201
G.R. No. L-34937 March 13, 1933 CONCEPCION VIDAL DE ROCES and her husband, MARCOS ROCES, and ELVIRA VIDAL DE RICHARDS, plaintiff-appellants, vs. JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellee. Feria and La O for appellants. Attorney-General Jaranilla for appellee. IMPERIAL, J.: The plaintiffs herein brought this action to recover from the defendant, Collector of Internal Revenue, certain sums of money paid by them under protest as inheritance tax. They appealed from the judgment rendered by the Court of First Instance of Manila dismissing the action, without costs. On March 10 and 12, 1925, Esperanza Tuazon, by means of public documents, donated certain parcels of land situated in Manila to the plaintiffs herein, who, with their respective husbands, accepted them in the same public documents, which were duly recorded in the registry of deeds. By virtue of said donations, the plaintiffs took possession of the said lands, received the fruits thereof and obtained the corresponding transfer certificates of title. On January 5, 1926, the donor died in the City of Manila without leaving any forced heir and her will which was admitted to probate, she bequeathed to each of the donees the sum of P5,000. After the estate had been distributed among the instituted legatees and before delivery of their respective shares, the appellee herein, as Collector of Internal Revenue, ruled that the appellants, as donees and legatees, should pay as inheritance tax the sums of P16,673 and P13,951.45, respectively. Of these sums P15,191.48 was levied as tax on the donation to Concepcion Vidal de Roces and P1,481.52 on her legacy, and, likewise, P12,388.95 was imposed upon the donation made to Elvira Vidal de Richards and P1,462.50 on her legacy. At first the appellants refused to pay the aforementioned taxes but, at the insistence of the appellee and in order not to delay the adjudication of the legacies, they agreed at last, to pay them under protest. The appellee filed a demurrer to the complaint on the ground that the facts alleged therein were not sufficient to constitute a cause of action. After the legal questions raised therein had been discussed, the court sustained the demurrer and ordered the amendment of the complaint which the appellants failed to do, whereupon the trial court dismissed the action on the ground that the afore- mentioned appellants did not really have a right of action.

Tax II Estate and Donor Cases

Embed Size (px)

DESCRIPTION

Cases

Citation preview

Page 1: Tax II Estate and Donor Cases

G.R. No. L-34937             March 13, 1933

CONCEPCION VIDAL DE ROCES and her husband, MARCOS ROCES, and ELVIRA VIDAL DE RICHARDS, plaintiff-appellants, vs.JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellee.

Feria and La O for appellants.Attorney-General Jaranilla for appellee.

IMPERIAL, J.:

The plaintiffs herein brought this action to recover from the defendant, Collector of Internal Revenue, certain sums of money paid by them under protest as inheritance tax. They appealed from the judgment rendered by the Court of First Instance of Manila dismissing the action, without costs.

On March 10 and 12, 1925, Esperanza Tuazon, by means of public documents, donated certain parcels of land situated in Manila to the plaintiffs herein, who, with their respective husbands, accepted them in the same public documents, which were duly recorded in the registry of deeds. By virtue of said donations, the plaintiffs took possession of the said lands, received the fruits thereof and obtained the corresponding transfer certificates of title.

On January 5, 1926, the donor died in the City of Manila without leaving any forced heir and her will which was admitted to probate, she bequeathed to each of the donees the sum of P5,000. After the estate had been distributed among the instituted legatees and before delivery of their respective shares, the appellee herein, as Collector of Internal Revenue, ruled that the appellants, as donees and legatees, should pay as inheritance tax the sums of P16,673 and P13,951.45, respectively. Of these sums P15,191.48 was levied as tax on the donation to Concepcion Vidal de Roces and P1,481.52 on her legacy, and, likewise, P12,388.95 was imposed upon the donation made to Elvira Vidal de Richards and P1,462.50 on her legacy. At first the appellants refused to pay the aforementioned taxes but, at the insistence of the appellee and in order not to delay the adjudication of the legacies, they agreed at last, to pay them under protest.

The appellee filed a demurrer to the complaint on the ground that the facts alleged therein were not sufficient to constitute a cause of action. After the legal questions raised therein had been discussed, the court sustained the demurrer and ordered the amendment of the complaint which the appellants failed to do, whereupon the trial court dismissed the action on the ground that the afore- mentioned appellants did not really have a right of action.

In their brief, the appellants assign only one alleged error, to wit: that the demurrer interposed by the appellee was sustained without sufficient ground.

The judgment appealed from was based on the provisions of section 1540 Administrative Code which reads as follows:

SEC. 1540. Additions of gifts and advances. — After the aforementioned deductions have been made, there shall be added to the resulting amount the value of all gifts or advances made by the predecessor to any those who, after his death, shall prove to be his heirs, devisees, legatees, or donees mortis causa.

The appellants contend that the above-mentioned legal provision does not include donations inter vivos and if it does, it is unconstitutional, null and void for the following reasons: first, because it violates section 3 of the Jones Law which provides that no law should embrace more than one subject, and that subject should be expressed in the title thereof; second that the Legislature has no authority to impose inheritance tax on donations inter vivos; and third, because a legal provision of this character contravenes the fundamental rule of uniformity of taxation. The appellee, in turn, contends that the words "all gifts" refer clearly to donations inter vivos and, in support of his theory, cites the doctrine laid in the case of Tuason and Tuason vs. Posadas (54 Phil., 289). After a careful study of the law and the authorities applicable thereto, we

Page 2: Tax II Estate and Donor Cases

are the opinion that neither theory reflects the true spirit of the aforementioned provision. The gifts referred to in section 1540 of the Revised Administration Code are, obviously, those donations inter vivos that take effect immediately or during the lifetime of the donor but are made in consideration or in contemplation of death. Gifts inter vivos, the transmission of which is not made in contemplation of the donor's death should not be understood as included within the said legal provision for the reason that it would amount to imposing a direct tax on property and not on the transmission thereof, which act does not come within the scope of the provisions contained in Article XI of Chapter 40 of the Administrative Code which deals expressly with the tax on inheritances, legacies and other acquisitions mortis causa.

Our interpretation of the law is not in conflict with the rule laid down in the case of Tuason and Tuason vs. Posadas, supra. We said therein, as we say now, that the expression "all gifts" refers to gifts inter vivos inasmuch as the law considers them as advances on inheritance, in the sense that they are gifts inter vivos made in contemplation or in consideration of death. In that case, it was not held that that kind of gifts consisted in those made completely independent of death or without regard to it.

Said legal provision is not null and void on the alleged ground that the subject matter thereof is not embraced in the title of the section under which it is enumerated. On the contrary, its provisions are perfectly summarized in the heading, "Tax on Inheritance, etc." which is the title of Article XI. Furthermore, the constitutional provision cited should not be strictly construed as to make it necessary that the title contain a full index to all the contents of the law. It is sufficient if the language used therein is expressed in such a way that in case of doubt it would afford a means of determining the legislators intention. (Lewis' Sutherland Statutory Construction, Vol. II, p. 651.) Lastly, the circumstance that the Administrative Code was prepared and compiled strictly in accordance with the provisions of the Jones Law on that matter should not be overlooked and that, in a compilation of laws such as the Administrative Code, it is but natural and proper that provisions referring to diverse matters should be found. (Ayson and Ignacio vs. Provincial Board of Rizal and Municipal Council of Navotas, 39 Phil., 931.)

The appellants question the power of the Legislature to impose taxes on the transmission of real estate that takes effect immediately and during the lifetime of the donor, and allege as their reason that such tax partakes of the nature of the land tax which the law has already created in another part of the Administrative Code. Without making express pronouncement on this question, for it is unnecessary, we wish to state that such is not the case in these instance. The tax collected by the appellee on the properties donated in 1925 really constitutes an inheritance tax imposed on the transmission of said properties in contemplation or in consideration of the donor's death and under the circumstance that the donees were later instituted as the former's legatees. For this reason, the law considers such transmissions in the form of gifts inter vivos, as advances on inheritance and nothing therein violates any constitutional provision, inasmuch as said legislation is within the power of the Legislature.

Property Subject to Inheritance Tax. — The inheritance tax ordinarily applies to all property within the power of the state to reach passing by will or the laws regulating intestate succession or by gift inter vivos in the manner designated by statute, whether such property be real or personal, tangible or intangible, corporeal or incorporeal. (26 R.C.L., p. 208, par. 177.)

In the case of Tuason and Tuason vs. Posadas, supra, it was also held that section 1540 of the Administrative Code did not violate the constitutional provision regarding uniformity of taxation. It cannot be null and void on this ground because it equally subjects to the same tax all of those donees who later become heirs, legatees or donees mortis causa by the will of the donor. There would be a repugnant and arbitrary exception if the provisions of the law were not applicable to all donees of the same kind. In the case cited above, it was said: "At any rate the argument adduced against its constitutionality, which is the lack of Uniformity, does not seem to be well founded. It was said that under such an interpretation, while a donee inter vivos who, after the predecessor's death proved to be an heir, a legatee, or a donee mortis causa, would have to pay the tax, another donee inter vivos who did not prove to he an heir, a legatee, or a donee mortis causa of the predecessor, would be exempt from such a tax. But as these are two different cases, the principle of uniformity is inapplicable to them."

The last question of a procedural nature arising from the case at bar, which should be passed upon, is whether the case, as it now stands, can be decided on the merits or should be remanded to the court a quo for further proceedings. According to

Page 3: Tax II Estate and Donor Cases

our view of the case, it follows that, if the gifts received by the appellants would have the right to recover the sums of money claimed by them. Hence the necessity of ascertaining whether the complaint contains an allegation to that effect. We have examined said complaint and found nothing of that nature. On the contrary, it be may be inferred from the allegations contained in paragraphs 2 and 7 thereof that said donations inter vivos were made in consideration of the donor's death. We refer to the allegations that such transmissions were effected in the month of March, 1925, that the donor died in January, 1926, and that the donees were instituted legatees in the donor's will which was admitted to probate. It is from these allegations, especially the last, that we infer a presumption juris tantum that said donations were made mortis causa and, as such, are subject to the payment of inheritance tax.

Wherefore, the demurrer interposed by the appellee was well-founded because it appears that the complaint did not allege fact sufficient to constitute a cause of action. When the appellants refused to amend the same, spite of the court's order to that effect, they voluntarily waived the opportunity offered them and they are not now entitled to have the case remanded for further proceedings, which would serve no purpose altogether in view of the insufficiency of the complaint.

Wherefore, the judgment appealed from is hereby affirmed, with costs of this instance against the appellants. So ordered.

Avanceña, C.J., Villamor, Ostrand, Abad Santos, Hull, Vickers and Buttes, JJ., concur.

Separate Opinions

VILLA-REAL, J., dissenting:

I sustain my concurrence in Justice Street's dissenting opinion in the case of Tuason and Tuason vs. Posadas (54 Phil., 289).

The majority opinion to distinguish the present case from above-mentioned case of Tuason and Tuason vs. Posadas, by interpreting section 1540 of the Administrative Code in the sense that it establishes the legal presumption juris tantum that all gifts inter vivos made to persons who are not forced heirs but who are instituted legatees in the donor's will, have been made in contemplation of the donor's death. Presumptions are of two kinds: One determined by law which is also called presumption of law or of right; and another which is formed by the judge from circumstances antecedent to, coincident with or subsequent to the principal fact under investigation, which is also called presumption of man (presuncion de hombre). (Escriche, Vol. IV, p. 662.) The Civil Code as well as the code of Civil Procedure establishes presumptions juris et de jure and juris tantum which the courts should take into account in deciding questions of law submitted to them for decision. The presumption which majority opinion wishes to draw from said section 1540 of the Administrative Code can neither be found in this Code nor in any of the aforementioned Civil Code and Code of Civil Procedure. Therefore, said presumption cannot be called legal or of law. Neither can it be called a presumption of man (presuncion de hombre) inasmuch as the majority opinion did not infer it from circumstances antecedent to, coincident with or subsequent to the principal fact with is the donation itself. In view of the nature, mode of making and effects of donations inter vivos, the contrary presumption would be more reasonable and logical; in other words, donations inter vivos made to persons who are not forced heirs, but who are instituted legatees in the donor's will, should be presumed as not made mortis causa, unless the contrary is proven. In the case under consideration, the burden of the proof rests with the person who contends that the donation inter vivos has been made mortis causa.

It is therefore, the undersigned's humble opinion that the order appealed from should be reversed and the demurrer overruled, and the defendant ordered to file his answer to the complaint.

Street, J., concurs.

Page 4: Tax II Estate and Donor Cases

G.R. No. L-36770             November 4, 1932

LUIS W. DISON, plaintiff-appellant, vs.JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellant.

Marcelino Aguas for plaintiff-appellant.Attorney-General Jaranilla for defendant-appellant.

 

BUTTE, J.:

          This is an appeal from the decision of the Court of First Instance of Pampanga in favor of the defendant Juan Posadas, Jr., Collector of Internal Revenue, in a suit filed by the plaintiffs, Luis W. Dison, for the recovery of an inheritance tax in the sum of P2,808.73 paid under protest. The petitioner alleged in his complaint that the tax is illegal because he received the property, which is the basis of the tax, from his father before his death by a deed of gift inter vivos which was duly accepted and registered before the death of his father. The defendant answered with a general denial and with a counterdemand for the sum of P1,245.56 which it was alleged is a balance still due and unpaid on account of said tax. The plaintiff replied to the counterdemand with a general denial. The court a quo held that the cause of action set up in the counterdemand was not proven and dismissed the same. Both sides appealed to this court, but the cross-complaint and appeal of the Collector of Internal Revenue were dismissed by this court on March 17, 1932, on motion of the Attorney-General.1awphil.net

          The only evidence introduced at the trial of this cause was the proof of payment of the tax under protest, as stated, and the deed of gift executed by Felix Dison on April 9, 1928, in favor of his sons Luis W. Dison, the plaintiff-appellant. This deed of gift transferred twenty-two tracts of land to the donee, reserving to the donor for his life the usufruct of three tracts. This deed was acknowledged by the donor before a notary public on April 16, 1928. Luis W. Dison, on April 17, 1928, formally accepted said gift by an instrument in writing which he acknowledged before a notary public on April 20, 1928.

          At the trial the parties agreed to and filed the following ingenious stipulation of fact:

1. That Don Felix Dison died on April 21, 1928;

2. That Don Felix Dison, before his death, made a gift inter vivos in favor of the plaintiff Luis W. Dison of all his property according to a deed of gift (Exhibit D) which includes all the property of Don Felix Dizon;

3. That the plaintiff did not receive property of any kind of Don Felix Dison upon the death of the latter;

4. That Don Luis W. Dison was the legitimate and only child of Don Felix Dison.

          It is inferred from Exhibit D that Felix Dison was a widower at the time of his death.

          The theory of the plaintiff-appellant is that he received and holds the property mentioned by a consummated gift and that Act No. 2601 (Chapter 40 of the Administrative Code) being the inheritance tax statute, does not tax gifts. The provision directly here involved is section 1540 of the Administrative Code which reads as follows:

          Additions of Gifts and Advances. — After the aforementioned deductions have been made, there shall be

Page 5: Tax II Estate and Donor Cases

added to the resulting amount the value of all gifts or advances made by the predecessor to any of those who, after his death, shall prove to be his heirs, devises, legatees, or donees mortis causa.

          The question to be resolved may be stated thus: Does section 1540 of the Administrative Code subject the plaintiff-appellant to the payment of an inheritance tax?

          The appellant argues that there is no evidence in this case to support a finding that the gift was simulated and that it was an artifice for evading the payment of the inheritance tax, as is intimated in the decision of the court below and the brief of the Attorney-General. We see no reason why the court may not go behind the language in which the transaction is masked in order to ascertain its true character and purpose. In this case the scanty facts before us may not warrant the inference that the conveyance, acknowledged by the donor five days before his death and accepted by the donee one day before the donor's death, was fraudulently made for the purpose of evading the inheritance tax. But the facts, in our opinion, do warrant the inference that the transfer was an advancement upon the inheritance which the donee, as the sole and forced heir of the donor, would be entitled to receive upon the death of the donor.

          The argument advanced by the appellant that he is not an heir of his deceased father within the meaning of section 1540 of the Administrative Code because his father in his lifetime had given the appellant all his property and left no property to be inherited, is so fallacious that the urging of it here casts a suspicion upon the appellants reason for completing the legal formalities of the transfer on the eve of the latter's death. We do not know whether or not the father in this case left a will; in any event, this appellant could not be deprived of his share of the inheritance because the Civil Code confers upon him the status of a forced heir. We construe the expression in section 1540 "any of those who, after his death, shall prove to be his heirs", to include those who, by our law, are given the status and rights of heirs, regardless of the quantity of property they may receive as such heirs. That the appellant in this case occupies the status of heir to his deceased father cannot be questioned. Construing the conveyance here in question, under the facts presented, as an advance made by Felix Dison to his only child, we hold section 1540 to be applicable and the tax to have been properly assessed by the Collector of Internal Revenue.

          This appeal was originally assigned to a Division of five but referred to the court in banc by reason of the appellant's attack upon the constitutionality of section 1540. This attack is based on the sole ground that insofar as section 1540 levies a tax upon gifts inter vivos, it violates that provision of section 3 of the organic Act of the Philippine Islands (39 Stat. L., 545) which reads as follows: "That no bill which may be enacted into law shall embraced more than one subject, and that subject shall be expressed in the title of the bill." Neither the title of Act No. 2601 nor chapter 40 of the Administrative Code makes any reference to a tax on gifts. Perhaps it is enough to say of this contention that section 1540 plainly does not tax gifts per se but only when those gifts are made to those who shall prove to be the heirs, devisees, legatees or donees mortis causa of the donor. This court said in the case of Tuason and Tuason vs. Posadas 954 Phil., 289):lawphil.net

          When the law says all gifts, it doubtless refers to gifts inter vivos, and not mortis causa. Both the letter and the spirit of the law leave no room for any other interpretation. Such, clearly, is the tenor of the language which refers to donations that took effect before the donor's death, and not to mortis causa donations, which can only be made with the formalities of a will, and can only take effect after the donor's death. Any other construction would virtually change this provision into:

          ". . . there shall be added to the resulting amount the value of all gifts mortis causa . . . made by the predecessor to those who, after his death, shall prove to be his . . . donees mortis causa." We cannot give to the law an interpretation that would so vitiate its language. The truth of the matter is that in this section (1540) the law presumes that such gifts have been made in anticipation of inheritance, devise, bequest, or gift mortis causa, when the donee, after the death of the donor proves to be his heir, devisee or donee mortis causa, for the purpose of evading the tax, and it is to prevent this that it provides that they shall be added to the resulting amount." However much appellant's argument on this point may fit his preconceived notion that the transaction between him and his father was a consummated gift with no relation to the inheritance, we hold that there is not merit in this attack upon the constitutionality of section 1540 under our view of the facts. No other constitutional questions were raised in this case.

Page 6: Tax II Estate and Donor Cases

          The judgment below is affirmed with costs in this instance against the appellant. So ordered.

Avanceña, C.J., Street, Malcolm, Ostrand, Abad Santos, Vickers and Imperial, JJ., concur.

G.R. No. L-34583             October 22, 1931

THE BANK OF THE PHILIPPINE ISLANDS, administrator of the estate of the late Adolphe Oscar Schuetze, plaintiff-appellant, vs.JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellee.

Araneta, De Joya, Zaragoza and Araneta for appellant.Attorney-General Jaranilla for appellee.

 

VILLA-REAL, J.:

          The Bank of the Philippine Islands, as administrator of the estate of the deceased Adolphe Oscar Schuetze, has appealed to this court from the judgment of the Court of First Instance of Manila absolving the defendant Juan Posadas, Jr., Collector of Internal Revenue, from the complaint filed against him by said plaintiff bank, and dismissing the complaint with costs.

          The appellant has assigned the following alleged errors as committed by the trial court in its judgment, to wit:

1. The lower court erred in holding that the testimony of Mrs. Schuetze was inefficient to established the domicile of her husband.

2. The lower court erred in holding that under section 1536 of the Administrative Code the tax imposed by the defendant is lawful and valid.

3. The lower court erred in not holding that one-half (½) of the proceeds of the policy in question is community property and that therefore no inheritance tax can be levied, at least on one-half (½) of the said proceeds.

4. The lower court erred in not declaring that it would be unconstitutional to impose an inheritance tax upon the insurance policy here in question as it would be a taking of property without due process of law.

          The present complaint seeks to recover from the defendant Juan Posadas, Jr., Collector of Internal Revenue, the amount of P1,209 paid by the plaintiff under protest, in its capacity of administrator of the estate of the late Adolphe Oscar Schuetze, as inheritance tax upon the sum of P20,150, which is the amount of an insurance policy on the deceased's life,

Page 7: Tax II Estate and Donor Cases

wherein his own estate was named the beneficiary.

          At the hearing, in addition to documentary and parol evidence, both parties submitted the following agreed statement of facts of the court for consideration:

It is hereby stipulated and agreed by and between the parties in the above-entitled action through their respective undersigned attorneys:

1. That the plaintiff, Rosario Gelano Vda. de Schuetze, window of the late Adolphe Oscar Schuetze, is of legal age, a native of Manila, Philippine Islands, and is and was at all times hereinafter mentioned a resident of Germany, and at the time of the death of her husband, the late Adolphe Oscar Schuetze, she was actually residing and living in Germany;

2. That the Bank of the Philippine Islands, is and was at all times hereinafter mentioned a banking institution duly organized and existing under and by virtue of the laws of the Philippine Islands;

3. That on or about August 23, 1928, the herein plaintiff before notary public Salvador Zaragoza, drew a general power appointing the above-mentioned Bank of the Philippine Islands as her attorney-in-fact, and among the powers conferred to said attorney-in-fact was the power to represent her in all legal actions instituted by or against her;

4. That the defendant, of legal age, is and at all times hereinafter mentioned the duly appointed Collector of Internal Revenue with offices at Manila, Philippine Islands;

5. That the deceased Adolphe Oscar Schuetze came to the Philippine Islands for the first time of March 31, 1890, and worked in the several German firms as a mere employee and that from the year 1903 until the year 1918 he was partner in the business of Alfredo Roensch;

6. That from 1903 to 1922 the said Adolphe Oscar Schuetze was in the habit of making various trips to Europe;

7. That on December 3, 1927, the late Adolphe Oscar Schuetze coming from Java, and with the intention of going to Bremen, landed in the Philippine Islands where he met his death on February 2, 1928;

8. That on March 31, 1926, the said Adolphe Oscar Schuetze, while in Germany, executed a will, in accordance with its law, wherein plaintiff was named his universal heir;

9. That the Bank of the Philippine Islands by order of the Court of First Instance of Manila under date of May 24, 1928, was appointed administrator of the estate of the deceased Adolphe Oscar Schuetze;

10. That, according to the testamentary proceedings instituted in the Court of First Instance of Manila, civil case No. 33089, the deceased at the time of his death was possessed of not only real property situated in the Philippine Islands, but also personal property consisting of shares of stock in nineteen (19) domestic corporations;

11. That the fair market value of all the property in the Philippine Islands left by the deceased at the time of his death in accordance with the inventory submitted to the Court of First Instance of Manila, civil case No. 33089, was P217,560.38;

12. That the Bank of the Philippine Islands, as administrator of the estate of the deceased rendered its final account on June 19, 1929, and that said estate was closed on July 16, 1929;

13. That among the personal property of the deceased was found life-insurance policy No. 194538 issued at

Page 8: Tax II Estate and Donor Cases

Manila, Philippine Islands, on January 14, 1913, for the sum of $10,000 by the Sun Life Assurance Company of Canada, Manila branch, a foreign corporation duly organized and existing under and by virtue of the laws of Canada, and duly authorized to transact business in the Philippine Islands;

14. That in the insurance policy the estate of the said Adolphe Oscar Schuetze was named the beneficiary without any qualification whatsoever;

15. That for five consecutive years, the deceased Adolphe Oscar Schuetze paid the premiums of said policy to the Sun Life Assurance Company of Canada, Manila branch;

16. That on or about the year 1918, the Sun Life Assurance Company of Canada, Manila branch, transferred said policy to the Sun Life Assurance Company of Canada, London branch;

17. That due to said transfer the said Adolphe Oscar Schuetze from 1918 to the time of his death paid the premiums of said policy to the Sun Life Assurance Company of Canada, London Branch;

18. That the sole and only heir of the deceased Adolphe Oscar Schuetze is his widow, the plaintiff herein;

19. That at the time of the death of the deceased and at all times thereafter including the date when the said insurance policy was paid, the insurance policy was not in the hands or possession of the Manila office of the Sun Life Assurance Company of Canada, nor in the possession of the herein plaintiff, nor in the possession of her attorney-in-fact the Bank of the Philippine Islands, but the same was in the hands of the Head Office of the Sun Life Assurance Company of Canada, at Montreal, Canada;

20. That on July 13, 1928, the Bank of the Philippine Islands as administrator of the decedent's estate received from the Sun Life Assurance Company of Canada, Manila branch, the sum of P20,150 representing the proceeds of the insurance policy, as shown in the statement of income and expenses of the estate of the deceased submitted on June 18, 1929, by the administrator to the Court of First Instance of Manila, civil case No. 33089;

21. That the Bank of the Philippine Islands delivered to the plaintiff herein the said sum of P20,150;

22. That the herein defendant on or about July 5, 1929, imposed an inheritance tax upon the transmission of the proceeds of the policy in question in the sum of P20,150 from the estate of the late Adolphe Oscar Schuetze to the sole heir of the deceased, or the plaintiff herein, which inheritance tax amounted to the sum of P1,209;

23. That the Bank of the Philippine Islands as administrator of the decedent's estate and as attorney-in-fact of the herein plaintiff, having been demanded by the herein defendant to pay inheritance tax amounting to the sum of P1,209, paid to the defendant under protest the above-mentioned sum;

24. That notwithstanding the various demands made by plaintiff to the defendant, said defendant has refused and refuses to refund to plaintiff the above mentioned sum of P1,209;

25. That plaintiff reserves the right to adduce evidence as regards the domicile of the deceased, and so the defendant, the right to present rebuttal evidence;

26. That both plaintiff and defendant submit this stipulation of facts without prejudice to their right to introduce such evidence, on points not covered by the agreement, which they may deem proper and necessary to support their respective contentions.

          In as much as one of the question raised in the appeal is whether an insurance policy on said Adolphe Oscar Schuetze's life was, by reason of its ownership, subject to the inheritance tax, it would be well to decide first whether the

Page 9: Tax II Estate and Donor Cases

amount thereof is paraphernal or community property.

          According to the foregoing agreed statement of facts, the estate of Adolphe Oscar Schuetze is the sole beneficiary named in the life-insurance policy for $10,000, issued by the Sun Life Assurance Company of Canada on January 14, 1913. During the following five years the insured paid the premiums at the Manila branch of the company, and in 1918 the policy was transferred to the London branch.

          The record shows that the deceased Adolphe Oscar Schuetze married the plaintiff-appellant Rosario Gelano on January 16, 1914.

          With the exception of the premium for the first year covering the period from January 14, 1913 to January 14, 1914, all the money used for paying the premiums, i. e., from the second year, or January 16, 1914, or when the deceased Adolphe Oscar Schuetze married the plaintiff-appellant Rosario Gelano, until his death on February 2, 1929, is conjugal property inasmuch as it does not appear to have exclusively belonged to him or to his wife (art. 1407, Civil Code). As the sum of P20,150 here in controversy is a product of such premium it must also be deemed community property, because it was acquired for a valuable consideration, during said Adolphe Oscar Schuetze's marriage with Rosario Gelano at the expense of the common fund (art. 1401, No. 1, Civil Code), except for the small part corresponding to the first premium paid with the deceased's own money.

          In his Commentaries on the Civil Code, volume 9, page 589, second edition, Manresa treats of life insurance in the following terms, to wit:

          The amount of the policy represents the premiums to be paid, and the right to it arises the moment the contract is perfected, for at the moment the power of disposing of it may be exercised, and if death occurs payment may be demanded. It is therefore something acquired for a valuable consideration during the marriage, though the period of its fulfillment, depend upon the death of one of the spouses, which terminates the partnership. So considered, the question may be said to be decided by articles 1396 and 1401: if the premiums are paid with the exclusive property of husband or wife, the policy belongs to the owner; if with conjugal property, or if the money cannot be proved as coming from one or the other of the spouses, the policy is community property.

          The Supreme Court of Texas, United States, in the case of Martin vs. Moran (11 Tex. Civ. A., 509) laid down the following doctrine:

          COMMUNITY PROPERTY — LIFE INSURANCE POLICY. — A husband took out an endowment life insurance policy on his life, payable "as directed by will." He paid the premiums thereon out of community funds, and by his will made the proceeds of the policy payable to his own estate. Held, that the proceeds were community estate, one-half of which belonged to the wife.

          In In re Stan's Estate, Myr. Prob. (Cal.), 5, the Supreme Court of California laid down the following doctrine:

          A testator, after marriage, took out an insurance policy, on which he paid the premiums from his salary. Held that the insurance money was community property, to one-half of which, the wife was entitled as survivor.

          In In re Webb's Estate, Myr. Prob. (Cal.), 93, the same court laid down the following doctrine:

          A decedent paid the first third of the amount of the premiums on his life-insurance policy out of his earnings before marriage, and the remainder from his earnings received after marriage. Held, that one-third of the policy belonged to his separate estate, and the remainder to the community property.

          Thus both according to our Civil Code and to the ruling of those North American States where the Spanish Civil Code once governed, the proceeds of a life-insurance policy whereon the premiums were paid with conjugal money,

Page 10: Tax II Estate and Donor Cases

belong to the conjugal partnership.

          The appellee alleges that it is a fundamental principle that a life-insurance policy belongs exclusively to the beneficiary upon the death of the person insured, and that in the present case, as the late Adolphe Oscar Schuetze named his own estate as the sole beneficiary of the insurance on his life, upon his death the latter became the sole owner of the proceeds, which therefore became subject to the inheritance tax, citing Del Val vs. Del Val (29 Phil., 534), where the doctrine was laid down that an heir appointed beneficiary to a life-insurance policy taken out by the deceased, becomes the absolute owner of the proceeds of such policy upon the death of the insured.

          The estate of a deceased person cannot be placed on the same footing as an individual heir. The proceeds of a life-insurance policy payable to the estate of the insured passed to the executor or administrator of such estate, and forms part of its assets (37 Corpus Juris, 565, sec. 322); whereas the proceeds of a life-insurance policy payable to an heir of the insured as beneficiary belongs exclusively to said heir and does not form part of the deceased's estate subject to administrator. (Del Val vs. Del Val, supra; 37 Corpus Juris, 566, sec. 323, and articles 419 and 428 of the Code of Commerce.)

          Just as an individual beneficiary of a life-insurance policy taken out by a married person becomes the exclusive owner of the proceeds upon the death of the insured even if the premiums were paid by the conjugal partnership, so, it is argued, where the beneficiary named is the estate of the deceased whose life is insured, the proceeds of the policy become a part of said estate upon the death of the insured even if the premiums have been paid with conjugal funds.

          In a conjugal partnership the husband is the manager, empowered to alienate the partnership property without the wife's consent (art. 1413, Civil Code), a third person, therefore, named beneficiary in a life-insurance policy becomes the absolute owner of its proceeds upon the death of the insured even if the premiums should have been paid with money belonging to the community property. When a married man has his life insured and names his own estate after death, beneficiary, he makes no alienation of the proceeds of conjugal funds to a third person, but appropriates them himself, adding them to the assets of his estate, in contravention of the provisions of article 1401, paragraph 1, of the Civil Code cited above, which provides that "To the conjugal partnership belongs" (1) Property acquired for a valuable consideration during the marriage at the expense of the common fund, whether the acquisition is made for the partnership or for one of the spouses only." Furthermore, such appropriation is a fraud practised upon the wife, which cannot be allowed to prejudice her, according to article 1413, paragraph 2, of said Code. Although the husband is the manager of the conjugal partnership, he cannot of his own free will convert the partnership property into his own exclusive property.

          As all the premiums on the life-insurance policy taken out by the late Adolphe Oscar Schuetze, were paid out of the conjugal funds, with the exceptions of the first, the proceeds of the policy, excluding the proportional part corresponding to the first premium, constitute community property, notwithstanding the fact that the policy was made payable to the deceased's estate, so that one-half of said proceeds belongs to the estate, and the other half to the deceased's widow, the plaintiff-appellant Rosario Gelano Vda. de Schuetze.

          The second point to decide in this appeal is whether the Collector of Internal Revenue has authority, under the law, to collect the inheritance tax upon one-half of the life-insurance policy taken out by the late Adolphe Oscar Schuetze, which belongs to him and is made payable to his estate.

          According to the agreed statement of facts mentioned above, the plaintiff-appellant, the Bank of the Philippine Islands, was appointed administrator of the late Adolphe Oscar Schuetze's testamentary estate by an order dated March 24, 1928, entered by the Court of First Instance of Manila. On July 13, 1928, the Sun Life Assurance Company of Canada, whose main office is in Montreal, Canada, paid Rosario Gelano Vda. de Schuetze upon her arrival at Manila, the sum of P20,150, which was the amount of the insurance policy on the life of said deceased, payable to the latter's estate. On the same date Rosario Gelano Vda. de Schuetze delivered the money to said Bank of the Philippine Islands, as administrator of the deceased's estate, which entered it in the inventory of the testamentary estate, and then returned the money to said widow.

Page 11: Tax II Estate and Donor Cases

          Section 1536 of the Administrative Code, as amended by section 10 of Act No. 2835 and section 1 of Act No. 3031, contains the following relevant provision:

          SEC. 1536. Conditions and rate of taxation. — Every transmission by virtue of inheritance, devise, bequest, gift mortis causa or advance in anticipation of inheritance, devise, or bequest of real property located in the Philippine Islands and real rights in such property; of any franchise which must be exercised in the Philippine Islands; of any shares, obligations, or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippine Islands in accordance with its laws; of any shares or rights in any partnership, business or industry established in the Philippine Islands or of any personal property located in the Philippine Islands shall be subject to the following tax:

x x x           x x x           x x x

          In as much as the proceeds of the insurance policy on the life of the late Adolphe Oscar Schuetze were paid to the Bank of the Philippine Islands, as administrator of the deceased's estate, for management and partition, and as such proceeds were turned over to the sole and universal testamentary heiress Rosario Gelano Vda. de Schuetze, the plaintiff-appellant, here in Manila, the situs of said proceeds is the Philippine Islands.

          In his work "The Law of Taxation," Cooley enunciates the general rule governing the levying of taxes upon tangible personal property, in the following words:

          GENERAL RULE. — The suits of tangible personal property, for purposes of taxation may be where the owner is domiciled but is not necessarily so. Unlike intangible personal property, it may acquire a taxation situs in a state other than the one where the owner is domiciled, merely because it is located there. Its taxable situs is where it is more or less permanently located, regardless of the domicile of the owner. It is well settled that the state where it is more or less permanently located has the power to tax it although the owner resides out of the state, regardless of whether it has been taxed for the same period at the domicile of the owner, provided there is statutory authority for taxing such property. It is equally well settled that the state where the owner is domiciled has no power to tax it where the property has acquired an actual situs in another state by reason of its more or less permanent location in that state. ... (2 Cooley, The Law of Taxation, 4th ed., p. 975, par. 451.)

          With reference to the meaning of the words "permanent" and "in transit," he has the following to say:

          PERMANENCY OF LOCATION; PROPERTY IN TRANSIT. — In order to acquire a situs in a state or taxing district so as to be taxable in the state or district regardless of the domicile of the owner and not taxable in another state or district at the domicile of the owner, tangible personal property must be more or less permanently located in the state or district. In other words, the situs of tangible personal property is where it is more or less permanently located rather than where it is merely in transit or temporarily and for no considerable length of time. If tangible personal property is more or less permanently located in a state other than the one where the owner is domiciled, it is not taxable in the latter state but is taxable in the state where it is located. If tangible personal property belonging to one domiciled in one state is in another state merely in transitu or for a short time, it is taxable in the former state, and is not taxable in the state where it is for the time being. . . . .

          Property merely in transit through a state ordinarily is not taxable there. Transit begins when an article is committed to a carrier for transportation to the state of its destination, or started on its ultimate passage. Transit ends when the goods arrive at their destination. But intermediate these points questions may arise as to when a temporary stop in transit is such as to make the property taxable at the place of stoppage. Whether the property is taxable in such a case usually depends on the length of time and the purpose of the interruption of transit. . . . .

          . . . It has been held that property of a construction company, used in construction of a railroad, acquires a situs at the place where used for an indefinite period. So tangible personal property in the state for the purpose of undergoing a partial finishing process is not to be regarded as in the course of transit nor as in the state for a mere

Page 12: Tax II Estate and Donor Cases

temporary purpose. (2 Cooley, The Law of Taxation, 4th ed., pp. 982, 983 and 988, par. 452.)

          If the proceeds of the life-insurance policy taken out by the late Adolphe Oscar Schuetze and made payable to his estate, were delivered to the Bank of the Philippine Islands for administration and distribution, they were not in transit but were more or less permanently located in the Philippine Islands, according to the foregoing rules. If this be so, half of the proceeds which is community property, belongs to the estate of the deceased and is subject to the inheritance tax, in accordance with the legal provision quoted above, irrespective of whether or not the late Adolphe Oscar Schuetze was domiciled in the Philippine Islands at the time of his death.

          By virtue of the foregoing, we are of opinion and so hold: (1) That the proceeds of a life-insurance policy payable to the insured's estate, on which the premiums were paid by the conjugal partnership, constitute community property, and belong one-half to the husband and the other half to the wife, exclusively; (2) that if the premiums were paid partly with paraphernal and partly conjugal funds, the proceeds are likewise in like proportion paraphernal in part and conjugal in part; and (3) that the proceeds of a life-insurance policy payable to the insured's estate as the beneficiary, if delivered to the testamentary administrator of the former as part of the assets of said estate under probate administration, are subject to the inheritance tax according to the law on the matter, if they belong to the assured exclusively, and it is immaterial that the insured was domiciled in these Islands or outside.1awphil.net

          Wherefore, the judgment appealed from is reversed, and the defendant is ordered to return to the plaintiff the one-half of the tax collected upon the amount of P20,150, being the proceeds of the insurance policy on the life of the late Adolphe Oscar Schuetze, after deducting the proportional part corresponding to the first premium, without special pronouncement of costs. So ordered.

Avanceña, C.J., Johnson, Street, Malcolm, Villamor, and Ostrand, JJ., concur.

 

 

 

Separate Opinions

 

IMPERIAL, J., dissenting:

          I cannot concur with the majority in holding that one-half of the insurance policy on the life of the late Adolphe Oscar Schuetze, excepting the proportional part corresponding to the first year's premium is community property belonging to the deceased's widow, named Rosario Gelano, and as such is not subject to the inheritance tax.

          There is no question in regard to the facts: It is admitted that Schuetze insured himself in the Sun Life Insurance Company of Canada in Manila, and that the policy was issued on January 14, 1913, payable to his estate after death. He died in Manila on February 2, 1928, leaving his widow as his sole testamentary heiress. The appellant, the Bank of the Philippine Islands, as administrator of the late Schuetze's testamentary estate, received from the insurer the amount of this policy, or the net sum of P20,150.

          It is an established and generally recognized principle that in a life-insurance policy where the insured has named a beneficiary, the proceeds belong to said beneficiary, and to him alone. "Vested Interest of Beneficiary. — In practically every jurisdiction it is the rule that in an ordinary life insurance policy made payable to a beneficiary, and which does not authorize a change of beneficiary, the named beneficiary has an absolute, vested interest in the policy from the date of its issuance, delivery and acceptance, and this is true of a policy payable to the children of the insured equally, without

Page 13: Tax II Estate and Donor Cases

naming them, or their executors, administrators or assigns." (14 R.C.L., 1376.) (Del Val vs. Del Val, 29 Phil., 534 et seq.; Gercio vs. Sun Life Assurance Co. of Canada, 48 Phil., 53 et seq.) When in a life-insurance policy the insured's estate is named beneficiary, the proceeds must be delivered not to the decedent's heirs, but to his administrator or legal representative. "Policy Payable to Insured, His Estate, or Legal Representatives. ... Ordinarily the proceeds of a life insurance policy are payable to the executor or administrator of insured as assets of his estate where by the terms of the policy the proceeds are payable to insured, his estate, his legal representatives, his executors or administrators, his "executors, administrators, or assigns," or even his "heirs, executors, administrators, or assigns." ..." (37 C.J., 565.) "Personal Representatives or Legal Representatives. — While there is some authority to the effect that "legal representatives" means the persons entitled to the estate of the insured, and not his executor or administrator, the better view is that ordinarily the proceeds of such a policy pass to his executor or administrator." (14 R.C.L., 1372.)

          If the foregoing are the principles which should govern life-insurance policies with reference to beneficiaries and the right to the proceeds of such policies, it is evident that Schuetze's estate, and not his widow or the conjugal partnership, is entitled to the proceeds of said policy exclusively, and may receive them from the insurer. The parties must have so understood it when the insurer delivered the net amount of the policy to the Bank of the Philippine Islands, as judicial administrator of the insured.

          It is stated in the majority opinion that the money with which the premiums were paid during the marriage of the Schuetzes is presumed to have been taken from the conjugal funds, according to article 1407 of the Civil Code, which provides that "All the property of the spouses shall be deemed partnership property in the absence of proof that it belongs exclusively to the husband or to the wife." This is the very argument which led to the settlement of the point of law raised. The provisions of the Civil Code on conjugal property have been improperly applied without considering that a life-insurance contract is a peculiar contract governed by special laws, such as Act No. 2427 with its amendments, and the Code of Commerce, which is still in force. In Del Val, supra, it was already held:

          We cannot agree with these contentions. The contract of life insurance is a special contract and the destination of the proceeds thereof is determined by special laws which deal exclusively with that subject. The Civil Code has no provisions which relate directly and specially to life insurance contracts or to the destination of life insurance proceeds. That subject is regulated exclusively by the Code of Commerce which provides for the terms of the contract, the relations of the parties and the destination of the proceeds of the policy.

          The main point to be decided was not whether the premiums were paid out of conjugal or personal funds of one of the spouses, but whether or not the proceeds of the policy became assets of the insured's estate. If it be admitted that the estate is the sole owner of the aforesaid proceeds, which cannot be denied, inasmuch as the policy itself names the estate as the beneficiary, it is beside the point to discuss the nature and origin of the amounts used to pay the premiums, as the title to the proceeds of the policy is vested in the insured's estate, and any right the widow might have should be vindicated in another action. In such a case she might be entitled to reimbursement of her share in the conjugal funds, but not in the present case, for she has been instituted the sole testamentary heiress.

          From the foregoing, it follows that as the proceeds of the policy belong to Schuetze's estate, and inasmuch as the inheritance tax is levied upon the transmission of a deceased person's estate upon, or, on the occasion of his death, it is clear that the whole proceeds, and not one-half thereof, are subject to such tax.

          In my opinion the judgment appealed from should have been affirmed in its entirely.

Romualdez, J., concurs.

G.R. No. L-11622             January 28, 1961

Page 14: Tax II Estate and Donor Cases

THE COLLECTOR OF INTERNAL REVENUE, petitioner, vs.DOUGLAS FISHER AND BETTINA FISHER, and the COURT OF TAX APPEALS, respondents.

x---------------------------------------------------------x

G.R. No. L-11668             January 28, 1961.

DOUGLAS FISHER AND BETTINA FISHER, petitioner, vs.THE COLLECTOR OF INTERNAL REVENUE, and the COURT OF TAX APPEALS, respondents.

BARRERA, J.:

This case relates to the determination and settlement of the hereditary estate left by the deceased Walter G. Stevenson, and the laws applicable thereto. Walter G. Stevenson (born in the Philippines on August 9, 1874 of British parents and married in the City of Manila on January 23, 1909 to Beatrice Mauricia Stevenson another British subject) died on February 22, 1951 in San Francisco, California, U.S.A. whereto he and his wife moved and established their permanent residence since May 10, 1945. In his will executed in San Francisco on May 22, 1947, and which was duly probated in the Superior Court of California on April 11, 1951, Stevenson instituted his wife Beatrice as his sole heiress to the following real and personal properties acquired by the spouses while residing in the Philippines, described and preliminary assessed as follows:

Gross Estate

Real Property — 2 parcels of land in Baguio, covered by T.C.T. Nos. 378 and 379 P43,500.00

Personal Property

(1) 177 shares of stock of Canacao Estate at P10.00 each 1,770.00

(2) 210,000 shares of stock of Mindanao Mother Lode Mines, Inc. at P0.38 per share 79,800.00

(3) Cash credit with Canacao Estate Inc. 4,870.88

(4) Cash, with the Chartered Bank of India, Australia & China           851.97

            Total Gross Assets P130,792.85

On May 22, 1951, ancillary administration proceedings were instituted in the Court of First Instance of Manila for the settlement of the estate in the Philippines. In due time Stevenson's will was duly admitted to probate by our court and Ian Murray Statt was appointed ancillary administrator of the estate, who on July 11, 1951, filed a preliminary estate and inheritance tax return with the reservation of having the properties declared therein finally appraised at their values six months after the death of Stevenson. Preliminary return was made by the ancillary administrator in order to secure the

Page 15: Tax II Estate and Donor Cases

waiver of the Collector of Internal Revenue on the inheritance tax due on the 210,000 shares of stock in the Mindanao Mother Lode Mines Inc. which the estate then desired to dispose in the United States. Acting upon said return, the Collector of Internal Revenue accepted the valuation of the personal properties declared therein, but increased the appraisal of the two parcels of land located in Baguio City by fixing their fair market value in the amount of P52.200.00, instead of P43,500.00. After allowing the deductions claimed by the ancillary administrator for funeral expenses in the amount of P2,000.00 and for judicial and administration expenses in the sum of P5,500.00, the Collector assessed the state the amount of P5,147.98 for estate tax and P10,875,26 or inheritance tax, or a total of P16,023.23. Both of these assessments were paid by the estate on June 6, 1952.

On September 27, 1952, the ancillary administrator filed in amended estate and inheritance tax return in pursuance f his reservation made at the time of filing of the preliminary return and for the purpose of availing of the right granted by section 91 of the National Internal Revenue Code.

In this amended return the valuation of the 210,000 shares of stock in the Mindanao Mother Lode Mines, Inc. was reduced from 0.38 per share, as originally declared, to P0.20 per share, or from a total valuation of P79,800.00 to P42,000.00. This change in price per share of stock was based by the ancillary administrator on the market notation of the stock obtaining at the San Francisco California) Stock Exchange six months from the death of Stevenson, that is, As of August 22, 1931. In addition, the ancillary administrator made claim for the following deductions:

Funeral expenses ($1,04326) P2,086.52

Judicial Expenses:

(a) Administrator's Fee P1,204.34

(b) Attorney's Fee 6.000.00

(c) Judicial and Administration expenses as of August 9, 1952 1,400.05

8,604.39

Real Estate Tax for 1951 on Baguio real properties (O.R. No. B-1 686836) 652.50

Claims against the estate:($5,000.00) P10,000.00 P10,000.00

Plus: 4% int. p.a. from Feb. 2 to 22, 1951 22.47   10,022.47

Sub-Total P21,365.88

In the meantime, on December 1, 1952, Beatrice Mauricia Stevenson assigned all her rights and interests in the estate to the spouses, Douglas and Bettina Fisher, respondents herein.

On September 7, 1953, the ancillary administrator filed a second amended estate and inheritance tax return (Exh. "M-N"). This return declared the same assets of the estate stated in the amended return of September 22, 1952, except that it

Page 16: Tax II Estate and Donor Cases

contained new claims for additional exemption and deduction to wit: (1) deduction in the amount of P4,000.00 from the gross estate of the decedent as provided for in Section 861 (4) of the U.S. Federal Internal Revenue Code which the ancillary administrator averred was allowable by way of the reciprocity granted by Section 122 of the National Internal Revenue Code, as then held by the Board of Tax Appeals in case No. 71 entitled "Housman vs. Collector," August 14, 1952; and (2) exemption from the imposition of estate and inheritance taxes on the 210,000 shares of stock in the Mindanao Mother Lode Mines, Inc. also pursuant to the reciprocity proviso of Section 122 of the National Internal Revenue Code. In this last return, the estate claimed that it was liable only for the amount of P525.34 for estate tax and P238.06 for inheritance tax and that, as a consequence, it had overpaid the government. The refund of the amount of P15,259.83, allegedly overpaid, was accordingly requested by the estate. The Collector denied the claim. For this reason, action was commenced in the Court of First Instance of Manila by respondents, as assignees of Beatrice Mauricia Stevenson, for the recovery of said amount. Pursuant to Republic Act No. 1125, the case was forwarded to the Court of Tax Appeals which court, after hearing, rendered decision the dispositive portion of which reads as follows:

In fine, we are of the opinion and so hold that: (a) the one-half (½) share of the surviving spouse in the conjugal partnership property as diminished by the obligations properly chargeable to such property should be deducted from the net estate of the deceased Walter G. Stevenson, pursuant to Section 89-C of the National Internal Revenue Code; (b) the intangible personal property belonging to the estate of said Stevenson is exempt from inheritance tax, pursuant to the provision of section 122 of the National Internal Revenue Code in relation to the California Inheritance Tax Law but decedent's estate is not entitled to an exemption of P4,000.00 in the computation of the estate tax; (c) for purposes of estate and inheritance taxation the Baguio real estate of the spouses should be valued at P52,200.00, and 210,000 shares of stock in the Mindanao Mother Lode Mines, Inc. should be appraised at P0.38 per share; and (d) the estate shall be entitled to a deduction of P2,000.00 for funeral expenses and judicial expenses of P8,604.39.

From this decision, both parties appealed.

The Collector of Internal Revenue, hereinafter called petitioner assigned four errors allegedly committed by the trial court, while the assignees, Douglas and Bettina Fisher hereinafter called respondents, made six assignments of error. Together, the assigned errors raise the following main issues for resolution by this Court:

(1) Whether or not, in determining the taxable net estate of the decedent, one-half (½) of the net estate should be deducted therefrom as the share of tile surviving spouse in accordance with our law on conjugal partnership and in relation to section 89 (c) of the National Internal revenue Code;

(2) Whether or not the estate can avail itself of the reciprocity proviso embodied in Section 122 of the National Internal Revenue Code granting exemption from the payment of estate and inheritance taxes on the 210,000 shares of stock in the Mindanao Mother Lode Mines Inc.;

(3) Whether or not the estate is entitled to the deduction of P4,000.00 allowed by Section 861, U.S. Internal Revenue Code in relation to section 122 of the National Internal Revenue Code;

(4) Whether or not the real estate properties of the decedent located in Baguio City and the 210,000 shares of stock in the Mindanao Mother Lode Mines, Inc., were correctly appraised by the lower court;

(5) Whether or not the estate is entitled to the following deductions: P8,604.39 for judicial and administration expenses; P2,086.52 for funeral expenses; P652.50 for real estate taxes; and P10,0,22.47 representing the amount of indebtedness allegedly incurred by the decedent during his lifetime; and

(6) Whether or not the estate is entitled to the payment of interest on the amount it claims to have overpaid the government and to be refundable to it.

In deciding the first issue, the lower court applied a well-known doctrine in our civil law that in the absence of any ante-

Page 17: Tax II Estate and Donor Cases

nuptial agreement, the contracting parties are presumed to have adopted the system of conjugal partnership as to the properties acquired during their marriage. The application of this doctrine to the instant case is being disputed, however, by petitioner Collector of Internal Revenue, who contends that pursuant to Article 124 of the New Civil Code, the property relation of the spouses Stevensons ought not to be determined by the Philippine law, but by the national law of the decedent husband, in this case, the law of England. It is alleged by petitioner that English laws do not recognize legal partnership between spouses, and that what obtains in that jurisdiction is another regime of property relation, wherein all properties acquired during the marriage pertain and belong Exclusively to the husband. In further support of his stand, petitioner cites Article 16 of the New Civil Code (Art. 10 of the old) to the effect that in testate and intestate proceedings, the amount of successional rights, among others, is to be determined by the national law of the decedent.

In this connection, let it be noted that since the mariage of the Stevensons in the Philippines took place in 1909, the applicable law is Article 1325 of the old Civil Code and not Article 124 of the New Civil Code which became effective only in 1950. It is true that both articles adhere to the so-called nationality theory of determining the property relation of spouses where one of them is a foreigner and they have made no prior agreement as to the administration disposition, and ownership of their conjugal properties. In such a case, the national law of the husband becomes the dominant law in determining the property relation of the spouses. There is, however, a difference between the two articles in that Article

1241 of the new Civil Code expressly provides that it shall be applicable regardless of whether the marriage was celebrated

in the Philippines or abroad while Article 13252 of the old Civil Code is limited to marriages contracted in a foreign land.

It must be noted, however, that what has just been said refers to mixed marriages between a Filipino citizen and a

foreigner. In the instant case, both spouses are foreigners who married in the Philippines. Manresa,3 in his Commentaries, has this to say on this point:

La regla establecida en el art. 1.315, se refiere a las capitulaciones otorgadas en Espana y entre espanoles. El 1.325, a las celebradas en el extranjero cuando alguno de los conyuges es espanol. En cuanto a la regla procedente cuando dos extranjeros se casan en Espana, o dos espanoles en el extranjero hay que atender en el primer caso a la legislacion de pais a que aquellos pertenezean, y en el segundo, a las reglas generales consignadas en los articulos 9 y 10 de nuestro Codigo. (Emphasis supplied.)

If we adopt the view of Manresa, the law determinative of the property relation of the Stevensons, married in 1909, would be the English law even if the marriage was celebrated in the Philippines, both of them being foreigners. But, as correctly observed by the Tax Court, the pertinent English law that allegedly vests in the decedent husband full ownership of the properties acquired during the marriage has not been proven by petitioner. Except for a mere allegation in his answer, which is not sufficient, the record is bereft of any evidence as to what English law says on the matter. In the absence of proof, the Court is justified, therefore, in indulging in what Wharton calls "processual presumption," in presuming that the

law of England on this matter is the same as our law.4

Nor do we believe petitioner can make use of Article 16 of the New Civil Code (art. 10, old Civil Code) to bolster his stand. A reading of Article 10 of the old Civil Code, which incidentally is the one applicable, shows that it does not encompass or contemplate to govern the question of property relation between spouses. Said article distinctly speaks of amount of successional rights and this term, in speaks in our opinion, properly refers to the extent or amount of property that each heir is legally entitled to inherit from the estate available for distribution. It needs to be pointed out that the property relation of spouses, as distinguished from their successional rights, is governed differently by the specific and express provisions of Title VI, Chapter I of our new Civil Code (Title III, Chapter I of the old Civil Code.) We, therefore, find that the lower court correctly deducted the half of the conjugal property in determining the hereditary estate left by the deceased Stevenson.

On the second issue, petitioner disputes the action of the Tax Court in the exempting the respondents from paying inheritance tax on the 210,000 shares of stock in the Mindanao Mother Lode Mines, Inc. in virtue of the reciprocity proviso of Section 122 of the National Internal Revenue Code, in relation to Section 13851 of the California Revenue and Taxation Code, on the ground that: (1) the said proviso of the California Revenue and Taxation Code has not been duly

Page 18: Tax II Estate and Donor Cases

proven by the respondents; (2) the reciprocity exemptions granted by section 122 of the National Internal Revenue Code can only be availed of by residents of foreign countries and not of residents of a state in the United States; and (3) there is no "total" reciprocity between the Philippines and the state of California in that while the former exempts payment of both estate and inheritance taxes on intangible personal properties, the latter only exempts the payment of inheritance tax..

To prove the pertinent California law, Attorney Allison Gibbs, counsel for herein respondents, testified that as an active member of the California Bar since 1931, he is familiar with the revenue and taxation laws of the State of California. When asked by the lower court to state the pertinent California law as regards exemption of intangible personal properties, the witness cited article 4, section 13851 (a) and (b) of the California Internal and Revenue Code as published in Derring's California Code, a publication of the Bancroft-Whitney Company inc. And as part of his testimony, a full quotation of the cited section was offered in evidence as Exhibits "V-2" by the respondents.

It is well-settled that foreign laws do not prove themselves in our jurisdiction and our courts are not authorized to take

judicial notice of them.5 Like any other fact, they must be alleged and proved.6

Section 41, Rule 123 of our Rules of Court prescribes the manner of proving foreign laws before our tribunals. However, although we believe it desirable that these laws be proved in accordance with said rule, we held in the case of Willamette Iron and Steel Works v. Muzzal, 61 Phil. 471, that "a reading of sections 300 and 301 of our Code of Civil Procedure (now section 41, Rule 123) will convince one that these sections do not exclude the presentation of other competent evidence to prove the existence of a foreign law." In that case, we considered the testimony of an attorney-at-law of San Francisco, California who quoted verbatim a section of California Civil Code and who stated that the same was in force at the time the obligations were contracted, as sufficient evidence to establish the existence of said law. In line with this view, we find no error, therefore, on the part of the Tax Court in considering the pertinent California law as proved by respondents' witness.

We now take up the question of reciprocity in exemption from transfer or death taxes, between the State of California and the Philippines.F

Section 122 of our National Internal Revenue Code, in pertinent part, provides:

... And, provided, further, That no tax shall be collected under this Title in respect of intangible personal property (a) if the decedent at the time of his death was a resident of a foreign country which at the time of his death did not impose a transfer of tax or death tax of any character in respect of intangible personal property of citizens of the Philippines not residing in that foreign country, or (b) if the laws of the foreign country of which the decedent was a resident at the time of his death allow a similar exemption from transfer taxes or death taxes of every character in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country." (Emphasis supplied).

On the other hand, Section 13851 of the California Inheritance Tax Law, insofar as pertinent, reads:.

"SEC. 13851, Intangibles of nonresident: Conditions. Intangible personal property is exempt from the tax imposed by this part if the decedent at the time of his death was a resident of a territory or another State of the United States or of a foreign state or country which then imposed a legacy, succession, or death tax in respect to intangible personal property of its own residents, but either:.

(a) Did not impose a legacy, succession, or death tax of any character in respect to intangible personal property of residents of this State, or

(b) Had in its laws a reciprocal provision under which intangible personal property of a non-resident was exempt from legacy, succession, or death taxes of every character if the Territory or other State of the United States or foreign state or country in which the nonresident resided allowed a similar exemption in respect to intangible personal property of residents of the Territory or State of the United States or foreign state or country of residence

Page 19: Tax II Estate and Donor Cases

of the decedent." (Id.)

It is clear from both these quoted provisions that the reciprocity must be total, that is, with respect to transfer or death taxes of any and every character, in the case of the Philippine law, and to legacy, succession, or death taxes of any and every character, in the case of the California law. Therefore, if any of the two states collects or imposes and does not exempt any transfer, death, legacy, or succession tax of any character, the reciprocity does not work. This is the underlying principle of the reciprocity clauses in both laws.

In the Philippines, upon the death of any citizen or resident, or non-resident with properties therein, there are imposed upon his estate and its settlement, both an estate and an inheritance tax. Under the laws of California, only inheritance tax is imposed. On the other hand, the Federal Internal Revenue Code imposes an estate tax on non-residents not citizens of the

United States,7 but does not provide for any exemption on the basis of reciprocity. Applying these laws in the manner the Court of Tax Appeals did in the instant case, we will have a situation where a Californian, who is non-resident in the Philippines but has intangible personal properties here, will the subject to the payment of an estate tax, although exempt from the payment of the inheritance tax. This being the case, will a Filipino, non-resident of California, but with intangible personal properties there, be entitled to the exemption clause of the California law, since the Californian has not been exempted from every character of legacy, succession, or death tax because he is, under our law, under obligation to pay an estate tax? Upon the other hand, if we exempt the Californian from paying the estate tax, we do not thereby entitle a Filipino to be exempt from a similar estate tax in California because under the Federal Law, which is equally enforceable in California he is bound to pay the same, there being no reciprocity recognized in respect thereto. In both instances, the Filipino citizen is always at a disadvantage. We do not believe that our legislature has intended such an unfair situation to the detriment of our own government and people. We, therefore, find and declare that the lower court erred in exempting the estate in question from payment of the inheritance tax.

We are not unaware of our ruling in the case of Collector of Internal Revenue vs. Lara (G.R. Nos. L-9456 & L-9481, prom. January 6, 1958, 54 O.G. 2881) exempting the estate of the deceased Hugo H. Miller from payment of the inheritance tax imposed by the Collector of Internal Revenue. It will be noted, however, that the issue of reciprocity between the pertinent provisions of our tax law and that of the State of California was not there squarely raised, and the ruling therein cannot control the determination of the case at bar. Be that as it may, we now declare that in view of the express provisions of both the Philippine and California laws that the exemption would apply only if the law of the other grants an exemption from legacy, succession, or death taxes of every character, there could not be partial reciprocity. It would have to be total or none at all.

With respect to the question of deduction or reduction in the amount of P4,000.00 based on the U.S. Federal Estate Tax Law which is also being claimed by respondents, we uphold and adhere to our ruling in the Lara case (supra) that the amount of $2,000.00 allowed under the Federal Estate Tax Law is in the nature of a deduction and not of an exemption regarding which reciprocity cannot be claimed under the provision of Section 122 of our National Internal Revenue Code. Nor is reciprocity authorized under the Federal Law. .

On the issue of the correctness of the appraisal of the two parcels of land situated in Baguio City, it is contended that their assessed values, as appearing in the tax rolls 6 months after the death of Stevenson, ought to have been considered by petitioner as their fair market value, pursuant to section 91 of the National Internal Revenue Code. It should be pointed out, however, that in accordance with said proviso the properties are required to be appraised at their fair market value and the assessed value thereof shall be considered as the fair market value only when evidence to the contrary has not been shown. After all review of the record, we are satisfied that such evidence exists to justify the valuation made by petitioner which was sustained by the tax court, for as the tax court aptly observed:

"The two parcels of land containing 36,264 square meters were valued by the administrator of the estate in the Estate and Inheritance tax returns filed by him at P43,500.00 which is the assessed value of said properties. On the other hand, defendant appraised the same at P52,200.00. It is of common knowledge, and this Court can take judicial notice of it, that assessments for real estate taxation purposes are very much lower than the true and fair market value of the properties at a given time and place. In fact one year after decedent's death or in 1952 the said

Page 20: Tax II Estate and Donor Cases

properties were sold for a price of P72,000.00 and there is no showing that special or extraordinary circumstances caused the sudden increase from the price of P43,500.00, if we were to accept this value as a fair and reasonable one as of 1951. Even more, the counsel for plaintiffs himself admitted in open court that he was willing to purchase the said properties at P2.00 per square meter. In the light of these facts we believe and therefore hold that the valuation of P52,200.00 of the real estate in Baguio made by defendant is fair, reasonable and justified in the premises." (Decision, p. 19).

In respect to the valuation of the 210,000 shares of stock in the Mindanao Mother Lode Mines, Inc., (a domestic corporation), respondents contend that their value should be fixed on the basis of the market quotation obtaining at the San Francisco (California) Stock Exchange, on the theory that the certificates of stocks were then held in that place and registered with the said stock exchange. We cannot agree with respondents' argument. The situs of the shares of stock, for purposes of taxation, being located here in the Philippines, as respondents themselves concede and considering that they are sought to be taxed in this jurisdiction, consistent with the exercise of our government's taxing authority, their fair market value should be taxed on the basis of the price prevailing in our country.

Upon the other hand, we find merit in respondents' other contention that the said shares of stock commanded a lesser value at the Manila Stock Exchange six months after the death of Stevenson. Through Atty. Allison Gibbs, respondents have shown that at that time a share of said stock was bid for at only P.325 (p. 103, t.s.n.). Significantly, the testimony of Atty. Gibbs in this respect has never been questioned nor refuted by petitioner either before this court or in the court below. In the absence of evidence to the contrary, we are, therefore, constrained to reverse the Tax Court on this point and to hold that the value of a share in the said mining company on August 22, 1951 in the Philippine market was P.325 as claimed by respondents..

It should be noted that the petitioner and the Tax Court valued each share of stock of P.38 on the basis of the declaration made by the estate in its preliminary return. Patently, this should not have been the case, in view of the fact that the ancillary administrator had reserved and availed of his legal right to have the properties of the estate declared at their fair market value as of six months from the time the decedent died..

On the fifth issue, we shall consider the various deductions, from the allowance or disallowance of which by the Tax Court, both petitioner and respondents have appealed..

Petitioner, in this regard, contends that no evidence of record exists to support the allowance of the sum of P8,604.39 for the following expenses:.

1) Administrator's fee P1,204.34

2) Attorney's fee 6,000.00

3) Judicial and Administrative expenses   2,052.55

            Total Deductions P8,604.39

An examination of the record discloses, however, that the foregoing items were considered deductible by the Tax Court on the basis of their approval by the probate court to which said expenses, we may presume, had also been presented for consideration. It is to be supposed that the probate court would not have approved said items were they not supported by evidence presented by the estate. In allowing the items in question, the Tax Court had before it the pertinent order of the probate court which was submitted in evidence by respondents. (Exh. "AA-2", p. 100, record). As the Tax Court said, it found no basis for departing from the findings of the probate court, as it must have been satisfied that those expenses were actually incurred. Under the circumstances, we see no ground to reverse this finding of fact which, under Republic Act of California National Association, which it would appear, that while still living, Walter G. Stevenson obtained we are not inclined to pass upon the claim of respondents in respect to the additional amount of P86.52 for funeral expenses which

Page 21: Tax II Estate and Donor Cases

was disapproved by the court a quo for lack of evidence.

In connection with the deduction of P652.50 representing the amount of realty taxes paid in 1951 on the decedent's two parcels of land in Baguio City, which respondents claim was disallowed by the Tax Court, we find that this claim has in fact been allowed. What happened here, which a careful review of the record will reveal, was that the Tax Court, in itemizing the liabilities of the estate, viz:

1) Administrator's fee P1,204.34

2) Attorney's fee 6,000.00

3) Judicial and Administration expenses as of August 9, 1952   2,052.55

            Total P9,256.89

added the P652.50 for realty taxes as a liability of the estate, to the P1,400.05 for judicial and administration expenses approved by the court, making a total of P2,052.55, exactly the same figure which was arrived at by the Tax Court for judicial and administration expenses. Hence, the difference between the total of P9,256.98 allowed by the Tax Court as deductions, and the P8,604.39 as found by the probate court, which is P652.50, the same amount allowed for realty taxes. An evident oversight has involuntarily been made in omitting the P2,000.00 for funeral expenses in the final computation. This amount has been expressly allowed by the lower court and there is no reason why it should not be. .

We come now to the other claim of respondents that pursuant to section 89(b) (1) in relation to section 89(a) (1) (E) and section 89(d), National Internal Revenue Code, the amount of P10,022.47 should have been allowed the estate as a deduction, because it represented an indebtedness of the decedent incurred during his lifetime. In support thereof, they offered in evidence a duly certified claim, presented to the probate court in California by the Bank of California National Association, which it would appear, that while still living, Walter G. Stevenson obtained a loan of $5,000.00 secured by pledge on 140,000 of his shares of stock in the Mindanao Mother Lode Mines, Inc. (Exhs. "Q-Q4", pp. 53-59, record). The Tax Court disallowed this item on the ground that the local probate court had not approved the same as a valid claim against the estate and because it constituted an indebtedness in respect to intangible personal property which the Tax Court held to be exempt from inheritance tax.

For two reasons, we uphold the action of the lower court in disallowing the deduction.

Firstly, we believe that the approval of the Philippine probate court of this particular indebtedness of the decedent is necessary. This is so although the same, it is averred has been already admitted and approved by the corresponding probate court in California, situs of the principal or domiciliary administration. It is true that we have here in the Philippines only an ancillary administration in this case, but, it has been held, the distinction between domiciliary or principal administration and ancillary administration serves only to distinguish one administration from the other, for the two

proceedings are separate and independent.8 The reason for the ancillary administration is that, a grant of administration does not ex proprio vigore, have any effect beyond the limits of the country in which it was granted. Hence, we have the requirement that before a will duly probated outside of the Philippines can have effect here, it must first be proved and

allowed before our courts, in much the same manner as wills originally presented for allowance therein.9 And the estate shall be administered under letters testamentary, or letters of administration granted by the court, and disposed of

according to the will as probated, after payment of just debts and expenses of administration.10 In other words, there is a regular administration under the control of the court, where claims must be presented and approved, and expenses of administration allowed before deductions from the estate can be authorized. Otherwise, we would have the actuations of our own probate court, in the settlement and distribution of the estate situated here, subject to the proceedings before the foreign court over which our courts have no control. We do not believe such a procedure is countenanced or contemplated

Page 22: Tax II Estate and Donor Cases

in the Rules of Court.

Another reason for the disallowance of this indebtedness as a deduction, springs from the provisions of Section 89, letter (d), number (1), of the National Internal Revenue Code which reads:

(d) Miscellaneous provisions — (1) No deductions shall be allowed in the case of a non-resident not a citizen of the Philippines unless the executor, administrator or anyone of the heirs, as the case may be, includes in the return required to be filed under section ninety-three the value at the time of his death of that part of the gross estate of the non-resident not situated in the Philippines."

In the case at bar, no such statement of the gross estate of the non-resident Stevenson not situated in the Philippines appears in the three returns submitted to the court or to the office of the petitioner Collector of Internal Revenue. The purpose of this requirement is to enable the revenue officer to determine how much of the indebtedness may be allowed to be deducted, pursuant to (b), number (1) of the same section 89 of the Internal Revenue Code which provides:

(b) Deductions allowed to non-resident estates. — In the case of a non-resident not a citizen of the Philippines, by deducting from the value of that part of his gross estate which at the time of his death is situated in the Philippines —

(1) Expenses, losses, indebtedness, and taxes. — That proportion of the deductions specified in paragraph (1) of

subjection (a) of this section11 which the value of such part bears the value of his entire gross estate wherever situated;"

In other words, the allowable deduction is only to the extent of the portion of the indebtedness which is equivalent to the proportion that the estate in the Philippines bears to the total estate wherever situated. Stated differently, if the properties in the Philippines constitute but 1/5 of the entire assets wherever situated, then only 1/5 of the indebtedness may be deducted. But since, as heretofore adverted to, there is no statement of the value of the estate situated outside the Philippines, no part of the indebtedness can be allowed to be deducted, pursuant to Section 89, letter (d), number (1) of the Internal Revenue Code.

For the reasons thus stated, we affirm the ruling of the lower court disallowing the deduction of the alleged indebtedness in the sum of P10,022.47.

In recapitulation, we hold and declare that:

(a) only the one-half (1/2) share of the decedent Stevenson in the conjugal partnership property constitutes his hereditary estate subject to the estate and inheritance taxes;

(b) the intangible personal property is not exempt from inheritance tax, there existing no complete total reciprocity as required in section 122 of the National Internal Revenue Code, nor is the decedent's estate entitled to an exemption of P4,000.00 in the computation of the estate tax;

(c) for the purpose of the estate and inheritance taxes, the 210,000 shares of stock in the Mindanao Mother Lode Mines, Inc. are to be appraised at P0.325 per share; and

(d) the P2,000.00 for funeral expenses should be deducted in the determination of the net asset of the deceased Stevenson.

In all other respects, the decision of the Court of Tax Appeals is affirmed.

Respondent's claim for interest on the amount allegedly overpaid, if any actually results after a recomputation on the basis

Page 23: Tax II Estate and Donor Cases

of this decision is hereby denied in line with our recent decision in Collector of Internal Revenue v. St. Paul's Hospital (G.R. No. L-12127, May 29, 1959) wherein we held that, "in the absence of a statutory provision clearly or expressly directing or authorizing such payment, and none has been cited by respondents, the National Government cannot be required to pay interest."

WHEREFORE, as modified in the manner heretofore indicated, the judgment of the lower court is hereby affirmed in all other respects not inconsistent herewith. No costs. So ordered.

Paras, C.J., Bengzon, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Gutierrez David, Paredes and Dizon, JJ., concur.

G.R. No. 123206             March 22, 2000

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.COURT OF APPEALS, COURT OF TAX APPEALS and JOSEFINA P. PAJONAR, as Administratrix of the Estate of Pedro P. Pajonar, respondents.

R E S O L U T I O N

GONZAGA-REYES, J.:

Assailed in this petition for review on certiorari is the December 21, 1995 Decision1 of the Court of Appeals2 in CA-G.R. Sp. No. 34399 affirming the June 7, 1994 Resolution of the Court of Tax Appeals in CTA Case No. 4381 granting private respondent Josefina P. Pajonar, as administratrix of the estate of Pedro P. Pajonar, a tax refund in the amount of P76,502.42, representing erroneously paid estate taxes for the year 1988.

Pedro Pajonar, a member of the Philippine Scout, Bataan Contingent, during the second World War, was a part of the infamous Death March by reason of which he suffered shock and became insane. His sister Josefina Pajonar became the guardian over his person, while his property was placed under the guardianship of the Philippine National Bank (PNB) by the Regional Trial Court of Dumaguete City, Branch 31, in Special Proceedings No. 1254. He died on January 10, 1988. He was survived by his two brothers Isidro P. Pajonar and Gregorio Pajonar, his sister Josefina Pajonar, nephews Concordio Jandog and Mario Jandog and niece Conchita Jandog.

On May 11, 1988, the PNB filed an accounting of the decedent's property under guardianship valued at P3,037,672.09 in Special Proceedings No. 1254. However, the PNB did not file an estate tax return, instead it advised Pedro Pajonar's heirs to execute an extrajudicial settlement and to pay the taxes on his estate. On April 5, 1988, pursuant to the assessment by the Bureau of Internal Revenue (BIR), the estate of Pedro Pajonar paid taxes in the amount of P2,557.

On May 19, 1988, Josefina Pajonar filed a petition with the Regional Trial Court of Dumaguete City for the issuance in her favor of letters of administration of the estate of her brother. The case was docketed as Special Proceedings No. 2399. On July 18, 1988, the trial court appointed Josefina Pajonar as the regular administratrix of Pedro Pajonar's estate.

On December 19, 1988, pursuant to a second assessment by the BIR for deficiency estate tax, the estate of Pedro Pajonar paid estate tax in the amount of P1,527,790.98. Josefina Pajonar, in her capacity as administratrix and heir of Pedro Pajonar's estate, filed a protest on January 11, 1989 with the BIR praying that the estate tax payment in the amount of

Page 24: Tax II Estate and Donor Cases

P1,527,790.98, or at least some portion of it, be returned to the heirs. 3

However, on August 15, 1989, without waiting for her protest to be resolved by the BIR, Josefina Pajonar filed a petition for review with the Court of Tax Appeals (CTA), praying for the refund of P1,527,790.98, or in the alternative,

P840,202.06, as erroneously paid estate tax. 4 The case was docketed as CTA Case No. 4381.

On May 6, 1993, the CTA ordered the Commissioner of Internal Revenue to refund Josefina Pajonar the amount of

P252,585.59, representing erroneously paid estate tax for the year 1988.5 Among the deductions from the gross estate allowed by the CTA were the amounts of P60,753 representing the notarial fee for the Extrajudicial Settlement and the

amount of P50,000 as the attorney's fees in Special Proceedings No. 1254 for guardianship.6

On June 15, 1993, the Commissioner of Internal Revenue filed a motion for reconsideration7 of the CTA's May 6, 1993 decision asserting, among others, that the notarial fee for the Extrajudicial Settlement and the attorney's fees in the guardianship proceedings are not deductible expenses.

On June 7, 1994, the CTA issued the assailed Resolution8 ordering the Commissioner of Internal Revenue to refund Josefina Pajonar, as administratrix of the estate of Pedro Pajonar, the amount of P76,502.42 representing erroneously paid estate tax for the year 1988. Also, the CTA upheld the validity of the deduction of the notarial fee for the Extrajudicial Settlement and the attorney's fees in the guardianship proceedings.

On July 5, 1994, the Commissioner of Internal Revenue filed with the Court of Appeals a petition for review of the CTA's May 6, 1993 Decision and its June 7, 1994 Resolution, questioning the validity of the abovementioned deductions. On

December 21, 1995, the Court of Appeals denied the Commissioner's petition.9

Hence, the present appeal by the Commissioner of Internal Revenue.

The sole issue in this case involves the construction of section 79 10 of the National Internal Revenue Code 11 (Tax Code) which provides for the allowable deductions from the gross estate of the decedent. More particularly, the question is whether the notarial fee paid for the extrajudicial settlement in the amount of P60,753 and the attorney's fees in the guardianship proceedings in the amount of P50,000 may be allowed as deductions from the gross estate of decedent in order to arrive at the value of the net estate.

We answer this question in the affirmative, thereby upholding the decisions of the appellate courts.

In its May 6, 1993 Decision, the Court of Tax Appeals ruled thus:

Respondent maintains that only judicial expenses of the testamentary or intestate proceedings are allowed as a deduction to the gross estate. The amount of P60,753.00 is quite extraordinary for a mere notarial fee.

This Court adopts the view under American jurisprudence that expenses incurred in the extrajudicial settlement of the estate should be allowed as a deduction from the gross estate. "There is no requirement of formal administration. It is sufficient that the expense be a necessary contribution toward the settlement of the case." [ 34 Am. Jur. 2d, p. 765; Nolledo, Bar Reviewer in Taxation, 10th Ed. (1990), p. 481]

x x x           x x x          x x x

The attorney's fees of P50,000.00, which were already incurred but not yet paid, refers to the guardianship proceeding filed by PNB, as guardian over the ward of Pedro Pajonar, docketed as Special Proceeding No. 1254 in

Page 25: Tax II Estate and Donor Cases

the RTC (Branch XXXI) of Dumaguete City. . . .

x x x           x x x          x x x

The guardianship proceeding had been terminated upon delivery of the residuary estate to the heirs entitled thereto. Thereafter, PNB was discharged of any further responsibility.

Attorney's fees in order to be deductible from the gross estate must be essential to the collection of assets, payment of debts or the distribution of the property to the persons entitled to it. The services for which the fees are charged must relate to the proper settlement of the estate. [34 Am. Jur. 2d 767.] In this case, the guardianship proceeding was necessary for the distribution of the property of the late Pedro Pajonar to his rightful heirs.

x x x           x x x          x x x

PNB was appointed as guardian over the assets of the late Pedro Pajonar, who, even at the time of his death, was incompetent by reason of insanity. The expenses incurred in the guardianship proceeding was but a necessary expense in the settlement of the decedent's estate. Therefore, the attorney's fee incurred in the guardianship proceedings amounting to P50,000.00 is a reasonable and necessary business expense deductible from the gross

estate of the decedent. 12

Upon a motion for reconsideration filed by the Commissioner of Internal Revenue, the Court of Tax Appeals modified its previous ruling by reducing the refundable amount to P76,502.43 since it found that a deficiency interest should be

imposed and the compromise penalty excluded. 13 However, the tax court upheld its previous ruling regarding the legality of the deductions —

It is significant to note that the inclusion of the estate tax law in the codification of all our national internal revenue laws with the enactment of the National Internal Revenue Code in 1939 were copied from the Federal Law of the United States. [ UMALI, Reviewer in Taxation (1985), p. 285 ] The 1977 Tax Code, promulgated by Presidential Decree No. 1158, effective June 3, 1977, reenacted substantially all the provisions of the old law on estate and gift taxes, except the sections relating to the meaning of gross estate and gift. [ Ibid, p. 286. ]

In the United States, [a]dministrative expenses, executor's commissions and attorney's fees are considered allowable deductions from the Gross Estate. Administrative expenses are limited to such expenses as are actually and necessarily incurred in the administration of a decedent's estate. [PRENTICE-HALL, Federal Taxes Estate and Gift Taxes (1936), p. 120, 533.] Necessary expenses of administration are such expenses as are entailed for the preservation and productivity of the estate and for its management for purposes of liquidation, payment of debts and distribution of the residue among the persons entitled thereto. [Lizarraga Hermanos vs. Abada, 40 Phil. 124.] They must be incurred for the settlement of the estate as a whole. [34 Am. Jur. 2d, p. 765.] Thus, where there were no substantial community debts and it was unnecessary to convert community property to cash, the only practical purpose of administration being the payment of estate taxes, full deduction was allowed for attorney's fees and miscellaneous expenses charged wholly to decedent's estate. [ Ibid., citing Estate of Helis, 26 T.C. 143 (A).]

Petitioner stated in her protest filed with the BIR that "upon the death of the ward, the PNB, which was still the guardian of the estate, (Annex "Z"), did not file an estate tax return; however, it advised the heirs to execute an extrajudicial settlement, to pay taxes and to post a bond equal to the value of the estate, for which the state paid P59,341.40 for the premiums. (See Annex "K")." [p. 17, CTA record.] Therefore, it would appear from the records of the case that the only practical purpose of settling the estate by means of an extrajudicial settlement pursuant to Section 1 of Rule 74 of the Rules of Court was for the payment of taxes and the distribution of the estate to the heirs. A fortiori, since our estate tax laws are of American origin, the interpretation adopted by American Courts has some persuasive effect on the interpretation of our own estate tax laws on the subject.

Page 26: Tax II Estate and Donor Cases

Anent the contention of respondent that the attorney's fees of P50,000.00 incurred in the guardianship proceeding should not be deducted from the Gross Estate, We consider the same unmeritorious. Attorneys' and guardians' fees incurred in a trustee's accounting of a taxable inter vivos trust attributable to the usual issues involved in such an accounting was held to be proper deductions because these are expenses incurred in terminating an inter vivos trust that was includible in the decedent's estate. [Prentice Hall, Federal Taxes on Estate and Gift, p. 120, 861] Attorney's fees are allowable deductions if incurred for the settlement of the estate. It is noteworthy to point that PNB was appointed the guardian over the assets of the deceased. Necessarily the assets of the deceased formed part of his gross estate. Accordingly, all expenses incurred in relation to the estate of the deceased will be deductible for estate tax purposes provided these are necessary and ordinary

expenses for administration of the settlement of the estate. 14

In upholding the June 7, 1994 Resolution of the Court of Tax Appeals, the Court of Appeals held that:

2. Although the Tax Code specifies "judicial expenses of the testamentary or intestate proceedings," there is no reason why expenses incurred in the administration and settlement of an estate in extrajudicial proceedings should not be allowed. However, deduction is limited to such administration expenses as are actually and necessarily incurred in the collection of the assets of the estate, payment of the debts, and distribution of the remainder among those entitled thereto. Such expenses may include executor's or administrator's fees, attorney's fees, court fees and charges, appraiser's fees, clerk hire, costs of preserving and distributing the estate and storing or maintaining it, brokerage fees or commissions for selling or disposing of the estate, and the like. Deductible attorney's fees are those incurred by the executor or administrator in the settlement of the estate or in defending or prosecuting claims against or due the estate. (Estate and Gift Taxation in the Philippines, T. P. Matic, Jr., 1981 Edition, p. 176).

x x x           x x x          x x x

It is clear then that the extrajudicial settlement was for the purpose of payment of taxes and the distribution of the estate to the heirs. The execution of the extrajudicial settlement necessitated the notarization of the same. Hence the Contract of Legal Services of March 28, 1988 entered into between respondent Josefina Pajonar and counsel was presented in evidence for the purpose of showing that the amount of P60,753.00 was for the notarization of the Extrajudicial Settlement. It follows then that the notarial fee of P60,753.00 was incurred primarily to settle the estate of the deceased Pedro Pajonar. Said amount should then be considered an administration expenses actually and necessarily incurred in the collection of the assets of the estate, payment of debts and distribution of the remainder among those entitled thereto. Thus, the notarial fee of P60,753 incurred for the Extrajudicial Settlement should be allowed as a deduction from the gross estate.

3. Attorney's fees, on the other hand, in order to be deductible from the gross estate must be essential to the settlement of the estate.

The amount of P50,000.00 was incurred as attorney's fees in the guardianship proceedings in Spec. Proc. No. 1254. Petitioner contends that said amount are not expenses of the testamentary or intestate proceedings as the guardianship proceeding was instituted during the lifetime of the decedent when there was yet no estate to be settled.

Again, this contention must fail.

The guardianship proceeding in this case was necessary for the distribution of the property of the deceased Pedro Pajonar. As correctly pointed out by respondent CTA, the PNB was appointed guardian over the assets of the deceased, and that necessarily the assets of the deceased formed part of his gross estate. . . .

x x x           x x x          x x x

It is clear therefore that the attorney's fees incurred in the guardianship proceeding in Spec. Proc. No. 1254 were essential to the distribution of the property to the persons entitled thereto. Hence, the attorney's fees incurred in the guardianship

Page 27: Tax II Estate and Donor Cases

proceedings in the amount of P50,000.00 should be allowed as a deduction from the gross estate of the decedent. 15

The deductions from the gross estate permitted under section 79 of the Tax Code basically reproduced the deductions

allowed under Commonwealth Act No. 466 (CA 466), otherwise known as the National Internal Revenue Code of 1939, 16

and which was the first codification of Philippine tax laws. Section 89 (a) (1) (B) of CA 466 also provided for the deduction of the "judicial expenses of the testamentary or intestate proceedings" for purposes of determining the value of

the net estate. Philippine tax laws were, in turn, based on the federal tax laws of the United States. 17 In accord with established rules of statutory construction, the decisions of American courts construing the federal tax code are entitled to

great weight in the interpretation of our own tax laws. 18

Judicial expenses are expenses of administration. 19 Administration expenses, as an allowable deduction from the gross estate of the decedent for purposes of arriving at the value of the net estate, have been construed by the federal and state courts of the United States to include all expenses "essential to the collection of the assets, payment of debts or the

distribution of the property to the persons entitled to it." 20 In other words, the expenses must be essential to the proper settlement of the estate. Expenditures incurred for the individual benefit of the heirs, devisees or legatees are not

deductible. 21 This distinction has been carried over to our jurisdiction. Thus, in Lorenzo v. Posadas 22 the Court construed the phrase "judicial expenses of the testamentary or intestate proceedings" as not including the compensation paid to a trustee of the decedent's estate when it appeared that such trustee was appointed for the purpose of managing the decedent's real estate for the benefit of the testamentary heir. In another case, the Court disallowed the premiums paid on the bond filed by the administrator as an expense of administration since the giving of a bond is in the nature of a

qualification for the office, and not necessary in the settlement of the estate. 23 Neither may attorney's fees incident to litigation incurred by the heirs in asserting their respective rights be claimed as a deduction from the gross estate. 241âwphi1

Coming to the case at bar, the notarial fee paid for the extrajudicial settlement is clearly a deductible expense since such settlement effected a distribution of Pedro Pajonar's estate to his lawful heirs. Similarly, the attorney's fees paid to PNB for acting as the guardian of Pedro Pajonar's property during his lifetime should also be considered as a deductible administration expense. PNB provided a detailed accounting of decedent's property and gave advice as to the proper settlement of the latter's estate, acts which contributed towards the collection of decedent's assets and the subsequent settlement of the estate.

We find that the Court of Appeals did not commit reversible error in affirming the questioned resolution of the Court of Tax Appeals.

WHEREFORE, the December 21, 1995 Decision of the Court of Appeals is AFFIRMED. The notarial fee for the extrajudicial settlement and the attorney's fees in the guardianship proceedings are allowable deductions from the gross estate of Pedro Pajonar.1âwphi1.nêt

SO ORDERED.

Melo, Vitug, Panganiban and Purisima, JJ., concur.

G.R. No. L-9271             March 29, 1957

In the matter of the testate estate of the late DA. MARGARITA DAVID. CARLOS MORAN SISON, Judicial

Page 28: Tax II Estate and Donor Cases

Administrator, petitioner-appellant, vs.NARCISA F. TEODORO, heiress, oppositor-appellee.

Teodoro R. Dominguez for appellant.Manuel O. Chan for appellee.

BAUTISTA ANGELO, J.:

On December 20, 1948, the Court of First Instance of Manila, which has jurisdiction over the estate of the late Margarita David, issued an order appointing Carlos Moran Sison as judicial administrator, without compensation, after filing a bond in the amount of P5,000. The next day, Carlos Moran Sison took his oath of office and put up the requisite bond which was duly approved by the court. On the same day, letters of administration were issued to him.

On January 19, 1955, the judicial administrator filed an accounting of his administration which contains, among others, the following disbursement items:

13. Paid to Visayan Surety & Insurance Corporation on August 6, 1954, as renewal premiums on the Administrator's bond of Judicial Administrator Carlos Moran Sison covering the period from December 20, 1949 to December 20, 1954, inclusive ................................. P380.70

15. Paid to Visayan Surety & Insurance Corporation on December 21, 1954, for premiums due on the Administrator's bond of judicial Administrator Carlos Moran Sison for the period from December 21, 1954 to December 21, 1955 ............................................................... 76.14

Narcisa F. Teodoro, one of the heirs, objected to the approval of the above- quoted items on the grounds that they are not necessary expenses of administration and should not be charged against the estate. On February 25, 1955, the court approved the report of the administrator but disallowed the items objected to on the ground that they cannot be considered as expenses of administration. The administrator filed a motion for reconsideration and when the same was denied, he took the present appeal.

The only issue to be determined is "whether a judicial administrator, serving without compensation, is entitled to charge as an expense of administration the premiums paid on his bond."

The lower court did not consider the premiums paid on the bond filed by the administrator as an expense of administration taking into account undoubtedly the ruling laid down in the case of Sulit vs. Santos, 56 Phil., 626. That is a case which also involves the payment of certain premium on the bond put up by the judicial administrator and when he asked the court that the same be considered as an expense of administration, it was disapproved for the same reasons advanced by the trial court. In sustaining this finding, this Court ruled that the "expense incurred by an executor or administrator to produce a bond is not a proper charge against the estate. Section 680 of the Code of Civil Procedure (similar to section 7, Rule 86) does not authorize the executor or administrator to charge against the estate the money spent for the presentation, filing, and substitution of a bond." And elaborating on this matter, the Court made the following comment:

The aforementioned cases, in reality, seem superfluous in ascertaining the true principle. The position of an executor or administrator is one of trust. In fact, the Philippine Code of Civil Procedure so mentions it. It is proper

Page 29: Tax II Estate and Donor Cases

for the law to safeguard the estate of deceased persons by requiring the executor or administrator to give a suitable bond. The ability to give this bond is in the nature of a qualification for the office. The execution and approval of the bond constitute a condition precedent to acceptance of the responsibilities of the trust. If an individual does not desire to assume the position of executor of administrator, he may refuse to do so. On the other hand, when the individual prefers an adequate bond and has it approved by the probate court, he thereby admits the adequacy of the compensation which is permitted him pursuant to law. It would be a very far-fetched construction to deduce the giving of a bond in order to qualify for the office of executor or administrator is a necessary expense in the care, management, and settlement of the estate within the meaning of section 680 of the Code of Civil Procedure, for these are expenses incurred after the executor of administrator has met the requirements of the law and has entered upon the performance of his duties. (See In re Eby's Estate [1894], 30 Atl., 124.)

We feel that the orders of Judge Mapa in this case rested on a fine sense of official duty, sometimes lacking in cases of this character, to protect the residue of the estate of a deceased person from unjustifiable inroads by an executor, and that as these orders conform to the facts and the law, they are entitled to be fortified by an explicit pronouncement from this court. We rule that the expense incurred by an execution or administrator to procure a bond is not a proper charge against the estate, and that section 680 of the Code of Civil Procedure does not authorize the executor or administrator to charge against the estate the money spent for the presentation, filing, and substitution of a bond.

It is true that the Sulit case may be differentiated from the present in the sense that, in the former the administrator accepted the trust with the emolument that the law allows, whereas in the latter the administrator accepted the same without compensation, but this difference is of no moment, for there is nothing in the decision that may justify the conclusion that the allowance or disallowance of premiums paid on the bond of the administrator is made dependent on the receipt of compensation. On the contrary, a different conclusion may be inferred considering the ratio decidendi on which the ruling is predicated. Thus, it was there stated that the position of an executor or administrator is one of trust: that it is proper for the law to safeguard the estates of deceased persons by requiring the administrator to give a suitable bond, and that the ability to give this bond is in the nature of a qualification for the office. It is also intimated therein that "If an individual does not desire to assume the position of executor or administrator, he may refuse to do so," and it is far-fetched to conclude that the giving of a bond by an administrator is an necessary expense in the care, management and settlement of the estate within the meaning of the law, because these expenses are incurred "after the executor or administrator has met the requirement of the law and has entered upon the performance of his duties." Of course, a person may accept the position of executor or administrator with all the incident appertaining thereto having in mind the compensation which the law allows for the purpose, but he may waive this compensation in the same manner as he may refuse to serve without it. Appellant having waived compensation, he cannot now be heard to complain of the expenses incident to his qualification.

The orders appealed from are hereby affirmed, without costs.

Paras. C.J., Bengzon, Reyes, A., Labrador, Concepcion, Reyes, J.B.L., Endencia and Felix, JJ., concur.

G.R. No. L-17175             July 31, 1962

RICARDO M. GUTIERREZ, plaintiff-appellant, vs.LUCIA MILAGROS BARRETTO-DATU, Executrix of the Testate Estate of the deceased MARIA GERARDO VDA. DE BARRETTO, defendant-appellee.

Teofilo Sison and Mariano G. Bustos and Associates for plaintiff-appellant.

Page 30: Tax II Estate and Donor Cases

Deogracias T. Reyes and Luison and Associates for defendant-appellee.

MAKALINTAL, J.:

Ricardo M. Gutierrez appeals from the orders of Court of First Instance of Rizal (1) dismissing his complaint against Lucia Milagros Barretto-Datu, as executive of the estate of the deceased Maria Gerardo Vda. de Barreto, and (2) denying his motion for reconsideration the dismissal.

The relevant facts alleged by appellant are as follows; In 1940, Maria Gerardo Vda. de Barretto, owner of hectares of fishpond lands in Pampanga, leased the same to appellant Gutierrez for a term to expire on May 1, 1947. On November 1, 1941, pursuant to a decision of Department of Public Works rendered after due investigation the dikes of the fishponds were opened at several points, resulting in their destruction and in the loss great quantities of fish inside, to the damage and prejudice of the lessee.

In 1956, the lessor having died in 1948 and the corresponding testate proceeding to settle her estate having been opened (Sp. Proc. No. 5002, C.F.I., Manila), Gutierrez filed a claim therein for two items: first, for the sum of P32,000.00 representing advance rentals he had to the decedent (the possession of the leased property is alleged, having been returned to her after the open of the dikes ordered by the government); and second, the sum of P60,000.00 as damages in the concept of earned profits, that is, profits which the claimant failed to realize because of the breach of the lease contract allegedly committed by the lessor.

On June 7, 1957 appellant commenced the instant ordinary civil action in the Court of First Instance of Rizal (Quezon City branch) against the executrix of the testate for the recovery of the same amount of P60,000 referred to as the second item claimed in the administration proceeding. The complaint specifically charges decedent Manila Gerardo Vda. de Barretto, is lessor, was having violated a warranty in the lease contract again any damages the lessee might suffer by reason of the claim of the government that several rivers and creeks of the public domain were included in the fishponds.

In July 1957 appellant amended his claim in the testate proceeding by withdrawing therefrom the item of P60,000.00, leaving only the one for refund of advance rentals in the sum of P32,000.00.

After the issues were joined in the present case with the filing of the defendant's answer, together with a counterclaim, and after two postponements of the trial were granted, the second of which was in January 1958, the court dismissed the action for abandonment by both parties in an order dated July 31, 1959. Appellant moved to reconsider; appellee opposed the motion; and after considerable written argument the court, on March 7, 1960, denied the motion for reconsideration on the ground that the claim should have been prosecuted in the testate proceeding and not by ordinary civil action.

Appellant submits his case on this lone legal question: whether or not his claim for damages based on unrealized profits is a money claim against the estate of the deceased Maria Gerardo Vda. de Barretto within the purview of Rule 87, Section 5. This section states:

SEC. 5. Claims which must be filed under the notice. If not filed, barred; exception. — All claims for money against the decedent, arising from contract, express or implied, whether the same be due, not due, or contingent, all claims for funeral expenses and expenses of the last sickness of the decedent, and judgment for money against the decedent, must be filed within the time limited in the notice; otherwise they are barred forever, except that they may be set forth as counterclaims in any action that the executor or administrator may bring against the claimants. Where an executor or administrator commences an action, or prosecutes an action already commenced by the deceased in his lifetime, the debtor may set forth by answer the claims he has against the decedent, instead of presenting them independently to the court as herein provided, and mutual claims may be set off against each other in such action; and if final judgment is rendered in favor of the defendant, the amount so determined shall be considered the true balance against the estate, as though the claim had been presented directly before the court in the administration proceedings. Claims not yet due, or contingent, may be approved at their present value.

Page 31: Tax II Estate and Donor Cases

The word "claims" as used in statutes requiring the presentation of claims against a decedent's estate 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 judgments; and among these are those founded upon contract. 21 Am. Jur. 579. The claim in this case is based on contract — specifically, on a breach thereof. It falls squarely under section 5 of Rule 87 "Upon all contracts by the decedent broken during his lifetime, even though they were personal to the decedent in liability, the personal representative is answerable for the breach out of the assets." 3 Schouler on Wills, Executors and Administrators, 6th Ed., 2395. A claim for breach of a covenant in a deed of the decedent must be presented under a statute requiring such presentment of all claims grounded on contract. Id. 2461; Clayton v. Dinwoody, 93 P. 723; James v. Corvin,

51 P. 2nd 689.1

The only actions that may be instituted against the executor or administrator are those to recover real or personal property from the estate, or to enforce a lien thereon, and actions to recover damages for an injury to person or property, real or personal. Rule 88, section 1. The instant suit is not one of them.

Appellant invokes Gavin v. Melliza, 84 Phil. 794, in support of his contention that this action is proper against the executrix. The citation is not in point. The claim therein, which was filed in the testate proceeding, was based upon a breach of contract committed by the executrix herself, in dismissing the claimant as administrator of the hacienda of the deceased. While the contract was with the decedent, its violation was by the executrix and hence personal to her. Besides, the claim was for indemnity in the form of a certain quantity of palay every year for the unexpired portion of the term of the contract. The denial of the claim was affirmed by this Court on the grounds that it was not a money claim and that it arose after the decedent's demise, placing it outside the scope of Rule 87, Section 5.

The orders appealed from are affirmed, with costs against appellant.

Bengzon, C.J., Labrador, Concepcion, Barrera, Paredes, Dizon and Regala, JJ., concur.Padilla, J., took no part.

RAFAEL ARSENIO S. DIZON, in his capacity as the Judicial Administrator of the Estate of the deceased JOSE P. FERNANDEZ,

Petitioner,

 

 

          - versus -

 

 

COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE,

G.R. No. 140944

 

Present:

 

YNARES-SANTIAGO, J.,

   Chairperson,

AUSTRIA-MARTINEZ,

CHICO-NAZARIO,

NACHURA, and

Page 32: Tax II Estate and Donor Cases

                            Respondents. REYES, JJ.

 

Promulgated:

 

   April 30, 2008

 x------------------------------------------------------------------------------------x

 

 

DECISION

 

NACHURA, J.:

                            

 

          Before this Court is a Petition for Review on Certiorari[1] under Rule 45 of the Rules of Civil Procedure

seeking the reversal of the Court of Appeals (CA) Decision[2] dated April 30, 1999 which affirmed the

Decision[3] of the Court of Tax Appeals (CTA) dated June 17, 1997.[4]

 

The Facts

 

 

          On November 7, 1987, Jose P. Fernandez (Jose) died. Thereafter, a petition for the probate of his will [5]

was filed with Branch 51 of the Regional Trial Court (RTC) of Manila (probate court).[6] The probate court then

appointed retired Supreme Court Justice Arsenio P. Dizon (Justice Dizon) and petitioner, Atty. Rafael Arsenio P.

Dizon (petitioner) as Special and Assistant Special Administrator, respectively, of the Estate of Jose (Estate). In a

letter[7] dated October 13, 1988, Justice Dizon   informed respondent Commissioner of the Bureau of Internal

Revenue (BIR) of the special proceedings for the Estate.

 

          Petitioner alleged that several requests for extension of the period to file the required estate tax return were

granted by the BIR since the assets of the estate, as well as the claims against it, had yet to be collated,

determined and identified. Thus, in a letter[8] dated March 14, 1990, Justice Dizon authorized Atty. Jesus M.

Gonzales (Atty. Gonzales) to sign and file on behalf of the Estate the required estate tax return and to represent

the same in securing a Certificate of Tax Clearance. Eventually, on April 17, 1990, Atty. Gonzales wrote a

Page 33: Tax II Estate and Donor Cases

letter[9] addressed to the BIR Regional Director for San Pablo City and filed the estate tax return[10] with the

same BIR Regional Office, showing therein a NIL estate tax liability, computed as follows:

 

Page 34: Tax II Estate and Donor Cases

 

COMPUTATION OF TAX

 

Conjugal Real Property (Sch. 1)                       P10,855,020.00

Conjugal Personal Property (Sch.2)                      3,460,591.34

Taxable Transfer (Sch. 3)

Gross Conjugal Estate                                        14,315,611.34

Less: Deductions (Sch. 4)                                 187,822,576.06

Net Conjugal Estate                                                      NIL

Less: Share of Surviving Spouse                                            NIL               .

Net Share in Conjugal Estate                                        NIL

            x x x

Net Taxable Estate                                                       NIL               .

Estate Tax Due                                                           NIL               .[11]

 

 

 

On April 27, 1990, BIR Regional Director for San Pablo City, Osmundo G. Umali issued Certification

Nos. 2052[12] and 2053[13] stating that the taxes due on the transfer of real and personal properties[14] of Jose

had been fully paid and said properties may be transferred to his heirs. Sometime in August 1990, Justice Dizon

passed away. Thus, on October 22, 1990, the probate court appointed petitioner as the administrator of the

Estate.[15]

 

Petitioner requested the probate court's authority to sell several properties forming part of the Estate, for

the purpose of paying its creditors, namely: Equitable Banking Corporation (P19,756,428.31), Banque de

L'Indochine et. de Suez (US$4,828,905.90 as of January 31, 1988), Manila Banking Corporation

(P84,199,160.46 as of February 28, 1989) and State Investment House, Inc. (P6,280,006.21). Petitioner

manifested that Manila Bank, a major creditor of the  Estate was not included, as it did not file a claim with the

probate court since it had security over several real estate properties forming part of the Estate.[16]

 

 

However, on November 26, 1991, the Assistant Commissioner for Collection of the BIR, Themistocles

Montalban, issued Estate Tax Assessment Notice No. FAS-E-87-91-003269,[17] demanding the payment of

P66,973,985.40 as deficiency estate tax, itemized as follows:

Page 35: Tax II Estate and Donor Cases

 

Deficiency Estate Tax- 1987

 

Estate tax                                                         P31,868,414.48

25% surcharge- late filing                                      7,967,103.62

                              late payment                           7,967,103.62

         Interest                                                      19,121,048.68

         Compromise-non filing                                      25,000.00

                                 non payment                             25,000.00

                                 no notice of death                            15.00

                                 no CPA Certificate                                            300.00

 

Total amount due & collectible              P 66,973,985.40 [18]

           

 

 

          In his letter[19] dated December 12, 1991, Atty. Gonzales moved for the reconsideration of the said estate

tax assessment. However, in her letter[20] dated April 12, 1994, the BIR Commissioner denied the request and

reiterated that the estate is liable for the payment of P66,973,985.40 as deficiency estate tax. On May 3, 1994,

petitioner received the letter of denial. On June 2, 1994, petitioner filed a petition for review[21] before

respondent CTA. Trial on the merits ensued. 

 

 

          As found by the CTA, the respective parties presented the following pieces of evidence, to wit:

 

            In the hearings conducted, petitioner did not present testimonial evidence but merely documentary evidence consisting of the following:

 

            Nature of Document (sic)                                                                                  Exhibits 1.         Letter dated October 13, 1988            from Arsenio P. Dizon addressed            to the Commissioner of Internal            Revenue informing the latter of            the special proceedings for the            settlement of the estate (p. 126,            BIR records);                                                   "A" 2.         Petition for the probate of the

Page 36: Tax II Estate and Donor Cases

            will and issuance of letter of            administration filed with the            Regional Trial Court (RTC) of            Manila, docketed as Sp. Proc.            No. 87-42980 (pp. 107-108, BIR            records);                                                          "B"& "B-1” 3.         Pleading entitled "Compliance"            filed with the probate Court            submitting the final inventory            of all the properties of the            deceased (p. 106, BIR records);                       "C" 4.         Attachment to Exh. "C" which            is the detailed and complete            listing of the properties of            the deceased (pp. 89-105, BIR rec.);               "C-1" to "C-17" 5.         Claims against the estate filed            by Equitable Banking Corp. with            the probate Court in the amount            of P19,756,428.31 as of March 31,            1988, together with the Annexes            to the claim (pp. 64-88, BIR records);  "D" to "D-24" 6.         Claim filed by Banque de L'            Indochine et de Suez with the            probate Court in the amount of            US $4,828,905.90 as of January 31,            1988 (pp. 262-265, BIR records);                   "E" to "E-3" 7.         Claim of the Manila Banking            Corporation (MBC) which as of            November 7, 1987 amounts to            P65,158,023.54, but recomputed            as of February 28, 1989 at a            total amount of P84,199,160.46;            together with the demand letter            from MBC's lawyer (pp. 194-197,            BIR records);                                                   "F" to "F-3" 8.         Demand letter of Manila Banking            Corporation prepared by Asedillo,            Ramos and Associates Law Offices            addressed to Fernandez Hermanos,            Inc., represented by Jose P.            Fernandez, as mortgagors, in the            total amount of P240,479,693.17            as of February 28, 1989            (pp. 186-187, BIR records);                            "G"& "G-1" 9.         Claim of State Investment            House, Inc. filed with the

Page 37: Tax II Estate and Donor Cases

            RTC, Branch VII of Manila,            docketed as Civil Case No.            86-38599 entitled "State            Investment House, Inc.,            Plaintiff, versus Maritime            Company Overseas, Inc. and/or            Jose P. Fernandez, Defendants,"            (pp. 200-215, BIR records);                            "H" to "H-16" 10.       Letter dated March 14, 1990            of Arsenio P. Dizon addressed            to Atty. Jesus M. Gonzales,            (p. 184, BIR records);                                      "I" 11.       Letter dated April 17, 1990            from J.M. Gonzales addressed            to the Regional Director of            BIR in San Pablo City            (p. 183, BIR records);                                      "J" 12.       Estate Tax Return filed by            the estate of the late Jose P.            Fernandez through its authorized            representative, Atty. Jesus M.            Gonzales, for Arsenio P. Dizon,            with attachments (pp. 177-182,            BIR records);                                                   "K" to "K-5"

Page 38: Tax II Estate and Donor Cases

13.       Certified true copy of the            Letter of Administration            issued by RTC Manila, Branch            51, in Sp. Proc. No. 87-42980            appointing Atty. Rafael S.            Dizon as Judicial Administrator            of the estate of Jose P.            Fernandez; (p. 102, CTA records)            and                                                                   "L" 14.       Certification of Payment of            estate taxes Nos. 2052 and            2053, both dated April 27, 1990,            issued by the Office of the            Regional Director, Revenue            Region No. 4-C, San Pablo            City, with attachments            (pp. 103-104, CTA records.).                          "M" to "M-5"

 

            Respondent's [BIR] counsel presented on June 26, 1995 one witness in the person of Alberto Enriquez, who was one of the revenue examiners who conducted the investigation on the estate tax case of the late Jose P. Fernandez. In the course of the direct examination of the witness, he identified the following:

 

            Documents/            Signatures                                                         BIR Record 1.         Estate Tax Return prepared by            the BIR;                                                           p. 138 2.         Signatures of Ma. Anabella            Abuloc and Alberto Enriquez,            Jr. appearing at the lower            Portion of Exh. "1";                                           -do- 3.         Memorandum for the Commissioner,            dated July 19, 1991, prepared by            revenue examiners, Ma. Anabella A.            Abuloc, Alberto S. Enriquez and            Raymund S. Gallardo; Reviewed by            Maximino V. Tagle                                           pp. 143-144 4.         Signature of Alberto S.            Enriquez appearing at the            lower portion on p. 2 of Exh. "2";                      -do- 5.         Signature of Ma. Anabella A.            Abuloc appearing at the            lower portion on p. 2 of Exh. "2";                      -do- 6.         Signature of Raymund S.            Gallardo appearing at the

Page 39: Tax II Estate and Donor Cases

            Lower portion on p. 2 of Exh. "2";                    -do- 7.         Signature of Maximino V.            Tagle also appearing on            p. 2 of Exh. "2";                                                -do- 8.         Summary of revenue            Enforcement Officers Audit            Report, dated July 19, 1991;                            p. 139 9.         Signature of Alberto            Enriquez at the lower            portion of Exh. "3";                                           -do- 10.       Signature of Ma. Anabella A.            Abuloc at the lower            portion of Exh. "3";                                           -do- 11.       Signature of Raymond S.            Gallardo at the lower            portion of Exh. "3";                                           -do- 12.       Signature of Maximino            V. Tagle at the lower            portion of Exh. "3";                                           -do- 13.       Demand letter (FAS-E-87-91-00),            signed by the Asst. Commissioner            for Collection for the Commissioner            of Internal Revenue, demanding            payment of the amount of            P66,973,985.40; and                                       p. 169 14.       Assessment Notice FAS-E-87-91-00               pp. 169-170[22]  

The CTA's Ruling

 

 

          On June 17, 1997, the CTA denied the said petition for review. Citing this Court's ruling in Vda. de Oñate

v. Court of Appeals,[23] the CTA opined that the aforementioned pieces of evidence introduced by the BIR were

admissible in evidence. The CTA ratiocinated:

Although the above-mentioned documents were not formally offered as evidence for respondent, considering that respondent has been declared to have waived the presentation thereof during the hearing on March 20, 1996, still they could be considered as evidence for respondent since they were properly identified during the presentation of respondent's witness, whose testimony was duly recorded as part of the records of this case. Besides, the documents marked as respondent's exhibits formed part of the BIR records of the case.[24] 

 

Page 40: Tax II Estate and Donor Cases

 Nevertheless, the CTA did not fully adopt the assessment made by the BIR and it came up with its own

computation of the deficiency estate tax, to wit:

 

Conjugal Real Property                                              P   5,062,016.00Conjugal Personal Prop.                                               33,021,999.93Gross Conjugal Estate                                                  38,084,015.93Less:  Deductions                                                         26,250,000.00Net Conjugal Estate                                                   P  11,834,015.93Less:  Share of Surviving Spouse                                  5,917,007.96Net Share in Conjugal Estate                                     P    5,917,007.96Add:  Capital/ParaphernalProperties – P44,652,813.66                        Less:  Capital/Paraphernal                        Deductions                                              44,652,813.66Net Taxable Estate                                                    P  50,569,821.62                                                                                 ============ Estate Tax Due P  29,935,342.97Add:  25% Surcharge for Late Filing                                7,483,835.74Add:  Penalties for-No notice of death                                      15.00                               No CPA certificate                                                               300.00 Total deficiency estate tax                                          P   37,419,493.71                                                                                  ============= exclusive of 20% interest from due date of its payment until full payment thereof[Sec. 283 (b), Tax Code of 1987].[25]  

          Thus, the CTA disposed of the case in this wise:

 

 

            WHEREFORE, viewed from all the foregoing, the Court finds the petition unmeritorious and denies the same. Petitioner and/or the heirs of Jose P. Fernandez are hereby ordered to pay to respondent the amount of P37,419,493.71 plus 20% interest from the due date of its payment until full payment thereof as estate tax liability of the estate of Jose P. Fernandez who died on November 7, 1987.             SO ORDERED.[26]  

          Aggrieved, petitioner, on March 2, 1998, went to the CA via a petition for review.[27]

 

The CA's Ruling

          On April 30, 1999, the CA affirmed the CTA's ruling. Adopting in full the CTA's findings, the CA ruled

that the petitioner's act of filing an estate tax return with the BIR and the issuance of BIR Certification Nos. 2052

Page 41: Tax II Estate and Donor Cases

and 2053 did not deprive the BIR Commissioner of her authority to re-examine or re-assess the said return filed

on behalf of the Estate.[28]

 

 

          On May 31, 1999, petitioner filed a Motion for Reconsideration[29] which the CA denied in its

Resolution[30] dated November 3, 1999.

 

          Hence, the instant Petition raising the following issues:

 

1.      Whether or not the admission of evidence which were not formally offered by the respondent BIR by the Court of Tax Appeals which was subsequently upheld by the Court of Appeals is contrary to the Rules of Court and rulings of this Honorable Court;

 2. Whether or not the Court of Tax Appeals and the Court of Appeals erred in

recognizing/considering the estate tax return prepared and filed by respondent BIR knowing that the probate court appointed administrator of the estate of Jose P. Fernandez had previously filed one as in fact, BIR Certification Clearance Nos. 2052 and 2053 had been issued in the estate's favor;

 3. Whether or not the Court of Tax Appeals and the Court of Appeals erred in disallowing the

valid and enforceable claims of creditors against the estate, as lawful deductions despite clear and convincing evidence thereof; and

 4. Whether or not the Court of Tax Appeals and the Court of Appeals erred in validating

erroneous double imputation of values on the very same estate properties in the estate tax return it prepared and filed which effectively bloated the estate's assets.[31]

 

 

          The petitioner claims that in as much as the valid claims of creditors against the Estate are in excess of the

gross estate, no estate tax was due; that the lack of a formal offer of evidence is fatal to BIR's cause; that the

doctrine laid down in Vda. de Oñate has already been abandoned in a long line of cases in which the Court held

that evidence not formally offered is without any weight or value; that Section 34 of Rule 132 of the Rules on

Evidence requiring a formal offer of evidence is mandatory in character; that, while BIR's witness Alberto

Enriquez (Alberto) in his testimony before the CTA identified the pieces of evidence aforementioned such that

the same were marked, BIR's failure to formally offer said pieces of evidence and depriving petitioner the

opportunity to cross-examine Alberto, render the same inadmissible in evidence; that assuming arguendo that the

ruling in Vda. de Oñate is still applicable, BIR failed to comply with the doctrine's requisites because the

documents herein remained simply part of the BIR records and were not duly incorporated in the court records;

that the BIR failed to consider that although the actual payments made to the Estate creditors were lower than

their respective claims, such were compromise agreements reached long after the Estate's liability had been

Page 42: Tax II Estate and Donor Cases

settled by the filing of its estate tax return and the issuance of BIR Certification Nos. 2052 and 2053; and that the

reckoning date of the claims against the Estate and the settlement of the estate tax due should be at the time the

estate tax return was filed by the judicial administrator and the issuance of said BIR Certifications and not at the

time the aforementioned Compromise Agreements were entered into with the Estate's creditors.[32]     

 

 

          On the other hand, respondent counters that the documents, being part of the records of the case and duly

identified in a duly recorded testimony are considered evidence even if the same were not formally offered; that

the filing of the estate tax return by the Estate and the issuance of BIR Certification Nos. 2052 and 2053 did not

deprive the BIR of its authority to examine the return and assess the estate tax; and that the factual findings of

the CTA as affirmed by the CA may no longer be reviewed by this Court via a petition for review.[33]

 

The Issues

 

          There are two ultimate issues which require resolution in this case:

 

          First. Whether or not the CTA and the CA gravely erred in allowing the admission of the pieces of

evidence which were not formally offered by the BIR; and

 

          Second. Whether or not the CA erred in affirming the CTA in the latter's determination of the deficiency

estate tax imposed against the Estate.

 

The Court’s Ruling

 

          The Petition is impressed with merit.

 

           Under Section 8 of RA 1125, the CTA is categorically described as a court of record. As cases filed before

it are litigated de novo, party-litigants shall prove every minute aspect of their cases. Indubitably, no evidentiary

value can be given the pieces of evidence submitted by the BIR, as the rules on documentary evidence require

that these documents must be formally offered before the CTA.[34] Pertinent is Section 34, Rule 132 of the

Revised Rules on Evidence which reads:

Page 43: Tax II Estate and Donor Cases

 

            SEC. 34. Offer of evidence. — The court shall consider no evidence which has not been formally offered. The purpose for which the evidence is offered must be specified.   The CTA and the CA rely solely on the case of Vda. de Oñate, which reiterated this Court's previous

rulings in People v. Napat-a[35] and People v. Mate[36] on the admission and consideration of exhibits which

were not formally offered during the trial.  Although in a long line of cases many of which were decided after

Vda. de Oñate, we held that courts cannot consider evidence which has not been formally offered,[37]

nevertheless, petitioner cannot validly assume that the doctrine laid down in Vda. de Oñate has already been

abandoned. Recently, in Ramos v. Dizon,[38] this Court, applying the said doctrine, ruled that the trial court

judge therein committed no error when he admitted and considered the respondents' exhibits in the resolution of

the case, notwithstanding the fact that the same

Page 44: Tax II Estate and Donor Cases

were not formally offered. Likewise, in Far East Bank & Trust Company v. Commissioner of Internal Revenue,

[39] the Court made reference to said doctrine in resolving the issues therein. Indubitably, the doctrine laid down

in Vda. De Oñate still subsists in this jurisdiction. In Vda. de Oñate, we held that:

 

             From the foregoing provision, it is clear that for evidence to be considered, the same must be formally offered. Corollarily, the mere fact that a particular document is identified and marked as an exhibit does not mean that it has already been offered as part of the evidence of a party. In Interpacific Transit, Inc. v. Aviles [186 SCRA 385], we had the occasion to make a distinction between identification of documentary evidence and its formal offer as an exhibit. We said that the first is done in the course of the trial and is accompanied by the marking of the evidence as an exhibit while the second is done only when the party rests its case and not before. A party, therefore, may opt to formally offer his evidence if he believes that it will advance his cause or not to do so at all. In the event he chooses to do the latter, the trial court is not authorized by the Rules to consider the same.             However, in People v. Napat-a [179 SCRA 403] citing People v. Mate [103 SCRA 484], we relaxed the foregoing rule and allowed evidence not formally offered to be admitted and considered by the trial court provided the following requirements are present, viz.: first, the same must have been duly identified by testimony duly recorded and, second, the same must have been incorporated in the records of the case.[40]  

         

From the foregoing declaration, however, it is clear that Vda. de Oñate is merely an exception to the

general rule.  Being an exception, it may be applied only when there is strict compliance with the requisites

mentioned therein; otherwise, the general rule in Section 34 of Rule 132 of the Rules of Court should prevail.

 

          In this case, we find that these requirements have not been satisfied. The assailed pieces of evidence were

presented and marked during the trial particularly when Alberto took the witness stand. Alberto identified these

pieces of evidence in his direct testimony.[41]  He was also subjected to cross-examination and re-cross

examination by petitioner.[42] But Alberto’s account and the exchanges between Alberto and petitioner did not

sufficiently describe the contents of the said pieces of evidence presented by the BIR.  In fact, petitioner sought

that the lead examiner, one Ma. Anabella A. Abuloc, be summoned to testify, inasmuch as Alberto was

incompetent to answer questions relative to the working papers.[43]  The lead examiner never testified.

Moreover, while Alberto's testimony identifying the BIR's evidence was duly recorded, the BIR documents

themselves were not incorporated in the records of the case. 

 

          A common fact threads through Vda. de Oñate and Ramos that does not exist at all in the instant case.  In

the aforementioned cases, the exhibits were marked at the pre-trial proceedings to warrant the pronouncement

that the same were duly incorporated in the records of the case. Thus, we held in Ramos:

Page 45: Tax II Estate and Donor Cases

            In this case, we find and so rule that these requirements have been satisfied. The exhibits in question were presented and marked during the pre-trial of the case thus, they have been incorporated into the records. Further, Elpidio himself explained the contents of these exhibits when he was interrogated by respondents' counsel... x x x x But what further defeats petitioner's cause on this issue is that respondents' exhibits were marked and admitted during the pre-trial stage as shown by the Pre-Trial Order quoted earlier.[44]    

Page 46: Tax II Estate and Donor Cases

          While the CTA is not governed strictly by technical rules of evidence,[45] as rules of procedure are not

ends in themselves and are primarily intended as tools in the administration of justice, the presentation of the

BIR's evidence is not a mere procedural technicality which may be disregarded considering that it is the only

means by which the CTA may ascertain and verify the truth of BIR's claims against the Estate.[46] The BIR's

failure to formally offer these pieces of evidence, despite CTA's directives, is fatal to its cause. [47] Such failure

is aggravated by the fact that not even a single reason was advanced by the BIR to justify such fatal omission.

This, we take against the BIR.

 

          Per the records of this case, the BIR was directed to present its evidence[48] in the hearing of February 21,

1996, but BIR's counsel failed to appear.[49] The CTA denied petitioner's motion to consider BIR's presentation

of evidence as waived, with a warning to BIR that such presentation would be considered waived if BIR's

evidence would not be presented at the next hearing. Again, in the hearing of March 20, 1996, BIR's counsel

failed to appear.[50] Thus, in its Resolution[51] dated March 21, 1996, the CTA considered the BIR to have

waived presentation of its evidence.  In the same Resolution, the parties were directed to file their respective

memorandum. Petitioner complied but BIR failed to do so.[52]  In all of these proceedings, BIR was duly

notified. Hence, in this case, we are constrained to apply our ruling in Heirs of Pedro Pasag v. Parocha:[53]

          A formal offer is necessary because judges are mandated to rest their findings of facts

and their judgment only and strictly upon the evidence offered by the parties at the trial. Its function is to enable the trial judge to know the purpose or purposes for which the proponent is presenting the evidence. On the other hand, this allows opposing parties to examine the evidence and object to its admissibility. Moreover, it facilitates review as the appellate court will not be required to review documents not previously scrutinized by the trial court.             Strict adherence to the said rule is not a trivial matter. The Court in Constantino v. Court of Appeals ruled that the formal offer of one's evidence is deemed waived after failing to submit it within a considerable period of time. It explained that the court cannot admit an offer of evidence made after a lapse of three (3) months because to do so would "condone an inexcusable laxity if not non-compliance with a court order which, in effect, would encourage needless delays and derail the speedy administration of justice."             Applying the aforementioned principle in this case, we find that the trial court had reasonable ground to consider that petitioners had waived their right to make a formal offer of documentary or object evidence. Despite several extensions of time to make their formal offer, petitioners failed to comply with their commitment and allowed almost five months to lapse before finally submitting it. Petitioners' failure to comply with the rule on admissibility of evidence is anathema to the efficient, effective, and expeditious dispensation of justice.   

          Having disposed of the foregoing procedural issue, we proceed to discuss the merits of the case.

 

Page 47: Tax II Estate and Donor Cases

Ordinarily, the CTA's findings, as affirmed by the CA, are entitled to the highest respect and will not be

disturbed on appeal unless it is shown that the lower courts committed gross error in the appreciation of facts.

[54]  In this case, however, we find the decision of the CA affirming that of the CTA tainted with palpable error.

 

          It is admitted that the claims of the Estate's aforementioned creditors have been condoned. As a mode of

extinguishing an obligation,[55] condonation or remission of debt[56] is defined as:

 

an act of liberality, by virtue of which, without receiving any equivalent, the creditor renounces the enforcement of the obligation, which is extinguished in its entirety or in that part or aspect of the same to which the remission refers. It is an essential characteristic of remission that it be gratuitous, that there is no equivalent received for the benefit given; once such equivalent exists, the nature of the act changes. It may become dation in payment when the creditor receives a thing different from that stipulated; or novation, when the object or principal conditions of the obligation should be changed; or compromise, when the matter renounced is in litigation or dispute and in exchange of some concession which the creditor receives.[57]    

          Verily, the second issue in this case involves the construction of Section 79[58] of the National Internal

Revenue Code[59] (Tax Code) which provides for the allowable deductions from the gross estate of the

decedent. The specific question is whether the actual claims of the aforementioned creditors may be fully

allowed as deductions from the gross estate of Jose despite the fact that the said claims were reduced or

condoned through compromise agreements entered into by the Estate with its creditors.

 

          “Claims against the estate,” as allowable deductions from the gross estate under Section 79 of the Tax

Code, are basically a reproduction of the deductions allowed under Section 89 (a) (1) (C) and (E) of

Commonwealth Act No. 466 (CA 466), otherwise known as the National Internal Revenue Code of 1939, and

which was the first codification of Philippine tax laws.   Philippine tax laws were, in turn, based on the federal

tax laws of the United States. Thus, pursuant to established rules of statutory construction, the decisions of

American courts construing the federal tax code are entitled to great weight in the interpretation of our own tax

laws.[60]

 

          It is noteworthy that even in the United States, there is some dispute as to whether the deductible amount

for a claim against the estate is fixed as of the decedent's death which is the general rule, or the same should be

adjusted to reflect post-death developments, such as where a settlement between the parties results in the

reduction of the amount actually paid.[61] On one hand, the U.S. court ruled that the appropriate deduction is the

“value” that the claim had at the date of the decedent's death.[62] Also, as held in Propstra v. U.S., [63] where a

Page 48: Tax II Estate and Donor Cases

lien claimed against the estate was certain and enforceable on the date of the decedent's death, the fact that the

claimant subsequently settled for lesser amount did not preclude the estate from deducting the entire amount of

the claim for estate tax purposes. These pronouncements essentially confirm the general principle that post-death

developments are not material in determining the amount of the deduction.

 

 

On the other hand, the Internal Revenue Service (Service) opines that post-death settlement should be

taken into consideration and the claim should be allowed as a deduction only to the extent of the amount actually

paid.[64] Recognizing the dispute, the Service released Proposed Regulations in 2007 mandating that the

deduction would be limited to the actual amount paid.[65]

 

 In announcing its agreement with Propstra,[66] the U.S. 5th Circuit Court of Appeals held:

 

We are persuaded that the Ninth Circuit's decision...in Propstra correctly apply the Ithaca Trust date-of-death valuation principle to enforceable claims against the estate. As we interpret Ithaca Trust, when the Supreme Court announced the date-of-death valuation principle, it was making a judgment about the nature of the federal estate tax specifically, that it is a tax imposed on the act of transferring property by will or intestacy and, because the act on which the tax is levied occurs at a discrete time, i.e., the instance of death, the net value of the property transferred should be ascertained, as nearly as possible, as of that time. This analysis supports broad application of the date-of-death valuation rule.[67]   

          We express our agreement with the date-of-death valuation rule, made pursuant to the ruling of the U.S.

Supreme Court in Ithaca Trust Co. v. United States.[68] First.  There is no law, nor do we discern any legislative

intent in our tax laws, which disregards the date-of-death valuation principle and particularly provides that post-

death developments must be considered in determining the net value of the estate. It bears emphasis that tax

burdens are not to be imposed, nor presumed to be imposed, beyond what the statute expressly and clearly

imports, tax statutes being construed strictissimi juris against the government.[69] Any doubt on whether a

person, article or activity is taxable is generally resolved against taxation.[70] Second. Such construction finds

relevance and consistency in our Rules on Special Proceedings wherein the term "claims" required to be

presented against a decedent's estate is generally construed to mean debts or demands of a pecuniary nature

which could have been enforced against the deceased in his lifetime, or liability contracted by the deceased

before his death.[71] Therefore, the claims existing at the time of death are significant to, and should be made

the basis of, the determination of allowable deductions.

 

Page 49: Tax II Estate and Donor Cases

          WHEREFORE, the instant Petition is GRANTED. Accordingly, the assailed  Decision dated  April 30,

1999 and the Resolution dated November 3, 1999 of the Court of Appeals in CA-G.R. S.P. No. 46947 are

REVERSED and SET ASIDE. The Bureau of Internal Revenue's deficiency estate tax assessment against the

Estate of Jose P. Fernandez is hereby NULLIFIED. No costs.

 

SO ORDERED.

 

 

                                      ANTONIO EDUARDO B. NACHURA

                                      Associate Justice

 

 

WE CONCUR:

 

 

 

 

CONSUELO YNARES-SANTIAGO

Associate Justice

Chairperson

 

 

 

 

MA. ALICIA AUSTRIA-MARTINEZ

Associate Justice

MINITA V. CHICO-NAZARIO

Associate Justice

 

 

 

 

RUBEN T. REYES

Associate Justice

 

 

A T T E S T A T I O N

 

Page 50: Tax II Estate and Donor Cases

          I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

 

 

 

                                      CONSUELO YNARES-SANTIAGO

                                      Associate Justice

                                      Chairperson, Third Division

 

 

Page 51: Tax II Estate and Donor Cases

 

C E R T I F I C A T I O N

 

          Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, I certify that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

 

 

 

 

                                      REYNATO S. PUNO

                                      Chief Justice

REPUBLIC OF THE PHILIPPINES Court ofT ax Appeals QUEZON CITY ENBANC

ESTATE OF FIDEL F. REYES and ESTATE OF TERESITA R. REYES, Petitioners, -versus-

COMMISSIONER OF INTERNAL REVENUE, Respondent. C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747)

Present: A COST A, Presiding Justice, CASTANEDA, JR., BAUTISTA, UY, CASANOVA, and P ALANCA-

ENRIQUEZ, JJ. Promulgated:

X ------------------------------------------------------------------------------------ X DECISION

PALANCA-ENRIQUEZ, J:.: Central in this controversy is the issue as to whether or not the

petitioners are liable to pay the 50% fraud penalty for filing false returns. THE CASE

This question is the subject of this Petition for Review filed by the Estates of Fidel F. Reyes and Teresita R. Reyes (hereafter "petitione~

C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION 2

under Section 11 of Republic Act No. 9282 (An Act Expanding the Jurisdiction of the Court of Tax Appeals), in relation to Rule 43 of the 1997 Rules of Civil

Procedure, as amended, which seeks the review of the Decision dated January 16, 2006 of the First Division of this Court in C.T.A. Case No. 6747 entitled "Estate of Fidel F. Reyes and Estate of Teresita R. Reyes

vs. Commissioner of Internal Revenue", the dispositive portion of which reads as follows:

"WHEREFORE, premises considered, the assessments against the estates of Spouses Fidel and Teresita Reyes are hereby AFFIRMED but in the reduced amounts of P1 ,286,751.53 and P1,508,326.84, respectively,

computed as follows: I. ESTATE OF FIDEL REYES

Real Properties - Conjugal Real Properties - Exclusive Personal Properties -Conjugal Personal Properties -

Page 52: Tax II Estate and Donor Cases

Exclusive Gross Estate

Per Respondent's Review p 13,160,494.00 5,813,532.33 10,000.00 1,353,041 .69 P20,337,068.02

Add/(Deduct) Adjustments (P 481 ,307.00) ( 2,249,793.00) 1,353,041.69 ( 1,353.041.69) (P2,731,1 00.00)

Per Court's Finding P12,679,187.00 3,563,739.33 1,363,041 .69 0.00 P17,605,968.02 ------------- ------------ ------------- ------------ Less: Exclusive Properties 3,563,739.33

Gross Conjugal Estate P14,042,228.69 Less: Conjugal Deductions a. Funeral Expenses (P59,260.00) b. Claims against the Estate ( 1,358,412.36)

Net Conjugal Estate P12,624,556.33 Less: 1/2 share of surviving spouse (P12,624,556.33/2) 6,312,278.16 Net Estate P 6,312,278.17 Add: Exclusive Properties 3,563,739.33

Total Net Estate P 9,876,017.50 ~ C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION

Less: Family Home Net Taxable Estate

Estate Tax Due Less: Payment on 12/29/1997 Payment on 7/29/1998 Deficiency Estate Tax

Add: 50% Surcharge 20% Interest (7/24/97 to 12/30/02) Total Amount Due

II. ESTATE OF TERESITA REYES Gross Estate (Share from exclusive and conjugal properties) Less: Deductions a. Funeral Expense b. Accrued/Unpaid taxes c. Claim against the Estate

Subtotal d. Vanishing Deductions Net Estate Less: Family Home Standard Deductions Medical Expenses

Net Taxable Estate Estate Tax Due Less: Payment on 2/24/1999 Payment on 10/17/2001

Deficiency Estate Tax Add: 50% Surcharge 20% Interest (2/25/99 to 12/30/02)

Total Amount Due p 200,000.00 422,486.59 100,000.00

p 722,486.59 663,027.01 P1 ,000,000.00 1,000,000.00 95,801.47

p 268,377.60 53,672.52 ( 1 ,000,000.00)

p 8,876,017.50 ============ p 1 ,046,402.63 251 ,031.51 297,582.00 p 497,789.12 ============ 248,894.56 540,067.85

p 1,286,751 .53 ============ p 11,959,390.99

1,385,513.60 P1 0,573,877.39

2,095,801.47 p 8,478,075.92 ------------ ------------ p 986,711 .39

322,050.12 p 664,661 .27 ------------ ------------ 332,330.64 511 ,334.93

p 1 ,508,326.84 ============ Accordingly, the estates of Fidel F. Reyes and Teresita R. Reyes are hereby ORDERED TO PAY the respondent the amounts of P1,286,751.53 and P1 ,508,326.84, respectively, representing deficiency/delinquency estate taxes

for taxable years 1997 & 1998. In addition, 20% delinquency ~ 3

C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION interest is imposed thereon from December 31, 2002 until the respective amounts are fully paid pursuant to

Section 249 (C) (3) of the 1997 NIRC. However, the assessments for deficiency donor's tax in the amount of P216,632.54 and compromise penalty in the amount of P37,900 are hereby CANCELLED.

Page 53: Tax II Estate and Donor Cases

SO ORDERED." 4

and the Resolution dated May 22, 2006, denying petitioner's "Motion for Partial Reconsideration" and "Supplement to the Motion for Partial

Reconsideration", the dispositive portion of which reads: "WHEREFORE, there being no justifiable reason to overturn Our Decision, petitioner's Motion for Partial Reconsideration and Supplement to the Motion for Partial Reconsideration are hereby DENIED for lack of

merit. SO ORDERED."

THE FACTS In their "Joint Stipulation of Facts and Issues", the parties

stipulated as follows: "1. Petitioners are represented by Priscilla Reyes- Pacheco, as Administrator of the two estates.

2. An estate tax return pursuant to the Voluntary Assessment Program (V AP) under Revenue Memorandum Order No. 58-97 was filed for the estate of Fidel F. Reyes on 29 December 1997.

C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION 3. Again on 29 June 1998, an amended estate tax return was filed for the same estate of Fidel F. Reyes.

4. On 24 February 1999, an estate tax return was filed for the estate of Teresita R. Reyes. 5. On 17 October 2001, the estate of Teresita R. Reyes paid an additional estate tax pursuant to the Voluntary

Assessment Program (V AP) under Revenue Regulation No. 8-2001. 6. On April 21 , 2002, a Preliminary Assessment Notice (PAN) was issued to the petitioners.

7. On 29 November 2002, respondent issued two (2) sets of "Formal Letter of Demand" with their corresponding Final Assessment Notices (FAN) attached therewith to the petitioners which the latter received.

8. Consequently, Petitioners filed their administrative protest against the Final Assessment Notices with the Office of the Regional Director of Revenue Region No. 7, Quezon City, Metro Manila on 4 February 2003.

9. On 28 February 2003, respondent wrote a letter to petitioners through undersigned counsel in reply to their abovementioned protest dated 3 February 2003 advising the former that said protest has been forwarded to the

Revenue District Office No. 40 of Cubao, Quezon City, for appropriate action. 10. The investigation of the petitioner's estate tax liabilities revealed a tax obligation of P8,814, 179.17 as

deficiency/delinquency estate tax, donor's tax, and compromise penalty." 5

C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION 6

In his answer filed on October 21, 2003, respondent Commissioner of Internal Revenue (hereafter "respondent") alleged by way of special and affirmative defenses: that the investigation of petitioner's estate tax

liabilities revealed a tax obligation of P8,814, 179.17 as deficiency/delinquency estate tax, donor's tax, and compromise penalty; that the subject deficiency/delinquency tax assessments were issued in accordance with law and pertinent regulations and have substantially complied with the provisions of Section 228 of the National Internal

Revenue Code of 1997 (hereafter "NJRC of 1997 "), as amended, relative to the taxpayer being informed in writing of the facts and law in which

the assessment is based; that the deficiency/delinquency tax assessments were based on the following: (a) deficiency/delinquency estate tax in the amount ofP6,766,193.05 for the Estate of Fidel F. Reyes was assessed on the basis of the failure to declare exclusive/capital and conjugal properties

left by the late Fidel F. Reyes, but the same is without any legal justification, being neither recorded nor declared in the estate tax return

resulting to the understatement of the reported taxable estate; (b) deficiency/delinquency estate tax in the amount ofP1,793,453.58 for the

Estate of Teresita R. Reyes was assessed on the basis of the existence of ~ C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION

Page 54: Tax II Estate and Donor Cases

7 some discrepancy in the estate tax return of the late Teresita R. Reyes and the verification disclosed that some of the conjugal properties reported to the estate tax return belong to her late husband, Fidel F. Reyes and there was also an overstatement of vanishing deductions claimed; (c) that in view of the foregoing, such failure and omission renders the estate tax

returns filed false returns which can be assessed within 1 0 years from the discovery of falsity, fraud or omission; (d) deficiency/delinquency

donor's tax in the amount ofP216,632.54 was assessed as a result of the partition of the estate, per extrajudicial settlement concurred by all the

parties, pursuant to Sections 98 to 104 of the NIRC of 1997; (e) Compromise Penalty in the amount ofP37,900.00 for violation of Section 255, in relation to Section 275 of the NIRC relative to late filing/payment of estate and donor's tax; (f) the 50% surcharge was imposed, pursuant to the provisions of Section 248(B) of the NIRC, in relation to Section 332 [now 222(a)] of the NIRC; and (g) the 20% interest per annum has been

imposed, pursuant to the provisions of Section 249(b), now Section 249(B) of the NIRC; and (h) finally, that all presumptions are in favor of

the correctness of tax assessments and the burden of proof to prove otherwise is upon the petitioner. ~ C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION

8 After trial on the merits, the First Division rendered the assailed

decision in the terms earlier set forth. Not satisfied, petitioner moved for a partial reconsideration of the

same, which the First Division denied in its Resolution dated May 22, 2006.

Hence, the present Petition for Review. ISSUES

Petitioners raised the following assignment of errors: I

THE FIRST DIVISION ERRED WHEN IT RULED THAT THE RIGHT OF RESPONDENT TO ASSESS PETITIONERS OF DEFICIENCY ESTATE TAXES HAS NOT YET PRESCRIBED.

II THE FIRST DIVISION LIKEWISE ERRED WHEN IT IMPOSED THE 50% SURCHARGE ON THE

DEFICIENCY ESTATE TAXES DUE ON THE ESTATES OF BOTH FIDEL F. REYES AND TERESITA R. REYES WITHOUT LEGAL BASIS.

On July 19, 2006, without necessarily giving due course to the petition, We required respondent to file his comment on the petition, within ten (10) days from notice. w

C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION 9

For failure of respondent to file his comment despite the expiration of the prescribed period, the petition was deemed submitted for decision.

THE COURT EN BANC'S RULING The petition is partly meritorious.

First Issue: Prescription ofthe Period to Assess in Relation to the Definition of a "False Return" The first vital issue to be decided here is whether the right of the

Commissioner of Internal Revenue to assess deficiency estate taxes had already prescribed at the time the final Assessment Notice was issued on

November 29, 2002. Petitioners mainly argue that respondent's right to assess

deficiency estate taxes due had long prescribed considering that the Final Assessment Notice against the estates of Fidel Reyes and Teresita Reyes

was issued only on November 29, 2002, when the estate tax return of

Page 55: Tax II Estate and Donor Cases

Fidel Reyes was filed on December 29, 1997, while the estate tax return of Teresita Reyes was filed and paid on February 24, 1999, which was

apparently beyond the three (3) year period to assess. Petitioners further argue that the returns should not be treated as a false return under Section

222 of the National Internal Revenue Code of 1997 (hereafter "NIRC of @);)--C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION

10 1997"), as amended, as the underdeclaration of properties was a result of

failure to correctly classifY and declare in the estate tax return the properties of the late Fidel F. Reyes as conjugal or exclusive. Respondent, on the other hand, maintains that the failure and

omission of petitioners to declare exclusive/capital and conjugal properties left by Fidel Reyes renders the estate tax returns filed as false returns, which can be assessed within ten (1 0) years from the discovery

of the falsity, fraud or omission. What, therefore, constitutes "false return" to warrant the

application of the ten-year prescriptive period? The applicable laws are Sections 203 and 222 of the NIRC of

1997, as amended, which provide: "SEC. 203. Period of Limitation Upon Assessment and Collection. - Except as provided in Section 222, internal

revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided, That in a case where a return is filed beyond the period prescribed by law,

the three (3)-year period shall be counted from the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day."~

C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION "SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes. -

(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be filed without assessment, at any time

within ten (10) years after the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or

criminal action for the collection thereof. (b) If before the expiration of the time prescribed in Section 203 for the assessment of the tax, both the Commissioner and the taxpayer have agreed in writing to its assessment after

such time, the tax may be assessed within the period agreed upon. The period so agreed upon may be extended by subsequent written agreement made before the expiration of the period previously agreed upon. (c) Any

internal revenue tax which has been assessed within the period of limitation as prescribed in paragraph (a) hereof may be collected by distraint or levy or by a proceeding in court within five (5) years following the assessment of the tax. (d) Any internal revenue tax, which has been assessed within the period agreed upon as provided in paragraph (b) hereinabove, may be collected by distraint or levy or by a proceeding in court within the period

agreed upon in writing before the expiration of the five (5)-year period. The period so agreed upon may be extended by subsequent written agreements made before the expiration of the period previously agreed upon. ( e)

Provided, however, That nothing in the immediately preceding Section and paragraph (a) hereof shall be construed to authorize the examination and investigation

11 C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION

or inquiry into any tax return filed in accordance with the provisions of any tax amnesty law or decree." 12

Pursuant to the above provisions, respondent has three (3) years from the filing of the returns to assess petitioners of any internal revenue

tax. The exception is when there is a finding of falsity or fraud in the filing of said returns, in which case, the prescriptive period to assess is

ten ( 10) years from the discovery of such falsity or fraud. The main question lies on the correct interpretation of the

Page 56: Tax II Estate and Donor Cases

application of the qualifying words "with intent to evade tax" to a false return and fraudulent return under Section 222 (a) of the NIRC of 1997, as amended, to warrant the application of the ten (1 0) year prescriptive

period to assess the taxpayer. Petitioners invoke the decision of the Court of Appeals in

Commissioner of Internal Revenue vs. Ayala Hotels, Inc. (CA-G.R. SP. No. 70025, Apri/19, 2004), pertinent portion of which reads as follows:

"In interpreting the above provision, it is important to note that commentaries consider two (2) groups of exceptions provided for in Section 222: The first, where there is a failure to file the required return; and the second, where there is a return filed but the same is false or fraudulent and made with intent to evade tax. It

appears that the phrase 'with intent to evade tax' qualifies not o~ C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION

the word 'fraudulent' but also the word 'false', having been grouped together as one category under the exceptions.

Under the rules of statutory construction, the qualifying words 'with intent to evade tax' should refer to both the words 'false' and 'fraudulent' since these words are not separated by a comma. If it was the intent of the

lawmakers to qualify only the word 'fraudulent' then the same should have been treated separately or at the very least, the words 'false' and 'fraudulent' should have been separated by a comma to show separate treatment of the

two." 13

On the other hand, the First Division citing the case of Aznar vs. Court of Tax Appeals (58 SCRA 519) ruled:

"The Supreme Court in the case of Aznar vs. Court of Tax Appeals, already resolved this issue when it made a distinction between 'false' and 'fraudulent' returns as provided for by the law. To quote:

'[W]e believe that the proper and reasonable interpretation of said provision should be that in the three different cases of (1) false return, (2) fraudulent return with intent to evade tax, (3) failure to file a return, the tax may be

assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time within ten years after the discovery of the (1) falsity, (fraud), (3) omission. Our stand that the law should be interpreted to mean a separation of the three different situations of false return, fraudulent return with intent to evade tax,

and failure to file a return is strengthened immeasurably by the last portion of the provision which segregates the situations into three different classes, namely -'falsity', 'fraud' and 'omission'. That there is a difference between 'false return' and 'fraudulent return' cannot be denied. While the first merely implies deviation from the truth,

whether intentional or not, the second implies intentional or deceitful entry with intent to evade the taxes due. ~ C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION

The ordinary period of prescription of five ( 5) years [now three (3) years] within which to assess tax liabilities under Section 331 of the NIRC [now Section 203] should be applicable to normal circumstances, but whenever

the government is placed at a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities due to false returns, fraudulent return intended to evade payment of tax or failure to file return, the

period of ten years provided for in Section 332 (a) NIRC [now Section 222(a)], from the time of the discovery of the falsity, fraud or omission even seems to be inadequate and should be the one enforced.'

Based on the above pronouncements, false returns do not necessary mean with intent to evade taxes, otherwise, there will be no distinction between false and fraudulent returns and the law would not have provided for the

distinct situations. Simply put, whenever intent to evade taxes exists, fraud already exists. To apply petitioners' interpretation that both false and fraudulent returns require the 'intent to evade taxes' element would mean that in

false returns, fraud also necessarily exists because of the requirement of the intent to evade payment correct taxes accompanying the falsity."

14 In the Aznar case, the Supreme Court ruled that no 50% final

surcharge under the then Section 72, now Section 247 (b) of the NIRC of 1997, is applicable in the absence of fraud on the part of the taxpayer,

notwithstanding the applicability of the ten-year prescriptive period from discovery of the fraud, falsity or omission under the then Section 332 (a),

now Section 222 of the NIRC of 1997.

Page 57: Tax II Estate and Donor Cases

Petitioners' contention that the Aznar case cannot be applied in this present case has no basis. Although in this case, there ~ C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION

15 recurrence of underdeclaration of taxes due, as compared with the Aznar

case, still, there are substantial underdeclaration of taxable estate and overstatement of vanishing deductions, which renders the estate tax returns filed a "false return" contemplated under Section 222 (a) that

warrants the application of the ten (10) year period to assess. In this case, petitioners, in fact, candidly stated in their Petition

For Review that they committed mistakes in the interpretation of the law and in the declaration of the property that made the estate tax return filed

a false return, but maintained that these mistakes were done in good faith. However, the law does not make any qualification as to the falsity

of the return which would render the return a "false return". The law does not distinguish a false return made in good faith or false return made in bad faith, as long as a false return is filed, the taxpayer is

covered by Section 222 (a) . Moreover, the errors committed by petitioners, even considering

that it was a simple mistake or a mere oversight, cannot be disregarded because of the substantial amount of deficiency in the estate tax.

Section 248 (B) of the NIRC of 1997, as amended, provides that a substantial underdeclaration of receipts or a substantial overstatement of ~

C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION 16

deductions shall constitute prima facie evidence of a false or fraudulent return.

After a careful evaluation of the evidence on record, We find that there is a clear substantial overstatement of vanishing deductions.

Petitioners claim a total of P10,680,355.43, as vanishing deductions (Exhibit "C-2 ''), when in fact only the amount of P663,027.01 (Decision of

the First Division dated January 16, 2006) can be claimed as vanishing deductions in the computation of the taxable estate of Teresita Reyes. The glaring difference of more than ten (1 0) million pesos, which is actually more than 30% of the actual deductions, renders petitioners

liable for overstatement of deductions pursuant to Section 248 (B) of the NIRC of 1997, as amended. Further, the underdeclaration of the

properties of Fidel Reyes for the determination of the proper estate tax due of more than one ( 1) million pesos is also substantial, in conformity

with the above ruling. As aptly ruled by the First Division:

"In the case at bar, the bases for the falsity of the returns are the substantial underdeclaration of properties in the amounts of P497,789.12 and P664,661.27 for the estates of Fidel F. Reyes and Teresita R. Reyes and

overstatement of vanishing deductions in the amount o~ C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION

Pl0,680,355.43 for the estate of Teresita R. Reyes. In the case of Packaging Products Corporation, the absence of falsity of the return stemmed from different interpretation of the law with regard to the availment of tax credits

on sales taxes. Indeed, there is no indicia of fraud in the instant case. The estates of Fidel and Teresita Reyes, through

Administrator Pacheco, availed of the VA P of the government and even included properties not forming part of the estates which negate any deceitful intention to defraud the government of revenues. However, the Court is convinced that petitioners filed false returns taking into account that: 1) Despite having reported conjugal and

paraphernal properties, both real and personal, the estate of Fidel Reyes failed to declare basic deficiency estate

Page 58: Tax II Estate and Donor Cases

tax worth P497,789.12; 2) Instead of the vanishing deductions claimed of Pl0,680,355.43, the estate of Teresita R. Reyes may only claim vanishing deductions of P663,027.01. The failure to correctly include deductions

actually incurred by the taxpayer, in effect lowered deficiency estate tax of the estate of Teresita Reyes; and 3) The estate of Teresita R. Reyes did not report basic deficiency estate tax in the sum ofP664,661.27.

To reiterate, in the filing of false returns, intention to evade taxes need not exist. A fraudulent return is always an attempt to evade a tax, but a merely false return may not be. The filing of a false return is sufficient to warrant

assessment of ten (1 0) years from date of discovery of the falsity. Having established that petitioners filed false returns, We therefore hold that the subject deficiency estate tax

(g)JV 17

C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION assessments were issued within the prescribed period mandated by law.

Under Section 203 of the 1997 NIRC, the assessment period for estate tax deficiency is within three (3) years from the expiration of the due date or the actual date of the return, whichever is later. Petitioners are required to

file estate tax returns within six ( 6) months from the demise of the decedents. Pursuant to Section 222( a), there are three instances when the three (3)-year prescriptive period to assess

deficiency taxes do not apply, namely: a) false returns; b) fraudulent returns with intent to evade tax; and c) failure to file returns. In any of these situations, the Commissioner of Internal Revenue is given the option to

dispense with assessment and proceed to collect delinquency taxes or he may assess the taxpayer within ten (10) years from discovery of the falsity, fraud or omission.

In the case at bar, the assessments dated November 29, 2002 and received by the petitioners on January 7, 2003, although issued beyond three (3) years from the filing of the estate returns of the estates of Fidel F. Reyes and

Teresita R. Reyes on December 29, 1997 and February 24, 1999, respectively, were issued within the prescribed period of ten (1 0) years. xxx"

18 Accordingly, We sustain the findings of the First Division that the

Final Assessment Notice against the estates of Fidel Reyes and Teresita Reyes, which was issued on November 29, 2002, was well within the ten

( 1 0) year prescriptive period to assess. C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION

Second Issue: Imposition of the 50% surcharge 19

The second issue which appears to be of vital importance in this case centers on the First Division's imposition of the 50% surcharge

authorized by law as fraud penalty. Petitioners insist that the 50% surcharge under Section 248 (B) of the NIRC of 1997, as amended, should not be imposed by the First

Division as the intent to evade tax was already ruled out in its assailed Decision when it found "no indicia of fraud in the instant case". Further, petitioners' interpretation of the law is that the presence of the qualifying

word "willfully" necessarily implies that it is possible that false or fraudulent returns are not willfully filed. Thus, for the 50% penalty to be

imposed, the filing of the false or fraudulent return must have been willfully or intentionally made. And since Section 248 (B) is a penal

provision, the same must be liberally construed in favor of the taxpayer. We agree with the petitioners.

Section 248 of the NIRC of 1997, as amended, provides: "SEC. 248. Civil Penalties. -

XXX XXX C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION

(B) In case of willful neglect to file the return within the period prescribed by this Code or by rules and regulations, or in case a false or fraudulent return is willfully made, the penalty to be imposed shall be fifty

percent (50%) of the tax or of the deficiency tax, in case any payment has been made on the basis of such return

Page 59: Tax II Estate and Donor Cases

before the discovery of the falsity or fraud: Provided, That a substantial under declaration of taxable sales, receipts or income, or a substantial overstatement of deductions, as determined by the Commissioner pursuant to the rules and regulations to be promulgated by the Secretary of Finance, shall constitute prima facie evidence of

a false or fraudulent return: Provided, further, That failure to report sales, receipts or income in an amount exceeding thirty percent (30%) of that declared per return, and a claim of deductions in an amount exceeding thirty percent (30%) of actual deductions, shall render the taxpayer liable for substantial underdeclaration of

sales, receipts or income or for overstatement of deductions, as mentioned herein." 20

In interpreting Section 248 (B), the First Division ruled m its Resolution dated May 22, 2006:

"A perusal of the foregoing shows that the law affixes the disjunctive article "or" to delineate false from fraudulent returns. When "or" is used the various members of the sentence are to be taken separately. Thus, the filing of a false return or fraudulent return cannot be classified as one act which should be qualified "with intent

to evade taxes". xxx" We agree with the First Division in so far as its interpretation that

the aforequoted Section 248 (B) applies to both false and fraudulent returns. However, it bears stressing that Section 248 (B) contains the ~

C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION 21

qualifying words "willfully made". A careful reading of Section 248 (B) shows that the law is very explicit in imposing the civil penalty of 50% surcharge in case a false or fraudulent return is willfully made. It cannot

be said that the qualifying word "willfully" is only applicable to fraudulent returns because of the presence of the conjunction word "or"

between false and fraudulent return. The word "or" is a coordinating conjunction which is a linking word used to connect words, phrases, or group of words in a sentence (Mauricio C. Ulep, Basic Legal Writing, rr

Edition 2002, p.II2). Consequently, as applied in Section 248 (B), the word "or" denotes the intention of the framers of the Tax Code to connect both

false and fraudulent; likewise, the presence of the linking verb "is" associates both types of return to the qualifying words "willfully made". In this sense, the words "willfully made" should be interpreted to refer to

both false and fraudulent returns. Section 248 (B) imposes the surcharge of fifty percent (50%) only

in two instances. First, in case of willful neglect to file the return within the period prescribed, and second, in case a false or fraudulent return is willfully made. Thus, it is not enough that the taxpayer failed to file the

required tax return or that the return is false to justify the imposition of ~ C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION

22 the 50% for fraud. The law is clear that "a false or fraudulent return is willfully made". It must be emphasized that respondent did not present

evidence to directly prove that there was a willful intention on the part of petitioners to evade the payment of taxes. What is evident in this case is the negligence and mistake of the petitioners in the interpretation of the

law that caused the deficiencies found by the respondent in his assessments. However, We find no actual and intentional fraud through willful and deliberate misleading of the government agency concerned,

the Bureau of Internal Revenue. The government was not induced to give up some legal right and place itself at a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities

because petitioners did not conceal anything. Error or mistake of law is not fraud (Commissioner of Internal Revenue vs. Javier, Jr., 199 SCRA 824).

Page 60: Tax II Estate and Donor Cases

The word "willfully" carries the idea, when used in connection with an act forbidden by law, that the act must be done knowingly or

intentionally; that, with knowledge, the will consented to, designed, and directed the act (U.S. vs. Bull, 15 Phil 19). Further, a willful act may be described as one done intentionally, knowingly, and purposely, without justifiable excuse, as distinguished from an act done carelessly, @JJV

C.T.A. E.B. NO. 189 23 (C.T.A. CASE NO. 6747) DECISION thoughtlessly, heedlessly, or inadvertently. A willful act differs

essentially from a negligent act. The one is positive and the other negative (Black's Law Dictionary, 61h Edition, p. I 599). The Supreme Court

has ruled that the word willful in a statute means "not merely voluntary but with a bad purpose; in other words, corruptly" (US vs. Ah Chong, I 5 SCRA 498) and "premedidated; malicious; done with intent, or with bad

motive or purpose, or with indifference to the natural consequence" (Commissioner of Internal Revenue vs. Court of Appeals, 257 SCRA 224).

The First Division in its decision ruled out the element of fraud in this instant case, thus, petitioners have no intention to willfully file a

false return to evade payment of taxes. The following circumstances attendant to the case at bar show that

in filing the questioned returns, the petitioners were guided not by that "willful and deliberate intent to prevent the Government from making a

proper assessment" which constitute fraud: First, the availment of a Voluntary Assessment Program of the

BIR, thereby exposing itself to further investigation of its books of account and other accounting records by the governm~

C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION 24

Second, the other errors in computing the taxes paid by the estates, such as the inclusion of other properties no longer owned by the estate or have no more market value and failure to deduct the standard deduction of Pl,OOO,OOO.OO and family home which were all beneficial to the

government; Third, the petitioners further paid additional taxes under the V AP.

In the Aznar case, fraud in relation to the filing of income tax return, was discussed in this manner:

"xxx the fraud contemplated by law is actual and not constructive. It must be intentional fraud, consisting of deception willfully and deliberately done or resorted to in order to induce another to give up some legal right. Negligence, whether slight or gross, is not equivalent to the fraud with intent to evade the tax contemplated by law. It must amount to intentional wrong-doing with the sole object of avoiding the tax. It necessarily follows

that a mere mistake cannot be considered as fraudulent intent, and if both petitioner and respondent Commissioner of Internal Revenue committed mistakes in making entries in the returns and in the assessment, respectively, under the inventory method of determining tax liability, it would be unfair to treat the mistakes of

the petitioner as tainted with fraud and those of the respondent as made in good faith." To reiterate, the fraud contemplated by law IS actual not

constructive. Fraud is never imputed and the courts never sustain findings of fraud upon circumstances which, at most, create only ~

C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION 25

suspicion and the mere understatement of a tax is not itself proof of fraud for the purpose of tax evasion (Yutivo Sons Hardware Co. vs. Court of Tax

Appeals, 1 SCRA 160; Commissioner of Internal Revenue vs. Javier, Jr., 199 SCRA 824). Negligence, whether slight or gross, is not equivalent to the fraud with intent to evade the tax contemplated by the law. It must amount to

Page 61: Tax II Estate and Donor Cases

intentional wrong-doing with the sole object of avoiding the tax (Aznar vs. Court of Tax Appeals, 58 SCRA 519). It necessarily follows that a mere

mistake cannot be considered as fraudulent intent to evade tax. For all the foregoing, We hold, therefore, that the imposition of

the fraud penalty in this case is not justified by the extant facts. With the conclusion of the First Division and affirmed by Us that petitioners had

filed a false return, but there was no fraud, it is evident that the false return was not willfully made, hence petitioners should not be held liable for the 50% fraud surcharge under Section 248 (B). The conclusion that

petitioners should not be held to pay for the 50% fraud surcharge is coherent with the ruling out of the existence of fraud by the First

Division. We conclude that the 50% surcharge, as fraud penalty authorized

under Section 248 (B) of the NIRC of 1997, should not be imposed, but [pJJl C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION

26 eliminated from the deficiency estate taxes for the taxable years 1997

and 1998. Therefore, the penalty that is applicable in the case at bar is the

25% late payment surcharge pursuant to Section 248 (A) of the NIRC of 1997, as amended, which provides:

"SEC. 248. Civil Penalties. - (A) There shall be imposed, in addition to the tax required to be paid, a penalty equivalent to twenty-five percent (25%) of the amount due, in the following cases:

XXX XXX (3) Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment; or

XXX XXX." WHEREFORE, premises considered, the decision of the First Division, dated January 16, 2006, in C.T.A. Case No. 6747 is

MODIFIED in so far as the imposition of the 50% fraud penalty is concerned, and AFFIRMED in all other respects.

Accordingly, petitioners are ORDERED TO PAY to the Commissioner of Internal Revenue the sums of P1,162,304.25

C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION 27

P1 ,342,161.52 respectively, representing deficiency/delinquency estate taxes for taxable years 1997 and 1998, computed as follows:

I. ESTATE OF FIDEL REYES Real Properties - Conjugal Real Properties - Exclusive Personal Properties - Conjugal Personal Properties -

Exclusive Gross Estate

Less: Exclusive Properties Gross Conjugal Estate Less: Conjugal Deductions a. Funeral Expenses b. Claims against the Estate

Net Conjugal Estate Less: 1/2 share of surviving spouse (P12,624,556.33/2) Net Estate Add: Exclusive Properties Total Net Estate Less: Family Home

Net Taxable Estate Estate Tax Due Less: Payment on 12/29/1997 Payment on 7/29/1998

Deficiency Estate Tax Add: 25% Surcharge Per Respondent's Review p 13,160,494.00 5,813,532.33 10,000.00 1,353,041 .69

P20,337,068.02 ============= 20% Interest (7/24/97 to 12/30/02)

Total Amount Due II. ESTATE OF TERESITA REYES

Page 62: Tax II Estate and Donor Cases

Add/(Deduct) Adjustments (P481 ,307.00) ( 2,249,793.00) 1,353,041 .69 ( 1 ,353.041 .69) ( P2,731,100.00) =============

Gross Estate (Share from exclusive and conjugal properties) Less: Deductions a. Funeral Expense b. Accrued/Unpaid taxes

p 200,000.00 422,486.59 Per Court's Finding P12,679, 187.00 3,563,739.33 1 ,363,041.69 0.00

P17,605,968.02 3,563,739.33

P14,042,228.69 (P59,260.00) ( 1 ,358,412.36)

P12,624,556.33 6,312,278.16

p 6,312,278.17 3,563,739.33 p 9,876,017.50 ( 1 ,000,000.00)

p 8,876,017.50 ============ p 1,046,402.63 251,031 .51 297,582.00 p 497,789.12 124,447.28 540,067.85 p 1,162,304.25 ------------ ------------

p 11 ,959,390.99 c. Claim against the Estate 100,000.00 ~

C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION Subtotal d. Vanishing Deductions

Net Estate Less: Family Home Standard Deductions Medical Expenses Net Taxable Estate

Estate Tax Due Less: Payment on 2/24/1999 Payment on 10/17/2001 Deficiency Estate Tax Add: 25% Surcharge

28 p 722,486.59 663,027.01 1,385,513.60

P1 0,573,877.39 P1 ,000,000.00 1,000,000.00 95,801.47 2,095,801.47

p 8,478,075.92 ============ p 986,711.39

p 268,377.60 53,672.52 322,050.12 20% Interest (2/25/99 to 12/30/02)

p 664,661 .27 166,165.32 511,334.93 Total Amount Due p 1,342,161.52 ============

In addition, 20% delinquency interest is hereby imposed thereon from December 31, 2002 until the respective amounts are fully paid pursuant to Section 249 (C) (3) of the NIRC of 1997, as amended.

SO ORDERED. WE CONCUR:

~d~~E~QUEZ Associate Justice ~~. ~ ERNESTO D. ACOSTA Presiding Justice

C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION ~~CL~~. <1UANITO C. CASTANED~, JR. Associate Justice

ER~UY A~~tice . BAUTISTA

CAES~SANOVA Associate Justice CERTIFICATION

29 Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the above Decision has been

reached in consultation with the members of the Court En Bane before the case was assigned to the writer of the opinion of the Court. Q__ '---4 . C-v,__ ERNESTO D. ACOSTA Presiding Justice

Page 63: Tax II Estate and Donor Cases

G.R. No. L-43082             June 18, 1937

PABLO LORENZO, as trustee of the estate of Thomas Hanley, deceased, plaintiff-appellant, vs.JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellant.

Pablo Lorenzo and Delfin Joven for plaintiff-appellant.Office of the Solicitor-General Hilado for defendant-appellant.

LAUREL, J.:

On October 4, 1932, the plaintiff Pablo Lorenzo, in his capacity as trustee of the estate of Thomas Hanley, deceased, brought this action in the Court of First Instance of Zamboanga against the defendant, Juan Posadas, Jr., then the Collector of Internal Revenue, for the refund of the amount of P2,052.74, paid by the plaintiff as inheritance tax on the estate of the deceased, and for the collection of interst thereon at the rate of 6 per cent per annum, computed from September 15, 1932, the date when the aforesaid tax was [paid under protest. The defendant set up a counterclaim for P1,191.27 alleged to be interest due on the tax in question and which was not included in the original assessment. From the decision of the Court of First Instance of Zamboanga dismissing both the plaintiff's complaint and the defendant's counterclaim, both parties appealed to this court.

It appears that on May 27, 1922, one Thomas Hanley died in Zamboanga, Zamboanga, leaving a will (Exhibit 5) and considerable amount of real and personal properties. On june 14, 1922, proceedings for the probate of his will and the settlement and distribution of his estate were begun in the Court of First Instance of Zamboanga. The will was admitted to probate. Said will provides, among other things, as follows:

4. I direct that any money left by me be given to my nephew Matthew Hanley.

5. I direct that all real estate owned by me at the time of my death be not sold or otherwise disposed of for a period of ten (10) years after my death, and that the same be handled and managed by the executors, and proceeds thereof to be given to my nephew, Matthew Hanley, at Castlemore, Ballaghaderine, County of Rosecommon, Ireland, and that he be directed that the same be used only for the education of my brother's children and their descendants.

6. I direct that ten (10) years after my death my property be given to the above mentioned Matthew Hanley to be disposed of in the way he thinks most advantageous.

x x x           x x x           x x x

8. I state at this time I have one brother living, named Malachi Hanley, and that my nephew, Matthew Hanley, is a son of my said brother, Malachi Hanley.

The Court of First Instance of Zamboanga considered it proper for the best interests of ther estate to appoint a trustee to administer the real properties which, under the will, were to pass to Matthew Hanley ten years after the two executors named in the will, was, on March 8, 1924, appointed trustee. Moore took his oath of office and gave bond on March 10, 1924. He acted as trustee until February 29, 1932, when he resigned and the plaintiff herein was appointed in his stead.

During the incumbency of the plaintiff as trustee, the defendant Collector of Internal Revenue, alleging that the

Page 64: Tax II Estate and Donor Cases

estate left by the deceased at the time of his death consisted of realty valued at P27,920 and personalty valued at P1,465, and allowing a deduction of P480.81, assessed against the estate an inheritance tax in the amount of P1,434.24 which, together with the penalties for deliquency in payment consisting of a 1 per cent monthly interest from July 1, 1931 to the date of payment and a surcharge of 25 per cent on the tax, amounted to P2,052.74. On March 15, 1932, the defendant filed a motion in the testamentary proceedings pending before the Court of First Instance of Zamboanga (Special proceedings No. 302) praying that the trustee, plaintiff herein, be ordered to pay to the Government the said sum of P2,052.74. The motion was granted. On September 15, 1932, the plaintiff paid said amount under protest, notifying the defendant at the same time that unless the amount was promptly refunded suit would be brought for its recovery. The defendant overruled the plaintiff's protest and refused to refund the said amount hausted, plaintiff went to court with the result herein above indicated.

In his appeal, plaintiff contends that the lower court erred:

I. In holding that the real property of Thomas Hanley, deceased, passed to his instituted heir, Matthew Hanley, from the moment of the death of the former, and that from the time, the latter became the owner thereof.

II. In holding, in effect, that there was deliquency in the payment of inheritance tax due on the estate of said deceased.

III. In holding that the inheritance tax in question be based upon the value of the estate upon the death of the testator, and not, as it should have been held, upon the value thereof at the expiration of the period of ten years after which, according to the testator's will, the property could be and was to be delivered to the instituted heir.

IV. In not allowing as lawful deductions, in the determination of the net amount of the estate subject to said tax, the amounts allowed by the court as compensation to the "trustees" and paid to them from the decedent's estate.

V. In not rendering judgment in favor of the plaintiff and in denying his motion for new trial.

The defendant-appellant contradicts the theories of the plaintiff and assigns the following error besides:

The lower court erred in not ordering the plaintiff to pay to the defendant the sum of P1,191.27, representing part of the interest at the rate of 1 per cent per month from April 10, 1924, to June 30, 1931, which the plaintiff had failed to pay on the inheritance tax assessed by the defendant against the estate of Thomas Hanley.

The following are the principal questions to be decided by this court in this appeal: (a) When does the inheritance tax accrue and when must it be satisfied? (b) Should the inheritance tax be computed on the basis of the value of the estate at the time of the testator's death, or on its value ten years later? (c) In determining the net value of the estate subject to tax, is it proper to deduct the compensation due to trustees? (d) What law governs the case at bar? Should the provisions of Act No. 3606 favorable to the tax-payer be given retroactive effect? (e) Has there been deliquency in the payment of the inheritance tax? If so, should the additional interest claimed by the defendant in his appeal be paid by the estate? Other points of incidental importance, raised by the parties in their briefs, will be touched upon in the course of this opinion.

(a) The accrual of the inheritance tax is distinct from the obligation to pay the same. Section 1536 as amended,

Page 65: Tax II Estate and Donor Cases

of the Administrative Code, imposes the tax upon "every transmission by virtue of inheritance, devise, bequest, gift mortis causa, or advance in anticipation of inheritance,devise, or bequest." The tax therefore is upon transmission or the transfer or devolution of property of a decedent, made effective by his death. (61 C. J., p. 1592.) It is in reality an excise or privilege tax imposed on the right to succeed to, receive, or take property by or under a will or the intestacy law, or deed, grant, or gift to become operative at or after death. Acording to article 657 of the Civil Code, "the rights to the succession of a person are transmitted from the moment of his death." "In other words", said Arellano, C. J., ". . . the heirs succeed immediately to all of the property of the deceased ancestor. The property belongs to the heirs at the moment of the death of the ancestor as completely as if the ancestor had executed and delivered to them a deed for the same before his death." (Bondad vs. Bondad, 34 Phil., 232. See also, Mijares vs. Nery, 3 Phil., 195; Suilong & Co., vs. Chio-Taysan, 12 Phil., 13; Lubrico vs. Arbado, 12 Phil., 391; Innocencio vs. Gat-Pandan, 14 Phil., 491; Aliasas vs.Alcantara, 16 Phil., 489; Ilustre vs. Alaras Frondosa, 17 Phil., 321; Malahacan vs. Ignacio, 19 Phil., 434; Bowa vs. Briones, 38 Phil., 27; Osario vs. Osario & Yuchausti Steamship Co., 41 Phil., 531; Fule vs. Fule, 46 Phil., 317; Dais vs. Court of First Instance of Capiz, 51 Phil., 396; Baun vs. Heirs of Baun, 53 Phil., 654.) Plaintiff, however, asserts that while article 657 of the Civil Code is applicable to testate as well as intestate succession, it operates only in so far as forced heirs are concerned. But the language of article 657 of the Civil Code is broad and makes no distinction between different classes of heirs. That article does not speak of forced heirs; it does not even use the word "heir". It speaks of the rights of succession and the transmission thereof from the moment of death. The provision of section 625 of the Code of Civil Procedure regarding the authentication and probate of a will as a necessary condition to effect transmission of property does not affect the general rule laid down in article 657 of the Civil Code. The authentication of a will implies its due execution but once probated and allowed the transmission is effective as of the death of the testator in accordance with article 657 of the Civil Code. Whatever may be the time when actual transmission of the inheritance takes place, succession takes place in any event at the moment of the decedent's death. The time when the heirs legally succeed to the inheritance may differ from the time when the heirs actually receive such inheritance. "Poco importa", says Manresa commenting on article 657 of the Civil Code, "que desde el falleimiento del causante, hasta que el heredero o legatario entre en posesion de los bienes de la herencia o del legado, transcurra mucho o poco tiempo, pues la adquisicion ha de retrotraerse al momento de la muerte, y asi lo ordena el articulo 989, que debe considerarse como complemento del presente." (5 Manresa, 305; see also, art. 440, par. 1, Civil Code.) Thomas Hanley having died on May 27, 1922, the inheritance tax accrued as of the date.

From the fact, however, that Thomas Hanley died on May 27, 1922, it does not follow that the obligation to pay the tax arose as of the date. The time for the payment on inheritance tax is clearly fixed by section 1544 of the Revised Administrative Code as amended by Act No. 3031, in relation to section 1543 of the same Code. The two sections follow:

SEC. 1543. Exemption of certain acquisitions and transmissions. — The following shall not be taxed:

(a) The merger of the usufruct in the owner of the naked title.

(b) The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the trustees.

(c) The transmission from the first heir, legatee, or donee in favor of another beneficiary, in accordance with the desire of the predecessor.

In the last two cases, if the scale of taxation appropriate to the new beneficiary is greater than that paid by

Page 66: Tax II Estate and Donor Cases

the first, the former must pay the difference.

SEC. 1544. When tax to be paid. — The tax fixed in this article shall be paid:

(a) In the second and third cases of the next preceding section, before entrance into possession of the property.

(b) In other cases, within the six months subsequent to the death of the predecessor; but if judicial testamentary or intestate proceedings shall be instituted prior to the expiration of said period, the payment shall be made by the executor or administrator before delivering to each beneficiary his share.

If the tax is not paid within the time hereinbefore prescribed, interest at the rate of twelve per centum per annum shall be added as part of the tax; and to the tax and interest due and unpaid within ten days after the date of notice and demand thereof by the collector, there shall be further added a surcharge of twenty-five per centum.

A certified of all letters testamentary or of admisitration shall be furnished the Collector of Internal Revenue by the Clerk of Court within thirty days after their issuance.

It should be observed in passing that the word "trustee", appearing in subsection (b) of section 1543, should read "fideicommissary" or "cestui que trust". There was an obvious mistake in translation from the Spanish to the English version.

The instant case does fall under subsection (a), but under subsection (b), of section 1544 above-quoted, as there is here no fiduciary heirs, first heirs, legatee or donee. Under the subsection, the tax should have been paid before the delivery of the properties in question to P. J. M. Moore as trustee on March 10, 1924.

(b) The plaintiff contends that the estate of Thomas Hanley, in so far as the real properties are concerned, did not and could not legally pass to the instituted heir, Matthew Hanley, until after the expiration of ten years from the death of the testator on May 27, 1922 and, that the inheritance tax should be based on the value of the estate in 1932, or ten years after the testator's death. The plaintiff introduced evidence tending to show that in 1932 the real properties in question had a reasonable value of only P5,787. This amount added to the value of the personal property left by the deceased, which the plaintiff admits is P1,465, would generate an inheritance tax which, excluding deductions, interest and surcharge, would amount only to about P169.52.

If death is the generating source from which the power of the estate to impose inheritance taxes takes its being and if, upon the death of the decedent, succession takes place and the right of the estate to tax vests instantly, the tax should be measured by the vlaue of the estate as it stood at the time of the decedent's death, regardless of any subsequent contingency value of any subsequent increase or decrease in value. (61 C. J., pp. 1692, 1693; 26 R. C. L., p. 232; Blakemore and Bancroft, Inheritance Taxes, p. 137. See also Knowlton vs. Moore, 178 U.S., 41; 20 Sup. Ct. Rep., 747; 44 Law. ed., 969.) "The right of the state to an inheritance tax accrues at the moment of death, and hence is ordinarily measured as to any beneficiary by the value at that time of such property as passes to him. Subsequent appreciation or depriciation is immaterial." (Ross, Inheritance Taxation, p. 72.)

Our attention is directed to the statement of the rule in Cyclopedia of Law of and Procedure (vol. 37, pp. 1574, 1575) that, in the case of contingent remainders, taxation is postponed until the estate vests in possession or the contingency is settled. This rule was formerly followed in New York and has been adopted in Illinois,

Page 67: Tax II Estate and Donor Cases

Minnesota, Massachusetts, Ohio, Pennsylvania and Wisconsin. This rule, horever, is by no means entirely satisfactory either to the estate or to those interested in the property (26 R. C. L., p. 231.). Realizing, perhaps, the defects of its anterior system, we find upon examination of cases and authorities that New York has varied and now requires the immediate appraisal of the postponed estate at its clear market value and the payment forthwith of the tax on its out of the corpus of the estate transferred. (In re Vanderbilt, 172 N. Y., 69; 69 N. E., 782; In re Huber, 86 N. Y. App. Div., 458; 83 N. Y. Supp., 769; Estate of Tracy, 179 N. Y., 501; 72 N. Y., 519; Estate of Brez, 172 N. Y., 609; 64 N. E., 958; Estate of Post, 85 App. Div., 611; 82 N. Y. Supp., 1079. Vide also, Saltoun vs. Lord Advocate, 1 Peter. Sc. App., 970; 3 Macq. H. L., 659; 23 Eng. Rul. Cas., 888.) California adheres to this new rule (Stats. 1905, sec. 5, p. 343).

But whatever may be the rule in other jurisdictions, we hold that a transmission by inheritance is taxable at the time of the predecessor's death, notwithstanding the postponement of the actual possession or enjoyment of the estate by the beneficiary, and the tax measured by the value of the property transmitted at that time regardless of its appreciation or depreciation.

(c) Certain items are required by law to be deducted from the appraised gross in arriving at the net value of the estate on which the inheritance tax is to be computed (sec. 1539, Revised Administrative Code). In the case at bar, the defendant and the trial court allowed a deduction of only P480.81. This sum represents the expenses and disbursements of the executors until March 10, 1924, among which were their fees and the proven debts of the deceased. The plaintiff contends that the compensation and fees of the trustees, which aggregate P1,187.28 (Exhibits C, AA, EE, PP, HH, JJ, LL, NN, OO), should also be deducted under section 1539 of the Revised Administrative Code which provides, in part, as follows: "In order to determine the net sum which must bear the tax, when an inheritance is concerned, there shall be deducted, in case of a resident, . . . the judicial expenses of the testamentary or intestate proceedings, . . . ."

A trustee, no doubt, is entitled to receive a fair compensation for his services (Barney vs. Saunders, 16 How., 535; 14 Law. ed., 1047). But from this it does not follow that the compensation due him may lawfully be deducted in arriving at the net value of the estate subject to tax. There is no statute in the Philippines which requires trustees' commissions to be deducted in determining the net value of the estate subject to inheritance tax (61 C. J., p. 1705). Furthermore, though a testamentary trust has been created, it does not appear that the testator intended that the duties of his executors and trustees should be separated. (Ibid.; In re Vanneck's Estate, 161 N. Y. Supp., 893; 175 App. Div., 363; In re Collard's Estate, 161 N. Y. Supp., 455.) On the contrary, in paragraph 5 of his will, the testator expressed the desire that his real estate be handled and managed by his executors until the expiration of the period of ten years therein provided. Judicial expenses are expenses of administration (61 C. J., p. 1705) but, in State vs. Hennepin County Probate Court (112 N. W., 878; 101 Minn., 485), it was said: ". . . The compensation of a trustee, earned, not in the administration of the estate, but in the management thereof for the benefit of the legatees or devises, does not come properly within the class or reason for exempting administration expenses. . . . Service rendered in that behalf have no reference to closing the estate for the purpose of a distribution thereof to those entitled to it, and are not required or essential to the perfection of the rights of the heirs or legatees. . . . Trusts . . . of the character of that here before the court, are created for the the benefit of those to whom the property ultimately passes, are of voluntary creation, and intended for the preservation of the estate. No sound reason is given to support the contention that such expenses should be taken into consideration in fixing the value of the estate for the purpose of this tax."

(d) The defendant levied and assessed the inheritance tax due from the estate of Thomas Hanley under the provisions of section 1544 of the Revised Administrative Code, as amended by section 3 of Act No. 3606. But Act No. 3606 went into effect on January 1, 1930. It, therefore, was not the law in force when the testator died on May 27, 1922. The law at the time was section 1544 above-mentioned, as amended by Act No. 3031, which

Page 68: Tax II Estate and Donor Cases

took effect on March 9, 1922.

It is well-settled that inheritance taxation is governed by the statute in force at the time of the death of the decedent (26 R. C. L., p. 206; 4 Cooley on Taxation, 4th ed., p. 3461). The taxpayer can not foresee and ought not to be required to guess the outcome of pending measures. Of course, a tax statute may be made retroactive in its operation. Liability for taxes under retroactive legislation has been "one of the incidents of social life." (Seattle vs. Kelleher, 195 U. S., 360; 49 Law. ed., 232 Sup. Ct. Rep., 44.) But legislative intent that a tax statute should operate retroactively should be perfectly clear. (Scwab vs. Doyle, 42 Sup. Ct. Rep., 491; Smietanka vs. First Trust & Savings Bank, 257 U. S., 602; Stockdale vs. Insurance Co., 20 Wall., 323; Lunch vs. Turrish, 247 U. S., 221.) "A statute should be considered as prospective in its operation, whether it enacts, amends, or repeals an inheritance tax, unless the language of the statute clearly demands or expresses that it shall have a retroactive effect, . . . ." (61 C. J., P. 1602.) Though the last paragraph of section 5 of Regulations No. 65 of the Department of Finance makes section 3 of Act No. 3606, amending section 1544 of the Revised Administrative Code, applicable to all estates the inheritance taxes due from which have not been paid, Act No. 3606 itself contains no provisions indicating legislative intent to give it retroactive effect. No such effect can begiven the statute by this court.

The defendant Collector of Internal Revenue maintains, however, that certain provisions of Act No. 3606 are more favorable to the taxpayer than those of Act No. 3031, that said provisions are penal in nature and, therefore, should operate retroactively in conformity with the provisions of article 22 of the Revised Penal Code. This is the reason why he applied Act No. 3606 instead of Act No. 3031. Indeed, under Act No. 3606, (1) the surcharge of 25 per cent is based on the tax only, instead of on both the tax and the interest, as provided for in Act No. 3031, and (2) the taxpayer is allowed twenty days from notice and demand by rthe Collector of Internal Revenue within which to pay the tax, instead of ten days only as required by the old law.

Properly speaking, a statute is penal when it imposes punishment for an offense committed against the state which, under the Constitution, the Executive has the power to pardon. In common use, however, this sense has been enlarged to include within the term "penal statutes" all status which command or prohibit certain acts, and establish penalties for their violation, and even those which, without expressly prohibiting certain acts, impose a penalty upon their commission (59 C. J., p. 1110). Revenue laws, generally, which impose taxes collected by the means ordinarily resorted to for the collection of taxes are not classed as penal laws, although there are authorities to the contrary. (See Sutherland, Statutory Construction, 361; Twine Co. vs. Worthington, 141 U. S., 468; 12 Sup. Ct., 55; Rice vs. U. S., 4 C. C. A., 104; 53 Fed., 910; Com. vs. Standard Oil Co., 101 Pa. St., 150; State vs. Wheeler, 44 P., 430; 25 Nev. 143.) Article 22 of the Revised Penal Code is not applicable to the case at bar, and in the absence of clear legislative intent, we cannot give Act No. 3606 a retroactive effect.

(e) The plaintiff correctly states that the liability to pay a tax may arise at a certain time and the tax may be paid within another given time. As stated by this court, "the mere failure to pay one's tax does not render one delinqent until and unless the entire period has eplased within which the taxpayer is authorized by law to make such payment without being subjected to the payment of penalties for fasilure to pay his taxes within the prescribed period." (U. S. vs. Labadan, 26 Phil., 239.)

The defendant maintains that it was the duty of the executor to pay the inheritance tax before the delivery of the decedent's property to the trustee. Stated otherwise, the defendant contends that delivery to the trustee was delivery to the cestui que trust, the beneficiery in this case, within the meaning of the first paragraph of subsection (b) of section 1544 of the Revised Administrative Code. This contention is well taken and is sustained. The appointment of P. J. M. Moore as trustee was made by the trial court in conformity with the wishes of the testator as expressed in his will. It is true that the word "trust" is not mentioned or used in the will but the intention to create one is clear. No particular or technical words are required to create a testamentary trust

Page 69: Tax II Estate and Donor Cases

(69 C. J., p. 711). The words "trust" and "trustee", though apt for the purpose, are not necessary. In fact, the use of these two words is not conclusive on the question that a trust is created (69 C. J., p. 714). "To create a trust by will the testator must indicate in the will his intention so to do by using language sufficient to separate the legal from the equitable estate, and with sufficient certainty designate the beneficiaries, their interest in the ttrust, the purpose or object of the trust, and the property or subject matter thereof. Stated otherwise, to constitute a valid testamentary trust there must be a concurrence of three circumstances: (1) Sufficient words to raise a trust; (2) a definite subject; (3) a certain or ascertain object; statutes in some jurisdictions expressly or in effect so providing." (69 C. J., pp. 705,706.) There is no doubt that the testator intended to create a trust. He ordered in his will that certain of his properties be kept together undisposed during a fixed period, for a stated purpose. The probate court certainly exercised sound judgment in appointment a trustee to carry into effect the provisions of the will (see sec. 582, Code of Civil Procedure).

P. J. M. Moore became trustee on March 10, 1924. On that date trust estate vested in him (sec. 582 in relation to sec. 590, Code of Civil Procedure). The mere fact that the estate of the deceased was placed in trust did not remove it from the operation of our inheritance tax laws or exempt it from the payment of the inheritance tax. The corresponding inheritance tax should have been paid on or before March 10, 1924, to escape the penalties of the laws. This is so for the reason already stated that the delivery of the estate to the trustee was in esse delivery of the same estate to the cestui que trust, the beneficiary in this case. A trustee is but an instrument or agent for the cestui que trust (Shelton vs. King, 299 U. S., 90; 33 Sup. Ct. Rep., 689; 57 Law. ed., 1086). When Moore accepted the trust and took possesson of the trust estate he thereby admitted that the estate belonged not to him but to his cestui que trust (Tolentino vs. Vitug, 39 Phil.,126, cited in 65 C. J., p. 692, n. 63). He did not acquire any beneficial interest in the estate. He took such legal estate only as the proper execution of the trust required (65 C. J., p. 528) and, his estate ceased upon the fulfillment of the testator's wishes. The estate then vested absolutely in the beneficiary (65 C. J., p. 542).

The highest considerations of public policy also justify the conclusion we have reached. Were we to hold that the payment of the tax could be postponed or delayed by the creation of a trust of the type at hand, the result would be plainly disastrous. Testators may provide, as Thomas Hanley has provided, that their estates be not delivered to their beneficiaries until after the lapse of a certain period of time. In the case at bar, the period is ten years. In other cases, the trust may last for fifty years, or for a longer period which does not offend the rule against petuities. The collection of the tax would then be left to the will of a private individual. The mere suggestion of this result is a sufficient warning against the accpetance of the essential to the very exeistence of government. (Dobbins vs. Erie Country, 16 Pet., 435; 10 Law. ed., 1022; Kirkland vs. Hotchkiss, 100 U. S., 491; 25 Law. ed., 558; Lane County vs. Oregon, 7 Wall., 71; 19 Law. ed., 101; Union Refrigerator Transit Co. vs. Kentucky, 199 U. S., 194; 26 Sup. Ct. Rep., 36; 50 Law. ed., 150; Charles River Bridge vs. Warren Bridge, 11 Pet., 420; 9 Law. ed., 773.) The obligation to pay taxes rests not upon the privileges enjoyed by, or the protection afforded to, a citizen by the government but upon the necessity of money for the support of the state (Dobbins vs. Erie Country, supra). For this reason, no one is allowed to object to or resist the payment of taxes solely because no personal benefit to him can be pointed out. (Thomas vs. Gay, 169 U. S., 264; 18 Sup. Ct. Rep., 340; 43 Law. ed., 740.) While courts will not enlarge, by construction, the government's power of taxation (Bromley vs. McCaughn, 280 U. S., 124; 74 Law. ed., 226; 50 Sup. Ct. Rep., 46) they also will not place upon tax laws so loose a construction as to permit evasions on merely fanciful and insubstantial distictions. (U. S. vs. Watts, 1 Bond., 580; Fed. Cas. No. 16,653; U. S. vs. Wigglesirth, 2 Story, 369; Fed. Cas. No. 16,690, followed in Froelich & Kuttner vs. Collector of Customs, 18 Phil., 461, 481; Castle Bros., Wolf & Sons vs. McCoy, 21 Phil., 300; Muñoz & Co. vs. Hord, 12 Phil., 624; Hongkong & Shanghai Banking Corporation vs. Rafferty, 39 Phil., 145; Luzon Stevedoring Co. vs. Trinidad, 43 Phil., 803.) When proper, a tax statute should be construed to avoid the possibilities of tax evasion. Construed this way, the statute, without resulting in injustice to the taxpayer, becomes fair to the government.

Page 70: Tax II Estate and Donor Cases

That taxes must be collected promptly is a policy deeply intrenched in our tax system. Thus, no court is allowed to grant injunction to restrain the collection of any internal revenue tax ( sec. 1578, Revised Administrative Code; Sarasola vs. Trinidad, 40 Phil., 252). In the case of Lim Co Chui vs. Posadas (47 Phil., 461), this court had occassion to demonstrate trenchment adherence to this policy of the law. It held that "the fact that on account of riots directed against the Chinese on October 18, 19, and 20, 1924, they were prevented from praying their internal revenue taxes on time and by mutual agreement closed their homes and stores and remained therein, does not authorize the Collector of Internal Revenue to extend the time prescribed for the payment of the taxes or to accept them without the additional penalty of twenty five per cent." (Syllabus, No. 3.)

". . . It is of the utmost importance," said the Supreme Court of the United States, ". . . that the modes adopted to enforce the taxes levied should be interfered with as little as possible. Any delay in the proceedings of the officers, upon whom the duty is developed of collecting the taxes, may derange the operations of government, and thereby, cause serious detriment to the public." (Dows vs. Chicago, 11 Wall., 108; 20 Law. ed., 65, 66; Churchill and Tait vs. Rafferty, 32 Phil., 580.)

It results that the estate which plaintiff represents has been delinquent in the payment of inheritance tax and, therefore, liable for the payment of interest and surcharge provided by law in such cases.

The delinquency in payment occurred on March 10, 1924, the date when Moore became trustee. The interest due should be computed from that date and it is error on the part of the defendant to compute it one month later. The provisions cases is mandatory (see and cf. Lim Co Chui vs. Posadas, supra), and neither the Collector of Internal Revenuen or this court may remit or decrease such interest, no matter how heavily it may burden the taxpayer.

To the tax and interest due and unpaid within ten days after the date of notice and demand thereof by the Collector of Internal Revenue, a surcharge of twenty-five per centum should be added (sec. 1544, subsec. (b), par. 2, Revised Administrative Code). Demand was made by the Deputy Collector of Internal Revenue upon Moore in a communiction dated October 16, 1931 (Exhibit 29). The date fixed for the payment of the tax and interest was November 30, 1931. November 30 being an official holiday, the tenth day fell on December 1, 1931. As the tax and interest due were not paid on that date, the estate became liable for the payment of the surcharge.

In view of the foregoing, it becomes unnecessary for us to discuss the fifth error assigned by the plaintiff in his brief.

We shall now compute the tax, together with the interest and surcharge due from the estate of Thomas Hanley inaccordance with the conclusions we have reached.

At the time of his death, the deceased left real properties valued at P27,920 and personal properties worth P1,465, or a total of P29,385. Deducting from this amount the sum of P480.81, representing allowable deductions under secftion 1539 of the Revised Administrative Code, we have P28,904.19 as the net value of the estate subject to inheritance tax.

The primary tax, according to section 1536, subsection (c), of the Revised Administrative Code, should be imposed at the rate of one per centum upon the first ten thousand pesos and two per centum upon the amount by which the share exceed thirty thousand pesos, plus an additional two hundred per centum. One per centum of ten thousand pesos is P100. Two per centum of P18,904.19 is P378.08. Adding to these two sums an additional two hundred per centum, or P965.16, we have as primary tax, correctly computed by the defendant, the sum of P1,434.24.

Page 71: Tax II Estate and Donor Cases

To the primary tax thus computed should be added the sums collectible under section 1544 of the Revised Administrative Code. First should be added P1,465.31 which stands for interest at the rate of twelve per centum per annum from March 10, 1924, the date of delinquency, to September 15, 1932, the date of payment under protest, a period covering 8 years, 6 months and 5 days. To the tax and interest thus computed should be added the sum of P724.88, representing a surhcarge of 25 per cent on both the tax and interest, and also P10, the compromise sum fixed by the defendant (Exh. 29), giving a grand total of P3,634.43.

As the plaintiff has already paid the sum of P2,052.74, only the sums of P1,581.69 is legally due from the estate. This last sum is P390.42 more than the amount demanded by the defendant in his counterclaim. But, as we cannot give the defendant more than what he claims, we must hold that the plaintiff is liable only in the sum of P1,191.27 the amount stated in the counterclaim.

The judgment of the lower court is accordingly modified, with costs against the plaintiff in both instances. So ordered.

Avanceña, C.J., Abad Santos, Imperial, Diaz and Concepcion, JJ., concur.Villa-Real, J., concurs.

.R. No. 155541             January 27, 2004

ESTATE OF THE LATE JULIANA DIEZ VDA. DE GABRIEL, petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, respondent.

D E C I S I O N

YNARES-SANTIAGO, J.:

This petition for review on certiorari assails the decision of the Court of Appeals in CA-G.R. CV No. 09107, dated September 30, 2002,1 which reversed the November 19, 1995 Order of Regional Trial Court of Manila, Branch XXXVIII, in Sp. Proc. No. R-82-6994, entitled "Testate Estate of Juliana Diez Vda. De Gabriel". The petition was filed by the Estate of the Late Juliana Diez Vda. De Gabriel, represented by Prudential Bank as its duly appointed and qualified Administrator.

As correctly summarized by the Court of Appeals, the relevant facts are as follows:

During the lifetime of the decedent, Juliana Vda. De Gabriel, her business affairs were managed by the Philippine Trust Company (Philtrust). The decedent died on April 3, 1979. Two days after her death, Philtrust, through its Trust Officer, Atty. Antonio M. Nuyles, filed her Income Tax Return for 1978. The return did not indicate that the decedent had died.

On May 22, 1979, Philtrust also filed a verified petition for appointment as Special Administrator with the Regional Trial Court of Manila, Branch XXXVIII, docketed as Sp. Proc. No. R-82-6994. The court a quo appointed one of the heirs as Special Administrator. Philtrust’s motion for reconsideration was denied by the

Page 72: Tax II Estate and Donor Cases

probate court.

On January 26, 1981, the court a quo issued an Order relieving Mr. Diez of his appointment, and appointed Antonio Lantin to take over as Special Administrator. Subsequently, on July 30, 1981, Mr. Lantin was also relieved of his appointment, and Atty. Vicente Onosa was appointed in his stead.

In the meantime, the Bureau of Internal Revenue conducted an administrative investigation on the decedent’s tax liability and found a deficiency income tax for the year 1977 in the amount of P318,233.93. Thus, on November 18, 1982, the BIR sent by registered mail a demand letter and Assessment Notice No. NARD-78-82-00501 addressed to the decedent "c/o Philippine Trust Company, Sta. Cruz, Manila" which was the address stated in her 1978 Income Tax Return. No response was made by Philtrust. The BIR was not informed that the decedent had actually passed away.

In an Order dated September 5, 1983, the court a quo appointed Antonio Ambrosio as the Commissioner and Auditor Tax Consultant of the Estate of the decedent.

On June 18, 1984, respondent Commissioner of Internal Revenue issued warrants of distraint and levy to enforce collection of the decedent’s deficiency income tax liability, which were served upon her heir, Francisco Gabriel. On November 22, 1984, respondent filed a "Motion for Allowance of Claim and for an Order of Payment of Taxes" with the court a quo. On January 7, 1985, Mr. Ambrosio filed a letter of protest with the Litigation Division of the BIR, which was not acted upon because the assessment notice had allegedly become final, executory and incontestable.

On May 16, 1985, petitioner, the Estate of the decedent, through Mr. Ambrosio, filed a formal opposition to the BIR’s Motion for Allowance of Claim based on the ground that there was no proper service of the assessment and that the filing of the aforesaid claim had already prescribed. The BIR filed its Reply, contending that service to Philippine Trust Company was sufficient service, and that the filing of the claim against the Estate on November 22, 1984 was within the five-year prescriptive period for assessment and collection of taxes under Section 318 of the 1977 National Internal Revenue Code (NIRC).

On November 19, 1985, the court a quo issued an Order denying respondent’s claim against the Estate,2 after finding that there was no notice of its tax assessment on the proper party.3

On July 2, 1986, respondent filed an appeal with the Court of Appeals, docketed as CA-G.R. CV No. 09107, 4

assailing the Order of the probate court dated November 19, 1985. It was claimed that Philtrust, in filing the decedent’s 1978 income tax return on April 5, 1979, two days after the taxpayer’s death, had "constituted itself as the administrator of the estate of the deceased at least insofar as said return is concerned."5 Citing Basilan Estate Inc. v. Commissioner of Internal Revenue,6 respondent argued that the legal requirement of notice with respect to tax assessments7 requires merely that the Commissioner of Internal Revenue release, mail and send the notice of the assessment to the taxpayer at the address stated in the return filed, but not that the taxpayer actually receive said assessment within the five-year prescriptive period.8 Claiming that Philtrust had been remiss in not notifying respondent of the decedent’s death, respondent therefore argued that the deficiency tax assessment had already become final, executory and incontestable, and that petitioner Estate was liable therefor.

On September 30, 2002, the Court of Appeals rendered a decision in favor of the respondent. Although acknowledging that the bond of agency between Philtrust and the decedent was severed upon the latter’s death, it was ruled that the administrator of the Estate had failed in its legal duty to inform respondent of the decedent’s

Page 73: Tax II Estate and Donor Cases

death, pursuant to Section 104 of the National Internal Revenue Code of 1977. Consequently, the BIR’s service to Philtrust of the demand letter and Notice of Assessment was binding upon the Estate, and, upon the lapse of the statutory thirty-day period to question this claim, the assessment became final, executory and incontestable. The dispositive portion of said decision reads:

WHEREFORE, finding merit in the appeal, the appealed decision is REVERSED AND SET ASIDE. Another one is entered ordering the Administrator of the Estate to pay the Commissioner of Internal Revenue the following:

a. The amount of P318,223.93, representing the deficiency income tax liability for the year 1978, plus 20% interest per annum from November 2, 1982 up to November 2, 1985 and in addition thereto 10% surcharge on the basic tax of P169,155.34 pursuant to Section 51(e)(2) and (3) of the Tax Code as amended by PD 69 and 1705; and

b. The costs of the suit.

SO ORDERED.9

Hence, the instant petition, raising the following issues:

1. Whether or not the Court of Appeals erred in holding that the service of deficiency tax assessment against Juliana Diez Vda. de Gabriel through the Philippine Trust Company was a valid service in order to bind the Estate;

2. Whether or not the Court of Appeals erred in holding that the deficiency tax assessment and final demand was already final, executory and incontestable.

Petitioner Estate denies that Philtrust had any legal personality to represent the decedent after her death. As such, petitioner argues that there was no proper notice of the assessment which, therefore, never became final, executory and incontestable.10 Petitioner further contends that respondent’s failure to file its claim against the Estate within the proper period prescribed by the Rules of Court is a fatal error, which forever bars its claim against the Estate.11

Respondent, on the other hand, claims that because Philtrust filed the decedent’s income tax return subsequent to her death, Philtrust was the de facto administrator of her Estate.12 Consequently, when the Assessment Notice and demand letter dated November 18, 1982 were sent to Philtrust, there was proper service on the Estate.13

Respondent further asserts that Philtrust had the legal obligation to inform petitioner of the decedent’s death, which requirement is found in Section 104 of the NIRC of 1977.14 Since Philtrust did not, respondent contends that petitioner Estate should not be allowed to profit from this omission.15 Respondent further argues that Philtrust’s failure to protest the aforementioned assessment within the 30-day period provided in Section 319-A of the NIRC of 1977 meant that the assessment had already become final, executory and incontestable.16

The resolution of this case hinges on the legal relationship between Philtrust and the decedent, and, by extension, between Philtrust and petitioner Estate. Subsumed under this primary issue is the sub-issue of whether or not service on Philtrust of the demand letter and Assessment Notice No. NARD-78-82-00501 was valid service on petitioner, and the issue of whether Philtrust’s inaction thereon could bind petitioner. If both sub-issues are answered in the affirmative, respondent’s contention as to the finality of Assessment Notice No. NARD-78-82-

Page 74: Tax II Estate and Donor Cases

00501 must be answered in the affirmative. This is because Section 319-A of the NIRC of 1977 provides a clear 30-day period within which to protest an assessment. Failure to file such a protest within said period means that the assessment ipso jure becomes final and unappealable, as a consequence of which legal proceedings may then be initiated for collection thereof.

We find in favor of the petitioner.

The first point to be considered is that the relationship between the decedent and Philtrust was one of agency, which is a personal relationship between agent and principal. Under Article 1919 (3) of the Civil Code, death of the agent or principal automatically terminates the agency. In this instance, the death of the decedent on April 3, 1979 automatically severed the legal relationship between her and Philtrust, and such could not be revived by the mere fact that Philtrust continued to act as her agent when, on April 5, 1979, it filed her Income Tax Return for the year 1978.

Since the relationship between Philtrust and the decedent was automatically severed at the moment of the Taxpayer’s death, none of Philtrust’s acts or omissions could bind the estate of the Taxpayer. Service on Philtrust of the demand letter and Assessment Notice No. NARD-78-82-00501 was improperly done.

It must be noted that Philtrust was never appointed as the administrator of the Estate of the decedent, and, indeed, that the court a quo twice rejected Philtrust’s motion to be thus appointed. As of November 18, 1982, the date of the demand letter and Assessment Notice, the legal relationship between the decedent and Philtrust had already been non-existent for three years.

Respondent claims that Section 104 of the National Internal Revenue Code of 1977 imposed the legal obligation on Philtrust to inform respondent of the decedent’s death. The said Section reads:

SEC. 104. Notice of death to be filed. – In all cases of transfers subject to tax or where, though exempt from tax, the gross value of the estate exceeds three thousand pesos, the executor, administrator, or any of the legal heirs, as the case may be, within two months after the decedent’s death, or within a like period after qualifying as such executor or administrator, shall give written notice thereof to the Commissioner of Internal Revenue.

The foregoing provision falls in Title III, Chapter I of the National Internal Revenue Code of 1977, or the chapter on Estate Tax, and pertains to "all cases of transfers subject to tax" or where the "gross value of the estate exceeds three thousand pesos". It has absolutely no applicability to a case for deficiency income tax, such as the case at bar. It further lacks applicability since Philtrust was never the executor, administrator of the decedent’s estate, and, as such, never had the legal obligation, based on the above provision, to inform respondent of her death.

Although the administrator of the estate may have been remiss in his legal obligation to inform respondent of the decedent’s death, the consequences thereof, as provided in Section 119 of the National Internal Revenue Code of 1977, merely refer to the imposition of certain penal sanctions on the administrator. These do not include the indefinite tolling of the prescriptive period for making deficiency tax assessments, or the waiver of the notice requirement for such assessments.

Thus, as of November 18, 1982, the date of the demand letter and Assessment Notice No. NARD-78-82-00501, there was absolutely no legal obligation on the part of Philtrust to either (1) respond to the demand letter and assessment notice, (2) inform respondent of the decedent’s death, or (3) inform

Page 75: Tax II Estate and Donor Cases

petitioner that it had received said demand letter and assessment notice. This lack of legal obligation was implicitly recognized by the Court of Appeals, which, in fact, rendered its assailed decision on grounds of "equity".17

Since there was never any valid notice of this assessment, it could not have become final, executory and incontestable, and, for failure to make the assessment within the five-year period provided in Section 318 of the National Internal Revenue Code of 1977, respondent’s claim against the petitioner Estate is barred. Said Section 18 reads:

SEC. 318. Period of limitation upon assessment and collection. – Except as provided in the succeeding section, internal revenue taxes shall be assessed within five years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period. For the purpose of this section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day: Provided, That this limitation shall not apply to cases already investigated prior to the approval of this Code.

Respondent argues that an assessment is deemed made for the purpose of giving effect to such assessment when the notice is released, mailed or sent to the taxpayer to effectuate the assessment, and there is no legal requirement that the taxpayer actually receive said notice within the five-year period.18 It must be noted, however, that the foregoing rule requires that the notice be sent to the taxpayer, and not merely to a disinterested party. Although there is no specific requirement that the taxpayer should receive the notice within the said period, due process requires at the very least that such notice actually be received. In Commissioner of Internal Revenue v. Pascor Realty and Development Corporation,19 we had occasion to say:

An assessment contains not only a computation of tax liabilities, but also a demand for payment within a prescribed period. It also signals the time when penalties and interests begin to accrue against the taxpayer. To enable the taxpayer to determine his remedies thereon, due process requires that it must be served on and received by the taxpayer.

In Republic v. De le Rama,20 we clarified that, when an estate is under administration, notice must be sent to the administrator of the estate, since it is the said administrator, as representative of the estate, who has the legal obligation to pay and discharge all debts of the estate and to perform all orders of the court. In that case, legal notice of the assessment was sent to two heirs, neither one of whom had any authority to represent the estate. We said:

The notice was not sent to the taxpayer for the purpose of giving effect to the assessment, and said notice could not produce any effect. In the case of Bautista and Corrales Tan v. Collector of Internal Revenue … this Court had occasion to state that "the assessment is deemed made when the notice to this effect is released, mailed or sent to the taxpayer for the purpose of giving effect to said assessment." It appearing that the person liable for the payment of the tax did not receive the assessment, the assessment could not become final and executory. (Citations omitted, emphasis supplied.)

In this case, the assessment was served not even on an heir of the Estate, but on a completely disinterested third party. This improper service was clearly not binding on the petitioner.

By arguing that (1) the demand letter and assessment notice were served on Philtrust, (2) Philtrust was remiss in its obligation to respond to the demand letter and assessment notice, (3) Philtrust was remiss in its obligation to inform respondent of the decedent’s death, and (4) the assessment notice is therefore binding on the Estate,

Page 76: Tax II Estate and Donor Cases

respondent is arguing in circles. The most crucial point to be remembered is that Philtrust had absolutely no legal relationship to the deceased, or to her Estate. There was therefore no assessment served on the Estate as to the alleged underpayment of tax. Absent this assessment, no proceedings could be initiated in court for the collection of said tax,21 and respondent’s claim for collection, filed with the probate court only on November 22, 1984, was barred for having been made beyond the five-year prescriptive period set by law.

WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals in CA-G.R. CV No. 09107, dated September 30, 2002, is REVERSED and SET ASIDE. The Order of the Regional Trial Court of Manila, Branch XXXVIII, in Sp. Proc. No. R-82-6994, dated November 19, 1985, which denied the claim of the Bureau of Internal Revenue against the Estate of Juliana Diez Vda. De Gabriel for the deficiency income tax of the decedent for the year 1977 in the amount of P318,223.93, is AFFIRMED.

No pronouncement as to costs.

SO ORDERED.

Davide, Jr., C.J., (Chairman), Panganiban, and Carpio, JJ., concur.Azcuna, J., on official leave.

G.R. No. L-19495           November 24, 1966

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.LILIA YUSAY GONZALES and THE COURT OF TAX APPEALS, respondents.

Office of the Solicitor General for the petitioner.Ramon A. Gonzales for respondent Lilia Yusay Gonzales.

BENGZON, J.P., J.:

Matias Yusay, a resident of Pototan, Iloilo, died intestate on May 13, 1948, leaving two heirs, namely, Jose S. Yusay, a legitimate child, and Lilia Yusay Gonzales, an acknowledged natural child. Intestate proceedings for the settlement of his estate were instituted in the Court of First Instance of Iloilo (Special Proceedings No. 459). Jose S. Yusay was therein appointed administrator.

On May 11, 1949 Jose S. Yusay filed with the Bureau of Internal Revenue an estate and inheritance tax return declaring therein the following properties:

Personal properties

PalayCarabaos

P6,444.001,000.00 P7,444.00

Page 77: Tax II Estate and Donor Cases

Real properties:Capital, 74 parcels )

Conjugal 19 parcels)assessed at P179,760.00

Total gross estate P187,204.00

The return mentioned no heir.

Upon investigation however the Bureau of Internal Revenue found the following properties:

Personal properties:

PalayCarabaosPackard Automobile2 Aparadors

P6,444.001,500.002,000.00

500.00 P10,444.00

Real properties:Capital, 25 parcels assessed at P87,715.32

1/2 of Conjugal, 130 parcels assessed at P121,425.00 P209,140.32

Total P219,584.32

The fair market value of the real properties was computed by increasing the assessed value by forty percent.

Based on the above findings, the Bureau of Internal Revenue assessed on October 29, 1953 estate and inheritance taxes in the sums of P6,849.78 and P16,970.63, respectively.

On January 25, 1955 the Bureau of Internal Revenue increased the assessment to P8,225.89 as estate tax and P22,117.10 as inheritance tax plus delinquency interest and demanded payment thereof on or before February 28, 1955. Meanwhile, on February 16, 1955, the Court of First Instance of Iloilo required Jose S. Yusay to show proof of payment of said estate and inheritance taxes.

On March 3, 1955 Jose S. Yusay requested an extension of time within which to pay the tax. He posted a surety bond to guarantee payment of the taxes in question within one year. The Commissioner of Internal Revenue however denied the request. Then he issued a warrant of distraint and levy which he transmitted to the Municipal Treasurer of Pototan for execution. This warrant was not enforced because all the personal properties subject to

Page 78: Tax II Estate and Donor Cases

distraint were located in Iloilo City.

On May 20, 1955 the Provincial Treasurer of Iloilo requested the BIR Provincial Revenue Officer to furnish him copies of the assessment notices to support a motion for payment of taxes which the Provincial Fiscal would file in Special Proceedings No. 459 before the Court of First Instance of Iloilo. The papers requested were sent by the Commissioner of Internal Revenue to the Provincial Revenue Officer of Iloilo to be transmitted to the Provincial Treasurer. The records do not however show whether the Provincial Fiscal filed a claim with the Court of First Instance for the taxes due.

On May 30, 1956 the commissioner appointed by the Court of First Instance for the purpose, submitted a reamended project of partition which listed the following properties:

 Personal properties:

Buick SedanPackard carAparadorsCash in Bank (PNB)PalayCarabaos

P8,100.002,000.00

500.008,858.466,444.00

          1,500.00 P27,402.46

Real properties:

Land, 174 parcels assessed atBuildings

P324,797.21          4,500.00 P329,297.21

Total P356,699.67

More than a year later, particularly on July 12, 1957, an agent of the Bureau of Internal Revenue apprised the Commissioner of Internal Revenue of the existence of said reamended project of partition. Whereupon, the Internal Revenue Commissioner caused the estate of Matias Yusay to be reinvestigated for estate and inheritance tax liability. Accordingly, on February 13, 1958 he issued the following assessment:

Estate tax P16,246.04

5% surcharge 411.29

Delinquency 11,868.90

Page 79: Tax II Estate and Donor Cases

interest

CompromiseNo notice of deathLate payment

P15.0040.00                 55.00

Total P28,581.23

Inheritance Tax P38,178.12

5% surcharge 1,105.86

Delinquency interest 28,808.75

Compromise for late payment                 50.00

Total P69,142.73

Total estate and inheritance taxes P97,723.96

Like in previous assessments, the fair market value of the real properties was arrived at by adding 40% to the assessed value.

In view of the demise of Jose S. Yusay, said assessment was sent to his widow, Mrs. Florencia Piccio Vda. de Yusay, who succeeded him in the administration of the estate of Matias Yusay.

No payment having been made despite repeated demands, the Commissioner of Internal Revenue filed a proof of claim for the estate and inheritance taxes due and a motion for its allowance with the settlement court in voting priority of lien pursuant to Section 315 of the Tax Code.

On June 1, 1959, Lilia Yusay, through her counsel, Ramon Gonzales, filed an answer to the proof of claim alleging non-receipt of the assessment of February 13, 1958, the existence of two administrators, namely Florencia Piccio Vda. de Yusay who administered two-thirds of the estate, and Lilia Yusay, who administered the remaining one-third, and her willingness to pay the taxes corresponding to her share, and praying for deferment of the resolution on the motion for the payment of taxes until after a new assessment corresponding to her share was issued.

On November 17, 1959 Lilia Yusay disputed the legality of the assessment dated February 13, 1958. She claimed that the right to make the same had prescribed inasmuch as more than five years had elapsed since the

Page 80: Tax II Estate and Donor Cases

filing of the estate and inheritance tax return on May 11, 1949. She therefore requested that the assessment be declared invalid and without force and effect. This request was rejected by the Commissioner in his letter dates January 20, 1960, received by Lilia Yusay on March 14, 1960, for the reasons, namely, (1) that the right to assess the taxes in question has not been lost by prescription since the return which did not name the heirs cannot be considered a true and complete return sufficient to start the running of the period of limitations of five years under Section 331 of the Tax Code and pursuant to Section 332 of the same Code he has ten years within which to make the assessment counted from the discovery on September 24, 1953 of the identity of the heirs; and (2) that the estate's administrator waived the defense of prescription when he filed a surety bond on March 3, 1955 to guarantee payment of the taxes in question and when he requested postponement of the payment of the taxes pending determination of who the heirs are by the settlement court.

On April 13, 1960 Lilia Yusay filed a petition for review in the Court of Tax Appeals assailing the legality of the assessment dated February 13, 1958. After hearing the parties, said Court declared the right of the Commissioner of Internal Revenue to assess the estate and inheritance taxes in question to have prescribed and rendered the following judgment:

WHEREFORE, the decision of respondent assessing against the estate of the late Matias Yusay estate and inheritance taxes is hereby reversed. No costs.

The Commissioner of Internal Revenue appealed to this Court and raises the following issues:

1. Was the petition for review in the Court of Tax Appeals within the 30-day period provided for in Section 11 of Republic Act 1125?

2. Could the Court of Tax Appeals take cognizance of Lilia Yusay's appeal despite the pendency of the "Proof of Claim" and "Motion for Allowance of Claim and for an Order of Payment of Taxes" filed by the Commissioner of Internal Revenue in Special Proceedings No. 459 before the Court of First Instance of Iloilo?

3. Has the right of the Commissioner of Internal Revenue to assess the estate and inheritance taxes in question prescribed?

On November 17, 1959 Lilia Yusay disputed the legality of the assessment of February 13, 1958. On March 14, 1960 she received the decision of the Commissioner of Internal Revenue on the disputed assessment. On April 13, 1960 she filed her petition for review in the Court of Tax Appeals. Said Court correctly held that the appeal was seasonably interposed pursuant to Section 11 of Republic Act 1125. We already ruled in St. Stephen's Association v. Collector of Internal Revenue,1 that the counting of the thirty days within which to institute an appeal in the Court of Tax Appeals should commence from the date of receipt of the decision of the Commissioner on the disputed assessment, not from the date the assessment was issued.

Accordingly, the thirty-day period should begin running from March 14, 1960, the date Lilia Yusay received the appealable decision. From said date to April 13, 1960, when she filed her appeal in the Court of Tax Appeals, is exactly thirty days. Hence, the appeal was timely.

Next, the Commissioner attacks the jurisdiction of the Court of Tax Appeals to take cognizance of Lilia Yusay's appeal on the ground of lis pendens. He maintains that the pendency of his motion for allowance of claim and for order of payment of taxes in the Court of First Instance of Iloilo would preclude the Court of Tax Appeals from acquiring jurisdiction over Lilia Yusay's appeal. This contention lacks merit.

Page 81: Tax II Estate and Donor Cases

Lilia Yusay's cause seeks to resist the legality of the assessment in question. Should she maintain it in the settlement court or should she elevate her cause to the Court of Tax Appeals? We say, she acted correctly by appealing to the latter court. An action involving a disputed assessment for internal revenue taxes falls within the exclusive jurisdiction of the Court of Tax Appeals.2 It is in that forum, to the exclusion of the Court of First Instance,3 where she could ventilate her defenses against the assessment.

Moreover, the settlement court, where the Commissioner would wish Lilia Yusay to contest the assessment, is of limited jurisdiction. And under the Rules,4 its authority relates only to matters having to do with the settlement of estates and probate of wills of deceased persons.5 Said court has no jurisdiction to adjudicate the contentions in question, which — assuming they do not come exclusively under the Tax Court's cognizance — must be submitted to the Court of First Instance in the exercise of its general jurisdiction.6

We now come to the issue of prescription. Lilia Yusay claims that since the latest assessment was issued only on February 13, 1958 or eight years, nine months and two days from the filing of the estate and inheritance tax return, the Commissioner's right to make it has expired. She would rest her stand on Section 331 of the Tax Code which limits the right of the Commissioner to assess the tax within five years from the filing of the return.

The Commissioner claims that fraud attended the filing of the return; that this being so, Section 332(a) of the Tax Code would apply.7 It may be well to note that the assessment letter itself (Exhibit 22) did not impute fraud in the return with intent to evade payment of tax. Precisely, no surcharge for fraud was imposed. In his answer to the petition for review filed by Lilia Yusay in the Court of Tax Appeals, the Commissioner alleged no fraud. Instead, he broached the insufficiency of the return as barring the commencement of the running of the statute of limitations. He raised the point of fraud for the first time in the proceedings, only in his memorandum filed with the Tax Court subsequent to resting his case. Said Court rejected the plea of fraud for lack of allegation and proof, and ruled that the return, although not accurate, was sufficient to start the period of prescription.

Fraud is a question of fact.8 The circumstances constituting it must be alleged and proved in the court below.9

And the finding of said court as to its existence and non-existence is final unless clearly shown to be erroneous.10 As the court a quo found that no fraud was alleged and proved therein, We see no reason to entertain the Commissioner's assertion that the return was fraudulent.

The conclusion, however, that the return filed by Jose S. Yusay was sufficient to commence the running of the prescriptive period under Section 331 of the Tax Code rests on no solid ground.

Paragraph (a) of Section 93 of the Tax Code lists the requirements of a valid return. It states:

(a) Requirements.—In all cases of inheritance or transfers subject to either the estate tax or the inheritance tax, or both, or where, though exempt from both taxes, the gross value of the estate exceeds three thousand pesos, the executor, administrator, or anyone of the heirs, as the case may be, shall file a return under oath in duplicate, setting forth (1) the value of the gross estate of the decedent at the time of his death, or, in case of a nonresident not a citizen of the Philippines ; (2) the deductions allowed from gross estate in determining net estate as defined in section eighty-nine; (3) such part of such information as may at the time be ascertainable and such supplemental data as may be necessary to establish the correct taxes.

A return need not be complete in all particulars. It is sufficient if it complies substantially with the law. There is substantial compliance (1) when the return is made in good faith and is not false or fraudulent; (2) when it covers

Page 82: Tax II Estate and Donor Cases

the entire period involved; and (3) when it contains information as to the various items of income, deduction and credit with such definiteness as to permit the computation and assessment of the tax.11

There is no question that the state and inheritance tax return filed by Jose S. Yusay was substantially defective.

First, it was incomplete. It declared only ninety-three parcels of land representing about 400 hectares and left out ninety-two parcels covering 503 hectares. Said huge under declaration could not have been the result of an over-sight or mistake. As found in L-11378, supra note 7, Jose S. Yusay very well knew of the existence of the ommited properties. Perhaps his motive in under declaring the inventory of properties attached to the return was to deprive Lilia Yusay from inheriting her legal share in the hereditary estate, but certainly not because he honestly believed that they did not form part of the gross estate.

Second, the return mentioned no heir. Thus, no inheritance tax could be assessed. As a matter of law, on the basis of the return, there would be no occasion for the imposition of estate and inheritance taxes. When there is no heir - the return showed none - the intestate estate is escheated to the State.12 The State taxes not itself.

In a case where the return was made on the wrong form, the Supreme Court of the United States held that the filing thereof did not start the running of the period of limitations.13 The reason is that the return submitted did not contain the necessary information required in the correct form. In this jurisdiction, however, the Supreme Court refrained from applying the said ruling of the United States Supreme Court in Collector of Internal Revenue v. Central Azucarera de Tarlac, L-11760-61, July 31, 1958, on the ground that the return was complete in itself although inaccurate. To our mind, it would not make much difference where a return is made on the correct form prescribed by the Bureau of Internal Revenue if the data therein required are not supplied by the taxpayer. Just the same, the necessary information for the assessment of the tax would be missing.

The return filed in this case was so deficient that it prevented the Commissioner from computing the taxes due on the estate. It was as though no return was made. The Commissioner had to determine and assess the taxes on data obtained, not from the return, but from other sources. We therefore hold the view that the return in question was no return at all as required in Section 93 of the Tax Code.

The law imposes upon the taxpayer the burden of supplying by the return the information upon which an assessment would be based.14 His duty complied with, the taxpayer is not bound to do anything more than to wait for the Commissioner to assess the tax. However, he is not required to wait forever. Section 331 of the Tax Code gives the Commissioner five years within which to make his assessment.15 Except, of course, if the taxpayer failed to observe the law, in which case Section 332 of the same Code grants the Commissioner a longer period. Non-observance consists in filing a false or fraudulent return with intent to evade the tax or in filing no return at all.

Accordingly, for purposes of determining whether or not the Commissioner's assessment of February 13, 1958 is barred by prescription, Section 332(a) which is an exception to Section 331 of the Tax Code finds application.16

We quote Section 332(a):

SEC. 332. Exceptions as to period of limitation of assessment and collection of taxes.— (a) In the case of a false or fraudulent return with intent to evade tax or of a failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within ten years after the discovery of the falsity, fraud or omission.

Page 83: Tax II Estate and Donor Cases

As stated, the Commissioner came to know of the identity of the heirs on September 24, 1953 and the huge underdeclaration in the gross estate on July 12, 1957. From the latter date, Section 94 of the Tax Code obligated him to make a return or amend one already filed based on his own knowledge and information obtained through testimony or otherwise, and subsequently to assess thereon the taxes due. The running of the period of limitations under Section 332(a) of the Tax Code should therefore be reckoned from said date for, as aforesaid, it is from that time that the Commissioner was expected by law to make his return and assess the tax due thereon. From July 12, 1957 to February 13, 1958, the date of the assessment now in dispute, less than ten years have elapsed. Hence, prescription did not abate the Commissioner's right to issue said assessment.

Anent the Commissioner's contention that Lilia Yusay is estopped from raising the defense of prescription because she failed to raise the same in her answer to the motion for allowance of claim and for the payment of taxes filed in the settlement court (Court of First Instance of Iloilo), suffice it to state that it would be unjust to the taxpayer if We were to sustain such a view. The Court of First Instance acting as a settlement court is not the proper tribunal to pass upon such defense, therefore it would be but futile to raise it therein. Moreover, the Tax Code does not bar the right to contest the legality of the tax after a taxpayer pays it. Under Section 306 thereof, he can pay the tax and claim a refund therefor. A fortiori his willingness to pay the tax is no waiver to raise defenses against the tax's legality.

WHEREFORE, the judgment appealed from is set aside and another entered affirming the assessment of the Commissioner of Internal Revenue dated February 13, 1958. Lilia Yusay Gonzales, as administratrix of the intestate estate of Matias Yusay, is hereby ordered to pay the sums of P16,246.04 and P39,178.12 as estate and inheritance taxes, respectively, plus interest and surcharge for delinquency in accordance with Section 101 of the National Internal Revenue Code, without prejudice to reimbursement from her co-administratrix, Florencia Piccio Vda. de Yusay for the latter's corresponding tax liability. No costs. So ordered.

Concepcion, C.J., Reyes, J.B.L., Barrera, Dizon, Regala, Makalintal, Sanchez and Castro, JJ., concur.Zaldivar, J., took no part.

R E S O L U T I O N

April 24, 1967

BENGZON, J.P., J.:

Respondent Lilia Yusay Gonzales seeks reconsideration of our decision holding her liable for the payment of P97,723.96 as estate and inheritance taxes plus delinquency penalties as administratrix of the intestate estate of Matias Yusay. The grounds raised by her deserve this extended resolution.

Firstly, movant maintains that the issue of whether or not the estate and inheritance tax return filed by Jose Yusay on May 13, 1949 was sufficient to start the running of the statute of limitations on assessment, was neither raised in the Court of Tax Appeals nor assigned as error before this Court. The records in the Court of Tax Appeals however show the contrary. Paragraph 2 of the answer filed by the Commissioner of Internal Revenue states:

2. That he likewise admits, as alleged in paragraph 1 thereof having received the letter of the petitioner dated November 27, 1959 (Annex "A" of the Petition for Review), contesting the assessment of estate and inheritance taxes levied against the Intestate Estate of the late Matias Yusay, Special Proceedings No.

Page 84: Tax II Estate and Donor Cases

459, Court of First Instance of Iloilo, on the ground that the said assessment has already prescribed, but specifically denies the allegation that the assessment have already prescribed, the truth of the matter being that the returns filed on May 11, 1949 cannot be considered as a true, and complete return sufficient to start the running of the period of five (5) years prescribed in Sec. 331 of the Tax Code;

This point was discussed in the memorandum of the Commissioner of Internal Revenue, thus:

In the estate and inheritance tax return filed by Jose S. Yusay (Exhibits B & 1, pp. 14-20, B.I.R. records) the net value of the estate of the deceased was claimed to be P203,354.00 and no inheritance tax was shown as the heirs were not indicated. In the final computation of the estate by an examiner of the respondent, the net estate was found to be worth P410,518.38 (p. 105, B.I.R. records) or about more than twice the original amount declared in the return. In the subsequent investigation of this case, it was also determined that the heirs of the deceased were Jose S. Yusay, a legitimate son, and Lilia Yusay, an acknowledged natural child, (petitioner herein).

Under the circumstances, we believe the return filed on May 11, 1949 was false or fraudulent in the sense that the value of the properties were underdeclared and that the said return was also incomplete as the heirs to the estate were not specified. Inasmuch as the respondent was not furnished adequate data upon which to base an assessment, the said return cannot be considered a true and complete return sufficient to start the running of the period of limitations of five (5) years prescribed in Section 331 of the Tax Code.

In the lower court the defense of the Commissioner of Internal Revenue against Lilia Yusay Gonzales' plea of prescription, centered on the insufficiency and fraudulence or falsity of the return filed by Jose Yusay. The Court of Tax Appeals overruled the Commissioner of Internal Revenue. Said the Tax Code:

The provision of Section 332(a) of the Tax Code cannot be invoked in this case as it was neither alleged in respondent's answer, nor proved during the hearing that the return was false or fraudulent with intent to evade the payment of tax. Moreover, the failure of respondent to charge fraud and impose the penalty thereof in the assessments made in 1953, 1955 and 1956 is an eloquent demonstration that the filing of petitioner's transfer tax return was not attended by falsity or fraud with intent to evade tax.

xxx           xxx           xxx

But respondent urges upon us that the filing of the return did not start the running of the five (5) year period for the reason that the return did not disclose the heirs of the deceased Matias Yusay, and contained inadequate data regarding the value of the estate. We believe that these mere omissions do not require additional returns for the same. Altho incomplete for being deficient on these matters, the return cannot be regarded as a case of failure to file a return where want of good faith and intent to evade the tax on the part of petitioner are not charged. It served as a sufficient notice to the Commissioner of Internal Revenue to make his assessment and start the running, of the period of limitation. In this connection, it must be borne in mind that the Commissioner is not confined to the taxpayer's return in making assessment of the tax, and for this purpose he may secure additional information from other sources. As was done in the case at bar, he sends investigators to examine the taxpayer's records and other pertinent data. His assessment is based upon the facts uncovered by the investigation (Collector vs. Central Azucarera de Tarlac, G.R. Nos. L-11760 and L-11761, July 31, 1958).

Furthermore, the failure to state the heirs in the return can be attributed to the then unsettled conflict raging before the probate court as to who are the heirs of the estate. Such failure could not have been a

Page 85: Tax II Estate and Donor Cases

deliberate attempt to mislead the government in the assessment of the correct taxes.

In his appeal, the Commissioner of Internal Revenue assigned as third error of the Court of Tax Appeals the finding that the assessment in question was "made beyond the five-year statutory period provided in Section 332 (a) of the Tax Code," and that the right of the Commissioner of Internal Revenue to assess the estate and inheritance taxes has already prescribed. To sustain his side, the Commissioner ventilated in his brief, fraud in the filing of the return, absence of certain data from the return which prevented him from assessing thereon the tax due and the pendency in this Court of L-11374 entitled "Intestate Estate of the late Matias Yusay, Jose C. Yusay, Administrator vs. Lilia Yusay Gonzales" which allegedly had the effect of suspending the running of the period of limitations on assessment.

Clearly, therefore, it would be incorrect to say that the question of whether or not the return filed by Jose Yusay was sufficient to start the running of the statute of limitations to assess the corresponding tax, was not raised by the Commissioner in the Court of Tax Appeals and in this Court.

Second. Movant contend that contrary to Our ruling, the return filed by Jose Yusay was sufficient to start the statute of limitations on assessment. Inasmuch as this question was amply discussed in Our decision sought to be reconsidered, and no new argument was advanced, We deem it unnecessary to pass upon the same. There is no reason for any change on Our stand on this point.

Third. Movant insists that since she administers only one-third of the estate of Matias Yusay, she should not be liable for the whole tax. And she suggests that We hold the intestate estate of Matias Yusay liable for said taxes, one-third to be paid by Lilia Yusay Gonzales and two-thirds to be paid by Florencia P. Vda. de Yusay.

The foregoing suggestion to require payment of two-thirds of the total taxes by Florencia P. Vda. de Yusay is not acceptable, for she (Florencia P. Vda. de Yusay) is not a party in this case.

It should be pointed out that Lilia Yusay Gonzales appealed the whole assessment to the Court of Tax Appeals. Thereupon, the Commissioner of Internal Revenue questioned her legal capacity to institute the appeal on the ground that she administered only one-third of the estate of Matias Yusay. In opposition, she espoused the view, which was sustained by the Tax Court, that in co-administration, the administratrices are regarded as one person and the acts of one of them in relation to the regular administration of the estate are deemed to be the acts of all; hence, each administratrix can represent the whole estate. In advancing such proposition, Lilia Yusay Gonzales represented the whole estate and hoped to benefit from the favorable outcome of the case. For the same reason that she represented her co-administratrix and the whole estate of Matias Yusay, she risked being ordered to pay the whole assessment, should the assessment be sustained.

Her change of stand adopted in the motion for reconsideration to the effect that she should be made liable for only one-third of the total tax, would negate her aforesaid proposition before the Court of Tax Appeals. She is now estopped from denying liability for the whole tax.

At any rate, estate and inheritance taxes are satisfied from the estate and are to be paid by the executor or administrator.1 Where there are two or more executors, all of them are severally liable for the payment of the estate tax.2 The inheritance tax, although charged against the account of each beneficiary, should be paid by the executor or administrator.3 Failure to pay the estate and inheritance taxes before distribution of the estate would subject the executor or administrator to criminal liability under Section 107(c) of the Tax Code.

It is immaterial therefore that Lilia Yusay Gonzales administers only one-third of the estate and will receive as

Page 86: Tax II Estate and Donor Cases

her share only said portion, for her right to the estate comes after taxes.4 As an administratrix, she is liable for the entire estate tax. As an heir, she is liable for the entire inheritance tax although her liability would not exceed the amount of her share in the estate.5 The entire inheritance tax which amounts to P39,178.12 excluding penalties is obviously much less than her distributive share.

Motion for reconsideration denied.

Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal, Sanchez and Castro, JJ., concur.Zaldivar, J., took no part.

G.R. No. L-27745 October 18, 1977

MISAEL P. VERA, as Commissioner of Internal Revenue, petitioner, vs.Hon. Judge PEDRO C. NAVARRO, in his capacity as Judge of the Court of First Instance of Pasig, Rizal (Branch V MAGDALENA ABANTO and CAMILO ERIBAL, as voluntary residual heirs of the Estate of the deceased ELSIE M. GACHES; DELIA P. MEDINA, as attorney-in-fact of said heirs; BIENVENIDO A. TAN, SR., as Executor of the Estate of ELSIE M. GACHES; PHILIPPINE NATIONAL BANK; PHILIPPINE BANKING CORPORATION; THE OVERSEAS BANK OF MANILA; and BANCO FILIPINO SAVINGS AND MORTGAGE BANK, respondents.

CASTRO, C.J.:têñ.£îhqwâ£

This is a petition for certiorari, mandamus, prohibition and injunction filed by the herein petitioner Misael P. Vera, in his capacity as Commissioner of Internal Revenue (hereinafter referred to as "Commissioner"), against the Honorable Judge Pedro C. Navarro, in his capacity as Judge of the Court of First Instance of Pasig, Rizal (hereinafter referred to as "respondent Judge"), on account of three orders dated June 5, 8 and 9, 1967, which the latter issued in Special Proceedings No. 5249 entitled "In the Matter of the Testate Estate of Elsie M. Gaches — Bienvenido Tan, Executor," which the Commissioner maintains were issued without or in excess of jurisdiction or with grave abuse of discretion.

It appears that one Elsie M. Gaches died on March 9, 1966 without a child. The deceased, however, left a last will and testament in which she made the following relevant disposition of her estate, to wit: ñé+.£ªwph!1 3. After payment of my just debts and funeral expenses I intact that the balance of my property, both real and personal in the Philippines, he distributed as follows: ñé+.£ªwph!1

'a) to my driver, PACITO TROCIO — Ten Thousand Pesos (P10,000.00);

b) to my lavandero, VICENTE JERODIAS — One Thousand Pesos (P1,000.00);

c) to my gardener, CRISANTO SALIPOT, JR. — Five Hundred Pesos (P500.00);

d) the balance of my estate in the Philippines shall then be divided in half; One-half (1/2) to be given to CAMILO ERIBAL and the other half to MISS MAGDALENA ABANTO;

Page 87: Tax II Estate and Donor Cases

e) to MISS CONSUELO L. TAN — My office table and chair now in the library of my house, and one of the carpets in my house to be selected by her;'

4. All my property in the United States consisting of furs, jewelry and stocks I leave to my sister BESS LAUER widow, and at present a resident of San Francisco, California.

On March 11, 1966, the herein respondent Judge Bienvenido Tan, Sr. (hereinafter referred to as "Judge Tan") filed with the Court of First instance of Pasig, Rizal a petition for the probate of the aforesaid will On Aped 21, Judge Tan was appointed as executor of the testate estate of Elsie M. Gaches without a bond.

In a letter, dated June 3, 1966, Judge Tan informed the Commissioner that the testate estate was worth about ten million (P10 million) pesos and that the estate and inheritance taxes due thereon were about P9.5 million.

On June 11, 1966, the herein respondent Atty. Delia P. Medina (hereinafter referred to as "Atty. Medina"), representing herself as the attorney-in-fact of the herein respondents Camilo Eribal and Magdalena Abanto, filed with the probate court a motion praying that the executor of the estate be authority to give a monthly allowance to the voluntary heirs Abanto and Eribal from the month of May, 1966 until "the receipt of the recommended advance of inheritance of P100,000.00 each recommended by the Executor in his motion of June 6, 1966 and/or final distribution has been made to said heirs of their respective shares in the estate." This prayer was granted by the probate court in an order dated June 25, 1966 (subsequently clarified in an order dated August 11, 1966).

On July 9, 1966, the Commissioner filed with the probate court a proof of claim for the sum "of P192,364.00 as income tax for 1965 and 1% monthly interest due from the d Elsie M. Gaches."

On July 19, 1966, Judge Tan filed with the probate court a motion praying for authority to make the following additional advance payments — (1) To Abanto and Eribal, P150,000.00; (2) To Bess Lauer, $75,000.00; (3) To Judge Tan as advance executor's fees, P50,000.00; and (4) To Attys. Medina and Bienvenido Tan, Jr., P75,000.00 each as advance attomey's fees. In this motion, Judge Tan claimed that the estate was very liquid and that "any claims whatsoever against the Estate and the Government shall be amply protected since over P7,000,000.00 worth of shares shall still remain to answer therefor (Sec. 1, Rule 90, Rules of Court)." The respondent Judge granted Judge Tan's prayer in an order dated July 23, 1966,

In a letter, dated November 4, 1966, the Commissioner advised Judge Tan to Pay to the Bureau of Internal Revenue the sum of P1,398,436.30 as estate tax and P7,140,060.69 as inheritance tax, the investigation of his office having allegedly disclosed that the next value of the testate estate was P10,212,899.20. 1 Judge Tan disputed the correctness of the assessment in a letter sent to the Commissioner.

On November 26, 1966, the Commissioner filed with the probate court a proof of claim for the death taxes stated in the assessment notice sent to Judge Tan. On the same date, the Commissioner also submitted to the probate court for its resolution a motion praying: (1) for the revocation of the court's orders dated June 25, July 6, July 23 and August 11, 1966 and all other orders granting the payment of advance inheritance, allowances and fees; (2) for the appointment of a co-administrator of the estate to represent the Government; and (3) for the non-disbursement of funds of the estate without prior notice to the Commissioner. Although the records do not disclose that the probate court specifically disposed of this motion, the said court, from its subsequent actuations, may be considered to have impliedly denied the Commissioner's prayers for the appointment of a co-administrator and the non-payment of advance allowances and fees.

On January 19, 1967, the probate court authorized the conversion of the amount of P75,000.00 previously ruled to be paid to Atty. Medina as advance attomey's fees in its order of July 23, 1966 into allowances for Eribal and Abanto.

On April 14, 1967, with the Probate court's approval, Judge Tan paid to the Bureau of Internal Revenue the amount of ?185,286.93 as estate tax and, on April 24, 1967, the amount of P1,055,776.00 as inheritance tax.

Page 88: Tax II Estate and Donor Cases

These payments were based on a tax return filed by Atty. Medina on March 8, 1967 with the Bureau of Internal Revenue.

On June 3, 1967, Judge Tan submitted to the probate court for approval a final accounting and project of partition of the testate estate. Acting thereon, the respondent Judge issued an order, dated June 5, 1967, for the partial distribution of the estate as follows: ñé+.£ªwph!1 Submitted for resolution of this Court is the Amended Final Accounting and Project of Partition dated May 27, 1967, presented by The executor.

Atty. Paredes manifested that he has no objection to the approval thereof provided that certain items enumerated therein be corrected or modified, as follows: the amount of shares in the Lepanto consolidated Mining Co. should be 6,105,429 instead of 6,015,429, as reported; the amount of P11,537.60 reported as expenses made on January 30, 1967 should be cancelled or excluded . . . and that the time appearing as expenses made on May 10, 1967 payable to Apolonio manifastation illegal should be only P114,000.00 instead of P135,000.00 . . . which manifestations were also adopted by Atty. Virgilio Saldajeno of the Bureau of Internal Revenue, and in addition, he objected in principle to the Executor Fees and to the Attorney's Fees as excessive but left the matter to the discretion of the Court.

Considering, further, the manifestations of Atty. Saidajeno that him has no objection to the partial distribution of the estate as long as it an he shown that the rights and interests of the government can be full protected, and it appearing from the subsequent manifestation of Atty. Paredes, counsel for the heirs, that sufficient assets with a nutrient market value of at least P8,000,000.00 will be left to the estate even if a partial distribution in the amount of P3,000,000.00 is made for which reason the rights of the government to collect whatever deficiency, taxes, if any may be asses it may be assessed in the future the heirs have already paid in good faith even ahead of its due dates transfer taxes in the total amount of P1,241,062.93, the Amended Final Accounting and Project of Partition dated May 27, 1967 may be approved, subject Lo this following, terms and conditions:

1. The Executor is hereby discharged from any and all responsibilities that lie has pertaining to the estate;

2. The voluntary heirs Magdalena Abanto and Camilo Eribal shill be responsible for all taxes of any nature whatsoever which may be due the government arising out of the transaction of the properties ol' the estate and the environment can, if it so desires, register its tax lien in the remaining assets after a partial distribution of the estate;

3. Bess Lauer, sister and heir of the deceased shall be fully for, all United States taxes pertaining to her share in the estate.

WHEREFORE, subject to the above terms and conditions, entitled Final Accounting and Project of Partition dated May 27, 1967 submitted by the Executor. as modified in the, manifestation of Atty. Paredes and Saidajeno, is hereby approved.

1. Pacita Trocio P10,000.00

2. To Vicente Jerodias 1,000.00

Page 89: Tax II Estate and Donor Cases

3. To Vicente Crisanto salipot, Jr. 500.00

4. To Magdalena Abanto and Camilo Eribal, share and share alike thru their attorney-in-fact Delia P. Medina, cash in the amont of 2,330.00

5. To Judge Bienvenido A. Tan, Sr. 120,000.00

6. To Atty. Bienvenido A. Tan, Jr. 150,000.00

The aforesaid amount is hereby ordered to be taken from the funds of the estate deposited with the Philippine National bank.

As to the other properties remaining after this partial distribution, consisting of the following:

A. BANK DEPOSITS:

1. Philippine Banking Corporation 559,147.41

2. Philippine National Bank 238,5000.00

3. Overseas Bank of Manila 700,000.00

Page 90: Tax II Estate and Donor Cases

4. Banco Filipino Savings & Mortgage Bank 581.00

5. Refund from expenses 32,537.60

B. HOUSE AND LOT LOCATED AT NO. 50 TAMARIND ROAD, FORBES PARK, MAKATI, RIZAL;

C. SHARES OF STOCK IN THE FOLLOWING:

1. Lepanto Consolidated Mining Co. 1,105,429 shares

2. San Miguel Corp. 16,692 shares

(common)

3. San Miguel Corp. 500 shares

(preferred)

4. Central Azucarera del Pilar 17,755 shares

Page 91: Tax II Estate and Donor Cases

5. Manufacturas Textile Industriales de Filipinas, Inc. 10,368 shares

6. Consolidated Mines, Inc. 85,858 shares

7. Mayon Metal Corporation 5,000 shares

8. Soliangco & Co Inc. 25 shares

9. San Juan Heights 5 shares

10. Metropolitan Insurance Co. 443 shares

11. Realty Investment Inc. 652 shares

(10 shares, management & 642 common)

The same shall be turned over and delivered to the attorney-in-fact of the voluntary heirs. Atty. Delia P. Medina, to be held by her to answer for whatever deficiency estate and inheritance taxes may still be due from the estate and the heirs in favor of the government.

SO ORDERED.

Pasig, Rizal, June 5,1967.ñé+.£ªwph!1

(Sgd.) PEDRO C. NAVARROñé+.£ªwph!1

Judge

On the same day (that is, June 5, 1967), the Commissioner, having been informed in advance about the foregoing order by certain undisclosed sources, issued warrants of garnishment against the funds of the estate deposited with the Philippine National Manial, the overseas Bank of Manila, and the Philippine Banking Corporation, on

Page 92: Tax II Estate and Donor Cases

the strength of sections 315-330 of the National Internal Revenue Code.

On June 7, 1967, Atty. Medina filed in the probate court a petition for the discharge of the writs of punishment issued by the commissioner. On June 8, 1967, the respondent Judge issued an order lifting the wants in question.

On June 9, 1967, the Philippine National Bank filed a motion in the probate court praying that it be authority to deposit with the said court the money in its hands in view of the conflicting claims of the parties over the funds in dispute. On the same day (that is, June 9, 1967), the respondent Judge issued an order denying the said motion and threatening the bank officials who refuse to implement its orders of June 5 and 8, 1967 with contempt. Atty. Medina was consequently able to withdraw the sum of P2,330,000.00 from the PNB. A copy of this order of June 9, 1967 as well as the orders of June 5 and 8, 1967 were received by the Commissioner on June 13, 1967.

On June 16, 1967, the Commissioner filed a motion for reconsideration (supplemented on June 22, 1967) of the orders of the probate court dated June 5, 8 and 9, 1967. On July 6, 1967, however, the Commissioner, on the belief that the probate court's resolution on its motion was not legally necessary, filed with this Court the instant petition for certiorari, mandamus, prohibition and injunction against the aforesaid orders of the respondent Judge. The petition at bar is based on the following propositions:

(1) That the distributive shares of an heir can only be paid after full payment of the death taxes. As this case subsequently progressed before this Court, the position of the Commissioner would seem to be that the deficiency income taxes due and payable during the lifetime of the deceased should also be paid first.

(2) While partial distribution of the estate of a deceased may allowed, a bond must be filed by the distributees to secure the payment of the transfer taxes. Subsequently, however, the Commissioner changed his position, stating that such distribute may be made so long as the payment of the taxes due the government is "provided for," citing section 1, rule go of the Rules of Court in relation to sections 95 (c), 97, 103, 106 and 107 (c) the National lnternal Revenue Code.

(3) That the executor of an estate cannot be discharged without the payment of estate and inheritance taxes. The Commissioner later modified his stand on this ProPosition in line with the view that it is sufficient if the payment of the said taxes is "Provided for.,,

(4) That the delivery of properties of the estate to a stranger [that is, to the voluntary heirs herein] is not sanctioned by law. Later, as the case at bar Progressed, and in view of a compromise offer made by the respondents Abanto and Eribal to pay the taxes being claimed by the Bureau of Internal Revenue, the Commissioner advanced the view that this proposition is already moot and academic.

(5) That the respondent Judge has no authority to quash or dissolve writs of garnishment issued by the Commissioner. Subsequently, however, the Commissioner reversed his stand on this point and stated that the probate court may so dissolve said writs of punishment as the assets in question were then in custodia legis, citing Collector vs. Vda. de Codeniera L-9675, Sept. 28, 1957.

Taking stock of the Commissioner's complaint that the disputed orders Were issued without or in excess of jurisdiction or with grave abuse of discretion, the herein respondents Atty. Medina and Judge Tan put up a number of factual and legal arguments, the material ones of which may be stated, in sum, as follows:

(1) The Commissioner's notice of assessment, dated November 10, 966, was based on wrong premises and valuation of the assets in question; in fact, the Commissioner had agreed during the pretrial conference in the probate court to reconsider certain items therein;

(2) The allowance granted to Abanto and Eribal were taken solely from the income of the estate, a fact admitted by Atty. Saldajeno of the Bureau of Internal Revenue; it is claimed that in 1965 the estate had an income of P41 1,000.00 and over P750,000.00 in 1966, which could more than cover the questioned allowances;

Page 93: Tax II Estate and Donor Cases

(3) Eribal and Abanto are willing and bound themselves to assume the responsibility for the payment of the taxes due against the estate except for the properties located in the United States which should be charged against Bess Lauer;

(4) The Commissioner does not object to the partition of the estate in question provided that enough assets are left to pay the taxes against the estate;

(5) The estate has sufficient assets with which to pay the taxes being claimed by the government;

(6) There was nothing unusual in the institution of Abanto and Eribal as residual heirs of the deceased; Abanto was the testator's special nurse, companion, secretary and cook from 1945 until Elsie M. Gaches death in March, 1966; Eribal, on the other hand, was the deceased's cook, caretaker, companion and driver since 1929;

(7) The grant of allowances was never contested below and cannot now be raised in the-instant proceedings;

(8) Adequate safeguards were specified in the probate court's order of June 5, 1967 to cover the tax claims; and

(9) There had been no full distribution of the estate in question without payment of the transfer taxes since the said taxes are being disputed by the heirs.

In a reply filed on September 7, 1967, the Commissioner stated that he had issued a revised assessment dated August 24, 1967 and that, furthermore, there were due from the estate deficiency income taxes for the years 1961 to 1965 in the total sum of P1,182,296.16, for which reason the estate should not be ordered distributed until the same is fully satisfied. In a rejoinder, Judge Tan claimed that the August 24, 1967 assessment could still be reduced considerably. The contents of the mentioned revised assessment which was addressed to Atty. Medina are, inter alia, as follows: ñé+.£ªwph!1 Madam:

... I have the honor to advise that in a reinvestigation conducted by this Office, for transfer tax purposes, it was ascertained that she left real and personal properties in the sums of P377,912.50 and P5,963,822.31 respectively, or a gross estate of P9,341,734.81. The amounts of P193,892.38, P462,022.83 and Pl,226,783.53, representing accrued household and medical expenses, funeral expenses and income taxes (1961-1965) payable, respectively, or a total of P1,882,198.74, were allowed as deductions resulting in a net taxable estate in,the sum of P7,459.536.07 subject to estate and inheritance taxes.

In view thereof, there are hereby further assessed the sums of P891,673.68 and P4,353,972.87 as deficiency estate and inheritance taxes and penalty still due on the transmission of the decedent's estate, after, crediting the sums of P185,286.73 and P1,055,776.00, which were paid on April 4, 1967 and April 24, 1967, details of which are shown hereunder:

Estate tax Pl,076.960.41

Less: Amount Paid 185,286.7

Page 94: Tax II Estate and Donor Cases

Total P891,673.69

Inheritance tax 5,448.87

Corporation CPA Certificate 300.00

Total P5,409,748.87

Less Amount Paid 1,055,776.00

Deficiency Inheritance Tax & Penalty P4,353,972.87

xxx xxx xxx

The deadlines for the payment of the aforementioned transfer taxes without penalty were December 9, 1967 for the estate tax and March 9, 1968 for the inherit tax.

On Sepember 9, 1967, Atty. Medina riled with this Court a pleading captioned "Compliance and Offer of Compromise to Terminate this Case" in which she stated the following:ñé+.£ªwph!1 xxx xxx xxx

Page 95: Tax II Estate and Donor Cases

4. Although respondents voluntary heirs intend to assail and question the correctness of said assessment only insofar as the same has disallowed the deductions claimed by them for personal services rendered by various persons in the total sum of P366,800.00, foregoing thereby other possible objections to the other items just so this case can be earlier disposed of, said repondents, nevertheless, are willing to pay even before these due dates the entire amount-specified in said assessment, but under protest insofar as the same has disallowance is concerned, in order to already terminate and dispose of this case before this Honorable Court.

To pay the taxes in question, Atty. Medina prayed in her offer of that she and Abanto and Eribal be authorize to make use of the funds of the estate on deposit with the Philippine National (P238,500.00), the Banking Corporation (P559,147.41), the Banco Filipino savings and Mortgage Bank (P581.00), and the Bank of Manila (P700,000.00), and to gradually dispose of and sell the shares of stock representing of the delegate with an estimated market value of P2,154,026.36. Also included among the assets for which authority to sell was being procured in the said offer of were 2,442,000 Lepanto Consolidated Co. which Abanto and Eribal with the probate court niether this Court issued a pre injunction in the case at bar on july 10, 1967 ordering, among others, Atty. Medina, Abanto and Eribal to restore to the court a quo the amount of P2,330,000.00 withdrawn from the Philippine National Bank pursuant to the questioned orders of the probate court, and every other money or property revived by them by of said questioned orders. The mentioned Lepanto shares had then an estimated market value of P2,588,520.00. It should bear mention, at this point, that the money withdrawn from the Philippine National Bank was not returned by Atty. Medina, Abanto or Eribal to the probate court, these respondents having prayed this Court that the deposit of the mentioned stocks be as full compliance by them with the writ of pre injunction issued by this Court.

On September 19, 1967, this Court issued a resolution requiring the Commissioner to submit a memorandum on how he arrived at his original assessment of more than ?8.83 million and the revised assessment of only about ?6.48 million, showing a reduced difference of more than P2 million. The Commissioner submitted to this Court the required memorandum on May 25, 1968, the important items and figures described in which may be summed up comparatively as follows: ñé+.£ªwph!1 ESTATE OF ELSIER GACHES

ASSETS ORIGINAL REVISED

ASSESSMENT ASSESSMENT

Cash in bank -

Philippine

Page 96: Tax II Estate and Donor Cases

Pl,172.635.62 P1,172,635.62

Foreign (US$ P3.95) 559,335.00 559,335.00

Cars-

Lincoln — Pl8,000.00

Volkswagen 7,000.00

(Vauxhalll) 25.000.00 12,000.00

Furnitures 30,000.00 30,000.00

Shares of stock 7,923,576.23 7,189,851.69

Page 97: Tax II Estate and Donor Cases

Forbes Park lot —

(at P144.73/sq. in.) 383,202.35

(at P97.50/sq.m.) 258,862.50

House ------- P111,850.00

Swimming Pool — 5,000.00

Fence -------- 2,200.00 119,050.00 119,050.00

TOTAL ASSETS P10,212,899.20 P9,341,734.81

ñé+.£ªwph!1

Page 98: Tax II Estate and Donor Cases

LIABILITIES AND DEDUCTIONS

Estimated Income Tax

Payable (1965) P192,364.00

(1961-1965) P1,882,783.53

Aaccrued medical expenses 13,000.00)

Funeral expenses 73,320.00) 193,392.38

Judicial exercises 331,026.40 462,022.83

TOTAL LIABS. &

Page 99: Tax II Estate and Donor Cases

DEDUCTIONS P610,190.60 P1,882,198.74

TRANSFER TAXES PAYABLE

Gross Estate P10,212,899.20 P9,341,734.81

Less: Laibs. & Deductions 610,190.60 1,882,198.74

Net Taxable Estate P9,602,708.60 P7,459,536.07

Less Estate'tax Due P 1,398,436.30 Pl,076,960.41

Estate Subj. to Inh. Tax P 8,204,272.30 P6,382,575.66

Distribution of Hereditary

Estate

Page 100: Tax II Estate and Donor Cases

C. Salipot, Jr. P 500.00 P 500.00

V. Jerodias 1,000.00 1,000.00

P. Trocio 10,000.00 10,000.00

Bess Lauer 672,305.00 672,305.00

M. Abanto 3,760,233.65 2,849,385.33

C. Eribal 3,760,233.65 2,849,385.33

Inheritance Tax Due

Page 101: Tax II Estate and Donor Cases

C. Salipot, Jr. P10.00 P 10.00

V. Jerodias 20.00 20.00

P. Trocio 600.00 600.00

Bess Lauer 192,186.75 192,186.75

M. Abanto 3,473,621.97 2,608,316.06

C. Eribal 3,473,621.97 2,698,316.06

Page 102: Tax II Estate and Donor Cases

Total inheritance Tax due P 7,140,060.69 P5,409,448.87

Add: Estate Tax Due P 1,398,436.30 Pl,076,960.41

TOTAL TRANSFER

TAXES DUE P8,538,496.99 P6,486,409.28

On November 17, 1967, this Court authorized the herein respondents Abanto, Eribal and Atty. Medina to withdraw funds of the estate deposited with the Philippine Banking Corporation (P191,673,68) and the Overseas Bank of Manila (P700,000.00) in the form of cashier's checks payable to the Commissioner for the payment of the estate tax still unpaid under the terms of the revised assessment.

On November 23, 1967, the Solicitor General filed with this court a manifestation expressing his conformity, in behalf of the Commissioner, to the offer of compromise dated September 9, 1967 made by Atty. Medina, subject to certain conditions, such as, that the cash in the banks of the estate as well as the proceeds to be realized from the sale of the shares of stock should be turned over to the Commissioner for the payment of the taxes due against the estate and the heirs thereof. This manifestation was first opposed by the Acting Commissioner of Internal Revenue on the ground that the Commissioner (who was then abroad) had actually requested the Solicitor General not to agree to the mentioned offer of compromise; however, the Solicitor General subsequently said that the Commissioner's conformity was given to him orally.

On December 5, 1967, Atty. Medina filed with this Court a petition to declare the Overseas Bank of Manila in contempt for allowing the renewal, without court authority, of the time deposit of P700,000.00 with the said bank for another year. In a supplemental motion filed on December 8, 1967, Atty. Medina also prayed that the said bank and those responsible for extending the maturity date of said time deposit be held liable for the payment of whatever surcharges, interest and penalties may be imposed as a consequence of the late payment of the balance of the estate tax assessed against the estate. It appears that the time deposit in question was held by the said bank under two certificates, one for P100,000.00 to mature on May 12, 1967, and the other, for P600,000.00 to mature on June 16, 1967. Judge Tan, however, extended the maturity date of said time deposits to May 12, 1968. The certificates of time deposit covering the said funds had been endorsed in favor of the Commissioner in payment of the unpaid balance of the estate then December 7, 1967) amounted to P700,000.00.

Page 103: Tax II Estate and Donor Cases

Commmoner, however. mentioned the respondents End an Abanto through their counsel that his Office - ñé+.£ªwph!1 ... regrets that the same cannot be accepted as payment of the deficiency estate tax in this case since they cannot, at present or on before December 9, 1967, be. converted into cash. However, we are holding said certificates of time deposit for possible application in payment of the unpaid balance of the deficiency estate tax in this case as soon as said certificates can be converted into cash. It will be understood in this connection that if the balance of the deficiency estate tax in this case is not paid on or before December 9, 1967, the same shall be subject to the interest on deficiency, 5% surcharge and 1% monthly interest for deliquency.

According to Judge Tan, he caused the extension of the maturity date of the said deposit but that in doing so he acted in good faith in that the testate estate then had ample funds and assets and the said time deposit earned a higher interest than a savings deposit; that he needed no specific court authority for the purpose; and that he had a gentleman's agreement with the officials of the bank that said deposit could be withdrawn in advance, such being the custom in banking circles. The Overseas Bank of Manila, on the other hand, in answer to Atty. Medina's mentioned petition, claimed that the deposit in question was renewed before the bank received any letter demanding its release. In view of this impasse and the fast approaching deadline for the payment of the estate tax, Atty. Medina requested the Commissioner to credit P700,000.00 to the amount previously paid as inheritance tax; but, apparently, this request was not honored by the Commissioner.

On January 26, 1968, Atty. Medina filed with this Court a manifestation in which she alleged that even as the proposed joint manifestation between the parties which was supposed to describe the matters agreed upon between them and the Commissioner during a conference hearing held on January 24, 1968 had not yet been shown to her, she already wished to express her principals, conformity to pay, but under protest, the deficiency estate tax of P700,000.00 plus surcharges, interest and penalties due thereon and the inheritance tax in the amount of P4,161,986.12 appearing, to Atty. Medina, in the mentioned assessment notice dated August 24, 1967; that she was likewise agreeable to pay, under protest however, the income taxes for 1961 to 1965 against the estate in the demand letter of the Commissioner dated August 29, 1967 in the amount of P1,175,974.51 plus whatever interest, surcharges and penalties were due'thereon; and that she was also agreeable to being authority to sell such properties of the estate as may be necessary for the mentioned -

On the following day, however, that is, January 27, 1968, the herein respondents Eribal, Abanto and Atty. Medina, on the one hand, and the Commissioner and the Solicitor General, on the other, filed with this Court a joint manifestation which, inter alia, reads as follows:ñé+.£ªwph!1 l. That the respondent taxpayers will pay the estate, inheritance and deficiency income taxes covered by existing assessments; which are due and collectible from the estate of Elsie M. Gaches, including the delinquency penaltiesthereon, but without prejudice to any right of the taxpayer to contest or protest the said assessments at the proper time and in the proper court;

2. That the respondents Delia P. Medina, Magdalena Abanto and Camilo Eribal shall submit to this Honorable Court an inventory of all the properties and assets of the estate ... ;

3. That is order to generate the necessary funds for the purpose of paying the said taxes and delinquency penalties, so much of the assets of the estate ... shall be sold ...

4. That respondent Delia P. Medina, . and. Mr. Rodolfo U. Arrano Supervising Revenue Examiner of the Bureau of Internal Revenue, ... are hereby proposed to be constituted as the authorized agents of the parties herein to effect the sale ...;

5. That the said agents shall be direct to sell the assets of the estate ... ;

Page 104: Tax II Estate and Donor Cases

6. That all negotiations and transactions for the sale of the assets of the estate shall be made jointly by the authorized agents ... ;

7. That no disposition of any property or assets of the estate shall be effected except for the foregoing purpose;

8. That this case shall not be terminated until ... the above mentioned ... taxes and delinquency penalties are fully paid; and liquidated;

9. That the parties pray for the approval of the foregoing propositions.

On February 6, 1968, this Court, acting on the abovement manifestation of Atty. Medina and the at manifestation of the Parties, issued a resolution authorizing Atty. Medina to pay, amt, under at, the transfer and in taxes collectible from the estate, including the accopanying delinquency penalties. A Medina was given the necessary authority to collect and receive funds payable to the estate in question and to sell such a thereof as may be necessary.

On February 10, 1968, a motion to declare in contempt Lepanto Consolidated Mining Co. was filed by Atty. Medina on t ground that the said corporation refused to tum over to dividends payable to the testate estate unless the Commissioner first lifted his garnishment order on said dividends.

On February 16, 1968, this Court issued a resolution suspendi the writs to preliminary junction issued by this Court on July and 17, 1967 and all warrants of garnishment issued by the Commissioner relative to the estate of Elsie M. Gaches, said suspension to be effective until such time that Atty. Medina, End and Abanto shall save fully paid the transfer and income tax including the penalties thereon, covered by existing assessment Atty. Medina thereafter submitted to this Court performance reports on her activities relative to the authority given her.

On March 9, 1968, Atty. Medina filed with this Court manifestation stating that she received a demand letter dated March 9, 1968 from the Commissioner for the payment of the following 1'756 900- 00 as estate tax, including penalties; (2) P192,186.75 as inheritance tax corresponding to the share of Bess Lauer; and (3) P451.435.91 as balance of the income tax for the years 1961 to 1965 Atty. Medina claimed the said demands to be erroneous for the following reasons' (1) as to the estate tax, the time deposit in the Overseas Bank of Manila of P700,000.00 plus interest earned of P60,000.00 as of March 9, 1968 would more than cover the said tax and the certificates of time deposits were already endorsed to the Cmmissioner on December 6, 1967; (2) as to the inheritance tax, she (that is. he principals Abanto and Eribal) was not responsible therefore, as the resolution of this Court dated February 6, 1968 required her "to pay only the estate, inheritance and in income taxes, under protest covered by existing assessments, against the Estate, and against the heirs Magdalena Abanto and Camilo Eribal;" in a supplemental motion, Atty. medina further argued that Bess Lauer alone was solely responsible for the payment of the inheritance tax on her share and not the decedent's estate in the Philippines, and that the properties of the testate estate in the United States of America which consisted of shares of stock and deposits in banks, being personal properties, were to be excluded from the computation of the gross estate of the deceased in the Philippines and the computation of the Philippine estate and inheritance taxes because, under philippine law, the sites of those properties is the place where they are located, citing Article 16 of the new Civil Code which she she argued, abandoned the doctrine of mobilia sequuntur personal embodied in Article 19 of the old Civil Code; and (3) as to tile deficiency income tax for 1961-1965, she had paid the same in the total amount of P1,182,296.16 as of March 9, 1968, which was the amount stated in the assessment letter of the Commissioner cited August 9, 1967. According to Atty. Medina, the payment of the taxes was made in the following manner: on February 27, she paid a total of ?838,518.62 as follows: the income tax (P715,619.46) in full; interest (P106,855.29) in full, compromise penalty (P5.,000.00) in full and surcharges P1,052.07) in. part only; and, on March 8, 1968. the amount of P343,773.54 as payment of the remaining surcharges, Consequently, she argued the the surcharges and interest, if any were still due, could legally, accrue only from September 29, 1967 up to February 27, 1968 and only on the tax proper.

Page 105: Tax II Estate and Donor Cases

On April 16, 1968, a counter-manifestation was filed with this court by the Commissiorner to the above-metioned manifestation according to the Commissioner, (that is under existing assessments that is under the letter of demand of August 24 and 29, 1967)

Estate tax (Balance- P700,000.00 (x)

Inheritance tax 4,353,927.87 (xx)

Total Estate and

Inheritance taxes P5,053,927.87

Deficiency income taxes

for 1961 to 1965 P1,175,974.51 (xxx)

Delinquency penalties for late filing

Page 106: Tax II Estate and Donor Cases

of income tax return and late payment of

income tax for 1965 per return filed- 6,321.65 (xxxx)

Total deficiency income taxes for

1961 to 1965 and the delinquency

penalties of income tax 1965 per

return P1,182,296.16

GRAND TOTAL P6,236,269.03

ñé+.£ªwph!1 (x) pIus 5% surcharge and 1% monthly interest thereon from December 9, 1967 until full payment thereof; (xx)

Page 107: Tax II Estate and Donor Cases

plus 5% surcharge and 1%, monthly interest thereon, if the same is not paid in full on or before March 9, 1968; (xxx) plus 5% surcharge and 1% monthly interest thereon from August 29, 1967 until full payment thereof; and (xxxx) pIus additional 1% monthly interest from September 29, 1967 until full payment thereof.

Further, the Commissioner alleged that after taking into consideration the payments made by Atty. Medina, the balances as of March 9, 1968 of the death and income taxes still compatible were as follows:

Estate Tax

Balance of the estate tax P700,000.00

5%, surcharge 35,000.00

1% monthly interest from

12/9/67 to 3/9/68 21,000.00

Total P 756,000.00

plus additional 1% monthly interest

from March 9, 1968 until full payment

thereof.

Page 108: Tax II Estate and Donor Cases

Inheritance Tax

Inheritance tax due and collectible

per letter of demand dated August 24,

1967 (Annex "A") P4,353,972.87

Less: Payments of inheritance Tax

on March 1 and March 6, 1968 per O.R.

2519938 and 2520026, respectively 4,161,986.12

Inheritance taxs due and collectible P191,986.75

plus 5% surcharge and 1% monthly

interest thereon from March 8, 1968

until full payment.

Page 109: Tax II Estate and Donor Cases

Deficiency Income Taxes

Deficiency income taxes from 1961

to 1965 per letter of demand dated

August 29, 1967 plus 5% surcharge and

1% monthly interest up to March 1968 P1,289,818.17

Less: Payments made on February

27, 1968 and March 8, 1968 under O.R.

207001 and 207002 P1,182,296.16

Deficiency income taxes still due

and collectivele P107,522.01

plus additional 1% monthly interest

Page 110: Tax II Estate and Donor Cases

thereon from March 8, 1968 until full

payment.

The Commissioner also explained that the i taxes paid by Atty. Medina in the total amount of P1,182,296.16 "included only the 1/2% monthly interest On deficiency with respect to the deficiency income taxes for 1961 to 1965 and the 1% monthly Interest for delinquency up to September 29, 1967 with respect to the income tax for 1965 which was paid per return, Out did not include the 5% surcharge and 1% monthly interest for delinquency from August 29, 1967 until full Payment with respect to the income tax for the 1965 return." The Commissioner consequently prayed that Atty. Medina be ordered to pay: ñé+.£ªwph!1 (1) The amount of P756,000.00 as balance of the estate tax, 5% surcharge and 1% monthly interest from December 9, 1967 to March 9, 1968, plus additional 1% monthly interest from March 9, 1968 until full payment;

(2) The amount of P191,986.75 as balance of the inheritance tax, plus 5% surcharge and 1% monthly interest thereon from March 9, 1968 until full payment; and

(3) The amount of P107,522.01 as balance of the deficiency income taxes, 5% surcharge and 1% monthly interest for delinquency up to M arch 8, 1968, plus additional 1% monthly interest thereon from March 8, 1968 until full payment ... ;

On August 23, 1968, Atty. Medina filed a manifestation with this Court adverting to the refusal of the Overseas Bank of Manila to permit the withdrawal of the time deposit of the testate estate in the said bank in spite of the fact that the extended maturity date of said deposit had may expired. Atty. Medina payed that the bank Ida as one boss able the deposit of the funds of is well as the who made i of the estate of Elsie M. Gaches with the said bank be declared in contempt. on September 18, 1968, the Central Bank Of the Philippines filed with this Court a comment on the urgent manifestation of Atty. Medina concerning the deposit in question. The Central Bank, which according to the Overseas Bank of Manila had restrained it from paying its time deposits to the bank's depositors, averred that this Court's resolution of November 17, 1967 merely authorized Atty. Medina to withdraw the deposit from the said bank and did not order the bank to pay the time deposit in question. Moreover, according to the Central Bank, the nonpayment of the said deposit was not wilful as the Overseas Bank of Manila was in a state of insolvency. A comment was filed on October 11 1968 by the Overseas Bank of Manila stating that the majority stockholders of the bank filed a petition against the Central Bank for certiorari. prohibition and mandamus in this Court in L-29352 entitled "Emerito M. Ramos, et at. vs. Central Bank;" 2 that the time deposit in question was an unrecorded transaction; and that the Central Bank prohibited the bank to do business due to its distressed financial condition, for which reason it could not give preference of the payment of the said deposit as it might prejudice other creditors of the bank.

On November 11, 19681, Atty. Medina filed with this Court a M. motion ,- reiterating a previous one to allow the payment of the announced of P6.000.00 to Atty. Manuel M. Paredes whom she and tile other herein respondent herein — Abanto and Eribal — hired as counsel in collection with the settlement proceedings of

Page 111: Tax II Estate and Donor Cases

Elsie M. Gaches estate. On March 29, 1969. pursuant to a resolution of this Court, Atty. Paredes ssubmitted knitted a memorandum on the nature and extent for the legal services he had rendered to tile herein respondents Atty. Medina Eribal and Abanto.

On June 26, 1971, Abanto and Eribal Jointly wrote the Chief Justice, expressing willingness and agreement to pay the amount due tile government as taxes against the estate and the heirs thereof, however, the two respondents herein subsequently retracted their statement in the said letter, claiming they signed and sent the same without knowing and understanding its effect and consequences.

A perusal in depth of the facts of the instant case discloses quite plainly that the respondent Judge committed a grave abuse of discretion amounting to lack of jurisdiction in issuing its orders of June 5, 8 and 9, 1967. Section 103 of the National Internal Revenue Code (hereinafter referred to as "Tax Code") unequivocally provides that "No judge shall authorize the executor or judicial administrator to deliver a distributive share to any party interested in the estate unless it shall appear that the estate tax has been paid." 3 The aforesaid orders of the respondent Judge are clearly in diametric opposition to the mentioned Section 103 of the Tax Code and, consequently, the same cannot merit approval of this Court.

While this Court thus holds that the questioned orders are not in accordance with statutory requirements, the fundamental question raised herein regarding the objectionable character of the probate court's mentioned orders has opened other issues which, not alone their importance to jurisprudence, but the indispensability of forestalling needless delays when those issues are raised anew, have, perforce, persuaded this Court that their complete and final adjudication here and now is properly called for. Said issues may be specificaly framed as follows:

(1) Should the herein respondent heirs be required to pay first the inheritance tax before the probate court may authorize the delivery of the hereditary share pertaining to each of them?

(2) Are the respondent heirs herein who are citizens and residents of the Philippines liable for the payment of the Philippine inheritance tax corresponding to the hereditary share of another heir who is a citizen and resident of the United States of America. said share of the latter consisting of personal (cash deposits and, shares) properties located in the mentioned court

(3) Does the assignment of a certificate of time deposit to the comissioner of Internal Revenue for the purpose of paying t I hereby the estate tax constitute payment of such tax?

(4) Should the herein respondent heirs be held liable for the payment of surcharge and interest on the amount (P700,000.00) representing the face value of time deposit certificates assigned to the Commissioner which could not be converted into cash?

Aside from the foregoing, there are also other incidental questions which are raised in the present recourse, viz.,

(5) What should be the liability of the respondents herein on the contempt charges respectively lodged against them?

(6) What should be a reasonable fee for the counsel of the respondents Atty. Medina, Eribal and Abanto for professional services rendered In connection with the settlement of the estate of Elsie M. Gaches?

1. On the matter of the authority of a probate court to allow distribution of an estate prior to the complete Nuidation of the inheritance tax, the Tax Code apparently lacks any provision substantially Identical to the mentioned Section 103 thereof. There are provisions of the Tax Code, e.g., Section 104, which makes it the duty of registers of deeds not to register the transfer to any new owner of a hereditary estate unless payment of the death taxes sham be shown; Section 106, which imposes a similar obligation on business establishments; and Section 107, which penalizes the executor who delivers to an heir or devise, and the officers and employees of

Page 112: Tax II Estate and Donor Cases

business establishments who transfer in their books to any new owner, any property forming part of a hereditary estate without the payment of the death taxes first being shown; but those provisions by themselves do not clearly establish that the purchase and object of the statute is to make the payment of the inheritance tax a pre-condition to an order for the distribution and delivery of the decedent's estate to the lawful heirs there. The cloud of vagueness in the statute, however, is not entirely unreachable. Section 1, Rule 90 of the Rules of Court erases this hiatus in the statute by providing thus: ñé+.£ªwph!1 Section 1. When order for distribution of residue made. — When the debts, funeral charges, and expenses of administration, the allowance to the widow, and inheritance tax, if any, chargeable to the estate in accordance with law, have been paid, the court, on the application of the executor or administrator, or of a person interested in the estate, and after hearing upon notice, shall assign the residue of the estate to the persons entitled to the same, naming them and the proportions, or parts, to which each is entitled, and such persons may demand and recover their respective shares from the executor or administrator, or any person having the same in his possession. If there is a controversy before the court as to who are the lawful heirs of the deceased person or as to the distributive shares to which each person is entitled under the law, the controversy shall be beard and decided as in ordinary cases.

No distribution shall be allowed until the payment of the obligations above mentioned has been made or provided for, unless the distributees, or any of them, give a bond, in a sum to be fixed by the court, conditioned for the payment of said obligations within such time as the court directs.

Under the provisions Of the aforequoted Rule, the distribution of a decedent's assets may only be ordered under any of the following three circumstances, namely, (1) when the inheritance tax, among others, is paid; (2) who bond a suffered bond is given to meet the payment of the tax and all the other options of the nature enumerated in the above-cited provision; or (3) when the payment of the said tax and at the other obligations mentioned in the said Rule has been provided for one of these thru camar as the satisfaction of the when tax due from the festate is were present when the question orders were issued in the case at bar. Although the respondent Judo did make a condition in its order of June 5, 1967 that the distribution of the estate of Elsie M. Gaches (except the cash deposits of more than P2 million) shall be trusted to Atty. Medina for the payment of whatever taxes may be due to the government from the estate and the heirs them to, this Court cannot subscribe to the proposition that the payment of the tax due was thereby adequately provided for. In the first place, the order of June 5, l967 was, for all intents and , a complete distribution of the estate to the heirs for, the executor who is supposed to take care of the estate was absolutely discharged the attorney's fees for the of a lawyer who presumably acted as legal counsel for the estate in the court below were ordered paid as were also the fees for the executor's the cash funds of the estate were red paid to the cash and the non-cash (real property and shares of stock) properties were likewise ordered delivered to Atty. Medina whose participation in the said proceedings was in the capacity of an attorney-in-fact of the herein respondent Eribal and Abanto. In short, the probate court virtually withdrew its custodial jurisdiction over the estate which is the subject of settlement before it. In the second place the respondent Judge, in the distribution of the properties of the estate in question, relief solely upon the mere mandestation of the counsel for the heirs Eribal and Abanto that them were affiant of the estate with which to pay the taxes due to the government. There is no evidence on record that would show that the probate court ever made a serious attempt to de what the values of the different assets the correctness of that such properties shall be preserved for the satisfaction of those case In the third place that main of pesos taxes were being called by the Bureau of Inc. Revenue, the least reasonable thing that the probate court should have done was to require the heirs to deposit the amount of inheritance tax being claimed in a suitable institution or to authorize the sale of non-cash assets under the court's control and supervision.

The record is likewise bereft of any evidence to show that sufficient bond has been filed to meet this particular outstanding obligation.

2. The liability of the herein respondents Eribal and Abanto to pay the inheritance tax corresponding to the share of Bess Lauer in the inheritance must be negated, The inheritance tax is an imposition created by law on the privilege to receive property. 4 Consequently, the scope and subjects of this tax and other related matters in

Page 113: Tax II Estate and Donor Cases

which it is involved must be traced and sought in the law itself. An analysis of our tax statutes supplies no sufficient indication that the inheritance tax, as a rule, was meant to be the joint and solidary liability of the heirs of a decedent. Section 95(c) of the Tax Code, in fact, indicates that the general presumption must be otherwise. The said subsection reads thus: ñé+.£ªwph!1 (c) xxx xxx xxx

The inheritance tax imposed by Section 86 shall, in the absence of contrary disposition by the predecessor, be charged to the account of each beneficiary, in proportion to the value of the benefit received, and in accordance with the scale fixed for the class or group to which is pertains: Provided, That in cases where the heirs divide extrajudicially the property left to them by their predecessor or otherwise convey, sell, transfer, mortgage, or encumber the same without being the estate or inheritance taxes within the period prescribed in the preceding subsections (a) and (b), they shall be solidarity liable for the payment of the said taxes to the extent of the estate they have received.

The statute's enumeration of the specific cases when the heirs may be held solidarity liable for the payment of the inheritance tax is, in the opinion of this Court, a clear indication that beyond those cases, the payment of the inheritance tax should be taken as'the individual responsibility, to the extent of the benefits received, of each heir.

3. And the effect of the indorsement of the time deposit certificates to the Commissioner, the same cannot be held to have extinguished the estate's liability for the estate tax. In the first place,in accepting the indorsement and delivery of the said certificates, the Commissioner expressly gave notice that his Office — ñé+.£ªwph!1 ... Regrets that the same cannot be accepted as payment of the deficiency estate tax in this case may they cannot, at present or on or therefore December 9, 1967, be converted into cash. However, we are holding said certificates of time deposit for possible application in payment of the unpaid balance of the deficiency estate tax in this case ,is soon as said certificates can be converted into cash. ...

In the second place, a time deposit certificate is a mercantile document and is essentially a promissory note. 5 By the express terms of Article 1249 of the Civil Code of the Philippines, the use of this medium to clear an obligation will "produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired." From the records of the case at bar, the Commissioner as well as the herein respondents Atty. Medina, Eribal and Abanto spared no time trying to collect the value of said certificates from the Overseas Bank of Manila but all to no avail. Consequently, the value of the said certificates (P700,000.00) should still be considered outstanding.

4. The estate of Elsie M. Gaches is likewise liable for the payment of the interest and surcharges on the said amount of P700.000.00 imposed under Section 101 (a) (1) and (c), respectively, of the Tax Code. 6

The Interest charge for 1% per month imposed under Section 101 (a) (1) of the Tax Code is essentially a commotion to the State for delay in the payment of the tax due thereto7 As for the accountant use by the tax payer of funds that nightday shall be in the government's funds. 8 As the indorsement and delivery of the mentioned time deposit certificates to the did not result in the payment of the estate tax (for which it was in the respondents estate is fluently liable for the interest charge imposed in the Tax Code.

The estate cannot likewise be exempted from the payment of the 5% surcharge imposed by Section 101 (c) of the Tax Code. While there are cases in this jurisdiction holding that a surcharge shall not be visited upon a taxpayer whose failure to pay the tax on time is in good faith, 9 this element does not appear to be present in the case at bar. The Commissioner, as aforesaid, fully informed the respondents Atty. Medina, Eribal and Abanto of the condition to this acceptance of the said time deposit certificates. The Commissioner, in fact, advised them in the same letter that "It will be understood in this connection that if the balance of the deficiency estate tax in this case is not paid on or before December 9, 1967, the name shall be subject to the interest on deficiency, 5%

Page 114: Tax II Estate and Donor Cases

surcharge and 1% monthly interest for deficiency." Moreover, Judge Tan himself, as executor of the estate of Elsie M. Gaches, specifically admitted that he was the one who caused the extension (and consolidation) of the maturity dates of the two time deposit certificates in question (one for P100,000.00 to mature on May 12, 1967 and the other for P600,000.00 to mature on June 16, 1967) to May 12, 1968,

It will be worthwhile to mention also, in this connection, that when Atty. Medina applied to this Court for authorize to the amount of P700,000.00 from the Overseas Bank of Manila on September 9, 1967, the resolution of this Court dated November 17, 1967, approve her request authorized her to withdraw the said amount in the form of cashier's checks payable to the Commissioner. Apparently, because the Overseas Bank of Manila refused to issue such checks or to allow her to withdraw said amount in view of the extension of the nuturity date of the deposit in question, Atty. Medina thought that by simply assigning the time deposit certificates to the Commissioner, she would be deemed to have paid the estate's obligation in its corresponding amount. However, as aforesaid the Commissioner was also unable to convert said amount to cash and he gave announce to that effect to Atty. Medina. Since the refusal of the Overseas Bank of Manila to snow the withdrawal of the said deposit was then well-known to the parties, it saw to reas that the tentatives of the estate who stand to be benefited. therefrom, such as the respondents Eribal and Abanto, should have forthwith asked for authority to pay the from other funds of the estate. Atty. Medina was, in fact, given the authority by this Court to sell assets of the estate for the payment of the taxes due to the State, but she never tried to pay the equivalent amount of P700,000.00 in question from the proceeds of the Wm she made afterwards. Moreover, it will also be noted that the respondents EAbal and Abanto, during the pendency of this case, had in their actual ion at least P2.3 million (the amount they were able to withdraw from the Philippine National Bank on account of the questioned orders) which they could have very well used for the payment of the estate tax. They, however, opted to put the same to other uses.

5. We now consider the several petitions for contempt riled in the case at bar, namely, (a) against the Philippine National Bank on account for allowing Atty. Medina to withdraw P2,330,000.00 in contravention of the writ of punishment issued by the Commissioner; (b) against the officer of the Overseas Bank of Manila for allowing the extension of the maturity date of the mentioned time deposit of P700,000.00 and for refusing to pay the same after the extended term expired; (c) against Judge Tan who renewed the maturity date of the said time deposits; (d) against the Lepanto Consolidated Mining Co. for refusing to turn over dividends payable to the estate of Elsie M. Gaches unless the Commissioner first lifted his punishment order; and (e) against the herein respondents Atty. Medina, Eribal and Abonto for citing shares of stock with the probate court instead of the cash amount of P2,330,000.00 which they withdrew from the renewed National Bank on account of the questioned orders of the probate court, contrary to the resolutions of this Court dated July 10 and 17, 1967.

(a) The contempt charge against the officials of the Philippine National Bank is without merit, it appearing to the satisfaction of this Court that they excited reasonable efforts not to disobey the writ of garnishing issued by the Commissioner. Indeed, said officials merely acted in obedience to the order of the probate court which threatened them with contempt of court after they moved to be allowed to deposit with the said probate court the money of the of Elsie Gaches deposited with the said bank. The commssioner himself, through the Solicitor General, admitted later that its writ of garnishment cannot be superior to that of the probate court,s order as the estate in Question was then in custodia legis.

(b) The contempt charges against the officials of the Overseas Bank of Manila likewise merit dismissal. In the case of the renewal of the term of the time deposits in question, the said extension was made by no less than the executor of the estate himself- The renewal of said term may be considered as purely an act of administration for the enhancement (due to the higher interest rates) of the value of the estate, and the officials of the bank cannot consequently be blamed or acting favorably on the executor's application. Judge Tan himself explained that he did what he did honest the belief that it would redound to the benefit of the estate on the account of the higher interest rate on time deposits.

With reference, to the refuse of the bank's officials to allow the witldrawal of time deposit in question after the extended term expired on May 12, 1968, this Court takes notice of the fact, as stated in our decision in Ramos

Page 115: Tax II Estate and Donor Cases

vs. Central Bank (L-293250, Oct. 4, 1971; 41 SCRA 565), that as early as November 20, 1967 the Central Bank required the Overseas Bank of Manila, in view of its distressed financial condition, to execute a voting trust agreement in order to bail it out through a change of management and the promise of fresh funds to replenish the bank's financial portfolio. The Overseas Bank of Manila was not able to normalize its operations in spite of the voting trust agreement — for, on July 31, 1968, it was excluded by the Central Bank from inter-bank clearing; on August 1, 1968, its operations were suspended; and on August 13, 1968, it was completely forbidden by the Central Bank to do business preparatory to its forcible liquidation. Under the circumstances, this Court is satisfied with the explanation that to allow Atty. Medina to withdraw the said time deposits after the extended term would have worked an undue prejudice to the other depositors and creditors of the bank.

(c) The contempt charge against Judge Tan is also not meritorious. There is no sufficient and convincing evidence to show that he renewed the maturity date of the time deposits in question maliciously or to the prejudice of the interest of the estate.

(d) The Lepanto Consolidated Mining Company is likewise entitled to exoneration from the contempt charge lodged against it. It is refusing to turn over to Atty. Medina stock dividends payable to the estate of Elsie M. Gaches, it is evident that the said corporation acted in good faith in view of the writ of garnishment issued to it by the Commissioner. Moreover, on February 16, 1968, this Court passed a resolution suspending temporarily the warrants of punishment issued by the Commissioner, and it does not appear that thereafter the turnover of the stock dividends to the estate was refused.

(e) With reference to the charge for contempt against the respondents Atty. Medina, Eribal and Abanto, although admittedly the resolutions of this Court dated July 10 and 17, 1967 were not strictly complied with by the said respondents, it appears clearly that they immediately deposited with the probate court shares of stock with a fairly stable liquidity value of P2,588,520.00. In any case, the main objective of the instant petition is to assure the State that the assessed tax obligations shall be paid and, from the records, more than P2 million had already been paid to the State during the pendency of the instant proceeding, in this Court.

6. With reference to the attorney's fees to be paid to Atty. Manuel M. Paredes, this court is of the opinion, after a careful study of the statement of services rendered by said counsel to the respondents Eribal and Abanto which was submitted to this Court, that the amount of Fifty Thousand Pesos (P50,000.00) is fair and reasonable. The payment of this amount, however, is the personal liability of the said respondents Eribal and Abanto. and not that of the estate of Elsie M. Gaches, as the said counsel was hired by the said respondents to give legal aid to them in connection with the settlement of the various claims preferred in the probate court and in this Court.

7. The Court's intended adjudication of the main issue has been rendered academic by supervening events which dictate that the court refrain from issuing any further order relating thereto. On July 18, 1977 a "Manifestation and Compliance" was filed by the, respondent Delia P. Medina which states that a compromise payment of P700,000 as all estate tax, evidence by an official receipt (annex A of the Manifestation), was accepted and duly approved by Acting Commissioner of Internal Revenue Efren I. Plana (annex B of the same Manifestation), and that "with the said compromise payment of P700,000, all estate, inheritance and deficiency income taxes . . . including pertinent delinquency penalties thereof have been fully paid and liquidated, aggregating to P7,929,498.55 ..." No objection thereto was interpored by any of this parties concerned despite due notice thereof. This was further supplemented by a communication, dated July 19, 1977, of Deputy Commissioner Conrado P. Diaz, informing the Register of Deeds of Pasig, Metro Manila, that the Gaches estate has already paid all the estate and inheritance taxes assessed against it, and that, consequently, the notice of tax then inscribed on the property and property rights of the estate can now be considered cancelled. With the full settlement of the tax claims, the requirements of the law have been fully met, and it has unnecessary for the Court to issue orders relative to the main issue.

ACCORDINGLY, the respondent Delia P. Medina is to deliver the remaining assets of the estate to the voluntary heirs in the proportions adjudicated in the will and to submit a report of compliance. On the incidental issues, the Court renders judgment as for:

Page 116: Tax II Estate and Donor Cases

(1) The amount of FIFTY THOUSAND (P50,000.00) PESOS is hereby awarded to Manuel M. Paredes as legal fee for his services,

the same to be Paid by the respondent End will the estate of Abanto, now

(2) The contempt charges against the officials of the Philippine National Bank and the Overseas Bank of Manila, Judge Bienvenido Tan, Sr., and Lepanto Consolidated Co. are hereby ordered dismissed;

(3) The authority given to the respondent Delia P. Medina in the resolution of the court dated February 6, 1968, to pay the death and income taxes, including delinquency penalties, claimed by the State and, for that, to withdraw all cash deposits in various banks and sell such properties of the estate as my be necessary, is hereby terminated; and

(4) The writs of preliminary injunction issued by the Court pursuant to its resolutions dated July 10 and 17, 1967 are hereby dissolved.

No costs.

Antonio, Muñ;oz Palma, Concepcion Jr., Martin, Santos, Fernandez and Guerrero, JJ., concur.1äwphï1.ñët

Fernando, J., is on leave.

Aquino, Makasiar, JJ., took no part.

Separate Opinions

TEEHANKEE, J., concur:

I concur in the disposition of the incidental issues regarding the payment of Atty. Paredes' attorney's fees due from respondents Eribal and Abanto's estate and the contempt charges as set forth in the Court's judgment.

I reserve my vote as to the Court's "intended adjudication of the main issues (Nos.[1] to [4] as discussed in the Chief Justice's main opinion at pages 25- 33), since as stated in the main opinion itself (at page 36) the said issues have been rendered academic with the full settlement of the Internal Revenue Commissioner's tax claims and it has therefore become unnecessary to advance an opinion thereon or resolve the same.

Separate Opinions

TEEHANKEE, J., concur:

I concur in the disposition of the incidental issues regarding the payment of Atty. Paredes' attorney's fees due from respondents Eribal and Abanto's estate and the contempt charges as set forth in the Court's judgment.

Page 117: Tax II Estate and Donor Cases

I reserve my vote as to the Court's "intended adjudication of the main issues (Nos.[1] to [4] as discussed in the Chief Justice's main opinion at pages 25- 33), since as stated in the main opinion itself (at page 36) the said issues have been rendered academic with the full settlement of the Internal Revenue Commissioner's tax claims and it has therefore become unnecessary to advance an opinion thereon or resolve the same.

G.R. No. L-22734             September 15, 1967

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.MANUEL B. PINEDA, as one of the heirs of deceased ATANASIO PINEDA, respondent.

Office of the Solicitor General for petitioner.Manuel B. Pineda for and in his own behalf as respondent.

 

BENGZON, J.P., J.:

          On May 23, 1945 Atanasio Pineda died, survived by his wife, Felicisima Bagtas, and 15 children, the eldest of whom is Manuel B. Pineda, a lawyer. Estate proceedings were had in the Court of First Instance of Manila (Case No. 71129) wherein the surviving widow was appointed administratrix. The estate was divided among and awarded to the heirs and the proceedings terminated on June 8, 1948. Manuel B. Pineda's share amounted to about P2,500.00.

          After the estate proceedings were closed, the Bureau of Internal Revenue investigated the income tax liability of the estate for the years 1945, 1946, 1947 and 1948 and it found that the corresponding income tax returns were not filed. Thereupon, the representative of the Collector of Internal Revenue filed said returns for the estate on the basis of information and data obtained from the aforesaid estate proceedings and issued an assessment for the following:

1. Deficiency income tax1945 P135.831946 436.951947 1,206.91 P1,779.69  Add: 5% surcharge 88.98

1% monthly interest from November 30, 1953 to April 15, 1957 720.77Compromise for late filing 80.00Compromise for late payment

40.00

Page 118: Tax II Estate and Donor Cases

Total amount due P2,707.44===========

2.Additional residence tax for 1945

P14.50===========

3. Real Estate dealer's tax for the fourth quarter of 1946 and the whole year of 1947

P207.50===========

          Manuel B. Pineda, who received the assessment, contested the same. Subsequently, he appealed to the Court of Tax Appeals alleging that he was appealing "only that proportionate part or portion pertaining to him as one of the heirs."

          After hearing the parties, the Court of Tax Appeals rendered judgment reversing the decision of the Commissioner on the ground that his right to assess and collect the tax has prescribed. The Commissioner appealed and this Court affirmed the findings of the Tax Court in respect to the assessment for income tax for the year 1947 but held that the right to assess and collect the taxes for 1945 and 1946 has not prescribed. For 1945 and 1946 the returns were filed on August 24, 1953; assessments for both taxable years were made within five years therefrom or on October 19, 1953; and the action to collect the tax was filed within five years from the latter date, on August 7, 1957. For taxable year 1947, however, the return was filed on March 1, 1948; the assessment was made on October 19, 1953, more than five years from the date the return was filed; hence, the right to assess income tax for 1947 had prescribed. Accordingly, We remanded the case to the Tax Court for further appropriate proceedings.1

          In the Tax Court, the parties submitted the case for decision without additional evidence.

          On November 29, 1963 the Court of Tax Appeals rendered judgment holding Manuel B. Pineda liable for the payment corresponding to his share of the following taxes:

Deficiency income tax

1945 P135.831946 436.95Real estate dealer's fixed tax 4th quarter of 1946 and whole year of 1947 P187.50

          The Commissioner of Internal Revenue has appealed to Us and has proposed to hold Manuel B. Pineda liable for the payment of all the taxes found by the Tax Court to be due from the estate in the total amount of P760.28 instead of only for the amount of taxes corresponding to his share in the estate.1awphîl.nèt

          Manuel B. Pineda opposes the proposition on the ground that as an heir he is liable for unpaid income tax due the estate only up to the extent of and in proportion to any share he received. He relies on Government of the Philippine Islands v. Pamintuan2 where We held that "after the partition of an estate, heirs and distributees are liable individually for the payment of all lawful outstanding claims against the estate in proportion to the amount

Page 119: Tax II Estate and Donor Cases

or value of the property they have respectively received from the estate."

          We hold that the Government can require Manuel B. Pineda to pay the full amount of the taxes assessed.

          Pineda is liable for the assessment as an heir and as a holder-transferee of property belonging to the estate/taxpayer. As an heir he is individually answerable for the part of the tax proportionate to the share he received from the inheritance.3 His liability, however, cannot exceed the amount of his share.4

          As a holder of property belonging to the estate, Pineda is liable for he tax up to the amount of the property in his possession. The reason is that the Government has a lien on the P2,500.00 received by him from the estate as his share in the inheritance, for unpaid income taxes4a for which said estate is liable, pursuant to the last paragraph of Section 315 of the Tax Code, which we quote hereunder:

          If any person, corporation, partnership, joint-account (cuenta en participacion), association, or insurance company liable to pay the income tax, neglects or refuses to pay the same after demand, the amount shall be a lien in favor of the Government of the Philippines from the time when the assessment was made by the Commissioner of Internal Revenue until paid with interest, penalties, and costs that may accrue in addition thereto upon all property and rights to property belonging to the taxpayer: . . .

          By virtue of such lien, the Government has the right to subject the property in Pineda's possession, i.e., the P2,500.00, to satisfy the income tax assessment in the sum of P760.28. After such payment, Pineda will have a right of contribution from his co-heirs,5 to achieve an adjustment of the proper share of each heir in the distributable estate.

          All told, the Government has two ways of collecting the tax in question. One, by going after all the heirs and collecting from each one of them the amount of the tax proportionate to the inheritance received. This remedy was adopted in Government of the Philippine Islands v. Pamintuan, supra. In said case, the Government filed an action against all the heirs for the collection of the tax. This action rests on the concept that hereditary property consists only of that part which remains after the settlement of all lawful claims against the estate, for the settlement of which the entire estate is first liable.6 The reason why in case suit is filed against all the heirs the tax due from the estate is levied proportionately against them is to achieve thereby two results: first, payment of the tax; and second, adjustment of the shares of each heir in the distributed estate as lessened by the tax.

          Another remedy, pursuant to the lien created by Section 315 of the Tax Code upon all property and rights to property belonging to the taxpayer for unpaid income tax, is by subjecting said property of the estate which is in the hands of an heir or transferee to the payment of the tax due, the estate. This second remedy is the very avenue the Government took in this case to collect the tax. The Bureau of Internal Revenue should be given, in instances like the case at bar, the necessary discretion to avail itself of the most expeditious way to collect the tax as may be envisioned in the particular provision of the Tax Code above quoted, because taxes are the lifeblood of government and their prompt and certain availability is an imperious need.7 And as afore-stated in this case the suit seeks to achieve only one objective: payment of the tax. The adjustment of the respective shares due to the heirs from the inheritance, as lessened by the tax, is left to await the suit for contribution by the heir from whom the Government recovered said tax.

          WHEREFORE, the decision appealed from is modified. Manuel B. Pineda is hereby ordered to pay to the Commissioner of Internal Revenue the sum of P760.28 as deficiency income tax for 1945 and 1946, and real estate dealer's fixed tax for the fourth quarter of 1946 and for the whole year 1947, without prejudice to his right

Page 120: Tax II Estate and Donor Cases

of contribution for his co-heirs. No costs. So ordered.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ., concur.

G.R. No. L-56340 June 24, 1983

SPOUSES ALVARO PASTOR, JR. and MA. ELENA ACHAVAL DE PASTOR, petitioners, vs.THE COURT OF APPEALS, JUAN Y. REYES, JUDGE OF BRANCH I, COURT OF FIRST INSTANCE OF CEBU and LEWELLYN BARLITO QUEMADA, respondents.

Pelaez, Pelaez, & Pelaez Law Office for petitioners.

Ceniza, Rama & Associates for private respondents.

 

PLANA, J.:

I. FACTS:

This is a case of hereditary succession.

Alvaro Pastor, Sr. (PASTOR, SR.), a Spanish subject, died in Cebu City on June 5, 1966, survived by his Spanish wife Sofia Bossio (who also died on October 21, 1966), their two legitimate children Alvaro Pastor, Jr. (PASTOR, JR.) and Sofia Pastor de Midgely (SOFIA), and an illegitimate child, not natural, by the name of Lewellyn Barlito Quemada QUEMADA PASTOR, JR. is a Philippine citizen, having been naturalized in 1936. SOFIA is a Spanish subject. QUEMADA is a Filipino by his mother's citizenship.

On November 13, 1970, QUEMADA filed a petition for the probate and allowance of an alleged holographic will of PASTOR, SR. with the Court of First Instance of Cebu, Branch I (PROBATE COURT), docketed as SP No. 3128-R. The will contained only one testamentary disposition: a legacy in favor of QUEMADA consisting of 30% of PASTOR, SR.'s 42% share in the operation by Atlas Consolidated Mining and Development Corporation (ATLAS) of some mining claims in Pina-Barot, Cebu.

On November 21, 1970, the PROBATE COURT, upon motion of QUEMADA and after an ex parte hearing, appointed him special administrator of the entire estate of PASTOR, SR., whether or not covered or affected by the holographic will. He assumed office as such on December 4, 1970 after filing a bond of P 5,000.00.

On December 7, 1970, QUEMADA as special administrator, instituted against PASTOR, JR. and his wife an action for reconveyance of alleged properties of the estate, which included the properties subject of the legacy and which were in the names of the spouses PASTOR, JR. and his wife, Maria Elena Achaval de Pastor, who claimed to be the owners thereof in their own rights, and not by inheritance. The action, docketed as Civil Case No. 274-R, was filed with the Court of First Instance of Cebu, Branch IX.

On February 2, 1971, PASTOR, JR. and his sister SOFIA filed their opposition to the petition for probate and the order

Page 121: Tax II Estate and Donor Cases

appointing QUEMADA as special administrator.

On December 5, 1972, the PROBATE COURT issued an order allowing the will to probate. Appealed to the Court of Appeals in CA-G.R. No. 52961- R, the order was affirmed in a decision dated May 9, 1977. On petition for review, the Supreme Court in G.R. No. L-46645 dismissed the petition in a minute resolution dated November 1, 1977 and remanded the same to the PROBATE COURT after denying reconsideration on January 11, 1978.

For two years after remand of the case to the PROBATE COURT, QUEMADA filed pleading after pleading asking for payment of his legacy and seizure of the properties subject of said legacy. PASTOR, JR. and SOFIA opposed these pleadings on the ground of pendency of the reconveyance suit with another branch of the Cebu Court of First Instance. All pleadings remained unacted upon by the PROBATE COURT.

On March 5, 1980, the PROBATE COURT set the hearing on the intrinsic validity of the will for March 25, 1980, but upon objection of PASTOR, JR. and SOFIA on the e ground of pendency of the reconveyance suit, no hearing was held on March 25. Instead, the PROBATE COURT required the parties to submit their respective position papers as to how much inheritance QUEMADA was entitled to receive under the wig. Pursuant thereto, PASTOR. JR. and SOFIA submitted their Memorandum of authorities dated April 10, which in effect showed that determination of how much QUEMADA should receive was still premature. QUEMADA submitted his Position paper dated April 20, 1980. ATLAS, upon order of the Court, submitted a sworn statement of royalties paid to the Pastor Group of tsn from June 1966 (when Pastor, Sr. died) to February 1980. The statement revealed that of the mining claims being operated by ATLAS, 60% pertained to the Pastor Group distributed as follows:

1. A. Pastor, Jr. ...................................40.5%

2. E. Pelaez, Sr. ...................................15.0%

3. B. Quemada .......................................4.5%

On August 20, 1980, while the reconveyance suit was still being litigated in Branch IX of the Court of First Instance of Cebu, the PROBATE COURT issued the now assailed Order of Execution and Garnishment, resolving the question of ownership of the royalties payable by ATLAS and ruling in effect that the legacy to QUEMADA was not inofficious. [There was absolutely no statement or claim in the Order that the Probate Order of December 5, 1972 had previously resolved the issue of ownership of the mining rights of royalties thereon, nor the intrinsic validity of the holographic will.]

The order of August 20, 1980 found that as per the holographic will and a written acknowledgment of PASTOR, JR. dated June 17, 1962, of the above 60% interest in the mining claims belonging to the Pastor Group, 42% belonged to PASTOR, SR. and only 33% belonged to PASTOR, JR. The remaining 25% belonged to E. Pelaez, also of the Pastor Group. The PROBATE COURT thus directed ATLAS to remit directly to QUEMADA the 42% royalties due decedent's estate, of which QUEMADA was authorized to retain 75% for himself as legatee and to deposit 25% with a reputable banking institution for payment of the estate taxes and other obligations of the estate. The 33% share of PASTOR, JR. and/or his assignees was ordered garnished to answer for the accumulated legacy of QUEMADA from the time of PASTOR, SR.'s death, which amounted to over two million pesos.

The order being "immediately executory", QUEMADA succeeded in obtaining a Writ of Execution and Garnishment on September 4, 1980, and in serving the same on ATLAS on the same day. Notified of the Order on September 6, 1980, the oppositors sought reconsideration thereof on the same date primarily on the ground that the PROBATE COURT gravely abused its discretion when it resolved the question of ownership of the royalties and ordered the payment of QUEMADA's legacy after prematurely passing upon the intrinsic validity of the will. In the meantime, the PROBATE COURT ordered suspension of payment of all royalties due PASTOR, JR. and/or his assignees until after resolution of oppositors' motion for reconsideration.

Before the Motion for Reconsideration could be resolved, however, PASTOR, JR., this time joined by his wife Ma.

Page 122: Tax II Estate and Donor Cases

ELENA ACHAVAL DE PASTOR, filed with the Court of Appeals a Petition for certiorari and Prohibition with a prayer for writ of preliminary injunction (CA-G.R. No. SP- 11373-R). They assailed the Order dated August 20, 1980 and the writ of execution and garnishment issued pursuant thereto. The petition was denied on November 18, 1980 on the grounds (1) that its filing was premature because the Motion for Reconsideration of the questioned Order was still pending determination by the PROBATE COURT; and (2) that although "the rule that a motion for reconsideration is prerequisite for an action for certiorari is never an absolute rule," the Order assailed is "legally valid. "

On December 9, 1980, PASTOR, JR. and his wife moved for reconsideration of the Court of Appeal's decision of November 18, 1980, calling the attention of the appellate court to another order of the Probate Court dated November 11, 1980 (i.e., while their petition for certiorari was pending decision in the appellate court), by which the oppositors' motion for reconsideration of the Probate Court's Order of August 20, 1980 was denied. [The November 11 Order declared that the questions of intrinsic validity of the will and of ownership over the mining claims (not the royalties alone) had been finally adjudicated by the final and executory Order of December 5, 1972, as affirmed by the Court of Appeals and the Supreme Court, thereby rendering moot and academic the suit for reconveyance then pending in the Court of First Instance of Cebu, Branch IX. It clarified that only the 33% share of PASTOR, JR. in the royalties (less than 7.5% share which he had assigned to QUEMADA before PASTOR, SR. died) was to be garnished and that as regards PASTOR, SR.'s 42% share, what was ordered was just the transfer of its possession to the custody of the PROBATE COURT through the special administrator. Further, the Order granted QUEMADA 6% interest on his unpaid legacy from August 1980 until fully paid.] Nonetheless, the Court of Appeals denied reconsideration.

Hence, this Petition for Review by certiorari with prayer for a writ of pre y injunction, assailing the decision of the Court of Appeals dated November 18, 1980 as well as the orders of the Probate Court dated August 20, 1980, November 11, 1980 and December 17, 1980, Med by petitioners on March 26, 1981, followed by a Supplemental Petition with Urgent Prayer for Restraining Order.

In April 1981, the Court (First Division) issued a writ of preliminary injunction, the lifting of which was denied in the Resolution of the same Division dated October 18, 1982, although the bond of petitioners was increased from P50,000.00 to P100,000.00.

Between December 21, 1981 and October 12, 1982, private respondent filed seven successive motions for early resolution. Five of these motions expressly prayed for the resolution of the question as to whether or not the petition should be given due course.

On October 18, 1982, the Court (First Division) adopted a resolution stating that "the petition in fact and in effect was given due course when this case was heard on the merits on September 7, (should be October 21, 1981) and concise memoranda in amplification of their oral arguments on the merits of the case were filed by the parties pursuant to the resolution of October 21, 1981 . . . " and denied in a resolution dated December 13, 1982, private respondent's "Omnibus motion to set aside resolution dated October 18, 1982 and to submit the matter of due course to the present membership of the Division; and to reassign the case to another ponente."

Upon Motion for Reconsideration of the October 18, 1982 and December 13, 1982 Resolutions, the Court en banc resolved to CONFIRM the questioned resolutions insofar as hey resolved that the petition in fact and in effect had been given due course.

II. ISSUES:

Assailed by the petitioners in these proceedings is the validity of the Order of execution and garnishment dated August 20, 1980 as well as the Orders subsequently issued allegedly to implement the Probate Order of December 5, 1972, to wit: the Order of November 11, 1980 declaring that the Probate Order of 1972 indeed resolved the issues of ownership and intrinsic validity of the will, and reiterating the Order of Execution dated August 20, 1980; and the Order of December 17, 1980 reducing to P2,251,516.74 the amount payable to QUEMADA representing the royalties he should have received

Page 123: Tax II Estate and Donor Cases

from the death of PASTOR, SR. in 1966 up to February 1980.

The Probate Order itself, insofar as it merely allowed the holographic will in probate, is not questioned. But petitioners denounce the Probate Court for having acted beyond its jurisdiction or with grave abuse of discretion when it issued the assailed Orders. Their argument runs this way: Before the provisions of the holographic win can be implemented, the questions of ownership of the mining properties and the intrinsic validity of the holographic will must first be resolved with finality. Now, contrary to the position taken by the Probate Court in 1980 — i.e., almost eight years after the probate of the will in 1972 — the Probate Order did not resolve the two said issues. Therefore, the Probate Order could not have resolved and actually did not decide QUEMADA's entitlement to the legacy. This being so, the Orders for the payment of the legacy in alleged implementation of the Probate Order of 1972 are unwarranted for lack of basis.

Closely related to the foregoing is the issue raised by QUEMADA The Probate Order of 1972 having become final and executory, how can its implementation (payment of legacy) be restrained? Of course, the question assumes that QUEMADA's entitlement to the legacy was finally adjudged in the Probate Order.

On the merits, therefore, the basic issue is whether the Probate Order of December 5, 1972 resolved with finality the questions of ownership and intrinsic validity. A negative finding will necessarily render moot and academic the other issues raised by the parties, such as the jurisdiction of the Probate Court to conclusively resolve title to property, and the constitutionality and repercussions of a ruling that the mining properties in dispute, although in the name of PASTOR, JR. and his wife, really belonged to the decedent despite the latter's constitutional disqualification as an alien.

On the procedural aspect, placed in issue is the propriety of certiorari as a means to assail the validity of the order of execution and the implementing writ.

III. DISCUSSION:

1. Issue of Ownership —

(a) In a special proceeding for the probate of a will, the issue by and large is restricted to the extrinsic validity of the will, i.e., whether the testator, being of sound mind, freely executed the will in accordance with the formalities prescribed by law. (Rules of Court, Rule 75, Section 1; Rule 76, Section 9.) As a rule, the question of ownership is an extraneous matter which the Probate Court cannot resolve with finality. Thus, for the purpose of determining whether a certain property should or should not be included in the inventory of estate properties, the Probate Court may pass upon the title thereto, but such determination is provisional, not conclusive, and is subject to the final decision in a separate action to resolve title. [3 Moran, Comments on the Rules of Court (1980 ed.), p. 458; Valero Vda. de Rodriguez vs. Court of Appeals, 91 SCRA 540.]

(b) The rule is that execution of a judgment must conform to that decreed in the dispositive part of the decision. (Philippine-American Insurance Co. vs. Honorable Flores, 97 SCRA 811.) However, in case of ambiguity or uncertainty, the body of the decision may be scanned for guidance in construing the judgment. (Heirs of Presto vs. Galang, 78 SCRA 534; Fabular vs. Court of Appeals, 119 SCRA 329; Robles vs. Timario. 107 Phil. 809.)

The Order sought to be executed by the assailed Order of execution is the Probate Order of December 5, 1972 which allegedly resolved the question of ownership of the disputed mining properties. The said Probate Order enumerated the issues before the Probate Court, thus:

Unmistakably, there are three aspects in these proceedings: (1) the probate of the holographic will (2) the intestate estate aspect; and (3) the administration proceedings for the purported estate of the decedent in the Philippines.

In its broad and total perspective the whole proceedings are being impugned by the oppositors on jurisdictional grounds, i.e., that the fact of the decedent's residence and existence of properties in the

Page 124: Tax II Estate and Donor Cases

Philippines have not been established.

Specifically placed in issue with respect to the probate proceedings are: (a) whether or not the holographic will (Exhibit "J") has lost its efficacy as the last will and testament upon the death of Alvaro Pastor, Sr. on June 5, 1966, in Cebu City, Philippines; (b) Whether or not the said will has been executed with all the formalities required by law; and (c) Did the late presentation of the holographic will affect the validity of the same?

Issues In the Administration Proceedings are as follows: (1) Was the ex- parte appointment of the petitioner as special administrator valid and proper? (2) Is there any indispensable necessity for the estate of the decedent to be placed under administration? (3) Whether or not petition is qualified to be a special administrator of the estate; and (4) Whether or not the properties listed in the inventory (submitted by the special administrator but not approved by the Probate Court) are to be excluded.

Then came what purports to be the dispositive portion:

Upon the foregoing premises, this Court rules on and resolves some of the problems and issues presented in these proceedings, as follows:

(a) The Court has acquired jurisdiction over the probate proceedings as it hereby allows and approves the so-called holographic will of testator Alvaro Pastor, Sr., executed on July 31, 1961 with respect to its extrinsic validity, the same having been duly authenticated pursuant to the requisites or solemnities prescribed by law. Let, therefore, a certificate of its allowance be prepared by the Branch Clerk of this Court to be signed by this Presiding Judge, and attested by the seal of the Court, and thereafter attached to the will, and the will and certificate filed and recorded by the clerk. Let attested copies of the will and of the certificate of allowance thereof be sent to Atlas Consolidated Mining & Development Corporation, Goodrich Bldg., Cebu City, and the Register of Deeds of Cebu or of Toledo City, as the case may be, for recording.

(b) There was a delay in the granting of the letters testamentary or of administration for as a matter of fact, no regular executor and/or administrator has been appointed up to this time and - the appointment of a special administrator was, and still is, justified under the circumstances to take possession and charge of the estate of the deceased in the Philippines (particularly in Cebu) until the problems causing the delay are decided and the regular executor and/or administrator appointed.

(c) There is a necessity and propriety of a special administrator and later on an executor and/or administrator in these proceedings, in spite of this Court's declaration that the oppositors are the forced heirs and the petitioner is merely vested with the character of a voluntary heir to the extent of the bounty given to him (under) the will insofar as the same will not prejudice the legitimes of the oppositor for the following reasons:

1. To submit a complete inventory of the estate of the decedent-testator Alvaro Pastor, Sr.

2. To administer and to continue to put to prolific utilization of the properties of the decedent;

3. To keep and maintain the houses and other structures and belonging to the estate, since the forced heirs are residing in Spain, and prepare them for delivery to the heirs in good order after partition and when directed by the Court, but only after the payment of estate and inheritance taxes;

Page 125: Tax II Estate and Donor Cases

(d) Subject to the outcome of the suit for reconveyance of ownership and possession of real and personal properties in Civil Case No. 274-T before Branch IX of the Court of First Instance of Cebu, the intestate estate administration aspect must proceed, unless, however, it is duly proven by the oppositors that debts of the decedent have already been paid, that there had been an extrajudicial partition or summary one between the forced heirs, that the legacy to be given and delivered to the petitioner does not exceed the free portion of the estate of the testator, that the respective shares of the forced heirs have been fairly apportioned, distributed and delivered to the two forced heirs of Alvaro Pastor, Sr., after deducting the property willed to the petitioner, and the estate and inheritance taxes have already been paid to the Government thru the Bureau of Internal Revenue.

The suitability and propriety of allowing petitioner to remain as special administrator or administrator of the other properties of the estate of the decedent, which properties are not directly or indirectly affected by the provisions of the holographic will (such as bank deposits, land in Mactan etc.), will be resolved in another order as separate incident, considering that this order should have been properly issued solely as a resolution on the issue of whether or not to allow and approve the aforestated will. (Emphasis supplied.)

Nowhere in the dispositive portion is there a declaration of ownership of specific properties. On the contrary, it is manifest therein that ownership was not resolved. For it confined itself to the question of extrinsic validity of the win, and the need for and propriety of appointing a special administrator. Thus it allowed and approved the holographic win "with respect to its extrinsic validity, the same having been duly authenticated pursuant to the requisites or solemnities prescribed by law." It declared that the intestate estate administration aspect must proceed " subject to the outcome of the suit for reconveyance of ownership and possession of real and personal properties in Civil Case 274-T before Branch IX of the CFI of Cebu." [Parenthetically, although the statement refers only to the "intestate" aspect, it defies understanding how ownership by the estate of some properties could be deemed finally resolved for purposes of testate administration, but not so for intestate purposes. Can the estate be the owner of a property for testate but not for intestate purposes?] Then again, the Probate Order (while indeed it does not direct the implementation of the legacy) conditionally stated that the intestate administration aspect must proceed "unless . . . it is proven . . . that the legacy to be given and delivered to the petitioner does not exceed the free portion of the estate of the testator," which clearly implies that the issue of impairment of legitime (an aspect of intrinsic validity) was in fact not resolved. Finally, the Probate Order did not rule on the propriety of allowing QUEMADA to remain as special administrator of estate properties not covered by the holographic will, "considering that this (Probate) Order should have been properly issued solely as a resolution on the issue of whether or not to allow and approve the aforestated will. "

(c) That the Probate Order did not resolve the question of ownership of the properties listed in the estate inventory was appropriate, considering that the issue of ownership was the very subject of controversy in the reconveyance suit that was still pending in Branch IX of the Court of First Instance of Cebu.

(d) What, therefore, the Court of Appeals and, in effect, the Supreme Court affirmed en toto when they reviewed the Probable Order were only the matters properly adjudged in the said Order.

(e) In an attempt to justify the issuance of the Order of execution dated August 20, 1980, the Probate Court in its Order of November 11, 1980 explained that the basis for its conclusion that the question of ownership had been formally resolved by the Probate Order of 1972 are the findings in the latter Order that (1) during the lifetime of the decedent, he was receiving royalties from ATLAS; (2) he had resided in the Philippines since pre-war days and was engaged in the mine prospecting business since 1937 particularly in the City of Toledo; and (3) PASTOR, JR. was only acting as dummy for his father because the latter was a Spaniard.

Based on the premises laid, the conclusion is obviously far-fetched.

(f) It was, therefore, error for the assailed implementing Orders to conclude that the Probate Order adjudged with finality the question of ownership of the mining properties and royalties, and that, premised on this conclusion, the dispositive

Page 126: Tax II Estate and Donor Cases

portion of the said Probate Order directed the special administrator to pay the legacy in dispute.

2. Issue of Intrinsic Validity of the Holographic Will -

(a) When PASTOR, SR. died in 1966, he was survived by his wife, aside from his two legitimate children and one illegitimate son. There is therefore a need to liquidate the conjugal partnership and set apart the share of PASTOR, SR.'s wife in the conjugal partnership preparatory to the administration and liquidation of the estate of PASTOR, SR. which will include, among others, the determination of the extent of the statutory usufructuary right of his wife until her death. * When the disputed Probate order was issued on December 5, 1972, there had been no liquidation of the community properties of PASTOR, SR. and his wife.

(b) So, also, as of the same date, there had been no prior definitive determination of the assets of the estate of PASTOR, SR. There was an inventory of his properties presumably prepared by the special administrator, but it does not appear that it was ever the subject of a hearing or that it was judicially approved. The reconveyance or recovery of properties allegedly owned but not in the name of PASTOR, SR. was still being litigated in another court.

(c) There was no appropriate determination, much less payment, of the debts of the decedent and his estate. Indeed, it was only in the Probate Order of December 5, 1972 where the Probate Court ordered that-

... a notice be issued and published pursuant to the provisions of Rule 86 of the Rules of Court, requiring all persons having money claims against the decedent to file them in the office of the Branch Clerk of this Court."

(d) Nor had the estate tax been determined and paid, or at least provided for, as of December 5, 1972.

(e) The net assets of the estate not having been determined, the legitime of the forced heirs in concrete figures could not be ascertained.

(f) All the foregoing deficiencies considered, it was not possible to determine whether the legacy of QUEMADA - a fixed share in a specific property rather than an aliquot part of the entire net estate of the deceased - would produce an impairment of the legitime of the compulsory heirs.

(g) Finally, there actually was no determination of the intrinsic validity of the will in other respects. It was obviously for this reason that as late as March 5, 1980 - more than 7 years after the Probate Order was issued the Probate Court scheduled on March 25, 1980 a hearing on the intrinsic validity of the will.

3. Propriety of certiorari —

Private respondent challenges the propriety of certiorari as a means to assail the validity of the disputed Order of execution. He contends that the error, if any, is one of judgment, not jurisdiction, and properly correctible only by appeal, not certiorari.

Under the circumstances of the case at bar, the challenge must be rejected. Grave abuse of discretion amounting to lack of jurisdiction is much too evident in the actuations of the probate court to be overlooked or condoned.

(a) Without a final, authoritative adjudication of the issue as to what properties compose the estate of PASTOR, SR. in the face of conflicting claims made by heirs and a non-heir (MA. ELENA ACHAVAL DE PASTOR) involving properties not in the name of the decedent, and in the absence of a resolution on the intrinsic validity of the will here in question, there was no basis for the Probate Court to hold in its Probate Order of 1972, which it did not, that private respondent is entitled to the payment of the questioned legacy. Therefore, the Order of Execution of August 20, 1980 and the subsequent implementing orders for the payment of QUEMADA's legacy, in alleged implementation of the dispositive part of the

Page 127: Tax II Estate and Donor Cases

Probate Order of December 5, 1972, must fall for lack of basis.

(b) The ordered payment of legacy would be violative of the rule requiring prior liquidation of the estate of the deceased, i.e., the determination of the assets of the estate and payment of all debts and expenses, before apportionment and distribution of the residue among the heirs and legatees. (Bernardo vs. Court of Appeals, 7 SCRA 367.)

(c) Neither has the estate tax been paid on the estate of PASTOR, SR. Payment therefore of the legacy to QUEMADA would collide with the provision of the National Internal Revenue Code requiring payment of estate tax before delivery to any beneficiary of his distributive share of the estate (Section 107 [c])

(d) The assailed order of execution was unauthorized, having been issued purportedly under Rule 88, Section 6 of the Rules of Court which reads:

Sec. 6. Court to fix contributive shares where devisees, legatees, or heirs have been in possession. — Where devisees, legatees, or heirs have entered into possession of portions of the estate before the debts and expenses have been settled and paid and have become liable to contribute for the payment of such debts and expenses, the court having jurisdiction of the estate may, by order for that purpose, after hearing, settle the amount of their several liabilities, and order how much and in what manner each person shall contribute, and may issue execution as circumstances require.

The above provision clearly authorizes execution to enforce payment of debts of estate. A legacy is not a debt of the estate; indeed, legatees are among those against whom execution is authorized to be issued.

... there is merit in the petitioners' contention that the probate court generally cannot issue a writ of execution. It is not supposed to issue a writ of execution because its orders usually refer to the adjudication of claims against the estate which the executor or administrator may satisfy without the necessity of resorting to a writ of execution. The probate court, as such, does not render any judgment enforceable by execution.

The circumstances that the Rules of Court expressly specifies that the probate court may issue execution (a) to satisfy (debts of the estate out of) the contributive shares of devisees, legatees and heirs in possession of the decedent's assets (Sec. 6. Rule 88), (b) to enforce payment of the expenses of partition (Sec. 3, Rule 90), and (c) to satisfy the costs when a person is cited for examination in probate proceedings (Sec. 13, Rule 142) may mean, under the rule of inclusion unius est exclusion alterius, that those are the only instances when it can issue a writ of execution. (Vda. de Valera vs. Ofilada, 59 SCRA 96, 108.)

(d) It is within a court's competence to order the execution of a final judgment; but to order the execution of a final order (which is not even meant to be executed) by reading into it terms that are not there and in utter disregard of existing rules and law, is manifest grave abuse of discretion tantamount to lack of jurisdiction. Consequently, the rule that certiorari may not be invoked to defeat the right of a prevailing party to the execution of a valid and final judgment, is inapplicable. For when an order of execution is issued with grave abuse of discretion or is at variance with the judgment sought to be enforced (PVTA vs. Honorable Gonzales, 92 SCRA 172), certiorari will lie to abate the order of execution.

(e) Aside from the propriety of resorting to certiorari to assail an order of execution which varies the terms of the judgment sought to be executed or does not find support in the dispositive part of the latter, there are circumstances in the instant case which justify the remedy applied for.

Petitioner MA. ELENA ACHAVAL DE PASTOR, wife of PASTOR, JR., is the holder in her own right of three mining claims which are one of the objects of conflicting claims of ownership. She is not an heir of PASTOR, SR. and was not a party to the probate proceedings. Therefore, she could not appeal from the Order of execution issued by the Probate Court. On the other hand, after the issuance of the execution order, the urgency of the relief she and her co-petitioner husband seek in the petition for certiorari states against requiring her to go through the cumbersome procedure of asking for leave to

Page 128: Tax II Estate and Donor Cases

intervene in the probate proceedings to enable her, if leave is granted, to appeal from the challenged order of execution which has ordered the immediate transfer and/or garnishment of the royalties derived from mineral properties of which she is the duly registered owner and/or grantee together with her husband. She could not have intervened before the issuance of the assailed orders because she had no valid ground to intervene. The matter of ownership over the properties subject of the execution was then still being litigated in another court in a reconveyance suit filed by the special administrator of the estate of PASTOR, SR.

Likewise, at the time petitioner PASTOR, JR. Med the petition for certiorari with the Court of Appeals, appeal was not available to him since his motion for reconsideration of the execution order was still pending resolution by the Probate Court. But in the face of actual garnishment of their major source of income, petitioners could no longer wait for the resolution of their motion for reconsideration. They needed prompt relief from the injurious effects of the execution order. Under the circumstances, recourse to certiorari was the feasible remedy.

WHEREFORE, the decision of the Court of Appeals in CA G.R. No. SP-11373-R is reversed. The Order of execution issued by the probate Court dated August 20, 1980, as well as all the Orders issued subsequent thereto in alleged implementation of the Probate Order dated December 5, 1972, particularly the Orders dated November 11, 1980 and December 17, 1980, are hereby set aside; and this case is remanded to the appropriate Regional Trial Court for proper proceedings, subject to the judgment to be rendered in Civil Case No. 274-R.

SO ORDERED.

Teehankee (Chairman), Melencio-Herrera Vasquez and Relova JJ., concur.

Gutierrez, J., took no part.

G.R. No. 170632               July 10, 2007

EUGENIA D. POLIDO, Petitioner, vs.HON. COURT OF APPEALS and MARIANO P. GASAT, Respondents.

D E C I S I O N

CARPIO MORALES, J.:

After the death of her husband Jacinto Polido (Polido), Eugenia Duque Polido, petitioner, tried to withdraw the joint savings deposit they maintained at the Philippine National Bank, Camiling, Tarlac Branch, but failed because one Mariano Gasat (Gasat), herein respondent who claimed to be the couple’s adopted child, objected thereto.

Petitioner thus filed on January 21, 2004 a complaint before the Regional Trial Court of Tarlac, with Motion for the Issuance of a Writ of Preliminary Injunction, against Gasat.

In her complaint, petitioner prayed for the following reliefs:

1. An Order granting the issuance of [a] writ of preliminary injunction enjoining and restraining the

Page 129: Tax II Estate and Donor Cases

defendant and all persons acting under him from preventing the officers or employee[s] of the Philippine National Bank, Camiling, Tarlac Branch from releasing in favor of the plaintiff the money deposited with the said bank upon posting of a bond by the plaintiff in an amount to be fixed by the Court;

2. After trial, to declare the defendant not the adopted child of the plaintiff and her husband Jacinto Polido;

3. Directing the defendant to pay plaintiff attorney’s fees and litigation expenses in the amount of P100,000.00 and moral damages in the amount of P50,000.00.

Other reliefs which are just and equitable under the premises are likewise prayed for.1 (Underscoring supplied)

In his Answer with Compulsory Counterclaim,2 Gasat alleged that petitioner and her late husband had adopted him as their child, annexing as proof thereof a photocopy of an Order dated September 23, 1970 of the Municipal Trial Court (MTC) of Camiling in Civil Case No. 2497, "In the Matter of the Adoption of the Minors, Lea D. Tomas and Mariano Gasat, JACINTO POLIDO AND EUGENIA POLIDO, Petitioners,"3 and a copy of a Certification4 from the MTC Clerk of Court that a "[c]opy of the decree of adoption dated September 23, 1970 was furnished to the Office of the Local Civil Registrar" and said decree had become final and executory; and that petitioner cannot withdraw any amount from the bank account because she should follow legal procedures governing settlement of the estate of a deceased, unless a competent court issues an order allowing her to withdraw from said account.5

In his Opposition to the Issuance of Preliminary Injunction and Motion to Set the Affirmative Defenses for Preliminary Hearing,6 Gasat argued that:

x x x x

3. Even assuming but without admitting that the defendant’s adoption paper is ineffective, still he cannot be deprived of his inheritance from the Estate of Jacinto Polido because said deceased and the plaintiff are childless and all the properties subject of inheritance are exclusive properties of the late Jacinto Polido, the same being inherited from his late father, NARCISO POLIDO[,] who died in Hawaii, USA.

4. The Estate of Narciso Polido was inherited by his two children, namely, said JACINTO POLIDO and PETRA P. GASAT, also deceased and the latter was survived by her husband and SEVEN (7) children of which the defendant (MARIANO D. POLIDO) is one . . .;

5. Thus, by virtue of the provision of Art. 1001 of the Civil Code of the Philippines, which reads as follows:

"ART. 1001. Should brothers and sisters or their children survive with the widow or widower, the latter shall be entitled to one-half of the inheritance and the brothers and sisters or their children to the other half."

[T]he heirs of the late Jacinto Polido are his WIFE (plaintiff) [who is entitled to] one-half (1/2) and Petra P. Gasat’s SEVEN (7) CHILDREN which would include the defendant[, who are entitled to] one-half (1/2).

HENCE, THERE IS NO WAY WHATSOEVER TO JUSTIFY THE ISSUANCE OF PRELIMINARY INJUNCTION AGAINST THE DEFENDANT EVEN IF HIS ADOPTION WOULD BE NULLIFIED OR OF

Page 130: Tax II Estate and Donor Cases

NO EFFECT WHATSOEVER.7 (Emphasis in the original; underscoring supplied)

Gasat subsequently filed an Omnibus Motion8 withdrawing 1) the allegation he had made in various pleadings that he is an adopted son of the couple and 2) his Motion to Set the Affirmative Defenses for Preliminary Hearing. And he moved to convert the case to an action for partition, at his instance, of the estate of his grandfather Narciso Polido, 9 father of petitioner’s husband and Gasat’s mother, and to require petitioner to file income tax returns and pay the estate tax due.

To Gasat’s prayer to convert the action to one for partition and to require her to file Estate Tax Returns, petitioner filed an Opposition.10 And she moved for Judgment on the Pleadings.11

To justify her motion for judgment on the pleadings, petitioner argued that Gasat, in withdrawing his claim and allegation that he is an adopted child, "practically admitted [her] material allegations [in the Complaint] that [he] is not an adopted child."12

By Order13 dated December 7, 2004, the trial court denied Gasat’s motion to convert the case to an action for partition and granted petitioner’s motion for judgment on the pleadings in this wise:

On November 30, 2004, the plaintiff filed a Motion for Judgment on the ground that by withdrawing all his allegations that he is [an] adopted child of the plaintiff, defendant practically admitted all the material allegations in the complaint and prayed that judgment be rendered as the complaint may warrant.

This Court resolves to grant the motion for judgment on the ground that the defense that he is an adopted child of the plaintiff is withdrawn by the defendant himself. By withdrawing his defense, he is deemed to have admitted the main allegation of the plaintiff that he is not an adopted child. On the motion of the defendant that the instant action be converted into a partition and that the plaintiff be ordered to file her real estate tax return, the same is denied for lack of merit.14 (Underscoring supplied)

Accordingly, the trial court disposed as follows:

WHEREFORE, judgment is hereby rendered:

1. Declaring the defendant not the adopted child of the plaintiff,

2. Ordering the Manager of the Philippine National Bank, Camiling Branch or any other branch to release to plaintiff upon her request the money she deposited or her deceased husband Jacinto Polido;

3. Directing the defendant to pay the plaintiff moral damages in the amount of P25,000.00 and attorney’s fee[s] in the amount of P25,000.00.

SO ORDERED.15 (Underscoring supplied)

Gasat filed a Notice of Appeal.16 On May 26, 2005, before the Court of Appeals, he filed an Ex-Parte Motion to Admit Payment of Docket Fee, 17 explaining that being jobless, it took some time for him to raise the docket fee. He added that he had to borrow at an exorbitant interest rate. Finally, he explained that when he went to the trial court to pay the docket fee, he was advised to pay the same at the Court of Appeals, the records having already

Page 131: Tax II Estate and Donor Cases

been forwarded to it.

The Court of Appeals denied his motion and dismissed his appeal. 18 On Motion for Reconsideration, however, the Court of Appeals, by Resolution dated July 19, 2005, admitted Gasat’s docket fee.19 Petitioner filed a Motion for Reconsideration, which the Court of Appeals denied in this wise: 20

It is settled that "delay in the payment of the docket fees confers a discretionary, and not mandatory, power to dismiss the proposed appeal." While the payment of the prescribed docket fee is a jurisdictional requirement, its non-payment at the time of filing does not automatically cause the dismissal of the case, as long as the fee is paid within the applicable prescriptive or reglementary period, moreso, when the party involved demonstrates a willingness to abide by the rules prescribing such payment. On this score is the case of Spouses Gregorio Go and Juan Tan Go v. Johnson Y. Tong, et. al., where the Supreme Court ruled that:

While the cause of action of the private respondent was supposed to prescribe in four (4) years, he was allowed to pay; and he in fact paid the docket fee in a year’s time. We do not see how this period can be deemed unreasonable. Moreover, on his part there is no showing of any pattern or intent to defraud the government of the required docket fee.

In the instant case, the period between the filing of the notice of appeal on February 28, 2005 and the payment of docket fee on May 26, 2005 is deemed reasonable. Moreover, justice will be better served with the admission of such belated payment.21 (Underscoring supplied)

Hence, the present Petition for Certiorari and Prohibition with Urgent Motion for Injunction and Temporary Restraining Order,22 petitioner faulting the Court of Appeals for committing grave abuse of discretion in relaxing the rule on the payment of docket fees on the ground of substantial justice.23

The petition fails.

Indeed, jurisprudence allows the relaxation of the Rule on non-payment of appellate docket fees.

Notwithstanding the mandatory nature of the requirement of payment of appellate docket fees, we also recognize that its strict application is qualified by the following: first, failure to pay those fees within the reglementary period allows only discretionary, not automatic, dismissal; second, such power should be used by the court in conjunction with its exercise of sound discretion in accordance with the tenets of justice and fair play, as well as with a great deal of circumspection in consideration of all attendant circumstances.24

The relaxation by the appellate court of the rule on non-payment of the appellate docket fee appears justified as a perusal of the records of the case shows persuasive and weighty reasons to give due course to the appeal.25

Instead of remanding the case to the appellate court, however, this Court, in the interest of speedy dispensation of justice,26 especially given that the main issue is a question of law, now passes on the merits of the appeal of Gasat.

Section 1 of Rule 34 of the Rules of Court provides:

SECTION 1. Judgment on the Pleadings. – Where an answer fails to tender an issue, or otherwise admits the material allegations of the adverse party’s pleading, the court may, on motion of that party, direct judgment on

Page 132: Tax II Estate and Donor Cases

such pleading. However, in actions for declaration of nullity or annulment of marriage or for legal separation, the material facts alleged in the complaint shall always be proved. (Emphasis and underscoring supplied)

Passing on this rule, the Court declared:

x x x The answer would fail to tender an issue x x x if it does not comply with the requirements for a specific denial set out in Section 10 (or Section 8) of Rule 8; and it would admit the material allegations of the adverse party’s pleadings not only where it expressly confesses the truthfulness thereof but also if it omits to deal with them at all.

Now, if an answer does in fact specifically deny the material averments of the complaint in the manner indicated by said Section 10 of Rule 8, and/or asserts affirmative defenses (allegations of new matter which, while admitting the material allegations of the complaint expressly or impliedly, would nevertheless bar recovery by the plaintiff) x x x, a judgment on the pleadings would naturally not be proper.27

In the case at bar, the trial court granted petitioner’s motion for judgment on the pleadings on petitioner’s argument that in withdrawing Gasat’s allegation of her having adopted him, he "practically admitted her material allegations [in her Complaint] that [he] is not an adopted child."

Gasat’s Answer with Compulsory Counterclaim raised other issues, however, which are independent of his claim of adoptive filiation and which would defeat petitioner’s main cause of action – for the court to enjoin Gasat "and all persons acting under him from preventing the officers or employees of the [PNB] from releasing" the deposit to her.

11. . . Further, defendant has all the rights to prohibit the plaintiff from personally withdrawing [from] the said bank account because, it is mandated by law that after the death of the owner of the said account, any withdrawal is prohibited except by order of the Court or upon presentation of an Extrajudicial Settlement executed by the legal heirs and after compliance with all the requirements of the law. Likewise the bank is prohibited to allow any withdrawal without submitting to it said requirements.

x x x x

13. With respect to the allegations of said paragraph 14, to wit –

Unless an injunction be issued against the defendant restraining him from claiming in the bank account, the plaintiff would suffer irreparable damage. The plaintiff is willing to post a bond in an amount to be fixed by the Honorable Court.

this allegation is UNFOUNDED AND BASELESS and the court cannot use [it] as a ground for the issuance of any restraining order. Even assuming that the court will issue an Order restraining defendant from claiming the bank account, the plaintiff still cannot withdraw any amount thereof, because it is a part of the ESTATE of Jacinto Polido, and as provided for by laws before the bank allows any withdrawal, the plaintiff has to follow certain procedures required by other laws governing estate settlement, that is, - (a) Payment of Estate Tax, if any; (b) BIR Tax Clearance; (c) Present a duly published Extrajudicial Partition executed by the heirs adjudicating said amount to such heir, unless a competent Court issues an Order allowing the plaintiff to withdraw [from] said account. 28 (Underscoring supplied)

It bears noting that petitioner and her deceased husband Polido were childless; hence, Gasat, who is a son of

Page 133: Tax II Estate and Donor Cases

Polido’s sister Petra P. Gasat, could inherit from Polido.

Parenthetically, Section 97 of the National Internal Revenue Code states:

x x x x

If a bank has knowledge of the death of a person, who maintained a bank deposit account alone, or jointly with another, it shall not allow any withdrawal from the said deposit account unless the Commissioner had certified that the taxes imposed thereon by this Title have been paid; Provided, however, That the administrator of the estate or any one (1) of the heirs of the decedent may, upon authorization by the Commissioner, withdraw an amount not exceeding Twenty thousand pesos (P20,000) without the said certification. For this purpose, all withdrawal slips shall contain a statement to the effect that all of the joint depositors are still living at the time of withdrawal by any one of the joint depositors and such statement shall be under oath by the said depositors.

There being no ground to merit petitioner’s Motion for Judgment on the Pleadings, the trial court erred in granting the same.lawphil.net

WHEREFORE, the assailed petition is DENIED. The Court of Appeals Resolution admitting respondent’s payment of docket fee is upheld.

The Order of the Regional Trial Court of Camiling, Tarlac, Branch 68 dated December 7, 2004 granting petitioner’s Motion for Judgment on the Pleadings is REVERSED and SET ASIDE.

Let the case be REMANDED to the trial court which is directed to continue with dispatch its proceedings on and/or resolve the case in light of the foregoing discussions.

Costs against petitioner.

SO ORDERED.

CONCHITA CARPIO MORALESAssociate Justice

WE CONCUR:

(ON OFFICIAL LEAVE)LEONARDO A. QUISUMBING*

Associate JusticeChairperson

ANTONIO T. CARPIO**

Associate JusticeActing Chairperson

DANTE O. TINGAAssociate Justice

PRESBITERO J. VELASCO, JR.Associate Justice

A T T E S T A T I O N

Page 134: Tax II Estate and Donor Cases

I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

ANTONIO T. CARPIOAssociate JusticeActing Chairperson

C E R T I F I C A T I O N

Pursuant to Section 13, Article VIII of the Constitution and the Division Acting Chairperson’s Attestation, I certify that the conclusions in the above decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

REYNATO S. PUNOChief Justice

G.R. No. 104171 February 24, 1999

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.B.F. GOODRICH PHILS., INC. (now SIME DARBY INTERNATIONAL TIRE CO., INC.) and THE COURT OF APPEALS, respondents.

 

PANGANIBAN, J.:

Notwithstanding the expiration of the five-year prescriptive period, may the Bureau of Internal Revenue (BIR) still assess a taxpayer even after the latter has already paid the tax due, on the ground that the previous assessment was insufficient or based on a "false" return?

The Case

This is the main question raised before us in this Petition for Review on Certiorari assailing the Decision 1 dated February

14, 1992, promulgated by the Court of Appeals 2 in CA-GR SP No. 25100. The assailed Decision reversed the Court of

Tax Appeals (CTA) 3 which upheld the BIR commissioner's assessments made beyond the five-year statute of limitations.

The Facts

The facts undisputed. 4 Private Respondent BF Goodrich Phils., Inc. (now Sime Darby International Tire Co, Inc.), was an American-owned and controlled corporation previous to July 3, 1974. As a condition for approving the manufacture by private respondent of tires and other rubber products, the Central Bank of the Philippines required that it should develop a rubber plantation. In compliance with this requirement, private respondent purchased from the Philippine government in 1961, under the Public Land Act and the Parity Amendment to the 1935 Constitution, certain parcels of land located in

Page 135: Tax II Estate and Donor Cases

Tumajubong, Basilan, and there developed a rubber plantation.

More than a decade later, on August 2, 1973, the justice secretary rendered an opinion stating that, upon the expiration of the Parity Amendment on July 3, 1974, the ownership rights of Americans over public agricultural lands, including the right to dispose or sell their real estate, would be lost. On the basis of this Opinion, private respondent sold to Siltown Realty Philippines, Inc. on January 21, 1974, its Basilan landholding for P500,000 payable in installments. In accord with the terms of the sale, Siltown Realty Philippines, Inc. leased the said parcels of land to private respondent for a period of 25 years, with an extension of another 25 years at the latter's option.

Based on the BIR's Letter of Authority No. 10115 dated April 14, 1975, the books and accounts of private respondent were examined for the purpose of determining its tax liability for taxable year 1974. The examination resulted in the April 23, 1975 assessment of private respondent for deficiency income tax in the amount of P6,005.35, which it duly paid.

Subsequently, the BIR also issued Letters of Authority Nos. 074420 RR and 074421 RR and Memorandum Authority Reference No. 749157 for the purpose of examining Siltown's business, income and tax liabilities. On the basis of this examination, the BIR commissioner issued against private respondent on October 10, 1980, an assessment for deficiency in donor's tax in the amount of P1,020,850, in relation to the previously mentioned sale of its Basilan landholdings to Siltown. Apparently, the BIR deemed the consideration for the sale insufficient, and the difference between the fair market value and the actual purchase price a taxable donation.

In a letter dated November 24, 1980, private respondent contested this assessment. On April 9, 1981, it received another assessment dated March 16, 1981, which increased to P 1,092,949 the amount demanded for the alleged deficiency donor's tax, surcharge, interest and compromise penalty.

Private respondent appealed the correctness and the legality of these last two assessments to the CTA. After trial in due course, the CTA rendered its Decision dated March 29, 1991, the dispositive portion of which reads as follows:

WHEREFORE, the decision of the Commissioner of Internal Revenue assessing petitioner deficiency gift tax is MODIFIED land petitioner is ordered to pay the amount of P1,311,179.01 plus 10% surcharge and 20% annual interest from March 16, 1981 until fully paid provided that the maximum amount that may be collected as interest on delinquency shall in no case exceed an amount corresponding to a period of three years pursuant to Section 130(b)(l) and (c) of the 1977 Tax Code, as amended by P.D. No. 1705, which took effect on August 1, 1980.

SO ORDERED. 5

Undaunted, private respondent elevated the matter to the Court of Appeals, which reversed the CTA, as follows:

What is involved here is not a first assessment; nor is it one within the 5-year period stated in Section 331 above. Since what is involved in this case is a multiple assessment beyond the five-year period, the assessment must be based on the grounds provided in Section 337, and not on Section 15 of the 1974 Tax Code. Section 337 utilizes the very specific terms "fraud, irregularity, and mistake". "Falsity does not appear to be included in this enumeration. Falsity suffices for an assessment, which is a first assessment made within the five-year period. When it is a subsequent assessment made beyond the five-year period, then, it may be validly justified only by "fraud, irregularity and mistake" on the part of the

taxpayer. 6

Hence, this Petition for Review under Rule 45 of the Rules of Court. 7

The Issues

Page 136: Tax II Estate and Donor Cases

Before us, petitioner raises the following issues:

I

Whether or not petitioner's right to assess herein deficiency donor's tax has indeed prescribed as ruled by public respondent Court of Appeals

II

Whether or not the herein deficiency donor's tax assessment for 1974 is valid and in accordance with law

Prescription is the crucial issue in the resolution of this case.

The Court's Ruling

The petition has no merit.

Main Issue: Prescription

The petitioner contends that the Court of Appeals erred in reversing the CTA on the issue of prescription, because its ruling was based on factual findings that should have been left undisturbed on appeal, in the absence of any showing that it had been tainted with gross error or grave abuse of

discretion. 8 The Court is not persuaded.

True, the factual findings of the CTA are generally not disturbed on appeal when supported by substantial evidence and in the absence of gross error or grave abuse of discretion. However, the CTA's application of the law to the facts of this controversy is an altogether different matter, for it involves a legal question. There is a question of law when the issue is the application of the law to a given set of facts. On the other hand, a question of fact involves the truth or falsehood of

alleged facts. 9 In the present case, the Court of Appeals ruled not on the truth or falsity of the facts found by the CTA, but on the latter's application of the law on prescription.

Sec. 331 of the National Internal Revenue Code provides:

Sec. 331. Period of limitation upon assessment and collection. — Except as provided in the succeeding section, internal-revenue taxes shall be assessed within five years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after expiration of such period. For the purposes of this section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day: Provided, That this limitation shall not apply to cases already investigated prior to the approval of this Code.

Applying this provision of law to the facts at hand, it is clear that the October 16, 1980 and the March 1981 assessments were issued by the BIR beyond the five-year statute of limitations. The Court has thoroughly studied the records of this case and found no basis to disregard the five-year period of prescription. As succinctly pronounced by the Court of Appeals:

The subsequent assessment made by the respondent Commissioner on October 40, 1980, modified by that of March 16, 1981, violates the law. Involved in this petition is the income of the petitioner for the year 1974, the returns for which were required to be filed on or before April 15 of the succeeding year. The returns for the year 1974 were duly filed by the petitioner, and assessment of taxes due for such year — including that on the transfer of properties on June 21, 1974 — was made on April 13, 1975 and acknowledged by Letter of Confirmation No. 101155 terminating the examination on this subject. The

Page 137: Tax II Estate and Donor Cases

subsequent assessment of October 10, 1980 modified, by that of March 16, 1981, was made beyond the

period expressly set in Section 331 of the National Internal Revenue Code . . . . 10

Petitioner relies on the CTA ruling, the salient portion of which reads:

Falsity is what we have here, and for that matter, we hasten to add that the second assessment (March 16, 1981) of the Commissioner was well-advised having been made in contemplation of his power under Section 15 of the 1974 Code (now Section 16, of NIRC) to assess the proper tax on the best evidence obtainable "when there is reason to believe that a report of a taxpayer is false, incomplete or erroneous. More, when there is falsity with intent to evade tax as in this case, the ordinary period of limitation upon assessment and collection does not apply so that contrary to the averment of petitioner, the right to assess respondent has not prescribed.

What is the considered falsity? The transfer through sale of the parcels of land in Tumajubong, Lamitan, Basilan in favor of Siltown Realty for the sum of P500,000.00 only whereas said lands had been sworn to under Presidential Decree No. 76 (Dec. 6, 1972) as having a value of P2,683,467 (P2,475,467 + P207,700)

(see Declaration of Real Property form, p. 28, and p. 15, no. 5, BIR Record). 11

For the purpose of safeguarding taxpayers from any unreasonable examination, investigation or assessment, our tax law provides a statute of limitations in the collection of taxes. Thus, the law on prescription, being a remedial measure, should

be liberally construed in order to afford such protection. 12 As a corollary, the exceptions to the law on prescription should perforce be strictly construed.

Sec. 15 of the NIRC, on the other hand, provides that "[w]hen a report required by law as a basis for the assessment of any national internal revenue tax shall not be forthcoming within the time fixed by law or regulation, or when there is reason to believe that any such report is false, incomplete, or erroneous, the Commissioner of Internal Revenue shall assess the proper tax on the best evidence obtainable." Clearly, Section 15 does not provide an exception to the statute of limitations on the issuance of an assessment, by allowing the initial assessment to be made on the basis of the best evidence available. Having made its initial assessment in the manner prescribed, the commissioner could not have been authorized to issue, beyond the five-year prescriptive period, the second and the third assessments under consideration before us.

Nor is petitioner's claim of falsity sufficient to take the questioned assessments out of the ambit of the statute of limitations. The relevant part of then Section 332 of the NIRC, which enumerates the exceptions to the period of prescription, provides:

Sec. 332. Exceptions as to period of limitation of assessment and collection of taxes. — (a) In the case of a false or fraudulent return with intent to evade a tax or of a failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within ten years after the discovery of the falsity, fraud, or omission: . . . .

Petitioner insists that private respondent committed "falsity" when it sold the property for a price lesser than its declared fair market value. This fact alone did not constitute a false return which contains wrong information due to mistake,

carelessness or ignorance. 13 It is possible that real property may be sold for less than adequate consideration for a bona fide business purpose; in such event, the sale remains an "arm's length" transaction. In the present case, the private respondent was compelled to sell the property even at a price less than its market value, because it would have lost all ownership rights over it upon the expiration of the parity amendment. In other words, private respondent was attempting to minimize its losses. At the same time, it was able to lease the property for 25 years, renewable for another 25. This can be regarded as another consideration on the price.

Furthermore, the fact that private respondent sold its real property for a price less than its declared fair market value did not by itself justify a finding of false return. Indeed, private respondent declared the sale in its 1974 return submitted to the

Page 138: Tax II Estate and Donor Cases

BIR. 14 Within the five-year prescriptive period, the BIR could have issued the questioned assessment, because the declared fair market value of said property was of public record. This it did not do, however, during all those five years. Moreover, the BIR failed to prove that respondent's 1974 return had been filed fraudulently. Equally significant was its failure to prove respondent's intent to evade the payment of the correct amount of tax.

Ineludibly, the BIR failed to show that private respondent's 1974 return was filed fraudulently with intent to evade the

payment of the correct amount of tax. 15 Moreover, even though a donor's tax, which is defined as "a tax on the privilege

of transmitting one's property or property rights to another or others without adequate and full valuable consideration," 16

is different from capital gains tax, a tax on the gain from the sale of the taxpayer's property forming part of capital assets, 17 the tax return filed by private respondent to report its income for the year 1974 was sufficient compliance with the legal requirement to file a return. In other words, the fact that the sale transaction may have partly resulted in a donation does not change the fact that private respondent already reported its income for 1974 by filing an income tax return.

Since the BIR failed to demonstrate clearly that private respondent had filed a fraudulent return with the intent to evade tax, or that it had failed to file a return at all, the period for assessments has obviously prescribed. Such instances of negligence or oversight on the part of the BIR cannot prejudice taxpayers, considering that the prescriptive period was precisely intended to give them peace of mind.

Based on the foregoing, a discussion of the validity and legality of the assailed assessments has become moot and unnecessary.

WHEREFORE, the Petition for Review is DENIED and the assailed Decision of the Court of Appeals is AFFIRMED. No costs.

SO ORDERED.

Romero, Purisima and Gonzaga-Reyes, JJ., concur.

Vitug, J., on official leave.