Chapter 1 -Transfer Taxes

Transfer Tax is a tax imposed upon the gratuitous or onerous disposition of private properties or rights.

Gratuitous transfer is one that neither imposes burden nor requires consideration from transferee or
recipient.

Business taxes is a tax on onerous transfer of property or rights.

Onerous transfer is one where the transferee gives consideration in return for the property or rights
received.

Gratuitous transfer at the time of death of the donor or donation mortis causa is subject to estate tax.

Gratuitous transfer during the lifetime of both the donor and the donee or donation inter vivos is subject
to donors tax.

Succession is a mode of acquisition by which the property or rights of a person are transmitted at the time
of his death to another or others either by his will or by operation of law.

Testate if the deceased left a will at the time of death. A type of succession that results from the
designation of an heir, made in will executed in the form prescribed by law.

Intestate if the deceased left without a will at the time of death. A type of succession which is effected by
operation of law or if the will executed by the deceased is void.

Mixed succession A type of succession which is effected partly by will and partly by operation of law.

Subject matter of the transfer tax it is the privilege of the transferor to transfer property or tights. It is a
tax imposed on the act of passing the ownership of the property and not on the value of the property or
right.

The right to succession are transmitted from the moment of death of the decedent, notwithstanding the
actual transfer.

The estate tax accrues immediately at the time of death and it can be filed within 6 months from the time
of death.

Example 1

Mr. Gary died on March 1, 2015. His estate composed of the following:
Cash in bank P15 000 000
Land and building 20 000 000
House and lot 30 000 000
David is the only heir of Mr. Gary. Mr. Gary was interred on March 7, 2015. The estate tax was paid and
filed by Mr. David on June 1, 2015. The estate was transferred to David on July, 1, 2015.
1. Transfer of ownership July 1, 2015
2. Estate tax reckoning date within six months from the date of death. So, it was paid and filed on
June 1, 2015 and therefore within the law.
 3. Testamentary succession:

In case Mr. Gary made a duly executed last will and testament transferring to David all his estate
upon his death.

4. Intestate or legal succession:

This assumes that Mr. Gary did not execute a last will and testament while he was still alive. The
estate shall be disposed of according to law.

5. Mixed succession:

Assuming there was a will, but it was made a year or two before Mr. Garys death. And so, the
estate increased and there are some additions not included in the estate. These additional estate
shall be deemed included in the will. And this will, becomes a mixed succession.

CAUSES OF LEGAL SUCCESSION OR INTESTACY:

1. If a person dies without a will, or with a void will, or one which has subsequently lost its
validity.
2. When the will does not institute an heir.
3. Partial institution of heir. In such a case, intestacy shall takes place in case of undisposed
properties.
4. When the heir instituted is incapable of succeeding.
5. Non-fulfillment of the suspensive condition attached to the institution of the heir. Suspensive
condition is a condition depending upon the happening of an uncertain event which must be
fulfilled before an obligation arises.
6. Preterition (omission in the testators will of one, some or all of the compulsory heirs in the
direct line which has the effect of annulling the institution of heir).
7. Fulfillment of resolutory condition. A resolutory condition refers to a condition whereby,
upon fulfillment terminates an already enforceable condition.
For example: I will transfer the estate to my heir two months before my death. But after a
month he died. So the condition of two months terminates already.
8. Expiration of the term or period of institution.
9. Non-compliance or impossibility of compliance with the will.
10. Repudiation of instituted heir.

Elements of succession:

1. Decedent a person who died and left an estate. If he left a will, he is called a testator.
2. Executor a person designated in the will who will carry out the provisions of the decedents
will.
3. Administrator is the person designated by the court to carry out the distribution of the estate to the
proper heirs.
4. Inheritance includes all the property, rights and obligations of a person which are not
extinguished by death and all which have accrued thereto since the opening of succession. Rights
which are purely personal are not transmissible for they are extinguished by death. Example:
Right to vote, right to travel,etc.
5. An heir or successor who is called in succession either the provision of a will or by operation of
law. The persons who receives the gift or property are called devisees and legatees by virtue of a
will. Classification of heirs are as follows:
 a. Compulsory heirs are those who succeed by force of law to some portion of the inheritance,
in an amount predetermined by law, known as legitime. They succeed whether the testator
likes it or not. The cannot be deprived of the inheritance even by the testator.

Kinds of compulsory heirs:

Primary those who have precedence over and exclude other compulsory heirs (i.e.
legitimate children and descendants)
Secondary those who succeed only in the absence of compulsory heirs; (i.e. legitimate
parents and ascendants)
Concurring those who succeed together with the primary or secondary heirs; e.g.
illegitimate children, and descendants and surviving spouse.

Legitime is part of a testators property which he cannot dispose of because the law has
reserved it for compulsory heirs.

Free portion is the portion of the estate which the testator can freely dispose of.

b. Voluntary heirs are those instituted by the testator in his will to succeed to the inheritance of
the free portion.
c. Legal or intestate heirs are those who succeed to the estate of the decedent by operation of
law.

ORDER OF INTESTATE SUCCESSION

1. LEGITIMATE CHILDREN OR DESCENDANTS

2. Legitimate parents or ascendants
3. Illegitimate children or descendants.
4. Surviving spouse
5. Brothers and sisters, nephews and nieces
6. Other collateral relatives within the fifth degree.
7. State

Consanguinity persons are related by blood, meaning they descend from the same stock or common
ancestors. It may be lineal or collateral.
Lineal consanguinity which may be ascending or descending is that which subsists between persons of
whom one is descended in a direct line from the other.

Collateral consanguinity is that which subsist between persons who have the same ancestors, but who
do not ascend or descend one from the other.

Case A. Assuming A died leaving an estate valued at P16,000,000. The surviving heirs were his spouse, 2
legitimate children and 1 illegitimate child.

Required: Distribute the estate by applying the rules on legitime.

Answer:

Children (1/2) P8,000,000

Legitimate child 1 P3,200,000
Legitimate child 2 3,200,000
 Illegitimate child 1 1,600,000
Surviving spouse (1/4) 4,000,000
Free portion (1/4) 4,000,000

Total P16,000,000

Will is an act whereby a person is permitted, with the formalities prescribed by law to control to a certain
degree the disposition of his estate to take effect after his death. It is a personal act. All persons may make
a will except:

Those persons below 18 years of age.

Those that are not of sound mind with proof.

Kinds of wills

1. Notarial or Ordinary or Attested will is one which is executed in accordance with the New Civil
Code.
Requisites:

a. It must be in writing and executed in the language or dialect known to the testator.
b. It must be subscribed by the testator himself.
c. It must be attested and subscribed by three or more credible witness in the presence of the
testator and of one another.

Disqualified to become a witness:

a. Any person not domiciled in the Philippines
b. Those who have been convicted of falsification of documents, perjury or false testimony.

2. Holographic will it is a written will which must be entirely written, dated and signed by the
hand of the testator himself.
3. Codicil is an addition to a will, made after the execution of a will.
4. Foreign wills it is a will of an alien who is abroad produces effect in the Philippines if made with
formalities prescribed by law of the place in which he resides in conformity with what the
Philippine civil code prescribes.

INSTITUTION OF HEIR

It is an act by virtue of which the testator designates in his will the person or persons who are to succeed
him in his property and transmissible rights and obligations.

DISINHERITANCE

IT IS A TESTAMENTARY DISPOSITION by which a compulsory heir is deprived of, or excluded from

the inheritance to which he has a right.

CHAPTER 2: ESTATE TAX

Definition: it is a tax imposed on the privilege that a person is given in controlling to a certain extent, the
disposition of his property to take effect upon death. It is a tax imposed on the act of passing the
ownership of property at the time of death and not on the value of the property or right.
Formula for the Estate Tax:

Gross Estate xxx

Less: Deductions from the gross estate xxx
Net taxable estate xxx
Estate tax (See table) xxx

Gross Estate
Inclusion:
1. Properties physically in the estate
2. Properties not physically in the estate depending on whether the decedent at the time of death
was:
a. A citizen or resident of the Philippines; or
b. Not a citizen of the Philippines, and not residing in the Philippines.

The gross estate of a resident or citizen of the Philippines will include all properties regardless of the
location.

The gross estate of a non-resident citizen, not citizen of the Philippines, will include only properties in the
Philippines.

Coverage of the Gross Estate

It consists of real estate and personal property.

Real estate, or real property means land, building, or anything attached to the soil with permanence.
Tangible personal property is personal property that can be seen and touched.
Intangible personal property is personal property that cannot be seen and touched.

Examples of intangible properties that are clearly in the law:

1. Franchises which must be exercised in the Philippines.

2. Shares, obligations or bonds issued by any corporation or sociedad anonima organized or
constituted in the Philippines in accordance with its laws;
3. Shares, obligations or bonds issued by any corporation, 85% of the business of which is located
in the Philippines.
4. Shares, obligations or bonds issued by any corporation if such shares, obligations, or bonds have
acquired a business situs in the Philippines; and
5. Shares or rights in any partnership, business or industry in the Philippines.

Other intangible properties shall be understood to follow the rule of law, which is intangible properties
follow the domicile of the owner.

Exception: RECIPROCITY CLAUSE Intangible personal property in the Philippines of a non-resident,

not citizen of the Philippines, is not includible in his gross estate if the country in which he is a citizen
allows the same privilege to a Filipino citizen.

Properties not in the estate:

There may be properties which at the time of the decedents death are not in the estate, because they were
transferred by him during his lifetime. A value from the properties will be borrowed and included in the
computation of the gross estate if transferred under the following circumstances:
1. Transfer in contemplation of death. A donation mortis causa transfer motivated by the thought
of death, although death may not be imminent.
2. Revocable transfer is a transfer where the terms of enjoyment of the property may be altered,
amended or revoked or terminated by the decedent.
3. Transfer under general power of appointment is the right to designate the person or persons who
will succeed to the property of a prior decedent. It is one which may be exercised in favor of
anybody.

Rules to follow in what value to include in the gross estate:

1. If the transfer was in the nature of a bona fide sale for an adequate and full consideration in
money or moneys worth no value will be included in the gross estate.
2. If the consideration received at the time of transfer was less than adequate and full, the value to
include in the gross estate will be the excess of the fair market value the time of the decedents
death over the consideration received;
3. If there was no consideration received on the transfer (as in donation mortis causa), the value to
include in the gross estate will be the fair market value of the property at the time of the
decedents death.

Illustration: Transfer for insufficient consideration and the gross estate.

Case 1 Case 2 Case 3
a. Fair market value at the time of transfer 100,000 100,000 100,000
b. Consideration received 100,000 60,000 0*
c. Fair market value at the time of death 180,000 180,000 180,000
Value to include in the gross estate None 120,000 180,000

*donation mortis causa

Compare (a) with (b) to determine the adequacy of
the consideration.
Compare (b) with (c) to determine the value to
include in the gross estate.

Location of Property

To be included in the gross estate:

The location of the property is immaterial if the decedent was a resident or citizen of the Philippines.
In case of non-resident, not citizen of the Philippines, the property must be located in the Philippines.

Distribution of borrowed value.

In the distribution of the estate, such value shall be returned to the transferee from whom the value was
borrowed as if due to him as an heir.

Proceeds of Life Insurance

These are paid by the insurance company directly to the beneficiary. These are included in the gross estate
if the beneficiary is the estate, executor or administrator, or if the third person is revocably designated as
beneficiary.

Claim against insolvent person

A decedents claim against an insolvent person must be included in the gross estate at the full amount of
the claim. Uncollectible portion of the claim will be recognized as a deduction in the gross estate.

Exceptions from the Gross Estate ( Sec 87, NIRC)

1. The merger of usufruct in the owner of the naked title.

2. The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the
fideicomissary;
3. The transmission from the first heir, legatee, or donee in favor of another beneficiary, in
accordance with the will of the predecessor.
4. All bequests, devises, legacies or transfers to social welfare, cultural, and charitable institutions
no part of the net income of which inures to the benefit of any individual: provided, that not more
than 30% of the said bequests, legacies or transfers shall be used by such institutions for
administrative purposes.
5. Exceptions under special laws:
a. Amounts received for war damages;
b. Amounts received from the US Veterans Administration
c. Benefits received from the GSIS
d. Benefits received from the SSS

Valuation of the gross estate.

It will be valued at its fair market value at the time of decedents death.

In case of real property, the value will be the current and fair market value, as shown in the schedule of
commissioner of Internal Revenue (zonal value) whichever is higher.

In case of shares of stock, the fair market value shall depend on whether or not the shares are traded in the
stock exchange. If it is listed in the stock exchange, the fair market value will be the arithmetic mean
between the highest and lowest quotation of the shares of stock on the valuation date.

If the shares of stock are unlisted in a stock exchange, the fair market value will be the book value , if
common, and the par value if preferred. In determining book value, appraisal surplus shall not be
considered, as well as value assigned to preferred shares, if any.

Invincible properties
There are properties which are intentionally not included in the gross estate, or which cannot be reported
as belonging to the decedent because they are still officially or on record as belonging to another.

Unliquidated Property Ownership

A died a widower, with property registered under his name. He had two legitimate children by a former
marriage, C and D. A died leaving ten hectares of farm land acquired when already a widower. C got
married to E and had a child F. E died ahead of C. D got married to G, and had two legitimate children, H
and I. G died ahead of D. The present generation is F, H and I. If all succession were intestate, what is the
interest of each in the present generation in the undivided property, that should have been reported as
gross estate of their predecessors, assuming such property had an unchanged fair market value of
P3,000,000? F, H and I must contribute to the estate tax that must be paid on the estate of A, to the extent
of for F, and each for H and I. F must pay the estate tax on the estate of C. H and I must share to the
extent of each on the estate tax on the estate of D.

Problems:

1. A decedent, citizen and resident of the Philippines had the following data on his properties, with
their indicated fair market values:
Piece of land with building in the Philippines P4 000 000
Piece of land in Malaysia 2 000 000
Car in the Philippines 800 000
Shares of stock of a foreign corporation 400 000
Bonds of a domestic corporation 300 000
How much is the gross estate if the decedent is:
a. A resident or citizen of the Philippines?
b. A non-resident who was not a citizen of the Philippines?

2. A decedent had:
Shares of stock of a domestic corporation in a bank safety
deposit box in the Philippines P200 000
Shares of stock of a domestic corporation, in a bank
safety deposit box in Indonesia P150 000
Shares of stock of a foreign corporation, 85% of the business
of which is located in the Philippines, in a bank
safety deposit box in Malaysia P400 000
Shares of stock of a foreign corporation, 15% of the business
of which is located in the Philippines, in a bank
safety deposit box in the Philippines P100 000
Bonds issued by a domestic corporation, with certificates
in a safety deposit box in Malaysia P50 000
Bonds issued by a domestic corporation with certificates
In a safety deposit box in Mexico P80 000

How much will be the gross estate if:

a. The decedent is a citizen or resident of the Philippines?

b. The decedent is a non-resident who is not a citizen of the Philippines?

3. The following were properties transferred by the decedent during his lifetime:

In contemplation of death:
Fair market value of property when transferred P70 000
Fair market value at the time of death P1 500 000
Consideration received P400 000
 Revocable transfer (1)
Fair market value of property when transferred P600 000
Fair market value at the time of death P1 500 000
Consideration received P400 000

Revocable transfer (2)

Fair market value of property when transferred P1 500 000
Fair market value at the time of death P800 000
Consideration received P900 000

Revocable transfer (3)

Fair market value when transferred P1 600 000
Fair market value at the time of death P1 500 000
Consideration received donation

Transfer under general power of appointment

Fair market value when transferred P500 000
Fair market value at the time of death P800 000
Consideration received P300 000

Transfer under limited power of appointment

Fair market value of when transferred P600 000
Fair market value at the time of death P800 000
Consideration received P200 000

How much will be the gross estate from these properties?

4. A decedent had left the following properties:

Shares of stock of a domestic corporation
in bank safety deposit box in the Philippines P100 000

Shares of stock of a domestic corporation, in

A bank safety deposit box in Malaysia 120 000

Shares of stock of a foreign corporation, 85%

Of the business of which is located in the Phils,
in a bank safety deposit box in Malaysia 300 000

Shares of stock of a foreign corporation, 15%

Of the business of which is located in the Phils,
In a bank safety deposit box in the Philippines 50 000

Bonds issued by a domestic corporation, with

Certificates in a safety deposit box in the Phils. 50 000

Bonds issued by a domestic corporation, with

Certificates in a safety deposit box in Malaysia 75 000

Domestic Corporation means a corporation organized under Philippine laws.

 How much would be the gross estate if?

a. The decedent is a citizen or resident of the Philippines.

b. The decedent is a non-resident who is not a citizen of the Philippines.

Solution:

a. A decedent is a citizen or resident of the Philippines:

Shares of stock of a domestic corporation

in bank safety deposit box in the Philippines P100 000

Shares of stock of a domestic corporation, in

A bank safety deposit box in Malaysia 120 000

Shares of stock of a foreign corporation, 85%

Of the business of which is located in the Phils,
in a bank safety deposit box in Malaysia 300 000

Shares of stock of a foreign corporation, 15%

Of the business of which is located in the Phils,
In a bank safety deposit box in the Philippines 50 000

Bonds issued by a domestic corporation, with

Certificates in a safety deposit box in the Phils. 50 000

Bonds issued by a domestic corporation, with

Certificates in a safety deposit box in Malaysia 75 000

Gross estate P695 000

b. Decedent is a non-resident who is not a citizen of the Philippines

Shares of stock of a domestic corporation

in bank safety deposit box in the Philippines P100 000

Shares of stock of a domestic corporation, in

A bank safety deposit box in Malaysia 120 000

Shares of stock of a foreign corporation, 85%

Of the business of which is located in the Phils,
in a bank safety deposit box in Malaysia 300 000

Bonds issued by a domestic corporation, with

Certificates in a safety deposit box in the Phils. 50 000

Bonds issued by a domestic corporation, with

Certificates in a safety deposit box in Malaysia 75 000

Gross estate P645 000

5. The following were properties transferred by the decedent while he is still alive:

In contemplation of death:

Fair market value of property when transferred P 600 000

Fair market value at the time of death 1 500 000
Consideration received 200 000

Revocable transfer (1)

Fair market value of property when transferred P 600 000

Fair market value at the time of death 1 500 000
Consideration received 400 000

Revocable transfer (2)

Fair market value of property when transferred P 1 500 000

Fair market value at the time of death 800 000
Consideration received 900 000

Revocable transfer (3)

Fair market value of property when transferred P 1 600 000

Fair market value at the time of death 1 500 000
Consideration received donation

Transfer under general power of appointment

Fair market value of property when transferred P500 000

Fair market value at the time of death 800 000
Consideration received 300 000

Transfer under limited power of appointment

Fair market value of property when transferred P 600 000

Fair market value at the time of death 800 000
Consideration received 200 000

How much shall be included in the gross estate from these properties?

Solution:

Transfer in contemplation of death

(P1,500,000 less P200,000) P1 300 000
Revocable transfer (1)
(P1,500,000 less P400,000) 1 100 000
Revocable transfer (2) 0
Revocable transfer (3)
(P1,500,000 less 0) 1 500 000
 Transfer under general power of appointment
(P800,000 less P300,000) 500 000

Value to include in the gross estate P4,400,000

6. Receivable under insurance policies:

Life insurance with estate as revocable beneficiary P1 000 000

Life insurance with estate as irrevocable beneficiary 500 000
Life insurance with wife as revocable beneficiary 800 000
Life insurance with spouse as irrevocable beneficiary 1 200 000
Receivable under insurance policies:
Accident insurance for injury 300 000
Health insurance for sickness 600 000
Property insurance for loss by fire 1 100 000
Crop insurance for growing crop destroyed 750 000
How much should be included in the gross estate?

Solution:

Life insurance with estate as beneficiary P1 000 000

Life insurance with estate as beneficiary 500 000
Life insurance with spouse as beneficiary 800 000
Accident insurance 300 000
Health insurance 600 000
Crop insurance 750 000
Property insurance 1 100 000

Gross estate P5 050 000

7. The estate of the decedent were:

Real estate with a fair market value of P2 000 000

Mortgage existing on the real property 1 200 000
Receivable from a debtor (1), who has no properties whatever 900 000
Receivable from a debtor (2) 30 000
Debtor from debtor 2:
Properties owned 120 000
Obligations of taxes to the government 20 000
Other obligations 300 000

How much is the value to be included in the gross estate?

Solution:

Real Property P2 000 000

Receivable from debtor (1) 900 000
Receivable from debtor (2)
 Gross estate P30 000
Deduction: (P200,000/P300,000 x P30,000) 20 000 10 000

Gross estate P2 910 000

8. A decedent had:
Real Property:
Selling price of adjacent piece of land P1 000 000
Zonal Value 1 200 000
Fair value in assessment rolls 700 000
1,000 shares of stock of a domestic corporation listed and traded
In a local stock exchange. At the date of death:
Par value per share P100
Highest price at which sold in the exchange P120
Lowest price at which traded in the exchange P115
Shares of stock of a domestic corporation not listed and traded
In the stock exchange. At the time of death:
500, Common
Par value P100
Book value P90
500, Preferred
Par value P50
Book value 60
Cash in bank, Philippine currency (in equivalent pesos)
In a bank in New York, USA P1 000 000
In a bank in the Philippines 1 500 000

How much was the value of the gross estate?

Solution:

Real property P1 200 000

Shares of stock (P117.50 x 1,000 shares) 117 500
Shares of stock, common (P90 x 500) 45 000
Shares of stock, preferred (P50 x 500) 25 000
Cash in bank, New York, USA 1 000 000
Cash in bank, Philippines 1 500 000

Gross estate P3 887 500