BIR Ruling [DA-053-06]

February 21, 2006 BIR RULING [DA-053-06] Sec. 86; 105-99; DA-573-99 SGV & Co 6760 Ayala Avenue Makati City Attention: M.F.A. Balili Tax Division Gentlemen : This refers to your letter dated January 06, 2006 requesting for a ruling whether your client, the Heirs of the Late Salvador H. Laurel, is liable for donor's tax and whether the amount of estate tax paid should be excluded in the computation of the net distributable estate in arriving at the distributive shares of the heirs. It is represented that on January on 27, 2004, the late Salvador H. Laurel (SHL) passed away leaving behind Mrs. Celia Diaz-Laurel and eight (8) children as heirs; that several real and personal properties, such as houses and lots, residential apartments, residential condominium units, office condominium units, farmlands, cash, cars, shares of stock and golf shares with a total value of P282,002,628.58 formed part of the Estate of the late SHL (the "Estate"); that the real properties are located in the following areas: a) Barangay Addition Hills, Mandaluyong City b) Pioneer Highlands, Mandaluyong City c) Barangay San Antonio, Pasig City d) Global City, Fort Bonifacio, Taguig City e) Mabini, South Lipa City f) Binubusan, Lian, Batangas g) Luyahan, Lian, Batangas h) Barangay San Antonio, San Pedro, Laguna i) Barangay Iruhin, Tagaytay City j) Filinvest Pagsanjan, Cainta while the following comprised the personal properties: a) Cash b) Golf shares in Baguio Country Club, Calatagan Golf and Country Club, Camp John Hay Country Club, Canlubang Golf and Country Club, Evercrest Golf Club Resort, Inc., Manila Golf and Country Club, Mt. Malairayat Golf and Country Club, Sta. Elena Golf and Country Club and Wack Wack Golf and Country Club; c) Shares of stock in Lyceum of the Philippines, Inc., Sound Development Corporation, LAHI, Inc., Dorel Development Corporation, and PLDT; and (d) Six (6) motor vehicles. that on July 23, 2004, Mrs. Celia Diaz-Laurel, surviving spouse of the late SHL, filed the estate tax return of her late husband with the Bureau of Internal Revenue (BIR), Revenue District Office (RDO) No. 41, Mandaluyong City, pursuant to Section 90 of the Tax Code of 1997; that as the Estate was not in a financial position to pay in full the total amount of the estate tax, Mrs. Laurel, in her own behalf, and on behalf of the other surviving heirs, requested an extension of time to pay balance of the said tax; that inasmuch as the Estate lacked sufficient cash to pay the estate taxes due, Mrs. Laurel obtained approval from RDO No. 41 to sell certain golf shares and apply the proceeds thereof to the payment of estate taxes; that as a sign of her earnest desire to pay the estate tax, Mrs. Laurel made an initial payment of P5,000,000.00 as partial fulfillment of the estate tax due; that this was later followed by payments of P11,421,250.00 on February 16, 2005, P837,225.00 on February 21, 2005, and P5,043,535.00 on May 04, 2005 to RDO No. 41; that on June 16, 2005, RDO No. 41 sent a notice of deficiency tax due in the amount of P7,833,012.12 to the Administrator of the Estate which was likewise duly paid; that in sum, the Heirs paid a total of P30,135,015.13 in estate taxes and interest; that on July 01, 2005, RDO No. 41 sent a letter to the Administrator of the Estate, acknowledging full payment of the estate tax; that the letter further acknowledged their duty to issue the corresponding CAR, provided the deed of extrajudicial partition is submitted to them. IHTaCE It is further represented that on July 31, 2005, the Heirs, by themselves and/or represented by Mrs. Celia Diaz-Laurel as guardian or attorney-in-fact of some of them, met and decided not to divide the properties pro indiviso , for the reason that some of the heirs wanted specific properties for their own individual sentimental preferences; that in the course of the discussion, the heirs agreed to allow Mrs. Celia Diaz-Laurel to have first choice of the properties comprising her one-half (1/2) share in the estate as surviving spouse, with the net distributable estate to be divided, to the extent possible, in accordance with their intestate shares taking into consideration the preferences of each individual heir; that the said method resulted in an uneven distribution of the estate wherein several heirs received more than the value of their supposed shares, with some heirs receiving less; that the heirs agreed to reimburse Mrs. Celia Diaz-Laurel for the estate taxes amounting to P30,135,015.13 which she advanced on everyone's behalf; that on August 26, 2005, the heirs executed a Deed of Extrajudicial Settlement and Partition; that all the real and personal properties comprising the gross estate the value of which was P282,002,628.58 were distributed among the heirs; that in compliance with the directive of the July 1, 2005 letter from RDO No. 41, you requested, on behalf of the heirs, for the issuance of the Certificate Authorizing Registration (CAR) for the properties forming part of the Estate, and submitted the Deed of Extrajudicial Settlement and Partition to the BIR on October 19, 2005; that upon follow-up on October 21, 2005, you were informed by RDO No. 41 that they could not issue the tax clearance and the CAR on the ground that a certain alleged heir by the name of Pia Pilapil-Gonzalo, contested your request; that subsequently, you learned that in a letter dated September 20, 2005, Ms. Gonzalo, through her counsel, Atty. Bayani Loste of the Fortun Narvasa and Salazar Law Offices, did not contest the Deed, nor did she request to hold in abeyance the issuance of the tax clearance or of the CAR; that she merely requested for a copy of the Estate Tax Return, the list of properties and copies of the transfer certificates of title (TCTs) covering the real properties involved; that in the letter endorsement of the BIR's Revenue Region No. 7 dated December 15, 2005, your client's right to the issuance of the CAR was upheld; that the same office, however, ruled that the heirs were liable for donor's tax and directed RDO No. 41 to study the matter and determine the appropriate tax due, to wit: "In the instant case, there appears to have an implied waiver of the inheritance among the heirs. . . . Accordingly, said implied waiver shall be treated as an act of disposition of the share of the inherited property since the benefits thereof are not enjoyed by everybody but only by one or more heirs and therefore the same shall be subject to the Donor's Tax. In this connection, a review of the Extrajudicial Settlement be made to determine if the same would result into unequal distribution of the inheritance taking into account the value of the estate as a whole viz a viz the value of the share to be received by the heirs in accordance with the Extrajudicial Settlement . . . . " (Emphasis supplied) In reply thereto, please be informed that in legal succession, accretion takes place in case of repudiation among heirs of the same degree. This is so because there is no right of representation. The co-heirs in legal succession are co-owners of the inheritance, for which reason there is always a right of accretion among them, unlike in testamentary succession where there may or may not be a right of accretion (Arts. 1018, 977, 967, Civil Code of the Philippines). However, if the renunciation by an heir or heirs is made in favor of one or more heirs but not all the other heirs, the act of renunciation is in effect all act of disposition inasmuch as the act of disposition and the benefits thereof are not enjoyed by everybody but by one or more heirs (Arts. 1050, 1051, 1016, Civil Code). In the instant case, there is no specific repudiation on the part of one or some of the heirs in favor of another heir or heirs to the exclusion of the other heirs. Everyone received a share in the estate. While the values of the properties received by each heir were not equal, this by itself cannot be interpreted as repudiation. Since most of the estate left behind by the late Salvador H. Laurel consisted of real property, it would be impossible, if not absurd, to expect that the properties distributed to each of the heirs would be of equal value, especially since they decided to divide the estate in accordance with their individual preferences for and sentimental attachments to the properties. Further, on the issue of whether the amount of estate tax paid should be excluded in the computation of the net distributable estate in arriving at the distributive shares of the heirs, this Office rules otherwise. Section 86 of the 1997 Tax Code, as amended, enumerates the items allowed as deductions against the gross estate of the decedent to be able to determine the net taxable estate. Such enumeration is exclusive thereby those items not mentioned therein are deemed excluded. Considering that the amount corresponding to the estate tax paid is not among those items enumerated in Section 86 of the Tax Code, as amended, it is therefore deemed excluded in the items allowed as deductions against the gross estate. Thus, for taxation purposes, specifically for the purpose of computing the net taxable estate, the amount corresponding to the properties sold to cover the amount of estate tax still has to form part of the gross estate of the decedent. The said amount still has to be considered in the distribution of the corresponding shares due to the heirs though the same, in actuality, may not be treated as part of the heirs' respective shares in the estate. aTHCSE Lastly, since the correctness of the payment of the estate tax due on the Estate of the late Salvador H. Laurel has already been established, the revenue district office concerned is hereby directed to forthwith issue the CARs covering the properties forming part thereof. 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 null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service