DIZON v.

CTA & CIR

April 30, 2008 | Nachura | Deductions – Claims against estate | Conejero

PETITIONERS: Rafael Arsenio S. Dizon, in his capacity as Judicial Administrator of the Estate
of the deceased Jose P. Fernandez
RESPONDENTS: Court of Tax Appeals and Commissioner of Internal Revenue

SUMMARY
Rafael Dizon, as administrator of the estate of the late Jose Fernandez, sought to sell off some
properties to pay creditors, but the BIR demanded deficiency estate tax of 66.97 million pesos
for 1987, as affirmed by the BIR Commissioner. Rafael filed a petition for review before the
CTA, but was not successful and was charged deficiency tax of 37.41 million pesos. The CA
affirmed the CTA, but the SC reversed, saying that the enforceable claims of creditors against
the estate should have been allowed as lawful deductions in their entirety despite compromise
agreements for lower amounts, since the agreements were reached long after the Estate's
liability had been settled by the filing of estate tax return and the issuance of BIR Certifications.

DOCTRINE
Substantive: Deductions based on the date-of-death valuation rule fix the deductible amount for
a claim against the estate as of the decedent's death (Ithaca Trust Co. v. US). The date-of-
death valuation principle is seen from the Tax Code and the interpretation of its origin provisions
in the US federal tax code. No provision in our laws disregard it, and our Rules on Special
Proceedings indicate the word “claims” as debts enforceable during the decedent’s lifetime.

Procedural: The general rule in Section 34 of Rule 132 of the Rules of Court is that “the court
shall consider no evidence which has not been formally offered. The purpose for which the
evidence is offered must be specified.” Vda. de Oate is an exception to the general rule
requiring offer, which allows consideration of evidence not offered. The exception may be
applied only when there is strict compliance with the requisites mentioned:
1. the same must have been duly identified by testimony duly recorded, and;
2. the same must have been incorporated in the records of the case.

FACTS
1. The probate court (RTC Manila Br. 51) appointed retired SC Justice Arsenio P. Dizon
and petitioner, Atty. Rafael Arsenio P. Dizon as Special and Assistant Special
Administrator of the Estate of Jose P. Fernandez (died November 7, 1987).
2. BIR Regional Director for San Pablo City, Osmundo Umali issued Certification Nos.
2052 and 2053 stating that the taxes due on the transfer of properties of Jose had been
fully paid—this was procured by Atty. Jesus M. Gonzales, authorized by SC Justice
Arsenio, who filed tax return and got Certificate of Tax Clearance with the San Pablo
Regional Office on behalf of the Estate, computing “nil” net conjugal estate and “nil”
estate tax due, as gross conjugal estate was P14.32M and deductions were P187.82 M.
3. In August 1990, SC Justice Arsenio passed away, so petitioner Rafael was appointed
the administrator of the Estate. Rafael requested authority to sell several properties
forming part of the Estate to pay creditors, namely:
 Equitable Banking Corporation (P19,756,428.31),
 Banque de L'Indochine et. de Suez (US$4,828,905.90 as of January 31, 1988),
 Manila Banking Corporation (P84,199,160.46 as of February 28, 1989) and
 State Investment House, Inc. (P6,280,006.21).
  Excluded: Manila Bank, a major creditor which did not file a claim as it had
security over several real estate properties forming part of the Estate
4. Assistant Commissioner for Collection of the BIR, Themistocles Montalban, issued
Estate Tax Assessment Notice No. FAS-E-87-91-003269 demanding the payment
of P66,973,985.40 as deficiency estate tax for 1987 (which was affirmed by the BIR
Commissioner) with P 31.86 million as estate tax and 25% surcharge plus late fees.
5. The CTA denied Rafael’s petition for review (supported only by documentary evidence)
and computed a total deficiency tax of P37,419,493.71 plus 20% interest payable by
Rafael and/or Jose’s heirs.
1. It cited Vda. de Oate v. CA to apply the exception that the aforementioned pieces
of evidence introduced by the BIR were admissible in evidence sincne they
satisfied requisites of: (1) identification during presentation of respondent’s
witness (Alberto Enriquez, a revenue examiner who investigated the estate tax
case of the late Jose, who identified the BIR-prepared estate tax return and audit
reports), whose testimony was duly recorded and (2) incorporation as part of the
BIR case records.
2. The Gross Conjugal Estate was worth P 38,084,015.93, less deductions of
P26,250,000.00 for net Conjugal Estate P 11,834,015.93. The Net Taxable
Estate came out to P 50,569,821.62.
6. On April 30, 1999, the CA affirmed the CTA's ruling.
1. CA ruled that the petitioner's act of filing a BIR estate tax return and the issuance
of BIR Certification Nos. 2052 and 2053 did not deprive the BIR Commissioner of
her authority to re-examine or re-assess the return filed on behalf of the Estate.
2. In May 1999, petitioner filed MR, but was denied by a November 1999 resolution.
7. The instant petition is raising the issues of whether Rules of Court were violated by the
admission of evidence not formally offered by the BIR, and whether the valid and
enforceable claims of creditors against the estate should have been allowed as lawful
deductions, given clear and convincing evidence of erroneous double imputation of
values on the very same estate properties.

ISSUES/HELD
1. Procedural: Whether the CTA and CA gravely erred in allowing the admission of the
pieces of evidence which were not formally offered by the BIR—YES. No evidentiary
value can be given the pieces of evidence submitted by the BIR, as the rules on
documentary evidence require that these documents must be formally offered before
the CTA.

2. Substantive: Whether creditor’s claims may be fully allowed as deductions from Jose’s
gross estate despite the fact that they were reduced or condoned1 through compromise
agreements entered into between them and the Estate—YES, they are fully allowed as
deductions based on the date-of-death valuation rule fixing the deductible amount for a
claim against the estate as of the decedent's death (Ithaca Trust Co. v. US). The CA
erred in affirming the CTA’s determination of the deficiency estate tax including post-
death developments as imposed against the Estate.

1 Condonation or remission of debt as a mode of extinguishing an obligation is defined as: an act of liberality, by virtue of which,
without receiving any equivalent, the creditor renounces the enforcement of the obligation, which is extinguished in its entirety or in
that part or aspect of the same to which the remission refers. It is an essential characteristic of remission that it be gratuitous, that
there is no equivalent received for the benefit given; once such equivalent exists, the nature of the act changes. It may become
dation in payment when the creditor receives a thing different from that stipulated; or novation, when the object or principal
conditions of the obligation should be changed; or compromise, when the matter renounced is in litigation or dispute and in
exchange of some concession which the creditor receives.
RATIO
1. The CTA is a court of record,2 and as cases filed before it are litigated de novo, party-
litigants shall prove every minute aspect of their cases. Pertinent is the mandatory Rule
132 §34, Revised Rules on Evidence.3 In this case, parties must formally offer
evidence. The BIR failed to formally offer these pieces of evidence after its counsel,
without reason, did not appear at two hearings in February and March 1996. The The
vda. de Oate case relied upon is an exception to the prohibition on unoffered evidence,
but the requisite of incorporation of the evidence into the case is missing.
a. The Vda de Oate exception is NOT abandoned as petitioner assumes. In the
case of Vda. de Oate, evidence not formally offered may be admitted and
considered by the trial court provided: (1) the same was duly identified by duly
recorded testimony and (2) the same was incorporated in the records of the
case (citing People v. Napat-a; Mate). While many cases after Vda. de Oate
held that courts cannot consider unoffered evidence, in Ramos v. Dizon this
Court affirmed the decision to consider respondents' exhibits, even if the
same were not formally offered. In Far East Bank & Trust Company v. CIR, the
Court made reference to the subsisting Vda. De Oate doctrine.
b. Vda. de Oate, as an exception, is applied only upon strict compliance with the
requisites, but here the general rule in §34 of Rule 132 of the Rules of Court
prevails. While Alberto's testimony identifying the evidence was duly recorded,
the BIR documents themselves were not incorporated in the records of the case.
Alberto’s direct testimony, cross-examination and re-cross examination
identified, but did not sufficiently describe the contents of the BIR’s evidence
(petitioner even sought to summon lead examiner Ma. Anabella Abuloc to
answer questions about the working papers).
c. As differentiated from Vda. de Oate and Ramos, in those cases the exhibits
were marked and admitted at the pre-trial proceedings to warrant the
pronouncement that the same were duly incorporated in the records of the case.

2. The date-of-death valuation principle is seen from the Tax Code and the interpretation
of its origin provisions in the US federal tax code. No provision in our laws disregard it,
and our Rules on Special Proceedings indicate the word “claims” as debts enforceable
during the decedent’s lifetime.
o The principle is enshrined in these laws:
 the Tax Code, which reproduces deductions allowed under §89(a)(1)(C)
and (E) of CA 466 (National Internal Revenue Code of 1939, the first
codification of Philippine tax laws).
 the judicial interpretation of its counterpart provisions in the US federal tax
code, which carry great weight in construction of Philippine tax laws that
were based on US federal tax laws, the deductible amount for a claim
against the estate is fixed as of the decedent's death.

2 RA 1125, §8. Court of record; seal; proceedings. - The Court of Tax Appeals shall be a court of record and shall have a seal which
shall be judicially noticed. It shall prescribe the form of its writs and other processes. It shall have the power to promulgate rules and
regulations for the conduct of the business of the Court, and as may be needful for the uniformity of decisions within its jurisdiction
as conferred by law, but such proceedings shall not be governed strictly by technical rules of evidence.

3 Revised Rules on Evidence, §34. Offer of evidence. The court shall consider no evidence which has not been formally offered.
The purpose for which the evidence is offered must be specified.
 o There is no intent to revoke or contradict the principle as:
 No provision or legislative intent in our tax laws disregard the date-of-
death valuation principle. Nothing provides for consideration of post-death
developments in determining net estate value. There should be no
presumption or imposition of tax burdens beyond what the statute
expressly, clearly imports, tax statutes being construed strictissimi
juris against the government. Doubt on whether a person, article or
activity is taxable is generally resolved against taxation.
 In our Rules on Special Proceedings, the term "claims" that are required
to be presented against a decedent's estate is generally construed to
mean debts or demands of a pecuniary nature enforceable against the
deceased when alive, or liability contracted by the deceased before dying.
Claims existing at the time of death should be made the basis of the
determination of allowable deductions.

DISPOSITIVE
Petition granted. CA decision and resolution reversed and set aside. The BIR’s deficiency estate
tax assessment against the Fernandez estate is nullified.

NOTES
 Differentiation of identification and offer of evidence. Identification of documentary
evidence is done in the course of the trial and is accompanied by the marking of the
evidence as an exhibit while formal offer as an exhibit is done only when the party rests
its case and not before. A party may opt to formally offer his evidence or not at all, and if
he does not, the trial court is not authorized by the Rules to consider the same
(Interpacific Transit v. Aviles).
 US jurisprudence affirming the date-of-death valuation rule. While disputed, the general
rule is that the deductible amount for a claim against the estate is fixed as of the
decedent's death. Post-death developments are not material to determine the amount of
the deduction (e.g. where settlement results in the reduction of amount paid).
o Smith v. CIR ruled that the appropriate deduction is the claim value at date of death.
o In Propstra v. US, a lien claimed against the estate was certain and enforceable on
the date of the decedent's death, but the estate was not precluded from deducting
the entire claim amount for estate tax purposes despite the claimant settling for less.
o The U.S. 5th Circuit Court of Appeals agreed with Propstra v. US in Smith’s Est. v.
CIR, saying: The Ithaca Trust date-of-death valuation principle applies to enforceable
claims against the estate. When the SC announced this valuation principle, it
adjudged the nature of the federal estate tax specifically, that it is a tax on the act of
transferring property by will or intestacy and, because the act on which the tax is
levied occurs at a discrete time (the instance of death), the net value of the property
transferred should be ascertained, as nearly as possible, as of that time.
 Opinion contrary to the date-of-death valuation rule. The general rule is disputed by the
Internal Revenue Service opines that post-death settlement should be taken into
consideration and the claim, which should be allowed as a deduction to the extent of the
amount that is actually paid, pursuant to the Proposed Regulations in 2007.