Lorenzo vs.

Posadas, (1937)
LAUREL, J.:

FACTS:
Thomas Hanley died, he left a will stating that:
o any money left will be given to his nephew Matthew, in Ireland
o all real estate owned will not be sold for 10 years after his death and will be handled by the
executors and proceeds of such will be given to Matthew (education purposes)
o after 10 years of death, all properties will be given to Matthew
CFI appointed a trustee for the Matthew, 1st it was Moore then Lorenzo.
CIR assess against the estate an inheritance tax which, together with the penalties for delinquency in
payment and 25% surcharge amounted to P2.052.74
Posadas (collector of internal revenue) filed a motion in the testamentary proceedings still pending,
which was granted and paid by Lorenzo under protest.
Lorenzo brought this action for the refund of the inheritance tax paid.

ISSUE + RULING:

When does the inheritance tax accrue and when must it be satisfied? Before delivery of property to Moor
(trustee)
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, gift mortis causa, or advance in anticipation of inheritance,
devise, or bequest." The tax therefore is upon transmission or the transfer or devolution of property
of a decedent, made effective by his death.
Article 657 of the Civil Code, "the rights to the succession of a person are transmitted from the
moment of his death."
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.
Time for the payment of inheritance tax is clearly fixed by section 1544 of the Revised Administrative
Code in relation to section 1543.
o Sec. 1543: The following shall not be taxed:
(b) The transmission or delivery of the inheritance or legacy by the fiduciary heir or
legatee to the trustees.
o Sec. 1544: 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.
o 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.
o The instant case does not fall under subsection (a), but under subsection (b), of section
1544, as there is here no fiduciary heir, first heir, legatee or donee. Under that subsection,
 the tax should have been paid before the delivery of the properties in question to P. J. M.
Moore as trustee.

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? At the time of death
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.

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
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, for it was mentioned in
the will that the executors will be the one managing the properties until the expiration of 10 years.

What law governs the case at bar? Should the provisions of Act No. 3606 favorable to the taxpayer be given
retroactive effect? Act. 3101, law in forced at time of death
CIR applied Sec. 1544 of Revised Admin. Code as amended by Act. 3606 but such was not the law
in force at the time Thomas died. It was Sec. 1544 as amended by Act. 3031.
It is well-settled that inheritance taxation is governed by the statute in force at the time of the death of
the decedent
Of course, a tax statute may be made retroactive in its operation. But legislative intent that a tax
statute should operate retroactively should be perfectly clear.
o Act No. 3606 contains no provisions indicating legislative intent to give it retroactive effect
CIR contends that certain provisions of Act No. 3606 are more favorable to the taxpayer, that said
provisions are penal in nature and, therefore, should operate retroactively. But such contention is
wrong because revenue laws, generally, which impose taxes collected by the means ordinarily
resorted to for the collection of taxes are not classed as penal laws.

Has there been delinquency in the payment of the inheritance tax? - YES
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 delinquent until
and unless the entire period has elapsed within which the taxpayer is authorized by law to make
such payments without being subjected to the payment of penalties for failure to pay his taxes within
the prescribed period
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.
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
To constitute a valid testamentary trust there must be a concurrence of three circumstances:
o (1) Sufficient words to raise a trust;
o (2) a definite subject;
o (3) a certain or ascertained 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 appointing a trustee to carry into effect the provisions of the
will.
When Moore accepted the trust and took possession of the trust estate he thereby admitted that the
estate belonged not to him but to his cestui que trust

Comments by the SC: Benefits-received Theory

Taxes are essential to the very existence of government. 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. 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. While
courts will not enlarge, by construction, the government's power of taxation, they also will not place
upon tax laws so loose a construction as to permit evasions on merely fanciful and insubstantial
distinctions. When proper, a tax statute should be construed to avoid the possibilities of tax evasion.

Whether or not the additional interest claimed by the CIR in his appeal be paid by the estate? - YES
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 provision of law requiring the payment of interest in appropriate
cases is mandatory, and neither the Collector of Internal Revenue nor this court may remit or
decrease such interest, no matter how heavily it may burden the taxpayer.
To the tax and interest due and unpaid within ten days after the date of notice and demand thereof by
the Collector of Internal Revenue, a surcharge of twenty-five per centum should be added
o Real Property: 27, 920 + Personal Property: 1,465 - Allowable deductions: 480.81 =
P28,904.19
o Primary Tax Computation:
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 P956.16, we
have as primary tax, correctly computed by the CIR, the sum of P1,434.24.
Interest: P1,465.31 - from March 10, 1924, the date of delinquency, to September 15,
1932, payment.
P724.88, representing a surcharge of 25% on both the tax and interest, and also
P10, the compromise, giving a grand total of P3,634.43.
o Since Lorenzo already paid P2,052.74, only the sum of P1,581.69 is legally due

DISPOSITION: Pay P1,581.69.