PIROVANO v.
COMMISSIONER OF INTERNAL REVENUE o SUPREME COURT : Modified CFI Rizal decision and ordered Company to pay
Exclusions from Gross Income | July 31, 1965 | Reyes, J.B.L., J.
Nature of Case: Appeal from Court of Tax Appeals
Digest maker: Jacinto
SUMMARY: Court of Tax Appeals imposed upon the children of Enrico Pirovano a donees’
gift tax for the amount conveyed to them by De la Rama Steamship Co. which was the
proceeds of the insurance policy of Pirovano. The Court held that the amount was a
donation to the children and hence a gift taxable under the Internal Revenue Code. The
children were wrong in not paying the tax when it was demanded from them.
DOCTRINE: Donations, whether renumeratory or simple donation, is still subject to gift tax.
Taxes must be paid immediately and should there be any contest, it should be subject to
recovery instead.
FACTS:
 Early 1941 : De la Rama Steamship Co. (company) insured the life of Enrico Pirovano,
President and General Manager of the company until his death, with various ISSUE/S & RATIO:
Philippine and American insurance companies for a total sum of one million pesos,
wherein the company was the designated beneficiary of the policies.
o Due to Japanese occupation of the Philippines, company was not able to
pay premiums to the policies issued in the Philippines. Premium payments
however were facilitated by the New York Office of the Company to the
American insurers
 Late 1944 : Pirovano died.
 July 10, 1946 : Company adopted a resolution granting and setting aside out of the
proceeds expected to be collected from the insurance policies the sum of P400,000.00
for equal division among the four (4) minor children of Pirovano, convertible into
1,000 shares of stock of the company per child. A total of P643,000.00 was obtained as
proceeds.
 January 6, 1947 : Company modified the July 10, 1946 resolution by renouncing all its
rights, title, and interest to the total proceeds of the insurance policy amounting to
P643,000.00.
o Condition of modification: Amount shall be retained by the company in the
nature of a loan, drawing interest at five percentum (5%) per annum,
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.
o January 10, 1947 and June 17, 1947 : Mrs. Estefania R. Pirovano, mother of
the children, executed a Memorandum of Agreement with the company
executing the said resolution.
 June 24, 1947 : Company further modified the resolution by stating that annual
interests accruing on the principal shall be paid when the company is in a position to
meet the obligation.
 February 26, 1948 : Heirs of Pirovano accepted the donation, and company took
official notice of formal acceptance
 September 13, 1949 : Stockholders of Company ratified the resolutions with
clarifying modifications that the payment 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.
 March 8, 1951 : Stockholders revoked the resolution approving the donation to the petitioners Pirovano.
heirs of Pirovano.
o COURT OF FIRST INSTANCE (RIZAL) : Due to revocation and refusal of
Company to pay, Mrs. Pirovano brought an action for recovery, plus interest and
damages against De la Rama Steamship Co.
P583,813.59 + interest of 5% per annum from the filing of complaint after having fully
redeemed preferred shares from National Development Company. Additional 10% of
amount payable shall be paid as attorney’s fees and costs of action.
 April 6, 1955 and May 12, 1955 : Company made partial and full payment
consecutively.
 March 6, 1955 : Commissioner of Internal Revenue assessed P60,869.67 as donees’ gift
tax for each Heir of Pirovano (total: P243,478.68)
o Appealed to the CIR and made claim to recover donee’s and donor’s gift
tax; filed petition for review with the Court of Tax Appeals
 April 23, 1955 : CIR assessed P34,371.76 as donor’s gift tax (paid by Company)
 January 31, 1962 : Court of Tax Appeals rendered a decision stating imposition of
donor’s gift tax was erroneous and due for refund, donee’s gift tax was properly
assessed, surcharge of 25% is improper, surcharge of 5% is legally due, 1% per month
on deficiency donees’ gift tax is due from March 8, 1955 until taxes are paid.
1. W/N Donees’ Gift Tax was properly assessed and whether the imposition of
surcharge and interest is valid YES
 On the matter of the assessed donees’ tax
o De la Rama Steamship Co. was not under any obligation to give to the
Heirs of Pirovano any share of the proceeds of the insurance policy. The
Court has previously held that the amount to be given was a renumeratory
donation and not a simple donation, as contended by the Heirs of Pirovano
which would not have made it a taxable gift. The donation was out of the
company’s gratitude and not for the services rendered per se.
o ART 725, NCC : 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…
o CTA took the reconveyance as a simple donation instead of a renumeratory
one. The Court holds that whether simple or renumeratory, the
conveyance remains to be a gift taxable under Chapter 2, Title III of the
Internal Revenue Code.
o Appellant’s contention that the conveyance was in consideration does not
hold ground as consideration is defined as a renumeration for services
rendered, when in fact the amount was given after the fact, not promised to
Pirovano.
 On the matter of the surcharge and interest assessed
o Petitioners failed to file any gift tax return and failed to pay the amount of
the assessment made in 1955. Section 119(b)(1) and (c) and Section 120 of
the Tax Code state that tax on deficiencies shall have a 1% per month
interest upon notice of demand, and a surcharge 5% of the unpaid amount
if not paid within 30 days of notice and demand.
o An appeal to the CTA shall not suspend the payment of the tax; what is
appropriate is to pay the tax then file for recovery if the amount is
contested.
o Interest and surcharge imposed is justified.
RULING: WHEREFORE, the decision of the Court of Tax Appeals is affirmed. Costs against