ISU MODULE TEMPLATE

Subject: BUSINESS TAXATION

Title of the Module
Chapter 9: Estate Tax

Properties to be included in the Estate

1. properties that are still owned by decedent at the time of his death, to the extent of his equity or
interest in such property, whether as exclusive owner, conjugal or community property owner or
common owner.

2. assets or properties owned by decedent during his lifetime but were no longer owned by him at
the time of his death, because these properties have been transferred during his lifetime by way of
taxable transfer as follows:

 Transfer in contemplation of death;

 Revocable transfers;
 Property passing under the general power of appointment;
 Transfer for insufficient consideration

Decedent’s Interest
Decedent’s interest includes up to the extent of the decedent’s interest therein in the properties at
the time of his death. Is shall include the following:

 Dividends declared by a corporation before death of a stockholder although paid after death,
if the decedent was living on the record date
 Partnership profits even if paid after death of partner
 Proceeds of life insurance policy payable to a revocable beneficiary
 Right of usufruct if transferable to the heirs.

Transfer in contemplation of death

This means that it is the thought of death, as a controlling motive, which includes the
disposition of the property for the purpose of avoiding estate tax.
The main reason behind this provision is to reach ingenious schemes to evade the estate tax
liability, by the use of other forms of conveyances rather than by succession or transfer mortis
causa.
The following are examples of circumstances which may be taken into consideration whether the
transfer was made in contemplation of death.
 Age and health of the decedent at the time of the gift, especially where he was aware of a
serious illness;
 Length of time between the gift and the date of death. A short interval suggest the condition
that the thought of death was in the decedent’s mind, and a long interval suggest the
opposite; and
 Concurrent making of a will or making a will within a short time after the transfer .
Thus, there is a transfer in contemplation of death when:
 The decedent transferred the possession or enjoyment of his property to another, but this
transfer was intended to take effect only upon his death.
 The decedent transferred title to the property but retained for his lifetime the right to posses
or enjoy the property or the income therefrom, or the rights to designate whom shall posses
or enjoy the same.
This does not apply when the sale is in good faith and for an adequate and full consideration.
Illustration:
When the doctor informed Concha that she is suffering from terminal cancer, she decided to
donate her house and lot worth P1,000,000 to her friend, Migay.
1. is this a transfer in contemplation of death?
2. how about if the house and lot were sold at its actual value of P1,000,000 and after the sale,
Concha spent the entire amount before her death?
3. how about if after selling the house and lot, Concha dies without being able to spend the money,
will the amount form part of her gross estate?

NR Alien
Classification of Resident (no NR Alien
Property or reciprocity (with
Citizen ) reciprocity)
Real Property
Within YES YES YES
Without YES NO NO
Personal Property
Tangible within YES YES YES
Tangible without YES NO NO
Intangible within YES YES NO
Intangible without YES NO NO

YES – the property is included in the Gross Estate of the Decedent

NO - the property is not included in the Gross Estate of the Decedent
Illustration:
Fina Thai, a decedent, single left the properties:
a. House in Thailand 1,200,000
b. Land in Davao City 80,000
c. Condo unit in Manila 3,000,000
d. Car in Thailand 700,000
e. Car in the Philippines 650,000
f. Jewelries in Thailand 125,000
g. Franchise exercised in Thailand 260,000
h. Franchise exercised in the Philippines 380,000
i. Accounts receivable, debtor residing in the Philippines 275,000
j. Accounts receivable, debtor residing in Thailand 240,000
k. Investment in Lovers Co. partnership (Thailand) 730,000
l. Investment in Mahalia Co. partnership (Philippines) 300,000
m. Domestic shares, certificate kept in the Philippines 140,000
n. Domestic shares, certificate kept in Thailand 250,000
o. Foreign shares, 90% of business in the Philippines 100,000
p. Foreign shares, 30% of business in the Philippines 270,000
but acquired business situs in the Philippines
q. Foreign shares, 70% of business in the Philippines 425,000
Total 9,125,000

Required: compute the gross estate if Fina Thai is a:

1. Resident or citizen
2. Nonresident alien (no reciprocity)
3. Nonresident alien (with reciprocity)
1. the decedent was either a resident citizen, resident alien, or non-resident citizen:
a. House in Thailand 1,200,000
b. Land in Davao City 80,000
c. Condo unit in Manila 3,000,000
d. Car in Thailand 700,000
e. Car in the Philippines 650,000
f. Jewelries in Thailand 125,000
g. Franchise exercised in Thailand 260,000
h. Franchise exercised in the Philippines 380,000
i. Accounts receivable, debtor residing in the Philippines 275,000
j. Accounts receivable, debtor residing in Thailand 240,000
k. Investment in Lovers Co. partnership (Thailand) 730,000
l. Investment in Mahalia Co. partnership (Philippines) 300,000
m. Domestic shares, certificate kept in the Philippines 140,000
n. Domestic shares, certificate kept in Thailand 250,000
o. Foreign shares, 90% of business in the Philippines 100,000
p. Foreign shares, 30% of business in the Philippines 270,000
but acquired business situs in the Philippines
q. Foreign shares, 70% of business in the Philippines 425,000
Total 9,125,000

2. the decedent was nonresident alien (no reciprocity)

a. Land in Davao City 80,000
b. Condo unit in Manila 3,000,000
c. Car in the Philippines 650,000
d. Franchise exercised in the Philippines 380,000
e. Accounts receivable, debtor residing in the Philippines 275,000
f. Investment in Mahalia Co. partnership (Philippines) 300,000
g. Domestic shares, certificate kept in the Philippines 140,000
h. Domestic shares, certificate kept in Thailand 250,000
i. Foreign shares, 90% of business in the Philippines 100,000
j. Foreign shares, 30% of business in the Philippines 270,000
but acquired business situs in the Philippines
Total 5,445,000

3. the taxpayer was a nonresident alien (with reciprocity)

a. Land in Davao City 80,000

b. Condo unit in Manila 3,000,000
c. Car in the Philippines 650,000
Total 3,730,000

Real and Personal Properties

Real properties are also known as “immovables” while the personal properties are known as
“movables”
The real properties are enumerated in Article 415 of the Civil Code of the Philippines.
Personal or movable properties are those that are not real. In order to determine whether an object
is movable or not, the following test must be applied in the successive order.

1. whether the object can be transported from place to place;

2. whether the change of location can take place without injury to the immovable to which it may
attached;
3. whether it is not included in the enumeration found in Article 415 of the Civil Code.
If the answers to the above questions are in the affirmative, the object is movable.

Intangible Personal Properties Within

The following intangible personal properties are considered situated within the Philippines:

1. Franchise which must be exercise within the Philippines;

2. Shares, obligations, or bonds issued by any corporation or sociedad anónima organized or
constituted in the Philippines in accordance with its laws
3. Shares, obligations or bonds issued by any foreign corporation eighty-five per centum (85%) of
the business of which is located in the Philippines;
4. Shares, obligations or bonds issued by a foreign corporation if such shares, obligations or bonds
have acquired a business situs in the Philippines; and
5. Shares or rights in any partnership, business or industry established in the Philippines (Sec. 104,
NIRC)

Marriage settlement governing spouses

The system of property relationship that shall govern the spouses will depend upon the
marriage settlements they have executed before the celebration of the marriage.

Needless to say, an unmarried decedent shall not govern by anyone of the systems
enumerated because all of his properties are exclusively owned by him.

The term “unmarried” shall refer to either single (never been married), legally separated,
widow/widower, or one whose married has been annulled.

In the absence of a marriage settlement, or when the regime agreed upon is void, the
system of absolute community of property shall govern (Art. 75, The Family Code of the
Philippines), unless the marriage was celebrated prior to August 3, 1988 (the effectivity date of
the Family Code, per Executive Order No. 227), because those celebrated before the effectivity of
the Family Code, which had no prior agreement on the system of property relationship, were
govern by the conjugal partnership of gains.

Illustration:
Mar and Cielo were married together on August 3, 1970. Prior to that date, they entered
into pre-nuptial agreement in writing that they shall be governed by the regime of absolute
community of property.

a. what marriage settlement govern the spouses?

b. supposes there was no pre-nuptial agreement between the spouses. What settlement
governs the properties of Mar and Cielo?

Illustration:
Kulukotoy, Filipino, married to Aida on February 10, 2005, died during the current year leaving
the following properties:

Riceland, bought by Kulukotoy in 2007 – P200,000

Income of the Riceland – P35,000
House and Lot which he bought into the marriage – P800,000
Income of a portion of the house being leased to student boarders – P26,500
Subdivision lot inherited by Kulukotoy from his father in 2007 – P350,000
Rent income of the subdivision lot – P12,000
Passenger jeepney given as birthday gift to Aida by her mother in 2007 – P160,000
Income of the jeepney – P8,000
Jewelries – P50,000
Savings deposit in bank earned by the spouses during the marriage – P875,000
Interest on the bank deposit, net of tax – P3,500
One-half share of Kulukotoy in the time deposit with PNB, P200,000. The entire deposit had earned
an interest of P6,000. The money was acquired by Kulukotoy and Bebang, his former wife who died
in 2003. Their marriage was blessed with one child, Koykoy.
Required: Compute the gross estate of Kulukotoy if the marriage was under the absolute
community of property regime:

Community property:
Riceland 200,000
Income of Riceland 35,000
House and Lot 800,000
Income from lease to boarders 26,500
Jewelries 50,000
Savings deposit 875,000
Interest on savings deposit 3,500
1,990,000
Exclusive property:
Subdivision lot 350,000
Rent income on lot 12,000
Share in time deposit 200,000
Share in interest 3,000
565,000
Gross Estate 2,555,000