TABLE OF CONTENTS

Introduction
Course Description
Course Outcomes
Final Course Output
Course Marking
Course Plan

Module 1 Estate Tax

Lesson 1: Introduction to Transfer Taxes
Lesson 2: Introduction to Estate Tax
Lesson 3: Gross Estate
Lesson 4: Deductions from Gross Estate

Module 2 Donor’s Tax

Lesson 1: Introduction to Donation and Donor’s Tax
Lesson 2: Gross Gift
Lesson 3: Deductions from Gross Gift

Module 3 Percentage Tax

Lesson 1: Introduction to Consumption and Business Taxes
Lesson 2: Tax on Person Exempt from Value-Added Tax
Lesson 3: Domestic Carriers and Keepers of Garages
Lesson 4: International Carriers
Lesson 5: Franchises
Lesson 6: Overseas Dispatch

Module 3 Percentage Tax

Lesson 7: Banks and Non-Bank Financial Intermediaries
Lesson 8: Other Non-Bank Financial Intermediaries
Lesson 9: Life Insurance Premiums
Lesson 10: Agents of Foreign Insurance Companies
Lesson 11: Amusement Taxes
Lesson 12: Winnings
Lesson 13: Sale, Barter or Exchange of Shares of Stock

Module 4 Value-Added Tax

Lesson 1: VAT-Exempt Transactions
Lesson 2: Output VAT
Lesson 3: Input VAT
Lesson 4: VAT on Importation
Lesson 5: VAT Payable and Other Requirements
INTRODUCTION

Learning through D’SPAC way!

The aim of this course is to introduce you to the concepts and rulings principles and
theories of language acquisition and learning. It is structured into four modules of five
parts: Devotional, Start Off, Pursue, Apply, Create (D’SPAC).

Devotional. Every lesson starts with the devotional. Remember, God wants us to
prioritize Him and make Him the first in all our learning activities (Matthew 6:33).
Through this devotional, we will seek God’s leading and wisdom.

Start Off. At this stage, you will be introduced to the learning objectives. It will be your
guide on what is expected to learn for this module.

Pursue. This is the lesson proper; the basic concepts will be unfolded. Be sure to
understand and internalize it.

Apply. This stage will broaden your understanding by making applications of your
acquired learning to a given scenario, a problem, or even to your actual daily activities.
This is where your knowledge is enhanced and your skill developed. It is hoped that
going through this phase, you will find your learning more relevant and grounded on
actual experiences.

Create. The final stage of your D’SPAC journey will be creating something out of your
learning. Learning is not only limited to acquiring information but more importantly,
translating it into something meaningful and essential. At this stage, your teacher may
require some performance-based assessment to reinforce and concretize your learning.
Be bold and creative in your outputs. Creativity and ingenuity will always be at your
disposal.

If you have queries along your journey, do not hesitate to ask your facilitator. You can
comment your queries in the POST TOPIC: QUERIES for others to read so that they
will be clarified if they have the same question. Always remember to learn with God
through the D’SPAC way!
COURSE DESCRIPTION

This course deals with the study of the Philippine business taxes namely value-added
tax or VAT, percentage taxes and excise tax. It covers VAT on sale of goods or
properties and services; VAT on importation; VAT registration and exemption;
percentage taxes under the National Internal Revenue Code 116 to 127; and
computation of excise tax. Secondly, this course also deals with the transfer taxes –
estate and donor’s taxes – specifically the computation of gross estate; deductions from
gross estate; tax credit; computation of gross gift; and deductions from gross gift. Also
discussed are the BIR forms applicable to the above-mentioned taxes, and the rules on
filing and payment.

COURSE OUTCOMES

On the completion of this course, you are expected to:

1. Identify the basic concepts in business and transfer taxes and apply these
concepts to business situations; and
2. Exhibit enhanced mastery on the subject matter in preparation for the CPA Board
Examinations.

FINAL COURSE OUTPUT

As evidence of attaining the above learning outcomes, you are to do the following:
1. Take quizzes and examinations on time and earn a passing grade for each
evaluation;
2. Submit required outputs/projects on time.

COURSE MARKING:
Participation 10%
Quizzes 30%
Assignment and Projects (Create) 20%
Examination (16% midterm, 24% final) 40%
Total 100%

GRADING: Student’s Score / Perfect Score x 50 + 50

COURSE PLAN

Module 1 Estate Tax

Lesson 1: Introduction to Transfer Taxes
Lesson 2: Introduction to Estate Tax
Lesson 3: Gross Estate
Lesson 4: Deductions from Gross Estate

Module 2 Donor’s Tax

Lesson 1: Introduction to Donation and Donor’s Tax
Lesson 2: Gross Gift
Lesson 3: Deductions from Gross Gift

Module 3 Percentage Tax

Lesson 1: Introduction to Consumption and Business Taxes
Lesson 2: Tax on Person Exempt from Value-Added Tax
Lesson 3: Domestic Carriers and Keepers of Garages
Lesson 4: International Carriers
Lesson 5: Franchises
Lesson 6: Overseas Dispatch

MIDTERM EXAMINATION (Tentative dates: February 24-25, 2021)

Module 3 Percentage Tax

Lesson 7: Banks and Non-Bank Financial Intermediaries
Lesson 8: Other Non-Bank Financial Intermediaries
Lesson 9: Life Insurance Premiums
Lesson 10: Agents of Foreign Insurance Companies
Lesson 11: Amusement Taxes
Lesson 12: Winnings
Lesson 13: Sale, Barter or Exchange of Shares of Stock

Module 4 Value-Added Tax

Lesson 1: VAT-Exempt Transactions
Lesson 2: Output VAT
Lesson 3: Input VAT
Lesson 4: VAT on Importation
Lesson 5: VAT Payable and Other Requirements

FINAL EXAMINATION (Tentative dates: March 24-25, 2021)

TEXTBOOK:
Tabag, E. & Garcia, E.J. (2020). Business and transfer taxation. EDT Book Shop
FACILITATOR/TUTOR AND TUTORIALS

You are free to work on each module at your convenient time, at your own pace.
However, you are expected to finish one Module each week except your teacher’s
instruction states otherwise. An online conference will happen twice a week every
Tuesday and Thursday, 2:30PM-4:00PM. Please make sure you utilize this opportunity
to raise questions so that difficult concepts may be clarified. Just make sure you have
read the course materials very well so you will be able to identify the issues that need to
be sorted out with your teacher during the scheduled meeting.

MODULE 1
Estate Taxes

Reflect on the devotional below and share your insight about the following questions:
1. On a scale of 1 to 10, how important is it to you to have the latest and greatest
in terms of gadgets, clothes or other stuff? Why did you pick that number?
2. God doesn’t get mad at Babylon for having nice things, but for the way they
lusted after and worshipped nice things. As you think about your attitude
toward money and stuff, is it verging on worship? Why do you say so?

How to Build a Legacy That Lasts

Habakkuk 2:4-14

You pull into the dump with your final load of trash. The cleanup was a success, and you
are ready to bask in the neatness of your newly-organized garage. But as you leave,
you notice the rusted remnants of a gas grill, decayed fragments of some outdoor
furniture, and a tattered old couch among the dumpsters.

The piles of discarded goods provide a tangible reminder of the temporary nature of life
on earth. Like us, Babylon lived in an age of prosperity and excess. People lusted after
what was newer, bigger, and better. But none of what they built still stands.

In Habakkuk 2, God spoke through the prophet Habakkuk to warn Babylon that He was
not pleased with their obsession with money and material possessions. Habakkuk
chastises Babylon for the way they built their wealth. Their desires were not upright.
They obtained their wealth through greed, arrogance, extortion, and bloodshed. Their
house was built through unjust gain and filled with stolen goods.
Habakkuk warns the Babylonians that, like the worn out items at the dump, their earthly
possessions will eventually decay. A life built on materialism will not last. But a life built
around a relationship with Jesus will last into eternity.

“The righteous will live by faithfulness,” Habakkuk writes, and one day “... the earth will
be filled with the knowledge of the glory of the Lord” (Habakkuk 2:4 and Habakkuk
2:14).

On that day, we will all give an account for what we built our lives on. Like the nations of
Habakkuk’s day, we have a choice: We can build our lives on a relationship with Jesus,
or we can build our lives on acquiring stuff and making money. But only one will last into
eternity.
https://newspring.cc/devotionals/habakkuk-a-7-day-devotional1/how-to-build-a-legacy-that-lasts

For this module, the objective is for you to have a basic understanding of transfer taxes
and estate tax. Specifically, you will:

a. Determine the concepts of transfer and its types;

b. Identify the different transfer taxes;
c. Explain the rationale of transfer taxation
d. Identify the types and elements of succession;
e. Compute for the gross and net estate;
f. Determine the items to be deducted from gross estate;
g. Explain the treatment of a tax credit; and
h. Explain the rule on filing of return and payment of estate tax due.

Lesson 1: Introduction to Transfer Taxes

What is “transfer”?
Transfers refer to any transmission of property from one person to another. A person
may be a natural person or a juridical person created by law.

Types of transfers:
1. Bilateral transfers
2. Unilateral transfers
 3. Complex transfers
The right or privilege to transfer properties is subject to “transfer taxes.”
Bilateral Transfers
Bilateral transfers involve transmission of property for a consideration. They are referred
to as onerous transactions or exchanges.
Examples:
1. Sale exchange of property for money
2. Barter exchange of property for another property
The realized gains on bilateral transfers or exchanges are subject to income taxation.

Unilateral Transfers
Unilateral transfers involve the transmission of property by a person without
consideration. They are commonly referred to as gratuitous transactions or simply,
transfers. The types of unilateral transfers are:
1. Donation - It is the gratuitous transfer of property from a living donor to a donee.
Since it is made between living persons, it is called donation inter vivos.
2. Succession - It is the gratuitous transfer of property from a deceased person
upon death to his heirs.

When people die, everything they own will be transferred to their successors in interests
(heirs) either by operation of law or by virtue of a will written by the decedent.
Succession is a form of donation effected by death; hence, it is called donation mortis
causa.

Complex Transfers
Complex transfers are transfers for less than full and adequate consideration. These are
sales made at prices which are significantly lower than the fair value of the property
sold.

What constitutes an adequate consideration? There is no fixed quantitative rule on what

constitutes an adequate consideration. The determination of whether or not a
consideration is adequate requires consideration of the facts and the circumstance
surrounding the sale. Consideration may be given to the liquidity of the asset or the
availability of willing buyers.

Hence, the consideration of P7,000 for a property which is readily saleable at P10,000
may be considered inadequate. The P3,000 discount may be considered a gratuity
subject to transfer tax. However, the consideration of P9,500 for a property with fair
value of P10,000 may be considered adequate. The discount of P500 may be
considered a normal discount and is not subject to transfer tax.
Transfers for adequate consideration are deemed pure exchanges and they’re subject
to income tax, not to transfer tax. Transfers for less than full and adequate consideration
are split into its components: transfer element and exchange element. The transfer
portion representing a gratuity is an indirect donation subject to transfer tax. The
onerous portion representing a realized gain is subject to income tax.

Illustration:
A property with a fair value of P40,000 and tax basis of P25,000 was sold for P30,000.

The transfer element (gratuity) is classified as either mortis causa or inter vivos
depending on the intent of the indirect donation. The gratuity on complex transfers is
generally considered as an inter vivos donation. However, if the sale is made in
contemplation of the death of the seller or if title to the property is agreed to be
transferred upon the death of the seller, the gratuity is considered a mortis causa
donation. The exchange element of P5,000 is a realized gain on sale and is subject to
income tax.

Types of Transfer Tax

1. Donor’s tax - imposed on donation inter vivos
2. Estate tax - imposed on donation mortis-causa

Rationale of Transfer Taxation

1. Tax evasion or minimization theory
Exchanges may be structured in such a way as to defeat income taxation. This may be
true especially when the seller and the buyer are related taxpayers.

Illustration:
Assume that a property with a fair value of P4,000 and tax basis of P1,000 is sold for
P2,000.

Under income taxation, only the P1,000 actual gain (P2,000 - P1,000) is subject to tax.
As a principle, income measurement is based on the selling price because it is the
extent of realization. The P2,000 (P4,000 - P2,000) value should have been part of the
taxable gain, except that it is given free to the buyer. This P2,000 unrealized portion of
the gain is not subject to income taxation. As a remedy to this limitation of income
taxation, the government taxes this lost profits (i.e., gratuity) to transfer taxation.

2. The Tax Recoupment Theory

Even without a deliberate intent to evade income tax, transfers have a natural effect of
decreasing future income tax collections of the government.

Illustration:
Alison has P5,000,000 properties which earn 10% or P500,000 annual income. He
wanted to see his five children become financially independent. He distributed his entire
properties to them. Each child received P1,000,000 properties. Each child earns roughly
P100,000 on the donated properties.

The split of the properties and the spread of the income to several taxpayers will result
in lower future tax collection to the government. Note that the taxation of the entire
P500,000 income of Mr. Allison will yield a greater amount of tax than the accumulated
tax from the five children. This is because under the progressive income tax on
individuals, a higher income yields a higher tax while a lower income yields a lower
income. The same effect would result even if we assume Mr. Alison dies with his
property distributed by way of succession to his children. There will be a similar
reduction in future income taxes.

To recoup on future losses in income taxes caused by transfers, the government has to
tax the transfer of the properties.

3. The Benefit Received Theory

When a person transfers property by donation or succession, the government is a party
in the orderly transfer of the property to the donee or heir. This is made possible by
government laws which enforce or effectuate donation and succession.

The transferor is actually exercising a privilege to transfer his property under

government security of an effective and orderly transmission under its laws which define
and effect donation or succession. Without these laws, the transfer could not have been
conveniently possible.

Exercising this special privilege to transfer property either inter vivos or mortis causa is
a benefit to the transferor. In accordance with the benefit received theory, the transfer
should be taxed. The benefit received theory is the most dominant rationalization of
transfer taxation.
4. The State Partnership Theory
The state ensures a civilized and orderly society where commercial undertaking and
wealth accumulation flourish. The government therefore is an indirect partner behind all
forms of wealth accumulation by any person within the state. Thus, when a person
transfers part or the whole of his wealth, the government should take its fair share by
taxing the transfer of the wealth to other persons.

5. Wealth Redistribution Theory

Equitable distribution of wealth is widely accepted as an element of social progress and
stability. Societies with high inequities in wealth distribution are normally associated with
high social unrest, lawlessness, insurgencies, wars, and chaos. Thus, governments
strive toward equitable wealth distribution as a basic policy. Taxation is a common tool
in redistributing wealth to society. When one transfers his wealth, the transfer should be
taxed so that part of the wealth will be redistributed to benefit society.

6. Ability to Pay Theory

No one could gratuitously give what he could not afford. The ability to transfer property
is an indication of an ability to pay tax. Hence, the transfer is subject to tax.

Nature of Transfer Taxes

1. Privilege tax
Transfer tax is dominantly viewed as a form of privilege tax rather than a form of penalty
tax. It is imposed because the transferor is exercising a privilege in the form of
assistance rendered by the government in effecting the transfer of properties by way of
donation or succession. Since the transferor is exercising a privilege, the transferor is
subject to tax.

2. Ad valorem tax
The amount of transfer tax is dependent on the value of the properties transferred.
Thus, valuation of the property transferred is needed in order to determine the amount
of tax.

3. Proportional tax
Under the TRAIN Law, transfer taxes are based on a fixed percentage of the amount of
the property, receipts or other basis to be taxed.

4. National tax
Transfer taxes are levied by the national government.

5. Direct tax
Transfer taxes cannot be shifted. The transferor-donor or transferor-decedent is the one
subject to tax.

6. Fiscal tax
Transfer taxes are levied to raise money for the support of the government.

Transfer Taxpayers
For the purposes of donor’s tax, juridical persons such as corporations and partnerships
which donate properties are classified as citizens or aliens and residents or
non-residents depending on their place of incorporation or operations.

A corporation or a partnership with a fixed place of business in the Philippines is a

resident. If the corporation has no fixed place of business within the Philippines, it is
considered a non-resident.

The citizenship of juridical persons is determined by the incorporation tests. Juridical

persons that are organized in the Philippines are considered Philippine citizens. Those
organized abroad are considered aliens.

General Rule in Transfer Taxation

1. Residents or citizens are subject to tax on all transfers of properties regardless of
their location. In other words, they are taxable on global transfer of properties.

Illustration:
Mr. Mario, an American residing in the Philippines, donated a car in Mexico to a friend
and a motorbike in the Philippines to his brother in America.

Since the taxpayer is a resident, both the donation of a car abroad and the donation of a
motorbike in the Philippines are subject to transfer tax. Since the donor is living at the
time of donation, the transfers are donations inter vivos subject to donor's tax.

Illustration:
Juan, a non-resident Filipino citizen, died leaving a building in the United States and an
agricultural land in the Philippines for his heirs.

Since the taxpayer is a citizen, both transfers of a building in the US and the agricultural
land in the Philippines are subject to Philippine transfer tax. Since the transfers are
effected by the death of the donor, they are donations mortis causa subject to estate
tax.
2. Non-resident aliens are taxable only on properties transferred which are located in
the Philippines at the date of transfer.

Illustration:
Mr. Kounoman, a Japanese citizen residing in Japan, donated a parcel of land in Japan
to a resident Filipino friend and his investment in the shares of stocks of a Philippine
corporation to his Japanese sister.

Since the donor is neither a Philippine resident nor a citizen, only the donation of shares
of stock in the Philippines is subject to transfer tax. Also, since the donor was living at
the date of donation, the transfer is a donation inter vivos subject to donor’s tax.

Illustration:
Mr. Ti Wong, a Chinese citizen residing in Hong Kong, died leaving a building in Hong
Kong and a car in the Philippines.

The donor is neither a resident nor a citizen. Only the car in the Philippines is subject to
transfer tax. Since the transfer is effected by death, it is a donation mortis causa subject
to estate tax.

Only the classification of the donor and the location of the property are material in
determining taxability. The identity of the donee is immaterial in the taxability of a
transfer.

Situs of Properties
The location of the property is highly essential for purposes of transfer taxation. This is
particularly important to non-resident aliens because they are taxable only on transfers
of properties located in the Philippines. For residents or citizens, it is relevant for
purposes of computing tax credits for foreign transfer taxes paid.

The following intangible properties are considered located in the Philippines:

1. Franchise exercisable in the Philippines
2. Shares, obligations, or bonds issued by any corporation or sociedad anonima
organized or constituted in the Philippines in accordance with its laws
3. Shares, obligations, or bonds issued by any foreign corporation 85% of the
business of which is located in the Philippines
4. Shares, obligations, or bonds issued by any foreign corporation if such shares,
obligations, or bonds have acquired business situs in the Philippines
5. Shares or rights in any partnership, business or industry established in the
Philippines
Reciprocity Rule on Non-Resident Aliens
The intangible personal properties of non-resident aliens are exempt from Philippine
transfer tax provided that the country in which such alien is a citizen also exempts the
intangible personal properties of Filipino nonresidents therein from transfer taxes.

GROSS ESTATE BASED ON CITIZENSHIP AND RESIDENCE

Real Property Tangible Personal Intangible Personal

Property Property

Decedent w/in w/out w/in w/out w/in w/out

Citizen or
resident

NRA w/o
reciprocity

NRA w/
reciprocity

Donation Inter Vivos vs. Donation Mortis Causa

A donation made during the lifetime of the donor is a donation inter vivos. It is valued at
the date of completion or perfection of the donation. A donation mortis causa is one
inspired or effected by death. It is valued at the time of death.

The motive of an inter vivos transfer is very important in determining whether it is

actually an inter vivos transfer or a mortis causa transfer. The donor’s motive is
established out of the wordings of the deed of donation prepared by the donor to effect
the donation.

Examples of motives associated with life:

a. To reward services rendered
b. To relieve the donor of the burden of management of the property
c. To save on income tax
d. To see children financially independent
e. To see children enjoy the property while the decedent still lives
f. To settle family disputes
The presence of express wordings in the deed of donation which indubitably manifest
that the donation is inspired by the decedent’s thought of death will qualify a donation as
a donation mortis causa. Also, a donation made on the decedent’s last will and
testament is a donation mortis causa. The ‘last will and testament’ is a document
expressing the decedent’s desire on how his properties will be distributed after his
death.

Illustration:
Rhad was indebted with a P100,000 loan from Juan. Juan cancelled Rhad’s promissory
note out of gratuity. Both Juan and Rhad were living at that time. The cancellation of
indebtedness without a consideration by a living donor is a donation inter-vivos.

Illustration:
During his lifetime, Don Juan transferred a property to his favorite granddaughter,
Karen. Don Juan allowed Karen to obtain possession of the property but under
condition that ownership will not transfer until his death. The transfer of property during
the lifetime of the donor is not intended to take effect in ownership immediately but at
the point of death. The transfer is a donation mortis causa.

Illustration:
On his deathbed, Don Pedro made a written donation saying “Death is imminent upon
me. I would like to ensure that Pablo will have my sports car as his legacy. For this, I am
donating my car to him.” Though the donation is made during the lifetime of Pedro, the
donation is inspired by the thought of death. This is a transfer mortis causa subject to
estate tax upon Pedro's death.

Examples of Donation Mortis Causa:

a. Donation to take effect at the death of the donor
b. Donation in the last will and testament of the donor
c. Donation with retention of certain rights until death
d. Revocable transfers
e. Conditional transfers

Non-Taxable Transfers
There are transfers of properties which are not actually donations and hence, not
subject to transfer taxes.

1. Void transfers
Void transfers are those that are prohibited by law or those that do not conform to legal
requirements for their validity. Void transfers are not taxable to either donor's tax or
transfer tax.

Examples of void transfers:

a. Transfer of property not owned
b. Donation between spouses
c. Donations which do not manifest all essential requisites to validity such as
donations refused by the donee
d. Donations that do not conform to formal requirements such as oral donation of
real properties

Illustration:
Tired of feeding Zeus’ derby roosters, Raymund donated them to Andrix, his best friend
“tupada” master. Since Raymund does not have ownership over the thing donated, the
donation is void. There is no valid donation to speak of; hence, no transfer tax is
imposable.

Illustration:
In an overnight drinking spree, Zeus orally donated his seven-hectare agricultural land
to Raymund. Oral donation of real property is legally void. There is no imposable
transfer tax since there is no donation to be taxed.

2. Quasi-transfers
There are transmissions of property which do not involve transfer of ownership. For the
purpose of our discussion, let us refer to these transmissions as “quasi-transfers.”
Quasi-transfers are not subject to transfer taxes.

Examples:
a. Transmission of the property by a person with a right of usufruct over the
property to the owners of the naked title
b. Transmission of the property by a trustee to the real owner
c. Transmission of the property from the desire predecessor

Illustration:
Mr. A died leaving a tract of land to C but since C was a minor, A devised in his will to
give B a usufructuary right to use and enjoy the land for 10 years before turning it over
to C. After the lapse of 10 years, B transferred the land to C.
B does not own the land. He was granted only the right to use the land but not
ownership thereto. The turnover of the land by B to C, the real owner, shall not be
subject to tax since there is no transfer of ownership.

Illustration:
Mr. A died leaving a commercial building as inheritance to C. Since C was a minor, A
appointed his older brother B to be the fiduciary heir to the property to take care of the
same until C turns 18 years old. When C turned 18 years old, B transferred the property
to C.

The transmission of the property from B, a mere trustee-heir, to C, the real heir, shall not
be subject to transfer tax since there is no transmission of legal ownership over the
property.

Note: If the usufruct in the first illustration and the fiduciary relationship in the second
illustration are pre-terminated by the death of the usufructuary or fiduciary heir, the
transfer of the property to the real owner is likewise not subject to estate tax for the
same reason that there is no transfer of ownership.

3. Incomplete transfers
Incomplete transfers involve the transmission or delivery of properties from one person
to another, but ownership is not transferred at the point of delivery. The actual transfer
of ownership will take effect in the future upon the happening of certain future events or
conditions.

Initially, incomplete transfers are not subject to transfer taxes upon delivery, but they are
subject to transfer tax in the future when the transfer is completed upon the happening
of the event or upon fulfillment of the specified conditions.

Types of incomplete transfers:

a. Conditional transfers
b. Revocable transfers
c. Transfer in contemplation of death
d. Transfers with reservation of title to property until death

Illustration:
On January 1, 2021, Don Lucio donated a luxury car with a value of P4,000,000 to his
son, Boy, under a condition that Boy must be a topnotcher in the May 2021 CPA Board
Exam. To motivate Boy, Don Lucio delivered the car to him on January 1, 2021.
The transfer of the car on January 1, 2021 shall not be subject to donor’s tax even if
there is a physical transfer of the car. Don Lucio is still the owner of the car. Title vests
only upon fulfillment of the condition.

Illustration:
On February 14, 2020, Mark transferred an iPhone to Goldemaire but subject to
revocation if Mark so pleases.

Although there is an actual physical transfer of property on February 14, 2020, the same
cannot be subject to donor's tax since there is no transfer of ownership at that date.

How are incomplete transfers completed?

1. Conditional transfers are completed inter-vivos upon the happening of the following
during the lifetime of the donor:
a. fulfillment of the condition by the transferee, or
b. waiver of the same by the transferor
2. Revocable transfers are completed inter-vivos upon:
a. waiver by the transferor to exercise his right of revocation, or
b. the lapse of his reserved right to revoke
3. Transfers in contemplation of death and transfers with reservation of title to property
until death are completed by the death of the decedent.

Revocable and conditional transfers that are completed during the lifetime of the
transferor constitute donations inter-vivos subject to donor’s tax at the fair value of the
property at the date of their completion or perfection.

Revocable transfers and conditional transfers that are pre-terminated by the death of
the transferor shall be subject to estate tax at the point of death of the transferor.

Illustration:
In March 2020, Alexis donated a piece of jewelry valuing P200,000 to his father on the
condition that the same shall be revocable until December 31, 2020. Alexis did not
revoke the property. On January 1, 2021, the property was worth P250,000.

The donation became complete on January 1, 2021, when Alexis’ right to revoke
lapsed. Since Alexis was living by January 1, 2021, the transfer is a donation inter vivos
subject to donor's tax at its value of P250,000.
Assume Alexis died on August 15, 2020 when the jewelry had a value of P240,000. In
this case, the jewelry shall be included in the donation mortis causa of the decedent.
The P240,000 jewelry shall be subject to estate tax.

Note that there is no donation to speak of if the donation is revoked by the donor before
December 31, 2020.

Illustration:
In January 2020, Glenn gave a car worth P1,000,000 to his brother, John, as a gift
subject to the condition that John must pass the October 2020 Board Exam. John
passed the Board Exam on October 23, 2020 when the fair value of the car was
P800,000.

The donation was completed on October 23, 2020 and shall be subject to donor’s tax at
its P800,000 value. Similarly, if Glenn dies before John fulfills the condition, the car shall
be subject to estate tax at the date of his death.

Complex Incomplete Transfers

Incomplete transfers are sometimes made for less than full and adequate consideration.
Similar to complex transfers, the gratuity component of the complex transfers is
determined and is subject to the appropriate type of transfer tax.

Valuation Rules:
1. Donation inter-vivos = fair value at the date of completion of transfer less the
consideration given
2. Donation mortis causa = fair value at the date of death less consideration given at the
date of transfer

Illustration:
On June 1, 2018, Mr. D transferred his car worth P1,000,000 to E but for a minimal
consideration of P200,000 only. The transfer shall be revocable by D in 5 years.

Case 1: Waiver before death

On July 3, 2020, D waived his right of revocation. The fair value of the car was
P800,000 on that date. Since D was still living upon the perfection of the transfer, the
transfer is a donation inter vivos. It shall be valued at P800,000 less P200,000. Hence,
P600,000 shall be subject to donor's tax.

Case 2: Death without revocation

Assume instead that Mr. D died on January 3, 2020 without waiving his right to revoke
the transfer. The fair value of the property was P 900,000 at that time. Since the
revocable transfer is pre-terminated by death, it is a donation mortis causa. It shall be
valued at P900,000 less P200,000. Hence, P 700,000 shall be subject to estate tax.

The following must be established before a complex incomplete transfer is taxable:

1. The incomplete transfer must have been paid for less than full and adequate
consideration at the date of delivery of the property.
2. The property must not have decreased in value less than the consideration paid at
the completion of the transfer.

Illustration:
Lordknight has a rare Egyptian artifact which has a fair value of P2,000,000. Lordknight
gave the artifact to Noventa for a consideration of P1,950,000 but revocable if Noventa
did not graduate as cum laude. Noventa subsequently graduated cum laude when the
artifact was worth P3,000,000.

The transfer was paid for an adequate consideration considering that the selling price
approximates the fair value at the date of delivery. The transfer is a bona fide sale which
will not be subject to transfer tax even if the fair value of the property appreciated at the
date of completion of the donation.

Illustration:
Soren sold a gold bullion with a fair value of P2,400,000 to Leomilo at a price of
P1,800,000 but revocable within one year. The one-year period lapsed and the gold
bullion had a fair value of P1,700,000.

The transaction is a complex incomplete transfer. This should be subject to transfer tax
upon completion of the transfer if the fair value upon completion of the sale exceeds the
consideration paid by the buyer at the date of delivery.

In this case, the excess is a negative P100,000 (P1,700,000 P1,800,000). Hence, it is

not subject to transfer tax since there is no gratuity after all.

Lesson 2: Introduction to Estate Tax

Nature of Estate Tax

It is a tax of the right to transfer property at death (succession) and on certain transfers
which are made by law the equivalent of testamentary disposition and is measured by
the value of the property.

The taxpayer in the estate taxation is the estate of the decedent represented by the
administrator, executor or legal heirs.

What is “succession”?
Succession is a mode of acquisition by virtue of which the property, rights and
obligations to the extent of the value of the inheritance, of a person are transmitted
through his death to another or others either by his will or by operation of law (Art 774,
Civil Code).

The inheritance includes all the property, rights and obligations of a person which are
not extinguished by his death (Art. 776, Ibid.).

The rights to the succession are transmitted from the moment of the death of the
decedent (Art. 777, Ibid.). The decedent is a deceased or dead person.

Types of Succession
1. Testamentary Succession
It is that which results from the designation of an heir, made in a will executed in the
form prescribed by law. (Art. 779, Civil Code)

A person can specify the recipient of his properties upon death. This designation must
be made through a written document called last will and testament. A person who died
with a will is said to be “testate.”

2. Intestate Succession
When a decedent dies without a will or with an invalid one, the distribution of the estate
shall be in accordance with the default provision of the Civil Code on succession.

3. Mixed Succession
Transmission of the decedent properties shall be partly by virtue of a written will and
partly by operation of law.

Will
A will is an act whereby a person is permitted, with the formalities prescribed by law, to
control to a certain degree the disposition of his estate, to take effect after his death
(Art. 783, Ibid). A will is an expression of the decedent’s desire as to how his properties
will be distributed after his or her death.

The making of a will is a strictly personal act; it cannot be left in whole or in part at the
discretion of a third person, or accomplished through the instrumentality of an agent or
attorney. (Art 784, Ibid.)

Types of will
1. Holographic will - a will which is entirely written, dated, and signed by the hand of
the testator himself, without the necessity of any witness. This kind of will does
not need formalities because many people can recognize his handwriting and it
can be verified by a penmanship expert.
2. Notarial or ordinary or attested will - is one which is executed in accordance with
the formalities prescribed by the Civil Code. It is a will that is created for the
testator by a third party, usually his lawyer, follows proper form, and signed and
dated in front of the required number of witnesses (3 or more witnesses) and
acknowledged by the presence of a notary public.

Codicil - a supplement or addition to a will, made after the execution of a will and
annexed to be taken as a part thereof, by which disposition made in the original will is
explained, added to, or altered (Art 825, Ibid.)

Nature of Succession
Succession is a gratuitous transmission of property from a deceased person in favor of
his successors. It is a donation caused by death (i.e. donation mortis causa).

Succession involves only the net properties of the decedent. The heirs will inherit what
remains of the decedent’s property after satisfying the decedent’s indebtedness and
obligations including the estate tax. The heirs shall not inherit the debt of the decedent.

Elements of Succession
1. Decedent - the general term applied to the person whose property is transmitted
through succession, whether or not he left a will. If he left a will, he is also called the
testator (Art. 775, Ibid.).
2. Estate - the property, rights and obligations of the decedent not extinguished by his
death. This is also referred to as the “inheritance” of the decedent.
3. Heir - a person called to the succession either by the provision of a will or by
operation of law (Art. 782, Ibid.).
Who are the heirs? The law identified certain persons which it designated as
“compulsory heirs.”

Types of compulsory heirs

1. Primary heirs: Legitimate children and their direct descendants
2. Secondary heirs: Legitimate/illegitimate parents and ascendants
3. Concurring heirs: The surviving spouse and illegitimate descendants

Definition of terms
1. Legitimate children are those born out of a legal marriage.
2. Direct descendants refer to children or, in their absence, grandchildren.
3. Legitimate parents refer to biological parents.
4. Illegitimate parents are adopting parents to an adopted child.
5. The surviving spouse is the widow or widower of the decedent.
6. Illegitimate descendants are illegitimate children.

Note: Under the Revised Family Code, adoptive parents can now qualify as secondary
heirs sharing 50:50 with biological parents.

The secondary compulsory heirs shall inherit only in default of the primary heirs.
Normally, only the primary heirs and concurring heirs share in the hereditary estate. In
the absence of primary heirs, the secondary heirs and concurring heirs shall share in
the hereditary estate.

In the absence of compulsory heirs, the following shall inherit in the following order of
priority:
1. Collateral relatives up to the fifth degree of consanguinity (in the closest degree)
2. The Philippine government

Summary of Rules:
1. Concurring heirs and
a. Descendants, or in their default,
b. Ascendants
2. Relatives in the collateral line up to fifth (5th) degree
3. Republic of the Philippines

Illustration:
Model:
A1 - Children C2 - 2nd degree relatives
A2 - Grandchildren (i.e., brothers and sisters)
A3 - Great Grandchildren C3 - 3rd degree relatives
B1 - Parents (uncle, aunt, niece, nephew)
B2 - Grandparents C4 - 4th degree relatives
B3 - Great Grandparents (1st cousins, 1st cousin of
grandparents)

Priority levels:
1st Priority - A = From A1 onwards in descending order of priority
2nd Priority - B = From B1 onwards in descending order of priority
3rd Priority - C = From C2 to C5 in descending order of priority
4th Priority = Philippine government

Note:
1. A1 includes both legitimate and illegitimate children.
2. Second cousins are in the 6th degree in the collateral line; hence, they cannot inherit.

Illustration:
Mr. X died. He was survived by his wife and four children. Mr. X has two brothers and
one surviving parent. The compulsory heirs are:
 a. Mrs. X
b. The four children
The surviving parent (secondary heirs) of Mr. X will not inherit because there are
descendants (i.e., four children).

Illustration:
Ms. X died single and without a child. Ms. X’s parents, three brothers, and two sisters
were her surviving relatives. The compulsory heirs are Ms. X’s parents. The collateral
relatives (brothers and sisters) cannot inherit since there are compulsory heirs.

Illustration:
Mr. Y died a bachelor. He had no child. His parents were all dead long before his death.
He only had a brother and a sister, a first cousin, and a second cousin. Since there is no
compulsory heir, the brother and sister in the collateral line shall inherit. Without them,
the first cousin shall inherit.

Assuming further that the first cousin is also dead, the government shall inherit the
estate. Succession in the collateral line cannot extend to the second cousin because
he/she is beyond the fifth degree of consanguinity.

Legitime
Legitime is that part of the testator's property which he cannot dispose of because the
law has reserved it for certain heirs who are, therefore, called compulsory heirs (Art.
886, Ibid).

In testamentary disposition, the decedent can name a person as an heir whether related
to him or not as long he does not violate his legitime. In intestate disposition, the heirs
shall be determined based on the provision of the Civil Code. In such case, the
compulsory heirs or, in their absence, collateral heirs shall inherit the decedent's
hereditary estate.

However, the part of the estate which the testator could dispose of freely through a
written will irrespective of his relationship to the recipient is called the free portion.

Disinheritance and Repudiation

A decedent can actually disinherit an heir on certain grounds. Similarly, heirs may
repudiate their share in the inheritance of the decedent.

These topics, together with the determination of shares of each heir in the hereditary
estate, are matters of law which are irrelevant to estate taxation. Hence, these topics
will not be emphasized in our discussion. Readers with particular interest in these
matters are advised to consult Title IV of Book III of the Civil Code.

The determination of the estate tax does not require prior identification of the heirs.
Once a person is dead, the estate of the decedent is simply determined and reduced by
deductions allowed by law. Then, the estate tax is computed out of the net estate.
Neither does the validity or invalidity of the decedent’s will nor the absence of an heir
affect estate taxation. In fact, the estate tax is due even if the decedent does not have
relatives who will inherit the property.

Furthermore, the determination of the share of each heir in the distributable estate is
done only after all charges to the hereditary estate, including estate tax, had been
deducted.

Other persons in succession

1. Legatee - an heir to a particular personal property given by virtue of a will
2. Devisee - an heir to a particular real property given by virtue of a will
3. Executor - a person named by the decedent who shall carry out the provisions of
his will
4. Administrator - a person appointed by the court to manage the distribution of the
estate of the decedent

The Estate Tax Model

Gross estate P XXX
Less: Deductions from gross estate XXX
Net taxable estate P XXX

“Gross Estate” pertains to the totality of the properties owned by the decedent at the
point of his death. There are two concepts to be discussed under gross estate:
a. Exclusions in gross estate - those properties or transfers excluded by law from
estate taxation
b. Inclusions in gross estate - those properties which are to be included as part of
the taxable gross estate

“Deductions” generally pertain to reduction in the inheritance of the heirs such as

expenses of the death, obligations of the decedent, losses of property since the
decedent’s death, and other deductions prescribed by the law.

“Net taxable estate” is the net properties of the decedent after all pertinent deductions
allowable by law. This is the amount subject to estate tax.
 Lesson 3: Gross Estate

Gross estate consists of all properties of the decedent, tangible or intangible, real or
personal, and wherever situated at the point of death.

In the case of a non-resident alien decedent, gross estate includes only properties
situated in the Philippines except intangible personal property when the reciprocity rule
applies.

GROSS ESTATE BASED ON CITIZENSHIP AND RESIDENCE

Real Property Tangible Personal Intangible Personal

Property Property

Decedent w/in w/out w/in w/out w/in w/out

Citizen or
resident

NRA w/o
reciprocity

NRA w/
reciprocity

Illustration:
A decedent died leaving the following property:
Location

Philippines Abroad Total

Real property P 2,000,000 P 3,000,000 P 5,000,000

Tangible personal property 1,000,000 500,000 1,500,000
Intangible personal property 800,000 1,200,000 2,000,000
Total P 3,800,000 P 4,700,000 P 8,500,000

Drill 1: Compute for the gross estate if the decedent is a

a. Resident citizen, non-resident citizen or resident alien
b. Non-resident alien without reciprocity
c. Non-resident alien with reciprocity
Components of the Gross Estate
1. Properties existing at the time of death such as:
a. Real property
b. Tangible personal property
c. Intangible personal property

2. Decedent’s interest - refers to the extent of equity or ownership participation of the

decedent on any property physically existing and present in the gross estate, whether or
not in his possession, control or dominion. It also refers to the value of any interest in
property owned or possessed by the decedent at the time of his death (interest having
value or capable of being valued, transferred).

Examples are:
● Dividends declared before his death but received after death
● Partnership profit which have accrued before his death
● Usufructuary rights, etc.

3. Transfer in contemplation of death - There are donations made by the decedent

during his lifetime which are motivated by the thought of his death. These transfers inter
vivos are usually made by the decedent in a stage of terminal illness or under belief of
imminent death. The thought of death is the impelling cause of the transfer.

Transfer in contemplation of death may include:

a. Transfers of property to take effect in possession or enjoyment at or after death
b. Transfer of property with retention of the right of repossession of enjoyment of
right over income of the property until death
c. Transfer of property with retention of the right, either alone or in conjunction with
any person, to designate the person who shall possess or enjoy the property or
the income therefrom; except in case of a bonafide sale for an adequate and full
consideration in money or money’s worth

Not in contemplation of death:

a. To relieve the donor from the burden of management
b. To save income of property taxes
c. To settle family litigate and unligitated disputes
d. To provide independent income for dependents
e. To see the children enjoy the property while the donor is still alive
f. To protect the family from the hazards of business operations
g. To reward services rendered
4. Transfer with retention or reservation of certain rights - allows the transferor to
continue enjoying, possessing or controlling the property (beneficial ownership)
because only the naked title has been transferred.

5. Revocable transfer - decedent transfers the enjoyment of his property to another,

subject to his right to evoke the transfer at will, with or without notifying the transferee,
anytime before he dies. Ownership transfers only when the transferor waives the right to
revoke the transfer. If the transferor dies without waiving his right of revocation, he owns
the property at the point of his death.

6. Property passing under general power of appointment - This refers to the value of
any property transferred to the decedent during his or her lifetime wherein he or she
was given the power to appoint any person, including himself or herself, to be the
recipient or beneficiary.

Illustration
Don Kulot died. In his will, he gave Mama Sang a house and lot with the right to
designate the property to whomever heir she wants. Mama Sang eventually died and
appointed Bebe as heir to the property.

Mama Sang had a general power over the property. The same shall be included in her
gross estate. If Mama Sang had limited or special power, the same shall not be included
in her gross estate.

7. Transfers for insufficient consideration - Included in the gross estate the excess of the
fair market value, at the time of death, over the value of the consideration received by
the decedent under the cases in numbers 3 to 6 above.

8. Proceeds from life insurance - the following are included in the gross estate:
a. Whether revocable or irrevocable, when the beneficiary is the
i. Estate of the deceased;
ii. His executor; or
iii. Administrator.
b. When the beneficiary is a third person, only if revocable.

Exemptions and Exclusions from Gross Estate

1. Under Section 85 and 86, NIRC
a. Capital or exclusive property of the surviving spouse
 Spouses have their separate properties and common properties. Common
properties are owned jointly by the spouses while separate or exclusive
properties are solely owned by either of them.
b. Properties outside the Philippines of a nonresident alien decedent
c. Intangible persona! property in the Philippines of a non-resident alien when the rule of
Reciprocity applies.

2. Under Section 87, NIRC

a. The merger of the usufruct (right to use) in the owner of the naked title

Illustration:
Mr. A died in June 2018. In his will, he devised an agricultural land to B who shall use
the property over 10 years and thereafter, to C. Subsequently, B died resulting in the
transmission of the property to C.

The transfer of the devise from B to C is referred to in law as the “merger of the usufruct
in the owner of the naked title.” The transfer from the usufructuary, B, to the real owner,
C, upon the death of B does not constitute a donation mortis causa as it is a mere return
of the property to the real owner. Hence, it is excluded from gross estate. Note that the
transfer from Mr. A, the predecessor, of the usufruct to B and the naked title to C
involves transfer of ownership. It is a donation mortis causa of Mr. A subject to estate
tax.

b. The transmission or delivery of the inheritance or legacy by the fiduciary heir or

legatee to the fideicommissary

Illustration:
Mr. A died leaving an inheritance consisting of several real estates to his favorite
grandson, C. Because C was a minor, Mr. A appointed B, an older brother of C, as
fiduciary of the inheritance. Before transferring the property to C, B died.
The delivery of the inheritance upon the death of B (fiduciary heir), to C
(fideicommissary) shall not be included in the gross estate of B because the transfer
does not involve a transfer of ownership from B to C. B is merely a trustee. The delivery
is a mere return of the property to the real owner, C.

c. The transmission from the first heir, legatee, or donee in favor of another beneficiary,
in accordance with the desire of the predecessor

Illustration:
In his will, Mr. A devised a piece of land to B as the first heir and thereafter to C as the
second heir. B subsequently died transmitting the property to C in accordance with Mr.
A’s will.

The transfer from B to C is referred to as transfer under a special power of appointment

The same is not B’s donation mortis causa. The transfer from B to C is merely an
implementation of the transfer which was originally mandated by predecessor A.

The same rule applies even if B were given the power, solely or in conjunction with
others, to appoint the second heir to the property from a list drawn by predecessor A.

In all previous illustrations, assuming B transferred the property during his lifetime to C,
the same shall not be subject to donor’s tax because there is no gratuitous transfer of
ownership.

d. All bequests, devises, legacies or transfers to social welfare, cultural and charitable
institutions, provided that:
- no part of the net income of which inures to the benefit of any individual; and
 - not more than thirty percent (30%) of the said bequests, devises, legacies or
transfers shall be used by such institutions for administration purposes.

The 30% conditional exclusion is deemed satisfied if the donee is an accredited

non-profit donee institution. If the donee is a qualified non-profit institution, the same is
excluded in gross estate.

3. Under special laws

a. Proceeds of life insurance and benefits received by members of the GSIS (RA728).
b. Benefits received by members from the SSS by reason of death (RA1792).
c. Amounts received from Philippine and United States governments for war damages.
d. Amounts received from the United States Veterans Administration.
e. Benefits received from the Philippines and US government for damages suffered
during World War II (RA227).
f. Retirement benefits of officials/employees of a Private firm (RA4917).
g. Payments from the Philippines of US government to the legal heirs of the deceased
of World War II Veterans and deceased civilians for supplies/services furnished to the
US and Philippine Army (RA136).
h. Personal Equity and Retirement Account (PERA) asset of the decedent-contributor
(Section 14, RA 9505).

Drill 2:
A resident decedent died with the following properties at the point of death:
Cash in bank account P 1,000,000
Receivables from friends and relatives 200,000
Borrowed car from a friend 120,000
House and lot 2,000,000
Motorcycle, registered in the name of his youngest son 80,000
Total P 4,400,000

Compute the gross estate.

Drill 3:
Mr. A, a citizen decedent, died leaving the following properties:

Cash proceeds of life insurance designated to a brother

as revocable beneficiary P 1,000,000
Building, properties held as usufructuary 4,000,000
Cash and cars, earned from building 2,400,000
Agricultural land 3,000,000
 House and lot, from Mr. A’s industry 7,000,000
Benefits from GSIS 500,000
Total P 17,900,000

Additional information:
1. The agricultural land was designated by Mr. A’s father in his will to be transferred to
D, Mr. A’s son, upon Mr. A’s death.
2. Mr. A made a revocable donation involving a residential lot to his brother E. Mr. E
paid P400,000 when the lot was worth P1,000,000. The lot was currently valued at
P2,000,000 zonal value upon Mr. A’s death.

Compute the gross estate.

Valuation of Gross Estate

The items comprising the gross estate shall be valued at the time of death or date
nearest such date.
1. Usufruct - based on the latest Basic Mortality Table to be approved by the Secretary
of Finance, upon recommendation of the Insurance Commissioner.
2. Real Property -the higher amount between:
a. The fair market value as determined by the Commissioner (zonal value), or
b. The fair market value as shown in the schedule of values fixed by the Provincial
and City Assessors (assessed value).
3. Personal Properties - Fair market value
4. Shares of stock
a. Traded in the Local Stock Exchange (LSE) - mean between the highest and
lowest quotations, at a date nearest the date of death, if none is available at the
date of death itself.
b. Not traded in the local stock exchange:
i. Common (ordinary) shares - book value
ii. Preferred (preference) shares - par value

Gross Estate of Married Decedents

The gross estate of a married decedent is composed of:
1. The decedent’s exclusive properties
2. The common properties of the spouses

Exclusive Conjugal/Communal Total

Gross Estate P xxx P xxx P xxx
Less: Deductions
Note: For single individuals, the “conjugal/communal” column is left blank.

Property Relations Between Spouses

What is a separate property or a common property? What constitutes a separate
property or a common property is a question which will be delineated by the property
regime of the spouses. Under the Family Code, the property relation between the
spouses must be agreed upon by the spouses before their marriage. The same is set in
their “Prenuptial Agreement.” The property interest of the spouses shall be determined
based on their agreed property regime. Upon the death of a spouse, the properties held
by the spouses shall be classified as separate or common properties depending on the
agreed regime.

Common types of property regimes:

1. Conjugal partnership of gains (CPG) - All properties that accrue as fruit of their
individual or joint labor or fruits of their properties during the marriage will be common
properties of the spouses.
2. Absolute community of property (ACP) - All present properties owned by the spouses
at the date of celebration of the marriage shall become common properties of the
spouses including future fruit of their separate or joint industry or fruits of their common
properties.

In the absence of an agreement or when the regime agreed by the spouses is void,
marriages celebrated before August 3, 1988 shall be governed by the conjugal
partnership of gains. Marriages celebrated starting August 3, 1988

Conjugal Partnership of Gains (CPG)

Exclusive properties:
a. That which is brought to marriage as his or her own;
b. That which each acquired during marriage by gratuitous title (unless it is
expressly provided by the donor, testator or grantor that they shall form part of
the common property);
c. That which is acquired by right of redemption, by barter or by exchange with
property belonging to any one of the spouses; and
d. That which is purchased with exclusive money of the wife or of the husband.

Conjugal/Common properties:
a. Those acquired by onerous title during marriage at the expense of the common
fund, whether the acquisition be for partnership, or for only one of the spouses;
b. Those obtained from labor, industry, work or profession of either or both of the
spouses;
 c. The fruits, natural or industrial, or civil, due or received during marriage from
common property, as well as the net fruits from the exclusive property of each
spouse;
d. The share of each spouse in the hidden treasure which the law awards to the
finder or owner of the property where the treasure is found;
e. Those acquired through occupation such as hunting or fishing;
f. Livestock existing upon dissolution of the partnership in excess of the number of
each kind brought to the marriage by either spouse; and
g. Those acquired by chance, such as winnings from gambling or betting. However,
losses therefrom shall be borne exclusively by the loser-spouse.

Illustration:
Mr. and Mrs. Calapan were under the conjugal partnership of gains. Mrs. Calapan is a
chief executive officer in a multinational company and is the breadwinner of the family.
Mr. Calapan is unemployed taking care of the children at home. During the marriage,
Mrs. Calapan acquired various properties totaling P10,000,000 from her salaries. Also
during the marriage, Mr. Calapan discovered a World War II treasure in their backyard
worth P100,000,000. Mr. Calapan also won the P200,000,000 jackpot in the PCSO 6/49
Super Lotto.

The P10,000,000 properties acquired by Mrs. Calapan, the P100,000,000 treasure

discovery and P200,000,000 lotto winnings of Mr. Calapan are all conjugal (common)
properties of the spouses.

Illustration:
Before their marriage on November 1, 1987, Mr. and Mrs. Negros had properties of
P1,000,000 car and P2,000,000 residential lot, respectively. Mr, and Mrs. Negros
married without an agreed property regime. During their marriage, Mr. and Mrs. Negros
acquired properties totaling P500,000 and P800,000, respectively, from their separate
labor. Mrs. Negros also sold her residential lot for P5,000,000 and invested the entire
proceeds in stocks.
Separate properties

Mr. Negros Mrs. Negros Conjugal

Properties
Car (owned before marriage) P 1,000,000
Stocks (owned before marriage) P 2,000,000 P 3,000,000
Fruits of labor (during marriage)
P500,000+P800,000 . . 1,300,000
Total P 1,000,000 P 2,000,000 P 4,300,000
Note:
a. The spouses are under the CPG by default because they got married before
August 3, 1988 and did not agree to a property regime.
b. Transformations of properties by sale or exchange do not change their
classification. Hence, the P2M of the stocks is still separate property since the
P2M lot where it came from is a separate property.
c. Under CPG, all fruits form part of the common property. Hence, the P3M gains
(P5M-P2M) in the form of stocks from the sale of the lot is a common property.

Drill 4:
Spouses Rene and Bebe who were under the conjugal partnership of gains had the
following properties:
Rene Bebe

Before marriage
1. Donations or inheritance received P 100,000 P 150,000
2. Income from properties in #1 10,000 20,000

During marriage
3. Properties acquired from separate industry or labor 400,000 300,000
4. Property received by donation or inheritance 800,000 500,000
5. Income from properties in #1 and #2 15,000 25,000
6. Income from properties in #3 40,000 30,000
7. Income from properties in #4 80,000 50,000

Compute for the following:

1. Total amount of Rene’s separate properties
2. Total amount of Bebe’s separate properties
3. Total amount of conjugal/common properties

Drill 5:
Mr. Crocs died. An inventory of the properties of Mr. and Mrs. Crocs who were under the
conjugal partnership of gains were as follows:
Mr. Crocs Mrs. Crocs Total

Properties accruing before marriage:

Properties inherited before marriage P 200,000 P 100,000 P 300,000
Other properties brought into the marriage 400,000 500,000 900,000

Properties accruing during marriage:

Properties inherited during marriage 250,000 150,000 400,000
Properties as fruit of own labor 140,000 160,000 300,000
Properties as fruit of common labor 250,000

Fruits of:
Properties inherited before marriage 100,000 50,000 150,000
Properties inherited during marriage 20,000 80,000 100,000
Properties acquired from own labor 20,000 40,000 60,000
Properties earned from common labor 50,000

Compute for Mr. Croc’s gross estate.

Absolute Community of Property

Community Properties:
a. All properties owned by the spouses at the time of celebration of the marriage;
and
b. Acquired thereafter.

Exclusive properties:
a. Property acquired during marriage by gratuitous title by spouse, and the fruits as
well as the income thereof (fruits follow the principal), unless it is expressly
provided by the donor, testator or grantor that they shall form part of the
community property;
b. Property for personal and exclusive use of either spouse;
Exception: Jewelry shall form part of the community property
c. Property acquired before marriage by either spouse who has legitimate
descendants by the former marriage, and the fruits as well as the income, of any
of such property.

Illustration:
Mr. Ato, a married decedent under the ACP regime, received the following properties by
gratuitous title:
Before marriage During marriage
Residential lot - gift to Mr. Ato P 2,000,000
Commercial lot - gift to Mrs. Ato - P 5,000,000
Income of residential lot 400,000 800,000
Income of commercial lot - 1,400,000
Income from own labor - Mr. Ato 200,000 800,000
Income from own labor - Mrs. Ato 300,000 800,000
 Separate properties

Mr. Ato Mrs. Ato Conjugal

Properties
Residential lot P - P - P 2,000,000
Commercial lot 5,000,000
Income - Residential lot 1,200,000
Income - Commercial lot 1,400,000
Income - own labor (Mr. Ato) - 1,000,000
Income - own labor (Mrs. Ato) . - 1,100,000
Total P - P 6,400,000 P 5,300,000

Note:
1. All properties acquired before marriage are community or common properties.
This includes those acquired by own labor or by gratuitous acquisition.
(retroactive)
2. Inheritance or gift during the marriage is a separate property, unless designated
for both spouses.
3. The income of properties follows the classification of the source.
4. The income from labor and industry of either or both spouses is common
property.

Illustration:
Mr. and Mrs. Quezon had the following personal properties:

Acquired before marriage: P 3,000

Tuxedo of Mr. Quezon 2,000
Wrist watch of Mr. Quezon 800,000
Car 40,000
Gown of Mrs. Quezon

Acquired during marriage:

Earrings and necklace of Mrs. Quezon 150,000
Cellphones 50,000
Louis Vuitton bag of Mrs. Quezon 150,000
Clothes and shoes of Mr. Quezon 60,000
Clothes and shoes of Mrs. Quezon 80,000

The following are the exclusive and communal property of the spouses:
 Separate properties

Mr. Negros Mrs. Negros Conjugal

Properties
Acquired before marriage:
Tuxedo P 3,000 P - P -
Wrist watch 2,000
Car 800,000
Gown 40,000

Acquired during marriage:

Earrings and necklace 150,000
Cellphones 50,000
Louis Vuitton bag 150,000
Clothes and shoes 60,000 80,000 -
Total P 63,000 P 270,000 P 1,002,000

Note:
1. The price of the property has nothing to do with price classification.
2. Cars and cellphones cannot be classified as properties for exclusive personal
use of either spouse.
3. Properties for exclusive personal use of either spouse, other than jewelry, are
separate properties even if:
a. They are acquired from fruits of labor or industry of either spouse or from
fruits of common properties.
b. They are acquired before or during marriage.

Drill 6:
Spouses Rene and Bebe who were under the absolute community of property had the
following properties:
Rene Bebe

Before marriage
1. Donations or inheritance received P 100,000 P 150,000
2. Income from properties in #1 10,000 20,000

During marriage
3. Properties acquired from separate industry or labor 400,000 300,000
4. Property received by donation or inheritance 800,000 500,000
5. Income from properties in #1 and #2 15,000 25,000
6. Income from properties in #3 40,000 30,000
 7. Income from properties in #4 80,000 50,000

Compute for the following:

1. Total amount of Rene’s separate properties
2. Total amount of Bebe’s separate properties
3. Total amount of common properties

Drill 7:
Mr. Crocs died. An inventory of the properties of Mr. and Mrs. Crocs who were under the
absolute community of property were as follows:
Mr. Crocs Mrs. Crocs Total

Properties accruing before marriage:

Properties inherited before marriage P 200,000 P 100,000 P 300,000
Properties for exclusive personal use 50,000 60,000 110,000
Other properties brought into the marriage 350,0000 440,000 790,000

Properties accruing during marriage:

Properties inherited during marriage 250,000 150,000 400,000
Properties as fruit of own labor 140,000 160,000 300,000
Properties acquired for exclusive use 30,000 40,000 70,000
Properties as fruit of common labor 250,000

Fruits of:
Properties inherited before marriage 100,000 50,000 150,000
Properties inherited during marriage 20,000 80,000 100,000
Properties acquired from own labor 20,000 40,000 60,000
Properties earned from common labor 50,000

Compute for Mr. Croc’s gross estate.

Lesson 4: Deductions From Gross Estate

Deductions are items which the law on estate tax allows to be subtracted from the value
of the gross estate in order to arrive at the net taxable estate. As a rule, deductions from
the gross estate are presumed to be common deductions unless specially identified as
exclusive.

Classifications of Deductions
 1. Ordinary deductions - generally include items which diminish the amount of the
inheritance. The only exception here is the “vanishing deduction” which is a taxed
incentive but is classified as ordinary deduction pursuant to the estate tax form
(BIR Form 1801).
2. Special deductions - items which do not reduce the inheritance but are
nonetheless allowed by the law as deductions against the gross estate in the
determination of the net taxable estate.
3. Share of the surviving spouse - pertains to the interest of the surviving spouse in
the net conjugal or communal properties of the spouses. This portion is not
owned by the decedent and will not be transmitted by the decedent as part of the
inheritance; hence, it must be removed in the determination of the taxable estate.

Presentation of Deductions

General Principles of Estate Deductions

1. The substantiation rule
All items of deduction must be supported with documentary evidence such as receipts,
invoices, contracts, financial statements and other proofs that they actually exist or
occurred to establish their validity. The only exception to this rule is the deduction
allowed for “Standard deduction.”

2. Matching principle
An item of deduction must be part of the gross estate to be deductible therefrom. No
deduction is allowed for those which are not part of the gross estate. For example,
losses of properties before the death of the taxpayer are not deductible because the
properties are no longer part of the gross estate of the decedent at the date of death.

3. No double classification rule

An item of deduction cannot be claimed under several deduction classifications. Only
one classification is allowable.
Examples:
a. A family home which is destroyed by any casualty during the settlement of the estate
cannot be simultaneously deducted as a “family home” and a “casualty loss.”
b. Losses claimed in the income tax return of the estate cannot be claimed again as
deduction in the estate tax return.

4. Default presumption on ordinary deduction

In the case of married decedents, ordinary deductions are presumed to be against the
common properties unless proven otherwise.

Ordinary Deductions
1. Claims against the estate (indebtedness)
The word "claims" as used in the statute is generally construed to mean debts or
demands of a pecuniary nature which could have been enforced against the deceased
in his lifetime and could have been reduced to simple money judgments. Claims against
the estate or indebtedness with respect to property may arise out of contract, tort, or
operations of law.

Requisites:
1. Personal debt of the decedent existing at the time of death
2. Contracted in good faith
3. Must be valid in law and enforceable in court
4. Must not have been condoned by the creditors
5. Action to collect from the decedent must not have prescribed
6. Debt instrument must be notarized
7. A statement under oath executed by the administrator or executor of the estate
reflecting the disposition of the proceeds of the loan if said loan was contracted
within 3 years prior to the death of the decedent.
The Concept of Accommodation Loan
An accommodation loan is one contracted by a person merely representing himself on
behalf of another person who will be the beneficiary of the loan proceeds.
Accommodation loan is included in the gross estate as a receivable and is also
presented as a deduction. However, if there is a legal impediment to recognize the
same as a receivable, it may not be included in the gross estate. Likewise, it will not be
presented as an obligation.

2. Claims against insolvent persons

Claims against insolvent persons is a form of loss but is presented as a separate item of
deduction in the tax return. The deductible amount of claim against insolvent persons is
the unrecoverable amount of the claim.

Requisites:
1. Value of the claim is included in the gross estate; and
2. The insolvency of the debtor must be established.

3. Unpaid mortgages
This includes mortgage upon, or any indebtedness, with respect to property where the
value of the decedent’s interest therein, undiminished by such mortgage or
indebtedness, is included in the gross estate. A deductible mortgage, just like other
obligations, must have been incurred before death and still unpaid at the point of death.

4. Unpaid taxes
This includes taxes such as income tax, business tax, and property tax which have
accrued as of the death of the decedent and which were unpaid as of the time of death.
It must be emphasized that only obligations existing at the point of death are deductible.
Obligations including taxes which are settled before death and those accruing after
death are not deductible from gross estate.

Hence, the following taxes are non-deductible:

a. Taxon income earned after death
b. Property taxes accruing after death
c. Business taxes accruing after death
d. Estate tax on the transmission of the estate to the heirs

Although taxes are claims against the estate, taxes should be reported under a
separate category because “claims against the estate” category is restricted to private
claims enforceable against the decedent's estate.
5. Losses
These pertain to losses of properties of the estate during settlement. These may arise
from fires, storms, shipwreck or other casualties or from robbery, theft or embezzlement
where such losses are not compensated by any insurance. It must be emphasized that
losses are deductible only if they occurred during the settlement of the estate before the
deadline of filing the estate return (i.e. within 1 year from death). The amount deductible
is the value of the property lost.

6. Transfer for public use

Transfer for public use includes the amount of all bequests, legacies, devises or transfer
to or for the use of the Government of the Republic of the Philippines, or any political
subdivision thereof, exclusively for public purposes. These must be indicated in the
decedent’s last will and testament.

7. Property previously taxed (Vanishing deduction)

There are instances where properties are transferred between persons in short periods
of time causing a series of transfer taxation. Due to this, a deduction is allowed by law
to mitigate the impact of successive transfer taxation.

The death of the decedent is preceded by a donation inter-vivos

The death of the decedent is preceded by a donation mortis causa

Requisites:
1. The present decedent must have died within five (5) years from date of death of
the prior decedent or date of gift.
2. The property with respect to which the deduction is claimed must have been part
of the gross estate situated in the Philippines of the prior decedent or taxable gift
of the donor. In short, the property must have been previously subjected to a
transfer tax.
3. The property must be identified as the same property received from prior
decedent or donor or the one received in exchange thereof. Deduction is still
claimable even if the property transformed into another kind of property.
4. The estate taxes on the transmission of the prior estate or the donor’s tax on the
gift must have been finally determined and paid. The basis of the vanishing
deduction is to mitigate the impact of double taxation. Vanishing deduction
cannot be claimed if the donor’s tax or estate tax was not paid in the prior
transfer.
5. No vanishing deduction on the property or the property given in exchange thereof
was allowed to the prior estate. This rule applies in the case of a series of
deaths. If the prior estate claimed vanishing deduction, the second estate cannot
claim vanishing deduction because the purpose of vanishing deduction is to
mitigate double taxation.

Procedural Computation:
1st: Determine the initial value.
The initial value is the fair market value of the property at the date of the first
transfer (i.e. date of prior decedent’s death or date of gift) or the fair value at the
date of death whichever is lower.
2nd: Determine the initial basis.
The initial basis is the initial value reduced by any indebtedness on the property
which was assumed and paid by the present decedent before his or her death.
3rd: Determine the final basis.
The final basis is the initial basis reduced by a proportion of other ordinary
deductions (items 1 to 6 above) which the initial basis bears over the gross estate
of the decedent. This is computed as
4th: Determine the vanishing deduction.
The vanishing deduction is the final basis multiplied by the following vanishing
percentages:
Interval between acquisition and death Vanishing percentage
Within 1 year 100%
More than 1 year but not more than 2 years 80%
More than 2 years but not more than 3 years 60%
 More than 3 years but not more than 4 years 40%
More than 4 years but not more than 5 years 20%

It is because of these decreasing deduction percentages that the deduction for property
previously taxed is referred to as “Vanishing Deduction.”

Pro-forma Computation:
Initial value P xxx
Less: Mortgage assumed or paid by present decedent xxx
Initial basis or IB P xxx
Less: Proportional deduction [(IB/GE)*(Ordinary Deductions)] xxx
Final basis P xxx
Rate x%
Vanishing deduction P xxx

Drill 8:
Mrs. Z died on July 1, 2020 leaving the following properties upon her death:
Ranch, received as inheritance on June 30, 2015 P 2,000,000
Orchard, bought with money donated by a friend on Dec. 18, 2018 3,000,000
Resthouse, inherited by Mr. Z on March 21, 2017 4,000,000
Commercial land, donated by his mother on January 2019 1,000,000
Family home 2,000,000
Other properties 7,000,000

The estate of Mrs. Z claims the following deductions:

Losses P 400,000
Claims against the estate 600,000
Unpaid mortgage 1,000,000

Additional information:
● The orchard had a fair value of P2,500,000 on Dec. 18, 2018.
● Mrs. Z mortgaged the orchard in January 2019 for P1,500,000. P500,000 of the
mortgage was paid before her death.
● Mrs. Z designated in her will to donate the commercial land to a government
agency for public use.

Determine the vanishing deduction.

 NOTA BENE!
Ordinary deductions are allowable to all types of decedents, whether they
are residents, citizens, or non-resident aliens. Generally, these deductions
are deductible from common properties unless proven otherwise.

Special Deductions
1. Standard deduction
This is an additional deduction from the gross estate which does not need any
substantiation.
Deductible for residents or citizens - P5,000,000
Deductible for non-resident aliens - P500,000

2. Family home
Family home includes the dwelling house, and the land on which it is situated, where
the decedent and/or members of his family reside as certified by the Barangay Captain
of the locality. The family home is deemed constituted on the house and lot from the
time it is actually occupied as a family residence and is considered as such for a long as
any of its beneficiaries actually resides therein (Arts. 152 and 153, Family Code).

To be considered family home, the residence shall be characterized by permanency. It

is the place to which, whenever absent for business or pleasure, one still intends to
return. For purposes of availing of a family home deduction to the extent allowable, a
person may constitute only one family home (Art. 161, Ibid).

Requisites:
1. The family home must be the actual residential home of the decedent and his
family at the time of his death, as certified by the Barangay Captain of the locality
where the family home is situated;
2. The value of the family home must be included as part of the gross estate of the
decedent; and
3. The allowable deduction is the lowest between:
a. fair market value of the family home as declared or included in gross
estate if it is an exclusive property;
b. extent of the decedent’s interest therein (½ of the value in letter (a) if it is a
conjugal/common property); and
c. P10,000,000, the limit set by law.
A single decedent who is a head of a family can also claim deduction for family home. A
head of a family is an unmarried or legally separated man or woman with one or both
parents, or with one or more brothers or sisters, or with one or more legitimate,
recognized natural or legally adopted children living with and dependent upon him or
her for their chief support, where such brothers or sisters or children are not more than
twenty one (21) years of age, unmarried and not gainfully employed or where such
children, brothers or sisters, regardless of age are incapable of self-support because of
mental or physical defect, or any of the beneficiaries mentioned in Article 154 of the
Family Code who is living in the family home and dependent upon the head of the family
for legal support.

3. Other special deductions

Example: Benefits under R.A. 4917
Pursuant to RA 4917 which took effect on June 17, 1967, the retirement benefit or
termination benefit received by employees of private firms is not subject to attachment,
levy, execution, or any tax whatsoever.

Pursuant to the NIRC which took effect on January 1, 1998, any amount received by the
heirs from the decedent’s employer as a consequence of the death of the
decedent-employee in accordance with Republic Act No. 4917 is allowed as a
deduction provided that the amount of the separation benefit is included as part of the
gross estate of the decedent.

Share of the Surviving Spouse

The share of the surviving spouse is one-half of the net conjugal or community
properties of the spouses. After deducting the allowable deductions pertaining to the
conjugal or community properties included in the gross estate, the share of the surviving
spouse must be removed to ensure that only the decedent's interest in the estate is
taxed (RR2-2003).

This is an unequivocal declaration that the amount of the deduction for the share of the
surviving spouse admits to adjustment in the deduction classification to ensure that only
the interest of the decedent is taxed.

Rate of Estate Tax

If decedent died January 1, 2018 onwards, estate tax due is equivalent to 6% of taxable
net estate.

Tax Credit for Estate Tax Paid to a Foreign Country

Only residents or citizens can claim tax credit which is the lower amount between the
actual estate tax paid abroad and the limit. The limit if:
a. Only one country is involved:
Net estate, foreign
x Philippine estate tax
World net estate

b. Two or more countries are involved (lower between the following):

Limit A - per foreign country
Net estate, per foreign country
x Philippine estate tax
World net estate

Limits B - by total
Net estate, all foreign countries
x Philippine estate tax
World net estate

Compliance Requirements
The executor, administrator, or any of the legal heirs shall file an estate tax return in all
cases of transfer subject to estate tax regardless of the amount of the gross estate,
where it consists of registered or registrable property. It shall be filed within one year
after the decedent’s death but can be extended up to 30 days if authorized by the BIR
Commissioner. When an estate tax return shows a gross value exceeding P5,000,000,
a certification by a Certified Public Accountant is required upon filing.

The estate tax due shall be paid at the time the return is filed. However, payment can be
extended up to five years if it is settled judicially or up to 10 years if settled
extra-judicially.

Duties of Certain Officers and Persons

● No judge shall authorize the executor or judicial administrator to deliver a distributive
share to any party interested in the estate, unless a certification from the Bureau of
Internal Revenue (BIR) that the estate tax has been paid is shown.
● Register of Deeds shall not register in the registry of property any transfer of real
property or real rights therein, or any mortgage, by way of donation mortis causa or
inheritance, without a certification from the BIR of payment of estate tax, and they
shall immediately notify the BIR of non-payment of tax discovered by them.
● Any lawyer, notary public or any government officer who, by reason of his official
duties, intervenes in the preparation or acknowledgment of documents regarding
partition or disposal of donations inter vivos or mortis causa, legacy or inheritance,
 shall furnish the BIR with copies of such documents and any information whatsoever
which may facilitate the collection of the estate tax.
● There shall not be transferred to any new owner in the books of any corporation,
sociedad anonima, partnership, business, or industry organized or established in the
Philippines any share, obligation, bond or right by way of gift inter-vivos or mortis
causa, legacy or inheritance, unless an eCAR is issued by the Commissioner or his
duly authorized representative.
● If a bank has knowledge of the death of a person, who maintained a bank account
alone, or jointly with another, it shall allow the withdrawal from said deposit account,
subject to a final withholding tax of 6% of the amount to be withdrawn, provided, that
the withdrawal shall only be made within one year from the date of said decedent.
The final tax withheld shall not be refunded, or credited on the tax due, on the net
taxable estate of the decedent. In instances where the deposit accounts have been
duly included in the gross estate of the decedent and the estate tax due thereon
paid, the executor, administrator, or any of the legal heirs shall present the eCAR
issued for the said estate prior to withdrawing from the bank deposit account. Such
withdrawal shall no longer be subject to the withholding tax imposed.

Now that you have learned the general principles of estate taxation, you are to apply
that learning in the assessment to be given at the end of this module.

To be announced...

“Do your best to present yourself to God as one approved,

a worker who does not need to be ashamed
and who correctly handles the word of truth.”
2 Timothy 2:15, NIV