Department of Accounting Education

Mabini Street, Tagum City

Davao del Norte
Telefax: (084) 655-9591, Local 116

Big Picture in Focus: ULOb. Apply taxation rules in determining estate

tax due of unmarried decedent.

Metalanguage
The terms used for this specific unit learning outcome are already discussed and explained
in the essential knowledge section as part of the discussion. Hence, having separate
presentation will mean redundancy.

Essential Knowledge
To perform the aforesaid big picture (unit learning outcomes), you need to fully understand
the following essential knowledge laid down in the succeeding pages. Please note that you
are not limited to exclusively refer to these resources. Thus, you are expected to utilize other
books, research articles and other resources that are available in the university’s library e.g.
ebrary, search.proquest.com etc., and even online tutorial websites.

GROSS ESTATE

Consist of all properties and interests in properties of a decedent at the time of death as well
as properties transferred during lifetime (only in form), but in substance was only transferred
at the time of death.

Classification of decedent

1. Resident or citizen- gross estate shall include all properties located within and outside
the Philippines.
2. Non-resident alien- gross estate shall include properties located only within the
Philippines.

Residents or NRA w/o NRA w/

Citizen Reciprocity Reciprocity
Within Abroad Within Abroad Within Abroad
Real Properties / / / x / x
Personal Properties
- Tangible / / / x / x
- Intangible / / / x x x

w/ reciprocity - citizen and resident of the same country ex. US citizen and
resident.
w/o reciprocity - citizen of another country and resident of another country ex. US
citizen residing in China.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Resident Citizen, Non-Resident Citizen and Resident Alien decedents

The following shall comprise the gross estate of the decedent:

1. Tangible personal property. Personal property that can be seen and touched. These
include appliances, jewelry, car and other movable property which can be transported
from another.
2. Intangible personal property. Personal property that cannot be seen and touched
because they have no physical form. Bank deposits, bonds, promissory notes, copyright,
trademark, mortgages, patent, and licenses are intangible personal property.
3. Real or immovable property. This consists of land, building, or anything attached to soil
with permanence.
4. Taxable transfers. Although these transfers are inter vivos (during the life time ) in form,
they are actually mortis causa in substance because they are intended to take effect upon
or after the death of the transferor.

a. Transfer in contemplation of death

b. Revocable transfers
c. Transfers under general power of appointment
d. Proceeds of life insurance with revocable beneficiary
e. Transfer for insufficient consideration

Transfer in contemplation of death

• The impelling cause of the transfer is the thought of his death
• It includes disposition of property for the purpose of avoiding tax
• Transfers of properties based on the following grounds are not considered in
contemplation of death
a. to relieve the donor from the burden of management
b. to settle family litigated or unlitigated disputes
c. to reduce or save tax or property taxes
d. to provide independent income for dependents
e. to reward services rendered
f. to protect family members from the hazards of business operations
g. to see children enjoy the property and its fruit while the donor is still alive

Revocable transfers
• In revocable transfers, the terms may be changed, amended, revoked, or
terminated by the decedent.
• What is material is the power to amend, revoke, terminate, or alter though the
power is not exercised.
• It includes the transfer which allows the transferor to continue enjoying,
possessing or controlling the property.

Transfers under general power of appointment

• A power of appointment is a right to designate by will or deed executed in
contemplation of death or after death.
• A power of appointment may either be general or special (limited)

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

• A special power of appointment authorizes the holder of the power to appoint only
among a restricted or designated class of persons other than him/her.
• General power of appointment means that the decedent must have the power to
exercise in favor of himself/herself, his/her estate, or the creditors of his/her estate.
• Requisites for inclusion of property transferred under the general power of
appointment
a. existence of the general power of appointment
b. exercise of such power by the decedent by will or by deed.
c. the transfer of the property by virtue of such exercise

Proceeds of life insurance with revocable beneficiary

a. If the wife, child, or other third person is the beneficiary
• The proceeds shall be taxable if the policy is revocable
• The proceeds shall be tax exempt the policy is irrevocable
b. If the estate, executor or administrator is the beneficiary:
• The proceeds are taxable whether the policy is revocable or irrevocable
• The policy shall clearly indicate whether the beneficiary is revocable or irrevocable.
In absence of any clear indication to that effect of designation of the beneficiary
shall be treated as revocable.

Transfer for insufficient consideration

• In general, if a property is transferred with inadequate consideration (partial payment),
the excess of the payment over the fair value at time of death shall be included as part
of the gross estate.
• If the property is transferred with inadequate consideration is capital asset (real assets
such as land or building).it is subject to 6% capital gain tax based on the selling price
or the fair market value whichever is higher.
• If the property is transferred in an ordinary asset, the disposition thereof for inadequate
consideration is subject to donor’s tax.
• If the transfer is not shown to have been made in contemplation of death or to take
effect upon the decedent’s death, the transfer is subject to donor’s tax.

Non-resident alien decedent

If the decedent is was a non-resident alien, only his property situated in the Philippines shall
form part of his gross estate. His gross estate shall include the following:

1. Franchise which must be exercisable in the Philippines;

2. Shares, obligations or bonds issued by domestic corporations;
3. Shares, obligations or bonds issued by any foreign corporation, 85% of business of
which is in the Philippines;
4. Shares, obligations or bonds issued by any foreign corporation, if such shares,
obligations or bonds have acquired business in the Philippines;
5. Shares or rights in any partnership, business or industry established in the
Philippines.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

The inclusion of intangible personal property located in the Philippines in the gross estate of
a non-resident alien decedent is subject to reciprocity rule. Such intangible personal
property shall not be included in the gross estate in the following cases:

• If the decedent at the time of was a resident of a foreign country which at the time of
death did not impose a transfer tax or death of any character in respect of intangible
personal property of citizens of the Philippines not residing in that foreign country; or
• If the laws of the foreign country of which the decedent was resident at the time of his
death allow similar exemption from transfer taxes or death taxes of every character in
respect of in intangible personal property owned by the citizens of the Philippines not
residing in that foreign country.

Valuation of gross estate

1. In general, gross estate shall be valued at its fair market value at the time of decedent’s
death
2. Real properties- valued, whichever is higher, based on
• Fair market value
• Zonal value
3. Personal properties-
• Recently acquired properties- valued at acquisition cost or purchase price
• Previously acquired properties- fair market value at the time of death
4. Usufruct
• In accordance with the latest Basic Standard Mortality Table, to be approved the
secretary of finance, upon recommendation of the Insurance Commissioner.
5. Shares of stock
a. Traded in local stock exchange (LSE)- mean (average) between the highest and
lowest quotations nearest the date of death, if none is available on the date of death
itself.
b. Not traded in local stock exchange
• Common shares- book value
• Preferred share-par value

Situs of Property

As a general rule, the situs of real property is the place or country where it is situated.

Generally, the situs of tangible personal property is the place or country where such is actually
located at the time of decedent’s death.

As a general rule, the situs of intangible personal property is the domicile or residence of the
owner. However, this rule may not control when the property has in fact, a situs, elsewhere.
In addition, to the ones already enumerated, the following test tests of situs apply;

1. Accounts receivable- residence of the debtor

2. Bank deposit- location of depository bank
3. Copyright, trademark, patent, & franchise- place or country were the intangibles is used
or exercised.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Illustration on Situs and Gross Estate:

Ms. Nila Banez, single, died leaving the following properties:

a. House and lot in the Philippines 2,500,000.00

b. House and lot in Australia 3,000,000.00
Land & building which is located in Quezon City,
c. Philippines 10,000,000.00
Trees, plants, growing fruits and land on which they
d. are planted in Tiaong, Quezon 500,000.00
e. Fish pond in Marilao, Bulacan 200,000.00
f. Car in the Philippines 700,000.00
g. Van in Australia 800,000.00
h. Appliances in house and lot in the Philippines 200,000.00
i Appliances in house and lot in Australia 400,000.00
j. Jewelry in the Philippines 1,200,000.00
k Jewelry in China 500,000.00
l. Bank deposit in Beijing, China 15,000,000.00
m. Bank deposit at BPI Bank, Ayala Ave., Makati City 5,000,000.00
n. Notes receivable, debtor residing in the Philippines 150,000.00
Accounts receivable, debtor residing in Sydney,
o. Australia 175,000.00
p. Copyright exercised in the Philippines 300,000.00
q. Trademark used in Australia 400,000.00
r. Patent exercised in China 600,000.00
s. Franchise used in the Philippines 700,000.00
t. ABS-CBN certificate of stocks kept safe in Australia 450,000.00
Meralco certificate of stocks kept safe in the
u. Philippines. 550,000.00
Trasury bonds issued by Bangko Sentral ng
v. Pilipinas. 850,000.00
w. Foreign shares,80% business in the Philippines 900,000.00
Obligations issued by foreign corporation with no
x. business situs in the Philippines 750,000.00
y. Foreign bonds with business situs in the Philippines 650,000.00
Business right in a corporation established in
z. Macau, China 1,500,000.00
Investment in partnership established in the
aa. Philippines 2,250,000.00
bb. Foreign shares,90% business in the Philippines 1,750,000.00
Interest in an industry established in Brisbane,
cc. Australia 2,000,000.00
Total 53,975,000.00

Required: After determining the situs of each items above, compute for the gross estate if
Ms. Banes died a/an:

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

1. Filipino residing in the Philippines. (Resident Citizen)

2. Filipino residing in Australia. (Non-Resident Citizen)
3. Australian residing in the Philippines. (Resident Alien)
4. Australian residing in the Australia with reciprocity. (Non-Resident Alien – w/ reciprocity)
5. Australian residing in China. (Non-Resident Alien – w/o reciprocity)

Residents or NRA w/o NRA w/

Citizen Reciprocity Reciprocity
Within Abroad Within Abroad Within Abroad
Real Properties / / / x / x
Personal Properties
- Tangible / / / x / x
- Intangible / / / x x x

w/ reciprocity - citizen and resident of the same country ex. US citizen and
resident.
w/o reciprocity - citizen of another country and resident of another country ex. US
citizen residing in China.

Solution: The situs of each item above follows:

a. House and lot in the Philippines 2,500,000.00 Within - Real

b. House and lot in Australia 3,000,000.00 Without
Land & building which is located in Quezon City
c. 10,000,000.00 Within - Real
Philippines
Trees, plants, growing fruits and land on which
d. 500,000.00 Within - Real
they are planted in Tiaong, Quezon
Within –
e. Fish pond in Marilao, Bulacan 200,000.00
Real
f. Car in the Philippines 700,000.00 Within - TP
g. Van in Australia 800,000.00 Without
h. Appliances in house and lot in the Philippines 200,000.00 Within -TP
i Appliances in house and lot in Australia 400,000.00 Without
j. Jewelry in the Philippines 1,200,000.00 Within -TP
k Jewelry in China 500,000.00 Without
l. Bank deposit in Beijing, China 15,000,000.00 Without
m. Bank deposit at BPI Bank, Ayala Ave., Makati City 5,000,000.00 Within - IP
n. Notes receivable, debtor residing in the Philippines 150,000.00 Within - IP
Accounts receivable, debtor residing in Sydney,
o. 175,000.00 Without
Australia
p. Copyright exercised in the Philippines 300,000.00 Within - IP
q. Trademark used in Australia 400,000.00 Without
r. Patent exercised in China 600,000.00 Without
s. Franchise used in the Philippines 700,000.00 Within - IP
t. ABS-CBN certificate of stocks kept safe in Australia 450,000.00 Within - IP

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Meralco certificate of stocks kept safe in the

u. 550,000.00 Within - IP
Philippines.
Trasury bonds issued by Bangko Sentral ng
v. 850,000.00 Within - IP
Pilipinas.
w. Foreign shares,80% business in the Philippines 900,000.00 Without
Obligations issued by foreign corporation with no
x. 750,000.00 Without
business situs in the Philippines
y. Foreign bonds with business situs in the Philippines 650,000.00 Within - IP
Business right in a corporation established in
z. 1,500,000.00 Without
Macau, China
Investment in partnership established in the
aa. 2,250,000.00 Within - IP
Philippines
bb. Foreign shares,90% business in the Philippines 1,750,000.00 Within - IP
Interest in an industry established in Brisbane,
cc. 2,000,000.00 Without
Australia

1. The gross estate of Ms. Banes being a resident of the Philippines shall include all her
property wherever situated, as enumerated in the illustration or P53,975,000. (Resident
Citizen)

2. The gross estate of Ms. Banes being a Filipino residing in Australia is also P53,975,000
because Filipino citizens whether residing or not in the Philippines, are subject to estate
tax in the same manner. (Non Resident Citizen)

3. The gross estate of Ms. Banes being an Australian residing in Philippines is also
P53,975,000 because residents of the Philippines, whether Filipino citizens or aliens are
subject to estate tax in the same manner. (Resident Alien)

4. The gross estate of Ms, Banes being an Australian residing in Australia shall consist of
property situated in the Philippines. (Non Resident Alien – w/ Reciprocity)

The reciprocity rule may apply in this case because Ms. Banez at the time of her death is
a resident and citizen of Australia and has intangible personal property in the
Philippines. When there is reciprocity, the transmission of intangible personal property
located in the Philippines of a non-resident alien decedent is not subject to tax.
Accordingly, the computation of Ms. Banes’ gross estate is shown below:

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

a. House and lost in the Philippines 2,500,000.00

Building & land o which is stands on Quezon City
c. Philippines 10,000,000.00
Trees, plants, growing fruits and land on which they
d. are planted in Tiaong,Quezon 500,000.00

e. Fish pond in Marilao, Bulacan 200,000.00

f. Car in the Philippines 700,000.00

h. Appliances in house and lot in the Philippines 200,000.00

j. Jewelry in the Philippines 1,200,000.00

Total 15,300,000.00

5. The gross estate of Ms, Banes being an Australian residing in China shall consist of
property situated in the Philippines. (Non Resident Alien – w/o Reciprocity)

The reciprocity rule cannot apply in this case because Ms. Banez although a non-resident
alien in the Philippines is not a resident and citizen of one foreign country. So that the
reciprocity rule may apply, the non-resident alien must be a resident and citizen of one
foreign country at the time of his death.

When there is no reciprocity, the transmission of intangible personal property located in

the Philippines of a non –resident alien decedent is subject to tax,

a. House and lost in the Philippines 2,500,000.00

Land & building which is located in Quezon City,
c. Philippines 10,000,000.00
Trees, plants, growing fruits and land on which they
d. are planted in Tiaong, Quezon 500,000.00

e. Fish pond in Marilao, Bulacan 200,000.00

f. Car in the Philippines 700,000.00

h. Appliances in house and lot in the Philippines 200,000.00

j. Jewelry in the Philippines 1,200,000.00

m. Bank deposit at BPI Bank, Ayala Ave., Makati City 5,000,000.00

n. Notes receivable, debtor residing in the Philippines 150,000.00

p. Copyright exercised in the Philippines 300,000.00

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

s. Franchise used in the Philippines 700,000.00

t. ABS-CBN certificate of stocks kept safe in Australia 450,000.00

Meralco certificate of stocks kept safe in the
u. Philippines. 550,000.00
Trasury bonds issued by Bangko Sentral ng
v. Pilipinas. 850,000.00

y. Foreign bonds with business situs in the Philippines 650,000.00

Investment in partnership established in the
aa. Philippines 2,250,000.00

bb. Foreign shares,90% business in the Philippines 1,750,000.00

Total 27,950,000.00

Exemptions and Exclusions from Gross Estate

• Under Section 85 and 86 of NIRC
1. Capital or exclusive property of the surviving spouse
2. Properties outside the Philippines of a non-resident alien decedent
3. Intangible personal property of a non-resident alien in the Philippines when the
rule of reciprocity applies.

• Under Section 87 of NIRC

1. Merger of usufruct in the owner of the naked title
2. Transmission or delivery of the inheritance or legacy of the fiduciary heir or
legatee to the fideicommissary
3. Transmission from the first heir, legatee or donee in favor of another
beneficiary, in accordance with the will of the predecessor
4. All bequests, devices, legacies or transfers to social welfare , cultural and
charitable institutions, provided:
i. No part of the net income of said institution inure to the benefit of any
individual;
ii. Not more than 30% of such transfers shall be used for administration
purposes.

• Under Special Laws

1. Proceeds of life insurance and benefits received by members of the GSIS (RA
728)
2. Benefits received by members from SSS by reason of death (RA 1792)
3. Amounts received from Philippine and United States governments for war
damages
4. Amounts received from United States Veterans Administration

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

5. Retirement benefits of officials/employees of a private firm (RA 4917), provided

they are included in the gross estate.
6. Payments from the Philippines and US governments to the legal heirs of
deceased of World War II Veterans and deceased civilian for supplies/services
furnished to the US and Philippine Army (RA 136)

Deductions from Gross Estate

Deductions are the amounts or items that the law allows to be deducted from gross estate to
arrive at net estate.

The deductions from gross estate should be grouped into:

1. Those allowed if the decedent was a resident or citizens
2. Those allowed if the decedent was a non-resident alien

Resident Citizen, Non-Resident Citizen and Resident Alien decedents

Ordinary deductions

1. Losses, Indebtedness, Taxes, etc. (LIT)

a. Casualty losses
b. Claim against insolvent person
c. Claim against the estate
d. Unpaid mortgage
e. Unpaid taxes

2. Transfer for public use

3. Property previously taxed or vanishing deduction

Special deductions
1. Standard deduction
2. Family home
3. Amount received by heirs under R.A. 4917
4. Share of the surviving spouse

Non-resident alien decedent

1. .Claims against the estate, claims against insolvent persons, and unpaid mortgages.
This deduction is subject to limitation as follows;

Gross estate, Phil x World Claims against the estate,

Gross estate, world claims against insolvent persons, = Deductions allowed
and unpaid mortgages

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

2. Property previously taxed or vanishing deduction. Vanishing deduction on property

situated in the Philippines.
3. Transfer for public use of property situated in the Philippines
4. Net share of surviving spouse in the conjugal partnership or community property
5. Standard deduction of P 500,000.

ORDINARY DEDUCTIONS

CASUALTY LOSSES
This includes losses due to fire, storm, shipwreck, theft, robbery or embezzlement.

Requisites:
• Incurred during the settlement of the estate;
• The loss is not compensated by insurance or otherwise;
• The loss is not claimed as a deduction in the estate income tax return;
• The loss must occur not later than the last day for payment of the estate tax. (The
last day for payment of the estate tax is 6 months from the decedent's death).
Amount deductible – the amount deductible is the value of property lost

Illustration: Five months after Mr. Manglapus died and while the estate was being settled, a
house which he owned and which was appropriately declared as forming his gross estate
was totally destroyed by fire. The house which had a fair market value of P1.5 million at the
time of death was not compensated for by insurance.

Gross Estate
House 1,500,000

Deductions:
Casualty Loss 1,500,000

CLAIM AGAINST INSOLVENT PERSON

These are receivables of the decedent on persons declared by competent authorities as
insolvent.

Requisites:
• value of the decedent's interest therein is included in the gross estate;
• The insolvency of the debtor must be established

Amount deductible – the amount of claims/receivable that cannot be collected

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Example:
Mr. X borrowed P 150,000 from Mr. Y. After a month, the debtor (x) paid P 50,000. Before
the remaining balance of P 100,000 was paid, Mr. Y died. Prior to his death, the court
declared Mr. X insolvent. The total assets and total liabilities of the debtor amount to P
200,000 and P 500,000 respectively.

The full amount of the claim must be included in the gross estate (Y). The proportionate
amount of P 40,000 ( P 100,000 X 2/5) is still collectible. The amount deductible from gross
estate is P 60,000 ( P 100,000-P 40,000).
Gross Estate
Receivable 100,000
Ordinary Deduction
Claims against insolvent 60,000
Net Estate 40,000

CLAIM AGAINST THE ESTATE

These are financial obligation of the decedent prior to his/her death and still enforceable at
the time of death.

Requisites:
• Contracted in good faith;
• Must be valid in law and enforceable in court;
• Must not have been condoned by the creditors;
• Must have not been prescribed;
• Personal debt of the decedent existing at the time of his death

Amount deductible - the amount of debt that will qualify in the above requirements.

Illustration: Mr. Manglapus during his lifetime obtained a loan of P500,000 from Mr.
Escuderao. The debt instrument was duly notarized. A year after, Mr. Manglapus died with
the loan unsettled.

The full amount of loan may be deducted from the gross estate of Mr. Manglapus.

UNPAID MORTGAGE
These are amounts owed by the decedent supported with collateral and still outstanding at
the time of death.

Requisites:
• The fair market value of the mortgaged property undiminished by the mortgage
indebtedness should be included in the gross estate;
• Contracted in good faith
• For an adequate and full consideration

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Amount deductible- amount of unpaid mortgage

Illustration: Mr. Manglapus mortgaged his house and lot to Banco Filipino for P1.5 million. He
died paid only 50% of the mortgage loan. The fair market value of the mortgaged house at
the time of his death is P2.5 million

Gross Estate:
House and Lot P2.5 million
Ordinary deduction:
Unpaid Mortgage 750,000
(1.5m X 50%)

UNPAID TAXES
Requisites:
• The tax must have accrued as of the death of the decedent which were unpaid as of
the time of death

Amount deductible –amount of taxes that accrued before the decedent’s death but not
including:
• Income tax on income earned after death;
• Property taxes that accrue after death;
• Estate tax

Illustration: On April 15, 2015, Mr. Manglapus, while on his way to the BIR to file his income
tax return and pay the tax payable of P20,000 for calendar year 2014 figured, in a car accident
and died.

TRANSFER FOR PUBLIC USE

These are amount of bequest, legacies, or devices to or for the use of the of the government
of the Philippines exclusively for public purpose.

Requisites:
• Given to the government of the Philippines (national or local);
• Must be testamentary in character;
• By way of donation mortis causa executed by the decedent before his death;
• Exclusively for public purpose

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Amount deductible- amount of all bequests, legacies, devises, or transfers to or for the use
of the Government of the Philippines, or any of its political subdivisions.

Illustration: Mr. Manglapus, in his will, transferred a 1,000 sq. m. lot with fair market value of
P2 million to the provincial government of Laguna to be developed as a public park.

PROPERTY PREVIOUSLY TAXED OR VANISHING DEDUCTION

Purpose: To minimize the effects of a double tax on the same property within a short period
of time.

A–B

Requisites:

Conditions for allowance:

• There is a property forming a part of the gross estate of the present decedent situated
in the Philippines;
• The present decedent acquired the property by inheritance or donation within 5 years
prior to his death;
• The property subject to vanishing deduction can be identified as the one received from
the prior decedent, or from the donor, or can be identified as having been acquired in
exchange for the property so received;
• The property acquired formed part of the gross estate of the prior decedent, or of the
taxable gift of the donor;
• The estate tax on the prior transfer or the gift tax on the gift must have been paid; and
• The estate of the prior decedent has not previously availed of the vanishing deduction.

Percentage of vanishing deduction - the rate depends on the interval between the death
of present decedent and death of prior decedent (if the property was acquired by inheritance)
or death of present decedent and date of gift (if the property was acquired by donation), as
follows:
More than Not more than Percentage
xxx 1 years 100%
1 years 2 years 80%
2 years 3 years 60%
3 years 4 years 40%
4 years 5 years 20%
5 years xxx xxx

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Procedures in computing vanishing deduction

a. Determine the initial value by comparing the FMV of the property used in computing
the first transfer tax paid with the FMV of the property in the present decedent. The
lower of the two is the initial value.
b. From the initial value taken, deduct any mortgage or lien on the property previously
taxed which was paid by the present decedent prior to his death, where such mortgage
or lien was a deduction from the gross estate of the prior decedent or gross gift of the
donor. This is the initial basis.
c. The initial value taken, as reduced by Step (b), shall be further reduced by prorated
deductions for losses, indebtedness, taxes and transfers for public purpose only,
allocable to the property previously taxed as follows:

Initial basis
Gross estate X Deductions = Portion deductible

This is the final basis.

d. Determine the time interval between the death of present decedent and death of prior
decedent (if the property was acquired by inheritance) or death of present decedent
and date of gift (if the property was acquired by donation) to find the applicable
percentage of vanishing deduction
e. Multiply the final basis by the percentage of vanishing deduction to arrive at the
VANISHING DEDUCTION.

Value of the Property xxx

Less: Mortgage paid (xxx)
Initial Basis xxx
Less: Proportion Deduction (LIT + TPU) (xxx)
Final Basis xxx
% of Vanishing Deduction %
Vanishing Deduction xxx

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Example:
Val Hallada died on November 20,2018. Some of the properties he left are the following:

Mode of Date of Market value Death of

Assets Acquisition Acquisition Date acquired VaL Hallada

Land Donation 7- 3- 2014 P 500,000 P 350,000

Car Purchase 10- 2-2017 800,000 980,000

Other information:
1. The gross estate of the decedent amounts to P 3,000,000.
2. The land was mortgaged for P 50,000 which was deducted in prior estate and Hallada
paid the same before he died.
3. The allowable deductions total P125,000, which includes medical expenses of P 30,000.
It excludes transfer to national government amounting to P 50,000.

Required: Compute for the vanishing deduction

1. Corrected Losses, indebtedness, taxes and Transfer for public use:

Unadjusted P 125,000
Add: Transfer for public use 50,000
Less: Medical expenses 30,000
Adjusted (LIT plus TPU) P 145,000

Value taken (Land) P350,000

Less: mortgage paid 50,000
Initial basis P 300,000
Less: proportional deduction
(300,000/3,000,000)*145,000 14,500
Final basis 285,500
Vanishing deduction % 20%
Vanishing deduction 57,100

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

SPECIAL DEDUCTIONS
STANDARD DEDUCTION
This is a fixed amount equivalent to P 5,000,000 which is automatically deductible and not
subject to any substantiation.

FAMILY HOME
1. Defined - The family home is the dwelling house where a person and his family reside,
and the land on which it is situated.
2. Value included in the gross estate. The current fair market value or zonal value of
the family home, whichever is higher, shall be included in the gross estate of decedent.
3. Valuation date. The family home shall be valued as of the date of death.
4. Conditions for allowance of deduction:
a. Decedent must have died on or after July 28, 1992.
b. The total value of the family home must be included in the gross estate of the
decedent.
c. The family home must be the actual residence of decedent and his family at the time
of death, as certified by the Barangay Captain of the locality where the family home
is situated.
d. Deduction cannot exceed the fair market value or zonal value of the family home as
included in the gross estate but not exceeding P10,000,000.
e. It is a deduction from common properties or separate properties of the decedent, as
the case maybe.

Example:
The current value of the family home at the time of death is of Mr. X is P 16,000,000 when
the zonal value is 17,500,000.

What amount of family home is to be included and deducted in the gross estate?

Answer:
The amount includible in the gross estate is the zonal value of P 17,500,000 because it is
higher than the current value.

The family home deductible from the gross estate is P 10,000,000 only because it is the
maximum amount allowed.

If the family home is a conjugal or community property, the amount deductible is the share
of the decedent in such property, which is equivalent to ½ of the amount included in the gross
estate but not exceeding P 10,000,000.

Thus, if the family home is part of the community property, the entire amount of P 17,500,000
is included in the gross estate. However only P 8,750,000 is deductible because this is the
only amount corresponding the share of the decedent is such property.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

AMOUNT RECEIVED BY HEIRS UNDER R.A. 4917

This pertaining to the benefits granted and received by the heirs of the decedent from his
employer, as a consequence of separation of service, due to death of the decedent.
Provided, however, that such amount is included in the gross estate of the decedent.

SHARE OF THE SURVIVING SPOUSE

The share of the surviving spouse in the conjugal or community property as diminished by
the obligations properly chargeable to such property shall be deducted from the gross estate.
Common properties P xx
Common deductions (xx)
Net common properties before deductions xx
Multiply by 50%
Share of the surviving spouse P xx

NET ESTATE AND ESTATE TAX: UNMARRIED DECEDENT

Format of Computation:
Gross Estate P xx
Less:
Ordinary deductions (xx)
Special deductions (xx)
Net Taxable Estate xx
Estate tax rate 6%
Estate tax due xx

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Illustration- Resident Citizen

Dina Nakahinga, resident Filipino, single, died on February 14, 2018. Assets declared and
deductions claimed by the estate are as follows:

Assets:
Family Home (house) Quezon City 8,000,000
Lot in Quezon City where the house stands 500,000
Fishpond, Bulacan 4,000,000
Apartment, Manila 1,600,000
Shares of stock, Good Luck Co., domestic 600,000
Shares of stock, BX Inc., a foreign Corporation
60% of the business is in the Phil. 400,000
Cash in Bank 100,000
Mr. Max Receivable 40,000
This represents unpaid subscription to 200
shares of Tililing Co. acquired on February 10,2018 200,000
Death benefits under RA 4917 300,000
Total 15,740,000

Deductions claimed: (Ord & Special)

Funeral expenses 300,000
Medical expenses incurred within one year before death 600,000
Loss (Decedent has a receivable from Mr. MAX) 40,000 OD
Liability (This represents unpaid subscription to 200
shares of Tililing Co. acquired on February 10,2018) 200,000 OD
Standard deduction (Unitemized & undocumented) 5,000,000 SD
Family home deduction 8,500,000 SD
Death benefits under RA 4917 300,000 SD
14,040,000
Net Taxable Estate 1,700,000
Multiply 6%
Estate Tax 102,000

Compute for the net taxable estate and estate tax.

Illustration- Non resident alien

Che Cua, a non resident alien died leaving the following assets-
Domestic shares P 1,000,000
Foreign shares 3,000,000
Tangible personal property, Philippines 6,000,000
Expenses( deductible) LIT 1,200,000

Note- The country where he is a citizen and resident does not impose transfer tax on
transmission of intangibles of Filipinos. (W/ RECIPROCITY)

Compute for the net taxable estate and estate tax.

Gross estate within in the Philippines P6, 000,000

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Gross estate outside the Philippines 4,000,000

Total gross estate within and outside the Philippines P 10,000,000

Gross estate P 6,000,000

Less:
Proportional deductions
(1,200,000*6/10) 720,000
Standard deduction 500,000
Total P1,220,000
Net Taxable estate P 4,780,000

Estate tax due (4,780,000* 6%) P 286,800

Self-Help: You can also refer to the sources below to help you further
understand the lesson.

Ballada, W., & Ballada, S. (2018). Transfer and business taxation: made easy. (17th ed.).
Philippines: DomDane Publishers & Made Easy Books.

Ampongan, O. (2013). Business & transfer taxes. (2nd ed.). Manila: Conanan Educational
Supply.

Tabag, D. (2018) Cpa reviewer in taxation with special notes. Manila: Professional Review
and Training Center.

Let’s Check

I Questions:

1. What constitute gross estate of a resident citizen?

_____________________________________________________________

_____________________________________________________________

_____________________________________________________________

2. What constitute gross estate of a non-resident alien?

_____________________________________________________________

_____________________________________________________________

_____________________________________________________________

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

3. What are the ordinary deductions?

_____________________________________________________________

_____________________________________________________________

_____________________________________________________________

4. What are the special deductions?

_____________________________________________________________

_____________________________________________________________

_____________________________________________________________

5. Explain reciprocity rule of non-resident alien?

_____________________________________________________________

_____________________________________________________________

_____________________________________________________________

_____________________________________________________________

II. MULTIPLE CHOICE QUESTIONS

1. As a rule, all the decedents are taxable on world, except
a. Non-resident alien
b. Non-resident citizen
c. Resident-alien
d. All of these

2. Which property is covered by the reciprocity exemption?

a. Intangible personal property abroad
b. Intangible personal property in the Philippines
c. Tangible personal property abroad
d. Tangible personal property in the Philippines

3. The proceeds of life insurance designated by the decedent to his executor is excluded in
the gross estate
a. If the designation is revocable
b. If the designation is irrevocable

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

c. Without regard to the designation as revocable or irrevovable

d. Under no circumstances

4. Mr. Faustino Santos, testator appointed Mr. Generoso Cruz as the executor of the
estate. Mr. Santos was a citizen of Argentina and a resident of Quezon City. He was in
California, USA visiting his son when he died. He owned a Mercedes sports car and
several bank deposits in the USA. The executor asked you whether or not the car and
bank deposits in USA will still have to be declared as part of the Philippine gross estate
of Faustino Santos. Argentina does not impose taxes of any kind. What answer will you
give him?
a. The car and bank deposits in the USA have to be declared as part of the
Philippine gross estate because the decedent was a resident at the time of his
death and, as such, properties wherever situated are included in the gross estate.
b. The car and bank deposits in the USA need not be declared as part of the
Philippine gross estate because when Mr. Santos died he was in California, USA
making him a non-resident alien.
c. The car and the bank deposits in the USA have to be declared as part of the
Philippine gross estate only when the decedent specified in his will and testament
that such properties must form part of his gross estate.
d. The car and the bank deposits in the USA need not be declared as part of the
Philippine gross estate because Argentina does not impose transfer taxes of any
kind.

5. Statement 1: A resident alien is taxable only on his estate situated in the Philippines.
Statement 2: A non-resident alien is taxable only on his estate situated in the
Philippines.
Which is correct?
a. Statement 1
b. Statement 2
c. Both statements
d. Neither statement

6. Which shall not form part of the gross estate of a decedent:

a. Life insurance where the executor is the beneficiary and it is irrevocable
b. Transfer passing special power of appointment.
c. Revocable transfer
d. Intangible personal property of non-resident
7. Personal property with a cost of P400,000 and a fair market value at the time of death
P900,000, but subject to a mortgage of P250,000
a. Shall be in the taxable net estate at P500,000
b. Shall be in the gross estate at the decedent’s equity of P650,000
c. Shall be in the gross estate at P400,000
d. Shall be in the gross estate at P900,000

8. Statement 1: Losses can be deducted only if incurred during the settlement of the
estate.
Statement 1: Losses can be deducted only if the property lost is included in the gross
estate.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

a. both statement are true.

b. both statement are false.
c. the first statement is true, but the second statement is false.
d. the first statement is false, but the second statement is true.

9. Which of the following is deductible from the gross estate?

a. Income tax paid on income received after death.
b. Unpaid property taxes accrued in the year of death.
c. Donor’s tax accrued after to death.
d. Estate tax paid to a foreign country.
10. Which is not a requisite of vanishing deduction?
a. If the property is acquired by inheritance, the prior estate must have paid the
estate tax
b. If the property is acquired by inheritance, the property must not have claimed
vanishing deduction
c. The decedent must have acquired the property by way of inheritance or
donation.
d. The decedent must have acquired the property by purchase.

11. A resident decedent was married at the time of death and under the system of conjugal
partnership of gains. Among the properties in the gross estate were:
Land, inherited before the marriage, fair market value P5, 000,000
Family home built by the spouses on the inherited land 4,000,000
Deduction for family home is:
a. P9,000,000 c. P5,000,000
b. P7,000,000 d. P2,000,000

12. The heirs of the decedent compiled the following accrued taxes:
Before death After death
Real property tax P 40,000 P-
Income tax P 80,000 P 110,000
Estimated estate tax P 400,000
Compute the deductible taxes.
a. P 120,000
b. P 230,000
c. P 510,000
d. P 630,000

A decedent left the following properties:

Land in Italy (with P1M unpaid mortgage) P 2,000,000
Land in Davao City, Phil.. (zonal value P750,000) 500,000
Franchise in USA 100,000
Receivable from debtor in Phil. 50,000
Receivable from debtor in USA 100,000
Bank deposit in Phil 20,000

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Bank deposits in USA 80,000

Shares of stocks of PLDT, Phil. 75,000
Shares of stock of ABC, foreign corporation
75% of the business in the Philippines 125,000
Other personal properties in the Philippines 300,000
13. If the decedent is a non-resident citizen his gross estate is:

a. P 3,350,000
b. P 3,600,000
c. P 2,350,000
d. P 2,600,000

14. If the decedent is non-resident alien (no reciprocity) his gross estate is?
a. P 800,000
b. P 945,000
c. P 1,050,000
d. P 1,195,000

15. If in the preceding number reciprocity law can be applied the gross estate is:
a. P 800,000
b. P 945,000
c. P 1,050,000
d. P 1,195,000

Let’s Analyze
For each type of decedent, compute for the Gross estate of Mr. Lao if he left the following
property:

A. Resident Citizen
B. Non- Resident Citizen
C. Resident Alien
D. Non- Resident Alien
E. Non- Resident Alien, Without Reciprocity

1. Lot in Pakistan P1,500,000

2. Accounts Receivable ,debtor in Jolo, Sulu 150,000
3. Foreign Bonds 2,800,000
4. Buildings in Quezon City 5,000,000
5. Fishing Boat in Nasugbu, Batangas 175,000
6. Car in Pakistan 1,200,000
7. Van in Manila 1,400,000
8. Farm in Lean, Batangas 550,000
9. Appliances in Cotabato City 500,000
10. Jewelry in Pakistan 800,000
11. Shares of stock,domestic corporation 250,000
12. Bank deposit, Swiss Bank 3,0000,000
13. Notes Receivable, debtor in Pakistan 700,000
14. Copyright exercised in the Philippines 2,500,000

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

15. Patent used in Paris 4,500,000

16. Franchise used in Sta. Rosa Laguna 2,000,0000
17. Treasury bonds, government corporation 900,000
18. House & Lot in Davao City 1,000,000
19. Fishpond in Nasugbu, Batangas 300,000
20. Mango Fruits and Tress in Zambales 850,000
21. Obligations by a domestic corporation 400,000
22. Interest in a domestic industry 475,000
23. Library house in Cotabato City 250,000

In a Nutshell

Mr. Nakalimot Huminga, head of family died on January 15,2018 ,leaving the following
properties and obligations:
Cash in bank,50% donated mortis causa to Natl
Govt;50% to Q.C. Govt 3,000,0000
House and lot in Makati, F. Home 15,000,000
Personal properties 15,000,000
Farm lot 8,250,000
Claim against an insolvent debtor 2,250,000
Transfer in contemplation of death( gratuitous) 15,000,000
Transfer passing under special power of appointment 750,000
Deductions claimed:
Funeral expenses 5,750,000
Judicial expenses 675,000
Donation mortis causa to Quezon City Government 1,500,000
Unpaid mortgage on the farm lot 750,000
Medical expenses( included in the funeral expenses
Incurred within the 1 year period with receipts) 2,250,000
The farm lot was inherited 5 1/2 years by the decedent before his death with a value then of
P 5,750,000 and a mortgage indebtedness of P 1,500,000.
Determine the following:
a. Gross Estate
b. Total allowable deductions
c. Net taxable estate
d. Estate tax due

Q&A List
In this section you are going to list what boggles you in this unit. You may indicate your
questions but noting you have to indicate the answers after your question is being raised and
clarified. You can write your questions below.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Questions/Issues Answers

1.

2.

3.

4.

Keyword Index
• Gross Estate
• Reciprocity
• Situs
• Allowable deductions
• Net Taxable Estate

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