Introduction to Transfer Taxation PDF

MODULE 1: INTRODUCTION TO TRANSFER TAXATION  INTRODUCTION TO TRANSFER TAXATION WHAT IS TRANSFER? Transfers refer to any transmission of property from one person to another. A person may be natural person or juridical persons created by law. Types of Transfers: 1. Bilate...

MODULE 1: INTRODUCTION TO TRANSFER TAXATION  INTRODUCTION TO TRANSFER TAXATION WHAT IS TRANSFER? Transfers refer to any transmission of property from one person to another. A person may be natural person or juridical persons created by law. Types of Transfers: 1. Bilateral transfers 2. Unilateral transfers 3. Complex transfers TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION 1. BILATERAL TRANSFERS Involve transmission of property for a consideration. They are referred to as onerous transactions or exchanges. Examples: a. Sale – exchange of property for money b. Barter – exchange of property for another property TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION 2. UNILATERAL TRANSFERS Involve the transmission of property by a person without consideration. They are commonly referred to as gratuitous transactions or simply, transfers. The right or privilege to transfer properties is subject to “transfer taxes” Types of Unilateral Transfers a. Donation b. Succession TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION A. Donation Is the gratuitous transfer of property from a living donor to a donee. Since it is made between living persons, it is called donation inter vivos. TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION B. Succession Is the gratuitous transfer of the properties of the deceased person upon his death to his heirs. It is called donation mortis causa. When a person dies, his legal identity including proprietary rights are extinguished. His properties will be gratuitously transferred to his successors either by operation of law of by virtue of a written will. TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION B. Succession Article 774 of Civil Code a mode of acquisition by virtue of which the property, rights and obligations to the extent of the value of the inheritance, of a person are transmitted through his death to another or others either by his will or by operation of law. TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION B. Succession Article 776 of the Civil Code The inheritance includes all the property, rights and obligations of a person which are not extinguished by his death Article 777 of the Civil Code The rights to the succession are transmitted from the moment of the death of the decedent notwithstanding the postponement of the actual possession or enjoyment of the estate by the beneficiary. TXTN2 – MODULE I INTRODUCTION TO TRANSFER TAXATION Decedent's Estate To be acquired/inherited by the Heir(s) Property Property Rights Rights Obligatios Obligations (should not be more than the combined value of the properties and rights inherited TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION Comparison of Inter-vivos and Mortis-causa Inter-vivos Mortis-causa Transferor Living donor Decedent Nature Voluntary Involuntary Reason Gratuity Death Scope of the transfer Only properties selected by All properties of the decedent of properties the donor at time of the death Property given Gift Estate Transferee Donee Heir Transfer tax Donor's Tax Estate Tax Timing of valuation Date of donation Date of death TXTN2 – MODULE I ILLUSTRATION 1 Pedro suffered an unexpected heart attack causing his death on November 1, 2021. His estate is composed of the following: Cash in Bank P 1,000,000.00 Commercial Building 5,000,000.00 Cars 1,000,000.00 House and Lot 3,000,000.00 Juan is the only heir of the decedent. Pedro’s remains were cremated on November 8, 2021. The executor of Pedro’s estate filed the estate tax return and paid the corresponding estate tax on April 30, 2022. The properties left by the decedent were finally distributed on June 30, 2022. TXTN2 – MODULE I ILLUSTRATION 1 Question 1: When will the transfer of ownership from the decedent to the heir take effect? Answer: November 1, 2021 The rights to the succession are transmitted from the moment of death of the decedent (November 1, 2021), notwithstanding the actual transfer dated June 30, 2022 (Art. 777 Civil Code) TXTN2 – MODULE I ILLUSTRATION 1 Question 2: Assume that Pedro’s total outstanding liabilities as of the time of his death amounted to P12,000,000, how much of the outstanding liabilities of the decedent should be assumed by Juan? Answer: P10,000,000 The amount of liability to be assumed by the heir(s) shall be limited only to the extent of the value of properties and rights inherited. (Art 774 Civil Code) TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION 3. COMPLEX TRANSFERS Transfers for less than full and adequate consideration. These are sales made at prices which are significantly lower than the fair value of the property sold. Partly gratuitous and partly onerous TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION Tax rules on transfers for adequate consideration Transfers for adequate consideration are deemed pure exchanges and are subject to income tax (regular income tax or capital gains tax), not to transfer tax. Transfer for less than adequate and full consideration Transfers for less than full and adequate consideration are split into two components: transfer element and exchange element. The transfer element is subject to transfer tax while the realized gain on the exchange element is subject to income tax. TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION The transfer element is generally considered as an inter-vivos donation, but it is a donation mortis-causa if: a. The sale is made in contemplation of the death of the seller, or b. If the title to the property is agreed to be transferred upon the death of the seller. TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION RATIONALE OF TRANSFER TAXATION 1. Tax evasion of minimization theory 2. Tax recoupment theory 3. Benefit received theory 4. State partnership theory 5. Wealth redistribution theory 6. Ability to pay theory TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION 1. Tax evasion or minimization theory Exchanges may be intentionally priced to evade or minimize income taxes. The indirect donation in an exchange is a lost gain which will evade taxation. To plug this tax loophole, the government subjects the gratuity to tax. However, it is not taxes in the absence of donative intent on the part of the seller such as when the sale is made in the normal course of business. TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION 2. Tax recoupment theory Even without a deliberate intent to evade income tax, transfers have a natural effect of decreasing future income tax collections of the government. TXTN2 – MODULE I ILLUSTRATION 2 Alison has P10,000,000 properties which earn 10% of P1,000,000 yearly income. Desiring to make his 5 children become financially independent, he divided his entire properties to them. Each child received P2,000,000 properties. Each child earns roughly P200,000 on the donated properties. Note that the split of the properties and the spread of the income to several taxpayers will result in lesser tax collection to the government because of the progressive tax imposed upon individuals. The same effect would result if Mr. Alison transfers his property to his children through succession. To recoup on future losses in income taxes caused by transfers, the government taxes the transfer of the properties. TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION 3. Benefit received theory The law considers the service rendered by the government in the transfer of property to the donee or heir. The transferor is actually exercising a privilege to transfer his property under the government security of an effective and orderly transmission under its laws which define and effect donation or succession. Without these laws, the transfer could not have been conveniently possible. Exercising this special privilege to transfer property either inter vivos or mortis causa is a benefit to the transferor. In accordance with the benefit received theory, the transfer should be taxes. TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION 4. State partnership theory The state ensures a civilized and orderly society where commercial undertaking and wealth accumulation flourish. The government therefore is an indirect partner behind all forms of wealth accumulation by any person within the state. Thus, when a person transfers part or the whole of his wealth, the government should take its fair share by taxing the transfer of the wealth to other persons. TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION 5. Wealth distribution theory Equitable distribution of wealth is widely accepted as an element of social progress and stability. Societies with high inequities in wealth distribution are normally associated with high social unrest, lawlessness, insurgencies, wars and chaos. Thus, the government strive toward equitable wealth distribution as a basic policy. Taxation is a common tool in redistributing wealth to society. When one transfers his wealth, the transfer should be taxed so that part of the wealth will be redistributed to benefit society. TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION 6. Ability to pay theory No one could gratuitously give what he could not afford. The ability to transfer property is an indication of an ability to pay tax. Hence, the transfer is subject to tax. TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION Comparison of the two types of transfer tax Donor's tax Estate tax Subject transfer Inter vivos Mortis causa Nature Annual tax One-time tax Taxpayer Donor Decedent Who actually pay the The donor himself Executor, adminstrator or tax? heirs in behalf of the decedent. TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION NATURE OF TRANSFER TAXES 1. Privilege tax Transfer tax is as a form of privilege tax rather than a form of penalty tax. It is imposed because the transferor (donor or decedent) is exercising a privilege in the form of assistance rendered by the government in effecting the transfer of properties by way of donation or succession. 2. Ad valorem tax The amount of transfer tax is dependent on the value of the properties transferred. Thus, valuation of the property transferred is needed in order to determine the amount of the tax. TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION NATURE OF TRANSFER TAXES 3. Proportional tax Transfer tax under the TRAIN law are imposed at flat 6% of the net estate or gift. 4. National tax Transfer taxes are levied by the national government. Local government units (LGUs) are legally precluded from imposing the same. 5. Direct tax Transfer taxes cannot be shifted. The transferor-donor or transferor- decendent is the one subject to tax 6. Fiscal tax Transfer taxes are levied to raise money for the support of the government. TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION CLASSIFICATION OF TRANSFER TAXPAYERS AND THEIR EXTENT OF TAXATION 1. Residents or Citizens – such as: a. Resident citizens b. Resident aliens c. Non-resident citizens These are taxable on global transfers of property 2. Non-resident Aliens a. These are taxable on Philippine transfers of property TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION CLASSIFICATION OF TRANSFER TAXPAYERS AND THEIR EXTENT OF TAXATION The citizenship of juridical persons is determined by the incorporation tests. Juridical persons that are organized in the Philippines are considered Philippine citizens. Those organized abroad are considered aliens. In donor’s taxation, the term resident citizen or alien included domestic or resident foreign corporation. Obviously, corporations are not subject to estate taxation. TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION GENERAL RULE IN TRANSFER TAXATION Taxpayers Inter-vivos Mortis causa Resident or citizens Global donation Global estate Non-resident aliens Philippine donation Philippine estate Global donation means properties donated wherever situated across the globe. Global estate means properties of the decedent wherever situated across the globe at the point of death. TXTN2 – MODULE I ILLUSTRATION 3 Mr. Mario, an American residing in the Philippines, donated a car in Mexico to a friend and a motorbike in the Philippines to his brother in America. Since the taxpayer is a resident, both the donation of a car abroad and the donation of a motorbike in the Philippines are subject to transfer tax. Since the donor is living, the transfers are donations inter-vivos subject to donor’s tax. TXTN2 – MODULE I ILLUSTRATION 4 Juan, a non-resident Filipino citizen, died leaving a building in the United States and an agricultural land in the Philippines for his heirs. Since the taxpayer is a citizen, the transfer mortis causa of the building in the US and the agricultural land in the Philippines is subject to Philippine estate tax. TXTN2 – MODULE I ILLUSTRATION 5 Mr. Kounoman, a Japanese citizen, residing in Japan, donated a parcel of land in Japan to a resident Filipino friend. He also donated his investment in the shares of stocks of a Philippine corporation to his Japanese sister. Since the donor is neither a Philippine resident nor a citizen, only the donation of domestic shares of stock in the Philippines is subject to transfer tax. Also, since the donor is living at the date of donation, the transfer is a donation inter-vivos subject to donor’s tax. TXTN2 – MODULE I ILLUSTRATION 6 Mr. Ti Wong, a Chinese citizen, residing in Hong Kong, died leaving a building in Hong Kong and a car in the Philippines. The donor is neither a resident nor a citizen. Only the car in the Philippines is subject to transfer tax. Since the transfer is effected by death, it is a donation mortis causa subject to estate tax. TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION PROPERTIES LOCATED IN THE PHILIPPINES The following properties are considered located in the Philippines: 1. Interest in a domestic business a. Shares, obligations, or bonds issued by any corporation or Sociedad anonima organized or constituted in the Philippines in accordance with its laws b. Shares or rights in any partnership, business or industry established in the Philippines 2. Foreign securities, under certain conditions: a. Shares, obligations, or bonds issued by any foreign corporation 85% of the business of which is located in the Philippines b. Shares, obligations, or bonds issued by any foreign corporation if such shares, obligations, or bonds have acquired business situs in the Philippines. 3. Franchise exercisable in the Philippines 4. Any personal property, whether tangible or intangible, located in the Philippines. TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION RECIPROCITY RULE ON NON-RESIDENT ALIENS The intangible personal properties of non-resident aliens are exempt from Philippines transfer taxes provided that the country in which such alien is a citizen also exempts the intangible personal properties of Filipino non-residents therein from transfer taxes. Examples of intangible properties: 1. Financial Assets: Cash, receivables or credit, investment in bonds, shares of stock in a corporation, and interest in a partnership 2. Accounting intangible assets Patent, franchise, leasehold right, copyright, trademark It must be pointed out that bills and coins are mere representation of purchasing power. They are intangibles rather than tangible assets. TXTN2 – MODULE I ILLUSTRATION 7 Mr. Shino, a Japanese citizen, donated the following properties in the Philippines: 1. Car 2. Cash in bank 3. Shares of stocks of a domestic corporation Under Japanese laws, non-resident Filipino are exempt on transfers of intangible properties in Japan. Since the reciprocity rule exemption applies, Mr. Shino is subject to donor’s tax only on the donation of the car. The donation of the intangible personal properties such as cash and shares of stocks are exempt. TXTN2 – MODULE I ILLUSTRATION 8 Assuming the same data, in the preceding problem, except that Mr. Shino died leaving those properties in the Philippines. The Japanese government do not tax intangible properties of non-resident Filipinos thereon to estate tax. Only the tangible property – car would be subject to estate tax. TXTN2 – MODULE I ILLUSTRATION 9 Mr. Park, a Korean citizen residing in the Philippines, died leaving P5,000,000 cash, P3,000,000 interest in a business and a P10,000,000 condo unit in the Philippines. Under Korean laws, Filipino non-residents therein are exempt from transfer taxation. All of these will be subject to estate tax since reciprocity exemption applies only to non-resident aliens to the exclusion of resident aliens. TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION CLASSIFYING DONATION AS INTER-VIVOS OR MORTIS CAUSA The timing of gratuitous transfer of ownership or legal title over the property to another determines the classification of the transfer. If gratuitous transfer of ownership occurs Type of transfer During the lifetime of the transferor Inter-vivos Upon death of the decement Mortis causa If ownership over property is voluntarily transferred by the owner during his lifetime, this is donation inter-vivos. If the owner retained ownership until the moment of his death, death will transfer it his successors in interest. This transfer is donation mortis causa. TXTN2 – MODULE I ILLUSTRATION 10 Don Juanico has a hotel and a commercial building as his only properties. He promised to donate the hotel to son, Juan and the building to son, Juanito. He was able to donate the hotel to Juan when the same was worth P40,000,000. While finalizing the deed of donation of the building for Juanito, Don Juanico met an accident and died. The hotel and the building has fair value of P45,000,000 and P50,000,000 at the date of death of Don Juanico. A year after his death, the properties have fair values of P48,000,000 and P52,000,000, respectively. The transfer of the hotel is a donation inter-vivos. The same shall be valued at P40,000,000 and shall be subject to donor’s tax. Since Don Juanico still owns the commercial building upon his death, the same is a transfer mortis causa. The same shall be valued at P50,000,000 and shall be subject to estate tax. Note: 1. Donation inter-vivos are valued at the date of donation 2. Donation mortis causa are valued at the date of death of the decedent. TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION EXCEPTIONAL RULES ON TRANSFERS Exceptional rules on transfers Inter-vivos Mortis causa 1. Transfer in contemplation of death x ✓ 2. Transfer intended to take affect at death x ✓ 3. Incomplete transfers ✓ ✓ TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION TRANSFER IN CONTEMPLATION OF DEATH A donation that is inspired or motivated by the thought of death of the decedent is donation mortis causa. If the donation is inspired by motives associated with life, it is a donation inter-vivos. The motive of donation is the determining factor The motive of an inter-vivos transfer is very important in determining whether it is actually an inter-vivos transfer or a mortis causa transfer. The donor’s motive is established out of the wordings of the deed of donation prepared by the donor to effect the donation. Thought of death The presence of express wordings in the deed of donation which indubitably manifest that the donation is inspired by the decedent’s thought of death will qualify a donation as a donation mortis causa TXTN2 – MODULE I ILLUSTRATION 11 On his death bed, Don Pedro made a written donation saying “Death is imminent upon me. I would like to ensure that Pablo will have my sports car as his legacy. For this, I am donating my car to him.” Though the donation is made during the lifetime of Don Pedro, the donation is inspired by the thought of death. This is a transfer mortis causa subject to estate tax upon Don Pedro’s death. TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION The evaluation of the decedent’s motive is done in particular when the decent made a donation just several months prior to his death and had a sever illness, suffering from a critical injury, or of too advanced age. Transfers in contemplation of death actually pass ownership over the property to the transferee at the date of donation but the same is taxable to estate tax not to donor’s tax because it is a donation mortis causa. TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION Motives associated with life: The following motives precludes a transfer from being classified as one in contemplation of death: 1. To reward services rendered 2. To relieve the donor of the burden of management of the property 3. To save on income tax 4. To see children financially independent 5. To see children enjoy the property while the decedent still lives 6. To settle family disputes TXTN2 – MODULE I ILLUSTRATION 12 Rhad distributed a significant part of his properties worth P500,000,000 to his children. In the deed of donation, he cited excessive income tax and his intent to save on income tax as reasons of his donation. The donation is a donation inter-vivos subject to donor’s tax. TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION TRANSFER INTENTED TO TAKE EFFECT UPON DEATH A donation that is made on the decedent’s last will and testament is a donation mortis causa. The “last will and testament” is a document expressing the decedent’s desire on how his properties will be distributed after his death. Similarly, a donation that is made during the lifetime of the decedent with a stipulation that ownership shall transfer upon his death, the same is donation mortis causa. TXTN2 – MODULE I ILLUSTRATION 13 During his lifetime, Don Juan transferred a property to his favorite granddaughter, Karen. Don Juan allowed Karen to obtain possession of the property but under condition that ownership will not transfer until his death. The transfer of property during the lifetime of the donor is not intended to take effect in ownership immediately but at the point of death. The transfer is a donation mortis causa subject to estate tax. TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION INCOMPLETE TRANSFERS Involve the transmission or delivery of properties from one person to another, but ownership is not transferred at the point of delivery. The actual transfer of ownership will take effect in the future upon the happening of certain future events or satisfaction of certain conditions. Initially, incomplete transfers are not subject to transfer taxes upon delivery of the property. They are subject to transfer tax in the future when the actual transfer of ownership occurs. TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION TYPES OF INCOMPLETE TRANSFERS 1. Conditional transfers 2. Revocable transfers 3. Transfers with reservation of title of property until death TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION HOW ARE INCOMPLETE TRANSFERS COMPLETED? 1. Conditional transfers are completed inter-vivos upon the happening of the following during the lifetime of the donor: a. Fulfillment of the condition by the transferee or b. Waiver of the condition by the transferor 2. Revocable transfers are completed inter-vivos upon: a. Waiver by the transfers to exercise his right of revocation or b. The lapse of his reserved right to revoke 3. Transfers with reservation of title of property until death are completed by the death of the decedent. Conditional transfers and revocable transfers become donation mortis causa when the transfer is pre-terminated by the death of the decedent. They will be included in the properties of the decedent subject to estate tax. TXTN2 – MODULE I ILLUSTRATION 14 On June 1, 2019, Don Lucio donated a luxury car with a value of P4,000,000 to his son, Bor, under a condition that Boy must be a topnotcher in the October 2019 CPA Board Exam. To motivate Boy, Don Lucio delivered the car to him on June 1, 2019. The transfer of the car on June 1, 2019 shall not be subject to donor’s tax even if there is a physical transfer of the car. Don Lucio is still the owner of the car. Title vests only upon fulfillment of the condition. Assuming Boy topped the CPA Board Exam on October 2019, the completed donation shall be subject to donor’s tax at that point. If Boy failed to top the exam, there will be no donation to tax; however. If Don Lucio waived his condition, the donation will nevertheless be perfected at that time and will be taxable to donor’s tax at its fair value at that time. Assuming Don Lucio died before the exams, car would be transferred mortis-causa as part of his estate abd would be subject to estate tax at its fair value at the date of death. TXTN2 – MODULE I ILLUSTRATION 15 On February 14, 2019, Mark transferred a phone to Goldemaire but subject to revocation if Mark so pleases. Although there is an actual physical transfer of property on February 14, 2019, the same cannot be subject to donor’s tax since there is no transfer of ownership on that date. Assuming Mark waived his right to revoke, the donation shall be subject to donor’s tax at its fair value at the time of waiver. If Mark revoked the property, there is no donation to speak of. Assuming Mark died without revoking the phone, the same would be transferred mortis-causa and would be included part of his estate subject to estate tax at its fair value at the point of death. TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION COMPLEX INCOMPLETE TRANSFERS Incomplete transfers are sometimes made for less than full and adequate consideration. Similar to complex transfers, the gratuity component of the complex transfers is subject to the appropriate type of transfer tax. Test of Taxability of Complex Incomplete Transfers The following must be established before a complex incomplete is taxable: 1. The incomplete transfer must have been paid for less than full and adequate consideration at the date of delivery of the property. 2. At the completion of the transfer, the property must not have decrease in value below the consideration paid. TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION Valuation of complex incomplete transfers Mortis causa Inter-vivos Fair value at completion or Fair value at death less perfection of donation less consideration upon transfer consideration upon transfer TXTN2 – MODULE I ILLUSTRATION 16 Example: At transfer Fair Value at The donation is Type of Donation Selling Price Fair Value death computed as Inter-vivos P 4,000.00 P 10,000.00 P 15,000.00 P 10,000 - 4,000 Mortis causa 4,000.00 10,000.00 15,000.00 15,000 - 4,000 TXTN2 – MODULE I ILLUSTRATION 17 On June 1, 2017, Mr. D transferred his car worth P1,000,000 to E but for a minimal consideration of P200,000 only. The transfer shall be revocable by D in 5 years. Case 1: Waiver before death On July 3, 2019, D intimated to E that he was waiving his right of revocation. The fair value of the car was P800,000 on that date. Since D was still living upon the perfection of the transfer, the transfer is a donation inter-vivos. It shall be valued at: P800,000 less P200,000. Hence, P600,000 shall be subject to donor’s tax. TXTN2 – MODULE I ILLUSTRATION 17 Case 2: Death without revocation Assume instead that Mr. D died on July 3, 2019 without waiving his right to revoke the transfer. The fair value of the property was P900,000 at that time. Since the revocable transfer is pre-terminated by death, it is a donation mortis causa. It shall be valued at (P900,000 less P200,000). Hence, P700,000 shall be subject to estate tax. TXTN2 – MODULE I ILLUSTRATION 18 Lorrknight has a rare Egyptian artifact which has a fair value of P2,000,000. He gave the artifact to Noventa for a consideration of P1,950,000 but revocable if Noventa did not graduate as cum laude. Noventa subsequently graduated cum laude when the artifact was worth P3,000,000. The transfer was paid for an adequate consideration considering that the selling price approximates the fair value at the date of delivery. The transfer is a bona fide sale which will not be subject to transfer tax even if the fair value of the property appreciated at the date of completion of the donation. TXTN2 – MODULE I ILLUSTRATION 19 Soren sold a gold bullion with a fair value of P2,500,000 to Leomillo at a price of P1,800,000 but revocable within one year. The one-year period lapsed when the gold bullion had a fair value of P1,700,000. The transfer is insufficient thus subject to donor’s tax upon expiration of the one-year period since Soren is living. Since the fair value upon completion fell below P1,800,000, there is no gratuity subject to donor’s tax. Assuming Soren died before the one-year period when the gold bullion was worth P2,300,000. The donation mortis causa subject to estate tax shall be P500,000 (P2,300,000 – P1,800,000). Assuming the value fell below the P1,800,000 considerations upon Soren’s death, there is no gratuity subject to estate tax. TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION NON-TAXABLE TRANSFERS There are transfers of properties which are not actually donations and hence, not subject to transfer taxes, such as: 1. Void transfers 2. Quasi-transfers TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION VOID TRANSFERS Those that are prohibited by law or those that do not conform to legal requirements for their validity. Void transfers do not transfer ownership over property and are therefore not subject to transfer tax. Examples of void transfers: 1. Donation of properties not owned by the donor 2. Donation between spouses 3. Donations which do not manifest all essential requisites to validity such as donations refused by the done 4. Donations that do not conform to formal requirements such as oral donation of real properties TXTN2 – MODULE I ILLUSTRATION 20 Tired of feeding Zeus’ derby roosters, Raymund donated them to Andrix, his bestfriend “tupada” master. Since Raymund does not have ownership over the thing donated, the donation is void. There is no valid donation to speak of; hence, no donor’s tax is impossible. TXTN2 – MODULE I ILLUSTRATION 21 In an overnight drinking spree, Zeus orally donated his seven-hectare agricultural land to Raymund. Oral donation of real property is legally void because the law requires the execution of a public instrument. There is no imposable donor’s tax since there is no donation to be taxed. TXTN2 – MODULE I  INTRODUCTION TO TRANSFER TAXATION QUASI-TRANSFERS The transmission of property which will never involve transfer of ownership. For the purpose of our discussion, let us refer to these transmissions as “quasi-transfers”. Quasi-transfers are not taxable. Examples: 1. Transmission of the property by the usufructuary to the owner of the naked title 2. Transmission of the property by a trustee to the real owner 3. Transmission of the property from the first heir to a second heir in accordance with the desire of a predecessor. TXTN2 – MODULE I ILLUSTRATION 22 Mr. A died leaving a track of land to C but since C was a minor. A devised in his will to give B a usufructuary right to use and enjoy the land for 10 years before turning it over to C. After the lapse of 10 years, B transferred the land to C. Usufructuary B does not own the land. He was granted only the right to use the same but not ownership thereto. B’s turnover of the land to C, the real owner, shall not be subject to donor’s tax since there is no transfer of ownership. TXTN2 – MODULE I ILLUSTRATION 23 Mr. A died leaving a commercial building as inheritance to C. Since C was a minor, A appointed his older brother B to be the fiduciary heir to the property to take care of the same until C becomes 18 years old. When C turned 18 years old, B transferred the property to C. The transmission of the property from B, a mere trustee, to C, the real heir, shall not be subject to donor’s tax since there is no transmission of legal ownership over the property. TXTN2 – MODULE I ILLUSTRATION 22 & 23 If the usufruct in the Illustration 22 and the fiduciary relationship in the Illustration 23 are pre-terminated by the death of the usufructuary or fiduciary heir, the transfer of the property to the real owner is likewise not subject to estate tax for the same reason that there is no transfer of ownership. TXTN2 – MODULE I