Taxation II Notes
Transcript of Taxation II Notes
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NOTES:
Estate of Hilario Ruiz v. CA
Allowances for support under Section 3 of Rule 83 should not be limited to the
"minor or incapacitated" children of the deceased.
Article 188 of the Civil Code of the Philippines, the substantive law in force at the
time of the testator's death, provides that during the liquidation of the conjugal
partnership, the deceased's legitimate spouse and children, regardless of their
age, civil status or gainful employment, are entitled to provisional support from
the funds of the estate. The law is rooted on the fact that the right and duty to
support, especially the right to education, subsist even beyond the age of
majority.
Grandchildren are not entitled to provisional support from the funds of the
decedent's estate. The law clearly limits the allowance to "widow and children"
and does not extend it to the deceased's grandchildren, regardless of their
minority or incapacity.
In settlement of estate proceedings, the distribution of the estate properties can
only be made:
o (1) after all the debts, funeral charges, expenses of administration,
allowance to the widow, and estate tax have been paid; oro (2) before payment of said obligations only if the distributees or any of
them gives a bond in a sum fixed by the court conditioned upon the
payment of said obligations within such time as the court directs, or when
provision is made to meet those obligations.
The estate tax is one of those obligations that must be paid before distribution of
the estate. If not yet paid, the rule requires that the distributees post a bond or
make such provisions as to meet the said tax obligation in proportion to their
respective shares in the inheritance.
Petitioner is not entitled to the funds: Petitioner must be reminded that his right of
ownership over the properties of his father is merely inchoate as long as the
estate has not been fully settled and partitioned.
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o As executor, he is a mere trustee of his father's estate. The funds of the
estate in his hands are trust funds and he is held to the duties and
responsibilities of a trustee of the highest order.
o He cannot unilaterally assign to himself and possess all his parents'
properties and the fruits thereof without first submitting an inventory and
appraisal of all real and personal properties of the deceased, rendering a
true account of his administration, the expenses of administration, the
amount of the obligations and estate tax, all of which are subject to a
determination by the court as to their veracity, propriety and justness.
CIR v. CA, CTA, Pajonar
This Court adopts the view under American jurisprudence that expenses incurred in
the extrajudicial settlement of the estate should be allowed as a deduction from the
gross estate.
o "There is no requirement of formal administration. It is sufficient that the
expense be a necessary contribution toward the settlement of the case."
Attorney's fees in order to be deductible from the gross estate must be essential to
the collection of assets, payment of debts or the distribution of the property to the
persons entitled to it.o The services for which the fees are charged must relate to the proper
settlement of the estate.
o In this case, the guardianship proceeding was necessary for the distribution of
the property of the late Pedro Pajonar to his rightful heirs.
In the United States, [a]dministrative expenses, executor's commissions and
attorney's fees are considered allowable deductions from the Gross Estate.
Administrative expenses are limited to such expenses as are actually and
necessarily incurred in the administration of a decedent's estate. [PRENTICE-HALL,
Federal Taxes Estate and Gift Taxes (1936), p. 120, 533.] Necessary expenses of
administration are such expenses as are entailed for the preservation and
productivity of the estate and for its management for purposes of liquidation,
payment of debts and distribution of the residue among the persons entitled thereto.
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[Lizarraga Hermanos vs. Abada, 40 Phil. 124.] They must be incurred for the
settlement of the estate as a whole. [34 Am. Jur. 2d, p. 765.] Thus, where there were
no substantial community debts and it was unnecessary to convert community
property to cash, the only practical purpose of administration being the payment of
estate taxes, full deduction was allowed for attorney's fees and miscellaneous
expenses charged wholly to decedent's estate.
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 extrajudicial proceedings should not be allowed.
o 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 the debts, and distribution of the remainder among those entitled thereto.
o Such expenses may include executor's or administrator's fees, attorney'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, and the like.
o Deductible attorney's fees are those incurred by the executor or administrator
in the settlement of the estate or in defending or prosecuting claims against or
due the estate.The guardianship proceeding in this case was necessary for the distribution of the
property of the deceased Pedro Pajonar. As correctly pointed out by respondent CTA,
the PNB was appointed guardian over the assets of the deceased, and that necessarily
the assets of the deceased formed part of his gross estate. . . .
x x x x x x x x x
It is clear therefore that the attorney's fees incurred in the guardianship proceeding
in Spec. Proc. No. 1254 were essential to the distribution of the property to the
persons entitled thereto. Hence, the attorney's fees incurred in the guardianship
proceedings in the amount of P50,000.00 should be allowed as a deduction from the
gross estate of the decedent.15
Judicial expenses are expenses of administration.19
Administration expenses, as an
allowable deduction from the gross estate of the decedent for purposes of arriving at
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the value of the net estate, have been construed by the federal and state courts of
the United States to include all expenses "essential to the collection of the assets,
payment of debts or the distribution of the property to the persons entitled to it."20In
other words, the expenses must be essential to the proper settlement of the estate.
Expenditures incurred for the individual benefit of the heirs, devisees or legatees are
not deductible.
Austria-Magat v. CA
the donation is a donation mortis causa pursuant to Article 728 of the New Civil
Code inasmuch as the same expressly provides that it would take effect upon the
death of the donor;
that the provision stating that the donor reserved the right to revoke the donation
is a feature of a donation mortis causa which must comply with the formalities of
a will;
and that inasmuch as the donation did not follow the formalities pertaining to
wills, the same is void and produced no effect whatsoever.
CA: In the case at bar, the decisive proof that the deed is a donation inter vivos is in the
provision that :
Ibinibigay ko at ipinagkakaloob ng ganap at hindi mababawi sa naulitna apat na anak ko at sa kanilang mga tagapagmana, ang aking lupang
residential o tirahan sampu ng aking bahay nakatirik doon xxx.
(emphasis supplied)
This is a clear expression of the irrevocability of the conveyance.
o The irrevocability of the donation is a characteristic of a donation inter
vivos.
o By the words hindi mababawi, the donor expressly renounced the right to
freely dispose of the house and lot in question.
o The right to dispose of a property is a right essential to full ownership.
Hence, ownership of the house and lot was already with the donees even
during the donors lifetime.
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It has been held that whether the donation is inter vivos ormortis causa depends
on whether the donor intended to transfer ownership over the properties upon the
execution of the deed.
CHARACTERISTICS OF A donation mortis causa:
(1) It conveys no title or ownership to the transferee before the death of the
transferor; or, what amounts to the same thing, that the transferor should
retain the ownership (full or naked) and control of the property while alive;
(2) That before his death, the transfer should be revocable by the transferor
at will, ad nutum; but revocability may be provided for indirectly by means
of a reserved power in the donor to dispose of the properties conveyed;
(3) That the transfer should be void if the transferor should survive the transferee.
In this case: The deed of donation provides that the donor will not dispose or take
away the property donated (thus making the donation irrevocable), he in effect is
making a donation inter vivos. He parts away with his naked title but maintains
beneficial ownership while he lives. It remains to be a donation inter vivos despite an
express provision that the donor continues to be in possession and enjoyment of the
donated property while he is alive.
The prohibition on the donor to alienate the said property during her lifetime is proof
that naked ownership over the property has been transferred to the donees.o It also supports the irrevocable nature of the donation considering that the
donor has already divested herself of the right to dispose of the donated
property.
o On the other hand, the prohibition on the donees only meant that they may
not mortgage or dispose the donated property while the donor enjoys and
possesses the property during her lifetime.
o However, it is clear that the donees were already the owners of the subject
property due to the irrevocable character of the donation.
In Gestopa v. Court of Appeals, this Court held that the prohibition to alienate does
not necessarily defeat the inter vivos character of the donation. It even highlights the
fact that what remains with the donor is the right of usufruct and not anymore the
naked title of ownership over the property donated. In the case at bar, the provision
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in the deed of donation that the donated property will remain in the possession of the
donor just goes to show that the donor has given up his naked title of ownership
thereto and has maintained only the right to use (jus utendi) and possess (jus
possidendi) the subject donated property.
Another indication in the deed of donation that the donation is inter vivos is the
acceptance clause therein of the donees. We have ruled that an acceptance clause
is a mark that the donation is inter vivos. Acceptance is a requirement for donations
inter vivos. On the other hand, donations mortis causa, being in the form of a will,
are not required to be accepted by the donees during the donors lifetime.
The act of selling the subject property to the petitioner herein cannot be considered
as a valid act of revocation of the deed of donation for the reason that a formal case
to revoke the donation must be filed pursuant to Article 764 of the Civil Code which
speaks of an action that has a prescriptive period of four (4) years from non-
compliance with the condition stated in the deed of donation.
o The rule that there can be automatic revocation without benefit of a court
action does not apply to the case at bar for the reason that the subject deed
of donation is devoid of any provision providing for automatic revocation in
event of non-compliance with the any of the conditions set forth therein.
o
Thus, a court action is necessary to be filed within four (4) years from thenon-compliance of the condition violated.
The four-year prescriptive period is not applicable to the case at bar for the reason
that there is no fraud in this case. The findings of fact of the appellate court which
are entitled to great respect, are devoid of any finding of fraud.
There being no fraud in the trust relationship between the donor and the donees
including the herein petitioner, the action for reconveyance prescribes in ten (10)
years.
Dizon v. CA
Issue: whether the actual claims of the aforementioned creditors may be fully
allowed as deductions from the gross estate of Jose despite the fact that the said
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claims were reduced or condoned through compromise agreements entered into by
the Estate with its creditors.
FROM US CASE: date-of-death valuation principle estate tax-that it 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 that time.
Therefore, the claims existing at the time of death are significant to, and should be
made the basis of, the determination of allowable deductions.
Gestopa v. CA
Crucial in resolving whether the donation was inter vivos or mortis causa is the
determination of whether the donor intended to transfer the ownership over the
properties upon the execution of the deed.
In ascertaining the intention of the donor, all of the deed's provisions must be read
together.[12] The deed of donation dated January 16, 1973, in favor of Mercedes
contained the following:
"That for and in consideration of the love and affection which the Donor inspires in the Donee andas an act of liberality and generosity, the Donor hereby gives, donates, transfer and conveys by way
of donation unto the herein Donee, her heirs, assigns and successors, the above-described parcels ofland;That it is the condition of this donation that the Donor shall continue to enjoy all the fruits of
the land during his lifetime and that of his spouse and that the donee cannot sell or otherwise, disposeof the lands without the prior consent and approval by the Donor and her spouse during their lifetime.That for the same purpose as hereinbefore stated, the Donor further states that he has reserved forhimself sufficient properties in full ownership or in usufruct enough for his maintenance of a decent
livelihood in consonance with his standing in society.
That the Donee hereby accepts the donation and expresses her thanks and gratitude for thekindness and generosity of the Donor."
the granting clause shows that Diego donated the properties out of love and
affection for the donee. This is a mark of a donation inter vivos.
Second, the reservation of lifetime usufruct indicates that the donor intended to
transfer the naked ownership over the properties. As correctly posed by the Court of
Appeals, what was the need for such reservation if the donor and his spouse
remained the owners of the properties?
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Third, the donor reserved sufficient properties for his maintenance in accordance
with his standing in society, indicating that the donor intended to part with the six
parcels of land.
Lastly, the donee accepted the donation.
o Acceptance is a requirement for donations inter vivos. Donations mortis
causa, being in the form of a will, are not required to be accepted by the
donees during the donors' lifetime.
InAlejandro, we ruled that a limitation on the right to sell during the donors' lifetime
implied that ownership had passed to the donees and donation was already effective
during the donors' lifetime.
A valid donation, once accepted, becomes irrevocable, except on account of
officiousness, failure by the donee to comply with the charges imposed in the
donation, or ingratitude.
Tang Ho v. The Board of Tax Appeals
ISSUE:Is a donation of community property by the father alone equivalent in law to
a donation of one-half of its value by the father and one-half by the mother?
The consequence of the husband's legal power to donate community property is
that, where made by the husband alone, the donation is taxable as his own
exclusive act. Hence, only one exemption or deduction can be claimed for every
such gift, and not two, as claimed by appellants herein.
o Community property = the donations should be viewed as made by both
spouses.
To be a donation by both spouses, taxable to both, the wife must expresslyjoin the
husband in making the gift; her participation therein cannot be implied.
HELD:
o That under the old Civil Code, a donation by the husband alone does not
become in law a donation by both spouses merely because it involves
property of the conjugal partnership;
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o That such a donation of property belonging to the conjugal partnership, made
during its existence, by the husband alone in favor of the common children, is
taxable to him exclusively as sole donor.