must be within 5 years.
2. One where there is a donor and donee and
then the done dies in which case the first
transfer and the second transfer has also a
gap of 5 years.
Q: Is it necessary that the donor must also die? NO.
In which case the first situation contemplates two
decedents however the second situation does not
contemplate that there are two decedents because it
might happen that the donor is still alive that such
that the first transfer which is the donation and the
second transfer which is succession happened within
five years.
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 TAXATION 2 NOTES
REQUISITES OF DEDUCTIBILITY OF VANISHING
DEDUCTIONS:
1. The present decedent died within 5 years from
the date of death of the prior decedent or in
case of a gift, it should be five years from the
date of the gift.
2. The property can be identified as the one
received from the prior decedent or from the
donor.
3. The property must have formed part of the
gross estate situated in the Philippines of the
prior decedent or have been included in the
total amount of the gifts of the donor paid
within the same 5-year period.
4. The estate tax or the donor’s tax must have
been paid.
5. There must be no previous vanishing
deduction on the same property. Why?
Because vanishing deduction cannot be
availed of for more than once.
6. The property must be located in the
Philippines.
BAR EXAM QUESTION:
Pedro and Assunta were travelling to Baguio along
with their son Jose and when they were at NLEX they
met an accident. Jose died. After one day, Assunta
died.
Pedro has an exclusive property of 1.5 million; a
conjugal property of 3 million; Assunta has an
exclusive property of 2 million; community property of
3 million; and Jose has an exclusive property of 1.2
million
Illustration:
Properties Pedro Assunta Jose
Exclusive 1.5M 2M 1.2M
Conjugal 3M 3M 0 Q: And if we have a net estate of 200,000 pesos just
Q: Can the estate of Assunta avail of vanishing
deduction?
Discussion:
-look at the requisites of deductibility of vanishing
deduction:
1st requisite – within five –year period? YES.
2nd requisite – can be identified as the one received
from the prior decedent. – Jose in this case is the prior
decedent who has a property worth 1.2 million. who
are the heirs of Jose? Pedro and Assunta. Therefore
can we identify that this property can be one of the
property that would be inherited by Assunta? YES.
3rd requisite – form part of the gross estate. Is this
part of the gross estate of Jose? YES.
4th requisite – estate or donor’s tax must have been
paid. –you must assume in this problem that the
administrator would have filed the estate tax return
of Jose first and then later on filed the estate tax of
Assunta. In that case would that suffice with respect
to compliance with that requisite? YES.
But the main issue here is not really the fact of having
a one-day gap but because of the fact that if we
would take a look at the gross estate of Jose you
would lead to the conclusion that the net estate is
200,000 pesos. Why? because under the Tax Code,
Estates can deduct standard deduction of 1 million
pesos without the necessity of substantiation
meaning there are no substantiation requirements
with respect to the 1M standard deduction.
The estate can immediately deduct 1 million pesos
provided that the decedent is a resident decedent. So
dito ang presumption ba ng batas ay resident
decedent si Jose? YES. So, can the estate of Jose
deduct 1 m? YES.
Now, if we would deduct 1 million pesos from the 1.2
million pesos it would result to the net estate of
200,000 pesos.
by looking at your estate tax table, how much is the
tax if the net estate is exactly pegged at 200,000
pesos?
23
 TAXATION 2 NOTES

Estate Tax table (RR No. 2-2003) 6th requisite – property located in the Philippines? Yes.
If the Net Estate is:
Over But not The tax Plus Of the Different concepts in the computation of vanishing
over shall be excess over deduction
- 200,000 Exempt - -
1. Value taken of property previously taxed – this is
200,000 500,000 0 5% 200,000
500,000 2,000,000 15,000 8% 500,000 the value during the first transfer and the value
2,000,000 5,000,000 135,000 11% 2,000,000 during the second transfer whichever is lower.
5,000,000 10,000,000 465,000 15% 5,000,000 2. Initial basis – is the difference between the value
10,000,000 And over 1,215,000 20% 10,000,000 taken of the property previously taxed and any
mortgage paid.
A: If the net estate is not over 200,000 the estate tax
3. Final basis – is the difference between initial basis
is exempt meaning there is no estate tax to be
and a certain portion of expenses, losses,
imposed. If that is assume, will we treat it as payment
indebtedness, taxes and transfer for public use in
as sufficient compliance with the requirement that
proportion to the initial basis that bears over the
estate tax has been paid? Will we treat exemption as
gross estate of the present decedent.
payment of estate tax?
Dean’s answer: the filing of an estate tax return
Mathematical equation:
would correspond to the payment of tax so once the
FINAL BASIS = INITIAL BASIS – a certain portion of
estate of Jose has filed an estate tax return, that is
expenses, losses, indebtedness taxes and transfer for
considered as payment of tax and therefore if Jose’s
public use ÷ initial basis ÷ the gross estate of the
estate has already filed his tax return notwithstanding
present decedent
the non-payment of any tax liability by reason of the
exemption by operation of law then the estate of
How much is the value of the vanishing deduction?
Assunta can avail of vanishing deduction.
The vanishing deduction would depend on the gap
between the first transfer and the second transfer:
Ma’am Tin’s answer: the estate of Assunta can not
 If the gap between the first transfer and the
avail of vanishing deduction because vanishing
second transfer is within the 1 year period
deduction contemplates an actual payment of tax
then 100% of the final basis shall be the
liability. This deduction has been granted by the
amount of vanishing deduction.
Congress in order to reduce the burden or harshness
 However, if the gap between the first
of taxation and since the estate of Jose has not
transfer and the second transfer is more than
experienced any burden at tax for it is exempted by
1 year but not more than 2 years or up to 2
law then the estate of Assunta cannot avail of
years, then only 80% of the final basis shall be
vanishing deduction. In the first place, it is a well-
considered as the amount of vanishing
settled doctrine that tax exemptions or tax
deduction.
deductions in cases of ambiguity in the provision of
 If the gap between those transfers is more
law must be strictly construed against the taxpayer
than 2 years up to 3 years then only 60% of
and since there is an ambiguity with respect to the
the final basis can be used as a vanishing
definition of estate tax payment then it must be
deduction.
construed against the taxpayer.
 If the gap is more than 3 years up to 4 years
then only 40% of the final basis can be used
5th requisite – no previous vanishing deduction? Yes.
as a vanishing deduction.

24
 TAXATION 2 NOTES
 If the gap is more than 4 years up to 5 years
then only 20% of the final basis can be used
as a vanishing deduction.
Can there be more than five years? No, because
vanishing deduction can only be availed of if the gap
between the first transfer and second transfer is not
exceeding five years.
***2012 bar exam - How much of the final basis can
used as a vanishing deduction? You should only take a
look at the number of years that had lapsed between
the first transfer and the second transfer.
Therefore, if the decedent (A) died on January 1, 2011
and then on January 5, 2012 his sole heir (B) died
transferring the properties by operation of law to the
heirs of B, could the transfer from A to B be subject
to tax? YES.
Could the transfer from B to the heirs of B be subject
to tax? YES.
Now, can the estate of B avail of vanishing deduction?
YES, provided all the requisites exist.
Is it within five years? YES.
Would you assume that it had formed part of the
gross estate of A? YES.
Would you assume that the estate tax has been paid?
YES.
Property located in the Philippines? YES.
Avail of vanishing deduction not more than once?
YES.
How much of the final basis can be used as an
amount of vanishing deduction? 80% because the gap
between the first transfer and the second transfer is
more than 1 year or not more than 2 years.
SHARE OF SURVIVING SPOUSE
This is equivalent to 50% of the community property or
conjugal property in which case you have to exclude
the exclusive property of the decedent because the
surviving spouse has no interest over this property.
If there is 1 million worth of exclusive property and 3
million worth of community property how much is the
share of surviving spouse? 50% of 3 million. 1.5 million.
However, if there are deductions you should have
reduced the amount of gross estate through the
amounts of ordinary deductions. This was the reason
why Ma’am Tin crafted the mnemonics ELIT TAVS –
because before you arrive at the amount of shares of
the surviving spouse you should have deducted all
these first (ELIT TAV) so, 3 million gross estate deduct
first expenses, loses, indebtedness, taxes, transfer for
public use, amount received under RA 4917, Vanishing
deduction then after deducting all these amounts, you
can now get 50% of the net estate which is the share
of surviving spouse.
Not unless it clearly appears that the expenses or any
of these were sourced from the exclusive property.
Ganito kapag ang kinuha mong pambayad ng funeral
expense ay galling sa exclusive property saan ko
idededuct ang funeral expense sa community
property parin ba? NO. sa exclusive nalang kasi doon
kinuha yung pambayad ng funeral expense, now,
what if the transfer to the government pertains to an
exclusive property would you deduct the transfer
from the community property or from the exclusive
property? Obviously, it would be deducted from the
exclusive property. But if there is no showing that
these deductions were sourced from the exclusive
properties then you need to deduct it from the
community property.
Actual Problem:
Client has a community property worth 3 million.
The total amount of ordinary deduction is 500,000
which is the combination of ELIT TAV. If we would
deduct the ordinary deductions of 500,000 we would
arrive at the net estate of 2.5 million; exclusive
property of 1M, how much is the share of surviving
spouse? Will we add 1 million and 2.5 million and get
the 50%?
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 TAXATION 2 NOTES
NO, because again the surviving spouse will not have
any interest over the exclusive properties of the
decedent in which case only 50% of the community
property shall be treated as share of surviving spouse.
So how much is 50% of 2.5M? 1.25 million. So the net
estate now is 1.25 million pesos plus 1 million you will
arrive at the net estate of 2.25 million.
(story of Ma’am Tin’s encounter with the revenue
officer)
Things that you should remember from the story:
1. In the computation of shares of surviving
spouse, you will only deduct ordinary
deductions. You should not deduct special
deductions before you get 50% of the interest.
2. Whenever you transact with government
agencies or employees, you should never
make them feel that they committed a
mistake 
SPECIAL DEDUCTIONS:
Three types of Special deductions:
1. Family Home
2. Standard deduction
3. Medical expenses
STANDARD DEDUCTION
-it does not need substantiation requirement. The
estate of the decedent can immediately deduct 1
million pesos however, before this can be availed of,
the decedent must be a resident decedent because a
non-resident decedent cannot avail of special
deductions.
(story about the client of Atty. Belmes)
Yung namatay ay American citizen pero naninirahan
na sa Philippines. Pwede bang magdeduct ng
standard deduction at family home?
What is the classification of the decedent? Alien siya
but he is a resident alien and he is classified as a
resident decedent. Can a resident decedent avail of
standard deduction? Yes, so dapat ba nagminus ng
family home at standard deduction? Yes.
Is there a proof that must to be presented before they
can avail of the standard deductions? All the estate
needs to present is a certification that he is a resident
of the place and if he has obtained an alien’s
certificate of residency from the Bureau of
Immigration that can also be presented.
FAMILY HOME
Requisites of Deductibility:
1. The family home should have formed part of
the gross estate
2. There must be a certification from the punong
barangay that the decedent is a resident of
such place.
3. There should only be one family home.
4. It can be availed of by the husband and the
wife or the head of the family. (in income
taxation there has been no concept of the
head of family because all the individual
taxpayer regardless of the status(single or
married) can avail of basic personal
exemptions in the amount of 50,000 pesos.)
the concept of the head of family is still
applicable in estate tax that is if the decedent
is the head of the family then the estate of
such decedent can deduct family home
notwithstanding the fact that the decedent is
single.
5. The amount of deduction shall be limited to
the fair market value of the property as
included in the gross estate or to the extent of
the decedent’s interest whichever is lower but
not exceeding 1 million pesos.
Do not immediately conclude na ang family home ay
ay 1 million. Ang automatic lang na 1 million ay
standard deduction because if you will read the
provision of the law with respect to family home, ang
1 million pesos ay only the ceiling amount.
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 TAXATION 2 NOTES
What if A died with this house and lot in the
Philippines as his family home and the total fair
market value of this property is 1.5 million. This
property is the exclusive property of A. How much is
the family home deduction of A?
Discussion of answer:
How much is the fair market value of the property
included in the gross estate? 1.5 million. How much is
the interest of the decedent? Exclusive property yan
diba? so magkano? 1.5 million. So how much is the
family deduction? 1 million because it should not
exceed 1 million.
What if this particular property is not the exclusive
property of A but rather the conjugal property of A
and his wife? How much is the FMV of the property
that has toi be included as part of the GE? 1.5 million di
ba sabi ko dati na kapag community or conjugal
property yung buong value ng property yung isasama
sa gross estate.
How much is the interest of A? 750,ooo. Which is
lower? 750,000. so how much is the family home
deduction? 750,000 that is the reason why I said that
family home is not always interpreted to 1 million
pesos because it might happen that the FMV of the
property of the decedent or decedent’s interest is
lower than 1 million.
Question of Joshua:
Si Paulo at si Claire mag-asawa. The properties is
registered under the name of Paulo and Claire. They
have 3 children: Ran, Ferdz, and Frederick. Nag-asawa
si Ran si Titus, Si Ferdz si MJ, si Frederick si Regine
tapos lahat daw sila nakatira sa bahay ni Paulo and
Claire. (typical Filipino family)
Pag kunwari namatay si Paulo, Claire, or Ran pwede
daw ba silang magdeduct ng family home?
Paulo? Yes, because obviously it would formed part of
the gross estate.
Claire? Yes.
Ran? (pinakachallenging na question) can he deduct
family home deductions? Yes.
In answering questions of deductibility you only have
to look at the requisites of deductibility.
So if you would take a look at the requisites of
deductibility of family home.
What are the requisites of deductibility?
1. Part of the gross estate? Yes.
2. Can the estate of Ran get a certification from
the punong barangay that he is a resident of
such place? Yes.
3. Only one family home? Si ran ba iisa lang ang
family home? Yes
4. Must be head of the family? Head of the family
ba si Ran?
Would it form part of the gross estate of Ran?
When Paulo died this particular property sabihin na
nating it is worth 5 million. It formed part of the gross
estate of Paulo now, sa law on succession paano nila
ito paghahatian? Kanino mapupunta yung property?
Kay surviving spouse kasi kanya to yung half yun yung
division dun sa heirs ilan ang heirs? 4. 3 legitimate
children and 1 surviving spouse meaning:
Claire: ¼
Ran: ¼
Ferdz: ¼
Frederick: ¼
Nung namatay si Claire? Alin ang nagfoform part ng ge
ni Claire yung buo parin bang 5 million? Hindi na. Only
half of the 5 million so that is 2.5 million plus ¼ of the
2.5 million kasi yun yung inheritance niya eh.
Nung namatay si Claire kanino ito mapupunta? Sa mga
anak. So yung tatlo maghahati hati
Ran: 1/3
Ferdz: 1/3
Frederick: 1/3
So when Ran died would this form part of Ran’s gross
estate? Yes. Now so check ba tayo sa first requisite?
Yes. Yung fourth requisite (head of the family)? Ano si
ran dito? Husband siya ni Titus, so can he deduct
family home? Yes but the computation of the
27
 TAXATION 2 NOTES
limitation would only up to the extend that has been
included as part of the ge.
Di ba 1/4 mula sa namana plus 1/3 dito. Icocompute pa
ba natin to tas compare whichever is lower? No. pag
nainherit exclusive property na to. So equal lang ba
yung Fair Market Value that has been included as part
of the gross estate and the interest of the decedent?
Yes. Equal lang yan but not exceeding 1 million.
MEDICAL EXPENSES
What are the requisites of deductibility of medical
expenses?
1. It must have been incurred within 1 year
before the death
2. It must be duly substantiated
3. It must exceed 500,000 pesos
Q: November 1, 2011 naincur yung expense, namatay
Nov. 12, 2013 can the expense be deducted from the
gross estate? No, because it did not comply with the
one year period
Q: What if the decedent dies on November 1, 2011 the
amount of medical expenses is 800,000 pesos?
450,000 paid; 350,000 pesos, unpaid. How much is
the amount of medical expense? May requisite ba na
dapat paid? Wala. Magkano? 500,000 kasi wala
namang requirement na dapat paid.
Ang presumption mo ba duly substantiated? Yes.
Now, up to how much? 500,000
If there is an unpaid amount of 350,000, 50,000 has
already been deducted as medical expense, 300,000
has not yet been deducted, can the 300,000 be
deducted as claims against the estate? No. Why?
Because as ma’am had reiterated claims against the
estate cannot be in the nature of judicial expense,
funeral expense, medical expense because these
types of expenses have their own classification like in
the first case, would the treatment of the 300,000 as
claims against the estate be considered as an indirect
circumvention of the definition provided under the
law? Yes kasi if we treat 300,000 as claims against the
estate technically makakapagdeduct ka na ng 800,000
at more than na to sa 500,000 this is the logic behind
this.
February 15, 2016
Deductions in favor of Non-resident Decedents
 What are the deductions that a non-resident
decedent can avail of? A non-resident
decedent can avail of all ordinary deductions
except amount received under RA 4917.
A non-resident decedent may A non-resident
avail of: decedent may not
avail of:
1. Expenses 1. Family Home
2. Losses 2. Standard
3. Indebtedness Deduction
4. Taxes 3. Rental
5. Transfers for Public Expense
Use
6. Vanishing Deductions
7. Share of Surviving
Spouse
 With respect to Expenses, Losses,
Indebtedness and Taxes (ELIT), it shall only be
deductible up to a certain amount based on
the ratio of the Philippine Gross Estate that
bears over the World Wide Gross Estate. And
therefore, in order for a non-resident
decedent to avail of ELIT, the estate shall be
required to declare the Gross Estate located
outside the Philippines. Does declaration of
the estate located outside the Philippines
mean that it will be subject to tax? No because
a non-resident decedent shall only be subject
to tax for estate located within the
Philippines. The declaration of the Gross
Estate located outside the Philippines would
only be necessary in order to compute the
ratio of the Philippine Gross Estate that bears
over the World Wide Gross Estate. What is the
World Wide Gross Estate in the first place? It is
the combination between the Philippine Gross
Estate and the Gross Estate located outside
the Philippines. And that is the reason why the
estate of the non-resident decedent shall be
28
 TAXATION 2 NOTES
required to declare his estate located outside
the Philippines. What if the estate of the non-
resident decedent did not declare the estate
outside the Philippines? The effect is that the
non-resident decedent’s estate cannot avail of
ELIT as deductions because before these
items can be deducted, the estate of the non-
resident decedent must declare the estate
located outside the Philippines.
Tax credits
 Review: concept of tax credit under income
taxation. It is used to reduce tax liability.
There can only be tax credit if there has been
payment made to a foreign country with
respect to an income earned in that foreign
country. Therefore, tax credits will only be
applicable in income taxation if the individual
taxpayer is a resident decedent. The purpose
of tax credits is in order to counter the effect
of double taxation. So kailan lang
magkakaroon ng double taxation? Kaninong
taxpayer lang mag-aaplyang double taxation?
Resident citizen. Why? Because this is the only
taxpayer who shall be subject to tax for
income sourced from within and outside the
Philippines. If the taxpayer is a non-resident
citizen, or maybe a resident alien, or maybe a
non-resident alien, these taxpayers shall only
be subject to tax if the income is sourced from
within, thus, there would be no double
taxation in this case. With respect to a
resident citizen, will he be subject to tax twice
by two different states? Yes. Example, Manny
Pacquiao! Manny Pacquiao is a resident
citizen. Manny Pacquiao earned from a boxing
bout at Las Vegas. Would the income earned
by Manny Pacquiao in Las Vegas be subject to
tax by the State of Vegas? Yes! Ang source ng
income ay Las Vegas. Now, would the
Philippine government impose a tax on the
income of Manny Pacquiao earned at Las
Vegas? Yes! Because Manny Pacquiao is a
resident citizen who can be subject to tax
from income sourced from outside the
Philippines. Now, will there be double taxation
in that particular case? Yes! What type of
double taxation? Indirect because the taxing
authorities are different. Now, if there are
foreign tax payments, how shall be treat
foreign tax payments? Will it automatically be
considered as tax credits under income
taxation? No because it can either be treated
as deductions or tax credits. The only time
that the foreign tax payment shall be treated
as tax credits would be when the taxpayer
had declared that he is intending to use the
foreign tax payment as tax credits. If the
taxpayer did not manifest his intention to use
the foreign tax payments as tax credits, how
shall we treat the foreign tax payments? Tax
deductions. What is the difference between
deductions and credits? If it would be treated
as tax deductions, then the amount shall
reduce the amount of gross income. If it
would be treated as tax credit, then it would
be used to reduce the amount of tax liability.
Which is more beneficial to a taxpayer?
Foreign tax payments being treated as tax
credits.
 In estate taxation, foreign tax payments shall
immediately be treated as tax credits. There is
no such obligation to make a manifestation.
Agad agad tax credits. Sa income tax lang
mag-aapply yung deduction or credit.
 When will we apply tax credits in estate
taxation? When the taxpayer is a resident
decedent because he is the only taxpayer
where double taxation can be applied.
Therefore, tax credits will apply if the resident
decedent has been subject to estate tax for
the same property by two taxing states. So
the foreign tax payments shall be treated as
tax credits.
 In income taxation, is there a limitation on the
amount of tax credits that can be used by the
taxpayer? Balik tayo kay Manny Pacquiao.
Manny Pacquiao earned 9M from his boxing
bout in the United States, 1M from his
endorsements in the Philippines. Payments
made to USA is 3M. The government had
assessed 3M taxes in the Philippines. Yung 3M
bana tax ni Manny Pacquiao na kinompute ni
Philippine Government based bay an sa 9M
boxing bout, 1M endorsements, or the entire
10M? 10M kasi tataxan din ni Philippine
29
 TAXATION 2 NOTES
government yung income earned from
outside the Philippines. So yung 3M ay tax for
the income sourced from outside the
Philippines and income sourced from within. If
we would actually take a look at this particular
tax liability, how much of the income is
sourced outside and which portion of it
represents the income sourced from within? If
the total amount of income is 10M, then the
ratio would have been 90% has been sourced
outside and 10% has been sourced from within.
Will we assume that of the 3M pesos, 90%
represents the tax for income sourced outside
and 10% represents the income sourced from
within? Yes. Kung ang tinataxan mo ay yung
10M, edi ibig sabihin nyan, tax yan para sa
income sourced from outside and within. Sa
10M, magkano doon ang sourced from within?
10%. E sa outside? 90%. So ibig sabihin dun sa
tax liability na 3M, 90% don ay tax sourced
from outside, 10% nun ay tax sourced from
within. Under the tax code, the tax credits
that a resident citizen could avail of should
only be limited to a certain percentage of the
Philippine income tax due based on the Gross
income sourced from outside the Philippines
that bears over the World Wide Gross Income.
Sabi, pwede lang daw magdeduct ng foreign
tax payments but shall be limited to the
percentage of the gross income sourced from
outside the Philippines that bears over world
wide gross income. Bakit kaya sabi limited
langsya up to a certain percentage? Yung 3M
ba yung binayad sa US? Yes. Pwede bang
gamitin ito ni Manny Pacquiao para
mabawasan yung tax due nyang 3M. Pwede
naman. Kapag hindi i-aapply yung limitation,
pwede nyang gamitin yung buo. Ang sabi sa
batas, it would only be limited to the amount
of income tax due based on a certain
percentage of the gross income sourced from
outside which is 9M that bears over the world
wide gross income which is 10M. 90% baito of
the 3M tax liability? Yes. So magkano yan?
2.7M. So ang sinasabi dyan, hindi sya pwedeng
mag-exceed ng 2.7M. What is the logic of this
particular provision? Kung pwedeng gamitin ni
Manny Pacquiao yung buong 3M para
bawasan ang kanyang 3M tax liability, ang
effect banyan would be magbebenefit yung
tax being imposed which was sourced from
within? Sabihin natin na 90% of the 3M is the
tax for the income sourced from outside
which is 2.7M. 10% represents the tax that is
being imposed on the income sourced from
within which is 300k. Tanong, if Manny
Pacquiao can use the entire amount of 10M in
order to reduce the tax liability of 3M, would it
in effect be used to reduce the amount of tax
liability with respect to that income sourced
from within? Yes. Parang gagamitin nya yung
portion ng foreign tax payments para bayaran
ang tax nya na sourced naman from within.
Ngayon, nagbenefit ba ng Philippine
Government sa foreign tax payments na ito?
Hindi. Sino ang nagbenefit sa foreign tax
payment na ito? US. Kaya meron syang
limitation why it would only be limited up to
the portion of tax liability that represents the
income that has been sourced from outside
the Philippines. Ang konsepto ganito, bayad
to sa income sourced from outside so dapat
ba ng maapektohan lang ay yung tax sourced
outside? Yes. Magkano ba ng tax with respect
to income sourced outside? 2.7M. So dapat ba
ng magbebenefit lang ay yung 2.7M? Yes.
Magkano lang ang pwedeng ideduct?
Hanggang 2.7M. lang kasi yun lang yung
portion nung tax representing the income
sourced from outside the Phils. Bakit? Kapag
ginamit nya yung buo, yung buong tax
payments na hindi naman nakakuhasi
Philippine Government gagamitin ni taxpayer
pangbayad dun sa tax nya for income sourced
from within. Unfair ba yun sa Philippine
Government? Yes. Will be use the same
limitation under estate taxation? Yes. That is
the reason why the same provision of tax
credits, the provision states that the tax
credits would only be limited to a certain
percentage of the estate tax due in the
Philippines that corresponds to the ratio of
the net estate sourced outside the Philippines
that bears over the World Wide Net Estate.
Same concept. Dun lang sya limited.
30
 TAXATION 2 NOTES

 What to remember during the bar: Not the of incorporation and it could
entire amount of tax credits can be used to only change if the corporation
reduce the amount of tax liability that will only would amend the articles of
be limited up to a certain portion that incorporation. But if the
represents the tax being imposed upon the corporation will not amend its
income sourced from outside the Philippines. articles of incorporation, then
Bakit outside? Kasi nga foreign tax payments the value remains the same.
yan.  If the shares are unlisted
common shares, the valuation
VALUATION would be based on book
 How will we value properties being included value.
as part of the Gross Estate?
 For real properties, it should be valued based ADMINISTRATIVE REQUIREMENTS
on its Fair Market Value (FMV)at the time of
death. The definition of Fair Market Value is in When will it be When is
Section 6(e) of the tax code which states that required? the due
FMV is the higher amount between the value date?
prescribed by the BIR which is also called A. Notice of It will be It must be
Zonal Value, or the value prescribed by the Death required if the filed within
City/Provincial Assessor which is also called gross estateis 2 months
Assessed Value. valued at more the date of
 For personal properties, they are valued at than death, or 2
FMV except in cases of shares of stocks. 20,000Php. months
(According to Ingles, if the personal property from the
was recently acquired by the decedent, the date that
purchase price may indicate the FMV. If it was the
not recently acquired, there should be some executor or
evidence of the FMV) administrat
 In cases of shares of stocks, the valuation will or has been
depend on whether shares of stocks are listed qualified as
or not listed. such.
o If the shares of stocks are listed in the B. Estate Tax It shall be It must be
stock exchange, then the valuation Return required if the filed within
would be the arithmetic mean gross estate 6 months
between the highest and the lowest exceeds from the
quotation at the date of death. If 200,000Php. date of
none, the date nearest the death. However, if the death
(This is based on the book of Ingles, gross estate which is
baliktad yung sinabi ni Ma’am Tin) consists of extendible
o If the shares of stocks are not listed, registrable or for 30 days.
the valuation would depend on registered
whether the shares are preferred properties,
shares or common shares. then an estate
 If the shares are unlisted tax return shall
preferred shares, then the be required
valuation would be the par regardless the
value. Par value is the fixed amount of the
value indicated in the articles gross estate.

31
 TAXATION 2 NOTES

C. Statement or It shall be Since it will January – 30

Certification required if the be filed February – 29
coming from gross estate along with March – 31
an exceeds the estate April – 30
independent 2,000,000Php. tax return, May – 31
accountant It will be filed it must be June – 29
along with the filed within 180 days
estate tax 6 months Thus, the last day shall be on June 29, 2016
return. from the
It must contain date of Place of filing the return
the following: death  The return should be filed on the place where
- Itemized which is the decedent has domiciled at the time of his
assets extendible death, or his last place of residence. How
- Itemized for 30 days. would you know his last place of residence?
deduction What document would indicate his last place
s of residence? The revenue officer would
- Amount of typically rely on the certificate of death.
tax due  What if there is no legal residence in the
Philippines, then it would be filed on the office
Situation1: A has a property located in La Union. This of the CIR. However, RR 2-2003 provides for
particular property has a FMV of 20k. rules in places when the decedent is a non-
Q1: Is a notice of death required? No because even resident citizen or a non-resident alien.
though the gross estate does not exceed 20k it is an o If there is an executor or
estate tax return that is required in this case. administrator, the return should be
Q2: Is an estate tax return required assuming that this filed at the place where the executor
particular property is covered by a tax declaration or administrator is registered. If the
only? Yes because the estate of A contains a executor/administrator is not
registrable property. Therefore, regardless of the registered, then the return shall be
value of the gross estate, an estate tax return is filed at the legal residence of the
required. executor/administrator.
Q3: Is a certificate coming from an independent o If the non-resident alien or non-
accountant required? No. resident citizen does not have any
executor/administrator in the
Situation2: A died on January 1, 2016. Philippines, the return shall be filed at
Q1: What is the effect of failing to file an estate tax the office of the commissioner.
return on time? Your client shall be liable for 20%  What is the effect of failure to file at the
interest per annum, 25% surcharge, and compromise proper place? It will be subject to 25%
penalty. surcharge.
Q2: When is the last day for the filing of notice of
death? If we talk about 2 months, it will be equivalent Situation: May client ako na may properties sa cubao
to 60 days because the administrative code provides which in reality, the worth is 20M pero sa zonal value
that 1 month shall be equivalent to 30 days. So if the nya ay valued lang sya around 10M. Namatay sya
law provides for a 2-month period, then that would noong 2008. So anong magiging computation? Yung
mean 60 days. Thus, you may file until March 1, 2016. 10M o yung valuation noong 2008? Yung 2008 kasi
Q3: When is the last day for filing of estate tax return? dun sya namatay eh, you value the gross estate at the
time of death and at the time of death, it was only
valued at 6M kaya lang ang laki laki nung tax liability
kasi hindi sya exempt compared dun sa cliente ko nan
32
 TAXATION 2 NOTES
a-exempt kaya wala nang interest at surcharge. Eto
class, hindi sya exempt kasi Malaki laki yung gross
estate. So Malaki yung interest nya, Malaki yung
surcharge, Malaki rin yung compromise penalty. Kasi
yung interest eh kung ilang years eh. Nagfile lang sila
nung 2013 so 5 years. Ang nangyari, may property nga
sa cubao, ang sabi sa certificate of death, the person
died at Cabugao, Ilocos Sur.
Q: If you were the lawyer, will you file that in Vigan
which is the revenue district which has jurisdiction
over Cabugao, Ilocos Sur, or would you report it at
Quezon City which is the revenue district which has
jurisdiction over Cubao?
A: Ang nasa isip nyo dapat, irereport ko to sa Quezon
City dahil gusto kong magdeduct ng family home,
hindi ba? Kapag nireport mo yan sa Cabugao, Ilocos
Sur, hindi ka na makakadeduct ng 1M family home
obviously kasi kapag sinabi mong nakatira sya sa
Cabugao, hindi nya family home yung nasa Cubao.
Kapag naman nireport mo sya sa Cubao, pwede ka
bang magreport ng family home as a deduction? Yes,
especially if this person is the head of the family.
Pwede ko bang palabasin na head of the family sya?
Oo naman.
Q: Eh pano yun ma’am, his certificate of death states
that he died in Cabugao, Ilocos Sur, what will I do?
A: Then you get a certification from the Punong
Barangay of Cubao that the decedent is a resident of
such place. You can die anywhere so you can say to
the revenue officer that this person is having a
vacation at Cabugao which is the family home of his
persons but he is really a resident of Cubao. You just
need to get a certificate coming from the Punong
Barangay that he is a resident of Cubao.
Q: Saan ko fi-nile?
A: Sa Vigan pa rin kasi nung pumunta ako sa Cubao,
sabi nila, mag-usap muna kami before ako maka-
deduct ng family home as a deduction. However, I do
not resort to underhanded methods. Sa Vigan,
fortunately, may batchmate ako. Sabi ko, “wala akong
resibo ng funeral expense, pwede mo bang tanggalin
ang lungkot ko? Sige, ideduct natin yan.” Gusto kong
magdeduct ng family home na 1M, meron naman
akong certificate galing sa punong barangay, ang sabi,
“o sige, ideduct natin yan pero magbabayad ka ng
surcharge na 25% kasi wrong filing of venue.”
Pumayag ako kasi nung kinompare ko na yung walang
family home deduction vs. w/ family home as a
deduction pero may 25% surcharge, mas Malaki ang
matitipid ko sa wrong filing of venue. So mas
gugustuhin ko nalang na wrong filing of venue kasi
nga ayaw kong ang magbigay ng kahit single cent sa
kanila. Pero anong effect nun class? Since I filed at the
wrong venue, then I need to get an after payment,
and what have you, after the issuance of the
certificate of … registration. I need to get an approval
from the RDO of Quezon City, yun lang naman.
 (Hindi ko maintindihan yung caption ni ma’am
para sa enumeration na ito)
1. You need to check the place of residence
because it must be place where the estate tax
would be filed.
2. The certificate of death does not conclusively
prove the last place of residence. Because it
might happen that the decedent was merely
on vacation at the place of death.
3. You need to check the availability of family
home as a deduction.
Payment of Taxes
 When would taxes be paid? The tax must be
paid at the time that the return has been filed.
And when is the filing of an estate tax return?
Within 6 months from the date of death.
Therefore, should this be the period for the
payment of tax? Yes. Could this be extended?
It depends:
o If the estate is under judicial
settlement of estate, then it can be
extended up to a period of 5 years.
o If the estate is under extrajudicial
settlement, then the payment can be
extended up to a period of 2 years.
 If an extension is granted, the CIR may require
the executor or administrator to furnish a
bond in an amount not exceeding double the
amount of tax.
 What is the requirement for extension of
payment or extension of filing? The taxpayer is
required to file an application with … the BIR.
 Will there be payment of interests and
surcharges if the extension has been granted?
There will be no imposition of surcharge but
interest will still be imposed.
33
 TAXATION 2 NOTES

Liability Case: Lorenzo v. Posadas

Case: Marcos II vs. CA Q: In this particular case, the Supreme Court had
 Taxes should be settled first before the discuss the concept of accrual of the tax liability, what
distribution of the estate particularly if there is the ruling of the supreme court as to this topic?
are special claims against the estate.
A: shall be paid in accordance with what the provision
states
February 17, 2016
Q: How shall the estate of the inheritance be valued?
Case: CIR v. Pineda
Would it be after ten years?
What are the two ways in which the government can
In this particular case the property has not been
collect taxes?
transferred until after the ten year period so basically
1. By going after all the heirs and collecting from
the argument was the property or the estate should
each one of them the amount of the tax
have been valued upon the transfer of the property to
proportionate to the inheritance received.
Mathew. But is that argument correct? No, because
2. Pursuant to the lien created by Section 315 of the
the interest of the property was transferred after the
Tax Code upon all property and rights to property
time of death.
belonging to the taxpayer for unpaid income tax,
by subjecting said property of the estate which is
Q: issue on the expense. Are these not considered
in the hands of an heir or transferee to the
judicial expenses?
payment of the tax due the estate.
Let us go back to CIR v. Pajonar, the Supreme Court
held that compensation of trustee cannot be
Discussion:
deducted as claims against the estate in fact it was
There is a tax lien over the estate of the decedent in
treated as judicial expense but how can we
which case the tax liability can be collected from one
differentiate it with this case of Lorenzo v. Posadas?
or some of the heirs but only up to the extent of their
In CIR v. Pajonar, the Supreme Court cited the case of
share in the inheritance. In this particular case, the tax
Lorenzo v. Posadas. Why? Because in Cir v. Pajonar the
liability was 760 and the share of Manuel in the
Supreme Court had emphasize the principle that if the
inheritance was 2,500. The government is collecting
expense had been incurred for the benefit of the
the entire amount of 760 from Manuel only. so the
estate or for the benefit of all the individuals who
argument of Manuel was the government cannot
would benefit from the estate then it will be treated
collect the entire amount of 760 because he should
as judicial expense but if the expense had been
only be made liable for 1/15 because there are 15 heirs.
incurred in order to protect the interest of a specific
heir or just one heir then it cannot be considered as a
But the Supreme Court held that the government can
judicial expense and that was the reason why the
expedite the collection of tax liability by collecting the
Supreme Court echoed the ruling in the case of
tax liability by one or some of the heirs and in this
Lorenzo v. Posadas because in the case of Lorenzo v.
particular case, the government had resorted to the
Posadas, the compensation of Lorenzo was for the
second method for in which the tax liability has been
benefit of Mathew only it was not for the benefit of all
constituted as tax lien over the inheritance or share of
the heirs of the decedent in which case it cannot be
the inheritance of the heir.
allowed as a deduction from the gross estate.

34
 TAXATION 2 NOTES
Case: Dizon v. CTA
Under the discussion of claims against the estate, the
requisites of deductibility are:
1. That there must be a valid and enforceable
obligation
2. Existing at the time of death
3. Must be reasonable in amount
4. Contracted in good faith
Can that particular liability be considered as a
deduction against the gross estate? Yes because it is
considered as existing at the time of death. Post
death developments are immaterial in the valuation of
the gross estate.
In the date of death valuation rule what should be
material are:
1. The valuation of the property at the time of death
and all existing interest at the time of death. Any post
death developments shall be immaterial in the
valuation of the gross estate.
(Case of Gabriel v. CA was not discussed)
GIFT TAXATION
What is the nature of gift tax?
Excise tax why? because this is a tax on the privilege
of transferring property surreptitiously during the
lifetime of the transferor.
2 concepts of gifts:
1. Direct gift
2. Indirect gift
Difference between Direct and Indirect gift:
Direct gift has the element of intent to donate or
animus donandi on the other hand, indirect gift does
not have that element or there was no intention to
donate the property.
For there to be a taxable donation, there are four
requisites or elements of taxable donation:
1. Capacity of the donor – meaning the donor
must be capacitated to donate the property
2. Intent to donate or animus donandi – this
particular requisite should not be required in
case of indirect gift
3. There must be acceptance of the gift because
there will be no perfected gift if the gift has
not been accepted by the done
4. Delivery of the gift
Under Revenue Regulation 2-2003, donor’s taxes shall
accrue if there is a perfected or completed gift and
there would only be a completed gift if there is
delivery of the gift.
Review of provisions under the Civil Code:
If there is a donation between a husband and wife,
what is the status of the donation? VOID not unless
the gift is in the nature of a moderate gift.
What if the donation has been made between a
person and his paramour? What is the status of
donation? VOID
In these situations where there is no valid gift, there
can be no accrual of donor’s tax because it is not a
completed gift in which case the formalities of a
donation must be remembered. Should the donation
of a property be made in writing?
Donation of personal properties: should it be made in
writing? YES, if the value of the personal property is
more than 5,000 pesos.
What if the property being donated is a real property
should it be made in writing? YES. Can it be made in a
private instrument? What is the effect if the donation
of the property is made in a private instrument? What
is the status of the contract? VOID, because the civil
code provides that the donation of real property must
be made in a public instrument otherwise it shall be
void. So, if it is in a private instrument, will there be
accrual of the donor’s tax? NONE, because the
donation is VOID.
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 TAXATION 2 NOTES
Example No. 1:
Ma’am Tin has given a gift in favor of his boyfriend, a
pair of shoes worth 10,000 pesos and she had written
a love note which said, “To my boyfriend who cannot
support himself, this gift symbolizes my love for you,
love Tin-Tin”
Q: Is it a valid gift? This is a donation of personal
property worth 5,000 pesos. Did she made it in
writing? Yes. Wala namang formality na dapat public
instrument yan di ba? Valid donation? YES, will there
be accrual of donor’s tax liability? YES
Example No. 2:
Ferdz gave a gift to his girlfriend (a trip to
somewhere) ang nagastos niya ay 3,000. This is less
than 5,000 so should it be made in writing? NO. Is that
a valid gift? Yes. Should there be accrual of donor’s
tax liability? Yes, valid donation yun eh.
Example No. 3:
Bulaklak na 40 pesos na ibinigay sa teachers para
pumasa at hati-hati pa kayo sa bayad. Is that a gift?
Yes. Should there be donor’s tax to be imposed?
Answer: talking about the theoretical part, there
should be accrual of donor’s tax liability because all
the elements of a taxable donation are present
however the government will not deduct 30% of 40
pesos because the cost of collection is higher than the
tax to be collected and you call that as abatement of
tax liability.
In other words, there is still a tax liability but the tax
liability will no longer be collected because there
would be no exemption if there is no exempting law.
And there is no law which exempt such amount from
tax liability not unless the gift has been given in favor
of a relative.
INDIRECT GIFTS
1. Condonation of indebtedness
2. Transfers for Insufficient Consideration
3. Waivers
4. Renunciation of Inheritance
CONDONATION OF INDEBTEDNESS
Under Income Taxation, if an indebtedness has been
cancelled would it be immediately considered as
subject to donor’s tax? NO, it would be depend on the
reason of the condonation.
If the condonation of Indebtedness was by reason of
rendition of service of the debtor you call that as
remuneratory donation, will it be subject to donor’s
tax? NO, it would be subject to income tax because
there has been a rendition of service.
However, if the condonation of Indebtedness was by
reason of pure generosity. Will that be subject to
donor’s tax? YES.
If the condonation of Indebtedness has been made
between a corporation and stockholder where the
stockholder is the debtor, what is the tax implication
of the condonation of Indebtedness of the
stockholder? It would be treated as a declaration of
dividend in which case the condonation of
Indebtedness shall be subject to final withholding tax
if the taxpayer is an individual taxpayer.
TRANSFER FOR INSUFFICIENT CONSIDERATION
It is a transfer for consideration which is not a bona
fide sale from adequate and full consideration in
money therefore if there is a deed of absolute sale
indicating that the personal property has been sold
for 1 million when the fair market value of the
personal property is 3 million pesos. And there is
convincing evidence that the deed of sale has not
been entered into at arm’s length because they have
undervalued the gross selling price of the property.
Would we consider the transfer as a transfer for
insufficient consideration? Yes, because there is no
bona fide sale and therefore the difference between
the actual selling price or actual consideration and the
market value shall be subject to donor’s tax that is if
the transfer would take effect during the lifetime of
the transferor so the 2M will be subject to donor’s tax.
But if the transfer would take effect after the death of
the transferor, then the difference between the actual
selling price or actual consideration and the market
value shall be subject to estate tax.
WAIVER (not discussed)
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 TAXATION 2 NOTES
RENUNCIATION OF INHERITANCE
2 types of renunciation of inheritance:
1. General renunciation
2. Specific renunciation
Difference between general renunciation and specific
renunciation:
General renunciation is the renunciation in favor of all
heirs on the other hand; specific renunciation is the
renunciation of inheritance in favor of one or some
but not all of the heirs.
General renunciation is not subject to donor’s tax but
specific renunciation shall be subject to donor’s tax.
Why is this so? General Renunciation is not considered
an indirect gift because in the first place if the heir will
renounce his share the right of accretion shall apply.
And if we would apply the principle of accretion under
succession law then the remaining heirs shall succeed
to the inheritance that has been renounced by the
renouncing heir.
On the other hand, if we talked about the specific
renunciation then that is in the nature of an indirect
gift because the right of accretion will not apply.
Example No. 1
When former President Corazon Aquino died who will
inherit? Her children (Kris, Noy, Viel, Balsy). Kris said
that she does not need the inheritance from her
mother because that is only 10% of her endorsements
so she renounce her share in favor of Noy, Viel and
Balsy. Is this general or specific renunciation? General
kasi sa lahat niya ni-renounce. Therefore will the
renunciation of the inheritance by Kris be subject to
donor’s tax? NO, kasi kung ayaw niyang magmana at
iapply natin yung batas sinong magmamana ng share
niya? silang tatlo parin. That is the reason why general
renunciation will not be subject to donor’s tax.
Now, what if this was the situation: Kris renounced
her share in favor of President Noy only. Will the
renunciation of inheritance be subject to tax? YES,
because this is a specific renunciation.
February 20, 2016
#Bar
Situation: A died leaving a property with a market
value of 5M. A was survived by his spouse and 3
legitimate children. The surviving spouse had decided
to donate or invest over this property in favor of A1,
A2, and A3 because he was thinking that he was
already 80 years of age, and he does not really need
idle holding the property so she decided to donate.
Q: Will the donation of the interest of the surviving
spouse over the property be subject to tax?
A: If we have this particular property, shall we
consider 5M as the net distributable estate of the
decedent? No. Assuming that this is a community or
conjugal property, half of it shall be owned by the
spouse and half of it shall be owned by the decedent
in their own respective interest. So only half of it shall
be distributed in favor of the heirs. So half of it shall
be divided into 4. ¼ belongs to surviving spouse, ¼
belongs to A1, ¼ belongs to A2, and ¼ belongs to A3. In
which case, if we talk about renunciation of
inheritance, can we use the principles of renunciation
of inheritance with respect to the ½ interest over the
property relinquished by the surviving spouse (is this
an inheritance?)? No because this is not part of her
inheritance. This interest is her own personal interest
over the property. Therefore, the principles on
general and specific renunciation cannot be applied.
But with respect to the ¼ share of the surviving
spouse over the other half interest of the decedent,
the principles under general or specific renunciation
can be applied. In this case, general renunciation shall
be applied. Therefore, the renunciation of the ¼ of
the ½ interest of the decedent shall not be subject to
donor’s tax. Because there exists a general
renunciation. But with respect to the ½ personal
interest of the surviving spouse, we cannot apply that
tenant because this is not part of the inheritance that
she had received from the decedent. Now, can we
consider this as a direct gift? Yes because there is an
intent to donate and therefore, subject to donor’s tax.
FACTORS AFFECTING THE LIABILITY FOR GIFT TAXES
(SEC. 99)
 The liability for gift taxes has only one factor
and that is the relationship of the donor and
the done (Sec. 99).
 If the donor and the done are relatives, then
we will apply the schedular tax rates. The
lowest rate is 2% and the highest rate is 15%.
That is why several authors state that estate
taxes would range from 5%-20% while Donor’s
37
 TAXATION 2 NOTES
tax would range from 2%-15% which is based on
the schedular tax rates.
The net gift is:
Over But Not The Tax Plus Of the
Over Shall be Excess Over
P 100,000 Exempt
P 100,000 200,000 0 2% P100,000
200,000 500,000 2,000 4% 200,000
500,000 1,000,000 14,000 6% 500,000
1,000,000 3,000,000 44,000 8% 1,000,000
3,000,000 5,000,000 204,000 10% 3,000,000
5,000,000 10,000,000 404,000 12% 5,000,000
10,000,000 1,004,000 15% 10,000,000
o What if the net gift is 100k? How much
tax shall be imposed? Exempt. It will
fall under the bracket of gifts that are
exempt from donor’s tax. Sa estate
tax, ang rate na exempt ay 200k or
below.
 What if there is no relationship between the
donor and the donee, meaning, they are
strangers? Will we apply the schedular tax
rates? No. The gift shall be subject to a fixed
tax rate of 30%. Therefore, it is very important
for us to know the definition of relatives
under Sec. 99 of the tax code.
 Who are relatives?
o Spouses
o ascendants or lineal descendants
o Brothers/sisters whether whole blood
or half blood
o Relatives by consanguinity in the
collateral line within the 4th civil
degree
Q: If had given a gift in favor of my husband and the
value of the gift is 15k, will it be subject to donor’s tax?
A: Ang una nyong iisipin, ano bang relationship ng
donor at donee – are they relatives? Yes. He is my
husband; the donee is my husband. Since the donee is
a relative of the donor, will we apply the 30% or the
schedular rate? The schedular rate. Under the
schedular rate, net gifts in the amount of 15k shall be
exempt from donor’s tax. In that particular problem,
the gift is exempt from tax.
Q: Nagbigay kayo sa teacher nyo ng bulaklak na P40 at
nag ambag ambag kayo. Sampu kayo sa klase, P4
each. Is that subject to tax?
A: Theoretically speaking, it is subject to tax. Ang net
gain mo na P4 in favor of a stranger is subject to tax
kasi hindi mon a gagamitin yung schedular tax rates.
So cannot argue to me that the gift is less than
P100,000 and therefore, exempt from tax. Why?
Because the teacher and the student are not relatives.
An author will tell you (Hindi ko maintindihan yung
name), if you are giving several materials and there is
a net gift in the amount of P200,000, you should first
deduct the P100,000 because it is exempt from tax.
And you will arrive at an amount of a net gift which is
your taxable base which you would use in determining
the amount of the tax liability, is this correct? Kasi
every academic year, may estudyante ako na
magsasagot ng ganito, probably because he have
read a particular review material that says that 100k is
exempt from tax, therefore, you should deduct it first
from the gross gift in order to compute the net gift
which is not correct. This is because the 100k is only
being exempt by reason of the application of the
schedular tax rate. So ano ang titignan mo na basis?
200k. so kapag tinignan mo tong 200k na ito and it is a
gift given in favor of a relative, would it be exempt
from tax? No because the gift is more than 100k. How
much is the tax with respect to 200k net gift? It is 0 +
2% of the excess of 100k. So you do not deduct 100k
from the gross estate.
 Husbands and wives are treated as separate
and distinct donors. Therefore, a husband is
treated as a separate and distinct donor and
his wife shall be treated as a separate and
distinct donor.
Q: A husband and wife had given a gift in favor of their
daughter where the gift is 200k, will the gift be
subject to tax?
A: If we treat the husband and the wife as separate
donors, it will be deemed as if the husband had given
100k and the wife had given 100k in favor of their
daughter. What is the relationship between the donor
and the donee – are they relatives? Yes, daughter eh,
lineal descendant. Will we apply the schedular tax
rates? Yes. And applying the schedular tax rates, will
38
 TAXATION 2 NOTES
the husband be subject to tax? No because the gift is
100k. What about the wife – will she be subject to tax?
No because the net gift is 100k.
#2012 Bar
Situation: 400k cash gift has been given by the
parents of A in favor of A and her husband.
Q: Are the donations taxable?
A: It is part taxable and part not taxable. Since this is
presumed to be conjugal/community, then we would
assume the 200k has been given by the husband in
favor of the daughter and son-in-law, and 200k has
been given by the wife in favor of the daughter and
son-in-law. In which case, it would be as if the
husband has given 100k in favor of the daughter and
100k in favor of the son-in-law. If this is the situation,
does the gift given in favor of the daughter by the
husband be subject to donor’s tax? No. this is a gift
given in favor of a relative and being as such, the
schedular tax rates shall apply and based on such tax
rates, net gifts in the amount of 100k and below shall
be exempt from tax. Will we apply the same answer
with respect to the gift given by the wife in favor of
her daughter? Yes. What about the gift given by the
husband in favor of his son-in-law – will we apply the
schedular tax rates? No because the son-in-law is
considered a stranger in the contemplation of Sec. 99
of the tax code. So how much is the tax with respect
to the gift given in favor of the son-in-law? It will be
30% based on 100k. Will we apply the same answer
with respect to the gift given by the wife in favor of
son-in-law? Yes. So what is the lesson learned? Do not
give gifts in favor of in-laws. Joke lang. The lesson
learned is if the gift has been given in favor of in-laws,
it shall be treated as gift given in favor of strangers.
Since it is a gift given in favor of a stranger, then we
will apply the fix rate of 30% based on the net gift.
#Bar (According to ma’am, she really loves this
question because it is a little bit challenging)
Situation: Husband and wife had given a gift in favor
of their daughter and they had given this cash gift
because their daughter is getting married on
December 8, 2015. The cash gift is 420k.
Side Note: In order to answer this question, you need
to be informed of several principles under donor’s tax.
The first principle is this – donor’s taxes are being
computed under a cumulative basis. And donor’s
taxes are computed per taxable year. The second
principle is about dowry deductions – dowry
deductions is equivalent to the amount of 10k and it
can only be deducted by a resident donor who’s child
is whether legitimate or illegitimate is getting married
and the gift must be given on account of marriage
where the gift must be given before the marriage or 1
year after the marriage. In this particular example, do
we have resident donors? Yes. Is the gift given in favor
of a child? Yes. Is it being given on account of
marriage? Yes. Was it given before the marriage or 1
year after the marriage? Yes, it was given before the
marriage. Therefore, can the donor deduct 10k dowry
deduction? Yes. But that is not the question.
Q: What is the best mode to donate the property in
favor of their daughter in order to reduce or avoid the
payment of tax liability?
A: We can give the gift:
Can there be dowry deductions in 2015? Ah yes! Diba,
it’s a gift given on account of marriage – it was given
before the marriage. So magkano yung bawas? 10k. It
will result in a net gain of 95k – exempt tama? Sabi
nya, noong, 2016, chaka nalang ibigay yung 105k din.
Since this is given on a different taxable year, iba na
naman bang computation nyan? Yes because we
compute the donor’s tax per taxable year. So yung
donation noong 2016, masusubject ba sya sa tax?
Pwede pa bas yang magbawas ng 10k ulit? The answer
is in the negative. Why? Because the donor had
already availed of dowry deduction in the amount of
39
 TAXATION 2 NOTES

10k in 2015. Otherwise, it would be in contravention 2. The gift must have been given in favor of a
with the limitation that the dowry deduction shall only child whether legitimate or illegitimate.
be 10k per gift on account of marriage. So yung 105k 3. The gift must be given on account of
noong 2016, subject to tax? Yes. Subject na yan sa tax marriage.
kasi that’s more than 100k. so he excess of 100k shall 4. The gift must be given before the
be subject to 2% tax. Is there a better way? If the gifts marriage or 1 year after the marriage.
to be given before marriage would be 110k each, and 5. The deduction must only be limited to 10k.
give the remaining 100k each on a different taxable  Non-resident donors cannot avail of done
year, the 10k donated be deducted because it is a gift deductions.
on account of marriage which would result in a net  The next two items in the list are not
gift of 100k each, each of them can avail of donee considered as deductions but as exemptions
deduction. Why? Because you treat the husband as a because you do not include them as part of
separate and distinct donor from the wife so tig-isa the gross gift. They are the following:
sila ng 10k. If it would allow 200k net gift for the o Donations in favor of the National
taxable year 2015, is this subject to tax? No because Government or its Political
magfafall sya sa 100k below eh. Ngayon, yung Subdivisions provided that the
remaining 200k, binigay noong 2016. Exempt na donation will be used exclusively for
naman ba to sa tax? Yes. You do not add the previous public purpose. If a gift has been given
gift because it was made on a different taxable year. in favor of a national government and
You only compute taxes on a cumulative basis if they the gift shall be used exclusively for
were given during the same taxable year. The 100k public use or public purpose, it will not
net gift was actually given in a different taxable year. form part of the amount of gross gift
Therefore, we compute it separately from the because that is considered as an
previous gift given in 2015. Is the 2015 donation exemption.
exempt from tax? Yes. Is the 2016 donation exempt o Donations in favor of charitable
from tax? Yes. This particular system is called splitting organizations or social welfare
of donations and it is actually a mode in order to avoid institution. There is a qualifying phrase
the payment of donor’s tax. which state that not more than 30% of
the donation shall be used for
administrative purpose. So if that
particular condition has been
complied with, then the donation
made in favor of the social welfare
institution shall be exempt from
donor’s tax. Being exempt, the gift
shall not form part of the gross gifts
DEDUCTIONS/EXEMPTIONS FROM GIFT TAX (SEC. 101) made during the taxable year.
 If you would take a look at Sec. 101 of the tax
Question in relation to tax 1: Bakit idodonate ni ABS sa
code, the title of that particular section is
sagip kapamilya instead of ABS directly giving it to the
exemption. If we would take a look at the first
members of the family of the victims?
item in the list, we have there dowry
A: If the gift had been given directly to the victims,
deduction. Dowry is not really in the nature of
ABS cannot avail of charitable contribution as a
exemption but a deduction because you do
deduction because the recipient is not a qualified
not exclude it from the gross gift but rather
donee. If ABS has coursed its donation through sagip
you just deduct the 10k.
kamapilya which is a social welfare institution, can
 Requisites of deductibility of Dowry
ABS be allowed to use the donation as a charitable
deductions:
contribution? Yes because it has been given to a
1. The donor must be a resident donor.
40
 TAXATION 2 NOTES
qualified donee. That is under income taxation. The
other aspect of the story would be donor’s tax
because you need to remember that the act of ABS is
also an act of transferring a property gratuitously to
another person. Kapag binigay ni ABS yung regalo sa
victims ng typhoon Yolanda, will the donation be
subject to tax? Yes because under Sec. 101, there are
only 2 items in the list that are exempted – donations
made in favor of the national government or its
political subdivisions and donations made in favor of
social welfare institutions or NGOs. Provided that not
more than 30% shall be used for administrative
purpose. May nakasulat ba dyan na victims of
calamity? Wala. May nakasulat ba dyan na individuals?
Wala. In which case, since the law does not provide
for any exemption with respect to such donation,
then such donation shall be subject to tax. Now, what
if ABS has coursed its donation through sagip
kapamilya, meaning ABS had donated to sagip
kapamilya – would that be exempt from donor’s tax?
Yes provided that not more than 30% of the gift shall
be used for administrative purpose. Eh saan lang ba
gagamitin ni sagip kapamilya yun? Diba gagamitin din
naman nya yun para sa victims of typhoon Yolanda.
Ginamit nya ba yun from administrative purpose? No.
Therefore, ABS shall be exempt from donor’s tax. In
that situation, in adopting that particular scheme, ABS
has two benefits: (1) exemption from donor’s tax, and
(2) availment of charitable contributions as an
allowable deduction.
 RR 2-2003 has included additional deductions
from the gross gift. They are the following:
o Diminution of their value of the gift.
o Encumbrance assumed by the donee.
 The value of the diminution or the value of the
encumbrance that has been assumed by the
donee shall be treated as a deduction from
the gross gift. The rationale is that only that
portion that had redounded to the benefit of
the donee shall be treated as a taxable gift.
Situation: I had donated a real property with a FMV of
5M in favor of Paulo. However, I had mortgaged the
same property in order to secure my obligation and I
still have an outstanding obligation in the amount of
3M pesos. Paulo and I have agreed that Paulo would
assume the 3M obligation after the donation and that
would be included as part of the stipulation in the
deed of donation.
Q: How much is the taxable gift?
A: The value of the gross gift is 5M, however, the
donor can deduct the encumbrance assumed by Paulo
from the gross gift because technically, Paulo will only
benefit up to the extent of 2M and this is the reason
why encumbrances assumed by the donee shall be
treated as deduction from the gross gift.
TRANSFERS FOR INSUFFICIENT CONSIDERATION
(SEC. 100)
 Just remember that the sale of real property
classified as capital asset which is subject to
tax under 24D, will never ever fall in the
application of transfer for insufficient
consideration.
TAX TREATMENT OF POLITICAL CONTRIBUTIONS
 Case: Abello vs. CIR
o SC mentioned that capital
contributions are considered as
taxable gifts. Why are they considered
as taxable gifts? Because of the
existence of the 3 elements – (1)there
is increase in the patrimony of the
recipient, (2) decrease in the
patrimony of the giver, and (3) an
intent to donate or animus donandi.
Since all these elements exists, then
capital contributions are treated as
gifts, and being gifts, they are subject
to tax. However, the Congress had
enacted a law in 1991 and that is RA
7166 which was made effective on
Nov. 25, 1991, providing that if there is
a compliance with the reportorial
requirements provided under the
Omnibus Election Code, then
campaign contributions shall be
exempt from donor’s tax. But
remember, capital exemption shall
only be exempt from donor’s tax if
they had been made after the
effectivity of RA 7166 and that there
has been compliance with the
reportorial requirements provided
under the Omnibus Election Code. So
41
 TAXATION 2 NOTES
kung may problem sa bar exam at
walang inispecify na date or year,
iaasume nyo ba na yung capital
contribution ibinigay yung year nung
bar ninyo? Yes. Diba yun lang naman
yung assumption mo na ang problem
pag walang specified date sa question,
i-assume mon a nangyari at the
present time. So kapag nangyari at the
present time, will the capital
contributions be exempt from donor’s
tax? Yes. Pero syempre lagyan mo ng
qualifying phrase na – provided that
the requirements provided under the
Omnibus Election Code was complied
with.
 Under RR 8-2009, the political candidate or
the political party has been constituted by the
government as a withholding agent of the
income payments made to suppliers of
campaign materials/paraphernalia. It works
when a campaign contribution has been given
in favor of a political party or a political
candidate and this particular contribution has
been used in order to procure campaign
materials. If that is the situation, then the
income payments made to the suppliers shall
be subject to 5% Creditable Withholding Tax.
And who shall withhold the 5% creditable
withholding tax? Yung political party or yung
political candidate.
Situation: Mr. A donated 100k in favor of Bongbong
Marcos. Bongbong Marcos had used the 100k in order
to purchase posters, t-shirts, etc. and he only has 1
supplier – Mr. Lee.
Q1: Is the donation made by Mr. A subject to tax?
Matataxan basi Mr. A dahil nagbigay sya? Supposedly
yes because it is a gift which should have been subject
to donor’s tax. However, it is not subject to donor’s
tax because under RA 7166, campaign contributions
are exempt from donor’s tax provided that the
reportorial requirements provided under the Omnibus
Election Code are complied with.
Q2: Will the 100k received by Bongbong be subject to
income tax – are gifts subject to income tax? No –
gifts, bequests and devises are excluded from the
gross income under Sec. 32(B) of the Tax Code.
Therefore, it will not be subject to income tax.
Q3: With respect to the payments made by Bongbong
to Mr. Lee, is that subject to tax? Yes. Who is the
income earner in this example? Mr. Lee. The
obligation of the political candidate under RR 8-2009
is to withhold 5% creditable withholding tax on the
income payments made to Mr. Lee. So if all the 100k
has been paid to Mr. Lee, then the withholding tax
shall be 5% of the 100k.
Q4: What if Bongbong failed to withhold the taxes
from the income payments made to Mr. Lee, would
that make the donation subject to tax? Ang sabi lang
sa 7166, magcomply ka lang sa Omnibus Election
Code, exempt nayan. Walang sinabi na magcomply ka
sa RR 8-2009. So what is the effect of failure to
withhold? It will only make Bongbong liable for the 5%
CWT in the event that the government cannot collect
from Mr. Lee based from a Ruling.
 RR 7-2011 states that unused campaign
contributions of a political candidate or a
political party shall be subject to income tax.
Last school year, dean Jason has asked this question –
Secretary of Finance issued a RR providing that
unused campaign contributions shall be subject to
income tax. Rule on the legality of the RR. If we would
simplify the question of dean Jason, he is simply
asking to rule on the legality of RR 8-2011.
A: The RR is contrary to the provisions of the tax code
particularly under Sec. 32(B) of the tax code, gifts,
bequests, and devises shall be excluded from the
gross income and being excluded from gross income,
gifts can never be subject to income tax. Under the
case of Abello vs. CIR, campaign contributions are in
the nature of gifts and being in the nature of gifts,
such will not be subject to income tax.
VALUATION
 The valuation of gross gifts is the same as the
valuation of the gross estate. So it is based on
the Market Value. And what is market value?
Sec. 6(e) provides that Market Value is the
value prescribed by the BIR which is called the
Zonal Value, or the value prescribed by the
city/provincial assessor which is the Assessed
Value, whichever is higher.
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 TAXATION 2 NOTES

dyan yung binayaran ko na 1k? Yes. So how much is my

ADMINISTRATIVE REQUIREMENTS payment in the month of December? Only 1k.
 There must be a filing of a donor’s tax return
within 30 days from the date of donation.  Filing of notice of donation is not required.
However, if the donor is exempt from paying
BJ: Ma’am you had mentioned that we compute donor’s tax and would avail the amount of
donor’s tax on a cumulative basis, so would that mean such donation as charitable contribution, then
the filing of the donor’s tax return shall be made a notice of donation shall be required
within 30 days from the date that the last gift has provided that the amount of gross gifts would
been given? exceed 50k.
A: The answer is in the negative because under the tax
code, it speaks of 30 days from the date of donation. Q: Doon sa case ni ABS, required ba sya na magfile ng
Example, if I had given a gift in the month of January notice of donation? Yes. Gagamitin nya yung donation
in favor of Ferdinand amounting to 50k and I had as a charitable donation, gusto nyang ma-exempt sa
given a gift in favor of Paulo in the month of June tax at yung gift at more than 50k
another 50k, and I had given a gift in favor of Amor in
the month of September another 50k, In the month of  When will donor’s tax be paid? Pay as you file
December, I had given a gift in favor of Von, 50k, and system. So kalian mo dapat bayaran? Within
all of them are my full brothers, when would the 30 days from the date of donation because
return be filed? The return be filed 30 days from that is also the period for the filing of donor’s
January, kung kelan ko binigay yung first gift. Is this tax.
exempt? Yes because it is a gift given in favor of a
relative and the value of the net gift is less than 100k.
Nevertheless, you are required to file a donor’s tax
return within 30 days from the date of gift. In the
month of June, I had given a gift in favor of Paulo, will
I file a return? Yes within 30 days from June. Since
donor’s taxes are computed in a cumulative basis, the
50k that I had given in favor of Paulo will be added to
the previous gift that I had given in favor of
Ferdinand. So how much is the total gift given? 100k –
is this exempt from tax? Yes. In the month of
September, am I required to file a donor’s tax return?
Yes, 30 days from the date of donation. Since it is
reported in a cumulative basis, the 50k gift given in
the month of September will be added to the previous
gifts given during the same year kasi nga cumulative –
so plus 100k. Is 150k gifts subject to tax? Yes, more
than 100k na yan eh. How much is the tax? 2% of the
excess of 100k. So excess of 100k is 50k times 2% is 1k
so I need to pay 1k. December, do I need to file a
return? Yes. But how much is the gift to be reflected in
my return? It is the gift given in December plus the
previous gift of 150k amounting to 200k because
gross gifts are computed in a cumulative basis. So
how is the tax for 200k? 2% of the excess of 100k. How
much is that? 2k. Magbabayad ba ako ng 2k sa
government? No. because I had paid 1k. Imiminus ba

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