COMPLEX TRANSFERS

Transfer for less than adequate and full consideration

Assume a property with a fair value of P50,000 and tax basis of P10,000 is sold for merely
P30,000.

Fair value 50,000.00

Less: Indirect donation (50,000-30,000) 20,000.00 subject to

transfer tax

Consideration or selling price 30,000.00

Less: Cost or basis 10,000.00

Realized gain 20,000.00 subject to income tax

The transfer element is generally considered as an inter-vivos donation, but it is a donation

mortis-causa

if:

A. The sale is made in contemplation of the death of the seller, or

B. If the title to the property is agreed to be transferred upon the death of the seller.

RATIONALE OF TRANSFER TAXATION

1. Tax evasion or minimization theory -

Exchanges may be intentionally priced to evade or minimize income taxes. The indirect
donation

in an exchange is actually a lost gain which will evade taxation. To plug this tax loophole, the
government

subjects the gratuity to tax. However, it is not taxed in the absence of donative intent on the
part of the

seller of such as when the sale is made in the normal course of business.
 2. Tax Recoupment theory

Even without a deliberate intent to evade income tax, transfers have natural effect of
decreasing

future income tax collections of the government.

Illustration:

Alison has P10,000,000 properties which earn 10% or P1,000,000 yearly income. Desiring to
make his

5 children become financially indpendent, he divided his entire properties to them. Each child
received

P2,000,000 properties. Each child earns roughly P200,000 on the donated properties.

3. Benefit received theory

Each person has the right to transfer properties to another person either by reason of
liberality

or by death and for each mode of transfer benefit is derived by the transferor. Such transfer
therefore is

subject to tax.

4. State Partnership Theory

The state ensures a civilized and orderly society where commercial undertaking and
wealth

accumulation flourish. The government therefore is an indirect partner behind all forms of
wealth

accumulation by any person within the rate. Thus, when a person transfers part or the whole of
his wealth,

the government should take its fair share by taxing the transfer of the wealth to other persons.
 5. Wealth Redistribution Theory

Equitable distribution of wealth is widely accepted as an element of social progress and

stability. Societies with high inequities in wealth distribution are normally associated with high
social

unrest, lawlessness, insurgencies, wars, and chaos.

Thus, governments strive toward equitable wealth distribution as a basic policy.

Taxation is a

common tool in redistributiong wealth to society. When one transfers his wealth, the transfer
should be

taxed so that part of the wealth will be redistributed to benefit society.

6. Ability of Pay Theory

No one could gratuitously give what he could not afford. The ability to transfer property
is an

indication of an ability to pay tax. Hence, the transfer is subject to tax.

COMPARISON OF THE TWO TYPES OF TRANSFER TAX

DONOR'S TAX ESTATE TAX

Subject transfer Inter-vivos Mortis Causa

Nature Annual Tax One-time tax

Taxpayer Donor Decedent

Who actually pay the tax Donor Executor, administrator or heirs

in behalf of the decedent