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G.R. No. L-43082

June 18, 1937
FACTS: 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
During the incumbency of the plaintiff as trustee, the defendant Collector of Internal Revenue (Posadas) 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 Lorenzos protest and refused to refund the said amount. Plaintiff
went to court. The CFI dismissed Lorenzos complaint and Posadas counterclaim. Both parties appealed to this court.
(e) Has there been delinquency in the payment of the inheritance tax?
HELD: The judgment of the lower court is accordingly modified, with costs against the plaintiff in both instances
The defendant maintains that it was the duty of the executor to pay the inheritance tax before the delivery of the
decedents property to the trustee. Stated otherwise, the defendant contends that delivery to the trustee was
delivery to the cestui que trust, the beneficiary in this case, within the meaning of the first paragraph of subsection
(b) of section 1544 of the Revised Administrative Code. This contention is well taken and is sustained. A trustee is
but an instrument or agent for the cestui que trust
The appointment of Moore as trustee was made by the trial court in conformity with the wishes of the testator as
expressed in his will. It is true that the word trust is not mentioned or used in the will but the intention to create
one is clear. No particular or technical words are required to create a testamentary trust. The words trust and
trustee, though apt for the purpose, are not necessary. In fact, the use of these two words is not conclusive on the
question that a trust is created. To constitute a valid testamentary trust there must be a concurrence of three
(1) Sufficient words to raise a trust;
(2) a definite subject;
(3) a certain or ascertain object; statutes in some jurisdictions expressly or in effect so providing.
There is no doubt that the testator intended to create a trust. He ordered in his will that certain of his properties be
kept together undisposed during a fixed period, for a stated purpose. The probate court certainly exercised sound
judgment in appointmening a trustee to carry into effect the provisions of the will
As the existence of the trust was already proven, it results that the estate which plaintiff represents has been
delinquent in the payment of inheritance tax and, therefore, liable for the payment of interest and surcharge
provided by law in such cases.

The delinquency in payment occurred on March 10, 1924, the date when Moore became trustee. On that date trust
estate vested in him. The interest due should be computed from that date.
NOTES: Other issues:
(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.
Acording to article 657 of the Civil Code, the rights to the succession of a person are transmitted from the moment
of his death. In other words, said Arellano, C. J., . . . the heirs succeed immediately to all of the property of the
deceased ancestor. The property belongs to the heirs at the moment of the death of the ancestor as completely as
if the ancestor had executed and delivered to them a deed for the same before his death.
Whatever may be the time when actual transmission of the inheritance takes place, succession takes place in any
event at the moment of the decedents death. The time when the heirs legally succeed to the inheritance may differ
from the time when the heirs actually receive such inheritance. Thomas Hanley having died on May 27, 1922, the
inheritance tax accrued as of the date.
From the fact, however, that Thomas Hanley died on May 27, 1922, it does not follow that the obligation to pay the
tax arose as of the date. The time for the payment on inheritance tax is clearly fixed by section 1544 of the Revised
Administrative Code as amended by Act No. 3031, in relation to section 1543 of the same Code. The two sections
SEC. 1543. Exemption of certain acquisitions and transmissions. The following shall not be taxed:
(a) The merger of the usufruct in the owner of the naked title.
(b) The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the trustees.
(c) The transmission from the first heir, legatee, or donee in favor of another beneficiary, in accordance with the
desire of the predecessor. xx
SEC. 1544. When tax to be paid. The tax fixed in this article shall be paid:
(a) In the second and third cases of the next preceding section, before entrance into possession of the property.
(b) In other cases, within the six months subsequent to the death of the predecessor; but if judicial testamentary or
intestate proceedings shall be instituted prior to the expiration of said period, the payment shall be made by the
executor or administrator before delivering to each beneficiary his share.
The instant case does[not] fall under subsection (a), but under subsection (b), of section 1544 above-quoted, as
there is here no fiduciary heirs, first heirs, legatee or donee. Under the subsection, the tax should have been paid
before the delivery of the properties in question to Moore as trustee.
(b) Should the inheritance tax be computed on the basis of the value of the estate at the time of the testators 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 decedents death, regardless of any
subsequent contingency value of any subsequent increase or decrease in value
(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
(d) What law governs the case at bar? Should the provisions of Act No. 3606 favorable to the tax-payer be given
retroactive effect?
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, . . . . Act
No. 3606 itself contains no provisions indicating legislative intent to give it retroactive effect. No such effect can be
given the statute by this court.

Commissioner of Internal Revenue vs. Gonzales and the CTA

G.R. No. L-19495. November 24, 1966.
FACTS: Matias Yusay, a resident of Pototan, Iloilo, died intestate on May 13, 1948, leaving two heirs, namely, Jose S.
Yusay, a legitimate child, and Lilia Yusay Gonzales, an acknowledged natural child. Intestate proceedings for the
settlement of his estate were instituted in the Court of First Instance of Iloilo (Special Proceedings No. 459). Jose S.
Yusay was therein appointed administrator.
On May 11, 1949 Jose S. Yusay filed with the Bureau of Internal Revenue an estate and inheritance tax return
declaring that the gross estate of Matias Yusay was P187,204.00. The return mentioned no heir. Upon investigation,
however, the BIR found that several properties were not included in the return filed by Jose Yusay and that the total
gross estate of the deceased should be P219,584.32.
Based on the foregoing findings, the Bureau of Internal Revenue assessed on October 29, 1953 estate and
inheritance taxes in the sums of P6,849.78 and P16,970.63, respectively.
On July 12, 1957, an agent of the Bureau of Internal Revenue apprised the Commissioner of Internal Revenue of the
existence of a reamended project of partition. Whereupon, the Internal Revenue Commissioner caused the estate
of Matias Yusay to be reinvestigated for estate and inheritance tax liability. The CIR found a huge underdeclaration
of the gross estate of the deceased.
In view of the demise of Jose S. Yusay, said assessment was sent to his widow, Mrs. Florencia Piccio Vda. de Yusay,
who succeeded him in the administration of the estate of Matias Yusay.
No payment having been made despite repeated demands, the Commissioner of Internal Revenue filed a proof of
claim for the estate and inheritance taxes due and a motion for its allowance with the settlement court in voting
priority of lien pursuant to Section 315 of the Tax Code.
On April 13, 1960 Lilia Yusay filed a petition for review in the Court of Tax Appeals assailing the legality of the
assessment dated February 13, 1958. After hearing the parties, said Court declared the right of the Commissioner of
Internal Revenue to assess the estate and inheritance taxes in question to have prescribed.
Hence, this petition.
ISSUE: Whether or not the right of the Commissioner of Internal Revenue to assess the estate and inheritance
taxes in question has prescribed?

DECISION: NO. Lilia Yusay claims that since the latest assessment was issued only on February 13, 1958 or eight
years, nine months and two days from the filing of the estate and inheritance tax return, the Commissioner's right
to make it has expired. She would rest her stand on Section 331 of the Tax Code which limits the right of the
Commissioner to assess the tax within five years from the filing of the return.
The conclusion, however, that the return filed by Jose S. Yusay was sufficient to commence the running of the
prescriptive period under Section 331 of the Tax Code rests on no solid ground.
A return need not be complete in all particulars. It is sufficient if it complies substantially with the law. There is
substantial compliance (1) when the return is made in good faith and is not false or fraudulent; (2) when it covers
the entire period involved; and (3) when it contains information as to the various items of income, deduction and
credit with such definiteness as to permit the computation and assessment of the tax.
First, it was incomplete. It declared only ninety-three parcels of land representing about 400 hectares and left out
ninety-two parcels covering 503 hectares. Said huge under declaration could not have been the result of an oversight or mistake. As found in L-11378, supra note 7, Jose S. Yusay very well knew of the existence of the ommited
properties. Perhaps his motive in under declaring the inventory of properties attached to the return was to deprive
Lilia Yusay from inheriting her legal share in the hereditary estate, but certainly not because he honestly believed
that they did not form part of the gross estate.
Second, the return mentioned no heir. Thus, no inheritance tax could be assessed. As a matter of law, on the basis
of the return, there would be no occasion for the imposition of estate and inheritance taxes. When there is no heir
- the return showed none - the intestate estate is escheated to the State. The State taxes not itself.
The return filed in this case was so deficient that it prevented the Commissioner from computing the taxes due on
the estate. It was as though no return was made. The Commissioner had to determine and assess the taxes on data
obtained, not from the return, but from other sources. We therefore hold the view that the return in question was
no return at all as required in Section 93 of the Tax Code.
The law imposes upon the taxpayer the burden of supplying by the return the information upon which an assessment
would be based. His duty complied with, the taxpayer is not bound to do anything more than to wait for the
Commissioner to assess the tax. However, he is not required to wait forever. Section 331 of the Tax Code gives the
Commissioner five years within which to make his assessment. Except, of course, if the taxpayer failed to observe
the law, in which case Section 332 of the same Code grants the Commissioner a longer period. Non-observance
consists in filing a false or fraudulent return with intent to evade the tax or in filing no return at all.
As stated, the Commissioner came to know of the identity of the heirs on September 24, 1953 and the huge
underdeclaration in the gross estate on July 12, 1957. From the latter date, Section 94 of the Tax Code obligated him
to make a return or amend one already filed based on his own knowledge and information obtained through
testimony or otherwise, and subsequently to assess thereon the taxes due. The running of the period of limitations
under Section 332(a) of the Tax Code should therefore be reckoned from said date for, as aforesaid, it is from that
time that the Commissioner was expected by law to make his return and assess the tax due thereon. From July 12,
1957 to February 13, 1958, the date of the assessment now in dispute, less than ten years have elapsed. Hence,
prescription did not abate the Commissioner's right to issue said assessment.