4-ESTATE TAXATION (Gross Estate:Residence/Citizenship 59

EXERCISE 4-6 CASE STUDY

Hugo H Miller ,an American citizen, was born in Santa Cruz, California, U,S,A In 1883 In 1905, he come to
the Philippines from 1906 to 1917, he was connected with the public school system, first as a teacher
and later as a division superintendent of school. After his retirement, Miller accepted an executive
position in the local branch of Ginn & Co., book publishers with principal offices in New York and Boston,
U.S.A up to the outbreak of the Pacific War.

From 1922 up to December 7, 1941, he was stationed in the Philippines as oriental representative of
Ginn & Co., Covering not only the Philippines but also China and Japan. His principal work was selling
books specially written for Philippines school in or about the year 1922 my Miller lived at the Manila
hotel. his wife remained at their home in Ben-Lomond, Santa Cruz, California, but she used to come to
the Philippines for brief visits with Miller, staying three or four months Miller also used to visit his wife in
California

He never lived in any residential house in the Philippines after of his wife in 1931, he transferred from
the Manila hotel to the army and Navy club, where he was staying at the outbreak of the Pacific War. On
January 17, 1941, Miller executed his last will and testament in Santa Cruz California in which he
declared that he was “of Santa Cruz California". On December 7, 1941 because of the Pacific War, the
office of Ginn & Co was closed, and Miller joined the Board of Censors of the United States Navy. During
the war, he was taken prisoner by the Japanese force in Leyte, and in January, 1944, he was transferred
to Catbalogan, Samar, where he was reported to have been heard from him.

The collector maintains that under the tax laws, Residence and domicile have different meaning, that tax
laws on estate only mention resident and non- resident and no reference whatsoever is made to
domicile, that Miller during his long stay in the Philippines had required a "Residence" in this country,
and was a resident thereof at the of his death.

De Lara , the ancillary administrator however , equally maintains that for estate tax purposes , the term
"Residence" is synonymous with the term domicile particularly that of Velilla vs. Posadas, 62 Phil. 624,
wherein this Tribunal used the terms "residence" and "domicile" interchangeably and without
distinction.

ISSUE: Is Miller a resident or a non-resident of the Philippines?

SOURCE: CIR vs. DOMINGO DE LARA

G.R. Nos. L-9456 and L-9481, January 6, 1958

Chapter 5

Gross Estate (Property relations between spouses)

TABLE OF CONTENTS

Marriage settlement governing the spouses

Absolute community of property

Charges upon and obligations of the absolute community

Donation of community property by either spouse

Conjugal partnership of gains

Property bought on installments paid partly from exclusive and partly from conjugal funds

Ownership of credit payable within a period of time

Ownership of improvements on a separate property

Charges upon and obligations of the conjugal partnership

Conjugal and community property , distinguished

Dissolution of absolute community and conjugal partnership

Regime of complete separation of property

Regime of unions without marriage

Regime in cohabitations of spouses who are incapacitated to marry each other

Exercise 5-1. True or False Questions

Exercise 5-2. Multiple Choice Questions/Problems

Exercise 5-3. Discussion Questions/Problems

Exercise 5-4. Case Study

5 — ESTATE TAXATION (Property Relations Between Spouses)61

The determination of gross estate of married decedent shall depend on the system of a property
relationship that governed the spouses which could have been either any of the following:

a. Absolute community of a property regime

b. Conjugal partnership of gains

c. Complete separation of property

d. Any other regime

Marriage settlement governing the spouses

The system of property relationship that shall govern the spouses will depend upon the marriage
settlements they have executed before the celebration marriage.

Needless to say , an unmarried decedent shall not be governed by anyone of the systems enumerated
because all of his properties are exclusively owned by him.

The term "unmarried" shall refer to either single (never been married), legally separated,widow/
widower, or no one whose married has been annulled

In the absence of a marriage settlement, or when the regime agreed upon is void, the system of
absolute community of property shall govern (Art. 75, The Family Code of the Philippines ), unless the
marriage was celebrated prior to August 3, 1988 (the effectivity date of the Family Code ,per Executed
Order No. 227), because those celebrated before the effectivity of the Family Code, which had no prior
agreement on the system of property relationship ,were governed by the conjugal partnership of gains.

Illustration 5-1

Mar and Cielo were married together on August 3, 1970. Prior to that date, they entered into pre-
nuptial agreement in writing that they shall be governed by the regime of absolute community of a
property.

a. What marriage settlement governs the spouses?

Mar and Cielo are governed by the absolute community of property - the marriage settlement that had
agreed upon before the marriage.

b. Suppose there was no pre-nuptial agreement between the spouses.

What settlement governs the properties of Mar and Cielo?

TRANSFER & BUSINESS TAXES - Ampongan 62

The spouse are under the conjugal partnership of gains because the marriage was celebrated before
August 3,1988.

If the marriage was celebrated on or after the aforementioned date and there was no prior agreement
as to the property ownership, the spouses shall be governed by the absolute community of property
regime.

Absolute community property

Unless otherwise provided, the community property shall consist of (1) all the property owned by the
spouses at the time of the celebration of the marriage, or (2) acquired thereafter (art.91, lbid.).

The following shall be excused from the community property

1. Property acquired during the marriage by gratuitous title by Either Spouse, and the fruit as well as the
income thereof, if any, unless it is expressly provide by the donor, testator or grantor that they shall
from part of the community property

2. Property for personal and exclusive use to either spouse, However, jewelry shall from part of the
community property;

3. Properties expired before the marriage by either spouse who has legitimate descendants by a former
marriage, and the income, if any of such property.

Property acquired during the marriage is presumed to belong to the community, unless it is one of those
excluded therefrom (Art.93,I'd.).

Charges upon and obligations of the absolute community

The absolute community of property shall be liable for:

(1) The support of the spouses, their common children, and legitimate children of either spouse;
however, the support of illegitimate children shall be governed by the provisions of the family code on
support;

(2) All debts and obligations contacted during the marriage by the designated administrator spouse for
the benefit of the community, or by both spouses, or by the spouses with the consent of the other;
5 ESTATE TAXATION ( Property Relations Between Spouses). 63

(3) Debts and obligations contracted by either spouse without the consent of the other to the extent
that the family may have been benefit;

(4) All taxes, liens, charges and expenses, including major or minor repairs, upon the community
property

(5) All taxes and expenses for mere preservation made during marriage upon the separate property of
either spouse used by the family;

(6) Expenses to enable either spouse to commence or complete a professional or vocational course, or
other activity for self-improvement;

(7) Ante-nuptial debts of either spouse insofar as they have redounded to the benefit of the family;

(8) The value of what is donated or promised by both spouses in favor of their common legitimate
children for the exclusive purposes of commencing or completing a professional or vocational course of
either activity for self-improvement

(9) Ante-nuptial debts of either spouse other than those falling under paragraph (7) of this Article, the
support of illegitimate children of either spouse, and liabilities incurred by either spouse by reason of a
crime or a quasi-delict, in case of absence or insufficiency of the exclusive property of the debtor-
spouse, the payment of which shall be considered as advances to be deducted from the share of the
debtor-spouse upon liquidation of the community; and

(10) Expenses of litigation between the spouses unless the suit is found to be groundless.

Illustration 5-2

Kulukotoy, Filipino, married to Alda on February 10,2005, died during the current year leaving
the following properties:

Riceland, bought by kulukotoy in 2007-P200,000

Income of the riceland -P35,000

House and lot which he bought into the marriage -P800,000

Income of a portion of the house being leased to student boarders-P26,500

Subdivision lot inherited by kulukotoy from his father in 2007 -P350, 000 Rent income of the subdivision
lot P12,000
TRANSFERRED BUSINESS TAXES-Amponigan 64

Coconut land inherited by alda from her father who died in September 1995 -P250,000

Income from the coconut land -15,000

Passenger jeppney given a birthday gift to alda by her mother in 2007 - P160,000

Income of the jeppney -P8,000

Jewelries P 50,000

Saving deposit in a bank earned by the spouses during the marriage -P875,000

Interest on the bank deposit, net of tax-P3,500

One-half share of kulukotoy in the time deposit with PNB,P200,000.The either deposit had earned on
interest of P6,000. The money was acquired by kulukotoy and Bebang, his former wife who died in 2003
their marriage was blessed with one child, koykoy.

REQUIRED: compute the gross estate of kulukotoy if the marriage was under the absolute community of
property regime

Community property:

Riceland. 200,000

Income of Riceland. 35,000

House and lot. 800,000

Income from lease to boarders. 26,500

Coconut land. 250,000

Income of coconut land. 15,000

Jewelries. 50,000

Saving deposit. 875,000

Interest on savings deposit. 3,500 P2,255,000

Exclusive property:

Sobdivision lot. 350,000

Rent income on lot 12,000

Share in the time deposit. 200,000

Share in interest (P6,000) 3,000 565,000

Gross estate. 2820,000

5 ESTATE TAXATION (property regime Between Spouses) 6⁵

1. The passenger jeepney is an exclusive property of Alda because it was acquired by gratuitous title
during the marriage. The income of the jeepney is also an executive property of Alda.

Executive properties of the surviving spouse are not included as part of the gross estate.

2. The share in the time deposit and in the interest is an exclusive property of kulukotoy because they
are acquired during a former marriage in which there was a legitimate descendant in that marriage

Donation of community property by either spouse

Either spouse my dispose by will of his or interest in the community property (Art. 97,I'd.).

Neither spouse may donate any community property without the consent of the other. However, either
spouse my without the consent of the other, make moderate donations from the community property
for charity or an occasions of family rejoicing or family distress(Art 98,I'd.).

Illustration 5-3

After the death first liquidate the community property, either judicially extra judicially, with one year
from such death

If he fails to so any disposition or encumbrance involving the community property of the terminated
marriage shall be void.

The term liquidation means the determination and settlement of liabilities, and includes the
appointment of the community property to who may have entitlement there over.

Conjugal partnership of gains

The regime of conjugal partnership shall apply only to spouse (1) whose married took place
before the effectivity of the family code and the spouses did not execute a marriage settlement or, if
they did, they adopted the conjugal
TRANSFER & BUSINESS TAXES- Ampongan 66

Partnership of gains; and (2) those whose married were celebrated under the family code whereby the
spouses agree to the conjugal partnership.

All property acquired during the marriage, whatever the acquisition appears to have been made,
contracted or registered in the name of one or both spouses, is presumed to be conjugal unless the
contrary is proved (Art. 166,New Family Code.).

Under the conjugal partnership of gains, the spouses retain the ownership, possession, administration
and enjoyment of their exclusive property (Art,110,ibid.).

The following are conjugal partnership properties

1 Those acquired by onerous title during the marriage at the expense of the common fund, whether the
acquisition be for the partnership, or for only one of the spouses;

2Those obtained from the labor, industry, work or profession of either or both of the spouses;

3 The fruit, natural or industrial, or civil , due or received during the marriage from the common
property, as well as the net fruit from exclusive property of each;

4 The share of either spouse in the hidden treasures which the low awards to the finder or owner of the
property where the treasure found;

5 Those acquired thought accusation such as fishing or hunting;

6 Livestock existing upon dissolution one the partnership in excess of the number of each kind brought
to the marriage by either spouse; and

7 Those which are acquired by chance, such as winnings from gambling or betting. However, losses
therefrom shall be bome exclusive by the loser-spouse (Art.117,I'd. ).

The following properties are excluded From the conjugal partnership of gains because they shall be the
exclusive property of each spouse:

1 That which is brought to the marriage as his own;

2 That which each acquires during the marriage by gratuitous title;

3 That which is acquired by right of redemption, by barber or by exchange with property belonging to
only one of the spouses; and

4 That which is purchased with exclusive money of the wife or of the husband (Art.109,id.).
5 ESTATE TAXATION (Property Relations Between Spouses) 67

Illustration 5-4

Conception, married to Domingo Jugaled died leaving the following properties:

Car purchased 3 year before marriage P250,000

House and lot acquired during marriage from conjugal funds. 800,000

Savings deposit with Banco de Oro, obtained through labor and industry of Domingo. 90,000

Fishpond in pangasinan, acquired thought the income from Conception 's Former Goto House.
200,000

Lotto winnings by Domingo 5,000,000

Yamaha wonderbike purchased by conception out of her exclusive property. 50,000

Riceland, brought in to the marriage by Domingo 200,000

Shares of stock inherited by conception from her mother who died two weeks ago. 63.000

REQUIRED: Compute the gross estate of Conception.

Conjugal properties:

House and lot. P 800,000

Saving deposit. 90,000

Fishpond in pangasinan. 200,000

Winnings in lotto. 5,000,000. P 6,090,00

Exclusive property:

Car 250,000

Yamaha wonder bike. 50,000

Shares of stock. 63,000 363,000

Gross estate. 6.453,000

TRANSFER & BUSINESSES TAXES -Ampogan 68

Under conjugal partnership of gains properties brought into the marriage by one spouses shall be
considered as an exclusive property of that spouse. Since Domingo brouth the riceland into the
marriage. It is classified as his exclusive property

Property brought on installments paid partly from exclusive funds and party from conjugal found

Property brought on installments paid partly from exclusive founds of either or both spouses and party
from conjugal funds belong to the to the buyer or buyurs if full ownership was wasted before the
marriage the to the conjugal partnership if such ownership was wasted during the marriage. in
either,case,any amount advanced by the partnership or by either or both spouses shall be reimbursed
by the owner or owners upon liqulation of the partnership.

Illustration 5-5

Tanny brought a slightly used Isuzu Sportivo Car P900,00 payable in 24 months. Letter on, he marriage
ferry At that time , he had already paid P700,000 For the car during the marriage, the monthly
amortizations were paid out of the conjugal funds of the spouses. Two years after the marriage. Tanny
died. Of the value of the car at the time of his death was P750,000, how much should be included as( a)
conjugal property, and (b) exclusive property in the gross estate of Tanny if full ownership over the
property was vested

1 Before the marriage

2 During the marriage

1 Full ownership was vested before the marriage:

Conjugal property in the gross estate 200,000

Exclusive property in the gross estate. 750,000

Upon liquidation of the conjugal property, the exclusive property of Tanny shall reimburse the conjugal
funds of the spouses by P200,000 representing the amortizations pain on the car during the
marriage.Thuse ,in computing the net taxable estate a deduction of P200,000 from the exclusive
property shall be made representing on item of deduction as "Claims against the estate"
5- ESTATE TAXATION (Property Relations Between Spouses)69

2 Full ownership was vested during marriage:

Conjugal property in the gross estate

Exclusive property in the gross estate

Upon liquidation of the conjugal property, the exclusive property of Tanny shall be reimbursed by the
conjugal funds of the spouses by P700,000 representing the amortizations paid by Tanny on the car prior
to the marriage. This, in computing the net taxable estate a conjugal deduction of P700 ,000 shall be
made representing an item of deduction as "Claims against the estate,"

Ownership of credit payable within a period of time

Whenever an amount or credit payable within a period of time belongs to one of the spouses, the sums
which may be collected during the marriage in partial payments or by installments on the principal shall
be the exclusive property of the source, However, interests falling due during the marriage on the
principal shall belong to the conjugal partnership.

Illustration 5-6

On March 31, 2010 Sonny extended credit to Lanie in the amount of P500,000 payable in two (2) years
at an annual interest of 12%. On January 1, 2011 he married Remy. The properties of the spouses were
governed by the conjugal partnership of gains.On April1, 2012 Sonny died.

How much shall be the exclusive property in the gross estate of Sonny ? How about the conjugal
property?

The exclusive and conjugal properties shall consist of the following:

Exclusive properties:

Principal amount P 500,000

Interest (500,000× 12%× 9/12) 45,000

Total 545,000

Conjugal property:

Interest (500,000 × 12% × 15/12) 75,000

TRANSFER & BUSINESS TAXES- Ampongan

Ownership of improvement, whether for untility or adornment , made on the separate property of the
spouses at the expense of the partnership or through the acts or efforts of either or both spouses shall
pertain to the conjugal partnership, or to the original owner-spouse ,subject to the following rukes:

When the cost of the improvement made by the conjugal partnership and any resulting increase in value
are more than the value of the property at the time of the improvement, the entire property of one of
the spouses shall belong to the conjugal partnership, subject to the reimbursement of the value of the
property of the owner-spouse at the time of the improvement; otherwise,said property shall be retained
in ownership by the owner-spouse,likewise subject to reimbursement of the costs of the improvement.

In either case, the ownership of the entire property shall vested upon the reimbursement,which shall be
made at the time of the liquidation of the conjugal partnership.

Ilustration 5-7

Bannie and Clyde, husband and wife , contructed a building out of the conjugal funds on a lot which is
exclusively owned by Clyde. The building had a cost P1.5 million,while the market value of the lot at the
time of the improvement was P 2 million

If at the time of Clyde's death, the lot and the building had a value of P3 million and P 1.2 million,
respectively:

Q1:How shall the ownership of f the lot and/or the building be classified ?

Although the lot is higher in value than the building at the time of the improvement,each of them shall
have a Different classification. This, the lot shall be classified as exclusively property of Clyde, while the
building shall be a conjugal property of the spouses.

This is because the ownership of both properties shall be vested only upon the reimbursement of the
cost of construction of the building which shall be made at the time of the liquidation of the conjugal
partnership

Q2: How shall properties be presented in the gross estate of Clyde?