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Misguided Estate Planning

(Article Published in the Sunstar Manila issue of Jul 17,2013)

       The names of people, places and dates I have changed to protect their privacy; but the events are real. Together, they constitute the facts and circumstances narrated in the complaint-affidavit filed with the Department of Justice by the Bureau of Internal Revenue recently, in the course of its Run-Against-Tax-Evaders campaign.

       From the moment of the death of X, spouse of Y, in 1986, the legal heirs by operation of law became the owners of the properties left by the decedent, X, who left no will. Under the law what they (or any one of them) should have done, before identifying which properties were to be owned by whom, was settle the estate tax liability of X. They were supposed to (a) file a written notice of death within 2 months, and (b) file the estate tax return and pay the estate tax due thereon within 6 months, unless an extension is granted by the Bureau of Internal Revenue. They did not.

       Instead, what they did was let 10 years pass without doing anything. Then they sought to avail themselves of the benefits of the Voluntary Assessment Program (VAP) pursuant to RMO 59-97. That RMO which was issued on October 27, 1997 “gave erring taxpayers a final opportunity to come up with a clean slate.” (Com’r of Internal Revenue v. Ariete, GR No. 164152, promulgated on January 21, 2010).

       But although the heirs may have come up with a clean slate, the evil serpent of tax cheating may have entered the hearts and minds of those left behind. Out of the blue, several Special Powers of Attorney sprouted overnight. The special powers of attorney were purportedly signed in Quezon City by the decedent and her husband in 2006 or 20 years after the death of X who obviously could not by then have executed those documents. Under these special powers of attorney, Z was appointed as the spouses’ attorney-in-fact to manage their properties covered by the agency. The special powers of attorney, significantly, gave Z authority to sell and dispose of the interest of X and Y in propertes, some of which were land located in various places, including Quezon City

       The special powers of attorney were supposedly notarized by Atty N, who it turned out was not really commissioned as notary of Quezon City at that time.

       Two years later, in 2008, Y, the surviving spouse of X, himself died. No estate tax return was also filed for him. Instead, Z, using the special powers of attorney purportedly executed by X and Y in 2006, transferred the real properties to Company W.

       The transfer of the lands of X and Y to Company W was sought to be accomplished under Section 40(C)(2) of the National Internal Revenue Code of 1997 (“Tax Code”). That provision in the Tax Code exempted from taxes the transfer of property by a person to a corporation, as a consequence of which transfer, that person together with not more than five, gains control of the corporation.

       That section in the Tax Code forced the incorporators to attribute the majority of the shares in Company W to X and Y who ought to appear to have, by virtue of the transfer of their properties to Company W, gained control of the corporation. However, the reality was that, since X and Y were in fact dead, the actual control of Company W fell into the hands of Z.

       At that point, the tax cheating did seem to pay off. The appropriate certification rulings from the BIR, which were based on papers submitted by Z, were issued thereby permitting the properties to be transferred to the name of Company W.

       It thus did appear that by Z’s astute manoeuvring of documents, albeit false and falsified, and transactions, the properties owned by the spouses X and Y have escaped (a) the estate taxes on the estates of each of the spouses; and (b) the transfer taxes due on the transfer of the properties constituting their estate to Company W

       All that was needed after all those machinations was a transfer by Company W to an innocent third party for value, a third party who knew nothing of the deceitful provenance of the properties he or she was buying and who in fact parted with sufficient consideration.

       Presumably, after receiving good cash for the properties that used to be owned by the spouses X and Y, Corporation W would die a natural death, without the tax authorities knowing any better.

       But, as fate would have it, a denunciation letter was sent to the BIR by one who could not stomach what was going on. It reported that Y had died leaving no will but leaving several commercial and residential properties. The letter was taken seriously by the BIR and very soon an investigation of the estate of the Y was conducted pursuant to the letter of authority prompted by the denunciation letter.

       Today, the party is over and piper needs to be paid. Z is the only left of the dramatis personae. She, because she is in actual or constructive possession of the properties that belonged to the estate of Y, is being made to pay about Php 30 million in estate taxes. Moreover, since it was undeniable that no estate tax return was filed, resulting in the non-payment of the estate tax, Z, too, became liable for that.

           Most unlucky seems to be “notary” N. Because of his indispensable participation in the tax evasion, he too became liable as a principle, just like Z. The irony is that he may have been paid only a pittance for his malfeasance.

       Many years, undoubtedly, will have to pass before the end of this story is finally told. What is clear though is that while death and taxes may lead the list of things most certain in this life, discovery, at some point or another, of the cheating on taxes comes in a close third

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