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Business Matters

The uncommon sense of tax law

/ 11:53 PM February 08, 2013

As a young lawyer, I used to complain to my mentor, Allison J. Gibbs, that often tax laws defy common sense. He would reply that tax laws and their implementation are simply exactions of the state to which logic or common sense take a back seat.

Common sense certainly did that in the tax case over an artwork, “Canyon” by Robert Rauschenberg, as related in an article by Patricia Cohen in the July 23, 2012, issue of the International Herald Tribune.

The Internal Revenue Service of the United States and the heirs of art dealer Heana Sonabend, who died in 2007, were in disagreement on how much value to attribute to “Canyon,” for purposes of determining the tax on Sonabend’s estate.


“Canyon” is a sculpture that is admittedly a 20th-century masterwork of Robert Rauschenberg. The IRS, on the advice of its art advisory panel that is made up of experts from the private sector, valued the artwork at $66 million. The heirs of Sonabend insisted on valuing it at zero because mounted in a part of the sculpture is a dead bald eagle.

Laws in the United States, such as the Bald and Golden Eagle Protection Act and the Migratory Bird Treaty Act, make it illegal to possess, sell, purchase, barter, transport, or export any bald eagle, whether dead or alive.

Sonabend’s heirs thus contended that “Canyon” had been legislated out of the purview of the market and therefore had no value for purposes of the estate tax. The US federal estate tax, like that of the Philippines, is imposed on the net estate of a decedent which is arrived at, in general, by subtracting a short list of allowable deductions from the “gross estate.” The “gross estate,” in turn, is the total fair market value of the items in the estate’s inventory at the time of the decedent’s death.

“Canyon,” because of the bald eagle, could not even be placed in the market; therefore, logically, it had zero fair market value, argued the heirs.

Speaking for the IRS’ advisory panel, Stephanie Barron, however, explained why the art experts could not concede the value of zero to “Canyon.” Barron, the senior curator of 20th-century art at the Los Angeles County Museum of Art that exhibited “Canyon” for two years, said that for them, the value of an artwork is its artistic worth. “The ‘Canyon’ is a stunning work of art and we all just cringed at the idea of saying that this had zero value. It just didn’t make any sense,” she said.

Common sense dictated to Barron and her coadvisers that something as magnificently artistic as “Canyon” had to have substantial value. But common sense also appears to be also on the side of the Sonabend heirs, who argued that, by the operation of the relevant laws that make it illegal to sell or dispose of the bald eagle, dead or alive, the artistic value which the panel saw in “Canyon” had no worth at all in the market.

I have no update on how the US tax court resolved the controversy. But on the local front, our own tax laws and regulations are not wanting in the lack of logic and/or common sense.

A quick instance is the taxation of the income of collective investment funds which are formed by pooling together moneys of many investors, usually individuals. The income of mutual funds is treated as corporate income and taxed at 32 percent on the net. However, the income of a common trust fund, commonly known as a unit investment trust fund, is subject to only 20 percent, but on the gross. Yet the two methods of pooling funds are substantially the same.


We need go no further for another example: the “long-term deposit or investment certificate.”  Section FF of the Tax Code says the term “refers to certificate of time deposit or investment certificate in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments with a maturity period of not less than five (5) years, … issued by banks … in denominations of Ten Thousand pesos (P10,000)…”

Jumping out of the page is why time-deposit accounts are treated in the same way as trust funds and investment management accounts.  Time and savings deposits are borrowings of a bank from the public and are therefore correctly described as issued by banks.  But common or individual trust funds and investment management accounts are of a different nature.  Instead of being debts of a bank, these accounts simply are funds under the bank’s management.

Hence, accounting-wise, time deposits are recorded in the books of a bank as actual liabilities; trust and investment management accounts are only contingent liabilities.

But tax law disregards the common sense of treating different things differently: Time deposits, on the one hand, and trust and investment accounts, on the other, that are contracted for five years are taxed on their income similarly.

Such lack of logic in tax law makes us scratch our heads, but not too much lest we end up like a bald eagle.

Ricardo J. Romulo is a senior partner of Romulo Mabanta Buenaventura Sayoc & De Los Angeles.

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