Republic of the Philippines Cerdeira, from the decision of the respondent Collector of Internal Revenue, assessing
SUPREME COURT against and demanding from the former the sum P161,874.95 as deficiency estate and
Manila
EN BANC
 
G.R. No. L-13250 October 29, 1971
THE COLLECTOR OF INTERNAL REVENUE, petitioner,
vs.
ANTONIO CAMPOS RUEDA, respondent..
Assistant Solicitor General Jose P. Alejandro and Special Attorney Jose G. Azurin, (O.S.G.)
for petitioner.
Ramirez and Ortigas for respondent.
FERNANDO, J.:
The basic issue posed by petitioner Collector of Internal Revenue in this appeal from a
decision of the Court of Tax Appeals as to whether or not the requisites of statehood, or at
least so much thereof as may be necessary for the acquisition of an international personality,
must be satisfied for a "foreign country" to fall within the exemption of Section 122 of the
National Internal Revenue Code1 is now ripe for adjudication. The Court of Tax Appeals
answered the question in the negative, and thus reversed the action taken by petitioner
Collector, who would hold respondent Antonio Campos Rueda, as administrator of the estate
of the late Estrella Soriano Vda. de Cerdeira, liable for the sum of P161,874.95 as deficiency
estate and inheritance taxes for the transfer of intangible personal properties in the
Philippines, the deceased, a Spanish national having been a resident of Tangier, Morocco
from 1931 up to the time of her death in 1955. In an earlier resolution promulgated May 30,
1962, this Court on the assumption that the need for resolving the principal question would
be obviated, referred the matter back to the Court of Tax Appeals to determine whether the
alleged law of Tangier did grant the reciprocal tax exemption required by the aforesaid
Section 122. Then came an order from the Court of Tax Appeals submitting copies of
legislation of Tangier that would manifest that the element of reciprocity was not lacking. It
was not until July 29, 1969 that the case was deemed submitted for decision. When the
petition for review was filed on January 2, 1958, the basic issue raised was impressed with
an element of novelty. Four days thereafter, however, on January 6, 1958, it was held by this
Court that the aforesaid provision does not require that the "foreign country" possess an
international personality to come within its terms. 2 Accordingly, we have to affirm.
The decision of the Court of Tax Appeals, now under review, sets forth the background facts
as follows: "This is an appeal interposed by petitioner Antonio Campos Rueda as
administrator of the estate of the deceased Doña Maria de la Estrella Soriano Vda. de
inheritance taxes, including interest and penalties, on the transfer of intangible personal
properties situated in the Philippines and belonging to said Maria de la Estrella Soriano Vda.
de Cerdeira. Maria de la Estrella Soriano Vda. de Cerdeira (Maria Cerdeira for short) is a
Spanish national, by reason of her marriage to a Spanish citizen and was a resident of
Tangier, Morocco from 1931 up to her death on January 2, 1955. At the time of her demise
she left, among others, intangible personal properties in the Philippines." 3 Then came this
portion: "On September 29, 1955, petitioner filed a provisional estate and inheritance tax
return on all the properties of the late Maria Cerdeira. On the same date, respondent, pending
investigation, issued an assessment for state and inheritance taxes in the respective amounts
of P111,592.48 and P157,791.48, or a total of P369,383.96 which tax liabilities were paid by
petitioner ... . On November 17, 1955, an amended return was filed ... wherein intangible
personal properties with the value of P396,308.90 were claimed as exempted from taxes. On
November 23, 1955, respondent, pending investigation, issued another assessment for estate
and inheritance taxes in the amounts of P202,262.40 and P267,402.84, respectively, or a total
of P469,665.24 ... . In a letter dated January 11, 1956, respondent denied the request for
exemption on the ground that the law of Tangier is not reciprocal to Section 122 of the
National Internal Revenue Code. Hence, respondent demanded the payment of the sums of
P239,439.49 representing deficiency estate and inheritance taxes including ad
valorem penalties, surcharges, interests and compromise penalties ... . In a letter dated
February 8, 1956, and received by respondent on the following day, petitioner requested for
the reconsideration of the decision denying the claim for tax exemption of the intangible
personal properties and the imposition of the 25% and 5% ad valorem penalties ... .
However, respondent denied request, in his letter dated May 5, 1956 ... and received by
petitioner on May 21, 1956. Respondent premised the denial on the grounds that there was
no reciprocity [with Tangier, which was moreover] a mere principality, not a foreign
country. Consequently, respondent demanded the payment of the sums of P73,851.21 and
P88,023.74 respectively, or a total of P161,874.95 as deficiency estate and inheritance taxes
including surcharges, interests and compromise penalties." 4
The matter was then elevated to the Court of Tax Appeals. As there was no dispute between
the parties regarding the values of the properties and the mathematical correctness of the
deficiency assessments, the principal question as noted dealt with the reciprocity aspect as
well as the insisting by the Collector of Internal Revenue that Tangier was not a foreign
country within the meaning of Section 122. In ruling against the contention of the Collector
of Internal Revenue, the appealed decision states: "In fine, we believe, and so hold, that the
expression "foreign country", used in the last proviso of Section 122 of the National Internal
Revenue Code, refers to a government of that foreign power which, although not an
international person in the sense of international law, does not impose transfer or death upon
intangible person properties of our citizens not residing therein, or whose law allows a
similar exemption from such taxes. It is, therefore, not necessary that Tangier should have
been recognized by our Government order to entitle the petitioner to the exemption benefits
of the proviso of Section 122 of our Tax. Code."5
Hence appeal to this court by petitioner. The respective briefs of the parties duly submitted,
but as above indicated, instead of ruling definitely on the question, this Court, on May 30,
1962, resolve to inquire further into the question of reciprocity and sent back the case to the
Court of Tax Appeals for the motion of evidence thereon. The dispositive portion of such
resolution reads as follows: "While section 122 of the Philippine Tax Code aforequoted
speaks of 'intangible personal property' in both subdivisions (a) and (b); the alleged laws of
Tangier refer to 'bienes muebles situados en Tanger', 'bienes muebles radicantes en Tanger',
'movables' and 'movable property'. In order that this Court may be able to determine whether
the alleged laws of Tangier grant the reciprocal tax exemptions required by Section 122 of
the Tax Code, and without, for the time being, going into the merits of the issues raised by
the petitioner-appellant, the case is [remanded] to the Court of Tax Appeals for the reception
of evidence or proof on whether or not the words `bienes muebles', 'movables' and 'movable
properties as used in the Tangier laws, include or embrace 'intangible person property', as
used in the Tax Code."6 In line with the above resolution, the Court of Tax Appeals admitted
evidence submitted by the administrator petitioner Antonio Campos Rueda, consisting of
exhibits of laws of Tangier to the effect that "the transfers by reason of death of movable
properties, corporeal or incorporeal, including furniture and personal effects as well as of
securities, bonds, shares, ..., were not subject, on that date and in said zone, to the payment of
any death tax, whatever might have been the nationality of the deceased or his heirs and
legatees." It was further noted in an order of such Court referring the matter back to us that
such were duly admitted in evidence during the hearing of the case on September 9, 1963.
Respondent presented no evidence."7
The controlling legal provision as noted is a proviso in Section 122 of the National Internal
Revenue Code. It reads thus: "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 tax or death tax of
any character in respect of intangible person property 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."8 The only obstacle therefore to a definitive ruling is
whether or not as vigorously insisted upon by petitioner the acquisition of internal
personality is a condition sine qua non to Tangier being considered a "foreign country".
Deference to the De Lara ruling, as was made clear in the opening paragraph of this opinion,
calls for an affirmance of the decision of the Court of Tax Appeals.
It does not admit of doubt that if a foreign country is to be identified with a state, it is
required in line with Pound's formulation that it be a politically organized sovereign
community independent of outside control bound by penalties of nationhood, legally
supreme within its territory, acting through a government functioning under a regime of
law.9 It is thus a sovereign person with the people composing it viewed as an organized
corporate society under a government with the legal competence to exact obedience to its
commands. 10 It has been referred to as a body-politic organized by common consent for
mutual defense and mutual safety and to promote the general welfare. 11 Correctly has it been
described by Esmein as "the juridical personification of the nation." 12 This is to view it in the
light of its historical development. The stress is on its being a nation, its people occupying a
definite territory, politically organized, exercising by means of its government its sovereign
will over the individuals within it and maintaining its separate international personality.
Laski could speak of it then as a territorial society divided into government and subjects,
claiming within its allotted area a supremacy over all other institutions. 13 McIver similarly
would point to the power entrusted to its government to maintain within its territory the
conditions of a legal order and to enter into international relations. 14 With the latter requisite
satisfied, international law do not exact independence as a condition of statehood. So Hyde
did opine. 15
Even on the assumption then that Tangier is bereft of international personality, petitioner has
not successfully made out a case. It bears repeating that four days after the filing of this
petition on January 6, 1958 in Collector of Internal Revenue v. De Lara, 16 it was specifically
held by us: "Considering the State of California as a foreign country in relation to section
122 of our Tax Code we believe and hold, as did the Tax Court, that the Ancilliary
Administrator is entitled the exemption from the inheritance tax on the intangible personal
property found in the Philippines." 17 There can be no doubt that California as a state in the
American Union was in the alleged requisite of international personality. Nonetheless, it was
held to be a foreign country within the meaning of Section 122 of the National Internal
Revenue Code. 18
What is undeniable is that even prior to the De Lara ruling, this Court did commit itself to
the doctrine that even a tiny principality, that of Liechtenstein, hardly an international
personality in the sense, did fall under this exempt category. So it appears in an opinion of
the Court by the then Acting Chief Justicem Bengson who thereafter assumed that position in
a permanent capacity, in Kiene v. Collector of Internal Revenue. 19 As was therein noted:
'The Board found from the documents submitted to it — proof of the laws of Liechtenstein
— that said country does not impose estate, inheritance and gift taxes on intangible property
of Filipino citizens not residing in that country. Wherefore, the Board declared that pursuant
to the exemption above established, no estate or inheritance taxes were collectible, Ludwig
Kiene being a resident of Liechtestein when he passed away." 20 Then came this definitive
ruling: "The Collector — hereafter named the respondent — cites decisions of the United
States Supreme Court and of this Court, holding that intangible personal property in the
Philippines belonging to a non-resident foreigner, who died outside of this country is subject
to the estate tax, in disregard of the principle 'mobilia sequuntur personam'. Such property is
admittedly taxable here. Without the proviso above quoted, the shares of stock owned here
by the Ludwig Kiene would be concededly subject to estate and inheritance taxes.
Nevertheless our Congress chose to make an exemption where conditions are such that
demand reciprocity — as in this case. And the exemption must be honored." 21
WHEREFORE, the decision of the respondent Court of Tax Appeals of October 30, 1957 is
affirmed. Without pronouncement as to costs.
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-34937             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 Wherefore, the demurrer interposed by the appellee was well-founded because it appears that
Navotas, 39 Phil., 931.) 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
The appellants question the power of the Legislature to impose taxes on the transmission of waived the opportunity offered them and they are not now entitled to have the case remanded
real estate that takes effect immediately and during the lifetime of the donor, and allege as for further proceedings, which would serve no purpose altogether in view of the
their reason that such tax partakes of the nature of the land tax which the law has already insufficiency of the complaint.
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 Wherefore, the judgment appealed from is hereby affirmed, with costs of this instance
instance. The tax collected by the appellee on the properties donated in 1925 really against the appellants. So ordered.
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.
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-36770             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 court a 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 cross-complaint 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
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.
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:
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

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:

". . . 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.

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-34583             October 22, 1931
THE BANK OF THE PHILIPPINE ISLANDS, administrator of the estate of the late
Adolphe Oscar Schuetze, plaintiff-appellant,
vs.
JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellee.
Araneta, De Joya, Zaragoza and Araneta for appellant.
Attorney-General Jaranilla for appellee.
VILLA-REAL, J.:
The Bank of the Philippine Islands, as administrator of the estate of the deceased Adolphe
Oscar Schuetze, has appealed to this court from the judgment of the Court of First Instance
of Manila absolving the defendant Juan Posadas, Jr., Collector of Internal Revenue, from the
complaint filed against him by said plaintiff bank, and dismissing the complaint with costs.
The appellant has assigned the following alleged errors as committed by the trial court in its
judgment, to wit:
1. The lower court erred in holding that the testimony of Mrs. Schuetze was
inefficient to established the domicile of her husband.
2. The lower court erred in holding that under section 1536 of the Administrative
Code the tax imposed by the defendant is lawful and valid.
3. The lower court erred in not holding that one-half (½) of the proceeds of the
policy in question is community property and that therefore no inheritance tax can
be levied, at least on one-half (½) of the said proceeds.
4. The lower court erred in not declaring that it would be unconstitutional to
impose an inheritance tax upon the insurance policy here in question as it would be
a taking of property without due process of law.
The present complaint seeks to recover from the defendant Juan Posadas, Jr., Collector of
Internal Revenue, the amount of P1,209 paid by the plaintiff under protest, in its capacity of
administrator of the estate of the late Adolphe Oscar Schuetze, as inheritance tax upon the
sum of P20,150, which is the amount of an insurance policy on the deceased's life, wherein
his own estate was named the beneficiary.
At the hearing, in addition to documentary and parol evidence, both parties submitted the
following agreed statement of facts of the court for consideration:
It is hereby stipulated and agreed by and between the parties in the above-entitled
action through their respective undersigned attorneys:
1. That the plaintiff, Rosario Gelano Vda. de Schuetze, window of the late
Adolphe Oscar Schuetze, is of legal age, a native of Manila, Philippine Islands,
and is and was at all times hereinafter mentioned a resident of Germany, and at the
time of the death of her husband, the late Adolphe Oscar Schuetze, she was
actually residing and living in Germany;
2. That the Bank of the Philippine Islands, is and was at all times hereinafter
mentioned a banking institution duly organized and existing under and by virtue of
the laws of the Philippine Islands;
3. That on or about August 23, 1928, the herein plaintiff before notary public
Salvador Zaragoza, drew a general power appointing the above-mentioned Bank of
the Philippine Islands as her attorney-in-fact, and among the powers conferred to
said attorney-in-fact was the power to represent her in all legal actions instituted by
or against her;
4. That the defendant, of legal age, is and at all times hereinafter mentioned the
duly appointed Collector of Internal Revenue with offices at Manila, Philippine
Islands;
5. That the deceased Adolphe Oscar Schuetze came to the Philippine Islands for
the first time of March 31, 1890, and worked in the several German firms as a
mere employee and that from the year 1903 until the year 1918 he was partner in
the business of Alfredo Roensch;
6. That from 1903 to 1922 the said Adolphe Oscar Schuetze was in the habit of
making various trips to Europe;
7. That on December 3, 1927, the late Adolphe Oscar Schuetze coming from Java,
and with the intention of going to Bremen, landed in the Philippine Islands where
he met his death on February 2, 1928;
8. That on March 31, 1926, the said Adolphe Oscar Schuetze, while in Germany,
executed a will, in accordance with its law, wherein plaintiff was named his
universal heir;
9. That the Bank of the Philippine Islands by order of the Court of First Instance of
Manila under date of May 24, 1928, was appointed administrator of the estate of
the deceased Adolphe Oscar Schuetze;
10. That, according to the testamentary proceedings instituted in the Court of First
Instance of Manila, civil case No. 33089, the deceased at the time of his death was
possessed of not only real property situated in the Philippine Islands, but also
personal property consisting of shares of stock in nineteen (19) domestic
corporations;
11. That the fair market value of all the property in the Philippine Islands left by
the deceased at the time of his death in accordance with the inventory submitted to
the Court of First Instance of Manila, civil case No. 33089, was P217,560.38;
12. That the Bank of the Philippine Islands, as administrator of the estate of the
deceased rendered its final account on June 19, 1929, and that said estate was
closed on July 16, 1929;
13. That among the personal property of the deceased was found life-insurance
policy No. 194538 issued at Manila, Philippine Islands, on January 14, 1913, for
the sum of $10,000 by the Sun Life Assurance Company of Canada, Manila
branch, a foreign corporation duly organized and existing under and by virtue of
the laws of Canada, and duly authorized to transact business in the Philippine
Islands;
14. That in the insurance policy the estate of the said Adolphe Oscar Schuetze was
named the beneficiary without any qualification whatsoever;
15. That for five consecutive years, the deceased Adolphe Oscar Schuetze paid the
premiums of said policy to the Sun Life Assurance Company of Canada, Manila
branch;
16. That on or about the year 1918, the Sun Life Assurance Company of Canada,
Manila branch, transferred said policy to the Sun Life Assurance Company of
Canada, London branch;
17. That due to said transfer the said Adolphe Oscar Schuetze from 1918 to the
time of his death paid the premiums of said policy to the Sun Life Assurance
Company of Canada, London Branch;
18. That the sole and only heir of the deceased Adolphe Oscar Schuetze is his
widow, the plaintiff herein;
19. That at the time of the death of the deceased and at all times thereafter
including the date when the said insurance policy was paid, the insurance policy
was not in the hands or possession of the Manila office of the Sun Life Assurance
Company of Canada, nor in the possession of the herein plaintiff, nor in the
possession of her attorney-in-fact the Bank of the Philippine Islands, but the same
was in the hands of the Head Office of the Sun Life Assurance Company of
Canada, at Montreal, Canada;
20. That on July 13, 1928, the Bank of the Philippine Islands as administrator of
the decedent's estate received from the Sun Life Assurance Company of Canada,
Manila branch, the sum of P20,150 representing the proceeds of the insurance
policy, as shown in the statement of income and expenses of the estate of the
deceased submitted on June 18, 1929, by the administrator to the Court of First
Instance of Manila, civil case No. 33089;
21. That the Bank of the Philippine Islands delivered to the plaintiff herein the said
sum of P20,150;
22. That the herein defendant on or about July 5, 1929, imposed an inheritance tax
upon the transmission of the proceeds of the policy in question in the sum of
P20,150 from the estate of the late Adolphe Oscar Schuetze to the sole heir of the
deceased, or the plaintiff herein, which inheritance tax amounted to the sum of
P1,209;
23. That the Bank of the Philippine Islands as administrator of the decedent's estate
and as attorney-in-fact of the herein plaintiff, having been demanded by the herein
defendant to pay inheritance tax amounting to the sum of P1,209, paid to the
defendant under protest the above-mentioned sum;
24. That notwithstanding the various demands made by plaintiff to the defendant,
said defendant has refused and refuses to refund to plaintiff the above mentioned
sum of P1,209;
25. That plaintiff reserves the right to adduce evidence as regards the domicile of
the deceased, and so the defendant, the right to present rebuttal evidence;
26. That both plaintiff and defendant submit this stipulation of facts without
prejudice to their right to introduce such evidence, on points not covered by the
agreement, which they may deem proper and necessary to support their respective
contentions.
In as much as one of the question raised in the appeal is whether an insurance policy on said
Adolphe Oscar Schuetze's life was, by reason of its ownership, subject to the inheritance tax,
it would be well to decide first whether the amount thereof is paraphernal or community
property.
According to the foregoing agreed statement of facts, the estate of Adolphe Oscar Schuetze
is the sole beneficiary named in the life-insurance policy for $10,000, issued by the Sun Life
Assurance Company of Canada on January 14, 1913. During the following five years the
insured paid the premiums at the Manila branch of the company, and in 1918 the policy was
transferred to the London branch.
The record shows that the deceased Adolphe Oscar Schuetze married the plaintiff-appellant
Rosario Gelano on January 16, 1914.
With the exception of the premium for the first year covering the period from January 14,
1913 to January 14, 1914, all the money used for paying the premiums, i. e., from the second
year, or January 16, 1914, or when the deceased Adolphe Oscar Schuetze married the
plaintiff-appellant Rosario Gelano, until his death on February 2, 1929, is conjugal property
inasmuch as it does not appear to have exclusively belonged to him or to his wife (art. 1407,
Civil Code). As the sum of P20,150 here in controversy is a product of such premium it must
also be deemed community property, because it was acquired for a valuable consideration,
during said Adolphe Oscar Schuetze's marriage with Rosario Gelano at the expense of the
common fund (art. 1401, No. 1, Civil Code), except for the small part corresponding to the
first premium paid with the deceased's own money.
In his Commentaries on the Civil Code, volume 9, page 589, second edition, Manresa treats
of life insurance in the following terms, to wit:
The amount of the policy represents the premiums to be paid, and the right to it
arises the moment the contract is perfected, for at the moment the power of
disposing of it may be exercised, and if death occurs payment may be demanded. It
is therefore something acquired for a valuable consideration during the marriage,
though the period of its fulfillment, depend upon the death of one of the spouses,
which terminates the partnership. So considered, the question may be said to be
decided by articles 1396 and 1401: if the premiums are paid with the exclusive
property of husband or wife, the policy belongs to the owner; if with conjugal
property, or if the money cannot be proved as coming from one or the other of the
spouses, the policy is community property.
The Supreme Court of Texas, United States, in the case of Martin vs. Moran (11 Tex. Civ.
A., 509) laid down the following doctrine:
COMMUNITY PROPERTY — LIFE INSURANCE POLICY. — A husband took
out an endowment life insurance policy on his life, payable "as directed by will."
He paid the premiums thereon out of community funds, and by his will made the
proceeds of the policy payable to his own estate. Held, that the proceeds were
community estate, one-half of which belonged to the wife.
In In re Stan's Estate, Myr. Prob. (Cal.), 5, the Supreme Court of California laid down the
following doctrine:
A testator, after marriage, took out an insurance policy, on which he paid the
premiums from his salary. Held that the insurance money was community
property, to one-half of which, the wife was entitled as survivor.
In In re Webb's Estate, Myr. Prob. (Cal.), 93, the same court laid down the following
doctrine:
A decedent paid the first third of the amount of the premiums on his life-insurance
policy out of his earnings before marriage, and the remainder from his earnings
received after marriage. Held, that one-third of the policy belonged to his separate
estate, and the remainder to the community property.
Thus both according to our Civil Code and to the ruling of those North American States
where the Spanish Civil Code once governed, the proceeds of a life-insurance policy
whereon the premiums were paid with conjugal money, belong to the conjugal partnership.
The appellee alleges that it is a fundamental principle that a life-insurance policy belongs
exclusively to the beneficiary upon the death of the person insured, and that in the present
case, as the late Adolphe Oscar Schuetze named his own estate as the sole beneficiary of the
insurance on his life, upon his death the latter became the sole owner of the proceeds, which
therefore became subject to the inheritance tax, citing Del Val vs. Del Val (29 Phil., 534),
where the doctrine was laid down that an heir appointed beneficiary to a life-insurance policy
taken out by the deceased, becomes the absolute owner of the proceeds of such policy upon
the death of the insured.
The estate of a deceased person cannot be placed on the same footing as an individual heir.
The proceeds of a life-insurance policy payable to the estate of the insured passed to the
executor or administrator of such estate, and forms part of its assets (37 Corpus Juris, 565,
sec. 322); whereas the proceeds of a life-insurance policy payable to an heir of the insured as
beneficiary belongs exclusively to said heir and does not form part of the deceased's estate
subject to administrator. (Del Val vs. Del Val, supra; 37 Corpus Juris, 566, sec. 323, and
articles 419 and 428 of the Code of Commerce.)
Just as an individual beneficiary of a life-insurance policy taken out by a married person
becomes the exclusive owner of the proceeds upon the death of the insured even if the
premiums were paid by the conjugal partnership, so, it is argued, where the beneficiary
named is the estate of the deceased whose life is insured, the proceeds of the policy become a
part of said estate upon the death of the insured even if the premiums have been paid with
conjugal funds.
In a conjugal partnership the husband is the manager, empowered to alienate the partnership
property without the wife's consent (art. 1413, Civil Code), a third person, therefore, named
beneficiary in a life-insurance policy becomes the absolute owner of its proceeds upon the
death of the insured even if the premiums should have been paid with money belonging to
the community property. When a married man has his life insured and names his own estate
after death, beneficiary, he makes no alienation of the proceeds of conjugal funds to a third
person, but appropriates them himself, adding them to the assets of his estate, in
contravention of the provisions of article 1401, paragraph 1, of the Civil Code cited above,
which provides that "To the conjugal partnership belongs" (1) Property acquired for a
valuable consideration during the marriage at the expense of the common fund, whether the
acquisition is made for the partnership or for one of the spouses only." Furthermore, such
appropriation is a fraud practised upon the wife, which cannot be allowed to prejudice her,
according to article 1413, paragraph 2, of said Code. Although the husband is the manager of
the conjugal partnership, he cannot of his own free will convert the partnership property into
his own exclusive property.
As all the premiums on the life-insurance policy taken out by the late Adolphe Oscar
Schuetze, were paid out of the conjugal funds, with the exceptions of the first, the proceeds
of the policy, excluding the proportional part corresponding to the first premium, constitute
community property, notwithstanding the fact that the policy was made payable to the
deceased's estate, so that one-half of said proceeds belongs to the estate, and the other half to
the deceased's widow, the plaintiff-appellant Rosario Gelano Vda. de Schuetze.
The second point to decide in this appeal is whether the Collector of Internal Revenue has
authority, under the law, to collect the inheritance tax upon one-half of the life-insurance
policy taken out by the late Adolphe Oscar Schuetze, which belongs to him and is made
payable to his estate.
According to the agreed statement of facts mentioned above, the plaintiff-appellant, the Bank
of the Philippine Islands, was appointed administrator of the late Adolphe Oscar Schuetze's
testamentary estate by an order dated March 24, 1928, entered by the Court of First Instance
of Manila. On July 13, 1928, the Sun Life Assurance Company of Canada, whose main
office is in Montreal, Canada, paid Rosario Gelano Vda. de Schuetze upon her arrival at
Manila, the sum of P20,150, which was the amount of the insurance policy on the life of said
deceased, payable to the latter's estate. On the same date Rosario Gelano Vda. de Schuetze
delivered the money to said Bank of the Philippine Islands, as administrator of the deceased's
estate, which entered it in the inventory of the testamentary estate, and then returned the
money to said widow.
Section 1536 of the Administrative Code, as amended by section 10 of Act No. 2835 and
section 1 of Act No. 3031, contains the following relevant provision:
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 of real property located in the Philippine Islands and
real rights in such property; of any franchise which must be exercised in the
Philippine Islands; of any shares, obligations, or bonds issued by any corporation
or sociedad anonima organized or constituted in the Philippine Islands in
accordance with its laws; of any shares or rights in any partnership, business or
industry established in the Philippine Islands or of any personal property located in
the Philippine Islands shall be subject to the following tax:
xxx     xxx     xxx
In as much as the proceeds of the insurance policy on the life of the late Adolphe Oscar
Schuetze were paid to the Bank of the Philippine Islands, as administrator of the deceased's
estate, for management and partition, and as such proceeds were turned over to the sole and
universal testamentary heiress Rosario Gelano Vda. de Schuetze, the plaintiff-appellant, here
in Manila, the situs of said proceeds is the Philippine Islands.
In his work "The Law of Taxation," Cooley enunciates the general rule governing the
levying of taxes upon tangible personal property, in the following words:
GENERAL RULE. — The suits of tangible personal property, for purposes of
taxation may be where the owner is domiciled but is not necessarily so. Unlike
intangible personal property, it may acquire a taxation situs in a state other than the
one where the owner is domiciled, merely because it is located there. Its taxable
situs is where it is more or less permanently located, regardless of the domicile of
the owner. It is well settled that the state where it is more or less permanently
located has the power to tax it although the owner resides out of the state,
regardless of whether it has been taxed for the same period at the domicile of the
owner, provided there is statutory authority for taxing such property. It is equally
well settled that the state where the owner is domiciled has no power to tax it
where the property has acquired an actual situs in another state by reason of its
more or less permanent location in that state. ... (2 Cooley, The Law of Taxation,
4th ed., p. 975, par. 451.)
With reference to the meaning of the words "permanent" and "in transit," he has the
following to say:
PERMANENCY OF LOCATION; PROPERTY IN TRANSIT. — In order to
acquire a situs in a state or taxing district so as to be taxable in the state or district
regardless of the domicile of the owner and not taxable in another state or district
at the domicile of the owner, tangible personal property must be more or less
permanently located in the state or district. In other words, the situs of tangible
personal property is where it is more or less permanently located rather than where
it is merely in transit or temporarily and for no considerable length of time. If
tangible personal property is more or less permanently located in a state other than
the one where the owner is domiciled, it is not taxable in the latter state but is
taxable in the state where it is located. If tangible personal property belonging to
one domiciled in one state is in another state merely in transitu or for a short time,
it is taxable in the former state, and is not taxable in the state where it is for the
time being. . . . .
Property merely in transit through a state ordinarily is not taxable there. Transit
begins when an article is committed to a carrier for transportation to the state of its
destination, or started on its ultimate passage. Transit ends when the goods arrive
at their destination. But intermediate these points questions may arise as to when a
temporary stop in transit is such as to make the property taxable at the place of
stoppage. Whether the property is taxable in such a case usually depends on the
length of time and the purpose of the interruption of transit. . . . .
. . . It has been held that property of a construction company, used in construction
of a railroad, acquires a situs at the place where used for an indefinite period. So
tangible personal property in the state for the purpose of undergoing a partial
finishing process is not to be regarded as in the course of transit nor as in the state
for a mere temporary purpose. (2 Cooley, The Law of Taxation, 4th ed., pp. 982,
983 and 988, par. 452.)
If the proceeds of the life-insurance policy taken out by the late Adolphe Oscar Schuetze and
made payable to his estate, were delivered to the Bank of the Philippine Islands for
administration and distribution, they were not in transit but were more or less permanently
located in the Philippine Islands, according to the foregoing rules. If this be so, half of the
proceeds which is community property, belongs to the estate of the deceased and is subject to
the inheritance tax, in accordance with the legal provision quoted above, irrespective of
whether or not the late Adolphe Oscar Schuetze was domiciled in the Philippine Islands at
the time of his death.
By virtue of the foregoing, we are of opinion and so hold: (1) That the proceeds of a life-
insurance policy payable to the insured's estate, on which the premiums were paid by the
conjugal partnership, constitute community property, and belong one-half to the husband and
the other half to the wife, exclusively; (2) that if the premiums were paid partly with
paraphernal and partly conjugal funds, the proceeds are likewise in like proportion
paraphernal in part and conjugal in part; and (3) that the proceeds of a life-insurance policy
payable to the insured's estate as the beneficiary, if delivered to the testamentary
administrator of the former as part of the assets of said estate under probate administration,
are subject to the inheritance tax according to the law on the matter, if they belong to the
assured exclusively, and it is immaterial that the insured was domiciled in these Islands or
outside.1awphil.net

Wherefore, the judgment appealed from is reversed, and the defendant is ordered to return to
the plaintiff the one-half of the tax collected upon the amount of P20,150, being the proceeds
of the insurance policy on the life of the late Adolphe Oscar Schuetze, after deducting the
proportional part corresponding to the first premium, without special pronouncement of
costs. So ordered.
 FIRST DIVISION
[G.R. No. 43082. June 18, 1937.]
PABLO LORENZO, as trustee of the estate of Thomas Hanley, deceased, Plaintiff-
Appellant, v. JUAN POSADAS, JR., Collector of Internal Revenue, Defendant-
Appellant.
Pablo Lorenzo and Delfin Joven, for Plaintiff-Appellant.
Solicitor-General Hilado, for Defendant-Appellant.
SYLLABUS
DECISION
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 interest 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:jgc:chanrobles.com.ph
"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 my 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.
x       x       x
"8. I state that at this time I have one brother living named Malachi Hanley, and that my
nephew, Matthew Hanley, is a son of my brother, Malachi Hanley."cralaw virtua1aw library
The Court of First Instance of Zamboanga 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 Matthew Hanley ten years after the testator’s death. Accordingly, P. J. M. Moore, one of
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.
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 personality 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 delinquency 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
this 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 or any part thereof. His
administrative remedies exhausted, plaintiff went to court with the result herein above
indicated.
In his appeal, plaintiff contends that the lower court erred:jgc:chanrobles.com.ph
"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 that time,
the latter became the owner thereof.
"II. In holding, in effect, that there was delinquency 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 "trustee"
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."cralaw virtua1aw library
The defendant-appellant contradicts the theories of the plaintiff and assigns the following
error besides:jgc:chanrobles.com.ph
"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."cralaw virtua1aw library
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 taxpayer be given retroactive effect? (e) Has
there been delinquency 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, gift mortis 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. According 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
v. Bondad, 34 Phil., 232. See also, Mijares v. Nery, 3 Phil., 195; Suiliong & Co., v. Chio-
Taysan, 12 Phil., 13; Lubrico v. Arbado, 12 Phil., 391; Inocencio v. Gat- Pandan, 14 Phil.,
491; Aliasas v. Alcantara, 16 Phil., 489; Ilustre v. Alaras Frondosa, 17 Phil., 321; Malahacan
v. Ignacio, 19 Phil., 434; Bowa v. Briones, 38 Phil., 276; Osorio v. Osorio & Ynchausti
Steamship Co., 41 Phil., 531; Fule v. Fule, 46 Phil., 317; Dais v. Court of First Instance of
Capiz, 51 Phil., 396; Baun v. 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 of 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 effect the general rule
laid down in article 647 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 received such inheritance. "Poco importa",
says Manresa commenting on article 567 of the Civil Code, "que desde el fallecimiento del
causante, hasta que el heredero o legatario entre en posesion de los bienes de la herencia a
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 that date.
From the fact, however, that Thomas Hanley died on May 27, 1922, it dies not follow that
the obligation to pay the tax arose as of that date. The time for the payment of 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:jgc:chanrobles.com.ph
"SEC. 1543. Exemption of certain acquisitions and transmission. — The following shall not
be taxed:jgc:chanrobles.com.ph
"(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:jgc:chanrobles.com.ph
"(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 copy of all letters testamentary or of administration shall be furnished the
Collector of Internal Revenue by the Clerk of Court within thirty days after their
issuance."cralaw virtua1aw library
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 not fall under subsection (a), but under subsection (b), of section 1544
above-quoted, as there is here no fiduciary heir, first heir, legatee or donee. Under that
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 state to impose inheritance
taxes its being and if, upon the death of the decedent, succession takes place and the right of
the state 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 affecting
value or 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 v. 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 depreciation is immaterial." (Ross, Inheritance Taxation, p. 72.) .
Our attention is directed to the statement of the rule in Cyclopedia of Law 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, however, 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 it out of the corpus of the estate
transferred. (In re Vanderbilt, 172 N. Y., 69; 69 N. E., 782; In re Hober, 86 N. Y. App. Div.,
458; 83 N. Y. Supp., 769; Estate of Tracy, 179, 179 N. Y., 501; 72 N. Y., 519; Estate of
Brez, 172 N. Y., 609; 64; 64 N. E., 958; Estate of Post, 85 App. Div., 611; 82 N. Y. Supp.,
1079. Vide also, Saltoun v. Lord Advocate, 1 Pater. 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 jurisdiction, 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 value 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 of only P480.81. This sum represents the
expenses and disbursement 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, . . . ."cralaw virtua1aw library
A trustee, no doubt, is entitled to receive a fair compensation for his services (Barney v.
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 v. 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 devisees, does not come
properly within the class or reason for exempting administration expenses. . . . Services
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 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."cralaw virtua1aw library
(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 that 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 v.
Kelleher, 195 U.S., 351, 360; 49 Law. ed., 232; 25 Sup. Ct. Rep., 44.) But legislative intent
that a tax statute should operate retroactively should be perfectly clear. (Scwab v. Doyle, 42
Sup. Ct., Rep., 491; Smietanka v. First Trust & Savings Bank, 257 U. S., 602; Stockdale v.
Insurance Co., 20 Wall., 323 Lunch v. 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 presses that it shall
have a retroactive effect, . . . (61 C. J., p. 1602.) Though the last paragraph of section 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 be
given 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 the
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 statutes 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., v. Worthington, 141 U.S., 468; 12 Sup. Ct., 55; Rice v. U. S.,
4 C. C. A., 104; 53 Fed., 910; Com. v. Standard Oil Co., 101 Pa. St., 150; State v. 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 delinquent until and unless the entire period has elapsed
within which the taxpayer is authorized by law to make such payments without being
subjected to the payment of penalties for failure to pay his taxes within the prescribed
period." (U. S. v. 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 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. 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 certainly designate the
beneficiaries, their interest in the trust, 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 ascertained 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 appointing 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 the 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 law. 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 the cestui que trust (Shelton v. King, 299 U. S., 90; 33 Sup. Ct.
Rep., 689; 57 Law. ed., 1086). When Moore accepted the trust and took possession of the
trust estate he thereby admitted that the estate belonged not to him but to his cestui que trust
(Tolentino v. 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 perpetuities. 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 acceptance
of the contention of the plaintiff in the case at bar. Taxes are essential to the very existence
of government. (Dobbins v. Erie County, 16 Pet., 435; 10 Law. ed., 1022; Kirkland v.
Hotchkiss, 100 U. S., 491; 25 Law. ed., 558; Lane County v. Oregon, 7 Wall, 71; 19 Law.
ed., 101; Union Refrigerator Transit Co., v. Kentucky, 199 U. S., 194; 26 Sup. Ct., Rep., 36;
50 Law. ed., 150; Charles River Bridge v. 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 v. Erie County, 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 v.
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 v. 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 distinctions. (U. S. v.
Watts, 1 Bond, 580; Fed. Cas. No. 16,653; U. S. v. Wigglesworth, 2 Story, 369; Fed. Cas.
No. 16,690, followed in Froelich & Kuttner v. Collector of Customs, 18 Phil., 461, 481;
Castle Bros., Wolf & Sons v. McCoy, 21 Phil., 300; Muñoz & Co. v. Hord, 12 Phil., 624;
Hongkong & Shanghai Banking Corporation v. Rafferty, 39 Phil., 145; Luzon Stevedoring
Co. v. 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 v. Trinidad, 40 Phil., 252). In the case of
Lim Co Chui v. Posadas (47 Phil., 461), this court had occasion to demonstrate trenchant
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 paying 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 Stated.." . . 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 devolved of collecting the taxes, may derange the operations of
government, and thereby cause serious detriment to the public." (Dows v. Chicago, 11 Wall., As the plaintiff has already paid the sum of P2,052.74, only the sum of P1,581.69 is legally
108; 20 Law. ed., 65.66; Churchill and Tait v. Rafferty, 32 Phil., 580.) 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
It results that the estate which plaintiff represents has been delinquent in the payment of claims, we must hold that the plaintiff is liable only in the sum of P1,191.27, the amount
inheritance tax and, therefore, liable for the payment of interest and surcharge provided by stated in the counterclaim.
law in such cases.
The judgment of the lower court is accordingly modified, with costs against the plaintiff in
The delinquency in payment occurred on March 10, 1924, the date when Moore became both instances. So ordered.
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 provision of law requiring the payment of
interest in appropriate cases is mandatory (see and cf. Lim Co Chui v. Posadas, supra), and
neither the Collector of Internal Revenue nor 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 communication 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 in accordance with the conclusion 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 section 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 of the beneficiary exceeds ten thousand
pesos but does not 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 P956.16, 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 surcharge 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.
 Republic of the Philippines China
SUPREME COURT
Manila             Total Gross Assets P130,792.85

EN BANC 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
G.R. No. L-11622             January 28, 1961
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
THE COLLECTOR OF INTERNAL REVENUE, petitioner, their values six months after the death of Stevenson. Preliminary return was made by the
vs. ancillary administrator in order to secure the waiver of the Collector of Internal Revenue on
DOUGLAS FISHER AND BETTINA FISHER, and the COURT OF TAX the inheritance tax due on the 210,000 shares of stock in the Mindanao Mother Lode Mines
APPEALS, respondents. 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
x---------------------------------------------------------x 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
G.R. No. L-11668             January 28, 1961.
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
DOUGLAS FISHER AND BETTINA FISHER, petitioner, inheritance tax, or a total of P16,023.23. Both of these assessments were paid by the estate
vs. on June 6, 1952.
THE COLLECTOR OF INTERNAL REVENUE, and the COURT OF TAX
APPEALS, respondents.
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
BARRERA, J.: and for the purpose of availing of the right granted by section 91 of the National Internal
Revenue Code.
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 In this amended return the valuation of the 210,000 shares of stock in the Mindanao Mother
the Philippines on August 9, 1874 of British parents and married in the City of Manila on Lode Mines, Inc. was reduced from 0.38 per share, as originally declared, to P0.20 per share,
January 23, 1909 to Beatrice Mauricia Stevenson another British subject) died on February or from a total valuation of P79,800.00 to P42,000.00. This change in price per share of
22, 1951 in San Francisco, California, U.S.A. whereto he and his wife moved and established stock was based by the ancillary administrator on the market notation of the stock obtaining
their permanent residence since May 10, 1945. In his will executed in San Francisco on May at the San Francisco California) Stock Exchange six months from the death of Stevenson,
22, 1947, and which was duly probated in the Superior Court of California on April 11, that is, As of August 22, 1931. In addition, the ancillary administrator made claim for the
1951, Stevenson instituted his wife Beatrice as his sole heiress to the following real and following deductions:
personal properties acquired by the spouses while residing in the Philippines, described and
preliminary assessed as follows:
Funeral expenses ($1,04326) P2,086.52
Judicial Expenses:
Gross Estate
(a) Administrator's Fee P1,204.34
Real Property — 2 parcels of land in Baguio, covered
by T.C.T. Nos. 378 and 379 P43,500.00 (b) Attorney's Fee 6.000.00
Personal Property (c) Judicial and Administration expenses as of
August 9, 1952 1,400.05
(1) 177 shares of stock of Canacao Estate at P10.00
each 1,770.00 8,604.39
(2) 210,000 shares of stock of Mindanao Mother Lode Real Estate Tax for 1951 on Baguio real
Mines, Inc. at P0.38 per share 79,800.00 properties (O.R. No. B-1 686836) 652.50
(3) Cash credit with Canacao Estate Inc. 4,870.88 Claims against the estate:
($5,000.00) P10,000.00 P10,000.00
(4) Cash, with the Chartered Bank of India, Australia &           851.97
 Plus: 4% int. p.a. from Feb. 2 to 22, 1951 22.47
Sub-Total
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:
  10,022.47 (1) Whether or not, in determining the taxable net estate of the decedent, one-half (½) of the
net estate should be deducted therefrom as the share of tile surviving spouse in accordance
P21,365.88 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 fine, we are of the opinion and so hold that: (a) the one-half (½) 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:
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 1325 2 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. "AA-2", 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 P1,204.34
2) Attorney's fee 6,000.00
3) Judicial and Administration expenses as of August 9, 1952   2,052.55
            Total 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 —
(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.

(1) Expenses, losses, indebtedness, and taxes. — That proportion of the deductions

specified in paragraph (1) of subjection (a) of this section 11 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
 Republic of the Philippines Less: Deductions (Sch. 4) 187,822,576.06
SUPREME COURT
Manila Net Conjugal Estate NIL  
Less: Share of Surviving Spouse NIL.  
THIRD DIVISION Net Share in Conjugal Estate NIL  
xxx
G.R. No. 140944             April 30, 2008
Net Taxable Estate NIL.  
RAFAEL ARSENIO S. DIZON, in his capacity as the Judicial Administrator of the Estate Tax Due NIL.11
Estate of the deceased JOSE P. FERNANDEZ, petitioner,
vs. On April 27, 1990, BIR Regional Director for San Pablo City, Osmundo G. Umali issued
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL Certification Nos. 2052[12] and 2053[13] stating that the taxes due on the transfer of real and
REVENUE, respondents. 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, on October 22, 1990,
DECISION the probate court appointed petitioner as the administrator of the Estate. 15

NACHURA, J.: 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
Before this Court is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Civil (P19,756,428.31), Banque de L'Indochine et. de Suez (US$4,828,905.90 as of January 31,
Procedure seeking the reversal of the Court of Appeals (CA) Decision 2 dated April 30, 1999 1988), Manila Banking Corporation (P84,199,160.46 as of February 28, 1989) and State
which affirmed the Decision3 of the Court of Tax Appeals (CTA) dated June 17, 1997.4 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
The Facts
However, on November 26, 1991, the Assistant Commissioner for Collection of the BIR,
On November 7, 1987, Jose P. Fernandez (Jose) died. Thereafter, a petition for the probate of Themistocles Montalban, issued Estate Tax Assessment Notice No. FAS-E-87-91-
his will5 was filed with Branch 51 of the Regional Trial Court (RTC) of Manila (probate 003269,17 demanding the payment of P66,973,985.40 as deficiency estate tax, itemized as
court).[6] The probate court then appointed retired Supreme Court Justice Arsenio P. Dizon follows:
(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 Deficiency Estate Tax- 1987
Internal Revenue (BIR) of the special proceedings for the Estate. Estate tax P31,868,414.48
25% surcharge- late filing 7,967,103.62
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 late payment 7,967,103.62
it, had yet to be collated, determined and identified. Thus, in a letter 8 dated March 14, 1990, Interest 19,121,048.68
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 Compromise-non filing 25,000.00
of Tax Clearance. Eventually, on April 17, 1990, Atty. Gonzales wrote a letter 9 addressed to non payment 25,000.00
the BIR Regional Director for San Pablo City and filed the estate tax return 10 with the same
no notice of death 15.00
BIR Regional Office, showing therein a NIL estate tax liability, computed as follows:
no CPA Certificate 300.00
COMPUTATION OF TAX Total amount due & collectible P66,973,985.4018
Conjugal Real Property (Sch. 1) P10,855,020.00
In his letter19 dated December 12, 1991, Atty. Gonzales moved for the reconsideration of the
Conjugal Personal Property (Sch.2) 3,460,591.34
said estate tax assessment. However, in her letter 20 dated April 12, 1994, the BIR
Taxable Transfer (Sch. 3) Commissioner denied the request and reiterated that the estate is liable for the payment
Gross Conjugal Estate 14,315,611.34 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.
As found by the CTA, the respective parties presented the following pieces of evidence, to
wit:
In the hearings conducted, petitioner did not present testimonial evidence but
merely documentary evidence consisting of the following:
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
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.).

Nature of Document (sic) 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
1. Letter dated October 13, 1988 from Arsenio P. Dizon addressed to the
conducted the investigation on the estate tax case of the late Jose P.
Commissioner of Internal Revenue informing the latter of the special
Fernandez. In the course of the direct examination of the witness, he identified
proceedings for the settlement of the estate (p. 126, BIR records);
the following:
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); Documents/Signatures

3. Pleading entitled "Compliance" filed with the probate Court submitting the 1. Estate Tax Return prepared by the BIR;
final inventory of all the properties of the deceased (p. 106, BIR records); 2. Signatures of Ma. Anabella Abuloc and Alberto Enriquez, Jr. appearing at
4. Attachment to Exh. "C" which is the detailed and complete listing of the the lower Portion of Exh. "1";
properties of the deceased (pp. 89-105, BIR rec.); 3. Memorandum for the Commissioner, dated July 19, 1991, prepared by
5. Claims against the estate filed by Equitable Banking Corp. with the revenue examiners, Ma. Anabella A. Abuloc, Alberto S. Enriquez and
probate Court in the amount of P19,756,428.31 as of March 31, 1988, Raymund S. Gallardo; Reviewed by Maximino V. Tagle
together with the Annexes to the claim (pp. 64-88, BIR records); 4. Signature of Alberto S. Enriquez appearing at the lower portion on p. 2 of
6. Claim filed by Banque de L' Indochine et de Suez with the probate Court Exh. "2";
in the amount of US $4,828,905.90 as of January 31, 1988 (pp. 262-265, 5. Signature of Ma. Anabella A. Abuloc appearing at the lower portion on p.
BIR records); 2 of Exh. "2";
7. Claim of the Manila Banking Corporation (MBC) which as of November 6. Signature of Raymund S. Gallardo appearing at the Lower portion on p. 2
7, 1987 amounts to P65,158,023.54, but recomputed as of February 28, of Exh. "2";
1989 at a total amount of P84,199,160.46; together with the demand letter
7. Signature of Maximino V. Tagle also appearing on p. 2 of Exh. "2";
from MBC's lawyer (pp. 194-197, BIR records);
8. Summary of revenue Enforcement Officers Audit Report, dated July 19,
8. Demand letter of Manila Banking Corporation prepared by Asedillo,
1991;
Ramos and Associates Law Offices addressed to Fernandez Hermanos,
Inc., represented by Jose P. Fernandez, as mortgagors, in the total amount 9. Signature of Alberto Enriquez at the lower portion of Exh. "3";
of P240,479,693.17 as of February 28, 1989 (pp. 186-187, BIR records); 10. Signature of Ma. Anabella A. Abuloc at the lower portion of Exh. "3";
9. Claim of State Investment House, Inc. filed with the RTC, Branch VII of 11. Signature of Raymond S. Gallardo at the lower portion of Exh. "3";
Manila, docketed as Civil Case No. 86-38599 entitled "State Investment
House, Inc., Plaintiff, versus Maritime Company Overseas, Inc. and/or 12. Signature of Maximino V. Tagle at the lower portion of Exh. "3";
Jose P. Fernandez, Defendants," (pp. 200-215, BIR records); 13. Demand letter (FAS-E-87-91-00), signed by the Asst. Commissioner for
10. Letter dated March 14, 1990 of Arsenio P. Dizon addressed to Atty. Jesus Collection for the Commissioner of Internal Revenue, demanding payment
M. Gonzales, (p. 184, BIR records); of the amount of P66,973,985.40; and
11. Letter dated April 17, 1990 from J.M. Gonzales addressed to the Regional 14. Assessment Notice FAS-E-87-91-00
Director of BIR in San Pablo City (p. 183, BIR records);
12. Estate Tax Return filed by the estate of the late Jose P. Fernandez through The CTA's Ruling
its authorized representative, Atty. Jesus M. Gonzales, for Arsenio P.
Dizon, with attachments (pp. 177-182, BIR records);
On June 17, 1997, the CTA denied the said petition for review. Citing this Court's ruling are hereby ordered to pay to respondent the amount of P37,419,493.71 plus 20%
in Vda. de Oñate v. Court of Appeals,23 the CTA opined that the aforementioned pieces of interest from the due date of its payment until full payment thereof as estate tax
evidence introduced by the BIR were admissible in evidence. The CTA ratiocinated: liability of the estate of Jose P. Fernandez who died on November 7, 1987.

Although the above-mentioned documents were not formally offered as evidence for SO ORDERED.26
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 Aggrieved, petitioner, on March 2, 1998, went to the CA via a petition for review. 27
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

Nevertheless, the CTA did not fully adopt the assessment made by the BIR and it came up On April 30, 1999, the CA affirmed the CTA's ruling. Adopting in full the CTA's findings,
with its own computation of the deficiency estate tax, to wit: 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
Conjugal Real Property P 5,062,016.00
Conjugal Personal Prop. 33,021,999.93 On May 31, 1999, petitioner filed a Motion for Reconsideration29 which the CA denied in its
Gross Conjugal Estate 38,084,015.93 Resolution30 dated November 3, 1999.

Less: Deductions 26,250,000.00

Hence, the instant Petition raising the following issues:
Net Conjugal Estate P 11,834,015.93
Less: Share of Surviving Spouse 5,917,007.96 1. Whether or not the admission of evidence which were not formally offered by
Net Share in Conjugal Estate P 5,917,007.96 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
Add: Capital/Paraphernal Honorable Court;
Properties – P44,652,813.66
Less: Capital/Paraphernal Deductions 44,652,813.66 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
Net Taxable Estate P 50,569,821.62 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;
Estate Tax Due P 29,935,342.97
Add: 25% Surcharge for Late Filing 7,483,835.74 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
Add: Penalties for-No notice of death 15.00 lawful deductions despite clear and convincing evidence thereof; and
No CPA certificate 300.00
Total deficiency estate tax P 37,419,493.71 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
exclusive of 20% interest from due date of its payment until full payment thereof
The petitioner claims that in as much as the valid claims of creditors against the Estate are in
[Sec. 283 (b), Tax Code of 1987].25 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 Oñate has already been
Thus, the CTA disposed of the case in this wise: 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
WHEREFORE, viewed from all the foregoing, the Court finds the petition requiring a formal offer of evidence is mandatory in character; that, while BIR's witness
unmeritorious and denies the same. Petitioner and/or the heirs of Jose P. Fernandez 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 Oñate 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
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
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 Court’s 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 Oñate, which reiterated this Court's
previous rulings in People v. Napat-a35 and People v. Mate36 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 Oñate, 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 Oñate 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 Oñate still subsists in this jurisdiction.
In Vda. de Oñate, 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 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.
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
From the foregoing declaration, however, it is clear that Vda. de Oñate 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 re-cross examination by petitioner. 42 But Alberto’s
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 Oñate 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 Resolution51 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 non-
compliance 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.
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 debt56 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
Verily, the second issue in this case involves the construction of Section 79 58 of the National
Internal Revenue Code59 (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 date-
of-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

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.

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.

The incredible shrinking estate tax
"Of all forms of taxes this
seems the wisest," said Andrew Carnegie in 1889, talking about taxes on people's wealth
after they have died. He also said that the wealthy should give away the vast bulk of their
wealth to provide “ladders upon which the aspiring can rise.”
So this remarkable statistic, from the Tax Policy Center at the Urban Institute and Brookings
Institution in Washington D.C., is depressing:
"The estate tax is only a faint shadow of its former self. In 2009, less than one-quarter of one
percent of deaths—just 5,500 decedents—will leave taxable estates, the smallest percentage
since at least the Great Depression."
The rest of this short post explains what's behind this. And it's a measure of the distortions
in the political debates in the United States that things have fallen so far:
"Opinion polls show significant numbers of voters saying they would more likely vote for a
candidate who favors repeal. Maybe they all think they’ll win the lottery or their next great
idea will become another Google. In the real world, we’re spending a lot of time worrying
about a tax that fewer than three in a thousand of us will pay. And, when we do, we’ll be
dead."
Huge lobbying interests are at play, of course: watch Citizens for Tax Justice demolish some
of the lobbyists' arguments here, and read more on U.S. estate taxes here.
Not all wealthy people are against estate taxes: Warren Buffett is one of them, saying this in
2007:
“Tax law changes have benefited this group, including me, in a huge way. During that time
the average American went exactly nowhere on the economic scale: he’s been on a treadmill
while the superrich have been on a spaceship.”
Not all wealthy people are against high taxes, for that matter: this BBC story about wealthy
Germans is interesting:
"A group of rich Germans has launched a petition calling for the government to make
wealthy people pay higher taxes. The group say they have more money than they need, and
the extra revenue could fund economic and social programmes to aid Germany's economic
recovery. Germany could raise 100bn euros (£91bn) if the richest people paid a 5% wealth
tax for two years, they say."
POSTED BY TJN AT  1:03 AM
2 COMMENTS:
 Fred Fry said...
"Not all wealthy people are against estate taxes: Warren Buffett is one of them,
saying this in 2007:
“Tax law changes have benefited this group, including me, in a huge way. During
that time the average American went exactly nowhere on the economic scale: he’s
been on a treadmill while the superrich have been on a spaceship.”"
What buffett does with his own money is for him to decide.
He does not need the Government to tax his estate to get their hands on it. The
Government also permits Americans to give directly to the Treasury. Interestingly
enough, some people do.
If Buffett is so in favor of the Government taxing his estate, then he is more than
welcome to leave his estate to the Government himself. That would be putting
money where his mouth is.
Also, keep in mind that taxes have already been paid on his assets either through
wages or capital gains...
5:46 AM
 Anonymous said...
Can anyone explain to me why there should be a tax levied upon the accrual when
someone died? What for? Greed, envy or just to "buy" votes with other´s money.
Fortunately some modern states have abolished such tax.
And if some feel their bank accounts as a burden it is up to them to give it to those
whom they consider to be in demand. Let´s hope that they are mature enough not
to need a nurse called state to help them in their willingness to support others.

Four bills and a tax: Amending the estate tax system
I have a friend who loves the British TV drama “Downton Abbey.” Now, why would a
taxman like me suddenly be thinking of a TV show about an aristocratic family and its
country mansion? Well, as my friend told me, one of the show’s episodes revolved around
how the “death duties”—the British term for “estate taxes”—for the enormous property
(think hacienda) where the fictional country manor sits would be paid.
Should the family sell some of the land and break up the property that’s been in the family
for several generations, or try to negotiate a schedule to pay the death duties over 20 years?
Of course, the age of the great haciendas of the Colonial era being long past, there aren’t that
many enormous properties for which huge taxes have to be paid when they become
someone’s inheritance, but the problems that accompany the payment of estate taxes aren’t
limited to the upper crust of society and involve many other issues aside from where to get
the money to pay the tax.
More often than not, wading through the interminable documentary requirements poses an
even bigger challenge—any taxman worth his salt knows that.
In recent weeks, there’s been some talk about moves to abolish the estate tax. Part of me
thinks that proposal isn’t such a bad idea, but the more prudent side of me also knows that
abolishing a particular tax won’t necessarily solve the problem.
It’s not hard to see why some people aren’t convinced that estate taxes contribute
significantly to the country’s tax collections.
Data from the National Statistics Office shows that in 2010, there were just over 488,000
registered deaths—no mention, though, of how many of those individuals belonged to which
economic class.
The BIR’s Annual Report for 2013 offered the information that there were only 28,634
registered estate taxpayers for that year, and taxes on property—which include estate taxes—
totaled only P3.275 billion, a minuscule 0.269 percent of the BIR’s total collection of P1.216
trillion. Taking such data into consideration, it’s obvious that estate taxes account for a very
small slice of the pie where tax revenues are concerned.
Still and all, one doesn’t throw the baby out with the bathwater, and for one thing, perhaps
the reason why so little is paid by way of estate taxes is precisely because it’s so difficult to
file and pay them in the first place.
A few weeks ago, some friends of mine from MAP were discussing the ins and outs of estate
taxation, and we fell to debating on the merits of four Senate bills that were filed to amend
the estate tax laws. Perhaps it might help to take a quick look at those elements of estate
taxes that cause such concern for the families of decedents across the country, and how these
bills will address those issues.
Probably the first and most immediate problem so many heirs have is that they simply don’t
have enough money to pay the estate taxes on their inheritance.
Section 97 of the Tax Code says, in a nutshell, that the heirs of a decedent can’t touch his (or
her) bank deposits until the estate taxes have been paid. That usually means the heirs can’t
even withdraw money to pay for the funeral expenses or the final medical bills of their
deceased relative, much less use the money to pay the very estate taxes that will be imposed
on them. But the problem stretches further back in time.
In many cases, real properties have passed from one generation to another without the
payment of estate taxes simply because the heirs can’t afford to pay the taxes that
accumulated over the decades. I’ve also heard countless stories of people who are
“custodians” of properties that are still registered in the names of their grandparents or great-
grandparents.
Senate Bill (SB) No. 2244 proposes some options to deal with these issues.
First, the bill suggests that the requirement for an estate tax clearance be scrapped, and a
“withholding tax” be imposed on the decedent’s bank deposits, for estate tax purposes. The
deposits can then be released—minus the withholding tax on estate, of course—to the heirs,
who will then file and pay the remaining estate tax due. The bill also proposes the use of a
gross estate tax (GET) system.
Imposing the GET, albeit at a lower rate than the current estate tax and with far fewer
requirements, will encourage more heirs to pay estate taxes and do away with many of the
administrative costs associated with administering the estate tax system. And for those estate
taxes that remained unpaid for several decades, the bill recommends the grant of an amnesty,
to allow the concerned heirs to “wipe the slate clean,” so to speak.
No discussion, however brief, of a particular tax system would be complete without
considering its exemptions. The general rule is that an estate with a net worth of P200,000 is
considered exempt from estate taxes. This figure, though, was set in 1997—18 years ago!—
and if you factor in the value of money today, it is high time for an adjustment. This is what
SB No. 1489 hopes to achieve, by proposing that the minimum value of the net taxable estate
be pegged at P400,000.
Let’s not forget the issue of the family home, perhaps the single most important item in a
deceased’s estate. At present, the Tax Code allows an exemption for the family home up to
the amount of P1 million. Property values and the purchasing power of the peso being what
they are now, even a modest family home in a socialized-housing project would cost at least
P1 million.
This is where SB No. 2102 comes in—it proposes that the exemption for the family home be
raised to P10 million. That would free up more of the heirs’ funds for the payment of debts
and medical expenses the decedent may have left behind, and in some cases, save the family
from selling the family home itself to pay those debts or the estate tax itself.
And, talking about medical expenses, how often have we seen a decedent’s medical expenses
for a final illness bring his family to its knees, leaving them with virtually nothing left to
settle the estate taxes? SB No. 2028 took this into account, and proposes to raise the
maximum allowable deductions for medical expenses from the present ceiling of P500,000
to P1.5 million.
All things considered, the bottom line is that scrapping a particular tax from the Tax Code
isn’t the way to make the national tax system more progressive; indeed, the end result would
be that the country would lose one source of tax revenues, and for a developing economy
such as ours, every peso paid in taxes counts. No one can blame the government for
imposing taxes, but the people do have the right to expect that efforts will be made to lessen
the burden of paying those taxes. It’s never easy to convince a person to part with his hard-
earned money.
So when it comes to asking a bereaved family to pay estate taxes, the best thing to do – as far
as I’m concerned – is, as with all taxes, to make the process as painless as possible.
Because no matter what some may say about the “oppressiveness” of taxation, there’s no
rule, after all, which says that taxation can’t, at times, be merciful.