Amendments to Regulations No. 42

December 26, 1929 DOF REGULATIONS NO. 065-29 1 SUBJECT : Amendments to Regulations No. 42 TO : All Internal Revenue Officers and Others Concerned Attention is hereby drawn to the provisions of Act No. 3606 amending certain sections of the Inheritance Tax Law, and, for this purpose, the following amendments to the Inheritance Tax Regulations are published for the information and guidance of all concerned: (Sections quoted are from the Administrative Code, as amended.) SEC. 1538. (As amended by section 1, Act No. 3606.) Exemption in favor of surviving spouse, children, and the Insular Government or any political subdivision thereof. For purposes of the tax fixed in this article, the surviving spouse, and the legitimate or recognized natural, or adopted children, shall each be entitled to an exemption of three thousand pesos. All property passing to the Insular Government or to any political subdivision thereof by way of legacy, devise, or bequest shall be exempt from the tax imposed in this article. SECTION 1. Section 10 of Regulations No. 42 is hereby amended by adding thereto the following paragraph: "All property devised or bequeathed to the Insular Government or to any political subdivision thereof is exempt from the payment of the inheritance tax. In establishing the right of the estate to this exemption, the executor must submit a copy of the will of the decedent by virtue of which the Insular Government or any political subdivision thereof is made a legatee or a devisee, and also a copy of the order of the court admitting said will to probate." SEC. 1539. (As amended by section 2, Act No. 3606.) Deductions to be made in determining net taxable amount. In order to determine the net sum which must bear the tax, when an inheritance is concerned, there shall be deducted, in case of a resident, the expenses of the funeral and burial of the deceased, the proper capital of the surviving spouse, and his or her part of the conjugal property (gananciales) , the proven debts, exempt portions, the judicial expenses of the testamentary or intestate proceedings, and claims against insolvent persons. cIACaT In the case of a nonresident there shall be deducted from the value of that part of his gross estate which at the time of his death is situated in the Philippine Islands that proportion of the deductions specified in the preceding paragraph which the value of such part bears to the value of his entire gross estate, wherever situated, but in no case shall the amount so deducted exceed ten per centum of the value of that part of his gross estate which at the time of his death is situated in the Philippine Islands; Provided, That no deduction shall be allowed in the case of a nonresident unless the executors or administrators, or the heirs, as the case may be, furnish the Collector of Internal Revenue with a list of the gross estate not situated in the Philippine Islands and its corresponding value at the time of his death. SECTION 2. Section 11 of Regulations No. 42 is hereby amended so as to read as follows: "SEC. 11. Funeral and burial expenses. These expenses are deductible only when they have been actually paid for from the estate of the deceased. If they have been defrayed in whole or in part by the friends or relatives of the deceased the same or the part thereof that is not paid from the estate of the deceased shall not be allowed as a deduction. "Funeral and burial expenses properly include "1. The expenses of interment, such as transportation of the remains of the deceased and the immediate members of his family to the place of interment, undertaker's fees, and the like. "2. The mourning clothing of the widow and children of the deceased used on the occasion of the burial. "3. The expenses of the wake preceding the burial of the deceased. "4. Fees and charges for the performances of the rites and ceremonies incident to interment. But the expenses incurred after the interment, such as for prayers, masses, entertainment, or the like are not deductible. "5. The cost of the burial plot, tomb-stones or monument, but not their upkeep. "The funeral and burial expenses should be chargeable to the conjugal partnership and not to the separate property of the deceased. "In passing upon the propriety of these deductions consideration should be given to the circumstances of each case, the rank and life of the decedent, the size of the estate left by him, and whether the executors or heirs have acted with common prudence or in obedience to the will. If in view of these considerations the expenses incurred are clearly extravagant notwithstanding the fact that they are included in the items above enumerated, so much thereof as a reasonably prudent man would not have incurred should be disallowed. EScAHT "In case of a nonresident decedent, however, only that proportion of the funeral and burial expenses should be allowed as deduction which the value of that part of his gross estate which at the time of his death is situated in the Philippine Islands bears to the value of his entire estate wherever situated, but in no case shall this amount together with the proven debts, obligations, and judicial expenses exceed 10 per centum of the value of that part of his gross estate which at the time of his death is situated in the Philippine Islands. However, no deduction shall be allowed in the case of a nonresident decedent unless his executors, administrators, or his heirs furnish the Collector of Internal Revenue with a list of all the property of such decedent not situated in the Philippine Islands and its corresponding value at the time of his death." SECTION 3. Section 14 of Regulations No. 42 is hereby amended so as to read as follows: "SEC. 14. Proven debts. The term 'proven debts' referred to in this section of the law includes any debt which the decedent has contracted before his death and which is a proper charge against his estate. In cases of testamentary or intestate proceedings, the debts allowed by the court to be paid by the executor or administrator will not be disputed by the Bureau of Internal Revenue. In case where there are no testamentary or intestate proceedings private documents tending to prove the existence of the debts claimed to be proper deduction will be accepted by the Collector of Internal Revenue. Taxes upon income received during the decedent's lifetime are deductible but taxes upon income received after death are not deductible. Real estate taxes which are a lien and payable at the time of the decedent's death should be deducted. HSIaAT "In case of a nonresident decedent, only that proportion of the proven debts incurred by the estate of said nonresident decedent which that part of his gross estate situated in the Philippine Islands at the time of his death bears to the value of his entire estate wherever situated should be allowed as deduction; Provided, That in no case shall the proven debts together with the other deductions prescribed in section 1539 of the Administrative Code, as amended by Act No. 3606 shall exceed 10 per centum of the value of his gross estate in the Philippine Islands. This limitation shall apply even though all the property of a nonresident decedent is located in these Islands." SECTION 4. Section 15 of Regulations No. 42 is hereby amended so as to read as follows: "SEC. 15. Judicial expenses. These are court expenses, the fees allowed to commissioners, the attorney's fees, and all other expenses incurred in the settlement of the estate. Deductions may be taken for attorney's fees for services rendered to the executor or administrator in his official capacity, although not yet allowed by the court, provided such fees are reasonable in amount, and have been actually paid. When the disbursement has not been made, the executor or administrator claiming such deductions, must furnish at the time of the investigation satisfactory evidence that payment will be made and the amount of such payment. In case a testator makes a bequest to his executors or trustees in lieu of compensation, the excess of such bequest over and above a reasonable compensation for their services as prescribed in the Code of Civil Procedure is not deductible. Lawful expenditures and expenses made by the executor in defending the will should be deducted in determining the amount of inheritance tax. However, the expenses of the heirs in successfully contesting the probate of a will do not constitute a proper deduction, inasmuch as expenses of this character are proper charges against the beneficiaries personally and are not judicial expenses of the testamentary proceedings as contemplated by the statute. The expenses of a controversy among the distributees as to the proper distribution of the estate of the deceased are likewise not deductible. "In case of a nonresident decedent, only that proportion of the judicial expenses shall be allowed as deduction which the value of that part of his gross estate, which at the time of death is situated in the Philippine Islands bears to the value of his entire gross estate wherever situated. "In either case, all judicial expenses should be chargeable to the conjugal partnership and not to the separate property of the deceased." SEC. 1544. (As amended by section 13, Act No. 2835, and section 3, Act No. 3031, and section 3, Act No. 3606.) When return to be filed and tax to be paid. In all cases of inheritance or transfers subject to tax, or where though exempt from tax, the gross value of the estate exceeds three thousand pesos, the corresponding return shall be filed, and the corresponding tax paid as follows: (a) In the second and third cases of the next preceding section, the return must be filed before entrance into possession of the property and the tax paid within twenty days after service of notice of assessment by the Collector of Internal Revenue. (b) In other cases, within six months after the death of the predecessor, and the tax paid within twenty days after service of notice of assessment; but if judicial testamentary or intestate proceedings shall be instituted prior to the expiration of said period, the return must be filed by the executor or administrator within thirty days after the date of approval by the court of the schedule of partition and the tax paid within twenty days after service of assessment notice by the Collector of Internal Revenue. In case where no schedule of partition is presented, or if presented is not approved or acted upon by the Court of First Instance within a period of eighteen months from the filing of the action, the Collector of Internal Revenue shall assess the proper tax on the best evidence obtainable, file the return for the taxpayers, and demand payment of the taxes due from the executor or administrator within twenty days from the service of the notice of assessment. The difference between the tax assessed and paid and the amount found to be properly due as ascertained after the judicial proceedings are terminated shall be collected or refunded, as the case may be. If the tax is not paid within the time hereinbefore prescribed, there shall be added to the tax a surcharge of twenty-five per centum and an interest at the rate of twelve per centum per annum to be counted from the date of delinquency, or in case the return is not filed in due time, from the date when it should have been filed, until paid, both surcharge and interest to form a part of the tax. A certified copy of all letters testamentary or of administration as well as certified copies of the schedule of partition and the order of the Court of First Instance approving the same shall be furnished the Collector of Internal Revenue by the clerk of court within thirty days after the issuance of such letters testamentary or of administration, and within a like period after the promulgation of such order. SECTION 5. Section 25 of Regulations No. 42 is hereby amended so as to read as follows: "SEC. 25. Executor or administrator, or heir or beneficiary obliged to file return; penalty for delinquency. An inheritance tax return on B.I.R. Form No. 18.01 is required to be filed in all cases of inheritance or transfers subject to tax, or where though exempt from tax, the gross value of the estate exceeds P3,000. The value of all property included in the gross estate is the fair market value thereof at the time of the decedent's death: Provided, however, that in the case of real property, its fair market value shall not be less than its assessed value as of the decedent's death. The fair market value is the price at which property would change hands between a willing buyer and a willing seller neither being under any compulsion to buy or to sell. Where the property is sold within a reasonable period after the decedent's death, and it is shown that the selling price reflects the fair market value thereof as of the date of the decedent's death, the selling price will be accepted: Provided, that in case of real property, the selling price shall not be less than its assessed value. Inasmuch as the right of the Government to an inheritance tax accrues at the moment of death and hence is ordinarily measured as to any beneficiary by the value at that time of such property as passes to him, subsequent appreciation or depreciation in value is immaterial. THcaDA "The duty of filing the return shall devolve upon the executor or administrator, or if there be none such, the heirs or beneficiary, or any of them. The treasurer or any internal revenue agent in the locality shall determine who shall file the return and make written demand therefor. If compliance is refused, such treasurer or agent shall prepare the same, basing it on the best evidence obtainable. In such a case the prosecution of the person upon whom demand to file the return was made and who refused to comply with the demand should be recommended to the Collector of Internal Revenue on B.I.R. Form No. 33.02. "The return must be filed within six months subsequent to the death of the predecessor, and must be rendered, regardless of whether the estate left by the decedent has been divided among the heirs or remains undivided. But if testamentary or intestate proceedings are instituted prior to the expiration of said period of six months, the return must be filed within thirty days after the schedule of partition of the estate has been approved by the court. But in cases where no schedule of partition is presented, or if presented is not approved or acted upon by the Court of First Instance within a period of eighteen months from the filing of the action, the return must be filed within eighteen months from the filing of said action provided that the judicial proceedings are commenced within six months after the death of the deceased, otherwise the Collector of Internal Revenue shall file the return for the taxpayer, assess the proper tax, and demand payment thereof from the executor or administrator. If the proceedings are instituted after the expiration of the period of six months after the death of the deceased, the return must be filed as if there were no court proceedings at all, that is, within six months after the death of the deceased. "For cases treated in paragraph (a) of section 1544, the return must be filed before entrance into possession of the property." SECTION 6. Section 28 of Regulations No. 42 is hereby amended so as to read as follows: "SEC. 28. Time for payment of tax. The tax should be paid within the time specified in the assessment notice, and failure to do so renders the taxpayer liable to the penalties provided for by law. SECTION 7. Section 29 of Regulations No. 42 is hereby amended so as to read as follows: "SEC. 29. Penalty for delinquency in payment of tax. Section 1544 of the Administrative Code above quoted provides that if the tax is not paid within twenty days from the date of service of the notice of assessment there shall be added a surcharge of 25 per centum and interest at the rate of 12 per cent per annum to be counted from the date of delinquency, or, in case the return is not filed in due time, from the date when the return should have been filed, until paid, both surcharge and interest to form a part of the tax. For example " Case No. 1. X died on January 1, 1920, leaving property worth P7,000 to his only son C. No court proceedings were instituted within or after the six months subsequent to the death and the return was not filed until July 1, 1925. The tax then due would be 1 per cent of (P7,000 minus P3,000 exemption), or P40. Since the return was not filed within six months subsequent to the death, that is, from January 1, 1920, to July 1, 1920, interest at the rate of 12 per cent per annum would accrue from July 1, 1920, to July 1, 1925, or five years. The interest of P40 for five years is P24, so that the tax and interest amount to P64. Now if the taxpayer is served with assessment notice on August 1, 1925, and does not pay the same on or before August 21, 1925, a surcharge of 25 per cent on the tax would further accrue. Suppose, for example, that the taxpayer finally pays the tax on December 31, 1925, the total amount of tax, surcharge, and interest due from him is P76.40, computed as follows: Original tax P40.00 Twenty-five per cent surcharge 10.00 One per cent monthly interest from July 1, 1920, to December 31, 1925 26.40 ______ Total tax and penalties 76.40 " Case No. 2. A died on January 1, 1920, leaving property worth P7,000 to his only son B. Court proceedings were instituted on June 1, 1920, that is, within six months subsequent to the death of the decedent, and the schedule of partition was approved by the court on June 1, 1921, that is, within eighteen months after the institution of said proceedings. The return was filed on July 1, 1925. The tax due would be 1 per cent of (P7,000 minus P3,000 exemption), or P40. Since the return was not filed on or before July 1, 1921, that is, within thirty days after the schedule of partition was approved by the court, interest at 12 per centum per annum would accrue from July 1, 1921 to July 1, 1925, or four years. The interest on P40 for four years is P19.20, so that the tax and interest would amount to P59.20. "In this connection, it should be borne in mind that Act No. 3606 covers only the estates of those who die on or after January 1, 1930, except section 3 thereof which is applicable to all estates the tax due on which has not yet been paid up to January 1, 1930." SEC. 1545. (As amended by section 4, Act No. 3606.) Liability of heirs for the payment of tax. In the absence of contrary disposition by the predecessor, there shall be charged to the account of each beneficiary the part of the tax which pertains to him, in proportion to the value of the benefit received, and in accordance with the scale fixed for the class or group to which he pertains: Provided, That in cases where the heirs divide extrajudicially the property left to them by their predecessor or otherwise convey, sell, transfer, mortgage, or encumber the same without paying the corresponding inheritance tax within the period prescribed in the preceding section, they shall be solidarily liable for the payment of the tax to the extent of the estate they have received. HTSAEa SECTION 8. Section 30 of Regulations No. 42 is hereby amended by adding thereto the following paragraph: "In all cases where the heirs divide extrajudicially the property left to them by their predecessor or otherwise convey, sell, transfer, mortgage, or encumber the same without first paying the corresponding inheritance tax, they shall be solidarily liable for the payment of the tax to the extent of the estate they have received. In other words, the total amount of inheritance tax payable by the estate can be collected from any one of the heirs provided that the total amount of the tax and penalties due shall not exceed the distributive share of the inheritance he may have received. It should be noted, in this connection, however, that the solidary liability refers merely to extra-judicial partition, but has no application to cases where judicial proceedings have been instituted for the settlement of the estate." SEC. 2740. (As amended by section 5, Act No. 3606.) Concealment of property subject to inheritance tax. Any administrator, executor, donee, legatee, or heir who conceals any goods, rights, credits, or transfers subject to the tax imposed in article eleven of the Internal Revenue Law shall be punished by a fine of not less than twenty-five per centum of the value of that which he may have concealed, nor more than said value, or by imprisonment for not more than one year or by both penalties. SECTION 9. These regulations shall take effect upon their promulgation in the Official Gazette. Manila, December 26, 1929. MIGUEL UNSON Secretary of Finance Recommended by: JUAN POSADAS, JR. Collector of Internal Revenue Footnotes 1. Promulgated August 16, 1930, XXVIII Off. Gaz., 98, page 3118.