CIR
v. CA
Doctrine:
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 PNB.
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.
PNB filed an accounting of the decedent'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.
Pursuant to the assessment by the BIR, the estate
of Pedro Pajonar paid taxes in the amount of P2,557.
The trial court appointed Josefina as the regular
administratrix of Pedro Pajonar's estate.
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, in her capacity as administratrix and
heir of Pedro Pajonar's estate, 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.
However, without waiting for her protest to be
resolved by the BIR, Josefina filed a petition for review with the Court of Tax
Appeals praying for the refund of P1,527,790.98, or in the alternative,
P840,202.06, as erroneously paid estate tax.
CTA ordered the CIR to refund Josefina 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
Commissioner of Internal Revenue filed a motion
for reconsideration of the CTA's 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.
CTA issued the assailed Resolution ordering the
Commissioner of Internal Revenue to refund Josefina, 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
Commissioner of Internal Revenue filed with the
Court of Appeals a petition for review questioning the validity of the
abovementioned deductions.
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.
Ruling:
YES
Respondent maintains that only judicial expenses
of the testamentary or intestate proceedings are 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."
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. In this case, the guardianship proceeding was necessary for the
distribution of the property of the late Pedro Pajonar to his rightful heirs.
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.
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.
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 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
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 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.
Thus, in Lorenzo v. Posadas 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.
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.
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