129 LORENZO vs. POSADAS JR.

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

Thomas Hanley died, leaving a will and a considerable amount of real and personal properties.
Proceedings for the probate of his will and the settlement and distribution of his estate were
begun in the CFI of Zamboanga. The will was admitted to probate. The CFI considered it proper
for the best interests of the estate to appoint a trustee to administer the real properties which,
under the will, were to pass to nephew Matthew ten years after the two executors named in the
will was appointed trustee. Moore acted as trustee until he resigned and the plaintiff Lorenzo
herein was appointed in his stead. During the incumbency of the plaintiff as trustee, the
defendant Collector of Internal Revenue assessed against the estate an inheritance tax,
together with the penalties for deliquency in payment. Lorenzo paid said amount under protest,
notifying Posadas at the same time that unless the amount was promptly refunded suit would
be brought for its recovery. Posadas overruled Lorenzo’s protest and refused to refund the said
amount. Plaintiff went to court. The CFI dismissed Lorenzo’s complaint and Posadas’
counterclaim. Both parties appealed to this court.

Ruling:

(a)   When does the inheritance tax accrue and when must it be satisfied?

The accrual of the inheritance tax is distinct from the obligation to pay the same. Section 1536 as amended,
of the Administrative Code, imposes the tax upon "every transmission by virtue of inheritance, devise, bequest, gift
mortis causa, or advance in anticipation of inheritance, devise, or bequest." The tax therefore is upon transmission or
the transfer or devolution of property of a decedent, made effective by his death. It is in reality an excise or privilege
tax imposed on the right to succeed to, receive, or take property by or under a will or the intestacy law, or deed,
grant, or gift to become operative at or after death. According to article 657 of the Civil Code, "the rights to the
succession of a person are transmitted from the moment of his death."  The property belongs to the heirs at the
moment of the death of the ancestor as completely as if the ancestor had executed and delivered to them a deed for
the same before his death."
The authentication of a will implies its due execution but once probated and allowed the transmission is
effective as of the death of the testator in accordance with article 657 of the Civil Code. Whatever may be the time
when actual transmission of the inheritance takes place, succession takes place in any event at the moment of the
decedent's death. The time when the heirs legally succeed to the inheritance may differ from the time when the heirs
actually receive such inheritance.
From the fact, however, that Thomas Hanley died on May 27, 1922, it does not follow that the obligation to
pay the tax arose as of the date.
SEC. 1544. When tax to be paid. — The tax fixed in this article shall be paid:
(b) In other cases, within the six months subsequent to the death of the predecessor; but if judicial
testamentary or intestate proceedings shall be instituted prior to the expiration of said period, the payment shall be
made by the executor or administrator before delivering to each beneficiary his share.
            Under the subsection, the tax should have been paid before the delivery of the properties in question to P. J.
M. Moore as trustee on March 10, 1924.

(b)   Should the inheritance tax be computed on the basis of the value of the estate at the time of the
testator's death, or on its value ten years later?
If death is the generating source from which the power of the estate to impose inheritance taxes takes its
being and if, upon the death of the decedent, succession takes place and the right of the estate to tax vests
instantly, the tax should be measured by the value of the estate as it stood at the time of the decedent's death,
regardless of any subsequent contingency value of any subsequent increase or decrease in value.
The transmission by inheritance is taxable at the time of the predecessor's death, notwithstanding the
postponement of the actual possession or enjoyment of the estate by the beneficiary, and the tax measured by the
value of the property transmitted at that time regardless of its appreciation or depreciation.

(c)   In determining the net value of the estate subject to tax, is it proper to deduct the compensation due
to trustees?

A trustee, no doubt, is entitled to receive a fair compensation for his services. But from this it does not
follow that the compensation due him may lawfully be deducted in arriving at the net value of the estate subject to
tax. There is no statute in the Philippines which requires trustees' commissions to be deducted in determining the net
value of the estate subject to inheritance tax. Furthermore, though a testamentary trust has been created, it does
 not appear that the testator intended that the duties of his executors and trustees should be separated. On the
contrary, in paragraph 5 of his will, the testator expressed the desire that his real estate be handled and managed by
his executors until the expiration of the period of ten years therein provided. Judicial expenses are expenses of
administration but, the compensation of a trustee, earned, not in the administration of the estate, but in the
management thereof for the benefit of the legatees or devises, does not come properly within the class or reason for
exempting administration expenses. . . . Service rendered in that behalf have no reference to closing the estate for
the purpose of a distribution thereof to those entitled to it, and are not required or essential to the perfection of the
rights of the heirs or legatees. . . . Trusts . . . of the character are created for the benefit of those to whom the
property ultimately passes, are of voluntary creation, and intended for the preservation of the estate. No sound
reason is given to support the contention that such expenses should be taken into consideration in fixing the value of
the estate for the purpose of this tax.

(d)   What law governs the case at bar? Should the provisions of Act No. 3606 favorable to the taxpayer be
given retroactive effect?

The defendant levied and assessed the inheritance tax due from the estate of Thomas Hanley under the provisions of
section 1544 of the Revised Administrative Code, as amended by section 3 of Act No. 3606. But Act No. 3606 went
into effect on January 1, 1930. It, therefore, was not the law in force when the testator died on May 27, 1922. The
law at the time was section 1544 abovementioned, as amended by Act No. 3031, which took effect on March 9,
1922.
It is well settled that inheritance taxation is governed by the statute in force at the time of the death of the
decedent. The taxpayer cannot foresee and ought not to be required to guess the outcome of pending measures. Of
course, a tax statute may be made retroactive in its operation. Liability for taxes under retroactive legislation has
been "one of the incidents of social life." "A statute should be considered as prospective in its operation, whether it
enacts, amends, or repeals an inheritance tax, unless the language of the statute clearly demands or expresses that
it shall have a retroactive Effect.

(e)   Has there been deliquency in the payment of the inheritance tax?

The mere failure to pay one's tax does not render one delinquent until and unless the entire period has
elapsed within which the taxpayer is authorized by law to make such payment without being subjected to the
payment of penalties for failure to pay his taxes within the prescribed period.
The defendant maintains that it was the duty of the executor to pay the inheritance tax before the delivery
of the decedent's property to the trustee.
P. J. M. Moore became trustee on March 10, 1924. On that date trust estate vested in him. The mere fact
that the estate of the deceased was placed in trust did not remove it from the operation of our inheritance tax laws
or exempt it from the payment of the inheritance tax. The corresponding inheritance tax should have been paid on or
before March 10, 1924, to escape the penalties of the laws. This is so for the reason already stated that the delivery
of the estate to the trustee was in essence delivery of the same estate to the cestui que trust, the beneficiary in this
case. A trustee is but an instrument or agent for the cestui que trust. When Moore accepted the trust and took
possession of the trust estate he thereby admitted that the estate belonged not to him but to his cestui que trust. He
did not acquire any beneficial interest in the estate. He took such legal estate only as the proper execution of the
trust required and, his estate ceased upon the fulfillment of the testator's wishes. The estate then vested absolutely
in the beneficiary.
No one is allowed to object to or resist the payment of taxes solely because no personal benefit to him can
be pointed out.
The delinquency in payment occurred on March 10, 1924, the date when Moore became trustee. The
interest due should be computed from that date and it is error on the part of the defendant to compute it one month
later