Atty. Roberto Lock 7.28.

2017 Part 1

If inheritance tax is re-enacted, will there be prohibited double taxation? None, the requisite for double
taxation is it must be taxed on the same subject matter is lacking, bec. It is not a tax on property. For
Estate Tax, it is a tax on transmitting. While for inheritance Tax, it is a tax on privilege on receiving.

Assume, X in his will indicates that his land be given to the Roman Catholic Church to be used as a
church. Is the transmission subject to Estate Tax? No, bec according to SC, exemption from taxes of
churches only covers property taxes. Estate Tax is an excise tax.

Sec 87(D) only covers charitable, social welfare, and cultural institutions. Educational and Religious
institutions are not included in exemption.

Accrual of the Tax happens upon death of the decedent. (Apply Tax Law during death of decedent)

Payment is 6 months thereafter.

Estate Tax applies only to Natural Persons. In the case of corporations, it is liquidating dividends.

Situs Rules in Estate Taxation:

First determine the proper taxpayer (decedent)

2 kinds of decedents in general – 1. Resident/ Citizen 2. Non-Resident Alien

How to define residents for purpose of Estate Taxation

Ex. X, a resident of Alabama, USA but a citizen of PH having a Family Home in Makati.

For Income tax purposes , under sec 22E3 he is considered as a non-resident Citizen as far as income
derived from Alabama. Sec22E3 only refers to Income Tax.

For Estate Tax purposes, residence means domicile (Habitual place of residence). He is a resident citizen.

Situs Provisions:

Income Taxation – Sec 23 and 42.

Sec 23: Only Resident Citizens are taxed world-wide – Not same with Estate Taxation, only NRA
are taxed within with regard to gross estate.

Estate Taxation – Sec 85 and 104

3 Rules for NRA decedent

1. Only properties situated within the PH are included

2. With respect to limitations on intangible personal property under Sec 104
3. Rules on reciprocity under Sec 104
Rule 2 Expounded - Intangible personal property:

Shares of stock – situs is

Rule 1 – If issued by Domestic Corp – Situs is Within the PH

Rule 2 – if issued by Non-resident Foreign Corp – Situs is Outside (General Rule)

Rule 3 – if issued by Resident Foreign Corp – Situs is within if shares 85% of the business of the
Corporation is located in the PH

Example:

A Non-Resident Alien leaves a valuable copyright. Is it situated within or without?

Not included in Sec 104. Thus, we follow movables follow the person. With respect to the
trademark, copyright, patent will follow the residence of the decedent. Use only this in the absence of a
specific rule under Sec 104.

Rule 3 Expounded – Rule on Reciprocity

Sec 104 3 requisites:

1. Intangible Personal Property

2. Situated in the Philippines

X, A Japanese Citizen and Resident leaves San Miguel shares to his heirs. First look at Japanese Laws and
compare the treatment to Filipino’s estate. If there are none, X will be exempt as well.

There is total reciprocity or none at all.

2009 Bar Exam Question regarding Sec 104.

Miguel, a Mexican Citizen and Resident of Mexico died leaving 1,000 US Dollars worth of shares of stock
in a Mexican Company to his son. Mexico does not impose any transfer tax in whatever nature. Is it
exempt on the basis of reciprocity? No, but it is exempt on the basis of situs. The second requisite is not
present.

Inclusion Rules under Section 85

Sec 85a – only include in the estate the extent of ownership of the decedent in co-owned property

Rights that accrued prior to death of the decedent must be included in the estate.

Sec 85b,c, and d. – 3 kinds of intervivos transfers to be included in the gross estate:

Transferor retained control over the property transferred – full ownership has not been
transferred
 1. Transfer in contemplation of death. Intervivos in form, mortis causa in substance.
2 kinds:
A. Actually a subjective test – BIR must prove that the transfer was prompted in relation to a
death motive. Burden of proof to prove that the transfer was due to thought of death is on
the BIR. Main reason - Pursuant to a death motive to avoid the imposition of estate tax.
B. Objective test – decedent made the transfer but retained certain rights (income,
possession) of which the retained rights will be transferred ONLY upon the death of the
decedent.
In the case of survivorship agreement on a joint deposit account wherein the surviving party
will receive the full amount of the deposit if one of the co-depositor dies, should the ½ part
of the deposit be included in the gross estate? Under Civil Law it is 50/50. But according to
the BIR this is actually a transfer in contemplation of death, because at the time of opening
a joint account, there was already a motive to avoid estate taxes.
2. Revocable Transfers – somewhat similar tot eh 2nd kind of transfer in contemplation of death.
Similarities – Forms part of the Gross Estate
Differences – In transfer in contemplation of death, rights were reserved. In revocable transfer,
all requirements for transfer of ownership are present, however, the transferor has the right to
get it back. (i.e. revocable trust)
In Irrevocable transfers – donors tax
3. Property passing under the general power of appointment Sec 87 b/c
Power of appointment – given to a person to decide who will enjoy the property later on.
Special power of appointment – the transferor still has control over to whom the property must
be given. Only as if a pass-through.
General power of appointment – the administrator has the option to choose to whom he will
transfer the property, thus must be included in the gross estate.

2 scenarios:
Trust – X, grandfather owns a house and lot. If X dies, the property goes to Y, his son. If Y dies,
the property goes to Z the grandson. X made a trust naming Y as benefactor with the condition
that Z will be the ultimate and final benefactor. If Y dies, the property will not form part of his
gross estate as it is a special power of appointment.

Sec 85g – Valuation Provision

Even if a property satisfies the conditions under the kinds of transfers above, it is still excluded in the
gross estate if it is a bona fide sale for adequate and full consideration in money or in money’s worth.
Example, in the 2013 BAR exam: X, 91 and in sick health, for valuable consideration transferred
property to Z. Is it included in the gross estate assuming it satisfies the conditions set under intervivos
transfer included in the gross estate? No. However, the consideration received should form part of the
estate.