General Tax Audit Procedures and Documentation

Assessment Process

1. When does the audit process begin? The audit process commences with the issuance of a Letter of Authority to a taxpayer who has been selected for audit.

2. What is a Letter of Authority? The Letter of Authority is an official document that empowers a Revenue Officer to examine and scrutinize a Taxpayer’s books of accounts and other accounting records, in order to determine the Taxpayer’s correct internal revenue tax liabilities.

3. Who issues the Letter of Authority? Letter of Authority, for audit/investigation of taxpayers under the jurisdiction of National Office, shall be issued and approved by the Commissioner of Internal Revenue, while, for taxpayers under the jurisdiction of Regional Offices, it shall be issued by the Regional Director.

4. When must a Letter of Authority be served? A Letter of Authority must be served to the concerned Taxpayer within thirty (30) days from its date of issuance, otherwise, it shall become null and void. The Taxpayer shall then have the right to refuse the service of this LA, unless the LA is revalidated.

5. How often can a Letter of Authority be revalidated? A Letter of Authority is revalidated through the issuance of a new LA. However, a Letter of Authority can be revalidated—

Only once, for LAs issued in the Revenue Regional Offices or the Revenue District Offices; or

Twice, in the case of LAs issued by the National Office.

Any suspended LA(s) must be attached to the new LA issued (RMO 38-88).

6. How much time does a Revenue Officer have to conduct an audit? A Revenue Officer is allowed only one hundred twenty (120) days from the date of receipt of a Letter of Authority by the Taxpayer to conduct the audit and submit the required report of investigation. If the Revenue Officer is unable to submit his final report of investigation within the 120-day period, he must then submit a Progress Report to his Head of Office, and surrender the Letter of Authority for revalidation.

7. How is a particular taxpayer selected for audit? Officers of the Bureau (Revenue District Officers, Chief, Large Taxpayer Assessment Division, Chief, Excise Taxpayer Operations Division, Chief, Policy Cases and Tax Fraud Division) responsible for the conduct of audit/investigation shall prepare a list of all taxpayer who fall within the selection criteria prescribed in a Revenue Memorandum Order issued by the CIR to establish guidelines for the audit program of a particular year. The list of taxpayers shall then be submitted to their respective Assistant Commissioner for pre-approval and to the Commissioner of Internal Revenue for final approval. The list submitted by RDO shall be pre-approved by the Regional Director and finally approved by Assistant Commissioner, Assessment Service (RMOs 64-99, 67-99, 18-2000 and 19-2000).

8. How many times can a taxpayer be subjected to examination and inspection for the same taxable year? A taxpayer’s books of accounts shall be subjected to examination and inspection only once for a taxable year, except in the following cases:

When the Commissioner determines that fraud, irregularities, or mistakes were committed by Taxpayer;

When the Taxpayer himself requests a re-investigation or re-examination of his books of accounts;

When there is a need to verify the Taxpayer’s compliance with withholding and other internal revenue taxes as prescribed in a Revenue Memorandum Order issued by the Commissioner of Internal Revenue.

When the Taxpayer’s capital gains tax liabilities must be verified; and

When the Commissioner chooses to exercise his power to obtain information relative to the examination of other Taxpayers (Secs. 5 and 235, NIRC).

9. What are some of the powers of the Commissioner relative to the audit process? In addition to the authority of the Commissioner to examine and inspect the books of accounts of a Taxpayer who is being audited, the Commissioner may also:

Obtain data and information from private parties other than the Taxpayer himself (Sec.5, NIRC); and

Conduct inventory and surveillance, and prescribe presumptive gross sales and receipts (Sec. 6, NIRC).

10. Within what time period must an assessment be made? An assessment must be made within three (3) years from the last day prescribed by law for the filing of the tax return for the tax that is being subjected to assessment or from the day the return was filed if filed late. However, in cases involving tax fraud, the Bureau has ten (10) years from the date of discovery of such fraud within which to make the assessment.

Any assessments issued after the applicable period are deemed to have prescribed, and can no longer be collected from the Taxpayer, unless the Taxpayer has previously executed a Waiver of Statute of Limitations.

11. What is “Jeopardy Assessment”? A Jeopardy Assessment is a tax assessment made by an authorized Revenue Officer without the benefit of complete or partial audit, in light of the RO’s belief that the assessment and collection of a deficiency tax will be jeopardized by delay caused by the Taxpayer’s failure to:

Comply with audit and investigation requirements to present his books of accounts and/or pertinent records, or

Substantiate all or any of the deductions, exemptions or credits claimed in his return. A jeopardy assessment is illegal.

12. What is a Pre-Assessment Notice (PAN)? The Pre-Assessment Notice is a communication issued by the Regional Assessment Division, or any other concerned BIR Office, informing a Taxpayer who has been audited of the findings of the Revenue Officer, following the review of these findings.

If the Taxpayer disagrees with the findings stated in the PAN, he shall then have fifteen (15) days from his receipt of the PAN to file a written reply contesting the proposed assessment.

13. Under what instances is PAN no longer required? A Preliminary Assessment Notice shall not be required in any of the following cases, in which case, issuance of the formal assessment notice for the payment of the taxpayer’s deficiency tax liability shall be sufficient:

When the finding for any deficiency tax is the result of mathematical error in the computation of the tax appearing on the face of the tax return filed by the taxpayer; or

When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or

When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or

When the excise tax due on excisable articles has not been paid; or

When an article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non-exempt persons.

14. What is a Notice of Assessment/Formal Letter of Demand?

A Notice of Assessment is a declaration of deficiency taxes issued to a Taxpayer who fails to respond to a Pre-Assessment Notice within the prescribed period of time, or whose reply to the PAN was found to be without merit. The Notice of Assessment shall inform the Taxpayer of this fact, and that the report of investigation submitted by the Revenue Officer conducting the audit shall be given due course.

The formal letter of demand calling for payment of the taxpayer’s deficiency tax or taxes shall state the facts, the law, rules and regulations, or jurisprudence on which the assessment is based, otherwise, the formal letter of demand and the notice of assessment shall be void.

15. What is required of a taxpayer who is being audited? A Taxpayer who is being audited is obliged to:

Duly acknowledge his receipt of the appropriate Letter of Authority upon its presentation by the Revenue Officer authorized to conduct the audit by affixing in the Letter of Authority the name of the recipient and the date of receipt.

Present within a reasonable period of time, his books of accounts and other related accounting records that may be required by the Revenue Officer; and

Submit the necessary schedules as may be requested by the Revenue Officer within a reasonable amount of time from his (Taxpayer’s) receipt of the Letter of Authority.

16. What is the recourse of a Taxpayer who cannot submit the documents being required of him within the prescribed period of time? If a Taxpayer, believing that he cannot present his books of accounts and/or other accounting records, intends to request for more time to present these documents in order to avoid the issuance of a Jeopardy Assessment, the Taxpayer may execute what is referred to as a Waiver of the Statute of Limitations.

17. What is a Waiver of the Statute of Limitations? The Waiver of the Statute of Limitations is a signed statement whereby the Taxpayer conveys his agreement to extend the period within which the Bureau may validly issue an assessment for deficiency taxes. If a Taxpayer opts to execute a Waiver of the Statute of Limitations, he shall likewise be, in effect, waiving his right to invoke the defense of prescription for assessments issued after the reglementary period.

No Waiver of the Statute of Limitations shall be considered valid unless it is accepted by a duly authorized Bureau official.

18. If a Taxpayer does not agree with the assessment made following an audit, can he protest this Assessment?Yes, he can. A Taxpayer has the right to contest an assessment, and may do so by filing a letter of protest stating in detail his reasons for contesting the assessment.

19. What are the characteristics of a valid protest? A protest is considered valid if it satisfies the following conditions:

It is made in writing, and addressed to the Commissioner of Internal Revenue;

It contains the information, and complies with the conditions required by Sec. 6 of Revenue Regulations No. 12-85; to wit:

a.) Name of the taxpayer and address for the immediate past three (3) taxable year.

b.) Nature of request whether reinvestigation or reconsideration specifying newly discovered evidence he intends to present if it is a request for investigation.

c.) The taxable periods covered.

d.) Assessment number.

e.) Date of receipt of assessment notice or letter of demand.

f.) Itemized statement of the findings to which the taxpayer agrees as a basis for computing the tax due, which amount should be paid immediately upon the filing of the protest. For this purpose, the protest shall not be deemed validly filed unless payment of the agreed portion of the tax is paid first.

g.) The itemized schedule of the adjustments with which the taxpayer does not agree.

h.) A statement of facts and/or law in support of the protest.

The taxpayer shall state the facts, applicable law, rules and regulations or jurisprudence on which his protest is based, otherwise, his protest shall be considered void and without force and effect on the event the letter of protest submitted by the taxpayer is accepted, the taxpayer shall submit the required documents in support of his protest within sixty (60) days from date of filing of his letter of protest, otherwise, the assessment shall become final, executory and demandable.

It is filed within thirty (30) days from the Taxpayer’s receipt of the Notice of Assessment and formal Letter of Demand.

20. In the event the Commissioner’s duly authorized representative denies a Taxpayer’s protest, what alternative course of action is open to the Taxpayer? If a protest filed by a Taxpayer be denied by the Commissioner’s duly authorized representative, the Taxpayer may request the Commissioner for a reconsideration of such denial and that his tax case be referred to the Bureau’s Appellate Division. The Appellate Division serves as a “Court”, where both parties, i.e. the Revenue Officer on one hand, and the Taxpayer on the other, can present testimony and evidence before a Hearing Officer, to support their respective claims.

21. What recourse is open to a Taxpayer if his request for reconsideration is denied or his protest is not acted?

Should the Taxpayer’s request for reconsideration be denied or his protest is not acted upon within 180 days from submission of documents by the Commissioner, the Taxpayer has the right to appeal with the Court of Tax Appeals (CTA).

Any appeal must be done within thirty (30) days from the date of the Taxpayer’s receipt of the Commissioner’s decision denying the request for reconsideration or from the lapse of the 180 day period counted from the submission of the documents. (Sec. 228 of the Tax Code, as amended).

22. If the Taxpayer is not satisfied with the CTA’s decision, can he appeal the decision to a higher Court? Yes, he can. Decisions of the Court of Tax Appeals may be appealed with the Court of Appeals within fifteen (15) days from the Taxpayer’s receipt of the CTA’s decision. In the event that the Taxpayer is likewise unsatisfied with the decision of the Court of Appeals, he may appeal this decision with the Supreme Court.

23. Can a Taxpayer claim a refund or tax credit for erroneously or illegally collected taxes? Yes, he can. The Taxpayer may file such a claim with the Commissioner of Internal Revenue (Sec.229, NIRC), within two (2) years from the payment of the tax or penalty sought to be refunded. Failure of the Taxpayer to file such a claim within this prescribed period shall result in the forfeiture of his right to the refund or tax credit.

24. If a Taxpayer has filed a claim for refund and the Bureau has yet to render a decision on this claim, can the Taxpayer elevate his claim to the CTA?

25. What means are available to the Bureau to compel a Taxpayer to produce his books of accounts and other records? A Taxpayer shall be requested, in writing, not more than two (2) times, to produce his books of accounts and other pertinent accounting records, for inspection. If, after the Taxpayer’s receipt of the second written request, he still fails to comply with the requirements of the notice, the Bureau shall then issue him a Subpoena Duces Tecum.

26. What course of action shall the Bureau take if the Taxpayer fails to comply with the Subpoena Duces Tecum?

If, after the Taxpayer fails, refuses, or neglects to comply with the requirements of the Subpoena Duces Tecum, the Bureau may:

File a criminal case against the Taxpayer for violation of Section 5 as it relates to Sections 14 and 266, of the NIRC, as amended; and/or

Initiate proceedings to cite the Taxpayer for contempt, under Section 3(f), Rule 71 of the Revised Rules of Court.

27. What alternatives are open to Government for the collection of delinquent accounts?

Once an assessment becomes final and demandable, the Government may employ any, or all, of the following remedies for the collection of delinquent accounts:

Distraint of personal property;

Levy of real property belonging to the Taxpayer;

Civil Action; and

Criminal Action.

28. What is “Distraint of Personal Property”? Distraint of personal property involves the seizure by the Government of personal property – tangible or intangible – to enforce the payment of taxes, followed by the public sale of such property, if the Taxpayer fails to pay the taxes voluntarily.

29. What is “Levy of Real Property”? Levy of real property refers to the same act of seizure, but in this case of real property, and interest in or rights to such property in order to enforce the payment of taxes. As in the distraint of personal property, the real property under levy shall be sold in a public sale, if the taxes involved are not voluntarily paid following such levy.

30. In what time period must collection be made? Any internal revenue tax, which has been assessed within the period prescribed shall be collected within three (3) years from date of assessment. However, tax fraud cases may be collected by distraint or levy or by a court proceeding within five (5) years from assessment of the tax or from the last waiver.

 

Financial Accounting vs. Tax Accounting

“Then render to Caesar the things that are Caesar’s, and to God the things that are God’s.” (Luke 20:25, ESV)

Although roughly only 10% of taxpayers are audited annually, professionals and business owners are in constant fear of the Bureau of Internal Revenue (BIR), especially with the spunky Commissioner Kim Jacinto-Henares at its helm. In speaking and interacting with several accountants in a business setting, I have heard them say again and again that no matter how well they prepare a client’s financial statements, the BIR can and will always find a deficiency somewhere. To be sure, this is not only true for small and medium accounting and auditing firms but with big ones as well.

Certified Public Accountants (CPAs) use financial accounting principles or what is more commonly known as Generally Accepted Accounting Principles (GAAP) and Generally Accepted Auditing Standards (GAAS). In the Philippines, we have adopted the International Financial Reporting Standards (IFRS) as our Philippine Financial Reporting Standards (PFRS). The problem arises when these audited financial statements (AFS) are submitted to the BIR as attachment to company or individual Income Tax Returns (ITR) for purposes of computing the tax liability. This is due to the fact that the BIR does not use the same accounting principles and standards used in financial accounting but rather that which is provided for by law under the National Internal Revenue Code of 1997 (NIRC) or Tax Code for short, along with revenue issuances by the Commissioner of Internal Revenue, such as Revenue Regulations (RR), Revenue Memorandum Orders (RMO), and Revenue Audit Memorandum Orders (RAMO), among others.

RR No. 8-2007 provides that “the recording and recognition of business transactions for financial accounting purposes, in a majority of situations, differ from the application of tax rules on the same transactions resulting to disparity of reports for financial accounting vis-à-vis tax accounting.” Moreover, RMC No. 22-2004 states that “It has been observed that the GAAP and GAAS approved and adopted may from time to time be different from the provisions of the Tax Code.” It then provides that “All returns required to be filed by the Tax Code shall be prepared always in conformity with the provisions of the Tax Code. Taxability of income and deductibility of expenses shall be determined strictly in accordance with the provisions of the Tax Code and the rules and regulations issued implementing the said Tax Code. In case of difference between the provisions of the Tax Code and the rules and regulations implementing the Tax Code, on one hand, and the GAAP and GAAS, on the other hand, the provisions of the Tax Code and the rules and regulations issued implementing the Tax Code shall prevail.” In a separate ruling, the BIR held that “Therefore, it is the financial statements which is in conformity with the Tax Code that should be attached in the filing of Income Tax Returns” (BIR Ruling No. M-111-2006).

This is the main reason why the BIR always finds alleged deficiencies in a taxpayer’s tax return and payment. But what if you have already been using financial accounting principles for the longest time in filing your ITR? Don’t worry, all hope is not lost. RR No. 8-2007 further provides that “Hence, there is a need to reconcile the disparity in a systematic and clear manner to avoid irritants between the taxpayer and the tax enforcer. Accordingly, concerned taxpayers are hereby mandated to maintain books and records that would reflect the reconciling items between Financial Statements figures and/or data with those reflected/presented in the filed Income Tax Return (ITR). The recording and presentation of the reconciling items in such books and records shall be done in such a manner that would facilitate the understanding by the examiners/auditors of the Bureau of Internal Revenue tasked to undertake audit/investigation functions, providing in sufficient detail the computation of the differences and the reasons therefore aimed at bringing into agreement the IFRS and ITR figures.”

Surely, such reconciling of records is indeed taxing (pun intended)! So, in order to avoid such a predicament and the headaches that come along with it, it would be better for taxpayers to adopt tax accounting methods and principles as the PFRS from the very beginning instead of the IFRS as their GAAP and GAAS. For more information on tax accounting principles and methods, please refer to RR V-1 for the Bookkeeping Regulations and RAMO 1-2000, which serves as the guidebook of BIR auditors and examiners in implementing the provisions of the Tax Code, or consult a competent tax professional.

Effects of the Different Property Regimes in the Computation of the Estate Tax Due

Someone asked: “Atty. Terence, I just wanted to ask, what if there was a prenup agreement? How do you divide the properties and compute the estate tax due? Will a prenup supersede the law of a community property with regard to estate tax?”

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Answer: A prenuptial agreement, otherwise known legally as a marriage settlement, is a contract entered into by the parties intending to get married, which must be executed by them prior to the wedding, otherwise, the same shall be void. The primary purpose of a marriage settlement is to determine the property regime of the parties to the future marriage other than that provided for by law by default.

Estate tax, also known as inheritance tax, is a tax on the right of a deceased person to transmit his estate to his lawful heirs and beneficiaries. Contrary to popular belief, it is not a tax on property but on the right to transmit property at death, and is measured by the value of the property.

Now that we know what estate tax is, we should then consider the different kinds of property regimes that a married couple can enter into in order for us to properly compute the value of their respective gross estates and ultimately, their net taxable estates.

For marriages celebrated after or on the effectivity date of the Family Code, which is on August 3, 1988, in the absence of a valid marriage settlement, the default property regime of absolute community of property (ACP) shall govern. In a regime of ACP, the community property shall consist of all the property owned by the spouses at the time of the celebration of the marriage or acquired thereafter. However, the following are excluded therefrom: (1) Property acquired during the marriage by gratuitous title by either spouse, and the fruits as well as the income thereof, if any, unless it is expressly provided by the donor, testator or grantor that they shall form part of the community property; (2) Property for personal and exclusive use of either spouse; however, jewelry shall form part of the community property; and (3) Property acquired before the marriage by either spouse who has legitimate descendants by a former marriage, and the fruits as well as the income, if any, of such property.

On the other hand, for marriages celebrated before the effectivity of the Family Code, the default property regime of conjugal partnership of gains (CPG) provided for under the Civil Code, the effectivity of which began on August 30, 1950, shall prevail. The same is true in case the future spouses agree in the marriage settlements that the regime of conjugal partnership of gains shall govern their property relations during the marriage. In a regime of CPG, the husband and wife place in a common fund  the proceeds, products, fruits and income from their separate properties and those acquired by either or both spouses through their efforts or by chance, and, upon dissolution of the marriage of the partnership, the net gains or benefits obtained by either of both spouses shall be divided equally between them, unless otherwise agreed in the marriage settlements. Hence, the following shall be the exclusive property of each spouse: (1) That which is brought to the marriage as his or her own; (2) That which each acquires during the marriage by gratuitous title; (3) That which is acquired by right of redemption, by barter or exchange with property belonging to only one of the spouses; and (4) That which is purchased with exclusive money of the wife or of the husband.

Lastly, in a regime of complete separation of property (CSP), each spouse retains ownership of his or her own properties including the fruits thereof. In short, what’s yours is yours and what’s mine is mine. Article 134 of the Family Code provides that in the absence of an express declaration in the marriage settlements, the separation of property between spouses during the marriage shall not take place except by judicial order. Such judicial separation of property may either be voluntary or for sufficient cause.

So, after determining the share of each spouse from the mass of the community or conjugal property, we can now compute for their respective individual gross estates. Section 85 of the National Internal Revenue Code provides that “the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated; Provided however, that in the case of the non-resident decedent who at the time of his death was not a citizen of the Philippines only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate.”

Having determined their respective individual gross estates, we can now proceed to computing their net taxable estates taking into consideration the applicable exclusions and deductions provided for by law.

Life Insurance as an Indispensable Tool in Estate Planning

life-insurance

In a previous article, I talked about the importance of having a sound estate plan in securing your family’s future, not only in terms of material needs, but also in order to ensure peace after you leave them for the afterlife. Now, I am here to discuss one of the most important, if not the most important tools in estate planning: life insurance.

Several years ago, I used to think that all life insurance agents are just out to get people to buy their product, which they cannot even enjoy during their lifetime. For me, life insurance was just another unnecessary expense that will further diminish my hard-earned money in addition to my contributions for my social security, PAG-IBIG, Philhealth, and those darn taxes. I was even annoyed how these agents refer to themselves as ‘financial advisors’ when in truth and in fact; all they are are but salesmen. Hence, whenever, a financial advisor would contact me in order to talk about my ‘future,’ I avoided them like the plague!

However, when I began learning about estate planning in order to include it in my law practice, I discovered and was truly convinced that life insurance is indeed very important and that 21st century insurance agents, at least the ones I know, are real financial advisors in the truest sense. As is often said in the insurance industry: “Life Insurance is the only necessity that you can purchase today when you do not need it and something that you cannot purchase in the future when you need it the most.” In fact, it is indispensable to sound estate planning and personal finance in general. Now why would I say such a thing? Here are some of the reasons:

  • Estate Tax. We all know that taxes are a pain in the ass (Especially for men because they keep their wallets in their back pockets!) and would therefore do anything to legally avoid paying them. Imagine, if you leave behind an estate worth at least ten million pesos (P10,000,000.00), then your heirs would have to pay a whopping minimum of P1,215,000.00 plus 20% of anything in excess of P10,000,000.00 in estate taxes! Now what if the only property you left was the ancestral or family home worth P10 million? Where will your heirs get the money to pay the estate tax, which, by the way, should be paid within six months from the time of your death? The only solution left is for them is to sell their beloved ancestral house and lot and usually at a loss. That would be so sad! However, ample life insurance can quickly solve this problem for just a fraction of the amount of estate tax due that your heirs would need to pay. How? By first applying the life insurance proceeds to the payment of the estate tax due. In this way, your heir/s would be able to receive their inheritance wholly intact.

estatetax

  • Equalization of Inheritance. Contrary to what most people think, Filipinos do not have the absolute liberty to dispose of their properties as they deem fit. One example of this is in the area of wills and succession. The law reserves a certain portion of our estate to those who are referred to as ‘compulsory heirs.’ This reserved portion is called their ‘legitime.’ There are instances however that some people would want to give more to an heir, especially if they have illegitimate children because under the Civil Code of the Philippines, the same are only entitled to one-half of the legitime of the legitimate children. One of the ways a testator can equalize the share of his illegitimate children is by bequeathing to them a bigger share from the free disposable portion of his estate. The problem with that strategy however is that it can and will cause feelings of hurt and resentment in the hearts of the surviving legitimate family because in addition to the betrayal, their share in the estate of their deceased parent is even lessened due to the presence of illegitimate children; or when the free disposable portion is insufficient. But there is a better way, and that is through life insurance. By naming the illegitimate children as beneficiaries, they will be able to receive more than what the law provides for them, provided that only a sufficient and fair amount is given to them in such a way that they will not receive a larger inheritance than the legitimate children.

These are just some of the reasons why life insurance is an indispensable tool in estate planning. To be sure, there are more but those will be discussed in later articles. For now, suffice it to say that life insurance is definitely not a want or a luxury, but certainly a necessity for those who are responsible enough to take care of the needs of their loved ones even in their permanent absence. If you would want to know more about how estate planning works, consult a trusted lawyer, accountant or financial planner.

Democracy at Work or Constitutional Strife?

It started with the impeachment trial of former Chief Justice Renato Corona. Then came the PDAF scam, then the DAP scam, and now the looming BIR controversy.

Driven by the Corona impeachment in 2012, the BIR sent the Supreme Court (SC) a request for copies of the statements of assets, liabilities and net worth (SALN) of its respective justices. However, in a resolution dated June 17, 2014, the SC denied the said request “for lack of sufficient basis.”

Analysts say that one of the reasons, if not the main reason, PNoy went after CJ Corona was because of the recent decision of the SC involving Hacienda Luisita, which is owned by the President’s clan. Thereafter, the PDAF scam was brought into the fore thanks to the whistleblowing efforts of a certain Benhur Luy and caused by the social media posts of Janet Napoles’ daughter showcasing her expensive stuff and lavish lifestyle. Nevertheless, despite the overwhelming evidence for the guilt of a majority of the senators, only three have been issued warrants of arrest and incarcerated. In an ironic twist of fate, Senate President Juan Ponce Enrile, the presiding judge of the Corona impeachment trial, was among those arrested for the PDAF scam along with Senators Bong Revilla and Jinggoy Estrada. Why is that? Could it have anything to do with those three senators being opposition members; or that Enrile was once a crony of the deposed dictator, Ferdinand Marcos, and hence an enemy of the Aquinos? Of course, we already know by now that the legislature, which consists of the Senate and the House of Representatives, is basically controlled by the President.

But this is not the end of it. On July 1, 2014, the SC ruled on the controversial Disbursement Acceleration Program (DAP) of the Executive Department, declaring the salient point thereof as unconstitutional. In response to this decision, PNoy gave a national address relative thereto on July 14, 2014 defending the DAP and asking the SC to reconsider its decision.

Considering this background, and the apparent vengefulness of PNoy, it is quite understandable that the SC justices would deny the BIR its request for fear of “harassment.” And why wouldn’t they be careful considering what happened to CJ Corona and the three senators? Atty. Mel Sta. Maria, the new dean of the FEU Institute of Law and resident legal analyst of TV5, said that these things simply show democracy at work (my own paraphrase). Now, is it really just democracy and constitutionalism at work or is it a case of the three co-equal branches of government, or maybe just two, fighting against each other in the quest for supremacy? Only time will tell. The only thing we can do right now is be vigilant by knowing what the law says about these things. Remember, “Ignorance of the law excuses no one from compliance therewith” (Article 3, Civil Code of the Philippines).

Real Pinoy Legal Horror Stories (No. 1)

Bobby, a successful iridologist and businessman, was married to Esperanza and they had a daughter named Queenie. They owned the house and lot they lived in located at White Plains, Quezon City currently valued at least P20,000,000.00. However, after a few years, Esperanza died. Bobby then allegedly married Dora who had children from a previous marriage named Luwalhati and Kiko. However, it was only Luwalhati who lived with Bobby and Dora in the house in White Plains. After several years, Bobby died leaving behind Dora and Luwalhati who continued living in their house in Quezon City. Luwalhati became a spinster who then adopted two children, one boy and one girl. The girl’s name was Tina and the boy’s name was Allan.

Afterwards, Dora died leaving the house to Luwalhati and her two adopted children. Unfortunately, after a few years, Luwalhati also died due to cancer leaving Tina and Allan to the care of her best friend, Suzy. During this time, Queenie has already been living in the United States with her family. When Queenie found out about the death of Luwalhati, she became concerned about their ancestral house as she is the only living legitimate child of the deceased patriarch Bobby.

Now the question is: To whom does the house and lot go? Originally, the house and lot in Quezon City was under the name of Bobby who allegedly then donated an undivided share thereof to Dora and Luwalhati, thus including their names in the Transfer Certificate of Title. However, upon the death of Luwalhati, it was discovered that the property is now under the name of Dora and Luwalhati. Now, Suzy, being the one who took care of Luwalhati during her battle with cancer, claimed that she has in her possession the Last Will and Testament of the latter and that she was named executor therein. The problem is, she refused and continues to refuse producing the same for the other property claimants to see. On the other hand, Kiko does not believe that his sister wrote and executed such a will and also claims that he is a legal intestate heir of Luwalhati because Allan and Tina were not legally adopted by her. However, Queenie, on the contrary, claims that Luwalhati was never validly adopted by her father Bobby and that he and Dora were not even married although there was a time that the TCT of the subject property was named under Booby “married to” Dora. Hence, she is likewise claiming the subject property as a primary compulsory heir of her father Bobby and her mother Esperanza. To make things more complicated, the Registry of Deeds of Quezon City could not find any copy of the transfer documents concerning the house and lot putting into question the validity of the subsequent transfers from Bobby to Dora and Luwalhati. It seems like somewhere along the way, an irregularity was committed regarding the transfers of ownership of the subject property.

Presently, it is still unclear about what truly transpired and how the title to the subject property was transferred from Bobby to Dora and Luwalhati. But one thing is clear: All of these problems could have been avoided if only Bobby came up with a sound estate plan including a Last Will and Testament.

How to Protect Your Hard-Earned Assets

Have you ever wondered how a lot of big business owners in America managed to keep their empires afloat and their properties intact even after a major trial or setback?  With the help of highly capable legal and financial professionals, they have learned to master the art and science of sound asset protection planning.

Sadly however, here in the Philippines, most of our countrymen have been lax when it comes to  keeping their money and property safe. Usually, Filipinos have the following mindset when it comes to asset protection planning:

-“I don’t need those sophisticated asset protection stuff, anyway, I only have a simple sari-sari store! Let’s just leave that to the rich and famous like Henry Sy or John Gokongwei!”

-“Lawyers are expensive! Why would I need to spend so much when I only have so little?”

-“This business has been passed on and survived for many generations. So why would I need asset protection now when they didn’t need it before?”

The people who think this way, whether they know it or not, are actually more at risk of losing everything they have worked so hard for.

The goal of asset protection is to shield assets from the reach of creditors, especially the government in the form of taxes.

Asset protection should simply be about structuring the ownership of one’s assets to safeguard them from potential future risks. Most asset protection structures are commonly used business and estate planning tools, such as corporations, limited partnerships, trusts and the like. Properly implemented asset protection planning should be legal and ethical. It should not be based on hiding assets or on secrecy. It is not a means or an excuse to evade taxes.

Asset protection will not work to insulate the proceeds of crime. Only properties that have been legally acquired are covered by asset protection methods. If an asset protection plan is implemented, it should be for legitimate business purposes, not as an instrument to defraud creditors.

There is no one “magic bullet” in asset protection. The term “asset protection” encompasses a number of planning and structuring mechanisms that may be implemented by a practitioner to minimize a client’s exposure to risk. For each client the asset protection solution will be different, depending on (i) the identity of the debtor; (ii) the nature of the claim; (iii) the identity of the creditor; and (iv) the nature of the assets. These are four threshold factors that are either expressly or implicitly analyzed in each asset protection case. The analysis of these four factors determines what planning would be possible and effective for a specific client.

A.​ Identity of the Debtor

In analyzing the identity of the debtor, one should consider the following initial issues:

1. Is the debtor an individual or an entity?

a. If the debtor is an individual:

i. Does he or she have a spouse, and is the spouse also liable? For example, the spouse may be liable as a co-signor of a personal guarantee or as a co-owner of community property assets.

– If the spouse of the debtor is not liable, is it possible to file an action in court in order to transmute the assets from community property to the respective separate property of each of the spouses?

ii. Are the spouses engaged in activities that are equally likely to result in lawsuits, or is one spouse more likely to be sued than the other?

b. If the debtor is an entity:

i. Did an individual guarantee the entity’s debt?

ii. How likely is it that the creditor will be able to pierce the corporate veil, or otherwise get at the assets of the individual owners?

iii. Is there a statute that renders the individual personally liable for the obligations of the entity? Often, clients assume that if assets are placed within a limited liability entity, such assets are shielded from lawsuits. Another common assumption is that a lawsuit against such an entity cannot reach the owners of the entity. These assumptions are frequently erroneous.

B. The Nature of the Claim

It is not sufficient to know the identity of the debtor. The practitioner will also need to know what type of a claim will be brought against the client. Here are some variables:

1. Are there any specific claims against the client, or is asset protection being undertaken as a result of a general fear of lawsuits and the desire to insulate the client from lawsuits?

2. Has the claim been reduced to a judgment? If the claim has been reduced to a judgment, what assets does the judgment encumber? For example, a lien will cover only those assets that are titled in the name of the defendant. If there is any variance, the judgment lien will not attach. Similarly, a notice for a debtor’s examination will impose an automatic lien only on those assets which are titled in the name of the debtor.

3. Has the claim matured to the extent that any transfer of assets will constitute a fraudulent transfer?

4. Is the claim brought against the debtor a tort claim? Tort claims are generally covered by liability insurance. To the extent that asset protection is desired, it is because the plaintiff will deem that the insurance coverage is not sufficient, and will seek to get the defendant to contribute to a settlement with the defendant’s own funds.

5. Certain debts are subject to pre-judgment attachment, if: (i) they arose in the context of the debtor’s business, and (ii) the amount owed is readily ascertainable. In this case the plaintiff does not need to wait until he obtains a judgment in order to encumber the asset. However, the amount of the debt must be evident from the face of the instrument sued upon, such as a promissory note or a liquidated damage provision.

6. An always relevant question is the dischargeability of the claim in bankruptcy. If the claim is dischargeable in bankruptcy, and the debtor’s debts are exempt or otherwise unreachable, then asset protection planning may not be warranted – a bankruptcy discharging the claim will be sufficient.

a. The fact that a claim is dischargeable provides leverage when negotiating with creditors.

b. Asset protection planning and bankruptcy planning usually go hand-in-hand. Often the goal of asset protection planning is to structure the debtor’s assets so that upon the filing of a bankruptcy the debtor’s claims are discharged and assets are retained.

7. What is the statute of limitations for bringing the claim?

8. What is the size of the potential claim? Creditors become more aggressive if the liability is greater. In addition, certain asset protection strategies are more expensive than others.

C. Identity of the Creditor

The third factor to be considered before implementing an asset protection strategy is the identity of the creditor. Here we are referring to certain creditor traits:

1. How aggressive/lazy is the creditor? How smart/knowledgeable is the creditor and the creditor’s counsel? Accurately answering these questions will help us determine the scope of collection activities that the creditor is likely to engage in. This tells us how much protection the debtor requires.

2. Is the creditor a government agency? Taxing authority? Some government agencies possess powers of seizure that other government agencies do not. For example, the Bureau of Internal Revenue and Bureau of Customs, with due process, have the power to seize assets that it deems are used to defraud the Government.

3. Is the potential creditor a spouse in an action for annulment of marriage or declaration of nullity of marriage that has not yet been filed?

D. The Nature of the Assets

The final factor that needs to be analyzed is the nature of the assets we are seeking to protect. This factor, to a much greater extent than anything else, will determine what may be done and what needs to be done to protect the debtor:

1. To what extent are the assets exempt from the claims of creditors?

2. How are the assets titled? If assets constitute community property, it is usually irrelevant that the assets are titled in the name of one spouse. The creditor can attach all of the community property, even if only one spouse is the debtor, provided that the debt inured to the benefit of the family. This may hold true even if the debt arose prior to the marriage.

Each of the issues presented above should be carefully considered by the legal counsel or financial planner before structuring and implementing an asset protection plan. Consult a specialist for adequate and sound asset protection planning.

Estate Planning for Every Juan

“A good person leaves an inheritance for their children’s children, but a sinner’s wealth is stored up for the righteous.” (Proverbs 13:22)

Both as a lawyer and a pastor, I have come across several people who are having problems with disposing certain properties which are still under the name of their long-deceased relative. The relative is usually a parent, a grandparent, an uncle, an aunt, or even a sibling. In other cases, I also encounter siblings quarrelling amongst each other or even with their surviving parent. Such situations are truly heartbreaking to say the least. These kinds of problems usually arise due to the failure of the surviving relatives, who are more often than not the legal heirs, to pay the necessary estate tax and settle the estate of the decedent. However, are the heirs the only ones to blame? Definitely not. The decedent, while living, likewise has a part, if not more parts, to play in ensuring that his descendants or heirs do not have a difficult time in acquiring the inheritance he had left for them to enjoy. Now, this is where sound estate planning comes in.

Before going any further, it is imperative that we first clarify some key terms because most people are confused between “estate” and “real estate.” On the one hand, an “estate” is the accumulation of all the property, real or personal, tangible or intangible, wherever situated, of a person at the time of his death (Sec. 85, National Internal Revenue Code). On the other hand, “real estate” is property consisting of land and anything permanently fixed to it, including buildings, trees, sheds and other items attached to the structure (Art. 415, Civil Code of the Philippines). Hence, from the above definitions, we can infer that “real estate tax” is different from “estate tax.”

Contrary to what most people think, estate planning is not only for the rich and famous. For as long as you own something, anything, you have an estate! Most of the time, family members don’t even fight among themselves over a piece of expensive property but over those which have sentimental value such as trinkets, paintings, jewelry, books, etc. As a famous saying goes: “There are only two certain things in life, death and taxes.” Of course, in reality, there are more than those two. Still, for some people, when they hear of estate planning, what comes to mind is the Last Will and Testament. Although indispensable thereto, the latter is merely one of the tools used in estate planning. Simply put, Estate Planning is basically transferring your properties to your heirs in the best way possible while avoiding unnecessary costs, especially on taxes.

It is never too early to start planning your estate. Death comes like a thief in the night, to borrow Jesus’ words. Therefore, in order to avoid the hassles and problems that you may leave your loved ones as illustrated by the true to life cases given above, show them that you care by planning ahead. Remember, failing to plan is planning to fail! In the following weeks, I will be sharing more real life horror stories of people who failed to plan their estates resulting in heart-wrenching family feuds or squabbles. So what are you waiting for? Consult your lawyer, accountant or financial planner today!

The Methods of Pastoral Counseling

As with all new lawyers, after I took my oath and signed the Roll of Attorneys, thereby becoming a full-fledged licensed counselor and attorney-at-law, I was so excited to begin my practice. However, little did I know that law school did not prepare me to do so! Yes, I knew the law, both substantive and procedural, but I knew nothing about the professional or “business” aspect of building my own law office. I realized that I did not know how to properly set up and conduct an interview with a prospective client and worse, I had no idea how much to charge for my services! I was so dumbfounded that I just tried calling up older and more experienced lawyers to ask them for some advice. The only thing was, there were almost as many different methods and styles as there are law practitioners. During that time, and even now after six years of law practice, I really wished that all law schools would include in their curriculum a subject on “How to Set Up and Manage a Law Office.”

Likewise, the same thing is true with regard to the practice or ministry of pastoral counseling. Fortunately for me, I am now learning in seminary the things that I should have learned in law school, particularly, how to arrange and conduct an effective client interview. According to Dr. Clyde Narramore, a renowned clinical psychologist and counselor, effective counselors are conscious of details and thus give careful thought to such arrangements as: (a) setting the appointment; (b) preparing the interview; (c) beginning the interview; (d) determining the length of the interview; (e) closing the interview; (f) recording the interview; and (g) handling persistent cases. In his seminal book, The Psychology of Counseling, he provides basic guidelines therefor. He further stressed that counseling is different from a lecture or seminar where one person merely passes on information to other people because in counseling, both the counselor and the counselee undergo a process which doesn’t necessarily end after one session.

Dr, Narramore also discussed the need for counselors to give their best attention to their clients taking into account not only the latter’s words but also their demeanor in order for the former to adequately assess and analyze the latter’s problems and hence, provide effective solutions. That is why in setting an appointment, possible distractions must be minimized if not totally eliminated so that not even the minutest detail can escape the attention of the counselor. Lastly, Dr. Narramore stressed the value of discussion. He said that contrary to popular belief that “talk is cheap,” talking actually helps a person think clearly by putting into words the concepts he has in mind. In doing so, good ideas are sifted from bad ones. It helps us define just what we really do think. It shows up the true issue and points out possible danger or good.

Due to their similarities, the lessons I am currently learning about pastoral counseling can also readily be applied to legal counseling. Observing these basic steps will certainly make one a good counselor, whether pastoral or legal.

The Covenants in Scripture

As I was reading the book Renewal Theology about the covenants God made with His people, I was reminded of a certain theologian, a former Presbyterian minister turned Catholic, by the name of Dr. Scott Hahn. In his book, Rome Sweet Home, where he recounts his conversion to Roman Catholicism, he mentions that during his seminary days, his main interest of study was that of the covenant. As a Calvinist Presbyterian—and still even now as a Catholic—he believed that the overarching story of the Bible centers on the covenants God has made with His chosen people.

The relationship of God and humanity is, in a word, covenantal. God does not deal with His creation apart from covenant. Essentially, “covenant” is a bond or relationship between two parties. In the covenants between God and humanity, the Lord God sovereignly imposes the terms of these arrangements in accordance with His own will and good pleasure. In the history of Christian doctrine, it is the unique contribution of Reformed theology to have developed and systematized the biblical doctrine of covenants.

Biblical history is structured in terms of a series of distinct covenants. Following the traditional Reformed schematization, the divine covenants reflect the decretal purposes of God in creation and redemption. Standing behind the creation of the world is the eternal plan or counsel of God. One particular feature of that plan is the “Covenant of Redemption” (to use of older terminology) made in eternity between the Father and the Son respecting the salvation of God’s elect, those chosen in Christ by God the Father and effectually called to true faith and repentance in history by means of the regenerating and convicting power of the Spirit of God. Election to salvation is the proper purpose of redemptive covenant (the “Covenant of Grace” which spans the epoch from the Fall of Adam to the Consummation of history at the return of Christ). According to Dr. Williams, the essential components of a biblical covenant are the (1) parties; (2) promises; (3) ratification; (4) obligation; and (5) fulfillment. As a lawyer familiar with how human covenants—or contracts—are executed, I truly appreciate how this theology of the covenant works out. Article 1305 of the Civil Code of the Philippines provides that “a contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service.” Article 1318 thereof further provides the essential requisites of a valid contract, to wit: (1) consent of the contracting parties; (2) object certain which is the subject matter of the contract; and (3) cause of the obligation which is established.

Most Reformed theologians referred to the Old Testament (“Covenant”) covenants as the “Covenant of Works” and the New Testament covenant as the “Covenant of Grace”. I find these terms simplistic because if we analyze the OT covenants, the same were also by the grace of God. What I mean is, although on the surface God demanded certain obligations from the human parties, the existence of the covenant itself is due to the mercy and grace of God. God invited man into a covenant relationship with Him in order to give man a chance at redemption. In fact, all the OT covenants find their ultimate fulfillment in the new covenant of Christ in His blood.