PHILIPPINE JURISPRUDENCE - FULL TEXT

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G.R. No. L-43082             June 18, 1937
PABLO LORENZO vs. JUAN POSADAS, JR.

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; Muñ oz & Co. vs. Hord, 12 Phil., 624;
Hongkong & Shanghai Banking Corporation vs. Rafferty, 39 Phil., 145; Luzon Stevedoring
Co. vs. Trinidad, 43 Phil., 803.) When proper, a tax statute should be construed to avoid
the possibilities of tax evasion. Construed this way, the statute, without resulting in
injustice to the taxpayer, becomes fair to the government.

That taxes must be collected promptly is a policy deeply intrenched in our tax system.
Thus, no court is allowed to grant injunction to restrain the collection of any internal
revenue tax ( sec. 1578, Revised Administrative Code; Sarasola vs. Trinidad, 40 Phil.,
252). In the case of Lim Co Chui vs. Posadas (47 Phil., 461), this court had occassion to
demonstrate trenchment adherence to this policy of the law. It held that "the fact that on
account of riots directed against the Chinese on October 18, 19, and 20, 1924, they were
prevented from praying their internal revenue taxes on time and by mutual agreement
closed their homes and stores and remained therein, does not authorize the Collector of
Internal Revenue to extend the time prescribed for the payment of the taxes or to accept
them without the additional penalty of twenty five per cent." (Syllabus, No. 3.)

". . . It is of the utmost importance," said the Supreme Court of the United States, ". . . that
the modes adopted to enforce the taxes levied should be interfered with as little as
possible. Any delay in the proceedings of the officers, upon whom the duty is developed
of collecting the taxes, may derange the operations of government, and thereby, cause
serious detriment to the public." (Dows vs. Chicago, 11 Wall., 108; 20 Law. ed., 65, 66;
Churchill and Tait vs. Rafferty, 32 Phil., 580.)

It results that the estate which plaintiff represents has been delinquent in the payment of
inheritance tax and, therefore, liable for the payment of interest and surcharge provided
by law in such cases.

The delinquency in payment occurred on March 10, 1924, the date when Moore became
trustee. The interest due should be computed from that date and it is error on the part of
the defendant to compute it one month later. The provisions cases is mandatory (see and
cf. Lim Co Chui vs. Posadas, supra), and neither the Collector of Internal Revenuen or this
court may remit or decrease such interest, no matter how heavily it may burden the
taxpayer.

To the tax and interest due and unpaid within ten days after the date of notice and
demand thereof by the Collector of Internal Revenue, a surcharge of twenty-five per
centum should be added (sec. 1544, subsec. (b), par. 2, Revised Administrative Code).
Demand was made by the Deputy Collector of Internal Revenue upon Moore in a
communiction dated October 16, 1931 (Exhibit 29). The date fixed for the payment of the
tax and interest was November 30, 1931. November 30 being an official holiday, the
tenth day fell on December 1, 1931. As the tax and interest due were not paid on that
date, the estate became liable for the payment of the surcharge.

In view of the foregoing, it becomes unnecessary for us to discuss the fifth error assigned
by the plaintiff in his brief.

We shall now compute the tax, together with the interest and surcharge due from the
estate of Thomas Hanley inaccordance with the conclusions we have reached.

At the time of his death, the deceased left real properties valued at P27,920 and personal
properties worth P1,465, or a total of P29,385. Deducting from this amount the sum of
P480.81, representing allowable deductions under secftion 1539 of the Revised
Administrative Code, we have P28,904.19 as the net value of the estate subject to
inheritance tax.

The primary tax, according to section 1536, subsection (c), of the Revised Administrative
Code, should be imposed at the rate of one per centum upon the first ten thousand pesos
and two per centum upon the amount by which the share exceed thirty thousand pesos,
plus an additional two hundred per centum. One per centum of ten thousand pesos is
P100. Two per centum of P18,904.19 is P378.08. Adding to these two sums an additional
two hundred per centum, or P965.16, we have as primary tax, correctly computed by the
defendant, the sum of P1,434.24.

To the primary tax thus computed should be added the sums collectible under section
1544 of the Revised Administrative Code. First should be added P1,465.31 which stands
for interest at the rate of twelve per centum per annum from March 10, 1924, the date of
delinquency, to September 15, 1932, the date of payment under protest, a period
covering 8 years, 6 months and 5 days. To the tax and interest thus computed should be
added the sum of P724.88, representing a surhcarge of 25 per cent on both the tax and
interest, and also P10, the compromise sum fixed by the defendant (Exh. 29), giving a
grand total of P3,634.43.

As the plaintiff has already paid the sum of P2,052.74, only the sums of P1,581.69 is
legally due from the estate. This last sum is P390.42 more than the amount demanded by
the defendant in his counterclaim. But, as we cannot give the defendant more than what
he claims, we must hold that the plaintiff is liable only in the sum of P1,191.27 the
amount stated in the counterclaim.

The judgment of the lower court is accordingly modified, with costs against the plaintiff
in both instances. So ordered.

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

The Lawphil Project - Arellano Law Foundation

PHILIPPINE JURISPRUDENCE - FULL TEXT

The Lawphil Project - Arellano Law Foundation
G.R. No. L-11622             January 28, 1961
COLLECTOR OF INTERNAL REVENUE vs. DOUGLAS FISHER, ET
AL.

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 (½) share of the
surviving spouse in the conjugal partnership property as diminished by the
obligations properly chargeable to such property should be deducted from the
net estate of the deceased Walter G. Stevenson, pursuant to Section 89-C of the
National Internal Revenue Code; (b) the intangible personal property belonging
to the estate of said Stevenson is exempt from inheritance tax, pursuant to the
provision of section 122 of the National Internal Revenue Code in relation to the
California Inheritance Tax Law but decedent's estate is not entitled to an
exemption of P4,000.00 in the computation of the estate tax; (c) for purposes of
estate and inheritance taxation the Baguio real estate of the spouses should be
valued at P52,200.00, and 210,000 shares of stock in the Mindanao Mother Lode
Mines, Inc. should be appraised at P0.38 per share; and (d) the estate shall be
entitled to a deduction of P2,000.00 for funeral expenses and judicial expenses of
P8,604.39.

From this decision, both parties appealed.

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

(1) Whether or not, in determining the taxable net estate of the decedent, one-half (½) of
the net estate should be deducted therefrom as the share of tile surviving spouse in
accordance with our law on conjugal partnership and in relation to section 89 (c) of the
National Internal revenue Code;

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

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

(4) Whether or not the real estate properties of the decedent located in Baguio City and
the 210,000 shares of stock in the Mindanao Mother Lode Mines, Inc., were correctly
appraised by the lower court;
(5) Whether or not the estate is entitled to the following deductions: P8,604.39 for
judicial and administration expenses; P2,086.52 for funeral expenses; P652.50 for real
estate taxes; and P10,0,22.47 representing the amount of indebtedness allegedly
incurred by the decedent during his lifetime; and

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

In deciding the first issue, the lower court applied a well-known doctrine in our civil law
that in the absence of any ante-nuptial agreement, the contracting parties are presumed
to have adopted the system of conjugal partnership as to the properties acquired during
their marriage. The application of this doctrine to the instant case is being disputed,
however, by petitioner Collector of Internal Revenue, who contends that pursuant to
Article 124 of the New Civil Code, the property relation of the spouses Stevensons ought
not to be determined by the Philippine law, but by the national law of the decedent
husband, in this case, the law of England. It is alleged by petitioner that English laws do
not recognize legal partnership between spouses, and that what obtains in that
jurisdiction is another regime of property relation, wherein all properties acquired
during the marriage pertain and belong Exclusively to the husband. In further support of
his stand, petitioner cites Article 16 of the New Civil Code (Art. 10 of the old) to the effect
that in testate and intestate proceedings, the amount of successional rights, among
others, is to be determined by the national law of the decedent.

In this connection, let it be noted that since the mariage of the Stevensons in the
Philippines took place in 1909, the applicable law is Article 1325 of the old Civil Code and
not Article 124 of the New Civil Code which became effective only in 1950. It is true that
both articles adhere to the so-called nationality theory of determining the property
relation of spouses where one of them is a foreigner and they have made no prior
agreement as to the administration disposition, and ownership of their conjugal
properties. In such a case, the national law of the husband becomes the dominant law in
determining the property relation of the spouses. There is, however, a difference
between the two articles in that Article 1241 of the new Civil Code expressly provides that
it shall be applicable regardless of whether the marriage was celebrated in the
Philippines or abroad while Article 13252 of the old Civil Code is limited to marriages
contracted in a foreign land.

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

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

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

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

Nor do we believe petitioner can make use of Article 16 of the New Civil Code (art. 10, old
Civil Code) to bolster his stand. A reading of Article 10 of the old Civil Code, which
incidentally is the one applicable, shows that it does not encompass or contemplate to
govern the question of property relation between spouses. Said article distinctly speaks
of amount of successional rights and this term, in speaks in our opinion, properly refers to
the extent or amount of property that each heir is legally entitled to inherit from the
estate available for distribution. It needs to be pointed out that the property relation of
spouses, as distinguished from their successional rights, is governed differently by the
specific and express provisions of Title VI, Chapter I of our new Civil Code (Title III,
Chapter I of the old Civil Code.) We, therefore, find that the lower court correctly
deducted the half of the conjugal property in determining the hereditary estate left by the
deceased Stevenson.

On the second issue, petitioner disputes the action of the Tax Court in the exempting the
respondents from paying inheritance tax on the 210,000 shares of stock in the Mindanao
Mother Lode Mines, Inc. in virtue of the reciprocity proviso of Section 122 of the National
Internal Revenue Code, in relation to Section 13851 of the California Revenue and
Taxation Code, on the ground that: (1) the said proviso of the California Revenue and
Taxation Code has not been duly proven by the respondents; (2) the reciprocity
exemptions granted by section 122 of the National Internal Revenue Code can only be
availed of by residents of foreign countries and not of residents of a state in the United
States; and (3) there is no "total" reciprocity between the Philippines and the state of
California in that while the former exempts payment of both estate and inheritance taxes
on intangible personal properties, the latter only exempts the payment of inheritance
tax..

To prove the pertinent California law, Attorney Allison Gibbs, counsel for herein
respondents, testified that as an active member of the California Bar since 1931, he is
familiar with the revenue and taxation laws of the State of California. When asked by the
lower court to state the pertinent California law as regards exemption of intangible
personal properties, the witness cited article 4, section 13851 (a) and (b) of the
California Internal and Revenue Code as published in Derring's California Code, a
publication of the Bancroft-Whitney Company inc. And as part of his testimony, a full
quotation of the cited section was offered in evidence as Exhibits "V-2" by the
respondents.
It is well-settled that foreign laws do not prove themselves in our jurisdiction and our
courts are not authorized to take judicial notice of them. 5 Like any other fact, they must
be alleged and proved.6

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

P1,204.34
1) Administrator's fee
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   2,052.55
 9, 1952
            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.

Footnotes

1
ART. 124. If the marriage is between a citizen of the Philippines and a foreigner,
whether celebrated in the Philippines or abroad, the following rules shall prevail:
(1) If the husband is a citizen of the Philippines while the wife is a foreigner, the
provisions of this Code shall govern their property relations; (2) If the husband is
a foreigner and the wife is a citizen of the Philippines, the laws of the husband's
country shall be followed, without prejudice to the provisions of this Code with
regard to immovable property."

2
ART. 1325. Should the marriage be contracted in a foreign country, between a
Spaniard and a foreign woman or between a foreigner and a Spanish woman, and
the contracting parties should not make any statement or stipulation with respect
to their property, it shall be understood, when the husband is a Spaniard, that he
marries under the system of the legal conjugal partnership, and when the wife is
a Spaniard, that she marries under the system of law in force in the husband's
country, all without prejudice to the provisions of this code with respect to real
property. .

3
IX Manresa, Comentarios al Codigo Civil Espanol, p. 209. .

4
Yam Ka Lim vs. Collector of Customs, 30 Phil. 46; Lim & Lim vs. Collector of
Customs, 36 Phil. 472; International Harvester Co. vs. Hamburg-American Line,
 42 Phil. 845; Beam vs. Yatco, 46 O.G. No. 2, p. 530.).

5
Lim vs. Collector of Customs, supra; International Harvester Co. vs. Hamburg-
American Line, supra; Phil. Manufacturing Co. vs. Union Ins. Society of Canton, 42
Phil. 378; Adong vs. Cheong Seng Gee, Phil. 53.

6
Sy Joc Leing vs. Sy Quia, 16 Phil. 138; Ching Huat vs. Co Heong, 77 Phil. 985;
Adong vs. Cheong supra.

7
See Sec. 860, Internal Revenue Code of 1939, 26 USCA 408.

8
In the matter of the testate estate of Basil Gordon Butler, G.R. No. L-3677, Nov.
29, 1951. .

9
Rule 78, Sees. 1, 2 and 3, Rules of Court. See also Hix vs. Fluemer, 54 Phil. 610. .

10
Rule 78, See. 4, lbid.

11
Expense, losses, indebtedness, and taxes which may be deducted to determine
the net estate of a citizen or resident of the Philippines.

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PHILIPPINE JURISPRUDENCE - FULL TEXT

The Lawphil Project - Arellano Law Foundation
G.R. No. L-34937             March 13, 1933
CONCEPCION VIDAL DE ROCES, ET AL. vs. JUAN POSADAS, JR.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-34937             March 13, 1933

CONCEPCION VIDAL DE ROCES and her husband,

MARCOS ROCES, and ELVIRA VIDAL DE RICHARDS, plaintiff-appellants,
vs.
JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellee.

Feria and La O for appellants.

Attorney-General Jaranilla for appellee.
IMPERIAL, J.:

The plaintiffs herein brought this action to recover from the defendant, Collector of
Internal Revenue, certain sums of money paid by them under protest as inheritance tax.
They appealed from the judgment rendered by the Court of First Instance of Manila
dismissing the action, without costs.

On March 10 and 12, 1925, Esperanza Tuazon, by means of public documents, donated
certain parcels of land situated in Manila to the plaintiffs herein, who, with their
respective husbands, accepted them in the same public documents, which were duly
recorded in the registry of deeds. By virtue of said donations, the plaintiffs took
possession of the said lands, received the fruits thereof and obtained the corresponding
transfer certificates of title.

On January 5, 1926, the donor died in the City of Manila without leaving any forced heir
and her will which was admitted to probate, she bequeathed to each of the donees the
sum of P5,000. After the estate had been distributed among the instituted legatees and
before delivery of their respective shares, the appellee herein, as Collector of Internal
Revenue, ruled that the appellants, as donees and legatees, should pay as inheritance tax
the sums of P16,673 and P13,951.45, respectively. Of these sums P15,191.48 was levied
as tax on the donation to Concepcion Vidal de Roces and P1,481.52 on her legacy, and,
likewise, P12,388.95 was imposed upon the donation made to Elvira Vidal de Richards
and P1,462.50 on her legacy. At first the appellants refused to pay the aforementioned
taxes but, at the insistence of the appellee and in order not to delay the adjudication of
the legacies, they agreed at last, to pay them under protest.

The appellee filed a demurrer to the complaint on the ground that the facts alleged
therein were not sufficient to constitute a cause of action. After the legal questions raised
therein had been discussed, the court sustained the demurrer and ordered the
amendment of the complaint which the appellants failed to do, whereupon the trial court
dismissed the action on the ground that the afore- mentioned appellants did not really
have a right of action.

In their brief, the appellants assign only one alleged error, to wit: that the demurrer
interposed by the appellee was sustained without sufficient ground.

The judgment appealed from was based on the provisions of section 1540 Administrative
Code which reads as follows:

SEC. 1540. Additions of gifts and advances. — After the aforementioned

deductions have been made, there shall be added to the resulting amount the
value of all gifts or advances made by the predecessor to any those who, after his
death, shall prove to be his heirs, devisees, legatees, or donees mortis causa.

The appellants contend that the above-mentioned legal provision does not include
donations inter vivos and if it does, it is unconstitutional, null and void for the following
reasons: first, because it violates section 3 of the Jones Law which provides that no law
should embrace more than one subject, and that subject should be expressed in the title
thereof; second that the Legislature has no authority to impose inheritance tax on
donations inter vivos; and third, because a legal provision of this character contravenes
the fundamental rule of uniformity of taxation. The appellee, in turn, contends that the
words "all gifts" refer clearly to donations inter vivos and, in support of his theory, cites
the doctrine laid in the case of Tuason and Tuason vs. Posadas (54 Phil., 289). After a
careful study of the law and the authorities applicable thereto, we are the opinion that
neither theory reflects the true spirit of the aforementioned provision. The gifts referred
to in section 1540 of the Revised Administration Code are, obviously, those donations
inter vivos that take effect immediately or during the lifetime of the donor but are made
in consideration or in contemplation of death. Gifts inter vivos, the transmission of which
is not made in contemplation of the donor's death should not be understood as included
within the said legal provision for the reason that it would amount to imposing a direct
tax on property and not on the transmission thereof, which act does not come within the
scope of the provisions contained in Article XI of Chapter 40 of the Administrative Code
which deals expressly with the tax on inheritances, legacies and other acquisitions mortis
causa.

Our interpretation of the law is not in conflict with the rule laid down in the case of
Tuason and Tuason vs. Posadas, supra. We said therein, as we say now, that the expression
"all gifts" refers to gifts inter vivos inasmuch as the law considers them as advances on
inheritance, in the sense that they are gifts inter vivos made in contemplation or in
consideration of death. In that case, it was not held that that kind of gifts consisted in
those made completely independent of death or without regard to it.

Said legal provision is not null and void on the alleged ground that the subject matter
thereof is not embraced in the title of the section under which it is enumerated. On the
contrary, its provisions are perfectly summarized in the heading, "Tax on Inheritance,
etc." which is the title of Article XI. Furthermore, the constitutional provision cited should
not be strictly construed as to make it necessary that the title contain a full index to all
the contents of the law. It is sufficient if the language used therein is expressed in such a
way that in case of doubt it would afford a means of determining the legislators intention.
(Lewis' Sutherland Statutory Construction, Vol. II, p. 651.) Lastly, the circumstance that
the Administrative Code was prepared and compiled strictly in accordance with the
provisions of the Jones Law on that matter should not be overlooked and that, in a
compilation of laws such as the Administrative Code, it is but natural and proper that
provisions referring to diverse matters should be found. (Ayson and Ignacio vs. Provincial
Board of Rizal and Municipal Council of Navotas, 39 Phil., 931.)

The appellants question the power of the Legislature to impose taxes on the transmission
of real estate that takes effect immediately and during the lifetime of the donor, and
allege as their reason that such tax partakes of the nature of the land tax which the law
has already created in another part of the Administrative Code. Without making express
pronouncement on this question, for it is unnecessary, we wish to state that such is not
the case in these instance. The tax collected by the appellee on the properties donated in
1925 really constitutes an inheritance tax imposed on the transmission of said properties
in contemplation or in consideration of the donor's death and under the circumstance
that the donees were later instituted as the former's legatees. For this reason, the law
considers such transmissions in the form of gifts inter vivos, as advances on inheritance
and nothing therein violates any constitutional provision, inasmuch as said legislation is
within the power of the Legislature.

Property Subject to Inheritance Tax. — The inheritance tax ordinarily applies to all
property within the power of the state to reach passing by will or the laws
regulating intestate succession or by gift inter vivos in the manner designated by
statute, whether such property be real or personal, tangible or intangible,
corporeal or incorporeal. (26 R.C.L., p. 208, par. 177.)

In the case of Tuason and Tuason vs. Posadas, supra, it was also held that section 1540 of
the Administrative Code did not violate the constitutional provision regarding uniformity
of taxation. It cannot be null and void on this ground because it equally subjects to the
same tax all of those donees who later become heirs, legatees or donees mortis causa by
the will of the donor. There would be a repugnant and arbitrary exception if the
provisions of the law were not applicable to all donees of the same kind. In the case cited
above, it was said: "At any rate the argument adduced against its constitutionality, which
is the lack of Uniformity, does not seem to be well founded. It was said that under such an
interpretation, while a donee inter vivos who, after the predecessor's death proved to be
an heir, a legatee, or a donee mortis causa, would have to pay the tax, another donee inter
vivos who did not prove to he an heir, a legatee, or a donee mortis causa of the
predecessor, would be exempt from such a tax. But as these are two different cases, the
principle of uniformity is inapplicable to them."

The last question of a procedural nature arising from the case at bar, which should be
passed upon, is whether the case, as it now stands, can be decided on the merits or
should be remanded to the court a quo for further proceedings. According to our view of
the case, it follows that, if the gifts received by the appellants would have the right to
recover the sums of money claimed by them. Hence the necessity of ascertaining whether
the complaint contains an allegation to that effect. We have examined said complaint and
found nothing of that nature. On the contrary, it be may be inferred from the allegations
contained in paragraphs 2 and 7 thereof that said donations inter vivos were made in
consideration of the donor's death. We refer to the allegations that such transmissions
were effected in the month of March, 1925, that the donor died in January, 1926, and that
the donees were instituted legatees in the donor's will which was admitted to probate. It
is from these allegations, especially the last, that we infer a presumption juris tantum that
said donations were made mortis causa and, as such, are subject to the payment of
inheritance tax.

Wherefore, the demurrer interposed by the appellee was well-founded because it

appears that the complaint did not allege fact sufficient to constitute a cause of action.
When the appellants refused to amend the same, spite of the court's order to that effect,
they voluntarily waived the opportunity offered them and they are not now entitled to
have the case remanded for further proceedings, which would serve no purpose
altogether in view of the insufficiency of the complaint.

Wherefore, the judgment appealed from is hereby affirmed, with costs of this instance
against the appellants. So ordered.
Avanceña, C.J., Villamor, Ostrand, Abad Santos, Hull, Vickers and Buttes, JJ., concur.

Separate Opinions

VILLA-REAL, J., dissenting:

I sustain my concurrence in Justice Street's dissenting opinion in the case of Tuason and
Tuason vs. Posadas (54 Phil., 289).

The majority opinion to distinguish the present case from above-mentioned case of
Tuason and Tuason vs. Posadas, by interpreting section 1540 of the Administrative Code
in the sense that it establishes the legal presumption juris tantum that all gifts inter vivos
made to persons who are not forced heirs but who are instituted legatees in the donor's
will, have been made in contemplation of the donor's death. Presumptions are of two
kinds: One determined by law which is also called presumption of law or of right; and
another which is formed by the judge from circumstances antecedent to, coincident with
or subsequent to the principal fact under investigation, which is also called presumption
of man (presuncion de hombre). (Escriche, Vol. IV, p. 662.) The Civil Code as well as the
code of Civil Procedure establishes presumptions juris et de jure and juris tantum which
the courts should take into account in deciding questions of law submitted to them for
decision. The presumption which majority opinion wishes to draw from said section
1540 of the Administrative Code can neither be found in this Code nor in any of the
aforementioned Civil Code and Code of Civil Procedure. Therefore, said presumption
cannot be called legal or of law. Neither can it be called a presumption of man
(presuncion de hombre) inasmuch as the majority opinion did not infer it from
circumstances antecedent to, coincident with or subsequent to the principal fact with is
the donation itself. In view of the nature, mode of making and effects of donations inter
vivos, the contrary presumption would be more reasonable and logical; in other words,
donations inter vivos made to persons who are not forced heirs, but who are instituted
legatees in the donor's will, should be presumed as not made mortis causa, unless the
contrary is proven. In the case under consideration, the burden of the proof rests with
the person who contends that the donation inter vivos has been made mortis causa.

It is therefore, the undersigned's humble opinion that the order appealed from should be
reversed and the demurrer overruled, and the defendant ordered to file his answer to the
complaint.

Street, J., concurs.

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PHILIPPINE JURISPRUDENCE - FULL TEXT

The Lawphil Project - Arellano Law Foundation
G.R. No. L-36770             November 4, 1932
LUIS W. DISON vs. JUAN POSADAS, JR.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-36770             November 4, 1932

LUIS W. DISON, plaintiff-appellant,

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

Marcelino Aguas for plaintiff-appellant.

Attorney-General Jaranilla for defendant-appellant.

BUTTE, J.:

          This is an appeal from the decision of the Court of First Instance of Pampanga in
favor of the defendant Juan Posadas, Jr., Collector of Internal Revenue, in a suit filed by
the plaintiffs, Luis W. Dison, for the recovery of an inheritance tax in the sum of P2,808.73
paid under protest. The petitioner alleged in his complaint that the tax is illegal because
he received the property, which is the basis of the tax, from his father before his death by
a deed of gift inter vivos which was duly accepted and registered before the death of his
father. The defendant answered with a general denial and with a counterdemand for the
sum of P1,245.56 which it was alleged is a balance still due and unpaid on account of said
tax. The plaintiff replied to the counterdemand with a general denial. The court a quo
held that the cause of action set up in the counterdemand was not proven and dismissed
the same. Both sides appealed to this court, but the cross-complaint and appeal of the
Collector of Internal Revenue were dismissed by this court on March 17, 1932, on motion
of the Attorney-General.1awphil.net

          The only evidence introduced at the trial of this cause was the proof of payment of
the tax under protest, as stated, and the deed of gift executed by Felix Dison on April 9,
1928, in favor of his sons Luis W. Dison, the plaintiff-appellant. This deed of gift
transferred twenty-two tracts of land to the donee, reserving to the donor for his life the
usufruct of three tracts. This deed was acknowledged by the donor before a notary public
on April 16, 1928. Luis W. Dison, on April 17, 1928, formally accepted said gift by an
instrument in writing which he acknowledged before a notary public on April 20, 1928.

          At the trial the parties agreed to and filed the following ingenious stipulation of fact:

1. That Don Felix Dison died on April 21, 1928;

 2. That Don Felix Dison, before his death, made a gift inter vivos in favor of the
plaintiff Luis W. Dison of all his property according to a deed of gift (Exhibit D)
which includes all the property of Don Felix Dizon;

3. That the plaintiff did not receive property of any kind of Don Felix Dison upon
the death of the latter;

4. That Don Luis W. Dison was the legitimate and only child of Don Felix Dison.

          It is inferred from Exhibit D that Felix Dison was a widower at the time of his death.

          The theory of the plaintiff-appellant is that he received and holds the property
mentioned by a consummated gift and that Act No. 2601 (Chapter 40 of the
Administrative Code) being the inheritance tax statute, does not tax gifts. The provision
directly here involved is section 1540 of the Administrative Code which reads as follows:

          Additions of Gifts and Advances. — After the aforementioned deductions

have been made, there shall be added to the resulting amount the value of all gifts
or advances made by the predecessor to any of those who, after his death, shall
prove to be his heirs, devises, legatees, or donees mortis causa.

          The question to be resolved may be stated thus: Does section 1540 of the
Administrative Code subject the plaintiff-appellant to the payment of an inheritance tax?

          The appellant argues that there is no evidence in this case to support a finding that
the gift was simulated and that it was an artifice for evading the payment of the
inheritance tax, as is intimated in the decision of the court below and the brief of the
Attorney-General. We see no reason why the court may not go behind the language in
which the transaction is masked in order to ascertain its true character and purpose. In
this case the scanty facts before us may not warrant the inference that the conveyance,
acknowledged by the donor five days before his death and accepted by the donee one day
before the donor's death, was fraudulently made for the purpose of evading the
inheritance tax. But the facts, in our opinion, do warrant the inference that the transfer
was an advancement upon the inheritance which the donee, as the sole and forced heir of
the donor, would be entitled to receive upon the death of the donor.

          The argument advanced by the appellant that he is not an heir of his deceased father
within the meaning of section 1540 of the Administrative Code because his father in his
lifetime had given the appellant all his property and left no property to be inherited, is so
fallacious that the urging of it here casts a suspicion upon the appellants reason for
completing the legal formalities of the transfer on the eve of the latter's death. We do not
know whether or not the father in this case left a will; in any event, this appellant could
not be deprived of his share of the inheritance because the Civil Code confers upon him
the status of a forced heir. We construe the expression in section 1540 "any of those who,
after his death, shall prove to be his heirs", to include those who, by our law, are given the
status and rights of heirs, regardless of the quantity of property they may receive as such
heirs. That the appellant in this case occupies the status of heir to his deceased father
cannot be questioned. Construing the conveyance here in question, under the facts
presented, as an advance made by Felix Dison to his only child, we hold section 1540 to
be applicable and the tax to have been properly assessed by the Collector of Internal
Revenue.

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

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

          ". . . there shall be added to the resulting amount the value of all gifts mortis causa . . .
made by the predecessor to those who, after his death, shall prove to be his . . . donees
mortis causa." We cannot give to the law an interpretation that would so vitiate its
language. The truth of the matter is that in this section (1540) the law presumes that
such gifts have been made in anticipation of inheritance, devise, bequest, or gift mortis
causa, when the donee, after the death of the donor proves to be his heir, devisee or
donee mortis causa, for the purpose of evading the tax, and it is to prevent this that it
provides that they shall be added to the resulting amount." However much appellant's
argument on this point may fit his preconceived notion that the transaction between him
and his father was a consummated gift with no relation to the inheritance, we hold that
there is not merit in this attack upon the constitutionality of section 1540 under our view
of the facts. No other constitutional questions were raised in this case.

          The judgment below is affirmed with costs in this instance against the appellant. So
ordered.

Avanceña, C.J., Street, Malcolm, Ostrand, Abad Santos, Vickers and Imperial, JJ., concur.

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[Synopsis/Syllabi]
SECOND DIVISION

[G.R. No. 118671. January 29, 1996]

THE ESTATE OF HILARIO M. RUIZ, EDMOND RUIZ, Executor, petitioner, vs. THE COURT OF
APPEALS (Former Special Sixth Division), MARIA PILAR RUIZ-MONTES, MARIA CATHRYN RUIZ,
CANDICE ALBERTINE RUIZ, MARIA ANGELINE RUIZ and THE PRESIDING JUDGE OF THE
REGIONAL TRIAL COURT OF PASIG, BRANCH 156, respondents.

DECISION

PUNO, J.:

This petition for review on certiorari seeks to annul and set aside the decision dated November 10,
1994 and the resolution dated January 5, 1995 of the Court of Appeals in CA-G.R. SP No. 33045.

The facts show that on June 27, 1987, Hilario M. Ruiz1 executed a holographic will naming as his
heirs his only son, Edmond Ruiz, his adopted daughter, private respondent Maria Pilar Ruiz Montes,
and his three granddaughters, private respondents Maria Cathryn, Candice Albertine and Maria
Angeline, all children of Edmond Ruiz. The testator bequeathed to his heirs substantial cash,
personal and real properties and named Edmond Ruiz executor of his estate.2

On April 12, 1988, Hilario Ruiz died. Immediately thereafter, the cash component of his estate was
distributed among Edmond Ruiz and private respondents in accordance with the decedent’s will.
For unbeknown reasons, Edmond, the named executor, did not take any action for the probate of
his father’s holographic will.

On June 29, 1992, four years after the testator’s death, it was private respondent Maria Pilar Ruiz
Montes who filed before the Regional Trial Court, Branch 156, Pasig, a petition for the probate and
approval of Hilario Ruiz’s will and for the issuance of letters testamentary to Edmond Ruiz.3
Surprisingly, Edmond opposed the petition on the ground that the will was executed under undue
influence.

On November 2, 1992, one of the properties of the estate - the house and lot at No. 2 Oliva Street,
Valle Verde IV, Pasig which the testator bequeathed to Maria Cathryn, Candice Albertine and Maria
Angeline4 - was leased out by Edmond Ruiz to third persons.

On January 19, 1993, the probate court ordered Edmond to deposit with the Branch Clerk of Court
the rental deposit and payments totalling P540,000.00 representing the one-year lease of the Valle
Verde property. In compliance, on January 25, 1993, Edmond turned over the amount of
P348,583.56, representing the balance of the rent after deducting P191,416.14 for repair and
maintenance expenses on the estate.5

In March 1993, Edmond moved for the release of P50,000.00 to pay the real estate taxes on the real
properties of the estate. The probate court approved the release of P7,722.006

On May 14, 1993, Edmond withdrew his opposition to the probate of the will.  Consequently, the
probate court,  on May 18, 1993, admitted the will to probate and ordered the issuance of letters
testamentary to Edmond conditioned upon the filing of a bond in the amount of P50,000.00.  The
letters testamentary were issued on June 23, 1993.

On July 28, 1993, petitioner Testate Estate of Hilario Ruiz as executor, filed an “Ex-Parte Motion for
Release of Funds.” It prayed for the release of the rent payments deposited with the Branch Clerk of
Court.  Respondent Montes opposed the motion and concurrently filed a “Motion for Release of
Funds to Certain Heirs” and Motion for Issuance of Certificate of Allowance of Probate Will.” Montes
prayed for the release of the said rent payments to Maria Cathryn, Candice Albertine and Maria
Angeline and for the distribution of the testator’s properties, specifically the Valle Verde property
and the Blue Ridge apartments, in accordance with the provisions of the holographic will.

On August 26, 1993, the probate  court denied petitioner’s motion for release of funds but granted
respondent Montes’ motion in view of petitioner’s lack of opposition.  It thus ordered the release of
the rent payments to the decedent’s three granddaughters.  It further ordered the delivery of the
titleds to and possession of the properties bequeathed to the three granddaughters and respondent
Montes upon the filing of a bond of P50,000.00.

Petitioner moved for reconsideration alleging that he actually filed his opposition to respondent
Montes’ motion for release of rent payments which opposition the court failed to consider. 
Petitioner likewise reiterated his previous motion for release of funds.

On November 23, 1993, petitioner, through counsel, manifested that he was withdrawing his
motion for release of funds in view of the fact that the lease contract over Valle Verde property had
been renewed for another year.7

Despite petitioner’s manifestation, the probate court, on December 22, 1993, ordered the release of
the funds to Edmond but only “such amount as may be necessary to cover the espenses of
administration and allowanceas for support” of the testator’s three granddaughters subject to
collation and deductible from their share in the inheritance.  The court, however, held in abeyance
the release of the titles to respondent Montes and the three granddaughters until the lapse of six
months from the date of firast publication of the notice to creditors.8  The Court stated thus:

“xxx                                       xxx                                  xxx

After consideration of the arguments set forth thereon by the parties, the court resolves to allow
Administrator Edmond M. Ruiz to take possession of the rental payments deposited with the Clerk
of Court, Pasig Regional Trial Court, but only such amount as may be necessary to cover the
expenses of administration and allowances for support of Maria Cathryn Veronique, Candice
Albertine and Maria Angeli, which are subject to collation and deductible from the share in the
inheritance of said heirs and insofar as they exceed the fruits or rents pertaining to them.

As to the release of the titles bequeathed to petitioner Maria Pilar Ruiz-Montes and the above-
named heirs, the same is hereby reconsidered and held in abeyance until the lapse of six (6)
months from the date of first publication of Notice to Creditors.

WHEREFORE, Administrator Edmond M. Ruiz is hereby ordered to submit an accounting of the

expenses necessary for administration including provisions for the support Of Maria Cathryn
Veronique Ruiz, Candice Albertine Ruiz and Maria Angeli Ruiz before the amount required can be
withdrawn and cause the publication of the notice to creditors with reasonable dispatch.9
Petitioner assailed this order before the Court of Appeals. Finding no grave abuse of discretion on
the part of respondent judge, the appellate court dismissed the petition and sustained the probate
court’s order in a decision dated November 10, 199410 and a resolution dated January 5, 1995.11

Hence, this petition.

Petitioner claims that:

 “THE PUBLIC RESPONDENT COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION

AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN AFFIRMING AND CONFIRMING THE
ORDER OF RESPONDENT REGIONAL TRIAL COURT OF PASIG, BRANCH 156, DATED DECEMBER
22, 1993, WHICH WHEN GIVEN DUE COURSE AND IS EFFECTED WOULD: (1) DISALLOW THE
EXECUTOR/ADMINISTRATOR OF THE ESTATE OF THE LATE HILARIO M. RUIZ TO TAKE
POSSESSION OF ALL THE REAL AND PERSONAL PROPERTIES OF THE ESTATE; (2) GRANT
SUPPORT, DURING THE PENDENCY OF THE SETTLEMENT OF AN ESTATE, TO CERTAIN PERSONS
NOT ENTITLED THERETO; AND (3) PREMATURELY PARTITION AND DISTRIBUTE THE ESTATE
PURSUANT TO THE PROVISIONS OF THE HOLOGRAPHIC WILL EVEN BEFORE ITS INTRINSIC
VALIDITY HAS BEEN DETERMINED, AND DESPITE THE EXISTENCE OF UNPAID DEBTS AND
OBLIGATIONS OF THE ESTATE.”12

The issue for resolution is whether the probate court, after admitting the will to probate but before
payment of the estate’s debts and obligations, has the authority: (1) to grant an allowance from the
funds of the estate for the support of the testator’s grandchildren; (2) to order the release of the
titles to certain heirs; and (3) to grant possession of all properties of the estate to the executor of
the will.

On the matter of allowance, Section 3 of Rule 83 of the Revised Rules of Court provides:

“Sec. 3. Allowance to widow and family. - The widow and minor or incapacitated children of a
deceased person, during the settlement of the estate, shall receive therefrom under the direction of
the court, such allowance as are provided by law.”

Petitioner alleges that this provision only gives the widow and the minor or incapacitated children
of the deceased the right to receive allowances for support during the settlement of estate
proceedings. He contends that the testator’s three granddaughters do not qualify for an allowance
because they are not incapacitated and are no longer minors but of legal age, married and gainfully
employed. In addition, the provision expressly states “children” of the deceased which excludes the
latter’s grandchildren.

It is settled that allowances for support under Section 3 of Rule 83 should not be limited to the
“minor or incapacitated” children of the deceased. Article 18813 of the Civil Code of the Philippines,
the substantive law in force at the time of the testator’s death, provides that during the liquidation
of the conjugal partnership, the deceased’s legitimate spouse and children, regardless of their age,
civil status or gainful employment, are entitled to provisional support from the funds of the
estate.14 The law is rooted on the fact that the right and duty to support, especially the right to
education, subsist even beyond the age of majority.15

Be that as it may, grandchildren are not entitled to provisional support from the funds of the
decedent’s estate. The law clearly limits the allowance to “widow and children” and does not extend
it to the deceased’s grandchildren, regardless of their minority or incapacity.16 It was error,
therefore, for the appellate court to sustain the probate court’s order granting an allowance to the
grandchildren of the testator pending settlement of his estate.

Respondent courts also erred when they ordered the release of the titles of the bequeathed
properties to private respondents six months after the date of first publication of notice to
creditors. An order releasing titles to properties of the estate amounts to an advance distribution of
the estate which is allowed only under the following conditions:

“Sec. 2. Advance distribution in special proceedings. - Nothwithstanding a pending controversy or

appeal in proceedings to settle the estate of a decedent, the court may, in its discretion and upon
such terms as it may deem proper and just, permit that such part of the estate as may not be
affected by the controversy or appeal be distributed among the heirs or legatees, upon compliance
with the conditions set forth in Rule 90 of these Rules.”17

And Rule 90 provides that:

“Sec. 1. When order for distribution of residue made. - When the debts, funeral charges, and expenses
of administration, the allowance to the widow, and inheritance tax, if any, chargeable to the estate
in accordance with law, have been paid, the court, on the application of the executor or
administrator, or of a person interested in the estate, and after hearing upon notice, shall assign the
residue of the estate to the persons entitled to the same, naming them and the proportions, or parts,
to which each is entitled, and such persons may demand and recover their respective shares from
the executor or administrator, or any other person having the same in his possession. If there is a
controversy before the court as to who are the lawful heirs of the deceased person or as to the
distributive shares to which each person is entitled under the law, the controversy shall be heard
and decided as in ordinary cases.

No distribution shall be allowed until the payment of the obligations above-mentioned has
been made or provided for, unless the distributees, or any of them, give a bond, in a sum to
be fixed by the court, conditioned for the payment of said obligations within such time as the
court directs.18

In settlement of estate proceedings, the distribution of the estate properties can only be made: (1)
after all the debts, funeral charges, expenses of administration, allowance to the widow, and estate
tax have been paid; or (2) before payment of said obligations only if the distributees or any of them
gives a bond in a sum fixed by the court conditioned upon the payment of said obligations within
such time as the court directs, or when provision is made to meet those obligations.19

In the case at bar, the probate court ordered the release of the titles to the Valle Verde property and
the Blue Ridge apartments to the private respondents after the lapse of six months from the date of
first publication of the notice to creditors. The questioned order speaks of “notice” to creditors, not
payment of debts and obligations. Hilario Ruiz allegedly left no debts when he died but the taxes on
his estate had not hitherto been paid, much less ascertained. The estate tax is one of those
obligations that must be paid before distribution of the estate.  If not yet paid, the rule requires that
the distributees post a bond or make such provisions as to meet the said tax obligation in
proportion to their respective shares in the inheritance.20 Notably, at the time the order was issued
the properties of the estate had not yet been inventoried and appraised.
It was also too early in the day for the probate court to order the release of the titles six months
after admitting the will to probate.  The probate of a will is conclusive as to its due execution and
extrinsic validity21 and settles only the question of whether the testator, being of sound mind,
freely executed it in accordance with the formalities prescribed by law.22 Questions as to the
intrinsic validity and efficacy of the provisions of the will, the legality of any devise or legacy may be
raised even after the will has been authenticated.23

The intrinsic validity of Hilario’s holographic will was controverted by petitioner before the
probate court in his Reply to Montes’ Opposition to his motion for release of funds24 and his
motion for reconsideration of the August 26, 1993 order of the said court.25 Therein, petitioner
assailed the distributive shares of the devisees and legatees inasmuch as his father’s will included
the estate of his mother and allegedly impaired his legitime as an intestate heir of his mother. The
Rules provide that if there is a controversy as to who are the lawful heirs of the decedent and their
distributive shares in his estate, the probate court shall proceed to hear and decide the same as in
ordinary cases.26

Still and all, petitioner cannot correctly claim that the assailed order deprived him of his right to
take possession of all the real and personal properties of the estate. The right of an executor or
administrator to the possession and management of the real and personal properties of the
deceased is not absolute and can only be exercised “so long as it is necessary for the payment of the
debts and expenses of administration,”27 Section 3 of Rule 84 of the Revised Rules of Court
explicitly provides:

“Sec. 3. Executor or administrator to retain whole estate to pay debts, and to administer estate not
willed. - An executor or administrator shall have the right to the possession and management of the
real as well as the personal estate of the deceased so long as it is necessary for the payment of
the debts and expenses for administration.”28

When petitioner moved for further release of the funds deposited with the clerk of court, he had
been previously granted by the probate court certain amounts for repair and maintenance expenses
on the properties of the estate, and payment of the real estate taxes thereon. But petitioner moved
again for the release of additional funds for the same reasons he previously cited. It was correct for
the probate court to require him to submit an accounting of the  necessary expenses for
administration before releasing any further money in his favor.

It was relevantly noted by the probate court that petitioner had deposited with it only a portion of
the one-year rental income from the Valle Verde property. Petitioner did not deposit its succeeding
rents after renewal of the lease.29 Neither did he render an accounting of such funds.

Petitioner must be reminded that his right of ownership over the properties of his father is merely
inchoate as long as the estate has not been fully settled and partitioned.30 As executor, he is a mere
trustee of his father’s estate. The funds of the estate in his hands are trust funds and he is held to
the duties and responsibilities of a trustee of the highest order.31 He cannot unilaterally assign to
himself and possess all his parents’ properties and the fruits thereof without first submitting an
inventory and appraisal of all real and personal properties of the deceased, rendering a true
account of his administration, the expenses of administration, the amount of the obligations and
estate tax, all of which are subject to a determination by the court as to their veracity, propriety and
justness.32
IN VIEW WHEREOF, the decision and resolution of the Court of Appeals in CA-G.R. SP No. 33045
affirming the order dated December 22, 1993 of the Regional Trial Court, Branch 156, Pasig in SP
Proc. No. 10259 are affirmed with the modification that those portions of the order granting an
allowance to the testator’s grandchildren and ordering the release of the titles to the private
respondents upon notice to creditors are annulled and set aside.

Respondent judge is ordered to proceed with dispatch in the proceedings below.

SO ORDERED.

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

1 Predeceased by his wife who died on August 4, 1986

2 Annex “D” to the Petition, Rollo, pp. 46-60.

3 SP Proc. No. 10259.

4 Holographic Will, p. 10; RoIlo, p. 55.

5 Comment to the Petition, pp. 8-9; rollo, pp. 97-98

6 Reply to Comment, p.2; rollo,  p. 114.

7 Comment, Annex “1”; Rollo, p. 110.

8 Petition, Annex “C”; Rollo, p. 45.

9 Id.; Emphasis as copied.

10 CA-G.R. SP No. 33045, Annex “A” to the Petition; Rollo, pp. 36-42.

11 Id., Annex “B” to the Petition; Rollo, p. 44.

12  Petition, p. 8; Rollo, p. 17.

13 “Art. 188. From the common mass of property support shall be given to the surviving spouse and
to the children during the liquidation of the inventoried property and until what belongs to them is
delivered; but from this shall be deducted that amount received for support which exceeds fruits or
rents pertaining to them.”

            Article 188 is now Article 133 of the Family Code.

14  Santero v. Court of First Instance of Cavite, 153 SCRA 728 [1987].

15 Id., pp. 733-734; Article 290, Civil Code of the Philippines.

16 Babao v. Villavicencio, 44 Phil. 921 [1922].

17 Revised Rules of Court, Rule 109, Section 2.

18 Emphasis supplied.

19 Castillo v. Castillo, 124 Phil. 485 [1966]; Edmands v. Philippine Trust Co., 87 Phil. 405 [1952].

20 Prieto v. Valdez, 95 Phil. 46 [1954].

21 Rule 75, Section 1.

22 Acain v. Intermediate Appellate Court, 155 SCRA 100 [1987]; Pastor v. Court of Appeals, 122
SCRA 885 [1983]; Maninang v. Court of Appeals, 114 SCRA 478 [1982].

23 Maninang v. Court of Appeals, supra; Sumilang v. Ramagosa, 21 SCRA 1369 [1967]; Cacho v.
Udan, 13 SCRA 693 [1965]; Montanano v. Suesa, 14 Phil. 676, 679-680 [1909].

24 Reply to Opposition of Funds and Opposition to Omnibus Motion, pp. 1-3; Rollo, pp. 69-71.

25 Motion for Reconsideration, p. 14; Rollo, p. 66.

26 Rule 90, Section 1, paragraph 1; Pimentel v. Palanca, 5 Phil. 436 [1905]; II Regalado, Remedial
Law Compendium 88 [1989].

27 Mananquil v. Villegas, 189 SCRA 335 [1990].

28 Emphasis supplied.

29 Comment to the Petition, p. 9; Rollo, p. 98.

30 Salvador v. Sta. Maria, 20 SCRA 603 [1967].

31 Noel v. Court qf Appeals, 240 SCRA 78,89 [1995]; 3 Martin, Rules of Court of the Philippines 545-
546 [1986] citing 21 Am. Jur. 370-371.

32  Rule 81, Section 1; Rule 85, Sections ito 9.

PHILIPPINE JURISPRUDENCE - FULL TEXT

The Lawphil Project - Arellano Law Foundation
G.R. No. L-9776             July 31, 1957
TESTATE ESTATE OF CARLOS T. PALANCA. ROMAN OZAETA vs.
TERESA PALANCA, ET AL.

Republic of the Philippines

SUPREME COURT
Manila
 EN BANC

G.R. No. L-9776             July 31, 1957

TESTATE ESTATE OF CARLOS PALANCA Y TAGUINLAY, deceased. ROMAN OZAETA,

Special Administrator, Appellant,
vs.
TERESA PALANCA DEL RIO, CARMEN PALANCA, CONSUELO PALANCA, MANUEL
PALANCA and ALFREDO PALANCA, oppositors-appellees.

G.R. No. L-9851             July 31, 1957

TESTATE ESTATE OF CARLOS PALANCA, deceased. SYCIP GORRES, VELAYO & CO.,
movant-appellant,
vs.
ROMAN OZAETA, Special Administrator and appellee.
TERESA PALANCA DEL RIO, ET AL., oppositors-appellees.

Arturo S. Monzon for the movant and appellant.

Lichauco and Picazo for special administrator and appellant.
Sison and Sison for the Cuartero children.
De los Santos and De los Santos for Sebastian C. Palanca.
Rafael Dinglasan for Angel C. Palanca. Manuel V. San Jose for Rosa Gonzales and her
children.

LABRADOR, J.:

On May 5, 1955, the special administrator filed a petition in court for authority to pay the
accounting firm of Sycip, Gorres, Velayo & Co. the sum of P3,650, for services rendered in
taking inventory of assets in 1950, tax consultations in 1950 to 1954, and preparation of
income tax returns for 1953 and 1954. The court below denied this motion, on the
ground that the services covered by the fees of the accounting firm were rendered to the
former special administrator Philippine Trust Company. Upon being notified of the denial
of the special administrator's petition to pay it, the accounting firm appeared in court and
asked for the reconsideration of the order of denial. Opposition to this motion for
reconsideration was filed by heirs Teresa, Carmen, Consuelo, Manuel, Elena and Alfredo,
all surnamed Palanca y Cuartero, on the following grounds: as to the fees for services in
the taking of the inventory in 1950, Mr. Ozaeta, who asked for said services, was not yet
the special administrator when said services were rendered; the tax consultations from
1950 to 1954 cover years in which Mr. Ozaeta was not yet the special administrator, and
as the same was rendered during the incumbency of the Philippine Trust, the fees should
be paid for by Mr. Ozaeta himself. After various arguments, the court refused to grant the
reconsideration of its original order denying the petition, and so appeal therefrom was
taken to this Court.

Since the pendency of the case in court, the oppositors-appellees have presented a
withdrawal of their opposition, on the ground that they have already assigned their
rights, titles and participations in the said estate to the eight children of Rosa Gonzales
Vda. de Palanca, and no longer have any interest in the estate, nor do they have any
personality to further intervene in the proceedings. A similar motion has also been filed
by Sebastian Palanca, who states that he has transferred his share to the inheritance to
Carlos Palanca, Jr. For their part Rosa Gonzales Vda. de Palanca and her eight children
have filed a statement expressing conformity to the payment of the fees.

The withdrawal of the objections notwithstanding, it seems that it is still necessary to

decide the questions raised, i.e., whether the services rendered to the special
administrator named in the will, previous to his actual appointment as such and at his
instance, are chargeable against the estate.

There is no question that the services rendered were for the benefit of the estate. The
Rules require that the administrator should submit an inventory of the properties of the
estate within three months from his appointment (Sec. 1, Rule 84, Rules of Court). As Mr.
Ozaeta expected to be appointed administrator of the estate immediately, in view of his
designation as executor of the will of the decedent, it was proper, necessary and
expedient for him, even before his actual appointment to employ the services of
accountants in order that they can prepare the accounts or the inventory in due time and
within the period prescribed by the Rules.

The general rule is that acts done by an executor in the interest of his trust, prior to his
qualification as such, become binding on the estate upon his qualification (Baker vs.
Cauthorn, et al., 55 N. E. 963). In the said case the court held:

It is contended by appellant that the services rendered by appellees were to the

said James E. Baker before he actually became the executor of decedent's will, and
that said Baker is individually liable for the value of whatever services were so
rendered, and not said estate. It is not contended that appellees were not
retained, nor that the advice was not given, nor that the services were not of the
value of $100, but the sole contention seems to be that, because the actual work
which was done occupied prior to the time appellant in fact qualified as executor,
said Baker was individually liable, and appellees had no claim against the estate
which he (Baker) was representing. . . .

We think the evidence sustains the finding and judgment of the lower court. It
shows that the services rendered by appellees were connected with the
settlement of his decedent's estate. There was no special agreement between
James E. Baker and appellees that they were to look to the estate alone for
payment; hence they could, if they so desired, look to said James E. Baker
personally for the value of such services. Long vs. Rodman, 58 Ind. 58. Appellees
waived the right to hold said James E. Baker personally and elected to hold the
estate, for the value of such services. . . . After the executor has qualified, his
authority over the decedent's property reaches back to the time of the decedent's
death, and covers all acts done by him in the interest of his trust. Gilkey vs.
Hamilton, 22 Mich. 283. Under the evidence in this case, we think the executor of
the will of Nancy L. Baker could have the claim of appellees, and rightfully
insisted upon its allowance as a credit in his settlement of the trust. Not having
done this, the only way open to appellees to secure payment for their services
 from the trust fund was to file the claim against the estate, and proceed as the
record shows they have done. We find no error in the record. (Baker vs. Cauthorn,
et al., supra, pp. 963-964.)

The services rendered in the years 1953-54 were also as useful to the estate as those
rendered in connection with the preparation of the inventory. Whoever may have
contracted the services of the accountants, whether it was Mr. Ozaeta before his
appointment or the Philippine Trust, such services were for the benefit of the estate and
have redounded to the estate's benefit.

For the foregoing considerations, the order denying payment to the firm of Sycip, Gorres,
Velayo & Co. of the sum of P3,650 is hereby reversed, and the authority for the payment
of the same by the special administrator from the funds of the estate is hereby granted.
Without costs.

Paras, C.J., Padilla, Montemayor, Reyes, A., Bautista Angelo, Concepcion, Endencia and Felix,
JJ., concur.

The Lawphil Project - Arellano Law Foundation

PHILIPPINE JURISPRUDENCE - FULL TEXT

The Lawphil Project - Arellano Law Foundation
G.R. No. L-9271             March 29, 1957
IN RE: DA. MARGARITA DAVID. CARLOS MORAN SISON vs.
NARCISA F. TEODORO

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-9271             March 29, 1957

In the matter of the testate estate of the late DA. MARGARITA DAVID. CARLOS
MORAN SISON, Judicial Administrator, petitioner-appellant,
vs.
NARCISA F. TEODORO, heiress, oppositor-appellee.

Teodoro R. Dominguez for appellant.

Manuel O. Chan for appellee.

BAUTISTA ANGELO, J.:

On December 20, 1948, the Court of First Instance of Manila, which has jurisdiction over
the estate of the late Margarita David, issued an order appointing Carlos Moran Sison as
judicial administrator, without compensation, after filing a bond in the amount of P5,000.
The next day, Carlos Moran Sison took his oath of office and put up the requisite bond
which was duly approved by the court. On the same day, letters of administration were
issued to him.

On January 19, 1955, the judicial administrator filed an accounting of his administration
which contains, among others, the following disbursement items:

13. Paid to Visayan Surety & Insurance

Corporation on August 6, 1954, as renewal
premiums on the Administrator's bond of
Judicial Administrator Carlos Moran Sison
covering the period from December 20, 1949 to
December 20, 1954, inclusive ................................. P380.70
15. Paid to Visayan Surety & Insurance
Corporation on December 21, 1954, for
premiums due on the Administrator's bond of
judicial Administrator Carlos Moran Sison for
the period from December 21, 1954 to
December 21,
1955 ............................................................... 76.14
Narcisa F. Teodoro, one of the heirs, objected to the approval of the above- quoted items
on the grounds that they are not necessary expenses of administration and should not be
charged against the estate. On February 25, 1955, the court approved the report of the
administrator but disallowed the items objected to on the ground that they cannot be
considered as expenses of administration. The administrator filed a motion for
reconsideration and when the same was denied, he took the present appeal.

The only issue to be determined is "whether a judicial administrator, serving without

compensation, is entitled to charge as an expense of administration the premiums paid
on his bond."

The lower court did not consider the premiums paid on the bond filed by the
administrator as an expense of administration taking into account undoubtedly the
ruling laid down in the case of Sulit vs. Santos, 56 Phil., 626. That is a case which also
involves the payment of certain premium on the bond put up by the judicial
administrator and when he asked the court that the same be considered as an expense of
administration, it was disapproved for the same reasons advanced by the trial court. In
sustaining this finding, this Court ruled that the "expense incurred by an executor or
administrator to produce a bond is not a proper charge against the estate. Section 680 of
the Code of Civil Procedure (similar to section 7, Rule 86) does not authorize the executor
or administrator to charge against the estate the money spent for the presentation, filing,
and substitution of a bond." And elaborating on this matter, the Court made the following
comment:
 The aforementioned cases, in reality, seem superfluous in ascertaining the true
principle. The position of an executor or administrator is one of trust. In fact, the
Philippine Code of Civil Procedure so mentions it. It is proper for the law to
safeguard the estate of deceased persons by requiring the executor or
administrator to give a suitable bond. The ability to give this bond is in the nature
of a qualification for the office. The execution and approval of the bond constitute
a condition precedent to acceptance of the responsibilities of the trust. If an
individual does not desire to assume the position of executor of administrator, he
may refuse to do so. On the other hand, when the individual prefers an adequate
bond and has it approved by the probate court, he thereby admits the adequacy
of the compensation which is permitted him pursuant to law. It would be a very
far-fetched construction to deduce the giving of a bond in order to qualify for the
office of executor or administrator is a necessary expense in the care,
management, and settlement of the estate within the meaning of section 680 of
the Code of Civil Procedure, for these are expenses incurred after the executor of
administrator has met the requirements of the law and has entered upon the
performance of his duties. (See In re Eby's Estate [1894], 30 Atl., 124.)

We feel that the orders of Judge Mapa in this case rested on a fine sense of official
duty, sometimes lacking in cases of this character, to protect the residue of the
estate of a deceased person from unjustifiable inroads by an executor, and that as
these orders conform to the facts and the law, they are entitled to be fortified by
an explicit pronouncement from this court. We rule that the expense incurred by
an execution or administrator to procure a bond is not a proper charge against
the estate, and that section 680 of the Code of Civil Procedure does not authorize
the executor or administrator to charge against the estate the money spent for
the presentation, filing, and substitution of a bond.

It is true that the Sulit case may be differentiated from the present in the sense that, in
the former the administrator accepted the trust with the emolument that the law allows,
whereas in the latter the administrator accepted the same without compensation, but
this difference is of no moment, for there is nothing in the decision that may justify the
conclusion that the allowance or disallowance of premiums paid on the bond of the
administrator is made dependent on the receipt of compensation. On the contrary, a
different conclusion may be inferred considering the ratio decidendi on which the ruling
is predicated. Thus, it was there stated that the position of an executor or administrator
is one of trust: that it is proper for the law to safeguard the estates of deceased persons
by requiring the administrator to give a suitable bond, and that the ability to give this
bond is in the nature of a qualification for the office. It is also intimated therein that "If an
individual does not desire to assume the position of executor or administrator, he may
refuse to do so," and it is far-fetched to conclude that the giving of a bond by an
administrator is an necessary expense in the care, management and settlement of the
estate within the meaning of the law, because these expenses are incurred "after the
executor or administrator has met the requirement of the law and has entered upon the
performance of his duties." Of course, a person may accept the position of executor or
administrator with all the incident appertaining thereto having in mind the
compensation which the law allows for the purpose, but he may waive this compensation
in the same manner as he may refuse to serve without it. Appellant having waived
 compensation, he cannot now be heard to complain of the expenses incident to his
qualification.

The orders appealed from are hereby affirmed, without costs.

Paras. C.J., Bengzon, Reyes, A., Labrador, Concepcion, Reyes, J.B.L., Endencia and Felix, JJ.,
concur.

PHILIPPINE JURISPRUDENCE - FULL TEXT

The Lawphil Project - Arellano Law Foundation
G.R. No. L-31364 March 30, 1979
MISAEL P. VERA vs. JOSE F. FERNANDEZ

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-31364 March 30, 1979

MISAEL P. VERA, as Commissioner of Internal Revenue, and JAIME ARANETA, as Regional

Director, Revenue Region No. 14, Bureau of Internal Revenue, petitioners,
vs.
HON. JOSE F. FERNANDEZ, Judge of the Court of First Instance of Negros Occidental, Branch V,
and FRANCIS A. TONGOY, Administrator of the Estate of the late LUIS D. TONGOY respondents.

DE CASTRO, J.:

Appeal from two orders of the Court of First Instance of Negros Occidental, Branch V in Special
Proceedings No. 7794, entitled: "Intestate Estate of Luis D. Tongoy," the first dated July 29, 1969
dismissing the Motion for Allowance of Claim and for an Order of Payment of Taxes by the
Government of the Republic of the Philippines against the Estate of the late Luis D. Tongoy, for
deficiency income taxes for the years 1963 and 1964 of the decedent in the total amount of
P3,254.80, inclusive 5% surcharge, 1% monthly interest and compromise penalties, and the second,
dated October 7, 1969, denying the Motion for reconsideration of the Order of dismissal.

The Motion for allowance of claim and for payment of taxes dated May 28, 1969 was filed on June 3,
1969 in the abovementioned special proceedings, (par. 3, Annex A, Petition, pp. 1920, Rollo). The
claim represents the indebtedness to the Government of the late Luis D. Tongoy for deficiency
income taxes in the total sum of P3,254.80 as above stated, covered by Assessment Notices Nos. 11-
50-29-1-11061-21-63 and 11-50-291-1 10875-64, to which motion was attached Proof of Claim
 (Annex B, Petition, pp. 21-22, Rollo). The Administrator opposed the motion solely on the ground
that the claim was barred under Section 5, Rule 86 of the Rules of Court (par. 4, Opposition to
Motion for Allowance of Claim, pp. 23-24, Rollo). Finding the opposition well-founded, the
respondent Judge, Jose F. Fernandez, dismissed the motion for allowance of claim filed by herein
petitioner, Regional Director of the Bureau of Internal Revenue, in an order dated July 29, 1969
(Annex D, Petition, p. 26, Rollo). On September 18, 1969, a motion for reconsideration was filed, of
the order of July 29, 1969, but was denied in an Order dated October 7, 1969.

Hence, this appeal on certiorari, petitioner assigning the following errors:

1. The lower court erred in holding that the claim for taxes by the government
against the estate of Luis D. Tongoy was filed beyond the period provided in Section
2, Rule 86 of the Rules of Court.

2. The lower court erred in holding that the claim for taxes of the government was
already barred under Section 5, Rule 86 of the Rules of Court.

which raise the sole issue of whether or not the statute of non-claims Section 5, Rule 86 of the New
Rule of Court, bars claim of the government for unpaid taxes, still within the period of limitation
prescribed in Section 331 and 332 of the National Internal Revenue Code.

Section 5, Rule 86, as invoked by the respondent Administrator in hid Oppositions to the Motion for
Allowance of Claim, etc. of the petitioners reads as follows:

All claims for money against the decedent, arising from contracts, express or
implied, whether the same be due, not due, or contingent, all claims for funeral
expenses and expenses for the last sickness of the decedent, and judgment for
money against the decedent, must be filed within the time limited in they notice;
otherwise they are barred forever, except that they may be set forth as counter
claims in any action that the executor or administrator may bring against the
claimants. Where the executor or administrator commence an action, or prosecutes
an action already commenced by the deceased in his lifetime, the debtor may set
forth may answer the claims he has against the decedents, instead of presenting
them independently to the court has herein provided, and mutual claims may be set
off against each other in such action; and in final judgment is rendered in favored of
the decedent, the amount to determined shall be considered the true balance against
the estate, as though the claim has been presented directly before the court in the
administration proceedings. Claims not yet due, or contingent may be approved at
their present value.

A perusal of the aforequoted provisions shows that it makes no mention of claims for monetary
obligation of the decedent created by law, such as taxes which is entirely of different character from
the claims expressly enumerated therein, such as: "all claims for money against the decedent
arising from contract, express or implied, whether the same be due, not due or contingent, all claim
for funeral expenses and expenses for the last sickness of the decedent and judgment for money
against the decedent." Under the familiar rule of statutory construction of expressio unius est
exclusio alterius, the mention of one thing implies the exclusion of another thing not mentioned.
Thus, if a statute enumerates the things upon which it is to operate, everything else must
 necessarily, and by implication be excluded from its operation and effect (Crawford, Statutory
Construction, pp. 334-335).

In the case of Commissioner of Internal Revenue vs. Ilagan Electric & Ice Plant, et al., G.R. No. L-
23081, December 30, 1969, it was held that the assessment, collection and recovery of taxes, as well
as the matter of prescription thereof are governed by the provisions of the National Internal
revenue Code, particularly Sections 331 and 332 thereof, and not by other provisions of law. (See
also Lim Tio, Dy Heng and Dee Jue vs. Court of Tax Appeals & Collector of Internal Revenue, G.R. No.
L-10681, March 29, 1958). Even without being specifically mentioned, the provisions of Section 2 of
Rule 86 of the Rules of Court may reasonably be presumed to have been also in the mind of the
Court as not affecting the aforecited Section of the National Internal Revenue Code.

In the case of Pineda vs. CFI of Tayabas, 52 Phil. 803, it was even more pointedly held that "taxes
assessed against the estate of a deceased person ... need not be submitted to the committee on
claims in the ordinary course of administration. In the exercise of its control over the administrator,
the court may direct the payment of such taxes upon motion showing that the taxes have been
assessed against the estate." The abolition of the Committee on Claims does not alter the basic
ruling laid down giving exception to the claim for taxes from being filed as the other claims
mentioned in the Rule should be filed before the Court. Claims for taxes may be collected even after
the distribution of the decedent's estate among his heirs who shall be liable therefor in proportion
of their share in the inheritance. (Government of the Philippines vs. Pamintuan, 55 Phil. 13).

The reason for the more liberal treatment of claims for taxes against a decedent's estate in the form
of exception from the application of the statute of non-claims, is not hard to find. Taxes are the
lifeblood of the Government and their prompt and certain availability are imperious need.
(Commissioner of Internal Revenue vs. Pineda, G. R. No. L-22734, September 15, 1967, 21 SCRA
105). Upon taxation depends the Government ability to serve the people for whose benefit taxes are
collected. To safeguard such interest, neglect or omission of government officials entrusted with the
collection of taxes should not be allowed to bring harm or detriment to the people, in the same
manner as private persons may be made to suffer individually on account of his own negligence, the
presumption being that they take good care of their personal affairs. This should not hold true to
government officials with respect to matters not of their own personal concern. This is the
philosophy behind the government's exception, as a general rule, from the operation of the
principle of estoppel. (Republic vs. Caballero, L-27437, September 30, 1977, 79 SCRA 177; Manila
Lodge No. 761, Benevolent and Protective Order of the Elks Inc. vs. Court of Appeals, L-41001,
September 30, 1976, 73 SCRA 162; Sy vs. Central Bank of the Philippines, L-41480, April 30,1976,
70 SCRA 571; Balmaceda vs. Corominas & Co., Inc., 66 SCRA 553; Auyong Hian vs. Court of Tax
Appeals, 59 SCRA 110; Republic vs. Philippine Rabbit Bus Lines, Inc., 66 SCRA 553; Republic vs.
Philippine Long Distance Telephone Company, L-18841, January 27, 1969, 26 SCRA 620; Zamora vs.
Court of Tax Appeals, L-23272, November 26, 1970, 36 SCRA 77; E. Rodriguez, Inc. vs. Collector of
Internal Revenue, L- 23041, July 31, 1969, 28 SCRA 119.) As already shown, taxes may be collected
even after the distribution of the estate of the decedent among his heirs (Government of the
Philippines vs. Pamintuan, supra; Pineda vs. CFI of Tayabas, supra Clara Diluangco Palanca vs.
Commissioner of Internal Revenue, G. R. No. L-16661, January 31, 1962).

Furthermore, as held in Commissioner of Internal Revenue vs. Pineda, supra, citing the last
paragraph of Section 315 of the Tax Code payment of income tax shall be a lien in favor of the
Government of the Philippines from the time the assessment was made by the Commissioner of
Internal Revenue until paid with interests, penalties, etc. By virtue of such lien, this court held that
 the property of the estate already in the hands of an heir or transferee may be subject to the
payment of the tax due the estate. A fortiori before the inheritance has passed to the heirs, the
unpaid taxes due the decedent may be collected, even without its having been presented under
Section 2 of Rule 86 of the Rules of Court. It may truly be said that until the property of the estate of
the decedent has vested in the heirs, the decedent, represented by his estate, continues as if he
were still alive, subject to the payment of such taxes as would be collectible from the estate even
after his death. Thus in the case above cited, the income taxes sought to be collected were due from
the estate, for the three years 1946, 1947 and 1948 following his death in May, 1945.

Even assuming arguendo that claims for taxes have to be filed within the time prescribed in Section
2, Rule 86 of the Rules of Court, the claim in question may be filed even after the expiration of the
time originally fixed therein, as may be gleaned from the italicized portion of the Rule herein cited
which reads:

Section 2. Time within which claims shall be filed. - In the notice provided in the
preceding section, the court shall state the time for the filing of claims against the
estate, which shall not be more than twelve (12) nor less than six (6) months after
the date of the first publication of the notice. However, at any time before an order of
distribution is entered, on application of a creditor who has failed to file his claim
within the time previously limited the court may, for cause shown and on such terms
as are equitable, allow such claim to be flied within a time not exceeding one (1)
month. (Emphasis supplied)

In the instant case, petitioners filed an application (Motion for Allowance of Claim and for an Order
of Payment of Taxes) which, though filed after the expiration of the time previously limited but
before an order of the distribution is entered, should have been granted by the respondent court, in
the absence of any valid ground, as none was shown, justifying denial of the motion, specially
considering that it was for allowance Of claim for taxes due from the estate, which in effect
represents a claim of the people at large, the only reason given for the denial that the claim was
filed out of the previously limited period, sustaining thereby private respondents' contention,
erroneously as has been demonstrated.

WHEREFORE, the order appealed from is reverse. Since the Tax Commissioner's assessment in the
total amount of P3,254.80 with 5 % surcharge and 1 % monthly interest as provided in the Tax
Code is a final one and the respondent estate's sole defense of prescription has been herein
overruled, the Motion for Allowance of Claim is herein granted and respondent estate is ordered to
pay and discharge the same, subject only to the limitation of the interest collectible thereon as
provided by the Tax Code. No pronouncement as to costs.

SO ORDERED.

Teehankee (Chairman), Makasiar, Fernandez, Guerrero, and Melencio-Herrera, JJ., concur.

PHILIPPINE JURISPRUDENCE - FULL TEXT

The Lawphil Project - Arellano Law Foundation
G.R. No. L-29276 May 18, 1978
DE GUZMAN vs. DE GUZMAN-CARILLO
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-29276 May 18, 1978

Testate Estate of the Late Felix J. de Guzman. VICTORINO G. DE GUZMAN, administrator-

appellee,
vs.
CRISPINA DE GUZMAN-CARILLO, ARSENIO DE GUZMAN and HONORATA DE GUZMAN-
MENDIOLA, oppositors-appellants.

Emiliano Samson & R. Balderama-Samson for appellants.

Cezar Paralejo for appellee.

AQUINO, J.:

This case is about the propriety of allowing as administration expenses certain disbursements
made by the administrator of the testate estate of the late Felix J. de Guzman of Gapan, Nueva Ecija.

The deceased testator was survived by eight children named Victorino, Librada, Severino,
Margarita, Josefina, Honorata, Arsenio and Crispina. His will was duly probated. Letters of
administration were issued to his son, Doctor Victorino G. de Guzman, pursuant to the order dated
September 17, 1964 of the Court of First Instance of Nueva Ecija in Special Proceeding No. 1431.

One of the properties left by the dent was a residential house located in the poblacion. In
conformity with his last will, that house and the lot on which it stands were adjudicated to his eight
children, each being given a one-eighth proindiviso share in the project of partition dated March 19,
1966, which was signed by the eight heirs and which was approved in the lower court's order of
April 14, 1967 but without prejudice to the final outcome of the accounting.

The administrator submitted four accounting reports for the period from June 16, 1964 to
September, 1967. Three heirs Crispina de Guzmans-Carillo Honorata de Guzman-Mendiola and
Arsenio de Guzman interposed objections to the administrator's disbursements in the total sum of
P13,610.48, broken down as follows:

I. Expense for the improvement and renovation of the decedent's residential house.

1. Construction of fence — P3,082.07

2. Renovation of bathroom — P1,389.52

3. Repair of terrace and

 interior of house — P5,928.00 — P10,399.59

II. Living expenses of Librada de Guzman while occupying the family home without paying rent:

1. For house helper — P1,170.00

2. Light bills — 227.41

3. Water bills — 150.80

4. Gas oil, floor wax

and switch nail — 54.90 — P 1,603.11

III. Other expenses:

1. Lawyer's subsistence — P 19.30

2. Gratuity pay in lieu

of medical fee — 144.00

3. For stenographic notes — 100.00

4. For food served on

decedent's first

death anniversary — 166.65

5. Cost of publication of

death anniversary

of decedent — 102.00

6. Representation

expenses — 26.25 — P558.20

IV. Irrigation fee P1.049.58

TOTAL P13,610.48

It should be noted that the probate court in its order of August 29, 1966 directed the administrator
"to refrain from spending the assets of the estate for reconstructing and remodeling the house of
the deceased and to stop spending (sic) any asset of the estate without first during authority of the
court to do so" (pp. 26-27, Record on Appeal).
 The lower court in its order of April 29, 1968 allowed the d items as legitimate expenses of
administration. From that order, the three oppositors appealed to this Court. Their contention is
that the probate court erred in approving the utilization of the income of the estate (from rice
harvests) to defray those expenditures which allegedly are not allowable under the Rules of Court.

An executor or administrator is allowed the necessary expenses in the care, management, and
settlement of the estate. He is entitled to possess and manage the decedent's real and personal
estate as long as it is necessary for the payment of the debts and the expenses of administration. He
is accountable for the whole decedent's estate which has come into his possession, with all the
interest, profit, and income thereof, and with the proceeds of so much of such estate as is sold by
him, at the price at which it was sold (Sec. 3, Rule 84; Secs. 1 and 7, Rule 85, Rules of Court).

One of the Conditions of the administrator's bond is that he should render a true and just account of
his administration to the court. The court may examine him upon oath With respect to every matter
relating to his accounting 't and shall so examine him as to the correctness of his account before the
same is allowed, except when no objection is made to the allowance of the account and its
correctness is satisfactorily established by competent proof. The heirs, legatees, distributes, and
creditors of the estate shall have the same privilege as the executor or administrator of being
examined on oath on any matter relating to an administration account." (Sec. 1[c] Rule 81 and secs.
8 and 9, Rule 85, Rules of Court).

A hearing is usually held before an administrator's account is approved, especially if an interested

Party raises objections to certain items in the accounting report (Sec. 10, Rule 85).

At that hearing, the practice is for the administrator to take the witness stand, testify under oath on
his accounts and Identify the receipts, vouchers and documents evidencing his disbursements
which are offered as exhibits. He may be interrogated by the court and crossed by the oppositors's
counsel. The oppositors may present proofs to rebut the ad. administrator's evidence in support of
his accounts.

I. Expenses for the renovation and improvement of the family residence — P10,399.59. — As
already shown above, these expenses consisted of disbursements for the repair of the terrace and
interior of the family home, the renovation of the bathroom, and the construction of a fence. The
probate court allowed those expenses because an administrator has the duty to "maintain in
tenantable repair the houses and other structures and fences belonging to the estate, and deliver
the same in such repair to the heirs or devises" when directed to do so by the court (Sec. 2, Rule 84,
Rules of Court).

On the other hand, the oppositors-appellants contend that the trial court erred in allowing those
expenses because the same did not come within the category of necessary expenses of
administration which are understood to be the reasonable and necessary expenses of caring for the
property and managing it until the debts are paid and the estate is partitioned and distributed
among the heirs (Lizarraga Hermanos vs. Abada, 40 Phil. 124).

As clarified in the Lizarraga case, administration expenses should be those which are necessary for
the management of the estate, for protecting it against destruction or deterioration, and, possibly,
for the production of fruits. They are expenses entailed for the preservation and productivity of the
estate and its management for purposes of liquidation, payment of debts, and distribution of the
residue among the persons entitled thereto.
It should be noted that the family residence was partitioned proindiviso among the decedent's eight
children. Each one of them was given a one-eighth share in conformity with the testator's will. Five
of the eight co-owners consented to the use of the funds of the estate for repair and improvement of
the family home. It is obvious that the expenses in question were incurred to preserve the family
home and to maintain the family's social standing in the community.

Obviously, those expenses redounded to the benefit of an the co- owners. They were necessary for
the preservation and use of the family residence. As a result of those expenses, the co-owners,
including the three oppositors, would be able to use the family home in comfort, convenience and
security.

We hold that the probate court did not err in approving the use of the income of the estate to defray
those ex

II. Expenses incurred by Librada de Guzman as occupant of the family residence without paying rent
— P1 603.11 — The probate court allowed the income of the estate to be used for those expenses
on the theory that the occupancy of the house by one heir did not deprive the other seven heirs
from living in it. Those expenses consist of the salaries of the house helper, light and water bills, and
the cost of gas, oil floor wax and switch nail

We are of the opinion that those expenses were personal expenses of Librada de Guzman, inuring y
to her benefit. Those expenses, not being reasonable administration expenses incurred by the
administrator, should not be charged against the income of the estate.

Librada de Guzman, as an heir, is entitled to share in the net income of the estate. She occupied the
house without paying rent. She should use her income for her living expenses while occupying the
family residence.

The trial court erred in approving those expenses in the administrator's accounts. They should be,
as they are hereby, disallowed (See 33 C.J.S 1239-40).

III. Other expenses — P558.20. — Among these expenses is the sum of P100 for stenographic notes
which, as admitted by the administrator on page 24 of his brief, should be disallowed. Another item,
"representation expenses" in the sum of P26.25 (2nd accounting), was not explained. it should
likewise be disallowed.

The probate court erred in allowing as expenses of ad. administration the sum of P268.65 which
was incurred during the celebration of the first death anniversary of the deceased. Those expenses
are disallowed because they have no connection with the care, management and settlement of the
decedent's estate (Nicolas vs. Nicolas 63 Phil 332).

The other expenses, namely, P19.30 for the lawyer's subsistence and P144 as the cost of the gift to
the physician who attended to the testator during his last s are allowable expenses.

IV. Irrigation fee — P1,049.58. —The appellants question the deductibility of that expense on the
ground that it seems to be a duplication of the item of P1,320 as irrigation fee for the same 1966-67
crop-year.
 The administrator in his comment filed on February 28, 1978 explained that the item of P1,320
represented the "allotments" for irrigation fees to eight tenants who cultivated the Intan crop,
which allotments were treated as "assumed expenses" deducted as farming expenses from the
value of the net harvests.

The explanation is not quite clear but it was not disputed by the appellants. The fact is that the said
sum of P1,049.58 was paid by the administrator to the Penaranda Irrigation System as shown in
Official Receipt No. 3596378 dated April 28, 1967. It was included in his accounting as part of the
farming expenses. The amount was properly allowed as a legitimate expense of administration.

WHEREFORE, the lower court's order of April 29, 1968 is affirmed with the modifications that the
sum of (a) P1,603.11 as the living expenses of Librada de Guzman. (b) P100 for stenographic notes,
(c) P26.25 as representation expenses, and (d) P268.65 as expenses for the celebration of the first
anniversary of the decedent's death are disallowed in the administrator's accounts. No costs.

SO ORDERED.

Fernando (Chairman), Barredo, Antonio, Concepcion, Jr., and Santos, JJ., concur.

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The Lawphil Project - Arellano Law Foundation

PHILIPPINE JURISPRUDENCE - FULL TEXT

The Lawphil Project - Arellano Law Foundation
G.R. No. L-42669             January 29, 1938
ESTATE OF JUAN DE LA VIÑ A vs. GOVERNMENT OF THE
PHILIPPINE ISLANDS

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-42669             January 29, 1938

Estate of the deceased JUAN DE LA VIÑA, plaintiff-appellee,

vs.
GOVERNMENT OF THE PHILIPPINE ISLANDS, claimant-appellant.

Office of the Solicitor General Hilado for appellant.

Jose Galan Blanco for appellee.
CONCEPCION, J.:

The question raised on this appeal is whether or not the action of the government to
collect a tax through the courts is imprescriptible.

In In re Estate of the deceased Juan de la Viñ a, represented by his judicial administratrix,

the collector of Internal Revenue had filed a claim for the payment of unpaid income tax
allegedly due from said estate for the years 1919, 1920, 1923, 1924, 1926, 1928, 1929,
1930 and 1931. The court ordered the administratrix to give preference to the payment
to the Government of the Philippine Islands of the sum of P6,236.25, the total amount of
the back taxes owing for the years 1926, 1928, 1929, 1930 and 1931, and held that the
payment of the back taxes for the years 1919, 1920, 1923 and 1924 was not demandable
because the government's action has prescribed. It likewise held that neither the
surcharge of 5 per cent on the amount owing for said taxes nor the interest of 1 per cent
also claimed by the government was collectible, because this has to do with the claim
against a deceased person falling under the exemption established at the end of section 9
(a) of Act No. 2833.

From this decision an appeal was taken by the Solicitor-General on behalf of the
government after his motion for a new trial was denied by the court. The judicial
administratrix of the deceased Juan de la Viñ a alleged in her answer that the deceased
while living had paid all the taxes for the years above-mentioned, with the exception of
the years 1928 and 1929, and that the claim of the government was for taxes in addition
to those already paid. With respect to the years 1928 and 1929, she alleged that due to
the amount of the income in 1928, Viñ a did not have to pay any tax, as to the year 1929,
that no income tax return had been filed for said year because Viñ a was then seriously ill.
Said judicial administratrix did not appeal from the decision not withstanding the holding
of the court that her evidence was not sufficient to impugn that of the government and
notwithstanding the fact that she was ordered to pay the back taxes for the five years
above-mentioned.

In view thereof, there is now no question upon the facts. The court found established all
those which form the basis of the government's claim for back taxes owing from the
estate of said deceased for the nine years claimed. The judicial administratrix does not
question them, for, as already stated, she has neither appealed nor even presented a brief
in reply to that of the government. The whole question, therefore, boils down to a
determination of whether or not the general law regarding prescription of actions found
in the Code of Civil Procedure, is applicable to cases involving, as the one at bar,
governments claim of the nature of those in the present case, filed in the matter of the
estate of the deceased Viñ a. The court affirmatively resolved this question with respect to
the claim for the years 1919, 1920, 1923, and 1924, applying thereto the prescription of
six years established in number 2 of section 43 of the aforesaid Code of Civil Procedure.
The Solicitor-General contends that this was error in view of the settled doctrine, both in
the jurisdiction as well as in that of the United States, that, unless expressly provided by
law, the statutes of limitations do not run against the State, and that this principle is
applicable to actions brought for the collection of taxes. We believe that the government's
contention is sustainable. (26 R. C. L., 388; 37 C. J., 711.)1ªvvphïl.nët
 Is the Philippine Government bound by the statute of limitations? The Supreme
Court of the United States in United States vs. Nashville, Chattanooga & St. Louis
Railway Co. (118 U. S., 12, 125), said:

"It is settled beyond doubt or controversy — upon the foundation of the

great principle of public policy, applicable to all governments alike, which
forbids that the public interest should be prejudiced by the negligence of
the officers or agents to whose care they are confided — that the United
States, asserting rights vested in it as a sovereign government, is not
bound by any statute of limitations, unless Congress has clearly
manifested its intention that it should be so bound," (Lindsey vs. Miller, 6
Pet., 666; U. S. vs. Knight, 14 Pet., 301, 315; Gibson vs. Chouteau, 13 Wall.,
92; U. S. vs. Thompson, 98 U. S., 486; Fink vs. O'Neil, 106 U. S., 272, 281.)

xxx     xxx     xxx

"These principles being based "upon the foundation of the great principle of public
policy" are, in the very nature of things, applicable to the Philippine Government."
(Government of the Philippine Islands vs. Monte de Piedad y Caja de Ahorros de Manila,
35 Phil., 728, 751-753; emphasis ours.)

Having shown that the government's action to collect judicially the back taxes in
question, does not prescribed, the only remaining point for determination is whether the
action of the government should be conditioned upon the fact that the discovery of the
erroneous, false and fraudulent return of the taxpayer, should take place within 3 years
following the date of such return or the date of the payment of the tax, as required by
section 9 (a) of the Act No. 2833 in order that the collector of Internal Revenue may
collect the back tax owing. This question has already been decided by this court in the
case of Collector of Internal Revenue vs. Villeges (56 Phil., 554, 559), wherein it was said:

It is therefore a matter established by the American jurisprudence that the three-

year prescription refers to the discovery of erroneous, false, or fraudulent
returns, and to tax assessments and their summary collection, but not to their
collection through judicial channels. The motion filed by the Collector of Internal
Revenue in this case, is equivalent to a judicial action for the collection of the
accured income tax. Therefore, the fact that the omission of the net income from
the administrator's return was discovered after the period of three years from
the filing of such return, on March 13, 1926, does not prevent the collection of the
proper tax assessed after such discovery.

And further on this court said in conclusion:

In view of the foregoing considerations, we are of opinion and so hold that the
three-year prescription established in section 9, subdivision (a), of Act No. 2833,
refers to the discovery of erroneous, false, or fraudulent returns made by a tax
payer, and not to the summary assessment and collection of said tax, but not to its
collection by an action in court.
Wherefore, the appealed decision is modified by ordering the estate of the deceased Juan
de la Viñ a to pay the back income taxes owing therefrom, for the amounts and for the
years following:

For the year 1919 . . . . . . . . . . . . . . . . . . . . . . . . . . P4,171.46

For the year 1920 . . . . . . . . . . . . . . . . . . . . . . . . . . 266.32
For the year 1923 . . . . . . . . . . . . . . . . . . . . . . . . . . 1,688.26
For the year 1924 . . . . . . . . . . . . . . . . . . . . . . . . . . 1,321.73

7,447.77
The appealed decision is affirmed in all other respects, with the costs to the estate of the
deceased Juan de la Viñ a. So ordered.

Avanceña, C.J., Villa-Real, Imperial, Diaz and Laurel, JJ., concur.

The Lawphil Project - Arellano Law Foundation

PHILIPPINE JURISPRUDENCE - FULL TEXT

The Lawphil Project - Arellano Law Foundation
G.R. No. 40235           September 6, 1933
MARIANO CU UNJIENG, ET AL. vs. JUAN POSADAS, ET AL.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. 40235           September 6, 1933

MARIANO CU UNJIENG, GUILLERMO A. CU UNJIENG and CU UNJIENG e HIJOS,

petitioners,
vs.
JUAN POSADAS, Collector of Internal Revenue, SOTERO RODAS, First Assistant
Fiscal of the City of Manila, SERAFIN P. HILADO, Solicitor-General, and LEONARD S.
GODDARD, Judge of First Instance of Manila, respondents.

Duran, Lim and Tuason for petitioners.

C.A. DeWitt and the respondents for the latter.

STREET, J.:
This is a petition for the writ of prohibition presented by Mariano Cu Unjieng, Guillermo
A. Cu Unjieng and Cu Unjieng e Hijos against Juan Posadas, Collector of Internal Revenue,
Sotero Rodas, First Assistant Fiscal of the City of Manila, Serafin P. Hilado, Solicitor-
General, and L. S. Goddard, Judge of the Court of First Instance of Manila.

The petition is now submitted upon the answer of the respondents, and the facts
essential to a decision in this Court of First Instance of the City of Manila, before Judge L.
S. Goddard, wherein Mariano Cu Unjieng is the accused. In the course of the trial in said
case the prosecution desired to submit as evidence the income tax returns of Mariano Cu
Unjieng, Guillermo A. Cu Unjieng, and Cu Unjieng e Hijos for the years 1929, 1930 and
1931. The Solicitor-General, on August 17, 1933, therefore addressed a letter to the
Collector of Internal Revenue requesting that the income tax returns referred to should
be produced before Judge Goddard in the Court of First Instance of Manila, on August 18,
1933, there to be used as evidence in the criminal case mentioned.

Accordingly, on said date, a representative of the Bureau of Internal Revenue appeared in

court with said returns, and the prosecuting attorney asked leave to present said witness
and to submit said income tax returns as evidence. Counsel for the defense objected on
the ground that the production of said returns would be in violation of sections 30 and 31
of the Income Tax Law. After discussion of the matter the courts suspended its resolution
in order to give an opportunity to the attorneys for the defendant to submit the present
petition.

The provisions of law pertinent to the discussion are these:

After the assessment shall have been made, as provided in this law, the returns
together with any corrections thereof which may have been made by the
Collector shall be filed in the Office of the Collector of Internal Revenue and shall
constitute public records and be open to inspection as such upon the order of the
Governor-General under rules and regulations to be prescribed by the Secretary
of Finance. (Subsec. [b], sec. 14, of Income Tax Law, Act No. 2833.)

SEC. 2716. Unlawful divulgence of trade secrets. — Any officer or employee of the
Bureau of Internal Revenue who divulges to any person or makes known in any
other manner than may be provided by law information regarding the business
or income of any taxpayer, the secrets, operation, style of work, or apparatus of
any manufacturer or producer, or confidential information regarding the
business of any taxpayer, knowledge of which was acquired by him in the
discharge of his official duties shall be fined in a sum not more than two thousand
pesos or be imprisoned for a term of not less than six months nor more than five
years, or both. (Sec. 2716, Adm. Code, as amended by sec. 30 of Act No. 2833.)

SEC. 2731. Procuring unlawful divulgence of trade secrets. — Any person who
causes or procures an officer or employee of the Bureau of Internal revenue to
divulge any confidential information regarding the business or income of any
taxpayer knowledge of which was acquired by him in the discharge of his duties
and which it is unlawful for him to reveal, and any person who publishes or prints
in any manner whatever not provided by law any income, profits, losses, or
 expenditures appearing in any income-tax return, shall be fined in a sum not
more than two thousand pesos or be imprisoned for a term of not less than six
months nor more than five years or both. (Sec. 2731, Adm. Code, as amended by
sec. 31 of Act No. 2833.)

In addition to the foregoing provisions we quote section 11 of the Regulations (No. 33)
relating to inspection of income tax returns, promulgated by the Secretary of Finance and
approved by the Governor-General on October 13, 1922, as follows:

SEC. 11. Copies of returns furnished for use in legal proceedings. — When it become
necessary for the Bureau of Internal Revenue to furnish returns or copies thereof
for use in legal proceedings, inspection of such returns or copies that necessarily
results from such use is permitted.

The original income tax return of an individual, corporation, joint-stock company,

partnership, joint account (cuenta en participacion), association, insurance
company, or fiduciary, or a copy thereof, may be furnished by the Collector of
Internal Revenue for use as evidence in litigation in any court, where the
Government of the Philippine Islands is interested in the result, or for use in the
preparation for such litigation, to provincial or city fiscal or any attorney
connected with the Bureau of Justice designated to handle such matters, upon
written request of the Attorney-General, or an assistant acting on his behalf.
When an income tax return or copy thereof is thus furnished, it must be limited in
use to the purpose for which it is furnished, and is under no conditions to be
made public except where publicity necessarily results from such use. In case the
original return is necessary, it shall be placed in evidence by the Collector of
Internal Revenue or by some other officer or employee of the Bureau of Internal
Revenue designated by the Collector for that purpose, and after it has been placed
in evidence it shall be returned to the files in the Office of the Collector in Manila.
Neither the original nor a copy of an income tax return, desired for use in
litigation in court where the Government of the Philippines Islands is not
interested in the result and where such use might result in making public the
information contained therein, will be furnished, except as otherwise provided in
the next succeeding section. (21 Off. Gaz., 1246.)

A comparison of the Regulations just quoted, of our Department of Finance, with the
Department regulations of the United States Treasury, promulgated under the Revenue
Act prevailing in the United States, clearly discloses that our regulations governing the
inspection of income tax returns were taken from those of the Treasury Department,
with the sole difference that the federal regulations are not approved by the President,
while our regulations were approved by the Governor-General.

Again, it is evident that the provisions of law quoted above place no restriction upon the
divulgence of the information contained in income tax returns when the publication of
such information is made in the manner provided by law. It results that, when the
custodian of income tax returns is lawfully required to reveal them, he is protected from
the penalties expressed in sections 2716 and 2731 of the Administrative Code. There was
no intention to restrict the use of these documents, when their custodian is lawfully
required produce them or make their contents known.

In order to define the extent to which the returns are open to inspection, the Regulations
from which we have quoted were prescribed by our Secretary of Finance with the
approval of the Governor-General. We note that in section 1 of these Regulations it is
stated that they deal only with the inspection of returns, and that other uses to which
returns may be lawfully put, without action by the Governor-General, are not covered by
the Regulations. Upon a narrow interpretation of this language, it might seem that the
Regulations were intended to cover only such inspections as are made of the returns in
the Bureau of Internal Revenue and that it was not intended to prescribe the conditions
under which the returns, or copies thereof, may be supplied for use in legal proceedings.
But in section 11 of the Regulations we find provisions dealing precisely with this matter;
and we note that the prerequisites prescribed in section 11 were followed as a
preliminary to the production of the returns in court in the present case. We consider
that the word "inspection", in subsection (b) of section 14 of Act No. 2833 is used in an
untechnical sense, sufficiently broad to include the production of the returns in court.

In the second paragraph of section 11 of the Regulations we find it stated that the original
income tax returns, or copies thereof, may be furnished by the Collector of Internal
Revenue for use as evidence in litigation in any court where the Government of the
Philippine Islands is interested in the results. Stress is laid by the attorneys for the
petitioners on the words "where the government of the Philippine Islands is interested in
the result", and it is suggested that the Government of the Philippine Islands is not
interested in the result in this case. To this contention we are unable to give our assent.
The case now on trial is one prosecuted under by the authority of the Government of the
Philippine Islands, and although the case is styled People of the Philippine Islands vs.
Mariano Cu Unjieng et al., the Government is naturally interested in the result. A criminal
case is a sort of case in which, above all others, the Government, as corporate
representative of all society, is highly and immediately interested.

Finally, we observe that the Solicitor-General in his letter to the Collector of Internal
Revenue states that the Government of the Philippine Islands is interested in the result of
the decision in the case wherein the evidence in question is to be used, and if we could
not take judicial knowledge of that interest, this certification from the legal
representative of the Government might be taken as a sufficient indication of the fact.

It results that the income tax returns which have been brought into court under the
circumstances above mentioned are admissible in evidence, provided they contain
matter really pertinent to the issue, or issues, in the case now pending before the
respondent judge. Upon this point his Honor, as we understand, has not yet been called
upon to rule.

In what has been said we pretermit any discussion of the question whether the writ of
prohibition is a remedy that can be used in any case to prevent a Judge of First Instance
from admitting evidence which one of the litigants believes to be privileged or protected
from disclosure. As was said of the use of writ of mandamus, in Orient Insurance Co. vs.
Revilla and Teal Motor Co. (54 Phil., 919, 929), this court is loath to interfere in the course
of a trial in the Court of First Instance, as such interference might unduly prolong the
litigation in that court. In the case before us we find nothing which would justify us in
departing from the ordinary criterion.

In conclusion we wish to observe that the federal decisions discussing matters analogous
to that here under consideration are all cases where appeal had been taken in ordinary
course, and the question raised in the appellate court was whether or not the income tax
returns were properly admitted in evidence. In Corliss vs. U.S. ( [1925]), 7 Fed. [2nd],
455), it was held that the regulations of the Treasury Department governing the use of
such documents had not been followed, and the returns used were therefore
inadmissible. In Lewy vs. U.S. ( [1928], 29 Fed. [2nd], 462), the tax returns had been
obtained in compliance with the Treasury regulations, and hence were admissible. In
Gibson vs. U.S. ( [1929], 31 Fed. [2nd], 19), it was held that a supplementary income tax
return was admissible in evidence when the regulations of the Treasury Department with
reference to the production of returns had been followed, notwithstanding the fact that
the deputy collector had agreed with the taxpayer that such supplementary return would
not be used him in any case pending in court. In all of these cases relief against the use of
the returns was sought in ordinary course of appeal. We may add that the doctrine of
those cases support the conclusion reached above that the income tax returns involved in
this case were properly brought before the court.

The present petition, in our opinion, is not maintainable and the same is accordingly
dismissed, with costs against the petitioners. So ordered.

Malcolm, Abad Santos, and Hull, JJ., concur.

Imperial, J., concurs in the result.

The Lawphil Project - Arellano Law Foundation

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-68385 May 12, 1989

ILDEFONSO O. ELEGADO, as Ancillary Administrator of the Testate Estate of the late WARREN
TAYLOR GRAHAM, petitioner
vs.
HON. COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE respondents.

Agrava, Lucero & Gineta for petitioners.

The Office of the Solictor General for public respondents.

 
CRUZ, J.:

What the petitioner presents as a rather complicated problem is in reality a very simple question
from the viewpoint of the Solicitor General. We agree with the latter. There is actually only one
issue to be resolved in this action. That issue is whether or not the respondent Court of Tax Appeals
erred in dismissing the petitioner's appeal on grounds of jurisdiction and lack of a cause of action.

Appeal from what? That indeed is the question.

But first the facts.

On March 14, 1976, Warren Taylor Graham, an American national formerly resident in the
Philippines, died in Oregon, U.S.A. 1 As he left certain shares of stock in the Philippines, his son,
Ward Graham, filed an estate tax return on September 16, 1976, with the Philippine Revenue
Representative in San Francisco, U.S.A. 2

On the basis of this return, the respondent Commissioner of Internal Revenue assessed the
decedent's estate an estate tax in the amount of P96,509.35 on February 9, 1978. 3 This assessment
was protested on March 7, 1978, by the law firm of Bump, Young and Walker on behalf of the
estate . 4 The protest was denied by the Commissioner on July 7, 1978. 5 No further action was taken
by the estate in pursuit of that protest.

Meanwhile, on January 18, 1977, the decedent's will had been admitted to probate in the Circuit
Court of Oregon 6 Ward Graham, the designated executor, then appointed Ildefonso Elegado, the
herein petitioner, as his attorney-in-fact for the allowance of the will in the Philippines. 7

Pursuant to such authority, the petitioner commenced probate proceedings in the Court of First
Instance of Rizal. 8 The will was allowed on December 18, 1978, with the petitioner as ancillary
administrator. 9 As such, he filed a second estate tax return with the Bureau of Internal Revenue on
June 4, 1980. 10

On the basis of this second return, the Commissioner imposed an assessment on the estate in the
amount of P72,948.87. 11 This was protested on behalf of the estate by the Agrava, Lucero and
Gineta Law Office on August 13, 1980. 12

While this protest was pending, the Commissioner filed in the probate proceedings a motion for the
allowance of the basic estate tax of P96,509.35 as assessed on February 9, 1978. 13 He said that this
liability had not yet been paid although the assessment had long become final and executory.

The petitioner regarded this motion as an implied denial of the protest filed on August 13, 1980,
against the second assessment of P72,948.87. 14 On this understanding, he filed on September 15,
1981, a petition for review with the Court of Tax Appeals challenging the said assessment. 15

The Commissioner did not immediately answer (in fact, as the petitioner stressed, no answer was
filed during a delay of 195 days) and in the end instead cancelled the protested assessment in a
letter to the decedent's estate dated March 31, 1982. 16 This cancellation was notified to the Court of
Tax Appeals in a motion to dismiss on the ground that the protest had become moot and academic.
17
The motion was granted and the petition dismissed on April 25, 1984. 18 The petitioner then came
to this Court on certiorari under Rule 45 of the Rules of Court.

The petitioner raises three basic questions, to wit, (1) whether the shares of stocks left by the
decedent should be treated as his exclusive, and not conjugal, property; (2) whether the said stocks
should be assessed as of the time of the owner's death or six months thereafter; and (3) whether
the appeal filed with the respondent court should be considered moot and academic.

We deal first with the third issue as it is decisive of this case.

In the letter to the decedent's estate dated March 31, 1982, the Commissioner of Internal Revenue
wrote as follows:

Estate of WARREN T. GRAHAM c/o Mr. ILDEFENSO O. ELEGADO Ancillary Administrator Philex
Building cor. Brixton & Fairlane Sts. Pasig, Metro Manila

Sir:

This is with regard to the estate of the late WARREN TAYLOR GRAHAM, who died a
resident of Oregon, U.S.A. on March 14, 1976. It appears that two (2) letters of
demand were issued by this Bureau. One is for the amount of P96,509.35 based on
the first return filed, and the other in the amount of P72,948.87, based on the
second return filed.

It appears that the first assessment of P96,509.35 was issued on February 9, 1978
on the basis of the estate tax return filed on September 16, 1976. The said
assessment was, however, protested in a letter dated March 7, 1978 but was denied
on July 7, 1978. Since no appeal was made within the regulatory period, the same
has become final.

In view thereof, it is requested that you settle the aforesaid assessment for
P96,509.35 within fifteen (15) days upon receipt hereof to the Receivable Accounts
Division, this Bureau, BIR National Office Building, Diliman, Quezon City. The
assessment for P72,949.57 dated July 3, 1980, referred to above is hereby cancelled.

Very truly yours,

(SGD.) RUBEN B. ANCHETA Acting Commissioner 19

It is obvious from the express cancellation of the second assessment for P72,948.87 that the
petitioner had been deprived of a cause of action as it was precisely from this assessment that he
was appealing.

In its decision, the Court of Tax Appeals said that the petition questioning the assessment of July 3,
1980, was "premature" since the protest to the assessment had not yet been resolved. 20 As a matter
of fact it had: the said assessment had been cancelled by virtue of the above-quoted letter. The
respondent court was on surer ground, however, when it followed with the finding that the said
cancellation had rendered the petition moot and academic. There was really no more assessment to
review.
The petitioner argues that the issuance of the second assessment on July 3, 1980, had the effect of
canceling the first assessment of February 9, 1978, and that the subsequent cancellation of the
second assessment did not have the effect of automatically reviving the first. Moreover, the first
assessment is not binding on him because it was based on a return filed by foreign lawyers who had
no knowledge of our tax laws or access to the Court of Tax Appeals.

The petitioner is clutching at straws.

It is noted that in the letter of July 3, 1980, imposing the second assessment of P72,948.87, the
Commissioner made it clear that "the aforesaid amount is considered provisional only based on the
estate tax return filed subject to investigation by this Office for final determination of the correct
estate tax due from the estate. Any amount that may be found due after said investigation will be
assessed and collected later." 21 It is illogical to suggest that a provisional assessment can supersede
an earlier assessment which had clearly become final and executory.

The second contention is no less flimsy. The petitioner cannot be serious when he argues that the
first assessment was invalid because the foreign lawyers who filed the return on which it was based
were not familiar with our tax laws and procedure. Is the petitioner suggesting that they are
excused from compliance therewith because of their ignorance?

If our own lawyers and taxpayers cannot claim a similar preference because they are not allowed to
claim a like ignorance, it stands to reason that foreigners cannot be any less bound by our own laws
in our own country. A more obvious and shallow discrimination than that suggested by the
petitioner is indeed difficult to find.

But the most compelling consideration in this case is the fact that the first assessment is already
final and executory and can no longer be questioned at this late hour. The assessment was made on
February 9, 1978. It was protested on March 7, 1978. The protest was denied on July 7, 1978. As no
further action was taken thereon by the decedent's estate, there is no question that the assessment
has become final and executory.

In fact, the law firm that had lodged the protest appears to have accepted its denial. In his motion
with the probate court, the respondent Commissioner stressed that "in a letter dated January 29,
1980, the Estate of Warren Taylor Graham thru the aforesaid foreign law firm informed claimant
that they have paid said tax liability thru the Agrava, Velarde, Lucero and Puno, Philippine law firm
of 313 Buendia Avenue Ext., Makati, Metro Manila that initiated the instant ancillary proceedings"
although he added that such payment had not yet been received. 22 This letter was an
acknowledgment by the estate of the validity and finality of the first assessment. Significantly, it has
not been denied by the petitioner.

In view of the finality of the first assessment, the petitioner cannot now raise the question of its
validity before this Court any more than he could have done so before the Court of Tax Appeals.
What the estate of the decedent should have done earlier, following the denial of its protest on July
7, 1978, was to appeal to the Court of Tax Appeals within the reglementary period of 30 days after
it received notice of said denial. It was in such appeal that the petitioner could then have raised the
first two issues he now raises without basis in the present petition.

The question of whether or not the shares of stock left by the decedent should be considered
conjugal property or belonging to him alone is immaterial in these proceedings. So too is the time at
which the assessment of these shares of stock should have been made by the BIR. These questions
were not resolved by the Court of Tax Appeals because it had no jurisdiction to act on the
petitioner's appeal from an assessment that had already been cancelled. The assessment being no
longer controversial or reviewable, there was no justification for the respondent court to rule on
the petition except to dismiss it.

If indeed the Commissioner of Internal Revenue committed an error in the computation of the
estate tax, as the petitioner insists, that error can no longer be rectified because the original
assessment has long become final and executory. If that assessment was not challenged on time and
in accordance with the prescribed procedure, that error — for error it was — was committed not
by the respondents but by the decedent's estate itself which the petitioner represents. So how can
he now complain. –Ang taray ng lolo mo!

WHEREFORE, the petition is DENIED, with costs against the petitioner. It is so ordered,

Narvasa (Chairman), Griño-Aquino and Medialdea, JJ., concur.

Footnotes

1 Rollo, p. 9.

2 lbid., p. 40.

3 Id.

4 Id.

5 Id.

6 Id., p. 65.

7 Id., pp. 65-66.

8 Id., p. 66; Sp. Proc. No. 8869.

9 Id.

10 Id.

11 Id., p. 67.

12 Id., p. 68.

13 Id., pp. 47-50.

14 Id., p. 69.
 15 Id., p. 50.

16 Appendix B, Rollo, p. 35.

17 Reno, p. 50,

18 Decision penned by Judge Alex Z. Reyes, with Presiding Judge Amante Filler and
Judge Constante C. Roaquin, concurring.

19 Appendix B, Rollo, p. 35.

20 Rollo, pp. 53-54.

21 Ibid., p. 11.

22 Id., p. 49.

PHILIPPINE JURISPRUDENCE - FULL TEXT

The Lawphil Project - Arellano Law Foundation
G.R. No. L-22734             September 15, 1967
COMMISSIONER OF INTERNAL REVENUE vs. MANUEL B. PINEDA

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-22734             September 15, 1967

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
MANUEL B. PINEDA, as one of the heirs of deceased ATANASIO PINEDA, respondent.

Office of the Solicitor General for petitioner.

Manuel B. Pineda for and in his own behalf as respondent.

BENGZON, J.P., J.:

          On May 23, 1945 Atanasio Pineda died, survived by his wife, Felicisima Bagtas, and
15 children, the eldest of whom is Manuel B. Pineda, a lawyer. Estate proceedings were
had in the Court of First Instance of Manila (Case No. 71129) wherein the surviving
widow was appointed administratrix. The estate was divided among and awarded to the
heirs and the proceedings terminated on June 8, 1948. Manuel B. Pineda's share
amounted to about P2,500.00.

          After the estate proceedings were closed, the Bureau of Internal Revenue
investigated the income tax liability of the estate for the years 1945, 1946, 1947 and
1948 and it found that the corresponding income tax returns were not filed. Thereupon,
the representative of the Collector of Internal Revenue filed said returns for the estate on
the basis of information and data obtained from the aforesaid estate proceedings and
issued an assessment for the following:

1. Deficiency income tax

1945 P135.83
1946 436.95
1947 1,206.91 P1,779.69
  Add: 5% surcharge 88.98
1% monthly interest
from November 30,
1953 to April 15, 1957 720.77
Compromise for late
filing 80.00
Compromise for late
payment 40.00

Total amount due P2,707.44

===========
Additional residence tax for P14.50
2.
1945 ===========
3. Real Estate dealer's tax for
the fourth quarter of 1946 P207.50
and the whole year of 1947 ===========
          Manuel B. Pineda, who received the assessment, contested the same. Subsequently,
he appealed to the Court of Tax Appeals alleging that he was appealing "only that
proportionate part or portion pertaining to him as one of the heirs."

          After hearing the parties, the Court of Tax Appeals rendered judgment reversing the
decision of the Commissioner on the ground that his right to assess and collect the tax
has prescribed. The Commissioner appealed and this Court affirmed the findings of the
Tax Court in respect to the assessment for income tax for the year 1947 but held that the
right to assess and collect the taxes for 1945 and 1946 has not prescribed. For 1945 and
1946 the returns were filed on August 24, 1953; assessments for both taxable years were
made within five years therefrom or on October 19, 1953; and the action to collect the tax
was filed within five years from the latter date, on August 7, 1957. For taxable year 1947,
however, the return was filed on March 1, 1948; the assessment was made on October
19, 1953, more than five years from the date the return was filed; hence, the right to
assess income tax for 1947 had prescribed. Accordingly, We remanded the case to the
Tax Court for further appropriate proceedings. 1

          In the Tax Court, the parties submitted the case for decision without additional
evidence.

          On November 29, 1963 the Court of Tax Appeals rendered judgment holding Manuel
B. Pineda liable for the payment corresponding to his share of the following taxes:

Deficiency income tax

1945 P135.83
1946 436.95
Real estate dealer's
fixed tax 4th quarter
of 1946 and whole
year of 1947 P187.50
          The Commissioner of Internal Revenue has appealed to Us and has proposed to hold
Manuel B. Pineda liable for the payment of all the taxes found by the Tax Court to be due
from the estate in the total amount of P760.28 instead of only for the amount of taxes
corresponding to his share in the estate.1awphîl.nèt

          Manuel B. Pineda opposes the proposition on the ground that as an heir he is liable
for unpaid income tax due the estate only up to the extent of and in proportion to any
share he received. He relies on Government of the Philippine Islands v. Pamintuan2 where
We held that "after the partition of an estate, heirs and distributees are liable individually
for the payment of all lawful outstanding claims against the estate in proportion to the
amount or value of the property they have respectively received from the estate."

          We hold that the Government can require Manuel B. Pineda to pay the full amount
of the taxes assessed.

          Pineda is liable for the assessment as an heir and as a holder-transferee of property

belonging to the estate/taxpayer. As an heir he is individually answerable for the part of
the tax proportionate to the share he received from the inheritance. 3 His liability,
however, cannot exceed the amount of his share.4

          As a holder of property belonging to the estate, Pineda is liable for he tax up to the
amount of the property in his possession. The reason is that the Government has a lien on
the P2,500.00 received by him from the estate as his share in the inheritance, for unpaid
income taxes4a for which said estate is liable, pursuant to the last paragraph of Section
315 of the Tax Code, which we quote hereunder:

          If any person, corporation, partnership, joint-account (cuenta en

participacion), association, or insurance company liable to pay the income tax,
neglects or refuses to pay the same after demand, the amount shall be a lien in
favor of the Government of the Philippines from the time when the assessment
was made by the Commissioner of Internal Revenue until paid with interest,
penalties, and costs that may accrue in addition thereto upon all property and
rights to property belonging to the taxpayer: . . .
          By virtue of such lien, the Government has the right to subject the property in
Pineda's possession, i.e., the P2,500.00, to satisfy the income tax assessment in the sum of
P760.28. After such payment, Pineda will have a right of contribution from his co-heirs, 5
to achieve an adjustment of the proper share of each heir in the distributable estate.

          All told, the Government has two ways of collecting the tax in question. One, by
going after all the heirs and collecting from each one of them the amount of the tax
proportionate to the inheritance received. This remedy was adopted in Government of the
Philippine Islands v. Pamintuan, supra. In said case, the Government filed an action against
all the heirs for the collection of the tax. This action rests on the concept that hereditary
property consists only of that part which remains after the settlement of all lawful claims
against the estate, for the settlement of which the entire estate is first liable. 6 The reason
why in case suit is filed against all the heirs the tax due from the estate is levied
proportionately against them is to achieve thereby two results: first, payment of the tax;
and second, adjustment of the shares of each heir in the distributed estate as lessened by
the tax.

          Another remedy, pursuant to the lien created by Section 315 of the Tax Code upon
all property and rights to property belonging to the taxpayer for unpaid income tax, is by
subjecting said property of the estate which is in the hands of an heir or transferee to the
payment of the tax due, the estate. This second remedy is the very avenue the
Government took in this case to collect the tax. The Bureau of Internal Revenue should be
given, in instances like the case at bar, the necessary discretion to avail itself of the most
expeditious way to collect the tax as may be envisioned in the particular provision of the
Tax Code above quoted, because taxes are the lifeblood of government and their prompt
and certain availability is an imperious need.7 And as afore-stated in this case the suit
seeks to achieve only one objective: payment of the tax. The adjustment of the respective
shares due to the heirs from the inheritance, as lessened by the tax, is left to await the
suit for contribution by the heir from whom the Government recovered said tax.

          WHEREFORE, the decision appealed from is modified. Manuel B. Pineda is hereby

ordered to pay to the Commissioner of Internal Revenue the sum of P760.28 as deficiency
income tax for 1945 and 1946, and real estate dealer's fixed tax for the fourth quarter of
1946 and for the whole year 1947, without prejudice to his right of contribution for his
co-heirs. No costs. So ordered.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and
Fernando, JJ., concur.

Footnotes

1
Collector of Internal Revenue v. Manuel B. Pineda as one of the heirs of the
deceased Atanasio Pineda, L-14522, May 31, 1961.

2
55 Phil. 13.
 3
Government of the Philippine Islands v. Santos, 56 Phil. 827.

4
Art. 1311, Civil Code of the Philippines.

4a
Real estate dealer's fixed tax is subject to the same lien pursuant to the first
paragraph of Sec. 355, Tax Code.

5
Government of the Philippine Islands v. Santos, G.R. No. 34152, Dec. 15, 1931, 56
Phil. 827.

6
Lopez v. Enriquez, 16 Phil. 336.

7
Bull v. United States, 295 U.S. 247, 15 AFTR 1069, 1073.

The Lawphil Project - Arellano Law Foundation

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 120880 June 5, 1997

FERDINAND R. MARCOS II, petitioner,

vs.
COURT OF APPEALS, THE COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE and
HERMINIA D. DE GUZMAN, respondents.

TORRES, JR., J.:

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

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

WHEREFORE, premises considered, judgment is hereby rendered DISMISSING the

petition for certiorari with prayer for Restraining Order and Injunction.

No pronouncements as to costs.

SO ORDERED.

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

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

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

II. Annul and set aside the Notices of Sale dated May 26, 1993;

III. Enjoin the Head Revenue Executive Assistant Director II (Collection Service),
from proceeding with the Auction of the real properties covered by Notices of Sale.

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

WHEREFORE, premises considered judgment is hereby rendered DISMISSING the

petition for Certiorari with prayer for Restraining Order and Injunction.

No pronouncements as to cost.

SO ORDERED.

Unperturbed, petitioner is now before us assailing the validity of the appellate court's decision,
assigning the following as errors:
 A. RESPONDENT COURT MANIFESTLY ERRED IN RULING THAT THE SUMMARY
TAX REMEDIES RESORTED TO BY THE GOVERNMENT ARE NOT AFFECTED AND
PRECLUDED BY THE PENDENCY OF THE SPECIAL PROCEEDING FOR THE
ALLOWANCE OF THE LATE PRESIDENT'S ALLEGED WILL. TO THE CONTRARY,
THIS PROBATE PROCEEDING PRECISELY PLACED ALL PROPERTIES WHICH FORM
PART OF THE LATE PRESIDENT'S ESTATE IN CUSTODIA LEGIS OF THE PROBATE
COURT TO THE EXCLUSION OF ALL OTHER COURTS AND ADMINISTRATIVE
AGENCIES.

B. RESPONDENT COURT ARBITRARILY ERRED IN SWEEPINGLY DECIDING THAT

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

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

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

[b] Petitioner, as one of the late President's compulsory heirs, was

never notified, much less served with copies of the Notices of Levy,
contrary to the mandate of Section 213 of the NIRC. As such,
petitioner was never given an opportunity to contest the Notices in
violation of his right to due process of law.

C. ON ACCOUNT OF THE CLEAR MERIT OF THE PETITION, RESPONDENT COURT

MANIFESTLY ERRED IN RULING THAT IT HAD NO POWER TO GRANT INJUNCTIVE
RELIEF TO PETITIONER. SECTION 219 OF THE NIRC NOTWITHSTANDING, COURTS
POSSESS THE POWER TO ISSUE A WRIT OF PRELIMINARY INJUNCTION TO
RESTRAIN RESPONDENTS COMMISSIONER'S AND DE GUZMAN'S ARBITRARY
METHOD OF COLLECTING THE ALLEGED DEFICIENCY ESTATE AND INCOME
TAXES BY MEANS OF LEVY.

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

On September 29, 1989, former President Ferdinand Marcos died in Honolulu,

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

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

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

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

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

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

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

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

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

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

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

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

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

Petitioner posits that notices of levy, notices of sale, and subsequent sale of properties of the late
President Marcos effected by the BIR are null and void for disregarding the established procedure
for the enforcement of taxes due upon the estate of the deceased. The case of Domingo vs. Garlitos 4
is specifically cited to bolster the argument that "the ordinary procedure by which to settle claims
of indebtedness against the estate of a deceased, person, as in an inheritance (estate) tax, is for the
claimant to present a claim before the probate court so that said court may order the administrator
to pay the amount therefor." This remedy is allegedly, exclusive, and cannot be effected through any
other means.
Petitioner goes further, submitting that the probate court is not precluded from denying a request
by the government for the immediate payment of taxes, and should order the payment of the same
only within the period fixed by the probate court for the payment of all the debts of the decedent. In
this regard, petitioner cites the case of Collector of Internal Revenue vs. The Administratrix of the
Estate of Echarri (67 Phil 502), where it was held that:

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

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

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

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

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

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

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

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

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

Taxes assessed against the estate of a deceased person, after administration is

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

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

Claims for taxes, whether assessed before or after the death of the deceased, can be
collected from the heirs even after the distribution of the properties of the decedent.
They are exempted from the application of the statute of non-claims. The heirs shall
be liable therefor, in proportion to their share in the inheritance. 13
 Thus, the Government has two ways of collecting the taxes in question. One, by
going after all the heirs and collecting from each one of them the amount of the tax
proportionate to the inheritance received. Another remedy, pursuant to the lien
created by Section 315 of the Tax Code upon all property and rights to property
belong to the taxpayer for unpaid income tax, is by subjecting said property of the
estate which is in the hands of an heir or transferee to the payment of the tax due
the estate. (Commissioner of Internal Revenue vs. Pineda, 21 SCRA 105, September
15, 1967.)

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

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

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

Section 229 of the NIRC tells us how:

Sec. 229. Protesting of assessment. — When the Commissioner of Internal Revenue

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

Such assessment may be protested administratively by filing a request for

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

If the protest is denied in whole or in part, the individual, association or corporation

adversely affected by the decision on the protest may appeal to the Court of Tax
Appeals within thirty (30) days from receipt of said decision; otherwise, the
decision shall become final, executory and demandable. (As inserted by P.D. 1773)

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

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

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

. . . the Notices of Levy on Real Property (Annexes O to NN of Annex C of this

Petition) in satisfaction of said assessments were still issued by respondents well
beyond the period mandated in Revenue Memorandum Circular No. 38-68. These
Notices of Levy were issued only on 22 February 1993 and 20 May 1993 when at
least seventeen (17) months had already lapsed from the last service of tax
assessment on 12 September 1991. As no notices of distraint of personal property
were first issued by respondents, the latter should have complied with Revenue
Memorandum Circular No. 38-68 and issued these Notices of Levy not earlier than
three (3) months nor later than six (6) months from 12 September 1991. In
accordance with the Circular, respondents only had until 12 March 1992 (the last
day of the sixth month) within which to issue these Notices of Levy. The Notices of
Levy, having been issued beyond the period allowed by law, are thus void and of no
effect. 15

We hold otherwise. The Notices of Levy upon real property were issued within the prescriptive
period and in accordance with the provisions of the present Tax Code. The deficiency tax
assessment, having already become final, executory, and demandable, the same can now be
collected through the summary remedy of distraint or levy pursuant to Section 205 of the NIRC.

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

Sec. 223. Exceptions as to a period of limitation of assessment and collection of

taxes. — (a) In the case of a false or fraudulent return with intent to evade tax or of a
failure to file a return, the tax may be assessed, or a proceeding in court for the
collection of such tax may be begun without assessment, at any time within ten (10)
years after the discovery of the falsity, fraud, or omission: Provided, That, in a fraud
assessment which has become final and executory, the fact of fraud shall be
judicially taken cognizance of in the civil or criminal action for the collection thereof.

xxx xxx xxx

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

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

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

Petitioner also expresses his reservation as to the propriety of the BIR's total assessment of
P23,292,607,638.00, stating that this amount deviates from the findings of the Department of
Justice's Panel of Prosecutors as per its resolution of 20 September 1991. Allegedly, this is clear
evidence of the uncertainty on the part of the Government as to the total value of the estate of the
late President.

This is, to our mind, the petitioner's last ditch effort to assail the assessment of estate tax which had
already become final and unappealable.

It is not the Department of Justice which is the government agency tasked to determine the amount
of taxes due upon the subject estate, but the Bureau of Internal Revenue, 16 whose determinations
and assessments are presumed correct and made in good faith. 17 The taxpayer has the duty of
proving otherwise. In the absence of proof of any irregularities in the performance of official duties,
an assessment will not be disturbed. Even an assessment based on estimates is prima facie valid
and lawful where it does not appear to have been arrived at arbitrarily or capriciously. The burden
of proof is upon the complaining party to show clearly that the assessment is erroneous. Failure to
present proof of error in the assessment will justify the judicial affirmance of said assessment. 18 In
this instance, petitioner has not pointed out one single provision in the Memorandum of the Special
Audit Team which gave rise to the questioned assessment, which bears a trace of falsity. Indeed, the
petitioner's attack on the assessment bears mainly on the alleged improbable and unconscionable
amount of the taxes charged. But mere rhetoric cannot supply the basis for the charge of
impropriety of the assessments made.
Moreover, these objections to the assessments should have been raised, considering the ample
remedies afforded the taxpayer by the Tax Code, with the Bureau of Internal Revenue and the Court
of Tax Appeals, as described earlier, and cannot be raised now via Petition for Certiorari, under the
pretext of grave abuse of discretion. The course of action taken by the petitioner reflects his
disregard or even repugnance of the established institutions for governance in the scheme of a well-
ordered society. The subject tax assessments having become final, executory and enforceable, the
same can no longer be contested by means of a disguised protest. In the main, Certiorari may not be
used as a substitute for a lost appeal or remedy. 19 This judicial policy becomes more pronounced in
view of the absence of sufficient attack against the actuations of government.

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

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

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

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

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

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

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

xxx xxx xxx

. . . Levy shall be effected by writing upon said certificate a description of the

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

xxx xxx xxx

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

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

SO ORDERED.

Regalado, Romero, Puno and Mendoza, JJ., concur.

Footnotes

1 Penned by Associate Justice Asaali S. Isnani, Chairman; Justices Corona Ibay

Somera and Celia Lipana Reyes, concurring.

2 Annex "A", Petition, p. 80, Rollo.

3 Commissioner of Internal Revenue vs. Algue, Inc., et. al., G.R. No. L-28896,
February 17, 1988, 158 SCRA 9.

4 G.R. No. L-18994, June 29, 8 SCRA 443.

 5 Acebedo vs. Abesamis, G.R. No. 102380, 18 January 1993, 217 SCRA 186.

6 Reyes vs. Ysip, G.R. No. 7516, May 12, 1955, 97 Phil 11.

7 Gaas vs. Fortich, G.R. No. 3154, Dec. 28, 1929, 54 Phil 196.

8 Torres vs. Javier, May 24, 1916 34 Phil 382.

9 Pecson vs. Mediavillo, G.R. No. 7890, September 29, 1914, 28 Phil 81.

10 Borromeo-Herrera vs. Borromeo, et. al., L-41171, July 23, 1982.

11 85 C.J.S. # 1191, pp. 1056-1057.

12 No. L-31364, March 30, 1979, 89 SCRA 199.

13 Pineda vs. Court of First Instance of Tayabas, G.R. No. 30921, February 16, 1929,
52 Phil 805; Government vs. Pamintuan, G.R. No. 33139, October 11, 1930, 55 Phil
13.

14 Petition, p. 50, Rollo.

15 Ibid., pp. 57-58.

16 Section 16, National Internal Revenue Code.

17 Interprovincial Autobus Co., Inc. vs. Collector of Internal Revenue, G.R. No. 6741,
January 31, 1956, 98 Phil 290; CIR vs. Construction Resources Asia, Inc., G.R. No.
98230, November 25, 1986, 145 SCRA 671; Sy Po vs. Court of Tax Appeals, et. al.,
G.R. No. L-81446, August 18, 1988, 164 SCRA 524; CIR vs. Bohol Land
Transportation Co., 58 O.G. 2407 (1960).

18 Gutierrez vs. Villegas, G.R. No. L-17117, July 31, 1963, 8 SCRA 527.

19 De la Paz vs. Panis, G.R. No. 57023, June 22, 1995, 245 SCRA 242.

20 Court of Appeals Decision, pp. 12-13, Rollo.

21 Affidavit of Service by the Revenue Officer of the Collection and Enforcement

Division of the BIR, Annex "D", Comment/Memorandum of the Commissioner of
Internal Revenue in the Court of Appeals.

PHILIPPINE JURISPRUDENCE - FULL TEXT

The Lawphil Project - Arellano Law Foundation
G.R. No. L-33139             October 11, 1930
GOVERNMENT OF THE PHILIPPINE ISLANDS vs. JOSE MA.
PAMINTUAN, ET AL.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-33139             October 11, 1930

THE GOVERNMENT OF THE PHILIPPINE ISLANDS, plaintiff-appellants,

vs.
JOSE MA. PAMINTUAN, ET AL., defendants-appellees.

Attorney-General Jaranilla for appellant.

Jose Ma.Cavanna for appellees.

VILLA-REAL, J.:

          This is an appeal taken by the Government of the Philippine Islands from the
judgment of the Court of First Instance of Manila dismissing its complaint and absolving
the defendants, without costs. In support of the appeal the following alleged errors have
been assigned to the court below in its judgment:

1. The lower court erred in holding that the failure of the plaintiff to file its claim
with the committee on claims and appraisals barred it from collecting the tax in
questions in this action.

2. The lower court erred in holding that this case is governed by the principle laid
down in the case of the Government of the Philippine Islands vs. Inchausti & Co.
(24 Phil., 315).

3. The lower court erred in absolving the defendants from the complaint and in
denying the plaintiff's motion for new trial.

          The present case was submitted to the court below upon the following agreed
statement of facts:

I. That on February 27, 1920, Florentino Pamintuan, represented by J. V. Ramirez

or his attorney-in-fact charged with the administration of his property, filed
income-tax return for the year 1919, paying the amount of P 672.99 on the basis
of said return, and the additional sum of P151.01 as a result of a subsequent
assessment received from the Collector of Internal Revenue.

II. That on April 24, 1925, Florentino Pamintuan died in Washington, D. C., U. S. A.,
leaving the defendants herein as his heirs.
III. That on April 24, 1925, intestate proceedings were instituted in the Court of
First Instance of Manila in civil case No. 27948, intestate of the late Florentino
Pamintuan.

IV. That on April 28,1925, the Court of First Instance of Manila appointed Maximo
de la Paz and Candido Ilagan commissioners of appraisal of the property left by
the deceased Pamintuan, the said appointees taking their oaths of office on May 4
and May 9, 1925, respectively, and letters of appointment to the committee on
claims and appraisals were made on May 9,1925. 1awph!l.net

V. That the said committee on claims and appraisals after the publications of the
notices required by law held the necessary sessions in accordance with said
notices for the presentation and determination of all claims and credits against
the estate of the deceased Pamintuan.

VI. That on December 1, 1925, the above-mentioned committee rendered its

report which was duly approved by the court, and in which report it appears that
he only claims presented and that were approved were those of Tomasa Centeno,
Jose, Paz, Caridad, and Natividad Pamintuan and Cavanna, Aboitiz and Agan.

VII. That on June 12, 1926, Jose V. Ramirez, the duly appointed judicial
administrator of the estate of the deceased Florentino Pamintuan presented a
proposed partition of the decedent's estate which proposed partition was
approved by the court on July 6,1926, the court ordering the delivery to the heirs,
the defendants herein, of their respective shares of the inheritance after paying
the corresponding inheritance taxes which were duly paid on September 2, 1926,
in the amount of P25,047.19 as appears on the official receipt No. 4421361.

VIII. That the defendants herein inherited from the deceased Florentino
Pamintuan in the following proportions: Tomasa Pamintuan inherited 0.0571 per
cent of the decedent's estate and the other defendants 0.0784 per cent each
according to the partition approved by the court in civil case No. 27948.

IX. That during the pendency of the intestate proceedings, the administrator filed
income-tax returns for the estate of the deceased corresponding to the years
1925 and 1926.

X. That the intestate proceedings in civil case No. 27948 were definitely closed on
October 27, 1926, by order of the court of the same date.

XI. That subsequent to the distribution of the decedent's estate to the defendants
herein, that is, on February 16, 1927, the plaintiff discovered the fact that the
deceased Florentino Pamintuan has not paid the amount of four hundred and
sixty-two pesos (P462) as additional income tax and surcharge for the calendar
year 1919, on account of the sale made by him on November 14, 1919, of his
house and lot located at 922 M. H. del Pilar, Manila, from which sale he realized a
net profit or income of P11,000, which was not included in his income-tax return
 filed for said year 1919.

XII. That the defendants cannot disprove that the deceased Florentino Pamintuan
made a profit of P11,000 in the sale of the house referred to in paragraph Xl
hereof because they have destroyed the voluminous records and evidences
regarding the sale in question and other similar transactions which might show
repairs on the house, commissions, and other expenses tending to reduce the
profit obtained as mentioned above.

XIII. That demand for the payment of the income tax referred to herein was made
on February 24, 1927, on the defendants but they refused and still refuse to pay
the same either in full or in part.

          With regard to the first assignment of error, this court held in Pineda vs. Court of
First Instance of Tayabas and Collector of Internal Revenue (52 Phil., 803):

          To reply to these contentions in turn , we observe that, while there are a few
courts that have expressed themselves to the effect that a claim for taxes due to
the Government should be presented like other claims to the committee
appointed for the purpose of passing upon claims, the clear weight of judicial
authority is to the effect that claims for taxes and assessments, whether assessed
before or after the death of the decedent, are not required to be presented to the
committee. (24 C. J., 325; People vs. Olvera, 43 Cal., 492; Hancock vs.Whittemore,
50 Cal., 522; Findley vs. Taylor, 97 Iowa, 420; Bogue vs.Laughlin,149 Wis., 271; 40
L. R. A. [N.S.], 927; Ann. Cas.1913 C.,p.1367.)

          See also In re Estate of Frank H.Goulette (G. R. No. 32361, 1 decided on September
22,1930.)

          The administration proceedings of the late Florentino Pamintuan having been

closed, and his estate distributed among his heirs, the defendants herein, the latter are
responsible for the payment of the income tax here in question in proportion to the share
of each in said estate, in accordance with section 731 of the Code of Civil Procedure, and
the doctrine of this court laid down in Lopez vs. Enriquez (16 Phil.,336) as follows:

          ESTATE; LIABILITY OF HEIRS AND DISTRIBUTEES. — Heirs are not

required to respond with their own property for the debts of their deceased
ancestors. But even after the partition of an estate, heirs and distributees are
liable individually for the payment of all lawful outstanding claims against the
estate in proportion to the amount or value of the property they have
respectively received from the estate. The hereditary property consists only of
that part which remains after the settlement of all lawful claims against the
estate, for the settlement of which the entire estate is first liable. The heirs
cannot, by any act of their own or by agreement among themselves, reduce the
creditors' security for the payment of their claims. (Pavia vs. De la Rosa, 8
Phil.,70; secs. 731, 749, Code of Civil Procedure; art,1257, Civil Code.)

          For the reasons stated, we are of opinion and so hold that claims for income taxes
need not be filed with the committee on claims and appraisals appointed in the course of
testate proceedings and may be collected even after the distribution of the decedent's
estate among his heirs, who shall be liable therefor in proportion to their share in the
inheritance.

          Wherefore, let the defendants pay the plaintiff the sum of P462, with 1 per centum
monthly interest from August 19, 1927 until fully paid, as follows: Tomasa Centeno
0.0571 per cent, and each one of the other defendants 0.0784 per cent, with costs against
the appellees. So ordered.

Avanceña, C.J., Street, Malcolm, Ostrand, Ostrand, Johns and Romualdez, JJ., concur.

Footnotes

1
Whitney vs. Collector of Internal Revenue, not reported.
PHILIPPINE JURISPRUDENCE - FULL TEXT
The Lawphil Project - Arellano Law Foundation
G.R. No. L-19342 May 25, 1972
LORENZO T. OÑA, ET AL. vs. COMMISSIONER OF INTERNAL
REVENUE

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-19342 May 25, 1972

LORENZO T. OÑA and HEIRS OF JULIA BUÑALES, namely: RODOLFO B. OÑA, MARIANO B. OÑA,
LUZ B. OÑA, VIRGINIA B. OÑA and LORENZO B. OÑA, JR., petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.

Orlando Velasco for petitioners.

Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R. Rosete, and
Special Attorney Purificacion Ureta for respondent.

BARREDO, J.:p
Petition for review of the decision of the Court of Tax Appeals in CTA Case No. 617, similarly
entitled as above, holding that petitioners have constituted an unregistered partnership and are,
therefore, subject to the payment of the deficiency corporate income taxes assessed against them
by respondent Commissioner of Internal Revenue for the years 1955 and 1956 in the total sum of
P21,891.00, plus 5% surcharge and 1% monthly interest from December 15, 1958, subject to the
provisions of Section 51 (e) (2) of the Internal Revenue Code, as amended by Section 8 of Republic
Act No. 2343 and the costs of the suit, 1 as well as the resolution of said court denying petitioners'
motion for reconsideration of said decision.

The facts are stated in the decision of the Tax Court as follows:

Julia Buñ ales died on March 23, 1944, leaving as heirs her surviving spouse, Lorenzo
T. Oñ a and her five children. In 1948, Civil Case No. 4519 was instituted in the Court
of First Instance of Manila for the settlement of her estate. Later, Lorenzo T. Oñ a the
surviving spouse was appointed administrator of the estate of said deceased
(Exhibit 3, pp. 34-41, BIR rec.). On April 14, 1949, the administrator submitted the
project of partition, which was approved by the Court on May 16, 1949 (See Exhibit
K). Because three of the heirs, namely Luz, Virginia and Lorenzo, Jr., all surnamed
Oñ a, were still minors when the project of partition was approved, Lorenzo T. Oñ a,
their father and administrator of the estate, filed a petition in Civil Case No. 9637 of
the Court of First Instance of Manila for appointment as guardian of said minors. On
November 14, 1949, the Court appointed him guardian of the persons and property
of the aforenamed minors (See p. 3, BIR rec.).

The project of partition (Exhibit K; see also pp. 77-70, BIR rec.) shows that the heirs
have undivided one-half (1/2) interest in ten parcels of land with a total assessed
value of P87,860.00, six houses with a total assessed value of P17,590.00 and an
undetermined amount to be collected from the War Damage Commission. Later,
they received from said Commission the amount of P50,000.00, more or less. This
amount was not divided among them but was used in the rehabilitation of
properties owned by them in common (t.s.n., p. 46). Of the ten parcels of land
aforementioned, two were acquired after the death of the decedent with money
borrowed from the Philippine Trust Company in the amount of P72,173.00 (t.s.n., p.
24; Exhibit 3, pp. 31-34 BIR rec.).

The project of partition also shows that the estate shares equally with Lorenzo T.
Oñ a, the administrator thereof, in the obligation of P94,973.00, consisting of loans
contracted by the latter with the approval of the Court (see p. 3 of Exhibit K; or see
p. 74, BIR rec.).

Although the project of partition was approved by the Court on May 16, 1949, no
attempt was made to divide the properties therein listed. Instead, the properties
remained under the management of Lorenzo T. Oñ a who used said properties in
business by leasing or selling them and investing the income derived therefrom and
the proceeds from the sales thereof in real properties and securities. As a result,
petitioners' properties and investments gradually increased from P105,450.00 in
1949 to P480,005.20 in 1956 as can be gleaned from the following year-end
balances:
 Y Invest La Bui
e ment nd ldi
a ng
r

  Accou Acc Acc

nt ou oun
nt t

1949 — P87,860.00 P17,590.00

1950 P24,657.65 128,566.72 96,076.26

1951 51,301.31 120,349.28 110,605.11

1952 67,927.52 87,065.28 152,674.39

1953 61,258.27 84,925.68 161,463.83

1954 63,623.37 99,001.20 167,962.04

1955 100,786.00 120,249.78 169,262.52

1956 175,028.68 135,714.68 169,262.52

(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 102-104)

From said investments and properties petitioners derived such incomes as profits
from installment sales of subdivided lots, profits from sales of stocks, dividends,
rentals and interests (see p. 3 of Exhibit 3; p. 32, BIR rec.; t.s.n., pp. 37-38). The said
incomes are recorded in the books of account kept by Lorenzo T. Oñ a where the
corresponding shares of the petitioners in the net income for the year are also
known. Every year, petitioners returned for income tax purposes their shares in the
net income derived from said properties and securities and/or from transactions
involving them (Exhibit 3, supra; t.s.n., pp. 25-26). However, petitioners did not
actually receive their shares in the yearly income. (t.s.n., pp. 25-26, 40, 98, 100). The
income was always left in the hands of Lorenzo T. Oñ a who, as heretofore pointed
out, invested them in real properties and securities. (See Exhibit 3, t.s.n., pp. 50, 102-
104).

On the basis of the foregoing facts, respondent (Commissioner of Internal Revenue)

decided that petitioners formed an unregistered partnership and therefore, subject
to the corporate income tax, pursuant to Section 24, in relation to Section 84(b), of
the Tax Code. Accordingly, he assessed against the petitioners the amounts of
P8,092.00 and P13,899.00 as corporate income taxes for 1955 and 1956,
respectively. (See Exhibit 5, amended by Exhibit 17, pp. 50 and 86, BIR rec.).
Petitioners protested against the assessment and asked for reconsideration of the
ruling of respondent that they have formed an unregistered partnership. Finding no
merit in petitioners' request, respondent denied it (See Exhibit 17, p. 86, BIR rec.).
(See pp. 1-4, Memorandum for Respondent, June 12, 1961).
 The original assessment was as follows:

1955

Net income as per investigation ................ P40,209.89

Income tax due thereon ............................... 8,042.00

25% surcharge .............................................. 2,010.50
Compromise for non-filing .......................... 50.00
Total ............................................................... P10,102.50

1956

Net income as per investigation ................ P69,245.23

Income tax due thereon ............................... 13,849.00

25% surcharge .............................................. 3,462.25
Compromise for non-filing .......................... 50.00
Total ............................................................... P17,361.25

(See Exhibit 13, page 50, BIR records)

Upon further consideration of the case, the 25% surcharge was eliminated in line
with the ruling of the Supreme Court in Collector v. Batangas Transportation Co., G.R.
No. L-9692, Jan. 6, 1958, so that the questioned assessment refers solely to the
income tax proper for the years 1955 and 1956 and the "Compromise for non-
filing," the latter item obviously referring to the compromise in lieu of the criminal
liability for failure of petitioners to file the corporate income tax returns for said
years. (See Exh. 17, page 86, BIR records). (Pp. 1-3, Annex C to Petition)

Petitioners have assigned the following as alleged errors of the Tax Court:

I.

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONERS

FORMED AN UNREGISTERED PARTNERSHIP;

II.

THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS
WERE CO-OWNERS OF THE PROPERTIES INHERITED AND (THE) PROFITS
DERIVED FROM TRANSACTIONS THEREFROM (sic);

III.

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONERS WERE

LIABLE FOR CORPORATE INCOME TAXES FOR 1955 AND 1956 AS AN
UNREGISTERED PARTNERSHIP;
 IV.

ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED AN UNREGISTERED

PARTNERSHIP, THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE
PETITIONERS WERE AN UNREGISTERED PARTNERSHIP TO THE EXTENT ONLY
THAT THEY INVESTED THE PROFITS FROM THE PROPERTIES OWNED IN
COMMON AND THE LOANS RECEIVED USING THE INHERITED PROPERTIES AS
COLLATERALS;

V.

ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED PARTNERSHIP, THE

COURT OF TAX APPEALS ERRED IN NOT DEDUCTING THE VARIOUS AMOUNTS
PAID BY THE PETITIONERS AS INDIVIDUAL INCOME TAX ON THEIR RESPECTIVE
SHARES OF THE PROFITS ACCRUING FROM THE PROPERTIES OWNED IN
COMMON, FROM THE DEFICIENCY TAX OF THE UNREGISTERED PARTNERSHIP.

In other words, petitioners pose for our resolution the following questions: (1) Under the facts
found by the Court of Tax Appeals, should petitioners be considered as co-owners of the properties
inherited by them from the deceased Julia Buñ ales and the profits derived from transactions
involving the same, or, must they be deemed to have formed an unregistered partnership subject to
tax under Sections 24 and 84(b) of the National Internal Revenue Code? (2) Assuming they have
formed an unregistered partnership, should this not be only in the sense that they invested as a
common fund the profits earned by the properties owned by them in common and the loans
granted to them upon the security of the said properties, with the result that as far as their
respective shares in the inheritance are concerned, the total income thereof should be considered
as that of co-owners and not of the unregistered partnership? And (3) assuming again that they are
taxable as an unregistered partnership, should not the various amounts already paid by them for
the same years 1955 and 1956 as individual income taxes on their respective shares of the profits
accruing from the properties they owned in common be deducted from the deficiency corporate
taxes, herein involved, assessed against such unregistered partnership by the respondent
Commissioner?

Pondering on these questions, the first thing that has struck the Court is that whereas petitioners'
predecessor in interest died way back on March 23, 1944 and the project of partition of her estate
was judicially approved as early as May 16, 1949, and presumably petitioners have been holding
their respective shares in their inheritance since those dates admittedly under the administration
or management of the head of the family, the widower and father Lorenzo T. Oñ a, the assessment in
question refers to the later years 1955 and 1956. We believe this point to be important because,
apparently, at the start, or in the years 1944 to 1954, the respondent Commissioner of Internal
Revenue did treat petitioners as co-owners, not liable to corporate tax, and it was only from 1955
that he considered them as having formed an unregistered partnership. At least, there is nothing in
the record indicating that an earlier assessment had already been made. Such being the case, and
We see no reason how it could be otherwise, it is easily understandable why petitioners' position
that they are co-owners and not unregistered co-partners, for the purposes of the impugned
assessment, cannot be upheld. Truth to tell, petitioners should find comfort in the fact that they
were not similarly assessed earlier by the Bureau of Internal Revenue.
The Tax Court found that instead of actually distributing the estate of the deceased among
themselves pursuant to the project of partition approved in 1949, "the properties remained under
the management of Lorenzo T. Oñ a who used said properties in business by leasing or selling them
and investing the income derived therefrom and the proceed from the sales thereof in real
properties and securities," as a result of which said properties and investments steadily increased
yearly from P87,860.00 in "land account" and P17,590.00 in "building account" in 1949 to
P175,028.68 in "investment account," P135.714.68 in "land account" and P169,262.52 in "building
account" in 1956. And all these became possible because, admittedly, petitioners never actually
received any share of the income or profits from Lorenzo T. Oñ a and instead, they allowed him to
continue using said shares as part of the common fund for their ventures, even as they paid the
corresponding income taxes on the basis of their respective shares of the profits of their common
business as reported by the said Lorenzo T. Oñ a.

It is thus incontrovertible that petitioners did not, contrary to their contention, merely limit
themselves to holding the properties inherited by them. Indeed, it is admitted that during the
material years herein involved, some of the said properties were sold at considerable profit, and
that with said profit, petitioners engaged, thru Lorenzo T. Oñ a, in the purchase and sale of
corporate securities. It is likewise admitted that all the profits from these ventures were divided
among petitioners proportionately in accordance with their respective shares in the inheritance. In
these circumstances, it is Our considered view that from the moment petitioners allowed not only
the incomes from their respective shares of the inheritance but even the inherited properties
themselves to be used by Lorenzo T. Oñ a as a common fund in undertaking several transactions or
in business, with the intention of deriving profit to be shared by them proportionally, such act was
tantamonut to actually contributing such incomes to a common fund and, in effect, they thereby
formed an unregistered partnership within the purview of the above-mentioned provisions of the
Tax Code.

It is but logical that in cases of inheritance, there should be a period when the heirs can be
considered as co-owners rather than unregistered co-partners within the contemplation of our
corporate tax laws aforementioned. Before the partition and distribution of the estate of the
deceased, all the income thereof does belong commonly to all the heirs, obviously, without them
becoming thereby unregistered co-partners, but it does not necessarily follow that such status as
co-owners continues until the inheritance is actually and physically distributed among the heirs, for
it is easily conceivable that after knowing their respective shares in the partition, they might decide
to continue holding said shares under the common management of the administrator or executor or
of anyone chosen by them and engage in business on that basis. Withal, if this were to be allowed, it
would be the easiest thing for heirs in any inheritance to circumvent and render meaningless
Sections 24 and 84(b) of the National Internal Revenue Code.

It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated, among the reasons for holding
the appellants therein to be unregistered co-partners for tax purposes, that their common fund
"was not something they found already in existence" and that "it was not a property inherited by
them pro indiviso," but it is certainly far fetched to argue therefrom, as petitioners are doing here,
that ergo, in all instances where an inheritance is not actually divided, there can be no unregistered
co-partnership. As already indicated, for tax purposes, the co-ownership of inherited properties is
automatically converted into an unregistered partnership the moment the said common properties
and/or the incomes derived therefrom are used as a common fund with intent to produce profits
for the heirs in proportion to their respective shares in the inheritance as determined in a project
partition either duly executed in an extrajudicial settlement or approved by the court in the
corresponding testate or intestate proceeding. The reason for this is simple. From the moment of
such partition, the heirs are entitled already to their respective definite shares of the estate and the
incomes thereof, for each of them to manage and dispose of as exclusively his own without the
intervention of the other heirs, and, accordingly he becomes liable individually for all taxes in
connection therewith. If after such partition, he allows his share to be held in common with his co-
heirs under a single management to be used with the intent of making profit thereby in proportion
to his share, there can be no doubt that, even if no document or instrument were executed for the
purpose, for tax purposes, at least, an unregistered partnership is formed. This is exactly what
happened to petitioners in this case.

In this connection, petitioners' reliance on Article 1769, paragraph (3), of the Civil Code, providing
that: "The sharing of gross returns does not of itself establish a partnership, whether or not the
persons sharing them have a joint or common right or interest in any property from which the
returns are derived," and, for that matter, on any other provision of said code on partnerships is
unavailing. In Evangelista, supra, this Court clearly differentiated the concept of partnerships under
the Civil Code from that of unregistered partnerships which are considered as "corporations" under
Sections 24 and 84(b) of the National Internal Revenue Code. Mr. Justice Roberto Concepcion, now
Chief Justice, elucidated on this point thus:

To begin with, the tax in question is one imposed upon "corporations", which,
strictly speaking, are distinct and different from "partnerships". When our Internal
Revenue Code includes "partnerships" among the entities subject to the tax on
"corporations", said Code must allude, therefore, to organizations which are not
necessarily "partnerships", in the technical sense of the term. Thus, for instance,
section 24 of said Code exempts from the aforementioned tax "duly registered
general partnerships," which constitute precisely one of the most typical forms of
partnerships in this jurisdiction. Likewise, as defined in section 84(b) of said Code,
"the term corporation includes partnerships, no matter how created or organized."
This qualifying expression clearly indicates that a joint venture need not be
undertaken in any of the standard forms, or in confirmity with the usual
requirements of the law on partnerships, in order that one could be deemed
constituted for purposes of the tax on corporation. Again, pursuant to said section
84(b),the term "corporation" includes, among others, "joint accounts,(cuentas en
participacion)" and "associations", none of which has a legal personality of its own,
independent of that of its members. Accordingly, the lawmaker could not have
regarded that personality as a condition essential to the existence of the
partnerships therein referred to. In fact, as above stated, "duly registered general
co-partnerships" — which are possessed of the aforementioned personality — have
been expressly excluded by law (sections 24 and 84[b]) from the connotation of the
term "corporation." ....

xxx xxx xxx

Similarly, the American Law

... provides its own concept of a partnership. Under the term

"partnership" it includes not only a partnership as known in
common law but, as well, a syndicate, group, pool, joint venture, or
other unincorporated organization which carries on any business,
 financial operation, or venture, and which is not, within the meaning
of the Code, a trust, estate, or a corporation. ... . (7A Merten's Law of
Federal Income Taxation, p. 789; emphasis ours.)

The term "partnership" includes a syndicate, group, pool, joint

venture or other unincorporated organization, through or by means of
which any business, financial operation, or venture is carried on. ... . (8
Merten's Law of Federal Income Taxation, p. 562 Note 63; emphasis
ours.)

For purposes of the tax on corporations, our National Internal Revenue Code includes
these partnerships — with the exception only of duly registered general
copartnerships — within the purview of the term "corporation." It is, therefore, clear
to our mind that petitioners herein constitute a partnership, insofar as said Code is
concerned, and are subject to the income tax for corporations.

We reiterated this view, thru Mr. Justice Fernando, in Reyes vs. Commissioner of Internal Revenue, G.
R. Nos. L-24020-21, July 29, 1968, 24 SCRA 198, wherein the Court ruled against a theory of co-
ownership pursued by appellants therein.

As regards the second question raised by petitioners about the segregation, for the purposes of the
corporate taxes in question, of their inherited properties from those acquired by them
subsequently, We consider as justified the following ratiocination of the Tax Court in denying their
motion for reconsideration:

In connection with the second ground, it is alleged that, if there was an unregistered
partnership, the holding should be limited to the business engaged in apart from the
properties inherited by petitioners. In other words, the taxable income of the
partnership should be limited to the income derived from the acquisition and sale of
real properties and corporate securities and should not include the income derived
from the inherited properties. It is admitted that the inherited properties and the
income derived therefrom were used in the business of buying and selling other real
properties and corporate securities. Accordingly, the partnership income must
include not only the income derived from the purchase and sale of other properties
but also the income of the inherited properties.

Besides, as already observed earlier, the income derived from inherited properties may be
considered as individual income of the respective heirs only so long as the inheritance or estate is
not distributed or, at least, partitioned, but the moment their respective known shares are used as
part of the common assets of the heirs to be used in making profits, it is but proper that the income
of such shares should be considered as the part of the taxable income of an unregistered
partnership. This, We hold, is the clear intent of the law.

Likewise, the third question of petitioners appears to have been adequately resolved by the Tax
Court in the aforementioned resolution denying petitioners' motion for reconsideration of the
decision of said court. Pertinently, the court ruled this wise:

In support of the third ground, counsel for petitioners alleges:

 Even if we were to yield to the decision of this Honorable Court that
the herein petitioners have formed an unregistered partnership and,
therefore, have to be taxed as such, it might be recalled that the
petitioners in their individual income tax returns reported their
shares of the profits of the unregistered partnership. We think it only
fair and equitable that the various amounts paid by the individual
petitioners as income tax on their respective shares of the
unregistered partnership should be deducted from the deficiency
income tax found by this Honorable Court against the unregistered
partnership. (page 7, Memorandum for the Petitioner in Support of
Their Motion for Reconsideration, Oct. 28, 1961.)

In other words, it is the position of petitioners that the taxable income of the
partnership must be reduced by the amounts of income tax paid by each petitioner
on his share of partnership profits. This is not correct; rather, it should be the other
way around. The partnership profits distributable to the partners (petitioners
herein) should be reduced by the amounts of income tax assessed against the
partnership. Consequently, each of the petitioners in his individual capacity
overpaid his income tax for the years in question, but the income tax due from the
partnership has been correctly assessed. Since the individual income tax liabilities
of petitioners are not in issue in this proceeding, it is not proper for the Court to
pass upon the same.

Petitioners insist that it was error for the Tax Court to so rule that whatever excess they might have
paid as individual income tax cannot be credited as part payment of the taxes herein in question. It
is argued that to sanction the view of the Tax Court is to oblige petitioners to pay double income tax
on the same income, and, worse, considering the time that has lapsed since they paid their
individual income taxes, they may already be barred by prescription from recovering their
overpayments in a separate action. We do not agree. As We see it, the case of petitioners as regards
the point under discussion is simply that of a taxpayer who has paid the wrong tax, assuming that
the failure to pay the corporate taxes in question was not deliberate. Of course, such taxpayer has
the right to be reimbursed what he has erroneously paid, but the law is very clear that the claim
and action for such reimbursement are subject to the bar of prescription. And since the period for
the recovery of the excess income taxes in the case of herein petitioners has already lapsed, it
would not seem right to virtually disregard prescription merely upon the ground that the reason
for the delay is precisely because the taxpayers failed to make the proper return and payment of the
corporate taxes legally due from them. In principle, it is but proper not to allow any relaxation of
the tax laws in favor of persons who are not exactly above suspicion in their conduct vis-a-vis their
tax obligation to the State.

IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax Appeals appealed from is
affirm with costs against petitioners.

Makalintal, Zaldivar, Fernando, Makasiar and Antonio, JJ., concur.

Reyes, J.B.L. and Teehankee, JJ., concur in the result.

Castro, J., took no part.

Concepcion, C.J., is on leave.

Footnotes

1 In other words, the assessment was affirmed except for the sum of P100.00 which
was the total of two P50-items purportedly for "Compromise for non-filing" which
the Tax Court held to be unjustified, since there was no compromise agreement to
speak of.

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G.R. No. L-19201             June 16, 1965
REV. FR. CASIMIRO LLADOC vs. COMMISSIONER OF INTERNAL
REVENUE, ET AL.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-19201             June 16, 1965

REV. FR. CASIMIRO LLADOC, petitioner,

vs.
The COMMISSIONER OF INTERNAL REVENUE and The COURT of TAX APPEALS,
respondents.

Hilado and Hilado for petitioner.

Office of the Solicitor General for respondents.

PAREDES, J.:

Sometime in 1957, the M.B. Estate, Inc., of Bacolod City, donated P10,000.00 in cash to
Rev. Fr. Crispin Ruiz, then parish priest of Victorias, Negros Occidental, and predecessor
of herein petitioner, for the construction of a new Catholic Church in the locality. The
total amount was actually spent for the purpose intended.

On March 3, 1958, the donor M.B. Estate, Inc., filed the donor's gift tax return. Under date
of April 29, 1960, the respondent Commissioner of Internal Revenue issued an
assessment for donee's gift tax against the Catholic Parish of Victorias, Negros Occidental,
of which petitioner was the priest. The tax amounted to P1,370.00 including surcharges,
interests of 1% monthly from May 15, 1958 to June 15, 1960, and the compromise for the
late filing of the return.

Petitioner lodged a protest to the assessment and requested the withdrawal thereof. The
protest and the motion for reconsideration presented to the Commissioner of Internal
Revenue were denied. The petitioner appealed to the Court of Tax Appeals on November
2, 1960. In the petition for review, the Rev. Fr. Casimiro Lladoc claimed, among others,
that at the time of the donation, he was not the parish priest in Victorias; that there is no
legal entity or juridical person known as the "Catholic Parish Priest of Victorias," and,
therefore, he should not be liable for the donee's gift tax. It was also asserted that the
assessment of the gift tax, even against the Roman Catholic Church, would not be valid,
for such would be a clear violation of the provisions of the Constitution.

After hearing, the CTA rendered judgment, the pertinent portions of which are quoted
below:

... . Parish priests of the Roman Catholic Church under canon laws are similarly
situated as its Archbishops and Bishops with respect to the properties of the
church within their parish. They are the guardians, superintendents or
administrators of these properties, with the right of succession and may sue and
be sued.

xxx     xxx     xxx

The petitioner impugns the, fairness of the assessment with the argument that he
should not be held liable for gift taxes on donation which he did not receive
personally since he was not yet the parish priest of Victorias in the year 1957
when said donation was given. It is intimated that if someone has to pay at all, it
should be petitioner's predecessor, the Rev. Fr. Crispin Ruiz, who received the
donation in behalf of the Catholic parish of Victorias or the Roman Catholic
Church. Following petitioner's line of thinking, we should be equally unfair to
hold that the assessment now in question should have been addressed to, and
collected from, the Rev. Fr. Crispin Ruiz to be paid from income derived from his
present parish where ever it may be. It does not seem right to indirectly burden
the present parishioners of Rev. Fr. Ruiz for donee's gift tax on a donation to
which they were not benefited.

xxx     xxx     xxx

We saw no legal basis then as we see none now, to include within the
Constitutional exemption, taxes which partake of the nature of an excise upon the
use made of the properties or upon the exercise of the privilege of receiving the
properties. (Phipps vs. Commissioner of Internal Revenue, 91 F [2d] 627; 1938,
302 U.S. 742.)

It is a cardinal rule in taxation that exemptions from payment thereof are highly
 disfavored by law, and the party claiming exemption must justify his claim by a
clear, positive, or express grant of such privilege by law. (Collector vs. Manila
Jockey Club, G.R. No. L-8755, March 23, 1956; 53 O.G. 3762.)

The phrase "exempt from taxation" as employed in Section 22(3), Article VI of the
Constitution of the Philippines, should not be interpreted to mean exemption
from all kinds of taxes. Statutes exempting charitable and religious property from
taxation should be construed fairly though strictly and in such manner as to give
effect to the main intent of the lawmakers. (Roman Catholic Church vs. Hastrings
5 Phil. 701.)

xxx     xxx     xxx

WHEREFORE, in view of the foregoing considerations, the decision of the

respondent Commissioner of Internal Revenue appealed from, is hereby affirmed
except with regard to the imposition of the compromise penalty in the amount of
P20.00 (Collector of Internal Revenue v. U.S.T., G.R. No. L-11274, Nov. 28,
1958); ..., and the petitioner, the Rev. Fr. Casimiro Lladoc is hereby ordered to pay
to the respondent the amount of P900.00 as donee's gift tax, plus the surcharge of
five per centum (5%) as ad valorem penalty under Section 119 (c) of the Tax Code,
and one per centum (1%) monthly interest from May 15, 1958 to the date of
actual payment. The surcharge of 25% provided in Section 120 for failure to file a
return may not be imposed as the failure to file a return was not due to willful
neglect.( ... ) No costs.

The above judgment is now before us on appeal, petitioner assigning two (2) errors
allegedly committed by the Tax Court, all of which converge on the singular issue of
whether or not petitioner should be liable for the assessed donee's gift tax on the
P10,000.00 donated for the construction of the Victorias Parish Church.

Section 22 (3), Art. VI of the Constitution of the Philippines, exempts from taxation
cemeteries, churches and parsonages or convents, appurtenant thereto, and all lands,
buildings, and improvements used exclusively for religious purposes. The exemption is
only from the payment of taxes assessed on such properties enumerated, as property
taxes, as contra distinguished from excise taxes. In the present case, what the Collector
assessed was a donee's gift tax; the assessment was not on the properties themselves. It
did not rest upon general ownership; it was an excise upon the use made of the
properties, upon the exercise of the privilege of receiving the properties (Phipps vs. Com.
of Int. Rec. 91 F 2d 627). Manifestly, gift tax is not within the exempting provisions of the
section just mentioned. A gift tax is not a property tax, but an excise tax imposed on the
transfer of property by way of gift inter vivos, the imposition of which on property used
exclusively for religious purposes, does not constitute an impairment of the Constitution.
As well observed by the learned respondent Court, the phrase "exempt from taxation," as
employed in the Constitution (supra) should not be interpreted to mean exemption from
all kinds of taxes. And there being no clear, positive or express grant of such privilege by
law, in favor of petitioner, the exemption herein must be denied.

The next issue which readily presents itself, in view of petitioner's thesis, and Our finding
that a tax liability exists, is, who should be called upon to pay the gift tax? Petitioner
postulates that he should not be liable, because at the time of the donation he was not the
priest of Victorias. We note the merit of the above claim, and in order to put things in
their proper light, this Court, in its Resolution of March 15, 1965, ordered the parties to
show cause why the Head of the Diocese to which the parish of Victorias pertains, should
not be substituted in lieu of petitioner Rev. Fr. Casimiro Lladoc it appearing that the Head
of such Diocese is the real party in interest. The Solicitor General, in representation of the
Commissioner of Internal Revenue, interposed no objection to such a substitution.
Counsel for the petitioner did not also offer objection thereto.

On April 30, 1965, in a resolution, We ordered the Head of the Diocese to present
whatever legal issues and/or defenses he might wish to raise, to which resolution
counsel for petitioner, who also appeared as counsel for the Head of the Diocese, the
Roman Catholic Bishop of Bacolod, manifested that it was submitting itself to the
jurisdiction and orders of this Court and that it was presenting, by reference, the brief of
petitioner Rev. Fr. Casimiro Lladoc as its own and for all purposes.

In view here of and considering that as heretofore stated, the assessment at bar had been
properly made and the imposition of the tax is not a violation of the constitutional
provision exempting churches, parsonages or convents, etc. (Art VI, sec. 22 [3],
Constitution), the Head of the Diocese, to which the parish Victorias Pertains, is liable for
the payment thereof.

The decision appealed from should be, as it is hereby affirmed insofar as tax liability is
concerned; it is modified, in the sense that petitioner herein is not personally liable for
the said gift tax, and that the Head of the Diocese, herein substitute petitioner, should
pay, as he is presently ordered to pay, the said gift tax, without special, pronouncement
as to costs.

Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon,
J.P., and Zaldivar, JJ., concur.
Barrera, J., took no part.

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G.R. No. L-19865             July 31, 1965
MARIA CARLA PIROVANO, etc., et al. vs. COMMISSIONER OF
INTERNAL REVENUE

Republic of the Philippines

SUPREME COURT
Manila
 EN BANC

G.R. No. L-19865             July 31, 1965

MARIA CARLA PIROVANO, etc., et al., petitioners-appellants,

vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent-appellee.

Angel S. Gamboa for petitioners-appellants.

Office of the Solicitor General for respondent-appellee.

REYES, J.B.L., J.:

This case is a sequel to the case of Pirovano vs. De la Rama Steamship Co., 96 Phil. 335.

Briefly, the facts of the aforestated case may be stated as follows:

Enrico Pirovano was the father of the herein petitioners-appellants. Sometime in the
early part of 1941, De la Rama Steamship Co. insured the life of said Enrico Pirovano, who
was then its President and General Manager until the time of his death, with various
Philippine and American insurance companies for a total sum of one million pesos,
designating itself as the beneficiary of the policies, obtained by it. Due to the Japanese
occupation of the Philippines during the second World War, the Company was unable to
pay the premiums on the policies issued by its Philippine insurers and these policies
lapsed, while the policies issued by its American insurers were kept effective and
subsisting, the New York office of the Company having continued paying its premiums
from year to year.

During the Japanese occupation , or more particularly in the latter part of 1944, said
Enrico Pirovano died.

After the liberation of the Philippines from the Japanese forces, the Board of Directors of
De la Rama Steamship Co. adopted a resolution dated July 10, 1946 granting and setting
aside, out of the proceeds expected to be collected on the insurance policies taken on the
life of said Enrico Pirovano, the sum of P400,000.00 for equal division among the four (4)
minor children of the deceased, said sum of money to be convertible into 4,000 shares of
stock of the Company, at par, or 1,000 shares for each child. Shortly thereafter, the
Company received the total sum of P643,000.00 as proceeds of the said life insurance
policies obtained from American insurers.

Upon receipt of the last stated sum of money, the Board of Directors of the Company
modified, on January 6, 1947, the above-mentioned resolution by renouncing all its rights
title, and interest to the said amount of P643,000.00 in favor of the minor children of the
deceased, subject to the express condition that said amount should be retained by the
Company in the nature of a loan to it, drawing interest at the rate of five per centum (5%)
per annum, and payable to the Pirovano children after the Company shall have first
settled in full the balance of its present remaining bonded indebtedness in the sum of
approximately P5,000,000.00. This latter resolution was carried out in a Memorandum
Agreement on January 10, 1947 and June 17, 1947., respectively, executed by the
Company and Mrs. Estefania R. Pirovano, the latter acting in her capacity as guardian of
her children (petitioners-appellants herein) find pursuant to an express authority
granted her by the court.

On June 24, 1947, the Board of Directors of the Company further modified the last
mentioned resolution providing therein that the Company shall pay the proceeds of said
life insurance policies to the heirs of the said Enrico Pirovano after the Company shall
have settled in full the balance of its present remaining bonded indebtedness, but the
annual interests accruing on the principal shall be paid to the heirs of the said Enrico
Pirovano, or their duly appointed representative, whenever the Company is in a position
to meet said obligation.

On February 26, 1948, Mrs. Estefania R. Pirovano, in behalf of her children, executed a
public document formally accepting the donation; and, on the same date, the Company
through its Board of Directors, took official notice of this formal acceptance.

On September 13, 1949, the stockholders of the Company formally ratified the various
resolutions hereinabove mentioned with certain clarifying modifications that the
payment of the donation shall not be effected until such time as the Company shall have
first duly liquidated its present bonded indebtedness in the amount of P3,260,855.77
with the National Development Company, or fully redeemed the preferred shares of stock
in the amount which shall be issued to the National Development Company in lieu
thereof; and that any and all taxes, legal fees, and expenses in any way connected with
the above transaction shall be chargeable and deducted from the proceeds of the life
insurance policies mentioned in the resolutions of the Board of Directors.

On March 8, 1951, however, the majority stockholders of the Company voted to revoke
the resolution approving the donation in favor of the Pirovano children.

As a consequence of this revocation and refusal of the Company to pay the balance of the
donation amounting to P564,980.90 despite demands therefor, the herein petitioners-
appellants represented by their natural guardian, Mrs. Estefania R. Pirovano, brought an
action for the recovery of said amount, plus interest and damages against De la Rama
Steamship Co., in the Court of First Instance of Rizal, which case ultimately culminated to
an appeal to this Court. On December 29, 1954, this court rendered its decision in the
appealed case (96 Phil. 335) holding that the donation was valid and remunerative in
nature, the dispositive part of which reads:

Wherefore, the decision appealed from should be modified as follows: (a) that the
donation in favor of the children of the late Enrico Pirovano of the proceeds of the
insurance policies taken on his life is valid and binding on the defendant
corporation; (b) that said donation, which amounts to a total of P583,813.59,
including interest, as it appears in the books of the corporation as of August 31,
1951, plus interest thereon at the rate of 5 per cent per annum from the filing of
the complaint, should be paid to the plaintiffs after the defendant corporation
shall have fully redeemed the preferred shares issued to the National
Development Company under the terms and conditions stared in the resolutions
 of the Board of Directors of January 6, 1947 and June 24, 1947, as amended by the
resolution of the stockholders adopted on September 13, 1949; and (c) defendant
shall pay to plaintiffs an additional amount equivalent to 10 per cent of said
amount of P583,813.59 as damages by way of attorney's fees, and to pay the costs
of action. (Pirovano et al. vs. De la Rama Steamship Co., 96 Phil. 367-368)

The above decision became final and executory. In compliance therewith, De la Rama
Steamship Co. made, on April 6, 1955, a partial payment on the amount of the judgment
and paid the balance thereof on May 12, 1955.

On March 6, 1955, respondent Commissioner of Internal Revenue assessed the amount of

P60,869.67 as donees' gift tax, inclusive of surcharges, interests and other penalties,
against each of the petitioners-appellants, or for the total sum of P243,478.68; and, on
April 23, 1955, a donor's gift tax in the total amount of P34,371.76 was also assessed
against De la Rama Steamship Co., which the latter paid.

Petitioners-appellants herein contested respondent Commissioner's assessment and

imposition of the donees' gift taxes and donor's gift tax and also made a claim for refund
of the donor's gift tax so collected. Respondent Commissioner overruled petitioners'
claims; hence, the latter presented two (2) petitions for review against respondent's
rulings before the Court of Tax Appeals, said petitions having been docketed as CTA
Cases Nos. 347 and 375. CTA Case No. 347 relates to the petition disputing the legality of
the assessment of donees' gift taxes and donor's gift tax while CTA Case No. 375 refers to
the claim for refund of the donor's gift tax already paid.

After the filing of respondent's usual answers to the petitions, the two cases, being
interrelated to each other, were tried jointly and terminated.

On January 31, 1962, the Court of Tax Appeals rendered its decision in the two cases, the
dispositive part of which reads:

In resume, we are of the opinion, that (1) the donor's gift tax in the sum of
P34,371.76 was erroneously assessed and collected, hence, petitioners are
entitled to the refund thereof; (2) the donees' gift taxes were correctly assessed;
(3) the imposition of the surcharge of 25% is not proper; (4) the surcharge of 5%
is legally due; and (5) the interest of 1% per month on the deficiency donees' gift
taxes is due from petitioners from March 8, 1955 until the taxes are paid.

IN LINE WITH THE FOREGOING OPINION, petitioners are hereby ordered to pay
the donees' gift taxes as assessed by respondent, plus 5% surcharge and interest
at the rate of 1% per month from March 8, 1955 to the date of payment of said
donees' gift taxes. Respondent is ordered to apply the sum of P34,371.76 which is
refundable to petitioners, against the amount due from petitioners. With costs
against petitioners in Case No. 347.

Petitioners-appellants herein filed a motion to reconsider the above decision, which the
lower court denied. Hence, this appeal before us.
In the instant appeal, petitioners-appellants herein question only that portion of the
decision of the lower court ordering the payment of donees' gift taxes as assessed by
respondent as well as the imposition of surcharge and interest on the amount of donees'
gift taxes.

In their brief and memorandum, they dispute the factual finding of the lower court that
De la Rama Steamship Company's renunciation of its rights, title, and interest over the
proceeds of said life insurance policies in favor of the Pirovano children "was motivated
solely and exclusively by its sense of gratitude, an act of pure liberality, and not to pay
additional compensation for services inadequately paid for." Petitioners now contend
that the lower court's finding was erroneous in seemingly considering the disputed grant
as a simple donation, since our previous decision (96 Phil. 335) had already declared that
the transfer to the Pirovano children was a remuneratory donation. Petitioners further
contend that the same was made not for an insufficient or inadequate consideration but
rather it a was made for a full and adequate compensation for the valuable services
rendered by the late Enrico Pirovano to the De la Rama Steamship Co.; hence, the
donation does not constitute a taxable gift under the provisions of Section 108 of the
National Internal Revenue Code.

The argument for petitioners-appellants fails to take into account the fact that neither in
Spanish nor in Anglo-American law was it considered that past services, rendered
without relying on a coetaneous promise, express or implied, that such services would be
paid for in the future, constituted cause or consideration that would make a conveyance
of property anything else but a gift or donation. This conclusion flows from the text of
Article 619 of the Code of 1889 (identical with Article 726 of the present Civil Code of the
Philippines):

When a person gives to another a thing ... on account of the latter's merits or of
the services rendered by him to the donor, provided they do not constitute a
demandable debt, ..., there is also a donation. ... .

There is nothing on record to show that when the late Enrico Pirovano rendered services
as President and General Manager of the De la Rama Steamship Co. he was not fully
compensated for such services, or that, because they were "largely responsible for the
rapid and very successful development of the activities of the company" (Res. of July 10,
1946). Pirovano expected or was promised further compensation over and in addition to
his regular emoluments as President and General Manager. The fact that his services
contributed in a large measure to the success of the company did not give rise to a
recoverable debt, and the conveyances made by the company to his heirs remain a gift or
donation. This is emphasized by the directors' Resolution of January 6, 1947, that "out of
gratitude" the company decided to renounce in favor of Pirovano's heirs the proceeds of
the life insurance policies in question. The true consideration for the donation was,
therefore, the company's gratitude for his services, and not the services themselves.

That the tax court regarded the conveyance as a simple donation, instead of a
remuneratory one as it was declared to be in our previous decision, is but an innocuous
error; whether remuneratory or simple, the conveyance remained a gift, taxable under
Chapter 2, Title III of the Internal Revenue Code.

But then appellants contend, the entire property or right donated should not be
considered as a gift for taxation purposes; only that portion of the value of the property
or right transferred, if any, which is in excess of the value of the services rendered should
be considered as a taxable gift. They cite in support Section 111 of the Tax Code which
provides that —

Where property is transferred for less, than an adequate and full consideration in
money or money's worth, then the amount by which the value of the property
exceeded the value of the consideration shall, for the purpose of the tax imposed
by this Chapter, be deemed a gift, ... .

The flaw in this argument lies in the fact that, as copied from American law, the term
consideration used in this section refers to the technical "consideration" defined by the
American Law Institute (Restatement of Contracts) as "anything that is bargained for by
the promisor and given by the promisee in exchange for the promise" (Also, Corbin on
Contracts, Vol. I, p. 359). But, as we have seen, Pirovano's successful activities as officer of
the De la Rama Steamship Co. cannot be deemed such consideration for the gift to his
heirs, since the services were rendered long before the Company ceded the value of the
life policies to said heirs; cession and services were not the result of one bargain or of a
mutual exchange of promises.

And the Anglo-American law treats a subsequent promise to pay for past services (like
one to pay for improvements already made without prior request from the promisor) to
be a nudum pactum (Roscorla vs. Thomas, 3 Q.B. 234; Peters vs. Poro, 25 ALR 615; Carson
vs. Clark, 25 Am. Dec. 79; Boston vs. Dodge, 12 Am. Dec. 206), i.e., one that is
unenforceable in view of the common law rule that consideration must consist in a legal
benefit to the promisee or some legal detriment to the promisor.

What is more, the actual consideration for the cession of the policies, as previously
shown, was the Company's gratitude to Pirovano; so that under section 111 of the Code
there is no consideration the value of which can be deducted from that of the property
transferred as a gift. Like "love and affection," gratitude has no economic value and is not
"consideration" in the sense that the word is used in this section of the Tax Code.

As stated by Chief Justice Griffith of the Supreme Court of Mississippi in his well-known
book, "Outlines of the Law" (p. 204) —

Love and affection are not considerations of value — they are not estimable in terms of
value. Nor are sentiments of gratitude for gratuitous part favors or kindnesses; nor are
obligations which are merely moral. It has been well said that if a moral obligation were
alone sufficient it would remove the necessity for any consideration at all, since the fact
of making a promise impose, the moral obligation to perform it."

It is of course perfectly possible that a donation or gift should at the same time impose a
burden or condition on the donee involving some economic liability for him. A, for
example, may donate a parcel of land to B on condition that the latter assume a mortgage
existing on the donated land. In this case the donee may rightfully insist that the gift tax
be computed only on the value of the land less the value of the mortgage. This, in fact, is
contemplated by Article 619 of the Civil Code of 1889 (Art. 726 of the Tax Code) when it
provides that there is also a donation "when the gift imposes upon the donee a burden
which is less than the value of the thing given." Section 111 of the Tax Code has in view
situations of this kind, since it also prescribes that "the amount by which the value of the
property exceeded the value of the consideration" shall be deemed a gift for the purpose
of the tax. .

Petitioners finally contend that, even assuming that the donation in question is subject to
donees' gift taxes, the imposition of the surcharge of 5% and interest of 1% per month
from March 8, 1955 was not justified because the proceeds of the life insurance policies
were actually received on April 6, 1955 and May 12, 1955 only and in accordance with
Section 115(c) of the Tax Code; the filing of the returns of such tax became due on March
1, 1956 and the tax became payable on May 15, 1956, as provided for in Section 116(a) of
the same Code. In other words, petitioners maintain that the assessment and demand for
donees' gift taxes was prematurely made and of no legal effect; hence, they should not be
held liable for such surcharge and interest.

It is well to note, and it is not disputed, that petitioners-donees have failed to file any gift
tax return and that they also failed to pay the amount of the assessment made against
them by respondent in 1955. This situation is covered by Section 119(b) (1) and (c) and
Section 120 of the Tax Code:

(b) Deficiency.

(1) Payment not extended. — Where a deficiency, or any interest assessed in

connection therewith, or any addition to the taxes provided for in section one
hundred twenty is not paid in full within thirty days from the date of the notice
and demand from the Commissioner, there shall be collected as a part of the
taxes, interest upon the unpaid amount at the rate of one per centum a month
from the date of such notice and demand until it is paid. (section 119)

(c) Surcharge. — If any amount of the taxes included in the notice and demand
from the Commissioner of Internal Revenue is not paid in full within thirty days
after such notice and demand, there shall be collected in addition to the interest
prescribed above as a part of the taxes a surcharge of five per centum of the
unpaid amount. (sec. 119)

The failure to file a return was found by the lower court to be due to reasonable cause
and not to willful neglect. On this score, the elimination by the lower court of the 25%
surcharge is ad valorem penalty which respondent Commissioner had imposed pursuant
to Section 120 of the Tax Code was proper, since said Section 120 vests in the
Commissioner of Internal Revenue or in the tax court power and authority to impose or
not to impose such penalty depending upon whether or not reasonable cause has been
shown in the non-filing of such return.

On the other hand, unlike said Section 120, Section 119, paragraphs (b) (1) and (c) of the
Tax Code, does not confer on the Commissioner of Internal Revenue or on the courts any
power and discretion not to impose such interest and surcharge. It is likewise provided
for by law that an appeal to the Court of Tax Appeals from a decision of the Commissioner
of Internal Revenue shall not suspend the payment or collection of the tax liability of the
taxpayer unless a motion to that effect shall have been presented to the court and
granted by it on the ground that such collection will jeopardize the interest of the
taxpayer (Sec. 11, Republic Act No. 1125; Rule 12, Rules of the Court of Tax Appeals). It
should further be noted that —

It has been the uniform holding of this Court that no suit for enjoining the
collection of a tax, disputed or undisputed, can be brought, the remedy being to
pay the tax first, formerly under protest and now without need of protect, file the
claim with the Collector, and if he denies it, bring an action for recovery against
him. (David v. Ramos, et al., 90 Phil. 351)

Section 306 of the National Internal Revenue Code ... lays down the procedure to
be followed in those cases wherein a taxpayer entertains some doubt about the
correctness of a tax sought to be collected. Said section provides that the tax,
should first be paid and the taxpayer should sue for its recovery afterwards. The
purpose of the law obviously is to prevent delay in the collection of taxes, upon
which the Government depends for its existence. To allow a taxpayer to first
secure a ruling as regards the validity of the tax before paying it would be to
defeat this purpose. (National Dental Supply Co. vs. Meer, 90 Phil. 265)

Petitioners did not file in the lower court any motion for the suspension of payment or
collection of the amount of assessment made against them.

On the basis of the above-stated provisions of law and applicable authorities, it is evident
that the imposition of 1% interest monthly and 5% surcharge is justified and legal. As
succinctly stated by the court below, said imposition is "mandatory and may not be
waived by the Commissioner of Internal Revenue or by the courts" (Resolution on
petitioners' motion for reconsideration, Annex XIV, petition). Hence, said imposition of
interest and surcharge by the lower court should be upheld.

WHEREFORE, the decision of the Court of Tax Appeals is affirmed. Costs against
petitioners Pirovano.

Bengzon, C.J., Bautista Angelo, Paredes, Dizon, Regala, Makalintal, Bengzon, J.P., and
Zaldivar, JJ., concur.
Concepcion, J., took no part.
Barrera, J., is on leave.

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