2014 (Taxation) Bar Exam Questions: Question 20

[Answer / discuss the question below. Or see 2014 bar exam Taxation Instructions; 2014 Taxation essay and multiple choice Questions: 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28 and 29; See also 2014 Bar Exam: Information, Discussions, Tips, Questions and Results]


During his lifetime, Mr. Sakitin obtained a loan amounting to P10 million from Bangko Uno for the purchase of a parcel of land located in Makati City, using such property as collateral for the loan. The loan was evidenced by a duly notarized promissory note. Subsequently, Mr. Sakitin died. At the time of his death, the unpaid balance of the loan amounted to P2 million. The heirs of Mr. Sakitin deducted the amount of P2 million from the gross estate, as part of the “Claims against the Estate.” Such deduction was disallowed by the Bureau of Internal Revenue (BIR) Examiner, claiming that the mortgaged property was not included in the computation of the gross estate. Do you agree with the BIR? Explain. (4%)

One comment

  1. The contention of the BIR is not correct.

    What the tax code requires for the indebtedness or claims against the estate be allowed or included as deduction to the gross estate are the following:
    a. the debt must be valid in law and enforceable in court;
    b. It is not condoned nor has been prescribed;
    c. that the debt instrument must be notarized, except for those loans obtained from financial institutions which do not practice notarization of the debt instrument; and
    d. If it is contracted three years before the death of the decedent, the statement of which must be under oath by the executor or administrator showing the disposition of the proceeds thereof.

    Applying the foregoing premises in the facts, the debt of the decedent is valid in law and enforceable; it is not condoned nor the debt has been prescribed; the instrument is notarized; and with regard to the last requirement, there was no mention of the date but it could be inferred that since 2 million is the remaining balance, debt could have been incurred not within 3 years prior to the decedent’ death.

    Moreover, the law is clear that there is no mention of the requirement for a mortgaged property to be included in the gross estate under indebtedness or claims against the estate.

    Thus the disallowance of the BIR is not correct.

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