Estate & Donor's Tax

11/25/20085:29 PM

Atty. Dan Macatangay

Tax II – Estate & Donor’s Tax [Apr 2008]

Assigns:

Read the following:

Estate Tax and Donor’s Tax will be discussed in two meetings each, or 4 meetings combined.

1. Estate Tax (Sec. 84 to 97 and Sec 104) [two meetings]

2. Articles 725, 728, 729, 734, 777, 863 to 866 of the Civil Code of the Philippines

3. Rev. Reg. No. 2-2003

4. Donor’s Tax (Sec. 98 to 104) [two meetings]

5. Hector De Leon NIRC Annotation, vol. 1 [Estate and Donor’s Tax]

5.a SOME REVIEW QUESTIONS

1. How would you classify Estate tax and Donor’s tax according to their nature?

They are excise taxes, meaning taxes imposed on the privilege of transmitting properties gratuitously, either during the lifetime of the transferor or upon his death.

1.a Distinction between estate tax and donor’s tax

ET – transfer takes effect upon death of transferor

DT – takes effect during the lifetime of transferor, except TCD

ET – taxpayer is the estate of transferor/decedent

DT – tax payer is the donor

ET – Tax is based on net estate

DT – Tax is based on net gift

ET – First P200K exempt; top rate 20%

DT – First P100K exempt; top rate 15%; 30% - donation to stranger

ET – Return filed w/in 6 months from death

DT – within 30 days from donation 1.b. Whose Estate is subject to Estate tax?

Resident & non-resident Filipino & resident alien

2. What does Gross Estate include?

a. Decedent’s interest at the time of death (capital, conjugal or community properties) b. Transfers inter vivos

a. Transfer in contemplation of death (sale or donation) b. Revocable transfers c. Property passing under general power of attorney d. Transfer for insufficient consideration

c. Proceeds of Life insurance, subject to certain exceptions

3. Class of Properties included?

Real & personal

4. Class of personal properties?

Tangible & intangible

5. Samples of tangible personal?

Car, furniture, jewelries, etc.

6. Intangibles? Cash, stocks, interest in partnership, insurance, 7. Samples of real properties?

Land, building, and interest therein

8. Where situated?

Within and without the Philippines

9. What is TCD under the Tax Code?

a. transfers to take in possession or enjoyment at or after death b. transfers but retain right for life or period to end at his death possession, enjoyment or income,

or alone or with other right to designate a person to so enjoy. (see Guillermo Cruz vs. CA, et al, GR No. 156894, Dec 2, 2005 and Laureta v. Mata and Magno[4] stating that one who donates with a term, such as the donation effecting at one’s death, but without reservation, already disposes of the thing donated and cannot again dispose of the thing in favor of another.[ [4] No. 19740, 22 March 1923, 44 Phil. 668, 674.)

c. except bona fide sale for a full and adequate consideration in money or in money’s worth d. it does not refer to general expectation of death but death is the controlling motive to make

transfers to avoid taxes; it is a question of fact.

9.a What circumstances are taken into account in determining if

d. Age and state of health, length of time between gift and death, concurrence of making will or short time between will making and transfer. (see Vidal de Roces vs. Posadas 58 Phil 108)

http://www.supremecourt.gov.ph/jurisprudence/2005/dec2005/#_ftn4

http://www.supremecourt.gov.ph/jurisprudence/2005/dec2005/#_ftnref4

TCD exists?

10. What is a revocable transfer?

e. Transfers, where enjoyment is subject to change by exercise of power by decedent or other person to alter, etc.

f. Or where such power is relinquished in contemplation of death 11. What is property passing under general Power of Appointment?

a. Exercised by decedent by (1) will, (2) deed executed in contemplation of death, or where enjoyment or possession to take effect at or after his death or (3) deed retaining for life or period not ascertainable without reference to his death enjoyment, possession or income, or designate other to enjoy, etc. alone or with other

b. except bonafide sale c. it is general if it authorizes donee (decedent) to designate any persons (including the

decedent) who shall enjoy the property from estate of prior decedent. It is special if he cannot appoint himself. To be included in the gross estate, it must be general, exercised by will or deed and passing of property by the exercise of power.

12. Proceeds of Life Insurance

a. insurance on decedents life with estate, executor or adm is beneficiary, whether designation is revocable or not

b. if beneficiary is other than above, if designation is revocable, include, if not, exclude.

13. What is prior interest?

These rules apply to transfers, estates, trusts, rights, powers and relinquishment made or done before or after effectivity of the Tax Code.

14. What is transfer for insufficient consideration? Are there any exception?

There is consideration in money or money’s worth but not a bonafide sale for an adequate or full consideration, short is to be included in the gross estate. Note that the transfer for insufficient consideration must be in contemplation of death, otherwise, it could be subject to donor’s tax, except when the property involved is a capital asset subject to final income tax.

15. How to treat capital of Surviving Spouse?

It is excluded from gross estate.

16. How are conjugal and community properties treated for estate tax purposes?

They are included as part of GE but ½ of SS share is deducted before exemptions

17. How are estate properties valued?

a. The estate is valued at FMV at time of death, but real property shall be valued at the higher of FMV per CIR or of FMV fixed by Prov or City Assessor

b. Usufruct valued using latest Basic Std Mortality Table approved by DF 18. How is estate tax computed? (See below for computations)

Gross estate (exclusive conjugal/community)

Less: Allow deductions (ordinary & special)

Estate after deductions

Less: ½ net share of SS in conjug or com (if applicable)

Net Estate of Decedent

Less: P200,000 and other exemptions

Net Taxable estate

Apply table in Sec 84

Amount of estate tax due. 19. What deductions from gross estate are allowed?

1. Expenses, losses, indebtedness and taxes

a. funeral expenses - 5% of GE but not > P200K; any amount in excess of the cap can’t be claimed under claims vs the estate; it includes mourning apparel of spouse and unmarried children; wake expenses, including food and drinks; publication, telecom to inform relatives; cost of burial plot, etc., internment, burial etc., other rites expenses. After internment not deductible;

b. Judicial exp of testate or intestate; collection of assets, payment of debts or the distribution of properties; expenses of administration. Expenditures for individual benefit of heirs, devisees or legatees not deductible ( CIR v. CA, 328 SCRA 666, 2000); excludes compensation paid to trustees whose work is for the benefit of heirs (Lorenzo v. Posadas, 64 Phil 353, 1937); disallowed premium on bond to qualify as administrator (Sison v. Teodoro, 100 Phil 1055); nor attorneys to defend heirs rights; notarial fees for executing extrajudicial settlement; attorneys fees paid to bank for acting as guardian of decedent property during his lifetime; providing detailed accounting, giving advice to collect his assets and subsequent settlement of estates. Expenses during settlement but not beyond last day for filing – atty fees, court fees, brokerage fees to sell property, etc. (Rev Reg No. 2-2003).; Claims of lawyer v. estate (Salonga Hernandez & Allado v. Pascual, GR No. 127165, May 2, 2006)

c. Claims v estate, notarized PN and if within 3 years from death, accounting how money was used; contracted in good faith, exists at the time of death, valid and legally enforceable and has not prescribed. But unpaid funeral and medical bills are to be claimed under those items of deductions. In Rafael Dizon v CTA & BIR, GR 140944, Apr 30, 2008, SC held that the value of the claims against the estate as of the date of death was the amount deductible from gross estate even if said claims had been reduced thereafter due to compromise.

d. Claims v insolvent but must be included in GE; incapacity of debtor to pay proven e. Unpaid mortgages or indebtedness, if value of property undiminished by mortgages is included

in GE; Must arose from bonafide transaction and full and adequate consideration. f. Unpaid taxes of decedent except income tax on income received after death, property tax

accruing after death and estate tax. g. Losses during settlement of estate from fires, storms, shipwreck, or other casualties, or

robbery, theft, embezzlement, not compensated by insurance or otherwise, and not claimed as deduction for income tax purposes and provided said losses are incurred not later than the last day for payment of estate tax return under Sec 91 Subsection (A),

2. Property previously taxed (vanishing deduction) – property inherited or received as donee within 5 years prior to decedent’s death subject to estate or donor’s tax; 100% of value – 1 year; 80% - 2 years; 60% - 3 years; 40%, 20% within 4 and 5 years. The value should be as declared before, or as included in GE now , which ever is lower, and it was not claimed PPT before. If PPT was mortgaged at the time inherited/donated but paid prior to decedent’s death, such payment will be deduction from allowable PPT deduction.

3. Transfer for public use - bequests, legacies, devisees or transfers to or for use of the gov of RP or any political sub thereof exclusively for public purpose by testamentary or donation mortis causa.

4. Family home – not exceeding P1 MM, excess taxable and certified by Barangay as family home; included in GE; one half share of SS is deducted from GE; then one half share of decedent is deducted from net estate. It can also be claimed by Head of the family. Single cannot claim it.

5. Std deduction – P 1 MM

6. Medical expenses w/in 1 year with receipts not exceeding P500K

7. Amount received under 4917 from employer of decedent but must be included in the estate

8. See Rev Reg 2-2003

20(a) How is Vanishing Deduction or PPT computed?

(1) Value of PPT

Less: Mortgage debt (lien) paid, if any – 1st deduction

= Initial basis

(2) Initial basis Expenses, etc

--------------------- x transfer for PP = 2nd

Value of GE of deduction

present decedent

(3) Initial basis

Less: 2nd deduction

-----------------------

Final basis

Multiplied by rate of deduction

---------------------------------

= vanishing deduction 20. What happens if after payment of taxes there is still a valid claim against the estate that can be deducted from the GE?

If there is order from the court to pay the obligations, there can be a proportionate restitution of the estate tax paid.

21. What is the statute of non-claims? What are exceptions?

Claims against the estate must be filed within the time fixed by the court in the notice which shall not be more than 12 months, nor less than 6 months from the first publication of the notice. (Sec 2, Rule 86 of Rules of Court), otherwise barred. But this does not apply to payment of estate tax. (Pineda v. CFI of Tayabas, 52 Phil 805, Gov v. Pamintuan 55 Phil 13; Vera v. Fernandez, 89 SCRA 199, Mar 30, 1979)

22. What is the rule on tax credit?

In general, estate tax paid in a foreign country is creditable vs local estate tax subject to the:

a. the credit shall not exceed the same proportion of the tax against which the credit is taken,

which the decedent net estate situated in such fx country bears to his entire estate. b. The total credit shall not exceed the same proportion of the tax against which the credit is

taken, which the decedent net estate situated outside the Phil bears to his entire estate. c. This applies both to citizens and resident aliens whose properties located outside the

Philippines are subjected estate or inheritance tax in the countries where they are located.

23. What acquisitions or transmissions are exempt from tax?

What is meant by Fideicommissary?

1. Merger of usufruct with owner of naked title

2. transmission of inheritance or legacy by the fiduciary heir or legatee to the fideicommissary

3.Transmission from first heir, legatee or donee to another beneficiary upon instruction of predecessor

4. social welfare, cultural, and charitable, no part of income inures to benefit of any individual, provided not more than 30% are used for admin

The first three are presumed to have already been taxed. Ex. A transmitted use of a land to B and the title to C. When B dies he transmits use to C.

24. Notice of death

Transfer is subject to tax, or if exempt value exceeds 20K, within 2 months (60 days) from death or from qualifying of administrator

25. Filing Estate Tax return

Subject to tax, or if exempt but value exceeds 200K or regardless of value if real property, stocks, motor vehicles, where clearance is required, need to file a return; If more than 2MM, audited statement is needed; within 6 months from death file the return; file certified true copy of court order of distribution with BIR

Extension 30 days fiom filing of return; Filing with the AAB or RDO, Collection Officer or Treasurer of mun or city where decedent was domiciled at time of death. If none, CIR.

There is need to obtain separate TIN for the estate, which is treated as a separate taxpayer. 26. When is the time of payment?

a. Pay a you file. b. Extension – to avoid undue hardship, 5 years if there is court hearing and 2 years if extra-

judicially. It suspends the running of prescriptive period. c. In case of assessment due to negligence, intentional disregard of rules, or fraud, no extension

shall be granted. d. Bond is required in an amount of not more than twice the amount of tax.

27. Who is liable to pay the tax?

1. Primarily, executor or administrator shall be liable to pay the tax before delivery to beneficiary his share.

2. Such beneficiary shall, to the extent of his distributive share of the estate, be subsidiarily liable for the payment of such portion of the tax as his distributive share bears to the total value of net estate.

3. If there is no exec or adm, then any person in actual or constructive possession of the property

4. Tax can be collected even after distribution (Palarca v. CIR, 16661, Jan 31, 1962)

5. Maybe asked to pay tax up to the extent of share received even if said tax is more than his proportionate share of the tax. Gov has option to collect only share or the entire tax by enforcing lien (CIR v. Pineda, 21 SCRA 105, 1967); see also Gonzales v CTA & CIR, Dec 19, 1980]

6. Agency is terminated by death. ITR filed by said agent is not valid and does not bind the estate. Thus it cannot be used to as basis to reckon the prescriptive period to collect the tax. Administrator takes over the mgt of the estate. (see Estate of the Late Juliana Diez Vda de Gabriel v Cir, 421 SCRA 266 (2004)

28. How is the exec or admin discharged?

File written application with CIR; his discharge does not necessarily mean estate is also discharged.

29. What are the duties of Register of Deeds, Lawyer, Notary Public, government officer and Debtors; corporation shares; bank?

Shall not register without CIR certification; if has prepared or acknowledged documents donation intervivos, or mortis causa, notary public should furnish CIR info; debtor should not pay without CIR certification, but may if the debt is included in the estate.; should not allow withdrawal without certification unless the amount is not more than 20K

Who should implement the final decision of the SC affirming the decision of the CTA ordering the admin to pay tax, probate court or CTA?

CTA has the power to enforce it. [Gonzalez v. CTA & CIR, Dec 19, 1980]

* Computation of Estate Tax.

SECTION 8 of Rev 2-2003. Proper Presentation Of Funeral Expenses, Family Home, Standard Deduction, And Medical Expenses As Deductions From The Gross Estate. — Illustrative examples to properly present the manner of deducting funeral expenses, family home, standard deduction, and medical expenses from the gross estate in accordance with the provisions of the Code.

"Illustrations:

(1) Decedent is an unmarried head of a family:

(a) Real and personal properties P5,000,000

Family Home 2,000,000

—————

Gross Estate P7,000,000

==========

Less: Deductions

Ordinary Deductions

Funeral Expenses P200,000

Other Deductions 1,300,000 P1,500,000

—————

Special Deductions

Family Home P1,000,000

Standard Deduction 1,000,000

Medical Expenses* 500,000 2,500,000

————— —————

Total Deductions P4,000,000

—————

Net Taxable Estate P3,000,000

==========

Although the family home is valued at P2 million, the maximum allowable deduction for the family home is P1million only.

Note: * Medical expenses are not included in the deductions referred under Section 86(A)(1) of the Code but are treated as a special item of deduction under Section 86(A)(6) of the same Code.

(b) Real and personal properties P5,000,000

Family Home 800,000

—————

Gross Estate P5,800,000

==========

Less: Deductions

Ordinary Deductions

Funeral Expenses P200,000

Other Deductions 1,300,000 P1,500,000

—————

Special Deductions

Family Home P800,000

Standard Deduction 1,000,000

Medical Expenses 500,000 2,300,000

————— —————

Total Deductions P3,800,000

—————


==========

Note: Deduction for family home is allowed for P800,000 only which is the declared value of the family home.

(2) Decedent is a married man with surviving spouse:

(a) The family home is his exclusive property —

Exclusive Conjugal Total

Conjugal Properties:

Real Properties P5,000,000 P5,000,000

Exclusive Properties:


Other Exclusive properties 2,500,000 4,500,000

————— ————— —————

Gross Estate P4,500,000 P5,000,000 P9,500,000

========= ========= =========

Less:

Ordinary Deductions

Conjugal Deductions

Funeral Expenses (P200,000) (200,000)

Other Deductions (1,300,000) (1,300,000)

————— —————

Total Conjugal Deductions (P1,500,000) (P1,500,000)

—————

Net Conjugal Estate P3,500,000

—————

Special Deductions

Family Home (1,000,000)

Standard Deduction (1,000,000)

Medical Expenses (500,000)

Total Deductions (P4,000,000)

—————

Net Estate P5,500,000

Less: ½ Share of Surviving Spouse

Conjugal Property P5,000,000

Conjugal Deduction (1,500,000)

————


————

(P3,500,000/2) (1,750,000)

—————


—————

(b) Family home is a conjugal or community property —




Other Real Properties P5,000,000 P7,000,000

Exclusive Properties P2,000,000 - 2,000,000

————— ————— —————

Gross Estate P2,000,000 P7,000,000 P9,000,000

—————

Less: Deductions

Ordinary Deductions

Conjugal Deductions



————— —————


—————


—————

Special Deductions

Family Home (1,000,000)



—————


—————





————


————

(P5,500,000/2) (2,750,000)

—————


—————

(c) Same facts and figures as in (b) except that the family home has a fair market value/zonal value of only P1,500,000.



Family Home P1,500,000 P1,500,000


Exclusive Properties P2,000,000 - 2,000,000

————— ————— —————

Gross Estate P2,000,000 P6,500,000 P8,500,000

—————

Less:

Ordinary Deductions

Conjugal Deductions



————— —————


—————


—————

Special Deductions

Family Home (750,000)



—————


—————





————


————

(P5,000,000/2) (2,500,000)

—————


—————

Note: Since the fair market value/zonal value of the conjugal family home in the above example is P1,500,000, the family home deduction corresponding to ½ of such fair market value/zonal value is P750,000 only.

(d) Family home is conjugal property, but lot on which it stands is exclusive property —


Conjugal Properties


Family Home P1,000,000 1,000,000

Exclusive Properties

Other Real Properties P2,000,000 2,000,000

Family lot 400,000 400,000

————— ————— —————

Gross Estate P2,400,000 P4,000,000 P6,400,000

—————

Less:

Ordinary Deductions

Conjugal Deductions



————— —————


—————


—————

Special Deductions

Family Home

Exclusive Lot P400,000

Conjugal Home

(P1,000,000/2) (500,000) (900,000)

—————



—————


—————





————


————

(P2,500,000/2) (1,250,000)

—————


6. Guillermo Cruz vs. CA, et al, GR No. 156894, Dec 2, 2005. The RTC ruled that the deed of donation, on which the respondents based their claim, was a donation inter vivos because, other than the title and the phrase “to take effect after her death”, the deed, as it was worded, clearly disposed of the property with finality and without reservation. It cited the landmark case of Laureta v. Mata and Magno[4] stating that one who donates with a term, such as the donation effecting at one’s death, but without reservation, already disposes of the thing donated and cannot again dispose the thing in favor of another.[ [4] No. 19740, 22 March 1923, 44 Phil. 668, 674.]

http://www.supremecourt.gov.ph/jurisprudence/2005/dec2005/#_ftnref4

http://www.supremecourt.gov.ph/jurisprudence/2005/dec2005/#_ftn4

7. Vidal de Roces vs.Posadas 58 Phil 108 (TICD) On March 10 and 12, 1925, Esperanza Tuazon, by means of public documents, donated certain parcels of land situated in Manila to the plaintiffs herein, who, with their respective husbands, accepted them in the same public documents, which were duly recorded in the registry of deeds. By virtue of said donations, the plaintiffs took possession of the said lands, received the fruits thereof and obtained the corresponding transfer certificates of title. On January 5, 1926, the donor died in the City of Manila without leaving any forced heir and in her will which was admitted to probate, she bequeathed to each of the donees the sum of P5,000. Held: According to our view of the case, it follows that, if the gifts received by the appellants were not given mortis causa, the same would not be subject to the payment of an inheritance tax and said appellants would have the right to recover the sums of money claimed by them. Hence the necessity of ascertaining whether the complaint contains an allegation to that effect. We have examined said complaint and found nothing of that nature. On the contrary, it may be inferred from the allegations contained in paragraphs 2 and 7 thereof that said donations inter vivos were made in consideration of the donor's death. We refer to the allegations that such transmissions were effected in the month of March, 1925, that the donor died in January, 1926, and that the donees were instituted legatees in the donor's will which was admitted to probate. It is from these allegations, especially the last that we infer a presumption juris tantum that said donations were made mortis causa and, as such, are subject to the payment of inheritance tax.

8. CIR v. CA & Pajonar, 328 SCRA 666, Mar 22, 2000 (Judicial expenses) The sole issue in this case involves the construction of section 79 10 of the National Internal Revenue Code 11 (Tax Code) which provides for the allowable deductions from the gross estate of the decedent. More particularly, the question is whether the notarial fee paid for the extrajudicial settlement in the amount of P60,753 and the attorney's fees in the guardianship proceedings in the amount of P50,000 may be allowed as deductions from the gross estate of decedent in order to arrive at the value of the net estate. Held: We answer this question in the affirmative, thereby upholding the decisions of the appellate courts.

9. CIR v. Pineda, 21 SCRA 105, Sep 15, 1967 (ET-Collection) The Commissioner of Internal Revenue has appealed to Us and has proposed to hold Manuel B. Pineda liable for the payment of all the taxes found by the Tax Court to be due from the estate in the total amount of P760.28 instead of only for the amount of taxes corresponding to his share in the estate. Manuel B. Pineda opposes the proposition on the ground that as an heir he is liable for unpaid income tax due the estate only up to the extent of and in proportion to any share he received. He relies on Government of the Philippine Islands vs. Pamintuan 2 where We held that "after the partition of an estate, heirs and distributees are liable individually for the payment of all lawful outstanding claims against the estate in proportion to the amount or value of the property they have respectively received from the estate." Held: We hold that the Government can require Manuel B. Pineda to pay the full amount of the taxes assessed. 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. 3 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. The reason is that the Government has a lien on the P2,500.00 received by him from the estate as his share in the inheritance, for unpaid income taxes 4 for which said estate is liable, (The govt has two ways of collecting the tax. One, by going after the heirs and collecting from each one of them the amount of tax proportionate to the inheritance received; and two, pursuant to the lien created by Sec 219 of the tax code upon all property and property rights belonging to the taxpayer for unpaid income tax, by subjecting the properties of the estate which re in the hands of the heirs or transferee. The Bureau of Internal Revenue should be given, in instances like the case at bar, the necessary discretion to avail itself of the most expeditious way to collect the tax as may be envisioned in the particular provision of the Tax Code above quoted, because taxes are the lifeblood of Government and their prompt and certain availability is an imperious need.)

10. Vera v. Fernandez, 89 SCRA 199, Mar 30, 1979 – (ET v Rules of Court) Appeal from two orders of the Court of First Instance of Negros Occidental, Branch V in Special Proceedings No. 7794, entitled: "Intestate

Estate of Luis D. Tongoy," the first dated July 29, 1969 dismissing the Motion for Allowance of Claim and for an Order of Payment of Taxes by the Government of the Republic of the Philippines against the Estate of the late Luis D. Tongoy, for deficiency income taxes for the years 1963 and 1964 of the decedent for being barred by the statutes of non-claims [Sec 2 & 5, Rule 86 of the Rules of Court]. Held: Not barred. Taxes not among mentioned in the lists of claims to be filed within the period prescribed by the Rules of Court. [EXPRESSIO UNIUS EST EXCLUSIO ALTERIUS]; Lifeblood theory; taxes can be collected even in the hands of beneficiaries with more reason prior to distribution; lien.

11. Marcos II v. CA & CIR 273 SCRA 47 (1997) – (same) The approval of the court, sitting in probate, or as a settlement tribunal over the deceased is not a mandatory requirement in the collection of estate taxes. It cannot therefore be argued that the Tax Bureau erred in proceeding with the levying and sale of the properties allegedly owned by the late President, on the ground that it was required to seek first the probate court's sanction. There is nothing in the Tax Code, and in the pertinent remedial laws that implies the necessity of the probate or estate settlement court's approval of the state's claim for estate taxes, before the same can be enforced and collected. On the contrary, under Section 87 of the NIRC, it is the probate or settlement court which is bidden not to authorize the executor or judicial administrator of the decedent's estate to deliver any distributive share to any party interested in the estate, unless it is shown a Certification by the Commissioner of Internal Revenue that the estate taxes have been paid. This provision disproves the petitioner's contention that it is the probate court which approves the assessment and collection of the estate tax. Apart from failing to file the required estate tax return within the time required for the filing of the same, petitioner, and the other heirs never questioned the assessments served upon them, allowing the same to lapse into finality, and prompting the BIR to collect the said taxes by levying upon the properties left by President Marcos. The Notices of Levy upon real property were issued within the prescriptive period and in accordance with the provisions of the present Tax Code. The deficiency tax assessment, having already become final executory, and demandable, the same can now be collected through the summary remedy for distraint or levy pursuant to Section 205 of the NIRC.

12. Pirovano v. CIR, GR No. L- 19865, Jul 31, 1965 –There is nothing on record to show that when the late Enrico Pirovano rendered services as President and General Manager of the De la Rama Steamship Co. he was not fully compensated for such services, or that, because they were "largely responsible for the rapid and very successful development of the activities of the company" (Resol. of July 10, 1946), Pirovano expected or was promised further compensation over and in addition to his regular emoluments as President and General Manager. The fact that his services contributed in a large measure to the success of the company did not give rise to a recoverable debt, and the conveyances made by the company to his heirs remain a gift or donation. This is emphasized by the director's Resolution of January 6, 1947, that "out of gratitude" the company decided to renounce in favor of Pirovano's heirs the proceeds of the life insurance policies in question. The true consideration for the donation was, therefore, the company's gratitude for his services, and not the services themselves. Thus subject to donor’s and donee’s tax. [See Art 726 of the Civil Code]

13. Collector vs. Rueda, 42 SCRA 23, GR L No. 13250, Oct 29, 1971 –[ Sec. 98 (now Sec. 104)]. Spanish national who resided in Tangier, Morocco which exempted bines muebles from this tax. Held: What is undeniable is that even prior to the De Lara ruling, this Court did commit itself to the doctrine that even a tiny principality, that of Liechtenstein, hardly an international personality in the traditional sense, did fall under this exempt category. So it appears in an opinion of the Court by the then Acting Chief Justice Bengzon, who thereafter assumed that position in a permanent capacity, in Riene v. Collector of Internal Revenue. 19 As was therein noted: 'The Board found from the documents submitted to it — proof of the laws of Liechtenstein — that said country does not impose estate, inheritance and gift taxes on intangible personal property of Filipino citizens not residing in that country. Wherefore, the Board declared that pursuant to the exemption above established, no estate or inheritance taxes were collectible, Ludwig Kiene being a resident of Liechtenstein when he passed away." 20 Then came this definitive ruling "The Collector — hereafter named respondent — cites decisions of the United States Supreme Court and of this Court, holding that intangible personal property in the Philippines belonging to a non-resident foreigner, who died outside of this country is subject to the estate tax, in disregard of the principle 'mobilia sequuntur personam'. Such property admittedly is taxable here. Without the proviso above quoted, the shares of stock owned here by the Ludwig Kiene

would be concededly subject to estate and inheritance taxes. Nevertheless our Congress chose to make an exemption where conditions are such that demand reciprocity — as in this case. And the exemption must be honored." 21 [The reciprocity clause now applies to both estate tax and donor’s tax. It is not essential that the foreign country possesses international personality in the traditional sense. Thus intangible property of the citizen of Tangier, Morocco which does not impose an estate tax and which does have international standing was allowed to apply the reciprocity clause.under Sec. 98 (now Sec. 104).]

14. Estate of the Late Juliana Diez Vda de Gabriel v Cir, 421 SCRA 266 (Jan 27, 2004) During the lifetime of the decedent, Juliana Vda. De Gabriel, her business affairs were managed by the Philippine Trust Company (Philtrust). The decedent died on April 3, 1979. Two days after her death, Philtrust, through its Trust Officer, Atty. Antonio M. Nuyles, filed her Income Tax Return for 1978. The return did not indicate that the decedent had died. Held: The most crucial point to be remembered is that Philtrust had absolutely no legal relationship to the deceased, or to her Estate. There was therefore no assessment served on the Estate as to the alleged underpayment of tax. Absent this assessment, no proceedings could be initiated in court for the collection of said tax, 21 and respondent's claim for collection, filed with the probate court only on November 22, 1984, was barred for having been made beyond the five-year prescriptive period set by law. In Republic v. De le Rama, 20 we clarified that, when an estate is under administration, notice must be sent to the administrator of the estate, since it is the said administrator, as representative of the estate, who has the legal obligation to pay and discharge all debts of the estate and to perform all orders of the court. In that case, legal notice of the assessment was sent to two heirs, neither one of whom had any authority to represent the estate. [124 Phil. 1493 (1966).] [The death of a taxpayer automatically severed the legal relationship between her and her agent, and such could not be revived by the mere fact that the agent continued to act as such when two days after the principal’s death, the agent filed the principal’s income tax return. Sec 104 of the NIRC of 1977 requiring notice of death of taxpayer to be filed, falls in Title III, Chapter I and pertains to “all cases of transfers subject to tax” or where the “gross value of the estate exceeds three hundred pesos” and has absolutely no applicability to a case for deficiency income tax. Although the administrator of the estate may have been remiss in his legal obligation to inform respondent of the decedent’s death, the consequence thereof, as provided in Sec 119 of the NIRC x x x sanctions on the administrator. Where there was never any valid notice of an assessment, it could not have become final, executory and uncontestable, and for failure to make the assessment within the five year period provided in Sec 318 of the NIRC of 1977, the CIR’s claims against the taxpayer is barred. The rule that an assessment is deemed made for the purpose of giving effect to such assessment when the notice is released, mailed or sent to the taxpayer and not merely to a disinterested party. When the estate is under administration, notice must be sent to the administrator of the estate. Estate of the Late Juliana Diez Vda de Gabriel v Cir, 421 SCRA 266 (2004)]

15. CIR v Benigno Toda, 438 SCRA 290 (2004) – Claims against the heirs of the decedent meaning of fraud; tax avoidance/evasion.

16. Domingo v. Garlitos, 8 SCRA 443 [1963](exception: allowed) [Estate and Inheritance taxes v. specifically appropriated fund for the payment of obligation to the estate were allowed to be compensated.]

17. What are the requirements for the deductibility of donations for income tax purposes? (Mariposa Properties, Inc. v. Commissioner of Internal Revenue, CTA Case No. 6402, February 13, 2007)In deciding on the BIR’s disallowance of deduction for donations made to a private foundation, the CTA required the donor to prove compliance of both the donor and the donee with the requirements for deductibility of donations. Hence, for failure of the donor to present proof that the foundation’s income tax return and audited financial statements, as well as the annual information report of the foundation were submitted to BIR as required in the regulations, the deduction for donations was disallowed.

18. When should the value of claims against the estate be reckoned with for purposes of deducting the same from the Gross Estate?

This involves the contraction of Sec 79 of the National Internal Revenue Code[1][59] (Tax Code) which provides for the allowable deductions from the gross estate of the decedent. The specific question is whether the actual claims of the aforementioned creditors may be fully allowed as deductions from the gross estate of Jose despite the fact that the said claims were reduced or condoned through compromise agreements entered into by the Estate with its creditors.

We express our agreement with the date-of-death valuation rule, made pursuant to the ruling of the U.S. Supreme Court in Ithaca Trust Co. v. United States.[2][68] First. There is no law, nor do we discern any legislative intent in our tax laws, which disregards the date-of-death valuation principle and particularly provides that post-death developments must be considered in determining the net value of the estate. It bears emphasis that tax burdens are not to be imposed, nor presumed to be imposed, beyond what the statute expressly and clearly imports, tax statutes being construed strictissimi juris against the government.[3][69] Any doubt on whether a person, article or activity is taxable is generally resolved against taxation.[4][70]

Second. Such construction finds relevance and consistency in our Rules on Special Proceedings wherein the term "claims" required to be presented against a decedent's estate is generally construed to mean debts or demands of a pecuniary nature which could have been enforced against the deceased in his lifetime, or liability contracted by the deceased before his death.[5][71] Therefore, the claims existing at the time of death are significant to, and should be made the basis of, the determination of allowable deductions. (Rafael Arsenio Dizon, as administrator of Jose Fernandez v CTA & CIR, GR 140944, Apr 30, 2008)

DONOR’S TAX

1. What is a donation?

Donation is an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another, who accepts it. [Art 725, Civil Code]. Donation inter vivos is one made between living person, and which is perfected from the moment the donor knows of the acceptance of the donee. [Art 734, ibid.]. It is subject to donor’s tax. Donation mortis causa is one which is to take effect upon the death of the donor and, therefore partakes of the nature of testamentary disposition. [Art. 728, ibid.] It is subject to estate tax.

It is an excise tax on the privilege of transferring property to another gratuitously, thus it does not rest upon general ownership. [Bromley v McCaughn, 280 U.S. 124]. It is intended to supplement and prevent the circumvention of estate tax and to prevent the avoidance of income tax through the device of splitting income among members of a family to avoid the progressive impact of income taxation.

2. What are the requisites for a valid donation for purposes of donor’s tax? a. Consent, subject matter and cause or consideration [as in contracts] b. Form [delivery in some cases; execution of a public document] c. Consent or acceptance of the donee during the lifetime of the donor d. Irrevocability [except for legal causes] e. Animus donandi [intent to benefit donee]; liberality is more emphasized than gratuitously.

Commodatum is gratuitous but it is not considered a donation. f. Resultant decrease in the patrimony of the donor [Giving of mortgage as security is not

donation because there is no decrease in the assets of donor] 3. Distinguish donor’s tax from estate tax.

ET – transfer takes effect upon death of transferor

DT – takes effect during the lifetime of transferor, except TCD

ET – taxpayer is the estate of transferor/decedent

DT – tax payer is the donor

ET – Tax is based on net estate

DT – Tax is based on net gift

ET – First P200K exempt; top rate 20%

DT – First P100K exempt; top rate 15%; 30% - donation to stranger

ET – Return filed w/in 6 months from death

DT – within 30 days from donation

4. What are the objectives of donor’s tax? a. To supplement Estate Tax, whose tax rates are higher than DT, given that there is a

tendency to lower one’s tax liability by resorting to some tax planning exercise. The lower DT rates are compensated by the fact that taxes are collected earlier than ET.

b. Same objectives for ET 5. Is donative intent a mandatory requisite for the imposition of donor’s tax?

a. No. In case of sale for less than the full and adequate consideration. The law presumes presence of donative intent thus imposes DT on the difference.

6. Is the proceeds of a life insurance policy taken by an employer over the life of employee subject to donor’s tax when distributed to the heirs of employee?

a. Pirovano v. CIR, GR No. L- 19865, Jul 31, 1965 –There is nothing on record to show that when the late Enrico Pirovano rendered services as President and General Manager of the De la Rama Steamship Co. he was not fully compensated for such services, or that, because they were "largely responsible for the rapid and very successful development of the activities of the company" (Resol. of July 10, 1946), Pirovano expected or was promised further compensation over and in addition to his regular emoluments as President and General Manager. The fact that his services contributed in a large measure to the success of the company did not give rise to a recoverable debt, and the conveyances made by the company to his heirs remain a gift or donation. This is emphasized by the director's Resolution of January 6, 1947, that "out of gratitude" the company decided to renounce in favor of Pirovano's heirs the proceeds of the life insurance policies in question. The true consideration for the donation was, therefore, the company's gratitude for his services, and not the services themselves. Thus subject to donor’s and donee’s tax. [See Art 726 of the Civil Code]; See also current provision of the NIRC on Donor’s Tax for possible exclusion.

7. What are the classifications of donation a. According to motive, purpose or casue

i. Simple – no string attached ii. Remuneratory 1st kind – to reward past services but not demandable debt

iii. Remuneratory 2nd kind - combination of onerous and remuneratory iv. Onerous

b. According to time of taking effect i. Inter vivos

ii. In preasenti to be delivered in futoro [considered inter vivos] iii. Mortis Causa

c. According to occasion i. Ordinary

ii. Donation propter nuptias d. According to object donated

i. Corporeal ii. Incorporeal – alienable rights

e. According to the nature of Donor i. Natural person [Citizen or alien, either res and non res]

ii. Juridical person [domestic or foreign] f. According to the relation of Donor to Donee

i. Relative

ii. Stranger g. According taxability

i. Taxable ii. Exempt

8. A donated a parcel of land to B reserving to A the usufruct until his death. The following day A died. Is this subject to donor’s tax, or to estate tax? Donor’s tax.

9. A renounces his receivable from B provided the latter renounces his receivable from C. Is there a donation? If so, between whom? A to C.

10. Are remuneratory donations subject to donor’s tax? It depends if it’s the first or the second kind. The latter is subject to donor’s tax.

11. What are the properties included in the term “gift”? What are excluded?

"SECTION 104. Definitions. — For purposes of this Title, the terms 'gross estate' and 'gifts' include real and personal property, whether tangible or intangible, or mixed, wherever situated: Provided, however, That where the decedent or donor was a nonresident alien at the time of his death or donation, as the case may be, his real and personal property so transferred but which are situated outside the Philippines shall not be included as part of his 'gross estate' or 'gross gift': Provided, further, That franchise which must be exercised in the Philippines; shares, obligations or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws; shares, obligations or bonds by any foreign corporation eighty-five percent (85%) of the business of which is located in the Philippines, shares, obligations or bonds issued by any foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines; shares or rights in any partnership, business or industry established in the Philippines, shall be considered as situated in the Philippines:

Provided, still further, That no tax shall be collected under this Title in respect of intangible personal property: (a) if the decedent at the time of his death or the donor at the time of the donation was a citizen and resident of a foreign country which at the time of his 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, or (b) if the laws of the foreign country of which the decedent or donor was a citizen and resident at the time of his death or donation 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.[6]

12. Who are subject to donor’s tax?

"SECTION 98. Imposition of Tax. — "(A) There shall be levied, assessed, collected and paid upon the transfer by any person, resident or nonresident, of the property by gift, a tax, computed as provided in Section 99.

13. What are the kinds of donors? Relatives or Strangers. 14. How are they taxed on their donations? Relatives are subject to the graduated gift tax rates.

Strangers to a flat rate of 30% 15. Who are considered strangers for donation tax purposes?

"(B) Tax Payable by Donor if Donee is a Stranger. — When the donee or beneficiary is a stranger, the tax payable by the donor shall be thirty percent (30%) of the net gifts. For the purpose of this tax, a 'stranger' is a person who is not a:

"(1) Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant; [7]or

"(2) Relative by consanguinity in the collateral line within the fourth degree of relationship.

16. A, a widow of the decedent, renounced her inheritance in favor of her co-heirs. Is this subject to donor’s tax? If general renounciation, no. If specific, yes.

17. She renounced her share in the conjugal properties after the dissolution of the marriage, is this subject to donor’s tax? Yes.

18. A Corp. donated P1 Million to the candidacy of the Pres. GMA in the last election. Is this subject to donor’s tax? No, if donation is in accordance with the provisions of the Omnibus Election Code.

19. B donated a diamond ring to C, his confidential secretary on the occasion of the latter’s birthday. Is this subject to donor’s tax? If so, how?

20. D donated P500,000 to his first cousin, who was reviewing for the BAR? Is this subject to donor’s tax? How?

21. A, non resident alien donated his Makati condo unit worth P5 Million to B, his Filipino friend. Is this subject to donor’s tax? Is A entitled to tax credit imposed by his country of residence on said donation? No, because a non-resident is subject to DT only properties located in the Philippines. TC is available for citizens and resident aliens whose donated properties are located in a foreign country who imposed DT on the transfer.

22. How are donations of conjugal properties treated for donor’s tax purposes? 23. How are gifts valued for donor’s tax purposes? Personal/Real? 24. What happens if the FMV of a real property donated is higher than the zonal valuation pegged by the

BIR? What is the basis for donor’tax purposes? See August 9, 1989 BIR RULING NO. 167-89 29(h)(3) 228-88 167-89 [see also FEBTC v Quezon City case GR 129130, December 9, 2005]

25. How is donor’s tax computed? All donations during the year are cumulatively computed. 26. Who should file the return? And when? Donor files the Donor’s tax return within 30 days from

donation. 27. Is an assessment from BIR required in order to pay the tax? No. Pay as you File system. 28. Estate of the Late Juliana Diez Vda de Gabriel v Cir, 421 SCRA 266 (2004) 29. Guillermo Cruz vs. CA, et al, GR No. 156894, Dec 2, 2005. 30. FIRST DIVISION [G.R. No. 120721. February 23, 2005] MANUEL G. ABELLO, JOSE C.

CONCEPCION, TEODORO D. REGALA, AVELINO V. CRUZ, petitioners, vs. COMMISSIONER OF INTERNAL REVENUE and COURT OF APPEALS, respondents. The NIRC does not define transfer of property by gift. However, Article 18 of the Civil Code, states: In matters which are governed by the Code of Commerce and special laws, their deficiency shall be supplied by the provisions of this Code. Thus, reference may be made to the definition of a donation in the Civil Code. Article 725 of said Code defines donation as: . an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another, who accepts it. Donation has the following elements: (a) the reduction of the patrimony of the donor; (b) the increase in the patrimony of the donee; and, (c) the intent to do an act of liberality or animus donandi.[7] The present case falls squarely within the definition of a donation. Petitioners, the late Manuel G. Abello [8], Jose C. Concepcion, Teodoro D. Regala and Avelino V. Cruz, each gave P882,661.31 to the campaign funds of Senator Edgardo Angara, without any material consideration. All three elements of a donation are present. The patrimony of the four petitioners were reduced by P882,661.31 each. Senator Edgardo Angara’s patrimony correspondingly increased by P3,530,645.24[9]. There was intent to do an act of liberality or animus donandi was present since each of the petitioners gave their contributions without any

http://www.supremecourt.gov.ph/jurisprudence/2005/feb2005/#_ftn9



consideration. Taken together with the Civil Code definition of donation, Section 91 of the NIRC is clear and unambiguous, thereby leaving no room for construction. Finally, this Court takes note of the fact that subsequent to the donations involved in this case, Congress approved Republic Act No. 7166 on November 25, 1991, providing in Section 13 thereof that political/electoral contributions, duly reported to the Commission on Elections, are not subject to the payment of any gift tax. This all the more shows that the political contributions herein made are subject to the payment of gift taxes, since the same were made prior to the exempting legislation, and Republic Act No. 7166 provides no retroactive effect on this point.

31. What are the requirements for the deductibility of donations for income tax purposes? (Mariposa Properties, Inc. v. Commissioner of Internal Revenue, CTA Case No. 6402, February 13, 2007)In deciding on the BIR’s disallowance of deduction for donations made to a private foundation, the CTA required the donor to prove compliance of both the donor and the donee with the requirements for deductibility of donations. Hence, for failure of the donor to present proof that the foundation’s income tax return and audited financial statements, as well as the annual information report of the foundation were submitted to BIR as required in the regulations, the deduction for donations was disallowed.

1

Product of Atty. Danilo A. Macatangay

[1]

[2]

[3]

[4]

[5]

[6] A Spanish national who resided in Tangier, Morocco which exempted bienes muebles from this tax. Held: What is undeniable is that even prior to the De Lara ruling, this Court did commit itself to the doctrine that even a tiny principality, that of Liechtenstein, hardly an international personality in the tradition sense, did fall under this exempt category. So it appears in an opinion of the Court by the then Acting Chief Justice Bengzon, who thereafter assumed that position in a permanent capacity, in Riene v. Collector of Internal Revenue. 19 As was therein noted: 'The Board found from the documents submitted to it — proof of the laws of Liechtenstein — that said country does not impose estate, inheritance and gift taxes on intangible personal property of Filipino citizens not residing in that country. Wherefore, the Board declared that pursuant to the exemption above established, no estate or inheritance taxes were collectible, Ludwig Kiene being a resident of Liechtenstein when he passed away." 20 Then came this definitive ruling "The Collector — hereafter named respondent — cites decisions of the United States Supreme Court and of this Court, holding that intangible personal property in the Philippines belonging to a non-resident foreigner, who died outside of this country is subject to the estate tax, in disregard of the principle 'mobilia sequuntur personam'. Such property admittedly taxable here. Without the proviso above quoted, the shares of stock owned here by the Ludwig Kiene would be concededly subject to estate and inheritance taxes. Nevertheless our Congress chose to make an exemption where conditions are such that demand reciprocity — as in this case. And the exemption must be honored." {Collector vs. Rueda, 42 SCRA 23, GR L No. 13250, Oct 29, 1971 –[ Sec. 98 (now Sec. 104)}.

[7] 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. Donation made between business organizations and those made between an individual and a business organization shall be considered as donation made to a stranger.

Documents

Estate & Donor's Tax