CHAPTER – DISCUSSION QUESTIONS / PROBLEMS The BIR is correct It is not the obligation of the BIR to prove that the deductions are not allowed, but the executor of the estate of Licupo has the burden of proof to establish the validity of claimed deductions (Comm vs Algue, 158 SCRA 91) He must point to some specific provisions of the statute in which that deduction is authorized, and must be able to prove that he is entitled to the deduction which the law allows Deductions are classified as conjugal or community when they are normal charges against conjugal or community properties Thus, funeral expenses, judicial expenses, and other expenses such as losses, indebtedness and taxes incurred which have been beneficial to, are classified as conjugal/community property deductions Charges against the exclusive properties of the decedent are classified as exclusive deductions, such as bequests, legacies or devises to the government or to social welfare institutions a b c d e f g h i j Deductible Deductible Deductible Deductible Deductible Deductible Deductible Not deductible To be allowed as deduction, the expenses must not be borne by any person whether a friend or relative Not deductible Expenses incurred after the burial are not allowed as deduction Not deductible Case Actual P 130,000 158,000 5% of GE P 80,000 Maximum Deductible P 200,000 P 80,000 200,000 158,000 200,000 173,750 200,000 200,000 189,000 211,000 173,750 213,500 205,615 Collection expenses Attorney's fees (25,000 x 60%) Accountant's fees Executor's commissions Appraiser's fees Court costs Total judicial expenses 75,000 15,000 5,000 10,000 4,000 18,000 127,000 No Since the decedent exercises substantial control over the creditor corporation and due to apparent defects in the creditor's policy and security on the loans, it would be 12 very easy to manipulate the records of the creditor corporation Thus, based on the facts presented, the claims were not incurred in good faith by the decedent a b c d e The unpaid balance or 85% of the GSIS loan is deductible Not deductible because there is no more legal liability to pay the debt Not deductible The taxes must have accrued prior to the death of the decedent Deductible These are valid claims against the estate Not deductible There is no valid claim against the estate because the property was inherited thereby imposing no obligation on the decedent No, the estate of Pamugat cannot claim the P300,000 as deduction representing claim against insolvent person because Pamaan was not actually insolvent He was only encountering a liquidity problem Liquidity should be distinguished from insolvency While in the former, there is a problem on insufficiency of cash; in insolvency, the total liability is more than its total assets It is a valid deduction because it diminishes the estate of the decedent However, it is still counted as part of his properties For which reason, it should be included as part of his gross estate Moreover, most deductions are allowed because they diminish the value of the distributable estate If the amount of claims against insolvent person is not to be included in the gross estate, it will understate the net estate by an amount equivalent to the value of the "claims." 10 The insolvency of the debtor should be proven in court through an insolvency proceeding, and not merely alleged Thus, the information relayed by Mayo is not a valid basis in allowing the estate of Mac to claim the P100,000 as a deduction from gross estate under "claims against insolvent persons." 11 The amount of unpaid mortgage indebtedness is deductible, provided (1) the value of the land in the amount of P950,000 is included in the gross estate of Dalahera and (2) it was contracted bona fide and for an adequate and full consideration in money or money's worth 12 The entire real estate taxes of P320,000 is deductible provided that they are still unpaid as of June 30, 2008 The income tax on income earned from January to June, 2008 of P15,500 is also deductible The tax on the income which have accrued after his death are not deductible 13 a Yes, because the shipwreck occurred after the death but before the deadline for filing the estate tax return As a rule, losses are deductible from gross estate if it occurred within a period of six(6) months from the death of the decedent However, since the insurance company indemnified the 50% of the value of the car, only a loss P600,000 can be claimed as deduction from gross estate b If the loss occurred before Carperter's death, it is not deductible because the lost property should not also be included in the gross estate 13 14 c The law uses the phrase "losses incurred during the settlement of the estate." Therefore, to be considered as a valid deduction, the loss should occur after death irrespective of the time it was discovered d If the value of the car lost was indemnified by the insurer, then the estate of Carpenter (the owner), did not suffer any loss Consequently, it cannot claim that amount as deduction from gross estate In the case of White vs Comm'r., 48 TC 439 (1967), the tax court held that an accidental and irrevocable loss of property can be the basis of a casualty loss deduction The court has accepted the principle that an accidental loss of property qualifies as a casualty provided the loss is (1) identifiable; (2) damaging to property; and (3) sudden, unexpected, and unusual in nature Considering that the loss of the property complies with the essentials of a casualty loss, the value of the jewel could have been deductible had it occurred after the death of Carlos' wife 15 Section 125 of the New Family Code provides that neither spouse may donate any conjugal partnership property without the consent of the other However, either spouse may, without the consent of the other, make moderate donations from the conjugal partnership property for charity or on occasions of family rejoicing or distress A donation of a 200-square meter lot in the poblacion of Infanta, Quezon is not a moderate donation Therefore, the donation is not binding In this case, the value of the property is not deductible from gross estate for estate tax purposes 16 Property A – Exclusive B C D E – – – – – Community Exclusive Exclusive Exclusive Exclusive F 17 Although the second transfer of the property took place within five(5) years from the first transfer, the estate of the present decedent cannot claim vanishing deduction because the full amount of the property donated to the barangay is already deductible from gross estate as “transfer for public purpose.” Otherwise, it would result to double deduction 18 Lower value of property Less: Mortgage paid Initial basis Less: Deductions (pro-rated) 200,0 00 P 250,000 50,000 200,000 x (575,000 - 75,000) 50,000 2,000,0 00 14 Base Rate (more than year but not more than years) Vanishing deduction 19 No No No No No 10 Yes Yes No No No 11 12 13 14 15 20 a Decedent is an unmarried head of family Case Case 150,00 80% 120,00 No Yes No No No Deductible P 1,000,000 820,000 b Decedent is married Family home is an exclusive property Case Case P 1,000,000 820,000 c Decedent is married The family home is a conjugal property Case Case P 1,000,000 410,000 d Decedent is married The family home is composed of the house and the lot Thirty five percent (35%) of its value is community property Case (P2,000,000 x 35%) x 1/2 ( 2,000,000 x 65%) = 1,300,000 Deductible, maximum P 350,000 650,000 1,000,000 Case (P820,000 x 35%) x 1/2 ( 820,000 x 65%) Deductible e P 143,500 533,000 676,500 Decedent is married The house, which is 70% of the total value of the family home, is a community property, while the land which is 30% of the value of the family home is an exclusive property Case (P2,000,000 x 70%) x 1/2 P 700,000 15 ( 2,000,000 x 30%) 300,000 =600,000 Deductible 1,000,000 Case House (820,000 x 70%) x P 287,000 1/2 Lot (820,000 x 30%) Deductible 21 246,000 533,000 Real properties, Philippines P3,000,000 00 700,000.0 3,700,000.0 Personal properties, Philippines Gross estate Less: Deductions Funeral expenses abroad, actual P230,000 Limit 200,000 Deductible Judicial expenses Bad debts Total P 200,000 90,000 45,000 335,000 (3,700,000/7,700,000) x P335,000 160,974.0 3,539,075.9 Net estate House, Sapporo P 2,500,000 1,500,00 3,000,00 700,00 7,700,00 Properties, Japan Real properties, Philippines Personal properties, Philippines Total gross estate 22 The decedent-spouse does not solely own a conjugal or community property because it is equally owned by the husband and the wife The share of the spouse in the property should not be subject to succession considering that he/she is still alive However, since the community or the conjugal property in the gross estate includes the share of the surviving spouse, it should be deducted Otherwise, estate taxes 16 being imposed will include properties which are not subjects of succession 23 24 Community property Charges against community properties Net community property Deductible share (1,865,000/2) ATM deposit Time deposit Interest (200,000 x 18% x 6.5/12) Less: Final tax (19,500 x 20%) Car 13th month pay Cellular phone Condominium unit Post-dated check Laptop computer Accrued wages Cows (15,000 x 5) Calf Total exclusive Add: Share in co-ownership Appliances & home decors Other personal properties Total Share (130,000/2) Gross estate Less: Deductions Ordinary Claims against the estate Credit card Car loan Utility bills Funeral expenses Special Medical expenses Standard deduction Net taxable estate P2,500,000 635,000 1,865,000 932,500 126,540 200,000 19,500 3,900 15,600 441,246 45,000 25,000 1,542,895 15,000 40,000 15,000 75,000 5,000 2,546,281 50,000 80,000 130,000 65,000 2,611,281 15,273 237,181 7,654 145,000 28,000 1,000,000 ( 405,108) (1,028,000) 1,178,173 Notes: The land donated to the government is no longer part of decedent’s interest considering that it had been donated already There is no tax payable because a donation to the government is tax exempt The remaining balance of the loan with Pag-Ibig has been condoned because the debtor died with an updated payment This is a loan policy of Pag-Ibig The cost of appliances and other personal properties are owned by Antonio and Vittorio in equal shares because the problem does not give the share of 17 the respective couple in the actual contribution of each Under the law on sales, a buyer of an illegally acquired property does not acquire a title better to the property that that the seller had Antonio is not legally bound to reimburse Luca Brasi the P25,000 because the latter does not acquire better title to the laptop than Vittorio had Luca Brasi did not even bought the computer in a trade, or fair or market Under the law on sales, the buyer is entitled to the fruits of a thing from the time of the perfection of the contract even before its delivery Thus, Antonio is entitled to the calf even the cows have not yet been delivered by Tattaglia 18 ... Total P 200,000 90,000 45,000 335,000 (3 ,70 0,000 /7, 700,000) x P335,000 160, 974 .0 3,539, 075 .9 Net estate House, Sapporo P 2,500,000 1,500,00 3,000,00 70 0,00 7, 700,00 Properties, Japan Real properties,... 2,546,281 50,000 80,000 130,000 65,000 2,611,281 15, 273 2 37, 181 7, 654 145,000 28,000 1,000,000 ( 405,108) (1,028,000) 1, 178 , 173 Notes: The land donated to the government is no longer part of decedent’s... Philippines Total gross estate 22 The decedent-spouse does not solely own a conjugal or community property because it is equally owned by the husband and the wife The share of the spouse in the property