CIR vs CA and Pajonar

8/13/2019 CIR vs CA and Pajonar

1/15

Republic of the Philippines

SUPREME COURT

Manila

THIRD DIVISION

G.R. No. 123206 March 22, 2000

COMMISSIONER OF INTERNAL REVENUE,petitioner,

vs.

COURT OF APPEALS, COURT OF TAX APPEALS and JOSEFINA P. PAJONAR, as Administratrix of the

Estate of Pedro P. Pajonar,respondents.

R E S O L U T I O N

GONZAGA-REYES,J.:

Assailed in this petition for review on certiorari is the December 21, 1995 Decision1of the Court of

Appeals2in CA-G.R. Sp. No. 34399 affirming the June 7, 1994 Resolution of the Court of Tax Appeals in

CTA Case No. 4381 granting private respondent Josefina P. Pajonar, as administratrix of the estate of

Pedro P. Pajonar, a tax refund in the amount of P76,502.42, representing erroneously paid estate taxes

for the year 1988.

Pedro Pajonar, a member of the Philippine Scout, Bataan Contingent, during the second World War, was

a part of the infamous Death March by reason of which he suffered shock and became insane. His sister

Josefina Pajonar became the guardian over his person, while his property was placed under the

guardianship of the Philippine National Bank (PNB) by the Regional Trial Court of Dumaguete City,

Branch 31, in Special Proceedings No. 1254. He died on January 10, 1988. He was survived by his two

brothers Isidro P. Pajonar and Gregorio Pajonar, his sister Josefina Pajonar, nephews Concordio Jandogand Mario Jandog and niece Conchita Jandog.

On May 11, 1988, the PNB filed an accounting of the decedent's property under guardianship valued at

P3,037,672.09 in Special Proceedings No. 1254. However, the PNB did not file an estate tax return,

instead it advised Pedro Pajonar's heirs to execute an extrajudicial settlement and to pay the taxes on

his estate. On April 5, 1988, pursuant to the assessment by the Bureau of Internal Revenue (BIR), the

estate of Pedro Pajonar paid taxes in the amount of P2,557.

On May 19, 1988, Josefina Pajonar filed a petition with the Regional Trial Court of Dumaguete City for

the issuance in her favor of letters of administration of the estate of her brother. The case was docketed

as Special Proceedings No. 2399. On July 18, 1988, the trial court appointed Josefina Pajonar as theregular administratrix of Pedro Pajonar's estate.

On December 19, 1988, pursuant to a second assessment by the BIR for deficiency estate tax, the estate

of Pedro Pajonar paid estate tax in the amount of P1,527,790.98. Josefina Pajonar, in her capacity as

administratrix and heir of Pedro Pajonar's estate, filed a protest on January 11, 1989 with the BIR

praying that the estate tax payment in the amount of P1,527,790.98, or at least some portion of it, be

returned to the heirs.3

However, on August 15, 1989, without waiting for her protest to be resolved by the BIR, Josefina Pajonar

filed a petition for review with the Court of Tax Appeals (CTA), praying for the refund of P1,527,790.98,

or in the alternative, P840,202.06, as erroneously paid estate tax.4The case was docketed as CTA Case

No. 4381.

On May 6, 1993, the CTA ordered the Commissioner of Internal Revenue to refund Josefina Pajonar the

amount of P252,585.59, representing erroneously paid estate tax for the year 1988.5Among the

deductions from the gross estate allowed by the CTA were the amounts of P60,753 representing the

notarial fee for the Extrajudicial Settlement and the amount of P50,000 as the attorney's fees in Special

Proceedings No. 1254 for guardianship.6
http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt1http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt1http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt1http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt2http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt2http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt2http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt3http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt3http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt3http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt4http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt4http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt4http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt5http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt5http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt5http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt6http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt6http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt6http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt6http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt5http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt4http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt3http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt2http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt1


2/15

On June 15, 1993, the Commissioner of Internal Revenue filed a motion for reconsideration7of the CTA's

May 6, 1993 decision asserting, among others, that the notarial fee for the Extrajudicial Settlement and

the attorney's fees in the guardianship proceedings are not deductible expenses.

On June 7, 1994, the CTA issued the assailed Resolution8ordering the Commissioner of Internal Revenue

to refund Josefina Pajonar, as administratrix of the estate of Pedro Pajonar, the amount of P76,502.42

representing erroneously paid estate tax for the year 1988. Also, the CTA upheld the validity of the

deduction of the notarial fee for the Extrajudicial Settlement and the attorney's fees in the guardianship

proceedings.

On July 5, 1994, the Commissioner of Internal Revenue filed with the Court of Appeals a petition for

review of the CTA's May 6, 1993 Decision and its June 7, 1994 Resolution, questioning the validity of the

abovementioned deductions. On December 21, 1995, the Court of Appeals denied the Commissioner's

petition.9

Hence, the present appeal by the Commissioner of Internal Revenue.

The sole issue in this case involves the construction of section 7910 of the National Internal Revenue

Code11

(Tax Code) which provides for the allowable deductions from the gross estate of the decedent.

More particularly, the question is whether the notarial fee paid for the extrajudicial settlement in the

amount of P60,753 and the attorney's fees in the guardianship proceedings in the amount of P50,000

may be allowed as deductions from the gross estate of decedent in order to arrive at the value of the

net estate.

We answer this question in the affirmative, thereby upholding the decisions of the appellate courts.

In its May 6, 1993 Decision, the Court of Tax Appeals ruled thus:

Respondent maintains that only judicial expenses of the testamentary or intestate proceedingsare allowed as a deduction to the gross estate. The amount of P60,753.00 is quite extraordinary

for a mere notarial fee.

This Court adopts the view under American jurisprudence that expenses incurred in the

extrajudicial settlement of the estate should be allowed as a deduction from the gross estate.

"There is no requirement of formal administration. It is sufficient that the expense be a

necessary contribution toward the settlement of the case." [ 34 Am. Jur. 2d, p. 765; Nolledo, Bar

Reviewer in Taxation, 10th Ed. (1990), p. 481]

x x x x x x x x x

The attorney's fees of P50,000.00, which were already incurred but not yet paid, refers to the

guardianship proceeding filed by PNB, as guardian over the ward of Pedro Pajonar, docketed as

Special Proceeding No. 1254 in the RTC (Branch XXXI) of Dumaguete City. . . .

x x x x x x x x x

The guardianship proceeding had been terminated upon delivery of the residuary estate to the

heirs entitled thereto. Thereafter, PNB was discharged of any further responsibility.

Attorney's fees in order to be deductible from the gross estate must be essential to the

collection of assets, payment of debts or the distribution of the property to the persons entitled

to it. The services for which the fees are charged must relate to the proper settlement of the

estate. [34 Am. Jur. 2d 767.] In this case, the guardianship proceeding was necessary for the

distribution of the property of the late Pedro Pajonar to his rightful heirs.

x x x x x x x x x
http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt7http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt7http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt8http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt8http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt9http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt9http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt9http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt10http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt11http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt11http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt11http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt11http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt10http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt9http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt8http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt7


3/15

PNB was appointed as guardian over the assets of the late Pedro Pajonar, who, even at the time

of his death, was incompetent by reason of insanity. The expenses incurred in the guardianship

proceeding was but a necessary expense in the settlement of the decedent's estate. Therefore,

the attorney's fee incurred in the guardianship proceedings amounting to P50,000.00 is a

reasonable and necessary business expense deductible from the gross estate of the decedent.12

Upon a motion for reconsideration filed by the Commissioner of Internal Revenue, the Court of Tax

Appeals modified its previous ruling by reducing the refundable amount to P76,502.43 since it found

that a deficiency interest should be imposed and the compromise penalty excluded.13

However, the tax

court upheld its previous ruling regarding the legality of the deductions

It is significant to note that the inclusion of the estate tax law in the codification of all our national

internal revenue laws with the enactment of the National Internal Revenue Code in 1939 were copied

from the Federal Law of the United States. [ UMALI, Reviewer in Taxation (1985), p. 285 ] The 1977 Tax

Code, promulgated by Presidential Decree No. 1158, effective June 3, 1977, reenacted substantially all

the provisions of the old law on estate and gift taxes, except the sections relating to the meaning of

gross estate and gift. [ Ibid, p. 286. ]

In the United States, [a]dministrative expenses, executor's commissions and attorney's fees are

considered allowable deductions from the Gross Estate. Administrative expenses are limited to such

expenses as are actually and necessarily incurred in the administration of a decedent's estate.

[PRENTICE-HALL, Federal Taxes Estate and Gift Taxes (1936), p. 120, 533.] Necessary expenses of

administration are such expenses as are entailed for the preservation and productivity of the estate and

for its managementfor purposes of liquidation, payment of debts and distribution of the residue among

the persons entitled thereto. [Lizarraga Hermanos vs. Abada, 40 Phil. 124.] They must be incurred for the

settlement of the estate as a whole. [34 Am. Jur. 2d, p. 765.] Thus, where there were no substantial

community debts and it was unnecessary to convert community property to cash, the only practical

purpose of administration being the payment of estate taxes, full deduction was allowed for attorney's

fees and miscellaneous expenses charged wholly to decedent's estate. [Ibid., citing Estate of Helis, 26T.C. 143 (A).]

Petitioner stated in her protest filed with the BIR that "upon the death of the ward, the PNB, which was

still the guardian of the estate, (Annex "Z"), did not file an estate tax return; however, it advised the

heirs to execute an extrajudicial settlement, to pay taxes and to post a bond equal to the value of the

estate, for which the state paid P59,341.40 for the premiums. (SeeAnnex "K")." [p. 17, CTA record.]

Therefore, it would appear from the records of the case that the only practical purpose of settling the

estate by means of an extrajudicial settlement pursuant to Section 1 of Rule 74 of the Rules of Court was

for the payment of taxes and the distribution of the estate to the heirs. A fortiori, since our estate tax

laws are of American origin, the interpretation adopted by American Courts has some persuasive effect

on the interpretation of our own estate tax laws on the subject.

Anent the contention of respondent that the attorney's fees of P50,000.00 incurred in the guardianship

proceeding should not be deducted from the Gross Estate, We consider the same unmeritorious.

Attorneys' and guardians' fees incurred in a trustee's accounting of a taxable inter vivos trust

attributable to the usual issues involved in such an accounting was held to be proper deductions

because these are expenses incurred in terminating an inter vivos trust that was includible in the

decedent's estate. [Prentice Hall, Federal Taxes on Estate and Gift, p. 120, 861] Attorney's fees are

allowable deductions if incurred for the settlement of the estate. It is noteworthy to point that PNB was

appointed the guardian over the assets of the deceased. Necessarily the assets of the deceased formed

part of his gross estate. Accordingly, all expenses incurred in relation to the estate of the deceased will

be deductible for estate tax purposes provided these are necessary and ordinary expenses for

administration of the settlement of the estate.14

In upholding the June 7, 1994 Resolution of the Court of Tax Appeals, the Court of Appeals held that:

2. Although the Tax Code specifies "judicial expenses of the testamentary or intestate proceedings,"

there is no reason why expenses incurred in the administration and settlement of an estate in

extrajudicial proceedings should not be allowed. However, deduction is limited to such administration
http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt12http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt12http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt12http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt13http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt13http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt13http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt14http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt14http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt14http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt14http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt13http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt12


4/15

expenses as are actually and necessarily incurred in the collection of the assets of the estate, payment of

the debts, and distribution of the remainder among those entitled thereto. Such expenses may include

executor's or administrator's fees, attorney's fees, court fees and charges, appraiser's fees, clerk hire,

costs of preserving and distributing the estate and storing or maintaining it, brokerage fees or

commissions for selling or disposing of the estate, and the like. Deductible attorney's fees are those

incurred by the executor or administrator in the settlement of the estate or in defending or prosecuting

claims against or due the estate. (Estate and Gift Taxation in the Philippines, T. P. Matic, Jr., 1981

Edition, p. 176).

x x x x x x x x x

It is clear then that the extrajudicial settlement was for the purpose of payment of taxes and the

distribution of the estate to the heirs. The execution of the extrajudicial settlement necessitated the

notarization of the same. Hence the Contract of Legal Services of March 28, 1988 entered into between

respondent Josefina Pajonar and counsel was presented in evidence for the purpose of showing that the

amount of P60,753.00 was for the notarization of the Extrajudicial Settlement. It follows then that the

notarial fee of P60,753.00 was incurred primarily to settle the estate of the deceased Pedro Pajonar.

Said amount should then be considered an administration expenses actually and necessarily incurred inthe collection of the assets of the estate, payment of debts and distribution of the remainder among

those entitled thereto. Thus, the notarial fee of P60,753 incurred for the Extrajudicial Settlement should

be allowed as a deduction from the gross estate.

3. Attorney's fees, on the other hand, in order to be deductible from the gross estate must be essential

to the settlement of the estate.

The amount of P50,000.00 was incurred as attorney's fees in the guardianship proceedings in Spec. Proc.

No. 1254. Petitioner contends that said amount are not expenses of the testamentary or intestate

proceedings as the guardianship proceeding was instituted during the lifetime of the decedent when

there was yet no estate to be settled.

Again, this contention must fail.

The guardianship proceeding in this case was necessary for the distribution of the property of the

deceased Pedro Pajonar. As correctly pointed out by respondent CTA, the PNB was appointed guardian

over the assets of the deceased, and that necessarily the assets of the deceased formed part of his gross

estate. . . .

x x x x x x x x x

It is clear therefore that the attorney's fees incurred in the guardianship proceeding in Spec. Proc. No.1254 were essential to the distribution of the property to the persons entitled thereto. Hence, the

attorney's fees incurred in the guardianship proceedings in the amount of P50,000.00 should be allowed

as a deduction from the gross estate of the decedent.15

The deductions from the gross estate permitted under section 79 of the Tax Code basically reproduced

the deductions allowed under Commonwealth Act No. 466 (CA 466), otherwise known as the National

Internal Revenue Code of 1939,16and which was the first codification of Philippine tax laws. Section 89

(a) (1) (B) of CA 466 also provided for the deduction of the "judicial expenses of the testamentary or

intestate proceedings" for purposes of determining the value of the net estate. Philippine tax laws were,

in turn, based on the federal tax laws of the United States.17In accord with established rules of

statutory construction, the decisions of American courts construing the federal tax code are entitled to

great weight in the interpretation of our own tax laws.18

Judicial expenses are expenses of administration.19

Administration expenses, as an allowable deduction

from the gross estate of the decedent for purposes of arriving at the value of the net estate, have been

construed by the federal and state courts of the United States to include all expenses "essential to the

collection of the assets, payment of debts or the distribution of the property to the persons entitled to

it."20In other words, the expenses must be essential to the proper settlement of the estate.
http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt15http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt15http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt15http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt16http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt16http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt16http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt17http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt17http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt17http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt18http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt18http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt18http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt19http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt19http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt19http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt20http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt20http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt20http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt20http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt19http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt18http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt17http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt16http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt15


5/15

Expenditures incurred for the individual benefit of the heirs, devisees or legatees are not

deductible.21

This distinction has been carried over to our jurisdiction. Thus, in Lorenzo v.Posadas22

the

Court construed the phrase "judicial expenses of the testamentary or intestate proceedings" as not

including the compensation paid to a trustee of the decedent's estate when it appeared that such

trustee was appointed for the purpose of managing the decedent's real estate for the benefit of the

testamentary heir. In another case, the Court disallowed the premiums paid on the bond filed by the

administrator as an expense of administration since the giving of a bond is in the nature of a

qualification for the office, and not necessary in the settlement of the estate.23Neither may attorney's

fees incident to litigation incurred by the heirs in asserting their respective rights be claimed as a

deduction from the gross estate.241wphi1

Coming to the case at bar, the notarial fee paid for the extrajudicial settlement is clearly a deductible

expense since such settlement effected a distribution of Pedro Pajonar's estate to his lawful heirs.

Similarly, the attorney's fees paid to PNB for acting as the guardian of Pedro Pajonar's property during

his lifetime should also be considered as a deductible administration expense. PNB provided a detailed

accounting of decedent's property and gave advice as to the proper settlement of the latter's estate,

acts which contributed towards the collection of decedent's assets and the subsequent settlement of

the estate.

We find that the Court of Appeals did not commit reversible error in affirming the questioned resolution

of the Court of Tax Appeals.

WHEREFORE, the December 21, 1995 Decision of the Court of Appeals is AFFIRMED. The notarial fee for

the extrajudicial settlement and the attorney's fees in the guardianship proceedings are allowable

deductions from the gross estate of Pedro Pajonar.1wphi1.nt

SO ORDERED.

Melo, Vitug, Panganiban and Purisima, JJ., concur.

Footnotes

1Entitled "Commissioner of Internal Revenue v. Josefina P. Pajonar, as Administratrix of the Estate of Pedro P.

Pajonar, and Court of Tax Appeals." Rollo, 35-46.

2Eighth Division composed of J. Jaime M. Lantin, ponente; and JJ Eduardo G. Montenegro and Jose C. De la Rama,

concurring.

3CA Records, 45-53.

4Ibid., 37-44.

5The CTA made the following computations

Estate of Pedro P. Pajonar

Lagtangon, Siaton, Negros Oriental

Died January 10, 1988

I. Real Properties P102,966.59

II. Personal Properties

a. Refrigerator P7,500.00

b. Wall Clock, Esso Gasul.

Tables and Chairs 3,090.00

c. Beddings, Stereo Cassette,

TV, Betamax 15,700.00

d. Karaoke, Electric Iron, Fan, 7,400.00
http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt21http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt21http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt21http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt22http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt22http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt22http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt23http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt23http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt23http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt24http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt24http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt1http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt1http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt2http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt2http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt3http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt3http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt4http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt4http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt5http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt5http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt5http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt4http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt3http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt2http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt1http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt24http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt23http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt22http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#fnt21


6/15

Transformer and Corner Set

e. Toyota Tamaraw 27,500.00 61,190.00

Additional Personal Properties:

f. Time Deposit - PNB P200,000.00

g. Stocks and Bonds - PNB 201,232.37

h. Money Market 2,300,000.00

i. Cash Deposit 114,101.83 2,815,334.20

GROSS ESTATE P2,979,490.79

Less: Deductions:

A a. Funeral expenses P50,000.00

b. Commission to Trustee (PNB) 18,335.93

B c. Notarial Fee for the Extrajudicial Settlement 60,753.00

d. Attorney's Fees in Special Proceeding No. 1254 for

Guardianship 50,000.00

e. Filing Fees in Special Proceeding No. 2399

6,374.88

f. Publication of Notice to Creditors September 7, 14 and 21,

1988 issues of the Dumaguete Star Informer 600.00

g. Certification fee for publication on the Bulletin Board of the

Municipal Building of Siaton, Negros Oriental 2.00

h. Certification fee for Publication in the Capitol 5.00

i. Certification fee for publication of Notice to Creditors 5.00 186,075.81

NET ESTATE 2,793,414.98

============

Estate Tax Due P1,277,762.39

Less: Estate Tax Paid:

CB Confirmation Receipt Nos.

B 14268064 P2,557.00

B 15517625 1,527,790.98 1,530,347.98

AMOUNT REFUNDABLE P252,585.59

===========

Rollo, 86-88.

6Ibid., 78-79, 81-83.

7CA Records, 118-130.

8Rollo, 47-56.

9Ibid., 35-46.

10Sec. 79 Computation of net estate and estate tax. For the purpose of the tax imposed in this Chapter, the value

of the net estate shall be determined:

(a) In the case of a citizen or resident of the Philippines, by deducting from the value of the gross estate
http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt99http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt99http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt99http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt6http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt6http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt7http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt7http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt8http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt8http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt9http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt9http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt10http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt10http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt10http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt9http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt8http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt7http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt6http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt99


7/15

(1) Expenses, losses, indebtedness, and taxes. Such amounts

(A) For funeral expenses in an amount equal to fiveper centumof the gross estate but in no case to exceed

P50,000.00;

(B) For judicial expenses of the testamentary or intestate proceedings;

x x x x x x x x x

11This refers to the 1977 National Internal Revenue Code, as amended. On the date of decedent's death (January 10,

1988), the latest amendment to the Tax Code was introduced by Executive Order No. 273, which became effective on

January 1, 1988.

12Rollo, 78-79, 81-83.

13Estate tax due P1,277,762.39

Less: estate tax paid 04.05.88

[CBCR No. 14268054]

2,557.00

Deficiency estate tax P1,275,205.39

Add: Additions to tax Interest on

deficiency [Sec. 249 (b)] 04.12.88 to

12.19.88 (1,275,205.39 x 20% x

252/365) 176,083.16

Total deficiency tax P1,451,288.55

Less: estate tax paid 12.19.88

[CBCR No. 15517625] 1,527,790.98

Amount refundable P76,502.43

===========

Ibid., 54.

14Ibid., 49-51.

15Ibid., 43-45.

16Approved on June 15, 1939.

17Wise & Co. v. Meer, 78 Phil 655 (1947),

18Carolina Industries, Inc. v. CMS Stock Brokerage, Inc., 97 SCRA 734 (1980).

19Lorenzo v. Posada, 64 Phil 353 (1937).

2034A Am Jur 2d, Federal Taxation (1995), sec. 144, 288, citingUnion Commerce Bank, trans, (1963) 39 TC 973, affd &

revd on other issues (1964, CA6) 339 F2d 163, 65-1 USTC p 12279, 15 AFTR 2d 1281.

21Ibid., sec. 144,272, citingBretzfelder, Charles, exr v. Com., (1936, CA2) 86 F2d 713, 36-2 USTC sec. 9548, 18 AFTR

653.

22Lorenzo v. Posada, supra.

23Sison vs. Teodoro, 100 Phil. 1055 (1957).

24Johannes v. Imperial, 43 Phil 597 (1922).
http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt11http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt11http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt12http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt12http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt13http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt13http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt14http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt14http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt15http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt15http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt16http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt16http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt17http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt17http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt18http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt18http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt19http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt19http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt20http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt20http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt21http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt21http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt22http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt22http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt23http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt23http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt24http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt24http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt24http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt23http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt22http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt21http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt20http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt19http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt18http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt17http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt16http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt15http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt14http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt13http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt12http://www.lawphil.net/judjuris/juri2000/mar2000/gr_123206_2000.html#rnt11


8/15

CIR v. CA and Pajonar #4

Doctrine: [Judicial Expenses] Expenses on extrajudicial settlement of the estate are allowed as

deductions. They come within the meaning of administration expenses.

Petitioner: Commissioner of Internal Revenue

Respondents: Court Of Appeals, Court Of Tax Appeals & Josefina P. Pajonar (as Administratrix Of The

Estate Of Pedro P. Pajonar)

Ponente:J. Gonzaga-Reyes

Nature of the Case:Petition for Review on Certiorari on the Decision of the Court of Appeals affirming

the Resolution of the Court of Tax Appeals granting Josefina P. Pajonar, as administratrix of the estate of

Pedro P. Pajonar, a tax refund in the amount of P76,502.42, representing erroneously paid estate taxes

for the year 1988.

Summary:

By reason of the Bataan Death March during World War II, Pedro Pajonar became insane. His property

was placed under the guardianship of PNB, while his sister Josefina became the guardian over his

person, and eventually the administratrix of his estate when he died. After his death, his heirs executed

an extrajudicial settlement and paid the estate tax. Thereafter, BIR assessed the estate of Pedro

deficiency taxes. The estate paid under protest and filed a case with the CTA, which in turn allowed

P60,753 representing the notarial fee for the Extrajudicial Settlement and P50,000 attorney's fees for

guardianship proceedings as among the allowed deductions from the gross estate.

Issue is WON the notarial fee and attorney's fees allowed as deductions from the gross estate. YES.

The notarial fee paid for the extrajudicial settlement is a deductible expense since such settlement

effected a distribution of Pedros estate to his lawful heirs. Similarly, attorney's fees paid to PNB for

acting as the guardian of Pedros property during his lifetime should also be considered as a deductible

administration expense. This is because PNB provided a detailed accounting of decedent's property and

gave advice as to the proper settlement of the latter's estate, acts which contributed towards the

collection of decedent's assets and the subsequent settlement of the estate.

FACTS:

Pedro Pajonar was a member of the Philippine Scout, Bataan Contingent, during World War IIand was a part of the infamous Death March by reason of which he suffered shock and became

insane. His sister Josefina became the guardian over his person, while his property was placed

under the guardianship of the Philippine National Bank (PNB) by RTC of Dumaguete.

After his death, PNB filed an accounting of his property under guardianship valued atP3,037,672.09 in a Special Proceeding. However, PNB did NOT file an estate tax return, instead it

advised Pedro's heirs to execute an extrajudicial settlement and to pay the taxes on his estate.

Pursuant to the assessment by the BIR, the estate of Pedro paid taxes in the amount of P2,557. Josefina then filed a petition with RTC of Dumaguete for the issuance in her favor of letters of

administration of the estate of her brother. This was granted and she was appointed as the

regular administratrix of Pedros estate.


9/15

The BIR then made a second assessment for deficiency estate tax which Josefina, in her capacityas administratrix and heir of Pedros estate, paid under protest. And without waiting for her

protest to be resolved by the BIR, she filed a petition for review with the Court of Tax Appeals

(CTA), praying for the refund of P1,527,790.98, or in the alternative, P840,202.06, as

erroneously paid estate tax.

The CTA ordered the Commissioner of Internal Revenue to refund Josefina P252,585.59,representing erroneously paid estate tax for the year 1988. Among the deductions from the

gross estate allowed by the CTA were P60,753 representing the notarial fee for the Extrajudicial

Settlement and the amount of P50,000 as the attorney's fees for guardianship proceedings.

CIR filed a MR which the CTA denied. It then filed with the CA a petition for review which wasalso denied Hence, the present appeal.

ISSUE: WON the notarial fee paid for the extrajudicial settlement of P60,753 and the attorney's fees in

the guardianship proceedings of P50,000 may be allowed as deductions from the gross estate of

decedent in order to arrive at the value of the net estate.YES.

RATIO

Judicial expenses are expenses of administration.o Administration expenses, as an allowable deduction from the gross estate of the

decedent for purposes of arriving at the value of the net estate, have been construed by

the federal and state courts of the United States to include all expenses "essential to

the collection of the assets, payment of debts or the distribution of the property to

the persons entitled to it." In other words, the expenses must be essential to the proper

settlement of the estate.

This Court adopts the view under American jurisprudence that expenses incurred in theextrajudicial settlement of the estate should be allowed as a deduction from the gross estate.

There is no requirement of formal administration. It is sufficient that the expense be a

necessary contribution toward the settlement of the case.

Although the Tax Code specifies "judicial expenses of the testamentary or intestateproceedings," there is no reason why expenses incurred in the administration and settlement of

an estate in extrajudicial proceedingsshould not be allowed.

o However, deduction is limited to such administration expenses as are actually andnecessarilyincurred in the collection of the assets of the estate, payment of the debts,

and distribution of the remainder among those entitled thereto.

Such expenses may include executor's or administrator's fees, attorney's fees,court fees and charges, appraiser's fees, clerk hire, costs of preserving and

distributing the estate and storing or maintaining it, brokerage fees or

commissions for selling or disposing of the estate, and the like.

Deductible attorney's fees are those incurred by the executor or administratorin the settlement of the estate or in defending or prosecuting claims against ordue the estate.

It is clear then that the extrajudicial settlement was for the purpose of payment of taxes and thedistribution of the estate to the heirs.


10/15

The execution of the extrajudicial settlement necessitated the notarization of the same. Hencethe Contract of Legal Services entered into between Josefina and counsel was presented in

evidence for the purpose of showing that the amount of P60,753.00 was for the notarization of

the Extrajudicial Settlement.

o The notarial fee of P60,753.00 was incurred primarily to settle the estate of Pedro. Saidamount should then be considered an administration expenses actually and necessarily

incurred in the collection of the assets of the estate, payment of debts and distribution

of the remainder among those entitled thereto.

Attorney's fees, on the other hand, in order to be deductible from the gross estate must beessential to the collection of assets, payment of debts or the distribution of the property to the

persons entitled to it. The services for which the fees are charged must relate to the proper

settlement of the estate.

o The amount of P50,000.00 was incurred as attorney's fees in the guardianshipproceedings.

o The guardianship proceeding in this case was necessary for the distribution of theproperty of the deceased Pedro. PNB was appointed guardian over the assets of the

deceased, and that necessarily the assets of the deceased formed part of his gross

estate.

PNB provided a detailed accounting of decedent's property and gave advice asto the proper settlement of the latter's estate, acts which contributed towards

the collection of decedent's assets and the subsequent settlement of the estate.

DECISION:WHEREFORE, the December 21, 1995 Decision of the Court of Appeals is AFFIRMED.


11/15


Facts: Pedro Pajonar, a member of the Philippine Scout, Bataan Contingent, during the second World

War, was a part of the infamous Death March by reason of which he suffered shock and became insane.

His sister Josefina Pajonar became the guardian over his person, while his property was placed under

the guardianship of the Philippine National Bank (PNB) by the Regional Trial Court of Dumaguete City,Branch 31, in Special Proceedings No. 1254. He died on January 10, 1988. He was survived by his two

brothers Isidro P. Pajonar and Gregorio Pajonar, his sister Josefina Pajonar, nephews Concordio Jandog

and Mario Jandog and niece Conchita Jandog.

On May 11, 1988, the PNB filed an accounting of the decedent's property under guardianship valued at

P3,037,672.09 in Special Proceedings No. 1254. However, the PNB did not file an estate tax return,

instead it advised Pedro Pajonar's heirs to execute an extrajudicial settlement and to pay the taxes on

his estate. On April 5, 1988, pursuant to the assessment by the Bureau of Internal Revenue (BIR), the

estate of Pedro Pajonar paid taxes in the amount of P2,557.

On May 19, 1988, Josefina Pajonar filed a petition with the Regional Trial Court of Dumaguete City for

the issuance in her favor of letters of administration of the estate of her brother. The case was docketed

as Special Proceedings No. 2399. On July 18, 1988, the trial court appointed Josefina Pajonar as the

regular administratrix of Pedro Pajonar's estate.

On December 19, 1988, pursuant to a second assessment by the BIR for deficiency estate tax, the estate

of Pedro Pajonar paid estate tax in the amount of P1,527,790.98. Josefina Pajonar, in her capacity as

administratrix and heir of Pedro Pajonar's estate, filed a protest on January 11, 1989 with the BIR

praying that the estate tax payment in the amount of P1,527,790.98, or at least some portion of it, be

returned to the heirs.

However, on August 15, 1989, without waiting for her protest to be resolved by the BIR, Josefina Pajonar

filed a petition for review with the Court of Tax Appeals (CTA), praying for the refund of P1,527,790.98,

or in the alternative, P840,202.06, as erroneously paid estate tax.

The CTA ordered the Commissioner of Internal Revenue to refund Josefina Pajonar the amount of

P252,585.59, representing erroneously paid estate tax for the year 1988. Among the deductions from

the gross estate allowed by the CTA were the amounts of P60,753 representing the notarial fee for the

Extrajudicial Settlement and the amount of P50,000 as the attorney's fees in Special Proceedings No.

1254 for guardianship.

On June 15, 1993, the Commissioner of Internal Revenue filed a motion for reconsideration of the CTA's

May 6, 1993 decision asserting, among others, that the notarial fee for the Extrajudicial Settlement and

the attorney's fees in the guardianship proceedings are not deductible expenses.

On June 7, 1994, the CTA issued the assailed Resolution 8 ordering the Commissioner of Internal

Revenue to refund Josefina Pajonar, as administratrix of the estate of Pedro Pajonar, the amount of

P76,502.42 representing erroneously paid estate tax for the year 1988. Also, the CTA upheld the validity

of the deduction of the notarial fee for the Extrajudicial Settlement and the attorney's fees in the

guardianship proceedings.

On July 5, 1994, the Commissioner of Internal Revenue filed with the Court of Appeals a petition for

review of the CTA's May 6, 1993 Decision and its June 7, 1994 Resolution, questioning the validity of the

abovementioned deductions. On December 21, 1995, the Court of Appeals denied the Commissioner's

petition.


12/15

Issue: Whether the notarial fee paid for the extrajudicial settlement in the amount of P60,753 and the

attorney's fees in the guardianship proceedings in the amount of P50,000 may be allowed as

deductions from the gross estate of decedent in order to arrive at the value of the net estate.

Held: Yes. . Although the Tax Code specifies "judicial expenses of the testamentary or intestate

proceedings," there is no reason why expenses incurred in the administration and settlement of anestate in extrajudicial proceedings should not be allowed. However, deduction is limited to such

administration expenses as are actually and necessarily incurred in the collection of the assets of the

estate, payment of the debts, and distribution of the remainder among those entitled thereto. Such

expenses may include executor's or administrator's fees, attorney's fees, court fees and charges,

appraiser's fees, clerk hire, costs of preserving and distributing the estate and storing or maintaining it,

brokerage fees or commissions for selling or disposing of the estate, and the like. Deductible attorney's

fees are those incurred by the executor or administrator in the settlement of the estate or in defending

or prosecuting claims against or due the estate.



notarization of the same. Hence the Contract of Legal Services of March 28, 1988 entered into between

respondent Josefina Pajonar and counsel was presented in evidence for the purpose of showing that the

amount of P60,753.00 was for the notarization of the Extrajudicial Settlement. It follows then that the

notarial fee of P60,753.00 was incurred primarily to settle the estate of the deceased Pedro Pajonar.

Said amount should then be considered an administration expenses actually and necessarily incurred in

the collection of the assets of the estate, payment of debts and distribution of the remainder among

those entitled thereto. Thus, the notarial fee of P60,753 incurred for the Extrajudicial Settlement should

be allowed as a deduction from the gross estate.

Attorney's fees, on the other hand, in order to be deductible from the gross estate must be essential to

the settlement of the estate. The amount of P50,000.00 was incurred as attorney's fees in the

guardianship proceedings. Petitioner contends that said amount are not expenses of the testamentary

or intestate proceedings as the guardianship proceeding was instituted during the lifetime of the

decedent when there was yet no estate to be settled. Again, this contention must fail. The guardianship

proceeding in this case was necessary for the distribution of the property of the deceased. The PNB was

appointed guardian over the assets of the deceased, and that necessarily the assets of the deceased

formed part of his gross estate.

The deductions from the gross estate permitted under section 79 of the Tax Code basically reproduced

the deductions allowed under Commonwealth Act No. 466 (CA 466), otherwise known as the National

Internal Revenue Code of 1939, 16 and which was the first codification of Philippine tax laws. Section 89

(a) (1) (B) of CA 466 also provided for the deduction of the "judicial expenses of the testamentary or

intestate proceedings" for purposes of determining the value of the net estate. Philippine tax laws were,

in turn, based on the federal tax laws of the United States. In accord with established rules of statutory

construction, the decisions of American courts construing the federal tax code are entitled to great

weight in the interpretation of our own tax laws.

Judicial expenses are expenses of administration. Administration expenses, as an allowable deduction

from the gross estate of the decedent for purposes of arriving at the value of the net estate, have been

construed by the federal and state courts of the United States to include all expenses "essential to thecollection of the assets, payment of debts or the distribution of the property to the persons entitled to

it." In other words, the expenses must be essential to the proper settlement of the estate. Expenditures

incurred for the individual benefit of the heirs, devisees or legatees are not deductible. This distinction

has been carried over to our jurisdiction.


13/15

Thus, in Lorenzo v. Posadas 22 the Court construed the phrase "judicial expenses of the testamentary or

intestate proceedings" as not including the compensation paid to a trustee of the decedent's estate

when it appeared that such trustee was appointed for the purpose of managing the decedent's real

estate for the benefit of the testamentary heir. In another case, the Court disallowed the premiums paid

on the bond filed by the administrator as an expense of administration since the giving of a bond is in

the nature of a qualification for the office, and not necessary in the settlement of the estate. Neither

may attorney's fees incident to litigation incurred by the heirs in asserting their respective rights be

claimed as a deduction from the gross estate.

Coming to the case at bar, the notarial fee paid for the extrajudicial settlement is clearly a deductible

expense since such settlement effected a distribution of Pedro Pajonar's estate to his lawful heirs.

Similarly, the attorney's fees paid to PNB for acting as the guardian of Pedro Pajonar's property during

his lifetime should also be considered as a deductible administration expense. PNB provided a detailed

accounting of decedent's property and gave advice as to the proper settlement of the latter's estate,

acts which contributed towards the collection of decedent's assets and the subsequent settlement of

the estate.


14/15


Facts:Private respondent Josefina Pajonar was the guardian of the person of decedent Pedro Pajonar. The

property of the decedent was put by the RTC- Dumaguete, under the guardianship of the Philippine National

Bank via special proceeding, wherein 50, 000 was spent therein for payment of attorney's fees.

When the decedent died, instead of filing a estate tax return, PNB advised Josefina to extra-judicially settle

the estate of his brother. The decedent's estate was extra-judicially settled and the heirs paid an amount of

60, 753 for the notarization of the deed of extra-judicial settlement of estate.

The private paid the estate tax, however, they were subsequently assessed of deficiency taxes because the

amount paid in the special proceeding [50, 000] and the notarization fee [60, 753] cannot be claimed as a

deduction to the decedent's estate. Private respondent paid the said taxes under protest. While the case is

under review by the BIR, she filed a claim for refund in the CTA which was granted.

Issue:whether or not the notarial fee paid for the extrajudicial settlement in the amount of P60,753 and the

attorney's fees in the guardianship proceedings in the amount of P50,000 may be allowed as deductions from

the gross estate of decedent in order to arrive at the value of the net estate.

Held: Yes. As to the deductibility of the amount spent for notarization of the deed of extra-judicial

settlement of estate-Explained the SC, administration expenses, as an allowable deduction from the gross

estate of the decedent for purposes of arriving at the value of the net estate, have been construed by the

federal and state courts of the United States [which the law on allowable deductions from gross estate was

copied!] to include all expenses "essential to the collection of the assets, payment of debts or the distribution

of the property to the persons entitled to it."

In other words, the expenses must be essential to the proper settlement of the estate. Expenditures incurred

for the individual benefit of the heirs, devisees or legatees are not deductible. This distinction has been

carried over to our jurisdiction. Thus, in Lorenzo v.Posadasthe Court construed the phrase "judicial expenses

of the testamentary or intestate proceedings" as not including the compensation paid to a trustee of the

decedent's estate when it appeared that such trustee was appointed for the purpose of managing the

decedent's real estate for the benefit of the testamentary heir. In another case, the Court disallowed the

premiums paid on the bond filed by the administrator as an expense of administration since the giving of a

bond is in the nature of a qualification for the office, and not necessary in the settlement of the estate.

Neither may attorney's fees incident to litigation incurred by the heirs in asserting their respective rights be

claimed as a deduction from the gross estate.

In this case, it is clear that the extrajudicial settlement was for the purpose of payment of taxes and the


notarization of the same. It follows then that the notarial fee of P60,753.00 was incurred primarily to settle

the estate of the deceased Pedro Pajonar. Said amount should then be considered an administration

expenses actually and necessarily incurred in the collection of the assets of the estate, payment of debts and

distribution of the remainder among those entitled thereto. Thus, the notarial fee of P60,753 incurred for the

Extrajudicial Settlement should be allowed as a deduction from the gross estate.

Deductible expenses of administration of the estate may include executor's or administrator's fees,

attorney's fees, court fees and charges, appraiser's fees, clerk hire, costs of preserving and distributing the

estate and storing or maintaining it, brokerage fees or commissions for selling or disposing of the estate, and

the like. Deductible attorney's fees are those incurred by the executor or administrator in the settlement of

the estate or in defending or prosecuting claims against or due the estate.

As to the deductibility of attorney's fees in the Special proceedings- As a rule attorney's fees in order to be

deductible from the gross estate must be essential to the collection of assets, payment of debts or the

distribution of the property to the persons entitled to it. The services for which the fees are charged mustrelate to the proper settlement of the estate. [34 Am. Jur. 2d 767.] In this case, the guardianship proceeding

was necessary for the distribution of the property of the late Pedro Pajonar to his rightful heirs. It is

noteworthy to point that PNB was appointed the guardian over the assets of the deceased. Necessarily the

assets of the deceased formed part of his gross estate. Accordingly, all expenses incurred in relation to the

estate of the deceased will be deductible for estate tax purposes provided these are necessary and ordinary

expenses for administration of the settlement of the estate. Hence the attorney's fees of 50, 000 is

deductible from the gross estate of the decedent.


15/15


When Pedro Pajonar suffered shock and became insane, his sister Josefina Pajonar becamethe guardian over his person while his property was placed under guardianship of the Philippine

National Bank (PNB).

On May 11, 1988, four months after the death of Pedro, the PNB filed an accounting of thedecedent's property under guardianship valued at P3,037,672.09 . However, the PNB did not file

an estate tax return, instead it advised Pedro Pajonar's heirs to execute an extrajudicial

settlement and to pay the taxes on his estate.

On April 5, 1988, pursuant to the assessment by the Bureau of Internal Revenue (BIR), theestate of Pedro Pajonar paid taxes in the amount of P2,557.

Pursuant to a second assessment by the BIR for deficiency estate tax, the estate of PedroPajonar paid estate tax in the amount of P1,527,790.98. Josefina Pajonar, filed a protest with

the BIR praying that the estate tax payment in the amount of P1,527,790.98, or at least some

portion of it, be returned to the heirs. 3 The CTA ordered the Commissioner of Internal Revenue to refund Josefina Pajonar the

amount of P252,585.59, representing erroneously paid estate tax for the year 1988.5Among the

deductions from the gross estate allowed by the CTA were the amounts of P60,753 representing

the notarial fee for the Extrajudicial Settlement and the amount of P50,000 as the attorney's

fees for guardianship.6

Commissioner of Internal Revenue filed a motion for reconsideration asserted that thenotarial fee for the extrajudicial settlement and the attorneys fees in the guardianship

proceedings are not deductible expenses.

On June 7, 1994, the CTA upheld the validity of the deduction of the notarial fee for theExtrajudicial Settlement and the attorney's fees in the guardianship proceedings. Later on, the

Court of Appeals denied the Commissioners petition for review of the CTAs decision.

Hence, the present appeal by the Commissioner of Internal Revenue.Issue: Whether or not the notarial fee paid for the extrajudicial settlement and the attorneys fees in theguardianship proceedings may be allowed as deductions from the decedents gross estate in order to

arrive at the value of the net estate.

Held: Upholding the decisions of the appellate courts, the Court of Tax Appeals thus ruled:

This Court adopts the view under American jurisprudence that expenses incurred in the extrajudicial

settlement of the estate should be allowed as a deduction from the gross estate. "There is no

requirement of formal administration. It is sufficient that the expense be a necessary contribution

toward the settlement of the case.

Attorney's fees in order to be deductible from the gross estate must be essential to the collection ofassets, payment of debts or the distribution of the property to the persons entitled to it. The services for

which the fees are charged must relate to the proper settlement of the estate.In this case, the

guardianship proceeding was necessary for the distribution of the property of the late Pedro Pajonar to

his rightful heirs.



notarization of the same. Hence the Contract of Legal Services of March 28, 1988 entered into

between respondent Josefina Pajonar and counsel was presented in evidence for the purpose of

showing that the amount of P60,753.00 was for the notarization of the Extrajudicial Settlement. It

follows then that the notarial fee of P60,753.00 was incurred primarily to settle the estate of the

deceased Pedro Pajonar. Said amount should then be considered an administration expenses actually

and necessarily incurred in the collection of the assets of the estate, payment of debts and distribution

of the remainder among those entitled thereto.

WHEREFORE, the December 21, 1995 Decision of the Court of Appeals is AFFIRMED. The notarial fee for

the extrajudicial settlement and the attorney's fees in the guardianship proceedings are allowable

deductions from the gross estate of Pedro Pajonar.

CIR vs CA and Pajonar

Documents

Transcript of CIR vs CA and Pajonar