Taxation Law II

1. Succession and Transfer Taxes

Definition of succession and transfer tax
-Transfer taxes are those taxes imposed upon the privilege
granted by the state to the taxpayer so that he may
transfer properties, real or personal, without consideration.
-Excise taxes imposed upon the privilege of gratuitously
transmitting ones property to another.
Nature of transfer taxes
-Transfer taxes are excise or privilege taxes that are
imposed on the act of passing ownership of property and
not taxes on the property transferred.
Kinds of Succession
1. Estate tax a tax that is levied, assessed, collected
and paid upon the transfer of the net estate of a decedent
to his or her heirs. It is tax imposed on the privilege to
transfer property upon ones death.
2. Donors tax - is an excise tax levied, collected, and
paid upon the privilege of transferring property
gratuitously by way of gift inter vivos by any person,
resident or non-resident. . It is tax imposed on the privilege
to transfer property during ones life time.
Causes of legal succession or intestacy
Elements of succession
- It is a mode of acquiring ownership
- There is transmission property... to another person.
- The cause of the transmission is the death of the
decedent
- The procedure of transmission may be by will or by
operation o law
- There is a presumption that the heirs accepted the
inheritance
ADDITIONAL
Q: What is the law that governs the imposition of
transfer taxes?
Transfer taxes are governed by the laws existing at the
time the transfer takes place. In particular
a. Donations inter vivos are governed by the law existing at
the time of the effectivity of the donation since the transfer
takes place at that time
b. Donations mortis causa are governed by the law at the
time of death because it is at that time that the property is
transferred
2. Estate Tax
Nature and definition

An excise tax on the right of transmitting property at the

time of death and on the privilege that a person is given in
controlling to a certain extent the disposition of his
property to take effect upon death. The tax imposed is
based on the entire net estate.
Th e NATURE of the Estate Tax:
a. It is not a tax on property
b. It is a tax imposed on the privilege to transmit property
a death and is measured by the value of the property.
RR 02-2003 [December 16, 2002] reiterates the wellsettled rule that estate taxation is governed by the statute
in force at the time of the death of the decedent.
Evolution of estate tax laws in the Philippines
RA 8424 Tax Reform Act
(Sec. 84-97, Sec. 104, NIRC, Revenue Regulations No. 1793, Estate Tax Regulations, as amended by RR 2-2003
dated December 16, 2002)
LORENZO VS. POSADAS, G.R. NO. 43082, JUNE 18, 1937
Facts: On 27 May 1922, Thomas Hanley died in Zamboanga, leaving a will
and considerable amount of real and personal properties. Hanleys will
provides the following: his money will be given to his nephew, Matthew
Hanley, as well as the real estate owned by him. It further provided that the
property will only be given ten years after Thomas Hanleys death. Thus, in
the testamentary proceedings, the Court of First Instance of Zamboanga
appointed P.J.M. Moore as trustee of the estate. Moore took oath of office on
March 10, 1924, and resigned on Feb. 29, 1932. Pablo Lorenzo was appointed
in his stead. Juan Posadas, Collector of Internal Revenue, assessed
inheritance tax against the estate amounting to P2,057.74 which includes
penalty and surcharge. He filed a motion in the testamentary proceedings so
that Lorenzo will be ordered to pay the amount due. Lorenzo paid the
amount in protest after CFI granted Posadas motion. He claimed that the
inheritance tax should have been assessed after 10 years. He asked for a
refund but Posadas declined to do so. The latter counterclaimed for the
additional amount of P1,191.27 which represents interest due on the tax and
which was not included in the original assessment. However, CFI dismissed
this counterclaim. It also denied Lorenzos claim for refund against Posadas.
Hence, both appealed.
Issues: (1) When does the inheritance tax accrue and when must it be
satisfied?
(2) Should the inheritance tax 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?
(3) In determining the net value of the estate subject to tax, is it proper
to deduct the compensation due to trustees?
(4) What law should govern the case at bar?

Held: (1) The inheritance tax shall accrue upon transmission or the transfer
or devolution of property of a decedent, made effective by his death. It is in
reality an excise or privilege tax imposed on the right to succeed to, receive,
or take property by or under a will or the intestacy law, or deed, grant, or gift
to become operative at or after death. According to article 657 of the Civil
Code, "the rights to the succession of a person are transmitted from the
moment of his death." In the case at bar, decedent Thomas Hanley having
died on May 27, 1922, the inheritance tax accrued as of the date.
However, the inheritance tax must be satisfied before the delivery of the
properties in question to P. J. M. Moore as trustee on March 10, 1924. This is
in accordance with the following provisions:
SEC. 1543. Exemption of certain acquisitions and
transmissions. The following shall not be taxed:
(a) The merger of the 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 trustees.
(c) The transmission from the first heir, legatee, or donee in favor of
another beneficiary, in accordance with the desire of the predecessor.
In the last two cases, if the scale of taxation appropriate to the new
beneficiary is greater than that paid by the first, the former must pay
the difference.
SEC. 1544. When tax to be paid. The tax fixed in this article
shall be paid:
(a) In the second and third cases of the next preceding section, before
entrance into possession of the property.
(b) In other cases, within the six months subsequent to the death of
the predecessor; but if judicial testamentary or intestate proceedings
shall be instituted prior to the expiration of said period, the payment
shall be made by the executor or administrator before delivering to
each beneficiary his share.
(2) If death is the generating source from which the power of the estate to
impose inheritance taxes takes its being and if, upon the death of the
decedent, succession takes place and the right of the estate to tax vests
instantly, the tax should be measured by the vlaue of the estate as it stood
at the time of the decedent's death, regardless of any subsequent
contingency value of any subsequent increase or decrease in value. Hence,
the inheritance tax should be computed on the basis of the estates value at
the time of decedents death and NOT ten years after the testator's death,
even such is what the will had stipulated.
(3) NO, in determining the net value of the estate subject to tax, it is not
proper to deduct the compensation due to trustees. A trustee, no doubt, is
entitled to receive a fair compensation for his services, but from this it does
not follow that the compensation due him may lawfully be deducted in

arriving at the net value of the estate subject to tax. There is no statute in
the Philippines which requires trustees' commissions to be deducted in
determining the net value of the estate subject to inheritance tax.
(4) It is well-settled that inheritance taxation is governed by the statute in
force at the time of the death of the decedent. The law at the time of
decedents death was section 1544 amended by Act No. 3031, which took
effect on March 9, 1922. Hence, it should be the law that should be applied.
The taxpayer can not foresee and ought not to be required to guess the
outcome of pending measures. Of course, a tax statute may be made
retroactive in its operation. Liability for taxes under retroactive legislation
has been "one of the incidents of social life.

Gross Estate
Rules for imposition
COLLECTOR VS. FISHER, 1 SCRA 93
Facts:
Composition of gross estate
The following properties and interest therein at the
time of decedents death:
Citizens and Resident Aliens all properties, real or
personal, tangible or intangible, wherever situated
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 Sect 104, NIRC
INCLUSIONS IN THE GROSS ESTATE (Art 85 of
NIRC)
1. Decedents interest
2. Transfer in contemplation of death
3. Revocable transfer
4. Transfer under general power of appointment
5. Proceeds of life insurance
6. Transfer for insufficient consideration
7. Prior interests
Valuation of gross estate (Art 88 of the NIRC)
GENERAL RULE: The properties comprising the gross
estate shall be valued based on FAIR MARKET VALUE (FMV)
as of the time of death.
Real property-FMV as determined by the
Commissioner OR FMV as shown in the schedule of
values fixed by the provincial and city assessors,
whichever is HIGHER.
Shares of Stock o Listed shares FMV is the
arithmetic mean between the highest and lowest

quotation at a date of death, OR the date nearest

the date of death, if none is available on the date of
death itself o Unlisted shares - COMMON shares are
valued based on BOOK VALUE; while PREFERRED
shares are valued at PAR VALUE
Right to usufruct, use or habitation, annuity - the
probable life of the beneficiary in accordance with
the latest basic standard mortality table is to be
taken into account, to be approved by the Secretary
of Finance, upon recommendation of the Insurance
Commissioner.
Exclusion and Deductions from gross estate (ART
86)
Ordinary deductions
a. Expenses, losses, indebtedness, taxes, etc
i. Funeral expenses
ii. Judicial expenses
iii. Claims against the estate
iv. Claims against insolvent persons
v. Unpaid mortgage or indebtedness on property
vi. Taxes
vii. Losses
b. Vanishing Deduction
c. Transfer for public use
Special deductions
a. Family home
b. Standard deduction
c. Medical expenses
d. Amount received by heir under RA 4917
Note: Non-resident aliens cannot avail of the special
deductions.
Property previously taxed and vanishing deductions
Deduction allowed on the property left behind by the
decedent which he had acquired previously by inheritance
or donation. Previously, a transfer tax had already been
imposed on the property, either the estate tax (if property
inherited) or the donors tax (if property donated). Now
that the recipient of the inheritance or donation has died,
the same property will again be subjected to a transfer
tax, the estate tax. Thus, to minimize the effects of a
double tax on the same property within a short period of
time, i.e. five (5) years, the law allows a deduction to be
claimed on the said property.
Example: Mr. A died in December 2003. In March 2003,
Mr. B (Mr. As father) died and left Mr. A some properties as
inheritance. May vanishing deductions be claimed as
deductions in computing Mr. As net taxable estate? YES,
vanishing deductions shall be allowed if the following
conditions are met

REQUISITES FOR DEDUCTIBILITY

1) Death the present decedent (Mr. A) died within five
years from the receipt of the property from a prior
decedent (Mr. B) or donor;
2) Identity of the property The property with respect to
which deduction is sought can be identified as the one
received from the prior decedent or the donor, or as the
property acquired in exchange for the original property
so received.;

3) Inclusion of the property The property must have

formed part of the gross estate situated in the Philippines
of the prior decedent, or the total amount of the gifts of
the donor;
4) Previous taxation of the property the donor's tax on
the gift or estate tax on the prior succession (Mr. Bs
succession) was finally determined and paid;
5) No vanishing deduction on the property was allowed to
the estate of the prior decedent.
(Illustration of how this requirement may NOT be met: In
the example above, if Mr. B received the same properties
as a donation from Mr. C in July 2002, a vanishing
deduction on the properties was claimed with respect to
Mr. Bs estate. Thus, no more vanishing deduction may be
claimed by Mr. As estate)
Filing of returns, tax credits and payment
(ART 89 90 91 of NIRC)