PART Ill

1RANSFER TAXES
CHAPTER XIII
ESTATE TAX

Transfer Taxes
"Transfer taxes" are taxes imposed upon the gratuitous
disposition of private property. Under the Tax Code, transfer taxes
refer to:
1. Estate tax (donation mortis causa) - Tax levied on
the transmission of properties from a decedent to his r
heirs. Estate tax is the tax on the privilege to transmit
property at death and on certain transfers which are
made the equivalent of testamentary dispositions by
the statute. ·
2. Donor's tax (donation inter vivas)- . , Tax levied on the
transmission of properties from a living person (donor) to
another living -p erson (donee). ·

Distinctions between Donation inter vivos and Donation

mortis causa
1. A donation mortis causa is made -in consideration of
death without the donor's intention to lose the thing
'
conveyed or its free disposal in case of survival, while a
donation inter vivos is made without such consideration
but out of the donor's generosity (Balaqui v. Dongso,
53 Phil. 673 /1929]) , although the subject matter is
not delivered at once, or the delivery is to be made post
mortem, which is a simple matter of form and does not
change the nature of the act.
2. A transfer mortis causa, being testamentary in nature,
should be embodied in a last will and testament

423
r
424 R EVIEWER ON TAXATION

(Art. 728, Civil Code). It is not a contr~ct; ~tis~ legac_y. If

not embodied in a valid will, the donation 1s void (Puig v.
Pena{lorida, 16 SCRA 136 [19661).
3. The transfer conveys no title or ownership to the transferee
before the death of the transferor, or the transferor retains
the ownership, full or naked, of the property conveyed; it
is the donor's death that determines the acquisition of, or
the right to the property. In donation inter viuos, its effect
is produced while the donor is still alive.
4. The transfer is revocable before the transferor's death
and revocability may be provided indirectly by means of
the reserved power in the donor to dispose of the property
conveyed.
5. The transfer would be void if the transferor survived the
transferee, in the case of donation mortis causa.
6. Donations, being in the form of a will, are never accepted
by the donees during the donor's lifetime. Acceptance is a
requirement for donations inter vivos. Where the donation
took effect immediately upon the donee's acceptance
thereof and it was subject to a resolutory condition that
the donation would be revoked if the donee did not fulfill
certain conditions, the donation is inter vivos (Bonsato v.
Court of Appeals, 95 Phil. 481 [1954]).

Bar Question (1994) ~411 ,...,.ilu, ~t,.JL ~

lrOV'fo.A'\' M., dd,
'ji . (f ~ l J ~ O - ~ ~~ I ~,11,U
,. (1) What is the princiifle of mbbilta sequuntur p ersona-In? .. \..u. j-;'1-''
(2) Are donations inter vivos and donations mortis causa
..
,.::..
subject to estate taxes?

Suggested answer:
(1) Principle of mobilia sequuntur personam refers to the
principle that taxation of intangible personal property
generally follows the residence or domicile of the owner
)
thereof.
(2) Donations inter vivos are subject to donor's gift tax (Sec.
91/a], Tax Code) while donations mortis causa are subject
to estate tax (Sec. 77, Tax Code). However, donations inter
vivos constituted lifetime like transfers in contemplation
 TRANSFER TAXES 425
Estate Tax

of death or revocable transfers (Sec. 78[b} and [c}, Tax

Code) may be taxed for estate tax purposes, the theory
being that the transferor's control thereon extends up to
the time of his death.

Estate Tax
Nature and Object of Estate Tax
Estate tax is laid neither on the property nor on the transferor
or the transferee. It is an ~cise tax or privilege tax and its object is
to tax the shifting of economic benefits and enjoyment of property
from the dead to the living (Gregg v. Commissioner, 315 Mass.
704).
Taxation of the transmission of the decedent's estate and
donations made by persons, natural or juridical, whether citizens
or aliens, residents or non-residents shall be governed by these
regulations1 promulgated to implement the provisions of R.A. 8424.
For purposes of these regulations, the provisions of the Family
Code of the Philippines (E.O. 209) which took effect on August 3,
1988 shall govern the property relations between husband and
wife whose marriage was celebrated on or after such date. For
marriages celebrated prior to the effectivity of the Family Code
of the Philippines, the Civil Code of the Philippines shall govern
the property relations between husband and wife in r elation to the
pertinent provisions of the Family Code.

Rates of Estate Tax

i de The estate tax

accrues as of the death of the decedent and the accrual of the tax is
distinct from the obligation to pay the same. Upon the death of the
decedent, succession takes place and the right of the State to tax the
Privilege to transmit the estate vests instantly upon the death (Sec.
3, Rev. Regs. No. 12-2018, January 25, 2018).
The transfer of the net estate of every decedent, whether
resident or non-resident of the Philippines, as determined in
accordance with the Code, shall be subject to the estate tax. The

1
Rev. Regs. No. 12-2018, January 26, 2018, amending Rev. Regs. No. 02-03 and
Rev. Regs. No. 17-93.
 426 REVIEWER ON TAXATION ·

entire value of the net estate is divided into brackets and each rate
is imposed on the corresponding bracket. Below is a table showing
the tax on each bracket and the cumulative total tax for the entire
net estate, pursuant to the rates provided in the Code.
The net estate of every decedent, whether resident or non-
resident of the Philippines, as determined in accordance with the
NIRC, shall be subject to an estate tax at the rate of six percent
(Sec. 84, NIRC, as amended by R.A. 10963 [TRAIN], effective
January 1, 2018). Under R.A. 8424, effective January 1, 1998 to
December 31, 2017, the rates of Estate Tax are as follows:
If the Net Estate is

Over But not The tax Plus Of the

over shall be excess
over
P200,000 Exempt - -

P200,000 500,000 0 5% 200,000

500,000 2,000,000 P15,000 8% 500,000
2,000,000 5,000,000 135,000 11% 2,000,000

....
;
.,,,
5,000,000
10,000,000
10,000,000
and over
465,000
1,215,000
15%
20%
5,000,000
10,000,000

Justification of Estate Tax

1. Benefit-received theory. - (See discussions on ''benefit-
received theory''. in income taxation)';
2. Privilege theory or State-. · partnership theory. -
Succession to the property of a deceased person is not
a fundamental right and consequently, the legislature
can constitutionally burden such succession with a tax
.(Stebbins v. Rilly, 268 US 137);
3. Ability to pay theory. - Those who have more properties
to transfer to their heirs upon death shall pay more estate
,. taxes. Another name or concept similar to the ability to
pay theory is the redistribution of wealth theory. The taxes
paid by rich people are programmed for disbursement by
Congress more for the benefit of the poor in terms of social
services, education, health, etc.
 TRANSFER T AXES
427
Estate Tax

The term "decedent" refers to a deceased person who is

the source of the hereditary property or estate which is to be
distributed. He is called "testator" or "testatrix," if he/she left a will,
and "intestate," if he/she left no will.
"Inheritance" refers to the mass of property, rights, and
obligations of a person existing at the time of his death and which
are not extinguished by his death (Art. 776, NCC), including those
which have accrued from that time (Art. 781., NCC). Rights which
are extinguished by death because they are intransmissible by
their nature and purpose (e.g., right. of usufruct, right of personal
easement, or right to life annuity), not by contractual stipulation,
are also called purely personal rights because are inseparable from
their holder or owner. They are not included in the inheritance.
For purposes of computing the estate tax, only property and rights
existing at the time of death shall be included in the gross estate of
the decedent.

Reasons for Taxability of Transfers of Property

The dominant purpose of the law is to reach such transfers
which are really substitutes for testamentary dispositions and thus I
prevent thfe evasion of:he eshtate tax (U.S. v. ~ells,b283 U.S. 102). :,.-
1n most o these trans1ers, t e property remains su stantially that
of the transferor during his lifetime notwithstanding the transfer as
he still retains either the beneficial ownership or naked title to the
property. Hence, the transfer is essentially similar in respect to a
transmission by testacy or intestacy upon the death of the decedent.
The transfer by inter vivos must be absolute and outright with no
strings attached whatsoever by the donor. A transfer of property by
trust or donation is no·t consummate tiritil put beyond recall (Burnet
v. Guggehein, 288 U.S. 280) . ...

Death Is the Generating Source of Power

Estate tax laws rest in their essence upon the 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 (Lorenzo v. Posadas, 64 Phil. 353
[19371). No manual transfer of the property to the heirs is required,
but the source and direction of the property are under the control of
the probate court and the transfer is not effected until its recipients
are determined and title is lodged in them (85 CJS 990).
 428 REVIEWER ON TAXATION

Law and Market Value at the Time of Death Is Applied

The law in force at the time of death of the decedent governs.
The taxpayer cannot foresee and ough t not to be required to guess the
outcome of pending measures. The tax may be made retroactive in
its operation, but legislative intent that a tax statute should operate
retroactively should be perfectly clear (Lorenzo v. Posadas, ibid.).
The fair mar ket value at the time of death of properties left
by the decedent·to his/her h eirs sh all be used in det ermining the
amount of his grQss estate (Sec. 85, NIR C).

Residence
''Residence" refers to the permanent home, th e place to which
whenever absent, for busine~s or plea sure, one intends to return,
and depends on facts and circumstances, in the sense that disclose
'intent (Corre v. Tan Corre, 100 Phil. 321 [19561). It is, therefore,
not necessarily the actual place of residence. Thus, a citizen who
went abroad for operation in a prestigious hospital and stayed there
_for one month but unfortunately died therein is still a resident of the
Philippines for estate tax purposes.

Gross Estate
All properties and interests in properties of the decedent at
the time of his death shall be included .in his gross estate. Where
the decedent had, before his death, relinquished his interest in
.property, he could not be deemed to have transmitted any interest
in such property at his death (Crooks v. Hasselson, 282 U.S. 55).
The value of the gross estate of the decedent shall be determined
by including the value at the time of death of all property, real or
personal, tangible or intangible, wherever situated (Sec. 85, NIR C).
The properties includible in t he gross estate of the decedent
would depend on whether or not the decedent is a citizen or alien
and whether or not the alien decedent is a resident of t he Philippines
at the time of his death . Thus,
1. Citizen and resident alien dece dent:
(a) Real property wher ever situated·
'
(b) Tangible personal property wher ever situated;
(c) Intangible personal property wherever situated.
 TRANSFER T AXES 429
Estate Tax

2. Non-resident alien decedent: ~U

(a) Real property situated in the Philippines;

(b) Tangible personal property situated 1n the
Philippines;
(c) Intangible personal property with a situs in the
P,hilippi@s, unless exempted on the basis of
reciprocity (Sec. 104, NIRC).
The estate of a deceased person is a juridical entity that has
a personality of its own. Judgment in a case binds only the parties
therein and not the estate of a deceased person which might have
been represented at one time by one of the parties (Nazareno v.
Court of Appeals, 343 SCRA 637 [2000]).

Bar Question (2016)

Jennifer is the only daughter of Janina who was a resident
in Los Angeles, California, U.S.A. Janina died in the U.S. leaving r
to Jennifer one million shares of Sun Life (Philippines), Inc., a
corporation organized and existing under the laws of the Republic
of the Philippines. Said shares were held in trust for Janina by the
Corporate Secretary of Sun Life and the latter can vote the shares
and receive dividends for Janina. The Internal Revenue Service I
(IRS) of the U.S. taxed the shares on the ground that Janina was
domiciled in the U.S. at the time of her death.
(a) Can the CIR of the Philippines also tax the same shares?
Explain.
Suggested answer:
(a) ~~ The property being a property located in the
'i.iiJzippines, it is subject to the Philippine estate tax
irrespective of the citizenship or residence of the decedent
(Sec. 85, NIRC). However, if Janina is a non-resident
alien at the time of her death, the transmission of the
shares of stock can only be taxed applying the principle of 'i,
1
reciprocity (Sec. 104, NIRC). :'

Bar Question (2014)

Mr. X, a Filipino residing in Alabama, U.S.A., died on January
2,_2013 after undergoing a major heart surgery. He left behind to his
wife and two (2) kids several properties, to wit: ' ,;,,'
(1) Family home in Makati City;
 430 R EVIEWER ON TAXATION

(2) Condomin.ium unit in Las Pin.as City;

(3) Proceeds of health insurance from Take Care, a health
maintenance organization in the Philippines; and
(4) Land in Alabama, U.S.A.
The following expenses were paid:
(1) Funeral expenses;
(2) Medical expenses; and
(3) Judicial expense in the testat e proceedings.
(A) What are the items that mus t be considered as part of the
gross estate income of Mr. X?

Suggested answer:
(A) All the items ofproperties enumerated in the problem shall
form part of the gross estate of Mr. X. The composition of
the gross estate of a decedent who is a Filipino citizen shall
include all of his properties, real or personal, tangible or
intangible, wherever situated (Sec. 85, NIRC).

[NOTE: It is suggested that if the examinee answered NONE,

r---...... the same should be given full credit because there is no gross estate
INCOME, in the problem. Likewise, it is suggested that any answer
l should be given full credit because the question is worded in a
confusing manner].

Settlement of Estate
The estate left by a decedent may be settled and distributed:
a. By extrajudicial settlement among the heirs where there
are no debts or claims against the estate (Sec. 1, Rule 74,
Rules of Court).
b. By ordinary judicial action for partition, when the heirs
cannot come to a n extrajudicial settlement (ibid.); and
c. By judicial settlem ent, which may be summary, in which
,, case no administrator is appointed to r epresent the estate,
,..
or regular , in which case an administrator is appointed
(Sec. 2, Rules of Court; Villocino v. Doyon, 65 SCRA
460 I19751).
The "executor" is the person appointed by the testator ~n
his will to carry out its provisions. Upon the probate of the WJll
 TRANSFER TAXES 431
'
Estate Tax

(Art. 838, NCC), the probate court appoints him, unless he is unfit
to discharge the trust as such (Sec. 4, Rule 80, Rules of Court).
The "administrator" is the person appointed by the probate court
to administer the estate of a person who dies intestate or testate
without having appointed an executor; or where the person is unfit
or refuses to act as such; or where the will was void and not allowed
to probate (Art. 881, NCC).

Partition and Distribution of Estate

Partition is the separation, division, and assignment of a thing
held in common among those to whom it may belong. The thing itself
may be divided, or its value (Art. 1079, NCC). The idea of partition
involves not only the setting apart and division of a thing owned
in common but also the assignment or allotment of the respective
shares or parts of the heirs, so that they may enjoy and possess the
same separately and exclusively. It is the purpose of partition to
put an end to co-ownership. It seeks a severance of the individual
interest of each heir, vesting in each a full ownership in specific
property and giving to each one the right to enjoy his estate without
supervision or interference from the others (Confessor v. Pelayo, 1
SCRA 817 [19611). Partition of the estate may be:
1. Judicial - when it is made by the court in an ordinary
action for partition or in the course of administration
proceedings (Rules 69-90, Rules of Court); or
2. Extrajudicial-when it is made by the decedent himself
by an act inter vivos or by will (Art. 1080, NCC), or by a
third person entrusted by the decedent (Art. 1081, NCC),
or by the heirs themselves who are all of age and there are
no debts (Sec. 1, R ule 74, R ules of Court).
Where there are two or more heirs, the whole estate of the
decedent is, before its partition, owned in common by such heirs,
subject to the payment of debts of the deceased (Art. 1078, NCC).
From the moment of death of the decedent, the heir, if there is only
one, becomes the sole owner of the estate (Art. 777, NCC). There
is no need for judicial declaration of his heirship. An affidavit of
extrajudicial declaration suffices to settle the entire of the decedent
(Sec. 7, Rule 74, Rules of Court; Cabuyao v. Caagbay, 95 Phil.
614 [1954]) . Pending actual partition, the co-heirs succeeding to the
estate are co-owners thereof (Art. 484, NCC), with respect to the
Part or portion which might be adjudicated to each of them, subject
to the payment of debts of the deceased. Until a partition is made,
432 R EVIEWER ON TAXATION

the respective share of each heir cann~t _be determi~ed and every
heir exercises, together with the others, Joint o~nersh1p over the J!ro
indiviso property, in addition to his use an_d ~nJoyme?t thereof w1~h
no other limitation than that he shall not 1n3ure the interests of his
co-heirs or co-owners.

Bar Question (2008)

Jose Cerna, Filipino citizen, married to Maria Cerna, died in
a vehicular accident in NLEX on July 10, 2007. The spouses owned,
among others a 100-hectare agricultural land in Sta. Rosa, Laguna
with current fair market value of P20 million, which was subject
matter of a Joint Venture Agreement about to be implemented with
Star Land Corporation (SLC), a well-known real estate development
company. He bought the said real property for P2 million 50 years
ago. On January 5, 2008, the administrator of the estate and
SLC jointly announced their big plans to start conversion and
development of the agricultural lands in Sta. Rosa, Laguna into
first-class residential and commercial centers. As a result, the prices
of real properties in the locality have doubled. The administrator of
the Estate of Jose Cernan filed the estate tax return on January 9,
2008, by including in the gross estate the real property at P2 million.
After nine months, the BIR issued deficiency estate tax assessment,
by valuing the real property at P40 million. (a) Is the BIR correct in
valuing the real property at P40 million? (b) If you disagree, what is
the correct value to be used for estate tax purposes?

Suggested answers:
a. No, the BIR is wrong in valuing the real property at P40
million. The P40 million represents the value of the real
property in 2008, after the announcement by the joint
venture partners that development plans would be pursued
in the area. The value of the gross estate of the decedent
shall be determined by including the value at the time Qf
death in 2007 of all property, real or personal, tangible or
intangible, wherever situated (Sec. 85, NIRC).
b. Since the fair market value of the real property at the
time of death of Mr. Jose Cerna in 2007 was P20 million,
this market value should be the one used for purposes of
determining the gross estate. Whatever is the value of the
property after his death - whether it increases or decreases
- is of no moment for estate tax purposes.
r~;~:..}~.- -
TRANSFER TAXES 433
: '•'~ :- I Estate Tax .,
~- 'f _ • ,

''
:.·!~<;~ 'c
n \

! ' . ~- ,--
;.,: '
Decedent's Gross Estate '!' ~
,t·
.,,.. 1. Decedent's interest; ··.·
{
._, <f

2. Transfers in contemplation of death;

~ + ._'. ,.,.'

3. Revocable transfers;
' . 4. Property passing under general power of appointment;
'
..;_,,•_
•··,.,.:
. ·-,'- ;
5. Proceeds of life insurance;
6. Prior inter ests;
7. Transfers for insufficient consideration;
8. Capital of the surviving spouse (Sec. 85, NIRC).

Kinds of Property Embraced Under Decedent's Interest:

1. Property owned. - The decedent possesses all the
attributes of ownership.
.~~·. ' '' 2. Interest in property possessed. - The law contemplates
any interest or right in the nature of property, but
,· ~ .......:·-
less than title having value or capable of being valued,
•··· ·......, ·_v.
transferred by the decedent at his death. If the decedent
owns only a proportionate share in property, only the
value of such share has to be included in the gross estate.
If he is entitled only to the use of the property, it is the
,, •,t
value of that use that has to be included.
Examples:

. ·,
y." Dividends declared by a corporation before death of
the stockholder although paid after death;
~ Partnership profits even if paid after death of the
partner;
7 Proceeds of a life insurance policy payable to a
designated ~ ene.ficiary;
Ji.-" Right of usufruct.
3. Property or interest transferred.

Exclusions from Decedent's Gross Estate

1. Amount received by Heirs under R.A. 4917 - any amount
r eceived by the heirs from the decedent's employer
as a consequence of the death of a decedent-employee
 434 R KVIEW&R ON TAXATION

in accordance with a reasonable private benefit plan

maintained by the employer; provided, su ch amount is
included in the gross estate (Sec. 86[A)[7], NIRC);
2. Share of surviving spou se in the conjugal property (Sec.
86/CJ. NIRC);
3. Amount received by Heirs under Special Laws:
a. Proceeds of life insurance and benefits received by
members of the GSIS; 2
b. Benefits received by members of the SSS by reason
of death;3
c. A.mounts received from the Philippine and United
States governments for damages suffered during the
last war; 4
d. Benefits received by beneficiaries residing in the
Philippines under laws administered by the U.S.
Veterans Administration;5
e. Grants and donations to the Intramuros Adminis-
,.,.. -
tration ·6
'
f. Personal Equity and Retirement Account (PERA)
assets of the decedent-contributor. 7

Exempt Acquisitions and Transfers from Estate Tax

1. Merger of usufruct in the owner of the naked title (Sec.
87/AJ, NIRC).
2. Transmission or delivery of the inheritance or legacy
by the fiduciary heir or legatee to the fideicommissa.ry
(Sec. 87/BJ, NIRC).
3. Transmission from the first heir, legatee or donee in favor
of another beneficiary, in accordance with the desire of
the predecessor (Sec. 87[CJ, NIRC).

3
Sec. 39, P .D. No. 1146, as amended by R.A. 8291.
3
Sec. 16, R.A 1161, as amended by R.A. 8282.
•R.A. 227.
5R.A. 360.

6P .D . 1616.
7 Sec. 14, R.A. 9605.
 TRANSFER TAXBS 435
Estate Tax

4. Bequests, legacies or donations mortis causa to social

welfare, cultural, or charitable organizations,8 no part
of the net income of which inures to the benefit of any
individual, provided that not more t han 30% of said
bequests, devises, legacies, or transfers sh all be used for
administration purposes; but bequests to religious and
educational institutions are not exempt (BIR Ruling 75-
001, January 15, 1975) (Sec. 87[DJ, NIRC).

Bar Question (2005)

Ralph Donald, an American citizen, was a top executive of a
U.S. company in the Philippines until he retired in 1999. 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
j
the spring of 2004, while vacationing in Orlando, Florida, USA, he ·,
suffered a heart attack and died. At the time of his death , he left the
following properties: (a) bank deposits with Citibank Makati and
Citibank Orlando, Florida; (b) a rest house in Orlando, Florida; (c)
a condominium unit in Makati; (d) shares of stock in the Philippine
subsidiary of the U.S. Company where he worked; (e) shares of stock
in San Miguel Corp. and PLDT; (f) shares of stock in Disney World
l
in Florida; (g) U.S. treasury bonds; and (h) proceeds from a life
insurance policy issued by a U.S. corporation:
..,
Which of the foregoing assets shall be included in the taxable
gross estate in the Philippines? Explain.

Suggested answer:
Being a resident of the Philippines at the time of his death, the
gross estate of Ralph Donald shall include all his property, real or
personal, tangible or intangible, wherever situated at the time of his
death (Sec. 85, NIRC). Thus, the following shall be included in his
taxable gross estate in the Philippines:
a. bank deposits with Citibank Makati and Citibank
Orlando, Florida
b. a rest house in Orlando, Florida
c. a condominium unit in Makati

8
P.D. 307.
436 REVIEWER ON TAXATION

d. shares of stock in the Philippine subsidiary of the U.S.

company
e. shares in San Miguel Corp. and PLDT
f. shares of stock in Disney world in Florida
g. U.S. treasury bonds
The proceeds from a life insurance policy issued by a U.S.
corporation is included as part of the gross estate of Ralph Donald,
if the designation of the beneficiary is revocable or irrespective
of the nature of the designation, if the designated beneficiary is
either the estate of the deceased, his executor or administrator.
If the designated beneficiary is other than the estate, executor , or
administrator and the designation is irrevocable, the proceeds shall
not form part of his gross estate (Sec. 85[EJ, NIRC).

Bar Question (1994)

Jose Ortiz owns 100 hectares of agricultural land planted
to coconut trees. He died on May 30, 1994. Prior to his death, the
government, by operation oflaw, acquired under the Comprehensive
Agrarian Reform Law all his agricultural lands except five hectares.
Upon the death of Ortiz, 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 h er?

Suggested answer:
The 100 hectares of land, which Jose Ortiz owned but which
prior to his death on May 30, 1994 were acquired by the government
under CARP, are no longer part of his taxable gross estate, with the
exception of the remaining five hectares which under Section 78(a) of
the Tax Code still rormB part of "decedent's interest.,,

Bar Question (1994)

Cliff Robertson, a.n American citizen, was a permanent resident
of the Philippines. He died in Miami, Florida. He left 10,000 shares
of Meralco, a condominium unit at the Twin Towers Building at
Pasig, Metro Manila and a house and lot in Los Angeles, California.
What assets shall be included in the Estate Tax Return to be
filed with the BIR?
 TRANSFER TAXES 437
Estate Tax

Suggested answer:
All of Mr. Robertson's assets, consisting of 10,000 shares in the
Meralco, a condominium unit in Pasig, and his house and lot in Los
Angeles. California, are taxable. The properties of a resident alien
decedent like Mr. Robertson are taxable wherever situated (Secs. 77,
78 and 98, NIRC).

Intangible personal property

As a general rule, the situs of an intangible personal property
is at the domicile or residence of the owner (51 Am. Jur. 494-
495). This is the known as the principle of "m obilia sequuntur
personam." The principle, however, is not controlling (a) when it is
inconsistent with express provisions of statute, or (b) when justice
does not demand that it should be, as when the property has in fact
a situs elsewhere (Collec tor v. Fis her, 1 SCRA 93 [19611). Bonds,
mortgages and certificates of stock are taxable at the place where
they are physically located (Burnet v. B rooks, 288 U.S. 378) .
Under the Tax Code, the following intangible personal
properties have situs in the Philippines:
1.
2.
Franchise which must be exercised in the Philippines;
Shares, obligations, or bonds issued by any corporation
j
or sociedad anonima organized or constituted in the
Philippines in accordance with its laws;
3. Shares, obligations, or bonds issued by any foreign
corporation 85% of the business of which is located in the
Philippines;
4. Shares, obligations, or bonds issued by any foreign corpo-
ration if such shares, obligations or bonds have acquired
a business situs (i.e., they are used in furtherance of its
business in the Philippines by th e foreign corporation) in
the Philippines;
5. Shares or rights in partnership, business or industry
established in the Philippines (Sec. 104, NIRC).

Reciprocal Exemption as to Intangible Personal Property

A decedent's intangible personal property may be subject
to transfer taxes both in his place of domicile or residence and in
the place where such property h as a situs or is located. In order
 REV[EWER ON TAXATION
438

to prevent multiplicity of taxation, the Tax Code provides that the

tax imposed by this Title shall be credited with the amounts of any
estate tax imposed by the authority of a foreign country, subject to
limitation (Sec. 86[EJ, NIRC). No tax shall be imposed in respect of
intangible personal property of a citizen and resident of a foreign
country (a) when the foreign country does not impose transfer tax of
any character in respect of intangible personal property of citizens of
the Philippines not residing in that foreign country, or (b) when the
foreign country imposes transfer taxes but grant s similar exemption
from transfer taxes in respect of intangible personal property owned
by citizens of the Philippines not residing in that foreign country
(Sec. 104, NIRC). The term "foreign country'' may refer to the
Federal Government or to the individual states of the United States
(CIR v. Norton, 103 Phil. 1558 [1964]).
Reciprocity in exemption does not Tequire the foreign country
to possess international personality in the traditional sense. Thus,
Tangier, Morocco (Collector v. Campos Rueda, 42 SCRA 23
[1971]) and California, a state in the American Union (Collector v.
De Lara, 102 Phil. 813 [19581), were held to be "foreign countries"
within the meaning of Section 108 of the Tax Code.

Transfer in Contemplation of Death

The term "in contemplation of death" does not refer to the
general expectation of death which all entertain. The words mean
that it is the thought of death, as a controlling motive, which induces
the disposition of the property for the purpose of avoiding the tax.
The decedent either has retained for his life or for any period which
does not in fact end before his death (a) the possession or enjoyment,
or the right to the income from the property, or (b) the right, either
alone or in conjunction with any person, to designate the person who
shall possess or enjoy the property or the income therefrom, except
in case of a bona fide sale for an adequate and full consideration
in money or money's worth (See Sec. 85[BJ, NIRC). The decedent's
motive or intention is a question of fact. Thus, the imminence of
death may afford convincing evidence of the impelling cause of the
transfer. However, it is contemplation of death and not necessarily
contemplation of imminent death to which the statute refers (U.S.
v. Wells, 283 U.S. 102).
This provision is not confined to disposition of property or
property rights made by last will and testament or to gifts mortis
causa, which are made in anticipation of impending death, are
 ,'
TRANSFER TAXES 439
Estate Tax

revocable and are defeated if the donor survives the apprehended

peril (Basket v. Hassel, 107 U.S. 602).

Circumstances taken into account include:

1. Age and state of health of the decedent at the time of gift,
especially where he was aware of a serious illness;
2. Length of time between the gift and the date of death
(Dison v. Posadas, 57 Phil. 465 [19321). A short
interval suggests the conclusion that the thought of death
was in the decedent's mind, and a long interval suggests
the opposite (Estate of Mary Aushman, 40 BTA 948);
3. Concurrent making of a will or making a will within a
short time after the transfer (De Roces v. Posadas, 58
Phil. 108 [1933)).
Motives associated with life that precludes the category of
transfer in contemplation of death are:
1. To relieve the donor from the burden of management;
'
2. To save income or property taxes;
3. To settle family litigated and unlitigated disputes;
I
4. To provide independent income for dependents;
5. To see the children enjoy the property while the donor is
alive;
6. To protect family from hazards of business operations;
and
7. To reward services rendered.

Bar Question (2013)

Mr. Agustin, 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 therefore form
Part of the gross estate for estate tax purposes. Is the BIR correct? ,,I•
, •,

Suggested answer:
No. The house and lot were not transferred in contemplation of
death; therefore, these properties should not form part of the decedent's
440 RIMEWER ON TAXATION

gross estate. To qualify as a transfer in contemplation of death, the

transfer must be either without consideration or for insufficient
consideration. Since the house and lot were sold for valuable and
sufficient consideration, there is no transfer in contemplation of
death for estate tax purposes (Sec. 85[BJ, NIRC).

Bar Question (2001)

A, aged 90 years and suffering from incurable cancer, on August
1, 2001 wrote a will and, on the same day, made several inter vivos
gifts to his children. Ten days later, he died. In your opinion, are
the inter vivos gifts considered transfers in contem.plation of death
for purposes of determining properties to be included in his gross
estate? Explain your answer.

Suggested answer:
Yes. 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 contemplatio·n of death (De Roces v. Posadas,
58 Phils. 108 /19331). Obviously, the intention of the donor in
making the inter vivos gifts is to avoid the imposition of the estate
tax and since the donees are likewise his forced heirs who are called
upon to inherit, it will create a presumption juris tantum that said
donations were made mortis causa; hence, the properties donated
shall be included as part of A's estate.

Revocable Transfers (Transfer with Retention or Reservation

of Certain Rights)
Revocable transfers cover transfers (except in case of bona fide
sale for an adequate and full consideration in money or money's
worth) 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 (in whatever capacity exercisable) by t he decedent alone
or 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 where any such
power is relinquished in contemplation of the decedent's death (Sec.
85/C], NIRC).
In a case where the deceased expressly and consistently
declared her conveyance to be one of donation mortis causa and
further forbade the registration of the deed until after her death,
the court said all these features concordantly indicated that the
 'rRANsFER TAXES 4-41
Estate Tax

conveyance was not intended to produce any definitive effects nor

to finally pass any interest to the grantee, except from and after
the death of the grantor. The power, as reserved in the deed, was a
power to destroy the donation at any time, and that it meant that
the transfer was not binding on the grantor until his death made it
impossible to channel the property elsewhere (Puig v. Penaflorida,
supra).

Transfer of Property Under General Power of Appointment

Any property passing under a general power of appointment
exercised by the decedent: (a) by will, or (b) by deed executed in
contemplation of, or intended to take effect in possession or enjoyment
at, or after his death, or (c) by deed under which he has retained
for his life or any period not ascertainable without reference to his
death or for any period which does not in fact end before his death
(i) the possession or enjoyment of, or the right to the income from,
the property, or (ii) the right, either alone or in conjunction with
any person, to designate the persons who shall possess or enjoy the
property or the income therefrom, except in case of a bona fide sale
for an adequate and full consideration in money or money's worth
(Sec. 85/D], NIRC).
A ''power of appointment" refers to a right to designate
the person or persons who shall enjoy or possess certain property
from the estate of a prior decedent. It is "generar' when it gives
to the donee the power to appoint any person he pleases, including
himself, his spouse, his estate, executor or administrator, and his
creditor, thus having as full dominion over the property as though
he owned it. It is "special" when the donee can appoint only among
a restricted or designated class of persons other than himself
(Morgan v. Commissioner, 309 U.S. 78).
The property passing under a general power of appointment
comes from the donor and the donee (decedent). The power to dispose
of property at death by the exercise of a power of appointment is
the equivalent of ownership. It is a potential source of wealth to
the appointee and the disposition of wealth effected by its exercise
or relinquishment at death is one form of the enjoyment of wealth
(Graves v. Schmidlapp, 36 U.S. 657).

Bar Question (2009)

In 1999, Xavier purchased from his frie~d,_ Yuri, a painting
for P500,000. The fair market value of the painting at the time of
442 R EVIEWER ON T AXATION

purchase was Pl million. Yuri paid all the corresponding taxes on

the transaction. In 2001, Xavier died. In his last will and testament,
Xavier bequeathed the painting, already worth Pl.5 million, to his
only son, Zandro. The will also granted Zandro the power to appoint
his wife, Wilma, as successor to the painting in the event of Zandro's
death. Zandro died in 2007, and Wilma succeeded to the property.
(a) Should the painting be included in the gross estate of Xavier in
2001 and thus, be subject to estate tax? (b) Should the painting be
included in the gross estate of Zandro in 2007 and thus, be subject
to estate tax? (c) May a vanishing deduction be allowed in either or
both of the estates?

Suggested answers:
a. The value of the gross . estate of the 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 (Sec. 85, NIRC). Accordingly, the fair
market value of the painting in 2001, which was owned by
Xavier at the time of his death, should be included in the
gross estate of Xavier and be subject to estate tax.
b. The value of the painting in 2007, which was bequeathed
by Xavier to Zandra by will in 2001 with power to appoint
his wife, Wilma, as successor to the painting, should not
be included in the gross estate of Zandro. Only property
passing under a general power of appointment is included
in the gross estate of the decedent.·ln this case, the painting
has to be transferred by Zandra to his wife, Wilma, based
on the will of his father, Xavier, and since the power of
appointment granted by Xavier to Zandro is specific (i.e.,
only to his wife), such property should not be included in
his gross estate in 2007.
C. No, vanishing deduction is not available to both Estates
of Xavier and Zandro because in the case of Xavier, he
acquired the painting by purchase, and in the case of
Zandro, the painting shall not be included in his gross
estate; hence, there would be no double taxation of the
same property, for estate tax purposes. Moreover, the two
deaths must occur within a period of five years. In this
case, the death of Zandra occurred in 2007, and more than
five years have, therefore, elapsed from the date of death
of Xavier in 2001.
 TRANSFER TAXES 443
Estate Tax

Proceeds of Life Insurance

Taxation of the proceeds of life insurance will depend on the
designated beneficiary, the manner of designation of such beneficiary
(whether irrevocable or revocable), and the period and source of the
funds used in paying the premiums on the insurance contract. Thus,
I. The proceeds of life insurance are taxable in the following
cases:
(a) Beneficiary is the estate of the deceased, his executor
or administrator, irrespective of whether or not the
insured retained the power of revocation;
(b) Beneficiary is other than the decedent's estate,
executor, or administrator, when designation of
beneficiary is not expressly made irrevocable or
the designation of the beneficiary is revocable
(Sec. 85[EJ, NIRC). Previously, under P .D. 1460
(Insurance Code of 1978), insurance proceeds are
presumed to be revocable; hence, includible in the
decedent's gross estate. However, notwithstanding
the revocable designation of the beneficiary by
•
the insured/owner of the policy, in the event the
insured/owner of the policy does not change the
beneficiary during his lifetime, the designation shall
now be deemed irrevocable (Sec. 11, R.A 10607
[Insurance Code], August 15, 2013).
2. The proceeds of life insurance are not taxable in the
following cases:
(a) Accident insurance proceeds. Tax Code specifically
mentions only life insurance policies;
(b) Proceeds of a group insurance policy taken out by a
company for its employees. The law speaks of policies
"taken out by the decedent upon his own life";
(c) Amount receivable by any beneficiary irrevocably
designated in the policy of insurance by the insured.
The transfer is absolute and the insured did not
retain any legal interest in the insurance (Sec. 85[EJ,
NIRC);
(d) Proceeds of insurance policies issued by the GSIS to
government officials and employees (P.D. 1146) are
exempt from all taxes;
 444 REVlEWER ON TAXATION

(e) Benefits accruing under the 888 law (R.A. 1161, as

amended);
(f) Proceeds of life insurance payable to heirs of
deceased member s of military personnel (R .A . 360).
3. To determine t he conjugal or separate character of
proceeds, the following factors are considered:
(a) Policy taken before marriage - source of funds
determines ownership of the proceeds of life
insurance;
(b) Policy taken during marriage
1. Beneficiary is estate of the insured - proceeds
are presumed conjugal; hence, one-half share
of surviving spouse is not taxable;
11. Beneficiary is third person - proceeds are
payable to the beneficiary even if premiums
were paid out of the conjugal partnership (Del
Val v. Del Val, 29 Phil. 534 [1915]).

Bar Question (2003)

In June 2000, X took out a life insurance policy on his own life in
the amount of P2,000,000. He designated his son, Z, as his beneficiary
with respect to Pl,000,000, reserving his right to substitute him for
another. X died in September 2003. Are the proceeds of life insurance
to form part of the gross estate of X? Explain.

Suggested answer:
Only the proceed of Pl,000,000 given to the son, Z, shall form
part of the gross estate of X. Under the Tax Code, proceeds of life
insurance shall form part of the gross estate of the decedent to the
extent of the amount receivable by the beneficiary designated in the
policy of insurance except when it is expressly stipulated that the
designation of the beneficiary is irrevocable. As stated in the problem,
,-· .~-
) only the designation of Y is irrevocable, and the decedent reserved the
right to substitute Z as beneficiary for another person. Accordingly,
the proceeds received by Y shall be excluded, while the proceeds
received by Z shall be included in the gross estate of X (Sec. 85/E},
NIRC).
 TRANSFER TAXES 445
Estate Tax

Exclusive Property
The following are the exclusive property of each spouse:
y. That which is brought to the marriage as his or her own;
y That which each acquires during the marriage by lucrative
title;
That which is acquired by right of redemption or by
exchange with other property belonging to only one of the
spouses; and
y That which is purchased with exclusive money of the wife
or of the husband (Sec. 148, Civil Code).
The sums collected by installments during the marriage from
credit payable in a certain number of years are considered property
of the spouse to whom the credit belongs (Art. 156, NIRC). The
right to an annuity, whether perpetual or for life, and the right of
usufruct, belonging to one of the spouses, form part of his or her
separate property, but the fruits, pensions and interests, due during
the marriage belong to the partnership (Art. 157, NIRC).
All other property belongs to the conjugal partnership.
The fair market values of exclusive properties of the decedent
are included in full to his gross estate and no deduction for share of
the surviving spouse shall be considered th erefrom. Indeed, share of
the surviving spouse shall be computed and taken only against the
fair market values of conjugal properties or absolute community of
properties.

Bar Question (1999)

A died, survived by his wife and three children. The estate tax
was properly paid and the estate settled and divided and distributed
among the four heirs. Later, the 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 three children are residing
abroad, the BIR sought to collect the full tax deficiency only against
the widow. Is the BIR correct?

Suggested answer:
Yes. The BIR is correct. In a case where the estate has been
distributed to the heirs, the collection remedies available to the BIR
 446 REVIEWER ON T AXATlON

in collecting tax liabilities of an estate may either (1) sue all the heirs
and collect from each of them the amount of tax proportionate to the,
inheritance received or (2) by virtue of the lien created under Section
219, sue only one heir and subject the p rop erty he received from the
estate to the payment of the estate tax. The BIR, therefore, is correct
in p ursuing the second remedy although this will give rise to the
right of the heir who pays to seek reimbursement from the other heirs
(CIR v. P ineda, 21 SCRA 105 [19671) . In no case, however, can the
BIR enforce the tax liability in excess of the share of the widow in the
inheritance.

Deductions9
Th e deductions from the gross estate of the decedent would
depend on whether or not the decedent is a citizen or alien and
whether or not the alien decedent is a resident of the Philippines at
the time of his dea th . Under R.A. 10963 (TRAIN), effective January
1, 2018, the folJowing are the deductions from gross estate:
1. Citizen and resident alien decedent:
(a) Standard deduction - P5,000,000 without need of
substantiation;
(b) Claims against the estate - debts or demands of a
pecuniary nature, arising out of a contract, tort, or
by operation of law, which could have been enforced
against the deceased in his lifetime and could have
been reduced to simple money judgments;
(c) Claims of the deceased against insolvent persons10
where the value of the interest therein is included in
the value of the gross estate;
(d) Unpaid mortgages, taxes, and casualty losses;
(e) Properties previously taxed;
(f) Transfers for public use;
(g) Family Home - the current fair market value of the
decedent's family home not exceeding Pl0,000,000,
provided a certification that said family home has

't
J Sec. 86, NIRC.
9

0See R.A 10142 (Financial Rehabilitation and Insolvency Act [FRIA] of

1

2010).
 447
,•·'.ri',
TRANSFER TAXES
Estate Tax
...,,.
)

been the decedent's family home is secured from the

Barangay Captain of the locality;
(h) Amount received by Heirs under R.A. 4917, provided
said amount is included as part of the gross estate of .., !

the decedent; and

i .
(i) Net Share of the Surviving Spouse in the Conjugal
Partnership or Community Property.
2. Non-resident alien decedent - The value of the
decedent's net estate shall be determined by deducting
from the value of his gross estate situated in the
Philippines the following:
(a) Standard deduction - P500,000 without need of
substantiation;
(b) Proportion of the total losses and indebtedness which
the value· of the decedent's gross estate situated -•
'
in the Philippines bears to his entire gross estate
wherever situated. Losses and indebtedness include
the following:
1. Claims against the estate;
11. Claims of the deceased against insolvent
persons where the value of the interest therein
is included in the value of the gross estate;
n1. Unpaid mortgages, taxes and casualty losses;
(b) Properties previously taxed;
(c) Transfers for public use; and
(d) Net Share of the Surviving Spouse in the Conjugal
Partnership or Community Property.
Under R.A. 8424, the following are the deductions from a
decedent's gross estate:
1. Citizen and resident alien decedent:
(a) Expenses, losses, indebtedness, and taxes consisting
of:
l. Actual funeral expenses or five percent of
the gross estate, whichever is lower, but not
exceeding P200,000;
448 REVIEWER ON TAXATION

11. Judicial expenses of the testamentary or

intestate proceedings;
111. Claims against the estate;
IV. Unpaid mortgages in favor of the estate, under
certain conditions;
V. Unpaid taxes;
Vl. Casualty losses;
(b) Properties previously taxed;
(c) Transfers for public use;
(d) Family Home - the current fair market value of the
decedent's family home not exceeding Pl,000,000,
provided a certification that said family home has
been the decedent's family home is secured from the
Barangay Captain of the locality;
(e) Standard deduction - Pl,000,000 without need of
substantiation;
(f) Medical expenses not exceeding P500,000, duly
substantiated with receipts;
(g) Amount received by Heirs under R.A. 4917, provided
said amount is included as part of the gross estate of
the decedent; and
(h) Net Share of the Surviving Spouse in the Conjugal
Partnership or Community Property.
2. Non-resident alien decedent - The value of the
decedent's net estate shall be determined by deducting
from the value of his gross estate situated in the
Philippines the following:
(a) Proportion of the funeral expenses, losses, and
indebtedness, and taxes which the value of the
decedent's gross estate situated in the Philippines
bears to his entire gross estate wherever situated;
(b) Properties previously taxed;
(c) Transfers for public use; and
(d) Net Share of the Surviving Spouse in the Conjugal
Partnership or Community Property.
(
TRANSFER T AXES 449
Estate Tax
, ,'-
,,.'i,,
.-,
Funeral expenses
Amounts for actual funeral expenses or in an amount equal to
five percent of the gross estate, whichever is lower, but in no case
to exceed P200,000 shall be deducted from gross estate (Sec. 86[AJ
fl], NIRC). This deduction from a decedent's gross estate has been
removed under R.A. 10963 (TRAIN), effective January 1, 2018.

Bar Question (2014)

Mr. X, a Filipino residing in Alabama, U.S.A., died on January
2, 2013 after undergoing a major heart surgery. He left behind to his
wife and two kids several properties, to wit:
(1) Family home in Makati City;
(2) Condominium unit in Las Pin.as City;
(3) Proceeds of health insurance from Take Care, a health
maintenance organization in the Philippines; and
- .

(4) Land in Alabama, U.S.A.

The following expenses were paid:
(1) Funeral expenses;
(2) Medical expenses; and
(3) Judicial expe~se in the testate proceedings.
(B) What are the items that may be considered as deductions
from the gross estate?

Suggested answer:
(B) All the items of expenses in the problem are deductible
from his gross estate. However, the allowable amount of
funeral expenses shall be five percent of the gross estate or
actual, whoever is lower, but in no case shall the amount
deductible to go beyond P200, 000. Likewise, the deductible
medical expenses must be limited to those incurred within
one year prior to his death but not to exceed P500,000. In
addition to the items of expenses mentioned in the problem,
there is also allowed as a deduction from the gross estate
the standard deduction amounting to P 1 million (Sec. 86,
N IRC) (See amendment$ introduced by R.A. 10963
(TRAIN), effective January 1, 2018).
 REVlEWER ON TAXATION
450

Bar Question (2014)

During his lifetime, Mr. Sakitin obtained a loan amounting to
PlO million from Bangko Uno for the purchase of a parcel of land
located in Makati City, using such property as collateral for the
loan. The loan was evidenced by a duly notarized promissory note.
Subsequently, Mr. Sakitin died. The heirs of Mr. Sakitin deducted
the amount of P2 million from the gross estate, as part of the "Claims
against the Estate." Such deduction was disallowed by the Bureau
of Internal Revenue (BIR) Examiner, claiming that the mortgaged
property was not included in the computation of the gross estate. Do
you agree with the BIR? Explain.

Suggested answer:
Yes. Unpaid mortgages upon, or any indebtedness with respect
to property are deductible from the gross estate only if the value
of the decedent's interest in said property, undiminished by such
mortgage or indebtedness, is included in the gross estate (Sec. 86[AJ
{IJ[e], NIRC). In the instant case, the interest of the decedent in the
property purchased from the loan where the said property was used
as the collateral, was not included in the gross estate. Accordingly,
the unpaid balance of the loan at the time of Mr. Sakitin 's death is
not deductible as "Claims against the Estate."

Bar Question (2001)

On the first anniversary of the death of Y, his heirs hosted a
sumptuous dinner for his doctors, nurses, and others who attended
to Y during his last illness. The cost of the dinner amounted to
50,000. Compared to his gross estate, the 50,000 did not exceed five
percent of the estate. Is the said cost of the dinner to commemorate
his one year death anniversary deductible from his gross estate?
Explain your answer.

Suggested answer:
No. This expense will not fall under any of the allowable
deductions from gross estate. Whether viewed in the context of either
/
funeral expenses or medical expenses, the same will not qualify as
a deduction. Funeral expenses may include medical expenses of
the last illness but rwt expenses incurred after burial nor expenses
incurred to commemorate the death anniversary (De Guzman v.
De Guzman, 83 SCRA 256 [1978]). Medical expenses, on the other
 TRANSFER TAXES 45 1
Estate Tax

hand, are allowed only if incurred by the decedent within one year
prior to his death (Sec. 86[AJ[6], NIRC).

Claims against the Estate

Claims against the estate shall be deductible from gross estate,
provided that at the time the indebtedness was incurred, the debt
instrument was duly notarized and, if the loan was contracted within
three years before the death of the decedent, the administrator or
executor shall submit a statement showing the disposition of the
proceeds of the loan (Sec. 86[c], NIRC).
The requirements for the deductibility of claims against the
estate are:
1. They were contracted in good faith and for an adequate
and full consideration in money or money's worth;
2. They must be existing against the estate;
3. They must be enforced by the claimants;
4. They must be reasonably certain in amount; and
5. At the time the indebtedness was incurred, the debt
instrument was duly notarized and, if the loan was
contracted within three years before the death of the
decedent, the administrator or executor shall submit a
statement showing the disposition of the proceeds of the
loan (P.D. 1994).
An indebtedness that has been condoned or has prescribed
may not be claimed as a deduction (Bocanegra v. Collector, CTA
Case No. 420, October 12, 1959). Unpaid taxes such as income and
real estate taxes that accrued after the death of the decedent are not
deductible from gross estate as they are properly chargeable to the
income of the estate (Dela Vina v. Collector, 65 Phil. 620 [19391) .
In the testate or intestate proceedings to settle the estate
of a deceased person, the properties of the estate are under the
jurisdiction of the court until they have been distributed among the
heirs entitled thereto (Domingo v. Garlitos:, 8 SCRA 443 [19631) .

Bar Question (2015)

State the conditions for allowing the following as deductions
~om the gross estate of a citizen or resident alien for the purpose of
imposing estate tax:
a. Claims against the estate.
452 REVIEWER ON TAXATION

Suggested answer:
a. In order that claims against the estate may be allowe_d as
deductions from the gross estate of a citizen or resident
alien for purposes of imposing the estate tax,. the law
requires that at the time the indebtedness w~ ~ncu:red,
the debt instrument was duly notarized. In addition, if the
loan was contracted within three years before the death of
the decedent, the executor or administrator shall submit
a statement showing the disposition of the proceeds of the
loan (Sec. 86[AJ[l}[c], NIRC).

Claims against Insolvent Persons

For claims against insolvent persons to be deductible from the
gross estate (Sec. 86[d], NIRC), it is important to show that:
1. The amount of said claims has been initially included as
part of his gross estate; and
2. The incapacity of the debtors to pay their obligations is
proven, not merely alleged (Monserrat v. Collector,
CTA Case No. 11, December 28, 1955).

Unpaid Mortgages and Taxes

Unpaid mortgages upon, or any indebtedness in respect to,
property shall be deductible from gross estate, where the value
of decedent's interest therein, undiminished by such mortgage or
indebtedness, is included in the value of the gross estate. However,
unpaid income tax upon income received after the death of the
decedent, or property taxes not accrued before his death, or any
estate tax shall not be deductible from gross estate. The unpaid
mortgages and taxes must be contracted bona fide and for an
adequate and full consideration in money or money's worth (Sec.
86[e], NIRC).
Where the decedent owned only one-half of the property
mortgaged so that only one-half of its value was included in his
estate, only one-half of the mortgage debt was deductible, even
though the executor paid the entire debt, the liability of the decedent
being solidary, inasmuch as the executor would be subrogated to the
rights of the mortgagee as against the co-owner and co-mortgagor
(Parrot v. Commissioner, 279 U.S. 870).
Indebtedness secured by mortgage of real property situated
outside the Philippines may not be deducted where such property
 'ToANRFRR 'l'AXfi:S 463
Est nt,, 1'nx

is not includible in the gross est ate for the reason that t he decedent
at the time of his death was a non-resident alien (lntestado de
Don Valentin Descals v. Administrator de Rentals Jnternas,
98 Phil. 694 [1956)).
Bar Question (2014)
During his lifetime, Mr. Sakitin obtained a loan amounting to
10 million from Bangko Uno for the purchase of a parcel of land
located in Makati City, using such property as collateral for the
loan. The loan was evidenced by a duly notarized promissory note.
Subsequently, Mr. Sakitin died. At the time of his death, the unpaid
balance of the loan amounted to 2 million. The h eirs of Mr. Sakitin
deducted the amount of 2 million from the gross estate, as part of
the "Claims against the Estate." Such deduction was disallowed
by the Bureau of Internal Revenue (BIR) Examiner, claiming that
the mortgaged property was not included in the computation of the
gross estate. Do you agree with the BIR? Explain.
Suggested answer:
Yes. Unpaid mortgages upon, or any indebtedness with respect
to property are deductible from the gross estate only if the value of the
decedent's interest in said property, undiminished by such mortgage
or indebtedness, is included in the gross estate (Section 86[A][l][e],
NIRC). In the instant case, the interest of the decedent in the property
purchased from the loan where the said property was used as the
collateral, was not included in the gross estate. Accordingly, the
unpaid balance of the loan at the time of Mr. Sakitin's death is not
deductible as "Claims against the Estate."
Losses
Losses incurred during the settlement of the estate arising
from fir es, storms, shipwreck, or oth er casualties, or from robbery,
theft, or embezzlement, wh en such losses are not compensated for by
insurance or otherwise, and if at the time of the filing of the [estate]
return' such losses have not been claimed as a deduction
.
for income
tax purposes in an income tax return, and provided that such losses
were incurred not later than the last day for the payment of the
estate tax (i.e., six months from date of death) are deductible from
gross estate (Sec. 86[e], NIRC).

Family home
Family home means the dwelling house, including the land
on which it is situated, where the husband and wife, or a h ead of
454 REVIEWER ON T AXATlON

the family, and members of their family reside, as certified to by

the Barangay Captain of the locality. The family home is deemed
constituted on the house and lot from the time it is actually occupied
as a family residence and is considered as such for as long as any of
its beneficiaries actually resides therein. 11

Conditions for the allowance of family home as deduction

from the gross estate
1. The family home must be the actual residential home of
the decedent and his family at the time of his death, as
certified by the Barangay Captain of the locality where
the family home is situated;
2. The total value of the family home must be included as
part of the gross estate of the decedent; and
3. Allowable deduction must be in an amount equivalent
to the current fair market value of the family home as
declared or included in the gross estate, or the extent of the
decedent's interest (whether conjugal or community, or
exclusive property), whichever is lower, but not exceeding
Pl0,000,000 under R.A. 10963 (TRAIN), effective January
1, 2018 (formerly, the allowable deduction for family home
was not exceeding Pl,000,000 under R.A. 8424).

Standard Deduction
A deduction in the amount of One million pesos (Pl,000,000)
shall be allowed as an additional deduction without need of
substantiation. The full amount of Pl,000,000 shall be allowed
as deduction for the benefit of the decedent. The presentation of
such deduction in the computation of the net taxable estate of the
decedent is properly illustrated in these regulations. Note that the
amount of deduction h as been increased to P5,000,000 under R.A.
10963 (TRAIN), effective January 1, 2018.

Medical Expenses
All medical expenses (cost of medicines, hospital bills, doctors'
fees, etc.) incurred (whether paid or unpaid) within one year before

Arts. 152 and 153, Family Code.

11
 TRANSFER TAXES 456
Estate Tax

the death of the decedent shall be allowed as a deduction, provided

that the same are duly substantiated with official receipts for
services rendered by the decedent's attending physicians, invoices,
statements of account duly certified by the hospital, and such other
documents in support thereof and provided, further, that the total
amount thereof, whether paid or unpaid, does not exceed 500,000.
Any amount of medical expenses incurred within one year from
death in excess of P500,000 shall no longer be allowed as a deduction
under this subsection. Neither can any unpaid amount thereof in
excess of the P500,000 threshold nor any unpaid amount for medical
expenses incurred prior to the one-year period from date of death be
allowed to be deducted from the gross estate as claim against the
estate.
This deduction from a decedent's gross estate has been removed
under R.A. 10963 (TRAIN), effective January 1, 2018.

Bar Question (2015)

State the conditions for allowing the following as deductions
from the gross estate of a citizen or resident alien for the purpose of
imposing estate tax:
b. Medical Expenses.
Suggested answer:
b. The conditions for the allowance of medical expenses as
deductions from the gross estate of a citizen or resident
alien are: (1) The medical expenses must have been incurred
within one (1) year before the death of the decedent; (2)
That the medical expenses are duly substantiated with
receipts; and (3) The total amount thereof, whether paid
or unpaid, does not exceed P500,000.00 (Sec. 86[AJ[6},
NIRC).

Property Previously Taxed (or Vanishing Deduction)

The vanishing deduction operates to ease the harshness of
successive taxation of the same property within a relatively short
period of time (up to five years) occasioned by the untimely death of
the transferee after the death of the prior decedent or donor.
 456 R EVTEWER ON TAXATION

Requisites:
1. Death _ The present decedent died within fivfe _yfears
from date of death of the prior decedent or date o git.
2. Identity of the property - The property with respect
to which deduction is sought can be identified as the one
r eceived from prior decedent or from 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 h ave been included in the total
amount of the gifts of the donor within five years prior to
the present decedent's death.
4. Previous taxation of the property - The estate tax
on the prior succession, or the donor's tax on the gift,
must have been finally determined and paid by the prior
decedent or by the donor, as the case may be.
5. No previous vanishing deduction on the property
- No such deduction on the property, or the property
given in exchange therefore, was allowed in determining
the value of the net estate of the prior decedent. This
limitation is intended to preclude the application of
vanishing deduction on the same property more tha n once
(Sec. 86[AJ[2], NIRC).

Limitations as to Amount of Deduction Allowable

1. Value of property - The deduction is limited by the
value of the property previously taxed or the aggregate
value of such property if more than one item, as finally
determined for the purpose of the prior estate tax (or gift
tax) or the value of such propert y in present decedent's

i 2.
gross estate, whichever is lower.
Deduction for mortgage or other lien - The initial
value in the previous item shall be reduced by the t otal
amount paid, if any, by the present decedent, on any
mortgage or other lien on the property where a deduction
was allowed, by reason of the payment of such mortgage
or other lien from the gross estate of the prior decedent, or
gift of the donor, in determining the estate tax of the prior
decedent or the donor's tax.
 TRANSFER TAXES 457
Estate Tax

3. Deduction for expense; l9sses, indebtedness, taxes,

etc. - The value as reduced .in the previous item shall
be fu1·ther r educed by an amo\lnt which bears the same
ratio to the a mounts allowed as deductions for expenses,
losses, indebtedness, taxes, and transfers for public use as
the amount otherwise deductible for property previously
taxed bears to the value of the decedent's gross estate.
4. Percentage of deductions - The vanishing deduction
shall be the value in the previous item multiplied by the
following percentage of deduction:
(a) 100% of the value, if the prior decedent died within
one year prior to the death of the present decedent,
or if the property was transferred to him (present
decedent) by gift within the same period prior to his
death;
(b) 80%, if the period is more than one year but not more
than two years;
(c) 60%, if the period is more than two years but not
more than three years;
(d) 40%, if the period is more th an three years but not
more than four years; or
(e) 20%, if the period is more than four years but not
more than five years.
In outline form, the computation of vanishing deduction shall
be as follows:
Value taken of property previously taxed (prior decedent's
gross estate)
Less: Mortgage debt paid, if any (1st deduction)
Initial basis
Divided by the value of gross estate of present decedent
Multiplied by expenses, indebtedness, etc. and transfers
for public purposes
Equals 2nd deduction
Initial basis less 2nd deduction
Equals final basis
Multiplied by applicable rate of vanishing deduction
Equals amount of vanishing deduction
458 R EVIEWER ON TAXA'l"ION

[NOTE: The amount of vanishing deduction is not subtracted

from the value of the conjugal property to determine the share of the
surviving spouse.]

Bar Question (2017)

CasimiradiedonJune 19, 2017, afterthreeweeksofconfinement
due to an unsuccessful liver transplant. For her confinement, she had
incurred substantial medical expenses that she financed through
personal loans secured by mortgages on her real properties. Her
heirs ai·e still in the process of making an inventory of her assets
that she can used to pay the estate truces, if any, which are due on
December 19, 2017.
(a) Are the medical expenses, personal loans and mortgages
incurred by Casimira deductible from her gross estate?
Explain your answer.
(b) May the heirs of Casimira file the estate tax return and
pay the corresponding estate tax beyond December 19,
2017, without incurring interest and surcharge? Explain
your answer

Suggested answer:
(a) Yes, subject to certain conditions set by the NIRC. As for
the medical expenses, they must be incurred within one
year from death, whether paid or unpaid, and the amount
must not exceed P500, 000. As for the personal loans, it
is required that the loan document must be notarized
and if incurred within three years from date of death,
the executor or administrator shall submit a statement
showing the disposition of the proceeds of the loan. As to
the mortgages, it is required that the fair market value
of Casimira's interest in said property, undiminished by
such mortgage or indebtedness, is included in the value
of the gross estate. The claims for personal loans and
mortgages must have been contracted bona fide and for an
adequate consideration in money or money's worth (Sec.
86, 1997 NIRC, as amended).
(b) The heirs may file the estate tax returns beyond December
19, 2017, as long as they filed a request for a reasonable
extension, not exceeding 30 days. Once the request for
extension has been granted and the return filed within the
 TRANSFER TAXES 459
Estate Tax

extended period following the ''pay-as-you-file" procedure,

only the interest on extended payment may be imposed but
not the surcharge. Interest and surcharge, however, may
be imposed upon failure of the heirs to file and pay the
estate tax within the extended period granted by the CIR
(Secs. 248[AJ and 249[DJ, 1997 NJRC, as amended).

Section 91, on the other hand, allows for the extension of time
to pay the estate tax due, for a period not exceeding five years in
case the estate is settled through the courts, or two years in case
the estate is settled extrajudicially. If an extension is granted, the
interest on extended payment may be imposed. The Commissioner
may require the executor, or administrator, or beneficiary, as the
case may be, to furnish a bond in an a mount not exceeding double
the amount of the tax and with such sureties as the Commissioner
deems necessary, conditioned upon the payment of the said tax in
accordance with the terms of the extension.

Bar Question (2008)

While driving his car to Baguio City last month, Pedro
Asuncion, together with his wife, Assunta, and only son, Jaime,
met an accident that caused the instantaneous death of Jaime. The
following day, Assunta also died in a hospital. The spouses and their
son had the following assets and liabilities at the time of death:

Assunta
Conjugal Jaime

Cash Pl0,000,000 Pl,200,000

Cars ,2,000,000 500,000
Land 5,000,000 2,000,000
Residential house 4,000,000
Mortgage payable 2,500,000
Funeral expenses 300,000

a. Is the Estate of J aime Asuncion liable to estate tax?

Explain.
b. Is vanishing deduction applicable to the Estate of Assunta
Asuncion? Explain.
460 REVIEWER ON TAXATION

Suggested answers:
a. The Estate of Jaime Asuncion is not liable to estate tax. At
the time of death, his gross estate amounted to Pl,200,000.
Since his estate is entitled to standard deduction of P 1
million and funeral expenses equivalent to five percent of
his gross estate not exceeding P200,000, plus the fact that
the first P200, 000 of his net estate is exempt from estate
tax, there would be no estate tax due on his net estate.
b. No, there would be no vanishing deduction allowed to the
Estate of Assunta Asuncion, since she did not inherit or
receive any property from her deceased son, Jaime, that
was previously subjected to estate tax or donor's tax. While
her estate could be entitled to receive one-half of Pl.2
million (or ?600,000) cash deposit from her deceased son,
this is exempt from estate tax, as explained above. To be
entitled to the vanishing deduction, it is important that
the property (cash of P600,000 in the instant case) must
have been taxed in the estate of a prior decedent.

Bar Question (1994)

What is vanishing deductions in estate taxation?

Suggested answer:
Vanishing deductions or property previously taxed in estate
taxation refers to the diminishing deductibility/exemption, at the
rate of 20% over a period of five years until it is lost after the fifth
year, of any property (situated in the Philippines) forming part of
the gross estate, acquired by the decedent from a prior decedent who
died within a period of five years from the decedent's death.

Valuation of Property
l. "Fair market value" is the price which a property will
bring when it is offer ed for sale by one who desires, but
is not obliged to sell, and is bought by one who is under
no necessity of buying it (Manila Railroad Co. v.
Velasquez, 32 Phil. 286 [1915]). Itis the price at which a
property would change hands between a willing buyer and
a willing seller with neith er being under any compulsion
to buy or sell and both having reasonable knowledge of the
facts and acting for their own best interests (Worcester
Country Trust Co. v. Commissioner, 134 F. 2nd 578).
 TRANSFER TAXES 461
Estate Tax

2. The estate shall be appraised at its fair value as of the

time of death since by fiction of law, property is deemed to
be transferred at such time (Art. 777, Civil Code).
3. For real property, the current and fair market value as
shown in the schedule of values fixed by provincial and
city assessors or the fair market value as determined
by the Commissioner (commonly referred to by revenue
officers as "zonal value"), whichever is higher, shall be
used. The use of the schedule of values is prescribed in
order to minimize the discretion of examiners in making
valuation of real property.
4. For unlisted shares of stocks of domestic corporations,
fair market value shall be determined in accordance with
the provisions of Revenue Regulations No. 6-2013 dated
April 11, 2013. For th e listed shares of stocks of domestic
corporations, the fair market value of the shares of stocks
on the date of death or closest to the date of death of the
decedent shall be used.
If the property is a real property, the fair market value shall
be the fair market value as determined by the Commissioner or the
fair market value as shown in the schedule of values fixed by the
provincial and city assessors, whichever is higher . For purposes of
prescribing real property values, the Commissioner is authorized to
divide the Philippines into different zones or areas and shall, upon
consultation with competent appraisers, both from the private and
public sectors, determine the fair market value of real properties
located in each zone or area.
In the case of shares of stocks, the fair market value shall
depend on whether the shares are listed or unlisted in the stock
exchanges. Unlisted common shares are valued based on their book
value while unlisted preferred shares are valued at par value. In
determining the book value of common shares, appraisal surplus
shall not be considered as well as the value assigned to preferred
shares, if there are any.
For shares which are listed in the stock exchanges, the fair
market value shall be the arithmetic mean between the highest
and lowest quotation at a date nearest the date of death, if none is
available on the date of death itself.
To determine the value of the right to usufruct, use or
i habitation, as well as that of annuity, there shall be taken into
462

. bf' ficiarv in accordan<'P with thP

account the probable hfe of th e ne · · d h . th"' t..:!~""°tan·
. ta ble, t 0 be· aJ)prove ·\ ' .~-..,
latest basic standard morta11ty .
•..- • ·
..
of Finance, upon recommendation of the Insurance Comm1ss1on~r.

Bar Question (2006)

Varnishing deduction is availed of by taxpayers to:

a. Correct his accounting records to reflect the actual

deductions made;
b. reduce his gross income;
c. reduce his output value-added tax liability:
d. reduce his gross estate.
Choose the correct answer. Explain.

Suggested answer:
I choose (d), reduce his gross estate. Vanishing deduction or
property previously taxed is one of th<> items of deductions allowed
in computing the net estate of a decedent (Sec. 86/A/12/ and 86/B/[2],
NIRC).

Bar Question (2000)

a) Discuss the rule on situs of taxation with res pect to the
imposition of the estate tax on property left behind by a
non-resident decedent.

Suggested answer:
The value of the gross estate of a non-resident decedent who
is a Filipi,w citizen at the time of his death shall be determined by
including the value at the time of his death of all property, real or
personal, tangible or intangible, wherever situated to the extent of
the interest therein of the decedent at the time of his death (Sec. 85
[A], NIRC). These properties shall have a situs of taxation in the
Philippines; hence, subject to Philippine estate taxes.
On the other hand, in the case of a non-resident decedent who
at the time of his death was not a citizen of the Philippines, only thut
part of the entire gross estate which is situated in the Philippint1s to
the extent of the interest therein of the decedent at the time of hill dealh
shall be included in his taxable estate, provided that with rr:>spect to
intangible personal property, we apply the rule of reciprocity.
 'l'RANSFER TAXES
Estate Tax

b) Mr. Felix de la Cruz, a bachelor resident citizen, suffered

from a heart attack while on a business trip to the USA. He
died intestate on June 15, 2000 in New York City, leaving
behind real properties situated in New York; his family
home in Valle Verde, Pasig City; an office condominium in
Makati City; shares of stocks in San Miguel Corporation;
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 deductions may be claimed by the
estate and when and where shall the return be filed and
estate tax paid?

Suggested answer:
The gross estate shall be determined by including the value at
the time of his death all of the properties mentioned, to the extent of
the interest he had at the time of his death because he is a Filipino
citizen (Sec. 85[A], NIRC).
With respect to the life insurance proceeds, the amount
includible in the gross estate for Philippine tax purposes would be
to the extent of the amount receivable by the estate of the deceased,
his executor, or administrator, under policies taken out by decedent
upon his own life, irrespective of whether or not the insured retained
the power of revocation or to the extent of the amount receivable by
any beneficiary designated in the policy of insurance, except when
it is expressly stipulated that the designation of the beneficiary is
irrevocable (Sec. 85[E], NIRC).
The deductions (under R .A. 8424) that may be claimed by the
estate are:
1) The actual funeral expenses or in an amount equal to five
percent of the gross estate, whichever is lower, but in no
case to exceed two hundred thousand pesos (P200,000)
I
~
(Sec. 86/AJ[l][a], NIRC);
~
2) The judicial expenses in the testate or intestate proceedings
'
•,·
i
(Sec. 86/A][l], NIRC);

l
I
3) The value of the decedent's family home located in Valle
Verde, Pasig City in an amount not exceeding one million
~
pesos (P 1,000,000) and upon presentation of a certification,
~
 464 REVIEWER ON TAXATION

of the barangay captain of the locality that the same has

been the decedent's family home (Sec. 86[AJ[4), NIRC)
4) The standard deduction of PJ,000,000 (Sec. 86[A)[5],
NIRC);
5) Medical expenses incurred within one year from death in
an amount not exceeding 500,000 (Sec. 86[AJ[6], NIRC).
The estate tax return shall be filed within six months from the
decedent's death (Sec. 90[B], NIRC), provided that the Commissioner ,
of Internal Revenue shall have authority to grant in meritorious ,.
cases, a reasonable extension not exceeding 30 days for filing the
return (Sec. 90[CJ, NIRC).
Except in cases where the Commissioner of Internal Revenue
otherwise permits, the estate tax return shall be filed with an
authorized agent bank, or Revenue District Officer, Collection Officer,
or duly authorized Treasurer of Pasig City, the City in which the
decedent, Mr. de la Cruz, was domiciled at the time of his death (Sec.
90[DJ, NIRC).

Bar Question (2002)

Mr. Castro inherited from his father, who died on June 10,
1994, several pieces of real property in Metro Manila. The estate tax
return was filed and the estate tax due in the amount of P250,000
was paid on December· 6, 1994. The Tax Fraud Division of the BIR
investigated the case on the basis of confidential information given
by Mr. Santos on January 6, 1998 that the return filed by Mr. Castro
was fraudulent and that he failed to declare all properties left by his
father with intent to evade payment of the correct tax. As a result,
a deficiency estate tax assessment for Pl,250,000, inclusive of 50%
surcharge for fraud, interest and penalty, was issued against him
on January 10, 2001. Mr. Castro protested the assessment, on the
ground of prescription.

I A.
B.
Decide Mr. Castro's protest.
What legal requirement must Mr. Santos comply with so
that he can claim his reward? Explain.

Suggested answer:
A. The protest should be resolved against Mr. Castro. What
was filed is a fraudulent return making the prescriptive
period for assessment l Oyears from discovery of the fraud
 TRANSFER TAXES
465
Estate Tax

(~ec .. 222, NIRC). Accordingly, the assessment was issued

within the prescriptive period to make an assessment
based on a fraudulent return.
B. The legal requirements that must be satisfied by Mr.
Santos to entitle him to reward are as follows:
1. He should voluntarily file confidential information
under oath with the Law Division of the Bureau
of Internal Revenue alleging therein the specific
violations constituting fraud;
2. The information must not yet be in the possession
of the Bureau of Internal Revenue, or refer to a case
already pending or previously investigated by the
Bureau of Internal Revenue;
3. Mr. Santos should not be a government employee or
a relative of a government employee within the sixth \
degree of consanguinity; and I
4. The information must result in collections of revenues
and/or fines and penalties (Sec. 282, NIRC).

Estate Tax Returns

The filing of an estate tax r eturn is r equired: (1) in all cases of
transfers subject to estate tax; or (2) regardless of the gross value
of the estate, where the estate consists of registered or registrable
property such as real property, motor vehicle, shares of stock, or other
similar property for which a Certificate Authorizing Registration
from the BIR is required as a condition precedent for the transfer of
ownership from the decedent to the heirs and/or beneficiaries.
Estate tax returns showing a gross value exceeding P5,000,000
(formerly P2,000,000 under R.A. 8424) shall be supported with a
statement duly certified to by a Certified Public Accountant.

Time of Filing
The estate tax r eturn shall be filed within one year from the
decedent's death (formerly within six months under R.A. 8424). The
Commissioner or any Revenue Officer authorized by him pursuant
to the NIRC shall have authority to grant, in meritorious cases, a
reasonable extension, not exceeding 30 days, for filing the return.
466 REVIEWER ON TAXATION

Payment of Estate Tax

Generally, the estate tax shall be paid at th~ time the return
is filed by the executor, administrator or the heirs. The payment
of the estate tax may be extended to not more than five years, for
estates settled through the courts, or not more than two years, for
estates settled extrajudicially, when the Commissioner finds that
the payment of the estate tax or of any part thereof would impose
undue hardship upon the estate or any of the heirs.

Payment by Installment
This is allowed in case of insufficiency of cash for the immediate
payment of the total estate tax due. The cash installment shall be
made within two years from the date of filing of the estate tax return.

Payment by Partial Disposition

The partial disposition of the estate and application of its
proceeds to the estate tax due is allowed in case of insufficiency of
cash for the immediate payment of the total estate tax due. The
disposition of the estate shall refer to the conveyance of property,
whether real, personal, or intangible property, with the equivalent
cash consideration. The estate shall only pay the proportionate
estate tax due of the property intended to be disposed of.

Bank Withdrawal Limit

If a bank has knowledge of the death of a person, who
maintained a bank deposit account alone, or jointly with another,
it shall allow the withdrawal from the said deposit account, subject
to the final withholding tax of six percent of the amount to be
withdrawn, provided that the withdrawal shall only be made within
one year from the date of death of decedent (Sec. 97, NIRC, as
amended by R.A. 10963; Sec. 10, Rev. Regs. No. 12-2018).
!''
·,/
 CHAPTER XIV
DONOR'S TAX

''Donation" is an act of liberality whereby a person (donor)

disposes gratuitously of a thing or right in favor of another (donee)
who accepts it (Art. 725, Civil Code). There is also donation when
a person gives to another a thing or right on account of the latter's
merits or of the services rendered by him to the donor provided they
do not constitute a demandable debt or when the gift imposes upon
the donee a burden which is less than the value of the thing given
(Art. 726, Civil Code).
Il l
I

Under the Tax Code, donation has a broader meaning. It I

extends to sales or exchanges of property, other than real property
classified as capital asset located in the Philippines, for less than
adequate and full consideration in money or money's wortht (Sec. \
100, NIRC, as amended by R.A. 10963 [TRAIN], effective January 1,
2018). \
Nature of gift tax
Gift tax is not a property tax but an excise tax imposed on
\l
the privilege of the owner to give. It is not a tax on property as
·such because the imposition does not rest upon general ownership
(Bromley v. McCaughn, 280 U.S. 124). Thus, the levy on the
transfer by way of donation inter vivos of property used exclusively
l
for religious purposes does not infringe the provisions of the
Constitution exempting from taxation churches and parsonages and
all lands, buildings, and improvements used actually, directly, and
exclusively for religious purposes (Lladoc v. CIR, 14 SCRA 292
[1965]). However, gifts in favor of religious institutions are now
exempt from donor's tax.

1
Sale, exchange, or other transfer of property made in the ordinary course
of hu~iness (a transaction which is a bona fide, at arm's length, and free from any
donative intent) will be considered as made for an adequate and full consideration in
money or money's worth.

467
468 REVIEWER ON TAXATION

Donor's tax is imposed upon the transfer by any person , resident

or non-resident, of the property by gift. The tax shall apply whether
the transfer is in trust or otherwise, whether the gift is direct or
indirect, and whether the property is real or per sonal, tangible or
intangible (Sec. 98, NIRC).

Purposes of Donor's Tax

1. To supplement estate tax;
2. To prevent avoidance of income tax through the device
of splitting income among numerous donees, who are
usually members of a family or into many trusts, with the
donor thereby escaping the effect of the progressive rates
of income tax.

Rate of Donor's Tax2

A. Tax payable by the donor. - The tax for each calendar
year shall be six percent computed on the basis of the total
net gifts in excess of P250,000 (formerly Pl00,000) exempt
gift made during the calendar year. For purposes of the
donor's tax, "NET GIFT" shall mean the net economic
benefit from the transfer that accrues to the done (Sec.
12, Rev. Regs. No. 12-2018).
The application of the rate as provided above is
imposed on donations made beginning January 1, 2018,
which is the effectivity date of R.A. 10963 (TRAIN).
B. Contribution for election campaign. - Any contribution
in cash or in kind to any candidate, political party, or
coalition of parties for campaign purposes, shall be
governed by th e Election Code, as amended.

Bar Question (2014)

Mr. De Sarapen is a candidat e in the upcoming Senatorial
elections. Mr. De Almacen, believing in the sincerity and ability of
Mr. De Sarapen to introduce much needed reforms in the country,
contributed P500,000 in cash to the campaign ch est of Mr. De
Sarapen. In addition, Mr. De Almacen purchased tarpaulins,

2As a mended by R.A. No. 10963 (TRAIN), effective January 1, 2018.

 TRANSFER T AXES 469
Donor's Tax

t-shirts, umbrellas, caps, and other campaign materials that he

also donated to Mr. De Sarapen for u se in his campaign. Is the
contribution of cash and campaign materials subject to donor's
tax?

Suggested answer:
The Tax Code provides that any contribution in cash or in kind
to any candidate, political party, or coalition of parties for campaign
purposes shall be governed by the Election Code (Sec. 99[C], NIRC).
On the other hand, the Omnibus Election Code provides, that any
provision of the law to the contrary notwithstanding, any contribution
in cash or in kind to any candidate or political party or coalition
of parties for campaign purposes, duly reported to the Commission
shall not be subject to any payment of gift tax (Sec. 13, R.A. 7166).
Hence, the contributions will be exempt from donor's tax if they are
duly reported to the Commission. Otherwise, the contributions will
be subject to donor's tax.
(

Bar Question (2003, 1998)

Are contributions to a candidate in an election subject to donor's
tax? On the part of the contributor, is it allowable as a deduction
from gross income?
I
Suggested answer:
No, provided the recipient candidate had complied with the
requirement for filing of returns of contribution_s with the Commission
on Elections as required under the Omnibus Election Code.
The contributor is not allowed to deduct the contributions
l
j
because the said expense is not directly attributable to, the
development, management, operation, and/or conduct of a trade,
I business or profession (Sec. 34[A][l][a], NIRC). Furthermore, if the

I candidate is an incumbent government official or employee, it may

even be considered as bribe or a kickback (Sec. 34[AJ[l][c], NIRC).

Valuation of Gifts Made

The valuation of gifts in the form of property shall be as follows:
1. If the property is real property, the appraised value
thereof as of the time of donation shall be whichever is
higher of the fair market value as: (a) determined by the
Commissioner; or (b) shown in the schedule of values
470 REVIEWER ON TAXATION

fixed by the provincial and city assessors, whichever is

higher.
2. In the case of shares of stocks, the fair market :valude. s~~ll
depend on whether the shares are listed or un11ste 1n e
stock exchanges.:i
The reckoning point for valuation shall be the date when the
donation is made (Sec. 13, Rev. Regs. No. 12-2018).

Bar Question (2015)

Mr. L owned several parcels and he donated a parcel each to
his two children. Mr. L acquired parcels ofland in 1975 for P200,000.
At the time of donation, the fair market value of the two parcels
of land, as determined by the CIR, was P2,300,000; while the fair
market value of the same properties as shown in the schedule of
values prepared by the City Assessors was P2,500,000. What is the
proper valuation of Mr. L's gifts to his children for the purpose of
computing donor's tax?

Suggested answer:
The valuation of Mr. L's gift to his children is the fair market
value (FMV) of the property at the time of donation. The FMV is the
higher of the FMV as determined by the Commissioner or the FMV
as shown in the schedule of values fixed by the provincial and city
assessors. In this case, for the purpose of computing donor's tax,
the proper valuation is the value prepared by the City Assessors
amounting to P2,500,000 because it is higher than the FMV as
determined by the CIR (Sec. 102 in relation to Sec. 88/B], NIRC).

Taxable Transfers
. The term "transfer of property in trust or otherwise,
direct o~ indirect"i s u8ed by the law in the most comprehensive
sense. It includes not only the transfer of ownership in the fullest
sern,e but also. the tran sfer of any right or interest in property,
but less than title. A transfer becomes complete and taxable only
when the donor has divested himself of all beneficial interest in
himself or his est~te. The law contemplates the passage of control
over the economic benefits of the property, rather than mere

3
Stt Sec. 5, Rev. Regs. No. 12-2018.
 TRANSFER TAXES 471
Donor's Tax

technical changes in the title (Sanford v. Commissioner, 308

U.S. 39).
Title to immovable property does not pass from the donor
to the donee by virtue of a deed of donation until and unless it
has been accepted in a public instrument and the donor duly
notified thereof. The acceptance may be made in the very sa me
instrument of donation. If the acceptance does not appear in the
same document, it must be made in another. Where the deed
of donation fails to show the acceptance, or where the formal
notice of the acceptance, made in a separate instrument, is either
not given to the donor or else not noted in the deed of donation
and in the separate acceptance, the donation is null and void
(Sumipat v. Banga, G.R. No. 155810, August 13, 2004). The
donor's tax shall not apply unless and until there is a completed gift.
The transfer of property by gift is perfected from the moment the
donor knows of the acceptance by the donee; it is completed by the
delivery, either actually or constructively, of the donated property
to the donee. Thus, the law in force at the time of the perfection/
completion of the donation shall govern the imposition of the donor's
tax (Sec. 12, Rev. Regs. No. 12-2018).

Bar Question (2016)

In 2011, Solar Computer Corporation (Solar) purchased a
proprietary membership share covered by Membership Certificate
No. 8 from the Mabuhay Golf Club, Inc. for P500,000. On December
27, 2012, it transferred the same to David, its American consultant,
to enable him to avail of the facilities of the Club. David execu ted a
Deed of Declaration of Trust and Assignment of Shares wherein he
acknowledged the absolute ownership of Solar over the share; that
the assignment was without any consideration; and tha t th e share
was placed in his name because the Club required it to be done. In
2013, the value of the share increased to P800,000.
Is the said assignment a "gift" and, therefore subject to gift
tax? Explain.

Suggested answer:
No. The transfer is not a taxable donation because there is
no divestment of ownership by the transferor. The purpose of the
transfer is simply to allow David to avail of the facilities of the Club.
The execution of a "Deed of Declaration of Trust and Assignment
of Shares" where the absolute ownership by Solar of the share
472 REVIEWER ON TAXATION

is acknowledged would show that there is no relinquishment of

ownership by Solar. The transfer being merely a transfer in form but
not in substance, the same is not subject to gift tax.

Bar Question (1996)

X, a multinational corporation doing business in the Philippines,
donated 100 shares of stock of said corporation to Mr. Y, its resident
manager in the Philippines.
(1) What is the tax liability, if any, of X corporation?
(2) Assuming the shares of stocks were given to Mr. Y in
consideration of his services to the corporation, what are
the tax implications? Explain.

Suggested answer:
(1) Foreign corporations effecting a donation are subject to
donor's tax only if the property donated is located in the
Philippines. Accordingly, donation ofa foreign corporation
of its own shares of stocks in favor of resident employees is
not subject to donor's tax (BIR Ruling No. 018-87, Ja nuary
26, 1987). However, if 85% of the business of the foreign
corporation is located in the Philippines or the shares
donated have acquired business situs in the Philippines,
the donation may be taxed in the Philippines subject to the
rule of reciprocity.
(2) If the shares of stocks were given to Mr. Yin consideration
of his services to the corporation, the same shall constitute
taxable compensation income to the recipient because it
is a compensation for services rendered in an employer-
employee relationship; hence, subject to income tax.
The par value or stated value of the shares issues also constitutes
deductible expense to the corporation, provided it is subjected to
withholding tax on wages.

Essentials of a Taxable Donation

1. Capacity of the donor;
2. Donative intent;
3. Delivery, whether actual or constructive, of the subject
matter;
4. Acceptance of the gift by the donee (Art. 746, Civil Code).
 TRANSf'ER TAXES 473
Donor's Tax

Donative Intent
Donative intent must be present in a direct gift of property
in order that the donor's tax can be assessed and collected. Such
intent followed by a donative act is essential to constitute a gift,
and no strained and artificial construction of a supplementary
statute should be included to tax as gift a transfer actually lacking
donative intent. Thus, it was held that the transfer of properties
from one corporation to another corporation which is connected
with, subordinate to, and a district or local organization or branch
of the transferor corporation is not subject to donor's tax because
it is wanting in donative intent. Such transfer, being in name
only, a transfer from the right hand to the left hand, and merely to
enable the transferee corporation to better perform its obligation to
administer, apply and use the said properties for the same purposes
(religious, charitable, and educational) for which the transferor was
created and still exists (The Christian & Missionary Alliance
Churches of the Phil. v. Collector, CTA Case No. 668, August
21, 1964).
Donative intent is not, however , required in transfers of
property for less t han adequate and full consideration. In such a
case, donative intent is superfluous (Perez v. CIR, CTA Case 1707,
February 10, 1909).

Consideration
"Consideration" means money or equal value or some goods
or service capable of being evaluated in money. "Gratitude" is not
a consideration the value of which can be deducted from that of
the property transferred as a gift. Like "love and affection," it has
no economic value and is not "consideration" in the sense that the
word is used in Section 108 of the NIRC. Thus, donation given out
of gratitude for services rendered constitutes taxable donation. It is
not deductible from gross income of the donor for t he value of said
services does not constitute recoverable debt (Pirovano v. CIR,
G.R. No. L-19865, July 31, 1965).

Donation of Conjugal Property

The spouses are co-owners of conjugal property (Art. 174,
Ciuil Code). Thus, a gift made by the spouses of conjugal property
shall be deemed separate donations by the husband and the wife in
proportion to their respective interests. In other words, there will be
two donations made and two separate computations of donor's taxes.
474 REVIEWER ON TAXATION

However unless the wife expressly joins in making the donation

of conju~al property, it shall be deemed to have been made the ?Y
husband alone (Tang Ho v. Board of Tax Appeals, 97 Phil. 889
[19551).

Right of Accretion
Accretion is a right by virtue of which, when two or more
persons are called to the same inheritance, devise, o_r leg_acy, the
part assigned to the one who renounces, or cannot receive his shar~,
or who died before the testator is added or incorporate to that of his
co-heirs, co-devisees, or co-legatees (Art. 1015, Civil Code).
Accretion is a right based on the presumed will of the decedent.
When the testator gives a determinate, undivided thing or the
same inheritance to two or more persons, without designating their
specific shares, he thereby manifests his desire to give to said persons
preference to the right over the thing or inheritance assigned. Hence,
if for any reason one of them does not or cannot receive his share,
the law, following the testator's implied desires, gives the vacant
share to the others. Accretion is a right and not an obligation; hence,
it may be renounced or waived by anyone who stands to benefit from
it (Ynza v. Rodriguez, 95 Phil. 347 [1954]).
Accretion, whether in testamentary or intestate succession,
refers only to the free portion. It never operates in compulsory
succession. However, an heir who repudiates his inheritance cannot
be represented (Art. 977, NCC). Hence, in intestate succession, the
share of a co-heir who renounces his share in the inheritance accrues
to his co-heirs. The effect is the same as where there is accretion.

Bar Question (2013)

In the settlement of the estate of Mr. Barbera who died
Intestate, his wife renounced her inheritance and her share of the
conjugal property in favor of their children. The BIR determined
that there was a taxable gift and thus assessed Mrs. Barbera as a
donor. Was the BIR correct?

Suggested answer:
The BIR _is ~orrect that there was a taxable gift but only insofar
as
. the renunciation. .of the share of the wir.e
,, i·n the con1uga
· l proper ty
is concerned.
. This is .a transfer of property w i·thout consi'deration,
·
which takes effect during the lifetime of the transfer; wife, and it thus
 TRANSFER TAXES 475
Donor's Tax

qualifies as a taxable gift (Rev. Regs. No. 2-2003, as amended by Rev.

Regs. No. 12-2018).
But the renunciation of the wife's share in the inheritance from
her deceased husband is not a taxable gift, considering that the
property is automatically transferred to the other heirs by operation
of law due to her repudiation of her inheritance (BIR Ruling No. DA-
333-07; Rev. Regs. No. 12-2018).

Bar Question (2008)

Spouses Jose San Pedro and Clara San Pedro, both Filipino
citizens, are the owners of a residential house and lot in Quezon
City. After the recent wedding of their son, Mario, to Maria, the
spouses donated said real property to them. At the time of donation,
the real property has a fair market value of P2 million.
a. Are Mario and Maria subject to income tax for the value
of the real property donated to them? Explain.
b. Are Jose and Clara subject to donor's tax? If so, how much I
is the taxable gift of each spouse a nd what rate shall be I
•
applied to the gift? Explain.
j
I
Suggested answers: I
a. Mario and Maria, donees, are exempt from income tax on
the value of the real property received by them through
donation of their parents. The value of property acquired
by gift, bequest, devise, or descent, shall not be included in
the gross income of the donees. However, income from such
property shall be included in their gross incomes during
the year (Sec. 32[BJ[3], NIRC).
b. Spouses Jose and Clara are subject to donor's tax on
the fair market value (P2 million) of the real property
donated to their son, Mario, and on the donation made to
Mario's wife, Maria. There are four taxable donations of
P500,000 made by the spouses. Donor Jose made PS00,000
donation to his son, Mario, and another donation of
P500,000 to his daughter-in-law, Maria. Donor Clara also
made P500,000 donation to her son, Mario, and another
donation of P500, 000 to her daughter-in-law, Maria.
Since the donations to their son, Mario, were made by
the Spouses Jose and Clara on account of his marriage
Jose and Clara can each deduct Pl0,000 from his 0 ;
476 REVIEWER ON TAXATION

her gross gift. Their net gifts of P490,000 (P5~0,000 less

p Jo, 000) will be subject to the graduated donors tax ra~es
ranging from two percent to 15% (Sec. 99fA!, NIRC). Wi_th
respect to their donations to their daughter~in-law, Man~,
their gross gifts of ?500,000 shall be sub1ec~ to the 30¼
donor's tax rate, considering that the donee is a stranger
in relation to the donors. A "stranger" is a person who is
not a: (i) brother, sister (whether by whole or h.°:lf-bloo~),
spouse, ancestor, and lineal descendant; or (ii) relative
by consanguinity to the collateral line within the fourth
degree of relationship (Sec. 99[B], NIRC).

[NOTE: A flat rate of 6% donor's tax is imposed on the total

donations made during the calendar year in excess of P250,000,
regardless of relationship of donor and donee, under R .A. 10963
(TRAIN), effective January 1, 2018.]

Bar Question (1998)

Ace Tobacco Corporation bought a parcel of land situated at
Pateros and donated it to the Municipal Government of Pateros for
the sole purpose of devoting the said land as a relocation site for
the less fortunate constituents of said municipality. In accordance
therewith, the Municipal Government of Pateros issued to the
occupants/beneficiaries Certificates of Award giving to them the
respective areas where their houses are erected. Through Ordinance
No. 2, Series of 1998, the said municipal government ordained that
the lots awarded to the awardees be finally transferred and donated
to them. Determine the tax consequence of the foregoing dispositions
with respect to Ace Tobacco Corporation, the Municipal Government
of Pateros, and the occupants/beneficiaries.

Suggested answer:
The donation by Ace Tobacco Corporation is exempt from
the _d_onor's tax because it qualifies as a gift to or for the use of any
political subdivision of the National Government (Sec. 101[2],
NIRC). The ~o_nveyance is likewise exempt from documentary stamp
tax because it is a transfer without consideration. Since the donation
is to be use~ ?-8 ~ relocation site for the less fortunate constituents
of the municipality, it may be considered as an undertaking for
~uman settlements; hen_ce, the value of the land may be deductible
~n full from the ?ross inco?'1-e of Ace Tobacco Corporation if it is
in accordance with a National Priority Plan determined by the
 TRANSFER TAXES 477
Donor's Tax

National Economic Development Authority (Sec. 34[H][2J[a], NIRC).

I f the utilization is not in accordance with a National Priority Plan
determined by the National Economic Development Authority, then
Ace Tobacco Corporation may deduct the value of the land donated
only to the extent of five percent of its taxable income derived from
trade or business as computed without the benefit of the donation
(Sec. 34[HJ[2}[a] in relation to Sec. 34[H][l}, NIRC).
The Municipality of Pateros is not subject to any donor's tax on
the value of land it subsequently donated, it being exempt from taxes
as a political subdivision of the National Government.
The occupants I beneficiaries are subject to real property taxes
because they now own the land.

Transfer for Insufficient Consideration4

Where property (i.e., ordinary asset), other than real property
referred to in Section 24(D), is transferred for less than an adequate
and full consideration in money or money's worth, then the amount
by which the fair market value of the property exceeded the value
of the consideration shall, for the purpose of the tax imposed by this
Chapter, be deemed a gift, and shall be included in computing the
amount of gifts made during the calendar year: Provided, however,
That a sale, exchange, or other transfer of property made in the
ordinary course of business (a transaction which is a bona fide, at
arm's lene:th, and free from any donative intent), will be considered
as made for an adequate and full consideration in money or money's
worth.

Bar Question (1999)

A, an individual, sold to B, his brother-in-law, his lot with
a market value of 1'1,000,000 for P600,000. A's cost in the lot is
Pl00,000. B is financialJy capable of buying the lot. A also owns X
Co., which has a fast growing business.
A sold some of his shares of stock in X Co. to his key executives
in X Co. These executives are not related to A. The selling price is
P3,000,000 which is the book value of the shares sold but with a
market value of P5,000,000. A's cost in the shares sold is Pl,000,000.
The purpose of A in selling the shares is to enable his key executives

'Sec. 100, NIRC, as amended by R.A. No. 10963 (TRA]N), effective January
1
2018; Sec. 16, Rev. Regs. No. 12-2018. '
478 REVIEWER ON TAXATION

to acquire proprietary interest in the business and have a personal

stake in its business.
Explain if the above transactions are subject to donor's tax.

Suggested answer:
The first transaction where a lot was sold by A to his brother-
in-law for a price below its fair market value will not be subject to
donor's tax if the lot qualifies as a capital asset. The transfer for less
than adequate and full consideration which gives rise to a deemed
gift, does not apply to a sale of property subject to capital gains tax
(Sec. J00, NIRC). However, if the lot sold is an ordinary asset, the
excess of the fair market value over the consideration received shall
be considered as a gift subject to the donor's tax.
The sale of shares of stock below the fair mark et value thereof
is subject to the donor's tax pursuant to the provisions of Section 100
of the Tax Code. The excess of the fair market value over the selling
price is a deemed gift.

Exempt Donations
The following gifts or dona tions made by a resident or
nonresident alien are exempt from the donor's tax: 5
1. Gifts made to or for the use of the National Govern ment
or any entity created by any of its agencies which is not conducted
for profit, or to a ny political subdivision of the said Government; and
2. Gifts in favo r of a n education al and/or ch arita ble, reli-
gious, cultural, or social welfare corporation, in stitution , accred-
ited non-government organization, t rust, or philanthropic organi-
zation or research institution or organization: Provided, however,
That not more than 30% of said gifts sh all be used by such donee
for administration purposes. For the purpose of this exemption, a
'non-profit educational and/or c haritable corporation, in-
s titution,
·1 accredited nongovernme nt organization, trust, or
P h i anthropic organiz ation and/or research institution or
organiz ation' is a school, college, or university an d/or ch aritable
corporation, accredited non-government or ganization, trust, or phil-

5
Sec. 101, NIRC, as amended by R.A. 10963 (TRAIN), effective January 1,
2018; Sec. 17, Rev. Regs. No. 12-2018.
 TRANRFRR TAXE!'I 479
Donor·~ Tax

anthropir organization and/or research institution or organization,

jncorporated 8$ a non-stock entity, paying no dividends, governed by
truste~s who receive no compensation, and devoting all its income,
whether students· fees or gifts, donation, subsidies, or other forms of
philanthropy, to the accomplishment and promotion of the purposes
enumerated in its Articles of Incorporation.

Dowries or Gifts on Account of Marriage

The exemption of dowries or gifts made on account of
ma rriage and before its celebration or within one year thereafter
by parents to each of their legitimate, recognized natural, or
adopted childre n to t he extent of the first Pl0,000 under Section
101 of the NIRC was revoked by R.A. 10963 (TRAIN), effective
January 1, 2018.

Bar Question (1992)

Mr. Bill Morgan, a Canadian citizen and a resident of
Scarborough. Ontario, sends a gift check of $20,000 to his future
Filipino daughter-in-law who is to be married to his only son in the
Philippines.
1) Is the donation by Mr. Morgan subject to tax? Explain.

Suggested answer:
Yes. While the gift has been made on account of marriage, to
qualify for exemption to the extent of the first P 10,000 of the value
thereof, such gift should have been given to a legitimate, recognized
natural, or adopted child of the donor.

2) What is the tax consequence, if any, to the donee (Filipino

daughter-in-law of Mr. Morgan)?

Suggested answer:
The gift, with respect to the donee, is ex~luded from, gr?ss income
and is exempt from income taxation. There is no donee s gift tax.

3) Can you name one kind of gift th~t is exempt from d~nor's
tax which is extendible to both residents and non-residents
or non-citizens of the Philippines? Include qualifications,
if any.
480 R EVIEWER ON TAXATION

Suggested answer:
Gifts made to or for the use of the National Government or any
entity created by any of its agencies which is not cond ucted for profit,
or to any political subdivision of the said Government, are exempt
from gift tax with respect to both residents and non-residents.

Bar Question (2011)

Celia donated Pl 10,000 to her friend Victoria, who was getting
married. Celia gave no other gift during the calendar year. What is
the donor's tax implication on Celia's donation?

Suggested answer:
Celia shall pay a 30% donor's tax on the Pl00,000 cash
donation, since Victoria, the donee, is a stranger to her. A "stranger"
is a person who is not a brother, sister (whether by whole or half-
blood), spouse, ancestor and lineal descendant; or a relative by
consanguinity in the collateral line within the fourth civil degree of
relationship (Sec. 99[BJ, NIRC). Celia is not entitled to deduct the
amount of P10,000 as dowry or gift on account of marriage because
that privilege is given only to parents of the donee who is getting
married (Sec. lOl[AJ, NIRC). [NOTE: The exemption of dowries or
gifts on account of marriage has been removed under R.A. 10963
(TRAIN)]

Bar Question (2009)

Miguel, a citizen and resident of Mexico, donated $1,000 worth
of stocks in Barack Motors Corporation, a Mexican company, to his
legitimate son, Miguelito, who is residing in the Philippines and
about to be married to a Filipino girlfriend. Mexico does not impose
any transfer tax of whatever nature on all gratuitous transfers of
property. (a) Is Miguel entitled to claim a dowry exclusion? Why or
why not? (b) Is Miguel entitled to the rule of reciprocity in order to
be exempt from the Philippine donor's tax? Why or why not?

Suggested answers:
a. Dowries or gifts made on account of marriage and before
its celebration or within one year thereafter by parents to
each of their legitimate, recognized natural, or adopted
children to the extent of the first Ten thousand pesos
(PJ0,000) is exempt from donor's tax (Sec. lOJ[AJ, NIRC).
To be entitled to the dowry exemption under the donor's
 TRANSFER TAXES 481
Donor's Tax

tax law, the donor must be a resident of the Philippines.

Since Miguel is a non-resident alien, he does not qualify to
claim such exemption.
b. Miguel is not entitled to the rule of reciprocity in order to be
exempt from the Philippine donor's tax. In the first place,
the donation by Miguel, a non-resident Mexican citizen,
of the shares of stocks of Barack Motors Corporation, a
Mexican company, which has not acquired business situs
in the Philippines, to his son, Miguelito, is exempt from
donor's tax under Section 104 of the 1997 Tax Code, which
provides that "... where the donor was a non-resident
alien at the time of his donation, his real and personal
property so transferred but which are situated outside
the Philippines shall not be included as part of his 'gross
gift.' " In other words, there is nothing to be subject to
donor's tax, and there is no reciprocity rule necessary to
claim exemption.

Exemptions under Special Laws

1. Donations to Philippine government for scientific,
engineering, and technological research, invention, and
development (R.A. 1606);
2. Donations to social welfare, cultural, and charitable
organizations (P.D. 507; R.A. 1.916);
3. Donations to the International Rice Research Institute
(R.A. 2707);
4. Donations to Ramon Magsaysay Award Foundation (R.A .
3076);
5. Donations to the National Museum, the National Library,
and the archives of the National Historical Institute (P.D.
373);
6. Donations to the Southern Philippines Development
Administration (P.D. 690);
7. Donations to the Intramuros Administration (P. D. 1616).

Bar Question (2017)

CMI School Inc., a non-stock, non-profit corporation, donated
its three parcel~ of idle land situated in the Municipality of
Cuyapo, Nueva Ecija to SLC University, another non-stock, non-
482 REVIEWER ON TAXATION

profit corporation, in recognition of the latter's contribution to and

i
participation in the spiritual and educational development of the t
former. l
t
(a) Is CMI School, Inc. liable for the payment of donor's tax? i
(b) Is SLC University later sells the three parcels of idle land
to Puregold Supermarket, Inc., a stock corporation, will
SLC University be liable to capital gains tax? Explain
your answer
(c) If SLC University donates the three parcels of idle land
in favor of the Municipality of Cuyapo, Nueva Ecija, will
SLC University be liable for donor's tax? Explain your
answer.

Suggested answer: ·
. . .

(a) No. Gifts made by a resident in favor of an educational

corporation or institution shall be exempt from donor's
tax (Sec. 101[AJ[3]; 1997 NIRC, as amended). Considering
that SLC University is a non-stock, non-profit corporation,
· and the property donated was made by a resident, then,
such exemption under the law applies to the present case.
(b) Yes. The gain presumed to have been realized on.the sale,
exchange, or disposition of lands and/or buildings which
are not actually used in. the business of a corporation and
are treated as capital assets shall be subject to capital gains
tax (Sec. · 27[DJ[5], 1997 NIRC, as amended). Likewise,
Section 30 of the NIRC subjects . to income tax (capital
gains tax) all income from properties, real or personal, or
from any activity conducted for profit, irrespective of the
disposition of the income, by all tax exempt corporations.
(c) No. Gifts made by a resident to any political subdivision
of the National Government shall be exempt from donor's
tax (Sec. 10J[AJ[2], 1997 NIRC, as amended).
Bar Question (2011)
Levox Corporation wanted to donate P5 million as prize money
for the i:vorld f!rofessional billiard championship to be held in the
Philippines. Sin_ce the Billiard Sports Federation of the Philippines
does not. recognize th~ event, it was held under the auspices of the
International Professional Billiards Association, Inc. IsLevox subject
to donor's tax on its donation?
 TRANSFER TAXES 483
Donor's Tax

Suggested answer:
Yes, . since the national sports association fo r billiards does
not sanction the event, and the donation is not included among the
exempt donations under the law.

Bar Question (2002)

On De_cember _6, 2001, LVN Corporation donated a piece of
vac~nt lot situated 1n Mandaluyon g City to an accredited and duly
registered non-st ock, non-profit educational institution to be used
by the latter in building a sports complex for students.
a. May the donor claim in full as deduction from its gross
income for the taxable year 2001 the amount of t he
donated lot equivalent to its fair market value/zonal value
at the time of the donation? Explain your answer.
b. In order that donations to non-stock, non-profit
educational institution may be exempt from the donor's
gift tax, what conditions must be met by the donee?

Suggested answer:
a. No. Donations and/or contributions made to qualified
donee institutions consisting of property other than money
shall be based on the acquisition cost of the property. The
donor is not entitled to claim as full deduction the fair
market value/zonal value of the lot donated (Sec. 34/HJ,
NIRC).
b. In order that donations to non-stock, non-profit educational
institution may be exempt from the donor's gift tax, it is
required that not more than 30% of the said gifts shall be
used by the donee-institution for administration purposes
(Sec. 101{AJ[3J, NIRC).
Bar Question (1994)
In 1991, Imelda gave her parents a Christmas gift of Pl00,000
and a donation of PS0,000 to her parish church. She also donated a
parcel of land for the construction of a building to the PUP Alumni
Association, a non-stock, non-profit organization. Portions of the
building shall be leased to generate income for the association.
(1) Is the Christmas gift of Pl00,000 to Imelda's parents
subject to tax?
484 R EVIEWER ON T AXATION

(2) How about the donation to the parish church?

(3) How about the donation to the P.U.P. Alumni Association?

Suggested answer:
(I) The Christmas gift of PJ00,000 given by Imelda to her
parents is taxable up to P50,000 because under the law
(Sec. 92[a] now Sec. 99[A], NIRC), net gifts not exceeding
P50, 000. 00 are exempt.
[NOTE: A flat rate of six percent donor's tax is
imposed on the total donations made during the calendar
year in excess of P250,000, regardless of relationship of
donor and donee, under R.A. 10963 (TRAIN), effective
January 1, 2018]
(2) The donation of P80,000 to the parish church even
assuming that it is exclusively for religious purposes is not
tax-exempt because the exemption granted under Section
28(3), Article VI of the Constitution applies only to real
estate taxes (L ladoc v. CIR, 14 SCRA 292 [1965]) .
[NOTE: Gifts in favor of religious institutions are
now exempt from donor's tax.]
(3) The donation to the P. U.P. Alumni Association does not
also qualify for exemption both under the Constitution
and the aforecited law because it is not an educational
or research organization, corporation, institution,
foundation, or trust.

Procedure for computing net gifts

The tax for each calendar year shall be computed on th e basis
of the total net gifts made during the calendar year in accordance
with the tax rate prescribed in the law (i.e., The first P250,000 net
gift is exempt under R.A. 10963 [TRAIN], effective January 1, 2018,
and any amount in excess thereof shall be subject to six percent)
(Sec. 99[AJ, NIRC).
The tax is imposed on the cumulative basis during the calendar
year; i.e., the rate is applied on the aggregate net gifts during the
calendar year, but donor's taxes paid during the calendar year are
credited against the donor's tax due on the latest donation during
the same calendar year. Thus, all donations made in one calendar
year by a donor are taxed at the same tax rate as if they had been
 TRANSFER TAXES 485
Donor's Tax

made at one time. A new computa tion of donor's tax is made for gifts
made by the donor in another calendar year(s).

Bar Question (1995)

Kenneth Yusoph owns a commercial lot which he bought many
years ago for Pl Million. It is now worth P20 Million although the
zonal value is only P15 Million. He donates one-half pro indiviso
interest in the land to his son Dino on December 31, 1994, and the
other one-half pro indiviso interest to the same son on January 2,
1995.
(1) How much is the value of the gifts in 1994 and 1995 for
purposes of computing the gift tax? Explain.
(2) The Revenue District Officer questions the splitting of the
donations into 1994 and 1995. He says that since there
were only two days separating the two donations they
should be treated as one, having been made within one
year. Is he correct? Explain.
(3) Dino subsequently sold the land to a buyer for P20 Million.
How much did Dino gain on the sale? Explain.
(4) Suppose, instead of receiving the lot by way of donation,
Dino received it by inheritance. What would be his gain
on the sale of the lot for P20 Million? Explain.

Suggested answer:
(1) TM value of the gifts for purposes of computing the gift tax
shall be P7.5 million in 1994 and P7.5 million in 1995. In
valuing a real property for gift tax purposes the property
should be appraised at the higher of two values as of the
time of donation which are (a) the fair market value as
determined by the Commissioner (which is the zonal value
fixed pursuant to S ec. 16[e] of the Tax Code), or (b) the fair
market value as shown in the schedule of values fixed by the
Provincial and City Assessors. The fact that the property is
worth P20 million as of the time of donation is immaterial,
unless it can be shown that this value is one of the two
values mentioned as provided under Section 81 of the Tax
Code.
(2) The Revenue District Officer is not correct because the
computation of the gift tax is cumulative but only insofar
486 REVIEWER ON TAXATION

as gifts made within the same calendar year. Therefore,

there is no legal justification for treating two gifts effected
in two separate calendar years as one gift.
(3) Dino gained an income of P 19 million from t~e sale.
Dino acquires a carry-over basis which is the basis of the
property in the hands of the donor or P1 million. The gain
from the sale or other disposition of property shall be the
excess of the amount realized therefrom over the basis or
adjusted basis for determining gain (Sec. 34[aj, NIRC).
Since the property was acquired by gift, the basis for
determining gain shall be the same as if it would be in the
hands of the donor or the last preceding owner by whom
the property was not acquired by gift. Hence, the gain is
computed by deducting the basis of P 1 million from the
amount realized which is P20 million.
(4) If the commercial lot was received by inheritance the gain
from the sale for P20 million is P5 million because the
basis is the fair market value as of the date of acquisition.
The stepped-up basis of P 15 million which is the value for
estate tax purposes is the basis for determining the gain
(Sec. 34[bj[2}, N IRC).
Bar Question (2001)
Your bachelor client, a Filipino residing in Quezon City,
wants to give his sister a gift of P200,000. He seeks your advice, for
purposes of reducing if not eliminating t he donor's tax on the gift, on
whether it is better for him to give all of the P200,000 on Christmas
2001 or to give PI00,000 on Christmas 2001 and the other Pl00,000
on January 1, 2002. Please explain your advice.

Suggested answer:
I would advise him to split the donation. Giving the P200,000
as a one-time donation would mean that it will be subject to a higher
tax bracket under the graduated tax structure, thereby necessitating
the payment of donor's tax. On the other hand, splitting the donation
into two equal amounts of P 100,000 given on two different years will
totally relieve the donor from the donor's tax because the first PI 00, 000
donation in the graduated brackets is exempt (Sec. 99, NIRC).
lfhile the donor's tax is computed on the cumulative donations, the
aggregation of all donations made by a donor is allowed only over
one calendar year.
 TRANSFER TAXES 487
Donor's Tax

[NOTE: A flat rate of six percent donor's tax is imposed on the

total donations made during the calendar year in excess of P250,000,
regardless of relationship of donor and donee, under R.A. 10963
(TRAIN), effective January 1, 2018.]

Bar Question (2000)

a) When the donee or beneficiary is a stranger, the tax
payable by the donor shall be 30% of the net gifts. For
purposes of this tax, who is a stranger?
b) What conditions must occur in order that all grants,
donations and contributions to non-stock, non-profit
private educational institutions may be exempt from the
donor's tax under Section l0l(a) of the Tax Code?

Suggested answer:
(a) A "stranger" is a person who is not a:
(1) Brother or sister (whether by whole or half-blood),
spouse, ancestor, and lineal descendant; or
(2) Relative by consanguinity in the collateral line
within the fourth degree of relationship (Sec. 98[BJ,
NIRC).
[NOTE: A flat rate of six percent donor's tax is imposed on the
total donations made during the calendar year in excess of P250,000,
regardless of relationship of donor and donee, under R.A. 10963
(TRAIN), effective January 1, 2018.]
(b) The fallowing are the conditions:
1) Not more than 30% of said gifts shall be used by
such donee for administration purposes;
2) The educational institution is incorporated as a
I
non-stock entity, paying no dividends, governed by

lI trustees who receive no compensation, and devoting

all its income, whether students' fees or gifts,
donations, subsidies or other forms of philanthropy,
to the accomplishment and promotion of the
purposes enumerated in its Articles of Incorporation
(Sec. J0J[AJ[3}, NIRC).