G.R. No.

123206

March 22, 2000

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
COURT OF APPEALS, COURT OF TAX APPEALS and JOSEFINA P. PAJONAR, as
Administratrix of the Estate of Pedro P. Pajonar, respondents.
Assailed in this petition for review on certiorari is the December 21, 1995 Decision 1 of
the Court of Appeals2 in CA-G.R. Sp. No. 34399 affirming the June 7, 1994 Resolution
of the Court of Tax Appeals in CTA Case No. 4381 granting private respondent Josefina
P. Pajonar, as administratrix of the estate of Pedro P. Pajonar, a tax refund in the
amount of P76,502.42, representing erroneously paid estate taxes for the year 1988.
Pedro Pajonar, a member of the Philippine Scout, Bataan Contingent, during the
second World War, was a part of the infamous Death March by reason of which he
suffered shock and became insane. His sister Josefina Pajonar became the guardian
over his person, while his property was placed under the guardianship of the Philippine
National Bank (PNB) by the Regional Trial Court of Dumaguete City, Branch 31, in
Special Proceedings No. 1254. He died on January 10, 1988. He was survived by his
two brothers Isidro P. Pajonar and Gregorio Pajonar, his sister Josefina Pajonar,
nephews Concordio Jandog and Mario Jandog and niece Conchita Jandog.
On May 11, 1988, the PNB filed an accounting of the decedent's property under
guardianship valued at P3,037,672.09 in Special Proceedings No. 1254. However, the
PNB did not file an estate tax return, instead it advised Pedro Pajonar's heirs to execute
an extrajudicial settlement and to pay the taxes on his estate. On April 5, 1988,
pursuant to the assessment by the Bureau of Internal Revenue (BIR), the estate of
Pedro Pajonar paid taxes in the amount of P2,557.
On May 19, 1988, Josefina Pajonar filed a petition with the Regional Trial Court of
Dumaguete City for the issuance in her favor of letters of administration of the estate of
her brother. The case was docketed as Special Proceedings No. 2399. On July 18, 1988,
the trial court appointed Josefina Pajonar as the regular administratrix of Pedro
Pajonar's estate.
On December 19, 1988, pursuant to a second assessment by the BIR for deficiency
estate tax, the estate of Pedro Pajonar paid estate tax in the amount of P1,527,790.98.
Josefina Pajonar, in her capacity as administratrix and heir of Pedro Pajonar's estate,
filed a protest on January 11, 1989 with the BIR praying that the estate tax payment in
the amount of P1,527,790.98, or at least some portion of it, be returned to the heirs.

However, on August 15, 1989, without waiting for her protest to be resolved by the BIR,
Josefina Pajonar filed a petition for review with the Court of Tax Appeals (CTA), praying

for the refund of P1,527,790.98, or in the alternative, P840,202.06, as erroneously paid

estate tax.

The case was docketed as CTA Case No. 4381.

On May 6, 1993, the CTA ordered the Commissioner of Internal Revenue to refund
Josefina Pajonar the amount of P252,585.59, representing erroneously paid estate tax
for the year 1988.5 Among the deductions from the gross estate allowed by the CTA
were the amounts of P60,753 representing the notarial fee for the Extrajudicial
Settlement and the amount of P50,000 as the attorney's fees in Special Proceedings No.
1254 for guardianship.6
On June 15, 1993, the Commissioner of Internal Revenue filed a motion for
reconsideration7 of the CTA's May 6, 1993 decision asserting, among others, that the
notarial fee for the Extrajudicial Settlement and the attorney's fees in the guardianship
proceedings are not deductible expenses.
On June 7, 1994, the CTA issued the assailed Resolution 8 ordering the Commissioner
of Internal Revenue to refund Josefina Pajonar, as administratrix of the estate of Pedro
Pajonar, the amount of P76,502.42 representing erroneously paid estate tax for the
year 1988. Also, the CTA upheld the validity of the deduction of the notarial fee for the
Extrajudicial Settlement and the attorney's fees in the guardianship proceedings.
On July 5, 1994, the Commissioner of Internal Revenue filed with the Court of Appeals
a petition for review of the CTA's May 6, 1993 Decision and its June 7, 1994
Resolution, questioning the validity of the abovementioned deductions. On December
21, 1995, the Court of Appeals denied the Commissioner's petition. 9
Hence, the present appeal by the Commissioner of Internal Revenue.
The sole issue in this case involves the construction of section 79 10 of the National
Internal Revenue Code

11

(Tax Code) which provides for the allowable deductions from

the gross estate of the decedent. More particularly, the question is whether the notarial
fee paid for the extrajudicial settlement in the amount of P60,753 and the attorney's
fees in the guardianship proceedings in the amount of P50,000 may be allowed as
deductions from the gross estate of decedent in order to arrive at the value of the net
estate.
We answer this question in the affirmative, thereby upholding the decisions of the
appellate courts.
In its May 6, 1993 Decision, the Court of Tax Appeals ruled thus:
Respondent maintains that only judicial expenses of the testamentary or
intestate proceedings are allowed as a deduction to the gross estate. The amount
of P60,753.00 is quite extraordinary for a mere notarial fee.

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

xxx

xxx

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

xxx

xxx

The guardianship proceeding had been terminated upon delivery of the

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

xxx

xxx

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

12

Upon a motion for reconsideration filed by the Commissioner of Internal Revenue, the
Court of Tax Appeals modified its previous ruling by reducing the refundable amount to
P76,502.43 since it found that a deficiency interest should be imposed and the
compromise penalty excluded.

13

However, the tax court upheld its previous ruling

regarding the legality of the deductions

It is significant to note that the inclusion of the estate tax law in the codification of all
our national internal revenue laws with the enactment of the National Internal Revenue

Code in 1939 were copied from the Federal Law of the United States. [ UMALI, Reviewer
in Taxation (1985), p. 285 ] The 1977 Tax Code, promulgated by Presidential Decree No.
1158, effective June 3, 1977, reenacted substantially all the provisions of the old law
on estate and gift taxes, except the sections relating to the meaning of gross estate and
gift. [ Ibid, p. 286. ]
In the United States, [a]dministrative expenses, executor's commissions and attorney's
fees are considered allowable deductions from the Gross Estate. Administrative
expenses are limited to such expenses as are actually and necessarily incurred in the
administration of a decedent's estate. [PRENTICE-HALL, Federal Taxes Estate and Gift
Taxes (1936), p. 120, 533.] Necessary expenses of administration are such expenses as
are entailed for the preservation and productivity of the estate and for its
management for purposes of liquidation, payment of debts and distribution of the residue
among the persons entitled thereto. [Lizarraga Hermanos vs. Abada, 40 Phil. 124.] They
must be incurred for the settlement of the estate as a whole. [34 Am. Jur. 2d, p. 765.]
Thus, where there were no substantial community debts and it was unnecessary to
convert community property to cash, the only practical purpose of administration being
the payment of estate taxes, full deduction was allowed for attorney's fees and
miscellaneous expenses charged wholly to decedent's estate. [Ibid., citing Estate of
Helis, 26 T.C. 143 (A).]
Petitioner stated in her protest filed with the BIR that "upon the death of the ward, the
PNB, which was still the guardian of the estate, (Annex "Z"), did not file an estate tax
return; however, it advised the heirs to execute an extrajudicial settlement, to pay
taxes and to post a bond equal to the value of the estate, for which the state paid
P59,341.40 for the premiums. (See Annex "K")." [p. 17, CTA record.] Therefore, it would
appear from the records of the case that the only practical purpose of settling the
estate by means of an extrajudicial settlement pursuant to Section 1 of Rule 74 of the
Rules of Court was for the payment of taxes and the distribution of the estate to the
heirs. A fortiori, since our estate tax laws are of American origin, the interpretation
adopted by American Courts has some persuasive effect on the interpretation of our
own estate tax laws on the subject.
Anent the contention of respondent that the attorney's fees of P50,000.00 incurred in
the guardianship proceeding should not be deducted from the Gross Estate, We
consider the same unmeritorious. Attorneys' and guardians' fees incurred in a trustee's
accounting of a taxable inter vivos trust attributable to the usual issues involved in
such an accounting was held to be proper deductions because these are expenses
incurred in terminating an inter vivos trust that was includible in the decedent's estate.
[Prentice Hall, Federal Taxes on Estate and Gift, p. 120, 861] Attorney's fees are
allowable deductions if incurred for the settlement of the estate. It is noteworthy to
point that PNB was appointed the guardian over the assets of the deceased. Necessarily
the assets of the deceased formed part of his gross estate. Accordingly, all expenses

incurred in relation to the estate of the deceased will be deductible for estate tax
purposes provided these are necessary and ordinary expenses for administration of the
settlement of the estate.

14

In upholding the June 7, 1994 Resolution of the Court of Tax Appeals, the Court of
Appeals held that:
2. Although the Tax Code specifies "judicial expenses of the testamentary or intestate
proceedings," there is no reason why expenses incurred in the administration and
settlement of an estate in extrajudicial proceedings should not be allowed. However,
deduction is limited to such administration expenses as are actually and necessarily
incurred in the collection of the assets of the estate, payment of the debts, and
distribution of the remainder among those entitled thereto. Such expenses may include
executor's or administrator's fees, attorney's fees, court fees and charges, appraiser's
fees, clerk hire, costs of preserving and distributing the estate and storing or
maintaining it, brokerage fees or commissions for selling or disposing of the estate, and
the like. Deductible attorney's fees are those incurred by the executor or administrator
in the settlement of the estate or in defending or prosecuting claims against or due the
estate. (Estate and Gift Taxation in the Philippines, T. P. Matic, Jr., 1981 Edition, p.
176).
xxx

xxx

xxx

It is clear then that the extrajudicial settlement was for the purpose of payment of taxes
and the distribution of the estate to the heirs. The execution of the extrajudicial
settlement necessitated the notarization of the same. Hence the Contract of Legal
Services of March 28, 1988 entered into between respondent Josefina Pajonar and
counsel was presented in evidence for the purpose of showing that the amount of
P60,753.00 was for the notarization of the Extrajudicial Settlement. It follows then that
the notarial fee of P60,753.00 was incurred primarily to settle the estate of the
deceased Pedro Pajonar. Said amount should then be considered an administration
expenses actually and necessarily incurred in the collection of the assets of the estate,
payment of debts and distribution of the remainder among those entitled thereto. Thus,
the notarial fee of P60,753 incurred for the Extrajudicial Settlement should be allowed
as a deduction from the gross estate.
3. Attorney's fees, on the other hand, in order to be deductible from the gross estate
must be essential to the settlement of the estate.
The amount of P50,000.00 was incurred as attorney's fees in the guardianship
proceedings in Spec. Proc. No. 1254. Petitioner contends that said amount are not
expenses of the testamentary or intestate proceedings as the guardianship proceeding
was instituted during the lifetime of the decedent when there was yet no estate to be
settled.

Again, this contention must fail.

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

xxx

xxx

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

15

The deductions from the gross estate permitted under section 79 of the Tax Code
basically reproduced the deductions allowed under Commonwealth Act No. 466 (CA
466), otherwise known as the National Internal Revenue Code of 1939,

16

and which

was the first codification of Philippine tax laws. Section 89 (a) (1) (B) of CA 466 also
provided for the deduction of the "judicial expenses of the testamentary or intestate
proceedings" for purposes of determining the value of the net estate. Philippine tax laws
were, in turn, based on the federal tax laws of the United States.

17

In accord with

established rules of statutory construction, the decisions of American courts

construing the federal tax code are entitled to great weight in the interpretation of our
own tax laws.

18

Judicial expenses are expenses of administration.

19

Administration expenses, as an

allowable deduction from the gross estate of the decedent for purposes of arriving at
the value of the net estate, have been construed by the federal and state courts of the
United States to include all expenses "essential to the collection of the assets, payment
of debts or the distribution of the property to the persons entitled to it."

20

In other

words, the expenses must be essential to the proper settlement of the estate.
Expenditures incurred for the individual benefit of the heirs, devisees or legatees are
not deductible.

21

This distinction has been carried over to our jurisdiction. Thus,

inLorenzo v. Posadas

22

the Court construed the phrase "judicial expenses of the

testamentary or intestate proceedings" as not including the compensation paid to a

trustee of the decedent's estate when it appeared that such trustee was appointed for
the purpose of managing the decedent's real estate for the benefit of the testamentary
heir. In another case, the Court disallowed the premiums paid on the bond filed by the
administrator as an expense of administration since the giving of a bond is in the
nature of a qualification for the office, and not necessary in the settlement of the
estate.

23

Neither may attorney's fees incident to litigation incurred by the heirs in

asserting their respective rights be claimed as a deduction from the gross

estate.

1wphi1

24

Coming to the case at bar, the notarial fee paid for the extrajudicial settlement is clearly
a deductible expense since such settlement effected a distribution of Pedro Pajonar's
estate to his lawful heirs. Similarly, the attorney's fees paid to PNB for acting as the
guardian of Pedro Pajonar's property during his lifetime should also be considered as a
deductible administration expense. PNB provided a detailed accounting of decedent's
property and gave advice as to the proper settlement of the latter's estate, acts which
contributed towards the collection of decedent's assets and the subsequent settlement
of the estate.
We find that the Court of Appeals did not commit reversible error in affirming the
questioned resolution of the Court of Tax Appeals.
WHEREFORE, the December 21, 1995 Decision of the Court of Appeals is AFFIRMED.
The notarial fee for the extrajudicial settlement and the attorney's fees in the
guardianship proceedings are allowable deductions from the gross estate of Pedro
Pajonar.
G.R. No. L-5949

November 19, 1955

TANG HO, WILLIAM LEE, HENRI LEE, SOFIA LEE TEEHANKEE, THOMAS LEE,
ANTHONY LEE, JULIA LEE KAW, CHARLES LEE, VALERIANA LEE YU, VICTOR
LEE, SILVINO LEE, MARY LEE, JOHN LEE, and PETER LEE, for themselves and as
heirs of LI SENG GIAP, deceased, petitioners,
vs.
THE BOARD OF TAX APPEALS and THE COLLECTOR OF INTERNAL
REVENUE, respondents.
This is a petition for the review of the petition of the defunct Board of Tax Appeals
holding petitioner Li Seng Giap, et al. liable for gift taxes in accordance with the
assessments made by the respondent Collector of Internal Revenue.
Petitioners Li Seng Giap (who died during the pendency of this appeal) and his wife
Tang Ho and their thirteen children appear to be the stockholder of two close family
corporations named Li Seng Giap & Sons, Inc. and Li Seng Giap & Co. On or about
May, 1951, examiners of the Bureau of Internal Revenue, then detailed to the Allas
Committee of the Congress of the Philippines, made an examination of the books of the
two corporation aforementioned and found that each of Li Seng Giap's 13 children had
a total investment therein of approximately P63,195.00, in shares issued to them by
their father Li Seng Giap (who was the manager and controlling stockholder of the two
corporations) in the years 1940, 1942, 1948, 1949, and 1950 in the following amounts:

Donees

1940

1942

1948

1949

1950

William Lee

7,500

12,500

6,750

27,940

7,500

Henry Lee

7,500

12,500

6,750

27,940

7,500

Sofia Lee

7,500

12,500

16,500

26,690

Thomas Lee

7,500

12,500

7,500

28,190

7,500

Anthony Lee

18,000

7,500

28,190

7,500

Julia Lee

20,000

15,000

25,690

2,500

Charles Lee

20,000

7,500

60,690

7,500

Valeriana
Lee

63,190

2,500

Victor Lee

63,190

Silvino Lee

63,190

Mary Lee

63,190

John Lee

63,190

Peter Lee

63,190

The Collector of Internal Revenue regarded these transfers as undeclared gifts made in
the respective years, and assessed against Li Seng Giap and his children donor's and
donee's taxes in the total amount of P76,995.31, including penalties, surcharges,
interests, and compromise fee due to the delayed payment of the taxes. The petitioners
paid the sum of P53,434.50, representing the amount of the basic taxes, and put up a
surety bond to guarantee payment of the balance demanded. And on June 25, 1951,
they requested the Collector of Internal Revenue for a revision of their tax assessments,
and submitted donor's and donee's gift tax returns showing that each child received by
way of gift inter vivos, every year from 1939 to 1950 (except in 1947 and 1948) P4,000
in cash; that each of the eight children who married during the period aforesaid, were
given an additional P20,000 as dowry or gift propter nuptias; that the unmarried
children received roughly equivalent amount in 1949, also by way of gifts inter vivos, so
that the total donations made to each and every child, as of 1950, stood at P63,190.
Appellants admit that these gifts were not reported; but contend that as the cash
donated came from the conjugal funds, they constituted individual donations by each
of the spouses Li Seng Giap and Tang Ho of one half of the amount received by the
donees in each instance, up to a total of P31,505 to each of the thirteen children from
each parent. They further alleged that the children's stockholding in the two family
corporations were purchased by them with savings from the aforesaid cash donations
received from their parents.
Claiming the benefit of gift tax exemptions (under section 110 and 112 of the Internal
Revenue Code) at the rate of P2000 a year for each donation, plus P10,000 for each
gift propter nuptias made by either parent, and appellants' aggregate tax liability,
according to their returns, would only be P4,599.94 for the year 1949, and P228,28 for
the year 1950, or a total of P4,838.22, computed as follows:

DONORS

1939-44

1945-46

Li Seng Giap

Exempt

Tang Ho

Total

William Lee

1949

1950

TOTAL

Exempt

P1,110.72

P74.14

P1,184.86

Exempt

Exempt

1,110.72

74.14

1,184.86

None

None

P2,221.44

P148.28

P2,369.72

Exempt

Exempt

P253.80

P30.00

P283.80

Henry Lee

Exempt

Exempt

Exempt

15.00

15.00

Sofia Lee

Exempt

Exempt

P51.90

None

51.90

Thomas Lee

Exempt

Exempt

Exempt

15.00

15.00

Anthony Lee

Exempt

Exempt

Exempt

15.00

15.00

Julia Lee

Exempt

Exempt

26.90

Exempt

26.90

Charles Lee

Exempt

Exempt

Exempt

15.00

15.00

Valeriana Lee

Exempt

Exempt

26.90

Exempt

26.90

Victor Lee

Exempt

Exempt

403.80

None

403.80

Silvino Lee

Exempt

Exempt

403.80

None

403.80

Mary Lee

Exempt

Exempt

403.80

None

403.80

John Lee

Exempt

Exempt

403.80

None

403.80

Peter Lee

Exempt

Exempt

403.80

None

403.80

Total

None

None

Grand total liability of Donors and

Donees

P2,378.50

P90.00

P2,468.50

P4,599.9
4

P238.28

P4,838.22

The Collector refused to revise his original assessments; and the petitioners appealed to
the then Board of Tax Appeals (created by Executive Order 401-A, in 1951) insisting
that the entries in the books of the corporation do not prove donations; that the true
amount and date of the donation were those appearing in their tax returns; and that
the donees merely bought stocks in the corporation out of savings made from the
money received from their parents. The Board of Tax Appeals upheld the decision of the
respondent Collector of Internal Revenue; hence, this petition for review.
The questions in this appeal may be summarized as follows:
(1) Whether or not the dates and amounts of the donations taxable against petitioners
were as found by the Collector of Internal Revenue from the books of the corporations
Li Seng Giap & Sons, Inc. and Li Seng Giap & Co., or as set forth in petitioners' gift tax
returns;
(2) Whether or not the donations made by petitioner Li Seng Giap to his children from
the conjugal property should be taxed against the husband alone, or against husband
and wife; and
(3) Whether or not petitioners should be allowed the tax deduction claimed by them.
On the first question, which is of fact the appellants take the preliminary stand that
because of Collector failed to specifically deny the allegation of their petition in the Tax
Board he must be deemed to have admitted the annual and propter nuptias donations
alleged by them, and that he is estopped from denying their existence. As the
proceedings before the Tax Board were administrative in character, not governed by the
Rules of Court (see Sec. 10, Executive Order 401-A),and as the Collector actually
submitted his own version of the transactions, we do not consider that the Collector's
failure to make specific denials should be given the same binding effect as in strict
court pleadings.
Going now to the merits of the issue. The appealed findings of the Board of Tax Appeals
and of the Collector of Internal Revenue (that the stock transfers from Li Seng Giap to
his children were donations) appear supported by the following circumstances:
(1) That the transferor Li Seng Giap (now deceased) had in fact conveyed shares to stock
to his 13 children on the dates and in the amounts shown in the table on page 2 of this
decision.

(2) That none of the transferees appeared to possess adequate independent means to
buy the shares, so much so that they claim now to have purchased the shares with the
cash donations made to them from time to time.
(3) That the total of the alleged cash donations to each child is practically identical to
the value of the shares supposedly purchased by each donee.
(4) That there is no evidence other than the belated sworn gift tax returns of the
spouses Li Seng Giap and Ang Tang Ho, and their children, appellants herein, to
support their contention that the shares were acquired by purchase. No contracts of
sale or other documents were presented, nor any witnesses introduced; not even the
claimants themselves have testified.
(5) The claim that the shares were acquired by the children by purchase was first
advanced only after the assessment of gift taxes and penalties due thereon (in the sum
of P76,995.31) had been made, and after the appellants had paid P53,434.50 on
account, and had filed a bond to guarantee the balance.
(6) That for the parent to donate cash to enable the donee to buy from him shares of
equivalent value is, for all intents and purposes, a donation of such shares to the
purchaser donee.
We cannot say, under the circumstances, that there is no sufficient evidence on record
to support the findings of the Tax Board that the stock transfers above indicated were
made by way of donation, as would entitle us to disregard or reverse the Board's
finding.
The filing of the gift tax returns only after assessments and part payment of the taxes
demanded by the Collector, and the lack of corroboration of the alleged donations in
cash, amply justify the Tax Board's distrust of the veracity of the appellants' belated tax
returns "on or before the first of March following the close of the calendar year" when
the gifts were made (Sec. 115, par. [c]; and besides the return a written notice to the
Collector of each donation of P10,000 or more, must be given within thirty days after
the donation, Sec. 114). These yearly returns and notices are evidently designed to
enable the Collector to verify promptly their truth and correctness, while the gifts are
still recent and proof of the circumstances surrounding the making thereof is still fresh
and accessible. On their own admission, appellants failed to file for ten successive
years, the corresponding returns for the alleged yearly gifts of P4,000 to each child, and
likewise failed to give the notices for the P20,000 marriage gifts to each married child.
Hence, they are now scarcely in a position to complain if their contentions are not
accepted as truthful without satisfactory corroboration. Any other view would leave the
collection of taxes at the mercy of explanations concoctedex post facto by evading
taxpayers, drafted to suit any facts disclosed upon investigation, and safe from
contradiction because the passing years have erased all trace of the truth.
The second and third issues in this appeal revolve around appellants' thesis that
inasmuch as the property donated was community property (gananciales), and such
property is jointly owned by their parents, the total amount of the gifts made in each

year should be divided between the father and the mother, as separate donors, and
should be taxed separately to each one of them.
In assessing the worth of this contention, it must be ever borne in mind that appellants
have not only failed to prove that the donations were actually made by both spouses, Li
Seng Giap and Tang Ho, but that precisely the contrary appears from their own
evidence. In the original claim for tax refund, filed with the Collector of Internal
Revenue, under date of June 25, 1951 (copied in pages 6 and 7 of the appellants'
petition for review addressed to the Board of Tax Appeals), the father, Li Seng Giap,
describes himself as "the undersigned donor" (par. 1) and speaks of "cash donations
made by the undersigned" (par. 3), without in any way mentioning his wife as a coparticipant in the donation. The issue is thus reduced to the following: Is a donation of
community property by the father alone equivalent in law to a donation of one-half of
its value by the father and one-half by the mother? Appellants submit that all such
donations of community property are to be regarded, for tax purposes, as donations
by both spouses, for which two separate exemptions may be claimed in each instance,
one for each spouse.
This presentation should be viewed in the light of the provisions of the Spanish Civil
Code of 1889, which was the governing law in the years herein involved, 1939 to 1950.
the determinative rule is that of Arts. 1409 and 1415, reading as follows:
Art. 1409. The conjugal partnership shall also be chargeable with anything
which may have been given or promised by the husband to the children born of
the marriage solely in order to obtain employment for them or give them a
profession, or by both spouses by common consent, should they not have
stipulated that such expenditures should be borne in whole or in part by the
separate property of one of them.
ART. 1415, p. 1. The husband may dispone of the property of the conjugal
partnership for the purposes mentioned in Art. 1409.
In effect, these Articles clearly refute the appellants' theory that because the property
donated is community property, the donations should be viewed as made by both
spouses. First, because the law clearly differentiates the donations of such property "by
the husband" from the "donations by both spouses by common consent" ("por el marido
. . . o por ambos conyuges de comun acuerdo," in the Spanish text).
Next, the wording of Arts. 1409 and 1415 indicates that the lawful donations by the
husband to the common children are valid and are chargeable to the community
property, irrespective of whether the wife agrees or objects thereof. Obviously, should
the wife object to the donation, she can not be regarded as a donor at all.
Even more: Suppose that the husband should make a donation of some community
property to a concubine or paramour. Undeniably, the wife cannot be regarded as
joining in any such donation. Yet under the old Civil Code, the donation would stand,
with the only limitation that the wife should not be prejudiced in the division of the
profits after the conjugal partnership affairs are liquidated. So that if the value of the
donation should be found to fit within the limits of the husband's ultimate share in the

conjugal partnership profits, the donation by the husband would remain unassailable,
over and against the non-participation of the wife therein. This Court has so ruled
in Baello vs. Villanueva (54 Phil. 213, 214):
According to article 1413 of the Civil Code, any transfer or agreement upon
conjugal property made by the husband in contravention of its provisions, shall
not prejudice his wife or her heirs. As the conjugal property belongs equally to
husband and wife, the donation of this property made by the husband
prejudices the wife in so far as it includes a part or the whole of the wife's half,
and is to that extent invalid. Hence article 1419, in providing for the liquidation
of the conjugal partnership, directs that all illegal donations made by the
husband be charged against his estates and deducted from his capital. But it is
only then, when the conjugal partnership is in the process of liquidation, that it
can be discovered whether or not an illegal donation made by the husband
prejudices the wife. And inasmuch as these gifts are only to be held invalid in so
far as they prejudice the wife, their nullity cannot be decided until after the
liquidation of the conjugal partnership and it is found that they encroach upon
the wife's portion.
Appellants herein are therefore in error when they contend that it is enough that the
property donated should belong to the conjugal partnership in order that the donation
be considered and taxed as a donation of both husband and wife, even if the husband
should appear as the sole donor. There is no blinking the fact that, under the old Civil
Code, to be a donation by both spouses, taxable to both, the wife must expressly join
the husband in making the gift; her participation therein cannot be implied.
It is true, as appellants stress, that in Gibbs vs. Government of the Philippines, 59
Phil., 293, this Court ruled that "the wife, upon acquisition of any conjugal property,
becomes immediately vested with an interest and title equal to that of the husband";
but this Court was careful to immediately add, "subject to the power of
management and disposition which the law vests on the husband." As has been shown,
this power of disposition may, within the legal limits, override the objections of the wife
and render the donation of the husband fully effective without need of the wife's joining
therein. (Civil Code of 1889, Arts 1409, 1415.)
It becomes unnecessary to discuss the nature of a conjugal partnership, there being
specific rules on donations of property belonging to it. The consequence of the
husband's legal power to donate community property is that, where made by the
husband alone, the donation is taxable as his own exclusive act. Hence, only one
exemption or deduction can be claimed for every such gift, and not two, as claimed by
appellants herein. In thus holding, the Board of Tax Appeals committed no error.
Premises considered, we are of the opinion and so declare:
(a) That the finding of the defunct Board of Tax Appeals to the effect that shares
transferred from Li Seng Giap to his children were conveyed to them by way of
donation inter vivos is supported by adequate evidence, and therefore cannot be
reviewed by this Court (Comm. of Internal Revenue. vs. Court Holding Co., L. Ed. 981;
Comm. of Internal Revenue vs. Scottish American Investment Co., 89 L. Ed. 113;

Comm. of Internal Revenue vs. Tower, 90 L. Ed. 670; Helvering vs. Tax Penn. Oil Co., 81
L. Ed. 755).
(b) That under the old Civil Code, a donation by the husband alone does not become in
law a donation by both spouses merely because it involves property of the conjugal
partnership;
(c) That such a donation of property belonging to the conjugal partnership, made
during its existence, by the husband alone in favor of the common children, is taxable
to him exclusively as sole donor. Wherefore, the decision appealed from is affirmed with
costs to the appellants. So ordered.