(Article published in the Jan 20,2003 issue of TODAY, Business Section)Recently issued Revenue Regulations 2-2003, blemished at bit though it may be, in some places, by occasional infelicity of language and, in others, by conceptual confusion, is nevertheless a welcome restatement and clarification of the more important rules and regulations on the estate tax and the donors tax. It is too comprehensive to be, with justice, dealt with in one column, and so I intend to treat it in several issues, limiting myself in this initial essay to bits and pieces that may be quickly digested and disposed of.
The Bureau of Internal
Revenue (BIR) most likely, like me, does not have a proof reader of what it sends to press
because what was published last Saturday contains an error or two, clerical and innocuous
but, to a certain extent, revealing of how things are processed in the bureaucracy. Take,
of instance, the matter of the date of issuance of the regulation. The published copy of
the regulations bears the date of "December 16, 2002". But it is titled as
"Revenue Regulations 2-2003". Traditionally, the second of the two sets of
numbers in a revenue regulation indicates the year when it was issued; the first speaks of
the chronological position of the regulation vis-à-vis the others already issued. Thus,
the "2-2003" in Revenue Regulations 2-2003 says that this is the second revenue
regulation issued in the year 2003. But if it is issued in 2003, why is the date
"December 16, 2002?"
What might have happened is that last year, on December 16, 2002, BIR Commissioner Guillermo L. Parayno, Jr. sent the proposed regulations for signature to Finance Secretary Jose Isidro Camacho but, for reasons understood by and acceptable only to those who work in government, it was signed and/or released just this year. No one bothered to change the date on the regulation and so when the people at the records section of the BIR assigned the correct number (they could not do otherwise since Revenue Regulations 1-2003, dated January 2, 2003 had by then already been released to the public), the dating error had to be immortalized.
The inconsistency, however, is not damaging to the anybody, except for the bureaucrats pretensions of efficiency, since the regulations, which seem to have been carried by at least one broadsheet last Saturday, will take effect, by their own terms, after 15 days of publication in a newspaper of general circulation.
Just as innocuous is the lapse in Section 6(B) and 6(C). These portions of the regulations refer respectively to the deductibility, from the gross estate, of (a) property previously taxed and (b) transfers for public use. Since the subject line of the regulations tells us that Revenue Regulations 2-2003 is supposed to be the "consolidated regulations" on the estate and donors tax, one would expect that rules previously issued would be restated side by side with the new ones. Instead, however, one finds for these deductions referred to simply as "Property previously taxed - xxx xxx xxx" and : "Transfers for public use xxx xxx xxx".
The use of a series of groups of exes, separated by spaces, as in "xxx xxx xxx" is an anachronistic device of lawyers, apparently handed over from days of old before the typewriter, to indicate that certain portions of a quotation are being omitted for not being relevant to the issue under discussion. It is the counterpart of the more modern " "
But the "xxx xxx xxx" found in Section 6(B) and 6(C) of Revenue Regulations 2-2003 certainly cannot mean that what was omitted is not relevant to the subject. What must have been meant was that the previous regulations on these deductible items remain the same. If so, the appropriate thing to do was to reproduce the old rules, precisely because Revenue Regulations 2-2003 is a consolidation. It is possible that, to economize on paper and effort, the discussion drafts of the regulations, because they were not affected by the Tax Reform Act of 1997, deliberately omitted the rules on those deductions with the intention of supplying the omitted portions from the old regulations when the consolidated regulations are finalized.
But when President Arroyo announced by yearend that she was not seeking election for 2004, the stunned bureaucracy forgot that little item that had to be done before the final regulations were issued. Hence, giving the final regulations the appearance of a draft.
These warts, however, should not detract from the merits of Revenue Regulations 2-2003. A significant rule newly enunciated in the regulations relates to the deduction of expenses related to the funeral of the decedent. For the longest time, the estate tax law allowed the deduction from the gross estate of "funeral expenses", which covers expenses of wake and burial, as well as "claims against the estate" which deals with obligations of the decedent that remained unpaid upon his death.
Because "funeral expenses" in the days of old could only be so much, the law had always placed a maximum limit to the amount that may be deducted. Under current law, what may be deducted as "funeral expenses" is the lowest of three amounts, namely (a) the actual funeral expenses, (b) the amount equal to 5 percent of the gross estate, and (c) P200,000. There was no limit, however, on how much may be deducted as "claims against the estate" for as long as the obligation is duly documented.
Thus, particularly in these days when the cost of a decent wake and burial more often than not exceeds the limit on the allowable deduction for funeral expenses, the smarter taxpayers resorted to taking out the excess of their funeral expenses as claims against the estate. In effect, they have, by so doing, circumvented the statutory limitation.
The new regulations seeks to plug the loophole by expressly providing that "any amount of funeral expenses in excess of the P200,000 threshold whether the same had already been paid or still payable shall not be allowed as a deduction under this Subsection. Neither shall the unpaid portion of the funeral expenses incurred which is in excess of the P200,000 threshold be allowed to be claimed as a deduction under claims against the estate provided under Subsection (C) hereof."
There is, however, a slight error even in this clarification. The quoted portion of the regulations speak of the "P200,000" threshold. Actually, as correctly shown in the illustrations in the regulations on how to determine the correct amount of allowable funeral expenses, the threshold is the lowest of the three items mentioned above, namely (a) the actual funeral expenses, (b) the amount equal to 5 percent of the gross estate, and (c) P200,000 and not just P200,000.
Another loophole sought to be plugged by the regulations is found in the allowance of unpaid mortgages. Section 86(A)(1)(e) of the Tax Code allows the deduction "for unpaid mortgages upon, or any indebtedness in respect to, property where the value of the decedents interest therein, undiminished by such mortgage or indebtedness is included in the value of the gross estate."
This provision has been commonly abused in two ways. The first was to interpret the law as granting the executor or administrator the option to either (a) report the full amount of the property mortgaged and deduct the amount of the indebtedness secured by the mortgage or (b) report only the excess the value of the property over the indebtedness. While arithmetically the result is the same, the effects of one manner of reporting over the other differ under different circumstances. The second mode of abusing Section 86(A)(1)(e) was less sophisticated. The executor or administrator simply deducted the amount of the mortgaged indebted even if the decedent was not really the person who benefited from the loan.
The regulations, in response to these dubious strategies, now provide, in contrary response against the theory of executors or administrators option, that "in all instances, the mortgaged property, to the extent of the decedents interest therein, should always form part of the taxable gross estate." As for accommodation loan, the regulations require that "where the loan proceeds went to another person, the value of the unpaid loan must be included as a receivable of the estate".
The third laudable provision in Revenue Regulations 2-2003 is explicit recognition of the intent behind the so-called "standard deduction" of P1,000,000. The common understanding of "standard deduction" is rooted in the way the same term is used in the Income Tax law. Under Section 34(L) of the Tax Code, an individual, other than a nonresident alien, may, in computing for his net income subject to tax, elect to deduct an amount not exceeding 10 percent of his gross income, in lieu of claiming itemized deductions. This is particularly useful for people who could not substantiate their business deductions or do not keep adequate records of their business expenses. The commonly held view thus is that the "standard deduction" is claimed in lieu of the "itemized deductions".
To the surprise of many, however, "standard deduction" under the estate tax does not have the same meaning found in the income tax law. Under the estate tax, it is not in lieu of the other deductions against the gross estate. It is in addition to them. This liberal stance is now formalized in Section 6(E) of Revenue Regulations 2-2003. It says that "a deduction in the amount of One Million Pesos (P1,000,000) shall be allowed as additional deduction without need of substantiation. The full amount of P1,000,000 shall be allowed as a benefit of the decedent."
Other items in Revenue Regulations 2-2003 deserve a more focused and extensive treatment. I will endeavor to provide that in the succeeding issues of this column.