BUSTAX : CH 2

What was the first estate tax law in the Philippines and when did it take effect?

Act 2601, which took effect on July 1, 1916.

How did Act 2601 compute estate tax rates?

Imposed graduated rates computed on net inventoried property left by a decedent.

What is RA 8424 also known as and when did it take effect?

Tax Reform Act or NIRC, effective Jan. 1, 1998.

What significant deduction did RA 8424 allow from the gross estate?

RA 8424 allowed the deduction of medical expenses from the gross estate.

Which Philippine codes embody the bulk of estate tax law regarding the tax base?

The National Internal Revenue Code, Civil Code, and Family Code of the Philippines.

What is RA 10963 also known as and when did it take effect?

TRAIN Act, effective January 1, 2018.

How did the TRAIN Act change the estate tax rate structure?

Replaced graduated tax rates with a single rate of 6% of net taxable estate.

Which expenses were repealed by the TRAIN Act?

Funeral expenses, judicial expenses, and medical expenses.

Define the nature of Estate Tax in the Philippines.

An excise tax on the privilege of controlling property disposition taking effect upon death.

When does the right of the State to tax the privilege to transmit the estate vest?

The right of the State to tax the privilege vests instantly upon death.

Explain the Benefit-Received Theory.

State collects tax for services rendered in distributing the estate and protecting heirs.

Explain the Privilege or State Partnership Theory.

Inheritance is a privilege granted by State, acting as a passive partner in wealth.

Explain the Ability to Pay Theory.

Inheritance is unearned wealth creating an ability to pay and contribute to government income.

Explain the Redistribution of Wealth Theory.

Estate tax promotes equitable distribution of wealth and reduces societal inequalities.

What is the tax base under the Redistribution of Wealth Theory?

The tax base is the value of the property.

How are decedents classified for estate taxation purposes?

Decedents are classified into 3 categories: citizens, resident aliens, and nonresident aliens.

What is included in the gross estate of a citizen or resident alien?

All property, real or personal, tangible or intangible, wherever situated.

What is included in the gross estate of a nonresident alien?

Only that part of the entire gross estate which is situated in the Philippines.

What 3 items comprise the gross estate of a nonresident alien?

1. Philippine real property; 2. Philippine tangible personal property; 3. Philippine intangible personal property.

When is intangible personal property excluded for a nonresident alien?

When it is excluded on the basis of the reciprocity clause.

What is the first condition for reciprocity under Section 104?

Foreign country does not tax intangible property of non-resident Filipinos.

What is the second condition for reciprocity under Section 104?

Foreign laws allow similar estate tax exemptions for intangible property of non-resident Filipinos.

How do Accounting Standards define an intangible asset?

Identifiable nonmonetary asset without physical substance deriving value from intellectual or legal rights.

What is the general rule for the situs of intangible personal property?

Domicile of the owner, also known as "mobilia sequntur personam".

When does "mobilia sequntur personam" not apply?

If property has situs elsewhere or has acquired a business situs in another jurisdiction.

Where is the situs of a Franchise?

The place where such franchise is exercised, regardless of the owner's domicile.

What is the situs of a franchise under Section 104?

Franchise which must be exercised in the Philippines.

What Philippine-issued securities have a situs in the Philippines?

Shares, obligations, or bonds issued by corporations organized in the Philippines.

When do foreign corporation shares have a Philippine situs?

If 85% of the business is located in the Philippines.

What is another way foreign shares acquire a Philippine situs?

If such shares, obligations, or bonds have acquired a business situs in the Philippines.

Where is the situs of partnership shares or rights?

Any partnership, business, or industry established in the Philippines.

What is the situs of real property and tangible personal property?

The location of the property.

What is the situs of shares, franchise, and copyright?

Where the intangible is exercised regardless of where the certificate is stored.

What is the situs of receivables?

The residence of the debtor.

What is the situs of a bank deposit?

The location of the depository bank.

How is the estate of the decedent appraised generally?

At its fair market value at the time of the decedent's death.

How is real property valued for estate tax purposes?

Higher value between Commissioner’s zonal value and the provincial or city assessed value.

How is the value of an improvement determined for real property?

Construction cost per building permit or fair market value per latest tax declaration.

How is the fair market value of unlisted common shares determined?

Book value per share of the issuing corporation excluding appraisal surplus and preference shares.

What is the valuation of unlisted preference shares?

Par value per share.

How are listed shares of stock valued?

Arithmetic mean between highest and lowest quotation nearest the date of death.

How are units of participation in recreation or amusement clubs valued?

Bid price nearest date of death published in any newspaper or general publication.

How is the right to usufruct, use, habitation, or annuity valued?

Based on latest Basic Standard Mortality Table considering the beneficiary's probable life.

What are the 2 components of a married decedent's gross estate?

Exclusive properties of decedent and common properties of decedent and surviving spouse.

Why is exclusive property of the surviving spouse excluded from the gross estate?

Because these properties are not owned by the decedent upon his death.

What is the term for exclusive property of the husband?

Capital property.

What is the term for exclusive property of the wife?

Paraphernal property.

What determines if a property is exclusive or common between spouses?

The type of property relations or marriage settlement of the husband and wife.

What property is excluded for a nonresident alien decedent?

Property situated or with situs outside of the Philippines.

When is intangible personal property in the Philippines excluded for nonresident aliens?

It is excluded from the gross estate if there is reciprocity under Section 104.

What is the first exclusion from the gross estate under Section 87?

The merger of usufruct in the owner of the naked title.

What is the second exclusion under Section 87 regarding the fiduciary heir?

Transmission of inheritance from fiduciary heir or legatee to the fideicommissary.

What is the third exclusion under Section 87 involving another beneficiary?

Transmission from the first heir in favor of another beneficiary per predecessor's desire.

What is another name for the third exclusion under Section 87?

Transfer under Special Power of Appointment.

What condition applies to transfers to social welfare or charitable institutions?

No part of net income inures to the benefit of any individual.

What is the limit for administration expenses in charitable bequests?

Not more than 30% shall be used by such institutions for administration purposes.

Which agency determines the exemption for transfers to charitable institutions?

The government agency empowered to determine the exemption is the BIR.

How is a charitable transfer recorded to enable BIR power?

Included in the gross estate then taken up as an equal amount for deduction.

Define the 'merger of usufruct in the owner of the naked title'.

When the current decedent only had the right to use another's property until death.

Define Usufruct.

The right or privilege to enjoy the use and advantages of another's property.

Why is usufruct excluded from the current decedent's gross estate?

The current decedent is not considered the owner of the property.

In Illustration 4, why is land excluded from Juan's estate?

Juan is not intended owner; his death merges usufruct to the owner Pedro.

What happens to Pedro's rights upon Juan's death in Illustration 4?

Pedro becomes entitled to both the usufruct and ownership of the naked title.

Why is property excluded in a transmission to a second heir?

The first heir acts only as a trustee or fiduciary until transfer to beneficiary.

What is the role of the donor-decedent in Illustration 5?

The prior decedent or predecessor who is the donor of the power.

What is the role of the donee-decedent in Illustration 5?

Current decedent or donee of power holding property under Special Power of Appointment.

Define Special Power of Appointment.

Donee-decedent can appoint only from a restricted class of persons other than himself.

Why is property under a Special Power of Appointment excluded?

Because the donee-decedent only holds the property in trust for the restricted class.

How is a parcel of land treated in the gross estate of Mr. Yumao?

Included in gross estate and subject to estate tax.

Why is the land excluded from the gross estate of Juan (1st heir)?

Juan acts only as trustee/fiduciary for Pedro the intended beneficiary.

Is the transfer from Juan to Pedro subject to estate tax?

No it is excluded in gross estate and not subject to estate tax.

How is the land treated in Pedro's gross estate upon his death?

Included in gross estate and subject to estate tax.

Define Fideicommissary Substitution.

Transmission of inheritance from fiduciary heir to the fideicommissary not more than 1 degree apart.

What is the primary degree requirement for fideicommissary substitution?

Substitution must not go beyond 1 degree from the heir originally instituted.

What condition must both heirs meet at the testator's death for fideicommissary substitution?

The fiduciary and fideicommissary must both be living at the time of testator's death.

Are GSIS life insurance proceeds and benefits included in the gross estate?

No they are excluded under special laws (RA 728).

Are SSS accruals and benefits received by reason of death excluded?

Yes these are excluded from the gross estate under RA 1792.

How are war damage payments from the Philippines or US governments treated?

They are excluded from the gross estate under RA 227.

Are amounts received from the United States Veterans Administration excluded?

Yes these amounts are excluded from the gross estate.

Are payments to heirs of World War II veterans for services/supplies excluded?

Yes excluded under RA 136.

What is the status of retirement benefits from a private firm under RA 4917?

They are excluded from the gross estate.

Are PERA assets of a decedent-contributor included in the gross estate?

No they are excluded under Sec. 14 of RA 9505.

How is COVID-19 death compensation for health workers treated for estate tax?

Not included in the gross estate under RA 11494.

Generally, what does the gross estate consist of?

All property owned by decedent or interests held at the time of death.

List types of properties included in the gross estate.

Real property personal tangible property and intangible personal property.

Are bank deposits and shares of stock included in the gross estate?

Yes they are included in the composition of the gross estate.

How are dividends declared before death but received after death treated?

They are included in the gross estate.

Are partnership profits accrued before death included in the gross estate?

Yes partnership profits accrued before death are included.

Are usufructuary rights included in the gross estate?

Yes they are included as part of the decedent’s interests at death.

Which section of the Tax Code enumerates the composition of the Gross Estate?

Section 85 of the Tax Code enumerates the composition of the Gross Estate.

What are examples of property actually and physically present in the estate at death?

Land buildings shares of stock vehicles bank deposits and other similar physically present assets.

Define Decedent's Interest according to Sec. 85(A).

Equity or ownership participation of the decedent in any property physically existing in estate.

What does Decedent's Interest refer to regarding property ownership?

Value of any interest in property owned or possessed by decedent at death.

Why are some properties not physically in the estate still subject to estate tax?

Transfers were intended to take effect at death or did not convey full ownership.

Define Transfers in Contemplation of Death according to Sec. 85(B).

Property dispositions prompted by the thought of death as the controlling motive for transfer.

What motive induces a transfer in contemplation of death?

The thought of death is the controlling motive which induces the disposition of property.

What type of donation is included in transfers in contemplation of death?

Donation mortis causa is included within the concept of transfer in contemplation of death.

Give an example of a transfer intended to take effect at death.

Transfer of property where the disposition was intended to take effect only upon transferor's death.

What is a transfer with retention or reservation of certain rights?

Lifetime property transfer where decedent retained beneficial enjoyment or right to receive income.

When is a transfer NOT considered to be in contemplation of death?

When the transfer of property is a bonafide sale for adequate and full consideration.