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Republic of the Philippines

SUPREME COURT
Manila

The Court of First Instance of Zamboanga considered it proper for the best interests of ther
estate to appoint a trustee to administer the real properties which, under the will, were to pass to
Matthew Hanley ten years after the two executors named in the will, was, on March 8, 1924,
appointed trustee. Moore took his oath of office and gave bond on March 10, 1924. He acted as
trustee until February 29, 1932, when he resigned and the plaintiff herein was appointed in his
stead.

EN BANC
G.R. No. L-43082

June 18, 1937

PABLO LORENZO, as trustee of the estate of Thomas Hanley, deceased, plaintiff-appellant,


vs.
JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellant.
Pablo Lorenzo and Delfin Joven for plaintiff-appellant.
Office of the Solicitor-General Hilado for defendant-appellant.
LAUREL, J.:
On October 4, 1932, the plaintiff Pablo Lorenzo, in his capacity as trustee of the estate of
Thomas Hanley, deceased, brought this action in the Court of First Instance of Zamboanga
against the defendant, Juan Posadas, Jr., then the Collector of Internal Revenue, for the refund
of the amount of P2,052.74, paid by the plaintiff as inheritance tax on the estate of the
deceased, and for the collection of interst thereon at the rate of 6 per cent per annum, computed
from September 15, 1932, the date when the aforesaid tax was [paid under protest. The
defendant set up a counterclaim for P1,191.27 alleged to be interest due on the tax in question
and which was not included in the original assessment. From the decision of the Court of First
Instance of Zamboanga dismissing both the plaintiff's complaint and the defendant's
counterclaim, both parties appealed to this court.
It appears that on May 27, 1922, one Thomas Hanley died in Zamboanga, Zamboanga, leaving
a will (Exhibit 5) and considerable amount of real and personal properties. On june 14, 1922,
proceedings for the probate of his will and the settlement and distribution of his estate were
begun in the Court of First Instance of Zamboanga. The will was admitted to probate. Said will
provides, among other things, as follows:
4. I direct that any money left by me be given to my nephew Matthew Hanley.
5. I direct that all real estate owned by me at the time of my death be not sold or
otherwise disposed of for a period of ten (10) years after my death, and that the same
be handled and managed by the executors, and proceeds thereof to be given to my
nephew, Matthew Hanley, at Castlemore, Ballaghaderine, County of Rosecommon,
Ireland, and that he be directed that the same be used only for the education of my
brother's children and their descendants.
6. I direct that ten (10) years after my death my property be given to the above
mentioned Matthew Hanley to be disposed of in the way he thinks most
advantageous.
xxx

xxx

xxx

8. I state at this time I have one brother living, named Malachi Hanley, and that my
nephew, Matthew Hanley, is a son of my said brother, Malachi Hanley.

During the incumbency of the plaintiff as trustee, the defendant Collector of Internal Revenue,
alleging that the estate left by the deceased at the time of his death consisted of realty valued at
P27,920 and personalty valued at P1,465, and allowing a deduction of P480.81, assessed
against the estate an inheritance tax in the amount of P1,434.24 which, together with the
penalties for deliquency in payment consisting of a 1 per cent monthly interest from July 1, 1931
to the date of payment and a surcharge of 25 per cent on the tax, amounted to P2,052.74. On
March 15, 1932, the defendant filed a motion in the testamentary proceedings pending before
the Court of First Instance of Zamboanga (Special proceedings No. 302) praying that the
trustee, plaintiff herein, be ordered to pay to the Government the said sum of P2,052.74. The
motion was granted. On September 15, 1932, the plaintiff paid said amount under protest,
notifying the defendant at the same time that unless the amount was promptly refunded suit
would be brought for its recovery. The defendant overruled the plaintiff's protest and refused to
refund the said amount hausted, plaintiff went to court with the result herein above indicated.
In his appeal, plaintiff contends that the lower court erred:
I. In holding that the real property of Thomas Hanley, deceased, passed to his
instituted heir, Matthew Hanley, from the moment of the death of the former, and that
from the time, the latter became the owner thereof.
II. In holding, in effect, that there was deliquency in the payment of inheritance tax due
on the estate of said deceased.
III. In holding that the inheritance tax in question be based upon the value of the
estate upon the death of the testator, and not, as it should have been held, upon the
value thereof at the expiration of the period of ten years after which, according to the
testator's will, the property could be and was to be delivered to the instituted heir.
IV. In not allowing as lawful deductions, in the determination of the net amount of the
estate subject to said tax, the amounts allowed by the court as compensation to the
"trustees" and paid to them from the decedent's estate.
V. In not rendering judgment in favor of the plaintiff and in denying his motion for new
trial.
The defendant-appellant contradicts the theories of the plaintiff and assigns the following error
besides:
The lower court erred in not ordering the plaintiff to pay to the defendant the sum of
P1,191.27, representing part of the interest at the rate of 1 per cent per month from
April 10, 1924, to June 30, 1931, which the plaintiff had failed to pay on the inheritance
tax assessed by the defendant against the estate of Thomas Hanley.
The following are the principal questions to be decided by this court in this appeal: (a) When
does the inheritance tax accrue and when must it be satisfied? (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? (c) In determining the net value of the estate subject to tax, is it proper to
deduct the compensation due to trustees? (d) What law governs the case at bar? Should the
provisions of Act No. 3606 favorable to the tax-payer be given retroactive effect? (e) Has there
been deliquency in the payment of the inheritance tax? If so, should the additional interest
claimed by the defendant in his appeal be paid by the estate? Other points of incidental
importance, raised by the parties in their briefs, will be touched upon in the course of this
opinion.
(a) 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, giftmortis 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. (61 C. J., p. 1592.) 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.
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." (Bondad vs. Bondad, 34 Phil.,
232. See also, Mijares vs. Nery, 3 Phil., 195; Suilong & Co., vs. Chio-Taysan, 12 Phil., 13;
Lubrico vs. Arbado, 12 Phil., 391; Innocencio vs. Gat-Pandan, 14 Phil., 491; Aliasas
vs.Alcantara, 16 Phil., 489; Ilustre vs. Alaras Frondosa, 17 Phil., 321; Malahacan vs. Ignacio, 19
Phil., 434; Bowa vs. Briones, 38 Phil., 27; Osario vs. Osario & Yuchausti Steamship Co., 41
Phil., 531; Fule vs. Fule, 46 Phil., 317; Dais vs. Court of First Instance of Capiz, 51 Phil., 396;
Baun vs. Heirs of Baun, 53 Phil., 654.) Plaintiff, however, asserts that while article 657 of the
Civil Code is applicable to testate as well as intestate succession, it operates only in so far as
forced heirs are concerned. But the language of article 657 of the Civil Code is broad and makes
no distinction between different classes of heirs. That article does not speak of forced heirs; it
does not even use the word "heir". It speaks of the rights of succession and the transmission
thereof from the moment of death. The provision of section 625 of the Code of Civil Procedure
regarding the authentication and probate of a will as a necessary condition to effect transmission
of property does not affect the general rule laid down in article 657 of the Civil Code. 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. "Poco importa", says Manresa commenting on article 657 of the Civil Code, "que
desde el falleimiento del causante, hasta que el heredero o legatario entre en posesion de los
bienes de la herencia o del legado, transcurra mucho o poco tiempo, pues la adquisicion ha de
retrotraerse al momento de la muerte, y asi lo ordena el articulo 989, que debe considerarse
como complemento del presente." (5 Manresa, 305; see also, art. 440, par. 1, Civil Code.)
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 follow:
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.
In the last two cases, if the scale of taxation appropriate to the new beneficiary is
greater than that paid by the first, the former must pay the difference.
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.
If the tax is not paid within the time hereinbefore prescribed, interest at the rate of
twelve per centum per annum shall be added as part of the tax; and to the tax and
interest due and unpaid within ten days after the date of notice and demand thereof by
the collector, there shall be further added a surcharge of twenty-five per centum.
A certified of all letters testamentary or of admisitration shall be furnished the Collector
of Internal Revenue by the Clerk of Court within thirty days after their issuance.
It should be observed in passing that the word "trustee", appearing in subsection (b) of section
1543, should read "fideicommissary" or "cestui que trust". There was an obvious mistake in
translation from the Spanish to the English version.
The instant case does 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 P.
J. M. Moore as trustee on March 10, 1924.
(b) The plaintiff contends that the estate of Thomas Hanley, in so far as the real properties are
concerned, did not and could not legally pass to the instituted heir, Matthew Hanley, until after
the expiration of ten years from the death of the testator on May 27, 1922 and, that the
inheritance tax should be based on the value of the estate in 1932, or ten years after the
testator's death. The plaintiff introduced evidence tending to show that in 1932 the real
properties in question had a reasonable value of only P5,787. This amount added to the value of
the personal property left by the deceased, which the plaintiff admits is P1,465, would generate
an inheritance tax which, excluding deductions, interest and surcharge, would amount only to
about P169.52.
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 vlaue 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. (61 C. J., pp. 1692, 1693; 26 R. C. L., p. 232;

Blakemore and Bancroft, Inheritance Taxes, p. 137. See also Knowlton vs. Moore, 178 U.S., 41;
20 Sup. Ct. Rep., 747; 44 Law. ed., 969.) "The right of the state to an inheritance tax accrues at
the moment of death, and hence is ordinarily measured as to any beneficiary by the value at that
time of such property as passes to him. Subsequent appreciation or depriciation is immaterial."
(Ross, Inheritance Taxation, p. 72.)
Our attention is directed to the statement of the rule in Cyclopedia of Law of and Procedure (vol.
37, pp. 1574, 1575) that, in the case of contingent remainders, taxation is postponed until the
estate vests in possession or the contingency is settled. This rule was formerly followed in New
York and has been adopted in Illinois, Minnesota, Massachusetts, Ohio, Pennsylvania and
Wisconsin. This rule, horever, is by no means entirely satisfactory either to the estate or to those
interested in the property (26 R. C. L., p. 231.). Realizing, perhaps, the defects of its anterior
system, we find upon examination of cases and authorities that New York has varied and now
requires the immediate appraisal of the postponed estate at its clear market value and the
payment forthwith of the tax on its out of the corpus of the estate transferred. (In re Vanderbilt,
172 N. Y., 69; 69 N. E., 782; In re Huber, 86 N. Y. App. Div., 458; 83 N. Y. Supp., 769; Estate of
Tracy, 179 N. Y., 501; 72 N. Y., 519; Estate of Brez, 172 N. Y., 609; 64 N. E., 958; Estate of Post,
85 App. Div., 611; 82 N. Y. Supp., 1079. Vide also, Saltoun vs. Lord Advocate, 1 Peter. Sc. App.,
970; 3 Macq. H. L., 659; 23 Eng. Rul. Cas., 888.) California adheres to this new rule (Stats.
1905, sec. 5, p. 343).
But whatever may be the rule in other jurisdictions, we hold that a 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) Certain items are required by law to be deducted from the appraised gross in arriving at the
net value of the estate on which the inheritance tax is to be computed (sec. 1539, Revised
Administrative Code). In the case at bar, the defendant and the trial court allowed a deduction of
only P480.81. This sum represents the expenses and disbursements of the executors until
March 10, 1924, among which were their fees and the proven debts of the deceased. The
plaintiff contends that the compensation and fees of the trustees, which aggregate P1,187.28
(Exhibits C, AA, EE, PP, HH, JJ, LL, NN, OO), should also be deducted under section 1539 of
the Revised Administrative Code which provides, in part, as follows: "In order to determine the
net sum which must bear the tax, when an inheritance is concerned, there shall be deducted, in
case of a resident, . . . the judicial expenses of the testamentary or intestate proceedings, . . . ."
A trustee, no doubt, is entitled to receive a fair compensation for his services (Barney vs.
Saunders, 16 How., 535; 14 Law. ed., 1047). 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 (61 C. J., p. 1705).
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. (Ibid.; In
re Vanneck's Estate, 161 N. Y. Supp., 893; 175 App. Div., 363; In re Collard's Estate, 161 N. Y.
Supp., 455.) 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 (61 C. J., p. 1705) but,
in State vs. Hennepin County Probate Court (112 N. W., 878; 101 Minn., 485), it was said: ". . .
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 of that here before the court, are created for the 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) 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 above-mentioned, 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 (26 R. C. L., p. 206; 4 Cooley on Taxation, 4th ed., p. 3461). The taxpayer
can not 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." (Seattle vs. Kelleher, 195 U.
S., 360; 49 Law. ed., 232 Sup. Ct. Rep., 44.) But legislative intent that a tax statute should
operate retroactively should be perfectly clear. (Scwab vs. Doyle, 42 Sup. Ct. Rep., 491;
Smietanka vs. First Trust & Savings Bank, 257 U. S., 602; Stockdale vs. Insurance Co., 20 Wall.,
323; Lunch vs. Turrish, 247 U. S., 221.) "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, . . . ." (61 C. J., P.
1602.) Though the last paragraph of section 5 of Regulations No. 65 of the Department of
Finance makes section 3 of Act No. 3606, amending section 1544 of the Revised Administrative
Code, applicable to all estates the inheritance taxes due from which have not been paid, Act No.
3606 itself contains no provisions indicating legislative intent to give it retroactive effect. No such
effect can begiven the statute by this court.
The defendant Collector of Internal Revenue maintains, however, that certain provisions of Act
No. 3606 are more favorable to the taxpayer than those of Act No. 3031, that said provisions are
penal in nature and, therefore, should operate retroactively in conformity with the provisions of
article 22 of the Revised Penal Code. This is the reason why he applied Act No. 3606 instead of
Act No. 3031. Indeed, under Act No. 3606, (1) the surcharge of 25 per cent is based on the tax
only, instead of on both the tax and the interest, as provided for in Act No. 3031, and (2) the
taxpayer is allowed twenty days from notice and demand by rthe Collector of Internal Revenue
within which to pay the tax, instead of ten days only as required by the old law.
Properly speaking, a statute is penal when it imposes punishment for an offense committed
against the state which, under the Constitution, the Executive has the power to pardon. In
common use, however, this sense has been enlarged to include within the term "penal statutes"
all status which command or prohibit certain acts, and establish penalties for their violation, and
even those which, without expressly prohibiting certain acts, impose a penalty upon their
commission (59 C. J., p. 1110). Revenue laws, generally, which impose taxes collected by the
means ordinarily resorted to for the collection of taxes are not classed as penal laws, although
there are authorities to the contrary. (See Sutherland, Statutory Construction, 361; Twine Co. vs.
Worthington, 141 U. S., 468; 12 Sup. Ct., 55; Rice vs. U. S., 4 C. C. A., 104; 53 Fed., 910; Com.
vs. Standard Oil Co., 101 Pa. St., 150; State vs. Wheeler, 44 P., 430; 25 Nev. 143.) Article 22 of
the Revised Penal Code is not applicable to the case at bar, and in the absence of clear
legislative intent, we cannot give Act No. 3606 a retroactive effect.
(e) The plaintiff correctly states that the liability to pay a tax may arise at a certain time and the
tax may be paid within another given time. As stated by this court, "the mere failure to pay one's
tax does not render one delinqent until and unless the entire period has eplased within which the
taxpayer is authorized by law to make such payment without being subjected to the payment of
penalties for fasilure to pay his taxes within the prescribed period." (U. S. vs. Labadan, 26 Phil.,
239.)

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. Stated otherwise, the defendant contends
that delivery to the trustee was delivery to the cestui que trust, the beneficiery 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. The appointment of P. J. M.
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 (69 C. J., p. 711). 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 (69 C. J., p. 714). "To create a trust by will the testator must indicate in the will
his intention so to do by using language sufficient to separate the legal from the equitable estate,
and with sufficient certainty designate the beneficiaries, their interest in the ttrust, the purpose or
object of the trust, and the property or subject matter thereof. Stated otherwise, to constitute a
valid testamentary trust there must be a concurrence of three circumstances: (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." (69 C. J., pp. 705,706.) 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 appointment a trustee to carry into effect the provisions of the will
(see sec. 582, Code of Civil Procedure).
P. J. M. Moore became trustee on March 10, 1924. On that date trust estate vested in him (sec.
582 in relation to sec. 590, Code of Civil Procedure). 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 esse delivery of the
same estate to the cestui que trust, the beneficiary in this case. A trustee is but an instrument or
agent for thecestui que trust (Shelton vs. King, 299 U. S., 90; 33 Sup. Ct. Rep., 689; 57 Law.
ed., 1086). When Moore accepted the trust and took possesson of the trust estate he thereby
admitted that the estate belonged not to him but to his cestui que trust (Tolentino vs. Vitug, 39
Phil.,126, cited in 65 C. J., p. 692, n. 63). He did not acquire any beneficial interest in the estate.
He took such legal estate only as the proper execution of the trust required (65 C. J., p. 528)
and, his estate ceased upon the fulfillment of the testator's wishes. The estate then vested
absolutely in the beneficiary (65 C. J., p. 542).
The highest considerations of public policy also justify the conclusion we have reached. Were
we to hold that the payment of the tax could be postponed or delayed by the creation of a trust
of the type at hand, the result would be plainly disastrous. Testators may provide, as Thomas
Hanley has provided, that their estates be not delivered to their beneficiaries until after the lapse
of a certain period of time. In the case at bar, the period is ten years. In other cases, the trust
may last for fifty years, or for a longer period which does not offend the rule against petuities.
The collection of the tax would then be left to the will of a private individual. The mere suggestion
of this result is a sufficient warning against the accpetance of the essential to the very
exeistence of government. (Dobbins vs. Erie Country, 16 Pet., 435; 10 Law. ed., 1022; Kirkland
vs. Hotchkiss, 100 U. S., 491; 25 Law. ed., 558; Lane County vs. Oregon, 7 Wall., 71; 19 Law.
ed., 101; Union Refrigerator Transit Co. vs. Kentucky, 199 U. S., 194; 26 Sup. Ct. Rep., 36; 50
Law. ed., 150; Charles River Bridge vs. Warren Bridge, 11 Pet., 420; 9 Law. ed., 773.) The
obligation to pay taxes rests not upon the privileges enjoyed by, or the protection afforded to, a
citizen by the government but upon the necessity of money for the support of the state (Dobbins
vs. Erie Country, supra). For this reason, no one is allowed to object to or resist the payment of
taxes solely because no personal benefit to him can be pointed out. (Thomas vs. Gay, 169 U. S.,
264; 18 Sup. Ct. Rep., 340; 43 Law. ed., 740.) While courts will not enlarge, by construction, the
government's power of taxation (Bromley vs. McCaughn, 280 U. S., 124; 74 Law. ed., 226; 50
Sup. Ct. Rep., 46) they also will not place upon tax laws so loose a construction as to permit
evasions on merely fanciful and insubstantial distictions. (U. S. vs. Watts, 1 Bond., 580; Fed.

Cas. No. 16,653; U. S. vs. Wigglesirth, 2 Story, 369; Fed. Cas. No. 16,690, followed in Froelich
& Kuttner vs. Collector of Customs, 18 Phil., 461, 481; Castle Bros., Wolf & Sons vs. McCoy, 21
Phil., 300; Muoz & Co. vs. Hord, 12 Phil., 624; Hongkong & Shanghai Banking Corporation vs.
Rafferty, 39 Phil., 145; Luzon Stevedoring Co. vs. Trinidad, 43 Phil., 803.) When proper, a tax
statute should be construed to avoid the possibilities of tax evasion. Construed this way, the
statute, without resulting in injustice to the taxpayer, becomes fair to the government.
That taxes must be collected promptly is a policy deeply intrenched in our tax system. Thus, no
court is allowed to grant injunction to restrain the collection of any internal revenue tax ( sec.
1578, Revised Administrative Code; Sarasola vs. Trinidad, 40 Phil., 252). In the case of Lim Co
Chui vs. Posadas (47 Phil., 461), this court had occassion to demonstrate trenchment
adherence to this policy of the law. It held that "the fact that on account of riots directed against
the Chinese on October 18, 19, and 20, 1924, they were prevented from praying their internal
revenue taxes on time and by mutual agreement closed their homes and stores and remained
therein, does not authorize the Collector of Internal Revenue to extend the time prescribed for
the payment of the taxes or to accept them without the additional penalty of twenty five per
cent." (Syllabus, No. 3.)
". . . It is of the utmost importance," said the Supreme Court of the United States, ". . . that the
modes adopted to enforce the taxes levied should be interfered with as little as possible. Any
delay in the proceedings of the officers, upon whom the duty is developed of collecting the taxes,
may derange the operations of government, and thereby, cause serious detriment to the public."
(Dows vs. Chicago, 11 Wall., 108; 20 Law. ed., 65, 66; Churchill and Tait vs. Rafferty, 32 Phil.,
580.)
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.
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. The provisions cases is mandatory (see and cf. Lim Co Chui vs.
Posadas, supra), and neither the Collector of Internal Revenuen or this court may remit or
decrease such interest, no matter how heavily it may burden the taxpayer.
To the tax and interest due and unpaid within ten days after the date of notice and demand
thereof by the Collector of Internal Revenue, a surcharge of twenty-five per centum should be
added (sec. 1544, subsec. (b), par. 2, Revised Administrative Code). Demand was made by the
Deputy Collector of Internal Revenue upon Moore in a communiction dated October 16, 1931
(Exhibit 29). The date fixed for the payment of the tax and interest was November 30, 1931.
November 30 being an official holiday, the tenth day fell on December 1, 1931. As the tax and
interest due were not paid on that date, the estate became liable for the payment of the
surcharge.
In view of the foregoing, it becomes unnecessary for us to discuss the fifth error assigned by the
plaintiff in his brief.
We shall now compute the tax, together with the interest and surcharge due from the estate of
Thomas Hanley inaccordance with the conclusions we have reached.
At the time of his death, the deceased left real properties valued at P27,920 and personal
properties worth P1,465, or a total of P29,385. Deducting from this amount the sum of P480.81,
representing allowable deductions under secftion 1539 of the Revised Administrative Code, we
have P28,904.19 as the net value of the estate subject to inheritance tax.

The primary tax, according to section 1536, subsection (c), of the Revised Administrative Code,
should be imposed at the rate of one per centum upon the first ten thousand pesos and two per
centum upon the amount by which the share exceed thirty thousand pesos, plus an additional
two hundred per centum. One per centum of ten thousand pesos is P100. Two per centum of
P18,904.19 is P378.08. Adding to these two sums an additional two hundred per centum, or
P965.16, we have as primary tax, correctly computed by the defendant, the sum of P1,434.24.
To the primary tax thus computed should be added the sums collectible under section 1544 of
the Revised Administrative Code. First should be added P1,465.31 which stands for interest at
the rate of twelve per centum per annum from March 10, 1924, the date of delinquency, to
September 15, 1932, the date of payment under protest, a period covering 8 years, 6 months
and 5 days. To the tax and interest thus computed should be added the sum of P724.88,
representing a surhcarge of 25 per cent on both the tax and interest, and also P10, the
compromise sum fixed by the defendant (Exh. 29), giving a grand total of P3,634.43.
As the plaintiff has already paid the sum of P2,052.74, only the sums of P1,581.69 is legally due
from the estate. This last sum is P390.42 more than the amount demanded by the defendant in
his counterclaim. But, as we cannot give the defendant more than what he claims, we must hold
that the plaintiff is liable only in the sum of P1,191.27 the amount stated in the counterclaim.

Republic of the Philippines


SUPREME COURT
Manila
EN BANC
G.R. No. L-11622

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

The judgment of the lower court is accordingly modified, with costs against the plaintiff in both
instances. So ordered.
Avancea, C.J., Abad Santos, Imperial, Diaz and Concepcion, JJ., concur.
Villa-Real, J., concurs.

January 28, 1961

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

Personal Property

P43,500.00

(1) 177 shares of stock of Canacao Estate at P10.00


each

Funeral expenses ($1,04326)

P2,086.52

1,770.00

Judicial Expenses:
(2) 210,000 shares of stock of Mindanao Mother Lode
Mines, Inc. at P0.38 per share

79,800.00
(a) Administrator's Fee

(3) Cash credit with Canacao Estate Inc.

(4) Cash, with the Chartered Bank of India, Australia &


China

Total Gross Assets

P1,204.34

4,870.88
(b) Attorney's Fee

6.000.00

(c) Judicial and Administration expenses as of


August 9, 1952

1,400.05

851.97

P130,792.85
8,604.39

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:

Real Estate Tax for 1951 on Baguio real


properties (O.R. No. B-1 686836)

Claims against the estate:


($5,000.00) P10,000.00

Plus: 4% int. p.a. from Feb. 2 to 22, 1951

Sub-Total

652.50

P10,000.00

22.47

10,022.47

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 () 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 () 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. "AA2", 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

2) Attorney's fee

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

Total

P1,204.34

6,000.00

2,052.55

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.

Republic of the Philippines


SUPREME COURT
Manila

Paras, C.J., Bengzon, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Gutierrez David,
Paredes and Dizon, JJ., concur.

EN BANC
G.R. No. L-29204

December 29, 1928

RUFINA ZAPANTA, ET AL., plaintiffs-appellees,


vs.
JUAN POSADAS, JR., ET AL., defendants-appellants.
--------------------------------G.R. No. L-29205

December 29, 1928

ROSARIO PINEDA, plaintiff-appellee,


vs.
JUAN POSADAS, JR., ET AL., defendants-appellants.
--------------------------------G.R. No. L-29206

December 29, 1928

OLIMPIO GUANZON, ET AL., plaintiffs-appellees,


vs.
JUAN POSADAS, JR., ET AL., defendants-appellants.
---------------------------------

G.R. No. L-29207

December 29, 1928

LEONCIA PINEDA, ET AL., plaintiffs-appellees,


vs.
JUAN POSADAS, JR., ET AL., defendants-appellants.
--------------------------------G.R. No. L-29208

December 29, 1928

EMIGDIO DAVID, ET AL., plaintiffs-appellees,


vs.
JUAN POSADAS, JR., ET AL., defendants-appellants.
--------------------------------G.R. No. L-29209

December 29, 1928

GERONIMA PINEDA, plaintiff-appellees,


vs.
JUAN POSADAS, JR., ET AL., defendants-appellants.
Office of the Solicitor-General Reyes for appellants.
Aurelio Pineda for appellees.

AVANCEA, C. J.:
Father Braulio Pineda died in January 1925 without any ascendants or descendants leaving a
will in which he instituted his sister Irene Pineda as his sole heiress. During his lifetime Father
Braulio donated some of his property by the instruments to the six plaintifffs, severally, with the
condition that some of them would pay him a certain amount of rice, and others of money every
year, and with the express provision that failure to fulfill this condition would revoke the
donations ipso facto. These six plaintiff-donees are relatives, and some of them brothers of
Father Braulio Pineda. The donations contained another clause that they would take effect upon
acceptance. They were accepted during Father Braulio's lifetime by every one of the donees.
Every one of the six plaintiffs filed a separate action against the Collector of Internal Revenue
and his deputy for the sums of which each of them paid, under protest, as inheritance tax on the
property donated to them, in accordance with section 1536 of the Administrative Code, as
amended by section 10 of Act No. 2835, and by section 1 of Act No. 3031. Section 1536 of the
Administrative Code reads:
Every transmission by virtue of inheritance, devise, bequest, gift mortis causa or
advance in anticipation of inheritance, devise, or bequest of real property located in
the Philippine Islands and real rights in such property; . . .
The trial court in deciding these six cases, held that the donations to the six plaintiffs made by
the deceased Father Braulio Pineda are donations inter vivos, and therefore, not subject to the

inheritance tax, and ordered the defendants to return to each of the plaintiffs the sums paid by
the latter.
The defendants appealed from this judgment.
The whole quetion involved in this appeal resolves into whether the donations made by Father
Braulio Pineda to each of the plaintiffs are donations inter vivos, or mortis causa, for it is the
latter upon which the Administrative Code imposes inheritance tax. In our opinion, said
donations are inter vivos. It is so expressly stated in the instruments in which they appear. They
were made in consideration of the donor's affection for the donees, and of the services they had
rendered him, but he has charged them with the obligation to pay him a certain amount of rice
and money, respectively, each year during his lifetime, the donations to become effective upon
acceptance. They are therefore not in the nature of donations mortis causa but inter vivos.
The principal characteristics of a donation mortis causa, which distinguish it essentially from a
donation inter vivos, are that in the former it is the donor's death that determines the acquisition
of, or the right to, the property, and that it is revocable at the will of the donor. In the donations in
question, their effect, that is, the acquisition of, or the right to, the property, was produced while
the donor was still alive, for according to their expressed terms they were to have this effect
upon acceptance, and this took place during the donor's lifetime. The nature of these donations
is not affected by the fact that they were subject to a condition, since it was imposed as a
resolutory condition, and in this sense, it is necessarily implies that the right came into existence
first as well as its effect, because otherwise there would be nothing to resolve upon the
nonfulfillment of the condition imposed. Neither does the fact that these donations are revocable,
give them the character of donations mortis causa, inasmuch as the revocation is not the failure
to fulfill the condition imposed. In relation to the donor's will alone, these donations are
irrevocable. On the other hand, this condition, in so far as it renders the donation onerous, takes
it further away from the disposition mortis causa and brings it nearer to contract. In this sense,
by virtue of this condition imposed, they are not donations throughout their full extent, but only
so far as they exceed the incumbrance imposed, for so far as concerns the portion equivalent to
or less than said incumbrance, it has the nature of a real contract and is governed by the rule on
contracts (art. 622 of the Civil Code). And in the part in which it is strictly a donation, it is a
donation inter vivos, because its effect was produced by the donees' acceptance during the
donor's lifetime and was not determined by the donor's death. Upon being accepted they had full
effect. If the donor's life is mentioned in connection with this condition, it is only fix the donor's
death as the end of the term within which the condition must be fulfilled, and not because such
death of the donor is the cause which determines the birth of the right to the donation. The
property donated passed to the ownership of the donees from the acceptance of the donations,
and these could not be revoked except upon the nonfulfillment of the condition imposed, or for
other causes prescribed by the law, but not by mere will of the donor.
Neither can these donations be considered as an advance on inheritance or legacy, according to
the terms of section 1536 of the Administrative Code, because they are neither an inheritance
nor a legacy. And it cannot be said that the plaintiffs received such advance on inheritance or
legacy, since they were not heirs or legatees of their predessor in interest upon his death (sec.
1540 of the Administrative Code). Neither can it be said that they obtained this inheritance or
legacy by virtue of a document which does not contain the requisites of a will (sec. 618 of the
Code of Civil Pocedure).1awphi1.net
Besides, if the donations made by the plaintiffs are, as the appellants contended, mortis causa,
then they must be governed by the law on testate succession (art. 620 of the Civil Code). In
such a case, the documents in which these donations appear, being instruments which do not
contain the requisites of a will, are not valid to transmit the property to the donees (sec. 618,
Code of Civil Procedure.) Then the defendants are not justified in collecting from the donees the
inheritance tax, on property which has not been legally transferred to them, and in which they
acquired no right.

For these reasons the judgment appealed from is affirmed, without special pronouncement as to
costs. So ordered.
Johnson, Malcolm, Villamor, Romualdez and Villa-Real, JJ., concur.
Ostrand and Johns, JJ., dissent.
Separate Opinions
STREET, J., dissenting:
Of course I agree with so much of the discussion in the majority opinion as declarees that the
various donations made prior to his death by Rev. Braulio Pineda to various nephews and nieces
were not donations mortis causa. But this is by no means decisive of the case. Among the forms
of succession which are by law made subject to the inheritance tax are advances in anticipation
of inheritance (Adm. Code, sec. 1536, as amended); and I consider these donations to be
taxable in that character. The device adopted in this case for the distribution of the bulk of the
donor's property before his death is, to my mind, a transparent attempt at an evasion of the tax.
The donations in question were made to all persons who would have been entitled to inherit if no
will had been made, except one; and this one was instituted as sole heir in the will. If no will had
been left, all of the donees and the heir instituted in the will would have shared jointly in the
estate by regular succession. It is thus seen that the making of the donations and the making of
the will were part of a single purpose, which was, to effect the distribution of the donor's property.
What else is necessary to make an advance "in anticipation of inheritance?"
The suggestion in the opinion that the institution of another person as heir in the will had effect of
destroying the capacity of the donees to take as heirs, is not well founded, for the question
whether these donations should be considered advances in anticipation of inheritance ought to
be determined with reference to the situation at the time the donations were made. The very
reason that the prospective heir to whom no donation had been made was instituted as sole heir
in the will is of course found in the fact that advances had already been made to the others. The
purpose of the statute was to impose a tax on successions; and in order to prevent the
successful use of devices of this kind, the lawmaker expressly made the tax applicable to
advance in anticipation inheritance. If the situation before us is not within both the letter and
meaning of that provision, the undersigned has entirely misinterpreted its purport.

Republic of the Philippines


SUPREME COURT
Manila
EN BANC
G.R. No. L-30885

January 23, 1930

ALFONSO TUASON Y ANGELES and MARIANO TUASON Y ANGELES, plaintiffs-appellees,


vs.
JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellant.
Attorney-General Jaranilla for appellant.
Salvador Franco for appellees.
AVANCEA, C.J.:
On September 15, 1922, Esperanza Tuason y Chuajap made a donation inter vivos of certain
property to plaintiff Mariano Tuason y Angeles. On April 30, 1923, she made another
donation inter vivos to Alfonso Tuason y Angeles, the other plaintiff. On January 5, 1926, she
died of senile weakness at the age of 73, leaving a will bequeathing of P5,025 to Mariano
Tuason y Angeles. Her judicial administratrix paid the prescribed inheritance tax on these two
bequests.
Furthermore, the defendant collected the sums of P3,809.76 and P6,653.64 from plaintiffs
Mariano Tuason y Angeles and Alfonso Tuason y Angeles against their opposition and over their
protest as inheritance tax upon the gifts inter vivos made to them.
The plaintiffs brought this action against the Collector of Internal Revenue for the recovery of the
amounts of P3,809.76 and P6,653.64 collected from them as inheritance tax.

The judgment appealed from ordered the defendant to return the amounts claimed to the
plaintiffs.
The appellant contends that the collection of these amounts as inheritance tax is authorized by
the law.

cases, the principle of uniformity is inapplicable to them. Aside from this, in regard to other
aspects, we see nothing against the constitutionality of the law (Bromley vs. McCaughn [1929],
U. S. Supreme Court Advance Opinions, p. 69).
The judgment appealed from is reversed, and the defendant is absolved from the complaint,
without special pronouncement of costs. So ordered.

Section 1536 of the Administrative Code provides:


Malcolm, Villamor, Ostrand, Johns and Romualdez, JJ., concur.
SEC. 1536. Conditions and rate of taxation. Every transmission by virtue of
inheritance, devise, bequest, gift mortis causa, or advance in anticipation of
inheritance, devise, or bequest shall be subject to the following tax;

Separate Opinions
STREET, J., dissenting:

xxx

xxx

xxx

Section 1539 enumerates the deductions to be made in determining the net sum which must
bear the tax.
Section 1540 then provides:
SEC. 1540. Additions of gifts and advances. After the aforementioned deductions
have been made, there shall be added to the resulting amount the value of all gifts or
advances made by the predecessor to any of those who, after his death, shall prove to
be his heirs, devisees, legatees, or donees mortis causa.
When the law say all gifts, it doubtless refers to gifts inter vivos, and not mortis causa. Both the
letter and the spirit of the law leave no room for any other interpretation. Such, clearly, is the
tenor of the language which refers to donation that took effect before the donor's death, and not
to mortis causa donations, which can only be made with the formalities of a will, and can only
take effect after the donor's death. Any other construction would virtually change this provision
into:
. . . there shall be added to the resulting amount the value of all gifts mortis causa . . .
made by the predecessor to those who, after his death, shall prove to be his . . .
donees mortis causa." We cannot give to the law an interpretation that would so vitiate
its language. The truth of the matter is that in this section (1540) the law presumes
that such gifts have been made in anticipation of inheritance, devise, bequest, or
gift mortis causa, when the donee, after the death of the donor proves to be his heir,
devisee or donee mortis causa, for the purpose of evading the tax, and it is to prevent
this that it provides that they shall be added to the resulting amount.
This being so, and it appearing that the appellees after the death of Esperanza Tuason y
Chuajap, were found to be legatees under her will, the donation inter vivos she had made to
them in 1922 and 1923, must be added to the net amount that is to be taxed.
In the course of the deliberations of this court on this case, the question arose as to whether or
not that interpretation of the law would be constitutional. But as the parties did not raise this
question in the court below, nor in this court, we cannot consider it. At any rate the argument
adduced against its constitutionality, which is the lack of uniformity, does not seem to be wellfounded. It was said that under such an interpretation, while a doneeinter vivos who, after the
predecessor's death prove to be an heir, a legatee, or a donee mortis causa, would have to pay
the tax, another donee inter vivos who did not prove to be an heir, a legatee, or a donee mortis
causaof the predecessor, would be exempt from such a tax. But as these are two different

The two plaintiffs in this case are suing to recover two several sums of money, the payment of
which has been exacted from them in the character of taxes upon inheritance, and it is very
manifest to me that the taxes in question were imposed, and have been collected, in violation of
that portion of section 3 of the Autonomy Act (Jones Law) which declares that the rule of taxation
in these Islands shall be uniform. To demonstrate this conclusion it is desirable to fix in the mind
the exact state of fact upon which the decision should turn. In this connection we note that the
plaintiffs are not persons who would have inherited any part of the estate of Esperanza Tuason y
Chuajap, if she had died intestate. It is clear therefore that the donations made to the two
plaintiffs in 1922 and 1923, respectively, were not made "in anticipation of inheritance," and they
are therefore not taxable in that character. The gifts in question were donations inter vivos, and
as such they should be free from the inheritance tax.
But it happened that the donor, in a will executed late in 1925, gave two legacies of about
P5,000 each to the two plaintiffs. These two legacies were of course subject to the legacy tax
imposed by law, and those taxes have been paid without question. Nevertheless, under the
decision now before us, the giving of those legacies has the effect of making the gifts of 1922
and 1923 to the plaintiffs taxable in the character of inheritances. This substitutes mere caprice
for uniformity.
Further to illustrate this, let it be supposed that a person, desirous of conferring a benefit upon
two persons held in about equal esteem, makes a gift of P10,000 to one and P9,900 to the
other. In a subsequent will, in order to equalize the gifts, the same benefactor gives a legacy of
P100 to the second donee. Under the statute, as interpreted by the court, the first donee is not
liable to any inheritance tax, but the second is liable upon the entire amount first given to him.
This shows the lack of logical relation between the incidence of the tax and the fact taken as a
basis for its imposition.
It will be noted that we do not here question the proposition that section 1540 of the
Administrative Code might lawfully operate upon a donee who at the time of receiving the
gift inter vivos belongs to the class who could take by intestate succession, in the absence of a
will, for in this case the donation may be made in anticipation of inheritance (sec. 1536, Adm.
Code). It was for this very reason that the undersigned sustained the position in Zapanta vs.
Posadas (52 Phil., 557), that the gifts there made were taxable. But section 1540 of the
Administrative Code cannot, in my opinion, properly be interpreted to extend to gifts inter
vivos made to a person not in a position to take as heir of the donor dying intestate.
In closing I wish to point out that the vital difference between this case and that under
consideration in Zapanta vs. Posadas, supra, is that in the latter case the donees were persons
who would have been heirs of the donor if the latter had died intestate, while in this case the
donees are not in such position.

The judgment, in my opinion, should have been affirmed.


Johnson and Villa-Real, JJ., concur.

The only evidence introduced at the trial of this cause was the proof of payment of the tax under
protest, as stated, and the deed of gift executed by Felix Dison on April 9, 1928, in favor of his
sons Luis W. Dison, the plaintiff-appellant. This deed of gift transferred twenty-two tracts of land
to the donee, reserving to the donor for his life the usufruct of three tracts. This deed was
acknowledged by the donor before a notary public on April 16, 1928. Luis W. Dison, on April 17,
1928, formally accepted said gift by an instrument in writing which he acknowledged before a
notary public on April 20, 1928.
At the trial the parties agreed to and filed the following ingenious stipulation of fact:
1. That Don Felix Dison died on April 21, 1928;
2. That Don Felix Dison, before his death, made a gift inter vivos in favor of the plaintiff
Luis W. Dison of all his property according to a deed of gift (Exhibit D) which includes
all the property of Don Felix Dizon;
3. That the plaintiff did not receive property of any kind of Don Felix Dison upon the
death of the latter;
4. That Don Luis W. Dison was the legitimate and only child of Don Felix Dison.

Republic of the Philippines


SUPREME COURT
Manila
EN BANC
G.R. No. L-36770

It is inferred from Exhibit D that Felix Dison was a widower at the time of his death.
The theory of the plaintiff-appellant is that he received and holds the property mentioned by a
consummated gift and that Act No. 2601 (Chapter 40 of the Administrative Code) being the
inheritance tax statute, does not tax gifts. The provision directly here involved is section 1540 of
the Administrative Code which reads as follows:

November 4, 1932

LUIS W. DISON, plaintiff-appellant,


vs.
JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellant.
Marcelino Aguas for plaintiff-appellant.
Attorney-General Jaranilla for defendant-appellant.

BUTTE, J.:
This is an appeal from the decision of the Court of First Instance of Pampanga in favor of the
defendant Juan Posadas, Jr., Collector of Internal Revenue, in a suit filed by the plaintiffs, Luis
W. Dison, for the recovery of an inheritance tax in the sum of P2,808.73 paid under protest. The
petitioner alleged in his complaint that the tax is illegal because he received the property, which
is the basis of the tax, from his father before his death by a deed of gift inter vivos which was
duly accepted and registered before the death of his father. The defendant answered with a
general denial and with a counterdemand for the sum of P1,245.56 which it was alleged is a
balance still due and unpaid on account of said tax. The plaintiff replied to the counterdemand
with a general denial. The courta quo held that the cause of action set up in the counterdemand
was not proven and dismissed the same. Both sides appealed to this court, but the crosscomplaint and appeal of the Collector of Internal Revenue were dismissed by this court on
March 17, 1932, on motion of the Attorney-General.1awphil.net

Additions of Gifts and Advances. After the aforementioned deductions have been
made, there shall be added to the resulting amount the value of all gifts or advances
made by the predecessor to any of those who, after his death, shall prove to be his
heirs, devises, legatees, or donees mortis causa.
The question to be resolved may be stated thus: Does section 1540 of the Administrative Code
subject the plaintiff-appellant to the payment of an inheritance tax?
The appellant argues that there is no evidence in this case to support a finding that the gift was
simulated and that it was an artifice for evading the payment of the inheritance tax, as is
intimated in the decision of the court below and the brief of the Attorney-General. We see no
reason why the court may not go behind the language in which the transaction is masked in
order to ascertain its true character and purpose. In this case the scanty facts before us may not
warrant the inference that the conveyance, acknowledged by the donor five days before his
death and accepted by the donee one day before the donor's death, was fraudulently made for
the purpose of evading the inheritance tax. But the facts, in our opinion, do warrant the inference
that the transfer was an advancement upon the inheritance which the donee, as the sole and
forced heir of the donor, would be entitled to receive upon the death of the donor.
The argument advanced by the appellant that he is not an heir of his deceased father within the
meaning of section 1540 of the Administrative Code because his father in his lifetime had given
the appellant all his property and left no property to be inherited, is so fallacious that the urging
of it here casts a suspicion upon the appellants reason for completing the legal formalities of the
transfer on the eve of the latter's death. We do not know whether or not the father in this case

left a will; in any event, this appellant could not be deprived of his share of the inheritance
because the Civil Code confers upon him the status of a forced heir. We construe the expression
in section 1540 "any of those who, after his death, shall prove to be his heirs", to include those
who, by our law, are given the status and rights of heirs, regardless of the quantity of property
they may receive as such heirs. That the appellant in this case occupies the status of heir to his
deceased father cannot be questioned. Construing the conveyance here in question, under the
facts presented, as an advance made by Felix Dison to his only child, we hold section 1540 to
be applicable and the tax to have been properly assessed by the Collector of Internal Revenue.
This appeal was originally assigned to a Division of five but referred to the court in banc by
reason of the appellant's attack upon the constitutionality of section 1540. This attack is based
on the sole ground that insofar as section 1540 levies a tax upon gifts inter vivos, it violates that
provision of section 3 of the organic Act of the Philippine Islands (39 Stat. L., 545) which reads
as follows: "That no bill which may be enacted into law shall embraced more than one subject,
and that subject shall be expressed in the title of the bill." Neither the title of Act No. 2601 nor
chapter 40 of the Administrative Code makes any reference to a tax on gifts. Perhaps it is
enough to say of this contention that section 1540 plainly does not tax gifts per se but only when
those gifts are made to those who shall prove to be the heirs, devisees, legatees or
donees mortis causa of the donor. This court said in the case of Tuason and
Tuason vs. Posadas 954 Phil., 289):lawphil.net
Republic of the Philippines
SUPREME COURT
Manila

When the law says all gifts, it doubtless refers to gifts inter vivos, and not mortis
causa. Both the letter and the spirit of the law leave no room for any other
interpretation. Such, clearly, is the tenor of the language which refers to donations that
took effect before the donor's death, and not to mortis causa donations, which can
only be made with the formalities of a will, and can only take effect after the donor's
death. Any other construction would virtually change this provision into:

EN BANC
G.R. No. L-34937

". . . there shall be added to the resulting amount the value of all gifts mortis causa . . . made by
the predecessor to those who, after his death, shall prove to be his . . . donees mortis causa."
We cannot give to the law an interpretation that would so vitiate its language. The truth of the
matter is that in this section (1540) the law presumes that such gifts have been made in
anticipation of inheritance, devise, bequest, or gift mortis causa, when the donee, after the death
of the donor proves to be his heir, devisee or donee mortis causa, for the purpose of evading the
tax, and it is to prevent this that it provides that they shall be added to the resulting amount."
However much appellant's argument on this point may fit his preconceived notion that the
transaction between him and his father was a consummated gift with no relation to the
inheritance, we hold that there is not merit in this attack upon the constitutionality of section
1540 under our view of the facts. No other constitutional questions were raised in this case.
The judgment below is affirmed with costs in this instance against the appellant. So ordered.
Avancea, C.J., Street, Malcolm, Ostrand, Abad Santos, Vickers and Imperial, JJ., concur

March 13, 1933

CONCEPCION VIDAL DE ROCES and her husband,


MARCOS ROCES, and ELVIRA VIDAL DE RICHARDS, plaintiff-appellants,
vs.
JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellee.
Feria and La O for appellants.
Attorney-General Jaranilla for appellee.
IMPERIAL, J.:
The plaintiffs herein brought this action to recover from the defendant, Collector of Internal
Revenue, certain sums of money paid by them under protest as inheritance tax. They appealed
from the judgment rendered by the Court of First Instance of Manila dismissing the action,
without costs.
On March 10 and 12, 1925, Esperanza Tuazon, by means of public documents, donated certain
parcels of land situated in Manila to the plaintiffs herein, who, with their respective husbands,
accepted them in the same public documents, which were duly recorded in the registry of deeds.
By virtue of said donations, the plaintiffs took possession of the said lands, received the fruits
thereof and obtained the corresponding transfer certificates of title.
On January 5, 1926, the donor died in the City of Manila without leaving any forced heir and her
will which was admitted to probate, she bequeathed to each of the donees the sum of P5,000.
After the estate had been distributed among the instituted legatees and before delivery of their
respective shares, the appellee herein, as Collector of Internal Revenue, ruled that the

appellants, as donees and legatees, should pay as inheritance tax the sums of P16,673 and
P13,951.45, respectively. Of these sums P15,191.48 was levied as tax on the donation to
Concepcion Vidal de Roces and P1,481.52 on her legacy, and, likewise, P12,388.95 was
imposed upon the donation made to Elvira Vidal de Richards and P1,462.50 on her legacy. At
first the appellants refused to pay the aforementioned taxes but, at the insistence of the appellee
and in order not to delay the adjudication of the legacies, they agreed at last, to pay them under
protest.
The appellee filed a demurrer to the complaint on the ground that the facts alleged therein were
not sufficient to constitute a cause of action. After the legal questions raised therein had been
discussed, the court sustained the demurrer and ordered the amendment of the complaint which
the appellants failed to do, whereupon the trial court dismissed the action on the ground that the
afore- mentioned appellants did not really have a right of action.
In their brief, the appellants assign only one alleged error, to wit: that the demurrer interposed by
the appellee was sustained without sufficient ground.
The judgment appealed from was based on the provisions of section 1540 Administrative Code
which reads as follows:
SEC. 1540. Additions of gifts and advances. After the aforementioned deductions
have been made, there shall be added to the resulting amount the value of all gifts or
advances made by the predecessor to any those who, after his death, shall prove to
be his heirs, devisees, legatees, or donees mortis causa.
The appellants contend that the above-mentioned legal provision does not include
donations inter vivos and if it does, it is unconstitutional, null and void for the following reasons:
first, because it violates section 3 of the Jones Law which provides that no law should embrace
more than one subject, and that subject should be expressed in the title thereof; second that the
Legislature has no authority to impose inheritance tax on donations inter vivos; and third,
because a legal provision of this character contravenes the fundamental rule of uniformity of
taxation. The appellee, in turn, contends that the words "all gifts" refer clearly to donations inter
vivos and, in support of his theory, cites the doctrine laid in the case of Tuason and Tuason vs.
Posadas (54 Phil., 289). After a careful study of the law and the authorities applicable thereto,
we are the opinion that neither theory reflects the true spirit of the aforementioned provision. The
gifts referred to in section 1540 of the Revised Administration Code are, obviously, those
donations inter vivos that take effect immediately or during the lifetime of the donor but are made
in consideration or in contemplation of death. Gifts inter vivos, the transmission of which is not
made in contemplation of the donor's death should not be understood as included within the said
legal provision for the reason that it would amount to imposing a direct tax on property and not
on the transmission thereof, which act does not come within the scope of the provisions
contained in Article XI of Chapter 40 of the Administrative Code which deals expressly with the
tax on inheritances, legacies and other acquisitions mortis causa.
Our interpretation of the law is not in conflict with the rule laid down in the case of Tuason and
Tuason vs. Posadas, supra. We said therein, as we say now, that the expression "all gifts" refers
to gifts inter vivos inasmuch as the law considers them as advances on inheritance, in the sense
that they are gifts inter vivos made in contemplation or in consideration of death. In that case, it
was not held that that kind of gifts consisted in those made completely independent of death or
without regard to it.
Said legal provision is not null and void on the alleged ground that the subject matter thereof is
not embraced in the title of the section under which it is enumerated. On the contrary, its
provisions are perfectly summarized in the heading, "Tax on Inheritance, etc." which is the title of
Article XI. Furthermore, the constitutional provision cited should not be strictly construed as to

make it necessary that the title contain a full index to all the contents of the law. It is sufficient if
the language used therein is expressed in such a way that in case of doubt it would afford a
means of determining the legislators intention. (Lewis' Sutherland Statutory Construction, Vol. II,
p. 651.) Lastly, the circumstance that the Administrative Code was prepared and compiled
strictly in accordance with the provisions of the Jones Law on that matter should not be
overlooked and that, in a compilation of laws such as the Administrative Code, it is but natural
and proper that provisions referring to diverse matters should be found. (Ayson and Ignacio vs.
Provincial Board of Rizal and Municipal Council of Navotas, 39 Phil., 931.)
The appellants question the power of the Legislature to impose taxes on the transmission of real
estate that takes effect immediately and during the lifetime of the donor, and allege as their
reason that such tax partakes of the nature of the land tax which the law has already created in
another part of the Administrative Code. Without making express pronouncement on this
question, for it is unnecessary, we wish to state that such is not the case in these instance. The
tax collected by the appellee on the properties donated in 1925 really constitutes an inheritance
tax imposed on the transmission of said properties in contemplation or in consideration of the
donor's death and under the circumstance that the donees were later instituted as the former's
legatees. For this reason, the law considers such transmissions in the form of gifts inter vivos, as
advances on inheritance and nothing therein violates any constitutional provision, inasmuch as
said legislation is within the power of the Legislature.
Property Subject to Inheritance Tax. The inheritance tax ordinarily applies to all
property within the power of the state to reach passing by will or the laws regulating
intestate succession or by gift inter vivos in the manner designated by statute, whether
such property be real or personal, tangible or intangible, corporeal or incorporeal. (26
R.C.L., p. 208, par. 177.)
In the case of Tuason and Tuason vs. Posadas, supra, it was also held that section 1540 of the
Administrative Code did not violate the constitutional provision regarding uniformity of taxation. It
cannot be null and void on this ground because it equally subjects to the same tax all of those
donees who later become heirs, legatees or donees mortis causa by the will of the donor. There
would be a repugnant and arbitrary exception if the provisions of the law were not applicable to
all donees of the same kind. In the case cited above, it was said: "At any rate the argument
adduced against its constitutionality, which is the lack of Uniformity, does not seem to be well
founded. It was said that under such an interpretation, while a donee inter vivos who, after the
predecessor's death proved to be an heir, a legatee, or a donee mortis causa, would have to pay
the tax, another donee inter vivos who did not prove to he an heir, a legatee, or a donee mortis
causa of the predecessor, would be exempt from such a tax. But as these are two different
cases, the principle of uniformity is inapplicable to them."
The last question of a procedural nature arising from the case at bar, which should be passed
upon, is whether the case, as it now stands, can be decided on the merits or should be
remanded to the court a quo for further proceedings. According to our view of the case, it follows
that, if the gifts received by the appellants would have the right to recover the sums of money
claimed by them. Hence the necessity of ascertaining whether the complaint contains an
allegation to that effect. We have examined said complaint and found nothing of that nature. On
the contrary, it be may be inferred from the allegations contained in paragraphs 2 and 7 thereof
that said donations inter vivos were made in consideration of the donor's death. We refer to the
allegations that such transmissions were effected in the month of March, 1925, that the donor
died in January, 1926, and that the donees were instituted legatees in the donor's will which was
admitted to probate. It is from these allegations, especially the last, that we infer a
presumption juris tantum that said donations were made mortis causa and, as such, are subject
to the payment of inheritance tax.
Wherefore, the demurrer interposed by the appellee was well-founded because it appears that
the complaint did not allege fact sufficient to constitute a cause of action. When the appellants

refused to amend the same, spite of the court's order to that effect, they voluntarily waived the
opportunity offered them and they are not now entitled to have the case remanded for further
proceedings, which would serve no purpose altogether in view of the insufficiency of the
complaint.
Wherefore, the judgment appealed from is hereby affirmed, with costs of this instance against
the appellants. So ordered.
Avancea, C.J., Villamor, Ostrand, Abad Santos, Hull, Vickers and Buttes, JJ., concur.
Separate Opinions
VILLA-REAL, J., dissenting:
I sustain my concurrence in Justice Street's dissenting opinion in the case of Tuason and
Tuason vs. Posadas (54 Phil., 289).
The majority opinion to distinguish the present case from above-mentioned case of Tuason and
Tuason vs. Posadas, by interpreting section 1540 of the Administrative Code in the sense that it
establishes the legal presumption juris tantum that all gifts inter vivos made to persons who are
not forced heirs but who are instituted legatees in the donor's will, have been made in
contemplation of the donor's death. Presumptions are of two kinds: One determined by law
which is also called presumption of law or of right; and another which is formed by the judge
from circumstances antecedent to, coincident with or subsequent to the principal fact under
investigation, which is also called presumption of man (presuncion de hombre). (Escriche, Vol.
IV, p. 662.) The Civil Code as well as the code of Civil Procedure establishes presumptions juris
et de jure and juris tantum which the courts should take into account in deciding questions of law
submitted to them for decision. The presumption which majority opinion wishes to draw from
said section 1540 of the Administrative Code can neither be found in this Code nor in any of the
aforementioned Civil Code and Code of Civil Procedure. Therefore, said presumption cannot be
called legal or of law. Neither can it be called a presumption of man (presuncion de
hombre) inasmuch as the majority opinion did not infer it from circumstances antecedent to,
coincident with or subsequent to the principal fact with is the donation itself. In view of the
nature, mode of making and effects of donations inter vivos, the contrary presumption would be
more reasonable and logical; in other words, donations inter vivos made to persons who are not
forced heirs, but who are instituted legatees in the donor's will, should be presumed as not
made mortis causa, unless the contrary is proven. In the case under consideration, the burden
of the proof rests with the person who contends that the donation inter vivos has been
made mortis causa.
It is therefore, the undersigned's humble opinion that the order appealed from should be
reversed and the demurrer overruled, and the defendant ordered to file his answer to the
complaint.
Street, J., concurs.

THIRD DIVISION
[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.
RESOLUTION
GONZAGA-REYES, J.: Supr-ema
Assailed in this petition for review on certiorari is the December 21, 1995 Decision[1] of the Court
of Appeals[2] 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.[3] Jur-is
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.[4] 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]Juri-ssc
[7]

On June 15, 1993, the Commissioner of Internal Revenue filed a motion for reconsideration 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. J-jlex

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. x x x
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. Scjuris
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. ] Nc-mmis
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 estate 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]

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. Acctmis
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. x x x
xxx.....xxx.....xxx

In upholding the June 7, 1994 Resolution of the Court of Tax Appeals, the Court of Appeals held
that: Newmiso

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] Scc-alr
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, in Lorenzo 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.[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.
SO ORDERED.
Melo, (Chairman), Vitug, Panganiban, and Purisima, JJ

Republic of the Philippines


SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-29276 May 18, 1978
Testate Estate of the Late Felix J. de Guzman. VICTORINO G. DE GUZMAN, administratorappellee,
vs.
CRISPINA DE GUZMAN-CARILLO, ARSENIO DE GUZMAN and HONORATA DE GUZMANMENDIOLA,oppositors-appellants.
Emiliano Samson & R. Balderama-Samson for appellants.
Cezar Paralejo for appellee.

AQUINO, J.:

., concur.

This case is about the propriety of allowing as administration expenses certain disbursements
made by the administrator of the testate estate of the late Felix J. de Guzman of Gapan, Nueva
Ecija.
The deceased testator was survived by eight children named Victorino, Librada, Severino,
Margarita, Josefina, Honorata, Arsenio and Crispina. His will was duly probated. Letters of

administration were issued to his son, Doctor Victorino G. de Guzman, pursuant to the order
dated September 17, 1964 of the Court of First Instance of Nueva Ecija in Special Proceeding
No. 1431.
One of the properties left by the dent was a residential house located in the poblacion. In
conformity with his last will, that house and the lot on which it stands were adjudicated to his
eight children, each being given a one-eighth proindiviso share in the project of partition dated
March 19, 1966, which was signed by the eight heirs and which was approved in the lower
court's order of April 14, 1967 but without prejudice to the final outcome of the accounting.
The administrator submitted four accounting reports for the period from June 16, 1964 to
September, 1967. Three heirs Crispina de Guzmans-Carillo Honorata de Guzman-Mendiola and
Arsenio de Guzman interposed objections to the administrator's disbursements in the total sum
of P13,610.48, broken down as follows:

decedent's first
death anniversary 166.65
5. Cost of publication of
death anniversary
of decedent 102.00
6. Representation
expenses 26.25 P558.20

I. Expense for the improvement and renovation of the decedent's residential house.
IV. Irrigation fee P1.049.58
1. Construction of fence P3,082.07
TOTAL P13,610.48
2. Renovation of bathroom P1,389.52
3. Repair of terrace and
interior of house P5,928.00 P10,399.59
II. Living expenses of Librada de Guzman while occupying the family home without paying rent:
1. For house helper P1,170.00
2. Light bills 227.41
3. Water bills 150.80
4. Gas oil, floor wax

It should be noted that the probate court in its order of August 29, 1966 directed the
administrator "to refrain from spending the assets of the estate for reconstructing and
remodeling the house of the deceased and to stop spending (sic) any asset of the estate without
first during authority of the court to do so" (pp. 26-27, Record on Appeal).
The lower court in its order of April 29, 1968 allowed the d items as legitimate expenses of
administration. From that order, the three oppositors appealed to this Court. Their contention is
that the probate court erred in approving the utilization of the income of the estate (from rice
harvests) to defray those expenditures which allegedly are not allowable under the Rules of
Court.
An executor or administrator is allowed the necessary expenses in the care, management, and
settlement of the estate. He is entitled to possess and manage the decedent's real and personal
estate as long as it is necessary for the payment of the debts and the expenses of
administration. He is accountable for the whole decedent's estate which has come into his
possession, with all the interest, profit, and income thereof, and with the proceeds of so much of
such estate as is sold by him, at the price at which it was sold (Sec. 3, Rule 84; Secs. 1 and 7,
Rule 85, Rules of Court).

and switch nail 54.90 P 1,603.11


III. Other expenses:
1. Lawyer's subsistence P 19.30
2. Gratuity pay in lieu
of medical fee 144.00
3. For stenographic notes 100.00
4. For food served on

One of the Conditions of the administrator's bond is that he should render a true and just
account of his administration to the court. The court may examine him upon oath With respect to
every matter relating to his accounting 't and shall so examine him as to the correctness of his
account before the same is allowed, except when no objection is made to the allowance of the
account and its correctness is satisfactorily established by competent proof. The heirs, legatees,
distributes, and creditors of the estate shall have the same privilege as the executor or
administrator of being examined on oath on any matter relating to an administration account."
(Sec. 1[c] Rule 81 and secs. 8 and 9, Rule 85, Rules of Court).
A hearing is usually held before an administrator's account is approved, especially if an
interested Party raises objections to certain items in the accounting report (Sec. 10, Rule 85).
At that hearing, the practice is for the administrator to take the witness stand, testify under oath
on his accounts and Identify the receipts, vouchers and documents evidencing his

disbursements which are offered as exhibits. He may be interrogated by the court and crossed
by the oppositors's counsel. The oppositors may present proofs to rebut the ad. administrator's
evidence in support of his accounts.
I. Expenses for the renovation and improvement of the family residence P10,399.59. As
already shown above, these expenses consisted of disbursements for the repair of the terrace
and interior of the family home, the renovation of the bathroom, and the construction of a fence.
The probate court allowed those expenses because an administrator has the duty to "maintain in
tenantable repair the houses and other structures and fences belonging to the estate, and
deliver the same in such repair to the heirs or devises" when directed to do so by the court (Sec.
2, Rule 84, Rules of Court).
On the other hand, the oppositors-appellants contend that the trial court erred in allowing those
expenses because the same did not come within the category of necessary expenses of
administration which are understood to be the reasonable and necessary expenses of caring for
the property and managing it until the debts are paid and the estate is partitioned and distributed
among the heirs (Lizarraga Hermanos vs. Abada, 40 Phil. 124).
As clarified in the Lizarraga case, administration expenses should be those which are necessary
for the management of the estate, for protecting it against destruction or deterioration, and,
possibly, for the production of fruits. They are expenses entailed for the preservation and
productivity of the estate and its management for purposes of liquidation, payment of debts, and
distribution of the residue among the persons entitled thereto.
It should be noted that the family residence was partitioned proindiviso among the decedent's
eight children. Each one of them was given a one-eighth share in conformity with the testator's
will. Five of the eight co-owners consented to the use of the funds of the estate for repair and
improvement of the family home. It is obvious that the expenses in question were incurred to
preserve the family home and to maintain the family's social standing in the community.
Obviously, those expenses redounded to the benefit of an the co- owners. They were necessary
for the preservation and use of the family residence. As a result of those expenses, the coowners, including the three oppositors, would be able to use the family home in comfort,
convenience and security.
We hold that the probate court did not err in approving the use of the income of the estate to
defray those ex
II. Expenses incurred by Librada de Guzman as occupant of the family residence without paying
rent P1 603.11 The probate court allowed the income of the estate to be used for those
expenses on the theory that the occupancy of the house by one heir did not deprive the other
seven heirs from living in it. Those expenses consist of the salaries of the house helper, light and
water bills, and the cost of gas, oil floor wax and switch nail
We are of the opinion that those expenses were personal expenses of Librada de Guzman,
inuring y to her benefit. Those expenses, not being reasonable administration expenses incurred
by the administrator, should not be charged against the income of the estate.
Librada de Guzman, as an heir, is entitled to share in the net income of the estate. She occupied
the house without paying rent. She should use her income for her living expenses while
occupying the family residence.

The trial court erred in approving those expenses in the administrator's accounts. They should
be, as they are hereby, disallowed (See 33 C.J.S 1239-40).
III. Other expenses P558.20. Among these expenses is the sum of P100 for stenographic
notes which, as admitted by the administrator on page 24 of his brief, should be disallowed.
Another item, "representation expenses" in the sum of P26.25 (2nd accounting), was not
explained. it should likewise be disallowed.
The probate court erred in allowing as expenses of ad. administration the sum of P268.65 which
was incurred during the celebration of the first death anniversary of the deceased. Those
expenses are disallowed because they have no connection with the care, management and
settlement of the decedent's estate (Nicolas vs. Nicolas 63 Phil 332).
The other expenses, namely, P19.30 for the lawyer's subsistence and P144 as the cost of the
gift to the physician who attended to the testator during his last s are allowable expenses.
IV. Irrigation fee P1,049.58. The appellants question the deductibility of that expense on the
ground that it seems to be a duplication of the item of P1,320 as irrigation fee for the same
1966-67 crop-year.
The administrator in his comment filed on February 28, 1978 explained that the item of P1,320
represented the "allotments" for irrigation fees to eight tenants who cultivated the Intan crop,
which allotments were treated as "assumed expenses" deducted as farming expenses from the
value of the net harvests.
The explanation is not quite clear but it was not disputed by the appellants. The fact is that the
said sum of P1,049.58 was paid by the administrator to the Penaranda Irrigation System as
shown in Official Receipt No. 3596378 dated April 28, 1967. It was included in his accounting as
part of the farming expenses. The amount was properly allowed as a legitimate expense of
administration.
WHEREFORE, the lower court's order of April 29, 1968 is affirmed with the modifications that
the sum of (a) P1,603.11 as the living expenses of Librada de Guzman. (b) P100 for
stenographic notes, (c) P26.25 as representation expenses, and (d) P268.65 as expenses for
the celebration of the first anniversary of the decedent's death are disallowed in the
administrator's accounts. No costs.
SO ORDERED.
Fernando (Chairman), Barredo, Antonio, Concepcion, Jr., and Santos, JJ., concur.

The Facts
On November 7, 1987, Jose P. Fernandez (Jose) died. Thereafter, a petition for the probate of his
will[5] 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[7] dated 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 return[10] with the same BIR Regional Office, showing therein a NIL estate tax liability, computed as
follows:

THIRD DIVISION
RAFAEL ARSENIO S. DIZON, in his capacity as the Judicial
Administrator of the Estate of the deceased JOSE P.
FERNANDEZ,
Petitioner,
- versus COURT OF TAX APPEALS andCOMMISSIONER OF
INTERNAL REVENUE,
Respondents.

G.R. No. 140944


Present:
YNARES-SANTIAGO, J.,
Chairperson,
AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
NACHURA, and
REYES, JJ.
Promulgated:
April 30, 2008

x------------------------------------------------------------------------------------x
DECISION
NACHURA, J.:
Before this Court is a Petition for Review on Certiorari[1] under Rule 45 of the Rules of Civil Procedure
seeking the reversal of the Court of Appeals (CA) Decision [2] datedApril 30, 1999 which affirmed the
Decision[3] of the Court of Tax Appeals (CTA) dated June 17, 1997.[4]

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, onOctober 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

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. 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); "A"
2. Petition for the probate of the
will and issuance of letter of
administration filed with the
Regional Trial Court (RTC) of
Manila, docketed as Sp. Proc.
No. 87-42980 (pp. 107-108, BIR
records); "B" & "B-1
3. Pleading entitled "Compliance"
filed with the probate Court
submitting the final inventory
of all the properties of the
deceased (p. 106, BIR records); "C"
4. Attachment to Exh. "C" which
is the detailed and complete
listing of the properties of
the deceased (pp. 89-105, BIR rec.); "C-1" to "C-17"
5. Claims against the estate filed
by Equitable 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); "D" to "D-24"
6. Claim filed by Banque de L'
Indochine et de Suez with the
probate Court in the amount of
US $4,828,905.90 as of January 31,
1988 (pp. 262-265, BIR records); "E" to "E-3"

In his letter[19] dated December 12, 1991, Atty. Gonzales moved for the reconsideration of the said estate
tax assessment. However, in her letter[20] 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
review[21] before respondent CTA. Trial on the merits ensued.

7. Claim of the Manila Banking


Corporation (MBC) 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); "F" to "F-3"

As found by the CTA, the respective parties presented the following pieces of evidence, to wit:

8. Demand letter of Manila Banking


Corporation prepared by Asedillo,

Total amount due & collectible P66,973,985.40[18]

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); "G" & "G-1"
9. Claim of State Investment
House, Inc. filed with 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); "H" to "H-16"
10. Letter dated March 14, 1990
of Arsenio P. Dizon addressed
to Atty. Jesus M. Gonzales,
(p. 184, BIR records); "I"
11. Letter dated April 17, 1990
from J.M. Gonzales addressed
to the Regional Director of
BIR in San Pablo City
(p. 183, BIR records); "J"
12. Estate Tax Return filed by
the estate of the late Jose P.
Fernandez through its authorized
representative, Atty. Jesus M.
Gonzales, for Arsenio P. Dizon,
with attachments (pp. 177-182,
BIR records); "K" to "K-5"
13. Certified true copy of the
Letter of Administration
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 "L"
14. Certification of Payment of
estate taxes Nos. 2052 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.). "M" to "M-5"

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 Enriquez,
Jr. appearing at the lower
Portion of Exh. "1"; -do3. Memorandum for the Commissioner,
dated July 19, 1991, prepared by
revenue examiners, Ma. Anabella A.
Abuloc, Alberto S. Enriquez and
Raymund S. Gallardo; Reviewed by
Maximino V. Tagle pp. 143-144
4. Signature of Alberto S.
Enriquez appearing at the
lower portion on p. 2 of Exh. "2"; -do5. Signature of Ma. Anabella A.
Abuloc appearing at the
lower portion on p. 2 of Exh. "2"; -do6. Signature of Raymund S.
Gallardo appearing at the
Lower portion on p. 2 of Exh. "2"; -do7. Signature of Maximino V.
Tagle also appearing on
p. 2 of Exh. "2"; -do8. Summary of revenue
Enforcement Officers Audit
Report, dated July 19, 1991; p. 139
9. Signature of Alberto
Enriquez at the lower
portion of Exh. "3"; -do10. Signature of Ma. Anabella A.
Abuloc at the lower
portion of Exh. "3"; -do11. Signature of Raymond S.
Gallardo at the lower
portion of Exh. "3"; -do12. Signature of Maximino
V. Tagle at the lower

portion of Exh. "3"; -do13. Demand letter (FAS-E-87-91-00),


signed by the Asst. Commissioner
for Collection for the Commissioner
of Internal Revenue, demanding
payment of the amount of
P66,973,985.40; and p. 169

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]

14. Assessment Notice FAS-E-87-91-00 pp. 169-170[22]


Aggrieved, petitioner, on March 2, 1998, went to the CA via a petition for review.[27]
The CTA's Ruling
On June 17, 1997, the CTA denied the said petition for review. Citing this Court's ruling in Vda. de Oate 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]

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 Reconsideration[29] which the CA denied in its
Resolution[30] dated November 3, 1999.
Hence, the instant Petition raising the following issues:
1.

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
Deductions 44,652,813.66
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:

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 Oate 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 Oate 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]

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.

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]

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]

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 Courts 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 Oate, which reiterated this Court's
previous rulings in People v. Napat-a[35] and People v. Mate[36] 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 Oate, 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
Oate has already been abandoned. Recently, in Ramos v. Dizon,[38] this 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 Oate still subsists in this jurisdiction. In Vda. de Oate, 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

From the foregoing declaration, however, it is clear that Vda. de Oate 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 recross examination by petitioner.[42]But Albertos 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 Oate 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 Resolution[51] 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 noncompliance 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.

Verily, the second issue in this case involves the construction of Section 79[58] of the National Internal
Revenue Code[59] (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.[64] Recognizing 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 dateof-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]

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 debt[56] 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]

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.

Republic of the Philippines


SUPREME COURT
Manila

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.

EN BANC

SO ORDERED.
G.R. No. L-33139

October 11, 1930

THE GOVERNMENT OF THE PHILIPPINE ISLANDS, plaintiff-appellants,


vs.
JOSE MA. PAMINTUAN, ET AL., defendants-appellees.
Attorney-General Jaranilla for appellant.
Jose Ma.Cavanna for appellees.

VILLA-REAL, J.:
This is an appeal taken by the Government of the Philippine Islands from the judgment of the
Court of First Instance of Manila dismissing its complaint and absolving the defendants, without
costs. In support of the appeal the following alleged errors have been assigned to the court
below in its judgment:
1. The lower court erred in holding that the failure of the plaintiff to file its claim with
the committee on claims and appraisals barred it from collecting the tax in questions in
this action.
2. The lower court erred in holding that this case is governed by the principle laid
down in the case of the Government of the Philippine Islands vs. Inchausti & Co. (24
Phil., 315).
3. The lower court erred in absolving the defendants from the complaint and in
denying the plaintiff's motion for new trial.
The present case was submitted to the court below upon the following agreed statement of
facts:
I. That on February 27, 1920, Florentino Pamintuan, represented by J. V. Ramirez or
his attorney-in-fact charged with the administration of his property, filed income-tax
return for the year 1919, paying the amount of P 672.99 on the basis of said return,
and the additional sum of P151.01 as a result of a subsequent assessment received
from the Collector of Internal Revenue.
II. That on April 24, 1925, Florentino Pamintuan died in Washington, D. C., U. S. A.,
leaving the defendants herein as his heirs.
III. That on April 24, 1925, intestate proceedings were instituted in the Court of First
Instance of Manila in civil case No. 27948, intestate of the late Florentino Pamintuan.

IV. That on April 28,1925, the Court of First Instance of Manila appointed Maximo de la
Paz and Candido Ilagan commissioners of appraisal of the property left by the
deceased Pamintuan, the said appointees taking their oaths of office on May 4 and
May 9, 1925, respectively, and letters of appointment to the committee on claims and
appraisals were made on May 9,1925. 1awph!l.net
V. That the said committee on claims and appraisals after the publications of the
notices required by law held the necessary sessions in accordance with said notices
for the presentation and determination of all claims and credits against the estate of
the deceased Pamintuan.
VI. That on December 1, 1925, the above-mentioned committee rendered its report
which was duly approved by the court, and in which report it appears that he only
claims presented and that were approved were those of Tomasa Centeno, Jose, Paz,
Caridad, and Natividad Pamintuan and Cavanna, Aboitiz and Agan.
VII. That on June 12, 1926, Jose V. Ramirez, the duly appointed judicial administrator
of the estate of the deceased Florentino Pamintuan presented a proposed partition of
the decedent's estate which proposed partition was approved by the court on July
6,1926, the court ordering the delivery to the heirs, the defendants herein, of their
respective shares of the inheritance after paying the corresponding inheritance taxes
which were duly paid on September 2, 1926, in the amount of P25,047.19 as appears
on the official receipt No. 4421361.
VIII. That the defendants herein inherited from the deceased Florentino Pamintuan in
the following proportions: Tomasa Pamintuan inherited 0.0571 per cent of the
decedent's estate and the other defendants 0.0784 per cent each according to the
partition approved by the court in civil case No. 27948.
IX. That during the pendency of the intestate proceedings, the administrator filed
income-tax returns for the estate of the deceased corresponding to the years 1925
and 1926.
X. That the intestate proceedings in civil case No. 27948 were definitely closed on
October 27, 1926, by order of the court of the same date.
XI. That subsequent to the distribution of the decedent's estate to the defendants
herein, that is, on February 16, 1927, the plaintiff discovered the fact that the
deceased Florentino Pamintuan has not paid the amount of four hundred and sixtytwo pesos (P462) as additional income tax and surcharge for the calendar year 1919,
on account of the sale made by him on November 14, 1919, of his house and lot
located at 922 M. H. del Pilar, Manila, from which sale he realized a net profit or
income of P11,000, which was not included in his income-tax return filed for said year
1919.
XII. That the defendants cannot disprove that the deceased Florentino Pamintuan
made a profit of P11,000 in the sale of the house referred to in paragraph Xl hereof
because they have destroyed the voluminous records and evidences regarding the
sale in question and other similar transactions which might show repairs on the house,
commissions, and other expenses tending to reduce the profit obtained as mentioned
above.

XIII. That demand for the payment of the income tax referred to herein was made on
February 24, 1927, on the defendants but they refused and still refuse to pay the
same either in full or in part.
With regard to the first assignment of error, this court held in Pineda vs. Court of First Instance of
Tayabas and Collector of Internal Revenue (52 Phil., 803):
To reply to these contentions in turn , we observe that, while there are a few courts
that have expressed themselves to the effect that a claim for taxes due to the
Government should be presented like other claims to the committee appointed for the
purpose of passing upon claims, the clear weight of judicial authority is to the effect
that claims for taxes and assessments, whether assessed before or after the death of
the decedent, are not required to be presented to the committee. (24 C. J., 325;
People vs. Olvera, 43 Cal., 492; Hancock vs.Whittemore, 50 Cal., 522; Findley vs.
Taylor, 97 Iowa, 420; Bogue vs.Laughlin,149 Wis., 271; 40 L. R. A. [N.S.], 927; Ann.
Cas.1913 C.,p.1367.)
See also In re Estate of Frank H.Goulette (G. R. No. 32361, 1 decided on September 22,1930.)
The administration proceedings of the late Florentino Pamintuan having been closed, and his
estate distributed among his heirs, the defendants herein, the latter are responsible for the
payment of the income tax here in question in proportion to the share of each in said estate, in
accordance with section 731 of the Code of Civil Procedure, and the doctrine of this court laid
down in Lopez vs. Enriquez (16 Phil.,336) as follows:
ESTATE; LIABILITY OF HEIRS AND DISTRIBUTEES. Heirs are not required to
respond with their own property for the debts of their deceased ancestors. But even
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. The
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. The heirs cannot, by any act of their own or by agreement among themselves,
reduce the creditors' security for the payment of their claims. (Pavia vs. De la Rosa, 8
Phil.,70; secs. 731, 749, Code of Civil Procedure; art,1257, Civil Code.)
For the reasons stated, we are of opinion and so hold that claims for income taxes need not be
filed with the committee on claims and appraisals appointed in the course of testate proceedings
and may be collected even after the distribution of the decedent's estate among his heirs, who
shall be liable therefor in proportion to their share in the inheritance.
Wherefore, let the defendants pay the plaintiff the sum of P462, with 1 per centum monthly
interest from August 19, 1927 until fully paid, as follows: Tomasa Centeno 0.0571 per cent, and
each one of the other defendants 0.0784 per cent, with costs against the appellees. So ordered.
Avancea, C.J., Street, Malcolm, Ostrand, Ostrand, Johns and Romualdez, JJ., concur.

Republic of the Philippines


SUPREME COURT
Manila
EN BANC
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.
Office of the Solicitor General for petitioner.
Manuel B. Pineda for and in his own behalf as respondent.

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

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
Add: 5% surcharge
1% monthly interest from November
30, 1953 to April 15, 1957
Compromise for late filing
Compromise for late payment
Total amount due
2. Additional residence tax for 1945
3. Real Estate dealer's tax for the fourth
quarter of 1946 and the whole year of 1947

P1,779.69
88.98
720.77
80.00
40.00
P2,707.44
===========
P14.50
===========
P207.50
===========

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."

1945
P135.83
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.1awphl.nt
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 taxes4a 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.

EN BANC
G.R. No. L-19495

November 24, 1966

COMMISSIONER OF INTERNAL REVENUE, petitioner,


vs.
LILIA YUSAY GONZALES and THE COURT OF TAX APPEALS, respondents.
Office of the Solicitor General for the petitioner.
Ramon A. Gonzales for respondent Lilia Yusay Gonzales.
BENGZON, J.P., J.:
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 therein the following properties:

Personal properties

Palay
Carabaos

P6,444.00
1,000.00

Real properties:
Capital, 74 parcels )

Conjugal 19 parcels)

Total gross estate

Republic of the Philippines


SUPREME COURT
Manila

P7,444.00

assessed at

P179,760.00

P187,204.00

The return mentioned no heir.


Upon investigation however the Bureau of Internal Revenue found the following properties:

not however show whether the Provincial Fiscal filed a claim with the Court of First Instance for
the taxes due.
Personal properties:
On May 30, 1956 the commissioner appointed by the Court of First Instance for the purpose,
submitted a reamended project of partition which listed the following properties:
Palay
Carabaos
Packard Automobile
2 Aparadors

P6,444.00
1,500.00
2,000.00
500.00

Real properties:
Capital, 25 parcels assessed at

Personal properties:
P10,444.00

Buick Sedan
Packard car
Aparadors
Cash in Bank (PNB)
Palay
Carabaos

P87,715.32

1/2 of Conjugal, 130 parcels assessed at

P121,425.00

P8,100.00
2,000.00
500.00
8,858.46
6,444.00
1,500.00

P27,402.46

P324,797.21
4,500.00

P329,297.21

P209,140.32
Real properties:

Total

P219,584.32

The fair market value of the real properties was computed by increasing the assessed value by
forty percent.

Land, 174 parcels assessed


at
Buildings

Based on the above 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 January 25, 1955 the Bureau of Internal Revenue increased the assessment to P8,225.89 as
estate tax and P22,117.10 as inheritance tax plus delinquency interest and demanded payment
thereof on or before February 28, 1955. Meanwhile, on February 16, 1955, the Court of First
Instance of Iloilo required Jose S. Yusay to show proof of payment of said estate and inheritance
taxes.
On March 3, 1955 Jose S. Yusay requested an extension of time within which to pay the tax. He
posted a surety bond to guarantee payment of the taxes in question within one year. The
Commissioner of Internal Revenue however denied the request. Then he issued a warrant of
distraint and levy which he transmitted to the Municipal Treasurer of Pototan for execution. This
warrant was not enforced because all the personal properties subject to distraint were located in
Iloilo City.
On May 20, 1955 the Provincial Treasurer of Iloilo requested the BIR Provincial Revenue Officer
to furnish him copies of the assessment notices to support a motion for payment of taxes which
the Provincial Fiscal would file in Special Proceedings No. 459 before the Court of First Instance
of Iloilo. The papers requested were sent by the Commissioner of Internal Revenue to the
Provincial Revenue Officer of Iloilo to be transmitted to the Provincial Treasurer. The records do

Total

P356,699.67

More than a year later, particularly on July 12, 1957, an agent of the Bureau of Internal Revenue
apprised the Commissioner of Internal Revenue of the existence of said reamended project of
partition. Whereupon, the Internal Revenue Commissioner caused the estate of Matias Yusay to
be reinvestigated for estate and inheritance tax liability. Accordingly, on February 13, 1958 he
issued the following assessment:

Estate tax

5% surcharge

P16,246.04

411.29

Delinquency interest

11,868.90

Compromise
No notice of death
Late payment

P15.00
40.00

Total

Inheritance Tax

55.00

P28,581.23

P38,178.12

5% surcharge

1,105.86

Delinquency interest

28,808.75

Compromise for late payment

50.00

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 June 1, 1959, Lilia Yusay, through her counsel, Ramon Gonzales, filed an answer to the
proof of claim alleging non-receipt of the assessment of February 13, 1958, the existence of two
administrators, namely Florencia Piccio Vda. de Yusay who administered two-thirds of the
estate, and Lilia Yusay, who administered the remaining one-third, and her willingness to pay the
taxes corresponding to her share, and praying for deferment of the resolution on the motion for
the payment of taxes until after a new assessment corresponding to her share was issued.
On November 17, 1959 Lilia Yusay disputed the legality of the assessment dated February 13,
1958. She claimed that the right to make the same had prescribed inasmuch as more than five
years had elapsed since the filing of the estate and inheritance tax return on May 11, 1949. She
therefore requested that the assessment be declared invalid and without force and effect. This
request was rejected by the Commissioner in his letter dates January 20, 1960, received by Lilia
Yusay on March 14, 1960, for the reasons, namely, (1) that the right to assess the taxes in
question has not been lost by prescription since the return which did not name the heirs cannot
be considered a true and complete return sufficient to start the running of the period of
limitations of five years under Section 331 of the Tax Code and pursuant to Section 332 of the
same Code he has ten years within which to make the assessment counted from the discovery
on September 24, 1953 of the identity of the heirs; and (2) that the estate's administrator waived
the defense of prescription when he filed a surety bond on March 3, 1955 to guarantee payment
of the taxes in question and when he requested postponement of the payment of the taxes
pending determination of who the heirs are by the settlement court.
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 and rendered the following judgment:
WHEREFORE, the decision of respondent assessing against the estate of the late
Matias Yusay estate and inheritance taxes is hereby reversed. No costs.
The Commissioner of Internal Revenue appealed to this Court and raises the following issues:

Total

Total estate and inheritance taxes

P69,142.73

1. Was the petition for review in the Court of Tax Appeals within the 30-day period provided for in
Section 11 of Republic Act 1125?

P97,723.96

2. Could the Court of Tax Appeals take cognizance of Lilia Yusay's appeal despite the pendency
of the "Proof of Claim" and "Motion for Allowance of Claim and for an Order of Payment of
Taxes" filed by the Commissioner of Internal Revenue in Special Proceedings No. 459 before
the Court of First Instance of Iloilo?

Like in previous assessments, the fair market value of the real properties was arrived at by
adding 40% to the assessed value.
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.

3. Has the right of the Commissioner of Internal Revenue to assess the estate and inheritance
taxes in question prescribed?
On November 17, 1959 Lilia Yusay disputed the legality of the assessment of February 13,
1958. On March 14, 1960 she received the decision of the Commissioner of Internal Revenue
on the disputed assessment. On April 13, 1960 she filed her petition for review in the Court of
Tax Appeals. Said Court correctly held that the appeal was seasonably interposed pursuant to
Section 11 of Republic Act 1125. We already ruled in St. Stephen's Association v. Collector of
Internal Revenue,1 that the counting of the thirty days within which to institute an appeal in the

Court of Tax Appeals should commence from the date of receipt of the decision of the
Commissioner on the disputed assessment, not from the date the assessment was issued.
Accordingly, the thirty-day period should begin running from March 14, 1960, the date Lilia
Yusay received the appealable decision. From said date to April 13, 1960, when she filed her
appeal in the Court of Tax Appeals, is exactly thirty days. Hence, the appeal was timely.
Next, the Commissioner attacks the jurisdiction of the Court of Tax Appeals to take cognizance
of Lilia Yusay's appeal on the ground of lis pendens. He maintains that the pendency of his
motion for allowance of claim and for order of payment of taxes in the Court of First Instance of
Iloilo would preclude the Court of Tax Appeals from acquiring jurisdiction over Lilia Yusay's
appeal. This contention lacks merit.
Lilia Yusay's cause seeks to resist the legality of the assessment in question. Should she
maintain it in the settlement court or should she elevate her cause to the Court of Tax Appeals?
We say, she acted correctly by appealing to the latter court. An action involving a disputed
assessment for internal revenue taxes falls within the exclusive jurisdiction of the Court of Tax
Appeals.2 It is in that forum, to the exclusion of the Court of First Instance,3 where she could
ventilate her defenses against the assessment.
Moreover, the settlement court, where the Commissioner would wish Lilia Yusay to contest the
assessment, is of limited jurisdiction. And under the Rules,4 its authority relates only to matters
having to do with the settlement of estates and probate of wills of deceased persons.5 Said court
has no jurisdiction to adjudicate the contentions in question, which assuming they do not
come exclusively under the Tax Court's cognizance must be submitted to the Court of First
Instance in the exercise of its general jurisdiction.6
We now come to the issue of prescription. 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 Commissioner claims that fraud attended the filing of the return; that this being so, Section
332(a) of the Tax Code would apply.7 It may be well to note that the assessment letter itself
(Exhibit 22) did not impute fraud in the return with intent to evade payment of tax. Precisely, no
surcharge for fraud was imposed. In his answer to the petition for review filed by Lilia Yusay in
the Court of Tax Appeals, the Commissioner alleged no fraud. Instead, he broached the
insufficiency of the return as barring the commencement of the running of the statute of
limitations. He raised the point of fraud for the first time in the proceedings, only in his
memorandum filed with the Tax Court subsequent to resting his case. Said Court rejected the
plea of fraud for lack of allegation and proof, and ruled that the return, although not accurate,
was sufficient to start the period of prescription.
8

Fraud is a question of fact. The circumstances constituting it must be alleged and proved in the
court below.9And the finding of said court as to its existence and non-existence is final unless
clearly shown to be erroneous.10As the court a quo found that no fraud was alleged and proved
therein, We see no reason to entertain the Commissioner's assertion that the return was
fraudulent.
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.
Paragraph (a) of Section 93 of the Tax Code lists the requirements of a valid return. It states:

(a) Requirements.In all cases of inheritance or transfers subject to either the estate
tax or the inheritance tax, or both, or where, though exempt from both taxes, the gross
value of the estate exceeds three thousand pesos, the executor, administrator, or
anyone of the heirs, as the case may be, shall file a return under oath in duplicate,
setting forth (1) the value of the gross estate of the decedent at the time of his death,
or, in case of a nonresident not a citizen of the Philippines ; (2) the deductions allowed
from gross estate in determining net estate as defined in section eighty-nine; (3) such
part of such information as may at the time be ascertainable and such supplemental
data as may be necessary to establish the correct taxes.
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.11
There is no question that the state and inheritance tax return filed by Jose S. Yusay was
substantially defective.
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 over-sight 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.12 The State taxes not itself.
In a case where the return was made on the wrong form, the Supreme Court of the United
States held that the filing thereof did not start the running of the period of limitations. 13 The
reason is that the return submitted did not contain the necessary information required in the
correct form. In this jurisdiction, however, the Supreme Court refrained from applying the said
ruling of the United States Supreme Court in Collector of Internal Revenue v. Central Azucarera
de Tarlac, L-11760-61, July 31, 1958, on the ground that the return was complete in itself
although inaccurate. To our mind, it would not make much difference where a return is made on
the correct form prescribed by the Bureau of Internal Revenue if the data therein required are
not supplied by the taxpayer. Just the same, the necessary information for the assessment of
the tax would be missing.
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.14 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.15 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.
Accordingly, for purposes of determining whether or not the Commissioner's assessment of
February 13, 1958 is barred by prescription, Section 332(a) which is an exception to Section 331
of the Tax Code finds application.16We quote Section 332(a):
SEC. 332. Exceptions as to 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 years after the
discovery of the falsity, fraud or omission.
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.

BENGZON, J.P., J.:


Respondent Lilia Yusay Gonzales seeks reconsideration of our decision holding her liable for the
payment of P97,723.96 as estate and inheritance taxes plus delinquency penalties as
administratrix of the intestate estate of Matias Yusay. The grounds raised by her deserve this
extended resolution.
Firstly, movant maintains that the issue of whether or not the estate and inheritance tax return
filed by Jose Yusay on May 13, 1949 was sufficient to start the running of the statute of
limitations on assessment, was neither raised in the Court of Tax Appeals nor assigned as error
before this Court. The records in the Court of Tax Appeals however show the contrary.
Paragraph 2 of the answer filed by the Commissioner of Internal Revenue states:
2. That he likewise admits, as alleged in paragraph 1 thereof having received the letter
of the petitioner dated November 27, 1959 (Annex "A" of the Petition for Review),
contesting the assessment of estate and inheritance taxes levied against the Intestate
Estate of the late Matias Yusay, Special Proceedings No. 459, Court of First Instance
of Iloilo, on the ground that the said assessment has already prescribed, but
specifically denies the allegation that the assessment have already prescribed, the
truth of the matter being that the returns filed on May 11, 1949 cannot be considered
as a true, and complete return sufficient to start the running of the period of five (5)
years prescribed in Sec. 331 of the Tax Code;
This point was discussed in the memorandum of the Commissioner of Internal Revenue, thus:

Anent the Commissioner's contention that Lilia Yusay is estopped from raising the defense of
prescription because she failed to raise the same in her answer to the motion for allowance of
claim and for the payment of taxes filed in the settlement court (Court of First Instance of Iloilo),
suffice it to state that it would be unjust to the taxpayer if We were to sustain such a view. The
Court of First Instance acting as a settlement court is not the proper tribunal to pass upon such
defense, therefore it would be but futile to raise it therein. Moreover, the Tax Code does not bar
the right to contest the legality of the tax after a taxpayer pays it. Under Section 306 thereof, he
can pay the tax and claim a refund therefor. A fortiori his willingness to pay the tax is no waiver
to raise defenses against the tax's legality.
WHEREFORE, the judgment appealed from is set aside and another entered affirming the
assessment of the Commissioner of Internal Revenue dated February 13, 1958. Lilia Yusay
Gonzales, as administratrix of the intestate estate of Matias Yusay, is hereby ordered to pay the
sums of P16,246.04 and P39,178.12 as estate and inheritance taxes, respectively, plus interest
and surcharge for delinquency in accordance with Section 101 of the National Internal Revenue
Code, without prejudice to reimbursement from her co-administratrix, Florencia Piccio Vda. de
Yusay for the latter's corresponding tax liability. No costs. So ordered.
Concepcion, C.J., Reyes, J.B.L., Barrera, Dizon, Regala, Makalintal, Sanchez and Castro,
JJ., concur.
Zaldivar, J., took no part.

RESOLUTION
April 24, 1967

In the estate and inheritance tax return filed by Jose S. Yusay (Exhibits B & 1, pp. 1420, B.I.R. records) the net value of the estate of the deceased was claimed to be
P203,354.00 and no inheritance tax was shown as the heirs were not indicated. In the
final computation of the estate by an examiner of the respondent, the net estate was
found to be worth P410,518.38 (p. 105, B.I.R. records) or about more than twice the
original amount declared in the return. In the subsequent investigation of this case, it
was also determined that the heirs of the deceased were Jose S. Yusay, a legitimate
son, and Lilia Yusay, an acknowledged natural child, (petitioner herein).
Under the circumstances, we believe the return filed on May 11, 1949 was false or
fraudulent in the sense that the value of the properties were underdeclared and that
the said return was also incomplete as the heirs to the estate were not specified.
Inasmuch as the respondent was not furnished adequate data upon which to base an
assessment, the said return cannot be considered a true and complete return
sufficient to start the running of the period of limitations of five (5) years prescribed in
Section 331 of the Tax Code.
In the lower court the defense of the Commissioner of Internal Revenue against Lilia Yusay
Gonzales' plea of prescription, centered on the insufficiency and fraudulence or falsity of the
return filed by Jose Yusay. The Court of Tax Appeals overruled the Commissioner of Internal
Revenue. Said the Tax Code:
The provision of Section 332(a) of the Tax Code cannot be invoked in this case as it
was neither alleged in respondent's answer, nor proved during the hearing that the
return was false or fraudulent with intent to evade the payment of tax. Moreover, the
failure of respondent to charge fraud and impose the penalty thereof in the
assessments made in 1953, 1955 and 1956 is an eloquent demonstration that the
filing of petitioner's transfer tax return was not attended by falsity or fraud with intent to
evade tax.

xxx

xxx

xxx

But respondent urges upon us that the filing of the return did not start the running of
the five (5) year period for the reason that the return did not disclose the heirs of the
deceased Matias Yusay, and contained inadequate data regarding the value of the
estate. We believe that these mere omissions do not require additional returns for the
same. Altho incomplete for being deficient on these matters, the return cannot be
regarded as a case of failure to file a return where want of good faith and intent to
evade the tax on the part of petitioner are not charged. It served as a sufficient notice
to the Commissioner of Internal Revenue to make his assessment and start the
running, of the period of limitation. In this connection, it must be borne in mind that the
Commissioner is not confined to the taxpayer's return in making assessment of the
tax, and for this purpose he may secure additional information from other sources. As
was done in the case at bar, he sends investigators to examine the taxpayer's records
and other pertinent data. His assessment is based upon the facts uncovered by the
investigation (Collector vs. Central Azucarera de Tarlac, G.R. Nos. L-11760 and L11761, July 31, 1958).
Furthermore, the failure to state the heirs in the return can be attributed to the then
unsettled conflict raging before the probate court as to who are the heirs of the estate.
Such failure could not have been a deliberate attempt to mislead the government in
the assessment of the correct taxes.
In his appeal, the Commissioner of Internal Revenue assigned as third error of the Court of Tax
Appeals the finding that the assessment in question was "made beyond the five-year statutory
period provided in Section 332 (a) of the Tax Code," and that the right of the Commissioner of
Internal Revenue to assess the estate and inheritance taxes has already prescribed. To sustain
his side, the Commissioner ventilated in his brief, fraud in the filing of the return, absence of
certain data from the return which prevented him from assessing thereon the tax due and the
pendency in this Court of L-11374 entitled "Intestate Estate of the late Matias Yusay, Jose C.
Yusay, Administrator vs. Lilia Yusay Gonzales" which allegedly had the effect of suspending the
running of the period of limitations on assessment.
Clearly, therefore, it would be incorrect to say that the question of whether or not the return filed
by Jose Yusay was sufficient to start the running of the statute of limitations to assess the
corresponding tax, was not raised by the Commissioner in the Court of Tax Appeals and in this
Court.
Second. Movant contend that contrary to Our ruling, the return filed by Jose Yusay was sufficient
to start the statute of limitations on assessment. Inasmuch as this question was amply discussed
in Our decision sought to be reconsidered, and no new argument was advanced, We deem it
unnecessary to pass upon the same. There is no reason for any change on Our stand on this
point.

Third. Movant insists that since she administers only one-third of the estate of Matias Yusay, she
should not be liable for the whole tax. And she suggests that We hold the intestate estate of
Matias Yusay liable for said taxes, one-third to be paid by Lilia Yusay Gonzales and two-thirds to
be paid by Florencia P. Vda. de Yusay.
The foregoing suggestion to require payment of two-thirds of the total taxes by Florencia P. Vda.
de Yusay is not acceptable, for she (Florencia P. Vda. de Yusay) is not a party in this case.
It should be pointed out that Lilia Yusay Gonzales appealed the whole assessment to the Court
of Tax Appeals. Thereupon, the Commissioner of Internal Revenue questioned her legal capacity
to institute the appeal on the ground that she administered only one-third of the estate of Matias
Yusay. In opposition, she espoused the view, which was sustained by the Tax Court, that in coadministration, the administratrices are regarded as one person and the acts of one of them in
relation to the regular administration of the estate are deemed to be the acts of all; hence, each
administratrix can represent the whole estate. In advancing such proposition, Lilia Yusay
Gonzales represented the whole estate and hoped to benefit from the favorable outcome of the
case. For the same reason that she represented her co-administratrix and the whole estate of
Matias Yusay, she risked being ordered to pay the whole assessment, should the assessment
be sustained.
Her change of stand adopted in the motion for reconsideration to the effect that she should be
made liable for only one-third of the total tax, would negate her aforesaid proposition before the
Court of Tax Appeals. She is now estopped from denying liability for the whole tax.
At any rate, estate and inheritance taxes are satisfied from the estate and are to be paid by the
executor or administrator.1 Where there are two or more executors, all of them are severally
liable for the payment of the estate tax.2 The inheritance tax, although charged against the
account of each beneficiary, should be paid by the executor or administrator.3 Failure to pay the
estate and inheritance taxes before distribution of the estate would subject the executor or
administrator to criminal liability under Section 107(c) of the Tax Code.
It is immaterial therefore that Lilia Yusay Gonzales administers only one-third of the estate and
will receive as her share only said portion, for her right to the estate comes after taxes.4 As an
administratrix, she is liable for the entire estate tax. As an heir, she is liable for the entire
inheritance tax although her liability would not exceed the amount of her share in the
estate.5 The entire inheritance tax which amounts to P39,178.12 excluding penalties is obviously
much less than her distributive share.
Motion for reconsideration denied.
Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal, Sanchez and Castro, JJ., concur.
Zaldivar, J., took no part.