Republic of the Philippines

SUPREME COURT
Manila

EN BANC

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.

xxx xxx xxx

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

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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 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.

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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, of the Administrative Code, imposes the tax upon "every transmission by virtue of inheritance,
devise, bequest, giftmortis 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:

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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 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.

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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, 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

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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 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

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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 (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 thecestui 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).

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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.

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

TAX 2 8
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.

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.

TAX 2 9
LORENZO vs. POSADAS JR.

G.R. No. L-43082

June 18, 1937

FACTS:

Thomas Hanley died, leaving a will and a considerable amount of real and personal properties.
Proceedings for the probate of his will and the settlement and distribution of his estate were begun in the
CFI of Zamboanga. The will was admitted to probate.

The CFI considered it proper for the best interests of the estate to appoint a trustee to administer the real
properties which, under the will, were to pass to nephew Matthew ten years after the two executors
named in the will was appointed trustee. Moore acted as trustee until he resigned and the plaintiff
Lorenzo herein was appointed in his stead.

During the incumbency of the plaintiff as trustee, the defendant Collector of Internal Revenue (Posadas)
assessed against the estate an inheritance tax, together with the penalties for deliquency in payment.
Lorenzo paid said amount under protest, notifying Posadas at the same time that unless the amount was
promptly refunded suit would be brought for its recovery. Posadas overruled Lorenzo’s protest and
refused to refund the said amount. Plaintiff went to court. The CFI dismissed Lorenzo’s complaint and
Posadas’ counterclaim. Both parties appealed to this court.

ISSUE:

(e) Has there been delinquency in the payment of the inheritance tax?

HELD:

The judgment of the lower court is accordingly modified, with costs against the plaintiff in both
instances.

YES.

TAX 2 10
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 beneficiary 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. A trustee is but an instrument or agent for the cestui que trust.

The appointment of 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. 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. ” 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.”

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 appoint mening a trustee to carry into effect the provisions of the
will

As the existence of the trust was already proven, 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. On that
date trust estate vested in him. The interest due should be computed from that date.

NOTES: Other issues:

(a) When does the inheritance tax accrue and when must it be satisfied?

The accrual of the inheritance tax is distinct from the obligation to pay the same.

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.”

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. ” Thomas Hanley
having died on May 27, 1922, the inheritance tax accrued as of the date.

TAX 2 11
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. xx

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.

The instant case does[not] 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 Moore as trustee.

(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?

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 value 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

(c) In determining the net value of the estate subject to tax, is it proper to deduct the compensation due
to trustees?

A trustee, no doubt, is entitled to receive a fair compensation for his services. 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.

TAX 2 12
(d) What law governs the case at bar? Should the provisions of Act No. 3606 favorable to the tax-payer
be given retroactive effect?

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, . . . .” Act No. 3606 itself contains no provisions indicating legislative intent to give it
retroactive effect. No such effect can be given the statute by this court.

TAX 2 13
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-13250 October 29, 1971

THE COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
ANTONIO CAMPOS RUEDA, respondent..

Assistant Solicitor General Jose P. Alejandro and Special Attorney Jose G. Azurin, (O.S.G.) for
petitioner.

Ramirez and Ortigas for respondent.

FERNANDO, J.:

The basic issue posed by petitioner Collector of Internal Revenue in this appeal from a decision of the
Court of Tax Appeals as to whether or not the requisites of statehood, or at least so much thereof as may
be necessary for the acquisition of an international personality, must be satisfied for a "foreign country"
to fall within the exemption of Section 122 of the National Internal Revenue Code 1 is now ripe for
adjudication. The Court of Tax Appeals answered the question in the negative, and thus reversed the
action taken by petitioner Collector, who would hold respondent Antonio Campos Rueda, as
administrator of the estate of the late Estrella Soriano Vda. de Cerdeira, liable for the sum of
P161,874.95 as deficiency estate and inheritance taxes for the transfer of intangible personal properties
in the Philippines, the deceased, a Spanish national having been a resident of Tangier, Morocco from
1931 up to the time of her death in 1955. In an earlier resolution promulgated May 30, 1962, this Court
on the assumption that the need for resolving the principal question would be obviated, referred the
matter back to the Court of Tax Appeals to determine whether the alleged law of Tangier did grant the
reciprocal tax exemption required by the aforesaid Section 122. Then came an order from the Court of
Tax Appeals submitting copies of legislation of Tangier that would manifest that the element of
reciprocity was not lacking. It was not until July 29, 1969 that the case was deemed submitted for
decision. When the petition for review was filed on January 2, 1958, the basic issue raised was
impressed with an element of novelty. Four days thereafter, however, on January 6, 1958, it was held by
this Court that the aforesaid provision does not require that the "foreign country" possess an
international personality to come within its terms. 2 Accordingly, we have to affirm.

The decision of the Court of Tax Appeals, now under review, sets forth the background facts as follows:
"This is an appeal interposed by petitioner Antonio Campos Rueda as administrator of the estate of the
deceased Doña Maria de la Estrella Soriano Vda. de Cerdeira, from the decision of the respondent
TAX 2 14
Collector of Internal Revenue, assessing against and demanding from the former the sum P161,874.95
as deficiency estate and inheritance taxes, including interest and penalties, on the transfer of intangible
personal properties situated in the Philippines and belonging to said Maria de la Estrella Soriano Vda. de
Cerdeira. Maria de la Estrella Soriano Vda. de Cerdeira (Maria Cerdeira for short) is a Spanish national,
by reason of her marriage to a Spanish citizen and was a resident of Tangier, Morocco from 1931 up to
her death on January 2, 1955. At the time of her demise she left, among others, intangible personal
properties in the Philippines." 3 Then came this portion: "On September 29, 1955, petitioner filed a
provisional estate and inheritance tax return on all the properties of the late Maria Cerdeira. On the same
date, respondent, pending investigation, issued an assessment for state and inheritance taxes in the
respective amounts of P111,592.48 and P157,791.48, or a total of P369,383.96 which tax liabilities were
paid by petitioner ... . On November 17, 1955, an amended return was filed ... wherein intangible
personal properties with the value of P396,308.90 were claimed as exempted from taxes. On November
23, 1955, respondent, pending investigation, issued another assessment for estate and inheritance taxes
in the amounts of P202,262.40 and P267,402.84, respectively, or a total of P469,665.24 ... . In a letter
dated January 11, 1956, respondent denied the request for exemption on the ground that the law of
Tangier is not reciprocal to Section 122 of the National Internal Revenue Code. Hence, respondent
demanded the payment of the sums of P239,439.49 representing deficiency estate and inheritance taxes
including ad valorem penalties, surcharges, interests and compromise penalties ... . In a letter dated
February 8, 1956, and received by respondent on the following day, petitioner requested for the
reconsideration of the decision denying the claim for tax exemption of the intangible personal properties
and the imposition of the 25% and 5% ad valorem penalties ... . However, respondent denied request, in
his letter dated May 5, 1956 ... and received by petitioner on May 21, 1956. Respondent premised the
denial on the grounds that there was no reciprocity [with Tangier, which was moreover] a mere
principality, not a foreign country. Consequently, respondent demanded the payment of the sums of
P73,851.21 and P88,023.74 respectively, or a total of P161,874.95 as deficiency estate and inheritance
taxes including surcharges, interests and compromise penalties." 4

The matter was then elevated to the Court of Tax Appeals. As there was no dispute between the parties
regarding the values of the properties and the mathematical correctness of the deficiency assessments,
the principal question as noted dealt with the reciprocity aspect as well as the insisting by the Collector
of Internal Revenue that Tangier was not a foreign country within the meaning of Section 122. In ruling
against the contention of the Collector of Internal Revenue, the appealed decision states: "In fine, we
believe, and so hold, that the expression "foreign country", used in the last proviso of Section 122 of the
National Internal Revenue Code, refers to a government of that foreign power which, although not an
international person in the sense of international law, does not impose transfer or death upon intangible
person properties of our citizens not residing therein, or whose law allows a similar exemption from
such taxes. It is, therefore, not necessary that Tangier should have been recognized by our Government
order to entitle the petitioner to the exemption benefits of the proviso of Section 122 of our Tax. Code." 5

Hence appeal to this court by petitioner. The respective briefs of the parties duly submitted, but as above
indicated, instead of ruling definitely on the question, this Court, on May 30, 1962, resolve to inquire
further into the question of reciprocity and sent back the case to the Court of Tax Appeals for the motion
of evidence thereon. The dispositive portion of such resolution reads as follows: "While section 122 of
the Philippine Tax Code aforequoted speaks of 'intangible personal property' in both subdivisions (a) and
(b); the alleged laws of Tangier refer to 'bienes muebles situados en Tanger', 'bienes muebles radicantes
en Tanger', 'movables' and 'movable property'. In order that this Court may be able to determine whether
the alleged laws of Tangier grant the reciprocal tax exemptions required by Section 122 of the Tax Code,
and without, for the time being, going into the merits of the issues raised by the petitioner-appellant, the
case is [remanded] to the Court of Tax Appeals for the reception of evidence or proof on whether or not
TAX 2 15
the words `bienes muebles', 'movables' and 'movable properties as used in the Tangier laws, include or
embrace 'intangible person property', as used in the Tax Code." 6 In line with the above resolution, the
Court of Tax Appeals admitted evidence submitted by the administrator petitioner Antonio Campos
Rueda, consisting of exhibits of laws of Tangier to the effect that "the transfers by reason of death of
movable properties, corporeal or incorporeal, including furniture and personal effects as well as of
securities, bonds, shares, ..., were not subject, on that date and in said zone, to the payment of any death
tax, whatever might have been the nationality of the deceased or his heirs and legatees." It was further
noted in an order of such Court referring the matter back to us that such were duly admitted in evidence
during the hearing of the case on September 9, 1963. Respondent presented no evidence." 7

The controlling legal provision as noted is a proviso in Section 122 of the National Internal Revenue
Code. It reads thus: "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 tax or death tax of any character in respect of intangible person
property 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." 8 The only obstacle therefore to a definitive ruling is
whether or not as vigorously insisted upon by petitioner the acquisition of internal personality is a
condition sine qua non to Tangier being considered a "foreign country". Deference to the De Lara ruling,
as was made clear in the opening paragraph of this opinion, calls for an affirmance of the decision of the
Court of Tax Appeals.

It does not admit of doubt that if a foreign country is to be identified with a state, it is required in line
with Pound's formulation that it be a politically organized sovereign community independent of outside
control bound by penalties of nationhood, legally supreme within its territory, acting through a
government functioning under a regime of
law. 9 It is thus a sovereign person with the people composing it viewed as an organized corporate
society under a government with the legal competence to exact obedience to its commands. 10 It has been
referred to as a body-politic organized by common consent for mutual defense and mutual safety and to
promote the general welfare. 11 Correctly has it been described by Esmein as "the juridical
personification of the nation." 12 This is to view it in the light of its historical development. The stress is
on its being a nation, its people occupying a definite territory, politically organized, exercising by means
of its government its sovereign will over the individuals within it and maintaining its separate
international personality. Laski could speak of it then as a territorial society divided into government and
subjects, claiming within its allotted area a supremacy over all other institutions. 13 McIver similarly
would point to the power entrusted to its government to maintain within its territory the conditions of a
legal order and to enter into international relations. 14 With the latter requisite satisfied, international law
do not exact independence as a condition of statehood. So Hyde did opine. 15

Even on the assumption then that Tangier is bereft of international personality, petitioner has not
successfully made out a case. It bears repeating that four days after the filing of this petition on January
6, 1958 in Collector of Internal Revenue v. De Lara, 16 it was specifically held by us: "Considering the
State of California as a foreign country in relation to section 122 of our Tax Code we believe and hold,
as did the Tax Court, that the Ancilliary Administrator is entitled the exemption from the inheritance tax
on the intangible personal property found in the Philippines." 17 There can be no doubt that California as
a state in the American Union was in the alleged requisite of international personality. Nonetheless, it
was held to be a foreign country within the meaning of Section 122 of the National Internal Revenue
Code. 18
TAX 2 16
What is undeniable is that even prior to the De Lara ruling, this Court did commit itself to the doctrine
that even a tiny principality, that of Liechtenstein, hardly an international personality in the sense, did
fall under this exempt category. So it appears in an opinion of the Court by the then Acting Chief
Justicem Bengson who thereafter assumed that position in a permanent capacity, in Kiene v. Collector of
Internal Revenue. 19 As was therein noted: 'The Board found from the documents submitted to it —
proof of the laws of Liechtenstein — that said country does not impose estate, inheritance and gift taxes
on intangible property of Filipino citizens not residing in that country. Wherefore, the Board declared
that pursuant to the exemption above established, no estate or inheritance taxes were collectible, Ludwig
Kiene being a resident of Liechtestein when he passed away." 20 Then came this definitive ruling: "The
Collector — hereafter named the respondent — cites decisions of the United States Supreme Court and
of this Court, holding that intangible personal property in the Philippines belonging to a non-resident
foreigner, who died outside of this country is subject to the estate tax, in disregard of the principle
'mobilia sequuntur personam'. Such property is admittedly taxable here. Without the proviso above
quoted, the shares of stock owned here by the Ludwig Kiene would be concededly subject to estate and
inheritance taxes. Nevertheless our Congress chose to make an exemption where conditions are such
that demand reciprocity — as in this case. And the exemption must be honored." 21

WHEREFORE, the decision of the respondent Court of Tax Appeals of October 30, 1957 is affirmed.
Without pronouncement as to costs.

Concepcion, C.J., Makalintal, Zaldivar, Castro, Villamor and Makasiar, JJ., concur.

Reyes, J.B.L., J., concurs in the result.

Teehankee and Barredo, JJ., took no part.

THE COLLECTOR OF INTERNAL REVENUE v. ANTONIO CAMPOS RUEDA. G.R. No. L-

13250. October 29, 1971

TAX 2 17
FACTS:

Antonio Campos Rueda is the administrator of the estate of the deceased Maria Cerdeira. Cerdeira is a
Spanish national, by reason of her marriage to a Spanish citizen and was a resident of Tangier, Morocco
up to her death. At the time of her demise she left, among others, intangible personal properties in the
Philippines. The CIR then issued an assessment for state and inheritance taxes of P369,383.96. Rueda
filed an amended return stating that intangible personal properties worth P396,308.90 should be
exempted from taxes. The CIR denied the request on the ground that the law of Tangier is not reciprocal
to Section 122 (now Section 104) of the National Internal Revenue Code.

The case was elevated to the CTA which sided with Rueda. The CTA stated that the foreign country
mentioned in Section 122 "refers to a government of that foreign power which, although not an
international person in the sense of international law, does not impose transfer or death upon intangible
person properties of our citizens not residing therein, or whose law allows a similar exemption from
such taxes. It is, therefore, not necessary that Tangier should have been recognized by our Government
order to entitle the petitioner to the exemption benefits of the proviso of Section 122 of our Tax. Code."

ISSUE: Whether the exemption is valid.

RULING:

YES.

The controlling legal provision as noted is a proviso in Section 122 of the National Internal Revenue
Code. It reads thus: "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 tax or death tax of any character in respect of intangible person
property 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."

It does not admit of doubt that if a foreign country is to be identified with a state, it is required in line
with Pound's formulation that it be a politically organized sovereign community independent of outside
control bound by penalties of nationhood, legally supreme within its territory, acting through a
government functioning under a regime of law. A foreign country is thus a sovereign person with the
people composing it viewed as an organized corporate society under a government with the legal
competence to exact obedience to its commands.

Even on the assumption then that Tangier is bereft of international personality, the CIR has not
successfully made out a case. The Court did commit itself to the doctrine that even a tiny principality,
like Liechtenstein, hardly an international personality in the sense, did fall under this exempt category.

Collector of Internal Revenue vs Antonio Campos Rueda [G.R. L-13250] October 29, 1971

Facts:
TAX 2 18
Maria Cerdiera is a Spanish national (Filipina married to a Spanish citizen), lived in Morocco and died
there. In the Philippines, she left intangible properties. The person tasked as administrator of the
intangible properties is Antonio Campos Rueda. He filed a provisional estate and inheritance tax return
on all properties left by her. The Collector of Internal Revenue, the respondent, pending the investigation
of the tax value of the properties, issued an assessment for estate tax worth P111,592.48 and inheritance
tax worth P187,791.48 with a total amount of P369,383.96. These tax liabilities were paid by Antonio
Rueda.

Later, Campos Rueda filed an amended tax return wherein the properties worth P396,308.90 are claimed
as exempted from taxes. Respondent, still pending investigation on the same subject, issued another
assessment for estate tax worth P202,262.40 and inheritance taxed worth P267,402.84 with a total
amount of P469,665.24.

Issues:

Respondent’s reply to the request for exemption of taxes, etc.:

(1) There is no reciprocity as it did not meet the requirements mentioned in Section 122 of the National
Internal Revenue Code. Tangier is a mere principality and not a foreign country.

(Note: As argued, section 122, in relation to the case, grants certain exemption of taxes provided that
‘reciprocity’ be met and for reciprocity to be met, Tangier must be a foreign country within the meaning
of Section 122).

(2) Respondent denied request for exemption because the law of Tangier is not reciprocal to Section 122
of the National Internal Revenue Code.

(3) Respondent demanded the payment of the sums of 239,439.49 representing deficiency estate and
inheritance tax including ad valorem penalties, surcharges, interests and compromise penalties.

The Court of Tax Appeals ruled:

(1) Tangier allows a similar law for the exemption of taxes. Such exemption is sufficient to entitle
Antonio Rueda to the exemption benefits. There is no lacking of reciprocity.

The Collector of Internal Revenue asked a question of law:

(1) Whether the requisites of statehood is necessary (sine qua non) for the acquisition of international
personality.

(2) Whether acquisition of international personality is required for a ‘foreign country’ to fall within the
exemption of Section 122 of the National Internal Revenue Code.

The Supreme Court referred the case back to the Court of Tax Appeals to determine whether the alleged
law of Tangier did grant the reciprocal tax exemption required by Section 122.

Held:

TAX 2 19
(1) Requisite of Statehood is necessary.

It does not admit of doubt that if a foreign country is to be identified with a state, it is required in line
with Pound’s formulation that:“it be a politically organized sovereign community independent of outside
control bound by penalties of nationhood, legally supreme within its territory, acting through a
government functioning under a regime of law.”

(2) Tangier is a state.

(3) Section 122 does not require that the “foreign country” possess an international personality. In other
words, international personality is not a requisite.

(4) Supreme Court affirms Court of Tax Appeals ruling. (Note: Look at the ruling of the Court of
Appeals found in the issue.)

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

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

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

TAX 2 20
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, 851.9
Australia & China 7

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 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

TAX 2 21
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 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
TAX 2 22
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-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
TAX 2 23
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 124 1 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 1325 2 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 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

TAX 2 24
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

TAX 2 25
(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 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. .

TAX 2 26
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 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..

TAX 2 27
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 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

TAX 2 28
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 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 section 11 which the value of such part bears the value of his entire
gross estate wherever situated;"

TAX 2 29
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 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.

TAX 2 30
IR v Fisher

 Walter G. Stevenson was born in the Philippines of British parents, married in Manila to another British
subject, Beatrice. He died in 1951 in California where he and his wife moved to.

 In his will, he instituted Beatrice as his sole heiress to certain real and personal properties, among which
are 210,000 shares of stocks in Mindanao Mother Lode Mines (Mines).

 Ian Murray Statt (Statt), the appointed ancillary administrator of his estate filed an estate and inheritance
tax return. He made a preliminary return to secure the waiver of the CIR on the inheritance of the Mines
shares of stock.

 In 1952, Beatrice assigned all her rights and interests in the estate to the spouses Fisher.

 Statt filed an amended estate and inheritance tax return claiming ADDITIOANL EXEMPTIONS, one of
which is the estate and inheritance tax on the Mines’ shares of stock pursuant to a reciprocity proviso in
the NIRC, hence, warranting a refund from what he initially paid. The collector denied the claim. He then
filed in the CFI of Manila for the said amount.

 CFI ruled that (a) the ½ share of Beatrice should be deducted from the net estate of Walter, (b) the
intangible personal property belonging to the estate of Walter is exempt from inheritance tax pursuant to
TAX 2 31
 the reciprocity proviso in NIRC.

 I: W/N the estate can avail itself of the reciprocity proviso in the NIRC granting exemption from the
payment of taxes for the Mines shares of stock

 R: No.

 Reciprocity must be total. If any of the two states collects or imposes or does not exempt any transfer,
death, legacy or succession tax of any character, the reciprocity does not work.

 In the Philippines, upon the death of any citizen or resident, or non-resident with properties, there are
imposed upon his estate, both an estate and an inheritance tax.

 But, under the laws of California, only inheritance tax is imposed. Also, although the Federal Internal
Revenue Code imposes an estate tax, it does not grant exemption on the basis of reciprocity. Thus, a
Filipino citizen shall always be at a disadvantage. This is not what the legislators intended.

 SPECIFICALLY:

 Section122 of the NIRC provides that “No tax shall be collected under this Title in respect of intangible
personal property

o (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

o (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."

 On the other hand, Section 13851 of the California Inheritance Tax Law provides that
intangible personal property is exempt from tax 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 of the decedent."

TAX 2 32
 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

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.

RESOLUTION

GONZAGA-REYES, J.:

TAX 2 33
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 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 reconsideration 7 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 Resolution 8 ordering the Commissioner of Internal
Revenue to refund Josefina Pajonar, as administratrix of the estate of Pedro Pajonar, the amount of

TAX 2 34
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]

xxx xxx xxx

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

xxx xxx xxx

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

TAX 2 35
Pajonar to his rightful heirs.

xxx xxx xxx

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.

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

TAX 2 36
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).

xxx xxx xxx

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

TAX 2 37
over the assets of the deceased, and that necessarily the assets of the deceased formed part of his gross
estate. . . .

xxx xxx xxx

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 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.

TAX 2 38
SO ORDERED.

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

CIR vs. CA and Pajonar; Estate Tax

G.R. No. 123206 March 22, 2000

Facts: Private respondent Josefina Pajonar was the guardian of the person of decedent Pedro Pajonar.
The property of the decedent was put by the RTC- Dumaguete, under the guardianship of the Philippine
National Bank via special proceeding, wherein 50, 000 was spent therein for payment of attorney's fees.

When the decedent died, instead of filing a estate tax return, PNB advised Josefina to extra-judicially
settle the estate of his brother. The decedent's estate was extra-judicially settled and the heirs paid an
amount of 60, 753 for the notarization of the deed of extra-judicial settlement of estate.

The private paid the estate tax, however, they were subsequently assessed of deficiency taxes because
the amount paid in the special proceeding [50, 000] and the notarization fee [60, 753] cannot be claimed
as a deduction to the decedent's estate. Private respondent paid the said taxes under protest. While the
case is under review by the BIR, she filed a claim for refund in the CTA which was granted.

Issue: whether or not 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.

Held: Yes.

As to the deductibility of the amount spent for notarization of the deed of extra-judicial settlement of
estate- Explained the SC, 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 [which the law on allowable deductions from gross estate was copied!]
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."

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. This distinction
has been carried over to our jurisdiction. Thus, in Lorenzo v. Posadas 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. 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.

TAX 2 39
In this case, it is clear 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. 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.

Deductible expenses of administration of the estate 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.

As to the deductibility of attorney's fees in the Special proceedings- As a rule 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. 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. Hence the attorney's
fees of 50, 000 is deductible from the gross estate of the decedent.

TAX 2 40
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-29276 May 18, 1978

Testate Estate of the Late Felix J. de Guzman. VICTORINO G. DE GUZMAN, administrator-

appellee,
vs.
CRISPINA DE GUZMAN-CARILLO, ARSENIO DE GUZMAN and HONORATA DE
GUZMAN-MENDIOLA,oppositors-appellants.

Emiliano Samson & R. Balderama-Samson for appellants.

Cezar Paralejo for appellee.

AQUINO, J.:

This case is about the propriety of allowing as administration expenses certain disbursements made by
the administrator of the testate estate of the late Felix J. de Guzman of Gapan, Nueva Ecija.

The deceased testator was survived by eight children named Victorino, Librada, Severino, Margarita,
Josefina, Honorata, Arsenio and Crispina. His will was duly probated. Letters of administration were
issued to his son, Doctor Victorino G. de Guzman, pursuant to the order dated September 17, 1964 of the
Court of First Instance of Nueva Ecija in Special Proceeding No. 1431.

One of the properties left by the dent was a residential house located in the poblacion. In conformity
with his last will, that house and the lot on which it stands were adjudicated to his eight children, each
being given a one-eighth proindiviso share in the project of partition dated March 19, 1966, which was
signed by the eight heirs and which was approved in the lower court's order of April 14, 1967 but
without prejudice to the final outcome of the accounting.
TAX 2 41
The administrator submitted four accounting reports for the period from June 16, 1964 to September,
1967. Three heirs Crispina de Guzmans-Carillo Honorata de Guzman-Mendiola and Arsenio de Guzman
interposed objections to the administrator's disbursements in the total sum of P13,610.48, broken down
as follows:

I. Expense for the improvement and renovation of the decedent's residential house.

1. Construction of fence — P3,082.07

2. Renovation of bathroom — P1,389.52

3. Repair of terrace and

interior of house — P5,928.00 — P10,399.59

II. Living expenses of Librada de Guzman while occupying the family home without paying rent:

1. For house helper — P1,170.00

2. Light bills — 227.41

3. Water bills — 150.80

4. Gas oil, floor wax

and switch nail — 54.90 — P 1,603.11

III. Other expenses:

1. Lawyer's subsistence — P 19.30

2. Gratuity pay in lieu

of medical fee — 144.00

3. For stenographic notes — 100.00

4. For food served on

decedent's first

death anniversary — 166.65

5. Cost of publication of

death anniversary

TAX 2 42
of decedent — 102.00

6. Representation

expenses — 26.25 — P558.20

IV. Irrigation fee P1.049.58

TOTAL P13,610.48

It should be noted that the probate court in its order of August 29, 1966 directed the administrator "to
refrain from spending the assets of the estate for reconstructing and remodeling the house of the
deceased and to stop spending (sic) any asset of the estate without first during authority of the court to
do so" (pp. 26-27, Record on Appeal).

The lower court in its order of April 29, 1968 allowed the d items as legitimate expenses of
administration. From that order, the three oppositors appealed to this Court. Their contention is that the
probate court erred in approving the utilization of the income of the estate (from rice harvests) to defray
those expenditures which allegedly are not allowable under the Rules of Court.

An executor or administrator is allowed the necessary expenses in the care, management, and settlement
of the estate. He is entitled to possess and manage the decedent's real and personal estate as long as it is
necessary for the payment of the debts and the expenses of administration. He is accountable for the
whole decedent's estate which has come into his possession, with all the interest, profit, and income
thereof, and with the proceeds of so much of such estate as is sold by him, at the price at which it was
sold (Sec. 3, Rule 84; Secs. 1 and 7, Rule 85, Rules of Court).

One of the Conditions of the administrator's bond is that he should render a true and just account of his
administration to the court. The court may examine him upon oath With respect to every matter relating
to his accounting 't and shall so examine him as to the correctness of his account before the same is
allowed, except when no objection is made to the allowance of the account and its correctness is
satisfactorily established by competent proof. The heirs, legatees, distributes, and creditors of the estate
shall have the same privilege as the executor or administrator of being examined on oath on any matter
relating to an administration account." (Sec. 1[c] Rule 81 and secs. 8 and 9, Rule 85, Rules of Court).

A hearing is usually held before an administrator's account is approved, especially if an interested Party
raises objections to certain items in the accounting report (Sec. 10, Rule 85).

At that hearing, the practice is for the administrator to take the witness stand, testify under oath on his
accounts and Identify the receipts, vouchers and documents evidencing his disbursements which are
offered as exhibits. He may be interrogated by the court and crossed by the oppositors's counsel. The
oppositors may present proofs to rebut the ad. administrator's evidence in support of his accounts.

I. Expenses for the renovation and improvement of the family residence — P10,399.59. — As already
shown above, these expenses consisted of disbursements for the repair of the terrace and interior of the
family home, the renovation of the bathroom, and the construction of a fence. The probate court allowed
those expenses because an administrator has the duty to "maintain in tenantable repair the houses and
other structures and fences belonging to the estate, and deliver the same in such repair to the heirs or
TAX 2 43
devises" when directed to do so by the court (Sec. 2, Rule 84, Rules of Court).

On the other hand, the oppositors-appellants contend that the trial court erred in allowing those expenses
because the same did not come within the category of necessary expenses of administration which are
understood to be the reasonable and necessary expenses of caring for the property and managing it until
the debts are paid and the estate is partitioned and distributed among the heirs (Lizarraga Hermanos vs.
Abada, 40 Phil. 124).

As clarified in the Lizarraga case, administration expenses should be those which are necessary for the
management of the estate, for protecting it against destruction or deterioration, and, possibly, for the
production of fruits. They are expenses entailed for the preservation and productivity of the estate and its
management for purposes of liquidation, payment of debts, and distribution of the residue among the
persons entitled thereto.

It should be noted that the family residence was partitioned proindiviso among the decedent's eight
children. Each one of them was given a one-eighth share in conformity with the testator's will. Five of
the eight co-owners consented to the use of the funds of the estate for repair and improvement of the
family home. It is obvious that the expenses in question were incurred to preserve the family home and
to maintain the family's social standing in the community.

Obviously, those expenses redounded to the benefit of an the co- owners. They were necessary for the
preservation and use of the family residence. As a result of those expenses, the co-owners, including the
three oppositors, would be able to use the family home in comfort, convenience and security.

We hold that the probate court did not err in approving the use of the income of the estate to defray those
ex

II. Expenses incurred by Librada de Guzman as occupant of the family residence without paying rent —
P1 603.11 — The probate court allowed the income of the estate to be used for those expenses on the
theory that the occupancy of the house by one heir did not deprive the other seven heirs from living in it.
Those expenses consist of the salaries of the house helper, light and water bills, and the cost of gas, oil
floor wax and switch nail

We are of the opinion that those expenses were personal expenses of Librada de Guzman, inuring y to
her benefit. Those expenses, not being reasonable administration expenses incurred by the administrator,
should not be charged against the income of the estate.

Librada de Guzman, as an heir, is entitled to share in the net income of the estate. She occupied the
house without paying rent. She should use her income for her living expenses while occupying the
family residence.

The trial court erred in approving those expenses in the administrator's accounts. They should be, as they
are hereby, disallowed (See 33 C.J.S 1239-40).

III. Other expenses — P558.20. — Among these expenses is the sum of P100 for stenographic notes
which, as admitted by the administrator on page 24 of his brief, should be disallowed. Another item,
"representation expenses" in the sum of P26.25 (2nd accounting), was not explained. it should likewise
be disallowed.
TAX 2 44
The probate court erred in allowing as expenses of ad. administration the sum of P268.65 which was
incurred during the celebration of the first death anniversary of the deceased. Those expenses are
disallowed because they have no connection with the care, management and settlement of the decedent's
estate (Nicolas vs. Nicolas 63 Phil 332).

The other expenses, namely, P19.30 for the lawyer's subsistence and P144 as the cost of the gift to the
physician who attended to the testator during his last s are allowable expenses.

IV. Irrigation fee — P1,049.58. —The appellants question the deductibility of that expense on the
ground that it seems to be a duplication of the item of P1,320 as irrigation fee for the same 1966-67
crop-year.

The administrator in his comment filed on February 28, 1978 explained that the item of P1,320
represented the "allotments" for irrigation fees to eight tenants who cultivated the Intan crop, which
allotments were treated as "assumed expenses" deducted as farming expenses from the value of the net
harvests.

The explanation is not quite clear but it was not disputed by the appellants. The fact is that the said sum
of P1,049.58 was paid by the administrator to the Penaranda Irrigation System as shown in Official
Receipt No. 3596378 dated April 28, 1967. It was included in his accounting as part of the farming
expenses. The amount was properly allowed as a legitimate expense of administration.

WHEREFORE, the lower court's order of April 29, 1968 is affirmed with the modifications that the sum
of (a) P1,603.11 as the living expenses of Librada de Guzman. (b) P100 for stenographic notes, (c)
P26.25 as representation expenses, and (d) P268.65 as expenses for the celebration of the first
anniversary of the decedent's death are disallowed in the administrator's accounts. No costs.

SO ORDERED.

Fernando (Chairman), Barredo, Antonio, Concepcion, Jr., and Santos, JJ., concur.

TAX 2 45
De Guzman V. De Guzman

G.R. No. L-29276 May 18, 1978

Laws Applicable: Sec. 3, Rule 84, Secs. 1 and 7, Rule 85, Rules of Court

Lessons Applicable: allowable administration expenses

FACTS:

1 The late Felix J. de Guzman was survived by 8 children. Letters of administration were
issued to his son, Doctor Victorino G. de Guzman. One of the properties left by the decedent
was a residential house located in the poblacion of which 8 children were given a 1/8 proindiviso
share in the project of partition. 3 heirs Crispina de Guzmans-Carillo Honorata de Guzman-
Mendiola and Arsenio de Guzman interposed objections to the administrator's disbursements in
the total sum of P13,610.48.

o Expense for the improvement and renovation of the decedent's residential house

o Living expenses of Librada de Guzman while occupying the family home without paying
rent

o Other expenses: Lawyer's subsistence, Gratuity pay in lieu of medical fee, stenographic
notes, decedent's first death anniversary, representation expenses

o Irrigation fee

2 Lower court: allowed the expenses

ISSUE: W/N they were allowable administration expenses

Held: Some yes and some no. Affirmed with modification.

TAX 2 46
 3 An executor or administrator is allowed the necessary expenses in the care, management,
and settlement of the estate. He is entitled to possess and manage the decedent's real and personal
estate as long as it is necessary for the payment of the debts and the expenses of administration.
He is accountable for the whole decedent's estate which has come into his possession, with all
the interest, profit, and income thereof, and with the proceeds of so much of such estate as is sold
by him, at the price at which it was sold (Sec. 3, Rule 84; Secs. 1 and 7, Rule 85, Rules of
Court).

4 One of the Conditions of the administrator's bond is that he should render a true and just
account of his administration to the court

5 A hearing is usually held before an administrator's account is approved, especially if an

interested Party raises objections to certain items in the accounting report

6 Expenses:

o Expense for the improvement and renovation of the decedent's residential house – allowable

5 out of 8 co-owners consented to the use of the funds of the estate for repair and
improvement of the family home. It is obvious that the expenses in question were
incurred to preserve the family home and to maintain the family's social standing in the
community.

o Living expenses of Librada de Guzman while occupying the family home without paying
rent – disallowed

o Other expenses:

§ Lawyer's subsistence – allowable

§ Gratuity pay in lieu of medical fee – allowable

§ stenographic notes – disallowed

§ decedent's first death anniversary - disallowed

§ representation expenses - unexplained = disallowed

7 Irrigation fee – allowable since unquestioned though duplicate

TAX 2 47
 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 140944 April 30, 2008

TAX 2 48
RAFAEL ARSENIO S. DIZON, in his capacity as the Judicial Administrator of the Estate of the
deceased JOSE P. FERNANDEZ, petitioner,
vs.
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.

DECISION

NACHURA, J.:

Before this Court is a Petition for Review on Certiorari1 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
Decision3 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 letter7dated 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 letter9addressed to the BIR Regional Director for San Pablo City and filed
the estate tax return10 with the same BIR Regional Office, showing therein a NIL estate tax liability,
computed as follows:

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
xxx
Net Taxable Estate NIL.
Estate Tax Due NIL.11

TAX 2 49
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:

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 P66,973,985.4018

In his letter19 dated December 12, 1991, Atty. Gonzales moved for the reconsideration of the said estate
tax assessment. However, in her letter20 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
review21 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

TAX 2 50
1. Letter dated October 13, 1988 from Arsenio P. Dizon addressed to "A"
the Commissioner of Internal Revenue informing the latter of the
special proceedings for the settlement of the estate (p. 126, BIR
records);
2. Petition for the probate of the will and issuance of letter of "B" & "B-1"
administration filed with the Regional Trial Court (RTC) of
Manila, docketed as Sp. Proc. No. 87-42980 (pp. 107-108, BIR
records);
3. Pleading entitled "Compliance" filed with the probate Court "C"
submitting the final inventory of all the properties of the deceased
(p. 106, BIR records);
4. Attachment to Exh. "C" which is the detailed and complete listing "C-1" to "C-17"
of the properties of the deceased (pp. 89-105, BIR rec.);
5. Claims against the estate filed by Equitable Banking Corp. with "D" to "D-24"
the probate Court in the amount ofP19,756,428.31 as of March
31, 1988, together with the Annexes to the claim (pp. 64-88, BIR
records);
6. Claim filed by Banque de L' Indochine et de Suez with the "E" to "E-3"
probate Court in the amount of US $4,828,905.90 as of January
31, 1988 (pp. 262-265, BIR records);
7. Claim of the Manila Banking Corporation (MBC) which as of "F" to "F-3"
November 7, 1987 amounts to P65,158,023.54, but recomputed as
of February 28, 1989 at a total amount ofP84,199,160.46; together
with the demand letter from MBC's lawyer (pp. 194-197, BIR
records);
8. Demand letter of Manila Banking Corporation prepared by "G" & "G-1"
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);
9. Claim of State Investment House, Inc. filed with the RTC, Branch "H" to "H-16"
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);
10. Letter dated March 14, 1990 of Arsenio P. Dizon addressed to "I"
Atty. Jesus M. Gonzales, (p. 184, BIR records);
11. Letter dated April 17, 1990 from J.M. Gonzales addressed to the "J"
Regional Director of BIR in San Pablo City (p. 183, BIR records);
12. Estate Tax Return filed by the estate of the late Jose P. Fernandez "K" to "K-5"
through its authorized representative, Atty. Jesus M. Gonzales, for
Arsenio P. Dizon, with attachments (pp. 177-182, BIR records);
13. Certified true copy of the Letter of Administration issued by RTC "L"
Manila, Branch 51, in Sp. Proc. No. 87-42980 appointing Atty.

TAX 2 51
 Rafael S. Dizon as Judicial Administrator of the estate of Jose P.
Fernandez; (p. 102, CTA records) and
14. Certification of Payment of estate taxes Nos. 2052 and 2053, both "M" to "M-5"
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.).
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. -do-
appearing at the lower Portion of Exh. "1";
3. Memorandum for the Commissioner, dated July 19, 1991, pp. 143-144
prepared by revenue examiners, Ma. Anabella A. Abuloc,
Alberto S. Enriquez and Raymund S. Gallardo; Reviewed by
Maximino V. Tagle
4. Signature of Alberto S. Enriquez appearing at the lower portion -do-
on p. 2 of Exh. "2";
5. Signature of Ma. Anabella A. Abuloc appearing at the lower -do-
portion on p. 2 of Exh. "2";
6. Signature of Raymund S. Gallardo appearing at the Lower -do-
portion on p. 2 of Exh. "2";
7. Signature of Maximino V. Tagle also appearing on p. 2 of Exh. -do-
"2";
8. Summary of revenue Enforcement Officers Audit Report, dated p. 139
July 19, 1991;
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 -do-
Exh. "3";
11. Signature of Raymond S. Gallardo at the lower portion of Exh. -do-
"3";
12. Signature of Maximino V. Tagle at the lower portion of Exh. -do-
"3";
13. Demand letter (FAS-E-87-91-00), signed by the Asst. p. 169
Commissioner for Collection for the Commissioner of Internal
Revenue, demanding payment of the amount ofP66,973,985.40;
and
14. Assessment Notice FAS-E-87-91-00 pp. 169-17022

The CTA's Ruling

TAX 2 52
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

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 5,062,016.00

Conjugal Personal Prop. 33,021,999.93
Gross Conjugal Estate 38,084,015.93
Less: Deductions 26,250,000.00
Net Conjugal Estate P 11,834,015.93
Less: Share of Surviving Spouse 5,917,007.96
Net Share in Conjugal Estate P 5,917,007.96
Add: Capital/Paraphernal
Properties – P44,652,813.66
Less: Capital/Paraphernal Deductions 44,652,813.66
Net Taxable Estate P 50,569,821.62
============

Estate Tax Due P 29,935,342.97

Add: 25% Surcharge for Late Filing 7,483,835.74
Add: 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

TAX 2 53
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 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
Resolution30 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
TAX 2 54
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 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:

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 inPeople v. Napat-a35 and People v. Mate36 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 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
TAX 2 55
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:

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...

xxxx

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

While the CTA is not governed strictly by technical rules of evidence, 45 as rules of procedure are not
TAX 2 56
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 Resolution51 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.

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 debt56 is defined as:

TAX 2 57
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 Code59 (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 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.64Recognizing 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

TAX 2 58
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.71Therefore, the claims
existing at the time of death are significant to, and should be made the basis of, the determination of
allowable deductions.

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.

Rafael Arsenio S. Dizon, v. CTA and CIR

G.R. No. 140944; April 30, 2008

Facts: Jose P. Fernandez died in November 7, 1987. Thereafter, a petition for the probate of his will was
filed. The probate court appointed Atty. Rafael Arsenio P. Dizon as administrator of the Estate of Jose

TAX 2 59
Fernandez.

An estate tax return was filed later on which showed ZERO estate tax liability. BIR thereafter issued a
deficiency estate tax assessment, demanding payment of Php 66.97 million as deficiency estate tax.
This was subsequently reduced by CTA to Php 37.42 million. The CA affirmed the CTA’s ruling, hence,
the instant petition.

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. On the other hand, respondents argue that since the claims of the
Estate’s creditors have been condoned, such claims may no longer be deducted from the gross estate of
the decedent.

Issue: Whether the actual claims of 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

Held: YES. Following the US Supreme Court’s ruling in Ithaca Trust Co. v. United States, the Court
held that post-death developments are not material in determining the amount of deduction. This is
because estate tax 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 the that time. This is the date-of-
death valuation rule.

The Court, in adopting the date-of-death valuation principle, explained that: 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. 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. Therefore,
the claims existing at the time of death are significant to, and should be made the basis of, the
determination of allowable deductions.

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Dizon v CTA G.R. No. 140944 April 30, 2008

FACTS:
On November 7, 1987, Jose P. Fernandez (Jose) died. Thereafter, a petition for the probate of his will
was filed with Branch 51 of the Regional Trial Court (RTC) of Manila (probate court). 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). 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.

ISSUES:
1. 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

2. 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 Or Whether or not the CA erred in
affirming the CTA in the latter's determination of the deficiency estate tax imposed against the Estate.

RULING:
1. Yes. While the CTA is not governed strictly by technical rules of evidence, 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. The BIR's failure to formally offer these pieces of evidence, despite CTA's
directives, is fatal to its cause

2. Yes. The claims existing at the time of death are significant to, and should be made the basis of, the
determination of allowable deductions. Also, as held in Propstra v. U.S., where a 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. This is called the date-of-death valuation rule.

TAX 2 61
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

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

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Palay P6,444.00
Carabaos 1,000.00 P7,444.00

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:

Palay P6,444.00
Carabaos 1,500.00
Packard Automobile 2,000.00
2 Aparadors 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 distraint were located in Iloilo City.

TAX 2 63
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 Sedan P8,100.00

Packard car 2,000.00
Aparadors 500.00
Cash in Bank (PNB) 8,858.46
Palay 6,444.00
Carabaos 1,500.00 P27,402.46

Real properties:

Land, 174 parcels assessed at P324,797.21

Buildings 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 interest 11,868.90

Compromise
No notice of death P15.00
Late payment 40.00 55.00

Total P28,581.23

Inheritance Tax P38,178.12

5% surcharge 1,105.86

TAX 2 64
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 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.

TAX 2 65
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.

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
TAX 2 66
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.9And the finding of said court as to its existence and non-existence is final unless clearly shown to
be erroneous.10As 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 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.

TAX 2 67
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.16We 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.

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

TAX 2 68
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.

RE S O LUTI ON

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. 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)
TAX 2 69
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
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

TAX 2 70
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 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.

TAX 2 71
Motion for reconsideration denied.

Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal, Sanchez and Castro, JJ., concur.
Zaldivar, J., took no part.

Commissioner of Internal Revenue vs Lilia Gonzales (MFR)

Taxation – Liability of Administrator

In November 1966, the Supreme Court issued a decision declaring Lilia Gonzales to be liable for the
entire tax deficiency due on an estate left by her father. Gonzales seeks reconsideration for her not to be
adjudged as liable for the whole tax since she administers only 1/3 of the estate. And that the other 2/3 is
now administered by his deceased brother’s widow, Florencia Yusay.

ISSUE: Whether or not Gonzales is only liable for 1/3.

HELD: No. In the first place, Florencia cannot be adjudged liable because she is not a party to this case.
Gonzales appealed the tax assessments to the Court of Tax Appeals hoping for a favorable judgment.
The adverse judgment shall be borne by her. Under the tax code, failure to pay the estate and inheritance
taxes before distribution of the estate would subject the executor or administrator to criminal liability.
The Supreme Court also clarified, it is immaterial that Gonzales administers only one-third of the estate
and will receive as her share only said portion, for her right to the estate comes after taxes. 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. Besides, the tax payment
shall come from the estate before actual distribution.

TAX 2 72
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-33139 October 11, 1930

THE GOVERNMENT OF THE PHILIPPINE ISLANDS, plaintiff-appellants,

vs.
JOSE MA. PAMINTUAN, ET AL., defendants-appellees.

Attorney-General Jaranilla for appellant.

Jose Ma.Cavanna for appellees.

VILLA-REAL, J.:

This is an appeal taken by the Government of the Philippine Islands from the judgment of the Court of
First Instance of Manila dismissing its complaint and absolving the defendants, without costs. In support
of the appeal the following alleged errors have been assigned to the court below in its judgment:

1. The lower court erred in holding that the failure of the plaintiff to file its claim with the committee on
claims and appraisals barred it from collecting the tax in questions in this action.

TAX 2 73
2. The lower court erred in holding that this case is governed by the principle laid down in the case of
the Government of the Philippine Islands vs. Inchausti & Co. (24 Phil., 315).

3. The lower court erred in absolving the defendants from the complaint and in denying the plaintiff's
motion for new trial.

The present case was submitted to the court below upon the following agreed statement of facts:

I. That on February 27, 1920, Florentino Pamintuan, represented by J. V. Ramirez or his attorney-in-fact
charged with the administration of his property, filed income-tax return for the year 1919, paying the
amount of P 672.99 on the basis of said return, and the additional sum of P151.01 as a result of a
subsequent assessment received from the Collector of Internal Revenue.

II. That on April 24, 1925, Florentino Pamintuan died in Washington, D. C., U. S. A., leaving the
defendants herein as his heirs.

III. That on April 24, 1925, intestate proceedings were instituted in the Court of First Instance of Manila
in civil case No. 27948, intestate of the late Florentino Pamintuan.

IV. That on April 28,1925, the Court of First Instance of Manila appointed Maximo de la Paz and
Candido Ilagan commissioners of appraisal of the property left by the deceased Pamintuan, the said
appointees taking their oaths of office on May 4 and May 9, 1925, respectively, and letters of
appointment to the committee on claims and appraisals were made on May 9,1925. 1awph!l.net

V. That the said committee on claims and appraisals after the publications of the notices required by law
held the necessary sessions in accordance with said notices for the presentation and determination of all
claims and credits against the estate of the deceased Pamintuan.

VI. That on December 1, 1925, the above-mentioned committee rendered its report which was duly
approved by the court, and in which report it appears that he only claims presented and that were
approved were those of Tomasa Centeno, Jose, Paz, Caridad, and Natividad Pamintuan and Cavanna,
Aboitiz and Agan.

VII. That on June 12, 1926, Jose V. Ramirez, the duly appointed judicial administrator of the estate of
the deceased Florentino Pamintuan presented a proposed partition of the decedent's estate which
proposed partition was approved by the court on July 6,1926, the court ordering the delivery to the heirs,
the defendants herein, of their respective shares of the inheritance after paying the corresponding
inheritance taxes which were duly paid on September 2, 1926, in the amount of P25,047.19 as appears
on the official receipt No. 4421361.

VIII. That the defendants herein inherited from the deceased Florentino Pamintuan in the following
proportions: Tomasa Pamintuan inherited 0.0571 per cent of the decedent's estate and the other
defendants 0.0784 per cent each according to the partition approved by the court in civil case No. 27948.

IX. That during the pendency of the intestate proceedings, the administrator filed income-tax returns for
the estate of the deceased corresponding to the years 1925 and 1926.

TAX 2 74
X. That the intestate proceedings in civil case No. 27948 were definitely closed on October 27, 1926, by
order of the court of the same date.

XI. That subsequent to the distribution of the decedent's estate to the defendants herein, that is, on
February 16, 1927, the plaintiff discovered the fact that the deceased Florentino Pamintuan has not paid
the amount of four hundred and sixty-two pesos (P462) as additional income tax and surcharge for the
calendar year 1919, on account of the sale made by him on November 14, 1919, of his house and lot
located at 922 M. H. del Pilar, Manila, from which sale he realized a net profit or income of P11,000,
which was not included in his income-tax return filed for said year 1919.

XII. That the defendants cannot disprove that the deceased Florentino Pamintuan made a profit of
P11,000 in the sale of the house referred to in paragraph Xl hereof because they have destroyed the
voluminous records and evidences regarding the sale in question and other similar transactions which
might show repairs on the house, commissions, and other expenses tending to reduce the profit obtained
as mentioned above.

XIII. That demand for the payment of the income tax referred to herein was made on February 24, 1927,
on the defendants but they refused and still refuse to pay the same either in full or in part.

With regard to the first assignment of error, this court held in Pineda vs. Court of First Instance of
Tayabas and Collector of Internal Revenue (52 Phil., 803):

To reply to these contentions in turn , we observe that, while there are a few courts that have expressed
themselves to the effect that a claim for taxes due to the Government should be presented like other
claims to the committee appointed for the purpose of passing upon claims, the clear weight of judicial
authority is to the effect that claims for taxes and assessments, whether assessed before or after the death
of the decedent, are not required to be presented to the committee. (24 C. J., 325; People vs. Olvera, 43
Cal., 492; Hancock vs.Whittemore, 50 Cal., 522; Findley vs. Taylor, 97 Iowa, 420; Bogue
vs.Laughlin,149 Wis., 271; 40 L. R. A. [N.S.], 927; Ann. Cas.1913 C.,p.1367.)

See also In re Estate of Frank H.Goulette (G. R. No. 32361, 1 decided on September 22,1930.)

The administration proceedings of the late Florentino Pamintuan having been closed, and his estate
distributed among his heirs, the defendants herein, the latter are responsible for the payment of the
income tax here in question in proportion to the share of each in said estate, in accordance with section
731 of the Code of Civil Procedure, and the doctrine of this court laid down in Lopez vs. Enriquez (16
Phil.,336) as follows:

ESTATE; LIABILITY OF HEIRS AND DISTRIBUTEES. — Heirs are not required to respond with
their own property for the debts of their deceased ancestors. But even 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 or value of the property they have respectively received from the
estate. The 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. The heirs cannot, by
any act of their own or by agreement among themselves, reduce the creditors' security for the payment
of their claims. (Pavia vs. De la Rosa, 8 Phil.,70; secs. 731, 749, Code of Civil Procedure; art,1257, Civil
Code.)

TAX 2 75
For the reasons stated, we are of opinion and so hold that claims for income taxes need not be filed with
the committee on claims and appraisals appointed in the course of testate proceedings and may be
collected even after the distribution of the decedent's estate among his heirs, who shall be liable therefor
in proportion to their share in the inheritance.

Wherefore, let the defendants pay the plaintiff the sum of P462, with 1 per centum monthly interest from
August 19, 1927 until fully paid, as follows: Tomasa Centeno 0.0571 per cent, and each one of the other
defendants 0.0784 per cent, with costs against the appellees. So ordered.

Avanceña, C.J., Street, Malcolm, Ostrand, Ostrand, Johns and Romualdez, JJ., concur.

TAX 2 76
Govt. of the Philippines vs Pamintuan

Facts:

Florentino Pamintuan filed an income tax return for the year 1919 and paid an amount on the basis of
said return.When Florentino died in 1925, intestate proceedings were instituted where the court
appointed commissioners for the appraisal of the value of the property left by Florentino.The court then
ordered the delivery to the heirs of their respective shares of the inheritance after paying the
corresponding inheritance taxes which were duly paid.During the pendency of the intestate proceedings,
the administrator Jose Ramirez filed income tax returns for the estate of the deceased corresponding to
the years 1925 and 1926. The intestate proceedings were then closed in 1926.

In 1927, subsequent to the distribution of Florentino’s estate, the government discovered that Florentino
had not paid P462 as additional income for 1919 on account of the sale of his house, from which he
realized an income of P11,000.00 which was not included in his income tax return filed in 1919.The
government demanded payment of the income tax but the heirs refused to pay.The lower court ruled that
the government was barred from collecting the income tax due to its failure to file its claim with the
committee on claims and appraisals.

Issue:

W/n the gov can still collect the income tax despite its failure to file its claim with the committee on
claims and appraisals

Ruling:The administration proceedings of the late Florentino Pamintuan having been closed,and his
estate distributed among his heirs, the defendants herein, the latter are responsible for the payment of the
income tax here in question in proportion to the share of each in said estate, in accordance with section
731 of the Code of Civil Procedure:ESTATE; LIABILITY OF HEIRS AND DISTRIBUTEES.

—Heirs are not required to respond with their own property for the debts of their deceased ancestors.
But even 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 or value of the property they
have respectively received from the estate. The 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. The heirs cannot, by any act of their own or by agreement among themselves, reduce

TAX 2 77
the creditors' security for the payment of their claims.For the reasons stated, we are of opinion and so
hold that claims for income taxes need not be filed with the committee on claims and appraisals
appointed in the course of testate proceedings and may be collected even after the distribution of the
decedent's estate among his heirs, who shall be liable therefor in proportion to their share in the
inheritance.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

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.

TAX 2 78
 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 tax

1945 P135.83
1946 436.95
1947 1,206.91 P1,779.69
Add: 5% surcharge 88.98
1% monthly interest from November 30, 1953 to April 15, 1957 720.77
Compromise for late filing 80.00
Compromise for late payment 40.00

P2,707.44
Total amount due
==========
=
P14.50
2. Additional residence tax for 1945 ==========
=
3. P207.50
Real Estate dealer's tax for the fourth quarter of 1946 and the whole year of 1947 ==========
=

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 P135.83
TAX 2 79
 1946 436.95
Real 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.

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 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 taxes 4a 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
TAX 2 80
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 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.

CIR v Pineda (1967)

GR No L-22734, September 15, 1967

FACTS:

BIR investigated the income tax liability of Anastacio Pineda’s estate for the years 1945, 1946, 1947,
and 1948 and it found that the corresponding income tax return were not filed. This resulted to a
P760.28 deficiency income tax for 1945 and 1946 and real estate dealer’s fixed tax for the 4thquarter of
1946 and for the whole year 1947. Manuel Pineda, eldest son of Anastacio, received the assessment. He
contested the same alleging that only a proportionate part should be his liability. CTA ruled that Pineda
is liable only for taxes corresponding to his share in the estate. Hence, the present petition.

ISSUE:

Whether the Government can require Manuel Pineda to pay the full amount of the tax assessed

RULING:

Yes. As a holder of property belonging to the estate, Pineda is liable for the tax up to the amount of the
property in his possession. The BIR is given the discretion to avail of the most expeditious way to
collect the tax. This is, of course, without prejudice to Pineda’s right of contribution for his co-heirs. Put
simply, the Supreme Court held that the rule on solidarity applies to taxes because it is not an ordinary
contract. Two persons liable for payment of estate tax:

TAX 2 81
 1 Executor or administrator;

2 Heirs up to the extent of their inheritance.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-19865 July 31, 1965

MARIA CARLA PIROVANO, etc., et al., petitioners-appellants,

vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent-appellee.

Angel S. Gamboa for petitioners-appellants.

Office of the Solicitor General for respondent-appellee.

REYES, J.B.L., J.:

This case is a sequel to the case of Pirovano vs. De la Rama Steamship Co., 96 Phil. 335.

Briefly, the facts of the aforestated case may be stated as follows:

Enrico Pirovano was the father of the herein petitioners-appellants. Sometime in the early part of 1941,
De la Rama Steamship Co. insured the life of said Enrico Pirovano, who was then its President and
General Manager until the time of his death, with various Philippine and American insurance companies
for a total sum of one million pesos, designating itself as the beneficiary of the policies, obtained by it.
Due to the Japanese occupation of the Philippines during the second World War, the Company was
unable to pay the premiums on the policies issued by its Philippine insurers and these policies lapsed,
while the policies issued by its American insurers were kept effective and subsisting, the New York
office of the Company having continued paying its premiums from year to year.

During the Japanese occupation , or more particularly in the latter part of 1944, said Enrico Pirovano
died.

TAX 2 82
After the liberation of the Philippines from the Japanese forces, the Board of Directors of De la Rama
Steamship Co. adopted a resolution dated July 10, 1946 granting and setting aside, out of the proceeds
expected to be collected on the insurance policies taken on the life of said Enrico Pirovano, the sum of
P400,000.00 for equal division among the four (4) minor children of the deceased, said sum of money to
be convertible into 4,000 shares of stock of the Company, at par, or 1,000 shares for each child. Shortly
thereafter, the Company received the total sum of P643,000.00 as proceeds of the said life insurance
policies obtained from American insurers.

Upon receipt of the last stated sum of money, the Board of Directors of the Company modified, on
January 6, 1947, the above-mentioned resolution by renouncing all its rights title, and interest to the said
amount of P643,000.00 in favor of the minor children of the deceased, subject to the express condition
that said amount should be retained by the Company in the nature of a loan to it, drawing interest at the
rate of five per centum (5%) per annum, and payable to the Pirovano children after the Company shall
have first settled in full the balance of its present remaining bonded indebtedness in the sum of
approximately P5,000,000.00. This latter resolution was carried out in a Memorandum Agreement on
January 10, 1947 and June 17, 1947., respectively, executed by the Company and Mrs. Estefania R.
Pirovano, the latter acting in her capacity as guardian of her children (petitioners-appellants herein) find
pursuant to an express authority granted her by the court.

On June 24, 1947, the Board of Directors of the Company further modified the last mentioned resolution
providing therein that the Company shall pay the proceeds of said life insurance policies to the heirs of
the said Enrico Pirovano after the Company shall have settled in full the balance of its present remaining
bonded indebtedness, but the annual interests accruing on the principal shall be paid to the heirs of the
said Enrico Pirovano, or their duly appointed representative, whenever the Company is in a position to
meet said obligation.

On February 26, 1948, Mrs. Estefania R. Pirovano, in behalf of her children, executed a public
document formally accepting the donation; and, on the same date, the Company through its Board of
Directors, took official notice of this formal acceptance.

On September 13, 1949, the stockholders of the Company formally ratified the various resolutions
hereinabove mentioned with certain clarifying modifications that the payment of the donation shall not
be effected until such time as the Company shall have first duly liquidated its present bonded
indebtedness in the amount of P3,260,855.77 with the National Development Company, or fully
redeemed the preferred shares of stock in the amount which shall be issued to the National Development
Company in lieu thereof; and that any and all taxes, legal fees, and expenses in any way connected with
the above transaction shall be chargeable and deducted from the proceeds of the life insurance policies
mentioned in the resolutions of the Board of Directors.

On March 8, 1951, however, the majority stockholders of the Company voted to revoke the resolution
approving the donation in favor of the Pirovano children.

As a consequence of this revocation and refusal of the Company to pay the balance of the donation
amounting to P564,980.90 despite demands therefor, the herein petitioners-appellants represented by
their natural guardian, Mrs. Estefania R. Pirovano, brought an action for the recovery of said amount,
plus interest and damages against De la Rama Steamship Co., in the Court of First Instance of Rizal,
which case ultimately culminated to an appeal to this Court. On December 29, 1954, this court rendered
its decision in the appealed case (96 Phil. 335) holding that the donation was valid and remunerative in

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nature, the dispositive part of which reads:

Wherefore, the decision appealed from should be modified as follows: (a) that the donation in favor of
the children of the late Enrico Pirovano of the proceeds of the insurance policies taken on his life is valid
and binding on the defendant corporation; (b) that said donation, which amounts to a total of
P583,813.59, including interest, as it appears in the books of the corporation as of August 31, 1951, plus
interest thereon at the rate of 5 per cent per annum from the filing of the complaint, should be paid to the
plaintiffs after the defendant corporation shall have fully redeemed the preferred shares issued to the
National Development Company under the terms and conditions stared in the resolutions of the Board of
Directors of January 6, 1947 and June 24, 1947, as amended by the resolution of the stockholders
adopted on September 13, 1949; and (c) defendant shall pay to plaintiffs an additional amount
equivalent to 10 per cent of said amount of P583,813.59 as damages by way of attorney's fees, and to
pay the costs of action. (Pirovano et al. vs. De la Rama Steamship Co., 96 Phil. 367-368)

The above decision became final and executory. In compliance therewith, De la Rama Steamship Co.
made, on April 6, 1955, a partial payment on the amount of the judgment and paid the balance thereof on
May 12, 1955.

On March 6, 1955, respondent Commissioner of Internal Revenue assessed the amount of P60,869.67 as
donees' gift tax, inclusive of surcharges, interests and other penalties, against each of the petitioners-
appellants, or for the total sum of P243,478.68; and, on April 23, 1955, a donor's gift tax in the total
amount of P34,371.76 was also assessed against De la Rama Steamship Co., which the latter paid.

Petitioners-appellants herein contested respondent Commissioner's assessment and imposition of the

donees' gift taxes and donor's gift tax and also made a claim for refund of the donor's gift tax so
collected. Respondent Commissioner overruled petitioners' claims; hence, the latter presented two (2)
petitions for review against respondent's rulings before the Court of Tax Appeals, said petitions having
been docketed as CTA Cases Nos. 347 and 375. CTA Case No. 347 relates to the petition disputing the
legality of the assessment of donees' gift taxes and donor's gift tax while CTA Case No. 375 refers to the
claim for refund of the donor's gift tax already paid.

After the filing of respondent's usual answers to the petitions, the two cases, being interrelated to each
other, were tried jointly and terminated.

On January 31, 1962, the Court of Tax Appeals rendered its decision in the two cases, the dispositive
part of which reads:

In resume, we are of the opinion, that (1) the donor's gift tax in the sum of P34,371.76 was erroneously
assessed and collected, hence, petitioners are entitled to the refund thereof; (2) the donees' gift taxes
were correctly assessed; (3) the imposition of the surcharge of 25% is not proper; (4) the surcharge of
5% is legally due; and (5) the interest of 1% per month on the deficiency donees' gift taxes is due from
petitioners from March 8, 1955 until the taxes are paid.

IN LINE WITH THE FOREGOING OPINION, petitioners are hereby ordered to pay the donees' gift
taxes as assessed by respondent, plus 5% surcharge and interest at the rate of 1% per month from March
8, 1955 to the date of payment of said donees' gift taxes. Respondent is ordered to apply the sum of
P34,371.76 which is refundable to petitioners, against the amount due from petitioners. With costs
against petitioners in Case No. 347.

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Petitioners-appellants herein filed a motion to reconsider the above decision, which the lower court
denied. Hence, this appeal before us.

In the instant appeal, petitioners-appellants herein question only that portion of the decision of the lower
court ordering the payment of donees' gift taxes as assessed by respondent as well as the imposition of
surcharge and interest on the amount of donees' gift taxes.

In their brief and memorandum, they dispute the factual finding of the lower court that De la Rama
Steamship Company's renunciation of its rights, title, and interest over the proceeds of said life
insurance policies in favor of the Pirovano children "was motivated solely and exclusively by its sense
of gratitude, an act of pure liberality, and not to pay additional compensation for services inadequately
paid for." Petitioners now contend that the lower court's finding was erroneous in seemingly considering
the disputed grant as a simple donation, since our previous decision (96 Phil. 335) had already declared
that the transfer to the Pirovano children was a remuneratory donation. Petitioners further contend that
the same was made not for an insufficient or inadequate consideration but rather it a was made for a full
and adequate compensation for the valuable services rendered by the late Enrico Pirovano to the De la
Rama Steamship Co.; hence, the donation does not constitute a taxable gift under the provisions of
Section 108 of the National Internal Revenue Code.

The argument for petitioners-appellants fails to take into account the fact that neither in Spanish nor in
Anglo-American law was it considered that past services, rendered without relying on a coetaneous
promise, express or implied, that such services would be paid for in the future, constituted cause or
consideration that would make a conveyance of property anything else but a gift or donation. This
conclusion flows from the text of Article 619 of the Code of 1889 (identical with Article 726 of the
present Civil Code of the Philippines):

When a person gives to another a thing ... on account of the latter's merits or of the services rendered by
him to the donor, provided they do not constitute a demandable debt, ..., there is also a donation. ... .

There is nothing on record to show that when the late Enrico Pirovano rendered services as President
and General Manager of the De la Rama Steamship Co. he was not fully compensated for such services,
or that, because they were "largely responsible for the rapid and very successful development of the
activities of the company" (Res. of July 10, 1946). Pirovano expected or was promised further
compensation over and in addition to his regular emoluments as President and General Manager. The
fact that his services contributed in a large measure to the success of the company did not give rise to a
recoverable debt, and the conveyances made by the company to his heirs remain a gift or donation. This
is emphasized by the directors' Resolution of January 6, 1947, that "out of gratitude" the company
decided to renounce in favor of Pirovano's heirs the proceeds of the life insurance policies in question.
The true consideration for the donation was, therefore, the company's gratitude for his services, and not
the services themselves.

That the tax court regarded the conveyance as a simple donation, instead of a remuneratory one as it was
declared to be in our previous decision, is but an innocuous error; whether remuneratory or simple, the
conveyance remained a gift, taxable under Chapter 2, Title III of the Internal Revenue Code.

But then appellants contend, the entire property or right donated should not be considered as a gift for
taxation purposes; only that portion of the value of the property or right transferred, if any, which is in
excess of the value of the services rendered should be considered as a taxable gift. They cite in support

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Section 111 of the Tax Code which provides that —

Where property is transferred for less, than an adequate and full consideration in money or money's
worth, then the amount by which the value of the property exceeded the value of the consideration shall,
for the purpose of the tax imposed by this Chapter, be deemed a gift, ... .

The flaw in this argument lies in the fact that, as copied from American law, the term consideration used
in this section refers to the technical "consideration" defined by the American Law Institute
(Restatement of Contracts) as "anything that is bargained for by the promisor and given by the promisee
in exchange for the promise" (Also, Corbin on Contracts, Vol. I, p. 359). But, as we have seen,
Pirovano's successful activities as officer of the De la Rama Steamship Co. cannot be deemed such
consideration for the gift to his heirs, since the services were rendered long before the Company ceded
the value of the life policies to said heirs; cession and services were not the result of one bargain or of a
mutual exchange of promises.

And the Anglo-American law treats a subsequent promise to pay for past services (like one to pay for
improvements already made without prior request from the promisor) to be a nudum pactum (Roscorla
vs. Thomas, 3 Q.B. 234; Peters vs. Poro, 25 ALR 615; Carson vs. Clark, 25 Am. Dec. 79; Boston vs.
Dodge, 12 Am. Dec. 206), i.e., one that is unenforceable in view of the common law rule that
consideration must consist in a legal benefit to the promisee or some legal detriment to the promisor.

What is more, the actual consideration for the cession of the policies, as previously shown, was the
Company's gratitude to Pirovano; so that under section 111 of the Code there is no consideration the
value of which can be deducted from that of the property transferred as a gift. Like "love and affection,"
gratitude has no economic value and is not "consideration" in the sense that the word is used in this
section of the Tax Code.

As stated by Chief Justice Griffith of the Supreme Court of Mississippi in his well-known book,
"Outlines of the Law" (p. 204) —

Love and affection are not considerations of value — they are not estimable in terms of value. Nor are
sentiments of gratitude for gratuitous part favors or kindnesses; nor are obligations which are merely
moral. It has been well said that if a moral obligation were alone sufficient it would remove the necessity
for any consideration at all, since the fact of making a promise impose, the moral obligation to perform
it."

It is of course perfectly possible that a donation or gift should at the same time impose a burden or
condition on the donee involving some economic liability for him. A, for example, may donate a parcel
of land to B on condition that the latter assume a mortgage existing on the donated land. In this case the
donee may rightfully insist that the gift tax be computed only on the value of the land less the value of
the mortgage. This, in fact, is contemplated by Article 619 of the Civil Code of 1889 (Art. 726 of the Tax
Code) when it provides that there is also a donation "when the gift imposes upon the donee a burden
which is less than the value of the thing given." Section 111 of the Tax Code has in view situations of
this kind, since it also prescribes that "the amount by which the value of the property exceeded the value
of the consideration" shall be deemed a gift for the purpose of the tax. .

Petitioners finally contend that, even assuming that the donation in question is subject to donees' gift
taxes, the imposition of the surcharge of 5% and interest of 1% per month from March 8, 1955 was not

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justified because the proceeds of the life insurance policies were actually received on April 6, 1955 and
May 12, 1955 only and in accordance with Section 115(c) of the Tax Code; the filing of the returns of
such tax became due on March 1, 1956 and the tax became payable on May 15, 1956, as provided for in
Section 116(a) of the same Code. In other words, petitioners maintain that the assessment and demand
for donees' gift taxes was prematurely made and of no legal effect; hence, they should not be held liable
for such surcharge and interest.

It is well to note, and it is not disputed, that petitioners-donees have failed to file any gift tax return and
that they also failed to pay the amount of the assessment made against them by respondent in 1955. This
situation is covered by Section 119(b) (1) and (c) and Section 120 of the Tax Code:

(b) Deficiency.

(1) Payment not extended. — Where a deficiency, or any interest assessed in connection therewith, or
any addition to the taxes provided for in section one hundred twenty is not paid in full within thirty days
from the date of the notice and demand from the Commissioner, there shall be collected as a part of the
taxes, interest upon the unpaid amount at the rate of one per centum a month from the date of such
notice and demand until it is paid. (section 119)

(c) Surcharge. — If any amount of the taxes included in the notice and demand from the Commissioner
of Internal Revenue is not paid in full within thirty days after such notice and demand, there shall be
collected in addition to the interest prescribed above as a part of the taxes a surcharge of five per centum
of the unpaid amount. (sec. 119)

The failure to file a return was found by the lower court to be due to reasonable cause and not to willful
neglect. On this score, the elimination by the lower court of the 25% surcharge is ad valorem penalty
which respondent Commissioner had imposed pursuant to Section 120 of the Tax Code was proper,
since said Section 120 vests in the Commissioner of Internal Revenue or in the tax court power and
authority to impose or not to impose such penalty depending upon whether or not reasonable cause has
been shown in the non-filing of such return.

On the other hand, unlike said Section 120, Section 119, paragraphs (b) (1) and (c) of the Tax Code,
does not confer on the Commissioner of Internal Revenue or on the courts any power and discretion not
to impose such interest and surcharge. It is likewise provided for by law that an appeal to the Court of
Tax Appeals from a decision of the Commissioner of Internal Revenue shall not suspend the payment or
collection of the tax liability of the taxpayer unless a motion to that effect shall have been presented to
the court and granted by it on the ground that such collection will jeopardize the interest of the taxpayer
(Sec. 11, Republic Act No. 1125; Rule 12, Rules of the Court of Tax Appeals). It should further be noted
that —

It has been the uniform holding of this Court that no suit for enjoining the collection of a tax, disputed or
undisputed, can be brought, the remedy being to pay the tax first, formerly under protest and now
without need of protect, file the claim with the Collector, and if he denies it, bring an action for recovery
against him. (David v. Ramos, et al., 90 Phil. 351)

Section 306 of the National Internal Revenue Code ... lays down the procedure to be followed in those
cases wherein a taxpayer entertains some doubt about the correctness of a tax sought to be collected.
Said section provides that the tax, should first be paid and the taxpayer should sue for its recovery

TAX 2 87
afterwards. The purpose of the law obviously is to prevent delay in the collection of taxes, upon which
the Government depends for its existence. To allow a taxpayer to first secure a ruling as regards the
validity of the tax before paying it would be to defeat this purpose. (National Dental Supply Co. vs.
Meer, 90 Phil. 265)

Petitioners did not file in the lower court any motion for the suspension of payment or collection of the
amount of assessment made against them.

On the basis of the above-stated provisions of law and applicable authorities, it is evident that the
imposition of 1% interest monthly and 5% surcharge is justified and legal. As succinctly stated by the
court below, said imposition is "mandatory and may not be waived by the Commissioner of Internal
Revenue or by the courts" (Resolution on petitioners' motion for reconsideration, Annex XIV, petition).
Hence, said imposition of interest and surcharge by the lower court should be upheld.

WHEREFORE, the decision of the Court of Tax Appeals is affirmed. Costs against petitioners Pirovano.

Bengzon, C.J., Bautista Angelo, Paredes, Dizon, Regala, Makalintal, Bengzon, J.P., and Zaldivar, JJ.,
concur.
Concepcion, J., took no part.
Barrera, J., is on leave.

Pirovano v. CIR (14 SCRA 232)

Sec. 32[B] of the NIRC provides that Gifts, bequests and devises are excluded from gross income
liable to tax. Instead, such donations are subject to estate or gift taxes. However, if the amount is
received on account of services rendered, whether constituting a demandable debt or not (such as
remuneratory donations under Civil Law), the donation is considered taxable income.
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 Facts: De la Rama Steamship Co. insured the life of Enrico Pirovano who was then its President and
General Manager. The company initially designated itself as the beneficiary of the policies but, after
Pirovano’s death, it renounced all its rights, title and interest therein, in favor of Pirovano’s heirs.

The CIR subjected the donation to gift tax. Pirovano’s heirs contended that the grant was not subject to
such donee’s tax because it was not a simple donation, as it was made for a full and adequate
compensation for the valuable services by the late Priovano (i.e. that it was remuneratory).

Issue: WON the donation is remuneratory and therefore not subject to donee’s tax, but rather taxable
as part of gross income.

Held: No. the donation is not remuneratory. There is nothing on record to show that when the late
Enrico Pirovano rendered services as President and General Manager of the De la Rama Steamship Co.
and was “largely responsible for the rapid and very successful development of the activities of the
company", he was not fully compensated for such services. The fact that his services contributed in a
large measure to the success of the company did not give rise to a recoverable debt, and the
conveyances made by the company to his heirs remain a gift or a donation. The company’s gratitude
was the true consideration for the donation, and not the services themselves.

TAX 2 89
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 111904 October 5, 2000

SPS. AGRIPINO GESTOPA and ISABEL SILARIO GESTOPA, petitioners,

vs.
COURT OF APPEALS and MERCEDES DANLAG y PILAPIL, respondents.

DECISION

QUISUMBING, J.:

This petition for review,1 under Rule 45 of the Rules of Court, assails the decision 2 of the Court of
Appeals dated August 31, 1993, in CA-G.R. CV No. 38266, which reversed the judgment 3 of the
Regional Trial Court of Cebu City, Branch 5.

The facts, as culled from the records, are as follows:

Spouses Diego and Catalina Danlag were the owners of six parcels of unregistered lands. They executed
three deeds of donation mortis causa, two of which are dated March 4, 1965 and another dated October
13, 1966, in favor of private respondent Mercedes Danlag-Pilapil. 4 The first deed pertained to parcels 1
& 2 with Tax Declaration Nos. 11345 and 11347, respectively. The second deed pertained to parcel 3,
with TD No. 018613. The last deed pertained to parcel 4 with TD No. 016821. All deeds contained the
reservation of the rights of the donors (1) to amend, cancel or revoke the donation during their lifetime,
and (2) to sell, mortgage, or encumber the properties donated during the donors' lifetime, if deemed
necessary.

On January 16, 1973, Diego Danlag, with the consent of his wife, Catalina Danlag, executed a deed of
donationinter vivos5 covering the aforementioned parcels of land plus two other parcels with TD Nos.
11351 and 11343, respectively, again in favor of private respondent Mercedes. This contained two
conditions, that (1) the Danlag spouses shall continue to enjoy the fruits of the land during their lifetime,
and that (2) the donee can not sell or dispose of the land during the lifetime of the said spouses, without
their prior consent and approval. Mercedes caused the transfer of the parcels' tax declaration to her name
and paid the taxes on them.

On June 28, 1979 and August 21, 1979, Diego and Catalina Danlag sold parcels 3 and 4 to herein
petitioners, Mr. and Mrs. Agripino Gestopa. On September 29, 1979, the Danlags executed a deed of
revocation6 recovering the six parcels of land subject of the aforecited deed of donation inter vivos.

TAX 2 90
On March 1, 1983, Mercedes Pilapil (herein private respondent) filed with the RTC a petition against the
Gestopas and the Danlags, for quieting of title 7 over the above parcels of land. She alleged that she was
an illegitimate daughter of Diego Danlag; that she lived and rendered incalculable beneficial services to
Diego and his mother, Maura Danlag, when the latter was still alive. In recognition of the services she
rendered, Diego executed a Deed of Donation on March 20, 1973, conveying to her the six (6) parcels of
land. She accepted the donation in the same instrument, openly and publicly exercised rights of
ownership over the donated properties, and caused the transfer of the tax declarations to her name.
Through machination, intimidation and undue influence, Diego persuaded the husband of Mercedes,
Eulalio Pilapil, to buy two of the six parcels covered by the deed of donation. Said donation inter vivos
was coupled with conditions and, according to Mercedes, since its perfection, she had complied with all
of them; that she had not been guilty of any act of ingratitude; and that respondent Diego had no legal
basis in revoking the subject donation and then in selling the two parcels of land to the Gestopas.

In their opposition, the Gestopas and the Danlags averred that the deed of donation dated January 16,
1973 was null and void because it was obtained by Mercedes through machinations and undue influence.
Even assuming it was validly executed, the intention was for the donation to take effect upon the death
of the donor. Further, the donation was void for it left the donor, Diego Danlag, without any property at
all.

On December 27, 1991, the trial court rendered its decision, thus:

"WHEREFORE, the foregoing considered, the Court hereby renders judgment in favor of the defendants
and against the plaintiff:

1. Declaring the Donations Mortis Causa and Inter Vivos as revoked, and, therefore, has (sic) no legal
effect and force of law.

2. Declaring Diego Danlag the absolute and exclusive owner of the six (6) parcels of land mentioned in
the Deed of revocation (Exh. P-plaintiff, Exh. 6-defendant Diego Danlag).

3. Declaring the Deeds of Sale executed by Diego Danlag in favor of spouses Agripino Gestopa and
Isabel Gestopa dated June 28, 1979 (Exh. S-plaintiff; Exh. 18-defendant); Deed of Sale dated December
18, 1979 (Exh. T plaintiff; Exh. 9-defendant); Deed of Sale dated September 14, 1979 (Exh. 8); Deed of
Sale dated June 30, 1975 (Exh. U); Deed of Sale dated March 13, 1978 (Exh. X) as valid and
enforceable duly executed in accordance with the formalities required by law.

4. Ordering all tax declaration issued in the name of Mercedes Danlag Y Pilapil covering the parcel of
land donated cancelled and further restoring all the tax declarations previously cancelled, except parcels
nos. 1 and 5 described, in the Deed of Donation Inter Vivos (Exh. "1") and Deed of Sale (Exh. "2")
executed by defendant in favor of plaintiff and her husband.

[5.] With respect to the contract of sale of abovestated parcels of land, vendor Diego Danlag and spouse
or their estate have the alternative remedies of demanding the balance of the agreed price with legal
interest, or rescission of the contract of sale.

SO ORDERED."8

In rendering the above decision, the trial court found that the reservation clause in all the deeds of
TAX 2 91
donation indicated that Diego Danlag did not make any donation; that the purchase by Mercedes of the
two parcels of land covered by the Deed of Donation Inter Vivos bolstered this conclusion; that
Mercedes failed to rebut the allegations of ingratitude she committed against Diego Danlag; and that
Mercedes committed fraud and machination in preparing all the deeds of donation without explaining to
Diego Danlag their contents.

Mercedes appealed to the Court of Appeals and argued that the trial court erred in (1) declaring the
donation dated January 16, 1973 as mortis causa and that the same was already revoked on the ground
of ingratitude; (2) finding that Mercedes purchased from Diego Danlag the two parcels of land already
covered by the above donation and that she was only able to pay three thousand pesos, out of the total
amount of twenty thousand pesos; (3) failing to declare that Mercedes was an acknowledged natural
child of Diego Danlag.

On August 31, 1993, the appellate court reversed the trial court. It ruled:

"PREMISES CONSIDERED, the decision appealed from is REVERSED and a new judgment is hereby
rendered as follows:

1. Declaring the deed of donation inter vivos dated January 16, 1973 as not having been revoked and
consequently the same remains in full force and effect;

2. Declaring the Revocation of Donation dated June 4, 1979 to be null and void and therefore of no force
and effect;

3. Declaring Mercedes Danlag Pilapil as the absolute and exclusive owner of the six (6) parcels of land
specified in the above-cited deed of donation inter vivos;

4. Declaring the Deed of Sale executed by Diego Danlag in favor of spouses Agripino and Isabel
Gestopa dated June 28, 1979 (Exhibits S and 18), Deed of Sale dated December 18, 1979 (Exhibits T
and 19), Deed of Sale dated September 14, 1979 (Exhibit 8), Deed of Sale dated June 30, 1975 (Exhibit
U), Deed of Sale dated March 13, 1978 (Exhibit X) as well as the Deed of Sale in favor of Eulalio
Danlag dated December 27, 1978 (Exhibit 2) not to have been validly executed;

5. Declaring the above-mentioned deeds of sale to be null and void and therefore of no force and effect;

6. Ordering spouses Agripino Gestopa and Isabel Silerio Gestopa to reconvey within thirty (30) days
from the finality of the instant judgment to Mercedes Danlag Pilapil the parcels of land above-specified,
regarding which titles have been subsequently fraudulently secured, namely those covered by O.C.T. T-
17836 and O.C.T. No. 17523.

7. Failing to do so, ordering the Branch Clerk of Court of the Regional Trial Court (Branch V) at Cebu
City to effect such reconveyance of the parcels of land covered by O.C.T. T-17836 and 17523.

SO ORDERED."9

The Court of Appeals held that the reservation by the donor of lifetime usufruct indicated that he
transferred to Mercedes the ownership over the donated properties; that the right to sell belonged to the

TAX 2 92
donee, and the donor's right referred to that of merely giving consent; that the donor changed his
intention by donating inter vivosproperties already donated mortis causa; that the transfer to Mercedes'
name of the tax declarations pertaining to the donated properties implied that the donation was inter
vivos; and that Mercedes did not purchase two of the six parcels of land donated to her.

Hence, this instant petition for review filed by the Gestopa spouses, asserting that:

"THE HONORABLE COURT OF APPEALS, TWELFTH DIVISION, HAS GRAVELY ERRED IN

REVERSING THE DECISION OF THE COURT A QUO."10

Before us, petitioners allege that the appellate court overlooked the fact that the donor did not only
reserve the right to enjoy the fruits of the properties, but also prohibited the donee from selling or
disposing the land without the consent and approval of the Danlag spouses. This implied that the donor
still had control and ownership over the donated properties. Hence, the donation was post mortem.

Crucial in resolving whether the donation was inter vivos or mortis causa is the determination of
whether the donor intended to transfer the ownership over the properties upon the execution of the
deed.11

In ascertaining the intention of the donor, all of the deed's provisions must be read together. 12 The deed
of donation dated January 16, 1973, in favor of Mercedes contained the following:

"That for and in consideration of the love and affection which the Donor inspires in the Donee and as an
act of liberality and generosity, the Donor hereby gives, donates, transfer and conveys by way of
donation unto the herein Donee, her heirs, assigns and successors, the above-described parcels of land;

That it is the condition of this donation that the Donor shall continue to enjoy all the fruits of the land
during his lifetime and that of his spouse and that the donee cannot sell or otherwise, dispose of the
lands without the prior consent and approval by the Donor and her spouse during their lifetime.

xxx

That for the same purpose as hereinbefore stated, the Donor further states that he has reserved for
himself sufficient properties in full ownership or in usufruct enough for his maintenance of a decent
livelihood in consonance with his standing in society.

That the Donee hereby accepts the donation and expresses her thanks and gratitude for the kindness and
generosity of the Donor."13

Note first that the granting clause shows that Diego donated the properties out of love and affection for
the donee. This is a mark of a donation inter vivos.14 Second, the reservation of lifetime usufruct
indicates that the donor intended to transfer the naked ownership over the properties. As correctly posed
by the Court of Appeals, what was the need for such reservation if the donor and his spouse remained
the owners of the properties? Third, the donor reserved sufficient properties for his maintenance in
accordance with his standing in society, indicating that the donor intended to part with the six parcels of
land.15 Lastly, the donee accepted the donation. In the case ofAlejandro vs. Geraldez, 78 SCRA 245
(1977), we said that an acceptance clause is a mark that the donation isinter vivos. Acceptance is a
requirement for donations inter vivos. Donations mortis causa, being in the form of a will, are not
TAX 2 93
required to be accepted by the donees during the donors' lifetime.

Consequently, the Court of Appeals did not err in concluding that the right to dispose of the properties
belonged to the donee. The donor's right to give consent was merely intended to protect his usufructuary
interests. InAlejandro, we ruled that a limitation on the right to sell during the donors' lifetime implied
that ownership had passed to the donees and donation was already effective during the donors' lifetime.

The attending circumstances in the execution of the subject donation also demonstrated the real intent of
the donor to transfer the ownership over the subject properties upon its execution. 16 Prior to the
execution of donation inter vivos, the Danlag spouses already executed three donations mortis causa. As
correctly observed by the Court of Appeals, the Danlag spouses were aware of the difference between
the two donations. If they did not intend to donate inter vivos, they would not again donate the four lots
already donated mortis causa. Petitioners' counter argument that this proposition was erroneous because
six years after, the spouses changed their intention with the deed of revocation, is not only disingenious
but also fallacious. Petitioners cannot use the deed of revocation to show the spouses' intent because its
validity is one of the issues in this case.

Petitioners aver that Mercedes' tax declarations in her name can not be a basis in determining the donor's
intent. They claim that it is easy to get tax declarations from the government offices such that tax
declarations are not considered proofs of ownership. However, unless proven otherwise, there is a
presumption of regularity in the performance of official duties. 17 We find that petitioners did not
overcome this presumption of regularity in the issuance of the tax declarations. We also note that the
Court of Appeals did not refer to the tax declarations as proofs of ownership but only as evidence of the
intent by the donor to transfer ownership.

Petitioners assert that since private respondent purchased two of the six parcels of land from the donor,
she herself did not believe the donation was inter vivos. As aptly noted by the Court of Appeals,
however, it was private respondent's husband who purchased the two parcels of land.

As a rule, a finding of fact by the appellate court, especially when it is supported by evidence on record,
is binding on us.18 On the alleged purchase by her husband of two parcels, it is reasonable to infer that
the purchase was without private respondent's consent. Purchase by her husband would make the
properties conjugal to her own disadvantage. That the purchase is against her self-interest, weighs
strongly in her favor and gives credence to her claim that her husband was manipulated and unduly
influenced to make the purchase, in the first place.1âwphi1

Was the revocation valid? A valid donation, once accepted, becomes irrevocable, except on account of
officiousness, failure by the donee to comply with the charges imposed in the donation, or ingratitude. 19
The donor-spouses did not invoke any of these reasons in the deed of revocation. The deed merely
stated:

"WHEREAS, while the said donation was a donation Inter Vivos, our intention thereof is that of Mortis
Causa so as we could be sure that in case of our death, the above-described properties will be inherited
and/or succeeded by Mercedes Danlag de Pilapil; and that said intention is clearly shown in paragraph 3
of said donation to the effect that the Donee cannot dispose and/or sell the properties donated during our
life-time, and that we are the one enjoying all the fruits thereof."20

Petitioners cited Mercedes' vehemence in prohibiting the donor to gather coconut trees and her filing of

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instant petition for quieting of title. There is nothing on record, however, showing that private
respondent prohibited the donors from gathering coconuts. Even assuming that Mercedes prevented the
donor from gathering coconuts, this could hardly be considered an act covered by Article 765 of the
Civil Code.21 Nor does this Article cover respondent's filing of the petition for quieting of title, where
she merely asserted what she believed was her right under the law.

Finally, the records do not show that the donor-spouses instituted any action to revoke the donation in
accordance with Article 769 of the Civil Code.22 Consequently, the supposed revocation on September
29, 1979, had no legal effect.

WHEREFORE, the instant petition for review is DENIED. The assailed decision of the Court of
Appeals dated August 31, 1993, is AFFIRMED.

Costs against petitioners.

SO ORDERED.

Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.

GESTOPA VS. CA FACTS- Acceptance in Donation

Acceptance is a mark that the donation is inter vivos. Donations mortis causa, being in the form of a
will, are not required to be accepted by the donee during the donor’s lifetime.

FACTS:

Spouses Danlag own six parcels of land. To four parcels of land, they executed a donation mortis causa
in favor of respondent Mercedes Danlag-Pilapil, reserving donor's rights to amend, cancel, or revoke the
donation and to sell or encumber such properties. Years later, they executed another donation, this time
inter vivos, to six parcels of land in favor of respondents, reserving their rights to the fruits of the land
during their lifetime and for prohibiting the donee to sell or dispose the properties donated.
Subsequently, the spouses sold 2 parcels to herein petitioners, spouses Gestopa, and eventually revoking
the donation. Respondent filed a petition to quiet title, stating that she had already become the owner of
the parcels of land. Trial Court ruled in favor of petitioners, but CA reversed.

ISSUE:

Whether the (second) donation was inter vivos or mortis causa

RULING:

It was donation inter vivos. The spouses were aware of the difference between the two donations, and
that they needed to execute another deed of donation inter vivos, since it has a different application to a
donation mortis causa. Also, the court stated four reasons to the matter: (1) that the spouses donated the

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parcels of land out of love and affection, a clear indication of a donation inter vivos; (2) the reservation
of a lifetime usufruct; (3) reservation of sufficient properties for maintenance that shows the intention to
part with their six lot; and (4) respondent's acceptance, contained in the deed of donation. Once a deed of
donation has been accepted, it cannot be revoked, except for officiousness or ingratitude, which the
spouses failed to invoke.

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