Taxation Law Reviewer (Part 1)

CAVEAT: TRAIN LAW NOT INCORPORATED.


Sharing my midterms and finals reviewers /memory work.

TAXATION LAW II

Midterms Reviewer

Memory Work

Transfer Taxes

Olive Cachapero

ESTATE TAX

Estate Tax – excise tax imposed on the right of transmitting property at the time of death AND on the certain transfers which are made by statute the equivalent of testamentary disposition.

        Accrues as of the death of the decedent

Estate planning – the manner by which a person takes steps to conserve the property to be transmitted to his heirs by decreasing the amount of estate taxes to be paid upon his death. It is considered to be lawful tax avoidance if the means are sanctioned by law and executed in good faith.

Gross estate – consist of the value of all property, real or personal, tangible or intangible, wherever situated, of the decedent (except NRA), to the extent of his interest at the time of his death.

INCLUSIONS

Included in the Gross Estate (DIARI):

{  Dividends declared by a corporation before death of stockholder although paid afte death, if the decedent was living on the record date;

{  Partnership profits even if paid after death of partner;

{  Rights of Usufruct if transferable to the heirs

1)       Transfer in contemplation of death – if the transferor retains control over the property transferred in the following manner:

        Possession or enjoyment of the property

        Receipt of the income or fruits

        Right either alone or in conjunction with any person, to designate person who shall possess or enjoy the said property or income therefrom

2)      Revocable Transfer – by trust or otherwise, where the enjoyment thereof is subject to any change before his death

3)      Property passing under the GENERAL power of appointment – decedent has the power to designate who shall enjoy and possess certain property, exercised by will, by deed which is to take effect after his death, or by a deed where he retained possession or enjoyment or the right to the income and fruits

        LIMITED power of appointment – one which may be exercised only in favour of a certain person/s designated by the prior decedent

Ø  not included in the GE

4)      Proceeds of life insurance payable to a revocable beneficiary

        Decedent takes an insurance policy on his own life where the amount is receivable by his executor, administrator or his estate

5)       Transfer for Insufficient Consideration

        FMV-consideration paid = value included in the GE

Valuation of the GE

1)       Real Property – Zonal value or FMV as shown in the schedule of values fixed by the provincial and city assessors, whichever is HIGHER

2)      Personal Property – FMV as of the time of death

EXEMPTIONS

Exemptions from the GE

1)       The merger or usufruct in the owner of the naked title

2)      Fideicommissary substitution

3)      Transmission from the first heir, legatee or done in favour of another beneficiary, in accordance with the desire of the predecessor

4)      All bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of the net income of which insures to the benefit 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.

5)       Net estate not exceeding P200, 000

DEDUCTIONS

RC, NRC, RA

NRA

1)       Ordinary expenses (ELIT) – expenses, losses, indebtedness and taxes a)       Funeral expenses b)      Judicial expenses c)       Claims against the estate d)      Claims against insolvent persons e)      Unpaid mortgages f)        Unpaid taxes g)       Losses 2)      Vanishing deductions 3)      Transfers for public use 4)      Family home 5)       Standard deduction 6)      Medical expenses 7)       Retirement benefits 8)      Conjugal share of the surviving spouse

1)       ELIT 2)      Transfer for public use 3)      Vanishing deductions on property in the Philippines 4)      Conjugal share of the surviving spouse Not allowed: 1)       Family home 2)      Standard deduction 3)      Medical expenses 4)      Retirement benefits

DEDUCTIONS, Explained:

1)       Ordinary expenses (ELIT) – expenses, losses, indebtedness and taxes

        Must be supported by receipts or invoices or other evidence to show that they were actually incurred

a)      Funeral expenses – actual FE or 5% of the GE, whichever is LOWER but not exceeding P200,000

b)      Judicial expenses in testamentary or intestate proceedings used for

i)        Attorney’s fees

ii)       Collection of assets

iii)     Payment of debts

iv)     Distribution of properties

v)       Administration

vi)     Inventory taking

NOTE: Extrajudicial expenses are included (atty’s fee for guardianship, notarial fee, etc.)

c)       Claims against the estate - debts

d)      Claims against insolvent persons

e)      Unpaid mortgages

f)       Unpaid taxes – which accrued as of or before death

g)      Losses

2)      Vanishing deductions

        Vanishing deductions – deduction allowed from the GE of RC, RA and NRC for the properties which were previously subject to ET or DT.

        Vanishing because the deduction allowed diminishes over  a period of 5 years

        Also known as a deduction of property previously taxed

        It is the second transfer which is subject to VD

Period prior to decedent’s death	% f the value of the property allowed as deduction
Within 1 year If the prior decedent died within 1 year prior to the death of the decedent, or if the property was transferred to him by gift within 1 year prior to death of decedent	100%
More than 1 year but not more than 2 years If the prior decedent died more than 1 year but not more than 2 years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death	80%
More than 2 years but not more than 3 years	60%
More than 3 years but not more than 4 years	40%
More than 4 year but not more than 5 years	20%

3)      Transfers for public use

        to the government, social welfare, cultural and charitable institutions, exclusively for public use

4)      Family home

        The place to which whenever absent for business or pleasure, one still intends to return

        As certified by the Brgy. Captain of the locality

        Allowable deduction: current FMV as declared/included in the GE or the extent of decedent’s interest )whether conjugal or community or exclusive property), whichever is LOWER but NOT exceeding P1M. The excess shall be subject to tax

        In CPG/ACP: deduction to 1 spouse is ½ of the FMV

5)       Standard deduction – P1M

6)      Medical expenses

        Incurred (whether paid/unpaid) within 1 year prior to his death

        Substantiated with receipts

        Shall not exceed P500K. If it exceeds P500K, the whole amount becomes TAXABLE

7)      Retirement benefits –RA 4917: employee – in service for at least 20 years and is not less than 50yo at the time of his retirement

8)      Conjugal share of the surviving spouse

        After deducting the allowable deductions appertaining to the conjugal or community properties included in the GE, the share of the surviving spouse must be removed to ensure that only the decedent’s interest in the estate is taxed

Tax credit – against Philippine estate tax is allowed for the estate tax/taxes paid to a foreign country/countries.

Procedure for Ultimate Settlement of Estate Tax

1)       Filing of notice of death to the Commissioner within 2 months after decedent’s death in cases where:

a)       transfer is subject to tax, or

b)      GE exceeds P20K

2)      Filing of estate tax return, when:

a)       GE exceeds P200K

b)      Regardless of the value, where the estate consists of registered/registrable properties provided the gross value exceeds P2M and the return is supported with a statement duly certified to by a CPA

NOTE: NRA are required to file ET return which includes ALL his properties  wherever situated, even if he is taxable only for properties situated in the Philippines

{  Certification from the Commissioner that the ET has been paid – important; must be presented

	Time of Filing of Return	Time of Payment
Estate Tax	6 months from death *Extension of not more than 30 days may be granted by the Commissioner         Interest will be collected (20%)         Surchage will not be collected	Pay-as-you-file *may be extended upon request filed before the expiration of the original period – extension shall not exceed 5 years (in judicial settlement) or shall not exceed 2 years (in extrajudicial settlement)
Donor’s Tax	Within 30 days after the gift is made	Pay-as-you-file *no extension

DONOR’S TAX

Donation – an act of liberality whereby a person disposes gratuitously of a thing or right n favour of another who accepts it.

Donor’s tax – an excise tax imposed on the privilege transfer of property by way of gift INTER VIVOS based on a pure act of liberality without any or less than adequate consideration and without any legal compulsion to give

        in trust or otherwise

        direct or indirect gift

        real or personal, tangible or intangible

Requisites of a taxable donation (CIDA):

1)       Capacity of the donor

        all persons who may contract and dispose of their property may make a donation

        at the time of the making of the donation

2)      Donative intent

3)      Delivery of the gift

        Actual or constructive

4)      Acceptance by the done

        During the lifetime of the donor or done

        Perfects the contract

Form:

1)       Personal property – if value exceeds P5K, donation and acceptance must be in writing

2)      Real property – donation and acceptance must be in a public document

        Governed by the law in force at the time of the perfection (acceptance)/completion (delivery) of the donation.

CUMULATIVE METHOD	SPLITTING METHOD
When the donor makes two or more donations within the same calendar year, said donations will be INCLUDED in the return for the last donation	Donor makes two or more donations during different calendar years
No double taxation here because the tax paid will be considered as tax credit for succeeding donations
Final DT = DT for total donation less previous DTS paid DT for total donation Ex. (donation 1 + donation 2 + donation 3) get DT using the graduated rates = X X less previous DTs paid = Final DT Last DT (X) – DT3-DT2-DT1 = Final DT

Cases of transfer inter vivos

1)       Donation between spouses – void except moderate gifts

        Refund within 2 years from payment (in case of void donation) otherwise DT may no longer be recovered

2)      Donations by one of the spouses without the consent of the other – only the donor spouse is subject to DT

3)      Donations to conceived and unborn child

4)      Contribution for election campaign – NOT subject to DT

        Corp are not allowed to give donation in aid of any political party of candidate or for purposes of partisan political activity

5)       Transfer for less than the adequate and full consideration

        NOTE: If the real property transferred is a capital asset located in the Philippines, it is subject to final income tax of 6% of the FMV or gross selling price, whichever is higher (not DT)

6)      Forgiveness of indebtedness

a)       Taxable income – if such is made on account of debtor’s services to creditor

b)      Taxable gift – if no service was rendered but the creditor simply condones the debt

7)       Renunciation of the share of the surviving spouse in the ACP or CPG after dissolution of marriage in favour of the heirs of the deceased spouse of any other person - Subject to DT

8)      Renunciation of inheritance to a co-heir

a)       Not subject to DT - General renunciation of inheritance in favour of a co-heir

b)      Subject to DT – renunciation in favour of specific heir/s to the exclusion or disadvantage of other co-heirs

9)      Renunciation of inheritance to another person not a co-heir – subject to DT

10)    Life insurance with 3^rd persons as beneficiary – it is the total amount of premiums paid, not the sum received by the beneficiary, that is the subject of DT

11)     Remuneratory donations – subject to income tax

EXEMPTIONS

Donations exempted from tax:

1)       Dowries

a)       On account of marriage

b)      Made before or within 1 year after the celebration of marriage

c)       Donor is a parent

d)      Done is a legitimate, recognized natural, or adopted cild

e)      Amount exempted is only up to the first P10K

2)      Gifts made to the government or to any political subdivision, entity or agency not conducted for profit

3)      Gift in favour of an educational and/or charitable, religious, cultural or social welfare corporation, institution, accredited NGO or philanthropic, organization or research institution

        Not more than 30% of the gift should be used for administrative purposes

4)      Athlete’s prizes and award

        In local/international sports tournament and competitions in Phil/abroad, sanctioned by the respective national sport associations

5)       Etc.

TAXATION LAW II

Midterm Reviewer

Olive Cachapero

ESTATE TAX

WHO	WHERE	WHEN	PAYMENT
Estate, through the executor or administrator. If more than 1 executor or admin, all are severally liable. Heir or beneficiary: subsidiary liability for the payment of that portion of the estate which his distributive share bears to the value of the estate. Can’t be liable for more than the value of his share. MANDATORY filing: Transfers subject to estate tax Transfers which are exempt but the gross value of the estate exceeds P200,000. Regardless of the gross value, the estate consists of registered/registrable property for which a clearance from the BIR is needed for transfer of ownership in the name of the transferee	Authorized agent bank in the territorial jurisdiction of the RDO where the taxpayer is required to register or where   the taxpayer has legal residence or place of business in the Phil If no AAB, returns shall be filed with the: RCO City or Municipal treasurer If taxpayer has no legal residence or place of business, file with the Office of the Commissioner Same, but should be of place of decedent’s domicile	GR: Within 6 months from the decedent’s death EX: can be given extension by the CIR, but extension should not exceed 30 days Upon payment of the amount, the executor or administrator shall be discharged from personal liability for any deficiency in the tax. Also, upon payment and receipt of clearance from the BIR, the estate can now be distributed. Notice of death: within 2 months after death, or within a like period after qualifying as such executor or administrator TO the COMISSIONER	GR: Pay as you file, but before delivery of the shares to the heirs or beneficiaries EX: when the CIR finds that payment on due date would impose undue hardship upon the estate or the heirs, the CIR can extend time to pay: If judicial settlement, not to exceed 5 years. If extrajudicial, not to exceed 2 years. No extension when taxes are assessed by reason of: Negligence Intentional disregard of rules and regulations Fraud on the taxpayer

DONOR’S TAX

WHO	WHEN	WHERE	PAYMENT
The transferor or donor, whether natural or juridical, resident or nonresident	Same, but should be place of donor’s domicile In case of nonresident alien, then in Office of Commissioner or Philippine Embassy or Consulate where the donor is domiciled at time of transfer.	Within 30 days after the date the gift is made Remember that each donation “piles up” during the CALENDAR year. Return should state: Each gift made during the calendar year Deductions claimed Any previous net gifts during the calendar year Name of the done	Pay as you file

AUSTRIA-MAGAT vs. CA (2002)

Characteristics of a donation mortis causa, to wit:

1)       It conveys no title or ownership to the transferee before the death of the transferor; or, what amounts to the same thing, that the transferor should retain the ownership (full or naked) and control of the property while alive;

2)      That before his death, the transfer should be revocable by the transferor at will, ad nutum; but revocability may be provided for indirectly by means of a reserved power in the donor to dispose of the properties conveyed;

3)      That the transfer should be void if the transferor should survive the transferee.

When the deed of donation provides that the donor will not dispose or take away the property donated (thus making the donation irrevocable), he in effect is making a donation inter vivos. He parts away with his naked title but maintains beneficial ownership while he lives. It remains to be a donation inter vivos despite an express provision that the donor continues to be in possession and enjoyment of the donated property while he is alive.

Construing together the provisions of the deed of donation, we find and so hold that in the case at bar the donation is inter vivos. The express irrevocability of the same (hindi na mababawi) is the distinctive standard that identifies that document as a donation inter vivos. The other provisions therein which seemingly make the donation mortis causa do not go against the irrevocable character of the subject donation. According to the petitioner, the provisions which state that the same will only take effect upon the death of the donor and that there is a prohibition to alienate, encumber, dispose, or sell the same, are proofs that the donation is mortis causa. We disagree. The said provisions should be harmonized with its express irrevocability. In Bonsato where the donation per the deed of donation would also take effect upon the death of the donor with reservation for the donor to enjoy the fruits of the land, the Court held that the said statements only mean that after the donors death, the donation will take effect so as to make the donees the absolute owners of the donated property, free from all liens and encumbrances; for it must be remembered that the donor reserved for himself a share of the fruits of the land donated.^[14]

In Gestopa v. Court of Appeals,^[15] this Court held that the prohibition to alienate does not necessarily defeat the inter vivos character of the donation. It even highlights the fact that what remains with the donor is the right of usufruct and not anymore the naked title of ownership over the property donated. In the case at bar, the provision in the deed of donation that the donated property will remain in the possession of the donor just goes to show that the donor has given up his naked title of ownership thereto and has maintained only the right to use (jus utendi) and possess (jus possidendi) the subject donated property.

Thus, we arrive at no other conclusion in that the petitioners cited provisions are only necessary assurances that during the donors lifetime, the latter would still enjoy the right of possession over the property; but, his naked title of ownership has been passed on to the donees; and that upon the donors death, the donees would get all the rights of ownership over the same including the right to use and possess the same.

Another indication in the deed of donation that the donation is inter vivos is the acceptance clause therein of the donees. We have ruled that an acceptance clause is a mark that the donation is inter vivos. Acceptance is a requirement for donations inter vivos. On the other hand, donations mortis causa, being in the form of a will, are not required to be accepted by the donees during the donors lifetime.

The act of selling the subject property to the petitioner herein cannot be considered as a valid act of revocation of the deed of donation for the reason that a formal case to revoke the donation must be filed pursuant to Article 764 of the Civil Code^[19] which speaks of an action that has a prescriptive period of four (4) years from non-compliance with the condition stated in the deed of donation. The rule that there can be automatic revocation without benefit of a court action does not apply to the case at bar for the reason that the subject deed of donation is devoid of any provision providing for automatic revocation in event of non-compliance with the any of the conditions set forth therein. Thus, a court action is necessary to be filed within four (4) years from the non-compliance of the condition violated. 

GESTOPA vs. CA (2000)

Note first that the granting clause shows that Diego donated the properties out of love and affection for the donee. This is a mark of a donation inter vivos.^[14] Second, the reservation of lifetime usufruct indicates that the donor intended to transfer the naked ownership over the properties. As correctly posed by the Court of Appeals, what was the need for such reservation if the donor and his spouse remained the owners of the properties? Third, the donor reserved sufficient properties for his maintenance in accordance with his standing in society, indicating that the donor intended to part with the six parcels of land.^[15] Lastly, the donee accepted the donation. In the case of Alejandro vs. Geraldez, 78 SCRA 245 (1977), we said that an acceptance clause is a mark that the donation is inter vivos. Acceptance is a requirement for donations inter vivos. Donations mortis causa, being in the form of a will, are not required to be accepted by the donees during the donors' lifetime.

Consequently, the Court of Appeals did not err in concluding that the right to dispose of the properties belonged to the donee. The donor's right to give consent was merely intended to protect his usufructuary interests. In Alejandro, we ruled that a limitation on the right to sell during the donors' lifetime implied that ownership had passed to the donees and donation was already effective during the donors' lifetime.

Was the revocation valid? A valid donation, once accepted, becomes irrevocable, except on account of officiousness, failure by the donee to comply with the charges imposed in the donation, or ingratitude.

Art. 765 The donation may also be revoked at the instance of the donor, by reason of ingratitude in the following cases: 

1)     If the donee should commit some offense against the person, the honor or the property of the donor, or of his wife or children under his parental authority. 

2)     If the donee imputes to the donor any criminal offense, or any act involving moral turpitude, even though he should prove it, unless the crime or the act has been committed against the donee himself, his wife or children under his authority;

3)     If he unduly refuses him support when the donee is legally or morally bound to give support to the donor.

TANG HO vs. BOARD OF TAX APPEALS

According to article 1413 of the Civil Code, any transfer or agreement upon conjugal property made by the husband in contravention of its provisions, shall not prejudice his wife or her heirs. As the conjugal property belongs equally to husband and wife, the donation of this property made by the husband prejudices the wife in so far as it includes a part or the whole of the wife's half, and is to that extent invalid. Hence article 1419, in providing for the liquidation of the conjugal partnership, directs that all illegal donations made by the husband be charged against his estates and deducted from his capital. But it is only then, when the conjugal partnership is in the process of liquidation, that it can be discovered whether or not an illegal donation made by the husband prejudices the wife. And inasmuch as these gifts are only to be held invalid in so far as they prejudice the wife, their nullity cannot be decided until after the liquidation of the conjugal partnership and it is found that they encroach upon the wife's portion.

Appellants herein are therefore in error when they contend that it is enough that the property donated should belong to the conjugal partnership in order that the donation be considered and taxed as a donation of both husband and wife, even if the husband should appear as the sole donor. There is no blinking the fact that, under the old Civil Code, to be a donation by both spouses, taxable to both, the wife must expressly join the husband in making the gift; her participation therein cannot be implied.

It is true, as appellants stress, that in Gibbs vs. Government of the Philippines, 59 Phil., 293, this Court ruled that "the wife, upon acquisition of any conjugal property, becomes immediately vested with an interest and title equal to that of the husband"; but this Court was careful to immediately add, "subject to the power of management and disposition which the law vests on the husband." As has been shown, this power of disposition may, within the legal limits, override the objections of the wife and render the donation of the husband fully effective without need of the wife's joining therein. (Civil Code of 1889, Arts 1409, 1415.)

It becomes unnecessary to discuss the nature of a conjugal partnership, there being specific rules on donations of property belonging to it. The consequence of the husband's legal power to donate community property is that, where made by the husband alone, the donation is taxable as his own exclusive act. Hence, only one exemption or deduction can be claimed for every such gift, and not two, as claimed by appellants herein. In thus holding, the Board of Tax Appeals committed no error.

That under the old Civil Code, a donation by the husband alone does not become in law a donation by both spouses merely because it involves property of the conjugal partnership;

That such a donation of property belonging to the conjugal partnership, made during its existence, by the husband alone in favor of the common children, is taxable to him exclusively as sole donor.