TAXATION 2

ESTATE TAX
Estate
-

Tax
tax on the right of the deceased person
to transmit his estate to his lawful heirs and beneficiaries at the time of death
and on certain transfers, which are made by law as equivalent to testamentary disposition.

Characteristics of Estate Tax

1. Excise Tax imposed upon the privilege to transfer property mortis causa
2. Ad Valorem Tax based on the value of the property at the time of decedents death
3. Direct Tax although burden may be shifted to another, it is the estate who is primarily liable.
4. National Tax imposed by the national government through the NIRC
5. General or Revenue Tax it is for the purpose of raising revenue
6. Progressive Tax as tax base increases, tax rate increases
Constitutional basis of Progressive system of taxation
- Art VI, Sec 28, par 1, sen 2 = The Congress shall evolve a progressive system of taxation
- Supreme Court construed this as:
o that direct taxes are to be preferred and as much as possible, indirect taxes should be
minimized. Indeed, the mandate to Congress is not to prescribe, but to evolve a progressive
tax system
- Evolve = is a mere directive to Congress on the system of taxation to be used.
- Therefore, even if Congress makes regressive rates, it may still be Constitutional.
Local Governments on Estate Tax
- LGUs do not have the power to impose estate tax of donation mortis causa as provided in Sec 133
(c) of the LGC
o Sec 133. Common Limitations on the taxing power of loval government units Unless
otherwise provided herein, the exercise of the taxing powers of provinces, cities,
municipalitis, and barangays shall not extend to the levy of the following: (c) Taxes on
estates, inheritance, gifts, legacies, and other acquisitions mortis causa,
EXCEPT as otherwise provided herein;
Right
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to RECEIVE gifts vs TRANSFER

Inheritance tax or the right to receive gifts has been abolished by PD 69.
This is because its imposition is incapable of proper and effective enforcement.
According to the fundamental principles of a sound tax system:
o Fiscal Adequacy revenue must meet expenditures of government
o Administrative Feasibility clear, concise, capable of proper and effective enforcement
o Theoretical Justice must be based on the tax payers ability to pay
- It violates administrative feasibility
- But suppose Congress restores the inheritance tax, such law is still valid because the violation of
the fundamental principles of a sound tax system does not invalidate a tax law passed by Congress.

Not a Property Tax

- Although the amount of the law is measured by the value of the property, estate tax is imposed not
upon the general ownership of the person over the property.
- The valuation of the property is material to mitigate the resulting hardship in the case of decline in
value of estates and prevent the danger of complete confiscation due to the need to pay tax.
- Estate tax is imposed on the PRIVILEGE of transmitting property upon the death of the owner.
Theories to justify imposition of Estate Tax
1. Benefits-protection theory
o Based on the power of the State to demand and receive taxes on the reciprocal duties to
support and protection
2. State-partnership theory
o State as a silent and passive partner in the privilege of accumulating property, has the right
to collect the share which is properly due to it.
3. Ability to pay theory

Receipt of inheritance is in the nature of unearned wealth which creates the ability to pay
the tax
4. Redistribution of wealth theory
o The value received by the successor is thereby reduced and brings said value into the
coffers of the government.
o

Section 84, Rates of Estate Tax

- There shall be levied, assessed, collected, and paid upon the transfer of the NET estate, whether
resident or not of the Philippines
o Levy imposition or enactment of a tax law which is a legislative act (impact of taxation)
o Assessment a notice to the effect that the amount therein stated is due as a tax and/or a
demand for payment thereof.
o Collection may be effected within 5 years after assessment or period of collection agreed
upon by Commissioner and taxpayer.
o Payment see NCC (incidence of taxation)
- Section 84 classified 2 kinds of decedents 1. Resident (covers resident citizen, non-resident
citizen, resident alien) and 2. Non-resident
- There is such a distinction because not all properties of non-resident decedent are taxed.
o Resident wherever situated
o Non-resident only those situated in the Philippines
Mobilia Sequuntur Personam principle
- Sec 104s principle of Movable Follows the owner is not adhered to in the imposition of estate
taxes.
- The Supreme Court in Wells Fargo Bank v. Collector said that the latin maxim is a mere fiction of law
that may be designed to prevent injustice and for convenience. We are not bound by this latin
maxim because a particular country can provide tax situs to particular object or subject of taxation.
Must yield to the actual situs of property as according to sec 104
- Sec 104 provides exceptions to the latin maxim regarding intangible personal properties.
Sec 84 vis--vis Sec 104 of the NIRC
- Sec 104 applies to both inter vivos and mortis causa transfers whether resident or not
- Sec 104 gross estate and gifts include real and personal property, whether tangible, intangible or
mixed, wherever situated.
o GR Provided, however, that where the decedent or donor was a non-resident alien at the time
of his death or donation, the property so transferred situated outside the Philippines SHALL NOT
BE INCLUDED as part of gross estate,
o EXPTN PROVIDED, further, that:
1. franchise which must be exercised in the Philippines,
2. Shares, obligations or bonds issued by any corporatons in the Philippines,
3. Shares, obligations or bonds by any foreign corporation 85% of its business is located in
the Philippines
4. Shares, obligations or bonds issued by foreign corporation, if such shares, bond, or
obligations have acquired business situs in the Philippines
5. Shares or rights in any partnership, business, or industry established in the Philippines.
o EXPTN to the EXCEPTN (Rule of Reciprocity)
Provided further that no tax shall be collected with respect to INTAGIBLE PROPERTY
If the decedent at the time of death or donor at donation was a citizen and
resident of a foreign country which at that time 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
If the law of the foreign country of which the decedent or donor was a citizen and
resident at the time of death or donation allows a similar exemption from transfer
of death taxes of every character or description I respect of intangible personal
property owned by citizens of the Philippines not resident in that foreign country.
Section 85, Gross Estate
- Includes:
1. Decedents Interest
2. Transfer in Contemplation of Death

3.
4.
5.
6.
7.
-

Revocable Transfer
Property Passing under the General Power of Appointment
Proceeds of Life Insurance
Prior Interest
Transfer for insufficient Consideration

#2, 3, 4 = substitute for testamentary disposition, inter vivos in form, mortis causa in substance.

1. DECEDENTS INTEREST
- Any interest having value or capable of being valued and transferred by decedent AT HIS DEATH.
- This includes:
o Fruits natural or civil (rent or income)
o Stockholders investments and dividends in a corporation.
Those declared after his death will form part of the gross estate as decedents
interest. Those declared before his death is constructively part of his income thus
subject to some taxes and residue will still form part of the gross estate.
The determinative factor is the date of declaration of the dividends. The corporation
code provides that a stockholder acquires the right over such dividend upon its
declaration, applying the concept of constructive receipt of income.
o A partners interest in the partnership
Art 1512 of the NCC
The distributable net income after tax of a partnership which he is a partner (except
general professional partnership) shall be subject to income tax first and its residue
will be part of the gross estate.
o Cash in banks
o Claims of decedent before his death (Receivables and Collectibles at the time of death)
Claim of decedent as a solidary debtor for paying the entire obligation.
Uncollected compensation
13th month pay (those mandated by law) <Christmas bonus not included>
o Naked ownership of a property having another as a usufrustuary is included
- Action filed by heirs against person responsible for accident, decision in their favour with award.
Award not part of gross estate for the decedent has no control over the disposition of such property.
- CONTROLLING TEST must have vested interest over such claim
2. TRANSFER IN CONTEMPLATION OF DEATH
- 5 SITUATIONS:
1. To the extent of interest which decedent has made a transfer (by trust or otherwise) in
contemplation of or intended to take effect in possession or enjoyment at or after his death
2.-3. Which he has made a transfer under which he has retained for his life
The possession, enjoyment or right to income from the property
The right, alone or with another, to designate person to possess or enjoy the property
or income
4.-5. Which he has made a transfer which does not in fact end before his death
The possession, enjoyment or right to income from the property
The right, alone or with another, to designate person to possess or enjoy the property
or income
- EXPT in cases of a bona fide SALE for an adequate and full consideration in money and
moneys worth.
-

by trust or otherwise - These are transfers equivalent to testamentary dispositions (intervivos in

form, mortis causa in substance); TRUST is covered because there is no actual transfer of ownership
10 FACTORS to determine transfer is in contemplation of death:
1. Age of decedent when transfer made
2. Health of Decedent as he knew it at or before transfer
3. Interval of transfer and death
4. Amount of property transferred in proportion to amount retained
5. Nature of disposition
6. Existence of general testamentary scheme
7. Relationship of done to decedent
8. Desire to escape burden of managing property by transferring to another

9. Long-established gift-making policy of decedent or desire to enjoy the enjoyment of the

donees of the property transferred
10. Desire to avoid paying estate taxes via inter vivos transfer of property
No such thing as presumption of transferring in contemplation of death.
CASE: DISON v. POSADAS (GR L-36770, 04 November 1932)
o Felix Dison executed a deed of gift involving 22 tracts of land to son Luis Dison on April 9,
1928, reserving only usufruct of 3 tracts for him.
o Deed was acknowledged by donor before a notary public on April 16, 1928.
o Formal Acceptance of gift was on April 17, 1928.
o Acknowledgement of acceptance before a notary on April 20, 1928
o Felix Dison died April 21, 1928
o CONTENTIONS:
plaintiff did not receive property of any kind upon death of father.
That he received mentioned properties by a consummated gift.
No evidence that gift was simulated and that it was for evading inheritance tax
He is not considered an heir for he has not received any property
o SC DECISION:
In this case the scanty facts before us may not warrant the inference that the
conveyance, acknowledged by the donor five days before his death and accepted by
the donee one day before the donor's death, was fraudulently made for the purpose
of evading the inheritance tax. But the facts, in our opinion, do warrant the inference
that the transfer was an advancement upon the inheritance which the donee, as the
sole and forced heir of the donor, would be entitled to receive upon the death of the
donor.
the appellant in this case occupies the status of heir to his deceased father cannot be
questioned. Construing the conveyance here in question, under the facts presented,
as an advance made by Felix Dison to his only child, the law is applicable and the tax
to have been properly assessed by the Collector of Internal Revenue.
CASE: VIDAL DE ROCES v. POSADAS ( GR L-34937, 13 March 1933)
o March 10 and 12, 1925 Esperanza Tuazon donated parcels of land in Manila to plaintiffs
who accepted them and eventually took possession.
o January 5, 1926 donor died without any heir, her will admitted to probate bequeathed to
each of the donees P5K. CIR imposed inheritance tax on the donation made.
o

CONTENTIONS:

Appellant that the provision does not include donations inter vivos and if it does, it
is unconstitutional, null and void for the Legislature has no authority to impose
inheritance tax on donations inter vivos; and it contravenes the fundamental rule of
uniformity of taxation.

Appellee that the words "all gifts" refer clearly to donations inter vivos and, in
support of his theory, cites the doctrine in Tuason vs. Posadas.

SC DECISION:

Neither theory reflects the true spirit of the provision. The gifts referred to are,
obviously, those donations inter vivos that take effect immediately or during the
lifetime of the donor but are made in consideration or in contemplation of death.
Gifts inter vivos, the transmission of which is not made in contemplation of the
donor's death should not be understood as included within the said legal provision for
the reason that it would amount to imposing a direct tax on property and not on the
transmission thereof, which act does not come within the scope of the provisions
which deals expressly with the tax on inheritances, legacies and other
acquisitions mortis causa.

Our interpretation of the law is not in conflict with the rule laid down in the case
of Tuason and Tuason vs. Posadas, supra. We said therein, as we say now, that the
expression "all gifts" refers to gifts inter vivos inasmuch as the law considers them as

advances on inheritance, in the sense that they are gifts inter vivos made in
contemplation or in consideration of death. In that case, it was not held that that kind
of gifts consisted in those made completely independent of death or without regard
to it.
The tax collected by the appellee on the properties donated in 1925 really constitutes
an inheritance tax imposed on the transmission of said properties in contemplation or
in consideration of the donor's death and under the circumstance that the donees
were later instituted as the former's legatees. For this reason, the law considers such
transmissions in the form of gifts inter vivos, as advances on inheritance and nothing
therein violates any constitutional provision, inasmuch as said legislation is within the
power of the Legislature.
We refer to the allegations that such transmissions were effected in the month of
March, 1925, that the donor died in January, 1926, and that the donees were
instituted legatees in the donor's will which was admitted to probate. It is from these
allegations, especially the last, that we infer a presumption juris tantum that said
donations were made mortis causa and, as such, are subject to the payment of
inheritance tax.
7 MOTIVES to preclude or negate such transfer as one in contemplation of death
1. Relieve donor from burden of management
2. Save income or property taxes
3. Settle family litigated and unlitigated disputes
4. Provide independent income for dependents
5. See children enjoy property while donors alive
6. Protect family from hazards of business operations
7. Reward services rendered
PD 1705 3 year presumption rule is no longer applicable.
Is it possible that the transfer is via Sale yet considered in contemplation of death ? YES. If no
consideration given, then it is fictitious it is covered by the phrase or otherwise because there is
no contract of sale to speak of.
If price is Grossly inadequate? GR: Art 1470 of NCC gross inadequacy of price does NOT affect
the contract of sale.
o EXPT if there is defect in consent, or parties really intended a donation or some other act or
contract.
Determinative test of donation mortis causa effective from the moment of death of the decedent
Characteristics of donation mortis causa effective upon death and revocable
Acceptance and delivery not required in donation mortis causa. Right to the property is vested to
the heirs upon death of decedent (art 777 of NCC)
Testamentary succession has a prescribed form to be valid, intestate succession does not.
If there is a VALID donation mortis causa, it cannot be included in the gross income because gifts,
bequests and devises are excluded from the gross income.
IF a a donation mortis causa is INVALID and there is no donation mortis causa to speak of, it is still
taxable as INCOME, being a flow of wealth other than a mere return of capital

3. REVOCABLE TRANSFER
- To the extent of any interest decedent has transfereed by trust or otherwise (EXPT bona fide sale for
adequate and full consideration in money or moneys worth) where enjoyment at the time of death
is subject to change through the exercise of power in whatever capacity by him alone or In
conjunction with another (without regard to when or what source he acquired such power) to alter,
amend, revoke, terminate or where such power is relinquished in contemplation of decedents
death.
- Such power exists on the date of death though exercise of power is subject to preceding giving of
notice OR though it only takes effect on expiration of a period w/n notice was given here, proper
adjustment shall be made representing the interests which would have been excluded from the
power if decedent had lived.
- If no notice or power not exercised, on or before death, notice is considered given or power
exercised, on date of death.
- WHY revocable transfers form part of Gross Estate?
o Because the transferor can amend, alter, revoke, or terminate the transfer anytime as if no
transfer was made, having control over the right to possess, enjoy, income and fruits, it is
deemed included.

GR Donation Mortis Causa Revocable; Donation inter vivos Irrevocable; Irrevocable trust not
included in gross estate

4. PROPERTY PASSING UNDER THE GENERAL POWER OF APPOINTMENT

- Any property passing under general power of appointment exercised by decedent either
o By will
o By deed executed in contemplation of, or intended to take effect in possession or enjoyment
at, or after death
o By deed under which he has retained for his life or any period not ascertainable without
reference to his deathor period not end before his death

The possession, enjoyment or right to income from the property

The right, alone or with another, to designate person to possess or enjoy the property
or income
- EXPT in cases of a bona fide SALE for an adequate and full consideration in money and
moneys worth.
- POWER OF APPOINTMENT a right to designate the person or persons who shall enjoy or possess
certain property from the estate of a prior decedent, it may either be:
o GENERAL gives done the power to appoint as he pleases, including himself, spouse, etc,
having full dominion over the property as though he owns it
o SPECIAL when the done can appoint only among a restricted r designated class of persons
other than himself.
- Reason for inclusion: property comes from the donor or decedent. The power to dispose property at
death by power of appointment is equivalent to ownership.
- Difference with Transfer in contemplation of death
5. PROCEEDS OF LIFE INSURANCE
- Sec 85 (E) : MEMORIZE!
o To the extent of the amount receivable by the estate of the deceased, his executor, or
administrator,
o as insurance under policies taken out by the decedent upon his own life,
o irrespective of whether or not the insured retained the power of revocation,
o or to the extent of the amount receivable by any beneficiary designated in the policy of
insurance,
EXPT when it is expressly stipulated that the designation of the beneficiary is
irrevocable.
- Included in gross estate!
o Beneficiary is the heir, executor, administrator, regardless of designation (revocable or not)
o 3rd person REVOCABLY designated as beneficiary
- Excluded in gross estate!
o 3rd person IRREVOCABLY designated as beneficiary
o If it partakes of a nature of Group Insurance Policy
- Tax implication of Life Insurance Premiums:
o Taxable if beneficiary is the heir, estate, executor, administrator
As compensation income if employee is a rank and file (sec 32A)
As fringe benefits if employee is a managerial or supervisory one (sec32B)
A deductible expense for the employer as other forms of compensation for personal
services rendered under sec 32 A 1, a, 1
o NOT Taxable if beneficiary is a 3rd person (including employer) because it is a mere return
of capital.
Not deductible expense for employer if designated beneficiary is the employer
himself.
- GR - Insurance Code provides that insured has the right to change beneficiary designated.
Designation of beneficiary is revocable
- EXPT - when he expressly waived such a right in the policy.
6. PRIOR INTEREST
- B,C, E shall apply to transfers, trusts, estates, interest, rights, powers, relinquishment of powers
7. TRANSFER FOR INSUFFICIENT CONSIDERATION

In : a) transfers in contemplation of death; b) Revocable transfers and c) Property passing under

general power of appointment:
o Only the excess of the fair market value of the property at the time of death over the
consideration received shall be included in the gross estate
These are intended to evade the payment of estate tax
A similar provision in donation inter vivos is found in Sec 100
When amount of property exceeds value of consideration, amount shall be deemed a gift for
purpose of tax

Sec 85 (H) - Capital of Surviving Spouse

- This speaks of EXCLUSION from the Gross Estate
- The one included is only the exclusive property of the decedent, not part of the conjugal
partnership or community property.