TAXATION 2

NOTES KMH

DEFINITION AND CONCEPT OF TAXATION

- These are imposed whether the transfer is
gratuitous or onerous.
Taxation is the power by which the sovereign, through its
law-making body, raises revenue to defray the necessary - They are not taxes on the property because their
expenses of government. It is merely a way of apportioning imposition does not rest upon general ownership
the costs of government among those who, in some but on the transfer of the property.
measure, are privileged to enjoy its benefits and must bear - Transfer tax is due although the properties are
its burdens (Aban, 2001). escheated to the State for lack of heirs.

It is a mode by which governments make exactions for 1. Constitutional Provisions on Transfer Taxes
revenue in order to support their existence and carry out
their legitimate objectives. Taxation may refer to either or 1.1. Sec I Art III
both the power to tax or the act or process by which the - No person shall be deprived of life, liberty, or
taxing power is exercised (Vitug, 2006). property without due process of law, nor shall
any person be denied the equal protection of the
In other words, taxation is:
laws.
- The inherent power of the sovereign exercised through
legislature 1.2 Sec 28 (1) Art VI
- To impose burdens - The rule of taxation shall be uniform and
- Upon subjects and objects equitable. The Congress shall evolve a
- Within its jurisdiction progressive system of taxation.
- For the purpose of raising revenues 1.3 Sec 4 (4) Art XIV
- To carry out the legitimate objects of government - Subject to conditions prescribed by
law, all grants, endowments, donations, or
MODES OF ACQUIRING OWNERSHIP contributions used actually, directly, and
exclusively for educational purposes shall be
NCC Article 712. Ownership is acquired by: exempt from tax.

2. Types of Transfer Taxes

1. Occupation; and
2.1 NIRC Sec 84- Estate Tax -Rates of Estate Tax. 
2. by intellectual creation. - There shall be levied, assessed, collected and
paid upon the transfer of the net estate as
Ownership and other real rights over property are determined in accordance with Sections 85 and
acquired and transmitted: 86 of every decedent, whether resident or
nonresident of the Philippines, a tax at the rate
1. by law; of six percent (6%) based on the value of such
net estate.
2. by donation;
2.2 NIRC Sec 98 – Donors Tax Imposition of Tax-
- (a) There shall be levied, assessed, collected and
3. by testate and intestate succession; paid upon the transfer by any person, resident or
nonresident, of the property by gift, a tax,
4. and in consequence of certain contracts, by computed as provided in Section 99.
tradition.
- (b) The tax shall apply whether the transfer is in
They may also be acquired by means of prescription. trust or otherwise, whether the gift is direct or
indirect, and whether the property is real or
personal, tangible or intangible.

TRANSFER TAXES 2.3 RA 7160 Sec 135 - Tax on Transfer of Real

Property Ownership
- Transfer taxes are taxes imposed upon the privilege of (a) The province may impose a tax on the sale ,
gratuitously transferring or passing ownership of property. donation, barter, or on any other mode of
Gratuitous transfer is one that neither imposes burden nor
transferring ownership or title of real property at
requires consideration from the transferee or recipient.
the rate of not more than fifty percent (50%) of
- Taxes levied on the transmission of private properties the one percent (1%) of the total consideration
from a prior decedent to his heirs in the case of estate tax, involved in the acquisition of the property or of
or from a donor to a done in the case of donor’s tax. the fair market value in case the monetary
1

Page
 TAXATION 2
NOTES KMH
consideration involved in the transfer is not
substantial, whichever is higher. The sale, - By nature, estate tax is an excise tax, it is a tax
transfer or other disposition of real property on privilege of transmitting property from one
pursuant to R.A. No. 6657 shall be exempt from person to another, it is not a property tax. The
this tax. value of the property only serves as a tax base.
Sec. 84 provides that Estate tax is base on the
(b) For this purpose, the Register of Deeds of the value, it refers to the value of the property
province concerned shall, before registering any multiplied by the rate.
deed, require the presentation of the evidence - Estate tax is an ad valorem tax, it is base on
of payment of this tax. The provincial assessor shall value.
likewise make the same requirement before - It is a national tax.
cancelling an old tax declaration and issuing a - It is a general tax, there is no specific purpose
new one in place thereof. Notaries public shall furnish for its collection.
the provincial treasurer with a copy of any deed - Fiscal tax since it is intended to defray the
transferring ownership or title to any real expenses of the government.
property within thirty (30) days from the date of - Progressive tax, as your tax base increases, your
notarization. tax rate also increases.

TRANSFER TAX
It shall be the duty of the seller, donor,
transferor, executor or administrator to pay the
These are taxes imposed upon the privilege of passing
tax herein imposed within sixty (60) days from ownership of property without any valuable consideration
the date of the execution of the deed or from the (Domondon, 2014).
date of the decedent’s death.
Kinds of Transfer Taxes under the NIRC
- This covers real property only 1. Estate tax - the privilege of a decedent to gratuitously
transmit property at the time of his death.
- This covers both gratuitous and onerous 2. Donor’s tax - It is a tax on the privilege of a person to
transfer. gratuitously transmit property during his lifetime.

II. ESTATE TAX

3. Rationale of Transfer of Taxation
- It Is a tax on the right to transfer property at
- A transfer tax is imposed on tax on the sale, donation, death and on certain transfers that are made by
barter, or any other mode of transferring ownership or law the equivalent of testamentary disposition
title of real property at the maximum rate of 50% of 1% and is measured by the value of the property.
(75% of 1% in the case of cities and municipalities within
Metro Manila) of the total consideration involved in the Characteristics of Estate Tax
acquisition of the property or of the fair market value in
case the monetary consideration involved in the transfer is By nature, estate tax is an excise tax, it is a tax on privilege
not substantial, whichever is higher. This is pursuant to of transmitting property from one person to another, it is
Section 135 of the Local Government Code of 1991 (LGC). not a property tax. The value of the property only serves
as a tax base. Sec. 84 provides that Estate tax is base on
Transfer tax is needed to be paid because the evidence of its the value, it refers to the value of the property multiplied
payment is required by the Register of Deeds of the by the rate.
province concerned before registering any deed. This is
also required by the provincial assessor before cancelling
Estate tax is an ad valorem tax, it is base on value.
an old tax declaration and issuing a new one in its
place. Please do not confuse the transfer tax which is
paid to the local government with the transfer taxes due It is a national tax.
to the BIR (which may either be donor’s or estate taxes).
It is a general tax, there is no specific purpose for its
4. Nature of Transfer Taxes collection.
- Transfer taxes are excise or  privilege taxes.
Fiscal tax since it is intended to defray the expenses of the
- It is not a tax on property because their
government.
imposition does not rest upon general ownership
but rather they are privilege tax since they are
Progressive tax, as your tax base increases, your tax rate
imposed on the act of passing ownership of
also increases.
property (Domondon, 2009).

Page
 TAXATION 2
NOTES KMH
- This is a privilege tax imposed on the act of
passing ownership of property and not a direct Thomas Hanley died, leaving a will and considerable
tax on the property itself neither is it a capitation
tax ( a tax laid on the property or transferor or amount of real and personal properties. The will
transferee). bequeathed Matthew Hanley, Thomas' nephew, the
- It is an excise tax the object is the shifting o money and the real estate. Also stipulated was that the
economic benefits and enjoyment of property
from the dead to the living. property will only be given ten years after Thomas' death.
- This is imposed on the basis of the net estate
considered as a unit. The first Php 5.0 million of The CFI appointed PJM Moore as considered trustee to
the net estate is EXEMPT from estate tax. administer the real properties. Moore acted as trustee
- It accrues as of the death of the decedent, until he resigned and Pablo Lorenzo was appointed in his
notwithstanding the postponement of the actual stead.
possession or enjoyment of the estate
beneficiary.
- The transfer of the property of a decedent to his Juan Posadas, the CIR, assessed inheritance tax against the
heirs and beneficiaries takes place at the estate amounting to P2,057.74. Lorenzo paid the tax after
moment of death without any interruption. he was ordered by the CFI due to the CIR's motion.
- It is imposed on the transfer of the decedent’s
estate to his lawful heirs and beneficiaries based Lorenzo claimed that the inheritance tax should have been
on the fair market value of the net estate at the assessed after 10 years and asked for a refund.
time of the decedent’s death.
- The law at the time of death of the decedent is
controlling notwithstanding the actual The CIR denied the protest and reassessed Lorenzo of
possession or enjoyment of the property by the P1,191.27 which represents interest due on the tax and
beneficiary. which was not included in the original assessment.
- If the properties are worth less than Php 20,000
but the composition thereof includes registrable However, the CFI dismissed this counterclaim and also
properties, notice of death is required. denied Lorenzo’s claim for refund against the CIR, thus the
- An estate tax return shall be filed by the case.
executor, administrator or any of the legal heirs
with the BIR within 1 year from date of death.
The BIR may give a reasonable extension of not ISSUES :
exceeding 30 days for the filing of the return.
- The estate tax return shall be filed with the office 1. When does the inheritance tax accrue and when
of the CIR where the decedent was domiciled at must it be satisfied.
the time of his death.
2. Whether the inheritance tax be computed from
- Under the Tax Code, the estate tax shall be paid
its value ten years later.
at the time the return is filed. When the CIR shall
            
find that the payment on the date prescribed by
3. Whether the compensation of the trustees
law would impose undue hardships upon the
should be part of the estate subject to tax.
estate or the heir, he may extend the time for
payment of such tax not to exceed 5 years in
case of judicial settlement or 2 years in case the RULING:
estate is extra-judicially settled.
- The taxpayer in estate taxation is the estate of 1. The accrual of the inheritance tax is distinct
the decedent represented by the administrator, from the obligation to pay the same. Section
executor or legal heirs. Said tax as imposed 1536 as amended, of the Administrative Code,
should therefore be paid by any of them before imposes the tax upon "every transmission by
delivery of any distributive share of the estate to virtue of inheritance, devise, bequest, gift mortis
any beneficiary, the Tax Code imposes upon the causa, or advance in anticipation of inheritance,
beneficiary a subsidiary liability for the devise, or bequest." The tax therefore is upon
payment of such portion of the estate as his transmission or the transfer or devolution of
distributive share bears to the value of the total property of a decedent, made effective by his
net estate. (proportionate). death. It is in reality an excise or privilege tax
imposed on the right to succeed to, receive, or
Pablo Lorenzo v. Juan Posadas Jr. take property by or under a will or the intestacy
G.R. No. L- 43082, June 18, 1937 law, or deed, grant, or gift to become operative

Page
 TAXATION 2
NOTES KMH
at or after death. According to article 657 of the SEC. 1543. Exemption of certain acquisitions and
Civil Code, "the rights to the succession of a transmissions. — The following shall not be
person are transmitted from the moment of his taxed:
death." "In other words", said Arellano, C. J., ". . .
the heirs succeed immediately to all of the (a) The merger of the usufruct in the
property of the deceased ancestor. The property owner of the naked title.
belongs to the heirs at the moment of the death
of the ancestor as completely as if the ancestor
(b) The transmission or delivery of the
had executed and delivered to them a deed for
inheritance or legacy by the fiduciary
the same before his death."
heir or legatee to the trustees.

Plaintiff, however, asserts that while article 657

(c) The transmission from the first heir,
of the Civil Code is applicable to testate as well as
legatee, or donee in favor of another
intestate succession, it operates only in so far as
beneficiary, in accordance with the
forced heirs are concerned. But the language of
desire of the predecessor.
article 657 of the Civil Code is broad and makes
no distinction between different classes of heirs.
That article does not speak of forced heirs; it In the last two cases, if the scale of taxation
does not even use the word "heir". It speaks of the appropriate to the new beneficiary is greater
rights of succession and the transmission thereof than that paid by the first, the former must pay
from the moment of death. The provision of the difference.
section 625 of the Code of Civil Procedure
regarding the authentication and probate of a SEC. 1544. When tax to be paid. — The tax fixed
will as a necessary condition to effect transmission of in this article shall be paid:
property does not affect the general rule laid
down in article 657 of the Civil Code. The (a) In the second and third cases of the
authentication of a will implies its due execution next preceding section, before
but once probated and allowed the transmission entrance into possession of the
is effective as of the death of the testator in property.
accordance with article 657 of the Civil Code.
Whatever may be the time when actual
transmission of the inheritance takes place, (b) In other cases, within the six
succession takes place in any event at the months subsequent to the death of the
moment of the decedent's death. The time when predecessor; but if judicial
the heirs legally succeed to the inheritance may testamentary or intestate proceedings
differ from the time when the heirs actually shall be instituted prior to the
receive such inheritance. "Poco importa" ( does expiration of said period, the payment
not matter), says Manresa commenting on shall be made by the executor or
article 657 of the Civil Code, "That from the death of administrator before delivering to each
the deceased, until the heir or legatee comes into beneficiary his share.
possession of the assets of the inheritance or the
legacy, a long or little time elapses, since the If the tax is not paid within the time
acquisition must be carried back to the moment hereinbefore prescribed, interest at the rate of
of death, and so ordered by the Article 989, twelve per centum per annum shall be added as
which should be considered as a complement to this. "" part of the tax; and to the tax and interest due
Thomas Hanley having died on May 27, 1922, the and unpaid within ten days after the date of
inheritance tax accrued as of the date. notice and demand thereof by the collector,
there shall be further added a surcharge of
Thomas Hanley having died on May 27, 1922, the twenty-five per centum.
inheritance tax accrued as of the date.
A certified of all letters testamentary or of
The time for the payment on inheritance tax is administration shall be furnished the Collector of
clearly fixed by section 1544 of the Revised Internal Revenue by the Clerk of Court within
Administrative Code as amended by Act No. thirty days after their issuance.
3031, in relation to section 1543 of the same
Code. The two sections follow:
2. If death is the generating source from which the
power of the estate to impose inheritance taxes

Page
 TAXATION 2
NOTES KMH

takes its being and if, upon the death of the ultimately passes, are of voluntary creation, and
intended for the preservation of the estate. No
decedent, succession takes place and the right of sound reason is given to support the contention
the estate to tax vests instantly, the tax should that such expenses should be taken into
be measured by the value of the estate as it consideration in fixing the value of the estate for
the purpose of this tax."
stood at the time of the decedent's death,
regardless of any subsequent contingency value BIR Ruling No. 093-85, June 13, 1985
of any subsequent increase or decrease in value.
"The right of the state to an inheritance tax THEORIES OF ESTATE TAXATION
accrues at the moment of death, and hence is
ordinarily measured as to any beneficiary by the 1. Benefit Received Theory
- The tax is in return for the services of the
value at that time of such property as passes to
government renders in the distribution of the
him. Subsequent appreciation or depreciation is estate of the decedent, either by law or in
immaterial." accordance with his wishes, for the performance
of these services and other benefits that accrue
to the estate and the heirs, the State collects the
A transmission by inheritance is taxable at the
tax.
time of the predecessor's death, notwithstanding
2. Redistribution of Wealth Theory
the postponement of the actual possession or
- The tax is imposed to help reduce undue
enjoyment of the estate by the beneficiary, and
concentration of wealth the receipt of
the tax measured by the value of the property
inheritance is a contributing factor. Thus, the
transmitted at that time regardless of its
imposition of death tax reduces the property
appreciation or depreciation.
received by the successor, helping bring about a
more equitable distribution of wealth in society.
3. No. A trustee, no doubt, is entitled to receive a
3. Ability to pay Theory
fair compensation for his services. But from this
- The tax is based on the fact that the receipt of
it does not follow that the compensation due
inheritance creates an ability to pay, thus, the
him may lawfully be deducted in arriving at the
recipient has the ability to contribute to
net value of the estate subject to tax. There is no
government income.
statute in the Philippines which requires
4. State Partnership Theory
trustees' commissions to be deducted in
- The tax is the share of the State as a “passive”
determining the net value of the estate subject
and “silent/hidden partner” in the accumulation
to inheritance tax. Furthermore, though a
of property, because it has provided taxpayer for
testamentary trust has been created, it does not
protection, resources, incentives, proper climate
appear that the testator intended that the duties
and peace and order. Thus, it has the right to
of his executors and trustees should be
collect its share that is properly due.
separated. On the contrary, in paragraph 5 of his
will, the testator expressed the desire that his
GOVERNING LAW ON IMPOSITION OF ESTATE TAX
real estate be handled and managed by his
executors until the expiration of the period of
ten years therein provided. Judicial expenses are Pablo Lorenzo v. Juan Posadas Jr.
expenses of administration but, in State vs. G.R. No. L- 43082, June 18, 1937
Hennepin County Probate Court , it was said:
". . . The compensation of a trustee, earned, not It is well-settled that inheritance taxation is governed by
in the administration of the estate, but in the the statute in force at the time of the death of the
management thereof for the benefit of the decedent. The taxpayer cannot foresee and ought not to
legatees or devises, does not come properly be required to guess the outcome of pending measures. Of
within the class or reason for exempting course, a tax statute may be made retroactive in its
administration expenses. . . . Service rendered in operation. Liability for taxes under retroactive legislation
that behalf have no reference to closing the has been "one of the incidents of social life." But legislative
estate for the purpose of a distribution thereof intent that a tax statute should operate retroactively
to those entitled to it, and are not required or should be perfectly clear. "A statute should be considered
essential to the perfection of the rights of the as prospective in its operation, whether it enacts, amends,
heirs or legatees. . . . Trusts . . . of the character or repeals an inheritance tax, unless the language of the
of that here before the court, are created for the statute clearly demands or expresses that it shall have a
benefit of those to whom the property retroactive effect, . . . ." Though the last paragraph of

Page
 TAXATION 2
NOTES KMH
section 5 of Regulations No. 65 of the Department of primary obligation to pay the estate tax but the
Finance makes section 3 of Act No. 3606, amending heir or beneficiary has subsidiary liability for the
section 1544 of the Revised Administrative Code, payment of that portion of the estate which his
applicable to all estates the inheritance taxes due from distributive share bears to the value of the total
which have not been paid, Act No. 3606 itself contains no net estate. The extent of his liability, however,
provisions indicating legislative intent to give it retroactive shall in no case exceed the value of his share in
effect. No such effect can begiven the statute by this court. the inheritance.

Revenue Regulation No. 2-2001 Sec 3 DETERMINATION OF ESTATE TAX LIABILITY

SEC. 3. THE LAW THAT GOVERNS THE IMPOSITION OF ESTATE TAX RATE
ESTATE TAX. – It is a well-settled rule that estate taxation
is governed by the statute in force at the time of death of Section 85 NIRC
the decedent. The estate tax accrues as of the death of the
decedent and the accrual of the tax is distinct from the
- Gross Estate. - the value of the gross estate of
obligation to pay the same. Upon the death of the
the decedent shall be determined by including
decedent, succession takes place and the right of the State
the value at the time of his death of all property,
to tax the privilege to transmit the estate vests instantly
real or personal, tangible or intangible, wherever
upon death. The application of the rates herein prescribed
situated: Provided, however, that in the case of a
and the procedures in determining the estate tax due shall
nonresident decedent who at the time of his
apply to estate taxes falling due or have accrued beginning
death was not a citizen of the Philippines, only
January 1, 1998, the effectivity date of Republic Act No.
that part of the entire gross estate which is
8424, otherwise known as “The Tax Reform Act of 1997”.
situated in the Philippines shall be included in his
taxable estate.
It is a well-settled rule that estate taxation is governed by
- (A) Decedent's Interest. - To the extent of the
the statute in force at the time of death of the decedent
interest therein of the decedent at the time of
(Sec. 3 of RR No. 2-2003, Dec. 16, 2002 and Sec. 3 of RR
his death;
No. 12-2018, Jan. 25, 2018).
- (B) Transfer in Contemplation of Death. - To the
extent of any interest therein of which the
Accordingly, the tax rates and procedures prescribed decedent has at any time made a transfer, by
under the NIRC as amended by the TRAIN Law shall trust or otherwise, in contemplation of or
govern the estate of the decedent who died on or after intended to take effect in possession or
the effectivity date of the TRAIN Law which is on Jan. 1, enjoyment at or after death, or of which he has
at any time made a transfer, by trust or
2018.
otherwise, under which he has retained for his
life or for any period which does not in fact end
TAXPAYER OF ESTATE TAX AND LIABILITY FOR before his death (1) the possession or enjoyment
PAYMENT of, or the right to the income from the property,
or (2) the right, either alone or in conjunction
Section 22 (a) NIRC with any person, to designate the person who
- The term ‘person‘ means an individual, a trust, shall possess or enjoy the property or the
estate, or corporation. income therefrom; except in case of a bonafide
sale for an adequate and full consideration in
Section 9 (G), Revenue Regulation No. 2 -2003 money or money's worth.
- (G) Liability for payment – The estate tax - (C) Revocable Transfer. -
imposed under the Code shall be paid by the - (1) To the extent of any interest therein, of
executor or administrator before the delivery of which the decedent has at any time made a
the distributive share in the inheritance to any transfer (except in case of a bona fide sale for an
heir or beneficiary. Where there are two or more adequate and full consideration in money or
executors or administrators, all of them are money's worth) by trust or otherwise, where the
severally liable for the payment of the tax. The enjoyment thereof was subject at the date of his
estate tax clearance issued by the Commissioner death to any change through the exercise of a
or the Revenue District Officer (RDO) having power (in whatever capacity exerciseable) by the
jurisdiction over the estate, will serve as the decedent alone or by the decedent in
authority to distribute the conjunction with any other person (without
remaining/distributable properties/share in the regard to when or from what source the
inheritance to the heir or beneficiary. The decedent acquired such power), to alter, amend,
executor or administrator of an estate has the revoke, or terminate, or where any such power is
6

Page
 TAXATION 2
NOTES KMH
relinquished in contemplation of the decedent's - (G) Transfers of Insufficient Consideration. - If any
death. one of the transfers, trusts, interests, rights or
- (2) For the purpose of this Subsection, the power powers enumerated and described in
to alter, amend or revoke shall be considered to Subsections (B), (C) and (D) of this Section is
exist on the date of the decedent's death even made, created, exercised or relinquished for a
though the exercise of the power is subject to a consideration in money or money's worth, but is
precedent giving of notice or even though the not a bona fide sale for an adequate and full
alteration, amendment or revocation takes consideration in money or money's worth, there
effect only on the expiration of a stated period shall be included in the gross estate only the
after the exercise of the power, whether or not excess of the fair market value, at the time of
on or before the date of the decedent's death death, of the property otherwise to be included
notice has been given or the power has been on account of such transaction, over the value of
exercised. In such cases, proper adjustment shall the consideration received therefor by the
be made representing the interests which would decedent.
have been excluded from the power if the - (H) Capital of the Surviving Spouse. - The capital
decedent had lived, and for such purpose if the of the surviving spouse of a decedent shall not,
notice has not been given or the power has not for the purpose of this Chapter, be deemed a
been exercised on or before the date of his part of his or her gross estate.
- death, such notice shall be considered to have
been given, or the power exercised, on the date Section 22 TRAIN Law
of his death. - Section 84 of the NIRC, as amended, is hereby
- (D) Property Passing Under General Power of further amended to read as follows:
Appointment. - To the extent of any property - "Sec. 84. Rate of Estate Tax. - There
passing under a general power of appointment shall be levied, assessed, collected and
exercised by the decedent: (1) by will, or (2) by paid upon the transfer of the net
deed executed in contemplation of, or intended estate as determined in accordance
to take effect in possession or enjoyment at, or with Sections 85 and 86 of every
after his death, or (3) by deed under which he decedent, whether resident or
has retained for his life or any period not nonresident of the Philippines, a tax at
ascertainable without reference to his death or the rate of six percent (6%) based on
for any period which does not in fact end before the value of such net estate."
his death (a) the possession or enjoyment of, or
the right to the income from, the property, or (b) CLASSIFICATION OF DECEDENT
the right, either alone or in conjunction with any
person, to designate the persons who shall
possess or enjoy the property or the income (a) Resident Citizen (RC)
therefrom; except in case of a bona fide sale for (b) Non-Resident Citizen (NRC)
an adequate and full consideration in money or (c) Resident Alien (RA)
money's worth. (d) Non-Resident Alien with Reciprocity (NRAw/R)
- (E) Proceeds of Life Insurance. - To the extent of (e) Non-Resident Alien without Reciprocity (NRAw/oR)
the amount receivable by the estate of the
deceased, his executor, or administrator, as Q: Why is it important to determine the type of
insurance under policies taken out by the decedent?
decedent upon his own life, irrespective of
whether or not the insured retained the power A: To determine if the decedent will be taxable
of revocation, or to the extent of the amount from within and without;
receivable by any beneficiary designated in the
policy of insurance, except when it is expressly  Taxable from within and without: Resident
stipulated that the designation of the beneficiary citizen, Non-resident citizen, resident alien
is irrevocable.
- (F) Prior Interests. - Except as otherwise  Taxable only from within: Non- resident citizen
specifically provided therein, Subsections (B), (C)
and (E) of this Section shall apply to the A: The classification of a decedent affects the
transfers, trusts, estates, interests, rights, determination of his/her Gross Estate, the
powers and relinquishment of powers, as Allowable Deductions which he/she may claim
severally enumerated and described therein, and the place where his/her Estate Tax Return
whether made, created, arising, existing, must be filed.
exercised or relinquished before or after the
effectivity of this Code.
7

Page
 TAXATION 2
NOTES KMH
Reciprocity rule is applicable only in case of intangible time of his death or donation did not impose a
personal property. transfer tax of any character, in respect of intangible
personal property of citizens of the Philippines not
So if yong non- resident citizen may real property dito sa residing in that foreign country, or
Pilipinas, kasama yon sa gross estate. Pag may personal 2. No Transfer Tax Clause- If the laws of the foreign
property, saka may qualify. If tangible like car, yate, country of which the decedent or donor was a citizen
kasama yan. If intangible saka papasok kung mag aapply ba and resident at the time of his death or donation
ung reciprocity rule. allows a similar exemption from transfer or death
taxes of every character or description in respect of
Reciprocity Clause – No tax shall be collected with respect intangible personal property owned by citizens of the
to the intangible personal property of a decedent (who Philippines not residing in that foreign country. (Sec.
died here in the Philippines) if: 104, NIRC)

#1. At the time of his death, the decedent was GROSS ESTATE
a citizen and resident of a foreign country,
which, at the time of his death, did not SEC 4, REVENUE REGULATION 2-2003
impose a transfer tax of any character on
intangible personal properties of citizens COMPOSITION OF THE GROSS ESTATE. – The gross estate
of the Philippines not residing in that of a decedent shall be comprised of the following
foreign country; or properties and interest therein at the time of his death,
including revocable transfers and transfers for insufficient
#2. The laws of the foreign country of which consideration, etc.:
the decedent was a citizen and resident at A) Residents and citizens – all properties,
the time of his death allows a similar real or personal, tangible or intangible,
exemption from transfer or death taxes of wherever situated.
every character or description with
respect to intangible personal properties B) Non-resident aliens – only properties
of citizens of the Philippines not residing situated in the Philippines provided, that,
in that foreign country. with respect to intangible personal
property, its inclusion in the gross estate
Q: What are considered as Intangible Personal Properties
is subject to the rule of reciprocity
located/situated in the Philippines?
provided for under Section 104 of the
Code.
Section 104 provides for the intangible personal
properties. (not exclusive) and the Q: How do you determine the gross estate?
requirements/conditions for them to be considered as
located/situated in the Philippines: A:
1. All the properties existing at the time of death less
1. Franchise which must be exercised in the Philippines; the exemptions (Sec.85 [h]), exclusions (Sec.87).
2. Shares, obligations or bonds issued by any corporation
or sociedad anonima Organized or constituted in the General Rule: All properties existing and
Philippines in accordance with its laws; owned by the decedent at the time of his
3. Shares, obligations or bonds by any foreign corporation death shall form part of his Gross Estate.
85% of its business is located in the Philippines;
4. Shares, obligations or bonds issued by any Foreign Exceptions: There are properties not owned by the
corporation if such shares, obligations or bonds have decedent, at the time of his death, which shall still
acquired a business Situs in the Philippines; form part of his Gross Estate:
5. Shares or rights in any partnership, business or industry
Established in the Philippines.
a. DECEDENT’S INTEREST, to the extent of his
interest therein at the time of his death.
Reciprocity Rule
This refers to the extent of equity or
1. Exemption Clause - If the decedent at the time of his
ownership participation of the decedent
death or the donor at the time of the donation was a
on any property physically existing and
citizen and resident of a foreign country which at the

Page
 TAXATION 2
NOTES KMH
present in the gross estate, whether or
not in his possession, control or dominion.
(b) stage of health of the decedent at
Example: dividend declared before but the date of transfer;
paid after the death of a stockholder-
decedent or rental income which already
accrued but not yet received by the (c) age of the decedent at the time of
decedent. transfer;

TRANSFERS IN CONTEMPLATION OF DEATH

It refers to: (d) the act of concurrently making a
will (making a will shortly after the
transfer) because when the donor
(a) a transfer made by the decedent
makes his will within a short time
motivated by the thought of
after the transfer or
impending death although death
simultaneously with the transfer,
may not be imminent, which may be
the gifts are considered as having
determined by taking into
been made in contemplation of
consideration the acts of the
death.
decedent before, during and after
the transfer; or
2. Determine taxable transfers.
(b) a transfer, by trust or otherwise,
made by the decedent under which a. Transfer in contemplation of death (Sec.85 [b])-
he has retained for his life or for any the transfer of property is motivated by the
period which does not in fact end thought of impending death. Look at
before his death: (1) the possession surrounding circumstances, prior, during and
or enjoyment of, or the right to the subsequent to the transfer such as age,
income from the property, or (2) the difference of time between date of transfer and
right, either alone or in conjunction date of death
with any person, to designate the
person who shall possess or enjoy b. Revocable Transfer- The transferor has the
the property or the income power to alter, modify or revoke the transfer.
therefrom. c. Property passing under the general power of
appointment-

The main elements of TICOD are: Q: What do you mean by power of

appointment?

(a) the transfer must be gratuitous or A: It is the power to designate the person to
without consideration and whom the property may be given. Binibigyan mo
ng karapatan o authority ang isang tao para
idetermine kung kanino ibibgay ang certain
(b) the transfer was motivated by the property. The property is called the appointed
thought of impending death of the property.
transferor.
Parties:
-donor of the power of appointment
The main consideration for the transfer - recipient is the donee of the power of
must be the thought of death which can appointment
be determined by considering the acts of - beneficiary
the decedent before, during and after the
transfer, such as the following factors, Sa kanilang tatlo, sino ang decedent? Si donee. Si
based on jurisprudence: donor may property, then this property was
transferred to done, therefore the property now
is with the donee. When done died pwede na
(a) time between the transfer and the nya itransfer ang property sa heirs.
death of the decedent; Q: Is that property included or excluded in his
gross estate?
9

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 TAXATION 2
NOTES KMH
A: Determine kung anong klase ang power of is a consideration, that is transfer for insufficient
appointment ni done. consideration.
 Special- meaning to say the beneficiary
is named by the donor or specifically  Si Pedro may property binigay nya kay Juan-
identified. Donor’s tax
 General- Walang restriction as to
whom you can give the property.  SI Pedro may lupa naisip nya mamatay na sya,
binigay nya kay Juan- Transfer in Contemplation of Death:
Pag special you are a mere trustee, Estate tax
katiwala ka lang, the property is
EXCLUDED in your gross estate. Pero  Si Pedro may lupa, naisip nya mamatay na sya so
pag general, you are considered as the ibebenta nya nalng kay Juan. Ang value ng property 1M,
owner of the property and that ibebenta nalang ng P500,000, anong tax ang mag- apply?
property is INCLUDED in the gross -Estate tax, transfer for insufficient consideration
estate.
d. Transfer for insufficient consideration- Not the  Si Pedro may lupa, ibebenta nya kay Juan dahil
same with Sec. 100 Transfer for less than full or matagal na silang magkaibigan. Ang value ng property 1M,
adequate consideration. ibebenta nya ng P500,000 nalang.
- Donor’s tax, Sec. 100 transfer for less than full or
Q: How will we know whether the transfer is for adequate consideration
insufficient consideration?
 Si Pedro may lupa, ibbenta nya kay Juan. Ang
A: General premise, the transfer is gratuitous, the value 1M, ibebenta ng 1M.
exception is under Sec. 85 (g), transfer for insufficient -not subject to donor’s tax or estate tax because there is a
consideration. bone fide sale for adequate and full consideration

1. Determine the fair market value of the property at the

time of transfer; Other inclusions (Sec.85):
2. Determine the consideration received at the time of
transfer; 1. Decedent’s Interest- rights, properties and interests
3. Determine the FMV at the time of death; and which accrued before the death of the decedent.
4. Determine the value to be included in the gross estate.
Example:
Ex. Sale 1. Si Pedro stockholder ng ABC Corp. SI ABC Corp nag
A nagbenta kay B. declare ng cash dividends Jan.1 ,2017 to be paid on
1M ang FMV at the time of death of A. June 1, 2017. Si Pedro namatay May. Is that part of
Ang nareceive na amount ni A ay 1M, ang FMV ay 1M. the estate? Yes, kasi January palang may right na si
Is the consideration insufficient? NO. Kasi same FMV Pedro dun kahit June pa matatanggap.
at ang amount na natanggap. —bona fide sale 2. Si Pedro may room for rent, si Juan nagbabayed
every 21th ng month. Si Pedro namatay Jan. 15. Yong
A nagbenta kay B. rent income nya for that month ay kasama sa gross
1M ang value at the time of transfer. estate, subject to estate tax. But the income after the
Ang nareceive na consideration is P500,000. Is that a that month is subject na sa income tax.
transfer for insufficient consideration? Yes, kasi ung
1M ung FMV pero 500,000 lang ang benta. If the FMV 2. Proceeds of Life Insurance- Before the proceeds of
at the time of death is 1.5M, how much is included in life insurance be included in the gross estate, the
the gross estate? The difference between #3 and #2, following are the requirements:
so 1M. Yong 1M ang ilalagay sa gross estate, hindi
yong buong value, ung excess lang. a) The insurance taken must be a LIFE insurance.
b) It must be taken by the decedent out of his own
 Compare 1 and 2. Then 2 and 3. life. Kung ibang tao ang kumuha, di yun isasama
as proceeds of life insurance.
SI Pedro may lupa, matanda na sya so inisip nya c) Look at the designated beneficiary.
mamatay naman na siya ibbenta nya nalang sa - If the designated beneficiary is the estate,
murang halaga nalang. executor or administrator, REGARDLESS OF THE
-there is a thought of impending death, so it is a DESIGNATION WHETHER REVOCABLE OR
transfer in contemplation of death, but because there IRREVOCABLE, that is included.

10

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 TAXATION 2
NOTES KMH
- If the beneficiary is other than the estate, real and personal property, whether tangible or
executor or administrator, you have to qualify. If intangible, or mixed, wherever situated:
the designation is irrevocable, that is excluded; if Provided, however, That where the decedent or
revocable, that is included. donor was a nonresident alien at the time of his
death or donation, as the case may be, his real
- yong mga group life insurance na kinuha ng and personal property so transferred but which
company for employees di yon kasama kasi yong are situated outside the Philippines shall not be
2nd requirement dapat ikaw ang kumuha included as part of his 'gross estate' or 'gross
- accident insurance, property insurance, hindi gift': Provided, further, That franchise which
din. dapat life. must be exercised in the Philippines; shares,
- yong insurance sa sss, gsis hindi rin. obligations or bonds issued by any corporation
or sociedad anonima organized or constituted in
the Philippines in accordance with its laws;
There are other inclusions under Sec.86 but before you can shares, obligations or bonds by any foreign
include it as a deduction, you have to include it first on corporation eighty-five percent (85%) of the
your gross estate, otherwise di mo sya maki-claim as business of which is located in the Philippines;
deduction shares, obligations or bonds issued by any
foreign corporation if such shares, obligations or
3. Claims against insolvent person- included muna bonds have acquired a business situs in the
dapat yung value claim sa gross estate. Sec.86, a,1[d]) Philippines; shares or rights in any partnership,
business or industry established in the
4. Unpaid Mortgages- include the undiminished value of Philippines, shall be considered as situated in the
the property. Kung ang value ng property ay 1M, Philippines: Provided, still further, that no tax
sinanla para sa loan na P200,000, hindi ung 800,000 shall be collected under this Title in respect of
ang ilalagay na value. 1M ang ilalagay then claim ung intangible personal property: (a) if the decedent
200k as unpaid mortgage. (Sec.86, a,1[e]) at the time of his death or the donor at the time
of the donation was a citizen and resident of a
5. Property Previously Taxed or Vanishing Deduction- foreign country which at the time of his death or
the property subject to ppt must be included in the donation did not impose a transfer tax of any
gross estate (Sec.86, a, 2) character, in respect of intangible personal
property of citizens of the Philippines not
Q: What are the requisites for its deductibility? residing in that foreign country, or (b) if the laws
A: of the foreign country of which the decedent or
a) The present decedent died within 5 years from donor was a citizen and resident at the time of
receipt of the property from the prior decedent his death or donation allows a similar exemption
or donor; from transfer or death taxes of every character
b) The property on which vanishing deduction is or description in respect of intangible personal
being claimed is located within the Philippines; property owned by citizens of the Philippines not
c) The property formed Part of the taxable estate residing in that foreign country.
of the prior decedent or of the taxable gift of the - The term 'deficiency' means: (a) the amount by
donor; which tax imposed by this Chapter exceeds the
d) The estate Tax on the prior succession or donor’s amount shown as the tax by the donor upon his
tax on the gift must have been finally return; but the amount so shown on the return
determined and paid; shall first be increased by the amount previously
e) The property on which the vanishing deduction is assessed (or Collected without assessment) as a
taken must be Identified as the one received or deficiency, and decreased by the amounts
acquired; and previously abated, refunded or otherwise repaid
f) NO vanishing deduction was allowed o the same in respect of such tax, or (b) if no amount is
property on the prior decedent’s estate. shown as the tax by the donor, then the amount
by which the tax exceeds the amounts previously
6. Family home assessed, (or collected without assessment) as a
deficiency, but such amounts previously
7. Amounts received under RA 4917 assessed, or collected without assessment, shall
first be decreased by the amount previously
abated, refunded or otherwise repaid in respect
RECIPROCITY RULE Section 104, NIRC
of such tax.

- Section 104. Definitions. - For purposes of this

Title, the terms 'gross estate' and 'gifts' include
11

Page
 TAXATION 2
NOTES KMH

Collector of Internal Revenue v. Antonio Campus Rueda, competence to exact obedience to its commands. 
G.R. No. L-13250, October 29, 1971

Even on the assumption then that Tangier is bereft of

FACTS:
international personality, the CIR has not successfully
made out a case. The Court did commit itself to the
Antonio Campos Rueda is the administrator of the estate
doctrine that even a tiny principality, like Liechtenstein,
of the deceased Maria Cerdeira. Cerdeira is a Spanish
hardly an international personality in the sense, did fall
national, by reason of her marriage to a Spanish citizen
under this exempt category.
and was a resident of Tangier, Morocco up to her death. At
the time of her demise she left, among others, intangible
personal properties in the Philippines. The CIR then issued EXEMPTIONS AND EXCLUSIONS TO GROSS ESTATE
an assessment for state and inheritance taxes of
P369,383.96. Rueda filed an amended return stating that Exempt Properties Sec 87 NIRC
intangible personal properties worth P396,308.90 should
be exempted from taxes. The CIR denied the request on
- Exemption of Certain Acquisitions and
the ground that the law of Tangier is not reciprocal to
Transmissions. - The following shall not be
Section 122 (now Section 104) of the National Internal
taxed:
Revenue Code.

The case was elevated to the CTA which sided with Rueda. - (A) The merger of usufruct in the owner of the
The CTA stated that the foreign country mentioned in naked title;
Section 122 "refers to a government of that foreign power
which, although not an international person in the sense of - (B) The transmission or delivery of the
international law, does not impose transfer or death upon inheritance or legacy by the fiduciary heir or
intangible person properties of our citizens not residing legatee to the fideicommissary;
therein, or whose law allows a similar exemption from
such taxes. It is, therefore, not necessary that Tangier - (C) The transmission from the first heir, legatee
should have been recognized by our Government order to or donee in favor of another beneficiary, in
entitle the petitioner to the exemption benefits of the accordance with the desire of the predecessor;
proviso of Section 122 of our Tax. Code." and

ISSUE: Whether the exemption is valid.

- (D) All bequests, devises, legacies or transfers to
social welfare, cultural and charitable
RULING: YES. The controlling legal provision as noted is a
institutions, no part of the net income of which
proviso in Section 122 of the National Internal Revenue
insures to the benefit of any individual: Provided,
Code. It reads thus: "That no tax shall be collected under
however, That not more than thirty percent
this Title in respect of intangible personal property
(30%) of the said bequests, devises, legacies or
(a) if the decedent at the time of his death was a resident
transfers shall be used by such institutions for
of a foreign country which at the time of his death did not
administration purposes.
impose a transfer tax or death tax of any character in
-
respect of intangible person property of the Philippines
not residing in that foreign country, or Excluded Properties Sec 85 H NIRC
(b) if the laws of the foreign country of which the decedent
was a resident at the time of his death allow a similar a. CAPITAL OR PARAPHERNAL PROPERTY OF
exemption from transfer taxes or death taxes of every THE SURVIVING SPOUSE (Sec. 85[H], NIRC,
character in respect of intangible personal property owned as amended)
by citizens of the Philippines not residing in that foreign
country." 
All the capital property (property exclusively
It does not admit of doubt that if a foreign country is to be owned by the husband) or paraphernal property
identified with a state, it is required in line with Pound's (property exclusively owned by the wife) shall
formulation that it be a politically organized sovereign be excluded from the Gross Estate of the
community independent of outside control bound by deceased spouse, as the case may be.
penalties of nationhood, legally supreme within its
territory, acting through a government functioning under a 1. Merger of the usufruct with the owner of the naked
regime of  law. A foreign country is thus a sovereign person title
with the people composing it viewed as an organized
corporate society under a government with the legal

12

Page
 TAXATION 2
NOTES KMH
What is usufruct? It is the right to enjoy the property TAXABLE TRANSFERS
of another.
A. Transfer in Contemplation
of Death
A, the owner of the house, entered into a contract of
usufruct with B. B died. A, being the owner of the
house has the naked title while B has the usufruct. Section 85(B), NIRC
The usufruct now will return to A, yun yung merger. - to the extent of any interest therein of which the
Bumalik lang kay A yung right, di subject sa estate tax. decedent has at any time made a transfer, by
trust or otherwise, in contemplation of or
Sec. 88 provides for the determination of the value of intended to take effect in possession or
the gross estate and letter (a) is Usufruct. So parang enjoyment at or after death, or of which he has
may conflict kasi excluded daw sbi ng Sec.87 pero at any time made a transfer, by trust or
bakit pa kailangan I-determine ang value ng excluded otherwise, under which he has retained for his
sa gross estate? life or for any period which does not in fact end
before his death (1) the possession or enjoyment
To reconcile the conflict, dapat tignan kung may of, or the right to the income from the property,
period yong usufruct. or (2) the right, either alone or in conjunction
a. Usufruct without period under Sec.87- excluded with any person, to designate the person who
sa gross estate shall possess or enjoy the property or the
b. Usufruct with a period, included sa gross estate income therefrom; except in case of a bonafide
sale for an adequate and full consideration in
Si A at B nagkasundo na si B muna ang gagamit ng money or money's worth.
bahay ni A for a period of 10 years. Si B may mga
anak. On the 6th year, B died. Ano ngayon mangyayari
sa house, kanino mapupunta? Thelma Aranas v. Teresita Mercado, et.al., G.R.
-- the right of usufruct can be transferred to B’s heirs, No. 156407, January 14, 2014 citing 1959
after ng period, ibalik na dapat kay A ang usufruct. Prentice Hall, p. 3909
Yong 4 years na natitira ung right of usufruct na
vinavalue sa Sec.88 (a) kasi included yun sa gross Emigdio S. Mercado owned shares in Mervir Realty Corp.
estate. and Cebu Emerson Transportation Corp. He assigned his
real properties in exchange for stocks in Mervir Realty and
b. PROPERTIES OUTSIDE THE PHILIPPINES OF sold his real property in Badian, Cebu to Mervir Realty.
A NON-RESIDENT ALIEN (Sec. 86[B], NIRC, Emigdio died intestate, survived by his second wife,
as amended) Teresita and their five children, and his children from his
first wife, Thelma Aranas. Teresita was appointed as
As discussed above, only the properties of a NRA administrator. Teresita indicated in her inventory that at
situated within the Philippines are subject to the time of his death, Emigdio had “left no real properties
Estate Tax. Thus, all his properties situated but only personal properties.” Thelma claimed that
outside the Philippines must be excluded from Emigdio owned properties that were not included in the
inventory. The parties agreed to submit themselves to the
his Gross Estate.
jurisdiction of the court on the issue of what properties
should be included in or excluded from the inventory.
c. INTANGIBLE PERSONAL PROPERTIES IN Thereafter, the RTC ruled that Teresita should have
THE PHILIPPINES OF A NON-RESIDENT included in the Badian Property in the inventory.
ALIEN WITH RECIPROCITY (Sec. 104, NIRC,
as amended) ISSUE: Whether or not the RTC have the authority to order
the inclusion of the Badian Property in the inventory in the
As discussed above, if the reciprocity rule is course of the intestate proceedings.
applicable (such as when the national laws of
the NRA decedent provides tax exemption to HELD: YES. The determination of which properties should
intangible personal properties of Filipinos who be excluded from or included in the inventory of estate
died in that country, the similar privilege will be properties was well within the authority and discretion of
given/granted to NRA decedents (who died) the RTC as an intestate court. In making its determination,
here in the Phil.) all the intangible personal the RTC acted with circumspection, and proceeded under
properties of a NRA must be excluded from his the guiding policy that it was best to include all properties
Gross Estate as they are exempt from Estate in the possession of the administrator or were known to
Tax. the administrator to belong to Emigdio rather than to
exclude properties that could turn out in the end to be
actually part of the estate. The usage of the word “all” in
13

Page
 TAXATION 2
NOTES KMH
Section 1, Rule 83, demands the inclusion of all the real passing under a general power of appointment
and personal properties of the decedent in the inventory. exercised by the decedent: (1) by will, or (2) by
However, the word “all” is qualified by the phrase which deed executed in contemplation of, or intended
has come into his possession or knowledge, which signifies to take effect in possession or enjoyment at, or
that the properties must be known to the administrator to after his death, or (3) by deed under which he
belong to the decedent or are in her possession as the has retained for his life or any period not
administrator. Section 1 allows no exception, for the ascertainable without reference to his death or
phrase true inventory implies that no properties appearing for any period which does not in fact end before
to belong to the decedent can be excluded from the his death (a) the possession or enjoyment of, or
inventory, regardless of their being in the possession of the right to the income from, the property, or (b)
another person or entity. the right, either alone or in conjunction with any
person, to designate the persons who shall
B. Revocable Transfer possess or enjoy the property or the income
therefrom; except in case of a bona fide sale for
Section 85(C), NIRC an adequate and full consideration in money or
money's worth.
- 1. ) To the extent of any interest therein, of
which the decedent has at any time made a ELIZABETH MORGAN V. CIR,
transfer (except in case of a bona fide sale for an APRIL 2, 2008
adequate and full consideration in money or
money's worth) by trust or otherwise, where the
We took this case because it raises an important question
enjoyment thereof was subject at the date of his
as to the construction of the Revenue Act of 1926, 302(f),
death to any change through the exercise of a
amended by the Revenue Act of 1932, 803(b).1
power (in whatever capacity exerciseable) by the
decedent alone or by the decedent in
conjunction with any other person (without The question is to what extent and in what sense the law
regard to when or from what source the of the decedent's domicile governs in determining
decedent acquired such power), t o alter, whether a power of appointment exercised by him is a
amend, revoke, or terminate, or where any such general power within the meaning of the statute.
power is relinquished in contemplation of the
decedent's death. The petitioner is the executor of Elizabeth S. Morgan who
- (2) For the purpose of this Subsection, the power was the donee of two powers of appointment over
to alter, amend or revoke shall be considered to property held in two trusts created by her father by will
exist on the date of the decedent's death even and by deed. The persons named are, or were, at death,
though the exercise of the power is subject to a citizens of Wisconsin. It is unnecessary to recite the terms
precedent giving of notice or even though the of the trusts. Suffice it to say that under each, property
alteration, amendment or revocation takes remaining in the trustees' hands for Elizabeth S. Morgan
effect only on the expiration of a stated period was given at her death, to the appointee or appointees
after the exercise of the power, whether or not named in her will, with gifts over in case she failed to
on or before the date of the decedent's death appoint. Under both trusts, if in the judgment of the
notice has been given or the power has been trustees, property going to any beneficiary would be
exercised. In such cases, proper adjustment shall dissipated for any reason, or improvidently handled, the
be made representing the interests which would trustees were to withhold any part of such property; with
have been excluded from the power if the directions for disposition, in such event, of what was
decedent had lived, and for such purpose if the withheld. The decedent appointed in favor of her husband.
notice has not been given or the power has not
been exercised on or before the date of his The Commissioner ruled that the value of the appointed
- death, such notice shall be considered to have property should be included in the gross estate and
been given, or the power exercised, on the date determined a tax deficiency. The Board of Tax Appeals
of his death. approved his action.  The Circuit Court of Appeals affirmed
the Board's decision. 
C. PROPERTY PASSING UNDER GENERAL POWER OF
APPOINTMENT Under the law of Wisconsin, the decedent could have
appointed anyone to receive the trust property, including
her estate and her creditors, the petitioner urges that, by
Section 85 (D), NIRC
statute and decision, Wisconsin has defined as special a
- D) Property Passing Under General Power of
power such as she held.  The respondent urges that this is
Appointment. - To the extent of any property
not a correct interpretation of the State law. We find it
14

Page
 TAXATION 2
NOTES KMH
unnecessary to resolve the issue, since we hold that the discretion as respects any appointee of the decedent. This
powers are general within the intent of the Revenue Act, fact, they say, renders the power a special one. Assuming
notwithstanding they may be classified as special by the that the trustees could withhold the appointed property
law of Wisconsin. from an appointee, we think the power must still be held
general. The quantum or character of the interest
State law creates legal interests and rights. The federal appointed, or the conditions imposed by the terms of the
revenue acts designate what interests or rights, so created, trust upon its enjoyment, do not render the powers in
shall be taxed. Our duty is to ascertain the  meaning of the question special within the purport of 302(f). The
words used to specify the thing taxes. If it is found in a important consideration is the breadth of the control the
given case that an interest or right created by local law decedent could exercise over the property, whatever the
was the object intended to be taxes, the federal law must nature or extent of the appointee's interest.
prevail no matter what name is given to the interest or
right by state law.   The judgment is affirmed

None of the revenue acts has defined the phrase 'general D.TRANSFERS FOR INSUFFICIENT CONSIDERATION
power of appointment'. The distinction usually made
between a general and a special power lies in the
circumstance that, under the former, the donee may 85 (G) ,NIRC
appoint to anyone, including his own estate or his - (G) Transfers for Insufficient Consideration. - If
creditors, thus having as full dominion over the property as any one of the transfers, trusts, interests, rights
if he owned it; whereas, under the latter, the donee may or powers enumerated and described in
appoint only amongst a restricted or designated class of Subsections (B), (C) and (D) of this Section is
persons other than himself.  made, created, exercised or relinquished for a
consideration in money or money's worth, but is
not a bona fide sale for an adequate and full
We should expect, therefore, that Congress had this
consideration in money or money's worth, there
distinction in mind when it used the adjective 'general'.
shall be included in the gross estate only the
The legislative history indicates that this is so. The Treasury
excess of the fair market value, at the time of
regulations have provided that a power is within the
death, of the property otherwise to be included
purview of the statute, if the donee may appoint to any
on account of such transaction, over the value of
person. 
the consideration received therefor by the
decedent.
With these regulations outstanding Congress has several -
times reenacted Sec. 302(f), and has thus adopted the
OTHER INCLUSIONS
administrative construction. That construction is in accord
with the opinion of several federal courts. The petitioner
claims, however, that the decision below is in conflict with
two by other Circuit Courts of Appeal. The contention is A. DECEDENT’S INTEREST
based on certain phrases found in the opinions. We think it
clear that, in both cases, the courts examined the local law - Section 85 A
to ascertain whether a power would be construed by the
state court to permit the appointment of the donee, his - (A) Decedent's Interest. - To the extent of the
estate or his creditors, and on the basis of the answer to interest therein of the decedent at the time of
that question determined whether the power was general his death;
within the intent of the federal act.
B. PROCEEDS OF LIFE INSURANCE

As the decedent in this case could have appointed to her

- Section 85 (E), NIRC
estate, or to her creditors, we hold that she had a general
power within the meaning of Sec. 302(f). This conclusion is
not inconsistent with authorities on which the petitioner E) Proceeds of Life Insurance. - To the extent of
relies,11 holding that, in the application of a federal the amount receivable by the estate of the
revenue act, state law controls in determining the nature deceased, his executor, or administrator, as
of the legal interest which the taxpayer had in the insurance under policies taken out by the
property or income sought to be reached by the statute. decedent upon his own life, irrespective of
whether or not the insured retained the power
of revocation, or to the extent of the amount
The petitioner's section position is that, inasmuch as the
receivable by any beneficiary designated in the
trustees had an unfettered discretion to withhold principal
policy of insurance, except when it is expressly
or income from any beneficiary, they could exercise their

15

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 TAXATION 2
NOTES KMH
stipulated that the designation of the beneficiary Section 5, Revenue Regulation No. 2-2003
is irrevocable.
SEC. 5. VALUATION OF THE GROSS ESTATE. – The
Section 32 (B) (1), NIRC properties comprising the gross estate shall be valued
based on their fair market value as of the time of death. If
the property is a real property, the fair market value shall
- (B) Exclusions from Gross Income. - The
be the fair market value as determined by the
following items shall not be included in gross
Commissioner or the fair market value as shown in the
income and shall be exempt from taxation under
schedule of values fixed by the provincial and city
this Title:
assessors, whichever is higher. For purposes of prescribing
- (1) Life Insurance. - The proceeds of life
real property values, the Commissioner is authorized to
insurance policies paid to the heirs or
divide the Philippines into different zones or areas and
beneficiaries upon the death of the insured,
shall, upon consultation with competent appraisers, both
whether in a single sum or otherwise, but if such
from the private and public sectors, determine the fair
amounts are held by the insurer under an
market value of real properties located in each zone or
agreement to pay interest thereon, the interest
area. In the case of shares of stocks, the fair market value
payments shall be included in gross income.
shall depend on whether the shares are listed or unlisted
in the stock exchanges. Unlisted common shares are
C. PRIOR INTEREST valued based on their book value while unlisted preferred
shares are valued at par value. In determining the book
Section 85 (F), NIRC value of common shares, appraisal surplus shall not be
considered as well as the value assigned to preferred
- (F) Prior Interests. - Except as otherwise shares, if there are any. For shares which are listed in the
specifically provided therein, Subsections stock exchanges, the fair market value shall be the
(B), (C) and (E) of this Section shall apply to arithmetic mean between the highest and lowest
the transfers, trusts, estates, interests, rights, quotation at a date nearest the date of death, if none is
powers and relinquishment of powers, as available on the date of death itself. 3 To determine the
severally enumerated and described therein, value of the right to usufruct, use or habitation, as well as
whether made, created, arising, existing, that of annuity, there shall be taken into account the
exercised or relinquished before or after the probable life of the beneficiary in accordance with the
effectivity of this Code. latest basic standard mortality table, to be approved by
the Secretary of Finance, upon recommendation of the
DETERMINATION OF THE VALUE OF THE GROSS ESTATE Insurance Commissioner.

Section 88, NIRC Revenue Regulation No. 12-2018

Section 5 – Valuation of the ross Estate – The properties

comprising the gross estate shall be valued according to
- (A) Usufruct. - To determine the value of the right of their fair market value as of the time of decedent’s death.
usufruct, use or habitation, as well as that of annuity,
there shall be taken into account the probable life of the If the property is a real property, the appraised value
beneficiary in accordance with the latest Basic Standard thereof as of the time of death shall be, whichever is the
Mortality Table, to be approved by the Secretary of higher of –
Finance, upon recommendation of the Insurance
Commissioner. 1. The fair market value determined by the
Commissioner, or
2. The fair market value as shown in the schedule
(B) Properties. - The estate shall be appraised at its fair
of values fixed by the provincial and city
market value as of the time of death. However, the
assessors, whichever is higher.
appraised value of real property as of the time of death
For purposes of prescribing real property values,
shall be, whichever is higher of -
the Commissioner is authorized to divide the
Philippines into different zones or areas and
(1) The fair market value as determined by the shall, upon consultation with competent
Commissioner; or appraisers, both from the private and public
sectors, determine the fair market value of real
(2) The fair market value as shown in the schedule of properties located in each zone or area.
values fixed by the Provincial and City Assessors.
In the case of shares of stock, the fair market
value shall depend on whether the shares are
16

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 TAXATION 2
NOTES KMH
listed or unlisted in the stock exchanges. - Net share of the surviving spouse in the conjugal
Unlisted common shares are valued based on partnership or community property
their book value while unlisted preferred shares
are valued at par value. In determining the book B. Matching Principle
value of common shares, appraisal surplus shall
not be considered as well as the value assigned The concept known as matching principle, where revenues
to preferred shares, if there are any. On this are matched with expenditures. This matching principle is
note, the valuation of unlisted shares shall be a method of handling expense deductions where the
exempt from the provisions of RR No. 06-2013, expense in a given year is matched with the associated tax
as amended. benefit. Costs directly associated with the revenue of a
particular taxable period are properly allocable to that
For shares which are listed in the stock period. Guided by this principle, even if the expenses per
exchanges, the fair market value shall be the alphalist were to be considered as income subject to
arithmetic mean between the highest and lowest output VAT, the same shall be offset by treating the
quotation at a date nearest the date, if none is equivalent payments as purchases for which input tax
available on the date of death itself. credits may be claimed. Thus, even if these alleged
unaccounted expenses are to be considered as income,
The fair market value of units of participation in they may be offset by recording the equivalent payments
any association, recreation or amusement club as expenses.
( such as golf, polo or similar clubs), shall be the
bid price nearest the date of death published in C. No Double Classification Rule
any newspaper or publication of general
circulation. D. Default Presumption on Ordinary
Deduction
To determine the value of the right to usufruct,
use of habitation, as well as that of annuity, ORDINARY DEDUCTIONS
there shall be taken into account the probable
life of the beneficiary in accordance with the A. Expenses, Losses, Indebtedness, Taxes, etc.
latest basic standard mortality table, to be (ELITE)
approved by the Secretary of Finance, upon
recommendation of the Insurance Sec 86 A 1(a) – (e)
Commissioner. Section 86. Computation of Net Estate. - For the
purpose of the tax imposed in this Chapter, the
DEDUCTIONS TO ESTATE OF RESIDENT AND value of the net estate shall be determined:
CITIZEN DECEDENT
(A) Deductions Allowed to the Estate of Citizen
GENERAL PRINCIPLES OF ESTATE DEDUCTIONS or a Resident. – In the case of a citizen or
resident of the Philippines, by deducting from
A. Substantiation Rule the value of the gross estate –
- All unpaid obligations and liabilities of the
decedent at the time of his death are allowed as (1) Expenses, Losses, Indebtedness, and taxes. –
deductions from gross estate. Provided however, Such amounts –
that the required requirements/documents are
submitted: (a) For actual funeral expenses or in an amount
- In case of simple loan equal to five percent (5%) of the gross estate,
- If the unpaid obligation arose from purchase of whichever is lower, but in no case to exceed Two
goods and services hundred thousand pesos (P200,000);
- Claims of the deceased against insolvent person
as defined under RA 10142 and other existing (b) For judicial expenses of the testamentary or
laws, where the value of the decedents interest intestate proceedings;
therein is included in the value of the gross
estate. (c) For claims against the estate: Provided, That
- Unpaid mortgages, taxes and casualty losses at the time the indebtedness was incurred the
- Property previously taxed debt instrument was duly notarized and, if the
- Transfers for public use loan was contracted within three (3) years
- The family home before the death of the decedent, the
- Amount received by heirs under RA 4917 administrator or executor shall submit a

17

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 TAXATION 2
NOTES KMH
statement showing the disposition of the
proceeds of the loan; (A) Expenses, losses, indebtedness, and taxes- Such
amounts for:
(d) For claims of the deceased against insolvent (1) Actual funeral expenses (whether paid or unpaid) up to
persons where the value of decedent's interest the time of interment, or an amount equal to five percent
therein is included in the value of the gross (5%) of the gross estate, whichever is lower, but in no case
estate; and to exceed P200,000.
Any amount of funeral expenses in excess of the P200,000
(e) For unpaid mortgages upon, or any threshold, whether the same had actually been paid or still
indebtedness in respect to, property where the payable, shall not be allowed as a deduction under this
value of decedent's interest therein, Subsection.
undiminished by such mortgage or Neither shall the unpaid portion of the funeral expenses
indebtedness, is included in the value of the incurred which is in excess of the P200,000 threshold be
gross estate, but not including any income tax allowed to be claimed as a deduction under “claims
upon income received after the death of the against the estate” provided under Subsection (C) hereof.
decedent, or property taxes not accrued before The term "FUNERAL EXPENSES" is not confined to its
his death, or any estate tax. The deduction ordinary or usual meaning.
herein allowed in the case of claims against the
estate, unpaid mortgages or any indebtedness They include:
shall, when founded upon a promise or (a) The mourning apparel of the surviving spouse and
agreement, be limited to the extent that they unmarried minor children of the deceased bought and
were contracted bona fide and for an adequate used on the occasion of the burial;
and full consideration in money or money's (b) Expenses for the deceased’s wake, including food and
worth. There shall also be deducted losses drinks;
incurred during the settlement of the estate (c) Publication charges for death notices;
arising from fires, storms, shipwreck, or other (d) Telecommunication expenses incurred in informing
casualties, or from robbery, theft or relatives of the deceased;
embezzlement, when such losses are not (e) Cost of burial plot, tombstones, monument or
compensated for by insurance or otherwise, and mausoleum but not their upkeep. In case the deceased
if at the time of the filing of the return such owns a family estate or several burial lots, only the value
losses have not been claimed as a deduction for corresponding to the plot where he is buried is deductible;
the income tax purposes in an income tax return, (f) Interment and/or cremation fees and charges; and
and provided that such losses were incurred not (g) All other expenses incurred for the performance of the
later than the last day for the payment of the rites and ceremonies incident to interment. Expenses
estate tax as prescribed in Subsection (A) of incurred after the interment, such as for prayers, masses,
Section 91. entertainment, or the like are not deductible. Any portion
of the funeral and burial expenses borne or defrayed by
Sec. 86 B 1 relatives and friends of the deceased are not deductible.
- (B) Deductions Allowed to Nonresident Estates. Medical expenses as of the last illness will not form part of
- In the case of a nonresident not a citizen of the funeral expenses but should be claimed under subsection
Philippines, by deducting from the value of that (F) of this section.
part of his gross estate which at the time of his Actual funeral expenses shall mean those which are
death is situated in the Philippines: actually incurred in connection with the interment or
- burial of the deceased. The expenses must be duly
- (1) Expenses, Losses, Indebtedness and Taxes. - supported by receipts or invoices or other evidence to
That proportion of the deductions specified in show that they were actually incurred.
paragraph (1) of Subsection (A) of this Section
which the value of such part bears to the value Illustrations on how to determine the amount of
of his entire gross estate wherever situated; allowable funeral expenses –
(a) If five percent (5%) of the gross estate is P70,000 and
the amount actually incurred is P50,000, only P50,000 will
SEC. 6 (A) (1)-(5) RR No. 2-2003 be allowed as deduction;
(b) If the expenses actually incurred amount to P90,000
SEC. 6. COMPUTATION OF THE NET ESTATE OF A and five percent (5%) of the gross estate is P70,000, only
DECEDENT WHO IS EITHER A CITIZEN OR RESIDENT OF P70,000 will be allowed as deduction;.
THE PHILIPPINES. (c) If five percent (5%) of the gross estate is P220,000 and
- The value of the net estate of a citizen or resident alien of the amount actually incurred is P215,000, the maximum
the Philippines shall be determined by deducting from the amount that may be deducted is only P200,000;
value of the gross estate the following items of deduction :
18

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 TAXATION 2
NOTES KMH
(d) If five percent (5%) of the gross estate is P 100,000 and classified under a different category of deductions
the total amount incurred is P150,000 where P20,000 pursuant to these Regulations;
thereof is still unpaid, the only amount that can be claimed
as deduction for funeral expenses is P100,000. The entire (b) The liability was contracted in good faith and for
P50,000 excess amount consisting of P30,000 paid amount adequate and full consideration in money or money’s
and P20,000 unpaid amount can no longer be claimed as worth;
FUNERAL EXPENSES. Neither can the P20,000 unpaid
portion be deducted from the gross estate as CLAIMS (c) The claim must be a debt or claim which is valid in law
AGAINST THE ESTATE under Subsection (C) hereof. and enforceable in court;

(2) Judicial expenses of the testamentary or intestate (d) The indebtedness must not have been condoned by the
proceedings. creditor or the action to collect from the decedent must
not have prescribed.
- Expenses allowed as deduction under this category are
those incurred in the inventory-taking of assets comprising (ii) Substantiation Requirements. - All unpaid obligations
the gross estate, their administration, the payment of and liabilities of the decedent at the time of his death
debts of the estate, as well as the distribution of the estate (except unpaid funeral or medical expenses which are
among the heirs. deductible under a different category) are allowed as
In short, these deductible items are expenses incurred deductions from gross estate. Provided, however, that the
during the settlement of the estate but not beyond the last following requirements/documents are complied
day prescribed by law, or the extension thereof, for the with/submitted :
filing of the estate tax return.
(a) In case of simple loan (including advances):
Judicial expenses may include:
(1) The debt instrument must be duly notarized at the time
(a) Fees of executor or administrator; the indebtedness was incurred, such as promissory note or
(b) Attorney’s fees; contract of loan, except for loans granted by financial
(c) Court fees; institutions where notarization is not part of the business
(d) Accountant’s fees; practice/policy of the financial institution-lender;
(e) Appraiser’s fees;
(f) Clerk hire; (2) Duly notarized Certification from the creditor as to the
(g) Costs of preserving and distributing the estate; unpaid balance of the debt, including interest as of the
(h) Costs of storing or maintaining property of the estate; time of death.
and If the creditor is a corporation, the sworn certification
(i) Brokerage fees for selling property of the estate. should be signed by the President, or Vice-President, or
other principal officer of the corporation. If the creditor is
Any unpaid amount for the aforementioned cost and a partnership, the sworn certification should be signed by
expenses claimed under “Judicial Expenses” should be any of the general partners.
supported by a sworn statement of account issued and In case the creditor is a bank or other financial institutions,
signed by the creditor. the Certification shall be executed by the branch manager
of the bank/financial institution which monitors and
(3) Claims against the estate. manages the loan of the decedent-debtor.
– The word “claims” is generally construed to mean debts If the creditor is an individual, the sworn certification
or demands of a pecuniary nature which could have been should be signed by him. In any of these cases, the one
enforced against the deceased in his lifetime and could who should certify must not be a relative of the borrower
have been reduced to simple money judgements. within the fourth civil degree, either by consanguinity or
affinity, except when the requirement below is complied
Claims against the estate or indebtedness in respect of with. When the lender, or the President/Vice-president
property may arise out of : /principal officer of the creditor-corporation, or the
(1) Contract; general partner of the creditor-partnership is a relative of
(2) Tort; or the debtor in the degree mentioned above, a copy of the
(3) Operation of Law. promissory note or other evidence of the indebtedness
must be filed with the RDO having jurisdiction over the
(i) Requisites for Deductibility of Claims Against the borrower within fifteen days from the execution thereof.
Estate - (a) The liability represents a personal obligation of
the deceased existing at the time of his death except (3) In accordance with the requirements as prescribed in
unpaid obligations incurred incident to his death such as existing or prevailing internal revenue issuances, proof of
unpaid funeral expenses (i.e., expenses incurred up to the financial capacity of the creditor to lend the amount at the
time of interment) and unpaid medical expenses which are time the loan was granted, as well as its latest audited
19

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 TAXATION 2
NOTES KMH
balance sheet with a detailed schedule of its receivable (3) Certified true copy of the latest audited balance sheet
showing the unpaid balance of the decedent-debtor. of the creditor with a detailed schedule of its receivable
showing the unpaid balance of the decedent-debtor.
In case the creditor is an individual who is no longer Moreover, a certified true copy of the updated latest
required to file income tax returns with the Bureau, a duly subsidiary ledger/records of the debt of the debtor-
notarized Declaration by the creditor of his capacity to decedent, (certified by the creditor, i.e., the officers
lend at the time when the loan was granted without mentioned in the preceding paragraphs) should likewise
prejudice to verification that may be made by the BIR to be submitted.
substantiate such declaration of the creditor.
If the creditor is a non-resident, the executor/ (c) Where the settlement is made through the Court in a
administrator or any of the legal heirs must submit a duly testate or intestate proceeding, pertinent documents
notarized declaration by the creditor of his capacity to lend filed with the Court evidencing the claims against the
at the time when the loan was granted, authenticated or estate, and the Court Order approving the said claims, if
certified to as such by the tax authority of the country already issued, in addition to the documents mentioned
where the non-resident creditor is a resident; in the preceding paragraphs.

(4) A statement under oath executed by the administrator (4) Claims of the deceased against insolvent persons
or executor of the estate reflecting the disposition of the where the value of the decedent’s interest therein is
proceeds of the loan if said loan was contracted within included in the value of the gross estate; and,
three (3) years prior to the death of the decedent;
(5) Unpaid mortgages, taxes and casualty losses –
(b) If the unpaid obligation arose from purchase of goods
or services: (a) Unpaid mortgages upon, or any indebtedness in
respect to, property where the value of the decedent’s
(1) Pertinent documents evidencing the purchase of interest therein, undiminished by such mortgage or
goods or service, such as sales invoice/delivery receipt indebtedness, is included in the value of the gross estate.
(for sale of goods), or contract for the services agreed to The deduction herein allowed in the case of claims against
be rendered (for sale of service), as duly acknowledged, the estate, unpaid mortgages or any indebtedness shall,
executed and signed by decedent debtor and creditor, and when founded upon a promise or agreement, be limited to
statement of account given by the creditor as duly the extent that they were contracted bona fide and for an
received by the decedent debtor; adequate and full consideration in money or money’s
worth.
(2) Duly notarized Certification from the creditor as to the
unpaid balance of the debt, including interest as of the (b) Taxes which have accrued as of the death of the
time of death. decedent which were unpaid as of the time of death. This
If the creditor is a corporation, the sworn Certification deduction will not include income tax upon income
should be signed by the President, or Vice-President, or received after death, or property taxes not accrued before
other principal officer of the corporation. his death, or the estate tax due from the transmission of
his estate.
If the creditor is a partnership, the sworn certification
should be signed by any of the general partners. (c) There shall also be deducted losses incurred during the
settlement of the estate arising from fires, storms,
If the creditor is a sole proprietorship, the sworn shipwreck, or other casualties, or from robbery, theft or
certification should be signed by the owner of the embezzlement, when such losses are not compensated for
business. by insurance or otherwise, and if at the time of the filing of
the return such losses have not been claimed as a
In any of these cases, the one who issues the certification deduction for income tax purposes in an income tax
must not be a relative of the decedent-debtor within the return, and provided that such losses were incurred not
fourth civil degree, either by consanguinity or affinity, later than the last day for the payment of the estate tax as
except when the requirement below is complied with. prescribed in Subsections (A) and (B) of Section 91. In case
When the lender, or the unpaid mortgage payable is being claimed by the estate,
President/VicePresident/principal officer of the creditor- verification must be made as to who was the beneficiary of
corporation, or the general partner of the creditor- the loan proceeds. If the loan is found to be merely an
partnership is a relative of the debtor in the degree accommodation loan where the loan proceeds went to
mentioned above, a copy of the promissory note or other another person, the value of the unpaid loan must be
evidence of the indebtedness must be filed with the RDO included as a receivable of the estate. If there is a legal
having jurisdiction over the borrower within fifteen days impediment to recognize the same as receivable of the
from the execution thereof. estate, said unpaid obligation/mortgage payable shall not
be allowed as a deduction from the gross estate. In all
20

Page
 TAXATION 2
NOTES KMH
instances, the mortgaged property, TO THE EXTENT OF
THE DECEDENT’S INTEREST THEREIN, should always form Josefina then file to the RTC for issuance of Letter of
part of the gross taxable estate. Administration in her name and it was granted by the RTC
and appointed her as administratix of Pedro’s estate.
SECTION 7 (1), RR No. 2-2003 On Dec 1988, Pursuant to the second assessment of BIR
for deficiency tax, the estate paid estate tax in the amount
- SEC. 7. COMPUTATION OF THE NET ESTATE OF A of P1,527,790.98. Josefina, as administratrix and heir of
DECEDENT WHO IS A NON-RESIDENT ALIEN OF Pedro’s estate, filed a protest on January 1989 with the BIR
THE PHILIPPINES. praying that the estate tax payment in the amount of
P1,527,790.98, or at least some portion of it, be returned
- - The value of the net estate of a decedent who to the heirs. However, on August 1989 without waiting for
is a non-resident alien in the Philippines shall be the protest to be resolved by the BIR Josefina filed a
determined by deducting from the value of that petition for review with the CTA praying for the refund or
part of his gross estate which at the time of his in the alternative, P840,202.06, as erroneously paid estate
death is situated in the Philippines the following tax.
items of deductions:
On May 6, 1993, the CTA ordered the Commissioner of
(1) Expenses, losses, indebtedness, and taxes Internal Revenue to refund Josefina the amount of
– That proportion of the total expenses, P252,585.59, representing erroneously paid estate tax for
losses, indebtedness, and taxes which the the year 1988. Among the deductions from the gross
value of such part bears to the value of his estate allowed by the CTA were the amounts of P60,753
entire gross estate wherever situated. The representing the notarial fee for the Extrajudicial
allowable deduction under this subsection Settlement and the amount of P50,000 as the attorney's
shall be computed using the following fees in Special Proceedings for guardianship.
formula:
The CIR then file for a motion for reconsideration
Phil Gross Estatae asserting among others that the notarial fee for the
-------------------------- extrajudicial settlement and the attorney’s fees in the
World Gross Estate guardianship proceedings are not deductible expenses.
The CTA upheld the validity of the deductions. The CIR
X then filed with the CA a petition for review questioning the
validity of the deductions which the CA denied. Hence, the
Expenses, Losses, indebtness, Taxes petition for certiorari.

= Allowable deduction ISSUE:

Whether or not the notarial fee paid for the extrajudicial

CIR v. Josefina Pajonar settlement and the attorney's fees in the guardianship
G.R. No. 123 206,March 22, 2000 proceedings may be allowed as deductions from the gross
estate of decedent in order to arrive at the value of the net
Pedro Pajonar, a member of the Philippine Scout, Bataan estate.
Contingent, during the second World War, was a part of
the infamous Death March by reason of which he suffered HELD:
shock and became insane. His sister Josefina Pajonar
became the guardian over his person, while his property Yes. The Court adopts the view under American
was placed under the guardianship of the Philippine jurisprudence that expenses incurred in the extrajudicial
National Bank (PNB) by the Regional Trial Court of settlement of the estate should be allowed as a deduction
Dumaguete City. Pedro died on January 10, 1988 and was from the gross estate. "There is no requirement of formal
survived by his two brothers and sister Josefina Pajonar, administration. It is sufficient that the expense be a
two nephews and a niece. necessary contribution toward the settlement of the case.

On May 11, 1988, PNB filed an accounting of the Pablo’s The attorney's fees of P50,000.00, which were already
property under guardianship valued at P3,037,672.09 in incurred but not yet paid, refers to the guardianship
Special Proceedings. However, the PNB did not file an proceeding filed by PNB, as guardian over the ward of
estate tax return, instead it advised Pedro’s heirs to Pedro docketed as Special Proceeding.
execute an extrajudicial settlement and to pay the taxes on
his estate. Pursuant to the assessment by the BIR the Attorney's fees in order to be deductible from the gross
estate of Pedro paid taxes in the amount of P2,557. estate must be essential to the collection of assets,

21

Page
 TAXATION 2
NOTES KMH
payment of debts or the distribution of the property to the part of his gross estate. Accordingly, all expenses incurred
persons entitled to it. The services for which the fees are in relation to the estate of the deceased will be deductible
charged must relate to the proper settlement of the for estate tax purposes provided these are necessary and
estate. [34 Am. Jur. 2d 767.] In this case, the guardianship ordinary expenses for administration of the settlement of
proceeding was necessary for the distribution of the the estate.
property of the late Pedro Pajonar to his rightful heirs.
In upholding the June 7, 1994 Resolution of the Court of
PNB was appointed as guardian over the assets of the late Tax Appeals, the Court of Appeals held that:
Pedro Pajonar, who, even at the time of his death, was
incompetent by reason of insanity. The expenses incurred
Although the Tax Code specifies "judicial expenses of the
in the guardianship proceeding was but a necessary
testamentary or intestate proceedings," there is no
expense in the settlement of the decedent's estate.
reason why expenses incurred in the administration and
Therefore, the attorney's fee incurred in the guardianship
settlement of an estate in extrajudicial proceedings
proceedings amounting to P50,000.00 is a reasonable and
should not be allowed. However, deduction is limited to
necessary business expense deductible from the gross
such administration expenses as are actually and
estate of the decedent.
necessarily incurred in the collection of the assets of the
estate, payment of the debts, and distribution of the
It is significant to note that the inclusion of the estate tax
remainder among those entitled thereto. Such expenses
law in the codification of all our national internal revenue
may include executor's or administrator's fees, attorney's
laws with the enactment of the National Internal Revenue
fees, court fees and charges, appraiser's fees, clerk hire,
Code in 1939 were copied from the Federal Law of the
costs of preserving and distributing the estate and storing
United States.The 1977 Tax Code, promulgated by
or maintaining it, brokerage fees or commissions for
Presidential Decree No. 1158, effective June 3, 1977,
selling or disposing of the estate, and the like. Deductible
reenacted substantially all the provisions of the old law on
attorney's fees are those incurred by the executor or
estate and gift taxes, except the sections relating to the
administrator in the settlement of the estate or in
meaning of gross estate and gift.
defending or prosecuting claims against or due the estate.

In the United States, administrative expenses, executor's

It is clear then that the extrajudicial settlement was for the
commissions and attorney's fees are considered allowable
purpose of payment of taxes and the distribution of the
deductions from the Gross Estate. Administrative expenses
estate to the heirs. The execution of the extrajudicial
are limited to such expenses as are actually and necessarily
settlement necessitated the notarization of the same. It
incurred in the administration of a decedent's estate.
follows then that the notarial fee was incurred primarily to
Necessary expenses of administration are such expenses
settle the estate of the deceased Said amount should then
as are entailed for the preservation and productivity of
be considered an administration expenses actually and
the estate and for its management for purposes of
necessarily incurred in the collection of the assets of the
liquidation, payment of debts and distribution of the
estate, payment of debts and distribution of the remainder
residue among the persons entitled thereto. They must be
among those entitled thereto. Thus, the notarial fee
incurred for the settlement of the estate as a whole.
incurred for the Extrajudicial Settlement should be allowed
Thus, where there were no substantial community debts
as a deduction from the gross estate.
and it was unnecessary to convert community property to
cash, the only practical purpose of administration being
The guardianship proceeding in this case was necessary for
the payment of estate taxes, full deduction was allowed
the distribution of the property of the deceased. As
for attorney's fees and miscellaneous expenses charged
correctly pointed out by respondent CTA, the PNB was
wholly to decedent's estate.
appointed guardian over the assets of the deceased, and
that necessarily the assets of the deceased formed part of
Anent the contention of respondent that the attorney's his gross estate. . . .
fees incurred in the guardianship proceeding should not
be deducted from the Gross Estate, We consider the same
Judicial expenses are expenses of administration.
unmeritorious. Attorneys' and guardians' fees incurred in a
Administration expenses, as an allowable deduction from
trustee's accounting of a taxable inter vivos trust
the gross estate of the decedent for purposes of arriving at
attributable to the usual issues involved in such an
the value of the net estate, have been construed by the
accounting was held to be proper deductions because
federal and state courts of the United States to include all
these are expenses incurred in terminating an inter vivos
expenses "essential to the collection of the assets,
trust that was includible in the decedent's estate.
payment of debts or the distribution of the property to the
Attorney's fees are allowable deductions if incurred for
persons entitled to it." In other words, the expenses must
the settlement of the estate. It is noteworthy to point that
be essential to the proper settlement of the estate.
PNB was appointed the guardian over the assets of the
Expenditures incurred for the individual benefit of the
deceased. Necessarily the assets of the deceased formed

22

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 TAXATION 2
NOTES KMH
heirs, devisees or legatees are not deductible. This
distinction has been carried over to our jurisdiction. Thus, The CTA and CA who affirmed, ruled that the evidence
in Lorenzo v.  Posadas the Court construed the phrase introduced by the BIR were admissible.
"judicial expenses of the testamentary or intestate
proceedings" as not including the compensation paid to a ISSUE:
trustee of the decedent's estate when it appeared that
such trustee was appointed for the purpose of managing
Whether the CA erred in affirming the CTA in the latter's
the decedent's real estate for the benefit of the
determination of the deficiency estate tax imposed against
testamentary heir. In another case, the Court disallowed
the Estate.
the premiums paid on the bond filed by the administrator
as an expense of administration since the giving of a bond
is in the nature of a qualification for the office, and not HELD:
necessary in the settlement of the estate.  Neither may
attorney's fees incident to litigation incurred by the heirs in YES. The specific question is whether the actual claims of
asserting their respective rights be claimed as a deduction the aforementioned creditors may be fully allowed as
from the gross estate. deductions from the gross estate of Jose despite the fact
that the said claims were reduced or condoned through
Coming to the case at bar, the notarial fee paid for the compromise agreements entered into by the Estate with
extrajudicial settlement is clearly a deductible expense its creditors.
since such settlement effected a distribution of Pedro's
estate to his lawful heirs. Similarly, the attorney's fees paid The Court agreed with an American ruling relating to the
to PNB for acting as the guardian of Pedro 's property date-of-death valuation, a tax imposed on the act of
during his lifetime should also be considered as a transferring property by will or intestacy and, because the
deductible administration expense. PNB provided a act on which the tax is levied occurs at a discrete time, i.e.,
detailed accounting of decedent's property and gave the instance of death, the net value of the property
advice as to the proper settlement of the latter's estate, transferred should be ascertained, as nearly as possible, as
acts which contributed towards the collection of of that time, to be followed. Also the Court, emphasized
decedent's assets and the subsequent settlement of the the definition of claims which are debts or demands of a
estate. pecuniary nature which could have been enforced against
the deceased in his lifetime, or liability contracted by the
DIZON v. CTA G.R. No. 140944, April 30,2008 deceased before his death. Therefore, the claims existing
at the time of death are significant to, and should be made
the basis of, the determination of allowable deductions.
On November 7, 1987, Jose P. Fernandez died. Thereafter,
a petition for the probate of his will was filed.The probate
court then appointed retired Supreme Court Justice MONSERRAT v. CIR, CTA Case No. 11, December 28, 1955
Arsenio P. Dizon and petitioner, Atty. Rafael Arsenio P.
Dizon as Special and Assistant Special Administrator. Aguada Monserrat died on June 6, 1932, she left an estate
Justice Dizon authorized Atty. Jesus M. Gonzales (Atty. valued at 4, 210. Her only heir was her mother Vicenta
Gonzales) to sign and file on behalf of the Estate the Salamanca who failed to file the necessary inheritance tax
required estate tax return and to represent the same in return or pay the corresponding tax due. The matter was
securing a Certificate of Tax Clearance. On April 27, 1990, discovered on 1952 and an assessment of 84.20 as
BIR Regional Director issued Certification stating that the inheritance tax was made by the BIR. In addition to the
taxes due on the transfer of real and personal properties inheritance tax, Vicenta was also required to pay 25% of
of Jose had been fully paid and said properties may be the tax amounting to 21. 05, and interest rate of 12% per
transferred to his heirs. Petitioner requested the probate anum. Computed from Dec 1932 to August 1954.
court's authority to sell several properties forming part of Petitioner did not question the imposition of the tax but
the Estate, for the purpose of paying its creditors. maintained that the imposition of surcharge and interest is
not proper.
 Petitioner manifested that Manila Bank, a major creditor
of the Estate was not included, as it did not file a claim With respect to the estate of Vicenta, it appears that upon
with the probate court since it had security over several her death on June 1948, she left 19 parcels of land and
real estate properties forming part of the Estate. However, personal property with an aggregate fair market value
on November 26, 1991, the Assistant Commissioner for according to the estate and inheritance tax return filed by
Collection of the BIR, issued Estate Tax Assessment Notice the heirs of 18, 320. In the said return deduction
demanding the payment of P66,973,985.40 as deficiency amounting to 14, 530 were claimed, leaving an estate
estate tax. Gonzales moved for the reconsideration but value of 3, 770 subject to tax. On the basis of the said
was denied. return the heirs were exempt from the inheritance tax, but

23

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 TAXATION 2
NOTES KMH
they paid an estate tax of 139. 10 plus a compromise of 5 against third persons were not included in the gross
for failure to notice of death or total of 143.10. estate of the deceased and no proof has been adduced
that the debtors are incapable to pay. Hence, denied.
But an examiner of the BIR found that the aggregate value
of the 19 parcels of land at the time of death of Vicenta SECTION 23 TRAIN LAW
was 83, 189.20. , while personal property were worth
2,100, or a total of 85, 289.12. The deductions in the
Section 23. Section 86 of the NIRC, as amended, is hereby
return claims were disallowed except the sum of 1,
further amended to read as follows:
108.50 representing funeral expenses, leaving a net
taxable valued at 84, 180.62. Accordingly, a deficiency
estate tax and inheritance tax were assessed on the basis "Sec. 86. Computation of Net Estate.— For the purpose of
of the fair market value of the estate as determined by the the tax imposed in this Chapter, the value of the net estate
respondent upon the recommendation of the BIR shall be determined:
examiner.
"(A) Deductions Allowed to the Estate of a Citizen or a
The petitioners claimed that the determination by the Resident - In the case of a citizen or resident of the
respondent of the fair market value of the parcels of land Philippines, by deducting from the value of the gross
is not correct. That the disallowance of certain deductions estate—
is not proper and the imposition of the surcharge and
interest is illegal. "(1) Standard Deduction - An amount equivalent to Five
million pesos (₱5,000,000).
ISSUE:
"(2) For claims against the estate: Provided, That at the
Whether certain deductions claimed by the petitioners in time the indebtedness was incurred the debt instrument
the estate and inheritance tax return covering the estate was duly notarized and, if the loan was contracted within
of Vicenta are allowable. three (3) years before the death of the decedent, the
administrator or executor shall submit a statement
showing the disposition of the proceeds of the loan.
Whether the imposition of the surcharge and interest on
the estate and inheritance taxes assessed on the estate
left by Vicenta and Monserrat is in accordance with the "(3) For claims of the deceased against insolvent persons
law. where the value of decedent’s interest therein is included
in the value of the gross estate.
HELD:
"(4) For unpaid mortgages upon, or any indebtedness in
respect to, property where the value of decedent’s
No. In the estate tax return the following deductions were
interest therein, undiminished by such mortgage or
claimed:
indebtedness, is included in the value of the gross estate,
but not including any income tax upon income received
Funeral expenses, Judicial expenses of the testamentary or after the death of the decedent, or property taxes not
intestate proceedings, claims against the estate, claims accrued before his death, or any estate tax. The deduction
against insolvent persons, losses during the settlement of herein allowed in the case of claims against the estate,
the estate from casualties not compensated for by unpaid mortgages or any indebtedness shall, when
insurance or otherwise not deducted in any income tax founded upon a promise or agreement, be limited to the
return and vanishing deductions (property previously extent that they were contracted bona fide and for an
taxed). Respondent disallowed all the deductions claimed adequate and full consideration in money or money’s
except the sum for funeral expenses. worth. There shall also be deducted losses incurred during
the settlement of the estate arising from fires, storms,
Under the NIRC Sec 89, it allows the deduction from the shipwreck, or other casualties, or from robbery, theft or
gross estate the funeral expenses of a deceased person, embezzlement, when such losses are not compensated for
which shall in no case exceed 5% of the total gross estate. by insurance or otherwise, and if at the time of the filing of
the return such losses have not been claimed as a
The sum being claimed as bad debts , or claims of the deduction for the income tax purposes in an income tax
estate against insolvent person, in order to be allowed as return, and provided that such losses were incurred not
deduction, it is essential that said claims be included as later than the last day for the payment of the estate tax as
part of the gross estate and that the debtors are really prescribed in Subsection (A) of Section 91.
incapable of paying the obligations. The incapacity of the
debtor to pay must be proven. In this case , the claims
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 TAXATION 2
NOTES KMH
"(5) Property Previously Taxed. - An amount equal to the shall be reduced by the amount so paid. Such deduction
value specified below of any property forming part of the allowable shall be reduced by an amount which bears the
gross estate situated in the Philippines of any person who same ratio to the amounts allowed as deductions under
died within five (5) years prior to the death of the paragraphs (2), (3), (4), and (6) of this Subsection as the
decedent, or transferred to the decedent by gift within five amount otherwise deductible under said paragraph (5)
(5) years prior to his death, where such property can be bears to the value of the decedent’s estate. Where the
identified as having been received by the decedent from property referred to consists of two or more items, the
the donor by gift, or from such prior decedent by gift, aggregate value of such items shall be used for the
bequest, devise or inheritance, or which can be identified purpose of computing the deduction.
as having been acquired in exchange for property so
received: "(6) Transfers for Public Use - The amount of all bequests,
legacies, devises or transfers to or for the use of the
"One hundred percent (100%) of the value, if the prior Government of the Republic of the Philippines, or any
decedent died within one (1) year prior to the death of the political subdivision thereof for exclusively public
decedent, or if the property was transferred to him by gift, purposes.
within the same period prior to his death;
"(7) The Family Home. - An amount equivalent to the
"Eighty percent (80%) of the value, if the prior decedent current fair market value of the decedent’s family
died more than one (1) year but not more than two (2) home: Provided, however, That if the said current fair
years prior to the death of the decedent, or if the property market value exceeds Ten million pesos (₱10,000,000), the
was transferred to him by gift within the same period prior excess shall be subject to estate tax.
to his death;
"(8) Amount Received by Heirs Under Republic Act No.
"Sixty percent (60%) of the value, if the prior decedent 4917 - Any amount received by the heirs from the
died more than two (2) years but not more than three (3) decedent’s employee as a consequence of the death of the
years prior to the death of the decedent, or if the property decedent-employee in accordance with Republic Act No.
was transferred to him by gift within the same period prior 4917: Provided, That such amount is included in the gross
to his death; estate of the decedent.

"Forty percent (40%) of the value, if the prior decedent "(B) Deductions Allowed to Nonresident Estates - In the
died more than three (3) years but not more than four (4) case of a nonresident not a citizen of the Philippines, by
years prior to the death of the decedent, or if the property deducting from the value of that part of his gross estate
was transferred to him by gift within the same period prior which at the time of his death is situated in the Philippines:
to his death; and
"(1) Standard Deduction - An amount equivalent to Five
"Twenty percent (20%) of the value, if the prior decedent hundred thousand pesos (₱500,000);
died more than four (4) years but not more than five (5)
years prior to the death of the decedent, or if the property "(2) That proportion of the deductions specified in
was transferred to him by gift within the same period prior paragraphs (2), (3), and (4) of Subsection (A) of this Section
to his death. which the value of such part bears to the value of his
entire gross estate wherever situated;
"These deductions shall be allowed only where a donor’s
tax, or estate tax imposed under this Title was finally "(3) Property Previously Taxed - x x x
determined and paid by or on behalf of such donor, or the
estate of such prior decedent, as the case may be, and
"(4) Transfers for Public Use - The amount of all bequests,
only in the amount finally determined as the value of such
legacies, devises or transfers to or for the use of the
property in determining the value of the gift, or the gross
Government of the Republic of the Philippines or any
estate of such prior decedent, and only to the extent that
political subdivision thereof, for exclusively public
the value of such property is included in the decedent’s
purposes.
gross estate, and only if in determining the value of the
estate of the prior decedent, no deduction was allowable
under paragraph (5) in respect of the property or "(C) Share in the Conjugal Property - The net share of the
properties given in exchange therefor. Where a deduction surviving spouse in the conjugal partnership property as
was allowed of any mortgage or other lien in determining diminished by the obligations properly chargeable to such
the donor’s tax, or the estate tax of the prior decedent, property shall, for the purpose of this Section, be deducted
which was paid in whole or in part prior to the decedent’s from the net estate of the decedent.
death, then the deduction allowable under said Subsection

25

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 TAXATION 2
NOTES KMH
"(D) Tax Credit for Estate Taxes Paid to a Foreign Country - - Sixty percent (60%) of the value, if the prior
decedent died more than two (2) years but not
"(1) In General - The tax imposed by this Title shall be more than three (3) years prior to the death of
credited with the amounts of any estate tax imposed by the decedent, or if the property was transferred
the authority of a foreign country. to him by gift within the same period prior to his
death;
- Forty percent (40%) of the value, if the prior
"(2) Limitations on Credit. - The amount of the credit taken
decedent died more than three (3) years but
under this Section shall be subject to each of the following
not more than four (4) years prior to the death
limitations:
of the decedent, or if the property was
transferred to him by gift within the same period
"(a) The amount of the credit in respect to the tax paid to prior to his death;
any country shall not exceed the same proportion of the - Twenty percent (20%) of the value, if the prior
tax against which such credit is taken, which the decedent died more than four (4) years but not
decedent’s net estate situated within such country taxable more than five (5) years prior to the death of
under this Title bears to his entire net estate; and the decedent, or if the property was transferred
to him by gift within the same period prior to his
"(b) The total amount of the credit shall not exceed the death;
same proportion of the tax against which such credit is - These deductions shall be allowed only where a
taken, which the decedent’s net estate situated outside donor's tax or estate tax imposed under this Title
the Philippines taxable under this Title bears to his entire was finally determined and paid by or on behalf
net estate." of such donor, or the estate of such prior
decedent, as the case may be, and only in the
amount finally determined as the value of such
B. PROPERTY PREVIOUSLY TAXED OR
property in determining the value of the gift, or
VANISHING DEDUCTIONS
the gross estate of such prior decedent, and only
to the extent that the value of such property is
SEC 86 (A) (2) NIRC included in the decedent's gross estate, and only
if in determining the value of the estate of the
(A) Deductions Allowed to the Estate of Citizen prior decedent, no deduction was allowable
or a Resident. - In the case of a citizen or under paragraph (2) in respect of the property or
resident of the Philippines, by deducting from properties given in exchange therefor. Where a
the value of the gross estate - deduction was allowed of any mortgage or other
lien in determining the donor's tax, or the estate
tax of the prior decedent, which was paid in
Property Previously Taxed. - An amount equal to
whole or in part prior to the decedent's death,
the value specified below of any property
then the deduction allowable under said
forming a part of the gross estate situated in the
Subsection shall be reduced by the amount so
Philippines of any person who died within five (5)
paid. Such deduction allowable shall be reduced
years prior to the death of the decedent, or
by an amount which bears the same ratio to the
transferred to the decedent by gift within five (5)
amounts allowed as deductions under
years prior to his death, where such property can
paragraphs (1) and (3) of this Subsection as the
be identified as having been received by the
amount otherwise deductible under said
decedent from the donor by gift, or from such
paragraph (2) bears to the value of the
prior decedent by gift, bequest, devise or
decedent's estate. Where the property referred
inheritance, or which can be identified as having
to consists of two or more items, the aggregate
been acquired in exchange for property so
value of such items shall be used for the purpose
received:
of computing the deduction.
- One hundred percent (100%) of the value, if the
prior decedent died within one (1) year prior to
SEC 86 (B) (2) NIRC
the death of the decedent, or if the property
- (B) Deductions Allowed to Nonresident Estates.
was transferred to him by gift within the same
- In the case of a nonresident not a citizen of the
period prior to his death;
Philippines, by deducting from the value of that
- Eighty percent (80%) of the value, if the prior
part of his gross estate which at the time of his
decedent died more than one (1) year but not
death is situated in the Philippines:
more than two (2) years prior to the death of
the decedent, or if the property was transferred
- Property Previously Taxed. - An amount equal to
to him by gift within the same period prior to his
the value specified below of any property
death;
forming part of the gross estate situated in the
26

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 TAXATION 2
NOTES KMH
Philippines of any person who died within five (5) prior to the decedent's death, then the
years prior to the death of the decedent, or deduction allowable under said paragraph shall
transferred to the decedent by gift within five (5) be reduced by the amount so paid. Such
years prior to his death, where such property can deduction allowable shall be reduced by an
be identified as having been received by the amount which bears the same ratio to the
decedent from the donor by gift, or from such amounts allowed as deductions under
prior decedent by gift, bequest, devise or paragraphs (1) and (3) of this Subsection as the
inheritance, or which can be identified as having amount otherwise deductible under paragraph
been acquired in exchange for property so (2) bears to the value of that part of the
received: decedent's gross estate which at the time of his
- One hundred percent (100%) of the value if the death is situated in the Philippines. Where the
prior decedent died within one (1) year prior to property referred to consists of two (2) or more
the death of the decedent, or if the property was items, the aggregate value of such items shall be
transferred to him by gift, within the same used for the purpose of computing the
period prior to his death; deduction.
- Eighty percent (80%) of the value, if the prior
decedent died more than one (1) year but not
more than two (2) years prior to the death of the ESTATE OF REYES v. CIR, CTA Case No. 6747,
decedent, or if the property was transferred to January 16, 2006
him by gift within the same period prior to his
death;
On January 1997 and August 1998, Spouses Fidel and
- Sixty percent (60%) of the value, if the prior
Teresita Reyes died respectively, leaving various conjugal,
decedent died more than two (2) years but not
paraphernal, personal and real properties to their legal
more than three (3) years prior to the death of
heirs. On December 1997 and February 1999, estate tax
the decedent, or if the property was transferred
returns were filed for their estates pursuant to the
to him by gift within the same period prior to his
Voluntary Assessment Program of the BIR. On June 1998
death;
an amended estate tax return was filed for the estate of
- Forty percent (40%) of the value, if the prior
Fidel and on October 2001, the estate of Teresita paid
decedent died more than three (3) years but not
additional estate tax in the amount of 53, 675. 52. The
more than four (4) years prior to the death of
regional director of the BIR directed the examination of
the decedent, or if the property was transferred
the books of accounts and other accounting records in
to him by gift within the same period prior to his
ascertaining the liability of the estate of Teresita. On the
death; and
basis of the said investigation, respondent issued a
- Twenty percent (20%) of the value, if the prior
Preliminary Assessment Notice (PAN) finding the petitioner
decedent died more than four (4) years but not
liable in the aggregate amount of 7, 837, 512 representing
more than five (5) years prior to the death of the
deficiency estate tax and donor’s tax. Dissatisfied with the
decedent, or if the property was transferred to
petitioner’s counsel explanation in reply to the PAN, a
him by gift within the same period prior to his
formal letter of demand was sent with the Fina Notice of
death.
Assessment (FNA) demanding payment of petitioners tax
- These deductions shall be allowed only where a
obligation.
donor's tax, or estate tax imposed under this
Title is finally determined and paid by or on
behalf of such donor, or the estate of such prior Respondent ratiocinated that the deficiency estate tax for
decedent, as the case may be, and only in the the estate of Fidel was assessed on the basis of the failure
amount finally determined as the value of such to declare actual exclusive /capital and conjugal property
property in determining the value of the gift, or of the decedent. The delinquency estate tax assessment
the gross estate of such prior decedent, and only for the estate of Teresita was attributed to the inclusion of
to the extent that the value of such property is some conjugal properties which actually belong to her
included in that part of the decedent's gross spouse Fidel and an overstatement of vanishing
estate which at the time of his death is situated deductions claimed.
in the Philippines; and only if, in determining the
value of the net estate of the prior decedent, no The delinquency donors tax was assessed as a result of the
deduction is allowable under paragraph (2) of partition of the estates per extra judicial settlement
Subsection (B) of this Section, in respect of the concurred by all the legal heirs of the decedents. A
property or properties given in exchange demand to pay compromise penalty for the late
therefore. Where a deduction was allowed of filing/payment of estate tax and donor’s tax was likewise
any mortgage or other lien in determining the made by the respondent.
donor's tax, or the estate tax of the prior
decedent, which was paid in whole or in part
27

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 TAXATION 2
NOTES KMH
On February 4, 2003, petitioners protested the or which can be identified as having been acquired in
assessments. 10 According to petitioners, the FANs are exchange for property so received.
void for having been issued by the respondent beyond the
three (3)-year period to assess and collect taxes. "Eighty percent (80%) of the value, if the prior decedent
Respondent belatedly issued the FANs more than three (3) died more than one (.t) year but not more than two (2)
years from the time of the filing of the tax returns of the years prior to the death of the decedent, or if the property
estates of Fidel and Teresita Reyes on June 29, 1998 and was transferred to him by gift within the same period prior
February 24, 1999, respectively. The ten (10)-year period to his death;
to assess estate tax returns does not apply because the
returns are devoid of any falsity or fraudulent intention to
XXX XXX XXX These deductions shall be allowed only where
evade taxes. At the very least, petitioners committed a
a donor's tax or estates tax imposed under this Title was
mistake in using the market values in the tax declaration,
finally determined and paid by or on behalf of such donor,
instead of the zonal values as a basis for valuation of the
or the estates of such prior decedent, as the case may be,
properties of the late Fidel Reyes. Also, there was an
and only in the amount finally determined as the value of
erroneous classification of the properties as conjugal
such property in determining the value of the gift, or the
and/or capital/ paraphernal. Finally, the computation of
gross estates of such prior decedent, and only to the
vanishing deductions was miscalculated in the estate
extent that the value of such property is included in the
return of Teresita R. Reyes. The other errors have proven
decedent's gross estates, and only if in determining the
to be beneficial to the government because the properties
value of the estate of the prior decedent, no deduction
subject of the assessment are no longer owned by the
was allowable under paragraph (2) in respect of the
estates or they have no more market value. The estate tax
property or properties given in exchange therefor. Where
return of the estate of Teresita R. Reyes shows that the
a deduction was allowed of any mortgage or other lien in
accountant even failed to deduct the standard deduction
determining the donor's tax, or the estate tax of the prior
of P1,000,000.00 and family home, also in the amount of
decedent, which was paid in whole or in part prior to the
P1,000,000.00 from the gross estate. The additional
decedent's death, then the deduction allowable under said
payment of taxes under the VAP was not even credited to
Subsection shall be reduced by the amount so paid. Such
the estate of the decedents.
deduction allowable shall be reduced by an amount which
bears the same ratio to the amounts allowed as
Subsequently, respondent forwarded petitioners' request deductions under paragraphs (.t) and (3) of this Subsection
for reconsideration and/or reinvestigation to the Revenue as the amount otherwise deductible under said paragraph
District Office, Cubao City. On August 12, 2003, petitioners (2) bears to the value of the decedent's estate. Where the
filed a Petition for Review before this Court without property referred to consists of two or more items, the
waiting for respondent's decision on their protest. aggregate value of such items shall be used for the
purpose of computing the deduction." An evaluation of the
ISSUE: records reveals that there was an overstatement of
vanishing deductions in petitioners' computation of the
Whether or not there was an overstatement of vanishing estate of Teresita R. Reyes. The initial basis used by the
deductions in the estate of Teresita? petitioners is 13/24 of the gross estate of Fidel F. Reyes
instead of only 1/24 (petitioners considered all the
properties of Fidel Reyes as conjugal), which is the
HELD:
inheritance share of Teresita R. Reyes. This resulted to the
bloating of the vanishing deductions.
YES. Vanishing deduction is a deduction allowed from the
gross estate of citizens, resident aliens and non-resident
estates for properties which were previously subject to
donor's or estate taxes. The deduction allowed diminishes
for a period of five (5) years. 38 Section 86(A)(2) of the
1997 NIRC provides for the computation of property
previously taxed, to wit: "(2) Property Previously Taxed. -
An amount equal to the value specified below of any
property forming a part of the gross estate situated in the
Philippines of any person who died within five (5) years
prior to the death of the decedent, or transferred to the
decedent by gift within five (5) years prior to his death,
where such property can be identified as having been
received by the decedent from the donor by gift, or from
such prior decedent by gift, bequest, devise or inheritance,

28

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 TAXATION 2
NOTES KMH

29

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