Estate Tax

Dizon vs CTA
GR 140944
April 30, 2008

Facts:

On November 7, 1987, Jose P. Fernandez (Jose) died. Thereafter, a petition for the probate of his will was
filed with RTC. The probate court then appointed petitioner as Special and Assistant Special Administrator.
Eventually, on April 17, 1990, Atty. Gonzales wrote a letter addressed to the BIR Regional Director for San
Pablo City and filed the estate tax return with the same BIR Regional Office, showing therein a NIL estate tax
liability.

However, on November 26, 1991, the Assistant Commissioner for Collection of the BIR, issued Estate Tax
Assessment Notice demanding the payment of P66,973,985.40 as deficiency estate tax.

The petitioner claims that in as much as the valid claims of creditors against the Estate are in excess of the
gross estate, no estate tax was due; that the BIR failed to consider that although the actual payments made
to the Estate creditors were lower than their respective claims, such were compromise agreements reached
long after the Estate's liability had been settled by the filing of its estate tax return and the issuance of BIR
Certification Nos. 2052 and 2053; and that the reckoning date of the claims against the Estate and the
settlement of the estate tax due should be at the time the estate tax return was filed by the judicial
administrator and the issuance of said BIR Certifications and not at the time the aforementioned Compromise
Agreements were entered into with the Estate's creditors.

Issue: whether the actual claims of the aforementioned creditors may be fully allowed as deductions from
the gross estate of Jose despite the fact that the said claims were reduced or condoned through compromise
agreements entered into by the Estate with its creditors.

Held:

Yes, It is noteworthy that even in the United States, there is some dispute as to whether the deductible
amount for a claim against the estate is fixed as of the decedent's death which is the general rule, or the
same should be adjusted to reflect post-death developments, such as where a settlement between the
parties results in the reduction of the amount actually paid.

On one hand, the U.S. court ruled that the appropriate deduction is the "value" that the claim had at the date
of the decedent's death.Also, as held in Propstra v. U.S., 63 where a lien claimed against the estate was certain
and enforceable on the date of the decedent's death, the fact that the claimant subsequently settled for
lesser amount did not preclude the estate from deducting the entire amount of the claim for estate tax
purposes. These pronouncements essentially confirm the general principle that post-death developments
are not material in determining the amount of the deduction.
On the other hand, the Internal Revenue Service (Service) opines that post-death settlement should be taken
into consideration and the claim should be allowed as a deduction only to the extent of the amount actually
paid. Recognizing the dispute, the Service released Proposed Regulations in 2007 mandating that the
deduction would be limited to the actual amount paid.65

In announcing its agreement with Propstra,66 the U.S. 5th Circuit Court of Appeals held:

We are persuaded that the Ninth Circuit's decision...in Propstra correctly apply the Ithaca Trust date-
of-death valuation principle to enforceable claims against the estate. As we interpret Ithaca Trust,
when the Supreme Court announced the date-of-death valuation principle, it was making a judgment
about the nature of the federal estate tax specifically, that it is a tax imposed on the act of
transferring property by will or intestacy and, because the act on which the tax is levied occurs at a
discrete time, i.e., the instance of death, the net value of the property transferred should be
ascertained, as nearly as possible, as of that time. This analysis supports broad application of the
date-of-death valuation rule.67

We express our agreement with the date-of-death valuation rule, made pursuant to the ruling of the U.S.
Supreme Court in Ithaca Trust Co. v. United States. There is no law, nor do we discern any legislative intent in
our tax laws, which disregards the date-of-death valuation principle and particularly provides that post-death
developments must be considered in determining the net value of the estate. It bears emphasis that tax
burdens are not to be imposed, nor presumed to be imposed, beyond what the statute expressly and clearly
imports, tax statutes being construed strictissimi juris against the government. Any doubt on whether a
person, article or activity is taxable is generally resolved against taxation. Therefore, the claims existing at the
time of death are significant to, and should be made the basis of, the determination of allowable deductions.

1. Estate of Ruiz vs CA
GR 118671
January 29, 2006

Facts:

Hilario M. Ruiz executed a holographic will naming as his heirs his only son, Edmond Ruiz, his adopted
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daughter, private respondent Maria Pilar Ruiz Montes, and his three granddaughters, private respondents
Maria Cathryn, Candice Albertine and Maria Angeline, all children of Edmond Ruiz. Hilario Ruiz died. On June
29, 1992, four years after the testator's death, it was private respondent Maria Pilar Ruiz Montes who filed
before the Regional Trial Court, a petition for the probate and approval of Hilario Ruiz's will and for the
issuance of letters testamentary to Edmond Ruiz, Surprisingly, Edmond opposed the petition on the ground
that the will was executed under undue influence.

One of the properties of the estate — the house and lot at No. 2 Oliva Street, Valle Verde IV, Pasig which the
testator bequeathed to Maria Cathryn, Candice Albertine and Maria Angeline — was leased out by Edmond
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Ruiz to third persons.

The probate court ordered Edmond to deposit with the Branch Clerk of Court the rental deposit and
payments totalling P540,000.00 representing the one-year lease of the Valle Verde property.

On July 28, 1993, petitioner Testate Estate of Hilario Ruiz, with Edmond Ruiz as executor, filed an "Ex-Parte
Motion for Release of Funds." It prayed for the release of the rent payments deposited with the Branch Clerk
of Court. Respondent Montes opposed the motion and concurrently filed a "Motion for Release of Funds to
Certain Heirs" and "Motion for Issuance of Certificate of Allowance of Probate Will." Montes prayed for the
release of the said rent payments to Maria Cathryn, Candice Albertine and Maria Angeline and for the
distribution of the testator's properties, specifically the Valle Verde property.

On August 26, 1993, the probate court denied petitioner's motion for release of funds but granted
respondent Montes' motion in view of petitioner's lack of opposition. It thus ordered the release of the rent
payments to the decedent's three granddaughters. It further ordered the delivery of the titles to and
possession of the properties bequeathed to the three granddaughters and respondent Montes upon the
filing of a bond of P50,000.00.

Despite petitioner's manifestation, the probate court, on December 22, 1993, ordered the release of the
funds to Edmond but only "such amount as may be necessary to cover the expenses of administration and
allowances for support" of the testator's three granddaughters subject to collation and deductible from their
share in the inheritance. The court, however, held in abeyance the release of the titles to respondent Montes
and the three granddaughters until the lapse of six months from the date of first publication of the notice to
creditors.

Petitioner assailed this order before the Court of Appeals. Finding no grave abuse of discretion on the part of
respondent judge, the appellate court dismissed the petition and sustained the probate court's order in a
decision. Hence, this petition.

Issue: whether the probate court, after admitting the will to probate but before payment of the estate's
debts and obligations, has the authority: (1) to grant an allowance from the funds of the estate for the
support of the testator's grandchildren; (2) to order the release of the titles to certain heirs; and (3) to grant
possession of all properties of the estate to the executor of the will.

Held:

No, In settlement of estate proceedings, the distribution of the estate properties can only be made: (1) after
all the debts, funeral charges, expenses of administration, allowance to the widow, and estate tax have been
paid; or (2) before payment of said obligations only if the distributees or any of them gives a bond in a sum
fixed by the court conditioned upon the payment of said obligations within such time as the court directs, or
when provision is made to meet those obligations.

In the case at bar, the probate court ordered the release of the titles to the Valle Verde property and the Blue
Ridge apartments to the private respondents after the lapse of six months from the date of first publication
of the notice to creditors. The questioned order speaks of "notice" to creditors, not payment of debts and
obligations. Hilario Ruiz allegedly left no debts when he died but the taxes on his estate had not hitherto
been paid, much less ascertained. The estate tax is one of those obligations that must be paid before
distribution of the estate. If not yet paid, the rule requires that the distributees post a bond or make such
provisions as to meet the said tax obligation in proportion to their respective shares in the
inheritance. Notably, at the time the order was issued the properties of the estate had not yet been
 

inventoried and appraised.

Petitioner must be reminded that his right of ownership over the properties of his father is merely inchoate
as long as the estate has not been fully settled and partitioned. As executor, he is a mere trustee of his
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father's estate. The funds of the estate in his hands are trust funds and he is held to the duties and
responsibilities of a trustee of the highest order. He cannot unilaterally assign to himself and possess all his
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parents' properties and the fruits thereof without first submitting an inventory and appraisal of all real and
personal properties of the deceased, rendering a true account of his administration, the expenses of
administration, the amount of the obligations and estate tax, all of which are subject to a determination by
the court as to their veracity, propriety and justness. 3

Donors Tax

Lladoc vs CIR
GR No. L-19201
June 16, 1965

Facts:

The M.B. Estate, Inc., of Bacolod City, donated P10,000.00 in cash to Rev. Fr. Crispin Ruiz, then parish priest of
Victorias, Negros Occidental, and predecessor of herein petitioner, for the construction of a new Catholic
Church in the locality. Thereafter, the respondent Commissioner of Internal Revenue issued an assessment
for donee's gift tax against the Catholic Parish of Victorias, Negros Occidental, of which petitioner was the
priest.

Petitioner lodged a protest to the assessment and requested the withdrawal thereof. The protest and the
motion for reconsideration presented to the Commissioner of Internal Revenue were denied. The petitioner
appealed to the Court of Tax Appeals. In the petition for review, the Rev. Fr. Casimiro Lladoc claimed that the
assessment of the gift tax, even against the Roman Catholic Church, would not be valid, for such would be a
clear violation of the provisions of the Constitution. The CTA ruled in favor of the CIR.

Issue: whether or not petitioner should be liable for the assessed donee's gift tax

Held:

Yes, Section 22 (3), Art. VI of the Constitution of the Philippines, exempts from taxation
cemeteries, churches and parsonages or convents, appurtenant thereto, and all lands, buildings, and
improvements used exclusively for religious purposes. The exemption is only from the payment of taxes
assessed on such properties enumerated, as property taxes, as contra distinguished from excise taxes.
In the present case, what the Collector assessed was a donee's gift tax; the assessment was not on the
properties themselves. It did not rest upon general ownership; it was an excise upon the use made of the
properties, upon the exercise of the privilege of receiving the properties (Phipps vs. Com. of Int. Rec. 91 F 2d
627). Manifestly, gift tax is not within the exempting provisions of the section just mentioned. A gift tax is not
a property tax, but an excise tax imposed on the transfer of property by way of gift  inter vivos, the imposition
of which on property used exclusively for religious purposes, does not constitute an impairment of the
Constitution. As well observed by the learned respondent Court, the phrase "exempt from taxation," as
employed in the Constitution (supra) should not be interpreted to mean exemption from all kinds of taxes.
And there being no clear, positive or express grant of such privilege by law, in favor of petitioner, the
exemption herein must be denied.

The Philippine American Life vs Secretary of Finance

GR No. 210987
November 24, 2014

Facts:

Petitioner The Philippine American Life and General Insurance Company (Philamlife) used to own Class A
shares in Philam Care Health Systems, Inc. (PhilamCare), representing 49.89% of the latter's outstanding
capital stock. In 2009, petitioner, in a bid to divest itself of its interests in the health maintenance
organization industry, offered to sell its shareholdings in PhilamCare through competitive bidding. Thus,
petitioner's Class A shares were sold for USD 2,190,000, or PhP 104,259,330 based on the prevailing
exchange rate at the time of the sale, to STI Investments, Inc., who emerged as the highest bidder.

Thereafter, Philamlife filed an application for a certificate authorizing registration/tax clearance with the
Bureau of Internal Revenue (BIR) to facilitate the transfer of the shares. Petitioner requested a ruling to
confirm that the sale was not subject to donor’s tax, pointing out, in its request, the following: that the
transaction cannot attract donor’s tax liability since there was no donative intent and,ergo, no taxable
donation;  that the shares were sold at their actual fair market value and at arm’s length; that as long as the
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transaction conducted is at arm’s length––such that a bona fide business arrangement of the dealings is done
in the ordinary course of business––a sale for less than an adequate consideration is not subject to donor’s
tax; and that donor’s tax does not apply to saleof shares sold in an open bidding process.

As determined by the Commissioner, the selling price of the shares thus sold was lower than their book value
based on the financial statements of PhilamCare as of the end of 2008.  As such, the Commisioner held,
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donor’s tax became imposable on the price difference pursuant to Sec. 100 of the National Internal Revenue
Code.

SEC. 100. Transfer for Less Than Adequate and full Consideration.- Where property, other than real property
referred to in Section 24(D), is transferred for less than an adequate and full consideration in money or
money’s worth, then the amount by which the fair market value of the property exceeded the value of the
consideration shall, for the purpose of the tax imposed by this Chapter, be deemed a gift, and shall be
included in computing the amount of gifts made during the calendar year.

Issue: Whether or not the price difference in petitioner’s adverted sale of shares in PhilamCare attracts
donor’s tax

Held:

Yes, SEC. 100. Transfer for Less Than Adequate and full Consideration.- Where property, other than real
property referred to in Section 24(D), is transferred for less than an adequate and full consideration in money
or money’s worth, then the amount by which the fair market value of the property exceeded the value of the
consideration shall, for the purpose of the tax imposed by this Chapter, be deemed a gift, and shall be
included in computing the amount of gifts made during the calendar year.

The price difference is subject to donor's tax

Petitioner's substantive arguments are unavailing. The absence of donative intent, if that be the case, does
not exempt the sales of stock transaction from donor's tax since Sec. 100 of the NIRC categorically states that
the amount by which the fair market value of the property exceeded the value of the consideration shall be
deemed a gift.  Thus, even if there is no actual donation, the difference in price is considered a donation by
1âwphi1

fiction of law.