COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF APPEALS, COURT OF TAX APPEALS and JOSEFINA P. PAJONAR, as Adinistratri! o" t#e Estate o" Pedro P. Pa$onar, respondents.
%.R. No. &'(')* Mar+# '', ')))
NOTES/FF0
FACTS0 1. Pedro Pajonar, a member of the Philippine Scout, Bataan Contingent, during the second World War, was a part of the
infamous Death March b reason of which he su!ered shoc" and became insane. a. #is sister $ose%na Pajonar became the guardian o&er his person, while his propert was placed under the
guardianship of the Philippine 'ational Ban" (P'B) b the *+C Dumaguete. b. #e died on $anuar 1, 1-. c. #e was sur&i&ed b his two brothers /sidro P. Pajonar and 0regorio Pajonar, his sister $ose%na Pajonar, nephews
Concordio $andog and Mario $andog and niece Conchita $andog. . Ma 11, 1- 2 P'B %led an accounting of the decedent3s propert under guardianship &alued at P4,45,65.- in
SpocPro 'o. 178. #owe&er, the P'B did not %le an estate ta9 return, instead it ad&ised Pedro Pajonar3s heirs to e9ecute an e9trajudicial settlement and to pa the ta9es on his estate.
4. :pril 7 2 pursuant to the assessment b the B/*, the estate of Pedro Pajonar paid ta9es in the amount of P,775. 8. Ma 1- 2 $ose%na Pajonar %led a petition with the *egional +rial Court of Dumaguete Cit for the issuance in her fa&or of 
letters of administration of the estate of her brother. 7. $ul 1 2 court appointed $ose%na Pajonar as the regular administratri9 of Pedro Pajonar3s estate. 6. Dec 1- ; because of the nd assessment b the B/* for de%cienc estate ta9, the estate of Pedro Pajonar paid estate ta9 in
the amount of P1,75,5-.-. a. $ose%na Pajonar, in her capacit as administratri9 and heir of Pedro Pajonar3s estate, %led a protest on $anuar 11,
1-- with the B/* praing that the estate ta9 pament in the amount of P1,75,5-.-, or at least some portion of it, be returned to the heirs.
5. :ug 17, 1-- 2 without waiting for her protest to be resol&ed b the B/*, $ose%na Pajonar %led a petition for re&iew < C+: praing for the refund of P1,75,5-.-, or in the alternati&e, P8,.6, as erroneousl paid estate ta9.
. Ma 6, 1--4 2 C+: ordered the Commissioner of /nternal *e&enue to refund $ose%na Pajonar the amount of P7,77.7-, representing erroneousl paid estate ta9 for the ear 1-.
-. :mong the deductions from the gross estate allowed b the C+: were the amounts of P6,574 representing the notarial fee for the =9trajudicial Settlement and the amount of P7, as the attorne3s fees in Special Proceedings 'o. 178 for guardianship.
1. $une 17 2 Commissioner of /nternal *e&enue M* of the C+:3s decision asserting, among others, that the notarial fee for the =9trajudicial Settlement and the attorne3s fees in the guardianship proceedings are not deductible e9penses.
11. $une 5, 1--8 ; C+:> refund $ose%na Pajonar, as administratri9 of the estate of Pedro Pajonar, the amount of P56,7.8 representing erroneousl paid estate ta9 for the ear 1-. :lso upheld the &alidit of the deduction of the notarial fee for the =9trajudicial Settlement and the attorne3s fees in the guardianship proceedings.
&'. $ul 7 2 Commissioner of /nternal *e&enue %led petition for re&iew. C:2 denied. 
ISSUE0 +he sole issue in this case in&ol&es the construction of section 5- of the 'ational /nternal *e&enue Code (+a9 Code) which pro&ides for the allowable deductions from the gross estate of the decedent. More particularl, the ?uestion is whether the notarial fee paid for the e9trajudicial settlement in the amount of P6,574 and the attorne3s fees in the guardianship proceedings in the amount of P7, ma be allowed as deductions from the gross estate of decedent in order to arri&e at the &alue of the net estate. 1EL20  @=S.
RATIO0 1. C+:As Ma 6, 1--4 Decision>
*espondent maintains that onl judicial e9penses of the testamentar or intestate proceedings are allowed as a deduction to the gross estate. +he amount of P6,574. is ?uite e9traordinar for a mere notarial fee.  +his Court adopts the &iew under :merican jurisprudence that e9penses incurred in the e9trajudicial settlement of the estate should be allowed as a deduction from the gross estate. +here is no re?uirement of formal administration. /t is sucient that the e9pense be a necessar contribution toward the settlement of the case. 48 :m. $ur. d, p. 567E 'olledo, Bar *e&iewer in +a9ation, 1th =d. (1--), p. 81F 9 9 9 9 9 9 9 9 9  +he attorne3s fees of P7,., which were alread incurred but not et paid, refers to the guardianship proceeding %led b P'B, as guardian o&er the ward of Pedro Pajonar, doc"eted as Special Proceeding 'o. 178 in the *+C (Branch GGG/) of Dumaguete Cit. . . . 9 9 9 9 9 9 9 9 9  +he guardianship proceeding had been terminated upon deli&er of the residuar estate to the heirs entitled thereto. +hereafter, P'B was discharged of an further responsibilit. :ttorne3s fees in order to be deductible from the gross estate must be essential to the collection of assets, pament of debts or the distribution of the property to the persons entitled to it . +he ser&ices for which the fees are charged must relate to the proper settlement of the estate. 48 :m. $ur. d 565.F /n this case, the guardianship proceeding was necessar for the distribution of the propert of the late Pedro Pajonar to his rightful heirs. 9 9 9 9 9 9 9 9 9 P'B was appointed as guardian o&er the assets of the late Pedro Pajonar, who, e&en at the time of his death, was incompetent b reason of insanit. +he e9penses incurred in the guardianship proceeding was but a necessar e9pense in the settlement of the decedent3s estate. +herefore, the attorne3s fee incurred in the guardianship proceedings amounting to P7,. is a reasonable and necessar business e9pense deductible from the gross estate of the decedent.
 
pre&ious ruling b reducing the refundable amount to P56,7.84 since it found that a de%cienc interest should be imposed and the compromise penalt e9cluded. #owe&er, the ta9 court upheld its pre&ious ruling regarding the legalit of  the deductions I
4. /t is signi%cant to note that the inclusion of the estate ta9 law in the codi%cation of all our national internal re&enue laws with the enactment of the 'ational /nternal *e&enue Code in 1-4- were copied from the Jederal Kaw of the Hnited States.  +he 1-55 +a9 Code, promulgated b Presidential Decree 'o. 117, e!ecti&e $une 4, 1-55, reenacted substantiall all the pro&isions of the old law on estate and gift ta9es, e9cept the sections relating to the meaning of gross estate and gift.
8. /n the Hnited States, aFdministrati&e e9penses, e9ecutor3s commissions and attorne3s fees are considered allowable deductions from the 0ross =state. :dministrati&e e9penses are limited to such e9penses as are actuall and necessaril incurred in the administration of a decedent3s estate.
a. 'ecessar e9penses of administration are such e9penses as are entailed for the preser&ation and producti&it of the estate and for its management for purposes of liquidation, payment of debts and distr ibution of the residue among the persons entitled thereto .
b. +he must be incurred for the settlement of the estate as a whole. c. +hus, where there were no substantial communit debts and it was unnecessar to con&ert communit propert to cash, the onl
practical purpose of administration being the pament of estate ta9es, full deduction was allowed for attorne3s fees and miscellaneous e9penses charged wholl to decedent3s estate.
7. Petitioner stated in her protest %led with the B/* that upon the death of the ward, the P'B, which was still the guardian of the estate, , did not %le an estate ta9 returnE howe&er, it advised the heirs to execute an extrajudicial settlement, to  pay taxes and to post a bond e?ual to the &alue of the estate, for which the state paid P7-,481.8 for the premiums.
6. +herefore, it would appear from the records of the case that the onl practical purpose of settling the estate b means of  an e9trajudicial settlement pursuant to Section 1 of *ule 58 of the *ules of Court was for the pament of ta9es and the distribution of the estate to the heirs. : fortiori, since our estate ta9 laws are of :merican origin, the interpretation adopted b :merican Courts has some persuasi&e e!ect on the interpretation of our own estate ta9 laws on the subject.
5. :nent the contention of respondent that the attorne3s fees of P7,. incurred in the guardianship proceeding should not be deducted from the 0ross =state, We consider the same unmeritorious. :ttornes3 and guardians3 fees incurred in a trustee3s accounting of a ta9able inter &i&os trust attributable to the usual issues in&ol&ed in such an accounting was held to be proper deductions because these are e9penses incurred in terminating an inter &i&os trust that was includible in the decedent3s estate.
. :ttorne3s fees are allowable deductions if incurred for the settlement of the estate. /t is noteworth to point that P'B was appointed the guardian o&er the assets of the deceased. 'ecessaril the assets of the deceased formed part of his gross estate. :ccordingl, all e9penses incurred in relation to the estate of the deceased will be deductible for estate ta9 purposes pro&ided these are necessar and ordinar e9penses for administration of the settlement of the estate.
-. /n upholding the $une 5, 1--8 *esolution of the Court of +a9 :ppeals, the Court of :ppeals held that> a. :lthough the +a9 Code speci%es judicial e9penses of the testamentar or intestate proceedings, there is no reason wh e9penses
incurred in the administration and settlement of an estate in e9trajudicial proceedings should not be allowed. #owe&er, deduction is limited to such administration e9penses as are actuall and necessaril incurred in the collection of the assets of the estate, pament of the debts, and distribution of the remainder among those entitled thereto. Such e9penses ma include e9ecutor3s or administrator3s fees, attorne3s fees, court fees and charges, appraiser3s fees, cler" hire, costs of preser&ing and distributing the estate and storing or maintaining it, bro"erage fees or commissions for selling or disposing of the estate, and the li"e. Deductible attorne3s fees are those incurred b the e9ecutor or administrator in the settlement of the estate or in defending or prosecuting claims against or due the estate.
1. /t is clear then that the e9trajudicial settlement was for the purpose of pament of ta9es and the distribution of the estate to the heirs. +he e9ecution of the e9trajudicial settlement necessitated the notariLation of the same. #ence the Contract of Kegal Ser&ices of March , 1- entered into between respondent $ose%na Pajonar and counsel was presented in e&idence for the purpose of showing that the amount of P6,574. was for the notariLation of the =9trajudicial Settlement. /t follows then that the notarial fee of P6,574. was incurred primaril to settle the estate of the deceased Pedro Pajonar. Said amount should then be considered an administration e9penses actuall and necessaril incurred in the collection of the assets of the estate, pament of debts and distribution of the remainder among those entitled thereto. +hus, the notarial fee of P6,574 incurred for the =9trajudicial Settlement should be allowed as a deduction from the gross estate.
11. :ttorne3s fees, on the other hand, in order to be deductible from the gross estate must be essential to the settlement of  the estate.
1. +he amount of P7,. was incurred as attorne3s fees in the guardianship proceedings in Spec. Proc. 'o. 178. Petitioner contends that said amount are not e9penses of the testamentar or intestate proceedings as the guardianship proceeding was instituted during the lifetime of the decedent when there was et no estate to be settled.
14. :gain, this contention must fail. 18. +he guardianship proceeding in this case was necessar for the distribution of the propert of the deceased Pedro
Pajonar. :s correctl pointed out b respondent C+:, the P'B was appointed guardian o&er the assets of the deceased, and that necessaril the assets of the deceased formed part of his gross estate. . . .
17. /t is clear therefore that the attorne3s fees incurred in the guardianship proceeding in Spec. Proc. 'o. 178 were essential to the distribution of the propert to the persons entitled thereto. #ence, the attorne3s fees incurred in the guardianship proceedings in the amount of P7,. should be allowed as a deduction from the gross estate of the decedent.
16. +he deductions from the gross estate permitted under section 5- of the +a9 Code basicall reproduced the deductions allowed under Commonwealth :ct 'o. 866 (C: 866), otherwise "nown as the 'ational /nternal *e&enue Code of  1-4-, and which was the %rst codi%cation of Philippine ta9 laws. Section - (a) (1) (B) of C: 866 also pro&ided for the deduction of the judicial e9penses of the testamentar or intestate proceedings for purposes of determining the &alue of the net estate. Philippine ta9 laws were, in turn, based on the federal ta9 laws of the Hnited States. /n accord with established rules of statutor construction, the decisions of :merican courts construing the federal ta9 code are entitled to great weight in the interpretation of our own ta9 laws.
 
deductible. +his distinction has been carried o&er to our jurisdiction. +hus, inLorenzo v . Posadas  the Court construed the phrase judicial e9penses of the testamentar or intestate proceedings as not including the compensation paid to a trustee of the decedent3s estate when it appeared that such trustee was appointed for the purpose of managing the decedent3s real estate for the bene%t of the testamentar heir. /n another case, the Court disallowed the premiums paid on the bond %led b the administrator as an e9pense of administration since the gi&ing of a bond is in the nature of a ?uali%cation for the oce, and not necessar in the settlement of the estate. 'either ma attorne3s fees incident to litigation incurred b the heirs in asserting their respecti&e rights be claimed as a deduction from the gross estate.
1. Coming to the case at bar, the notarial fee paid for the e9trajudicial settlement is clearl a deductible e9pense since such settlement e!ected a distribution of Pedro Pajonar3s estate to his lawful heirs. Similarl, the attorne3s fees paid to P'B for acting as the guardian of Pedro Pajonar3s propert during his lifetime should also be considered as a deductible administration e9pense. P'B pro&ided a detailed accounting of decedent3s propert and ga&e ad&ice as to the proper settlement of the latter3s estate, acts which contributed towards the collection of decedent3s assets and the subse?uent settlement of the estate.
1-. We %nd that the Court of :ppeals did not commit re&ersible error in arming the ?uestioned resolution of the Court of +a9 :ppeals.