Taxation Two Complete

Taxation Two

Mickey Ingles

Ateneo Law 2012

Atty. Montero, with review notes from Atty. Salvador last updated: November 12, 2012

1

ESTATE  TAX  

1  

DONOR’S  TAX  

20  

VALUE-­‐ADDED  TAX  

28  

PERCENTAGE  TAXES  

55  

EXCISE  TAXES  

65  

DOCUMENTARY  STAMP  TAXES  

69  

POWERS  OF  THE  BIR  

71  

REMEDIES  OF  THE  GOVERNMENT  

77  

TAXPAYER’S  REMEDIES  

100  

COMPLIANCE  REQUIREMENTS  

107  

COURT  OF  TAX  APPEALS  (RA  9282  AND  REVISED  RULES  OF  COURT  OF  THE  CTA)  

111  

LOCAL  TAXATION  

116  

COMMUNITY  TAX  

135  

REAL  PROPERTY  TAXATION  

137  

CUSTOMS  AND  TARIFFS  CODE  

148  

Based on Atty. Montero’s outline, with integrated notes from Atty. Salvador’s review class, Reyes, some Mamalateo,

some CoUntian and the various reviewers in school.

Estate Tax

•

Estate tax is the tax on the right to transmit property at death and on certain transfers

by the decedent during his lifetime which are made by the law equivalent of

testamentary dispositions.

•

It accrues upon the death of the decedent.

•

A transmission by inheritance is taxable at the time of the predecessor’s death,

notwithstanding the postponement of the actual possession or enjoyment of the estate

by the beneficiary. (Lorenzo v Posadas)

•

The tax is measured by the value of the property transmitted at the time of death,

regardless of its appreciation or depreciation.

•

The accrual of the tax is distinct from the obligation to pay the tax.

SEC. 84. Rates of Estate Tax. - There shall be levied, assessed, collected and paid upon the transfer of the net

estate as determined in accordance with Sections 85 and 86 of every decedent, whether resident or nonresident of the Philippines, a tax based on the value of such net estate, as computed in accordance with the following schedule…

Over

But not over

The tax shall

be

Plus

Of the Excess

Over

P200k

Exempt

P200k

P500k

0

5%

P200k

P500k

P2m

P15k

8%

P500k

P2m

P5m

P135k

11%

P2m

P5m

P10m

P465k

15%

P5m

P10m

P1.215m

20%

P10m

Properties in the Estate

SEC. 85. Gross Estate. - the value of the gross estate of the decedent shall be determined by including the value

at the time of his death of all property, real or personal, tangible or intangible, wherever situated: Provided, however, that in the case of a nonresident decedent who at the time of his 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.

Taxation Two

Mickey Ingles

Ateneo Law 2012

Atty. Montero, with review notes from Atty. Salvador last updated: November 12, 2012

2

(A) Decedent's Interest. - To the extent of the interest therein of the decedent at the time of his death;

SEC. 104. Definitions. - For purposes of this Title, the terms "gross estate" and "gifts" include real and personal property, whether tangible or intangible, or mixed, wherever situated: Provided, however, That where the decedent or donor was a nonresident alien at the time of his death or donation, as the case may be, his real and personal property so transferred but which are situated outside the Philippines shall not be included as part of his "gross estate" or "gross gift": Provided, further, That franchise which must be exercised in the Philippines; shares, obligations or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws; shares, obligations or bonds by any foreign corporation eighty-five percent (85%) of the business of which is located in the Philippines; shares, obligations or bonds issued by any foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines; shares or rights in any partnership, business or industry established in the Philippines, shall be considered as situated in the Philippines: Provided, still further, that no tax shall be collected under this Title in respect of intangible personal property: (a) if the decedent at the time of his death or the donor at the time of the donation was a citizen and resident of a foreign country which at the time of his death or donation did not impose a transfer tax of any character, in respect of intangible personal property of citizens of the Philippines not residing in that foreign country, or (b) if the laws of the foreign country of which the decedent or donor was a citizen and resident at the time of his death or donation allows a similar exemption from transfer or death taxes of every character or description in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country.

•

For estate tax purposes, residence refers to the domicile of the person.

•

For residents and citizens, gross estate includes ALL properties, real or personal,

tangible or intangible, WHEREVER situated.

•

For non-resident aliens, gross estate includes only properties those situated in the

Philippines.

o Except with respect to INTANGIBLE personal property, its inclusion to the gross

estate is the subject to the rule of reciprocity.

 If the foreign country of the non-resident alien does not impose a transfer

tax of any character on the IPP of Filipinos not residents of that foreign

country; or

 The foreign country of the non-resident alien allows a similar exemption

from transfer tax in respect of IPP owned by Filipinos not residents of that

foreign country,

•

Then IPPs of the non-resident alien here are exempt from the

estate tax.

o Reciprocity must be total. If any of the two states or countries collects or imposes

and does not exempt any transfer, death, legacy, or succession tax of any

character, reciprocity does not apply. (CIR v Fisher)

o Reciprocity in exemption does not require the “foreign country” to possess

international personality. (CIR v Campos Rueda)

•

Includes any interest or right in the nature of property, but less than title, having value

or capable of having value, like

o Dividends declared, but paid after the death

o Partnership profits

o Right of usufruct

•

The following, among others, are intangible personal properties located in the

Philippines:

1. Franchise which must be exercised in the Philippines

2. Shares, obligations or bonds issued by any corporation or sociedad anonima

organized or constituted in the Philippines in accordance with its laws

3. Shares, obligations or bonds issued by any foreign corporation 85% of the business

of which is located in the Philippines

4. Shares, obligations or bonds issued by ay foreign corporation if such shares,

obligations or bonds have acquired a business situs in the Philippines, and

Taxation Two

Mickey Ingles

Ateneo Law 2012

Atty. Montero, with review notes from Atty. Salvador last updated: November 12, 2012

3

Properties not in the estate

•

There may be properties which at the time of the decedent’s death are not in the estate

because they were transferred by him during his lifetime.

•

These transfers are:

1. Transfers in contemplation of death,

2. Revocable transfers,

3. Transfers under a general power of appointment, and

4. Transfers for an insufficient consideration.

o The values of these properties will be included in the determination of the gross

estate for estate tax purposes.

•

As such, the gross estate, for purposes of the estate tax, may exceed the actual value of

his assets at the time of his death as it includes the value of transfers of property by him

during his lifetime that partake of the nature of testamentary dispositions.

•

These kinds of transfers have the following in common:

o They are ostensible transfers, usually with the purpose to evade the estate tax

o They are extension of interests

o If the transfers are in fact for a bona fide consideration, then they will not form

part of the gross estate (this proviso is present in all the provisions regarding

these transfers)

Transfers in contemplation of death

(B) Transfer in Contemplation of Death. - To the extent of any interest therein of which the decedent has at

any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after death, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from the property, or (2) the right, either alone or in conjunction with any person, to designate the person who shall possess or enjoy the property or the income therefrom; except in case of a bonafide sale for an adequate and full consideration in money or money's worth.

•

A transfer in contemplation of death is a transfer motivated by the thought of death,

although death may not be imminent.

•

The following are examples of circumstances which may be taken into consideration in

determining whether the transfer was made in contemplation of death:

o We can look at the age and state of health of the decedent at the time of the

transfer (is he terminally ill?)

o Length of time between the transfer and the date of the death.

o Concurrent making of a will or making of a will within a short time after the

transfer.

•

But again, in the case of a bona fide sale for an adequate and full consideration in

money or money’s worth, the value of the property transferred will not be considered in

determining the gross estate.

Revocable transfers

(C) Revocable Transfer.

-(1) To the extent of any interest therein, of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth) by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power (in whatever capacity exerciseable) by the decedent alone or by the decedent in conjunction with any other person (without regard to when or from what source the decedent acquired such power), t o alter, amend, revoke, or terminate, or where any such power is relinquished in contemplation of the decedent's death.

(2) For the purpose of this Subsection, the power to alter, amend or revoke shall be considered to exist on the date of the decedent's death even though the exercise of the power is subject to a precedent giving of notice or even though the alteration, amendment or revocation takes effect only on the expiration of a stated period after the exercise of the power, whether or not on or before the date of the decedent's death notice has been given or the power has been exercised. In such cases, proper adjustment shall be made representing the interests which would have been excluded from the power if the decedent had lived, and for such purpose if the notice has not been given or the power has not been exercised on or before the date of his

Taxation Two

Mickey Ingles

Ateneo Law 2012

Atty. Montero, with review notes from Atty. Salvador last updated: November 12, 2012

4

death, such notice shall be considered to have been given, or the power exercised, on the date of his death.

•

A revocable transfer is a transfer where the terms of the enjoyment of the property may

be altered, amended, revoked or terminated by the decedent.

•

It is sufficient that the decedent had the power to revoke, though he did not exercise the

power to revoke.

•

Again, the same rule with bona fide sales applies.

Transfers under a General Power of Appointment

(D) 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, to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money's worth.

•

A power of appointment refers to the right to designate the person or persons who will

succeed the property of a prior decedent.

•

A general power of appointment is one which may be exercised in favor of anybody.

o Carles donated property to Andres, with a provision that Andres can transfer the

property to anyone. Andres transferred it to Iker. The property should be

included in the gross estate of Andres.

•

A limited power of appointment is one which may be exercised only in favor of a certain

person or persons designated by the prior decedent.

o Carles donated property to Andres, with a provision that Andres should transfer

the property to Iker, and only Iker. The value of the property should not be

included in the gross estate of Andres.

•

In order that property passing under a power of appointment may be included in the

gross estate of the transferor, the power of appointment must be a general power of

appointment.

•

Again, the bona fide sale rule applies.

(F) Prior Interests. - Except as otherwise specifically provided therein, Subsections (B), (C) and (E) of this

Section 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 this Code.

(G) Transfers of Insufficient Consideration. - If any one of the transfers, trusts, interests, rights or powers

enumerated and described in Subsections (B), (C) and (D) of this Section is made, created, exercised or relinquished for a consideration in money or money's worth, but is not a bona fide sale for an adequate and full consideration in money or money's 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 therefor by the decedent.

•

In the transfers in contemplation of death, revocable transfer, or transfer under a GPA,

the value to include in the gross estate will be determined under the following rules:

o If the transfer was in the nature of a bona fide sale for an adequate and full

consideration in money or money’s worth, no value will be included in the gross

estate;

o If the consideration received on the transfer was less than adequate and full, the

value to include in the gross estate will be the excess of the fair market value at

the time of the decedent’s death over the consideration received;

o If there was no consideration received on the transfer (donation mortis causa),

the value to include in the gross estate will be the fair market value of the

property at the time of the decedent’s death.

Taxation Two

Mickey Ingles

Ateneo Law 2012

Atty. Montero, with review notes from Atty. Salvador last updated: November 12, 2012

5

a. If yes, then add the balance of the FMV at the time of death and the

consideration.

b. If no, then it was a bona fide sale. Don’t add the value to the gross estate.

Analysis of the cases of Zapanta, Tuason, Dizon and Vidal de Roces

Voluntary/Compulsory

Heir

Time between

transfer

and

death

Will?

Remarks

Zapanta

Compulsory

None

Yes

Not

considered

advances.

Tuason

Voluntary

3 years

Yes

Considered

as

advances,

because

the

donees became

legatees in the

will.

Dizon

Compulsory

1 day

No

Considered

advances.

The

donee

is

a

compulsory heir.

Vidal de Roces

Voluntary

9 months

Yes

Considered

advances.

Donees

were

legatees in the

will

•

When it comes to transfers done during the lifetime of a decedent, there is a disputable

presumption that the transfers are in contemplation of death if the recipients are

compulsory heirs.

o The government presumes that one is transferring property beforehand to escape

the estate tax, and instead pay the lower donor’s tax.

o The case of Zapanta showed that the presumption is disputable. There, the Court

considered the gifts as not advances even if the recipients were compulsory

heirs. The reason for this was the condition imposed upon the recipients by the

decedent (they had to pay the decedent a certain amount of rice and money

during his lifetime). It showed that the transfer was not in contemplation of

death, because the decedent in fact, would benefit from the transfer.

o The presence of a will also plays a part. In the cases of Tuason and Vidal de

Roces, the Court considered the transfers as advances because a will was made

making the transferees legatees. This played a part in the Court’s impression that

there was an intention of the decedent to minimize his gross estate.

o Thus, when looking at cases like these, the totality of all the factors and facts

must be taken into consideration.

•

Does the government always want to consider a transfer an advance (to be covered by

the estate tax)? Not necessarily. There are instances where they will argue for it to be

considered under the donor’s tax.

Life Insurance Proceeds

(E) Proceeds of Life Insurance. - To the extent of the amount receivable by the estate of the deceased, his

executor, or administrator, as insurance under policies taken out by the decedent upon his own life, irrespective of whether or not the insured retained the power of revocation, or to the extent of the amount receivable by any beneficiary designated in the policy of insurance, except when it is expressly stipulated that the designation of the beneficiary is irrevocable.

Taxation Two

Mickey Ingles

Ateneo Law 2012

Atty. Montero, with review notes from Atty. Salvador last updated: November 12, 2012

6

•

Proceeds of insurance under policies taken out by the decedent upon his life shall

constitute part of the gross estate if the beneficiary is:

1. The estate of the decedent, his executor or administrator AS SUCH; or

2. A third person (not those in #1), and the designation of the beneficiary is revocable.

•

The Insurance Code states that the designation of a beneficiary is generally revocable.

o Except of course, when the policy states that the designation is irrevocable. In

such cases, the proceeds are not considered as part of the decedent’s estate.

•

With #1, doesn’t matter if revocable or not.

•

With #2, life insurance proceeds are excluded, provided:

o Irrevocable, and

o Payable to beneficiary other than estate, executor, administrator

•

Life insurance proceeds must be taken out BY THE DECEDENT.

o So not included in the GE if from:

 Company policy

 GSIS

 SSS

•

It must be LIFE INSURANCE to be included in the GE

o If accident insurance, not included in GE

So, gross estate is made up of:

1. The decedent’s interests at the time of his death

2. Transfers made during his lifetime (in contemplation of death, revocable, and under

a GPA), and

3. Life insurance proceeds

4. Some other stuff required by law to be included in the gross estate in order to allow

deductions (claims against insolvent persons, unpaid mortgage, value of the family

home, and the retirement benefits under RA 4917)

Valuation of the gross estate

SEC. 88. Determination of the Value of the Estate.

-(A) Usufruct. - To determine the value of the right of usufruct, use or habitation, as well as that of annuity, there shall be taken into account the probable life of the beneficiary in accordance with the latest Basic Standard Mortality Table, to be approved by the Secretary of Finance, upon recommendation of the Insurance Commissioner. (B) Properties. - The estate shall be appraised at its fair market value as of the time of death. However, the appraised value of real property as of the time of death shall be, whichever is higher of:

(1) The fair market value as determined by the Commissioner, or

(2) The fair market value as shown in the schedule of values fixed by the Provincial and City Assessors.

•

The properties comprising the gross estate shall be valued based on the FMV as of the

time of death.

•

In case of real property, the fair market value shall be:

1. The FMV as determined by the Commissioner; or

2. The FMV as shown in the schedule of values fixed by the Provincial and City

Assessors

o Whichever is HIGHER

•

In case of personal property recently acquired by the decedent, the purchase price may

indicate the FMV.

o In case of personal property not recently acquired, there should be some

evidence of the FMV.

•

For shares of stock, the FMV shall depend on whether the shares are isted or unlisted in

the stock exchange.

o If unlisted

 Common shares – based on their book value

 Preferred shares – based on their par value

o If listed

Taxation Two

Mickey Ingles

Ateneo Law 2012

Atty. Montero, with review notes from Atty. Salvador last updated: November 12, 2012

7

 The mean between the highest and lowest quotation on the date of death;

 If none, then the date nearest the death.

•

For use of usufruct, there be taken into account the probable life of the beneficiary in

accordance with the latest basic standard mortality table, to be approved by the

Secretary of Finance.

Computation for the net estate

•

The basic equation to determine the net taxable estate is (gross estate – deductions)

•

The complication arises when the decedent is married at the time of his death. We’ll

tackle that later.

•

First, let’s take a look at the deductions.

Deductions

•

The deductions from the gross estate are:

1. Ordinary deductions

a. Expenses, losses, indebtedness, taxes, etc:

i. Funeral expenses

ii. Judicial expenses of testamentary or intestate proceedings

iii. Claims against the estate

iv. Claims against the insolvent persons

v. Unpaid mortgage or indebtedness on property

vi. Taxes paid

vii. Losses

b. Transfer for public use

c. Vanishing deductions

2. Special deductions

a. Family home

b. Standard deduction of P1,000,000

c. Medical expenses

d. Amounts received by heirs under RA 4917.

•

These deductions are allowed for a citizen or resident of the Philippines.

•

Non-resident aliens are not entitled to special deductions.

Ordinary deductions

Funeral expenses

(A) Deductions Allowed to the Estate of Citizen or a Resident. - In the case of a citizen or resident of the

Philippines, by deducting from the value of the gross estate -(1) Expenses, Losses, Indebtedness, and taxes. - Such amounts:

(a) For actual funeral expenses or in an amount equal to five percent (5%) of the gross estate, whichever is lower, but in no case to exceed Two hundred thousand pesos (P200,000);

•

The deduction of funeral expenses is the

o Amount of actual funeral expenses, or

o An amount equal to 5% of the gross estate, whichever is LOWER,

 But not to exceed P200,000.

•

“Funeral expenses” includes:

1. Mourning apparel of the surviving spouse and the unmarried minor children of the

deceased bought and used on the occasion of the burial

2. Expenses for the deceased wake’s

3. Publication charges for death notices

4. Telecommunication expenses incurred in informing relatives of the deceased

5. Cost of burial plot, tombstones, monument or mausoleum (BUT NOT THEIR UPKEEP)

6. Interment and/or cremation fees and charges, and

Taxation Two

Mickey Ingles

Ateneo Law 2012

Atty. Montero, with review notes from Atty. Salvador last updated: November 12, 2012

8

7. All other expenses incurred for the performance of the rites and ceremonies incident

to interment

•

These aren’t deductible:

o Expenses incurred AFTER the interment

o Expenses borne or defrayed by relatives and friends

•

The cut-off point is interment. Thus, the expenses for the 9

day, thank you cards, 40

day aren’t included.

•

When some of the items which are actual funeral expenses are covered by a memorial

plan, the value of the memorial plan must be included in the gross estate.

o The value of the memorial plan plus other actual funeral expenses will give an

aggregate which will be compared with the 5% limitation and with P200k.

Judicial expenses of the testamentary/intestate proceedings

(b) For judicial expenses of the testamentary or intestate proceedings;

•

These are the expenses incurred during the settlement of the estate,

o BUT not beyond the last day prescribed by law for the filing of the estate tax

return (within 6 months from the date of death), or the extension period allowed.

•

These judicial expenses include

1. Fees of the 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

9. Brokerage fees for selling property of the estate

•

Expenses on extrajudicial settlement of the estate are allowed as deductions. They come

within the meaning of administration expenses.

o 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.

(CIR v CA & Pajonar)

 In that case, the notarial fees and the guardianship fee of the attorney

were considered deductibles.

•

Expenditures incurred for the individual benefit of the heirs, devisees or legatees are not

deductible.

•

Expenses for the improvement and renovation of the decedent’s residential house were

allowed as a deductible. (Testate Estate of Felix de Guzman v de Guzman-Carillo)

o Admin expenses should be those which are necessary for the management of the

estate, for protecting it against destruction or deterioration, and possible for the

production of fruits.

•

Attorney’s fees paid by the heirs to their respective lawyers arising from conflicting

claims are not deductible as judicial expenses. These shall be separately borne by them.

Claims against the estate

c) For claims against the estate: Provided, That at the time the indebtedness was incurred the debt instrument was duly notarized and, if the loan was contracted within three (3) years before the death of the decedent, the administrator or executor shall submit a statement showing the disposition of the proceeds of the loan;

•

“Claims” means debts or demands of a pecuniary nature which could have been

enforced against the deceased in his lifetime and could not have been reduced to simple

money judgments.

Taxation Two

Mickey Ingles

Ateneo Law 2012

Atty. Montero, with review notes from Atty. Salvador last updated: November 12, 2012

9

o In other words, if enforceable against him when he was alive, the obligations will

be claims against his estate when he shall be dead.

o So, an obligation that has prescribed during his lifetime, or that was

unenforceable against him, will not be a claim against his estate when he shall be

dead.

•

Requisites:

1. The liability must represent a personal obligation of the deceased at the time of his

death (except unpaid obligations incurred incident to his death and unpaid medical

expenses classified as a deduction),

2. The liability was contracted in good faith and for adequate and full consideration,

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

4. The indebtedness must not have been condoned by the creditor during the lifetime of

the decedent, or the actions to collect must not have prescribed.

•

Regarding the 4

requisite, if the debts were condoned AFTER the decedent’s death, the

debts are deductible, following the date-of-death valuation rule. (Dizon v CTA)

•

If the claim arose out of a debt instrument, the debt instrument must be notarized.

o EXCEPT for loans granted by financial institutions where notarization is not part

of the business practice or policy of the institution.

•

If the loan was contracted within 3 years before the death of the decedent, the admin

or executor must submit a statement showing the disposition of the proceeds of the

loan.

•

If a monetary claim against the decedent did not arise out of a debt instrument, the

requirement of a notarized debt instrument does not apply.

•

There is no requirement to add the amount to the gross estate (as compared to claims

against insolvent persons/mortgage). This is a DIRECT DEDUCTION.

Claims against insolvent persons

(d) For claims of the deceased against insolvent persons where the value of decedent's interest therein is included in the value of the gross estate;

•

Claims against insolvent persons are deductions from the gross estate

o SUBJECT to the condition that the full amounts of the receivables are first

included in the gross estate.

•

The deduction from the gross estate will be the uncollectible portion.

Unpaid mortgage or indebtedness on property

(e) For unpaid mortgages upon, or any indebtedness in respect to, property where the value of decedent's interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estate, but not including any income tax upon income received after the death of the decedent, or property taxes not accrued before his death, or any estate tax. The deduction herein allowed in the case of claims against the estate, unpaid mortgages or any indebtedness shall, when founded upon a promise or agreement, be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money's worth…When a person leaves property encumbered by a mortgage or indebtedness, his gross estate must include the fair market value of the property, undiminished by the mortgage or indebtedness.

•

The mortgage or indebtedness will be claimed as a deduction from the gross estate.

o Pique died leaving real property with a FMV of P1m, subject to a mortgage in the

amount of P600k. Before he can deduct the P600k, he has to include the total

FMV of his property to the gross income.

•

If the loan is merely an accommodation loan, where the proceeds of the loan went to

another person, the value of the unpaid loan must be included in the receivable of the

estate.

•

In the cases of claims against insolvent persons and unpaid mortgage/indebtedness on

property, it is imperative that the values of each are first added to the gross estate.

Taxation Two

Mickey Ingles

Ateneo Law 2012

Atty. Montero, with review notes from Atty. Salvador last updated: November 12, 2012

10

o These are called zero-sum computations. They don’t really benefit the heirs

because these transactions weren’t supposed to be part of the gross estate

anyway.

Taxes

•

Taxes are deductions from the gross estate if such taxes accrued prior to the decedent’s

death.

•

Those that accrued after the decedent’s death are not deductions from gross estate.

•

These taxes can NOT be deducted:

1. Income tax on income received after death

2. Property taxes not accrued before death

3. Estate tax

Losses

There shall also be deducted losses incurred during the settlement of the estate arising from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement, when such losses are not compensated for by insurance or otherwise, and if at the time of the filing of the return such losses have not been claimed as a deduction for the income tax purposes in an income tax return, and provided that such losses were incurred not later than the last day for the payment of the estate tax as prescribed in Subsection (A) of Section 91.

•

Losses are deductible from the gross estate if:

1. Arising from fire, storm, shipwreck, or other casualty, robbery, theft or

embezzlement

2. Not compensated by insurance or otherwise

3. Not claimed as a deduction in an income tax return of the estate subject to

income tax

4. Occurring during the settlement of the estate, and

5. Occurring before the last day for the payment of the estate tax (6 months after

the decedent’s death, or the allowed extension)

o Example: Dude died January 1, 2010. A fire razed his house on March 1, 2010.

His estate was settled January 1, 2012. He can claim a deduction (within 6

months!)

Dude died January 1, 2010. A fire razed his house on January 1, 2011.

He can’t claim a deduction.

Transfers for public use

(3) Transfers for Public Use. - The amount of all the 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.

•

“Transfers for public use” mean dispositions in a last will and testament, or a transfer to

take effect after death, in favor of the Government of the Philippines, or any political

subdivision thereof, for exclusively public purposes.

•

You can deduct the value of the property transferred to the government.

Vanishing deductions

(2) Property Previously Taxed. - An amount equal to the value specified below of any property forming a part of the gross estate situated in the Philippines of any person who died within five (5) years prior to the death of the decedent, or transferred to the decedent by gift within five (5) years prior to his death, where such property can be identified as having been received by the decedent from the donor by gift, or from such prior decedent by gift, bequest, devise or inheritance, or which can be identified as having been acquired in exchange for property so received:

One hundred percent (100%) of the value, if the prior decedent died within one (1) year prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death;

Eighty percent (80%) of the value, if the prior decedent died more than one (1) year but not more than two (2) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death;

Taxation Two

Mickey Ingles

Ateneo Law 2012

Atty. Montero, with review notes from Atty. Salvador last updated: November 12, 2012

11

Sixty percent (60%) of the value, if the prior decedent died more than two (2) years but not more than three (3) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death;

Forty percent (40%) of the value, if the prior decedent died more than three (3) years but not more than four (4) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death;

Twenty percent (20%) of the value, if the prior decedent died more than four (4) years but not more than five (5) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death;

These deductions shall be allowed only where a donor's tax or estate tax imposed under this Title was finally determined and paid by or on behalf of such donor, or the estate of such prior decedent, as the case may be, and only in the amount finally determined as the value of such property in determining the value of the gift, or the gross estate of such prior decedent, and only to the extent that the value of such property is included in the decedent's gross estate, and only if in determining the value of the estate of the prior decedent, no deduction was allowable under paragraph (2) in respect of the property or properties given in exchange therefor. Where a deduction was allowed of any mortgage or other lien in determining the donor's tax, or the estate tax of the prior decedent, which was paid in whole or in part prior to the decedent's death, then the deduction allowable under said Subsection shall be reduced by the amount so paid. Such deduction allowable shall be reduced by an amount which bears the same ratio to the amounts allowed as deductions under paragraphs (1) and (3) of this Subsection as the amount otherwise deductible under said paragraph (2) bears to the value of the decedent's estate. Where the property referred to consists of two or more items, the aggregate value of such items shall be used for the purpose of computing the deduction.

•

Property may change hands within a very short period of time by reason of the early

death of the owner who received it by inheritance or by donation (gift).

•

To provide relief to the burdened taxpayer, vanishing deductions are allowed to reduce

the gross estate.

•

Vanishing deductions are allowed when:

1. The present decedent died within 5 years from receipt of the property from a

prior decedent or donor;

2. The property on which the vanishing deduction is being claimed must be located

in the Philippines

3. The property must have formed part of the taxable estate of the prior decedent,

or of the taxable gift of the donor

4. The estate tax on the prior succession or the donor’s tax on the gift must have

been finally determined and paid

5. The property must be identified as the one received from the prior decedent or

donor, or something acquired in exchange therefore

6. No vanishing deduction on the property was allowable to the estate of the prior

decedent

•

How do we compute?

Step 1: Get the basis. Either the value of the property in the prior estate/value used for

donor’s tax purposes OR the value of the property in the present estate, whichever is

LOWER.

Step 2: The Step 1 value will be reduced by any payment made by the present decedent on

any mortgage or lien on the property (when such mortgage/lien was used as a

deduction on the prior dead guy’s estate, or gift of the donor)

Step 3: The Step 2 value shall be further reduced by:

Step 2 value

x

Expenses, losses, indebtedness, taxes and transfers for

Gross Estate

public use

This is done to prevent double deduction.

Step 4: Look at the chart below and multiply to get the value which you can actually deduct.

%

If received by inheritance or gift

100

Within one year prior to death of the decedent

80

More than one year but not more than two years

Taxation Two

Mickey Ingles

Ateneo Law 2012

Atty. Montero, with review notes from Atty. Salvador last updated: November 12, 2012

12

60

More than two years but not more than 3 years

40

More than 3 years but not more than 4 years

20

More than 4 years but not more than 5 years

Example

Che inherited land from his pop with a fmv of P500k when inherited. Two and a half

years later, Che died. The FMV of the land was P600k at that time. The gross estate, on

which the land was part, was P2m. deductions from the gross estate (not including the

family home, medical expenses, standard deduction or RA 4917 receivable) amounted to

P400k. What’s the vanishing deduction?

Step 1: Get the lower value. - P500k

Step 2: No mortgage mentioned, so 

P500k

Step 3: P500k

x

P400k =

P100k

P2m

Basis of the vanishing deduction (500k-100k) = P400k

Vanishing deduction (60% of P400k)

= P240

Special deductions

Family Home

(4) The Family Home. - An amount equivalent to the current fair market value of the decedent's family home: Provided, however, That if the said current fair market value exceeds One million pesos (P1,000,000), the excess shall be subject to estate tax. As a sine qua non condition for the exemption or deduction, said family home must have been the decedent's family home as certified by the barangay captain of the locality.

•

The deduction is an amount equivalent to the current FMV of the decedent’s family

home.

o BUT the maximum is P1m only.

•

Do not forget to add the amount of the family home to the gross estate. Kasama yan!

o Zero-sum? Yes, but only to the extent of P1m. Lugi yung rich folk.

•

The deduction will be allowed when the famly home is certified to be as such by the

barangay captain of the locality where it is located.

•

For a person married at the time of death, and who was under a system of conjugal

partnership or absolute community, the deduction for the family home is ½ of the FMV,

but should not exceed P1m, if such family home was conjugal property or community

property. (Remember this!)

Standard deduction

(5) Standard Deduction. - An amount equivalent to One million pesos (P1,000,000).

•

Do not forget to deduct P1m every time! It’s standard!

Medical expenses

(6) Medical Expenses. - Medical Expenses incurred by the decedent within one (1) year prior to his death which shall be duly substantiated with receipts: Provided, That in no case shall the deductible medical expenses exceed Five Hundred Thousand Pesos (P500,000).

•

All medical expenses incurred (whether paid or unpaid) within ONE YEAR before the

death of the decedent shall be allowed as a deduction, PROVIDED,

o that the same are duly substantiated with official receipts, and

o The total amount, whether paid or unpaid, does NOT exceed P500k.

•

If it’s more than P500k, can you deduct it as a claims against the estate? No. See

requisites of claims against the estate.

Taxation Two

Mickey Ingles

Ateneo Law 2012

Atty. Montero, with review notes from Atty. Salvador last updated: November 12, 2012

13

(7) Amount Received by Heirs Under Republic Act No. 4917. - Any amount received by the heirs from the decedent - employee as a consequence of the death of the decedent-employee in accordance with Republic Act No. 4917:

Provided, That such amount is included in the gross estate of the decedent.

•

Retirement benefits received by employees of private firms in accordance with a

reasonable benefit plan maintained by the employer are EXEMPT from all taxes, provided

that the retiriing employee has been in the services of the same employer for at least 10

years and is not less than 50 years old at the time of his retirement.

•

The amount must:

o have been received by the heirs of the decedent-employee as a consequence of

the latter’s death, and

o included in the gross estate of the descendent. (important!)

Deductions from the gross estate with ceilings

Funeral expenses

Actual funeral expenses, or

5% of the gross estate; or

P200k

Whichever is the LOWEST

Medical expenses

Actual medical expenses, or

P500k

Whichever is LOWER

Family home

FMV, or

P1m

Whichever is LOWER

Deductions for a NON-RESIDENT, NOT CITIZEN of the Philippines

(B) Deductions Allowed to Nonresident Estates. - In the case of a nonresident not a citizen of the Philippines,

by deducting from the value of that part of his gross estate which at the time of his death is situated in the Philippines:

(1) Expenses, Losses, Indebtedness and Taxes. - That proportion of the deductions specified in paragraph (1) of Subsection (A) of this Section which the value of such part bears to the value of his entire gross estate wherever situated;

(2) Property Previously Taxed. - An amount equal to the value specified below of any property forming part of the gross estate situated in the Philippines of any person who died within five (5) years prior to the death of the decedent, or transferred to the decedent by gift within five (5) years prior to his death, where such property can be identified as having been received by the decedent from the donor by gift, or from such prior decedent by gift, bequest, devise or inheritance, or which can be identified as having been acquired in exchange for property so received:

One hundred percent (100%) of the value if the prior decedent died within one (1) year prior to the death of the decedent, or if the property was transferred to him by gift, within the same period prior to his death;

Eighty percent (80%) of the value, if the prior decedent died more than one (1) year but not more than two (2) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death;

Sixty percent (60%) of the value, if the prior decedent died more than two (2) years but not more than three (3) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death;

Forty percent (40%) of the value, if the prior decedent died more than three (3) years but not more than four (4) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; and

Twenty percent (20%) of the value, if the prior decedent died more than four (4) years but not more than five (5) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death.

These deductions shall be allowed only where a donor's tax, or estate tax imposed under this Title is finally determined and paid by or on behalf of such donor, or the estate of such prior decedent, as the case may be, and only in the amount finally determined as the value of such property in determining the value of the gift, or the gross estate of such prior decedent, and only to the extent that the value of such property is included in that part of the decedent's gross estate which at the time of his death is situated in the Philippines; and only if, in determining the value of the net estate of the prior decedent, no deduction is allowable under paragraph (2) of Subsection (B) of this Section, in respect of the property or properties given in exchange therefore. Where a deduction was allowed of any mortgage or other lien in determining the donor's tax, or the estate tax of the prior

Taxation Two

Mickey Ingles

Ateneo Law 2012

Atty. Montero, with review notes from Atty. Salvador last updated: November 12, 2012

14

decedent, which was paid in whole or in part prior to the decedent's death, then the deduction allowable under said paragraph shall be reduced by the amount so paid. Such deduction allowable shall be reduced by an amount which bears the same ratio to the amounts allowed as deductions under paragraphs (1) and (3) of this Subsection as the amount otherwise deductible under paragraph (2) bears to the value of that part of the decedent's gross estate which at the time of his death is situated in the Philippines. Where the property referred to consists of two (2) or more items, the aggregate value of such items shall be used for the purpose of computing the deduction.

(3) Transfers for Public Use. - The 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.

•

A non-resident decedent who was not a citizen of the Philippines at the time of death,

with properties within and outside the Philippines, is subject to tax only on his estate

within the Philippines.

•

Due to this, the estate in the Philippines is allowed deductions for:

1. Expenses, losses, indebtedness, taxes, etc, computed by:

Gross Estate, Philippines

x

World expenses, losses, indebtedness,

Gross Estate, World

taxes, funeral expenses, judicial

expenses, etc

It does not matter where the expenses are paid or incurred. On the total of

the items, the formula provided by law will be applied.

Moreover, it also doesn’t matter if you can pinpoint specifically where the

expenses were incurred, you have to use the formula.

2. Transfers for public use of property in the Philippines

3. Vanishing deduction on property in the Philippines

•

A non-resident, not citizen is NOT allowed:

1. Deduction for family home

2. Standard deduction

3. Deduction for medical expenses

4. Deduction for amount receivable under RA 4917

D) Miscellaneous Provisions. - No deduction shall be allowed in the case of a nonresident not a citizen of the

Philippines, unless the executor, administrator, or anyone of the heirs, as the case may be, includes in the return required to be filed under Section 90 the value at the time of his death of that part of the gross estate of the nonresident not situated in the Philippines.

•

No deduction shall be allowed for a non-resident alien unless the executor, administrator

or anyone of his heirs, includes in the return required to be filed under Sec. 90 the value

at the time of the decedent’s death that part of his gross estate not situated in the

Philippines. (Needed for the formula specified above)

Net Estate Computation of Married Persons

Section 85 (H) Capital of the Surviving Spouse. - The capital of the surviving spouse of a decedent shall not,

for the purpose of this Chapter, be deemed a part of his or her gross estate.

Section 86 (C) Share in the Conjugal Property. - the net share of the surviving spouse in the conjugal

partnership property as diminished by the obligations properly chargeable to such property shall, for the purpose of this Section, be deducted from the net estate of the decedent.

Gross estate

•

The gross estate of a decedent who was married and who was under the system of

absolute community of property during the marriage consists of:

1. The EXCLUSIVE properties of the decedent, and

2. The COMMUNITY properties

•

The exclusive properties are:

1. Property acquired during the marriage by gratuitous title (inheritance/donation) by

either spouse, and the fruits as well as the income thereof

a. Unless the donor, testator or grantor states that they will be part of the

community property

2. Property for personal and exclusive use of either spouse

a. But jewelry will form part of the community property

Taxation Two

Mickey Ingles

Ateneo Law 2012

Atty. Montero, with review notes from Atty. Salvador last updated: November 12, 2012

15

3. Property acquired BEFORE the marriage by either spouse who have legitimate

descendants by a former marriage, and the fruits as well as the income of such

property

•

Community property will consist of all properties owned by the spouses at the time of

the celebration marriage or acquired thereafter (presumed to belong to the community)

o The family home constituted by the husband and wife is community property.

•

Proceeds of life insurance taken out by the decedent on his own life, when includible in

the gross estate, will be exclusive property if the premiums were paid out of exclusive

funds.

o They will be community property if the premiums were paid out of community

funds.

•

A claim against an insolvent person will be included in the gross estate as exclusive or

community depending on whether the claim is for exclusive or community property.

Deductions from gross estate

•

The same rules and ceilings which were discussed on the part of deductions will apply

•

The following are the community/conjugal deductions:

1. Funeral expenses and judicial expenses

2. Those obligations contracted during the marriage which are presumed to have

benefited the family (debts incurred during the marriage, etc)

•

The following are exclusive deductions:

1. Debts before the marriage by either spouse that did NOT redound to the benefit of

the family

2. Special deductions of family home, standard deduction, medical expenses and

amounts receivable under RA 4917

3. Support of the illegitimate children of either spouse

4. Liabilities incurred by either spouse of a crime

So, how do we get the net estate of a married person?

Step 0: Know which are community/conjugal and which are exclusive

Step 1: Get the net conjugal estate (gross conjugal estate – conjugal deductions)

Step 2: Get the decedent’s share (net conjugal estate/2)

Step 3: Get the gross estate of the decedent (decedent’s share + exclusive properties)

Step 4: Get his net estate (gross estate of the decedent – exclusive & special deductions)

Step 5: Once you reach step 4, yun na yon! That’s the decedent’s taxable estate.

Mao, a citizen and resident of the Philippines, was married under the system of absolute

community of property during the marriage. He died leaving the following properties and

obligations:

Real properties inherited from his father 10 years ago and before the marriage P200k

Real property received as a gift from the mother 7 years ago,

during the marriage

P1.115m

Cash – income from the property received as gift

P5k

Real property owned by Mrs. Mao before the marriage

P300k

The family home

P500k

Medical expenses

P70k

Funeral expenses

P50k

Judicial expenses for settlement of estate

P100k

Obligations incurred during the marriage

P150k

Taxation Two

Mickey Ingles

Ateneo Law 2012

Atty. Montero, with review notes from Atty. Salvador last updated: November 12, 2012

16

Step 0: Determine what are conjugal/community and what are exclusive

Step 1: Get the net conjugal estate (gross conjugal estate – conjugal deductions)

(P200k

_{+ P300k}

_+500k

_{) - (P50k}

_{+ P100k}

_{+ P150k}

_{) = P700k}

Step 2: Get the decedent’s share (Step 1’s NCE/2)

P700k/2 = P350k

Step 3: Get the gross estate of the decedent (decedent’s share + exclusive properties)

P350k + P1.115m

_{+ P5k}

_{= P1.47m}

Step 4: Get his net estate (Gross estate decedent – exclusive deductions & special

deductions)

P1.47m – (P120k

_{+ P250k}

_{+ P70k}

_{+ P1m}

_{) = P30k}

Step 5: The net taxable estate is P30k. Check the schedular rate, and you’ll find out that his

estate is tax exempt!

Tips:

•

Do not forget the limitations and ceilings imposed by the general rule of deductions.

o Family home only up to P1m.

o Funeral expenses only up to P200k – whatever’s lower of the actual expense and

5% of the gross estate (exclusive + conjugal)

o Medical expenses not to exceed P500k

•

Remember that only ½ of the family home is counted as a special deduction (since half

belongs to the still living spouse).

o And also remember that if the value of the family home (once halved) is above

P1m, the deduction allowed is still P1m because of the ceiling imposed by law.

•

Don’t forget to subtract the standard deduction. It’s not usually given as part of the facts

but you still have to deduct that.

•

Medical expenses are special deductions and are deducted from the gross estate of the

decedent. Funeral deductions are conjugal deductions and are deducted from the gross

conjugal/community estate.

Exemption from Estate Tax

SEC. 87. Exemption of Certain Acquisitions and Transmissions. - The following shall not be taxed: (A) The merger of usufruct in the owner of the naked title;

(B) The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommissary;

(C) The transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance with the desire of the predecessor; and

1 _{Real property inherited from the father}

2 _{Real property owned by Mrs. Mao before the marriage} 3 _{Value of the family home}

4 _{Funeral expenses} 5 _{Judicial expenses}

6 _{Obligations incurred during the marriage} 7 _{Real property gift from mom during marriage} 8 _{Income from the gift}

9 _{debt before marriage}

10 _{½ the value of the family home} 11 _{Medical expenses}

Taxation Two

Mickey Ingles

Ateneo Law 2012

Atty. Montero, with review notes from Atty. Salvador last updated: November 12, 2012

17

(D) All bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of the net income of which insures to the benefit of any individual: Provided, however, That not more than thirty percent (30%) of the said bequests, devises, legacies or transfers shall be used by such institutions for administration purposes.

•

The following are exempt from estate tax:

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

2. Transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee

to the fideicommisary

3. Transmission from the 1

_{heir, legatee or donee in favor of another beneficiary in}

accordance with the desire of the predecessor, and

4. All bequests, devises, legacies or transfers to social welfare, cultural and charitable

institutions, no part of the net income inures to the benefit of any individual,

provided that not more than 30% of the said bequests, devises, legacies or transfers

shall be used by such institutions for the administration purposes

5. Irrevocable life insurance to someone other than the EEA

6. GSIS/SSS benefits

7. Retirement benefits of private firms approved by the BIR

8. Separate property of the surviving spouse

Tax Credit for Foreign Estate Tax

E) Tax Credit for Estate Taxes paid to a Foreign Country.

-(1) In General. - The tax imposed by this Title shall be credited with the amounts of any estate tax imposed by the authority of a foreign country.

(2) Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each of the following limitations:

(a) 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 this Title bears to his entire net estate; and

(b) 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 this Title bears to his entire net estate.

•

To minimize the onerous effect of taxing the same property twice, a tax credit against

Philippine estate tax is allowed for estate taxes paid to foreign countries.

One foreign country

What you paid to the foreign country

Tax Credit Limit = Net foreign estate

x

Tax here in the Philippines

Entire Net Estate

•

Between what you paid to the foreign country and the tax credit limit here, you choose

whatever’s lower as what you can credit.

•

See example in donor’s tax part.

If tax is paid to 2 or more foreign countries:

Limitation A: see above

Limitation B: Tax Credit Limit = Total foreign net estate

x Tax here in the Philippines

Entire Net Estate

•

Between limitation A and B, you choose whatever’s lower as your credit.

Admin Provisions

SEC. 89. Notice of Death to be Filed. - In all cases of transfers subject to tax, or where, though exempt from