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April 30, 2008
Petitioner: Rafael Dizon, in his capacity as the Judicial Administrator of the Estate
of the deceased Jose Fernandez
Respondent: CTA and CIR
Jose Fernandez died. A petition for the probate of his will was filed with the Manila
RTC, who appointed the late Supreme Court Justice Arsenio Dizon and Atty. Rafael
Dizon (petitioner herein) as administrator and assistant administrator, respectively,
of Fernandezs estate. Justice Dizon then filed an estate tax return with the BIR
Regional Office. The return showed a nil (or completely zero) estate tax liability. (The
gross value of the estate was estimated at P14 million, while the deductions
presented amounted to P187 million.)
The BIR Regional Director then issued a certification, stating that the taxes due on
the transfer of Fernandezs properties had been fully paid, and may be transferred
to his heirs.
Thereafter, Rafael Dizon (who at this point became the administrator at this point as
Justice Dizon passed away) requested the probate courts authority to sell some of
the estates properties to pay off Fernandezs creditors, namely Equitable Bank,
Banque de LIndochine, Manila Bank and State Investment House. The amounts paid
to these creditors, however, were significantly lower than their respective claims.
Some claims were lowered due to compromise agreements, while others were fully
A few months later, the Assistant Commissioner of BIR issued an Estate Tax
Assessment Notice, demanding the estate to pay around P66.9 million as deficiency
estate tax (P31.8 million as the estate tax itself, with the rest of the amount being
surcharges and penalties for late payment). The BIR basically reduced the
deductions filed beforehand, and only the amount actually paid to the creditors, and
not the amount that was due to the creditors at the time of the death of Jose
Fernandez, was allowed as a deduction.
The BIR denied the motion to reconsider the tax assessment, so the case was
elevated to the CTA, then the CA, and finally the SC.
Issue and Held: W/N the deductible amount of the estate can be adjusted by postdeath developmentsNO.
Note: The bulk of the ratio of the case is based on an evidentiary issue. Basically, in
the trials in the CTA and the CA, the BIR presented evidence that were not formally

offered, which were considered by both courts. The BIR relied on the SCs ruling in
Onate v. CA and Ramos v. Dizon, wherein the SC allowed the evidence to be used,
even if the same were not formally offered. However, in those cases, the evidence
was duly presented and marked during the pre-trial and was thus incorporated into
the records of the case. Such circumstances were completely absent in this case, so
the CTA and CA should not have considered the evidence of BIR.
Ratio (on the estate tax deductions):


Section 86 of the NIRC (then Section 79) allows as deductions from the value
of the gross estate the amounts represented as claims against the estate.
To answer the question on allowable deduction (i.e. whether the deductible
amount of the estate can be adjusted by post-death developments, such as
condonation of debts), the SC turned to the American legal system, on which
the NIRC was based.
A. There are two American theories on the issue:
1. In Propstra v. US, 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 a lesser amount did not preclude the
estate from deducting the entire amount of the claim for estate tax
purposes. This principle is called the Ithaca Trust date-of-death
valuation principle.
2. The Internal Revenue Service or IRS, on the other hand, says that postdeath developments should be taken into consideration, and that the
creditors claim should be allowed only to the extent of the amount
B. Our Supreme Court affirmed the theory stated in Propstra.
1. Elaborating on the Ithaca Trust date-of-death valuation principle, the
US court said in Propstra that the estate tax is basically a tax imposed
on the act of transferring property by will or intestacy.
2. Because the act on which the tax is imposed occurs at a very distinct
time (i.e. the instance of death of the decedent), the value of the
property transferred should be ascertained as of that time.
3. In addition, there is no Philippine law that disallows or disregards the
date-of-death valuation principle. (Remember that tax statutes are
construed strictissimi juris against the taxing authority.)
4. Also, in our Rules of Court, the term claims is generally construed to
consist of those debts which could have been enforced against the
deceased in his lifetime, or liability contracted by the deceased before
his death.
Thus, the claims existing at the time of death are significant to, and should be
made the basis of, the determination of allowable deductions.