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.: Supr-ema
Assailed in this petition for review on certiorari
is the December 21, 1995 Decision[1] of the Court of Appeals[2] in 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 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.[3] Jur-is
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.[4] The 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.[5]
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.[6]Juri-ssc
On June 15, 1993, the Commissioner of
Internal Revenue filed a motion for reconsideration[7] 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.[9]
Hence, the present appeal by the
Commissioner of Internal Revenue.
The sole issue in this case involves the
construction of section 79[10] of the National Internal Revenue Code[11] (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. J-jlex
In its May 6, 1993 Decision, the Court of
Tax Appeals ruled thus:
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." [ 34 Am. Jur. 2d, p. 765; Nolledo,
Bar Reviewer in Taxation, 10th Ed. (1990), p. 481 ]
xxx.....xxx.....xxx
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
xxx.....xxx.....xxx
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. Sc-juris
xxx.....xxx.....xxx
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. ] Nc-mmis
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 management for 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, 26 T .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 estate paid P59,341.40 for the premiums. (See Annex
'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: Newmiso
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 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 ).
xxx.....xxx.....xxx
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.
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. Acctmis
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
xxx.....xxx.....xxx
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,[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.[17] 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.[18] Scc-alr
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."[20] 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.[21] This distinction has been carried over to our
jurisdiction. 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.[23] 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.[24]
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.
SO ORDERED.
Melo, (Chairman), Vitug, Panganiban, and Purisima, JJ., concur. Calrs-pped
[1] Entitled "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.
[2] Eighth Division composed of J. Jaime M. Lantin, ponente; and JJ Eduardo G. Montenegro and Jose C. De la Rama, concurring.
[3] CA Records, 45-53.
[4] Ibid., 37-44.
[5] The CTA made the following computations¾
Estate
of Pedro P. Pajonar
Lagtangon, Siaton, Negros Oriental
Died January 10, 1998
|
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,Transformer
and Corner Set |
7,400.00 |
|
|
|
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 |
|
|
P 2,979,490.79 |
|
|
Less: Deductions: |
|
|
|
A |
a. Funeral expenses |
P50,000.00 |
|
|
|
b. Commission to Trustee (PNB) |
18,335.93 |
|
|
B |
c. Notarial Fee for the Extra-judicial
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. |
|
|
|
[6] Ibid., 78-79, 81-83.
[7] CA Records, 118-130.
[8] Rollo, 47-56.
[9] Ibid., 35-46.
[10] SEC. 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-
(1)..... Expenses, losses, indebtedness, and
taxes. – Such amounts-
(A).....For funeral expenses in an amount
equal to five per centum of the gross estate but in no case to exceed
P50,000.00;
(B).....For judicial expenses of the
testamentary or intestate proceedings;
xxx.....xxx.....xxx
[11] This 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.
[12] Rollo, 78-79, 81-83.
|
Estate tax Due |
P1,277,762.39 |
|
Less : estate tax
paid 04.05.88 |
2,557.00 |
|
Deficiency estate
tax |
P1,275,205.39 |
|
Add: Additions to
tax |
176,083.16 |
|
Total deficiency
tax |
P1,451,288.55 |
|
Less: estate tax
paid 12.19.88 |
1,527,790.98 |
|
Amount Refundable |
P76,502.43 |
Ibid., 54.
[14] Ibid., 49-51.
[15] Ibid., 43-45.
[16] Approved on June 15, 1939.
[17] Wise & Co. v. Meer, 78 Phil 655 (1947)
[18] Carolina Industries, Inc. v. CMS Stock Brokerage, Inc., 97 SCRA 734 (1980)
[19] Lorenzo v. Posada, 64 Phil 353 (1937)
[20] 34A Am Jur 2d, Federal Taxation (1995), sec. 144, 288, citing Union 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.
[21] Ibid., sec. 144,272, citing Bretzfelder, Charles, exr v. Com., (1936, CA2) 86 F2d 713, 36-2 USTC sec. 9548, 18 AFTR 653.
[22] Lorenzo v. Posada, supra.
[23] Sison vs. Teodoro, 100 Phil. 1055 (1957)
[24] Johannes v. Imperial, 43 Phil 597 (1922)