Chapter 5 - Estate Tax

BUSINESS AND TRANSFER TAXATION 5th Edition (BY: VALENCIA & ROXAS)SUGGESTED ANSWERS

Chapter 5: ESTATE TAX

CHAPTER 5

ESTATE TAX

Problem 5–11. False – only P200,000.2. True3. True4. True5. True6. True7. True8. False – If the value of the gross estate exceeds P2,000,000.9. False – only 30 days.10. True

Problem 5–2 1. A 6. D2. C 7. C3. A 8. A4. D 9. D5. D 10. A

Problem 5–3 1. Conjugal gross estate (P3,120,000 + P180,000) P3,300,000

Funeral expense allowed (P3,300,000 x 5%) ( 165,000)Share of surviving spouse (P3,300,000 – P165,000) x 50% ( 1,567,500)Standard deduction ( 1,000,000)Net estate P 567,500

2. Net conjugal estate P2,000,000Less: Share of surviving spouse P1,000,000 Standard deduction 1,000,000 2,000,000 Net estate P - 0 -

3. Net distributable estate (P1,000,000 + P900,000) P1,900,000

4. Net estate of P15,000 estate tax P 500,000Add: Standard deduction 1,000,000 Net estate before standard deduction P1,500,000Add: Share of surviving spouse 1,500,000 Net conjugal estate before funeral expense allowed P3,000,000Divided by (100% - 5%) 95% Gross estate P3,157,895

5. Gross estate (within) P5,000,000Less: Prorated allowable deduction* (P1,000,000 x 5/15) 333,333 Net estate – Philippines P4,666,667

*If properties outside are presented, then prorate. It not, then there is no deduction allowed for NRA.

Estate tax on P2,000,000 P135,000Add: Tax on excess (P2,666,667 x 11%) 293,333 Estate tax P428,333

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6. 40% of properties in the Philippines are intangibleTangible properties in the Philippines (P5,000,000 x 60%) P3,000,000Less: Allowable deduction (P1,000,000 x 5/15) x 60% 200,000 Net estate – Philippines P2,800,000

Estate tax on P2,000,000 P 135,000Add: Tax on excess (P800,000 x 11%) 88,000 Estate tax - Philippines P 223,000

7. Gross estate P20,000,000Less: Funeral expense 200,000 Net conjugal estate P19,800,000Less: Share of surviving spouse (P19,800,000 x 50%) 9,900,000 Net estate before standard P 9,900,000Less: Standard deduction 1,000,000 Net estate P 8,900,000

Estate tax on P5,000,000 P 465,000Add: Tax on excess (P3,900,000 x 15%) 585,000 Estate tax due P1,050,000

Tax credit: Limit (P1,050,000 x 40%) = P420,000 Actual allowed P100,000

8. Gross estate (P20,000,000 x 60%) P12,000,000Less: Prorated allowable deduction (P2,000,000 x 60%) 1,200,000 Net estate before share of surviving spouse P10,800,000Less: Share of surviving spouse (P10,800,000 x 50%) 5,400,000 Net estate – NRA P 5,400,000

Estate tax on P5,000,000 P 465,000Add: Tax on excess (P400,000 x 15%) 60,000Philippine estate tax P 525,000

Problem 5–4 BGross estate P3,000,000Funeral expense allowed (P3,000,000 x 5%) ( 150,000)Standard deduction (1,000,000)Net estate P1,850,000

Problem 5–5 A Net estate after deductions P1,200,000Add: Actual deductions (P150,000 + P50,000) 200,000 Gross estate P1,400,000Less: Funeral expense allowed (P1,400,000 x 5%) P 70,000 Other deduction 50,000 Standard deduction 1,000,000 (1,120,000)Net estate P 280,000

Problem 5–6 D Exclusive Conjugal

Property – cash P1,000,000 P4,000,000Transfer for public use (1,000,000)Funeral expense allowed ( 200,000)

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Chapter 5: ESTATE TAXShare of surviving spouse (P4,000,000 – P200,000) x 50%

(1,900,000)

Standard deduction (1,000,000)Net estate P 900,000

Problem 5–7 AGross estate P1,500,000Funeral and judicial expenses ( 60,000)Net estate before share of surviving spouse P1,440,000Share of surviving spouse ( 720,000)Net estate before special deduction P 720,000Standard deduction (1,000,000)Net estate – negative ( P280,000)Net estate taxable in the Philippines is P - 0 -

Problem 5–8 A Conjugal Exclusive

Properties P3,400,000 P2,600,000Funeral expense ( 200,000)Judicial expenses ( 250,000)Claims against properties ( 550,000) (700,000)Shares of surviving spouse (P2,400,000 x 50%) (1,200,000) 1,200,000Standard deduction (1,000,000)Net estate P2,100,000

Problem 5–9 CNet estate of P500,000 has a estate tax amounting to P15,000

Problem 5–10 D Net estate Estate tax

Amounts P2,000,000 P135,000

Nonresident alien decedent is not allowed to have standard deduction. The funeral expense is not deductible because no part of gross estate located outside the Philippines is reported. (Sec. 86 (B), NIRC)

Problem 5–111.

A Conjugal Exclusive

Real estate P1,600,000 P2,800,000Personal property 800,000Funeral expense, limit ( 200,000)Judicial expenses ( 100,000)Unpaid mortgage loan ( 300,000)Share of surviving spouse (P1,800,000 x 50%) ( 900,000) 900,000Standard deduction (1,000,000)Family home (P1,600,000/2) ( 800,000)Net estate P1,900,000

2.

B

Estate tax on P500,000 P 15,000Estate tax on excess (P1,400,000 x 8%) 112,000 Estate tax P127,000

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3.

B Conjugal Exclusive

Real estate P1,600,000 P2,800,000Personal property 800,000Funeral expense, actual ( 245,000)Judicial expenses ( 100,000)Unpaid mortgage loan ( 300,000)Share of surviving spouse (P1,755,000 x 50%) ( 877,500) 877,500Estate tax ( 127,000)Net distributable estate P3,550,500

Problem 5–12 CTax credit P100,000 x 2M/5M) P40,000

Problem 5–13 ATotal gross estate (P1,700,000 + P800,000)Less: DeductionsNet taxable estate

Estate tax on P500,000Excess P500,000 x 8%Total estate tax in the Philippines

P2,500,000 1,500,000 P1,000,000

P15,000 40,000 P55,000

Tax credit allowed (P800,000/ P2,500,000) x P55,000 = P17,600 vs. P20,000

P17,600

Problem 5–14 Gross estate (P2,000,000 + P180,000)Less: Deductions: Unpaid mortgage Funeral expense Judicial expense StandardNet estate

Tax on P500,000Tax on excess P120,000 x 8%Total estate tax

P 480,00060,000

20,0001,000,000

P2,180,000

1,560,000 P 620,000

P15,000 9,600 P24,600

Gross estateLess: Ordinary deductions (P480,000 + P80,000) Estate taxNet distributable estate

P560,000 24,600

P2,180,000

584,600 P1,595,400

Problem 5–15Cash PropertyGross estateDeductions: Promissory note Funeral expense Net estate before share of surviving spouseLess: Share of surviving spouse (P1,330,000 x 50%)Net estate before special deductionLess: Standard deduction

P 400,000 1,500,000 P1,900,000

( 500,000)( 70,000)P1,330,000 665,000 P 665,000 1,000,000

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Chapter 5: ESTATE TAXNet estate (P 335,000)Gross estateLess: Promissory note Funeral expenseNet estate before share of surviving spouseLess: Share of surviving spouse (P1,330,000 x 50%)Net distributable estate

P500,000 70,000

P1,900,000

570,000 P1,330,000 665,000 P 665,000

Problem 5–16 Conjugal Exclusive

Gross estate (P1,000,000 + P9,000,000)Ordinary deductions: Funeral expense (limit) Judicial expense Claims against the estateNet conjugal estate before share of surviving spouseLess: Share of surviving spouse (P100,000 x 50%)Special deductions: Standard deduction Medical expenseNet taxable estate

P1,000,000

( 200,000)( 200,000)( 500,000)P 100,000 50,000

P9,000,000

50,000

(1,000,000)( 500,000)P7,550,000

Tax on P5,000,000Tax on excess P2,550,000 x 15%Estate tax

P465,000 382,500 P847,500

Conjugal estateLess: Ordinary deductions (actual): Funeral expense Judicial expense Claims against the estateNet conjugal estate before share of surviving spouseLess: Share of surviving spouse (P90,000 x 50%)Net share of the decedent Add: Exclusive property of the decedentNet distributable estate before estate taxLess: Estate taxNet distributable estateDivide by number of heirs (12 + 1)Share of each heir

P210,000200,000

500,000

P1,000,000

910,000 P 90,000 45,000 P 45,000 9,000,000 P9,045,000 847,500 P8,197,500 13

P 603,576.92

Note: The medical expense is assumed to have been paid.

Problem 5–17 Taxable Distributable

Conjugal property - real estateOrdinary deductions: Funeral expenses, limit (P2,300,000 x 5%) Judicial expenses Unpaid mortgage Vanishing deduction*Net estate before share of surviving spouse

P2,000,000

( 115,000)( 5,000)( 500,000)

( 175,304) P1,204,696

P2,000,000

( 150,000)( 5,000)( 500,000) . P1,345,000

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Chapter 5: ESTATE TAXLess: Share of surviving spouse (50%)Net estate before exclusive propertyAdd: Exclusive property – personal property inheritedNet estate before special deductionLess: Standard deductionNet estate Divide by number of compulsory heirsInheritance of each heir

( 602,348)P 602,348 300,000 P 902,348 1,000,000 (P 97,652)

672,500 P 672,500 300,000 P 972,500 . P 972,500 3 P 324,167

*Value takenLess: Proportionate deductions (P620,000 x P300,000/ P2,300,000)Final basisMultiply by percentage of vanishing deduction – one year agoVanishing deductions

P300,000 80,870 P219,130 80% P175,304

Note: The inherited property is exclusive because the problem states that it is the decedent’s estate.

Problem 5–181. P3,900,0002. P 265,0003. P2,250,0004. P1,817,5005. P - 0 - or (P432,500)6. P - 0 -7. P1,515,000

Supporting computations (Problem 5-18):Gross estateHouse and lot, Baguio City P1,000,000House and lot, Quezon City – family home* 1,500,000Grocery store, Baclaran 300,000Inventory (P700,000 – P300,000) x 450/300 600,000Cash sales 450,000Claims against insolvent persons 50,000 P3,900,000 (1)Ordinary deductions: Funeral (P3,900,000 x 5%) P 195,000 Claims against insolvent persons 50,000 Unpaid income taxes 20,000 ( 265,000) (2)Net estate before share of surviving spouse P3,635,000Less: Share of surviving spouse (P3,635,000 x 50%) 1,817,500 Net estate before special deductions P1,817,500 (4)Special deductions: Family home (P1,500,000/2) P 750,000 Medical expenses 500,000 Standard deductions 1,000,000 (2,250,000) (3)Net estate (P 432,500) (5)

Estate tax due P - 0 - (6)

Gross estate P3,900,000Actual deductions: Funeral P250,000 Claims against insolvent persons 50,000 Unpaid income taxes 20,000 Medical expense 550,000 870,000 Net estate before share of spouse P3,030,000Share of surviving spouse (P3,030,000 x 50%)

1,515,000

Net distributable estate P1,515,000 (7)

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Note: The house and lot in New York, Quezon City is assumed family home because Don and Dona Posamin resides in that place.

Problem 5–19 1. P6,540,0002. P350,0003. P2,500,0004. P595,0005. P22,6006. P3,047,4007. P761,750

Supporting computations (Problem 5-19):House and lot (family home) P3,000,000Time deposit – principal amount 2,000,000Accrued interest 2004: (P2,000,000 x 12% x 12/12) 240,000 2005: (P2,000,000 x 12% x 10/12) 200,000Car 1,000,000Claims against insolvent person 100,000 Gross estate P6,540,000Ordinary deductions: Funeral expense, limit P 200,000 Judicial 50,000 Claims against insolvent person 100,000 ( 350,000)Net estate before share of surviving spouse P6,190,000Less: Share of surviving spouse (P6,190,000 x 50%) 3,095,000 Net estate before special deductions P3,095,000Special deductions: Standard deductions P1,000,000 Medical expense, limit 500,000 Family home, limit 1,000,000 2,500,000 Net estate P 595,000

Tax on P500,000 P 15,000Tax on excess (P95,000 x 8%) 7,600 Estate tax P 22,600

Gross estate P6,540,000Actual deductions: Funeral expense P250,000 Judicial expense 50,000 Claims against insolvent person 100,000 ( 400,000)Net distributable estate before share of surviving spouse P6,140,000Less: Share of surviving spouse (P6,140,000 x 50%) 3,070,000 Net actual estate P3,070,000Less: Estate tax 22,600 Net distributable estate P3,047,400Divided by number of heirs (intestate succession) 4 Share of each heir P 761,850

Problem 5–201. Estate tax credit = P212,917

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Chapter 5: ESTATE TAX2. Estate tax payable = P224,583

Supporting computations:

a. Estate tax payable to the Philippines : Country A Country B Philippines Entire

Gross estateUnpaid mortgagesUnpaid taxesTransfer for public useNet of identifiable deductionsAllocated deductions**Net estate

P1,200,000(200,000)

. P1,000,000 (208,333

)P 791,667

P2,500,000

(500,000) . P2,000,000 (416,667) P1,583,333

P5,000,000

(2,000,000)P3,000,000 (625,000) P2,375,000

P8,700,000(200,000)(500,000)

(2,000,000)P6,000,000(1,250,000)P4,750,000

b. Computation of Philippines estate tax:Tax on P2,000,000Tax on excess (P2,750,000 x 11%)Total Less: Tax credit allowed*Estate tax payable to the Philippine Government

P135,000 302,500 P437,500 212,917 P224,583

c. Computation of tax credit:

Limit A:Country A: [P437,500 x (P791,667/ P4,750,000)] - lowerActual payment to country A Tax credit allowed for country ACountry B: (P437,500 x P1,583,333/ P4,750,000)Actual payment to country B Tax credit allowed for country BTax credit – Limit A

P 72,917P 75,000

P145,833P140,000

P 72,917

140,000 P212,917

Limit B:Total net estate – foreign [(P791,667 + P1,583,333)/ P4,750,000] x P437,500Total actual estate tax payments – foreign (P75,000 + P140,000) – lower Tax credit – Limit B

P218,750

P215,000P215,000

*Tax credit allowed (the lower of limit A or B) P212,917

** Computation of allocated deductions:Country A Country B Philippines Entire

Funeral expensesJudicial expensesStandard deduction allocatedTotal allocated deductions

P 33,3338,333

166,667 P208,333

P 66,66716,667

333,333 P416,667

P100,00025,000

500,000 P625,000

P 200,00050,000

1,000,000 P1,250,000

Note: The above deductions are allocated because they are not specifically identified as deductions from a specific country. The allocation is computed by multiplying the fraction of the estate after identifiable deduction with the allocable deductions. The fraction per country is computed as follows:

Country A Country B Philippines Entire Estate net of identifiable deductions per countryDivide by entire net estateFraction

P1,000,000P6,000,000

1/6

P2,000,000P6,000,000

2/6

P3,000,000P6,000,000

3/6

P6,000,000P6,000,000

6/6

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Problem 5–21 Conjugal Exclusive

CashShares of stock (P100 x 100,000 shares)Insurance proceedsTransfer in contemplation of deathTotal gross estateOrdinary deduction – Transfer for public useNet estate before share of spouseLess: Share of surviving spouse (P800,000 x 50%)Net estate before special deductionLess: Standard deductionNet estate

P2,000,000

. P2,000,000 . P2,000,000 P1,000,000

P10,000,0001,000,000

3,000,000 P14,000,000(10,000,000)P 4,000,000 1,000,000 P 5,000,000 1,000,000 P 4,000,000

Estate tax on P2,000,000Tax on excess (P2,000,000 x 11%)Total estate taxLess: Tax credits on tax previously paid (P34,840 + P204,000)Transfer tax still due

P135,000 220,000 P355,000 238,840 P116,160

Problem 5–22Estate tax on P5,000,000 P 135,000Estate tax on excess (P3,000,000 x 15%) 450,000 Estate tax P 585,000Add: Surcharges – willful neglect (P585,000 x 50%) P292,500 Interest for 4 years (P585,000 x 20% x 4) 468,000 760,500 Total amount to be paid P1,345,500

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Chapter 5 - Estate Tax

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