Commissioner of Internal Revenue v. Pajonar

EIGHTH DIVISION [CA-G.R. SP No. 34399. December 21, 1995.] (C.T.A. Case No. 4381) COMMISSIONER OF INTERNAL REVENUE , petitioner , vs. JOSEFINA P. PAJONAR, as Administratrix of the Estate of Pedro P. Pajonar, and COURT OF TAX APPEALS , respondents . D E C I S I O N LANTIN , J p : This is a petition for review filed by petitioner Commissioner of Internal Revenue against respondents Josefina P. Pajonar, as administratrix of the Estate of Pedro P. Pajonar, and the Court of Tax Appeals (CTA, for short), seeking for the modification of respondent CTA's Decision of May 6, 1993 in CTA Case No. 4381, ordering petitioner to refund in favor of respondent Josefina Pajonar the amount of P252,585.59 as erroneously paid estate tax for the year 1988, and of the Resolution of June 7, 1994, partly denying petitioner's motion for reconsideration of the Decision of May 6, 1993, by ordering petitioner to refund the lesser amount of P76,502.42. The background setting is as follows: On May 19, 1988, respondent Josefina Pajonar filed a Petition for Letters of Administration with the RTC-Dumaguete City, Branch 43, in Special Proceedings No. 2399, entitled "In the Matter of the Intestate Estate of Pedro P. Pajonar, alleging among others, that she is a sister of the deceased Pedro Pajonar; that there is a need for the administration of the estate of the deceased on the grounds that there is a need for payment of the estate tax with the Bureau of Internal Revenue (BIR) and that the US Veterans Administration required an appointed administrator to receive the burial benefits due from said office; and that the decedent's only surviving heirs are his collateral relatives. Respondent Josefina Pajonar prayed that letters of administration of the estate of the deceased be issued to her. On July 18, 1988, the RTC-Dumaguete City, Branch 43, issued an order, appointing respondent Josefina Pajonar as the regular administratrix of the estate of the late Pedro Pajonar. On December 19, 1988, the estate of Pedro Pajonar paid the estate tax in the amount of P1,527,790.98 per BIR assessment. On January 11, 1989, respondent Josefina Pajonar filed a protest with the BIR, alleging, among others, that she was the guardian of the person of the incompetent US Veterans Administration pensioner Pedro Pajonar during his lifetime; that the property of the ward was under the guardianship value at P3,037,672.09 in Spec. Proc. No. 1254; that upon the death of the ward, the PNB, which was still the guardian of the estate, did not file an estate tax return; that the PNB 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; that on April 5, 1988, the estate tax in the amount of P2,557.00, as assessed by the BIR, was paid; that the BIR made a new assessment in the amount of P1,527,790.98, which amount was paid by the estate on December 19, 1988; that the heirs are now contesting the collection of the BIR as way beyond the proper estate tax; that the heirs should be reimbursed or be allowed recovery of the excess tax payment as the heirs should not be penalized with the 20% interest; that they have paid the estate tax in the amount of P2,557.00 per BIR assessment; and that the pension from the US Veterans Administration is tax-exempt. Respondent Josefina Pajonar prayed that a thorough examination and assessment of the correct tax be conducted, and that the excess of the estate tax paid be refunded. On August 15, 1989, respondent Josefina Pajonar filed a Petition for Review with respondent CTA in CTA Case No. 4381, alleging among others, that on December 19, 1988, the assessment and collection of the estate tax of Pedro Pajonar was made by the BIR in the amount of P1,527,790.98; that on January 11, 1989, respondent Josefina Pajonar, in her capacity as administratrix and as heir of the estate, filed a protest with the BIR for the refund and/or reinvestigation of said tax assessment and collection; and that the assessment was paid but the protest has not been resolved by the BIR up to the filing of the petition for review with respondent CTA. Respondent Josefina Pajonar prayed for the refund of P1,527,790.98, or in the alternative, P840,202.06, as erroneously paid estate tax. Petitioner Commissioner of Internal Revenue filed an Answer, dated September 27, 1989, alleging, among others, that tax assessments issued by the Commissioner of Internal Revenue or a subordinate official are presumed correct and made in good faith; that the taxpayer has the burden of showing that the assessment is illegal or improper; that a refund of tax partakes of the nature of an exemption, thus, should be construed strictly against the taxpayer; and that the personal properties forming part of the estate of Pedro Pajonar are not exempt from the estate tax. Petitioner Commissioner of Internal Revenue prayed that the petition for review be dismissed. On November 9, 1989, respondent Josefina Pajonar filed a Reply to the Answer of September 27, 1989, alleging, among others, that the law allows refund of erroneous collection through erroneous assessment; that the assessment in the case at bar was not done in good faith as proved by the non-resolution of the protest; that petitioner's failure to resolve the petition for reconsideration or reinvestigation and/or claim for tax refund operates as admission of the sufficiency of proofs for the refundable amount of P840,202.06; and that benefits derived by beneficiaries residing in the Philippines under laws of the US Veterans Administration relating to veterans residing in the Philippines shall be exempt from taxation. Respondent Josefina Pajonar prayed that the petition for review be given due course. On May 6, 1993, after hearing and the submission of the parties' respective memorandums, respondent CTA rendered a Decision, ordering petitioner Commissioner of Internal Revenue to refund to respondent Josefina Pajonar the amount of P252,585.59, representing erroneously paid estate tax for the year 1988. The deductions from the gross estate of P2,979,490.79 included the notarial fee for the Extrajudicial Settlement in the amount of P60,753.00 and attorney's fees in Special Proceedings No. 1254 in the amount of P50,000.00. On June 15, 1993, petitioner Commissioner of Internal Revenue filed a Motion for Reconsideration of respondent CTA's Decision of May 6, 1993, alleging, among others, that the notarial fee for the document of Extrajudicial Settlement in the amount of P60,753.00 and the attorney's fees in the guardianship proceeding in the amount of P50,000.00, not being judicial expenses of the testamentary or intestate proceedings are not deductible expenses; and that in determining the estate tax due from the estate, respondent CTA failed to impose interest on the deficiency and penalties. On July 7, 1993, respondent Josefina Pajonar filed a Comment and Motion with respondent CTA, praying that respondent CTA's Decision of May 6, 1993 be affirmed, with modification that petitioner Commissioner of Internal Revenue be ordered to refund in favor of respondent Josefina Pajonar the amount of P870,885.90 representing erroneously collected estate tax for the year 1988. On June 7, 1994, respondent CTA issued a Resolution, modifying its Decision of May 6, 1993, and ordering petitioner Commissioner of Internal Revenue to refund in favor of respondent Josefina Pajonar the amount of P76,502.42, representing erroneously paid estate tax for the year 1988, after imposing a deficiency interest in the amount of P176,083.16. The present petition raises a single issue: WHETHER OR NOT RESPONDENT JOSEFINA IS ENTITLED TO THE REFUND OF THE AMOUNT OF P76,502.42 AS ERRONEOUSLY PAID ESTATE TAX ON THE ESTATE OF PEDRO PAJONAR. 1. Petitioner Commissioner of Internal Revenue confines the present petition to respondent CTA's ruling that the notarial fee for the document of Extrajudicial Settlement in the amount of P60,753.00 and the attorney's fees in the guardianship proceedings in the amount of P50,000.00 are deductible expenses from the gross estate of the late Pedro Pajonar. Petitioner contends that respondent's ruling is erroneous because the aforesaid expenses are not judicial expenses of the testamentary or intestate proceedings, as provided in Section 79 of the 1986 Tax Code, hence, not deductible from the gross estate. Respondent CTA, in its Decision of May 6, 1993, held that: "2. Notarial fee for the document of extra-judicial Settlement (Exh. 1-2) of P60,753.00. 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 estate. ( 34 Am. Jur. 2d, p. 765; Nolledo, Bar Reviewer in Taxation, 10th Ed. (1990), p. 481 . ) Petitioner presented as evidence the Contract of Legal Services, dated March 28, 1988, signed by both counsel and petitioner for the notarization of the Extra-judicial Settlement Agreement between the heirs of the decedent. (Exh. I-2, p. 36, CTA record.) It is sufficient for deductions that the expenses be actually and necessarily incurred. Payment is not a precondition but the amount of the expense must be ascertainable. ( supra .) Considering the value of the gross estate of the decedent. We find the attorney's fee of P60,753.00 quite reasonable. This expense was incurred primarily to settle the estate of the decedent. Therefore, the notarial fee of P60,753.00 incurred for the Extra-judicial Settlement Agreement should be allowed as a deduction from the gross estate. xxx xxx xxx 7. Attorney's fees in Special Proceeding No. 1254 for Guardianship (Exh. N) in the amount of P50,000.00 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 Pedro Pajonar, docketed as Special Proceeding No. 1254 in the RTC (Branch XXXI) of Dumaguete City. PNB submitted to said court the final statement of accounting from September 1, 1987 to March 31, 1988, with no objections on the part of the U.S. Veterans Administration, showing a cash balance and total value of the ward's estate, as follows: (pp. 45-46, BIR record.) Cash balance in estate P314,432.50 Time deposit 200,000.00 Money Market 2,450,000.00 House & Lot 45,739.59 Toyota Tamaraw 27,500.00 Total P3,037,672.09 ========== 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 charge 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. Guardians for incompetents or minors have no separate taxable entity apart from the ward; accordingly, the minor or incompetent is the taxpayer. Whether a payment by the guardian or committee is deductible depends on whether it is a business expenses to the ward. ( 6 Mertens 357, see also Mary D. Moore Holified, 7 BTA 1302 .) 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." Petitioner Commissioner of Internal Revenue maintains that Section 79 of the Tax Code is clear, to wit: "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 xxx xxx xxx (B) For judicial expenses of the testamentary or intestate proceedings;" The question thus is: Are the notarial fee for the document of Extrajudicial Settlement in the amount of P60,753.00 and the attorney's fees in the guardianship proceedings in the amount of P50,000.00 deductible expenses from the gross estate of the deceased Pedro Pajonar? We rule in the affirmative. 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 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 fee, 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) Petitioner contends that the extrajudicial settlement was not in any way connected with Special Proceedings No. 2399 for the settlement of the estate of Pedro Pajonar. Respondent Josefina Pajonar, on the other hand, alleged in her Protest of January 11, 1989 that: "(g) Upon the death of the ward, the PNB, which was still the guardian of the estate, . . ., 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. . . ." 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 in to 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 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 expense 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 P60,753.00 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. In fact, the Order of May 26, 1988 of the RTC-Dumaguete, Branch 31, in Spec. Proc. No. 1254 states, among others that: "2. The guardian Philippine National Bank is further authorized to deliver the residuary estate left by the deceased ward Pedro P. Pajonar to his heir/heirs entitled thereto as may be established in the manner provided by law; 3. Upon proof of delivery of the residuary estate to the heirs entitled thereto, this guardianship proceedings shall be closed and terminated, and Philippine National Bank discharged from further responsibilities." 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. WHEREFORE, the instant petition for review is DENIED DUE COURSE, and the Resolution of June 7, 1994 of respondent Court of Tax Appeals, modifying its Decision of May 6, 1993 in CTA Case No. 4381, is hereby AFFIRMED. IT IS SO ORDERED. Montenegro and Dela Rama , JJ ., concur.