Assignments for Tax II for June 2010. Estate and Donors Taxes Reading materials 1.

Sections 84 to 104 Tax Code 2. Revenue Regulations 2-2003. 3. Cases Vidal de Roces vs Posadas 58 Phil 108 Dizon vs Posadas 58 Phil 465 CIR vs CA GR no. 123206 March 22, 2000 Dizon vs CTA, GR No. 140944, April 30 2008 Lladoc vs CIR L 19201, June 16,1965 14 SCRA 292 Delpher Trades vs IAC 157 SCRA 349 Manuel Abello, et al vs CIR GR 120721, February 23, 2005 4. Guide Notes (to be distributed)

Guide Notes
Estate and Donors Taxes Introduction The general concept of taxation is to tax income of a person. On the other hand the concept of a transfer tax is a tax on the privilege to transfer certain properties from one person to another. Estate tax or donors tax, is a tax not on the income of the estate nor of the property being donated but on the privilege to transfer certain properties from one person to another person by virtue of the death of a person or donation of the property to another person. Estate Tax (Sections 84, 85 and 86 of the NIRC ) Estate Tax is an excise tax on the privilege of transferring properties owned by a decedent at the time of his death to his/her heirs. Section 84 of the NIRC provides for the tax rate

applicable to be imposed upon the net estate that are subject of the transfer. While the tax base shall be the net value of the properties subject of transfer.

Gross Estate The Gross estate according to Section 85 shall be determined by including at the time of the decedents death the value of all property, real or personal, tangible or intangible, and wherever situated. And depending upon whether the decedent is a resident or citizen or non resident alien, this will also determine which properties will be included or excluded in arriving at the gross estate. Gross estate of a decedent according to Section 84 includes properties , real or personal, tangible or intangible wherever situated , provided that in case of non resident decedent who at the time of death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate. With respect to intangible personal property, its inclusion in the gross estate is subject to the rule of reciprocity provided for under Section 104 of the Tax Code. For resident or citizen therefore , the gross estates is composed of, properties, real or personal, tangible or intangible, wherever situated. Definition of Decedent Interest

All the interest of the decedent at the time of his death.

Decedent Interest The decedents interest which are to be included as part of the gross estate includes the following: 1. revocable transfer 2. transfer in contemplation of death 3. property passing under general power of appointment 4. proceeds of life insurance 5. prior interests 6. transfer for insufficient consideration 7. capital of surviving spouse Revocable transfer Any interest of a decedent which the decedent has transferred at any time either by trust or otherwise, where the enjoyment of thereof was subject was subject of change at the date of the death of the decedent through the exercise of a power by the decedent himself or in conjunction with any other person to amend or revoke or terminate and such power is relinguish in contemplation of the decedents death.. Except if such transfer is a bonafide sale or for an adequate and cull consideration in money or moneys worth. Section 85 (1) (2).

Transfer in contemplation of death When a decedent has at anytime made a transfer by trust or otherwise in contemplation of or intended to take effect in possession or enjoyment at or after his death OR has at anytime made a transfer by trust or otherwise under which he has retained for his life or for a period not ascertainable without reference to his death or for any period which does not in fact end before his death, the possession or enjoyment of or the right to the income of the property, or the right either alone or in conjunction with any person to designate the person who shall possess or enjoy the property or the income there from. Section 85 (B) NIRC Donations intervivos vs donations mortis causa Donations intervivos are donations made during the lifetime of a person hence it is subject to donors tax. Donations mortis causa are donations made in contemplation of death, that is to take effect at or upon death of the giver, hence it is subject to estate tax Vidal de Roces vs Posadas 58 Phil. 108; Dizon vs Posadas 57 Phil. 465 Property passing under general power of appointment To the extent of any property passing under a general power of appointment exercised by the decedent (1) by will, or (2) by deed executed in contemplation of , or intended to take effect in possession or enjoyment

at, or after his death, or (3) by deed under which he has retained for his life or any period not ascertainable without reference to his death or for any period which does not in fact end before his death (a) the possession or enjoyment of, or the right to the income from, the property, or (b) the right, either alone or in conjunction with any person, designate the persons who shall possess or enjoy the property or the income therefrom; except in case or a bona fide sale for an adequate and full consideration in money or moneys worth. Proceeds of life insurance When a decedent takes an insurance policy on his own life and the amounts are receivable by the decedents estate, his executor, or administrator irrespective of whether or not the insured retained the power of revocation, OR the amounts are receivable by any beneficiary designated in the policy of the insurance as revocable beneficiary, the proceeds of which are to be included in the computation of the gross estate. Prior Interests Except as otherwise specifically provided therein, subsections (B), (C) and (E) of Section 85 shall apply to the transfers, trusts, estates, interests, rights, powers and relinquishment of powers , as severally enumerated and described therein, whether made, created, arising, existing, exercised or relinquished before or after the effectivity of the Code. Transfer for insufficient consideration If any transfers, of the decedents interests is for a

consideration in money or moneys worth, but is not a bonafide sale for an adequate and full consideration in money or moneys worth, there shall be included in the gross estate only the excess of the fair market value, at the time of death, of the property otherwise to be included on account of such transaction, over the value of the consideration received therefore by the decedent. Capital of the Surviving Spouse The capital of the surviving spouse of a decedent shall not, for the purpose of computing the gross estate of a decedent be deemed a part of his or her gross estate.

Valuation of the Net Estate For purposes of determining the value of the estate, Section 5 of Revenue Regulations No. 2-2003 provides that the properties comprising the gross estate shall be valued based on their fair market value as of the time of the death. If the property is a real property, the fair market value shall be the fair market value as determined by the Commissioner of Internal Revenue or the fair market value as shown in the schedule of values fixed by the provincial and city assessors whichever is higher In case of shares of stocks, the fair market value shall depend on whether the shares are listed or non-listed in the stock exchanges. Unlisted shares are valued based on the book value while unlisted preferred shares are valued at par value. In determining the book value of

common shares, appraisal surplus shall not be considered as well as the value assigned to preferred shares, if there are any. For shares listed in the stock exchanges, the FMV 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. Computation of the net estate In determining the net estate as the basis for computing the estate tax, the value of the gross estate shall allow certain deductions according to Section 86 of the Tax Code. Deductions allowed to the Estate of a Citizen or a Resident Section 6 Rev Reg 2-2003 1. Expenses, losses, indebtedness and taxes a. Actual funeral expenses or 5% of the gross estate whichever is lower but in no case to exceed 200K pesos. Funeral expenses include the following: i. mourning apparel of the surviving spouse and unmarried minor children of the deceased bought and used on the occasion of the burial; ii. expenses for the deceased wake, including food and drinks iii. publication charges for death notices

iv. telecommunication expenses incurred in informing relatives of the deceased v. cost of burial, plot, tombstones, monument or mausoleum but not their upkeep vi. Internment and/or cremation fees and charges; and vii. All other expenses incurred for the performance of the rites and ceremonies incident to internment b. Judicial expenses of the testamentary or intestate proceedings. (CIR vs CA GR. No. 123206, March 22, 2000) This may also includes expenses incurred in the inventory taking of assets comprising the gross estate, their administration, the payment of debts of the estate, as well as the distribution of the estate among the heirs. This may include: i. Fees of executor or administrator ii. Attys fees iii. Court fees iv. Accountants fees v. Appraisers fees vi. Clerk hire; vii. Costs of preserving and distributing the estate viii. Costs of storing or maintaining property of the estate and ix. Brokerage fees for selling

property of the estate. c. Claims against the estate - Claims against the estate or indebtedness in respect of property may arise out of : (1) contract; (2) tort; or (3) operation of law i. Requisites for deductibility of claims against the estate 1. Liability represents a personal obligation of the deceased existing at the time of his death except unpaid obligations incurred incident to his death 2. Liability was contracted in good faith and for adequate and full consideration in money or moneys worth; 3. Claim must be valid in law and enforceable in court 4. Indebtedness must not have been condoned by the creditor or must not be barred by prescription ii. Substantiation requirements 1. For simple loan a. debt instrument must be duly notarized at the time the indebtedness was incurred b. duly notarized certification from the

creditor as t o the unpaid balance of the debt including interest as of the time of death. c. Proof of financial capacity to lend of the creditor as well as the financial statement showing the indebtedness as a receivable. d. Statement under oath executed by the administrator or executor of the estate reflecting the disposition of the proceeds of the loan if said loan was contracted within 3 years prior to the death of the decedent 2. For unpaid obligation arose from purchase of goods or services; a. Documents evidencing the purchase of goods or service, such as sales invoice/ delivery receipt, or contract for services agreed to be rendered as duly acknowledged,

2.

executed and signed by the decedentdebtor and creditor, statement of account given by the creditor as duly received by the decedent-debtor, b. Duly notarized certification from the creditor as to the unpaid balance of the debt. c. Certified true copy of the latest audited balance sheet of the creditor with the detailed schedule of its receivable showing the unpaid balance of the decedent-debtor. (Dizon vs CTA, GR No. 140944, April 30 2008) d. Claims of the deceased against insolvent persons where the value of the decedents interest therein is included in the value of the gross estate. e. Unpaid mortgages, taxes and casualty losses Property previously taxed This is a deduction which is allowed to be deducted from the gross estates of citizens, resident aliens and non resident estates for properties

which were previously subject to donors or estate taxes. This kind of deductions is also called Vanishing Deduction. a. 100% of the value if the prior decedent died within one year prior to the death of the decedent will be deducted, or if the property was transferred to him by gift within the same period prior to his death; b. 80% of the value if the prior decedent died more than one year c. 60% of the value if the prior decedent died more two years d. 40% of the value if the prior decedent died more than 3 years e. 20% of the value if the prior decedent died more than 4 years but not more than 5 years prior to the death of the decedent.. Section 86 (A) (2) and (B) (2) , of the Tax Code. Definition of Vanishing Deduction Deduction from the gross estates of citizens, resident aliens and nonresident estates for properties which were previously subject to estates or donors taxes. This is called Vanishing deductions because the allowed deductions diminishes over a period of 5 years. 3. Transfers for public use - amount of all bequests, legacies, devises or transfers to or for the use of the government of the Republic of the Philippines or any political subdivision thereof, for exclusively public purposes.

4. Family Home a. Amount equivalent to the current fair market value of the decedents family home: provided however, that if the said current fair market value exceeds One million pesos(P 1,000,000.), the excess shall be subject to estate tax. The family must be certified as such by the barangay captain of the locality. i. Definition of a family home Arts 152 and 153 of the Family Code) 5. Standard deduction a. The amount of one Million pesos (P1,000,000.) shall be allowed as an additional deduction without need of any substantiation. 6. Medical expenses a. All medical expenses incurred within one year before the death of the decedent shall be allowed as deduction, provided they are duly receipted and not to exceed P 500,000. 7. Amounts received by heirs under RA 4917. Any amount received by the heirs from the decedents employer as a consequence of the death of the decedent-employee in accordance with RA 4917 is allowed as a deduction provided that the amount of the separation benefit is included as part of the gross estate of the decedent. Computation of the net estate of a decedent who is a non resident alien

The value of the net estate of a decedent who is a non-resident alien shall be determined by deducting from the value of his gross estate which at the time of his death is situated in the Philippines. The following are the allowable deductions: 1. Expenses, losses, indebtedness and taxes 2. Property previously taxed 3. Transfer for public use However, no deduction shall be allowed in the case of a non-resident decedent not a citizen of the Phil, unless the executor, administrator, or anyone of the heirs, as the case maybe, includes in the return required to be filed under Section 90 of the Code the value at the time of the decedents death of that part of his gross estate not situated in the Philippines. Section 7 Rev Reg 2-2003 Taxation of estate is governed by the law existing at the time of the death of the decedent and the accrual of the tax due is distinct from the obligation to pay the same. The tax accrues at the time of death, that is within 6 months from the time of the death of the decedent. Section 3, Revenue Regulations 2-2003. Payment of Estate Tax is due on the day the Return is filed by the Executor , Administrators, or heirs. The Estate Tax Return shall be filed within 6 months from the decedents death. Section 9 Rev Reg 2-2003 However payment of estate tax maybe extended for

meritorious reason, provided it will not exceed 5 years in case the estate is settled though courts, or 2 years in case the estate is settled extrajudicially. In both cases, a bond shall be required. Section 9 Rev Reg 2-2003 Payment can also be in installments Section 9 Rev Reg 2-2003 Section 89 provides that in all cases of transfers subject of tax, or where though exempt from tax, the gross value of the estate exceeds 20K, the executor, administrator or any of the legal heirs, within 2 months after the death of the decedent, or within alike period after qualifying as such executor or administrator, shall give a written notice to the Commissioner of Internal Revenue.

Donors Tax It is an excise tax for the privilege of transferring properties by way of donation or a gift during the lifetime of the giver. It is based on pure act of liberality where the transfer of the property is one without any or adequate consideration and without any legal compulsion to do so. The transfer by any person, resident or non resident of the property by gift computed as provided for in Section 99 whether in trust or otherwise, whether the

gift is direct or indirect and whether the property is real or personal, tangible or intangible. When the transfer is one for less than adequate consideration, the difference between the supposed consideration and the actual fair market value of the property will be considered as a donation and such amount shall be included in computing the total amount of the gifts made during the calendar year. Section 100. The tax base, is arrived at on the basis of the total net gifts during the calendar year and the tax rate is in accordance with the schedule provided for under section 99. The donees are (1) brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant (2) relatives by consanguinity in the collateral line within the fourth degree of relationship The transfer of the total net gifts made during the calendar year shall be subject to tax in accordance with the schedule provided in Section 99 of the Tax Code. But if the donee is a stranger the tax payeable by the donor shall be thirty per cent (30%) of the net gifts. Donation to a stranger If donation is made to a stranger, the tax payable by the donor shall be thirty per cent (30%) of the net gifts. Section 99 of the Tax Code. Unlike in the computation of the net estate, there are

no deductions allowed to arrive at the value of the net gifts, instead net gifts means the total value of the gifts made during the calendar year. Certain Gifts which are exempted from Donors Tax Section 101 of the Tax Code 1. Gifts made by a Resident a. Dowries or gifts made on account of marriage before its celebration or one year thereafter by parents to each of their legitimate, recognized natural, or adopted children to the extent of the first 10k. b. Gifts made to or for 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 said government. c. Gifts in favor of educational and/or charitable, religious, cultural or social welfare organization, trust or philanthropic org., or research institution or org. provided however, that not more than 30 of said gifts shall be used by such donee for administration purposes . 2. Gifts made by a Non-resident not a citizen of the Phils. a. Gift made to or for the use of the National government. b. Gifts in favor of educational/charitable religious, cultural or social welfare corp., institution, foundation, trust or philanthropic org. or research institution or org. Provided, however, That not more

than 30% of said gifts shall be used by such donee for administration purposes. Tax Credit for Donors Taxes paid to a Foreign Country Tax Credit for Donors Taxes paid to a Foreign Country applicable to citizen or a resident at the time of donation, shall be credited with the amount of any donors tax of any character and description imposed by the authority of a foreign country. There is a limit to the amount that maybe credited. It should be just proportionate to what was credited. Which means the donor shall be entitled to credit the taxes he has paid as taxes for donations made provided the amount of the tax to be allowed to credit such amount of tax paid to the foreign country with regard to such donation. Campaign Contributions Section 99 of the Tax Code provides that any contribution in cash or in kind to any candidate, political party or coalition of parties for campaign purposes shall be governed by the Election Code, as amended. Section 13 of RA 7166 on one hand states that any provision of law to the contrary notwithstanding any contribution in cash or in kind to any candidate or political party or coalition of parties for campaign purposes, duly reported to the COMELEC shall not be subject to the payment of any gift tax. Section 99 of the Tax Code; Section 13 of RA 7166 Manuel Abello, et al vs CIR GR 120721, February 23, 2005 Valuation of gifts made in property

The value shall be equivalent to the fair market value at the time the gift was made. Section 102 Tax Code Filing of donors tax return and payment. For every donation made, a donors tax return must also be filed. The donors tax return shall be filed within 30 days after the date the gift is made or completed and the tax due is paid at the time the return is filed. Section 103Tax Code , Section 13 Rev. Reg . No. 2-2003. Property subject of donation is not considered as transferred unless donors tax is paid. Registers of Deeds shall not register in the Registry of Property any document transferring real property or real rights therein or any chattel mortgage, by way of gifts intervivos or mortis causa unless upon a certification from the Commissioner of Internal Revenue that the estate or donors tax fixed and actually has been paid.