Republic of the Philippines

SUPREME COURT
Manila

EN BANC

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

PABLO LORENZO, as trustee of the estate of Thomas Hanley, deceased, plaintiff-appellant,

vs.
JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellant.

Pablo Lorenzo and Delfin Joven for plaintiff-appellant.

Office of the Solicitor-General Hilado for defendant-appellant.

LAUREL, J.:

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

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

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

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

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

xxx xxx xxx

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

Avanceña, C.J., Abad Santos, Imperial, Diaz and Concepcion, JJ., concur.
Villa-Real, J., concurs.
SECOND DIVISION

[G.R. No. 120880. June 5, 1997]

FERDINAND R. MARCOS II, petitioner, vs. COURT OF APPEALS, THE COMMISSIONER OF

THE BUREAU OF INTERNAL REVENUE and HERMINIA D. DE GUZMAN, respondents.

DECISION

TORRES, JR., J.:

In this Petition for Review on Certiorari, Government action is once again assailed as precipitate and
unfair, suffering the basic and oftly implored requisites of due process of law. Specifically, the
petition assails the Decision[1] of the Court of Appeals dated November 29, 1994 in CA-G.R. SP No.
31363, where the said court held:

"In view of all the foregoing, we rule that the deficiency income tax assessments and estate tax
assessment, are already final and (u)nappealable -and- the subsequent levy of real properties is a
tax remedy resorted to by the government, sanctioned by Section 213 and 218 of the National
Internal Revenue Code.This summary tax remedy is distinct and separate from the other tax
remedies (such as Judicial Civil actions and Criminal actions), and is not affected or precluded by
the pendency of any other tax remedies instituted by the government.

WHEREFORE, premises considered, judgment is hereby rendered DISMISSING the petition for
certiorari with prayer for Restraining Order and Injunction.

No pronouncements as to costs.

SO ORDERED."

More than seven years since the demise of the late Ferdinand E. Marcos, the former President of
the Republic of the Philippines, the matter of the settlement of his estate, and its dues to the
government in estate taxes, are still unresolved, the latter issue being now before this Court for
resolution. Specifically, petitioner Ferdinand R. Marcos II, the eldest son of the decedent, questions
the actuations of the respondent Commissioner of Internal Revenue in assessing, and collecting
through the summary remedy of Levy on Real Properties, estate and income tax delinquencies upon
the estate and properties of his father, despite the pendency of the proceedings on probate of the
will of the late president, which is docketed as Sp. Proc. No. 10279 in the Regional Trial Court of
Pasig, Branch 156.

Petitioner had filed with the respondent Court of Appeals a Petition for Certiorari and Prohibition with
an application for writ of preliminary injunction and/or temporary restraining order on June 28, 1993,
seeking to -

I. Annul and set aside the Notices of Levy on real property dated February 22, 1993 and May 20,
1993, issued by respondent Commissioner of Internal Revenue;

II. Annul and set aside the Notices of Sale dated May 26, 1993;
III. Enjoin the Head Revenue Executive Assistant Director II (Collection Service), from proceeding
with the Auction of the real properties covered by Notices of Sale.

After the parties had pleaded their case, the Court of Appeals rendered its Decision[2] on November
29, 1994, ruling that the deficiency assessments for estate and income tax made upon the petitioner
and the estate of the deceased President Marcos have already become final and unappealable, and
may thus be enforced by the summary remedy of levying upon the properties of the late President,
as was done by the respondent Commissioner of Internal Revenue.

"WHEREFORE, premises considered judgment is hereby rendered DISMISSING the petition for
Certiorari with prayer for Restraining Order and Injunction.

No pronouncements as to cost.

SO ORDERED."

Unperturbed, petitioner is now before us assailing the validity of the appellate court's decision,
assigning the following as errors:

A. RESPONDENT COURT MANIFESTLY ERRED IN RULING THAT THE SUMMARY TAX

REMEDIES RESORTED TO BY THE GOVERNMENT ARE NOT AFFECTED AND PRECLUDED
BY THE PENDENCY OF THE SPECIAL PROCEEDING FOR THE ALLOWANCE OF THE LATE
PRESIDENT'S ALLEGED WILL. TO THE CONTRARY, THIS PROBATE PROCEEDING
PRECISELY PLACED ALL PROPERTIES WHICH FORM PART OF THE LATE PRESIDENT'S
ESTATE IN CUSTODIA LEGIS OF THE PROBATE COURT TO THE EXCLUSION OF ALL OTHER
COURTS AND ADMINISTRATIVE AGENCIES.

B. RESPONDENT COURT ARBITRARILY ERRED IN SWEEPINGLY DECIDING THAT SINCE THE

TAX ASSESSMENTS OF PETITIONER AND HIS PARENTS HAD ALREADY BECOME FINAL AND
UNAPPEALABLE, THERE WAS NO NEED TO GO INTO THE MERITS OF THE GROUNDS CITED
IN THE PETITION. INDEPENDENT OF WHETHER THE TAX ASSESSMENTS HAD ALREADY
BECOME FINAL, HOWEVER, PETITIONER HAS THE RIGHT TO QUESTION THE UNLAWFUL
MANNER AND METHOD IN WHICH TAX COLLECTION IS SOUGHT TO BE ENFORCED BY
RESPONDENTS COMMISSIONER AND DE GUZMAN. THUS, RESPONDENT COURT SHOULD
HAVE FAVORABLY CONSIDERED THE MERITS OF THE FOLLOWING GROUNDS IN THE
PETITION:

(1) The Notices of Levy on Real Property were issued beyond the period provided in the Revenue
Memorandum Circular No. 38-68.

(2) [a] The numerous pending court cases questioning the late President's ownership or interests in
several properties (both personal and real) make the total value of his estate, and the consequent
estate tax due, incapable of exact pecuniary determination at this time. Thus, respondents
assessment of the estate tax and their issuance of the Notices of Levy and Sale are premature,
confiscatory and oppressive.

[b] Petitioner, as one of the late President's compulsory heirs, was never notified, much less served
with copies of the Notices of Levy, contrary to the mandate of Section 213 of the NIRC. As such,
petitioner was never given an opportunity to contest the Notices in violation of his right to due
process of law.
C. ON ACCOUNT OF THE CLEAR MERIT OF THE PETITION, RESPONDENT COURT
MANIFESTLY ERRED IN RULING THAT IT HAD NO POWER TO GRANT INJUNCTIVE RELIEF
TO PETITIONER. SECTION 219 OF THE NIRC NOTWITHSTANDING, COURTS POSSESS THE
POWER TO ISSUE A WRIT OF PRELIMINARY INJUNCTION TO RESTRAIN RESPONDENTS
COMMISSIONER'S AND DE GUZMAN'S ARBITRARY METHOD OF COLLECTING THE ALLEGED
DEFICIENCY ESTATE AND INCOME TAXES BY MEANS OF LEVY.

The facts as found by the appellate court are undisputed, and are hereby adopted:

"On September 29, 1989, former President Ferdinand Marcos died in Honolulu, Hawaii, USA.

On June 27, 1990, a Special Tax Audit Team was created to conduct investigations and
examinations of the tax liabilities and obligations of the late president, as well as that of his family,
associates and "cronies". Said audit team concluded its investigation with a Memorandum dated July
26, 1991. The investigation disclosed that the Marcoses failed to file a written notice of the death of
the decedent, an estate tax returns [sic], as well as several income tax returns covering the years
1982 to 1986, -all in violation of the National Internal Revenue Code (NIRC).

Subsequently, criminal charges were filed against Mrs. Imelda R. Marcos before the Regional Trial
of Quezon City for violations of Sections 82, 83 and 84 (has penalized under Sections 253 and 254
in relation to Section 252- a & b) of the National Internal Revenue Code (NIRC).

The Commissioner of Internal Revenue thereby caused the preparation and filing of the Estate Tax
Return for the estate of the late president, the Income Tax Returns of the Spouses Marcos for the
years 1985 to 1986, and the Income Tax Returns of petitioner Ferdinand 'Bongbong' Marcos II for
the years 1982 to 1985.

On July 26, 1991, the BIR issued the following: (1) Deficiency estate tax assessment no. FAC-2-89-
91-002464 (against the estate of the late president Ferdinand Marcos in the amount of
P23,293,607,638.00 Pesos); (2) Deficiency income tax assessment no. FAC-1-85-91-002452 and
Deficiency income tax assessment no. FAC-1-86-91-002451 (against the Spouses Ferdinand and
Imelda Marcos in the amounts of P149,551.70 and P184,009,737.40 representing deficiency income
tax for the years 1985 and 1986); (3) Deficiency income tax assessment nos. FAC-1-82-91-002460
to FAC-1-85-91-002463 (against petitioner Ferdinand 'Bongbong' Marcos II in the amounts of
P258.70 pesos; P9,386.40 Pesos; P4,388.30 Pesos; and P6,376.60 Pesos representing his
deficiency income taxes for the years 1982 to 1985).

The Commissioner of Internal Revenue avers that copies of the deficiency estate and income tax
assessments were all personally and constructively served on August 26, 1991 and September 12,
1991 upon Mrs. Imelda Marcos (through her caretaker Mr. Martinez) at her last known address at
No. 204 Ortega St., San Juan, M.M. (Annexes 'D' and 'E' of the Petition). Likewise, copies of the
deficiency tax assessments issued against petitioner Ferdinand 'Bongbong' Marcos II were also
personally and constructively served upon him (through his caretaker) on September 12, 1991, at his
last known address at Don Mariano Marcos St. corner P. Guevarra St., San Juan, M.M. (Annexes 'J'
and 'J-1' of the Petition). Thereafter, Formal Assessment notices were served on October 20, 1992,
upon Mrs. Marcos c/o petitioner, at his office, House of Representatives, Batasan Pambansa,
Quezon City. Moreover, a notice to Taxpayer inviting Mrs. Marcos (or her duly authorized
representative or counsel), to a conference, was furnished the counsel of Mrs. Marcos, Dean
Antonio Coronel - but to no avail.

The deficiency tax assessments were not protested administratively, by Mrs. Marcos and the other
heirs of the late president, within 30 days from service of said assessments.
On February 22, 1993, the BIR Commissioner issued twenty-two notices of levy on real property
against certain parcels of land owned by the Marcoses - to satisfy the alleged estate tax and
deficiency income taxes of Spouses Marcos.

On May 20, 1993, four more Notices of Levy on real property were issued for the purpose of
satisfying the deficiency income taxes.

On May 26, 1993, additional four (4) notices of Levy on real property were again issued. The
foregoing tax remedies were resorted to pursuant to Sections 205 and 213 of the National Internal
Revenue Code (NIRC).

In response to a letter dated March 12, 1993 sent by Atty. Loreto Ata (counsel of herein petitioner)
calling the attention of the BIR and requesting that they be duly notified of any action taken by the
BIR affecting the interest of their client Ferdinand 'Bongbong Marcos II, as well as the interest of the
late president - copies of the aforesaid notices were served on April 7, 1993 and on June 10, 1993,
upon Mrs. Imelda Marcos, the petitioner, and their counsel of record, 'De Borja, Medialdea, Ata,
Bello, Guevarra and Serapio Law Office'.

Notices of sale at public auction were posted on May 26, 1993, at the lobby of the City Hall of
Tacloban City. The public auction for the sale of the eleven (11) parcels of land took place on July 5,
1993. There being no bidder, the lots were declared forfeited in favor of the government.

On June 25, 1993, petitioner Ferdinand 'Bongbong' Marcos II filed the instant petition for certiorari
and prohibition under Rule 65 of the Rules of Court, with prayer for temporary restraining order
and/or writ of preliminary injunction."

It has been repeatedly observed, and not without merit, that the enforcement of tax laws and the
collection of taxes, is of paramount importance for the sustenance of government. Taxes are the
lifeblood of the government and should be collected without unnecessary hindrance. However, such
collection should be made in accordance with law as any arbitrariness will negate the very reason for
government itself. It is therefore necessary to reconcile the apparently conflicting interests of the
authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the
common good, may be achieved."[3]

Whether or not the proper avenues of assessment and collection of the said tax obligations were
taken by the respondent Bureau is now the subject of the Court's inquiry.

Petitioner posits that notices of levy, notices of sale, and subsequent sale of properties of the late
President Marcos effected by the BIR are null and void for disregarding the established procedure
for the enforcement of taxes due upon the estate of the deceased. The case of Domingo vs.
Garlitos[4] is specifically cited to bolster the argument that "the ordinary procedure by which to settle
claims of indebtedness against the estate of a deceased, person, as in an inheritance (estate) tax, is
for the claimant to present a claim before the probate court so that said court may order the
administrator to pay the amount therefor." This remedy is allegedly, exclusive, and cannot be
effected through any other means.

Petitioner goes further, submitting that the probate court is not precluded from denying a request by
the government for the immediate payment of taxes, and should order the payment of the same only
within the period fixed by the probate court for the payment of all the debts of the decedent. In this
regard, petitioner cites the case of Collector of Internal Revenue vs. The Administratrix of the
Estate of Echarri (67 Phil 502), where it was held that:
"The case of Pineda vs. Court of First Instance of Tayabas and Collector of Internal Revenue (52
Phil 803), relied upon by the petitioner-appellant is good authority on the proposition that the court
having control over the administration proceedings has jurisdiction to entertain the claim presented
by the government for taxes due and to order the administrator to pay the tax should it find that the
assessment was proper, and that the tax was legal, due and collectible. And the rule laid down in
that case must be understood in relation to the case of Collector of Customs vs. Haygood, supra., as
to the procedure to be followed in a given case by the government to effectuate the collection of the
tax. Categorically stated, where during the pendency of judicial administration over the estate of a
deceased person a claim for taxes is presented by the government, the court has the authority to
order payment by the administrator; but, in the same way that it has authority to order payment or
satisfaction, it also has the negative authority to deny the same. While there are cases where courts
are required to perform certain duties mandatory and ministerial in character, the function of the
court in a case of the present character is not one of them; and here, the court cannot be an
organism endowed with latitude of judgment in one direction, and converted into a mere mechanical
contrivance in another direction."

On the other hand, it is argued by the BIR, that the state's authority to collect internal revenue taxes
is paramount. Thus, the pendency of probate proceedings over the estate of the deceased does not
preclude the assessment and collection, through summary remedies, of estate taxes over the
same. According to the respondent, claims for payment of estate and income taxes due and
assessed after the death of the decedent need not be presented in the form of a claim against the
estate. These can and should be paid immediately. The probate court is not the government agency
to decide whether an estate is liable for payment of estate of income taxes. Well-settled is the rule
that the probate court is a court with special and limited jurisdiction.

Concededly, the authority of the Regional Trial Court, sitting, albeit with limited jurisdiction, as a
probate court over estate of deceased individual, is not a trifling thing. The court's jurisdiction, once
invoked, and made effective, cannot be treated with indifference nor should it be ignored with
impunity by the very parties invoking its authority.

In testament to this, it has been held that it is within the jurisdiction of the probate court to approve
the sale of properties of a deceased person by his prospective heirs before final adjudication;[5] to
determine who are the heirs of the decedent;[6] the recognition of a natural child;[7] the status of a
woman claiming to be the legal wife of the decedent;[8] the legality of disinheritance of an heir by the
testator;[9] and to pass upon the validity of a waiver of hereditary rights.[10]

The pivotal question the court is tasked to resolve refers to the authority of the Bureau of Internal
Revenue to collect by the summary remedy of levying upon, and sale of real properties of the
decedent, estate tax deficiencies, without the cognition and authority of the court sitting in probate
over the supposed will of the deceased.

The nature of the process of estate tax collection has been described as follows:

"Strictly speaking, the assessment of an inheritance tax does not directly involve the administration
of a decedent's estate, although it may be viewed as an incident to the complete settlement of an
estate, and, under some statutes, it is made the duty of the probate court to make the amount of the
inheritance tax a part of the final decree of distribution of the estate. It is not against the property of
decedent, nor is it a claim against the estate as such, but it is against the interest or property right
which the heir, legatee, devisee, etc., has in the property formerly held by decedent. Further, under
some statutes, it has been held that it is not a suit or controversy between the parties, nor is it an
adversary proceeding between the state and the person who owes the tax on the
inheritance. However, under other statutes it has been held that the hearing and determination of the
cash value of the assets and the determination of the tax are adversary proceedings. The
proceeding has been held to be necessarily a proceeding in rem.[11]

In the Philippine experience, the enforcement and collection of estate tax, is executive in character,
as the legislature has seen it fit to ascribe this task to the Bureau of Internal Revenue. Section 3 of
the National Internal Revenue Code attests to this:

"Sec. 3. Powers and duties of the Bureau.-The powers and duties of the Bureau of Internal Revenue
shall comprehend the assessment and collection of all national internal revenue taxes, fees, and
charges, and the enforcement of all forfeitures, penalties, and fines connected therewith, including
the execution of judgments in all cases decided in its favor by the Court of Tax Appeals and the
ordinary courts. Said Bureau shall also give effect to and administer the supervisory and police
power conferred to it by this Code or other laws."

Thus, it was in Vera vs. Fernandez[12] that the court recognized the liberal treatment of claims for
taxes charged against the estate of the decedent. Such taxes, we said, were exempted from the
application of the statute of non-claims, and this is justified by the necessity of government funding,
immortalized in the maxim that taxes are the lifeblood of the
government. Vectigalia nervi sunt rei publicae - taxes are the sinews of the state.

"Taxes assessed against the estate of a deceased person, after administration is opened, need not
be submitted to the committee on claims in the ordinary course of administration. In the exercise of
its control over the administrator, the court may direct the payment of such taxes upon motion
showing that the taxes have been assessed against the estate."

Such liberal treatment of internal revenue taxes in the probate proceedings extends so far, even to
allowing the enforcement of tax obligations against the heirs of the decedent, even after distribution
of the estate's properties.

"Claims for taxes, whether assessed before or after the death of the deceased, can be collected
from the heirs even after the distribution of the properties of the decedent. They are exempted from
the application of the statute of non-claims. The heirs shall be liable therefor, in proportion to their
share in the inheritance."[13]

"Thus, the Government has two ways of collecting the taxes 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. Another remedy, pursuant to the lien created by Section 315 of the Tax Code upon all
property and rights to property belong 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. (Commissioner of Internal Revenue vs. Pineda, 21 SCRA 105, September 15, 1967.)

From the foregoing, it is discernible that the approval of the court, sitting in probate, or as a
settlement tribunal over the deceased is not a mandatory requirement in the collection of estate
taxes. It cannot therefore be argued that the Tax Bureau erred in proceeding with the levying and
sale of the properties allegedly owned by the late President, on the ground that it was required to
seek first the probate court's sanction. There is nothing in the Tax Code, and in the pertinent
remedial laws that implies the necessity of the probate or estate settlement court's approval of the
state's claim for estate taxes, before the same can be enforced and collected.

On the contrary, under Section 87 of the NIRC, it is the probate or settlement court which is bidden
not to authorize the executor or judicial administrator of the decedent's estate to deliver any
distributive share to any party interested in the estate, unless it is shown a Certification by the
Commissioner of Internal Revenue that the estate taxes have been paid. This provision disproves
the petitioner's contention that it is the probate court which approves the assessment and collection
of the estate tax.

If there is any issue as to the validity of the BIR's decision to assess the estate taxes, this should
have been pursued through the proper administrative and judicial avenues provided for by law.

Section 229 of the NIRC tells us how:

"Sec. 229. Protesting of assessment.-When the Commissioner of Internal Revenue or his duly
authorized representative finds that proper taxes should be assessed, he shall first notify the
taxpayer of his findings. Within a period to be prescribed by implementing regulations, the taxpayer
shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner shall
issue an assessment based on his findings.

Such assessment may be protested administratively by filing a request for reconsideration or

reinvestigation in such form and manner as may be prescribed by implementing regulations within
(30) days from receipt of the assessment; otherwise, the assessment shall become final and
unappealable.

If the protest is denied in whole or in part, the individual, association or corporation adversely
affected by the decision on the protest may appeal to the Court of Tax Appeals within thirty (30) days
from receipt of said decision; otherwise, the decision shall become final, executory and demandable.
(As inserted by P.D. 1773)"

Apart from failing to file the required estate tax return within the time required for the filing of the
same, petitioner, and the other heirs never questioned the assessments served upon them, allowing
the same to lapse into finality, and prompting the BIR to collect the said taxes by levying upon the
properties left by President Marcos.

Petitioner submits, however, that "while the assessment of taxes may have been validly undertaken
by the Government, collection thereof may have been done in violation of the law. Thus, the manner
and method in which the latter is enforced may be questioned separately, and irrespective of the
finality of the former, because the Government does not have the unbridled discretion to enforce
collection without regard to the clear provision of law."[14]

Petitioner specifically points out that applying Memorandum Circular No. 38-68, implementing
Sections 318 and 324 of the old tax code (Republic Act 5203), the BIR's Notices of Levy on the
Marcos properties, were issued beyond the allowed period, and are therefore null and void:

"...the Notices of Levy on Real Property (Annexes 0 to NN of Annex C of this Petition) in satisfaction
of said assessments were still issued by respondents well beyond the period mandated in Revenue
Memorandum Circular No. 38-68. These Notices of Levy were issued only on 22 February 1993 and
20 May 1993 when at least seventeen (17) months had already lapsed from the last service of tax
assessment on 12 September 1991. As no notices of distraint of personal property were first issued
by respondents, the latter should have complied with Revenue Memorandum Circular No. 38-68 and
issued these Notices of Levy not earlier than three (3) months nor later than six (6) months from 12
September 1991. In accordance with the Circular, respondents only had until 12 March 1992 (the
last day of the sixth month) within which to issue these Notices of Levy. The Notices of Levy, having
been issued beyond the period allowed by law, are thus void and of no effect."[15]
We hold otherwise. The Notices of Levy upon real property were issued within the prescriptive
period and in accordance with the provisions of the present Tax Code. The deficiency tax
assessment, having already become final, executory, and demandable, the same can now be
collected through the summary remedy of distraint or levy pursuant to Section 205 of the NIRC.

The applicable provision in regard to the prescriptive period for the assessment and collection of tax
deficiency in this instance is Article 223 of the NIRC, which pertinently provides:

"Sec. 223. Exceptions as to a 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 (10) years after the discovery of the falsity, fraud, or
omission: Provided, That, in a fraud assessment which has become final and executory, the fact of
fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof.

xxx

(c) Any internal revenue tax which has been assessed within the period of limitation above
prescribed, may be collected by distraint or levy or by a proceeding in court within three years
following the assessment of the tax.

xxx

The omission to file an estate tax return, and the subsequent failure to contest or appeal the
assessment made by the BIR is fatal to the petitioner's cause, as under the above-cited provision, in
case of failure to file a return, the tax may be assessed at any time within ten years after the
omission, and any tax so assessed may be collected by levy upon real property within three years
following the assessment of the tax. Since the estate tax assessment had become final and
unappealable by the petitioner's default as regards protesting the validity of the said assessment,
there is now no reason why the BIR cannot continue with the collection of the said tax. Any objection
against the assessment should have been pursued following the avenue paved in Section 229 of the
NIRC on protests on assessments of internal revenue taxes.

Petitioner further argues that "the numerous pending court cases questioning the late president's
ownership or interests in several properties (both real and personal) make the total value of his
estate, and the consequent estate tax due, incapable of exact pecuniary determination at this
time. Thus, respondents' assessment of the estate tax and their issuance of the Notices of Levy and
sale are premature and oppressive." He points out the pendency of Sandiganbayan Civil Case Nos.
0001-0034 and 0141, which were filed by the government to question the ownership and interests of
the late President in real and personal properties located within and outside the
Philippines. Petitioner, however, omits to allege whether the properties levied upon by the BIR in the
collection of estate taxes upon the decedent's estate were among those involved in the said cases
pending in the Sandiganbayan. Indeed, the court is at a loss as to how these cases are relevant to
the matter at issue. The mere fact that the decedent has pending cases involving ill-gotten wealth
does not affect the enforcement of tax assessments over the properties indubitably included in his
estate.

Petitioner also expresses his reservation as to the propriety of the BIR's total assessment
of P23,292,607,638.00, stating that this amount deviates from the findings of the Department of
Justice's Panel of Prosecutors as per its resolution of 20 September 1991. Allegedly, this is clear
evidence of the uncertainty on the part of the Government as to the total value of the estate of the
late President.
This is, to our mind, the petitioner's last ditch effort to assail the assessment of estate tax which had
already become final and unappealable.

It is not the Department of Justice which is the government agency tasked to determine the amount
of taxes due upon the subject estate, but the Bureau of Internal Revenue[16] whose determinations
and assessments are presumed correct and made in good faith.[17] The taxpayer has the duty of
proving otherwise. In the absence of proof of any irregularities in the performance of official duties,
an assessment will not be disturbed. Even an assessment based on estimates is prima facie valid
and lawful where it does not appear to have been arrived at arbitrarily or capriciously. The burden of
proof is upon the complaining party to show clearly that the assessment is erroneous. Failure to
present proof of error in the assessment will justify the judicial affirmance of said assessment.[18] In
this instance, petitioner has not pointed out one single provision in the Memorandum of the Special
Audit Team which gave rise to the questioned assessment, which bears a trace of falsity. Indeed,
the petitioner's attack on the assessment bears mainly on the alleged improbable and
unconscionable amount of the taxes charged. But mere rhetoric cannot supply the basis for the
charge of impropriety of the assessments made.

Moreover, these objections to the assessments should have been raised, considering the ample
remedies afforded the taxpayer by the Tax Code, with the Bureau of Internal Revenue and the Court
of Tax Appeals, as described earlier, and cannot be raised now via Petition for Certiorari, under the
pretext of grave abuse of discretion. The course of action taken by the petitioner reflects his
disregard or even repugnance of the established institutions for governance in the scheme of a well-
ordered society. The subject tax assessments having become final, executory and enforceable, the
same can no longer be contested by means of a disguised protest. In the main, Certiorari may not
be used as a substitute for a lost appeal or remedy.[19] This judicial policy becomes more
pronounced in view of the absence of sufficient attack against the actuations of government.

On the matter of sufficiency of service of Notices of Assessment to the petitioner, we find the
respondent appellate court's pronouncements sound and resilient to petitioner's attacks.

"Anent grounds 3(b) and (B) - both alleging/claiming lack of notice - We find, after considering the
facts and circumstances, as well as evidences, that there was sufficient, constructive and/or actual
notice of assessments, levy and sale, sent to herein petitioner Ferdinand "Bongbong" Marcos as well
as to his mother Mrs. Imelda Marcos.

Even if we are to rule out the notices of assessments personally given to the caretaker of Mrs.
Marcos at the latter's last known address, on August 26, 1991 and September 12, 1991, as well as
the notices of assessment personally given to the caretaker of petitioner also at his last known
address on September 12, 1991 - the subsequent notices given thereafter could no longer be
ignored as they were sent at a time when petitioner was already here in the Philippines, and at a
place where said notices would surely be called to petitioner's attention, and received by responsible
persons of sufficient age and discretion.

Thus, on October 20, 1992, formal assessment notices were served upon Mrs. Marcos c/o the
petitioner, at his office, House of Representatives, Batasan Pambansa, Q.C. (Annexes "A", "A-1",
"A-2", "A-3"; pp. 207-210, Comment/Memorandum of OSG). Moreover, a notice to taxpayer dated
October 8, 1992 inviting Mrs. Marcos to a conference relative to her tax liabilities, was furnished the
counsel of Mrs. Marcos - Dean Antonio Coronel (Annex "B", p. 211, ibid). Thereafter, copies of
Notices were also served upon Mrs. Imelda Marcos, the petitioner and their counsel "De Borja,
Medialdea, Ata, Bello, Guevarra and Serapio Law Office", on April 7, 1993 and June 10,
1993. Despite all of these Notices, petitioner never lifted a finger to protest the assessments, (upon
which the Levy and sale of properties were based), nor appealed the same to the Court of Tax
Appeals.

There being sufficient service of Notices to herein petitioner (and his mother) and it appearing that
petitioner continuously ignored said Notices despite several opportunities given him to file a protest
and to thereafter appeal to the Court of Tax Appeals, - the tax assessments subject of this case,
upon which the levy and sale of properties were based, could no longer be contested (directly or
indirectly) via this instant petition for certiorari."[20]

Petitioner argues that all the questioned Notices of Levy, however, must be nullified for having been
issued without validly serving copies thereof to the petitioner. As a mandatory heir of the decedent,
petitioner avers that he has an interest in the subject estate, and notices of levy upon its properties
should have been served upon him.

We do not agree. In the case of notices of levy issued to satisfy the delinquent estate tax, the
delinquent taxpayer is the Estate of the decedent, and not necessarily, and exclusively, the petitioner
as heir of the deceased. In the same vein, in the matter of income tax delinquency of the late
president and his spouse, petitioner is not the taxpayer liable. Thus, it follows that service of notices
of levy in satisfaction of these tax delinquencies upon the petitioner is not required by law, as under
Section 213 of the NIRC, which pertinently states:

"xxx

...Levy shall be effected by writing upon said certificate a description of the property upon which levy
is made. At the same time, written notice of the levy shall be mailed to or served upon the Register
of Deeds of the province or city where the property is located and upon the delinquent taxpayer, or if
he be absent from the Philippines, to his agent or the manager of the business in respect to which
the liability arose, or if there be none, to the occupant of the property in question.

xxx"

The foregoing notwithstanding, the record shows that notices of warrants of distraint and levy of sale
were furnished the counsel of petitioner on April 7, 1993, and June 10, 1993, and the petitioner
himself on April 12, 1993 at his office at the Batasang Pambansa.[21] We cannot therefore,
countenance petitioner's insistence that he was denied due process. Where there was an
opportunity to raise objections to government action, and such opportunity was disregarded, for no
justifiable reason, the party claiming oppression then becomes the oppressor of the orderly functions
of government. He who comes to court must come with clean hands. Otherwise, he not only taints
his name, but ridicules the very structure of established authority.

IN VIEW WHEREOF, the Court RESOLVED to DENY the present petition. The Decision of the Court
of Appeals dated November 29, 1994 is hereby AFFIRMED in all respects.

SO ORDERED.

Regalado, (Chairman), Romero, Puno, and Mendoza, JJ., concur.

RAFAEL ARSENIO S. DIZON, in his capacity as the Judicial Administrator of the Estate of the deceased JOSE P. G
FERNANDEZ, .
R
Petitioner, .
- versus - N
o
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, .
1
Respondents.
4
DECISION 0
9
NACHURA, J.: 4
4
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] A
p
The Facts
r
On November 7, 1987, Jose P. Fernandez (Jose) died. Thereafter, a petition for the probate of his will[5] was filed with i
Branch 51 of the Regional Trial Court (RTC) of Manila (probate court).[6] The probate court then appointed retired l
Supreme Court Justice Arsenio P. Dizon (Justice Dizon) and petitioner, Atty. Rafael Arsenio P. Dizon (petitioner) as 3
Special and Assistant Special Administrator, respectively, of the Estate of Jose (Estate). In a letter[7] dated October 13, 0
1988, Justice Dizon informed respondent Commissioner of the Bureau of Internal Revenue (BIR) of the special ,
proceedings for the Estate. 2
0
Petitioner alleged that several requests for extension of the period to file the required estate tax return were granted 0
by the BIR since the assets of the estate, as well as the claims against it, had yet to be collated, determined and 8
identified. Thus, in a letter[8] dated March 14, 1990, Justice Dizon authorized Atty. Jesus M. Gonzales (Atty. Gonzales)
to sign and file on behalf of the Estate the required estate tax return and to represent the same in securing a
Certificate of Tax Clearance. Eventually, on April 17, 1990, Atty. Gonzales wrote a letter[9] addressed to the BIR
Regional Director for San Pablo City and filed the estate tax return[10] with the same BIR Regional Office, showing
therein a NIL estate tax liability, computed as follows:

COMPUTATION OF TAX

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

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

Taxable Transfer (Sch. 3)

Gross Conjugal Estate 14,315,611.34

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

Net Conjugal Estate NIL

Less: Share of Surviving Spouse NIL .

Net Share in Conjugal Estate NIL

Net Taxable Estate NIL .

Estate Tax Due NIL .[11]

On April 27, 1990, BIR Regional Director for San Pablo City, Osmundo G. Umali issued Certification Nos. 2052[12] and
2053[13] stating that the taxes due on the transfer of real and personal properties[14] of Jose had been fully paid and
said properties may be transferred to his heirs. Sometime in August 1990, Justice Dizon passed away. Thus, on
October 22, 1990, the probate court appointed petitioner as the administrator of the Estate.[15]

Petitioner requested the probate court's authority to sell several properties forming part of the Estate, for the
purpose of paying its creditors, namely: Equitable Banking Corporation (P19,756,428.31), Banque de L'Indochine et. de
Suez (US$4,828,905.90 as of January 31, 1988), Manila Banking Corporation (P84,199,160.46 as of February 28, 1989)
and State Investment House, Inc. (P6,280,006.21). Petitioner manifested that Manila Bank, a major creditor of the
Estate was not included, as it did not file a claim with the probate court since it had security over several real estate
properties forming part of the Estate.[16]

However, on November 26, 1991, the Assistant Commissioner for Collection of the BIR, Themistocles Montalban,
issued Estate Tax Assessment Notice No. FAS-E-87-91-003269,[17] demanding the payment of P66,973,985.40 as
deficiency estate tax, itemized as follows:

Deficiency Estate Tax- 1987

Estate tax P31,868,414.48

25% surcharge- late filing 7,967,103.62

late payment 7,967,103.62

Interest 19,121,048.68

Compromise-non filing 25,000.00

non payment 25,000.00

no notice of death 15.00

no CPA Certificate 300.00

Total amount due & collectible P66,973,985.40[18]

In his letter[19] dated December 12, 1991, Atty. Gonzales moved for the reconsideration of the said estate tax
assessment. However, in her letter[20] dated April 12, 1994, the BIR Commissioner denied the request and reiterated
that the estate is liable for the payment of P66,973,985.40 as deficiency estate tax. On May 3, 1994, petitioner
received the letter of denial. On June 2, 1994, petitioner filed a petition for review[21] before respondent CTA. Trial on
the merits ensued.

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

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

Nature of Document (sic) Exhibits

1. Letter dated October 13, 1988

from Arsenio P. Dizon addressed

to the Commissioner of Internal

Revenue informing the latter of

the special proceedings for the

settlement of the estate (p. 126,

BIR records); "A"

2. Petition for the probate of the

will and issuance of letter of

administration filed with the

Regional Trial Court (RTC) of

Manila, docketed as Sp. Proc.

No. 87-42980 (pp. 107-108, BIR

records); "B" & "B-1

3. Pleading entitled "Compliance"

filed with the probate Court

submitting the final inventory

of all the properties of the

deceased (p. 106, BIR records); "C"

4. Attachment to Exh. "C" which

is the detailed and complete

listing of the properties of

the deceased (pp. 89-105, BIR rec.); "C-1" to "C-17"

5. Claims against the estate filed

by Equitable Banking Corp. with

the probate Court in the amount

of P19,756,428.31 as of March 31,

1988, together with the Annexes

to the claim (pp. 64-88, BIR records); "D" to "D-24"

6. Claim filed by Banque de L'

Indochine et de Suez with the

probate Court in the amount of

US $4,828,905.90 as of January 31,

1988 (pp. 262-265, BIR records); "E" to "E-3"

7. Claim of the Manila Banking

Corporation (MBC) which as of

November 7, 1987 amounts to

P65,158,023.54, but recomputed

as of February 28, 1989 at a

total amount of P84,199,160.46;

together with the demand letter

from MBC's lawyer (pp. 194-197,

BIR records); "F" to "F-3"

8. Demand letter of Manila Banking

Corporation prepared by Asedillo,

Ramos and Associates Law Offices

addressed to Fernandez Hermanos,

Inc., represented by Jose P.

Fernandez, as mortgagors, in the

total amount of P240,479,693.17

as of February 28, 1989

(pp. 186-187, BIR records); "G" & "G-1"

9. Claim of State Investment

House, Inc. filed with the

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

lower portion on p. 2 of Exh. "2"; -do-

6. Signature of Raymund S.

Gallardo appearing at the

Lower portion on p. 2 of Exh. "2"; -do-

7. Signature of Maximino V.

Tagle also appearing on

p. 2 of Exh. "2"; -do-

8. Summary of revenue

Enforcement Officers Audit

Report, dated July 19, 1991; p. 139

9. Signature of Alberto

Enriquez at the lower

portion of Exh. "3"; -do-

10. Signature of Ma. Anabella A.

Abuloc at the lower

portion of Exh. "3"; -do-

11. Signature of Raymond S.

Gallardo at the lower

portion of Exh. "3"; -do-

12. Signature of Maximino

V. Tagle at the lower

portion of Exh. "3"; -do-

13. Demand letter (FAS-E-87-91-00),

signed by the Asst. Commissioner

for Collection for the Commissioner

of Internal Revenue, demanding

payment of the amount of

P66,973,985.40; and p. 169

14. Assessment Notice FAS-E-87-91-00 pp. 169-170[22]

The CTA's Ruling

On June 17, 1997, the CTA denied the said petition for review. Citing this Court's ruling in Vda. de Oate v. Court of
Appeals,[23] the CTA opined that the aforementioned pieces of evidence introduced by the BIR were admissible in
evidence. The CTA ratiocinated:

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

Nevertheless, the CTA did not fully adopt the assessment made by the BIR and it came up with its own computation of
the deficiency estate tax, to wit:

Conjugal Real Property P 5,062,016.00

Conjugal Personal Prop. 33,021,999.93

Gross Conjugal Estate 38,084,015.93

Less: Deductions 26,250,000.00

Net Conjugal Estate P 11,834,015.93

Less: Share of Surviving Spouse 5,917,007.96

Net Share in Conjugal Estate P 5,917,007.96

Add: Capital/Paraphernal

Properties P44,652,813.66

Less: Capital/Paraphernal

Deductions 44,652,813.66

Net Taxable Estate P 50,569,821.62

============

Estate Tax Due P 29,935,342.97

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

Add: Penalties for-No notice of death 15.00

No CPA certificate 300.00

Total deficiency estate tax P 37,419,493.71

=============

exclusive of 20% interest from due date of its payment until full payment thereof

[Sec. 283 (b), Tax Code of 1987].[25]

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

WHEREFORE, viewed from all the foregoing, the Court finds the petition unmeritorious and denies 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...

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.

THIRD DIVISION
FIRST DIVISION

[G.R. No. 124043. October 14, 1998]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF APPEALS, COURT OF TAX APPEALS
and YOUNG MENS CHRISTIAN ASSOCIATION OF THE PHILIPPINES, INC., respondents.

DECISION

PANGANIBAN, J.:

Is the income derived from rentals of real property owned by the Young Mens Christian Association of
the Philippines, Inc. (YMCA) established as a welfare, educational and charitable non-profit corporation -
- subject to income tax under the National Internal Revenue Code (NIRC) and the Constitution?

The Case

This is the main question raised before us in this petition for review on certiorari challenging two
Resolutions issued by the Court of Appeals[1] on September 28, 1995[2] and February 29, 1996[3] in CA-GR
SP No. 32007. Both Resolutions affirmed the Decision of the Court of Tax Appeals (CTA) allowing the
YMCA to claim tax exemption on the latters income from the lease of its real property.

The Facts

The Facts are undisputed.[4] Private Respondent YMCA is a non-stock, non-profit institution, which
conducts various programs and activities that are beneficial to the public, especially the young people,
pursuant to its religious, educational and charitable objectives.

In 1980, private respondent earned, among others, an income of P676,829.80 from leasing out a portion
of its premises to small shop owners, like restaurants and canteen operators, and P44,259.00 from
parking fees collected from non-members. On July 2, 1984, the commissioner of internal revenue (CIR)
issued an assessment to private respondent, in the total amount of P415,615.01 including surcharge and
interest, for deficiency income tax, deficiency expanded withholding taxes on rentals and professional
fees and deficiency withholding tax on wages. Private respondent formally protested the assessment
and, as a supplement to its basic protest, filed a letter dated October 8, 1985. In reply, the CIR denied
the claims of YMCA.

Contesting the denial of its protest, the YMCA filed a petition for review at the Court if Tax Appeals (CTA)
on March 14, 1989. In due course, the CTA issued this ruling in favor of the YMCA:

xxx [T]he leasing of private respondents facilities to small shop owners, to restaurant and canteen
operators and the operation of the parking lot are reasonably incidental to and reasonably necessary for
the accomplishment of the objectives of the [private respondents]. It appears from the testimonies of
the witnesses for the [private respondent] particularly Mr. James C. Delote, former accountant of YMCA,
that these facilities were leased to members and that they have to service the needs of its members and
their guests. The Rentals were minimal as for example, the barbershop was only charged P300 per
month.He also testified that there was actually no lot devoted for parking space but the parking was
done at the sides of the building. The parking was primarily for members with stickers on the
windshields of their cars and they charged P.50 for non-members. The rentals and parking fees were just
enough to cover the costs of operation and maintenance only. The earning[s] from these rentals and
parking charges including those from lodging and other charges for the use of the recreational facilities
constitute [the] bulk of its income which [is] channeled to support its many activities and attainment of
its objectives. As pointed out earlier, the membership dues are very insufficient to support its
program. We find it reasonably necessary therefore for [private respondent] to make [the] most out [of]
its existing facilities to earn some income. It would have been different if under the circumstances,
[private respondent] will purchase a lot and convert it to a parking lot to cater to the needs of the
general public for a fee, or construct a building and lease it out to the highest bidder or at the market
rate for commercial purposes, or should it invest its funds in the buy and sell of properties, real or
personal. Under these circumstances, we could conclude that the activities are already profit oriented,
not incidental and reasonably necessary to the pursuit of the objectives of the association and
therefore, will fall under the last paragraph of section 27 of the Tax Code and any income derived
therefrom shall be taxable.

Considering our findings that [private respondent] was not engaged in the business of operating or
contracting [a] parking lot, we find no legal basis also for the imposition of [a] deficiency fixed tax and [a]
contractors tax in the amount[s] of P353.15 and P3,129.73, respectively.

xxxxxxxxx

WHEREFORE, in view of all the foregoing, the following assessments are hereby dismissed for lack of
merit:

1980 Deficiency Fixed Tax P353,15;

1980 Deficiency Contractors Tax P3,129.23;

1980 Deficiency Income Tax P372,578.20.

While the following assessments are hereby sustained:

1980 Deficiency Expanded Withholding Tax P1,798.93;

1980 Deficiency Withholding Tax on Wages P33,058.82

plus 10% surcharge and 20% interest per annum from July 2, 1984 until fully paid but not to exceed
three (3) years pursuant to Section 51 (e)(2) & (3) of the National Internal Revenue Code effective as of
1984.[5]
Dissatisfied with the CTA ruling, the CIR elevated the case to the Court of Appeals (CA). In its Decision of
February 16, 1994, the CA[6] initially decided in favor of the CIR and disposed of the appeal in the
following manner:

Following the ruling in the afore-cited cases of Province of Abra vs. Hernando and Abra Valley College
Inc. vs. Aquino, the ruling of the respondent Court of Tax Appeals that the leasing of petitioners (herein
respondent) facilities to small shop owners, to restaurant and canteen operators and the operation of
the parking lot are reasonably incidental to and reasonably necessary for the accomplishment of the
objectives of the petitioners,' and the income derived therefrom are tax exempt, must be reversed.

WHEREFORE, the appealed decision is hereby REVERSED in so far as it dismissed the assessment for:

1980 Deficiency Income Tax P 353.15

1980 Deficiency Contractors Tax P 3,129.23, &

1980 Deficiency Income Tax P372,578.20,

but the same is AFFIRMED in all other respect.[7]

Aggrieved, the YMCA asked for reconsideration based on the following grounds:

The findings of facts of the Public Respondent Court of Tax Appeals being supported by substantial
evidence [are] final and conclusive.

II

The conclusions of law of [p]ublic [r]espondent exempting [p]rivate [r]espondent from the income on
rentals of small shops and parking fees [are] in accord with the applicable law and jurisprudence.[8]

Finding merit in the Motion for Reconsideration filed by the YMCA, the CA reversed itself and
promulgated on September 28, 1995 its first assailed Resolution which, in part, reads:

The Court cannot depart from the CTAs findings of fact, as they are supported by evidence beyond what
is considered as substantial.

xxxxxxxxx

The second ground raised is that the respondent CTA did not err in saying that the rental from small
shops and parking fees do not result in the loss of the exemption. Not even the petitioner would hazard
the suggestion that YMCA is designed for profit. Consequently, the little income from small shops and
parking fees help[s] to keep its head above the water, so to speak, and allow it to continue with its
laudable work.
The Court, therefore, finds the second ground of the motion to be meritorious and in accord with law
and jurisprudence.

WHEREFORE, the motion for reconsideration is GRANTED; the respondent CTAs decision is AFFIRMED in
toto.[9]

The internal revenue commissioners own Motion for Reconsideration was denied by Respondent Court
in its second assailed Resolution of February 29, 1996. Hence, this petition for review under Rule 45 of
the Rules of Court.[10]

The Issues

Before us, petitioner imputes to the Court of Appeals the following errors:

In holding that it had departed from the findings of fact of Respondent Court of Tax Appeals when it
rendered its Decision dated February 16, 1994; and

II

In affirming the conclusion of Respondent Court of Tax Appeals that the income of private respondent
from rentals of small shops and parking fees [is] exempt from taxation.[11]

This Courts Ruling

The Petition is meritorious.

First Issue:

Factual Findings of the CTA

Private respondent contends that the February 16, 1994 CA Decision reversed the factual findings of the
CTA. On the other hand, petitioner argues that the CA merely reversed the ruling of the CTA that the
leasing of private respondents facilities to small shop owners, to restaurant and canteen operators and
the operation of parking lots are reasonably incidental to and reasonably necessary for the
accomplishment of the objectives of the private respondent and that the income derived therefrom are
tax exempt.[12] Petitioner insists that what the appellate court reversed was the legal conclusion, not the
factual finding, of the CTA.[13] The commissioner has a point.

Indeed, it is a basic rule in taxation that the factual findings of the CTA, when supported by substantial
evidence, will not be disturbed on appeal unless it is shown that the said court committed gross error in
the appreciation of facts.[14] In the present case, this Court finds that the February 16, 1994 Decision of
the CA did not deviate from this rule. The latter merely applied the law to the facts as found by the CTA
and ruled on the issue raised by the CIR: Whether or not the collection or earnings of rental income
from the lease of certain premises and income earned from parking fees shall fall under the last
paragraph of Section 27 of the National Internal Revenue Code of 1977, as amended.[15]
Clearly, the CA did not alter any fact or evidence. It merely resolved the aforementioned issue, as indeed
it was expected to. That it did so in a manner different from that of the CTA did not necessarily imply a
reversal of factual findings.

The distinction between a question of law and a question of fact is clear-cut. It has been held that
[t]here is a question of law in a given case when the doubt or difference arises as to what the law is on a
certain state of facts; there is a question of fact when the doubt or difference arises as to the truth or
falsehood of alleged facts.[16] In the present case, the CA did not doubt, much less change, the facts
narrated by the CTA. It merely applied the law to the facts. That its interpretation or conclusion is
different from that of the CTA is not irregular or abnormal.

Second Issue:

Is the Rental Income of the YMCA Taxable?

We now come to the crucial issue: Is the rental income of the YMCA from its real estate subject to
tax? At the outset, we set forth the relevant provision of the NIRC:

SEC. 27. Exemptions from tax on corporations. -- The following organizations shall not be taxed under
this Title in respect to income received by them as such --

xxxxxxxxx

(g) Civic league or organization not organized for profit but operated exclusively for the promotion of
social welfare;

(h) Club organized and operated exclusively for pleasure, recreation, and other non-profitable purposes,
no part of the net income of which inures to the benefit of any private stockholder or member;

xxxxxxxxx

Notwithstanding the provision in the preceding paragraphs, the income of whatever kind and character
of the foregoing organization from any of their properties, real or personal, or from any of their
activities conducted for profit, regardless of the disposition made of such income, shall be subject to the
tax imposed under this Code. (as amended by Pres. Decree No. 1457)

Petitioners argues that while the income received by the organizations enumerated in Section 27 (now
Section 26) of the NIRC is, as a rule, exempted from the payment of tax in respect to income received by
them as such, the exemption does not apply to income derived xxx from any if their properties, real or
personal, or from any of their activities conducted for profit, regardless, of the disposition made of such
income xxx.

Petitioner adds that rented income derived by a tax-exempt organization from the lease of its
properties, real or personal, [is] not, therefore, exempt from income taxation, even if such income [is]
exclusively used for the accomplishment of its objectives.[17] We agree with the commissioner.
Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict
interpretation in construing tax exemptions.[18] Furthermore, a claim of statutory exemption from
taxation should be manifest and unmistakable from the language of the law on which it is based. Thus,
the claimed exemption must expressly be granted in a statute stated in a language too clear to be
mistaken.[19]

In the instant case, the exemption claimed by the YMCA is expressly disallowed by the very wording of
the last paragraph of then Section 27 of the NIRC which mandates that the income of exempt
organizations (such as the YMCA) from any of their properties, real or personal, be subject to the
imposed by the same Code. Because the last paragraph of said section unequivocally subjects to tax the
rent income f the YMCA from its rental property,[20] the Court is duty-bound to abide strictly by its literal
meaning and to refrain from resorting to any convoluted attempt at construction.

It is axiomatic that where the language of the law is clear and unambiguous, its express terms must be
applied.[21] Parenthetically, a consideration of the question of construction must not even begin,
particularly when such question is on whether to apply a strict construction or a literal one on statutes
that grant tax exemptions to religious, charitable and educational propert[ies] or institutions.[22]

The last paragraph of Section 27, the YMCA argues, should be subject to the qualification that the
income from the properties must arise from activities conducted for profit before it may be considered
taxable.[23] This argument is erroneous. As previously stated, a reading of said paragraph ineludibly
shows that the income from any property of exempt organizations, as well as that arising from any
activity it conducts for profit, is taxable. The phrase any of their activities conducted for profit does not
qualify the word properties. This makes income from the property of the organization taxable,
regardless of how that income is used -- whether for profit or for lofty non-profit purposes.

Verba legis non est recedendum. Hence, Respondent Court of Appeals committed reversible error when
it allowed, on reconsideration, the tax exemption claimed by YMCA on income it derived from renting
out its real property, on the solitary but unconvincing ground that the said income is not collected for
profit but is merely incidental to its operation. The law does not make a distinction. The rental income is
taxable regardless of whence such income is derived and how it used or disposed of. Where the law
does not distinguish, neither should we.

Constitutional Provisions

on Taxation

Invoking not only the NIRC but also the fundamental law, private respondent submits that Article VI,
Section 28 of par. 3 of the 1987 Constitution,[24] exempts charitable institutions from the payment not
only of property taxes but also of income tax from any source.[25] In support of its novel theory, it
compares the use of the words charitable institutions, actually and directly in the 1973 and the 1987
Constitutions, on the hand; and in Article VI Section 22, par. 3 of the 1935 Constitution, on the other
hand.[26]
Private respondent enunciates three points. First, the present provision is divisible into two categories:
(1) [c]haritable institutions, churches and parsonages or convents appurtenant thereto, mosques and
non-profit cemeteries, the incomes of which are, from whatever source, all tax-exempt;[27] and (2) [a]ll
lands, buildings and improvements actually and directly used for religious, charitable or educational
purposes, which are exempt only from property taxes.[28] Second, Lladoc v. Commissioner of Internal
Revenue,[29] which limited the exemption only to the payment of property taxes, referred to the
provision of the 1935 Constitution and not to its counterparts in the 1973 and the 1987
Constitutions.[30] Third, the phrase actually, directly and exclusively used for religious, charitable or
educational purposes refers not only to all lands, buildings and improvements, but also to the above-
quoted first category which includes charitable institutions like the private respondent.[31]

The Court is not persuaded. The debates, interpellations and expressions of opinion of the framers of
the Constitution reveal their intent which, in turn, may have guided the people in ratifying the
Charter.[32] Such intent must be effectuated.

Accordingly, Justice Hilario G. Davide, Jr., a former constitutional commissioner, who is now a member
of this Court, stressed during the Concom debates that xxx what is exempted is not the institution itself
xxx; those exempted from real estate taxes are lands, buildings and improvements actually, directly and
exclusively used for religious, charitable or educational purposes.[33] Father Joaquin G. Bernas, an
eminent authority on the Constitution and also a member of the Concom, adhered to the same view
that the exemption created by said provision pertained only to property taxes.[34]

In his treatise on taxation, Mr. Justice Jose C. Vitug concurs, stating that [t]he tax exemption
covers property taxes only."[35] Indeed, the income tax exemption claimed by private respondent finds
no basis in Article VI, Section 28, par. 3 of the Constitution.

Private respondent also invokes Article XIV, Section 4, par. 3 of the Charter,[36] claiming that the YMCA is
a non-stock, non-profit educational institution whose revenues and assets are used actually, directly and
exclusively for educational purposes so it is exempt from taxes on its properties and income.[37]We
reiterate that private respondent is exempt from the payment of property tax, but not income tax on
the rentals from its property. The bare allegation alone that it is a non-stock, non-profit educational
institution is insufficient to justify its exemption from the payment of income tax.

As previously discussed, laws allowing tax exemption are construed strictissimi juris. Hence, for the
YMCA to be granted the exemption it claims under the aforecited provision, it must prove with
substantial evidence that (1) it falls under the classification non-stock, non-profit educational institution;
and (2) the income it seeks to be exempted from taxation is used actually, directly, and exclusively for
educational purposes. However, the Court notes that not a scintilla of evidence was submitted by
private respondent to prove that it met the said requisites.

Is the YMCA an educational institution within the purview of Article XIV, Section 4, par.3 of the
Constitution? We rule that it is not. The term educational institution or institution of learning has
acquired a well-known technical meaning, of which the members of the Constitutional Commission are
deemed cognizant.[38] Under the Education Act of 1982, such term refers to schools.[39] The school
system is synonymous with formal education,[40] which refers to the hierarchically structured and
chronological graded learnings organized and provided by the formal school system and for which
certification is required in order for the learner to progress through the grades or move to the higher
levels.[41] The Court has examined the Amended Articles of Incorporation[42] and By-Laws[43] of the YMCA,
but found nothing in them that even hints that it is a school or an educational institution.[44]

Furthermore, under the Education Act of 1982, even non-formal education is understood to be school-
based and private auspices such as foundations and civic-spirited organizations are ruled out.[45] It is
settled that the term educational institution, when used in laws granting tax exemptions, refers to a xxx
school seminary, college or educational establishment xxx.[46] Therefore, the private respondent cannot
be deemed one of the educational institutions covered by the constitutional provision under
consideration.

xxx Words used in the Constitution are to be taken in their ordinary acceptation. While in its broadest
and best sense education embraces all forms and phrases of instruction, improvement and development
of mind and body, and as well of religious and moral sentiments, yet in the common understanding and
application it means a place where systematic instruction in any or all of the useful branches of learning
is given by methods common to schools and institutions of learning. That we conceive to be the true
intent and scope of the term [educational institutions,] as used in the Constitution.[47]

Moreover, without conceding that Private Respondent YMCA is an educational institution, the Court
also notes that the former did not submit proof of the proportionate amount of the subject income that
was actually, directly and exclusively used for educational purposes. Article XIII, Section 5 of the YMCA
by-laws, which formed part of the evidence submitted, is patently insufficient, since the same merely
signified that [t]he net income derived from the rentals of the commercial buildings shall be apportioned
to the Federation and Member Associations as the National Board may decide.[48] In sum, we find no
basis for granting the YMCA exemption from income tax under the constitutional provision invoked

Cases Cited by Private

Respondent Inapplicable

The cases[49] relied on by private respondent do not support its cause. YMCA of Manila v. Collector of
Internal Revenue[50] and Abra Valley College, Inc. v. Aquino[51] are not applicable, because the
controversy in both cases involved exemption from the payment of property tax, not income
tax.Hospital de San Juan de Dios, Inc. v. Pasay City[52] is not in point either, because it involves a claim for
exemption from the payment of regulatory fees, specifically electrical inspection fees, imposed by an
ordinance of Pasay City -- an issue not at all related to that involved in a claimed exemption from the
payment if income taxes imposed on property leases. In Jesus Sacred Heart College v. Com. Of Internal
Revenue,[53] the party therein, which claimed an exemption from the payment of income tax, was an
educational institution which submitted substantial evidence that the income subject of the controversy
had been devoted or used solely for educational purposes. On the other hand, the private respondent in
the present case had not given any proof that it is an educational institution, or that of its rent income is
actually, directly and exclusively used for educational purposes.
Epilogue

In deliberating on this petition, the Court expresses its sympathy with private respondent. It appreciates
the nobility its cause. However, the Courts power and function are limited merely to applying the law
fairly and objectively. It cannot change the law or bend it to suit its sympathies and
appreciations.Otherwise, it would be overspilling its role and invading the realm of legislation.

We concede that private respondent deserves the help and the encouragement of the government. It
needs laws that can facilitate, and not frustrate, its humanitarian tasks. But the Court regrets that, given
its limited constitutional authority, it cannot rule on the wisdom or propriety of legislation. That
prerogative belongs to the political departments of government. Indeed, some of the member of the
Court may even believe in the wisdom and prudence of granting more tax exemptions to private
respondent. But such belief, however well-meaning and sincere, cannot bestow upon the Court the
power to change or amend the law.

WHEREFORE, the petition is GRANTED. The Resolutions of the Court of Appeals dated September 28,
1995 and February 29, 1996 are hereby dated February 16, 1995 is REVERSED and SET ASIDE. The
Decision of the Court of Appeals dated February 16, 1995 is REINSTATED, insofar as it ruled that the
income tax. No pronouncement as to costs.

SO ORDERED.

Davide, Jr. (Chairman), Vitug and Quisumbing, JJ., concur.

Bellosillo, J., see Dissenting Opinion.