Araneta & Faustino Law Offices

February 11, 2020 BIR RULING NO. OT-0184-2020 Sections 24 (C), 98, and 175 of the National Internal Revenue Code of 1997, as amended; Revenue Regulations No. 02-2003 Araneta & Faustino Law Offices Unit 203 Le Metropole Building Corner De La Costa and Tordesillas Streets Salcedo Village, Makati City 1227 Attention: AAA BBB CCC Gentlemen : This refers to your letter dated February 19, 2018, requesting on behalf of your client, DDD ("DDD") , an ________ citizen, of legal age, and with local address at ________________________, for confirmation of your opinion that: 1. the shares of stock of domestic corporations registered in the name of a decedent but held in trust for a beneficial owner does not form part of the estate of the decedent and should be excluded in the computation of the estate tax; and 2. the transfer of shares of stock of domestic corporations from the decedent-trustee to the beneficial owner, as a result of the death of the decedent-trustee, and without monetary consideration, is exempt from capital gains tax ("CGT"), documentary stamp tax ("DST"), and donor's tax. Further, you also request confirmation of your opinion that the corporate secretary of the concerned domestic corporations may transfer the shares held in trust by the decedent-trustee to the beneficial owner upon the issuance of a favorable ruling without the necessity of securing a tax clearance. TIADCc Documents submitted disclosed that Mendieta & Inunciaga, Inc. ("M&I"), Mendal Realty Management and Development Corporation ("MRMDC"), and Mendalsa Realty, Inc. ("MRI") are domestic corporations, duly organized and existing under the laws of the Republic of the Philippines, with the following Securities and Exchange Commission ("SEC") Company Registration Numbers and offices addresses: NAME SEC REGISTRATION NO. ADDRESS M&I 0000073684 Hacienda San Jose, Tanjay City, Negros Oriental MRMDC 0000111503 Hacienda San Jose, Tanjay City, Negros Oriental MRI ASO91-191187 164 A. Bonifacio St., Canlalay, Bian, Laguna On November 25, 2009, EEE ("EEE"), of legal age, with residence and postal address at ___________________, and owner of several shares of stock in the above-named domestic corporations, executed three (3) Deeds of Assignment, to wit: 1. Assigning, transferring, and conveying in favor of FFF ("FFF"), GGG ("GGG"), and HHH ("HHH"), the following shares of stocks in M&I: Name of Stockholder No. of Shares FFF 753.858 GGG 251.286 HHH 502.572 with stipulation that 251.286 out of the 753.858 shares being assigned to FFF shall be transferred in the name of FFF in trust for DDD; 2. Assigning, transferring, and conveying in favor of FFF, GGG, DDD, and HHH, the following shares of stocks in MRMDC: Name of Stockholder No. of Shares FFF 1,339.191 GGG 446.397 DDD 446.397 HHH 892.794 with stipulation that 446.397 out of the 1,339.191 shares being assigned to FFF shall be transferred in the name of FFF in trust for DDD; and 3. Assigning, transferring, and conveying in favor of FFF, GGG, and HHH, the following shares of stocks in MRI: Name of Stockholder No. of Shares FFF 342,871.125 GGG 114,290.375 HHH 228,580.750 with stipulation that 114,290.375 out of the 342,871.125 shares being assigned to FFF shall be transferred in the name of FFF in trust for DDD. On the same date, FFF executed a Declaration of Trust, acknowledging that part of the above-mentioned shares of stock in the above-named domestic corporations registered in his name are beneficially owned by his niece, DDD, to wit: ISSUER NO. OF SHARES STOCK CERT NO. M&I 251.286 98 MRMDC 446.397 81 MRI 114,290.375 49 On January 15, 2016, FFF passed away. His legal heirs are now in the process of settling his estate. Hence, this request. AIDSTE In reply thereto, please be informed as follows: 1. Section 4 of Revenue Regulations (RR) No. 02-2003 1 (Consolidated Revenue Regulations on Estate Tax and Donor's Tax Incorporating the Amendments Introduced by Republic Act No. 8424, the Tax Reform Act of 1997) dated December 16, 2002, provides the composition of gross estate as follows: "SECTION 4. Composition of the Gross Estate. The gross estate of a decedent shall be comprised of the following properties and interest therein at the time of his death, including revocable transfers and transfers for insufficient consideration, etc.: A) Residents and citizens all properties, real or personal, tangible or intangible, wherever situated. xxx xxx xxx" Applying the above-quoted provision in this case, the gross estate of FFF, a ______ citizen, shall be comprised only of all properties, real or personal, tangible or intangible, wherever situated, and interest therein at the time of his death, and should not include those properties which were merely held in trust for the benefit of DDD. A declaration of trust has been defined by the Supreme Court as an act by which a person acknowledges that the property, title to which he holds, is held by him for the use of another. 2 A trust is the legal relationship between one person having an equitable ownership of property and another person owning the legal title to such property, the equitable ownership of the former entitling him to the performance of certain duties and the exercise of certain powers by the latter. 3 As such, while FFF held legal title to the subject shares of stock as trustee, the equitable or beneficial ownership belonged to DDD as trustor. Thus, in the computation of the estate tax payable by the estate of FFF, the subject shares of stock should be excluded. 2. A trust terminates upon the death of the trustee where the trust is personal to the trustee in the sense that the trustor intended no other person to administer it. 4 Thus, upon the death of FFF, the trustee, the subject shares of stock should be transferred back to DDD, who is the beneficial owner thereof, and such transfer is not subject to CGT imposed under Section 24 (D) (1) of the National Internal Revenue Code (NIRC) of 1997, as amended, considering that the conveyance is not motivated by a valuable consideration and merely acknowledges and confirms the legal title and beneficial ownership over the shares of stock in the name of DDD, the trustor. 5 Likewise, it is not subject to donor's tax imposed under Section 98 of the NIRC of 1997, as amended, since the transfer merely consolidates the legal title and beneficial ownership of the shares of DDD, the trustor. In BIR Ruling No. 031-99 dated March 19, 1999, this Office has already ruled that: ". . . the conveyance by the Trustee in favor of the Trustor of the subject properties which the former acquired by virtue of the Trust Agreement is not to be treated as another transfer separate and distinct from the sale between the original owner and the Trustee. The conveyance is merely to be treated as a continuation and confirmation of title in favor of the ultimate and real beneficiary of the subject properties." Moreover, the transfer is not subject to DST imposed under Section 196 of the NIRC of 1997, as amended. It is, however, understood that this Ruling is never intended, and shall not be construed, as giving authority to the Corporate Secretary of M&I, MRMDC, and MRI to effect transfer of the Certificate of Stocks in the name of DDD without the necessary Certificate Authorizing Registration (CAR) issued by this Bureau. In this regard, this Ruling shall be presented to the Revenue District Office (RDO) concerned in order for the latter to issue the CAR as prescribed in Revenue Memorandum Circular (RMC) No. 37-2012. AaCTcI 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, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. RR No. 02-2003 was used since the decedent died prior to the effectivity of RA No. 10963 (TRAIN Law). 2. Resurreccion De Leon, et al. vs. Emiliana Molo-Peckson, et al. , G.R. No. L-17809, December 29, 1962. 3. Caezo v. Rojas , G.R. No. 148788, November 23, 2007, 538 SCRA 242, 251; Tigno v. Court of Appeals , G.R. No. 110115, October 8, 1997, 280 SCRA 262, 271-272, citing Morales v. Court of Appeals , 274 SCRA 282 (1997). 4. Soledad Caezo, substituted by William Caezo and Victoriano Caezo vs. Concepcion Rojas , G.R. No. 148788, November 23, 2007. 5. BIR Ruling No. 051-2015 dated February 24, 2015.