Legal Accounting - March 18

Rules of Court Rule 85, Section 8 Section 8. When executor or administrator to render account. — Every executor or administrator shall render an account of his administration within one (1) year from the time of receiving letters testamentary or of administration, unless the court otherwise directs because of extensions of time for presenting claims against, or paying the debts of, the estate, or for disposing of the estate; and he shall render such further accounts as the court may require until the estate is wholly settled. Rules of Court Rule 87, Section 7 Section 7. Person entrusted with estate compelled to render account. — The court, on complaint of an executor or administrator, may cite a person entrusted by an executor or administrator with any part of the estate of the deceased to appear before it, and may require such person to render a full account, on oath, of the money, goods, chattels, bonds, account, or other papers belonging to such estate as came to his possession in trust for such executor or administrator, and of his proceedings thereon; and if the person so cited refuses to appear to render such account, the court may punish him for contempt as having disobeyed a lawful order of the court. Punongbayan v. Punongbayan, GR. 156842 Assailed in this petition for review is the Decision dated August 9, 2002 1 of the Court of Appeals (CA) in CA-G.R. SP No. 630022 which granted the special civil action for certiorari and mandamus filed by herein respondent, as well as its Resolution dated January 14, 20033 which denied petitioner’s motion for reconsideration. The antecedent facts are as follows: On July 31, 1969, Escolastica Punongbayan-Paguio died intestate leaving behind considerable properties in Misamis Oriental, Iligan City, and Bulacan. She was survived by her husband, Miguel Paguio; brothers Nicolas (now deceased) and SOTERO (herein petitioner), sisters Leonila and Leonora (both now deceased), all surnamed Punongbayan; nephews DANILO (herein respondent), Restituto, Perfecto, and Alfredo, and nieces Brigida, Lilia, Marilou, Adeluisa, and Grace, who were the children of Escolastica’s brother, Perfecto Punongbayan, Sr., who predeceased her. Proceedings for the settlement of her estate were initiated in the then Court of First Instance of Misamis Oriental, docketed as Special Proceedings No. 1053. 4 Miguel Paguio was appointed administrator and later, DANILO, as co-administrator to represent the interests of the Punongbayan family. On September 30, 1974, the above-mentioned heirs executed a compromise agreement distributing among themselves the estate of the decedent consisting of forty-one (41) parcels of land in Misamis Oriental, Iligan City, and Bulacan. They likewise authorized the administrator to sell five (5) parcels of land to pay the liabilities of the estate. The intestate court approved the agreement on June 7, 1976. Intestate proceedings, however, were left dormant from 1976 to 1993. On August 4, 1994, SOTERO, Leonila and Leonora (both now deceased) moved for the immediate distribution of the estate in accordance with the Compromise Agreement of 1974. They asked that DANILO be ordered to deposit the proceeds from the sales of estate properties with the Clerk of Court and to render an accounting of his administration for the past twenty (20) years. 5 The intestate court granted the motion in an Order dated February 1, 1995 and

directed DANILO to – 1. Effect the immediate distribution of the Estate in accordance with the Compromise Agreement dated September 30, 1974 approved by this Honorable Court in its Order of June 7, 1976; 2. Deposit with the Clerk of Court the proceeds of the sale of whatever properties [were] already sold; and 3. Render an accounting of his administration of the estate for the last twenty (20) years or from the time he assumed as administrator up to the present, within sixty (60) days from receipt of this Order. DANILO assailed6 the order in a special civil action for certiorari with the CA7 which, however, dismissed the same. We affirmed the dismissal in G. R. No. 128928, 8 there being no reversible error on the part of the CA.9 After the decision became final and executory, the corresponding writ of execution was issued by the intestate court on March 30, 1998. The writ was served upon DANILO’s wife but not upon DANILO himself as he was always absent from his residence and place of work whenever the sheriff came to serve the writ. A warrant of arrest was issued against him. DANILO filed an urgent motion to recall the warrant which was denied. Consequently, he assailed the order in a petition for certiorari before the CA, docketed as CA-G.R. SP No. 57754.10 During the pendency of the petition, DANILO was arrested but was later on released from custody by the CA upon his manifestation that he will comply with the intestate court’s writ of execution, copy of which was served upon him in open court, and that he will attend the next hearing to submit the certificates of placement of the proceeds from the sales of a substantial portion of the estate under his administration. Respondent did not appear during said hearing which prompted the CA to recall his release order and to direct the National Bureau of Investigation to arrest him. On October 19, 2000, the CA dismissed the petition for utter lack of merit, ruling that DANILO’s clear and contumacious refusal to obey the intestate court’s writ of execution for several years should no longer be countenanced. 11 Meanwhile, SOTERO moved for his appointment as co-administrator of the estate in June 2000 on the grounds that DANILO failed to discharge his duties as administrator, to render an accounting of his administration, and to turn over P25,000,000.00 in proceeds from the sales of a substantial portion of the estate, as required in the Order dated February 1, 1995. The motion was granted and SOTERO took his oath as co-administrator of the estate on August 30, 2000. On September 1, 2000, DANILO filed a "Motion to Order Sotero Punongbayan to Render an Accounting"12 alleging that SOTERO appropriated five (5) lots of the estate to the exclusion of the other heirs; that two (2) of the five lots were illegally sold to third persons while two (2) others were illegally transferred in his own name; and, that the fifth lot was leased to a third person without turning over lease rentals to the estate. DANILO alleged that he encountered difficulties in rendering an accounting of estate income and properties because of the illegal sales and lease made by SOTERO. Hence, DANILO alleged that SOTERO should be made to account first for the income derived from such illegal transfers and lease before he (DANILO) could render the full accounting required by the intestate court. The motion was denied in an Order dated September 15, 2000 13 as well as a subsequent motion for reconsideration thereof.14 DANILO again filed a special civil action for certiorari and mandamus with the CA to assail the order.15 On August 9, 2002, the CA rendered its decision, the dispositive portion of which reads – WHEREFORE, there being grave abuse of discretion in the issuance of the

Orders dated September 15, 2000 and November 10, 2000, this petition is GRANTED and said Orders are hereby NULLIFIED and SET ASIDE and in lieu thereof, an Order is hereby issued ordering private respondent Sotero Punongbayan to render an accounting of all the properties and monies belonging to the estate that came into his possession and to deposit with the probate (sic) court the proceeds of the sale of the estate properties. SO ORDERED.16 SOTERO’s motion for reconsideration was denied.17 Hence, this petition for review. Respondent raised certain procedural infirmities in his comment which allegedly warrant the outright dismissal of the petition. 18 We find no merit in them, 19 hence, proceed to resolve this petition on the merits. Two substantial issues confront us: First, whether the intestate court’s Order dated September 15, 2000 was a final order which should have been appealed by respondent, or an interlocutory one which was properly assailed in a petition for certiorari with the CA on the ground of grave abuse of discretion. Second, whether the CA erred in granting the writ of certiorari. A court order is final in character if it puts an end to the particular matter resolved, or settles definitely the matter therein disposed of, such that no further questions can come before the court except the execution of the order.20 On the other hand, a court order is merely interlocutory if it is provisional and leaves substantial proceeding to be had in connection with its subject.21 In the instant case, the Order dated September 15, 2000, which denied respondent’s motion for petitioner to render an accounting was an interlocutory order. The motion was filed under Section 8, Rule 85 of the Rules of Court, which provides – Every executor or administrator shall render an account of his administration within one (1) year from the time of receiving letters testamentary or of administration, unless the court otherwise directs because of extensions of time for presenting claims against, or paying the debts of, the estate, or of disposing of the estate; and he shall render such further accounts as the court may require until the estate is wholly settled. and Sec. 7, Rule 87, of the same Rules, which provides – The court, on complaint of an executor or administrator, may cite a person entrusted by an executor or administrator with any part of the estate of the deceased to appear before it, and may require such person to render a full account, on oath, of the money, goods, chattels, bonds, accounts, or other papers belonging to such estate as came to his possession in trust for such executor or administrator, and of his proceedings thereon; and if a person so cited refuses to appear to render such account, the court may punish him for contempt as having disobeyed a lawful order of the court. Applying Sec. 8, Rule 85, the intestate court denied the motion on the ground that it was premature considering that petitioner has been co-administrator for only one (1) day at the time it was filed. With the denial, petitioner’s accountability as coadministrator was in no way settled as it did not preclude or forestall future accountings by him which, under said Sec. 8, he is obliged to render within one (1) year from receiving letters of administration, or as required by the court until the estate is settled. Neither an accounting or an examination of petitioner under Section 7, Rule 87, definitely settle the issue of his alleged illegal transfers and lease since a

proceeding under this section, like that under Sec. 6 22 of the same Rule, is merely in the nature of fact-finding inquiries.23 It is intended to elicit information or evidence relative to estate properties. The Regional Trial Court (RTC) of Cagayan de Oro City which has jurisdiction over the administration and settlement of the estate has limited jurisdiction and is without authority to resolve issues of ownership with finality especially when third persons are involved.24 Separate actions should be instituted by the administrator for the purpose.25 In fine, denial of respondent’s motion for petitioner to render an accounting is an interlocutory order not subject to appeal but may be challenged before a superior court through a petition for certiorari under Rule 65.26 Be that as it may, we rule that the CA erred in granting the writ of certiorari. Certiorari under Rule 65 will lie only where a grave abuse of discretion or an act without or in excess of jurisdiction is clearly shown. 27 The abuse of discretion must be so patent and gross as to amount to an evasion of a positive duty or a virtual refusal to perform a duty enjoined by law, or to act at all in contemplation of law as where the power is exercised in an arbitrary and despotic manner by reason of passion and hostility.28 The intestate court correctly denied respondent’s motion for accounting. It is obvious that the motion was just another ploy of the respondent to delay his compliance with the court’s Order dated February 1, 1995 directing him to render an accounting of his administration of the estate and to turn over the certificates of placement of the proceeds from the sales of estate properties amounting to millions of pesos, which has long become final and executory with its affirmance by the CA in CA-G.R. SP No. 4115629 and finally by this Court, in G.R. No. 128928. 30 Indeed, the ground resurrected by respondent in the motion, that petitioner should be made to account first for the alleged illegal transfers of estate properties made by him before he (respondent) could render his own accounting, was already passed upon and rejected by the CA in aforesaid CA-G.R. SP No. 41156, viz: x x x [P]etitioner’s argument that the intestate court should first declare illegal sales of estate properties made by Sotero Punongbayan and other heirs, is incorrect for two reasons: (1) the petitioner has already initiated cases for the annulment of the said sales x x x hence, the intestate court will be barred from entertaining and resolving the same controversies by the principle of lis pendens, and (2) questions of title to real property cannot be determined in testate or intestate proceedings.31 The issue of petitioner’s alleged illegal transfers are, in fact, pending before the RTC of Malolos, Bulacan where cases32 for their annulment have been filed by respondent. Respondent admits that they involve the very same properties in respect to which the motion for accounting was filed.33 Thus, there is no more reason for respondent to further delay the accounting of his administration of the estate for even the petition for certiorari which he filed to question the warrant of arrest that had to be issued for his non-compliance was dismissed by the CA in CA-G.R. SP No. 57754 34 wherein his "clear and contumacious" refusal to obey court processes was condemned. Clearly, respondent was not entitled to the writ of certiorari erroneously issued by the CA. Certiorari, being an equitable remedy, will not issue where the petitioner is in bad faith.35 IN VIEW WHEREOF, the petition is GRANTED. The assailed Decision dated August 9, 2002 of the Court of Appeals in CA-G.R. SP No. 63002, as well as its Resolution dated January 14, 2003, are REVERSED and SET ASIDE. The Order dated September 15,

2000 of the Regional Trial Court of Cagayan de Oro City, Branch 19, in Special Proceedings No. 1053 is REINSTATED. SO ORDERED. NIRC, Sec. 86, 88 (B) SEC. 86. Computation of Net Estate. - For the purpose of the tax imposed in this Chapter, the value of the net estate shall be determined: (A) Deductions Allowed to the Estate of Citizen or a Resident. - 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 actual funeral expenses or in an amount equal to five percent (5%) of the gross estate, whichever is lower, but in no case to exceed Two hundred thousand pesos (P200,000); (b) For judicial expenses of the testamentary or intestate proceedings; (c) For claims against the estate: Provided, That at the time the indebtedness was incurred the debt instrument was duly notarized and, if the loan was contracted within three (3) years before the death of the decedent, the administrator or executor shall submit a statement showing the disposition of the proceeds of the loan; (d) For claims of the deceased against insolvent persons where the value of decedent's interest therein is included in the value of the gross estate; and (e) For unpaid mortgages upon, or any indebtedness in respect to, property where the value of decedent's interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estate, but not including any income tax upon income received after the death of the decedent, or property taxes not accrued before his death, or any estate tax. The deduction herein allowed in the case of claims against the estate, unpaid mortgages or any indebtedness shall, when founded upon a promise or agreement, be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money's worth. There shall also be deducted losses incurred during the settlement of the estate arising from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement, when such losses are not compensated for by insurance or otherwise, and if at the time of the filing of the return such losses have not been claimed as a deduction for the income tax purposes in an income tax return, and provided that such losses were incurred not later than the last day for the payment of the estate tax as prescribed in Subsection (A) of Section 91. (2) Property Previously Taxed. - An amount equal to the value specified below of any property forming a part of the gross estate situated in the Philippines of any person who died within five (5) years prior to the death of the decedent, or transferred to the decedent by gift within five (5) years prior to his death, where such property can be identified as having been received by the decedent from the donor by gift, or from such prior decedent by gift, bequest, devise or inheritance, or which can be identified as having been

acquired in exchange for property so received: One hundred percent (100%) of the value, if the prior decedent died within one (1) year prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; Eighty percent (80%) of the value, if the prior decedent died more than one (1) year but not more than two (2) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; Sixty percent (60%) of the value, if the prior decedent died more than two (2) years but not more than three (3) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; Forty percent (40%) of the value, if the prior decedent died more than three (3) years but not more than four (4) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; Twenty percent (20%) of the value, if the prior decedent died more than four (4) years but not more than five (5) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; These deductions shall be allowed only where a donor's tax or estate tax imposed under this Title was finally determined and paid by or on behalf of such donor, or the estate of such prior decedent, as the case may be, and only in the amount finally determined as the value of such property in determining the value of the gift, or the gross estate of such prior decedent, and only to the extent that the value of such property is included in the decedent's gross estate, and only if in determining the value of the estate of the prior decedent, no deduction was allowable under paragraph (2) in respect of the property or properties given in exchange therefor. Where a deduction was allowed of any mortgage or other lien in determining the donor's tax, or the estate tax of the prior decedent, which was paid in whole or in part prior to the decedent's death, then the deduction allowable under said Subsection shall be reduced by the amount so paid. Such deduction allowable shall be reduced by an amount which bears the same ratio to the amounts allowed as deductions under paragraphs (1) and (3) of this Subsection as the amount otherwise deductible under said paragraph (2) bears to the value of the decedent's estate. Where the property referred to consists of two or more items, the aggregate value of such items shall be used for the purpose of computing the deduction. (3) Transfers for Public Use. - The amount of all the bequests, legacies, devises or transfers to or for the use of the Government of the Republic of the Philippines, or any political subdivision thereof, for exclusively public purposes. (4) The Family Home. - An amount equivalent to the current fair market value of the decedent's family home: Provided, however, That if the said current fair market value exceeds One million pesos (P1, 000,000), the excess shall be subject to estate tax. As a sine qua non condition for the exemption or deduction, said family home must have been the decedent's family home as certified by the barangay captain of the locality.

(5) Standard Deduction. - An amount equivalent to One million pesos (P1, 000,000). (6) Medical Expenses. - Medical Expenses incurred by the decedent within one (1) year prior to his death which shall be duly substantiated with receipts: Provided, That in no case shall the deductible medical expenses exceed Five Hundred Thousand Pesos (P500, 000). (7) Amount Received by Heirs Under Republic Act No. 4917. - Any amount received by the heirs from the decedent - employee as a consequence of the death of the decedent-employee in accordance with Republic Act No. 4917: Provided, That such amount is included in the gross estate of the decedent. (B) Deductions Allowed to Nonresident Estates. - In the case of a nonresident not a citizen of the Philippines, by deducting from the value of that part of his gross estate which at the time of his death is situated in the Philippines: (1) Expenses, Losses, Indebtedness and Taxes. - That proportion of the deductions specified in paragraph (1) of Subsection (A) of this Section which the value of such part bears to the value of his entire gross estate wherever situated; (2) Property Previously Taxed. - An amount equal to the value specified below of any property forming part of the gross estate situated in the Philippines of any person who died within five (5) years prior to the death of the decedent, or transferred to the decedent by gift within five (5) years prior to his death, where such property can be identified as having been received by the decedent from the donor by gift, or from such prior decedent by gift, bequest, devise or inheritance, or which can be identified as having been acquired in exchange for property so received: One hundred percent (100%) of the value if the prior decedent died within one (1) year prior to the death of the decedent, or if the property was transferred to him by gift, within the same period prior to his death; Eighty percent (80%) of the value, if the prior decedent died more than one (1) year but not more than two (2) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; Sixty percent (60%) of the value, if the prior decedent died more than two (2) years but not more than three (3) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; Forty percent (40%) of the value, if the prior decedent died more than three (3) years but not more than four (4) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; and Twenty percent (20%) of the value, if the prior decedent died more than four (4) years but not more than five (5) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his

death. These deductions shall be allowed only where a donor's tax, or estate tax imposed under this Title is finally determined and paid by or on behalf of such donor, or the estate of such prior decedent, as the case may be, and only in the amount finally determined as the value of such property in determining the value of the gift, or the gross estate of such prior decedent, and only to the extent that the value of such property is included in that part of the decedent's gross estate which at the time of his death is situated in the Philippines; and only if, in determining the value of the net estate of the prior decedent, no deduction is allowable under paragraph (2) of Subsection (B) of this Section, in respect of the property or properties given in exchange therefore. Where a deduction was allowed of any mortgage or other lien in determining the donor's tax, or the estate tax of the prior decedent, which was paid in whole or in part prior to the decedent's death, then the deduction allowable under said paragraph shall be reduced by the amount so paid. Such deduction allowable shall be reduced by an amount which bears the same ratio to the amounts allowed as deductions under paragraphs (1) and (3) of this Subsection as the amount otherwise deductible under paragraph (2) bears to the value of that part of the decedent's gross estate which at the time of his death is situated in the Philippines. Where the property referred to consists of two (2) or more items, the aggregate value of such items shall be used for the purpose of computing the deduction. (3) Transfers for Public Use. - The amount of all bequests, legacies, devises or transfers to or for the use of the Government of the Republic of the Philippines or any political subdivision thereof, for exclusively public purposes. (C) Share in the Conjugal Property. - the net share of the surviving spouse in the conjugal partnership property as diminished by the obligations properly chargeable to such property shall, for the purpose of this Section, be deducted from the net estate of the decedent. (D) Miscellaneous Provisions. - No deduction shall be allowed in the case of a nonresident not a citizen of the Philippines, unless the executor, administrator, or anyone of the heirs, as the case may be, includes in the return required to be filed under Section 90 the value at the time of his death of that part of the gross estate of the nonresident not situated in the Philippines. (E) Tax Credit for Estate Taxes paid to a Foreign Country. (1) In General. - The tax imposed by this Title shall be credited with the amounts of any estate tax imposed by the authority of a foreign country. (2) Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each of the following limitations: (a) The amount of the credit in respect to the tax paid to any country shall not exceed the same proportion of the tax against which such credit is taken, which the decedent's net estate situated within such country taxable under this Title bears to his entire net estate; and (b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the decedent's net estate situated outside the Philippines taxable under this Title bears to his entire net estate.

SEC. 88. Determination of the Value of the Estate. (A) Usufruct. - To determine the value of the right of usufruct, use or habitation, as well as that of annuity, there shall be taken into account the probable life of the beneficiary in accordance with the latest Basic Standard Mortality Table, to be approved by the Secretary of Finance, upon recommendation of the Insurance Commissioner. (B) Properties. - The estate shall be appraised at its fair market value as of the time of death. However, the appraised value of real property as of the time of death shall be, whichever is higher of (1) The fair market value as determined by the Commissioner; or (2) The fair market value as shown in the schedule of values fixed by the Provincial and City Assessors. CIR v CA, GR. 123206 Assailed in this petition for review on certiorari is the December 21, 1995 Decision1 of the Court of Appeals2 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 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 On June 15, 1993, the Commissioner of Internal Revenue filed a motion for reconsideration7 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 Resolution8 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. 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. . . . 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. 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. ] 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 state 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: 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

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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.

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. . . . xxx

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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 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. 241âwphi1 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.1âwphi1.nêt SO ORDERED. BIR Form No. 1801 – Estate Tax Return