Chapter 2 - Transfer Taxes and Basic Succession2013

BUSINESS AND TRANSFER TAXATION 6th Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

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Chapter 2: TRANSFER TAXES AND BASIC SUCCESSION

CHAPTER 2

TRANSFER TAXES AND BASIC SUCCESSION Problem 2-1 1. False - gratuitous 2. False – donation mortis-causa is subject to estate tax. 3. False – Not all gratuitous transfer is subject to transfer tax. Example, the first P100,000 of net gift is exempt. Also, gratuitous transfer to the government is not subject to business tax. 4. True 5. False – subject to business tax 6. True 7. False – the legitime is based on value of the estate, not on the form of the estate. 8. False – they are voluntary heirs. 9. True 10. False – fixed by law 11. False – executor 12. True 13. False – an income earned; therefore, onerous transfer (consideration for service rendered). 14. False – upon right to transfer 15. True 16. False – upon death of the decedent. Problem 2-2 1. True 2. False – no oral will is valid. Will must be in writing to be valid. 3. False – legitimate parents succeed the rank, in the absence of the legitimate child. 4. False – relatives up to the 5th degree 5. True 6. True 7. True 8. False – equal rights 9. True 10. True 11. True 12. False – the 5th degree collateral line relative is the legitimate heir 13. False – If the surviving spouse is alone, his/her share is 100%. If no children, but with parents of the decedents, he/she will receive ¼ only if there is will. 14. False – if the transfer is testamentary, the free portion can be given to legitimate parent as provided in the will. 15. False – one for the legitimate child and half for the illegitimate child

BUSINESS AND TRANSFER TAXATION 6th Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

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Chapter 2: TRANSFER TAXES AND BASIC SUCCESSION

Problem 2-3 1. A 2. B 3. B 4. C 5. D 6. C 7. D 8. A 9. C 10. B 11. A 12. B 13. D 14. C Problem 2-6

Problem 2-4 1. A 2. D 3. C 4. D 5. C 6. C 7. D 8. B 9. C 10. B 11. A 12. D 13. B 14. A

Problem 2-5 1. D 2. C 3. B 4. D 5. D 6. C 7. A 8. B 9. A 10. A 11. B & D 12. A 13. D

A

Zero. Except for the prize for winning the tournament which is subject to final income tax of 20%, all properties received are subject to transfer tax which will be paid by the donor or the estate of the decedent. Problem 2-7 1. Letter D Business liabilities Car – first prize Amount of mortgage assumed Salary Amount of onerous transfer

P 500,000 1,000,000 1,500,000 300,000 P3,300,000

2. Letter B Business, net of liabilities (P2,000,000 – P500,000) House and lot as donation, net of mortgage (P2,000,000 – P1,500,000) Farm as inheritance Amount of gratuitous transfer

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

Problem 2-8 1. Letter A Car (P800,000 – P300,000) 2.

Letter D House and lot – mortis causa

P 500,000 P1,000,000

Every donation between the spouses during the marriage shall be void. This prohibition does not apply when the donation takes effect after the death of the donor. Neither does this prohibition apply to moderate gifts which the spouses may give each other on the occasion of any family rejoicing. (Art. 133, Civil Code) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, accredited nongovernment organization, trust or philanthrophic organization or research institution or organization are tax-exempt. (Sec. 101, NIRC)

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BUSINESS AND TRANSFER TAXATION 6th Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

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Chapter 2: TRANSFER TAXES AND BASIC SUCCESSION

Problem 2-9 A Property left by the decedent Less: Charges against the estate Hereditary estate Problem 2-10 D Distributable estate Less: Share of 3 children (P12,000,000 x 50%) Share of surviving spouse (P6,000,000/3) Free portion Less: Share of illegitimate child per Will Free portion for the church

P 5,000,000 1,000,000 P 4,000,000 P12,000,000 P6,000,000 2,000,000

8,000,000 P4,000,000 3,000,000 P1,000,000

The share of the illegitimate child must be taken from the free portion. The Will is valid because the 50% of the hereditary estate intended to legitimate children is not impaired. Problem 2-11 B Increase in the share of C (P1,500,000 x 3/5)

P900,000

Problem 2-12 C Net hereditary estate Legitime of children (P5,000,000 x ½) Portion for the surviving spouse (P5,000,000 x ¼) Free portion – may be distributed to strangers

P5,000,000 ( 2,500,000) ( 1,250,000) P1,250,000

Problem 2-13 B Inheritance of the spouse (P5,000,000/5)

P1,000,000

Problem 2-14 A Share of Abu = share of Surot (P12,000,000/3) Add: Share inheritance repudiated by Cuto (P4,000,000/2) Share of Surot

P4,000,000 2,000,000 P6,000,000

Problem 2-15 A Hereditary estate Legitime of children (P3,000,000 x ½) Portion for the spouse (P1,500,000/4) Free portion Multiplied by Legacy to the sister-in-law Problem 2-16 NOT IN THE CHOICES Hereditary estate Less: Share of parents (P3,000,000 x1/2) Share of illegitimate child (P3,000,000 x 1/4) Share of surviving spouse (P3,000,000 x 1/8) Free portion Share of the surviving spouse Add: Share from free portion (P375,000/3) Total share of the surviving spouse

P3,000,000 ( 1,500,000) ( 375,000) P1,125,000 20% P 225,000 P3,000,000 P1,500,000 750,000 375,000 P

2,625,000 375,000 P375,000 125,000 P500,000

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BUSINESS AND TRANSFER TAXATION 6th Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

Chapter 2: TRANSFER TAXES AND BASIC SUCCESSION

Problem 2-17 D Share of Anac (P12,000,000/3) Divided by number of children of Anac Share of Cute

P4,000,000 2 P2,000,000

Problem 2-18 A Zero, because Lolo and Lola are excluded by Tatay and Nanay who are nearer to the testator. The nearer excludes the farther. Problem 2-19 D Hereditary estate, net of charges (P7,000,000 – P1,000,000) Legitime of legitimate children (P6,000,000 x ½) Portion for the acknowledge natural child (P3,000,000/3) x 50% Portion for the surviving spouse (P3,000,000/3) Free portion – could be disposed of as legacy to the nanny

P 6,000,000 ( 3,000,000) ( 500,000) ( 1,000,000) P 1,500,000

Note: The testator is still intending to give 1/4 of the free portion to the nanny, but he can give the entire amount of free portion to the nanny. Problem 2-20 C Inheritance of each child (P5,000,000/6)

P 833,333

Problem 2-21 Gross taxable value for: 1. Capital gain tax

P 300,000

2. Donor’s tax

P 500,000

3. Business tax

P

4. Estate tax (P1,500,000 + P300,000) Problem 2-22 Cash in bank House and lot Investments in securities Total gross estate Less: Unpaid mortgage Existing loan Funeral expense Estate tax Hereditary estate Problem 2-23 Legitimate child – Mario (P1,200,000 x ½) Illegitimate child – Maria (P600,000 x ½) Surviving spouse (P600,000 x ½)

- 0 -

P1,800,000 P

100,000 5,000,000 400,000 P5,500,000

P 200,000 100,000 100,000 100,000

500,000 P5,000,000 P

600,000 300,000 300,000 P1,200,000

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BUSINESS AND TRANSFER TAXATION 6th Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

Chapter 2: TRANSFER TAXES AND BASIC SUCCESSION

Problem 2-24 With respect to legitime: Legitimate child (P4,200,000 – P200,000) x 50% Surviving spouse (P2,000,000 x ½)

Son P2,000,000

Wife P1,000,000

Remaining balance (divide based on the intention of the will) Legitimate child (P1,000,000 x ½) Surviving spouse (P1,000,000 x ½)

500,000 . P2,500,000

500,000 P1,500,000

Problem 2-25 Gross estate Less: Deduction Net estate before share of the surviving spouse Less: Share of the surviving spouse (P1,000,000 x 50%) Net estate before estate tax Less: Estate tax Net distributable estate

P2,000,000 1,000,000 P1,000,000 500,000 P 500,000 15,000 P 485,000

Estate Distribution – death of Sabel Fraction of share - intestate Distribution of inheritance Death of Jess Exclusive share when Sabel died Add: Share from distributable share Distributable estate Fraction of share - testate Distribution of inheritance

Dorado (child) 1/3 P161,667

Dorado (child) ¼ P165,417

Maya (child) 1/3 P161,667

Jess (husband) 1/3 P161,667

Maya (child) ¼ P165,417

Free Portion ½ P333,883

Total 1 P485,000 P 500,000 161,667 P 661,667 Total 1 P 661,667

Problem 2-26 Legitimate child 1

Fraction of share Amount of inheritance

1 P2,857,143

Legitimate child 2

Surviving spouse

Illegitimate child

1 P2,857,143

1 P2,857,143

½ P1,428,571

Total

3.5 P10,000,000

Note: The last will and testament is void because the presence of legitimate child eliminates the parents from the inheritance. In all cases, the legitime must not be impaired by the disposition through will. Problem 2-27 1. Computation of net distributable share Total gross estate (P10,000,000 + P20,000,000 + P30,000,000) Less: Ordinary deductions Net estate before share of surviving spouse Less: Share of surviving spouse (P57,500,000 x 50%) Net estate before standard deduction Less: Standard deduction Net taxable estate Multiplied by assumed estate tax rate Estate tax Net estate before standard deduction Less: Estate tax Net distributable estate

P60,000,000 2,500,000 P57,500,000 28,750,000 P28,750,000 1,000,000 P27,750,000 15% P 4,162,500 P28,750,000 4,162,500 P24,587,500

BUSINESS AND TRANSFER TAXATION 6th Edition (BY: VALENCIA & ROXAS) 10 SUGGESTED ANSWERS Chapter 2: TRANSFER TAXES AND BASIC SUCCESSION

2. Computation of the shares of the heirs Share of legitimate son (P24,587,500 x ½) Share of surviving spouse (P24,587,500 x ½)

P12,293,750 P12,293,750

Note: His mother and brother, as secondary heirs, are disqualified to share from the portion of the legitime due to the presence of a legitimate child. Hence, the will becomes void. Problem 2-28 1.

2.

Computation of net distributable estate: Gross estate (P4,000,000 + P1,000,000 + P200,000 + P5,000,000 + P3,000,000) Less: Ordinary deductions: Funeral expense P 100,000 Unpaid mortgage 200,000 Allowable deduction - Standard deduction Net taxable estate Less: Estate tax (P11,900,000 x 15%) Net estate after tax Add: Standard deduction Net distributable estate Distribution of net distributable estate: Testate succession Intestate succession Mixed succession

.

Christopher (son) P4,000,000 2,957,500 P6,957,500

Cristeta (daughter) P1,000,000 2,957,500 P3,957,500

P13,200,000 P 300,000 1,000,000

Crisistomo (driver) P 200,000 . P 200,000

1,300,000 P11,900,000 1,785,000 P10,115,000 1,000,000 P11,115,000

Total P 5,200,000 5,915,000 P 11,115,000