ALDERSGATE COLLEGE BUSINESS AND TRANSFER

SCHOOL OF BUSINESS AND ACCOUNTANCY

MODULE 1: TRANSFER TAXES

COURSE DESCRIPTION

This course involves an intensive study of the business and transfer tax system, including the estate tax,
the gift tax and transfer tax. The relationship between these three donative transfer taxes, and between the
transfer taxes and the income taxes, are emphasized. The policy underpinnings of wealth transfer taxation, and
the reasons for the recent erosion in its political support, will be explored. The expanded Value-Added Tax and
percentages taxes are also discussed.

COURSE OUTLINE

1. TRANSFER TAX

 A TRANSFER TAX is a tax on the passing of title to property from one person (or entity) to another.

 In a narrow legal sense, a transfer tax is essentially a transaction fee imposed on the transfer of title to
property. This kind of tax is typically imposed where there is a legal requirement for registration of the
transfer, such as transfers of real estate, shares, or bond.

 Examples of such taxes include some forms of stamp duty, real estate transfer tax, and levies for the
formal registration of a transfer. In some jurisdictions, transfers of certain forms of property require
confirmation by a notary. While notarial fees may add to the cost of the transaction, they are not a
transfer tax in the strict sense of the term.

 In this broader sense, estate tax, gift tax, capital gains tax, sales tax on goods (not services), and
certain use taxes are all transfer taxes because they involve a tax on the transfer of title.

1.1 The ESTATE TAX in the United States is a tax on the transfer of the estate of a deceased person.
The tax applies to property that is transferred via a will or according to state laws of intestacy.

 Other transfers that are subject to the tax can include those made through an intestate
estate or trust, or the payment of certain life insurance benefits or financial account sums
to beneficiaries. The estate tax is one part of the Unified Gift and Estate Tax system in the
United States. The other part of the system, the gift tax, applies to transfers of property
during a person's life.

 In addition to the federal estate tax, many states have enacted similar taxes. These taxes
may be termed an "inheritance tax." The tax is often the subject of political debate, and
opponents of the estate tax call it the "death tax"

If an asset is left to a spouse or a federally recognized

charity, the tax usually does not apply. In addition, up
to a certain amount varying year by year, amounting
to $5,250,000 for estates of persons dying in 2013,
$5,340,000 for estates of persons dying in 2014and
$5,430,000 for estates of persons dying in 2015, can
be given by an individual, before and/or upon their
death, without incurring federal gift or estate taxes.
Because of these exemptions, only the largest 0.2%
of estates in the US will have to pay any estate tax.

Federal estate tax

 The federal estate tax is imposed "on the transfer of the taxable estate of every decedent
who is a citizen or resident of the United States." The starting point in the calculation is the
"gross estate." Certain deductions from the "gross estate" are allowed to arrive at the
"taxable estate."

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1.1 ESTATE TAX *

 Taxpayer and Tax Base

The estate tax is imposed on the transfer of the decedent’s estate to his lawful heirs and
beneficiaries based on the fair market value of the net estate at the time of the decedent’s death. It
is not a tax on property. It is a tax imposed on the privilege of transmitting property upon the death
of the owner. The Estate Tax is based on the laws in force at the time of death notwithstanding the
postponement of the actual possession or enjoyment of the estate by the beneficiary.

 Computation of Net Estate

1.1.1. a GROSS ESTATE

 The "gross estate" for federal estate tax

purposes often includes more property than
that included in the "probate estate" under
the property laws of the state in which the
decedent lived at the time of death.
 The gross estate (before the modifications)
may be considered to be the value of all the
property interests of the decedent at the time
of death. To these interests are added the
following property interests generally not
owned by the decedent at the time of death:

 the value of property to the extent of an interest held by the surviving spouse as a
"dower or curtesy"
 the value of certain items of property in which the decedent had, at any time, made a
transfer during the three years immediately preceding the date of death (i.e., even if
the property was no longer owned by the decedent on the date of death), other than
certain gifts, and other than property sold for full value;
 the value of certain property transferred by the decedent before death for which the
decedent retained a "life estate", or retained certain "powers"
 the value of certain property in which the recipient could, through ownership, have
possession or enjoyment only by surviving the decedent;
 the value of certain property in which the decedent retained a "reversionary interest",
the value of which exceeded five percent of the value of the property;
 the value of certain property transferred by the decedent before death where the
transfer was revocable;
 the value of certain annuities
 the value of certain jointly owned property, such as assets passing by operation of
law or survivorship, i.e. joint tenants with rights of survivorship or tenants by the
entirety, with special rules for assets owned jointly by spouses.;
 the value of certain "powers of appointment";
 the amount of proceeds of certain life insurance policies

 The above list of modifications is not comprehensive.

 As noted above, life insurance benefits may be included in the gross estate (even though
the proceeds arguably were not "owned" by the decedent and were never received by the
decedent). Life insurance proceeds are generally included in the gross estate if the
benefits are payable to the estate, or if the decedent was the owner of the life insurance
policy or had any "incidents of ownership" over the life insurance policy (such as the
power to change the beneficiary designation). Similarly, bank accounts or other financial
instruments which are "payable on death" or "transfer on death" are usually included in
the taxable estate, even though such assets are not subject to the probate process under
state law.

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* Title III of the National Internal Revenue Code (NIRC) of 1997, as amended.

1.1.1.b GROSS ESTATE (PHILIPPINES)

The value of the gross estate of the decedent includes the value at the time of
his death of all property, real or personal, tangible or intangible, wherever situated.1
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 situated in the
Philippines is included in the taxable estate. 2

Gross estate 3 includes property falling under any of the following categories:
(1) Decedent’s interest, to the extent of his interest therein at the time of his death;
(2) Transfers in contemplation of death;
(3) Revocable transfers;
(4) Property passing under general power of appointment;
(5) Proceeds of life insurance;
(6) Prior interests; and
(7) Transfer for insufficient consideration.

The following are excluded from the gross estate 4

(1) GSIS proceeds/ benefits
(2) Accruals from SSS
(3) Proceeds of life insurance where the beneficiary is irrevocably appointed
(4) Proceeds of life insurance under a group insurance taken by employer (not taken out
upon his life)
(5) War damage payments
(6) Transfer by way of bona fide sales
(7) Transfer of property to the National Government or to any of its political subdivisions
(8) Separate property of the surviving spouse
(9) Merger of usufruct in the owner of the naked title
(10) Properties held in trust by the decedent
(11) Acquisition and/or transfer expressly declared as not taxable
(12) Personal Equity and Retirement Account (PERA) assets of the
Decedent-contributor 5

b. NET ESTATE 6
The net estate is determined by deducting from the value 7 of gross estate the
total amount of allowable deductions.

1.1.2 DEDUCTIONS ALLOWED TO ESTATE

 Once the value of the "gross estate" is determined, the law provides for various
"deductions" (in Part IV of Subchapter A of Chapter 11 of Subtitle B of the Internal
Revenue Code) in arriving at the value of the "taxable estate." Deductions include but are
not limited to:

 Funeral expenses, administration expenses, and claims against the estate;

 Certain charitable contributions;
 Certain items of property left to the surviving spouse.
 Beginning in 2005, inheritance or estate taxes paid to states or the District of
Columbia.

1 Sec. 85, NIRC of 1997

2 No estate tax shall be collected in respect of intangible personal property if (a) the decedent at the time of death
was a citizen and resident of a foreign country which 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 was a citizen or resident allows a similar exemption from transfer or death
taxes of every character in respect of intangible personal property owned by citizens of the Philippines not residing in
that foreign country. (Sec. 104, Ibid)
3 Sec. 85(a) to (g), supra
4 Source: <http://www.bir.gov.ph/taxinfo/tax_estate.htm> (August 16, 2010).

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5 Section 14, Republic Act No. 9505 or the “Personal Equity and Retirement Account (PERA) Act of 2008.”
6 Sec. 86, supra.
7 With the adoption of the zonal valuation scheme under PD 1994, the computation for estate tax purposes of real
properties shall be based on the zonal values at the time of death. Where no zonal values are yet approved, the
computation shall be based on the schedule of fair market values prepared by the Provincial or City Assessors, or
where both values exist, on whichever is higher. See Sec. 88 (b), Ibid.

 Of these deductions, the most important is the deduction for property passing to (or in
certain kinds of trust, for) the surviving spouse, because it can eliminate any federal estate
tax for a married decedent. However, this unlimited deduction does not apply if the
surviving spouse (not the decedent) is not a U.S. citizen. A special trust called a Qualified
Domestic Trust or QDOT must be used to obtain an unlimited marital deduction for
otherwise disqualified spouses.

1.1.3 TAX CREDIT FOR ESTATE TAX RETURNS, PAYMENTS PAID TO A FOREIGN COUNTRY

a) TENTATIVE TAX is based on the tentative tax base, which is the sum of the taxable
estate and the "adjusted taxable gifts" (i.e., taxable gifts made after 1976). For decedents
dying after December 31, 2009, the tentative tax will, with exceptions, be calculated by
applying the following tax rates:

Lower Limit Upper Limit Initial Taxation Further Taxation

0 $10,000 $0 18% of the amount
$10,000 $20,000 $1,800 20% of the excess
$20,000 $40,000 $3,800 22% of the excess
$40,000 $60,000 $8,200 24% of the excess
$60,000 $80,000 $13,000 26% of the excess
$80,000 $100,000 $18,200 28% of the excess
$100,000 $150,000 $23,800 30% of the excess
$150,000 $250,000 $38,800 32% of the excess
$250,000 $500,000 $70,800 34% of the excess
$500,000 $750,000 $155,800 37% of the excess
$750,000 $1,000,000 $248,300 39% of the excess
$1,000,000 and over $345,800 40% of the excess
Internal Revenue Code section 2001(c), as amended by section 302(a)(2) of the Tax Relief, Unemployment Insurance
Reauthorization, and Job Creation Act of 2010 (H.R. 4853), Pub. L. No. 111-312, 124 Stat. 3296, 3301 (Dec. 17, 2010), as
amended by section 101(c) (1) of the American Taxpayer Relief Act of 2012; see "Instructions for Form 706 (Rev. August 2013),"
page 5, Internal Revenue Service, U.S. Dep't of the Treasury

The tentative tax is reduced by gift tax that would have been paid on the adjusted taxable
gifts, based on the rates in effect on the date of death (which means that the reduction is not
necessarily equal to the gift tax actually paid on those gifts).

b) Credits against tax

There are several credits against the tentative tax, the most important of which is
a "unified credit" which can be thought of as providing for an "exemption equivalent" or
exempted value with respect to the sum of the taxable estate and the taxable gifts during
lifetime.

For a person dying during 2006, 2007, or 2008, the "applicable exclusion amount" is
$2,000,000, so if the sum of the taxable estate plus the "adjusted taxable gifts" made
during lifetime equals $2,000,000 or less, there is no federal estate tax to pay. According
to the Economic Growth and Tax Relief Reconciliation Act of 2001, the applicable
exclusion increased to $3,500,000 in 2009, and the estate tax was repealed for estates of
decedents dying in 2010, but then the Act was to "sunset" in 2011 and the estate tax was
to reappear with an applicable exclusion amount of only $1,000,000.

On December 16, 2010, Congress passed the Tax Relief, Unemployment Insurance
Reauthorization, and Job Creation Act of 2010, which was signed into law by President
Barack Obama on December 17, 2010. The 2010 Act changed, among other things, the
rate structure for estates of decedents dying after December 31, 2009, subject to certain

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exceptions. It also served to reunify the estate tax credit (aka exemption equivalent) with
the federal gift tax credit (aka exemption equivalent). The gift tax exemption is equal to
$5,250,000[2] for estates of decedents dying in 2013, and $5,340,000 for estates of
decedents dying in 2014.

The 2010 Act also provided portability to the credit, allowing a surviving spouse to
use that portion of the pre-deceased spouse's credit that was not previously used (e.g. a
husband died, used $3 million of his credit, and filed an estate tax return. At his wife's
subsequent death, she can use her $5 million credit plus the remaining $2 million of her
husband's). If the estate includes property that was inherited from someone else within
the preceding 10 years, and there was estate tax paid on that property, there may also be
a credit for property previously taxed.

Because of these exemptions, only the largest 0.2% of estates in the US will have to
pay any estate tax.

Before 2005, there was also a credit for non-federal estate taxes, but that credit was
phased out by the Economic Growth and Tax Relief Reconciliation Act of 2001.

DEDUCTIONS in the Philippines

(1) In the case of citizens or residents of the Philippines 8

(a) Expenses, losses, indebtedness, and taxes consisting of;

(i) Actual funeral expenses or five percent (5%) of the gross

estate, whichever is lower, but not exceeding Two Hundred Thousand Pesos
(P200, 000.00);

(ii) Judicial expenses of the testamentary or intestate proceedings;

(iii) Claims against the estate;

(iv) Claims of the deceased against insolvent persons where the

value of such claim is included in the value of the gross estate;

(v) Unpaid mortgages in favor of the estate, under certain conditions.

(vi) Unpaid taxes; and

(vii) Casualty losses.

(b) Value of property previously taxed (estate or donor’s tax), under certain
conditions.

(c) Transfers to or for the use of the Philippine Government or any political
subdivision thereof, exclusively for public purposes.

(d) Current fair market value of the decedent’s family home. If the said current
fair market value exceeds One Million Pesos (P1, 000,000.00) the excess
shall be subject to estate tax. Also, said family home must have been the
decedent’s family home as certified by the barangay captain of the locality.

(e) Standard deduction equivalent to One Million Pesos (P1, 000,000.00).

(f) Medical expenses not exceeding Five Hundred Thousand Pesos

(P500, 000.00), incurred by the decedent within one year prior to his death,
duly substantiated with receipt

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(g) Amount received by heirs under RA 4917 9(retirement benefits of employees

of private firms) provided such amount is included in the gross estate of the
deceased.
8 Sec. 86(A), supra
9 An Act Providing that Retirement Benefits of Employees of Private Firms Shall Not Be Subject to
Attachment, Levy, Execution, or Any Tax Whatsoever

(h) The net share of the surviving spouse in the conjugal partnership property.

(2) In the case of a nonresident not a citizen of the Philippines10

(a) That portion of the funeral expenses, losses and indebtedness, and taxes
which the value of the decedent’s gross estate situated in the Philippines bears
to his entire gross estate wherever situated;

(b) Value of property previously taxed, under certain conditions; if

part of decedent’s gross estate is situated in the Philippines;

(c) Transfers to or for the use of the Philippine Government or any political
subdivision thereof, exclusively for public purposes; and

(d) The net share of the surviving spouse in the conjugal partnership
property as diminished by the obligations properly chargeable to such property.

d. Exemptions11

The following shall not be taxed:

(1) The merger of usufruct in the owner of the naked title;

(2) The transmission or delivery of the inheritance or legacy by the fiduciary

heir or legatee to the fideicommissary;

(3) The transmission from the first heir, legatee, or donee in favor of another
beneficiary, in accordance with the desire of the predecessor; and

(4) All bequests, devises, legacies or transfers to social welfare cultural or

charitable institutions, no part of the net income of which insures to the benefit of
any individual, provided that not more than 30% of said bequests, devises,
legacies or transfers shall be used for administration purposes.

3. Rates of Estate Tax 12

If The Net Estate Is The Tax Shall Be Plus Of Excess Over

Over But Not Over
- P 200,000 Exempt - -
P 200,000 500,000 0 5% P 200,000
500,000 2,000,000 15,000 8% 500,000
2,000,000 5,000,000 135,000 11% 2,000,000
5,000,000 10,000,000 465,000 15% 5,000,000
10,000,000 and over 1,215,000 20% 10,000,000

4. Filing Requirements and Payment of Tax and attachments to the estate tax returns, including
CPA certificate

a. Persons required filing notice of death

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A written notice of death to the Commissioner of Internal Revenue shall be filed

by the executor, administrator or any of the legal heirs, as the case may be, within two (2)
months after the decedent’s death, or within a like period after qualifying as such executor
or administrator, in all cases of transfers subject to tax, or where, though exempt from tax,
the gross value of the estate exceeds Twenty Thousand Pesos (P20, 000.00). 13
10 Section 86(B), ibid
11 Section 87, ibid
12 Section 84, ibid
13 Section 89, ibid

b. Persons required filing estate tax returns 14

The estate tax return shall be filed by the executor or administrator, or any of the
legal heirs, in cases of transfers subject to estate tax, or where though exempt from estate
tax, the gross value of the estate exceeds Two Hundred Thousand Pesos (P200,000.00)
or regardless of the gross value of the estate, where the said estate consists of registered
property such as real property, motor vehicle, shares of stock or other similar property for
which a clearance from the BIR is required as a condition precedent for the transfer of
ownership thereof in the name of the transferee.

In case the estate tax return shows a gross value exceeding Two Million Pesos
(P2, 000,000) it must be supported with a statement certified to by a Certified Public
Accountant.

c. Time of filing 15

The estate tax return shall be filed within six (6) months from the decedent’s
death. The Commissioner shall have the authority to grant, in meritorious cases a
reasonable extension not exceeding thirty (30) days for filing the return.

d. Place of filing 16

The return shall be filed with an authorized agent bank, or Revenue District
Officer, Collection Officer or duly authorized Treasurer of the City or municipality in which
the decedent was domiciled at the time of his death or if there be no legal residence in the
Philippines, with the office of the Commissioner. Ex. Payment of tax 17

The estate tax shall be paid at the time the return is filed by the executor,
administrator or the heirs. The Commissioner may grant extension of time not exceeding
five (5) or two (2) years depending on whether the estate was settled judicially or extra
judicially.

In case the available cash of the estate is not sufficient to pay its total estate tax
liability, the estate may be allowed to pay the tax by installment and a clearance shall be
released only with respect to the property the corresponding/computed tax on which has
been paid. There shall, therefore, be as many clearances (Certificate Authorizing
Registration) as there are as many properties released because they have been paid for
by the installment payments of the estate tax.

The computation of the estate tax, however, shall always be on the cumulative
amount of the net taxable estate. Any amount paid after the statutory due date of the tax
shall be imposed the corresponding applicable penalty thereto. However, if the payment of
the tax after the due date is approved by the Commissioner or his duly authorized
representative, the imposable penalty thereon shall only be the interest.18

f. Penalties

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Violations of the estate tax provisions are subject to the applicable common
penalties prescribed under Title X (Statutory Offenses and Penalties) of the NIRC, as
amended.

14 Section 90(A), ibid

15 Section 90(B), ibid
16 Section 90(D), ibid
17 Sec. 91, ibid
18 Sec. 9 (F), Revenue Regulations No. 2-2003.

1.2 DONOR’S TAX

Taxpayer and Tax Base

o The donor’s tax is imposed on the transfer by any person, resident or
nonresident, of property by gift. 19
o The taxable base is the fair market value of the total net gifts made by a donor
during the calendar year.

a. Coverage of the Tax

“Gifts” include real and personal property, whether tangible or intangible, or

mixed wherever situated. In case of a nonresident alien, his real and personal property so
transferred but which are situated outside the Philippines are not included as part of the
gross gift. 20

The following are considered situated in the Philippines and includible as gifts:
(1) Franchise which must be exercised in the Philippines;

(2) Shares, obligations or bonds issued by any corporation or sociedad anonima

organized or constituted in the Philippines;

(3) Shares, obligations or bonds by any foreign corporation 85% of the business
of which is located in the Philippines;

(4) Shares, obligations, or bonds issued by any foreign corporation if such shares,
obligations, or bonds have acquired a business situs in the Philippines; and

(5) Shares or rights in any partnership, business or industry established in the

Philippines, which are to be considered as situated in the Philippines.

The following are the requisites of a donation for purposes of the donor’s tax:
(1) Capacity of the donor;

(2) Donative intent, or intent of the donor to make a gift

(3) Delivery, whether actual or constructive, of the subject matter of the gift; and

(4) Acceptance of the gift by the donee.

b. Exemptions

The following gifts or donations are exempt from the donor’s tax, under certain
conditions: 21

(1) In case of gifts made by a resident of the Philippines:

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(a) Dowries or gifts made on account of marriage and before its celebration or
within one year thereafter by the parents to each legitimate, recognized, natural,
or adopted children to the extent of the first P10,000.00;

(b) Gifts made to or for the use of the National Government or any entity created
by any of its agencies which is not conducted for profit, or to any of its political
subdivisions; and
19 Sec. 98, op.cit. The donations subject to donor’s tax are donations inter vivos or those made between living persons to
take effect during the lifetime of the donor. Donations mortis causa or those which are to take effect upon the death of the
donor and therefore partake of the nature of testamentary dispositions are subject to estate tax. [ Articles 728, 729, and
734, New Civil Code as cited in Hector S. De Leon, et. al., The National Internal Revenue Code Annotated, Vol. I, 8th Ed.,
(Manila: Rex Bookstore, 2003) p.619].
20 Section 104, ibid.
21 Section 101, ibid
(c) Gifts in favor of an educational and/or charitable, religious, cultural or
social welfare corporation, institution, accredited non-government organization,
trust or philanthropic organization or research institution or organization provided
that not more than 30% of said gifts shall be used by such donee for
administrative purposes.

(2) In case of gifts made by a nonresident alien of the Philippines:

(a) Gifts made to or for the use of the National Government or any entity created
by any of its agencies which is not conducted for profit, or to any of its political
subdivisions; and

(b) Gifts in favor of an educational and/or charitable, religious, cultural or

social welfare corporation, institution, foundation, trust or philanthropic
organization or research institution or organization, provided that not more than
30% of said gifts shall be used by the recipient for administrative purposes.

3. Donor’s Tax Rate22

a. The tax for each calendar year shall be computed on the basis of the total net
gifts made during the calendar year, in accordance with the following schedule:

If The Net Gift Is The Tax Shall Be Plus Of Excess Over

Over But Not Over
- P 100,000 EXEMPT
P 100,000 200,000 0 2% P 100,000
200,000 500,000 P 2,000 4% 200,000
500,000 1,000,000 14,000 6% 500,000
1,000,000 3,000,000 44,000 8% 1,000,000
3,000,000 5,000,000 204,000 10% 3,000,000
5,000,000 10,000,000 404,000 12% 5,000,000
10,000,000 1,004,000 15% 10,000,000

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

Any contribution in cash or in kind to any candidate or political party or

coalition of parties for campaign purposes, duly reported to the Commission,
shall not be subject to the payment of donor’s tax. 23

4. Filing Requirements

a. Filing and contents of returns

A return is required in all cases of transfers by gift except those which

are exempt under the NIRC, and shall set forth: each gift made during the
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calendar year which is to be included in computing net gifts; the deductions

claimed and allowable; any previous net gifts made during the same calendar
year; name of donee; relationship of the donor to the donee; and such other
information as may be required.

22 Section 99(A), NIRC of 1997.

23 Section 3, Commission on Elections’ (COMELEC) Resolution No. 8944 - Rules and Regulations Governing Electoral
Contributions and Expenditures in Connection With the May 10, 2010 National and Local Elections (promulgated May 25,
2010). Source: <http://www.comelec.gov.ph/2010%20National_Local/resolutions/r

b. Time and place of filing and payment

The return shall be filed within thirty (30) days after the date the gift is
made and the tax due thereon shall be paid at the time of filing with an
authorized agent bank, Revenue District Officer, Revenue Collection Officer or
duly authorized Treasurer of the city or municipality where the donor was
domiciled at the time of the transfer or if there is no legal residence in the
Philippines, with the Office of the Commissioner. In case of gifts made by a non-
resident, the return may be filed with the Philippine embassy or Consulate in the
country where the donor is domiciled at the time of the transfer, or directly with
the office of the Commissioner.

Definition of Terms:

1. Absolute Community of Property is a system of property relationship governing the spouses is applicable if
they are married on August 3, 1988 or thereafter.
2. Administratix is a female administrator.
3. Conjugal Partnership of Gains is a system of property relationship governing spouses applicable if they are
married before August 3, 1988.
4. Decedent’s interest is commonly thought of as a person’s estate, the wealth that he would have passed,
enjoyed and disposed, had he lived.
5. Devisee one who is given real property in a Will
6. Donor’s Tax is an excise tax imposed on the right to transfer gratuitously, directly or indirectly, real and
personal properties, tangible or intangible out of the owner’s liberality in favor of another that accepts the
gift.
7. Estate Tax is a tax on the transfer of the net estate of the decedent.
8. Fedeicommissary refers to a person designated who has the real or beneficial interest in an estate or fund,
the title or administration of which is temporarily confided to another.
9. Free Portion is the part of the whole estate which the testator could dispose of freely through a written will
irrespective of his relationship to the recipient.
10. General Power of Appointment means that the decedent must have had a power exercisable in favor of
himself, his estate, or creditors of his estate.

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11. Gratuitous Transfer of Property is a conveyance of property without any consideration involved in
exchanged for the property given away.
12. Gross Estate It consists of all properties owned by a decedent at the time of his death.
13. Intangible personal property is a property other than real property, with no physical form and its value lies in
the rights conveyed.
14. Legitimate It is the portion of the testator’s property which could not be disposed of freely because the law
has reserved it for the compulsory heirs.
15. Notarial Will is a will written in public instruments, notarized by a lawyer, signed by the testator and
witnesses.
16. Onerous Transfer of Property refers to exchange of property for a monetary consideration or a transfer of
goods or services in return for something of equal value like in sales or barter.
17. Primary Compulsory Heirs these are the successors to whom the legal portion of the estate is first reserved
by the law.
18. Real Property includes land, building, or any structure or even equipment permanently attached to the land.
19. Redistribution of wealth theory views that the inheritance received by the heir contributes to the unequal
distribution of wealth and earnings because the heir has not actually worked for it.
20. Reprobate is a special proceeding to establish the validity of a will previously proves in a foreign country.
21. Revocable transfer refers to a transfer of property with retention or reservation of rights over the property by
the donor while he still lives.
22. Succession is defined as a mode of acquisition by virtue of which the property, rights and obligations to the
extent of the value of the inheritance, of a person are transmitted through his death to another or others
either by will or by operation of law.
23. Successor is the heir or the person to whom the property or property rights is to be transferred.
24. Tangible personal property is a property with physical form that could be seen or touched such as vehicles,
artwork, jewelry, clothing, equipment, and furniture.
25. Testator is the decedent who made the last Will and Testament.

POST TEST:

I. Multiple Choice:

Read the questions below and choose your answer. Write the letter only on the answer sheet.

A 1. These taxes are imposed on the enjoyment of a privilege, performance of an act, or engagement to an occupation.
a. Excise taxes
b. Business taxes
c. Income Taxes
d. Transfer Taxes
C 2. A government agency primarily in charge to assess and collect all taxes and charges imposed by the NIRC, other
laws, and regulations.
a. Bureau of Customs
b. Local Government
c. Bureau of Internal Revenue
d. Department of Labor and Employment
C 3. It is the tax imposed on earnings derived from the trade, profession, or occupation.
a. Excise taxes
b. Business taxes
c. Income Taxes
d. Transfer Taxes
B 4. It is the tax imposed on the right or privilege to engage in an onerous transfer of goods or services in the normal
conduct of business.
a. Excise taxes
b. Business taxes
c. Income Taxes
d. Transfer Taxes
D 5. All of the following are considered “sin products’, EXCEPT
a. Tobacco

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b. Alcohol
c. Luxury items
d. Services
D 6. Statement 1: Transfer taxes are privilege taxes.
Statement 2: Income tax is a business tax.
a. True; True
b. False; True
c. True; False
d. False; False
C 7. Statement 1: Sin products are subject to excise tax.
Statement 2: The monthly payment of percentage tax is on the 25th day of the following month.
a. True; True
b. False; True
c. True; False
d. False; False
D 8. Statement 1: All national internal revenue taxes are excise taxes.
Statement 2: Both professional tax and documentary stamp tax are collected by the BIR.
a. True; True
b. False; True
c. True; False
d. False; False
D 9. All of the following are taxable for their gifts within and outside the Philippines, except
a. Resident citizen
b. Nonresident citizen
c. Resident alien
d. Nonresident alien
A 10.Which of the following is taxable with Philippine income tax for his income earned within and outside the
Philippines?
a. Resident citizen
b. Nonresident citizen
c. Resident alien
d. Nonresident alien

True or False: Read the following statement. Write T if the statement is true and F if the statement is false.

T 1. Deductions from gross estate are items which the law on estate tax allows to be deducted from the value of the
gross estate in order to arrive at the net taxable estate.
F 2. Deductions from the gross estate are presumed to be absolute deductions, unless specifically identified by its
nature or by law as an exclusive deduction.
T 3. In determining the allowable deductions from gross estate, the date-to-death- valuation rule is the method to be
applied.
F 4. Ordinary deductions are deductions that are comprised of ELITE, transfer for public use and vanishing deductions.
T 5. Funeral expense already paid such as in the case of a memorial plan is not allowed as deduction from the gross
estate subject to the statutory limit.
F 6. Judicial expenses are not allowed deductions incurred for the administration, inventory taking of assets, and
settlement of the estate.
F 7. The estate tax return should be filed within six (8) months from the decedent’s death.
T 8. Before the estate is divided among the heirs, all lawful debts of the decedent should be paid first.
T 9. For unpaid mortgages to be deductible, the property mortgaged must be part of the gross estate at fair market
value gross of any unpaid mortgage.
F 10. Taxes incurred prior to the date of the decedent’s death and remained unpaid as of the date of death are not
deductible.
F 11. A donation made other than for Philippine Government exclusively for public purposes is not allowed as
deduction from gross estate.
F 12. A person can donate a property which does not exclusively belong to him.
F 13. Medical expense actually incurred with a maximum amount of P1, 000,000.00 is allowed as deduction from the
gross estate.
F 14. A vanishing deduction is a special deduction.
T 15. The share of a surviving spouse in the estate in the estate shall be deducted equal to 1/2 of the gross conjugal
property.

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Problems Solving: Carefully read the situations given below then compute of what is being asked on the following
questions.

1. During the taxable year, the following transactions are reported by the taxpayer, a resident citizen. What is the
gross taxable amount of the following in terms of:
a. Business Tax (within) Answer: 2,000,000
b. Income Tax (within and outside) Answer: 900,000
c. Transfer Tax (within and outside) Answer: 500,000
Within Outside
Sales in the conduct of business P 2,000,000.00 P 1,500,000.00
Gain P 500,000.00 P 400,000.00
Donation P 300,000.00 P 200,000.00

2. Ermin Moreno, single and a resident Filipino citizen, has the following transactions during the year. What would be
the total National Internal Revenue Taxes paid by Juan Cruz during the year?

Sale of Land(Capital Asset) P 5,000,000.00

Compensation Income P 550,000.00
Purchased of imported products P 200,000.00
Donations to strangers P 150,000.00

Answer: total of 408,500

Capital gains tax: 300,000

Income tax: 67,500 based on Current BIR Income tax rates

Excise tax: 40,000

Donation’s tax: 1,000

3. Due to financial difficulties, Kevin sold his inherited lot to Jasz for P5, 000,000.00. The fair market value of the lot
is P8, 000,000.00. If the documentary stamp tax is 1.5%, how much is the total amount of taxes paid to the BIR?
Answer: =120,000 DST

4. The gross available estate is P10, 000,000.00. The debts and expenses related to death including estate tax to be
taken from the gross estate amounted to P500, 000.00. During his lifetime, the decedent had given P300, 000.00
donations in contemplation of death to his legitimate son.
No Question
5. Mr. K received the following during the year. How much is the amount of property received by Mr. K which he will
pay of donor’s or estate tax?

House and lot from his father to take effect upon death P 2,000,000.00
Dowry from his parents-in-law P 300,000.00
Birthday gifts from his friends P 50,000.00
First Prize for winning the basketball game P 200,000.00
Answer: None, the estate tax from the house and lot will be paid from the estate of the deceased, while the
donor’s tax will be paid by the donor not the done.

6. The hereditary estate is P5, 000,000.00. The surviving relatives are the parent of the testator, his wife spouse, and
one illegitimate child. The free portion is to be allocated among the heirs. How much would be the total amount to
be inherited by the wife?
Answer: 1,250,000

7. Mr. J, married in 1988, died leaving the following properties. How much would be the gross estate of Mr. H?

Properties Acquisition FMV at the Time

Cost of Death
a).Residential lot he inherited from his parent(before marriage) P400,000.00 P2,000,000.00

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b).Residential house built during marriage P600,000.00 P1,500,000.00

c).Personal properties acquired during marriage out of his P200,000.00 P 500,000.00
savings accumulated before marriage
Answer: 2,250,000

8. Since 1995, Angelo and Angela lived together as husband and wife without marriage. They bought and acquired
some properties before and during the cohabitation as follows: If Angelo died on December 31, 2014, how much
is his gross estate?

Properties Acquisition Cost

a). House and lot acquired during the live-in period P 500,000.00
b). Car bought into the live-in relation by Angela P 400,000.00
c). Subdivision inherited by Angelo P 2,000,000.00
d). Other properties P 3,000,000.00
Answer: 5,450,000

9. The following are claimed deductions from the gross estate of the decedent’s administrator: What would be the
allowed deductions from gross estate?

Funeral expenses (25% after the burial) P200,000.00

Calamity loss(50% compensated by insurance) P300,000.00
Jewelry loss before estate tax settlement date (exclusive property) P500,000.00
Answer: 800,000

10. Assuming that Mr. Batman has a mortgage loan amounting to P500, 000.00 payable within 2 years with 12%
interest per annum. He died within a year without paying his mortgage loan. How much is the allowable
deduction?
Answer: 560,000

References:

 Wikipedia, the free encyclopedia

 www.ntrc.gov.ph/files/Chapter--II---Estate-and-Donor-s-Taxes.pdf

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