FIRST DIVISION

G.R. No. 188497 February 19, 2014

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. PILIPINAS SHELL PETROLEUM
CORPORATION, Respondent.
SEPARATE OPINION
BERSAMIN, J.:
In essence, the Resolution written for the Court by my esteemed colleague, Justice Martin S.
Villarama, Jr., maintains that the exemption from payment of the excise tax under Section 135(a) of
the National Internal Revenue Code (NIRC) is conferred on the international carriers; and that,
accordingly, and in fulfillment of international agreement and practice to exempt aviation fuel from
the excise tax and other impositions, Section 135(a) of the NIRC prohibits the passing of the excise
tax to international carriers purchasing petroleum products from local manufacturers/sellers. Hence,
he finds merit in the Motion for Reconsideration filed by Pilipinas Shell Petroleum Corporation
(Pilipinas Shell), and rules that Pilipinas Shell, as the statutory taxpayer directly liable to pay the
excise tax on its petroleum products, is entitled to the refund or credit of the excise taxes it paid on
the petroleum products sold to international carriers, the latter having been granted exemption from
the payment of such taxes under Section 135(a) of the NIRC.
I CONCUR in the result.
I write this separate opinion only to explain that I hold a different view on the proper interpretation
of the excise tax exemption under Section 135(a) of the NIRC. I hold that the excise tax exemption
under Section 135(a) of the NIRC is conferred on the petroleum products on which the excise tax is
levied in the first place in view of its nature as a tax on property, the liability for the payment of
which is statutorily imposed on the domestic petroleum manufacturer.
I submit the following disquisition in support of this separate opinion.
The issue raised here was whether the manufacturer was entitled to claim the refund of the excise
taxes paid on the petroleum products sold to international carriers exempt under Section 135(a) of
the NIRC.
We ruled in the negative, and held that the exemption from the excise tax under Section 135(a) of
the NIRC was conferred on the international carriers to whom the petroleum products were sold. In
the decision promulgated onn April 25, 2012,1 the Court granted the petition for review on certiorari
filed by the Commissioner of Internal Revenue (CIR), and disposed thusly:
WHEREFORE, the petition for review on certiorari is GRANTED. The Decision dated March 25, 2009
and Resolution dated June 24, 2009 of the Court of Tax Appeals En Banc in CTA EB No. 415 are
hereby REVERSED and SET ASIDE. The claims for tax refund or credit filed by respondent Pilipinas
Shell Petroleum Corporation are DENIED for lack of basis.
No pronouncement as to costs.
SO ORDERED.2
We thereby agreed with the position of the Solicitor General that Section 135(a) of the NIRC must be
construed only as a prohibition for the manufacturer-seller of the petroleum products from shifting
the tax burden to the international carriers by incorporating the previously-paid excise tax in the
selling price. As a consequence, the manufacturer-seller could not invoke the exemption from the
excise tax granted to international carriers. Concluding, we said: –
Respondent’s locally manufactured petroleum products are clearly subject to excise tax under Sec.
148. Hence, its claim for tax refund may not be predicated on Sec. 229 of the NIRC allowing a refund
of erroneous or excess payment of tax. Respondent’s claim is premised on what it determined as a
tax exemption "attaching to the goods themselves," which must be based on a statute granting tax
exemption, or "the result of legislative grace." Such a claim is to be construed strictissimi juris
against the taxpayer, meaning that the claim cannot be made to rest on vague inference. Where the
rule of strict interpretation against the taxpayer is applicable as the claim for refund partakes of the
nature of an exemption, the claimant must show that he clearly falls under the exempting statute.
The exemption from excise tax payment on petroleum products under Sec. 135 (a) is conferred on
international carriers who purchased the same for their use or consumption outside the Philippines.
The only condition set by law is for these petroleum products to be stored in a bonded storage tank
and may be disposed of only in accordance with the rules and regulations to be prescribed by the
Secretary of Finance, upon recommendation of the Commissioner.3
xxxx
Because an excise tax is a tax on the manufacturer and not on the purchaser, and there being no
express grant under the NIRC of exemption from payment of excise tax to local manufacturers of
petroleum products sold to international carriers, and absent any provision in the Code authorizing
the refund or crediting of such excise taxes paid, the Court holds that Sec. 135 (a) should be
construed as prohibiting the shifting of the burden of the excise tax to the international carriers who
buys petroleum products from the local manufacturers. Said provision thus merely allows the
international carriers to purchase petroleum products without the excise tax component as an added
cost in the price fixed by the manufacturers or distributors/sellers. Consequently, the oil companies
which sold such petroleum products to international carriers are not entitled to a refund of excise
taxes previously paid on the goods.4
In its Motion for Reconsideration filed on May 23, 2012, Pilipinas Shell principally contends that the
Court has erred in its interpretation of Section 135(a) of the 1997 NIRC; that Section 135(a) of the
NIRC categorically exempts from the excise tax the petroleum products sold to international carriers
of Philippine or foreign registry for their use or consumption outside the Philippines; 5 that no excise
tax should be imposed on the petroleum products, whether in the hands of the qualified international
carriers or in the hands of the manufacturer-seller;6 that although it is the manufacturer, producer or
importer who is generally liable for the excise tax when the goods or articles are subject to the excise
tax, no tax should accordingly be collected from the manufacturer, producer or importer in instances
when the goods or articles themselves are not subject to the excise tax;7 and that as a consequence
any excise tax paid in advance on products that are exempt under the law should be considered
erroneously paid and subject of refund.8
Pilipinas Shell further contends that the Court’s decision, which effectively prohibits petroleum
manufacturers from passing on the burden of the excise tax, defeats the rationale behind the grant
of the exemption;9 and that without the benefit of a refund or the ability to pass on the burden of the
excise tax to the international carriers, the excise tax will constitute an additional production cost
that ultimately increases the selling price of the petroleum products.10
The CIR counters that the decision has clearly set forth that the excise tax exemption under Section
135(a) of the NIRC does not attach to the products; that Pilipinas Shell’s reliance on the Silkair
rulings is misplaced considering that the Court made no pronouncement therein that the
manufacturers selling petroleum products to international carriers were exempt from paying the
taxes; that the rulings that are more appropriate are those in Philippine Acetylene Co., Inc. v.
Commissioner of Internal Revenue11 and Maceda v. Macaraig, Jr.,12 whereby the Court confirmed the
obvious intent of Section 135 of the NIRC to grant the excise tax exemption to the international
carriers or agencies as the buyers of petroleum products; and that this intention is further supported
by the requirement that the petroleum manufacturer must pay the excise tax in advance without
regard to whether or not the petroleum purchaser is qualified for exemption under Section 135 of the
NIRC.
In its Supplemental Motion for Reconsideration, Pilipinas Shell reiterates that what is being exempted
under Section 135 of the NIRC is the petroleum product that is sold to international carriers; that the
exemption is not given to the producer or the buyer but to the product itself considering that the
excise taxes, according to the NIRC, are taxes applicable to certain specific goods or articles for
domestic sale or consumption or for any other disposition, whether manufactured in or imported into
the Philippines; that the excise tax that is passed on to the buyer is no longer in the nature of a tax
but of an added cost to the purchase price of the product sold; that what is contemplated under
Section 135 of the NIRC is an exemption from the excise tax, not an exemption from the burden to
shoulder the tax; and that inasmuch as the exemption can refer only to the imposition of the tax on
the statutory seller, like Pilipinas Shell, a contrary interpretation renders Section 135 of the NIRC
nugatory because the NIRC does not impose the excise tax on subsequent holders of the product like
the international carriers.
As I earlier said, I agree to GRANT Pilipinas Shell’s motions for reconsideration.
Excise tax is essentially a tax
on goods, products or articles
Taxes are classified, according to subject matter or object, into three groups, to wit: (1) personal,
capitation or poll taxes; (2) property taxes; and (3) excise or license taxes. Personal, capitation or
poll taxes are fixed amounts imposed upon residents or persons of a certain class without regard to
their property or business, an example of which is the basic community tax.13 Property taxes are
assessed on property or things of a certain class, whether real or personal, in proportion to their
value or other reasonable method of apportionment, such as the real estate tax. 14 Excise or license
taxes are imposed upon the performance of an act, the enjoyment of a privilege, or the engaging in
an occupation, profession or business.15 Income tax, value-added tax, estate and donor’s tax fall
under the third group.
Excise tax, as a classification of tax according to object, must not be confused with the excise tax
under Title VI of the NIRC. The term "excise tax" under Title VI of the 1997 NIRC derives its
definition from the 1986 NIRC,16 and relates to taxes applied to goods manufactured or produced in
the Philippines for domestic sale or consumption or for any other disposition and to things
imported.17 In contrast, an excise tax that is imposed directly on certain specified goods – goods
manufactured or produced in the Philippines, or things imported – is undoubtedly a tax on property.18
The payment of excise taxes is the direct
liability of the manufacturer or producer
The production, manufacture or importation of the goods belonging to any of the categories
enumerated in Title VI of the NIRC (i.e., alcohol products, tobacco products, petroleum products,
automobiles and non-essential goods, mineral products) are not the sole determinants for the proper
levy of the excise tax. It is further required that the goods be manufactured, produced or imported
for domestic sale, consumption or any other disposition.19 The accrual of the tax liability is, therefore,
contingent on the production, manufacture or importation of the taxable goods and the intention of
the manufacturer, producer or importer to have the goods locally sold or consumed or disposed in
any other manner. This is the reason why the accrual and liability for the payment of the excise tax
are imposed directly on the manufacturer or producer of the taxable goods, 20 and arise before the
removal of the goods from the place of their production.21
The manufacturer’s or producer’s direct liability to pay the excise taxes similarly operates although
the goods produced or manufactured within the country are intended for export and are "actually
exported without returning to the Philippines, whether so exported in their original state or as
ingredients or parts of any manufactured goods or products." This is implied from the grant of a tax
credit or refund to the manufacturer or producer by Section 130(4)(D) of the NIRC, thereby
presupposing that the excise tax corresponding to the goods exported were previously paid. Section
130(4)(D) reads:
xxxx
(D) Credit for Excise Tax on Goods Actually Exported. - When goods locally produced or
manufactured are removed and actually exported without returning to the Philippines, whether so
exported in their original state or as ingredients or parts of any manufactured goods or products, any
excise tax paid thereon shall be credited or refunded upon submission of the proof of actual
exportation and upon receipt of the corresponding foreign exchange payment: Provided, That the
excise tax on mineral products, except coal and coke, imposed under Section 151 shall not be
creditable or refundable even if the mineral products are actually exported. (Emphasis supplied.)
Simply stated, the accrual and payment of the excise tax under Title VI of the NIRC materially rest
on the fact of actual production, manufacture or importation of the taxable goods in the Philippines
and on their presumed or intended domestic sale, consumption or disposition. Considering that the
excise tax attaches to the goods upon the accrual of the manufacturer’s direct liability for its
payment, the subsequent sale, consumption or other disposition of the goods becomes relevant only
to determine whether any exemption or tax relief may be granted thereafter.
The actual sale, consumption or disposition
of the taxable goods confirms the proper tax
treatment of goods previously subjected
to the excise tax
Conformably with the foregoing discussion, the accrual and payment of the excise tax on the goods
enumerated under Title VI of the NIRC prior to their removal from the place of production are
absolute and admit of no exception. As earlier mentioned, even locally manufactured goods intended
for export cannot escape the imposition and payment of the excise tax, subject to a future claim for
tax credit or refund once proof of actual exportation has been submitted to the Commissioner of
Internal Revenue (CIR).22 Verily, it is the actual sale, consumption or disposition of the taxable goods
that confirms the proper tax treatment of goods previously subjected to the excise tax. If any of the
goods enumerated under Title VI of the NIRC are manufactured or produced in the Philippines and
eventually sold, consumed, or disposed of in any other manner domestically, therefore, there can be
no claim for any tax relief inasmuch as the excise tax was properly levied and collected from the
manufacturer-seller.
Here, the point of interest is the proper tax treatment of the petroleum products sold by Pilipinas
Shell to various international carriers. An international carrier is engaged in international
transportation or contract of carriage between places in different territorial jurisdictions.23
Pertinent is Section 135(a) of the NIRC, which provides:
SEC. 135. Petroleum Products Sold to International Carriers and Exempt Entities or Agencies. -
Petroleum products sold to the following are exempt from excise tax:
(a) International carriers of Philippine or foreign registry on their use or consumption outside the
Philippines: Provided, That the petroleum products sold to these international carriers shall be stored
in a bonded storage tank and may be disposed of only in accordance with the rules and regulations to
be prescribed by the Secretary of Finance, upon recommendation of the Commissioner; x x x
xxxx
As the taxpayer statutorily and directly liable for the accrual and payment of the excise tax on the
petroleum products it manufactured and it intended for future domestic sale or consumption, Pilipinas
Shell paid the corresponding excise taxes prior to the removal of the goods from the place of
production. However, upon the sale of the petroleum products to the international carriers, the goods
became exempt from the excise tax by the express provision of Section 135(a) of the NIRC. In the
latter instance, the fact of sale to the international carriers of the petroleum products previously
subjected to the excise tax confirms the proper tax treatment of the goods as exempt from the
excise tax.
It is worthy to note that Section 135(a) of the NIRC is a product of the 1944 Convention of
International Civil Aviation, otherwise known as the Chicago Convention, of which the Philippines is a
Member State. Article 24(a) of the Chicago Convention provides –
Article 24
Customs duty
(a) Aircraft on a flight to, from, or across the territory of another contracting State shall be admitted
temporarily free of duty, subject to the customs regulations of the State. Fuel, lubricating oils, spare
parts, regular equipment and aircraft stores on board an aircraft of a contracting State, on arrival in
the territory of another contracting State and retained on board on leaving the territory of that State
shall be exempt from customs duty, inspection fees or similar national or local duties and charges.
This exemption shall not apply to any quantities or articles unloaded, except in accordance with the
customs regulations of the State, which may require that they shall be kept under customs
supervision. x x x (Bold emphasis supplied.)
This provision was extended by the ICAO Council in its 1999 Resolution, which stated that "fuel …
taken on board for consumption" by an aircraft from a contracting state in the territory of another
contracting State departing for the territory of any other State must be exempt from all customs or
other duties. The Resolution broadly interpreted the scope of the Article 24 prohibition to include
"import, export, excise, sales, consumption and internal duties and taxes of all kinds levied upon . . .
fuel."24
Given the nature of the excise tax on petroleum products as a tax on property, the tax exemption
espoused by Article 24(a) of the Chicago Convention, as now embodied in Section 135(a) of the
NIRC, is clearly conferred on the aviation fuel or petroleum product on-board international carriers.
Consequently, the manufacturer’s or producer’s sale of the petroleum products to international
carriers for their use or consumption outside the Philippines operates to bring the tax exemption of
the petroleum products into full force and effect.
Pilipinas Shell, the statutory taxpayer, is
the proper party to claim the refund of
the excise taxes paid on petroleum
products sold to international carriers
The excise taxes are of the nature of indirect taxes, the liability for the payment of which may fall on
a person other than whoever actually bears the burden of the tax.25
In Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company,26 the Court
has discussed the nature of indirect taxes in the following manner:
[I]ndirect taxes are those that are demanded, in the first instance, from, or are paid by, one person
in the expectation and intention that he can shift the burden to someone else. Stated elsewise,
indirect taxes are taxes wherein the liability for the payment of the tax falls on one person but the
burden thereof can be shifted or passed on to another person, such as when the tax is imposed upon
goods before reaching the consumer who ultimately pays for it. When the seller passes on the tax to
his buyer, he, in effect, shifts the tax burden, not the liability to pay it, to the purchaser, as part of
the price of goods sold or services rendered.27
In another ruling, the Court has observed:
Accordingly, the party liable for the tax can shift the burden to another, as part of the purchase price
of the goods or services. Although the manufacturer/seller is the one who is statutorily liable for the
tax, it is the buyer who actually shoulders or bears the burden of the tax, albeit not in the nature of a
tax, but part of the purchase price or the cost of the goods or services sold.28
Accordingly, the option of shifting the burden to pay the excise tax rests on the statutory taxpayer,
which is the manufacturer or producer in the case of the excise taxes imposed on the petroleum
products. Regardless of who shoulders the burden of tax payment, however, the Court has ruled as
early as in the 1960s that the proper party to question or to seek a refund of an indirect tax is the
statutory taxpayer, the person on whom the tax is imposed by law and who paid the same, even if
he shifts the burden thereof to another.29 The Court has explained:
In Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue, the Court held that the sales
tax is imposed on the manufacturer or producer and not on the purchaser, "except probably in a very
remote and inconsequential sense." Discussing the "passing on" of the sales tax to the purchaser, the
Court therein cited Justice Oliver Wendell Holmes’ opinion in Lash’s Products v. United States wherein
he said:
"The phrase ‘passed the tax on’ is inaccurate, as obviously the tax is laid and remains on the
manufacturer and on him alone. The purchaser does not really pay the tax. He pays or may pay
the seller more for the goods because of the seller’s obligation, but that is all. x x x The price is the
sum total paid for the goods. The amount added because of the tax is paid to get the goods and for
nothing else. Therefore it is part of the price x x x."
Proceeding from this discussion, the Court went on to state:
It may indeed be that the economic burden of the tax finally falls on the purchaser; when it does the
tax becomes a part of the price which the purchaser must pay. It does not matter that an additional
amount is billed as tax to the purchaser. x x x The effect is still the same, namely, that the purchaser
does not pay the tax. He pays or may pay the seller more for the goods because of the seller’s
obligation, but that is all and the amount added because of the tax is paid to get the goods and for
nothing else.
But the tax burden may not even be shifted to the purchaser at all. A decision to absorb the burden
of the tax is largely a matter of economics. Then it can no longer be contended that a sales tax is a
tax on the purchaser.30
The Silkair rulings involving the excise taxes on the petroleum products sold to international carriers
firmly hold that the proper party to claim the refund of excise taxes paid is the manufacturer-seller.
In the February 2008 Silkair ruling,31 the Court declared:
The proper party to question, or seek a refund of, an indirect tax is the statutory taxpayer, the
person on whom the tax is imposed by law and who paid the same even if he shifts the burden
thereof to another. Section 130 (A) (2) of the NIRC provides that "[u]nless otherwise specifically
allowed, the return shall be filed and the excise tax paid by the manufacturer or producer before
removal of domestic products from place of production." Thus, Petron Corporation, not Silkair, is the
statutory taxpayer which is entitled to claim a refund based on Section 135 of the NIRC of 1997 and
Article 4(2) of the Air Transport Agreement between RP and Singapore.
Even if Petron Corporation passed on to Silkair the burden of the tax, the additional amount billed to
Silkair for jet fuel is not a tax but part of the price which Silkair had to pay as a purchaser
In the November 2008 Silkair ruling,32 the Court reiterated:
Section 129 of the NIRC provides that excise taxes refer to taxes imposed on specified goods
manufactured or produced in the Philippines for domestic sale or consumption or for any other
disposition and to things imported. The excise taxes are collected from manufacturers or producers
before removal of the domestic products from the place of production. Although excise taxes can be
considered as taxes on production, they are really taxes on property as they are imposed on certain
specified goods.
Section 148(g) of the NIRC provides that there shall be collected on aviation jet fuel an excise tax of
₱3.67 per liter of volume capacity. Since the tax imposed is based on volume capacity, the tax is
referred to as "specific tax." However, excise tax, whether classified as specific or ad valorem tax, is
basically an indirect tax imposed on the consumption of a specified list of goods or products. The tax
is directly levied on the manufacturer upon removal of the taxable goods from the place of
production but in reality, the tax is passed on to the end consumer as part of the selling price of the
goods sold
xxxx
When Petron removes its petroleum products from its refinery in Limay, Bataan, it pays the excise
tax due on the petroleum products thus removed. Petron, as manufacturer or producer, is the person
liable for the payment of the excise tax as shown in the Excise Tax Returns filed with the BIR. Stated
otherwise, Petron is the taxpayer that is primarily, directly and legally liable for the payment of the
excise taxes. However, since an excise tax is an indirect tax, Petron can transfer to its customers the
amount of the excise tax paid by treating it as part of the cost of the goods and tacking it on to the
selling price.
As correctly observed by the CTA, this Court held in Philippine Acetylene Co., Inc. v. Commissioner of
Internal Revenue:
It may indeed be that the economic burden of the tax finally falls on the purchaser; when it does the
tax becomes part of the price which the purchaser must pay.
Even if the consumers or purchasers ultimately pay for the tax, they are not considered the
taxpayers. The fact that Petron, on whom the excise tax is imposed, can shift the tax burden to its
purchasers does not make the latter the taxpayers and the former the withholding agent.
Petitioner, as the purchaser and end-consumer, ultimately bears the tax burden, but this does not
transform petitioner's status into a statutory taxpayer.
In the refund of indirect taxes, the statutory taxpayer is the proper party who can claim the refund.
Section 204(c) of the NIRC provides:
Sec. 204. Authority of the Commissioner to Compromise, Abate, and Refund or Credit Taxes. The
Commissioner may –
xxxx
(b) Credit or refund taxes erroneously or illegally received or penalties imposed without authority,
refund the value of internal revenue stamps when they are returned in good condition by the
purchaser, and, in his discretion, redeem or change unused stamps that have been rendered unfit for
use and refund their value upon proof of destruction. No credit or refund of taxes or penalties shall
be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund
within two (2) years after the payment of the tax or penalty: Provided, however, That a return filed
showing an overpayment shall be considered as a written claim for credit or refund. (Emphasis and
underscoring supplied)
The person entitled to claim a tax refund is the statutory taxpayer. Section 22(N) of the NIRC defines
a taxpayer as "any person subject to tax." In Commissioner of Internal Revenue v. Procter and
Gamble Phil. Mfg. Corp., the Court ruled that:
A "person liable for tax" has been held to be a "person subject to tax" and properly considered a
"taxpayer." The terms "liable for tax" and "subject to tax" both connote a legal obligation or duty to
pay a tax.
The excise tax is due from the manufacturers of the petroleum products and is paid upon removal of
the products from their refineries. Even before the aviation jet fuel is purchased from Petron, the
excise tax is already paid by Petron. Petron, being the manufacturer, is the "person subject to tax."
In this case, Petron, which paid the excise tax upon removal of the products from its Bataan refinery,
is the "person liable for tax." Petitioner is neither a "person liable for tax" nor "a person subject to
tax." There is also no legal duty on the part of petitioner to pay the excise tax; hence, petitioner
cannot be considered the taxpayer.
Even if the tax is shifted by Petron to its customers and even if the tax is billed as a separate item in
the aviation delivery receipts and invoices issued to its customers, Petron remains the taxpayer
because the excise tax is imposed directly on Petron as the manufacturer. Hence, Petron, as the
statutory taxpayer, is the proper party that can claim the refund of the excise taxes paid to the
BIR.33
It is noteworthy that the foregoing pronouncements were applied in two more Silkair
cases34 involving the same parties and the same cause of action but pertaining to different periods of
taxation.
The shifting of the tax burden by manufacturers-sellers is a business prerogative resulting from the
collective impact of market forces. Such forces include government impositions like the excise tax.
Hence, the additional amount billed to the purchaser as part of the price the purchaser pays for the
goods acquired cannot be solely attributed to the effect of the tax liability imposed on the
manufacture-seller. It is erroneous to construe Section 135(a) only as a prohibition against the
shifting by the manufacturers-sellers of petroleum products of the tax burden to international
carriers, for such construction will deprive the manufacturers-sellers of their business prerogative to
determine the prices at which they can sell their products.
Section 135(a) of the NIRC cannot be further construed as granting the excise tax exemption to the
international carrier to whom the petroleum products are sold considering that the international
carrier has not been subjected to excise tax at the outset. To reiterate, the excise tax is levied on the
petroleum products because it is a tax on property. Levy is the act of imposition by the Legislature
such as by its enactment of a law.35 The law enacted here is the NIRC whereby the excise tax is
imposed on the petroleum products, the liability for the payment of which is further statutorily
imposed on the domestic petroleum manufacturer. Accordingly, the exemption must be allowed to
the petroleum products because it is on them that the tax is imposed. The tax status of an
international carrier to whom the petroleum products are sold is not based on exemption; rather, it is
based on the absence of a law imposing the excise tax on it. This further supports the position that
the burden passed on by the domestic petroleum manufacturer is not anymore in the nature of a tax
– although resulting from the previously-paid excise tax – but as an additional cost component in the
selling price. Consequently, the purchaser of the petroleum products to whom the burden of the
excise tax has been shifted, not being the statutory taxpayer, cannot claim a refund of the excise tax
paid by the manufacturer or producer.
Applying the foregoing, the Court concludes that: (1) the exemption under Section 135(a) of the
NIRC is conferred on the petroleum products on which the excise tax was levied in the first place; (2)
Pilipinas Shell, being the manufacturer or producer of petroleum products, was the statutory
taxpayer of the excise tax imposed on the petroleum products; (3) as the statutory taxpayer,
Pilipinas Shell’s liability to pay the excise tax accrued as soon as the petroleum products came into
existence, and Pilipinas Shell accordingly paid its excise tax liability prior to its sale or disposition of
the taxable goods to third parties, a fact not disputed by the CIR; and (3) Pilipinas Shell’s sale of the
petroleum products to international carriers for their use or consumption outside the Philippines
confirmed the proper tax treatment of the subject goods as exempt from the excise tax.1âwphi1
Under the circumstances, therefore, Pilipinas Shell erroneously paid the excise taxes on its petroleum
products sold to international carriers, and was entitled to claim the refund of the excise taxes paid in
accordance with prevailing jurisprudence and Section 204(C) of the NIRC, viz:
Section 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes. – The
Commissioner may – x x x
xxxx
(C) Credit or refund taxes erroneously or illegally received or penalties imposed without authority,
refund the value of internal revenue stamps when they are returned in good condition by the
purchaser, and, in his discretion, redeem or change unused stamps that have been rendered unfit for
use and refund their value upon proof of destruction. No credit or refund of taxes or penalties shall
be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund
within two (2) years after payment of the tax or penalty: Provided, however, That a return filed
showing an overpayment shall be considered as a written claim for credit or refund.
IN VIEW OF THE FOREGOING, I VOTE TO GRANT the Motion for Reconsideration and Supplemental
Motion for Reconsideration of Pilipinas Shell Petroleum Corporation and, accordingly:
(a) TO AFFIRM the decision dated March 25, 2009 and resolution dated June 24, 2009 of the
Court of Tax Appeals En Banc in CTA EB No. 415; and
(b) TO DIRECT petitioner Commissioner of Internal Revenue to refund or to issue a tax credit
certificate to Pilipinas Shell Petroleum Corporation in the amount of ₱95,014,283.00
 representing the excise taxes it paid on the petroleum products sold to international carriers in
the period from October 2001 to June 2002.
LUCAS P. BERSAMIN
G.R. No. 188497 February 19, 2014

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. PILIPINAS SHELL PETROLEUM

CORPORATION, Respondent.

RESOLUTION

VILLARAMA, JR., J.:

For resolution are the Motion for Reconsideration dated May 22, 2012 and Supplemental Motion for
Reconsideration dated December 12, 2012 filed by Pilipinas Shell Petroleum Corporation
(respondent). As directed, the Solicitor General on behalf of petitioner Commissioner of Internal
Revenue filed their Comment, to which respondent filed its Reply.

In our Decision promulgated on April 25, 2012, we ruled that the Court of Tax Appeals (CTA) erred in
granting respondent's claim for tax refund because the latter failed to establish a tax exemption in its
favor under Section 135(a) of the National Internal Revenue Code of 1997 (NIRC).

WHEREFORE, the petition for review on certiorari is GRANTED. The Decision dated March 25, 2009
and Resolution dated June 24, 2009 of the Court of Tax Appeals En Banc in CTA EB No. 415 are
hereby REVERSED and SET ASIDE. The claims for tax refund or credit filed by respondent Pilipinas
Shell Petroleum Corporation are DENIED for lack of basis.

No pronouncement as to costs.

SO ORDERED.1

Respondent argues that a plain reading of Section 135 of the NIRC reveals that it is the petroleum
products sold to international carriers which are exempt from excise tax for which reason no excise
taxes are deemed to have been due in the first place. It points out that excise tax being an indirect
tax, Section 135 in relation to Section 148 should be interpreted as referring to a tax exemption from
the point of production and removal from the place of production considering that it is only at that
point that an excise tax is imposed. The situation is unlike the value-added tax (VAT) which is
imposed at every point of turnover – from production to wholesale, to retail and to end-consumer.
Respondent thus concludes that exemption could only refer to the imposition of the tax on the
statutory seller, in this case the respondent. This is because when a tax paid by the statutory seller is
passed on to the buyer it is no longer in the nature of a tax but an added cost to the purchase price
of the product sold.
Respondent also contends that our ruling that Section 135 only prohibits local petroleum
manufacturers like respondent from shifting the burden of excise tax to international carriers has
adverse economic impact as it severely curtails the domestic oil industry. Requiring local petroleum
manufacturers to absorb the tax burden in the sale of its products to international carriers is contrary
to the State’s policy of "protecting gasoline dealers and distributors from unfair and onerous trade
conditions," and places them at a competitive disadvantage since foreign oil producers, particularly
those whose governments with which we have entered into bilateral service agreements, are not
subject to excise tax for the same transaction. Respondent fears this could lead to cessation of
supply of petroleum products to international carriers, retrenchment of employees of domestic
manufacturers/producers to prevent further losses, or worse, shutting down of their production of jet
A-1 fuel and aviation gas due to unprofitability of sustaining operations. Under this scenario,
participation of Filipino capital, management and labor in the domestic oil industry is effectively
diminished.
Lastly, respondent asserts that the imposition by the Philippine Government of excise tax on
petroleum products sold to international carriers is in violation of the Chicago Convention on
International Aviation ("Chicago Convention") to which it is a signatory, as well as other international
agreements (the Republic of the Philippines’ air transport agreements with the United States of
America, Netherlands, Belgium and Japan).

In his Comment, the Solicitor General underscores the statutory basis of this Court’s ruling that the
exemption under Section 135 does not attach to the products. Citing Exxonmobil Petroleum &
Chemical Holdings, Inc.-Philippine Branch v. Commissioner of Internal Revenue,2 which held that the
excise tax, when passed on to the purchaser, becomes part of the purchase price, the Solicitor
General claims this refutes respondent’s theory that the exemption attaches to the petroleum
product itself and not to the purchaser for it would have been erroneous for the seller to pay the
excise tax and inequitable to pass it on to the purchaser if the excise tax exemption attaches to the
product.

As to respondent’s reliance in the cases of Silkair (Singapore) Pte. Ltd. v. Commissioner of Internal
Revenue3 and Exxonmobil Petroleum & Chemical Holdings, Inc.-Philippine Branch v. Commissioner of
Internal Revenue,4 the Solicitor General points out that there was no pronouncement in these cases
that petroleum manufacturers selling petroleum products to international carriers are exempt from
paying excise taxes. In fact, Exxonmobil even cited the case of Philippine Acetylene Co, Inc. v.
Commissioner of Internal Revenue.5 Further, the ruling in Maceda v. Macaraig, Jr.6 which confirms
that Section 135 does not intend to exempt manufacturers or producers of petroleum products from
the payment of excise tax.

The Court will now address the principal arguments proffered by respondent: (1) Section 135
intended the tax exemption to apply to petroleum products at the point of production; (2) Philippine
Acetylene Co., Inc. v. Commissioner of Internal Revenue and Maceda v. Macaraig, Jr. are inapplicable
in the light of previous rulings of the Bureau of Internal Revenue (BIR) and the CTA that the excise
tax on petroleum products sold to international carriers for use or consumption outside the
Philippines attaches to the article when sold to said international carriers, as it is the article which is
exempt from the tax, not the international carrier; and (3) the Decision of this Court will not only
have adverse impact on the domestic oil industry but is also in violation of international agreements
on aviation.

Under Section 129 of the NIRC, excise taxes are those applied to goods manufactured or produced in
the Philippines for domestic sale or consumption or for any other disposition and to things imported.
Excise taxes as used in our Tax Code fall under two types – (1) specific tax which is based on weight
or volume capacity and other physical unit of measurement, and (2) ad valorem tax which is based
on selling price or other specified value of the goods. Aviation fuel is subject to specific tax under
Section 148 (g) which attaches to said product "as soon as they are in existence as such."

On this point, the clarification made by our esteemed colleague, Associate Justice Lucas P. Bersamin
regarding the traditional meaning of excise tax adopted in our Decision, is well-taken.

The transformation undergone by the term "excise tax" from its traditional concept up to its current
definition in our Tax Code was explained in the case of Petron Corporation v. Tiangco,7 as follows:

Admittedly, the proffered definition of an excise tax as "a tax upon the performance, carrying on, or
exercise of some right, privilege, activity, calling or occupation" derives from the compendium
American Jurisprudence, popularly referred to as Am Jur and has been cited in previous decisions of
this Court, including those cited by Petron itself. Such a definition would not have been inconsistent
with previous incarnations of our Tax Code, such as the NIRC of 1939, as amended, or the NIRC of
1977 because in those laws the term "excise tax" was not used at all. In contrast, the nomenclature
used in those prior laws in referring to taxes imposed on specific articles was "specific tax." Yet
beginning with the National Internal Revenue Code of 1986, as amended, the term "excise taxes"
was used and defined as applicable "to goods manufactured or produced in the Philippines… and to
things imported." This definition was carried over into the present NIRC of 1997. Further, these two
latest codes categorize two different kinds of excise taxes: "specific tax" which is imposed and based
on weight or volume capacity or any other physical unit of measurement; and "ad valorem tax" which
is imposed and based on the selling price or other specified value of the goods. In other words, the
meaning of "excise tax" has undergone a transformation, morphing from the Am Jur definition to its
current signification which is a tax on certain specified goods or articles.

The change in perspective brought forth by the use of the term "excise tax" in a different connotation
was not lost on the departed author Jose Nolledo as he accorded divergent treatments in his 1973
and 1994 commentaries on our tax laws. Writing in 1973, and essentially alluding to the Am Jur
definition of "excise tax," Nolledo observed:

Are specific taxes, taxes on property or excise taxes –

In the case of Meralco v. Trinidad ([G.R.] 16738, 1925) it was held that specific taxes are property
taxes, a ruling which seems to be erroneous. Specific taxes are truly excise taxes for the fact that the
value of the property taxed is taken into account will not change the nature of the tax. It is correct to
say that specific taxes are taxes on the privilege to import, manufacture and remove from storage
certain articles specified by law.

In contrast, after the tax code was amended to classify specific taxes as a subset of excise taxes,
Nolledo, in his 1994 commentaries, wrote:

1. Excise taxes, as used in the Tax Code, refers to taxes applicable to certain specified goods or
articles manufactured or produced in the Philippines for domestic sale or consumption or for any
other disposition and to things imported into the Philippines. They are either specific or ad valorem.

2. Nature of excise taxes. – They are imposed directly on certain specified goods. (infra) They are,
therefore, taxes on property. (see Medina vs. City of Baguio, 91 Phil. 854.)

A tax is not excise where it does not subject directly the produce or goods to tax but indirectly as an
incident to, or in connection with, the business to be taxed.

In their 2004 commentaries, De Leon and De Leon restate the Am Jur definition of excise tax, and
observe that the term is "synonymous with ‘privilege tax’ and [both terms] are often used
interchangeably." At the same time, they offer a caveat that "[e]xcise tax, as [defined by Am Jur], is
not to be confused with excise tax imposed [by the NIRC] on certain specified articles manufactured
or produced in, or imported into, the Philippines, ‘for domestic sale or consumption or for any other
disposition.’"

It is evident that Am Jur aside, the current definition of an excise tax is that of a tax levied on a
specific article, rather than one "upon the performance, carrying on, or the exercise of an activity."

This current definition was already in place when the Code was enacted in 1991, and we can only
presume that it was what the Congress had intended as it specified that local government units could
not impose "excise taxes on articles enumerated under the [NIRC]." This prohibition must pertain to
the same kind of excise taxes as imposed by the NIRC, and not those previously defined "excise
taxes" which were not integrated or denominated as such in our present tax law.8 (Emphasis
supplied.)

That excise tax as presently understood is a tax on property has no bearing at all on the issue of
respondent’s entitlement to refund. Nor does the nature of excise tax as an indirect tax supports
respondent’s postulation that the tax exemption provided in Sec. 135 attaches to the petroleum
products themselves and consequently the domestic petroleum manufacturer is not liable for the
payment of excise tax at the point of production. As already discussed in our Decision, to which
Justice Bersamin concurs, "the accrual and payment of the excise tax on the goods enumerated
under Title VI of the NIRC prior to their removal at the place of production are absolute and admit of
no exception." This also underscores the fact that the exemption from payment of excise tax is
conferred on international carriers who purchased the petroleum products of respondent.

On the basis of Philippine Acetylene, we held that a tax exemption being enjoyed by the buyer
cannot be the basis of a claim for tax exemption by the manufacturer or seller of the goods for any
tax due to it as the manufacturer or seller. The excise tax imposed on petroleum products under
Section 148 is the direct liability of the manufacturer who cannot thus invoke the excise tax
exemption granted to its buyers who are international carriers. And following our pronouncement in
Maceda v. Macarig, Jr. we further ruled that Section 135(a) should be construed as prohibiting the
shifting of the burden of the excise tax to the international carriers who buy petroleum products from
the local manufacturers. Said international carriers are thus allowed to purchase the petroleum
products without the excise tax component which otherwise would have been added to the cost or
price fixed by the local manufacturers or distributors/sellers.

Excise tax on aviation fuel used for international flights is practically nil as most countries are
signatories to the 1944 Chicago Convention on International Aviation (Chicago Convention). Article
249 of the Convention has been interpreted to prohibit taxation of aircraft fuel consumed for
international transport. Taxation of international air travel is presently at such low level that there
has been an intensified debate on whether these should be increased to "finance development rather
than simply to augment national tax revenue" considering the "cross-border environmental damage"
caused by aircraft emissions that contribute to global warming, not to mention noise pollution and
congestion at airports).10 Mutual exemptions given under bilateral air service agreements are seen
as main legal obstacles to the imposition of indirect taxes on aviation fuel. In response to present
realities, the International Civil Aviation Organization (ICAO) has adopted policies on charges and
emission-related taxes and charges.11

Section 135(a) of the NIRC and earlier amendments to the Tax Code represent our Governments’
compliance with the Chicago Convention, its subsequent resolutions/annexes, and the air transport
agreements entered into by the Philippine Government with various countries. The rationale for
exemption of fuel from national and local taxes was expressed by ICAO as follows:

...The Council in 1951 adopted a Resolution and Recommendation on the taxation of fuel, a
Resolution on the taxation of income and of aircraft, and a Resolution on taxes related to the sale or
use of international air transport (cf. Doc 7145) which were further amended and amplified by the
policy statements in Doc 8632 published in 1966. The Resolutions and Recommendation concerned
were designed to recognize the uniqueness of civil aviation and the need to accord tax exempt status
to certain aspects of the operations of international air transport and were adopted because multiple
taxation on the aircraft, fuel, technical supplies and the income of international air transport, as well
as taxes on its sale and use, were considered as major obstacles to the further development of
international air transport. Non-observance of the principle of reciprocal exemption envisaged in
these policies was also seen as risking retaliatory action with adverse repercussions on international
air transport which plays a major role in the development and expansion of international trade and
travel.12

In the 6th Meeting of the Worldwide Air Transport Conference (ATCONF) held on March 18-22, 2013
at Montreal, among matters agreed upon was that "the proliferation of various taxes and duties on
air transport could have negative impact on the sustainable development of air transport and on
consumers." Confirming that ICAO’s policies on taxation remain valid, the Conference recommended
that "ICAO promote more vigorously its policies and with industry stakeholders to develop analysis
and guidance to States on the impact of taxes and other levies on air transport."13 Even as said
conference was being held, on March 7, 2013, President Benigno Aquino III has signed into law
Republic Act (R.A.) No. 1037814 granting tax incentives to foreign carriers which include exemption
from the 12% value-added tax (VAT) and 2.5% gross Philippine billings tax (GPBT). GPBT is a form
of income tax applied to international airlines or shipping companies. The law, based on reciprocal
grant of similar tax exemptions to Philippine carriers, is expected to increase foreign tourist arrivals
in the country.

Indeed, the avowed purpose of a tax exemption is always "some public benefit or interest, which the
law-making body considers sufficient to offset the monetary loss entailed in the grant of the
exemption."15 The exemption from excise tax of aviation fuel purchased by international carriers for
consumption outside the Philippines fulfills a treaty obligation pursuant to which our Government
supports the promotion and expansion of international travel through avoidance of multiple taxation
and ensuring the viability and safety of international air travel. In recent years, developing
economies such as ours focused more serious attention to significant gains for business and tourism
sectors as well. Even without such recent incidental benefit, States had long accepted the need for
international cooperation in maintaining a capital intensive, labor intensive and fuel intensive airline
industry, and recognized the major role of international air transport in the development of
international trade and travel.

Under the basic international law principle of pacta sunt servanda, we have the duty to fulfill our
treaty obligations in good faith. This entails harmonization of national legislation with treaty
provisions. In this case, Sec. 135(a) of the NIRC embodies our compliance with our undertakings
under the Chicago Convention and various bilateral air service agreements not to impose excise tax
on aviation fuel purchased by international carriers from domestic manufacturers or suppliers. In our
Decision in this case, we interpreted Section 135 (a) as prohibiting domestic manufacturer or
producer to pass on to international carriers the excise tax it had paid on petroleum products upon
their removal from the place of production, pursuant to Article 148 and pertinent BIR regulations.
Ruling on respondent’s claim for tax refund of such paid excise taxes on petroleum products sold to
tax-exempt international carriers, we found no basis in the Tax Code and jurisprudence to grant the
refund of an "erroneously or illegally paid" tax.

Justice Bersamin argues that "(T)he shifting of the tax burden by manufacturers-sellers is a business
prerogative resulting from the collective impact of market forces," and that it is "erroneous to
construe Section 135(a) only as a prohibition against the shifting by the manufacturers-sellers of
petroleum products of the tax burden to international carriers, for such construction will deprive the
manufacturers-sellers of their business prerogative to determine the prices at which they can sell
their products."

We maintain that Section 135 (a), in fulfillment of international agreement and practice to exempt
aviation fuel from excise tax and other impositions, prohibits the passing of the excise tax to
international carriers who buys petroleum products from local manufacturers/sellers such as
respondent. However, we agree that there is a need to reexamine the effect of denying the domestic
manufacturers/sellers’ claim for refund of the excise taxes they already paid on petroleum products
sold to international carriers, and its serious implications on our Government’s commitment to the
goals and objectives of the Chicago Convention.

The Chicago Convention, which established the legal framework for international civil aviation, did
not deal comprehensively with tax matters. Article 24 (a) of the Convention simply provides that fuel
and lubricating oils on board an aircraft of a Contracting State, on arrival in the territory of another
Contracting State and retained on board on leaving the territory of that State, shall be exempt from
customs duty, inspection fees or similar national or local duties and charges. Subsequently, the
exemption of airlines from national taxes and customs duties on spare parts and fuel has become a
standard element of bilateral air service agreements (ASAs) between individual countries.

The importance of exemption from aviation fuel tax was underscored in the following observation
made by a British author16 in a paper assessing the debate on using tax to control aviation
emissions and the obstacles to introducing excise duty on aviation fuel, thus:

Without any international agreement on taxing fuel, it is highly likely that moves to impose duty on
international flights, either at a domestic or European level, would encourage 'tankering': carriers
filling their aircraft as full as possible whenever they landed outside the EU to avoid paying
tax.1âwphi1 Clearly this would be entirely counterproductive. Aircraft would be travelling further than
necessary to fill up in low-tax jurisdictions; in addition they would be burning up more fuel when
carrying the extra weight of a full fuel tank.

With the prospect of declining sales of aviation jet fuel sales to international carriers on account of
major domestic oil companies' unwillingness to shoulder the burden of excise tax, or of petroleum
products being sold to said carriers by local manufacturers or sellers at still high prices , the practice
of "tankering" would not be discouraged. This scenario does not augur well for the Philippines'
growing economy and the booming tourism industry. Worse, our Government would be risking
retaliatory action under several bilateral agreements with various countries. Evidently, construction
of the tax exemption provision in question should give primary consideration to its broad implications
on our commitment under international agreements.

In view of the foregoing reasons, we find merit in respondent's motion for reconsideration. We
therefore hold that respondent, as the statutory taxpayer who is directly liable to pay the excise tax
on its petroleum products, is entitled to a refund or credit of the excise taxes it paid for petroleum
products sold to international carriers, the latter having been granted exemption from the payment
of said excise tax under Sec. 135 (a) of the NIRC.

WHEREFORE, the Court hereby resolves to:

(1) GRANT the original and supplemental motions for reconsideration filed by respondent Pilipinas
Shell Petroleum Corporation; and

(2) AFFIRM the Decision dated March 25, 2009 and Resolution dated June 24, 2009 of the Court of
Tax Appeals En Banc in CT A EB No. 415; and DIRECT petitioner Commissioner of Internal Revenue
to refund or to issue a tax credit certificate to Pilipinas Shell Petroleum Corporation in the amount of
J195,014,283.00 representing the excise taxes it paid on petroleum products sold to international
carriers from October 2001 to June 2002.

SO ORDERED.

MARTIN S. VILLARAMA, JR.

G.R. No. L-13250 October 29, 1971

THE COLLECTOR OF INTERNAL REVENUE, petitioner, vs. ANTONIO CAMPOS RUEDA,

respondent..

Ramirez and Ortigas for respondent.

FERNANDO, J.:
The basic issue posed by petitioner Collector of Internal Revenue in this appeal from a decision of the
Court of Tax Appeals as to whether or not the requisites of statehood, or at least so much thereof as
may be necessary for the acquisition of an international personality, must be satisfied for a "foreign
country" to fall within the exemption of Section 122 of the National Internal Revenue Code1 is now
ripe for adjudication. The Court of Tax Appeals answered the question in the negative, and thus
reversed the action taken by petitioner Collector, who would hold respondent Antonio Campos Rueda,
as administrator of the estate of the late Estrella Soriano Vda. de Cerdeira, liable for the sum of
P161,874.95 as deficiency estate and inheritance taxes for the transfer of intangible personal
properties in the Philippines, the deceased, a Spanish national having been a resident of Tangier,
Morocco from 1931 up to the time of her death in 1955. In an earlier resolution promulgated May 30,
1962, this Court on the assumption that the need for resolving the principal question would be
obviated, referred the matter back to the Court of Tax Appeals to determine whether the alleged law
of Tangier did grant the reciprocal tax exemption required by the aforesaid Section 122. Then came
an order from the Court of Tax Appeals submitting copies of legislation of Tangier that would
manifest that the element of reciprocity was not lacking. It was not until July 29, 1969 that the case
was deemed submitted for decision. When the petition for review was filed on January 2, 1958, the
basic issue raised was impressed with an element of novelty. Four days thereafter, however, on
January 6, 1958, it was held by this Court that the aforesaid provision does not require that the
"foreign country" possess an international personality to come within its terms.2 Accordingly, we
have to affirm.

The decision of the Court of Tax Appeals, now under review, sets forth the background facts as
follows: "This is an appeal interposed by petitioner Antonio Campos Rueda as administrator of the
estate of the deceased Doña Maria de la Estrella Soriano Vda. de Cerdeira, from the decision of the
respondent Collector of Internal Revenue, assessing against and demanding from the former the sum
P161,874.95 as deficiency estate and inheritance taxes, including interest and penalties, on the
transfer of intangible personal properties situated in the Philippines and belonging to said Maria de la
Estrella Soriano Vda. de Cerdeira. Maria de la Estrella Soriano Vda. de Cerdeira (Maria Cerdeira for
short) is a Spanish national, by reason of her marriage to a Spanish citizen and was a resident of
Tangier, Morocco from 1931 up to her death on January 2, 1955. At the time of her demise she left,
among others, intangible personal properties in the Philippines."3 Then came this portion: "On
September 29, 1955, petitioner filed a provisional estate and inheritance tax return on all the
properties of the late Maria Cerdeira. On the same date, respondent, pending investigation, issued an
assessment for state and inheritance taxes in the respective amounts of P111,592.48 and
P157,791.48, or a total of P369,383.96 which tax liabilities were paid by petitioner ... . On November
17, 1955, an amended return was filed ... wherein intangible personal properties with the value of
P396,308.90 were claimed as exempted from taxes. On November 23, 1955, respondent, pending
investigation, issued another assessment for estate and inheritance taxes in the amounts of
P202,262.40 and P267,402.84, respectively, or a total of P469,665.24 ... . In a letter dated January
11, 1956, respondent denied the request for exemption on the ground that the law of Tangier is not
reciprocal to Section 122 of the National Internal Revenue Code. Hence, respondent demanded the
payment of the sums of P239,439.49 representing deficiency estate and inheritance taxes including
ad valorem penalties, surcharges, interests and compromise penalties ... . In a letter dated February
8, 1956, and received by respondent on the following day, petitioner requested for the
reconsideration of the decision denying the claim for tax exemption of the intangible personal
properties and the imposition of the 25% and 5% ad valorem penalties ... . However, respondent
denied request, in his letter dated May 5, 1956 ... and received by petitioner on May 21, 1956.
Respondent premised the denial on the grounds that there was no reciprocity [with Tangier, which
was moreover] a mere principality, not a foreign country. Consequently, respondent demanded the
payment of the sums of P73,851.21 and P88,023.74 respectively, or a total of P161,874.95 as
deficiency estate and inheritance taxes including surcharges, interests and compromise penalties."4

The matter was then elevated to the Court of Tax Appeals. As there was no dispute between the
parties regarding the values of the properties and the mathematical correctness of the deficiency
assessments, the principal question as noted dealt with the reciprocity aspect as well as the insisting
by the Collector of Internal Revenue that Tangier was not a foreign country within the meaning of
Section 122. In ruling against the contention of the Collector of Internal Revenue, the appealed
decision states: "In fine, we believe, and so hold, that the expression "foreign country", used in the
last proviso of Section 122 of the National Internal Revenue Code, refers to a government of that
foreign power which, although not an international person in the sense of international law, does not
impose transfer or death upon intangible person properties of our citizens not residing therein, or
whose law allows a similar exemption from such taxes. It is, therefore, not necessary that Tangier
should have been recognized by our Government order to entitle the petitioner to the exemption
benefits of the proviso of Section 122 of our Tax. Code."5

Hence appeal to this court by petitioner. The respective briefs of the parties duly submitted, but as
above indicated, instead of ruling definitely on the question, this Court, on May 30, 1962, resolve to
inquire further into the question of reciprocity and sent back the case to the Court of Tax Appeals for
the motion of evidence thereon. The dispositive portion of such resolution reads as follows: "While
section 122 of the Philippine Tax Code aforequoted speaks of 'intangible personal property' in both
subdivisions (a) and (b); the alleged laws of Tangier refer to 'bienes muebles situados en Tanger',
'bienes muebles radicantes en Tanger', 'movables' and 'movable property'. In order that this Court
may be able to determine whether the alleged laws of Tangier grant the reciprocal tax exemptions
required by Section 122 of the Tax Code, and without, for the time being, going into the merits of the
issues raised by the petitioner-appellant, the case is [remanded] to the Court of Tax Appeals for the
reception of evidence or proof on whether or not the words `bienes muebles', 'movables' and
'movable properties as used in the Tangier laws, include or embrace 'intangible person property', as
used in the Tax Code."6 In line with the above resolution, the Court of Tax Appeals admitted
evidence submitted by the administrator petitioner Antonio Campos Rueda, consisting of exhibits of
laws of Tangier to the effect that "the transfers by reason of death of movable properties, corporeal
or incorporeal, including furniture and personal effects as well as of securities, bonds, shares, ...,
were not subject, on that date and in said zone, to the payment of any death tax, whatever might
have been the nationality of the deceased or his heirs and legatees." It was further noted in an order
of such Court referring the matter back to us that such were duly admitted in evidence during the
hearing of the case on September 9, 1963. Respondent presented no evidence."7

The controlling legal provision as noted is a proviso in Section 122 of the National Internal Revenue
Code. It reads thus: "That no tax shall be collected under this Title in respect of intangible personal
property (a) if the decedent at the time of his death was a resident of a foreign country which at the
time of his death did not impose a transfer tax or death tax of any character in respect of intangible
person property 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."8 The only obstacle therefore to a
definitive ruling is whether or not as vigorously insisted upon by petitioner the acquisition of internal
personality is a condition sine qua non to Tangier being considered a "foreign country". Deference to
the De Lara ruling, as was made clear in the opening paragraph of this opinion, calls for an
affirmance of the decision of the Court of Tax Appeals.

It does not admit of doubt that if a foreign country is to be identified with a state, it is required in line
with Pound's formulation that it be a politically organized sovereign community independent of
outside control bound by penalties of nationhood, legally supreme within its territory, acting through
a government functioning under a regime of
law.9 It is thus a sovereign person with the people composing it viewed as an organized corporate
society under a government with the legal competence to exact obedience to its commands. 10 It
has been referred to as a body-politic organized by common consent for mutual defense and mutual
safety and to promote the general welfare.11 Correctly has it been described by Esmein as "the
juridical personification of the nation." 12 This is to view it in the light of its historical development.
The stress is on its being a nation, its people occupying a definite territory, politically organized,
exercising by means of its government its sovereign will over the individuals within it and maintaining
its separate international personality. Laski could speak of it then as a territorial society divided into
government and subjects, claiming within its allotted area a supremacy over all other institutions.13
McIver similarly would point to the power entrusted to its government to maintain within its territory
the conditions of a legal order and to enter into international relations. 14 With the latter requisite
satisfied, international law do not exact independence as a condition of statehood. So Hyde did opine.
15

Even on the assumption then that Tangier is bereft of international personality, petitioner has not
successfully made out a case. It bears repeating that four days after the filing of this petition on
January 6, 1958 in Collector of Internal Revenue v. De Lara, 16 it was specifically held by us:
"Considering the State of California as a foreign country in relation to section 122 of our Tax Code we
believe and hold, as did the Tax Court, that the Ancilliary Administrator is entitled the exemption
from the inheritance tax on the intangible personal property found in the Philippines." 17 There can
be no doubt that California as a state in the American Union was in the alleged requisite of
international personality. Nonetheless, it was held to be a foreign country within the meaning of
Section 122 of the National Internal Revenue Code. 18

What is undeniable is that even prior to the De Lara ruling, this Court did commit itself to the
doctrine that even a tiny principality, that of Liechtenstein, hardly an international personality in the
sense, did fall under this exempt category. So it appears in an opinion of the Court by the then
Acting Chief Justicem Bengson who thereafter assumed that position in a permanent capacity, in
Kiene v. Collector of Internal Revenue. 19 As was therein noted: 'The Board found from the
documents submitted to it — proof of the laws of Liechtenstein — that said country does not impose
estate, inheritance and gift taxes on intangible property of Filipino citizens not residing in that
country. Wherefore, the Board declared that pursuant to the exemption above established, no estate
or inheritance taxes were collectible, Ludwig Kiene being a resident of Liechtestein when he passed
away." 20 Then came this definitive ruling: "The Collector — hereafter named the respondent — cites
decisions of the United States Supreme Court and of this Court, holding that intangible personal
property in the Philippines belonging to a non-resident foreigner, who died outside of this country is
subject to the estate tax, in disregard of the principle 'mobilia sequuntur personam'. Such property is
admittedly taxable here. Without the proviso above quoted, the shares of stock owned here by the
Ludwig Kiene would be concededly subject to estate and inheritance taxes. Nevertheless our
Congress chose to make an exemption where conditions are such that demand reciprocity — as in
this case. And the exemption must be honored." 21

WHEREFORE, the decision of the respondent Court of Tax Appeals of October 30, 1957 is affirmed.
Without pronouncement as to costs.

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:.

1) Administrator's fee

P1,204.34

2) Attorney's fee

6,000.00

3) Judicial and Administrative expenses

2,052.55

Total Deductions

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

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

1) Administrator's fee

P1,204.34

2) Attorney's fee

6,000.00

3) Judicial and Administration expenses as of August 9, 1952

2,052.55

Total

P9,256.89

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

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

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

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

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

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

(b) Deductions allowed to non-resident estates. — In the case of a non-resident not a citizen of the
Philippines, by deducting from the value of that part of his gross estate which at the time of his death
is situated in the Philippines —

(1) Expenses, losses, indebtedness, and taxes. — That proportion of the deductions specified in
paragraph (1) of subjection (a) of this section11 which the value of such part bears the value of his
entire gross estate wherever situated;"

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

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

In recapitulation, we hold and declare that:

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

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

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

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

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

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

WHEREFORE, as modified in the manner heretofore indicated, the judgment of the lower court is
hereby affirmed in all other respects not inconsistent herewith. No costs. So ordered.

G.R. No. 140944 April 30, 2008

RAFAEL ARSENIO S. DIZON, in his capacity as the Judicial Administrator of the Estate of
the deceased JOSE P. FERNANDEZ, petitioner, vs. COURT OF TAX APPEALS and
COMMISSIONER OF INTERNAL REVENUE, respondents.
DECISION
NACHURA, J.:
Before this Court is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Civil Procedure
seeking the reversal of the Court of Appeals (CA) Decision2 dated April 30, 1999 which affirmed the
Decision3 of the Court of Tax Appeals (CTA) dated June 17, 1997.4
The Facts
On November 7, 1987, Jose P. Fernandez (Jose) died. Thereafter, a petition for the probate of his
will5 was filed with Branch 51 of the Regional Trial Court (RTC) of Manila (probate court). [6] The
probate court then appointed retired Supreme Court Justice Arsenio P. Dizon (Justice Dizon) and
petitioner, Atty. Rafael Arsenio P. Dizon (petitioner) as Special and Assistant Special Administrator,
respectively, of the Estate of Jose (Estate). In a letter 7dated October 13, 1988, Justice Dizon
informed respondent Commissioner of the Bureau of Internal Revenue (BIR) of the special
proceedings for the Estate.
Petitioner alleged that several requests for extension of the period to file the required estate tax
return were granted by the BIR since the assets of the estate, as well as the claims against it, had
yet to be collated, determined and identified. Thus, in a letter 8 dated March 14, 1990, Justice Dizon
authorized Atty. Jesus M. Gonzales (Atty. Gonzales) to sign and file on behalf of the Estate the
required estate tax return and to represent the same in securing a Certificate of Tax Clearance.
Eventually, on April 17, 1990, Atty. Gonzales wrote a letter 9 addressed to the BIR Regional Director
for San Pablo City and filed the estate tax return10 with the same BIR Regional Office, showing
therein a NIL estate tax liability, computed as follows:
COMPUTATION OF TAX
Conjugal Real Property (Sch. 1) P10,855,020.00
 Conjugal Personal Property (Sch.2) 3,460,591.34
Taxable Transfer (Sch. 3)
Gross Conjugal Estate 14,315,611.34
Less: Deductions (Sch. 4) 187,822,576.06
Net Conjugal Estate NIL
Less: Share of Surviving Spouse NIL.
Net Share in Conjugal Estate NIL
xxx
Net Taxable Estate NIL.
Estate Tax Due NIL.11
On April 27, 1990, BIR Regional Director for San Pablo City, Osmundo G. Umali issued Certification
Nos. 2052[12]and 2053[13] stating that the taxes due on the transfer of real and personal
properties[14] of Jose had been fully paid and said properties may be transferred to his heirs.
Sometime in August 1990, Justice Dizon passed away. Thus, on October 22, 1990, the probate court
appointed petitioner as the administrator of the Estate.15
Petitioner requested the probate court's authority to sell several properties forming part of the
Estate, for the purpose of paying its creditors, namely: Equitable Banking Corporation
(P19,756,428.31), Banque de L'Indochine et. de Suez (US$4,828,905.90 as of January 31, 1988),
Manila Banking Corporation (P84,199,160.46 as of February 28, 1989) and State Investment House,
Inc. (P6,280,006.21). Petitioner manifested that Manila Bank, a major creditor of the Estate was not
included, as it did not file a claim with the probate court since it had security over several real estate
properties forming part of the Estate.16
However, on November 26, 1991, the Assistant Commissioner for Collection of the BIR, Themistocles
Montalban, issued Estate Tax Assessment Notice No. FAS-E-87-91-003269,17 demanding the
payment of P66,973,985.40 as deficiency estate tax, itemized as follows:
Deficiency Estate Tax- 1987
Estate tax P31,868,414.48
25% surcharge- late filing 7,967,103.62
late payment 7,967,103.62
Interest 19,121,048.68
Compromise-non filing 25,000.00
non payment 25,000.00
no notice of death 15.00
no CPA Certificate 300.00
Total amount due & collectible P66,973,985.4018
In his letter dated December 12, 1991, Atty. Gonzales moved for the reconsideration of the said
19

estate tax assessment. However, in her letter20 dated April 12, 1994, the BIR Commissioner denied
the request and reiterated that the estate is liable for the payment of P66,973,985.40 as deficiency
estate tax. On May 3, 1994, petitioner received the letter of denial. On June 2, 1994, petitioner filed
a petition for review21 before respondent CTA. Trial on the merits ensued.
As found by the CTA, the respective parties presented the following pieces of evidence, to wit:
In the hearings conducted, petitioner did not present testimonial evidence but merely
documentary evidence consisting of the following:
Nature of Document (sic) Exhibits
1. Letter dated October 13, 1988 from Arsenio P. "A"
Dizon addressed to the Commissioner of Internal
Revenue informing the latter of the special
proceedings for the settlement of the estate (p.
 126, BIR records);
2. Petition for the probate of the will and issuance of "B" & "B-1"
letter of administration filed with the Regional Trial
Court (RTC) of Manila, docketed as Sp. Proc. No.
87-42980 (pp. 107-108, BIR records);
3. Pleading entitled "Compliance" filed with the "C"
probate Court submitting the final inventory of all
the properties of the deceased (p. 106, BIR
records);
4. Attachment to Exh. "C" which is the detailed and "C-1" to "C-17"
complete listing of the properties of the deceased
(pp. 89-105, BIR rec.);
5. Claims against the estate filed by Equitable "D" to "D-24"
Banking Corp. with the probate Court in the
amount of P19,756,428.31 as of March 31, 1988,
together with the Annexes to the claim (pp. 64-
88, BIR records);
6. Claim filed by Banque de L' Indochine et de Suez "E" to "E-3"
with the probate Court in the amount of US
$4,828,905.90 as of January 31, 1988 (pp. 262-
265, BIR records);
7. Claim of the Manila Banking Corporation (MBC) "F" to "F-3"
which as of November 7, 1987 amounts
to P65,158,023.54, but recomputed as of February
28, 1989 at a total amount of P84,199,160.46;
together with the demand letter from MBC's
lawyer (pp. 194-197, BIR records);
8. Demand letter of Manila Banking Corporation "G" & "G-1"
prepared by Asedillo, Ramos and Associates Law
Offices addressed to Fernandez Hermanos, Inc.,
represented by Jose P. Fernandez, as mortgagors,
in the total amount of P240,479,693.17 as of
February 28, 1989 (pp. 186-187, BIR records);
9. Claim of State Investment House, Inc. filed with "H" to "H-16"
the RTC, Branch VII of Manila, docketed as Civil
Case No. 86-38599 entitled "State Investment
House, Inc., Plaintiff, versus Maritime Company
Overseas, Inc. and/or Jose P. Fernandez,
Defendants," (pp. 200-215, BIR records);
10. Letter dated March 14, 1990 of Arsenio P. Dizon "I"
addressed to Atty. Jesus M. Gonzales, (p. 184, BIR
records);
11. Letter dated April 17, 1990 from J.M. Gonzales "J"
addressed to the Regional Director of BIR in San
Pablo City (p. 183, BIR records);
12. Estate Tax Return filed by the estate of the late "K" to "K-5"
Jose P. Fernandez through its authorized
representative, Atty. Jesus M. Gonzales, for
Arsenio P. Dizon, with attachments (pp. 177-182,
BIR records);
13. Certified true copy of the Letter of Administration "L"
 issued by RTC Manila, Branch 51, in Sp. Proc. No.
87-42980 appointing Atty. Rafael S. Dizon as
Judicial Administrator of the estate of Jose P.
Fernandez; (p. 102, CTA records) and
14. Certification of Payment of estate taxes Nos. 2052 "M" to "M-5"
and 2053, both dated April 27, 1990, issued by
the Office of the Regional Director, Revenue
Region No. 4-C, San Pablo City, with attachments
(pp. 103-104, CTA records.).
Respondent's [BIR] counsel presented on June 26, 1995 one witness in the person
of Alberto Enriquez, who was one of the revenue examiners who conducted the
investigation on the estate tax case of the late Jose P. Fernandez. In the course of
the direct examination of the witness, he identified the following:
Documents/Signatures BIR Record
1. Estate Tax Return prepared by the BIR; p. 138
2. Signatures of Ma. Anabella Abuloc and Alberto -do-
Enriquez, Jr. appearing at the lower Portion of
Exh. "1";
3. Memorandum for the Commissioner, dated July pp. 143-144
19, 1991, prepared by revenue examiners, Ma.
Anabella A. Abuloc, Alberto S. Enriquez and
Raymund S. Gallardo; Reviewed by Maximino V.
Tagle
4. Signature of Alberto S. Enriquez appearing at the -do-
lower portion on p. 2 of Exh. "2";
5. Signature of Ma. Anabella A. Abuloc appearing at -do-
the lower portion on p. 2 of Exh. "2";
6. Signature of Raymund S. Gallardo appearing at -do-
the Lower portion on p. 2 of Exh. "2";
7. Signature of Maximino V. Tagle also appearing on -do-
p. 2 of Exh. "2";
8. Summary of revenue Enforcement Officers Audit p. 139
Report, dated July 19, 1991;
9. Signature of Alberto Enriquez at the lower portion -do-
of Exh. "3";
10. Signature of Ma. Anabella A. Abuloc at the lower -do-
portion of Exh. "3";
11. Signature of Raymond S. Gallardo at the lower -do-
portion of Exh. "3";
12. Signature of Maximino V. Tagle at the lower -do-
portion of Exh. "3";
13. Demand letter (FAS-E-87-91-00), signed by the p. 169
Asst. Commissioner for Collection for the
Commissioner of Internal Revenue, demanding
payment of the amount of P66,973,985.40; and
14. Assessment Notice FAS-E-87-91-00 pp. 169-17022
The CTA's Ruling
On June 17, 1997, the CTA denied the said petition for review. Citing this Court's ruling in Vda. de
Oñate v. Court of Appeals,23 the CTA opined that the aforementioned pieces of evidence introduced
by the BIR were admissible in evidence. The CTA ratiocinated:
Although the above-mentioned documents were not formally offered as evidence for respondent,
considering that respondent has been declared to have waived the presentation thereof during the
hearing on March 20, 1996, still they could be considered as evidence for respondent since they were
properly identified during the presentation of respondent's witness, whose testimony was duly
recorded as part of the records of this case. Besides, the documents marked as respondent's exhibits
formed part of the BIR records of the case.24
Nevertheless, the CTA did not fully adopt the assessment made by the BIR and it came up with its
own computation of the deficiency estate tax, to wit:
Conjugal Real Property P 5,062,016.00
Conjugal Personal Prop. 33,021,999.93
Gross Conjugal Estate 38,084,015.93
Less: Deductions 26,250,000.00
Net Conjugal Estate P 11,834,015.93
Less: Share of Surviving Spouse 5,917,007.96
Net Share in Conjugal Estate P 5,917,007.96
Add: Capital/Paraphernal
Properties – P44,652,813.66
Less: Capital/Paraphernal 44,652,813.66
Deductions
Net Taxable Estate P 50,569,821.62
============

Estate Tax Due P 29,935,342.97

Add: 25% Surcharge for Late Filing 7,483,835.74
Add: Penalties for-No notice of death 15.00
No CPA certificate 300.00
Total deficiency estate tax P 37,419,493.71
============
exclusive of 20% interest from due date of its payment until full payment thereof
[Sec. 283 (b), Tax Code of 1987].25
Thus, the CTA disposed of the case in this wise:
WHEREFORE, viewed from all the foregoing, the Court finds the petition unmeritorious and
denies the same. Petitioner and/or the heirs of Jose P. Fernandez are hereby ordered to pay to
respondent the amount of P37,419,493.71 plus 20% interest from the due date of its payment
until full payment thereof as estate tax liability of the estate of Jose P. Fernandez who died on
November 7, 1987.
SO ORDERED.26
Aggrieved, petitioner, on March 2, 1998, went to the CA via a petition for review.27
The CA's Ruling
On April 30, 1999, the CA affirmed the CTA's ruling. Adopting in full the CTA's findings, the CA ruled
that the petitioner's act of filing an estate tax return with the BIR and the issuance of BIR
Certification Nos. 2052 and 2053 did not deprive the BIR Commissioner of her authority to re-
examine or re-assess the said return filed on behalf of the Estate.28
On May 31, 1999, petitioner filed a Motion for Reconsideration29 which the CA denied in its
Resolution30 dated November 3, 1999.
Hence, the instant Petition raising the following issues:
1. Whether or not the admission of evidence which were not formally offered by the
respondent BIR by the Court of Tax Appeals which was subsequently upheld by the Court of
Appeals is contrary to the Rules of Court and rulings of this Honorable Court;
 2. Whether or not the Court of Tax Appeals and the Court of Appeals erred in
recognizing/considering the estate tax return prepared and filed by respondent BIR knowing
that the probate court appointed administrator of the estate of Jose P. Fernandez had
previously filed one as in fact, BIR Certification Clearance Nos. 2052 and 2053 had been
issued in the estate's favor;
3. Whether or not the Court of Tax Appeals and the Court of Appeals erred in disallowing the
valid and enforceable claims of creditors against the estate, as lawful deductions despite clear
and convincing evidence thereof; and
4. Whether or not the Court of Tax Appeals and the Court of Appeals erred in validating
erroneous double imputation of values on the very same estate properties in the estate tax
return it prepared and filed which effectively bloated the estate's assets.31
The petitioner claims that in as much as the valid claims of creditors against the Estate are in excess
of the gross estate, no estate tax was due; that the lack of a formal offer of evidence is fatal to BIR's
cause; that the doctrine laid down in Vda. de Oñate has already been abandoned in a long line of
cases in which the Court held that evidence not formally offered is without any weight or value; that
Section 34 of Rule 132 of the Rules on Evidence requiring a formal offer of evidence is mandatory in
character; that, while BIR's witness Alberto Enriquez (Alberto) in his testimony before the CTA
identified the pieces of evidence aforementioned such that the same were marked, BIR's failure to
formally offer said pieces of evidence and depriving petitioner the opportunity to cross-examine
Alberto, render the same inadmissible in evidence; that assuming arguendo that the ruling in Vda. de
Oñate is still applicable, BIR failed to comply with the doctrine's requisites because the documents
herein remained simply part of the BIR records and were not duly incorporated in the court records;
that the BIR failed to consider that although the actual payments made to the Estate creditors were
lower than their respective claims, such were compromise agreements reached long after the Estate's
liability had been settled by the filing of its estate tax return and the issuance of BIR Certification
Nos. 2052 and 2053; and that the reckoning date of the claims against the Estate and the settlement
of the estate tax due should be at the time the estate tax return was filed by the judicial
administrator and the issuance of said BIR Certifications and not at the time the aforementioned
Compromise Agreements were entered into with the Estate's creditors.32
On the other hand, respondent counters that the documents, being part of the records of the case
and duly identified in a duly recorded testimony are considered evidence even if the same were not
formally offered; that the filing of the estate tax return by the Estate and the issuance of BIR
Certification Nos. 2052 and 2053 did not deprive the BIR of its authority to examine the return and
assess the estate tax; and that the factual findings of the CTA as affirmed by the CA may no longer
be reviewed by this Court via a petition for review.33
The Issues
There are two ultimate issues which require resolution in this case:
First. Whether or not the CTA and the CA gravely erred in allowing the admission of the pieces of
evidence which were not formally offered by the BIR; and
Second. Whether or not the CA erred in affirming the CTA in the latter's determination of the
deficiency estate tax imposed against the Estate.
The Court’s Ruling
The Petition is impressed with merit.
Under Section 8 of RA 1125, the CTA is categorically described as a court of record. As cases filed
before it are litigated de novo, party-litigants shall prove every minute aspect of their cases.
Indubitably, no evidentiary value can be given the pieces of evidence submitted by the BIR, as the
rules on documentary evidence require that these documents must be formally offered before the
CTA.34 Pertinent is Section 34, Rule 132 of the Revised Rules on Evidence which reads:
SEC. 34. Offer of evidence. — The court shall consider no evidence which has not been
formally offered. The purpose for which the evidence is offered must be specified.
The CTA and the CA rely solely on the case of Vda. de Oñate, which reiterated this Court's previous
rulings in People v. Napat-a35 and People v. Mate36 on the admission and consideration of exhibits
which were not formally offered during the trial. Although in a long line of cases many of which were
decided after Vda. de Oñate, we held that courts cannot consider evidence which has not been
formally offered,37 nevertheless, petitioner cannot validly assume that the doctrine laid down in Vda.
de Oñate has already been abandoned. Recently, in Ramos v. Dizon,38this Court, applying the said
doctrine, ruled that the trial court judge therein committed no error when he admitted and
considered the respondents' exhibits in the resolution of the case, notwithstanding the fact that the
same were not formally offered. Likewise, in Far East Bank & Trust Company v. Commissioner of
Internal Revenue,39 the Court made reference to said doctrine in resolving the issues therein.
Indubitably, the doctrine laid down in Vda. De Oñate still subsists in this jurisdiction. In Vda. de
Oñate, we held that:
From the foregoing provision, it is clear that for evidence to be considered, the same must be
formally offered. Corollarily, the mere fact that a particular document is identified and marked
as an exhibit does not mean that it has already been offered as part of the evidence of a
party. In Interpacific Transit, Inc. v. Aviles [186 SCRA 385], we had the occasion to make a
distinction between identification of documentary evidence and its formal offer as an exhibit.
We said that the first is done in the course of the trial and is accompanied by the marking of
the evidence as an exhibit while the second is done only when the party rests its case and not
before. A party, therefore, may opt to formally offer his evidence if he believes that it will
advance his cause or not to do so at all. In the event he chooses to do the latter, the trial
court is not authorized by the Rules to consider the same.
However, in People v. Napat-a [179 SCRA 403] citing People v. Mate [103 SCRA 484], we
relaxed the foregoing rule and allowed evidence not formally offered to be admitted
and considered by the trial court provided the following requirements are present,
viz.: first, the same must have been duly identified by testimony duly recorded and,
second, the same must have been incorporated in the records of the case.40
From the foregoing declaration, however, it is clear that Vda. de Oñate is merely an exception to the
general rule. Being an exception, it may be applied only when there is strict compliance with the
requisites mentioned therein; otherwise, the general rule in Section 34 of Rule 132 of the Rules of
Court should prevail.
In this case, we find that these requirements have not been satisfied. The assailed pieces of evidence
were presented and marked during the trial particularly when Alberto took the witness stand. Alberto
identified these pieces of evidence in his direct testimony.41 He was also subjected to cross-
examination and re-cross examination by petitioner.42 But Alberto’s account and the exchanges
between Alberto and petitioner did not sufficiently describe the contents of the said pieces of
evidence presented by the BIR. In fact, petitioner sought that the lead examiner, one Ma. Anabella A.
Abuloc, be summoned to testify, inasmuch as Alberto was incompetent to answer questions relative
to the working papers.43 The lead examiner never testified. Moreover, while Alberto's testimony
identifying the BIR's evidence was duly recorded, the BIR documents themselves were not
incorporated in the records of the case.
A common fact threads through Vda. de Oñate and Ramos that does not exist at all in the instant
case. In the aforementioned cases, the exhibits were marked at the pre-trial proceedings to warrant
the pronouncement that the same were duly incorporated in the records of the case. Thus, we held
in Ramos:
In this case, we find and so rule that these requirements have been satisfied. The exhibits in
question were presented and marked during the pre-trial of the case thus, they have
been incorporated into the records. Further, Elpidio himself explained the contents of
these exhibits when he was interrogated by respondents' counsel...
xxxx
But what further defeats petitioner's cause on this issue is that respondents' exhibits were
marked and admitted during the pre-trial stage as shown by the Pre-Trial Order quoted
earlier.44
While the CTA is not governed strictly by technical rules of evidence,45 as rules of procedure are not
ends in themselves and are primarily intended as tools in the administration of justice, the
presentation of the BIR's evidence is not a mere procedural technicality which may be disregarded
considering that it is the only means by which the CTA may ascertain and verify the truth of BIR's
claims against the Estate.46 The BIR's failure to formally offer these pieces of evidence, despite CTA's
directives, is fatal to its cause.47 Such failure is aggravated by the fact that not even a single reason
was advanced by the BIR to justify such fatal omission. This, we take against the BIR.
Per the records of this case, the BIR was directed to present its evidence 48 in the hearing of February
21, 1996, but BIR's counsel failed to appear.49 The CTA denied petitioner's motion to consider BIR's
presentation of evidence as waived, with a warning to BIR that such presentation would be
considered waived if BIR's evidence would not be presented at the next hearing. Again, in the
hearing of March 20, 1996, BIR's counsel failed to appear.50 Thus, in its Resolution51 dated March 21,
1996, the CTA considered the BIR to have waived presentation of its evidence. In the same
Resolution, the parties were directed to file their respective memorandum. Petitioner complied but
BIR failed to do so.52 In all of these proceedings, BIR was duly notified. Hence, in this case, we are
constrained to apply our ruling in Heirs of Pedro Pasag v. Parocha:53
A formal offer is necessary because judges are mandated to rest their findings of facts and
their judgment only and strictly upon the evidence offered by the parties at the trial. Its
function is to enable the trial judge to know the purpose or purposes for which the proponent
is presenting the evidence. On the other hand, this allows opposing parties to examine the
evidence and object to its admissibility. Moreover, it facilitates review as the appellate court
will not be required to review documents not previously scrutinized by the trial court.
Strict adherence to the said rule is not a trivial matter. The Court in Constantino v. Court of
Appeals ruled that the formal offer of one's evidence is deemed waived after failing to
submit it within a considerable period of time. It explained that the court cannot
admit an offer of evidence made after a lapse of three (3) months because to do so
would "condone an inexcusable laxity if not non-compliance with a court order
which, in effect, would encourage needless delays and derail the speedy
administration of justice."
Applying the aforementioned principle in this case, we find that the trial court had reasonable
ground to consider that petitioners had waived their right to make a formal offer of
documentary or object evidence. Despite several extensions of time to make their formal
offer, petitioners failed to comply with their commitment and allowed almost five months to
lapse before finally submitting it. Petitioners' failure to comply with the rule on
admissibility of evidence is anathema to the efficient, effective, and expeditious
dispensation of justice.
Having disposed of the foregoing procedural issue, we proceed to discuss the merits of the case.
Ordinarily, the CTA's findings, as affirmed by the CA, are entitled to the highest respect and will not
be disturbed on appeal unless it is shown that the lower courts committed gross error in the
appreciation of facts.54 In this case, however, we find the decision of the CA affirming that of the CTA
tainted with palpable error.
It is admitted that the claims of the Estate's aforementioned creditors have been condoned. As a
mode of extinguishing an obligation,55 condonation or remission of debt56 is defined as:
an act of liberality, by virtue of which, without receiving any equivalent, the creditor
renounces the enforcement of the obligation, which is extinguished in its entirety or in that
part or aspect of the same to which the remission refers. It is an essential characteristic of
remission that it be gratuitous, that there is no equivalent received for the benefit given; once
such equivalent exists, the nature of the act changes. It may become dation in payment when
the creditor receives a thing different from that stipulated; or novation, when the object or
principal conditions of the obligation should be changed; or compromise, when the matter
renounced is in litigation or dispute and in exchange of some concession which the creditor
receives.57
Verily, the second issue in this case involves the construction of Section 79 58 of the National Internal
Revenue Code59 (Tax Code) which provides for the allowable deductions from the gross estate of the
decedent. The specific question is whether the actual claims of the aforementioned creditors may be
fully allowed as deductions from the gross estate of Jose despite the fact that the said claims were
reduced or condoned through compromise agreements entered into by the Estate with its creditors.
"Claims against the estate," as allowable deductions from the gross estate under Section 79 of the
Tax Code, are basically a reproduction of the deductions allowed under Section 89 (a) (1) (C) and (E)
of Commonwealth Act No. 466 (CA 466), otherwise known as the National Internal Revenue Code of
1939, and which was the first codification of Philippine tax laws. Philippine tax laws were, in turn,
based on the federal tax laws of the United States. Thus, pursuant to established rules of statutory
construction, the decisions of American courts construing the federal tax code are entitled to great
weight in the interpretation of our own tax laws.60
It is noteworthy that even in the United States, there is some dispute as to whether the deductible
amount for a claim against the estate is fixed as of the decedent's death which is the general rule, or
the same should be adjusted to reflect post-death developments, such as where a settlement
between the parties results in the reduction of the amount actually paid. 61 On one hand, the U.S.
court ruled that the appropriate deduction is the "value" that the claim had at the date of the
decedent's death.62 Also, as held in Propstra v. U.S., 63 where a lien claimed against the estate was
certain and enforceable on the date of the decedent's death, the fact that the claimant subsequently
settled for lesser amount did not preclude the estate from deducting the entire amount of the claim
for estate tax purposes. These pronouncements essentially confirm the general principle that post-
death developments are not material in determining the amount of the deduction.
On the other hand, the Internal Revenue Service (Service) opines that post-death settlement should
be taken into consideration and the claim should be allowed as a deduction only to the extent of the
amount actually paid.64Recognizing the dispute, the Service released Proposed Regulations in 2007
mandating that the deduction would be limited to the actual amount paid.65
In announcing its agreement with Propstra,66 the U.S. 5th Circuit Court of Appeals held:
We are persuaded that the Ninth Circuit's decision...in Propstra correctly apply the Ithaca
Trust date-of-death valuation principle to enforceable claims against the estate. As we
interpret Ithaca Trust, when the Supreme Court announced the date-of-death valuation
principle, it was making a judgment about the nature of the federal estate tax specifically, that
it is a tax imposed on the act of transferring property by will or intestacy and, because the act
on which the tax is levied occurs at a discrete time, i.e., the instance of death, the net value of
the property transferred should be ascertained, as nearly as possible, as of that time. This
analysis supports broad application of the date-of-death valuation rule.67
We express our agreement with the date-of-death valuation rule, made pursuant to the ruling of the
U.S. Supreme Court in Ithaca Trust Co. v. United States.68 First. There is no law, nor do we discern
any legislative intent in our tax laws, which disregards the date-of-death valuation principle and
particularly provides that post-death developments must be considered in determining the net value
of the estate. It bears emphasis that tax burdens are not to be imposed, nor presumed to be
imposed, beyond what the statute expressly and clearly imports, tax statutes being
construed strictissimi juris against the government.69 Any doubt on whether a person, article or
activity is taxable is generally resolved against taxation.70 Second. Such construction finds relevance
and consistency in our Rules on Special Proceedings wherein the term "claims" required to be
presented against a decedent's estate is generally construed to mean debts or demands of a
pecuniary nature which could have been enforced against the deceased in his lifetime, or liability
contracted by the deceased before his death.71 Therefore, the claims existing at the time of death are
significant to, and should be made the basis of, the determination of allowable deductions.
WHEREFORE, the instant Petition is GRANTED. Accordingly, the assailed Decision dated April 30,
1999 and the Resolution dated November 3, 1999 of the Court of Appeals in CA-G.R. S.P. No. 46947
are REVERSED and SET ASIDE. The Bureau of Internal Revenue's deficiency estate tax assessment
against the Estate of Jose P. Fernandez is hereby NULLIFIED. No costs.
SO ORDERED

FIRST DIVISION
[G.R. NO. 155541 - January 27, 2004]
ESTATE OF THE LATE JULIANA DIEZ VDA. DE GABRIEL, Petitioner, v.COMMISSIONER OF
INTERNAL REVENUE, Respondent.
DECISION
YNARES-SANTIAGO, J.:
This Petition for Review on Certiorari assails the decision of the Court of Appeals in CA-G.R. CV No.
09107, dated September 30, 2002,1 which reversed the November 19, 1995 Order of Regional Trial
Court of Manila, Branch XXXVIII, in Sp. Proc. No. R-82-6994, entitled "Testate Estate of Juliana Diez
Vda. De Gabriel". The petition was filed by the Estate of the Late Juliana Diez Vda. De Gabriel,
represented by Prudential Bank as its duly appointed and qualified Administrator.
As correctly summarized by the Court of Appeals, the relevant facts are as follows:
During the lifetime of the decedent, Juliana Vda. De Gabriel, her business affairs were managed by
the Philippine Trust Company (Philtrust). The decedent died on April 3, 1979. Two days after her
death, Philtrust, through its Trust Officer, Atty. Antonio M. Nuyles, filed her Income Tax Return for
1978. The return did not indicate that the decedent had died.
On May 22, 1979, Philtrust also filed a verified petition for appointment as Special Administrator with
the Regional Trial Court of Manila, Branch XXXVIII, docketed as Sp. Proc. No. R-82-6994. The court a
quo appointed one of the heirs as Special Administrator. Philtrusts motion for reconsideration was
denied by the probate court.
On January 26, 1981, the court a quo issued an Order relieving Mr. Diez of his appointment, and
appointed Antonio Lantin to take over as Special Administrator. Subsequently, on July 30, 1981, Mr.
Lantin was also relieved of his appointment, and Atty. Vicente Onosa was appointed in his stead.
In the meantime, the Bureau of Internal Revenue conducted an administrative investigation on the
decedents tax liability and found a deficiency income tax for the year 1977 in the amount of
P318,233.93. Thus, on November 18, 1982, the BIR sent by registered mail a demand letter and
Assessment Notice No. NARD-78-82-00501 addressed to the decedent "c/o Philippine Trust
Company, Sta. Cruz, Manila" which was the address stated in her 1978 Income Tax Return. No
response was made by Philtrust. The BIR was not informed that the decedent had actually passed
away.
In an Order dated September 5, 1983, the court a quo appointed Antonio Ambrosio as the
Commissioner and Auditor Tax Consultant of the Estate of the decedent.
On June 18, 1984, respondent Commissioner of Internal Revenue issued warrants of distraint and
levy to enforce collection of the decedents deficiency income tax liability, which were served upon her
heir, Francisco Gabriel. On November 22, 1984, respondent filed a "Motion for Allowance of Claim
and for an Order of Payment of Taxes" with the court a quo. On January 7, 1985, Mr. Ambrosio filed
a letter of protest with the Litigation Division of the BIR, which was not acted upon because the
assessment notice had allegedly become final, executory and incontestable.
On May 16, 1985, petitioner, the Estate of the decedent, through Mr. Ambrosio, filed a formal
opposition to the BIRs Motion for Allowance of Claim based on the ground that there was no proper
service of the assessment and that the filing of the aforesaid claim had already prescribed. The BIR
filed its Reply, contending that service to Philippine Trust Company was sufficient service, and that
the filing of the claim against the Estate on November 22, 1984 was within the five-year prescriptive
period for assessment and collection of taxes under Section 318 of the 1977 National Internal
Revenue Code (NIRC).
On November 19, 1985, the court a quo issued an Order denying respondents claim against the
Estate,2 after finding that there was no notice of its tax assessment on the proper party.3
On July 2, 1986, respondent filed an appeal with the Court of Appeals, docketed as CA-G.R. CV No.
09107,4 assailing the Order of the probate court dated November 19, 1985. It was claimed that
Philtrust, in filing the decedents 1978 income tax return on April 5, 1979, two days after the
taxpayers death, had "constituted itself as the administrator of the estate of the deceased at least
insofar as said return is concerned."5 Citing Basilan Estate Inc. v. Commissioner of Internal
Revenue,6respondent argued that the legal requirement of notice with respect to tax
assessments7 requires merely that the Commissioner of Internal Revenue release, mail and send the
notice of the assessment to the taxpayer at the address stated in the return filed, but not that the
taxpayer actually receive said assessment within the five-year prescriptive period.8 Claiming that
Philtrust had been remiss in not notifying respondent of the decedents death, respondent therefore
argued that the deficiency tax assessment had already become final, executory and incontestable,
and that petitioner Estate was liable therefor.
On September 30, 2002, the Court of Appeals rendered a decision in favor of the respondent.
Although acknowledging that the bond of agency between Philtrust and the decedent was severed
upon the latters death, it was ruled that the administrator of the Estate had failed in its legal duty to
inform respondent of the decedents death, pursuant to Section 104 of the National Internal Revenue
Code of 1977. Consequently, the BIRs service to Philtrust of the demand letter and Notice of
Assessment was binding upon the Estate, and, upon the lapse of the statutory thirty-day period to
question this claim, the assessment became final, executory and incontestable. The dispositive
portion of said decision reads:
WHEREFORE, finding merit in the appeal, the appealed decision is REVERSED AND SET ASIDE.
Another one is entered ordering the Administrator of the Estate to pay the Commissioner of Internal
Revenue the following:
A. The amount of P318,223.93, representing the deficiency income tax liability for the year 1978,
plus 20% interest per annum from November 2, 1982 up to November 2, 1985 and in addition
thereto 10% surcharge on the basic tax of P169,155.34 pursuant to Section 51(e) (2) and (3) of the
Tax Code as amended by PD 69 and 1705; andcralawlibrary
b. The costs of the suit.
SO ORDERED.9
Hence, the instant petition, raising the following issues:
1. Whether or not the Court of Appeals erred in holding that the service of deficiency tax assessment
against Juliana Diez Vda. de Gabriel through the Philippine Trust Company was a valid service in
order to bind the Estate;chanroblesvirtuallawlibrary
2. Whether or not the Court of Appeals erred in holding that the deficiency tax assessment and final
demand was already final, executory and incontestable.
Petitioner Estate denies that Philtrust had any legal personality to represent the decedent after her
death. As such, petitioner argues that there was no proper notice of the assessment which,
therefore, never became final, executory and incontestable.10Petitioner further contends that
respondents failure to file its claim against the Estate within the proper period prescribed by the
Rules of Court is a fatal error, which forever bars its claim against the Estate.11
Respondent, on the other hand, claims that because Philtrust filed the decedents income tax return
subsequent to her death, Philtrust was the de facto administrator of her Estate. 12 Consequently,
when the Assessment Notice and demand letter dated November 18, 1982 were sent to Philtrust,
there was proper service on the Estate.13Respondent further asserts that Philtrust had the legal
obligation to inform petitioner of the decedents death, which requirement is found in Section 104 of
the NIRC of 1977.14 Since Philtrust did not, respondent contends that petitioner Estate should not be
allowed to profit from this omission.15 Respondent further argues that Philtrusts failure to protest the
aforementioned assessment within the 30-day period provided in Section 319-A of the NIRC of 1977
meant that the assessment had already become final, executory and incontestable. 16
The resolution of this case hinges on the legal relationship between Philtrust and the decedent, and,
by extension, between Philtrust and petitioner Estate. Subsumed under this primary issue is the sub-
issue of whether or not service on Philtrust of the demand letter and Assessment Notice No. NARD-
78-82-00501 was valid service on petitioner, and the issue of whether Philtrusts inaction thereon
could bind petitioner. If both sub-issues are answered in the affirmative, respondents contention as
to the finality of Assessment Notice No. NARD-78-82-00501 must be answered in the affirmative.
This is because Section 319-A of the NIRC of 1977 provides a clear 30-day period within which to
protest an assessment. Failure to file such a protest within said period means that the assessment
ipso jure becomes final and unappealable, as a consequence of which legal proceedings may then be
initiated for collection thereof.
We find in favor of the petitioner.
The first point to be considered is that the relationship between the decedent and Philtrust was one
of agency, which is a personal relationship between agent and principal. Under Article 1919 (3) of the
Civil Code, death of the agent or principal automatically terminates the agency. In this instance, the
death of the decedent on April 3, 1979 automatically severed the legal relationship between her and
Philtrust, and such could not be revived by the mere fact that Philtrust continued to act as her agent
when, on April 5, 1979, it filed her Income Tax Return for the year 1978.
Since the relationship between Philtrust and the decedent was automatically severed at the moment
of the Taxpayers death, none of Philtrusts acts or omissions could bind the estate of the Taxpayer.
Service on Philtrust of the demand letter and Assessment Notice No. NARD-78-82-00501 was
improperly done.
It must be noted that Philtrust was never appointed as the administrator of the Estate of the
decedent, and, indeed, that the court a quo twice rejected Philtrusts motion to be thus appointed. As
of November 18, 1982, the date of the demand letter and Assessment Notice, the legal relationship
between the decedent and Philtrust had already been non-existent for three years.
Respondent claims that Section 104 of the National Internal Revenue Code of 1977 imposed the legal
obligation on Philtrust to inform respondent of the decedents death. The said Section reads:
SEC. 104. Notice of death to be filed. In all cases of transfers subject to tax or where, though exempt
from tax, the gross value of the estate exceeds three thousand pesos, the executor, administrator, or
any of the legal heirs, as the case may be, within two months after the decedents death, or within a
like period after qualifying as such executor or administrator, shall give written notice thereof to the
Commissioner of Internal Revenue.
The foregoing provision falls in Title III, Chapter I of the National Internal Revenue Code of 1977, or
the chapter on Estate Tax, and pertains to "all cases of transfers subject to tax" or where the "gross
value of the estate exceeds three thousand pesos". It has absolutely no applicability to a case for
deficiency income tax, such as the case at bar. It further lacks applicability since Philtrust
was never the executor, administrator of the decedents estate, and, as such, never had the legal
obligation, based on the above provision, to inform respondent of her death.
Although the administrator of the estate may have been remiss in his legal obligation to inform
respondent of the decedents death, the consequences thereof, as provided in Section 119 of the
National Internal Revenue Code of 1977, merely refer to the imposition of certain penal sanctions on
the administrator. These do not include the indefinite tolling of the prescriptive period for making
deficiency tax assessments, or the waiver of the notice requirement for such assessments.
Thus, as of November 18, 1982, the date of the demand letter and Assessment Notice No. NARD-78-
82-00501, there was absolutely no legal obligation on the part of Philtrust to either (1) respond to
the demand letter and assessment notice, (2) inform respondent of the decedents death, or (3)
inform petitioner that it had received said demand letter and assessment notice. This lack of legal
obligation was implicitly recognized by the Court of Appeals, which, in fact, rendered its assailed
decision on grounds of "equity".17
Since there was never any valid notice of this assessment, it could not have become final, executory
and incontestable, and, for failure to make the assessment within the five-year period provided in
Section 318 of the National Internal Revenue Code of 1977, respondents claim against the petitioner
Estate is barred. Said Section 18 reads:
SEC. 318. Period of limitation upon assessment and collection. Except as provided in the succeeding
section, internal revenue taxes shall be assessed within five years after the return was filed, and no
proceeding in court without assessment for the collection of such taxes shall be begun after the
expiration of such period. For the purpose of this section, a return filed before the last day prescribed
by law for the filing thereof shall be considered as filed on such last day: Provided, That this
limitation shall not apply to cases already investigated prior to the approval of this Code.
Respondent argues that an assessment is deemed made for the purpose of giving effect to such
assessment when the notice is released, mailed or sent to the taxpayer to effectuate the assessment,
and there is no legal requirement that the taxpayer actually receive said notice within the five-year
period.18 It must be noted, however, that the foregoing rule requires that the notice be sent to the
taxpayer, and not merely to a disinterested party. Although there is no specific requirement that the
taxpayer should receive the notice within the said period, due process requires at the very least that
such notice actually be received. In Commissioner of Internal Revenue v. Pascor Realty and
Development Corporation,19 we had occasion to say:
An assessment contains not only a computation of tax liabilities, but also a demand for payment
within a prescribed period. It also signals the time when penalties and interests begin to accrue
against the taxpayer. To enable the taxpayer to determine his remedies thereon, due process
requires that it must be served on and received by the taxpayer.
In Republic v. De le Rama,20 we clarified that, when an estate is under administration, notice must be
sent to the administrator of the estate, since it is the said administrator, as representative of the
estate, who has the legal obligation to pay and discharge all debts of the estate and to perform all
orders of the court. In that case, legal notice of the assessment was sent to two heirs, neither one of
whom had any authority to represent the estate. We said:
The notice was not sent to the taxpayer for the purpose of giving effect to the assessment, and said
notice could not produce any effect. In the case of Bautista and Corrales Tan v. Collector of Internal
Revenue this Court had occasion to state that "the assessment is deemed made when the notice to
this effect is released, mailed or sent to the taxpayer for the purpose of giving effect to said
assessment." It appearing that the person liable for the payment of the tax did not receive the
assessment, the assessment could not become final and executory. (Citations omitted, emphasis
supplied.)
In this case, the assessment was served not even on an heir of the Estate, but on a completely
disinterested third party. This improper service was clearly not binding on the petitioner.
By arguing that (1) the demand letter and assessment notice were served on Philtrust, (2) Philtrust
was remiss in its obligation to respond to the demand letter and assessment notice, (3) Philtrust was
remiss in its obligation to inform respondent of the decedents death, and (4) the assessment notice
is therefore binding on the Estate, respondent is arguing in circles. The most crucial point to be
remembered is that Philtrust had absolutely no legal relationship to the deceased, or to her Estate.
There was therefore no assessment served on the Estate as to the alleged underpayment of tax.
Absent this assessment, no proceedings could be initiated in court for the collection of said tax, 21 and
respondents claim for collection, filed with the probate court only on November 22, 1984, was barred
for having been made beyond the five-year prescriptive period set by law.
WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals in CA-G.R. CV No.
09107, dated September 30, 2002, is REVERSED and SET ASIDE. The Order of the Regional Trial
Court of Manila, Branch XXXVIII, in Sp. Proc. No. R-82-6994, dated November 19, 1985, which
denied the claim of the Bureau of Internal Revenue against the Estate of Juliana Diez Vda. De Gabriel
for the deficiency income tax of the decedent for the year 1977 in the amount of P318,223.93, is
AFFIRMED.
No pronouncement as to costs.
SO ORDERED.

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.
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 P14.50
2.
tax for 1945 ===========
3. Real Estate dealer's
tax for the fourth
quarter of 1946 and
the whole year of P207.50
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
P135.8
1945
3
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 taxes 4a 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.

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 1of 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.
G.R. No. 208293
PHILIPPINE NATIONAL BANK, Petitioner vs. CARMELITA S. SANTOS, REYME L. SANTOS,
ANGEL L. SANTOS, NONENG S. DIANCO, ET AL., Respondent
x-----------------------x
G.R. No. 208295
LINA B. AGUILAR, Petitioner
vs.
CARMELITA S. SANTOS, REYME L. SANTOS, ANGEL L. SANTOS, BUENVENIDO L. SANTOS, ET
AL.,Respondents.
DECISION
LEONEN, J.:
The standard of diligence required of banks is higher than the degree of diligence of a good father of
a family. Respondents are children of Angel C. Santos who died on March 21, 1991.1
Sometime in May 1996, respondents discovered that their father maintained a premium savings
account with Philippine National Bank (PNB), Sta. Elena-Marikina City Branch.2 As of July 14, 1996,
the deposit amounted to 1,759,082.63.3 Later, respondents would discover that their father also had
a time deposit of 1,000,000.00 with PNB.4
Respondents went to PNB to withdraw their father’s deposit.5
Lina B. Aguilar, the Branch Manager of PNB-Sta. Elena-Marikina City Branch, required them to submit
the following: "(1) original or certified true copy of the Death Certificate of Angel C. Santos; (2)
certificate of payment of, or exemption from, estate tax issued by the Bureau of Internal Revenue
(BIR); (3) Deed of Extrajudicial Settlement; (4) Publisher’s Affidavit of publication of the Deed of
Extrajudicial Settlement; and (5) Surety bond effective for two (2) years and in an amount equal to
the balance of the deposit to be withdrawn."6
By April 26, 1998, respondents had already obtained the necessary documents. 7 They tried to
withdraw the deposit.8 However, Aguilar informed them that the deposit had already "been released
to a certain Bernardito Manimbo (Manimbo) on April 1, 1997."9 An amount of 1,882,002.05 was
released upon presentation of: (a) an affidavit of selfadjudication purportedly executed by one of the
respondents, Reyme L. Santos; (b) a certificate of time deposit dated December 14, 1989 amounting
to 1,000,000.00; and (c) the death certificate of Angel C. Santos, among others. 10 A special power of
attorney was purportedly executed by Reyme L. Santos in favor of Manimbo and a certain Angel P.
Santos for purposes of withdrawing and receiving the proceeds of the certificate of time deposit.11
On May 20, 1998, respondents filed before the Regional Trial Court of Marikina City a complaint for
sum of money and damages against PNB, Lina B. Aguilar, and a John Doe. 12 Respondents questioned
the release of the deposit amount to Manimbo who had no authority from them to withdraw their
father’s deposit and who failed to present to PNB all the requirements for such
withdrawal.13 Respondents prayed that they be paid: (a) the premium deposit amount; (b) the
certificate of time deposit amount; and (c) moral and exemplary damages, attorney’s fees, and costs
of suit.14
PNB and Aguilar denied that Angel C. Santos had two separate accounts (premium deposit account
and time deposit account) with PNB.15 They alleged that Angel C. Santos’ deposit account was
originally a time deposit account that was subsequently converted into a premium savings
account.16 They also alleged that Aguilar did not know about Angel C. Santos’ death in 1991 because
she only assumed office in 1996.17 Manimbo was able to submit an affidavit of self-adjudication and
the required surety bond.18 He also submitted a certificate of payment of estate tax dated March 31,
1997.19 All documents he submitted appeared to be regular.20
PNB and Aguilar filed a third-party complaint against Manimbo, Angel P. Santos, and Capital
Insurance and Surety Co., Inc.21
Angel P. Santos denied having anything to do with the special power of attorney and affidavit of self-
adjudication presented by Manimbo.22 He also alleged that Manimbo presented the certificate of time
deposit without his knowledge and consent.23
Capital Insurance and Surety Co., Inc. alleged that its undertaking was to pay claims only when
persons who were unduly deprived of their lawful participation in the estate filed an action in court
for their claims.24 It did not undertake to pay claims resulting from PNB’s negligence.25
In the decision26 dated February 22, 2011, the trial court held that PNB and Aguilar were jointly and
severally liable to pay respondents the amount of 1,882,002.05 with an interest rate of 6% starting
May 20, 1998.27 PNB and Aguilar were also declared jointly and severally liable for moral and
exemplary damages, attorney’s fees, and costs of suit.28Manimbo, Angel P. Santos, and Capital
Insurance and Surety Co., Inc. were held jointly and severally liable to pay PNB 1,877,438.83
pursuant to the heir’s bond and 50,000.00 as attorney’s fees and the costs of suit. 29 The dispositive
portion of the trial court’s decision reads:
WHEREFORE, foregoing premises considered, judgment is hereby rendered as follows:
1. ordering the defendants PNB and LINA B. AGUILAR jointly and severally liable to pay the plaintiffs
the amount of P1,882,002.05, representing the face value of PNB Manager’s Check No. AF-974686B
as balance of the total deposits of decedent Angel C. Santos at the time of its issue, with interest
thereon at the rate of 6% starting on May 20, 1998, the date when the complaint was filed, until fully
paid;
2. ordering both defendants jointly and severally liable to pay plaintiffs the amount of Php
100,000.00 as moral damages, another Php100,000.00 as exemplary damages and Php 50,000.00
as attorney’s fees and the costs of suit;
On the Third party complaint:
3. Ordering the third party defendants Bernardito P. Manimbo, Angel P. Santos and Capital Insurance
& Surety Co., Inc., jointly and severally liable to pay third party plaintiff PNB, the amount of Php
1,877,438.83 pursuant to the Heir’s Bond and the amount of Php 50,000.00 as attorney’s fees and
the costs of suit.
SO ORDERED.30
The trial court found that Angel C. Santos had only one account with PNB. 31 The account was
originally a time deposit, which was converted into a premium savings account when it was not
renewed on maturity.32 The trial court took judicial notice that in 1989, automatic rollover of time
deposit was not yet prevailing.33
On the liability of PNB and Aguilar, the trial court held that they were both negligent in releasing the
deposit to Manimbo.34 The trial court noted PNB’s failure to notify the depositor about the maturity of
the time deposit and the conversion of the time deposit into a premium savings account. 35 The trial
court also noted PNB’s failure to cancel the certificate of time deposit despite conversion.36 PNB and
Aguilar also failed to require the production of birth certificates to prove claimants’ relationship to the
depositor.37 Further, they relied on the affidavit of self-adjudication when several persons claiming to
be heirs had already approached them previously.38
Aguilar filed a motion for reconsideration39 of the February 22, 2011 Regional Trial Court decision.
This was denied in the June 21, 2011 Regional Trial Court order.40
PNB and Aguilar appealed before the Court of Appeals.41
Aguilar contended that she was not negligent and should not have been made jointly and severally
liable with PNB.42 She merely implemented PNB’s Legal Department’s directive to release the deposit
to Manimbo.43
PNB argued that it was not negligent.44 The release of the deposit to Manimbo was pursuant to an
existing policy.45Moreover, the documents submitted by Manimbo were more substantial than those
submitted by respondents.46Respondents could have avoided the incident "had they accomplished the
required documents immediately."47
In the decision48 promulgated on July 25, 2013, the Court of Appeals sustained the trial court’s
finding that there was only one account.49 Angel C. Santos could not have possibly opened the
premium savings account in 1994 since he already died in 1991.50 The Court of Appeals also held
that PNB and Aguilar were negligent in handling the deposit. 51 The deposit amount was released to
Manimbo who did not present all the requirements, particularly the Bureau of Internal Revenue (BIR)
certification that estate taxes had already been paid.52 They should also not have honored the
affidavit of self-adjudication.53
The Court of Appeals ruled that Aguilar could not escape liability by pointing her finger at PNB’s Legal
Department.54As the Bank Manager, she should have given the Legal Department all the necessary
information that must be known in order to protect both the depositors’ and the bank’s interests.55
The Court of Appeals removed the award of exemplary damages, upon finding that there was no
malice or bad faith.56
The Court of Appeals considered the deposit as an ordinary loan by the bank from Angel C. Santos or
his heirs.57Therefore, the deposit was a forbearance which should earn an interest of 12% per
annum.58 The dispositive portion of the Court of Appeals’ decision reads:
WHEREFORE, premises considered, the assailed decision of the court a quo dated February 22,
2011 is AFFIRMED with the MODIFICATIONS in that the rate of interest shall be twelve percent
(12%) per annum computed from the filing of the case until fully satisfied. The interest due shall
further earn an interest of 12% per annum to be computed from the date of the filing of the
complaint until fully paid. Meanwhile, the award of exemplary damages is DELETED.
SO ORDERED.59
PNB and Aguilar filed their separate petitions for review of the Court of Appeals’ July 25, 2013
decision.60
We resolve the following issues:
I. Whether Philippine National Bank was negligent in releasing the deposit to Bernardito Manimbo;
II. Whether Lina B. Aguilar is jointly and severally liable with Philippine National Bank for the release
of the deposit to Bernardito Manimbo; and
III. Whether respondents were properly awarded damages.
Petitioner Aguilar argued that the Court of Appeals had already found no malice or bad faith on her
part.61 Moreover, as a mere officer of the bank, she cannot be made personally liable for acts that
she was authorized to do.62 These acts were mere directives to her by her superiors.63 Hence, she
should not be held solidarily liable with PNB.64
Petitioner PNB argued that it was the presumptuousness and cavalier attitude of respondents that
gave rise to the controversy and not its judgment call.65 Respondents were lacking in sufficient
documentation.66 Petitioner PNB also argued that respondents failed to show any justification for the
award of moral damages.67 No bad faith can be attributed to Aguilar.68
In their separate comments to the petitions, respondents argued that the trial court and the Court of
Appeals did not err in finding that petitioners PNB and Aguilar were negligent in handling their
father’s deposit.69 The acceptance of invalid and incomplete documents to support the deposit’s
release to Manimbo was a violation of the bank’s fiduciary duty to its clients. 70 These acts constituted
gross negligence on the part of petitioners PNB and Aguilar.71
However, according to respondents, the Court of Appeals erred in deleting the award for exemplary
damages because the acts in violation of the bank’s fiduciary were done in bad faith.72
We rule for the respondents.
The trial court and the Court of Appeals correctly found that petitioners PNB and Aguilar were
negligent in handling the deposit of Angel C. Santos.
The contractual relationship between banks and their depositors is governed by the Civil Code
provisions on simple loan.73 Once a person makes a deposit of his or her money to the bank, he or
she is considered to have lent the bank that money.74 The bank becomes his or her debtor, and he or
she becomes the creditor of the bank, which is obligated to pay him or her on demand.75
The default standard of diligence in the performance of obligations is "diligence of a good father of a
family." Thus, the Civil Code provides:
ART. 1163. Every person obliged to give something is also obliged to take care of it with the proper
diligence of a good father of a family, unless the law or the stipulation of the parties requires another
standard of care.
....
ART. 1173. The fault or negligence of the obligor consists in the omission of that diligence which is
required by the nature of the obligation and corresponds with the circumstances of the persons, of
the time and of the place. When negligence shows bad faith, the provisions of articles 1171 and
2201, paragraph 2, shall apply.
If the law or contract does not state the diligence which is to be observed in the performance, that
which is expected of a good father of a family shall be required. (Emphasis supplied)
"Diligence of a good father of a family" is the standard of diligence expected of, among others,
usufructuaries,76 passengers of common carriers,77 agents,78 depositaries,79 pledgees,80 officious
managers,81 and persons deemed by law as responsible for the acts of others.82 "The diligence of a
good father of a family requires only that diligence which an ordinary prudent man would exercise
with regard to his own property.83
Other industries, because of their nature, are bound by law to observe higher standards of diligence.
Common carriers, for example, must observe "extraordinary diligence in the vigilance over the goods
and for the safety of [their] passengers"84 because it is considered a business affected with public
interest. "Extraordinary diligence" with respect to passenger safety is further qualified as "carry[ing]
the passengers safely as far as human care and foresight can provide, using the utmost diligence of
very cautious persons, with a due regard for all the circumstances."85
Similar to common carriers, banking is a business that is impressed with public interest. It affects
economies and plays a significant role in businesses and commerce.86 The public reposes its faith and
confidence upon banks, such that "even the humble wage-earner has not hesitated to entrust his
life’s savings to the bank of his choice, knowing that they will be safe in its custody and will even
earn some interest for him."87 This is why we have recognized the fiduciary nature of the banks’
functions, and attached a special standard of diligence for the exercise of their functions.
In Simex International (Manila), Inc. v. Court of Appeals,88 this court described the nature of banks’
functions and the attitude expected of banks in handling their depositors’ accounts, thus:
In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether
such account consists only of a few hundred pesos or of millions. . . .
The point is that as a business affected with public interest and because of the nature of its functions,
the bank is under obligation to treat the accounts of its depositors with meticulous care, always
having in mind the fiduciary nature of their relationship.89 (Emphasis supplied)
The fiduciary nature of banking is affirmed in Republic Act No. 8791 or The General Banking Law,
thus:
SEC. 2. Declaration of Policy.—The State recognizes the vital role of banks in providing an
environment conducive to the sustained development of the national economy and the fiduciary
nature of banking that requires high standards of integrity and performance. In furtherance thereof,
the State shall promote and maintain a stable and efficient banking and financial system that is
globally competitive, dynamic and responsive to the demands of a developing economy. (Emphasis
supplied)
In The Consolidated Bank and Trust Corporation v. Court of Appeals,90 this court explained the
meaning of fiduciary relationship and the standard of diligence assumed by banks:
This fiduciary relationship means that the bank’s obligation to observe "high standards of integrity
and performance" is deemed written into every deposit agreement between a bank and its depositor.
The fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a
good father of a family. Article 1172 of the Civil Code states that the degree of diligence required of
an obligor is that prescribed by law or contract, and absent such stipulation then the diligence of a
good father of a family.91 (Emphasis supplied, citation omitted)
Petitioners PNB and Aguilar’s treatment of Angel C. Santos’ account is inconsistent with the high
standard of diligence required of banks. They accepted Manimbo’s representations despite knowledge
of the existence of circumstances that should have raised doubts on such representations. As a
result, Angel C. Santos’ deposit was given to a person stranger to him.
Petitioner PNB pointed out that since petitioner Aguilar assumed office as PNB-Sta. Elena-Marikina
City Branch Manager only five (5) years from Angel C. Santos’ death, she was not in the position to
know that respondents were the heirs of Angel C. Santos.92 She could not have accepted the
unsigned and unnotarized extrajudicial settlement deed that respondents had first showed her. 93 She
was not competent to make a conclusion whether that deed was genuine. 94 Neither could petitioners
PNB and Aguilar pass judgment on a letter from respondents’ lawyer stating that respondents were
the nine heirs of Angel C. Santos.95 Petitioners PNB and Aguilar’s negligence is not based on their
failure to accept respondents’ documents as evidence of their right to claim Angel C. Santos’ deposit.
Rather, it is based on their failure to exercise the diligence required of banks when they accepted the
fraudulent representations of Manimbo. Petitioners PNB and Aguilar disregarded their own
requirements for the release of the deposit to persons claiming to be heirs of a deceased depositor.
When respondents asked for the release of Angel C. Santos’ deposit, they were required to present
the following: "(1) original or certified true copy of the Death Certificate of Angel C. Santos; (2)
certificate of payment of, or exemption from, estate tax issued by the Bureau of Internal Revenue
(BIR); (3) Deed of Extrajudicial Settlement; (4) Publisher’s Affidavit of publication of the Deed of
Extrajudicial Settlement; and (5) Surety bond effective for two (2) years and in an amount equal to
the balance of the deposit to be withdrawn."96
Petitioners PNB and Aguilar, however, accepted Manimbo’s representations, and they released Angel
C. Santos’ deposit based on only the following documents:
1. Death certificate of Angel C. Santos;
2. Birth certificate of Reyme L. Santos;
3. Affidavit of self-adjudication of Reyme L. Santos;
4. Affidavit of publication;
5. Special power of attorney that Reyme L. Santos executed in favor of Bernardito Manimbo and
Angel P. Santos;
6. Personal items of Angel C. Santos, such as photocopies or originals of passport, residence
certificate for year 1990, SSS I.D., etc.;
7. Surety good for two (2) years; and
8. Certificate of Time Deposit No. 341306.97
Based on these enumerations, petitioners PNB and Aguilar either have no fixed standards for the
release of their deceased clients’ deposits or they have standards that they disregard for
convenience, favor, or upon exercise of discretion. Both are inconsistent with the required diligence
of banks. These threaten the safety of the depositors’ accounts as they provide avenues for
fraudulent practices by third persons or by bank officers themselves.
In this case, petitioners PNB and Aguilar released Angel C. Santos’ deposit to Manimbo without
having been presented the BIR-issued certificate of payment of, or exception from, estate tax. This is
a legal requirement before the deposit of a decedent is released. Presidential Decree No. 1158,98 the
tax code applicable when Angel C. Santos died in 1991, provides:
SEC. 118. Payment of tax antecedent to the transfer of shares, bonds, or rights. — There shall not be
transferred to any new owner in the books of any corporation, sociedad anonima, partnership,
business, or industry organized or established in the Philippines, any shares, obligations, bonds or
rights by way of gift inter vivos or mortis causa, legacy, or inheritance unless a certification from the
Commissioner that the taxes fixed in this Title and due thereon have been paid is shown.
If a bank has knowledge of the death of a person who maintained a bank deposit account alone, or
jointly with another, it shall not allow any withdrawal from the said deposit account, unless the
Commissioner has certified that the taxes imposed thereon by this Title have been paid; Provided,
however, That the administrator of the estate or any one of the heirs of the decedent may upon
authorization by the Commissioner of Internal Revenue, withdraw an amount not exceeding 10,000
without the said certification. For this purpose, all withdrawal slips shall contain a statement to the
effect that all of the joint depositors are still living at the time of withdrawal by any one of the joint
depositors and such statement shall be under oath by the said depositors.99 (Emphasis supplied)
This provision was reproduced in Section 97 of the 1997 National Internal Revenue Code, thus:
SEC. 97. Payment of Tax Antecedent to the Transfer of Shares, Bonds or Rights. - There
shall not be transferred to any new owner in the books of any corporation, sociedad anonima,
partnership, business, or industry organized or established in the Philippines any share, obligation,
bond or right by way of gift inter vivos or mortis causa, legacy or inheritance, unless a certification
from the Commissioner that the taxes fixed in this Title and due thereon have been paid is shown.
If a bank has knowledge of the death of a person, who maintained a bank deposit account alone, or
jointly with another, it shall not allow any withdrawal from the said deposit account, unless the
Commissioner has certified that the taxes imposed thereon by this Title have been paid: Provided,
however, That the administrator of the estate or any one (1) of the heirs of the decedent may, upon
authorization by the Commissioner, withdraw an amount not exceeding Twenty thousand pesos
(20,000) without the said certification. For this purpose, all withdrawal slips shall contain a statement
to the effect that all of the joint depositors are still living at the time of withdrawal by any one of the
joint depositors and such statement shall be under oath by the said depositors. (Emphasis supplied)
Taxes are created primarily to generate revenues for the maintenance of the government. However,
this particular tax may also serve as guard against the release of deposits to persons who have no
sufficient and valid claim over the deposits. Based on the assumption that only those with sufficient
and valid claim to the deposit will pay the taxes for it, requiring the certificate from the BIR increases
the chance that the deposit will be released only to them.
In their compulsory counterclaim,100 petitioners PNB and Aguilar claimed that Manimbo presented a
certificate of payment of estate tax.101 During trial, however, it turned out that this certificate was
instead an authority to accept payment, which is not the certificate required for the release of bank
deposits.102 It appears that Manimbo was not even required to submit the BIR certificate.103 He, thus,
failed to present such certificate. Petitioners PNB and Aguilar provided no satisfactory explanation
why Angel C. Santos’ deposit was released without it.
Petitioners PNB and Aguilar’s negligence is also clear when they accepted as bases for the release of
the deposit to Manimbo: (a) a mere photocopy of Angel C. Santos’ death certificate;104 (b) the
falsified affidavit of self-adjudication and special power of attorney purportedly executed by Reyme L.
Santos;105 and (c) the certificate of time deposit.106
Petitioner Aguilar was aware that there were other claimants to Angel C. Santos’ deposit.
Respondents had already communicated with petitioner Aguilar regarding Angel C. Santos’ account
before Manimbo appeared. Petitioner Aguilar even gave respondents the updated passbook of Angel
C. Santos’ account.107 Yet, petitioners PNB and Aguilar did not think twice before they released the
deposit to Manimbo. They did not doubt why no original death certificate could be submitted. They
did not doubt why Reyme L. Santos would execute an affidavit of self-adjudication when he, together
with others, had previously asked for the release of Angel C. Santos’ deposit. They also relied on the
certificate of time deposit and on Manimbo’s representation that the passbook was lost when the
passbook had just been previously presented to Aguilar for updating.108
During the trial, petitioner PNB’s counsel only reasoned that the photocopy of the death certificate
was also submitted with other documents, which led him to no other conclusion than that Angel C.
Santos was already dead.109 On petitioners PNB and Aguilar’s reliance special power of attorney
allegedly executed by Reyme L. Santos, Aguilar admitted that she did not contact Reyme L. Santos
for verification. Her reason was that Reyme L. Santos was their client. Therefore, they had no
obligation to do so.110
Given the circumstances, "diligence of a good father of a family" would have required petitioners PNB
and Aguilar to verify. A prudent man would have inquired why Reyme L. Santos would issue an
affidavit of selfadjudication when others had also claimed to be heirs of Angel C. Santos. Contrary to
petitioner Aguilar’s reasoning, the fact that Reyme L. Santos was not petitioner PNB’s client should
have moved her to take measures to ensure the veracity of Manimbo’s documents and
representations. This is because she had no previous knowledge of Reyme L. Santos his
representatives, and his signature.
Petitioner PNB is a bank from which a degree of diligence higher than that of a good father of a
family is expected. Petitioner PNB and its manager, petitioner Aguilar, failed to meet even the
standard of diligence of a good father of a family. Their actions and inactions constitute gross
negligence. It is for this reason that we sustain the trial court’s and the Court of Appeals’ rulings that
petitioners PNB and Aguilar are solidarily liable with each other.111
For the same reason, we sustain the award for moral damages. Petitioners PNB and Aguilar’s gross
negligence deprived Angel C. Santos’ heirs what is rightfully theirs. Respondents also testified that
they experienced anger and embarrassment when petitioners PNB and Aguilar refused to release
Angel C. Santos’ deposit.112 "The bank’s negligence was the result of lack of due care and caution
required of managers and employees of a firm engaged in so sensitive and demanding business as
banking."113
Exemplary damages should also be awarded. "The law allows the grant of exemplary damages by
way of example for the public good. The public relies on the banks’ sworn profession of diligence and
meticulousness in giving irreproachable service. The level of meticulousness must be maintained at
all times by the banking sector."114
Since exemplary damages are awarded and since respondents were compelled to litigate to protect
their interests,115 the award of attorney’s fees is also proper.
The Court of Appeals' award of interest should be modified to 12% from demand on April 26, 1998
until June 30, 2013, and 6% from July I, 2013 until fully paid. In Nacar v. Gallery Frames:116
Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that
would govern the parties, the rate of legal interest for loans or forbearance of any money. . . s.hall
no longer be twelve percent (12%) per annum ... but will now be six percent (6%) per
annum effective July 1, 2013. It should be noted, nonetheless, that. .. the twelve percent (12%) per
annum legal interest shall apply only until June 30, 2013. Come July 1, 2013 the new rate of six
percent (6%) per annum shall be the prevailing rate of interest when applicable.
....
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded.
In the absence of stipulation, the rate of interest shall be 6% per annum to be computed from
default, i.e., from judicial or extrajudicial demand ...
....
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate
of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per
annumfrom such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.117
WHEREFORE, the Court of Appeals' decision dated July 25, 2013 is AFFIRMED with
the MODIFICATIONS in that petitioners Philippine National Bank and Lina B. Aguilar are ordered
solidarily liable to pay respondents Pl 00,000.00 as exemplary damages. Further, the interest rate for
the amount of Pl,882,002.05, representing the face value of PNB Manager's Check No. AF-974686B is
modified to 12% from April 26, 1998 until June 30, 2013, and 6% from July 1, 2013 until
satisfaction. All monetary awards shall then earn interest at the rate of 6% per annum from finality
of the decision until full satisfaction.
SO ORDERED.
MARVIC M.V.F. LEONEN
DONOR’S TAX

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.

EN BANC

G.R. No. L-5377 December 29, 1954

MARIA CLARA PIROVANA ET AL., plaintiffs-appellees,

vs.
THE DE LA RAMA STEAMSHIP CO., defendant-appellant.

Del Rosario and Garcia for appellant.

Vicente J. Francisco for appellees.

BAUTISTA ANGELO, J.:

This is an appeal from a decision of the Court of First Instance of Rizal declaring the donation made
by the defendant in favor of the minor children of the late Enrico Pirovano of the proceeds of the
insurance policies taken on his life valid and binding, and ordering said defendant to pay to said
minor children the sum of P583,813.59, with interest thereon at the rate of per cent from the date of
filing of the complaint, plus an additional amount equivalent to 20 per cent of said sum of
P538,813.59 as damages by way of attorney's fees and the costs of action.

Plaintiffs herein are the minor children of the late Enrico Pirovano represented by their mother and
judicial guardian Estefania R. Pirovano. They seek to enforce certain resolutions adopted by the
Board of Directors and stockholders of the defendant company giving to said minor children of the
proceeds of the insurance policies taken on the life of their deceased father Enrico Pirovano with the
company as beneficiary. Defendant's main defense is: that said resolutions and the contract executed
pursuant thereto are ultra vires, and, if valid, the obligation to pay the amount given is not yet due
and demandable.

The trial court resolved all the issues raised by the parties in favor of the plaintiffs and, after
considering the evidence, both oral and documentary, arrived at the following conclusions:

First. — That the contract executed between the plaintiffs and the defendant is a renumerative
donation.
Second. — That said contract or donation is not ultra vires, but an act executed within the powers of
the defendant corporation in accordance with its articles of incorporation and by laws, sanctioned and
approved by its Board of Directors and stockholders; and subsequently ratified by other subsequent
acts of the defendant company.

Third. — That the said donation is in accordance with the trend of modern and more enlightened
legislation in its treatment of questions between labor and capital.

Fourth. — That the condition mentioned in the donation is null and void because it depends on the
provisions of Article 1115 of the old Civil Code.

Fifth. — That if the condition is valid, its non-fulfillment is due to the desistance of the defendant
company from obeying and doing the wishes and mandates of the majority of the stockholders.

Sixth. — That the non-payment of the debt in favor of the National Development Company is not due
to the lack of funds, nor to lack of authority, but the desire of the President of the corporation to
preserve and continue the Government participation in the company.

Seventh. — That due demands were made by the plaintiffs and their attorneys and these demands
were rejected for no justifiable or legal grounds.

The important facts which need to be considered for purposes of this appeal may be briefly stated as
follows: Defendant is a corporation duly organized in accordance with law with an authorized capital
of P500,000, divided into 5,000 shares, with a par value of P100 each share. The stockholders were:
Esteban de la Rama, 1,800 shares, Leonor de la Rama, 100 shares, Estefania de la Rama, 100
shares, and Eliseo Hervas, Tomas Concepcion, Antonio G. Juanco, and Gaudencio Volasote with 5
shares each. Leonor and Estefania are daughters of Don Esteban, while the rest his employees.
Estefania de la Rama was married to the late Enrico Pirovano and to them four children were born
who are the plaintiffs in this case.

Enrico Pirovano became the president of the defendant company and under his management the
company grew and progressed until it became a multi-million corporation by the time Pirovano was
executed by the Japanese during the occupation. On May 13, 1941, the capital stock of the
corporation was increased to P2,000,000, after which a 100 per cent stock dividend was declared.
Subsequently, or before the outbreak of the war , new stock dividends of 200 per cent and 33 1/3
per cent were again declared. On December 4, 1941, the capital stock was once more increased to
P5,000,000. Under Pirovano's management, the assets of the company grew and increased from an
original paid up capital of around P240,000 to P15,538,024.37 by September 30, 1941 (Exhibit HH).

In the meantime, Don Esteban de la Rama, who practically owned and controlled the stock of the
defendant corporation, distributed his shareholding among his five daughters, namely, Leonor,
Estefania, Lourdes, Lolita and Conchita and his wife Natividad Aguilar so that, at that time, or on July
10, 1946, the stockholding of the corporation stood as follows: Esteban de la Rama, 869 shares,
Leonor de la Rama, 3,375 shares, Estefania de la Rama, 3,368 shares, Lourdes de la Rama, 3,368
shares, Lolita de la Rama, 3,368 shares, Conchita de la Rama, 3,376 shares, and Natividad Aguilar,
2,136 shares. The other stockholders , namely, Eliseo Hervas, Tomas Concepcion, Antonio Juanco,
and Jose Aguilar, who were merely employees of Don Esteban, were given 40 shares each, while Pio
Pedrosa, Marcial P. Lichauco and Rafael Roces, one share each, because they merely represented the
National Development Company. This Company was given representation in the Board Of Directors of
the corporation because at that time the latter had an outstanding bonded indebtedness to the
National Development Company.

This bonded indebtedness was incurred on February 26, 1940 and was in the amount of P7,500.00.
The bond held by the National Development Company was redeemable within a period of 20 years
from March 1, 1940,. bearing interest at the rate of 5 per cent per annum. To secure said bonded
indebtedness, all the assets of the De la Rama Steamship Co., Inc., and properties of Don Esteban de
la Rama, as well as those of the Hijos de I. de la Rama and Co., Inc., a sister corporation owned by
Don Esteban and his family, were mortgaged to the National Development Company (Annexes A, B,
C, D of Exhibit 3, Deed of Trust). Payments made by the corporation under the management of
Pirovano reduced this bonded indebtedness to P3,260,855.77.

Upon arrangement made with the National Development Company, the outstanding bonded
indebtedness was converted into non-voting preferred shares of stock of the De la Rama company
under the express condition that they would bear affixed cumulative dividend of 6 per cent per
annum and would be redeemable within 15 years (Exhibits 5 and 7). This conversion was carried out
on September 23, 1949, when the National Development Company executed a "Deed of Termination
of Trust and Release of Mortgage" in favor of the De la Rama company (Exhibit 6.) The immediate
effect of this conversion was the released from incumbrance of all the properties Of Don Esteban and
of the Hijos de I. de la Rama and Co., Inc., which was apparently favorable to the interests of the De
la Rama company, but, on the other hand, it resulted in the inconvenience that, as holder of the
preferred stock, the National Development Company, was given to the right to 40 per cent of the
membership of the Board of Directors of the De la Rama company, which meant an increase in the
representation of the National Development Company from 2 to 4 of the 9 members of said Board of
Directors.

The first resolution granting to the Pirovano children the proceeds of the insurance policies taken on
his life by the defendant company was adopted by the Board of Directors at a meeting held on July
10, 1946, (Exhibit B). This grant was called in the resolution as "Special Payment to Minor Heirs of
the late Enrico Pirovano". Because of its direct hearing on the issues involved in this case, said
resolution is hereunder reproduced in toto:

SPECIAL PAYMENT TO MINORS HEIRS OF THE LATE ENRICO PIROVANO

The President stated that the principal purpose for which the meeting had been called was to discuss
the advisability of making some form of compensation to the minor heirs of the late Enrico Pirovano,
former President and General Manager of the Company. As every member of the Board knows, said
the President, the late Enrico Pirovano who was largely responsible for the very successful
development of the activities of the Company prior to war was killed by the Japanese in Manila
sometime in 1944 leaving as his only heirs four minor children, Maria Carla, Esteban, Enrico and John
Albert. Early in 1941, explained the President, the Company had insured the life of Mr. Pirovano for a
million pesos. Following the occupation of the Philippines by Japanese forces the Company was
unable to pay the premiums on those policies issued by Filipino companies and these policies had
lapsed. But with regards to the York Office of the De la Rama Steamship Co., Inc. had kept up
payment of the premiums from year to year. The payments made on account of these premiums,
however, are very small compared to the amount which the Company will now receive as a result of
Mr. Pirovano's death. The President proposed therefore that out of the proceeds of these policies the
sum of P400,000 be set aside for the minor children of the deceased, said sum of money to be
convertible into 4,000 shares of the stock of the Company, at par, or 1,000 shares for each child.
This proposal, explained the President as being made by him upon suggestion of President Roxas,
but, he added, that he himself was very much in favor of it also. On motion of Miss Leonor de la
Rama duly seconded by Mrs. Lourdes de la Rama de Osmeña, the following resolution was,
thereupon, unanimously approved:

Whereas, the late Enrico Pirovano, President and General Manager of the De la Rama Steamship
Company, died in Manila sometime in November, 1944:

Whereas, the said Enrico Pirovano was largely responsible for the rapid and very successful
development of the activities of thus company;

Whereas, early in 1941 this company insured the life of said Enrico Pirovano in various Philippine and
American Life Insurance companies for the total sum of P1,000,000;
Whereas, the said Enrico Pirovano is survived by his widow, Estefania Pirovano and four minor
children, to wit: Esteban, Maria Carla, Enrico and John Albert, all surnamed Pirovano;lawphil.net

Whereas, said Enrico Pirovano left practically nothing to his heirs and it is but fit proper that this
company which owes so much to the deceased should make some provision for his children;

Whereas, this company paid premium on Mr. Pirovano's life insurance policies for a period of only 4
years so that it will receive from the insurance companies sums of money greatly in excess of the
premiums paid by this company.

Be it resolved, That out of the proceeds to be collected from the life insurance policies on the life of
the late Enrico Pirovano, the sum of P400,000 be set aside for equal division among the 4 minor
children of the deceased, to wit: Esteban, Maria Carla, Enrico and John Albert, all surnamed Pirovano,
which sum of money shall be convertible into shares of stock of the De la Rama Steamship Company,
at par and, for that purpose, that the present registered stockholders of the corporation be requested
to waive their preemptive right to 4,000 shares of the unissued stock of the company in order to
enable each of the 4 minor heirs of the deceased, to wit: Esteban, Maria Carla, Enrico and John
Albert, all surnamed Pirovano, to obtain 1,000 shares at par;

Resolved, further, that in view of the fact that under the provisions of the indenture with the National
Development Company, it is necessary that action herein proposed to be confirmed by the Board of
Directors of that company, the Secretary is hereby instructed to send a copy of this resolution to the
proper officers of the National Development Company for appropriate action. (Exhibit B)

The above resolution, which was adopted on July 10, 1946, was submitted to the stockholders of the
De la Rama company at a meeting properly convened, and on that same date, July 10, 1946, the
same was duly approved.

It appears that, although Don Esteban and the Members of his family were agreeable to giving to the
Pirovano children the amount of P400,000 out of the proceeds of the insurance policies taken on the
life of Enrico Pirovano, they did not realize that when they provided in the above referred two
resolutions that said Amount should be paid in the form of shares of stock, they would be actually
giving to the Pirovano children more than what they intended to give. This came about when Lourdes
de la Rama, wife of Sergio Osmeña, Jr., showed to the latter copies of said resolutions and asked him
to explain their import and meaning, and it was value then that Osmeña explained that because the
value then of the shares of stock was actually 3.6 times their par value, the donation their value, the
donation, although purporting to be only P400,00, would actually amount to a total of P1,440,000.
He further explained that if the Pirovano children would given shares of stock in lieu of the amount to
be donated, the voting strength of the five daughters of Don Esteban in the company would be
adversely affected in the sense that Mrs. Pirovano would be adversely affected in the sense that Mrs.
Pirovano would have a voting power twice as much as that of her sisters. This caused Lourdes de la
Rama to write to the secretary of the corporation, Atty. Marcial Lichauco, asking him to cancel the
waiver she supposedly gave of her pre-emptive rights. Osmeña elaborated on this matter at the
annual meeting of the stockholders held on December 12, 1946 but at said meeting it was decided to
leave the matter in abeyance pending further action on the part of the members of the De la Rama
family.

Osmeña, in the meantime, took up the matter with Don Esteban and, as consequence, the latter, on
December 30, 1946, addressed to Marcial Lichauco a letter stating, among other things, that "in view
of the total lack of understanding by me and my daughters of the two Resolutions abovementioned,
namely, Directors' and Stockholders' dated July 10, 1946, as finally resolved by the majority of the
Stockholders and Directors present yesterday, that you consider the abovementioned resolutions
nullified." (Exhibit CC).

On January 6, 1947, the Board of Directors of the De la Rama company, as a consequence of the
change of attitude of Don Esteban, adopted a resolution changing the form of the donation to the
Pirovano children from a donation of 4,000 shares of stock as originally planned into a renunciation in
favor of the children of all the company's "right, title, and interest as beneficiary in and to the
proceeds of the abovementioned life insurance policies", subject to the express condition that said
proceeds should be retained by the company as a loan drawing interest at the rate of 5 per cent 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"
(Exhibit C). This resolution was concurred in by the representatives of the National Development
Company. The pertinent portion of the resolution reads as follows:

Be resolved, that out of gratitude to the late Enrico Pirovano this Company renounce as it hereby
renounces, all of his right, title, and interest as beneficiary in and to the proceeds of the
abovementioned life insurance policies in favor of Esteban, Maria Carla, Enrico and John Albert, all
surnamed Pirovano, subject to the terms and conditions herein after provided;

That the proceeds of said insurance policies shall be retained by the Company in the nature of a loan
drawing interest at the rate of 5 per cent annum from the date of receipt of payment by the
Company from the various insurance companies above-mentioned until the time the time the same
amounts are paid to the minor heirs of Enrico Pirovano previously mentioned;

That all amounts received from the above-mentioned policies shall be divided equally among the
minors heirs of said Enrico Pirovano;

That the company shall proceed to pay the proceeds of said insurance policies plus interests that may
have accrued to each of the heirs of the said Enrico Pirovano or their duly appointed representatives
after the Company shall have first settled in full the balance of its present remaining bonded
indebtedness in the sum of the approximately P5,000,000.

The above resolution was carried out by the company and Mrs. Estefania R. Pirovano, the latter
acting as guardian of her children, by executing a Memorandum Agreement on January 10, 1947 and
June 17, 1947, respectively, stating therein that the De la Rama Steamship Co., Inc., shall enter in
its books as a loan the proceeds of the life insurance policies taken on the life of Pirovano totalling
S321,500, which loan would earn interest at the rate of 5 per cent per annum. Mrs. Pirovano, in
executing the agreement, acted with the express authority granted to her by the court in an order
dated March 26, 1947.

On June 24, 1947, the Board of Directors approved a resolution providing therein that instead of the
interest on the loan being payable, together with the principal, only after the company shall have first
settled in full its bonded indebtedness, said interest may be paid to the Pirovano children "whenever
the company is in a position to met said obligation" (Exhibit D), and on February 26, 1948, Mrs.
Pirovano executed a public document in which she formally accepted the donation (Exhibit H). The
Dela Rama company took "official notice" of this formal acceptance at a meeting held by its Board of
Directors on February 26, 1948.

In connection with the above negotiations, the Board of Directors took up at its meeting on July 25,
1949, the proposition of Mrs. Pirovano to buy the house at New Rochelle, New York, owned by the
Demwood Realty, a subsidiary of the De la Rama company at its original costs of $75,000, which
would be paid from the funds held in trust belonging to her minor children. After a brief discussion
relative to the matter, the proposition was approved in a resolution adopted on the same date.

The formal transfer was made in an agreement signed on September 5, 1949 by Mrs. Pirovano, as
guardian of her children, and by the De la Rama company, represented by its new General Manager,
Sergio Osmeña, Jr. The transfer of this property was approved by the court in its order of September
20, 1949.lawphil.net

On September 13, 1949, or two years and 3 months after the donation had been approved in the
various resolutions herein above mentioned, the stockholders of the De la Rama company formally
ratified the donation (Exhibit E), with certain clarifying modifications, including the resolution
approving the transfer of the Demwood property to the Pirovano children. The clarifying modifications
are quoted hereunder:

1. That the payment of the above-mentioned donation shall not be affected 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;

2. 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. (Exhibit E)

Sometime in March 1950, the President of the corporation, Sergio Osmeña, Jr., addressed an inquiry
to the Securities and Exchange Commission asking for opinion regarding the validity of the donation
of the proceeds of the insurance policies to the Pirovano children. On June 20, 1950 that office
rendered its opinion that the donation was void because the corporation could not dispose of its
assets by gift and therefore the corporation acted beyond the scope of its corporate powers. This
opinion was submitted to the Board of Directors at its meting on July 12, 1950, on which occasion
the president recommend that other legal ways be studied whereby the donation could be carried
out. On September 14, 1950, another meeting was held to discuss the propriety of the donation. At
this meeting the president expressed the view that, since the corporation was not authorized by its
charter to make the donation to the Pirovano children and the majority of the stockholders was in
favor of making provision for said children, the manner he believed this could be done would be to
declare a cash dividend in favor of the stockholders in the exact amount of the insurance proceeds
and thereafter have the stockholders make the donation to the children in their individual capacity.
Notwithstanding this proposal of the president, the board took no action on the matter, and on March
8, 1951, at a stockholders' meeting convened on that date the majority of the stockholders' voted to
revoke the resolution approving the donation to the Pirovano children. The pertinent portion of the
resolution reads as follows:

Be it resolved, as it is hereby resolved, that in view of the failure of compliance with the above
conditions to which the above donation was made subject, and in view of the opinion of the
Securities and Exchange Commissioner, the stockholders revoke, rescind and annul, as they do
thereby revoke, rescind and annul, its ratification and approval on September 13, 1949 of the
aforementioned resolution of the Board of Directors of January 6, 1947, as amended on June 24,
1947. (Exhibit T)

In view of the resolution declaring that the corporation failed to comply with the condition set for the
effectivity of the donation and revoking at the same time the approval given to it by the corporation,
and considering that the corporation can no longer set aside said donation because it had no longer
set aside said donation because it had long been perfected and consummated, the minor children of
the late Enrico Pirovano, represented by their mother and guardian, Estefania R. de Pirovano,
demanded the payment of the credit due them as of December 31, 1951, amounting to P564,980.89,
and this payment having been refused, they instituted the present action in the Court of First
Instance of Rizal wherein they prayed that the be granted an alternative relief of the following tenor:
(1) sentencing defendant to pay to the plaintiff the sum of P564,980.89 as of December 31, 1951,
with the corresponding interest thereon; (2) as an alternative relief, sentencing defendant to pay to
the plaintiffs the interests on said sum of P564,980.89 at the rate of 5 per cent per annum, and the
sum of P564,980.89 after the redemption of the preferred shares of the corporation held by the
National Development Company; and (3) in any event, sentencing defendant to pay the plaintiffs
damages in the amount of not less than 20 per cent of the sum that may be adjudged to the
plaintiffs, and the costs of action.

The only issues which in the opinion of the court need to be determined in order to reach a decision
in this appeal are: (1) Is the grant of the proceeds of the insurance policies taken on the life of the
late Enrico Pirovano as embodied in the resolution of the Board of Directors of defendant corporation
adopted on January 6, 1947 and June 24, 1947 a remunerative donation as found by the lower
court?; (2) IN the affirmative case, has that donation been perfected before its rescission or
nullification by the stockholders of the corporation on March 8, 1951?; (3) Can defendant corporation
give by way of donation the proceeds of said insurance policies to the minor children of the late
Enrico Pirovano under the law or its articles of corporation, or is that donation an ultra vires act?;
and (4) has the defendant corporation, by the acts it performed subsequent to the granting of the
donation, deliberately prevented the fulfillment of the condition precedent to the payment of said
donation such that it can be said it has forfeited its right to demand its fulfillment and has made the
donation entirely due and demandable?

We will discuss these issues separately.

1. To determine the nature of the grant made by the defendant corporation to the minor children
of the late Enrico Pirovano, we do not need to go far nor dig into the voluminous record that lies at
the bottom of this case. We do not even need to inquire into the interest which has allegedly been
shown by President Roxas in the welfare of the children of his good friend Enrico Pirovano. Whether
President Roxas has taken the initiative in the move to give something to said children which later
culminated in the donation now in dispute, is of no moment for the fact is that, from the mass of
evidence on hand, such a donation has been given the full indorsement and encouraging support by
Don Esteban de la Rama who was practically the owner of the corporation. We only need to fall back
to accomplish this purpose on the several resolutions of the Board of Directors of the corporations
containing said grant for they clearly state the reasons and purposes why the donation has been
given.

Before we proceed further, it is convenient to state here in passing that, before the Board of
Directors had approved its resolution of January 6, 1947, as later amended by another resolution
adopted on June 24, 1947, the corporation had already decided to give to the minor children of the
late Enrico Pirovano the sum of P400,000 out of the proceeds of the insurance policies taken on his
life in the form of shares, and that when this form was considered objectionable because its result
and effect would be to give to said children a much greater amount considering the value then of the
stock of the corporation, the Board of Directors decided to amend the donation in the form and under
the terms stated in the aforesaid resolutions. Thus, in the original resolution approved by the Board
of Directors on July 10, 1946, wherein the reasons for granting the donation to the minor children of
the late Enrico Pirovano were clearly, we find out the following revealing statements:

Whereas, the late Enrico Pirovano President and General Manager of the De la Rama Steamship
Company, died in Manila sometime in November, 1944;

Whereas, the said Enrico Pirovano was largely responsible for the rapid and very successful
development of the activities of this company;

Whereas, early in 1941 this company insured the life of said Enrico Pirovano in various Philippine and
American Life Insurance companies for the total sum of P1,000,000;

Whereas, the said Enrico Pirovano is survived by his widow, Estefania Pirovano and 4 minor children,
to wit: Esteban, Maria Carla, Enrico and John Albert, all surnamed Pirovano;

Whereas, the said Enrico Pirovano left practically nothing to his heirs and it is but fit and proper that
this company which owes so much to the deceased should make some provisions for his children;

Whereas, this company paid premiums on Mr. Pirovano's life insurance policies for a period of only 4
years so that it will receive from the insurance companies sums of money greatly in excess of the
premiums paid by the company,
Again, in the resolution approved by the Board of Directors on January 6, 1947, we also find the
following expressive statements which are but a reiteration of those already expressed in the original
resolution:

Whereas, the late Enrico Pirovano, President and General Manager of the De la Rama Steamship Co.,
Inc., died in Manila sometime during the latter part of the year 1944;

Whereas, the said Enrico Pirovano was to a large extent responsible for the rapid and very successful
development and expansion of the activities of this company;

Whereas, early in 1941, the life of the said Enrico Pirovano was insured in various life companies, to
wit:

Whereas, the said Enrico Pirovano is survived by 4 minor children, to wit: Esteban, Maria Carla,
Enrico and John Albert, all surnamed Pirovano; and

Whereas, the said Enrico Pirovano left practically nothing to his heirs and it is but fit and proper that
this Company which owes so much to the deceased should make some provision for his children;

Be it resolved, that out of gratitude to the late Enrico Pirovano this Company renounce as it hereby
renounces, . . . .

From the above it clearly appears that the corporation thought of giving the donation to the children
of the late Enrico Pirovano because he "was to a large extent responsible for the rapid and very
successful development and expansion of the activities of this company"; and also because he "left
practically nothing to his heirs and it is but fit and proper that this company which owes so much to
the deceased should make some provision to his children", and so, the donation was given "out of
gratitude to the late Enrico Pirovano." We do not need to stretch our imagination to see that a grant
or donation given under these circumstances is remunerative in nature in contemplation of law.

That which is made to a person in consideration of his merits or for services rendered to the donor,
provided they do not constitute recoverable debts, or that in which a burden less than the value of
the thing given is imposed upon the donee, is also a donation." (Art. 619, old Civil Code.)

In donations made to a person for services rendered to the donor, the donor's will is moved by acts
which directly benefit him. The motivating cause is gratitude, acknowledgment of a favor, a desire to
compensate. A donation made to one who saved the donor's life, or a lawyer who renounced his fees
for services rendered to the donor, would fall under this class of donations. These donations are
called remunerative donations . (Sinco and Capistrano, The Civil Code, Vol. 1, p. 676; Manresa, 5th
ed., pp. 72-73.)

2. The next question to be determined is whether the donation has been perfected such that the
corporation can no longer rescind it even if it wanted to. The answer to this question cannot but be in
the affirmative considering that the same has not only been granted in several resolutions duly
adopted by the Board of Directors of the defendant corporation, and in all these corporate acts the
concurrence of the representatives of the National Development Company, the only creditor whose
interest may be affected by the donation, has been expressly given. The corporation has even gone
further. It actually transferred the ownership of the credit subject of donation to the Pirovano
children with the express understanding that the money would be retained by the corporation subject
to the condition that the latter would pay interest thereon at the rate of 5 per cent per annum
payable whenever said corporation may be in a financial position to do so. Thus, the following acts of
the corporation as reflected from the evidence bear this out:

(a) The donation was embodied in a resolution duly approved by the Board of Directors on
January 6, 19437. In this resolution, the representatives of the National Development Company,
have given their concurrence. This is the only creditor which can be considered as being adversely
affected by the donation. The resolution of June 24, 1947 did not modify the substance of the former
resolution for it merely provided that instead of the interest on the loan being payable, together with
the principal, only after the corporation had first settled in full its bonded indebtedness, said interest
would be paid "whenever the company is in a position to meet said obligation."

(b) The resolution of January 6, 1947 was actually carried out when the company and Mrs.
Estefania R. Pirovano, executed a memorandum agreement stating therein hat the proceeds of the
insurance policies would be entered in the books of the corporation as a loan which would bear an
interest at the rate of 5 per cent per annum, and said agreement was signed by Mrs. Pirovano as
judicial guardian of her children after she had been expressly authorized by the court to accept the
donation in behalf of her children.

(c) While the donation can be considered as duly executed by the execution of the document
stated in the preceding paragraph, and by the entry in the books of the corporation of the donation
as a loan, a further record of said execution was made when Mrs. Pirovano executed a public
document on February 26, 1948 making similar acceptance of the donation. And this acceptance was
officially recorded by the corporation when on the same date its Board of Directors approved a
resolution taking "official notice" of said acceptance.

(d) On July 25, 1949, the Board of Directors approved the proposal of Mrs. Pirovano to buy the
house at New Rochelle, New York, owned by a subsidiary of the corporation at the costs of S75,000
which would be paid from the sum held in trust belonging to her minor children. And this agreement
was actually carried out in a document signed by the general manager of the corporation and by Mrs.
Pirovano, who acted on the matter with the express authority of the court.

(e) And on September 30, 1949, or two years and 3 months after the donation had been
executed, the stockholders of the defendant corporation formally ratified and gave approval to the
donation as embodied in the resolutions above referred to, subject to certain modifications which did
not materially affect the nature of the donation.

There can be no doubt from the foregoing relation of facts the donation was a corporate act carried
out by the corporation not only with the sanction of its Board of Directors but also of its stockholders.
It is evident that the donation has reached the stage of perfection which is valid and binding upon
the corporation and as such cannot be rescinded unless there is exists legal grounds for doing so. In
this case, we see none. The two reasons given for the rescission of said donation in the resolution of
the corporation adopted on March 8, 1951, to wit: that the corporation failed to comply with the
conditions to which the above donation was made subject, and that in the opinion of the Securities
and Exchange Commission said donation is ultra vires, are not, in our opinion, valid and legal as to
justify the rescission of a perfected donation. These reasons, as we will discuss in the latter part of
this decision, cannot be invoked by the corporation to rescind or set at naught the donation, and the
only way by which this can be done is to show that the donee has been in default, or that the
donation has not been validly executed, or is illegal or ultra vires, and such is not the case as we will
see hereafter. We therefore declare that the resolution approved by the stockholders of the
defendant corporation on March 8, 1951 did not and cannot have the effect of nullifying the donation
in question.

3. The third question to be determined is: Can defendant corporation give by way of donation the
proceeds of said insurance policies to the minor children of the late Enrico Pirovano under the law or
its articles of corporation, or is that donation an ultra vires act? To answer this question it is
important for us to examine the articles of incorporation of the De la Rama company to see this
question it is important for us to examine the articles of incorporation of the De la Rama company to
see if the act or donation is outside of their scope. Paragraph second of said articles provides:

Second.— The purposes for which said corporation is formed are:

(a) To purchase, charter, hire, build, or otherwise acquire steam or other ships or vessels,
together with equipments and furniture therefor, and to employ the same in conveyance and carriage
of goods, wares and merchandise of every description, and of passengers upon the high seas.

(b) To sell, let, charter, or otherwise dispose of the said vessels or other property of the company.

(c) To carry on the business of carriers by water.

(d) To carry on the business of shipowners in all of its branches.

(e) To purchase or take on lease, lands, wharves, stores, lighters, barges and other things which
the company may deem necessary or advisable to be purchased or leased for the necessary and
proper purposes of the business of the company, and from time to time to sell the dispose of the
same.

(f) To promote any company or companies for the purposes of acquiring all or any of the property
or liabilities of this company, or both, or for any other purpose which may seem directly or indirectly
calculated to benefit the company.

(g) To invest and deal with the moneys of the company and immediately required, in such manner
as from time to time may be determined.

(h) To borrow, or raise, or secure the payment of money in such manner as the company shall
think fit.

(i) Generally, to do all such other thing and to transact all business as may be directly or
indirectly incidental or conducive to the attainment of the above object, or any of them respectively.

(j) Without in any particular limiting or restricting any of the objects and powers of the
corporation, it is hereby expressly declared and provided that the corporation shall have power to
issue bonds and provided that the corporation shall have power to issue bonds and other obligations,
to mortgage or pledge any stocks, bonds or other obligations or any property which may be required
by said corporations; to secure any bonds, guarantees or other obligations by it issued or incurred;
to lend money or credit to and to aid in any other manner any person, association, or corporation of
which any obligation or in which any interest is held by this corporation or in the affairs or prosperity
of which this corporation or in the affairs or prosperity of which this corporation has a lawful interest,
and to do such acts and things as may be necessary to protect, preserve, improve, or enhance the
value of any such obligation or interest; and, in general, to do such other acts in connection with the
purposes for which this corporation has been formed which is calculated to promote the interest of
the corporation or to enhance the value of its property and to exercise all the rights, powers and
privileges which are now or may hereafter be conferred by the laws of the Philippines upon
corporations formed under the Philippine Corporation Act; to execute from time to time general or
special powers of attorney to persons, firms, associations or corporations either in the Philippines, in
the United States, or in any other country and to revoke the same as and when the Directors may
determine and to do any and or all of the things hereinafter set forth and to the same extent as
natural persons might or could do.

After a careful perusal of the provisions above quoted we find that the corporation was given broad
and almost unlimited powers to carry out the purposes for which it was organized among them, (1)
"To invest and deal with the moneys of the company not immediately required, in such manner as
from time to time may be determined" and, (2) "to aid in any other manner any person, association,
or corporation of which any obligation or in which any interest is held by this corporation or in the
affairs or prosperity of which this corporation has a lawful interest." The world deal is broad enough
to include any manner of disposition, and refers to moneys not immediately required by the
corporation, and such disposition may be made in such manner as from time to time may be
determined by the corporations. The donation in question undoubtedly comes within the scope of this
broad power for it is a fact appearing in the evidence that the insurance proceeds were not
immediately required when they were given away. In fact, the evidence shows that the corporation
declared a 100 per cent cash dividend, or P2,000,000, and later on another 30 per cent cash
dividend. This is clear proof of the solvency of the corporation. It may be that, as insinuated, Don
Esteban wanted to make use of the insurance money to rehabilitate the central owned by a sister
corporation, known as Hijos de I. de la Rama and Co., Inc., situated in Bago, Negros Occidental, but
this, far from reflecting against the solvency of the De la Rama company, only shows that the funds
were not needed by the corporation.

Under the second broad power we have the above stated, that is, to aid in any other manner any
person in the affairs and prosperity of whom the corporation has a lawful interest, the record of this
case is replete with instances which clearly show that the corporation knew well its scope and
meaning so much so that, with the exception of the instant case, no one has lifted a finger to dispute
their validity. Thus, under this broad grant of power, this corporation paid to the heirs of one
Florentino Nonato, an engineer of one of the ships of the company who died in Japan, a gratuity of
P7,000, equivalent to one month salary for each year of service. It also gave to Ramon Pons, a
captain of one of its ships , a retirement gratuity equivalent to one month salary for every year of
service, the same to be based upon his highest salary. And it contributed P2,000 to the fund raised
by the Associated Steamship Lines for the widow of the late Francis Gispert, secretary of said
Association, of which the De la Rama Steamship Co., Inc., was a member along with about 30 other
steamship companies. In this instance, Gispert was not even an employee of the corporation. And
invoking this vast power, the corporation even went to the extent of contributing P100,000 to the
Liberal Party campaign funds, apparently in the hope that by conserving its cordial relations with that
party it might continue to retain the patronage of the administration. All these acts executed before
and after the donation in question have never been questioned and were willingly and actually
carried out.

We don't see much distinction between these acts of generosity or benevolence extended to some
employees of the corporation, and even to some in whom the corporation was merely interested
because of certain moral or political considerations, and the donation which the corporation has seen
fit to give to the children of the late Enrico Pirovano from the point of view of the power of the
corporation as expressed in its articles of incorporation. And if the former had been sanctioned and
had been considered valid and intra vires, we see no plausible reasons why the latter should now be
deemed ultra vires. It may perhaps be argued that the donation given to the children of the late
Enrico Pirovano is so large and disproportionate that it can hardly be considered a pension of gratuity
that can be placed on a par with the instances above mentioned, but this argument overlooks one
consideration: the gratuity here given was not merely motivated by pure liberality or act of
generosity, but by a deep sense of recognition of the valuable services rendered by the late Enrico
Pirovano which had immensely contributed to the growth of the corporation to the extent that from
its humble capitalization it blossomed into a multi-million corporation that it is today. In other words
of the very resolutions granting the donation or gratuity, said donation was given not only because
the company was so indebted to him that it saw fit and proper to make provisions for his children,
but it did so out of a sense of gratitude. Another factor that we should bear in mind is that Enrico
Pirovano was not only a high official of the company but was at the same time a member of the De la
Rama family, and the recipient of the donation are the grandchildren of Don Esteban de la Rama.
This we, may say, is the motivating root cause behind the grant of this bounty.

It may be contended that a donation is different from a gratuity. While technically this may be so in
substance they are the same. They are even similar to a pension. Thus, it was granted for services
previously rendered, and which at the time they were rendered gave rise to no legal obligation. "
(Words and Phrases, Permanent Edition, p. 675; O'Dea vs. Cook,, 169 Pac., 306, 176 Cal., 659.) Or
stated in another way, a "Gratuity is mere bounty given by the Government in consideration or
recognition or meritorious services and springs from the appreciation an d graciousness of the
Government", (Ilagan vs. Ilaya, G.R. No. 33507, Dec. 20 1930) or "A gratuity is something given
freely, or without recompense, a gift, something voluntarily given in return for a favor or services; a
bounty; a tip." Wood Mercantile Co. vs. Cole, 209 S.W. 2d. 290; Mendoza vs. Dizon, 77 Phil., 533, 43
Off. Gaz. p. 4633. We do not see much difference between this definition of gratuity and a
remunerative donation contemplated in the Civil Code. In essence they are the same. Such being the
case, it may be said that this donation is gratuity in a large sense for it was given for valuable
services rendered an ultra vires act in the light of the following authorities:

Indeed, some cases seem to hold that the giving of a pure gratuity to directors is ultra vires of
corporation, so that it could not be legalized even if the approval of the shareholders; but this
position has no sound reason to support it, and is opposed to the weight of authority (Suffaker vs.
Kierger's Assignee, 53 S.W. Rep. 288; !07 Ky. 200; 46 L.R.A. 384).

But although business corporations cannot contribute to charity or benevolence, yet they are not
required always to insist on the full extent of their legal rights. They are not forbidden for the
recognizing moral obligation of which strict law takes no cognizance. They are not prohibited from
establishing a reputation for board, liberal, equitable dealing which may stand them in good stead in
competition with less fair rivals. Thus, an incorporated fire insurance company which policies except
losses from explosions may nevertheless pay a loss from that cause when other companies are
accustomed to do so, such liberal dealing being deemed conducive to the prosperity of the
corporation." (Modern Law of Corporations, Machen, Vol. 1, p. 81).

So, a bank may grant a five years pension to the family at one of its officers. In all cases in this
sorts, the amount of the gratuity rests entirely within the discretion of the company, unless indeed it
be all together out of the reason and fitness. But where the company has ceased to be going
concerned, this power to make gifts or present it at the end. (Modern Law of Corporations, Machen,
Vol. 1, p. 82.).

Payment of Gratitude out of Capital.— There seems on principle no reason to doubt that gifts or
gratuities wherever they are lawful may be paid out of capital as well as out of profits. (Modern Law
of corporations, Machen, Vol. 1 p. 83.).

Whether desirable to supplement implied powers of this kind by express provisions.— Enough has
been said to show that the implied powers of a corporation to give gratuities to its servants and
officers, as well as to strangers, are ample, so that there is therefore no need to supplement them by
express provisions." (modern Law of Corporations, Machen, Vol. 1, p. 83.) 1

Granting arguendo that the donation given by Pirovano children is outside the scope of the powers of
the defendant corporation, or the scope of the powers that it may exercise under the law, or it is an
ultra vires act, still it may said that the same can not be invalidated, or declared legally ineffective for
the reason alone, it appearing that the donation represents not only the act of the Board of Directors
but of the stockholders themselves as shown by the fact that the same has been expressly ratified in
a resolution duly approved by the latter. By this ratification, the infirmity of the corporate act, it may
has been obliterated thereby making the cat perfectly valid and enforceable. This is specially so if the
donation is not merely executory but executed and consummated and no creditors are prejudice, or if
there are creditors affected, the latter has expressly given their confirmity.

In making this pronouncement, advertence should made of the nature of the ultra vires act that is in
question. A little digression needs be made on this matter to show the different legal effect that may
result consequent upon the performance of a particular ultra vires act on the part of the corporation.
may authorities may be cited interpreting or defining, extent, and scope of an ultra vires act, but all
of them are uniform and unanimous that the same may be either an act performed merely outside
the scope of the powers granted to it by it articles of incorporation, or one which is contrary to law or
violative of any principle which will void any contract whether done individually or collectively. In
other words, a distinction should be made between corporate acts or contracts which are illegal and
those which are merely ultra vires. The former contemplates the doing of an act which is contrary to
law, morals, or public policy or public duty, and are, like similar transactions between the individuals
void. They cannot serve as basis of a court action, nor require validity ultra vires acts on the other
hand, or those which are not illegal and void ab initio, but are merely within are not illegal and void
ab initio, but are not merely within the scope of the articles of incorporation, are merely voidable and
may become binding and enforceable when ratified by the stockholders.

Strictly speaking, an ultra vires act is one outside the scope of the power conferred by the
legislature, and although the term has been used indiscriminately, it is properly distinguishable from
acts which are illegal, in excess or abuse of power, or executed in an unauthorized manner, or acts
within corporate powers but outside the authority of particular officers or agents (19 C. J. S. 419).

Corporate transactions which are illegal because prohibited by statute or against public policy are
ordinarily void and unenforceable regardless of the part performance, ratification, or estoppel; but
general prohibitions against exceeding corporate powers and prohibitions intended to protect a
particular class or specifying the consequences of violation may not preclude enforcement of the
transaction and an action may be had for the part unaffected by the illegality or for equitable
restitution. (19 C.J.S. 421.)

Generally, a transaction within corporate powers but executed in an irregular or unauthorized manner
is voidable only, and may become enforceable by reason of ratification or express or implied assent
by the stockholders or by reason of estoppel of the corporation or the other party to the transaction
to raise the objection, particularly where the benefits are retained

As appears in paragraphs 960-964 supra, the general rule is that a corporation must act in the
manner and with the formalities, if any, prescribed by its character or by the general law. However, a
corporation transaction or contract which is within the corporation powers, which is neither wrong in
itself nor against public policy, but which is defective from a failure to observe in its execution a
requirement of law enacted for the benefit or protection of a certain class, is voidable and is valid
until avoided, not void until validated; the parties for whose benefit the requirement was enacted
may ratify it or be estoppel to assert its invalidity, and third persons acting in good faith are not
usually affected by an irregularity on the part of the corporation in the exercise of its granted powers.
(19 C.J.S., 423-24.)

It is true that there are authorities which told that ultra vires acts, or those performed beyond the
powers conferred upon the corporation either by law or by its articles of incorporation, are not only
voidable, but wholly void and of no legal effect, and that such acts cannot be validated by ratification
or be the basis of any action in court; but such ruling does not constitute the weight of authority, the
reason being that they fail to make the important distinction we have above adverted to. Because
rule has been rejected by most of the state courts and even by the modern treaties or corporations
(7 Flethcer, Cyc. Corps., 563-564). And now it can be said that the majority of the cases hold that
acts which are merely ultra vires, or acts which are not illegal, may be ratified by the stockholders of
a corporation (Brooklyn Heights R. Co. vs. Brooklyn City R. Co., 135 N.Y. Supp. 1001).

Strictly speaking, an act of a corporation outside of its character powers is just as such ultra vires
where all the stockholders consent thereto as in a case where none of the stockholders expressly or
cannot be ratified so as to make it valid, even though all the stockholders consent thereto; but
inasmuch as the stockholders in reality constitute the corporation, it should , it would seem, be
estopped to allege ultra vires, and it is generally so held where there are no creditors, or the
creditors are not injured thereby, and where the rights of the state or the public are not involved,
unless the act is not only ultra vires but in addition illegal and void. of course, such consent of all the
stockholders cannot adversely affect creditors of the corporation nor preclude a proper attack by the
state because of such ultra vires act. (7 Fletcher Corp., Sec. 3432, p. 585)

Since it is not contended that the donation under consideration is illegal, or contrary to any of the
express provision of the articles of incorporation, nor prejudicial to the creditors of the defendant
corporation, we cannot but logically conclude, on the strength of the authorities we have quoted
above, that said donation, even if ultra vires in the supposition we have adverted to, is not void, and
if voidable its infirmity has been cured by ratification and subsequent acts of the defendant
corporation. The defendant corporation, therefore, is now prevented or estopped from contesting the
validity of the donation. This is specially so in this case when the very directors who conceived the
idea of granting said donation are practically the stockholders themselves, with few nominal
exception. This applies to the new stockholder Jose Cojuangco who acquired his interest after the
donation has been made because of the rule that a "purchaser of shares of stock cannot avoid ultra
vires acts of the corporation authorized by its vendor, except those done after the purchase" (7
Fletcher, Cyc. Corps. section 3456, p. 603; Pascual vs. Del Saz Orozco, 19 Phil., 82.) Indeed, how
can the stockholders now pretend to revoke the donation which has been partly consummated? How
can the corporation now set at naught the transfer made to Mrs. Pirovano of the property in New
York, U.S.A., the price of which was paid by her but of the proceeds of the insurance policies given as
donation. To allow the corporation to undo what it has done would only be most unfair but would
contravene the well-settled doctrine that the defense of ultra vires cannot be set up or availed of in
completed transactions (7 Fletcher, Cyc. Corps. Section 3497, p. 652; 19 C.J.S., 431).

4. We now come to the fourth and last question that the defendant corporation, by the acts it has
performed subsequent to the granting of the donation, deliberately prevented the fulfillment of the
condition precedent to the payment of said donation such that it can be said it has forfeited entirely
due and demandable.

It should be recalled that the original resolution of the Board of Directors adopted on July 10, 1946
which provided for the donation of P400,000 out of the proceeds which the De la Rama company
would collect on the insurance policies taken on the life of the late Enrico Pirovano was, as already
stated above, amended on January 6, 1947 to include, among the conditions therein provided, that
the corporation shall proceed to pay said amount, as well as the interest due thereon, after it shall
have settled in full balance of its bonded indebtedness in the sum of P5,000,000. It should be
recalled that on September 13, 1949, or more than 2 years after the last amendment referred too
above, the stockholders adopted another resolution whereby they formally ratified said donation but
subject to the following clarifications: (1) that the amount 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 to the National Development Company, or shall have first fully redeemed
the preferred shares of stock in the amount to be issued to said company in lieu thereof, and (2) that
any and all taxes, legal fees, and expenses connected with the transaction shall be chargeable from
the proceeds of said insurance policies.

The trial court, in considering these conditions in the light of the acts subsequently performed by the
corporation in connection with the proceeds of the insurance policies, considered said conditions null
and void, or at most not written because in its pinion their non-fulfillment was due to a deliberate
desistance of the corporation and not to lack of funds to redeem the preferred shares of the National
Development Company. The conclusions arrived at by the trial court on this point are as follows:

Fourth. — that the condition mentioned in the donation is null and void because it depends on the
exclusive will of the donor, in accordance with the provisions of Article 1115 of the Old Civil Code.

Fifth. — That if the condition is valid, its non-fulfillment is due to the desistance of the defendant
company from obeying and doing the wishes and mandate of the majority of the stockholders.

Sixth. — That the non-payment of the debt in favor of the National Development Company is due to
the lack of funds, nor to lack of authority, but to the desire of the President of the corporation to
preserve and continue the Government participation in the company.

To this views of the trial court, we fail to agree. There are many factors we can consider why the
failure to immediately redeem the preferred shares issued to the National Development Company as
desired by the minor children of the late Enrico Pirovano cannot or should not be attributed to a mere
desire on the part of the corporation to delay the redemption, or to prejudice the interest of the
minors, but rather to protect the interest of the corporation itself. One of them is the text of the very
resolution approved by the National Development Company on February 18, 1949 which prescribed
the terms and conditions under which it expressed its conformity to the conversion of the bonded
indebtedness into preferred shares of stock. The text of the resolution above mentioned reads:

Resolved: That the outstanding bonded indebtedness of the Dela Rama Steamship Co., Inc., in the
approximate amount of P3,260,855.77 be converted into non-voting preferred shares of stock of said
company, said shares to bear a fixed dividend of 6 percent per annum which shall be cumulative and
redeemable within 15 years. Said shares shall be preferred as to assets in the event of liquidation or
dissolution of said company but shall be non-participating.

It is plain from the text of the above resolution that the defendant corporation had 15 years from
February 18, 1949, or until 1964, within which to effect the redemption of the preferred shares
issued to the National Development Company. This condition cannot but be binding and obligatory
upon the donees, if they desire to maintain the validity of the donation, for it is not only the basis
upon which the stockholders of the defendant corporation expressed their willingness to ratify the
donation, but it is also by way which its creditor, the National Development Company, would want it
to be. If the defendant corporation is given 15 years within which to redeem the preferred shares,
and that period would expire in 1964, one cannot blame the corporation for availing itself of this
period if in its opinion it would redound to its best interest. It cannot therefore be said that the
fulfillment of the condition for the payment of the donation is one that wholly depends on the
exclusive will of the donor, as the lower court has concluded, simply because it failed to meet the
redemption of said shares in her manner desired by the donees. While it may be admitted that
because of the disposition of the assets of the corporation upon the suggestion of its general
manager more than enough funds had been raised to effect the immediate redemption of the above
shares, it is not correct to say that the management has completely failed in its duty to pay its
obligations for, according to the evidence, a substantial portion of the indebtedness has been paid
and only a balance of about P1,805,169.98 was outstanding when the stockholders of the corporation
decided to revoke or cancel the donation. (Exhibit P.)

But there are other good reasons why all the available funds have not been actually applied to the
redemption of the preferred shares, one of them being the "desire of the president of the corporation
to preserve and continue the government participation in the company" which even the lower court
found it to be meritorious, which is one way by which it could continue receiving the patronage and
protection of the government. Another reason is that the redemption of the shares does not depend
on the will of the corporation alone but to a great extent on the will of a third party, the National
Development Company. In fact, as the evidence shows, this Company had pledged these shares to
the Philippine National Bank and the Rehabilitation Finance Corporation as a security to obtain certain
loans to finance the purchase of certain ships to be built for the use of the company under
management contract entered into between the corporation and the National Development Company,
and this was what prevented the corporation from carrying out its offer to pay the sum
P1,956,513.07 on April 5, 1951. Had this offer been accepted, or favorably acted upon by the
National Development Company, the indebtedness would have been practically liquidated, leaving
outstanding only one certificate worth P217,390.45. Of course, the corporation could have insisted in
redeeming the shares if it wanted to even to the extent of taking a court action if necessary to force
its creditor to relinquish the shares that may be necessary to accomplish the redemption, but such
would be a drastic step which would have not been advisable considering the policy right along
maintained by the corporation to preserve its cordial and smooth relation with the government. At
any rate, whether such attitude be considered as a mere excuse to justify the delay in effecting the
redemption of the shares, or a mere desire on the part of the corporation to retain in its possession
more funds available to attend to other pressing need as demanded by the interest of the
corporation, we fail to see in such an attitude an improper motive to circumvent the early realization
of the desire of the minors to obtain the immediate payment of the donation which was made
dependent upon the redemption of said shares there being no clear evidence that may justify such
design. Anyway, a great portion of the funds went to the stockholders themselves by way of
dividends to offset, so it appears, the huge advances that the corporation had made to them which
were entered in the books of the corporation as loans and, therefore, they were invested for their
own benefit. As General Manager Osmeña said, "we were first confronted with the problem of the
withdrawals of the family which had to be repaid back to the National Development Company and
one of the most practical solutions to that was to declare dividends and reduce the amounts of their
withdrawals", which then totalled about P3,000,000.

All things considered, we are of the opinion that the finding of the lower court that the failure of the
defendant corporation to comply with the condition of the donation is merely due to its desistance
from obeying the mandate of the majority of the stockholders and not to lack of funds, or to lack of
authority, has no foundation in law or in fact, and, therefore, its conclusion that because of such
desistance that condition should be deemed as fulfilled and the payment of the donation due and
demandable, is not justified. In this respect, the decision of the lower court should be reversed.

Having reached the foregoing conclusion, we deem it unnecessary to discuss the other issues raised
by the parties in their briefs.

The lower court adjudicated to plaintiff an additional amount equivalent to 20 per cent of the amount
claimed as damages by way of attorney's fees, and in our opinion, this award can be justified under
Article 2208, paragraph 2, of the new Civil Code, which provides: "When the defendant's act or
omission has compelled the plaintiff to litigate with third persons or to incur expenses to protect his
interest", attorney's fees nay be awarded as damages. However, the majority believes that this
award should be reduced to 10 per cent.

Wherefore, the decision appealed from should be modified as follows: (a) that the donation made 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 stated
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.

Paras, C. J., Pablo Bengzon, Padilla, Montemayor, Jugo, Concepcion, and Reyes, J. B. L., concur.
Reyes, A., concurs in the result.

[G.R. NO. 120721 : February 23, 2005]

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

Petitioners, v. COMMISSIONER OF INTERNAL REVENUE and COURT OF APPEALS,
Respondents.

DECISION

AZCUNA, J.:

This is a Petition for Review on Certiorari under Rule 45 of the Rules of Civil Procedure, assailing the
decision of the Court of Appeals in CA 'G.R. SP No. 27134, entitled "Comissioner of Internal Revenue
v. Manuel G. Abello, Jose C. Concepcion, Teodoro D. Regala, Avelino V. Cruz and Court of Tax
Appeals," which reversed and set aside the decision of the Court of Tax Appeals (CTA), ordering the
Commissioner of Internal Revenue (Commissioner) to withdraw his letters dated April 21, 1988 and
August 4, 1988 assessing donor's taxes and to desist from collecting donor's taxes from petitioners.

During the 1987 national elections, petitioners, who are partners in the Angara, Abello, Concepcion,
Regala and Cruz (ACCRA) law firm, contributed P882,661.31 each to the campaign funds of Senator
Edgardo Angara, then running for the Senate. In letters dated April 21, 1988, the Bureau of Internal
Revenue (BIR) assessed each of the petitioners P263,032.66 for their contributions. On August 2,
1988, petitioners questioned the assessment through a letter to the BIR. They claimed that political
or electoral contributions are not considered gifts under the National Internal Revenue Code (NIRC),
and that, therefore, they are not liable for donor's tax. The claim for exemption was denied by the
Commissioner.1 ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

On September 12, 1988, petitioners filed a Petition for Review with the CTA, which was decided on
October 7, 1991 in favor of the petitioners. As aforestated, the CTA ordered the Commissioner to
desist from collecting donor's taxes from the petitioners.2

On appeal, the Court of Appeals reversed and set aside the CTA decision on April 20, 1994.3 The
appellate Court ordered the petitioners to pay donor's tax amounting to P263,032.66 each, reasoning
as follows:

The National Internal Revenue Code, as amended, provides:

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

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

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

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

As correctly pointed out by the Solicitor General:

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

Section 91 of the Tax Code is very clear. A donor's or gift tax is imposed on the transfer of property
by gift.ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

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

Political Contributions. 'For internal revenue purposes, political contributions in the Philippines are
considered taxable gift rather than taxable income. This is so, because a political contribution is
indubitably not intended by the giver or contributor as a return of value or made because of any
intent to repay another what is his due, but bestowed only because of motives of philanthropy or
charity. His purpose is to give and to bolster the morals, the winning chance of the candidate and/or
his party, and not to employ or buy. On the other hand, the recipient-donee does not regard himself
as exchanging his services or his product for the money contributed. But more importantly he
receives financial advantages gratuitously.
When the U.S. gift tax law was adopted in the Philippines (before May 7, 1974), the taxability of
political contributions was, admittedly, an unsettled issue; hence, it cannot be presumed that the
Philippine Congress then had intended to consider or treat political contributions as non-taxable gifts
when it adopted the said gift tax law. Moreover, well-settled is the rule that the Philippines need not
necessarily adopt the present rule or construction in the United States on the matter. Generally,
statutes of different states relating to the same class of persons or things or having the same
purposes are not considered to be in pari materia because it cannot be justifiably presumed that the
legislature had them in mind when enacting the provision being construed. (5206, Sutherland,
Statutory Construction, p. 546.) Accordingly, in the absence of an express exempting provision of
law, political contributions in the Philippines are subject to the donor's gift tax. (cited in National
Internal Revenue Code Annotated by Hector S. de Leon, 1991 ed., p. 290).

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

Petitioners filed a motion for reconsideration, which the Court of Appeals denied in its resolution of
June 16, 1995.5

Petitioners thereupon filed the instant petition on July 26, 1995. Raised are the following issues:

1. DID THE HONORABLE COURT OF APPEALS ERR WHEN IT FAILED TO CONSIDER IN ITS DECISION
THE PURPOSE BEHIND THE ENACTMENT OF OUR GIFT TAX LAW?chanroblesvirtualawlibrary

2. DID THE HONORABLE COURT OF APPEALS ERR IN NOT CONSIDERING THE INTENTION OF THE
GIVERS IN DETERMINING WHETHER OR NOT THE PETITIONERS' POLITICAL CONTRIBUTIONS WERE
GIFTS SUBJECT TO DONORS TAX?chanroblesvirtualawlibrary

3. DID THE HONORABLE COURT OF APPEALS ERR WHEN IT FAILED TO CONSIDER THE DEFINITION
OF AN "ELECTORAL CONTRIBUTION" UNDER THE OMNIBUS ELECTION CODE IN DETERMINING
WHETHER OR NOT POLITICAL CONTRIBUTIONS ARE TAXABLE?chanroblesvirtualawlibrary

4. DID THE HONORABLE COURT OF APPEALS ERR IN NOT CONSIDERING THE ADMINISTRATIVE
PRACTICE OF CLOSE TO HALF A CENTURY OF NOT SUBJECTING POLITICAL CONTRIBUTIONS TO
DONORS TAX?chanroblesvirtualawlibrary

5. DID THE HONORABLE COURT OF APPEALS ERR IN NOT CONSIDERING THE AMERICAN
JURISPRUDENCE RELIED UPON BY THE COURT OF TAX APPEALS AND BY THE PETITIONERS TO THE
EFFECT THAT POLITICAL CONTRIBUTIONS ARE NOT TAXABLE GIFTS?chanroblesvirtualawlibrary

6. DID THE HONORABLE COURT OF APPEALS ERR IN NOT APPLYING AMERICAN JURISPRUDENCE ON
THE GROUND THAT THIS WAS NOT KNOWN AT THE TIME THE PHILIPPINES GIFT TAX LAW WAS
ADOPTED IN 1939?chanroblesvirtualawlibrary

7. DID THE HONORABLE COURT OF APPEALS ERR IN RESOLVING THE CASE MAINLY ON THE BASIS
OF A RULING ISSUED BY THE RESPONDENT ONLY AFTER THE ASSESSMENTS HAD ALREADY BEEN
MADE?chanroblesvirtualawlibrary

8. DID THE HONORABLE COURT OF APPEALS ERR WHEN IT DID NOT CONSTRUE THE GIFT TAX LAW
LIBERALLY IN FAVOR OF THE TAXPAYER AND STRICLTY AGAINST THE GOVERNMENT IN
ACCORDANCE WITH APPLICABLE PRINCIPLES OF STATUTORY CONSTRUCTION?6

First, Fifth and Sixth Issues

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

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

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

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

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

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

. . . an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another,
who accepts it.

Donation has the following elements: (a) the reduction of the patrimony of the donor; (b) the
increase in the patrimony of the donee; and, (c) the intent to do an act of liberality or animus
donandi.7

The present case falls squarely within the definition of a donation. Petitioners, the late Manuel G.
Abello8, Jose C. Concepcion, Teodoro D. Regala and Avelino V. Cruz, each gave P882,661.31 to the
campaign funds of Senator Edgardo Angara, without any material consideration. All three elements of
a donation are present. The patrimony of the four petitioners were reduced by P882,661.31 each.
Senator Edgardo Angara's patrimony correspondingly increased by P3,530,645.249 . There was
intent to do an act of liberality or animus donandi was present since each of the petitioners gave
their contributions without any consideration.

Taken together with the Civil Code definition of donation, Section 91 of the NIRC is clear and
unambiguous, thereby leaving no room for construction. In Rizal Commercial Banking Corporation v.
Intermediate Appellate Court10 the Court enunciated:

It bears stressing that the first and fundamental duty of the Court is to apply the law. When the law
is clear and free from any doubt or ambiguity, there is no room for construction or interpretation. As
has been our consistent ruling, where the law speaks in clear and categorical language, there is no
occasion for interpretation; there is only room for application (Cebu Portland Cement Co. v.
Municipality of Naga, 24 SCRA 708 [1968])

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

Only when the law is ambiguous or of doubtful meaning may the court interpret or construe its true
intent.ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

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

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

Third Issue

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

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

Since the purpose of an electoral contribution is to influence the results of the election, petitioners
again claim that donative intent is not present. Petitioners attempt to place the barrier of mutual
exclusivity between donative intent and the purpose of political contributions. This Court reiterates
that donative intent is not negated by the presence of other intentions, motives or purposes which do
not contradict donative intent.

Petitioners would distinguish a gift from a political donation by saying that the consideration for a gift
is the liberality of the donor, while the consideration for a political contribution is the desire of the
giver to influence the result of an election by supporting candidates who, in the perception of the
giver, would influence the shaping of government policies that would promote the general welfare
and economic well-being of the electorate, including the giver himself.

Petitioners' attempt is strained. The fact that petitioners will somehow in the future benefit from the
election of the candidate to whom they contribute, in no way amounts to a valuable material
consideration so as to remove political contributions from the purview of a donation. Senator Angara
was under no obligation to benefit the petitioners. The proper performance of his duties as a
legislator is his obligation as an elected public servant of the Filipino people and not a consideration
for the political contributions he received. In fact, as a public servant, he may even be called to enact
laws that are contrary to the interests of his benefactors, for the benefit of the greater good.

In fine, the purpose for which the sums of money were given, which was to fund the campaign of
Senator Angara in his bid for a senatorial seat, cannot be considered as a material consideration so
as to negate a donation.

Fourth Issue

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

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

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

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

Seventh Issue

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

Eighth Issue

Petitioners next contend that tax laws are construed liberally in favor of the taxpayer and strictly
against the government. This rule of construction, however, does not benefit petitioners because, as
stated, there is here no room for construction since the law is clear and unambiguous.

Finally, this Court takes note of the fact that subsequent to the donations involved in this case,
Congress approved Republic Act No. 7166 on November 25, 1991, providing in Section 13 thereof
that political/electoral contributions, duly reported to the Commission on Elections, are not subject to
the payment of any gift tax. This all the more shows that the political contributions herein made are
subject to the payment of gift taxes, since the same were made prior to the exempting legislation,
and Republic Act No. 7166 provides no retroactive effect on this point.

WHEREFORE, the petition is DENIED and the assailed Decision and Resolution of the Court of Appeals
are AFFIRMED.

No costs.

SO ORDERED.