CHAPTER THREE: DEDUCTIONS FROM GROSS ESTATE ➢ Unpaid Obligation Arises from Purchase of Goods or

Services
A. ORDINARY DEDUCTIONS
1. Pertinent Documents
1. LOSSES – deductible losses - Evidence of sale or service
- “Casualty losses” - Signed by creditor and decedent-debtor
- Includes:
1. Storms 2. Statement of Account
2. Shipwreck or other casualties - Received by decedent-debtor
3. Robbery
4. Theft 3. Duly Notarized Certification from Creditor
5. Embezzlement - Same table as in Simple Loans
- Amount deductible: Value of property lost - Unpaid balance + Interest
- Requisite for deductibility:
1. Arising from Acts of God 4. Certified True Copy of Audited Balance Sheet with detailed
2. Arising from Acts of Man Schedule of Receivables
3. No insurance
4. Not claimed as a deduction in the ITR of the estate 5. Certified True Copy of the updated latest Subsidiary
5. Incurred during the Settlement Period Ledgers

6. Settlement
- Made through court
- Testate/Intestate
- Pertinent documents evidencing claims against the estate and
the court approving said claims

3. UNPAID MORTGAGES
2. INDEBTEDNESS/CLAIMS AGAINST THE ESTATE
- Claims – debts or damages of a pecuniary nature which could - FMV of property must be included in the Gross Estate
- Amount to be deducted = Outstanding debt or mortgage
have been enforced against the deceased IN HIS LIFETIME and
could have been reduced to simple money judgments.
- Liability: 4. ACCOMMODATION LOAN
- Contracted by a person in behalf of another person with the
✓ Personal obligation of the decedent
✓ Existing at the time of his death contracting person merely representing in behalf of the beneficiary
✓ Contracted in good faith - Loan proceeds went to another person
- The value of unpaid loan is included as RECEIVABLE of the estate
✓ For adequate and full consideration in money or money’s
worth - If there is hindrance in recognizing it as a receivable, it must not be
- May arise from: allowed as a deduction → Also not allowed as an inclusion to gross
estate
1. Contract
2. Tort - In all instances, mortgaged property is included in Gross Estate
3. Operation of Law
5. TAXES
- Requisites for Deductibility:
1. Represents personal obligation (existing at the time of death) - Include:
2. Contracted in good faith (adequate or full consideration of 1. Income Tax
2. Property Tax
money or money’s worth)
3. Debt or claim is valid in law and enforceable in court 3. Business Tax
4. Death must not be condoned by creditor or the action to - Estate Tax not included
- Deductible:
collect has not yet prescribed
1. Unpaid import duties
2. Tax assessment and deficiencies
Substantiation Requirements:
- All unpaid obligations or claims can be deducted as long as all
6. CLAIMS AGAINST AN INSOLVENT PERSON
of the following requirements are complied:
- Claims by decedent during his lifetime that are not collectible
- Insolvent – a person whose properties are not sufficient to satisfy
➢ Simple Loans (Including advances)
whether fully or partially his debts
- Requisites:
1. Duly Notarized Debt Instruments
1. Judicial declaration of insolvency is not required
- EXCEPT: If granted by financial institutions
2. Incapacity of the person should be proven
3. Full amount is included in GE, amount uncollectible is allowed
2. Duly Notarized Certification from Creditor
as deduction
4. If only partial amount can be paid, full amount is included then
CREDITOR: SIGNED BY:
deducted
Corporation President/Vice President/Principal Officer
Partnership General Partners 7. TRANSFER FOR PUBLIC USE – Include then Deduct
Bank Branch Managers - Dispositions or transfers to take effect after the death of the
Individual Himself decedent in favor of the Government of the Philippines for PUBLIC
PURPOSE
The one to certify must not be a relative of the buyer up to 4th - Must be indicated in the LAST WILL AND TESTAMENT
degree of consanguinity or affinity except if the following is
applied: Transfers to GOCCs → not deductible
• Copy of promissory note and other evidence of indebtedness - Not considered as for public use
must be filed with the RDO within 15 days from the date of - Still included in the gross estate
evaluation
8. VANISHING DEDUCTIONS
3. Proof of financial capacity of the creditor at time the loan - Deductions for “Property Previously Taxed”
was granted + attest audited balance sheet with details of - Subject to deductions if the property was given/acquired through:
accounts receivable a) Donation Mortis Causa
b) Donation Inter Vivos
▪ If creditor is NOT required to file an ITR - Gifts
✓ Duly notarized declaration by the creditor if his capacity to - Bequests, device, inheritance
lend when the loan was granted - Act of giving or leaving something by will
- Subject to PREVIOUS TRANSFER TAXATION
▪ Creditor is NRA - Requisites:
✓ Duly notarized declaration by the creditor if his capacity to 1. Death – Present decedent must have died within 5 years from
lend when the loan was granted the death of prior decedent or of the gift
✓ Certified by the tax authority where NRA creditor is a 2. Identity of the Property – The property must be identified as
resident one received from prior decedent
3. Location - Property must be in Philippines
4. Statement under Oath 4. Inclusion of Property – Property must have formed part of
- Executed by executor or administrator the gross estate of the prior decedent
- Showing disposition of the loan 3 years prior to decedent’s death 5. Previous taxation on the property is determined and
already paid
6. No previous vanishing deduction on the property
Vanishing Deduction Rates DEDUCTIONS FROM THE GROSS ESTATE OF THE NRA
- Period from RECEIPT to DECEDENT’S DEATH A. ORDINARY DEDUCTIONS
Within one year 100% • LITe
More than 1 to 2 years 80%
More than 2 to 3 years 60%
More than 3 to 4 years 40% • Vanishing Deductions
More than 4 to 5 years 20% • Transfer for Public Use

Formula for Vanishing Deduction B. SPECIAL DEDUCTIONS → P500,000

VALUE TO TAKE: C. SHARE OF SURVIVING SPOUSE → If married

Pxxx

LESS: Mortgage Paid (xxx)

INITIAL BASIS xxx
LESS: Proportional Deduction

(xxx)

FINAL BASIS xxx

Vanishing Deduction % %
VANISHING DEDUCTION xxx

B. SPECIAL DEDUCTIONS

1. STANDARD DEDUCTION – Allowed as an additional deduction

without substantiation
- Only special deduction allowed to NRAs
- FULL AMOUNT is deducted:
Resident or Citizen P5,000,000
Non-Resident Alien P500,000

2. FAMILY HOME

- Considered as a family home from the time it is occupied by a

family and as long as any beneficiary lives in it
- Shall not be considered abandoned when there is temporary
absence
- Limitation: One family home only
- Requisites:
1. Decedent is married or single (but head of the family)
2. Decedent and the beneficiaries are living in the same family
home
3. Family home + land → both owned by decedent
4. Family home must be the residential home
- Certified by the Barangay Captain
5. Total value if the family home is included in the gross estate

➢ Unmarried Head of the Family

- Decedent is unmarried
- One or both parents, siblings, or legitimate children are living
with and dependent to the decedent
- Provided that the siblings or legitimate children are:
a. Not more than 21 years old
b. Unmarried
c. Not gainfully employed
d. Has mental or physical defect (regardless of age)

3. RA 4917
- Amount received from decedent’s employer as a consequence of
the death of the decedent – employee
- Not subject to attachment, levy, execution or any tax
- Must be included in the GE of the decedent

4. Net Share of Surviving Spouse

- ½ or 50% of the Conjugal Property

INCLUDE THEN EXCLUDE IN GROSS ESTATE ITEMS:

1. Bequests, legatees, device to social welfare, cultural, and

charitable institutions
2. Claims against insolvent persons
- Full amount of receivable – Include
- Amount Uncollectible – Deduct
3. Unpaid Mortgages
- Amount of Property – Include
- Mortgage – Deduct
4. Accommodation Loan
- Include then Deduct
- If there is hindrance, do not include and deduct
5. Transfer for Public Use
6. RA 4917