B.

Donor's (Gift) Tax

Definition and nature

Donor's tax is a tax on a donation or gifts, and is imposed on the gratuitous transfer
of property between two or more persons who are living at the time of the transfer.

A donor's tax (or gift tax) is a tax levied, assessed, collected and paid upon the
transfer by any person, resident or nonresident, of the property oy girt (Sec. 98, NIRC).

It is a tax imposed on the exercise of the donor's right during lifetime to transter
property to others in the form of gift.

The donor's tax is not a property tax, but is a tax imposed on the transter of property
oy way ot gift inter vivos (Lladoc vs. CIR, 14 SCRA 242, cited in RR 2-2003).

As in the case of the estate tax, the donor's tax is an excise. Thus, the tax is
imposed on the donor and determined with reterence to all the donor's gifts.

In donor's tax, the law imposable is the law in force at the time of the
perfection/completion of the donation.

Transfers subject to the gift tax

The gitt tax is, and is intended to be, comprehensive. While limited to transie of
property (no tax is payable on donated services), anything of value may be the subject of
a taxable transfer. The tax applies to cash gifts and to those in the to realty or tangible or
intangible personal property. Nor need gifts be made directly ; one's payment ot one's
child mortgage or interest on the mortgage is a gift to the child. Beyond this, any
discernible gratuitous shifting of financial advantage from one to another may constitute
a gift (Stephens, Federal Estate and Gift Taxation |1996], P. 1-19

That is why, everyday classes ot property such as a house, a car, jewe furniture,
books, cash and intangibles such as stocks, bonds, pateni applications, and real estate
are all property that may be the subject or a patent transfer (ibid).

But of course the scope of the term "property" is much broader. Partial interest in
property are also "property". Thus, an income interest in a trust, a right to share a future
rental payments (Galt v. Comm'r, 216 F22d41), and an option to purchase property and
all interests in property that can be the subject of a gift, notwithstanding possible
difficulties of valuation (id) are included in the term property.
Illustration 10-1

Arturo is indebted to Basilio in the amount of P I50,000. Unable to pay, Basillo the
crediror, warned that he will file a case for collection against the debtor. When the matter
reached corcolon, a friend of Arturo, he paid the debt by way of expromision which was
duly accepted by Basilio. Afterwards, Arturo thanked him for that gesture.

Was there a donatiorn subject to gift tax?

Yes. The giving of gitt may not be made directly by the donor to the donee. The
gratuitous shifting or financial advantage made by Corcolon is a gift to Arturo.

Whenever property or property rights or interests are gratuitousily passed to or

conferred on another, the gift tax will apply to such transters regardless of the means or
devices employed or the form of the transaction (1955 PH Fed Tax Service, Par. 125,
801).

Dominion and control

A timing question can arise with respect to gifts that take the form of something less
than an outright transfer. The key to answering the question of when a gift is made is the
determination whether the donor has relinquished dominion and control over the
property or property interest transferred.

For example, a transfer of property to another may constitute a gift.

However, if the donor retains a right to revoke it, the donor has not relinquish control
over the property and no gift has yet occurred.

If the donor should later relinquish the right to revoke, the transfer would then be
complete for gift tax purposes.

This suggests two related thoughts. First, the time at which the gift becomes
complete determines when it must be reported and gift tax be paid. Second, valuation of
the gift is to be time the gift becomes complete.

A gift that is incomplete because of reserve powers, becomes complete when either
(1) the donor renounces the power, or (2) nis rignt to exercise the reserve power ceases
because of the happening of some event or contingency or the fulfillment of some
condition, other than because of the donors death.

Thus, if in 2015, Arbaja donated 100 shares of BMW Resources stock to Bagana
and then in 2018 relinquished the power of revocation, the gift tax liability on the transfer
would be measured not by the lower value of the stock when it was donated, but by its
much greater value when the gift became complete (RR 12-2018).

Purposes of gift tax

The purposes for the imposition of gift tax are the following:

1. To prevent avoidance of estate tax.

With the adoption of an estate tax, it is possible that some property owners might
attempt to avoid the estate tax by transferring their property by way of donation inter
vivos which, under prior law, was exempt from death tax.

It is not unnatural that they should desire to avoid the imposition of the estate tax
upon their estates so that such estates may pass to the objects of their bounty
unimpaired. It is to forestall such an eventuality that the gift tax has been conceived (Vol.
1, Report of the Tax Commission on National Internal Revenue Law, p. 63.)

2. To prevent or compensate tor the loss of the progressive rates of income tax when
largee estates are spit up by gitts to numerous donees (stanford's Estate vs. Comm. 308
U.S. 39.).

Gifts in trust

Gift tax shall apply whether the transfer is in trust or otherwise, whether the gift is
direct or indirect, and whether the property is real or personal, tangible or intangible.

A trust is an arrangement created by will or an agreement under which title to

property is passed to another for conservation or investment with the there from and
ultimately the corpus (principal) to be distributed in accordance with the directions of the
creator as expressed in the governing instrument.

A gift in trust is a gift to the beneficiary of the trust and not to the trustee.

A taxable transfer includes not only the transfer of ownership in the fulless sense
but also the transfer or any right or interest in property, but less than title.
Forgiveness of indebtedness

If the creditor condones the indebtedness of the debtor, the following rules shall
apply:

a. On account of debtor's services to the creditor, the same is taxable income to the
debtor.

b. If no services were rendered but the creditor simply condones the debt, it is taxable
gift not taxable income.

lustration 10-2

Aionzo, an architect, owes Zulueta a businessman P30,000. The latter engaged tne
services of the former to remodel his house. The value of the services rendered
amounted to P30.000. Accordingly. Zulueta cancelled the debt of Alonzo.

a. Is the P30,000 value of services taxable to Alonzo?

Yes, it is a simple case of paying the indebtedness to Zulueta Consequently, the

P30.000 15 taxable fo Alonzo as an income.

b. Suppose Zuluefa condoned the debt of Alonzo without requiring the latter to render
any service. Is the P30,000 subject to income tax?

The case is a matter of condonation which is purely based on the liberty ty of the
benefactor. Thus, it is Considered as a gift wnich is governed by the law on donor's
taxafion.

Constitutional provision on donation

Subject to conditions prescribed by law, all grants, endowments, donations, or

contributions used actually, directly and exclusively for educational purposes shall be
exempt from tax (Art. XIV, Sec. 4(4), Constitution).

This provision is not self-executory. That is wny, there is a need for an enacted of a
law by the Congress to make this effective.

It should be noted, however, that donations in favor of educational institution which

are declared as non-profit are expressly exempt trom the payment of donor's tax,
provided that not more than thirty percent (30%) of said gifts shall be used by such for
administration purposes.
Renunciation of inheritance

A renunciation of inheritance in favor of a co-heir is not a donation for the purpose of

taxation, even if the renouncing heir says "l donate to my cc-heir my share."

The reason is that the eftects of the repudiation or renunciation shall always retroact
to the moment of the death of the decedent (Art. 1042, Civil Code). Therefore, the
renounced share accrues to the other heirs, so that any word to that effect, by the heir is
a mere surplusage.

On the other hand, if a renunciation is made in favor of another person not a co-heir,
there is a donation.

In other words, if the effects of the donation are the same as what the law on
succession would provide, then there is no donation. But if the effect is to change the
distribution of the estate, then there is a donation.

A renunciation by the surviving spouse of his or her share in the conjugal

partnership or absolute community after the dissolution of the marriage in favor of the
heirs of the deceased spouse or any other person/s is subject to donor's tax (Rev. Reg.
12-2018).

General renunciation by an heir, including the surviving spouse, of his/her share in

the hereditary estate left by the decedent is not subject to donor's tax, unless
specifically and categorically done in favor of identified heir(s) to the exclusion or
disadvantage of the other co-heirs in the hereditary estate (ibid).

Donation of a life insurance

When a person gets a life insurance and names a third person as his beneficiary,
and then the insurance becomes payable by the death ot the insured, there is a donation
in favor of the beneficiary, not in the sum received by heir from the insurer, but in the
total amount of premiums that have been paid by the insured (Tolentino, 462) provided
that:

1. The insured purchases policy all the benefits of which are payable to beneficiary other
than insured's estate and the insured retains no power to change beneficiaries or other
proportionate benefits, or to revest the economic benefits in himself or his estate and no
reversionary interest in himself or his estate;

2.The insured relinquishes his assignment, by designation of a new beneficiary, or

otherwise, every power retained by him in a previously issued policy.
 In this case, an additional gift results everytime a premium is paid by the insured
(34 Am. Jur. 2d, p. 849).

Void donations

Those made between persons who were guilty of adultery or concubinage at the
time of donation, or to those found guilty of the same criminal offense, in consideration
thereof, or donations made to a public officer or his wife, descendants, by reason of his
office are void donations (Art. 739, NCC).

Consequently, the above donations are not subject to donor s tax.

Contribution for election campaign

Any contribution in cash or in kind to any candidate, political party or coalition of

parties for campaign purposes shall be governed by the Election Code, as amended.

Remuneratory donations

Remuneratory donations are those which remunerate past services which not
constitute demandable debts. These donations are not in consideration of liberality, but
of services performed such as donations made to one who saved the donor's life, or to
an accountant who renounced his fees for service rendered to the donor.

Since the motivating cause in remunerative donation is gratitude, acknowledgement

of a favor, or a desire to compensate, and not the liberality ot the donor, they are not
subject to gift tax. Instead, they are income subject to income tax.

Ilustration 10-3

Amado saved the life of Berganio who met a car accident. The latter in a display of
grafitude, gave him P50,000 cash.

a. Is the P50,000 a taxable income?

Yes. this is a case of a remuneraory donalion, subject to income tax.

b. Supposing without doing anything. Amado received P50.000 from Berganio due
purely to the liberality of ihe laller. Is the P50.000 still considered as a taxable income?
 No. The situation does not contain remuneraroy donation anymore. The cause of
the gift is the liberaliy of Berganio. Hence, it is not considered asa taxable income.

Donation of property between spouses

Every donation or grant of gratuitous advantage, direct or indirect, between the

spouses during the marriage shall be void, except mode rate gifts which the spouses
may give each other on the occasion of any family rejoicing. The prohibition shall also
apply to persons living together as husband and wife without a valid marriage (Art. 87,
New Family Code).

Therefore, donations of this kind are not subject to donor's tax.

Donation of property re absentee

An absentee is a person who disappears from his domicile, his whereabouts being
unknown for sufficient number of years, and without leaving an agent administer his
property or when the power conferred to an agent has expired.

The absence of a person may be judicially declared if two (2) years elapsed without
any news about the absentee or since the receipt of the last and five (5) years in case
the absentee has left a person in charge of the administration of his property.

Donation to a person who was later on declared as an absentee is not valid there
being no acceptance. However, the donation shall be valid if accepted by an authorized
administrator of his property until such time that he is later on presumed to be dead. This
is so because death extinguishes civil personality.

After the absence of seven (7) years,being unknown whether or not the absence still
lives, he shall be presumed dead for all purposes, except for those of succession.

The computation of the seven-year period begins not from the declaration ot
absence but from the date or which last news concerning the absentee is received.
Thus, death is presumed to have occurred on the last day of the period.

In the following inatances, however, a person is considered to have been

extraordinarily absent; hence, presumed dead for all purposes at the beginning of the
period.

1. A person on board a vesse lost during a sea voyage, or an aeroplane which is

missing, who has not been heard of for four years since the loss of the vessel or
aeroplane;
2. A person in the armed forces who has taken part in war, and has been missing for
four years.

3. A person who has been in danger of death under other circumstances and his
existence has not been known for four years.

In the case of extraordinary absence above, the person is considered dead at the
time of the occurrence of the incident.

Donations given to an absentee and accepted by his administrator would have a

valid etfet only prior to his presumption ot death.

Needless to say, if the absentee is presumed dead aiready at the time of the
donation all donations given to him are not considered valid.

On the other hand, a donation made on the property ot an absentee by the

administrator is unenforceable due to the absence of a special power of attorney which
is required in an act of ownership. A donation of property, unless made in the ordinary
course of business, cannot be considered as an act of administration.

The wife who is appointed as an administratrix of the husband's property connot

alienate or encumber the husband's property, or that or the conjugal partnership, without
judicial authority.

llustration 10-4

On May 10, 2014, Zaen left for Manila on board a bus from Leyte to visit his Uncle
in Quezon City. Since then, notning has been heard of hi whereabouts.

Q1: In view of the absence of Zaen, may his wife bring an action in court regarding the
capifal property of Zaen as its administration?

No. Before an action can be properly brought on behalf of an absent person, a

pefilion for declaration of absence must first be granted in court.

Q2: Suppose his mother believes that his son is still alive. Thus, she donated her house
and lot to Zaen. Is the wife capacitated to accept the donation on behalf of her husband?

Yes. provided that she is judicially deciared as the legal representative of her
husband.

Q3: May the wife alienate, donate or encumber the capital property of her husband, or
their conjugal property after her appointment as administratrix?
 No. She must always obtain judicial pemission or authority in order that she can
alienate or encumber her husband's propeny or their conjugal property.

Splitting of gift

Splitting of gift is a tax minimization scheme which is done by spreading gift over
numerous calendar years to avail of lower tax liability.

The gift-splitting scheme is a legally permissible means to reduce or escape totally

from a possible tax liability. It is not therefore, illegal.

Except on the exemption of P250,000 of net gift per year, this scheme may longer
be advisable on donations made effective 2018 because under the TRAIN law donor's
tax is now a proportional tax with a fixed rate of 6%.

It is no longer a progressive tax.

EXERCISE 10-1. TRUE OR FALSE QUESTIONS

1. A donation inter vivos is an act of liberality whereby a person disposes gratuitously or

a property or right in favor of another who accepts it.

2. A donation mortis causa is an act of liberality whereby a person disposesgratuitously

of a thing or right in favor ot another who accepts it.

3. A distinction between a donation inter vivos and a donation mortis causa is that the
first takes effect during the lifetime of the grantor, while the second takes effect at the
time ot death of the donor.

4. A distinction between a donation inter vivos and a donation mortis causa is that the
first should always be in writing while the second should always De done orally.

5. A donation to an infant is not valid because a donation always requires acceptance

from the donee and an infant is not yet capacitated to accept a donation.

6. A donation to an unemancipated minor is voidable because a donation is a contract

and a minor is not capacitated to enter into a Contract.

7. Donative intent is necessary in all cases of donations in order that it will be valid,
whether the donation is direct or indirect.
8. As a donated a property to Basa. Due to over-excitement upon receiving the deed of
donation, Basa suffered a heart attack and died belore Asa knew of his acceptance-the
donation is not pertected.

9. Alsa donated a property to Baso. When Alsa's wife learned of the donation, she
lambasted Alsa who as a result died of a heart attack before Alsa knew of Baso's
acceptance. The donation is perfected because he can no longer redeem what he had
already donated.

10. As a formal requisite, a donation ota movable property may be done orally.

11. If the value of the movable property donated exceeds P5,000, it should always be in
writing. Otherwise, the donation would be unenforceable because it violates the Statute
of Frauds.

12. If the property donated is immovable, it should al ways be in writing in order to be

valid.

13. In donor's tax, the property shall be valued at the time ot the otter of the donation
and not at the time of its acceptance.

14. In a revocable donation, a donor s tax does not accrue until such time that the
condition of revocability has been relinquished to the donee.

15. One of the objectives of donor's tax is to compensate the loss of revenue that may
be legally avoided on estates that may be taxed upon the death of the decedent.

16. A gift that is subject to donor's tax is one that is given because of the liberality of the
benefactor

17. An heir who renounces an inheritance from his father in favor of his brother, who is a
co-heir to the property, is not liable to pay donor s tax.

18. Donation of a life insurance in favor of a person who is an irrevocable beneficiary 1s

subject to donor's tax.

19. A donation made by a sympathizer to a candidate or his political party is exempt

from donor's tax.

20. A donation made by a husband to his wife who was forced to donate because of
violence employed by the latter to the former is voidable.

EXERCISE 10-2. MULTIPLE CHOICE QUESTIONS

1. An act of liberal ity whereby one disposes gratuitously of a thing or right in favor of
another who accepts it-

a. Succession c. Donation

b. Occupation d. Tradition

2. The following are the requisites of a donation for purposes of donor's tax, except

a. Capacity of the donor

b. Capacity of the donee

c. Delivery of the subject matter of gift

d. Donative intent

3. Which of the following donations is defective?

a. An donation given to an tinsane.

b. Adonation made by a demented person.

c. An acceptance made by a representative of a moron

d. Adonation made thru ai agent who is an unemancipated minor.

4. Which of the following donations must be in writing to be valid

a. Donation of a laptop computer worth P70,000.

b. Donation of a cellular phone worth P4,000.

c. Donation of cash worth P3,000 to the church.