BUSINESS AND TRANSFER TAXATION 6th Edition (BY: VALENCIA & ROXAS) 19 SUGGESTED ANSWERS Chapter 4: DEDUCTIONS FROM GROSS ESTATE DEDUCTIONS FROM GROSS ESTATE

BUSINESS AND TRANSFER TAXATION 6th Edition (BY: VALENCIA & ROXAS) 19
SUGGESTED ANSWERS

Chapter 4: DEDUCTIONS FROM GROSS ESTATE

CHAPTER 4
DEDUCTIONS FROM GROSS ESTATE

Problem 4–1
False – could not be claimed as claim against the estate.

True
False – indebtedness is not transferrable to the heirs.
True
False – bank loan is the exception for notarization requirement.
True
True

False – unpaid taxes accrued before death only.

False – not deductible because the loss has been claimed by gross income. No double deduction is allowed.

False – not deductible. Donation is deductible if given for Philippine Government and exclusively for public purposes.

True
False – special deductions are not allowed to nonresident alien decedent.
True

Problem 4–2
False – value of deduction at the time of death.
False – not terminated upon the decedent's death but shall be paid by the remaining estate.
True

False – judicial expense incurred after death but before the estate tax settlement date is still deductible from gross estate.

False – losses that are deductible must have been sustained after death but before the settlement date of estate tax.

True
True

False – not deductible. Only those expenses actually taken from the gross estate are deductible.

False – actual or 5% of the gross not exceeding P200,000
False – this threshold is applicable to funeral expense.
False – Only those expenses actually taken from the gross estate.
True
True

Problem 4–3
False – special deduction.
False – neither special nor ordinary deduction.
True
True
True

False – deductible only if included in the gross estate. The amount deductible from the gross estate is limited to the amount that cannot be recovered.

False – either against the gross estate or against gross income. There is no double deduction.
False – Estate tax is not deductible from gross estate. (Sec. 86, NIRC)
True
False – not deductible because not yet accrued expense.
True

False – Nondeductible because only those related to gathering, preservation and settlement of the estate is allowed as deductible judicial expense from the gross estate.

True

SUGGESTED ANSWERS


Problem 4–4
False – ordinary deduction.
True
False – ½ of net conjugal estate, after ordinary deductions
False – no funeral deduction expense is allowed.
False – funeral expense is deducted first from common property
True
True
True

False – deductible whether paid or unpaid, the maximum deductible medical expense is P500,000.

False – not allowed as deduction is in excess of P500,000

False – this is in addition to other allowable deductions. Standard deduction is not in lieu of ordinary deduction.

False – no receipt is necessary for standard deduction.
True

Problem 4–5
Problem 4–6
Problem 4–7
Problem 4–8
1. C
1.
D
1. C
1.
D
2. B
2. C
2.
A
2.
B
3. C
3.
D
3. B
3.
C
4.
D
4.
A
4.
D
4.
A
5.
A
5. B
5.
D
5.
A
6.
D
6.
A
6. C
6.
B
7. C
7. C
7.
A
7.
A
8.
A
8. B
8. B
8.
D
9. B
9.
A
9.
D
9.
D
10. A
10. D
10. C
10.
C

Problem 4–9

P – 0 -. The funeral expenses should first be substantiated with documentary evidences that they actually incurred before the 5% of the gross estate or the P200,000 whichever is the lowest of the three is made. If the funeral expenses are not substantiated, such become the lowest among the three choices.

P375,000. D's administrator could still collect 25% or (P600,000/P2,400,000) of B's asset.
The remaining uncollectible would be 75% of P500,000 = P375,000.

P - 0 -. No vanishing deduction is allowed when the property subjected to previous transfer taxes is located outside the Philippines.

P - 0 -. No deduction is allowed if the estate tax return of a nonresident alien does not contain properties located outside the Philippines.

P - 0 -. Special deductions are not allowed to nonresident alien.

P100,000. The excess of unpaid funeral expense shall not be deducted as claimed against the estate.

P1,840,000. The special deduction within is computed as follows:
Family home
P1,000,000
Standard deduction (P1,000,000 x 3/5)
600,000
Medical expense (P400,000 x 3/5)
240,000
Total special deduction within
P1,840,000

SUGGESTED ANSWERS


P1,000,000. Only donation to the Philippine Government and nay of its political subdivisions are allowed to be deducted from the decedent's gross estate for Philippine estate tax purposes.

P - 0 -. Losses could only be claimed within 6 months from the date of death.

Problem 4–10
C

Proportionate ELIT (P500,000 x 3/5)
P 300,000
Add: Donation to Philippine government
100,000
Allowable deduction within
P400,000

Problem 4–11
C

Funeral expense (P3,500,000 x 5%)

P175,000
Whether paid or unpaid, actual funeral expense is deductible subject to limit.

Problem 4–12
B

Gross estate (P3,150,000 + P175,000)
P3,325,000
Multiplied by funeral rate

5%
Deductible funeral expense
P
166,250
Problem 4–13
A

Gross estate (P2,000,000 + P1,000,000)
P3,000,000
Multiplied by funeral rate

5%
P
150,000
Problem 4–14
NOT IN THE CHOICES

Real property

P1,560,000
Cash paid for medical expense from decedent's estate

45,000
Cash used for wake expenses from decedent's estate

85,000
Memorial plan already paid

40,000
Claims against insolvent person

100,000
Total gross estate

P1,830,000
Multiplied by percent of funeral expense

5%
Funeral expense allowed
P
91,500

The actual funeral expense is P125,000; the total of P85,000 wake expenses, and P40,000 memorial plan already paid.

Problem 4–15
D

Funeral expense, lowest amount
P130,000
Claims against the estate
P - 0 -

The entire amount of P90,000 in excess of P130,000 limit can no longer be deducted as funeral expense not it can be deducted as judicial expense.

Problem 4–16
D

Capital gains tax (P1,780,000/89%) x 6%
P120,000
Judicial expense (P1,900,000/95%) – P1,900,000
100,000
Total judicial expense
P220,000

The capital gains tax is considered judicial expense because it is a legitimate and necessary charge in disposing the property for the settlement of estate.

SUGGESTED ANSWERS

Problem 4–17
C

Agreed contract price (P10M x 10%)

P1,000,000
Extra-judicial settlement of the estate

500,000

Total deductible judicial expenses

P1,500,000
Problem 4–18
C

Deductible loss (P48,000/40%)

P120,000
Problem 4–19
A

There is no deductible loss from the gross estate because the car is not anymore available at the time of death. To be deductible, the loss must be sustained after death but before the filing and payment of the estate tax.

Problem 4–20
D

Value of apartment raged by fire

P3,000,000
Less: Insurance recovery (P3,000,000 x 60%)
P1,800,000

Scrap value

100,000
1,900,000
Deductible loss

P1,100,000

Problem 4–21
A

Unpaid mortgage on the real property included in the gross estate

P500,000
Problem 4–22
D

Loans from Metro Bank (not notarized per bank's policy)

P500,000
Interest on loans payable in the bank

30,000

Loans from Metro Bank (not notarized per bank's policy)

P530,000
Problem 4–23
D

Accounts receivable

P500,000
Multiplied by percent of uncollectible (100% - 66.67%)

33.33%
Bad debts deductible

P166,667
Percent of collectible is computed as follows:

Assets, net of unpaid taxes (P1,500,000 – P500,000)
P1,000,000

Divided by liabilities, net of taxes payable (P2,000,000 – P500,000)
P1,500,000

66.67%
Problem 4–24
B

Uncollectible amount (P160,000 x 87.50%)

P140,000
Percent of the entire amount
100.00%

Less: percent of collectible amount (P50,000/P400,000)
12.50%

Percent of uncollectible
87.50%

Problem 4–25
B

Exclusive

Conjugal
Properties

P2,800,000
P3,500,000
Ordinary deductions:

Transfer for public use
(400,000)

Unpaid mortgage loan used to finance family business

(

800,000)
Funeral expense

.

(

180,000)
Properties after ordinary deductions
P2,400,000
P2,520,000
Problem 4–26
D

Unpaid real property tax incurred prior to date of death

P100,000
Donor's tax prior to date of death

80,000

Deductible unpaid taxes from gross estate

P180,000

SUGGESTED ANSWERS


Problem 4–27
A

Zero. No vanishing deduction is allowed for properties located outside the Philippines.

Problem 4–28
A

Value taken (lower)

P1,000,000
Proportionate ordinary deduction (P1,000,000/P3,000,000) x P150,000

50,000
Final basis

P
950,000
Multiplied by percent of vanishing deduction

60%
Amount of vanishing deduction

P
570,000
Problem 4–29
D

Value taken (lower)

P2,100,000
Less: Mortgage paid

400,000
Initial basis

P1,700,000
Less: Proportionate deduction (P1,700,000/P5,000,000) x P400,000

136,000
Final basis

P1,564,000
Multiplied by percent of vanishing deduction

40%
Amount of vanishing deduction

P
625,600
Computation of ELIT:

Funeral expense, limit
P200,000

Judicial expense
100,000

Unpaid mortgage
100,000

Total ELIT

P400,000

Problem 4–30
B

Unpaid mortgage (P300,000 – P200,000)

P100,000

150,000
Ordinary deduction subject to proportionate computation

P250,000
Problem 4–31
D

Deductible transfer for public use (P2,000,000/1,000) x 200

P400,000
Problem 4–32
C

Donation to the City of Manila

P200,000

Transfer for public use (Philippine Government) is the only donation allowed deductible from gross estate.

Problem 4–33
C

P150,000
Judicial expense (P250,000 x 60%)
150,000
Bad debts (P150,000/3)
50,000
Ordinary deductions
P350,000

Problem 4–34
B

Funeral expenses

P200,000
Add: Medical expenses

650,000
Total

P850,000
Less: Limit amounts:

Funeral (P3,000,000 x 5%)
P150,000

Medical expenses

500,000
650,000
Nondeductible amount of expenses

P200,000

SUGGESTED ANSWERS

Problem 4–35
C

Standard deduction to Filipino and resident alien

P1,000,000
Problem 4–36
D

Nonresident alien does not have standard deduction

Problem 4–37
D

Maximum amount of family home deductible

P1,000,000
The family home is an exclusive property of the decedent.

Problem 4–38
C

Building – conjugal (P1,000,000/2)

P500,000
Land – exclusive

400,000
Family home - deductible

P900,000
Problem 4–39
D

Exclusive portion of family home

P
800,000

Add: Share in the conjugal home

(P2,000,000-P800,000)/2

600,000

Total

P1,400,000
Less: Maximum family home

1,000,000

Family home subject to tax

P
400,000

Problem 4–40
C

Deductible medical expense (paid or unpaid) within one year prior to death

P300,000
Problem 4–41
A

The unpaid medical expense in excess of the maximum P500,000 is nondeductible as

claims against the estate.

Problem 4–42
D

Medical expenses incurred from October 2013 to December 2013

P100,000
Problem 4–43
A

Exclusive

Conjugal
Properties

P1,000,000
P2,000,000
Transfer for public use
(
500,000)

Share of surviving spouse (P2,000,000 x 50%)

.

(1,000,000)
Net estate

P
500,000
P1,000,000
Problem 4–44
B

Conjugal estate

P5,000,000

(
200,000)
Net estate before share of surviving spouse

P4,800,000
Multiplied by share of surviving spouse

50%
Share of surviving spouse

P2,400,000
Problem 4–45
D

Standard deduction

P1,000,000
Family home (P1,000,000/2)

500,000
Amount received under R.A. 4917

500,000
Special deductions

P2,000,000

SUGGESTED ANSWERS

Problem 4–46

1.
Letter C

Donation to the government

P1,000,000

Funeral expense

100,000

Total ordinary deductions

P1,100,000
2.
Letter D

Standard deduction

P1,000,000

Family home

1,000,000

Amount receivable R.A. 4917

500,000

Medical expense

400,000

Total special deductions

P2,900,000
Problem 4–47

1.
Letter D

Claims against the estate (P3M + P1M)

P4,000,000

Transfer for public use (P500k + P200k)

700,000

Medical expenses

500,000

Family home

1,000,000

Standard deduction

1,000,000

Total deductions from gross estate

P7,200,000
2.
Letter C

Claims against the estate (P4,000,000 x 5/8)

P2,500,000

Transfer for public use (P500k + P200k)

700,000

Total deductions allowed from gross estate

P3,200,000
Problem 4–48
B

Japan

Philippines

Funeral: (P200,000 x 2/5) & (3/5)

P
80,000

P
120,000

Unpaid loans

300,000

700,000

Donations to government – Philippines

400,000

Judicial expenses (P600,000 x 2/10) & (8/10)

120,000

480,000

Total ordinary deductions

P500,000

P1,700,000
Special deductions:

Standard (P1,000,000 x 2/10) & (8/10)

P
200,000

P
800,000

Family home

1,000,000

Medical (P500,000 x 5/8) & (3/8)

312,500

187,500

Total special deduction

P
512,500

P1,987,500
Total deductions

P1,012,500

P3,687,500
Problem 4–49
A

P5,000,000. No deduction shall be allowed in the case of a nonresident decedent alien if his properties outside the Philippines are not reported in the Philippine estate tax return. [Sec. 86 (D), NIRC]

Problem 4–50
NOT IN THE CHOICES

Net taxable estate

P3,000,000
Add: Standard deduction
P1,000,000

Family home

1,000,000

Medical expenses

500,000

Ordinary deductions
1,500,000
4,000,000
Gross estate

P7,000,000

SUGGESTED ANSWERS

Problem 4–51
C

Net taxable estate

P4,000,000
Add: Share of surviving spouse

2,000,000
Net estate after special deductions

P6,000,000
Add: Special deductions

Standard deduction

P1,000,000

Family home

1,000,000

Medical expenses

500,000


250,000

2,750,000
Total net estate before ordinary deductions

P8,750,000
Less: Net exclusive estate

Family home

P1,500,000


250,000

Gross exclusive estate

P1,750,000

Less: Exclusive ordinary deduction

750,000

1,000,000
Net conjugal estate

P7,750,000
Problem 4–52

Burial lot (P50,000 x 80%)

P40,000
Expenses for wake before burial

20,000

Telegrams and cable to relatives

1,000

Mourning apparel of the surviving spouse and children

3,000

Entertainment expenses during the rites and burial ceremonies

2,500

Allowable funeral expenses

P66,500
Problem 4–53

January until
November until

1.
October 200A
December 200A

Total

Unpaid taxes:

Income tax

P200,000

P200,000

Donor's tax

100,000

100,000

Funeral expenses:

Memorial plan
50,000

50,000

Wake expenses

100,000

100,000

Accrued expenses
80,000

80,000

Total ordinary deductions allowed

P530,000
2.
Special deductions:

Standard deduction

P1,000,000

Family home

1,000,000

Medical expenses:

Hospital bills

400,000

400,000

Total special deduction

P2,400,000
Problem 4–54

Exclusive

Conjugal
Real estate property

P700,000

P2,200,000
Personal property

.

400,000
Total

P700,000

P2,600,000
Funeral expense (P700,000 + P2,600,000) x 5%

(
165,000)
Judicial expenses

(
50,000)
Mortgage payable to the bank

(
400,000)
Net estate before share of surviving spouse

P1,985,000
Multiplied by percent share of surviving spouse

50%
Share of surviving spouse

P
992,500

SUGGESTED ANSWERS


Problem 4–55

October 1 to 20, 2014 from Saint Luke's Hospital:

Diagnostic fee

P
60,000

Doctors' fee

120,000

Hospital rooms

80,000

Operating costs

50,000

Medicines

90,000

Total medical expense deductible

P400,000
Problem 4–56

Funeral expense, actual
P
150,000
Judicial expense

50,000
Medical expense, maximum allowed

500,000
Standard deductions
1,000,000
Total deductions
P1,700,000
Problem 4–57

1.
Gross estate
P3,000,000
2.
Actual deductions (P200,000 + 500,000)

P700,000
3.
Deductible allowance – standard deduction
P1,000,000
4.
Net taxable estate (P3,000,000 – P700,000 – P1,000,000)
P1,300,000

Note: Since the funeral and judicial expense are combined, it is assumed that the limit for funeral expense amounting to P150,000 or 5% of gross estate is complied and the remaining balance of P50,000 is for the judicial expense.

BUSINESS AND TRANSFER TAXATION 6th Edition (BY: VALENCIA & ROXAS) 19 SUGGESTED ANSWERS Chapter 4: DEDUCTIONS FROM GROSS ESTATE DEDUCTIONS FROM GROSS ESTATE

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