Intangible personal property in Japan, inherited by Unico before marriage 50,000

Income of personal property in Japan 7,000

REQUIREMENTS:

1. Classify the properties into:

a. Conjugal / Community

b. Exclusive of the decedent

c. Exclusive of the surviving spouse

2. Compute the gross estate assuming the spouses are governed by:

a. Absolute community of property regime

b. Conjugal partnership of gains

3. Absolute community property. One week prior to his scheduled marriage. Manny
received a house and lot worth P2,000,000 as a wedding gift from his mother. After a
year, he inherited a farmland valued at P500,000 from his father. During marriage, he
acquired properties worth P750,000 while his wife earned P125,000 out of her salary.
Which of the above properties belong to the community property of the spouses?

4. Conjugal partnership of gains. July married to April, died on December 15leaving

the following properties:

Antique collections acquired by April while still single 275,000

Vacation house in Baguio City, purchased by July before the marriage 1,900,000

Car purchased by April out of her exclusive property 450,000

Apartment house exclusively owned by April 3,500,000

Rent income on the apartment house 25,000

House and lot, acquired out of conjugal funds, registered in the name of July 2,250,000

Winnings in lotto 6,000,000

Savings deposit earned from the salary of July 250,000

How much is the gross estate of July under the conjugal partnership?

5. Property relationship of spouses. Mark and Mahalia, husband and wife, have the
following data of ownership and obligations:

Cash 250,000

Accounts receivable 78,000

Car inherited by Mark before marriage 350,000

Car purchased by Mahalia during the marriage 600,000

Fishpond acquired by Mark when he was still single 200,000

Jewelries bought by Mark in Hongkong for his wife 60,000

Residential house and lot received as gift by Mahalia from her parents.
The deed expressly provides that it shall form part of the property of the

Spouse 1,500,000

Properties for exclusive use of Mahalia 75,000

Properties for exclusive use of Mark 120,000

Beach resort acquired by Mark during marriage 420,000

Cash brought into the marriage by Mahalia 130,000

Bank loan acquired by Mahalia during marriage to finance the renovation of the

house 150,000

Mortgage on fishpond acquired by Mark to finance its operation 75,000

How much is the gross estate of Mark if the spouses were governed by:

a. Absolute community of property regime.

b. Conjugal partnership of gains.

6. Conjugal partnership of gains. Based on the following data, compute the gross
estate on the estate of Adonis:

Car for exclusive use of Adonis (purchased out of conjugal funds) 450,000

Family home 1,200,000

Savings account with Metrobank, obtained thru the labor of his wife, Betania

during marriage 200,000

Cash obtained during marriage from the exercise of his profession 150,000

Interest on bank account with Metrobank, net of 20% income tax 2,500

Value of cattle, per head (62 heads) 10,000

Note: Before the marriage, the number of cattle owned by Adonis was only 15 heads)

Net winnings in jueteng (losses incurred, P4,000) 20,000

House and lot inherited by Adonis from his father before the marriage 1,650,000

Jewelries inherited by Betania from her mother, acquired during the

marriage 120,000

Passenger jeepney purchased by Adonis out of his exclusive property 90,000

Income earned on jeepney 6,000

7. Absolute community of property. How much is the gross estate on the estate of
Alvarado, assuming he was under absolute community of property regime? How about if
he was governed by the regime of complete separation of property

Market value of 1,000 shares of Made Difficult Corp, inherited from his
brother during marriage (value upon inheritance, P455, 000) 520,000

Apartment house inherited from his mother before marriage 2,500,000

Income of apartment house 80,000

Gold necklace for exclusive use of Alvarado 20,000

Share in conjugal property of a previous marriage (childless) 1,540,000

Income of conjugal property 95,000

Family home acquired thru the efforts of Alvarado 900,000

Cash savings by Buena, wife 55,000

Sole proprietorship business donated to Buena by her parents before

marriage 825,000

Income of sole proprietorship business 66,000

8. Computation of gross estate. Salak Sala, died. His only child, Malak K. Sala hired
you to compute the gross estate of his father. Upon your request, the following list of
properties was handed to you:

a. A car worth P200,000 delivered by a friend "for sale on approval, on trial oron
satisfaction."

b. A Rolex wristwatch worth P200, 000 pledged by a debtor on a loan of P150,000.

c. A coconut land (assessed value-P40,000: zonal value- P80,000) mortgaged by Salak

on a bank loan of P50,000 d. Second hand appliances held on consignment from an
appliance store, P40,000

e. Riceland received as donation from his wife, P170,000

f. A store space worth P150, 000 in Salak's possession. It has been sold to Ahmand but
delivered to the buyer via constitutum possessorium.

g. Purchase of a risograph thru an agent. Salak had already paid the agent its purchase
price of P150, 000 although said sale has not yet been known to the principal

h. A residential lot valued at P200,000 purchased for P180,000 thru an agent who was
orally authorized by the owner to sell the parcel.

COMPUTE for the gross estate.

9. A man and a woman living together as husband and wife are not disqualified by
an impediment to marry each other. Agustin, single, living under a common-law
marriage with Teresita, widow, died. The following properties and rights were acquired
by the couple.

Salary of Agustin 40,000

Salary of Teresita 50,000

House and lot acquired by spouses 1,400,000

Car, obtained by Teresita before cohabitation 500,000

Riceland, obtained by Agustin before cohabitation 250,000

Bank deposit ofcouple (share of Agustin - 60%) 125,000

Lot acquired by spouses (donated by Agustin to Nicolas against the

willof Teresita) 200,000

REQUIRED: Compute the gross estate of Agustin.

10. The couple living together are disqualified by impediment to marry each other.
Sam B. Ajero, S5, married to Paz N. Ciosa, 60 years old in 1975. Cohabiting with Miss
Tress, 23 years old, his office secretary. On February 14, 2011 Sam died leaving the
following properties

Properties acquired by Sam and Paz during marriage 3,400,000

Parcels of land inherited by Paz from her parents during marriages 2,500,000

Natural fruits on the land inherited 250,000

House in Quezon City inherited by Sam from his parents before marriages 1,850,000

Condominium unit bought by Sam as gift to Miss Tress 1,000,000

Jewelries bought from salary of Miss Tress 200,000

Appliances inside the condo (60:40 share by Sam & Miss

Tress, respectively) 500,000

Joint deposit of Sam and Miss Tress 88,000

REQUIRED: Compute the following:

1. Exclusive property of Sam

2. Conjugal property of Sam and Paz

3. Gross estate

EXERCISE 5-4. CASE STUDY

Philippine Blooming Mills (PBM) obtained a P50,300,000 loan from Ayala Investment
and Development Corporation (AIDC). As added security for the credit line extended to
PBM, Alfredo Ching Executive Vice President of PBM, executed security agreements
making himself jointly and severally answerable with PBM's indebtedness to AIDC.

PBM failed to pay the loan. Thus, AIDC filed a case for sum of money against PBM and
Alfredo Ching.

ISSUE: Are the debts chargeable against the conjugal property of spouses Ching?

CHAPTER 6
 GROSS ESTATE

(Exclusions / Exemptions)

TABLE OF CONTENTS

Exemptions of certain acquisitions and transmissions 89

Transfer exempt from estate tax under the code 89

Common requisites to the first three exclusions 89

Merger of usufruct in the owner of the naked title 89

Transmission from fiduciary heir to the fideicommissary 91

Second transfer in accordance with the desire of predecessor 92

Donations to social welfare, cultural and charitable institutions 92

Separate property of the surviving spouse 94

Exemptions under special laws 94

Inheritance by the estate 95

Exercise 6-1. True or False Questions 97

Exercise 6-2. Multiple Choice Questions 98

Exercise 6-3. Word Search 100

Exercise 6-4. Discussion Questions 102

Exemption of certain acquisitions and transmissions

Transfers exempt from estate tax are transfers mortis causa which are not subject
thereto. That is why they are not included in the gross estate of the decedent.

The exemptions from estate tax may be either under the provisions of the National
Internal Revenue Code or by reason of special law.

Transfers exempt from estate tax under the code

Under the code, the following shall not be taxed:

1. The merger of the 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 charitable

institutions, no part of the net income of which inures to the benefit and of any individual.
Provided, however, that not more than thirty percent (30%) of the said bequests,
devises, legacies or transfers shall be used by such institutions for administration
purposes (Sec. 87, NIRC).

5. The exclusive (separate) property of the surviving spouse.

Common requisites to the first three exclusions

The first three (3) enumerated exclusions have common requisites. They are the
following:

1. There must be two transmissions of the same property or a portion thereof;

2. The transfer from the prior decedent must be testamentary in character,

3. The first transfer is subject to estate tax, while the second transfer is the one exempt

Merger of usufruct in the owner of the naked title

Usufruct is defined as a real right, of a temporary nature, which authorizes its holder to
enjoy all the benefits which results from the normal enjoyment of another's property, with
the obligation to return, at the designated time, either the same thing or, in special
cases, its equivalent.

In a usufruct there are two rightful claimants to a thing, namely the usufructuary, and the
owner of the naked title.

The usufructuary has the right to enjoy the property, to the same extent as the owner,
but only with respect to its use and the receipt of its fruits (2 Antokoletz 729).

The owner of the naked title, during the usufruct, can exercise all the rights of ownership
consistent with the enjoyment of the thing by the usufructuary. But none of these acts
can affect the rights of the usufructuary (2 Tolentino, 272).

There is merger of the usufruct in the owner of the naked title when the naked ownership
and the usufruct come to be held by the same person.

Illustration 6- 1

Leoncio died testate. The will provides that the usufruct over his land shall be inherited
by his eldest son, Asungot for the rest of his life, while the naked title shall go to his
youngest son, Pusakal.

a. Is the transfer of the property from Leoncio to his children taxable?

Yes, the fact that the usufruct over the property has been inherited by Asungot and the
naked title by Pusakal, does not invalidate the transfer. It is therefore, subject to estate
tax.

b. What happens if Asungot dies ahead of Pusakal and the usufruct is transferred to the
latter

This is a case of a merger of the usufruct in the owner of the naked title, because
Pusakal is now the absolute owner of the property. In this case, the transfer is exempt
from the estate tax.

The exemption is premised on the fact that there is only one transmission of property,
i.e. from the testator to the owner of the naked title.

Moreover, the reason for the law is that the transfer had been previously subject to
estate tax hence, the exemption.

Transmission from fiduciary heir to the fideicommissary

Fideicommissary substitution is that by virtue of which a testator institutes a first heir,
and charges him to preserve and transmit the whole or part of the inheritance later on to
a second heir.

For example, Tess institutes Cea as first heir. The will states that Cea should preserve
and transmit later on the estate to Sarry, Cea's daughter.

In the example above, Tess is the testator, Cea is the first heir or fiduciary heir, while
Sarry is the second heir or the fideicommissary.

In a fideicommissary substitution, there must be a first heir and a second heir whose
relationship must be one degree such that of parent and child, vice versa.

Illustration 6 - 2

May instituted Jun as first heir, and Jun's eldest son Julio as second heir. The will
requires Jun to preserve and transmit the property upon his (Jun)death.

a. Upon the death of May, will the transfer of the property be subject to estate tax?

Yes, what is given tax exemption is the transfer from the fiduciary heir lo lhe
fideicommissary. The first transfer from the lestator to first heir is subject to tax

b. How about the transmission of the property from Jun to Julio

The transter is exempt because this is the portion of the fideicommissary substitution
which is not taxable.

The reason is that, in a fideicommissary substitution, only one transfer of property is

involved, and the first one was already subjected lo estate tax. To tax both transfers
would amount to double taxation.

c. How about if Julio (the second heir) predeceases Jun (the first heir

The property automatically goes to the heirs of Julio upon the death of Jun, the fiduciary
heir.

In the instant case, the second transfer remains exempt from estate tax although not
falling under fideicommissary substitution anymore.

Second transfer in accordance with the desire of predecessor

This is referring to the transmission of property from the first heir, legatee or donee in
favor of another beneficiary in accordance with the desire of the predecessor.

This exemption and in the others (merger of usufruct in owner of naked title and transfer
from fiduciary heir to the fideicommissary) is premised on the fact that there is only a
single transmission of property, i.e. from the testator - to the owner of the naked title, or
to the fideicommissary, or to the second beneficiary, as the case may be. Hence, the
exemption from the tax because the transfer was subject previously thereto (De Leon,
Transfer and Business Taxation, 1995, p.40).

Illustration 6-3

Magna devised in her will that the farmland in Cagayan de Oro shall go to Carna on until
such time that Alas reaches the age of majority.

a. Upon the death of Magna, will the transfer of property to Cama be subject to tax?

Yes, this is a case of an ordinary succession which is subject to estate tax.

b. How about the transfer of the same property from Carna to Alas?

The transfer of the property is exempt from estate tax because it is a transmission of
property from the first heir to another beneficiary in accordance with the desire of the
testator,

Donations to social welfare, cultural and charitable institutions

This is the estate tax counterpart of the more familiar income tax charitable deduction
provision. However, this charitable deduction is unlimited in the sense that it is not
subject to percentage restrictions such as are applicable to the income tax deductions
for contributions to charity.

It might be a charitable act to leave money to a poor person, but the statute authorizes
no deduction for such direct philanthropy, requiring instead that bequests be made to
qualified recipient organizations.

Thus, a nonprofit hospital may be a qualified recipient, even where small charges are
made for use, except where restricted to less than the entire community (Old Colory
Trust Co. v. U.S., 438 F2nd 684), but a nonprofit cemetery association not exclusively
for charitable purposes will not qualify (Child v. U.S, 540 F2nd 579).
Moreover, no exemption is assured merely because a portion of the decedent's wealth
actually reaches a qualified organization; it must get there by way of a bequest, legacy
or devise.

The donations must be given to an institution which is duly accredited by a recognized

accrediting entity.

Note that the donations shall be exempt from estate taxation only if not more than thirty
percent (30%) of said bequests, devises, legacies or transfers shall be used by such
institutions for administration purposes.

illustration 6 - 4

Bait bequeathed the following properties in her will:

P200,000 - to her brother, Mulintapang.

150,000 - to the Kawanggawa Foundation, an accredited social welfare institution.

75,000 - to the victims of the eruption of Mayon Volcano.

550,000 - real property to iloilo City for public purposes.

REQUIRED: Discuss the taxability or nontaxability of the above donations.

The amount inherited by her brother should be included in the gross estate. It is taxable
because it inures to the benefit of a private individual.

The donation to Kawanggawa Foundation is exempt, if proven that not more than 30% of
the gift was used for administration purposes.

The mortis causa donation to the victims of MI. Mayon eruption is Taxable because it
was not given to social welfare, cultural or charitable institutions.

The property transferred to Iloilo City is included in the gross estate However, it is
allowed as deduction therefrom for the purpose of computing the net taxable estate.

Separate property of the surviving spouse

The exclusive (separate) property of the surviving spouse of the decedent shall not be
deemed part of the gross estate.

This is based on the rationale that the separate property of the husband or the the wife
cannot be the subject of succession while the owner is still living because succession is
made effective only from the moment of death of the decedent.

However, the share of the surviving spouse in the conjugal/community property shall be
included in the computation of the gross estate.

Illustration 6 -5

Carlito and Carlota are husband and wife. Upon the death of Carlota, the following
properties were available:

Capital property of Carlito 1,200,000

Exclusive property of Carlota 800,000

Conjugal property of the spouses 2,000,000

How much is the gross estate?

Exclusivel property of Carlota 800,000

Conjugal property of the spouses 2,000,000

Gross estate 2,800,000

Exemptions under special laws:

The following transfers are exempt from estate tax by reason of special laws
1. Benefits received from the Government Service Insurance System (GSIS) (PD 1146,
as amended);

2. Benefits received from the Social Security System (SSS) (RA 1161, as amended);

3. Amounts received from the Philippine Government and the United States
governments from damages suffered during the last war (RA 227); and