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Dizon v CTA (Taxation)

Dizon v CTA G.R. No. 140944 April 30, 2008

On November 7, 1987, Jose P. Fernandez (Jose) died. Thereafter, a petition for the probate of his will was filed with
Branch 51 of the Regional Trial Court (RTC) of Manila (probate court). 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). 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.

1. 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

2. 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 Or Whether or not the CA erred in affirming the CTA in the latter's
determination of the deficiency estate tax imposed against the Estate.

1. Yes. While the CTA is not governed strictly by technical rules of evidence, 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. The BIR's failure to formally offer these
pieces of evidence, despite CTA's directives, is fatal to its cause

2. Yes. The claims existing at the time of death are significant to, and should be made the basis of, the determination
of allowable deductions. Also, as held in Propstra v. U.S., 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. This is called the date-
of-death valuation rule.


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

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


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

HELD: The judgment of the lower court is accordingly modified, with costs
against the plaintiff in both instances
The defendant maintains that it was the duty of the executor to pay the
inheritance tax before the delivery of the decedent’s property to the trustee.
Stated otherwise, the defendant contends that delivery to the trustee was
delivery to the cestui que trust, the beneficiary in this case, within the meaning
of the first paragraph of subsection (b) of section 1544 of the Revised
Administrative Code. This contention is well taken and is sustained. A trustee
is but an instrument or agent for the cestui que trust

The appointment of Moore as trustee was made by the trial court in

conformity with the wishes of the testator as expressed in his will. It is true
that the word “trust” is not mentioned or used in the will but the intention to
create one is clear. No particular or technical words are required to create a
testamentary trust. The words “trust” and “trustee”, though apt for the
purpose, are not necessary. In fact, the use of these two words is not
conclusive on the question that a trust is created. ” To constitute a valid
testamentary trustthere 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.”

There is no doubt that the testator intended to create a trust. He ordered in his
will that certain of his properties be kept together undisposed during a fixed
period, for a stated purpose. The probate court certainly exercised sound
judgment in appointmening a trustee to carry into effect the provisions of the

As the existence of the trust was already proven, it results that the estate which
plaintiff represents has been delinquent in the payment of inheritance tax and,
therefore, liable for the payment of interest and surcharge provided by law in
such cases.

The delinquency in payment occurred on March 10, 1924, the date when
Moore became trustee. On that date trust estate vested in him. The interest
due should be computed from that date.

NOTES: Other issues:

(a) When does the inheritance tax accrue and when must it be satisfied?
The accrual of the inheritance tax is distinct from the obligation to pay the

Acording to article 657 of the Civil Code, “the rights to the succession of a
person are transmitted from the moment of his death.” “In other words”, said
Arellano, C. J., “. . . the heirs succeed immediately to all of the property of the
deceased ancestor. The property belongs to the heirs at the moment of the
death of the ancestor as completely as if the ancestor had executed and
delivered to them a deed for the same before his death.”

Whatever may be the time when actual transmission of the inheritance takes
place, succession takes place in any event at the moment of the 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. ” Thomas
Hanley having died on May 27, 1922, the inheritance tax accrued as of the

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. xx
SEC. 1544. When tax to be paid. — The tax fixed in this article shall be paid:
(a) In the second and third cases of the next preceding section, before entrance
into possession of the property.
(b) In other cases, within the six months subsequent to the death of the
predecessor; but if judicial testamentary or intestate proceedings shall be
instituted prior to the expiration of said period, the payment shall be made by
the executor or administrator before delivering to each beneficiary his share.
The instant case does[not] fall under subsection (a), but under subsection (b),
of section 1544 above-quoted, as there is here no fiduciary heirs, first heirs,
legatee or donee. Under the subsection, the tax should have been paid before
the delivery of the properties in question to Moore as trustee.
(b) Should the inheritance tax be computed on the basis of the value of the
estate at the time of the testator’s death, or on its value ten years later?

If death is the generating source from which the power of the estate to impose
inheritance taxes takes its being and if, upon the death of the decedent,
succession takes place and the right of the estate to tax vests instantly, the tax
should be measured by the value of the estate as it stood at the time of the
decedent’s death, regardless of any subsequent contingency value of any
subsequent increase or decrease in value
(c) In determining the net value of the estate subject to tax, is it proper to
deduct the compensation due to trustees?

A trustee, no doubt, is entitled to receive a fair compensation for his services.

But from this it does not follow that the compensation due him may lawfully
be deducted in arriving at the net value of the estate subject to tax. There is no
statute in the Philippines which requires trustees’ commissions to be deducted
in determining the net value of the estate subject to inheritance tax

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

A statute should be considered as prospective in its operation, whether it

enacts, amends, or repeals an inheritance tax, unless the language of the
statute clearly demands or expresses that it shall have a retroactive effect, . . .
.” Act No. 3606 itself contains no provisions indicating legislative intent to
give it retroactive effect. No such effect can be given the statute by this court.

Commissioner of Internal
Revenue vs Court of Appeals
and A. Soriano Corp.
Don Andres Soriano (American), founder of A. Soriano Corp. (ASC) had a total
shareholdings of 185,154 shares. Broken down, the shares comprise of 50,495 shares
which were of original issue when the corporation was founded and 134,659 shares as
stock dividend declarations. So in 1964 when Soriano died, half of the shares he held went
to his wife as her conjugal share (wife’s “legitime”) and the other half (92,577 shares, which
is further broken down to 25,247.5 original issue shares and 82,752.5 stock dividend
shares) went to the estate. For sometime after his death, his estate still continued to receive
stock dividends from ASC until it grew to at least 108,000 shares.
In 1968, ASC through its Board issued a resolution for the redemption of shares from
Soriano’s estate purportedly for the planned “Filipinization” of ASC. Eventually, 108,000
shares were redeemed from the Soriano Estate. In 1973, a tax audit was conducted.
Eventually, the Commissioner of Internal Revenue (CIR) issued an assessment against
ASC for deficiency withholding tax-at-source. The CIR explained that when the redemption
was made, the estate profited (because ASC would have to pay the estate to redeem), and
so ASC would have withheld tax payments from the Soriano Estate yet it remitted no such
withheld tax to the government.
ASC averred that it is not duty bound to withhold tax from the estate because it redeemed
the said shares for purposes of “Filipinization” of ASC and also to reduce its remittance
ISSUE: Whether or not ASC’s arguments are tenable.
HELD: No. The reason behind the redemption is not material. The proceeds from a
redemption is taxable and ASC is duty bound to withhold the tax at source. The Soriano
Estate definitely profited from the redemption and such profit is taxable, and again, ASC
had the duty to withhold the tax. There was a total of 108,000 shares redeemed from the
estate. 25,247.5 of that was original issue from the capital of ASC. The rest (82,752.5) of
the shares are deemed to have been from stock dividend shares. Sale of stock dividends is
taxable. It is also to be noted that in the absence of evidence to the contrary, the Tax Code
presumes that every distribution of corporate property, in whole or in part, is made out of
corporate profits such as stock dividends.
It cannot be argued that all the 108,000 shares were distributed from the capital of ASC and
that the latter is merely redeeming them as such. The capital cannot be distributed in the
form of redemption of stock dividends without violating the trust fund doctrine — wherein the
capital stock, property and other assets of the corporation are regarded as equity in trust for
the payment of the corporate creditors. Once capital, it is always capital. That doctrine was
intended for the protection of corporate creditors.

273 SCRA 47, GR No. 120880, June 5, 1997
Bongbong Marcos sought for the reversal of the ruling of the Court of Appeals to grant CIR's petition to
levy the properties of the late Pres. Marcos to cover the payment of his tax delinquencies during the
period of his exile in the US. The Marcos family was assessed by the BIR after it failed to file estate tax
returns. However the assessment were not protested administratively by Mrs. Marcos and the heirs of the
late president so that they became final and unappealable after the period for filing of opposition has
prescribed. Marcos contends that the properties could not be levied to cover the tax dues because they are
still pending probate with the court, and settlement of tax deficiencies could not be had, unless there is an
order by the probate court or until the probate proceedings are terminated.
Petitioner also pointed out that applying Memorandum Circular No. 38-68, the BIR's Notices of Levy on
the Marcos properties were issued beyond the allowed period, and are therefore null and void.

Whether or not the contentions of Bongbong Marcos are correct

No. The deficiency income tax assessments and estate tax assessment are already final and unappealable -
and-the subsequent levy of real properties is a tax remedy resorted to by the government, sanctioned by
Section 213 and 218 of the National Internal Revenue Code. This summary tax remedy is distinct and
separate from the other tax remedies (such as Judicial Civil actions and Criminal actions), and is not
affected or precluded by the pendency of any other tax remedies instituted by the government.
The approval of the court, sitting in probate, or as a settlement tribunal over the deceased's estate is not a
mandatory requirement in the collection of estate taxes. On the contrary, under Section 87 of the NIRC, it
is the probate or settlement court which is bidden not to authorize the executor or judicial administrator of
the decedent's estate to deliver any distributive share to any party interested in the estate, unless it is
shown a Certification by the Commissioner of Internal Revenue that the estate taxes have been paid. This
provision disproves the petitioner's contention that it is the probate court which approves the assessment
and collection of the estate tax.
On the issue of prescription, the omission to file an estate tax return, and the subsequent failure to contest
or appeal the assessment made by the BIR is fatal to the petitioner's cause, as under Sec.223 of the NIRC,
in case of failure to file a return, the tax may be assessed at anytime within 10 years after the omission,
and any tax so assessed may be collected by levy upon real property within 3 years (now 5 years)
following the assessment of the tax. Since the estate tax assessment had become final and unappealable
by the petitioner's default as regards protesting the validity of the said assessment, there is no reason why
the BIR cannot continue with the collection of the said tax.