EN BANC
I direct that ten (10) years after my death my property be given to the
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.
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 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.
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, gift mortis causa, or advance
in anticipation of inheritance,devise, or bequest." The tax therefore is upon
transmission or the transfer or devolution of property of a decedent, made
effective by his death. (61 C. J., p. 1592.) It is in reality an excise or privilege tax
imposed on the right to succeed to, receive, or take property by or under a will or
the intestacy law, or deed, grant, or gift to become operative at or after death.
Acording to article 657 of the Civil Code, "the rights to the succession of a person
are transmitted from the moment of his death." "In other words", said Arellano, C.
J., ". . . the heirs succeed immediately to all of the property of the deceased
ancestor. The property belongs to the heirs at the moment of the death of the
ancestor as completely as if the ancestor had executed and delivered to them a
deed for the same before his death." (Bondad vs. Bondad, 34 Phil., 232. See also,
Mijares vs. Nery, 3 Phil., 195; Suilong & Co., vs. Chio-Taysan, 12 Phil., 13; Lubrico vs.
Arbado, 12 Phil., 391; Innocencio vs. Gat-Pandan, 14 Phil., 491; Aliasas vs.Alcantara,
16 Phil., 489; Ilustre vs. Alaras Frondosa, 17 Phil., 321; Malahacan vs. Ignacio, 19
Phil., 434; Bowa vs. Briones, 38 Phil., 27; Osario vs. Osario & Yuchausti Steamship
Co., 41 Phil., 531; Fule vs. Fule, 46 Phil., 317; Dais vs. Court of First Instance of Capiz,
51 Phil., 396; Baun vs. Heirs of Baun, 53 Phil., 654.) Plaintiff, however, asserts that
while article 657 of the Civil Code is applicable to testate as well as intestate
succession, it operates only in so far as forced heirs are concerned. But the
language of article 657 of the Civil Code is broad and makes no distinction between
different classes of heirs. That article does not speak of forced heirs; it does not
even use the word "heir". It speaks of the rights of succession and the transmission
thereof from the moment of death. The provision of section 625 of the Code of Civil
Procedure regarding the authentication and probate of a will as a necessary
condition to effect transmission of property does not affect the general rule laid
down in article 657 of the Civil Code. The authentication of a will implies its due
execution but once probated and allowed the transmission is effective as of the
death of the testator in accordance with article 657 of the Civil Code. Whatever may
be the time when actual transmission of the inheritance takes place, succession
takes place in any event at the moment of the decedent's death. The time when the
heirs legally succeed to the inheritance may differ from the time when the heirs
actually receive such inheritance. "Poco importa", says Manresa commenting on
article 657 of the Civil Code, "que desde el falleimiento del causante, hasta que el
heredero o legatario entre en posesion de los bienes de la herencia o del legado,
transcurra mucho o poco tiempo, pues la adquisicion ha de retrotraerse al momento
de la muerte, y asi lo ordena el articulo 989, que debe considerarse como
complemento del presente." (5 Manresa, 305; see also, art. 440, par. 1, Civil Code.)
Thomas Hanley having died on May 27, 1922, the inheritance tax accrued as of the
date.
From the fact, however, that Thomas Hanley died on May 27, 1922, it does not
follow that the obligation to pay the tax arose as of the date. The time for the
payment on inheritance tax is clearly fixed by section 1544 of the Revised
Administrative Code as amended by Act No. 3031, in relation to section 1543 of the
same Code. The two sections follow:
SEC. 1543. Exemption of certain acquisitions and transmissions. — The
following shall not be taxed:
 (a) The merger of the usufruct in the owner of the naked title.
(b) The transmission or delivery of the inheritance or legacy by the
fiduciary heir or legatee to the trustees.
(c) The transmission from the first heir, legatee, or donee in favor
of another beneficiary, in accordance with the desire of the
predecessor.
In the last two cases, if the scale of taxation appropriate to the new
beneficiary is greater than that paid by the first, the former must pay the
difference.
SEC. 1544. When tax to be paid. — The tax fixed in this article shall be paid:
(a) In the second and third cases of the next preceding section,
before entrance into possession of the property.
(b) In other cases, within the six months subsequent to the death
of the predecessor; but if judicial testamentary or intestate
proceedings shall be instituted prior to the expiration of said
period, the payment shall be made by the executor or
administrator before delivering to each beneficiary his share.
If the tax is not paid within the time hereinbefore prescribed, interest at
the rate of twelve per centum per annum shall be added as part of the tax;
and to the tax and interest due and unpaid within ten days after the date
of notice and demand thereof by the collector, there shall be further
added a surcharge of twenty-five per centum.
A certified of all letters testamentary or of admisitration shall be furnished
the Collector of Internal Revenue by the Clerk of Court within thirty days
after their issuance.
It should be observed in passing that the word "trustee", appearing in subsection
(b) of section 1543, should read "fideicommissary" or "cestui que trust". There was
an obvious mistake in translation from the Spanish to the English version.
The instant case does fall under subsection (a), but under subsection (b), of section
1544 above-quoted, as there is here no fiduciary heirs, first heirs, legatee or donee.
Under the subsection, the tax should have been paid before the delivery of the
properties in question to P. J. M. Moore as trustee on March 10, 1924.
(b) The plaintiff contends that the estate of Thomas Hanley, in so far as the real
properties are concerned, did not and could not legally pass to the instituted heir,
Matthew Hanley, until after the expiration of ten years from the death of the
testator on May 27, 1922 and, that the inheritance tax should be based on the
value of the estate in 1932, or ten years after the testator's death. The plaintiff
introduced evidence tending to show that in 1932 the real properties in question
had a reasonable value of only P5,787. This amount added to the value of the
personal property left by the deceased, which the plaintiff admits is P1,465, would
generate an inheritance tax which, excluding deductions, interest and surcharge,
would amount only to about P169.52.
If death is the generating source from which the power of the estate to impose
inheritance taxes takes its being and if, upon the death of the decedent, succession
takes place and the right of the estate to tax vests instantly, the tax should be
measured by the vlaue of the estate as it stood at the time of the decedent's death,
regardless of any subsequent contingency value of any subsequent increase or
decrease in value. (61 C. J., pp. 1692, 1693; 26 R. C. L., p. 232; Blakemore and
Bancroft, Inheritance Taxes, p. 137. See also Knowlton vs. Moore, 178 U.S., 41; 20
Sup. Ct. Rep., 747; 44 Law. ed., 969.) "The right of the state to an inheritance tax
accrues at the moment of death, and hence is ordinarily measured as to any
beneficiary by the value at that time of such property as passes to him. Subsequent
appreciation or depriciation is immaterial." (Ross, Inheritance Taxation, p. 72.)
Our attention is directed to the statement of the rule in Cyclopedia of Law of and
Procedure (vol. 37, pp. 1574, 1575) that, in the case of contingent remainders,
taxation is postponed until the estate vests in possession or the contingency is
settled. This rule was formerly followed in New York and has been adopted in
Illinois, Minnesota, Massachusetts, Ohio, Pennsylvania and Wisconsin. This rule,
horever, is by no means entirely satisfactory either to the estate or to those
interested in the property (26 R. C. L., p. 231.). Realizing, perhaps, the defects of its
anterior system, we find upon examination of cases and authorities that New York
has varied and now requires the immediate appraisal of the postponed estate at its
clear market value and the payment forthwith of the tax on its out of the corpus of
the estate transferred. (In re Vanderbilt, 172 N. Y., 69; 69 N. E., 782; In re Huber, 86
N. Y. App. Div., 458; 83 N. Y. Supp., 769; Estate of Tracy, 179 N. Y., 501; 72 N. Y.,
519; Estate of Brez, 172 N. Y., 609; 64 N. E., 958; Estate of Post, 85 App. Div., 611;
82 N. Y. Supp., 1079. Vide also, Saltoun vs. Lord Advocate, 1 Peter. Sc. App., 970; 3
Macq. H. L., 659; 23 Eng. Rul. Cas., 888.) California adheres to this new rule (Stats.
1905, sec. 5, p. 343).
But whatever may be the rule in other jurisdictions, we hold that a transmission by
inheritance is taxable at the time of the predecessor's death, notwithstanding the
postponement of the actual possession or enjoyment of the estate by the
beneficiary, and the tax measured by the value of the property transmitted at that
time regardless of its appreciation or depreciation.
(c) Certain items are required by law to be deducted from the appraised gross in
arriving at the net value of the estate on which the inheritance tax is to be
computed (sec. 1539, Revised Administrative Code). In the case at bar, the
defendant and the trial court allowed a deduction of only P480.81. This sum
represents the expenses and disbursements of the executors until March 10, 1924,
among which were their fees and the proven debts of the deceased. The plaintiff
contends that the compensation and fees of the trustees, which aggregate
P1,187.28 (Exhibits C, AA, EE, PP, HH, JJ, LL, NN, OO), should also be deducted under
section 1539 of the Revised Administrative Code which provides, in part, as follows:
"In order to determine the net sum which must bear the tax, when an inheritance is
concerned, there shall be deducted, in case of a resident, . . . the judicial expenses
of the testamentary or intestate proceedings, . . . ."
A trustee, no doubt, is entitled to receive a fair compensation for his services
(Barney vs. Saunders, 16 How., 535; 14 Law. ed., 1047). But from this it does not
follow that the compensation due him may lawfully be deducted in arriving at the
net value of the estate subject to tax. There is no statute in the Philippines which
requires trustees' commissions to be deducted in determining the net value of the
estate subject to inheritance tax (61 C. J., p. 1705). Furthermore, though a
testamentary trust has been created, it does not appear that the testator intended
that the duties of his executors and trustees should be separated. (Ibid.; In
re Vanneck's Estate, 161 N. Y. Supp., 893; 175 App. Div., 363; In re Collard's Estate,
161 N. Y. Supp., 455.) On the contrary, in paragraph 5 of his will, the testator
expressed the desire that his real estate be handled and managed by his executors
until the expiration of the period of ten years therein provided. Judicial expenses
are expenses of administration (61 C. J., p. 1705) but, in State vs. Hennepin County
Probate Court (112 N. W., 878; 101 Minn., 485), it was said: ". . . The compensation
of a trustee, earned, not in the administration of the estate, but in the management
thereof for the benefit of the legatees or devises, does not come properly within
the class or reason for exempting administration expenses. . . . Service rendered in
that behalf have no reference to closing the estate for the purpose of a distribution
thereof to those entitled to it, and are not required or essential to the perfection of
the rights of the heirs or legatees. . . . Trusts . . . of the character of that here before
the court, are created for the the benefit of those to whom the property ultimately
passes, are of voluntary creation, and intended for the preservation of the estate.
No sound reason is given to support the contention that such expenses should be
taken into consideration in fixing the value of the estate for the purpose of this tax."
(d) The defendant levied and assessed the inheritance tax due from the estate of
Thomas Hanley under the provisions of section 1544 of the Revised Administrative
Code, as amended by section 3 of Act No. 3606. But Act No. 3606 went into effect
on January 1, 1930. It, therefore, was not the law in force when the testator died on
May 27, 1922. The law at the time was section 1544 above-mentioned, as amended
by Act No. 3031, which took effect on March 9, 1922.
It is well-settled that inheritance taxation is governed by the statute in force at the
time of the death of the decedent (26 R. C. L., p. 206; 4 Cooley on Taxation, 4th ed.,
p. 3461). The taxpayer can not foresee and ought not to be required to guess the
outcome of pending measures. Of course, a tax statute may be made retroactive in
its operation. Liability for taxes under retroactive legislation has been "one of the
incidents of social life." (Seattle vs. Kelleher, 195 U. S., 360; 49 Law. ed., 232 Sup. Ct.
Rep., 44.) But legislative intent that a tax statute should operate retroactively
should be perfectly clear. (Scwab vs. Doyle, 42 Sup. Ct. Rep., 491; Smietanka vs. First
Trust & Savings Bank, 257 U. S., 602; Stockdale vs. Insurance Co., 20 Wall., 323;
Lunch vs. Turrish, 247 U. S., 221.) "A statute should be considered as prospective in
its operation, whether it enacts, amends, or repeals an inheritance tax, unless the
language of the statute clearly demands or expresses that it shall have a retroactive
effect, . . . ." (61 C. J., P. 1602.) Though the last paragraph of section 5 of
Regulations No. 65 of the Department of Finance makes section 3 of Act No. 3606,
amending section 1544 of the Revised Administrative Code, applicable to all estates
the inheritance taxes due from which have not been paid, Act No. 3606 itself
contains no provisions indicating legislative intent to give it retroactive effect. No
such effect can begiven the statute by this court.
The defendant Collector of Internal Revenue maintains, however, that certain
provisions of Act No. 3606 are more favorable to the taxpayer than those of Act No.
3031, that said provisions are penal in nature and, therefore, should operate
retroactively in conformity with the provisions of article 22 of the Revised Penal
Code. This is the reason why he applied Act No. 3606 instead of Act No. 3031.
Indeed, under Act No. 3606, (1) the surcharge of 25 per cent is based on the tax
only, instead of on both the tax and the interest, as provided for in Act No. 3031,
and (2) the taxpayer is allowed twenty days from notice and demand by rthe
Collector of Internal Revenue within which to pay the tax, instead of ten days only
as required by the old law.
Properly speaking, a statute is penal when it imposes punishment for an offense
committed against the state which, under the Constitution, the Executive has the
power to pardon. In common use, however, this sense has been enlarged to include
within the term "penal statutes" all status which command or prohibit certain acts,
and establish penalties for their violation, and even those which, without expressly
prohibiting certain acts, impose a penalty upon their commission (59 C. J., p. 1110).
Revenue laws, generally, which impose taxes collected by the means ordinarily
resorted to for the collection of taxes are not classed as penal laws, although there
are authorities to the contrary. (See Sutherland, Statutory Construction, 361; Twine
Co. vs. Worthington, 141 U. S., 468; 12 Sup. Ct., 55; Rice vs. U. S., 4 C. C. A., 104; 53
Fed., 910; Com. vs. Standard Oil Co., 101 Pa. St., 150; State vs. Wheeler, 44 P., 430;
25 Nev. 143.) Article 22 of the Revised Penal Code is not applicable to the case at
bar, and in the absence of clear legislative intent, we cannot give Act No. 3606 a
retroactive effect.
(e) The plaintiff correctly states that the liability to pay a tax may arise at a certain
time and the tax may be paid within another given time. As stated by this court,
"the mere failure to pay one's tax does not render one delinqent until and unless
the entire period has eplased within which the taxpayer is authorized by law to
make such payment without being subjected to the payment of penalties for
fasilure to pay his taxes within the prescribed period." (U. S. vs. Labadan, 26 Phil.,
239.)
The defendant maintains that it was the duty of the executor to pay the inheritance
tax before the delivery of the decedent's property to the trustee. Stated otherwise,
the defendant contends that delivery to the trustee was delivery to the cestui que
trust, the beneficiery in this case, within the meaning of the first paragraph of
subsection (b) of section 1544 of the Revised Administrative Code. This contention
is well taken and is sustained. The appointment of P. J. M. Moore as trustee was
made by the trial court in conformity with the wishes of the testator as expressed in
his will. It is true that the word "trust" is not mentioned or used in the will but the
intention to create one is clear. No particular or technical words are required to
create a testamentary trust (69 C. J., p. 711). The words "trust" and "trustee",
though apt for the purpose, are not necessary. In fact, the use of these two words is
not conclusive on the question that a trust is created (69 C. J., p. 714). "To create a
trust by will the testator must indicate in the will his intention so to do by using
language sufficient to separate the legal from the equitable estate, and with
sufficient certainty designate the beneficiaries, their interest in the ttrust, the
purpose or object of the trust, and the property or subject matter thereof. Stated
otherwise, to constitute a valid testamentary trust there must be a concurrence of
three circumstances: (1) Sufficient words to raise a trust; (2) a definite subject; (3) a
certain or ascertain object; statutes in some jurisdictions expressly or in effect so
providing." (69 C. J., pp. 705,706.) There is no doubt that the testator intended to
create a trust. He ordered in his will that certain of his properties be kept together
undisposed during a fixed period, for a stated purpose. The probate court certainly
exercised sound judgment in appointment a trustee to carry into effect the
provisions of the will (see sec. 582, Code of Civil Procedure).
P. J. M. Moore became trustee on March 10, 1924. On that date trust estate vested
in him (sec. 582 in relation to sec. 590, Code of Civil Procedure). The mere fact that
the estate of the deceased was placed in trust did not remove it from the operation
of our inheritance tax laws or exempt it from the payment of the inheritance tax.
The corresponding inheritance tax should have been paid on or before March 10,
1924, to escape the penalties of the laws. This is so for the reason already stated
that the delivery of the estate to the trustee was in esse delivery of the same estate
to the cestui que trust, the beneficiary in this case. A trustee is but an instrument or
agent for the cestui que trust (Shelton vs. King, 299 U. S., 90; 33 Sup. Ct. Rep., 689;
57 Law. ed., 1086). When Moore accepted the trust and took possesson of the trust
estate he thereby admitted that the estate belonged not to him but to his cestui
que trust (Tolentino vs. Vitug, 39 Phil.,126, cited in 65 C. J., p. 692, n. 63). He did not
acquire any beneficial interest in the estate. He took such legal estate only as the
proper execution of the trust required (65 C. J., p. 528) and, his estate ceased upon
the fulfillment of the testator's wishes. The estate then vested absolutely in the
beneficiary (65 C. J., p. 542).
The highest considerations of public policy also justify the conclusion we have
reached. Were we to hold that the payment of the tax could be postponed or
delayed by the creation of a trust of the type at hand, the result would be plainly
disastrous. Testators may provide, as Thomas Hanley has provided, that their
estates be not delivered to their beneficiaries until after the lapse of a certain
period of time. In the case at bar, the period is ten years. In other cases, the trust
may last for fifty years, or for a longer period which does not offend the rule against
petuities. The collection of the tax would then be left to the will of a private
individual. The mere suggestion of this result is a sufficient warning against the
accpetance of the essential to the very exeistence of government. (Dobbins vs. Erie
Country, 16 Pet., 435; 10 Law. ed., 1022; Kirkland vs. Hotchkiss, 100 U. S., 491; 25
Law. ed., 558; Lane County vs. Oregon, 7 Wall., 71; 19 Law. ed., 101; Union
Refrigerator Transit Co. vs. Kentucky, 199 U. S., 194; 26 Sup. Ct. Rep., 36; 50 Law.
ed., 150; Charles River Bridge vs. Warren Bridge, 11 Pet., 420; 9 Law. ed., 773.) The
obligation to pay taxes rests not upon the privileges enjoyed by, or the protection
afforded to, a citizen by the government but upon the necessity of money for the
support of the state (Dobbins vs. Erie Country, supra). For this reason, no one is
allowed to object to or resist the payment of taxes solely because no personal
benefit to him can be pointed out. (Thomas vs. Gay, 169 U. S., 264; 18 Sup. Ct. Rep.,
340; 43 Law. ed., 740.) While courts will not enlarge, by construction, the
government's power of taxation (Bromley vs. McCaughn, 280 U. S., 124; 74 Law.
ed., 226; 50 Sup. Ct. Rep., 46) they also will not place upon tax laws so loose a
construction as to permit evasions on merely fanciful and insubstantial distictions.
(U. S. vs. Watts, 1 Bond., 580; Fed. Cas. No. 16,653; U. S. vs. Wigglesirth, 2 Story,
369; Fed. Cas. No. 16,690, followed in Froelich & Kuttner vs. Collector of Customs,
18 Phil., 461, 481; Castle Bros., Wolf & Sons vs. McCoy, 21 Phil., 300; Muñoz & Co.
vs. Hord, 12 Phil., 624; Hongkong & Shanghai Banking Corporation vs. Rafferty, 39
Phil., 145; Luzon Stevedoring Co. vs. Trinidad, 43 Phil., 803.) When proper, a tax
statute should be construed to avoid the possibilities of tax evasion. Construed this
way, the statute, without resulting in injustice to the taxpayer, becomes fair to the
government.
That taxes must be collected promptly is a policy deeply intrenched in our tax
system. Thus, no court is allowed to grant injunction to restrain the collection of
any internal revenue tax ( sec. 1578, Revised Administrative Code; Sarasola vs.
Trinidad, 40 Phil., 252). In the case of Lim Co Chui vs. Posadas (47 Phil., 461), this
court had occassion to demonstrate trenchment adherence to this policy of the law.
It held that "the fact that on account of riots directed against the Chinese on
October 18, 19, and 20, 1924, they were prevented from praying their internal
revenue taxes on time and by mutual agreement closed their homes and stores and
remained therein, does not authorize the Collector of Internal Revenue to extend
the time prescribed for the payment of the taxes or to accept them without the
additional penalty of twenty five per cent." (Syllabus, No. 3.)
". . . It is of the utmost importance," said the Supreme Court of the United States, ".
. . that the modes adopted to enforce the taxes levied should be interfered with as
little as possible. Any delay in the proceedings of the officers, upon whom the duty
is developed of collecting the taxes, may derange the operations of government,
and thereby, cause serious detriment to the public." (Dows vs. Chicago, 11 Wall.,
108; 20 Law. ed., 65, 66; Churchill and Tait vs. Rafferty, 32 Phil., 580.)
It results that the estate which plaintiff represents has been delinquent in the
payment of inheritance tax and, therefore, liable for the payment of interest and
surcharge provided by law in such cases.
The delinquency in payment occurred on March 10, 1924, the date when Moore
became trustee. The interest due should be computed from that date and it is error
on the part of the defendant to compute it one month later. The provisions cases is
mandatory (see and cf. Lim Co Chui vs. Posadas, supra), and neither the Collector of
Internal Revenuen or this court may remit or decrease such interest, no matter how
heavily it may burden the taxpayer.
To the tax and interest due and unpaid within ten days after the date of notice and
demand thereof by the Collector of Internal Revenue, a surcharge of twenty-five
per centum should be added (sec. 1544, subsec. (b), par. 2, Revised Administrative
Code). Demand was made by the Deputy Collector of Internal Revenue upon Moore
in a communiction dated October 16, 1931 (Exhibit 29). The date fixed for the
payment of the tax and interest was November 30, 1931. November 30 being an
official holiday, the tenth day fell on December 1, 1931. As the tax and interest due
were not paid on that date, the estate became liable for the payment of the
surcharge.
In view of the foregoing, it becomes unnecessary for us to discuss the fifth error
assigned by the plaintiff in his brief.
We shall now compute the tax, together with the interest and surcharge due from
the estate of Thomas Hanley inaccordance with the conclusions we have reached.
At the time of his death, the deceased left real properties valued at P27,920 and
personal properties worth P1,465, or a total of P29,385. Deducting from this
amount the sum of P480.81, representing allowable deductions under secftion
1539 of the Revised Administrative Code, we have P28,904.19 as the net value of
the estate subject to inheritance tax.
The primary tax, according to section 1536, subsection (c), of the Revised
Administrative Code, should be imposed at the rate of one per centum upon the
first ten thousand pesos and two per centum upon the amount by which the share
exceed thirty thousand pesos, plus an additional two hundred per centum. One per
centum of ten thousand pesos is P100. Two per centum of P18,904.19 is P378.08.
Adding to these two sums an additional two hundred per centum, or P965.16, we
have as primary tax, correctly computed by the defendant, the sum of P1,434.24.
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.
EN BANC (3) Cash credit with Canacao Estate Inc. 4,870.88
(4) Cash, with the Chartered Bank of India,
G.R. No. L-11622 January 28, 1961
Australia & China 851.97

THE COLLECTOR OF INTERNAL REVENUE, petitioner, Total Gross Assets P130,792.85

vs.
DOUGLAS FISHER AND BETTINA FISHER, and the COURT OF TAX
APPEALS, respondents.
x---------------------------------------------------------x
G.R. No. L-11668 January 28, 1961.
DOUGLAS FISHER AND BETTINA FISHER, petitioner,
vs.
THE COLLECTOR OF INTERNAL REVENUE, and the COURT OF TAX
APPEALS, respondents.
BARRERA, J.:
This case relates to the determination and settlement of the hereditary estate left
by the deceased Walter G. Stevenson, and the laws applicable thereto. Walter G.
Stevenson (born in the Philippines on August 9, 1874 of British parents and married
in the City of Manila on January 23, 1909 to Beatrice Mauricia Stevenson another
British subject) died on February 22, 1951 in San Francisco, California, U.S.A.
whereto he and his wife moved and established their permanent residence since
May 10, 1945. In his will executed in San Francisco on May 22, 1947, and which was
duly probated in the Superior Court of California on April 11, 1951, Stevenson
instituted his wife Beatrice as his sole heiress to the following real and personal
properties acquired by the spouses while residing in the Philippines, described and
preliminary assessed as follows:
Gross Estate
Real Property — 2 parcels of land in Baguio,
covered by T.C.T. Nos. 378 and 379 P43,500.00
Personal Property
(1) 177 shares of stock of Canacao Estate at
P10.00 each 1,770.00
(2) 210,000 shares of stock of Mindanao Mother
Lode Mines, Inc. at P0.38 per share 79,800.00
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 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 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 in 1909, the applicable law is Article 1325 of the old Civil
Code and not Article 124 of the New Civil Code which became effective only in
1950. It is true that both articles adhere to the so-called nationality theory of
determining the property relation of spouses where one of them is a foreigner and
they have made no prior agreement as to the administration disposition, and
ownership of their conjugal properties. In such a case, the national law of the
husband becomes the dominant law in determining the property relation of the
spouses. There is, however, a difference between the two articles in that Article
1241 of the new Civil Code expressly provides that it shall be applicable regardless
of whether the marriage was celebrated in the Philippines or abroad while Article
13252 of the old Civil Code is limited to marriages contracted in a foreign land.
It must be noted, however, that what has just been said refers to mixed marriages
between a Filipino citizen and a foreigner. In the instant case, both spouses are
foreigners who married in the Philippines. Manresa, 3 in his Commentaries, has this
to say on this point:
La regla establecida en el art. 1.315, se refiere a las capitulaciones
otorgadas en Espana y entre espanoles. El 1.325, a las celebradas en el
extranjero cuando alguno de los conyuges es espanol. En cuanto a la regla
procedente cuando dos extranjeros se casan en Espana, o dos espanoles
en el extranjero hay que atender en el primer caso a la legislacion de pais a
que aquellos pertenezean, y en el segundo, a las reglas generales
consignadas en los articulos 9 y 10 de nuestro Codigo. (Emphasis supplied.)
If we adopt the view of Manresa, the law determinative of the property relation of
the Stevensons, married in 1909, would be the English law even if the marriage was
celebrated in the Philippines, both of them being foreigners. But, as correctly
observed by the Tax Court, the pertinent English law that allegedly vests in the
decedent husband full ownership of the properties acquired during the marriage
has not been proven by petitioner. Except for a mere allegation in his answer, which
is not sufficient, the record is bereft of any evidence as to what English law says on
the matter. In the absence of proof, the Court is justified, therefore, in indulging in
what Wharton calls "processual presumption," in presuming that the law of England
on this matter is the same as our law.4
Nor do we believe petitioner can make use of Article 16 of the New Civil Code (art.
10, old Civil Code) to bolster his stand. A reading of Article 10 of the old Civil Code,
which incidentally is the one applicable, shows that it does not encompass or
contemplate to govern the question of property relation between spouses. Said
article distinctly speaks of amount of successional rights and this term, in speaks in
our opinion, properly refers to the extent or amount of property that each heir is
legally entitled to inherit from the estate available for distribution. It needs to be
pointed out that the property relation of spouses, as distinguished from their
successional rights, is governed differently by the specific and express provisions of
Title VI, Chapter I of our new Civil Code (Title III, Chapter I of the old Civil Code.) We,
therefore, find that the lower court correctly deducted the half of the conjugal
property in determining the hereditary estate left by the deceased Stevenson.
On the second issue, petitioner disputes the action of the Tax Court in the
exempting the respondents from paying inheritance tax on the 210,000 shares of
stock in the Mindanao Mother Lode Mines, Inc. in virtue of the reciprocity proviso
of Section 122 of the National Internal Revenue Code, in relation to Section 13851
of the California Revenue and Taxation Code, on the ground that: (1) the said
proviso of the California Revenue and Taxation Code has not been duly proven by
the respondents; (2) the reciprocity exemptions granted by section 122 of the
National Internal Revenue Code can only be availed of by residents of foreign
countries and not of residents of a state in the United States; and (3) there is no
"total" reciprocity between the Philippines and the state of California in that while
the former exempts payment of both estate and inheritance taxes on intangible
personal properties, the latter only exempts the payment of inheritance tax..
To prove the pertinent California law, Attorney Allison Gibbs, counsel for herein
respondents, testified that as an active member of the California Bar since 1931, he
is familiar with the revenue and taxation laws of the State of California. When asked
by the lower court to state the pertinent California law as regards exemption of
intangible personal properties, the witness cited article 4, section 13851 (a) and (b)
of the California Internal and Revenue Code as published in Derring's California
Code, a publication of the Bancroft-Whitney Company inc. And as part of his
testimony, a full quotation of the cited section was offered in evidence as Exhibits
"V-2" by the respondents.
It is well-settled that foreign laws do not prove themselves in our jurisdiction and
our courts are not authorized to take judicial notice of them. 5 Like any other fact,
they must be alleged and proved.6
Section 41, Rule 123 of our Rules of Court prescribes the manner of proving foreign
laws before our tribunals. However, although we believe it desirable that these laws
be proved in accordance with said rule, we held in the case of Willamette Iron and
Steel Works v. Muzzal, 61 Phil. 471, that "a reading of sections 300 and 301 of our
Code of Civil Procedure (now section 41, Rule 123) will convince one that these
sections do not exclude the presentation of other competent evidence to prove the
existence of a foreign law." In that case, we considered the testimony of an
attorney-at-law of San Francisco, California who quoted verbatim a section of
California Civil Code and who stated that the same was in force at the time the
obligations were contracted, as sufficient evidence to establish the existence of said
law. In line with this view, we find no error, therefore, on the part of the Tax Court
in considering the pertinent California law as proved by respondents' witness.
We now take up the question of reciprocity in exemption from transfer or death
taxes, between the State of California and the Philippines.F
Section 122 of our National Internal Revenue Code, in pertinent part, provides:
... And, provided, further, That no tax shall be collected under this Title in
respect of intangible personal property (a) if the decedent at the time of
his death was a resident of a foreign country which at the time of his death
did not impose a transfer of tax or death tax of any character in respect of
intangible personal property of citizens of the Philippines not residing in
that foreign country, or (b) if the laws of the foreign country of which the
decedent was a resident at the time of his death allow a similar exemption
from transfer taxes or death taxes of every character in respect of
intangible personal property owned by citizens of the Philippines not
residing in that foreign country." (Emphasis supplied).
On the other hand, Section 13851 of the California Inheritance Tax Law, insofar as
pertinent, reads:.
"SEC. 13851, Intangibles of nonresident: Conditions. Intangible personal
property is exempt from the tax imposed by this part if the decedent at the
time of his death was a resident of a territory or another State of the
United States or of a foreign state or country which then imposed a legacy,
succession, or death tax in respect to intangible personal property of its
own residents, but either:.
(a) Did not impose a legacy, succession, or death tax of any character in
respect to intangible personal property of residents of this State, or
(b) Had in its laws a reciprocal provision under which intangible personal
property of a non-resident was exempt from legacy, succession, or death
taxes of every character if the Territory or other State of the United States
or foreign state or country in which the nonresident resided allowed a
similar exemption in respect to intangible personal property of residents of
the Territory or State of the United States or foreign state or country of
residence of the decedent." (Id.)
It is clear from both these quoted provisions that the reciprocity must be total, that
is, with respect to transfer or death taxes of any and every character, in the case of
the Philippine law, and to legacy, succession, or death taxes of any and every
character, in the case of the California law. Therefore, if any of the two states
collects or imposes and does not exempt any transfer, death, legacy, or succession
tax of any character, the reciprocity does not work. This is the underlying principle
of the reciprocity clauses in both laws.
In the Philippines, upon the death of any citizen or resident, or non-resident with
properties therein, there are imposed upon his estate and its settlement, both an
estate and an inheritance tax. Under the laws of California, only inheritance tax is
imposed. On the other hand, the Federal Internal Revenue Code imposes an estate
tax on non-residents not citizens of the United States,7 but does not provide for any
exemption on the basis of reciprocity. Applying these laws in the manner the Court
of Tax Appeals did in the instant case, we will have a situation where a Californian,
who is non-resident in the Philippines but has intangible personal properties here,
will the subject to the payment of an estate tax, although exempt from the
payment of the inheritance tax. This being the case, will a Filipino, non-resident of
California, but with intangible personal properties there, be entitled to the
exemption clause of the California law, since the Californian has not been exempted
from every character of legacy, succession, or death tax because he is, under our
law, under obligation to pay an estate tax? Upon the other hand, if we exempt the
Californian from paying the estate tax, we do not thereby entitle a Filipino to be
exempt from a similar estate tax in California because under the Federal Law, which
is equally enforceable in California he is bound to pay the same, there being no
reciprocity recognized in respect thereto. In both instances, the Filipino citizen is
always at a disadvantage. We do not believe that our legislature has intended such
an unfair situation to the detriment of our own government and people. We,
therefore, find and declare that the lower court erred in exempting the estate in
question from payment of the inheritance tax.
We are not unaware of our ruling in the case of Collector of Internal Revenue vs.
Lara (G.R. Nos. L-9456 & L-9481, prom. January 6, 1958, 54 O.G. 2881) exempting
the estate of the deceased Hugo H. Miller from payment of the inheritance tax
imposed by the Collector of Internal Revenue. It will be noted, however, that the
issue of reciprocity between the pertinent provisions of our tax law and that of the
State of California was not there squarely raised, and the ruling therein cannot
control the determination of the case at bar. Be that as it may, we now declare that
in view of the express provisions of both the Philippine and California laws that the
exemption would apply only if the law of the other grants an exemption from
legacy, succession, or death taxes of every character, there could not be partial
reciprocity. It would have to be total or none at all.
With respect to the question of deduction or reduction in the amount of P4,000.00
based on the U.S. Federal Estate Tax Law which is also being claimed by
respondents, we uphold and adhere to our ruling in the Lara case (supra) that the
amount of $2,000.00 allowed under the Federal Estate Tax Law is in the nature of a
deduction and not of an exemption regarding which reciprocity cannot be claimed
under the provision of Section 122 of our National Internal Revenue Code. Nor is
reciprocity authorized under the Federal Law. .
On the issue of the correctness of the appraisal of the two parcels of land situated
in Baguio City, it is contended that their assessed values, as appearing in the tax
rolls 6 months after the death of Stevenson, ought to have been considered by
petitioner as their fair market value, pursuant to section 91 of the National Internal
Revenue Code. It should be pointed out, however, that in accordance with said
proviso the properties are required to be appraised at their fair market value and
the assessed value thereof shall be considered as the fair market value only when
evidence to the contrary has not been shown. After all review of the record, we are
satisfied that such evidence exists to justify the valuation made by petitioner which
was sustained by the tax court, for as the tax court aptly observed:
"The two parcels of land containing 36,264 square meters were valued by
the administrator of the estate in the Estate and Inheritance tax returns
filed by him at P43,500.00 which is the assessed value of said properties.
On the other hand, defendant appraised the same at P52,200.00. It is of
common knowledge, and this Court can take judicial notice of it, that
assessments for real estate taxation purposes are very much lower than
the true and fair market value of the properties at a given time and place.
In fact one year after decedent's death or in 1952 the said properties were
sold for a price of P72,000.00 and there is no showing that special or
extraordinary circumstances caused the sudden increase from the price of
P43,500.00, if we were to accept this value as a fair and reasonable one as
of 1951. Even more, the counsel for plaintiffs himself admitted in open
court that he was willing to purchase the said properties at P2.00 per
square meter. In the light of these facts we believe and therefore hold that
the valuation of P52,200.00 of the real estate in Baguio made by defendant
is fair, reasonable and justified in the premises." (Decision, p. 19).
In respect to the valuation of the 210,000 shares of stock in the Mindanao Mother
Lode Mines, Inc., (a domestic corporation), respondents contend that their value
should be fixed on the basis of the market quotation obtaining at the San Francisco
(California) Stock Exchange, on the theory that the certificates of stocks were then
held in that place and registered with the said stock exchange. We cannot agree
with respondents' argument. The situs of the shares of stock, for purposes of
taxation, being located here in the Philippines, as respondents themselves concede
and considering that they are sought to be taxed in this jurisdiction, consistent with
the exercise of our government's taxing authority, their fair market value should be
taxed on the basis of the price prevailing in our country.
Upon the other hand, we find merit in respondents' other contention that the said
shares of stock commanded a lesser value at the Manila Stock Exchange six months
after the death of Stevenson. Through Atty. Allison Gibbs, respondents have shown
that at that time a share of said stock was bid for at only P.325 (p. 103, t.s.n.).
Significantly, the testimony of Atty. Gibbs in this respect has never been questioned
nor refuted by petitioner either before this court or in the court below. In the
absence of evidence to the contrary, we are, therefore, constrained to reverse the
Tax Court on this point and to hold that the value of a share in the said mining
company on August 22, 1951 in the Philippine market was P.325 as claimed by
respondents..
It should be noted that the petitioner and the Tax Court valued each share of stock
of P.38 on the basis of the declaration made by the estate in its preliminary return.
Patently, this should not have been the case, in view of the fact that the ancillary
administrator had reserved and availed of his legal right to have the properties of
the estate declared at their fair market value as of six months from the time the
decedent died..
On the fifth issue, we shall consider the various deductions, from the allowance or
disallowance of which by the Tax Court, both petitioner and respondents have
appealed..
Petitioner, in this regard, contends that no evidence of record exists to support the
allowance of the sum of P8,604.39 for the following expenses:.
 1) Administrator's fee P1,204.34
2) Attorney's fee 6,000.00
3) Judicial and Administrative expenses 2,052.55
Total Deductions P8,604.39
An examination of the record discloses, however, that the foregoing items were
considered deductible by the Tax Court on the basis of their approval by the
probate court to which said expenses, we may presume, had also been presented
for consideration. It is to be supposed that the probate court would not have
approved said items were they not supported by evidence presented by the estate.
In allowing the items in question, the Tax Court had before it the pertinent order of
the probate court which was submitted in evidence by respondents. (Exh. "AA-2", p.
100, record). As the Tax Court said, it found no basis for departing from the findings
of the probate court, as it must have been satisfied that those expenses were
actually incurred. Under the circumstances, we see no ground to reverse this
finding of fact which, under Republic Act of California National Association, which it
would appear, that while still living, Walter G. Stevenson obtained we are not
inclined to pass upon the claim of respondents in respect to the additional amount
of P86.52 for funeral expenses which was disapproved by the court a quo for lack of
evidence.
In connection with the deduction of P652.50 representing the amount of realty
taxes paid in 1951 on the decedent's two parcels of land in Baguio City, which
respondents claim was disallowed by the Tax Court, we find that this claim has in
fact been allowed. What happened here, which a careful review of the record will
reveal, was that the Tax Court, in itemizing the liabilities of the estate, viz:
1) Administrator's fee P1,204.34
2) Attorney's fee 6,000.00
3) Judicial and Administration expenses as of August 9, 1952 2,052.55
Total P9,256.89
added the P652.50 for realty taxes as a liability of the estate, to the P1,400.05 for
judicial and administration expenses approved by the court, making a total of
P2,052.55, exactly the same figure which was arrived at by the Tax Court for judicial
and administration expenses. Hence, the difference between the total of P9,256.98
allowed by the Tax Court as deductions, and the P8,604.39 as found by the probate
court, which is P652.50, the same amount allowed for realty taxes. An evident
oversight has involuntarily been made in omitting the P2,000.00 for funeral
expenses in the final computation. This amount has been expressly allowed by the
lower court and there is no reason why it should not be. .
We come now to the other claim of respondents that pursuant to section 89(b) (1)
in relation to section 89(a) (1) (E) and section 89(d), National Internal Revenue
Code, the amount of P10,022.47 should have been allowed the estate as a
deduction, because it represented an indebtedness of the decedent incurred during
his lifetime. In support thereof, they offered in evidence a duly certified claim,
presented to the probate court in California by the Bank of California National
Association, which it would appear, that while still living, Walter G. Stevenson
obtained a loan of $5,000.00 secured by pledge on 140,000 of his shares of stock in
the Mindanao Mother Lode Mines, Inc. (Exhs. "Q-Q4", pp. 53-59, record). The Tax
Court disallowed this item on the ground that the local probate court had not
approved the same as a valid claim against the estate and because it constituted an
indebtedness in respect to intangible personal property which the Tax Court held to
be exempt from inheritance tax.
For two reasons, we uphold the action of the lower court in disallowing the
deduction.
Firstly, we believe that the approval of the Philippine probate court of this
particular indebtedness of the decedent is necessary. This is so although the same,
it is averred has been already admitted and approved by the corresponding probate
court in California, situs of the principal or domiciliary administration. It is true that
we have here in the Philippines only an ancillary administration in this case, but, it
has been held, the distinction between domiciliary or principal administration and
ancillary administration serves only to distinguish one administration from the
other, for the two proceedings are separate and independent. 8 The reason for the
ancillary administration is that, a grant of administration does not ex proprio vigore,
have any effect beyond the limits of the country in which it was granted. Hence, we
have the requirement that before a will duly probated outside of the Philippines
can have effect here, it must first be proved and allowed before our courts, in much
the same manner as wills originally presented for allowance therein. 9 And the
estate shall be administered under letters testamentary, or letters of administration
granted by the court, and disposed of according to the will as probated, after
payment of just debts and expenses of administration. 10 In other words, there is a
regular administration under the control of the court, where claims must be
presented and approved, and expenses of administration allowed before
deductions from the estate can be authorized. Otherwise, we would have the
actuations of our own probate court, in the settlement and distribution of the
estate situated here, subject to the proceedings before the foreign court over which
our courts have no control. We do not believe such a procedure is countenanced or
contemplated in the Rules of Court.
Another reason for the disallowance of this indebtedness as a deduction, springs
from the provisions of Section 89, letter (d), number (1), of the National Internal
Revenue Code which reads:
(d) Miscellaneous provisions — (1) No deductions shall be allowed in the
case of a non-resident not a citizen of the Philippines unless the executor,
administrator or anyone of the heirs, as the case may be, includes in the
return required to be filed under section ninety-three the value at the time
of his death of that part of the gross estate of the non-resident not
situated in the Philippines."
In the case at bar, no such statement of the gross estate of the non-resident
Stevenson not situated in the Philippines appears in the three returns submitted to
the court or to the office of the petitioner Collector of Internal Revenue. The
purpose of this requirement is to enable the revenue officer to determine how
much of the indebtedness may be allowed to be deducted, pursuant to (b), number
(1) of the same section 89 of the Internal Revenue Code which provides:
(b) Deductions allowed to non-resident estates. — In the case of a non-
resident not a citizen of the Philippines, by deducting from the value of
that part of his gross estate which at the time of his death is situated in the
Philippines —
(1) Expenses, losses, indebtedness, and taxes. — That proportion of the
deductions specified in paragraph (1) of subjection (a) of this
section11 which the value of such part bears the value of his entire gross
estate wherever situated;"
In other words, the allowable deduction is only to the extent of the portion of the
indebtedness which is equivalent to the proportion that the estate in the
Philippines bears to the total estate wherever situated. Stated differently, if the
properties in the Philippines constitute but 1/5 of the entire assets wherever
situated, then only 1/5 of the indebtedness may be deducted. But since, as
heretofore adverted to, there is no statement of the value of the estate situated
outside the Philippines, no part of the indebtedness can be allowed to be deducted,
pursuant to Section 89, letter (d), number (1) of the Internal Revenue Code.
For the reasons thus stated, we affirm the ruling of the lower court disallowing the
deduction of the alleged indebtedness in the sum of P10,022.47.
In recapitulation, we hold and declare that:
(a) only the one-half (1/2) share of the decedent Stevenson in the conjugal
partnership property constitutes his hereditary estate subject to the estate
and inheritance taxes;
(b) the intangible personal property is not exempt from inheritance tax,
there existing no complete total reciprocity as required in section 122 of
the National Internal Revenue Code, nor is the decedent's estate entitled
to an exemption of P4,000.00 in the computation of the estate tax;
(c) for the purpose of the estate and inheritance taxes, the 210,000 shares
of stock in the Mindanao Mother Lode Mines, Inc. are to be appraised at
P0.325 per share; and
(d) the P2,000.00 for funeral expenses should be deducted in the
determination of the net asset of the deceased Stevenson.
In all other respects, the decision of the Court of Tax Appeals is affirmed.
Respondent's claim for interest on the amount allegedly overpaid, if any actually
results after a recomputation on the basis 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.
EN BANC Braulio Pineda. The donations contained another clause that they would take effect
upon acceptance. They were accepted during Father Braulio's lifetime by every one
G.R. No. L-29204 December 29, 1928 of the donees.
RUFINA ZAPANTA, ET AL., plaintiffs-appellees,
vs. Every one of the six plaintiffs filed a separate action against the Collector of Internal
JUAN POSADAS, JR., ET AL., defendants-appellants. Revenue and his deputy for the sums of which each of them paid, under protest, as
--------------------------------- inheritance tax on the property donated to them, in accordance with section 1536
G.R. No. L-29205 December 29, 1928 of the Administrative Code, as amended by section 10 of Act No. 2835, and by
ROSARIO PINEDA, plaintiff-appellee, section 1 of Act No. 3031. Section 1536 of the Administrative Code reads:
vs.
JUAN POSADAS, JR., ET AL., defendants-appellants. Every transmission by virtue of inheritance, devise, bequest, gift mortis
--------------------------------- causa or advance in anticipation of inheritance, devise, or bequest of real
G.R. No. L-29206 December 29, 1928 property located in the Philippine Islands and real rights in such property; .
OLIMPIO GUANZON, ET AL., plaintiffs-appellees, ..
vs.
JUAN POSADAS, JR., ET AL., defendants-appellants. The trial court in deciding these six cases, held that the donations to the six
--------------------------------- plaintiffs made by the deceased Father Braulio Pineda are donations inter vivos, and
G.R. No. L-29207 December 29, 1928 therefore, not subject to the inheritance tax, and ordered the defendants to return
LEONCIA PINEDA, ET AL., plaintiffs-appellees, to each of the plaintiffs the sums paid by the latter.
vs.
JUAN POSADAS, JR., ET AL., defendants-appellants.
The defendants appealed from this judgment.
---------------------------------
G.R. No. L-29208 December 29, 1928
The whole quetion involved in this appeal resolves into whether the donations
EMIGDIO DAVID, ET AL., plaintiffs-appellees,
made by Father Braulio Pineda to each of the plaintiffs are donations inter vivos,
vs.
or mortis causa, for it is the latter upon which the Administrative Code imposes
JUAN POSADAS, JR., ET AL., defendants-appellants.
inheritance tax. In our opinion, said donations are inter vivos. It is so expressly
---------------------------------
stated in the instruments in which they appear. They were made in consideration of
G.R. No. L-29209 December 29, 1928
the donor's affection for the donees, and of the services they had rendered him,
GERONIMA PINEDA, plaintiff-appellees,
but he has charged them with the obligation to pay him a certain amount of rice
vs.
and money, respectively, each year during his lifetime, the donations to become
JUAN POSADAS, JR., ET AL., defendants-appellants.
effective upon acceptance. They are therefore not in the nature of donations mortis
Office of the Solicitor-General Reyes for appellants.
causa but inter vivos.
Aurelio Pineda for appellees.

AVANCEÑA, C. J.: The principal characteristics of a donation mortis causa, which distinguish it
essentially from a donation inter vivos, are that in the former it is the donor's death
that determines the acquisition of, or the right to, the property, and that it is
Father Braulio Pineda died in January 1925 without any ascendants or descendants
revocable at the will of the donor. In the donations in question, their effect, that is,
leaving a will in which he instituted his sister Irene Pineda as his sole heiress. During
the acquisition of, or the right to, the property, was produced while the donor was
his lifetime Father Braulio donated some of his property by the instruments to the
still alive, for according to their expressed terms they were to have this effect upon
six plaintifffs, severally, with the condition that some of them would pay him a
acceptance, and this took place during the donor's lifetime. The nature of these
certain amount of rice, and others of money every year, and with the express
donations is not affected by the fact that they were subject to a condition, since it
provision that failure to fulfill this condition would revoke the donations ipso facto.
was imposed as a resolutory condition, and in this sense, it is necessarily implies
These six plaintiff-donees are relatives, and some of them brothers of Father
that the right came into existence first as well as its effect, because otherwise there
would be nothing to resolve upon the nonfulfillment of the condition imposed. Johnson, Malcolm, Villamor, Romualdez and Villa-Real, JJ., concur.
Neither does the fact that these donations are revocable, give them the character Ostrand and Johns, JJ., dissent.
of donations mortis causa, inasmuch as the revocation is not the failure to fulfill the
condition imposed. In relation to the donor's will alone, these donations are Separate Opinions
irrevocable. On the other hand, this condition, in so far as it renders the donation
onerous, takes it further away from the disposition mortis causa and brings it STREET, J., dissenting:
nearer to contract. In this sense, by virtue of this condition imposed, they are not
donations throughout their full extent, but only so far as they exceed the
Of course I agree with so much of the discussion in the majority opinion as
incumbrance imposed, for so far as concerns the portion equivalent to or less than
declarees that the various donations made prior to his death by Rev. Braulio Pineda
said incumbrance, it has the nature of a real contract and is governed by the rule on
to various nephews and nieces were not donations mortis causa. But this is by no
contracts (art. 622 of the Civil Code). And in the part in which it is strictly a
means decisive of the case. Among the forms of succession which are by law made
donation, it is a donation inter vivos, because its effect was produced by the
subject to the inheritance tax are advances in anticipation of inheritance (Adm.
donees' acceptance during the donor's lifetime and was not determined by the
Code, sec. 1536, as amended); and I consider these donations to be taxable in that
donor's death. Upon being accepted they had full effect. If the donor's life is
character. The device adopted in this case for the distribution of the bulk of the
mentioned in connection with this condition, it is only fix the donor's death as the
donor's property before his death is, to my mind, a transparent attempt at an
end of the term within which the condition must be fulfilled, and not because such
evasion of the tax. The donations in question were made to all persons who would
death of the donor is the cause which determines the birth of the right to the
have been entitled to inherit if no will had been made, except one; and this one was
donation. The property donated passed to the ownership of the donees from the
instituted as sole heir in the will. If no will had been left, all of the donees and the
acceptance of the donations, and these could not be revoked except upon the
heir instituted in the will would have shared jointly in the estate by regular
nonfulfillment of the condition imposed, or for other causes prescribed by the law,
succession. It is thus seen that the making of the donations and the making of the
but not by mere will of the donor.
will were part of a single purpose, which was, to effect the distribution of the
donor's property. What else is necessary to make an advance "in anticipation of
Neither can these donations be considered as an advance on inheritance or legacy, inheritance?"
according to the terms of section 1536 of the Administrative Code, because they
are neither an inheritance nor a legacy. And it cannot be said that the plaintiffs
The suggestion in the opinion that the institution of another person as heir in the
received such advance on inheritance or legacy, since they were not heirs or
will had effect of destroying the capacity of the donees to take as heirs, is not well
legatees of their predessor in interest upon his death (sec. 1540 of the
founded, for the question whether these donations should be considered advances
Administrative Code). Neither can it be said that they obtained this inheritance or
in anticipation of inheritance ought to be determined with reference to the
legacy by virtue of a document which does not contain the requisites of a will (sec.
situation at the time the donations were made. The very reason that the
618 of the Code of Civil Pocedure).1awphi1.net
prospective heir to whom no donation had been made was instituted as sole heir in
the will is of course found in the fact that advances had already been made to the
Besides, if the donations made by the plaintiffs are, as the appellants others. The purpose of the statute was to impose a tax on successions; and in order
contended, mortis causa, then they must be governed by the law on testate to prevent the successful use of devices of this kind, the lawmaker expressly made
succession (art. 620 of the Civil Code). In such a case, the documents in which these the tax applicable to advance in anticipation inheritance. If the situation before us is
donations appear, being instruments which do not contain the requisites of a will, not within both the letter and meaning of that provision, the undersigned has
are not valid to transmit the property to the donees (sec. 618, Code of Civil entirely misinterpreted its purport.
Procedure.) Then the defendants are not justified in collecting from the donees the
inheritance tax, on property which has not been legally transferred to them, and in
which they acquired no right.

For these reasons the judgment appealed from is affirmed, without special
pronouncement as to costs. So ordered.
EN BANC
G.R. No. L-30885 January 23, 1930
ALFONSO TUASON Y ANGELES and MARIANO TUASON Y ANGELES, plaintiffs-
appellees,
vs.
JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellant.
Attorney-General Jaranilla for appellant.
Salvador Franco for appellees.
AVANCEÑA, C.J.:
On September 15, 1922, Esperanza Tuason y Chuajap made a donation inter vivos of
certain property to plaintiff Mariano Tuason y Angeles. On April 30, 1923, she made
another donation inter vivos to Alfonso Tuason y Angeles, the other plaintiff. On
January 5, 1926, she died of senile weakness at the age of 73, leaving a will
bequeathing of P5,025 to Mariano Tuason y Angeles. Her judicial administratrix paid
the prescribed inheritance tax on these two bequests.
Furthermore, the defendant collected the sums of P3,809.76 and P6,653.64 from
plaintiffs Mariano Tuason y Angeles and Alfonso Tuason y Angeles against their
opposition and over their protest as inheritance tax upon the gifts inter vivos made
to them.
The plaintiffs brought this action against the Collector of Internal Revenue for the
recovery of the amounts of P3,809.76 and P6,653.64 collected from them as
inheritance tax.
The judgment appealed from ordered the defendant to return the amounts claimed
to the plaintiffs.
The appellant contends that the collection of these amounts as inheritance tax is
authorized by the law.
Section 1536 of the Administrative Code provides:
SEC. 1536. Conditions and rate of taxation. — Every transmission by virtue
of inheritance, devise, bequest, gift mortis causa, or advance in
anticipation of inheritance, devise, or bequest shall be subject to the
following tax;
xxx xxx xxx
Section 1539 enumerates the deductions to be made in determining the net sum
which must bear the tax.
Section 1540 then provides:
SEC. 1540. Additions of gifts and advances. — After the aforementioned
deductions have been made, there shall be added to the resulting amount
the value of all gifts or advances made by the predecessor to any of those
who, after his death, shall prove to be his heirs, devisees, legatees, or
donees mortis causa.
When the law say all gifts, it doubtless refers to gifts inter vivos, and not mortis
causa. Both the letter and the spirit of the law leave no room for any other
interpretation. Such, clearly, is the tenor of the language which refers to donation
that took effect before the donor's death, and not to mortis causa donations, which
can only be made with the formalities of a will, and can only take effect after the
donor's death. Any other construction would virtually change this provision into:
. . . there shall be added to the resulting amount the value of all
gifts mortis causa . . . made by the predecessor to those who, after his
death, shall prove to be his . . . donees mortis causa." We cannot give to
the law an interpretation that would so vitiate its language. The truth of
the matter is that in this section (1540) the law presumes that such gifts
have been made in anticipation of inheritance, devise, bequest, or
gift mortis causa, when the donee, after the death of the donor proves to
be his heir, devisee or donee mortis causa, for the purpose of evading the
tax, and it is to prevent this that it provides that they shall be added to the
resulting amount.
This being so, and it appearing that the appellees after the death of Esperanza
Tuason y Chuajap, were found to be legatees under her will, the donation inter
vivos she had made to them in 1922 and 1923, must be added to the net amount
that is to be taxed.
In the course of the deliberations of this court on this case, the question arose as to
whether or not that interpretation of the law would be constitutional. But as the
parties did not raise this question in the court below, nor in this court, we cannot
consider it. At any rate the argument adduced against its constitutionality, which is
the lack of uniformity, does not seem to be well-founded. It was said that under
such an interpretation, while a donee inter vivos who, after the predecessor's death
prove to be an heir, a legatee, or a donee mortis causa, would have to pay the tax,
another donee inter vivos who did not prove to be an heir, a legatee, or a
donee mortis causa of the predecessor, would be exempt from such a tax. But as
these are two different cases, the principle of uniformity is inapplicable to them.
Aside from this, in regard to other aspects, we see nothing against the
constitutionality of the law (Bromley vs. McCaughn [1929], U. S. Supreme Court
Advance Opinions, p. 69).

The judgment appealed from is reversed, and the defendant is absolved from the
complaint, without special pronouncement of costs. So ordered.
EN BANC
G.R. No. L-36770 November 4, 1932
LUIS W. DISON, plaintiff-appellant,
vs.
JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellant.
Marcelino Aguas for plaintiff-appellant.
Attorney-General Jaranilla for defendant-appellant.
BUTTE, J.:
This is an appeal from the decision of the Court of First Instance of Pampanga in
favor of the defendant Juan Posadas, Jr., Collector of Internal Revenue, in a suit
filed by the plaintiffs, Luis W. Dison, for the recovery of an inheritance tax in the
sum of P2,808.73 paid under protest. The petitioner alleged in his complaint that
the tax is illegal because he received the property, which is the basis of the tax,
from his father before his death by a deed of gift inter vivos which was duly
accepted and registered before the death of his father. The defendant answered
with a general denial and with a counterdemand for the sum of P1,245.56 which it
was alleged is a balance still due and unpaid on account of said tax. The plaintiff
replied to the counterdemand with a general denial. The court a quo held that the
cause of action set up in the counterdemand was not proven and dismissed the
same. Both sides appealed to this court, but the cross-complaint and appeal of the
Collector of Internal Revenue were dismissed by this court on March 17, 1932, on
motion of the Attorney-General.1awphil.net
The only evidence introduced at the trial of this cause was the proof of payment of
the tax under protest, as stated, and the deed of gift executed by Felix Dison on
April 9, 1928, in favor of his sons Luis W. Dison, the plaintiff-appellant. This deed of
gift transferred twenty-two tracts of land to the donee, reserving to the donor for
his life the usufruct of three tracts. This deed was acknowledged by the donor
before a notary public on April 16, 1928. Luis W. Dison, on April 17, 1928, formally
accepted said gift by an instrument in writing which he acknowledged before a
notary public on April 20, 1928.
At the trial the parties agreed to and filed the following ingenious stipulation of
fact:
1. That Don Felix Dison died on April 21, 1928;
2. That Don Felix Dison, before his death, made a gift inter vivos in favor of
the plaintiff Luis W. Dison of all his property according to a deed of gift
(Exhibit D) which includes all the property of Don Felix Dizon;
3. That the plaintiff did not receive property of any kind of Don Felix Dison
upon the death of the latter;
4. That Don Luis W. Dison was the legitimate and only child of Don Felix
Dison.
It is inferred from Exhibit D that Felix Dison was a widower at the time of his death.
The theory of the plaintiff-appellant is that he received and holds the property
mentioned by a consummated gift and that Act No. 2601 (Chapter 40 of the
Administrative Code) being the inheritance tax statute, does not tax gifts. The
provision directly here involved is section 1540 of the Administrative Code which
reads as follows:
Additions of Gifts and Advances. — After the aforementioned deductions
have been made, there shall be added to the resulting amount the value of
all gifts or advances made by the predecessor to any of those who, after
his death, shall prove to be his heirs, devises, legatees, or donees mortis
causa.
The question to be resolved may be stated thus: Does section 1540 of the
Administrative Code subject the plaintiff-appellant to the payment of an inheritance
tax?
The appellant argues that there is no evidence in this case to support a finding that
the gift was simulated and that it was an artifice for evading the payment of the
inheritance tax, as is intimated in the decision of the court below and the brief of
the Attorney-General. We see no reason why the court may not go behind the
language in which the transaction is masked in order to ascertain its true character
and purpose. In this case the scanty facts before us may not warrant the inference
that the conveyance, acknowledged by the donor five days before his death and
accepted by the donee one day before the donor's death, was fraudulently made
for the purpose of evading the inheritance tax. But the facts, in our opinion, do
warrant the inference that the transfer was an advancement upon the inheritance
which the donee, as the sole and forced heir of the donor, would be entitled to
receive upon the death of the donor.
The argument advanced by the appellant that he is not an heir of his deceased
father within the meaning of section 1540 of the Administrative Code because his
father in his lifetime had given the appellant all his property and left no property to and it is to prevent this that it provides that they shall be added to the resulting
be inherited, is so fallacious that the urging of it here casts a suspicion upon the amount." However much appellant's argument on this point may fit his
appellants reason for completing the legal formalities of the transfer on the eve of preconceived notion that the transaction between him and his father was a
the latter's death. We do not know whether or not the father in this case left a will; consummated gift with no relation to the inheritance, we hold that there is not
in any event, this appellant could not be deprived of his share of the inheritance merit in this attack upon the constitutionality of section 1540 under our view of the
because the Civil Code confers upon him the status of a forced heir. We construe facts. No other constitutional questions were raised in this case.
the expression in section 1540 "any of those who, after his death, shall prove to be
his heirs", to include those who, by our law, are given the status and rights of heirs, The judgment below is affirmed with costs in this instance against the appellant. So
regardless of the quantity of property they may receive as such heirs. That the ordered.
appellant in this case occupies the status of heir to his deceased father cannot be
questioned. Construing the conveyance here in question, under the facts
presented, as an advance made by Felix Dison to his only child, we hold section
1540 to be applicable and the tax to have been properly assessed by the Collector
of Internal Revenue.

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

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

". . . there shall be added to the resulting amount the value of all gifts mortis causa .
. . made by the predecessor to those who, after his death, shall prove to be his . . .
donees mortis causa." We cannot give to the law an interpretation that would so
vitiate its language. The truth of the matter is that in this section (1540) the law
presumes that such gifts have been made in anticipation of inheritance, devise,
bequest, or gift mortis causa, when the donee, after the death of the donor proves
to be his heir, devisee or donee mortis causa, for the purpose of evading the tax,
EN BANC
G.R. No. L-34937 March 13, 1933
CONCEPCION VIDAL DE ROCES and her husband,
MARCOS ROCES, and ELVIRA VIDAL DE RICHARDS, plaintiff-appellants,
vs.
JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellee.
Feria and La O for appellants.
Attorney-General Jaranilla for appellee.
IMPERIAL, J.:
The plaintiffs herein brought this action to recover from the defendant, Collector of
Internal Revenue, certain sums of money paid by them under protest as inheritance
tax. They appealed from the judgment rendered by the Court of First Instance of
Manila dismissing the action, without costs.
On March 10 and 12, 1925, Esperanza Tuazon, by means of public documents,
donated certain parcels of land situated in Manila to the plaintiffs herein, who, with
their respective husbands, accepted them in the same public documents, which
were duly recorded in the registry of deeds. By virtue of said donations, the
plaintiffs took possession of the said lands, received the fruits thereof and obtained
the corresponding transfer certificates of title.
On January 5, 1926, the donor died in the City of Manila without leaving any forced
heir and her will which was admitted to probate, she bequeathed to each of the
donees the sum of P5,000. After the estate had been distributed among the
instituted legatees and before delivery of their respective shares, the appellee
herein, as Collector of Internal Revenue, ruled that the appellants, as donees and
legatees, should pay as inheritance tax the sums of P16,673 and P13,951.45,
respectively. Of these sums P15,191.48 was levied as tax on the donation to
Concepcion Vidal de Roces and P1,481.52 on her legacy, and, likewise, P12,388.95
was imposed upon the donation made to Elvira Vidal de Richards and P1,462.50 on
her legacy. At first the appellants refused to pay the aforementioned taxes but, at
the insistence of the appellee and in order not to delay the adjudication of the
legacies, they agreed at last, to pay them under protest.
The appellee filed a demurrer to the complaint on the ground that the facts alleged
therein were not sufficient to constitute a cause of action. After the legal questions
raised therein had been discussed, the court sustained the demurrer and ordered
the amendment of the complaint which the appellants failed to do, whereupon the
trial court dismissed the action on the ground that the afore- mentioned appellants
did not really have a right of action.
In their brief, the appellants assign only one alleged error, to wit: that the demurrer
interposed by the appellee was sustained without sufficient ground.
The judgment appealed from was based on the provisions of section 1540
Administrative Code which reads as follows:
SEC. 1540. Additions of gifts and advances. — After the aforementioned
deductions have been made, there shall be added to the resulting amount
the value of all gifts or advances made by the predecessor to any those
who, after his death, shall prove to be his heirs, devisees, legatees, or
donees mortis causa.
The appellants contend that the above-mentioned legal provision does not include
donations inter vivos and if it does, it is unconstitutional, null and void for the
following reasons: first, because it violates section 3 of the Jones Law which
provides that no law should embrace more than one subject, and that subject
should be expressed in the title thereof; second that the Legislature has no
authority to impose inheritance tax on donations inter vivos; and third, because a
legal provision of this character contravenes the fundamental rule of uniformity of
taxation. The appellee, in turn, contends that the words "all gifts" refer clearly to
donations inter vivos and, in support of his theory, cites the doctrine laid in the case
of Tuason and Tuason vs. Posadas (54 Phil., 289). After a careful study of the law
and the authorities applicable thereto, we are the opinion that neither theory
reflects the true spirit of the aforementioned provision. The gifts referred to in
section 1540 of the Revised Administration Code are, obviously, those
donations inter vivos that take effect immediately or during the lifetime of the
donor but are made in consideration or in contemplation of death. Gifts inter vivos,
the transmission of which is not made in contemplation of the donor's death should
not be understood as included within the said legal provision for the reason that it
would amount to imposing a direct tax on property and not on the transmission
thereof, which act does not come within the scope of the provisions contained in
Article XI of Chapter 40 of the Administrative Code which deals expressly with the
tax on inheritances, legacies and other acquisitions mortis causa.
Our interpretation of the law is not in conflict with the rule laid down in the case
of Tuason and Tuason vs. Posadas, supra. We said therein, as we say now, that the
expression "all gifts" refers to gifts inter vivos inasmuch as the law considers them
as advances on inheritance, in the sense that they are gifts inter vivos made in
contemplation or in consideration of death. In that case, it was not held that that
kind of gifts consisted in those made completely independent of death or without
regard to it.
Said legal provision is not null and void on the alleged ground that the subject
matter thereof is not embraced in the title of the section under which it is
enumerated. On the contrary, its provisions are perfectly summarized in the
heading, "Tax on Inheritance, etc." which is the title of Article XI. Furthermore, the
constitutional provision cited should not be strictly construed as to make it
necessary that the title contain a full index to all the contents of the law. It is
sufficient if the language used therein is expressed in such a way that in case of
doubt it would afford a means of determining the legislators intention. (Lewis'
Sutherland Statutory Construction, Vol. II, p. 651.) Lastly, the circumstance that the
Administrative Code was prepared and compiled strictly in accordance with the
provisions of the Jones Law on that matter should not be overlooked and that, in a
compilation of laws such as the Administrative Code, it is but natural and proper
that provisions referring to diverse matters should be found. (Ayson and Ignacio vs.
Provincial Board of Rizal and Municipal Council of Navotas, 39 Phil., 931.)
The appellants question the power of the Legislature to impose taxes on the
transmission of real estate that takes effect immediately and during the lifetime of
the donor, and allege as their reason that such tax partakes of the nature of the
land tax which the law has already created in another part of the Administrative
Code. Without making express pronouncement on this question, for it is
unnecessary, we wish to state that such is not the case in these instance. The tax
collected by the appellee on the properties donated in 1925 really constitutes an
inheritance tax imposed on the transmission of said properties in contemplation or
in consideration of the donor's death and under the circumstance that the donees
were later instituted as the former's legatees. For this reason, the law considers
such transmissions in the form of gifts inter vivos, as advances on inheritance and
nothing therein violates any constitutional provision, inasmuch as said legislation is
within the power of the Legislature.
Property Subject to Inheritance Tax. — The inheritance tax ordinarily
applies to all property within the power of the state to reach passing by
will or the laws regulating intestate succession or by gift inter vivos in the
manner designated by statute, whether such property be real or personal,
tangible or intangible, corporeal or incorporeal. (26 R.C.L., p. 208, par.
177.)
In the case of Tuason and Tuason vs. Posadas, supra, it was also held that section
1540 of the Administrative Code did not violate the constitutional provision
regarding uniformity of taxation. It cannot be null and void on this ground because
it equally subjects to the same tax all of those donees who later become heirs,
legatees or donees mortis causa by the will of the donor. There would be a
repugnant and arbitrary exception if the provisions of the law were not applicable
to all donees of the same kind. In the case cited above, it was said: "At any rate the
argument adduced against its constitutionality, which is the lack of Uniformity, does
not seem to be well founded. It was said that under such an interpretation, while a
donee inter vivos who, after the predecessor's death proved to be an heir, a
legatee, or a donee mortis causa, would have to pay the tax, another donee inter
vivos who did not prove to he an heir, a legatee, or a donee mortis causa of the
predecessor, would be exempt from such a tax. But as these are two different
cases, the principle of uniformity is inapplicable to them."
The last question of a procedural nature arising from the case at bar, which should
be passed upon, is whether the case, as it now stands, can be decided on the merits
or should be remanded to the court a quo for further proceedings. According to our
view of the case, it follows that, if the gifts received by the appellants would have
the right to recover the sums of money claimed by them. Hence the necessity of
ascertaining whether the complaint contains an allegation to that effect. We have
examined said complaint and found nothing of that nature. On the contrary, it be
may be inferred from the allegations contained in paragraphs 2 and 7 thereof that
said donations inter vivos were made in consideration of the donor's death. We
refer to the allegations that such transmissions were effected in the month of
March, 1925, that the donor died in January, 1926, and that the donees were
instituted legatees in the donor's will which was admitted to probate. It is from
these allegations, especially the last, that we infer a presumption juris tantum that
said donations were made mortis causa and, as such, are subject to the payment of
inheritance tax.
Wherefore, the demurrer interposed by the appellee was well-founded because it
appears that the complaint did not allege fact sufficient to constitute a cause of
action. When the appellants refused to amend the same, spite of the court's order
to that effect, they voluntarily waived the opportunity offered them and they are
not now entitled to have the case remanded for further proceedings, which would
serve no purpose altogether in view of the insufficiency of the complaint.
Wherefore, the judgment appealed from is hereby affirmed, with costs of this
instance against the appellants. So ordered.
[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.: Supr-ema
Assailed in this petition for review on certiorari is the December 21, 1995
Decision[1] of the Court of Appeals[2] 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] Jur-is
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]Juri-ssc
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 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. J-jlex
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. x x x
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 Pajonar to his
rightful heirs. Sc-juris
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. ] Nc-mmis
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 estate 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 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: Newmiso
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. Acctmis
 The amount of P50,000.00 was incurred as attorney's fees in the
guardianship proceedings in Spec. Proc. No. 1254. Petitioner
contends that said amount are not expenses of the testamentary
or intestate proceedings as the guardianship proceeding was
instituted during the lifetime of the decedent when there was yet
no estate to be settled.
Again , this contention must fail.
The guardianship proceeding in this case was necessary for the
distribution of the property of the deceased Pedro Pajonar. As
correctly pointed out by respondent CTA, the PNB was appointed
guardian over the assets of the deceased, and that necessarily the
assets of the deceased formed part of his gross estate. x x x
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] Scc-alr
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.[24]
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.
SO ORDERED.

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
G.R. No. L-29276 May 18, 1978 3. Repair of terrace and

Testate Estate of the Late Felix J. de Guzman. VICTORINO G. DE interior of house — P5,928.00 — P10,399.59
GUZMAN, administrator-appellee,
vs. II. Living expenses of Librada de Guzman while occupying the family home without
CRISPINA DE GUZMAN-CARILLO, ARSENIO DE GUZMAN and HONORATA DE paying rent:
GUZMAN-MENDIOLA, oppositors-appellants.
1. For house helper — P1,170.00
Emiliano Samson & R. Balderama-Samson for appellants.
2. Light bills — 227.41
Cezar Paralejo for appellee.
3. Water bills — 150.80
AQUINO, J.:
4. Gas oil, floor wax
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 and switch nail — 54.90 — P 1,603.11
Guzman of Gapan, Nueva Ecija.
III. Other expenses:
The deceased testator was survived by eight children named Victorino, Librada,
Severino, Margarita, Josefina, Honorata, Arsenio and Crispina. His will was duly
1. Lawyer's subsistence — P 19.30
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
2. Gratuity pay in lieu
Instance of Nueva Ecija in Special Proceeding No. 1431.

of medical fee — 144.00

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- 3. For stenographic notes — 100.00
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 4. For food served on
14, 1967 but without prejudice to the final outcome of the accounting.
decedent's first
The administrator submitted four accounting reports for the period from June 16,
1964 to September, 1967. Three heirs Crispina de Guzmans-Carillo Honorata de death anniversary — 166.65
Guzman-Mendiola and Arsenio de Guzman interposed objections to the
administrator's disbursements in the total sum of P13,610.48, broken down as 5. Cost of publication of
follows:
death anniversary
I. Expense for the improvement and renovation of the decedent's residential house.
of decedent — 102.00
1. Construction of fence — P3,082.07
6. Representation
2. Renovation of bathroom — P1,389.52
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 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 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.

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.

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.
RAFAEL ARSENIO S. DIZON, in his capacity as the G.R. No. 140944 Petitioner alleged that several requests for extension of the period to file the
Judicial Administrator of the Estate of the required estate tax return were granted by the BIR since the assets of the estate, as
deceased JOSE P. FERNANDEZ, Present: well as the claims against it, had yet to be collated, determined and identified. Thus,
Petitioner, in a letter[8] dated March 14, 1990, Justice Dizon authorized Atty. Jesus M. Gonzales
YNARES-SANTIAGO, J., (Atty. Gonzales) to sign and file on behalf of the Estate the required estate tax
Chairperson, return and to represent the same in securing a Certificate of Tax Clearance.
- versus - AUSTRIA-MARTINEZ, Eventually, on April 17, 1990, Atty. Gonzales wrote a letter[9] addressed to the BIR
CHICO-NAZARIO, Regional Director for San Pablo City and filed the estate tax return[10] with the same
NACHURA, and BIR Regional Office, showing therein a NIL estate tax liability, computed as follows:
COURT OF TAX APPEALS and COMMISSIONER OF REYES, JJ.
INTERNAL REVENUE,
Respondents. Promulgated:

April 30, 2008 COMPUTATION OF TAX

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

x------------------------------------------------------------------------------------x
DECISION
NACHURA, J.:
Before this Court is a Petition for Review on Certiorari[1] under Rule 45 of the Rules
of Civil Procedure seeking the reversal of the Court of Appeals (CA)
Decision[2] dated April 30, 1999 which affirmed the Decision[3] of the Court of Tax
Appeals (CTA) dated June 17, 1997.[4]
The Facts
On November 7, 1987, Jose P. Fernandez (Jose) died. Thereafter, a petition for the
probate of his will[5] was filed with Branch 51 of the Regional Trial Court (RTC)
of Manila (probate court).[6] The probate court then appointed retired Supreme
Court Justice Arsenio P. Dizon (Justice Dizon) and petitioner, Atty. Rafael Arsenio P.
Dizon (petitioner) as Special and Assistant Special Administrator, respectively, of the
Estate of Jose (Estate). In a letter[7] dated October 13, 1988, Justice Dizon informed
respondent Commissioner of the Bureau of Internal Revenue (BIR) of the special
proceedings for the Estate.
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]
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]
 settlement of the estate (p. 126,
BIR records); "A"
However, on November 26, 1991, the Assistant Commissioner for
Collection of the BIR, Themistocles Montalban, issued Estate Tax Assessment Notice 2. Petition for the probate of the
No. FAS-E-87-91-003269,[17] demanding the payment of P66,973,985.40 as will and issuance of letter of
deficiency estate tax, itemized as follows: administration filed with the
Regional Trial Court (RTC) of
Deficiency Estate Tax- 1987 Manila, docketed as Sp. Proc.
No. 87-42980 (pp. 107-108, BIR
Estate tax P31,868,414.48 records); "B" & "B-1
25% surcharge- late filing 7,967,103.62
late payment 7,967,103.62 3. Pleading entitled "Compliance"
Interest 19,121,048.68 filed with the probate Court
Compromise-non filing 25,000.00 submitting the final inventory
non payment 25,000.00 of all the properties of the
no notice of death 15.00 deceased (p. 106, BIR records); "C"
no CPA Certificate 300.00
4. Attachment to Exh. "C" which
Total amount due & collectible P66,973,985.40[18] is the detailed and complete
listing of the properties of
the deceased (pp. 89-105, BIR rec.); "C-1" to "C-17"
In his letter[19] dated December 12, 1991, Atty. Gonzales moved for the
reconsideration of the said estate tax assessment. However, in her 5. Claims against the estate filed
letter[20] dated April 12, 1994, the BIR Commissioner denied the request and by Equitable Banking Corp. with
reiterated that the estate is liable for the payment of P66,973,985.40 as deficiency the probate Court in the amount
estate tax. On May 3, 1994, petitioner received the letter of denial. On June 2, of P19,756,428.31 as of March 31,
1994, petitioner filed a petition for review[21] before respondent CTA. Trial on the 1988, together with the Annexes
merits ensued. to the claim (pp. 64-88, BIR records); "D" to "D-24"

6. Claim filed by Banque de L'

As found by the CTA, the respective parties presented the following pieces of Indochine et de Suez with the
evidence, to wit: probate Court in the amount of
US $4,828,905.90 as of January 31,
In the hearings conducted, petitioner did not present testimonial 1988 (pp. 262-265, BIR records); "E" to "E-3"
evidence but merely documentary evidence consisting of the
following: 7. Claim of the Manila Banking
Corporation (MBC) which as of
Nature of Document (sic) Exhibits November 7, 1987 amounts to
P65,158,023.54, but recomputed
1. Letter dated October 13, 1988 as of February 28, 1989 at a
from Arsenio P. Dizon addressed total amount of P84,199,160.46;
to the Commissioner of Internal together with the demand letter
Revenue informing the latter of from MBC's lawyer (pp. 194-197,
the special proceedings for the BIR records); "F" to "F-3"

8. Demand letter of Manila Banking
Corporation prepared by Asedillo,
Ramos and Associates Law Offices
addressed to Fernandez Hermanos,
Inc., represented by Jose P.
Fernandez, as mortgagors, in the
total amount of P240,479,693.17
as of February 28, 1989
(pp. 186-187, BIR records); "G" & "G-1"
9. Claim of State Investment
House, Inc. filed with the
RTC, Branch VII of Manila,
docketed as Civil Case No.
86-38599 entitled "State
Investment House, Inc.,
Plaintiff, versus Maritime
Company Overseas, Inc. and/or
Jose P. Fernandez, Defendants,"
(pp. 200-215, BIR records); "H" to "H-16"
10. Letter dated March 14, 1990
of Arsenio P. Dizon addressed
to Atty. Jesus M. Gonzales,
(p. 184, BIR records); "I"
11. Letter dated April 17, 1990
from J.M. Gonzales addressed
to the Regional Director of
BIR in San Pablo City
(p. 183, BIR records); "J"
12. Estate Tax Return filed by
the estate of the late Jose P.
Fernandez through its authorized
representative, Atty. Jesus M.
Gonzales, for Arsenio P. Dizon,
with attachments (pp. 177-182,
BIR records); "K" to "K-5"
13. Certified true copy of the
Letter of Administration
issued by RTC Manila, Branch
51, in Sp. Proc. No. 87-42980
appointing Atty. Rafael S.
Dizon as Judicial Administrator
of the estate of Jose P.
Fernandez; (p. 102, CTA records)
and "L"
14. Certification of Payment of
estate taxes Nos. 2052 and
2053, both dated April 27, 1990,
issued by the Office of the
Regional Director, Revenue
Region No. 4-C, San Pablo
City, with attachments
(pp. 103-104, CTA records.). "M" to "M-5"
Respondent's [BIR] counsel presented on June 26, 1995 one
witness in the person of Alberto Enriquez, who was one of the
revenue examiners who conducted the investigation on the
estate tax case of the late Jose P. Fernandez. In the course of the
direct examination of the witness, he identified the following:
Documents/
Signatures BIR Record
1. Estate Tax Return prepared by
the BIR; p. 138
2. Signatures of Ma. Anabella
Abuloc and Alberto Enriquez,
Jr. appearing at the lower
Portion of Exh. "1"; -do-
3. Memorandum for the Commissioner,
dated July 19, 1991, prepared by
revenue examiners, Ma. Anabella A.
Abuloc, Alberto S. Enriquez and
Raymund S. Gallardo; Reviewed by
Maximino V. Tagle pp. 143-144
4. Signature of Alberto S.
Enriquez appearing at the
lower portion on p. 2 of Exh. "2"; -do-
5. Signature of Ma. Anabella A.
Abuloc appearing at the On June 17, 1997, the CTA denied the said petition for review. Citing this Court's
lower portion on p. 2 of Exh. "2"; -do- ruling in Vda. de Oate v. Court of Appeals,[23] the CTA opined that the
aforementioned pieces of evidence introduced by the BIR were admissible in
6. Signature of Raymund S. evidence. The CTA ratiocinated:
Gallardo appearing at the Although the above-mentioned documents were not formally
Lower portion on p. 2 of Exh. "2"; -do- offered as evidence for respondent, considering that respondent
has been declared to have waived the presentation thereof during
7. Signature of Maximino V. the hearing on March 20, 1996, still they could be considered as
Tagle also appearing on evidence for respondent since they were properly identified
p. 2 of Exh. "2"; -do- during the presentation of respondent's witness, whose
testimony was duly recorded as part of the records of this case.
8. Summary of revenue Besides, the documents marked as respondent's exhibits formed
Enforcement Officers Audit part of the BIR records of the case.[24]
Report, dated July 19, 1991; p. 139

9. Signature of Alberto
Enriquez at the lower Nevertheless, the CTA did not fully adopt the assessment made by the BIR and it
portion of Exh. "3"; -do- came up with its own computation of the deficiency estate tax, to wit:

10. Signature of Ma. Anabella A. Conjugal Real Property P 5,062,016.00

Abuloc at the lower Conjugal Personal Prop. 33,021,999.93
portion of Exh. "3"; -do- Gross Conjugal Estate 38,084,015.93
Less: Deductions 26,250,000.00
11. Signature of Raymond S. Net Conjugal Estate P 11,834,015.93
Gallardo at the lower Less: Share of Surviving Spouse 5,917,007.96
portion of Exh. "3"; -do- Net Share in Conjugal Estate P 5,917,007.96
Add: Capital/Paraphernal
12. Signature of Maximino Properties P44,652,813.66
V. Tagle at the lower Less: Capital/Paraphernal
portion of Exh. "3"; -do- Deductions 44,652,813.66
Net Taxable Estate P 50,569,821.62
13. Demand letter (FAS-E-87-91-00), ============
signed by the Asst. Commissioner
for Collection for the Commissioner Estate Tax Due P 29,935,342.97
of Internal Revenue, demanding Add: 25% Surcharge for Late Filing 7,483,835.74
payment of the amount of Add: Penalties for-No notice of death 15.00
P66,973,985.40; and p. 169 No CPA certificate 300.00
Total deficiency estate tax P 37,419,493.71
14. Assessment Notice FAS-E-87-91-00 pp. 169-170[22] =============

exclusive of 20% interest from due date of its payment until full
The CTA's Ruling payment thereof
 [Sec. 283 (b), Tax Code of 1987].[25]
Thus, the CTA disposed of the case in this wise:
WHEREFORE, viewed from all the foregoing, the Court finds the
petition unmeritorious and denies the same. Petitioner and/or the
heirs of Jose P. Fernandez are hereby ordered to pay to
respondent the amount of P37,419,493.71 plus 20% interest from
the due date of its payment until full payment thereof as estate
tax liability of the estate of Jose P. Fernandez who died on
November 7, 1987.
SO ORDERED.[26]
Aggrieved, petitioner, on March 2, 1998, went to the CA via a petition for review. [27]
The CA's Ruling
On April 30, 1999, the CA affirmed the CTA's ruling. Adopting in full the CTA's
findings, the CA ruled that the petitioner's act of filing an estate tax return with the
BIR and the issuance of BIR Certification Nos. 2052 and 2053 did not deprive the BIR
Commissioner of her authority to re-examine or re-assess the said return filed on
behalf of the Estate.[28]
On May 31, 1999, petitioner filed a Motion for Reconsideration [29] which the CA
denied in its Resolution[30] dated November 3, 1999.
Hence, the instant Petition raising the following issues:
1. Whether or not the admission of evidence which were not
formally offered by the respondent BIR by the Court of Tax
Appeals which was subsequently upheld by the Court of
Appeals is contrary to the Rules of Court and rulings of this
Honorable Court;
2. Whether or not the Court of Tax Appeals and the Court of
Appeals erred in recognizing/considering the estate tax return
prepared and filed by respondent BIR knowing that the
probate court appointed administrator of the estate of Jose P.
Fernandez had previously filed one as in fact, BIR Certification
Clearance Nos. 2052 and 2053 had been issued in the estate's
favor;
3. Whether or not the Court of Tax Appeals and the Court of
Appeals erred in disallowing the valid and enforceable claims
of creditors against the estate, as lawful deductions despite
clear and convincing evidence thereof; and
4. Whether or not the Court of Tax Appeals and the Court of
Appeals erred in validating erroneous double imputation of
values on the very same estate properties in the estate tax
return it prepared and filed which effectively bloated the
estate's assets.[31]
The petitioner claims that in as much as the valid claims of creditors against the
Estate are in excess of the gross estate, no estate tax was due; that the lack of a
formal offer of evidence is fatal to BIR's cause; that the doctrine laid down in Vda.
de Oate 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 Oate is
still applicable, BIR failed to comply with the doctrine's requisites because the
documents herein remained simply part of the BIR records and were not duly
incorporated in the court records; that the BIR failed to consider that although the
actual payments made to the Estate creditors were lower than their respective
claims, such were compromise agreements reached long after the Estate's liability
had been 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 Courts 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 Oate, which
reiterated this Court's previous rulings in People v. Napat-a[35] and People v.
Mate[36] on the admission and consideration of exhibits which were not formally
offered during the trial. Although in a long line of cases many of which were
decided after Vda. de Oate, 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 Oate 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 Oate still
subsists in this jurisdiction. In Vda. de Oate, 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 Oate 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 Albertos 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 Oate 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 ends in themselves and are primarily intended as tools in the
administration of justice, the presentation of the BIR's evidence is not a mere
procedural technicality which may be disregarded considering that it is the only
means by which the CTA may ascertain and verify the truth of BIR's claims against
the Estate.[46] The BIR's failure to formally offer these pieces of evidence, despite
CTA's directives, is fatal to its cause.[47] Such failure is aggravated by the fact that
not even a single reason was advanced by the BIR to justify such fatal omission.
This, we take against the BIR.
Per the records of this case, the BIR was directed to present its evidence[48] in the
hearing of February 21, 1996, but BIR's counsel failed to appear. [49] The CTA denied
petitioner's motion to consider BIR's presentation of evidence as waived, with a
warning to BIR that such presentation would be considered waived if BIR's evidence
would not be presented at the next hearing. Again, in the hearing of March 20,
1996, BIR's counsel failed to appear.[50] Thus, in its Resolution[51] dated March 21,
1996, the CTA considered the BIR to have waived presentation of its evidence. In
the same Resolution, the parties were directed to file their respective
memorandum. Petitioner complied but BIR failed to do so.[52] In all of these
proceedings, BIR was duly notified. Hence, in this case, we are constrained to apply
our ruling in Heirs of Pedro Pasag v. Parocha:[53]
A formal offer is necessary because judges are mandated
to rest their findings of facts and their judgment only and strictly
upon the evidence offered by the parties at the trial. Its function
is to enable the trial judge to know the purpose or purposes for
which the proponent is presenting the evidence. On the other
hand, this allows opposing parties to examine the evidence and
object to its admissibility. Moreover, it facilitates review as the
appellate court will not be required to review documents not
previously scrutinized by the trial court.
Strict adherence to the said rule is not a trivial matter. The Court
in Constantino v. Court of Appeals ruled that the formal offer of
one's evidence is deemed waived after failing to submit it within
a considerable period of time. It explained that the court cannot
admit an offer of evidence made after a lapse of three (3)
months because to do so would "condone an inexcusable laxity
if not non-compliance with a court order which, in effect, would
encourage needless delays and derail the speedy administration
of justice."
Applying the aforementioned principle in this case, we find that
the trial court had reasonable ground to consider that petitioners
had waived their right to make a formal offer of documentary or
object evidence. Despite several extensions of time to make their
formal offer, petitioners failed to comply with their commitment
and allowed almost five months to lapse before finally submitting
it. Petitioners' failure to comply with the rule on admissibility of
evidence is anathema to the efficient, effective, and expeditious
dispensation of justice.
Having disposed of the foregoing procedural issue, we proceed to discuss the merits
of the case.
Ordinarily, the CTA's findings, as affirmed by the CA, are entitled to the
highest respect and will not be disturbed on appeal unless it is shown that the lower
courts committed gross error in the appreciation of facts. [54] In this case, however,
we find the decision of the CA affirming that of the CTA tainted with palpable error.
It is admitted that the claims of the Estate's aforementioned creditors have been
condoned. As a mode of extinguishing an obligation, [55] condonation or remission of
debt[56] is defined as:
 an act of liberality, by virtue of which, without receiving any
equivalent, the creditor renounces the enforcement of the
obligation, which is extinguished in its entirety or in that part or
aspect of the same to which the remission refers. It is an essential
characteristic of remission that it be gratuitous, that there is no
equivalent received for the benefit given; once such equivalent
exists, the nature of the act changes. It may become dation in
payment when the creditor receives a thing different from that
stipulated; or novation, when the object or principal conditions of
the obligation should be changed; or compromise, when the
matter renounced is in litigation or dispute and in exchange of
some concession which the creditor receives.[57]
Verily, the second issue in this case involves the construction of Section 79 [58] of the
National Internal Revenue Code[59] (Tax Code) which provides for the allowable
deductions from the gross estate of the decedent. The specific question is whether
the actual claims of the aforementioned creditors may be fully allowed as
deductions from the gross estate of Jose despite the fact that the said claims were
reduced or condoned through compromise agreements entered into by the Estate
with its creditors.
Claims against the estate, as allowable deductions from the gross estate under
Section 79 of the Tax Code, are basically a reproduction of the deductions allowed
under Section 89 (a) (1) (C) and (E) of Commonwealth Act No. 466 (CA 466),
otherwise known as the National Internal Revenue Code of 1939, and which was
the first codification of Philippine tax laws. Philippine tax laws were, in turn, based
on the federal tax laws of the United States. Thus, pursuant to established rules of
statutory construction, the decisions of American courts construing the federal tax
code are entitled to great weight in the interpretation of our own tax laws. [60]
It is noteworthy that even in the United States, there is some dispute as to whether
the deductible amount for a claim against the estate is fixed as of the decedent's
death which is the general rule, or the same should be adjusted to reflect post-
death developments, such as where a settlement between the parties results in the
reduction of the amount actually paid.[61] On one hand, the U.S. court ruled that the
appropriate deduction is the value that the claim had at the date of the decedent's
death.[62] Also, as held in Propstra v. U.S., [63] where a lien claimed against the estate
was certain and enforceable on the date of the decedent's death, the fact that the
claimant subsequently settled for lesser amount did not preclude the estate from
deducting the entire amount of the claim for estate tax purposes. These
pronouncements essentially confirm the general principle that post-death
developments are not material in determining the amount of the deduction.
On the other hand, the Internal Revenue Service (Service) opines that post-
death settlement should be taken into consideration and the claim should be
allowed as a deduction only to the extent of the amount actually
paid.[64] Recognizing the dispute, the Service released Proposed Regulations in 2007
mandating that the deduction would be limited to the actual amount paid. [65]
In announcing its agreement with Propstra,[66] the U.S. 5th Circuit Court of
Appeals held:
We are persuaded that the Ninth Circuit's
decision...in Propstra correctly apply the Ithaca Trust date-of-
death valuation principle to enforceable claims against the estate.
As we interpret Ithaca Trust, when the Supreme Court announced
the date-of-death valuation principle, it was making a judgment
about the nature of the federal estate tax specifically, that it is a
tax imposed on the act of transferring property by will or intestacy
and, because the act on which the tax is levied occurs at a discrete
time, i.e., the instance of death, the net value of the property
transferred should be ascertained, as nearly as possible, as of that
time. This analysis supports broad application of the date-of-
death valuation rule.[67]
We express our agreement with the date-of-death valuation rule, made pursuant to
the ruling of the U.S. Supreme Court in Ithaca Trust Co. v. United
States.[68] First. There is no law, nor do we discern any legislative intent in our tax
laws, which disregards the date-of-death valuation principle and particularly
provides that post-death developments must be considered in determining the net
value of the estate. It bears emphasis that tax burdens are not to be imposed, nor
presumed to be imposed, beyond what the statute expressly and clearly imports,
tax statutes being construed strictissimi juris against the government.[69] Any doubt
on whether a person, article or activity is taxable is generally resolved against
taxation.[70] Second. Such construction finds relevance and consistency in our Rules
on Special Proceedings wherein the term "claims" required to be presented against
a decedent's estate is generally construed to mean debts or demands of a
pecuniary nature which could have been enforced against the deceased in his
lifetime, or liability contracted by the deceased before his death.[71] Therefore, the
claims existing at the time of death are significant to, and should be made the basis
of, the determination of allowable deductions.
WHEREFORE, the instant Petition is GRANTED. Accordingly, the assailed Decision
dated April 30, 1999 and the Resolution dated November 3, 1999 of the Court of
Appeals in CA-G.R. S.P. No. 46947 are REVERSED and SET ASIDE. The Bureau of
Internal Revenue's deficiency estate tax assessment against the Estate of Jose P.
Fernandez is hereby NULLIFIED. No costs.

SO ORDERED.
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.
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.
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.)
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.)
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.

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:
EN BANC P2,707.44
===========
G.R. No. L-22734 September 15, 1967 P14.50
2. Additional residence tax for 1945
===========
COMMISSIONER OF INTERNAL REVENUE, petitioner, 3. Real Estate dealer's tax for the fourth
vs. quarter of 1946 and the whole year P207.50
MANUEL B. PINEDA, as one of the heirs of deceased ATANASIO of 1947 ===========
PINEDA, respondent.

Manuel B. Pineda, who received the assessment, contested the same.

Office of the Solicitor General for petitioner.
Subsequently, he appealed to the Court of Tax Appeals alleging that he was
Manuel B. Pineda for and in his own behalf as respondent.
appealing "only that proportionate part or portion pertaining to him as one of the
heirs."

BENGZON, J.P., J.:

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
On May 23, 1945 Atanasio Pineda died, survived by his wife, Felicisima Bagtas, and tax has prescribed. The Commissioner appealed and this Court affirmed the findings
15 children, the eldest of whom is Manuel B. Pineda, a lawyer. Estate proceedings of the Tax Court in respect to the assessment for income tax for the year 1947 but
were had in the Court of First Instance of Manila (Case No. 71129) wherein the held that the right to assess and collect the taxes for 1945 and 1946 has not
surviving widow was appointed administratrix. The estate was divided among and prescribed. For 1945 and 1946 the returns were filed on August 24, 1953;
awarded to the heirs and the proceedings terminated on June 8, 1948. Manuel B. assessments for both taxable years were made within five years therefrom or on
Pineda's share amounted to about P2,500.00. 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
After the estate proceedings were closed, the Bureau of Internal Revenue filed on March 1, 1948; the assessment was made on October 19, 1953, more than
investigated the income tax liability of the estate for the years 1945, 1946, 1947 five years from the date the return was filed; hence, the right to assess income tax
and 1948 and it found that the corresponding income tax returns were not filed. for 1947 had prescribed. Accordingly, We remanded the case to the Tax Court for
Thereupon, the representative of the Collector of Internal Revenue filed said further appropriate proceedings.1
returns for the estate on the basis of information and data obtained from the
aforesaid estate proceedings and issued an assessment for the following: In the Tax Court, the parties submitted the case for decision without additional
evidence.
1. Deficiency income tax
1945 P135.83 On November 29, 1963 the Court of Tax Appeals rendered judgment holding
1946 436.95 Manuel B. Pineda liable for the payment corresponding to his share of the following
taxes:
1947 1,206.91 P1,779.69
Add: 5% surcharge 88.98 Deficiency income tax
1% monthly interest from
November 30, 1953 to April 15,
P135.8
1957 720.77 1945
3
Compromise for late filing 80.00
1946 436.95
Compromise for late payment 40.00
Real estate dealer's fixed
Total amount due tax 4th quarter of 1946 P187.50
 and whole year of 1947
The Commissioner of Internal Revenue has appealed to Us and has proposed to
hold Manuel B. Pineda liable for the payment of all the taxes found by the Tax Court
to be due from the estate in the total amount of P760.28 instead of only for the
amount of taxes corresponding to his share in the estate.1awphîl.nèt
Manuel B. Pineda opposes the proposition on the ground that as an heir he is liable
for unpaid income tax due the estate only up to the extent of and in proportion to
any share he received. He relies on Government of the Philippine Islands v.
Pamintuan2 where We held that "after the partition of an estate, heirs and
distributees are liable individually for the payment of all lawful outstanding claims
against the estate in proportion to the amount or value of the property they have
respectively received from the estate."
We hold that the Government can require Manuel B. Pineda to pay the full amount
of the taxes assessed.
Pineda is liable for the assessment as an heir and as a holder-transferee of property
belonging to the estate/taxpayer. As an heir he is individually answerable for the
part of the tax proportionate to the share he received from the inheritance. 3 His
liability, however, cannot exceed the amount of his share. 4
As a holder of property belonging to the estate, Pineda is liable for he tax up to the
amount of the property in his possession. The reason is that the Government has a
lien on the P2,500.00 received by him from the estate as his share in the
inheritance, for unpaid income taxes4a for which said estate is liable, pursuant to
the last paragraph of Section 315 of the Tax Code, which we quote hereunder:
If any person, corporation, partnership, joint-account (cuenta en
participacion), association, or insurance company liable to pay the income
tax, neglects or refuses to pay the same after demand, the amount shall be
a lien in favor of the Government of the Philippines from the time when
the assessment was made by the Commissioner of Internal Revenue until
paid with interest, penalties, and costs that may accrue in addition thereto
upon all property and rights to property belonging to the taxpayer: . . .
All told, the Government has two ways of collecting the tax in question. One, by
going after all the heirs and collecting from each one of them the amount of the tax
proportionate to the inheritance received. This remedy was adopted in Government
of the Philippine Islands v. Pamintuan, supra. In said case, the Government filed an
action against all the heirs for the collection of the tax. This action rests on the
concept that hereditary property consists only of that part which remains after the
settlement of all lawful claims against the estate, for the settlement of which the
entire estate is first liable.6 The reason why in case suit is filed against all the heirs
the tax due from the estate is levied proportionately against them is to achieve
thereby two results: first, payment of the tax; and second, adjustment of the shares
of each heir in the distributed estate as lessened by the tax.
Another remedy, pursuant to the lien created by Section 315 of the Tax Code upon
all property and rights to property belonging to the taxpayer for unpaid income tax,
is by subjecting said property of the estate which is in the hands of an heir or
transferee to the payment of the tax due, the estate. This second remedy is the
very avenue the Government took in this case to collect the tax. The Bureau of
Internal Revenue should be given, in instances like the case at bar, the necessary
discretion to avail itself of the most expeditious way to collect the tax as may be
envisioned in the particular provision of the Tax Code above quoted, because taxes
are the lifeblood of government and their prompt and certain availability is an
imperious need.7 And as afore-stated in this case the suit seeks to achieve only one
objective: payment of the tax. The adjustment of the respective shares due to the
heirs from the inheritance, as lessened by the tax, is left to await the suit for
contribution by the heir from whom the Government recovered said tax.
WHEREFORE, the decision appealed from is modified. Manuel B. Pineda is hereby
ordered to pay to the Commissioner of Internal Revenue the sum of P760.28 as
deficiency income tax for 1945 and 1946, and real estate dealer's fixed tax for the
fourth quarter of 1946 and for the whole year 1947, without prejudice to his right
of contribution for his co-heirs. No costs. So ordered.

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.
EN BANC
Palay P6,444.00
Carabaos 1,500.00
G.R. No. L-19495 November 24, 1966 Packard Automobile 2,000.00
2 Aparadors 500.00 P10,444.00
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs. Real properties:
LILIA YUSAY GONZALES and THE COURT OF TAX APPEALS, respondents. Capital, 25 parcels assessed at P87,715.32

Office of the Solicitor General for the petitioner. 1/2 of Conjugal, 130 parcels
Ramon A. Gonzales for respondent Lilia Yusay Gonzales. assessed at P121,425.00 P209,140.32

Total P219,584.32
BENGZON, J.P., J.:

Matias Yusay, a resident of Pototan, Iloilo, died intestate on May 13, 1948, leaving The fair market value of the real properties was computed by increasing the
two heirs, namely, Jose S. Yusay, a legitimate child, and Lilia Yusay Gonzales, an assessed value by forty percent.
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). Based on the above findings, the Bureau of Internal Revenue assessed on October
Jose S. Yusay was therein appointed administrator. 29, 1953 estate and inheritance taxes in the sums of P6,849.78 and P16,970.63,
respectively.
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: 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
Personal properties
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.
Palay P6,444.00
Carabaos 1,000.00 P7,444.00
On March 3, 1955 Jose S. Yusay requested an extension of time within which to pay
Real properties: the tax. He posted a surety bond to guarantee payment of the taxes in question
Capital, 74 parcels ) 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
Conjugal 19 parcels) assessed at P179,760.00 Municipal Treasurer of Pototan for execution. This warrant was not enforced
because all the personal properties subject to distraint were located in Iloilo City.
Total gross estate P187,204.00
On May 20, 1955 the Provincial Treasurer of Iloilo requested the BIR Provincial
The return mentioned no heir. 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
Upon investigation however the Bureau of Internal Revenue found the following
requested were sent by the Commissioner of Internal Revenue to the Provincial
properties:
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
Personal properties: First Instance for the taxes due.
On May 30, 1956 the commissioner appointed by the Court of First Instance for the
Delinquency interest 28,808.75
purpose, submitted a reamended project of partition which listed the following
properties: Compromise for late payment 50.00

Total P69,142.73
Personal properties:
Total estate and inheritance taxes P97,723.96
Buick Sedan P8,100.00
Packard car 2,000.00
Aparadors 500.00 Like in previous assessments, the fair market value of the real properties was
Cash in Bank (PNB) 8,858.46 arrived at by adding 40% to the assessed value.
Palay 6,444.00
Carabaos 1,500.00 P27,402.46 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
Real properties:
estate of Matias Yusay.
Land, 174 parcels
assessed at P324,797.21 No payment having been made despite repeated demands, the Commissioner of
Buildings 4,500.00 P329,297.21 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
Total P356,699.67 pursuant to Section 315 of the Tax Code.

On June 1, 1959, Lilia Yusay, through her counsel, Ramon Gonzales, filed an answer
More than a year later, particularly on July 12, 1957, an agent of the Bureau of
to the proof of claim alleging non-receipt of the assessment of February 13, 1958,
Internal Revenue apprised the Commissioner of Internal Revenue of the existence
the existence of two administrators, namely Florencia Piccio Vda. de Yusay who
of said reamended project of partition. Whereupon, the Internal Revenue
administered two-thirds of the estate, and Lilia Yusay, who administered the
Commissioner caused the estate of Matias Yusay to be reinvestigated for estate and
remaining one-third, and her willingness to pay the taxes corresponding to her
inheritance tax liability. Accordingly, on February 13, 1958 he issued the following
share, and praying for deferment of the resolution on the motion for the payment
assessment:
of taxes until after a new assessment corresponding to her share was issued.

Estate tax P16,246.04 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
5% surcharge 411.29 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
Delinquency interest 11,868.90 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
Compromise
Yusay on March 14, 1960, for the reasons, namely, (1) that the right to assess the
No notice of death P15.00
taxes in question has not been lost by prescription since the return which did not
Late payment 40.00 55.00
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
Total P28,581.23
Code and pursuant to Section 332 of the same Code he has ten years within which
Inheritance Tax P38,178.12 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
5% surcharge 1,105.86 prescription when he filed a surety bond on March 3, 1955 to guarantee payment
of the taxes in question and when he requested postponement of the payment of
the taxes pending determination of who the heirs are by the settlement court.
On April 13, 1960 Lilia Yusay filed a petition for review in the Court of Tax Appeals
assailing the legality of the assessment dated February 13, 1958. After hearing the
parties, said Court declared the right of the Commissioner of Internal Revenue to
assess the estate and inheritance taxes in question to have prescribed and rendered
the following judgment:
WHEREFORE, the decision of respondent assessing against the estate of
the late Matias Yusay estate and inheritance taxes is hereby reversed. No
costs.
The Commissioner of Internal Revenue appealed to this Court and raises the
following issues:
1. Was the petition for review in the Court of Tax Appeals within the 30-day period
provided for in Section 11 of Republic Act 1125?
2. Could the Court of Tax Appeals take cognizance of Lilia Yusay's appeal despite the
pendency of the "Proof of Claim" and "Motion for Allowance of Claim and for an
Order of Payment of Taxes" filed by the Commissioner of Internal Revenue in
Special Proceedings No. 459 before the Court of First Instance of Iloilo?
3. Has the right of the Commissioner of Internal Revenue to assess the estate and
inheritance taxes in question prescribed?
On November 17, 1959 Lilia Yusay disputed the legality of the assessment of
February 13, 1958. On March 14, 1960 she received the decision of the
Commissioner of Internal Revenue on the disputed assessment. On April 13, 1960
she filed her petition for review in the Court of Tax Appeals. Said Court correctly
held that the appeal was seasonably interposed pursuant to Section 11 of Republic
Act 1125. We already ruled in St. Stephen's Association v. Collector of Internal
Revenue,1 that the counting of the thirty days within which to institute an appeal in
the Court of Tax Appeals should commence from the date of receipt of the decision
of the Commissioner on the disputed assessment, not from the date the
assessment was issued.
Accordingly, the thirty-day period should begin running from March 14, 1960, the
date Lilia Yusay received the appealable decision. From said date to April 13, 1960,
when she filed her appeal in the Court of Tax Appeals, is exactly thirty days. Hence,
the appeal was timely.
Next, the Commissioner attacks the jurisdiction of the Court of Tax Appeals to take
cognizance of Lilia Yusay's appeal on the ground of lis pendens. He maintains that
the pendency of his motion for allowance of claim and for order of payment of
taxes in the Court of First Instance of Iloilo would preclude the Court of Tax Appeals
from acquiring jurisdiction over Lilia Yusay's appeal. This contention lacks merit.
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,3where she could ventilate her defenses
against the assessment.
Moreover, the settlement court, where the Commissioner would wish Lilia Yusay to
contest the assessment, is of limited jurisdiction. And under the Rules, 4 its authority
relates only to matters having to do with the settlement of estates and probate of
wills of deceased persons.5 Said court has no jurisdiction to adjudicate the
contentions in question, which — assuming they do not come exclusively under the
Tax Court's cognizance — must be submitted to the Court of First Instance in the
exercise of its general jurisdiction.6
We now come to the issue of prescription. Lilia Yusay claims that since the latest
assessment was issued only on February 13, 1958 or eight years, nine months and
two days from the filing of the estate and inheritance tax return, the
Commissioner's right to make it has expired. She would rest her stand on Section
331 of the Tax Code which limits the right of the Commissioner to assess the tax
within five years from the filing of the return.
The Commissioner claims that fraud attended the filing of the return; that this being
so, Section 332(a) of the Tax Code would apply. 7 It may be well to note that the
assessment letter itself (Exhibit 22) did not impute fraud in the return with intent to
evade payment of tax. Precisely, no surcharge for fraud was imposed. In his answer
to the petition for review filed by Lilia Yusay in the Court of Tax Appeals, the
Commissioner alleged no fraud. Instead, he broached the insufficiency of the return
as barring the commencement of the running of the statute of limitations. He raised
the point of fraud for the first time in the proceedings, only in his memorandum
filed with the Tax Court subsequent to resting his case. Said Court rejected the plea
of fraud for lack of allegation and proof, and ruled that the return, although not
accurate, was sufficient to start the period of prescription.
Fraud is a question of fact.8 The circumstances constituting it must be alleged and
proved in the court below.9 And the finding of said court as to its existence and non-
existence is final unless clearly shown to be erroneous. 10 As the court a quo found
that no fraud was alleged and proved therein, We see no reason to entertain the
Commissioner's assertion that the return was fraudulent.
The conclusion, however, that the return filed by Jose S. Yusay was sufficient to
commence the running of the prescriptive period under Section 331 of the Tax Code
rests on no solid ground.
Paragraph (a) of Section 93 of the Tax Code lists the requirements of a valid return.
It states:
(a) Requirements.—In all cases of inheritance or transfers subject to either
the estate tax or the inheritance tax, or both, or where, though exempt
from both taxes, the gross value of the estate exceeds three thousand
pesos, the executor, administrator, or anyone of the heirs, as the case may
be, shall file a return under oath in duplicate, setting forth (1) the value of
the gross estate of the decedent at the time of his death, or, in case of a
nonresident not a citizen of the Philippines ; (2) the deductions allowed
from gross estate in determining net estate as defined in section eighty-
nine; (3) such part of such information as may at the time be ascertainable
and such supplemental data as may be necessary to establish the correct
taxes.
A return need not be complete in all particulars. It is sufficient if it complies
substantially with the law. There is substantial compliance (1) when the return is
made in good faith and is not false or fraudulent; (2) when it covers the entire
period involved; and (3) when it contains information as to the various items of
income, deduction and credit with such definiteness as to permit the computation
and assessment of the tax.11
There is no question that the state and inheritance tax return filed by Jose S. Yusay
was substantially defective.
First, it was incomplete. It declared only ninety-three parcels of land representing
about 400 hectares and left out ninety-two parcels covering 503 hectares. Said
huge under declaration could not have been the result of an over-sight or mistake.
As found in L-11378, supra note 7, Jose S. Yusay very well knew of the existence of
the ommited properties. Perhaps his motive in under declaring the inventory of
properties attached to the return was to deprive Lilia Yusay from inheriting her legal
share in the hereditary estate, but certainly not because he honestly believed that
they did not form part of the gross estate.
Second, the return mentioned no heir. Thus, no inheritance tax could be assessed.
As a matter of law, on the basis of the return, there would be no occasion for the
imposition of estate and inheritance taxes. When there is no heir - the return
showed none - the intestate estate is escheated to the State.12 The State taxes not
itself.
In a case where the return was made on the wrong form, the Supreme Court of the
United States held that the filing thereof did not start the running of the period of
limitations.13 The reason is that the return submitted did not contain the necessary
information required in the correct form. In this jurisdiction, however, the Supreme
Court refrained from applying the said ruling of the United States Supreme Court
in Collector of Internal Revenue v. Central Azucarera de Tarlac, L-11760-61, July 31,
1958, on the ground that the return was complete in itself although inaccurate. To
our mind, it would not make much difference where a return is made on the correct
form prescribed by the Bureau of Internal Revenue if the data therein required are
not supplied by the taxpayer. Just the same, the necessary information for the
assessment of the tax would be missing.
The return filed in this case was so deficient that it prevented the Commissioner
from computing the taxes due on the estate. It was as though no return was made.
The Commissioner had to determine and assess the taxes on data obtained, not
from the return, but from other sources. We therefore hold the view that the
return in question was no return at all as required in Section 93 of the Tax Code.
The law imposes upon the taxpayer the burden of supplying by the return the
information upon which an assessment would be based. 14 His duty complied with,
the taxpayer is not bound to do anything more than to wait for the Commissioner
to assess the tax. However, he is not required to wait forever. Section 331 of the
Tax Code gives the Commissioner five years within which to make his
assessment.15 Except, of course, if the taxpayer failed to observe the law, in which
case Section 332 of the same Code grants the Commissioner a longer period. Non-
observance consists in filing a false or fraudulent return with intent to evade the tax
or in filing no return at all.
Accordingly, for purposes of determining whether or not the Commissioner's
assessment of February 13, 1958 is barred by prescription, Section 332(a) which is
an exception to Section 331 of the Tax Code finds application. 16 We quote Section
332(a):
SEC. 332. Exceptions as to period of limitation of assessment and collection
of taxes.— (a) In the case of a false or fraudulent return with intent to
evade tax or of a failure to file a return, the tax may be assessed, or a
proceeding in court for the collection of such tax may be begun without
 assessment, at any time within ten years after the discovery of the falsity,
fraud or omission.

As stated, the Commissioner came to know of the identity of the heirs on

September 24, 1953 and the huge underdeclaration in the gross estate on July 12,
1957. From the latter date, Section 94 of the Tax Code obligated him to make a
return or amend one already filed based on his own knowledge and information
obtained through testimony or otherwise, and subsequently to assess thereon the
taxes due. The running of the period of limitations under Section 332(a) of the Tax
Code should therefore be reckoned from said date for, as aforesaid, it is from that
time that the Commissioner was expected by law to make his return and assess the
tax due thereon. From July 12, 1957 to February 13, 1958, the date of the
assessment now in dispute, less than ten years have elapsed. Hence, prescription
did not abate the Commissioner's right to issue said assessment.

Anent the Commissioner's contention that Lilia Yusay is estopped from raising the
defense of prescription because she failed to raise the same in her answer to the
motion for allowance of claim and for the payment of taxes filed in the settlement
court (Court of First Instance of Iloilo), suffice it to state that it would be unjust to
the taxpayer if We were to sustain such a view. The Court of First Instance acting as
a settlement court is not the proper tribunal to pass upon such defense, therefore it
would be but futile to raise it therein. Moreover, the Tax Code does not bar the
right to contest the legality of the tax after a taxpayer pays it. Under Section 306
thereof, he can pay the tax and claim a refund therefor. A fortiori his willingness to
pay the tax is no waiver to raise defenses against the tax's legality.

WHEREFORE, the judgment appealed from is set aside and another entered
affirming the assessment of the Commissioner of Internal Revenue dated February
13, 1958. Lilia Yusay Gonzales, as administratrix of the intestate estate of Matias
Yusay, is hereby ordered to pay the sums of P16,246.04 and P39,178.12 as estate
and inheritance taxes, respectively, plus interest and surcharge for delinquency in
accordance with Section 101 of the National Internal Revenue Code, without
prejudice to reimbursement from her co-administratrix, Florencia Piccio Vda. de
Yusay for the latter's corresponding tax liability. No costs. So ordered.
G.R. No. 210987 November 24, 2014 business arrangement of the dealings is done inthe ordinary course of business––a
sale for less than an adequate consideration is not subject to donor’s tax; and that
THE PHILIPPINE AMERICAN LIFE AND GENERAL INSURANCE COMPANY, Petitioner, donor’s tax does not apply to saleof shares sold in an open bidding process.
vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL On January 4, 2012, however, respondent Commissioner on Internal Revenue
REVENUE, Respondents. (Commissioner) denied Philamlife’s request through BIR Ruling No. 015-12. As
determined by the Commissioner, the selling price of the shares thus sold was
DECISION lower than their book value based on the financial statements of PhilamCare as of
the end of 2008.6 As such, the Commisioner held, donor’s tax became imposable on
VELASCO, JR., J.: the price difference pursuant to Sec. 100 of the National Internal Revenue Code
(NIRC), viz:
Nature of the Case
SEC. 100. Transfer for Less Than Adequate and full Consideration.- Where property,
other than real property referred to in Section 24(D), is transferred for less than an
Before the Court is a Petition for Review on Certiorari under Rule 45 of the Rules of
adequate and full consideration in money or money’s worth, then the amount by
Court assailing and seeking the reversal of the Resolutions of the Court of Appeals
which the fair market value of the property exceeded the value of the consideration
(CA) in CA-G.R. SP No. 127984, dated May 23, 20131 and January 21, 2014, which
shall, for the purpose of the tax imposed by this Chapter, be deemed a gift, and
dismissed outright the petitioner's appeal from the Secretary of Finance's review of
shall be included in computing the amount of gifts made during the calendar year.
BIR Ruling No. 015-122 for lack of jurisdiction.

The afore-quoted provision, the Commissioner added, is implemented by Revenue

The Facts
Regulation 6-2008 (RR 6-2008), which provides:
Petitioner The Philippine American Life and General Insurance Company (Philamlife)
SEC. 7. SALE, BARTER OR EXCHANGE OF SHARES OF STOCK NOT TRADED THROUGH
used to own 498,590 Class A shares in Philam Care Health Systems, Inc.
A LOCAL STOCK EXCHANGE PURSUANT TO SECS. 24(C), 25(A)(3), 25(B), 27(D)(2),
(PhilamCare), representing 49.89% of the latter's outstanding capital stock. In 2009,
28(A)(7)(c), 28(B)(5)(c) OF THE TAX CODE, AS AMENDED. —
petitioner, in a bid to divest itself of its interests in the health maintenance
organization industry, offered to sell its shareholdings in PhilamCare through
competitive bidding. Thus, on September 24, 2009, petitioner's Class A shares were xxxx
sold for USD 2,190,000, or PhP 104,259,330 based on the prevailing exchange rate
at the time of the sale, to STI Investments, Inc., who emerged as the highest (c) Determination of Amount and Recognition of Gain or Loss –
bidder.3
(c.1) In the case of cash sale, the selling price shall be the consideration per deed of
After the sale was completed and the necessary documentary stamp and capital sale.
gains taxes were paid, Philamlife filed an application for a certificate authorizing
registration/tax clearance with the Bureau of Internal Revenue (BIR) Large xxxx
Taxpayers Service Division to facilitate the transfer of the shares. Months later,
petitioner was informed that it needed to secure a BIR ruling in connection with its (c.1.4) In case the fair market value of the shares of stock sold, bartered, or
application due to potential donor’s tax liability. In compliance, petitioner, on exchanged is greater than the amount of money and/or fair market value of the
January 4, 2012, requested a ruling4 to confirm that the sale was not subject to property received, the excess of the fair market value of the shares of stock sold,
donor’s tax, pointing out, in its request, the following: that the transaction cannot bartered or exchanged overthe amount of money and the fair market value of the
attract donor’s tax liability since there was no donative intent and,ergo, no taxable property, if any, received as consideration shall be deemed a gift subject to the
donation, citing BIR Ruling [DA-(DT-065) 715-09] dated November 27, 2009;5 that donor’stax under Section 100 of the Tax Code, as amended.
the shares were sold at their actual fair market value and at arm’s length; that as
long as the transaction conducted is at arm’s length––such that a bona fide
xxxx
(c.2) Definition of ‘fair market value’of Shares of Stock. – For purposes of this
Section, ‘fair market value’ of the share of stock sold shall be:
xxxx
(c.2.2) In the case of shares of stock not listed and traded in the local stock
exchanges, the book value of the shares of stock as shown in the financial
statements duly certified by an independent certified public accountant nearest to
the date of sale shall be the fair market value.
In view of the foregoing, the Commissioner ruled that the difference between the
book value and the selling price in the sales transaction is taxable donation subject
to a 30% donor’s tax under Section 99(B) of the NIRC. 7Respondent Commissioner
likewise held that BIR Ruling [DA-(DT-065) 715-09], on which petitioner anchored its
claim, has already been revoked by Revenue Memorandum Circular (RMC) No. 25-
2011.8
Aggrieved, petitioner requested respondent Secretary of Finance (Secretary) to
review BIR Ruling No. 015-12, but to no avail. For on November 26, 2012,
respondent Secretary affirmed the Commissioner’s assailed ruling in its entirety. 9
Ruling of the Court of Appeals
Not contented with the adverse results, petitioner elevated the case to the CA via a
petition for review under Rule 43, assigning the following errors:10
A.
The Honorable Secretary of Finance gravely erred in not finding that the application
of Section 7(c.2.2) of RR 06-08 in the Assailed Ruling and RMC 25-11 is void insofar
as it altersthe meaning and scope of Section 100 of the Tax Code.
B.
The Honorable Secretary of Finance gravely erred in finding that Section 100 of the
Tax Code is applicable tothe sale of the Sale of Shares.
1.
The Sale of Shares were sold at their fair market value and for fair and full
consideration in money or money’s worth.
2.
The sale of the Sale Shares is a bona fide business transaction without any
donative intent and is therefore beyond the ambit of Section 100 of the
Tax Code.
3.
It is superfluous for the BIR to require an express provision for the
exemption of the sale of the Sale Shares from donor’s tax since Section 100
of the Tax Code does not explicitly subject the transaction to donor’s tax.
C.
The Honorable Secretary of Finance gravely erred in failing to find that in the
absence of any of the grounds mentioned in Section 246 of the Tax Code, rules and
regulations, rulings or circulars – such as RMC 25-11 – cannot be given retroactive
application to the prejudice of Philamlife.
On May 23, 2013, the CA issued the assailed Resolution dismissing the CA Petition,
thusly:
WHEREFORE, the Petition for Review dated January 9, 2013 is DISMISSED for lack of
jurisdiction.
SO ORDERED.
In disposing of the CA petition, the appellate court ratiocinated that it is the Court
of Tax Appeals (CTA), pursuant to Sec. 7(a)(1) of Republic Act No. 1125 (RA
1125),11 as amended, which has jurisdiction over the issues raised. The outright
dismissal, so the CA held, is predicated on the postulate that BIR Ruling No. 015-12
was issued in the exercise of the Commissioner’s power to interpret the NIRC and
other tax laws. Consequently, requesting for its review can be categorized as "other
matters arising under the NIRC or other laws administered by the BIR," which is
under the jurisdiction of the CTA, not the CA.
Philamlife eventually sought reconsideration but the CA, in its equally assailed
January 21, 2014 Resolution, maintained its earlier position. Hence, the instant
recourse.
Issues Secretary of Finance in the exercise of his power of review under the first, as what
was elevated to the CA. It added that under RA 1125, as amended, the only
Stripped to the essentials, the petition raises the following issues in both procedure decisions of the Secretary appealable to the CTA are those rendered in customs
and substance: cases elevated to him automatically under Section 2315 of the Tariff and Customs
Code.13
1. Whether or not the CA erred in dismissing the CA Petition for lack of
jurisdiction; and There is, thus, a gap in the law when the NIRC, as couched, and RA 1125, as
amended, failed to supply where the rulings of the Secretary in its exercise of its
2. Whether or not the price difference in petitioner’s adverted sale of power of review under Sec. 4 of the NIRC are appealable to. This gap, petitioner
shares in PhilamCare attracts donor’s tax. submits, was remedied by British American Tobacco v. Camacho 14 wherein the
Court ruled that where what is assailed is the validity or constitutionality of a law,
or a rule or regulation issued by the administrative agency, the regular courts have
Procedural Arguments
jurisdiction to pass upon the same.
a. Petitioner’s contentions
In sum, appeals questioning the decisions of the Secretary of Finance in the exercise
of its power of review under Sec. 4 of the NIRC are not within the CTA’s limited
Insisting on the propriety of the interposed CA petition, Philamlife, while conceding special jurisdiction and, according to petitioner, are appealable to the CA via a Rule
that respondent Commissioner issued BIR Ruling No. 015-12 in accordance with her
43 petition for review.
authority to interpret tax laws, argued nonetheless that such ruling is subject to
review by the Secretary of Finance under Sec. 4 of the NIRC, to wit:
b. Respondents’ contentions
SECTION 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax
Before the CA, respondents countered petitioner’s procedural arguments by
Cases. – The power to interpret the provisions of this Code and other tax laws shall
claiming that even assuming arguendo that the CTA does not have jurisdiction over
be under the exclusive and original jurisdiction of the Commissioner, subject to
the case, Philamlife, nevertheless,committed a fatal error when it failed to appeal
review by the Secretary of Finance.
the Secretary of Finance’s ruling to the Office of the President (OP). As made
apparent by the rules, the Department of Finance is not among the agencies and
The power to decide disputed assessments, refunds of internal revenue taxes, fees
quasi-judicial bodies enumerated under Sec. 1, Rule 43 of the Rules of Court whose
or other charges, penalties imposed in relation thereto, or other matters arising
decisions and rulings are appealable through a petition for review.15 This is in stark
under this Code orother laws or portions thereof administered by the Bureau of
contrast to the OP’s specific mention under the same provision, so respondents
Internal Revenue is vested in the Commissioner, subject to the exclusive appellate
pointed out.
jurisdiction of the Court of Tax Appeals. Petitioner postulates that there is a need to
differentiate the rulings promulgated by the respondent Commissioner relating to
To further reinforce their argument, respondents cite the President’s power of
those rendered under the first paragraph of Sec. 4 of the NIRC, which are
review emanating from his power of control as enshrined under Sec. 17 of Article
appealable to the Secretary of Finance, from those rendered under the second
VII of the Constitution, which reads:
paragraph of Sec. 4 of the NIRC, which are subject to review on appeal with the
CTA.
Section 17.The President shall have control of all the executive departments,
bureaus, and offices. He shall ensure that the laws be faithfully executed.
This distinction, petitioner argues, is readily made apparent by Department Order
No. 7-02,12 as circularized by RMC No. 40-A-02.
The nature and extent of the President’s constitutionally granted power of control
have beendefined in a plethora of cases, most recently in Elma v. Jacobi, 16 wherein
Philamlife further averred that Sec.7 of RA 1125, as amended, does not find
it was held that:
application in the case at bar since it only governs appeals from the Commissioner’s
rulings under the second paragraph and does not encompass rulings from the
x x x This power of control, which even Congress cannot limit, let alone withdraw,
means the power of the Chief Executive to review, alter, modify, nullify, or set aside
what a subordinate, e.g., members of the Cabinet and heads of line agencies, had
done in the performance of their duties and to substitute the judgment of the
former for that of the latter.
In their Comment on the instant petition, however, respondents asseverate that
the CA did not err in its holding respecting the CTA’s jurisdiction over the
controversy.
The Court’s Ruling
The petition is unmeritorious.
Reviews by the Secretary of Finance pursuant to Sec. 4 of the NIRC are appealable
to the CTA
To recapitulate, three different, if not conflicting, positions as indicated below have
been advanced by the parties and by the CA as the proper remedy open for
assailing respondents’ rulings:
1. Petitioners: The ruling of the Commissioner is subject to review by the
Secretary under Sec. 4 of the NIRC, and that of the Secretary to the CA via
Rule 43;
2. Respondents: The ruling of the Commissioner is subject to review by the
Secretary under Sec. 4 of the NIRC, and that of the Secretary to the Office
of the President before appealing to the CA via a Rule 43 petition; and
3. CA: The ruling of the Commissioner is subject to review by the CTA.
We now resolve.
Preliminarily, it bears stressing that there is no dispute that what is involved herein
is the respondent Commissioner’s exercise of power under the first paragraph of
Sec. 4 of the NIRC––the power to interpret tax laws. This, in fact, was recognized by
the appellate court itself, but erroneously held that her action in the exercise of
such power is appealable directly to the CTA. As correctly pointed out by petitioner,
Sec. 4 of the NIRC readily provides that the Commissioner’s power to interpret the
provisions of this Code and other tax laws is subject to review by the Secretary of
Finance. The issue that now arises is this––where does one seek immediate
recourse from the adverse ruling of the Secretary of Finance in its exercise of its
power of review under Sec. 4?
Admittedly, there is no provision in law that expressly provides where exactly the
ruling of the Secretary of Finance under the adverted NIRC provision is appealable
to. However, We find that Sec. 7(a)(1) of RA 1125, as amended, addresses the
seeming gap in the law asit vests the CTA, albeit impliedly, with jurisdiction over the
CA petition as "other matters" arising under the NIRC or other laws administered by
the BIR. As stated:
Sec. 7. Jurisdiction.- The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
1. Decisions of the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties in
relation thereto, or other matters arising under the National Internal Revenue or
other laws administered by the Bureau of Internal Revenue. (emphasis supplied)
Even though the provision suggests that it only covers rulings of the Commissioner,
We hold that it is, nonetheless, sufficient enough to include appeals from the
Secretary’s review under Sec. 4 of the NIRC.
It is axiomatic that laws should be given a reasonable interpretation which does not
defeat the very purpose for which they were passed. 17 Courts should not follow the
letter of a statute when to do so would depart from the true intent of the
legislature or would otherwise yield conclusions inconsistent with the purpose of
the act.18 This Court has, in many cases involving the construction of statutes,
cautioned against narrowly interpreting a statute as to defeat the purpose of the
legislator, and rejected the literal interpretation of statutes if todo so would lead to
unjust or absurd results.19
Indeed, to leave undetermined the mode of appeal from the Secretary of Finance
would be an injustice to taxpayers prejudiced by his adverse rulings. To remedy this
situation, Weimply from the purpose of RA 1125 and its amendatory laws that the
CTA is the proper forum with which to institute the appeal. This is not, and should
not, in any way, be taken as a derogation of the power of the Office of President
but merely as recognition that matters calling for technical knowledge should be
handled by the agency or quasi-judicial body with specialization over the
controversy. As the specialized quasi-judicial agency mandated to adjudicate tax,
customs, and assessment cases, there can be no other court of appellate
jurisdiction that can decide the issues raised inthe CA petition, which involves the
tax treatment of the shares of stocks sold. Petitioner, though, nextinvites attention
to the ruling in Ursal v. Court of Tax Appeals20 to argue against granting the CTA
jurisdiction by implication, viz:
Republic Act No. 1125 creating the Court of Tax Appeals did not grant it blanket
authority to decide any and all tax disputes. Defining such special court’s
jurisdiction, the Act necessarily limited its authority to those matters enumerated
therein. Inline with this idea we recently approved said court’s order rejecting an
appeal to it by Lopez & Sons from the decision of the Collector ofCustoms, because
in our opinion its jurisdiction extended only to a review of the decisions of the
Commissioner of Customs, as provided bythe statute — and not to decisions of the
Collector of Customs. (Lopez & Sons vs. The Court of Tax Appeals, 100 Phil., 850, 53
Off. Gaz., [10] 3065).
xxxx
x x x Republic Act No. 1125 is a complete law by itself and expressly enumerates the
matters which the Court of Tax Appeals may consider; such enumeration excludes
all others by implication. Expressio unius est exclusio alterius.
Petitioner’s contention is untenable. Lest the ruling in Ursalbe taken out of context,
but worse as a precedent, it must be noted that the primary reason for the
dismissal of the said case was that the petitioner therein lacked the personality to
file the suit with the CTA because he was not adversely affected by a decision or
ruling of the Collector of Internal Revenue, as was required under Sec. 11 of RA
1125.21 As held:
We share the view that the assessor had no personality to resort to the Court of Tax
Appeals. The rulings of the Board of Assessment Appeals did not "adversely affect"
him. At most it was the City of Cebu that had been adversely affected in the sense
that it could not thereafter collect higher realty taxes from the abovementioned
property owners. His opinion, it is true had been overruled; but the overruling
inflicted no material damage upon him or his office. And the Court of Tax Appeals
was not created to decide mere conflicts of opinion between administrative officers
or agencies. Imagine an income tax examiner resorting to the Court of Tax Appeals
whenever the Collector of Internal Revenue modifies, or lower his assessment on
the return of a tax payer!22
The appellate power of the CTA includes certiorari
Petitioner is quick to point out, however, that the grounds raised in its CA petition
included the nullity of Section 7(c.2.2) of RR 06-08 and RMC 25-11. In an attempt to
divest the CTA jurisdiction over the controversy, petitioner then cites British
American Tobacco, wherein this Court has expounded on the limited jurisdiction of
the CTA in the following wise:
While the above statute confers on the CTA jurisdiction to resolve tax disputes in
general, this does not include cases where the constitutionality of a law or rule is
challenged. Where what is assailed is the validity or constitutionality of a law, or a
rule or regulation issued by the administrative agency in the performance of its
quasi legislative function, the regular courts have jurisdiction to pass upon the
same. The determination of whether a specific rule or set of rules issued by an
administrative agency contravenes the law or the constitution is within the
jurisdiction of the regular courts. Indeed, the Constitution vests the power of
judicial review or the power to declare a law, treaty, international or executive
agreement, presidential decree, order, instruction, ordinance, or regulation inthe
courts, including the regional trial courts. This is within the scope of judicial power,
which includes the authority of the courts to determine inan appropriate action the
validity of the acts of the political departments. Judicial power includes the duty of
the courts of justice to settle actual controversies involving rights which are legally
demandable and enforceable, and to determine whether or not there has been a
grave abuse of discretion amounting to lack or excess of jurisdiction on the part of
any branch or instrumentality of the Government.23
Vis-a-vis British American Tobacco, it bears to stress what appears to be a
contrasting ruling in Asia International Auctioneers, Inc. v. Parayno, Jr., to wit:
Similarly, in CIR v. Leal, pursuant to Section 116 of Presidential Decree No. 1158
(The National Internal Revenue Code, as amended) which states that "[d]ealers in
securities shall pay a tax equivalent to six (6%) per centum of their gross income.
Lending investors shall pay a tax equivalent to five (5%) per cent, of their gross
income," the CIR issued Revenue Memorandum Order (RMO) No. 15-91 imposing
5% lending investor’s tax on pawnshops based on their gross income and requiring
all investigating units of the BIR to investigate and assess the lending investor’s tax
due from them. The issuance of RMO No. 15-91 was an offshoot of the CIR’s finding
that the pawnshop business is akin to that of "lending investors" as defined in
Section 157(u) of the Tax Code. Subsequently, the CIR issued RMC No. 43-91
subjecting pawn tickets to documentary stamp tax. Respondent therein, Josefina
Leal, owner and operator of Josefina’s Pawnshop, asked for a reconsideration of
both RMO No. 15-91 and RMC No. 43-91, but the same was denied by petitioner
CIR. Leal then filed a petition for prohibition with the RTC of San Mateo, Rizal,
seeking to prohibit petitioner CIR from implementing the revenue orders. The CIR,
through the OSG, filed a motion to dismiss on the ground of lack of jurisdiction. The
RTC denied the motion. Petitioner filed a petition for certiorari and prohibition with
the CA which dismissed the petition "for lack of basis." In reversing the CA,
dissolving the Writ of Preliminary Injunction issued by the trial court and ordering
the dismissal of the case before the trial court, the Supreme Court held that "[t]he
questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or opinions of
the Commissioner implementing the Tax Code on the taxability of pawnshops."
They were issued pursuant to the CIR’s power under Section 245 of the Tax Code
"to make rulings or opinions in connection with the implementation of the
provisions of internal revenue laws, including ruling on the classification of articles
of sales and similar purposes."The Court held that under R.A. No. 1125 (An Act
Creating the Court of Tax Appeals), as amended, such rulings of the CIR are
appealable to the CTA.
In the case at bar, the assailed revenue regulations and revenue memorandum
circulars are actually rulings or opinions of the CIR on the tax treatment of motor
vehicles sold at public auction within the SSEZ to implement Section 12 of R.A. No.
7227 which provides that "exportation or removal of goods from the territory of the
[SSEZ] to the other parts of the Philippine territory shall be subject to customs
duties and taxes under the Customs and Tariff Codeand other relevant tax laws of
the Philippines." They were issued pursuant to the power of the CIR under Section 4
of the National Internal Revenue Code x x x.24 (emphasis added)
The respective teachings in British American Tobacco and Asia International
Auctioneers, at first blush, appear to bear no conflict––that when the validity or
constitutionality of an administrative rule or regulation is assailed, the regular
courts have jurisdiction; and if what is assailed are rulings or opinions of the
Commissioner on tax treatments, jurisdiction over the controversy is lodged with
the CTA. The problem with the above postulates, however, is that they failed to
take into consideration one crucial point––a taxpayer can raise both issues
simultaneously.
Petitioner avers that there is now a trend wherein both the CTA and the CA disclaim
jurisdiction over tax cases: on the one hand, mere prayer for the declaration of a tax
measure’s unconstitutionality or invalidity before the CTA can result in a petition’s
outright dismissal, and on the other hand, the CA will likewise dismiss the same
petition should it find that the primary issue is not the tax measure’s validity but the
assessment or taxability of the transaction or subject involved. To illustrate this
point, petitioner cites the assailed Resolution, thusly: Admittedly, in British
American Tobacco vs. Camacho, the Supreme Court has ruled that the
determination of whether a specific rule or set of rules issued by an administrative
agency contravenes the law or the constitution is within the jurisdiction of the
regular courts, not the CTA.
xxxx
Petitioner essentially questions the CIR’s ruling that Petitioner’s sale of shares is a
taxable donation under Sec. 100 of the NIRC. The validity of Sec. 100 of the NIRC,
Sec. 7 (C.2.2) and RMC 25-11 is merely questioned incidentally since it was used by
the CIR as bases for its unfavourable opinion. Clearly, the Petition involves an issue
on the taxability of the transaction rather than a direct attack on the
constitutionality of Sec. 100, Sec.7 (c.2.2.) of RR 06-08 and RMC 25-11. Thus, the
instant Petition properly pertains to the CTA under Sec. 7 of RA 9282.
As a result of the seemingly conflicting pronouncements, petitioner submits that
taxpayers are now at a quandary on what mode of appeal should be taken, to which
court or agency it should be filed, and which case law should be followed.
Petitioner’s above submission is specious.
In the recent case of City of Manila v. Grecia-Cuerdo,25 the Court en banc has ruled
that the CTA now has the power of certiorari in cases within its appellate
jurisdiction. To elucidate:
The prevailing doctrine is that the authority to issue writs of certiorari involves the
exercise of original jurisdiction which must be expressly conferred by the
Constitution or by law and cannot be implied from the mere existence of appellate
jurisdiction. Thus, x x x this Court has ruled against the jurisdiction of courts or
tribunals over petitions for certiorari on the ground that there is no law which
expressly gives these tribunals such power. Itmust be observed, however, that x x x
these rulings pertain not to regular courts but to tribunals exercising quasijudicial
powers. With respect tothe Sandiganbayan, Republic Act No. 8249 now provides
that the special criminal court has exclusive original jurisdiction over petitions for
the issuance of the writs of mandamus, prohibition, certiorari, habeas corpus,
injunctions, and other ancillary writs and processes in aid of its appellate
jurisdiction.
In the same manner, Section 5 (1), Article VIII of the 1987 Constitution grants power
to the Supreme Court, in the exercise of its original jurisdiction, to issue writs of
certiorari, prohibition and mandamus. With respect to the Court of Appeals, Section
9 (1) of Batas Pambansa Blg. 129 (BP 129) gives the appellate court, also in the
exercise of its original jurisdiction, the power to issue, among others, a writ of
certiorari, whether or not in aid of its appellate jurisdiction. As to Regional Trial
Courts, the power to issue a writ of certiorari, in the exercise of their original
jurisdiction, is provided under Section 21 of BP 129.
The foregoing notwithstanding, while there is no express grant of such power, with
respect to the CTA, Section 1, Article VIII of the 1987 Constitution provides,
nonetheless, that judicial power shall be vested in one Supreme Court and in such
lower courts as may be established by law and that judicial power includes the duty
of the courts of justice to settle actual controversies involving rights which are
legally demandable and enforceable, and to determine whether or not there has
been a grave abuse of discretion amounting to lack or excess of jurisdiction on the
part of any branch or instrumentality of the Government.
On the strength of the above constitutional provisions, it can be fairly interpreted
that the power of the CTA includes that of determining whether or not there has
been grave abuse of discretion amounting to lack or excess of jurisdiction on the
part of the RTC in issuing an interlocutory order in cases falling within the exclusive
appellate jurisdiction of the tax court. It, thus, follows that the CTA, by
constitutional mandate, is vested with jurisdiction to issue writs of certiorari in
these cases.
market value of the property exceeded the value of the consideration shall be
deemed a gift.1âwphi1 Thus, even if there is no actual donation, the difference in
price is considered a donation by fiction of law.
Moreover, Sec. 7(c.2.2) of RR 06-08 does not alter Sec. 100 of the NIRC but merely
sets the parameters for determining the "fair market value" of a sale of stocks. Such
issuance was made pursuant to the Commissioner's power to interpret tax laws and
to promulgate rules and regulations for their implementation.
Lastly, petitioner is mistaken in stating that RMC 25-11, having been issued after the
sale, was being applied retroactively in contravention to Sec. 246 of the
NIRC.26 Instead, it merely called for the strict application of Sec. 100, which was
already in force the moment the NIRC was enacted.

Indeed, in order for any appellate court to effectively exercise its appellate WHEREFORE, the petition is hereby DISMISSED. The Resolutions of the Court of
jurisdiction, it must have the authority to issue, among others, a writ of certiorari. In Appeals in CA-G.R. SP No. 127984 dated May 23, 2013 and January 21, 2014 are
transferring exclusive jurisdiction over appealed tax cases to the CTA, it can hereby AFFIRMED.
reasonably be assumed that the law intended to transfer also such power as is
deemed necessary, if not indispensable, in aid of such appellate jurisdiction. There SO ORDERED.
is no perceivable reason why the transfer should only be considered as partial, not
total. (emphasis added)

Evidently, City of Manilacan be considered as a departure from Ursal in that in spite

of there being no express grant in law, the CTA is deemed granted with powers of
certiorari by implication. Moreover, City of Manila diametrically opposes British
American Tobacco to the effect that it is now within the power of the CTA, through
its power of certiorari, to rule on the validity of a particular administrative ruleor
regulation so long as it is within its appellate jurisdiction. Hence, it can now rule not
only on the propriety of an assessment or tax treatment of a certain transaction,
but also on the validity of the revenue regulation or revenue memorandum circular
on which the said assessment is based.

Guided by the doctrinal teaching in resolving the case at bar, the fact that the CA
petition not only contested the applicability of Sec. 100 of the NIRC over the sales
transaction but likewise questioned the validity of Sec. 7 (c.2.2) of RR 06-08 and
RMC 25-11 does not divest the CTA of its jurisdiction over the controversy, contrary
to petitioner's arguments.

The price difference is subject to donor's tax

Petitioner's substantive arguments are unavailing. The absence of donative intent, if

that be the case, does not exempt the sales of stock transaction from donor's tax
since Sec. 100 of the NIRC categorically states that the amount by which the fair
[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 donation inter vivos[5] 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 revocation[6]recovering the six parcels of land
subject of the aforecited deed of donation inter vivos.
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 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 donee, and the donor's right
referred to that of merely giving consent; that the donor changed his intention by
donating inter vivos properties 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 of Alejandro vs. Geraldez, 78 SCRA 245 (1977),
we said that an acceptance clause is a mark that the donation is inter
vivos. Acceptance is a requirement for donations inter vivos. Donations mortis
causa, being in the form of a will, are not 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.In Alejandro, 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.
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 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.
EN BANC
Anthony Lee 18,000 7,500 28,190 7,500

G.R. No. L-5949 November 19, 1955 Julia Lee 20,000 15,000 25,690 2,500

TANG HO, WILLIAM LEE, HENRI LEE, SOFIA LEE TEEHANKEE, THOMAS LEE, Charles Lee 20,000 7,500 60,690 7,500
ANTHONY LEE, JULIA LEE KAW, CHARLES LEE, VALERIANA LEE YU, VICTOR LEE,
SILVINO LEE, MARY LEE, JOHN LEE, and PETER LEE, for themselves and as heirs of Valeriana Lee 63,190 2,500
LI SENG GIAP, deceased, petitioners,
Victor Lee 63,190
vs.
THE BOARD OF TAX APPEALS and THE COLLECTOR OF INTERNAL
Silvino Lee 63,190
REVENUE, respondents.
Mary Lee 63,190
Ozaeta, Roxas, Lichauco and Picazo for petitioners.
Office of the Solicitor General Juan R. Liwag and Solicitor Jose P. Alejandro for John Lee 63,190
respondents.
Peter Lee 63,190
REYES, J.B.L., J.:
The Collector of Internal Revenue regarded these transfers as undeclared gifts
This is a petition for the review of the petition of the defunct Board of Tax Appeals made in the respective years, and assessed against Li Seng Giap and his children
holding petitioner Li Seng Giap, et al. liable for gift taxes in accordance with the donor's and donee's taxes in the total amount of P76,995.31, including penalties,
assessments made by the respondent Collector of Internal Revenue. surcharges, interests, and compromise fee due to the delayed payment of the
taxes. The petitioners paid the sum of P53,434.50, representing the amount of the
Petitioners Li Seng Giap (who died during the pendency of this appeal) and his wife basic taxes, and put up a surety bond to guarantee payment of the balance
Tang Ho and their thirteen children appear to be the stockholder of two close family demanded. And on June 25, 1951, they requested the Collector of Internal Revenue
corporations named Li Seng Giap & Sons, Inc. and Li Seng Giap & Co. On or about for a revision of their tax assessments, and submitted donor's and donee's gift tax
May, 1951, examiners of the Bureau of Internal Revenue, then detailed to the Allas returns showing that each child received by way of gift inter vivos, every year from
Committee of the Congress of the Philippines, made an examination of the books of 1939 to 1950 (except in 1947 and 1948) P4,000 in cash; that each of the eight
the two corporation aforementioned and found that each of Li Seng Giap's 13 children who married during the period aforesaid, were given an additional P20,000
children had a total investment therein of approximately P63,195.00, in shares as dowry or gift propter nuptias; that the unmarried children received roughly
issued to them by their father Li Seng Giap (who was the manager and controlling equivalent amount in 1949, also by way of gifts inter vivos, so that the total
stockholder of the two corporations) in the years 1940, 1942, 1948, 1949, and 1950 donations made to each and every child, as of 1950, stood at P63,190. Appellants
in the following amounts: admit that these gifts were not reported; but contend that as the cash donated
came from the conjugal funds, they constituted individual donations by each of the
spouses Li Seng Giap and Tang Ho of one half of the amount received by the donees
Donees 1940 1942 1948 1949 1950
in each instance, up to a total of P31,505 to each of the thirteen children from each
parent. They further alleged that the children's stockholding in the two family
William Lee 7,500 12,500 6,750 27,940 7,500
corporations were purchased by them with savings from the aforesaid cash
Henry Lee 7,500 12,500 6,750 27,940 7,500 donations received from their parents.

Sofia Lee 7,500 12,500 16,500 26,690 Claiming the benefit of gift tax exemptions (under section 110 and 112 of the
Internal Revenue Code) at the rate of P2000 a year for each donation, plus P10,000
Thomas Lee 7,500 12,500 7,500 28,190 7,500 for each gift propter nuptias made by either parent, and appellants' aggregate tax
liability, according to their returns, would only be P4,599.94 for the year 1949, and their tax returns; and that the donees merely bought stocks in the corporation out
P228,28 for the year 1950, or a total of P4,838.22, computed as follows: of savings made from the money received from their parents. The Board of Tax
Appeals upheld the decision of the respondent Collector of Internal Revenue;
hence, this petition for review.
DONORS 1939-44 1945-46 1949 1950 TOTAL

Li Seng Giap Exempt Exempt P1,110.72 P74.14 The questions in this appeal may be summarized as follows:
P1,184.86

Tang Ho Exempt Exempt 1,110.72 74.14 1,184.86

(1) Whether or not the dates and amounts of the donations taxable against
petitioners were as found by the Collector of Internal Revenue from the books of
Total None None P2,221.44 P148.28 P2,369.72
the corporations Li Seng Giap & Sons, Inc. and Li Seng Giap & Co., or as set forth in
petitioners' gift tax returns;
William Lee Exempt Exempt P253.80 P30.00 P283.80
(2) Whether or not the donations made by petitioner Li Seng Giap to his children
Henry Lee Exempt Exempt Exempt 15.00 15.00
from the conjugal property should be taxed against the husband alone, or against
Sofia Lee Exempt Exempt P51.90 None husband and wife; and
51.90

Thomas Lee Exempt Exempt Exempt 15.00 (3) Whether or not petitioners should be allowed the tax deduction claimed by
15.00
them.
Anthony Lee Exempt Exempt Exempt 15.00 15.00
On the first question, which is of fact the appellants take the preliminary stand that
Julia Lee Exempt Exempt 26.90 Exempt 26.90
because of Collector failed to specifically deny the allegation of their petition in the
Tax Board he must be deemed to have admitted the annual and propter
Charles Lee Exempt Exempt Exempt 15.00 15.00
nuptias donations alleged by them, and that he is estopped from denying their
Valeriana Lee Exempt Exempt 26.90 Exempt existence. As the proceedings before the Tax Board were administrative in
26.90
character, not governed by the Rules of Court (see Sec. 10, Executive Order 401-
Victor Lee Exempt Exempt 403.80 None A),and as the Collector actually submitted his own version of the transactions, we
403.80
do not consider that the Collector's failure to make specific denials should be given
Silvino Lee Exempt Exempt 403.80 None the same binding effect as in strict court pleadings.
403.80

Mary Lee Exempt Exempt 403.80 None 403.80

Going now to the merits of the issue. The appealed findings of the Board of Tax
Appeals and of the Collector of Internal Revenue (that the stock transfers from Li
John Lee Exempt Exempt 403.80 None 403.80
Seng Giap to his children were donations) appear supported by the following
circumstances:
Peter Lee Exempt Exempt 403.80 None 403.80

Total None None P2,378.50 P90.00 (1) That the transferor Li Seng Giap (now deceased) had in fact conveyed shares to
P2,468.50
stock to his 13 children on the dates and in the amounts shown in the table on page
Grand total liability of Donors and Donees P4,599.94 P238.28 2 of this decision.
P4,838.22

(2) That none of the transferees appeared to possess adequate independent means
The Collector refused to revise his original assessments; and the petitioners
to buy the shares, so much so that they claim now to have purchased the shares
appealed to the then Board of Tax Appeals (created by Executive Order 401-A, in
with the cash donations made to them from time to time.
1951) insisting that the entries in the books of the corporation do not prove
donations; that the true amount and date of the donation were those appearing in
(3) That the total of the alleged cash donations to each child is practically identical
to the value of the shares supposedly purchased by each donee.
(4) That there is no evidence other than the belated sworn gift tax returns of the
spouses Li Seng Giap and Ang Tang Ho, and their children, appellants herein, to
support their contention that the shares were acquired by purchase. No contracts
of sale or other documents were presented, nor any witnesses introduced; not even
the claimants themselves have testified.
(5) The claim that the shares were acquired by the children by purchase was first
advanced only after the assessment of gift taxes and penalties due thereon (in the
sum of P76,995.31) had been made, and after the appellants had paid P53,434.50
on account, and had filed a bond to guarantee the balance.
(6) That for the parent to donate cash to enable the donee to buy from him shares
of equivalent value is, for all intents and purposes, a donation of such shares to the
purchaser donee.
We cannot say, under the circumstances, that there is no sufficient evidence on
record to support the findings of the Tax Board that the stock transfers above
indicated were made by way of donation, as would entitle us to disregard or
reverse the Board's finding.
The filing of the gift tax returns only after assessments and part payment of the
taxes demanded by the Collector, and the lack of corroboration of the alleged
donations in cash, amply justify the Tax Board's distrust of the veracity of the
appellants' belated tax returns "on or before the first of March following the close
of the calendar year" when the gifts were made (Sec. 115, par. [c]; and besides the
return a written notice to the Collector of each donation of P10,000 or more, must
be given within thirty days after the donation, Sec. 114). These yearly returns and
notices are evidently designed to enable the Collector to verify promptly their truth
and correctness, while the gifts are still recent and proof of the circumstances
surrounding the making thereof is still fresh and accessible. On their own
admission, appellants failed to file for ten successive years, the corresponding
returns for the alleged yearly gifts of P4,000 to each child, and likewise failed to give
the notices for the P20,000 marriage gifts to each married child. Hence, they are
now scarcely in a position to complain if their contentions are not accepted as
truthful without satisfactory corroboration. Any other view would leave the
collection of taxes at the mercy of explanations concoctedex post facto by evading
taxpayers, drafted to suit any facts disclosed upon investigation, and safe from
contradiction because the passing years have erased all trace of the truth.
The second and third issues in this appeal revolve around appellants' thesis that
inasmuch as the property donated was community property (gananciales), and such
property is jointly owned by their parents, the total amount of the gifts made in
each year should be divided between the father and the mother, as separate
donors, and should be taxed separately to each one of them.
In assessing the worth of this contention, it must be ever borne in mind that
appellants have not only failed to prove that the donations were actually made by
both spouses, Li Seng Giap and Tang Ho, but that precisely the contrary appears
from their own evidence. In the original claim for tax refund, filed with the Collector
of Internal Revenue, under date of June 25, 1951 (copied in pages 6 and 7 of the
appellants' petition for review addressed to the Board of Tax Appeals), the father, Li
Seng Giap, describes himself as "the undersigned donor" (par. 1) and speaks of
"cash donations made by the undersigned" (par. 3), without in any way mentioning
his wife as a co-participant in the donation. The issue is thus reduced to the
following: Is a donation of community property by the father alone equivalent in
law to a donation of one-half of its value by the father and one-half by the mother?
Appellants submit that all such donations of community property are to be
regarded, for tax purposes, as donations by both spouses, for which two separate
exemptions may be claimed in each instance, one for each spouse.
This presentation should be viewed in the light of the provisions of the Spanish Civil
Code of 1889, which was the governing law in the years herein involved, 1939 to
1950. the determinative rule is that of Arts. 1409 and 1415, reading as follows:
Art. 1409. The conjugal partnership shall also be chargeable with anything
which may have been given or promised by the husband to the children
born of the marriage solely in order to obtain employment for them or give
them a profession, or by both spouses by common consent, should they
not have stipulated that such expenditures should be borne in whole or in
part by the separate property of one of them.
ART. 1415, p. 1. — The husband may dispone of the property of the
conjugal partnership for the purposes mentioned in Art. 1409.
In effect, these Articles clearly refute the appellants' theory that because the
property donated is community property, the donations should be viewed as made
by both spouses. First, because the law clearly differentiates the donations of such
property "by the husband" from the "donations by both spouses by common
consent" ("por el marido . . . o por ambos conyuges de comun acuerdo," in the
Spanish text).
Next, the wording of Arts. 1409 and 1415 indicates that the lawful donations by the management and disposition which the law vests on the husband." As has been
husband to the common children are valid and are chargeable to the community shown, this power of disposition may, within the legal limits, override the
property, irrespective of whether the wife agrees or objects thereof. Obviously, objections of the wife and render the donation of the husband fully effective
should the wife object to the donation, she can not be regarded as a donor at all. without need of the wife's joining therein. (Civil Code of 1889, Arts 1409, 1415.)

Even more: Suppose that the husband should make a donation of some community It becomes unnecessary to discuss the nature of a conjugal partnership, there being
property to a concubine or paramour. Undeniably, the wife cannot be regarded as specific rules on donations of property belonging to it. The consequence of the
joining in any such donation. Yet under the old Civil Code, the donation would husband's legal power to donate community property is that, where made by the
stand, with the only limitation that the wife should not be prejudiced in the division husband alone, the donation is taxable as his own exclusive act. Hence, only one
of the profits after the conjugal partnership affairs are liquidated. So that if the exemption or deduction can be claimed for every such gift, and not two, as claimed
value of the donation should be found to fit within the limits of the husband's by appellants herein. In thus holding, the Board of Tax Appeals committed no error.
ultimate share in the conjugal partnership profits, the donation by the husband
would remain unassailable, over and against the non-participation of the wife Premises considered, we are of the opinion and so declare:
therein. This Court has so ruled in Baello vs. Villanueva (54 Phil. 213, 214):
(a) That the finding of the defunct Board of Tax Appeals to the effect that shares
According to article 1413 of the Civil Code, any transfer or agreement upon transferred from Li Seng Giap to his children were conveyed to them by way of
conjugal property made by the husband in contravention of its provisions, donation inter vivos is supported by adequate evidence, and therefore cannot be
shall not prejudice his wife or her heirs. As the conjugal property belongs reviewed by this Court (Comm. of Internal Revenue. vs. Court Holding Co., L. Ed.
equally to husband and wife, the donation of this property made by the 981; Comm. of Internal Revenue vs. Scottish American Investment Co., 89 L. Ed.
husband prejudices the wife in so far as it includes a part or the whole of 113; Comm. of Internal Revenue vs. Tower, 90 L. Ed. 670; Helvering vs. Tax Penn. Oil
the wife's half, and is to that extent invalid. Hence article 1419, in Co., 81 L. Ed. 755).
providing for the liquidation of the conjugal partnership, directs that all
illegal donations made by the husband be charged against his estates and (b) That under the old Civil Code, a donation by the husband alone does not
deducted from his capital. But it is only then, when the conjugal become in law a donation by both spouses merely because it involves property of
partnership is in the process of liquidation, that it can be discovered the conjugal partnership;
whether or not an illegal donation made by the husband prejudices the
wife. And inasmuch as these gifts are only to be held invalid in so far as
(c) That such a donation of property belonging to the conjugal partnership, made
they prejudice the wife, their nullity cannot be decided until after the
during its existence, by the husband alone in favor of the common children, is
liquidation of the conjugal partnership and it is found that they encroach
taxable to him exclusively as sole donor.
upon the wife's portion.
Wherefore, the decision appealed from is affirmed with costs to the appellants. So
Appellants herein are therefore in error when they contend that it is enough that
ordered.
the property donated should belong to the conjugal partnership in order that the
donation be considered and taxed as a donation of both husband and wife, even if
the husband should appear as the sole donor. There is no blinking the fact that,
under the old Civil Code, to be a donation by both spouses, taxable to both, the
wife must expressly join the husband in making the gift; her participation therein
cannot be implied.

It is true, as appellants stress, that in Gibbs vs. Government of the Philippines, 59

Phil., 293, this Court ruled that "the wife, upon acquisition of any conjugal property,
becomes immediately vested with an interest and title equal to that of the
husband"; but this Court was careful to immediately add, "subject to the power of
EN BANC WHEREFORE, our decision of February 28, 1958 is modified in the sense
that the delinquency interest of one-half (1/2) of one (1%) percent should
G.R. No. L-14166 April 28, 1962 be computed on the deficiency taxes only from July 1, 1954 to July 30,
1954, and the defendant Collector of Internal Revenue is hereby ordered
FINLEY J. GIBBS, as Trustee for JOHNSON KELLEY GIBBS, ALLISON DEFRANCE refund to plaintiff the sum of P9,387.54 as computed in Annex "A" hereof,
GIBBS, with interest at the legal rate from date of payment. Without special
CANDACE GIBBS, DOUGLAS FLETCHER GIBBS, and REGINALD KELLEY pronouncement as to costs. 1äwphï1.ñët
GIBBS, plaintiff-petitioner;
ALLISON J. GIBBS and ESTHER K. GIBBS, intervenors-petitioners, On September 25, 1950, Allison J. Gibbs and his wife Esther K. Gibbs, hereinafter
vs. referred to as trustors, executed five (5) separate documents each, entitled "Deed
COLLECTOR OF INTERNAL REVENUE and COURT of TAX APPEALS, respondents. of Sale and Declaration of Trust", whereby the respective trustors transferred, sold
and assigned, in trust, 53,000 shares of stock of the Lepanto Consolidated Mining
----------------------------- Co., in favor of each one of their five (5) children, namely Johnson Kelley Gibbs,
Allison Defrance Gibbs, Candace Gibbs, Douglas Fletcher Gibbs and Reginald Kelley
Gibbs in consideration of the sum of P26,227.70, to be paid "on or before
G.R. No. L-14320 April 28, 1962
December 23, 1950, by selling, mortgaging, hypothecating or pledging part or all of
the corpus of the trust." The market value of said 53,000 shares on September 25,
COLLECTOR OF INTERNAL REVENUE, petitioner,
1950 was P34,980.00.
vs.
FINLEY J. GIBBS, as Trustee for JOHNSON KELLEY GIBBS, ALLISON DEFRANCE
The terms and conditions of the ten (10) deeds trust were identical. Instituted
GIBBS,
trustee, without bond, in said ten (10) deeds, was Finley J. Gibbs, a brother of
CANDACE GIBBS, DOUGLAS FLETCHER GIBBS and REGINALD KELLEY
trustor Allison J. Gibbs, who, as attorney-in-fact of the former, accepted the trust, in
GIBBS, respondent;
his (Finley J. Gibbs') name, for and on behalf of the aforementioned beneficiaries.
ALLISON J. GIBBS and ESTHER K. GIBBS, respondents-intervenors.
The trust was to terminate upon the respective beneficiary reaching the age of 35.
If the beneficiary died before reaching that age, leaving legitimate issue the trust
Ozaeta, Gibbs and Ozaeta for petitioner Finley J. Gibbs, et al.
would continue, but for the benefit of the latter, and the full distribution and
Office of the Solicitor General for respondent Collector of Internal Revenue.
termination of the trust with respect to such issue would be effected not later than
20 years after the death of said beneficiary. If the beneficiary died before reaching
CONCEPCION, J.: the age of 35 leaving no legitimate issue, the trustee would turn over the trust
corpus or the remainder thereof and any accumulated income, share and share
These are two (2) appeals, one by the plaintiff and the plaintiffs-intervenors and the alike, to the other beneficiaries or children of the trustors.
other by the Government, from a decision of the Court of Tax Appeals, hereafter
referred to as the lower court, promulgated on February 28, 1958, the dispositive On October 24, 1950, the trustors gave notice to the then Collector of Internal
part of which reads: Revenue, hereafter referred to as defendant, of the execution of the ten (10) deeds
of trust and requested a ruling on whether or not gift taxes were due thereon.
IN VIEW OF THE FOREGOING, the decision appeal from is modified, and the Soon, thereafter, or on December 14, 1950, defendant assessed a donee gift tax of
defendant Collector of Internal Revenue is hereby ordered to refund to the P75.00 on each of the beneficiaries in said trust agreements, or a total of P750.40,
plaintiff the sum P5,381.88, as computed in Annex "A" hereof, with and a donor gift tax of P774.04 on each of the trustors, or P1,548.08 for both. These
interest the legal rate from date of payment, Without special assessments were based upon the difference between said market value of the
pronouncement as to costs. shares of stock and the stipulated consideration for transfer thereof. On December
22, 1950, defendant revised his assessment of the donor gift tax by increasing it
as amended by a resolution of said lower court, dated July 25, 1958, the concluding from P774.04 to P342.84 for each trustor, or a total of P1,685.68. The next day, the
paragraph of which is as follows:
donee gift taxes were, also, increased, from the aforementioned total sum of
P750.40 to P17,856.90.
Within the period fixed by law, or on May 15, 1951, said donor and donee gift taxes
in the sums of P1,685.68 and P17,856.90, respectively, were paid. Subsequently,
the refund of P17,106.50, representing the difference between the amount if the
first assessment (P750.40) for donee gift taxes and that of the second assessment
thereof (P17,856.90), was demanded, but the demand was, on August 23, 1951,
turned down by the defendant. The trustee appealed to the Secretary of Finance.
Before the latter could pass upon the appeal, however, the Board of Tax Appeals
was created by Executive Order No. 401 of the President of the Philippines. The
pertinent records were then forwarded to said Board. Alleging fear of expiration of
the two-year period for the refund of said sum of P17,106.50, on May 12, 1953, the
trustee instituted Civil Case No. 19541 of the Court of First Instance of Manila
against the defendant for the recovery of such amount.
Meanwhile, or on December 28, 1951, the trustors, by five (5) separate documents
each, had created ten (10) additional and separate trusts, each involving 22,400
shares of stock of the same mining company, in favor of each of the
aforementioned beneficiaries, for the stipulated consideration of P17,430, to be
paid by the trustees within 120 days after the transfer of said stock has been
effected in the books of the mining company. In all other respects, the terms and
conditions of this second set of deeds of trusts are identical to those of the first set.
Admittedly, the market value of said 22,400 shares was then P19,264.00.
These additional deeds of trust impelled the defendant to assess, on April 8, 1952, a
donor gift tax of P304.42 on each trustor, or a total of P608.84 for both trustors,
and a donee gift tax of P36.69, on each of the beneficiaries, or a total of P366.90.
These amounts were paid on May 15, 1952, within the statutory period therefor.
Holding that gift taxes are available on the full market value of all the shares of
stock thus placed in trust — instead of upon the difference between said market
value and the stipulated considerations — on June 16, 1954, defendant assessed
additional donor gift taxes in the sums of P5,093.71 on each trustor, or a total of
P10,187.42, for the ten (10) trusts created on September 25, 1950, and P8,788.78,
on each trustor, or a total of P17,577.56 for the trusts created on December 28,
1951. Additional donee gift taxes were, likewise, assessed in the sum of P12,040.30
for the ten (10) additional trusts created on December 28, 1951. The corresponding
assessment notices demanded that these three (3) sums be paid on or before June
30, 1954. Upon request of the taxpayers, they were given an extension up to July
31, 1954, on which date said sums were paid under protest. Thus, the amounts paid
under protest for the two (2) sets of trusts in question aggregate P56,911.78,
itemized as follows: .
Donee gift taxes on the trusts created on September 25,
P17,106.50
1950
Donor gift taxes on the trusts created on September 25,
10,187.42
1950
Donee gift taxes on the trusts created on December 28,
12,040.30
1951
Donor gift taxes on the trusts created on December 28,
17,577.56
1951
TOTAL....................... P56,911.78
============
In the meantime, or on June 16, 1954, Republic Act No. 1125, creating the Court of
Tax Appeals, had been approved and become effective. Pursuant to section 22 of
said Act, the records of Civil Case No. 19541 of the Court of First Instance of Manila
were, on August 26, 1954, forwarded to the Court of Tax Appeals. In October, 1955,
the trustors intervened in the case as plaintiffs-intervenors. In their complaint in
intervention they prayed for the refund of the additional donor gift taxes paid by
them in the aggregate sum of P27,764.98, with interest and attorney's fees. In July,
1956, the trustee amended his complaint to include therein the claim for refund of
the aggregate sum of P50,911.78 specified above. In due course, thereafter, the
Court of Tax Appeals rendered its aforementioned decision, which on motion for
reconsideration was amended as adverted to above. Hence, these appeals, one by
the trustee (plaintiff) and the trustors (plaintiffs-intervenors), G. R. No. L-14166, and
another by the defendant, G. R. No. L-14320.
The main issue raised in the first appeal is whether the gift taxes on the transfer of
the shares of stock aforementioned should be based on the full market value of said
shares of stock at the time of the respective transfers thereof or only upon the
difference between said market value and the consideration stipulated in the trust
agreements. The defendant adhered to the first alternative, which the Court of Tax
Appeals, likewise, adopted, upon the ground that the stipulated considerations
were — except as to the aggregate sum of P52,277.00 allegedly paid by the trustee
in June 1953 — in effect, simulated.
Indeed, the stipulated consideration of P262,277.00, for the transfer of the 530,000
shares of stock involved in first set of deeds of trust were to be paid, pursuant
thereto, "on or before December 23, 1950, by selling, mortgaging, hypothecating or
pledging part or all of the corpus the trust". On December 2, 1950, the Central Bank
granted plaintiff's application for license to sell, assign or encumber said shares of
stock. Yet nothing was done pay the stipulated consideration on the date set
therefor. What is more, the trustors did not demand payment of, or do anything to
collect, said consideration.
It is true that on June 15, 1953, or about three and a half years (3-1/2) after the
latter had become due, Allison Gibbs, as one of the trustors and as attorney-in-fact
for the trustee, as well as the other trustor, his wife, Esther K. Gibbs, executed ten
(10) documents entitled Compromise Agreement", stating that the parties had
agreed to suspend and defer payment of the sum of P26,277.70 stipulated in each
of the first ten (10) trust agreements, and to liquidate the obligation to make said
payment as follows: (a) the trustee would pay P5,227.70 on or before June 30,
1953; and (b) the balance of P21,000.00 would be paid on or before the 21st
birthday of the respective beneficiaries or the date of termination of the trust,
which ever date came first. The trustee and the trustors have likewise, introduced
in evidence, ten (10) promissory notes of the trustee, for said sum of P21,000,
allegedly executed in compliance with said compromise agreements.
These did not merit, however, full faith and credence from the Court of Tax
Appeals, which regarded such agreements, as well as said promissory notes, as a
mere devise to avoid and evade payment of the corresponding gift taxes.
Considering that the trustee is a brother of trustor Allison J. Gibbs; that the ten (10)
cash payment of P5,277.70 each, referred to in the compromise agreements
aforementioned, were seemingly made to trustors Esther K. Gibbs and Allison J.
Gibbs by the latter as attorney-in-fact of the trustee, his brother Finley J. Gibbs; that
there was absolutely no consideration for the release of the trustee from the
obligation to pay P26,227.70 on or before December 23, 1950, under each of the
deeds of trust executed on September 25, 1950; that the promissory notes
adverted to above bear no date and were not executed before any witness; and
that the date of maturity therein set is so distant, in relation to the due dates under
said deeds of trust, we find no justification for disturbing the conclusion reached by
the lower court. In fact, said conclusion is borne out by the following circumstances:
. to P9,790.244. Certainly, this amount, as well as the aforementioned sum of
1. In answer to the following question propounded by a Judge of said court .
If the trusts were created for the benefit of your children and as you said,
one of the consequences of which was your love and affection for your
children, what need was there for you to impose this burden of requiring
them to pay for those shares?
trustor Allison J. Gibbs answered:
Well, there were tax considerations involved, Your Honor, I have not only
to think of the Philippine tax problems but also the United States tax
problems. I very carefully went into the whole matter before my wife and I
decided on doing what we did. I studied and came to the conclusion that
we could not afford to make an outright gift of these shares, that the taxes
that would result not only to the Philippine government but to the United
States government would be too big for us to shoulder, considering the
fact that we also are letting off our control of transfers of our right into
these substantial portion of our assets. We could not have afforded to do
it. It calls by way of future interest under the United States gift tax laws for
payment of gift taxes. We are allowed an exemption both — for both my
wife — for each of my wife and myself of $30,000.00 under the United
States Federal gift tax law. But these gifts, had they been accepted ... had
they been made 100% rather, these transfers had they been made without
any consideration would have been taxable 100% at the market value on
that date. That would have resulted on a tremendous tax both to the
Philippine government and to the United States government. We could not
afford to pay those taxes, and that is fundamentally one reason for fixing
the price that we did fix which was premised upon our cost.
2. The deeds of trust state that the purpose thereof is "to establish an endowment
for the support, maintenance, care, health, higher education and travel of the
beneficiary and the launching of his career after he becomes of age". These
purposes would be materially impaired, if not entirely defeated, if the beneficiaries
were to pay the stipulated consideration aggregating P262,277, under the first set
of deeds of trust, and P174,300 under the second set, or a total of P436,577. If we
deduct this sum from the aggregate market value of all the shares of stock in
question — which is P542,540 — the net value of the whole trust would be reduced
to P105,863 and the net value of the aggregate trust for each beneficiary would be
no more than P21,172.60. And, if as the trustee and the trustors maintain, the taxes
under consideration (P56,911.78) should be deducted from the corpus of the trust,
the net value of the aggregate trust for each beneficiary would be further reduced
P21,172.60 could hardly be sufficient for the "support, maintenance, care, health,
higher education and travel" of each beneficiary and "the launching of his career
after he has become of age." .
3. The trustors are financially well off. When the first set of deeds of trust were
executed (September 25, 1950), their assets in the Philippines and United States
were worth P1,500,000.00 and P500,000.00, respectively, at the rate of P2.00 to a
$1.00. If the trustors were earnestly concerned, as they seemingly were, in
providing ample funds to assure the support, maintenance, care, health, higher
education and travel of their children and the launching of their career after they
had become of age, the trustors would not have really meant to require them to
pay the consideration stipulated in the trust agreements. The subsequent acts of
the trustors showed that they did not intend to collect said consideration. As the
lower court had correctly observed:
... We assume that the trustors were indeed serious about the purpose of
the trusts. With this in mind, we cannot conceive how the purpose of the
trust may readily and liberally be achieved if the trust were to be burdened
by such onerous monetary consideration. Without the consideration, the
purpose or purposes of the trusts could have been more readily obtained.
Consequently, we feel constrained to treat the monetary considerations of
the trusts as an intended superfluity if not a subtlety, to becloud the
donative intent of trustors.
4. The corpus of the trust was never totally or partially sold, hypothecated or
encumbered. Instead, after December 7, 1950, when the Central Bank authorized
the conversion of the shares of stock covered by the first set of trust agreements
from resident stocks to non-resident stocks, the corresponding cash dividends and
stock dividends declared by the mining company were sent directly to the trustee in
the United States, thus enabling the trustors to create dollar assets in the United
States. The testimony of trustor Allison J. Gibbs on this point is illuminating.
JUDGE LUCIANO
If, as you said, one of the purposes of imposing a consideration on
the trustee in your favor and that of your wife, was to protect the
interest of both you and your wife, why is it that when these
dividends were declared by the Lepanto Consolidated Mining
Company, and were so declared, you did not collect the
consideration from these dividends to offset the stipulated
consideration in the series of trust agreements? .
A — Because that would defeat the very objectives for which we
created the trusts and at least, one of the objectives was to
transfer as much as possible of our Philippine assets to the United
States in the form of dollars so as to create dollar assets in the
United States on which our children could rely under the trust
indentures. In fact, that was the prime basis upon which I secured
the eventual licensing by the Central Bank of the transactions. In
fact, I told the Central Bank if they did not license it on the basis
on which I had proposed which I considered absolutely legal, then
I would find some other way of accomplishing the objective. If
necessary, I would leave the Philippine Islands and become a
resident of the United States. And, in that instance, under their
regulations, there could be no question that all of my assets in the
Philippines which were earning dividends would be entitled to
have the dividends remitted to the United States. They saw the
logic of my reasoning and they finally agreed on the transaction of
issuing the license, XL-530 on December 2, 1950, Exhibit J-2,
plaintiff. There has been no question from the very beginning of
one of the prime purposes of this transaction — it was to create a
dollar estate for our children in the United States, premised upon
our conviction that Lepanto Consolidated Mining Company was
going to pay dividends and that the Central Bank regulations
would allow the remittance of dividends to non-resident
stockholders.
The trustors could have easily collected the stipulated consideration or part of it
from said dividends, yet they did not do so — they even saw to it that the dividends
were sent to the United States.
In connection with the trust agreements executed on December 28, 1951, the
trustee, represented by his attorney-in-fact, Allison J. Gibbs, and the latter, as one
of the trustors, as well as his wife, trustor Esther K. Gibbs, executed on July 15,
1953, another set of deeds, entitled "Compromise Agreement", stating that the
trustee thereby resold, retransferred and reassigned to the trustor the 22,400
shares covered by each of said trust agreements, for and in consideration of the
sum of P19,264 to be paid by the trustors by crediting to the trustee the sum of
P17,430, the consideration stipulated in each one of said trust agreements, thereby
leaving a balance of P1,843 to be paid to the trustee upon the trustor's
repossession of the corresponding stock certificates.
The main reason given in said compromise agreements for the provisions thereof is
the alleged inability of the trustee to sell, mortgage, hypothecate, or pledge the said
shares of stock or otherwise deal with third parties with a view to raising funds for
the payment of the consideration stipulated in the trust agreements, pending
registration of the transfer of said stock, in the books of the mining company, in
view of the conditions — not described in the compromise agreements — imposed
by the Central Bank for the issuance of a license authorizing said transfer, which —
according to the compromise agreements — are rightly unacceptable to the
trustee.
This reason is clearly artificious. The stock involved in the trust agreements of
September 25, 1950 were so transferred. Still no payment was made thereon.
Moreover, the trustee could have authorized the trustors to sell, mortgage,
hypothecate or otherwise dispose of said stock to raise the necessary funds, if the
intent was really that the stipulated consideration be paid. Indeed, as attorney in-
fact for the trustee, trustor Allison J. Gibbs, with the ample powers that his acts
revealed he had, could have simply granted such authority to himself and his wife,
Esther K. Gibbs, as trustors. Considering that one of the prime objectives of the
trustors in executing the trust agreements was "to transfer as much as possible of
our Philippine assets to the United States in the form of dollars", it is
understandable that they did not wish the stock in question to be disposed of in the
Philippines, for this would surely defeat the accomplishment of said objectives. At
the same time, it is apparent that the reason given in said compromise agreements
for the execution thereof is not true.
It may not be amiss to note, also, that the compromise agreements affecting the
trusts constituted on December 28, 1951, virtually revoked said trusts, contrary to
the explicit provision in the trust agreements, to the effect that the trusts therein
established are "irrevocable".
Another factor that affects adversely the credence and weight due to all of the
compromise agreements is that the same were made with knowledge of the fact
that the defendant was already investigating whether the stipulated consideration
was real or fictitious and entertaining the idea of assessing the corresponding gift
taxes on the basis of the full market value of the stock involved.
The trustee and the trustors maintain that the lower court erred in not deducting
the amount of the donor gift taxes from the value of the property subject to the
donee gift taxes, in view of the provision of the trust agreement to the effect —
In addition to the foregoing, the TRUSTEE shall pay out of the property
and/or the gross income of the trust estate all income, estate, gift,
succession or inheritance taxes, if any, payable by the VENDOR, TRUSTEE
or BENEFICIARY by reason of this trust.
We find no merit in this pretense. The questions as to who shall pay any given tax
and what shall be the basis thereof are determined by law, the operation of which
can not be affected by the provisions of a contract to which the Government is not
a party. This, of course, is without prejudice to the right, if any, of a party to the
trust agreements to demand reimbursement from the other party. But such right of
reimbursement is independent of, and foreign to, the right and duty of the
defendant to collect the taxes in the manner and under the conditions prescribed
by law.
The appeal taken up by the defendant refers to the interest chargeable on the
amounts representing the taxes in question, and the interest on the sum to be
refunded by the Government.
In its resolution of June 25, 1958, the Court of Tax Appeals held that interest of one-
half (1/2) of one (1%) percent should be charged on the deficiency taxes only from
July 1, 1954 to July 30, 1954, because the defendant had demanded payment on or
before June 30, 1954, of the deficiency donor gift taxes — amounting to P10,187.42
and P17,577.56 — assessed on the first and the second set of trust agreements,
respectively, and the deficiency donee gift taxes of P12,040.30, assessed on the
second set of trust agreements. The defendant maintains that said interest should
be charged from the 15th day of May following the calendar year in which the gifts
in question had been made, for section 116 of the tax Code provides —
The gift taxes imposed by section one hundred nine and one hundred ten
of this Chapter shall be due and payable on or before the fifteenth day of
May following the close of the calendar year and shall be paid by the donor
or donee, as the case may be, to the Collector of Internal Revenue or the
treasurer of the province city or municipality of which the donor or the
donee is a resident.
Upon the other hand, section 118 (b) of the same Code, on which the lower court
relied, reads: .
In case an extension for the payment of a deficiency is granted, there shall
be collected, as a part of the taxes, interest on the part of the
deficiency the time for payment of which is so extended, at the rate of six
per centum per annum for the period of the extensions. (Emphasis
supplied.) .
At this juncture, it should be noted that the taxes assessed on the basis of the
difference between the market value and the consideration were paid within the
period fixed by law or on May 15, 1951, as regards to trusts created in 1950, and on
May 15, 1952, as regards the trusts constituted in 1951. Even the donor gift taxes,
under a revised assessment, and the deficiency donor gift taxes due on the first set
of trusts were paid in due time (May 15, 1951). With respect to the deficiency
donor gift taxes on the two sets of trust agreements and the deficiency donee gifts
taxes assessed on the second set of trust agreements, the defendant demanded
payment thereof on or before June 30, 1954. Had these assessments been paid on
that date, no interest whatsoever would have been due thereon. It is but fair and
just, therefore, that interest be charged only for the period of the extension
secured for the payment of the trust assessments, pursuant to section 118(b).
In support of the theory that interest is due, not only for said period of extension
but, also, from the fifteenth day of May of the year following that in which the trust
had been constituted, defendant cites section 119(b) (2) of the Tax Code, according
to which: .
 If the part of the deficiency the time for payment of which is extended
is not paid in accordance with the terms of the extension, there shall be
collected, as a part of the taxes, interest on such unpaid amount at the
rate of one per centum a month from the date the same was originally due
until it is paid.

This provision applies only when the taxes are not paid within the extension
granted by the Collector or Commissioner of Internal Revenue. It is inapplicable to
the case at bar, for the taxes involved herein were paid within said extension of
time.

It is urged by the defendant that the Government should not be required to pay
interest on the amount refundable to the trustee and the trustors. The matter of
payment of interest on sums collected by way of taxes, which the Government is
subsequently sentenced to refund to the taxpayer, depends upon whether or not
the collection of said sums is manifestly unwarranted (Collector of Internal Revenue
vs. Convention of the Philippine Baptist Churches, et al., L-11807, May 19, 1961
[Resolution]; Collector of Internal Revenue vs. Sweeney, L-12178, August 21, 1959;
Collector of Internal Revenue vs. St. Paul's Hospital, etc., L-12127, May 21, 1959). In
the case at bar, it is clearly not so, in the light of the attending circumstances.
Hence, the amount refundable by the Government, pursuant to the decision
appealed from, should draw no interest, and said decision should be modified
accordingly.

Thus modified, said decision should be, as it is hereby affirmed, in all other respects,
without pronouncement as to costs. It is so ordered.
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.
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 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)
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.

The above decision became final and executory. In compliance therewith, De la

Petitioners-appellants herein filed a motion to reconsider the above decision, which
Rama Steamship Co. made, on April 6, 1955, a partial payment on the amount of
the lower court denied. Hence, this appeal before us.
the judgment and paid the balance thereof on May 12, 1955.
In the instant appeal, petitioners-appellants herein question only that portion of the
On March 6, 1955, respondent Commissioner of Internal Revenue assessed the
decision of the lower court ordering the payment of donees' gift taxes as assessed
amount of P60,869.67 as donees' gift tax, inclusive of surcharges, interests and
by respondent as well as the imposition of surcharge and interest on the amount of
other penalties, against each of the petitioners-appellants, or for the total sum of
donees' gift taxes.
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
In their brief and memorandum, they dispute the factual finding of the lower court
paid.
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
Petitioners-appellants herein contested respondent Commissioner's assessment
"was motivated solely and exclusively by its sense of gratitude, an act of pure
and imposition of the donees' gift taxes and donor's gift tax and also made a claim
liberality, and not to pay additional compensation for services inadequately paid
for refund of the donor's gift tax so collected. Respondent Commissioner overruled
for." Petitioners now contend that the lower court's finding was erroneous in
petitioners' claims; hence, the latter presented two (2) petitions for review against
seemingly considering the disputed grant as a simple donation, since our previous
respondent's rulings before the Court of Tax Appeals, said petitions having been
decision (96 Phil. 335) had already declared that the transfer to the Pirovano
docketed as CTA Cases Nos. 347 and 375. CTA Case No. 347 relates to the petition
children was a remuneratory donation. Petitioners further contend that the same
disputing the legality of the assessment of donees' gift taxes and donor's gift tax
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 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 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 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.