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Commissioner of Internal Revenue vs. Court of AppealsG.R. No. 123206, March 22, 2000

FACTS:

Petitioner assailed the decision of the Court of Appeals which affirmed the Resolution of theCourt of Tax Appeals granting Josefina Pajonar, administratrix of the estate of Pedro Pajonar, atax refund representing erroneously paid estate taxes for the year 1988; and deduction of thenotarial fee for the Extrajudicial Settlement and the attorneys fees in the guardianshipproceedings.

Josefina Pajonar became the guardian over the person of Pedro Pajonar, when the lattersuffered shock and became insane while his property was placed under the guardianship of thePhilippine National Bank (PNB).

Pedro Pajonar, when he died, was survived by his two brothers Isidro P. Pajonar and GregorioPajonar, his sister Josefina Pajonar, nephews Concordio Jandog and Mario Jandog and nieceConchita Jandog.

The PNB filed an accounting of the decedent's property under guardianship however, the PNBdid not file an estate tax return, instead it advised Pedro Pajonar's heirs to execute anextrajudicial settlement and to pay the taxes on his estate, as such, pursuant to the assessmentby the Bureau of Internal Revenue (BIR), the estate of Pedro Pajonar paid taxes.

Josefina Pajonar filed a petition for the issuance in her favor of letters of administration of theestate of her brother and was appointed as the regular administratrix of Pedro Pajonar's estate.

Pursuant to a second assessment by the BIR for deficiency estate tax, the estate of PedroPajonar paid estate tax. Josefina Pajonar, in her capacity as administratrix and heir of PedroPajonar's estate, filed a protest with the BIR praying that the estate tax payment or at leastsome portion of it, be returned to the heirs.

However, without waiting for her protest to be resolved by the BIR, Josefina Pajonar filed apetition for review with the Court of Tax Appeals (CTA), praying for the refund, or in thealternative, some portion of the paid taxes, as erroneously paid estate tax.

The CTA ordered the Commissioner of Internal Revenue to refund Josefina Pajonar the amountrepresenting erroneously paid estate tax for the year 1988. Among the deductions from thegross estate allowed by the CTA were the notarial fee for the Extrajudicial Settlement and theattorney's fees.

The Commissioner of Internal Revenue filed a motion for reconsideration of the CTA's decisionasserting, among others, that the notarial fee for the Extrajudicial Settlement and theattorney's fees in the guardianship proceedings are not deductible expenses. However, the CTA

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upheld its decision but lowered the tax refund, and sustained the validity of the deduction ofthe notarial fee for the Extrajudicial Settlement and the attorney's fees in the guardianshipproceedings.

The Commissioner of Internal Revenue filed with the Court of Appeals a petition for review of

the CTAs decision but to their dismay it was denied.

ISSUE:

Whether or not the notarial fee paid for the extrajudicial settlement and the attorney's fees inthe guardianship proceedings may be allowed as deductions from the gross estate of decedentin order to arrive at the value of the net estate.

HELD:

YES. Administration expenses, as an allowable deduction from the gross estate of the decedentfor purposes of arriving at the value of the net estate, have been construed to include allexpenses essential to the proper settlement of the estate. In other words, the expenses mustbe essential to the proper settlement of the estate. Expenditures incurred for the individualbenefit of the heirs, devisees or legatees are not deductible.

Coming to the case at bar, the notarial fee paid for the extrajudicial settlement is clearly adeductible expense since such settlement effected a distribution of Pedro Pajonar's estate tohis lawful heirs. Similarly, the attorney's fees paid to PNB for acting as the guardian of PedroPajonar's property during his lifetime should also be considered as a deductible administrationexpense. 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 ofdecedent's assets and the subsequent settlement of the estate.

Whereby, the Supreme Court affirmed the decision of the CTA and the Court of Appeals andthat the notarial fee for the extrajudicial settlement and the attorney's fees in the guardianshipproceedings are allowable deductions from the gross estate of Pedro Pajonar.