Estate Tax

ESTATE TAX I. Basic Concepts A. Succession – Civil Code, Article 774. 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. 1. Testamentary – Civil Code, Article 779. Testamentary succession is that which results from the designation of an heir, made in a will executed in the form prescribed by law. 2. Intestate – Civil Code, Article 960. Legal or intestate succession takes place: (1) If a person dies without a will, or with a void will, or one which has subsequently lost its validity; (2) When the will does not institute an heir to, or dispose of all the property belonging to the testator. In such case, legal succession shall take place only with respect to the property of which the testator has not disposed; (3) If the suspensive condition attached to the institution of heir does not happen or is not fulfilled, or if the heir dies before the testator, or repudiates the inheritance, there being no substitution, and no right of accretion takes place; (4) When the heir instituted is incapable of succeeding, except in cases provided in this Code. 3. Mixed – Civil Code, Article 780. Mixed succession is that effected partly by will and partly by operation of law. B. Decedent – Civil Code, Article 775. In this Title, "decedent" is 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. C. Estate – Civil Code, Article 776. The inheritance includes all the property, rights and obligations of a person which are not extinguished by his death. D. Heir, Devisees and Legatees – Civil Code, Article 782. An heir is a person called to the succession either by the provision of a will or by operation of law. Devisees and legatees are persons to whom gifts of real and personal property are respectively given by virtue of a will.

II. Applicable Law A. Sections 84 – 97, NIRC

III. Persons Subject to Estate Tax A. Resident Decedents (whether citizens or aliens) - the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated (Sec. 85, NIRC). B. Non-Resident Alien Decedents - in the case of a nonresident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate (Sec. 85, NIRC).

IV. Gross Estate Subject to Tax A. Composition of Gross Estate of a Resident Decedent and a Non-Resident Decedent Section 85. Gross Estate. - the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated: Provided, however, that in the case of a nonresident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate. Section 104. Definitions. - For purposes of this Title, the terms 'gross estate' and 'gifts' include real and personal property, whether tangible or intangible, or mixed, wherever situated: Provided, however, That where the decedent or donor was a nonresident alien at the time of his death or donation, as the case may be, his real and personal property so transferred but which are situated outside the Philippines shall not be included as part of his 'gross estate' or 'gross gift': Provided, further, That franchise which must be exercised in the Philippines; shares, obligations or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws; shares, obligations or bonds by any foreign corporation eighty-five percent (85%) of the business of which is located in the Philippines; shares, obligations or bonds issued by any foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines; shares or rights in any partnership, business or industry established in the Philippines, shall be considered as situated in the Philippines: Provided, still further, that no tax shall be collected under this Title in respect of intangible personal property: (a) if the decedent at the time of his death or the donor at the time of the donation was a citizen and resident of a foreign country which at the time of his death or donation did not impose a transfer tax of any character, in respect of intangible personal property of citizens of the Philippines not residing in that foreign country, or (b) if the laws of the foreign country of which the decedent or donor was a citizen and resident at the time of his death or donation allows a similar exemption from transfer or death taxes of every character or description in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country. The term 'deficiency' means: (a) the amount by which tax imposed by this Chapter exceeds the amount shown as the tax by the donor upon his return; but the amount so shown on the return shall first be increased by the amount previously assessed (or Collected without assessment) as a deficiency, and decreased by the amounts previously abated, refunded or otherwise repaid in respect of such tax, or (b) if no amount is shown as the tax by the donor, then the amount by which the tax exceeds the amounts previously assessed, (or collected without assessment) as a deficiency, but such amounts previously assessed, or collected without assessment, shall first be decreased by the amount previously abated, refunded or otherwise repaid in respect of such tax. B. Decedent’s Interest. - To the extent of the interest therein of the decedent at the time of his death; (Sec. 85 (A), NIRC). C. Transfers in contemplation of death. - To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after death, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from the property, or (2) 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. (Sec. 85 (B), NIRC).

1. Vidal de Roces vs Posadas, 58 Phil 108 Facts: Esperanza Tuazon by public document donated parcels of land situated in Manila to plaintiffs Vidal de Roces, etc. with their respective husbands, accepted them in the same public documents, which were duly recorded in the registry of deeds. The plaintiffs took possession of the said lands, received the fruits and obtained TCTs. The donor then died w/o any forced heir and in her will, she bequeathed to each of the donees the sum of P5,000. After the estate had been distributed among the instituted legatees and before delivery of their respective shares, the CIR ruled that the donees should pay inheritance tax. They thus paid under protest, contending that Art 1540 of the Revised Administrative Code (after deductions have been made, there shall be added to the resulting amount the value of all gifts / advances made by the predecessor to any of those who after his death prove to be heirs, devisees, legatees or donees mortis causa) does NOT include donations inter vivos. If it does, it is null and void as it violates uniformity of taxation. Issue: Whether or Not donations inter vivos is included in Sec. 1540 of the Administrative Code Held: No. The gifts referred to in section 1540 of the Revised Administration Code are, obviously, those donations inter vivos that take effect immediately or during the lifetime of the donor but are made in consideration or in contemplation of death. Gifts inter vivos, the transmission of which is NOT MADE IN CONTEMPLATION OF THE DONOR'S DEATH should not be understood as included within the said legal provision for the reason that it would amount to imposing a direct tax on property and not on the transmission. This act does not come within the scope of the provisions contained in Article XI of Chapter 40 of the Administrative Code which deals expressly with the tax on inheritances, legacies and other acquisitions mortis causa. 2. Dizon vs Posadas, 57 Phil 465 Facts: Dizon was assessed to pay P2k+ as inheritance tax from the properties he received from his father prior to his father’s death through a deed of gift inter vivos. Dizon alleged that the tax was illegally collected because he received the property prior to the death of his father, through a deed of gift inter vivos which was duly accepted and registered before the death of his father making the property not an inheritance. He further states that he was not trying to evade the inheritance tax that is imposed on heirs when his father donated all his properties to him. Thus, no inheritance tax under Act No. 2601 (Chapter 40 of the Administrative Code), being the inheritance tax statute, should be imposed upon the said properties.The Court, however, ruled in favor of Posadas, hence, this appeal. Issue: Whether or Not the inheritance tax was correctly imposed upon the properties transferred through donation inter vivos

Held: YES. Section 1540 of the Administrative Code states that after deductions have been made, there shall be added to the resulting amount the value of all gifts or advances made by the predecessor to any of those who, after his death, shall prove to be his heirs, devises, legatees, or donees mortis causa. In this case facts conveyance was made by the donor five days before his death and accepted by the donee one day before the donor's death. Obviously, this was fraudulently made for the purpose of evading the inheritance tax. As to Dizon’s contention that the he is not an heir because there is no property to inherit anymore because he already received the properties of the father through a donation inter vivos, SC said that even if they don’t know w/n the father left a will, Dizon should NOT be deprived of his share of the inheritance because the Civil Code confers upon him the status of a forced heir. Thus, an advance made by the decedent to Dizon is subject to tax. As to Dizon’s contention that Section 1540 is unconstitutional in taxing gifts or donations because the act would then embrace two subjects, the Court states that: When the law says all gifts, it doubtless refers to gifts inter vivos, and not mortis causa. Both the letter and the spirit of the law leave no room for any other interpretation. Such, clearly, is the tenor of the language which refers to donations that took effect before the donor's death, and not to mortis causa donations, which can only be made with the formalities of a will, and can only take effect after the donor's death. The law presumes that such gifts have been made in ancitipation of inheritance in order to EVADE tax. Thus, to prevent this, they are added to the resulting amount." D. Revocable Transfer. (1) To the extent of any interest therein, of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth) by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power (in whatever capacity exerciseable) by the decedent alone or by the decedent in conjunction with any other person (without regard to when or from what source the decedent acquired such power), to alter, amend, revoke, or terminate, or where any such power is relinquished in contemplation of the decedent's death. (2) For the purpose of this Subsection, the power to alter, amend or revoke shall be considered to exist on the date of the decedent's death even though the exercise of the power is subject to a precedent giving of notice or even though the alteration, amendment or revocation takes effect only on the expiration of a stated period after the exercise of the power, whether or not on or before the date of the decedent's death notice has been given or the power has been exercised. In such cases, proper adjustment shall be made representing the interests which would have been excluded from the power if the decedent had lived, and for such purpose if the notice has not been given or the power has not been exercised on or before the date of hisdeath, such notice shall be considered to have been given, or the power exercised, on the date of his death. (Sec. 85 (C), NIRC). E. Property Passing Under General Power of Appointment. - To the extent of any property passing under a general power of appointment exercised by the decedent: (1) by will, or (2) by deed executed in contemplation of, or intended to take effect in possession or enjoyment at, or after his death, or (3) by deed under which he has retained for his life or any period not ascertainable without reference to his death or for any period which does not in fact end before his death (a) the possession or enjoyment of, or the right to the income from, the property, or (b) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the

property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money's worth (Sec. 85 (D), NIRC).

F. Proceeds of Life Insurance. - To the extent of the amount receivable by the estate of the deceased, his executor, or administrator, as insurance under policies taken out by the decedent upon his own life, irrespective of whether or not the insured retained the power of revocation, or to the extent of the amount receivable by any beneficiary designated in the policy of insurance, except when it is expressly stipulated that the designation of the beneficiary is irrevocable (Sec. 85 (E), NIRC). 1. BPI vs. Posadas, 56 Phil 215 Facts: BPI, as administrator of the estate of deceased Adolphe Schuetze, appealed to CFI Manila absolving defendant, Collector of Internal Revenue, from the complaint filed against him in recovering the inheritance tax amounting to P1209 paid by the plaintiff, Rosario Gelano Vda de Schuetze, under protest, and sum of P20,150 representing the proceeds of the insurance policy of the deceased. Rosario and Adolphe were married in January 1914. The wife was actually residing and living in Germany when Adolphe died in December 1927. The latter while in Germany, executed a will in March 1926, pursuant with its law wherein plaintiff was named his universal heir. The deceased possessed not only real property situated in the Philippines but also personal property consisting of shares of stocks in 19 domestic corporations. Included in the personal property is a life insurance policy issued at Manila on January 1913 for the sum of $10,000 by the Sun Life Assurance Company of Canada, Manila Branch. In the insurance policy, the estate of the deceased was named the beneficiary without any qualification. Rosario is the sole and only heir of the deceased. BPI, as administrator of the decedent’s estate and attorney in fact of the plaintiff, having been demanded by Posadas to pay the inheritance tax, paid under protest. Notwithstanding various demands made by plaintiff, Posadas refused to refund such amount. Issue: Whether or Not the plaintiff is entitled to the proceeds of the insurance. Held: SC ruled that (1)the proceeds of a life-insurance policy payable to the insured's estate, on which the premiums were paid by the conjugal partnership, constitute community property, and belong one-half to the husband and the other half to the wife, exclusively; (2)if the premiums were paid partly with paraphernal and partly conjugal funds, the proceeds are likewise in like proportion paraphernal in part and conjugal in part; and (3)the proceeds of a life-insurance policy payable to the insured's estate as the beneficiary, if delivered to the testamentary administrator of the former as part of the assets of said estate under probate administration, are subject to the inheritance tax according to the law on the matter, if they belong to the assured exclusively, and it is immaterial that the insured was domiciled in these Islands or outside. Hence, the defendant was ordered to return to the plaintiff one-half of the tax collected upon the amount of P20,150, being the proceeds of the insurance policy on the life of the late Adolphe Oscar Schuetze, after deducting the proportional part corresponding to the first premium.

G. Prior Interests. - Except as otherwise specifically provided therein, Subsections (B), (C) and (E) of this Section shall apply to the transfers, trusts, estates, interests, rights, powers and relinquishment of powers, as severally enumerated and described therein, whether made, created, arising, existing, exercised or relinquished before or after the effectivity of this Code (Sec. 85 (F), NIRC). H. Transfers of Insufficient Consideration. - If any one of the transfers, trusts, interests, rights or powers enumerated and described in Subsections (B), (C) and (D) of this Section is made, created, exercised or relinquished for a consideration in money or money's worth, but is not a bona fide sale for an adequate and full consideration in money or money's worth, there shall be included in the gross estate only the excess of the fair market value, at the time of death, of the property otherwise to be included on account of such transaction, over the value of the consideration received therefor by the decedent (Sec. 85 (G), NIRC). I. Capital of the Surviving Spouse. - The capital of the surviving spouse of a decedent shall not, for the purpose of this Chapter, be deemed a part of his or her gross estate (Sec. 85 (H), NIRC). 1. Property Relationship between spouses (Family Code) i. Absolute Community Art. 91. Unless otherwise provided in this Chapter or in the marriage settlements, the community property shall consist of all the property owned by the spouses at the time of the celebration of the marriage or acquired thereafter. Art. 92. The following shall be excluded from the community property: (1) Property acquired during the marriage by gratuitous title by either spouse, and the fruits as well as the income thereof, if any, unless it is expressly provided by the donor, testator or grantor that they shall form part of the community property; (2) Property for personal and exclusive use of either spouse. However, jewelry shall form part of the community property; (3) Property acquired before the marriage by either spouse who has legitimate descendants by a former marriage, and the fruits as well as the income, if any, of such property. ii. Conjugal Partnership of Gains Art. 105. In case the future spouses agree in the marriage settlements that the regime of conjugal partnership gains shall govern their property relations during marriage, the provisions in this Chapter shall be of supplementary application. The provisions of this Chapter shall also apply to conjugal partnerships of gains already established between spouses before the effectivity of this Code, without prejudice to vested rights already acquired in accordance with the Civil Code or other laws, as provided in Article 256. Art. 106. Under the regime of conjugal partnership of gains, the husband and wife place in a common fund the proceeds, products, fruits and income from their separate properties and those acquired by either or both spouses through their efforts or by chance, and, upon dissolution of the marriage or of the partnership, the net gains or benefits obtained by either or both spouses shall be divided equally between them, unless otherwise agreed in the marriage settlements. Art. 107. The rules provided in Articles 88 and 89 shall also apply to conjugal partnership of gains.

Art. 108. The conjugal partnership shall be governed by the rules on the contract of partnership in all that is not in conflict with what is expressly determined in this Chapter or by the spouses in their marriage settlements.

Art. 109. The following shall be the exclusive property of each spouse: (1) That which is brought to the marriage as his or her own; (2) That which each acquires during the marriage by gratuitous title; (3) That which is acquired by right of redemption, by barter or by exchange with property belonging to only one of the spouses; and (4) That which is purchased with exclusive money of the wife or of the husband. Art. 110. The spouses retain the ownership, possession, administration and enjoyment of their exclusive properties. Either spouse may, during the marriage, transfer the administration of his or her exclusive property to the other by means of a public instrument, which shall be recorded in the registry of property of the place the property is located. Art. 111. A spouse of age may mortgage, encumber, alienate or otherwise dispose of his or her exclusive property, without the consent of the other spouse, and appear alone in court to litigate with regard to the same. Art. 112. The alienation of any exclusive property of a spouse administered by the other automatically terminates the administration over such property and the proceeds of the alienation shall be turned over to the owner-spouse. Art. 113. Property donated or left by will to the spouses, jointly and with designation of determinate shares, shall pertain to the donee-spouses as his or her own exclusive property, and in the absence of designation, share and share alike, without prejudice to the right of accretion when proper. Art. 114. If the donations are onerous, the amount of the charges shall be borne by the exclusive property of the donee spouse, whenever they have been advanced by the conjugal partnership of gains. Art. 115. Retirement benefits, pensions, annuities, gratuities, usufructs and similar benefits shall be governed by the rules on gratuitous or onerous acquisitions as may be proper in each case. Art. 116. All property acquired during the marriage, whether the acquisition appears to have been made, contracted or registered in the name of one or both spouses, is presumed to be conjugal unless the contrary is proved. Art. 117. The following are conjugal partnership properties: (1) Those acquired by onerous title during the marriage at the expense of the common fund, whether the acquisition be for the partnership, or for only one of the spouses; (2) Those obtained from the labor, industry, work or profession of either or both of the spouses; (3) The fruits, natural, industrial, or civil, due or received during the marriage from the common property, as well as the net fruits from the exclusive property of each spouse; (4) The share of either spouse in the hidden treasure which the law awards to the finder or owner of the property where the treasure is found;

(5) Those acquired through occupation such as fishing or hunting; (6) Livestock existing upon the dissolution of the partnership in excess of the number of each kind brought to the marriage by either spouse; and (7) Those which are acquired by chance, such as winnings from gambling or betting. However, losses therefrom shall be borne exclusively by the loser-spouse. Art. 118. Property bought on installments paid partly from exclusive funds of either or both spouses and partly from conjugal funds belongs to the buyer or buyers if full ownership was vested before the marriage and to the conjugal partnership if such ownership was vested during the marriage. In either case, any amount advanced by the partnership or by either or both spouses shall be reimbursed by the owner or owners upon liquidation of the partnership. Art. 119. Whenever an amount or credit payable within a period of time belongs to one of the spouses, the sums which may be collected during the marriage in partial payments or by installments on the principal shall be the exclusive property of the spouse. However, interests falling due during the marriage on the principal shall belong to the conjugal partnership. Art. 120. The ownership of improvements, whether for utility or adornment, made on the separate property of the spouses at the expense of the partnership or through the acts or efforts of either or both spouses shall pertain to the conjugal partnership, or to the original owner-spouse, subject to the following rules: When the cost of the improvement made by the conjugal partnership and any resulting increase in value are more than the value of the property at the time of the improvement, the entire property of one of the spouses shall belong to the conjugal partnership, subject to reimbursement of the value of the property of the owner-spouse at the time of the improvement; otherwise, said property shall be retained in ownership by the owner-spouse, likewise subject to reimbursement of the cost of the improvement. In either case, the ownership of the entire property shall be vested upon the reimbursement, which shall be made at the time of the liquidation of the conjugal partnership. iii. Complete Separation of Property Art. 143. Should the future spouses agree in the marriage settlements that their property relations during marriage shall be governed by the regime of separation of property, the provisions of this Chapter shall be suppletory. Art. 144. Separation of property may refer to present or future property or both. It may be total or partial. In the latter case, the property not agreed upon as separate shall pertain to the absolute community. Art. 145. Each spouse shall own, dispose of, possess, administer and enjoy his or her own separate estate, without need of the consent of the other. To each spouse shall belong all earnings from his or her profession, business or industry and all fruits, natural, industrial or civil, due or received during the marriage from his or her separate property. Art. 146. Both spouses shall bear the family expenses in proportion to their income, or, in case of insufficiency or default thereof, to the current market value of their separate properties.chan robles virtual law library The liabilities of the spouses to creditors for family expenses shall, however, be solidary. iv. Marriage Settlement v. Property Regime of Union Without Marriage

Art. 143. Should the future spouses agree in the marriage settlements that their property relations during marriage shall be governed by the regime of separation of property, the provisions of this Chapter shall be suppletory. Art. 144. Separation of property may refer to present or future property or both. It may be total or partial. In the latter case, the property not agreed upon as separate shall pertain to the absolute community. Art. 145. Each spouse shall own, dispose of, possess, administer and enjoy his or her own separate estate, without need of the consent of the other. To each spouse shall belong all earnings from his or her profession, business or industry and all fruits, natural, industrial or civil, due or received during the marriage from his or her separate property. Art. 146. Both spouses shall bear the family expenses in proportion to their income, or, in case of insufficiency or default thereof, to the current market value of their separate properties.chan robles virtual law library The liabilities of the spouses to creditors for family expenses shall, however, be solidary. vi. Collector vs Fisher, 1 SCRA 93 Facts: Walter G. Stevenson was born in the Philippines of British parents, married in Manila to another British subject, Beatrice. He died in 1951 in California where he and his wife moved to. In his will, he instituted Beatrice as his sole heiress to certain real and personal properties, among which are 210,000 shares of stocks in Mindanao Mother Lode Mines (Mines). Ian Murray Statt (Statt), the appointed ancillary administrator of his estate filed an estate and inheritance tax return. He made a preliminary return to secure the waiver of the CIR on the inheritance of the Mines shares of stock. In 1952, Beatrice assigned all her rights and interests in the estate to the spouses Fisher. Statt filed an amended estate and inheritance tax return claiming ADDITIONAL EXEMPTIONS, one of which is the estate and inheritance tax on the Mines’ shares of stock pursuant to a reciprocity proviso in the NIRC, hence, warranting a refund from what he initially paid. The collector denied the claim. He then filed in the CFI of Manila for the said amount. CFI ruled that: (a) the ½ share of Beatrice should be deducted from the net estate of Walter, (b) the intangible personal property belonging to the estate of Walter is exempt from inheritance tax pursuant to the reciprocity proviso in NIRC. Issue: Whether or Not the estate can avail itself of the reciprocity proviso in the NIRC granting exemption from the payment of taxes for the Mines shares of stock Held: No. Reciprocity must be total. If any of the two states collects or imposes or does not exempt any transfer, death, legacy or succession tax of any character, the reciprocity does not work. In the Philippines, upon the death of any citizen or resident, or non-resident with properties, there are imposed upon his estate, both an estate and an inheritance tax. But, under the laws of California, only inheritance tax is imposed. Also, although the Federal Internal Revenue Code imposes an estate tax, it does not grant exemption on the basis of reciprocity. Thus, a Filipino citizen shall always be at a disadvantage. This is not what the legislators intended. SPECIFICALLY:

Section122 of the NIRC provides that “No tax shall be collected under this Title in respect of intangible personal property: (a) if the decedent at the time of his death was a resident of a foreign country which at the time of his death did not impose a transfer of tax or death tax of any character in respect of intangible personal property of citizens of the Philippines not residing in that foreign country, or (b) if the laws of the foreign country of which the decedent was a resident at the time of his death allow a similar exemption from transfer taxes or death taxes of every character in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country." On the other hand, Section 13851 of the California Inheritance Tax Law provides that intangible personal property is exempt from tax if the decedent at the time of his death was a resident of a territory or another State of the United States or of a foreign state or country which then imposed a legacy, succession, or death tax in respect to intangible personal property of its own residents, but either:. (a) Did not impose a legacy, succession, or death tax of any character in respect to intangible personal property of residents of this State, or (b) Had in its laws a reciprocal provision under which intangible personal property of a nonresident was exempt from legacy, succession, or death taxes of every character if the Territory or other State of the United States or foreign state or country in which the non-resident resided allowed a similar exemption in respect to intangible personal property of residents of the Territory or State of the United States or foreign state or country of residence of the decedent."

V. Deductions A. Citizen or Resident - (Sec. 86), NIRC). 1. Expenses, Loses, Indebtedness and Taxes i. Funeral Expenses - For actual funeral expenses or in an amount equal to five percent (5%) of the gross estate, whichever is lower, but in no case to exceed Two hundred thousand pesos (P200,000); (Sec. 86 (A)(1)(a), NIRC). ii. Judicial Expenses a. For judicial expenses of the testamentary or intestate proceedings; (Sec. 86 (A)(1)(b), NIRC). b. CIR vs CA, CTA and Pajonar, G.R. No. 140944 Facts: Pedro Pajonar, a member of the Philippine Scout during WWII was a part of the infamous Death March by reason of which he suffered shock and became insane. His sister Josefina became the guardian over his person, while his property was placed under the guardianship of the PNB by the RTC of Dumaguete. After his death, PNB filed an accounting of his property under guardianship valued at 3M in Special Proceedings. However, PNB did NOT file and estate tax return, instead it advised his heirs to execute an extrajudicial settlement and to pay taxes on the estate. Pursuant to BIR’s assessment, the estate of Pedro paid taxes in the amount of 2k. Josefina then filed a petition w/ RTC of Dumaguete for the issuance in her favor of letters of administration of the estate of her brother.

RTC appointed Josefina as regular administratrix of Pedro’s estate. The BIR then made a 2nd amendment for deficiency estate tax, w/c Josefina paid under protest. Without waiting for her protest to be resolved by the BIR, Josefina then filed a petition for review w/ the CTA praying for the refund of 1.5M OR the alternative 840k as erroneously paid estate tax. CTA ordered CIR to refund Josefina the amount of 252k, representing erroneously paid estate tax. Among the deductions from the gross estate allowed by CTA were the amounts of 60K representing notarial fee for Extrajudicial Settlement plus atty’s fees for guardianship proceedings. Issue: Whether or Not the notarial fee and attorney’s fees paid for the EJ Settlement may be allowed as deductions fro the gross estate of decedent in order to arrive at the value of the net estate. Held: YES, they are allowed deductions. ATTY’s FEES: Under American Jurisprudence, expenses incurred in the EJ Settlement of the estate should be allowed as deduction from the gross estate. “There is not requirement of formal administration. It is sufficient that the expense be a NECESSARY contribution toward the settlement to the case.” Atty’s fees in order to be deductible from the gross estate must be essential and related to the settlement of estate. In this case, the atty’s fees paid for guardianship proceeding was necessary for the distribution of the property of the late Pedro Pajonar to his rightful heirs. Thus, it was deductible. Necessary expenses of administration are such expenses as are entailed for the preservation and productivity of the estate and for it’s management for the purposes of liquidation, payment of debts and distribution of the residue among the persons entitled. NOTARIAL FEES: Although tax code specifies “judicial expenses of the testamentary or intestate proceedings,” there is no reason why expenses incurred in the administration and settlement of an estate in EJ proceedings should not be allowed. However, deduction is limited to such administration expenses as are actually and necessarily incurred in the collection of the assets of the estate, payment of debts, and distribution of the remainder among those entitled thereto. Such expenses may include executor’s or administrator’s fees, atty’s fees, court fees and charges, appraiser’s fees, clerk hire, costs of preserving and distributing the estate and storing or maintaining it, brokerage fees or commissions for selling or disposing of the estate. It is clear that the EJ settlement was for the purpose of payment of taxes and the distribution of the estate to the heirs. The execution of EJ settlement necessitated the notarization of the same. Thus the 60k for notarial fee for the EJ Settlement should be allowed as a deduction from the gross estate. Judicial expenses are expenses for administration. Administration expenses are deductible from the gross estate. Expenses must be essential to the proper settlement of the estate. iii. Claims Against the Estate a. For claims against the estate: Provided, That at the time the indebtedness was incurred the debt instrument was duly notarized and, if the loan was contracted within three (3) years before the death of the decedent, the administrator or executor shall submit a statement showing the disposition of the proceeds of the loan; (Sec. 86 (A)(1)(c), NIRC). b. Dizon vs CTA and CIR, G.R. No. 140944

Facts: Jose P. Fernandez died in November 7, 1987. Thereafter, a petition for the probate of his will was filed. The probate court appointed Atty. Rafael Arsenio P. Dizon as administrator of the Estate of Jose Fernandez. An estate tax return was filed later on which showed ZERO estate tax liability. BIR thereafter issued a deficiency estate tax assessment, demanding payment of Php 66.97 million as deficiency estate tax. This was subsequently reduced by CTA to Php 37.42 million. The CA affirmed the CTA’s ruling, hence, the instant petition. The petitioner claims that in as much as the valid claims of creditors against the Estate are in excess of the gross estate, no estate tax was due. On the other hand, respondents argue that since the claims of the Estate’s creditors have been condoned, such claims may no longer be deducted from the gross estate of the decedent. Issue: Whether the actual claims of creditors may be fully allowed as deductions from the gross estate of Jose despite the fact that the said claims were reduced or condoned through compromise agreements entered into by the Estate with its creditors Held: YES. Following the US Supreme Court’s ruling in Ithaca Trust Co. v. United States, the Court held that post-death developments are not material in determining the amount of deduction. This is because estate tax is a tax imposed on the act of transferring property by will or intestacy and, because the act on which the tax is levied occurs at a discrete time, i.e., the instance of death, the net value of the property transferred should be ascertained, as nearly as possible, as of the that time. This is the date-of-death valuation rule. The Court, in adopting the date-of-death valuation principle, explained that: First. There is no law, nor do we discern any legislative intent in our tax laws, which disregards the date-of-death valuation principle and particularly provides that post-death developments must be considered in determining the net value of the estate. It bears emphasis that tax burdens are not to be imposed, nor presumed to be imposed, beyond what the statute expressly and clearly imports, tax statutes being construed strictissimi juris against the government. Second. Such construction finds relevance and consistency in our Rules on Special Proceedings wherein the term "claims" required to be presented against a decedent's estate is generally construed to mean debts or demands of a pecuniary nature which could have been enforced against the deceased in his lifetime, or liability contracted by the deceased before his death. Therefore, the claims existing at the time of death are significant to, and should be made the basis of, the determination of allowable deductions. iv. Claims of Deceased Against Insolvent Persons a. For claims of the deceased against insolvent persons where the value of decedent's interest therein is included in the value of the gross estate; (Sec. 86 (A)(1)(d), NIRC). v. Unpaid Mortgages, taxes, casualty losses a. For unpaid mortgages upon, or any indebtedness in respect to, property where the value of decedent's interest therein, undiminished by such mortgage or indebtedness, is included

in the value of the gross estate, but not including any income tax upon income received after the death of the decedent, or property taxes not accrued before his death, or any estate tax. The deduction herein allowed in the case of claims against the estate, unpaid mortgages or any indebtedness shall, when founded upon a promise or agreement, be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money's worth. There shall also be deducted losses incurred during the settlement of the estate arising from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement, when such losses are not compensated for by insurance or otherwise, and if at the time of the filing of the return such losses have not been claimed as a deduction for the income tax purposes in an income tax return, and provided that such losses were incurred not later than the last day for the payment of the estate tax as prescribed in Subsection (A) of Section 91. (Sec. 86 (A)(1)(e), NIRC). 2. Property Previously Taxed (Vanishing Deductions) a. Property Previously Taxed. - An amount equal to the value specified below of any property forming a part of the gross estate situated in the Philippines of any person who died within five (5) years prior to the death of the decedent, or transferred to the decedent by gift within five (5) years prior to his death, where such property can be identified as having been received by the decedent from the donor by gift, or from such prior decedent by gift, bequest, devise or inheritance, or which can be identified as having been acquired in exchange for property so received: One hundred percent (100%) of the value, if the prior decedent died within one (1) year prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; Eighty percent (80%) of the value, if the prior decedent died more than one (1) year but not more than two (2) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; Sixty percent (60%) of the value, if the prior decedent died more than two (2) years but not more than three (3) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; Forty percent (40%) of the value, if the prior decedent died more than three (3) years but not more than four (4) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; Twenty percent (20%) of the value, if the prior decedent died more than four (4) years but not more than five (5) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; These deductions shall be allowed only where a donor's tax or estate tax imposed under this Title was finally determined and paid by or on behalf of such donor, or the estate of such prior decedent, as the case may be, and only in the amount finally determined as the value of such property in determining the value of the gift, or the gross estate of such prior decedent, and only to the extent that the value of such property is included in the decedent's gross estate, and only if in determining the value of the estate of the prior decedent, no deduction was allowable under paragraph (2) in respect of the property or properties given in exchange therefor. Where a deduction was allowed of any mortgage or other lien in determining the donor's tax, or the estate tax of the prior decedent, which was paid in whole or in part prior to the decedent's death, then the deduction allowable under said Subsection shall be reduced by the amount so paid. Such deduction allowable shall be reduced by an amount which bears the same ratio to the amounts allowed as deductions under paragraphs (1) and (3) of this Subsection as the amount otherwise deductible under said paragraph (2) bears to the value of the decedent's estate. Where the property referred to consists of two or more items, the aggregate value of such items shall be used for the purpose of computing the deduction. (Sec. 86 (A)(2), NIRC).

b. Estate of Fidel Reyes and Estate of Teresita Reyes vs CIR, CTA Case no 6737

3. Transfers for Public Use. - The amount of all the bequests, legacies, devises or transfers to or for the use of the Government of the Republic of the Philippines, or any political subdivision thereof, for exclusively public purposes. (Sec. 86 (A)(3), NIRC). 4. The Family Home. - An amount equivalent to the current fair market value of the decedent's family home: Provided, however, That if the said current fair market value exceeds One million pesos (P1,000,000), the excess shall be subject to estate tax. As a sine qua non condition for the exemption or deduction, said family home must have been the decedent's family home as certified by the barangay captain of the locality. (Sec. 86 (A)(4), NIRC). 5. Standard Deduction. - An amount equivalent to One million pesos (P1,000,000). (Sec. 86 (A) (5), NIRC). 6. Medical Expenses. - Medical Expenses incurred by the decedent within one (1) year prior to his death which shall be duly substantiated with receipts: Provided, That in no case shall the deductible medical expenses exceed Five Hundred Thousand Pesos (P500,000). (Sec. 86 (A) (6), NIRC). 7. Amount Received by Heirs Under Republic Act No. 4917. - Any amount received by the heirs from the decedent - employee as a consequence of the death of the decedent-employee in accordance with Republic Act No. 4917: Provided, That such amount is included in the gross estate of the decedent. (Sec. 86 (A)(7), NIRC). B. Non-Resident Deductions Allowed to Nonresident Estates. - In the case of a nonresident not a citizen of the Philippines, by deducting from the value of that part of his gross estate which at the time of his death is situated in the Philippines: (1) Expenses, Losses, Indebtedness and Taxes. - That proportion of the deductions specified in paragraph (1) of Subsection (A) of this Section which the value of such part bears to the value of his entire gross estate wherever situated; (Sec. 86 (B)(1), NIRC). (2) Property Previously Taxed. - An amount equal to the value specified below of any property forming part of the gross estate situated in the Philippines of any person who died within five (5) years prior to the death of the decedent, or transferred to the decedent by gift within five (5) years prior to his death, where such property can be identified as having been received by the decedent from the donor by gift, or from such prior decedent by gift, bequest, devise or inheritance, or which can be identified as having been acquired in exchange for property so received: One hundred percent (100%) of the value if the prior decedent died within one (1) year prior to the death of the decedent, or if the property was transferred to him by gift, within the same period prior to his death; Eighty percent (80%) of the value, if the prior decedent died more than one (1) year but not more than two (2) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; Sixty percent (60%) of the value, if the prior decedent died more than two (2) years but not more than three (3) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death;

Forty percent (40%) of the value, if the prior decedent died more than three (3) years but not more than four (4) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; and Twenty percent (20%) of the value, if the prior decedent died more than four (4) years but not more than five (5) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death. These deductions shall be allowed only where a donor's tax, or estate tax imposed under this Title is finally determined and paid by or on behalf of such donor, or the estate of such prior decedent, as the case may be, and only in the amount finally determined as the value of such property in determining the value of the gift, or the gross estate of such prior decedent, and only to the extent that the value of such property is included in that part of the decedent's gross estate which at the time of his death is situated in the Philippines; and only if, in determining the value of the net estate of the prior decedent, no deduction is allowable under paragraph (2) of Subsection (B) of this Section, in respect of the property or properties given in exchange therefore. Where a deduction was allowed of any mortgage or other lien in determining the donor's tax, or the estate tax of the prior decedent, which was paid in whole or in part prior to the decedent's death, then the deduction allowable under said paragraph shall be reduced by the amount so paid. Such deduction allowable shall be reduced by an amount which bears the same ratio to the amounts allowed as deductions under paragraphs (1) and (3) of this Subsection as the amount otherwise deductible under paragraph (2) bears to the value of that part of the decedent's gross estate which at the time of his death is situated in the Philippines. Where the property referred to consists of two (2) or more items, the aggregate value of such items shall be used for the purpose of computing the deduction. (Sec. 86 (B)(2), NIRC). (3) Transfers for Public Use. - The amount of all bequests, legacies, devises or transfers to or for the use of the Government of the Republic of the Philippines or any political subdivision thereof, for exclusively public purposes. (Sec. 86 (B)(3), NIRC). (4) Share in the Conjugal Property. - the net share of the surviving spouse in the conjugal partnership property as diminished by the obligations properly chargeable to such property shall, for the purpose of this Section, be deducted from the net estate of the decedent. (Sec. 86 (C), NIRC). (5) Miscellaneous Provisions. - No deduction shall be allowed in the case of a nonresident not a citizen of the Philippines, unless the executor, administrator, or anyone of the heirs, as the case may be, includes in the return required to be filed under Section 90 the value at the time of his death of that part of the gross estate of the nonresident not situated in the Philippines. (Sec. 86 (D), NIRC). C. Tax Credit for Estate Taxes Paid to Foreign Country (1) In General. - The tax imposed by this Title shall be credited with the amounts of any estate tax imposed by the authority of a foreign country. (2) Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each of the following limitations: (a) The amount of the credit in respect to the tax paid to any country shall not exceed the same proportion of the tax against which such credit is taken, which the decedent's net estate situated within such country taxable under this Title bears to his entir net estate; and

(b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the decedent's net estate situated outside the Philippines taxable under this Title bears to his entire net estate. (Sec. 86 (E), NIRC).

VI. Valuation A. Section 88. Determination of the Value of the Estate. (A) Usufruct. - To determine the value of the right of usufruct, use or habitation, as well as that of annuity, there shall be taken into account the probable life of the beneficiary in accordance with the latest Basic Standard Mortality Table, to be approved by the Secretary of Finance, upon recommendation of the Insurance Commissioner. (B) Properties. - The estate shall be appraised at its fair market value as of the time of death. However, the appraised value of real property as of the time of death shall be, whichever is higher of (1) The fair market value as determined by the Commissioner, or (2) The fair market value as shown in the schedule of values fixed by the Provincial and City Assessors. B. Lorenzo vs Posadas, 64 Phil 353 Facts: Thomas Hanley died in 1922 in Zamboanga leaving a will w/c provided that: -

Any money left be given to nephew Matthew All real estate shall not be sold or disposed of 10 years after his death. It shall be managed by the executors. The proceeds shall be given to nephew Matthew in Ireland to be used only for the education of Hanley’s brother's children and their descendants. 10 years after Thomas’ death, his property be given to Matthew to be disposed of in the way he thinks most advantageous In 1924, the CFI appointed an administrator, Moore, eventually replaced by Lorenzo (after Moore resigned). CIR assessed the estate inheritance taxes from the time of Thomas’ death including penalties for deliquency in payment (P2k+). CIR filed a motion before the CFI praying that the Lorenzo be ordered to pay the said amount. The motion was granted. Lorenzo paid under protest and asked for a refund. CIR refused to refund. Issues: (a) When does the inheritance tax accrue and when must it be satisfied? UPON DEATH Lorenzo asserts that article 657 of the Civil Code (“the rights to the succession of a person are transmitted from the moment of his death”) operates only in so far as forced heirs are concerned. HOWEVER, there is no distinction between different classes of heirs. The Administrative Code imposes the tax upon the transmission of property of a decedent, made effective by his death. An excise or privilege tax imposed on the right to succeed to, receive, or take property by or under a will or the intestacy law, or deed, grant, or gift to become operative at or after death. The property belongs to the heirs at the moment of the death of the ancestor as completely as if the ancestor had executed and delivered to them a deed for the same before his death.

Since Thomas Hanley died on May 27, 1922, the inheritance tax accrued as of the date. However, it does not follow that the obligation to pay the tax arose as of the date. The time for the payment on inheritance tax is fixed by the Revised Administrative Code w/c provides that the payment must be made before entrance into possession of the property of the fideicommissary or cestui que trust. Thus, the tax should have been paid before the delivery of the properties to Moore as trustee in 1924. (b) Should the inheritance tax be computed on the basis of the value of the estate at the time of the testator's death, or on its value ten years later? AT THE TIME OF DEATH Plaintiff contends that the estate of Thomas Hanley could not legally pass to Matthew until after the expiration of 10 years from the death of the testator in 1922 and the inheritance tax should be based on the value of the estate in 1932. Upon the death of the decedent, succession takes place and the right of the estate to tax vests instantly. The tax should be measured by the value of the estate as it stood at the time of the decedent's death, regardless of any subsequent contingency value of any subsequent increase or decrease in value, or the postponement of the actual possession or enjoyment of the estate by the beneficiary. (c) In determining the net value of the estate subject to tax, is it proper to deduct the compensation due to trustees? NO A trustee, no doubt, is entitled to receive a fair compensation for his services. However, it does not follow that the compensation due him may lawfully be deducted in arriving at the net value of the estate subject to tax. First, There is no statute requiring trustees' commissions to be deducted in determining the net value of the estate subject to inheritance tax. Second, though a testamentary trust has been created, the testator intended that the duties of his executors and trustees should be separated. (d) What law governs the case at bar? Should the provisions of Act No. 3606 favorable to the tax-payer be given retroactive effect? NO The law at the time was section 1544 of the Revised Administrative Code, as amended by Act No. 3031, which took effect on March 9, 1922. Inheritance taxation is governed by the statute in force at the time of the death of the decedent . A statute should be considered as prospective in its operation, whether it enacts, amends, or repeals an inheritance tax, unless the language of the statute clearly demands or expresses that it shall have a retroactive effect.

VII. Exemption of Certain Acquisitions and Transmissions A. Section 87. Exemption of Certain Acquisitions and Transmissions. - The following shall not be taxed: (A) The merger of usufruct in the owner of the naked title; (B) The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommissary; (C) The transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance with the desire of the predecessor; and (D) All bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of the net income of which insures to the benefit of any individual:

Provided, however, That not more than thirty percent (30%) of the said bequests, devises, legacies or transfers shall be used by such institutions for administration purposes.

VIII. Administrative Requirements A. Section 89. Notice of Death to be Filed. - In all cases of transfers subject to tax, or where, though exempt from tax, the gross value of the estate exceeds Twenty thousand pesos (P20,000), the executor, administrator or any of the legal heirs, as the case may be, within two (2) months after the decedent's death, or within a like period after qualifying as such executor or administrator, shall give a written notice thereof to the Commissioner. 1. Estate of the Late Juliana Diez Vda. De Gabriel vs CIR, G.R. No. 155541 Facts: During the lifetime of the decedent Juliana vda. De Gabriel, her business affairs were managed by the Philippine Trust Company (PhilTrust). The decedent died on April 3, 1979 but two days after her death, PhilTrust filed her income tax return for 1978 not indicating that the decedent had died. The BIR conducted an administrative investigation of the decedent’s tax liability and found a deficiency income tax for the year 1997 in the amount of P318,233.93. Thus, in November 18, 1982, the BIR sent by registered mail a demand letter and assessment notice addressed to the decedent “c/o PhilTrust, Sta. Cruz, Manila, which was the address stated in her 1978 income tax return. On June 18, 1984, respondent Commissioner of Internal Revenue issued warrants of distraint and levy to enforce the collection of decedent’s deficiency income tax liability and serve the same upon her heir, Francisco Gabriel. On November 22, 1984, Commissioner filed a motion to allow his claim with probate court for the deficiency tax. The Court denied BIR’s claim against the estate on the ground that no proper notice of the tax assessment was made on the proper party. On appeal, the CA held that BIR’s service on PhilTrust of the notice of assessment was binding on the estate as PhilTrust failed in its legal duty to inform the respondent of antecedent’s death. Consequently, as the estate failed to question the assessment within the statutory period of thirty days, the assessment became final, executory, and incontestable. Issue: (1) Whether or not the CA erred in holding that the service of deficiency tax assessment on Juliana through PhilTrust was a valid service as to bind the estate; (2) Whether or not the CA erred in holding that the tax assessment had become final, executory, and incontestable. Held: (1) Since the relationship between PhilTrust and the decedent was automatically severed the moment of the taxpayer’s death, none of the PhilTrust’s acts or omissions could bind the estate of the taxpayer. Although the administrator of the estate may have been remiss in his legal obligation to inform respondent of the decedent’s death, the consequence thereof merely refer to the imposition of certain penal sanction on the administrator. These do not include the indefinite tolling of the prescriptive period for making deficiency tax assessment or waiver of the notice requirement for such assessment. (2) The assessment was served not even on an heir or the estate but on a completely disinterested party. This improper service was clearly not binding on the petitioner. The most crucial point to be remembered is that PhilTust had absolutely no legal relationship with the deceased or to her Estate. There was therefore no assessment served on the estate as to the alleged underpayment of tax. Absent this assessment, no proceeding could be initiated in court for collection of said tax; therefore, it could not have become final, executory and incontestable. Respondent’s claim for collection filed with the court only on November 22, 1984 was barred for having been made beyond the five-year prescriptive period set by law. B. Computation of Tax

Section 84. Rates of Estate Tax. There shall be levied, assessed, collected and paid upon the transfer of the net estate as determined in accordance with Sections 85 and 86 of every decedent, whether resident or nonresident of the Philippines, a tax based on the value of such net estate, as computed in accordance with the following schedule: If the net estate is: Over

P 200,000 500,000 2,000,000 5,000,000 10,000,00 0

But Not Over P 200,000 550,000 2,000,000 5,000,000 10,000,000 And Over

The Tax shall be Exempt 0 P 15,000 135,000 465,000 1,215,000

Plu s

Of the Excess Over

5% 8% 11% 15% 20%

P 200,000 500,000 2,000,000 5,000,000 10,000,000

C. Filing of Estate Tax Returns 1. BIR Form No. 1801 – Estate Tax Return 2. Time of Filing and Payment Time for filing. - For the purpose of determining the estate tax provided for in Section 84 of this Code, the estate tax return required under the preceding Subsection (A) shall be filed within six (6) months from the decedent's death. A certified copy of the schedule of partition and the order of the court approving the same shall be furnished the Commissioner within thirty (30) after the promulgation of such order. (Sec. 90 (B), NIRC). Time of Payment. - The estate tax imposed by Section 84 shall be paid at the time the return is filed by the executor, administrator or the heirs. (Sec. 91 (A), NIRC) 3. Extension of Time for Filing and Payment Extension of Time. - The Commissioner shall have authority to grant, in meritorious cases, a reasonable extension not exceeding thirty (30) days for filing the return. (Sec. 90 (C), NIRC) Extension of Time. - When the Commissioner finds that the payment on the due date of the estate tax or of any part thereof would impose undue hardship upon the estate or any of the heirs, he may extend the time for payment of such tax or any part thereof not to exceed five (5) years, in case the estate is settled through the courts, or two (2) years in case the estate is settled extrajudicially. In such case, the amount in respect of which the extension is granted shall be paid on or before the date of the expiration of the period of the extension, and the running of the Statute of Limitations for assessment as provided in Section 203 of this Code shall be suspended for the period of any such extension. Where the taxes are assessed by reason of negligence, intentional disregard of rules and regulations, or fraud on the part of the taxpayer, no extension will be granted by the Commissioner. If an extension is granted, the Commissioner may require the executor, or administrator, or beneficiary, as the case may be, to furnish a bond in such amount, not exceeding double the amount of the tax and with such sureties as the Commissioner deems necessary, conditioned upon the payment of the said tax in accordance with the terms of the extension. (Sec. 91 (B), NIRC) 4. Place of Filing

Place of Filing. - Except in cases where the Commissioner otherwise permits, the return required under Subsection (A) shall be filed with an authorized agent bank, or Revenue District Officer, Collection Officer, or duly authorized Treasurer of the city or municipality in which the decedent was domiciled at the time of his death or if there be no legal residence in the Philippines, with the Office of the Commissioner. (Sec. 90 (E), NIRC) D. Liability for Payment of Tax 1. CIR vs Gonzales, 18 SCRA 757 Facts: Matias Yusay died leaving his two children as his heirs, Jose & Lilia. Jose was appointed administrator who filed with BIR an estate and inheritance tax return declaring personal & real properties of their father but the return did not mention any heir. On January 25, 1955, BIR demanded payment of assessed estate and inheritance taxes (approx P30k in total). Jose requested for an extension of time within which to pay the tax, which the CIR denied. During the pendency of the said proceedings in Iloilo and after reinvestigation, BIR reassessed the estate and inheritance tax liability and issued a reassessment of taxes in a total of P69k. Lilia disputed the legality of the 1958 assessment alleging that the right to make the same has prescribed since more than 5 years had elapsed since the filing of estate and inheritance tax return on May 11, 1949. CTA ruled in favor of Lilia. CIR appealed to the SC alleging that the right to assess the taxes in question has not been lost by prescription since the return which did not name the heirs cannot be considered true and complete return to start the running of the period of limitations of 5 years under Sec 331 of Tax Code and pursuant to Sec 332 he has 10 years within which to make the assessment counted from the discovery on September 24, 1953 of the identity of the heirs. Issue: Whether or Not the right of the CIR to assess the estate and inheritance taxes in question has prescribed - NO W/n the return filed by Jose sufficient to commence the running of the prescriptive period to assess said taxes – NO Held: When tax return is considered sufficient A return need not be complete in all particulars. It is sufficient if it complies substantially with law. There is substantial compliance (1) when the return is made in good faith & is not false or fraudulent; (2) when it covers the entire period involved; (3) when it contains information as to the various items of income, deductions and credits with such definiteness as to permit the computation and assessment of the tax. In this case, the estate and inheritance tax filed by Jose was substantially defective: -It was incomplete. – It declared only 93 parcels of land and leaving out 92 others. This was a huge underdeclaration. -Moreover, the return mentioned no heir. Thus, no inheritance tax could be assessed. As a matter of law, on the basis of return, there would be no occasion for the imposition of estate and inheritance taxes, When there is no heir, the estate is escheated to the State. The state does not tax itself. The deficient return did not start the running of the period of limitations BECAUSE the return was made on the wrong form. The taxpayer failed to observe the law (Sec 332) w/c grants the CIR 10 years (starting from date the fraud was discovered) within which to bring action for tax collection, applies. He is obligated to make a return or amend one already filed

based on his own knowledge & information obtained through testimony or otherwise, & subsequently to assess taxes due. On MR filed by Lilia: Lilia insists that since she administers only 1/3 of the estate of her father, she should not be liable for the whole tax. And she suggests that the intestate estate of Matias Yusay should be liable for the said taxes, 1/3 to be paid by Lilia and 2/3 to be paid by Florencia (wife of deceased Jose). Ruling of the Court: Estate and inheritance taxes are satisfied from the estate and are to be paid by the executor or administrator. Where there are 2 or more executors, all of them are severally liable for the payment of the estate tax. The inheritance tax, although charged against the account of each beneficiary, should be paid by the executor or administrator. Failure to pay the estate and the inheritance taxes before distribution of the estate would subject the executor or administrator to criminal liability. It is immaterial that Lilia administers only 1/3 of the estate & will receive as her share only said portion, for her right to the estate comes after taxes. As an administratrix, she is liable for the entire estate tax. As an heir, she is liable for the entire inheritance tax although her liability would not exceed the amount of her share in the estate. 2. Commisioner vs Pineda, 21 SCRA 105 Facts: Atanasio Pineda died and was survived by his wife Felicisima (the appointed administratrix) and 15 children. Estate proceedings were instituted in the CFI of Manila. The estate was divided among and awarded to the heirs and the proceedings terminated on June 8, 1948. After the estate proceedings, the BIR investigated the income tax liability of the estate for the years 1945, 1946, 1947 and 1948 and it found that the corresponding income tax returns were not filed. The CIR found the estate liable for Deficiency Income Tax (DIT), Additional residence tax for 1945 (ART ’45), and Real Estate dealer's tax for the 4 th qtr of 1946 and the whole year of 1947 (REDT ’46-’47) . Manuel, the eldest child, contested the assessment. Subsequently, he appealed to the CTA alleging that he was appealing "only that proportionate part or portion pertaining to him as one of the heirs." CTA held that Manuel was liable for payment corresponding to his share of such taxes. On the other hand, CIR insisted that Manuel should be liable for the payment of ALL the taxes found by the Tax Court to be due from the estate instead of only for the amount of taxes corresponding to his share in the estate. Manuel opposed the proposition on the ground that as an heir he is liable for unpaid income tax due the estate only up to the extent of and in proportion to any share he received, relying on on Government of the Philippine Islands v. Pamintuan. 1 Issue: W/n Manuel can be required to pay the FULL amount of the tax assessed by the BIR. Held: YES, he can be required to pay the full amount. Pineda is liable for the assessment as (1) AN HEIR and as (2) A HOLDER-TRANSFEREE of property belonging to the estate/taxpayer. As an HEIR: As an heir he is individually answerable for the part of the tax proportionate to the share he received from the inheritance. His liability, however, cannot exceed the amount of his share. As a HOLDER OF PROPERTY belonging to the estate: Pineda is liable for the tax up to the amount of the property in his possession. The reason is that the Government has a lien on the P2,500.00 received by him from the estate as his share in the 1 The SC held that "after the partition of an estate, heirs and distributees are liable individually for the payment of all lawful outstanding claims against the estate in proportion to the amount or value of the property they have respectively received from the estate."

inheritance, for unpaid income taxes for which said estate is liable, pursuant to the last paragraph of Section 315 of the Tax Code.2 Therefore, the Government has TWO WAYS of collecting the tax in question: One, by going after ALL the heirs and collecting from each one of them the amount of the tax proportionate to the inheritance received. This remedy was adopted in Government of the Philippine Islands v. Pamintuan. In said case, the Government filed an action against all the heirs for the collection of the tax. This action rests on the concept that hereditary property consists only of that part which remains after the settlement of all lawful claims against the estate, for the settlement of which the entire estate is first liable. The reason for filing a suit is to achieve thereby two results: first, payment of the tax; and second, adjustment of the shares of each heir in the distributed estate as lessened by the tax. Another remedy is by subjecting said property of the estate which is in the hands of an heir or transferee to the payment of the tax due, the estate. This second remedy is the very avenue the Government took in this case to collect the tax. The BIR should be given the necessary discretion to avail itself of the most expeditious way to collect the tax as may be envisioned in the §315, because taxes are the lifeblood of government and their prompt and certain availability is an imperious need. And as afore-stated in this case the suit seeks to achieve only one objective: payment of the tax. The adjustment of the respective shares due to the heirs from the inheritance, as lessened by the tax, is left to await the suit for contribution by the heir from whom the Government recovered said tax. 3. Gonzales vs CA and CIR, G.R. No. L-28821

2 If any person, corporation, partnership, joint-account (cuenta en participacion), association, or insurance company liable to pay the income tax, neglects or refuses to pay the same after demand, the amount shall be a lien in favor of the Government of the Philippines from the time when the assessment was made by the Commissioner of Internal Revenue until paid with interest, penalties, and costs that may accrue in addition thereto upon all property and rights to property belonging to the taxpayer: . . .

IX. Inhibitions, Responsibilities, Obligations in the Enforcement of Estate Tax A. Section 92. Discharge of Executor or Administrator from Personal Liability. - If the executor or administrator makes a written application to the Commissioner for determination of the amount of the estate tax and discharge from personal liability therefore, the Commissioner (as soon as possible, and in any event within one (1) year after the making of such application, or if the application is made before the return is filed, then within one (1) year after the return is filed, but not after the expiration of the period prescribed for the assessment of the tax in Section 203 shall not notify the executor or administrator of the amount of the tax. The executor or administrator, upon payment of the amount of which he is notified, shall be discharged from personal liability for any deficiency in the tax thereafter found to be due and shall be entitled to a receipt or writing showing such discharge. Section 94. Payment before Delivery by Executor or Administrator. - 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 Commissioner that the estate tax has been paid is shown. Section 95. Duties of Certain Officers and Debtors. - Registers of Deeds shall not register in the Registry of Property any document transferring real property or real rights therein or any chattel mortgage, by way of gifts inter vivos or mortis causa, legacy or inheritance, unless a certification from the Commissioner that the tax fixed in this Title and actually due thereon had been paid is show, and they shall immediately notify the Commissioner, Regional Director, Revenue District Officer, or Revenue Collection Officer or Treasurer of the city or municipality where their offices are located, of the non payment of the 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 donation intervivos or mortis causa, legacy or inheritance, shall have the duty of furnishing the Commissioner, Regional Director, Revenue District Officer or Revenue Collection Officer of the place where he may have his principal office, with copies of such documents and any information whatsoever which may facilitate the collection of the aforementioned tax. Neither shall a debtor of the deceased pay his debts to the heirs, legatee, executor or administrator of his creditor, unless the certification of the Commissioner that the tax fixed in this Chapter had been paid is shown; but he may pay the executor or judicial administrator without said certification if the credit is included in the inventory of the estate of the deceased. Section 96. Restitution of Tax Upon Satisfaction of Outstanding Obligations. - If after the payment of the estate tax, new obligations of the decedent shall appear, and the persons interested shall have satisfied them by order of the court, they shall have a right to the restitution of the proportional part of the tax paid. Section 97. Payment of Tax Antecedent to the Transfer of Shares, Bonds or Rights. - 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 a certification from the Commissioner that the taxes fixed in this Title and due thereon have been paid is shown. If a bank has knowledge of the death of a person, who maintained a bank deposit account alone, or jointly with another, it shall not allow any withdrawal from the said deposit account, unless the Commissioner has certified that the taxes imposed thereon by this Title have been paid: Provided, however, That the administrator of the estate or any one (1) of the heirs of the decedent may, upon

authorization by the Commissioner, withdraw an amount not exceeding Twenty thousand pesos (P20,000) without the said certification. For this purpose, all withdrawal slips shall contain a statement to the effect that all of the joint depositors are still living at the time of withdrawal by any one of the joint depositors and such statement shall be under oath by the said depositors.