BIR Ruling [DA-260-05]

June 16, 2005 BIR RULING [DA-260-05] Sections 99 to 107; BIR Ruling No. DA-035-02 Atty. Jose Ma. Q. Austria 3751-C Bautista St. Makati City S i r : This refers to your letter dated February 16, 2005 requesting on behalf of your client, Manuel P. Gorospe, for a ruling on the following issues: 1. Whether or not an extrajudicial settlement of the estate of a deceased must first be filed, despite the fact that a petition for letters of administration has already been granted by a court of competent jurisdiction on the estate of the deceased; and 2. Whether or not an estate of a decedent, under administratorship proceedings, filed with a court of competent jurisdiction, is required to pay estate taxes prior to a transfer to a third party, not a beneficiary of the estate, of a portion of the same, authorized under a competent court order, for the purpose of maintaining the estate alone and not distribution to the heirs or beneficiaries. You stated in your letter that the late Benjamin K. Gorospe passed away on March 15, 1984; that shortly thereafter, his wife Isabel P. Gorospe filed a Petition for Administration of his estate before the Regional Trial Court of Misamis Oriental, Branch 20 thereof, located in Cagayan De Oro City and docketed as SP. PROC No. 1928, wherein she was eventually appointed administratrix of the estate of the late Benjamin K. Gorospe; that on April 1, 1998, Isabel P. Gorospe, as the administratrix of the estate of the late Benjamin K. Gorospe, filed a Motion for Authority to Sell a portion of the estate located in Sampaloc, Manila and covered by TCT No. 70759 of the Registry of Deeds, Manila; that the purpose of said sale was to realize "funds in payment of real property taxes and other incidental expenses incurred in the administration of the estate"; that on the same date, Judge Alejandro M. Velez, Presiding Judge of Branch 20 of the Regional Trial Court of Misamis Oriental, located in Cagayan de Oro City, issued and Order granting the Motion and authorizing the sale of the parcel of land, indicated in the Motion and, covered by TCT No. 70759 of the Registry of Deeds of Manila; that on December 27, 1996, Isabel P. Gorospe executed a Special Power of Attorney in favor of Manuel P. Gorospe, to sell the said parcel of land; that on November 17, 2004, Isabel P. Gorospe, executed a second Special Power of Attorney in favor of Manuel P. Gorospe, for the same purpose; that on December 1, 2004, Manuel P. Gorospe sold the said property to Shirley Cua for Four Million Pesos (PhP4,000,000.00) in accordance with a Deed of Sale of even date; that on said date, the capital gains tax in the amount of Two Hundred Forty Thousand Pesos (PhP240,000.00), the documentary stamp tax in the amount of Sixty Thousand Pesos (PhP60,000.00) and the certification fee, in the amount of One Hundred Pesos (PhP100.00), were paid to the BIR, RDO 33; that despite payments made, the BIR RDO 33 refused to issue the Certificate Authorizing Registration (CAR) on the following grounds: 1) An Extrajudicial Settlement of the estate of the late Benjamin K. Gorospe must first be filed by the heirs; and 2) Estate taxes must be paid based on the said Extrajudicial Settlement and prior to transfer of the estate or any portion thereof; and that it is your contention that the filing of the estate tax return and the payment of the estate tax is not yet due since the distribution of the estate to the heirs is still have to be done by the court after the administratrix has completed her duties, and further, the transfer in issue is to third party, by the estate, and not to the heirs, and only for the purpose of maintaining the estate. In reply, please be informed that as consistently held by this Office, the settlement of estate tax shall be governed by the law obtaining at the time of death of the decedent. Thus, then Section 100 of the 1977 Tax Code, as amended, provides that "SEC. 100. 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: Provided, However , That in the case of a nonresident decedent who at the time of his death, was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate." For this purpose, the estate tax is based on the value of the net estate regardless of the number of heirs or their relationship to the decedent. Under then Section 99 of the same Code (now Section 84 of the Tax Code of 1997), an estate tax computed in accordance with the schedule found therein shall be imposed based on the value of the net estate of every decedent, whether resident or nonresident of the Philippines, as determined in accordance with Sections 100 and 101 of the same Code (now Section 85 and 86 of the Tax Code of 1997). In this connection, under Section 103 of the 1977 Tax Code, as amended, (now Sec. 88 of the Tax Code of 1997), the estate shall be appraised at its fair market value as of the time of death. However, the appraised value of real property as of the time of death shall either be whichever is higher of (1) the fair market value as determined by the Commissioner, or (2) the fair market value as shown in the schedule of values fixed by the Provincial and City Assessors, and shall be binding upon all concerned for purposes of computing any internal revenue tax based on the value of the property. From the foregoing, the estate of the late Benjamin K. Gorospe is liable to pay the estate tax imposed under then Section 99 of the 1977 Tax Code, as amended, (now Sec. 84 of the Tax Code of 1997) the law in force at the time of his death in 1984, based on the fair market value at the time of the death of the decedent as determined by the City Assessor of the above-mentioned realties comprising the net estate of the decedent. Furthermore, under then Section 104 of the same Code (now Sec. 89 of the Tax Code of 1997), in all cases of transfers subject to tax, or where, though exempt from tax, the gross value of the estate exceeds three thousand pesos (P3,000.00), the executor, administrator, or any of the legal heirs, as the case may be, within two (2) months after the decedent's death, or within a like period after qualifying as such executor or administrator, shall give a written notice to the Commissioner of Internal Revenue. Likewise, under then Section 105(b) of the same Code (now Sec. 90(B) of the Tax Code of 1997), the return required under Section 105(a) of the same Tax Code, as amended, (now Sec. 90(A) of the Tax Code of 1997) shall be filed within nine (9) months from the decedent's death. The Commissioner of Internal Revenue shall have authority to grant, in meritorious cases, a reasonable extension not exceeding thirty (30) days for filing the return. Further, pursuant to then Section 107(a) of the 1977 Tax Code, as amended, (now Sec. 91 (A) of the Tax Code of 1997), the estate tax imposed under then Section 99 of the same Code (now Sec. 88(B) of the Tax Code of 1997), shall be due and payable at the time the return is filed by the executor, administrator, or the heirs to the Commissioner of Internal Revenue or to the Regional Director, Revenue District Officer or Collection Agent of the city or municipality where the decedent was domiciled at the time of death. When the Commissioner of Internal Revenue finds that the payment on the due date of the estate tax or of any part thereof would impose undue hardship upon the estate or any of the heirs, he may extend the time for payment of such tax or any part thereof not to exceed five (5) years, in case the estate is settled through the court or two (2) years in case the estate is settled extrajudicially pursuant to Section 107(b) of the same Code (now Sec. 91(B) of the Tax Code of 1997). In view of the foregoing, we beg to disagree with your contention that the filing of the estate tax return and the payment of the estate tax is not yet due since the distribution of the estate to the heirs of Benjamin K. Gorospe is still to be done by the court after the administratrix has completed her duties, and further, that the transfer was made in favor of a third party, and not to the heirs, only for the purpose of maintaining the estate thereby there is no need of settling the obligation of the estate by paying the estate tax to the Government. Rather we rule that the administrator or any of the heirs of the late Benjamin K. Gorospe should have filed the estate tax return and pay the corresponding estate tax due thereon within the nine-month period from the time of death of the decedent as prescribed by the above cited provisions of Sections 105(B) and 107(a) of the 1977 Tax Code, as amended. The execution by the heirs or by the court of the deed or order, respectively, providing for the settlement of the estate did not and will not exempt the estate of Benjamin K. Gorospe from filing the estate tax return and payment of estate tax thereon. Considering that succession takes place upon death of the decedent and that his gross estate is determined by including the value at the time of his death of all his property for purposes of computing the estate tax to be imposed, the deed of partition or the order of the court providing for the partition of the estate to the heirs, therefore, is not an indispensable requirement before the administrator or any of the heirs could pay the estate tax. The herein administratrix, therefore, is advised to file, together with the other requirements, the inventory of the properties comprising the estate of the late Benjamin K. Gorospe. Moreover, the above property disposed in order to raise the funds to be used to maintain the said estate, still is considered as part of the estate for purposes of determining the gross estate of the decedent and for purposes of computing the estate tax due thereon. On the other hand, considering that the estate tax due on the estate of Benjamin K. Gorospe was not paid by the heirs or by herein administratrix within the time prescribed under Section 105(b) of the 1977 Tax Code, as amended, there shall be collected as an addition to the estate tax due, an interest upon such unpaid amount at the rate of twenty percent (20%) per annum, from the due date until it is paid. However, the maximum amount that may be collected as interest on delinquency shall in no case exceed the amount corresponding to a period of three (3) years. (Sec. 113, 1977 Tax Code, as amended). Moreover, an ad valorem penalty of twenty-five percent (25%) of the estate tax due shall be imposed for failure to make and file an estate tax return within the time prescribed by law. (Sec. 114, 1977 Tax Code, as amended). Finally, if after payment of the estate tax, final settlement of the estate shall be rendered by the court, the incidental expenses incurred in the intestate proceedings shall be allowed as deductions to the gross estate. (Sec. 101(a)(1)(B), 1977 Tax Code, as amended) The heirs, therefore, shall have a right to the restitution of the proportional part of the estate tax paid. (Sec. 117, 1977 Tax Code, as amended). HETDAa This serves as your authority to file the estate tax return of the late Benjamin K. Gorospe and pay the corresponding estate tax due thereon. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group