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RepublicofthePhilippines
SUPREMECOURT
Manila

THIRDDIVISION

G.R.No.123206March22,2000

COMMISSIONEROFINTERNALREVENUE,petitioner,
vs.
COURTOFAPPEALS,COURTOFTAXAPPEALSandJOSEFINAP.PAJONAR,asAdministratrixofthe
EstateofPedroP.Pajonar,respondents.

RESOLUTION

GONZAGAREYES,J.:

Assailedinthispetitionforreviewoncertiorari is the December 21, 1995 Decision1oftheCourtofAppeals2 in

CAG.R.Sp.No.34399affirmingtheJune7,1994ResolutionoftheCourtofTaxAppealsinCTACaseNo.4381
grantingprivaterespondentJosefinaP.Pajonar,asadministratrixoftheestateofPedroP.Pajonar,ataxrefund
intheamountofP76,502.42,representingerroneouslypaidestatetaxesfortheyear1988.

PedroPajonar,amemberofthePhilippineScout,BataanContingent,duringthesecondWorldWar,wasapartof
theinfamousDeathMarchbyreasonofwhichhesufferedshockandbecameinsane.HissisterJosefinaPajonar
became the guardian over his person, while his property was placed under the guardianship of the Philippine
NationalBank(PNB)bytheRegionalTrialCourtofDumagueteCity,Branch31,inSpecialProceedingsNo.1254.
HediedonJanuary10,1988.HewassurvivedbyhistwobrothersIsidroP.PajonarandGregorioPajonar,his
sisterJosefinaPajonar,nephewsConcordioJandogandMarioJandogandnieceConchitaJandog.

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
advisedPedroPajonar'sheirstoexecuteanextrajudicialsettlementandtopaythetaxesonhisestate.OnApril
5,1988,pursuanttotheassessmentbytheBureauofInternalRevenue(BIR),theestateofPedroPajonarpaid
taxesintheamountofP2,557.

On May 19, 1988, Josefina Pajonar filed a petition with the Regional Trial Court of Dumaguete City for the
issuanceinherfavoroflettersofadministrationoftheestateofherbrother.ThecasewasdocketedasSpecial
ProceedingsNo.2399.OnJuly18,1988,thetrialcourtappointedJosefinaPajonarastheregularadministratrix
ofPedroPajonar'sestate.

On December 19, 1988, pursuant to a second assessment by the BIR for deficiency estate tax, the estate of
PedroPajonarpaidestatetaxintheamountofP1,527,790.98.JosefinaPajonar,inhercapacityasadministratrix
and heir of Pedro Pajonar's estate, filed a protest on January 11, 1989 with the BIR praying that the estate tax
paymentintheamountofP1,527,790.98,oratleastsomeportionofit,bereturnedtotheheirs.3

However,onAugust15,1989,withoutwaitingforherprotesttoberesolvedbytheBIR,JosefinaPajonarfileda
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,aserroneouslypaidestatetax.4ThecasewasdocketedasCTACaseNo.4381.

OnMay6,1993,theCTAorderedtheCommissionerofInternalRevenuetorefundJosefinaPajonartheamount
of P252,585.59, representing erroneously paid estate tax for the year 1988.5 Among the deductions from the
grossestateallowedbytheCTAweretheamountsofP60,753representingthenotarialfeefortheExtrajudicial
SettlementandtheamountofP50,000astheattorney'sfeesinSpecialProceedingsNo.1254forguardianship.6

OnJune15,1993,theCommissionerofInternalRevenuefiledamotionforreconsideration7oftheCTA'sMay6,
1993 decision asserting, among others, that the notarial fee for the Extrajudicial Settlement and the attorney's
feesintheguardianshipproceedingsarenotdeductibleexpenses.
On June 7, 1994, the CTA issued the assailed Resolution8 ordering the Commissioner of Internal Revenue to
refundJosefinaPajonar,asadministratrixoftheestateofPedroPajonar,theamountofP76,502.42representing
erroneouslypaidestatetaxfortheyear1988.Also,theCTAupheldthevalidityofthedeductionofthenotarialfee
fortheExtrajudicialSettlementandtheattorney'sfeesintheguardianshipproceedings.

OnJuly5,1994,theCommissionerofInternalRevenuefiledwiththeCourtofAppealsapetitionforreviewofthe
CTA's May 6, 1993 Decision and its June 7, 1994 Resolution, questioning the validity of the abovementioned
deductions.OnDecember21,1995,theCourtofAppealsdeniedtheCommissioner'spetition.9

Hence,thepresentappealbytheCommissionerofInternalRevenue.

Thesoleissueinthiscaseinvolvestheconstructionofsection7910of the National Internal Revenue Code 11

(TaxCode)whichprovidesfortheallowabledeductionsfromthegrossestateofthedecedent.Moreparticularly,
the question is whether the notarial fee paid for the extrajudicial settlement in the amount of P60,753 and the
attorney'sfeesintheguardianshipproceedingsintheamountofP50,000maybeallowedasdeductionsfromthe
grossestateofdecedentinordertoarriveatthevalueofthenetestate.

Weanswerthisquestionintheaffirmative,therebyupholdingthedecisionsoftheappellatecourts.

InitsMay6,1993Decision,theCourtofTaxAppealsruledthus:

Respondentmaintainsthatonlyjudicialexpensesofthetestamentaryorintestateproceedingsareallowed
asadeductiontothegrossestate.TheamountofP60,753.00isquiteextraordinaryforamerenotarialfee.

This Court adopts the view under American jurisprudence that expenses incurred in the extrajudicial
settlementoftheestateshouldbeallowedasadeductionfromthegrossestate."Thereisnorequirement
offormaladministration.Itissufficientthattheexpensebeanecessarycontributiontowardthesettlement
ofthecase."[34Am.Jur.2d,p.765Nolledo,BarReviewerinTaxation,10thEd.(1990),p.481]

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Theattorney'sfeesofP50,000.00,whichwerealreadyincurredbutnotyetpaid,referstotheguardianship
proceedingfiledbyPNB,asguardianoverthewardofPedroPajonar,docketedasSpecialProceedingNo.
1254intheRTC(BranchXXXI)ofDumagueteCity....

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The guardianship proceeding had been terminated upon delivery of the residuary estate to the heirs
entitledthereto.Thereafter,PNBwasdischargedofanyfurtherresponsibility.

Attorney'sfeesinordertobedeductiblefromthegrossestatemustbeessentialtothecollectionofassets,
paymentofdebtsorthedistributionofthepropertytothepersonsentitledtoit.Theservicesforwhichthe
feesarechargedmustrelatetothepropersettlementoftheestate.[34Am.Jur.2d767.]Inthiscase,the
guardianshipproceedingwasnecessaryforthedistributionofthepropertyofthelatePedroPajonartohis
rightfulheirs.

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PNB was appointed as guardian over the assets of the late Pedro Pajonar, who, even at the time of his
death,wasincompetentbyreasonofinsanity.Theexpensesincurredintheguardianshipproceedingwas
butanecessaryexpenseinthesettlementofthedecedent'sestate.Therefore,theattorney'sfeeincurred
in the guardianship proceedings amounting to P50,000.00 is a reasonable and necessary business
expensedeductiblefromthegrossestateofthedecedent.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
interestshouldbeimposedandthecompromisepenaltyexcluded. 13However,thetaxcourtuphelditsprevious
rulingregardingthelegalityofthedeductions

Itissignificanttonotethattheinclusionoftheestatetaxlawinthecodificationofallournationalinternalrevenue
lawswiththeenactmentoftheNationalInternalRevenueCodein1939werecopiedfromtheFederalLawofthe
UnitedStates.[UMALI,ReviewerinTaxation(1985),p.285]The1977TaxCode,promulgatedbyPresidential
DecreeNo.1158,effectiveJune3,1977,reenactedsubstantiallyalltheprovisionsoftheoldlawonestateand
gifttaxes,exceptthesectionsrelatingtothemeaningofgrossestateandgift.[Ibid,p.286.]

In the United States, [a]dministrative expenses, executor's commissions and attorney's fees are considered
allowabledeductionsfromtheGrossEstate.Administrativeexpensesarelimitedtosuchexpensesasareactually
and necessarily incurred in the administration of a decedent's estate. [PRENTICEHALL, Federal Taxes Estate
andGiftTaxes(1936),p.120,533.]Necessaryexpensesofadministrationaresuchexpensesasareentailedfor
the preservation and productivity of the estate and for its management for purposes of liquidation, payment of
debtsanddistributionoftheresidueamongthepersonsentitledthereto.[LizarragaHermanosvs.Abada,40Phil.
124.]Theymustbeincurredforthesettlementoftheestateasawhole.[34Am.Jur.2d,p.765.]Thus,where
therewerenosubstantialcommunitydebtsanditwasunnecessarytoconvertcommunitypropertytocash,the
only practical purpose of administration being the payment of estate taxes, full deduction was allowed for
attorney'sfeesandmiscellaneousexpenseschargedwhollytodecedent'sestate.[Ibid.,citingEstateofHelis,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
guardianoftheestate,(Annex"Z"),didnotfileanestatetaxreturnhowever,itadvisedtheheirstoexecutean
extrajudicialsettlement,topaytaxesandtopostabondequaltothevalueoftheestate,forwhichthestatepaid
P59,341.40forthepremiums.(SeeAnnex"K")."[p.17,CTArecord.]Therefore,itwouldappearfromtherecords
ofthecasethattheonlypracticalpurposeofsettlingtheestatebymeansofanextrajudicialsettlementpursuant
toSection1ofRule74oftheRulesofCourtwasforthepaymentoftaxesandthedistributionoftheestatetothe
heirs.Afortiori,sinceourestatetaxlawsareofAmericanorigin,theinterpretationadoptedbyAmericanCourts
hassomepersuasiveeffectontheinterpretationofourownestatetaxlawsonthesubject.

Anent the contention of respondent that the attorney's fees of P50,000.00 incurred in the guardianship
proceedingshouldnotbedeductedfromtheGrossEstate,Weconsiderthesameunmeritorious.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
EstateandGift,p.120,861]Attorney'sfeesareallowabledeductionsifincurredforthesettlementoftheestate.It
is noteworthy to point that PNB was appointed the guardian over the assets of the deceased. Necessarily the
assetsofthedeceasedformedpartofhisgrossestate.Accordingly,allexpensesincurredinrelationtotheestate
ofthedeceasedwillbedeductibleforestatetaxpurposesprovidedthesearenecessaryandordinaryexpenses
foradministrationofthesettlementoftheestate.14

InupholdingtheJune7,1994ResolutionoftheCourtofTaxAppeals,theCourtofAppealsheldthat:

2.AlthoughtheTaxCodespecifies"judicialexpensesofthetestamentaryorintestateproceedings,"thereisno
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
remainderamongthoseentitledthereto.Suchexpensesmayincludeexecutor'soradministrator'sfees,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.
Deductibleattorney'sfeesarethoseincurredbytheexecutororadministratorinthesettlementoftheestateorin
defending or prosecuting claims against or due the estate. (Estate and Gift Taxation in the Philippines, T. P.
Matic,Jr.,1981Edition,p.176).

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Itisclearthenthattheextrajudicialsettlementwasforthepurposeofpaymentoftaxesandthedistributionofthe
estatetotheheirs.Theexecutionoftheextrajudicialsettlementnecessitatedthenotarizationofthesame.Hence
theContractofLegalServicesofMarch28,1988enteredintobetweenrespondentJosefinaPajonarandcounsel
waspresentedinevidenceforthepurposeofshowingthattheamountofP60,753.00wasforthenotarizationof
theExtrajudicialSettlement.ItfollowsthenthatthenotarialfeeofP60,753.00wasincurredprimarilytosettlethe
estate of the deceased Pedro Pajonar. Said amount should then be considered an administration expenses
actuallyandnecessarilyincurredinthecollectionoftheassetsoftheestate,paymentofdebtsanddistributionof
the remainder among those entitled thereto. Thus, the notarial fee of P60,753 incurred for the Extrajudicial
Settlementshouldbeallowedasadeductionfromthegrossestate.

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

The amount of P50,000.00 was incurred as attorney's fees in the guardianship proceedings in Spec. Proc. No.
1254.Petitionercontendsthatsaidamountarenotexpensesofthetestamentaryorintestateproceedingsasthe
guardianship proceeding was instituted during the lifetime of the decedent when there was yet no estate to be
settled.

Again,thiscontentionmustfail.

The guardianship proceeding in this case was necessary for the distribution of the property of the deceased
PedroPajonar.AscorrectlypointedoutbyrespondentCTA,thePNBwasappointedguardianovertheassetsof
thedeceased,andthatnecessarilytheassetsofthedeceasedformedpartofhisgrossestate....

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Itisclearthereforethattheattorney'sfeesincurredintheguardianshipproceedinginSpec.Proc.No.1254were
essentialtothedistributionofthepropertytothepersonsentitledthereto.Hence,theattorney'sfeesincurredin
the guardianship proceedings in the amount of P50,000.00 should be allowed as a deduction from the gross
estateofthedecedent.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
RevenueCodeof1939, 16andwhichwasthefirstcodificationofPhilippinetaxlaws.Section89(a)(1)(B)ofCA
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
lawsoftheUnitedStates. 17Inaccordwithestablishedrulesofstatutoryconstruction,thedecisionsofAmerican
courtsconstruingthefederaltaxcodeareentitledtogreatweightintheinterpretationofourowntaxlaws.18

Judicial expenses are expenses of administration. 19 Administration expenses, as an allowable deduction from
thegrossestateofthedecedentforpurposesofarrivingatthevalueofthenetestate,havebeenconstruedby
thefederalandstatecourtsoftheUnitedStatestoincludeallexpenses"essentialtothecollectionoftheassets,
paymentofdebtsorthedistributionofthepropertytothepersonsentitledtoit." 20Inotherwords,theexpenses
must be essential to the proper settlement of the estate. Expenditures incurred for the individual benefit of the
heirs,deviseesorlegateesarenotdeductible. 21Thisdistinctionhasbeencarriedovertoourjurisdiction.Thus,
in Lorenzo v. Posadas 22 the Court construed the phrase "judicial expenses of the testamentary or intestate
proceedings"asnotincludingthecompensationpaidtoatrusteeofthedecedent'sestatewhenitappearedthat
such trustee was appointed for the purpose of managing the decedent's real estate for the benefit of the
testamentaryheir.Inanothercase,theCourtdisallowedthepremiumspaidonthebondfiledbytheadministrator
asanexpenseofadministrationsincethegivingofabondisinthenatureofaqualificationfortheoffice,andnot
necessaryinthesettlementoftheestate.23Neithermayattorney'sfeesincidenttolitigationincurredbytheheirs
inassertingtheirrespectiverightsbeclaimedasadeductionfromthegrossestate.24 1 w p h i1

Coming to the case at bar, the notarial fee paid for the extrajudicial settlement is clearly a deductible expense
sincesuchsettlementeffectedadistributionofPedroPajonar'sestatetohislawfulheirs.Similarly,theattorney'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
andgaveadviceastothepropersettlementofthelatter'sestate,actswhichcontributedtowardsthecollectionof
decedent'sassetsandthesubsequentsettlementoftheestate.

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

WHEREFORE,theDecember21,1995DecisionoftheCourtofAppealsisAFFIRMED.Thenotarialfeeforthe
extrajudicialsettlementandtheattorney'sfeesintheguardianshipproceedingsareallowabledeductionsfromthe
grossestateofPedroPajonar. 1 w p h i1 .n t

SOORDERED.

Melo,Vitug,PanganibanandPurisima,JJ.,concur.

Footnotes

1Entitled"CommissionerofInternalRevenuev.JosefinaP.Pajonar,asAdministratrixoftheEstateof
PedroP.Pajonar,andCourtofTaxAppeals."Rollo,3546.

2EighthDivisioncomposedofJ.JaimeM.Lantin,ponenteandJJEduardoG.MontenegroandJoseC.De
laRama,concurring.

3CARecords,4553.

4Ibid.,3744.

5TheCTAmadethefollowingcomputations
 EstateofPedroP.Pajonar
Lagtangon,Siaton,NegrosOriental
DiedJanuary10,1988

I.RealProperties P102,966.59

II. PersonalProperties

a.Refrigerator P7,500.00
b.WallClock,EssoGasul.
TablesandChairs 3,090.00

c.Beddings,StereoCassette,
TV,Betamax 15,700.00

d.Karaoke,ElectricIron,Fan,
TransformerandCornerSet 7,400.00

e.ToyotaTamaraw 27,500.00 61,190.00

AdditionalPersonalProperties:

f.TimeDepositPNB P200,000.00

g.StocksandBondsPNB 201,232.37

h.MoneyMarket 2,300,000.00

i.CashDeposit 114,101.83 2,815,334.20

GROSSESTATE P2,979,490.79

Less:Deductions:

A a.Funeralexpenses P50,000.00
b.CommissiontoTrustee(PNB) 18,335.93

B c.NotarialFeefortheExtrajudicial
Settlement 60,753.00

d.Attorney'sFeesinSpecialProceeding
No.1254forGuardianship 50,000.00

e.FilingFeesinSpecialProceedingNo.
2399 6,374.88
f.PublicationofNoticetoCreditors
September7,14and21,1988issuesof
theDumagueteStarInformer 600.00

g.Certificationfeeforpublicationonthe
BulletinBoardoftheMunicipalBuilding
ofSiaton,NegrosOriental 2.00

h.CertificationfeeforPublicationinthe
Capitol 5.00

i.Certificationfeeforpublicationof 5.00 186,075.81

NoticetoCreditors

NETESTATE 2,793,414.98
============

EstateTaxDue P1,277,762.39

Less:EstateTaxPaid:

CBConfirmationReceiptNos.
 B14268064 P2,557.00

B15517625 1,527,790.98 1,530,347.98

AMOUNTREFUNDABLE P252,585.59
===========

Rollo,8688.

6Ibid.,7879,8183.

7CARecords,118130.

8Rollo,4756.

9Ibid.,3546.

10Sec.79Computationofnetestateandestatetax.ForthepurposeofthetaximposedinthisChapter,
thevalueofthenetestateshallbedetermined:

(a)InthecaseofacitizenorresidentofthePhilippines,bydeductingfromthevalueofthegross
estate

(1)Expenses,losses,indebtedness,andtaxes.Suchamounts

(A)Forfuneralexpensesinanamountequaltofivepercentumofthegrossestatebutinnocaseto
exceedP50,000.00

(B)Forjudicialexpensesofthetestamentaryorintestateproceedings

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11Thisreferstothe1977NationalInternalRevenueCode,asamended.Onthedateofdecedent'sdeath
(January 10, 1988), the latest amendment to the Tax Code was introduced by Executive Order No. 273,
whichbecameeffectiveonJanuary1,1988.

12Rollo,7879,8183.

13EstatetaxdueP1,277,762.39

Less:estatetaxpaid04.05.88 2,557.00
[CBCRNo.14268054]

Deficiencyestatetax P1,275,205.39
Add:AdditionstotaxInterest
ondeficiency[Sec.249(b)]
04.12.88to12.19.88
(1,275,205.39x20%x
252/365) 176,083.16

Totaldeficiencytax P1,451,288.55

Less:estatetaxpaid12.19.88

[CBCRNo.15517625] 1,527,790.98

Amountrefundable P76,502.43
===========

Ibid.,54.

14Ibid.,4951.
 15Ibid.,4345.

16ApprovedonJune15,1939.

17Wise&Co.v.Meer,78Phil655(1947),

18CarolinaIndustries,Inc.v.CMSStockBrokerage,Inc.,97SCRA734(1980).

19Lorenzov.Posada,64Phil353(1937).

2034AAmJur2d,FederalTaxation(1995),sec.144,288,citingUnionCommerceBank,trans,(1963)39
TC973,affd&revdonotherissues(1964,CA6)339F2d163,651USTCp12279,15AFTR2d1281.

21Ibid.,sec.144,272,citing Bretzfelder, Charles, exr v. Com., (1936, CA2) 86 F2d 713, 362 USTC sec.
9548,18AFTR653.

22Lorenzov.Posada,supra.

23Sisonvs.Teodoro,100Phil.1055(1957).

24Johannesv.Imperial,43Phil597(1922).

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