Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. Nos. L-9456 and L-9481 January 6, 1958

THE COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
DOMINGO DE LARA, as ancilliary administrator of the estate of HUGO H. MILLER (Deceased),
and the COURT OF TAX APPEALS, respondents.

Allison J. Gibbs, Zafra, De Leon and Veneracion for Domingo E. de Lara.

Assistant Solicitor General Ramon L. Avancena and Cezar L. Kierulf for the Collector of Internal
Revenue.

MONTEMAYOR, J.:

These are two separate appeals, one by the Collector of Internal Revenue, later on referred to as
the Collector, and the other by Domingo de Lara as Ancilliary Administrator of the estate of Hugo
H. Miller, from the decision of the Court of Tax Appeals of June 25, 1955, with the following
dispositive part:

WHEREFORE, respondent's assessment for estate and inheritance taxes upon the estate
of the decedent Hugo H. Miller is hereby modified in accordance with the computation
attached as Annex "A" of this decision. Petitioner is hereby ordered to pay the amount of
P2,047.22 representing estate taxes due, together with the interests and other
increments. In case of failure to pay the amount of P2,047.22 within thirty (30) days from
the time this decision has become final, the 5 per cent surcharge and the corresponding
interest due thereon shall be paid as a part of the tax.

The facts in the case gathered from the record and as found by the Court of Tax Appeals may be
briefly stated as follows: Hugo H. Miller, an American citizen, was born in Santa Cruz, California,
U.S.A., in 1883. In 1905, he came to the Philippines. From 1906 to 1917, he was connected with
the public school system, first as a teacher and later as a division superintendent of schools, later
retiring under the Osmeiia Retirement Act. After his retirement, Miller accepted an executive
position in the local branch of Ginn & Co., book publishers with principal offices in New York and
Boston, U.S.A., up to the outbreak of the Pacific War. From 1922 up to December 7, 1941, he was
stationed in the Philippines as Oriental representative of Ginn & Co., covering not only the
Philippines, but also China and Japan. His principal work was selling books specially written for
Philippine schools. In or about the year 1922, Miller lived at the Manila Hotel. His wife remained
at their home in Ben-Lomond, Santa Cruz, California, but she used to come to the Philippines for
brief visits with Miller, staying three or four months. Miller also used to visit his wife in California.
He never lived in any residential house in the Philippines. After the death of his wife in 1931, he
transferred from the Manila Hotel to the Army and Navy Club, where he was staying at the
outbreak of the Pacific War. On January 17, 1941, Miller executed his last will and testament in
Santa Cruz, California, in which he declared that he was "of Santa Cruz, California". On December
7, 1941, because of the Pacific War, the office of Ginn & Co. was closed, and Miller joined the
Board of Censors of the United States Navy. During the war, he was taken prisoner by the
Japanese forces in Leyte, and in January, 1944, he was transferred to Catbalogan, Samar, where
he was reported to have been executed by said forces on March 11, 1944, and since then, nothing
has been heard from him. At the time of his death in 1944, Miller owned the following properties:

Real Property situated in Ben-Lomond, Santa Cruz,

California valued at
...................................................................... P 5,000.00
Real property situated in Burlingame, San Mateo,
California valued at
........................................................................................ 16,200.00
Tangible Personal property,
worth............................................. 2,140.00
Cash in the banks in the United
States.................................... 21,178.20
Accounts Receivable from various persons in the
United States including notes
............................................................... 36,062.74
Stocks in U.S. Corporations and U.S. Savings Bonds,
valued at
........................................................................................ 123,637.16
Shares of stock in Philippine Corporations, valued at
.......... 51,906.45

Testate proceedings were instituted before the Court of California in Santa Cruz County, in the
course of which Miller's will of January 17, 1941 was admitted to probate on May 10, 1946. Said
court subsequently issued an order and decree of settlement of final account and final
distribution, wherein it found that Miller was a "resident of the County of Santa Cruz, State of
California" at the time of his death in 1944. Thereafter ancilliary proceedings were filed by the
executors of the will before the Court of First Instance of Manila, which court by order of
November 21, 1946, admitted to probate the will of Miller was probated in the California court,
also found that Miller was a resident of Santa Cruz, California, at the time of his death. On July
29, 1949, the Bank of America, National Trust and Savings Association of San Francisco California,
co-executor named in Miller's will, filed an estate and inheritance tax return with the Collector,
covering only the shares of stock issued by Philippines corporations, reporting a liability of
P269.43 for taxes and P230.27 for inheritance taxes. After due investigation, the Collector
assessed estate and inheritance taxes, which was received by the said executor on April 3, 1950.
The estate of Miller protested the assessment of the liability for estate and inheritance taxes,
including penalties and other increments at P77,300.92, as of January 16, 1954. This assessment
was appealed by De Lara as Ancilliary Administrator before the Board of Tax Appeals, which
appeal was later heard and decided by the Court of Tax Appeals.

In determining the "gross estate" of a decedent, under Section 122 in relation to section 88 of
our Tax Code, it is first necessary to decide whether the decedent was a resident or a non-
resident of the Philippines at the time of his death. The Collector maintains that under the tax
laws, residence and domicile have different meanings; that tax laws on estate and inheritance
taxes only mention resident and non-resident, and no reference whatsoever is made to domicile
except in Section 93 (d) of the Tax Code; that Miller during his long stay in the Philippines had
required a "residence" in this country, and was a resident thereof at the time of his death, and
consequently, his intangible personal properties situated here as well as in the United States
were subject to said taxes. The Ancilliary Administrator, however, equally maintains that for
estate and inheritance tax purposes, the term "residence" is synonymous with the term domicile.

We agree with the Court of Tax Appeals that at the time that The National Internal Revenue Code
was promulgated in 1939, the prevailing construction given by the courts to the "residence" was
synonymous with domicile. and that the two were used intercnangeabiy. Cases were cited in
support of this view, paricularly that of Velilla vs. Posadas, 62 Phil. 624, wherein this Tribunal
used the terms "residence" and "domicile" interchangeably and without distinction, the case
involving the application of the term residence employed in the inheritance tax law at the time
(section 1536- 1548 of the Revised Administrative Code), and that consequently, it will be
presumed that in using the term residence or resident in the meaning as construed and
interpreted by the Court. Moreover, there is reason to believe that the Legislature adopted the
American (Federal and State) estate and inheritance tax system (see e.g. Report to the Tax
Commision of the Philippines, Vol. II, pages 122-124, cited in I Dalupan, National Internal Revenue
Code Annotated, p. 469-470). In the United States, for estate tax purposes, a resident is
considered one who at the time of his death had his domicile in the United States, and in
American jurisprudence, for purposes of estate and taxation, "residence" is interpreted as
synonymous with domicile, and that

The incidence of estate and succession has historically been determined by domicile and
situs and not by the fact of actual residence. (Bowring vs. Bowers, (1928) 24 F 2d 918, at
921, 6 AFTR 7498, cert. den (1928) 272 U.S.608).

We also agree with the Court of Tax Appeals that at the time of his death, Miller had his residence
or domicile in Santa Cruz, California. During his country, Miller never acquired a house for
residential purposes for he stayed at the Manila Hotel and later on at the Army and Navy Club.
Except this wife never stayed in the Philippines. The bulk of his savings and properties were in
the United States. To his home in California, he had been sending souvenirs, such as carvings,
curios and other similar collections from the Philippines and the Far East. In November, 1940,
Miller took out a property insurance policy and indicated therein his address as Santa Cruz,
California, this aside from the fact that Miller, as already stated, executed his will in Santa Cruz,
California, wherein he stated that he was "of Santa Cruz, California". From the foregoing, it is
clear that as a non-resident of the Philippines, the only properties of his estate subject to estate
and inheritance taxes are those shares of stock issued by Philippines corporations, valued at
P51,906.45. It is true, as stated by the Tax Court, that while it may be the general rule that
personal property, like shares of stock in the Philippines, is taxable at the domicile of the owner
(Miller) under the doctrine of mobilia secuuntur persona, nevertheless, when he during his life
time,

. . . extended his activities with respect to his intangibles, so as to avail himself of the
protection and benefits of the laws of the Philippines, in such a way as to bring his person
or property within the reach of the Philippines, the reason for a single place of taxation
no longer obtains- protection, benefit, and power over the subject matter are no longer
confined to California, but also to the Philippines (Wells Fargo Bank & Union Trust Co. vs.
Collector (1940), 70 Phil. 325). In the instant case, the actual situs of the shares of stock
is in the Philippines, the corporation being domiciled herein: and besides, the right to vote
the certificates at stockholders' meetings, the right to collect dividends, and the right to
dispose of the shares including the transmission and acquisition thereof by succession, all
enjoy the protection of the Philippines, so that the right to collect the estate and
inheritance taxes cannot be questioned (Wells Fargo Bank & Union Trust Co. vs. Collector
supra). It is recognized that the state may, consistently with due process, impose a tax
upon transfer by death of shares of stock in a domestic corporation owned by a decedent
whose domicile was outside of the state (Burnett vs. Brooks, 288 U.S. 378; State
Commission vs. Aldrich, (1942) 316 U.S. 174, 86 L. Ed. 1358, 62 ALR 1008)." (Brief for the
Petitioner, p. 79-80).

The Ancilliary Administrator for purposes of exemption invokes the proviso in Section 122 of the
Tax Code, which provides as follows:

. . ."And Provided, however, That no tax shall be collected under this Title in respect of
intangible personal property (a) if the decedent at the time of his death was a resident of
a foreign country which at the time of his death did not impose a transfer tax or death tax
of any character in respect of intangible personal property of citizens of the Philippines
not residing in that country, or (b) if the laws of the foreign country of which the decedent
was resident at the tune of his death allow a similar exemption from transfer taxes or
death taxes of every character in respect of intangible personal property owned by
citizen, of the Philippine not residing in that foreign country.

The Ancilliary Administrator bases his claim of exemption on (a) the exemption of non-residents
from the California inheritance taxes with respect to intangibles, and (b) the exemption by way
of reduction of P4,000 from the estates of non-residents, under the United States Federal Estate
Tax Law. Section 6 of the California Inheritance Tax Act of 1935, now reenacted as Section 13851,
California Revenue and Taxation Code, reads as follows:

SEC. 6. The following exemption from the tax are hereby allowed:
 xxx xxx xxx.

(7) The tax imposed by this act in respect of intangible personal property shall not be
payable if decedent is a resident of a State or Territory of the United States or a foreign
state or country which at the time of his death imposed a legacy, succession of death tax
in respect of intangible personal property within the State or Territory or foreign state or
country of residents of the States or Territory or foreign state or country of residence of
the decedent at the time of his death contained a reciprocal provision under which non-
residents were exempted from legacy or succession taxes or death taxes of every
character in respect of intangible personal property providing the State or Territory or
foreign state or country of residence of such non-residents allowed a similar exemption
to residents of the State, Territory or foreign state or country of residence of such
decedent.

Considering the State of California as a foreign country in relation to section 122 of Our Tax Code
we beleive and hold, as did the Tax Court, that the Ancilliary Administrator is entitled to
exemption from the tax on the intangible personal property found in the Philippines. Incidentally,
this exemption granted to non-residents under the provision of Section 122 of our Tax Code, was
to reduce the burden of multiple taxation, which otherwise would subject a decedent's intangible
personal property to the inheritance tax, both in his place of residence and domicile and the place
where those properties are found. As regards the exemption or reduction of P4,000 based on the
reduction under the Federal Tax Law in the amount of $2,000, we agree with the Tax Court that
the amount of $2,000 allowed under the Federal Estate Tax Law is in the nature of deduction and
not of an exemption. Besides, as the Tax Court observes--.

. . . this exemption is allowed on all gross estate of non-residents of the United States,
who are not citizens thereof, irrespective of whether there is a corresponding or similar
exemption from transfer or death taxes of non-residents of the Philippines, who are
citizens of the United States; and thirdly, because this exemption is allowed on all gross
estates of non-residents irrespective of whether it involves tangible or intangible, real or
personal property; so that for these reasons petitioner cannot claim a reciprocity. . .

Furthermore, in the Philippines, there is already a reduction on gross estate tax in the amount of
P3,000 under section 85 of the Tax Code, before it was amended, which in part provides as
follows:

SEC. 85. Rates of estate tax.There shall be levied, assessed, collected, and paid upon
the transfer of the net estate of every decedent, whether a resident or non-resident of
the Philippines, a tax equal to the sum of the following percentages of the value of the
net estate determined as provided in sections 88 and 89:

One per centrum of the amount by which the net estate exceeds three thousand pesos
and does not exceed ten thousand pesos;. . .
It will be noticed from the dispositive part of the appealed decision of the Tax Court that the
Ancilliary Administrator was ordered to pay the amount of P2,047.22, representing estate taxes
due, together with interest and other increments. Said Ancilliary Administrator invokes the
provisions of Republic Act No. 1253, which was passed for the benefit of veterans, guerrillas or
victims of Japanese atrocities who died during the Japanese occupation. The provisions of this
Act could not be invoked during the hearing before the Tax Court for the reason that said Republic
Act was approved only on June 10, 1955. We are satisfied that inasmuch as Miller, not only
suffered deprivation of the war, but was killed by the Japanese military forces, his estate is
entitled to the benefits of this Act. Consequently, the interests and other increments provided in
the appealed judgment should not be paid by his estate.

With the above modification, the appealed decision of the Court of Tax Appeals is hereby
affirmed. We deem it unnecessary to pass upon the other points raised in the appeal. No costs.

Bengzon, Paras, C.J., Padilla, Reyes, A., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L.,
Endencia, and Felix, JJ., concur.
 THIRD DIVISION

[G. R. No. 123968. April 24, 2003]

URSULINA GANUELAS, METODIO GANUELAS and ANTONIO GANUELAS, vs. HON. ROBERT T.
CAWED, Judge of the Regional Trial Court of San Fernando, La Union (Branch 29),
LEOCADIA G. FLORES, FELICITACION G. AGTARAP, CORAZON G. SIPALAY and ESTATE
OF ROMANA GANUELAS DE LA ROSA, represented by GREGORIO DELA ROSA,
Administrator, respondent.

DECISION
CARPIO-MORALES, J.:

The present petition for review under Rule 45 of the Rules of Court assails, on a question of
law, the February 22, 1996 decision[1] of the Regional Trial Court of San Fernando, La Union,
Branch 29, in Civil Case No. 3947, an action for declaration of nullity of a deed of donation.
The facts, as culled from the records of the case, are as follows:
On April 11, 1958, Celestina Ganuelas Vda. de Valin (Celestina) executed a Deed of Donation
of Real Property[2] covering seven parcels of land in favor of her niece Ursulina Ganuelas
(Ursulina), one of herein petitioners.
The pertinent provision of the deed of donation reads, quoted verbatim:

xxx

That, for and in consideration of the love and affection which the DONOR has for the DONEE, and
of the faithful services the latter has rendered in the past to the former, the said DONOR does by
these presents transfer and convey, by way of DONATION, unto the DONEE the property above,
described, to become effective upon the death of the DONOR; but in the event that the DONEE
should die before the DONOR, the present donation shall be deemed rescinded and of no further
force and effect.

x x x.[3]

On June 10, 1967, Celestina executed a document denominated as Revocation of

Donation[4] purporting to set aside the deed of donation. More than a month later or on August
18, 1967, Celestina died without issue and any surviving ascendants and siblings.
After Celestinas death, Ursulina had been sharing the produce of the donated properties
with private respondents Leocadia G. Flores, et al., nieces of Celestina.
 In 1982, or twenty-four years after the execution of the Deed of Donation, Ursulina secured
the corresponding tax declarations, in her name, over the donated properties, to wit: Tax
Declarations Nos. 18108, 18109, 18110, 18111, 18112, 18113 and 18114, and since then, she
refused to give private respondents any share in the produce of the properties despite repeated
demands.
Private respondents were thus prompted to file on May 26, 1986 with the RTC of San
Fernando, La Union a complaint[5] against Ursulina, along with Metodio Ganuelas and Antonio
Ganuelas who were alleged to be unwilling plaintiffs. The complaint alleged that the Deed of
Donation executed by Celestina in favor of Ursulina was void for lack of acknowledgment by the
attesting witnesses thereto before notary public Atty. Henry Valmonte, and the donation was a
disposition mortis causa which failed to comply with the provisions of the Civil Code regarding
formalities of wills and testaments, hence, it was void. The plaintiffs-herein private respondents
thus prayed that judgment be rendered ordering Ursulina to return to them as intestate heirs the
possession and ownership of the properties. They likewise prayed for the cancellation of the tax
declarations secured in the name of Ursulina, the partition of the properties among the intestate
heirs of Celestina, and the rendering by Ursulina of an accounting of all the fruits of the properties
since 1982 and for her to return or pay the value of their shares.
The defendants-herein petitioners alleged in their Answer[6] that the donation in favor of
Ursulina was inter vivos as contemplated under Article 729 of the Civil Code,[7] hence, the deed
did not have to comply with the requirements for the execution of a valid will; the Revocation of
Donation is null and void as the ground mentioned therein is not among those provided by law
to be the basis thereof; and at any rate, the revocation could only be legally enforced upon filing
of the appropriate complaint in court within the prescriptive period provided by law, which
period had, at the time the complaint was filed, already lapsed.
By Decision of February 22, 1996, the trial court, holding that the provision in the Deed of
Donation that in the event that the DONEE should predecease the DONOR, the donation shall be
deemed rescinded and of no further force and effect is an explicit indication that the deed is a
donation mortis causa,[8] found for the plaintiffs-herein private respondents, thus:

WHEREFORE the Court renders judgment declaring null and void the Deed of Donation of Real
Property executed by Celestina Ganuelas, and orders the partition of the estate of Celestina
among the intestate heirs.

SO ORDERED.[9]

The trial court also held that the absence of a reservation clause in the deed implied that
Celestina retained complete dominion over her properties, thus supporting the conclusion that
the donation is mortis causa,[10] and that while the deed contained an attestation clause and an
acknowledgment showing the intent of the donor to effect a postmortem disposition, the
acknowledgment was defective as only the donor and donee appear to have acknowledged the
deed before the notary public, thereby rendering the entire document void.[11]
 Lastly, the trial court held that the subsequent execution by Celestina of the Revocation of
Donation showed that the donor intended the revocability of the donation ad nutum, thus
sustaining its finding that the conveyance was mortis causa.[12]
On herein petitioners argument that the Revocation of Donation was void as the ground
mentioned therein is not one of those allowed by law to be a basis for revocation, the trial court
held that the legal grounds for such revocation as provided under the Civil Code arise only in
cases of donations inter vivos, but not in donations mortis causa which are revocable at will
during the lifetime of the donor. The trial court held, in any event, that given the nullity of the
disposition mortis causa in view of a failure to comply with the formalities required therefor, the
Deed of Revocation was a superfluity.[13]
Hence, the instant petition for review, petitioners contending that the trial court erred:

I. . . . WHEN IT DECLARED NULL AND VOID THE DONATION EXECUTED BY CELESTINA

GANUELAS;

II. . . . WHEN IT UPHELD THE REVOCATION OF DONATION;

III. . . . IN RENDERING ITS DECISION ADVERSE TO PETITIONER URSULINA GANUELAS.[14]

Petitioners argue that the donation contained in the deed is inter vivos as the main
consideration for its execution was the donors affection for the donee rather than the donors
death;[15]that the provision on the effectivity of the donationafter the donors deathsimply meant
that absolute ownership would pertain to the donee on the donors death; [16] and that since the
donation is inter vivos, it may be revoked only for the reasons provided in Articles
760,[17] 764[18] and 765[19] of the Civil Code.
In a letter of March 16, 1998,[20] private respondent Corazon Sipalay, reacting to this Courts
January 28, 1998 Resolution requiring private respondents to SHOW CAUSE why they should not
be disciplinarily dealt with or held in contempt for failure to submit the name and address of their
new counsel, explains that they are no longer interested in pursuing the case and are willing and
ready to waive whatever rights they have over the properties subject of the
donation. Petitioners, who were required to comment on the letter, by Comment of October 28,
1998,[21] welcome private respondents gesture but pray that for the sake of enriching
jurisprudence, their [p]etition be given due course and resolved.
The issue is thus whether the donation is inter vivos or mortis causa.
Crucial in the resolution of the issue is the determination of whether the donor intended to
transfer the ownership over the properties upon the execution of the deed. [22]
Donation inter vivos differs from donation mortis causa in that in the former, the act is
immediately operative even if the actual execution may be deferred until the death of the donor,
while in the latter, nothing is conveyed to or acquired by the donee until the death of the donor-
testator.[23] The following ruling of this Court in Alejandro v. Geraldez is illuminating:[24]
If the donation is made in contemplation of the donors death, meaning that the full or naked
ownership of the donated properties will pass to the donee only because of the donors death,
then it is at that time that the donation takes effect, and it is a donation mortis causa which
should be embodied in a last will and testament.

But if the donation takes effect during the donors lifetime or independently of the donors death,
meaning that the full or naked ownership (nuda proprietas) of the donated properties passes to
the donee during the donors lifetime, not by reason of his death but because of the deed of
donation, then the donation is inter vivos.

The distinction between a transfer inter vivos and mortis causa is important as the validity
or revocation of the donation depends upon its nature. If the donation is inter vivos, it must be
executed and accepted with the formalities prescribed by Articles 748 [25] and 749[26] of the Civil
Code, except when it is onerous in which case the rules on contracts will apply. If it is mortis
causa, the donation must be in the form of a will, with all the formalities for the validity of wills,
otherwise it is void and cannot transfer ownership.[27]
The distinguishing characteristics of a donation mortis causa are the following:

1. It conveys no title or ownership to the transferee before the death of the transferor; or, what
amounts to the same thing, that the transferor should retain the ownership (full or naked) and
control of the property while alive;

2. That before his death, the transfer should be revocable by the transferor at will, ad nutum; but
revocability may be provided for indirectly by means of a reserved power in the donor to dispose
of the properties conveyed;

3. That the transfer should be void if the transferor should survive the transferee.[28]

In the donation subject of the present case, there is nothing therein which indicates that any
right, title or interest in the donated properties was to be transferred to Ursulina prior to the
death of Celestina.
The phrase to become effective upon the death of the DONOR admits of no other
interpretation but that Celestina intended to transfer the ownership of the properties to Ursulina
on her death, not during her lifetime.[29]
More importantly, the provision in the deed stating that if the donee should die before the
donor, the donation shall be deemed rescinded and of no further force and effect shows that the
donation is a postmortem disposition.
As stated in a long line of cases, one of the decisive characteristics of a donation mortis
causa is that the transfer should be considered void if the donor should survive the donee. [30]
More. The deed contains an attestation clause expressly confirming the donation as mortis
causa:
SIGNED by the above-named donor, Celestina Ganuelas, at the foot of this deed of donation
mortis causa, consisting of two (2) pages and on the left margin of each and every page thereof
in the joint presence of all of us who at her request and in her presence and that of each other
have in like manner subscribed our names as witnesses.[31] (Emphasis supplied)

To classify the donation as inter vivos simply because it is founded on considerations of love
and affection is erroneous. That the donation was prompted by the affection of the donor for the
donee and the services rendered by the latter is of no particular significance in determining
whether the deed constitutes a transfer inter vivos or not, because a legacy may have an identical
motivation.[32] In other words, love and affection may also underline transfers mortis causa.[33]
In Maglasang v. Heirs of Cabatingan,[34] the deeds of donation contained provisions almost
identical to those found in the deed subject of the present case:

That for and in consideration of the love and affection of the DONOR for the DONEE, x x x the
DONOR does hereby, by these presents, transfer, convey, by way of donation, unto the DONEE
the above-described property, together with the buildings and all improvements existing
thereon, to become effective upon the death of the DONOR; PROVIDED, HOWEVER, that in the
event that the DONEE should die before the DONOR, the present donation shall be deemed
automatically rescinded and of no further force and effect. (Underscoring supplied)

In that case, this Court held that the donations were mortis causa, for the above-quoted provision
conclusively establishes the donors intention to transfer the ownership and possession of the
donated property to the donee only after the formers death. Like in the present case, the deeds
therein did not contain any clear provision that purports to pass proprietary rights to the donee
prior to the donors death.
As the subject deed then is in the nature of a mortis causa disposition, the formalities of a
will under Article 728 of the Civil Code should have been complied with, failing which the
donation is void and produces no effect.[35]
As noted by the trial court, the attesting witnesses failed to acknowledge the deed before
the notary public, thus violating Article 806 of the Civil Code which provides:

Art. 806. Every will must be acknowledged before a notary public by the testator and the
witnesses. The notary public shall not be required to retain a copy of the will, or file another with
the office of the Clerk of Court. (Emphasis supplied)

The trial court did not thus commit any reversible error in declaring the Deed of Donation to
be mortis causa.
WHEREFORE, the petition is hereby DENIED for lack of merit.
SO ORDERED.
Panganiban, Sandoval-Gutierrez, and Corona, JJ., concur.
Puno, J., (Chairman), No part. Knows one of the parties.
 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; Muoz & 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.

Avancea, C.J., Abad Santos, Imperial, Diaz and Concepcion, JJ., concur.
Villa-Real, J., concurs.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 172804 January 24, 2011

GONZALO VILLANUEVA, represented by his heirs, Petitioner,

vs.
SPOUSES FROILAN and LEONILA BRANOCO, Respondents.

DECISION

CARPIO, J.:

The Case

This resolves the petition for review1 of the ruling2 of the Court of Appeals dismissing a suit to
recover a realty.

The Facts

Petitioner Gonzalo Villanueva (petitioner), here represented by his heirs,3 sued respondents,
spouses Froilan and Leonila Branoco (respondents), in the Regional Trial Court of Naval, Biliran
(trial court) to recover a 3,492 square-meter parcel of land in Amambajag, Culaba, Leyte
(Property) and collect damages. Petitioner claimed ownership over the Property through
purchase in July 1971 from Casimiro Vere (Vere), who, in turn, bought the Property from Alvegia
Rodrigo (Rodrigo) in August 1970. Petitioner declared the Property in his name for tax purposes
soon after acquiring it.

In their Answer, respondents similarly claimed ownership over the Property through purchase in
July 1983 from Eufracia Rodriguez (Rodriguez) to whom Rodrigo donated the Property in May
1965. The two-page deed of donation (Deed), signed at the bottom by the parties and two
witnesses, reads in full:

KNOW ALL MEN BY THESE PRESENTS:

That I, ALVEGIA RODRIGO, Filipino, of legal age, widow of the late Juan Arcillas, a resident of
Barrio Bool, municipality of Culaba, subprovince of Biliran, Leyte del Norte, Philippines, hereby
depose and say:

That as we live[d] together as husband and wife with Juan Arcillas, we begot children, namely:
LUCIO, VICENTA, SEGUNDINA, and ADELAIDA, all surnamed ARCILLAS, and by reason of poverty
which I suffered while our children were still young; and because my husband Juan Arcillas aware
as he was with our destitution separated us [sic] and left for Cebu; and from then on never cared
what happened to his family; and because of that one EUFRACIA RODRIGUEZ, one of my nieces
who also suffered with our poverty, obedient as she was to all the works in our house, and
because of the love and affection which I feel [for] her, I have one parcel of land located at Sitio
Amambajag, Culaba, Leyte bearing Tax Decl. No. 1878 declared in the name of Alvegia Rodrigo, I
give (devise) said land in favor of EUFRACIA RODRIGUEZ, her heirs, successors, and assigns
together with all the improvements existing thereon, which parcel of land is more or less
described and bounded as follows:

1. Bounded North by Amambajag River; East, Benito Picao; South, Teofilo Uyvico; and West, by
Public land; 2. It has an area of 3,492 square meters more or less; 3. It is planted to coconuts now
bearing fruits; 4. Having an assessed value of P240.00; 5. It is now in the possession of EUFRACIA
RODRIGUEZ since May 21, 1962 in the concept of an owner, but the Deed of Donation or that
ownership be vested on her upon my demise.

That I FURTHER DECLARE, and I reiterate that the land above described, I already devise in favor
of EUFRACIA RODRIGUEZ since May 21, 1962, her heirs, assigns, and that if the herein Donee
predeceases me, the same land will not be reverted to the Donor, but will be inherited by the
heirs of EUFRACIA RODRIGUEZ;

That I EUFRACIA RODRIGUEZ, hereby accept the land above described from Inay Alvegia Rodrigo
and I am much grateful to her and praying further for a longer life; however, I will give one half
(1/2) of the produce of the land to Apoy Alve during her lifetime.4

Respondents entered the Property in 1983 and paid taxes afterwards.

The Ruling of the Trial Court

The trial court ruled for petitioner, declared him owner of the Property, and ordered respondents
to surrender possession to petitioner, and to pay damages, the value of the Propertys produce
since 1982 until petitioners repossession and the costs.5 The trial court rejected respondents
claim of ownership after treating the Deed as a donation mortis causa which Rodrigo effectively
cancelled by selling the Property to Vere in 1970.6 Thus, by the time Rodriguez sold the Property
to respondents in 1983, she had no title to transfer.

Respondents appealed to the Court of Appeals (CA), imputing error in the trial courts
interpretation of the Deed as a testamentary disposition instead of an inter vivos donation,
passing title to Rodriguez upon its execution.

Ruling of the Court of Appeals

The CA granted respondents appeal and set aside the trial courts ruling. While conceding that
the "language of the [Deed is] x x x confusing and which could admit of possible different
interpretations,"7 the CA found the following factors pivotal to its reading of the Deed as
donation inter vivos: (1) Rodriguez had been in possession of the Property as owner since 21 May
1962, subject to the delivery of part of the produce to Apoy Alve; (2) the Deeds consideration
was not Rodrigos death but her "love and affection" for Rodriguez, considering the services the
latter rendered; (3) Rodrigo waived dominion over the Property in case Rodriguez predeceases
her, implying its inclusion in Rodriguezs estate; and (4) Rodriguez accepted the donation in the
Deed itself, an act necessary to effectuate donations inter vivos, not devises.8 Accordingly, the
CA upheld the sale between Rodriguez and respondents, and, conversely found the sale between
Rodrigo and petitioners predecessor-in-interest, Vere, void for Rodrigos lack of title.

In this petition, petitioner seeks the reinstatement of the trial courts ruling. Alternatively,
petitioner claims ownership over the Property through acquisitive prescription, having allegedly
occupied it for more than 10 years.9

Respondents see no reversible error in the CAs ruling and pray for its affirmance.

The Issue

The threshold question is whether petitioners title over the Property is superior to respondents.
The resolution of this issue rests, in turn, on whether the contract between the parties
predecessors-in-interest, Rodrigo and Rodriguez, was a donation or a devise. If the former,
respondents hold superior title, having bought the Property from Rodriguez. If the latter,
petitioner prevails, having obtained title from Rodrigo under a deed of sale the execution of
which impliedly revoked the earlier devise to Rodriguez.

The Ruling of the Court

We find respondents title superior, and thus, affirm the CA.

Naked Title Passed from Rodrigo to Rodriguez Under a Perfected Donation

We examine the juridical nature of the Deed whether it passed title to Rodriguez upon its
execution or is effective only upon Rodrigos death using principles distilled from relevant
jurisprudence. Post-mortem dispositions typically

(1) Convey no title or ownership to the transferee before the death of the transferor; or,
what amounts to the same thing, that the transferor should retain the ownership (full or
naked) and control of the property while alive;

(2) That before the [donors] death, the transfer should be revocable by the transferor at
will, ad nutum; but revocability may be provided for indirectly by means of a reserved
power in the donor to dispose of the properties conveyed;

(3) That the transfer should be void if the transferor should survive the transferee.10
 Further

[4] [T]he specification in a deed of the causes whereby the act may be revoked by the
donor indicates that the donation is inter vivos, rather than a disposition mortis causa[;]

[5] That the designation of the donation as mortis causa, or a provision in the deed to the
effect that the donation is "to take effect at the death of the donor" are not controlling
criteria; such statements are to be construed together with the rest of the instrument, in
order to give effect to the real intent of the transferor[;] [and]

(6) That in case of doubt, the conveyance should be deemed donation inter vivos rather
than mortis causa, in order to avoid uncertainty as to the ownership of the property
subject of the deed.11

It is immediately apparent that Rodrigo passed naked title to Rodriguez under a perfected
donation inter vivos. First. Rodrigo stipulated that "if the herein Donee predeceases me, the
[Property] will not be reverted to the Donor, but will be inherited by the heirs of x x x Rodriguez,"
signaling the irrevocability of the passage of title to Rodriguezs estate, waiving Rodrigos right to
reclaim title. This transfer of title was perfected the moment Rodrigo learned of Rodriguezs
acceptance of the disposition12 which, being reflected in the Deed, took place on the day of its
execution on 3 May 1965. Rodrigos acceptance of the transfer underscores its essence as a gift in
presenti, not in futuro, as only donations inter vivos need acceptance by the recipient.13 Indeed,
had Rodrigo wished to retain full title over the Property, she could have easily stipulated, as the
testator did in another case, that "the donor, may transfer, sell, or encumber to any person or
entity the properties here donated x x x"14 or used words to that effect. Instead, Rodrigo
expressly waived title over the Property in case Rodriguez predeceases her.

In a bid to diffuse the non-reversion stipulations damning effect on his case, petitioner tries to
profit from it, contending it is a fideicommissary substitution clause. 15 Petitioner assumes the
fact he is laboring to prove. The question of the Deeds juridical nature, whether it is a will or a
donation, is the crux of the present controversy. By treating the clause in question as mandating
fideicommissary substitution, a mode of testamentary disposition by which the first heir
instituted is entrusted with the obligation to preserve and to transmit to a second heir the whole
or part of the inheritance,16 petitioner assumes that the Deed is a will. Neither the Deeds text
nor the import of the contested clause supports petitioners theory.

Second. What Rodrigo reserved for herself was only the beneficial title to the Property, evident
from Rodriguezs undertaking to "give one [half] x x x of the produce of the land to Apoy Alve
during her lifetime."17 Thus, the Deeds stipulation that "the ownership shall be vested on
[Rodriguez] upon my demise," taking into account the non-reversion clause, could only refer to
Rodrigos beneficial title. We arrived at the same conclusion in Balaqui v. Dongso18 where, as
here, the donor, while "b[inding] herself to answer to the [donor] and her heirs x x x that none
shall question or disturb [the donees] right," also stipulated that the donation "does not pass
title to [the donee] during my lifetime; but when I die, [the donee] shall be the true owner" of
the donated parcels of land. In finding the disposition as a gift inter vivos, the Court reasoned:

Taking the deed x x x as a whole, x x x x it is noted that in the same deed [the donor] guaranteed
to [the donee] and her heirs and successors, the right to said property thus conferred. From the
moment [the donor] guaranteed the right granted by her to [the donee] to the two parcels of
land by virtue of the deed of gift, she surrendered such right; otherwise there would be no need
to guarantee said right. Therefore, when [the donor] used the words upon which the appellants
base their contention that the gift in question is a donation mortis causa [that the gift "does not
pass title during my lifetime; but when I die, she shall be the true owner of the two
aforementioned parcels"] the donor meant nothing else than that she reserved of herself the
possession and usufruct of said two parcels of land until her death, at which time the donee
would be able to dispose of them freely.19 (Emphasis supplied)

Indeed, if Rodrigo still retained full ownership over the Property, it was unnecessary for her to
reserve partial usufructuary right over it.20

Third. The existence of consideration other than the donors death, such as the donors love and
affection to the donee and the services the latter rendered, while also true of devises,
nevertheless "corroborates the express irrevocability of x x x [inter vivos] transfers."21 Thus, the
CA committed no error in giving weight to Rodrigos statement of "love and affection" for
Rodriguez, her niece, as consideration for the gift, to underscore its finding.

It will not do, therefore, for petitioner to cherry-pick stipulations from the Deed tending to serve
his cause (e.g. "the ownership shall be vested on [Rodriguez] upon my demise" and "devise").
Dispositions bearing contradictory stipulations are interpreted wholistically, to give effect to the
donors intent. In no less than seven cases featuring deeds of donations styled as "mortis causa"
dispositions, the Court, after going over the deeds, eventually considered the transfers inter
vivos,22 consistent with the principle that "the designation of the donation as mortis causa, or a
provision in the deed to the effect that the donation is to take effect at the death of the donor
are not controlling criteria [but] x x x are to be construed together with the rest of the instrument,
in order to give effect to the real intent of the transferor."23 Indeed, doubts on the nature of
dispositions are resolved to favor inter vivos transfers "to avoid uncertainty as to the ownership
of the property subject of the deed."24

Nor can petitioner capitalize on Rodrigos post-donation transfer of the Property to Vere as proof
of her retention of ownership. If such were the barometer in interpreting deeds of donation, not
only will great legal uncertainty be visited on gratuitous dispositions, this will give license to rogue
property owners to set at naught perfected transfers of titles, which, while founded on liberality,
is a valid mode of passing ownership. The interest of settled property dispositions counsels
against licensing such practice.25

Accordingly, having irrevocably transferred naked title over the Property to Rodriguez in 1965,
Rodrigo "cannot afterwards revoke the donation nor dispose of the said property in favor of
another."26 Thus, Rodrigos post-donation sale of the Property vested no title to Vere. As Veres
successor-in-interest, petitioner acquired no better right than him. On the other hand,
respondents bought the Property from Rodriguez, thus acquiring the latters title which they may
invoke against all adverse claimants, including petitioner.

Petitioner Acquired No Title Over the Property

Alternatively, petitioner grounds his claim of ownership over the Property through his and Veres
combined possession of the Property for more than ten years, counted from Veres purchase of
the Property from Rodrigo in 1970 until petitioner initiated his suit in the trial court in February
1986.27 Petitioner anchors his contention on an unfounded legal assumption. The ten year
ordinary prescriptive period to acquire title through possession of real property in the concept
of an owner requires uninterrupted possession coupled with just title and good faith.28There is
just title when the adverse claimant came into possession of the property through one of the
modes recognized by law for the acquisition of ownership or other real rights, but the grantor
was not the owner or could not transmit any right.29 Good faith, on the other hand, consists in
the reasonable belief that the person from whom the possessor received the thing was the owner
thereof, and could transmit his ownership.30

Although Vere and petitioner arguably had just title having successively acquired the Property
through sale, neither was a good faith possessor. As Rodrigo herself disclosed in the Deed,
Rodriguez already occupied and possessed the Property "in the concept of an owner" ("como
tag-iya"31) since 21 May 1962, nearly three years before Rodrigos donation in 3 May 1965 and
seven years before Vere bought the Property from Rodrigo. This admission against interest binds
Rodrigo and all those tracing title to the Property through her, including Vere and petitioner.
Indeed, petitioners insistent claim that Rodriguez occupied the Property only in 1982, when she
started paying taxes, finds no basis in the records. In short, when Vere bought the Property from
Rodrigo in 1970, Rodriguez was in possession of the Property, a fact that prevented Vere from
being a buyer in good faith.

Lacking good faith possession, petitioners only other recourse to maintain his claim of ownership
by prescription is to show open, continuous and adverse possession of the Property for 30
years.32 Undeniably, petitioner is unable to meet this requirement.1avvphil

Ancillary Matters Petitioner Raises Irrelevant

Petitioner brings to the Courts attention facts which, according to him, support his theory that
Rodrigo never passed ownership over the Property to Rodriguez, namely, that Rodriguez
registered the Deed and paid taxes on the Property only in 1982 and Rodriguez obtained from
Vere in 1981 a waiver of the latters "right of ownership" over the Property. None of these facts
detract from our conclusion that under the text of the Deed and based on the contemporaneous
acts of Rodrigo and Rodriguez, the latter, already in possession of the Property since 1962 as
Rodrigo admitted, obtained naked title over it upon the Deeds execution in 1965. Neither
registration nor tax payment is required to perfect donations. On the relevance of the waiver
agreement, suffice it to say that Vere had nothing to waive to Rodriguez, having obtained no title
from Rodrigo. Irrespective of Rodriguezs motivation in obtaining the waiver, that document,
legally a scrap of paper, added nothing to the title Rodriguez obtained from Rodrigo under the
Deed.

WHEREFORE, we DENY the petition. We AFFIRM the Decision dated 6 June 2005 and the
Resolution dated 5 May 2006 of the Court of Appeals.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 82027 March 29, 1990

ROMARICO G. VITUG, petitioner,

vs.
THE HONORABLE COURT OF APPEALS and ROWENA FAUSTINO-CORONA, respondents.

Rufino B. Javier Law Office for petitioner.

Quisumbing, Torres & Evangelista for private respondent.

SARMIENTO, J.:

This case is a chapter in an earlier suit decided by this Court 1 involving the probate of the two
wills of the late Dolores Luchangco Vitug, who died in New York, U. S.A., on November 10, 1980,
naming private respondent Rowena Faustino-Corona executrix. In our said decision, we upheld
the appointment of Nenita Alonte as co-special administrator of Mrs. Vitug's estate with her
(Mrs. Vitug's) widower, petitioner Romarico G. Vitug, pending probate.

On January 13, 1985, Romarico G. Vitug filed a motion asking for authority from the probate court
to sell certain shares of stock and real properties belonging to the estate to cover allegedly his
advances to the estate in the sum of P667,731.66, plus interests, which he claimed were personal
funds. As found by the Court of Appeals, 2the alleged advances consisted of P58,147.40 spent for
the payment of estate tax, P518,834.27 as deficiency estate tax, and P90,749.99 as "increment
thereto." 3 According to Mr. Vitug, he withdrew the sums of P518,834.27 and P90,749.99 from
savings account No. 35342-038 of the Bank of America, Makati, Metro Manila.

On April 12, 1985, Rowena Corona opposed the motion to sell on the ground that the same funds
withdrawn from savings account No. 35342-038 were conjugal partnership properties and part
of the estate, and hence, there was allegedly no ground for reimbursement. She also sought his
ouster for failure to include the sums in question for inventory and for "concealment of funds
belonging to the estate." 4

Vitug insists that the said funds are his exclusive property having acquired the same through a
survivorship agreement executed with his late wife and the bank on June 19, 1970. The
agreement provides:
 We hereby agree with each other and with the BANK OF AMERICAN NATIONAL
TRUST AND SAVINGS ASSOCIATION (hereinafter referred to as the BANK), that all
money now or hereafter deposited by us or any or either of us with the BANK in
our joint savings current account shall be the property of all or both of us and shall
be payable to and collectible or withdrawable by either or any of us during our
lifetime, and after the death of either or any of us shall belong to and be the sole
property of the survivor or survivors, and shall be payable to and collectible or
withdrawable by such survivor or survivors.

We further agree with each other and the BANK that the receipt or check of either,
any or all of us during our lifetime, or the receipt or check of the survivor or
survivors, for any payment or withdrawal made for our above-mentioned account
shall be valid and sufficient release and discharge of the BANK for such payment
or withdrawal. 5

The trial courts 6 upheld the validity of this agreement and granted "the motion to sell some of
the estate of Dolores L. Vitug, the proceeds of which shall be used to pay the personal funds of
Romarico Vitug in the total sum of P667,731.66 ... ." 7

On the other hand, the Court of Appeals, in the petition for certiorari filed by the herein private
respondent, held that the above-quoted survivorship agreement constitutes a
conveyance mortis causa which "did not comply with the formalities of a valid will as prescribed
by Article 805 of the Civil Code," 8 and secondly, assuming that it is a mere donation inter vivos, it
is a prohibited donation under the provisions of Article 133 of the Civil Code. 9

The dispositive portion of the decision of the Court of Appeals states:

WHEREFORE, the order of respondent Judge dated November 26, 1985 (Annex II,
petition) is hereby set aside insofar as it granted private respondent's motion to
sell certain properties of the estate of Dolores L. Vitug for reimbursement of his
alleged advances to the estate, but the same order is sustained in all other
respects. In addition, respondent Judge is directed to include provisionally the
deposits in Savings Account No. 35342-038 with the Bank of America, Makati, in
the inventory of actual properties possessed by the spouses at the time of the
decedent's death. With costs against private respondent. 10

In his petition, Vitug, the surviving spouse, assails the appellate court's ruling on the strength of
our decisions in Rivera v. People's Bank and Trust Co. 11 and Macam v. Gatmaitan 12 in which we
sustained the validity of "survivorship agreements" and considering them as aleatory
contracts. 13

The petition is meritorious.

The conveyance in question is not, first of all, one of mortis causa, which should be embodied in
a will. A will has been defined as "a personal, solemn, revocable and free act by which a
capacitated person disposes of his property and rights and declares or complies with duties to
take effect after his death." 14 In other words, the bequest or device must pertain to the
testator. 15 In this case, the monies subject of savings account No. 35342-038 were in the nature
of conjugal funds In the case relied on, Rivera v. People's Bank and Trust Co., 16 we rejected claims
that a survivorship agreement purports to deliver one party's separate properties in favor of the
other, but simply, their joint holdings:

xxx xxx xxx

... Such conclusion is evidently predicated on the assumption that Stephenson was
the exclusive owner of the funds-deposited in the bank, which assumption was in
turn based on the facts (1) that the account was originally opened in the name of
Stephenson alone and (2) that Ana Rivera "served only as housemaid of the
deceased." But it not infrequently happens that a person deposits money in the
bank in the name of another; and in the instant case it also appears that Ana Rivera
served her master for about nineteen years without actually receiving her salary
from him. The fact that subsequently Stephenson transferred the account to the
name of himself and/or Ana Rivera and executed with the latter the survivorship
agreement in question although there was no relation of kinship between them
but only that of master and servant, nullifies the assumption that Stephenson was
the exclusive owner of the bank account. In the absence, then, of clear proof to
the contrary, we must give full faith and credit to the certificate of deposit which
recites in effect that the funds in question belonged to Edgar Stephenson and Ana
Rivera; that they were joint (and several) owners thereof; and that either of them
could withdraw any part or the whole of said account during the lifetime of both,
and the balance, if any, upon the death of either, belonged to the survivor. 17

xxx xxx xxx

In Macam v. Gatmaitan, 18 it was held:

xxx xxx xxx

This Court is of the opinion that Exhibit C is an aleatory contract whereby,

according to article 1790 of the Civil Code, one of the parties or both reciprocally
bind themselves to give or do something as an equivalent for that which the other
party is to give or do in case of the occurrence of an event which is uncertain or
will happen at an indeterminate time. As already stated, Leonarda was the owner
of the house and Juana of the Buick automobile and most of the furniture. By
virtue of Exhibit C, Juana would become the owner of the house in case Leonarda
died first, and Leonarda would become the owner of the automobile and the
furniture if Juana were to die first. In this manner Leonarda and Juana reciprocally
 assigned their respective property to one another conditioned upon who might
die first, the time of death determining the event upon which the acquisition of
such right by the one or the other depended. This contract, as any other contract,
is binding upon the parties thereto. Inasmuch as Leonarda had died before Juana,
the latter thereupon acquired the ownership of the house, in the same manner as
Leonarda would have acquired the ownership of the automobile and of the
furniture if Juana had died first. 19

xxx xxx xxx

There is no showing that the funds exclusively belonged to one party, and hence it must be
presumed to be conjugal, having been acquired during the existence of the marita. relations. 20

Neither is the survivorship agreement a donation inter vivos, for obvious reasons, because it was
to take effect after the death of one party. Secondly, it is not a donation between the spouses
because it involved no conveyance of a spouse's own properties to the other.

It is also our opinion that the agreement involves no modification petition of the conjugal
partnership, as held by the Court of Appeals, 21 by "mere stipulation" 22 and that it is no
"cloak" 23 to circumvent the law on conjugal property relations. Certainly, the spouses are not
prohibited by law to invest conjugal property, say, by way of a joint and several bank account,
more commonly denominated in banking parlance as an "and/or" account. In the case at bar,
when the spouses Vitug opened savings account No. 35342-038, they merely put what rightfully
belonged to them in a money-making venture. They did not dispose of it in favor of the other,
which would have arguably been sanctionable as a prohibited donation. And since the funds were
conjugal, it can not be said that one spouse could have pressured the other in placing his or her
deposits in the money pool.

The validity of the contract seems debatable by reason of its "survivor-take-all" feature, but in
reality, that contract imposed a mere obligation with a term, the term being death. Such
agreements are permitted by the Civil Code. 24

Under Article 2010 of the Code:

ART. 2010. By an aleatory contract, one of the parties or both reciprocally bind
themselves to give or to do something in consideration of what the other shall
give or do upon the happening of an event which is uncertain, or which is to occur
at an indeterminate time.

Under the aforequoted provision, the fulfillment of an aleatory contract depends on either the
happening of an event which is (1) "uncertain," (2) "which is to occur at an indeterminate time."
A survivorship agreement, the sale of a sweepstake ticket, a transaction stipulating on the value
of currency, and insurance have been held to fall under the first category, while a contract for life
annuity or pension under Article 2021, et sequentia, has been categorized under the second. 25 In
either case, the element of risk is present. In the case at bar, the risk was the death of one party
and survivorship of the other.

However, as we have warned:

xxx xxx xxx

But although the survivorship agreement is per se not contrary to law its operation
or effect may be violative of the law. For instance, if it be shown in a given case
that such agreement is a mere cloak to hide an inofficious donation, to transfer
property in fraud of creditors, or to defeat the legitime of a forced heir, it may be
assailed and annulled upon such grounds. No such vice has been imputed and
established against the agreement involved in this case. 26

xxx xxx xxx

There is no demonstration here that the survivorship agreement had been executed for such
unlawful purposes, or, as held by the respondent court, in order to frustrate our laws on wills,
donations, and conjugal partnership.

The conclusion is accordingly unavoidable that Mrs. Vitug having predeceased her husband, the
latter has acquired upon her death a vested right over the amounts under savings account No.
35342-038 of the Bank of America. Insofar as the respondent court ordered their inclusion in the
inventory of assets left by Mrs. Vitug, we hold that the court was in error. Being the separate
property of petitioner, it forms no more part of the estate of the deceased.

WHEREFORE, the decision of the respondent appellate court, dated June 29, 1987, and its
resolution, dated February 9, 1988, are SET ASIDE.

No costs.

SO ORDERED.

Melencio-Herrera (Chairperson), Paras, Padilla and Regalado JJ., concur.

 THIRD DIVISION

RAFAEL ARSENIO S. DIZON, in his capacity as the G.R. No. 140944

Judicial Administrator of the Estate of the
deceased JOSE P. FERNANDEZ, Present:
Petitioner,
YNARES-SANTIAGO, J.,
Chairperson,
- versus - AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
NACHURA, and
COURT OF TAX APPEALS and COMMISSIONER OF REYES, JJ.
INTERNAL REVENUE,
Respondents. Promulgated:

April 30, 2008

x------------------------------------------------------------------------------------x

DECISION

NACHURA, J.:

Before this Court is a Petition for Review on Certiorari[1] under Rule 45 of the Rules of Civil
Procedure seeking the reversal of the Court of Appeals (CA) Decision[2] dated April 30, 1999 which
affirmed the Decision[3] of the Court of Tax Appeals (CTA) dated June 17, 1997.[4]

The Facts

On November 7, 1987, Jose P. Fernandez (Jose) died. Thereafter, a petition for the probate of his
will[5] was filed with Branch 51 of the Regional Trial Court (RTC) of Manila (probate court).[6] The
probate court then appointed retired Supreme Court Justice Arsenio P. Dizon (Justice Dizon) and
petitioner, Atty. Rafael Arsenio P. Dizon (petitioner) as Special and Assistant Special
Administrator, respectively, of the Estate of Jose (Estate). In a letter[7] dated October 13, 1988,
Justice Dizon informed respondent Commissioner of the Bureau of Internal Revenue (BIR) of the
special proceedings for the Estate.
Petitioner alleged that several requests for extension of the period to file the required estate tax
return were granted by the BIR since the assets of the estate, as well as the claims against it, had
yet to be collated, determined and identified. Thus, in a letter[8] dated March 14, 1990, Justice
Dizon authorized Atty. Jesus M. Gonzales (Atty. Gonzales) to sign and file on behalf of the Estate
the required estate tax return and to represent the same in securing a Certificate of Tax
Clearance. Eventually, on April 17, 1990, Atty. Gonzales wrote a 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
xxx
Net Taxable Estate NIL .
Estate Tax Due NIL .[11]

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

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

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...

xxxx

But what further defeats petitioner's cause on this issue is that respondents'
exhibits were marked and admitted during the pre-trial stage as shown by the Pre-
Trial Order quoted earlier.[44]

While the CTA is not governed strictly by technical rules of evidence,[45] as rules of procedure are
not ends in themselves and are primarily intended as tools in the administration of justice, the
presentation of the BIR's evidence is not a mere procedural technicality which may be
disregarded considering that it is the only means by which the CTA may ascertain and verify the
truth of BIR's claims against the Estate.[46] The BIR's failure to formally offer these pieces of
evidence, despite CTA's directives, is fatal to its cause.[47] Such failure is aggravated by the fact
that not even a single reason was advanced by the BIR to justify such fatal omission. This, we take
against the BIR.

Per the records of this case, the BIR was directed to present its evidence [48] in the hearing of
February 21, 1996, but BIR's counsel failed to appear.[49] The CTA denied petitioner's motion to
consider BIR's presentation of evidence as waived, with a warning to BIR that such presentation
would be considered waived if BIR's evidence would not be presented at the next hearing. Again,
in the hearing of March 20, 1996, BIR's counsel failed to appear.[50] Thus, in its
Resolution[51] dated March 21, 1996, the CTA considered the BIR to have waived presentation of
its evidence. In the same Resolution, the parties were directed to file their respective
memorandum. Petitioner complied but BIR failed to do so.[52] In all of these proceedings, BIR was
duly notified. Hence, in this case, we are constrained to apply our ruling in Heirs of Pedro Pasag
v. Parocha:[53]
A formal offer is necessary because judges are mandated to rest their
findings of facts and their judgment only and strictly upon the evidence offered by
the parties at the trial. Its function is to enable the trial judge to know the purpose
or purposes for which the proponent is presenting the evidence. On the other
hand, this allows opposing parties to examine the evidence and object to its
admissibility. Moreover, it facilitates review as the appellate court will not be
required to review documents not previously scrutinized by the trial court.

Strict adherence to the said rule is not a trivial matter. The Court in Constantino v.
Court of Appeals ruled that the formal offer of one's evidence is deemed waived
after failing to submit it within a considerable period of time. It explained that
the court cannot admit an offer of evidence made after a lapse of three (3)
months because to do so would "condone an inexcusable laxity if not non-
compliance with a court order which, in effect, would encourage needless delays
and derail the speedy administration of justice."
Applying the aforementioned principle in this case, we find that the trial court had
reasonable ground to consider that petitioners had waived their right to make a
formal offer of documentary or object evidence. Despite several extensions of
time to make their formal offer, petitioners failed to comply with their
commitment and allowed almost five months to lapse before finally submitting
it. Petitioners' failure to comply with the rule on admissibility of evidence is
anathema to the efficient, effective, and expeditious dispensation of justice.

Having disposed of the foregoing procedural issue, we proceed to discuss the merits of the case.

Ordinarily, the CTA's findings, as affirmed by the CA, are entitled to the highest respect
and will not be disturbed on appeal unless it is shown that the lower courts committed gross
error in the appreciation of facts.[54] In this case, however, we find the decision of the CA affirming
that of the CTA tainted with palpable error.

It is admitted that the claims of the Estate's aforementioned creditors have been condoned. As
a mode of extinguishing an obligation,[55] condonation or remission of debt[56] is defined as:

an act of liberality, by virtue of which, without receiving any equivalent, the

creditor renounces the enforcement of the obligation, which is extinguished in its
entirety or in that part or aspect of the same to which the remission refers. It is an
essential characteristic of remission that it be gratuitous, that there is no
 equivalent received for the benefit given; once such equivalent exists, the nature
of the act changes. It may become dation in payment when the creditor receives
a thing different from that stipulated; or novation, when the object or principal
conditions of the obligation should be changed; or compromise, when the matter
renounced is in litigation or dispute and in exchange of some concession which
the creditor receives.[57]

Verily, the second issue in this case involves the construction of Section 79 [58] of the National
Internal Revenue Code[59] (Tax Code) which provides for the allowable deductions from the gross
estate of the decedent. The specific question is whether the actual claims of the aforementioned
creditors may be fully allowed as deductions from the gross estate of Jose despite the fact that
the said claims were reduced or condoned through compromise agreements entered into by the
Estate with its creditors.

Claims against the estate, as allowable deductions from the gross estate under Section 79 of the
Tax Code, are basically a reproduction of the deductions allowed under Section 89 (a) (1) (C) and
(E) of Commonwealth Act No. 466 (CA 466), otherwise known as the National Internal Revenue
Code of 1939, and which was the first codification of Philippine tax laws. Philippine tax laws were,
in turn, based on the federal tax laws of the United States. Thus, pursuant to established rules of
statutory construction, the decisions of American courts construing the federal tax code are
entitled to great weight in the interpretation of our own tax laws.[60]

It is noteworthy that even in the United States, there is some dispute as to whether the
deductible amount for a claim against the estate is fixed as of the decedent's death which is the
general rule, or the same should be adjusted to reflect post-death developments, such as where
a settlement between the parties results in the reduction of the amount actually paid.[61] On one
hand, the U.S. court ruled that the appropriate deduction is the value that the claim had at the
date of the decedent's death.[62] Also, as held in Propstra v. U.S.,[63] where a lien claimed against
the estate was certain and enforceable on the date of the decedent's death, the fact that the
claimant subsequently settled for lesser amount did not preclude the estate from deducting the
entire amount of the claim for estate tax purposes. These pronouncements essentially confirm
the general principle that post-death developments are not material in determining the amount
of the deduction.
 On the other hand, the Internal Revenue Service (Service) opines that post-death
settlement should be taken into consideration and the claim should be allowed as a deduction
only to the extent of the amount actually paid.[64] Recognizing the dispute, the Service released
Proposed Regulations in 2007 mandating that the deduction would be limited to the actual
amount paid.[65]

In announcing its agreement with Propstra,[66] the U.S. 5th Circuit Court of Appeals held:

We are persuaded that the Ninth Circuit's decision...in Propstra correctly apply
the Ithaca Trust date-of-death valuation principle to enforceable claims against
the estate. As we interpret Ithaca Trust, when the Supreme Court announced the
date-of-death valuation principle, it was making a judgment about the nature of
the federal estate tax specifically, that it is a tax imposed on the act of transferring
property by will or intestacy and, because the act on which the tax is levied occurs
at a discrete time, i.e., the instance of death, the net value of the property
transferred should be ascertained, as nearly as possible, as of that time. This
analysis supports broad application of the date-of-death valuation rule.[67]

We express our agreement with the date-of-death valuation rule, made pursuant to the ruling of
the U.S. Supreme Court in Ithaca Trust Co. v. United States.[68] First. There is no law, nor do we
discern any legislative intent in our tax laws, which disregards the date-of-death valuation
principle and particularly provides that post-death developments must be considered in
determining the net value of the estate. It bears emphasis that tax burdens are not to be
imposed, nor presumed to be imposed, beyond what the statute expressly and clearly imports,
tax statutes being construed strictissimi juris against the government.[69] Any doubt on whether
a person, article or activity is taxable is generally resolved against taxation.[70] Second. Such
construction finds relevance and consistency in our Rules on Special Proceedings wherein the
term "claims" required to be presented against a decedent's estate is generally construed to
mean debts or demands of a pecuniary nature which could have been enforced against the
deceased in his lifetime, or liability contracted by the deceased before his death.[71] Therefore,
the claims existing at the time of death are significant to, and should be made the basis of, the
determination of allowable deductions.

WHEREFORE, the instant Petition is GRANTED. Accordingly, the assailed Decision dated April 30,
1999 and the Resolution dated November 3, 1999 of the Court of Appeals in CA-G.R. S.P. No.
46947 are REVERSED and SET ASIDE. The Bureau of Internal Revenue's deficiency estate tax
assessment against the Estate of Jose P. Fernandez is hereby NULLIFIED. No costs.
 THIRD DIVISION

[G.R. No. 123206. March 22, 2000]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF APPEALS, COURT OF TAX

APPEALS and JOSEFINA P. PAJONAR, as Administratrix of the Estate of Pedro P.
Pajonar, respondents.

RESOLUTION

GONZAGA-REYES, J.: Supr-ema

Assailed in this petition for review on certiorari is the December 21, 1995 Decision[1] of the Court
of Appeals[2] in CA-G.R. Sp. No. 34399 affirming the June 7, 1994 Resolution of the Court of Tax
Appeals in CTA Case No. 4381 granting private respondent Josefina P. Pajonar, as administratrix
of the estate of Pedro P. Pajonar, a tax refund in the amount of P76,502.42, representing
erroneously paid estate taxes for the year 1988.

Pedro Pajonar, a member of the Philippine Scout, Bataan Contingent, during the second World
War, was a part of the infamous Death March by reason of which he suffered shock and became
insane. His sister Josefina Pajonar became the guardian over his person, while his property was
placed under the guardianship of the Philippine National Bank (PNB) by the Regional Trial Court
of Dumaguete City, Branch 31, in Special Proceedings No. 1254. He died on January 10, 1988. He
was survived by his two brothers Isidro P. Pajonar and Gregorio Pajonar, his sister Josefina
Pajonar, nephews Concordio Jandog and Mario Jandog and niece Conchita Jandog.

On May 11, 1988, the PNB filed an accounting of the decedent's property under guardianship
valued at P3,037,672.09 in Special Proceedings No. 1254. However, the PNB did not file an estate
tax return, instead it advised Pedro Pajonar's heirs to execute an extrajudicial settlement and to
pay the taxes on his estate. On April 5, 1988, pursuant to the assessment by the Bureau of Internal
Revenue (BIR), the estate of Pedro Pajonar paid taxes in the amount of P2,557.

On May 19, 1988, Josefina Pajonar filed a petition with the Regional Trial Court of Dumaguete
City for the issuance in her favor of letters of administration of the estate of her brother. The
case was docketed as Special Proceedings No. 2399. On July 18, 1988, the trial court appointed
Josefina Pajonar as the regular administratrix of Pedro Pajonar's estate.

On December 19, 1988, pursuant to a second assessment by the BIR for deficiency estate tax, the
estate of Pedro Pajonar paid estate tax in the amount of P1,527,790.98. Josefina Pajonar, in her
capacity as administratrix and heir of Pedro Pajonar's estate, filed a protest on January 11, 1989
with the BIR praying that the estate tax payment in the amount of P1,527,790.98, or at least
some portion of it, be returned to the heirs.[3] Jur-is
However, on August 15, 1989, without waiting for her protest to be resolved by the BIR, Josefina
Pajonar filed a petition for review with the Court of Tax Appeals (CTA), praying for the refund of
P1,527,790.98, or in the alternative, P840,202.06, as erroneously paid estate tax.[4] The case was
docketed as CTA Case No. 4381.

On May 6, 1993, the CTA ordered the Commissioner of Internal Revenue to refund Josefina
Pajonar the amount of P252,585.59, representing erroneously paid estate tax for the year 1988.[5]

Among the deductions from the gross estate allowed by the CTA were the amounts of P60,753
representing the notarial fee for the Extrajudicial Settlement and the amount of P50,000 as the
attorney's fees in Special Proceedings No. 1254 for guardianship.[6]Juri-ssc

On June 15, 1993, the Commissioner of Internal Revenue filed a motion for reconsideration [7] of
the CTA's May 6, 1993 decision asserting, among others, that the notarial fee for the Extrajudicial
Settlement and the attorney's fees in the guardianship proceedings are not deductible expenses.

On June 7, 1994, the CTA issued the assailed Resolution[8] ordering the Commissioner of Internal
Revenue to refund Josefina Pajonar, as administratrix of the estate of Pedro Pajonar, the amount
of P76,502.42 representing erroneously paid estate tax for the year 1988. Also, the CTA upheld
the validity of the deduction of the notarial fee for the Extrajudicial Settlement and the attorney's
fees in the guardianship proceedings.

On July 5, 1994, the Commissioner of Internal Revenue filed with the Court of Appeals a petition
for review of the CTA's May 6, 1993 Decision and its June 7, 1994 Resolution, questioning the
validity of the abovementioned deductions. On December 21, 1995, the Court of Appeals denied
the Commissioner's petition.[9]

Hence, the present appeal by the Commissioner of Internal Revenue.

The sole issue in this case involves the construction of section 79 [10] of the National Internal
Revenue Code[11] (Tax Code) which provides for the allowable deductions from the gross estate
of the decedent. More particularly, the question is whether the notarial fee paid for the
extrajudicial settlement in the amount of P60,753 and the attorney's fees in the guardianship
proceedings in the amount of P50,000 may be allowed as deductions from the gross estate of
decedent in order to arrive at the value of the net estate.

We answer this question in the affirmative, thereby upholding the decisions of the appellate
courts. J-jlex

In its May 6, 1993 Decision, the Court of Tax Appeals ruled thus:

Respondent maintains that only judicial expenses of the testamentary or intestate

proceedings are allowed as a deduction to the gross estate. The amount of
P60,753.00 is quite extraordinary for a mere notarial fee.
 This Court adopts the view under American jurisprudence that expenses incurred
in the extrajudicial settlement of the estate should be allowed as a deduction from
the gross estate. "There is no requirement of formal administration. It is sufficient
that the expense be a necessary contribution toward the settlement of the case." [
34 Am. Jur. 2d, p. 765; Nolledo, Bar Reviewer in Taxation, 10th Ed. (1990), p. 481 ]

xxx.....xxx.....xxx

The attorney's fees of P50,000.00, which were already incurred but not yet paid,
refers to the guardianship proceeding filed by PNB, as guardian over the ward of
Pedro Pajonar, docketed as Special Proceeding No. 1254 in the RTC (Branch XXXI)
of Dumaguete City. x x x

xxx.....xxx.....xxx

The guardianship proceeding had been terminated upon delivery of the residuary
estate to the heirs entitled thereto. Thereafter, PNB was discharged of any further
responsibility.

Attorney's fees in order to be deductible from the gross estate must be essential
to the collection of assets, payment of debts or the distribution of the property to
the persons entitled to it. The services for which the fees are charged must relate
to the proper settlement of the estate. [ 34 Am. Jur. 2d 767. ] In this case, the
guardianship proceeding was necessary for the distribution of the property of the
late Pedro Pajonar to his rightful heirs. Sc-juris

xxx.....xxx.....xxx

PNB was appointed as guardian over the assets of the late Pedro Pajonar, who,
even at the time of his death, was incompetent by reason of insanity. The
expenses incurred in the guardianship proceeding was but a necessary expense in
the settlement of the decedent's estate. Therefore, the attorney's fee incurred in
the guardianship proceedings amounting to P50,000.00 is a reasonable and
necessary business expense deductible from the gross estate of the decedent.[12]

Upon a motion for reconsideration filed by the Commissioner of Internal Revenue, the Court of
Tax Appeals modified its previous ruling by reducing the refundable amount to P76,502.43 since
it found that a deficiency interest should be imposed and the compromise penalty
excluded.[13] However, the tax court upheld its previous ruling regarding the legality of the
deductions -

It is significant to note that the inclusion of the estate tax law in the codification
of all our national internal revenue laws with the enactment of the National
Internal Revenue Code in 1939 were copied from the Federal Law of the United
States. [UMALI, Reviewer in Taxation (1985), p. 285 ] The 1977 Tax Code,
promulgated by Presidential Decree No. 1158, effective June 3, 1977, reenacted
substantially all the provisions of the old law on estate and gift taxes, except the
sections relating to the meaning of gross estate and gift. [ Ibid, p. 286. ] Nc-mmis

In the United States, [a]dministrative expenses, executor's commissions and

attorney's fees are considered allowable deductions from the Gross Estate.
Administrative expenses are limited to such expenses as are actually and
necessarily incurred in the administration of a decedent's estate. [PRENTICE-HALL,
Federal Taxes Estate and Gift Taxes (1936), p. 120, 533. ] Necessary expenses of
administration are such expenses as are entailed for the preservation and
productivity of the estate and for its management for purposes of liquidation,
payment of debts and distribution of the residue among the persons entitled
thereto. [Lizarraga Hermanos vs. Abada, 40 Phil. 124. ] They must be incurred for
the settlement of the estate as a whole. [34 Am. Jur. 2d, p. 765. ] Thus, where
there were no substantial community debts and it was unnecessary to convert
community property to cash, the only practical purpose of administration being
the payment of estate taxes, full deduction was allowed for attorney's fees and
miscellaneous expenses charged wholly to decedent's estate. [ Ibid., citing Estate
of Helis, 26 T .C. 143 (A). ]

Petitioner stated in her protest filed with the BIR that "upon the death of the ward,
the PNB, which was still the guardian of the estate, (Annex 'Z' ), did not file an
estate tax return; however, it advised the heirs to execute an extrajudicial
settlement, to pay taxes and to post a bond equal to the value of the estate, for
which the estate paid P59,341.40 for the premiums. (See Annex 'K')." [p. 17, CTA
record. ] Therefore, it would appear from the records of the case that the only
practical purpose of settling the estate by means of an extrajudicial settlement
pursuant to Section 1 of Rule 74 of the Rules of Court was for the payment of taxes
and the distribution of the estate to the heirs. A fortiori, since our estate tax laws
are of American origin, the interpretation adopted by American Courts has some
persuasive effect on the interpretation of our own estate tax laws on the subject.

Anent the contention of respondent that the attorney's fees of P50,000.00

incurred in the guardianship proceeding should not be deducted from the Gross
Estate, We consider the same unmeritorious. Attorneys' and guardians' fees
incurred in a trustee's accounting of a taxable inter vivos trust attributable to the
usual issues involved in such an accounting was held to be proper deductions
because these are expenses incurred in terminating an inter vivos trust that was
includible in the decedent's estate. (Prentice Hall, Federal Taxes on Estate and Gift,
p.120, 861] Attorney's fees are allowable deductions if incurred for the settlement
of the estate. It is noteworthy to point that PNB was appointed the guardian over
the assets of the deceased. Necessarily the assets of the deceased formed part of
his gross estate. Accordingly, all expenses incurred in relation to the estate of the
 deceased will be deductible for estate tax purposes provided these are necessary
and ordinary expenses for administration of the settlement of the estate.[14]

In upholding the June 7, 1994 Resolution of the Court of Tax Appeals, the Court of Appeals held
that: Newmiso

2. Although the Tax Code specifies "judicial expenses of the testamentary or

intestate proceedings," there is no reason why expenses incurred in the
administration and settlement of an estate in extrajudicial proceedings should not
be allowed. However, deduction is limited to such administration expenses as are
actually and necessarily incurred in the collection of the assets of the estate,
payment of the debts, and distribution of the remainder among those entitled
thereto. Such expenses may include executor's or administrator's fees, attorney's
fees, court fees and charges, appraiser's fees, clerk hire, costs of preserving and
distributing the estate and storing or maintaining it, brokerage fees or
commissions for selling or disposing of the estate, and the like. Deductible
attorney's fees are those incurred by the executor or administrator in the
settlement of the estate or in defending or prosecuting claims against or due the
estate. (Estate and Gift Taxation in the Philippines, T. P. Matic, Jr., 1981 Edition, p.
176 ).

xxx.....xxx.....xxx

It is clear then that the extrajudicial settlement was for the purpose of payment
of taxes and the distribution of the estate to the heirs. The execution of the
extrajudicial settlement necessitated the notarization of the same. Hence the
Contract of Legal Services of March 28, 1988 entered into between respondent
Josefina Pajonar and counsel was presented in evidence for the purpose of
showing that the amount of P60,753.00 was for the notarization of the
Extrajudicial Settlement. It follows then that the notarial fee of P60,753.00 was
incurred primarily to settle the estate of the deceased Pedro Pajonar. Said amount
should then be considered an administration expenses actually and necessarily
incurred in the collection of the assets of the estate, payment of debts and
distribution of the remainder among those entitled thereto. Thus, the notarial fee
of P60,753 incurred for the Extrajudicial Settlement should be allowed as a
deduction from the gross estate.

3. Attorney's fees, on the other hand, in order to be deductible from the gross
estate must be essential to the settlement of the estate. Acctmis

The amount of P50,000.00 was incurred as attorney's fees in the guardianship

proceedings in Spec. Proc. No. 1254. Petitioner contends that said amount are not
expenses of the testamentary or intestate proceedings as the guardianship
 proceeding was instituted during the lifetime of the decedent when there was yet
no estate to be settled.

Again , this contention must fail.

The guardianship proceeding in this case was necessary for the distribution of the
property of the deceased Pedro Pajonar. As correctly pointed out by respondent
CTA, the PNB was appointed guardian over the assets of the deceased, and that
necessarily the assets of the deceased formed part of his gross estate. x x x

xxx.....xxx.....xxx

It is clear therefore that the attorney's fees incurred in the guardianship

proceeding in Spec. Proc. No. 1254 were essential to the distribution of the
property to the persons entitled thereto. Hence, the attorney's fees incurred in
the guardianship proceedings in the amount of P50,000.00 should be allowed as
a deduction from the gross estate of the decedent.[15]

The deductions from the gross estate permitted under section 79 of the Tax Code basically
reproduced the deductions allowed under Commonwealth Act No. 466 (CA 466), otherwise
known as the National Internal Revenue Code of 1939,[16] and which was the first codification of
Philippine tax laws. Section 89 (a) (1) (B) of CA 466 also provided for the deduction of the "judicial
expenses of the testamentary or intestate proceedings" for purposes of determining the value of
the net estate. Philippine tax laws were, in turn, based on the federal tax laws of the United
States.[17] In accord with established rules of statutory construction, the decisions of American
courts construing the federal tax code are entitled to great weight in the interpretation of our
own tax laws.[18] Scc-alr

Judicial expenses are expenses of administration.[19] Administration expenses, as an allowable

deduction from the gross estate of the decedent for purposes of arriving at the value of the net
estate, have been construed by the federal and state courts of the United States to include all
expenses "essential to the collection of the assets, payment of debts or the distribution of the
property to the persons entitled to it."[20] In other words, the expenses must be essential to the
proper settlement of the estate. Expenditures incurred for the individual benefit of the heirs,
devisees or legatees are not deductible.[21] This distinction has been carried over to our
jurisdiction. Thus, in Lorenzo v. Posadas[22] the Court construed the phrase "judicial expenses of
the testamentary or intestate proceedings" as not including the compensation paid to a trustee
of the decedent's estate when it appeared that such trustee was appointed for the purpose of
managing the decedent's real estate for the benefit of the testamentary heir. In another case,
the Court disallowed the premiums paid on the bond filed by the administrator as an expense of
administration since the giving of a bond is in the nature of a qualification for the office, and not
necessary in the settlement of the estate.[23] Neither may attorney's fees incident to litigation
incurred by the heirs in asserting their respective rights be claimed as a deduction from the gross
estate.[24]
Coming to the case at bar, the notarial fee paid for the extrajudicial settlement is clearly a
deductible expense since such settlement effected a distribution of Pedro Pajonar's estate to his
lawful heirs. Similarly, the attorney's fees paid to PNB for acting as the guardian of Pedro
Pajonar's property during his lifetime should also be considered as a deductible administration
expense. PNB provided a detailed accounting of decedent's property and gave advice as to the
proper settlement of the latter's estate, acts which contributed towards the collection of
decedent's assets and the subsequent settlement of the estate.

We find that the Court of Appeals did not commit reversible error in affirming the questioned
resolution of the Court of Tax Appeals.

WHEREFORE, the December 21, 1995 Decision of the Court of Appeals is AFFIRMED. The notarial
fee for the extrajudicial settlement and the attorney's fees in the guardianship proceedings are
allowable deductions from the gross estate of Pedro Pajonar.

SO ORDERED.

Melo, (Chairman), Vitug, Panganiban, and Purisima, JJ., concur. Calrs-pped

 THIRD DIVISION

RAFAEL ARSENIO S. DIZON, in his capacity as the G.R. No. 140944

Judicial Administrator of the Estate of the
deceased JOSE P. FERNANDEZ, Present:
Petitioner,
YNARES-SANTIAGO, J.,
Chairperson,
- versus - AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
NACHURA, and
COURT OF TAX APPEALS and COMMISSIONER OF REYES, JJ.
INTERNAL REVENUE,
Respondents. Promulgated:

April 30, 2008

x------------------------------------------------------------------------------------x

DECISION

NACHURA, J.:

Before this Court is a Petition for Review on Certiorari[1] under Rule 45 of the Rules of Civil
Procedure seeking the reversal of the Court of Appeals (CA) Decision[2] dated April 30, 1999 which
affirmed the Decision[3] of the Court of Tax Appeals (CTA) dated June 17, 1997.[4]

The Facts

On November 7, 1987, Jose P. Fernandez (Jose) died. Thereafter, a petition for the probate of his
will[5] was filed with Branch 51 of the Regional Trial Court (RTC) of Manila (probate court).[6] The
probate court then appointed retired Supreme Court Justice Arsenio P. Dizon (Justice Dizon) and
petitioner, Atty. Rafael Arsenio P. Dizon (petitioner) as Special and Assistant Special
Administrator, respectively, of the Estate of Jose (Estate). In a letter[7] dated October 13, 1988,
Justice Dizon informed respondent Commissioner of the Bureau of Internal Revenue (BIR) of the
special proceedings for the Estate.
Petitioner alleged that several requests for extension of the period to file the required estate tax
return were granted by the BIR since the assets of the estate, as well as the claims against it, had
yet to be collated, determined and identified. Thus, in a letter[8] dated March 14, 1990, Justice
Dizon authorized Atty. Jesus M. Gonzales (Atty. Gonzales) to sign and file on behalf of the Estate
the required estate tax return and to represent the same in securing a Certificate of Tax
Clearance. Eventually, on April 17, 1990, Atty. Gonzales wrote a 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
xxx
Net Taxable Estate NIL .
Estate Tax Due NIL .[11]

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

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

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...

xxxx

But what further defeats petitioner's cause on this issue is that respondents'
exhibits were marked and admitted during the pre-trial stage as shown by the Pre-
Trial Order quoted earlier.[44]

While the CTA is not governed strictly by technical rules of evidence,[45] as rules of procedure are
not ends in themselves and are primarily intended as tools in the administration of justice, the
presentation of the BIR's evidence is not a mere procedural technicality which may be
disregarded considering that it is the only means by which the CTA may ascertain and verify the
truth of BIR's claims against the Estate.[46] The BIR's failure to formally offer these pieces of
evidence, despite CTA's directives, is fatal to its cause.[47] Such failure is aggravated by the fact
that not even a single reason was advanced by the BIR to justify such fatal omission. This, we take
against the BIR.

Per the records of this case, the BIR was directed to present its evidence [48] in the hearing of
February 21, 1996, but BIR's counsel failed to appear.[49] The CTA denied petitioner's motion to
consider BIR's presentation of evidence as waived, with a warning to BIR that such presentation
would be considered waived if BIR's evidence would not be presented at the next hearing. Again,
in the hearing of March 20, 1996, BIR's counsel failed to appear.[50] Thus, in its
Resolution[51] dated March 21, 1996, the CTA considered the BIR to have waived presentation of
its evidence. In the same Resolution, the parties were directed to file their respective
memorandum. Petitioner complied but BIR failed to do so.[52] In all of these proceedings, BIR was
duly notified. Hence, in this case, we are constrained to apply our ruling in Heirs of Pedro Pasag
v. Parocha:[53]
A formal offer is necessary because judges are mandated to rest their
findings of facts and their judgment only and strictly upon the evidence offered by
the parties at the trial. Its function is to enable the trial judge to know the purpose
or purposes for which the proponent is presenting the evidence. On the other
hand, this allows opposing parties to examine the evidence and object to its
admissibility. Moreover, it facilitates review as the appellate court will not be
required to review documents not previously scrutinized by the trial court.

Strict adherence to the said rule is not a trivial matter. The Court in Constantino v.
Court of Appeals ruled that the formal offer of one's evidence is deemed waived
after failing to submit it within a considerable period of time. It explained that
the court cannot admit an offer of evidence made after a lapse of three (3)
months because to do so would "condone an inexcusable laxity if not non-
compliance with a court order which, in effect, would encourage needless delays
and derail the speedy administration of justice."
Applying the aforementioned principle in this case, we find that the trial court had
reasonable ground to consider that petitioners had waived their right to make a
formal offer of documentary or object evidence. Despite several extensions of
time to make their formal offer, petitioners failed to comply with their
commitment and allowed almost five months to lapse before finally submitting
it. Petitioners' failure to comply with the rule on admissibility of evidence is
anathema to the efficient, effective, and expeditious dispensation of justice.

Having disposed of the foregoing procedural issue, we proceed to discuss the merits of the case.

Ordinarily, the CTA's findings, as affirmed by the CA, are entitled to the highest respect
and will not be disturbed on appeal unless it is shown that the lower courts committed gross
error in the appreciation of facts.[54] In this case, however, we find the decision of the CA affirming
that of the CTA tainted with palpable error.

It is admitted that the claims of the Estate's aforementioned creditors have been condoned. As
a mode of extinguishing an obligation,[55] condonation or remission of debt[56] is defined as:

an act of liberality, by virtue of which, without receiving any equivalent, the

creditor renounces the enforcement of the obligation, which is extinguished in its
entirety or in that part or aspect of the same to which the remission refers. It is an
essential characteristic of remission that it be gratuitous, that there is no
 equivalent received for the benefit given; once such equivalent exists, the nature
of the act changes. It may become dation in payment when the creditor receives
a thing different from that stipulated; or novation, when the object or principal
conditions of the obligation should be changed; or compromise, when the matter
renounced is in litigation or dispute and in exchange of some concession which
the creditor receives.[57]

Verily, the second issue in this case involves the construction of Section 79 [58] of the National
Internal Revenue Code[59] (Tax Code) which provides for the allowable deductions from the gross
estate of the decedent. The specific question is whether the actual claims of the aforementioned
creditors may be fully allowed as deductions from the gross estate of Jose despite the fact that
the said claims were reduced or condoned through compromise agreements entered into by the
Estate with its creditors.

Claims against the estate, as allowable deductions from the gross estate under Section 79 of the
Tax Code, are basically a reproduction of the deductions allowed under Section 89 (a) (1) (C) and
(E) of Commonwealth Act No. 466 (CA 466), otherwise known as the National Internal Revenue
Code of 1939, and which was the first codification of Philippine tax laws. Philippine tax laws were,
in turn, based on the federal tax laws of the United States. Thus, pursuant to established rules of
statutory construction, the decisions of American courts construing the federal tax code are
entitled to great weight in the interpretation of our own tax laws.[60]

It is noteworthy that even in the United States, there is some dispute as to whether the
deductible amount for a claim against the estate is fixed as of the decedent's death which is the
general rule, or the same should be adjusted to reflect post-death developments, such as where
a settlement between the parties results in the reduction of the amount actually paid.[61] On one
hand, the U.S. court ruled that the appropriate deduction is the value that the claim had at the
date of the decedent's death.[62] Also, as held in Propstra v. U.S.,[63] where a lien claimed against
the estate was certain and enforceable on the date of the decedent's death, the fact that the
claimant subsequently settled for lesser amount did not preclude the estate from deducting the
entire amount of the claim for estate tax purposes. These pronouncements essentially confirm
the general principle that post-death developments are not material in determining the amount
of the deduction.
 On the other hand, the Internal Revenue Service (Service) opines that post-death
settlement should be taken into consideration and the claim should be allowed as a deduction
only to the extent of the amount actually paid.[64] Recognizing the dispute, the Service released
Proposed Regulations in 2007 mandating that the deduction would be limited to the actual
amount paid.[65]

In announcing its agreement with Propstra,[66] the U.S. 5th Circuit Court of Appeals held:

We are persuaded that the Ninth Circuit's decision...in Propstra correctly apply
the Ithaca Trust date-of-death valuation principle to enforceable claims against
the estate. As we interpret Ithaca Trust, when the Supreme Court announced the
date-of-death valuation principle, it was making a judgment about the nature of
the federal estate tax specifically, that it is a tax imposed on the act of transferring
property by will or intestacy and, because the act on which the tax is levied occurs
at a discrete time, i.e., the instance of death, the net value of the property
transferred should be ascertained, as nearly as possible, as of that time. This
analysis supports broad application of the date-of-death valuation rule.[67]

We express our agreement with the date-of-death valuation rule, made pursuant to the ruling of
the U.S. Supreme Court in Ithaca Trust Co. v. United States.[68] First. There is no law, nor do we
discern any legislative intent in our tax laws, which disregards the date-of-death valuation
principle and particularly provides that post-death developments must be considered in
determining the net value of the estate. It bears emphasis that tax burdens are not to be
imposed, nor presumed to be imposed, beyond what the statute expressly and clearly imports,
tax statutes being construed strictissimi juris against the government.[69] Any doubt on whether
a person, article or activity is taxable is generally resolved against taxation.[70] Second. Such
construction finds relevance and consistency in our Rules on Special Proceedings wherein the
term "claims" required to be presented against a decedent's estate is generally construed to
mean debts or demands of a pecuniary nature which could have been enforced against the
deceased in his lifetime, or liability contracted by the deceased before his death.[71] Therefore,
the claims existing at the time of death are significant to, and should be made the basis of, the
determination of allowable deductions.

WHEREFORE, the instant Petition is GRANTED. Accordingly, the assailed Decision dated April 30,
1999 and the Resolution dated November 3, 1999 of the Court of Appeals in CA-G.R. S.P. No.
46947 are REVERSED and SET ASIDE. The Bureau of Internal Revenue's deficiency estate tax
assessment against the Estate of Jose P. Fernandez is hereby NULLIFIED. No costs.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

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

THE COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
DOUGLAS FISHER AND BETTINA FISHER, and the COURT OF TAX APPEALS, respondents.

x---------------------------------------------------------x

G.R. No. L-11668 January 28, 1961.

DOUGLAS FISHER AND BETTINA FISHER, petitioner,

vs.
THE COLLECTOR OF INTERNAL REVENUE, and the COURT OF TAX APPEALS, respondents.

BARRERA, J.:

This case relates to the determination and settlement of the hereditary estate left by the
deceased Walter G. Stevenson, and the laws applicable thereto. Walter G. Stevenson (born in the
Philippines on August 9, 1874 of British parents and married in the City of Manila on January 23,
1909 to Beatrice Mauricia Stevenson another British subject) died on February 22, 1951 in San
Francisco, California, U.S.A. whereto he and his wife moved and established their permanent
residence since May 10, 1945. In his will executed in San Francisco on May 22, 1947, and which
was duly probated in the Superior Court of California on April 11, 1951, Stevenson instituted his
wife Beatrice as his sole heiress to the following real and personal properties acquired by the
spouses while residing in the Philippines, described and preliminary assessed as follows:

Gross Estate
Real Property 2 parcels of land in
Baguio, covered by T.C.T. Nos. 378 and
379 P43,500.00
Personal Property
(1) 177 shares of stock of Canacao Estate
at P10.00 each 1,770.00
(2) 210,000 shares of stock of Mindanao
Mother Lode Mines, Inc. at P0.38 per
share 79,800.00
 (3) Cash credit with Canacao Estate Inc. 4,870.88
(4) Cash, with the Chartered Bank of
India, Australia & China 851.97
Total Gross Assets P130,792.85

On May 22, 1951, ancillary administration proceedings were instituted in the Court of First
Instance of Manila for the settlement of the estate in the Philippines. In due time Stevenson's
will was duly admitted to probate by our court and Ian Murray Statt was appointed ancillary
administrator of the estate, who on July 11, 1951, filed a preliminary estate and inheritance tax
return with the reservation of having the properties declared therein finally appraised at their
values six months after the death of Stevenson. Preliminary return was made by the ancillary
administrator in order to secure the waiver of the Collector of Internal Revenue on the
inheritance tax due on the 210,000 shares of stock in the Mindanao Mother Lode Mines Inc.
which the estate then desired to dispose in the United States. Acting upon said return, the
Collector of Internal Revenue accepted the valuation of the personal properties declared therein,
but increased the appraisal of the two parcels of land located in Baguio City by fixing their fair
market value in the amount of P52.200.00, instead of P43,500.00. After allowing the deductions
claimed by the ancillary administrator for funeral expenses in the amount of P2,000.00 and for
judicial and administration expenses in the sum of P5,500.00, the Collector assessed the state
the amount of P5,147.98 for estate tax and P10,875,26 or inheritance tax, or a total of
P16,023.23. Both of these assessments were paid by the estate on June 6, 1952.

On September 27, 1952, the ancillary administrator filed in amended estate and inheritance tax
return in pursuance f his reservation made at the time of filing of the preliminary return and for
the purpose of availing of the right granted by section 91 of the National Internal Revenue Code.

In this amended return the valuation of the 210,000 shares of stock in the Mindanao Mother
Lode Mines, Inc. was reduced from 0.38 per share, as originally declared, to P0.20 per share, or
from a total valuation of P79,800.00 to P42,000.00. This change in price per share of stock was
based by the ancillary administrator on the market notation of the stock obtaining at the San
Francisco California) Stock Exchange six months from the death of Stevenson, that is, As of August
22, 1931. In addition, the ancillary administrator made claim for the following deductions:

Funeral expenses ($1,04326) P2,086.52

Judicial Expenses:
(a) Administrator's Fee P1,204.34
(b) Attorney's Fee 6.000.00
(c) Judicial and Administration
expenses as of August 9, 1952 1,400.05
8,604.39
 Real Estate Tax for 1951 on Baguio
real properties (O.R. No. B-1
686836) 652.50
Claims against the estate:
($5,000.00) P10,000.00 P10,000.00
Plus: 4% int. p.a. from Feb. 2 to 22,
1951 22.47 10,022.47
Sub-Total P21,365.88

In the meantime, on December 1, 1952, Beatrice Mauricia Stevenson assigned all her rights and
interests in the estate to the spouses, Douglas and Bettina Fisher, respondents herein.

On September 7, 1953, the ancillary administrator filed a second amended estate and inheritance
tax return (Exh. "M-N"). This return declared the same assets of the estate stated in the amended
return of September 22, 1952, except that it contained new claims for additional exemption and
deduction to wit: (1) deduction in the amount of P4,000.00 from the gross estate of the decedent
as provided for in Section 861 (4) of the U.S. Federal Internal Revenue Code which the ancillary
administrator averred was allowable by way of the reciprocity granted by Section 122 of the
National Internal Revenue Code, as then held by the Board of Tax Appeals in case No. 71 entitled
"Housman vs. Collector," August 14, 1952; and (2) exemption from the imposition of estate and
inheritance taxes on the 210,000 shares of stock in the Mindanao Mother Lode Mines, Inc. also
pursuant to the reciprocity proviso of Section 122 of the National Internal Revenue Code. In this
last return, the estate claimed that it was liable only for the amount of P525.34 for estate tax and
P238.06 for inheritance tax and that, as a consequence, it had overpaid the government. The
refund of the amount of P15,259.83, allegedly overpaid, was accordingly requested by the estate.
The Collector denied the claim. For this reason, action was commenced in the Court of First
Instance of Manila by respondents, as assignees of Beatrice Mauricia Stevenson, for the recovery
of said amount. Pursuant to Republic Act No. 1125, the case was forwarded to the Court of Tax
Appeals which court, after hearing, rendered decision the dispositive portion of which reads as
follows:

In fine, we are of the opinion and so hold that: (a) the one-half () share of the surviving
spouse in the conjugal partnership property as diminished by the obligations properly
chargeable to such property should be deducted from the net estate of the deceased
Walter G. Stevenson, pursuant to Section 89-C of the National Internal Revenue Code; (b)
the intangible personal property belonging to the estate of said Stevenson is exempt from
inheritance tax, pursuant to the provision of section 122 of the National Internal Revenue
Code in relation to the California Inheritance Tax Law but decedent's estate is not entitled
to an exemption of P4,000.00 in the computation of the estate tax; (c) for purposes of
estate and inheritance taxation the Baguio real estate of the spouses should be valued at
P52,200.00, and 210,000 shares of stock in the Mindanao Mother Lode Mines, Inc. should
be appraised at P0.38 per share; and (d) the estate shall be entitled to a deduction of
P2,000.00 for funeral expenses and judicial expenses of P8,604.39.
From this decision, both parties appealed.

The Collector of Internal Revenue, hereinafter called petitioner assigned four errors allegedly
committed by the trial court, while the assignees, Douglas and Bettina Fisher hereinafter called
respondents, made six assignments of error. Together, the assigned errors raise the following
main issues for resolution by this Court:

(1) Whether or not, in determining the taxable net estate of the decedent, one-half () of the net
estate should be deducted therefrom as the share of tile surviving spouse in accordance with our
law on conjugal partnership and in relation to section 89 (c) of the National Internal revenue
Code;

(2) Whether or not the estate can avail itself of the reciprocity proviso embodied in Section 122
of the National Internal Revenue Code granting exemption from the payment of estate and
inheritance taxes on the 210,000 shares of stock in the Mindanao Mother Lode Mines Inc.;

(3) Whether or not the estate is entitled to the deduction of P4,000.00 allowed by Section 861,
U.S. Internal Revenue Code in relation to section 122 of the National Internal Revenue Code;

(4) Whether or not the real estate properties of the decedent located in Baguio City and the
210,000 shares of stock in the Mindanao Mother Lode Mines, Inc., were correctly appraised by
the lower court;

(5) Whether or not the estate is entitled to the following deductions: P8,604.39 for judicial and
administration expenses; P2,086.52 for funeral expenses; P652.50 for real estate taxes; and
P10,0,22.47 representing the amount of indebtedness allegedly incurred by the decedent during
his lifetime; and

(6) Whether or not the estate is entitled to the payment of interest on the amount it claims to
have overpaid the government and to be refundable to it.

In deciding the first issue, the lower court applied a well-known doctrine in our civil law that in
the absence of any ante-nuptial agreement, the contracting parties are presumed to have
adopted the system of conjugal partnership as to the properties acquired during their marriage.
The application of this doctrine to the instant case is being disputed, however, by petitioner
Collector of Internal Revenue, who contends that pursuant to Article 124 of the New Civil Code,
the property relation of the spouses Stevensons ought not to be determined by the Philippine
law, but by the national law of the decedent husband, in this case, the law of England. It is alleged
by petitioner that English laws do not recognize legal partnership between spouses, and that
what obtains in that jurisdiction is another regime of property relation, wherein all properties
acquired during the marriage pertain and belong Exclusively to the husband. In further support
of his stand, petitioner cites Article 16 of the New Civil Code (Art. 10 of the old) to the effect that
in testate and intestate proceedings, the amount of successional rights, among others, is to be
determined by the national law of the decedent.
In this connection, let it be noted that since the mariage of the Stevensons in the Philippines took
place in 1909, the applicable law is Article 1325 of the old Civil Code and not Article 124 of the
New Civil Code which became effective only in 1950. It is true that both articles adhere to the so-
called nationality theory of determining the property relation of spouses where one of them is a
foreigner and they have made no prior agreement as to the administration disposition, and
ownership of their conjugal properties. In such a case, the national law of the husband becomes
the dominant law in determining the property relation of the spouses. There is, however, a
difference between the two articles in that Article 1241 of the new Civil Code expressly provides
that it shall be applicable regardless of whether the marriage was celebrated in the Philippines
or abroad while Article 13252 of the old Civil Code is limited to marriages contracted in a foreign
land.

It must be noted, however, that what has just been said refers to mixed marriages between a
Filipino citizen and a foreigner. In the instant case, both spouses are foreigners who married in
the Philippines. Manresa,3 in his Commentaries, has this to say on this point:

La regla establecida en el art. 1.315, se refiere a las capitulaciones otorgadas en Espana y

entre espanoles. El 1.325, a las celebradas en el extranjero cuando alguno de los conyuges
es espanol. En cuanto a la regla procedente cuando dos extranjeros se casan en Espana,
o dos espanoles en el extranjero hay que atender en el primer caso a la legislacion de pais
a que aquellos pertenezean, y en el segundo, a las reglas generales consignadas en los
articulos 9 y 10 de nuestro Codigo. (Emphasis supplied.)

If we adopt the view of Manresa, the law determinative of the property relation of the
Stevensons, married in 1909, would be the English law even if the marriage was celebrated in the
Philippines, both of them being foreigners. But, as correctly observed by the Tax Court, the
pertinent English law that allegedly vests in the decedent husband full ownership of the
properties acquired during the marriage has not been proven by petitioner. Except for a mere
allegation in his answer, which is not sufficient, the record is bereft of any evidence as to what
English law says on the matter. In the absence of proof, the Court is justified, therefore, in
indulging in what Wharton calls "processual presumption," in presuming that the law of England
on this matter is the same as our law.4

Nor do we believe petitioner can make use of Article 16 of the New Civil Code (art. 10, old Civil
Code) to bolster his stand. A reading of Article 10 of the old Civil Code, which incidentally is the
one applicable, shows that it does not encompass or contemplate to govern the question of
property relation between spouses. Said article distinctly speaks of amount of successional
rights and this term, in speaks in our opinion, properly refers to the extent or amount of property
that each heir is legally entitled to inherit from the estate available for distribution. It needs to
be pointed out that the property relation of spouses, as distinguished from their successional
rights, is governed differently by the specific and express provisions of Title VI, Chapter I of our
new Civil Code (Title III, Chapter I of the old Civil Code.) We, therefore, find that the lower court
correctly deducted the half of the conjugal property in determining the hereditary estate left by
the deceased Stevenson.
On the second issue, petitioner disputes the action of the Tax Court in the exempting the
respondents from paying inheritance tax on the 210,000 shares of stock in the Mindanao Mother
Lode Mines, Inc. in virtue of the reciprocity proviso of Section 122 of the National Internal
Revenue Code, in relation to Section 13851 of the California Revenue and Taxation Code, on the
ground that: (1) the said proviso of the California Revenue and Taxation Code has not been duly
proven by the respondents; (2) the reciprocity exemptions granted by section 122 of the National
Internal Revenue Code can only be availed of by residents of foreign countries and not of
residents of a state in the United States; and (3) there is no "total" reciprocity between the
Philippines and the state of California in that while the former exempts payment of both estate
and inheritance taxes on intangible personal properties, the latter only exempts the payment of
inheritance tax..

To prove the pertinent California law, Attorney Allison Gibbs, counsel for herein respondents,
testified that as an active member of the California Bar since 1931, he is familiar with the revenue
and taxation laws of the State of California. When asked by the lower court to state the pertinent
California law as regards exemption of intangible personal properties, the witness cited article 4,
section 13851 (a) and (b) of the California Internal and Revenue Code as published in Derring's
California Code, a publication of the Bancroft-Whitney Company inc. And as part of his testimony,
a full quotation of the cited section was offered in evidence as Exhibits "V-2" by the respondents.

It is well-settled that foreign laws do not prove themselves in our jurisdiction and our courts are
not authorized to take judicial notice of them.5 Like any other fact, they must be alleged and
proved.6

Section 41, Rule 123 of our Rules of Court prescribes the manner of proving foreign laws before
our tribunals. However, although we believe it desirable that these laws be proved in accordance
with said rule, we held in the case of Willamette Iron and Steel Works v. Muzzal, 61 Phil. 471, that
"a reading of sections 300 and 301 of our Code of Civil Procedure (now section 41, Rule 123) will
convince one that these sections do not exclude the presentation of other competent evidence
to prove the existence of a foreign law." In that case, we considered the testimony of an attorney-
at-law of San Francisco, California who quoted verbatim a section of California Civil Code and
who stated that the same was in force at the time the obligations were contracted, as sufficient
evidence to establish the existence of said law. In line with this view, we find no error, therefore,
on the part of the Tax Court in considering the pertinent California law as proved by respondents'
witness.

We now take up the question of reciprocity in exemption from transfer or death taxes, between
the State of California and the Philippines.F

Section 122 of our National Internal Revenue Code, in pertinent part, provides:

... And, provided, further, That no tax shall be collected under this Title in respect of
intangible personal property (a) if the decedent at the time of his death was a resident of
a foreign country which at the time of his death did not impose a transfer of tax or death
 tax of any character in respect of intangible personal property of citizens of the Philippines
not residing in that foreign country, or (b) if the laws of the foreign country of which the
decedent was a resident at the time of his death allow a similar exemption from transfer
taxes or death taxes of every character in respect of intangible personal property owned
by citizens of the Philippines not residing in that foreign country." (Emphasis supplied).

On the other hand, Section 13851 of the California Inheritance Tax Law, insofar as pertinent,
reads:.

"SEC. 13851, Intangibles of nonresident: Conditions. Intangible personal property is

exempt from the tax imposed by this part if the decedent at the time of his death was a
resident of a territory or another State of the United States or of a foreign state or country
which then imposed a legacy, succession, or death tax in respect to intangible personal
property of its own residents, but either:.

(a) Did not impose a legacy, succession, or death tax of any character in respect to
intangible personal property of residents of this State, or

(b) Had in its laws a reciprocal provision under which intangible personal property of a
non-resident was exempt from legacy, succession, or death taxes of every character if the
Territory or other State of the United States or foreign state or country in which the
nonresident resided allowed a similar exemption in respect to intangible personal
property of residents of the Territory or State of the United States or foreign state or
country of residence of the decedent." (Id.)

It is clear from both these quoted provisions that the reciprocity must be total, that is, with
respect to transfer or death taxes of any and every character, in the case of the Philippine law,
and to legacy, succession, or death taxes of any and every character, in the case of the California
law. Therefore, if any of the two states collects or imposes and does not exempt any transfer,
death, legacy, or succession tax of any character, the reciprocity does not work. This is the
underlying principle of the reciprocity clauses in both laws.

In the Philippines, upon the death of any citizen or resident, or non-resident with properties
therein, there are imposed upon his estate and its settlement, both an estate and an inheritance
tax. Under the laws of California, only inheritance tax is imposed. On the other hand, the Federal
Internal Revenue Code imposes an estate tax on non-residents not citizens of the United
States,7 but does not provide for any exemption on the basis of reciprocity. Applying these laws
in the manner the Court of Tax Appeals did in the instant case, we will have a situation where a
Californian, who is non-resident in the Philippines but has intangible personal properties here,
will the subject to the payment of an estate tax, although exempt from the payment of the
inheritance tax. This being the case, will a Filipino, non-resident of California, but with intangible
personal properties there, be entitled to the exemption clause of the California law, since the
Californian has not been exempted from every character of legacy, succession, or death tax
because he is, under our law, under obligation to pay an estate tax? Upon the other hand, if we
exempt the Californian from paying the estate tax, we do not thereby entitle a Filipino to be
exempt from a similar estate tax in California because under the Federal Law, which is equally
enforceable in California he is bound to pay the same, there being no reciprocity recognized in
respect thereto. In both instances, the Filipino citizen is always at a disadvantage. We do not
believe that our legislature has intended such an unfair situation to the detriment of our own
government and people. We, therefore, find and declare that the lower court erred in exempting
the estate in question from payment of the inheritance tax.

We are not unaware of our ruling in the case of Collector of Internal Revenue vs. Lara (G.R. Nos.
L-9456 & L-9481, prom. January 6, 1958, 54 O.G. 2881) exempting the estate of the deceased
Hugo H. Miller from payment of the inheritance tax imposed by the Collector of Internal Revenue.
It will be noted, however, that the issue of reciprocity between the pertinent provisions of our
tax law and that of the State of California was not there squarely raised, and the ruling therein
cannot control the determination of the case at bar. Be that as it may, we now declare that in
view of the express provisions of both the Philippine and California laws that the exemption
would apply only if the law of the other grants an exemption from legacy, succession, or death
taxes of every character, there could not be partial reciprocity. It would have to be total or none
at all.

With respect to the question of deduction or reduction in the amount of P4,000.00 based on the
U.S. Federal Estate Tax Law which is also being claimed by respondents, we uphold and adhere
to our ruling in the Lara case (supra) that the amount of $2,000.00 allowed under the Federal
Estate Tax Law is in the nature of a deduction and not of an exemption regarding which
reciprocity cannot be claimed under the provision of Section 122 of our National Internal
Revenue Code. Nor is reciprocity authorized under the Federal Law. .

On the issue of the correctness of the appraisal of the two parcels of land situated in Baguio City,
it is contended that their assessed values, as appearing in the tax rolls 6 months after the death
of Stevenson, ought to have been considered by petitioner as their fair market value, pursuant
to section 91 of the National Internal Revenue Code. It should be pointed out, however, that in
accordance with said proviso the properties are required to be appraised at their fair market
value and the assessed value thereof shall be considered as the fair market value only when
evidence to the contrary has not been shown. After all review of the record, we are satisfied that
such evidence exists to justify the valuation made by petitioner which was sustained by the tax
court, for as the tax court aptly observed:

"The two parcels of land containing 36,264 square meters were valued by the
administrator of the estate in the Estate and Inheritance tax returns filed by him at
P43,500.00 which is the assessed value of said properties. On the other hand, defendant
appraised the same at P52,200.00. It is of common knowledge, and this Court can take
judicial notice of it, that assessments for real estate taxation purposes are very much
lower than the true and fair market value of the properties at a given time and place. In
fact one year after decedent's death or in 1952 the said properties were sold for a price
of P72,000.00 and there is no showing that special or extraordinary circumstances caused
 the sudden increase from the price of P43,500.00, if we were to accept this value as a fair
and reasonable one as of 1951. Even more, the counsel for plaintiffs himself admitted in
open court that he was willing to purchase the said properties at P2.00 per square meter.
In the light of these facts we believe and therefore hold that the valuation of P52,200.00
of the real estate in Baguio made by defendant is fair, reasonable and justified in the
premises." (Decision, p. 19).

In respect to the valuation of the 210,000 shares of stock in the Mindanao Mother Lode Mines,
Inc., (a domestic corporation), respondents contend that their value should be fixed on the basis
of the market quotation obtaining at the San Francisco (California) Stock Exchange, on the theory
that the certificates of stocks were then held in that place and registered with the said stock
exchange. We cannot agree with respondents' argument. The situs of the shares of stock, for
purposes of taxation, being located here in the Philippines, as respondents themselves concede
and considering that they are sought to be taxed in this jurisdiction, consistent with the exercise
of our government's taxing authority, their fair market value should be taxed on the basis of the
price prevailing in our country.

Upon the other hand, we find merit in respondents' other contention that the said shares of stock
commanded a lesser value at the Manila Stock Exchange six months after the death of Stevenson.
Through Atty. Allison Gibbs, respondents have shown that at that time a share of said stock was
bid for at only P.325 (p. 103, t.s.n.). Significantly, the testimony of Atty. Gibbs in this respect has
never been questioned nor refuted by petitioner either before this court or in the court below.
In the absence of evidence to the contrary, we are, therefore, constrained to reverse the Tax
Court on this point and to hold that the value of a share in the said mining company on August
22, 1951 in the Philippine market was P.325 as claimed by respondents..

It should be noted that the petitioner and the Tax Court valued each share of stock of P.38 on the
basis of the declaration made by the estate in its preliminary return. Patently, this should not
have been the case, in view of the fact that the ancillary administrator had reserved and availed
of his legal right to have the properties of the estate declared at their fair market value as of six
months from the time the decedent died..

On the fifth issue, we shall consider the various deductions, from the allowance or disallowance
of which by the Tax Court, both petitioner and respondents have appealed..

Petitioner, in this regard, contends that no evidence of record exists to support the allowance of
the sum of P8,604.39 for the following expenses:.

1) Administrator's fee P1,204.34

2) Attorney's fee 6,000.00
3) Judicial and Administrative expenses 2,052.55
Total Deductions P8,604.39
An examination of the record discloses, however, that the foregoing items were considered
deductible by the Tax Court on the basis of their approval by the probate court to which said
expenses, we may presume, had also been presented for consideration. It is to be supposed that
the probate court would not have approved said items were they not supported by evidence
presented by the estate. In allowing the items in question, the Tax Court had before it the
pertinent order of the probate court which was submitted in evidence by respondents. (Exh. "AA-
2", p. 100, record). As the Tax Court said, it found no basis for departing from the findings of the
probate court, as it must have been satisfied that those expenses were actually incurred. Under
the circumstances, we see no ground to reverse this finding of fact which, under Republic Act of
California National Association, which it would appear, that while still living, Walter G. Stevenson
obtained we are not inclined to pass upon the claim of respondents in respect to the additional
amount of P86.52 for funeral expenses which was disapproved by the court a quo for lack of
evidence.

In connection with the deduction of P652.50 representing the amount of realty taxes paid in 1951
on the decedent's two parcels of land in Baguio City, which respondents claim was disallowed by
the Tax Court, we find that this claim has in fact been allowed. What happened here, which a
careful review of the record will reveal, was that the Tax Court, in itemizing the liabilities of the
estate, viz:

1) Administrator's fee P1,204.34

2) Attorney's fee 6,000.00
3) Judicial and Administration expenses as of
August 9, 1952 2,052.55
Total P9,256.89

added the P652.50 for realty taxes as a liability of the estate, to the P1,400.05 for judicial and
administration expenses approved by the court, making a total of P2,052.55, exactly the same
figure which was arrived at by the Tax Court for judicial and administration expenses. Hence, the
difference between the total of P9,256.98 allowed by the Tax Court as deductions, and the
P8,604.39 as found by the probate court, which is P652.50, the same amount allowed for realty
taxes. An evident oversight has involuntarily been made in omitting the P2,000.00 for funeral
expenses in the final computation. This amount has been expressly allowed by the lower court
and there is no reason why it should not be. .

We come now to the other claim of respondents that pursuant to section 89(b) (1) in relation to
section 89(a) (1) (E) and section 89(d), National Internal Revenue Code, the amount of P10,022.47
should have been allowed the estate as a deduction, because it represented an indebtedness of
the decedent incurred during his lifetime. In support thereof, they offered in evidence a duly
certified claim, presented to the probate court in California by the Bank of California National
Association, which it would appear, that while still living, Walter G. Stevenson obtained a loan of
$5,000.00 secured by pledge on 140,000 of his shares of stock in the Mindanao Mother Lode
Mines, Inc. (Exhs. "Q-Q4", pp. 53-59, record). The Tax Court disallowed this item on the ground
that the local probate court had not approved the same as a valid claim against the estate and
because it constituted an indebtedness in respect to intangible personal property which the Tax
Court held to be exempt from inheritance tax.

For two reasons, we uphold the action of the lower court in disallowing the deduction.

Firstly, we believe that the approval of the Philippine probate court of this particular
indebtedness of the decedent is necessary. This is so although the same, it is averred has been
already admitted and approved by the corresponding probate court in California, situs of the
principal or domiciliary administration. It is true that we have here in the Philippines only an
ancillary administration in this case, but, it has been held, the distinction between domiciliary or
principal administration and ancillary administration serves only to distinguish one
administration from the other, for the two proceedings are separate and independent. 8 The
reason for the ancillary administration is that, a grant of administration does not ex proprio
vigore, have any effect beyond the limits of the country in which it was granted. Hence, we have
the requirement that before a will duly probated outside of the Philippines can have effect here,
it must first be proved and allowed before our courts, in much the same manner as wills originally
presented for allowance therein.9 And the estate shall be administered under letters
testamentary, or letters of administration granted by the court, and disposed of according to the
will as probated, after payment of just debts and expenses of administration. 10 In other words,
there is a regular administration under the control of the court, where claims must be presented
and approved, and expenses of administration allowed before deductions from the estate can be
authorized. Otherwise, we would have the actuations of our own probate court, in the settlement
and distribution of the estate situated here, subject to the proceedings before the foreign court
over which our courts have no control. We do not believe such a procedure is countenanced or
contemplated in the Rules of Court.

Another reason for the disallowance of this indebtedness as a deduction, springs from the
provisions of Section 89, letter (d), number (1), of the National Internal Revenue Code which
reads:

(d) Miscellaneous provisions (1) No deductions shall be allowed in the case of a non-
resident not a citizen of the Philippines unless the executor, administrator or anyone of
the heirs, as the case may be, includes in the return required to be filed under section
ninety-three the value at the time of his death of that part of the gross estate of the non-
resident not situated in the Philippines."

In the case at bar, no such statement of the gross estate of the non-resident Stevenson not
situated in the Philippines appears in the three returns submitted to the court or to the office of
the petitioner Collector of Internal Revenue. The purpose of this requirement is to enable the
revenue officer to determine how much of the indebtedness may be allowed to be deducted,
pursuant to (b), number (1) of the same section 89 of the Internal Revenue Code which provides:
 (b) Deductions allowed to non-resident estates. In the case of a non-resident not a
citizen of the Philippines, by deducting from the value of that part of his gross estate
which at the time of his death is situated in the Philippines

(1) Expenses, losses, indebtedness, and taxes. That proportion of the deductions
specified in paragraph (1) of subjection (a) of this section 11 which the value of such part
bears the value of his entire gross estate wherever situated;"

In other words, the allowable deduction is only to the extent of the portion of the indebtedness
which is equivalent to the proportion that the estate in the Philippines bears to the total estate
wherever situated. Stated differently, if the properties in the Philippines constitute but 1/5 of the
entire assets wherever situated, then only 1/5 of the indebtedness may be deducted. But since,
as heretofore adverted to, there is no statement of the value of the estate situated outside the
Philippines, no part of the indebtedness can be allowed to be deducted, pursuant to Section 89,
letter (d), number (1) of the Internal Revenue Code.

For the reasons thus stated, we affirm the ruling of the lower court disallowing the deduction of
the alleged indebtedness in the sum of P10,022.47.

In recapitulation, we hold and declare that:

(a) only the one-half (1/2) share of the decedent Stevenson in the conjugal partnership
property constitutes his hereditary estate subject to the estate and inheritance taxes;

(b) the intangible personal property is not exempt from inheritance tax, there existing no
complete total reciprocity as required in section 122 of the National Internal Revenue
Code, nor is the decedent's estate entitled to an exemption of P4,000.00 in the
computation of the estate tax;

(c) for the purpose of the estate and inheritance taxes, the 210,000 shares of stock in the
Mindanao Mother Lode Mines, Inc. are to be appraised at P0.325 per share; and

(d) the P2,000.00 for funeral expenses should be deducted in the determination of the
net asset of the deceased Stevenson.

In all other respects, the decision of the Court of Tax Appeals is affirmed.

Respondent's claim for interest on the amount allegedly overpaid, if any actually results after a
recomputation on the basis of this decision is hereby denied in line with our recent decision
in Collector of Internal Revenue v. St. Paul's Hospital (G.R. No. L-12127, May 29, 1959) wherein
we held that, "in the absence of a statutory provision clearly or expressly directing or authorizing
such payment, and none has been cited by respondents, the National Government cannot be
required to pay interest."
WHEREFORE, as modified in the manner heretofore indicated, the judgment of the lower court
is hereby affirmed in all other respects not inconsistent herewith. No costs. So ordered.

Paras, C.J., Bengzon, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Gutierrez David,
Paredes and Dizon, JJ., concur.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 82027 March 29, 1990

ROMARICO G. VITUG, petitioner,

vs.
THE HONORABLE COURT OF APPEALS and ROWENA FAUSTINO-CORONA, respondents.

Rufino B. Javier Law Office for petitioner.

Quisumbing, Torres & Evangelista for private respondent.

SARMIENTO, J.:

This case is a chapter in an earlier suit decided by this Court 1 involving the probate of the two
wills of the late Dolores Luchangco Vitug, who died in New York, U. S.A., on November 10, 1980,
naming private respondent Rowena Faustino-Corona executrix. In our said decision, we upheld
the appointment of Nenita Alonte as co-special administrator of Mrs. Vitug's estate with her
(Mrs. Vitug's) widower, petitioner Romarico G. Vitug, pending probate.

On January 13, 1985, Romarico G. Vitug filed a motion asking for authority from the probate court
to sell certain shares of stock and real properties belonging to the estate to cover allegedly his
advances to the estate in the sum of P667,731.66, plus interests, which he claimed were personal
funds. As found by the Court of Appeals, 2the alleged advances consisted of P58,147.40 spent for
the payment of estate tax, P518,834.27 as deficiency estate tax, and P90,749.99 as "increment
thereto." 3 According to Mr. Vitug, he withdrew the sums of P518,834.27 and P90,749.99 from
savings account No. 35342-038 of the Bank of America, Makati, Metro Manila.

On April 12, 1985, Rowena Corona opposed the motion to sell on the ground that the same funds
withdrawn from savings account No. 35342-038 were conjugal partnership properties and part
of the estate, and hence, there was allegedly no ground for reimbursement. She also sought his
ouster for failure to include the sums in question for inventory and for "concealment of funds
belonging to the estate." 4

Vitug insists that the said funds are his exclusive property having acquired the same through a
survivorship agreement executed with his late wife and the bank on June 19, 1970. The
agreement provides:
 We hereby agree with each other and with the BANK OF AMERICAN NATIONAL
TRUST AND SAVINGS ASSOCIATION (hereinafter referred to as the BANK), that all
money now or hereafter deposited by us or any or either of us with the BANK in
our joint savings current account shall be the property of all or both of us and shall
be payable to and collectible or withdrawable by either or any of us during our
lifetime, and after the death of either or any of us shall belong to and be the sole
property of the survivor or survivors, and shall be payable to and collectible or
withdrawable by such survivor or survivors.

We further agree with each other and the BANK that the receipt or check of either,
any or all of us during our lifetime, or the receipt or check of the survivor or
survivors, for any payment or withdrawal made for our above-mentioned account
shall be valid and sufficient release and discharge of the BANK for such payment
or withdrawal. 5

The trial courts 6 upheld the validity of this agreement and granted "the motion to sell some of
the estate of Dolores L. Vitug, the proceeds of which shall be used to pay the personal funds of
Romarico Vitug in the total sum of P667,731.66 ... ." 7

On the other hand, the Court of Appeals, in the petition for certiorari filed by the herein private
respondent, held that the above-quoted survivorship agreement constitutes a
conveyance mortis causa which "did not comply with the formalities of a valid will as prescribed
by Article 805 of the Civil Code," 8 and secondly, assuming that it is a mere donation inter vivos, it
is a prohibited donation under the provisions of Article 133 of the Civil Code. 9

The dispositive portion of the decision of the Court of Appeals states:

WHEREFORE, the order of respondent Judge dated November 26, 1985 (Annex II,
petition) is hereby set aside insofar as it granted private respondent's motion to
sell certain properties of the estate of Dolores L. Vitug for reimbursement of his
alleged advances to the estate, but the same order is sustained in all other
respects. In addition, respondent Judge is directed to include provisionally the
deposits in Savings Account No. 35342-038 with the Bank of America, Makati, in
the inventory of actual properties possessed by the spouses at the time of the
decedent's death. With costs against private respondent. 10

In his petition, Vitug, the surviving spouse, assails the appellate court's ruling on the strength of
our decisions in Rivera v. People's Bank and Trust Co. 11 and Macam v. Gatmaitan 12 in which we
sustained the validity of "survivorship agreements" and considering them as aleatory
contracts. 13

The petition is meritorious.

The conveyance in question is not, first of all, one of mortis causa, which should be embodied in
a will. A will has been defined as "a personal, solemn, revocable and free act by which a
capacitated person disposes of his property and rights and declares or complies with duties to
take effect after his death." 14 In other words, the bequest or device must pertain to the
testator. 15 In this case, the monies subject of savings account No. 35342-038 were in the nature
of conjugal funds In the case relied on, Rivera v. People's Bank and Trust Co., 16 we rejected claims
that a survivorship agreement purports to deliver one party's separate properties in favor of the
other, but simply, their joint holdings:

xxx xxx xxx

... Such conclusion is evidently predicated on the assumption that Stephenson was
the exclusive owner of the funds-deposited in the bank, which assumption was in
turn based on the facts (1) that the account was originally opened in the name of
Stephenson alone and (2) that Ana Rivera "served only as housemaid of the
deceased." But it not infrequently happens that a person deposits money in the
bank in the name of another; and in the instant case it also appears that Ana Rivera
served her master for about nineteen years without actually receiving her salary
from him. The fact that subsequently Stephenson transferred the account to the
name of himself and/or Ana Rivera and executed with the latter the survivorship
agreement in question although there was no relation of kinship between them
but only that of master and servant, nullifies the assumption that Stephenson was
the exclusive owner of the bank account. In the absence, then, of clear proof to
the contrary, we must give full faith and credit to the certificate of deposit which
recites in effect that the funds in question belonged to Edgar Stephenson and Ana
Rivera; that they were joint (and several) owners thereof; and that either of them
could withdraw any part or the whole of said account during the lifetime of both,
and the balance, if any, upon the death of either, belonged to the survivor. 17

xxx xxx xxx

In Macam v. Gatmaitan, 18 it was held:

xxx xxx xxx

This Court is of the opinion that Exhibit C is an aleatory contract whereby,

according to article 1790 of the Civil Code, one of the parties or both reciprocally
bind themselves to give or do something as an equivalent for that which the other
party is to give or do in case of the occurrence of an event which is uncertain or
will happen at an indeterminate time. As already stated, Leonarda was the owner
of the house and Juana of the Buick automobile and most of the furniture. By
virtue of Exhibit C, Juana would become the owner of the house in case Leonarda
died first, and Leonarda would become the owner of the automobile and the
furniture if Juana were to die first. In this manner Leonarda and Juana reciprocally
 assigned their respective property to one another conditioned upon who might
die first, the time of death determining the event upon which the acquisition of
such right by the one or the other depended. This contract, as any other contract,
is binding upon the parties thereto. Inasmuch as Leonarda had died before Juana,
the latter thereupon acquired the ownership of the house, in the same manner as
Leonarda would have acquired the ownership of the automobile and of the
furniture if Juana had died first. 19

xxx xxx xxx

There is no showing that the funds exclusively belonged to one party, and hence it must be
presumed to be conjugal, having been acquired during the existence of the marita. relations. 20

Neither is the survivorship agreement a donation inter vivos, for obvious reasons, because it was
to take effect after the death of one party. Secondly, it is not a donation between the spouses
because it involved no conveyance of a spouse's own properties to the other.

It is also our opinion that the agreement involves no modification petition of the conjugal
partnership, as held by the Court of Appeals, 21 by "mere stipulation" 22 and that it is no
"cloak" 23 to circumvent the law on conjugal property relations. Certainly, the spouses are not
prohibited by law to invest conjugal property, say, by way of a joint and several bank account,
more commonly denominated in banking parlance as an "and/or" account. In the case at bar,
when the spouses Vitug opened savings account No. 35342-038, they merely put what rightfully
belonged to them in a money-making venture. They did not dispose of it in favor of the other,
which would have arguably been sanctionable as a prohibited donation. And since the funds were
conjugal, it can not be said that one spouse could have pressured the other in placing his or her
deposits in the money pool.

The validity of the contract seems debatable by reason of its "survivor-take-all" feature, but in
reality, that contract imposed a mere obligation with a term, the term being death. Such
agreements are permitted by the Civil Code. 24

Under Article 2010 of the Code:

ART. 2010. By an aleatory contract, one of the parties or both reciprocally bind
themselves to give or to do something in consideration of what the other shall
give or do upon the happening of an event which is uncertain, or which is to occur
at an indeterminate time.

Under the aforequoted provision, the fulfillment of an aleatory contract depends on either the
happening of an event which is (1) "uncertain," (2) "which is to occur at an indeterminate time."
A survivorship agreement, the sale of a sweepstake ticket, a transaction stipulating on the value
of currency, and insurance have been held to fall under the first category, while a contract for life
annuity or pension under Article 2021, et sequentia, has been categorized under the second. 25 In
either case, the element of risk is present. In the case at bar, the risk was the death of one party
and survivorship of the other.

However, as we have warned:

xxx xxx xxx

But although the survivorship agreement is per se not contrary to law its operation
or effect may be violative of the law. For instance, if it be shown in a given case
that such agreement is a mere cloak to hide an inofficious donation, to transfer
property in fraud of creditors, or to defeat the legitime of a forced heir, it may be
assailed and annulled upon such grounds. No such vice has been imputed and
established against the agreement involved in this case. 26

xxx xxx xxx

There is no demonstration here that the survivorship agreement had been executed for such
unlawful purposes, or, as held by the respondent court, in order to frustrate our laws on wills,
donations, and conjugal partnership.

The conclusion is accordingly unavoidable that Mrs. Vitug having predeceased her husband, the
latter has acquired upon her death a vested right over the amounts under savings account No.
35342-038 of the Bank of America. Insofar as the respondent court ordered their inclusion in the
inventory of assets left by Mrs. Vitug, we hold that the court was in error. Being the separate
property of petitioner, it forms no more part of the estate of the deceased.

WHEREFORE, the decision of the respondent appellate court, dated June 29, 1987, and its
resolution, dated February 9, 1988, are SET ASIDE.

No costs.

SO ORDERED.
 SECOND DIVISION

[G.R. No. 111904. October 5, 2000]

SPS. AGRIPINO GESTOPA and ISABEL SILARIO GESTOPA, petitioners, vs. COURT OF APPEALS
and MERCEDES DANLAG y PILAPIL, respondents.

DECISION
QUISUMBING, J.:

This petition for review,[1] under Rule 45 of the Rules of Court, assails the decision[2]of the
Court of Appeals dated August 31, 1993, in CA-G.R. CV No. 38266, which reversed the
judgment[3] of the Regional Trial Court of Cebu City, Branch 5.
The facts, as culled from the records, are as follows:
Spouses Diego and Catalina Danlag were the owners of six parcels of unregistered
lands. They executed three deeds of donation mortis causa, two of which are dated March 4,
1965 and another dated October 13, 1966, in favor of private respondent Mercedes Danlag-
Pilapil.[4] The first deed pertained to parcels 1 & 2 with Tax Declaration Nos. 11345 and 11347,
respectively. The second deed pertained to parcel 3, with TD No. 018613. The last deed pertained
to parcel 4 with TD No. 016821. All deeds contained the reservation of the rights of the donors
(1) to amend, cancel or revoke the donation during their lifetime, and (2) to sell, mortgage, or
encumber the properties donated during the donors' lifetime, if deemed necessary.
On January 16, 1973, Diego Danlag, with the consent of his wife, Catalina Danlag, executed
a deed of donation inter vivos[5] covering the aforementioned parcels of land plus two other
parcels with TD Nos. 11351 and 11343, respectively, again in favor of private respondent
Mercedes. This contained two conditions, that (1) the Danlag spouses shall continue to enjoy the
fruits of the land during their lifetime, and that (2) the donee can not sell or dispose of the land
during the lifetime of the said spouses, without their prior consent and approval. Mercedes
caused the transfer of the parcels' tax declaration to her name and paid the taxes on them.
On June 28, 1979 and August 21, 1979, Diego and Catalina Danlag sold parcels 3 and 4 to
herein petitioners, Mr. and Mrs. Agripino Gestopa. On September 29, 1979, the Danlags executed
a deed of revocation[6]recovering the six parcels of land subject of the aforecited deed of
donation inter vivos.
On March 1, 1983, Mercedes Pilapil (herein private respondent) filed with the RTC a petition
against the Gestopas and the Danlags, for quieting of title[7] over the above parcels of land.She
alleged that she was an illegitimate daughter of Diego Danlag; that she lived and rendered
incalculable beneficial services to Diego and his mother, Maura Danlag, when the latter was still
alive. In recognition of the services she rendered, Diego executed a Deed of Donation on March
20, 1973, conveying to her the six (6) parcels of land. She accepted the donation in the same
instrument, openly and publicly exercised rights of ownership over the donated properties, and
caused the transfer of the tax declarations to her name. Through machination, intimidation and
undue influence, Diego persuaded the husband of Mercedes, Eulalio Pilapil, to buy two of the six
parcels covered by the deed of donation. Said donation inter vivos was coupled with conditions
and, according to Mercedes, since its perfection, she had complied with all of them; that she had
not been guilty of any act of ingratitude; and that respondent Diego had no legal basis in revoking
the subject donation and then in selling the two parcels of land to the Gestopas.
In their opposition, the Gestopas and the Danlags averred that the deed of donation dated
January 16, 1973 was null and void because it was obtained by Mercedes through machinations
and undue influence. Even assuming it was validly executed, the intention was for the donation
to take effect upon the death of the donor. Further, the donation was void for it left the donor,
Diego Danlag, without any property at all.
On December 27, 1991, the trial court rendered its decision, thus:

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

1. Declaring the Donations Mortis Causa and Inter Vivos as revoked, and, therefore, has
(sic) no legal effect and force of law.
2. Declaring Diego Danlag the absolute and exclusive owner of the six (6) parcels of land
mentioned in the Deed of revocation (Exh. P-plaintiff, Exh. 6-defendant Diego
Danlag).
3. Declaring the Deeds of Sale executed by Diego Danlag in favor of spouses Agripino
Gestopa and Isabel Gestopa dated June 28, 1979 (Exh. S-plaintiff; Exh. 18-defendant);
Deed of Sale dated December 18, 1979 (Exh. T plaintiff; Exh. 9-defendant); Deed of
Sale dated September 14, 1979 (Exh. 8); Deed of Sale dated June 30, 1975 (Exh. U);
Deed of Sale dated March 13, 1978 (Exh. X) as valid and enforceable duly executed in
accordance with the formalities required by law.
4. Ordering all tax declaration issued in the name of Mercedes Danlag Y Pilapil covering
the parcel of land donated cancelled and further restoring all the tax declarations
previously cancelled, except parcels nos. 1 and 5 described, in the Deed of Donation
Inter Vivos (Exh. "1") and Deed of Sale (Exh. "2") executed by defendant in favor of
plaintiff and her husband.
[5.] With respect to the contract of sale of abovestated parcels of land, vendor Diego
Danlag and spouse or their estate have the alternative remedies of demanding the
balance of the agreed price with legal interest, or rescission of the contract of sale.

SO ORDERED."[8]
 In rendering the above decision, the trial court found that the reservation clause in all the
deeds of donation indicated that Diego Danlag did not make any donation; that the purchase by
Mercedes of the two parcels of land covered by the Deed of Donation Inter Vivos bolstered this
conclusion; that Mercedes failed to rebut the allegations of ingratitude she committed against
Diego Danlag; and that Mercedes committed fraud and machination in preparing all the deeds of
donation without explaining to Diego Danlag their contents.
Mercedes appealed to the Court of Appeals and argued that the trial court erred in (1)
declaring the donation dated January 16, 1973 as mortis causa and that the same was already
revoked on the ground of ingratitude; (2) finding that Mercedes purchased from Diego Danlag
the two parcels of land already covered by the above donation and that she was only able to pay
three thousand pesos, out of the total amount of twenty thousand pesos; (3) failing to declare
that Mercedes was an acknowledged natural child of Diego Danlag.
On August 31, 1993, the appellate court reversed the trial court. It ruled:

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

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

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

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

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

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

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

7. Failing to do so, ordering the Branch Clerk of Court of the Regional Trial Court (Branch V) at
Cebu City to effect such reconveyance of the parcels of land covered by O.C.T. T-17836 and
17523.
SO ORDERED."[9]

The Court of Appeals held that the reservation by the donor of lifetime usufruct indicated
that he transferred to Mercedes the ownership over the donated properties; that the right to sell
belonged to the donee, and the donor's right referred to that of merely giving consent; that the
donor changed his intention by donating inter vivos properties already donated mortis causa;
that the transfer to Mercedes' name of the tax declarations pertaining to the donated properties
implied that the donation was inter vivos; and that Mercedes did not purchase two of the six
parcels of land donated to her.
Hence, this instant petition for review filed by the Gestopa spouses, asserting that:

"THE HONORABLE COURT OF APPEALS, TWELFTH DIVISION, HAS GRAVELY ERRED IN REVERSING
THE DECISION OF THE COURT A QUO."[10]

Before us, petitioners allege that the appellate court overlooked the fact that the donor did
not only reserve the right to enjoy the fruits of the properties, but also prohibited the donee from
selling or disposing the land without the consent and approval of the Danlag spouses. This
implied that the donor still had control and ownership over the donated properties. Hence, the
donation was post mortem.
Crucial in resolving whether the donation was inter vivos or mortis causa is the
determination of whether the donor intended to transfer the ownership over the properties
upon the execution of the deed.[11]
In ascertaining the intention of the donor, all of the deed's provisions must be read
together.[12] The deed of donation dated January 16, 1973, in favor of Mercedes contained the
following:

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

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

xxx

That for the same purpose as hereinbefore stated, the Donor further states that he has reserved
for himself sufficient properties in full ownership or in usufruct enough for his maintenance of a
decent livelihood in consonance with his standing in society.
That the Donee hereby accepts the donation and expresses her thanks and gratitude for the
kindness and generosity of the Donor."[13]

Note first that the granting clause shows that Diego donated the properties out of love and
affection for the donee. This is a mark of a donation inter vivos.[14] Second, the reservation of
lifetime usufruct indicates that the donor intended to transfer the naked ownership over the
properties. As correctly posed by the Court of Appeals, what was the need for such reservation
if the donor and his spouse remained the owners of the properties? Third, the donor reserved
sufficient properties for his maintenance in accordance with his standing in society, indicating
that the donor intended to part with the six parcels of land.[15] Lastly, the donee accepted the
donation. In the case of Alejandro vs. Geraldez, 78 SCRA 245 (1977), we said that an acceptance
clause is a mark that the donation is inter vivos. Acceptance is a requirement for donations inter
vivos. Donations mortis causa, being in the form of a will, are not required to be accepted by the
donees during the donors' lifetime.
Consequently, the Court of Appeals did not err in concluding that the right to dispose of the
properties belonged to the donee. The donor's right to give consent was merely intended to
protect his usufructuary interests. In Alejandro, we ruled that a limitation on the right to sell
during the donors' lifetime implied that ownership had passed to the donees and donation was
already effective during the donors' lifetime.
The attending circumstances in the execution of the subject donation also demonstrated the
real intent of the donor to transfer the ownership over the subject properties upon its
execution.[16] Prior to the execution of donation inter vivos, the Danlag spouses already executed
three donations mortis causa. As correctly observed by the Court of Appeals, the Danlag spouses
were aware of the difference between the two donations. If they did not intend to donate inter
vivos, they would not again donate the four lots already donated mortis causa.Petitioners'
counter argument that this proposition was erroneous because six years after, the spouses
changed their intention with the deed of revocation, is not only disingenious but also
fallacious. Petitioners cannot use the deed of revocation to show the spouses' intent because its
validity is one of the issues in this case.
Petitioners aver that Mercedes' tax declarations in her name can not be a basis in
determining the donor's intent. They claim that it is easy to get tax declarations from the
government offices such that tax declarations are not considered proofs of ownership. However,
unless proven otherwise, there is a presumption of regularity in the performance of official
duties.[17] We find that petitioners did not overcome this presumption of regularity in the
issuance of the tax declarations. We also note that the Court of Appeals did not refer to the tax
declarations as proofs of ownership but only as evidence of the intent by the donor to transfer
ownership.
Petitioners assert that since private respondent purchased two of the six parcels of land from
the donor, she herself did not believe the donation was inter vivos. As aptly noted by the Court
of Appeals, however, it was private respondent's husband who purchased the two parcels of
land.
 As a rule, a finding of fact by the appellate court, especially when it is supported by evidence
on record, is binding on us.[18] On the alleged purchase by her husband of two parcels, it is
reasonable to infer that the purchase was without private respondent's consent. Purchase by her
husband would make the properties conjugal to her own disadvantage. That the purchase is
against her self-interest, weighs strongly in her favor and gives credence to her claim that her
husband was manipulated and unduly influenced to make the purchase, in the first place.
Was the revocation valid? A valid donation, once accepted, becomes irrevocable, except on
account of officiousness, failure by the donee to comply with the charges imposed in the
donation, or ingratitude.[19] The donor-spouses did not invoke any of these reasons in the deed
of revocation. The deed merely stated:

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

Petitioners cited Mercedes' vehemence in prohibiting the donor to gather coconut trees and
her filing of instant petition for quieting of title. There is nothing on record, however, showing
that private respondent prohibited the donors from gathering coconuts. Even assuming that
Mercedes prevented the donor from gathering coconuts, this could hardly be considered an act
covered by Article 765 of the Civil Code.[21] Nor does this Article cover respondent's filing of the
petition for quieting of title, where she merely asserted what she believed was her right under
the law.
Finally, the records do not show that the donor-spouses instituted any action to revoke the
donation in accordance with Article 769 of the Civil Code.[22] Consequently, the supposed
revocation on September 29, 1979, had no legal effect.
WHEREFORE, the instant petition for review is DENIED. The assailed decision of the Court of
Appeals dated August 31, 1993, is AFFIRMED.
Costs against petitioners.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-57455 January 18, 1990

EVELYN DE LUNA, ROSALINA DE LUNA, PRUDENCIO DE LUNA, JR., WILLARD DE LUNA,

ANTONIO DE LUNA, and JOSELITO DE LUNA, petitioners,
vs.
HON. SOFRONIO F. ABRIGO, Presiding Judge of the Court of First Instance of Quezon, Branch
IX, and LUZONIAN UNIVERSITY FOUNDATION, INC., respondents.

Milberto B. Zurbano for petitioners.

Joselito E. Talabong for private respondent.

MEDIALDEA, J.:

This is a petition for review on certiorari of the Order dated July 7, 1981 of respondent judge
Sofronio F. Abrigo of the Court of First Instance of Quezon, Branch IX in Civil Case No. 8624
dismissing the complaint of petitioners on the ground of prescription of action.

The antecedent facts are as follows:

On January 24, 1965, Prudencio de Luna donated a portion of 7,500 square meters of Lot No.
3707 of the Cadastral Survey of Lucena covered by Transfer Certificate of Title No. 1-5775 to the
Luzonian Colleges, Inc., (now Luzonian University Foundation, Inc., herein referred to as the
foundation). The donation, embodied in a Deed of Donation Intervivos (Annex "A" of Petition)
was subject to certain terms and conditions and provided for the automatic reversion to the
donor of the donated property in case of violation or non-compliance (pars. 7 and 10 of Annex
"A", p. 20, Rollo). The foundation failed to comply with the conditions of the donation. On April
9, 1971, Prudencio de Luna "revived" the said donation in favor of the foundation, in a document
entitled "Revival of Donation Intervivos" (Annex "B" of Petition) subject to terms and conditions
which among others, required:

xxx xxx xxx

 3. That the DONEE shall construct at its own expense a Chapel, a Nursery and
Kindergarten School, to be named after St. Veronica, and other constructions and
Accessories shall be constructed on the land herein being donated strictly in
accordance with the plans and specifications prepared by the O.R. Quinto &
Associates and made part of this donation; provided that the flooring of the Altar
and parts of the Chapel shall be of granoletic marble.

4. That the construction of the Chapel, Nursery and Kindergarten School shall start
immediately and must be at least SEVENTY (70) PER CENTUM finished by the end
of THREE (3) YEARS from the date hereof, however, the whole project as drawn in
the plans and specifications made parts of this donation must be completed within
FIVE (5) YEARS from the date hereon, unless extensions are granted by the DONOR
in writing;

. . . . (p. 23, Rollo)

As in the original deed of donation, the "Revival of Donation Intenrivos" also provided for the
automatic reversion to the donor of the donated area in case of violation of the conditions
thereof, couched in the following terms:

xxx xxx xxx.

11. That violation of any of the conditions herein provided shall cause the
automatic reversion of the donated area to the donor, his heirs, assigns and
representatives, without the need of executing any other document for that
purpose and without obligation whatever on the part of the DONOR. (p. 24, Rollo).

The foundation, through its president, accepted the donation in the same document, subject to
all the terms and conditions stated in the donation (p. 24, Rollo). The donation was registered
and annotated on April 15, 1971 in the memorandum of encumbrances as Entry No. 17939 of
Transfer Certificate of Title No. T-5775 (p. 15, Rollo).

On August 3, 1971, Prudencio de Luna and the foundation executed a 'Deed of Segregation"
(Annex "C" of Petition) whereby the area donated which is now known as Lot No. 3707-B of
Subdivision Plan Psd-40392 was adjudicated to the foundation. As a result, transfer certificate of
title No. T-16152 was issued in the name of the foundation. The remaining portion known as Lot
No. 3707-A was retained by the donor. (p. 16, Rollo).

On September 23, 1980, herein petitioners, Evelyn, Rosalina, Prudencio, Jr., Willard, Antonio and
Joselito, all surnamed de Luna, who claim to be the children and only heirs of the late Prudencio
de Luna who died on August 18, 1980, filed a complaint (pp. 14-17, Rollo) with the Regional Trial
Court of Quezon alleging that the terms and conditions of the donation were not complied with
by the foundation. Among others, it prayed for the cancellation of the donation and the reversion
of the donated land to the heirs. The complaint was docketed as Civil Case No. 8624.
In its answer (pp. 29-36, Rollo), respondent foundation claimed that it had partially and
substantially complied with the conditions of the donation and that the donor has granted the
foundation an indefinite extension of time to complete the construction of the chapel. It also
invoked the affirmative defense of prescription of action and prayed for the dismissal of the
complaint.

During the pre-trial of the case, the foundation moved for a preliminary hearing of its affirmative
defense of prescription of action which was opposed by the plaintiffs. After the parties have filed
their respective written motions, oppositions and memoranda, an Order (pp., 40-43, Rollo) dated
July 7, 1981 was issued dismissing the complaint. The dispositive portion of the Order states:

In view of the foregoing considerations, this Court finds the motion to dismiss
deemed filed by the defendant on the ground of prescription to be well-taken and
the same is hereby GRANTED.

WHEREFORE, the instant complaint is hereby ordered DISMISSED.

No pronouncement as to costs.

SO ORDERED. (pp. 42-43, Rollo)

No motion for reconsideration was filed by petitioners.

On July 22, 1981, petitioners brought the instant petition for review with the following
assignments of error:

I. THE LOWER COURT ERRED IN HOLDING THAT THE DONEE'S CONSENT TO THE
REVOCATION OF A DONATION TO BE VALID MUST BE GIVEN SUBSEQUENT TO THE
EFFECTIVITY OF THE DONATION OR VIOLATION OF (THE) ANY OF THE CONDITIONS
IMPOSED THEREIN.

II. THE LOWER COURT ERRED IN TREATING THE COMPLAINT AS ONE FOR JUDICIAL
DECREE OF REVOCATION OF THE DONATION IN QUESTION AS CONTEMPLATED IN
ARTICLE 764 OF THE CIVIL CODE OF THE PHILIPPINES AND WHICH PRESCRIBES IN
FOUR (4) YEARS AND IN NOT CONSIDERING IT AS AN ACTION TO ENFORCE A
WRITTEN CONTRACT WHICH PRESCRIBES IN TEN (10) YEARS AS PROVIDED IN
ARTICLE 1144, HENCE, THE LOWER COURT ERRED IN DISMISSING THE
COMPLAINT.

III. THE LOWER COURT ERRED IN NOT RENDERING JUDGMENT ON THE MERITS BY
WAY OF JUDGMENT ON THE PLEADINGS. (pp. 1-2, Petitioner's Brief)
We gave due course to the petition on August 3, 1981 (p. 45, Rollo). After the parties' submission
of their respective briefs, the Court resolved to consider the petition submitted for decision on
January 27, 1982 (p. 62, Rollo).

The assailed order of the trial court stated that revocation (of a donation) will be effective only
either upon court judgment or upon consent of the donee as held in the case of Parks v. Province
of Tarlac, No. 24190, July 13, 1926, 49 Phil. 143. The trial court dismissed the claim of petitioners
that the stipulation in the donation providing for revocation in case of non-compliance of
conditions in the donation is tantamount to the consent of the donee, opining that the consent
contemplated by law should be such consent given by the donee subsequent to the effectivity of
the donation or violation of the conditions imposed therein. The trial court further held that, far
from consenting to the revocation, the donee claimed that it had already substantially complied
with the conditions of the donation by introducing improvements in the property donated valued
at more than the amount of the donated land. In view thereof, a judicial decree revoking the
subject donation is necessary. Accordingly, under Article 764 of the New Civil Code, actions to
revoke a donation on the ground of non-compliance with any of the conditions of the donation
shall prescribe in four years counted from such non-compliance. In the instant case, the four-year
period for filing the complaint for revocation commenced on April 9, 1976 and expired on April
9, 1980. Since the complaint was brought on September 23, 1980 or more than five (5) months
beyond the prescriptive period, it was already barred by prescription.

On the other hand, petitioners argue that Article 764 of the New Civil Code was adopted to
provide a judicial remedy in case of non-fulfillment of conditions when revocation of the donation
has not been agreed upon by the parties. By way of contrast, when there is a stipulation agreed
upon by the parties providing for revocation in case of non-compliance, no judicial action is
necessary. It is then petitioners' claim that the action filed before the Court of First Instance of
Quezon is not one for revocation of the donation under Article 764 of the New Civil Code which
prescribes in four (4) years, but one to enforce a written contract which prescribes in ten (10)
years.

The petition is impressed with merit.

From the viewpoint of motive, purpose or cause, donations may be 1) simple, 2) remuneratory
or 3) onerous. A simple donation is one the cause of which is pure liberality (no strings attached).
A remuneratory donation is one where the donee gives something to reward past or future
services or because of future charges or burdens, when the value of said services, burdens or
charges is less than the value of the donation. An onerous donation is one which is subject to
burdens, charges or future services equal (or more) in value than that of the thing donated
(Edgardo L. Paras, Civil Code of the Philippines Annotated, 11 ed., Vol. 11, p. 726).

It is the finding of the trial court, which is not disputed by the parties, that the donation subject
of this case is one with an onerous cause. It was made subject to the burden requiring the donee
to construct a chapel, a nursery and a kindergarten school in the donated property within five
years from execution of the deed of donation.
Under the old Civil Code, it is a settled rule that donations with an onerous cause are governed
not by the law on donations but by the rules on contracts, as held in the cases of Carlos v. Ramil,
L-6736, September 5, 1911, 20 Phil. 183, Manalo vs. de Mesa, L-9449, February 12, 1915, 29 Phil.
495. On the matter of prescription of actions for the revocation of onerous donation, it was held
that the general rules on prescription applies. (Parks v. Province of Tarlac, supra.). The same rules
apply under the New Civil Code as provided in Article 733 thereof which provides:

Art. 733. Donations with an onerous cause shall be governed by the rules on
contracts, and remuneratory donations by the provisions of the present Title as
regards that portion which exceeds the value of the burden imposed.

It is true that under Article 764 of the New Civil Code, actions for the revocation of a donation
must be brought within four (4) years from the non-compliance of the conditions of the donation.
However, it is Our opinion that said article does not apply to onerous donations in view of the
specific provision of Article 733 providing that onerous donations are governed by the rules on
contracts.

In the light of the above, the rules on contracts and the general rules on prescription and not the
rules on donations are applicable in the case at bar.

Under Article 1306 of the New Civil Code, the parties to a contract have the right "to establish
such stipulations, clauses, terms and conditions as they may deem convenient, provided they are
not contrary to law, morals, good customs, public order or public policy." Paragraph 11 of the
"Revival of Donation Intervivos, has provided that "violation of any of the conditions (herein)
shall cause the automatic reversion of the donated area to the donor, his heirs, . . ., without the
need of executing any other document for that purpose and without obligation on the part of
the DONOR". Said stipulation not being contrary to law, morals, good customs, public order or
public policy, is valid and binding upon the foundation who voluntarily consented thereto.

The validity of the stipulation in the contract providing for the automatic reversion of the donated
property to the donor upon non-compliance cannot be doubted. It is in the nature of an
agreement granting a party the right to rescind a contract unilaterally in case of breach, without
need of going to court. Upon the happening of the resolutory condition of non-compliance with
the conditions of the contract, the donation is automatically revoked without need of a judicial
declaration to that effect. In the case of University of the Philippines v. de los Angeles, L-28602,
September 29, 1970, 35 SCRA 102-107, it was held:

. . . There is nothing in the law that prohibits the parties from entering into
agreement that violation of the terms of the contract would cause cancellation
thereof. even without court intervention. In other words, it is not always
necessary for the injured party to resort to court for rescission of the contract
(Froilan v. Pan Oriental Shipping Co., et al.,
L-11897, 31 October 1964, 12 SCRA 276).
This was reiterated in the case of Angeles v. Calasanz, L-42283, March 18, 1985:

Well settled is, however, the rule that a judicial action for the rescission of a
contract is not necessary where the contract provides that it may be revoked and
cancelled for violation of any of its terms and conditions (Lopez v. Commissioner
of Customs, 37 SCRA 327, 334, and cases cited therein).

Resort to judicial action for rescission is obviously not contemplated. The validity
of the stipulation can not be seriously disputed. It is in the nature of a facultative
resolutory condition which in many cases has been upheld, by this court. (Ponce
Enrile v. Court of Appeals, 29 SCRA 504)

However, in the University of the Philippines v. Angeles case, (supra), it was held that in cases
where one of the parties contests or denies the rescission, "only the final award of the court of
competent jurisdiction can conclusively settle whether the resolution is proper or not." It was
held, thus:

. . . since in every case, where the extrajudicial resolution is contested, only the
final award of the court of competent jurisdiction can conclusively settle whether
the resolution was proper or not. It is in this sense that judicial action will be
necessary as without it, the extrajudicial resolution will remain contestable and
subject to judicial invalidation, unless attack thereon should become barred by
acquiescence, estoppel or prescription.

It is clear, however, that judicial intervention is necessary not for purposes of obtaining a judicial
declaration rescinding a contract already deemed rescinded by virtue of an agreement providing
for rescission even without judicial intervention, but in order to determine whether or not the
recession was proper.

The case of Parks v. Province of Tarlac, supra, relied upon by the trial court, is not applicable in
the case at bar. While the donation involved therein was also onerous, there was no agreement
in the donation providing for automatic rescission, thus, the need for a judicial declaration
revoking said donation.

The trial court was therefore not correct in holding that the complaint in the case at bar is barred
by prescription under Article 764 of the New Civil Code because Article 764 does not apply to
onerous donations.

As provided in the donation executed on April 9, 1971, complaince with the terms and conditions
of the contract of donation, shall be made within five (5) years from its execution. The complaint
which was filed on September 23, 1980 was then well within the ten (10) year prescriptive period
to enforce a written contract (Article 1144[1], New Civil Code), counted from April 9, 1976.
Finally, considering that the allegations in the complaint on the matter of the donee's non-
compliance with the conditions of the donation have been contested by private respondents who
claimed that improvements more valuable than the donated property had been introduced, a
judgment on the pleadings is not proper. Moreover, in the absence of a motion for judgment on
the pleadings, the court cannot motu proprio render such judgment. Section 1 of Rule 19
provides: "Where an answer fails to tender an issue, or otherwise admits the material allegations
of the adverse party's pleading, the court may, on motion of that party, direct judgment on such
pleading." (Emphasis supplied)

ACCORDINGLY, the petition is GRANTED. Civil Case No. 8624 is hereby ordered reinstated.
Respondent judge is ordered to conduct a trial on the merits to determine the propriety of the
revocation of the subject donation.

SO ORDERED.

Narvasa, Cruz, Gancayco and Grio-Aquino, JJ., concur.

 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 210987 November 24, 2014

THE PHILIPPINE AMERICAN LIFE AND GENERAL INSURANCE COMPANY, Petitioner,

vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, Respondents.

DECISION

VELASCO, JR., J.:

Nature of the Case

Before the Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court assailing
and seeking the reversal of the Resolutions of the Court of Appeals (CA) in CA-G.R. SP No. 127984,
dated May 23, 20131 and January 21, 2014, which dismissed outright the petitioner's appeal from
the Secretary of Finance's review of BIR Ruling No. 015-122 for lack of jurisdiction.

The Facts

Petitioner The Philippine American Life and General Insurance Company (Philamlife) used to own
498,590 Class A shares in Philam Care Health Systems, Inc. (PhilamCare), representing 49.89% of
the latter's outstanding capital stock. In 2009, petitioner, in a bid to divest itself of its interests in
the health maintenance organization industry, offered to sell its shareholdings in PhilamCare
through competitive bidding. Thus, on September 24, 2009, petitioner's Class A shares were sold
for USD 2,190,000, or PhP 104,259,330 based on the prevailing exchange rate at the time of the
sale, to STI Investments, Inc., who emerged as the highest bidder.3

After the sale was completed and the necessary documentary stamp and capital gains taxes were
paid, Philamlife filed an application for a certificate authorizing registration/tax clearance with
the Bureau of Internal Revenue (BIR) Large Taxpayers Service Division to facilitate the transfer of
the shares. Months later, petitioner was informed that it needed to secure a BIR ruling in
connection with its application due to potential donors tax liability. In compliance, petitioner, on
January 4, 2012, requested a ruling4 to confirm that the sale was not subject to donors tax,
pointing out, in its request, the following: that the transaction cannot attract donors tax liability
since there was no donative intent and,ergo, no taxable donation, citing BIR Ruling [DA-(DT-065)
715-09] dated November 27, 2009;5 that the shares were sold at their actual fair market value
and at arms length; that as long as the transaction conducted is at arms lengthsuch that a
bona fide business arrangement of the dealings is done inthe ordinary course of businessa sale
for less than an adequate consideration is not subject to donors tax; and that donors tax does
not apply to saleof shares sold in an open bidding process.

On January 4, 2012, however, respondent Commissioner on Internal Revenue (Commissioner)

denied Philamlifes request through BIR Ruling No. 015-12. As determined by the Commissioner,
the selling price of the shares thus sold was lower than their book value based on the financial
statements of PhilamCare as of the end of 2008.6 As such, the Commisioner held, donors tax
became imposable on the price difference pursuant to Sec. 100 of the National Internal Revenue
Code (NIRC), viz:

SEC. 100. Transfer for Less Than Adequate and full Consideration.- Where property, other than
real property referred to in Section 24(D), is transferred for less than an adequate and full
consideration in money or moneys worth, then the amount by which the fair market value of
the property exceeded the value of the consideration shall, for the purpose of the tax imposed
by this Chapter, be deemed a gift, and shall be included in computing the amount of gifts made
during the calendar year.

The afore-quoted provision, the Commissioner added, is implemented by Revenue Regulation 6-

2008 (RR 6-2008), which provides:

SEC. 7. SALE, BARTER OR EXCHANGE OF SHARES OF STOCK NOT TRADED THROUGH A LOCAL
STOCK EXCHANGE PURSUANT TO SECS. 24(C), 25(A)(3), 25(B), 27(D)(2), 28(A)(7)(c), 28(B)(5)(c)
OF THE TAX CODE, AS AMENDED.

xxxx

(c) Determination of Amount and Recognition of Gain or Loss

(c.1) In the case of cash sale, the selling price shall be the consideration per deed of sale.

xxxx

(c.1.4) In case the fair market value of the shares of stock sold, bartered, or exchanged is greater
than the amount of money and/or fair market value of the property received, the excess of the
fair market value of the shares of stock sold, bartered or exchanged overthe amount of money
and the fair market value of the property, if any, received as consideration shall be deemed a gift
subject to the donorstax under Section 100 of the Tax Code, as amended.

xxxx

(c.2) Definition of fair market valueof Shares of Stock. For purposes of this Section, fair market
value of the share of stock sold shall be:

xxxx
(c.2.2) In the case of shares of stock not listed and traded in the local stock exchanges, the book
value of the shares of stock as shown in the financial statements duly certified by an independent
certified public accountant nearest to the date of sale shall be the fair market value.

In view of the foregoing, the Commissioner ruled that the difference between the book value and
the selling price in the sales transaction is taxable donation subject to a 30% donors tax under
Section 99(B) of the NIRC.7Respondent Commissioner likewise held that BIR Ruling [DA-(DT-065)
715-09], on which petitioner anchored its claim, has already been revoked by Revenue
Memorandum Circular (RMC) No. 25-2011.8

Aggrieved, petitioner requested respondent Secretary of Finance (Secretary) to review BIR Ruling
No. 015-12, but to no avail. For on November 26, 2012, respondent Secretary affirmed the
Commissioners assailed ruling in its entirety.9

Ruling of the Court of Appeals

Not contented with the adverse results, petitioner elevated the case to the CA via a petition for
review under Rule 43, assigning the following errors:10

A.

The Honorable Secretary of Finance gravely erred in not finding that the application of Section
7(c.2.2) of RR 06-08 in the Assailed Ruling and RMC 25-11 is void insofar as it altersthe meaning
and scope of Section 100 of the Tax Code.

B.

The Honorable Secretary of Finance gravely erred in finding that Section 100 of the Tax Code is
applicable tothe sale of the Sale of Shares.

1.

The Sale of Shares were sold at their fair market value and for fair and full consideration
in money or moneys worth.

2.

The sale of the Sale Shares is a bona fide business transaction without any donative intent
and is therefore beyond the ambit of Section 100 of the Tax Code.

3.
 It is superfluous for the BIR to require an express provision for the exemption of the sale
of the Sale Shares from donors tax since Section 100 of the Tax Code does not explicitly
subject the transaction to donors tax.

C.

The Honorable Secretary of Finance gravely erred in failing to find that in the absence of any of
the grounds mentioned in Section 246 of the Tax Code, rules and regulations, rulings or circulars
such as RMC 25-11 cannot be given retroactive application to the prejudice of Philamlife.

On May 23, 2013, the CA issued the assailed Resolution dismissing the CA Petition, thusly:

WHEREFORE, the Petition for Review dated January 9, 2013 is DISMISSED for lack of jurisdiction.

SO ORDERED.

In disposing of the CA petition, the appellate court ratiocinated that it is the Court of Tax Appeals
(CTA), pursuant to Sec. 7(a)(1) of Republic Act No. 1125 (RA 1125),11 as amended, which has
jurisdiction over the issues raised. The outright dismissal, so the CA held, is predicated on the
postulate that BIR Ruling No. 015-12 was issued in the exercise of the Commissioners power to
interpret the NIRC and other tax laws. Consequently, requesting for its review can be categorized
as "other matters arising under the NIRC or other laws administered by the BIR," which is under
the jurisdiction of the CTA, not the CA.

Philamlife eventually sought reconsideration but the CA, in its equally assailed January 21, 2014
Resolution, maintained its earlier position. Hence, the instant recourse.

Issues

Stripped to the essentials, the petition raises the following issues in both procedure and
substance:

1. Whether or not the CA erred in dismissing the CA Petition for lack of jurisdiction; and

2. Whether or not the price difference in petitioners adverted sale of shares in

PhilamCare attracts donors tax.

Procedural Arguments

a. Petitioners contentions

Insisting on the propriety of the interposed CA petition, Philamlife, while conceding that
respondent Commissioner issued BIR Ruling No. 015-12 in accordance with her authority to
interpret tax laws, argued nonetheless that such ruling is subject to review by the Secretary of
Finance under Sec. 4 of the NIRC, to wit:

SECTION 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. The
power to interpret the provisions of this Code and other tax laws shall be under the exclusive and
original jurisdiction of the Commissioner, subject to review by the Secretary of Finance.

The power to decide disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties imposed in relation thereto, or other matters arising under this Code orother
laws or portions thereof administered by the Bureau of Internal Revenue is vested in the
Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals.
Petitioner postulates that there is a need to differentiate the rulings promulgated by the
respondent Commissioner relating to those rendered under the first paragraph of Sec. 4 of the
NIRC, which are appealable to the Secretary of Finance, from those rendered under the second
paragraph of Sec. 4 of the NIRC, which are subject to review on appeal with the CTA.

This distinction, petitioner argues, is readily made apparent by Department Order No. 7-02,12 as
circularized by RMC No. 40-A-02.

Philamlife further averred that Sec.7 of RA 1125, as amended, does not find application in the
case at bar since it only governs appeals from the Commissioners rulings under the second
paragraph and does not encompass rulings from the Secretary of Finance in the exercise of his
power of review under the first, as what was elevated to the CA. It added that under RA 1125, as
amended, the only decisions of the Secretary appealable to the CTA are those rendered in
customs cases elevated to him automatically under Section 2315 of the Tariff and Customs
Code.13

There is, thus, a gap in the law when the NIRC, as couched, and RA 1125, as amended, failed to
supply where the rulings of the Secretary in its exercise of its power of review under Sec. 4 of the
NIRC are appealable to. This gap, petitioner submits, was remedied by British American Tobacco
v. Camacho14 wherein the Court ruled that where what is assailed is the validity or
constitutionality of a law, or a rule or regulation issued by the administrative agency, the regular
courts have jurisdiction to pass upon the same.

In sum, appeals questioning the decisions of the Secretary of Finance in the exercise of its power
of review under Sec. 4 of the NIRC are not within the CTAs limited special jurisdiction and,
according to petitioner, are appealable to the CA via a Rule 43 petition for review.

b. Respondents contentions

Before the CA, respondents countered petitioners procedural arguments by claiming that even
assuming arguendo that the CTA does not have jurisdiction over the case, Philamlife,
nevertheless,committed a fatal error when it failed to appeal the Secretary of Finances ruling to
the Office of the President (OP). As made apparent by the rules, the Department of Finance is
not among the agencies and quasi-judicial bodies enumerated under Sec. 1, Rule 43 of the Rules
of Court whose decisions and rulings are appealable through a petition for review.15 This is in
stark contrast to the OPs specific mention under the same provision, so respondents pointed
out.

To further reinforce their argument, respondents cite the Presidents power of review emanating
from his power of control as enshrined under Sec. 17 of Article VII of the Constitution, which
reads:

Section 17.The President shall have control of all the executive departments, bureaus, and
offices. He shall ensure that the laws be faithfully executed.

The nature and extent of the Presidents constitutionally granted power of control have
beendefined in a plethora of cases, most recently in Elma v. Jacobi,16 wherein it was held that:

x x x This power of control, which even Congress cannot limit, let alone withdraw, means the
power of the Chief Executive to review, alter, modify, nullify, or set aside what a subordinate,
e.g., members of the Cabinet and heads of line agencies, had done in the performance of their
duties and to substitute the judgment of the former for that of the latter.

In their Comment on the instant petition, however, respondents asseverate that the CA did not
err in its holding respecting the CTAs jurisdiction over the controversy.

The Courts Ruling

The petition is unmeritorious.

Reviews by the Secretary of Finance pursuant to Sec. 4 of the NIRC are appealable to the CTA

To recapitulate, three different, if not conflicting, positions as indicated below have been
advanced by the parties and by the CA as the proper remedy open for assailing respondents
rulings:

1. Petitioners: The ruling of the Commissioner is subject to review by the Secretary under
Sec. 4 of the NIRC, and that of the Secretary to the CA via Rule 43;

2. Respondents: The ruling of the Commissioner is subject to review by the Secretary

under Sec. 4 of the NIRC, and that of the Secretary to the Office of the President before
appealing to the CA via a Rule 43 petition; and

3. CA: The ruling of the Commissioner is subject to review by the CTA.

We now resolve.
Preliminarily, it bears stressing that there is no dispute that what is involved herein is the
respondent Commissioners exercise of power under the first paragraph of Sec. 4 of the NIRC
the power to interpret tax laws. This, in fact, was recognized by the appellate court itself, but
erroneously held that her action in the exercise of such power is appealable directly to the CTA.
As correctly pointed out by petitioner, Sec. 4 of the NIRC readily provides that the Commissioners
power to interpret the provisions of this Code and other tax laws is subject to review by the
Secretary of Finance. The issue that now arises is thiswhere does one seek immediate recourse
from the adverse ruling of the Secretary of Finance in its exercise of its power of review under
Sec. 4?

Admittedly, there is no provision in law that expressly provides where exactly the ruling of the
Secretary of Finance under the adverted NIRC provision is appealable to. However, We find that
Sec. 7(a)(1) of RA 1125, as amended, addresses the seeming gap in the law asit vests the CTA,
albeit impliedly, with jurisdiction over the CA petition as "other matters" arising under the NIRC
or other laws administered by the BIR. As stated:

Sec. 7. Jurisdiction.- The CTA shall exercise:

a. Exclusive appellate jurisdiction to review by appeal, as herein provided:

1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments,

refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other
matters arising under the National Internal Revenue or other laws administered by the Bureau
of Internal Revenue. (emphasis supplied)

Even though the provision suggests that it only covers rulings of the Commissioner, We hold that
it is, nonetheless, sufficient enough to include appeals from the Secretarys review under Sec. 4
of the NIRC.

It is axiomatic that laws should be given a reasonable interpretation which does not defeat the
very purpose for which they were passed.17 Courts should not follow the letter of a statute when
to do so would depart from the true intent of the legislature or would otherwise yield conclusions
inconsistent with the purpose of the act.18 This Court has, in many cases involving the
construction of statutes, cautioned against narrowly interpreting a statute as to defeat the
purpose of the legislator, and rejected the literal interpretation of statutes if todo so would lead
to unjust or absurd results.19

Indeed, to leave undetermined the mode of appeal from the Secretary of Finance would be an
injustice to taxpayers prejudiced by his adverse rulings. To remedy this situation, Weimply from
the purpose of RA 1125 and its amendatory laws that the CTA is the proper forum with which to
institute the appeal. This is not, and should not, in any way, be taken as a derogation of the power
of the Office of President but merely as recognition that matters calling for technical knowledge
should be handled by the agency or quasi-judicial body with specialization over the controversy.
As the specialized quasi-judicial agency mandated to adjudicate tax, customs, and assessment
cases, there can be no other court of appellate jurisdiction that can decide the issues raised inthe
CA petition, which involves the tax treatment of the shares of stocks sold. Petitioner, though,
nextinvites attention to the ruling in Ursal v. Court of Tax Appeals20 to argue against granting the
CTA jurisdiction by implication, viz:

Republic Act No. 1125 creating the Court of Tax Appeals did not grant it blanket authority to
decide any and all tax disputes. Defining such special courts jurisdiction, the Act necessarily
limited its authority to those matters enumerated therein. Inline with this idea we recently
approved said courts order rejecting an appeal to it by Lopez & Sons from the decision of the
Collector ofCustoms, because in our opinion its jurisdiction extended only to a review of the
decisions of the Commissioner of Customs, as provided bythe statute and not to decisions of
the Collector of Customs. (Lopez & Sons vs. The Court of Tax Appeals, 100 Phil., 850, 53 Off. Gaz.,
[10] 3065).

xxxx

x x x Republic Act No. 1125 is a complete law by itself and expressly enumerates the matters
which the Court of Tax Appeals may consider; such enumeration excludes all others by
implication. Expressio unius est exclusio alterius.

Petitioners contention is untenable. Lest the ruling in Ursalbe taken out of context, but worse as
a precedent, it must be noted that the primary reason for the dismissal of the said case was that
the petitioner therein lacked the personality to file the suit with the CTA because he was not
adversely affected by a decision or ruling of the Collector of Internal Revenue, as was required
under Sec. 11 of RA 1125.21 As held:

We share the view that the assessor had no personality to resort to the Court of Tax Appeals. The
rulings of the Board of Assessment Appeals did not "adversely affect" him. At most it was the City
of Cebu that had been adversely affected in the sense that it could not thereafter collect higher
realty taxes from the abovementioned property owners. His opinion, it is true had been
overruled; but the overruling inflicted no material damage upon him or his office. And the Court
of Tax Appeals was not created to decide mere conflicts of opinion between administrative
officers or agencies. Imagine an income tax examiner resorting to the Court of Tax Appeals
whenever the Collector of Internal Revenue modifies, or lower his assessment on the return of a
tax payer!22

The appellate power of the CTA includes certiorari

Petitioner is quick to point out, however, that the grounds raised in its CA petition included the
nullity of Section 7(c.2.2) of RR 06-08 and RMC 25-11. In an attempt to divest the CTA jurisdiction
over the controversy, petitioner then cites British American Tobacco, wherein this Court has
expounded on the limited jurisdiction of the CTA in the following wise:
While the above statute confers on the CTA jurisdiction to resolve tax disputes in general, this
does not include cases where the constitutionality of a law or rule is challenged. Where what is
assailed is the validity or constitutionality of a law, or a rule or regulation issued by the
administrative agency in the performance of its quasi legislative function, the regular courts have
jurisdiction to pass upon the same. The determination of whether a specific rule or set of rules
issued by an administrative agency contravenes the law or the constitution is within the
jurisdiction of the regular courts. Indeed, the Constitution vests the power of judicial review or
the power to declare a law, treaty, international or executive agreement, presidential decree,
order, instruction, ordinance, or regulation inthe courts, including the regional trial courts. This
is within the scope of judicial power, which includes the authority of the courts to determine inan
appropriate action the validity of the acts of the political departments. Judicial power includes
the duty of the courts of justice to settle actual controversies involving rights which are legally
demandable and enforceable, and to determine whether or not there has been a grave abuse of
discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality
of the Government.23

Vis-a-vis British American Tobacco, it bears to stress what appears to be a contrasting ruling in
Asia International Auctioneers, Inc. v. Parayno, Jr., to wit:

Similarly, in CIR v. Leal, pursuant to Section 116 of Presidential Decree No. 1158 (The National
Internal Revenue Code, as amended) which states that "[d]ealers in securities shall pay a tax
equivalent to six (6%) per centum of their gross income. Lending investors shall pay a tax
equivalent to five (5%) per cent, of their gross income," the CIR issued Revenue Memorandum
Order (RMO) No. 15-91 imposing 5% lending investors tax on pawnshops based on their gross
income and requiring all investigating units of the BIR to investigate and assess the lending
investors tax due from them. The issuance of RMO No. 15-91 was an offshoot of the CIRs finding
that the pawnshop business is akin to that of "lending investors" as defined in Section 157(u) of
the Tax Code. Subsequently, the CIR issued RMC No. 43-91 subjecting pawn tickets to
documentary stamp tax. Respondent therein, Josefina Leal, owner and operator of Josefinas
Pawnshop, asked for a reconsideration of both RMO No. 15-91 and RMC No. 43-91, but the same
was denied by petitioner CIR. Leal then filed a petition for prohibition with the RTC of San Mateo,
Rizal, seeking to prohibit petitioner CIR from implementing the revenue orders. The CIR, through
the OSG, filed a motion to dismiss on the ground of lack of jurisdiction. The RTC denied the
motion. Petitioner filed a petition for certiorari and prohibition with the CA which dismissed the
petition "for lack of basis." In reversing the CA, dissolving the Writ of Preliminary Injunction issued
by the trial court and ordering the dismissal of the case before the trial court, the Supreme Court
held that "[t]he questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or opinions
of the Commissioner implementing the Tax Code on the taxability of pawnshops." They were
issued pursuant to the CIRs power under Section 245 of the Tax Code "to make rulings or
opinions in connection with the implementation of the provisions of internal revenue laws,
including ruling on the classification of articles of sales and similar purposes."The Court held that
under R.A. No. 1125 (An Act Creating the Court of Tax Appeals), as amended, such rulings of the
CIR are appealable to the CTA.
In the case at bar, the assailed revenue regulations and revenue memorandum circulars are
actually rulings or opinions of the CIR on the tax treatment of motor vehicles sold at public
auction within the SSEZ to implement Section 12 of R.A. No. 7227 which provides that
"exportation or removal of goods from the territory of the [SSEZ] to the other parts of the
Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff
Codeand other relevant tax laws of the Philippines." They were issued pursuant to the power of
the CIR under Section 4 of the National Internal Revenue Code x x x.24 (emphasis added)

The respective teachings in British American Tobacco and Asia International Auctioneers, at first
blush, appear to bear no conflictthat when the validity or constitutionality of an administrative
rule or regulation is assailed, the regular courts have jurisdiction; and if what is assailed are
rulings or opinions of the Commissioner on tax treatments, jurisdiction over the controversy is
lodged with the CTA. The problem with the above postulates, however, is that they failed to take
into consideration one crucial pointa taxpayer can raise both issues simultaneously.

Petitioner avers that there is now a trend wherein both the CTA and the CA disclaim jurisdiction
over tax cases: on the one hand, mere prayer for the declaration of a tax measures
unconstitutionality or invalidity before the CTA can result in a petitions outright dismissal, and
on the other hand, the CA will likewise dismiss the same petition should it find that the primary
issue is not the tax measures validity but the assessment or taxability of the transaction or
subject involved. To illustrate this point, petitioner cites the assailed Resolution, thusly:
Admittedly, in British American Tobacco vs. Camacho, the Supreme Court has ruled that the
determination of whether a specific rule or set of rules issued by an administrative agency
contravenes the law or the constitution is within the jurisdiction of the regular courts, not the
CTA.

xxxx

Petitioner essentially questions the CIRs ruling that Petitioners sale of shares is a taxable
donation under Sec. 100 of the NIRC. The validity of Sec. 100 of the NIRC, Sec. 7 (C.2.2) and RMC
25-11 is merely questioned incidentally since it was used by the CIR as bases for its unfavourable
opinion. Clearly, the Petition involves an issue on the taxability of the transaction rather than a
direct attack on the constitutionality of Sec. 100, Sec.7 (c.2.2.) of RR 06-08 and RMC 25-11. Thus,
the instant Petition properly pertains to the CTA under Sec. 7 of RA 9282.

As a result of the seemingly conflicting pronouncements, petitioner submits that taxpayers are
now at a quandary on what mode of appeal should be taken, to which court or agency it should
be filed, and which case law should be followed.

Petitioners above submission is specious.

In the recent case of City of Manila v. Grecia-Cuerdo,25 the Court en banc has ruled that the CTA
now has the power of certiorari in cases within its appellate jurisdiction. To elucidate:
The prevailing doctrine is that the authority to issue writs of certiorari involves the exercise of
original jurisdiction which must be expressly conferred by the Constitution or by law and cannot
be implied from the mere existence of appellate jurisdiction. Thus, x x x this Court has ruled
against the jurisdiction of courts or tribunals over petitions for certiorari on the ground that there
is no law which expressly gives these tribunals such power. Itmust be observed, however, that x
x x these rulings pertain not to regular courts but to tribunals exercising quasijudicial powers.
With respect tothe Sandiganbayan, Republic Act No. 8249 now provides that the special criminal
court has exclusive original jurisdiction over petitions for the issuance of the writs of mandamus,
prohibition, certiorari, habeas corpus, injunctions, and other ancillary writs and processes in aid
of its appellate jurisdiction.

In the same manner, Section 5 (1), Article VIII of the 1987 Constitution grants power to the
Supreme Court, in the exercise of its original jurisdiction, to issue writs of certiorari, prohibition
and mandamus. With respect to the Court of Appeals, Section 9 (1) of Batas Pambansa Blg. 129
(BP 129) gives the appellate court, also in the exercise of its original jurisdiction, the power to
issue, among others, a writ of certiorari, whether or not in aid of its appellate jurisdiction. As to
Regional Trial Courts, the power to issue a writ of certiorari, in the exercise of their original
jurisdiction, is provided under Section 21 of BP 129.

The foregoing notwithstanding, while there is no express grant of such power, with respect to
the CTA, Section 1, Article VIII of the 1987 Constitution provides, nonetheless, that judicial power
shall be vested in one Supreme Court and in such lower courts as may be established by law and
that judicial power includes the duty of the courts of justice to settle actual controversies
involving rights which are legally demandable and enforceable, and to determine whether or not
there has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part
of any branch or instrumentality of the Government.

On the strength of the above constitutional provisions, it can be fairly interpreted that the power
of the CTA includes that of determining whether or not there has been grave abuse of discretion
amounting to lack or excess of jurisdiction on the part of the RTC in issuing an interlocutory order
in cases falling within the exclusive appellate jurisdiction of the tax court. It, thus, follows that
the CTA, by constitutional mandate, is vested with jurisdiction to issue writs of certiorari in these
cases.

Indeed, in order for any appellate court to effectively exercise its appellate jurisdiction, it must
have the authority to issue, among others, a writ of certiorari. In transferring exclusive
jurisdiction over appealed tax cases to the CTA, it can reasonably be assumed that the law
intended to transfer also such power as is deemed necessary, if not indispensable, in aid of such
appellate jurisdiction. There is no perceivable reason why the transfer should only be considered
as partial, not total. (emphasis added)

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

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

The price difference is subject to donor's tax

Petitioner's substantive arguments are unavailing. The absence of donative intent, if that be the
case, does not exempt the sales of stock transaction from donor's tax since Sec. 100 of the NIRC
categorically states that the amount by which the fair market value of the property exceeded the
value of the consideration shall be deemed a gift.1wphi1 Thus, even if there is no actual
donation, the difference in price is considered a donation by fiction of law.

Moreover, Sec. 7(c.2.2) of RR 06-08 does not alter Sec. 100 of the NIRC but merely sets the
parameters for determining the "fair market value" of a sale of stocks. Such issuance was made
pursuant to the Commissioner's power to interpret tax laws and to promulgate rules and
regulations for their implementation.

Lastly, petitioner is mistaken in stating that RMC 25-11, having been issued after the sale, was
being applied retroactively in contravention to Sec. 246 of the NIRC. 26 Instead, it merely called
for the strict application of Sec. 100, which was already in force the moment the NIRC was
enacted.

WHEREFORE, the petition is hereby DISMISSED. The Resolutions of the Court of Appeals in CA-
G.R. SP No. 127984 dated May 23, 2013 and January 21, 2014 are hereby AFFIRMED.

SO ORDERED.

PRESBITERO J. VELASCO, JR.

Associate Justice
 FIRST DIVISION

[G.R. No. 120721. February 23, 2005]

MANUEL G. ABELLO, JOSE C. CONCEPCION, TEODORO D. REGALA, AVELINO V.

CRUZ, petitioners, vs. COMMISSIONER OF INTERNAL REVENUE and COURT OF
APPEALS, respondents.

DECISION
AZCUNA, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Civil Procedure,
assailing the decision of the Court of Appeals in CA G.R. SP No. 27134, entitled Comissioner of
Internal Revenue v. Manuel G. Abello, Jose C. Concepcion, Teodoro D. Regala, Avelino V. Cruz
and Court of Tax Appeals, which reversed and set aside the decision of the Court of Tax Appeals
(CTA), ordering the Commissioner of Internal Revenue (Commissioner) to withdraw his letters
dated April 21, 1988 and August 4, 1988 assessing donors taxes and to desist from collecting
donors taxes from petitioners.
During the 1987 national elections, petitioners, who are partners in the Angara, Abello,
Concepcion, Regala and Cruz (ACCRA) law firm, contributed P882,661.31 each to the campaign
funds of Senator Edgardo Angara, then running for the Senate. In letters dated April 21, 1988,
the Bureau of Internal Revenue (BIR) assessed each of the petitioners P263,032.66 for their
contributions. On August 2, 1988, petitioners questioned the assessment through a letter to the
BIR. They claimed that political or electoral contributions are not considered gifts under the
National Internal Revenue Code (NIRC), and that, therefore, they are not liable for donors tax.
The claim for exemption was denied by the Commissioner.[1]
On September 12, 1988, petitioners filed a petition for review with the CTA, which was
decided on October 7, 1991 in favor of the petitioners. As aforestated, the CTA ordered the
Commissioner to desist from collecting donors taxes from the petitioners.[2]
On appeal, the Court of Appeals reversed and set aside the CTA decision on April 20,
1994.[3] The appellate Court ordered the petitioners to pay donors tax amounting to P263,032.66
each, reasoning as follows:

The National Internal Revenue Code, as amended, provides:

Sec. 91. Imposition of Tax. (a) There shall be levied, assessed, collected, and paid upon the
transfer by any person, resident, or non-resident, of the property by gift, a tax, computed as
provided in Section 92. (b) The tax shall apply whether the transfer is in trust or otherwise,
whether the gift is direct or indirect, and whether the property is real or personal, tangible or
intangible.

Pursuant to the above-quoted provisions of law, the transfer of property by gift, whether the
transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property
is real or personal, tangible or intangible, is subject to donors or gift tax.

A gift is generally defined as a voluntary transfer of property by one to another without any
consideration or compensation therefor (28 C.J. 620; Santos vs. Robledo, 28 Phil. 250).

In the instant case, the contributions are voluntary transfers of property in the form of money
from private respondents to Sen. Angara, without considerations therefor. Hence, they squarely
fall under the definition of donation or gift.

As correctly pointed out by the Solicitor General:

The fact that the contributions were given to be used as campaign funds of Sen. Angara does not
affect the character of the fund transfers as donation or gift. There was thereby no retention of
control over the disposition of the contributions. There was simply an indication of the purpose
for which they were to be used. For as long as the contributions were used for the purpose for
which they were intended, Sen. Angara had complete and absolute power to dispose of the
contributions. He was fully entitled to the economic benefits of the contributions.

Section 91 of the Tax Code is very clear. A donors or gift tax is imposed on the transfer of property
by gift.

The Bureau of Internal Revenue issued Ruling No. 344 on July 20, 1988, which reads:

Political Contributions. For internal revenue purposes, political contributions in the Philippines
are considered taxable gift rather than taxable income. This is so, because a political contribution
is indubitably not intended by the giver or contributor as a return of value or made because of
any intent to repay another what is his due, but bestowed only because of motives of
philanthropy or charity. His purpose is to give and to bolster the morals, the winning chance of
the candidate and/or his party, and not to employ or buy. On the other hand, the recipient-donee
does not regard himself as exchanging his services or his product for the money contributed. But
more importantly he receives financial advantages gratuitously.

When the U.S. gift tax law was adopted in the Philippines (before May 7, 1974), the taxability of
political contributions was, admittedly, an unsettled issue; hence, it cannot be presumed that the
Philippine Congress then had intended to consider or treat political contributions as non-taxable
gifts when it adopted the said gift tax law. Moreover, well-settled is the rule that the Philippines
need not necessarily adopt the present rule or construction in the United States on the matter.
Generally, statutes of different states relating to the same class of persons or things or having
the same purposes are not considered to be in pari materia because it cannot be justifiably
presumed that the legislature had them in mind when enacting the provision being construed.
(5206, Sutherland, Statutory Construction, p. 546.) Accordingly, in the absence of an express
exempting provision of law, political contributions in the Philippines are subject to the donors
gift tax. (cited in National Internal Revenue Code Annotated by Hector S. de Leon, 1991 ed., p.
290).

In the light of the above BIR Ruling, it is clear that the political contributions of the private
respondents to Sen. Edgardo Angara are taxable gifts. The vagueness of the law as to what
comprise the gift subject to tax was made concrete by the above-quoted BIR ruling. Hence, there
is no doubt that political contributions are taxable gifts.[4]

Petitioners filed a motion for reconsideration, which the Court of Appeals denied in its
resolution of June 16, 1995.[5]
Petitioners thereupon filed the instant petition on July 26, 1995. Raised are the following
issues:
1. DID THE HONORABLE COURT OF APPEALS ERR WHEN IT FAILED TO CONSIDER IN ITS
DECISION THE PURPOSE BEHIND THE ENACTMENT OF OUR GIFT TAX LAW?
2. DID THE HONORABLE COURT OF APPEALS ERR IN NOT CONSIDERING THE INTENTION
OF THE GIVERS IN DETERMINING WHETHER OR NOT THE PETITIONERS POLITICAL
CONTRIBUTIONS WERE GIFTS SUBJECT TO DONORS TAX?
3. DID THE HONORABLE COURT OF APPEALS ERR WHEN IT FAILED TO CONSIDER THE
DEFINITION OF AN ELECTORAL CONTRIBUTION UNDER THE OMNIBUS ELECTION
CODE IN DETERMINING WHETHER OR NOT POLITICAL CONTRIBUTIONS ARE
TAXABLE?
4. DID THE HONORABLE COURT OF APPEALS ERR IN NOT CONSIDERING THE
ADMINISTRATIVE PRACTICE OF CLOSE TO HALF A CENTURY OF NOT SUBJECTING
POLITICAL CONTRIBUTIONS TO DONORS TAX?
5. DID THE HONORABLE COURT OF APPEALS ERR IN NOT CONSIDERING THE AMERICAN
JURISPRUDENCE RELIED UPON BY THE COURT OF TAX APPEALS AND BY THE
PETITIONERS TO THE EFFECT THAT POLITICAL CONTRIBUTIONS ARE NOT TAXABLE
GIFTS?
6. DID THE HONORABLE COURT OF APPEALS ERR IN NOT APPLYING AMERICAN
JURISPRUDENCE ON THE GROUND THAT THIS WAS NOT KNOWN AT THE TIME THE
PHILIPPINES GIFT TAX LAW WAS ADOPTED IN 1939?
7. DID THE HONORABLE COURT OF APPEALS ERR IN RESOLVING THE CASE MAINLY ON
THE BASIS OF A RULING ISSUED BY THE RESPONDENT ONLY AFTER THE
ASSESSMENTS HAD ALREADY BEEN MADE?
8. DID THE HONORABLE COURT OF APPEALS ERR WHEN IT DID NOT CONSTRUE THE GIFT
TAX LAW LIBERALLY IN FAVOR OF THE TAXPAYER AND STRICLTY AGAINST THE
 GOVERNMENT IN ACCORDANCE WITH APPLICABLE PRINCIPLES OF STATUTORY
CONSTRUCTION?[6]

First, Fifth and Sixth Issues

Section 91 of the National Internal Revenue Code (NIRC) reads:

(A) There shall be levied, assessed, collected and paid upon the transfer by any person,
resident or nonresident, of the property by gift, a tax, computed as provided in
Section 92

(B) The tax shall apply whether the transfer is in trust or otherwise, whether the gift is
direct or indirect, and whether the property is real or personal, tangible or
intangible.

The NIRC does not define transfer of property by gift. However, Article 18 of the Civil Code,
states:

In matters which are governed by the Code of Commerce and special laws, their deficiency shall
be supplied by the provisions of this Code.

Thus, reference may be made to the definition of a donation in the Civil Code. Article 725 of said
Code defines donation as:

. . . an act of liberality whereby a person disposes gratuitously of a thing or right in favor of

another, who accepts it.

Donation has the following elements: (a) the reduction of the patrimony of the donor; (b) the
increase in the patrimony of the donee; and, (c) the intent to do an act of liberality or animus
donandi.[7]
The present case falls squarely within the definition of a donation. Petitioners, the late
Manuel G. Abello[8], Jose C. Concepcion, Teodoro D. Regala and Avelino V. Cruz, each
gave P882,661.31 to the campaign funds of Senator Edgardo Angara, without any material
consideration. All three elements of a donation are present. The patrimony of the four petitioners
were reduced by P882,661.31 each. Senator Edgardo Angaras patrimony correspondingly
increased by P3,530,645.24[9]. There was intent to do an act of liberality or animus donandi was
present since each of the petitioners gave their contributions without any consideration.
Taken together with the Civil Code definition of donation, Section 91 of the NIRC is clear and
unambiguous, thereby leaving no room for construction. In Rizal Commercial Banking
Corporation v. Intermediate Appellate Court[10] the Court enunciated:
It bears stressing that the first and fundamental duty of the Court is to apply the law. When the
law is clear and free from any doubt or ambiguity, there is no room for construction or
interpretation. As has been our consistent ruling, where the law speaks in clear and categorical
language, there is no occasion for interpretation; there is only room for application (Cebu
Portland Cement Co. v. Municipality of Naga, 24 SCRA 708 [1968])

Where the law is clear and unambiguous, it must be taken to mean exactly what it says and the
court has no choice but to see to it that its mandate is obeyed (Chartered Bank Employees
Association v. Ople, 138 SCRA 273 [1985]; Luzon Surety Co., Inc. v. De Garcia, 30 SCRA 111
[1969]; Quijano v. Development Bank of the Philippines, 35 SCRA 270 [1970]).

Only when the law is ambiguous or of doubtful meaning may the court interpret or construe its
true intent. Ambiguity is a condition of admitting two or more meanings, of being understood in
more than one way, or of referring to two or more things at the same time. A statute is ambiguous
if it is admissible of two or more possible meanings, in which case, the Court is called upon to
exercise one of its judicial functions, which is to interpret the law according to its true intent.

Second Issue

Since animus donandi or the intention to do an act of liberality is an essential element of a

donation, petitioners argue that it is important to look into the intention of the giver to determine
if a political contribution is a gift. Petitioners argument is not tenable. First of all, donative intent
is a creature of the mind. It cannot be perceived except by the material and tangible acts which
manifest its presence. This being the case, donative intent is presumed present when one gives
a part of ones patrimony to another without consideration. Second, donative intent is not
negated when the person donating has other intentions, motives or purposes which do not
contradict donative intent. This Court is not convinced that since the purpose of the contribution
was to help elect a candidate, there was no donative intent. Petitioners contribution of money
without any material consideration evinces animus donandi. The fact that their purpose for
donating was to aid in the election of the donee does not negate the presence of donative intent.

Third Issue

Petitioners maintain that the definition of an electoral contribution under the Omnibus
Election Code is essential to appreciate how a political contribution differs from a taxable
gift.[11]Section 94(a) of the said Code defines electoral contribution as follows:

The term "contribution" includes a gift, donation, subscription, loan, advance or deposit of
money or anything of value, or a contract, promise or agreement to contribute, whether or not
legally enforceable, made for the purpose of influencing the results of the elections but shall not
include services rendered without compensation by individuals volunteering a portion or all of
their time in behalf of a candidate or political party. It shall also include the use of facilities
voluntarily donated by other persons, the money value of which can be assessed based on the
rates prevailing in the area.

Since the purpose of an electoral contribution is to influence the results of the election,
petitioners again claim that donative intent is not present. Petitioners attempt to place the
barrier of mutual exclusivity between donative intent and the purpose of political contributions.
This Court reiterates that donative intent is not negated by the presence of other intentions,
motives or purposes which do not contradict donative intent.
Petitioners would distinguish a gift from a political donation by saying that the consideration
for a gift is the liberality of the donor, while the consideration for a political contribution is the
desire of the giver to influence the result of an election by supporting candidates who, in the
perception of the giver, would influence the shaping of government policies that would promote
the general welfare and economic well-being of the electorate, including the giver himself.
Petitioners attempt is strained. The fact that petitioners will somehow in the future benefit
from the election of the candidate to whom they contribute, in no way amounts to a valuable
material consideration so as to remove political contributions from the purview of a donation.
Senator Angara was under no obligation to benefit the petitioners. The proper performance of
his duties as a legislator is his obligation as an elected public servant of the Filipino people and
not a consideration for the political contributions he received. In fact, as a public servant, he may
even be called to enact laws that are contrary to the interests of his benefactors, for the benefit
of the greater good.
In fine, the purpose for which the sums of money were given, which was to fund the
campaign of Senator Angara in his bid for a senatorial seat, cannot be considered as a material
consideration so as to negate a donation.

Fourth Issue

Petitioners raise the fact that since 1939 when the first Tax Code was enacted, up to 1988
the BIR never attempted to subject political contributions to donors tax. They argue that:

. . . It is a familiar principle of law that prolonged practice by the government agency charged
with the execution of a statute, acquiesced in and relied upon by all concerned over an
appreciable period of time, is an authoritative interpretation thereof, entitled to great weight
and the highest respect. . . .[12]

This Court holds that the BIR is not precluded from making a new interpretation of the law,
especially when the old interpretation was flawed. It is a well-entrenched rule that

. . . erroneous application and enforcement of the law by public officers do not block subsequent
correct application of the statute (PLDT v. Collector of Internal Revenue, 90 Phil. 676), and that
the Government is never estopped by mistake or error on the part of its agents (Pineda v. Court
of First Instance of Tayabas, 52 Phil. 803, 807; Benguet Consolidated Mining Co. v. Pineda, 98
Phil. 711, 724).[13]

Seventh Issue

Petitioners question the fact that the Court of Appeals decision is based on a BIR ruling,
namely BIR Ruling No. 88-344, which was issued after the petitioners were assessed for donors
tax. This Court does not need to delve into this issue. It is immaterial whether or not the Court of
Appeals based its decision on the BIR ruling because it is not pivotal in deciding this case. As
discussed above, Section 91 (now Section 98) of the NIRC as supplemented by the definition of a
donation found in Article 725 of the Civil Code, is clear and unambiguous, and needs no further
elucidation.

Eighth Issue

Petitioners next contend that tax laws are construed liberally in favor of the taxpayer and
strictly against the government. This rule of construction, however, does not benefit petitioners
because, as stated, there is here no room for construction since the law is clear and unambiguous.
Finally, this Court takes note of the fact that subsequent to the donations involved in this
case, Congress approved Republic Act No. 7166 on November 25, 1991, providing in Section 13
thereof that political/electoral contributions, duly reported to the Commission on Elections, are
not subject to the payment of any gift tax. This all the more shows that the political contributions
herein made are subject to the payment of gift taxes, since the same were made prior to the
exempting legislation, and Republic Act No. 7166 provides no retroactive effect on this point.
WHEREFORE, the petition is DENIED and the assailed Decision and Resolution of the Court
of Appeals are AFFIRMED.
No costs.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Quisumbing, and Carpio, JJ., concur.
Ynares-Santiago, J., no part.