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Estate planning gets a boost from Republic Act 9243

(Article published in TODAY, Business Section)  

It was not even a glint in the fathers’ eyes.  And it was no more than vaguely included in the senator’s concerns.  But, thanks to the Conference Committee, it is clearly and undeniably part of the law.  Though precarious and dubious was its conception, and its birth attended by hints of illegitimacy, Section 199(m) of the Tax Code is undeniably a welcome boon to estate planners.

All that the House of Representatives wanted was to eliminate the documentary stamp tax on the secondary trading of financial instruments (House Bill No. 2266) and on the borrowing and lending of securities under the auspices of the stock exchange as authorized by the SEC (House Bill No. 4480) and to address the pesky problem of the Special Savings Account by expanding the meaning of “certificate of deposit” that is subject of the tax (House Bill No. 4481).

But after a gestation period in the Senate of about a year, these modest objectives of the Lower House were fertilized by with the more grandiose aims of the Upper House embodied in the rather pretentious title of “An Act Rationalizing the Provisions on the Documentary Stamp Tax of the National Internal Revenue Code, as amended, and for other purposes” (Senate Bill No. 2518).  Still, during the measure’s gestation at the committee level, the idea of providing a tax break to estate planners by exempting property transfers to controlled corporations was nowhere to be found.

It was only on 28 October 2003, during the period of the amendments from the floor, that Senator Villar injected the idea, albeit, vaguely and indirectly.  Senator Villar inquired whether transfers of stock or real property made by the parties to a merger or consolidation, to either the surviving corporation, or to a new entity formed to replace the parties would be benefited by the proposed measure.  Senator Recto, the sponsor, in bliss responded in the affirmative.  It seems, however, that Senator Villar was not too convinced that the text of the bill supported the sponsor’s optimism. 

As in other instances of this kind, to save their colleagues from embarrassment, session was suspended, on motion of Senator Villar, at 4:52 in the afternoon.  Thirty minutes later, after the usual whispers amongst the honorables, session was resumed; Senator Villar proposed, the sponsor accepted, and the senate approved “the insertion of a new subsection (in the enumeration of exemptions from the documentary stamp tax) to read as follows: “(m) Transfer of real property in corporate merger or consolidation.”

Thus, at the Conference Committee formed to reconcile the conflicting versions of the House and the Senate, the senators marched with a measure that granted a very limited exemption that was confined to (a) transfers of real property (b) in instances of corporate merger or consolidation”.  Whether the confines of the exemption were deliberately crafted during the thirty minute break to reflect only the narrow interests of the proponent of the particular tax benefit does not appear in the records.

But at the give-and-take atmosphere of the conference committee, the restrictive Villar amendment to Senate Bill No. 2518 metamorphosed into something beyond the expressed concern of the author.  It became “(m) Transfer of property pursuant to Section 40(C)(2) of the National Internal Revenue Code of 1997, as amended.”  Once again, the Conference Committee lived up to its reputation as being a Third House of our legislature, at least co-equal with the Senate and the Lower House, if not more important than the other two.

“Transfer of property pursuant to Section 40(C)(2)” is obviously not the same as “transfer of real property in corporate merger or consolidation”.  By the simple expedient of making reference to Section 40(C)(2) of the Tax Code, the Conference Committee, in one stroke, expanded the Villar exemption to include (a) transfers of all kinds of property and not just real property, (b) in instances not only of mergers and consolidations, but also conveyances by one person to a corporation as a result of which transfer he, together with not more than four other persons, gains control of that corporation. 

That latter expansion, relating to the kind of transfer to a controlled entity (usually a family corporation) is, as every estate planning practitioner knows, a popular tax planning technique in the country.  Space limitations prevent us from examining fully the advantages and disadvantages of that technique; suffice it to say at this time, however, that that tool acquired additional attractiveness.  What started as a parochial concern ended up being a benefit for everyone.

         Call it sheer luck, or Adam Smith’s “unseen hand” if you will, but, from where I sit, it does occur, sometimes, that people acting in their narrow interests bring about, albeit apparently unwittingly, contributions to what the scholastics call the common good.