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PM REYES BAR REVIEWER ON TAXATION II

(Based on the 2013 Bar Syllabus and Updated with the Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)

This is the second installment of my two-part reviewer on taxation. It covers 8 topics, namely: (1) Estate Tax (2) Donor’s Tax (3) Tax Remedies (4) Organization and Functions of the BIR (5) Local Government Taxation (6) Real Property Taxation (7) Tariff and Customs Code; (8) Judicial Remedies (CTA). It is a consolidated and updated version of my reviewers in Tax 2 and Taxation Law Review. This reviewer is based on notes from Atty. Montero and Assoc. Dean Gruba and the books and reviewers of Atty. Mamalateo and Atty. Domondon. I also added some stuff from Atty. Mickey Ingles’ reviewer and Justice Dimaampao. For the transfer taxes, I added stuff from Starr Weigand’s notes. References have also been made to the 2013 Bedan Red Book and the 2012 UP Tax Reviewer.

Further, I added the recent and relevant revenue regulations and other BIR issuances (especially those issued in 2012) and the latest SC and CTA jurisprudence (as of January 31, 2013). Most of the digests were sourced from Du Baladad and Associates (BDB Law) and from Baniqued & Baniqued. The reviewer will make reference to codal provisions. Thus, I recommend that you read this with a copy of the NIRC and other Laws Codal (2012 edition) by Atty. Sacadalan-Casasola

Possessors may reproduce and distribute my reviewer provided my name remains clearly associated with my work and no alterations in the form and content of my reviewer are made. No stamping please.

May this reviewer prove useful to you. If it does, please share it to others. Happy studying!

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TABLE OF CONTENTS

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II. NIRC

B.

Estate Tax

2

C.

Donor’s Tax

18

D.

Value-Added Tax

25

E.

Tax Remedies

59

F.

Organization and Function of the Bureau

of

Internal Revenue

100

III. Local Government Code

A. Local Government Taxation

104

B. Real Property Taxation

120

IV. Tariff and Customs Code

137

V. Judicial Remedies (CTA)

152

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PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

Note: Before we discuss Estate Tax, let us discuss the concept of Transfer Taxes.

Q: What are transfer taxes?

Transfer taxes are those taxes imposed upon the privilege granted by the state to the taxpayer so that he may transfer properties, real or personal, without consideration.

Q: What is the nature of transfer taxes?

Transfer taxes are excise or privilege taxes that are imposed on the act of passing ownership of property and not taxes on the property transferred.

Q: What are the kinds of transfer taxes and define each?

At present, the kinds of transfer taxes are:

1. Estate tax a tax that is levied, assessed, collected and paid upon the transfer of the net estate of a decedent to his or her heirs.

2. Donor’s tax - is an excise tax levied, collected, and paid upon the privilege of transferring property gratuitously by way of gift inter vivos by any person, resident or non-resident

Note: In 1973, aside from estate and donor’s tax, inheritance and donee’s tax were imposed. Inheritance taxes are imposed on the right of the heirs to receive property upon death of the decedent. Donee’s taxes are imposed on the right given to the done to receive property from a donor during his lifetime. PD No. 69 abolished these two transfer taxes. Today, the recipient of property by inheritance or donation is no longer liable for transfer taxes.

Q: Differentiate estate tax from donor’s tax.

Estate Tax

 

Donor’s Tax

 

Tax on the privilege to transfer property upon one’s death (mortis causa)

Tax on the privilege to transfer property during one’s life time (inter vivos)

Maximum tax rate of estate tax is 20% on net estates exceeding Php 10 million and the first Php 200,000 is exempt

Maximum

tax

rate

is

15%

on

the

net

gifts

exceeding Php 10 million

and

the

first

Php

100,000 is tax exempt

Page 1 of 164 Last Updated: 30 July 2013 (v3)

PM REYES BAR REVIEWER ON TAXATION II

(Based on the 2013 Bar Syllabus and Updated with the Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)

Estate tax is computed on the basis of the net estate transferred at the time of the death of the decedent

Donor’s tax is computed on the basis of net gifts given during a calendar year

Q: Compare and contrast donation mortis causa and donation inter vivos.

Mortis Causa

Inter Vivos

Both are transfers without onerous consideration

takes effect upon the death of the transferor

takes effect during the lifetime of the transferor

Ownership will pass only upon death

Ownership

will

pass

during the donor’s time

life

subject to estate tax

subject to donor’s tax

Q: What is the law that governs the imposition of transfer taxes?

Transfer taxes are governed by the laws existing at the time the transfer takes place. In particular

a. Donations inter vivos are governed by the law existing at the time of the effectivity of the donation since the transfer takes place at that time

b. Donations mortis causa are governed by the law at the time of death because it is at that time that the property is transferred.

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B. ESTATE TAX

----------------------------------------------------------

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1. Basic Principles

---------------------------------------------------------------

Q: What transfer is subject to estate tax?

The transfer of the net estate of every decedent, whether resident or non-resident is subject to estate tax.

PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

Q: What is the basis of the imposition of estate tax?

Estate tax is imposed upon the basis of the net estate of the decedent, considered as a unit, regardless of the number of shares into which it may be divided or the relationship of the beneficiaries.

Q: What law shall govern the imposition of estate tax?

RR 02-2003 [December 16, 2002] reiterates the well-settled rule that estate taxation is governed by the statute in force at the time of the death of the decedent.

Q: When does the estate tax accrue?

It accrues upon the death of the decedent. (Section 3, RR 22003 [December 16, 2002]

Q: Is the accrual of the estate tax distinct from the obligation to pay the same?

Yes. The accrual of

the tax

is

distinct from

the

obligation to pay the same. Upon the death of the decedent, succession takes place and the right of the State to tax the privilege to transmit the estate vests instantly upon death (see RR 02-2003 [December 16, 2002].

Generally, the estate tax is paid at the time the estate tax return is filed by the executor, administrator or the heirs. The period to file an estate tax return within six months from the death of the decedent except in meritorious cases where an extension not exceeding 30 days is granted. (see Section 90, Tax Code)

Q: A died. He left a will which provided that all real estate shall not be sold or disposed of 10 years after his death and when such period lapses, the property shall be given to B. (1) When does the estate tax accrue?

The estate tax accrues as decedent.

of

the

death of

the

Q: Based on the same facts as stated above, B contended that the inheritance tax should be based on the value of the estate at the lapse of the 10-year period. Is B’s contention correct?

Page 2 of 164 Last Updated: 30 July 2013 (v3)

PM REYES BAR REVIEWER ON TAXATION II

(Based on the 2013 Bar Syllabus and Updated with the Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)

No, the tax accrues at the time of death notwithstanding the condition. Since death is the generating source from which the power of the State to impose estate taxes takes its being and if upon the death of the decedent, succession takes place

and the right of the state to tax vests instantly, the tax is to be measured by the value of the estate as it stood at the time of the decedent’s death, regardless of any postponement of actual possession or any

subsequent

value.

or

increase

decrease

in

(LORENZO V. POSADAS [JUNE 18, 1937])

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2. Definition

---------------------------------------------------------------

Q: Define estate tax?

An estate tax is a graduated tax imposed on the privilege of the decedent to transmit property at death and is based on the entire net estate, regardless of the number of heirs and relations to the decedent.

It is a tax levied, assessed, collected and paid upon the privilege of gratuitously transferring the net estate of a decedent to his heirs.

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3. Nature

---------------------------------------------------------------

Q: What is the nature of the estate tax?

The Estate Tax is

a. It is not a tax on property

b. It is a tax imposed on the privilege to transmit property a death and is measured by the value of the property.

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4. Purpose or object

---------------------------------------------------------------

Q: What are the purposes for imposing the estate tax?

The generally accepted purposes for imposing the estate tax are as follows:

1. To generate additional revenue for the government

2. To reduce the concentration of wealth

PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

3. Provide for an equal distribution of wealth

4. It is the most appropriate and effective method for taxing the “privilege” which the decedent enjoys of controlling the dispositions

5. It is the only method of collecting the share which is properly due to the State as a partner in the accumulation of property which was made possible on account of the protection given by the State

Q: Discuss the different theories regarding the purposes of estate tax.

Benefit-received

The tax

is

in

return

for

the

theory

services rendered by the state in the distribution of the estate of the decedent and for the benefits that accrue to the estate and the heirs

State-

The tax is in the share

of

the

partnership

 

state as a passive and silent partner in the accumulation of property

theory

Ability

to

Pay

The tax is based on the act that the receipt of inheritance creates the ability to pay and thus contribute to governmental income

Theory

Redistribution of wealth theory

The tax is imposed to

help

reduce undue concentration of

 

wealth in society to which the

receipt of

inheritance is a

contributing factor

 

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5. Time and transfer of properties

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Q: When are properties and rights transferred to successors?

The properties and rights are transferred to the successors at the time of death of the decedent (Art. 777, NCC).

However, despite the transfer of properties and rights at the time of death, the executor or administrator shall not deliver a distributive share to any party interested in the estate unless there is a

Page 3 of 164 Last Updated: 30 July 2013 (v3)

PM REYES BAR REVIEWER ON TAXATION II

(Based on the 2013 Bar Syllabus and Updated with the Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)

certification from the CIR that estate tax has been paid. (see Section 94, Tax Code)

Note: In the determination of the estate tax, you should note 4 things: (1) The classification of the decedent based on nationality and/or domicile (2) The nature and the location of the assets (3) The computation and valuation of the assets (which includes deductions) and (4) Rates.

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6. Classification of decedent

---------------------------------------------------------------

Q:

estate tax?

Who

are

the

taxpayers

liable

1. Resident citizens

2. Non-resident citizens

3. Resident alien

4. Non-resident alien

to

pay

Note: Only natural persons can be held liable for estate tax. A corporation cannot be liable for the obvious reason that they cannot die (naturally speaking).

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7. Gross estate vis-à-vis net estate

8. Determination of gross estate and net estate

---------------------------------------------------------------

Read Section 85, ¶1

Q: How is gross estate determined?

Decedent

Determination

of

gross

estate

Resident

Citizen,

All

properties,

real

or

Non-resident

personal, tangible

or

Citizen,

Resident

intangible,

wherever

Alien

situated,

plus

items

includible in gross estate

Non-Resident Alien

Only those properties situated in the Philippines provided that with respect to intangible personal property, its inclusion in the gross estate is subject to the rule of reciprocity under Section 104 of the Tax Code

--------------------------------------------------------------- (See Section 4, RR No. 2-2003 [December 16,

Q: Distinguish Gross Estate from Net Estate

 

Gross Estate

 

Net Estate

The

value

of

all

the

The value of the gross estate less the ordinary and special deductions (see Section 86, Tax Code)

property,

real

or

personal,

tangible

or

intangible,

of

the

decedent

wherever

situated to the extent of his interest at the time of

 

his

death

as

well

as

other items includible in

the

gross

estate

(See

Section 85, Tax Code)

Note: In the case of a non- resident alien decedent, only that part of the entire gross estate which is situated in the Philippines shall form part of his gross estate.

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PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

2002])

Read Section 104, Tax Code

Q: What is the rule in determining the situs of intangible personal property for estate tax purposes?

As a general rule, we apply the principle of res mobilia sequuntur personam (“chattels follow the person”). In other words, the intangible property is taxed based on the domicile of the owner.

However,

intangibles be deemed located in the Philippines, namely:

certain

SECTION

104

provides

that

1. being

Franchises

exercised

in

the

Philippines

2. Shares, obligations,

or

bonds

issued

by

domestic corporations,

or partnerships,

business

or

industry

located

in

the

Philippines

 

3. Shares,

obligations

or

bonds

issued

by

foreign corporations

Page 4 of 164 Last Updated: 30 July 2013 (v3)

PM REYES BAR REVIEWER ON TAXATION II

(Based on the 2013 Bar Syllabus and Updated with the Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)

a. at least 85%

which is located in the Philippines;

or

b. which have acquired situs in the

of

of

the business

Philippines

4. All intangibles owned by residents

Q: What is meant by reciprocity as applied to intangibles of a non-resident alien for estate tax purposes?

As provided in Section 104, there is reciprocity if the foreign country of which the decedent was a citizen or resident at the time of his death:

1. Did not impose an estate tax; or

2. Allowed a similar exemption from estate tax with respect to intangible personal property owned by Filipino citizens not residing in that foreign country.

Q: Must there be total reciprocity?

Yes. In COLLECTOR OF INTERNAL REVENUE V. FISHER

[JANUARY 28, 1961], at issue is whether the shares of stock of a nonresident alien in a domestic mining company can be exempted from estate tax pursuant to the reciprocity proviso in the Philippine Tax Code. The Supreme Court held in the negative. Reciprocity must be total. If any of the two states collects or imposes or does not exempt any transfer, death, legacy, or succession tax of any character, the reciprocity does not work. In this case, the Philippines imposed an estate and an inheritance tax at the time while California imposed only inheritance tax.

Q: How is net estate determined?

Decedent

Determination of net estate

Resident

Citizen,

Net estate is equal to gross estate less ordinary and special deductions and exclusions allowed by law

Non-resident

Citizen,

Resident

Alien

Note: The

special

deductions (FSMA) are: (1) Family Home; (2) Standard deduction (3) Medical expenses and (4) Amount received by heir under RA

4917.

PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

Non-Resident Alien

Net estate is equal to gross estate less ordinary deductions and exclusions allowed by law

Note: Non-resident alien decedent cannot avail of special deductions.

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9. Composition of gross estate

---------------------------------------------------------------

Read Section 85, ¶1 and Section 104, Tax Code

Q: What does the gross estate of a decedent consist of?

Decedent

Composition

of

gross

estate

Resident

Citizen,

1. Real property within and without the Philippines

Non-resident

Citizen,

Resident

2. Tangible personal property within and without the Philippines

3. Intangible personal property within and without the Philippines

Alien

Non-Resident Alien

1. Real property within the Philippines

2. Tangible

personal

property within the

Philippines

3. Intangible

personal

property within the Philippines unless there

is reciprocity in which case it is not taxable

Note: In sum, all assets, real or personal, tangible or intangible wherever located of a citizen and resident alien is subject to estate tax while for nonresident aliens, estate tax is imposed only on properties within the Philippines provided in the case of intangible personal property, it is subject to the rule of reciprocity under Section 104 of the Tax Code.

Read Section 88, Tax Code

Page 5 of 164 Last Updated: 30 July 2013 (v3)

PM REYES BAR REVIEWER ON TAXATION II

(Based on the 2013 Bar Syllabus and Updated with the Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)

Q: How do you value the estate for estate tax purposes?

The properties comprising the gross estate shall be valued based on their fair market value as of the time of death.

Q: For purposes of estate taxation, how is the fair market value of the following properties determined?

Real Property

Fair market value determined by:

1. the CIR (zonal value) or

 

2. that shown in the schedule of values fixed by Provincial and City Assessors, whichever is higher

Shares

of

If unlisted:

 

Stock

 

1. Unlisted common shares are valued based on their book value

2. Unlisted preferred shares are valued at par value.

If listed:

The fair market value shall be the arithmetic mean between the highest and lowest quotation at a date nearest the date of death, if none is available on the date of death itself.

Usufructuary,

The

probable

life

of

the

use

or

beneficiary in accordance with the latest basic standard mortality

habitation,

annuity

table shall be taken into account

Improvement

1. The construction cost per building permit or

 

2. FMV per latest tax declaration

(See SECTION 88, TAX CODE AND SECTION 5, RR 02-

2003]

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10. Items to be included in gross estate

---------------------------------------------------------------

Q: What items/transfers should be included in the gross estate?

a. Decedent’s interest at the time of death

PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

b. Transfers in contemplation of death

c. Revocable transfers

d. Property under general power of appointment

e. Proceeds of a life insurance taken out by the decedent upon his own life where the beneficiary is the estate, his executor or administrator irrespective of whether or not insured retained power of revocation or any beneficiary designated as recovable

f. Transfers for insufficient consideration

Note: These are considered “substitutes for testamentary dispositions.” Although inter vivos in form, they are mortis causa in substance. Note that in all these transfers, if they were made for a bona fide consideration, they shall not form part of the gross estate.

Decedent’s Interest

Read Section 85(A)

interest

include?

It includes any interest having value or capable of being valued, transferred by the decedent at his death

Q:

What

does

the

decedent’s

Transfer in contemplation of death

Read Section 85(B)

Q: When is a transfer considered one made in contemplation of death?

A transfer is considered made in contemplation of death when the impelling motive or reason for the transfer is the thought of death, regardless of whether the transferor is near the possibility of death or not.

Note: The presumption that transfers made within three years before death are made in contemplation of death as provided under PD 1705 is no longer applicable.

Q: What factors should be considered in determining whether a transfer was made in contemplation of death?

One should consider the following:

1. The type of heir (whether compulsory or voluntary)

2. The timing of the transfer

3. Other special factors

Page 6 of 164 Last Updated: 30 July 2013 (v3)

PM REYES BAR REVIEWER ON TAXATION II

(Based on the 2013 Bar Syllabus and Updated with the Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)

Q: What is the relevance of the type of heir in determining if the transfer was made in contemplation of death?

When there is a donation inter vivos is made to a person who is not a forced heir, the presumption is that such transfer is a donation inter vivos.

However, if the recipient of the property is a forced heir, the presumption is that such transfer was made to accelerate inheritance and hence, such transfer is mortis causa. This presumption may be rebutted by evidence to the contrary. (see VIDAL DE ROCES V. POSADAS [MARCH 13, 1933])

Q: Name some instances/factors which would disprove the claim that the transfer was made in contemplation of death.

When the reason for the transfer was the desire of the decedent to:

1. see his children enjoy the property while the donor is still alive

2. save income of property taxes

3. settle family disputes

4. relieve donor from administrative burden

5. to reward services rendered

6. to provide independent income for dependents

In GESTOPA V. CA [OCTOBER 5, 2000], the Supreme Court enumerated some indications that the transfer was a donation inter vivos, to wit:

1. Property was donated out of love and affection

2. When a reservation on the donation is made only with respect to the right of usufruct which denotes naked ownership was already transferred

3. When the transferors retained sufficient property only for the purpose of maintaining their status in life, thereby implying that it was alright to part with the property even during the transferor’s lifetime

4. Donee accepted the donation since in a donation mortis causa acceptance is not required.

Q: A donated parcels of land to X, Y, and Z. A died without any forced heir. In her well, she bequeathed personal property to X, Y,

PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

and Z. The CIR contends that such transfers should form part of the gross estate for purposes of estate taxation. Is the CIR correct?

No. The donation inter vivos was made to a legatee who is not a forced heir. Thus, absent any evidence to the contrary, the presumption holds that such transfer is a donation inter vivos. Such being the case, the transfer shall not form part of the gross estate (see TUASON V. POSADAS [JANUARY 23,

1930]).

Q: Using the same facts above, it was determined that the transfer was made three months before his death. Will the transfer form part of the gross estate?

Yes. In VIDAL DE ROCES V. POSADAS [MARCH 13,

1933], the decedent died without forced heirs but instituted a certain person as a legatee in his will. The presumption that such transfer was a donation inter vivos did not hold because of the timing of the transfer, which was a short period before death.

Q: Prior to his death, A gave his son B a parcel of land through a deed of donation. Upon A’s death, the CIR contends that the transfer should form part of the gross estate for purposes of estate taxation. Is the CIR correct?

Yes. Since the recipient of the property, the son, is a forced heir, the presumption is that such transfer was made in contemplation of death. Thus, the transfer should form part of the gross estate. (see

DIZON V POSADAS [NOVEMBER 4, 1933])

Q: During his lifetime, Father Z donated some of his property to A, B, C on the condition that they provide him rice and money every year. Father Z died. The CIR contends that the transfers should form part of the gross estate of Father Z. Is the CIR correct?

No. In donations inter vivos, as in the present case, the donees acquired the right to the property while the donor was still alive, subject only to their acceptance and the condition that they pay the donor rice and/or money. (see ZAPANTA V. POSADAS [DECEMBER 29, 1928])

Page 7 of 164 Last Updated: 30 July 2013 (v3)

PM REYES BAR REVIEWER ON TAXATION II

(Based on the 2013 Bar Syllabus and Updated with the Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)

Recovable Transfers

Read Section 85(C)

Q: What is a revocable transfer?

the

transferor has reserved his right to alter, amend or revoke such transfer, regardless of whether the power is actually exercised or not during his lifetime and whether the power should be exercised by him alone or in conjunction with someone else. To the extent of any interest therein, it forms part of the gross estate of the decedent.

A

revocable

transfer

is

a

transfer

where

Property

under

General

Power

of

Appointment

Read Section 85(D)

Q: Differentiate the estate tax treatment of property passing under a general power of appointment and one under a special power of appointment.

Kind

of

Nature

Tax Treatment

appointment

General

Donor gives the donee the power to appoint any

Shall form part

of

the gross

estate

 

person

as

 

successor

to

enjoy

the

property.

Special

Donor

gives

the

Shall not form

donee the power

part

of

the

to

appoint

a

gross estate

person

within

a

 

limited

group

to

succeed

in

the

enjoyment

of

the

property

PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

Proceeds of Life Insurance

Read Section 85(E)

Q: When shall proceeds of the life insurance of the decedent form part of his gross estate?

They shall form beneficiary is:

part

of the gross

estate if

the

1. The estate of the deceased, his executor or administrator, irrespective of whether the insured retained the power of revocation

2. Any beneficiary (third person) designated in the policy as revocable

Note: (1) If the policy expressly stipulates that the designation of the beneficiary is irrevocable, then the amount of the proceeds shall not be included in the gross estate.

(2) It is revocable when the beneficiary may still be changed and the decedent has still retained interest in the policy. It is irrevocable when the beneficiary may no longer be changed as they have acquired a vested interest. For third persons whose designations are irrevocable, the proceeds of life insurance shall not form part of the gross estate. If it is revocable, it shall form part of the gross estate.

Transfers for Insufficient Consideration

Read Section 85(G)

Q:

consideration?

are those

transfers that are not bona fide sales of property for

an adequate and full consideration in money or money’s worth.

Transfers for insufficient consideration

What

are

transfers

for

insufficient

The excess of the fair market value at the time of the death over the value of the consideration received by the decedent shall form part of his gross estate.

Note: (1) The rule on transfer for insufficient consideration applies to (a) Transfers in contemplation of death (b) Revocable transfers and (c) Transfers under general power of appointment.

(2) As a numerical example

Page 8 of 164 Last Updated: 30 July 2013 (v3)

PM REYES BAR REVIEWER ON TAXATION II

(Based on the 2013 Bar Syllabus and Updated with the Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)

 

Example 1

Example 2

FMV at time of transfer

100

100

FMV at time of death

 

200

200

Consideration received at time of transfer

70

100

Amount

included

in

30

0

estate

In determining whether there was sufficient consideration, compare the FMV of the property at the time of the transfer with the amount of consideration received at the time of the transfer. However, the amount to be included in the estate is computed by taking the difference between the FMV of the property at the time of death and the amount of consideration received at the time of transfer.

Example 1: Since the property was sold for 30 less than its FMV at the time of the transfer, there is insufficient consideration. Hence, the difference between the consideration received and the FMV at time of death shall form part of the gross estate.

Example 2: This is not a transfer for insufficient consideration, hence, it shall not form part of the gross estate. This is a bona fide sale for an adequate and full consideration in money’s worth.

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11. Deductions from estate

---------------------------------------------------------------

Q: Enumerate the deductions from the gross estate.

The deductions from the gross estate are:

1. Ordinary deductions

a. Expenses, losses, indebtedness, taxes,

etc (ELIT)

i.

Funeral expenses

ii.

Judicial expenses

iii.

Claims against the estate

iv.

Claims against insolvent persons

v.

Unpaid mortgage or indebtedness

vi.

on property Taxes

vii.

Losses

b. Vanishing Deduction

c. Transfer for public use

2. Special deductions (FSMA)

a. Family home

b. Standard deduction

c. Medical expenses

d. Amount received by heir under RA 4917

PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

Note:

deductions.

Expenses, losses, indebtedness, taxes, etc (ELIT)

special

Nonresident

aliens

cannot avail

of the

Read Section 86(A)(1)

Funeral expenses

Q: What the conditions for the deductibility of funeral expenses?

1. Whether paid or unpaid

2. Up to the time of interment

3. The actual amount or in an amount equal to 5% of the gross estate, whichever is lower, but in no case to exceed P200,000

Note: (1) Actual funeral expenses shall mean those which are actually incurred in connection with the interment or burial of the deceased. The expenses must be duly supported by receipts or invoices or other evidence to show that they were actually incurred.

(2) The amount in excess of the P200,000 threshold shall not be allowed as a deduction nor will it be allowed to be claimed as a deduction under “claims against the estate.

Q: A died leaving an estate valued at P20,000,000. His heirs spent P500,000 for all the funeral services. How much should be allowed as a deduction?

The amount deductible is only P200,000. To determine amount deductible, compare P500,000 and P1,000,000 (5% of P20 million). The lower amount is P500,000. However, it is beyond the P200,000 threshold. Thus, only P200,000 will be allowed as a deduction.

Q: Give some examples of funeral expenses that are deductible

1. The mourning apparel of the surviving spouse and unmarried minor children of the deceased, bought and used on the occasion of the burial

2. Expenses for the deceased’s wake, including food and drinks

3. Publication charges for death notices;

4. Telecommunication expenses incurred in informing relatives of the deceased;

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5. Cost of burial plot, tombstones, monument or mausoleum but not their upkeep. In case the deceased owns a family estate or several burial lots, only the value

corresponding to the plot where he is buried is deductible;

6. interment and/or cremation fees and charges; and

7. All other expenses incurred for the performance of the rites and ceremonies incident to interment. (See RR 2-2003 [December 16, 2002])

Q: Give some examples of funeral expenses that are not deductible

1. Expenses incurred after the interment, such as for prayers, masses, entertainment, or the like.

2. Any portion of the funeral and burial expenses borne or defrayed by relatives and friends of the deceased.

3. Medical expenses as of the last illness (See RR 2-2003 [December 16, 2002])

Note: As to (3) This should instead be claimed as part of the deduction for “medical expenses”.

Judicial expenses

Q: What are the requisites for the deductibility of judicial expenses?

Judicial expenses to be deductible

1. Must be incurred during the settlement of the estate but not beyond the last day prescribed by law (within 6 months from the date of death of the decedent) or the extension thereof (in meritorious cases, the CIR may grant reasonable extension not exceeding 30 days) for the filing of the estate tax return.

2. The judicial expenses are incurred in:

a. Inventory-taking of assets comprising the gross estate

b. Administration

c. Payment of debts of the estate

d. The distribution of the estate among the heirs (RR 2-2003)

PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

Q: Give some examples of judicial expenses

Judicial expenses may include:

1. Fees of executor or administrator;

2. Attorney’s fees;

3. Court fees;

4. Accountant’s fees;

5. Appraiser’s fees;

6. Clerk hire;

7. Costs of preserving and distributing the estate;

8. Costs of storing or maintaining property of the estate; and

9. Brokerage fees for selling property of the estate. (RR 2-2003)

In CIR V. CA AND PAJONAR [MARCH 22, 2000], the Supreme Court held that expenses incurred in the extrajudicial settlement of the estate should be allowed as a deduction from the gross estate. It is sufficient that the expense be a necessary contribution toward the settlement of the estate. The notarial fee paid for the extrajudicial settlement is deductible since such settlement effected a distribution of the decedent’s estate to his lawful heirs. The attorney’s fees in the guardianship proceedings of the insane deceased is also deductible as it essential to the proper settlement of the estate, to preserve the properties of the deceased.

In Lorenzo v. Posadas [June 18, 1937], the Supreme Court held that compensation of the trustee earned, not in the administration of the estate, but in the management thereof for the benefit of the legatees or devisees, does not come within the class or reason for exempting administration expenses. Service rendered in behalf that behalf has no reference to closing the estate for the purpose of a distribution thereof to those entitled to it, and is not required or essential to the perfection of the rights of the heirs or legatees.

In De Guzman v. De Guzman-Carillo [May 18, 1978], the Court allowed the following expenses as proper expenses for administration of the estate of the deceased: expenses for the renovation and improvement of the family home, expenses for the lawyer’s subsistence and physician of the deceased during his last illness, and irrigation fees. However, expenses which inured to the benefit of only one heir were not allowed. Further, the expenses for stenographic notes, and celebration of the one year

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death anniversary were not allowed as they had nothing to do with the administration of the estate.

Claims against the estate

Q: What are claims against the estate?

These are debts or demands of pecuniary nature which could have been enforced against the deceased in his lifetime and could have been reduced to simple money judgments. It may arise out of:

1. Contract

2. Tort

3. Operation of law

Q: What are the requisites for deductibility of claims against the estate?

1. Must be a personal obligation of the deceased existing at the time of his death except those incurred incident to his death or those medical expenses

2. Liability must have been contracted in good faith

3. The claim must be a debt or claim which is valid in law and enforceable in court

4. Indebtedness not condoned by the creditor or the action to collect from the decedent must not have prescribed

Q: There were claims against the estate of the deceased which allegedly exceed the gross estate which resulted in the administrator reporting no estate tax liability. The BIR contested the amounts of the claims against the estate deductions stating that lower amounts were paid as compromise payments during the settlement of the estate and these amounts should be what will be considered in arriving at the net estate. Will the compromise amounts be the amounts considered as deductions to the gross estate?

No, the deduction allowable is that amount determined at the time of death. Post-death developments are not material in determining the amount of deduction, especially for the claims against the estate deduction. There is no law, nor

PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

any legislative intent in our tax laws, which disregards the date-of-death valuation principle which is the US rule on deductions. The amount deductible is the debt which could have been enforced against the deceased in his lifetime, nothing more and nothing less (DIZON V. CIR [APRIL 30, 2008])

Note: In sum, post-death developments should not be considered in determining the net value of the estate

Q: What are the requirements to substantial the claims?

In

case

of

a. Instrument must be duly notarized

simple loan

 

b. Duly notarized Certification from the creditor

c. Proof of financial capacity of the creditor to lend;

d. Statement under oath executed by the executor/administrator of the estate reflecting the disposition of the proceeds of the loan (if the loan was contracted within 3 years prior to the death of the decedent)

In

unpaid

a. Pertinent documents evidencing the purchase of goods or service

obligation

 

arose

from

purchase

of

b. Duly notarized Certification from the creditor as to the unpaid balance of the debt, including interest as of the time of death;

c. Certified true copy of the latest audited balance sheet of the creditor

goods

or

services

 

Claims against insolvent persons

Q: What are the requisites for claims against insolvent persons to be deductible?

1. The amount has been initially included as part of the gross estate; and

2. The incapacity of the debtors to pay their obligations is proven, not merely alleged.

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Unpaid

mortgage

or

indebtedness

on

property

Q: What are the requisites for unpaid mortgages to be allowed as a deduction?

1. The FMV of the property mortgaged without deducting the indebtedness has been initially included as part of the gross estate; and

2. The mortgage indebtedness was contracted in good faith and for an adequate and full consideration in money/money’s worth.

Taxes

Q: What are the requisites for unpaid taxes to be deductible?

1. Taxes which have accrued as of or before the death of the decedent; and

2. Unpaid as of the time of his death, regardless of whether or not it was incurred in connection with trade or business

Note: This deduction will not include: (1) income tax upon income received after death, or (2) property taxes not accrued before his death, or (3) the estate tax due from the transmission of his/her estate. These shall be chargeable against the income of the estate because it accrued after the death of the decedent.

Q: Are claims for taxes against the estate not filed in time barred forever?

No. As a general rule, all claims for money against the decedent, arising from contracts, express or implied, whether the same be due, not due, or contingent, all claims for funeral expenses and expenses for the last sickness of the decedent, and judgment for money against the decedent, must be filed within the time limited in they notice; otherwise they are barred forever.

However, as an exception, taxes assessed against the estate of a deceased person need not be submitted to the committee on claims in the ordinary course of administration. They may be collected even after the distribution of the decedent’s estate among his heirs who shall be liable therefore in proportion of their share in the inheritance. (Vera v. Fernandez [March 30, 1979])

PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

Losses

Q: What are the requisites for losses to be deductible from the gross estate?

Losses are deductible:

1. were incurred during the settlement of the estate

2. arose from fires, storms, shipwreck or other casualties or from robbery, theft or embezzlement

3. are not compensable

4. are not claimed as deduction for income tax purposes

5. were incurred not later than the last day for payment of the estate tax

Vanishing Deduction

Read Section 86(A)(2), Tax Code

Q: What is a vanishing deduction?

A vanishing deduction is a deduction allowed on the property left behind by the decedent which he had acquired previously by inheritance or donation

Note: The rationale is to minimize the effects of double taxation on the same property within a short period of time; the law allows a deduction to be claimed on the said property.

Q: What are the conditions for the deductibility of property previously taxed or vanishing deduction?

1. Death

2. Identity of property (the property with respect to which deduction is sought can be identified as the one received from the prior decedent)

3. Inclusion of the property (the property must form part of the gross estate situated in the Philippines of the prior decedent or was a taxable gift of the donor)

4. Previous taxation of property (Estate tax or donor’s tax due thereon must have been paid)

5. No vanishing deduction on the property was allowed to the estate of the prior decedent

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Q: What are the conditions for the deductibility of property previously taxed or vanishing deduction?

1. Determine the FMV of the PPT at the time of the prior decedent’s death and the FMV at the time of the present decedent’s death then get the lower of these two amounts

2. Prorate:

Note: Total deductions do not include the special deductions (FSMA)

3. Subtract 2 from 1

4. Apply the rate of vanishing deduction to 3 above.

Note: Let us have a numerical example. In 2000, A inherits a land valued at P500,000. In 2003, A died with the said land having a value of P600,000. His gross estate amounted to P2 million. His allowable deductions amounted to P400,000

500,000 (

= 400,000

= 400,000 x 60% = P240,000

Transfer for public use

Read Section 86(A)(3), Tax Code

Q: What are allowed deductions as Transfers for Public Use?

The deduction on transfers for public purpose refers to the amount of all bequests, legacies, devises, or transfers to or for the use of the Government or any political subdivision thereof, for exclusively public purposes,

Family home

Read Section 86(A)(4), Tax Code

Q: What are the requisites for deductibility of a family home?

1. The family home must be the actual residential home of the decedent and his family at the time of his death as certified by the barangay captain

PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

2. The total value of the family home must be included as part of the gross estate

3. Allowable deduction must be in an amount equivalent to:

a. the current FMV of the family home as declared or included in the gross estate or

b. the extent of the decedent’s interest (whether conjugal/community or exclusive property), whichever is lower

4. The deduction not exceed Php 1,000,000.

Standard deduction

Read Section 86(A)(5)

Q: What is the standard deduction?

The standard deduction shall be Php 1,000,000 without need of substantiation.

Medical expenses

Read Section 86(A)(6)

Q: What are the requisites for deductibility of medical expenses?

1. The expenses were incurred by the decedent within 1 year prior to his death

2. The expenses are duly substantiated with receipts

3. The deductible expense shall not exceed Php

500,000

Note: The amounts of medical expenses incurred in excess of P500,000 shall no longer be allowed as a deduction for medical expenses. Neither can any unpaid amount thereof in excess of the P500,000 threshold nor any unpaid amount for medical expenses incurred prior to the one-year period from date of death be allowed to be deducted from the gross estate as claim against the estate (see Section 6, RR 2-2003)

Amount received by heir under RA 4917

Read Section 86(A)(7), Tax Code

Q: Discuss the deductibility of amounts received by heirs under RA 4917.

Amounts received from the decedent’s employer as a consequence of the death of the decedent- employee as retirements benefits under RA 4917 (An Act Providing that Retirement Benefits of Employees of Private Firms shall not be subject to

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any Tax whatsoever) is allowed as a deduction provided that the amount of benefit is included in the gross estate.

Net share of the Surviving Spouse

Read Section 86(C), Tax Code

Deductions allowed to Non-Resident Estate

Read Section 86(B) to (D), Tax Code

Q: What may be deducted from the gross estate of non-resident aliens?

Citizen

or

Resident

Non-resident

alien

Alien Decedents

 

decedents

 

Gross

Estate

-

all

Gross Estate includes only that part of the gross estate located in the Philippines

property at the time of

death,

wherever

situated.

Deductions:

 

Deductions:

 

1.

Ordinary deductions

1.

Ordinary deductions

a.

Expenses,

2.

Share

in

conjugal

 

losses,

property

indebtedness,

 

taxes,

etc

Note: (1) Non-resident alien decedent cannot avail of special deductions. (2) No deduction shall be allowed unless the executor, administrator, or anyone of the heirs as the case may be

includes in the estate tax return of the decedent, the value at the time of his death

(ELIT)

 

i.

Funeral

 

expenses

 

ii.

Judicial

iii.

expenses

Claims

 

against

the

estate

 

iv.

Claims

that part of the gross estate of the non-resident not situated in the Philippines (Section 86(D), Tax Code)

 

against

insolvent

persons

 

v.

Unpaid

 
 

mortgage

or

indebtedness

on property

 

vi.

Taxes

vii.

Losses

b. Vanishing

 
 

Deduction

 

c. for

Transfer

 

public use

PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

2. Special

deductions

(FSMA)

a. Family home

b. Standard

deduction

c. Medical

expenses

d. Amount

received by heir under RA 4917

conjugal

3. Share

in

property

---------------------------------------------------------------

12. Exclusions from estate

---------------------------------------------------------------

Q: What are the exclusion from the gross estate?

1. The capital (exclusive property) of he surviving spouse is considered as an exclusion in the gross estate under Section 85(H) of the Tax Code

Note: Under Section 86(C), the share of the surviving spouse n the absolute community/conjugal partnership is considered as a deduction

2. Other items which are excluded:

a. GSIS proceeds/benefits

b. Accruals from SSS

c. Proceeds of life insurance where the beneficiary is irrevocably appointed

d. Proceeds of life insurance under a group insurance taken by employer (not taken out upon his life)

e. War damage payments

f. Transfer by way of bona fide sales

g. Transfer of property to the government or to any of its political subdivisions

h. Merger or usufruct in the owner of the naked title

i. Properties held in trust by the decedent

j. Acquisition and/or transfer expressly declared as not taxable

---------------------------------------------------------------

13.

foreign country

---------------------------------------------------------------

Tax credit for

estate

taxes paid

in

a

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Read Section 86(E), Tax Code

Note: It is a remedy against international double taxation. to minimize the onerous effect of taxing the same property twice, tax credit against Philippine estate tax is allowed for estate taxes paid to foreign countries.

Q: Who may avail of tax credit?

1. Citizen

2. Resident alien

Q: What is the amount allowable as a Tax Credit?

The estate tax imposed by the Philippines shall be credited with the amounts of an estate tax imposed by the authority of a foreign country.

However, the amount of tax credit is subject to the following limitations:

1. Per country basis: The amount of the credit in respect to the tax paid to any country shall not exceed the same proportion of the tax against which such credit is taken which the decedent’s net estate situated within such country taxable under the NIRC bears to his entire net estate.

Note: To best illustrate:

2. Overall basis: The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the decedent’s net estate situated outside the Philippines taxable under the NIRC bears to his entire net estate.

Note: To best illustrate:

---------------------------------------------------------------

14. Exemption of certain acquisitions and transmissions

---------------------------------------------------------------

Read Section 87, Tax Code

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Q: What are the acquisitions and transfers expressly declared as exempt?

1. Merger of the usufruct in the owner of the naked property

2. Transmission or delivery of the inheritance or legacy by the fiduciary heirs or legatee to the fideicomissary

3. Transmission from the first heirs, legatees or donees in favor of another beneficiary in accordance with the desire of the testator

4. All bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of the income of which inures to the benefit of any individual, provided that not more than 30% of the said bequests, devises, legacies or transfers shall be used for administrative purposes

Note: The bequest, devises, legacies, or transfers does not include those made to educational institutions.

Now, I want to show how we compute estate tax due and payable.

Q: How is estate tax computed?

1. List down all the common (conjugal or community) property

2. List down all the separate or exclusive property of the decedent (exclude the separate or exclusive property of the surviving spouse)

3. Include the family home either in (a) or (b), depending on the status of the house and lot

4. The resulting total is the gross estate

5. Deduct the appropriate deductions

6. The resulting balance is the net estate

7. Deduct the special deductions: (1) share of the surviving spouse (1/2) of the net common properties and (2) family home

8. The resulting balance is the taxable net estate

9. Compute the estate tax using the graduated estate tax rates

10. Deduct any tax credits

11. The resulting balance is the estate tax due and payable

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Note: To best illustrate

Conjugal community property + Separate property of decedent

= Gross Estate

Less:

Allowable

deductions,

conjugal/community

deductions, separate/exclusive deductions

= Net Estate

Less: Special deductions

or registerable property such as real property, motor vehicle, shares of stock or other similar property for which a clearance from the BIR is required as a condition precedent for the transfer of ownership thereof in the name of the transferee.

Q: When should the estate tax return be filed?

General Rule: Within 6 months from the death of decedent

= Taxable Net Estate

Multiplied by estate tax (per graduated rates)

Less: Tax Credits

= Estate Tax due and payable

Exceptions: The CIR, in meritorious cases, grant an extension not exceeding 30 days for filing the return.

Other Administrative Requirements

Read Section 91-97, Tax Code

---------------------------------------------------------------

15. Filing of notice of death

--------------------------------------------------------------- Q: When should the estate tax be paid?

Read Section 89, Tax Code

General Rule: At the time the return is filed by the executor, administrator or the heirs

Q: When is notice of death required to be given to the BIR?

1. In all cases of transfers subject to tax; or

2. Where, though exempt from tax, the gross value of the estate exceeds P20,000

Q: If required, when shall the notice of death be given?

1.

2.

Within 2 months after the death of the decedent; or Within a like period after the executor or administrator or executor qualifies as such.

---------------------------------------------------------------

16. Estate Tax Return

--------------------------------------------------------------

Read Section 90, Tax Code

Q: When is an estate tax return required?

1. When the estate is subject to estate tax

2. When, though exempt from tax, the gross value of the estate exceeds Php 200,000

3. Regardless of the gross value of the estate when the said estate consists of registered

Exception: The CIR, if he finds that the payment on the due date would impose undue hardship, may grant an extension of:

1. Not to exceed 5 years in case the estate is settled judicially

2. Not to exceed 2 years in case the estate is settled extrajudicially

Q: Who is liable for the payment estate tax?

The estate tax imposed under the Tax Code shall be paid by the executor or administrator before the delivery of the distributive share in the inheritance to any heir or beneficiary.

of the

In CIR V. GONZALES [NOVEMBER 24, 1966], the Supreme Court held that estate taxes are satisfied from the estate and are to be paid by the executor or administrator. Where there are 2 or more executors, all of them are severally liable for the payment of the estate tax. Failure to pay the estate taxes before distribution of the estate would subject the executor or administrator to criminal liability. It is immaterial that an heir administers only 1/3 of the estate and will receive as her share only said portion, for her right to the estate comes after taxes. As an administratrix, she is liable for the entire estate tax. As an heir, she is liable for the entire inheritance tax

PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

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although her liability would not exceed the amount of her share in the estate.

Q: May estate tax be collected even after the distribution to the heirs?

Yes.

claim for taxes and

assessments whether assessed before or after the death of the decedent, is not required to be presented to the committee on claims and appraisals. The Heirs are liable for the deficiency income taxes, in proportion to their share in the inheritance.

[OCTOBER 11, 1930], a

As

held

in

GOVERNMENT

V.

PAMINTUAN

As held in CIR V. PINEDA [SEPTEMBER 15, 1967], an heir is individually answerable for the part of the tax proportionate to the share he received from the inheritance. His liability, however, cannot exceed the amount of his share. On the other hand, a holder of property belonging to the estate is liable for the tax up to the amount of the property in his possession.

Q: How can the BIR recover such unpaid tax liabilities?

The BIR can recover in 2 ways:

1. It may recover said liability from all the heirs who shall share proportionately; or

2. It may go against the property held by an heir if the same is sufficient to cover the whole tax liability (in which case, the heir who paid can seek reimbursement from his/her co-heirs) CIR V. PINEDA [SEPTEMBER 15, 1967]

Note: In both instances, the respective heirs may not be held accountable for more than the share he/she inherited.

Q: Is the approval of the probate court or the court settling the estate of the decedent a mandatory requirement in the collection of the estate tax?

No. As held in MARCOS II V. CA [JUNE 5, 1997], it is discernible that the approval of the court, sitting in probate, or as a settlement tribunal over the deceased is not a mandatory requirement in the collection of estate taxes. It cannot therefore be argued that the Tax Bureau erred in proceeding with the levying and sale of the properties allegedly owned by the late President, on the ground that it was required to seek first the probate court's sanction. There is nothing in the Tax Code, and in

PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

the pertinent remedial laws that implies the necessity of the probate or estate settlement court's approval of the state's claim for estate taxes, before the same can be enforced and collected.

Q: What is the duty of a bank in case of the death of a decedent-depositor?

General Rule: If a bank has knowledge of the death of a person, who maintained a bank deposit account alone, or jointly with another, it shall not allow any withdrawal from the said deposit account, unless the Commissioner has certified that the estate taxes imposed thereon have been paid.

Exception: The administrator of the estate or any one (1) of the heirs of the decedent may, upon authorization by the Commissioner, withdraw an amount not exceeding Twenty thousand pesos (P20,000) without the said certification.

Q: A died and B (wife) tried to withdraw the joint savings deposit they maintained at the PNB Tarlac but failed because C, who claimed to be the couple’s adopted child, objected thereto. C claims that B cannot withdraw any amount from the bank account because she should follow legal procedures governing settlement of the estate of a deceased, unless a competent court issues an order allowing her to withdraw invoking Section 97 of the Tax Code. Can the money be released to B?

No. Section 97 of the National Internal Revenue Code states: “If a bank has knowledge of the death of a person, who maintained a bank deposit account alone, or jointly with another, it shall not allow any withdrawal from the said deposit account unless the Commissioner had certified that the taxes imposed thereon by this Title have been paid; Provided, however, That the administrator of the estate or any one (1) of the heirs of the decedent may, upon authorization by the Commissioner, withdraw an amount not exceeding Twenty thousand pesos (P20,000) without the said certification. For this purpose, all withdrawal slips shall contain a statement to the effect that all of the joint depositors are still living at the time of withdrawal by any one of the joint depositors and such statement shall be under oath by the said depositors.” (POLIDO V. CA [JULY 10, 2007])

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----------------------------------------------------------

C. DONOR’S TAX

----------------------------------------------------------

---------------------------------------------------------------

1. Basic Principles

---------------------------------------------------------------

Read Section 98

Q:

donor’s tax?

The donor’s tax is imposed only on donaitons inter vivos. Donations mortis causa partake of the nature

the

What

donations

are

covered

by

Note: Its purpose is to complement estate taxation by preventing tax-free depletion of the transferor’s estate during his lifetime.

---------------------------------------------------------------

3. Nature

---------------------------------------------------------------

Q: What is the nature of a donor’s tax?

It is an excise tax on the privilege of the donor to give or on the transfer of property by way of gift inter vivos. It is not a property tax (Lladoc v. CIR [14 SCRA 292])

---------------------------------------------------------------

of

testamentary dispositions are subject to estate tax

4.

Purpose or object

 

---------------------------------------------------------------

In

the case of Gestopa v CA [October 5, 2000], the

Supreme Court held that the donation of the

deceased spouses to their illegitimate daughter was

a donation inter vivos. The spouses executed the

deed out of love and affection for the donee, which is a mark of a donation inter vivos. The donor

reserved sufficient properties for their maintenance

in accord with their standing in society, indicating the

donor intended to part with the property donated. And, the donee accepted the donation, which is only required in donations inter vivos.

Q: When is donor’s tax imposed?

Donor’s tax is imposed upon the transfer by any person, resident or non-resident, of any property by gift.

Q:

donor’s tax?

The donor’s tax is governed by the statute in force at the time of the transfer.

What

law

governs

the

imposition

of

---------------------------------------------------------------

2. Definition

---------------------------------------------------------------

Q: What is a donor’s tax?

A donor’s tax is an excise tax imposed on the privilege to transfer property by way of gift inter vivos based on pure act of liberality without any or less than adequate consideration and without any legal compulsion to give.

PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

Q: What are the purposes for the imposition of donor’s tax?

1.

To raise revenues

2.

To tax the wealthy and reduce certain other excise taxes

3.

To discourage inter vivos transfers of property which could reduce the mortis causa transfers on which a higher tax, the estate tax would be collected

4.

It

will tend to reduce the incentive to make

gifts in order that distribution of future income from the donated property may be to

a number of persons with the result that the

taxes imposed by the higher brackets of the income tax are avoided.

---------------------------------------------------------------

5. Requisites of valid donation

---------------------------------------------------------------

Q:

donation?

What

are

the

requisites

of

a

valid

1. Capacity of donor

2. Donative intent (intention to donate)

3. Delivery, whether actual or constructive, of the subject gift

4. Acceptance by the done

5. Form prescribed by law

Note: (1) As to (1) All persons who may contract or dispose of their property may make a donation (Art. 735, NCC). The donor’s capacity shall be determined as of the time of the making of the donation (Art. 737, NCC).

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(2) As to (2) Donative intent is necessary only in case of a direct gift. If the gift is indirectly taking place by way of sale, exchange or other transfer of property as contemplated in cases of transfers for less than adequate and full consideration (see Section 100, Tax Code), donative intent is not always essential to constitute a gift.

(3) As to (3) There is delivery if the subject matter is within the dominion and control of the done

(4) As to (4) Acceptance is necessary because nobody is obliged to receive a gift against his will (OSORIO V. OSORIO [41 PHIL. 531])

Q: ABC Steamship insured the life of A who was then its President and General Manager. He was responsible for the success of the company for which he was compensated for. The company initially designated itself as the beneficiary of the policies but, after A’s death, it renounced all its rights, title and interest therein in favor of A’s heirs. The CIR subjected the donation to donor’s tax. The heirs contend that it was a remuneratory donation on full and adequate compensation for the valuable services of A and as such is not subject to donor’s tax. Is the contention of the heirs correct?

No. The donation is not remuneratory as A has been fully compensated for his services. A donation made by the corporation to the heirs of a deceased officer out of gratitude for the officer's past services is considered a donation and is subject to donee's gift tax. The fact that his services contributed in a large measure to the success of the company did not give rise to a recoverable debt, and the conveyances made by the company to his heirs remain a gift or donation. (Pirovano v. CIR [July 31, 1965])

Q: What are the requisites for a donation of a movable to be valid?

1. Donation may be oral or in writing

2. If oral, the donation must be accompanied with delivery

3. If value is more than Php 5,000, the donation must be in writing and accepted in writing. (Art. 748, NCC)

Q: What are the requisites for a donation of an immovable to be valid?

PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

1.

It

must be in public document

2.

The property donated and the value of the

charges which the done must satisfy must be specified

3.

The donee must accept through a deed or similar instrument. (Art. 749, NCC)

Q: What are the requirements for a donation to be subject to donor’s tax?

1. Property donated is not real property that is

a capital asset

2. The transfer is for less than adequate

consideration

3. The transfer is inter vivos

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6. Transfers which may be constituted as donation a) Sale/exchange/transfer of property for insufficient consideration b) Condonation/remission of debt

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Q: What are considered donations for tax purposes?

1. Sales, exchanges and other transfers of property for less than an adequate and full consideration in money or money’s worth

Except:

considered as capital assets which is

property

Transfers

of

real

subject to CGT.

2. Condonation or remission of debt where the debtor did not render service in favor of the creditor

Note: Condonation or remission of a debt would constitute a donation to the extent of the fair value of the debt condoned or remitted. Therefore, the creditor would be considered a donor for donor’s tax purposes and would be liable for the tax thereon.

Q: A sold his lot not used for business tto his brother B for P500,000 when at that time the lot was valued in the market at P1 million. A bought it for P100,000. In addition, A sold some of the shares of his company ABC Corp to his senior executives. He sold the ABC Corp shares for P300,000 when the

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(Based on the 2013 Bar Syllabus and Updated with the Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)

market value was at P500,000. His original cost in the shares is P100,000. Are the sales subject to donor’s tax?

The sale of the lot is not subject to donor’s tax as it is a real property classified as a capital asset and such is subject to the 6% CGT. The sale of the shares, however, are subject to the donor’s tax of 30% based on the difference between the selling price and the market value.

Q: Creditors A, B and C condoned the debt of XYZ Corp pursuant to a court approved restructuring. Are the creditors liable for donor’s tax?

No. The transaction is not subject to donor’s tax since the condonation was not implemented with a donative intent but only for business consideration. The restructuring was not a result of the mutual agreement of the debtors and creditors. It was through court action that the debt rehabilitation plan was approved and implemented. [BIR Ruling DA 028-2005 [January 24, 2005])

Q: Whether the transfer of property from the distressed Asset Asia Pacific, Inc. pursuant to the Special Purpose Vehicle (SPV) Act of 2002 subject to donor’s tax?

No. The transaction above is not a donation. Hence, it is not subject to donor’s tax. [BIR Ruling No. 109-

2011]

Note: Thus, if the transfer was made pursuant to law, it is not subject to donor’s tax.

Q: A died leaving as his only heirs, his surviving spouse B, and three minor children, X, Y and Z. Since B does not want to participate in the distribution of the estate, she renounced her hereditary share in the estate. Is the renunciation subject to donor’s tax?

No. The general renunciation by an heir, including the surviving spouse, as in the case of B, of her share in the hereditary estate left by the decedent is not subject to donor’s tax. This is so because the general renunciation by B was not specifically and categorically done in favor of identified heir/s to the exclusion or disadvantage of the other co-heirs in the hereditary estate (Section 11, RR No. 2-2003).

PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

Q: Supposing that instead of a general renunciation, B renounced her hereditary share in A’s estate to X who is a special child, would the renunciation be subject to donor’s tax?

Yes, the renunciation in favor of X would be subject to donor’s tax. This is so because the renunciation was specifically and categorically done in favor of X and identified heir to the exclusion or disadvantage of Y and Z, the other co-heirs in the hereditary estate. (Section 11, RR No. 2-2003)

Note: Without a source of income or acceptable form of acquisition of substantial amount to purchase properties, the inclusion of the names of minor children in the certificates of title of properties shall be deemed an implied donation, which is subject to donor’s tax. SPS.

HORDON H. EVONO AND MARIBEL C. EVONO VS. CIR, ET. AL.,

CTA EB NO. 705 (CTA CASE NO. 7573), JUNE 4, 2012

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7. Transfer for less than adequate and full consideration

---------------------------------------------------------------

Read Section 100

Q: When is there a transfer for less than an adequate and full consideration in money or money’s worth?

Where property, other than real property classified as capital asset subject to final capital gains tax, is transferred for less than an adequate and full consideration in money or money’s worth, the amount by which the fair market value of the property exceeded the value of the consideration shall, for purposes of donor’s tax, be deemed a gift.

Note: (1) The element of donative intent is conclusively presumed in transfers of property for less than an adequate or full consideration in money or money’s worth.

(2) Why is real property, classified as capital asset, that is transferred for less than an adequate and full consideration in money or money’s worth not deemed a gift subject to donor’s tax? Well, it is already subject to final capital gains tax, which is 6% of the gross selling price of fair market value of the property, whichever is higher. So what the seller avoids in the payment of the donor’s tax, it pays for in CGT.

Q: As a condition for approving the manufacture by BF Goodrich of tires and

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rubber products, the Central Bank required it to develop a rubber plantation. BF Goodrich purchased land under the Parity Amendment. Thereafter, the DOJ rendered an opinion stating that upon expiration of the Parity Amendment, ownership rights over such lands, including right to dispose or sell them, would be lost. Hence, BF Goodrich sold the rubber plantation to Siltown Realty for a price less than its declared fair market value. The BIR assessed BF Goodrich for deficiency donor’s tax representing the difference between the fair market value and the actual purchase price of the property. BIR contended that BF Goodrich filed a false income return. Did BF Goodrich commit falsity in its income return?

No. It is possible that real property may be sold for less than adequate consideration for a bona fide business purpose; in such event, the sale remains an "arm's length" transaction. In this case, Goodrich was compelled to sell the property even at

a price less than its market value, because it would

have lost all ownership rights over it upon the expiration of the parity amendment. In other words, it was attempting to minimize its losses. At the same

time, it was able to lease the property for 25 years, renewable for another 25. This can be regarded as another consideration on the price.

The fact that Goodrich sold its real property for a price less than its declared fair market value did not by itself justify a finding of false return. Even though

a donor's tax, which is defined as "a tax on the

privilege of transmitting one's property or property rights to another or others without adequate and full

valuable consideration," is different from capital gains tax, a tax on the gain from the sale of the taxpayer's property forming part of capital

assets, the tax return filed by Goodrich to report its income was sufficient compliance with the legal requirement to file a return. In other words, the fact that the sale transaction may have partly resulted in

a donation does not change the fact that Goodrich

already reported its income by filing an income tax return. [CIR v. B.F. Goodrich Phils [February 24,

1999]

PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

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8. Classification of donor

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Q: Who are liable to pay donor’s tax?

1. Resident citizen

2. Non-Resident Citizen

3. Resident Alien

4. Non-Resident Alien

5. Domestic Corporation

6. Foreign Corporation

Note: In contrast to estate taxes, a corporation can be subject to donor’s tax because it is capable of entering into a contract of donation through the appropriate Board Resolution.

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9. Determination of gross gift

---------------------------------------------------------------

Q: Distinguish Gross Gift from Net Gift

Gross Estate

Net Estate

Refers to all property, real or personal, tangible or intangible, that is given by the donor to the done by way of gift, without the benefit of any deduction.

Means the net economic benefit from the transfer that accrues to the done.

Q: How is gross estate determined?

Donor

Determination of gross gift

Citizens

and

Gross gift includes all real properties, tangible and intangible personal properties wherever located

Resident Aliens

Non-Resident

Aliens

Gross gift includes all real properties, tangible, and intangible properties located in the Philippines unless the reciprocity rule applies.

Note: In sum, all assets, real or personal, tangible or intangible given by way of gift wherever located of a citizen and resident alien is subject to donor’s tax while for nonresident aliens, donor’s tax is imposed only on properties located in the Philippines provided in the case

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of intangible personal property, it is subject to the rule of reciprocity under Section 104 of the Tax Code.

Same rules as in Estate Taxation. See previous discussion on intangible properties considered situated in the Philippines and rule on reciprocity.

Q: ABC a multinational corporation doing business in the Philippines donated 100 shares of stock of said corporation to Mr. Z, its resident manager in the Philippines. What is the tax liability, if any, of ABC corporation?

Foreign corporations effecting a donation are subject to donor’s tax only if the property donated is located in the Philippines. Accordingly, donation of a foreign corporation of its own shares of stock in favor of resident employees is not subject to donor’s tax.

However, if 85% of the business of the foreign corporation is located in the Philippines or the shares donated have acquired business situs in the Philippines, the donation may be taxed in the Philippines subject to the rule of reciprocity.

---------------------------------------------------------------

10. Composition of gross gift

 

schedule of values fixed by the provincial and city assessors (zonal value), whichever is higher. If there is no zonal value, taxable base is FMV that appears in the latest tax declaration.

For

The value of the improvement is the construction cost per building permit and/or occupancy permit plus 10% per year after year of construction or the FMV per latest tax declaration

improvements

For

all

other

The fair market value at that time will be considered the amount of gift

properties

In GIBBS V. CIR [APRIL 28, 1962], the parents made it appear that they transferred shares of stock in favor of their children for consideration, but it was found out that such was insufficient, and such agreements were made to evade taxes. The Supreme Court allowed the CIR to impose taxes for the full value of the shares of stock, not just the excess of the FMV over the consideration/price.

--------------------------------------------------------------- ---------------------------------------------------------------

Read Section 104, Tax Code

Q: What is included as part of gross gift?

As a general rule, gross gifts include real and personal property, whether tangible or intangible or mixed, wherever situated

Note: If the donor was a non-resident alien at the time of the donation, his real and personal property so transferred but which are situated outside the Philippines shall not be included as part of gross gift.

12. Tax Credit for donor’s taxes paid in a foreign country

---------------------------------------------------------------

Read Section 101(C), Tax Code

Note: See discussion of tax credit under Estate Tax. Computation of the donor’s tax credit is the same as the computation for estate tax credit. Just change net estate to net gifts.

---------------------------------------------------------------

13. Exemptions of gifts from donor’s tax

--------------------------------------------------------------- ---------------------------------------------------------------

11. Valuation of gifts made in property

---------------------------------------------------------------

Read Section 101(A) to (B), Tax Code

Read Section 102, Tax Code

Q: How do we value the gifts subject to donor’s tax?

For

Real

The value shall be based on either (1) the fair market value as determined by the CIR or (2) the fair market value as shown in the

Property

Note: There are really no deductions from gross gift. There are only exemptions.

Q: Enumerate the exemptions from gross gifts (exempt from donor’s tax)

1. Dowries or donations made:

a. on account of marriage

b. before its celebration or within one year thereafter

PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

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c. by parents to each of their legitimate, recognized natural or adopted children

d. to the extent of the first php10,000

2. Gifts made to or for the use of the national government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivision of the said government

3. Gifts in favor of an education and/or charitable, religious, cultural or social welfare corporation, institution, accredited NGO, trust or philanthropic organization or research institution or organization provided not more than 30% of said gifts will be used by such done for administrative purposes.

Q: What exemptions are allowed to non- resident aliens?

Non-resident aliens are exempt from donor’s tax with respect to (2) and (3) as enumerated above.

Q: In addition to exemptions provided under Section 101 of the Tax Code, are there any other exemptions allowed on gross gift?

1. Encumbrances on the property donated if assumed by the donee

2. Donations made to entities exempted under special laws (e.g. IBP, IRRI, National Museum, National Library)

3. Amount specifically provided by the donor as a diminution of the property donated.

4. Athlete’s Prizes and Awards (see RA 7549)

Q: What are the requisites for dowries or gifts made on account of marriage to be exempted?

1. The gift was made on account of marriage

2. It was made before or within one year after the celebration of marriage

3. Donor is a parent

4. Donee is a legitimate, recognized natural or adopted child of the donor

5. The amount of the gift exempted is only to the extent of the first P10,000 (per parent, if made out of conjugal or community funds)

Q: What are the requisites for gifts in favor of an education and/or charitable, religious, cultural or social welfare corporation,

PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

institution, accredited NGO, trust or philanthropic organization or research institution or organization to be exempted?

1. Not more than 30% of the said gift should be used for administrative purposes

2. The donee must be a non-stock, non-profit organization or institution

3. The donee organization or institution should be governed by trustees who do not receive any compensation

4. Said donee devotes all of its income to the accomplishment and promotion of its purposes

5. The NGO must be accredited by the Philippine Council for NGO Certification

6. The donor engaged in business shall give notice of donation on every donation worth at least P500,000 to the RDO which has jurisdiction over his place of business within 30 days after receipt of the qualified donee’s institution’s duly issued Certificate of Donation (RR 2-2003)

Q: What are the requisites for a donation given to athletes as prize or award to be exempted?

The donation must be prize or award given to athletes:

1. In local and international sports tournaments and competitions

2. Held in the Philippines or abroad;

3. Sanctioned by their respective national sports associations (RA 7549)

Note: Remember Section 32(B)(7)(d), Tax Code which provides that all prizes and awards granted to athletes in local and international competitions and tournaments, whether held in the Philippines or abroad, and sanctioned by their national sports associations are excluded from gross income.

Read Section 99(C), Tax Code

Q: Are political contributions considered gifts and therefore liable for donor’s tax?

Under Section 13 of RA 7166, such contributions, be duly reported to the COMELEC, shall no be subject to the payment of any gift tax.

Note: In Abello v. CIR [February 23, 2005], the Supreme Court ruled that the contributions made by certain partners of the ACCRA law firm to the campaign of Senator

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Edgardo Angara constitute as a donation subject to donor’s tax. However, this was decided before RA 7166. The Court noted that subsequent to the donations involved in the case, Congress approved RA 7166 on November 25, 1991, providing in Section 13 thereof that political/electoral contributions, duly reported to the Commission on Elections, are not subject to the payment of donor’s tax. RA 7166 provides no retroactive effect.

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14. Person liable

---------------------------------------------------------------

Read Section 103, Tax Code

Q: Who are liable for donor’s tax?

Every person, whether natural or juridical, resident or non- resident, who transfers or causes to transfer property by gift, whether in trust or otherwise, whether the gift is direct or indirect and whether the property is real or personal, tangible or intangible. In other words, the donor is always liable to pay the donor’s tax.

Q: What is the rule for donations made by husband and wife?

Husband and wife are considered as separate and distinct taxpayer's for purposes of the donor's tax. However, if what was donated is a conjugal or community property and only the husband signed the deed of donation, there is only one donor for donor's tax purposes, without prejudice to the right of the wife to question the validity of the donation without her consent pursuant to the pertinent provisions of the Civil Code of the Philippines and the Family Code of the Philippines. (see RR 2-2003)

In Tang Ho v. Board of Tax Appeals [November 19, 1955], the Supreme Court held that a donation of property belonging to the conjugal partnership, made during its existence, by the husband alone in favor of the common children, is taxable to him exclusively as sole donor. To be a donation by both spouses, taxable to both, the wife must expressly join the husband in making the gift. Her participation cannot be implied. In case a donation was made by the parents in favor of their children, consisting of cash form the CPG, then only one parent may claim the exemption granted by the law.

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15. Tax Basis

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PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

Note: Let’s now discuss how to compute donor’s tax due and payable.

Read Section 99(A) to (B), Tax Code

Q: What is the basis in computing donor’s tax?

The tax shall be computed on the basis of the total net gifts made during the calendar year in accordance with the graduated donor’s tax rates.

Note: To best illustrate

In general --

Gross gifts made Less: Deductions from the gross gifts

= Net gifts made Multiplied by applicable rate = Donor’s tax on the net gifts

If several gifts were made during the year --

Gross gifts made Less: Deductions from the gross gifts

= Net gifts made on this date Add: all prior net gifts during the year = Aggregate net gifts Multiplied by applicable rate = Donor’s tax on aggregate net gifts Less: donor’s tax paid on prior net gifts = Donor’s tax payable on the net gifts to date

In other words, if the donor makes several gifts during the same calendar year, the gifts shall be added on a cumulative basis.

Q: What are the rates of tax payable by donor’s?

The applicable donor’s tax rate shall depend upon the relationship between the donor and the donee.

If

the

donee

is

a

The tax

rate is

30% of the

stranger

to

the

net gifts.

donor

 

If the donee is not

The tax for each calendar

stranger to the donor

a

year shall be computed on the basis of the total net gifts made during the calendar year in accordance with the schedule provided in Section

99(A).

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