RR 2-40

SECTION 207.Estates and trusts. "Fiduciary" is a term which applies to all persons or corporations
that occupy positions of peculiar confidence towards others, such as trustees, executors, or
administrators; and a fiduciary, for income tax purposes, is any person or corporation that holds in
trust an estate of another person or persons. In order that a fiduciary relationship may exist, it is
necessary that a legal trust be created.
In general, the income of a trust for the taxable year which is to be distributed to the beneficiaries
must be returned by and will be taxed to the respective beneficiaries, but the income of a trust which
is to be accumulated or held for future distribution, whether consisting of ordinary income or gain from
the sale of assets included in the corpus of the trust, must be returned by and will be taxed to the
trustee. Three exceptions to this general rule are found in the law: (1) in the case of revocable trust
(Section 59); (2) in the case of a trust the income of which, in whole or in part, may be held or
distributed for the benefit of the grantor (Section 60); and (3) in the case of a trust administered in a
foreign country [Section 57(c)]. In the first case, the income from such part of the trust estate title to
which may be revested in the grantor should be included in the grantor's return. In the second case,
part of the income of the trust, which may be held or distributed for the benefit of the grantor, should
be included in the grantor's return. In the third case, the trustee is not entitled to the deductions
mentioned in subsections (a) and (b) of Section 57 and the net income of the trust undiminished by
any amounts distributed, paid or credited to beneficiaries will be taxed to the trustees; however, the
income included in the return of the trustees is not to be included in computing the income of the
beneficiaries.

SECTION 208.Consolidation of incomes of two or more trusts. Section 56(b)(2) expressly requires
the consolidation of the income of two or more trusts where the creator of the trust in each instance is
the same person and the beneficiary in each instance is the same. The tax due on the consolidated
income will be collected from the trustees in proportion to the net income of the of the respective
trusts. (See Section 215 of these regulations.)

SECTION 209.Estates and trusts taxed to fiduciary. In the case of a decedent's estate the
settlement of which is the object of testamentary or intestate proceedings, the fiduciary, executor, or administrator is
required to file an annual return for the estate up to the final settlement thereof. In the
same manner, the fiduciary is required to file a yearly return covering the income of a trust, whether
created by will or deed, for accumulation of income, whether for unascertained persons or persons
with contingent interests or otherwise. In both cases the income of the estate or trust is taxed to the
fiduciary. Where under the terms of a will or deed, the trustee, may in his discretion, distribute the
income or accumulate it, the income is taxed to the trustee, irrespective of the exercise of his
discretion. The imposition of the tax is not affected by the fact that an ultimate beneficiary may be a
person exempt from tax.

SECTION 210.Estate and trust taxed to beneficiaries. In the case of (a) a trust the income of which
is to be distributed annually or regularly; (b) an estate of a decedent the settlement of which is not the
object of judicial testamentary or intestate proceedings; and (c) properties held under a co-ownership
or tenancy in common, the income is taxable directly to the beneficiary or beneficiaries. Each
beneficiary must include in his return his distributive share of the net income of the trust, estate, or coownership.
In the case of trusts which are in whole or in part subject to revocation by the grantor, or
which are for the benefit of the grantor, the income of the trust is to be included in computing the net
income of the grantor.
SECTION 211.Decedent's estate administration. The "period of administration or settlement of the
estate" is the period required by the executor or administrator to perform the ordinary duties
pertaining to administration, in particular, the collection of assets and the payment of debts and
legacies. Estates during the period of administration have but one beneficiary and that beneficiary is
the estate.
No taxable income is realized from the passage of property to the executor or administrator on the
death of the decedent, even though it may have appreciated in value since the decedent acquired it.
In the event of delivery of property in kind to a legatee or distributee, no income is realized. Where,
however, prior to the settlement of the estate, the executor or administrator sells property of a
decedent's estate for more than the appraised value placed upon it at the death of the decedent, the
excess is income, taxable to the estate. Where property is sold after the settlement of the estate by
the devisee, legatee or heir at a price greater than the appraised value placed upon it at the time he
inherited the property from the decedent, he is taxable individually on any profit derived. An allowance
paid a widow or heir out of the corpus of the estate is not deductible from gross income.

SECTION 212.Liability for tax on estate or trusts. Liability for payment of the tax attaches to the
person of an executor or administrator up to and after his discharge, where prior to distribution and
discharge he had notice of his tax obligations or failed to exercise due diligence in determining
whether or not such obligations existed. Liability for the tax also follows the estate itself, and when the
estate has been distributed, the heirs, devisees, legatees, and distributors may be required to
discharge the amount of the tax due and unpaid, to the extent of and in proportion to any share
received. The same consideration apply to other trusts. Where the tax has been paid on the net
income of an estate or trust by the fiduciary, the net income on which the tax is paid is free from tax
when distributed to the beneficiaries.

SECTION 213.Exemption allowed to estate or trusts. An estate or a trust is allowed a personal

exemption of P1,800. Each beneficiary is entitled to but one personal exemption, no matter from how
many trusts he may receive income. (Section 61 of the Code)