Transfer Taxes

1. What are transfer taxes?

Transfer taxes are the taxes imposed upon the gratuitous disposition of property, whether
real or personal, tangible or intangible. They are not property taxes because their imposition
does not rest upon general ownership but rather considered as privilege taxes imposed on the
act of passing ownership of property.

2. What are the kinds of transfer taxes?

The kinds of transfer taxes are the following:
1. Estate tax – a tax imposed upon the privilege of individuals to transfer properties
occasioned by death (i.e. donation mortis causa)
2. Donor’s tax – a tax imposed upon the privilege of individuals and corporate donors to
transfer property during lifetime (donation inter vivos)

3. What is donation mortis causa and what are its elements?

These are donations which are to take effect upon the death of the donor.

Donation mortis causa has the following elements:

(1) the transferor retains the ownership (full or naked) and control the property while alive;
(2) the transfer is revocable, before his death, by the transferor at will, ad nutum; and
(3) the transfer should be void if the transfer should be void if the transferor should survive
the transferee.

4. What tax is involved with donation mortis causa?

Donation mortis causa is subject to estate tax.

Discuss the case of Del Rosario v. Ferrer, 630 SCRA 683.

Facts: Spouses Leopoldo and Guadalupe Gonzales executed an irrevocable "Donation
Mortis Causa" in favor of their two children, Asuncion and Emiliano, and their
granddaughter, Jarabini covering the spouses' 126-square meter lot and the house on it in
Pandacan, Manila. Although denominated as a donation mortis causa, which in law is the
equivalent of a will, the deed had no attestation clause and was witnessed by only two
persons. The donees, however, signified their acceptance of the donation on the face of the
document.
Guadalupe died in September 1968. A few months later, Leopoldo, the donor husband,
executed a deed of assignment of his rights and interests in subject property to their daughter
Asuncion. Leopoldo died in June 1972. Jarabini filed a petition for the probate of the deed of
donation mortis causa". Asuncion opposed the petition, invoking his father Leopoldo's
assignment of his rights and interests in the property to her.
Issue: Whether or not the spouses Leopoldo and Guadalupe's donation to Asuncion,
Emiliano, and Jarabini was a donation mortis causa, as it was denominated, or in fact a
donation inter vivos.
Ruling: The donation is inter vivos.
 A donation mortis causa has the following characteristics:
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; and
3. That the transfer should be void if the transferor should survive the transferee.
The three donees signed their acceptance of the donation, which acceptance the deed
required. An acceptance clause indicates that the donation is inter vivos, because acceptance
is a requirement only for such kind of donations. Donations mortis causa, being in the form
of a will, need not be accepted by the donee during the donor's lifetime.
5. Are donations inter vivos and donations mortis causa subject to estate taxes?
Only donation mortis causa is subject to estate tax. Donation inter vivos is subject to donor’s
tax.

A. ESTATE TAX

1. Just to be clear from the start, what is the difference of Estate Tax from Real Estate
Tax?
Estate tax is a tax on the privilege to transfer properties occasioned by death, whereas,
real estate tax is a tax on property.

2. Give the definition of Estate Tax

a. Lorenzo v. Posadas, 64 Phil. 353;
Facts: On May 27, 1922, one Thomas Hanley died in Zamboanga leaving a will and
considerable amount of real and personal properties. The will was admitted to probate.
Said will provides among other things that ten years after Hanley’s death, his property
will be given to his nephew Matthew Hanley. The Collector of Internal Revenue
assessed the estate an inheritance tax together with penalties and surcharge. Pablo
Lorenzo, the trustee of the estate, paid the amount under protest. The CIR overruled the
protest and refused to refund the amount.
The CIR contended that the estate of Thomas Hanley, in so far as the real properties are
concerned, did not and could not legally pass to the instituted heir, Matthew Hanley, until
after the expiration of ten years from the death of the testator on May 27, 1922 and, that
the inheritance tax should be based on the value of the estate in 1932, or ten years after
the testator’s death.
Issue: Whether the inheritance tax should be computed on the basis of the value of the
estate at the time of the testator’s death, or on its value ten years later.
 Ruling: A transmission by inheritance is taxable at the time of the predecessor’s death,
notwithstanding the postponement of the actual possession or enjoyment of the estate by
the beneficiary, and the tax measured by the value of the property transmitted at that time
regardless of its appreciation or depreciation.
If death is the generating source from which the power of the state to impose inheritance
taxes its being and if, upon the death of the decedent, succession takes place and the right
of the state to tax vests instantly, the tax should be measured by the value of the estate as
it stood at the time of the decedent’s death, regardless of any subsequent contingency
affecting value or any subsequent increase or decrease in value
b. Gregg v. Commissioner, 315 Mass. 704
Facts: The Equitable Life Assurance Society of the United States, in consideration of an
annual payment of 2,400, agreed to pay Gregg a fixed annuity for life when he reached
sixty-five years of age or in case he died before he reached that age, pay a death benefit
to his wife who had been named as beneficiary in the contract. He reserved the right to
change the beneficiary but he did not make any change. He died in the eighth year of the
contract.
Issue: Whether or not the receipt by beneficiary under the retirement annuity contract of
the death benefit, accumulated dividends and interest is subject to the succession tax.
Ruling: No. The annuity contract was made by Gregg for the purpose of acquiring
monthly payments for the rest of his life after he had become sixty-five years of age. He
was making an investment for his personal benefit. It was made in expectation of living
and not in contemplation of death. It is true that the contract contained a provision for the
payment of a death benefit, but that provision was inserted in order that the annuitant
should not lose all his investments if death came to him before annuity payments become
due.
3. What Basic Principle rests on the imposition of estate tax (what is the justification
for the imposition of estate tax)?
Estate tax law rest in their essence upon principle that death of an individual is the
generating source from which the taxing power takes its being, and that it is the power to
transmit or the transmission from the dead to the living on which the tax is more
immediately based.

Estate tax is a more effective agent for bringing about a more equitable distribution of
wealth, so far as that is the purpose of the tax, because it applies to the entire net estate,
including property otherwise exempted. It is the most appropriate and effective method
for taxing the “privilege” which the decedent enjoys of controlling the disposition at
death, of property accumulated during life. It is a method of collecting the share which is
properly due to the State as a “partner” in the accumulation of property which was made
possible on account of the protection given by the State.
4. As tax laws pertaining to estate taxes are dynamic, what tax law should be governed
for a person who has died in December 1998? What about a person that died
December 2019?
Estate taxation is governed by the statute in force at the time of death of the decedent.
Thus, the tax law which should govern for a person who has died in December 1998 is
Republic Act 8424 (Tax Reform Act of 1997) while a person who died in December
2019 is governed by Republic Act 10963 (TRAIn Law).

5. Where should one file the estate tax of a decedent (Place of filing)?
Resident decedent
 The estate tax return shall be filed with Accredited Agent Bank (AAB), Revenue
District Officer or Revenue Collection Officer having jurisdiction on the place
where the decedent was domiciled at the time of his death, whichever is
applicable.

Non-resident decedent (whether non-resident citizen or non-resident)

 In case of a decedent with executor or administrator in the Philippines, the estate
tax return shall be filed with and the TIN for the estate shall be secured from the
Revenue District Office where such executor or administrator is registered.

 In case the executor or administrator is not registered, the estate tax return shall be
filed with and the TIN of the estate shall be secured from the Revenue District
Office having jurisdiction over the executor or administrator’s legal residence.

 In case the non-resident decedent does not have an executor or administrator in

the Philippines, the estate tax return shall be filed with and the TIN for the estate
shall be secured from the Office of the Commissioner through RDO No. 39-South
Quezon City.

6. Gross Estate;
a. Define
The gross estate of a decedent shall be comprised of the following properties and
interest therein at the time of his/her death, including irrevocable transfers and
transfers for insufficient consideration:
1. Residents and citizens
- all properties, real or personal, tangible or intangible, wherever situated.

2. Non- resident aliens

- only properties situated in the Philippines provided, that with respect to
intangible personal property, its inclusion in the gross estate is subject to the rule
of reciprocity provided for under Section 104 of the NIRC.

b. What is the principle of mobilia sequuntur personam.

Principle of mobilia sequuntur personam means that the situs of an intangible
property is determined by the domicile or residence of the owner. obilia sequntur
personam, literally means “movable follows the person/owner.”
 c. Discuss the case of Blas v. Santos, 29 March 1961
Facts: Simeon Blas was married to Marta Cruz and had three children. When Marta died,
Simeon contracted a second marriage with Maximina Santos. At the time of the second
marriage, no liquidation of the properties acquired by Simeon and Marta were made.
Maxima did not appear to have apported properties to her marriage with Simeon. Before
Simeon’s death on January 9, 1937, he executed a last will and testament where he
declared one-half of their properties, after the payment of indebtedness, will constitute
the share of his wife Maxima Santos de Blas in their conjugal properties. Maximina then
made a promise contained in a document that she will give one-half of the properties
corresponding to her to the heirs and legatees named in the will of her husband Simeon.
When Maximina died, the heirs and legatees of Simeon instituted an action for one-half
of the properties left by Maximina to be adjudicated to them. The defendant claimed that
the promise contained in the document executed by Maximina is a worthless piece of
paper because it is not a will nor a donation mortis causa nor a contract. It is also
contended that it deals with future inheritance.
Issue: Whether or not the subject properties should be adjudicated to the plaintiffs.
Ruling: Yes. What is prohibited to be the subject matter of a contract under Article 1271
of the Civil Code is " future inheritance." Future inheritance is any property or right not
in existence or capable of determination at the time of the contract, that a person may in
the future acquire by succession. The properties subject of the document are well defined
properties, existing at the time of the agreement, which Simeon Blas declares in his
statement as belonging to his wife as her share in the conjugal partnership. His wife's
actual share in the conjugal properties may not be considered as future inheritance
because they were actually in existence at the time the document was executed.

d. What is the Date-of-death valuation rule as discussed in the case of Dizon v.

Court of Tax Appeals, G.R. No. 140944, 30 April 2008
The date-of-death valuation principle refers to the nature of the federal estate tax
specifically, that it is a tax imposed on the act of transferring property by will or
intestacy and, because the act on which the tax is levied occurs at a discrete
time, i.e., the instance of death, the net value of the property transferred should be
ascertained, as nearly as possible, as of that time.

e. According to Sec 85 of the Tax Code, what is the composition of Gross

Estate? Define each.
According to Section 85 of the Tax Code, the gross estate is composed of the
following:
i. Decedent's interest
This refers to the extent of equity or ownership participation of the
decedent on any property physically existing and present in the gross
estate, whether or not in his possession, control or dominion. It also refers
 to the value of any interest in property owned or possessed by the
decedent at the time of his death.
ii. Transfer in contemplation of death
It is a transfer motivated by the thought of an impending death regardless
of whether or not death is imminent.

This takes place:

1. When the decedent has, at any time, made a transfer in
contemplation of or intended to take effect in possession or
enjoyment at or after death; or
2. When decedent has, at any time, made a transfer under which he
has retained for his life or for a period not ascertainable without
reference to his death or any period which does not in fact end
before his death:
a. Possession, enjoyment or right to income from the
property; or
b. The right, either alone or in conjunction with any other
person, to designate the person who will possess or enjoy
the property or income therefrom.

iii. Revocable transfer

It is a transfer by trust or otherwise, where the enjoyment thereof was
subject at the date of his death to any change through the exercise of a
power to alter or amend or revoke or terminate such transfer by:
1. Decedent alone;
2. By the decedent in conjunction with any other person (without
regard to when or from what source the decedent acquired such
power), to alter, amend, revoke or terminate; or
3. Where any such power is relinquished in contemplation of the
decedent’s death other than a bone fide sale for an adequate and
full consideration in money or money’s worth.

iv. Property under general power of appointment

It is the right to designate by will or deed, without restrictions, the persons
who shall succeed to the property of the prior decedent. The appointment
could be in favor of anybody, including himself, his estate, his creditors,
or the creditors of his estate

v. Proceeds of life insurance

Proceeds of life insurance forms part of the gross estate when the
beneficiary is:
1. The estate of the decedent, his executor or administrator taken out
by the decedent upon his own life regardless of whether the
designation is revocable or irrevocable; or
2. A third person, other than the decedent’s estate, executor, or
administrator provided that the designation is not irrevocable
 vi. Prior interests
Prior Interest are all transfers, trusts, estates, interests, rights, powers and
relinquishment of powers made, created, arising existing, exercised or
relinquished before or after the effectivity of the NIRC (Sec. 85, NIRC).

Coverage of prior interest

1. Transfers in contemplation of death
2. Revocable transfers
3. Life insurance proceeds to the extent of the amount receivable by
the estate of the deceased, executor or administrator under policies
taken out by the decedent upon his own life or to the extent of the
amount receivable by any beneficiary not expressly designated as
irrevocable

vii. Transfers for insufficient consideration

When a transfer is for insufficient consideration, only the excess of the fair
market value of the property at the time of the decedent’s death over
the consideration received shall be included in the gross estate.

f. What items are not part of the gross estate? Discuss.

The following items are excluded from gross estate of the decedent:
 GSIS proceeds/ benefits
 Accruals from SSS
 Proceeds of life insurance where the beneficiary is irrevocably appointed
 Proceeds of life insurance under a group insurance taken by employer (not
taken out upon his life)
 War damage payments
 Transfer by way of bona fide sales
 Transfer of property to the National Government or to any of its political
subdivisions
 Separate property of the surviving spouse
 Merger of usufruct in the owner of the naked title
 Properties held in trust by the decedent
 Acquisition and/or transfer expressly declared as not taxable

7. Deductions from Gross Estate;

a. What are Ordinary Deductions from Gross estate
(a) Expenses, losses, indebtedness, taxes such as:
(i) Claims against the estate
(ii) Claims against insolvent persons
(iii) Unpaid mortgage or indebtedness on property
(iv)Taxes
(v) Losses
(b) Vanishing deduction
(c) Transfer for public use
b. What Ordinary Deductions under the Tax Code of 1997 were not included in
the Train Law?
The funeral expenses and judicial expenses which are ordinary deductions under
the Tax Code of 1997 are no longer included in the TRAIn Law.

c. What is Vanishing Deductions. Its rationale and the conditions for such.
Vanishing deduction refers to the diminishing deductibility allowed from the
gross estate of the decedent on the property left behind by the decedent which he
had acquire previously by inheritance or donation. Thus vanishing deduction is
deducted only from the exclusive properties of the decedent which form part of
his gross estate.

A property can only be allowed a vanishing deduction if it has been subjected to

the estate tax or donor’s tax within five years prior to the death of the present
decedent. In other words, the property had already been subjected to a transfer
tax (either donor’s tax or estate tax) and now that the recipient of the said
inheritance or donation has died, the same property will again be subjected to
another transfer tax, this time, estate tax. Thus, in order to mitigate the harshness
of successive taxation of the same property occasioned by death occurring within
a short period of time, the law allows vanishing deduction to be claimed on the
said property.

The requisites for the deductibility from gross estate of vanishing deductions are
the following:
1. The property involved must have been transferred by a prior decedent to
the present decedent either thru estate taxation or donation, or which can
be identified as having been acquired in exchange for property so
received;
2. The present decedent must have died within five years from receipt of the
property from a prior decedent or donor;
3. The property can be identified as the one received from the prior decedent
or donor, or as the property acquired in exchange for the original property
so received;
4. The property must have formed part of the gross estate of a prior decedent,
or the total amount of the gifts of the donor;
5. Donor’s tax on the girt or the estate tax on the inheritance must have been
already paid;
6. Said property must be situated in the Philippines and now forms part of
the gross estate of the present decedent;
7. The amount of the deduction is the full value of the property previously
taxed if the present decedent died within one year from the death of the
prior decedent and the amount deductible diminishes yearly and is finally
lost after the 5th year from the death of the prior decedent; and
8. The vanishing deduction on the property must have been claimed by the
previous estate involving the same property.
d. What are Transfers for public use and conditions for deductibility?
Transfers for public use are the amount of all bequests, legacies, devises or
transfers to or for the use of the Government of the Republic of the Philippines, or
any political subdivision thereof, for exclusively public purposes.

Conditions for deductibility:

1. The disposition is in a last will and testament
2. To take effect after death
3. In favor of the government of the Philippines or any political subdivision
thereof
4. For exclusive public purposes
5. The value of the property given is included in the gross estate

In case of a non-resident alien decedent, the property transferred must be located

within the Philippines and included in the gross estate.

e. What are the Special Deductions from Estate?

The special deductions from the estate are the following:
1. Family home;
2. Standard deduction; and
3. Amounts received under RA

f. What Special Deductions under the Tax Code of 1997 were not included in
the Train Law?
Medical expenses previously included as a special deduction under the Tax Code
of 1997 is no longer included in the TRAIn Law.

g. Is the net share of the surviving spouse in the conjugal or community

property included in the Estate?
No, the net share of the surviving spouse in the conjugal or community property is
included in the Estate.

h. For Nonresident Aliens, what are the deductions for his Gross Estate in the
Philippines?
The following items are allowable deductions from the gross estate of a non-
resident alien:
(a) Standard deduction in the amount of ₱500,000;
(b) Value of
a. Claims against the estate
b. Claims against the insolvent person
c. Unpaid mortgages
In proportion to the value of the entire gross estate situated in the
Philippines
(c) Property previously taxed;
4. Transfers for public use
 i. How do you compute the estate tax under the Tax Code of 1997 and under
then Train Law? What tax rates are involved?
The estate tax is computed by using the following formulae:

Under the Tax Code of 1997

Real and personal properties
Family home
Gross estate
Less: Deductions:
Ordinary deductions

Actual funeral expenses or 5% of the gross estate but in no case to exceed PHP200,000
Judicial expenses
Claims against the estate
Claims of the deceased against insolvent persons
Unpaid mortgages or any indebtedness in respect to the property
Taxes
Casualty losses
Special deductions
Family home
Standard deductions
Medical expenses
Amount received by heirs under RA 4917
  Total deductions
Net estate
Less: Share of the surviving spouse in the conjugal partnership of community property
Net taxable estate
*The net taxable estate is subject to the estate tax schedule under RA 8424

Net Estate Bracket

Tax rate
Over Not over
200,000 Exempt
200,000 500,000 5% of excess over 200,000
500,000 2,000,000 15,000 + 8% of excess over 500,000
2,000,000 5,000,000 153,000 + 11% of excess over 2,000,000
5,000,000 10,000,000 465,000 + 15% of excess over 5,000,000
10,000,000 1,215,000 + 20% of excess over 10,000,000

Under TRAIn Law

Real and personal properties

Family home
Gross estate
Less: Deductions:
Ordinary deductions
Claims against the estate
Claims of the deceased against insolvent persons
 Unpaid mortgages or any indebtedness in respect to the property
Taxes
Casualty losses
Special deductions
Family home
Standard deductions
Amount received by heirs under RA 4917
  Total deductions
Net estate
Less: Share of the surviving spouse in the conjugal partnership of community property
Net taxable estate
Multiply by tax rate of 6%
Estate tax

8. What are the Exemption of Certain Acquisitions and Transmissions (Section

87);
The following acquisitions and transmissions under Section 87 of the NIRC shall not be
taxed:
(a) The merger of usufruct in the owner of the naked title;
(b) The transmission or delivery of the inheritance or legacy by the fiduciary heir
or legatee to the fideicommissary;
(c) The transmission from the first heir, legatee or donee in favor of another
beneficiary, in accordance with the desire of the predecessor; and
(d) All bequests, devises, legacies or transfers to social welfare, cultural and
charitable institutions, no part of the net income of which inures 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.

9. When should the Estate tax be filed?

The estate tax return should be filed within one year from the date of death of the
decedent.

10. Is a notice of death required?

No, the notice of death is no longer required under the TRAIn Law.

11. Can estate taxes be paid on installment?

Yes, cash installments may be made within two years from the date of filing of the
estate tax return without civil penalty & interest in case of insufficient cash.

12. Discuss the following cases:

a. CIR vs. Fisher, GR No. L-11622, 28 January 1961;
Facts: Walter G. Stevenson, born in the Philippines British parents and married in the
City of Manila to Beatrice Mauricia, died on February 22, 1951 in San Francisco,
California, U.S.A. where he and his wife moved and established their permanent
residence. In his will executed in San Francisco, he instituted his wife Beatrice as his sole
heiress to all properties acquired by the spouses while residing in the Philippines.
Collector assessed the estate of estate tax and inheritance tax.
The ancillary administrator filed an amended estate and inheritance tax return which
contained, among others, a claim for exemption from the imposition of estate and
inheritance taxes on the 210,000 shares of stock in the Mindanao Mother Lode Mines,
Inc. also pursuant to the reciprocity proviso of Section 122 of the National Internal
Revenue Code. The provision states that no tax shall be collected in respect of intangible
personal property (a) if the decedent at the time of his death was a resident of a foreign
country which at the time of his death did not impose a transfer of tax or death tax of any
character in respect of intangible personal property of citizens of the Philippines not
residing in that foreign country, or (b) if the laws of the foreign country of which the
decedent was a resident at the time of his death allow a similar exemption from transfer
taxes or death taxes of every character in respect of intangible personal property owned
by citizens of the Philippines not residing in that foreign country.
Issue: Whether or not the estate can avail itself of the reciprocity proviso embodied in
Section 122 of the National Internal Revenue Code granting exemption from the payment
of estate and inheritance taxes on the 210,000 shares of stock in the Mindanao Mother
Lode Mines Inc.
Ruling: No. The reciprocity must be total, that is, with respect to transfer or death taxes
of any and every character, in the case of the Philippine law, and to legacy, succession, or
death taxes of any and every character, in the case of the California law. Therefore, if any
of the two states collects or imposes and does not exempt any transfer, death, legacy, or
succession tax of any character, the reciprocity does not work. This is the underlying
principle of the reciprocity clauses in both laws.
In the Philippines, upon the death of any citizen or resident, or non-resident with
properties therein, there are imposed upon his estate and its settlement, both an estate and
an inheritance tax. Under the laws of California, only inheritance tax is imposed. On the
other hand, the Federal Internal Revenue Code imposes an estate tax on non-residents not
citizens of the United States, but does not provide for any exemption on the basis of
reciprocity. Therefore, the estate is not exempted from payment of the inheritance tax.
b. US v. Wells, 283 US 102;
Facts: For some time prior to the year 1919, John W. Wells had suffered from attacks of
asthma. In 1920, the decedent was diagnosed with ulcerative colitis. On September 22,
1920, he was discharged from the hospital in an improved condition. He then resumed
his normal business activities. He was again admitted to the hospital in Chicago, on
November 30, 1920, for the purpose of an operation to relieve his asthma. On December
9, 1920, decedent was discharged from the hospital and returned to his home. He went
back to the hospital on January 10, 1921, for the completion of the nasal operation. At the
time of his discharge on January 14, 1921, the medical examination showed "a very
greatly improved condition". On January 26, 1921, the date of the trust agreement
(constituting the last of the transfers in question), decedent wrote to his son Ralph: "The
doctors pronounce me cured of bowel trouble, but I will always have asthma. I weigh 140
stripped." His physician stated that decedent at that time "considered himself well, and I
told him that he need have no anxiety whatever about his state of health; that I considered
him in excellent condition; that he need have no fears of any recurrence of the ulcerated
colitis. "
But, in April, 1921, while still in California, decedent had such a recurrence and he died
on August 17, 1921.
The Commissioner of Internal Revenue assessed additional estate taxes upon the ground
that that certain transfers by the decedent within two years prior to his death, were made
in contemplation of death and should be included in the taxable estate under the
provisions of the Revenue Act of 1918.
As early as the year 1901, decedent began the making of advancements of money and
other property to his children. He believed that the appropriate course for a man of wealth
was to give to his children substantial sums of money during his lifetime while he could
advise with them as to its proper use.
Issue: Whether or not certain transfers by the decedent within two years prior to his
death, were made in contemplation of death and should be included in the taxable estate
under the provisions of the Revenue Act of 1918.
Ruling: No. Death must be "contemplated" -- that is, the motive which induces the
transfer must be of the sort which leads to testamentary disposition.
The moving cause of the transfers was the carrying out of a policy long followed by
decedent in dealing with his children of making liberal gifts to them during his lifetime.
He had consistently followed that policy for nearly thirty years, and the three transfers in
question were a continuation and final consummation of such policy. Thus, the transfers
were not made in contemplation of death.
c. CIR vs. CA and Pajonar, GR No. 123206, 22 March 2000;
Facts: The properties of Pedro Pajonar, an insane person, was placed under the
guardianship of the Philippine National Bank (PNB). He died on January 10, 1988. On
May 11, 1988, the PNB filed an accounting of the decedent's property under guardianship
However, the PNB did not file an estate tax return, instead it advised Pedro Pajonar's
heirs to execute an extrajudicial settlement and to pay the taxes on his estate.
Josefina Pajonar, in her capacity as administratrix and heir of Pedro Pajonar's estate, filed
a protest with the BIR praying that the estate tax payment or at least some portion of it,
be returned to the heirs. However, without waiting for her protest to be resolved by the
BIR, Josefina Pajonar filed a petition for review with the Court of Tax Appeals (CTA).
The CTA then ordered the CIR to refund Josefina Pajonar the amount representing
erroneously paid estate tax for the year 1988. Among the deductions from the gross estate
allowed by the CTA were the notarial fee for the Extrajudicial Settlement and the
attorney's fees in the guardianship proceedings.
The CIR filed a motion for reconsideration of the CTA's decision asserting, among
others, that the notarial fee for the Extrajudicial Settlement and the attorney's fees in the
guardianship proceedings are not deductible expenses.
Issue: Whether or not the notarial fee paid for the extrajudicial settlement and the
attorney's fees in the guardianship proceedings may be allowed as deductions from the
gross estate of decedent in order to arrive at the value of the net estate.
Ruling: Yes. The guardianship proceeding in this case was necessary for the distribution
of the property of the deceased Pedro Pajonar. The PNB was appointed guardian over the
assets of the deceased, and necessarily the assets of the deceased formed part of his gross
estate. Therefore, the attorney's fees incurred in the guardianship proceeding were
essential to the distribution of the property to the persons entitled thereto. Hence, the
attorney's fees incurred in the guardianship proceedings should be allowed as a deduction
from the gross estate of the decedent.
The extrajudicial settlement was for the purpose of payment of taxes and the distribution
of the estate to the heirs. The execution of the extrajudicial settlement necessitated the
notarization of the same. It follows then that the notarial fee was incurred primarily to
settle the estate of the deceased Pedro Pajonar. The amount should then be considered an
administration expenses actually and necessarily incurred in the collection of the assets of
the estate, payment of debts and distribution of the remainder among those entitled
thereto. Thus, the notarial fee incurred for the Extrajudicial Settlement should be allowed
as a deduction from the gross estate.

d. CIR vs. Pineda, GR No. L-22734, 15 September 1967.

Facts: On May 23, 1945 Atanasio Pineda died, survived by his wife, Felicisima Bagtas,
and 15 children, the eldest of whom is Manuel B. Pineda. The estate was divided among
and awarded to the heirs and the proceedings terminated on June 8, 1948. Manuel B.
Pineda's amounted to about P2,500.00. After the estate proceedings were closed, the BIR
found that investigated the income tax returns of the estate for the years 1945, 1946, 1947
and 1948 were not filed. Thereupon, the representative of the Collector of Internal
Revenue assessed the estate for deficiency income taxes and real estate dealer’s tax.
Manuel B. Pineda, who received the assessment, contested the same. The CTA held that
Manuel B. Pineda is liable for the payment corresponding to his share of the taxes.
The CIR has appealed proposed to hold Manuel B. Pineda liable for the payment of all
the taxes found by the Tax Court to be due from the estate in the total amount instead of
only for the amount of taxes corresponding to his share in the estate.
Issue: Whether or not Manuel Pineda may be held liable for the full amount of the taxes
assessed.
Ruling: Yes. As a holder of property belonging to the estate, Pineda is liable for the tax
up to the amount of the property in his possession. The reason is that the Government has
 a lien on the P2,500.00 received by him from the estate as his share in the inheritance, for
unpaid income taxes for which the estate is liable, pursuant to the last paragraph of
Section 315 of the Tax Code, which provides that “if any person, corporation,
partnership, joint-account, association, or insurance company liable to pay the income
tax, neglects or refuses to pay the same after demand, the amount shall be a lien in favor
of the Government of the Philippines from the time when the assessment was made by
the Commissioner of Internal Revenue until paid with interest, penalties, and costs that
may accrue in addition thereto upon all property and rights to property belonging to the
taxpayer.
By virtue of such lien, the Government has the right to subject the property in Pineda's
possession, i.e., the P2,500.00, to satisfy the income tax assessment in the sum of
P760.28. After such payment, Pineda will have a right of contribution from his co-heirs,
to achieve an adjustment of the proper share of each heir in the distributable estate.
13. Computation (Use new / train law computation)
a. Decedent is unmarried, family home has a FMV of P30M. In addition, he
has other real and personal properties amounting to P14M. Decedent has an
unpaid mortgage/unpaid taxes amounting to P2M. Compute the taxable
estate.
Real and personal properties 14,000,000.00
Family home 30,000,000.00
Gross estate 44,000,000.00
Less: Deductions:
Ordinary deductions

Unpaid mortgage/unpaid taxes 2,000,000.00 2,000,000.00

Special deductions
Family home 10,000,000.00

Standard deductions 5,000,000.00 15,000,000.00

Total deductions 17,000,000.00
Net taxable estate 27,000,000.00

*The allowable deduction for family home is only up to P10,000,000.

b. Decedent is married, family home which is conjugal has a FMV of P30M,

other conjugal properties are real and personal properties amounting to
P14M. In addition, he has exclusive properties amounting to P5M. Decedent
has an unpaid mortgage/unpaid taxes amounting to P2M. Compute the
taxable estate

Exclusive Conjugal Total

Conjugal properties
Real and personal properties 14,000,000.00 14,000,000.00
Family home 30,000,000.00 30,000,000.00
Exclusive properties 5,000,000.00   5,000,000.00
 Gross estate 5,000,000.00 44,000,000.00 49,000,000.00
Less: Deductions:
Ordinary deductions
Unpaid mortgage/unpaid taxes 2,000,000.00 2,000,000.00

Special deductions
Family home 10,000,000.00
Standard deductions     5,000,000.00

Total deductions 2,000,000.00 - 17,000,000.00

Net estate 3,000,000.00 44,000,000.00 32,000,000.00
Less: Share of surviving spouse (1/2 x 44,000,000) 22,000,000.00
Net taxable estate 10,000,000.00

*The allowable deduction for family home is only up to P10,000,000.

c. Decedent is married, the estate includes conjugal real and personal

properties amounting to P14M and a family home with FMV of P30M, which
is exclusive. Decedent has an unpaid mortgage/unpaid taxes amounting to
P2M. Compute the taxable estate.
Exclusive Conjugal Total
Conjugal properties
14,000,000.0
Real and personal properties 14,000,000.00 0
Exclusive properties
30,000,000.0
Family home 30,000,000.00   0
44,000,000.0
Gross estate 30,000,000.00 14,000,000.00 0
Less: Deductions:
Ordinary deductions
2,000,000.0
Unpaid mortgage/unpaid taxes 2,000,000.00 0
Special deductions
10,000,000.0
Family home 0
5,000,000.0
Standard deductions 0
17,000,000.0
Total deductions 2,000,000.00 - 0
27,000,000.0
Net estate 28,000,000.00 14,000,000.00 0
7,000,000.0
Less: Share of surviving spouse (1/2 x 14,000,000) 0
Net taxable estate 20,000,000.00
*The allowable deduction for family home is only up to P10,000,000.
 d. Decedent is unmarried, family home is P9M. In addition, he has other real
and personal properties amounting to P14M. Decedent has an unpaid
mortgage/unpaid taxes amounting to P2M. Compute the taxable estate.

Real and personal properties 14,000,000.00

Family home 9,000,000.00

Gross estate 23,000,000.00

Less: Deductions:
Ordinary deductions

Unpaid mortgage/unpaid taxes 2,000,000.00 2,000,000.00

Special deductions

Family home 9,000,000.00

Standard deductions 5,000,000.00 14,000,000.00

Total deductions 16,000,000.00

Net taxable estate 7,000,000.00

*The allowable deduction for family home is only up to its fair market value of PHP 9,000,000.

e. Decedent is married, family home which is conjugal has a FMV of P9M,

other conjugal properties are real and personal properties amounting to
P14M. In addition, he has exclusive properties amounting to P5M. Decedent
has an unpaid mortgage/unpaid taxes amounting to P2M.Compute the
taxable estate.
Exclusive Conjugal Total
Conjugal properties
14,000,000.0
Real and personal properties 14,000,000.00 0
9,000,000.0
Family home 9,000,000.00 0
5,000,000.0
Exclusive properties 5,000,000.00   0
28,000,000.0
Gross estate 5,000,000.00 23,000,000.00 0
Less: Deductions:
Ordinary deductions
2,000,000.0
Unpaid mortgage/unpaid taxes 2,000,000.00 0

Special deductions
4,500,000.0
Family home 0
5,000,000.0
Standard deductions 0
Total deductions 11,500,000.0
 2,000,000.00 - 0
16,500,000.0
Net estate 3,000,000.00 23,000,000.00 0
11,500,000.0
Less: Share of surviving spouse (1/2 x 23,000,000) 0
Net taxable estate 5,000,000.00

*The allowable deduction for family home is only up to the decedent's interest of P4,500,000.

f. Decedent is married, the estate includes conjugal real and personal

properties amounting to P14M and a family home with a FMV of P9M,
which is exclusive. Decedent has an unpaid mortgage/unpaid taxes
amounting to P2M. Compute the taxable estate.
Exclusive Conjugal Total
Conjugal properties

Real and personal properties 14,000,000.00 14,000,000.00

Exclusive properties

Family home 9,000,000.00   9,000,000.00

Gross estate 9,000,000.00 14,000,000.00 23,000,000.00

Less: Deductions:
Ordinary deductions

Unpaid mortgage/unpaid taxes 2,000,000.00 2,000,000.00

Special deductions

Family home 9,000,000.00

Standard deductions 5,000,000.00

Total deductions 2,000,000.00 - 16,000,000.00

Net estate 7,000,000.00 14,000,000.00 7,000,000.00

Less: Share of surviving spouse (1/2 x14,000,000) 7,000,000.00

Net taxable estate -

*The allowable deduction for family home is only up to its fair market value of PHP 9,000,000.

14. Integration
a. Carl Cena, Filipino, married to Mrs. Cena, died in a vehicular accident in
NLEX on July 2007. The spouses owned, among others a 100-hectare
agricultural land in Pangasinan with a current fair market value of P20M,
which was subject of a Joint Venture Agreement about to be implemented
with ABC Corp. He bought the said property for P2M fifty years ago. On
January 5, 2008, the administrator of the estate and ABC jointly announced
their big plans to start conversion and development of the agricultural land
 into a first-class residential and commercial center. As a result, the prices of
real properties in the locality have doubled. The administrator of the estate
of Cena filed an estate tax return on January 2008, by including in the gross
estate the real property at P2M. After 9 months, the BIR issued deficiency
estate tax assessment by valuing the real property at P40M.
i. Is the BIR correct in valuing the real property at 40M.
No, The BIR is not correct in valuing the property at PHP 40,000,000.

Under the NIRC, the valuation of properties comprising the estate of a

decedent is the fair market as of the time of death.

ii. If you disagree, what is the correct value to be used for estate tax
purposes
The correct value to be used for estate tax purposes must be
PHP20,000,000 because it is the fair market value of the property at the
time of the decedent’s death.

b. Mr. Ralph, an American, was a top executive of a US company in the

Philippines until he retired in 2009. He came to like the Philippines so much
that following his retirement, he decided to spend the rest of his life in the
country. He applied for and was granted a permanent resident status the
following year. In the spring of 2014, while vacationing in the USA, he
suffered a heart attack and died. At the time of his death, he left the
following properties: (a) Bank deposit with Citibank Makati and Citibank
Orlando Florida; (b)rest house in Orlando Florida; (c) a condominium in
Makati; (c) shares of stock in the Philippine subsidiary of the US company
where he worked; (e) shares of stock of PLDT and San Miguel Corp; (f)
shares of Walt Disney in Florida; (g) US treasury bonds and (h)Proceeds
from the life insurance policy issued by a US Corporation.
Which of the following will be included in Mr. Ralph’s taxable estate
in the Philippines?
All of Ralph’s properties must be included in the computation of his
taxable estate.

Under the NIRC, the value of the gross estate of a resident alien decedent
shall be determined by including the value at the time of his death of all
property, real or personal, tangible or intangible, wherever situated

Ralph, having been granted a permanent resident status, is considered a

resident alien for tax purposes.

Therefore, all his properties must be included in his taxable estate.

c. Mr. Ortiz owns 100 hectares of agricultural land planted to coconut trees. He
died on May 2004. Prior to his death, the government, by operation of law,
acquired all his agricultural lands except five (5) hectares. Upon his death,
 his widow asked you how she will consider the 100 hectares of agricultural
land in the preparation of the estate tax return. What advice will you give
her.
I will advise the widow of Mr. Ortiz to exclude the portion of the property
acquired by the government in the gross estate. Only the properties existing at the
time of the decedent’s death must be included in his gross estate. Ninety-five
hectares of the decedent’s agricultural land was already owned by the government
at the time of his death. Therefore, such portion of the property must be excluded
from the decedent’s gross estate.

d. In 2016, Mr. A, 75 years old and suffering from an incurable disease decided
to sell for valuable and sufficient consideration, a house and lot to his son. He
died one year later. In the settlement of Mr. Agustin’s estate, the BIR argued
that the house and lot were transferred in contemplation of death and should
form part of the gross estate for estate tax purposes. Is the BIR correct?
No, the BIR is not correct. Under the NIRC, a bona fide sale for an adequate and
full consideration in money or money's worth is not a transfer in contemplation of
death. The transfer made by Mr. A before his death was through a contract of sale
for valuable and sufficient consideration. Therefore, the transfer is not in
contemplation of death.

i. What is the difference between the tax rates for estate and donation
during that year?
In 2016, the governing law for estate and donor’s tax is RA 8424 (Tax
Reform Act of 1997). Under RA 8424, estate tax is based on a six-bracket
schedule with rates ranging from 5% to 20%. Donor’s tax, on the other
hand, is imposes different tax rates depending on the relationship of the
donor with the donee. Donor’s tax shall be based on an eight-bracket
schedule with rates ranging from 2% to 15% in case the donee is relative
of the donor while a rate of 30% is imposed in case the donee is a stranger.

e. A 90year old man suffering from cancer, wrote a will on August 2015, on the
same day made several inter vivos gifts to his children. 10 days later, he died.
In your opinion, are the inter vivos gifts considered transfers in
contemplation of death for purposes of determining properties to be included
in his gross estate?
Yes, the gifts made by the decedent to his children are considered in
contemplation of death. When the donor makes his will within a short time of, or
simultaneously with, the making of gifts, the gifts are considered as having been
made in contemplation of death. Based on the fact that the decedent was suffering
from cancer and wrote his will on the same day he made the inter vivos gifts to
his children, it can be inferred that such transfers are in contemplation of death for
purposes of determining his gross estate.

f. In June 2010, X took out a life insurance policy on his own life in the amount
of P2M. He designated his son as his beneficiary with respect to P1M,
 reserving his right to substitute his for another. X died in September 2013.
Are the proceeds of life insurance to form part of the gross estate of X?
Yes, the proceeds of life insurance form part of X’s gross estate.
Proceeds of life insurance forms part of the gross estate when the beneficiary is
third person, other than the decedent’s estate, executor, or administrator provided
that the designation is not irrevocable. Here, X designated his son who is a third
person other the estate, executor, or administrator and the designation is
revocable. Thus, the proceeds of life insurance form part of the gross estate of X.

g. A died survived by his wife and 3 children. The estate tax was paid and the
estate was divided among the 4 heirs. Later, BIR found out that the estate
failed to report the income received by the estate during administration. The
BIR issued a deficiency income tax assessment plus interest surcharges and
penalties. Since the 3 children are residing abroad, the BIR sought to collect
the full tax deficiency only against the widow. Is the BIR correct?

Yes, the BIR is correct in collecting the full tax deficiency against the widow.
However, BIR cannot collect in excess of the share of the widow in the
inheritance.
The NIRC provides that if any person liable to pay the income tax, neglects or
refuses to pay the same after demand, the amount shall be a lien in favor of the
Government of the Philippines.

By virtue of such lien, the Government has the right to subject the widow’s share
in the estate to satisfy the full income tax assessment. However, the widow shall
have will have a right of contribution from his co-heirs, to achieve an adjustment
of the proper share of each heir in the distributable estate.

h. In 2019, while driving his car to Baguio, Pedro together with his wife
Assunta, and only, Jaime, met an accident that caused the instantaneous
death of Jaime. The following day, Assunta died in the hospital. The spouses
and their son had the following assets and liabilities at the time of death:

Exclusive Conjugal Jaime

(Assunta)
Cash 10,000,000 1,200,000
Cars 2,000,000 500,000
Land 5,000,000 2,000,000
Residential 4,000,000
house
Mortgage 2,500,000
Payable
Funeral Expense 300,000
 i. Is the Estate of Jaime liable to estate tax?
Yes, the Estate of Jaime is liable to estate tax. The governing law in the
year 2019 when Jaime died is the TRAIn Law. Funeral expenses are no
longer deductible from the gross estate under the TRAIn Law and because
the family home is a conjugal property, only one-half of its value is
deductible from the gross estate.
Exclusive Conjugal Total
Cash 1,200,000.00 10,000,000.00 11,200,000.00
Cars 500,000.00 500,000.00
Land 2,000,000.00 5,000,000.00 7,000,000.00
Residential house 4,000,000.00 4,000,000.00
Gross estate 3,200,000.00 19,500,000.00 22,700,000.00
Less: Deductions:
Ordinary deductions
Unpaid mortgage/unpaid taxes 2,500,000.00 2,500,000.00
Special deductions
Family home 2,000,000.00
Standard deduction 5,000,000.00
Total deductions 9,500,000.00
Net estate 17,000,000.00 13,200,000.00
Less: Share of surviving spouse
(1/2 x 17,000,000) 8,500,000.00
Net taxable estate 4,700,000.00

ii. Is vanishing deduction applicable in the estate of Assunta?

No, vanishing deduction is not applicable in the estate of Asunta. One of
the conditions for the application of vanishing deduction is that the estate
tax on the inheritance must already be paid. Here, there is no showing that
the estate of Jaime already paid the estate tax. Thus, vanishing deduction
cannot be applied to the estate of Asunta.

i. Vanishing deduction is availed of by taxpayers to:

d.) Reduce his gross estate

j. Felix, a bachelor, resident citizen, suffered a heart attack while on a business

trip in New York and died on June 15, 2019. He left behind real properties
situated in New York; his family home in Pasig; and office condominium in
Makati; shares of stock, cash in bank; and personal belongings. The decedent
is heavily insured with Insular Life. He had no known debts at the time of his
death. As the sole heir and appointed Administrator, how would you
determine the gross estate of the decedent? What deduction may be claimed
by the estate and when and where shall the return be filed and estate tax
paid?

If I were the administrator, I will get the total of all the properties of Felix
including the proceeds of the life insurance provided that beneficiary is the estate
of the decedent, his executor or administrator taken out by the decedent upon his
own life regardless of whether the designation is revocable or irrevocable or a
third person, other than the decedent’s estate, executor, or administrator provided
that the designation is not irrevocable.

The estate can claim the value of the family home in an amount not exceeding
PHP10,000,000 and a standard deduction of PHP5,000,000.

The estate tax return shall be filed within one year from the death of Felix or on or
before June 15, 2020. The estate tax return shall be filed with the Accredited
Agent Bank (AAB), Revenue District Officer or Revenue Collection Officer
having jurisdiction on the place where the decedent was domiciled at the time of
his death, whichever is applicable.