ALLOWABLE DEDUCTIONS worth

[note: must be an established financial obligation; not

There must be a distinction on whether the taxpayer is an obligation to render a service or to do something]
a resident/citizen or a non-resident alien.
3. The claim must be a debt or claim which is valid in
law and enforceable in court
1.Standard Deduction
[note: elements of a contract; grounds for validity and
enforceability]
Resident/Citizen
4. The indebtedness must not have been condoned1
“A deduction in the amount of Five Million Pesos by the creditor or the action to collect from the decedent
(P5,000,000) shall be allowed without need of must not have prescribed2.
substantiation. The full amount of P5,000,000 shall be st
[1 : condone means waiver of right to collect which
allowed as deduction for the benefit of the decedent. must happen before death;
The presentation of such deduction in the computation 2nd: prescription requires lapse of time from the time of
of the net taxable estate of the decedent is properly creation of the contract. Contemplates “post
illustrated in the Regulations.” [Section 6,RR 12-2018] development deaths” which should not be included in
computing the net estate of the decedent]
Automatic deduction per decedent. So even if the
decedent is husband and wife, each of them are Q: An obligation nga manglibre ka, is that a financial
entitled to a 5M deduction if they die. obligation?

Termed “standard” because generally there is no need Not necessarily, unless you said nga manglibre ka
for substantiation. This can be availed of provided that worth 100 pesos ug magpinirmahay mo diha ug
the estate filed for the estate tax return and computed kontrata.
for the estate tax of the decedent.
Q: What should be remember when we say valid and
Non-Resident Alien enforceable?

“A deduction in the amount of Five Hundred Thousand
Pesos (P500,000) shall be allowed without need of
substantiation. The full amount of P500,000 shall be
allowed as deduction for the benefit of the decedent.”
[Section 7, RR 12-2018]
t is valid when the elements of a contract are present
which are consent, object, and consideration. The
object of the contract must not be one that is against
law, morals, good customs, public order, or public
policy.

2. 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.” [Section 6, RR 12-2018]
When it comes to enforceability, we look at the form. It
must conform to the forms or solemnities required by
law especially if it falls under the statute of frauds.
Q: When we say condonation, what do we mean by
this?
Forgiveness of sin. Charot lang. Forgiveness of debt by
the creditor or a waiver of the right to collect.

The source of the claims may arise from a contract on

Q: When should the condonation happen to make it not
unpaid monetary obligations. Another source would be
a claim against the estate?
crime (delict) or tort (quasi-delict) on a finding of
Before death because there is no more obligation to
negligence on the part of the decedent during his
pay to speak of.
lifetime so he was made liable to financially pay but
was not able to pay. It could also be from operation of
Q: What if it was condoned after death
a law, common are unpaid penalties and surcharges
after death of decedent?
on tax liabilities of the deceased during his lifetime.

Even if condoned after death but at the time of the

Requisites for Deductibility:
death of the decedent he was not condoned, it will still
form part of gross estate and can be claimed as a claim
1.The liability represents a personal obligation of the against the estate.
deceased existing at the time of his death
2. The liability was contracted in good faith and for
Q: What is the tax exposure if condoned?
adequate and full consideration in money or money’s

Villaester-Silverio-Melendez Taxation II KMA EH404 2019-2020 1

Sources: NIRC, TRAIN Law, RR 6-2003, RR 12-2018, K.D. Alianza Notes, GoSalTo Notes
Donor’s tax.
Q: What if before death?
Depends on what is the context. If such condonation
was out of previous service, it would be subject to
income tax. If out of liberality, still donor’s tax. It cannot
be claimed as a CATE.
Q: when we say prescription, what do we mean by this?
Requires a lapse of time from the creation of the
contract.
NCC, Article 1144-1147
10 years- written contract, obligation created by law,
judgment
6 years- oral contract, quasi-contract
4 years- injury to the rights of the plaintiff, quasi-delict
1 year- forcible entry and detainer, defamation
NIRC, SECTION 281. Prescription for Violations of any
Provision of this Code. — All violations of any provision
of this Code shall prescribe after Five (5) years.
Prescription shall begin to run from the day of the
commission of the violation of the law, and if the same
be not known at the time, from the discovery thereof
and the institution of judicial proceedings for its
investigation and punishment.
The prescription shall be interrupted when proceedings
are instituted against the guilty persons and shall begin
to run again if the proceedings are dismissed for
reasons not constituting jeopardy.
The term of prescription shall not run when the offender
is absent from the Philippines.
Substantiation Requirements. - All unpaid
obligations and liabilities of the decedent at the time of
his death are allowed as deductions from gross estate.
Provided, however, that the following
requirements/documents are complied with/submitted :
In case of simple loan (including advances):
A. Simple loan [PIC 3]
- Duly notarized debt instrument at the time the
indebtedness was incurred, except for
loans granted by financial institutions where
notarization is not part of the business practice/policy
of the financial institution-lender;
- Duly notarized certification from the creditor as to the
unpaid balance of the debt, including interest as of the
time of death.
Villaester-Silverio-Melendez Taxation II KMA EH404 2019-2020
Sources: NIRC, TRAIN Law, RR 6-2003, RR 12-2018, K.D. Alianza Notes, GoSalTo Notes
- 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. 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.
- 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
3 years prior to the death of the decedent.
Take note:
• In the certification requirement, if the creditor
is a
a. Corporation: the sworn certification should
be signed by the President, or Vice-
President, or other principal officer of the
corporation.
b. Partnership: the sworn certification should
be signed by any of the general partners.
c. 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.
d. Individual: the sworn certification should
be signed by him.
GR: The one who should certify must not be
a relative of the borrower within the fourth
civil degree, either by consanguinity or
affinity
Exception: 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.
• The certification requirement is for the BIR to
verify because there is no way to ask the
decedent. An unpaid debt may be fabricated
and the decedent’s signature may easily be
forged so as to get a bigger deduction. BIR
will not only look at the promissory note and
contract of loan (any agreement) but also
requires the submission of a notarized
2
 certification of the unpaid balance and
interest.
Q: What is the consequence of the notarization?
The person who lied may be liable for perjury. The
person who certified it must not be a relative within
the 4th civil degree of consanguinity or affinity,
subject to exception.
• In the proof of financial capacity requirement,
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.
• In the statement under oath requirement, it is
to know whether the decedent or estate
benefited from such loan. (e.g. maybe used to
purchase family home and other properties)
If the unpaid obligation arose from purchase of goods
or services:
B. Arises from purchase of goods/services [LBC
CD]
o Documents evidencing the purchase of goods or
service (sales invoice/delivery receipt or contract for
the services agreed to be rendered), 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;
o Duly notarized certification from the creditor as to the
unpaid balance of the debt, including interest as of the
time of death
o 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.
o Certified true copy of the updated latest subsidiary
ledger/records of the debt of the debtor-decedent.
o If 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.
As to the balance in your credit cards, the billing
statement of account can be presented as proof.
Note: RR 2-2003
Note:
In the certification requirement, if the creditor is
Villaester-Silverio-Melendez Taxation II KMA EH404 2019-2020
Sources: NIRC, TRAIN Law, RR 6-2003, RR 12-2018, K.D. Alianza Notes, GoSalTo Notes
a. Corporation: the sworn Certification should be
signed by the President, or Vice- President, or other
principal officer of the corporation.
b. Partnership: the sworn certification should be signed
by any of the general partners.
c. Sole proprietorship: the sworn certification should be
signed by the owner of the business.
GR: 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.
Exception: 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.
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.
3. Claims of the deceased against insolvent persons as defined
2
under R.A. 10142 and other existing laws, where the value
of the decedent’s interest therein is included in the value of
the gross estate.
Claim shall refer to all claims or demands of whatever
nature or character against the debtor or its property,
whether for money or otherwise, liquidated or
unliquidated, fixed or contingent, matured or
unmatured, disputed or undisputed, including, but not
limited to: (1) all claims of the government, whether
national or local, including taxes, tariffs and customs
duties; and (2) claims against directors and officers of
the debtor arising from acts done in the discharge of
their functions falling within the scope of their authority:
Provided, That, this inclusion does not prohibit the
creditors or third parties from filing cases against the
directors and officers acting in their personal capacities
(RA No. 10142)
Note:
3
 • Requires that the entire receivable must be It may be deducted on the income during the lifetime
declared or stated therein. of the decedent.
• there must be a filing for insolvency on the
part of the debtor
Death
4. Unpaid Mortgages
BEFORE AFTER
• Loan should benefit the estate or decedent.
Claims against estate losses
• property must form part of the Gross estate
Taxes
5. Unpaid Taxes
Unpaid mortgages
Requisites for Deductibility:

• accrued PRIOR to the decedent’s death
• unpaid as of the time of death
The NIRC enumerated taxes that cannot be deducted,
as follows:
(a) income tax on income received AFTER death;
(b) property taxes NOT accrued BEFORE death; and
(c) estate tax. Estate tax accrues after death, hence not
deductible from the GE.
However, in the case of a decedent who was a citizen
or resident of the Philippines at the time of death, there
shall be a Philippine estate tax payment on his
properties within and outside the Philippines, and a
foreign estate tax payment on his properties outside
the Philippines. In this case, the law allows a tax credit
to reduce the Philippine estate tax. However, the
Philippine estate tax cannot be deducted.
Q: What if Under Section 5 (1), RR 12-2018 on the
extension of time to pay estate tax, when the
Commissioner finds that the payment of the estate tax
or of any part thereof would impose undue hardship
upon the estate or any of the heirs, he may extend the
time for payment of such tax or any part thereof
• not to exceed five (5) years in case the estate
is settled through the courts, or
• two (2) years in case the estate is settled
extrajudicially.
In such case, the amount in respect of which the
extension is granted shall be paid on or before the date
of the expiration of the period of the extension, and the
running of the statute of limitations for deficiency
assessment shall be suspended for the period of any
such extension.

6. Losses
Under RR 12-2018, Section 6(4.3)
Requisites for Deductibility: [SAD Cause Loss]

There shall also be deducted losses incurred during the

• incurred during the settlement of the estate (6
months after death + the allowed extension)
arising from acts of God, such as fires,
storms, shipwreck or other casualties; or from
acts of man, such as robbery, theft or
embezzlement
• not claimed as a deduction in an income tax
return of the estate subject to income tax
• not compensated by insurance or otherwise
(if naa but the FMV of the property lost is
greater than the amount of the insurance
proceeds, only the difference will be
deductible.)
• incurred not later than the last day for payment of the
estate tax (Last day to pay: 6 months after death or
the allowed extension)
Q: Why not include losses before death?
settlement of the estate arising from fires, storms,
shipwreck, or other casualties, or from robbery, theft or
embezzlement, when such losses are not
compensated for by insurance or otherwise, and 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, and provided that such losses
were incurred not later than the last day for the
payment of the estate tax as prescribed in Subsection
(A) of Section 91.
And in Section 91, NIRC
"(A) Time of Payment. — The estate tax imposed by
Section 84 shall be paid at the time the return is filed
by the executor, administrator or the heirs.
Note: Pay as you file

Villaester-Silverio-Melendez Taxation II KMA EH404 2019-2020 4

Sources: NIRC, TRAIN Law, RR 6-2003, RR 12-2018, K.D. Alianza Notes, GoSalTo Notes
7. Properties Previously Taxed (PPT) or Vanishing more items, the aggregate of the item by item lower of
Deduction 2 values will be the initial basis.

Rationale: to lessen the tax burden over the same 2. Initial Basis (IB) – the PPT value (1) will be reduced
property subjected to tax in a short period of time. by the mortgage or lien on the property paid by the
PRESENT decedent. This mortgage or lien should
Requisites for Deductibility: [DILPIN] have been included in the deduction from the GE of the
PRIOR decedent or gift of the donor.
• Death – died within 5 years from receipt of the
property from a prior decedent or donor; 3. The IB (2) will be further reduced by:

(Initial Basis Gross Estate) x (CULIT2)

• Identity of the property – can be identified as
the one received from the prior decedent, or 4. The remaining balance will be multiplied by the
from the donor, or something acquired in corresponding percentage:
exchange for it. It must be (1) the very same
property or (2) the value received in exchange
for it. Example, if you received a car before Property Received By Vanishing
then you sold it for 500k, the 500k will be used Decedent Prior To His/Her Deduction %
as the value on which the VD can be claimed. Death
However, if you already spent the money for within or less than a year 100%
something else, let’s say a bike, you can no more than a year but less than 80%
longer claim VD on such property. 2 years
• Location of the property – must be in the more than 2 years but not 60%
Philippines; if such is previously situated more than 3 years
abroad and the first tax was imposed and paid
more than 3 years but not 40%
there, then it follows that it cannot be more than 4 years
considered as a property previously taxed
more than 4 years but not 20%
here in the Philippines.
more than 5 years
• Previous taxation of the property – estate tax
on the prior succession or the donor’s tax on
the gift had been finally determined and paid;
• Inclusion of the property – part of the taxable [Note: sa exam, if wala naka state if gibayran ang
estate of the prior decedent, or of the taxable mortgage, indicate that it was paid by the present
gift of the donor; decedent as an assumption]
• No VD on the property was allowable to the
estate of the prior decedent. Formula:

Value taken for PPT (LOWER) P xx

Less: Mortgages or liens paid by the XX
EXAMPLE: present decedent
1. D donated a house to I. The latter died two years Initial Basis P XX
after from the receipt of house and lot. The property Less: (IB/GE x CULIT2) XX
transmitted to L. The transmission was subjected to Final Basis P XX
estate tax. Can claim VD? Yes Multiply by the Vanishing deduction % XX
Vanishing Deduction P XX
2. Continued, L donated property to P, 3 years after
L’s death. Can claim VD? No. Because donor’s tax is
imposed and not estate tax. Note,
Mr. DILPIN, Filipino, and a resident of Cebu City, died
on AUGUST 29, 2019, leaving a GE of P15M. Included
3. [I forgot the last one. Sorry, Ma. Ma, Sorry]
in his GE is a parcel of land in Cebu City, and an
automobile which he inherited from his mother, who
How To Compute The Vanishing Deduction predeceased him on Nov. 2, 2016, currently valued at
1. Determine the PPT Value – LOWER of: P1.2M and P120k, respectively. The properties were
o Value at the time of the prior decedent’s death or previously taxed for estate tax purposes at the value of:
prior donation Land – P1M; automobile – P200k, with a mortgage
o Value at the time of the present decedent’s death liability on the land of P40k which was paid by Mr.
DILPIN in 2017. His wife, Mrs. DILPIN, claimed the ff
TN: where the property referred to consists of 2 or deductions:

Villaester-Silverio-Melendez Taxation II KMA EH404 2019-2020 5

Sources: NIRC, TRAIN Law, RR 6-2003, RR 12-2018, K.D. Alianza Notes, GoSalTo Notes
1. Claims against the estate – P50k
2. Unpaid taxes – P80k
3. Family Home – P5M

Compute the vanishing deduction

Solution:

Value taken for PPT P 1, 120, 000

less: Mortgage paid 40, 000
Initial Basis P 1, 080, 000
(1.08 M/15M) x (130K) 9, 360
Final Basis P 1, 070, 640
Vanishing Deduction %. X 60%
Vanishing Deduction P 642, 384

NOTE:
a. Family home is not included

b. As for the period, 60% is used because counting

from November 2, 2016 up to August 29, 2019, the
transmission of the properties involved is within a
period which is more than 2 years but not more than 3
years.

c. As to who paid the mortgage, if it is not given, give

a qualified answer because the mortgage or lien may
only be deducted if the present decedent paid for it.

Villaester-Silverio-Melendez Taxation II KMA EH404 2019-2020 6

Sources: NIRC, TRAIN Law, RR 6-2003, RR 12-2018, K.D. Alianza Notes, GoSalTo Notes