BIR Ruling

September 20, 1971 Messrs. De Santos, Balgos & Perez Attorneys-at-Law 7th Floor, Tiaoqui Building Plaza Sta. Cruz, Manila Gentlemen : This refers to your letters dated July 14, 1971 and September 1, 1971 requesting a ruling as to whether the payment of the debts of the estate to be made by the widow is subject to the donor's and donee's gift taxes. The facts upon which your request is based are briefly stated as follows: acd The estate of X cannot be finally settled because of existing debts. The widow who wanted an immediate settlement offered to pay said debts of the estate as reported by the executor. However, the executor and three of the forced heirs are objecting to the offer of the widow. On the other hand, the other heirs are not only agreeable to the said offer but they would reimburse the widow of their proportionate shares in the obligation to be paid. The probate court had issued an order authorizing the payment of the obligations of the estate by the widow. Accordingly, the widow had deposited in Court cashier's checks payable to the creditors of the estate. In this connection, with respect to the other heirs objecting to the offer, the widow is leaving to their discretion whether or not to reimburse her for their proportionate shares in the obligations. In reply, I have the honor to inform you as follows: Whether or not a donation is deemed made depends on the actuation of the widow. As to when the actuation is ascertained is, however, the matter that poses a problem. It should be noted that the heirs ought to received only so much of the net estate that corresponds to their share as in fact it may be assumed that even the estate and inheritance taxes that were paid were computed on the basis of the net estate. Even the court, it is believed, cannot adjudicate to the heirs so much that would exceed their legitimate share in the net estate. Therefore, the indebtedness of the estate that the widow would advance or pay out of her personal funds will always remain as not forming part of the net estate and segregated therefrom. This portion cannot possibly be distributed to the heirs as they have no right thereto, it not forming part of the distributive net estate. The widow could therefore, very well define her actuation. If it is her intention to merely advance the amount in payment of the indebtedness of the estate in order to secure the early termination of the proceedings in court, she will simply manifest that fact to the court and the court will necessarily adjudge to her so much of the gross estate equal to the indebtedness, in which event there would be no donation. She would also very well define her intention to personally assume payment of the estate's obligations out of her personal funds, in which event, she would be deemed to have made a donation. This Office cannot reconcile itself to the proposition that some heirs will reimburse her their corresponding shares, whereas, others will not as they do not agree to the proposition. This Office believes that the attitude of the heirs could not and should not be countenanced for the obligor is the estate and not themselves. They have no interest whatsoever in that portion of the estate earmarked for creditors; and since this portion is not part of the net transmissible estate thru its executor can dispose of it to discharge obligations of the estate whether they like it or not. In the light of the foregoing, this Office believes that the widow should, inasmuch as she could very well do, make manifest from the outset her intention in effecting payment of the obligations of the estate out of her personal fund. This she must do inorder that the tax incidence of her act could be definitely established. The tax incidence of her act cannot be allowed to hang indefinitely depending upon the time when the heirs should or should not repay her for, as aforesaid, the property with which such obligations of the estate are to be satisfied is deemed segregated from the gross estate before distribution to them of their share of the net transmissible estate. aisa dc Very truly yours, MISAEL P. VERA Commissioner of Internal Revenue