Guide Notes Estate and Donors Taxes Introduction The general concept of taxation is to tax income of a person.

On the other hand the concept of a transfer tax is a tax on the privilege to transfer certain properties from one person to another. Estate tax or donors tax, is a tax not on the income of the estate nor of the property being donated but on the privilege to transfer certain properties from one person to another person by virtue of the death of a person or donation of the property to another person. Estate Tax (Sections 84, 85 and 86 of the NIRC ) Estate Tax is an excise tax on the privilege of transferring properties owned by a decedent at the time of his death to his/her heirs. Section ! of the "#$% provides for the tax rate applicable to be imposed upon the net estate that are sub&ect of the transfer. 'hile the tax base shall be the net value of the properties sub&ect of transfer.

Gross Estate The (ross estate according to Section ) shall be determined by including at the time of the decedent*s death the value of all property, real or personal, tangible or intangible, and wherever situated. +nd depending upon whether the decedent is a resident or citi,en or non resident alien, this will also determine which properties will be included or excluded in arriving at the gross estate. (ross estate of a decedent according to Section ! includes properties , real or personal, tangible or intangible wherever situated , provided that in case of non resident decedent who at the time of death was not a citi,en of the -hilippines, only that part of the entire gross estate which is situated in the -hilippines shall be included in his taxable estate. 'ith respect to intangible personal property, its inclusion in the gross estate is sub&ect to the rule of reciprocity provided for under Section ./! of the Tax %ode. 0or resident or citi,en therefore , the gross estates is composed of, properties, real or personal, tangible or intangible, wherever situated. Definition of Decedent Interest +ll the interest of the decedent at the time of his death.

Decedent Interest The decedent*s interest which are to be included as part of the gross estate includes the following1 .. 2. 3. !. ). 4. 5. revocable transfer transfer in contemplation of death property passing under general power of appointment proceeds of life insurance prior interests transfer for insufficient consideration capital of surviving spouse

Revocable transfer +ny interest of a decedent which the decedent has transferred at any time either by trust or otherwise, where the en&oyment of thereof

was sub&ect was sub&ect of change at the date of the death of the decedent through the exercise of a power by the decedent himself or in con&unction with any other person to amend or revo6e or terminate and such power is relinguish in contemplation of the decedent*s death.. Except if such transfer is a bonafide sale or for an ade7uate and cull consideration in money or money*s worth. Section ) 8.) 82). ransfer in conte!"lation of death 'hen a decedent has at anytime made a transfer by trust or otherwise in contemplation of or intended to ta6e effect in possession or en&oyment at or after his death O$ has at anytime made a transfer by trust or otherwise under which he has retained for his life or for a period not ascertainable without reference to his death or for any period which does not in fact end before his death, the possession or en&oyment of or the right to the income of the property, or the right either alone or in con&unction with any person to designate the person who shall possess or en&oy the property or the income there from. Section ) 89) "#$% Donations intervivos vs donations !ortis causa :onations intervivos ; are donations made during the lifetime of a person hence it is sub&ect to donors tax. :onations mortis causa are donations made in contemplation of death, that is to ta6e effect at or upon death of the giver, hence it is sub&ect to estate tax <idal de $oces vs -osadas ) -hil. ./ = :i,on vs -osadas )5 -hil. !4) #ro"ert$ "assin% under %eneral "o&er of a""oint!ent To the extent of any property passing under a general power of appointment exercised by the decedent 8.) by will, or 82) by deed executed in contemplation of , or intended to ta6e effect in possession or en&oyment at, or after his death, or 83) by deed under which he has retained for his life or any period not ascertainable without reference to his death or for any period which does not in fact end before his death 8a) the possession or en&oyment of, or the right to the income from, the property, or 8b) the right, either alone or in con&unction with any person, designate the persons who shall possess or en&oy the property or the income therefrom= except in case or a bona fide sale for an ade7uate and full consideration in money or money*s worth. #roceeds of life insurance 'hen a decedent ta6es an insurance policy on his own life and the amounts are receivable by the decedent*s estate, his executor, or administrator irrespective of whether or not the insured retained the power of revocation, O$ the amounts are receivable by any beneficiary designated in the policy of the insurance as revocable beneficiary, the proceeds of which are to be included in the computation of the gross estate. #rior Interests Except as otherwise specifically provided therein, subsections 89), 8%) and 8E) of Section ) shall apply to the transfers, trusts, estates, interests, rights, powers and relin7uishment of powers , as severally enumerated and described therein, whether made, created, arising, existing, exercised or relin7uished before or after the effectivity of the %ode. ransfer for insufficient consideration #f any transfers, of the decedent*s interests is for a consideration in money or money*s worth, but is not a bonafide sale for an ade7uate and full consideration in money or money*s worth, there shall be included in the gross estate only the excess of the fair mar6et value, at the time of death, of the property otherwise to be included on account of such transaction, over the value of the consideration received therefore by the decedent. Ca"ital of the Survivin% S"ouse The capital of the surviving spouse of a decedent shall not, for the purpose of computing the gross estate of a decedent be deemed a part of his or her gross estate.

Valuation of the Net Estate

0or purposes of determining the value of the estate, Section ) of $evenue $egulations "o. 2>2//3 provides that ? the properties comprising the gross estate shall be valued based on their fair mar6et value as of the time of the death. #f the property is a real property, the fair mar6et value shall be the fair mar6et value as determined by the %ommissioner of #nternal $evenue or the fair mar6et value as shown in the schedule of values fixed by the provincial and city assessors whichever is higher@@ #n case of shares of stoc6s, the fair mar6et value shall depend on whether the shares are listed or non>listed in the stoc6 exchanges. Anlisted shares are valued based on the boo6 value while unlisted preferred shares are valued at par value. #n determining the boo6 value of common shares, appraisal surplus shall not be considered as well as the value assigned to preferred shares, if there are any. 0or shares listed in the stoc6 exchanges, the 0B< shall be the arithmetic mean between the highest and lowest 7uotation at a date nearest the date of death, if none is available on the date of death itself. Computation of the net estate #n determining the net estate as the basis for computing the estate tax, the value of the gross estate shall allow certain deductions according to Section 4 of the Tax %ode. Deductions allo&ed to the Estate of a Citi'en or a Resident ( Section 6 Rev Re% )*)++, .. Expenses, losses, indebtedness and taxes a. +ctual funeral expenses or )C of the gross estate whichever is lower but in no case to exceed 2//D pesos. 0uneral expenses include the following1 i. mourning apparel of the surviving spouse and unmarried minor children of the deceased bought and used on the occasion of the burial= ii. expenses for the deceased wa6e, including food and drin6s iii. publication charges for death notices iv. telecommunication expenses incurred in informing relatives of the deceased v. cost of burial, plot, tombstones, monument or mausoleum but not their up6eep vi. #nternment and/or cremation fees and charges= and vii. +ll other expenses incurred for the performance of the rites and ceremonies incident to internment b. Eudicial expenses of the testamentary or intestate proceedings. 8%#$ vs %+ ($. "o. .232/4, Barch 22, 2///) This may also includes expenses incurred in the inventory ta6ing of assets comprising the gross estate, their administration, the payment of debts of the estate, as well as the distribution of the estate among the heirs. This may include1 i. 0ees of executor or administrator ii. +tty*s fees iii. %ourt fees iv. +ccountant*s fees v. +ppraiser*s fees vi. %ler6 hire= vii. %osts of preserving and distributing the estate viii. %osts of storing or maintaining property of the estate and ix. 9ro6erage fees for selling property of the estate. %laims against the estate > %laims against the estate or indebtedness in respect of property may arise out of 1 8.) contract= 82) tort= or 83) operation of law i. $e7uisites for deductibility of claims against the estate .. Fiability represents a personal obligation of the deceased existing at the time of his death except unpaid obligations incurred incident to his death 2. Fiability was contracted in good faith and for ade7uate and full consideration in money or money*s worth= 3. %laim must be valid in law and enforceable in court !. #ndebtedness must not have been condoned by the creditor or must not be barred by prescription ii. Substantiation re7uirements

c.

2.

0or simple loan a. debt instrument must be duly notari,ed at the time the indebtedness was incurred b. duly notari,ed certification from the creditor as t o the unpaid balance of the debt including interest as of the time of death. c. -roof of financial capacity to lend of the creditor as well as the financial statement showing the indebtedness as a receivable. d. Statement under oath executed by the administrator or executor of the estate reflecting the disposition of the proceeds of the loan if said loan was contracted within 3 years prior to the death of the decedent 2. 0or unpaid obligation arose from purchase of goods or services= a. :ocuments evidencing the purchase of goods or service, such as sales invoice/ delivery receipt, or contract for services agreed to be rendered as duly ac6nowledged, executed and signed by the decedent>debtor and creditor, statement of account given by the creditor as duly received by the decedent>debtor, b. :uly notari,ed certification from the creditor as to the unpaid balance of the debt. c. %ertified true copy of the latest audited balance sheet of the creditor with the detailed schedule of its receivable showing the unpaid balance of the decedent>debtor. 8:i,on vs %T+, ($ "o. .!/G!!, +pril 3/ 2// ) d. %laims of the deceased against insolvent persons where the value of the decedent*s interest therein is included in the value of the gross estate. e. Anpaid mortgages, taxes and casualty losses > -roperty previously taxed ; This is a deduction which is allowed to be deducted from the gross estates of citi,ens, resident aliens and non resident estates for properties which were previously sub&ect to donor*s or estate taxes. This 6ind of deductions is also called <anishing :eduction. a. .//C of the value if the prior decedent died within one year prior to the death of the decedent will be deducted, or if the property was transferred to him by gift within the same period prior to his death= b. /C of the value if the prior decedent died more than one year c. 4/C of the value if the prior decedent died more two years d. !/C of the value if the prior decedent died more than 3 years e. 2/C of the value if the prior decedent died more than ! years but not more than ) years prior to the death of the decedent.. Section 4 8+) 82) and 89) 82) , of the Tax %ode.

..

Definition of -anishin% Deduction :eduction from the gross estates of citi,ens, resident aliens and nonresident estates for properties which were previously sub&ect to estates or donor*s taxes. This is called <anishing deductions because the allowed deductions diminishes over a period of ) years. 3. Transfers for public use > amount of all be7uests, legacies, devises or transfers to or for the use of the government of the $epublic of the -hilippines or any political subdivision thereof, for exclusively public purposes. !. 0amily Home a. +mount e7uivalent to the current fair mar6et value of the decedent*s family home1 provided however, that if the said current fair mar6et value exceeds One million pesos8- .,///,///.), the excess shall be sub&ect to estate tax. The family must be certified as such by the barangay captain of the locality. i. :efinition of a family home +rts .)2 and .)3 of the 0amily %ode) ). 4. 5. Standard deduction a. The amount of one Billion pesos 8-.,///,///.) shall be allowed as an additional deduction without need of any substantiation. Bedical expenses a. +ll medical expenses incurred within one year before the death of the decedent shall be allowed as deduction, provided they are duly receipted and not to exceed - )//,///. +mounts received by heirs under $+ !G.5. +ny amount received by the heirs from the decedent*s employer as a conse7uence of the death of the decedent>employee in accordance with $+ !G.5 is allowed as a deduction provided that the amount of the separation benefit is included as part of the gross estate of the decedent.

Co!"utation of the net estate of a decedent &ho is a non resident alien The value of the net estate of a decedent who is a non>resident alien shall be determined by deducting from the value of his gross

estate which at the time of his death is situated in the -hilippines. The following are the allowable deductions1 .. Expenses, losses, indebtedness and taxes 2. -roperty previously taxed 3. Transfer for public use However, no deduction shall be allowed in the case of a non>resident decedent not a citi,en of the -hil, unless the executor, administrator, or anyone of the heirs, as the case maybe, includes in the return re7uired to be filed under Section G/ of the %ode the value at the time of the decedent*s death of that part of his gross estate not situated in the -hilippines. Section 5 $ev $eg 2>2//3 Taxation of estate is governed by the law existing at the time of the death of the decedent and the accrual of the tax due is distinct from the obligation to pay the same. The tax accrues at the time of death, that is within 4 months from the time of the death of the decedent. Section 3, $evenue $egulations 2>2//3. -ayment of Estate Tax is due on the day the $eturn is filed by the Executor , +dministrators, or heirs. The Estate Tax $eturn shall be filed within 4 months from the decedent*s death. Section G $ev $eg 2>2//3 However payment of estate tax maybe extended for meritorious reason, provided it will not exceed ) years in case the estate is settled though courts, or 2 years in case the estate is settled extra&udicially. #n both cases, a bond shall be re7uired. Section G $ev $eg 2>2//3 -ayment can also be in installments Section G $ev $eg 2>2//3 Section G provides that in all cases of transfers sub&ect of tax, or where though exempt from tax, the gross value of the estate exceeds 2/D, the executor, administrator or any of the legal heirs, within 2 months after the death of the decedent, or within ali6e period after 7ualifying as such executor or administrator, shall give a written notice to the %ommissioner of #nternal $evenue.

Donors Tax #t is an excise tax for the privilege of transferring properties by way of donation or a gift during the lifetime of the giver. #t is based on pure act of liberality where the transfer of the property is one without any or ade7uate consideration and without any legal compulsion to do so. The transfer by any person, resident or non resident of the property by gift computed as provided for in Section GG whether in trust or otherwise, whether the gift is direct or indirect and whether the property is real or personal, tangible or intangible. 'hen the transfer is one for less than ade7uate consideration, the difference between the supposed consideration and the actual fair mar6et value of the property will be considered as a donation and such amount shall be included in computing the total amount of the gifts made during the calendar year. Section .//. The tax base, is arrived at on the basis of the total net gifts during the calendar year and the tax rate is in accordance with the schedule provided for under section GG. The donees are 8.) brother, sister 8whether by whole or half>blood), spouse, ancestor and lineal descendant 82) relatives by consanguinity in the collateral line within the fourth degree of relationship The transfer of the total net gifts made during the calendar year shall be sub&ect to tax in accordance with the schedule provided in Section GG of the Tax %ode. 9ut if the donee is a stranger the tax payeable by the donor shall be thirty per cent 83/C) of the net gifts.

Donation to a stran%er #f donation is made to a stranger, the tax payable by the donor shall be thirty per cent 83/C) of the net gifts. Section GG of the Tax %ode. Anli6e in the computation of the net estate, there are no deductions allowed to arrive at the value of the net gifts, instead net gifts means the total value of the gifts made during the calendar year. Certain Gifts &hich are e.e!"ted fro! Donors a. Section /+/ of the a. Code .. (ifts made by a $esident a. :owries or gifts made on account of marriage before its celebration or one year thereafter by parents to each of their legitimate, recogni,ed natural, or adopted children to the extent of the first ./6. b. (ifts made to or for use of the "ational (overnment or any entity created by any of its agencies which is not conducted for profit or to any political subdivision of said government. c. (ifts in favor of educational and/or charitable, religious, cultural or social welfare organi,ation, trust or philanthropic org., or research institution or org. provided however, that not more than 3/ of said gifts shall be used by such donee for administration purposes . (ifts made by a "on>resident not a citi,en of the -hils. a. (ift made to or for the use of the "ational government@. b. (ifts in favor of educational/charitable religious, cultural or social welfare corp., institution, foundation, trust or philanthropic org. or research institution or org. -rovided, however, That not more than 3/C of said gifts shall be used by such donee for administration purposes.

2.

a. Credit for Donor0s a.es "aid to a 1orei%n Countr$ Tax %redit for :onor*s Taxes paid to a 0oreign %ountry applicable to citi,en or a resident at the time of donation, shall be credited with the amount of any donor*s tax of any character and description imposed by the authority of a foreign country. There is a limit to the amount that maybe credited. #t should be &ust proportionate to what was credited. 'hich means the donor shall be entitled to credit the taxes he has paid as taxes for donations made provided the amount of the tax to be allowed to credit such amount of tax paid to the foreign country with regard to such donation. Ca!"ai%n Contributions Section GG of the Tax %ode provides that any contribution in cash or in 6ind to any candidate, political party or coalition of parties for campaign purposes shall be governed by the Election %ode, as amended. Section .3 of $+ 5.44 on one hand states that ? any provision of law to the contrary notwithstanding any contribution in cash or in 6ind to any candidate or political party or coalition of parties for campaign purposes, duly reported to the %OBEFE% shall not be sub&ect to the payment of any gift tax. Section GG of the Tax %ode= Section .3 of $+ 5.44 Banuel +bello, et al vs %#$ ($ .2/52., 0ebruary 23, 2//) -aluation of %ifts !ade in "ro"ert$ The value shall be e7uivalent to the fair mar6et value at the time the gift was made. Section ./2 Tax %ode 1ilin% of donors ta. return and "a$!ent2 0or every donation made, a donor*s tax return must also be filed. The donor*s tax return shall be filed within 3/ days after the date the gift is made or completed and the tax due is paid at the time the return is filed. Section ./3Tax %ode , Section .3 $ev. $eg . "o. 2> 2//3. -roperty sub&ect of donation is not considered as transferred unless donors tax is paid. $egisters of :eeds shall not register in the $egistry of -roperty any document transferring real property or real rights therein or any chattel mortgage, by way of gifts intervivos or mortis causa unless upon a certification from the %ommissioner of #nternal $evenue that the estate or donor*s tax fixed and actually has been paid.

CIR

v.

PINEDA

GR 21 SCRA 1 5

No.

L-22734,

September

15,

1967

!AC"S# At$%$&'o P'%e($ ('e(, &)rv've( b* +'& ,'-e, !e.'/'&'m$ 0$1t$&, $%( 15 /+'.(re%, t+e e.(e&t o,+om '& Att*. 2$%)e. P'%e($. E&t$te pro/ee('%1& ,ere +$( '% Co)rt &o t+$t t+e e&t$te ,$& ('v'(e( $mo%1 $%( $,$r(e( to t+e +e'r&. Att* P'%e($3& &+$re $mo)%te( to $bo)t P2,5 . . A-ter t+e e&t$te pro/ee('%1& ,ere /.o&e(, t+e 0IR '%ve&t'1$te( t+e '%/ome t$4 .'$b'.'t* o- t+e e&t$te -or t+e *e$r& 1945, 1946, 1947 $%( 1945 $%( 't -o)%( t+$t t+e /orre&po%('%1 '%/ome t$4 ret)r%& ,ere %ot -'.e(. "+ere)po%, t+e repre&e%t$t've o- t+e Co..e/tor o- I%ter%$. Reve%)e -'.e( &$'( ret)r%& -or t+e e&t$te '&&)e( $% $&&e&&me%t $%( /+$r1e( t+e -).. $mo)%t to t+e '%+er't$%/e ()e to Att*. P'%e($ ,+o $r1)e( t+$t +e '& .'$b.e o%.* to e4te%t o- +'& proport'o%$. &+$re '% t+e '%+er't$%/e. ISS6E# C$% 0IR /o..e/t t+e -).. $mo)%t o- e&t$te t$4e& -rom $% +e'r3& '%+er't$%/e. 7ELD# 8e&. "+e Gover%me%t /$% re9)'re Att*. P'%e($ to p$* t+e -).. $mo)%t o- t+e t$4e& $&&e&&e(. "+e re$&o% '& t+$t t+e Gover%me%t +$& $ .'e% o% t+e P2,5 . re/e've( b* +'m -rom t+e e&t$te $& +'& &+$re '% t+e '%+er't$%/e, -or )%p$'( '%/ome t$4e& -or ,+'/+ &$'( e&t$te '& .'$b.e. 0* v'rt)e o- &)/+ .'e%, t+e Gover%me%t +$& t+e r'1+t to &)b:e/t t+e propert* '% P'%e($3& po&&e&&'o% to &$t'&-* t+e '%/ome t$4 $&&e&&me%t. A-ter &)/+ p$*me%t, P'%e($ ,'.. +$ve $ r'1+t o- /o%tr'b)t'o% -rom +'& /o-+e'r&, to $/+'eve $% $(:)&tme%t ot+e proper &+$re oe$/+ +e'r '% t+e ('&tr'b)t$b.e e&t$te. A.. to.(, t+e Gover%me%t +$& t,o ,$*& o- /o..e/t'%1 t+e t$4 '% 9)e&t'o%. ;%e, b* 1o'%1 $-ter $.. t+e +e'r& $%( /o..e/t'%1 -rom e$/+ o%e o- t+em t+e $mo)%t o- t+e t$4 proport'o%$te to t+e '%+er't$%/e re/e've(< $%( &e/o%(, '& b* &)b:e/t'%1 &$'( propert* o- t+e e&t$te ,+'/+ '& '% t+e +$%(& o- $% +e'r or tr$%&-eree to t+e p$*me%t o- t+e t$4 ()e. "+'& &e/o%( reme(* '& t+e ver* $ve%)e t+e Gover%me%t too= '% t+'& /$&e to /o..e/t t+e t$4. "+e 0)re$) o- I%ter%$. Reve%)e &+o).( be 1've%, '% '%&t$%/e& .'=e t+e /$&e $t b$r, t+e %e/e&&$r* ('&/ret'o% to $v$'. 't&e.- o- t+e mo&t e4pe('t'o)& ,$* to /o..e/t t+e t$4 $& m$* be e%v'&'o%e( '% t+e p$rt'/).$r prov'&'o% o- t+e "$4 Co(e $bove 9)ote(, be/$)&e t$4e& $re t+e .'-eb.oo( o- 1over%me%t $%( t+e'r prompt $%( /ert$'% $v$'.$b'.'t* '& $% 'mper'o)& %ee(.

DIZON vs. POSADAS 57 PHIL 465 Facts: The story of this case was :on :i,on made a donation inter vivos to his only son. 'hen :on 0elix :i,on died, the son didnIt receive any property from the former. Apon assessment of the inheritance tax against Fuis, part of the properties assessed was the gift made to him during the lifetime of the father.

Issue: 'hether or not section .)!/ of the aforementioned code sub&ect the plaintiff>appellant to the payment of inheritance taxJ

HELD: The ruling of the court was the facts warrant the inference that the transfer was advancement upon the inheritance upon the donee, as the sole and forced heir of the donor, which he w o u l d otherwise be entitled to upon thedeath of thefather. Theargumentfurtheredthat he is not an heir because there was no longer any p r o p e r t y i s fallacious. #n any event, Fuis cannot be deprived of his share in the inheritance because the law confers upon him the status of a forced heir. 0urthermore, following previous rulings, when the law says all gifts, it doubtless refers to gifts inter vivos, and not mortis causa. 9oth the letter and spirit of the law l e a v e s n o r o o m f o r a n y o t h e r i n t e r p r e t a t i o n . S u c h c l e a r l y , i s t h e t e n o r o f t h e language which refers to donations that too6 effect before the donor*s death, and not to mortis causa donations, which can only be made with the formalities of a will, and can only ta6e effect after the donor*s death Vera vs. Navarro, 79 S !A 4"# Facts: #n this case Elsie B. (aches died on Barch G, .G44 without a child. The deceased, however, left a last will and testament in which she made relevant disposition of her estate. Then Eudge Tan was appointed as executor of the testate estate of Elsie B. (aches without a bond. He preliminarily submitted a motion for advance payment of allowances, inheritance, etc. pending the finality of probate of the will. He maintained that there are sufficient assets to cover whatever liability to the government for taxes and other charges. The %ommissioner opposed this motion and showed some proof of claims for estate taxes and inheritance taxes. The court then disapproved the motion of Tan. On a later date, Tan paid the taxes due but there was deficiency in payment of the inheritance taxes. Apon payment, he moved again that he be allowed to pay advance inheritance, allowances, etc. This time, the court allowed him to do so. The %ommissioner tried to oppose this but to no avail. He then tried to garnish the ban6 accounts of the estate but wasn*t able to do so due to the 7uic6 thin6ing of Tan to have the writ of garnishment discharged. Issue: 'hether or not the respondent heirs are re7uired to pay first the inheritance tax before the probate court may authori,e the delivery of the hereditary share pertaining to each of them He$%: The court ruled in favor to the respondents heirs and the court ruled the case by citing a certain provision of the $ules of %ourt, together with the provision in the tax code, the distribution of a decedentIs assets may only be ordered under the following circumstances1 8.) 'hen the inheritance tax, among others, is paid= 82) when a sufficient bond is given to meet the payment of the inheritance tax and all other obligations of the nature enumerated= 83) when the payment of the said tax and all other obligations mentioned in the $ule has been provided for. "one of these were present when the 7uestioned orders were issued at the case at bar.