Business and Transfer Taxation 6th Editi

BUSINESS AND TRANSFER TAXATION 6th Edition (BY: VALENCIA & ROXAS) 19 SUGGESTED ANSWERS Chapter 4: DEDUCTIONS FROM GROSS ESTATE

CHAPTER 4

DEDUCTIONS FROM GROSS ESTATE Problem 4–1 1. False – could not be claimed as claim against the estate. 2. True 3. False – indebtedness is not transferrable to the heirs. 4. True 5. False – bank loan is the exception for notarization requirement. 6. True 7. True 8. False – unpaid taxes accrued before death only. 9. 10. 11. 12. 13.

False – not deductible because the loss has been claimed by gross income. No double deduction is allowed. False – not deductible. Donation is deductible if given for Philippine Government and exclusively for public purposes. True False – special deductions are not allowed to nonresident alien decedent. True

Problem 4–2 1. False – value of deduction at the time of death. 2. False – not terminated upon the decedent’s death but shall be paid by the remaining estate. 3. True 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.

False – judicial expense incurred after death but before the estate tax settlement date is still deductible from gross estate. False – losses that are deductible must have been sustained after death but before the settlement date of estate tax. True True False – not deductible. Only those expenses actually taken from the gross estate are deductible. False – actual or 5% of the gross not exceeding P200,000 False – this threshold is applicable to funeral expense. False – Only those expenses actually taken from the gross estate. True True

Problem 4–3 1. False – special deduction. 2. False – neither special nor ordinary deduction. 3. True 4. True 5. True 6.

False – deductible only if included in the gross estate. The amount deductible from the gross estate is limited to the amount that cannot be recovered. 7. False – either against the gross estate or against gross income. There is no double deduction. 8. False – Estate tax is not deductible from gross estate. (Sec. 86, NIRC) 9. True 10. False – not deductible because not yet accrued expense. 11. True 12. False – Nondeductible because only those related to gathering, preservation and settlement of the estate is allowed as deductible judicial expense from the gross estate.

13. True

BUSINESS AND TRANSFER TAXATION 6th Edition (BY: VALENCIA & ROXAS) 20 SUGGESTED ANSWERS Chapter 4: DEDUCTIONS FROM GROSS ESTATE

Problem 4–4 1. False – ordinary deduction. 2. True 3. False – ½ of net conjugal estate, after ordinary deductions 4. False – no funeral deduction expense is allowed. 5. False – funeral expense is deducted first from common property 6. True 7. True 8. True 9.

False – deductible whether paid or unpaid, the maximum deductible medical expense is P500,000. 10. False – not allowed as deduction is in excess of P500,000 11. False – this is in addition to other allowable deductions. Standard deduction is not in lieu of ordinary deduction. 12. False – no receipt is necessary for standard deduction. 13. True Problem 4–5 1. C 2. B 3. C 4. D 5. A 6. D 7. C 8. A 9. B 10. A

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

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

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

Problem 4–9 1.

P – 0 -. The funeral expenses should first be substantiated with documentary evidences that they actually incurred before the 5% of the gross estate or the P200,000 whichever is the lowest of the three is made. If the funeral expenses are not substantiated, such become the lowest among the three choices.

2.

P375,000. D’s administrator could still collect 25% or (P600,000/P2,400,000) of B’s asset. The remaining uncollectible would be 75% of P500,000 = P375,000.

3.

P - 0 -. No vanishing deduction is allowed when the property subjected to previous transfer taxes is located outside the Philippines.

4.

P - 0 -. No deduction is allowed if the estate tax return of a nonresident alien does not contain properties located outside the Philippines.

5.

P - 0 -. Special deductions are not allowed to nonresident alien.

6.

P100,000. The excess of unpaid funeral expense shall not be deducted as claimed against the estate.

7.

P1,840,000. The special deduction within is computed as follows: Family home Standard deduction (P1,000,000 x 3/5) Medical expense (P400,000 x 3/5) Total special deduction within

P1,000,000 600,000 240,000 P1,840,000

BUSINESS AND TRANSFER TAXATION 6th Edition (BY: VALENCIA & ROXAS) 21 SUGGESTED ANSWERS Chapter 4: DEDUCTIONS FROM GROSS ESTATE

8.

P1,000,000. Only donation to the Philippine Government and nay of its political subdivisions are allowed to be deducted from the decedent’s gross estate for Philippine estate tax purposes.

9.

P - 0 -. Losses could only be claimed within 6 months from the date of death.

Problem 4–10 C Proportionate ELIT (P500,000 x 3/5) Add: Donation to Philippine government Allowable deduction within Problem 4–11 C Funeral expense (P3,500,000 x 5%) Whether paid or unpaid, actual funeral expense is deductible subject to limit.

P 300,000 100,000 P400,000 P175,000

Problem 4–12 B Gross estate (P3,150,000 + P175,000) Multiplied by funeral rate Deductible funeral expense

P3,325,000 5% P 166,250

Problem 4–13 A Gross estate (P2,000,000 + P1,000,000) Multiplied by funeral rate Deductible funeral expense

P3,000,000 5% P 150,000

Problem 4–14 NOT IN THE CHOICES Real property Cash paid for medical expense from decedent’s estate Cash used for wake expenses from decedent’s estate Memorial plan already paid Claims against insolvent person Total gross estate Multiplied by percent of funeral expense Funeral expense allowed

P1,560,000 45,000 85,000 40,000 100,000 P1,830,000 5% P 91,500

The actual funeral expense is P125,000; the total of P85,000 wake expenses, and P40,000 memorial plan already paid. Problem 4–15 D Funeral expense, lowest amount Claims against the estate

P130,000 P - 0 -

The entire amount of P90,000 in excess of P130,000 limit can no longer be deducted as funeral expense not it can be deducted as judicial expense. Problem 4–16 D Capital gains tax (P1,780,000/89%) x 6% Judicial expense (P1,900,000/95%) – P1,900,000 Total judicial expense

P120,000 100,000 P220,000

The capital gains tax is considered judicial expense because it is a legitimate and necessary charge in disposing the property for the settlement of estate.

BUSINESS AND TRANSFER TAXATION 6th Edition (BY: VALENCIA & ROXAS) 22 SUGGESTED ANSWERS Chapter 4: DEDUCTIONS FROM GROSS ESTATE

Problem 4–17 C Agreed contract price (P10M x 10%) Extra-judicial settlement of the estate Total deductible judicial expenses

P1,000,000 500,000 P1,500,000

Problem 4–18 C Deductible loss (P48,000/40%) Problem 4–19

P120,000

A

There is no deductible loss from the gross estate because the car is not anymore available at the time of death. To be deductible, the loss must be sustained after death but before the filing and payment of the estate tax. Problem 4–20 D Value of apartment raged by fire Less: Insurance recovery (P3,000,000 x 60%) Scrap value Deductible loss

P1,800,000 100,000

P3,000,000 1,900,000 P1,100,000

Problem 4–21 A Unpaid mortgage on the real property included in the gross estate

P500,000

Problem 4–22 D Loans from Metro Bank (not notarized per bank’s policy) Interest on loans payable in the bank Loans from Metro Bank (not notarized per bank’s policy)

P500,000 30,000 P530,000

Problem 4–23 D Accounts receivable Multiplied by percent of uncollectible (100% - 66.67%) Bad debts deductible

P500,000 33.33% P166,667

Percent of collectible is computed as follows: Assets, net of unpaid taxes (P1,500,000 – P500,000) Divided by liabilities, net of taxes payable (P2,000,000 – P500,000)

P1,000,000 P1,500,000

Problem 4–24 B Uncollectible amount (P160,000 x 87.50%) Percent of the entire amount Less: percent of collectible amount (P50,000/P400,000) Percent of uncollectible Problem 4–25

B

Properties Ordinary deductions: Transfer for public use Unpaid mortgage loan used to finance family business Funeral expense Properties after ordinary deductions Problem 4–26 D Unpaid real property tax incurred prior to date of death Donor’s tax prior to date of death Deductible unpaid taxes from gross estate

66.67% P140,000

100.00% 12.50% 87.50% Exclusive P2,800,000 (400,000) . P2,400,000

Conjugal P3,500,000 ( 800,000) ( 180,000) P2,520,000 P100,000 80,000 P180,000

BUSINESS AND TRANSFER TAXATION 6th Edition (BY: VALENCIA & ROXAS) 23 SUGGESTED ANSWERS Chapter 4: DEDUCTIONS FROM GROSS ESTATE

Problem 4–27 A Zero. No vanishing deduction is allowed for properties located outside the Philippines. Problem 4–28 A Value taken (lower) Proportionate ordinary deduction (P1,000,000/P3,000,000) x P150,000 Final basis Multiplied by percent of vanishing deduction Amount of vanishing deduction

P1,000,000 50,000 P 950,000 60% P 570,000

Problem 4–29 D Value taken (lower) Less: Mortgage paid Initial basis Less: Proportionate deduction (P1,700,000/P5,000,000) x P400,000 Final basis Multiplied by percent of vanishing deduction Amount of vanishing deduction

P2,100,000 400,000 P1,700,000 136,000 P1,564,000 40% P 625,600

Computation of ELIT: Funeral expense, limit Judicial expense Unpaid mortgage Total ELIT

P200,000 100,000 100,000 P400,000

Problem 4–30 B Unpaid mortgage (P300,000 – P200,000) Funeral expense (P3,000,000 x 5%) Ordinary deduction subject to proportionate computation

P100,000 150,000 P250,000

Problem 4–31 D Deductible transfer for public use (P2,000,000/1,000) x 200

P400,000

Problem 4–32 C Donation to the City of Manila

P200,000

Transfer for public use (Philippine Government) is the only donation allowed deductible from gross estate. Problem 4–33 C Funeral expense (P3,000,000 x 5%) Judicial expense (P250,000 x 60%) Bad debts (P150,000/3) Ordinary deductions Problem 4–34 B Funeral expenses Add: Medical expenses Total Less: Limit amounts: Funeral (P3,000,000 x 5%) Medical expenses Nondeductible amount of expenses

P150,000 150,000 50,000 P350,000 P200,000 650,000 P850,000 P150,000 500,000

650,000 P200,000

BUSINESS AND TRANSFER TAXATION 6th Edition (BY: VALENCIA & ROXAS) 24 SUGGESTED ANSWERS Chapter 4: DEDUCTIONS FROM GROSS ESTATE

Problem 4–35 C Standard deduction to Filipino and resident alien

P1,000,000

Problem 4–36 D Nonresident alien does not have standard deduction Problem 4–37 D Maximum amount of family home deductible The family home is an exclusive property of the decedent.

P1,000,000

Problem 4–38 C Building – conjugal (P1,000,000/2) Land – exclusive Family home - deductible

P500,000 400,000 P900,000

Problem 4–39 D Exclusive portion of family home Add: Share in the conjugal home (P2,000,000-P800,000)/2 Total Less: Maximum family home Family home subject to tax

P

800,000

600,000 P1,400,000 1,000,000 P 400,000

Problem 4–40 C Deductible medical expense (paid or unpaid) within one year prior to death

P300,000

Problem 4–41 A The unpaid medical expense in excess of the maximum P500,000 is nondeductible as claims against the estate. Problem 4–42 D Medical expenses incurred from October 2013 to December 2013 Problem 4–43

A

Properties Transfer for public use Share of surviving spouse (P2,000,000 x 50%) Net estate

P100,000 Exclusive P1,000,000 ( 500,000) . P 500,000

Conjugal P2,000,000 (1,000,000) P1,000,000

Problem 4–44 B Conjugal estate Deductible funeral expense Net estate before share of surviving spouse Multiplied by share of surviving spouse Share of surviving spouse

P5,000,000 ( 200,000) P4,800,000 50% P2,400,000

Problem 4–45 D Standard deduction Family home (P1,000,000/2) Amount received under R.A. 4917 Special deductions

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

BUSINESS AND TRANSFER TAXATION 6th Edition (BY: VALENCIA & ROXAS) 25 SUGGESTED ANSWERS Chapter 4: DEDUCTIONS FROM GROSS ESTATE

Problem 4–46 1. Letter C Donation to the government Funeral expense Total ordinary deductions 2.

P1,000,000 100,000 P1,100,000

Letter D Standard deduction Family home Amount receivable R.A. 4917 Medical expense Total special deductions

P1,000,000 1,000,000 500,000 400,000 P2,900,000

Problem 4–47 1. Letter D Claims against the estate (P3M + P1M) Transfer for public use (P500k + P200k) Medical expenses Family home Standard deduction Total deductions from gross estate 2.

P4,000,000 700,000 500,000 1,000,000 1,000,000 P7,200,000

Letter C Claims against the estate (P4,000,000 x 5/8) Transfer for public use (P500k + P200k) Total deductions allowed from gross estate

Problem 4–48

B

Ordinary deductions: Funeral: (P200,000 x 2/5) & (3/5) Unpaid loans Donations to government – Philippines Judicial expenses (P600,000 x 2/10) & (8/10) Total ordinary deductions Special deductions: Standard (P1,000,000 x 2/10) & (8/10) Family home Medical (P500,000 x 5/8) & (3/8) Total special deduction Total deductions Problem 4–49

P2,500,000 700,000 P3,200,000 Japan P 80,000 300,000 120,000 P500,000 P 200,000

Philippines P

120,000 700,000 400,000 480,000 P1,700,000

P

312,500 P 512,500

800,000 1,000,000 187,500 P1,987,500

P1,012,500

P3,687,500

A

P5,000,000. No deduction shall be allowed in the case of a nonresident decedent alien if his properties outside the Philippines are not reported in the Philippine estate tax return. [Sec. 86 (D), NIRC] Problem 4–50 NOT IN THE CHOICES Net taxable estate Add: Standard deduction Family home Medical expenses Ordinary deductions Gross estate

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

P3,000,000

4,000,000 P7,000,000

BUSINESS AND TRANSFER TAXATION 6th Edition (BY: VALENCIA & ROXAS) 26 SUGGESTED ANSWERS Chapter 4: DEDUCTIONS FROM GROSS ESTATE

Problem 4–51 C Net taxable estate Add: Share of surviving spouse Net estate after special deductions Add: Special deductions Standard deduction Family home Medical expenses Amount received under R.A. 4917 Total net estate before ordinary deductions Less: Net exclusive estate Family home Amount received under R.A. 4917 Gross exclusive estate Less: Exclusive ordinary deduction Net conjugal estate

P4,000,000 2,000,000 P6,000,000 P1,000,000 1,000,000 500,000 250,000 P1,500,000 250,000 P1,750,000 750,000

Problem 4–52 Burial lot (P50,000 x 80%) Expenses for wake before burial Telegrams and cable to relatives Mourning apparel of the surviving spouse and children Entertainment expenses during the rites and burial ceremonies Allowable funeral expenses Problem 4–53 1.

Ordinary deductions: Unpaid taxes: Income tax Donor’s tax Funeral expenses: Memorial plan Wake expenses Accrued expenses Total ordinary deductions allowed

2.

Special deductions: Standard deduction Family home Medical expenses: Hospital bills Total special deduction

Problem 4–54 Real estate property Personal property Total Funeral expense (P700,000 + P2,600,000) x 5% Judicial expenses Mortgage payable to the bank Net estate before share of surviving spouse Multiplied by percent share of surviving spouse Share of surviving spouse

1,000,000 P7,750,000 P40,000 20,000 1,000 3,000 2,500 P66,500

January until November until October 200A December 200A P200,000 100,000 50,000

2,750,000 P8,750,000

Total P200,000 100,000

100,000

80,000

50,000 100,000 80,000 P530,000 P1,000,000 1,000,000

400,000

400,000 P2,400,000 Exclusive P700,000 . P700,000

Conjugal P2,200,000 400,000 P2,600,000 ( 165,000) ( 50,000) ( 400,000) P1,985,000 50% P 992,500

BUSINESS AND TRANSFER TAXATION 6th Edition (BY: VALENCIA & ROXAS) 27 SUGGESTED ANSWERS Chapter 4: DEDUCTIONS FROM GROSS ESTATE

Problem 4–55 October 1 to 20, 2014 from Saint Luke’s Hospital: Diagnostic fee Doctors’ fee Hospital rooms Operating costs Medicines Total medical expense deductible Problem 4–56 Funeral expense, actual Judicial expense Medical expense, maximum allowed Standard deductions Total deductions Problem 4–57 1. Gross estate

P 60,000 120,000 80,000 50,000 90,000 P400,000 P

150,000 50,000 500,000 1,000,000 P1,700,000 P3,000,000

2.

Actual deductions (P200,000 + 500,000)

P700,000

3.

Deductible allowance – standard deduction

P1,000,000

4.

Net taxable estate (P3,000,000 – P700,000 – P1,000,000)

P1,300,000

Note: Since the funeral and judicial expense are combined, it is assumed that the limit for funeral expense amounting to P150,000 or 5% of gross estate is complied and the remaining balance of P50,000 is for the judicial expense.