G.R. No.

120880 June 5, 1997

FERDINAND R. MARCOS II, petitioner,

vs.
COURT OF APPEALS, THE COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE and HERMINIA D. DE GUZMAN, respondents.

TORRES, JR., J.:

In this Petition for Review on Certiorari, Government action is once again assailed as precipitate and unfair, suffering the basic and oftly implored requisites of due process of law.
Specifically, the petition assails the Decision 1 of the Court of Appeals dated November 29, 1994 in CA-G.R. SP No. 31363, where the said court held:

In view of all the foregoing, we rule that the deficiency income tax assessments and estate tax assessment, are already final and (u)nappealable-and-the subsequent levy of real
properties is a tax remedy resorted to by the government, sanctioned by Section 213 and 218 of the National Internal Revenue Code. This summary tax remedy is distinct and
separate from the other tax remedies (such as Judicial Civil actions and Criminal actions), and is not affected or precluded by the pendency of any other tax remedies instituted by
the government.

WHEREFORE, premises considered, judgment is hereby rendered DISMISSING the petition for certiorari with prayer for Restraining Order and Injunction.

No pronouncements as to costs.

SO ORDERED.

More than seven years since the demise of the late Ferdinand E. Marcos, the former President of the Republic of the Philippines, the matter of the settlement of his estate, and its
dues to the government in estate taxes, are still unresolved, the latter issue being now before this Court for resolution. Specifically, petitioner Ferdinand R. Marcos II, the eldest son
of the decedent, questions the actuations of the respondent Commissioner of Internal Revenue in assessing, and collecting through the summary remedy of Levy on Real
Properties, estate and income tax delinquencies upon the estate and properties of his father, despite the pendency of the proceedings on probate of the will of the late president,
which is docketed as Sp. Proc. No. 10279 in the Regional Trial Court of Pasig, Branch 156.

Petitioner had filed with the respondent Court of Appeals a Petition for Certiorari and Prohibition with an application for writ of preliminary injunction and/or temporary restraining
order on June 28, 1993, seeking to —

I. Annul and set aside the Notices of Levy on real property dated February 22, 1993 and May 20, 1993, issued by respondent Commissioner of Internal Revenue;

II. Annul and set aside the Notices of Sale dated May 26, 1993;

III. Enjoin the Head Revenue Executive Assistant Director II (Collection Service), from proceeding with the Auction of the real properties covered by Notices of Sale.

After the parties had pleaded their case, the Court of Appeals rendered its Decision 2 on November 29, 1994, ruling that the deficiency assessments for estate and income tax made
upon the petitioner and the estate of the deceased President Marcos have already become final and unappealable, and may thus be enforced by the summary remedy of levying
upon the properties of the late President, as was done by the respondent Commissioner of Internal Revenue.

WHEREFORE, premises considered judgment is hereby rendered DISMISSING the petition for Certiorari with prayer for Restraining Order and Injunction.
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No pronouncements as to cost.

SO ORDERED.

Unperturbed, petitioner is now before us assailing the validity of the appellate court's decision, assigning the following as errors:

A. RESPONDENT COURT MANIFESTLY ERRED IN RULING THAT THE SUMMARY TAX REMEDIES RESORTED TO BY THE GOVERNMENT ARE NOT AFFECTED AND
PRECLUDED BY THE PENDENCY OF THE SPECIAL PROCEEDING FOR THE ALLOWANCE OF THE LATE PRESIDENT'S ALLEGED WILL. TO THE CONTRARY, THIS
PROBATE PROCEEDING PRECISELY PLACED ALL PROPERTIES WHICH FORM PART OF THE LATE PRESIDENT'S ESTATE IN CUSTODIA LEGIS OF THE PROBATE
COURT TO THE EXCLUSION OF ALL OTHER COURTS AND ADMINISTRATIVE AGENCIES.

B. RESPONDENT COURT ARBITRARILY ERRED IN SWEEPINGLY DECIDING THAT SINCE THE TAX ASSESSMENTS OF PETITIONER AND HIS PARENTS HAD ALREADY
BECOME FINAL AND UNAPPEALABLE, THERE WAS NO NEED TO GO INTO THE MERITS OF THE GROUNDS CITED IN THE PETITION. INDEPENDENT OF WHETHER THE
TAX ASSESSMENTS HAD ALREADY BECOME FINAL, HOWEVER, PETITIONER HAS THE RIGHT TO QUESTION THE UNLAWFUL MANNER AND METHOD IN WHICH TAX
COLLECTION IS SOUGHT TO BE ENFORCED BY RESPONDENTS COMMISSIONER AND DE GUZMAN. THUS, RESPONDENT COURT SHOULD HAVE FAVORABLY
CONSIDERED THE MERITS OF THE FOLLOWING GROUNDS IN THE PETITION:

(1) The Notices of Levy on Real Property were issued beyond the period provided in the Revenue Memorandum Circular No. 38-68.

(2) [a] The numerous pending court cases questioning the late President's ownership or interests in several properties (both personal and real) make the total value of his estate,
and the consequent estate tax due, incapable of exact pecuniary determination at this time. Thus, respondents' assessment of the estate tax and their issuance of the Notices of
Levy and Sale are premature, confiscatory and oppressive.

[b] Petitioner, as one of the late President's compulsory heirs, was never notified, much less served with copies of the Notices of Levy, contrary to the mandate of Section 213 of the
NIRC. As such, petitioner was never given an opportunity to contest the Notices in violation of his right to due process of law.

C. ON ACCOUNT OF THE CLEAR MERIT OF THE PETITION, RESPONDENT COURT MANIFESTLY ERRED IN RULING THAT IT HAD NO POWER TO GRANT INJUNCTIVE
RELIEF TO PETITIONER. SECTION 219 OF THE NIRC NOTWITHSTANDING, COURTS POSSESS THE POWER TO ISSUE A WRIT OF PRELIMINARY INJUNCTION TO
RESTRAIN RESPONDENTS COMMISSIONER'S AND DE GUZMAN'S ARBITRARY METHOD OF COLLECTING THE ALLEGED DEFICIENCY ESTATE AND INCOME TAXES BY
MEANS OF LEVY.

The facts as found by the appellate court are undisputed, and are hereby adopted:

On September 29, 1989, former President Ferdinand Marcos died in Honolulu, Hawaii, USA.

On June 27, 1990, a Special Tax Audit Team was created to conduct investigations and examinations of the tax liabilities and obligations of the late president, as well as that of his
family, associates and "cronies". Said audit team concluded its investigation with a Memorandum dated July 26, 1991. The investigation disclosed that the Marcoses failed to file a
written notice of the death of the decedent, an estate tax returns [sic], as well as several income tax returns covering the years 1982 to 1986, — all in violation of the National
Internal Revenue Code (NIRC).

Subsequently, criminal charges were filed against Mrs. Imelda R. Marcos before the Regional Trial of Quezon City for violations of Sections 82, 83 and 84 (has penalized under
Sections 253 and 254 in relation to Section 252 — a & b) of the National Internal Revenue Code (NIRC).

The Commissioner of Internal Revenue thereby caused the preparation and filing of the Estate Tax Return for the estate of the late president, the Income Tax Returns of the
Spouses Marcos for the years 1985 to 1986, and the Income Tax Returns of petitioner Ferdinand "Bongbong" Marcos II for the years 1982 to 1985.
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On July 26, 1991, the BIR issued the following: (1) Deficiency estate tax assessment no. FAC-2-89-91-002464 (against the estate of the late president Ferdinand Marcos in the
amount of P23,293,607,638.00 Pesos); (2) Deficiency income tax assessment no. FAC-1-85-91-002452 and Deficiency income tax assessment no. FAC-1-86-91-002451 (against
the Spouses Ferdinand and Imelda Marcos in the amounts of P149,551.70 and P184,009,737.40 representing deficiency income tax for the years 1985 and 1986); (3) Deficiency
income tax assessment nos. FAC-1-82-91-002460 to FAC-1-85-91-002463 (against petitioner Ferdinand "Bongbong" Marcos II in the amounts of P258.70 pesos; P9,386.40 Pesos;
P4,388.30 Pesos; and P6,376.60 Pesos representing his deficiency income taxes for the years 1982 to 1985).

The Commissioner of Internal Revenue avers that copies of the deficiency estate and income tax assessments were all personally and constructively served on August 26, 1991 and
September 12, 1991 upon Mrs. Imelda Marcos (through her caretaker Mr. Martinez) at her last known address at No. 204 Ortega St., San Juan, M.M. (Annexes "D" and "E" of the
Petition). Likewise, copies of the deficiency tax assessments issued against petitioner Ferdinand "Bongbong" Marcos II were also personally and constructively served upon him
(through his caretaker) on September 12, 1991, at his last known address at Don Mariano Marcos St. corner P. Guevarra St., San Juan, M.M. (Annexes "J" and "J-1" of the Petition).
Thereafter, Formal Assessment notices were served on October 20, 1992, upon Mrs. Marcos c/o petitioner, at his office, House of Representatives, Batasan Pambansa, Quezon
City. Moreover, a notice to Taxpayer inviting Mrs. Marcos (or her duly authorized representative or counsel), to a conference, was furnished the counsel of Mrs. Marcos, Dean
Antonio Coronel — but to no avail.

The deficiency tax assessments were not protested administratively, by Mrs. Marcos and the other heirs of the late president, within 30 days from service of said assessments.

On February 22, 1993, the BIR Commissioner issued twenty-two notices of levy on real property against certain parcels of land owned by the Marcoses — to satisfy the alleged
estate tax and deficiency income taxes of Spouses Marcos.

On May 20, 1993, four more Notices of Levy on real property were issued for the purpose of satisfying the deficiency income taxes.

On May 26, 1993, additional four (4) notices of Levy on real property were again issued. The foregoing tax remedies were resorted to pursuant to Sections 205 and 213 of the
National Internal Revenue Code (NIRC).

In response to a letter dated March 12, 1993 sent by Atty. Loreto Ata (counsel of herein petitioner) calling the attention of the BIR and requesting that they be duly notified of any
action taken by the BIR affecting the interest of their client Ferdinand "Bongbong" Marcos II, as well as the interest of the late president — copies of the aforesaid notices were,
served on April 7, 1993 and on June 10, 1993, upon Mrs. Imelda Marcos, the petitioner, and their counsel of record, "De Borja, Medialdea, Ata, Bello, Guevarra and Serapio Law
Office".

Notices of sale at public auction were posted on May 26, 1993, at the lobby of the City Hall of Tacloban City. The public auction for the sale of the eleven (11) parcels of land took
place on July 5, 1993. There being no bidder, the lots were declared forfeited in favor of the government.

On June 25, 1993, petitioner Ferdinand "Bongbong" Marcos II filed the instant petition for certiorari and prohibition under Rule 65 of the Rules of Court, with prayer for temporary
restraining order and/or writ of preliminary injunction.

It has been repeatedly observed, and not without merit, that the enforcement of tax laws and the collection of taxes, is of paramount importance for the sustenance of government.
Taxes are the lifeblood of the government and should be collected without unnecessary hindrance. However, such collection should be made in accordance with law as any
arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the
real purpose of taxation, which is the promotion of the common good, may be achieved. 3

Whether or not the proper avenues of assessment and collection of the said tax obligations were taken by the respondent Bureau is now the subject of the Court's inquiry.

Petitioner posits that notices of levy, notices of sale, and subsequent sale of properties of the late President Marcos effected by the BIR are null and void for disregarding the
established procedure for the enforcement of taxes due upon the estate of the deceased. The case of Domingo vs. Garlitos 4 is specifically cited to bolster the argument that "the

3
ordinary procedure by which to settle claims of indebtedness against the estate of a deceased, person, as in an inheritance (estate) tax, is for the claimant to present a claim before
the probate court so that said court may order the administrator to pay the amount therefor." This remedy is allegedly, exclusive, and cannot be effected through any other means.

Petitioner goes further, submitting that the probate court is not precluded from denying a request by the government for the immediate payment of taxes, and should order the
payment of the same only within the period fixed by the probate court for the payment of all the debts of the decedent. In this regard, petitioner cites the case of Collector of Internal
Revenue vs. The Administratrix of the Estate of Echarri (67 Phil 502), where it was held that:

The case of Pineda vs. Court of First Instance of Tayabas and Collector of Internal Revenue (52 Phil 803), relied upon by the petitioner-appellant is good authority on the proposition
that the court having control over the administration proceedings has jurisdiction to entertain the claim presented by the government for taxes due and to order the administrator to
pay the tax should it find that the assessment was proper, and that the tax was legal, due and collectible. And the rule laid down in that case must be understood in relation to the
case of Collector of Customs vs. Haygood, supra., as to the procedure to be followed in a given case by the government to effectuate the collection of the tax. Categorically stated,
where during the pendency of judicial administration over the estate of a deceased person a claim for taxes is presented by the government, the court has the authority to order
payment by the administrator; but, in the same way that it has authority to order payment or satisfaction, it also has the negative authority to deny the same. While there are cases
where courts are required to perform certain duties mandatory and ministerial in character, the function of the court in a case of the present character is not one of them; and here,
the court cannot be an organism endowed with latitude of judgment in one direction, and converted into a mere mechanical contrivance in another direction.

On the other hand, it is argued by the BIR, that the state's authority to collect internal revenue taxes is paramount. Thus, the pendency of probate proceedings over the estate of the
deceased does not preclude the assessment and collection, through summary remedies, of estate taxes over the same. According to the respondent, claims for payment of estate
and income taxes due and assessed after the death of the decedent need not be presented in the form of a claim against the estate. These can and should be paid immediately.
The probate court is not the government agency to decide whether an estate is liable for payment of estate of income taxes. Well-settled is the rule that the probate court is a court
with special and limited jurisdiction.

Concededly, the authority of the Regional Trial Court, sitting, albeit with limited jurisdiction, as a probate court over estate of deceased individual, is not a trifling thing. The court's
jurisdiction, once invoked, and made effective, cannot be treated with indifference nor should it be ignored with impunity by the very parties invoking its authority.

In testament to this, it has been held that it is within the jurisdiction of the probate court to approve the sale of properties of a deceased person by his prospective heirs before final
adjudication; 5 to determine who are the heirs of the decedent; 6 the recognition of a natural child; 7 the status of a woman claiming to be the legal wife of the decedent; 8 the legality
of disinheritance of an heir by the testator; 9 and to pass upon the validity of a waiver of hereditary rights. 10

The pivotal question the court is tasked to resolve refers to the authority of the Bureau of Internal Revenue to collect by the summary remedy of levying upon, and sale of real
properties of the decedent, estate tax deficiencies, without the cognition and authority of the court sitting in probate over the supposed will of the deceased.

The nature of the process of estate tax collection has been described as follows:

Strictly speaking, the assessment of an inheritance tax does not directly involve the administration of a decedent's estate, although it may be viewed as an incident to the complete
settlement of an estate, and, under some statutes, it is made the duty of the probate court to make the amount of the inheritance tax a part of the final decree of distribution of the
estate. It is not against the property of decedent, nor is it a claim against the estate as such, but it is against the interest or property right which the heir, legatee, devisee, etc., has in
the property formerly held by decedent. Further, under some statutes, it has been held that it is not a suit or controversy between the parties, nor is it an adversary proceeding
between the state and the person who owes the tax on the inheritance. However, under other statutes it has been held that the hearing and determination of the cash value of the
assets and the determination of the tax are adversary proceedings. The proceeding has been held to be necessarily a proceeding in rem. 11

In the Philippine experience, the enforcement and collection of estate tax, is executive in character, as the legislature has seen it fit to ascribe this task to the Bureau of Internal
Revenue. Section 3 of the National Internal Revenue Code attests to this:

Sec. 3. Powers and duties of the Bureau. — The powers and duties of the Bureau of Internal Revenue shall comprehend the assessment and collection of all national internal
revenue taxes, fees, and charges, and the enforcement of all forfeitures, penalties, and fines connected therewith, including the execution of judgments in all cases decided in its
4
favor by the Court of Tax Appeals and the ordinary courts. Said Bureau shall also give effect to and administer the supervisory and police power conferred to it by this Code or other
laws.

Thus, it was in Vera vs. Fernandez 12 that the court recognized the liberal treatment of claims for taxes charged against the estate of the decedent. Such taxes, we said, were
exempted from the application of the statute of non-claims, and this is justified by the necessity of government funding, immortalized in the maxim that taxes are the lifeblood of the
government. Vectigalia nervi sunt rei publicae — taxes are the sinews of the state.

Taxes assessed against the estate of a deceased person, after administration is opened, need not be submitted to the committee on claims in the ordinary course of administration.
In the exercise of its control over the administrator, the court may direct the payment of such taxes upon motion showing that the taxes have been assessed against the estate.

Such liberal treatment of internal revenue taxes in the probate proceedings extends so far, even to allowing the enforcement of tax obligations against the heirs of the decedent,
even after distribution of the estate's properties.

Claims for taxes, whether assessed before or after the death of the deceased, can be collected from the heirs even after the distribution of the properties of the decedent. They are
exempted from the application of the statute of non-claims. The heirs shall be liable therefor, in proportion to their share in the inheritance. 13

Thus, the Government has two ways of collecting the taxes in question. One, by going after all the heirs and collecting from each one of them the amount of the tax proportionate to
the inheritance received. Another remedy, pursuant to the lien created by Section 315 of the Tax Code upon all property and rights to property belong to the taxpayer for unpaid
income tax, is by subjecting said property of the estate which is in the hands of an heir or transferee to the payment of the tax due the estate. (Commissioner of Internal Revenue vs.
Pineda, 21 SCRA 105, September 15, 1967.)

From the foregoing, it is discernible that the approval of the court, sitting in probate, or as a settlement tribunal over the deceased is not a mandatory requirement in the collection of
estate taxes. It cannot therefore be argued that the Tax Bureau erred in proceeding with the levying and sale of the properties allegedly owned by the late President, on the ground
that it was required to seek first the probate court's sanction. There is nothing in the Tax Code, and in the pertinent remedial laws that implies the necessity of the probate or estate
settlement court's approval of the state's claim for estate taxes, before the same can be enforced and collected.

On the contrary, under Section 87 of the NIRC, it is the probate or settlement court which is bidden not to authorize the executor or judicial administrator of the decedent's estate to
deliver any distributive share to any party interested in the estate, unless it is shown a Certification by the Commissioner of Internal Revenue that the estate taxes have been paid.
This provision disproves the petitioner's contention that it is the probate court which approves the assessment and collection of the estate tax.

If there is any issue as to the validity of the BIR's decision to assess the estate taxes, this should have been pursued through the proper administrative and judicial avenues provided
for by law.

Section 229 of the NIRC tells us how:

Sec. 229. Protesting of assessment. — When the Commissioner of Internal Revenue or his duly authorized representative finds that proper taxes should be assessed, he shall first
notify the taxpayer of his findings. Within a period to be prescribed by implementing regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to
respond, the Commissioner shall issue an assessment based on his findings.

Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation in such form and manner as may be prescribed by implementing
regulations within (30) days from receipt of the assessment; otherwise, the assessment shall become final and unappealable.

If the protest is denied in whole or in part, the individual, association or corporation adversely affected by the decision on the protest may appeal to the Court of Tax Appeals within
thirty (30) days from receipt of said decision; otherwise, the decision shall become final, executory and demandable. (As inserted by P.D. 1773)

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Apart from failing to file the required estate tax return within the time required for the filing of the same, petitioner, and the other heirs never questioned the assessments served
upon them, allowing the same to lapse into finality, and prompting the BIR to collect the said taxes by levying upon the properties left by President Marcos.

Petitioner submits, however, that "while the assessment of taxes may have been validly undertaken by the Government, collection thereof may have been done in violation of the
law. Thus, the manner and method in which the latter is enforced may be questioned separately, and irrespective of the finality of the former, because the Government does not
have the unbridled discretion to enforce collection without regard to the clear provision of law." 14

Petitioner specifically points out that applying Memorandum Circular No. 38-68, implementing Sections 318 and 324 of the old tax code (Republic Act 5203), the BIR's Notices of
Levy on the Marcos properties, were issued beyond the allowed period, and are therefore null and void:

. . . the Notices of Levy on Real Property (Annexes O to NN of Annex C of this Petition) in satisfaction of said assessments were still issued by respondents well beyond the period
mandated in Revenue Memorandum Circular No. 38-68. These Notices of Levy were issued only on 22 February 1993 and 20 May 1993 when at least seventeen (17) months had
already lapsed from the last service of tax assessment on 12 September 1991. As no notices of distraint of personal property were first issued by respondents, the latter should have
complied with Revenue Memorandum Circular No. 38-68 and issued these Notices of Levy not earlier than three (3) months nor later than six (6) months from 12 September 1991.
In accordance with the Circular, respondents only had until 12 March 1992 (the last day of the sixth month) within which to issue these Notices of Levy. The Notices of Levy, having
been issued beyond the period allowed by law, are thus void and of no effect. 15

We hold otherwise. The Notices of Levy upon real property were issued within the prescriptive period and in accordance with the provisions of the present Tax Code. The deficiency
tax assessment, having already become final, executory, and demandable, the same can now be collected through the summary remedy of distraint or levy pursuant to Section 205
of the NIRC.

The applicable provision in regard to the prescriptive period for the assessment and collection of tax deficiency in this instance is Article 223 of the NIRC, which pertinently provides:

Sec. 223. Exceptions as to a period of limitation of assessment and collection of taxes. — (a) In the case of a false or fraudulent return with intent to evade tax or of a failure to file a
return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within ten (10) years after the discovery of the
falsity, fraud, or omission: Provided, That, in a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal
action for the collection thereof.

xxx xxx xxx

(c) Any internal revenue tax which has been assessed within the period of limitation above prescribed, may be collected by distraint or levy or by a proceeding in court within three
years following the assessment of the tax.

xxx xxx xxx

The omission to file an estate tax return, and the subsequent failure to contest or appeal the assessment made by the BIR is fatal to the petitioner's cause, as under the above-cited
provision, in case of failure to file a return, the tax may be assessed at any time within ten years after the omission, and any tax so assessed may be collected by levy upon real
property within three years following the assessment of the tax. Since the estate tax assessment had become final and unappealable by the petitioner's default as regards protesting
the validity of the said assessment, there is now no reason why the BIR cannot continue with the collection of the said tax. Any objection against the assessment should have been
pursued following the avenue paved in Section 229 of the NIRC on protests on assessments of internal revenue taxes.

Petitioner further argues that "the numerous pending court cases questioning the late president's ownership or interests in several properties (both real and personal) make the total
value of his estate, and the consequent estate tax due, incapable of exact pecuniary determination at this time. Thus, respondents' assessment of the estate tax and their issuance
of the Notices of Levy and sale are premature and oppressive." He points out the pendency of Sandiganbayan Civil Case Nos. 0001-0034 and 0141, which were filed by the
government to question the ownership and interests of the late President in real and personal properties located within and outside the Philippines. Petitioner, however, omits to

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allege whether the properties levied upon by the BIR in the collection of estate taxes upon the decedent's estate were among those involved in the said cases pending in the
Sandiganbayan. Indeed, the court is at a loss as to how these cases are relevant to the matter at issue. The mere fact that the decedent has pending cases involving ill-gotten
wealth does not affect the enforcement of tax assessments over the properties indubitably included in his estate.

Petitioner also expresses his reservation as to the propriety of the BIR's total assessment of P23,292,607,638.00, stating that this amount deviates from the findings of the
Department of Justice's Panel of Prosecutors as per its resolution of 20 September 1991. Allegedly, this is clear evidence of the uncertainty on the part of the Government as to the
total value of the estate of the late President.

This is, to our mind, the petitioner's last ditch effort to assail the assessment of estate tax which had already become final and unappealable.

It is not the Department of Justice which is the government agency tasked to determine the amount of taxes due upon the subject estate, but the Bureau of Internal Revenue, 16
whose determinations and assessments are presumed correct and made in good faith. 17 The taxpayer has the duty of proving otherwise. In the absence of proof of any irregularities
in the performance of official duties, an assessment will not be disturbed. Even an assessment based on estimates is prima facie valid and lawful where it does not appear to have
been arrived at arbitrarily or capriciously. The burden of proof is upon the complaining party to show clearly that the assessment is erroneous. Failure to present proof of error in the
assessment will justify the judicial affirmance of said assessment. 18 In this instance, petitioner has not pointed out one single provision in the Memorandum of the Special Audit
Team which gave rise to the questioned assessment, which bears a trace of falsity. Indeed, the petitioner's attack on the assessment bears mainly on the alleged improbable and
unconscionable amount of the taxes charged. But mere rhetoric cannot supply the basis for the charge of impropriety of the assessments made.

Moreover, these objections to the assessments should have been raised, considering the ample remedies afforded the taxpayer by the Tax Code, with the Bureau of Internal
Revenue and the Court of Tax Appeals, as described earlier, and cannot be raised now via Petition for Certiorari, under the pretext of grave abuse of discretion. The course of action
taken by the petitioner reflects his disregard or even repugnance of the established institutions for governance in the scheme of a well-ordered society. The subject tax assessments
having become final, executory and enforceable, the same can no longer be contested by means of a disguised protest. In the main, Certiorari may not be used as a substitute for a
lost appeal or remedy. 19 This judicial policy becomes more pronounced in view of the absence of sufficient attack against the actuations of government.

On the matter of sufficiency of service of Notices of Assessment to the petitioner, we find the respondent appellate court's pronouncements sound and resilient to petitioner's
attacks.

Anent grounds 3(b) and (B) — both alleging/claiming lack of notice — We find, after considering the facts and circumstances, as well as evidences, that there was sufficient,
constructive and/or actual notice of assessments, levy and sale, sent to herein petitioner Ferdinand "Bongbong" Marcos as well as to his mother Mrs. Imelda Marcos.

Even if we are to rule out the notices of assessments personally given to the caretaker of Mrs. Marcos at the latter's last known address, on August 26, 1991 and September 12,
1991, as well as the notices of assessment personally given to the caretaker of petitioner also at his last known address on September 12, 1991 — the subsequent notices given
thereafter could no longer be ignored as they were sent at a time when petitioner was already here in the Philippines, and at a place where said notices would surely be called to
petitioner's attention, and received by responsible persons of sufficient age and discretion.

Thus, on October 20, 1992, formal assessment notices were served upon Mrs. Marcos c/o the petitioner, at his office, House of Representatives, Batasan Pambansa, Q.C.
(Annexes "A", "A-1", "A-2", "A-3"; pp. 207-210, Comment/Memorandum of OSG). Moreover, a notice to taxpayer dated October 8, 1992 inviting Mrs. Marcos to a conference relative
to her tax liabilities, was furnished the counsel of Mrs. Marcos — Dean Antonio Coronel (Annex "B", p. 211, ibid). Thereafter, copies of Notices were also served upon Mrs. Imelda
Marcos, the petitioner and their counsel "De Borja, Medialdea, Ata, Bello, Guevarra and Serapio Law Office", on April 7, 1993 and June 10, 1993. Despite all of these Notices,
petitioner never lifted a finger to protest the assessments, (upon which the Levy and sale of properties were based), nor appealed the same to the Court of Tax Appeals.

There being sufficient service of Notices to herein petitioner (and his mother) and it appearing that petitioner continuously ignored said Notices despite several opportunities given
him to file a protest and to thereafter appeal to the Court of Tax Appeals, — the tax assessments subject of this case, upon which the levy and sale of properties were based, could
no longer be contested (directly or indirectly) via this instant petition for certiorari. 20

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Petitioner argues that all the questioned Notices of Levy, however, must be nullified for having been issued without validly serving copies thereof to the petitioner. As a mandatory
heir of the decedent, petitioner avers that he has an interest in the subject estate, and notices of levy upon its properties should have been served upon him.

We do not agree. In the case of notices of levy issued to satisfy the delinquent estate tax, the delinquent taxpayer is the Estate of the decedent, and not necessarily, and exclusively,
the petitioner as heir of the deceased. In the same vein, in the matter of income tax delinquency of the late president and his spouse, petitioner is not the taxpayer liable. Thus, it
follows that service of notices of levy in satisfaction of these tax delinquencies upon the petitioner is not required by law, as under Section 213 of the NIRC, which pertinently states:

xxx xxx xxx

. . . Levy shall be effected by writing upon said certificate a description of the property upon which levy is made. At the same time, written notice of the levy shall be mailed to or
served upon the Register of Deeds of the province or city where the property is located and upon the delinquent taxpayer, or if he be absent from the Philippines, to his agent or the
manager of the business in respect to which the liability arose, or if there be none, to the occupant of the property in question.

xxx xxx xxx

The foregoing notwithstanding, the record shows that notices of warrants of distraint and levy of sale were furnished the counsel of petitioner on April 7, 1993, and June 10, 1993,
and the petitioner himself on April 12, 1993 at his office at the Batasang Pambansa. 21 We cannot therefore, countenance petitioner's insistence that he was denied due process.
Where there was an opportunity to raise objections to government action, and such opportunity was disregarded, for no justifiable reason, the party claiming oppression then
becomes the oppressor of the orderly functions of government. He who comes to court must come with clean hands. Otherwise, he not only taints his name, but ridicules the very
structure of established authority.

IN VIEW WHEREOF, the Court RESOLVED to DENY the present petition. The Decision of the Court of Appeals dated November 29, 1994 is hereby AFFIRMED in all respects.

G.R. No. 147188             September 14, 2004

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
THE ESTATE OF BENIGNO P. TODA, JR., Represented by Special Co-administrators Lorna Kapunan and Mario Luza Bautista, respondents.

DECISION

DAVIDE, JR., C.J.:

This Court is called upon to determine in this case whether the tax planning scheme adopted by a corporation constitutes tax evasion that would
justify an assessment of deficiency income tax.

The petitioner seeks the reversal of the Decision 1 of the Court of Appeals of 31 January 2001 in CA-G.R. SP No. 57799 affirming the 3 January
2000 Decision2 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 5328, 3 which held that the respondent Estate of Benigno P. Toda, Jr. is
not liable for the deficiency income tax of Cibeles Insurance Corporation (CIC) in the amount of ₱79,099,999.22 for the year 1989, and ordered
the cancellation and setting aside of the assessment issued by Commissioner of Internal Revenue Liwayway Vinzons-Chato on 9 January
1995.

The case at bar stemmed from a Notice of Assessment sent to CIC by the Commissioner of Internal Revenue for deficiency income tax arising
from an alleged simulated sale of a 16-storey commercial building known as Cibeles Building, situated on two parcels of land on Ayala Avenue,

8
Makati City.

On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of its issued and outstanding capital stock, to sell the
Cibeles Building and the two parcels of land on which the building stands for an amount of not less than ₱90 million.4

On 30 August 1989, Toda purportedly sold the property for ₱100 million to Rafael A. Altonaga, who, in turn, sold the same property on the same day to
Royal Match Inc. (RMI) for ₱200 million. These two transactions were evidenced by Deeds of Absolute Sale notarized on the same day by the same
notary public.5

For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of ₱10 million.6

On 16 April 1990, CIC filed its corporate annual income tax return 7 for the year 1989, declaring, among other things, its gain from the sale of real
property in the amount of ₱75,728.021. After crediting withholding taxes of ₱254,497.00, it paid ₱26,341,207 8 for its net taxable income of
₱75,987,725.

On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for ₱12.5 million, as evidenced by a Deed of Sale of Shares of
Stocks.9 Three and a half years later, or on 16 January 1994, Toda died.

On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an assessment notice 10 and demand letter to the CIC for deficiency income tax for the
year 1989 in the amount of ₱79,099,999.22.

The new CIC asked for a reconsideration, asserting that the assessment should be directed against the old CIC, and not against the new CIC, which is
owned by an entirely different set of stockholders; moreover, Toda had undertaken to hold the buyer of his stockholdings and the CIC free from all tax
liabilities for the fiscal years 1987-1989.11

On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by special co-administrators Lorna Kapunan and Mario Luza Bautista, received a
Notice of Assessment12 dated 9 January 1995 from the Commissioner of Internal Revenue for deficiency income tax for the year 1989 in the amount of
₱79,099,999.22, computed as follows:

Income Tax – 1989

Net Income per return   ₱75,987,725.00  

Add: Additional gain on sale of real property taxable under ordinary
corporate income but were substituted with individual capital 100,000,000.00
gains(₱200M – 100M)
Total Net Taxable Income per investigation ₱175,987,725.00
Tax Due thereof at 35% ₱ 61,595,703.75
Less: Payment already made
1. Per return ₱26,595,704.00

9
 2. Thru Capital Gains Tax made
    by R.A. Altonaga 10,000,000.00 36,595,704.00 Balance of tax due

₱ 24,999,999.75
Add: 50% Surcharge 12,499,999.88
25% Surcharge 6,249,999.94

Total ₱ 43,749,999.57
Add: Interest 20% from
4/16/90-4/30/94 (.808) 35,349,999.65

TOTAL AMT. DUE & COLLECTIBLE ₱ 79,099,999.22

==============
The Estate thereafter filed a letter of protest.13

In the letter dated 19 October 1995,14 the Commissioner dismissed the protest, stating that a fraudulent scheme was deliberately perpetuated by the
CIC wholly owned and controlled by Toda by covering up the additional gain of ₱100 million, which resulted in the change in the income structure of
the proceeds of the sale of the two parcels of land and the building thereon to an individual capital gains, thus evading the higher corporate income tax
rate of 35%.

On 15 February 1996, the Estate filed a petition for review 15 with the CTA alleging that the Commissioner erred in holding the Estate liable for income
tax deficiency; that the inference of fraud of the sale of the properties is unreasonable and unsupported; and that the right of the Commissioner to
assess CIC had already prescribed.

In his Answer16 and Amended Answer,17 the Commissioner argued that the two transactions actually constituted a single sale of the property by CIC to
RMI, and that Altonaga was neither the buyer of the property from CIC nor the seller of the same property to RMI. The additional gain of ₱100 million
(the difference between the second simulated sale for ₱200 million and the first simulated sale for ₱100 million) realized by CIC was taxed at the rate
of only 5% purportedly as capital gains tax of Altonaga, instead of at the rate of 35% as corporate income tax of CIC. The income tax return filed by
CIC for 1989 with intent to evade payment of the tax was thus false or fraudulent. Since such falsity or fraud was discovered by the BIR only on 8
March 1991, the assessment issued on 9 January 1995 was well within the prescriptive period prescribed by Section 223 (a) of the National Internal
Revenue Code of 1986, which provides that tax may be assessed within ten years from the discovery of the falsity or fraud. With the sale being tainted
with fraud, the separate corporate personality of CIC should be disregarded. Toda, being the registered owner of the 99.991% shares of stock of CIC
and the beneficial owner of the remaining 0.009% shares registered in the name of the individual directors of CIC, should be held liable for the
deficiency income tax, especially because the gains realized from the sale were withdrawn by him as cash advances or paid to him as cash dividends.
Since he is already dead, his estate shall answer for his liability.

In its decision18 of 3 January 2000, the CTA held that the Commissioner failed to prove that CIC committed fraud to deprive the government of the
taxes due it. It ruled that even assuming that a pre-conceived scheme was adopted by CIC, the same constituted mere tax avoidance, and not tax
evasion. There being no proof of fraudulent transaction, the applicable period for the BIR to assess CIC is that prescribed in Section 203 of the NIRC
of 1986, which is three years after the last day prescribed by law for the filing of the return. Thus, the government’s right to assess CIC prescribed on
15 April 1993. The assessment issued on 9 January 1995 was, therefore, no longer valid. The CTA also ruled that the mere ownership by Toda of

10
99.991% of the capital stock of CIC was not in itself sufficient ground for piercing the separate corporate personality of CIC. Hence, the CTA declared
that the Estate is not liable for deficiency income tax of ₱79,099,999.22 and, accordingly, cancelled and set aside the assessment issued by the
Commissioner on 9 January 1995.

In its motion for reconsideration,19 the Commissioner insisted that the sale of the property owned by CIC was the result of the connivance between
Toda and Altonaga. She further alleged that the latter was a representative, dummy, and a close business associate of the former, having held his
office in a property owned by CIC and derived his salary from a foreign corporation (Aerobin, Inc.) duly owned by Toda for representation services
rendered. The CTA denied20 the motion for reconsideration, prompting the Commissioner to file a petition for review21 with the Court of Appeals.

In its challenged Decision of 31 January 2001, the Court of Appeals affirmed the decision of the CTA, reasoning that the CTA, being more
advantageously situated and having the necessary expertise in matters of taxation, is "better situated to determine the correctness, propriety, and
legality of the income tax assessments assailed by the Toda Estate."22

Unsatisfied with the decision of the Court of Appeals, the Commissioner filed the present petition invoking the following grounds:

I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT COMMITTED NO FRAUD WITH INTENT TO EVADE THE TAX ON THE
SALE OF THE PROPERTIES OF CIBELES INSURANCE CORPORATION.

II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE SEPARATE CORPORATE PERSONALITY OF CIBELES INSURANCE
CORPORATION.

III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF PETITIONER TO ASSESS RESPONDENT FOR DEFICIENCY INCOME
TAX FOR THE YEAR 1989 HAD PRESCRIBED.

The Commissioner reiterates her arguments in her previous pleadings and insists that the sale by CIC of the Cibeles property was in connivance with
its dummy Rafael Altonaga, who was financially incapable of purchasing it. She further points out that the documents themselves prove the fact of
fraud in that (1) the two sales were done simultaneously on the same date, 30 August 1989; (2) the Deed of Absolute Sale between Altonaga and RMI
was notarized ahead of the alleged sale between CIC and Altonaga, with the former registered in the Notarial Register of Jocelyn H. Arreza Pabelana
as Doc. 91, Page 20, Book I, Series of 1989; and the latter, as Doc. No. 92, Page 20, Book I, Series of 1989, of the same Notary Public; (3) as early as
4 May 1989, CIC received ₱40 million from RMI, and not from Altonaga. The said amount was debited by RMI in its trial balance as of 30 June 1989
as investment in Cibeles Building. The substantial portion of ₱40 million was withdrawn by Toda through the declaration of cash dividends to all its
stockholders.

For its part, respondent Estate asserts that the Commissioner failed to present the income tax return of Altonaga to prove that the latter is financially
incapable of purchasing the Cibeles property.

To resolve the grounds raised by the Commissioner, the following questions are pertinent:

1. Is this a case of tax evasion or tax avoidance?

2. Has the period for assessment of deficiency income tax for the year 1989 prescribed? and

11
3. Can respondent Estate be held liable for the deficiency income tax of CIC for the year 1989, if any?

We shall discuss these questions in seriatim.

Is this a case of tax evasion or tax avoidance?

Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation. Tax avoidance is the tax saving device
within the means sanctioned by law. This method should be used by the taxpayer in good faith and at arms length. Tax evasion, on the other hand, is
a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities.23

Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less than that known by the taxpayer to be
legally due, or the non-payment of tax when it is shown that a tax is due; (2) an accompanying state of mind which is described as being "evil," in "bad
faith," "willfull," or "deliberate and not accidental"; and (3) a course of action or failure of action which is unlawful.24

All these factors are present in the instant case. It is significant to note that as early as 4 May 1989, prior to the purported sale of the Cibeles property
by CIC to Altonaga on 30 August 1989, CIC received ₱40 million from RMI, 25 and not from Altonaga. That ₱40 million was debited by RMI and
reflected in its trial balance26 as "other inv. – Cibeles Bldg." Also, as of 31 July 1989, another ₱40 million was debited and reflected in RMI’s trial
balance as "other inv. – Cibeles Bldg." This would show that the real buyer of the properties was RMI, and not the intermediary Altonaga.lavvphi1.net

The investigation conducted by the BIR disclosed that Altonaga was a close business associate and one of the many trusted corporate executives of
Toda. This information was revealed by Mr. Boy Prieto, the assistant accountant of CIC and an old timer in the company.27 But Mr. Prieto did not testify
on this matter, hence, that information remains to be hearsay and is thus inadmissible in evidence. It was not verified either, since the letter-request for
investigation of Altonaga was unserved,28 Altonaga having left for the United States of America in January 1990. Nevertheless, that Altonaga was a
mere conduit finds support in the admission of respondent Estate that the sale to him was part of the tax planning scheme of CIC. That admission is
borne by the records. In its Memorandum, respondent Estate declared:

Petitioner, however, claims there was a "change of structure" of the proceeds of sale. Admitted one hundred percent. But isn’t this precisely the
definition of tax planning? Change the structure of the funds and pay a lower tax. Precisely, Sec. 40 (2) of the Tax Code exists, allowing tax free
transfers of property for stock, changing the structure of the property and the tax to be paid. As long as it is done legally, changing the structure of a
transaction to achieve a lower tax is not against the law. It is absolutely allowed.

Tax planning is by definition to reduce, if not eliminate altogether, a tax. Surely petitioner [sic] cannot be faulted for wanting to reduce the tax from
35% to 5%.29 [Underscoring supplied].

The scheme resorted to by CIC in making it appear that there were two sales of the subject properties, i.e., from CIC to Altonaga, and then from
Altonaga to RMI cannot be considered a legitimate tax planning. Such scheme is tainted with fraud.

Fraud in its general sense, "is deemed to comprise anything calculated to deceive, including all acts, omissions, and concealment involving a breach
of legal or equitable duty, trust or confidence justly reposed, resulting in the damage to another, or by which an undue and unconscionable advantage
is taken of another."30

Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid especially that the transfer from him to RMI
would then subject the income to only 5% individual capital gains tax, and not the 35% corporate income tax. Altonaga’s sole purpose of acquiring and
transferring title of the subject properties on the same day was to create a tax shelter. Altonaga never controlled the property and did not enjoy the
12
normal benefits and burdens of ownership. The sale to him was merely a tax ploy, a sham, and without business purpose and economic substance.
Doubtless, the execution of the two sales was calculated to mislead the BIR with the end in view of reducing the consequent income tax
liability.lavvphi1.net

In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was prompted more on the mitigation of tax liabilities than for legitimate
business purposes constitutes one of tax evasion.31

Generally, a sale or exchange of assets will have an income tax incidence only when it is consummated. 32 The incidence of taxation depends upon the
substance of a transaction. The tax consequences arising from gains from a sale of property are not finally to be determined solely by the means
employed to transfer legal title. Rather, the transaction must be viewed as a whole, and each step from the commencement of negotiations to the
consummation of the sale is relevant. A sale by one person cannot be transformed for tax purposes into a sale by another by using the latter as a
conduit through which to pass title. To permit the true nature of the transaction to be disguised by mere formalisms, which exist solely to alter tax
liabilities, would seriously impair the effective administration of the tax policies of Congress.33

To allow a taxpayer to deny tax liability on the ground that the sale was made through another and distinct entity when it is proved that the latter was
merely a conduit is to sanction a circumvention of our tax laws. Hence, the sale to Altonaga should be disregarded for income tax purposes. 34 The two
sale transactions should be treated as a single direct sale by CIC to RMI.

Accordingly, the tax liability of CIC is governed by then Section 24 of the NIRC of 1986, as amended (now 27 (A) of the Tax Reform Act of 1997),
which stated as follows:

Sec. 24. Rates of tax on corporations. – (a) Tax on domestic corporations.- A tax is hereby imposed upon the taxable net income received during each
taxable year from all sources by every corporation organized in, or existing under the laws of the Philippines, and partnerships, no matter how created
or organized but not including general professional partnerships, in accordance with the following:

Twenty-five percent upon the amount by which the taxable net income does not exceed one hundred thousand pesos; and

Thirty-five percent upon the amount by which the taxable net income exceeds one hundred thousand pesos.

CIC is therefore liable to pay a 35% corporate tax for its taxable net income in 1989. The 5% individual capital gains tax provided for in Section 34 (h)
of the NIRC of 198635 (now 6% under Section 24 (D) (1) of the Tax Reform Act of 1997) is inapplicable. Hence, the assessment for the deficiency
income tax issued by the BIR must be upheld.

Has the period of assessment prescribed?

No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform Act of 1997) read:

Sec. 269. Exceptions as to period of limitation of assessment and collection of taxes.-(a) In the case of a false or fraudulent return with intent to evade
tax or of failure to file a return, the tax may be assessed, or a proceeding in court after the collection of such tax may be begun without assessment, at
any time within ten years after the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has become final and
executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for collection thereof… .

Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3) failure to file a return, the period within which to

13
assess tax is ten years from discovery of the fraud, falsification or omission, as the case may be.

It is true that in a query dated 24 August 1989, Altonaga, through his counsel, asked the Opinion of the BIR on the tax consequence of the two sale
transactions.36 Thus, the BIR was amply informed of the transactions even prior to the execution of the necessary documents to effect the transfer.
Subsequently, the two sales were openly made with the execution of public documents and the declaration of taxes for 1989. However, these
circumstances do not negate the existence of fraud. As earlier discussed those two transactions were tainted with fraud. And even assuming arguendo
that there was no fraud, we find that the income tax return filed by CIC for the year 1989 was false. It did not reflect the true or actual amount gained
from the sale of the Cibeles property. Obviously, such was done with intent to evade or reduce tax liability.

As stated above, the prescriptive period to assess the correct taxes in case of false returns is ten years from the discovery of the falsity. The false
return was filed on 15 April 1990, and the falsity thereof was claimed to have been discovered only on 8 March 1991. 37 The assessment for the 1989
deficiency income tax of CIC was issued on 9 January 1995. Clearly, the issuance of the correct assessment for deficiency income tax was well within
the prescriptive period.

Is respondent Estate liable for the 1989 deficiency income tax of Cibeles Insurance Corporation?

A corporation has a juridical personality distinct and separate from the persons owning or composing it. Thus, the owners or stockholders of a
corporation may not generally be made to answer for the liabilities of a corporation and vice versa. There are, however, certain instances in which
personal liability may arise. It has been held in a number of cases that personal liability of a corporate director, trustee, or officer along, albeit not
necessarily, with the corporation may validly attach when:

1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross negligence in directing its affairs, or (c) conflict of interest,
resulting in damages to the corporation, its stockholders, or other persons;

2. He consents to the issuance of watered down stocks or, having knowledge thereof, does not forthwith file with the corporate secretary his written
objection thereto;

3. He agrees to hold himself personally and solidarily liable with the corporation; or

4. He is made, by specific provision of law, to personally answer for his corporate action.38

It is worth noting that when the late Toda sold his shares of stock to Le Hun T. Choa, he knowingly and voluntarily held himself personally liable for all
the tax liabilities of CIC and the buyer for the years 1987, 1988, and 1989. Paragraph g of the Deed of Sale of Shares of Stocks specifically provides:

g. Except for transactions occurring in the ordinary course of business, Cibeles has no liabilities or obligations, contingent or otherwise, for taxes, sums
of money or insurance claims other than those reported in its audited financial statement as of December 31, 1989, attached hereto as "Annex B" and
made a part hereof. The business of Cibeles has at all times been conducted in full compliance with all applicable laws, rules and regulations.
SELLER undertakes and agrees to hold the BUYER and Cibeles free from any and all income tax liabilities of Cibeles for the fiscal years
1987, 1988 and 1989.39 [Underscoring Supplied].

When the late Toda undertook and agreed "to hold the BUYER and Cibeles free from any all income tax liabilities of Cibeles for the fiscal years 1987,
1988, and 1989," he thereby voluntarily held himself personally liable therefor. Respondent estate cannot, therefore, deny liability for CIC’s deficiency
income tax for the year 1989 by invoking the separate corporate personality of CIC, since its obligation arose from Toda’s contractual undertaking, as

14
contained in the Deed of Sale of Shares of Stock.

WHEREFORE, in view of all the foregoing, the petition is hereby GRANTED. The decision of the Court of Appeals of 31 January 2001 in CA-G.R. SP
No. 57799 is REVERSED and SET ASIDE, and another one is hereby rendered ordering respondent Estate of Benigno P. Toda Jr. to pay
₱79,099,999.22 as deficiency income tax of Cibeles Insurance Corporation for the year 1989, plus legal interest from 1 May 1994 until the amount is
fully paid.

Costs against respondent.

SO ORDERED.

G.R. No. 140944             April 30, 2008

RAFAEL ARSENIO S. DIZON, in his capacity as the Judicial Administrator of the Estate of the deceased JOSE P. FERNANDEZ, petitioner,
vs.
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.

DECISION

NACHURA, J.:

Before this Court is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Civil Procedure seeking the reversal of the Court of Appeals (CA)
Decision2 dated April 30, 1999 which affirmed the Decision3 of the Court of Tax Appeals (CTA) dated June 17, 1997.4

The Facts

On November 7, 1987, Jose P. Fernandez (Jose) died. Thereafter, a petition for the probate of his will 5 was filed with Branch 51 of the Regional Trial
Court (RTC) of Manila (probate court).[6] The probate court then appointed retired Supreme Court Justice Arsenio P. Dizon (Justice Dizon) and
petitioner, Atty. Rafael Arsenio P. Dizon (petitioner) as Special and Assistant Special Administrator, respectively, of the Estate of Jose (Estate). In a
letter7 dated October 13, 1988, Justice Dizon informed respondent Commissioner of the Bureau of Internal Revenue (BIR) of the special proceedings
for the Estate.

Petitioner alleged that several requests for extension of the period to file the required estate tax return were granted by the BIR since the assets of the
estate, as well as the claims against it, had yet to be collated, determined and identified. Thus, in a letter 8 dated March 14, 1990, Justice Dizon
authorized Atty. Jesus M. Gonzales (Atty. Gonzales) to sign and file on behalf of the Estate the required estate tax return and to represent the same in
securing a Certificate of Tax Clearance. Eventually, on April 17, 1990, Atty. Gonzales wrote a letter 9 addressed to the BIR Regional Director for San
Pablo City and filed the estate tax return10 with the same BIR Regional Office, showing therein a NIL estate tax liability, computed as follows:

COMPUTATION OF TAX
Conjugal Real Property (Sch. 1) P10,855,020.00
Conjugal Personal Property (Sch.2) 3,460,591.34

15
 Taxable Transfer (Sch. 3)
Gross Conjugal Estate 14,315,611.34
Less: Deductions (Sch. 4) 187,822,576.06
Net Conjugal Estate NIL  
Less: Share of Surviving Spouse NIL.  
Net Share in Conjugal Estate NIL  
xxx
Net Taxable Estate NIL.  
Estate Tax Due NIL.11
On April 27, 1990, BIR Regional Director for San Pablo City, Osmundo G. Umali issued Certification Nos. 2052 [12] and 2053[13] stating that the taxes
due on the transfer of real and personal properties [14] of Jose had been fully paid and said properties may be transferred to his heirs. Sometime in
August 1990, Justice Dizon passed away. Thus, on October 22, 1990, the probate court appointed petitioner as the administrator of the Estate.15

Petitioner requested the probate court's authority to sell several properties forming part of the Estate, for the purpose of paying its creditors, namely:
Equitable Banking Corporation (P19,756,428.31), Banque de L'Indochine et. de Suez (US$4,828,905.90 as of January 31, 1988), Manila Banking
Corporation (P84,199,160.46 as of February 28, 1989) and State Investment House, Inc. (P6,280,006.21). Petitioner manifested that Manila Bank, a
major creditor of the Estate was not included, as it did not file a claim with the probate court since it had security over several real estate properties
forming part of the Estate.16

However, on November 26, 1991, the Assistant Commissioner for Collection of the BIR, Themistocles Montalban, issued Estate Tax Assessment
Notice No. FAS-E-87-91-003269,17 demanding the payment of P66,973,985.40 as deficiency estate tax, itemized as follows:

Deficiency Estate Tax- 1987

Estate tax P31,868,414.48
25% surcharge- late filing 7,967,103.62
late payment 7,967,103.62
Interest 19,121,048.68
Compromise-non filing 25,000.00
non payment 25,000.00
no notice of death 15.00
no CPA Certificate 300.00
Total amount due & collectible P66,973,985.4018
In his letter dated December 12, 1991, Atty. Gonzales moved for the reconsideration of the said estate tax assessment. However, in her letter 20 dated
19

April 12, 1994, the BIR Commissioner denied the request and reiterated that the estate is liable for the payment of P66,973,985.40 as deficiency
estate tax. On May 3, 1994, petitioner received the letter of denial. On June 2, 1994, petitioner filed a petition for review 21 before respondent CTA. Trial
on the merits ensued.

16
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:

Nature of Document (sic) Exhibits

1. Letter dated October 13, 1988 from Arsenio P. Dizon addressed to "A"
the Commissioner of Internal Revenue informing the latter of the
special proceedings for the settlement of the estate (p. 126, BIR
records);
2. Petition for the probate of the will and issuance of letter of "B" & "B-1"
administration filed with the Regional Trial Court (RTC) of Manila,
docketed as Sp. Proc. No. 87-42980 (pp. 107-108, BIR records);
3. Pleading entitled "Compliance" filed with the probate Court "C"
submitting the final inventory of all the properties of the deceased
(p. 106, BIR records);
4. Attachment to Exh. "C" which is the detailed and complete listing of "C-1" to "C-17"
the properties of the deceased (pp. 89-105, BIR rec.);
5. Claims against the estate filed by Equitable Banking Corp. with the "D" to "D-24"
probate Court in the amount of P19,756,428.31 as of March 31,
1988, together with the Annexes to the claim (pp. 64-88, BIR
records);
6. Claim filed by Banque de L' Indochine et de Suez with the probate "E" to "E-3"
Court in the amount of US $4,828,905.90 as of January 31, 1988
(pp. 262-265, BIR records);
7. Claim of the Manila Banking Corporation (MBC) which as of "F" to "F-3"
November 7, 1987 amounts to P65,158,023.54, but recomputed as
of February 28, 1989 at a total amount of P84,199,160.46; together
with the demand letter from MBC's lawyer (pp. 194-197, BIR
records);
8. Demand letter of Manila Banking Corporation prepared by Asedillo, "G" & "G-1"
Ramos and Associates Law Offices addressed to Fernandez
Hermanos, Inc., represented by Jose P. Fernandez, as mortgagors,
in the total amount of P240,479,693.17 as of February 28, 1989
(pp. 186-187, BIR records);
9. Claim of State Investment House, Inc. filed with the RTC, Branch "H" to "H-16"
VII of Manila, docketed as Civil Case No. 86-38599 entitled "State
Investment House, Inc., Plaintiff, versus Maritime Company
Overseas, Inc. and/or Jose P. Fernandez, Defendants," (pp. 200-
215, BIR records);
10. Letter dated March 14, 1990 of Arsenio P. Dizon addressed to Atty. "I"
Jesus M. Gonzales, (p. 184, BIR records);
11. Letter dated April 17, 1990 from J.M. Gonzales addressed to the "J"

17
 Regional 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 "K" to "K-5"
through its authorized representative, Atty. Jesus M. Gonzales, for
Arsenio P. Dizon, with attachments (pp. 177-182, BIR records);
13. Certified true copy of the Letter of Administration issued by RTC "L"
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 "M" to "M-5"
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.).
Respondent's [BIR] counsel presented on June 26, 1995 one witness in the person of Alberto Enriquez, who was one of the revenue
examiners who conducted the investigation on the estate tax case of the late Jose P. Fernandez. In the course of the direct examination of
the witness, he identified the following:

Documents/Signatures BIR Record

1. Estate Tax Return prepared by the BIR; p. 138
2. Signatures of Ma. Anabella Abuloc and Alberto Enriquez, Jr. -do-
appearing at the lower Portion of Exh. "1";
3. Memorandum for the Commissioner, dated July 19, 1991, prepared pp. 143-144
by revenue examiners, Ma. Anabella A. Abuloc, Alberto S. Enriquez
and Raymund S. Gallardo; Reviewed by Maximino V. Tagle
4. Signature of Alberto S. Enriquez appearing at the lower portion on -do-
p. 2 of Exh. "2";
5. Signature of Ma. Anabella A. Abuloc appearing at the lower portion -do-
on p. 2 of Exh. "2";
6. Signature of Raymund S. Gallardo appearing at the Lower portion -do-
on p. 2 of Exh. "2";
7. Signature of Maximino V. Tagle also appearing on p. 2 of Exh. "2"; -do-
8. Summary of revenue Enforcement Officers Audit Report, dated July p. 139
19, 1991;
9. Signature of Alberto Enriquez at the lower portion of Exh. "3"; -do-
10. Signature of Ma. Anabella A. Abuloc at the lower portion of Exh. -do-
"3";
11. Signature of Raymond S. Gallardo at the lower portion of Exh. "3"; -do-
12. Signature of Maximino V. Tagle at the lower portion of Exh. "3"; -do-
13. Demand letter (FAS-E-87-91-00), signed by the Asst. p. 169
Commissioner for Collection for the Commissioner of Internal
Revenue, demanding payment of the amount of P66,973,985.40;
and
18
 14. Assessment Notice FAS-E-87-91-00 pp. 169-17022
The CTA's Ruling

On June 17, 1997, the CTA denied the said petition for review. Citing this Court's ruling in Vda. de Oñate v. Court of Appeals,23 the CTA opined that
the aforementioned pieces of evidence introduced by the BIR were admissible in evidence. The CTA ratiocinated:

Although the above-mentioned documents were not formally offered as evidence for respondent, considering that respondent has been declared to
have waived the presentation thereof during the hearing on March 20, 1996, still they could be considered as evidence for respondent since they were
properly identified during the presentation of respondent's witness, whose testimony was duly recorded as part of the records of this case. Besides, the
documents marked as respondent's exhibits formed part of the BIR records of the case.24

Nevertheless, the CTA did not fully adopt the assessment made by the BIR and it came up with its own computation of the deficiency estate tax, to wit:

P 5,062,016.00
Conjugal Real Property
Conjugal Personal Prop. 33,021,999.93
Gross Conjugal Estate 38,084,015.93
Less: Deductions 26,250,000.00
Net Conjugal Estate P 11,834,015.93
Less: Share of Surviving Spouse 5,917,007.96
Net Share in Conjugal Estate P 5,917,007.96
Add: Capital/Paraphernal
Properties – P44,652,813.66
Less: Capital/Paraphernal Deductions 44,652,813.66
Net Taxable Estate P 50,569,821.62
============

Estate Tax Due P 29,935,342.97

Add: 25% Surcharge for Late Filing 7,483,835.74
Add: Penalties for-No notice of death 15.00
No CPA certificate 300.00
Total deficiency estate tax P 37,419,493.71
============
exclusive of 20% interest from due date of its payment until full payment thereof

[Sec. 283 (b), Tax Code of 1987].25

Thus, the CTA disposed of the case in this wise:

19
WHEREFORE, viewed from all the foregoing, the Court finds the petition unmeritorious and denies the same. Petitioner and/or the heirs of Jose P.
Fernandez are hereby ordered to pay to respondent the amount of P37,419,493.71 plus 20% interest from the due date of its payment until full
payment thereof as estate tax liability of the estate of Jose P. Fernandez who died on November 7, 1987.

SO ORDERED.26

Aggrieved, petitioner, on March 2, 1998, went to the CA via a petition for review.27

The CA's Ruling

On April 30, 1999, the CA affirmed the CTA's ruling. Adopting in full the CTA's findings, the CA ruled that the petitioner's act of filing an estate tax
return with the BIR and the issuance of BIR Certification Nos. 2052 and 2053 did not deprive the BIR Commissioner of her authority to re-examine or
re-assess the said return filed on behalf of the Estate.28

On May 31, 1999, petitioner filed a Motion for Reconsideration29 which the CA denied in its Resolution30 dated November 3, 1999.

Hence, the instant Petition raising the following issues:

1. Whether or not the admission of evidence which were not formally offered by the respondent BIR by the Court of Tax Appeals which was
subsequently upheld by the Court of Appeals is contrary to the Rules of Court and rulings of this Honorable Court;

2. Whether or not the Court of Tax Appeals and the Court of Appeals erred in recognizing/considering the estate tax return prepared and filed by
respondent BIR knowing that the probate court appointed administrator of the estate of Jose P. Fernandez had previously filed one as in fact, BIR
Certification Clearance Nos. 2052 and 2053 had been issued in the estate's favor;

3. Whether or not the Court of Tax Appeals and the Court of Appeals erred in disallowing the valid and enforceable claims of creditors against the
estate, as lawful deductions despite clear and convincing evidence thereof; and

4. Whether or not the Court of Tax Appeals and the Court of Appeals erred in validating erroneous double imputation of values on the very same
estate properties in the estate tax return it prepared and filed which effectively bloated the estate's assets.31

The petitioner claims that in as much as the valid claims of creditors against the Estate are in excess of the gross estate, no estate tax was due; that
the lack of a formal offer of evidence is fatal to BIR's cause; that the doctrine laid down in Vda. de Oñate has already been abandoned in a long line of
cases in which the Court held that evidence not formally offered is without any weight or value; that Section 34 of Rule 132 of the Rules on Evidence
requiring a formal offer of evidence is mandatory in character; that, while BIR's witness Alberto Enriquez (Alberto) in his testimony before the CTA
identified the pieces of evidence aforementioned such that the same were marked, BIR's failure to formally offer said pieces of evidence and depriving
petitioner the opportunity to cross-examine Alberto, render the same inadmissible in evidence; that assuming arguendo that the ruling in Vda. de
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

20
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
21
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

22
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 Code 59 (Tax Code) which provides for
the allowable deductions from the gross estate of the decedent. The specific question is whether the actual claims of the aforementioned creditors may
be fully allowed as deductions from the gross estate of Jose despite the fact that the said claims were reduced or condoned through compromise
agreements entered into by the Estate with its creditors.

"Claims against the estate," as allowable deductions from the gross estate under Section 79 of the Tax Code, are basically a reproduction of the
deductions allowed under Section 89 (a) (1) (C) and (E) of Commonwealth Act No. 466 (CA 466), otherwise known as the National Internal Revenue
Code of 1939, and which was the first codification of Philippine tax laws. Philippine tax laws were, in turn, based on the federal tax laws of the United
States. Thus, pursuant to established rules of statutory construction, the decisions of American courts construing the federal tax code are entitled to
great weight in the interpretation of our own tax laws.60

It is noteworthy that even in the United States, there is some dispute as to whether the deductible amount for a claim against the estate is fixed as of
the decedent's death which is the general rule, or the same should be adjusted to reflect post-death developments, such as where a settlement
between the parties results in the reduction of the amount actually paid. 61 On one hand, the U.S. court ruled that the appropriate deduction is the
"value" that the claim had at the date of the decedent's death.62 Also, as held in Propstra v. U.S., 63 where a lien claimed against the estate was certain
and enforceable on the date of the decedent's death, the fact that the claimant subsequently settled for lesser amount did not preclude the estate from
deducting the entire amount of the claim for estate tax purposes. These pronouncements essentially confirm the general principle that post-death

23
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.

SO ORDERED.

G.R. No. L-16544             March 30, 1921

LEONARDO OSORIO, plaintiff-appellee,

vs.
TOMASA OSORIO, administratrix of the estate of Petrona Reyes, and THE YNCHAUSTI STEAMSHIP CO., defendants-appellants.

Fernandez and Ansaldo for appellants.

Carlos Ledesma for appellee.

VILLAMOR, J.:

The plaintiff seeks to recover 610 shares of stock of "Ynchausti Steamship Co." and the dividends corresponding to them, which were included in the
inventory of the properties of the deceased Da. Maria Petrona Reyes, whose estate is administered by the defendant. The facts of this case are:

24
D. Antonio Osorio had formed with Ynchausti & Co., a joint account association for the exploitation of the shipping business, he being the owner of the
one-third of the company's capital. This capital amounted to P500,000, of which P166,666.66, that is, one-third belonged to D. Antonio Osorio. Upon
his death, his heirs agreed to authorize the defendant Da. Tomasa Osorio, then administratrix of the estate of the deceased, to present a project of
partition, and said administratix inserted in the project with the consent of all the heirs, among the properties which belonged to the widow Da. Petrona
Reyes, the sum of P94,000 as her part in the "share of the estate in the shipping business of Ynchausti & Co.," that is, a little over P166,666.66, which
was the share in said business of the deceased Osorio during his lifetime. The project of partition was approved on May 10, 1915, with the consent of
the heirs, by the Court of First Instance of Cavite, which had cognizance of the testamentary and administration proceedings of the state of the
deceased Osorio.

On February 28, 1914, the widow of D. Antonio Osorio, Da. Petrona Reyes, now also deceased, executed before the notary D. Florencio Gonzales
Diez a document of gift in favor of her son D. Leonardo Osorio, the plaintiff, giving to him one-half of her share in the one-third part which belonged to
her husband in the shipping business of Ynchausti & Co., a donation which was duly accepted by the donee D. Leonardo Osorio, who signed said
document with the plaintiff. On that date, February 28, 1914, the estate of D. Antonio Osorio was not yet distributed among his heirs, and the donor
Da. Petrona Reyes in order to correct the error in said document, wherein it was stated that said half was adjudicated to her as part of her conjugal
property, when the partition was yet being effected, executed another document dated July 3, 1915, maintaining said donation in effect in the sense
that she ceded and donated to her son D. Leonardo Osorio, for the same reasons stated in the document of February 28, 1914, al interest or
participation in said shipping business of Ynchausti & Co., which was adjudicated to her in the division of the estate of D. Antonio Osorio, which
division was approved by the Court of First Instance of Cavite on May 10, 1915.

After the death of D. Antonio Osorio and before the distribution of the estate, Ynchausti & Co. purchased the steamer Governor Forbes and
recognized the heirs of D. Antonio Osorio as having an interest to the extent of one-third in the ownership and business of said steamer. It was agreed
upon by all the interested parties that the share of Da. Petrona Reyes, widow of Osorio, in the vessel Governor Forbes, at the time of the incorporation
of "The Ynchausti Steamship Co." was P61,000, equivalent to 610 shares of stock of said corporation. Said sum was deposited with the Steamship
Co. until the final settlement of the question that had arisen between the heirs of Da. Petrona Reyes as to the ownership thereof for, while the plaintiff
alleges that, by virtue of the donation made in his favor by Da. Petrona Reyes, he is the owner of said shares and of their value which is P61,000; the
defendant on the other hand contends that said shares are not included in the donation in question and belong to the heirs of Da. Petrona Reyes.
Such as the facts which gave rise to this litigation.

The trial court rendered judgment in the case, declaring that the 610 shares of stock in dispute and their dividends belong to the plaintiff, and ordered
the defendant Da. Tomasa Osorio, administratrix of the estate of Da. Petrona Reyes, to exclude them from the inventory and her accounts, and the
other defendant "The Ynchausti Steamship Co." to inscribe them in the name of the plaintiff D. Leonardo Osorio, delivering to him the dividends
corresponding thereto, and denied the counterclaim for the sum of P45,000, on the ground that said sum represents the dividends corresponding to
the P94,000 adjudicated to Da. Petrona Reyes, in the partition of the estate of D. Antonio Osorio, and donated by her to the defendant in the
counterclaim.

The case having been appealed to this court, counsel for the defendant and appellant, in summing up their arguments in support of the errors
assigned in their brief, maintain the two following propositions:

1. The donation made by Da. Petrona Reyes in favor of the plaintiff was of no value and effect; and

2. That, supposing said donation valid, the 610 shares of stock, the value of which is P61,000, cannot be considered as included among them.

The document of donation dated February 28, 1914, attacked by the appellant, is as follows:

Know all me by these presents: That I, Petrona Reyes, of age, widow of D. Antonio Osorio and resident of the Province of Cavite, Philippine Islands,
25
being in possession of all my senses, freely and voluntarily state:

1. That my husband, the deceased D. Antonio Osorio, was a shareholder to the extent of one-third in the joint account association "Ynchausti & Co." of
this place, which is engaged in the business of buying vessels and in the exploitation of six steam vessels acquired from the Compañia Maritima, the
article of association of said joint account association having been executed in the city of Manila on July 3, 1906, before the notary public D. Florencio
Gonzales Diez.

2. That upon the death of my husband D. Antonio Osorio and upon the partition of his estate, there was adjudicated to me as conjugal property, one-
half of said one-third part in the business referred to, the other half thereof going to our four surviving children, such being the present condition of our
interest in said company.

3. That in consideration of the continuous services and attention received by me from my son D. Leonardo Osorio, of age, married and a resident of
Cavite also, and because of the affection he has always shown and still shows me, as well as because of the number of children that he has, I make a
free and expressed donation to my said son D. Leonardo Osorio of all my interest and participation in said company "Ynchausti and Co." which is
neither transferred nor burdened in any manner whatever.

4. I also declare that the present donation does not in any way prejudice the right which may accrue to my other children with respect to inheriting my
property and that therefore I can effect this donation, with all liberty, as I reserve for myself what is sufficient for me to live on in the manner which
corresponds to my social position and needs.

5. In turn, I, Leonardo Osorio, of age, married and a resident of the Province of Cavite, state my conformity and acceptance of said donation which my
dear mother makes to me, for which I am greatly thankful to her.

In witness whereof we sign the present document in triplicate at Manila, Philippine Islands, this twenty-eighth day of February, nineteen hundred and
fourteen.

(Sgd.) PETRONA REYES.

LEONARDO OSORIO.

Signed in the presence of:

(Sgd.) EUSEBIO ALBA.

SALVADOR BARRIOS.

Acknowledged before the notary public D. Florencio Gonzales Diez on February 28, 1914.

The document rectifying the ratifying the preceding is literally as follows:

Know all men by these presents: That I, Petrona Reyes, of age, widow of D. Antonio Osorio and resident of the Province of Cavite, Philippine Islands,
being in the full possession of my senses, freely and voluntarily declare:

1. That on February 28, 1914, before the notary public of Manila, D. Florencio Gonzales Diez, I executed a document of donation in favor of my son D.

26
Leonardo Osorio, of one-half of the one-third part which my deceased husband had in certain shipping business of the association "Ynchausti & Co."

2. That in said document I stated, through error, that said half of one-third part of the business referred to was adjudicated to me as my part of the
conjugal property in the partition of the properties left by my deceased husband, when the truth was that said partition had not yet been put in proper
form or finished.

3. That in order to correct said error, I so state, declaring however in any event that I make said donation subsisting in the sense that I cede and
donate to my side son D. Leonardo Osorio, in consideration of the same causes mentioned in said document of February 28, 1914, all interest or
share in said shipping business of Ynchausti & Co. which was adjudicated to me in the partition of the estate of my deceased husband, and approved
by the Court of First Instance of Cavite, on May 10, 1915.

In witness whereof I sign the present document in triplicate of Cavite on July 3, 1915.

(Sgd. by):

PETRONA REYES.

Signed in the presence of:

(Sgd.) CARLOS LEDESMA.

ISAURO GABALDON.

In support of the first proposition, the appellant invokes as the legal provision violated, article 635 of the Civil Code, which says:

A donation can not include future property.

By future property is understood that of which the donor can not dispose at the time of making the donation.

Commenting on article 635 of the Civil Code, Manresa says, among other things:

To close these fundamental ideas which the spirit of articles 634 and 635 develops we must fix our attention to the definition which the Code gives of
future properties. They are those of which the donor cannot dispose at the time of making the donation. This definition in reality includes all properties
which belong to others at the time of the donation, although they may or may not later belong to the donor, thus connecting two ideas which, although
lacking apparently in relation, are merged in reality in the subject which we examine and which gives assurance to their application. Article 635 refers
to the properties of third persons but it may be said that id does so in relation to a time to come; there can be properties which may latter belong to the
donor; but these properties cannot be donated, because they are not at present his properties, because he cannot dispose of them at the moment of
making the donation. The usufructuary for life or for a determined number of years of a vineyard may donate said usufruct to the whole extent that it
belongs to him but never the property itself. The bare owner of said vineyard may donate his right of course; but he may also donate the usufruct
which corresponds to the time that it will go back to him, because the case refers to a vested right of which he may dispose at the time of the donation.

It is alleged that the donation made by Da. Petrona Reyes is void because she donated on February 28, 1914, a future property, such as the share in
the business of the deceased Osorio, which was adjudicated to her on May 10, 1915, and because in 1914 she did not have the right to all or part of

27
the share which her deceased husband had in the shipping business of Ynchausti & Co.

Carefully examining said article 635 of the Civil Code, in relation to the worthy opinion of the commentator Manresa, we believe that the future
properties, the donation of which is prohibited by said article, are those belonging to other, which, as such, cannot be the object of the disposal by the
donor; but the properties of an existing inheritance as those of the case at bar, cannot be considered as another's property with relation to the heirs
who through a fiction of law continue the personality of the owner. Nor do they have the character of future property because the died before 1912, his
heirs acquired a right to succeed him from the moment of his death, because of the principle announced in article 657 and applied by article 661 of the
Civil Code, according to which the heirs succeed the deceased by the mere fact of his death. More of less time may elapse before the heirs enter into
the possession of the hereditary property, but this is not an obstacle, for the acquisition of said property retroacts in any event to the moment of death,
according to article 989 of the Civil Code. The right is acquired although subject to the adjudication of the corresponding hereditary portion.

Furthermore the Civil Code does not prohibit absolutely that future inheritance should be the object of agreement, for there are certain cases (arts.
177, 827, 831, and 1331) in which agreements may be made as to them, beside that indicated in article 1271, and it may be deduced that an
inheritance already existing, which is no longer future from the moment of death of the predecessor, may legally be the object of contract. A donation
being of a contractual nature, inasmuch as for its efficacy the concurrence of two wills is required, that of the donor and the donee, we believe that
which may be the object of contract may also be the object of a donation. Ubi eadem est ratio, ibi est eadem legis dispositio. We conclude that the
donor Da. Petrona Reyes, on February 28, 1912, and could legally dispose of her right through an act of liberality, as she had done.

With respect to the point that Da. Petrona Reyes did not have in 1914 any right to all or part of the share of her deceased husband in the shipping
business of Ynchausti and Co., it must be observed that in the project of partition of the property of D. Antonio Osorio the following appears:

The widow of the testator, Maria Petrona Reyes, her children Feliza, Tomasa, and Leonardo and her granddaugther Soledad Encarnacion Osorio y
San Agustin are at present all living and are the only heirs of the deceased.

The testator declares that all property left by him was acquired during his marriage with Petrona Reyes.

The testator institutes as his only and universal heirs his said children and granddaugther, designates the parts which each of them must receive as
legitime, betterment, and legacy, leaves to the disposition of his widow and amount equivalent to that set aside by him in payment of one-half part of
the conjugal property and orders that the remainder should be equally distributed among his heirs.

We do not have before us the will of D. Antonio Osorio but supposing that he had left no property but the share which he had in the shipping business
of Ynchausti & Co., can it be denied that the donor by law had the right to half of said share as her part of the conjugal property? Clearly not. The
defendant in her answer says:

That Da. Maria Petrona Reyes did not donate to the plaintiff more that her share in the shipping business of the firm Ynchausti & Co. which was
adjudicated to her in the partition of the property of D. Antonio Osorio and that said share amounts to P94,000.

This admission of the defendant is conclusive, and makes it unnecessary for us to enter into another discussion in order to deduce that Da. Petrona
Reyes had in 1914 a right to a certain part of the interest of the deceased Osorio in the shipping business of the firm Ynchausti & Co., and could
donate it, as she did, to her son D. Leonardo Osorio.

The allegation that the document of July 3, 1915, is void, because it does not show the acceptance of the donee, is of no importance, because of the
conclusion we have reached in discussing the document of donation of February 28, 1914. In the second document, the donor only tried to correct
what she believed to be an error in the first, wherein it is stated that in the partition of the property of her husband there was adjudicated to her the part

28
of the interest in the shipping business of Ynchausti & Co. which she donated to her son Leonardo, when in fact said partition was yet pending. After
its approval by the Court of First Instance of Cavite, the donor executed the document of 1915, ratifying and correcting the document of donation. She
did not make a new donation. She executed a personal act which did not require the concurrence of the donee. It is the duty of the donee, in order that
the donation may produce legal effect, to accept to the donation and notify the donor thereof. The acceptance is necessary because nobody is obliged
to receive a benefit against his will. And all this was complied with in the document of 1914. The wills of the donor and of the donee having concurred,
the donation, as a mode of transferring ownership, becomes perfect, according to article 623 of the Civil Code.

We will not pass to the second proposition of the appellant, that is, that the 610 shares, which are the subject matter of the suit, cannot be considered
as included in the donation made by Da. Petrona Reyes in favor of the plaintiff, supposing that said donation was valied. The reasons alleged by the
appellant are: (1) That the steam vessel Governor Forbes was purchased after the death of D. Antonio Osorio, with money borrowed and furnished by
the heirs individually and not by the estate, and (2) that the plaintiff appellee has recognized that the capital used in the steamer Forbes is distinct from
the money used in the purchase of other vessels in which the deceased Osorio had an interest.

The question whether the streamer Governor Forbes was or was not purchased with money furnished by Ynchausti and the heirs of Osorio,
indepedently of that former partnership in which the deceased Osorio had an interest, is one of the fact and must be resolved in view of the evidence
adduced at the trial.

D. Julio Gonzales, secretary and accountant of the firm Ynchausti, witness for the defendant, states that the Forbes was purchased with money which
the shipping business of Unchaisti & Co. had. The appellant herself admits that his vessel took part in the general shipping business of Ynchausti &
Co. for no new partnership was constituted for the purchase thereof, and, after its acquisition the Ynchausti firm accounted to the estate of D. Antonio
Osorio for the profits obtained and the dividends to be distributed and no separate account was made of the earnings of the vessel, but only a general
account, including the profits obtained in the shipping business, in which the Governor Forbes was but one of several vessels. D. Joaquin Elizalde,
manager of the firm Ynchausti & Co., by agreement of the parties and with the approval of the court, made a deposition before the notary public D.
Florencio Gonzales Diez, stating that when the steamer Forbes was acquired in 1912, the Ynchausti firm did not bring in any new capital, but obtained
money for its purchase by mortgaging the vessel itself and other vesseles of the company; and that the heirs of D. Antonio Osorio did not bring in any
new capital for the purchase of the vessel, but signed jointly with Ynchausti & Co. with the others, except Da. Soledad Osorio, the guaranty which the
bank required.

In our opinion the evidence shows conclusively that the vessel Governor Forbes forms part of the shipping business of Ynchausti & Co. in which D.
Antonio Osorio and his estate had an interest. It is no argument against this conclusion that the heirs of Osorio signed with Ynchausti & Co. the
guaranty required by the bank where the money used in the purchase of the Forbes was taken: (1) Because the guaranty is for the purpose only for
securing the payment of the amount indebted and not for excluding the estate of Osorio from the result of that banking operation; (2) because, besides
said guaranty, the other vessels of the joint account association of Osorio and Ynchausti & Co. were mortgage; (3) because no new partnership was
formed between Ynchausti & Co. and the heirs of Osorio for the purchase of the vessel Forbes; and (4) because, when Unchausti & Co. agreed with
the heirs of Osorio in that his share in the steamer Forbes was P108,333.33, this sum was distributed among said heirs, including Da. Soledad Osorio
who did not sign the guaranty, the accruing to each P11, 833.33 and to the widow Da. Petrona Reyes P61,000, which is the object of this suit.

All of the above shows that the estate of Osorio had a one-third part of the steamer Forbes represented by the capital which was distributed among the
heirs, there accruing to the widow, by agreement of the interested parties, the sum of P61,000. And this sum being part of the one-half of one-third of
the shipping business of Ynchausti & Co., which one-half part accrued to the widow in the distribution of the properties of Osorio; and the widow Da.
Petrona Reyes having disposed of this half, donating it to her son D. Leonardo Osorio, it clearly results, in our opinion, that the sum of 61,000, or the
corresponding shares of the new corporation "The Ynchausti Steamship Co." are included in said donation, and therefore belong to the plaintiff-
appellee.

The other reason alleged by the appellant in support of her contention is that the plaintiff has recognized in his letter addressed to the defendant
corporation, and inserted in the answer presented by the latter that the Forbes was acquired with money different from that of the joint account
29
association theretofore mentioned. We have carefully read the letter in question and what appears is that said plaintiff agreed that the P61,000 should
be deposited with Ynchausti & Co., as trustee, to be distributed with its accumulated dividends, when the question between the heirs of Da. Petrona
Reyes had already been terminated, that is to say, according to the result of the present suit. There is nothing in said letter which indicates how the
Governor Forbes was acquired.

With respect to the counterclaim of P45,609,91, we are of the opinion that the evidence justifies the conclusion of the trial court that they are the profits
or dividends accruing to the P94,000, which were adjudicated to the widow Da. Petrona Reyes in the distribution of the estate of the deceased Osorio
and which were donated by her to the plaintiff, and as such profits they belong to the latter, upon the principle of law that ownership of property gives
right by accession to all that it produces, or is united or incorporated thereto, naturally or artificially. (Art. 353 of the Civil Code.)

In view of what has been said, the judgment appealed from should be, as it is hereby, affirmed, with costs against the appellant. So ordered.

G.R. No. 210987               November 24, 2014

THE PHILIPPINE AMERICAN LIFE AND GENERAL INSURANCE COMPANY, Petitioner,

vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, Respondents.

DECISION

VELASCO, JR., J.:

Nature of the Case

Before the Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court assailing and seeking the reversal of the Resolutions of the
Court of Appeals (CA) in CA-G.R. SP No. 127984, dated May 23, 2013 1 and January 21, 2014, which dismissed outright the petitioner's appeal from
the Secretary of Finance's review of BIR Ruling No. 015-122 for lack of jurisdiction.

The Facts

Petitioner The Philippine American Life and General Insurance Company (Philamlife) used to own 498,590 Class A shares in Philam Care Health
Systems, Inc. (PhilamCare), representing 49.89% of the latter's outstanding capital stock. In 2009, petitioner, in a bid to divest itself of its interests in
the health maintenance organization industry, offered to sell its shareholdings in PhilamCare through competitive bidding. Thus, on September 24,
2009, petitioner's Class A shares were sold for USD 2,190,000, or PhP 104,259,330 based on the prevailing exchange rate at the time of the sale, to
STI Investments, Inc., who emerged as the highest bidder.3

After the sale was completed and the necessary documentary stamp and capital gains taxes were paid, Philamlife filed an application for a certificate
authorizing registration/tax clearance with the Bureau of Internal Revenue (BIR) Large Taxpayers Service Division to facilitate the transfer of the
shares. Months later, petitioner was informed that it needed to secure a BIR ruling in connection with its application due to potential donor’s tax liability.
In compliance, petitioner, on January 4, 2012, requested a ruling4 to confirm that the sale was not subject to donor’s tax, pointing out, in its request, the
following: that the transaction cannot attract donor’s tax liability since there was no donative intent and,ergo, no taxable donation, citing BIR Ruling
[DA-(DT-065) 715-09] dated November 27, 2009;5 that the shares were sold at their actual fair market value and at arm’s length; that as long as the
transaction conducted is at arm’s length––such that a bona fide business arrangement of the dealings is done inthe ordinary course of business––a
sale for less than an adequate consideration is not subject to donor’s tax; and that donor’s tax does not apply to saleof shares sold in an open bidding
30
process.

On January 4, 2012, however, respondent Commissioner on Internal Revenue (Commissioner) denied Philamlife’s request through BIR Ruling No.
015-12. As determined by the Commissioner, the selling price of the shares thus sold was lower than their book value based on the financial
statements of PhilamCare as of the end of 2008.6 As such, the Commisioner held, donor’s tax became imposable on the price difference pursuant to
Sec. 100 of the National Internal Revenue Code (NIRC), viz:

SEC. 100. Transfer for Less Than Adequate and full Consideration.- Where property, other than real property referred to in Section 24(D), is
transferred for less than an adequate and full consideration in money or money’s worth, then the amount by which the fair market value of the property
exceeded the value of the consideration shall, for the purpose of the tax imposed by this Chapter, be deemed a gift, and shall be included in
computing the amount of gifts made during the calendar year.

The afore-quoted provision, the Commissioner added, is implemented by Revenue Regulation 6-2008 (RR 6-2008), which provides:

SEC. 7. SALE, BARTER OR EXCHANGE OF SHARES OF STOCK NOT TRADED THROUGH A LOCAL STOCK EXCHANGE PURSUANT TO
SECS. 24(C), 25(A)(3), 25(B), 27(D)(2), 28(A)(7)(c), 28(B)(5)(c) OF THE TAX CODE, AS AMENDED. —

xxxx

(c) Determination of Amount and Recognition of Gain or Loss –

(c.1) In the case of cash sale, the selling price shall be the consideration per deed of sale.

xxxx

(c.1.4) In case the fair market value of the shares of stock sold, bartered, or exchanged is greater than the amount of money and/or fair market value
of the property received, the excess of the fair market value of the shares of stock sold, bartered or exchanged overthe amount of money and the fair
market value of the property, if any, received as consideration shall be deemed a gift subject to the donor’stax under Section 100 of the Tax Code, as
amended.

xxxx

(c.2) Definition of ‘fair market value’of Shares of Stock. – For purposes of this Section, ‘fair market value’ of the share of stock sold shall be:

xxxx

(c.2.2) In the case of shares of stock not listed and traded in the local stock exchanges, the book value of the shares of stock as shown in the financial
statements duly certified by an independent certified public accountant nearest to the date of sale shall be the fair market value.

In view of the foregoing, the Commissioner ruled that the difference between the book value and the selling price in the sales transaction is taxable
donation subject to a 30% donor’s tax under Section 99(B) of the NIRC. 7 Respondent Commissioner likewise held that BIR Ruling [DA-(DT-065) 715-

31
09], on which petitioner anchored its claim, has already been revoked by Revenue Memorandum Circular (RMC) No. 25-2011.8

Aggrieved, petitioner requested respondent Secretary of Finance (Secretary) to review BIR Ruling No. 015-12, but to no avail. For on November 26,
2012, respondent Secretary affirmed the Commissioner’s assailed ruling in its entirety.9

Ruling of the Court of Appeals

Not contented with the adverse results, petitioner elevated the case to the CA via a petition for review under Rule 43, assigning the following errors: 10

A.

The Honorable Secretary of Finance gravely erred in not finding that the application of Section 7(c.2.2) of RR 06-08 in the Assailed Ruling and RMC
25-11 is void insofar as it altersthe meaning and scope of Section 100 of the Tax Code.

B.

The Honorable Secretary of Finance gravely erred in finding that Section 100 of the Tax Code is applicable tothe sale of the Sale of Shares.

1.

The Sale of Shares were sold at their fair market value and for fair and full consideration in money or money’s worth.

2.

The sale of the Sale Shares is a bona fide business transaction without any donative intent and is therefore beyond the ambit of Section 100 of the
Tax Code.

3.

It is superfluous for the BIR to require an express provision for the exemption of the sale of the Sale Shares from donor’s tax since Section 100 of the
Tax Code does not explicitly subject the transaction to donor’s tax.

C.

The Honorable Secretary of Finance gravely erred in failing to find that in the absence of any of the grounds mentioned in Section 246 of the Tax
Code, rules and regulations, rulings or circulars – such as RMC 25-11 – cannot be given retroactive application to the prejudice of Philamlife.

On May 23, 2013, the CA issued the assailed Resolution dismissing the CA Petition, thusly:

WHEREFORE, the Petition for Review dated January 9, 2013 is DISMISSED for lack of jurisdiction.

32
SO ORDERED.

In disposing of the CA petition, the appellate court ratiocinated that it is the Court of Tax Appeals (CTA), pursuant to Sec. 7(a)(1) of Republic Act No.
1125 (RA 1125),11 as amended, which has jurisdiction over the issues raised. The outright dismissal, so the CA held, is predicated on the postulate
that BIR Ruling No. 015-12 was issued in the exercise of the Commissioner’s power to interpret the NIRC and other tax laws. Consequently,
requesting for its review can be categorized as "other matters arising under the NIRC or other laws administered by the BIR," which is under the
jurisdiction of the CTA, not the CA.

Philamlife eventually sought reconsideration but the CA, in its equally assailed January 21, 2014 Resolution, maintained its earlier position. Hence, the
instant recourse.

Issues

Stripped to the essentials, the petition raises the following issues in both procedure and substance:

1. Whether or not the CA erred in dismissing the CA Petition for lack of jurisdiction; and

2. Whether or not the price difference in petitioner’s adverted sale of shares in PhilamCare attracts donor’s tax.

Procedural Arguments

a. Petitioner’s contentions

Insisting on the propriety of the interposed CA petition, Philamlife, while conceding that respondent Commissioner issued BIR Ruling No. 015-12 in
accordance with her authority to interpret tax laws, argued nonetheless that such ruling is subject to review by the Secretary of Finance under Sec. 4
of the NIRC, to wit:

SECTION 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. – The power to interpret the provisions of this Code and
other tax laws shall be under the exclusive and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance.

The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other
matters arising under this Code orother laws or portions thereof administered by the Bureau of Internal Revenue is vested in the Commissioner,
subject to the exclusive appellate jurisdiction of the Court of Tax Appeals. Petitioner postulates that there is a need to differentiate the rulings
promulgated by the respondent Commissioner relating to those rendered under the first paragraph of Sec. 4 of the NIRC, which are appealable to the
Secretary of Finance, from those rendered under the second paragraph of Sec. 4 of the NIRC, which are subject to review on appeal with the CTA.

This distinction, petitioner argues, is readily made apparent by Department Order No. 7-02,12 as circularized by RMC No. 40-A-02.

Philamlife further averred that Sec.7 of RA 1125, as amended, does not find application in the case at bar since it only governs appeals from the
Commissioner’s rulings under the second paragraph and does not encompass rulings from the Secretary of Finance in the exercise of his power of
review under the first, as what was elevated to the CA. It added that under RA 1125, as amended, the only decisions of the Secretary appealable to
the CTA are those rendered in customs cases elevated to him automatically under Section 2315 of the Tariff and Customs Code.13

33
There is, thus, a gap in the law when the NIRC, as couched, and RA 1125, as amended, failed to supply where the rulings of the Secretary in its
exercise of its power of review under Sec. 4 of the NIRC are appealable to. This gap, petitioner submits, was remedied by British American Tobacco v.
Camacho14 wherein the Court ruled that where what is assailed is the validity or constitutionality of a law, or a rule or regulation issued by the
administrative agency, the regular courts have jurisdiction to pass upon the same.

In sum, appeals questioning the decisions of the Secretary of Finance in the exercise of its power of review under Sec. 4 of the NIRC are not within the
CTA’s limited special jurisdiction and, according to petitioner, are appealable to the CA via a Rule 43 petition for review.

b. Respondents’ contentions

Before the CA, respondents countered petitioner’s procedural arguments by claiming that even assuming arguendo that the CTA does not have
jurisdiction over the case, Philamlife, nevertheless,committed a fatal error when it failed to appeal the Secretary of Finance’s ruling to the Office of the
President (OP). As made apparent by the rules, the Department of Finance is not among the agencies and quasi-judicial bodies enumerated under
Sec. 1, Rule 43 of the Rules of Court whose decisions and rulings are appealable through a petition for review. 15 This is in stark contrast to the OP’s
specific mention under the same provision, so respondents pointed out.

To further reinforce their argument, respondents cite the President’s power of review emanating from his power of control as enshrined under Sec. 17
of Article VII of the Constitution, which reads:

Section 17.The President shall have control of all the executive departments, bureaus, and offices. He shall ensure that the laws be faithfully executed.

The nature and extent of the President’s constitutionally granted power of control have beendefined in a plethora of cases, most recently in Elma v.
Jacobi,16 wherein it was held that:

x x x This power of control, which even Congress cannot limit, let alone withdraw, means the power of the Chief Executive to review, alter, modify,
nullify, or set aside what a subordinate, e.g., members of the Cabinet and heads of line agencies, had done in the performance of their duties and to
substitute the judgment of the former for that of the latter.

In their Comment on the instant petition, however, respondents asseverate that the CA did not err in its holding respecting the CTA’s jurisdiction over
the controversy.

The Court’s Ruling

The petition is unmeritorious.

Reviews by the Secretary of Finance pursuant to Sec. 4 of the NIRC are appealable to the CTA

To recapitulate, three different, if not conflicting, positions as indicated below have been advanced by the parties and by the CA as the proper remedy
open for assailing respondents’ rulings:

1. Petitioners: The ruling of the Commissioner is subject to review by the Secretary under Sec. 4 of the NIRC, and that of the Secretary to the CA via
Rule 43;

34
2. Respondents: The ruling of the Commissioner is subject to review by the Secretary under Sec. 4 of the NIRC, and that of the Secretary to the Office
of the President before appealing to the CA via a Rule 43 petition; and

3. CA: The ruling of the Commissioner is subject to review by the CTA.

We now resolve.

Preliminarily, it bears stressing that there is no dispute that what is involved herein is the respondent Commissioner’s exercise of power under the first
paragraph of Sec. 4 of the NIRC––the power to interpret tax laws. This, in fact, was recognized by the appellate court itself, but erroneously held that
her action in the exercise of such power is appealable directly to the CTA. As correctly pointed out by petitioner, Sec. 4 of the NIRC readily provides
that the Commissioner’s power to interpret the provisions of this Code and other tax laws is subject to review by the Secretary of Finance. The issue
that now arises is this––where does one seek immediate recourse from the adverse ruling of the Secretary of Finance in its exercise of its power of
review under Sec. 4?

Admittedly, there is no provision in law that expressly provides where exactly the ruling of the Secretary of Finance under the adverted NIRC provision
is appealable to. However, We find that Sec. 7(a)(1) of RA 1125, as amended, addresses the seeming gap in the law asit vests the CTA, albeit
impliedly, with jurisdiction over the CA petition as "other matters" arising under the NIRC or other laws administered by the BIR. As stated:

Sec. 7. Jurisdiction.- The CTA shall exercise:

a. Exclusive appellate jurisdiction to review by appeal, as herein provided:

1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relation thereto, or other matters arising under the National Internal Revenue or other laws administered by the Bureau of Internal
Revenue. (emphasis supplied)

Even though the provision suggests that it only covers rulings of the Commissioner, We hold that it is, nonetheless, sufficient enough to include
appeals from the Secretary’s review under Sec. 4 of the NIRC.

It is axiomatic that laws should be given a reasonable interpretation which does not defeat the very purpose for which they were passed. 17 Courts
should not follow the letter of a statute when to do so would depart from the true intent of the legislature or would otherwise yield conclusions
inconsistent with the purpose of the act.18 This Court has, in many cases involving the construction of statutes, cautioned against narrowly interpreting
a statute as to defeat the purpose of the legislator, and rejected the literal interpretation of statutes if todo so would lead to unjust or absurd results.19

Indeed, to leave undetermined the mode of appeal from the Secretary of Finance would be an injustice to taxpayers prejudiced by his adverse rulings.
To remedy this situation, Weimply from the purpose of RA 1125 and its amendatory laws that the CTA is the proper forum with which to institute the
appeal. This is not, and should not, in any way, be taken as a derogation of the power of the Office of President but merely as recognition that matters
calling for technical knowledge should be handled by the agency or quasi-judicial body with specialization over the controversy. As the specialized
quasi-judicial agency mandated to adjudicate tax, customs, and assessment cases, there can be no other court of appellate jurisdiction that can
decide the issues raised inthe CA petition, which involves the tax treatment of the shares of stocks sold. Petitioner, though, nextinvites attention to the
ruling in Ursal v. Court of Tax Appeals20 to argue against granting the CTA jurisdiction by implication, viz:

Republic Act No. 1125 creating the Court of Tax Appeals did not grant it blanket authority to decide any and all tax disputes. Defining such special
court’s jurisdiction, the Act necessarily limited its authority to those matters enumerated therein. Inline with this idea we recently approved said court’s
35
order rejecting an appeal to it by Lopez & Sons from the decision of the Collector ofCustoms, because in our opinion its jurisdiction extended only to a
review of the decisions of the Commissioner of Customs, as provided bythe statute — and not to decisions of the Collector of Customs. (Lopez & Sons
vs. The Court of Tax Appeals, 100 Phil., 850, 53 Off. Gaz., [10] 3065).

xxxx

x x x Republic Act No. 1125 is a complete law by itself and expressly enumerates the matters which the Court of Tax Appeals may consider; such
enumeration excludes all others by implication. Expressio unius est exclusio alterius.

Petitioner’s contention is untenable. Lest the ruling in Ursalbe taken out of context, but worse as a precedent, it must be noted that the primary reason
for the dismissal of the said case was that the petitioner therein lacked the personality to file the suit with the CTA because he was not adversely
affected by a decision or ruling of the Collector of Internal Revenue, as was required under Sec. 11 of RA 1125.21 As held:

We share the view that the assessor had no personality to resort to the Court of Tax Appeals. The rulings of the Board of Assessment Appeals did not
"adversely affect" him. At most it was the City of Cebu that had been adversely affected in the sense that it could not thereafter collect higher realty
taxes from the abovementioned property owners. His opinion, it is true had been overruled; but the overruling inflicted no material damage upon him or
his office. And the Court of Tax Appeals was not created to decide mere conflicts of opinion between administrative officers or agencies. Imagine an
income tax examiner resorting to the Court of Tax Appeals whenever the Collector of Internal Revenue modifies, or lower his assessment on the return
of a tax payer!22

The appellate power of the CTA includes certiorari

Petitioner is quick to point out, however, that the grounds raised in its CA petition included the nullity of Section 7(c.2.2) of RR 06-08 and RMC 25-11.
In an attempt to divest the CTA jurisdiction over the controversy, petitioner then cites British American Tobacco, wherein this Court has expounded on
the limited jurisdiction of the CTA in the following wise:

While the above statute confers on the CTA jurisdiction to resolve tax disputes in general, this does not include cases where the constitutionality of a
law or rule is challenged. Where what is assailed is the validity or constitutionality of a law, or a rule or regulation issued by the administrative agency
in the performance of its quasi legislative function, the regular courts have jurisdiction to pass upon the same. The determination of whether a specific
rule or set of rules issued by an administrative agency contravenes the law or the constitution is within the jurisdiction of the regular courts. Indeed, the
Constitution vests the power of judicial review or the power to declare a law, treaty, international or executive agreement, presidential decree, order,
instruction, ordinance, or regulation inthe courts, including the regional trial courts. This is within the scope of judicial power, which includes the
authority of the courts to determine inan appropriate action the validity of the acts of the political departments. Judicial power includes the duty of the
courts of justice to settle actual controversies involving rights which are legally demandable and enforceable, and to determine whether or not there
has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of the Government.23

Vis-a-vis British American Tobacco, it bears to stress what appears to be a contrasting ruling in Asia International Auctioneers, Inc. v. Parayno, Jr., to
wit:

Similarly, in CIR v. Leal, pursuant to Section 116 of Presidential Decree No. 1158 (The National Internal Revenue Code, as amended) which states
that "[d]ealers in securities shall pay a tax equivalent to six (6%) per centum of their gross income. Lending investors shall pay a tax equivalent to five
(5%) per cent, of their gross income," the CIR issued Revenue Memorandum Order (RMO) No. 15-91 imposing 5% lending investor’s tax on
pawnshops based on their gross income and requiring all investigating units of the BIR to investigate and assess the lending investor’s tax due from
them. The issuance of RMO No. 15-91 was an offshoot of the CIR’s finding that the pawnshop business is akin to that of "lending investors" as defined
in Section 157(u) of the Tax Code. Subsequently, the CIR issued RMC No. 43-91 subjecting pawn tickets to documentary stamp tax. Respondent
36
therein, Josefina Leal, owner and operator of Josefina’s Pawnshop, asked for a reconsideration of both RMO No. 15-91 and RMC No. 43-91, but the
same was denied by petitioner CIR. Leal then filed a petition for prohibition with the RTC of San Mateo, Rizal, seeking to prohibit petitioner CIR from
implementing the revenue orders. The CIR, through the OSG, filed a motion to dismiss on the ground of lack of jurisdiction. The RTC denied the
motion. Petitioner filed a petition for certiorari and prohibition with the CA which dismissed the petition "for lack of basis." In reversing the CA,
dissolving the Writ of Preliminary Injunction issued by the trial court and ordering the dismissal of the case before the trial court, the Supreme Court
held that "[t]he questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or opinions of the Commissioner implementing the Tax Code on
the taxability of pawnshops." They were issued pursuant to the CIR’s power under Section 245 of the Tax Code "to make rulings or opinions in
connection with the implementation of the provisions of internal revenue laws, including ruling on the classification of articles of sales and similar
purposes."The Court held that under R.A. No. 1125 (An Act Creating the Court of Tax Appeals), as amended, such rulings of the CIR are appealable
to the CTA.

In the case at bar, the assailed revenue regulations and revenue memorandum circulars are actually rulings or opinions of the CIR on the tax
treatment of motor vehicles sold at public auction within the SSEZ to implement Section 12 of R.A. No. 7227 which provides that "exportation or
removal of goods from the territory of the [SSEZ] to the other parts of the Philippine territory shall be subject to customs duties and taxes under the
Customs and Tariff Codeand other relevant tax laws of the Philippines." They were issued pursuant to the power of the CIR under Section 4 of the
National Internal Revenue Code x x x.24 (emphasis added)

The respective teachings in British American Tobacco and Asia International Auctioneers, at first blush, appear to bear no conflict––that when the
validity or constitutionality of an administrative rule or regulation is assailed, the regular courts have jurisdiction; and if what is assailed are rulings or
opinions of the Commissioner on tax treatments, jurisdiction over the controversy is lodged with the CTA. The problem with the above postulates,
however, is that they failed to take into consideration one crucial point––a taxpayer can raise both issues simultaneously.

Petitioner avers that there is now a trend wherein both the CTA and the CA disclaim jurisdiction over tax cases: on the one hand, mere prayer for the
declaration of a tax measure’s unconstitutionality or invalidity before the CTA can result in a petition’s outright dismissal, and on the other hand, the CA
will likewise dismiss the same petition should it find that the primary issue is not the tax measure’s validity but the assessment or taxability of the
transaction or subject involved. To illustrate this point, petitioner cites the assailed Resolution, thusly: Admittedly, in British American Tobacco vs.
Camacho, the Supreme Court has ruled that the determination of whether a specific rule or set of rules issued by an administrative agency
contravenes the law or the constitution is within the jurisdiction of the regular courts, not the CTA.

xxxx

Petitioner essentially questions the CIR’s ruling that Petitioner’s sale of shares is a taxable donation under Sec. 100 of the NIRC. The validity of Sec.
100 of the NIRC, Sec. 7 (C.2.2) and RMC 25-11 is merely questioned incidentally since it was used by the CIR as bases for its unfavourable opinion.
Clearly, the Petition involves an issue on the taxability of the transaction rather than a direct attack on the constitutionality of Sec. 100, Sec.7 (c.2.2.) of
RR 06-08 and RMC 25-11. Thus, the instant Petition properly pertains to the CTA under Sec. 7 of RA 9282.

As a result of the seemingly conflicting pronouncements, petitioner submits that taxpayers are now at a quandary on what mode of appeal should be
taken, to which court or agency it should be filed, and which case law should be followed.

Petitioner’s above submission is specious.

In the recent case of City of Manila v. Grecia-Cuerdo, 25 the Court en banc has ruled that the CTA now has the power of certiorari in cases within its
appellate jurisdiction. To elucidate:

The prevailing doctrine is that the authority to issue writs of certiorari involves the exercise of original jurisdiction which must be expressly conferred by
37
the Constitution or by law and cannot be implied from the mere existence of appellate jurisdiction. Thus, x x x this Court has ruled against the
jurisdiction of courts or tribunals over petitions for certiorari on the ground that there is no law which expressly gives these tribunals such power. Itmust
be observed, however, that x x x these rulings pertain not to regular courts but to tribunals exercising quasijudicial powers. With respect tothe
Sandiganbayan, Republic Act No. 8249 now provides that the special criminal court has exclusive original jurisdiction over petitions for the issuance of
the writs of mandamus, prohibition, certiorari, habeas corpus, injunctions, and other ancillary writs and processes in aid of its appellate jurisdiction.

In the same manner, Section 5 (1), Article VIII of the 1987 Constitution grants power to the Supreme Court, in the exercise of its original jurisdiction, to
issue writs of certiorari, prohibition and mandamus. With respect to the Court of Appeals, Section 9 (1) of Batas Pambansa Blg. 129 (BP 129) gives the
appellate court, also in the exercise of its original jurisdiction, the power to issue, among others, a writ of certiorari, whether or not in aid of its appellate
jurisdiction. As to Regional Trial Courts, the power to issue a writ of certiorari, in the exercise of their original jurisdiction, is provided under Section 21
of BP 129.

The foregoing notwithstanding, while there is no express grant of such power, with respect to the CTA, Section 1, Article VIII of the 1987 Constitution
provides, nonetheless, that judicial power shall be vested in one Supreme Court and in such lower courts as may be established by law and that
judicial power includes the duty of the courts of justice to settle actual controversies involving rights which are legally demandable and enforceable,
and to determine whether or not there has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or
instrumentality of the Government.

On the strength of the above constitutional provisions, it can be fairly interpreted that the power of the CTA includes that of determining whether or not
there has been grave abuse of discretion amounting to lack or excess of jurisdiction on the part of the RTC in issuing an interlocutory order in cases
falling within the exclusive appellate jurisdiction of the tax court. It, thus, follows that the CTA, by constitutional mandate, is vested with jurisdiction to
issue writs of certiorari in these cases.

Indeed, in order for any appellate court to effectively exercise its appellate jurisdiction, it must have the authority to issue, among others, a writ of
certiorari. In transferring exclusive jurisdiction over appealed tax cases to the CTA, it can reasonably be assumed that the law intended to transfer also
such power as is deemed necessary, if not indispensable, in aid of such appellate jurisdiction. There is no perceivable reason why the transfer should
only be considered as partial, not total. (emphasis added)

Evidently, City of Manilacan be considered as a departure from Ursal in that in spite of there being no express grant in law, the CTA is deemed
granted with powers of certiorari by implication. Moreover, City of Manila diametrically opposes British American Tobacco to the effect that it is now
within the power of the CTA, through its power of certiorari, to rule on the validity of a particular administrative ruleor regulation so long as it is within its
appellate jurisdiction. Hence, it can now rule not only on the propriety of an assessment or tax treatment of a certain transaction, but also on the
validity of the revenue regulation or revenue memorandum circular on which the said assessment is based.

Guided by the doctrinal teaching in resolving the case at bar, the fact that the CA petition not only contested the applicability of Sec. 100 of the NIRC
over the sales transaction but likewise questioned the validity of Sec. 7 (c.2.2) of RR 06-08 and RMC 25-11 does not divest the CTA of its jurisdiction
over the controversy, contrary to petitioner's arguments.

The price difference is subject to donor's tax

Petitioner's substantive arguments are unavailing. The absence of donative intent, if that be the case, does not exempt the sales of stock transaction
from donor's tax since Sec. 100 of the NIRC categorically states that the amount by which the fair market value of the property exceeded the value of
the consideration shall be deemed a gift.1âwphi1 Thus, even if there is no actual donation, the difference in price is considered a donation by fiction of
law.

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 Moreover, Sec. 7(c.2.2) of RR 06-08 does not alter Sec. 100 of the NIRC but merely sets the parameters for determining the "fair market value" of a
sale of stocks. Such issuance was made pursuant to the Commissioner's power to interpret tax laws and to promulgate rules and regulations for their
implementation.

Lastly, petitioner is mistaken in stating that RMC 25-11, having been issued after the sale, was being applied retroactively in contravention to Sec. 246
of the NIRC.26 Instead, it merely called for the strict application of Sec. 100, which was already in force the moment the NIRC was enacted.

WHEREFORE, the petition is hereby DISMISSED. The Resolutions of the Court of Appeals in CA-G.R. SP No. 127984 dated May 23, 2013 and
January 21, 2014 are hereby AFFIRMED.

SO ORDERED.

G.R. No. 120721             February 23, 2005

MANUEL G. ABELLO, JOSE C. CONCEPCION, TEODORO D. REGALA, AVELINO V. CRUZ, petitioners,

vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF APPEALS, respondents.

DECISION

AZCUNA, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Civil Procedure, assailing the decision of the Court of Appeals in CA –G.R. SP No. 27134, entitled
"Comissioner of Internal Revenue v. Manuel G. Abello, Jose C. Concepcion, Teodoro D. Regala, Avelino V. Cruz and Court of Tax Appeals," which reversed and set aside the
decision of the Court of Tax Appeals (CTA), ordering the Commissioner of Internal Revenue (Commissioner) to withdraw his letters dated April 21, 1988 and August 4, 1988
assessing donor’s taxes and to desist from collecting donor’s taxes from petitioners.

During the 1987 national elections, petitioners, who are partners in the Angara, Abello, Concepcion, Regala and Cruz (ACCRA) law firm, contributed ₱882,661.31 each to the
campaign funds of Senator Edgardo Angara, then running for the Senate. In letters dated April 21, 1988, the Bureau of Internal Revenue (BIR) assessed each of the petitioners
₱263,032.66 for their contributions. On August 2, 1988, petitioners questioned the assessment through a letter to the BIR. They claimed that political or electoral contributions are
not considered gifts under the National Internal Revenue Code (NIRC), and that, therefore, they are not liable for donor’s tax. The claim for exemption was denied by the
Commissioner.1 1ªvvphi1.nét

On September 12, 1988, petitioners filed a petition for review with the CTA, which was decided on October 7, 1991 in favor of the petitioners. As aforestated, the CTA ordered the
Commissioner to desist from collecting donor’s taxes from the petitioners.2

On appeal, the Court of Appeals reversed and set aside the CTA decision on April 20, 1994. 3 The appellate Court ordered the petitioners to pay donor’s tax amounting to
₱263,032.66 each, reasoning as follows:

The National Internal Revenue Code, as amended, provides:

39
Sec. 91. Imposition of Tax. (a) There shall be levied, assessed, collected, and paid upon the transfer by any person, resident, or non-resident, of the property by gift, a tax, computed
as provided in Section 92. (b) The tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal,
tangible or intangible.

Pursuant to the above-quoted provisions of law, the transfer of property by gift, whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the
property is real or personal, tangible or intangible, is subject to donor’s or gift tax.

A gift is generally defined as a voluntary transfer of property by one to another without any consideration or compensation therefor (28 C.J. 620; Santos vs. Robledo, 28 Phil. 250).

In the instant case, the contributions are voluntary transfers of property in the form of money from private respondents to Sen. Angara, without considerations therefor. Hence, they
squarely fall under the definition of donation or gift.

As correctly pointed out by the Solicitor General:

The fact that the contributions were given to be used as campaign funds of Sen. Angara does not affect the character of the fund transfers as donation or gift. There was thereby no
retention of control over the disposition of the contributions. There was simply an indication of the purpose for which they were to be used. For as long as the contributions were
used for the purpose for which they were intended, Sen. Angara had complete and absolute power to dispose of the contributions. He was fully entitled to the economic benefits of
the contributions.

Section 91 of the Tax Code is very clear. A donor’s or gift tax is imposed on the transfer of property by gift.1awphi1.nét

The Bureau of Internal Revenue issued Ruling No. 344 on July 20, 1988, which reads:

Political Contributions. – For internal revenue purposes, political contributions in the Philippines are considered taxable gift rather than taxable income. This is so, because a political
contribution is indubitably not intended by the giver or contributor as a return of value or made because of any intent to repay another what is his due, but bestowed only because of
motives of philanthropy or charity. His purpose is to give and to bolster the morals, the winning chance of the candidate and/or his party, and not to employ or buy. On the other
hand, the recipient-donee does not regard himself as exchanging his services or his product for the money contributed. But more importantly he receives financial advantages
gratuitously.

When the U.S. gift tax law was adopted in the Philippines (before May 7, 1974), the taxability of political contributions was, admittedly, an unsettled issue; hence, it cannot be
presumed that the Philippine Congress then had intended to consider or treat political contributions as non-taxable gifts when it adopted the said gift tax law. Moreover, well-settled
is the rule that the Philippines need not necessarily adopt the present rule or construction in the United States on the matter. Generally, statutes of different states relating to the
same class of persons or things or having the same purposes are not considered to be in pari materia because it cannot be justifiably presumed that the legislature had them in mind
when enacting the provision being construed. (5206, Sutherland, Statutory Construction, p. 546.) Accordingly, in the absence of an express exempting provision of law, political
contributions in the Philippines are subject to the donor’s gift tax. (cited in National Internal Revenue Code Annotated by Hector S. de Leon, 1991 ed., p. 290).

In the light of the above BIR Ruling, it is clear that the political contributions of the private respondents to Sen. Edgardo Angara are taxable gifts. The vagueness of the law as to
what comprise the gift subject to tax was made concrete by the above-quoted BIR ruling. Hence, there is no doubt that political contributions are taxable gifts.4

Petitioners filed a motion for reconsideration, which the Court of Appeals denied in its resolution of June 16, 1995.5

Petitioners thereupon filed the instant petition on July 26, 1995. Raised are the following issues:

1. DID THE HONORABLE COURT OF APPEALS ERR WHEN IT FAILED TO CONSIDER IN ITS DECISION THE PURPOSE BEHIND THE ENACTMENT OF OUR GIFT TAX
LAW?
40
2. DID THE HONORABLE COURT OF APPEALS ERR IN NOT CONSIDERING THE INTENTION OF THE GIVERS IN DETERMINING WHETHER OR NOT THE PETITIONERS’
POLITICAL CONTRIBUTIONS WERE GIFTS SUBJECT TO DONORS TAX?

3. DID THE HONORABLE COURT OF APPEALS ERR WHEN IT FAILED TO CONSIDER THE DEFINITION OF AN "ELECTORAL CONTRIBUTION" UNDER THE OMNIBUS
ELECTION CODE IN DETERMINING WHETHER OR NOT POLITICAL CONTRIBUTIONS ARE TAXABLE?

4. DID THE HONORABLE COURT OF APPEALS ERR IN NOT CONSIDERING THE ADMINISTRATIVE PRACTICE OF CLOSE TO HALF A CENTURY OF NOT SUBJECTING
POLITICAL CONTRIBUTIONS TO DONORS TAX?

5. DID THE HONORABLE COURT OF APPEALS ERR IN NOT CONSIDERING THE AMERICAN JURISPRUDENCE RELIED UPON BY THE COURT OF TAX APPEALS AND BY
THE PETITIONERS TO THE EFFECT THAT POLITICAL CONTRIBUTIONS ARE NOT TAXABLE GIFTS?

6. DID THE HONORABLE COURT OF APPEALS ERR IN NOT APPLYING AMERICAN JURISPRUDENCE ON THE GROUND THAT THIS WAS NOT KNOWN AT THE TIME THE
PHILIPPINES GIFT TAX LAW WAS ADOPTED IN 1939?

7. DID THE HONORABLE COURT OF APPEALS ERR IN RESOLVING THE CASE MAINLY ON THE BASIS OF A RULING ISSUED BY THE RESPONDENT ONLY AFTER THE
ASSESSMENTS HAD ALREADY BEEN MADE?

8. DID THE HONORABLE COURT OF APPEALS ERR WHEN IT DID NOT CONSTRUE THE GIFT TAX LAW LIBERALLY IN FAVOR OF THE TAXPAYER AND STRICLTY
AGAINST THE GOVERNMENT IN ACCORDANCE WITH APPLICABLE PRINCIPLES OF STATUTORY CONSTRUCTION? 6

First, Fifth and Sixth Issues

Section 91 of the National Internal Revenue Code (NIRC) reads:

(A) There shall be levied, assessed, collected and paid upon the transfer by any person, resident or nonresident, of the property by gift, a tax, computed as provided in Section 92

(B) The tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible.

The NIRC does not define transfer of property by gift. However, Article 18 of the Civil Code, states:

In matters which are governed by the Code of Commerce and special laws, their deficiency shall be supplied by the provisions of this Code.

Thus, reference may be made to the definition of a donation in the Civil Code. Article 725 of said Code defines donation as:

. . . an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another, who accepts it.

Donation has the following elements: (a) the reduction of the patrimony of the donor; (b) the increase in the patrimony of the donee; and, (c) the intent to do an act of liberality or
animus donandi.7

The present case falls squarely within the definition of a donation. Petitioners, the late Manuel G. Abello 8 , Jose C. Concepcion, Teodoro D. Regala and Avelino V. Cruz, each gave
₱882,661.31 to the campaign funds of Senator Edgardo Angara, without any material consideration. All three elements of a donation are present. The patrimony of the four

41
petitioners were reduced by ₱882,661.31 each. Senator Edgardo Angara’s patrimony correspondingly increased by ₱3,530,645.24 9 . There was intent to do an act of liberality or
animus donandi was present since each of the petitioners gave their contributions without any consideration.

Taken together with the Civil Code definition of donation, Section 91 of the NIRC is clear and unambiguous, thereby leaving no room for construction. In Rizal Commercial Banking
Corporation v. Intermediate Appellate Court10 the Court enunciated:

It bears stressing that the first and fundamental duty of the Court is to apply the law. When the law is clear and free from any doubt or ambiguity, there is no room for construction or
interpretation. As has been our consistent ruling, where the law speaks in clear and categorical language, there is no occasion for interpretation; there is only room for application
(Cebu Portland Cement Co. v. Municipality of Naga, 24 SCRA 708 [1968])

Where the law is clear and unambiguous, it must be taken to mean exactly what it says and the court has no choice but to see to it that its mandate is obeyed ( Chartered Bank
Employees Association v. Ople, 138 SCRA 273 [1985]; Luzon Surety Co., Inc. v. De Garcia, 30 SCRA 111 [1969]; Quijano v. Development Bank of the Philippines, 35 SCRA 270
[1970]).

Only when the law is ambiguous or of doubtful meaning may the court interpret or construe its true intent.l^vvphi1.net Ambiguity is a condition of admitting two or more meanings, of
being understood in more than one way, or of referring to two or more things at the same time. A statute is ambiguous if it is admissible of two or more possible meanings, in which
case, the Court is called upon to exercise one of its judicial functions, which is to interpret the law according to its true intent.

Second Issue

Since animus donandi or the intention to do an act of liberality is an essential element of a donation, petitioners argue that it is important to look into the intention of the giver to
determine if a political contribution is a gift. Petitioners’ argument is not tenable. First of all, donative intent is a creature of the mind. It cannot be perceived except by the material
and tangible acts which manifest its presence. This being the case, donative intent is presumed present when one gives a part of ones patrimony to another without consideration.
Second, donative intent is not negated when the person donating has other intentions, motives or purposes which do not contradict donative intent. This Court is not convinced that
since the purpose of the contribution was to help elect a candidate, there was no donative intent. Petitioners’ contribution of money without any material consideration evinces
animus donandi. The fact that their purpose for donating was to aid in the election of the donee does not negate the presence of donative intent.

Third Issue

Petitioners maintain that the definition of an "electoral contribution" under the Omnibus Election Code is essential to appreciate how a political contribution differs from a taxable
gift.11 Section 94(a) of the said Code defines electoral contribution as follows:

The term "contribution" includes a gift, donation, subscription, loan, advance or deposit of money or anything of value, or a contract, promise or agreement to contribute, whether or
not legally enforceable, made for the purpose of influencing the results of the elections but shall not include services rendered without compensation by individuals volunteering a
portion or all of their time in behalf of a candidate or political party. It shall also include the use of facilities voluntarily donated by other persons, the money value of which can be
assessed based on the rates prevailing in the area.

Since the purpose of an electoral contribution is to influence the results of the election, petitioners again claim that donative intent is not present. Petitioners attempt to place the
barrier of mutual exclusivity between donative intent and the purpose of political contributions. This Court reiterates that donative intent is not negated by the presence of other
intentions, motives or purposes which do not contradict donative intent.

Petitioners would distinguish a gift from a political donation by saying that the consideration for a gift is the liberality of the donor, while the consideration for a political contribution is
the desire of the giver to influence the result of an election by supporting candidates who, in the perception of the giver, would influence the shaping of government policies that
would promote the general welfare and economic well-being of the electorate, including the giver himself.

42
Petitioners’ attempt is strained. The fact that petitioners will somehow in the future benefit from the election of the candidate to whom they contribute, in no way amounts to a
valuable material consideration so as to remove political contributions from the purview of a donation. Senator Angara was under no obligation to benefit the petitioners. The proper
performance of his duties as a legislator is his obligation as an elected public servant of the Filipino people and not a consideration for the political contributions he received. In fact,
as a public servant, he may even be called to enact laws that are contrary to the interests of his benefactors, for the benefit of the greater good.

In fine, the purpose for which the sums of money were given, which was to fund the campaign of Senator Angara in his bid for a senatorial seat, cannot be considered as a material
consideration so as to negate a donation.

Fourth Issue

Petitioners raise the fact that since 1939 when the first Tax Code was enacted, up to 1988 the BIR never attempted to subject political contributions to donor’s tax. They argue that:

. . . It is a familiar principle of law that prolonged practice by the government agency charged with the execution of a statute, acquiesced in and relied upon by all concerned over an
appreciable period of time, is an authoritative interpretation thereof, entitled to great weight and the highest respect. . . .12

This Court holds that the BIR is not precluded from making a new interpretation of the law, especially when the old interpretation was flawed. It is a well-entrenched rule that

. . . erroneous application and enforcement of the law by public officers do not block subsequent correct application of the statute (PLDT v. Collector of Internal Revenue, 90 Phil.
676), and that the Government is never estopped by mistake or error on the part of its agents (Pineda v. Court of First Instance of Tayabas, 52 Phil. 803, 807; Benguet Consolidated
Mining Co. v. Pineda, 98 Phil. 711, 724).13

Seventh Issue

Petitioners question the fact that the Court of Appeals decision is based on a BIR ruling, namely BIR Ruling No. 88-344, which was issued after the petitioners were assessed for
donor’s tax. This Court does not need to delve into this issue. It is immaterial whether or not the Court of Appeals based its decision on the BIR ruling because it is not pivotal in
deciding this case. As discussed above, Section 91 (now Section 98) of the NIRC as supplemented by the definition of a donation found in Article 725 of the Civil Code, is clear and
unambiguous, and needs no further elucidation.

Eighth Issue

Petitioners next contend that tax laws are construed liberally in favor of the taxpayer and strictly against the government. This rule of construction, however, does not benefit
petitioners because, as stated, there is here no room for construction since the law is clear and unambiguous.

Finally, this Court takes note of the fact that subsequent to the donations involved in this case, Congress approved Republic Act No. 7166 on November 25, 1991, providing in
Section 13 thereof that political/electoral contributions, duly reported to the Commission on Elections, are not subject to the payment of any gift tax. This all the more shows that the
political contributions herein made are subject to the payment of gift taxes, since the same were made prior to the exempting legislation, and Republic Act No. 7166 provides no
retroactive effect on this point.

WHEREFORE, the petition is DENIED and the assailed Decision and Resolution of the Court of Appeals are AFFIRMED.

43