BIR Ruling [DA-017-04]

January 12, 2004 BIR RULING [DA-017-04] Sections 84, 85, 248 & 249 BIR Ruling No. 509-88 & 161-93 Mr. Nicolas M. Cuenca, Jr. 19 Urdaneta Avenue, Urdaneta Village Makati City S i r : This refers to your letter dated July 17, 2003 indorsed to this Office by Atty. Cesar A. Pangilinan, Chief of the Legal Division of Revenue Region No. 8, requesting, in effect, for a ruling on the proper computation of the estate tax of the late Nicolas M. Cuenca, Sr. who died on July 28, 1970, particularly on the following issues: 1) Whether the inclusion of the real property covered by TCT No. RT-1478 in the gross estate was proper considering that it was already subject of an estate tax which was paid in 1998; 2) What rate should be applied in computing the estate tax; 3) Whether the heirs are liable for inheritance tax; 4) Whether the estate is still subject to surcharge and interest. If so, what rate should be applied in computing the surcharge and interest. Your queries are answered as follows: Q: Whether the inclusion of the value of the real property covered by TCT No. RT-1478 in the gross estate was proper considering that it was already subject of an estate tax which was paid in 1998. A: Section 88 of the National Internal Revenue Code (NIRC), otherwise known as the Commonwealth Act No. 466, as amended (now Section 85 of the Tax Code of 1997) which was the law in force at the time of the death of the decedent provides, viz : "Sec. 88. Gross Estate . The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated, except real property situated outside the Philippines . . . xxx xxx xxx (h) Capital of the surviving spouse . The capital of the surviving spouse of a decedent shall not, for the purpose of this Chapter, be deemed a part of his or her gross estate." In view of the foregoing, the gross estate of the late Nicolas M. Cuenca, Sr. shall consist of all his properties wherever situated. Such being the case, the value of the real property covered by TCT No. RT-1478 should be included in the gross estate of the late Nicolas M. Cuenca, Sr. unless it is a capital of the surviving spouse. However, if the heirs had already paid the estate tax due on the estate of the wife of the late Nicolas M. Cuenca, Sr. when she died in 1998, it follows that the same (share of the wife of the late Nicolas M. Cuenca, Sr. in the conjugal partnership property) should be excluded from the gross estate of the late Nicolas M. Cuenca, Sr. (BIR Ruling No. 509-88 dated October 14, 1988) . aScITE Q: What rate should be applied in computing the estate tax. A: It is a well-settled rule that estate taxation is governed by the statute in force at the time of death of the decedent. Upon the death of the decedent, succession takes place and the right of the state to tax vests instantly (cited in BIR Ruling No. 161-93 dated May 3, 1993). Such being the case, the law in force on July 28, 1970, the date of the death of Nicolas M. Cuenca, Sr. is Section 85 of Commonwealth Act No. 466, as amended (now Section 84 of the Tax Code of 1997), viz : "SEC. 85. Rates of estate tax . There shall be levied, assessed, collected, and paid upon the transfer of the net estate of every decedent, whether a resident or non-resident of the Philippines, a tax equal to the sum of the following percentages of the value of the net estate determined as provided in sections 88 and 89: One per centum of the amount by which the net estate exceeds five thousand pesos and does not exceed twelve thousand pesos; Two per centum of the amount by which the net estate exceeds twelve thousand pesos and does not exceed thirty thousand pesos; Two and one-half per centum of the amount by which the net estate exceeds thirty thousand pesos and does not exceed fifty thousand pesos; Three per centum of the amount by which the net estate exceeds fifty thousand pesos and does not exceed seventy thousand pesos; Five per centum of the amount by which the net estate exceeds seventy thousand pesos and does not exceed one hundred thousand pesos; Seven per centum of the amount by which the net estate exceeds one hundred thousand pesos and does not exceed one hundred and fifty thousand pesos; Nine per centum of the amount by which the net estate exceeds one hundred and fifty thousand pesos and does not exceed two hundred and fifty thousand pesos; Nine per centum of the amount by which the net estate exceeds one hundred and fifty thousand pesos and does not exceed two hundred and fifty thousand pesos; Eleven per centum of the amount by which the net estate exceeds two hundred and fifty thousand pesos and does not exceed five hundred thousand pesos; Thirteen per centum of the amount by which the net estate exceeds five hundred thousand pesos and does not exceed one million pesos; Fifteen per centum of the amount by which the net estate exceeds one million pesos and does not exceed one million pesos." Q: Whether the heirs are liable for inheritance tax. A: The heirs of the late Nicolas M. Cuenca, Sr. are liable for inheritance tax pursuant to Section 86 of the old Tax Code which was the law in force at the time of the death of the decedent, viz : "SEC. 86. Rates of inheritance tax . In addition to the estate tax imposed by section eighty-five, there shall be levied, assessed, collected and paid an inheritance tax equal to the sum of the following percentages of the value of the individual share of each heir or beneficiary in the net estate after deducting the amount of the estate tax of every decedent, whether a resident or non-resident of the Philippines. (a) When the surviving spouse, a legitimate, recognized natural, illegitimate or adopted child; or legitimate descendant, or ascendant, or either of the adopting parents is the beneficiary, or the father or mother who had recognized him as a natural child, and in every case where the beneficiary, of receives the property exclusively for educational or charitable purposes there shall be collected upon the share which corresponds to the following schedule: Provided, however , That such portion of the share of a surviving spouse or a legitimate, recognized natural, illegitimate, or adopted child of a decedent who was a citizen or resident of the Philippines at the time of his death which is not in excess of five thousand pesos shall be exempt from this tax: Two per centum of the amount of the sharp not in excess of twelve thousand pesos; Four per centum of the amount by which the share exceeds twelve thousand pesos and does not exceed thirty thousand pesos; Six per centum of the amount by which the share exceeds thirty thousand pesos and does not exceed fifty thousand pesos; Eight per centum of the amount by which the share exceeds fifty thousand pesos and does not exceed seventy thousand pesos; Twelve per centum of the amount by which the share exceeds seventy thousand pesos and does not exceed one hundred thousand pesos; Fourteen per centum of the amount by which the share exceeds seventy thousand pesos and does not exceed one hundred and fifty thousand pesos; Eighteen per centum of the amount by which the share exceeds two hundred and fifty thousand pesos and does not exceed two hundred and five hundred thousand pesos; Twenty per centum of the amount by which the share exceeds five hundred thousand pesos and does not exceed one million pesos; Twenty-two per centum of the amount by which the share exceeds one million pesos. xxx xxx xxx" Q: Whether the estate is still subject to surcharge and interest. If so, what rate should be applied in computing the surcharge and interest. A: Then Section 101 of the old Tax Code provides, viz : "SEC. 101. Addition to the tax in case of non-payment . (a) Tax shown on the return . (1) Payment not extended . Where the amount of the taxes imposed by this Chapter, or any part of such amount is not paid on the due date of the taxes, there shall be collected as part of the taxes, interest upon such unpaid amount at the rate of one per centum a month from the due date until it is paid. xxx xxx xxx (b) Deficiency . (1) Payment not extended . Where a deficiency, or any interest assessed in connection therewith under section 100, or any addition to the taxes provided for in section 102 is not paid in full within thirty days from the date of the notice and demand from the Commissioner, there shall be collected as part of the taxes, interest upon the unpaid amount at the rate of one per centum a month from the date of such notice and demand until it is paid. HTDCAS xxx xxx xxx (c) Surcharge . If any amount of the taxes included in the notice and demand from the Commissioner of Internal Revenue is not paid in full within thirty days after such notice and demand, there shall be collected in addition to the interest prescribed herein and in section ninety-nine and one hundred and as part of the taxes a surcharge of five per centum of the unpaid amount." Section 101 of the old Tax Code (now Section 249 of the Tax Code of 1997) provides that where the amount of the tax imposed is not paid on the due date, there shall be collected as part of the tax, interest upon such unpaid amount at the rate of one per centum (1%) per annum , from the due date until it is paid. Furthermore, pursuant to then Section 102 of the same Code (now Section 248 of the Tax Code of 1997), in addition to the aforesaid delinquency interest, for failure to pay the tax, make such return or supply such information, there shall also be imposed in addition to the tax or to the deficiency tax an ad valorem penalty (surcharge) of twenty-five per centum (25%) of the amount ( De Lara vs. CIR, G.R. Nos. L-9456 and L-9481, January 6, 1958 ) and fifty per centum (50%) in case of a false or fraudulent return. However, since you are now voluntarily paying the estate tax of the late Nicolas M. Cuenca, Sr. without notice and demand from the Commissioner of Internal Revenue under the VAAP, no ad valorem penalties prescribed under then Section 102 of the old Tax Code (now Section 248 of the Tax Code of 1997) shall be imposed for failure to make and file the return required to be filed therefor. Accordingly, the estate of the late Nicolas M. Cuenca, Sr. is liable to pay the estate tax due plus penalties consisting of delinquency interest in the maximum rate of fifteen per centum (15%) computed at one per centum (1%) per annum. Likewise, in addition to the inheritance tax imposed upon the heirs, a delinquency interest is hereby imposed at the same rate as herein above provided. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group