BUSINESS AND TRANSFER TAXATION

CHAPTER1

INTRODUCTION TO INTERNAL REVENUE TAXES

Sources of Revenue From Internal Revenue Tax

Internal Revenue Taxes are taxes that are specifically provided by

R.A. 8424, The International Revenue Code of the Philippines.

These taxes are commonly called “excise taxes” or “privilege taxes”

because they are imposed on the enjoyment of privilege, performance of
an act, or engagement to an occupation. (Black’s Law Dictionary)

Section 21 of the NIRC Provides the following taxes, fees, and charges
that are deemed to be National Internal revenue Taxes (NIRT):

1.Income Tax

2.Business Taxes

a. Value-added tax

b. Other percentage taxes

c. Excise tax

3.Transfer taxes

a. Estate tax

b. Donor’s tax

4. Documentary stamp tax

NIRT are collected by Bureau of Internal Revenue (BIR), the

government’s agency primarily in charge to assess and collect all
taxes and charges imposed by the NIRC, other tax laws, and
regulations.(Sec.2,NIRC)

Distinction of Internal Revenue Taxes

 Income tax - is the tax imposed on earnings derived from trade,
profession, or occupation. In general, the taxable amount of this tax
is the tax payer’s net taxable income.

Business tax- is the tax imposed on the right or privilege to engage

in an onerous transfer of goods or services in the normal conduct of
business. The taxable amount of this tax is the gross sales or gross
receipts

The following diagram shows the difference and tax base of business
tax and income and income tax:

Figure 1.1 Subject to business tax (Sales or gross

receipts)

Quarters

First Second Third Fourth

Sales 50,000 90,000 140,000 300,000
Cost of sales (20,000) (36,000) (56,000) (120,000)

Gross income 30,000 54,000 84,000 180,000

Itemized deductions
(20,000) (40,000) (60,000) (80,000)
Net taxable income
10,000 14,000 24,000 100,000

Subject to income tax (Net Income)

Transfer tax- is the tax imposed on one’s right to make casual and
gratuitous transfer of one’s property to the other person.

The transfer could be upon the death of the previous owner which
would be subject to estate tax, or the transfer could be during the
lifetime of the donor (donation inter-vivos), which would be subject
to donor’s tax.

Since transfer through donation and inheritance are without

consideration (for free), there is no expected gain or profit that
could be imposed with income tax on these transactions.

Whether the transfer is for profit or given free, it should be affixed

with corresponding documentary stamp in order to make the deed of
transfer (in the case of real property) acceptable in any government
agency or office.

Documentary stamp tax- is the tax imposed on the right to enter that a
particular transfer of property could be subject to business tax or
transfer tax, plus income tax and documentary stamp tax, in some
cases.

The imposition of these several taxes for particular transaction will

not constitute double taxation, because each type of tax is imposed in
different objects.

The following table will outline these different transfer and their
related taxes:

Figure 2.2

Mode of transfer Tax on transfer Tax on gain Tax on

documentation
I. In the
conduct of
business
a. VAT-
Registered VAT Income Tax Documentary Tax
person
b. Non-VAT
Registered Percentage Tax Income Tax Documentary Tax
person
II. Casual
transfers
a. Onerous (with Normal Income
sufficient Capital gain tax tax if not Documentary Tax
financial collected with
consideration) final capital
gain tax

b. Through Estate Tax No gain Documentary Tax

Inheritance

c. As a Donation Donor’s tax No gain Documentary Tax

or gift

Illustration

Candy Do is an owner of real property carrying a value of 5,000,000

Php.

 Case1- If Candy Do is not engaged in realty business and the

property is transferred to Fe Rez for a price of 6,000,000 Php.,
then taxes are:

1. Capital gains tax on sale of capital asset . The gain of 1,000,000

Php. Is no longer reportable in the income tax return of Do because
the transfer is already collected with final capital gains tax (a form
of income tax).

2.Documentary stamps tax, to make the document acceptable at the

registry of deeds for the processing of transfer.

 Case2- If Candy Do is a VAT-registered realtor and the property

is transferred to Fe Rez for a price of 6,000,000 the taxes are:

1.Value-added tax for the sale in the course of business;

2.Income tax on the gain arising from sale; and

3. Documentary stamps on to make the deed of sale acceptable in

the registry of deeds.
  Case3- If , out of her generosity, Candy Do transfers the
property to Fe Rez as a gift, the taxes are:

1.Donor’s tax for the gratuitous transfer, and

2.Documentary stamps tax, to make the deed of donation acceptable

in the registry of deeds.

 Case4- If the property is transferred to Fe Rez by the fact of

death of Ms. Do, then the taxes are:

1. Estate tax for the transfer of inheritance, and

2.Documentary stamps tax to effect the documentation of transfer.

SITUS OF TAXATION

The jurisdiction or the power of the government to tax is dependent on

the nature of tax.
Below is the table of situs of taxation for each type of Internal
Revenue Taxes:
NATURE OF TAX CITIZENSHIP/RESIDENCY WITHIN OUTSIDE
1.Income Income earner:
Taxes
Resident citizen √ √
Alien √ ×
Non-resident √ ×
2.Transfer Property Owner:
Taxes
Citizen √ √
Resident √ √
Non-resident alien √ ×
3.Business Sales/Transfers √
Taxes
√=taxable in the Philippines. ×=not taxable in the Philippines.

 Note: Within means earned or located within the Philippines.

Outside means earned or located outside the Philippines.
If pertaining to income tax, aside from the tax payer’s citizenship
and residency, the prominent determinant factor is the protection
afforded to the taxpayer by the taxing authoirity.

If pertaining to transfer tax, the prominent determinant factor aside

from the citizenship and residency of the owner is the location of the
property.

For business tax, only those goods or rights to be considered or

exercised within are taxable with Philippine business tax.

Illustration

During the taxable year, the following transactions are reported by

the tax payer:
Sales in the conduct of business

Within Outside
2,000,000 1,000,000
800,000 200,000
200,000 100,000
Sales in the conduct of business
Gain or income
Donation
 Case 1- If the tax payer is a resident citizen, his gross taxable
amount would be:
For: Gross taxable amount
Business tax (within)
2,000,000
Income tax (within and outside) 1,000,000
Transfer tax(within and outside) 300,000
 Case2- If the taxpayer is a non-resident citizen, his gross
taxable amount should be:
For: Gross taxable amount
Business tax (within)
P 2,000,000
Income tax (within) P
800,000
Transfer tax(within and outside) P
300,000
 Case3- If the tax payer is a resident alien, his gross taxable
amount would be:
For: Gross taxable amount
Business tax (within)
P 2,000,000
Income tax (within) P
800,000
Transfer tax(within and outside) P
300,000
 Case4- If the tax payer is a non- resident alien, his gross
taxable amount would be:
For: Gross taxable amount
Business tax (within)
P 2,000,000
Income tax (within) P
800,000
Transfer tax(within)
P 200,000

COMPREHENSIVE ILLUSTRATION

Juan Cruz, single and a resident Filipino citizen, has the following
transactions during the year:

Sale of land (capital asset) P2,000,000

Compensation income P 500,000
Purchased of imported products P 300,000
Donation to strangers P 100,000

The total Nation Internal Revenue Taxes paid by Juan Cruz during the
year would be

On sale land of land (capital asset):

Capital gain tax(P2,000,000 x 6 % ) P120,000
Documentary stamp tax (P2,000,000 x 1.5%) 30,000
On compensation income
Income tax due* 125,000
On purchased of imported products
VAT (300,00 x 12% ) 36,000
On donations to strangers
Donor’s tax (P100,000 x 30%) 30,000
Total taxes pain to the BIR P341,000
NOTES:
 Casual sale of real property is subject to capital gains tax of
6% based on the selling price or zonal value, whichever is
higher.
 The documentary stamp tax on the sale of real property is 1.5% of
the selling price of zonal value, whichever is higher.
 The income tax due of annual compensation income amounting to
P550,000 is computed as follows:

Annual compensation income P550,000

Less: Personal exemption-basic 50,000
Net taxable compensation income P500,000

*Tax on P500,000 (Sec. 24 (A), NIRC) P125,000

 The gift to stranger is subject to 30% donors tax based on the

fair market value of the property given at the time of gift.
FILING AND PAYMENT OF INTERNAL REVENUE TAXES
A ”due date” refers to the last day for filling tax return and payment
of tax. The following are the due prescribed by law filing of return
and payment of Internal Revenue Taxes that a typical business has to
comply with:

EVENTS DUE DATE

1.Income tax (taxpayer is April 15 succeeding year (BIR Form
employed) 1700)
2. Income tax (taxpayer is
individual, in business/practice
of profession) April 15 same year (new)
a) First quarter(January-March) August 15 same year
b) Second quarter ( April-June) November 15 same year
c) Third quarter (July- April 15 succeeding year
September) (BIR form 1701)
d) Annual (Final/adjustment
return)
3. Income tax (corporate taxpayers
a) First quarter 60th day after of qtr.
b) Second quarter 60th day after of qtr.
c) Third quarter 15th day of the 4th month after
d) Final/adjustment return close of taxable year (BIR Form
1702)
4. Value-added Tax
a) On sale of goods, services or
property 20th day after month’s end
(1) Monthly-declaration/payment 25th day after quarter’s end
(2)Quarterly return (BIR Form 2550)
5.Excise Tax
a) On importation Before release from BOC
b)On goods manufactured Before transfer from factory
6.Non-VAT percentage tax (monthly 20th day after month’s end (BIR
return) Form 2551)
7.Estate tax 6 months after death
8.Donor’s tax 30th day after each donation
9.Capital gain tax- sale of shares
of stock (not traded thru local
stock exchange) 30th day after sale
a)Per transaction return 15th day of 4th month after close of
b)Final/consolidated return taxable year
10.Capital gains tax on sale of
real property
(capital asset) by individual 30th day after sale
a)Cash sale 30th day after receipt of
b)Installment sale installation payment
11) Remittance of tax withheld
a)In general
January to November On or before 10th day of the
following month
December of which withholding was made
Not later than January 25 of the
succeeding year
b)Large tax payers
On or before 25th day of the month
which following the months in
which withholding was made.

LARGE TAXPAYER
A taxpayer who meets any of the following criteria is a large
taxpayer:

1.Value-added Tax (VAT)- Business establishment with VAT paid or

payable of at least one hundred thousand pesos (P100,000) for any
quarter of the preceding taxable year.
2.Excise Tax- Business establishment with excise tax paid or payable
of at least P1,000,000 of the preceding taxable year.

3.Corporate Income Tax- Business establishment with annual income tax

paid or payable

at least P1,000,000 of the preceding taxable year; and

4.Withholding Tax- Business establishment with a withholding tax

payment or remittance of at least P1,000,000 of the preceding taxable
year.

All large taxpayers are now required to file and pay

electronically all internal revenue taxes due thereon through the
Electronic Filling And Payment System. (RMC 15-2012)

The following taxpayers are automatically classified as candidate to

b e a large tax payer:

1. Branches of tax payer under the Large Taxpayer Service;

2.Subsidiaries, affiliates and entities of conglomerates or group of

companies of large taxpayer;

3.Surviving company in case of merger or consolidation involving a

large taxpayer;

4.Any corporation that absorbs the operation or business in case of

spin offs any large taxpayer;

5.Corporations with an authorized capitalization of at least P300

million;

6.Multi-national enterprises with an authorized capitalization or

assigned capital at least P300 million;

7.Publicly listed corporations; and

8. Universal, Commercial and foreign banks.

The Secretary of Finance, upon the recommendation of BIR Commissioner,

may modify the above criteria in determining a large taxpayer after
considering factors regarding inflation, volume of business, wage and
employment levels, and similar economic factors. (R.A 7646)

CHAPTER 2
TRANSFER TAXES AND BASIC SUCCESSION
NATURE OF TRANSFER TAXES

Transfer taxes are also called excise or privilege taxes. These taxes
are imposed for passing gratuitously private properties to the heirs
in case of death, or to the done in case of donation. They are not
imposed on the value or the property itself but on the act of
transmitting one’s property to another for free.

Figure 2.1

Properties:
1. Real Properties
2.Personal Properties (Tangible and Intangible Properties)
Transfer of Property Through

Onerous Transfer Gratuitous Transfer

Normal Course of Business

Fact of Death Donation
(Sale of Exchange) Casual Transfer

Transfer taxes

Business Taxes Capital

(VAT, Percentage Gains Tax Estate Tax Donor’s Tax
Taxes and Excise
Taxes)

Notes:

1. There are two types of transfer taxes (a) donor’s tax and (b)
estate tax.
2.a donor’s tax is imposed upon the privilege to give property without
consideration during lifetime of the owner.
3. An Estate tax is imposed upon the privilege to transmit the
property to the heirs upon the death of the owner.
Onerous Transfer of Property
Onerous transfer of property refers to the exchange of property for a
monetary consideration or a transfer of goods and services in return
for something of equal value like in sales or barter.

When the property is transferred in the normal course of business , a

corresponding business tax
 (e.i., VAT, OPT or excise tax) shall be imposed. If the transfer is
due to casual sale, the corresponding capital gain tax is imposed).

Gratuitous Transfer of Property

Gratuitous Transfer of Property is a conveyance of property without
any consideration involved in exchange for the property given away.

In other words, it is transfer of property for free because there is

no financial consideration or no performance of service as payment for
the transfer of property.

The taxes, which are imposed on gratuitous transfer of property, are

estate tax donor’s tax. These are commonly called transfer taxes.

Figure 2.2

DONATION INTER VIVOS

(Subject to Donor’s Tax)
Effectively-during the lifetime of donor

GRATUITOUS
TRANFERS
 DONATION MORTIS-CAUSA
 TESTAMENTARY TRANSFER
 INTESTATE TRANSFER
(Subject to Estate Tax)
Effectively-upon death of property owner
Note: When the donor intends that the donation shall take effect
during the lifetime of the donor, through the property shall not be
delivered till after the donor’s death, this shall be a donation inter
vivos. The fruits of the property from donor providers from the time
of the acceptance of the donation shall pertain to the done, unless
the donor provides otherwise. (Art.729, Civil Code)

NATURE OF DONOR’S TAX

Donor’s tax or gift tax is an excise tax imposed on the right to

transfer gratuitously, directly or indirectly, real and personal
properties, tangible or intangible out of the owner’s liberality in
favour of another that accepts the gift.
The gratuitous transfer of property taxes effect during the lifetime
of the donor without consideration or compensation from recipient.

A donor’s tax is imposed upon the right of the donor to donate. It is

not imposed on the donor, done or property donated.

In other words, the donor’s tax imposed on the transfer, not on the
property transferred. Thus, it applies even though the property
transferred may be exempted from income tax or other taxes. (34 Am.
Jur. @d,P.840; Commissioner vs. Hogle, 75, F. (d) 352)

JUSTIFICATION OF DONOR’S TAX

Donor’s tax is imposed to supplement the estate tax for the loss of
the government revenue when estates are split by donations.

Its basic purpose is to prevent the non-payment of estate tax since

properties are transferred without consideration while the property
owner is still alive. These properties could have been transferred by
virtue of Will or by the fact of the donor’s death.

NATURE OF ESTATE TAX

Estate Tax is a tax on the transfer of the net estate of the

decedent. (Sec. 84, NIRC)

The obligation to pay the estate tax accrues at the moment of death.
(Lorenzo, us. Posadas, 64 Phil. 353)

The object of estate tax is to tax the transfer of economic benefits

and enjoyment of property from a decedent person to the heir.

The State protects the rights of the individual on his property and
supervises its transfer from one generation to the next.

Consequently, the State, in the excise of its sovereignty, has always

regarded property transfer as appropriate object of taxation.

Justification of Estate Tax

Estate tax is imposed on the properties left by a decedent person not

only to augment the revenue of the government but also to apply the
fundamental principles or theories regarding taxation.

1. Redistribution of wealth theory

 This theory views that the inheritance received by the heir
contributes to the unequal distribution of wealth and earnings because
the heir has not actually worked for it.

The imposition of death taxes helps to distribute some of the economic

benefits which should have been solely enjoyed by the heir.

2. Benefits-received theory

According to this theory , the government protects and provides

services for the transfer of the estate of the decedent, either by law
or by will. These services resulted to benefits received by the
estate and the heir. Consequently, it is fair that the government
collects equivalent compensation for giving protection and services to
individual persons, properties or rights who gained from the benefits.

3. Privilege or state partnership theory

This theory asserts that the state is a “passive and a silent

partner” in the accumulation of wealth as it protects every individual
within its territory. Hence, it has the right to collect the share
which is properly due to it.

4. Ability-to pay theory

According to this theory , every inheritance received by an heir

is in the nature of unearned wealth. The effect of inheritance
increases the wealth of the heir thereby creating an ability to pay
the tax and thus contributing to governmental income.

EFFECTIVITY OF THE TRANSFER OF PROPERTIES

The Law provides that the right to succession is effected from

the moment of the decedent’s death (Article 777, Civil Code of the
Philippines). The properties and rights of the decedent are
transferred to his successor at the time of his death without any
interruption.
 In other words, The generating source of power to transfer the
properties and rights is death. The transfer the properties and rights
is death. The transfer accrues at the time of death of the decedent.
(Lorenzo vs. Posadas Phil.. 353)

Consequently, the determination of the tax on property transferred is

traced back to the moment of death.

DISTINCTION BETWEEN DONOR’S AND ESTATE TAX

Donor’s Tax Estate Tax

1.Effectivity of During the lifetime of Upon the death if

transfer of property donor and done the decedent

2.Taxpayer The donor Estate of the

deceased person
3.Basis of tax The net gift
Net estate of
4.Exempt amount Net gift of P100,000 P200,000 and below
and below
5.Filing and payment Within six (6)
Within thirty (30) days months from the
after the date gift is decedent’s death.
made.

BASIC CONCEPTS OF SUCCESSION

Succession is defined as mode as a mode of acquisition by virtue of

which the property, rights and obligations to the extent of the value
of inheritance, of a person are transmitted through his death to
another or others either by will (testate) or by operation of law
(intestate). (Art. 774, Civil Code of the Philippines)

Succession is comprised of the following basic elements:

1.Decedent- The person who died and whose property is transmitted
through succession. “Decedent is the general term applied to the
person whose property is transmitted through succession, whether or
not he left a will.” (Art. 775, Civil Code of the Philippines)

Testator is the decedent who made the last Will and testament. (Art.
775, Civil Code)

2. Estate the properties or property rights of the decedent, which is

the subject matter of succession.

Inheritance includes all properties, rights and obligation of a person

which are not extinguished by his death. It also includes those which
have accrued thereto since the opening of the succession. (Art. 776 &
781, Civil Code)

3.Successor The heir or the person to whom the property of property

rights is to be transferred.

Other basic concepts used in estate proceedings are the following:

1. Will- It is a document that determines the disposition of an

inheritance; an act whereby a person is permitted, with the
formalities prescribed by law, to control to a certain degree the
disposition of his estate.( Art. 783, Civil Code)

2.Codicil- A Supplement or and an addition to a will, made after the

execution of a will and annexed to be taken as a part thereof, by any
disposition made in the original will is explained, added to, or
altered. (Art. 825, Civil Code)

3.Holographic Will- One entirely written, dated and signed in the very
handwriting of the testator himself and is subject to no required
form, and may be made in or out of the Philippines , may be made
without a witness. (Art.810, Civil Code)

4.Notarial Will- A Will written in public instruments, notarized by a

lawyer, signed by the testator and witnesses. (Art. 805-806, Civil
Code)

5.Testate Estate- An estate of a deceased person which is settled with

a valid last will and testament.
6.Inestate Estate- An estate of estate of a deceased person without a
will.

7.Probate- A special proceeding to establish the validity of a Will.

Probate is mandatory, which means that no Will passes either real or
personal property unless it is proved and allowed in a proper court.

8. Reprobate- A special proceeding to establish the validity of will

previously prove in a foreign country.

9.Legatee- One who is given personal property through a Will. ( Art.

782, Civil Code)

10.Devisee- One who is giver real property in a Will ( Art. 782, Civil
Code)

11.Executor- The person named in the Will who is entrusted to

implement its provisions. (Rules of Court, Rule 78)

12.Executrix- A female executor.

13.Administrator- The person entrusted and assigned by court for the

care, custody, and management of the estate of a decedent until the
estate is partitioned and distributed to the heirs, legatees, and
devisees, if any. (Rules of Court, Rule 78)

14.Administratrix- A female administrator

15. Special proceedings- A remedy by which a party seeks to establish

a status, a right, or a particular fact. (Rules of Court, Rule 1, Sec.
3(c). Among the subject matters of special proceedings are escheat and
settlement of estate of deceased persons. (Rules of Court, Rule 72,
Sec. 1)

16.Escheat- A proceedings whereby the State, by virtue of

sovereignty, steps in and claims the real or personal property a
lawful owner, a property is claimed by the estate to forestall an open
“invitation to self-service by the first comers”. (Republic vs. CA,
G.R No. 143483)
BASIS OF SUCCESSION

The principles the provide for the bases of transferring the

decedent’s property to the heirs are the following:

1. Public Order

Immediately, upon the persons death, his property becomes without

ownership. To avoid chaotic conflicts, the heirs are protected by law
to succeed the rights of the decedent.

2. Family Relations

The principles of the natural law necessitates a person to

provide for those he left behind.as result, the decedent’s wealth
which he acquired during his lifetime is reserved for the benefits of
his heirs.

3. Implicit Ownership

As a consequence of death, heirs assume ownership of property

left by the decedent because they have the primary rights over the
inheritance.

4.Socio-economic

The wealth left by the decedent should be actively use to provide

economic benefit to the community. The successor should continue to
utilize the resources left by the decedent in order that the wealth
shall be preserved.

Persons Authorized To Take Charge Of The Estate

The actual transfer of the estate to the successors could not

immediately be made because some formal proceedings should be complied
first.

During the transition period, somebody must take charge to gather

and distribute the properties left by the decedent, and as such, the
estate has to be taken over by either an executor or an administrator

An Executor is a person or trust company named in the Will of the

testator to carry out its provisions.
 An Administrator is a person or trust company appointed by the
court to administer and distribute the decedent’s estate if there is
no Will, or if there is no executor named in the Will, or if the
person named in the Will does not act or execute its provisions.

The Estate, which is the subject of successions, has to be

transferred by operation of law or by virtue of a will to the
successor(s). This includes the properties, rights, and obligations of
the decedent which are not extinguished by his death.

The heirs are not liable for the value of the decedent’s
obligations existing at the time of death. The amount of inheritance
distributed to the heirs is the net estate after the payment of the
decedent’s obligations and estate tax.

SUCCESSORS

Successors are the parties who have the legal right to receive
the estate. The successors to the inheritance are classified as
primary compulsory heirs and secondary compulsory heirs. (Art. 887,
Civil Code of the Philippines)

They are called compulsory heirs because the testator cannot

disregard them to obtain inheritance. The law has reserved to them a
portion of the testator’s property (Art. 886, Civil Code of the
Philippines). However, compulsory heirs shall not be compelled to
accept the legitime.

Primary Compulsory Heirs are the successors to whom the legal portion
of the estate is first reserved by law.

The following are the primary compulsory heirs:

1.Legitimate children and their descendants, with respect to their

legitimate parents and ascendants;

Note: Legitimated and adopted children are deemed included in the term
”legitimate children.”

2.Surviving legitimate spouse and their (widow or widower); and

3. Illegitimate children and their descendants. (Art. 887, NCC Art.

176 Family Code)
Under the new Family Code, there are no more spurious children. Both
the natural and spurious children having are simply called
illegitimate children having exactly the same rights.

Illegitimate children are given inheritance because they are

considered innocent. However, since they are born outside marriage,
their share on the decedent’s property shall be less than the
inheritance to be received by the legitimate children , which is
usually one-half of the shares of the legitimate child. (Art. 895,
Civil Code of the Philippines)

Being an illegitimate child does not automatically make one a

compulsory heir. The existing blood relationship is not enough, there
must be a recognition of the illegitimate relationship, whether
voluntary or compulsory recognition. ( Art. 887, Civil Code)

Secondary Compulsory Heirs- are successors to receive the estate in

the absence of the primary compulsory heirs. The estate in the absence
of the primary compulsory heirs. The following persons are secondary
heirs:

1. Legitimate parents and legitimate ascendants- they inherit only in

default of legitimate children and their descendants (Art. 887, Civil
Code)

2. Illegitimate parents (no other descendants) –they inherit only in

default of surviving legitimate spouse and illegitimate children and
their descendants.

The parents mentioned in Art. 887 of the Civil Code do not include
parents-in-law. A widow is not a compulsory heir of a parent-in-law.
(Rosales vs. Rosales, 148 SCRA 60. Vs. Salas,71 SCRA 262)

Absence of Compulsory Heirs

In the absence of any compulsory heirs, the successors would be:

1. The decedent’s relatives up to the 5 th degree of consanguinity.

2. If there were no relatives to receive to estate, the government

shall inherit the whole estate (Art. 1001, Civil Code of the
Philippines)
3.If there is a will, the decedent may name other persons to inherit
the free portion of the net distributable estate.

Brothers, sisters, nephews, and nieces are not compulsory heirs; hence
, they are not entitled to the legitimate. They can become heirs only
in the intestate succession, (Arts. 1001 & 994, Civil Code, Gutierrez
del Camo vs. Varela Calderon, 59 Phil. 631; Manahan, 58, Phil. 448).
Strangers are not compulsory heirs. (Barrios vs. Enriquez, 52. Phil.
509)

However, as long as the legitimate of the compulsory heirs is not

impaired, it is not contrary to law in giving them a share of the
inheritance, if the testator desires it. In this case, they may be
called voluntary heirs.

Illustration

Mrs. Mina Las died leaving the following properties:

One thousand square meters residential lot P1,000,000

Second hand car 200,000
Jewelry 300,000

In her last will and testament, Mrs. Las assigned her brother, Ric
Lamo, To Administer the distribution of her properties upon her death,
which should be disposed of as follows:
1.The residential lot to her only son, Mado.
2.The car and the jewelry to Ric.

In the above case, the following are the parties (elements) in

succession:
Decedent -Mina Las Successors -Mado & Ric
Testator -Mina Las Compulsory heir -Mado Las
Estate -Land, car & jewelry Devisee -Mado Las
Executor -Ric Lamo Legatee -Ric Lamo

Figure 2.4
 TABLE OF COMPULSORY HEIRS
PRIMARY COMPULSORY HEIRS SECONDARY COMPULSORY HEIRS
1.Legitimate children and their In the absence of a decedent’s
legitimate descendants (Art. 887, child, the secondary compulsory
Civil Code) heirs are
Concurring primary heirs: 1. Legitimate parents and
legitimate ascendants. They inherit
only in default of No. 1
2. Surviving spouse
(legitimate)
3.Illegitimate children and their 2.Illegitimate parents (no other
descendants (legitimate or ascendants)
illegitimate) (Art. 902, Civil
Code)

Note: The relatives mentioned are those of the testator

KINDS OF SUCCESSION
The Civil Code classified succession as(a) testamentary, (b)
legal or intestate, or (c) mixed. (Art. 778, Civil Code of the
Philippines)

TESTAMENTARY SUCCESSION
Testamentary Succession is that which results from the
designation of an heir, made in a Will and executed in the form
prescribed by law. (Art. 779, Civil Code of the Philippines)

It can arise only when the decedent left a written valid Will or
through a Codicil which may be notarial or holographic.
Any person who is 18 years old and above and of a sound may make
a valid last will and testament for the disposition of his properties,
which should take effect upon his death. (Art. 797 & 798 , Civil Code
of the Philippines)

Every Will must be written and made in a language or dialect known to

the testator. ( Art. 804, Civil Code)

Oral Will (or Nuncupative Will) made by the testator in contemplation

of death and in the presence of credible witnesses is not allowed.
Oral wills include tape-recorded wills.
Under a testamentary succession, the mass of the properties left by
the decedent maybe classified in legitimate and free portion.

LEGITIMATE
Legitimate is the portion of the testator’s property which could
not be disposed off freely because the law has reserved it for the
compulsory heirs. Specifically, the legitimate is ascertained to
protect the children and the surviving spouse from the unjustified
distribution of properties. (Art. 886,, Civil Code of the Philippines)

The testator cannot deprive his compulsory heirs of their legitimate,

except in case expressly specified by law. (Art. 904,Civil Code of the
Philippines.

Even if the testator does not want to make a compulsory heir to

inherit, he cannot do so because this limitation is imposed upon him
directly by law.

Any compulsory heir to whom the testator hast left by any title less
than the legitimate belonging to him may demand that the same fully
satisfied. (Art. 906, Civil Code of the Philippines)

FREE PORTION
A free portion of the estate is that part of the whole estate
which the testator could dispose of freely through a written will
irrespective of his relationship to the recipient. In other words,
this is a portion of decedent’s estate in excess of the legitimate.

To determine the legitimate, the value of the property left at the

death of the testator shall be considered, deducting all debts and
charges, which shall not include those imposed in the Will.
The net value of the hereditary estate shall be increased by the value
of all donations made by the testator that are subject to collation at
the time of donation. (Art. 908,Civil Code of the Philippines)

A donation is collationable if its value is imputable into the

hereditary estate of the donor at the time of his death. Thus, the
formula would be

Property left Pxxx

Less: Debts and charges xxx
Net value of the hereditary estate Pxxx
Add: Collationable donations xxx
Total hereditary estate Pxxx

Illustration
The gross available estate is P5,000,000. The debts and expenses
related to death including estate tax to be taken from the gross
estate amounted to P600,000. During his lifetime, the decedent had
given P400,000 donation is contemplation of death to his legitimate
son.

The net hereditary is computed as:

Gross available estate P5,000,000
Less: Debts and charges 600,000
Net value of the hereditary estate P4,400,000
Add: Collationable donations 400,000
Total hereditary estate P4,800,000

Figure 2.5
TESTAMENTARY DISTRIBUTION OF NET ESTATE
Arts. 888 to 903 of the Civil Code of the Philippines
SUCCESSOR LEGITIMATE
1. Legitimate children or ½ (Art. 888)
descendants
2. Illegitimate children alone ½ (Art. 901)
3. Legitimate children (LC) or LC=1/2
natural children (NC) & . NC=1/2 of one LC
illegitimate children (IC) IC=1/2 of one LC
(Art. 176 of Family Code)
4. One legitimate child and LC, ½; SS ¼ (Art. 892)
surviving spouse
5. Two or more legitimate children SS=legitimate of 1 LC (Art. 892)
& surviving spouse
6. Illegitimate children & 1/3; 1/3 (Art. 894)
surviving spouse
7.Two or more legitimate children, LC=1/2
illegitimate children & surviving IC=1/2 of one LC (not exceed free
spouse portion)
SS= Same as on LC
(Art.897)
8. Parents or Ascendants alone ½(Art. 889)
9. Surviving spouse alone ½ or 1/3 (Art. 900)
10. Ascendants (As) & surviving Ascendants, ½;SS, ¼ (Art. 893)
spouse
11 Ascendants surviving spouse & As=1/2
illegitimate children SS=1/8
IC=1/4 (Art.899)