BUSINESS AND TRANSFER TAXATION
XBUSINESSTAX (FINALS) | 3rd Year 1st SEMESTER
DEDUCTIONS FROM GROSS ESTATE
CLASSIFICATIONS
● Ordinary
○ conceptually include items which diminish
the amount of the inheritance
● Special
○ items which do not reduce the inheritance
but are nonetheless allowed by the law as
incentive deductions against gross estate
● Share of the Surviving Spouse
○ pertains to the interest of the surviving
spouse in the net conjugal or communal
properties of the spouses
GENERAL PRINCIPLES
● Substantiation rule
● Matching principle
● No ‘double-classification’
● Default presumption on ordinary deduction
ORDINARY DEDUCTIONS
Losses, Indebtedness, and Taxes
● incurred during the settlement of the estate
● arose from fire, storm, shipwreck, or other casualties,
or from robbery, theft, or embezzlement
● not compensated for by insurance or otherwise
● must not have been claimed as deduction for income
tax purposes in an income tax return
● incurred not later than the last day for the payment of
the estate tax (within one (1) year after death.)
● Classified based on the ‘Property Classification Rule’
● Claims against insolvent persons
○ form of loss presented as a separate item of
deduction
○ deductible amount - unrecoverable amount
of claim
● Claims against the estate (Indebtedness)
○ the liability represents a personal obligation
of the deceased existing at the time of his
death
○ the liability was contracted in good faith and
for adequate and full consideration in money
or money’s worth
○ the claim must be a debt or claim which is
valid in law and enforceable in court
○ the indebtedness must not have been
condoned by the creditor or the action to
collect from the decedent must not have
prescribed
○ claims against the estate or indebtedness in
respect of property may arise out of the
following sources:
1. Contract
2. Tort
3. Operation of law
○ if the claim was based on a debt instrument,
such instrument must be NOTARIZED.
(Except loans granted by financial
institutions where notarization is not part of
the business practice of the financial
institution lender.)
○ if a loan was incurred within 3 years before
the decedent’s death, the administrator, or
executor is required to render a statement
showing the disposition of the loan proceeds
○ a verification as to the beneficiary of the
proceeds must be made
○ in case of accommodation (used) only, the
amount must also be claimed as receivable
included in the gross estate
● Classification Rules for Claims against the Estate
○ Family benefit rule
■ if the obligation was contracted or
incurred for the benefit of the family,
the claim shall be classified as
deduction against common property
■ otherwise, the property
classification rule shall be applied
○ Property classification rule
■ claims follow the classification of
the relevant property
● Special Rules on Certain Claims against the
Estate
○ Unpaid Mortgage
■ gross estate: include property
mortgaged.
■ deductions from gross estate:
amount of unpaid mortgage.
○ Unpaid Taxes
■ the tax must have accrued before
the death of the decedent
■ this includes taxes such as income
tax, business tax, and property tax
which have accrued as of the death
of the decedent and which were
unpaid as of the time of death
■ it must be emphasized that only
obligations existing at the point of
death are deductible. Obligations
including taxes which are settled
before death and those accruing
after death are not deductible from
gross estate.
■ hence, the following taxes are
non-deductible:
● tax on income earned after
death
● property taxes accruing
after death
● business taxes accruing
after death
● estate tax on the
transmission of the estate
to the heirs.
○ Accommodation Loan
■ one contracted by a person in
behalf of another person with the
contracting person merely
representing in behalf of the other
person who will be the beneficiary
of the loan proceeds
■ presented as a receivable in the
gross estate and is presented as a
deduction
■ if there is a legal impediment to
recognize the same as a
receivable, it may not be included in
the gross estate. Likewise, it will not
be presented as an obligation
Transfer for Public Use
● Amount deductible
○ amount of all bequest, legacies, devises or
transfer to or for the use of the Government
of the Philippines, or any political subdivision
for exclusively public purpose
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● Requisites for deduction the gross estate, or to the extent of the
○ The disposition must be decedent’s interest (whether
■ testamentary in character (in the conjugal/community or exclusive), whichever
last will and testament) or is lower, but not exceeding P10,000,000
■ by way of donation mortis causa Standard Deductions
(should take effect after death) ● the amount deductible is P5,000,000 (citizen-
■ executed by the decedent before resident/nonresident or a resident alien) P500,000
his death (nonresident alien) without any required
○ In favor of the Government of the Philippines substantiation
or any of its political subdivisions. Benefits under RA 4917
○ Exclusive for public purpose.
○ The value of the property given is included in ● any amount received by the heirs from the decedent’s
the gross estate. employer as a consequence of the death of the
○ Note: No purely religious organization decedent employee in accordance with Republic Act
● Deducted from No. 4917 is allowed as deduction provided that the
○ Exclusive property amount of the separation benefit is included as part of
the gross estate of the decedent
Vanishing Deductions
SHARE OF THE SURVIVING SPOUSE
● deduction derived from ● ½ of the net conjugal or community properties of the
○ a property that was previously subjected to spouses
transfer tax. ● only married decedents
● requisites for deduction ● the amount of deduction for the share of surviving
○ the present decedent must have died within spouse admits to adjustment in the deduction
five (5) years from the receipt of the property classification to ensure that only the interest of the
from a prior decedent or donor decedent is taxed\
○ the property involved must have been a
property transferred by a prior decedent or
donor to the present decedent or the RC, NRC, RA NRA
property acquired in exchange for the
original property so received Ordinary deduction ✔ ✔
○ the property must have formed part of the
prior decedent’s gross estate situated in the Special deduction ✔ None, except
Philippines or been included in the total standard
amount of the gifts of the donor made within deductions
5 years prior to the present decedent’s death
○ the estate tax on the prior succession must Share of surviving ✔ ✔
have been finally determined and paid by the spouse
prior decedent. The same applies to gifts, in
that donors must have taken care of the Deductions allowed to NRA decedents
donor’s tax ● prorated losses, indebtedness, and taxes (LIT)
○ the vanishing deduction on the property must ● property previously taxed (vanishing deductions)
not have been claimed by the previous ● transfer for public purpose
estate involving the same property ● share of the surviving spouse
SPECIAL DEDUCTIONS ● standard deduction
Family Home
● refers to the dwelling house, including the land on SUMMARY OF RC, NRC, RA NRA
which it is situated, where the husband and the wife, DEDUCTION
or an unmarried person who is the head of the family RULES
and members of the family reside, as certified by the
Barangay Captain of the locality Losses ✔ Pro-rated amount
● generally characterized by permanency, that is, the
place to which, whenever absent for business or
Claims against the ✔
pleasure, one still intends to return
estate
● for purposes of availing of a family home deduction to
the extent allowable, a person may constitute only
Indebtedness ✔
one family home
● Requisites for Deduction
○ the family home must be the actual Taxes ✔
residential home of the decedent and his
family at the time of his death, as certified by Transfer for public ✔ ✔
the Barangay Captain of the locality the use
family home is situated
○ the total value of the family home must be Vanishing ✔ ✔
included as part of the gross estate of the deductions
decedent, and
○ allowable deduction must be in an amount Family home ✔ X
equivalent to the current fair market value of
the family home as declared or included in

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Standard ✔ ✔
deductions

Benefits under RA ✔ X
4917
● Time of Collection
Share of the ✔ ✔ ○ Within 5 years following the assessment; or
surviving spouse ○ Within the period agreed upon between the
taxpayer and the Commissioner before the
expiration of the 5-year period; or
DONOR’S TAX ○ Within 10 years after the discovery of the
fraud, falsity, or omission even without
assessment thru a proceeding in court.
BIR Tax Audit Process
● Release of Letter of Authority to the revenue officer
○ an official document that authorizes a BIR
Revenue Officer to examine a taxpayer’s
books of accounts and other accounting
records in order to determine his correct
internal revenue tax liabilities.

○ Requisites for the validity of an LA:

■ The LA must be served to the
taxpayer within 30 days* from its
date of issuance.
■ The LA must be an electronic
TAX REMEDIES LA(eLA) printed under BIR Form
REMEDIES OF THE GOVERNMENT 1966 issued under the BIR Letter of
Assessment Authority Monitoring System (
● notice given to the taxpayer that the correct taxes have not LAMS ).
been paid ○ Manual LAs are no longer allowed.
● the assessment must: Examiners or revenue officers who conduct
○ State the facts and the law on which its audit investigations without an eLA will be
conclusion is based; subjected to administrative sanctions.
○ Include contain a computation of the tax ○ Only one LA shall be issued to the taxpayer.
liabilities, and Taxpayers who were inadvertently issued
○ Contain a demand for payment within a with multiple LAS shall inform the concerned
specified period BIR officer and formalize his request for
● Time of assessment cancellation of the other LA.
○ General Rule: Within 3 years after the last ○ Other BIR notices to taxpayers:
day prescribed by law for filing or from the ■ Tax verification notice (TVN)
date of filing the return, whichever is later ● authorizes evaluation or
○ Except: The 3-year period can be extended verification of tax on
in the following cases: one-time
■ In cases where a false or fraudulent transactions(ONETT)
return with intent to evade the tax is cases such as estate tax,
filed: Period of assessment = Within donor’s tax and capital
10 years after the discovery of the gains tax.
falsity or fraud ■ Letter notice ( LN )
○ Where there is a failure or omission to file a ● a communication from the
return: Period of assessment = Within 10 BIR national office
years after the discovery of the failure or informing the taxpayer of a
omission finding of significant
○ Within any period agreed upon by the discrepancy between
taxpayer and the Commissioner of the BIR. sales/purchases reported
Provided, such agreement is entered into in his tax return and
before the expiration of the 3-year period for information obtained by
assessment the BIR from third parties.
Collection ○ Data Matching Systems
■ The BIR national office embarked
on a program called Data Matching
which is basically a data mining
technique intended to match
taxpayer’s reported data such as

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sales against data furnished by
third parties such as purchases of
the taxpayer’s customers.
Significant discrepancies or
variances noted may indicate the
presence of unpaid taxes which
must be checked.
■ Discrepancies noted by the
matching systems are forwarded by
the national office to the revenue
district office which has jurisdiction
to the concerned taxpayer. The
revenue district office will serve the
○ LN to the taxpayer.
■ Reconciliation of discrepancies
■ Taxpayers have 5 days from the
receipt of the LN to reconcile the
discrepancies noted therein. If the
taxpayer agrees to the finding of
discrepancies, they must settle any
resultant tax liability within 30 days
from the receipt of the LN.
■ Timely payment of the LN will entitle
the taxpayer to abatement of
corresponding surcharge, interest
and compromise penalty.
○ Consolidation of LN and eLA
■ Taxpayers who are selected for
regular audit by the RDO may
likewise be concurrently issued with
an LN by the national office. The LN
in such case shall be consolidated
with the eLA issued for such
examination.
○ LN payments may be claimed as tax credit
■ Taxpayers who are selected for
regular audit may have paid taxes
under an LN. The amount paid
under the LN may be considered as
tax credit against any findings of
deficiency under the eLA (regular
audit) to the extent that they pertain
to the same issues.
● Conduct of the audit examination
● Reporting on the results of the examination
○ When the BIR examination or verification
determined that there exists a sufficient basis
to assess the taxpayer for any deficiency tax
or taxes, the revenue officer shall
recommend in his report the issuance of an
assessment to the taxpayer.
○ The assessment stage may involve the
issuances of the following notices in
sequence:
■ Notice of Discrepancy (RR 22-2020
)
■ Pre – assessment Notice (PAN)
■ Formal Letter of Demand and Final
Assessment (FLD/FAN)
■ Final Decision on a Disputed
Assessment (FFDA)
REMEDIES OF THE TAXPAYER
● e-Letter of Authority (LOA)
○ authority given to the appropriate revenue
officer assigned to performed functions. The
LOA empowers or enables said revenue
officer to examine the books of accounts and
other accounting records of a taxpayer for
the purposes of collecting the correct amount
of tax.
○ Unless authorized by the Commissioner or
his duly authorized representative through
an LOA, an examination of the taxpayer
cannot ordinarily be undertaken. Thus, a
Final Assessment Notice (FAN) issued on
the basis of a mere Letter of Notice (LN) is
void.
○ Moreover, a LOA must specify the years
covered for an investigation of those years to
be valid.
● Notice of Discrepancy (formerly known as Notice for
Information Conference)
○ written notice informing a taxpayer that the
findings of the audit conducted on his books
of accounts and accounting records indicate
that additional taxes or deficiency
assessments have to be paid.
○ The taxpayer shall then have thirty (30) days
from the date of his receipt of the Notice of
Discrepancy to explain his side.
○ The Revenue Officer who audited the
taxpayer’s records shall state in his report
whether or not the taxpayer agrees with his
findings of the taxpayer’s liability for
deficiency taxes. If the taxpayer is not
amenable, he shall be informed in writing by
the BIR of the discrepancies in the payment
of his internal revenue taxes for the purpose
of the “Discussion of Discrepancy” in order to
afford the taxpayer an opportunity to present
his side of the case.
○ The Discussion of Discrepancy shall in no
case extend beyond thirty (30) days from
receipt of notice thereof. If it is found that the
taxpayer is still liable for deficiency taxes
after presenting his side and the taxpayer is
still not amenable, his case shall be
endorsed to the reviewing office and
approving official in the National Office or
Revenue Regional Office of the BIR for
issuance of a deficiency tax assessment.
● Pre-assessment Notice or Preliminary Assessment
Notice (PAN) and Final Assessment Notice (FAN)
○ When the Commissioner or his duly
authorized representative finds that proper
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taxes should be assessed, he shall first
notify the taxpayer of his findings in a
Preliminary Assessment Notice (PAN). The
PAN shall show in detail the facts and the
law or jurisprudence on which the proposed
assessment is based.
○ The taxpayer is given 15 days to respond
from date of receipt of the PAN. If the
taxpayer fails to respond to the PAN within
the 15-day period or disagrees therewith, the
Commissioner or his duly authorized
representative shall issue the Formal Letter
of Demand and Final Assessment Notice
(FLD/FAN).
○ The FLD/FAN shall state the facts, the law,
rules and regulations or jurisprudence on
which the assessment is based; otherwise,
the assessment shall be void.
REMEDIES AVAILABLE TO THE GOVERNMENT AND
TAXPAYER
● Compromise
○ Mutual concession or settlement which can
be entered into by the BIR and the taxpayer
even if a (civil) case has been filed in court.
○ There is an offer to pay by the taxpayer and
an acceptance by the Commissioner called a
compromise penalty if paid in lieu of criminal
prosecution.
○ Grounds for Compromise:
■ Reasonable doubt as to the validity
of the claim against the taxpayer:
The delinquent account or disputed
assessment is one resulting from a
jeopardy assessment;
The assessment is lacking in legal
and/or factual basis; or
The taxpayer failed to file an
administrative protest on account of
the alleged failure to receive notice
of assessment, or
The demand notice allegedly failed
to comply with the formalities
prescribed under Section 228 of the
Tax Code; or
The assessment was made based
on the “Best Evidence Obtainable
Rule” under Section 6(B) of the Tax
Code, and there is reason to
believe that the same can be
disputed by sufficient and
competent evidence; or
The assessment was issued within
the prescriptive period for
assessment as extended by the
taxpayer’s execution of a Waiver of
the Statute of Limitations. However,
the validity or authenticity of such
waiver is being questioned or at
issue, and there is strong reason to
believe and evidence to prove that
the same is not authentic or
The assessment is based on an
issue where a court of competent
jurisdiction has made an adverse
decision against the BIR. However,
the Supreme Court has not decided
upon the case with finality.
● Financial inability to the taxpayer to
pay
The compromise must be
accompanied by a waiver under the
Secrecy of Bank Deposit Law.
● Bank Secrecy and the Bureau of Internal
Revenue
○ The Commissioner of Internal
Revenue is authorized to inquire
into bank deposits of:
A decedent, to determine the gross
estate
Any taxpayer who has filed an
application for compromise of his
tax liability by reason of financial
incapacity to pay the tax liability.
● Amounts of Compromise Settlement
○ The BIR has a schedule of
compromise penalties for various
violations of the Tax Code. A
compromise penalty may differ than
the prescribed amounts as long it is
approved by the Commissioner, but
shall not go below the following
minimum amounts:
■ For cases of financial
incapacity, a minimum
compromise rate
equivalent to ten percent
(10%) of the basic
assessed tax.
■ For other cases (doubtful
validity), a minimum
compromise rate
equivalent to forty percent
(40%) of the basic
assessed tax.
○ Approval of the Compromise
■ Where the basic tax
involved exceeds One
Million Pesos
(P1,000,000), or
■ Where the settlement
offered is less than the
prescribed minimum rates,
the compromise shall be
subject to the approval of
the National Evaluation
Board (NEB) which shall
be composed of the
Commissioner and four (4)
Deputy Commissioners.
○ Cases Which May Not Be
Compromised
■ Withholding tax cases, in
general;
■ Criminal tax fraud cases
confirmed as such by the
Commissioner of Internal
Revenue or his duly
authorized representative;
(Examples of fraud: (1)
discrepancies between
receipts per taxpayer’s
copy and amount in
purchaser’s copy; (2)
possession or use of
multiple set of invoices; (3)
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misrepresentation; (4)
falsification; and (5)
keeping 2 or more sets of
books.
■ Criminal violations already
filed in court;
■ Delinquent accounts with
duly approved schedule of
installment payments;
■ Cases where final reports
of reinvestigation or
reconsideration have been
issued resulting to
reduction in the original
assessment, and the
taxpayer is agreeable to
such decision by signing
the required agreement
form for the purpose.
■ In general, (a) cases which
have become final and
executory (except where
compromise is requested
on the ground of final
incapacity) and(b) estate
tax cases (except where
compromise is requested
on the ground of doubtful
validity of the
assessment).

● Abate or Cancel a Tax Liability

○ The Commissioner has the authority to abate
or cancel the surcharge, interest, and
compromise penalties.
○ Grounds to Abate or Cancel a Tax Liability
■ The tax or any portion thereof
appears to be unjustly or
excessively assessed;
a. When the filing of the return or
payment of the tax is made at the
wrong venue;
b. When the taxpayer’s mistake in
payment of his tax is due to the
erroneous written official advice of a
revenue officer;
c. When the taxpayer fails to file the
return and pay the tax on time due
to substantial losses from
prolonged labor dispute, force
majeure, or legitimate business
reverses, or to other circumstances
beyond the control of the taxpayer.
However, the abatement shall only
cover the surcharge and the
compromise penalty, and not the
interest imposed under Section 249
of the Tax Code.
d. When the assessment is the result
of the taxpayer's non-compliance
with the law due to a difficult
interpretation of said law.
● The administrative and collection costs
involved do not justify the collection of the
amount due.

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