RESUMEN DE PRINCIPALES POLITICAS CONTABLES APLICADAS

(1) Expenses, losses, indebtedness, taxes, etc. (ELIT)

(a) Funeral expenses (b) Judicial expenses (c) Claims against the

estate

(d) Claims against insolvent persons (e) Unpaid mortgage

and debt (f) Taxes (g) Losses

(2) Vanishing deductions (3) Transfers for public use

Ordinary deductions (1) Proportionate deductions for expenses, losses, indebtedness, taxes, etc. (ELIT)

(a) Funeral expenses (b) Judicial expenses (c) Claims against the

estate

(d) Claims against insolvent persons (e) Unpaid mortgage

and debt (f) Taxes (g) Losses

(2) Vanishing deductions (3) Transfers for public

Resident or citizen

decedent Non-resident alien decedent (4) Amounts received

under R.A. 4917 use (4) Amounts received under R.A. 4917 Special deductions

(a) Family home (b) Standard deduction (c) Medical expenses Share in conjugal

property Share in conjugal property Note: For non-resident aliens, this formula is used to compute for total allowable deductions of the first six items above [Sec. 7(1), RR 2-2003]:

Gross Estate, Phils. Gross Estate,

World X

World expenses, losses, indebted-ness, taxes etc.

WHEN DEDUCTION NOT ALLOWED

No deduction shall be allowed in the case of a non- resident decedent not a citizen of the Philippines, unless the executor, administrator, or anyone of the heirs, as the case may be, includes in the return required to be filed under Section 90 of the Code the value at the time of the decedent’s death of that part of his gross estate NOT situated in the Philippines. [Sec. 86 (D), NIRC; Sec 7, RR 2-2003]

ORDINARY DEDUCTIONS

Expenses, Losses, Indebtedness and Taxes, Etc. (ELIT) Funeral Expenses [Sec. 86 (A)(1), NIRC]

Allowable deduction is not to exceed P200,000 and whichever is lowerof:

(a) The actual funeral expenses (whether or not paid) up to the time of interment, or

(b) An amount equal to 5% of the gross estate. Actual funeral expenses shall mean those which are actually incurred in connection with the interment or burial of the deceased and must be paid out of the estate and not by another person or out of contributions from friends and relatives. These must be duly supported by receipts or invoices or other evidence to show that they were actually incurred. The unpaid portion of the funeral expenses incurred which is in excess of the P200,000 threshold is NOT allowed to be claimed as a deduction under “claims against the estate” (see 1(c) below). [Sec. 6(A)(1), RR 02-2003]

Examples of Funeral Expenses.—

The term “funeral expenses” is not confined to its ordinary or usual meaning. [RR 2-2003, Sec. 6 (A)(1)] (1) The MOURNING APPAREL of the surviving

spouse and unmarried minor children of the deceased, bought and used on the occasion of the burial

(2) EXPENSES of the WAKE preceding the burial, including food and drinks

(3) PUBLICATION CHARGES for death notices (4) TELECOMMUNICATIONS EXPENSES incurred in

informing relatives of the deceased

(5) Cost of BURIAL PLOT, TOMBSTONES, MONUMENT or MAUSOLEUM but not their upkeep. In case the deceased owns a family estate or several burial lots, only the value corresponding to the plot where he is buried is deductible

(6) INTERMENT and/or CREMATION FEES and CHARGES

(7) All other expenses incurred for the performance of the RITES and CEREMONIES incident to interment

Expenses Not Deductible as Funeral Expenses.— (1) Expenses incurred AFTER INTERMENT, such as

for prayers, masses, entertainment, or the like (2) Any portion of the funeral and burial expenses

BORNE or DEFRAYED by RELATIVES and FRIENDS of the deceased

(3) Medical expenses as of the last illness will not form part of funeral expenses but should be claimed as medical expenses.

Illustrations

(a) If five percent (5%) of the gross estate is P220,000 and the amount actually incurred is P215,000, the maximum amount that may be deducted is only P200,000;

(b) If five percent (5%) of the gross estate is P 100,000 and the total amount incurred is P150,000 where P20,000 thereof is still unpaid, the only amount that can be claimed as deduction for funeral expenses is P100,000. The entire P50,000 excess amount consisting of P30,000 paid amount and P20,000 unpaid amount can no longer be claimed as FUNERAL EXPENSES. Neither can the P20,000 unpaid portion be deducted from the gross estate as CLAIMS AGAINST THE ESTATE.

Judicial Expenses of Testamentary and intestate Proceedings [Sec. 86 (A)(1), NIRC]

Allowable deductions are administration expenses essential in the settlement of the estate or necessarily incurred, such as but not limited to the following:

(a) Inventory-taking or collection of the assets comprising the estate, their administration, (b) The payment of debts of the estate, as well

as the distribution of the estate among the heirs or those entitled thereto, DURING THE SETTLEMENT OF THE ESTATE BUT NOT BEYOND THE LAST DAY PRESCRIBED BY LAW, or the extension thereof, FOR THE FILING OF THE ESTATE TAX RETURN. [Sec. 6 (A)(2), RR 02-2003]

The expenses should be supported by receipts or invoices or by a sworn statement of account issued by the creditor.

Although the Tax Code specifies “judicial expenses of the testamentary and intestate proceedings”, there is no reason why expenses incurred in the administration and settlement of an estate in extrajudicial proceedings should not be allowed (CIR v. CTA, CTA and Pajonar, G.R. No. 123296, March 22, 2000).

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 thereto. The services for which the fees are charged must relate to the proper settlement of the estate. Attorney’s fees paid by the heirs to their respective lawyers arising from conflicting claims are not deductible as judicial expenses. These expenses should be separately borne by them.

Examples of judicial expenses.— (1) Actual judicial or court expenses (2) Fees of executor or administrator (3) Attorney’s fees

(4) Expenses of administration such as: (a) Accountant’s fees

(b) Appraiser’s fees (c) Clerk hire

(d) Costs of preserving and distributing the estate

(e) Costs of storing or maintaining property of the estate

(f) Brokerage fees for selling property of the estate

The notarial fee paid for the extrajudicial settlement is deductible since such settlement effected a distribution of the estate to the lawful heirs. Attorney’s fees to be deductible from the gross estate must be essential to the collection of assets, payment of debts or the distribution of property to the persons entitled to it. [Commissioner v. CA, 328 SCRA 666]

Claims Against the Estate[Sec. 86 (A)(1), NIRC] Claims are debts or demands of a pecuniary nature which could have been enforced against the deceased in his lifetime and could have been reduced to simple money judgments. May arise out of contract, tort or operation of law. [Sec. 6 (A)(3), RR 2-2003]

Provided, if the indebtedness arises from a debt instrument, the debt instrument was duly notarized at the time the indebtedness was incurred, except for loans granted by financial institutions where notarization is not part of the business practice/policy of the financial institution-lender) and, if the loan was contracted within three (3) years before the death of the decedent, the administrator or executor shall submit a statement under oath showing the disposition of the proceeds of the loan. [Sec. 6 (A)(1), RR 2-2003]

Requisites for deductibility (PVN GF) [Sec. 6 (A)(3), RR 2-2003].—

(1) Must be a PERSONAL OBLIGATION of the deceased existing at the time of his death (except unpaid funeral expenses and unpaid medical expenses, which are classified into their own separate categories)

(2) Liability must have been contracted in GOOD FAITH and for adequate and full consideration in money or money’s worth

(3) The claim must be a debt or claim which is VALID IN LAW and ENFORCEABLE IN COURT

(4) Indebtedness NOT CONDONED by the creditor or the action to collect from the decedent must NOT HAVE PRESCRIBED.

The term "claims" required to be presented against a decedent's estate is generally construed to mean debts or demands of a pecuniary nature which could have been enforced against the deceased in his lifetime, or liability contracted by the deceased before his death. Therefore, the claims existing at the time of death are significant to, and should be made the basis of, the determination of allowable, (and post-death developments, i.e. reduction or condonation through compromise agreements entered into by the Estate with its creditors, should not be considered). [Dizon v. CTA (2008)]

Claims Against Insolvent Persons[Sec. 86 (A)(1), NIRC] These are claims that are not collectible. To be deductible from the gross estate:

(a) The incapacity of the debtor to pay his obligation should be proven, although a judicial declaration of insolvency is not required;

(b) The full amount owed by the insolvent must first be included in the decedent’s gross estate; and (c) If the insolvent could only pay a partial amount,

the full amount owed shall be included in the gross estate, and the amount uncollectible shall be allowed as a deduction.

Unpaid Mortgages, Losses and Taxes

[Sec. 86 (A)(1), NIRC; Sec. 6 (A)(5), RR 2-2003] Unpaid Mortgages.—

These are deductible from the gross estate, provided: (a) That the gross estate must include the fair market of the property encumbered by such mortgage or indebtedness;

(b) That the deduction shall be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money’s worth, if such unpaid mortgages or indebtedness were founded upon a promise or an agreement. [Sec. 6-A5(a), RR 2-2003]

In case unpaid mortgage payable is being claimed by the estate, verification must be made as to who was the beneficiary of the loan proceeds. If loan is merely an accommodation loan where the loan proceeds went to another person, the value of the unpaid loan must be included as a receivable of the estate. If there is a legal impediment to its recognition as a receivable, such unpaid obligation/mortgage payable shall NOT be allowed as a deduction from the gross estate. [Sec. 6 (A)(5), RR 2-2003] In all instances, the mortgaged property, to the extent of the decedent’

Taxes.—

These are deductible from the gross estate if: (a) They have accrued as of the death of the

decedent, and

(b) They were unpaid as of the time of death.

This deduction DOES NOT include income tax upon income received after death, or property taxes accrued after his death, or the estate tax due from the transmission of his estate. [Sec. 6 (A)(5)(b), RR 2- 2003]

Losses.—

These are deductible from the gross estate if ALL of the following conditions are satisfied:

(a) The losses were INCURRED DURING the SETTLEMENT of the estate

(b) The losses arose from acts of God, such as FIRES, STORMS, SHIPWRECK or OTHER CASUALTIES, or from acts of man, such as ROBBERY, THEFT or EMBEZZLEMENT

(c) The losses are NOT COMPENSATED BY INSURANCE or otherwise

(d) The losses are not claimed as a deduction for income tax purposes in an income tax return of the estate subject to income tax

(e) The losses were incurred NOT LATER THAN THE LAST DAY FOR PAYMENT OF THE ESTATE TAX (6 months after the death of the decedent) [Sec. 6 (A)(5)(c), RR 2-2003]

The amount deductible is the amount of the property lost.

Property Previously Taxed [Sec. 86 (A)(2), NIRC]

Deduction allowed on the property left behind by the decedent, which he had acquired previously, by inheritance or donation.

Rationale

As a previous transfer tax had already been imposed on the property, either the estate tax (if property inherited) or the donor’s tax (if property donated), to minimize the effects of a double tax on the same property within a short period of time, i.e. five (5) years, the law allows a deduction to be claimed on the said property.

Example: Mr. A died in December 2003. In March 2003, Mr. B (Mr. A’s father) died and left Mr. A some properties as inheritance. May vanishing deductions be claimed as deductions in computing Mr. A’s net taxable estate?

YES, vanishing deductions shall be allowed if the following conditions are met:

Requisites for Deductibility [PINID]

(1) Death – the present decedent (Mr. A) died within five years from date of death of the prior decedent (Mr. B) or date of gift;

(2) Identity of the property – The property with respect to which deduction is sought can be identified as the one received from the prior decedent or the donor, or as the property acquired in exchange for the original property so received.

(3) Location of the property – The property on which vanishing deduction is claimed must be located in the Philippines.

(4) Inclusion of the property – The property must have formed part of the gross estate situated in the Philippines of the prior decedent, or must have been included in the total amount of the gifts of the donor made within five (5) years prior to the present decedent’s death.

(5) Previous taxation of the property – the donor's tax on the gift or estate tax on the prior succession (Mr. B’s succession) must have been finally determined and paid by the donor or the prior decedent, as the case may be.

(6) No previous vanishing deduction on the property, or the property exchanged therefor, was allowed in determining the value of the net estate of the prior decedent. (Illustration of how this requirement may NOT be met: In the example above, if Mr. B received the same properties as a donation from Mr. C in July 2002, a vanishing deduction on the properties was claimed with respect to Mr. B’s estate. Thus, no more vanishing deduction may be claimed by Mr. A’s estate)

Computation of Vanishing Deduction

(a) Using the facts above, assume that Mr. A inherited a car and a piece of land from his father Mr. B.

(b) At the time of Mr. B’s death, the FMV of the car was P120,000 and the FMV of the land was P800,000.

(c) At the time Mr. A inherited the land, it was subject to a mortgage of P80,000. Mr. A paid P70,000 of the mortgage during his lifetime (leaving a balance of P10,000).

(d) The FMV of the properties at the time of Mr. A’s death were P850,000 for the land and P70,000 for the car.

(e) Mr. A’s gross estate amounted to P3,200,000 while total deductions (excluding medical expenses, standard deductions, family home, including the above unpaid mortgage of P70,000) amounted to P600,000.

(1) First, GET THE VALUE OF THE PROPERTY PREVIOUSLY TAXED (PPT): compare the values of the property at the time of the prior decedent’s death and at the time of the present decedent’s death. The lower amount shall be the initial basis. (a) in the example, the value of the PPT shall be P800,000 for the land and P70,000 for the car, for a total of P870,000

Note: The value used on the PPT is significant only for purposes of computing the amount of vanishing deduction. The value included in the decedent’s gross estate is ALWAYS the fair market value at the time of his death.

(2) Then, THE PPT VALUE SHALL BE REDUCED BY ANY PAYMENT MADE BY THE PRESENT DECEDENT ON ANY MORTGAGE or lien on the property

(a) Mr. A paid P70,000 of the mortgage. Thus, P870,000 less 70,000 is P800,000

(b) The P800,000 is known as the INITIAL BASIS (3) The INITIAL BASIS shall be FURTHER REDUCED by the SECOND DEDUCTION,an amount equal to:

(INITIAL BASIS / Total amount of Gross Estate) X ordinary expenses or deductions*

*Ordinary, thus excluding family home, medical expenses, standard deduction and amounts received under RA 4917

(a) 800,000/3,200,0008 x 600,000 equals 150,000. This will be deducted from the initial basis of P800,000, which gives a balance of P650,000

(b) The 650,000 is known as the FINAL BASIS. (4) Finally, the remaining balance shall be multiplied

by the corresponding percentage: Vanishing

Deduction

Rate If received by inheritance or gift 100% Within one (1) year prior to the death of _{the present decedent}

80% More than one year but not more than two years prior to the death of the decedent

60% More than two years but not more than three years prior to the death of the decedent

40% More than three years but not more than four years prior to the death of the decedent

20% More than four years but not more than five years prior to the death of the decedent

(a) Since Mr. A received the inheritance in March 2003 (within 1 year from his death in December 2003], the balance of P650,000 shall be multiplied by 100%. Thus, the allowable vanishing deduction is P650,000 Formula

FORMULA:

(1) VALUE TAKEN FOR PPT (always the lower values) LESS: MORTGAGE (OR LIEN) PAID IF ANY(1ST

deduction)

(2) INITIAL BASIS (IB)

LESS: 2ND deduction = (IB/GE) x (ELIT + transfer for public use)

(3) FINAL BASIS

X RATES IN Sec 86A-2

VANISHING DEDUCTION in an Estate Tax Return, this is deducted from the Exclusive Properties of the decedent that form part of the gross estate.

Transfers for Public Purpose [Sec. 86 (A)(3), NIRC]

These are dispositions in a last will and testament or transfers to take effect after death in favor of the Government of the Republic of the Philippines, or any political subdivision thereof, for exclusively public purposes. The whole amount of all the BEQUESTS, LEGACIES, DEVISES or TRANSFERS to or for the use of shall be deductible from gross estate, provided such amount or value had been included in the computation of the gross estate. Amounts Received by Heirs Under RA 4917 [Sec. 86 (A)(7), NIRC]

Any amount received by the heirs from the decedent’s employer as a consequence of the death of the decedent-employee in accordance with RA No. 4917 (this law provides that retirement benefits of private employees shall not be subject to attachment, levy execution or any tax),PROVIDEDthat such amount is included in the gross estate of the decedent.