ALLOWABLE DEDUCTIONS CONTINUED:

ORDINARY DEDUCTIONS:

(1) LOSSES, INDEBTEDNESS, TAXES

(A) CLAIMS AGAINST ESTATE (OR INDEBTEDNESS)

 Deceased is the debtor

SUBSTANTIATION REQUIREMENTS: (refer to Revenue Regulation for complete provision)

If simple loan:

(1) The debt instrument must be duly notarized at the time of the indebtedness except if it pertains
to financial institutions where notarization is not part of the business practice or policy.

(2) Duly notarized certification from the creditor in relation to the unpaid balance of the debt
including the interest at the time of the death.

(3) Proof of financial capacity of the creditor at the time of incurrence, i.e. income tax return

• If the creditor is a non-resident, a certified sworn declaration will suffice and it must be
authenticated before it can be presented as evidence here in the Philippines.

•Authentication – the document will be presented to the Philippine Embassy or Consulate to have it
authenticated. (aka Red Ribbon)

(4) If the loan was contracted within 3 years prior to the death of the decedent – statement

under oath executed by the administrator or executor of the estate reflecting the disposition of the
proceeds.

If the unpaid obligation arose from purchase of

goods or services:

(1) Invoice or documents evidencing the purchase of the goods or service

(2) Duly notarized certification from the creditor as to the unpaid balance of the debt including the
interest at the time of death

(3) Certified true copy of the latest audited balance sheet of the creditor with a schedule of the
receivable

(4) If settlement is made through a testate or intestate proceeding, a document filed with the court
evidencing the claim and the corresponding court order approving the claims

(B) CLAIMS OF THE DECEASED AGAINST INSOLVENT PERSONS

 Deceased is the creditor

Requirement:

 The person must fall under the FRIA (FINANCIAL REHABILITATION INSOLVENCY ACT/RA.10142) in
order it to be considered as deductible claims of the deceased against insolvent persons

(C) UNPAID MORTGAGES

- Here, the deceased is the mortgagor. He mortgaged his property as security for the loan

he contracted. Thus, at the time of his death, the property mortgaged should form part of his gross
estate. Only the value of the unpaid mortgage at the time of the death can be included as a
deduction but it must be a bona fide mortgage ( it is not just mere accommodation where another
person actually benefited the proceeds of the loan)

-If it is an accommodation mortgage, you cannot deduct the unpaid mortgage but the gross estate
must report the value of the property and accounts receivable because in that case upon the death
of the decedent or his heirs has the right to go after the accommodated party

-it must be incurred before death and must be unpaid upon death

(D) UNPAID TAXES

REQUISITES FOR DEDUCTIBILITY: (not included estate tax due for the transmission of his estate,
income tax for the income received after death, real property taxes accrued after his death )

(1) They have accrued as of the death of the decedent, and

(2) They were unpaid as of the time of death.

 income tax for income accrued before death but received after death

-the tax can be deducted because this pertains to an income earned during the lifetime

-go back to the concept of decedent’s interest, so long as the decedent already has the right or claim
over that particular property or asset, even if it was not received yet at the point of death, you can
include it as part of the gross estate. To be fair, the taxes pertaining to it should also be allowed as a
deduction

 Income tax for income received after death

- this refers to the income earned by the estate, not the income earned by the decedent during his
lifetime and the corresponding tax to it

- therefore this is subject now to estate income tax

-not anymore deductible to the gross estate

 real property taxes accrued after his death

- not anymore deductible

-real property taxes has advance accrual

-deadline is January and February

(E) CASUALTY LOSSES

- losses which arose from fires, storms, shipwrecks or other casualties or losses from robbery, theft,
or embezzlement.

(1) The losses were incurred during the settlement of the estate (within 1 year from death + 30

days)

(2) The losses arose from acts of god, such as fires, storms, shipwreck or other casualties, or

from acts of man, such as robbery, theft or embezzlement

(3) The losses are not compensated by insurance or otherwise the losses are not claimed as a

deduction for income tax purposes in an income tax return of the estate subject to income tax

(4) The losses were incurred not later than the last day for payment of the estate tax (within 1 year

from death + 30 days if extended)

Another option:

- you can deduct the losses not considered in the estate tax return in the income tax return of the
estate (EXINTALOBA…)

-but you cannot deduct it in the computation in the estate tax

You can extend the last day for payment by installment (Section 91,b)

 Extrajudicial settlement of estate-2 years

 Judicial settlement-5 years

-But you cannot deduct the loss incurred in the extended years for payment

-as prescribe of subsection (a) of section 91

-time of payment- shall be paid at the time the return is filed by the executor, administrator or the
heirs because the 2 years and 5 years refers only to the extension of payment and not extension for
filing

-refers to pay as you file system (at most 1 year + 30 days)

-when it comes to request for extension or deduction, only one benefit at a time
VANISHING DEDUCTIONS:

-this otherwise known as property previously taxed

-this is basically allowed as a deduction in the property left behind by that decendent which was
acquired previously by gratuitous transfer meaning previously acquired through inheritance or
donation

-the primary purpose of these vanishing deduction is to reduce or minimize the burden of paying
transfer taxes at a short span or at a short period of time which the law interprets to be 5 years

-the property that is the subject of previous gratuitous transfer should be included first as part of
your gross estate

REQUISITES FOR DEDUCTIBILITY (DILPIN):

(1) Death – the present decedent died within five (5) years from date of death of the prior

decedent (in case of succession) or date of donation (in case of donation).

(2) Identity of the property – The property with respect to which deduction is sought can be

identified as the one received from the prior decedent or the donor, or as the property

acquired in exchange for the original property so received.

(3) Location of the property – The property on which vanishing deduction is claimed must be located
in the Philippines.

(4) Previous taxation of the property – the donor's tax on the gift or estate tax on the prior succession
must have been finally determined and paid by the donor or the prior decedent, as the case may be.

(5) Inclusion of the property – The property must have formed part of the gross estate situated

in the Philippines of the prior decedent, or must have been included in the total amount of the gifts
of the donor made within five (5) years prior to the present decedent’s death.

(6) No previous vanishing deduction on the property, or the property exchanged therefor,

was allowed in determining the value of the net estate of the prior decedent.

EXAMPLE:
FORMULA:

RULES IN COMPUTATION:

(1) Get the value of the property previously taxed (PPT): Compare the values of the property at

the time of the prior decedent’s death or at the time of the donation with the value at the time

of the present decedent’s death. The lower amount shall be the initial basis.

(2) The PPT value shall be reduced by any payment made by the present decedent on any mortgage
or lien on the property. This is now the initial basis.

(3) The initial basis shall be further reduced by the second deduction, an amount equal to:

(Initial Basis / Total amount of Gross Estate) x Ordinary Deductions

(4) The remaining balance shall be multiplied by the corresponding percentage:100% if 1 or less than

FORMULA

Value taken for PPT* xx

Less: Mortgages paid (xx)

Initial Basis xx

Less:

Initial Basis x CULIT2 + PPT

Gross Estate (xx)

Final Basis xx

x Vanishing Rate x%

Vanishing Deduction xx

SAMPLECOMPUTATION:

Mr. Dilpin, Filipino, a resident of Cebu died on August 29, 2019. Leaving a gross estate of P15M.
Included in his gross estate is a parcel of land in cebu city and an automobile which he inherited from
his mother, who predeceased him on Nov.2,2016.

The properties where previously taxed for estate tax purposes at the value of Land 1M, and
automobile 200k,with a mortgage liability of the land for 40k which was paid by Mr. Dilipin on 2017.
His wife Mrs. Claimed the ff deductions:

CLAIMS AGAINST THE ESTATE: P 50,000

UNPAID TAXES: P80,000

FAMILY HOME: P5,000,000

GIVEN:

GROSS ESTATE: P15,000,000

CLAIMS AGAINST THE ESTATE: P 50,000

UNPAID TAXES: P80,000

FAMILY HOME: P5,000,000

Property previously taxed

CURRENT VALUE BEFORE VALUE

LAND P1,200,000 P1,000,000

AUTOMOBILE P120,000 P 200,000

COMPUTE THE VANISHING DEDUCTION:

Land P1,000,000

Automobile 120,000 P1,120,000

Less:

Mortage paid 40,000

INITIAL BASIS P1,080,000

Less:

P130,000 x P1,080,000

P15M (9,360)

FINAL BASIS P1,070,640

2 years<3years 60%
VANISHING P642, 384
DEDUCTION