INSTITUTO NG PANGANGALAKAL AT PAGTUTUOS

Subject Code: ACT 26

Subject Title: Business Taxation
No. of Units: 3

MODULE 2:
GROSS ESTATE
I. PRE-TEST / ACTIVITY
1. Regardless of situs, the tax code excludes intangible personal property of a non-resident alien decedent in
determining his taxable estate.
A. True
B. False

2. If the zonal value of a real estate is available at date of death, and this is higher than the fair market value per
assessor’s listings of values, then the amount to be reported in the gross estate is the zonal value.
A. True
B. False

II. CONTENT
A. ESTATE TAX FORMULA
The computation of the estate tax will depend on the status of the decedent, whether he was single or married.
 If the decedent was single at the time of his death:
Real properties…………………………. ₱ xx
Personal properties……………………. xx
Gross estate…………………………… xx
Less: Ordinary deductions…………… (xx)
Special deductions……………. (xx)
Net taxable estate……………………. xx
X Tax rate 6%
Estate tax……………………………… xx

 If the decedent was married at the time of his death:

Conjugal/
Exclusive Community Total
Real properties………………………. ₱ xx ₱ xx
Personal properties…………………. xx xx
Gross estate………………………… xx xx
Less: Ordinary deductions………….. (xx) (xx)
Estate after ordinary deduction.……. xx xx ₱ xx
Less: Special deductions…………………………………………….. (xx)
Net estate………………………………………………………………. xx
Less: Share of surviving spouse (net conjugal estate divided 2)… (xx)
Net taxable estate……………………………………………………… xx
X Tax rate 6%
Estate tax……………………………………………………………….. xx

B. KINDS OF DECEDENTS
1. Citizen or Resident (Resident citizen, Non-resident citizen, and Resident alien)
Properties included in gross estate: (Sec. 4, RR 12-2018)
 Real property (e.g. land and building) wherever located
 Tangible personal property (e.g. car) wherever located
 Intangible personal property (e.g. receivable) wherever located
2. Non-Resident Alien (Engaged and Not engaged in trade or business in the Philippines)
Properties included in gross estate:
 Real property located in the Philippines
 Tangible personal property located in the Philippines
 Intangible personal property - with a situs in the Philippines such as:
o Franchise which must be exercised in the Philippines
o Shares, obligations or bonds issued by corporations organized or constituted in the
Philippines

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 o Shares, obligations or bonds issued by a foreign corporation 85% of the business of which
is located in the Philippines
o Shares, obligations or bonds issued by a foreign corporation if such shares, obligations or
bonds have acquired a business situs in the Philippines (i.e. they are used in the
furtherance of its business in the Philippines)
o Shares, rights in any partnership, business or industry established in the Philippines
Note: Hence, regardless of whether the decedent was a resident or a citizen or a non-resident
alien, any of the mentioned properties shall be included in his gross estate.

Illustration 1
Mr. Abad a citizen of the Philippines died residing in the Philippines. What kind of decedent is Mr. Abad?

Illustration 2
Mr. Laurel a citizen of the Philippines died while residing in Canada. What kind of decedent is Mr. Laurel?

Illustration 3
Mr. Yamamoto a citizen of Japan died while residing in the Philippines. What kind of decedent is Mr. Yamamoto?

Illustration 4
Mr. Park a citizen of Korea died in his country leaving properties in the Philippines. What kind of decedent is Mr.
Park?

Table 1. Summary of properties included in gross estate

Citizen Non-resident Non-resident
or Alien Alien
Classification of Property Resident (no reciprocity) (with reciprocity)
Real property within Yes Yes Yes
Real property without Yes
Tangible personal property within Yes Yes Yes
Tangible personal property without Yes
Intangible personal property within Yes Yes
Intangible personal property without Yes

C. THE GROSS ESTATE

1. Decedent’s interest
2. Transfer in contemplation of death
3. Revocable transfer
4. Property passing under general power of appointment
5. Transfer for insufficient consideration (1, 2 & 3)
6. Proceeds of life insurance

In numbers (2) to (5), the properties are not actually in the estate. They were the subjects of transfers by the decedent
during his lifetime. In his lifetime, and at his death, the properties were in the hands of the transferees already. Only
values from the properties shall be included in the gross estate and the properties remain physically with the transferees.
These are only paper computations. In the law of succession, this is called collation.

Decedent’s interest
This shall include all properties, rights and interest which the decedent owns at the time of death. (Sec. 85 A, NIRC)
It shall include: http://www.scribd.com/doc/3914010/Tax2-Ch15-Estate-Taxes-Reviewer
 Properties owned by the decedent actually and physically present in his estate at the time of his death such as
land, buildings, shares of stock, vehicles, bank deposit, etc.
 The value of any interest in property owned or possessed by the decedent at the time of his death such as dividends
declared before his death but received after his death, partnership profits which have accrued before his death,
usufructuary rights, etc.
 The value of property, right or interest in the property, transferred by the decedent during his lifetime which,
under the law, are in the nature of testamentary disposition such as insurance proceeds in favor of revocable
beneficiary.

Transfer in contemplation of death

Impelled by the thought of death (i.e., the motivating factor or controlling motive is the thought of death), regardless
of whether the transferor was near the possibility of death or not. (Sec. 85 B, ibid.)
E.g. Donation mortis causa – donation which takes effect upon the death of the donor, and therefore partakes of the
nature of a testamentary disposition.
 No transfer of title or ownership to the donee
 The donor retains ownership (either legal or beneficial) and remains in full control of the property during his
lifetime
 The transfer is revocable by donor at will during his lifetime
 The transfer is void if the donee dies first

The gross estate shall include the value of property transferred by the decedent during his lifetime in anticipation of
his death (transfer in contemplation of death) such as:
1. Transfer of property in favor of another person, but the transfer was intended to take effect only upon the
transferor's death.

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2. Transfer by gift intended to take effect at death, or after death, or under which the donor reserved the income or
the right to designate the persons who should enjoy the income.
3. Transfer with retention or reservation of certain rights. The decedent had transferred his property during his
lifetime, but retained for himself beneficial enjoyment of the thing or the right to receive income from the same.

Illustration 5
Mr. Alcala, aged 90 years and suffering from incurable cancer, on August 1 wrote a will and, on the same day, made
several inter-vivos gifts to his children. Ten days later, he died. In your opinion, are the inter-vivos gifts considered
transfers in contemplation of death for purposes of determining properties to be included in his gross estate?

Revocable transfer
Where the enjoyment of the property transferred may be altered, amended, revoked or terminated by the decedent. The
revocability is not affected by the failure of the decedent to exercise the power to revoke during his lifetime. If the
notice has not been given, the power to revoke has not been exercised on or before the date of his death, such notice
shall be considered to have been given, or the power exercised on the date of his death. (Sec. 85 C, ibid.)

Illustration 6
Vicente donated real property to Francisco during his lifetime. An item in the deed, however grants the donor the right
to revoke the donation at will. Is the real property subject to estate or donor’s tax?

Property passing under general power of appointment

A power of appointment is the right to designate the person or persons who will succeed to the property of the prior
decedent. (Sec. 85 D, ibid.)

It may be 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;
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 possessor
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.

A power of appointment may be a general or a limited/special. A general power of appointment is when it authorizes
the donee to appoint any person he pleases, including himself, his spouse, his estate, his executor or administrator, and
his creditor thus having full dominion over the property as though he owned it. A limited power of appointment is
when the donee can appoint only among a restricted or designated class or persons other than himself.
http://www.scribd.com/doc/45177293/Tax-2-Tagufa
Illustration 7
Guillermo died living a will whereby it was stipulated that his lot situated in Bulacan shall go to Roberto, and that
should the latter decide to transfer the property, he is free to transfer it to anybody. Is the power of appointment general
or limited?

Transfer for insufficient consideration

When the decedent’s property is transferred (Sec. 85 G, ibid.)
1. in contemplation of death,
2. revocable transfers, or
3. passed under a general power of appointment for a consideration in money or money's worth

Amount to be included in the gross estate:

 If the transfer is a bona fide sale for adequate and full consideration in money or money’s worth, no value shall
be included in the gross estate. (Case 1)
 If the transfer 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 of the property at the time of death
over the value of the consideration received by the decedent. (Case 2)
 If an inter vivos transfer of the decedent is proven to be fictitious, the total value of the property at the time of
death shall be included in the gross estate. (Case 3)

Table 2. Value of properties includible in the gross estate

Case 1 Case 2 Case 3
a) Consideration received at the time of transfer ₱ 200,000 ₱ 120,000 ₱ ---
b) Fair market value at the time of transfer 200,000 200,000 200,000
c) Fair market value time of death 360,000 360,000 360,000
Value to be included in the gross estate _______ _______ _______

Compare: (a) and (b) to determine the adequacy of consideration;

(c) and (a) to determine the value to include in the gross estate.

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 Illustration 8
Mr. Romulo, during his lifetime made a revocable transfer of property. There was a consideration of ₱1,400,000
received, when the fair market value of the property at the time of transfer was ₱2,000,000. At the time of Mr. Romulo’s
death the property had a fair market value of ₱1,200,000. How much should be included in the gross estate of Mr.
Romulo?

Proceeds of life insurance

Proceeds of life insurance under policies taken out by the decedent upon his own life shall be included in his gross
estate if the beneficiary is: (Sec. 85 E, ibid.)
1. the estate of the deceased, his executor or administrator, irrespective of whether or not the insured retained the
power of revocation; or
2. other than the decedent’s estate, executor or administration, when designation of beneficiary is revocable, that is,
when the designation of the beneficiary is not expressly made irrevocable.

A beneficiary is a person who will receive the proceeds of the insurance when the insured dies. A designation of
beneficiary is revocable if the insured can change the beneficiary from a person designated in the policy with another
person.

The proceeds of life insurance are not taxable in the following cases:
1. Proceeds of a group insurance policy taken out by the company for its employees;
2. Accident insurance proceeds. NIRC specifically mentions only life insurance policies;
3. Amount receivable by any beneficiary irrevocably designated in the policy of insurance by the insured;
4. Proceeds of insurance policies issued by the GSIS to the government official and employees are exempt from all
taxes;
5. Benefits accruing under the SSS law.
Illustration 9
Diego insured his life with Gabriela as beneficiary. The policy states that Diego can change Gabriela with another
person whom Diego may later designate as new beneficiary. Will the proceeds from the life insurance subject to estate
tax?

Illustration 10
Mr. Roco insured his life with Ayala Insurance Corporation with his wife Sonia to receive the proceeds of the insurance
when he dies. Will the proceeds from the life insurance subject to estate tax?

Illustration 11
Mr. Malvar took out a life insurance on his life and designated his estate as revocable beneficiary. Will the proceeds
of the insurance form part of his gross estate?

Illustration 12
Gregorio took out a life insurance on his life and stated that the revocable beneficiary is the executor of his estate. Will
the proceeds of the insurance form part of his gross estate?

Illustration 13
Luis took out a life insurance on his life and designated his wife as irrevocable beneficiary. Will the proceeds of the
insurance form part of his gross estate?

Illustration 14
SM Corporation the employer of Freddie took out a group life insurance on its employees, paying premiums on the
group insurance. Freddie designated Gina as his beneficiary. Freddie died. Will the proceeds of the insurance form part
of his gross estate?

Illustration 15
Vicente was covered by an accident insurance. An accident resulted in his death and the proceeds of insurance were
paid to his designated beneficiary, Ruby. Would the proceeds of the insurance be included in his gross estate?

D. VALUATION OF PROPERTIES IN THE GROSS ESTATE

The properties comprising the gross estate shall be valued based on their fair market value as of the time of death.
Valuation of: (Sec. 5, RR No. 2-2003)
1. Real property
a) FMV as determined by the Commissioner; or (zonal value)
b) FMV shown in schedule of values fixed by the provincial or city assessors, whichever is higher
(No zonal value: use the FMV in the latest tax declaration)
2. Personal property – FMV at the time of the decedent’s death
3. Shares of stock (listed or unlisted in the stock exchange)
a) Listed shares – the arithmetic mean between the highest and lowest quotation at date of death, or
the date nearest the date of death, if none is available on the date of death itself.

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 b) Unlisted shares
i. Common shares – book value
ii. Preferred shares – par value
4. Units of participation in any association, recreation, or amusement club (i.e., golf, polo similar clubs) – FMV is
the bid price nearest the date of death published in any newspaper or publication of general circulation.
5. Right to usufruct – 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 (Section 88 A,
NIRC)

Illustration 16
Mr. Ruiz bought a car for ₱1,600,000. When he died two years later, the car had a value of ₱800,000. How much is
the value to be included in the gross estate of Mr. Ruiz?

Illustration 17
Mr. Alano bought for ₱1,500,000 a piece of land in Sta. Maria, Bulacan. At the time of his death, the property could
be sold for ₱2,250,000 (an adjacent piece of land, with the same area as that of Mr. Alano’s land, was sold one day
before Mr. Alano’s death at that price). Its fair market value in the assessment rolls of the province was ₱1,350,000.
The fair market value of the property at the time of Mr. Alano’s death, as determined by the Bureau of Internal Revenue,
was ₱1,875,000. How much is the value to be included in the gross estate of Mr. Alano?

Illustration 18
Mrs. Blanca bought a piece of land in Pasig City on installment terms, with a mortgage constituted on the property for
its unpaid purchase price. At the time of Mrs. Blanca’s death, the property had a fair market value of ₱2,000,000 in the
assessment rolls of Makati City, and a zonal value of ₱3,000,000 as fixed by the Bureau of Internal Revenue. The
unpaid mortgage on the land at the time of Mrs. Blanca’s death was ₱500,000. How much is the value to be included
in the gross estate of Mrs. Blanca?

Illustration 19
Ms. Silva died leaving 2,000 shares of stock of Filinvest Inc. a domestic corporation. On the date of Ms. Silva’s death,
the shares were quoted in the Philippine Stock Exchange at ₱104 as highest and ₱102 as the lowest. How much is the
value to be included in the gross estate of Ms. Silva?

Illustration 20
Mr. Rico died leaving 2,000 common shares of stock of Megaworld Inc., a domestic corporation, not traded in any
stock exchange. On the date of the death of Mr. Rico, the statement of financial position of Megaworld Inc. showed a
capital stock issued and outstanding common of 20,000 shares with an aggregate par value of ₱2,000,000 and a retained
earnings of ₱400,000 so that the stockholders’ equity in the corporation was ₱2,400,000. How much is the value to be
included in the gross estate of Mr. Rico?

Illustration 21
Mr. Yan died leaving a substantial estate. Among the properties that he left were 1,500 preferred shares of stock of
Sta. Lucia Inc. The Sta. Lucia Inc. has common and preferred shares, neither of which is traded in a local stock
exchange. There is no evidence of the fair market value of the share. The common stock has a par value ₱120 per
share, although the book value (per company’s books of accounts and financial statements) is ₱170 per share. The
preferred stock has a par value of ₱70 per share. How much is the value to be included in the gross estate of Mr. Yan?

Illustration 22
When Mrs. Charito died, she had existing collectibles from various debtors amounting to ₱750,000. A month after
Mrs. Charito’s death, Mr. Solis, one of the debtors of the decedent, was proven and declared by the court insolvent and
the ₱150,000 claim against him could no longer be collected. How much should be the amount to be included in the
gross estate of Mrs. Charito?

E. EXEMPTION FROM THE ESTATE TAX

 Benefits received from GSIS (Sec. 33 PD 1146 as amended)
 Benefits received from SSS (Sec. 16 PD 1161 as amended)
 Benefits received from U.S Veterans Administration (RA 360)
 Benefits given by the Philippine government and U.S government due to damages suffered during the war (RA
227)
 Proceeds of life insurance where the beneficiary is irrevocably appointed
 Proceeds of life insurance under a group insurance taken by employer (not taken out upon his life)
 Transfer by way of bona fide sales
 Retirement benefits of employees of private firms from private pension plans approved by the BIR
 Personal Equity and Retirement Account (PERA) assets shall not be considered assets of the Contributor for
purposes of estate taxes (RA 9505)
 Bank deposit in the name of the decedent on which the 6% estate tax has been withheld and remitted by the bank
to the BIR upon withdrawal by the heirs

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F. EXEMPTION OF CERTAIN ACQUISITIONS AND TRANSMISSIONS
 The merger of usufruct in the owner of the naked title
Illustration 23
Mr. Perez died testate. The will provides that the usufruct over his land shall be inherited by his eldest son, Emilio,
while the naked title shall go to his youngest son, Elpidio.
Question 1. Is the transfer of the property from Mr. Perez to his children taxable?
Question 2. What if Emilio dies ahead of Elpidio and the usufruct is transferred to the latter, is the transfer taxable?

 Fideicommissary substitution - the transmission or delivery of the inheritance or legacy by the fiduciary heir or
legatee to the fideicommissary.
Also known as indirect substitution, it is a substitution by virtue of which the fiduciary or first heir instituted
is entrusted with the obligation to preserve and transmit to a second heir the whole or part of the inheritance.

NOTE: For its validity and effectivity, such substitution does not go beyond one degree from the heir
originally substituted and provided further, that the fiduciary or first heir and the second heir are
living at the time of death of the testator.

Illustration 24
Mr. Palma died testate. He appointed his only son, Jose, as the first heir of his property. His will, however, provides
that upon his death, the property shall be preserved and transmitted to Rafael, his grandson to Jose, upon reaching the
age of maturity or upon the death of his son.
Question 1. Upon the death of Mr. Palma, will the transfer of the property be subject to estate tax?
Question 2. Is the transfer of the property from Jose to Rafael taxable?

 The transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance with the
desire of the predecessor.

 All bequests, 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 thirty percent
(30%) of the said bequests, devises, legacies or transfers shall be used by such institutions for administration
purposes. (Sec. 87, NIRC)

G. CAPITAL OF THE SURVIVING SPOUSE

The capital of the surviving spouse of a decedent shall not be deemed a part of his or her gross estate. The term “capital
of surviving spouse” refers to the separate property of the surviving spouse.

The exclusive property of the husband is called capital, while the exclusive property of the wife is called paraphernal.
(Article 136 Civil Code of the Philippines)

However, the share of the surviving spouse in the conjugal/community property shall be included in the computation of
the gross estate.

III. ACTIVITY
Problem 1
A decedent taxpayer died leaving the following:
Farm land in the Philippines, with a mortgage in favor of the Philippine National
Bank for ₱600,000................................................................................................ ₱3,000,000
Parcel of land with vacation house in Malaysia................................................... 6,000,000
Family home (land and residential house) in the Philippines............................... 9,000,000
Shares of stock of a domestic corporation........................................................... 2,000,000
Shares of stock of a foreign corporation, the entire business of which is in the
Philippines........................................................................................................... 500,000
Receivable from a friend who has no property whatsoever................................. 300,000
Receivables under the following insurance policies:
Life insurance policy, taken by the decedent on his own life, with his estate
as revocable beneficiary............................................................................... 200,000
Life insurance policy, taken by the decedent on his own life, with his
daughter as revocable beneficiary................................................................. 300,000
Life insurance policy, taken by the decedent on his own life, with his son as
irrevocable beneficiary.................................................................................. 600,000
Life insurance (group) taken by the employer of the decedent, with the estate
as revocable beneficiary............................................................................... 150,000
Required:
Determine the correct gross estate assuming the decedent was:
1. Resident citizen
2. Resident alien
3. Non-resident alien with reciprocity
4. Non-resident alien without reciprocity

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Problem 2
The decedent devised to his three (3) children separate parcels of land with the following data:
A. To Maria, 1,000 square meter lot in Makati with the following valuation:
 Assessed value determined by the City of Manila, ₱16,000/sq. m.
 FMV as determined by independent assessors, ₱14,000,000
B. To Pedro, 1,000 square meter lot in Q.C. with the following valuation:
 Assessed value determined by Q.C., ₱16,000/sq. m.
 Zonal value as determined by the CIR, ₱19,000,000
 FMV as determined by independent assessors, ₱20,000,000
C. To Juan, 1,000 square meter lot in Sampaloc, Manila with the following valuation:
 Assessed value determined by the City of Manila. ₱26,000/sq. m.
 Zonal value as determined by the CIR, ₱18,000,000
 FMV as determined by independent assessors, ₱20,000,000
Required: Determine the gross estate of the decedent

Problem 3
Pedro owns various shares of stock from different companies during his lifetime. At the time of his death, the following
details were provided to you by his administrator:
A. 100,000 shares of Divergent Company's ordinary shares, listed shares
 Outstanding shares - 1,000,000 shares; ₱10 par
 Retained earnings - ₱5,000,000
 Mean value of the shares in the stock exchange - ₱16
B. 100,000 shares of Lenovo Company's ordinary shares, listed shares
 Outstanding shares- 1,000,000 shares; ₱10 par
 Retained earnings - ₱5,000,000
 Mean value of the shares in the stock exchange - ₱13
C. 100,000 shares of Frozen Company's ordinary shares, not traded
 Outstanding shares - 800,000 shares; ₱12 par
 Retained Earnings - ₱2,400,000
Required: Determine the gross estate of Pedro

Problem 4
For each of the following independent cases, determine the value of the property in the gross estate:
A. A property, acquired for ₱1,000,000, was transferred in contemplation of death for a consideration of ₱200,000.
Fair market value at the time of transfer, ₱1,500,000, while at the time of death, ₱1,200,000.
B. A property, acquired at a cost of ₱1,000,000, was transferred in contemplation of death for a consideration of
₱1,300,000. Fair market value at the time of transfer, ₱1,600,000, while at the time of death, ₱1,300,000.
C. A parcel of land inherited from the father was acquired by P decedent's father then for a cost of ₱360,000. Upon
inheritance, the fair market value was ₱300,000 as shown in the schedule of values from the Assessor's office and
₱330,000 as determined by the office of the BIR Commissioner.

IV. REFERENCES
Tabag, Enrico D. and Garcia, Earl Jimson R., Transfer & Business Taxation, 2022