Subject Code: ACT 26

Subject Title: Business Taxation

No. of Units: 3

CHAPTER 4 DEDUCTIONS FROM THE GROSS ESTATE

a. Ordinary deductions
b. Special deductions
c. Net share of the surviving spouse in the conjugal property
d. Deductions from the gross estate of a non-resident alien

I. Pre-test / Activity
1. It pertains to 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.
A. Vanishing deduction
B. Transfer for public use
C. Inheritance
D. Property previously taxed

2. Which of the following is not a remedy against double taxation?

A. Vanishing deduction
B. Estate tax credit
C. Transfer for public use
D. Delivery of property from fiduciary heir to fideicommissary in a fideicommissary
substitution

II. Content
A. DEDUCTIONS FROM THE GROSS ESTATE
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:(Sec 86 A NIRC; RR 12-2018)
 Ordinary deductions
1. Claims, Losses, Unpaid mortgages, Taxes
a) Claims against the estate
b) Claims against insolvent persons
c) Losses
d) Unpaid mortgages
e) Taxes
2. Transfer for public use
3. Vanishing deductions
 Special deductions
1. Standard deduction
2. Family home
3. Amount received by heirs under Republic Act No. 4917
 Net share of the surviving spouse in the conjugal property

B. ORDINARY DEDUCTIONS
1. Claims against the Estate
The word “claims” is 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 judgements. Claims against the estate or indebtedness in respect of property may
arise out of: (1) Contract; (2) Tort; or (3) Operation of Law.
Requisites for deductibility:
1. 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 (i.e., expenses incurred up to the time of interment) and unpaid medical
expenses;

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 2. The liability was contracted in good faith and for adequate and full consideration in
money or money’s worth;
3. The claim must be a debt or claim which is valid in law and enforceable in court;
4. The indebtedness must not have been condoned by the creditor or the action to collect
from the decedent must not have prescribed.

Substantiation requirements:
1. In case of simple loan (including advances)
a) The debt instrument must be duly notarized at the time the indebtedness was
incurred, such as promissory note or contract of loan, except for loans granted by
financial institutions where notarization is not part of the business practice/policy
of the financial institution-lender;
b) Duly notarized Certification from the creditor as to the unpaid balance of the debt,
including interest as of the time of death. If the creditor is a corporation, the sworn
certification should be signed by the President, or Vice-President, or other principal
officer of the corporation. If the creditor is a partnership, the sworn certification
should be signed by any of the general partners. In case the creditor is a bank or
other financial institutions, the Certification shall be executed by the branch
manager of the bank/financial institution which monitors and manages the loan of
the decedent-debtor. If the creditor is an individual, the sworn certification should
be signed by him. In any of these cases, the one who should certify must not be a
relative of the borrower within the fourth civil degree, either by consanguinity or
affinity, except when the requirement below is complied with.
When the lender, or the President/Vice-president/principal officer of the
creditor-corporation, or the general partner of the creditor-partnership is a relative
of the debtor in the degree mentioned above, a copy of the promissory note or other
evidence of the indebtedness must be filed with the RDO having jurisdiction over
the borrower within fifteen days from the execution thereof.
c) In accordance with the requirements as prescribed in existing or prevailing internal
revenue issuances, proof of financial capacity of the creditor to lend the amount at
the time the loan was granted, as well as its latest audited balance sheet with a
detailed schedule of its receivable showing the unpaid balance of the decedent-
debtor. In case the creditor is an individual who is no longer required to file income
tax returns with the Bureau, a duly notarized Declaration by the creditor of his
capacity to lend at the time when the loan was granted without prejudice to
verification that may be made by the BIR to substantiate such declaration of the
creditor. If the creditor is a non-resident. the executor/administrator or any of the
legal heirs must submit a duly notarized declaration by the creditor of his capacity
to lend at the time when the loan was granted, authenticated or certified to as such
by the tax authority of the country where the non-resident creditor is a resident;
d) A statement under oath executed by the administrator or executor of the estate
reflecting the disposition of the proceeds of the loan if said loan was contracted
within three (3) years prior to the death of the decedent;
2. If the unpaid obligation arose from purchase of goods or services:
a) Pertinent documents evidencing the purchase of goods or service, such as sales
invoice/delivery receipt (for sale of goods), or contract for the services agreed to
be rendered (for sale of service), as duly acknowledged, executed and signed by
decedent debtor and creditor, and statement of account given by the creditor as duly
received by the decedent debtor;
b) Duly notarized Certification from the creditor as to the unpaid balance of the debt,
including interest as of the time of death. If the creditor is a corporation, the sworn
Certification should be signed by the President, or Vice- President, or other
principal officer of the corporation. If the creditor is a partnership, the sworn
certification should be signed by any of the general partners. If the creditor is a sole
proprietorship, the sworn certification should be signed by the owner of the
business. In any of these cases, the one who issues the certification must, not be a
relative of the decedent-debtor within the fourth civil degree, either by
consanguinity or affinity, except when the requirement below is complied with.
When the lender, or the President Vice-President/principal officer of the
creditor-corporation, or the general partner of the creditor-partnership is a relative
of the debtor in the degree mentioned above, a copy of the promissory note or other
evidence of the indebtedness must be filed with the RDO having jurisdiction over
the borrower within fifteen days from the execution thereof.
c) Certified true copy of the latest audited balance sheet of the creditor with a detailed
schedule of its receivable showing the unpaid balance of the decedent-debtor.
Moreover, a certified true copy of the updated latest subsidiary ledger/records of
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 the debt of the debtor-decedent, (certified by the creditor, i.e., the officers
mentioned in the preceding paragraphs) should likewise be submitted.
d) Where the settlement is made through the Court in a testate or intestate proceeding,
pertinent documents filed with the Court evidencing the claims against the estate,
and the Court Order approving the said claims, if already issued, in addition to the
documents mentioned in the preceding paragraphs.

Illustration 1
Mr. Casiño borrowed ₱200,000 from Mr. Ramiro supported by a notarized promissory note. Mr.
Casiño died without paying the note. Is the unpaid obligation deductible from the gross estate?

2. Claims of the deceased against insolvent persons

These shall be deductible from the gross estate, provided that the value of the decedent’s interest
in the claim is included in the value of the gross estate.
Same in valuation of the GE, illustration 22 (Decedent was the creditor at the time of death)
Illustration 2
Mr. Atienza had a receivable of ₱150,000 from Mr. Lim. Mr. Lim could not be located where
he used to live and there were no properties of Mr. Lim that could be found. Mr. Atienza died.
How much is the deduction from the gross estate of Mr. Atienza?

Illustration 3
Mr. Panopio died with a receivable from Mr. Ramon of ₱300,000. The total assets and liabilities
of Mr. Ramon amount to ₱1,500,000 and ₱4,500,000 respectively. How much is the deduction
from the gross estate of Mr. Panopio?

Illustration 4
Mr. Lorico died with a receivable from Mr. Bonita. Mr. Bonita has properties worth ₱385,000
and obligations of ₱560,000. Included in the obligations of Mr. Bonita are ₱35,000 owed to the
Government of the Republic of the Philippines for unpaid taxes and ₱105,000 owed to Mr.
Lorico. How much could be deducted from the gross estate as claim against insolvent person?

3. Casualty Losses
Losses are deductible from the gross estate if all of the following conditions are satisfied:
1. Losses incurred during the settlement of the estate (within one (1) year from the decedent's
death),
2. Arising from fires, storms, shipwreck, or other casualties, or from robbery, theft or
embezzlement,
3. When such losses are not compensated for by insurance or otherwise, and
4. If at the time of the filing of the return such losses have not been claimed as a deduction
for income tax purposes in an income tax return.

Illustration 5
Four months after Mr. Peralta 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 ₱2,000,000 at the time of death was not
compensated for by insurance. How much is the loss deductible from the gross estate of Mr.
Peralta?

4. Unpaid Mortgages
Unpaid mortgages upon, or any indebtedness in respect to, property where the value of the
decedent's interest therein, undiminished by such mortgage or indebtedness, is included in the
value of the gross estate. 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.
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. 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. 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.
In all instances, the mortgaged property, to the extent of the decedent's interest therein,
should always form part of the gross taxable estate.

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 Illustration 6
Mr. Banzon mortgaged his house and lot to Allied Bank for ₱1,200,000. He died having paid
50% of the mortgage loan. The fair market value of the mortgaged house at the time of his death
is ₱2,000,000. How much is the debt deductible from the gross estate of Mr. Banzon?

5. Unpaid Taxes
These are taxes which have accrued as of the death of the decedent which were unpaid as of
the time of death.
The following are not deductible:
1. Income tax upon income received after death;
2. Property taxes that accrued after death; or
3. Estate tax due from the transmission of his estate.

Illustration 7
On April 10 Mr. Chua, while on his way to the BIR office to file his income tax return and pay
the tax payable of ₱17,000 for the calendar year, was hit by a car and died. How much is the tax
deductible from the gross estate of Mr. Chua?

6. Transfer 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.

Requisites for deductibility:

1. The disposition is in a last will and testament;
2. To take effect after death;
3. In favor of the government of the Philippines or any political subdivision thereof;
4. For exclusive public purpose; and
5. The value of property given is included in the gross estate

Illustration 8
Mr. Capitulo, in his last will and testament, devised a 1,500 sq. m. lot with fair market value of
₱3,000,000 to the provincial government of Bulacan to be developed as a public school. Is there
a deduction from the gross estate of Mr. Capitulo?

7. Vanishing deduction
Vanishing deduction or property previously taxed or is a deduction allowed on the property
left behind by the decedent which he had acquired previously by inheritance or donation.
Previously, a transfer tax had already been imposed on the property, either the estate tax
if the property was acquired by inheritance or the donor’s tax if the same was acquired by
donation. Now that the recipient of the inheritance or donation has died, the same property will
again be subjected to a transfer tax, the estate tax. Thus, to minimize the effects of double tax
on the same property within a short period of time, i.e. five (5) years, the law allows a deduction
to be claimed on the said property.
Requisites for deductibility:
1. Death – The present decedent died within five years from the receipt of the property from
a prior decedent or donor;
2. Identity of the property – The property with respect to which deduction is sought can
be identified as the one received from the prior decedent or the donor, or as the property
acquired in exchange for the original property so received;
3. Location – The property on which vanishing deduction is being claimed must be located
in the Philippines.
4. Inclusion of the property – The property must have formed part of the gross estate
situated in the Philippines of the prior decedent, or the total amount of the gifts of the
donor;
5. Previous taxation of the property – The donor's tax on the gift or estate tax on the prior
succession was finally determined and paid; and
6. No vanishing deduction on the property was allowed to the estate of the prior decedent.

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 Steps in computing the vanishing deductions:
Step 1 Value taken (value of property at the time of the first
transfer or at the time of the present decedent’s death,
whichever is lower) ₱ xx
Step 2 Less: Mortgage debt paid, if any (xx)
Initial Basis xx
Step 3 Less: Initial Basis
X (CLUT + T) = (xx)
Gross Estate
Final Basis xx

Step 4 Percentage of vanishing deduction %

Vanishing deduction xx

Table 1 Percentage of vanishing deduction

Rate More than Not more than
100% 1 year
80% 1 year 2 years
60% 2 years 3 years
40% 3 years 4 years
20% 4 years 5 years

Illustration 9
In January 2021, Mr. Alberto died leaving his house & lot and car to Mr. Benedict, his only son.
The FMV of the car was ₱240,000 and the FMV of the house& lot was ₱1,600,000 at the time
of Mr. Alberto’s death. At the time Mr. Benedict inherited the land, it was subject to mortgage
of ₱160,000. Mr. Benedict paid ₱140,000 of the mortgage during his lifetime (leaving a balance
of ₱20,000).

In July 2022, Mr. Benedict died. The FMV of the properties at the time of Mr. Benedict’s death
were ₱1,700,000 for the house & lot and ₱140,000 for the car. Mr. Benedict’s gross estate
amounted to ₱6,400,000 while total deductions (excluding medical expenses, family home,
standard deductions) amounted to ₱1,200,000.

C. SPECIAL DEDUCTIONS
1. Standard Deduction
A deduction in the amount of Five Million Pesos (₱5,000,000) shall be allowed without need of
substantiation.

Illustration 10
Mr. Bassig died leaving a gross estate of ₱9,400,000 and deductions from it of ₱1,800,000, not
including the standard deduction. How much is the net taxable estate?

2. Family Home
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)
For purposes of these Regulations, however, 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.
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 head of a family
on his or her own property. (Art. 156, Ibid.)
For purposes of availing of a family home deduction to the extent allowable, a person
may constitute only one family home. (Art. 161, Ibid.)

Requisites for deductibility:

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 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; Note: No longer required under the TRAIN Law
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 ₱10,000,000.

Illustration 11
The gross estate of Mr. Pagoso included a family home of ₱12,000,000 in the Philippines. How
much is the deduction for family home from the gross estate?

3. Amount received by heirs under Republic Act No. 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 is allowed as a deduction
provided that the amount of the separation benefit is included as part of the gross estate of the
decedent.

D. NET SHARE OF THE SURVIVING SPOUSE IN THE CONJUGAL PARTNERSHIP OR

COMMUNITY PROPERTY.
After deducting the allowable deductions appertaining to the conjugal or community properties
included in the gross estate, the share of the surviving spouse must be removed to ensure that only the
decedent's interest in the estate is taxed.

E. DEDUCTIONS FROM THE GROSS ESTATE OF A NON-RESIDENT ALIEN

Table 2 Comparison of deductions from the gross estate

Citizen or Resident Non-resident Alien
Deductions Decedent Decedent
1. Claims, losses, unpaid
mortgages, Deductible Phil. Gross Estate
X World CLUT
and taxes (CLUT) World Gross Estate

2. Transfer for public use Deductible Deductible

3. Vanishing deductions Deductible Deductible
4. Standard deduction Deductible Deductible
(₱5,000,000) (₱500,000)
5. Family home Deductible
6. Amounts received by heirs
under Republic Act No. Deductible
4917
7. Net share of the surviving
spouse in the conjugal Deductible Deductible
property

Illustration 12
The decedent was a non-resident alien
Gross estate in the Philippines……………………………… ₱ 4,800,000
Gross estate outside the Philippines………………………… 3,200,000
Funeral expenses outside the Philippines…………………… 320,000
Administration expenses in the Philippines…………………. 240,000
Administration expenses outside the Philippines…………… 160,000
Claims against the estate in the Philippines…………………. 640,000
Claims against the estate outside the Philippines…………… 240,000
How much is the allowable ordinary deduction from the gross estate?

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III. Activity
Problem 1
Various types of losses were incurred by a decedent/estate as follows:
 Loss due to typhoon, a day before the decedent's death, ₱1,000,000.
 Loss due to shipwreck, two (2) months after the decedent's death, ₱500,000.
 Loss due to robbery, eight months after the decedent's death, ₱2,000,000.
 Swindling loss incurred 2 months before death, ₱800,000
 Gambling losses before death, ₱2,250,000
Required:
1. How much is the deductible "losses" from the gross estate of the decedent?
2. How much is the deductible "losses" from the gross estate of the decedent assuming the robbery
loss was incurred 1 ½ years after the decedent's death?

Problem 2
Claims against insolvent persons Case A Case B Case C Case D
Receivable from a debtor............... ₱500,000 ₱500,000 ₱500,000 ₱500,000
Amount collectible........................ 400,000
Debtor's total assets....................... 400,000 1,200,000 1,200,000
Debtor's total liabilities excluding tax
payable.................................... 1,200,000 800,000 800,000
Unpaid taxes................................. 800,000
Allowable deductions claims
against insolvent persons ______ ______ ______ ______

Problem 3
Juan, a Filipino residing in Davao died on December 10, 2020, leaving a gross estate of ₱45,000,000
including a parcel of land valued at ₱11,250,000, which he inherited from his father who died on October
5, 2017; that the land was previously taxed with a fair value of ₱9,375,000 for estate tax purposes in the
estate of his father; that the land was subjected to a mortgage of ₱4,687,500 at the time it was inherited by
the present decedent, which amount was deducted from the net estate of the father; that the present decedent
paid ₱1,875,000 of the mortgage indebtedness and that the total deductions claimed for expenses, losses,
including the unpaid mortgage of ₱2,812,500 was ₱5,625,000.
Required: Determine the correct amount of vanishing deduction, if any.

Problem 4
Determine the deductible family home in 2018 from the following independent cases:
Case Particulars Family Home
A Decedent is single ₱10,0000,000
B Decedent is a head of a family 5,000,000
C Decedent is married. The family home is the exclusive
property of the surviving spouse. 8,000,000
D Decedent is married. The family home is the exclusive
property of the decedent 10,000,000
E Decedent is married. The family is classified as conjugal
property 12,000,000
F Decedent is married. Fifty percent (50%) of the family
home is classified as conjugal property, the remainder is
the exclusive property of the decedent. 10,000,000