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TAXATION II

PART 1 TRANSFER TAXES

Transfer taxes

Transfer taxes are taxes imposed upon the gratuitous disposition of


properties.

They are taxes levied on the transmission of properties from a prior


decedent to his heirs in the case of estate tax or from a donor to a
donee in the case of the donors tax.

Nature of Transfer Taxes

Transfer taxes have the nature of excise or privilege taxes imposed on

(a) the right to transmit property at the time of death and on the
privilege that a person is given in controlling to a certain extent the
disposition of his property to become operative at or after death, in the
case of estate taxes; and

(b) the privilege of transmitting ones property or property rights to


another or others without adequate and full valuable consideration, in
the case of donors taxes.

Note: 3 Main Kinds of Taxes

(1) Personal tax (tax of fixed amount imposed upon all persons of a
certain class, e.g., community tax);
(2) Property tax (tax imposed on all property of a certain class, e.g.,
real property tax); and
(3) Excise tax (tax imposed on the performance of an act, the
enjoyment of a right or privilege, or the engagement in an occupation.

Note: Transfer Tax under the National Internal Revenue Code (NIRC)
Different from the Transfer Tax under the Local Government Code (LGC)

The transfer tax referred to in the NIRC, which is a national tax, should
not be confused with the transfer tax referred to in Sec. 135 (for
provinces) and 151 (for cities) of the LGC, which is a local tax.

The transfer tax under the LGC is a tax on the sale, donation, barter,
or any other mode of transferring ownership or title of real property at
the maximum rate of 50% of 1% (in case of provinces) or 75% of 1% (in
the case of cities) of the total consideration or of the fair market value
whichever is higher.

KINDS OF TRANSFER TAXES

1. Estate tax (death tax)


2. Donors tax (gift tax)

Donors Tax and Estate Tax, distinguished.

(1) Effectivity of Transfer: Donors tax is a tax on the privilege to transfer


property during ones lifetime (inter vivos). Estate tax is a tax on the
privilege to transfer property upon ones death (mortis causa).
(2) Period of Transfers Covered: Donors tax is computed on the basis of
the net gifts given during a calendar year. Estate tax is computed on
the basis of the net estate transferred at the time of death.
(3) Amount of Exemption: Donors tax exempts the first P100,000 of the
net gifts from tax. Estate tax exempts the first P200,000 of the net estate
from tax.
(4) Top Rates: Donors tax is a progressive scheduler tax but with a top
rate of 15% on net gifts exceeding P10 Million. Estate tax is also a
progressive scheduler tax but with a higher top rate of 20% on net
estates exceeding P10 Million.
(5) Alternative Rate: Donors tax has an alternative rate of 30% of the
net gifts in case of strangers. Estate tax does not have such an
alternative rate for stranger-beneficiaries.

A. ESTATE TAX

Definition of Estate Tax

Estate tax is a tax that is levied, assessed, collected, and paid upon the
privilege of gratuitously transferring the net estate of a decedent which
are transmitted to his heirs or beneficiaries at the time of his death and
on certain transfers made by the decedent during his lifetime which
are considered by law as equivalent to testamentary dispositions.

Nature of Estate Tax

Estate tax has the nature of excise or privilege tax imposed on the right
to transmit property at the time of death and on the privilege that a
person is given in controlling to a certain extent the disposition of his
property to become operative at or after death.

Note: Aside from it being an excise tax, an estate tax is, likewise

(1) a transfer tax (as it is imposed on the gratuitous transfer of


properties);
(2) a national tax (as it is imposed by the national government);
(3) a progressive tax (as tax rate increases as the taxable base
amount increases); and
(4) a direct tax (although the heirs are subsidiarily liable, it is still the
estate of the decedent that is directly liable).

OBJECTS AND PURPOSES OF ESTATE TAX

(1) To tax the shifting of economic benefits and enjoyment of property


from the dead to the living;
(2) To generate additional revenue for the government;
(3) To provide an effective way for equal distribution of wealth and
reduce the concentration of wealth; and
(4) To provide a means for the State to collect its share from the
decedents wealth generated which he accumulated under the
States protection.

JUSTIFICATION OR THEORIES FOR THE IMPOSITION OF ESTATE TAX

(1) Benefit-received theory


(2) Privilege theory or state partnership theory
(3) Ability to pay theory
(4) Redistribution of wealth theory

Benefit-Received Theory

This theory considers the services of the government in the distribution


of the estate of the decedent, either by law or in accordance with his
wishes. For the performance of these services and other benefits that
accrue to the estate and the heirs, the State collects the tax.

Privilege Theory or State Partnership Theory

According to this theory, inheritance is not a right but a privilege


granted by the State, and large estates have been acquired only with
the protection of the State. Consequently, the State as a passive and
silent partner in the accumulation of property, has the right to collect
the share which is properly due it.

Ability to Pay Theory

The theory asserts that the receipt of inheritance, which is in the nature
of unearned wealth or windfall, place assets into the hands of the heirs
and beneficiaries thereby creating an ability to pay the tax and, thus,
to contribute to government income.
Redistribution of Wealth Theory

Under this theory, the receipt of inheritance is a contributing factor to


the inequalities in wealth and incomes. The imposition of estate tax
reduces the property received by the successor, thus helping to
promote a more equitable distribution of wealth in society. The tax base
is the value of the property and the progressive scheme of taxation is
precisely motivated by the desire to mitigate the evils of inheritance in
the present form.

BASIC PRINCIPLES OF ESTATE TAXATION

(1) Extent of the Estate


(2) Valuation of the Estate
(3) Accrual of the Estate Tax
(4) The Governing Law

Extent of Estate

Estate tax is levied on the extent of decedents interest at the time of


his death.

Valuation of the Estate

Estate tax is based on the fair market value of the estate as of the time
of decedents death.

Accrual of Estate Tax

The estate tax accrues as of the time of death of the decedent. The
properties and rights are transferred to the successors at the time of
death. Upon the death of the decedent, succession takes place and
the right of the State to tax the privilege to transmit the estate vests
instantly upon death.

Note: The accrual of the estate tax is distinct from the obligation to pay
said tax. It does not follow that the obligation to pay the estate tax
arises as of the time of death of the decedent. The time of payment is
clearly fixed by law, that is, 6 months from the date of decedents
death.

Governing Law

Estate taxation is governed by the statute in force at the time of death


of the decedent notwithstanding the postponement of the actual
possession or enjoyment of the estate by the beneficiary.
Time and Transfer of Properties

2 Types of Gratuitous Transfers

(1) Transfers Inter Vivos transfers effected during the lifetime of


transferor (strictly speaking, a donation);
(2) Transfers Mortis Causa transfers effected at the time of death of
transferor (strictly speaking, a succession)

Note: There are, however, transfers inter vivos which are treated by law
as transfers mortis causa since they are considered as substitutes for
testamentary dispositions (i.e., transfers which are inter vivos in FORM
but mortis causa in SUBSTANCE).

Transfers Inter Vivos as Transfers Mortis Causa


(1) Transfers in contemplation of death;
(2) Transfer with retention or reservation of certain rights;
(3) Revocable transfers;
(4) Transfers of property arising under general power of appointment;
and
(5) Transfers for insufficient consideration.

Note: When the donee in the foregoing gratuitous transfers, after the
death of the donor, proves to be his heir, devisee or donee mortis
causa, for the purpose of evading the estate tax, the law presumes that
the gratuitous transfers have been made in anticipation of inheritance,
devise, bequest or gift mortis causa.

Gratuitous Transfer Subject to a Resolutory Condition

Case: Tito donated his piece of land to Vic subject to the condition
that Vic shall give to Tito P50,000 every year for the rest of Titos life. In
case Vic fails to pay the said amount to Tito, the donation shall be
cancelled and the property shall revert back to Tito. Vic accepted the
donation and the property was transferred to Vics name.

Question: Is the gratuitous transfer that is subject to a resolutory


condition a donation inter vivos or a donation mortis causa?

Answer: The gratuitous transfer from Tito to Vic is a donation inter vivos.
In a donation mortis causa it is the donor's death that determines that
acquisition of, or the right to, the property donated, and the donation
is revocable at the donor's will. However, where the donation took
effect immediately upon the donees acceptance thereof but it was
just subject to a resolutory condition that the donation would be
revoked if the donee did not fulfill certain conditions, the donation is
considered inter vivos that is subject to donors tax.
Note: The control of whether or not the effect of the transfer continues
or not is on the donee and not on the donor.

Note: Suspensive Condition versus Resolutory Condition

A suspensive condition is a condition which suspends rights and


obligations until the uncertain future event occurs. If the suspensive
condition is never fulfilled, the suspended rights and obligations never
come into existence. It is as though they never existed.

In the case of a resolutory condition, there is no suspension or


postponement of terms in a contract. Rights and obligations come into
existence immediately upon agreement between the parties. If a
resolutory condition is fulfilled, the operation of the rights and
obligations cease.

Gratuitous Transfer Subject to a Suspensive Condition

Question: Are gratuitous transfers subject to a suspensive condition


considered as transfers mortis causa or transfers inter vivos?

Answer: It depends. Gratuitous transfers that are subject to a


suspensive condition, which condition may happen after the death of
the donor, may be considered as donation mortis causa considering
that no rights are actually transferred until happening of the suspensive
condition. If the suspensive condition, however, happens before the
death of the donor, then donation inter vivos takes effect.

Example: Tito donated a piece of land to Vic subject to the condition


that the transfer of ownership shall take place only if Vic graduates
from college during Titos lifetime or within one year after his death. If
Vic graduates while Tito is still alive, donation inter vivos takes place.
However, if Vic graduates within one year after the death of Tito, mortis
causa transfer takes place.

CLASSIFICATION OF DECEDENTS

For purposes of estate taxation, decedents may be classified as:


(1) Citizen (resident or non-resident);
(2) Resident Alien; or
(3) Non-Resident Alien.

Importance of Classifying Decedents

The importance of classifying decedents for purposes of estate


taxation lies on the extent of benefits as well as the resulting extent of
liabilities of a decedent.
Estate Taxation and the Benefits Protection Theory

For purposes of estate taxation, the benefits protection theory is used


as basis in classifying decedents. Such classification in turn determines
the composition of the decedents gross estate for purposes of estate
taxation.

Under the benefits protection theory, the Philippine Government


provides protection to the persons and as well as the properties of its
citizens and to resident aliens wherever they are situated. However,
insofar as non-resident aliens are concerned, the protection provided
by the government extends only to the persons and properties of said
non-resident aliens which are situated in the Philippines.

Filipino Citizens

(1) Those who are citizens of the Philippines at the time of the adoption
of the 1987 Constitution;
(2) Those whose fathers or mothers are citizens of the Philippines;
(3) Those born before January 17, 1973, of Filipino mothers, who elect
Philippine Citizenship upon reaching the age of majority; and
(4) Those who are naturalized in the accordance with law.

Note: The NIRC does not distinguish whether a Filipino is a resident or a


non-resident. The reason for this is that under the benefits protection
theory, the Government of the Philippines provides protection to its
citizens wherever they may be. Thus, with this protection benefit given
to Filipino citizens the Government is also given the authority to subject
to estate tax all the properties of its citizens, wherever they may be
situated.

Question: How about Dual Citizens or Filipino Citizens with other


citizenship? Do the rules on estate taxation for Filipino Citizens apply to
them?

Answer: The same rule applies to those with dual citizenships since they
are Filipino citizens.

They are, however, entitled to the benefits of availing tax credits for
estate taxes paid to a foreign country under Sec. 86 (E), NIRC.

General Rule: The estate tax imposed will be credited with the
amounts of any estate tax imposed by the authority of a foreign
country.
Limitations on Credit:

(a) Per Country Basis - 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 taxable net
estate situated within such country bears to his entire net estate; and

(b) Overall Basis - 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 taxable net estate situated outside the Philippines
bears to his entire net estate.

Resident Alien

Sec. 22 (F), NIRC defines Resident Alien as an individual whose


residence is within the Philippines and who is not a citizen therefor.

Non-Resident Alien

The term Non-Resident Alien is defined as an individual whose


residence is not within the Philippines and who is not a citizen thereof.
He is, therefore, just a mere transient or sojourner.

Case 1: Chris Brown came to the Philippines to perform in a concert.


Immediately after his concert, he is scheduled to leave for Indonesia to
perform in another concert. However, on his way to the airport, Chris
Brown died of heart attack.

Question: Is Chris Brown considered a resident alien?

Answer: No. Chris Browns coming to the Philippines was for a definite
purpose, which by its very nature may be promptly accomplished. He
considered a transient or a non-resident alien.

Case 2: Michael Jordan came to the Philippines to play in an exhibition


match with Filipino basketball players. After the match he decided to
visit the beautiful beaches of the Philippines. He enjoyed Boracay so
much that he fell in love with the place. He even fell in love with a
Filipina who became his girlfriend. He has decided to stay without any
definite plans of going back to America. On his 8th month of stay in the
Philippines, Michael Jordan died of heart attack.

Question: Is Michael Jordan considered a resident alien?

Answer: Yes. Michael Jordan may be considered as a resident alien for


purposes of estate taxation. Michael Jordan stayed in the Philippines
with no definite intention of going back to America or without definite
period or the length of time of his stay in the Philippines. He is not a
mere transient or sojourner. This makes him a resident alien.

Case 3: Cooper Anderson went to the Philippines to cover the effects


the typhoon Haiyan (Yolanda) as well as to cover the rehabilitation
efforts of the government as well as the full implementation of the
rehabilitation projects funded by the international donors. Cooper
Anderson indefinitely extended his stay in the Philippines and made
Tacloban as his temporary home with the intention of going back to his
home abroad once his assignment is consummated or terminated.
After 2 years of staying in the Philippines, Mr. Cooper died of dengue.

Question: Is Cooper Anderson considered a resident alien?

Answer: Yes. Cooper Anderson may be considered as a resident alien.


The purpose of Cooper Andersons stay in the Philippines is of such a
nature that an extended stay is necessary for its accomplishment, and
to that end he made his or her home temporarily in the Philippines.
Anderson Cooper became a resident though it may be his intention at
all times to return to his domicile abroad when the purpose for which
he came has been consummated or abandoned.

Relevance of Residence in Estate Taxation

(1) It is relevant insofar as aliens are concerned for purposes of


determining which properties are to be included in the gross estate of
a decedent alien. If a decedent alien is a resident alien, then his gross
estate shall include all his properties wherever situated. If the decedent
alien is a non-resident alien, only his properties located in the
Philippines shall be included as part of his gross estate.

(2) It is also relevant insofar as complying with the requirement on the


place of filing of estate returns and payment of estate tax is
concerned.

Note: Residence is not relevant insofar as citizens are concerned in


determining which properties are to be included in the Gross Estate of
the citizens-decedents since all properties, wherever they may be
located form part of the citizens-decedents Gross Estate.

THE ESTATE TAX FORMULA

The following illustrates the basic formula in arriving at a decedents


estate tax:
GROSS ESTATE 10,000,000

Less: Deductions Allowed 4,000,000

NET ESTATE 6,000,000

Less: Share of Spouse in Conjugal 3,000,000


Property
TAXABLE NET ESTATE 3,000,000

Applicable Tax Rate P135,000 (tax on P2M) +


P110,000 (P1Mx11%)
ESTATE TAX P245,000

THE GROSS ESTATE AND THE NET ESTATE

The Gross Estate

The gross estate is the starting point in determining the estate liability of
a decedent. In general, gross estate includes the total value of the all
the properties, rights and interests of the decedent at the time of his
death.

The Net Estate

The Net Estate is the determined value of the decedents estate after all
the allowable deductions have been deducted from the value the
gross estate and which value is subject to the graduated tax rates.

INCLUSIONS IN GROSS ESTATE OF DIFFERENT TAXPAYERS

(1) As to citizen (resident or non-resident) and resident alien

(a) Real properties wherever situated;


(b) Personal properties wherever situated (tangible or intangible);
and
(c) Mixed properties (e.g. Heirlooms, tombstones, monuments in a
church) wherever situated.

(2) As to non-resident alien

(a) Real properties in the Philippines;


(b) Tangible personal properties in the Philippines;
(c) Intangible personal properties in the Philippines, unless excluded
on the basis of reciprocity; and
(d) Mixed property in the Philippines.
The Reciprocity Rule on Intangible Personal Properties of Non-Resident
Aliens

The reciprocity rule applies only for purposes of determining whether


an intangible personal property forms part of the gross estate of a non-
resident alien. There is reciprocity if the foreign country of which the
decedent was a citizen and resident at the time of his death:

(1) 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
(2) Allowed a similar exemption from transfer tax in respect of
intangible personal property owned by citizens of the Philippines not
residing in that country.

Note: In sum, both States must exempt non-residents (citizens of the


other State) from transfer taxes in respect of intangible personal
properties. Moreover, there must be total reciprocity.

Case: Canada adopts both estate tax and inheritance tax where both
the giver and receiver of the gratuitous transfer are subject to death
taxes. The Philippines adopts estate taxation where only the estate of
the decedent is subject to estate tax.

Question: Will the principle of reciprocity on intangible personal


property apply?

Answer: No. For reciprocity rule to apply, there must be total


reciprocity. In this case, Canada taxes both the giver and the receiver.
Our jurisdiction, however, only the estate of the decedent is subject to
estate tax.

Relevance of the Reciprocity Rule

The relevance of the Reciprocity Rule is to determine whether certain


intangible personal property of decedent non-resident aliens are to be
included or excluded from their gross estate. If a similar exemption
from transfer tax in respect of intangible personal property owned by
citizens of the Philippines not residing in the decedents country is
accorded to them, then the non-resident aliens intangible personal
properties are likewise excluded from his gross estate, otherwise, they
must be included.
Intangible Personal Properties which are Considered Situated 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 any foreign corporation if
such shares, obligations or bonds have acquired a business situs in the
Philippines; and
(5) Shares or rights in any partnership, business or industry established in
the Philippines.

Note: The above-enumerated intangible properties considered


situated in the Philippines are, therefore, to be included in the gross
estate of the non-resident alien decedent unless the reciprocity rule
applies, in which case, they shall be excluded.

SPECIFIC ITEMS INCLUDED IN GROSS ESTATE OF DECEDENT

(1) Property owned by the decedent actually and physically present in


his estate at the time of his death;
(2) Decedents interest; and
(3) Properties not physically present in the estate but are nevertheless
subject to estate tax.

Properties Actually and Physically Present in the Estate

They may refer to land, buildings, shares of stock, vehicles, cash, bank
deposits, and others.

Decedents Interest

Decedents interest refers to the extent of equity or ownership


participation of the decedent on any property existing and present in
the gross estate, whether or not in his possession, control or dominion;
also refers to the value of any interest in property owned or possessed
by the decedent at the time of his death (interest having value or
capable of being valued or transferred).

Examples: Dividends declared before his death but received after


death, and partnership profits which have accrued before his death.
Case: Ramon Ang is a stockholder of San Miguel Corporation. He died
on May 10, 2014. On May 25, 2016, San Miguel Corporation declared
dividends. The estate of Ramon Ang received its dividend shares on
May 30, 2014.

Question: Are the dividend shares received by the estate of Ramon


Ang to be included as part of his gross estate?

Answer: No. The dividend shares declared and received after Mr.
Angs death are not to be included as part of the his gross estate since
said dividend shares did not yet accrue as the time of Mr. Angs death.

Note: Had the dividends been declared or accrued before the death
of Mr. Ang, the dividend shares received by the estate after his death
would have formed part of the gross estate of the decedent.

Question: If the dividends received do not form part of the estate of Mr.
Ang, how will they be treated?

Answer: The dividends received by the estate of Mr. Ang are to be


declared as an income of the Estate subject to income tax.

Properties Not Physically in the Estate

These include properties that have already been transferred during the
lifetime of the decedent but are nevertheless still subject to payment of
estate tax.

They include the following:

(a) Transfers in contemplation of death;


(b) Transfers w/ retention or reservation of certain rights;
(c) Revocable transfers;
(d) Property passing under general power of appointment;
(e) Transfers for insufficient consideration;
(f) Proceeds of life insurance;
(g) Claims against insolvent persons; and
(h) Capital of the surviving spouse.

Note: In relation to items (a), (b), (c), and (d) while the law identifies
them as gratuitous transfers mortis causa, if the transfer is bona fide,
meaning the sale, barter or any kind of onerous transfer was for an
adequate and full consideration, then such transfer is to be excluded
from the gross estate of the decedent since it does not partake the
nature of a gratuitous transfer mortis causa.
Transfers in Contemplation of Death

Transfers in contemplation of death is to the extent of any interest


therein of which the decedent has at any time made a transfer in
contemplation of or to take effect in possession at or after death. The
transfers referred to are those where the motivating factor or controlling
motive is the thought of death, regardless of whether the transferor was
near the possibility of death or not.

Meaning of in contemplation of death

A transfer in contemplation of death is a disposition of property


prompted by the thought of death (though it need not be solely so
prompted). A transfer is prompted by the thought of death if it is made
with the purpose of avoiding the tax, or as a substitute for testamentary
disposition of property or for any other motive associated with death.
The bodily and mental condition of the decedent and all other
attendant facts and circumstances are to be scrutinized to determine
whether or not such thought prompted the disposition. The thought of
death is the impelling cause of transfer and the motive which induces
transfer which leads to testamentary disposition and is practically
equivalent to mortis causa transfer.

Circumstances That Determine Dominant Motive of Decedent

The following circumstances do not automatically make them transfers


in contemplation of death but may be considered and weighed in
determining the dominant motive of the decedent in making inter vivos
transfers of his property:

1. The age of the decedent at the time the transfer was made. It must
be noted, however, that age will always be an extremely vital factor,
however, advanced age is never conclusive;

2. The decedents health, as he knew it, at or before the time of


transfer (note: this has been held as one of the most important
evidentiary factors);

3. The time interval between the transfer and the decedents death;

4. The amount of property transferred in proportion to the property


retained. Where a large percentage of the estate owners assets, in
relation to his overall wealth, is given, this points to contemplation of
death;

5. The nature of the property (disposability/value) given by the


decedent;

6. The nature and disposition of the decedent, whether cheerful or


gloomy, sanguine (positive, upbeat) or morbid, optimistic or pessimistic;

7. The relationship of the donee to the decedent, whether they were


the natural objects of his bounty;

8. The existence of a long established gift making policy on the part of


the decedent; and

9. The concurrent making of a will.

Motives of Transfer Associated with Life

The following are motives that would preclude an interpretation of a


transfer in contemplation of death but are motives associated with life:

(1) to relieve the donor from the burden of management;

(2) to save on income or property taxes;

(3) to settle family litigated and unlitigated disputes;

(4) to provide independent income for dependents;

(5) to see the children enjoy the property while the donor is alive;

(6) to protect the family from hazards of business operations; and

(7) to reward services.

Note: The law does not specify the number of years prior to a
decedents death within which a transfer can be considered in
contemplation of death.

PD 1705 (August, 01, 1980) deleted the provision in Sec. 100 (b) NIRC of
1977 (now Sec. 85 (B), NIRC) where transfers made by the decedent
within 3 years prior to his death without such adequate and full
consideration, be deemed to have been made in contemplation of
death.

The relevance of knowing the 3-year Presumption Rule is for purposes


of applying the governing law principle in estate taxation. Such that
all deaths prior to PD 1705 are bound by the provisions of the NIRC of
1977.
Transfers With Retention or Reservation of Certain Rights

This contemplates those cases where the owner transfers his property
during his lifetime but still retains economic benefits, such as:
(a) the possession or enjoyment of the property, or
(b) the power to designate the persons who may exercise such rights.

By reason of the restriction or encumbrance, the transferee is


incapable of freely enjoying and disposing of the property until the
transferors death, and the transfer of possession or enjoyment of the
right thereon may be regarded as having been intended to take
effect at the transferors death.

Properties Covered by the Transfer With Retention or Reservation of


Certain Rights

The gross estate shall include any interest in property of which the
decedent has at any time made a transfer by trust or otherwise

(1) Transfer without retention of interest, but effect postponed. This


refers to a transfer intended to take effect in possession or enjoyment
at or after his death making them donations mortis causa in substance.

(2) Transfer with retention of interest to income or with right to designate


persons who will enjoy income or property. This relates to a transfer
under which a person has retained for his life or for 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.

(3) Transfer with reversionary interest. This refers to a transfer under


which there is a possibility that the transferred property may return to
the decedent or his estate or that it may become subject to a power
of disposition by the decedent. This type of transfer has been
interpreted as comprehended within the phrase intended to take
effect in possession or enjoyment at after death (of transferor).

Case 1: Manny Villar gratuitously transfers shares of stock to his son,


Mark Villar, on the condition that Manny shall receive or enjoy the
dividends during Mannys lifetime. After Mannys death the right to
receive or enjoy the dividends shall accrue to Mark or his estate.
Question: For purposes of settling Manny Villars estate, is the transfer of
shares of stock to Mark to be included as part of Mannys gross estate?

Answer: Yes, the transfer of shares of stock transferred to Mark Villar is to


be included as part of Manny Villars estate since the enjoyment of the
property remains with Manny, the transferor, during his lifetime. The
value of the entire property transferred to Mark immediately before
Mannys death forms part of Mannys gross estate.

Case 2: In 1999 Andrew Jaworski makes a transfer of property in trust to


Joey De Leon, income payable to himself (Jaworski) for 10 years, and
thereafter to Mon Fernandez or Jaworskis estate. Jaworski died in 2005.

Question: For purposes of settling the estate of Jaworski, is the property


transferred in trust to Joey De Leon to be included as part of the gross
estate of Jaworski?

Answer: Yes. Jaworskis enjoyment of the income from the property did
not in fact end before his death. It only ended at or after his death.
Hence, the property is likewise to be included as part of Jaworskis
gross estate.

Case 3: Sharon created a trust to pay the income to Kiko for life, with
the remainder to Kikos estate. However, Sharon retained the power to
revoke the trust for the benefit of Kaycee. Sharon suddenly passed
away after the trust was created.

Question: For purposes of settling the estate of Sharon, is the trust


created by Sharon includible to her gross estate?

Answer: Yes. Note that Sharon retained the power to revoke the trust
and to designate the person or persons who shall possess or enjoy the
property or any income therefrom. Such revocability of the trust did not
vest upon Kiko the freedom to enjoy and dispose the same as it can be
taken away from here anytime by Sharon.

Case 4: With the same set of facts as in the immediately preceding


case, this time the power to revoke on the part of Sharon is subject to
the consent of Helen.

Question: Will the trust created still be included in the gross estate of
Sharon?

Answer: Yes. Whether the power to revoke the trust is exclusively


exercised by Sharon or in conjunction with Helen, the revocable trust is
still to be included in the gross estate of Sharon considering that the
trust may still be revoked anytime by Sharon and Helen and thereby,
did not vest upon Kiko the freedom to enjoy or dispose the same.

Case 5: Erap transfers his parcel of land to Jinggoy in naked ownership


and to Loi in usufruct (the right of one individual to use and enjoy the
property of another) throughout Lois lifetime. The transfer is subject to
the condition that if Loi predeceases Erap, the property shall return to
Erap.

Question: What is the effect if Erap predeceases Loi, for purposes of


settling Eraps estate?

Answer: If Erap dies ahead of Loi, the value of the reversionary interest
of Erap at death is to be included as part of Eraps gross estate. The
transfer is subject to estate tax as it is intended to take effect at or after
Eraps death because the possibility of reversion to Erap makes Lois
usufruct interest conditional as long as Erap lives. Insofar as Jinggoy is
concerned, he is incapable of freely enjoying and disposing of the
property until the death of Erap.

Transfer with Reservation of Right to Vote on Shares

Case: Henry Sy, Sr. gratuitously transferred corporate stock in trust for
the economic benefit of his children Teresita Sy, Henry Sy, Jr., and Hans
Sy with the reservation of the right to vote the shares during his lifetime.
The reservation of the right to vote was purposely to aid his children by
permitting them to assume financial responsibilities gradually.

Question: Is the transfer with reservation of right to vote on the shares to


be included as part of the gross estate of Henry Sy, Sr.?

Answer: No. The reservation did not render the trust corpus subject to
inheritance tax, since Mr. Henry Sy. Sr.s purpose was not to control or to
retain control over the economic benefit of the stocks as this was
already being enjoyed by his children. Instead, the retention of the
right to vote was to aid his children by permitting them to assume
financial responsibilities gradually.

Revocable Transfers

Included in the gross estate is the interest in the property of which the
decedent has at any time made a transfer by trust or otherwise:

(1) With reserved power to alter, amend, revoke, or terminate such


transfer; or

(2) With such power relinquished.


Case 1: Andrew transfers his property in trust with the income payable
to Kevin and Kester for their joint lives, and in the event of their death,
the remainder of the trust to go to Bong. Andrew, however, retains the
power to alter, amend, revoke, or terminate the income interest of
Kevin and/or Kester. After the transfer, Andrew died.

Question: For purposes of settling Andrews estate, will the property


transferred to be included in the gross estate of Andrew?

Answer: Yes. The value of the property is to be included in the gross


estate of Andrew upon his death. Note that the transfer is revocable
which gives Andrew the power to alter, amend, revoke, or terminate
the income interest of Kevin and/or Kester.

Case 2: With the same set of facts, before Andrew died, Andrew
relinquished his power to revoke the transfer as he was already
bedridden.

Question: What effect will the relinquishment have on the transfer, if


any?

Answer: The value of the transferred property will still be included in the
gross estate of Andrew. The relinquishment made by Andrew has no
effect on the inclusion of the property in the gross estate considering
that the relinquishment was made in contemplation of death.

Transfer of Property Under General Power of Appointment

Power of Appointment

A power of appointment refers to a right to designate the person or


persons who shall enjoy or possess certain property from the estate of
a prior decedent. A power of appointment is a term most frequently
used in the law of wills to describe the ability of the testator to select a
person who will be given the authority to dispose of certain property
under the will.

2 Types of Power of Appointment

(1) General Power of Appointment


(2) Special Power of Appointment

General Power of Appointment

A General Power of Appointment authorizes the donee the power to


appoint any person he pleases, who shall have the right to have the
beneficial use and enjoyment of certain property covered by the
power of appointment. The holder of a general power of appointment
is treated for estate tax purposes as if he or she is the owner of the
property subject to the power, whether or not the power is exercised.
Thus, the property which is subject to the power of appointment is to be
included in the power holder's gross estate for estate tax purposes. The
power may be exercised in favor of anybody including himself (donee-
decedent), his spouse, his estate, his executor, administrator, and his
creditor, thus having as full dominion over the property as though he
owned it.

Special Power of Appointment

A Special Power of Appointment exists when the donee can appoint


only from a restricted or designated class of persons other than himself,
who shall have the right to have the beneficial use and enjoyment of
certain property covered by the power of appointment. Property
transferred under a special power of appointment should be excluded
from the gross estate of the donee of the power because the donee-
decedent only holds the property in trust.

Note: Summary of the difference between a general power of


appointment and a special power of appointment

General Special

As to nature Donee has power to Donee must appoint


appoint any person he successor to the property
chooses who shall possess only within a limited group
or enjoy the property or class of persons
without restriction

As to tax Makes appointed Not includible in the gross


implications property, for all legal and estate of the Donee when
intents, the property of he dies
the Donee (includible in
his estate)

As to effects Donee holds the Donee holds the


appointed property with appointed property in
all the attributes of trust, or under the concept
ownership, under the of trustee
concept of owner
Transfers for Insufficient Consideration

Mortis causa transfers for insufficient consideration are treated as


follows:

(1) When a sale or transfer was made for a price less than its fair
market value (FMV) at the time of sale or transfer, the excess of the
FMV of the transferred property at the time of death over the value of
the consideration received is included in the gross estate.

(2) If the purported absolute sale inter vivos (but mortis causa in
substance) by the decedent is shown to be fictitious, then the total
FMV of the property transferred (at the time of death) is included in the
gross estate.

Case 1: If bona fide sale no value shall be included in the gross


estate. However, the difference between the amount received and
the FMV of the property, if any, may be subject to donors tax.

Case 2: If not a bona fide sale - the excess of the FMV at the time of
death over the value of the consideration received by the decedent
shall form part of his gross estate.

Case 3: If inter vivos transfer is proven fictitious/simulated the total


value of the property at the time of death is to be included in the gross
estate.

Bona Fide Not a Bona Simulated Inter


Sale Fide Sale Vivos Transfer

FMV at the time of 10,000 10,000 10,000


transfer

FMV at the time of 15,000 15,000 15,000


death

Consideration 10,000 8,000 0


received

Value to be 0 7,000 15,000


Included in the
Gross Estate
Note: The transfer for insufficient consideration must fall under any of
the following circumstances:

(1) Transfer in contemplation of death;


(2) Revocable transfer; or
(3) Property passing under a General Power of Appointment.

If the transfer for insufficient consideration does not fall under any of
the foregoing instances, the tax imposed is donors tax.

Proceeds of Life Insurance, when Included in Gross Estate

Proceeds of life insurance taken out by the decedent on his own life
shall be included in the decedents gross estate in the following cases:

(1) When the beneficiary is the estate of the deceased, his executor or
administrator, irrespective of whether or not the insured retained the
power of revocation; or
(2) When the beneficiary is other than the decedents estate, executor
or administrator, and the designation of beneficiary is not expressly
made irrevocable (designation of the beneficiary is revocable).

In the first case, it does not matter whether the designation is revocable
or irrevocable; in the second case, the designation is revocable. Thus,
failure to indicate in any insurance policy that the beneficiary is
irrevocably designated will result in the inclusion of the insurance
proceeds as part of the decedents gross estate.

Note: Under the Insurance Code of 1978, if the designation of the


beneficiary is not clear or silent, the designation is presumed to be
revocable, hence, included in the decedents gross estate.

Proceeds of Life Insurance, when Excluded From Gross Estate

(1) Accident insurance proceeds;


(2) Proceeds of a group insurance policy taken out by a company
for its employees;
(3) Amount receivable by any beneficiary irrevocably designated in
the policy of insurance by the insured. The transfer is absolute and the
insured did not retain any legal interest in the insurance;
(4) Proceeds of insurance policies issued by the GSIS to government
officials and employees, which are exempt from all taxes;
(5) Benefits accruing under the SSS law; and
(6) Proceeds of life insurance payable to heirs of deceased members
of military personnel.
Claims Against Insolvent Persons (Bad Debts)

Insolvent Person

An insolvent is a person whose properties are not sufficient to satisfy his


debts, whether fully or partially.

For estate tax purposes, as a rule, regardless of the amount the debtor
is unable to pay, the full amount of the claim against the insolvent
person should be included in the gross estate of the decedent. The
portion of the claim which is not collectible should be allowed as a
deduction from the gross estate.

Question: Is a judicial declaration of insolvency required for the bad


debt to be deductible from the decedents gross estate?

Answer: No. A judicial declaration of insolvency is not required but the


incapacity of the debtor must be proven.

Capital of the Surviving Spouse

By express provision of law, the capital contribution of the surviving


spouse is not part of the gross estate of the deceased spouse.

EXCLUSIONS FROM THE GROSS ESTATE

(1) Exclusive Property (capital/paraphernal) of the surviving spouse;


(2) Property outside the Philippines of a non-resident alien decedent;
and
(3) Intangible personal property in the Philippines of a non-resident
alien when the reciprocity rule applies.

Exclusions Under Special Laws

(1) Proceeds of life insurance benefits received by members of the


GSIS;
(2) Benefits received by members from the SSS by reason of death;
(3) Amounts received from the Philippine and the U.S. Governments
from the damages suffered during the last war;
(4) Benefits received by beneficiaries residing in the Philippines under
laws administered by the U.S. Veterans Administration; and
(5) Grants and donations to the Intramuros Administration.
EXEMPTIONS FROM THE GROSS ESTATE

Basic Exemption

Estates which are not in excess of P200,000 are exempted from estate
taxes. This exemption is implied considering that the Tax Code imposes
an estate tax on net estates with value exceeding P200,000.

Exemptions under the NIRC

The following acquisitions and transmissions are exempted from the


gross estate under the NIRC:

(1) The merger of the usufruct in the owner of the naked title;

(2) The transmission or delivery of the inheritance or legacy by the


fiduciary heir (1st heir) to the fideicomissary (2nd heir). Pending
transmission of the property, the fiduciary is entitled to all the rights of a
usufructuary, although the fideicomissary is entitled to all the rights of a
naked owner;

(3) The transmission from the first 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 of which inures to
the benefit of any individual; provided, however, that not more than
30% of said bequest, devises, legacies or transfers shall be used by such
institutions for administration purposes.

VALUATION OF THE GROSS ESTATE

As a general, the properties comprising the gross estate shall be valued


based on appraised fair market value (FMV) as of the time of
decedents death. The valuation of the property depends on the kind
of property involved.

Valuation of Real Properties

Real properties are valuated by getting the FMV as determined by the


BIR Commissioner (Zonal Value), or the FMV as shown in the schedule
of values fixed by the Provincial and City assessors (as indicated in the
Tax Declaration), whichever is higher at the time of decedents death.
Valuation of Personal Properties, in General

In general, personal properties are appraised at their FMV at the time of


decedents death.

Valuation of Shares of Stock

Shares of stock are valuated as follows:

(1) For listed shares the FMV is 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.

(2) For unlisted shares - common shares are valuated based on book
value; while preferred shares are valuated at par value.

Valuation of Right to Usufruct, Use or Habitation, Annuity

A right to usufruct, use or habitation, or annuity is valuated in


accordance with the latest Basic Standard Mortality Table taking into
account the probable life of the beneficiary, to be approved by the
Secretary of Finance, upon recommendation of the Insurance
Commissioner.

DEDUCTIONS TO THE GROSS ESTATE

Types of Deductions

(1) Ordinary Deductions;


(2) Special Deductions; and
(3) Net Share of the Surviving Spouse in the conjugal partnership
property.

Ordinary Deductions

(1) Expenses [funeral expenses (not to exceed P200,000), judicial


expenses], losses (calamity losses, claims against insolvent persons),
indebtedness (claims against the estate, unpaid mortgages), unpaid
taxes (ELIT);
(2) Property previously taxed (vanishing deductions);
(3) Transfers for public purpose; and
(4) Amounts received by heirs from decedents employer under RA
4917.
Special Deductions

(1) Family Home (not to exceed P1,000,000);


(2) Standard Deduction (P1,000,000); and
(3) Medical Expenses (not to exceed P500,000).

Net Share of the Surviving Spouse in the Conjugal Partnership Property

The net share is equivalent to or 50% of the conjugal property after


deducting the obligations chargeable to such property.

Importance of Classification of Deductions

Decedent-citizens and decedent-resident aliens are entitled to all


types of deductions.

However, decedent-non-resident aliens are only entitled to the


ordinary deductions and the net share of the surviving spouse in the
conjugal partnership property but not to the special deductions.

ORDINARY DEDUCTIONS

(1) Expenses

(a) Funeral Expenses

The allowable deduction is for the maximum amount of P200,000 or


whichever is lower of

(a) The actual funeral expenses (whether paid or not) up to the time
of interment; or

(b) An amount equal to 5% of the gross estate.

Examples of funeral expenses that are deductible:

(1) The mourning apparel of the surviving spouse and unmarried minor
children of the deceased, bought and used on the occasion of the
burial;
(2) Expenses of the wake preceding the burial, including food and
drinks;
(3) Publication charges for death notices;
(4) Telecommunications 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
(7) All other expenses incurred for the performance of the rites and
ceremonies incident to interment.

Case 1: After the interment, the bereaved family of decedent Mr.


Ronnie Nathanielsz held prayers for 9 days. The family spent the
amount P150,000 to cover for the food, candles, and entertainment
during said days of prayer and family gatherings.

Question: Are the expenses for the activities after the interment
deductible?

Answer: No. Expenses incurred after interment (such as prayers, masses,


entertainment, or the like) are not deductible under funeral expenses.

Case 2: The family and friends of decedent Nathanielsz decided to


contribute and pay for decedents funeral and burial expenses.

Question: Are these expenses deductible from the gross estate of


decedent Nathanielsz?

Answer: No. Funeral expenses borne and defrayed by the relatives and
friends of the deceased are not deductible as such since they are not
charged against the estate.

Case 3: The gross estate of Max Alvarado is P10,000,000. The amount


actually incurred by way of funeral expenses is P150,000.

Question: How much may be deducted from the gross estate by way
of funeral expenses?

Answer: Only P150,000 may be deducted from the gross estate by way
of funeral expenses considering that that is the only actual expense
incurred.

Note: Neither the maximum allowable deduction of P200,000 may be


deducted from the gross estate nor the 5% (P500,000) of the gross
estate (P10,000,000) may be deducted since the actual amount
incurred by way of funeral deduction is lower.

Case 4: The gross estate of Max Alvarado is P2,000,000 and the amount
actually paid for funeral expenses is P150,000 plus unpaid funeral
expenses of P25,000.

Question: How much may be deducted from the gross estate by way
of funeral expenses?
Answer: Only the amount of P100,000 (5% of P2M) may be deducted
from the gross estate considering that said amount is lower than total
amount of funeral expenses incurred, which is P175,000 (P150,000
actually paid and P25,000 unpaid).

Question: May the unpaid obligation of P25,000 incurred as funeral


expenses be deducted from the gross estate by way of a claim
against the estate?

Answer: The unpaid amount P25,000 may not be deducted as a claim


against the estate. In order for an indebtedness to be deductible as a
claim against the estate, the obligation must exist as of the time of
death of decedent. Obviously, the said amount of P25,000 was incurred
after the death of decedent. Furthermore, considering that the
expense is already categorized under funeral expenses, it is bound by
the rules on the deductibility of funeral expenses and may not be re-
classified under another category of deduction.

(b) Judicial Expenses of Testamentary and Intestate Proceedings

They comprise the administration expenses essential in the settlement


of the estate of the decedent or necessarily incurred therein, such as
but not limited to the following:

(1) Inventory-taking or collection of the assets comprising the estate,


their administration; and
(2) The payment of debts of the estate, as well as the distribution of the
estate among the heirs or those entitled thereto, during the settlement
of the estate but not beyond the last day prescribed by law, or the
extension thereof, for the filing of the estate tax return.

Case 1: The heirs of decedent Rudy Fernandez decided to settle the


estate of decedent through extrajudicial proceedings.

Question: Are expenses incurred in the administration and settlement


of an estate in extrajudicial proceedings, deductible by way of
judicial expenses?

Answer: Yes. Although the Tax Code specifies judicial expenses of the
testamentary and intestate proceedings, there is no reason why
expenses incurred in the administration and settlement of an estate in
extrajudicial proceedings should not be allowed since that said
expenses may be considered as an essential means in the settlement
of the estate of the decedent.
Case 2: In settling the estate of Rudy Fernandez, the heirs retained the
services of Atty. Edward Serapio for which they incurred expenses by
way of attorneys fees.

Question: Are the attorneys fees paid to Atty. Serapio deductible from
the gross estate?

Answer: Yes, the attorneys fees paid to Atty. Serapio are deductible
from the gross estate, provided, it can be shown that the retention of
Atty. Serapio as counsel is essential to the collection of assets, payment
of debts or the distribution of the property to the persons entitled
thereto. The services for which the fees are charged must relate to the
proper settlement of the estate.

Case 3: The 4 heirs of Rudy Fernandez could not agree on how to settle
the estate of decedent. The heirs retained the services of their own
lawyers who negotiated for settlement of their conflicting claims on the
estate.

Question: Are the attorneys fees paid by the heirs to their respective
lawyers arising from conflicting claims deductible as judicial expenses?

Answer: No. These expenses should be separately borne by them (the


heirs) as such expenses are not related to the settlement of the estate
but to their claims against each other.

Question: How about notarial fees paid for the extrajudicial settlement
of estate, are they deductible from the gross estate?

Answer: Yes. The notarial fee paid for the extrajudicial settlement is
deductible since such settlement effected a distribution of the estate to
the lawful heirs.

Examples of Deductible Judicial Expenses

(1) Actual judicial or court expenses


(2) Fees of executor or administrator
(3) Attorneys fees & notarial fees
(4) Expenses of administration such as:
(a) Accountants fees
(b) Appraisers fees
(c) Clerk hire
(d) Costs of preserving and distributing the estate
(e) Costs of storing or maintaining property of the estate
(f) Brokerage fees for selling property of the estate
(2) Losses -

(a) Casualty Losses

They include all losses incurred during the settlement of the estate
arising from fires, storms, shipwreck, or other casualties (acts of God), of
from robbery, theft, or embezzlement (acts of man)

Requisites for Deductibility of Casualty Losses:

(1) The losses were incurred during the settlement of the estate;
(2) The losses arose from acts of God, such as fires, storms, shipwreck or
other casualties, or from acts of man, such as robbery, theft or
embezzlement;
(3) The losses are not compensated by insurance or otherwise;
(4) The losses are not claimed as a deduction for income tax purposes
in an income tax return of the estate subject to income tax;
(5) The losses were incurred not later than the last day for payment of
the estate tax (which is 6 months after the death of the decedent)
(6) the value of the property lost must have been included in the gross
estate (Note: The amount deductible is the amount of the property
lost)

(b) Claims Against Insolvent Persons (Bad Debts)

Bad debts or claims that are uncollectible are considered worthless.

Requisites for Deductibility of Bad Debts:

(1) The incapacity of the debtor to pay his obligation should be proven
not merely alleged, although a judicial declaration of insolvency is not
required;
(2) The full amount owed by the insolvent must first be included in the
decedents gross estate; and
(3) If the insolvent could only pay a partial amount, the full amount
owed shall be included in the gross estate, and the amount
uncollectible shall be allowed as a deduction.

(3) Indebtedness -

(a) Claims Against the Estate

The term claims is generally construed to mean debts or demands of


a pecuniary nature which could have been enforced against the
deceased in his lifetime and could have been reduced to simple
money judgments. Claims against the estate or indebtedness in
respect of property may arise out of contract, tort or operation of law.

Requisites for Deductibility of claims against the estate (2015 Bar):

(1) The claim must be a personal obligation of the deceased existing at


the time of his death (except unpaid funeral expenses and unpaid
medical expenses, which are classified into their own separate
categories);
(2) Liability must have been contracted in good faith and for adequate
and full consideration in money or moneys worth (not simulated);
(3) The claim must be a debt or claim which is valid in law and
enforceable in court; and
(4) The indebtedness is not condoned by the creditor or the action to
collect from the decedent must not have prescribed.

(b) Unpaid Mortgages

An unpaid mortgage is a form of indebtedness. To be deductible, the


following conditions/requisites must be met:

(1) The fair market value of the property mortgaged without


deducting the mortgage or indebtedness has been initially included
as part of the gross estate;

(2) That the deduction shall be limited to the extent that they were
contracted bona fide and for an adequate and full consideration in
money or moneys worth, if such unpaid mortgages or indebtedness
were founded upon a promise or an agreement.

Case (2014 Bar Question): During his lifetime, Mr. Sakitin obtained a
loan amounting to P10 million from Bangko Uno for the purchase of a
parcel of land located in Makati City, using such property as collateral
for the loan. The loan was evidenced by a duly notarized promissory
note. Subsequently, Mr. Sakitin died. At the time of his death, the
unpaid balance of the loan amounted to P2 million. The heirs of Mr.
Sakitin deducted the amount of P2 million from the gross estate, as part
of the Claims against the Estate. Such deduction was disallowed by
the Bureau of Internal Revenue (BIR) Examiner, claiming that the
mortgaged property was not included in the computation of the gross
estate.

Question: Do you agree with the BIR? Explain.

Answer: Yes, the BIR examiner was correct in disallowing the deduction
of the unpaid mortgage from the gross estate. One of the requisites for
an unpaid mortgage to be deductible from the gross is that the fair
market value of the property mortgaged without deducting the
mortgage or indebtedness has been initially included as part of the
gross estate. In this case, it appears that the heirs did not include the
FMV of the mortgaged property as part of the gross estate. Thus, the
BIR examiner was correct in disallowing the deduction of the unpaid
mortgage from the gross estate.

(4) Unpaid Taxes

Taxes owed by the decedent and unpaid at the time of death, being
debts in favor of the government are also deductible as a claim
against the estate.

Requisites for Deductibility of Unpaid Taxes:

(1) The taxes have accrued as of the death of the decedent, and
(2) They were unpaid as of the time of death.

Question: The estate earned income upon which income tax was paid.
Is the income tax paid by the estate deductible from the gross estate?

Answer: No. Taxes to be deductible must have accrued as of the time


of death of the decedent and that they were unpaid as of the time of
death of the decedent.

Question: How about the Real Property taxes that accrued on the
properties of the decedent after his death, are they deductible from
the gross estate?

Answer: No. For the same reason as above, taxes to be deductible


from the gross estate must have accrued as of the time of death of the
decedent.

Property Previously Taxed (Vanishing Deductions)

A deduction is allowed on the property left behind by the decedent,


which he had acquired previously, by inheritance or donation. The
rationale of this allowed deduction is to minimize the effects of a
double tax on the same property within a short period of time, i.e. five
(5) years, considering that a previous transfer tax had already been
imposed on the property, either the estate tax (if property is inherited)
or the donors tax (if property is donated).

Requisites for Deductibility of Property Previously Taxed:

(1) Death the present decedent (Mr. A) died within five years from
date of death of the prior decedent (Mr. B) or date of gift;
(2) Identity of the property The property with respect to which
deduction is sought can be identified as the one received from the
prior decedent or the donor, or as the property acquired in exchange
for the original property so received.
(3) Location of the property The property on which vanishing
deduction is claimed must be located in the Philippines.
(4) Inclusion of the property The property must have formed part of
the gross estate situated in the Philippines of the prior decedent, or
must have been included in the total amount of the gifts of the donor
made within five (5) years prior to the present decedents death.
(5) Previous taxation of the property the donor's tax on the gift or
estate tax on the prior succession (Mr. Bs succession) must have been
finally determined and paid by the donor or the prior decedent, as the
case may be.
(6) No previous vanishing deduction on the property, or the property
exchanged therefor, was allowed in determining the value of the net
estate of the prior decedent.

Case 1: Cory is the mother of Kris. On 04 August 2009 Cory died leaving
a parcel of land to Kris by way of inheritance. Estate taxes were paid
on the inheritance received by Kris. On 13 March 2011, Kris also died
leaving the same property to Josh and Bimby.

Question: In computing Kris net taxable estate, may a vanishing


deduction may be claimed on the property received by Josh and
Bimby by way inheritance from decedent Kris?

Answer: Yes. Since the property was already previously taxed and paid
by Kris after inheriting it from Core, and considering further, that the
death of Kris happened within 5 years after the death of Cory, the
same may be subject to a vanishing deduction.

Case 2: With the same set of facts as in Case 1, Josh and Bimby both
died in a car accident on 12 June 2013 leaving the said property to
Noynoy by way of inheritance.

Question: In computing Joshs and Bimbys net taxable estate, may


vanishing deductions be claimed on the property received by Noynoy
by way inheritance from Josh and Bimby?

Answer: No. The property cannot be subject to any vanishing


deduction considering that the same property has already been
previously subject to a vanishing deduction. The fact that the deaths of
Bimby and Josh happened within 5 years from the death of Kris or of
Corys is no moment considering that the same property has already
been subject to a previous vanishing deduction.
Transfers for Public Purpose

These are dispositions in a last will and testament or transfers to take


effect after death in favor of the Government of the Republic of the
Philippines, or any political subdivision thereof, for exclusively public
purposes. The whole amount of all the bequests, legacies, devises or
transfers to or for the use of shall be deductible from gross estate,
provided such amount or value had been included in the computation
of the gross estate.

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 No. 4917 may be deducted from the gross estate provided
that such amount is included in the gross estate of the decedent.

Note: RA No. 4917 provides that retirement benefits of private


employees shall not be subject to attachment, levy execution or any
tax

SPECIAL DEDUCTIONS

(1) Family Home

It is the dwelling house, including the land on which it is situated, where


the husband and wife, or a head of the family, and members of their
family reside, as certified to by the Barangay Captain of the locality. It
is deemed constituted on the house and lot from the time it is actually
occupied as the family residence and considered as such for as long
as any of its beneficiaries actually resides therein.

Note: Temporary absence from the constituted family home due to


travel or studies or work abroad, etc. does not interrupt actual
occupancy.

Question: Can an unmarried decedent claim a family home as


deduction?

Answer: Yes. A family home may also be constituted by an unmarried


individual on his or her own property as this is not limited to those who
are married, provided, however, that he is a head of a family.

Requisites for the Deductibility of Family Home:


(1) The family home must be the actual residential home of the
decedent and his family at the time of his death, as certified by the
barangay captain of the locality;
(2) The total value of the family home must be included as part of the
gross estate of the decedent;
(3) Allowable deduction must be in an amount equivalent to the
current FMV of the family home as declared or included in the gross
estate, or the extent of the decedents interest (whether
conjugal/community or exclusive property), whichever is lower, but in
no case shall the deduction exceed P1,000,000;
(4) The decedent was married or if single, was a head of the family;
(5) Along with the decedent, any of the beneficiaries must be dwelling
in the family home; and
(6) The family home as well as the land on which it stands must be
owned by the decedent.

Case 1: Mr. Salonga has constituted two family homes for his family.
Family Home 1 has a FMV of P550,000 while Family Home 2 has a FMV
of P450,000. Mr. Salonga died.

Question: For purposes of deductions from the gross estate of Mr.


Salonga, can the estate deduct the value of both family homes?

Answer: No. For purposes of availing family home as a deduction, the


estate of Mr. Salonga may claim only one family home.

Case 2: Mr. Salonga has constituted two family homes for his family.
Family Home 1 has a FMV of P2,500,000 while Family Home 2 has a FMV
of P800,000. Mr. Salonga died.

Question: For purposes of deductions from the gross estate of Mr.


Salonga, can the estate choose Family Home 1 and claim its entire
value as a deduction to the gross estate?

Answer: The estate may choose Family Home 1 as decedents family


home. However, the estate can only deduct the maximum of amount
P1,000,000 and not the its full value P2,500,000.

(2) Standard Deduction

The amount of P1,000,000 is the standard deduction to the gross estate.

Question: What are the requirements for the estate of the decedent to
avail of the standard deduction of P1,000,000?

Answer: None. The decedent must, however, be a citizen or a resident


alien. Non-resident aliens are not entitled to any of the Special
Deductions including the Standard Deduction of P1,000,000.

(3) Medical Expenses

The term medical expenses includes cost of medicine, hospital bills,


doctors fees, etc.) which are incurred (whether paid or unpaid) by the
decedent prior to his death.

Requisites for the Deductibility of Medical Expenses (2015 Bar):

(1) The expenses were incurred by the decedent within one (1) year
prior to his death;
(2) The expenses are duly substantiated with receipts and other
documents in support thereof; and
(3) The medical expenses do not exceed P500,000.

Case 1: Dolphy died on 10 July 2012. Prior to his death, he has been
hospitalized from 10 January 2012 to 10 July 2012 where he incurred
medical expenses amounting to P1,000,000 where P400,000 has been
paid leaving the amount of P600,000 as unpaid medical bills.

Question: How much can the estate of Dolphy claim by way of


medical expenses?

Answer: The estate of Dolphy may only claim the amount of P500,000,
which includes the P400,000 already paid and P100,000 which is part of
the P600,000 which is still unpaid, as a deduction to the gross estate by
way of maximum medical expenses.

Case 2: With same facts as in Case 1, after deducting P100,000 from


the unpaid medical expenses of P600,000, can the estate deduct the
remaining unpaid medical expenses of P500,000 from the gross estate
by way of claims against the estate since they are considered
obligations incurred prior to decedents death?

Answer: No. Any amount of medical expenses incurred within one year
from death in excess of P500,000 shall no longer be allowed as a
deduction. Neither can any unpaid amount thereof in excess of the
P500,000 threshold nor any unpaid amount for medical expenses
incurred prior to the one-year period from date of death be allowed to
be deducted from the gross estate under claims against the estate.
Since the expenses is identified as medical expenses, it is subject to
maximum deductible amount of P500,000.

Note: While technically it is an indebtedness incurred before death,


thus, qualifying it to be a claim against the estate, the same may not
be claimed as such considering that it is incurred as medical expense
which has a statutory limit of P500,000.

NET SHARE OF THE SURVIVING SPOUSE IN THE CONJUGAL PARTNERSHIP


PROPERTY

The amount deductible is the net share of the surviving spouse in the
conjugal partnership property. The net share is equivalent to or 50%
of the conjugal property after deducting the obligations chargeable to
such property.

Question: The amount deductible is the net share of the surviving


spouse in the conjugal partnership property. Does this apply also to
the net share of the surviving spouse in the absolute community
property?

Answer: Yes. This should equally apply to the net share of the surviving
spouse in the absolute community property, considering that the share
of the surviving spouse which also amounts to or 50% of the
community property does not belong to the decedent and, thus,
should not be included in the gross estate of the decedent.

Note: As a general rule, all property acquired during the marriage,


whether the acquisition appears to have been made, contracted or
registered in the name of one or both spouses, is presumed to be
conjugal unless the contrary is proved.

Summary of Deductions

Citizen or Resident Alien Non-Resident Alien

Gross Estate Gross Estate

All property at the time of death, Includes only that part of gross
wherever situated estate located in the Philippines

Deductions Deductions

Ordinary deductions: Ordinary deductions:


Special deductions: No Special Deductions
1. Family home
2. Standard deduction
3. Medical expenses
Share in conjugal property Share in conjugal property

Case: Mr. Brad Pitt, a non-resident alien (NRA) died in the Philippines
while on vacation. While settling his estate located in the Philippines, his
estates Administrator failed to include the value of his other properties
not located in the Philippines as part of his gross estate at the time of his
death.
Question: What is the effect, if any, of the failure to include the value of
the deceased NRAs other properties not located in the Philippines as
part of his gross estate at the time of his death?

Answer: The failure of the Administrator to include the value of the


NRAs properties located outside the Philippines as part of his gross
estate at the time of his death shall not entitle the NRAs estate to any
deduction allowed under the NIRC. The inclusion of the value of the
NRAs properties located outside the Philippines is important as
because it is a factor in determining the amount of deductions the
deceased NRA is entitled to under the following formula:

(GE, Philippines)
(---------------------) x (World expenses, losses, indebtedness, taxes, etc.)
(GE, World )

TAX RATE

The Net Taxable estate is subjected to graduated rates from 5% to 20%


(over P10M) with the amount of P200,000 exempted from estate tax.

TAX CREDIT FOR ESTATE TAXES PAID IN A FOREIGN COUNTRY

The system of tax credit in estate taxation is a remedy against


international double taxation. To minimize the onerous effect of taxing
the same property twice, tax credit against Philippine estate tax is
allowed for estate taxes paid to foreign countries.

Who May Avail of Tax Credit

Only the estate of a decedent who was a citizen or a resident of the


Philippines at the time of his death can claim tax credit for any estate
tax paid to a foreign country

Note: Non-resident aliens are not entitled to avail of tax credits.

General Rule: The estate tax imposed by the Philippines shall be


credited with the amounts of any estate tax imposed by the authority
of a foreign country.

Limitations on the Allowable Tax Credits:

(a) Per Country Basis: 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 the NIRC bears to his entire
net estate; and

(b) Overall Basis: 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 the NIRC bears to his entire net estate.

Case (2016 Bar): Jennifer is the only daughter of Janina who was a
resident in Los Angeles, California, U.S.A. Janina died in the U.S. leaving
to Jennifer one million shares of Sun Life (Philippines), Inc., a corporation
organized and existing under the laws of the Republic of the
Philippines. Said shares were held in trust for Janina by the Corporate
Secretary of Sun Life and the latter can vote the shares and receive
dividends for Janina. The Internal Revenue Service (IRS) of the U.S.
taxed the shares on the ground that Janina was domiciled in the U.S.
at the time of her death.

Questions:

(a) Can the CIR of the Philippines also tax the same shares? Explain.
(b) Explain the concept of double taxation.

Answers:

(a) Yes. It can be assumed from the facts of the case that Janina is a
Filipino citizen residing in the U.S. when she died. Under the benefits
received theory, as a citizen of the Philippines her gross estate includes
all her properties wherever located. This includes the 1,000,000 shares of
Sun Life (Philippines), Inc. However, since that the same property is also
subject to estate tax by the U.S. IRS, the estate of Janina may claim the
estate tax paid to the U.S. IRS on the said shares by way of a tax credit.
(Note: If Janina is a non-resident alien, her estate may not claim any
tax credit. Furthermore, the CIR can subject said shares to estate tax,
unless reciprocity applies, in which case they are excluded.)

(b) Double taxation means taxing twice the same taxpayer for the
same tax period upon the same thing or activity, when it should be
taxed but once, for the same purpose and with the same kind of
character of tax.

ADMINISTRATIVE PROCEDURES IN ESTATE TAXATION

Filing of Notice of Death


In all cases of transfers subject to tax, or where, though exempt from
tax, the gross value of the estate exceeds P20,000, the executor,
administrator or any of the legal heirs, as the case may be, within 2
months after the decedent's death, or within the same period of 2
months after qualifying as such executor or administrator, must file a
written notice of death with the BIR Commissioner. The persons
responsible for giving the notice are the executor, administrator, or any
of the legal heirs, as the case may be.

Filing of the Estate Tax Return

When Required:

(a) When the estate is subject to estate tax;


(b) When, though exempt from tax, the gross value of the estate
exceeds P200,000; or
(c) Regardless of the gross value of the estate, when the said estate
consists of registered or registrable property such as real property,
motor vehicle, shares of stock or other similar property for which a
clearance from the Bureau of Internal Revenue is required as a
condition precedent for the transfer of ownership thereof in the name
of the transferee.

Contents:

(1) The value of the gross estate of the decedent at the time of his
death, or in case of a nonresident, not a citizen of the Philippines, of
that part of his gross estate situated in the Philippines;
(2) The deductions allowed from gross estate in determining the net
taxable estate; and
(3) Such part of such information as may at the time be ascertainable
and such supplemental data as may be necessary to establish the
correct taxes.
(4) For estate tax returns showing a gross value exceeding Two Million
pesos (P2,000,000) - there must be a statement duly certified to by a
Certified Public Accountant containing the following:
(a) Itemized assets of the decedent with their corresponding gross
value at the time of his death, or in the case of a nonresident, not a
citizen of the Philippines, of that part of his gross estate situated in the
Philippines;
(b) Itemized deductions from gross estate allowed in Sec. 86, NIRC;
and
(c) The amount of tax due whether paid or still due and
outstanding.

When Filed:
As a general rule, estate tax returns are required to be filed within six
(6) months from the decedent's death. The time of filing the return may,
however, be extended by the BIR Commissioner, in meritorious cases,
for a reasonable period of not exceeding thirty (30) days.

Where Filed:

Estate tax returns are to be filed:

(1) In
(a) An authorized agent bank (AAB);
(b) A Revenue District Officer (RDO);
(c) A Collection Officer;
(d) A Duly authorized Treasurer of the city or municipality, where the
decedent was domiciled at the time of his death; or

(2) With the Office of the Commissioner, if the decedent has no legal
residence in the Philippines.

Payment of Estate Tax

Primarily, the estate, through the executor or administrator, is liable for


the payment of estate taxes.

Subsidiarily, the heirs or beneficiaries are liable for the payment of that
portion of the estate which his distributive share bears to the value of
the total net estate. The extent of the heirs liability, however, shall in no
case exceed the value of his share in the inheritance.

Note: As a rule, estate taxes are to be paid before the shares of the
heirs are distributed to them.

Question: Can the heirs still be liable for unpaid estate taxes after they
already received their inheritance share?

Answer: Yes. Claims for taxes, whether assessed before or after the
death of the deceased, can be collected from the heirs even after the
distribution of the properties of the decedent. The heirs shall be liable
therefor, in proportion to their share in the inheritance.

When Paid:

The estate tax is paid at the time the return is filed by the executor,
administrator or the heirs. Since the estate tax return is required to be
filed within 6 months from the decedent's death, the payment of the
estate tax must also be paid within 6 months and simultaneously upon
filing of the estate tax return.

Extension of Payment

The Commissioner may allow an extension of payment, if he finds that


the payment on the due date of the estate tax or of any part thereof
would impose undue hardship upon the estate or any of the heirs. The
extension, however, shall not exceed:

(a) Five (5) years, in case the estate is settled judicially; or


(b) Two (2) years in case the estate is settled extra-judicially.

B. DONORS TAX

Donors Tax, definition.

A donors tax is levied, assessed, collected and paid upon the transfer
by any person, resident or nonresident, of the property by gift. It shall
apply whether the transfer is in trust or otherwise, whether the gift is
direct or indirect, and whether the property is real or personal, tangible
or intangible.

Nature of Donors Tax

Donors tax is not a property tax but an excise tax or privilege tax
imposed on the transfer of property by way of gift inter vivos.

PRINCIPLES OF DONORS TAXATION

(1) The donors tax is imposed on donations inter vivos or those made
between living persons to take effect during the lifetime of the donor.
(2) It supplements the estate tax by preventing the avoidance of the
latter through the device of donating the property during the lifetime
of the deceased.
(3) It shall not apply unless and until there is a completed gift. The
transfer of property by gift is perfected from the moment the donor
knows of the acceptance by the donee; it is completed by delivery,
either actually or constructively, of the donated property, to the
donee.

Thus, the law in force at the time of the perfection/completion of the


donation shall govern the imposition of the donors tax.

PURPOSE OR OBJECT OF DONORS TAX

(a) To raise revenues for the government;


(b) To supplement estate tax; and
(c) To prevent avoidance of income tax through the device of splitting
income among numerous donees, who are usually members of a
family or into many trusts, with the donor thereby escaping the effect
of the progressive rates of income tax.

Donation, defined

A donation is an act of liberality whereby a person (donor) disposes


gratuitously of a thing or right in favor of another (donee) who accepts
it.

Requisites of Valid Donation

(1) The donor must have capacity at time of the making of donation;
(2) There must be an intent to donate; and
(3) The donee must accept the donation.

Case (2016 Bar): In 2011, Solar Computer Corporation (Solar)


purchased a proprietary membership share covered by Membership
Certificate No. 8 from the Mabuhay Golf Club, Inc. for P500,000.00. On
December 27, 2012, it transferred the same to David, its American
consultant, to enable him to avail of the facilities of the Club. David
executed a Deed of Declaration of Trust and Assignment of Shares
wherein he acknowledged the absolute ownership of Solar over the
share; that the assignment was without any consideration; and that the
share was placed in his name because the Club required it to be
done. In 2013, the value of the share increased to P800,000.00.

Question: Is the said assignment a "gift" and, therefore, subject to gift


tax? Explain.

Answer: The assignment is not a gift, thus, it is not subject to donors tax.
One of the requisites of donation is the existence of the intent to
donate which element is lacking in this case. Further, this lack of intent
to donate on the part of Solar is clearly indicated by Davids execution
of the Deed of Declaration of Trust and Assignment of Shares, as
required by the Club, wherein he acknowledged the absolute
ownership of Solar over the share.

When an Incomplete Gift Becomes Complete

A gift that is incomplete because of reserved powers, becomes


complete when either:

(1) the donor renounces the power; or


(2) his right to exercise the reserved power ceases because of the
happening of some event or contingency or the fulfillment of some
condition, other than because of the donors death.

Requisites the Validity of Donation of Real Property/ Immovable


Property

(1) the donation must be made in a public instrument specifying


therein the property donated;
(2) the acceptance may be made in the same Deed of Donation or in
a separate public document, but it shall not take effect unless it is done
during the lifetime of the donor; and
(3) if the acceptance is made in a separate instrument, the donor shall
be notified thereof in an authentic form, and this step shall be noted in
both instruments.

How Donation of a Movable Property is Made

The donation of a movable property may be made orally or in writing.

An oral donation requires the simultaneous delivery of the thing or of


the document representing the right donated. However, if the personal
property donated exceeds P2,000, the donation and the acceptance
must be in writing, otherwise, the donation shall be void.

Renunciation of Spouses Share or Share in Inheritance in favor of Co-


heir

Case 1: John and Marsha are husband and wife. John died causing
the dissolution of the spouses property relations. The surviving spouse,
Marsha, renounced her share in the Conjugal Partnership or Absolute
Community of Properties in favor of her children Maricel, Van, and
Rolly. What is the effect of the Marshas renunciation of her shares in
favor of her children?

Answer: The renunciation by the surviving spouse (Marsha) of her share


in the Conjugal Partnership of Gains or Absolute Community of
Properties after the dissolution of marriage in favor of the heirs or any
other person is subject to donors tax.

Case 2: With the same set of facts as in Case 1, one of the heirs,
Maricel, renounced her share in the inheritance in favor of his co-heirs.
Is the renunciation subject to donors tax?

Answer: No. A general renunciation made by any heir in favor of his


co-heirs is not subject to donors tax. A general renunciation of
inheritance in favor of a co-heir is not a donation subject to donors tax
since the title to the property is not deemed to have vested in favor of
the repudiating heir. Since Maricel renounced her share in the
inheritance in favor of her co-heirs, the same is not subject to donors
tax.

Case 3: With the same set of facts as in Case 1, what if Maricel


renounced her share in the inheritance in favor of his co-heir, Van? Is
the renunciation subject to donors tax?

Answer: Yes, the renunciation of Maricels share in the inheritance in


favor of his co-heir Y is subject to donors tax. Since the renunciation is
specifically and categorically done in favor of an identified heir to the
exclusion of the other co-heirs, such renunciation is subject to donors
tax.

TRANSFERS WHICH MAY BE CONSTITUTED AS DONATION

(1) Sale, exchange, or transfer of property for insufficient consideration;


(2) Condonation or remission of debt where the debtor did not render
service in favor of the creditor; and
(3) Transfer for less than adequate and full consideration.

Question: What is the tax consequence of a sale, exchange, or transfer


of a real property considered as an ordinary asset for insufficient
consideration?

Answer: Where a real property, classified as an ordinary asset, is


transferred for less than an adequate and full consideration in money
or moneys worth, the amount by which the FMV of the property, at the
time of the execution of the Contract of Sale or execution of the Deed
of Sale which is not preceded by a Contract to Sell, exceeded the
value of the agreed or actual consideration or selling price shall be
deemed a gift, and shall be included in computing the amount of gifts
made during the calendar year subject to donors tax.

Question: What if the real property that is subject to the sale,


exchange, or transfer insufficient consideration is a capital asset, is it
also subject to donors tax?

Answer: No. Real property considered capital assets under the Tax
Code are excepted from the rule considering that the FMV itself, if
higher than the gross selling price, is the base for computing the capital
gains tax imposed upon the sale of such capital assets. Thus, what the
seller avoids in the payment of the donors tax, it pays for in the capital
gains tax.
Question: What if the consideration is fictitious?

Answer: If the consideration is fictitious, then the entire value of the


property shall be subject to donors tax.

GIFT-SPLITTING

Gift-splitting is a tax-saving measure which is done by spreading the


donations or gifts over a number of calendar years in order to avail of
the exemption from donors taxes (P100,000 exempted donations) or
lower donors taxes (graduated rates of donors tax of 2% to 15%).

Note: Gift-splitting does not apply if the donation is between strangers


considering that the donation is subject to a straight 30% tax rate.

CLASSIFICATION OF DONORS

(1) Citizens and residents of the Philippines. They are taxable on all
properties located not only within the Philippines but also in foreign
countries.

(2) Nonresident Aliens. They are taxable on all real and tangible
personal properties within the Philippines, as well as intangible personal
properties, unless there is reciprocity, in which case such intangible
personal properties are not taxable.

Question: Does the reciprocity rule apply in Donors Taxation?

Answer: Yes. The reciprocity rule insofar as intangible properties


situated in the Philippines of a non-resident alien also applies to donors
taxation.

DETERMINATION OF EXTENT OF GROSS GIFT

The extent gross gift is determined as follows:

(a) Gifts of real property and personal property wherever situated


belonging to the donor who is either a resident or citizen at the time of
the donation; and

(b) Gifts of real and tangible personal property situated in the


Philippines, and intangible personal property with a situs in the
Philippines unless exempted on the basis of reciprocity, belonging to
the donor who is a non-resident alien at the time of the donation.
Summary of What Constitutes Gross Gift

Citizen or Resident Alien Non-resident Alien

Real property in the Real property in the Philippines


Philippines

Tangible personal properties; Tangible personal properties (within the


and Philippines); and
Intangible personal Intangible personal properties (within
properties (within or outside the Philippines) Except: If reciprocity
the Philippines) rule applies.

COMPOSITION OF GROSS GIFT

Gross gift shall pertain to all donations inter vivos:

(1) Whether the transfer is in trust or otherwise;


(2) Whether the gift is direct or indirect; or
(3) Whether the property is real or personal, tangible or intangible.

VALUATION OF GIFTS MADE IN PROPERTY

Gifts made in property are valuated by taking their FMV at the time of
donation. More specifically:

(1) For real property FMV as determined by the CIR (Zonal Value) or
FMV as shown in the latest schedule of values of the provincial and city
assessor (Market Value per Tax Declaration), whichever is higher. If
there is no zonal value, the taxable base is the FMV that appears in the
latest tax declaration.

(2) For improvements the value of improvement is the construction


cost as per building permit and/or occupancy permit plus 10% per
year after year of construction, or the FMV per latest tax declaration.

Case (Bar 2015):


Mr. L owned several parcels of land and he donated a parcel each to
his two children. Mr. L acquired both parcels of land in 1975 for
P11,200,000.00. At the time of donation, the fair market value of the
two parcels of land, as determined by the CIR, was P112,300,000.00;
while the fair market value of the same properties as shown in the
schedule of values prepared by the City Assessors was P112,500,000.00.

Question: What is the proper valuation of Mr. L's gifts to his children for
purposes of computing donor's tax?

Answer: For purposes of determining the donors tax, the proper


valuation of the Mr. Ls gifts to his children is the fair market value of the
gifts made at the time the donation was made as determined by the
CIR (Zonal Value) or fair market value as shown in the latest schedule
of values of the provincial and city assessor (Market Value per Tax
Declaration), whichever is higher. In this case, since the fair market
value as provided by the City Assessor is higher than the fair market
value as provided by the CIR, the value of P112,500,000.00 shall be
used as the basis in valuing the gifts made by Mr. L to his children for
purposes of donors tax.

GENERAL FORMULA IN COMPUTING THE DONORS TAX

Gross gifts made


Less: Deductions from the gross gifts
Net gifts made
Multiplied by applicable rate
Donors tax on the net gifts

If there were several gifts made during the year, the formula is as
follows:

Gross gifts made on this date


Less: Deductions from the gross gifts
Net gifts made on this date
Add: all prior net gifts during the year
Aggregate net gifts
Multiplied by applicable rate
Donors tax on the aggregate net gifts
Less: donors tax paid on prior net gifts
Donors tax due on the net gifts to date

TAX RATES APPLICABLE


The applicable donors tax rate is dependent upon the relationship
between the donor and the donee.

(1) If the donee is a stranger to the donor, the tax rate is equivalent to
30% of the net gifts.

(2) If the donee is not a stranger to the donor, the tax for each
calendar year shall be computed on the basis of the total net gifts
made during the calendar year is subject to the graduated rates from
2% to 15%.

Stranger, defined

A stranger for purposes of the donors tax is

(a) a person who is not a brother, sister (whether by whole or half-


blood), spouse, ancestor or lineal descendant; or

(b) a person who is not a relative by consanguinity in the collateral line


within the fourth degree of relationship.

Case 1: Out of compassion, Fernando Poe adopted the daughter of


his driver. Later Fernando Poe donated a piece of land to his adopted
child. Is the donation made considered as a donation made to a
stranger?

Answer: No. A legally adopted child is entitled to all the rights and
obligations provided by law to legitimate children. Therefore, the
donation made by Fernando Poe to his adopted child shall is not
considered as a donation made to a stranger. As such, the donation
shall be subject to the graduated rates.

Case 2: San Miguel Corporation donated a parcel of land in favor of its


sister company Liberty Corporation. Is this considered a donation to
strangers?

Answer: Yes. Donations made between business organizations are


considered as donations made to a stranger.

Case 3: In the Case 2, what if the donation was made not by San
Miguel Corporation but instead made by its Chairman Mr. Cojuangco
to Liberty Corporation? Is the donation still considered as a donation to
strangers?

Answer: Yes. It is still considered as a donation to a stranger.


Case 4: What if the donation was made by San Miguel Corporation to
its Chairman, Mr. Cojuangco? Is the donation still considered as a
donation to strangers?

Answer: Yes. It is still considered as a donation to a stranger. Donations


made by a corporation to an individual or by an individual to a
corporation is considered as a donation to a stranger.

TAX CREDIT FOR DONORS TAXES PAID IN A FOREIGN COUNTRY

The tax credit system also applies in donors taxation. A situation may
arise when the property given as a gift is located in a foreign country
and the donor may be subject to donors tax twice on the same
property: first, by the Philippine government and second, by the foreign
government where the property is situated. The remedy of claiming a
tax credit is, therefore, aimed at minimizing the burdensome effect of
double taxation by allowing the taxpayer to deduct his foreign tax from
his Philippine tax, subject to the limitations provided by law.

Note: A tax credit may be claimed only by a resident citizen, non-


resident citizen and resident alien. Non-resident aliens are not entitled
to a tax credit.

EXEMPTIONS OF GIFTS FROM DONORS TAX

1. Dowries or donations made


(a) On account of marriage;
(b) Before its celebration or within one year thereafter;
(c) By parents to each of their legitimate, recognized, natural, or
adopted children;
(d) To the extent of the first P10,000.

Note: This exemption may not be availed of by a non-resident alien.

2. Gifts made to or for the 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 the said Government;

3. Gifts in favor of an educational and/or charitable, religious, cultural


or social welfare corporation, institution, accredited non-government
organization, trust or philanthropic organization or research institution or
organization, Provided not more than 30% of said gifts will be used by
such donee for administration purposes; and

4. Political or electoral contributions duly reported to the COMELEC.


Donations of Parents to Children Getting Married; Donations of Spouses

Question: Can both parents making a donation to a child in


consideration of marriage avail of the P10,000 deduction each?

Answer: Yes. If both spouses made the gift, then the gift is taxable
one-half to each donor spouse, where they can deduct P10,000 each
from their share. In which case separate donors tax returns must be
filed.

Note: Husband and wife are considered as separate and distinct


taxpayers for purposes of donors tax.

Political or Electoral Contributions

As a rule, contributions given to candidates or political parties are not


subject to donors tax as provided under the Omnibus Election Code
(OEC) and Republic Act No. (RA) 7166. Section 13 of RA 7166
specifically 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 Commission shall not be subject to the payment of any
gift tax (donors tax). Therefore, contributions are exempt from donors
tax only if they are duly reported to the Commission, which means
campaign contributions that are not reported will be subject to
appropriate donors tax.

Case (2014 Bar Question): Mr. De Sarapen is a candidate in the


upcoming Senatorial elections. Mr. De Almacen, believing in the
sincerity and ability of Mr. De Sarapen to introduce much needed
reforms in the country, contributed P500,000.00 in cash to the
campaign chest of Mr. De Sarapen. In addition, Mr. De Almacen
purchased tarpaulins, t-shirts, umbrellas, caps and other campaign
materials that he also donated to Mr. De Sarapen for use in his
campaign.

Question: Is the contribution of cash and campaign materials subject


to donors tax?

Answer: The campaign contributions of Mr. De Almacen to the election


campaign of Mr. De Serapen are not subject to donors tax, provided,
said political contributions are duly reported to the COMELEC as
campaign contributions, otherwise, the same are subject to donors
tax.

Note: Excess campaign contributions or such amount not fully used in


the political campaign is subject to income tax unless the same is
returned to the donors.

Donations Made to Entities Exempted Under Special Laws:

Donations to the following entities are exempt from Donors tax:


(a) Aquaculture Department of the Southeast Asian Fisheries
Development Center of the Philippines
(b) Development Academy of the Philippines
(c) Integrated Bar of the Philippines
(d) International Rice Research Institute
(e) National Museum
(f) National Library
(g) National Social Action Council
(h) Ramon Magsaysay Foundation
(i) Philippine Inventors Commission
(j) Philippine American Cultural Foundation
(k) Task Force on Human Settlement on the donation of equipment,
materials and services
(l) Rural Farm Schools under RA 10618

PERSONS LIABLE

Every person, whether natural or juridical, resident or non-resident, who


transfers or causes to transfer property by gift, whether in trust or
otherwise, whether the gift is direct or indirect and whether the
property is real or personal, tangible or intangible.

TAX BASIS

The tax for each calendar year shall be computed on the basis of the
total net gifts made during the calendar year.

Calendar Year, defined

Calendar year refers to the 12 consecutive months starting on January


1 and ending on December 31.

Net Gifts, defined

Net gift is the net economic benefit from the transfer that accrues to the
donee. Accordingly, if a mortgaged property is transferred as a gift,
but imposing upon the donee the obligation to pay the mortgage
liability, then the net gift is measured by deducting from the fair market
value of the property the amount of the mortgage assumed.

ADMINISTRATIVE PROCEDURE IN SETTLING DONORS TAX


Filing of Donors Tax Return & Payment

Contents of the Donors Tax Return:


(1) Each gift made during the calendar year which is to be included in
computing net gifts;
(2) The deductions claimed and allowable;
(3) Any previous net gifts made during the same calendar year;
(4) The name of the donee;
(5) Relationship of the donor to the donee; and
(6) Such further information as the Commissioner may require.

When Filed and Paid

A donors tax return is to be filed within thirty (30) days after the date
the gift is made or completed. The donors tax due thereon shall be
paid at the same time that the return is filed.

Note: The time for payment is mandatory and a notice of assessment


or demand is not necessary before any gift must be paid.

Where Filed and Paid

Unless the Commissioner otherwise permits, the donors tax return shall
be filed and the tax paid to:
(1) An authorized agent bank;
(2) The Revenue District Officer;
(3) Revenue Collection Officer;
(4) Duly authorized Treasurer of the city or municipality where the
donor was domiciled at the time of the transfer; or
(5) If there be no legal residence in the Philippines, with the Office of
the Commissioner.

Note: In the case of gifts made by a non-resident, the return may be


filed with:
(1) The Philippine Embassy or Consulate in the country where he is
domiciled at the time of the transfer; or
(2) Directly with the Office of the Commissioner.