ESTATE TAXES .

. In determining the gross estate of a decedent, are his properties abroad to 1 be included, and more particularly, what constitutes gross estate ?
SUGGESTED ANSWER: Yes, if the decedent is a Filipino citizen or a resident alien. The gross estate of a Filipino citizen or a resident alien comprises all his real property, wherever situated; all his personal property, tangible, intangible or mixed, wherever situated, to the extent of his interest existing therein at the time of his death. The gross estate of a non-resident alien comprises all his real property, situated in the Philippines; all his personal property, tangible, intangible or mixed, situated in the Philippines, to the extent of his interest existing therein at the time of his death.

2. William Smith, an American citizen, was a permanent resident of the Philippines. He died in San Francisco, California. He left 10,000 shares of San Miguel Corporation, a condominium unit at the Twin Towers Building at Pasig, Metro Manila and a house and lot in Miami, Florida. What assets shall be included in the Estate Tax Return to be filed with the BIR ?
SUGGESTED ANSWER: All of the assets should be included in the Estate Tax Return to be filed with the BIR. Smith, an American citizen and a permanent resident of the Philippines is considered, for Philippine estate tax purposes, a resident alien. Consequently, the assets to be included in the Estate Tax Return to be filed with the BIR should be all property, real or personal, tangible, intangible or mixed, wherever situated, to the extent of the interest that Smith has at the time of his death. Thus, all of the properties enumerated in the problem irrespective of where they are situated are includible in the gross estate of Smith.

3. Proceeds of life insurance includible in a decedents gross estate.

The decedent takes the insurance policy on his own life 1) The amounts are receivable by a) the decedents estate, b) his executor, or c) administrator irrespective of whether or not the insured retained the power of revocation, OR 2) The amounts are receivable by any beneficiary designated in the policy of insurance as revocable beneficiary. [Sec. 85 (E), NIRC of 1997] b. One, other than the decedent takes the insurance policy on the life of the decedent 1) The amounts are receivable by a) the decedents estate, b) his executor, or c) administrator 2) irrespective of whether or not the insured retained the power of revocation. a.

4. Proceeds of life insurance NOT included in a decedents gross estate.

a. b. The decedent takes the insurance policy on his own life, and the proceeds are receivable by a beneficiary designated as irrevocable. [Sec. 85 (E),
NIRC of 1997) NOTES AND COMMENTS: The beneficiary must not be the decedents estate, executor or administrator, because the proceeds are includible as part of gross estate whether or not the decedent retained the power of revocation. (Ibid.)

c. Where the insurance was NOT taken by the decedent upon his own life and the beneficiary is not the decedents estate, his executor or administrator.

4. Items deductible from the gross estate of a resident or nonresident Filipino decedent or resident alien decedent:
a. b. c. d. e. f. g. h. Expenses, losses, claims, indebtedness and taxes; Property previously taxed; Transfers for public use; The Family Home up to a value not exceeding P1 million; Standard deduction of P1 million; Medical expenses not exceeding P500,000.00; Amount of exempt retirement received by the heirs under Rep. Act Mo. 4917; Net share of the surviving spouse in the conjugal partnership.

5. There is no transfer in contemplation of death if there is no showing that the transferor retained for his life or for any period which does not in fact end before his death: (1) the possession or enjoyment of, or the right to the income from the property, or (2) the right, either alone or in conjunction with any person, to designate the person who shall possess or enjoy the property or the income therefrom. [Sec. 85 (B), NIRC of 1997]

6. Vanishing deduction (deduction for property previously taxed), defined.

The deduction allowed from the gross estates of citizens, resident aliens and nonresident estates for properties which were previously subject to donors or estate taxes. The deduction is called a vanishing deduction because the deduction allowed diminishes over a period of five (5) years. It is also known as a deduction for property previously taxed.

7. Vanishing deduction (property previously taxed) allowed as a deduction

from the gross estate of a Filipino citizen, whether resident or not, of a resident alien decedent, or of a nonresident alien decedent.
a. An amount equal to the value specified below of b. Any property forming a part of the gross estate situated in the Philippines c Of any person who died within five years prior to the death of the decedent, or transferred to the decedent by gift within five years prior to his death, d. Where such property can be identified as having been received by the decedent from the donor by gift, or from such prior decedent by gift, bequest, devise, or inheritance, or e. Which can be identified as having been acquired in exchange for property so received: 100% of the value if the prior decedent died within one year prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; 80% of the value if the prior decedent died more than one year but not more than two years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; 60% of the value if the prior decedent died more than two years but not more than three years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; 40% of the value if the prior decedent died more than three years but not more than four years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; and 20% of the value if the prior decedent died more than four years but not more than five years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death. [Sec. 86 (A) (2) and (B) (2), NIRC of 1997, numbering, arrangement and underlining supplied]

8. The approval of the court sitting in probate, or as a settlement tribunal over the estate of the deceased is not a mandatory requirement for the collection of the estate.
The probate court is determining issues which are not against the property of the decedent, or a claim against the estate as such, but is against the interest or property right which the heir, legatee, devisee, etc. has in the property formerly held by the decedent. The notices of levy were regularly issued within the prescriptive period.

The tax assessment having become final, executory and enforceable, the same can no longer be contested by means of a disguised protest. (Marcos, II v. Court of Appeals, et al., 273 SCRA 47)

DONORS TAXES

1. What is the donors tax rate if the donee is a stranger ?

SUGGESTED ANSWER: the donor shall be 30% of the net gifts. When the donee or beneficiary is a stranger, the tax payable by

2. For purposes of the donors tax who is a stranger ?

SUGGESTED ANSWER: A stranger is a is person who is not a: a. Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant; or b. Relative by consanguinity in the collateral line within the fourth degree of relationship.
[Sec. 99 (B), NIRC of 1997]

NOTES AND COMMENTS: All relatives by affinity, irrespective of the degree, are considered as strangers.

3. 4.

What is the tax base for donations ? For purposes of the donors tax, what is meant by net gifts ?

SUGGESTED ANSWER: The net gifts made during the calendar year. [Sec. 99 (A), NIRC of 1997] SUGGESTED ANSWER: The net economic benefit from the transfer that accrues to the donee. Accordingly, if a mortgaged property is transferred as a gift, but imposing upon the donee the obligation to pay the mortgage liability, then the net gift is measured by deducting from the fair market value of the property the amount of the mortgage assumed. (last par., Sec. 11, Rev. Regs.No.2-2003)

5.

How are gifts of personal property to be valued for donors tax purposes ?

SUGGESTED ANSWER: The market value of the personal property at the time of the gift shall be considered the amount of the gift. (Sec. 102, NIRC of 1997)

6.

What is the valuation of donated real property for donors tax purposes ?

SUGGESTED ANSWER: The real property shall be appraised at its fair market value as of the time of the gift. However, the appraised value of the real property at the time of the gift shall be whichever is the higher of: a. the fair market value as determined by the Commissioner of Internal Revenue (zonal valuation) or b. the fair market value as shown in the schedule of values fixed by the Provincial and City Assessors. [Sec. 102, in relation to Sec. 88 (B) both of the NIRC of 1997]

A died leaving as his only heirs, his surviving spouse B, and three minor children, X, Y and Z. Since B does not want to participate in the distribution of the estate, she renounced her hereditary share in the estate. a. Is the renunciation subject to donors tax ? Explain.
SUGGESTED ANSWER: No. The general renunciation by an heir, including the surviving spouse, as in the case B, of her share in the hereditary estate left by the decedent is not subject to donors tax. (4th par., Sec. 11, Rev. Regs. No. 2-2003) This is so because the general renunciation by B was not specifically and categorically done in favor of identified heir/s to the exclusion or disadvantage of the other co-heirs in the hereditary estate.

7.

b. Supposing that instead of a general renunciation, B renounced her hereditary share in As estate to X who is a special child, would your answer be the same ? Explain.
SUGGESTED ANSWER: My answer would be different. The renunciation in favor of X would be subject to donors tax.

This is so because the renunciation was specifically and categorically done in favor of X and identified heir to the exclusion or disadvantage of Y and Z, the other co-heirs in the hereditary estate. (4th
par., Sec. 11, Rev. Regs. No. 2-2003)

8.

Give some donations that are exempt from donors tax.

SUGGESTED ANSWER: a. The first P100,000.00 net donation during a calendar year is exempt from donors tax [Sec. 99 (A), NIRC of 1997] made by a resident or non resident; b. The donation by a resident or non-resident of a prize to an athlete in an international sports tournament held abroad and sanctioned by the national sports association is exempt from donors tax (Sec. 1, Rep. Act No. 7549) c. Political contributions made by a resident or non-resident individual if registered with the COMELEC irrespective of whether donated to a political party or individual. However, the Corporation Code prohibits corporations from making political contributions. (Corp. Code, Title IV, Sec. 36.9) d. Dowries or gifts made on account of marriage and before its celebration or within one year thereafter by residents who are parents to each of their legitimate, recognized natural, or adopted children to the extent of the first ten thousand pesos (P10,000.00); e. Gifts made by residents or non-residents to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivisions of the said Government; f. Gifts made by residents or non residents in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, foundation, trust or philanthropic organization or research institution or organization: Provided, however, That not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes. [Sec. 101 (A), NIRC of 1997, numbering and arrangement supplied] g. Gifts made by non-resident aliens outside of the Philippines to Philippine residents are exempt from donors taxes because taxation is basically territorial. The transaction, which should have been subject to tax was made by non-resident aliens and took place outside of the Philippines.

9. What is the concept of donation or gift splitting ? Illustrate.

SUGGESTED ANSWER: Donation or gift splitting is spreading the gift over numerous calendar years in order to avail of lower donors taxes. In 2008 Leon was thinking of donating a P200,000.00 to Miklos, his first cousin. The P200,000.00 is the totality of the net gifts for 2008. If he donated the P200,000.00 in 2008 the first P100,000 would be exempt and the remaining P50,000.00 would be subject to donors tax If Leon spreads the P200,000 donation over two (2) calendar years, donating P100,000.00 on December 30, 2008 and the remaining P100,000.00 on January 1, 2009 the transaction would be exempt from donors tax. This is so even if the donation is separated only by two days because the basis is the calendar year. Leon would be enjoying the exemption for the first P100,000.00 net gifts for each calendar year.

10. A, who is engaged in the car buy and sell business sold to B P7 million Jaguar for only P4 million. The proper VAT on the sale was paid. If you are the BIR examiner assigned to review the sale, would you issue a tax assessment on the transaction ? Explain your answer briefly.
SUGGESTED ANSWER: Donors taxes would be due on the insufficiency of consideration. Where property, other than real property that has been subjected to the final capital gains tax, is transferred for less than an adequate and full consideration in money or moneys worth, then the amount by which the fair market value of the property at the time of the execution of the Contract to Sell or execution of the Deed of Sale which is not preceded by a Contract to Sell exceeded the value of the agreed or actual consideration or selling price shall be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year. (5th par., Sec. 11, Rev. Regs. No. 2-2003)