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TAXATION II (Carag) Midterms ReviewerAnn, Dana, David, Jenin and Sandy

TAXATION IIPart 1: Transfer Taxes (Estate and Donors Tax)Estate taxI. BASIC PRINCIPLES OF ESTATE TAX

A. Estate Tax DefinedEstate tax is the tax on the right to transmit property at death and on certain transfers which are made by the statute the equivalent of testamentary dispositions, and is measured by the value of the property at the time of death. (De Leon cit Estate tax is a kind of transfer tax. Transfer taxes are taxes imposed upon gratuitous disposition of private properties. It has two kinds: 1) death taxes or duties, and 2) gift taxes

1) Death taxes include

Estate tax

Inheritance tax

2) Gift taxes include: Donors tax Donees gift tax

Due to the reforms introduced by R.A. No. 8424 (NIRC of 1997)we now have only estate tax and donors tax in the statute books

B. Nature and Purpose of Estate Tax

Nature of estate tax: Estate tax is neither a direct tax on property nor a capitation tax. It is an excise or privilege tax, the object of estate tax is to tax the shifting of economic benefits and enjoyment of property from the dead to the living. (De Leon) Basis: general taxing power of a State to select subjects of taxation. Moreover, succession to the property, rights and obligations of a deceased person is not a fundamental but merely statutory right. Consequently, the legislature can burden such statutory right with a tax.Purpose and justification of estate tax: (De Leon)1) Benefit-received theory considers the services the government renders in the distribution of the estate of the decedent, either by law or in accordance with his wishes. For the performance of these services to the estate and the heirs, the State collects the tax.2) Privilege theory or State partnership theory inheritance is not a right but a privilege granted by the State, and large estates have been acquired only with the protection of the State. The State, as a passive and silent partner in the accumulation of property, has the right to collect the share which is properly due to it.3) Ability to pay theory the receipt of inheritance, which is in the nature of unearned wealth or windfall, places assets in the hands of the heirs thereby creating an ability to pay the tax and thus contribute to governmental incomes. Thus, minimal amounts of inheritance are exempted.4) Redistribution of wealth theory the receipt of inheritance is a contributing factor to the inequalities in wealth and income. The imposition of death tax reduces the property received by the successor, thus helping bring about a more equitable distribution of wealth in society.C. Time of Transfer of Properties

General principle: Death is the generating source from which the taxing power takes its being. Thus it is the transmission of property from the dead to the living which is the taxable event considered by law. In order for estate tax to apply, it is essential that there be a transfer of property or rights from the decedent to a living person by reason of death. There must be some shifting of economic benefits from the dead to the living. E: certain inter vivos transfers are considered by statute to be made in contemplation of death, hence subject to estate tax. Estate tax accrues as of the death of the decedent by operation of law. (Lorenzo v. Posadas. See also CC, Art. 777, rights to the succession are transmitted from the moment of death of the decedent)

No manual transfer of property is required. The obligation to pay estate tax accrues as of the moment of death of the decedent, although the exact amount of the tax may then be unknown and may have to await settlement proceedings. Thus, it is the statute in force at the time of death of the decedent which governs.

LORENZO v. POSADAS [1937]

The accrual of estate tax is distinct from the obligation to pay the same The tax is [ ] upon the transmission or transfer or devolution of property of a decedent, made effective by his death. It is in reality an excise or privilege tax imposed on the right to succeed to, receive, or take property by or under a will or the intestacy lawto become operative at or after death.

According to article 657 of the Civil Code, the rights to the succession of a person are transmitted from the moment of his death The property belongs to the heirs at the moment of the death of the ancestor as completely as if the ancestor has executed and delivered to them a deed for the same before his death Whatever may be the time when actual transmission of the inheritance takes place, succession takes place in any event at the moment of the decedents death. The time when the heirs legally succeed to the inheritance may differ from the time when the heirs actually receive such inheritance. D. Governing Law

Estate taxation is governed by the statute in force at the time of death of the decedent.

CLASS NOTES:

Steps in computing estate tax:1) Inventory the properties left by the decedent:

- Determine if RC, NRC, RA or NRA

2) Determine residence/situs of properties:

- Determine location of real properties

- Determine situs of intangible personal properties (IPP). If IPP, determine further if exempt under Sec. 104

3) Determine property relations between husband and wife:

- ACP, CPG or separation of property?

Formula for computing net taxable estate:

Gross estate

Less: Ordinary deduction

Special deduction

NET ESTATE

Less: Share of the surviving spouse (if any)

NET TAXABLE ESTATE

II. DETERMINATION OF GROSS ESTATEA. Classification of DecedentNIRC

Sec. 85. Gross Estate. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated: Provided, however, That in case of a nonresident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate

Estate tax naturally applies only to natural persons. Among different classes of natural persons, the Tax Code makes a distinction only between an non-resident alien (NRA) and all the rest (RC, NRC, RA), citizenship and residence being determinative of the taxability of transmission of properties from the decedent to the heirs.

1. Citizen and Resident(RC, NRC, RA)What are taxable transmissions for citizens (RC and NRC) and resident aliens (RA):

All property, wherever situated. This includes: Decedents interest

Transfers made in contemplation of death

Transfers with retained interest

Revocable transfers

Property passing under a general power of appointment

Proceeds of life insurance

Prior interests

Transfers for insufficient consideration2. Non-resident Alien (NRA)

What are taxable transfers for a non-resident alien (NRA):

Transfers of all property as listed above, BUT only those SITUATED IN THE PHILIPPINES.

B. Composition of Gross Estate, in General1. RC, NRC, RA all properties, real or personal, tangible or intangible, wherever situatedIf the decedent was a resident or a citizen of the Philippines, the gross estate shall include, to the extent of his interest, the value at the time of his death of all:1) Real or immovable property, wherever situated;

2) Tangible personal property, wherever situated;

3) Intangible personal property, wherever situated.

2. NRA only properties situated in the Philippines, except for intangible property which is subject to the rule on reciprocityIf the decedent is a non-resident alien, it shall include to the extent of his interest, the value at the time of his death of all:

1) Real or immovable property situated in the Philippines;

2) Tangible personal property situated in the Philippines; and

3) Intangible personal property with a situs in the Philippines E: intangible personal property exempted on the basis of reciprocity (Sec. 104)

Situs of intangible personal properties:

GR: The situs is at the domicile or residence of the owner.

E: The principle is not controlling when:

1) It is inconsistent with express provision of statute; or

2) When justice does not demand that it should be, as where the property has in fact a situs elsewhere. (e.g., shares of stock in a domestic corporation have Philippine situs, regardless of the citizenship or domicile of the owner. The reason is that said shares receive protection and benefit from or laws.

Shares of stock of domestic corporations: situs is always the Philippines

Shares of stock of foreign corporations: situs is Philippines if a) 85% of business is located in the Philippines; or b) such shares, obligations or bonds have acquired a business situs in the Philippines.

i. Rule on ReciprocityNIRC

Sec. 104. Definitions. [N]o 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.

Intangible personal property may be subject to transfer taxes both in the country of domicile or residence and in the place where such property has a situs or is found. In order to prevent multiplicity of taxation of the same intangible personal property with a situs in the Philippines, left by a non-resident alien decedent, the Tax Code provides that no tax shall be collected as to such property in two instances:1) When the foreign country does not impose transfer tax if the foreign country of the alien decedent did not impose at the time of such death a transfer tax of any character, in respect of intangible personal property of citizens of the Philippines NOT residing in that foreign country E.g., Bonds from a domestic (Filipino) corporation held by a Swiss citizen not residing in the Philippines will be exempt from estate tax if it is proved that Switzerland did not impose estate tax with respect to bonds from a Swiss corporation held by Filipino citizens not residing in Switzerland.

2) When the foreign country imposes transfer tax but grants similar exemption if the laws of the foreign country allow a similar exemption from transfer or death taxes of every character or description in respect of intangible personal property owner by citizens of the Philippines not residing in that foreign country. E.g., Suppose that Morroco does not impose any estate tax on personal property of non-resident aliens. A bond from Ayala Land, Inc. held by a Morrocan, although having a situs in the Philippines, is not subject to estate tax because Morocco does not impose any estate tax on personal properties of Filipino citizens having a situs in their country.

NB: 1) The exemption provided by the other country must be total, not partial. Thus, even if a state (e.g., California) exempts such personal property from estate tax, if the Federal government of USA imposes federal estate tax, reciprocity will not work.

2) Reciprocity does not require the foreign country to possess international personality as in PIL. Thus, California, New York, New Jersey, and other states of the USA may be considered a foreign state.

C. Concept of Residence for Estate Tax PurposesThe terms residence and domicile for estate tax purposes are synonymous and are used interchangeably without distinction. For purposes of estate taxation, residence refers to the permanent home, the place to which whenever absent, for business or pleasure, one intends to return, and depends on facts and circumstances in the sense that they disclose such intent. It is, therefore, not necessarily the actual place of residence.

Implications:

A citizen of the Philippines is taxable on all property wherever situated, regardless of his actual residence. One may be an actual resident of a foreign country, but still considered a domiciliary of the Philippines.

D. Items to be Included in Determining Gross Estate

CLASS NOTES:

Properties included in the Gross Estate:

GR: All properties in the name of the decedent at the time of his death.E:Properties NOT (or no longer) in the name of the decedent at the time of his death are still considered part of his gross estate if it were:1) Transferred in contemplation of death2) Transferred with retained interest3) A revocable transfer4) Property passing under general power of appointment5) Transferred for insufficient considerationBona fide transfers of property for an adequate and full consideration is excluded from gross estate, thus not taxable.

1. Decedents InterestSEC. 85.Gross Estate. - the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated: Provided, however, that in the case of a nonresident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate.

(A) Decedent's Interest. - To the extent of the interest therein of the decedent at the time of his death;

Decedents Interest:Interest means a right to have the advantage accruing from anything; any right in the nature of property, but less than title. Ownership is, of course, the maximum interest that a person may have in relation to property. However, for purposes of estate tax, the gross estate of a decedent includes not only properties he actually owns, but also any interest having value or capable of being valued at the time of his death.

Thus, the gross estate for purposes of estate tax is not limited to and may exceed the actual value of his assets. As a general rule, all kinds of property owned or under the name of the decedent at the time of his death are part of his estate. In addition, the decedents interests in the following are included in his taxable estate:

1) Interest in property possessed The value of any interest in property which at the time of his death is in his actual or constructive possession. (E.g., value of usufructuary rights over a 1000 square meters of mango orchard)2) Interest in property owned The value of any interest in property which the decedent owned at the time of his death. (E.g., titled land; properties owned by the decedent but without a title [jewelries, valuable paintings, cash])3) Property or interest transferred The value of transfers of property or interest in property made by the decedent during his lifetime which partake of the nature of testamentary dispositions. (E.g., simulated sale of property to a descendant in order to avoid the estate tax. The transfer is considered not made, and the whole interest of the decedent in the property is included as part of his gross estate).2. Transfers in contemplation of deathSEC. 85.Gross Estate. - the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated: Provided, however, that in the case of a nonresident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate.

(B) Transfer in Contemplation of Death. - To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after death, or of which he has at any time made a transfer, by trust or otherwise, under which he has 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; except in case of a bonafide sale for an adequate and full consideration in money or money's worth.

Transfers in contemplation of death: These are transfers wherein the thought of death, as an imminent and not merely a general expectation, which serves as a controlling motive which induces the disposition of property. The decedents motive is a question of fact. Each case must be examined and determined on its own facts and circumstances. However, the following are examples of circumstances which may be taken into consideration in determining whether the transfer was made in contemplation of death:

Age and state of health of the decedent at the time of the gift, especially where he was aware of serious illness;

Length of time between the gift and the date of death. Short interval suggests that the thought of death was in the decedents mind, and a long interval suggests the opposite;

Concurrent making of a will or making a will within a short time after the transfer. (De Leon)

Transfers covered by Sec. 85 (B):

Transfer without retention of interest, but effect is postponed This refers to a transfer intended to take effect at or after death. Even if the donation was made during the lifetime of the deceased, if the effect is postponed (as when the donor expressly forbade the registration of the deed until after her death, or retained the power to revoke the donation), it is considered a donation mortis causa or a transfer in contemplation of death.

E.g., Donation of X to heir, to take effect 5 years after his death

Donation of X to heir, to take effect 5 years after the execution of the instrument:

If X dies prior to the lapse of the 5 year period: property forms part of his gross estate

If X dies after the 5 year period: the donation becomes absolute and the property generally is not part of his gross estate.

Transfer with retention of interest to income or with right to designate persons who will enjoy the income or property(see transfers with retained interest) The rights retained by the transferor until his death or for any period which does not in fact end before his death include:

The possession or enjoyment of or the right to the income from the property; or The right, either alone or in conjunction with another person, to designate the persons who shall possess or enjoy the property or the income therefrom.

Transfer with reversionary interest This refers to a transfer under which there is a possibility that the transferred property may return to the decedent or his estate, or that it may become subject to a power of disposition by the decedent. E.g., Real property of X, the naked ownership is donated to Y and the usufruct to Z, with the condition that if Z predeceases X, the property should return to X. If X predeceases Z, the value of the reversionary interest of X (i.e, the value of usufructuary rights over the property) at death is included in his gross estate.

CLASS NOTES:

Thought of death must be the controlling motive.

BIR will still go after a property donated inter vivos, even if donors tax was paid, if it is donated in contemplation of death.

Reason: to prevent evasion of estate tax.

Sir: The transfer is deemed by the law to be a testamentary disposition. Estate tax is imposed on privilege to transfer property after death.

Of course, this refers only to GRATUITOUS transfer of property. If the transfer is ONEROUS, even if the transfer is made in contemplation of death, it is outside the ambit of the provision. E.g., Real property with zonal value of P10 Million, sold for P10 Million. This sale is subject to final capital gains tax (if capital asset located in the Philippines).

If it is sold for P2M:

Capital asset located in the Philippines: CGT of 6% on P10 Million

Ordinary asset: The difference is considered a donation. P8 Million is subject to estate tax. (See transfers for insufficient consideration)

3. Transfers with retained interestSEC. 85.Gross Estate. - the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated: Provided, however, that in the case of a nonresident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate.

(B) Transfer in Contemplation of Death. - To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after death, or of which he has at any time made a transfer, by trust or otherwise, under which he has 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; except in case of a bonafide sale for an adequate and full consideration in money or money's worth.

Transfers with retained interest: This contemplates cases where the owner transfers his property during life but still retains the economic benefits until his death. The retained right includes: 1) the possession or enjoyment of the property, or 2) the power to designate persons who may exercise such rights. By reason of the restriction, the transferee is incapable of freely enjoying and disposing of the property until the transferors death. E.g., X donates legal title to Z, but retains the right to designate beneficial title to any person he likes. The property is considered part of Xs gross estate.

The mere fact, however, that the transferor remains in possession or enjoyment by permission or at the request of the transferee does not necessarily establish that it is a transfer with retained interest where there are circumstances justifying a reasonable inference that there was no such intent.4. Revocable TransfersSEC. 85.Gross Estate. - the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated: Provided, however, that in the case of a nonresident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate. (C) Revocable Transfer. -

(1) To the extent of any interest therein, of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth) by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power (in whatever capacity exerciseable) by the decedent alone or by the decedent in conjunction with any other person (without regard to when or from what source the decedent acquired such power), to alter, amend, revoke, or terminate, or where any such power is relinquished in contemplation of the decedent's death.

(2) For the purpose of this Subsection, the power to alter, amend or revoke shall be considered to exist on the date of the decedent's death even though the exercise of the power is subject to a precedent giving of notice or even though the alteration, amendment or revocation takes effect only on the expiration of a stated period after the exercise of the power, whether or not on or before the date of the decedent's death notice has been given or the power has been exercised. In such cases, proper adjustment shall be made representing the interests which would have been excluded from the power if the decedent had lived, and for such purpose if the notice has not been given or the power has not been exercised on or before the date of his death, such notice shall be considered to have been given, or the power exercised, on the date of his death.

Revocable transfers:

Also to be included in the gross estate is the interest in property of which the decedent has at any time made a transfer by trust of otherwise:1) With reserved power to alter, amend, revoke or terminate where the enjoyment of the property was subject at the date of his death to any change through the exercise of a power (in whatever capacity exerciseable) by the decedent (alone or in conjunction with any other person) to alter, amend, revoke or terminate the transfer E.g., X transfers his property in trust with the income payable to Y, his son, but X retains the power to alter, amend, revoke or terminate the payment of income to Y. The value of the property is includible in the gross estate of X.

2) With such power relinquished where any such power which would bring the property in the taxable estate is relinquished in contemplation of the decedents death E.g., Such power of X to alter or terminate the income payment to Y is relinquished by him because he just learned that he is suffering from terminal illness and has only three months to live. Such relinquishment made the transfer to Y absolute. The value of the property is nevertheless includible in the gross estate of X.

CLASS NOTES:

Sir: If under the deed of transfer, transferor reserved rights to revoke, alter or amend, even if he did not exercise that right, it is still considered part of his gross estate. Reason: He could have exercised it any time prior to his death so that the property reverts to his estate, so it is immaterial WON he actually exercised it.

5. Property passing under a general power of appointment

SEC. 85.Gross Estate. - the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated: Provided, however, that in the case of a nonresident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate.

X XX

(D) Property Passing Under General Power of Appointment. - To the extent of any property passing under a general power of appointment exercised by the decedent: (1) by will, or (2) by deed executed in contemplation of, or intended to take effect in possession or enjoyment at, or after his death, or (3) by deed under which he has retained for his life or any period not ascertainable without reference to his death or for any period which does not in fact end before his death (a) the possession or enjoyment of, or the right to the income from, the property, or (b) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money's worth.

X XXTransfer of property under general power of appointment:

Among those to be included in the gross estate is property passing under a general power of appointment exercised by the decedent:

1) By will; or

2) By deed executed in contemplation of or intended to take effect at or after his death; or

3) By deed under which he has retained for his life (or any period which does not in fact end before his death):

The possession or enjoyment of, or the right to the income from the property; or

The right to designate the persons who shall enjoy or possess the property or the income therefrom.

Under this provision, the property forms part of the estate of the donee/appointee/grantee, not the grantor or donor. The provision contemplates of three parties, an original donor/grantor giving the general power to appoint (GPA) to a donee/grantee, and the third person appointed by such grantee. If the donee/grantee exercises such GPA under the circumstances enumerated above, the property forms part of his gross estate.

Reason: For purpose of estate tax, the power to dispose of property at death by the exercise of a general power of appointment is equivalent of ownership. Hence, it is attributable to the estate of the grantee of the GPA.

Requisites: The value of the appointed property is includible in the gross estate of the decedent donee or appointee of the power if the following requirements for taxability are met:1) The existence of a general power of appointment;

A power of appointment is general when it authorizes the donee of the power to appoint any person he pleases, including himself, his spouse, his estate, his creditor, etc., thus having a full dominion over the property as if he owned it. It is special when the donee can appoint only a restricted or designated class of persons other than himself. Such property passing through a special power of appointment is not includible in the gross estate.

2) An exercise of such power by the decedent by will or by deed in certain cases; and

3) The passing of the property by virtue of such exercise.

CLASS NOTES:

Sir: Although as a general rule, a GPA must be exercised to fall within this provision, it is not automatic that just because the grantee did not exercise the GPA, the property is no longer part of his gross estate. One must look into the provisions of the deed.

WON the property is part of the grantees gross estate depends on the wording of specific provisions of the GPA:

Even if the grantee does not exercise the power, but the property remains in his estate, it is obviously part of his gross estate

If on the other hand, the legal title is coterminous with the life of the grantee, at the time of his death, the property no longer forms part of his estate.

Sir: If there is no provision as to what happens after the failure of grantee to exercise GPA, what is the tax implication? Will it form part of his gross estate?

6. Proceeds of Life Insurance

SEC. 85.Gross Estate. - the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated: Provided, however, that in the case of a nonresident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate.

X XX

(E) Proceeds of Life Insurance. - To the extent of the amount receivable by the estate of the deceased, his executor, or administrator, as insurance under policies taken out by the decedent upon his own life, irrespective of whether or not the insured retained the power of revocation, or to the extent of the amount receivable by any beneficiary designated in the policy of insurance, except when it is expressly stipulated that the designation of the beneficiary is irrevocable.

X XX

Proceeds of life insurance:

When included:

1) Beneficiary is estate, administrator or executory, whether revocable or irrevocable

2) Third person is revocably designated as a beneficiary

Under the Insurance Code, the designation of beneficiary is presumed to be revocable (Sec. 11, PD 1460). Thus, there is need for express stipulation that the designation of the beneficiary is irrevocable for it to be excluded from the gross estate.

When excluded:

1) Third person is irrevocably designated as beneficiary

2) Proceeds of other insurance policies having the characteristic of life insurance: Proceeds of a group insurance policy taken by an employer for its employees (law speaks of policies taken out by the decedent upon his own life)

Accident insurance, except when one of the risks insured against is death due to accident (in which case it will be considered life insurance)

Proceeds of insurance policies issued by GSIS (PD 1146 as amended)

Benefits accruing under SSS by reason of death (SSS v. Davao, RA 1161 as amended)

Life insurance policies payable to heirs of deceased members of military personnel of US Army or Philippine army under laws administered by US Veterans Administration (BIR Ruling, Aug. 25, 1950, RA 360)

Requirements for taxability:

1) Policy owner is the decedent

2) Cestuique vie is the decedent

3) Beneficiary is estate, executory or administrator, or third person revocably designated as beneficiary.

4) The life insurance proceeds is not expressly exempted from estate taxes by other special laws.

*NB: In income taxation, proceeds of life insurance is not subject to income tax. Reason: it is indemnity, not income.

Determining the conjugal or separate character of life insurance proceeds:

GR: If taken before marriage, the proceeds areseparate property of the person who paid for the premiums with his separate property. If paid partly with separate and partly with conjugal funds, then it is proportionately separate and conjugal property.If taken after the marriage, it is presumed conjugal or community property.

7. Prior Interest

SEC. 85.Gross Estate. - the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated: Provided, however, that in the case of a nonresident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate.

X XX

(F) Prior Interests. - Except as otherwise specifically provided therein, Subsections (B), (C) and (E) of this Section shall apply to the transfers, trusts, estates, interests, rights, powers and relinquishment of powers, as severally enumerated and described therein, whether made, created, arising, existing, exercised or relinquished before or after the effectivity of this Code.

X XX

8. Transfers for insufficient consideration

SEC. 85.Gross Estate. - the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated: Provided, however, that in the case of a nonresident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate.

X XX

(G) Transfers of Insufficient Consideration. - If any one of the transfers, trusts, interests, rights or powers enumerated and described in Subsections (B), (C) and (D) of this Section is made, created, exercised or relinquished for a consideration in money or money's worth, but is not a bona fide sale for an adequate and full consideration in money or money's worth, there shall be included in the gross estate only the excess of the fair market value, at the time of death, of the property otherwise to be included on account of such transaction, over the value of the consideration received therefor by the decedent.

X XXTransfers for insufficient consideration:

This provision contemplates sale of property or property rights, but for inadequate consideration. A bona fide sale for adequate consideration is of course not contemplated by estate taxation.

Rule: the excess of the FMV of the transferred property at the time of death over the value of consideration shall be included in the gross estate.

Illustrations:1) Real property subject to final capital gains tax (apply the 6% CGT even if the property is sold for inadequate consideration. Reason: in such sales, there is a conclusive presumption of gain as the tax base is either the gross selling price (GSP) or the FMV

Properties subject to final CGT:

RC, NRC, RA, NRA-ETB, NRA-NETB: Real property located in the Philippines classified as capital asset DC: land/building classified as capital asset (location is immaterial)

2) FMV = P 5 Million, sold for P 6M. At the time of death, the property has an FMV of P10 M. Included? NO. At the time of sale, there is adequate consideration, so it is a bona fide sale.

3) FMV = P10 Million, SP = P6M. At the time of death, the FMV fell to P6 Million. Included? NO. There is no difference between the FMV at the time of death and the GSP.

4) FMV = P10 Million, SP = P 2M. At the time of death, the FMV is P8 Million. Included? YES. How much? P6 Million.5) FMV = P10 Million, simulated sale at P8 Million. At the time of death, the FMV rose to P12 Million. Included? YES. How much? The whole FMV at the time of death (P12 Million) is subject to estate tax, since there is no actual consideration paid.

How to know if the consideration is inadequate: Use either FMV or zonal value (ZV). E.g., FMV = P20M, ZV = P10M, SP = P12M. Is there adequate consideration? Yes. As long as the selling price is equal to or above the zonal value, consideration is adequate. Reason: BIR uses the ZV as benchmark. Although the rule is FMV less SP, the problem is sometimes there are no market indicators to determine FMV.

This rule is subject to BIR resorting to extrinsic evidence to show actual FMV of property. If that is higher, then leave it to BIR to use that, since they will be able to collect more taxes.

CLASS NOTES: Bottomline: if property is transferred gratuitously or for less than adequate consideration, in contemplation of death, it will be included in the gross estate. This includes the retention of property for life, or for any period which does not in fact end before the transferors death.

E. Specific Items to be included in Gross Estate

SEC. 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 sociedadanonima 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.

The term 'deficiency' means: (a) the amount by which tax imposed by this Chapter exceeds the amount shown as the tax by the donor upon his return; but the amount so shown on the return shall first be increased by the amount previously assessed (or Collected without assessment) as a deficiency, and decreased by the amounts previously abated, refunded or otherwise repaid in respect of such tax, or (b) if no amount is shown as the tax by the donor, then the amount by which the tax exceeds the amounts previously assessed, (or collected without assessment) as a deficiency, but such amounts previously assessed, or collected without assessment, shall first be decreased by the amount previously abated, refunded or otherwise repaid in respect of such tax.

E. Specific Items to be included in Gross Estate

SEC. 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.

X X X

Real and Personal Property, whether tangible or intangible, or mixed, wherever situated If Decedent is an NRA at the time of his death, his real and personal property so transferred but which are situated outside the Philippines: NOT INCLUDED IN GROSS ESTATE Franchise which must be exercised in the Philippines

Shares, obligations or bonds

issued by any corporation or sociedad anonima organized and constituted in the Philippines

issued by any foreign corporation 85% of the business of which is located in the Philippines

issued by any foreign corporation if such shares, obligations, or bonds have acquired a business situs in the Philippines

used in furtherance of its business in the Philippines

Shares or rights in any partnership, business or industry established in the Philippines

Legend:

Included in gross estate

Excluded in gross estate

F. Valuation of the Gross Estate

SEC. 88. Determination of the Value of the Estate. -

(A) Usufruct. - To determine the value of the right of usufruct, use or habitation, as well as that of annuity, there shall be taken into account the probable life of the beneficiary in accordance with the latest Basic Standard Mortality Table, to be approved by the Secretary of Finance, upon recommendation of the Insurance Commissioner.

(B) Properties. - The estate shall be appraised at its fair market value as of the time of death. However, the appraised value of real property as of the time of death shall be, whichever is higher of -

(1) The fair market value as determined by the Commissioner, or

(2) The fair market value as shown in the schedule of values fixed by the Provincial and City Assessors.

RR 02-03

SEC. 5. VALUATION OF THE GROSS ESTATE. The properties

comprising the gross estate shall be valued based on their fair market value as of the time of death.

If the property is a real property, the fair market value shall be the fair market value as determined by the Commissioner or the fair market value as shown in the schedule of values fixed by the provincial and city assessors, whichever is higher. For purposes of prescribing real property values, the Commissioner is authorized to divide the Philippines into different zones or areas and shall, upon consultation with competent appraisers, both from the private and public sectors, determine the fair market value of real properties located in each zone or area.

In the case of shares of stocks, the fair market value shall depend on whether the shares are listed or unlisted in the stock exchanges. Unlisted common shares are valued based on their book value while unlisted preferred shares are valued at par value. In determining the book value of common shares, appraisal surplus shall not be considered as well as the value assigned to preferred shares, if there are any.

For shares which are listed in the stock exchanges, the fair market value shall be the arithmetic mean between the highest and lowest quotation at a date nearest the date of death, if none is available on the date of death itself.3

To determine the value of the right to usufruct, use or habitation, as well as that of annuity, there shall be taken into account the probable life of the beneficiary in accordance with the latest basic standard mortality table, to be approved by the Secretary of Finance, upon recommendation of the Insurance Commissioner.

IN GENERAL Initially made by the executor, administrator, or heir concerned, being the person required to file the estate tax return.

The value of the estate shall be appraised at its fair market value.

FMV is the price which a property will bring when it is offered for sale by one who desires, but is not obliged to sell, and is bought by one who is under no authority necessity of buying it.

SUMMARY OF VALUATIONPROPERTYBASIS OF VALUATION

REAL PROPERTY FMV as of the time of death, whichever is higher between:

(a) FMV as shown in the schedule of values fixed by the provincial and city assessors(b) FMV as determined by the CIR,

PERSONAL PROPERTY

(a) Generally FMV: at the price the property would change hands between a willing seller and a willing buyer

Sentimental value is disregarded

(b) Shares of Stock FMV: depends on whether listed or unlisted

(1) Unlisted(a) Common: book value

Appraisal surplus should not be considered

(b) Preferred: par value

Appraisal surplus should not be considered

(2) Listed FMV: arithmetic mean between the highest and lowest quotation at a date nearest the date of death

If none is available, the date of death itself

(c) Goodwill Valuable asset which is an integral part of a going business to which it is inseparably attached

EXCEPTION: If shown that success of business was directly proportional to the decedents personal efforts and reputation, no goodwill survives and therefore not included in gross estate

Not susceptible of determination of exactitude

(d) Notes and amounts receivable Principal + interests due and unpaid

(e) Rights or interest in property The probable life of the beneficiary in accordance with the latest basic standard mortality table

USUFRUCT Refer to the American Tropical Experience Table @ p. 83 DE LEON

VALUE OF USUFRUCT = [Value of property x AX value (under the actual age of the usufructuary)]

PRESENT WORTH = Value of usufruct x 8%

NAKED TITLE VALUE OF NAKED OWNERSHIP = VALUE OF THE PROPERTY VALUE OF THE USUFRUCT

ANNUITIES

(a) To last during the lifetime of the annuitant Amount payable annually x AX (under the nearest to the actual age of the annuitant)

(b) To last during lifetime of another person Where beneficiary is entitled to receive an annuity during the lifetime of a third person: based on age of third person at the time of decedents death

Where payable to beneficiary at upon the death of a third person: Based on the age of beneficiary at the time of Third Persons death

LEGACY OF EDUCATION = Number of years the legatee needs to reach 21 years or beyond (Note: legacy for education lasts until the legatee may finish some profession, vocational or general course) x average of the profits, interests or dividends derived from the property during a reliable period prior to decedents death

PROPERTY TRANSFERRED INTER VIVOSGENERAL RULE: valued as of the date of death or optional valuation date and not date of transfer

EXCEPTION: Where transferee has made a disposition of the property before the valuation date

(a) If it profited from the investment, then the increased value

(b) If it suffered loss, then the amount of the gift not the remaining value

III. DETERMINATION OF NET ESTATE/ALLOWABLE DEDUCTIONS FROM GROSS ESTATE

SEC. 86. Computation of Net Estate. - For the purpose of the tax imposed in this Chapter, the value of the net estate shall be determined:

NOTE:

The following is a short summary of the deductions as discussed in class. De Leons commentaries will come after Othellos words of wisdom. ( This part will deal with the items enclosed in the red box as follows:

ExclusiveConjugalTotal

GROSS ESTATE

Realxxxxxxxxxxxx

Personalxxxxxxxxxxxx

Intangiblexxxxxxxxxxxx

TOTAL GROSS ESTATExxxx

xxxx

LESS:

ORDINARY DEDUCTIONS

Expenses

Funeralxxxxxxxx

Judicialxxxxxxxx

Losses

Casualxxx orxxxx(xxxx)

Bad Debts (Claims against insolvent persons)xxx orxxxx(xxxx)

Indebtedness

Claims against the estatexxx orxxxx(xxxx)

Unpaid Mortgagexxxx orxxxx(xxxx)

Taxesxxxx (xxxx)

Property Previously Taxedxxx orxxxx(xxxx)

Transfer for Public Usexxxx orxxxx(xxxx)

SPECIAL DEDUCTIONS

Family Home

(xxxx)

Standard Deduction(xxxx)

Medical Expenses(xxxx)

Retirement, etc.(xxxx)

NET CONJUGAL ESTATE

xxxx

Less: Share of the Surviving Spouse(xxxx)

NET TAXABLE ESTATEXXXX

A. Net Estate of Decedent who is either Citizen or Resident of the Philippines (RC, NRC, RA) - Value of the estate shall be determined by deducting from the value of the estate:

SEC. 86. Computation of Net Estate. - For the purpose of the tax imposed in this Chapter, the value of the net estate shall be determined:

(A) Deductions Allowed to the Estate of Citizen or a Resident. - In the case of a citizen or resident of the Philippines, by deducting from the value of the gross estate -

1. Expenses, losses, indebtedness and taxes

SEC. 86. Computation of Net Estate. - For the purpose of the tax imposed in this Chapter, the value of the net estate shall be determined:

(B) Deductions Allowed to the Estate of Citizen or a Resident. - In the case of a citizen or resident of the Philippines, by deducting from the value of the gross estate -

(1) Expenses, Losses, Indebtedness, and taxes. - Such amounts -

(a) For actual funeral expenses or in an amount equal to five percent (5%) of the gross estate, whichever is lower, but in no case to exceed Two hundred thousand pesos (P200,000);

(b) For judicial expenses of the testamentary or intestate proceedings;

(c) For claims against the estate: Provided, That at the time the indebtedness was incurred the debt instrument was duly notarized and, if the loan was contracted within three (3) years before the death of the decedent, the administrator or executor shall submit a statement showing the disposition of the proceeds of the loan;

(d) For claims of the deceased against insolvent persons where the value of decedent's interest therein is included in the value of the gross estate; and

(e) For unpaid mortgages upon, or any indebtedness in respect to, property where the value of decedent's interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estate, but not including any income tax upon income received after the death of the decedent, or property taxes not accrued before his death, or any estate tax. The deduction herein allowed in the case of claims against the estate, unpaid mortgages or any indebtedness shall, when founded upon a promise or agreement, be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money's worth. There shall also be deducted losses incurred during the settlement of the estate arising from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement, when such losses are not compensated for by insurance or otherwise, and if at the time of the filing of the return such losses have not been claimed as a deduction for the income tax purposes in an income tax return, and provided that such losses were incurred not later than the last day for the payment of the estate tax as prescribed in Subsection (A) of Section 91.

i. Funeral Expenses

RR 02-03

SEC. 6. COMPUTATION OF THE NET ESTATE OF A DECEDENT WHO IS EITHER A CITIZEN OR RESIDENT OF THE PHILIPPINES. - The value of the net estate of a citizen or resident alien of the Philippines shall be determined by deducting from the value of the gross estate the following items of deduction:

(A) Expenses, losses, indebtedness, and taxes- Such amounts for:

(1) Actual funeral expenses (whether paid or unpaid) up to the time of interment, or an amount equal to five percent (5%) of the gross estate, whichever is lower, but in no case to exceed P200,000. Any amount of funeral expenses in excess of the P200,000 threshold, whether the same had actually been paid or still payable, shall not be allowed as a deduction under this Subsection. Neither shall the unpaid portion of the funeral expenses incurred which is in excess of the P200,000 threshold be allowed to be claimed as a deduction under claims against the estate provided under Subsection (C) hereof.

The term "FUNERAL EXPENSES" is not confined to its ordinary or usual meaning. They include:

(a) The mourning apparel of the surviving spouse and unmarried minor children of the deceased bought and used on the occasion of the burial;

(b) Expenses for the deceaseds wake, including food and drinks;

(c) Publication charges for death notices;

(d) Telecommunication expenses incurred in informing relatives of the deceased;

(e) Cost of burial plot, tombstones, monument or mausoleum but not their upkeep. In case the deceased owns a family estate or several burial lots, only the value corresponding to the plot where he is buried is deductible;

(f) Interment and/or cremation fees and charges; and

(g) All other expenses incurred for the performance of the rites and ceremonies incident to interment.

Expenses incurred after the interment, such as for prayers, masses, entertainment, or the like are not deductible. Any portion of the funeral and burial expenses borne or defrayed by relatives and friends of the deceased are not deductible.

Medical expenses as of the last illness will not form part of funeral expenses but should be claimed under subsection (F) of this section. Actual funeral expenses shall mean those which are actually incurred in connection with the interment or burial of the deceased. The expenses must be duly supported by receipts or invoices or other evidence to show that they were actually incurred.

Illustrations on how to determine the amount of allowable funeral expenses

(a) If five percent (5%) of the gross estate is P70,000 and the amount actually incurred is P50,000, only P50,000 will be allowed as deduction;

(b) If the expenses actually incurred amount to P90,000 and five percent (5%) of the gross estate is P70,000, only P70,000 will be allowed as deduction;.

(c) If five percent (5%) of the gross estate is P220,000 and the amount actually incurred is P215,000, the maximum amount that may be deducted is only P200,000;

(d) If five percent (5%) of the gross estate is P 100,000 and the total amount incurred is P150,000 where P20,000 thereof is still unpaid, the only amount that can be claimed as deduction for funeral expenses is P100,000. The entire P50,000 excess amount consisting of P30,000 paid amount and P20,000 unpaid amount can no longer be claimed as FUNERAL EXPENSES. Neither can the P20,000 unpaid portion be deducted from the gross estate as CLAIMS AGAINST THE ESTATE under Subsection (C) hereof.REQUISITESActual funeral expenses whether paid or unpaid which are:(1) Actually incurred in connection with the interment or burial of the deceased

(2) Paid for from the estate of the deceased

(3) Duly supported by receipts, invoices or other evidence

HOW DEDUCTED If the deceased is one of the spouses, funeral expense is chargeable to the conjugal partnership or community property

RESTRICTIONS (a) Actual funeral expense or (b) 5% of gross estate, WHICHEVER IS LOWER In no case shall it exceed P200, 000 (CEILING)

SCENARIO 1SCENARIO 2SCENARIO 3

Actual funeral ExpenseP 150KP100KP300K

Gross EstateP2M

(5%=P100K)P4M

(5% = P200K)P5M

(5% = P250K)

Maximum/ CeilingP 200KP 200KP200K

EXPENSES COVERED (RR 02-03; Sec. 6 (A)(1)) The mourning apparel of the surviving spouse and unmarried minor children of the deceased bought and used on the occasion of the burial;

Expenses for the deceaseds wake, including food and drinks;

Publication charges for death notices;

Telecommunication expenses incurred in informing relatives of the deceased;

Cost of burial plot, tombstones, monument or mausoleum. In case the deceased owns a family estate or several burial lots, only the value corresponding to the plot where he is buried is deductible;

Upkeep is not covered

Interment and/or cremation fees and charges; and

All other expenses incurred for the performance of the rites and ceremonies incident to interment.

EXPENSES NOT DEDUCTIBLE:

Expenses incurred after the interment (i.e. for prayers , entertainment and the like)

Any portion of the funeral and burial expenses defrayed by relatives and friends

REASON: did not come from the estate

Medical expenses as of the last illness claimed under the said item and categoryLegend:

Deductible from gross estate

Not deductible from gross estate

ii. Judicial expenses of the testamentary and intestate proceedingsRR 02-03

SEC. 6. COMPUTATION OF THE NET ESTATE OF A DECEDENT WHO IS EITHER A CITIZEN OR RESIDENT OF THE PHILIPPINES. - The value of the net estate of a citizen or resident alien of the Philippines shall be determined by deducting from the value of the gross estate the following items of deduction:

(A) Expenses, losses, indebtedness, and taxes- Such amounts for:

(2) Judicial expenses of the testamentary or intestate proceedings. Expenses allowed as deduction under this category are those incurred in the inventory-taking of assets comprising the gross estate, their administration, the payment of debts of the estate, as well as the distribution of the estate among the heirs. In short, these deductible items are expenses incurred during the settlement of the estate but not beyond the last day prescribed by law, or the extension thereof, for the filing of the estate tax return. Judicial expenses may include:

(a) Fees of executor or administrator;

(b) Attorneys fees;

(c) Court fees;

(d) Accountants fees;

(e) Appraisers fees;

(f) Clerk hire;

(g) Costs of preserving and distributing the estate;

(h) Costs of storing or maintaining property of the estate;and(i) Brokerage fees for selling property of the estate.

Any unpaid amount for the aforementioned cost and expenses claimed under Judicial Expenses should be supported by a sworn statement of account issued and signed by the creditor.

REQUISITES:

(1) Expenses must be incurred during the settlement of the estate but not beyond the last day prescribed or the extension thereof

Deadline: 6 months from the date of the death

(2) If unpaid, they should be supported by a statement of account issued and signed by the creditor.

EXPENSES COVERED:

Expenses incurred in the inventory taking, administration and collection, payment of debts and distribution of the property Executors or administrators fees Attorneys fees and court fees Appraisers fees Costs of preserving and distributing the estate Costs of preserving or distributing the estate EXPENSES NOT DEDUCTIBLE:

GENERAL RULE: Expenses not essential to the proper settlement of the estate but incurred for the individual benefit of the heirs, legatees or devicesEXAMPLES:

Trustees compensation for managing the decedents real estate for the benefit of the heirs Attorneys fees incident to the litigation incurred by the heirs for asserting their respective right and claims Premiums paid by the administrator on his bondOthello Says:

Paid by heirs or relatives

Paid or unpaid

Unpaid judicial expenses cannot be claimed under claims against the estate

Expenses in excess of P200K

Cannot also be claimed under claims against the estate

Administration for the settlement of the estate only

Trustee fees not essential to the settlement of the estate

These are incurred after the death of the decedent

Attorneys fees or Accountants fees

iii. Claims of the deceased against insolvent persons (Bad Debts)

RR 02-03

SEC. 6. COMPUTATION OF THE NET ESTATE OF A DECEDENT WHO IS EITHER A CITIZEN OR RESIDENT OF THE PHILIPPINES. - The value of the net estate of a citizen or resident alien of the Philippines shall be determined by deducting from the value of the gross estate the following items of deduction:

(A) Expenses, losses, indebtedness, and taxes- Such amounts for:

(4)Claims of the deceased against insolvent persons where the value of the decedents interest therein is included in the value of the gross estate; and,

REQUISITES:

(1) The amount of the claims has been initially included as part of his gross estate

If not declared and included as assets of the estate because it will amount to double deduction

(2) Incapacity of the debtors to pay their obligations is proven and not merely alleged

RATIONALE: Since the debts are uncollectible, they are worthless and it is therefore both unfair and unreasonable if taxes were to be paid on them by the heirs.iv. Casualty LossesRR 02-03

SEC. 6. COMPUTATION OF THE NET ESTATE OF A DECEDENT WHO IS EITHER A CITIZEN OR RESIDENT OF THE PHILIPPINES. - The value of the net estate of a citizen or resident alien of the Philippines shall be determined by deducting from the value of the gross estate the following items of deduction:

(A) Expenses, losses, indebtedness, and taxes- Such amounts for:

(5) Unpaid mortgages, taxes and casualty losses

(c) There shall also be deducted losses incurred during the settlement of the estate arising from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement, when such losses are not compensated for by insurance or otherwise, and if at the time of the filing of the return such losses have not been claimedas a deduction for income tax purposes in an income tax return, and provided that such losses were incurred not later than the last day for the payment of the estate tax as prescribed in Subsections (A) and (B) of Section 91.

REQUISITES:

(1) There must be a loss arising from fires, storms, shipwreck or other casualties or from robbery, theft, or embezzlement(2) Such loss is not compensated for by the insurance

(3) Such loss has not been claimed as a deduction for income tax purposes

(4) Such loss was incurred not later than the last day for the payment of the estate.

v. Claims against estate

1. Requisite for deductibility

RR 02-03

SEC. 6. COMPUTATION OF THE NET ESTATE OF A DECEDENT WHO IS EITHER A CITIZEN OR RESIDENT OF THE PHILIPPINES. - The value of the net estate of a citizen or resident alien of the Philippines shall be determined by deducting from the value of the gross estate the following items of deduction:

(A) Expenses, losses, indebtedness, and taxes- Such amounts for:

X X X

(3) Claims against the estate. The word claims is generally construed to mean debts or demands of a pecuniary nature which could have been enforced against the deceased in his lifetime and could have been reduced to simple money judgements. Claims against the estate or indebtedness in respect of property may arise out of : (1) Contract; (2) Tort; or (3) Operation of Law.

(i) Requisites for Deductibility of Claims Against the Estate

(a) The liability represents a personal obligation of the deceased existing at the time of his death except unpaid obligations incurred incident to his death such as unpaid funeral expenses (i.e., expenses incurred up to the time of interment) and unpaid medical expenses which are classified under a different category of deductions pursuant to these Regulations;

(b) The liability was contracted in good faith and for adequate and full consideration in money or moneys worth;

(c) The claim must be a debt or claim which is valid in law and enforceable in court;

(d) The indebtedness must not have been condoned by the creditor or the action to collect from the decedent must not have prescribed.

REQUISITES

[E-DRUG](1) Contracted in good faith and for an adequate and full consideration in money or moneys worth

(2) Must represent unpaid personal obligation of the deceased existing at the time of his death(3) Must be valid and legally enforceable obligations of the decedent and ought to be enforced by the claimants

(4) They must be reasonably certain in amount

(5) At the time the indebtedness was incurred, the debt instrument was duly notarized If the loan was contracted within 3 years before decedents death, the administrator or executor shall submit a statement showing the disposition of the proceeds of the loan

DEDUCTIBLE CLAIMS Debts or demands of a pecuniary nature which could have been enforced against a deceased in his lifetime and could have been reduced to simple money judgments

May arise out of contract, tort and operation of law

CLAIMS NOT DEDUCTIBLE Indebtedness that has been condoned

E: when, creditor settles for a lesser amount, where the lien claimed was certain and enforceable on the date of decedents death

ENTIRE amount of the obligation may be deductible notwithstanding the fact that technically, the creditor condoned a part of the obligation

Indebtedness the action to which has already prescribed

Unpaid obligations incurred incident to his death covered under funeral expenses or medical expenses

Income and real estate taxes that accrued after the date of decedents death chargeable to the income of the estate

PROCEDURE(1) NOTICE TO CREDITORS

WHEN: order immediately made after the granting of letters testamentary or of administration

(2) FILING OF CLAIMS

Claims which must be filed:

(a) All claims of money arising from contract, express or implied, whether due, not due or contingent

(b) All claims for funeral expenses and expenses for the last sickness of decedent (NOTE: these are deductible under a different items)

(c) Judgment for money

(3) EFFECT OF FAILURE TO FILE CLAIMS

GENERAL RULE: forever barred

E: may be set up as counterclaim

Othello says:

If expense is for family use then it is deducted from the conjugal properties

2. Substantiation Requirement

RR 02-03

SEC. 6. COMPUTATION OF THE NET ESTATE OF A DECEDENT WHO IS EITHER A CITIZEN OR RESIDENT OF THE PHILIPPINES. - The value of the net estate of a citizen or resident alien of the Philippines shall be determined by deducting from the value of the gross estate the following items of deduction:

(A) Expenses, losses, indebtedness, and taxes- Such amounts for:

X X X

(3) Claims against the estate. The word claims is generally construed to mean debts or demands of a pecuniary nature which could have been enforced against the deceased in his lifetime and could have been reduced to simple money judgements. Claims against the estate or indebtedness in respect of property may arise out of : (1) Contract; (2) Tort; or (3) Operation of Law.

(i) Requisites for Deductibility of Claims Against the Estate

X X X

(ii) Substantiation Requirements. - All unpaid obligations and liabilities of the decedent at the time of his death (except unpaid funeral or medical expenses which are deductible under a different category) are allowed as deductions from gross estate. Provided, however, that the following requirements/documents are complied with/submitted :

(a) In case of simple loan (including advances):

(1) The debt instrument must be duly notarized at the timethe indebtedness was incurred, such as promissory note or contract of loan, except for loans granted by financial institutions where notarization is not part of the business practice/policy of the financial institution-lender;

(2) Duly notarized Certification from the creditor as to the unpaid balanceof thedebt, including interest as of the time of death.

If the creditor is a corporation, the sworn certification should be signed by the President, or Vice-President, or other principal officer of the corporation. If the creditor is a partnership, the sworn certification should be signed by any of the general partners. In case the creditor is a bank or other financial institutions, the Certification shall be executed by the branch manager of the bank/financial institution which monitors and manages the loanof the decedent-debtor. If the creditor is an individual, the sworn certification should be signed by him. In any of these cases, the one who should certify must not be a relative of the borrower within the fourth civil degree, either by consanguinity or affinity, except when the requirement below is complied with.

When the lender, or the President/Vice-president /principal officer of the creditor-corporation, or the general partner of the creditor-partnership is a relative of the debtor in the degree mentioned above, a copy of the promissory note or other evidence of the indebtedness must be filed with the RDO having jurisdiction over the borrower within fifteen days from the execution thereof.

(3) In accordance withthe requirementsas prescribed in existing or prevailing internal revenue issuances, proof of financial capacity of the creditor to lend the amount at the time the loan was granted, as well as its latest audited balance sheet with a detailed schedule of its receivable showing the unpaid balance of the decedent-debtor. In case the creditor is an individual who is no longerrequired to file incometax returns with the Bureau, a duly notarized Declaration by the creditor of his capacity to lend at the time when the loan was granted without prejudice to verification that may be made by the BIR to substantiate such declaration of the creditor. If the creditor is a non-resident, the executor/ administrator or any of the legal heirs must submit a duly notarized declaration by the creditor of his capacity to lend at the time when the loan was granted, authenticated or certified to as such by the tax authority of the country where the non-resident creditor is a resident;

(4)A statement under oath executed by the administrator or executor of the estate reflecting the disposition of the proceeds of the loan if said loan was contracted within three (3) years prior to the death of the decedent;

(b) If the unpaid obligation arose from purchase of goods services: or

(1) Pertinent documents evidencing the purchase of goods or service, such, as sales invoice/delivery receipt (for sale of goods), or contract for the services agreed to be rendered (for sale of service), as duly acknowledged, executed andsigned by decedent- debtor and creditor, and statement of account given by the creditor as duly received by the decedent- debtor;

(2) Duly notarized Certification from the creditor as to the unpaid balance of the debt, including interest as of the time ofdeath. If the creditor is a corporation, the sworn Certification should be signed by the President, or Vice-President, or other principal officer of the corporation. If the creditor is a partnership, the sworn certification should be signed by any of the general partners. If the creditor is a sole proprietorship, the sworn certification should be signed by the owner of the business. In any of these cases, the one who issues the certification must not be a relative of the decedent-debtor within the fourth civil degree, either by consanguinity or affinity, except when the requirement below is complied with.

When the lender, or the President/Vice- President/principal officer of the creditor-corporation, or the general partner of the creditor-partnership is a relative of the debtor in the degree mentioned above, a copy of the promissory note or other evidence of the indebtedness must be filed with the RDO having jurisdiction over the borrower within fifteen days from the execution thereof.

(3) Certified true copy of the latest audited balance sheet of the creditor with a detailed schedule of its receivable showing the unpaid balance of the decedent-debtor. Moreover, a certified true copy of the updated latest subsidiary ledger/records of the debt of the debtor-decedent, (certified by the creditor, i.e.,the officers mentionedin the preceding paragraphs) should likewise be submitted.

(c) Where the settlement is made through the Court in a testate or intestate proceeding, pertinent documentsfiled with the Court evidencing the claims against the estate, and the Court Orderapproving the saidclaims,if already issued, in addition to the documents mentioned in the preceding paragraphs.

Annotation merely restated the provision. Just read the provision. (

vi. Unpaid mortgages

RR 02-03

SEC. 6. COMPUTATION OF THE NET ESTATE OF A DECEDENT WHO IS EITHER A CITIZEN OR RESIDENT OF THE PHILIPPINES. - The value of the net estate of a citizen or resident alien of the Philippines shall be determined by deducting from the value of the gross estate the following items of deduction:

(A) Expenses, losses, indebtedness, and taxes- Such amounts for:

X X X

(5) Unpaid mortgages, taxes and casualty losses

(a)Unpaid mortgages upon, or any indebtedness in respect to, property where the value of the decedents interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estate. The deduction herein allowed in the case of claims against the estate, unpaid mortgages or any indebtednessshall,when foundeduponapromiseor agreement, be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or moneys worth.

X X X

In case unpaid mortgage payable is being claimed by the estate, verification must be made as to who was the beneficiary of the loan proceeds. If the loan is found to be merely an accommodation loan where the loan proceeds went to another person, the value of the unpaid loan must be included as a receivable of the estate. If there is a legal impediment to recognize the same as receivable of the estate, said unpaid obligation/mortgage payable shall not be allowed as a deduction from the gross estate. In all instances, the mortgaged property, TO THE EXTENT OF THE DECEDENTS INTEREST THEREIN, should always form part of the gross taxable estate.

REQUISITES:

(1) The FMV of the property mortgaged without deducting the mortgage indebtedness has been initially included as part of the gross estate

(2) The mortgage indebtedness was contracted in good faith and for an adequate consideration and full consideration

EXAMPLE: Mortgaged Property = P200K to secure P150K indebtedness which remained unpaid at his death

P200K should be recorded in the gross estate in order to claim P150 unpaid mortgage indebtedness

Verification of the Beneficiary of Loan Proceeds: (a) If loan is merely an accommodation load where the loan proceeds went to another person, the value of the unpaid loan must be included as a receivable of the estate

(b) If there is a legal impediment to recognize the same as receivable of the estate, said unpaid obligation/mortgage payable shall not be allowed as a deduction from the gross estate

NOTE: In all cases, the mortgaged property should always form part of the gross taxable estate.

When Mortgagor is NRA

Indebtedness secured by a mortgage of real property situated outside the Philippines may not be deductedOthello says:

If proceeds of the mortgage loan was for family use then it is deducted from the conjugal properties

Does not matter if property mortgaged was conjugal or exclusivevii. Taxes

RR 02-03

SEC. 6. COMPUTATION OF THE NET ESTATE OF A DECEDENT WHO IS EITHER A CITIZEN OR RESIDENT OF THE PHILIPPINES. - The value of the net estate of a citizen or resident alien of the Philippines shall be determined by deducting from the value of the gross estate the following items of deduction:

(A) Expenses, losses, indebtedness, and taxes- Such amounts for:

X X X

(5) Unpaid mortgages, taxes and casualty losses

X X X

(b) Taxes which have accrued as of the death of the decedent which were unpaid as of the time of death. This deduction will not include income tax upon income received after death, or property taxes not accrued before his death, or the estate tax due from the transmission of his estate.

X X X

TAXES DEDUCTIBLE: Taxes owed by the decedent and unpaid at the time of death are deductible as CLAIMS AGAINST THE ESTATE

These are debts in favor of the government

TAXES NOT DEDUCTIBLE: because they are chargeable to the income of the estate

income taxes upon income received after the death of the decedent

property taxes not accrued before his death

estate tax due from the transmission of his estate

2. Property previously taxed (Vanishing Deduction)

SEC. 86. Computation of Net Estate. - For the purpose of the tax imposed in this Chapter, the value of the net estate shall be determined:

(A) Deductions Allowed to the Estate of Citizen or a Resident. - In the case of a citizen or resident of the Philippines, by deducting from the value of the gross estate -

X X X

(2) Property Previously Taxed. - An amount equal to the value specified below of any property forming a part of the gross estate situated in the Philippines of any person who died within five (5) years prior to the death of the decedent, or transferred to the decedent by gift within five (5) years prior to his death, 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 which can be identified as having been acquired in exchange for property so received:

One hundred percent (100%) of the value, if the prior decedent died within one (1) 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;

Eighty percent (80%) of the value, if the prior decedent died more than one (1) year but not more than two (2) 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;

Sixty percent (60%) of the value, if the prior decedent died more than two (2) years but not more than three (3) 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;

Forty percent (40%) of the value, if the prior decedent died more than three (3) years but not more than four (4) 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;

Twenty percent (20%) of the value, if the prior decedent died more than four (4) years but not more than five (5) 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;

These deductions shall be allowed only where a donor's tax or estate tax imposed under this Title was finally determined and paid by or on behalf of such donor, or the estate of such prior decedent, as the case may be, and only in the amount finally determined as the value of such property in determining the value of the gift, or the gross estate of such prior decedent, and only to the extent that the value of such property is included in the decedent's gross estate, and only if in determining the value of the estate of the prior decedent, no deduction was allowable under paragraph (2) in respect of the property or properties given in exchange therefor. Where a deduction was allowed of any mortgage or other lien in determining the donor's tax, or the estate tax of the prior decedent, which was paid in whole or in part prior to the decedent's death, then the deduction allowable under said Subsection shall be reduced by the amount so paid. Such deduction allowable shall be reduced by an amount which bears the same ratio to the amounts allowed as deductions under paragraphs (1) and (3) of this Subsection as the amount otherwise deductible under said paragraph (2) bears to the value of the decedent's estate. Where the property referred to consists of two or more items, the aggregate value of such items shall be used for the purpose of computing the deduction.

X X X

CONCEPT OF THE VANISHING DEDUCTION This deduction is an amount allowed to reduce the taxable estate of a decedent where property:

(a) Received by him from a prior decedent by gift, bequest, devise or inheritance; or

(b) Transferred to him by gift, has been the object of previous transfer taxation

RATIONALE: operates to ease the harshness of successive taxation of the same property within a relatively short time.

CONDITIONS: 2 factors necessary in vanishing deductions

(1) There are 2 deceased persons and the first is the donor

(2) The second decedent dies within 5 years after the death of the prior decedent, or in the case of gift, the decedent-donee dies within the same period after the date of the gift

WHO MAY AVAIL Vanishing deduction is allowable to the gross estate situated in the Philippines of a resident Filipino decedent as well as to the gross estate of a non-resident alien decedent

REQUISITES

(1) Death

The present decedent dies within 5 years from date of death of the prior decedent or date of gift

(2) Identity of the Property

The property with respect to which deduction is sought can be identified as the one received from prior decedent, or from the donor, or as the property acquired in exchange for the original property so received(3) Inclusion of the Property

The property must have formed part of the gross estate or have been included in the total amount of gifts of the donor made within 5 years prior to the present decedents death(4) Previous Taxation of the Property

The estate tax or donors tax on the previous transfer must have been finally determined and paid by the prior decedent or donor(5) No Previous Vanishing Deduction on the Property

LIMITATIONS/ Deductions on the deduction

(1) Value of Property Value of the property previously taxed (or the aggregate value of such property if more than one) OR the value of such property in present decedents gross estate, WHICHEVER IS LOWER

(2) Deduction for mortgage or other lien VALUE OF THE PROPERTY shall be reduced by the total amount paid by the present decedent on any mortgage or other lien on the property where a deduction was allowed, by reason of the payment of such from the estate of the prior decedent or gift of the donor. In short:VALUE TAKEN OF PPT

Less: Mortgage debt (or other lien paid) __

INITIAL BASIS

(3) Deductions for ELIT The Value shall be further reduced by an amount which bears the same ratio to the amounts allowed as deductions for (a) ELIT (b) transfers for Public Use as the amount otherwise deductible for PPT bears on the decedents gross estate In short,

(4) _____INITIAL BASIS___ xVALUE OF GROSS

ESTATE OF PRESENT

DECEDENTELIT and Transfer for Public Purpose

RATE OF DEDUCTION

100% of the value If the prior decedent died within 1 year prior to the death of the present decedent or if the property was transferred to him within the same period prior to his death

80% 1 year but not more than 2 years

60% More than 2 years but not more than 3 years

40% More than 3 years but not more than 4 years

20% More than 4 years but not more thah 5 years

COMPUTATION

STEP 1: FIRST DEDUCTION (MORTGAGE AND OTHER LIENS)

VALUE TAKEN OF PPT

Less: Mortgage Debt (or other lien) paid [1st DEDUCTION]

INITIAL BASIS

STEP 2: SECOND DEDUCTION (ELIT AND TRANSFER FOR PUBLIC USE

___INITIAL BASIS______ x ELIT, and Transfer for Public Purpose VALUE OF GROSS

ESTATE OF PRESENT

DECEDENT

STEP 3: VANISHING DEDUCTION

INITIAL BASIS

Less: 2nd Deduction_________________________

FINAL BASIS

x RATE OF DEDUCTION (see table above)

VANISHING DEDUCTION3. Transfers for Public Use

(3) Transfers for Public Use. - The amount of all the bequests, legacies, devises or transfers to or for the use of the Government of the Republic of the Philippines, or any political subdivision thereof, for exclusively public purposes.

X X X

ALLOWED DEDUCTIONS: Amount of all bequests, legacies, or transfers, to or for the use of the government or any political subdivision thereof, exclusively for public service

Must be TESTAMENTARY IN CHARACTER

ORAL TRANSFERS not deductible

RATIONALE: social need to finance socially desirable activities which the government would otherwise support by taxation

4. Family Home

SEC. 86. Computation of Net Estate. - For the purpose of the tax imposed in this Chapter, the value of the net estate shall be determined:

(A) Deductions Allowed to the Estate of Citizen or a Resident. - In the case of a citizen or resident of the Philippines, by deducting from the value of the gross estate -

X X X

(4) The Family Home. - An amount equivalent to the current fair market value of the decedent's family home: Provided, however, That if the s