TX-101 - Lecture notes 111 PDF

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ReSA - THE REVIEW SCHOOL OF ACCOUNTANCYCPA Review Batch 41 Ÿ May 2021 CPA Licensure Examination Ÿ Weeks 1-TAXATION A. Tamayo Ÿ G. Caiga Ÿ C. Lim Ÿ K. Manuel Ÿ E. BuenPage 1 of 10 0915 -2303213 Ÿ resacpareviewTAX-1 01: ESTATE TAXATIONA. ESTATE TAX RETURN (BIR FORM NO. 1801) – See actual Estate Tax Re...

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ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY CPA Review Batch 41 ! May 2021 CPA Licensure Examination ! Weeks 1-2

TAXATION

A. Tamayo ! G. Caiga ! C. Lim ! K. Manuel ! E. Buen

TAX-101: ESTATE TAXATION A. ESTATE TAX RETURN (BIR FORM NO. 1801) – See actual Estate Tax Return B. ESTATE TAX RATE Effective January 1, 2018 (Under TRAIN)

There shall be levied, assessed, collected and paid upon the transfer of the net estate of every decedent, whether resident or nonresident of the Philippines, a tax at the rate of six percent (6%) based on the value of such net estate.”

C. GROSS ESTATE Composition of Gross Estate Real properties Personal properties Taxable transfers

Resident or citizen decedent Wherever situated Wherever situated Wherever situated

D. GROSS ESTATE OF MARRIED DECEDENTS Conjugal partnership of gains (CPOG) Exclusive properties of the Included decedent Common properties Included Exclusive properties of the Not included surviving spouse

Non-resident alien decedent Situated in the Philippines Situated in the Philippines Situated in the Philippines

Absolute community of properties (ACOP) Included Included Not included

E. COMPOSITION OF THE GROSS ESTATE OF MARRIED DECEDENTS 1. Conjugal Partnership of Gains (Relative Community of Properties) Exclusive properties Conjugal properties a. Properties brought into the marriage a. Properties acquired by onerous title during the marriage at the as either of the spouse’s own; expense of the common fund, whether the acquisition be for the partnership, or for only one of the spouses; b. Properties acquired by gratuitous b. Properties obtained from labor, industry, work or profession of (or lucrative) title during the either or both of the spouses; marriage; c. Properties acquired by right of c. The fruits, natural, industrial or civil, due or received during the redemption or by exchange with marriage from the common property, as well as the net fruits other property belonging to only from the exclusive property of each spouse; one of the spouses; d. Properties acquired with exclusive d. The share of either spouse in the hidden treasure which the law money of either spouse. awards to the finder or owner of the property where the treasure is found; e. Properties acquired through occupation such as fishing and hunting; f. Livestock existing upon the dissolution of the partnership in excess of the number of each kind brought to the marriage by either spouse; g. Properties acquired by chance, such as winnings from gambling and betting. 2. Absolute Community of Properties Exclusive properties a. Properties acquired during the marriage by gratuitous (or lucrative) title by either spouse, and the fruits as well as the income thereof, if any, unless it is specifically provided by the donor, testator or grantor that they shall form part of the community; b. Property for personal and exclusive use of either spouse, however, jewelry shall form part of the community property; c. 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.

Community Properties a. All properties owned by spouses at the time of the celebration of marriage or acquired thereafter.

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0915-2303213 ! www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY

TAX-101

Weeks 1-2: ESTATE TAX

3. Exercise: The decedent was married at the time of death. He was survived by his wife and children. Indicate proper classification with a check mark. EXCL- CONJEXCLCOMMFMV CPOG CPOG ACOP ACOP Cash owned by the decedent before the marriage P5,000,000 Real property inherited by the decedent during the 6,000,000 marriage Personal property received by the wife as gift before 400,000 the marriage Property acquired by decedent with cash owned 600,000 before the marriage Personal effects of the decedent purchased with the exclusive money of the wife 500,000 Jewelry purchased with cash of the surviving spouse 1,000,000 earned before marriage Property unidentified when and by whom acquired 1,200,000 Cash representing income received during the marriage from exclusive property 2,000,000 Property acquired before marriage by the decedent who has legitimate 3,000,000 descendants by a former marriage F. DETERMINATION OF THE VALUE OF THE ESTATE 1. Usufruct In accordance with the latest Basic Standard Mortality Table, to be approved by the Secretary of Finance, upon the recommendation of the Insurance Commissioner. 2. Properties a. Generally – Fair market value at the time of decedent’s death; b. Real property – Higher between fair market value, BIR (zonal value) and fair market value, Provincial and City assessor (assessed value); c. Personal properties – Recently purchased – Purchase price Not recently purchased – Pawn value x 3 d. Securities (shares of stock) 1) Traded in the local stock exchange – Mean between the highest and lowest quotations on valuation date or on a date nearest the valuation date; 2) Not traded in the local stock exchange a) Common (ordinary) shares – Book value on valuation date or on a date nearest the valuation date; b) Preferred (preference) shares – Par value 3. Exercise: Determine the value to be included in the gross estate a. Real property, zonal value, time of death, P1,500,000; value per tax declaration, time of death, P1,200,000 b. Real property, zonal value, 6 months before death, P1,500,000; assessed value, time of death, P1,200,000 c. Personal property, recently purchased, FMV, time of death, P700,000; purchase price, P800,000 d. Personal property, recently purchased, purchase price, P800,000 e. Personal property, not recently purchased, pawn value, P80,000 f. 10,000 shares of stock, traded in the local stock exchange, par value, P20/share; mean between highest and lowest quotation, P15/share g. 5,000 common shares, not traded in the local stock exchange, FMV, time of death P2/share; par value, P5/share h. 5,000 common shares, not traded in the local stock exchange, par value, P5/share; book value, P4/share i. 10,000 preferred shares, not traded in the local stock exchange par value, P10/share; book value, P15/share G. RULE OF RECIPROCITY 1. Properties covered by reciprocity 2. Basic rules

3. Properties considered situated in the Philippines

(NON RESIDENT ALIEN DECEDENT) Intangible personal property situated in the Philippines owned by non-resident alien decedent. When there is reciprocity – The intangible personal property of non-resident alien situated in the Philippines are not included in the gross estate. When there is no reciprocity – The intangible personal property of nonresident alien situated in the Philippines are included in the gross estate. The following shall be considered as situated in the Philippines (among others): a. Franchise which must be exercised in the Philippines; b. Shares, obligations or bonds issued by any corporation or sociedad anonima organized and constituted in the Philippines in accordance with its law;

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY

TAX-101

Weeks 1-2: ESTATE TAX

c.

Shares, obligations or bonds issued by any foreign corporation 85% of the business of which is located in the Philippines; d. Shares, obligations or bonds issued by any foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines; e. Shares or rights in any partnership, business or industry established in the Philippines. 4. Exercise: A decedent died leaving the following properties. Check the appropriate box if included in the gross estate. Resident NRA-No NRA-With decedent Reciprocity Reciprocity House and lot, USA Condominium unit, Philippines Furniture and appliances, Philippines Car, USA Bonds, Philippines Common shares of stock not traded in the local stock exchange, Philippine Corporation Preferred shares of stock, foreign corporation, 85% of the business in the Philippines, Proceeds of life insurance, Philippines H. FAMILY HOME 1. The family home, constituted jointly by the husband and the wife or by an unmarried head of the family, is the dwelling house where they and their family reside and the land on which it is situated. 2. The family home must be the actual residential home of the decedent and his family at the time of his death, as certified by the Barangay Captain of the locality the family home is situated. 3. The total value of the family home must be included as part of the gross estate of the decedent. I.

OTHER ITEMS 1. Proceeds of life insurance

Assumption when designation is not stated 2. Claims against insolvent persons 3. Amount received by heirs under R.A. No. 4917

Generally taxable, except when: a. A third person is irrevocably designated as beneficiary; b. The proceeds/benefits come from SSS or GSIS; c. The proceeds come from group insurance. When the designation of the beneficiary is not stated or is not clear, the Insurance Code assumes revocable designation. a. The full amount of the claims is included in the gross estate. b. The uncollectible amount of the claims is deducted from the gross estate. a. R.A. No. 4917 is entitled ‘An Act Providing That Retirement Benefits of Employees of Private Firms Shall Not be Subject to Attachment, Levy, Execution, or Any Tax Whatsoever’. b. The amount received by heirs from decedent’s employer as a consequence of the death of the decedent-employee is included in the gross estate of the decedent. c. The amount above is also allowed as deduction from gross estate.

4. Exercise a. Determine whether or not the following proceeds of life insurance shall be included in the gross estate (Y/N) 1) Proceeds from life insurance, third person is irrevocably designated as beneficiary 2) Proceeds from life insurance, third person is revocably designated as beneficiary 3) Proceeds of life insurance, the beneficiary’s designation is not clear 4) Proceeds of life insurance, administrator of the estate is irrevocably designated as beneficiary 5) Proceeds of life insurance, executor of the estate is revocably designated as beneficiary 6) Benefits received from SSS, third person is irrevocably designated as beneficiary 7) Benefits from GSIS, third person is revocably designated as beneficiary J.

TAXABLE TRANSFERS 1. Examples of taxable transfer

2. Motives that

a. Transfer in contemplation of death – motivated by thought of death although death may not be imminent; b. Revocable transfer – the enjoyment of the property may be altered, amended, revoked or terminated by the decedent; c. Transfer passing under general power of appointment; d. Transfer with retention or reservation of certain rights; e. Transfer for insufficient consideration. a. To relieve donor from the burden of management;

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TAX-101

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY Weeks 1-2: ESTATE TAX

preclude a transfer from the category of one made in contemplation of death

b. To save income or property taxes; c. To settle family litigated and un-litigated disputes; d. To provide independent income for dependents; e. To see the children enjoy the property while the donor is alive; f. To protect the family from hazards of business operations; and g. To reward services rendered.

K. EXEMPTIONS/EXCLUSIONS 1. Exemptions of a. The merger of usufruct in the owner of the naked title; certain acquisitions b. The transmission or delivery of the inheritance or legacy by the fiduciary heir and transmissions 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 bequest, devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of the net income of which inures to the benefit of any individual: Provided, however, that not more than 30% of the said bequest, devises, legacies or transfers shall be used by such institutions for administration purposes. 2. Exclusions from a. Amount received as war damages; gross b. Amount received from US Veterans Administration; estate under special c. Benefits from GSIS and SSS. laws L. DEDUCTIONS ALLOWED TO ESTATE 1. Ordinary Deductions Under TRAIN (Effective Jan. 1, 2018) Resident or citizen decedent a. Funeral expenses No longer allowed b. Judicial expenses No longer allowed c. Losses Allowed actual amount d. Indebtedness (Claims against the estate) Allowed actual amount e. Taxes Allowed actual amount f. Claims against insolvent Allowed uncollectible amount due to debtor insolvency g. Unpaid mortgage Allowed actual amount h. Property previously taxed (vanishing deduction) Allowed amount per computation i. Transfer for public Allowed actual amount purpose 2. Special Deductions Under TRAIN (Effective Jan. 1, 2018) Resident or citizen decedent a. Family home Allowed deduction P10,000,000 maximum b. Standard deduction Allowed deduction P5,000,000 c. Medical expenses No longer allowed d. Amount received under R.A. 4917 Allowed actual amount as deduction 3. Other Deduction Under TRAIN (Effective Jan. 1, 2018) Resident or citizen decedent Share in the conjugal Allowed as deduction to married property decedents M. DEDUCTIONS AMPLIFIED 1. Expenses, Losses, Indebtedness, Taxes, Etc. (ELITE) a. Funeral expenses Not deductible b. Judicial expenses Not deductible c. Losses Deductible from common property or d. Indebtedness Deductible from common property or e. Taxes Deductible from common property or f. Claims against Deductible from common property or insolvent g. Unpaid mortgage Deductible from common property or

Non-resident alien decedent No longer allowed No longer allowed Allowed actual amount (pro-rated) Allowed actual amount (pro-rated) Allowed actual amount (pro-rated) Allowed uncollectible amount due to insolvency (pro-rated) Allowed actual amount (pro-rated) Allowed amount per computation Allowed actual amount

Non-resident alien decedent Not allowed as deduction Allowed deduction P500,000 No longer allowed as deduction Not allowed as deduction

Non-resident alien decedent Allowed as deduction to married decedents

exclusive property exclusive property exclusive property exclusive property exclusive property

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TAX-101

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY Weeks 1-2: ESTATE TAX

a. Losses Requisites for deduction and amount deductible

a) Incurred during the settlement of the estate; b) Arising from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement; c) Not compensated for by insurance or otherwise; d) Not claimed as deduction for income tax purposes in an income tax return; e) Incurred not later than the last day for the payment of the estate tax.

Actual amount of loss

Exercise: Y, a Filipino resident, died on November 5, 2018, and his estate incurred losses: First loss: From fire on February 2, 2018 of improvement on his property, not compensated by insurance, P500,000; Second loss: From flood on February 25, 2019 of household furniture also not compensated by insurance, P300,000. Third loss: From sale on February 20, 2019 of a property included in the gross estate, P100,000. Fourth loss: From theft on April 5, 2019, P300,000, 70% compensated by insurance Fifth loss: From robbery on May 5, 2019, P150,000, claimed as deduction from gross income The deductible loss is: P__________________ b. Indebtedness (Claims against the estate) Requisites for a) The liability represents a personal obligation of the deceased deduction and existing at the time of his death; amount b) The liability was contracted in good faith and for adequate and full consideration in money or money’s worth; deductible c) The claim must be a debt or claim which is valid in law and enforceable in court; d) The indebtedness must not have been condoned by the creditor or the action to collect from the decedent must not have prescribed. e) At the time the indebtedness was incurred the debt instrument was duly notarized; and f) 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 c. Unpaid taxes Requisites for deduction and amount deductible

The tax must have accrued before the death of the decedent

Debts or demands of pecuniary nature which could have been enforced against the deceased in his lifetime and could have been reduced to simple money terms

Unpaid taxes that accrued before the decedent’s death but not including: a) any income tax upon income received after the death of the decedent, or b) property taxes not accrued before his death, c) or any estate tax.

d. Claims against insolvent persons Requisites for a) Value of claims is included in the gross estate; deduction and b) The incapacity of the debtors to pay their obligation is amount deductible proven.

Claims that are not collectible

Exercise: Escolastica died with a claim against Juanico. Juanico has properties worth P250,000 and obligations of P350,000. Included in the obligations of Juanico are P50,000 unpaid taxes owed to the Government of the Philippines and P90,000 payable to Ms. Escolastica. The deductible claim against insolvent debtors is P_____________________ e. Unpaid mortgage Requisites for a) The fair market value of the mortgaged property without deduction and deducting the mortgage indebtedness has been initially included amount as part of the gross estate; deductible b) The mortgage indebtedness was contracted in good faith and for an adequate and full consideration. 2. Transfer for Public Use Requisite for deductibility The transfer must be testamentary in character or by way of donation mortis causa executed by the decedent before his death

Amount deductible Amount of all bequest, legacies, devises, or transfers to or for the use of the Government of the PH, or any political subdivision for exclusively public purpose

Amount of unpaid mortgage

Deducted from Exclusive property

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