Tax Reviewer - Transfer Taxes

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TRANSFER TAXES | ATTY. MONTERO | ATENEO LAW SCHOOL | 2013-2014 (1 SEMESTER)

I. Transfer Taxes A. Estate Tax 1. General Principles & Determination of the Estate Tax Sections 84 & 88, Tax Code

Lorenzo vs. Posadas (June 18, 1937)

84 – Rates of estate tax o Levied, assessed, collected and paid o Upon transfer of the net estate o Of every decedent (whether resident or non-resident) o Based on the value of such net estate 88 – Determination of the value of the net estate (A) Usufruct o Value of useful life, use or habitation, as well as that of annuity o Probable life of the beneficiary o In accordance with the latest Basic Standard Mortality Table o To be approved by the Secretary of Finance o Upon recommendation of the Insurance Commissioner (B) Properties o Appraised at its fair market value o At the time of death o Whichever is higher of (1) FMV as determined by the Commissioner (2) FMV as shown in the assessment of values by the Provincial and City Assessors There is a will that says that all real estate at the time of death should not be disposed until after 10 years. o The right of the State to inheritance tax accrues at the moment of a person's death. o The compensation to be received by the trustee for his services to the estate may not lawfully be deducted as judicial expenses. o A trustee is but an instrument or agent for the cestui que trust. As trustee, Moore did not acquire any beneficial interest in the estate. The delinquency in paying the inheritance tax arose when Moore was appointed as trustee. 1 – Scope o Govern the taxation of the transmission of the decedent’s estate and donations made by persons, natural or juridical, whether citizens or aliens, residents or non-residents o Family Code shall govern property relations between husband and wife whose marriage was celebrated on or after such date (Prior to it, the Civil Code shall govern) August 3, 1988

Revenue Regulations 02-03 (Consolidated Revenue Regulations on Estate tax and Donor’s Tax Incorporating the Amendments Introduced by Republic Act No. 8424, the Tax 2 – Rates of estate tax Reform Act of 1997) o Transfer of the net estate o Of every decedent, whether resident or non-resident

3 – The law that governs the imposition of estate tax o Statute in force at the time of death of the decedent o Estate tax accrues at the death of the decedent o Accrual of tax is distinct from the obligation to pay the same Frances Lipnica Pabilane | Ateneo Law School 2015 | 3A

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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.

4 – Composition of the gross estate o Properties and interest at the time of death including revocable transfers and transfers for insufficient consideration (A) Residents and citizens – properties, real or personal, tangible or intangible, WHEREVER situated (B) Non-resident aliens  Only properties situated in the Philippines  With respect to intangible personal property, inclusion in the gross estate is subject to principle of reciprocity 5 – Valuation of the gross estate o Based on the FMV at the time of death o Real property  FMV as determined by Commissioner or schedule of values by provincial and city assessors, whichever is higher o Shares of stocks  Depend on whether shares are listed or unlisted  Unlisted common shares – book value  Unlisted preferred shares – par value  In determining the book value of the common shares, appraisal surplus shall not be considered as well as the value assigned to preferred shares (if there are any)  Listed in stock exchanges – FMV shall be the arithmetic mean between the highest and lowest quotation at a date nearest the date of death, if none is available, the date of death itself o Usufruct  Use or habitation, that of annuity  Probable life of beneficiary in accordance with the basic standard of mortality table 6 – Computation of the net estate of a decedent who is either a citizen or resident of the Philippines o Deducting from the value of the net estate the following items of deduction: (A) Expenses, losses, indebtedness and taxes (1) Actual funeral expenses (whether paid or unpaid) up to the time of interment, or an amount equal to five percent (5%) of the gross estate, whichever is lower, but in no case to exceed 200,000  Excess cannot be claimed as deduction  Neither can it be claimed as “claims against estate”  “Funeral expenses” is not confined to its ordinary or usual meaning. They include: (a) Mourning apparel (surviving spouse and unmarried minor children) on the occasion of the burial (b) Expenses for the deceased’s wake, including food and drinks (c) Publication charges for death notices (d) Telecommunications expenses for informing relatives (e) Cost of burial plot, but not their upkeep (only the value corresponding to the plot where he is buried) (f) Interment and/or cremation fees and charges (g) All other expenses incurred for the performance of the rites and ceremonies incident to interment Frances Lipnica Pabilane | Ateneo Law School 2015 | 3A

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 Expenses after the interment are not deductible  Medical expenses of the last illness will not form part of funeral expenses bbut under subsection (F)  Actual funeral expenses – actually incurred in connection with the interment or burial.  Must be duly supported by receipts or invoices or other evidence (2) Judicial expenses of the testamentary or intestate proceedings  Inventory-taking of assets, administration, payment of debts, distribution of the estate  Incurred during the settlement of the estate but not beyond the last day prescribed by law (or extension thereof) for the filing of the estate tax return. Judicial expenses may include: (a) Fees of executor or administrator (b) Attorney’s fees (c) Court fees (d) Accountant’s fees (e) Appraiser’s fees (f) Clerk hire (g) Costs of preserving and distributing the estate (h) Costs for storing or maintaining property of the estate (i) Brokerage fees for selling property of estate  Any unpaid amount should be supported by a sworn statement of account issued and signed by the creditor (3) Claims against the estate  Debts or demands of pecuniary nature  May arise out of contract, tort or operation of law □ Requisites for deductibility of claims against the estate (a) Represents a personal obligation of the deceased (except unpaid funeral expenses and unpaid medical expenses) (b) Good faith and for adequate and full consideration in money or money’s worth (c) Debt or claim valid in law and enforceable in court (d) Not condoned by the creditor or the action to collect has prescribed □ Substantiation requirements (a) In case of a simple loan (including advances)  Debt instrument must be duly notarized at the time indebtedness was incurred  Duly notarized Certification as to the unpaid balance, including interest (one who will certify should not be a relative of the borrower within the fourth civil degree of consanguinity or affinity)  In accordance with the requirements  Statement under oath by administrator or executor of the disposition of the loan proceeds (if contracted within 3 years prior to the death of decedent) (b) If the unpaid obligation arose from purchase of goods or services  Pertinent documents evidencing the purchase of goods or service  Duly notarized Certification from the creditor as to the unpaid balance of the debt, including interest at the time of death  Certified true copy of the latest audited balance sheet Frances Lipnica Pabilane | Ateneo Law School 2015 | 3A

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of the creditor with a detailed schedule of its receivable showing the unpaid balance of the decedent-debtor (c) Where the settlement is made through the Court in a testate or intestate proceeding, pertinent documents filed with the Court evidencing the claims against the estate, and the Court Order approving the said claims, if already issued, in addition to the documents mentioned in the preceding paragraphs. (4) Claims of the deceased against insolvent persons where the value of the decedent’s interest therein is included in the value of the gross estate (5) Unpaid mortgages, taxes and casualty losses (a) Unpaid mortgages  In all instances, the mortgaged property, TO THE EXTENT OF THE DECEDENT’S INTEREST THEREIN, should always form part of the gross taxable estate. (b) Taxes which have accrued as of the death of the decedent which were unpaid at the time of death (c) Losses incurred during the settlement of the estate arising from fires, storms, shipwreck, or other casualties, or from robbery, theft, or embezzlement  Losses are not compensated for by insurance  Not claimed as deduction for income tax purposes (B) Property previously taxed (C) Transfers for public use (D) The family home (a) Definition of terms  Family home – dwelling house including the land; for the purpose of this regulation, actual occupancy of the house and lot shall not be considered interrupted/ abandoned by temporary absence (characterized by permanency); a person may constitute only one family home, for the purpose of availing deduction  Husband and wife – legally married man and woman  Unmarried head of a family  Beneficiaries of a family home: husband, wife, or head of family; parents, ascendants, descendants xxx (b) Conditions for the allowance of FAMILY HOME as deduction from the gross estate  Actual residential home  Total value of the family home must be included as part of the gross estate  Deduction equivalent to amount of current FMV or the extent of decedent’s interest NOT exceeding 1M (E) Standard deduction  On emillion pesos  Without need of substantiation (F) Medical expenses  All medical expenses  Incurred within 1 year before the death of the decedent  Duly substantiated with official receipts  Amount whether paid or unpaid does not exceed 500,000 (G) Amount received by heirs under Republic Act No. 4917  Received from employer as a consequence of death  Provided that amount of separation benefit is included as part of the Frances Lipnica Pabilane | Ateneo Law School 2015 | 3A

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gross estate (H) Net share of the surviving spouse in the conjugal partnership or community property  The share of the surviving spouse should be removed to ensure that only the decedent’s interest in the estate is taxed 7 – Computation of the net estate of a decedent who is a non-resident alien of the Philippines o Deducting from the value of that part of his gross estate which at the time of his death is situated in the Philippines the following items of deductions: (1) Expenses, losses, indebtedness and taxes  That proportion of the total expenses, losses, indebtedness and taxes which the value of such part bears to the value of his entire gross estate wherever situated (2) Property previously taxed (3) Transfers for public use (4) Net share of the surviving spouse in the conjugal property or community property o Executor or administrator should file a return of the gross estate not situated in the Philippines (Sec. 90) 8 – Proper presentation of funeral expenses, family home, standard deduction, and medical expenses ad deductions from gross estate 9 – Time and place of filing estate tax return and payment of estate tax due (A) Time for filing estate tax return o 6 months from the decedent’s death o Court shall furnish copy of partition to the Commissioner within 30 days from order (B) Extension of time to file estate tax return o Not exceeding 30 days (C) Place of filing the return and payment of tax o Resident decedent  Register the estate to secure a new TIN  Pay corresponding tax with AAB, RDO, Collection Officer or duly authorized Treasurer of the city or municipality o Non-resident decedent (whether non-resident citizen or non-resident alien)  If there is no executor or administrator in the Philippines – Office of the Commissioner through RDO No. 39 – South Quezon City (D) Time for payment of the estate tax o General rule: at the time the return is filed (E) Extension of time to pay estate tax o 5 years if settled through the courts o 2 years if settled extrajudicially o Running of the statute of limitations for deficiency shall be suspended for the period of extension o No extension shall be granted if reason is negligence, intentional disregard, fraud o May be required to furnish a bond not exceeding double the amount (F) Payment of the estate tax by installment o Clearance shall be released only with respect to the property the corresponding/ computed tax on which has been paid (G) Liability for payment Frances Lipnica Pabilane | Ateneo Law School 2015 | 3A

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Executor or administrator has primary obligation to pay estate tax But the heir or beneficiary has subsidiary liability for the payment of that portion of the estate which his distributive share bears the value of the total net estate 2. Gross Estate

Sections 85 and 104, 85 – Gross Estate Tax Code o At the time of death o ALL property, real or personal, tangible or intangible o WHEREVER situated o NONRESIDENT DECEDENT who at the time of death was NOT CITIZEN  Only part of the entire gross estate situated in the Philippines  Included in taxable estate (A) Decedent’s interest o Interest of the decedent at the time of his death (B) Transfer in contemplation of death o Possession or enjoyment of, or the right to the income from the property o Right either alone, or in conjunction with any person, to designate the person who shall possess or enjoy the property or the income therefrom o EXCEPT bona fide sale for an adequate and full consideration  In money  Or money’s worth (C) Revocable transfer o By gift where the donor has reserved the power to alter, amend and revoke donation o The donor retains the option to relinquish such power in contemplation of death (D) Property passing under general power of appointment (1) By will (2) By deed executed in contemplation of death (3) By deed which he retained for his life or any period not ascertainable without reference to death (a) Possession or enjoyment (b) Right to designate, either alone or in conjunction with any person  EXCEPT bona fide sale with full/ adequate consideration (E) Proceeds of life insurance o To the extent of the amount receivable by the estate o Policies taken out by decedent upon his OWN LIFE o Irrespective of WON the decedent retained the power of revocation o EXCEPT when expressly stipulated that the designation of beneficiary is irrevocable (F) Prior interests o Shall apply to the transfers, trusts, estates, interests, rights, powers and relinquishment of powers o As severally enumerated and described therein, whether o Made, created, arising, existing, exercised or relinquished before the effectivity of this Code (G) Transfers for insufficient consideration o Not a bona fide sale for an adequate and full consideration in money or money’s worth o Included in the gross estate o Excess of the FMV over the value of the consideration received thereof by the decedent Frances Lipnica Pabilane | Ateneo Law School 2015 | 3A

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(H) Capital of the surviving spouse o For purpose of this Chapter, shall NOT be deemed part of the gross estate 104 – Definitions o “Gross estate” and “gifts” – include real and personal, whether tangible or intangible o Considered situated in the Philippines  Franchise exercised in the Philippines  Shares, bonds, obligations – corporations in the Philippines  Shares, obligations, bonds – 85% in the Philippines  Shares, obligations, bonds – foreign business that acquired business situs in the Philippines  Shares, rights – partnership/ business in the Philippines o No tax shall be collected on intangible personal property (a) Decedent (citizen and resident of a foreign country) – time of death or donation did not impose a transfer tax of any character, in respect of intangible personal property of citizens of the Philippines not residing in that foreign country (b) Foreign country allows a similar exemption from transfer or death taxes of every character or description in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country o “Deficiency” – basically difference between amount of tax imposed with the amount shown in the return (better memorize this, or familiarize because Sir might ask this in fill in the blanks huhu) Collector of Internal Revenue v. Fisher

Zapanta v. Posadas

Tuason v. Posadas

Dison v. Posadas

It is clear from both these quoted provisions that the reciprocity must be total, that is, with respect to transfer of death taxes of any and every character, in the case of the Philippine law, and to legacy, succession, or death taxes of any and every character, in the case of the California law. o Therefore, if any of the two states collects and imposes and does not exempt any transfer, death, legacy, or succession tax of any character, the reciprocity does not work. o This is the underlying principle of the reciprocity clauses in both laws. In the Philippines, upon the death of any citizen or resident, or non-resident with properties therein, there are imposed upon his estate and its settlement, both an estate and an inheritance tax.  Under the laws of California, only inheritance tax is imposed.  On the other hand, the Federal Internal Revenue Code imposes an estate tax on non-residents who are not citizens of the United States, but does not provide for any exemption on the basis of reciprocity. Father Braulio donated properties by public instruments to six plaintiffs, with the condition that some of them would pay him a certain amount of rice. o Failure to fulfill his condition would revoke the donations. o The donations were made inter vivos and thus, not subject to inheritance tax o Here, the donations were neither inheritance nor legacy. o Revocation was also not based on the discretion of donor but the failure to fulfill condition. Donations made in anticipation of death are part of the gross estate. o It also appearing that the appellees after the death of Esperanza, were found to be legatees under her will, the donation inter vivos she had made to them in 1922 and 1923, must be added to the net amount to be taxed. Donor executed Deed of gift (April 9) Acknowledgment by donor before notary public o

Frances Lipnica Pabilane | Ateneo Law School 2015 | 3A

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Vidal de Posadas

Roces

v.

(April 16)  Formal acceptance by Dison Formal acceptance by Dison (April 17)  Acknowledgment by Dison before Notary Public (April 20)  Death of Felix Dison (donor) (April 21) o It is subject to inheritance tax. o The facts show that donation was fraudulently made for the purpose of evading inheritance tax. o The facts warrant the inference that the transfer was an advancement upon the inheritance which the donee, as the sole and forced heir of the donor, would be entitled to receive upon the death of the donor. Tuazon died without leaving any forced heir. o Issue here is whether donation inter vivos falls under the contemplation of Art. 1540 of the Administrative Code (Act No. 2061) - YES  "Additions of Gifts and Advances - After the aforementioned deductions have been made, there shall be added to the resulting amount the value of all gifts or advances made by the predecessor to any of those who, after his death, shall prove to be his heirs, devises, legatees, or donees mortis causa." o Included in the ambit of the provision would be the donations inter vivos that take effect immediately or during the lifetime of the donor but are made in contemplation of death. o If the donee inter vivos was found to be legatees, heirs, devisees or donees mortis causa of the decedent, then they would have to pay the inheritance tax.  The reason for this is because the donation inter vivos is deemed to be in anticipation of inheritance/ death, meaning that it is a scheme to evade payment of taxes. (advancement of inheritance!) 3. Deductions

Section 86, Tax Code

86 – Computation of net estate (A) Deductions allowed to the estate of a citizen or resident (1) Expenses, losses, indebtedness, and taxes (a) Actual funeral expenses o 5% of gross estate, but shall not exceed 200,000 WHICHEVER IS LOWER (b) Judicial expenses of testamentary or intestate proceedings (c) Claims against the estate o Duly notarized o If within 3 years before the death of decedent, statement showing the disposition of the proceeds (d) Claims against insolvent persons o Interest should be included in the gross estate (e) Unpaid mortgage or indebtedness on property o Xxx not compensated by insurance o Not yet claimed as deduction in income tax o Incurred not later than payment for estate tax (2) Property previously taxed (Vanishing deductions) o Forming part of gross estate situated in the Philippines o Any person who died within 5 years prior to the death of the decedent o Transferred to the decedent by gift within 5 years prior to his death o Two or more items, the aggregate value of such items shall be used for the purpose of computing the deduction o Requirements according to Mickey Ingles reviewer  Present decedent died within 5 years from receipt of the Frances Lipnica Pabilane | Ateneo Law School 2015 | 3A

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property from a prior decedent or donor Property being claimed must be located in the Philippines Property must have formed part of the taxable estate of the prior decedent or of the taxable gift of the donor  Estate tax on the prior succession or the donor’s tax on the gift must have been finally determined and paid  Property must be identified as the one received from the prior decedent or donor, or something acquired in exchange therefore  No vanishing deduction on the property was allowable to the estate of the prior decedent Transfers for public use o Government of the Republic of the Philippines o Or any political subdivision thereof o Exclusively public purposes The family home o Current FMV o If it exceeds 1M, excess shall be subject to estate tax o Condition sine qua non: should have been the family home by the decedent, as certified by the barangay captain of the locality Standard deduction o Amount equivalent to 1M Medical expenses o Incurred by decedent o Within 1 year prior to his death o Duly substantiated by receipts o Shall not exceed 500,000 Amount received by heirs under Republic Act No. 4917 o Received by heirs from decedent’s employer as consequence of death o PROVIDED, Amount is included in the gross estate of the decedent  

(3)

(4)

(5) (6)

(7)

(B) Deductions allowed to nonresident estates (1) Expenses, losses, indebtedness and taxes (2) Property previously taxed (3) Transfers for public use (C) Share in the conjugal property o Net share of surviving spouse o As diminished by the obligations chargeable (D) Miscellaneous provisions o For deductions to be allowed for nonresidents, noncitizens, executor, administrator, heirs o Return required to be filed (Sec. 90), the value at the time of death of the gross estate of nonresident not situated in the Philippines (E) Tax credit for estate taxes paid to a foreign country (1) In general – amounts of any estate tax imposed by the authority of a foreign country (2) Limitations on credit (a) Shall not exceed the same proportion off the tax against which such credit is taken (okay, I don’t get the difference between a and b. almost the same  total amount, one is within that country, other is outside the Philippines) Frances Lipnica Pabilane | Ateneo Law School 2015 | 3A

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Commissioner of Internal Revenue v. CA and Pajonar

o o o

Testate Estate of the late Felix de Guzman v. Guzman-Carillo

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o Dizon in his capacity as Administrator of deceased Fernandez v. CIR

o

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Notarial fees and attorney's fees may be allowed as deductions from gross estate. Neither may attorney's fees incident to litigation incurred by the heirs in asserting their respective rights be claimed as a deduction from the gross estate. The attorney's fees paid to PNB for acting as the guardian of Pedro's property during his lifetime should also be considered as a deductible administration expense. The deduction is limited to such administration expenses as are actually and necessarily incurred in the collection of the assets of the estate, payment of the debts, and distribution of the remainder among those entitled thereto.  It is clear that the extrajudicial settlement was for the purpose of payment of taxes and the distribution of the estate to the heirs. An executor or administrator is allowed the necessary expenses in the care, management, and settlement of the estate... entitled to possess and manage the decedent's real and personal estate as long as it is necessary for the payment of the debts and the expenses of administration... The expenses for the renovation and improvement of the family home redounded to the benefit of the owners (preservation of home and social standing). The expenses incurred by Librada as occupant of the house without paying rent were personal expenses, inuring only to her benefit and should not be charged against the estate. The stenographic notes, representation expenses and expenses in celebration of the first death anniversary are all disallowed as they have nothing to do with care, management and settlement of the estate. The return showed a completely zero estate tax liability. Gross value of estate was at 14M and deductions presented amounted to 187M.The amounts paid to creditors were significantly lowered because of compromise while others were fully condoned. BIR reduced deductions and included only the amount actually paid to creditors at the time of death was allowed deduction. Two views from American jurisprudence  Ithaca Trust date-of-death valuation principle: The fact that the claimant subsequently settled for a lesser amount did not preclude the estate from deducting the entire amount of the claim for estate tax purposes.  Internal Revenue Service or IRS: The post death developments should be taken into consideration and that the creditors' claim should be allowed only to the extent of the amount paid. The claims existing at the time of death are significant to, and should be made the basis of, the determination of allowable deductions. 4. Exemptions

Section 87, Tax Code

87 – Exemption of Certain Acquisitions and Transmissions (A) Merger of usufruct in the owner of the naked title (B) Transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommisary (C) Transmission from the first heir, legatee or done in favor of another beneficiary, in accordance with the desire of the predecessor (D) All bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions o No part inures to the benefit any individual o Not more than 30% shall be used for administration purposes 5. Administrative Requirements Frances Lipnica Pabilane | Ateneo Law School 2015 | 3A

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Sections Code

89-97,

Tax

89 – Notice off death to be filed o Though exempt from tax, gross value exceeds 20,000 o 2 months after the decedent’s death o Or within a like period after qualifying as such executor or administrator o Notice to the Commissioner 90 – Estate Tax Returns (A) Requirements o Exceeds 200,000 o Registered or registrable property (like real, motor, shares of stock) where BIR clearance is required for transfer. Shall set forth: (1) Value of the gross estate at time of death (if nonresident, noncitizen, situated in the Philppines) (2) Deductions allowed (3) Supplemental data necessary to establish correct taxes o If showing a gross exceeding 2M, supported by a statement duly certified by CPA containing: (a) Itemized assets (b) Itemized deductions (c) Amount of tax due (whether paid or still due and outstanding) (B) Time for filing o 6 months from the decedent’s death o Furnish Commissioner, within 30 days from order  schedule of partition of order of the court approving the same (C) Extension of time o Commissioner’s authority to grant, in meritorious cases, the filing of return o Not exceeding 30 days (D) Place of filing o AAB, RDO, Collection Officer, duly authorized Treasurer of city or municipality o Where there is no legal residence in the Philippines, then with the Office of the Commissioner 91 – Payment of Tax (A) Time of payment o At the time the return is filed (B) Extension of time o Undue hardship upon the estate or the heirs o Commissioner may extend time for payment or any part o Not to exceed 5 years (estate settled through the courts) o 2 years (in case estate is settled extrajudicially) o Running of Statute of Limitations for assessment shall be suspended during such extension o No extension  negligence, intentional disregard, fraud o If there is extension, Commissioner may require bond (not exceeding double the amount, conditioned on the term of the extension) (C) Liability for payment o Before delivery to any beneficiary of his distributive share of the estate o Beneficiary to the extent of his share, subsidiarily liable o If there is no executor or administrator, the person in actual or constructive possession of any property of the decedent 92 – Discharge of executor from personal liability Frances Lipnica Pabilane | Ateneo Law School 2015 | 3A

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Executor or administrator written application to the Commissioner For the determination of the amount of the estate tax and discharge from liability Commissioner  within 1 year from application, 1 year after return is filed, BUT NOT after the expiration of the period prescribed for assessment  notify of the amount of the tax Upon payment of tax based on such notice  discharged from personal liability for any deficiency in the tax found to be due Entitle to a receipt or writing showing such discharge

93 – Definition of “Deficiency” (a) (amount of tax exceeds that shown in return) Xxxx increased by the amounts previously assessed (or collected without assessment) as a deficiency and decreased by the amounts previously abated, refunded or otherwise repaid in respect of such tax (b) (no amount is shown) Xxx amount by which the tax exceeds the amount previously assessed (or collected without assessment) as a deficiency; but such amounts previously assessed or collected without assessment shall first be decreased by the amounts previously abated, refunded or otherwise repaid in respect of such tax 94 – Payment before delivery by executor or administrator o Certification from the Commissioner that the estate tax has been paid 95 – Duties of certain officers and debtors o Register of Deeds o Lawyer, notary public or any government officer o Debtor  But he may pay the executor or judicial administrator without certification from Commissioner (that tax has been paid)  if the credit is included in the inventory of the estate 96 – Restitution of tax upon satisfaction of outstanding obligations o Upon payment of tax, new obligations of the decedent shall appear o Right to the restitution of the proportional part of the tax paid 97 – Payment of tax antecedent to the transfer of shares, bonds, or rights o Certificate from the Commissioner that the taxes fixed in this Title and due thereon have been paid is shown o Bank  knowledge of death of person (account alone or jointly with another)  not allow withdrawal  Unless Commissioner certified that taxes imposed have been paid  May withdraw 20,000 without certification  All withdrawal slips  statement that all joint depositors are still living (under oath) Government of the Philippine Islands v. Pamintuan

o o o o

The claims presented did not include the claim from the Republic of the Philippines. Subsequently, Government of the Philippines discovered some unpaid taxes from the deceased Pamintuan. The heirs here are responsible for the payment of the income tax in proportion to the share of each in the estate. Claims for income taxes need to be filed with the committee on claims and appraisals appointed in the course of testate proceedings and may be collected Frances Lipnica Pabilane | Ateneo Law School 2015 | 3A

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Commissioner Internal Revenue Pineda

of v.

o

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Commissioner Internal Revenue Gonzales

of v.

o

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even after the distribution of the decedent's estate among his heirs, who shall be liable therefor in proportion to their share in the inheritance. Government can require Manuel to pay the full amount of the deficiency tax. Pineda is liable for the assessment as an heir and as a holder-transferee of property belonging to the estate/ taxpayer.  As an heir, he is individually answerable for the part of the tax proportionate to the share he received from the inheritance. His liability however, cannot exceed the amount of his share.  As a holder of property belonging to the estate, Pineda is liable for the tax up to the amount of the property in his possession. Government has two ways of collecting the tax in question  By going after all the heirs and collecting from each of them the amount of the tax proportionate to the inheritance received (used in Pamintuan).  By subjecting said property of the estate which is in the hands of an heir or transferee to the payment of the tax due the estate (used in this case). The counting of the thirty days within which to institute an appeal in the Court of Tax Appeals should commence from the date of receipt of the decision of the Commissioner on the disputed assessment, not from the date the assessment was issued. In a case where the return was made on the wrong form, the Supreme Court of the United States held that the filing thereof did not start the running of the period of limitations. The return filed is defective.  It was incomplete. It declared 400 hectares and left out 503 more.  The return mentioned no heir. Thus, no inheritance tax could be assessed. As a matter of law, on the basis of the return, there would be no occasion for the imposition of estate and inheritance taxes. When there is no heir, the intestate estate is escheated to the State. A return need not be complete in all particulars. It is sufficient if it complies substantially with the law. There is substantial compliance:  The return is made in good faith and is not false or fraudulent.  It covers the entire period involved.  It contains information as to the various items of income, deduction and credit with such definiteness as to permit the computation of the assessment of the tax. B. Donor’s Tax

1. General Principles & Determination of the Donor’s Tax Sections 98-100, 102, 98 – Imposition of tax 104, Tax Code (A) Levied, assessed collected and paid upon transfer o By any person, resident or nonresident (B) Tax shall apply whether transfer is in trust or otherwise o Whether gift is direct or indirect o Whether property is real or personal o Tangible or intangible 99 – Rates of tax payable by donor (A) In General o Computed on the basis of the total net gifts o Made during the calendar year (B) Tax payable by donor if done is a stranger Frances Lipnica Pabilane | Ateneo Law School 2015 | 3A

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Tax payable by donor is 30% of the net gifts Stranger is one who is not: (1) Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant (2) Relative by consanguinity in the collateral line within the fourth degree of relationship (C) Contribution in cash or in kind to any candidate, political party or coalition of parties for campaign shall be governed by the Election Code o o

100 – Transfer for less than adequate and full consideration o Property other than real property referred to in Section 224(D) o Less than adequate and full consideration in money or money’s worth o Deemed gift – the amount by which the FMV exceeded the value of consideration 102 – Valuation of gifts made in property o FMV at the time of gift shall be considered the amount of gift o In case of real property, the provisions of 88(B) “Determination of Value of the Estate” shall apply to the valuation 104 – Definitions (see above) v. The court ruled that the donation here is inter vivos (and not mortis causa). o The following facts were considered to decide the issue: love and affection; reservation of lifetime usufruct; reservation of sufficient properties; acceptance of the donee. o Prior to the donation inter vivos, the spouses already executed three donations mortis causa. Hence, they are aware of the difference. Tang Ho v. Board of The court ruled that the donations made by Li Seng Giap to his children from the Tax Appeals conjugal property should be taxed against the husband alone (and not against husband and wife). Only one exemption or deduction can be claimed for every such gift. Gibbs v. Collector of Gift taxes on the transfer of shares should be based on the full market value of the shares Internal Revenue of stock (not the difference between the market value and stipulated consideration). o The corpus of the trust was never totally or partially sold, hypothecated or encumbered. o There being no real consideration for the transfer, gift taxes should be based on the full market value of the shares of stock at the time of the respective transfer. Pivorano v. Gift taxes were proper because they were gifts and not remuneratory. Commissioner of o Records do not show that Enrico was not already fully compensated for the work Internal Revenue that he did for the company. o The fact that his services were so valuable did not make it a recoverable debt. Spouses Gestopa Court of Appeals

2. Exemptions Section 101, Tax Code

101 – Exemption of certain gifts (A) In case of gifts made by a resident (1) Dowries or gifts made on account of marriage o Before its celebration o Or within one year o By parents to legitimate, recognized natural or adopted children o To the extent of (P10,000) (2) Gifts made to or for the use of National Government o Any entity created by any of its agencies o Not conducted for profit o Or any political subdivision of the Government Frances Lipnica Pabilane | Ateneo Law School 2015 | 3A

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(3) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, accredited nongovernment organization, trust or philanthropic organization and/or research institution or organization o Not more than 30% is used for administration purposes o Institutions – paying no dividends, governed by trustees who receive no compensation, devoting all income to xxx the accomplishment and promotion of the purposes in the Articles of Corporation (B) In the case of gifts made by a nonresident not a citizen of the Philippines (1) For the use of national government or political subdivisions (read definition above) (2) Gifts in favor of educational xxx (see above) o Not more than 30% is used for administration purposes (C) Tax credit for donor’s taxes paid to a foreign country (1) In general o Citizen or resident at the time of donation o Credited with the amount of any donor’s tax of any character and description o Imposed by the authority of a foreign country (2) Limitations on credit (a) Shall not exceed the same proportion of the tax against which such credit is taken, which the net gifts situated within such country taxable under this Title to bear his entire net gifts (b) Total amount credit shall not exceed the same proportion of the tax against which such credit is taken, which the donor’s net gifts situated outside the Philippines taxable under this Title bears to his entire net gifts Republic Act 7166, An Act Providing for Synchronized National and Local Elections and for Electoral Section 13 Reforms 13 – Authorized expenses of candidates and political parties o President and Vice President – 10php o Other candidates – 3php for every voter currently registered in the constituency  5php for every voter for candidate without any political party and without support from any political party o Political parties – 5php for every voter currently registered in the constituency where it has official candidates o Contributions in cash or in kind to any candidate or political party or coalition of parties for campaign purposes  Duly reported to the Commission  Not subject to payment of gift tax Republic Act 10165, Foster Care Act Sections 3-5 & 22-24 22 – Assistance and incentives to foster parent o Additional exemption for dependents – 25,000; shall be amended to include foster child 23 – Incentives to agencies o Exemption from income tax 24 – Incentives to donors o Allowable deductions – to the extent of the amount donated to agencies o Exemption from donor’s tax – not more than 30% will be used for administrative expenses Revenue Regulations 7- Tax treatment of campaign contributions and expenditures 2001 1 – Background o XXX in instances when these campaign contributions are not fully utilized by a candidate for campaign purposes, there is a need to clarify the treatment of these Frances Lipnica Pabilane | Ateneo Law School 2015 | 3A

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excess campaign funds, for tax purposes 2 – Policies and guidelines o General rule: campaign contributions are not included in the taxable income  To be considered as exempt from income tax, these campaign contributions must have been utilized to cover a candidate’s expenditures for his/her electoral campaign.  Unutilized/ excess campaign funds shall be considered as subject to income tax.  Any candidate (winning or losing) who fails to file with the COMELEC the appropriate Statement of Expenditures shall be automatically precluded from claiming such expenditures as deductions from his/ her campaign contributions (as such, the entire amount shall be subject to income tax) 3. Administrative requirements Section 103, Tax Code

103 – Filing of return and payment of tax (A) Requirements o Any individual who makes any transfer by gift o For the purpose of the said tax o Make a return under oath in duplicate (1) Each gift made during the calendar year (included in computing net gifts) (2) Deductions claimed and allowable (3) Previous net gifts made during the same calendar year (4) Name of the done (5) Further information as may be required by rules and regulations (B) Time and place of filing and payment o 30 days after the date the gift is made o Tax due shall be paid on the time of filing o AAB, RDO, Revenue Collection Officer, duly authorized Treasure or the city or municipality where the donor was domiciled at the time of transfer. If there is no legal residence in the Philippines, with the Office of the Commissioner o Gifts made by a nonresident, return may be filed with the Philippine Embassy or Consulate or with the Office of the Commissioner Revenue Regulations 10 – Rate of donor’s tax 02-03, Sections 10-13 (A) Scheduler rates of donor’ tax imposable on donation made to a donee who is not a stranger o Brackets for each calendar year (B) Tax payable by the donor if donee is a stranger – 30% o Brother, sister (whether by whole or half blood), spouse, ancestor, and lineal descendant o Relative by consanguinity in the collateral line within the fourth degree of relationship o A legally adopted child is entitled to all the rights and obligations provided by law to legitimate children, and therefore, donation to him shall not be considered as donation made to stranger o Donation made between business organizations an those made between an individual and a business organization shall be considered as donation made to a stranger (C) Contribution for election campaigns 11 - The law that governs the imposition of donor’s tax o Donor’s tax is not a property tax. It is a tax imposed on the transfer of property Frances Lipnica Pabilane | Ateneo Law School 2015 | 3A

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o o o o o

o o

o

by way of gift inter vivos Donor’s tax shall not apply unless there is a completed gift It is completed from the moment the donor knows of the acceptance by the done. It is completed by delivery, either actually or constructively, of the donated property to the done. The law in force at the time of the perfection/ completion of the donation shall govern the imposition of the donor’s tax. For immovable, it must be made in a public document specifying the property donated  Acceptance may be made in the same Deed of Donation  Or in a separate public document  Shall not take effect unless it is done during the lifetime of the donor  If acceptance is made in a separate instrument, the donor shall be notified thereof in authentic form, and this step shall be noted in both instruments. A gift that is incomplete because of reserved powers becomes complete  Donor renounces the power  Right to exercise reserved power ceases Renunciation by surviving spouse of share in conjugal partnership or absolute community after dissolution of marriage  Specifically in favor of… (subject to donor’s tax)  In general (not subject to donor’s tax) The law in force at the time of eh completion of the donation shall govern the imposition of the donor’s tax.

12 – Computation of donor’s tax o The computation of the donor’s tax is on a cumulative basis over a period of one calendar year. o Husband and wife are considered as separate and distinct taxpayer for the purposes of donor’s tax. o However, if what was donated is a conjugal or community property and only the husband signed the deed of donation, there is only one donor for donor’s tax purposes  Without prejudice to the right of the wife to question the validity of donation without her consent 13 – Filing of returns and payment of donor’s tax (A) Requirements – donor to accomplish under oath a donor’s tax return in duplicate (1) Each gift made during the calendar year which is to be included in computing net gifts (2) Deductions claimed and allowable (3) Previous net gift made during the same calendar year (4) Name of the done (5) Relationship of the donor to the done (6) Such further information as the Commissioner may require (B) Time and filing of payment o 30 days from the time the gift is made or completed o Shall be paid at the same time the return is filed o AAB, RDO, Revenue Collection Officer or duly authorized Treasurer of the city or municipality where the donor was domiciled at the time of transfer o No legal residence  Office of the Commissioner o Non-resident  Embassy or Consulate or the Office of Commissioner Frances Lipnica Pabilane | Ateneo Law School 2015 | 3A

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Officer of the Commissioner shall refer to the RDO having jurisdiction over the BIR National Office Building which houses the Office of the Commissioner  presently, RDO 39 – South Quezon City (C) Notice of donation by a donor engaged in business o Given to qualified done institutions duly accredited by the Philippine Council for NGO Certification, Inc. o Notice to the RDO of his place from receipt of the qualified done o Not more than 30# shall be used for administration purposes 

C. Estates and Trusts Sections Code

60-66,

Tax

60 – Imposition of Tax (A) Application of Tax – shall apply to income of estates or of any kind of property held in trust (1) Income accumulated in trust for the benefit of unborn or unascertained persons xxx, and income accumulated or held for future distribution under the terms of a will or trust (2) Income which is to be currently distributed by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct (3) Income received by estates of deceased persons during the period of administration or settlement of estate (4) Income in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated (B) Exception o Employee’s trust which forms part of a pension, stock bonus or profitsharing plan of an employer (1) Contributions are made to the trust by employer or employees  purpose of distributing the earnings of accumulated by trust (2) If impossible, prior to the satisfaction of all liabilities xxx to be used or diverted to, for purposes other than the exclusive benefit of employees o Any amount actually distributed shall be taxable to him in the year which so distributed  to the extent that it exceeds the amount contributed by such employee or distribute (C) Computation and payment (1) In general o Computed upon the taxable income of the estate or trust, except  Revocable trust (63)  Income for the benefit of the grantor (64) (2) Consolidation of income of two or more trusts o Creator of trust is the same person o Beneficiary is the same o Tax shall be assessed and collected from each trustee  Taxable income of the trust administered by him 61 – Taxable income (in the same manner an on the same basis as in the case of an individual) except: (A) Any amount allowed as deduction under Subsection shall not be allowed as a deduction under Subsection B in the same or any succeeding taxable year. (B) Income received by estates of deceased persons during the period of administration or settlement of estate. (C) Trust administered in a foreign country, deductions in A and B shall not be allowed. Frances Lipnica Pabilane | Ateneo Law School 2015 | 3A

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o

The amount of any income included in the return of said trust shall not be included in computing the income of the beneficiaries.

62 – Exemption allowed to estates and trusts o 20,000 from the income of the estate or trust 63 – Revocable trust o When power to revest in the grantor title or any part of the trust is vested (1) In the grantor, either alone or in conjunction with any person (2) In a person not having substantial adverse interest o Income of such part of the trust shall be included in computing the taxable income of the grantor 64 – Income for benefit of grantor (A) Where any part of the income of a trust (shall be included in computing the taxable income of the grantor) (1) In the discretion of grantor or any person  may be held or accumulated for future distribution to the grantor (2) Interest in the disposition of such part of the income, be distributed to the grantor (3) May be applied to the payment of premiums upon policies of insurance on the life of the grantor (B) “In the discretion of the grantor” o Means in the discretion of the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of the part of the income in question 65 – Fiduciary returns o Guardians, trustees, executors, administrators, receivers, conservators and all persons or corporations (acting in fiduciary capacity) o Render in duplicate o Return of the income of the person, trust or estate o Subject to provisions if 20,000php or over o Take oath that he has sufficient knowledge  best of his knowledge and belief  true and correct o Joint fiduciaries  Filed in the province where such fiduciaries reside 66 – Fiduciaries indemnified against claims for taxes paid o For all the payments they shall be required to make under the provisions of this Title o Credit for the amount of such payments against the beneficiary or principal  In any accounting which they make as such trustees or other fiduciaries Revenue Regulations 207 - Estates and trusts No. 2 (Sections 207o "Fiduciary" - applies to all persons or corporations that occupy positions of 213) peculiar confidence towards others, such as trustees, executors, or administrators  Fiduciary (for income tax purposes) - any person or corporation that holds in trust an estate of another person or persons.  Fiduciary relationship – there needs to be a legal trust o In general, the income of a trust for the taxable year which is to be distributed to Frances Lipnica Pabilane | Ateneo Law School 2015 | 3A

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o

the beneficiaries  Must be returned by and will be taxed to the respective beneficiaries  But the income of a trust which is to be accumulated or held for future distribution, whether consisting of ordinary income or gain from the sale of assets included in the corpus of the trust, must be returned by and will be taxed to the trustee. Three exceptions to this general rule are found in the law:  In the case of revocable trust (income from such part of the trust estate title to which may be revested in the grantor should be included in the grantor's return)  In the case of a trust the income of which, in whole or in part, may be held or distributed for the benefit of the grantor (part of the income of the trust, which may be held or distributed for the benefit of the grantor, should be included in the grantor's return)  In the case of a trust administered in a foreign country (trustee is not entitled to the deductions mentioned in subsections (a) and (b) of Section 57 and the net income of the trust undiminished by any amounts distributed, paid or credited to beneficiaries will be taxed to the trustees; however, the income included in the return of the trustees is not to be included in computing the income of the beneficiaries)

208 - Consolidation of incomes of two or more trusts o Requires the consolidation of the income of two or more trusts o Creator of the trust in each instance is the same person o Beneficiary in each instance is the same. o The tax due on the consolidated income will be collected from the trustees in proportion to the net income of the respective trusts. 209 - Estates and trusts taxed to fiduciary o File an annual return for the estate up to the final settlement o File a yearly return covering the income of a trust  Whether created by will or deed, for accumulation of income  Whether for unascertained persons or persons with contingent interests or otherwise.  In both cases the income of the estate or trust is taxed to the fiduciary. o Where under the terms of a will or deed, the trustee, may in his discretion, distribute the income or accumulate it, the income is taxed to the trustee  Irrespective of the exercise of his discretion. o The imposition of the tax is not affected by the fact that an ultimate beneficiary may be a person exempt from tax. 210 - Estate and trust taxed to beneficiaries o Taxable directly to the beneficiary or beneficiaries (a) a trust the income of which is to be distributed annually or regularly; (b) an estate of a decedent the settlement of which is not the object of judicial testamentary or intestate proceedings; (c) properties held under a co-ownership or tenancy in common, the income is taxable directly to the beneficiary or beneficiaries. o Each beneficiary must include in his return his distributive share of the net income of the trust, estate, or co-ownership. o Included in computing the net income of the grantor  In whole or in part subject to revocation by the grantor  For the benefit of the grantor Frances Lipnica Pabilane | Ateneo Law School 2015 | 3A

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211 - Decedent's estate administration o "Period of administration or settlement of the estate"  Period required by the executor or administrator to perform the ordinary duties pertaining to administration  Collection of assets  Payment of debts and legacies. o Estates during the period of administration have but one beneficiary and that beneficiary is the estate. o No taxable income is realized  Passage of property to the executor or administrator on the death of the decedent even though it may have appreciated in value since the decedent acquired it.  Delivery of property in kind to a legatee or distribute o Where prior to the settlement of the estate, the executor or administrator sells property of a decedent's estate for more than the appraised value placed upon it at the death of the decedent  Excess is income, taxable to the estate o Where property is sold after the settlement of the estate by the devisee, legatee or heir at a price greater than the appraised value placed upon it at the time he inherited the property from the decedent  Taxable individually on any profit derived o An allowance paid a widow or heir out of the corpus of the estate is not deductible from gross income. 212 - Liability for tax on estate or trust o Liability for payment of the tax attaches  Executor or administrator  Up to and after his discharge o Liability for the tax also follows  Estate itself  When the estate has been distributed, the heirs, devisees, legatees, and distributors may be required to discharge the amount of the tax due and unpaid, to the extent of and in proportion to any share received. o Where the tax has been paid on the net income of an estate or trust by the fiduciary, the net income on which the tax is paid is free from tax when distributed to the beneficiaries. 213 - Exemption allowed to estate or trusts o Personal exemption of P1,800.  Each beneficiary is entitled to but one personal exemption, no matter from how many trusts he may receive income.

Frances Lipnica Pabilane | Ateneo Law School 2015 | 3A

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Tax Reviewer - Transfer Taxes

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