TRANSFER AND BUSINESS TAXATION NOTES (Tabag

& Garcia 2020 ed)

Chapter 1 - Succession and Transfer Taxes

New Civil Code (Art. 712); ownership may be acquired through:
 Occupation
 Intellectual creation
 Law
 Donation
 Tradition
 Contract
 Prescription
 Succession (testate and intestate)
Transfer taxes – taxes imposed upon the gratuitous disposition of private properties or rights
Onerous transfer – opposite of gratuitous; subject to business taxes instead of transfer
taxes
Donation mortis causa – when transfer takes effect at the time of death of the donor
Donation inter vivos - transfer takes effect during the lifetime of both donor and done

Succession – is a mode of acquisition by virtue of which, the property, rights, and obligations to
the extent of the value of the inheritance, of a person are transmitted through his death to
another or others either by his will or by operation of law (Art. 774 of New Civil Code)
Note: The amount of obligations acquired/inherited by an heir should not be more than the
combined value of the properties and rights inherited (liabilities up to the properties/rights
inherited)

Nature of Transfer Taxes

Subject matter: Privilege of the transferor to gratuitously transfer property or rights which takes
effect at the date of death of the transferor or during lifetime of the donor and done
- shall be classified as excise tax or privilege tax

The Law that Governs the Imposition of Estate Tax

Estate taxation – governed by statute in force at the time of death of the decedent
Estate tax – accrues as the date of death of the decedent and the accrual of the tax is
distinct from the obligation to pay the same

Kinds of Succession
 Testamentary or Testate – results from the designation of an heir, made in a will
executed in the form prescribed by law
 Legal or Intestate – effected by operations of law since the decedent did not execute a
will or if the last will and testament executed by him is void
Causes:
o If a person dies without a will, or with a void will, or one which has subsequently lost
its validity
o When the “will” does not institute an heir
o Partial institution of heir. Consequently, intestacy takes place as to the undisposed
portion
o When the heir instituted is incapable of succeeding (ex. Deceased/Mentally Ill)
o Other causes such as
  Mixed Succession – effected partly by will and partly by operation of law

Elements of Succession
1. Decedent – general term applied to the person whose property is transmitted through
succession, whether or not he left a will. If he left a will, he is called a testator
- Executor is a person designated in the last will and testament to carry out the provisions
of the decedent’s will
- Administrator is a person appointed by the court and performs the same duty, in lieu of
an executor, if the latter refused to accept the appointment, failed to qualify under the law
or the last will and testament did not appoint one.
2. Inheritance (Estate) – include all the property, rights and obligations of a person which
are not extinguished by death and all which have accrued thereto since the opening of
succession. Rights which are purely personal are not transmissible for they are
extinguished by death (Art. 776 NCC)
3. Successors – person who is called to the succession either the provision of a will or by
operation of law (Art. 782
NCC). Devisees and legatees are persons to whom gifts of real and personal property are
respectively given by virtue of a will. Successions or heirs are classified under the law as
follows:
a. Compulsory Heirs – those who succeed by force of law to some portion of the inheritance,
in an amount predetermined by law, known as the legitime. They succeed whether the
testator likes it or not. They cannot be deprived by the testator of their legitime except by
disinheritance properly effected
Kinds:
 Primary – have precedence over and exclude other compulsory heirs (legitimate children
and descendants)
 Secondary – succeeds only in the absence of the primary compulsory heirs (legitimate
parents and ascendants)
 Concurring – succeed together with the primary or secondary compulsory heirs (illegitimate
children and descendants and surviving spouse)
b. Voluntary Heirs – instituted by the testator in his will to succeed to the inheritance of the
portion thereof of which the testator can freely dispose. Free portion refers to the portion or
value left in the estate after deducting the legitimes of the compulsory heirs (determined
through the last will and testament)
c. Legal or Intestate Heirs – succeed to the estate of the decedent by operation of law
(decedent died without valid will or his estate was not entirely disposed of by will)

COMPOSITION OF GROSS ESTATES

Decedent’s Estate To be inherited by: Legitime

– Compulsory Heirs: part of
LEGITIME This portion of the estate is reserved by law the
(i.e. 75% of the specifically to compulsory heirs, regardless of testator’s
estate) whether or not a last will and testament was property
prepared which he
Compulsory Heirs and/or Voluntary Heirs: cannot
* As provided in the last will and testament dispose of
FREE PORTION
* In the absence of a will, this portion of the because
(i.e. 75% of the
estate shall be distributed to “intestate heirs” the law
estate)
based in the has
reserved
it for certain heirs who are, therefore, called compulsory heirs (Art. 886 NCC)
Free Portion – portion of the estate which the testator can freely dispose of. Hence, anyone may
inherit from free portion.

 Nonetheless, voluntary heirs may inherit only if mentioned in the will.

Order of Priority for Succession

1. Legitimate children or descendants
2. Legitimate parents or ascendants
3. Illegitimate children or descendants
4. Surviving spouse
5. Brothers and sisters, nephews and nieces
6. Other collateral relatives within the 5th degree
7. State

Collateral Relatives
Consanguinity (blood relatives) – relation of persons descending from the same stock or
common ancestors

Types:

Lineal - subsists between persons of whom one is descended in a direct line from the other

Collateral - subsists between persons who have the same ancestors but who not descend (or
ascend) one from the other

*Affinity -connection existing in consequence of a marriage between each of the married spouse
and the kindred of the other

Table of legitimes and shares from the free portion of the estate

Combinations of Compulsory Heirs Legitime under the Civil Code, as

1. Legitimate children of the testator
2. Legitimate parents, whether they
survive alone or concur with illegitimate
children and surviving spouse
3. Ascendants of equal degree of the
paternal and maternal lines, if testator
has no child or leaves neither father nor
mother
4. One (1) legitimate child and
surviving spouse
5. Two (2) or more legitimate
children and surviving spouse
amended
One half (1/2) of the hereditary estate
to be divided equally among the
legitimate children (Art. 888, CC),
irrespective whether they survive
alone or with concurring
compulsory heirs
One half (1/2) of the estate goes to the
legitimate parents to be divided equally
between (Arts. 889 & 890, CC)
One half (1/2) of the estate to be
divided equally between them. It
pertains entirely to the ones nearest in
degree of either line (Arts. 890, CC)
One half (1/2) of the estate (legitime)
goes to the legitimate child (Art. 888,
CC); and
One fourth (1/4) of the estate (free
portion) goes to the surviving spouse
(Arts. 892, CC)
One half (1/2) of the estate (legitime) to
be divided among the legitimate
children (Art. 888, CC); and
 Surviving spouse gets a share (from the
free portion) equal to the legitime of
each of the legitimate children (Arts.
892, CC)
6. Legitimate parents and surviving One half (1/2) of the estate (legitime)
spouse goes to the legitimate parents (Arts.
889 & 890, CC); and
One fourth (1/4) of the estate (free
portion) goes to the surviving spouse
(Arts. 893, CC)
7. Illegitimate children and surviving One third (1/3) of the estate (legitime)
spouse goes to the illegitimate children; and
One third (1/3) of the estate (legitime)
goes to the surviving spouse (Art. 894,
CC); and
8. Legitimate and illegitimate One half (1/2) of the hereditary estate
children (legitime) to be divided equally among
the legitimate children (Art. 888, CC);
and
Each illegitimate child gets a share
(from the free portion) equal to one half
(1/2) of the legitime of each of the
legitimate children (Arts. 895, CC)
All the concurring heirs get their shares
from the free portion. The surviving
spouse is preferred over the illegitimate
children whose share in the inheritance
may suffer a proportionate (pro rata)
reduction.
9. Legitimate parents and One half (1/2) of the estate (legitime)
illegitimate children goes to the legitimate parents (Art.
889, CC); and
One fourth (1/4) of the estate (free
portion) goes to the illegitimate children
(Art. 896, CC)
10. Legitimate and illegitimate children One half (1/2) of the estate (legitime) to
and surviving spouse be divided among the legitimate
children (Art. 888, CC);
Each illegitimate child gets a share
(from the free portion) equal to one half
(1/2) of the legitime of each of the
legitimate children;
Surviving spouse gets a share (from the
free portion) equal to the legitime of
each of the legitimate children (Arts.
892, CC) (Arts. 897 and 898, CC)
11. Legitimate parents, illegitimate One half (1/2) of the estate (legitime) to
children and surviving spouse be divided equally between the
legitimate parents (Arts. 889 & 890,
CC);
One fourth (1/4) of the estate (free
portion) goes to the illegitimate
children; and
One eighth (1/8) of the estate (free
portion) goes to the surviving

12. Surviving spouse
13. Illegitimate children
14. Illegitimate parents
15. Illegitimate parents and surviving
spouse of the illegitimate child
spouse (Art. 899, CC)
One half (1/2) of the estate (legitime)
goes to the surviving spouse;
But the share is reduced to one third
(1/3) of the estate in the case of
marriage in articulo mortis and the
testator died within three (3) months
from its solemnization (Art. 900, CC)
One half (1/2) of the estate (legitime)
goes to the illegitimate children (Art.
901, CC)
One half (1/2) of the estate (legitime) of
the illegitimate child (Art. 903, CC)
One fourth (1/4) of the estate (legitime)
goes to the illegitimate parents; and
One fourth (1/4) of the estate (legitime)
goes to the surviving spouse (Art. 903,
CC)

Wills

 An act whereby a person is permitted, with the formalities prescribed by law, to control to
a certain degree the disposition of his estate to take effect after his death
 A document whereby a person disposes of his/her properties or “estate” to take effect
upon his or her death

Kinds:

 Notarial/Ordinary/Attested - executed in accordance with the formalities prescribed by

Art. 804 to 808 of NCC. In the absence of bad faith, forgery, or fraud, or undue and
improper pressure and influence, defects and imperfections in the form of attestation
or in the language used therein shall not render the will invalid if it is proved that the
will is in fact executed and attested in substantial compliance with all the requirements
of the law
 Holographic – written will which must be entirely written, dated and signed by the hand
of the testator himself; subject to no other form and may be made in or out of the
country and need not be witnessed
o Probate of a will – a court procedure by which a will is proved to be valid or
invalid. The proceedings in the absence of a last will and testament is called
“intestate proceedings”

Foreign Wills

 The will of an alien who is abroad produces effect in the Philippines if made with the
formalities prescribed by law of the place in which he resides, or according to the
formalities observed in his country, or in conformity with those which the Philippine civil
code prescribes.

Revocation of wills and testamentary dispositions

A will may be revoked by the testator at any time before his death any waiver or restriction of
this right is void (Art. 822)
Modes of revoking a will:

1. Implication of law
2. By some will, codicil, or other writing executed as provided in case of wills
3. Burning, tearing, canceling, or obliterating the will with the intention of revoking it, by the
testator himself, or by some other person in his presence, and by his express direction.

Institution of heir (Art. 840)

 An act by virtue of which a testator designates in his will the person or persons who are to
succeed him in his property and transmissible rights and obligations

Disinheritance

 A testamentary disposition by which a compulsory heir is deprived of/ excluded him from
the inheritance to which he has a right.

Requisites:

 Effected only through a valid will

 For a cause expressly stated by the law
 Cause must be stated by the will itself
 Cause must be certain and true
 Unconditional
 Total (no partial disinheritance)
 The heir disinherited must be designated in such a manner that there can be no doubt
as to his identity

Right of Representation

 A right created by fiction of law where the representative is raised to the place and
degree of the person represented and acquired the rights which the latter would have if he
were living or could have inherited
 May arise because:
o Death
o Incapacity
o Disinheritance
 They shall not inherit more than what the person represented would inherit