TAX LAW 2

TRANFER TAXES
DISCUSSION GUIDE

Transfer Taxes Defined

 
       Are those imposed upon the gratuitous disposition of private property.
 
       Under our law, they are taxes levied on the transmission of private properties from a prior decedent to his heirs in the
case of estate tax, or from a donor to a donee in the case of donor’s tax.
  
 
Kinds of Transfer Taxes
 
1. Death taxes or duties   
       Are those levied on the gratuitous transfers of property upon one’s death, formerly comprised of the estate and
inheritance taxes: Both taxes are now integrated into one estate tax.
 
2. Gift Taxes
       Are imposed on the gratuitous transfers of property during one’s lifetime, formerly comprised of the donor’s and
donee’s gift taxes; both taxes are now integrated into a donor’s tax.  

A. ESTATE and DONORS TAXATION

1. How would you classify Estate tax and Donor’s tax according to their nature?
ANS: They are excise taxes, meaning taxes imposed on the privilege of transmitting
properties gratuitously,either during the lifetime of the transferor or upon his death.

Estate is the mass of property, rights and obligations left behind by the decedent upon his
death. Including those which have accrued from such time of death of decedent

Donation is an act of liberality whereby a person disposes gratuitously of a thing or right in

favour of another, who accepts it (Art 725 CC)

● Distinguish Estate from Donor’s Tax

ESTATE DONOR
Takes effect upon death of transferor Takes effect during the lifetime of transferor,
except TCD
Taxpayer is the estate of transferor/decedent Taxpayer is the donor
Tax is based on net estate Tax is based on net gift
6% rate First 250K exempt; 6% for excess
Return filed within 1 year (old:6mos) from Within 30 days from donation(paid at the time
death(paid at the time the return is filed) of filing)

● What is the situs of taxation of estate and donation

ESTATE:

NRA-tax based upon properties situated within the Philippines

RC or NRC-wherever situated
RA-wherever situated

DONOR:

NRA-within
RC, NRC, RA- wherever situated

● What are included in the gross estate of citizen decedents and alien decedents

a. For residents and citizens: all properties, real or personal, tangible or intangible
wherever situated
b. For non resident aliens: only properties situated in the Philippines provided that,
with respect to intangible personal property, its inclusion in the gross estate is
subject to the rule of reciprocity under sec 104 of nirc

There is reciprocity if the foreign country of which the decedent was a citizen or
resident at the time of his death:
1.) Did not impose an estate tax; or

2.) allowed a similar exemption from estate tax with respect to intangible personal
property owned by Filipino citizens not residing in that foreign country.

Gross estate includes (CR2IG DIP)

1. Transfer in contemplation of death t
2. Transfer with retention or reservation of certain rights
3. Revocable transfer
4. Property passing under a general power of appointment
5. Transfers for insufficient consideration
6. Proceeds of life insurance
7. Prior interests
8. Decedent’s interest

Inclusions in the Gross Estate (CR2IG DIP)

 
 1)       Transfer in contemplation of death
 A transfer with the thought of death. The term “in contemplation of death” means that the impelling or controlling motive
is the thought of death, regardless of whether the transferor is near the possibility of death or not, which induces the
disposition of the property for the purpose of avoiding the tax. Example: donation was made concurrently with the
execution of a will (Vidal de Rocs vs.Posadas, 58 Phil 108)
 The following circumstances are taken into account in determining in whether the transfer was made in contemplation
of death:
A.) Age and state of health of the decedent at the time of the gift;
B.) Length of time between the gift and the date of death; and
C.) Concurrent making of a will or making a will within a short time after the transfer.
 
       The following are examples of motives precluding the category of a transfer in contemplation of death:
a.)      To relieve the donor from the burden of management;
b.)      To save income or property taxes;
c.)       To settle family litigated and unlitigated disputes;
d.)      To provide independent income for dependents;
e.)      To see the children enjoy the property while the donor is alive.
f.)        To protect the family from hazards of business operations; and
g.)      To reward services rendered.
 
Note:

The THREE (3) YEAR PRESUMPTION provides that any transfer of a material part of his property in the
nature of a final disposition or distribution thereof made by the decedent within three years prior to his death without such
adequate and full consideration shall , unless shown to the contrary, be deemed to be have been made in contemplation of
death.
                This provision, however, has been already deleted in Sec.   100 (b) now sec. 85 (B) of the Tax Code by PD No. 1705.
                Under BIR Ruling No. 261 September 2, 1987, the law does not specify the number of years prior to a decedent’s
death within which a transfer can be considered in contemplation of death.
 
2.) Transfer with retention or reservation of certain rights
       This contemplates the instances where the owner transfers his property during life but still retains economic benefits
(the possession or enjoyment of the property or the power to designate the person who may exercise such rights).
It includes:
A. Transfer without retention of interest but intended to take effect at or after the decedents death.
Example: donations mortis causa.
B. Transfer with retention of interest in respect to:
 The possession or enjoyment of or the right to the income from the property; or
 The right either alone or in conjunction with any person, to designate the person who shall possess or enjoy the
property or the income therefrom. And such interest is retained by the decedent for his life or for any period which does
not in fact end before his death.
C. Transfer with reversionary interest, wherein there is a possibility that the transferred property may return to the
decedent or his estate or that it may become subject to a power of disposition by the decedent.
Illustration:
A transfers his property to B in naked ownership and to C in usufruct throughout C’s lifetime subject to the
condition that if C predeceases A, the property shall return to A. If A dies during C’s lifetime, the value of the
reversionary interest of A at death is included in his gross estate.
 
 
3.)      Revocable transfer
       A transfer where:
a.)       The decedent or in conjunction with any other person has reserved the right to alter, amend, revoke, or terminate; or
b.)       Any such power is relinquished in contemplation of the decedent’s death.
 The power to alter, amend or revoke shall be considered to exist on the date of the decedent’s death even
though:
a.)       the exercise of the power is subject to a precedent giving of notice; or
b.)       The alteration, amendment or revocation takes effect only upon the expiration of a stated period after the
exercise of the power.
If the notice has not been given or the power has not been exercised on or before the decedent’s
death, such notice or the power shall be considered to have been given or exercised on the date of the
decedent’s death.(sec.85 C.2) NIRC   
 
4.)      Transfer of property under a general power of appointment
 
       A transfer where the donor of the power of appointment authorizes the donee of such power to designate any person
he chooses to be given the right over the appointed property.
 
General power of appointment vs. special power of appointment:
 
A.)      A power is general, when it authorizes the donee of the power to appoint any person he pleases including himself,
thus having a full dominion over the property as if he owned it.
B.)      It is special when, the donee can appoint only among a restricted or designated class of persons other than himself.
 
Note:
        If the power of appointment is general, it makes the appointed property a part of the donee’s property.
 Under a general power of appointment, title to the property is legally transferred to the donee. Therefore the property
shall form part of the gross estate of the donee.
 
5.)      Transfer for insufficient consideration
 
       A transfer that is not a bona fide sale of property for an adequate and full consideration in money or money’s worth.
The excess of the fair market value at the time of death over the value of the consideration received by the decedent
shall form part of his gross estate. (Sec. 85, NIRC)
       However, if the purported absolute sale inter vivos by the decedent is shown to be fictitious, then the total value of the
property transferred is subject to inclusion in the taxable estate.
 
6.)      Proceeds of life insurance
 
       Proceeds of life insurance taken by the decedent on his own life shall be included in the gross estate if the beneficiary:
A.) Is the estate of the decedent, his executor, or administrator (regardless whether the designation is revocable or
irrevocable); or
B.) Third person other than the estate, executor, administrator but the designation of the beneficiary is revocable.
 
7.)      Prior Interest
 
       Except as otherwise specifically provided therein, subsections (B), (C), (E) of section 85 referring to transfer in
contemplation of death, revocable transfer and proceeds of life insurance respectively shall apply to the transfers,
trusts, estates, interests, rights, powers and relinquishment of powers as severally enumerated and described the rein,
whether made, created, arising, existing, exercised or relinquished before or after the effectivity of the CTRP.
 
 NOTE:
In most of these transfers the property remains substantially that of the transferor during his lifetime notwithstanding
the transfer since he still retain either the “beneficial ownership” or “naked title” to the property.
 
8.)      Decedent’s Interest
 
       To the extent of the interest therein of the decedent at the time of his death. (Sec. 85 A) NIRC
 ● What are excluded from the gross estate
● What is the basis of valuation of gross estate

FMV as of the time of decedent’s death which is determined as follows:

1. In case REAL property, the appraised value thereof as of the time of death shall be,
whichever is the higher of:
2. In case of SHARES, the FMV shall depend on whether the shares are listed or unlisted in
the stock exchanges if:
3. In case of UNITS OF PARTICIPATION in any association, or amusement club-the FMV
shall be the bid price nearest the date of death published in any newspaper or
publication of general circulation; and
4. In case of RIGHT TO USUFRUCT, USE OR HABITATION AND ANNUITY- there shall be
taken into account the probable life of the beneficiary in accordance with the latest
Basic standard mortality table, to be approved by the secretary of finance, upon
recommendation of the insurance commissioner
● What are the allowed deductions from the gross estate
● What are the tax rates?

Reference: Republic Act No. 10963, TRAIN Law, Republic Act No. 8424, NIRC of 1997

B. CASES

On Estate Tax
Lorenzo vs. Posadas, 64 Phil 353
(1) When does the inheritance tax accrue and when must it be satisfied?
The accrual of the inheritance tax is distinct from the obligation to pay the same.

Collector vs. Lara, 102 Phil 813

For estate tax purposes, the term residence” is synonymous with the term
“domicile” the terms may be used interchangeably without distinction

Dizon vs. Posadas, 57 Phil 465

Ganuelas et al vs. Hon Cawed, et.al., GR No. 123968, Apr 24, 2003
Corre vs. Tan Corre, 100 Phil321
Wells Fargo bs. Collector, 70Phil505
Coll vs. Fisher, GR No. L-11621, Jan 28, 2916
Collector vs. Campos Rueda, GR No/ L-1320, Oct 29, 1971
SSS vs. Davao, July 30, 1966
CIR vs. CA, et al, GR No. 123206, March 22, 2000)
Jao vs. CA, et al, GR No. 128,314 (May 29, 2002)
Garcia-Fule vs. CA, 74SCRA959 (1976)
Eusebio vs. Eusebio, 100Phil593 (1956)
Alejandro vs. Geraldez, GR No. L-33849, Aug 18, 1977
Puig vs. Peñaflorida, GR No. L-15939, Jan 31, 1966
Marcos vs. CA, G.R. # 120880, June 5, 1997

On Donors’ Tax

Tuazon vs. CIR, GR #. L-30403, July 3, 1969

CIR vs. Goodrich, GR # 104171, Feb 24, 1999
Roces vs. Posadas, 58 Phil 108
Philamlife vs. Sec of Finance, GR # 210987, Nov 24, 2014
Manuel Abello, et al. vs. CIR, et al. GR # 120721, Feb 23, 2005