221987143-Chapter-5-Estate-Tax2013

BUSINESS AND TRANSFER TAXATION 6th Edition (BY: VALENCIA & ROXAS) 28 SUGGESTED ANSWERS Chapter 5: ESTATE TAX

CHAPTER 5

ESTATE TAX Problem 5–1 1. True 2. False – 20% of the net taxable estate 3. False – intangible property of nonresident alien decedent. 4. False – Not any claims, but legal claims substantiated with supporting documents 5. False – Not allowed to nonresident alien decedent because they are taxed only on properties situated within. 6. False – the first P200,000 is estate tax-exempt. 7. True 8. True 9. True 10. False – If the value of the gross estate exceeds P2,000,000. 11. True 12. True Problem 5–2 1. False – This is also allowed to nonresident alien decedent for their ELITE. 2. True 3. True 4. True 5. False – deductible in full 6. False – standard deduction will not reduce the inheritance. 7. False – only 30 days. 8. True 9. True 10. True 11. True 12. True Problem 5-3 1. A 2. C 3. D 4. A 5. C 6. A 7. D 8. B 9. A 10. C 11. D 12. D

Problem 5-4 1. C 2. B 3. B 4. D 5. A 6. D 7. D 8. C 9. A 10. D 11. D

Problem 5-5 1. C 2. A 3. D 4. A 5. B 6. D 7. A 8. C 9. A 10. D 11. D

BUSINESS AND TRANSFER TAXATION 6th Edition (BY: VALENCIA & ROXAS) 29 SUGGESTED ANSWERS Chapter 5: ESTATE TAX

Problem 5–6 B Conjugal gross estate (P3,120,000 + P180,000) Funeral expense allowed (P3,300,000 x 5%) Share of surviving spouse (P3,300,000 – P165,000) x 50% Standard deduction Net estate

P3,300,000 ( 165,000) ( 1,567,500) ( 1,000,000) P 567,500

Problem 5–7 D Gross estate Funeral expense allowed (P3,000,000 x 5%) Net conjugal/community estate Standard deduction Net estate Share of surviving spouse (P2,850,000 x 50%) Net taxable estate

P3,000,000 ( 150,000) P2,850,000 (1,000,000) P1,850,000 1,425,000 P 425,000

Problem 5–8 A Estate after actual deductions Add: Actual deductions (P150,000 + P50,000) Gross estate Less: Funeral expense allowed (P1,400,000 x 5%) Other deduction Standard deduction Net taxable estate Problem 5–9

D

Property – cash Family home Transfer for public use Funeral expense allowed Net conjugal estate Family home (P800,000/2) Standard deduction Net estate Share of surviving spouse (P4,600,000 x 50%) Net taxable estate Problem 5–10 A Gross estate Charges against the estate Net conjugal estate Standard deduction Family home Net estate Share of surviving spouse (P4,300,000 x 50%) Net estate taxable in the Philippines Problem 5–11

B

Properties Funeral expense, limit Judicial expenses

P1,200,000 200,000 P1,400,000 P 70,000 50,000 1,000,000

Exclusive P1,000,000

(1,120,000) P 280,000 Conjugal P4,000,000 800,000

(1,000,000) ( 200,000) P4,600,000 (400,000) (1,000,000) P3,200,000 (2,300,000) P 900,000 P4,500,000 ( 200,000) P4,300,000 (1,000,000) (1,000,000) P2,300,000 (2,150,000) P 150,000 Conjugal P3,400,000 ( 200,000) ( 250,000)

BUSINESS AND TRANSFER TAXATION 6th Edition (BY: VALENCIA & ROXAS) 30 SUGGESTED ANSWERS Chapter 5: ESTATE TAX

Claims against properties Net conjugal estate

( 550,000) P2,400,000

Problem 5–12 C Net estate of P500,000 has a estate tax amounting to

P15,000

Problem 5–13 A Estate tax of P5,000,000 Problem 5–14

P465,000

D

Net estate P2,000,000

Amounts

Estate tax P135,000

Nonresident alien decedent is not allowed to have standard deduction. The funeral expense is not deductible because no part of gross estate located outside the Philippines is reported. (Sec. 86 (B), NIRC) Problem 5–15 A Net taxable estate Add: Family home Standard deduction Distributable estate before estate tax Less: Estate tax of P10,000,000 Net distributable estate Problem 5–16 1. Letter B Real estate Personal property Funeral expense, limit Judicial expenses Unpaid mortgage loan Net exclusive/conjugal state Standard deduction Family home (P1,600,000/2) Net estate Share of surviving spouse (P1,800,000 x 50%) Net taxable estate 2.

3.

P1,000,000 1,000,000

Exclusive P2,800,000

. P2,800,000

Conjugal P1,600,000 800,000 ( 200,000) ( 100,000) ( 300,000) P1,800,000

Letter D Estate tax on P500,000 Estate tax on excess (P1,600,000 x 8%) Estate tax Letter B Real estate Personal property Funeral expense, actual Judicial expenses Unpaid mortgage loan Net exclusive/conjugal estate Share of surviving spouse (P1,755,000 x 50%) Estate tax Net distributable estate

P10,000,000 2,000,000 P12,000,000 1,215,000 P10,785,000

P4,600,000 (1,000,000) ( 800,000) P2,800,000 ( 900,000) P2,100,000 P 15,000 128,000 P143,000

Exclusive P2,800,000

. P2,800,000

Conjugal P1,600,000 800,000 ( 245,000) ( 100,000) ( 300,000) P1,755,000

P4,555,000 ( 877,500) ( 143,000) P3,534,500

BUSINESS AND TRANSFER TAXATION 6th Edition (BY: VALENCIA & ROXAS) 31 SUGGESTED ANSWERS Chapter 5: ESTATE TAX

Problem 5–17 C Tax credit P100,000 x 2M/5M)

P40,000

Problem 5–18 A Total gross estate (P1,700,000 + P800,000) Less: Deductions Net taxable estate

P2,500,000 1,500,000 P1,000,000

Estate tax on P500,000 Excess P500,000 x 8% Total estate tax in the Philippines

P15,000 40,000 P55,000

Tax credit allowed (P800,000/P2,500,000) x P55,000 = P17,600 vs. P20,000

P17,600

Problem 5–19 Real property Inherited property Other properties Gross estate Less: Deductions: ELITE: Funeral expenses Judicial expenses Claims against the estate Transfer for public use Total deductions Net conjugal/exclusive estate Less: Special deductions: Standard deduction Medical expense Net estate before share of surviving spouse Less: Share of surviving spouse (P1,500,000 x 50%) Net taxable estate

Conjugal P1,500,000 500,000 P2,000,000 100,000 80,000 300,000 20,000 P 500,000 P1,500,000

Exclusive

Total

P700,000 . P700,000

P2,700,000

P700,000

500,000 P2,200,000

P

1,000,000 200,000 P1,000,000 750,000 P 250,000

Estate tax: Tax on P200,000 Tax on excess (P50,000 x 5%) Estate tax due

Problem 5–20 Family home – Philippines Family business – Philippines Properties – USA Gross estate Deductions: ELITE – Funeral expense Net conjugal/exclusive Less: Special deduction Std. deduction Family home Net estate before share of surviving spouse Less: Share of surviving spouse (P3,800,000 x 50%) Net taxable estate Estate tax:

P - 0 2,500 P 2,500

Conjugal P2,000,000 2,000,000 . P4,000,000

Exclusive

Total

P1,000,000 P1,000,000

P5,000,000

200,000 P3,800,000

. P1,000,000

. P4,800,000 1,000,000 1,000,000 P2,800,000 1,900,000 P 900,000

BUSINESS AND TRANSFER TAXATION 6th Edition (BY: VALENCIA & ROXAS) 32 SUGGESTED ANSWERS Chapter 5: ESTATE TAX P15,000 32,000 P47,000 13,429 P33,571

Tax on P500,000 Tax on excess (P400,000 x 8%) Estate tax due Less: Estate tax credit allowed (P47,000 x 8/28) – lower Estate tax still due and payable Supporting computation: The computation of net estate per country is as follows: Philippines Conjugal Gross estate P4,000,000 Funeral expense (200,000) Family home (1,000,000) Allocation of std deduction (P1,000,000 x 4/5): (1/4) (800,000) Net estate P2,000,000

U. S. A Exclusive P1,000,000

( 200,000) P 800,000

Problem 5–21

Conjugal Gross estate* P5,800,000 Less Deductions: Ordinary deductions: Funeral expenses (actual, P350,000; 5% limit, P500,000; statutory Maximum allowed, P200,000) - lowest (200,000) Judicial expenses (500,000) Other deductions (100,000) Vanishing deductions (note 1) . Net conjugal/exclusive estate P5,000,000 Special deductions: Standard deduction Family home (50% is P1,500,000) max. allowed Medical expenses (actual, P600,000) max. allowed Amount receivable under R.A. 4917 Net estate Less: Share of the surviving spouse (P5,000,000 x 50%) Net taxable estate

Total P5,000,000 (200,000) (1,000,000) (1,000,000) P2,800,000

Exclusive Total P4,200,000 P10,000,000

( 92,000) P4,108,000

9,108,000 (1,000,000) (1,000,000) (500,000) (200,000) P6,408,000 2,500,000 P3,908,000

*Note: The amount receivable under R.A. 4917 must be reclassified as exclusive property in order not to increase the deduction by 50%. Vanishing deduction: Cash, initial value allowed to take Less: Proportionate deductions: Funeral expense Judicial expense Other obligations Total (P800,000 x P500,000/P10,000,000) Final basis Multiplied by vanishing deduction rate Vanishing deduction

P500,000 P200,000 500,000 100,000 P800,000

40,000 P460,000 20% P 92,000

BUSINESS AND TRANSFER TAXATION 6th Edition (BY: VALENCIA & ROXAS) 33 SUGGESTED ANSWERS Chapter 5: ESTATE TAX

Problem 5–22 Gross estate (P2,000,000 + P180,000) Less: Deductions: Unpaid mortgage Funeral expense Judicial expense Standard Net estate

P2,180,000 P 480,000 60,000 20,000 1,000,000

Tax on P500,000 Tax on excess P120,000 x 8% Total estate tax

P15,000 9,600 P24,600

Gross estate Less: Ordinary deductions (P480,000 + P80,000) Estate tax Net distributable estate

P2,180,000 P560,000 24,600

Problem 5–23 Cash Property Gross estate Deductions: Promissory note Funeral expense Net conjugal estate Less: Standard deduction Net estate Less: Share of surviving spouse (P1,330,000 x 50%) Net taxable estate

Gross estate (P1,000,000 + P9,000,000) Ordinary deductions: Funeral expense (limit) Judicial expense Claims against the estate Net conjugal estate Special deductions: Standard deduction

584,600 P1,595,400 P 400,000 1,500,000 P1,900,000 ( 500,000) ( 70,000) P1,330,000 1,000,000 P 330,000 665,000 (P335,000)

Gross estate Less: Promissory note Funeral expense Net estate before share of surviving spouse Less: Share of surviving spouse (P1,330,000 x 50%) Net distributable estate Problem 5–24

1,560,000 P 620,000

P1,900,000 P500,000 70,000

Conjugal P1,000,000 ( ( ( P

200,000) 200,000) 500,000) 100,000

Exclusive P9,000,000

570,000 P1,330,000 665,000 P 665,000 Total P10,000,000 ( 200,000) ( 200,000) ( 500,000) P9,100,000 (1,000,000)

BUSINESS AND TRANSFER TAXATION 6th Edition (BY: VALENCIA & ROXAS) 34 SUGGESTED ANSWERS Medical expense Net estate Less: Share of surviving spouse (P100,000 x 50%) Net taxable estate

Chapter 5: ESTATE TAX

( 500,000) P7,600,000 50,000 P7,550,000

Tax on P5,000,000 Tax on excess P2,550,000 x 15% Estate tax

P465,000 382,500 P847,500

Conjugal estate Less: Ordinary deductions (actual): Funeral expense Judicial expense Claims against the estate Net conjugal estate before share of surviving spouse Less: Share of surviving spouse (P90,000 x 50%) Net share of the decedent Add: Exclusive property of the decedent Net distributable estate before estate tax Less: Estate tax Net distributable estate Divide by number of heirs (12 + 1) Share of each heir

P1,000,000 P210,000 200,000 500,000

910,000 90,000 45,000 P 45,000 9,000,000 P9,045,000 847,500 P8,197,500 13 P 603,576.92 P

Note: The medical expense is assumed to have been paid. Problem 5–25 Conjugal property - real estate Ordinary deductions: Funeral expenses, limit (P2M + P300,000) x 5% Judicial expenses Unpaid mortgage Vanishing deduction* Net conjugal estate Add: Exclusive property – personal property inherited Net estate before special deduction Less: Standard deduction Net estate before share of surviving spouse Less: Share of surviving spouse (P1,204,696 x 50%) (P1,345,000 x 50%) Net taxable/distributable estate Divide by number of compulsory heirs Inheritance of each heir Vanishing deduction: *Value taken Less: Proportionate deductions (P620,000 x P300,000/ P2,300,000) Final basis Multiply by percentage of vanishing deduction – one year ago Vanishing deductions

Taxable P2,000,000

Distributable P2,000,000

( 115,000) ( 5,000) ( 500,000) ( 175,304) P1,204,696 300,000 P1,504,696 1,000,000 P 504,696 602,348

( 150,000) ( 5,000) ( 500,000) . P1,345,000 300,000 P1,645,000 . P1,645,000

(P 97,652)

672,500 P 972,500 3 P 324,167 P300,000 80,870 P219,130 80% P175,304

BUSINESS AND TRANSFER TAXATION 6th Edition (BY: VALENCIA & ROXAS) 35 SUGGESTED ANSWERS Chapter 5: ESTATE TAX

Problem 5–26 The property relationship of Don and Dona Dinero shall be governed by the regime of absolute community property ownership because they got married after August 3, 1988. Hence, the computation would be: 1. Computation of net estate: Communal Residential house and lot P 3,500,000 Building apartment 10,000,000 Income of apartment 3,000,000 Deposit in Equitable Bank 5,000,000 Agricultural land Family car 550,000 Other personal properties 1,000,000 Claim against insolvent person 100,000 Total gross estate P23,150,000 Less: Ordinary deductions: ELIT: Funeral expenses – maximum 200,000 Judicial expenses 600,000 Claims against the estate 600,000 Claims against insolvent person 100,000 Unpaid mortgage Transfer for public use . Net estate before special deductions P21,650,000 Less: Special deductions: Standard deduction Family home – maximum Medical expenses – maximum Net estate Less: Share of surviving spouse (P21,650,000 x 50%) Net taxable estate

Exclusive

P 800,000 . P 800,000

P23,950,000

300,000 200,000 P 300,000

2,000,000 P21,950,000 1,000,000 1,000,000 500,000 P19,450,000 10,825,000 P 8,625,000

2. Computation of estate tax: For the first P5,000,000 Excess (P3,625,000 x 15%) Estate tax due 3.

Total

P

465,000 543,750 P1,008,750

Computation of net distributable estate: Residential house and lot Building apartment Income of apartment Deposit in equitable bank Agricultural land Family car Other personal properties Claims against insolvent person

Communal P 3,500,000 10,000,000 3,000,000 5,000,000 550,000 1,000,000 100,000

Exclusive

P 800,000 .

Total

BUSINESS AND TRANSFER TAXATION 6th Edition (BY: VALENCIA & ROXAS) 36 SUGGESTED ANSWERS Total gross estate Less: Actual deductions: Funeral expense – actual Judicial expenses Claims against the estate – actual Claims against insolvent person Unpaid mortgage Transfer for public use Net estate before share of surviving spouse Share of surviving spouse (P21,300,000 x 50%) Net estate before estate tax Less: Estate tax Net distributable estate

4.

P23,150,000 350,000 600,000 800,000 100,000 . P21,300,000

Chapter 5: ESTATE TAX P23,950,000

P 800,000

300,000 200,000 P300,000

2,350,000 P21,600,000 10,650,000 P10,950,000 1,008,750 P 9,941,250

Distribution of the net distributable estate: Following the assumptions given above, the computation of the share from the net distributable estate of each heir would be: Legitime: To two legitimate children (P9,941,250 x 50%) To legally surviving spouse (P4,970,625/2) To illegitimate child (P2,485,313 x 50%)

P 4,970,625 2,485,313 1,242,656

Free portion: To church – based on Will Total Problem 5-27 Estate tax: Gross estate House and lot, Baguio City House and lot, Quezon City – family home* Grocery store, Baclaran Inventory (P700,000 – P300,000) x 450/300 Cash sales Claims against insolvent persons Ordinary deductions: Funeral (P3,900,000 x 5%) Claims against insolvent persons Unpaid income taxes Net estate before special deductions Special deductions: Family home (P1,500,000/2) Medical expenses Standard deductions Net estate Less: Share of surviving spouse (P3,635,000 x 50%) Net taxable estate Estate tax due

1,242,656 P 9,941,250

P1,000,000 1,500,000 300,000 600,000 450,000 50,000 P 195,000 50,000 20,000 P 750,000 500,000 1,000,000

P3,900,000

(

265,000) P3,635,000

(2,250,000) P1,385,000 1,817,500 (P 432,500) P

- 0 -

Note: The house and lot in New York, Quezon City is assumed family home because Don and Dona Posamin reside in that place. Net distributable estate:

BUSINESS AND TRANSFER TAXATION 6th Edition (BY: VALENCIA & ROXAS) 37 SUGGESTED ANSWERS Gross estate Actual deductions: Funeral Claims against insolvent persons Unpaid income taxes Medical expense Net estate before share of spouse Share of surviving spouse (P3,030,000 x 50%) Net distributable estate Problem 5–28 1. Estate tax House and lot (family home) Time deposit – principal amount Accrued interest 2004: (P2,000,000 x 12% x 12/12) 2005: (P2,000,000 x 12% x 10/12) Car Claims against insolvent person Gross estate Ordinary deductions: Funeral expense, limit Judicial Claims against insolvent person Net estate before special deductions Special deductions: Standard deductions Medical expense, limit Family home, limit Net estate Less: Share of surviving spouse (P6,190,000 x 50%) Net taxable estate

Chapter 5: ESTATE TAX

P3,900,000 P250,000 50,000 20,000 550,000

870,000 P3,030,000 1,515,000 P1,515,000

P3,000,000 2,000,000 240,000 200,000 1,000,000 100,000 P6,540,000 P 200,000 50,000 100,000 P1,000,000 500,000 1,000,000

Tax on P500,000 Tax on excess (P95,000 x 8%) Estate tax 2. Net distributable estate Gross estate Actual deductions: Funeral expense Judicial expense Claims against insolvent person Net distributable estate before share of surviving spouse Less: Share of surviving spouse (P6,140,000 x 50%) Net actual estate Less: Estate tax Net distributable estate 3. Distribution of inheritance Net distributable estate Divided by number of heirs (intestate succession) Share of each heir

( 350,000) P6,190,000

(2,500,000) P3,690,000 3,095,000 P 595,000 P 15,000 7,600 P 22,600 P6,540,000

P250,000 50,000 100,000

( 400,000) P6,140,000 3,070,000 P3,070,000 22,600 P3,047,400 P3,047,400 4 P 761,850

BUSINESS AND TRANSFER TAXATION 6th Edition (BY: VALENCIA & ROXAS) 38 SUGGESTED ANSWERS Chapter 5: ESTATE TAX

Problem 5–29 1. Estate tax credit = P215,000 2. Estate tax payable = P222,500 Supporting computations: a. Estate tax payable to the Philippines : Country A Gross estate P1,200,000 Unpaid mortgages (200,000) Unpaid taxes Transfer for public use . Net of identifiable deductions P1,000,000 Allocated deductions** (172,500) Net estate P 827,500

Country B P2,500,000

Philippines P5,000,000

(500,000) . P2,000,000 (358,750) P1,641,250

(2,000,000) P3,000,000 (718,750) P2,281,250

Entire P8,700,000 (200,000) (500,000) (2,000,000) P6,000,000 (1,250,000) P4,750,000

** Computation of allocated deductions: Funeral expenses Judicial expenses Standard deduction allocated Total allocated deductions

Country A P 27,600 6,900 138,000 P172,500

Country B P 57,400 14,350 287,000 P358,750

Philippines Entire P115,000 P 200,000 28,750 50,000 575,000 1,000,000 P718,750 P1,250,000

Note: The above deductions are allocated because they are not specifically identified as deductions from a specific country. The fraction per country is computed as follows: Country A Country B Philippines Entire Gross state per country P1,200,000 P2,500,000 P5,000,000 P8,700,000 Divide by entire gross estate P8,700,000 P8,700,000 P8,700,000 P8,700,000 Fraction 13.80% 28.70% 57.50% 100%

b. Computation of Philippines estate tax: Tax on P2,000,000 Tax on excess (P2,750,000 x 11%) Total Less: Tax credit allowed* Estate tax payable to the Philippine Government c. Computation of tax credit: Limit A: Country A: [P437,500 x (P827,500/P4,750,000)] Actual payment to country A – lower Country B: (P437,500 x P1,641,250/P4,750,000)

P135,000 302,500 P437,500 215,000 P222,500

P P

76,217 75,000

P151,167

P 75,000

BUSINESS AND TRANSFER TAXATION 6th Edition (BY: VALENCIA & ROXAS) 39 SUGGESTED ANSWERS Chapter 5: ESTATE TAX

Actual payment to country B – lower

P140,000

Tax credit – Limit A

P215,000

Limit B: Total net estate – foreign [(P2,468,750)/P4,750,000] x P437,500 Total actual estate tax payments – foreign (P75,000 + P140,000) – lower Tax credit – Limit B

P227,385 P215,000 P215,000

*Tax credit allowed (the lower of limit A or B)

Problem 5–30 Cash Shares of stock (P100 x 100,000 shares) Insurance proceeds Transfer in contemplation of death Total gross estate Less: Ordinary deduction – Transfer for public use Net estate before special deduction Less: Standard deduction Net estate Less: Share of surviving spouse (P2,000,000 x 50%) Net taxable estate

P215,000

Conjugal P2,000,000 . P2,000,000 . P2,000,000

Exclusive

Total

P10,000,000 1,000,000 3,000,000 P14,000,000 P16,000,000 10,000,000 10,000,000 P 4,000,000 P 6,000,000 1,000,000 P 5,000,000 1,000,000 P 4,000,000

Estate tax on P2,000,000 Tax on excess (P2,000,000 x 11%) Total estate tax Less: Tax credits on tax previously paid (P34,840 + P204,000) Transfer tax still due Problem 5–31 Estate tax on P5,000,000 Estate tax on excess (P3,000,000 x 15%) Estate tax Add: Surcharges – willful neglect (P585,000 x 50%) Interest for 4 years (P585,000 x 20% x 4) Total amount to be paid

140,000

P135,000 220,000 P355,000 238,840 P116,160 P P P292,500 468,000

135,000 450,000 585,000

760,500 P1,345,500