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PM REYES BAR REVIEWER ON TAXATION II

(Based on the 2013 Bar Syllabus and Updated with the Recent BIR Issuances and the
Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)

This is the second installment of my two-part reviewer Note: Before we discuss Estate Tax, let us discuss the
on taxation. It covers 8 topics, namely: (1) Estate Tax concept of Transfer Taxes.
(2) Donor’s Tax (3) Tax Remedies (4) Organization and
Functions of the BIR (5) Local Government Taxation Q: What are transfer taxes?
(6) Real Property Taxation (7) Tariff and Customs
Code; (8) Judicial Remedies (CTA). It is a consolidated
and updated version of my reviewers in Tax 2 and
Transfer taxes are those taxes imposed upon the
Taxation Law Review. This reviewer is based on notes privilege granted by the state to the taxpayer so that
from Atty. Montero and Assoc. Dean Gruba and the he may transfer properties, real or personal, without
books and reviewers of Atty. Mamalateo and Atty. consideration.
Domondon. I also added some stuff from Atty. Mickey
Ingles’ reviewer and Justice Dimaampao. For the Q: What is the nature of transfer taxes?
transfer taxes, I added stuff from Starr Weigand’s
notes. References have also been made to the 2013
Transfer taxes are excise or privilege taxes that are
Bedan Red Book and the 2012 UP Tax Reviewer.
imposed on the act of passing ownership of property
Further, I added the recent and relevant revenue and not taxes on the property transferred.
regulations and other BIR issuances (especially those
issued in 2012) and the latest SC and CTA Q: What are the kinds of transfer taxes and
jurisprudence (as of January 31, 2013). Most of the define each?
digests were sourced from Du Baladad and
Associates (BDB Law) and from Baniqued & At present, the kinds of transfer taxes are:
Baniqued. The reviewer will make reference to codal
provisions. Thus, I recommend that you read this with
a copy of the NIRC and other Laws Codal (2012
1. Estate tax – a tax that is levied, assessed,
edition) by Atty. Sacadalan-Casasola collected and paid upon the transfer of the net
estate of a decedent to his or her heirs.
Possessors may reproduce and distribute my 2. Donor’s tax - is an excise tax levied, collected,
reviewer provided my name remains clearly and paid upon the privilege of transferring
associated with my work and no alterations in the property gratuitously by way of gift inter vivos by
form and content of my reviewer are made. No any person, resident or non-resident
stamping please.
Note: In 1973, aside from estate and donor’s tax,
May this reviewer prove useful to you. If it does, inheritance and donee’s tax were imposed. Inheritance
please share it to others. Happy studying! taxes are imposed on the right of the heirs to receive
property upon death of the decedent. Donee’s taxes are
--------------------------------------------------------------------------- imposed on the right given to the done to receive property
TABLE OF CONTENTS from a donor during his lifetime. PD No. 69 abolished
--------------------------------------------------------------------------- these two transfer taxes. Today, the recipient of property
by inheritance or donation is no longer liable for transfer
II. NIRC taxes.
B. Estate Tax ................................................. 2
C. Donor’s Tax ............................................. 18 Q: Differentiate estate tax from donor’s tax.
D. Value-Added Tax .................................... 25
E. Tax Remedies ......................................... 59 Estate Tax Donor’s Tax
F. Organization and Function of the Bureau
of Internal Revenue................................... 100 Tax on the privilege to Tax on the privilege to
III. Local Government Code transfer property upon transfer property during
A. Local Government Taxation ................ 104 one’s death (mortis one’s life time (inter
B. Real Property Taxation ........................ 120 causa) vivos)
IV. Tariff and Customs Code ......................... 137
V. Judicial Remedies (CTA) ......................... 152
Maximum tax rate of Maximum tax rate is
--------------------------------------------------------------------------- estate tax is 20% on net 15% on the net gifts
estates exceeding Php exceeding Php 10 million
10 million and the first and the first Php
Php 200,000 is exempt 100,000 is tax exempt

PIERRE MARTIN DE LEON REYES Page 1 of 164


Ateneo Law Batch 2013 Last Updated: 30 July 2013 (v3)
PM REYES BAR REVIEWER ON TAXATION II
(Based on the 2013 Bar Syllabus and Updated with the Recent BIR Issuances and the
Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)

Estate tax is computed Donor’s tax is computed Q: What is the basis of the imposition of
on the basis of the net on the basis of net gifts estate tax?
estate transferred at the given during a calendar
time of the death of the year Estate tax is imposed upon the basis of the net
decedent estate of the decedent, considered as a unit,
regardless of the number of shares into which it may
Q: Compare and contrast donation mortis be divided or the relationship of the beneficiaries.
causa and donation inter vivos.
Q: What law shall govern the imposition of
Mortis Causa Inter Vivos estate tax?

Both are transfers without onerous consideration RR 02-2003 [December 16, 2002] reiterates the
well-settled rule that estate taxation is governed by
takes effect upon the takes effect during the the statute in force at the time of the death of the
death of the transferor lifetime of the transferor decedent.

Ownership will pass only Ownership will pass Q: When does the estate tax accrue?
upon death during the donor’s life
time It accrues upon the death of the decedent. (Section
3, RR 2—2003 [December 16, 2002]
subject to estate tax subject to donor’s tax
Q: Is the accrual of the estate tax distinct
Q: What is the law that governs the from the obligation to pay the same?
imposition of transfer taxes?
Yes. The accrual of the tax is distinct from the
obligation to pay the same. Upon the death of the
Transfer taxes are governed by the laws existing at
decedent, succession takes place and the right of
the time the transfer takes place. In particular –
the State to tax the privilege to transmit the estate
vests instantly upon death (see RR 02-2003
a. Donations inter vivos are governed by the
[December 16, 2002].
law existing at the time of the effectivity of
the donation since the transfer takes place
Generally, the estate tax is paid at the time the
at that time
estate tax return is filed by the executor,
b. Donations mortis causa are governed by the
administrator or the heirs. The period to file an
law at the time of death because it is at that
estate tax return within six months from the death of
time that the property is transferred.
the decedent except in meritorious cases where an
extension not exceeding 30 days is granted. (see
---------------------------------------------------------- Section 90, Tax Code)
B. ESTATE TAX
---------------------------------------------------------- Q: A died. He left a will which provided that
all real estate shall not be sold or disposed
--------------------------------------------------------------- of 10 years after his death and when such
1. Basic Principles period lapses, the property shall be given to
--------------------------------------------------------------- B. (1) When does the estate tax accrue?

Q: What transfer is subject to estate tax? The estate tax accrues as of the death of the
decedent.
The transfer of the net estate of every decedent,
whether resident or non-resident is subject to estate Q: Based on the same facts as stated above,
tax. B contended that the inheritance tax should
be based on the value of the estate at the
lapse of the 10-year period. Is B’s
contention correct?

PIERRE MARTIN DE LEON REYES Page 2 of 164


Ateneo Law Batch 2013 Last Updated: 30 July 2013 (v3)
PM REYES BAR REVIEWER ON TAXATION II
(Based on the 2013 Bar Syllabus and Updated with the Recent BIR Issuances and the
Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)

3. Provide for an equal distribution of wealth


No, the tax accrues at the time of death 4. It is the most appropriate and effective
notwithstanding the condition. Since death is the method for taxing the “privilege” which the
generating source from which the power of the State decedent enjoys of controlling the
to impose estate taxes takes its being and if upon dispositions
the death of the decedent, succession takes place 5. It is the only method of collecting the share
and the right of the state to tax vests instantly, the which is properly due to the State as a
tax is to be measured by the value of the estate as it partner in the accumulation of property
stood at the time of the decedent’s death, regardless which was made possible on account of the
of any postponement of actual possession or any protection given by the State
subsequent increase or decrease in value.
(LORENZO V. POSADAS [JUNE 18, 1937]) Q: Discuss the different theories regarding
the purposes of estate tax.
---------------------------------------------------------------
2. Definition Benefit-received The tax is in return for the
--------------------------------------------------------------- theory services rendered by the state
in the distribution of the estate
Q: Define estate tax? of the decedent and for the
benefits that accrue to the
An estate tax is a graduated tax imposed on the estate and the heirs
privilege of the decedent to transmit property at
death and is based on the entire net estate, State- The tax is in the share of the
regardless of the number of heirs and relations to partnership state as a passive and silent
the decedent. theory partner in the accumulation of
property
It is a tax levied, assessed, collected and paid upon
the privilege of gratuitously transferring the net Ability to Pay The tax is based on the act that
estate of a decedent to his heirs. Theory the receipt of inheritance
creates the ability to pay and
--------------------------------------------------------------- thus contribute to governmental
3. Nature income
---------------------------------------------------------------
Redistribution The tax is imposed to help
of wealth theory reduce undue concentration of
Q: What is the nature of the estate tax? wealth in society to which the
receipt of inheritance is a
The Estate Tax is
contributing factor
a. It is not a tax on property
b. It is a tax imposed on the privilege to
---------------------------------------------------------------
transmit property a death and is measured
by the value of the property. 5. Time and transfer of properties
---------------------------------------------------------------
---------------------------------------------------------------
4. Purpose or object Q: When are properties and rights
--------------------------------------------------------------- transferred to successors?
The properties and rights are transferred to the
Q: What are the purposes for imposing the
successors at the time of death of the decedent (Art.
estate tax? 777, NCC).
The generally accepted purposes for imposing the However, despite the transfer of properties and
estate tax are as follows: rights at the time of death, the executor or
administrator shall not deliver a distributive share to
1. To generate additional revenue for the any party interested in the estate unless there is a
government
2. To reduce the concentration of wealth

PIERRE MARTIN DE LEON REYES Page 3 of 164


Ateneo Law Batch 2013 Last Updated: 30 July 2013 (v3)
PM REYES BAR REVIEWER ON TAXATION II
(Based on the 2013 Bar Syllabus and Updated with the Recent BIR Issuances and the
Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)

certification from the CIR that estate tax has been 8. Determination of gross estate and net
paid. (see Section 94, Tax Code) estate
---------------------------------------------------------------
Note: In the determination of the estate tax, you should
note 4 things: (1) The classification of the decedent based
on nationality and/or domicile (2) The nature and the Read Section 85, ¶1
location of the assets (3) The computation and valuation of
the assets (which includes deductions) and (4) Rates. Q: How is gross estate determined?
--------------------------------------------------------------- Decedent Determination of gross
6. Classification of decedent estate
---------------------------------------------------------------
Resident Citizen, All properties, real or
Q: Who are the taxpayers liable to pay Non-resident personal, tangible or
estate tax? Citizen, Resident intangible, wherever
Alien situated, plus items
1. Resident citizens includible in gross estate
2. Non-resident citizens
3. Resident alien Non-Resident Alien Only those properties
4. Non-resident alien situated in the Philippines
provided that with respect to
Note: Only natural persons can be held liable for estate intangible personal property,
tax. A corporation cannot be liable for the obvious reason its inclusion in the gross
that they cannot die (naturally speaking). estate is subject to the rule
of reciprocity under Section
--------------------------------------------------------------- 104 of the Tax Code
7. Gross estate vis-à-vis net estate
--------------------------------------------------------------- (See Section 4, RR No. 2-2003 [December 16,
2002])
Q: Distinguish Gross Estate from Net Estate
Read Section 104, Tax Code
Gross Estate Net Estate

The value of all the The value of the gross Q: What is the rule in determining the situs
property, real or estate less the ordinary of intangible personal property for estate tax
personal, tangible or and special deductions purposes?
intangible, of the (see Section 86, Tax
decedent wherever Code) As a general rule, we apply the principle of res
situated to the extent of mobilia sequuntur personam (“chattels follow the
his interest at the time of person”). In other words, the intangible property is
his death as well as taxed based on the domicile of the owner.
other items includible in
the gross estate (See However, SECTION 104 provides that certain
Section 85, Tax Code) intangibles be deemed located in the Philippines,
namely:
Note: In the case of a non-
resident alien decedent, 1. Franchises being exercised in the
only that part of the entire Philippines
gross estate which is
2. Shares, obligations, or bonds issued by
situated in the Philippines
shall form part of his gross domestic corporations, or partnerships,
estate. business or industry located in the
Philippines
--------------------------------------------------------------- 3. Shares, obligations or bonds issued by
foreign corporations

PIERRE MARTIN DE LEON REYES Page 4 of 164


Ateneo Law Batch 2013 Last Updated: 30 July 2013 (v3)
PM REYES BAR REVIEWER ON TAXATION II
(Based on the 2013 Bar Syllabus and Updated with the Recent BIR Issuances and the
Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)

a. at least 85% of the business of Non-Resident Alien Net estate is equal to gross
which is located in the Philippines; estate less ordinary
or deductions and exclusions
b. which have acquired situs in the allowed by law
Philippines
4. All intangibles owned by residents Note: Non-resident alien
decedent cannot avail of
Q: What is meant by reciprocity as applied special deductions.
to intangibles of a non-resident alien for
estate tax purposes? ---------------------------------------------------------------
9. Composition of gross estate
As provided in Section 104, there is reciprocity if the ---------------------------------------------------------------
foreign country of which the decedent was a citizen
or resident at the time of his death: Read Section 85, ¶1 and Section 104, Tax
Code
1. Did not impose an estate tax; or
2. Allowed a similar exemption from estate tax Q: What does the gross estate of a decedent
with respect to intangible personal property consist of?
owned by Filipino citizens not residing in that
foreign country. Decedent Composition of gross
estate
Q: Must there be total reciprocity?
Resident Citizen, 1. Real property within and
Yes. In COLLECTOR OF INTERNAL REVENUE V. FISHER Non-resident without the Philippines
[JANUARY 28, 1961], at issue is whether the shares Citizen, Resident 2. Tangible personal
of stock of a nonresident alien in a domestic mining Alien property within and
company can be exempted from estate tax pursuant without the Philippines
to the reciprocity proviso in the Philippine Tax Code. 3. Intangible personal
The Supreme Court held in the negative. Reciprocity property within and
must be total. If any of the two states collects or without the Philippines
imposes or does not exempt any transfer, death,
legacy, or succession tax of any character, the Non-Resident Alien 1. Real property within the
reciprocity does not work. In this case, the Philippines
Philippines imposed an estate and an inheritance 2. Tangible personal
tax at the time while California imposed only property within the
inheritance tax. Philippines
3. Intangible personal
Q: How is net estate determined? property within the
Philippines unless there
Decedent Determination of net estate is reciprocity in which
case it is not taxable
Resident Citizen, Net estate is equal to gross
Non-resident estate less ordinary and
Citizen, Resident special deductions and Note: In sum, all assets, real or personal, tangible or
Alien exclusions allowed by law intangible wherever located of a citizen and resident
alien is subject to estate tax while for nonresident aliens,
Note: The special estate tax is imposed only on properties within the
deductions (FSMA) are: (1) Philippines provided in the case of intangible personal
Family Home; (2) Standard property, it is subject to the rule of reciprocity under
Section 104 of the Tax Code.
deduction (3) Medical
expenses and (4) Amount
Read Section 88, Tax Code
received by heir under RA
4917.

PIERRE MARTIN DE LEON REYES Page 5 of 164


Ateneo Law Batch 2013 Last Updated: 30 July 2013 (v3)
PM REYES BAR REVIEWER ON TAXATION II
(Based on the 2013 Bar Syllabus and Updated with the Recent BIR Issuances and the
Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)

Q: How do you value the estate for estate b. Transfers in contemplation of death
tax purposes? c. Revocable transfers
d. Property under general power of
The properties comprising the gross estate shall be appointment
valued based on their fair market value as of the e. Proceeds of a life insurance taken out by the
time of death. decedent upon his own life where the
beneficiary is the estate, his executor or
Q: For purposes of estate taxation, how is administrator irrespective of whether or not
insured retained power of revocation or any
the fair market value of the following
beneficiary designated as recovable
properties determined? f. Transfers for insufficient consideration
Real Property Fair market value determined by: Note: These are considered “substitutes for testamentary
dispositions.” Although inter vivos in form, they are mortis
1. the CIR (zonal value) or causa in substance. Note that in all these transfers, if they
2. that shown in the schedule of were made for a bona fide consideration, they shall not
values fixed by Provincial and form part of the gross estate.
City Assessors, whichever is
higher Decedent’s Interest
Shares of If unlisted:
Stock Read Section 85(A)
1. Unlisted common shares are
valued based on their book Q: What does the decedent’s interest
value include?
2. Unlisted preferred shares are
valued at par value. It includes any interest having value or capable of
being valued, transferred by the decedent at his
If listed: death

The fair market value shall be the Transfer in contemplation of death


arithmetic mean between the
highest and lowest quotation at a Read Section 85(B)
date nearest the date of death, if
none is available on the date of Q: When is a transfer considered one made
death itself. in contemplation of death?
Usufructuary, The probable life of the
use or beneficiary in accordance with the A transfer is considered made in contemplation of
habitation, latest basic standard mortality death when the impelling motive or reason for the
annuity table shall be taken into account transfer is the thought of death, regardless of
whether the transferor is near the possibility of death
Improvement 1. The construction cost per or not.
building permit or
2. FMV per latest tax declaration Note: The presumption that transfers made within three
years before death are made in contemplation of death as
(See SECTION 88, TAX CODE AND SECTION 5, RR 02- provided under PD 1705 is no longer applicable.
2003]
Q: What factors should be considered in
--------------------------------------------------------------- determining whether a transfer was made in
10. Items to be included in gross estate contemplation of death?
---------------------------------------------------------------
One should consider the following:
Q: What items/transfers should be included 1. The type of heir (whether compulsory or
in the gross estate? voluntary)
2. The timing of the transfer
a. Decedent’s interest at the time of death 3. Other special factors

PIERRE MARTIN DE LEON REYES Page 6 of 164


Ateneo Law Batch 2013 Last Updated: 30 July 2013 (v3)
PM REYES BAR REVIEWER ON TAXATION II
(Based on the 2013 Bar Syllabus and Updated with the Recent BIR Issuances and the
Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)

and Z. The CIR contends that such transfers


Q: What is the relevance of the type of heir should form part of the gross estate for
in determining if the transfer was made in purposes of estate taxation. Is the CIR
contemplation of death? correct?
When there is a donation inter vivos is made to a No. The donation inter vivos was made to a legatee
person who is not a forced heir, the presumption is who is not a forced heir. Thus, absent any evidence
that such transfer is a donation inter vivos. to the contrary, the presumption holds that such
transfer is a donation inter vivos. Such being the
However, if the recipient of the property is a forced case, the transfer shall not form part of the gross
heir, the presumption is that such transfer was made estate (see TUASON V. POSADAS [JANUARY 23,
to accelerate inheritance and hence, such transfer is 1930]).
mortis causa. This presumption may be rebutted by
evidence to the contrary. (see VIDAL DE ROCES V. Q: Using the same facts above, it was
POSADAS [M ARCH 13, 1933]) determined that the transfer was made three
months before his death. Will the transfer
Q: Name some instances/factors which form part of the gross estate?
would disprove the claim that the transfer
was made in contemplation of death. Yes. In VIDAL DE ROCES V. POSADAS [M ARCH 13,
1933], the decedent died without forced heirs but
When the reason for the transfer was the desire of instituted a certain person as a legatee in his will.
the decedent to: The presumption that such transfer was a donation
inter vivos did not hold because of the timing of the
1. see his children enjoy the property while the transfer, which was a short period before death.
donor is still alive
2. save income of property taxes Q: Prior to his death, A gave his son B a
3. settle family disputes parcel of land through a deed of donation.
4. relieve donor from administrative burden
Upon A’s death, the CIR contends that the
5. to reward services rendered
6. to provide independent income for transfer should form part of the gross estate
dependents for purposes of estate taxation. Is the CIR
correct?
In GESTOPA V. CA [OCTOBER 5, 2000], the Supreme
Court enumerated some indications that the transfer Yes. Since the recipient of the property, the son, is a
was a donation inter vivos, to wit: forced heir, the presumption is that such transfer
was made in contemplation of death. Thus, the
1. Property was donated out of love and transfer should form part of the gross estate. (see
affection DIZON V POSADAS [NOVEMBER 4, 1933])
2. When a reservation on the donation is made
only with respect to the right of usufruct Q: During his lifetime, Father Z donated
which denotes naked ownership was some of his property to A, B, C on the
already transferred condition that they provide him rice and
3. When the transferors retained sufficient money every year. Father Z died. The CIR
property only for the purpose of maintaining contends that the transfers should form part
their status in life, thereby implying that it of the gross estate of Father Z. Is the CIR
was alright to part with the property even
correct?
during the transferor’s lifetime
4. Donee accepted the donation since in a
No. In donations inter vivos, as in the present case,
donation mortis causa acceptance is not
the donees acquired the right to the property while
required.
the donor was still alive, subject only to their
acceptance and the condition that they pay the
Q: A donated parcels of land to X, Y, and Z. donor rice and/or money. (see ZAPANTA V. POSADAS
A died without any forced heir. In her well, [DECEMBER 29, 1928])
she bequeathed personal property to X, Y,

PIERRE MARTIN DE LEON REYES Page 7 of 164


Ateneo Law Batch 2013 Last Updated: 30 July 2013 (v3)
PM REYES BAR REVIEWER ON TAXATION II
(Based on the 2013 Bar Syllabus and Updated with the Recent BIR Issuances and the
Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)

Recovable Transfers Proceeds of Life Insurance


Read Section 85(C) Read Section 85(E)

Q: What is a revocable transfer? Q: When shall proceeds of the life insurance


of the decedent form part of his gross
A revocable transfer is a transfer where the estate?
transferor has reserved his right to alter, amend or
revoke such transfer, regardless of whether the They shall form part of the gross estate if the
power is actually exercised or not during his lifetime beneficiary is:
and whether the power should be exercised by him
alone or in conjunction with someone else. To the 1. The estate of the deceased, his executor or
extent of any interest therein, it forms part of the administrator, irrespective of whether the
gross estate of the decedent. insured retained the power of revocation
2. Any beneficiary (third person) designated in
Property under General Power of the policy as revocable
Appointment
Note: (1) If the policy expressly stipulates that the
Read Section 85(D) designation of the beneficiary is irrevocable, then the
amount of the proceeds shall not be included in the gross
estate.
Q: Differentiate the estate tax treatment of
property passing under a general power of (2) It is revocable when the beneficiary may still be
appointment and one under a special power changed and the decedent has still retained interest in the
of appointment. policy. It is irrevocable when the beneficiary may no longer
be changed as they have acquired a vested interest. For
third persons whose designations are irrevocable, the
Kind of Nature Tax Treatment
proceeds of life insurance shall not form part of the gross
appointment estate. If it is revocable, it shall form part of the gross
estate.
General Donor gives the Shall form part
donee the power of the gross Transfers for Insufficient Consideration
to appoint any estate
person as Read Section 85(G)
successor to
enjoy the
Q: What are transfers for insufficient
property.
consideration?
Special Donor gives the Shall not form
Transfers for insufficient consideration are those
donee the power part of the
transfers that are not bona fide sales of property for
to appoint a gross estate
an adequate and full consideration in money or
person within a
money’s worth.
limited group to
succeed in the
The excess of the fair market value at the time of the
enjoyment of the
death over the value of the consideration received
property
by the decedent shall form part of his gross estate.

Note: (1) The rule on transfer for insufficient


consideration applies to (a) Transfers in contemplation of
death (b) Revocable transfers and (c) Transfers under
general power of appointment.

(2) As a numerical example –

PIERRE MARTIN DE LEON REYES Page 8 of 164


Ateneo Law Batch 2013 Last Updated: 30 July 2013 (v3)
PM REYES BAR REVIEWER ON TAXATION II
(Based on the 2013 Bar Syllabus and Updated with the Recent BIR Issuances and the
Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)

Note: Nonresident aliens cannot avail of the special


Example 1 Example 2 deductions.
FMV at time of transfer 100 100
FMV at time of death 200 200 Expenses, losses, indebtedness, taxes, etc
Consideration received 70 100 (ELIT)
at time of transfer
Amount included in 30 0 Read Section 86(A)(1)
estate

In determining whether there was sufficient consideration,


Funeral expenses
compare the FMV of the property at the time of the
transfer with the amount of consideration received at the Q: What the conditions for the deductibility
time of the transfer. However, the amount to be included in of funeral expenses?
the estate is computed by taking the difference between
the FMV of the property at the time of death and the
1. Whether paid or unpaid
amount of consideration received at the time of transfer.
2. Up to the time of interment
Example 1: Since the property was sold for 30 less than its 3. The actual amount or in an amount equal to
FMV at the time of the transfer, there is insufficient 5% of the gross estate, whichever is lower,
consideration. Hence, the difference between the but in no case to exceed P200,000
consideration received and the FMV at time of death shall
form part of the gross estate. Note: (1) Actual funeral expenses shall mean those which
are actually incurred in connection with the interment or
Example 2: This is not a transfer for insufficient burial of the deceased. The expenses must be duly
consideration, hence, it shall not form part of the gross supported by receipts or invoices or other evidence to
estate. This is a bona fide sale for an adequate and full show that they were actually incurred.
consideration in money’s worth.
(2) The amount in excess of the P200,000 threshold shall
--------------------------------------------------------------- not be allowed as a deduction nor will it be allowed to be
11. Deductions from estate claimed as a deduction under “claims against the estate.
---------------------------------------------------------------
Q: A died leaving an estate valued at
Q: Enumerate the deductions from the gross P20,000,000. His heirs spent P500,000 for all
estate. the funeral services. How much should be
allowed as a deduction?
The deductions from the gross estate are:
The amount deductible is only P200,000. To
1. Ordinary deductions determine amount deductible, compare P500,000
a. Expenses, losses, indebtedness, taxes, and P1,000,000 (5% of P20 million). The lower
etc (ELIT) amount is P500,000. However, it is beyond the
i. Funeral expenses P200,000 threshold. Thus, only P200,000 will be
ii. Judicial expenses allowed as a deduction.
iii. Claims against the estate
iv. Claims against insolvent persons
v. Unpaid mortgage or indebtedness Q: Give some examples of funeral expenses
on property that are deductible
vi. Taxes
vii. Losses 1. The mourning apparel of the surviving
b. Vanishing Deduction spouse and unmarried minor children of the
c. Transfer for public use deceased, bought and used on the occasion
2. Special deductions (FSMA) of the burial
a. Family home 2. Expenses for the deceased’s wake,
b. Standard deduction including food and drinks
c. Medical expenses 3. Publication charges for death notices;
d. Amount received by heir under RA 4917 4. Telecommunication expenses incurred in
informing relatives of the deceased;

PIERRE MARTIN DE LEON REYES Page 9 of 164


Ateneo Law Batch 2013 Last Updated: 30 July 2013 (v3)
PM REYES BAR REVIEWER ON TAXATION II
(Based on the 2013 Bar Syllabus and Updated with the Recent BIR Issuances and the
Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)

5. Cost of burial plot, tombstones, monument Q: Give some examples of judicial expenses
or mausoleum but not their upkeep. In case
the deceased owns a family estate or Judicial expenses may include:
several burial lots, only the value
corresponding to the plot where he is buried 1. Fees of executor or administrator;
is deductible; 2. Attorney’s fees;
6. interment and/or cremation fees and 3. Court fees;
charges; and 4. Accountant’s fees;
7. All other expenses incurred for the 5. Appraiser’s fees;
performance of the rites and ceremonies 6. Clerk hire;
incident to interment. (See RR 2-2003 7. Costs of preserving and distributing the
[December 16, 2002]) estate;
8. Costs of storing or maintaining property of
Q: Give some examples of funeral expenses the estate; and
that are not deductible 9. Brokerage fees for selling property of the
estate. (RR 2-2003)
1. Expenses incurred after the interment, such
as for prayers, masses, entertainment, or In CIR V. CA AND PAJONAR [M ARCH 22, 2000], the
the like. Supreme Court held that expenses incurred in the
2. Any portion of the funeral and burial extrajudicial settlement of the estate should be
expenses borne or defrayed by relatives and allowed as a deduction from the gross estate. It is
friends of the deceased. sufficient that the expense be a necessary
3. Medical expenses as of the last illness (See contribution toward the settlement of the estate. The
RR 2-2003 [December 16, 2002]) notarial fee paid for the extrajudicial settlement is
deductible since such settlement effected a
Note: As to (3) – This should instead be claimed as part of distribution of the decedent’s estate to his lawful
the deduction for “medical expenses”. heirs. The attorney’s fees in the guardianship
proceedings of the insane deceased is also
Judicial expenses deductible as it essential to the proper settlement of
the estate, to preserve the properties of the
Q: What are the requisites for the deceased.
deductibility of judicial expenses?
In Lorenzo v. Posadas [June 18, 1937], the
Judicial expenses to be deductible Supreme Court held that compensation of the
trustee earned, not in the administration of the
1. Must be incurred during the settlement of estate, but in the management thereof for the benefit
the estate but not beyond the last day of the legatees or devisees, does not come within
prescribed by law (within 6 months from the the class or reason for exempting administration
date of death of the decedent) or the expenses. Service rendered in behalf that behalf has
extension thereof (in meritorious cases, the no reference to closing the estate for the purpose of
CIR may grant reasonable extension not a distribution thereof to those entitled to it, and is not
exceeding 30 days) for the filing of the required or essential to the perfection of the rights of
estate tax return. the heirs or legatees.

In De Guzman v. De Guzman-Carillo [May 18,


2. The judicial expenses are incurred in: 1978], the Court allowed the following expenses as
proper expenses for administration of the estate of
a. Inventory-taking of assets comprising the deceased: expenses for the renovation and
the gross estate improvement of the family home, expenses for the
b. Administration lawyer’s subsistence and physician of the deceased
c. Payment of debts of the estate during his last illness, and irrigation fees. However,
d. The distribution of the estate among the expenses which inured to the benefit of only one heir
heirs (RR 2-2003) were not allowed. Further, the expenses for
stenographic notes, and celebration of the one year

PIERRE MARTIN DE LEON REYES Page 10 of 164


Ateneo Law Batch 2013 Last Updated: 30 July 2013 (v3)
PM REYES BAR REVIEWER ON TAXATION II
(Based on the 2013 Bar Syllabus and Updated with the Recent BIR Issuances and the
Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)

death anniversary were not allowed as they had any legislative intent in our tax laws, which
nothing to do with the administration of the estate. disregards the date-of-death valuation principle
which is the US rule on deductions. The amount
Claims against the estate deductible is the debt which could have been
enforced against the deceased in his lifetime,
Q: What are claims against the estate? nothing more and nothing less (DIZON V. CIR [APRIL
30, 2008])
These are debts or demands of pecuniary nature
Note: In sum, post-death developments should not be
which could have been enforced against the considered in determining the net value of the estate
deceased in his lifetime and could have been
reduced to simple money judgments. It may arise
Q: What are the requirements to substantial
out of:
the claims?
1. Contract
2. Tort In case of a. Instrument must be duly
3. Operation of law simple loan notarized
b. Duly notarized Certification
from the creditor
Q: What are the requisites for deductibility
c. Proof of financial capacity of the
of claims against the estate? creditor to lend;
d. Statement under oath executed
1. Must be a personal obligation of the by the executor/administrator of
deceased existing at the time of his death the estate reflecting the
except those incurred incident to his death disposition of the proceeds of
or those medical expenses the loan (if the loan was
2. Liability must have been contracted in good contracted within 3 years prior
faith to the death of the decedent)
3. The claim must be a debt or claim which is
valid in law and enforceable in court
In unpaid a. Pertinent documents
4. Indebtedness not condoned by the creditor
obligation evidencing the purchase of
or the action to collect from the decedent
arose from goods or service
must not have prescribed purchase of b. Duly notarized Certification
goods or from the creditor as to the
Q: There were claims against the estate of services unpaid balance of the debt,
the deceased which allegedly exceed the including interest as of the time
gross estate which resulted in the of death;
administrator reporting no estate tax c. Certified true copy of the latest
liability. The BIR contested the amounts of audited balance sheet of the
the claims against the estate deductions creditor
stating that lower amounts were paid as
compromise payments during the
settlement of the estate and these amounts
should be what will be considered in Claims against insolvent persons
arriving at the net estate. Will the
compromise amounts be the amounts Q: What are the requisites for claims against
considered as deductions to the gross insolvent persons to be deductible?
estate?
1. The amount has been initially included as
part of the gross estate; and
No, the deduction allowable is that amount
2. The incapacity of the debtors to pay their
determined at the time of death. Post-death
obligations is proven, not merely alleged.
developments are not material in determining the
amount of deduction, especially for the claims
against the estate deduction. There is no law, nor

PIERRE MARTIN DE LEON REYES Page 11 of 164


Ateneo Law Batch 2013 Last Updated: 30 July 2013 (v3)
PM REYES BAR REVIEWER ON TAXATION II
(Based on the 2013 Bar Syllabus and Updated with the Recent BIR Issuances and the
Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)

Unpaid mortgage or indebtedness on Losses


property
Q: What are the requisites for losses to be
Q: What are the requisites for unpaid deductible from the gross estate?
mortgages to be allowed as a deduction?
Losses are deductible:
1. The FMV of the property mortgaged without 1. were incurred during the settlement of the estate
deducting the indebtedness has been 2. arose from fires, storms, shipwreck or other
initially included as part of the gross estate; casualties or from robbery, theft or
and embezzlement
2. The mortgage indebtedness was contracted 3. are not compensable
in good faith and for an adequate and full 4. are not claimed as deduction for income tax
consideration in money/money’s worth. purposes
5. were incurred not later than the last day for
payment of the estate tax
Taxes
Vanishing Deduction
Q: What are the requisites for unpaid taxes
to be deductible? Read Section 86(A)(2), Tax Code

1. Taxes which have accrued as of or before Q: What is a vanishing deduction?


the death of the decedent; and
2. Unpaid as of the time of his death, A vanishing deduction is a deduction allowed on the
regardless of whether or not it was incurred property left behind by the decedent which he had
in connection with trade or business acquired previously by inheritance or donation

Note: This deduction will not include: (1) income tax upon Note: The rationale is to minimize the effects of double
income received after death, or (2) property taxes not taxation on the same property within a short period of
accrued before his death, or (3) the estate tax due from time; the law allows a deduction to be claimed on the said
the transmission of his/her estate. These shall be property.
chargeable against the income of the estate because it
accrued after the death of the decedent. Q: What are the conditions for the
deductibility of property previously taxed or
Q: Are claims for taxes against the estate vanishing deduction?
not filed in time barred forever?
1. Death
No. As a general rule, all claims for money against 2. Identity of property (the property with
the decedent, arising from contracts, express or respect to which deduction is sought can be
implied, whether the same be due, not due, or identified as the one received from the prior
contingent, all claims for funeral expenses and decedent)
expenses for the last sickness of the decedent, and 3. Inclusion of the property (the property must
judgment for money against the decedent, must be form part of the gross estate situated in the
filed within the time limited in they notice; otherwise Philippines of the prior decedent or was a
they are barred forever. taxable gift of the donor)
4. Previous taxation of property (Estate tax or
However, as an exception, taxes assessed against donor’s tax due thereon must have been
the estate of a deceased person need not be paid)
submitted to the committee on claims in the ordinary 5. No vanishing deduction on the property was
course of administration. They may be collected allowed to the estate of the prior decedent
even after the distribution of the decedent’s estate
among his heirs who shall be liable therefore in
proportion of their share in the inheritance. (Vera v.
Fernandez [March 30, 1979])

PIERRE MARTIN DE LEON REYES Page 12 of 164


Ateneo Law Batch 2013 Last Updated: 30 July 2013 (v3)
PM REYES BAR REVIEWER ON TAXATION II
(Based on the 2013 Bar Syllabus and Updated with the Recent BIR Issuances and the
Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)

Q: What are the conditions for the 2. The total value of the family home must be
deductibility of property previously taxed or included as part of the gross estate
3. Allowable deduction must be in an amount
vanishing deduction? equivalent to:
a. the current FMV of the family home as
1. Determine the FMV of the PPT at the time of declared or included in the gross estate or
the prior decedent’s death and the FMV at b. the extent of the decedent’s interest
the time of the present decedent’s death (whether conjugal/community or exclusive
then get the lower of these two amounts property), whichever is lower
2. Prorate: 4. The deduction not exceed Php 1,000,000.

Standard deduction

Read Section 86(A)(5)


Note: Total deductions do not include the special
deductions (FSMA)

3. Subtract 2 from 1 Q: What is the standard deduction?


4. Apply the rate of vanishing deduction to 3
above. The standard deduction shall be Php 1,000,000
without need of substantiation.
Note: Let us have a numerical example. In 2000, A
inherits a land valued at P500,000. In 2003, A died with
the said land having a value of P600,000. His gross estate Medical expenses
amounted to P2 million. His allowable deductions
amounted to P400,000 Read Section 86(A)(6)
500,000 – ( Q: What are the requisites for deductibility
of medical expenses?
= 400,000 1. The expenses were incurred by the decedent
= 400,000 x 60% = P240,000 within 1 year prior to his death
2. The expenses are duly substantiated with
Transfer for public use receipts
3. The deductible expense shall not exceed Php
500,000
Read Section 86(A)(3), Tax Code
Note: The amounts of medical expenses incurred in
Q: What are allowed deductions as excess of P500,000 shall no longer be allowed as a
Transfers for Public Use? deduction for medical expenses. Neither can any unpaid
amount thereof in excess of the P500,000 threshold nor
The deduction on transfers for public purpose refers any unpaid amount for medical expenses incurred prior to
the one-year period from date of death be allowed to be
to the amount of all bequests, legacies, devises, or
deducted from the gross estate as claim against the estate
transfers to or for the use of the Government or any (see Section 6, RR 2-2003)
political subdivision thereof, for exclusively public
purposes,
Amount received by heir under RA 4917
Family home Read Section 86(A)(7), Tax Code
Read Section 86(A)(4), Tax Code Q: Discuss the deductibility of amounts
received by heirs under RA 4917.
Q: What are the requisites for deductibility
of a family home? Amounts received from the decedent’s employer as
a consequence of the death of the decedent-
1. The family home must be the actual residential employee as retirements benefits under RA 4917
home of the decedent and his family at the time (An Act Providing that Retirement Benefits of
of his death as certified by the barangay captain
Employees of Private Firms shall not be subject to

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Ateneo Law Batch 2013 Last Updated: 30 July 2013 (v3)
PM REYES BAR REVIEWER ON TAXATION II
(Based on the 2013 Bar Syllabus and Updated with the Recent BIR Issuances and the
Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)

any Tax whatsoever) is allowed as a deduction 2. Special deductions


provided that the amount of benefit is included in the (FSMA)
gross estate. a. Family home
b. Standard
Net share of the Surviving Spouse deduction
c. Medical
Read Section 86(C), Tax Code expenses
d. Amount
received by heir
Deductions allowed to Non-Resident Estate under RA 4917
3. Share in conjugal
Read Section 86(B) to (D), Tax Code property

---------------------------------------------------------------
Q: What may be deducted from the gross 12. Exclusions from estate
estate of non-resident aliens? ---------------------------------------------------------------
Citizen or Resident Non-resident alien Q: What are the exclusion from the gross
Alien Decedents decedents estate?
Gross Estate - all Gross Estate – includes 1. The capital (exclusive property) of he
property at the time of only that part of the gross surviving spouse is considered as an
death, wherever estate located in the exclusion in the gross estate under Section
situated. Philippines 85(H) of the Tax Code

Note: Under Section 86(C), the share of the


Deductions: Deductions: surviving spouse n the absolute
1. Ordinary deductions 1. Ordinary deductions community/conjugal partnership is considered as
a. Expenses, 2. Share in conjugal a deduction
losses, property
indebtedness, 2. Other items which are excluded:
taxes, etc Note: (1) Non-resident alien a. GSIS proceeds/benefits
(ELIT) decedent cannot avail of b. Accruals from SSS
i. Funeral special deductions. c. Proceeds of life insurance where the
expenses (2) No deduction shall be beneficiary is irrevocably appointed
allowed unless the executor, d. Proceeds of life insurance under a
ii. Judicial administrator, or anyone of
expenses group insurance taken by employer (not
the heirs as the case may be
iii. Claims includes in the estate tax taken out upon his life)
against the return of the decedent, the e. War damage payments
estate value at the time of his death f. Transfer by way of bona fide sales
iv. Claims that part of the gross estate g. Transfer of property to the government
against of the non-resident not or to any of its political subdivisions
insolvent situated in the Philippines h. Merger or usufruct in the owner of the
persons (Section 86(D), Tax Code) naked title
v. Unpaid i. Properties held in trust by the decedent
mortgage or j. Acquisition and/or transfer expressly
indebtedness declared as not taxable
on property
vi. Taxes ---------------------------------------------------------------
vii. Losses 13. Tax credit for estate taxes paid in a
b. Vanishing foreign country
Deduction ---------------------------------------------------------------
c. Transfer for
public use

PIERRE MARTIN DE LEON REYES Page 14 of 164


Ateneo Law Batch 2013 Last Updated: 30 July 2013 (v3)
PM REYES BAR REVIEWER ON TAXATION II
(Based on the 2013 Bar Syllabus and Updated with the Recent BIR Issuances and the
Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)

Read Section 86(E), Tax Code Q: What are the acquisitions and transfers
expressly declared as exempt?
Note: It is a remedy against international double taxation.
to minimize the onerous effect of taxing the same property 1. Merger of the usufruct in the owner of the
twice, tax credit against Philippine estate tax is allowed for naked property
estate taxes paid to foreign countries. 2. Transmission or delivery of the inheritance
or legacy by the fiduciary heirs or legatee to
Q: Who may avail of tax credit? the fideicomissary
3. Transmission from the first heirs, legatees or
1. Citizen donees in favor of another beneficiary in
2. Resident alien accordance with the desire of the testator
4. All bequests, devises, legacies or transfers
to social welfare, cultural and charitable
Q: What is the amount allowable as a Tax institutions, no part of the income of which
Credit? inures to the benefit of any individual,
provided that not more than 30% of the said
The estate tax imposed by the Philippines shall be bequests, devises, legacies or transfers
credited with the amounts of an estate tax imposed shall be used for administrative purposes
by the authority of a foreign country.
Note: The bequest, devises, legacies, or transfers does
However, the amount of tax credit is subject to the not include those made to educational institutions.
following limitations:
Now, I want to show how we compute estate tax due and
1. Per country basis: The amount of the credit payable.
in respect to the tax paid to any country shall
not exceed the same proportion of the tax Q: How is estate tax computed?
against which such credit is taken which the
decedent’s net estate situated within such 1. List down all the common (conjugal or
country taxable under the NIRC bears to his community) property
entire net estate. 2. List down all the separate or exclusive
property of the decedent (exclude the
Note: To best illustrate: separate or exclusive property of the
surviving spouse)
3. Include the family home either in (a) or (b),
depending on the status of the house and lot
4. The resulting total is the gross estate
2. Overall basis: The total amount of the credit 5. Deduct the appropriate deductions
shall not exceed the same proportion of the 6. The resulting balance is the net estate
tax against which such credit is taken, which 7. Deduct the special deductions: (1) share of
the decedent’s net estate situated outside the surviving spouse (1/2) of the net
the Philippines taxable under the NIRC common properties and (2) family home
bears to his entire net estate. 8. The resulting balance is the taxable net
estate
Note: To best illustrate: 9. Compute the estate tax using the graduated
estate tax rates
10. Deduct any tax credits
11. The resulting balance is the estate tax due
and payable
---------------------------------------------------------------
14. Exemption of certain acquisitions and
transmissions
---------------------------------------------------------------

Read Section 87, Tax Code

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Ateneo Law Batch 2013 Last Updated: 30 July 2013 (v3)
PM REYES BAR REVIEWER ON TAXATION II
(Based on the 2013 Bar Syllabus and Updated with the Recent BIR Issuances and the
Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)

Note: To best illustrate or registerable property such as real


property, motor vehicle, shares of stock or
Conjugal community property other similar property for which a clearance
+ Separate property of decedent from the BIR is required as a condition
= Gross Estate
precedent for the transfer of ownership
thereof in the name of the transferee.
Less: Allowable deductions, conjugal/community
deductions, separate/exclusive deductions Q: When should the estate tax return be
filed?
= Net Estate
General Rule: Within 6 months from the death of
Less: Special deductions
decedent
= Taxable Net Estate
Multiplied by estate tax (per graduated rates) Exceptions: The CIR, in meritorious cases, grant an
extension not exceeding 30 days for filing the return.
Less: Tax Credits
Other Administrative Requirements
= Estate Tax due and payable

--------------------------------------------------------------- Read Section 91-97, Tax Code


15. Filing of notice of death
--------------------------------------------------------------- Q: When should the estate tax be paid?

Read Section 89, Tax Code General Rule: At the time the return is filed by the
executor, administrator or the heirs

Q: When is notice of death required to be Exception: The CIR, if he finds that the payment on
given to the BIR? the due date would impose undue hardship, may
grant an extension of:
1. In all cases of transfers subject to tax; or 1. Not to exceed 5 years in case the estate is
2. Where, though exempt from tax, the gross settled judicially
value of the estate exceeds P20,000 2. Not to exceed 2 years in case the estate is
settled extrajudicially
Q: If required, when shall the notice of death
be given? Q: Who is liable for the payment of the
estate tax?
1. Within 2 months after the death of the
decedent; or The estate tax imposed under the Tax Code shall be
2. Within a like period after the executor or
paid by the executor or administrator before the
administrator or executor qualifies as such. delivery of the distributive share in the inheritance to
any heir or beneficiary.
---------------------------------------------------------------
In CIR V. GONZALES [NOVEMBER 24, 1966], the
16. Estate Tax Return
Supreme Court held that estate taxes are satisfied
-------------------------------------------------------------- from the estate and are to be paid by the executor or
administrator. Where there are 2 or more executors,
Read Section 90, Tax Code all of them are severally liable for the payment of the
estate tax. Failure to pay the estate taxes before
Q: When is an estate tax return required? distribution of the estate would subject the executor
or administrator to criminal liability. It is immaterial
1. When the estate is subject to estate tax that an heir administers only 1/3 of the estate and
2. When, though exempt from tax, the gross will receive as her share only said portion, for her
value of the estate exceeds Php 200,000 right to the estate comes after taxes. As an
3. Regardless of the gross value of the estate administratrix, she is liable for the entire estate tax.
when the said estate consists of registered As an heir, she is liable for the entire inheritance tax

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Ateneo Law Batch 2013 Last Updated: 30 July 2013 (v3)
PM REYES BAR REVIEWER ON TAXATION II
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Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)

although her liability would not exceed the amount of the pertinent remedial laws that implies the
her share in the estate. necessity of the probate or estate settlement court's
approval of the state's claim for estate taxes, before
Q: May estate tax be collected even after the the same can be enforced and collected.
distribution to the heirs?
Q: What is the duty of a bank in case of the
Yes. As held in GOVERNMENT V. PAMINTUAN death of a decedent-depositor?
[OCTOBER 11, 1930], a claim for taxes and
assessments whether assessed before or after the General Rule: If a bank has knowledge of the death of a
death of the decedent, is not required to be person, who maintained a bank deposit account alone, or
jointly with another, it shall not allow any withdrawal from
presented to the committee on claims and the said deposit account, unless the Commissioner has
appraisals. The Heirs are liable for the deficiency certified that the estate taxes imposed thereon have been
income taxes, in proportion to their share in the paid.
inheritance.
Exception: The administrator of the estate or any one (1)
As held in CIR V. PINEDA [SEPTEMBER 15, 1967], an of the heirs of the decedent may, upon authorization by
heir is individually answerable for the part of the tax the Commissioner, withdraw an amount not exceeding
proportionate to the share he received from the Twenty thousand pesos (P20,000) without the said
inheritance. His liability, however, cannot exceed the certification.
amount of his share. On the other hand, a holder of
property belonging to the estate is liable for the tax Q: A died and B (wife) tried to withdraw the
up to the amount of the property in his possession. joint savings deposit they maintained at the
PNB Tarlac but failed because C, who
Q: How can the BIR recover such unpaid tax claimed to be the couple’s adopted child,
liabilities? objected thereto. C claims that B cannot
withdraw any amount from the bank account
The BIR can recover in 2 ways: because she should follow legal procedures
1. It may recover said liability from all the heirs governing settlement of the estate of a
who shall share proportionately; or deceased, unless a competent court issues
2. It may go against the property held by an an order allowing her to withdraw invoking
heir if the same is sufficient to cover the Section 97 of the Tax Code. Can the money
whole tax liability (in which case, the heir be released to B?
who paid can seek reimbursement from
his/her co-heirs) CIR V. PINEDA [SEPTEMBER No. Section 97 of the National Internal Revenue
15, 1967] Code states: “If a bank has knowledge of the
death of a person, who maintained a bank deposit
Note: In both instances, the respective heirs may not be account alone, or jointly with another, it shall not
held accountable for more than the share he/she inherited. allow any withdrawal from the said deposit account
unless the Commissioner had certified that the taxes
Q: Is the approval of the probate court or the imposed thereon by this Title have been
court settling the estate of the decedent a paid; Provided, however, That the administrator of
mandatory requirement in the collection of the estate or any one (1) of the heirs of the decedent
the estate tax? may, upon authorization by the Commissioner,
withdraw an amount not exceeding Twenty thousand
No. As held in M ARCOS II V. CA [JUNE 5, 1997], it is pesos (P20,000) without the said certification. For
discernible that the approval of the court, sitting in this purpose, all withdrawal slips shall contain a
probate, or as a settlement tribunal over the statement to the effect that all of the joint depositors
deceased is not a mandatory requirement in the are still living at the time of withdrawal by any one of
collection of estate taxes. It cannot therefore be the joint depositors and such statement shall be
argued that the Tax Bureau erred in proceeding with under oath by the said depositors.” (POLIDO V. CA
the levying and sale of the properties allegedly [JULY 10, 2007])
owned by the late President, on the ground that it
was required to seek first the probate court's
sanction. There is nothing in the Tax Code, and in

PIERRE MARTIN DE LEON REYES Page 17 of 164


Ateneo Law Batch 2013 Last Updated: 30 July 2013 (v3)
PM REYES BAR REVIEWER ON TAXATION II
(Based on the 2013 Bar Syllabus and Updated with the Recent BIR Issuances and the
Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)

---------------------------------------------------------- Note: Its purpose is to complement estate taxation by


preventing tax-free depletion of the transferor’s estate
C. DONOR’S TAX during his lifetime.
----------------------------------------------------------
---------------------------------------------------------------
--------------------------------------------------------------- 3. Nature
1. Basic Principles ---------------------------------------------------------------
---------------------------------------------------------------
Q: What is the nature of a donor’s tax?
Read Section 98
It is an excise tax on the privilege of the donor to
Q: What donations are covered by the give or on the transfer of property by way of gift inter
donor’s tax? vivos. It is not a property tax (Lladoc v. CIR [14
SCRA 292])
The donor’s tax is imposed only on donaitons inter
vivos. Donations mortis causa partake of the nature ---------------------------------------------------------------
of testamentary dispositions are subject to estate tax 4. Purpose or object
---------------------------------------------------------------
In the case of Gestopa v CA [October 5, 2000], the
Supreme Court held that the donation of the Q: What are the purposes for the imposition
deceased spouses to their illegitimate daughter was of donor’s tax?
a donation inter vivos. The spouses executed the
deed out of love and affection for the donee, which 1. To raise revenues
is a mark of a donation inter vivos. The donor 2. To tax the wealthy and reduce certain other
reserved sufficient properties for their maintenance excise taxes
in accord with their standing in society, indicating the 3. To discourage inter vivos transfers of
donor intended to part with the property donated. property which could reduce the mortis
And, the donee accepted the donation, which is only causa transfers on which a higher tax, the
required in donations inter vivos. estate tax would be collected
4. It will tend to reduce the incentive to make
Q: When is donor’s tax imposed? gifts in order that distribution of future
income from the donated property may be to
Donor’s tax is imposed upon the transfer by any a number of persons with the result that the
person, resident or non-resident, of any property by taxes imposed by the higher brackets of the
gift. income tax are avoided.

Q: What law governs the imposition of ---------------------------------------------------------------


donor’s tax? 5. Requisites of valid donation
---------------------------------------------------------------
The donor’s tax is governed by the statute in force at
the time of the transfer. Q: What are the requisites of a valid
--------------------------------------------------------------- donation?
2. Definition 1. Capacity of donor
--------------------------------------------------------------- 2. Donative intent (intention to donate)
3. Delivery, whether actual or constructive, of
Q: What is a donor’s tax? the subject gift
4. Acceptance by the done
A donor’s tax is an excise tax imposed on the 5. Form prescribed by law
privilege to transfer property by way of gift inter vivos
based on pure act of liberality without any or less Note: (1) As to (1) – All persons who may contract or
than adequate consideration and without any legal dispose of their property may make a donation (Art. 735,
compulsion to give. NCC). The donor’s capacity shall be determined as of the
time of the making of the donation (Art. 737, NCC).

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Ateneo Law Batch 2013 Last Updated: 30 July 2013 (v3)
PM REYES BAR REVIEWER ON TAXATION II
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Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)

1. It must be in public document


(2) As to (2) – Donative intent is necessary only in case of 2. The property donated and the value of the
a direct gift. If the gift is indirectly taking place by way of charges which the done must satisfy must
sale, exchange or other transfer of property as be specified
contemplated in cases of transfers for less than adequate
and full consideration (see Section 100, Tax Code),
3. The donee must accept through a deed or
donative intent is not always essential to constitute a gift. similar instrument. (Art. 749, NCC)

(3) As to (3) – There is delivery if the subject matter is Q: What are the requirements for a donation
within the dominion and control of the done to be subject to donor’s tax?
(4) As to (4) – Acceptance is necessary because nobody 1. Property donated is not real property that is
is obliged to receive a gift against his will (OSORIO V.
OSORIO [41 PHIL. 531])
a capital asset
2. The transfer is for less than adequate
Q: ABC Steamship insured the life of A who consideration
3. The transfer is inter vivos
was then its President and General
Manager. He was responsible for the
---------------------------------------------------------------
success of the company for which he was
6. Transfers which may be constituted as
compensated for. The company initially
donation
designated itself as the beneficiary of the
a) Sale/exchange/transfer of property for
policies but, after A’s death, it renounced all
insufficient consideration
its rights, title and interest therein in favor of
b) Condonation/remission of debt
A’s heirs. The CIR subjected the donation to ---------------------------------------------------------------
donor’s tax. The heirs contend that it was a
remuneratory donation on full and adequate
Q: What are considered donations for tax
compensation for the valuable services of A
purposes?
and as such is not subject to donor’s tax. Is
the contention of the heirs correct? 1. Sales, exchanges and other transfers of
property for less than an adequate and full
No. The donation is not remuneratory as A has been consideration in money or money’s worth
fully compensated for his services. A donation made
by the corporation to the heirs of a deceased officer Except: Transfers of real property
out of gratitude for the officer's past services is considered as capital assets which is
considered a donation and is subject to donee's gift subject to CGT.
tax. The fact that his services contributed in a large
measure to the success of the company did not give 2. Condonation or remission of debt where
rise to a recoverable debt, and the conveyances the debtor did not render service in favor of
made by the company to his heirs remain a gift or the creditor
donation. (Pirovano v. CIR [July 31, 1965])
Note: Condonation or remission of a debt would
Q: What are the requisites for a donation of constitute a donation to the extent of the fair
value of the debt condoned or remitted.
a movable to be valid? Therefore, the creditor would be considered a
donor for donor’s tax purposes and would be
1. Donation may be oral or in writing liable for the tax thereon.
2. If oral, the donation must be accompanied
with delivery Q: A sold his lot not used for business tto
3. If value is more than Php 5,000, the his brother B for P500,000 when at that time
donation must be in writing and accepted in
the lot was valued in the market at P1
writing. (Art. 748, NCC)
million. A bought it for P100,000. In addition,
Q: What are the requisites for a donation of A sold some of the shares of his company
an immovable to be valid? ABC Corp to his senior executives. He sold
the ABC Corp shares for P300,000 when the

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Ateneo Law Batch 2013 Last Updated: 30 July 2013 (v3)
PM REYES BAR REVIEWER ON TAXATION II
(Based on the 2013 Bar Syllabus and Updated with the Recent BIR Issuances and the
Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)

market value was at P500,000. His original Q: Supposing that instead of a general
cost in the shares is P100,000. Are the sales renunciation, B renounced her hereditary
subject to donor’s tax? share in A’s estate to X who is a special
child, would the renunciation be subject to
The sale of the lot is not subject to donor’s tax as it donor’s tax?
is a real property classified as a capital asset and
such is subject to the 6% CGT. The sale of the Yes, the renunciation in favor of X would be subject
shares, however, are subject to the donor’s tax of to donor’s tax. This is so because the renunciation
30% based on the difference between the selling was specifically and categorically done in favor of X
price and the market value. and identified heir to the exclusion or disadvantage
of Y and Z, the other co-heirs in the hereditary
Q: Creditors A, B and C condoned the debt estate. (Section 11, RR No. 2-2003)
of XYZ Corp pursuant to a court approved
restructuring. Are the creditors liable for Note: Without a source of income or acceptable form of
donor’s tax? acquisition of substantial amount to purchase properties,
the inclusion of the names of minor children in the
certificates of title of properties shall be deemed an
No. The transaction is not subject to donor’s tax implied donation, which is subject to donor’s tax. SPS.
since the condonation was not implemented with a HORDON H. EVONO AND MARIBEL C. EVONO VS. CIR, ET. AL.,
donative intent but only for business consideration. CTA EB NO. 705 (CTA CASE NO. 7573), JUNE 4, 2012
The restructuring was not a result of the mutual
agreement of the debtors and creditors. It was ---------------------------------------------------------------
through court action that the debt rehabilitation plan
7. Transfer for less than adequate and full
was approved and implemented. [BIR Ruling DA
028-2005 [January 24, 2005]) consideration
---------------------------------------------------------------
Q: Whether the transfer of property from the
distressed Asset Asia Pacific, Inc. pursuant Read Section 100
to the Special Purpose Vehicle (SPV) Act of
2002 subject to donor’s tax? Q: When is there a transfer for less than an
adequate and full consideration in money or
No. The transaction above is not a donation. Hence, money’s worth?
it is not subject to donor’s tax. [BIR Ruling No. 109-
2011] Where property, other than real property classified
as capital asset subject to final capital gains tax, is
Note: Thus, if the transfer was made pursuant to law, it is transferred for less than an adequate and full
not subject to donor’s tax. consideration in money or money’s worth, the
amount by which the fair market value of the
Q: A died leaving as his only heirs, his property exceeded the value of the consideration
surviving spouse B, and three minor shall, for purposes of donor’s tax, be deemed a gift.
children, X, Y and Z. Since B does not want Note: (1) The element of donative intent is conclusively
to participate in the distribution of the presumed in transfers of property for less than an
estate, she renounced her hereditary share adequate or full consideration in money or money’s worth.
in the estate. Is the renunciation subject to
donor’s tax? (2) Why is real property, classified as capital asset, that is
transferred for less than an adequate and full
consideration in money or money’s worth not deemed a
No. The general renunciation by an heir, including gift subject to donor’s tax? Well, it is already subject to
the surviving spouse, as in the case of B, of her final capital gains tax, which is 6% of the gross selling
share in the hereditary estate left by the decedent is price of fair market value of the property, whichever is
not subject to donor’s tax. This is so because the higher. So what the seller avoids in the payment of the
general renunciation by B was not specifically and donor’s tax, it pays for in CGT.
categorically done in favor of identified heir/s to the
exclusion or disadvantage of the other co-heirs in Q: As a condition for approving the
the hereditary estate (Section 11, RR No. 2-2003). manufacture by BF Goodrich of tires and

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Ateneo Law Batch 2013 Last Updated: 30 July 2013 (v3)
PM REYES BAR REVIEWER ON TAXATION II
(Based on the 2013 Bar Syllabus and Updated with the Recent BIR Issuances and the
Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)

rubber products, the Central Bank required ---------------------------------------------------------------


it to develop a rubber plantation. BF 8. Classification of donor
Goodrich purchased land under the Parity ---------------------------------------------------------------
Amendment. Thereafter, the DOJ rendered
an opinion stating that upon expiration of Q: Who are liable to pay donor’s tax?
the Parity Amendment, ownership rights
over such lands, including right to dispose 1. Resident citizen
or sell them, would be lost. Hence, BF 2. Non-Resident Citizen
3. Resident Alien
Goodrich sold the rubber plantation to
4. Non-Resident Alien
Siltown Realty for a price less than its 5. Domestic Corporation
declared fair market value. The BIR 6. Foreign Corporation
assessed BF Goodrich for deficiency
donor’s tax representing the difference Note: In contrast to estate taxes, a corporation can be
between the fair market value and the actual subject to donor’s tax because it is capable of entering into
purchase price of the property. BIR a contract of donation through the appropriate Board
Resolution.
contended that BF Goodrich filed a false
income return. Did BF Goodrich commit ---------------------------------------------------------------
falsity in its income return? 9. Determination of gross gift
---------------------------------------------------------------
No. It is possible that real property may be sold for
less than adequate consideration for a bona Q: Distinguish Gross Gift from Net Gift
fide business purpose; in such event, the sale
remains an "arm's length" transaction. In this case, Gross Estate Net Estate
Goodrich was compelled to sell the property even at
a price less than its market value, because it would Refers to all property, Means the net economic
have lost all ownership rights over it upon the real or personal, tangible benefit from the transfer
expiration of the parity amendment. In other words, it or intangible, that is that accrues to the done.
was attempting to minimize its losses. At the same given by the donor to the
time, it was able to lease the property for 25 years, done by way of gift,
renewable for another 25. This can be regarded as without the benefit of any
another consideration on the price. deduction.
The fact that Goodrich sold its real property for a
Q: How is gross estate determined?
price less than its declared fair market value did not
by itself justify a finding of false return. Even though
Donor Determination of gross gift
a donor's tax, which is defined as "a tax on the
privilege of transmitting one's property or property
Citizens and Gross gift includes all real
rights to another or others without adequate and full
Resident Aliens properties, tangible and
valuable consideration," is different from capital
intangible personal
gains tax, a tax on the gain from the sale of the
properties wherever located
taxpayer's property forming part of capital
assets, the tax return filed by Goodrich to report its
Non-Resident Gross gift includes all real
income was sufficient compliance with the legal
Aliens properties, tangible, and
requirement to file a return. In other words, the fact
intangible properties located
that the sale transaction may have partly resulted in
in the Philippines unless the
a donation does not change the fact that Goodrich
reciprocity rule applies.
already reported its income by filing an income tax
return. [CIR v. B.F. Goodrich Phils [February 24, Note: In sum, all assets, real or personal, tangible or
1999] intangible given by way of gift wherever located of a
citizen and resident alien is subject to donor’s tax while
for nonresident aliens, donor’s tax is imposed only on
properties located in the Philippines provided in the case

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Ateneo Law Batch 2013 Last Updated: 30 July 2013 (v3)
PM REYES BAR REVIEWER ON TAXATION II
(Based on the 2013 Bar Syllabus and Updated with the Recent BIR Issuances and the
Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)

of intangible personal property, it is subject to the rule of schedule of values fixed by the
reciprocity under Section 104 of the Tax Code. provincial and city assessors
(zonal value), whichever is higher.
Same rules as in Estate Taxation. See previous If there is no zonal value, taxable
discussion on intangible properties considered situated in
the Philippines and rule on reciprocity.
base is FMV that appears in the
latest tax declaration.
Q: ABC a multinational corporation doing
For The value of the improvement is
business in the Philippines donated 100
improvements the construction cost per building
shares of stock of said corporation to Mr. Z, permit and/or occupancy permit
its resident manager in the Philippines. plus 10% per year after year of
What is the tax liability, if any, of ABC construction or the FMV per latest
corporation? tax declaration
Foreign corporations effecting a donation are subject to For all other The fair market value at that time
donor’s tax only if the property donated is located in the
properties will be considered the amount of
Philippines. Accordingly, donation of a foreign corporation
of its own shares of stock in favor of resident employees gift
is not subject to donor’s tax.
In GIBBS V. CIR [APRIL 28, 1962], the parents made it
However, if 85% of the business of the foreign corporation appear that they transferred shares of stock in favor
is located in the Philippines or the shares donated have of their children for consideration, but it was found
acquired business situs in the Philippines, the donation out that such was insufficient, and such agreements
may be taxed in the Philippines subject to the rule of were made to evade taxes. The Supreme Court
reciprocity. allowed the CIR to impose taxes for the full value of
the shares of stock, not just the excess of the FMV
--------------------------------------------------------------- over the consideration/price.
10. Composition of gross gift
--------------------------------------------------------------- ---------------------------------------------------------------
12. Tax Credit for donor’s taxes paid in a
Read Section 104, Tax Code foreign country
---------------------------------------------------------------
Q: What is included as part of gross gift?
Read Section 101(C), Tax Code
As a general rule, gross gifts include real and personal
property, whether tangible or intangible or mixed,
Note: See discussion of tax credit under Estate Tax.
wherever situated
Computation of the donor’s tax credit is the same as the
computation for estate tax credit. Just change net estate to
Note: If the donor was a non-resident alien at the time of
net gifts.
the donation, his real and personal property so transferred
but which are situated outside the Philippines shall not be
included as part of gross gift. ---------------------------------------------------------------
13. Exemptions of gifts from donor’s tax
--------------------------------------------------------------- ---------------------------------------------------------------
11. Valuation of gifts made in property
--------------------------------------------------------------- Read Section 101(A) to (B), Tax Code
Note: There are really no deductions from gross gift.
Read Section 102, Tax Code There are only exemptions.

Q: How do we value the gifts subject to Q: Enumerate the exemptions from gross
donor’s tax? gifts (exempt from donor’s tax)
For Real The value shall be based on either 1. Dowries or donations made:
Property (1) the fair market value as a. on account of marriage
determined by the CIR or (2) the b. before its celebration or within one year
fair market value as shown in the thereafter

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Ateneo Law Batch 2013 Last Updated: 30 July 2013 (v3)
PM REYES BAR REVIEWER ON TAXATION II
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Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)

c. by parents to each of their legitimate, institution, accredited NGO, trust or


recognized natural or adopted children philanthropic organization or research
d. to the extent of the first php10,000 institution or organization to be exempted?
2. Gifts made to or for the use of the national 1. Not more than 30% of the said gift should be
government or any entity created by any of used for administrative purposes
its agencies which is not conducted for 2. The donee must be a non-stock, non-profit
profit, or to any political subdivision of the organization or institution
said government 3. The donee organization or institution should
be governed by trustees who do not receive
3. Gifts in favor of an education and/or any compensation
charitable, religious, cultural or social 4. Said donee devotes all of its income to the
welfare corporation, institution, accredited accomplishment and promotion of its
NGO, trust or philanthropic organization or purposes
research institution or organization provided 5. The NGO must be accredited by the
not more than 30% of said gifts will be used Philippine Council for NGO Certification
by such done for administrative purposes. 6. The donor engaged in business shall give
notice of donation on every donation worth
Q: What exemptions are allowed to non- at least P500,000 to the RDO which has
resident aliens? jurisdiction over his place of business within
30 days after receipt of the qualified donee’s
Non-resident aliens are exempt from donor’s tax with institution’s duly issued Certificate of
respect to (2) and (3) as enumerated above. Donation (RR 2-2003)

Q: In addition to exemptions provided under Q: What are the requisites for a donation
Section 101 of the Tax Code, are there any given to athletes as prize or award to be
other exemptions allowed on gross gift? exempted?
1. Encumbrances on the property donated if The donation must be prize or award given to
assumed by the donee athletes:
2. Donations made to entities exempted under 1. In local and international sports tournaments
special laws (e.g. IBP, IRRI, National and competitions
Museum, National Library) 2. Held in the Philippines or abroad;
3. Amount specifically provided by the donor 3. Sanctioned by their respective national
as a diminution of the property donated. sports associations (RA 7549)
4. Athlete’s Prizes and Awards (see RA 7549)
Note: Remember Section 32(B)(7)(d), Tax Code which
Q: What are the requisites for dowries or provides that all prizes and awards granted to athletes in
gifts made on account of marriage to be local and international competitions and tournaments,
exempted? whether held in the Philippines or abroad, and sanctioned
by their national sports associations are excluded from
1. The gift was made on account of marriage gross income.
2. It was made before or within one year after
the celebration of marriage Read Section 99(C), Tax Code
3. Donor is a parent
4. Donee is a legitimate, recognized natural or Q: Are political contributions considered
adopted child of the donor gifts and therefore liable for donor’s tax?
5. The amount of the gift exempted is only to
the extent of the first P10,000 (per parent, if Under Section 13 of RA 7166, such contributions,
made out of conjugal or community funds) be duly reported to the COMELEC, shall no be
subject to the payment of any gift tax.
Q: What are the requisites for gifts in favor
Note: In Abello v. CIR [February 23, 2005], the Supreme
of an education and/or charitable, religious, Court ruled that the contributions made by certain partners
cultural or social welfare corporation, of the ACCRA law firm to the campaign of Senator

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Ateneo Law Batch 2013 Last Updated: 30 July 2013 (v3)
PM REYES BAR REVIEWER ON TAXATION II
(Based on the 2013 Bar Syllabus and Updated with the Recent BIR Issuances and the
Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)

Edgardo Angara constitute as a donation subject to Note: Let’s now discuss how to compute donor’s tax due
donor’s tax. However, this was decided before RA 7166. and payable.
The Court noted that subsequent to the donations involved
in the case, Congress approved RA 7166 on November Read Section 99(A) to (B), Tax Code
25, 1991, providing in Section 13 thereof that
political/electoral contributions, duly reported to the
Commission on Elections, are not subject to the payment Q: What is the basis in computing donor’s
of donor’s tax. RA 7166 provides no retroactive effect. tax?

--------------------------------------------------------------- The tax shall be computed on the basis of the total


14. Person liable net gifts made during the calendar year in
--------------------------------------------------------------- accordance with the graduated donor’s tax rates.

Note: To best illustrate –


Read Section 103, Tax Code
In general --

Q: Who are liable for donor’s tax? Gross gifts made


Less: Deductions from the gross gifts
Every person, whether natural or juridical, resident or non- = Net gifts made
resident, who transfers or causes to transfer property by Multiplied by applicable rate
gift, whether in trust or otherwise, whether the gift is direct = Donor’s tax on the net gifts
or indirect and whether the property is real or personal,
tangible or intangible. In other words, the donor is always
liable to pay the donor’s tax. If several gifts were made during the year --

Q: What is the rule for donations made by Gross gifts made


husband and wife? Less: Deductions from the gross gifts
= Net gifts made on this date
Add: all prior net gifts during the year
Husband and wife are considered as separate and = Aggregate net gifts
distinct taxpayer's for purposes of the donor's tax. Multiplied by applicable rate
However, if what was donated is a conjugal or = Donor’s tax on aggregate net gifts
community property and only the husband signed Less: donor’s tax paid on prior net gifts
the deed of donation, there is only one donor for = Donor’s tax payable on the net gifts to date
donor's tax purposes, without prejudice to the right
of the wife to question the validity of the donation In other words, if the donor makes several gifts during the
without her consent pursuant to the pertinent same calendar year, the gifts shall be added on a
provisions of the Civil Code of the Philippines and cumulative basis.
the Family Code of the Philippines. (see RR 2-2003)
Q: What are the rates of tax payable by
In Tang Ho v. Board of Tax Appeals [November donor’s?
19, 1955], the Supreme Court held that a donation
of property belonging to the conjugal partnership, The applicable donor’s tax rate shall depend upon
made during its existence, by the husband alone in the relationship between the donor and the donee.
favor of the common children, is taxable to him
exclusively as sole donor. To be a donation by both If the donee is a The tax rate is 30% of the
spouses, taxable to both, the wife must expressly stranger to the net gifts.
join the husband in making the gift. Her participation donor
cannot be implied. In case a donation was made by
the parents in favor of their children, consisting of If the donee is not The tax for each calendar
cash form the CPG, then only one parent may claim a stranger to the year shall be computed on
the exemption granted by the law. donor the basis of the total net gifts
made during the calendar
--------------------------------------------------------------- year in accordance with the
schedule provided in Section
15. Tax Basis
99(A).
---------------------------------------------------------------

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Ateneo Law Batch 2013 Last Updated: 30 July 2013 (v3)