AKLAN STATE UNIVERSITY

School of Management Sciences

Banga, Aklan
Transfer and Business Taxation
Lecture 4 – Deductions from Gross Estate 2nd semester

Deductions from Gross Estate

Resident Citizen, Non-Resident Citizen and Resident Alien Decedents. The value of the net estate of a citizen or resident
alien of the Philippines shall be determined by deducting from the value of the gross estate the following items of
deduction:
1. Expenses, losses, indebtedness, and taxes
a. Funeral expenses
b. Judicial expenses of the testamentary/intestate proceedings
c. Claims against the estate
d. Claims of the deceased against insolvent persons
e. Unpaid mortgages/indebtedness
f. Unpaid taxes
g. Casualty losses
2. Property previously taxed or vanishing deduction
3. Transfers for public use
4. Family home
5. Standard deduction equivalent to one million pesos (P 1,000,000)
6. Medical expenses
7. Amount received by heirs under Republic Act No. 4917
8. Net share of surviving spouse in the conjugal partnership or community property. (To be discussed in Chapters 7
and 8).
Non-Resident Alien Decedents. The estate of non-resident alien decedents are taxable only on their gross estate situated
in the Philippines and as such are allowed the following deductions from their gross estate:
1. Expenses, Losses, Indebtedness, and Taxes. This deduction is subject to limitation as follows:
Gross estate, Phil.
X World expenses, losses, indebtedness and taxes = Deduction allowed
Gross estate, World
2. Property Previously Taxed. Vanishing deduction on property situated in the Philippines.
3. Transfers for Public Use of Property situated in the Philippines.
4. Net Share of Surviving Spouse in the Conjugal Partnership or Community Property.
Funeral Expenses
For deaths occurring on or after January 1, 1998, the amount allowable as deduction shall be lower amount between the
actual funeral expenses (whether paid or unpaid) and five percent (5%) of the gross estate, but in no case to exceed two
hundred thousand pesos (P 200,000). Any unpaid portion in excess of the P 200,000 threshold cannot be claimed as
deduction under ‘claims against the estate’.
Prior to this date, the following laws and rates govern:
Period Covered Rate Governing Law
Up to Dec. 31, 1972 5% of gross estate CA 466
Jan. 1, 1973 – Jul. 27, 1992 5% of gross estate but not exceeding P 50,000 PD 69
Jul. 28, 1992 – Dec. 31, 1997 5% of gross estate but not exceeding P 100,000 RA 7499

Actual funeral expenses shall mean those which are actually incurred in connection with the interment or burial of the
deceased. The expenses must be duly supported by receipts, invoices or other evidence to show that they were actually
incurred. The term ‘Funeral Expenses’ is not confined to its ordinary or usual meaning. They include:
 1. Mourning apparel of the surviving spouse and unmarried minor children of the deceased bought and used on the
occasion of the burial;
2. Expenses for the deceased’s wake, including food and drinks;
3. Publication charges for death notices;
4. Telecommunication expenses in informing relatives of the deceased;
5. Cost of burial plot, tombstones, monument or mausoleum but not their upkeep. In case the deceased owns a
family estate or several burial lots, only the value corresponding to the plot where he is buried is deductible;
6. Interment and/or cremation fees and charges; and
7. All other expenses incurred for the performance of the rites and ceremonies incident to interment.
Expenses incurred after the interment such as for prayers, entertainment, or the like are not deductible. Any portion of the
funeral and burial expenses borne or defrayed by relatives and friends of the deceased are not deductible.
Illustration:
CASE
A B C
Gross estate P 2,500,000 P 3,500,000 P 4,500,000
1. Actual funeral expenses P 100,000 P 185,000 P 250,000
2. 5% of gross estate P 125,000 P 175,000 P 225,000
3. Maximum limit P 200,000 P 200,000 P 200,000
Deduction allowed P 100,000 P 175,000 P 200,000

 There are three amounts to compare. Items “1” and “2” are first compared. The lesser amount is chosen.
 The chosen amount is compared with item “3”. If it exceeds the third limit, which is P 200,000, then the
deduction allowed is P 200,000.
 Note that in all cases, it is always the least amount among the three amounts compared that is being allowed as
deduction.
Judicial Expenses
‘Judicial expenses of the testamentary or intestate proceedings’ are those incurred in the:
 Inventory taking of assets comprising the gross estate
 Their administration
 The payment of debts of the estate
 Distribution of the estate among the heirs
In short, these deductible items are expenses incurred during the settlement of the estate but not beyond the last day
prescribed by law, or the extension thereof, for the filing of the estate tax return. Judicial expenses may include:
i. Fees of executor or administrator
ii. Attorney’s fees
iii. Court fees
iv. Accountant’s fees
v. Appraiser’s fees
vi. Clerk hire
vii. Costs of preserving and distributing the estate
viii. Costs of storing or maintaining property of the estate
ix. Brokerage fees for selling property of the estate
Any unpaid amount for the aforementioned cost and expenses claimed under ‘Judicial Expenses’ should be supported by a
sworn statement of account issued and signed by the creditor.
Illustration: Mr. Escudero, the executor appointed by Mr. Manglapus in his will, incurred the following expenses after
Mr. Manglapus’ death:
Administrative expenses to gather the assets 20,000
Administrative expenses to pay debts and taxes 10,000
Fees charged by Mr. Escudero 10,000
Total 40,000
The entire P 40,000 is deductible from the gross estate inasmuch as these expenses fall under judicial expenses.
On March 22, 2000, the Supreme Court ruled in Commissioner of Internal Revenue vs. Court of Appeals, et. al., that
notarial fee paid for the extrajudicial settlement of the estate is a deductible expense since such settlement effected a
distribution of the decedent’s estate to the lawful heirs. Furthermore, the attorney’s fees paid to Philippine National Bank
(PNB) for acting as the guardian of the decedent’s property during his lifetime is also a deductible administration expense
because such guardianship proceeding was necessary for the distribution of the property of the deceased.
Claims Against the Estate
A claim against the estate is an obligation contracted by the decedent when he was alive which he should have settled or
paid during his lifetime. But because he died without paying this obligation and because said obligation is not terminated
by his death, his estate is being allowed to deduct the claim so that his creditor, in turn, may collect from the estate.
The word “claims” generally construed to mean debts or demands of a pecuniary nature which could have been enforced
against the deceased in his lifetime and could have been reduced to simple money judgments. Claims against the estate or
indebtedness in respect of property may arise out of:
1. Contract
2. Tort
3. Operation of law
Requisites for Deductibility
a. The liability represents a personal obligation of the deceased existing at the time of his death except unpaid
obligations incurred incident to his death such as unpaid funeral expenses and unpaid medical expenses;
b. The liability was contracted in good faith and for adequate and full consideration in money or money’s worth;
c. The claim must be a debt or claim which is valid in law and enforceable in court;
d. The indebtedness must not have been condoned by the creditor or the action to collect from the decedent must not
have prescribed.
In addition to the requisites above, substantiation requirements have to be complied with.
Illustration: Mr. Manglapus during his lifetime obtained a loan of P 500,000 from Mr. Escudero. The debt instrument
was duly notarized. A year after, Mr. Manglapus died with the loan unsettled.
The full amount of loan may be deducted from the gross estate of Mr. Manglapus. However, since the loan was obtained
within the three-year period (Requirement No. 5) the administrator or executor of the estate must submit a statement of
disposition of the loan proceeds.
Claims Against Insolvent Persons
The decedent-creditor during his lifetime must have lent another person-debtor a certain sum of money. Here, the creditor
dies unable to collect from the debtor because of the debtor’s insolvency. Although the creditor’s death does not
extinguish the right of his estate to collect from his debtor, the estate is being allowed a deduction for the claim because of
the hopelessness of collection from the debtor by the estate.
For claims of the deceased against insolvent persons to be deductible, the full amount of the claim must be included in the
gross estate. The incapacity of the debtors to pay their debts due to insolvency must be proven. The amount of receivable
which is uncollectible may be allowed as a deduction from the gross estate.
Illustration: Mr. Fernan’s estate has a claim of P 600,000 against Mr. Mitra, a debtor declared insolvent. Mr. Mitra’s
assets are worth P 3,000,000 while his liabilities P 9,000,000. The full amount of the claim of P 600,000 must be included
in the gross estate. The proportionate amount of P 200,000 [P 600,000 x (P 3,000,000 / P 9,000,000)] is still collectible.
The amount deductible from the gross estate is P 400,000 (P 600,000 – P 200,000).
Unpaid Mortgages
Unpaid mortgages exists when the decedent leaves property encumbered by mortgage. For unpaid mortgage to be
deductible, the fair market value of the property mortgaged must be included in the gross estate in full. The unpaid
mortgage deductible shall be to the extent that it was contracted bona fide and for an adequate and full consideration in
money or money’s worth.
In case unpaid mortgage payable is being claimed by the estate, verification must be made as to who was the beneficiary
of the loan proceeds:
1. If the loan is found to be merely an accommodation loan where the loan proceeds went to another person, the
value of the unpaid loan must be included as a receivable of the estate.
2. If there is a legal impediment to recognize the same as receivable of the estate, said unpaid obligation/mortgage
payable shall not be allowed as a deduction from the gross estate.
3. In all instances, the mortgaged property, to the extent of the decedent’s interest therein, should always form part
of the gross taxable estate.
Illustration: Mr. Manglapus mortgaged his house and lot to Banco Filipino for P 1.5 million. He died having paid only
50% of the mortgage loan. The fair market value of the mortgage house at the time of his death is P 2.5 million.
The fair market value of the mortgaged house, which is P 2.5 million shall form part of the gross estate. The unpaid
mortgage of P 750,000 shall be allowed as deduction.
Unpaid Taxes
These are taxes which have accrued as of the death of the decedent but which were unpaid as of the time of death. This
deduction will not include:
 Income tax upon income received after death;
 Property taxes not accrued before his death; or
 Estate tax due from the transmission of his estate.
The above-mentioned taxes shall be chargeable against the income of the estate because the same accrue after the death of
the decedent.
Illustration: On April 15, 1999, Mr. Manglapus, while on his way to the BIR to file his income tax return and pay the tax
payable of P 20,000 for calendar year 1998, figured in a car accident and die.
Since the income tax which Mr. Manglapus was supposed to pay the day he died has accrued before his death, the same
shall be allowed as deduction from his gross estate in full.
Casualty Losses
There shall also be deducted losses incurred during the settlement of the estate arising from:
 Fires, storms, shipwreck, or other casualties, or
 Robbery, theft or embezzlement,
Subject to the following conditions that such losses:
1. Are not compensated for by insurance or otherwise;
2. At the time of the filing of the return, have not been claimed as a deduction for income tax purposes in an income
tax return; and
3. Were incurred not later than the last day for payment of the estate tax.
Illustration: Five months after Mr. Manglapus died and while the estate was being settled, a house which he owned and
which was appropriately declared as forming his gross estate was totally destroyed by fire. The house which had a fair
market value of P 1.5 million at the time of death was not compensated for by insurance.
If the loss has not been claimed as deduction for income tax purposes, the fire loss equivalent to the fair market value of
the house or P 1.5 million shall be deductible from the gross estate. This is so because all other necessary conditions have
been met.
Assuming that the fire loss occurred during the settlement of the estate but beyond the six-month period during which the
estate tax is supposed to be paid, the loss shall not be deductible.
Property Previously Taxed or Vanishing Deduction
The Tax Code also allows as deduction from the gross estate certain amount pertaining to property previously taxed
(PPT). This is also referred to as vanishing deduction. This deduction is being allowed to lessen the impact of successive
taxation of the same property within a very short period due to the death of the decedent-transferee.
Requisites of Deductibility
1. Present decedent must have died within five (5) years from date of death of prior decedent or date of gift.
2. The property with respect to which the deduction is claimed must have formed part of the gross estate situated in
the Philippines of the prior decedent or taxable gift of the donor.
 3. The property must be identified as the same property received from prior decedent or donor or the one received in
exchange therefor.
4. The estate taxes on the transmission of the prior estate or the donor’s tax on the gift must have been finally
determined and paid.
5. No vanishing deduction on the property or the property given in exchange therefor was allowed to the prior estate.
Limitations on Amount Deductible
1. Value of the property – The deduction is limited by the value of the property previously taxed or the aggregate
value of such property if more than one item, as finally determined for the purpose of the prior estate tax (or gift
tax) or the value of such property in present decedent’s gross estate, whichever is lower;
2. Deduction for mortgage or other lien – The initial value in No. 1 above shall be reduced by the total amount
paid, if any, by the present decedent, on any mortgage or other lien on the property where a deduction was
allowed, by reason of the payment of such mortgage or other lien from the gross estate of the prior decedent, or
gift of the donor, in determining the estate tax of the prior decedent or the donor’s tax;
3. Deductions for expenses, etc. – The value as reduced in No. 2 above shall be further reduced by an amount
which bears the same ratio to the amounts allowed as deductions for expenses, losses, indebtedness, taxes, and
transfers for public use as the amount otherwise deductible for property previously taxed bears to the value of the
decedent’s gross estate. Note that family home, standard deduction, medical expenses and amounts received
under R.A. 4917 are not among the deductions hereunder.
4. Percentage of deductions – The vanishing deduction shall be the value (final basis) in No. 3 above multiplied by
the following percentage of deduction:
Percentage Transfer more than But not more than
100% one year
80% one year two years
60% two years three years
40% three years four years
20% four years five years
The step-by-step computation of the vanishing deduction is shown as follows:
i. Value taken of PPT xxx
Less: Mortgage debt or other lien paid, if any (1st deduction) xxx
Initial basis xxx
ii. Initial basis Expenses, etc.
Value of gross estate x and transfers for = 2nd Deduction
of present decedent public purposes
iii. Initial basis xxx
Less: 2nd deduction xxx
Final basis xxx
Multiply by percentage of deduction x%
Vanishing deduction xxx
If there is no mortgage debt paid, the value taken of property previously taxed would be the initial basis. If only part
of the mortgage is paid, then only that part is deductible.
Illustration: On August 14, 1996, Mr. Sancho died leaving his house & lot and van to Junior, his only son who is
still a bachelor. The estate tax corresponding to the transmission of these property were paid. Following are relevant
data:
Fair market value at the time of death Unpaid mortgage at the time of death
Property
Sancho’s Junior’s Sancho’s Junior’s
House and lot P 2,400,000 P 2,550,000 P 240,000 P 30,000
Van P 360,000 P 210,000
On October 19, 1999, Junior died. His gross estate including the house & lot and van were declared at P 9.6 million
while deductions (for expenses, losses, indebtedness, taxes, etc. and transfer for public purpose) amounted to P 1.8
million.
 The vanishing deduction is computed below:
1. Value taken of PPT (P 2,400,000 + P 210,000) 2,610,000
Less: Mortgage debt or other lien paid, if any – 1st deduction (P 240,000 – P 30,000) 210,000
Initial basis 2,400,000
2. 2,400,000
X P 1,800,000 = P 450,000
9,600,000
3. Initial basis 2,400,000
Less: 2nd deduction 450,000
Final basis 1,950,000
Multiply by percentage of deduction* 40%
Vanishing deduction 780,000
*The percentage of deduction is 40% because from August 14, 1996 to October 19, 1999 is more than three years but
less than four years; or three years two months and five days to be exact.
Transfers for Public Use
There shall be allowed as deduction from gross estate 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 exclusive public
purposes.
Illustration: Mr. Manglapus, in his will, transferred a 1,000 sq. m. lot with fair market value of P 2 million to the
provincial government of Laguna to be developed as a public park.
The full amount of P 2 million shall be deducted from the gross estate.
Family Home
The amount deductible from the gross estate as family home shall be the current fair market value of the decedent’s
family home at the time of death. However, if the said current fair market value exceeds one million pesos (P 1,000,000),
the excess shall be subject to estate tax.
Family Home is the dwelling house, including the land on which it is situated, where the husband and wife, or a head of
the family, and members of their family reside, as certified to by the Barangay Captain of the locality. The family home is
deemed constituted on the house and lot from the time it is actually occupied as a family residence and is considered as
such for as long as any of its beneficiaries actually resides therein. (Arts. 152 and 153, Family Code)
Actual occupancy of the house or house and lot as the family residence shall not be considered interrupted or abandoned
in such cases as the temporary absence from the constituted family home due to travel or studies or work abroad, etc. In
other words, the family home is generally characterized by permanency, that is, the place to which whenever absent for
business or pleasure, one still intends to return. (RR 2-2003)
The family home must be part of the properties of the absolute community or of the conjugal partnership, or of the
exclusive properties of either spouse depending upon the classification of the property (family home) and the property
relations prevailing on the properties of the husband and wife. It may also be constituted by an unmarried member of a
family on his or her own property. (Art. 156, Family Code)
For purposes of availing of a family deduction to the extent allowable, a person may constitute only one family home.
(Art. 161, Family Code)
Beneficiaries of a Family Home
1. The husband and wife, or the head of a family; and
2. Their parents, ascendants, descendants including legally adopted children, brothers and sisters, whether the
relationship be legitimate or illegitimate, who are living in the family home and who depend upon the head of the
family for legal support. (Art. 154, Family Code)
Requisites for Deductibility
1. The family home must be the actual residential home of the decedent and his family at the time of his death, as
certified by the Barangay Captain of the locality where the family home is situated;
2. The total value of the family home must be included as part of the gross estate of the decedent; and
3. Allowable deduction must be in an amount equivalent to the current fair market value of the family home as
declared or included in the gross estate, or the extent of the decedent’s interest (whether conjugal/community or
exclusive property), whichever is lower, but not exceeding P 1,000,000.
The succeeding illustrations are consistent with RR 2-2003. Note that deductions are being classified into ordinary and
special.
Illustration: Assume that the decedent is an unmarried head of a family. The current fair market value of the family
home is P 2 million.
Real and personal properties 5,000,000
Family Home 2,000,000
Gross Estate 7,000,000
Less: Deductions
Ordinary Deductions
Funeral Expenses 200,000
Other Deductions 1,300,000 1,500,000
Special Deductions
Family Home 1,000,000
Standard Deduction 1,000,000
Medical Expenses 500,000 2,500,000
Total Deductions 4,000,000
Net Taxable Estate 3,000,000
Notes:
1. Although the family home is valued at P 2 million, the maximum allowable deduction for the family home is P 1
million only.
2. Medical expenses are treated as a special item of deduction.
Illustration: Assume that the decedent is an unmarried head of a family. The current fair market value of the family
home is P 800,000.
Real and personal properties 5,000,000
Family Home 800,000
Gross Estate 5,800,000
Less: Deductions
Ordinary Deductions
Funeral Expenses 200,000
Other Deductions 1,300,000 1,500,000
Special Deductions
Family Home 800,000
Standard Deduction 1,000,000
Medical Expenses 500,000 2,300,000
Total Deductions 3,800,000
Net Taxable Estate 2,000,000
Note: Deduction for family home is allowed for P 800,000 only which is the declared value of the family home.
Standard Deduction
Standard deduction is a new deduction introduced in the Tax Code of 1997, medical expenses and amounts received by
heirs under R.A, 4917 being the two others. The standard deduction does not apply to non-resident alien decedents.
A deduction in the amount of one million pesos (P 1,000,000) shall be allowed as an additional deduction without need of
substantiation. The full amount of P 1,000,000 shall be allowed as deduction for the benefit of the decedent.

Illustration: Mr. Lo, a bachelor and resident citizen, died leaving the following properties:
House and lot in San Francisco del Monte, Quezon City (family home) 3,000,000
Honda Civic car 650,000
Farm in Camiling, Tarlac 500,000
Bank deposit at Solid Bank in Pasay City 1,500,000
The following are being claimed by his executor as deductions:
Actual funeral expenses 250,000
Judicial expenses 30,000
Medical expenses incurred two months before death 150,000
Family home 3,000,000
Consequently, the deductions of Mr. Lo’s estate is computed as follows:
Ordinary Deductions:
Funeral Expenses
Actual 250,000
5% x P 5,650,000* 282,500
Maximum limit 200,000
Allowed 200,000
Judicial Expenses 30,000 230,000
Special Deductions:
Family Home 1,000,000
Standard Deduction 1,000,000
Medical Expenses 150,000 2,150,000
Total Deductions 2,380,000
*Gross estate:
House and lot in San Francisco del monte, Quezon City (family home) 3,000,000
Honda Civic car 650,000
Farm in Camiling, Tarlac 500,000
Bank deposit at Solid Bank in Pasay City 1,500,000
Total 5,650,000
Medical Expenses
Medical expenses incurred by the decedent, whether paid or unpaid, within one (1) year prior to his death and duly
substantiated with receipts, shall be allowed as deduction from gross estate. However, in no case shall the deductible
medical expenses exceed five hundred thousand pesos (P 500,000).
Illustration:
Case 1 Case 2
Threshold 500,000 500,000
Actually incurred 250,000 600,000
Allowed 250,000 500,000
Case 3
Total amount incurred 600,000
Unpaid portion of total amount incurred 100,000
Allowed 500,000
Not allowed 100,000 – unpaid amount; neither can this be deducted from the gross
estate as ‘claims against the estate’.
Note: Paid or unpaid, the P 100,000 excess above the P 500,000 threshold shall not be allowed as deduction under any
category.

Amount Received by Heirs Under R.A. 4917

Any amount received by the heirs from the decedent’s employer as a consequence of the death of the decedent-employee
in accordance with Republic Act No. 4917 shall be deductible. Such amount must be included in the gross estate of the
decedent.
Illustration: Mr. Manglapus’ unexpected death came as a sad news to his employer whom he served for fifteen years.
Consequently, his son received P 60,000 as benefit in accordance with R.A. 4917.
The full amount of P 60,000 shall be included as part of the gross estate of Mr. Manglapus. The same amount is
deductible.
Net Share of the Surviving Spouse
After deducting the allowable deductions pertaining to the conjugal or community properties included in the gross estate,
the one-half share of the surviving spouse must be removed to ensure that only the decedent’s interest in the estate is
taxed.
Deductions from the Gross Estate of a Non-Resident Alien Decedent
The estate of a non-resident decedent consists of property in the Philippines and in other country or countries. For estate
tax purposes, only his property in the Philippines shall be considered in the gross estate computation. The estate is
entitled to the following deductions:
1. Expenses, losses, indebtedness, and taxes subject to limitation as follows:
Gross estate, Phil.
X World expenses, losses, indebtedness and taxes = Deduction allowed
Gross estate, World
2. Property previously taxed. Vanishing deduction on property situated in the Philippines.
3. Transfers for public use of property situated in the Philippines.
4. Net share of the surviving spouse.
No deduction shall be allowed in the case of a non-resident decedent not a citizen of the Philippines, unless the executor,
or anyone of the heirs, as the case may be, includes in the return required to be filed, the value at the time of the
decedent’s death of that part of his gross estate not situated in the Philippines.
Accordingly, the estate shall not be allowed the following deductions:
1. Family home
2. Standard deduction equivalent to P 1,000,000
3. Medical expenses
4. Amount received by heirs under Republic Act No. 4917
Illustration: The following describe the estate left by Mr. Le, a resident citizen of China and other pertinent information:
Philippines China Total
Gross estate 1,500,000 3,000,000 4,500,000
Expenses, losses, indebtedness, taxes, etc. 750,000 1,125,000 1,875,000
Vanishing deduction, as computed 3,000 3,000
Transfer for public use 297,000 297,000
The net taxable estate is computed as follows:
Gross estate 1,500,000
Less: Deductions
Expenses, losses, indebtedness, taxes, etc.* 625,000
Vanishing deduction 3,000
Transfer for public use 297,000 925,000
Net taxable estate 575,000
*P 1,500,000
X P 1,875,000 = P 625,000
P 4,500,000