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Generational Transfers and Tax Amnesty

(Article published in the Nov. 21, 2007 issue of Manila Standard Today)  

The purpose of the estate tax, aside from the general purpose of raising revenues for the government, is to tax the transfer of property down from one generation to another; hence its name, “generational tax.” The perception that it is both unreasonably high (despite its reduction to lower levels by the Tax Reform Code of 1997) and fundamentally unfair (for the reason that, prior to one’s death the government is considered by many as having already exacted its just share in the form of taxes through the income tax, the value-added tax, and the real property tax) is the driver of many estate planning techniques designed to reduce the base upon which the tax is levied on transfers at death.

 One cannot, however, reduce one’s estate at death to zero.  Prudence dictates that an estate planner ought to reserve for himself enough properties so as not to be a burden to his family or to society.  Thus, addressing itself to those who would think of escaping the estate tax by giving their properties all away prior to their death, Article 750 of the Civil Code provides that a “donation may comprehend all the present property of the donor, or part thereof, provided he reserves, in full ownership or in usufruct, sufficient means for the support of himself and of all relatives who at the time of he acceptance of the donations are by law entitled to be supported by the donor.”  Violation of such obligation to reserve will result in the donation being reduced on petition of any person affected.


          Death and the death tax, or estate tax as it is legally known, are thus both certain.  Thanks to R.A. No. 9480, known as the Tax Amnesty Law, those transfers upon deaths which occurred 31 December 2005 or earlier that did not fully comply with the concomitant tax liabilities related to dying presently have the opportunity to be eventually laid to rest.  How the benefits may be availed of by the taxpayers concerned is clarified in R.M.C. No. 69-2007.

 Tax theory says that the estate tax is a tax on a person’s right to transfer property upon his death.  Strictly speaking, the person liable should therefore logically be the decedent.  But a decedent, by definition, has already moved to an address that is beyond the reach of the taxman.  Taxes are paid by live persons; hence, tax practice imposes the obligation to pay the estate tax on the executor, administrator, or any person in actual or constructive possession of the property that the decedent left behind (Sec. 91 (C), Tax Code) and they are usually the decedent’s heirs.  It stands to reason therefore that the same person ought to have the privilege of applying for tax amnesty for the decedent’s estate (Q & A, Nos. 42 and 43).

 If that person thinks that he needs to avail himself of the benefits of tax amnesty, both in his capacity as executor or administrator of a decedent’s estate and in his own capacity as a person liable for internal revenue taxes, he ought to file two tax amnesty returns. One for the estate and another one for him own tax liabilities (Q & A, No. 2, RMC 69-2007).

 Essential to the availment of the tax amnesty is the filing of the Statement of Assets, Liabilities and Networth (SALN).  Section 3 of R.A. 9480 requires that the SALN, to be filed by anyone seeking amnesty, “contain a declaration of the assets, liabilities and networth as of December 31, 2005.”  However, December 31, 2005 is a date irrelevant, for valuation purposes, to the estate of any decedent who did not die on that day since “the estate is appraised at its fair market value as of the time death” (Sec. 88(B), Tax Code). Which law ought the executor or administrator follow?

 RMC 69-2007 adopts the logical rule and in effect creates an exception to R.A. No. 9480 which the legislators themselves would have made had they thought about the precise issue.  The valuation date of the estate for amnesty tax availment should be the same date as that for the determination of the estate tax (Q & A, No. 41).  The value at the date of death is what should be stated in the SALN and that will be the basis for the computation of the amnesty tax (Q & A, No. 45). 

 The task of the availing executor or administrator is not, however, as simple  as adding back an omitted or undervalued asset to the net estate and imposing the amnesty tax rate.  The method of computing for the net estate is not the same as the method for computing for the networth for amnesty tax purposes.

 The net estate is arrived at by deducting from the gross estate, as defined in Section 84 of the Tax Code, the items allowed under Section 86.  On the other hand, the networth for purposes of the tax amnesty is the difference between the total assets and total liabilities, as defined in Section 3 of R.A. No. 9480.  Unfortunately, while there is general agreement in both laws of figure to start with, “deductions” under the Tax Code is broader in scope that “liabilities” under the tax amnesty law. 

 “Deductions” include certain items which are clearly not obligations or charges against the assets.  RMC 69-2007 isolated these items by limiting the amounts recognized as liabilities to “unpaid legitimate and enforceable obligations incurred in acquiring the properties included in the gross estate.”  Accordingly, certain items allowed as deductions from the gross estate will not be allowed to be deducted from the assets in the SALN.  These items are deductions for the “family home, medical expenses incurred, funeral expenses incurred, standard deductions and other deductions not related to the acquisition of the properties forming part of the gross estate” (Q & A No. 46).

 The executor or administrator and the decedent’s heirs should therefore carefully determine whether it is more advantageous for them, considering both the financial burden as well as the personal responsibility for the payment of the correct tax, to simply seek to amend the estate tax and pay the corresponding deficiency together will all the interests and charges or to file for tax amnesty and pay the tax on the networth.  Undoubtedly, in some instances, the financial burden may be a bit heavier under the tax amnesty law than under the estate tax law.  But, it seems to me, even in that case, the incremental cost just might be all that is needed to let the decedent finally rest in peace and his heirs enjoy lasting peace of mind.