DEDUCTIONS

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[G.R. No. 123206. March 22, 2000]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF APPEALS, COURT

OF TAX APPEALS and JOSEFINA P. PAJONAR, as Administratrix of the Estate of Pedro
P. Pajonar, respondents.

RESOLUTION

GONZAGA-REYES, J.: Supr-ema

Assailed in this petition for review on certiorari is the December 21, 1995 Decision[1] of the Court
of Appeals[2] in CA-G.R. Sp. No. 34399 affirming the June 7, 1994 Resolution of the Court of Tax
Appeals in CTA Case No. 4381 granting private respondent Josefina P. Pajonar, as
administratrix of the estate of Pedro P. Pajonar, a tax refund in the amount of P76,502.42,
representing erroneously paid estate taxes for the year 1988.

Pedro Pajonar, a member of the Philippine Scout, Bataan Contingent, during the second World
War, was a part of the infamous Death March by reason of which he suffered shock and
became insane. His sister Josefina Pajonar became the guardian over his person, while his
property was placed under the guardianship of the Philippine National Bank (PNB) by the
Regional Trial Court of Dumaguete City, Branch 31, in Special Proceedings No. 1254. He died
on January 10, 1988. He was survived by his two brothers Isidro P. Pajonar and Gregorio
Pajonar, his sister Josefina Pajonar, nephews Concordio Jandog and Mario Jandog and niece
Conchita Jandog.

On May 11, 1988, the PNB filed an accounting of the decedent's property under guardianship
valued at P3,037,672.09 in Special Proceedings No. 1254. However, the PNB did not file an
estate tax return, instead it advised Pedro Pajonar's heirs to execute an extrajudicial settlement
and to pay the taxes on his estate. On April 5, 1988, pursuant to the assessment by the Bureau
of Internal Revenue (BIR), the estate of Pedro Pajonar paid taxes in the amount of P2,557.

On May 19, 1988, Josefina Pajonar filed a petition with the Regional Trial Court of Dumaguete
City for the issuance in her favor of letters of administration of the estate of her brother. The
case was docketed as Special Proceedings No. 2399. On July 18, 1988, the trial court
appointed Josefina Pajonar as the regular administratrix of Pedro Pajonar's estate.

On December 19, 1988, pursuant to a second assessment by the BIR for deficiency estate tax,
the estate of Pedro Pajonar paid estate tax in the amount of P1,527,790.98. Josefina Pajonar, in
her capacity as administratrix and heir of Pedro Pajonar's estate, filed a protest on January 11,
1989 with the BIR praying that the estate tax payment in the amount of P1,527,790.98, or at
least some portion of it, be returned to the heirs.[3] Jur-is

However, on August 15, 1989, without waiting for her protest to be resolved by the BIR, Josefina
Pajonar filed a petition for review with the Court of Tax Appeals (CTA), praying for the refund of
P1,527,790.98, or in the alternative, P840,202.06, as erroneously paid estate tax. [4] The case
was docketed as CTA Case No. 4381.

On May 6, 1993, the CTA ordered the Commissioner of Internal Revenue to refund Josefina
Pajonar the amount of P252,585.59, representing erroneously paid estate tax for the year 1988.
[5]

Among the deductions from the gross estate allowed by the CTA were the amounts of P60,753
representing the notarial fee for the Extrajudicial Settlement and the amount of P50,000 as the
attorney's fees in Special Proceedings No. 1254 for guardianship.[6]Juri-ssc

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On June 15, 1993, the Commissioner of Internal Revenue filed a motion for reconsideration [7] of
the CTA's May 6, 1993 decision asserting, among others, that the notarial fee for the
Extrajudicial Settlement and the attorney's fees in the guardianship proceedings are not
deductible expenses.

On June 7, 1994, the CTA issued the assailed Resolution[8] ordering the Commissioner of
Internal Revenue to refund Josefina Pajonar, as administratrix of the estate of Pedro Pajonar,
the amount of P76,502.42 representing erroneously paid estate tax for the year 1988. Also, the
CTA upheld the validity of the deduction of the notarial fee for the Extrajudicial Settlement and
the attorney's fees in the guardianship proceedings.

On July 5, 1994, the Commissioner of Internal Revenue filed with the Court of Appeals a petition
for review of the CTA's May 6, 1993 Decision and its June 7, 1994 Resolution, questioning the
validity of the abovementioned deductions. On December 21, 1995, the Court of Appeals denied
the Commissioner's petition.[9]

Hence, the present appeal by the Commissioner of Internal Revenue.

The sole issue in this case involves the construction of section 79 [10] of the National Internal
Revenue Code[11] (Tax Code) which provides for the allowable deductions from the gross estate
of the decedent. More particularly, the question is whether the notarial fee paid for the
extrajudicial settlement in the amount of P60,753 and the attorney's fees in the guardianship
proceedings in the amount of P50,000 may be allowed as deductions from the gross estate of
decedent in order to arrive at the value of the net estate.

We answer this question in the affirmative, thereby upholding the decisions of the appellate
courts. J-jlex

In its May 6, 1993 Decision, the Court of Tax Appeals ruled thus:

Respondent maintains that only judicial expenses of the testamentary or intestate

proceedings are allowed as a deduction to the gross estate. The amount of
P60,753.00 is quite extraordinary for a mere notarial fee.

This Court adopts the view under American jurisprudence that expenses incurred
in the extrajudicial settlement of the estate should be allowed as a deduction from
the gross estate. "There is no requirement of formal administration. It is sufficient
that the expense be a necessary contribution toward the settlement of the
case." [ 34 Am. Jur. 2d, p.765; Nolledo, Bar Reviewer in Taxation,
10th Ed. (1990), p. 481 ]

xxx.....xxx.....xxx

The attorney's fees of P50,000.00, which were already incurred but not yet paid,
refers to the guardianship proceeding filed by PNB, as guardian over the ward of
Pedro Pajonar, docketed as Special Proceeding No. 1254 in the RTC (Branch
XXXI) of Dumaguete City. x x x

xxx.....xxx.....xxx

The guardianship proceeding had been terminated upon delivery of the residuary
estate to the heirs entitled thereto. Thereafter, PNB was discharged of any further
responsibility.

Attorney's fees in order to be deductible from the gross estate must be essential to
the collection of assets, payment of debts or the distribution of the property to the
persons entitled to it. The services for which the fees are charged must relate to
the proper settlement of the estate. [ 34 Am. Jur. 2d 767. ] In this case, the

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 guardianship proceeding was necessary for the distribution of the property of the
late Pedro Pajonar to his rightful heirs. Sc-juris

xxx.....xxx.....xxx

PNB was appointed as guardian over the assets of the late Pedro Pajonar, who,
even at the time of his death, was incompetent by reason of insanity. The
expenses incurred in the guardianship proceeding was but a necessary expense
in the settlement of the decedent's estate. Therefore, the attorney's fee incurred in
the guardianship proceedings amounting to P50,000.00 is a reasonable and
necessary business expense deductible from the gross estate of the decedent.[12]

Upon a motion for reconsideration filed by the Commissioner of Internal Revenue, the Court of
Tax Appeals modified its previous ruling by reducing the refundable amount to P76,502.43 since
it found that a deficiency interest should be imposed and the compromise penalty excluded.
[13]
 However, the tax court upheld its previous ruling regarding the legality of the deductions -

It is significant to note that the inclusion of the estate tax law in the codification of
all our national internal revenue laws with the enactment of the National Internal
Revenue Code in 1939 were copied from the Federal Law of the United States.
[UMALI, Reviewer in Taxation (1985), p. 285 ] The 1977 Tax Code, promulgated
by Presidential Decree No. 1158, effective June 3, 1977, reenacted substantially
all the provisions of the old law on estate and gift taxes, except the sections
relating to the meaning of gross estate and gift. [ Ibid, p. 286. ] Nc-mmis

In the United States, [a]dministrative expenses, executor's commissions and

attorney's fees are considered allowable deductions from the Gross Estate.
Administrative expenses are limited to such expenses as are actually and
necessarily incurred in the administration of a decedent's estate. [PRENTICE-
HALL, Federal Taxes Estate and Gift Taxes (1936), p. 120, 533. ] Necessary
expenses of administration are such expenses as are entailed for the preservation
and productivity of the estate and for its management for purposes of liquidation,
payment of debts and distribution of the residue among the persons entitled
thereto. [Lizarraga Hermanos vs. Abada, 40 Phil. 124. ] They must be incurred for
the settlement of the estate as a whole. [34 Am. Jur. 2d, p. 765. ] Thus, where
there were no substantial community debts and it was unnecessary to convert
community property to cash, the only practical purpose of administration being the
payment of estate taxes, full deduction was allowed for attorney's fees and
miscellaneous expenses charged wholly to decedent's estate. [ Ibid., citing Estate
of Helis, 26 T .C. 143 (A). ]

Petitioner stated in her protest filed with the BIR that "upon the death of the ward,
the PNB, which was still the guardian of the estate, (Annex 'Z' ), did not file an
estate tax return; however, it advised the heirs to execute an extrajudicial
settlement, to pay taxes and to post a bond equal to the value of the estate, for
which the estate paid P59,341.40 for the premiums. (See Annex 'K')." [p. 17, CTA
record. ] Therefore, it would appear from the records of the case that the only
practical purpose of settling the estate by means of an extrajudicial settlement
pursuant to Section 1 of Rule 74 of the Rules of Court was for the payment of
taxes and the distribution of the estate to the heirs. A fortiori, since our estate tax
laws are of American origin, the interpretation adopted by American Courts has
some persuasive effect on the interpretation of our own estate tax laws on the
subject.

Anent the contention of respondent that the attorney's fees of P50,000.00 incurred
in the guardianship proceeding should not be deducted from the Gross Estate, We
consider the same unmeritorious. Attorneys' and guardians' fees incurred in a
trustee's accounting of a taxable inter vivos trust attributable to the usual issues
involved in such an accounting was held to be proper deductions because these

3
 are expenses incurred in terminating an inter vivos trust that was includible in the
decedent's estate. (Prentice Hall, Federal Taxes on Estate and Gift, p.120, 861]
Attorney's fees are allowable deductions if incurred for the settlement of the
estate. It is noteworthy to point that PNB was appointed the guardian over the
assets of the deceased. Necessarily the assets of the deceased formed part of his
gross estate. Accordingly, all expenses incurred in relation to the estate of the
deceased will be deductible for estate tax purposes provided these are necessary
and ordinary expenses for administration of the settlement of the estate.[14]

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

2. Although the Tax Code specifies "judicial expenses of the testamentary or

intestate proceedings," there is no reason why expenses incurred in the
administration and settlement of an estate in extrajudicial proceedings should not
be allowed. However, deduction is limited to such administration expenses as are
actually and necessarily incurred in the collection of the assets of the estate,
payment of the debts, and distribution of the remainder among those entitled
thereto. Such expenses may include executor's or administrator's fees, attorney's
fees, court fees and charges, appraiser's fees, clerk hire, costs of preserving and
distributing the estate and storing or maintaining it, brokerage fees or commissions
for selling or disposing of the estate, and the like. Deductible attorney's fees are
those incurred by the executor or administrator in the settlement of the estate or in
defending or prosecuting claims against or due the estate. (Estate and Gift
Taxation in the Philippines, T. P. Matic, Jr., 1981 Edition, p. 176 ).

xxx.....xxx.....xxx

It is clear then that the extrajudicial settlement was for the purpose of payment of
taxes and the distribution of the estate to the heirs. The execution of the
extrajudicial settlement necessitated the notarization of the same. Hence the
Contract of Legal Services of March 28, 1988 entered into between respondent
Josefina Pajonar and counsel was presented in evidence for the purpose of
showing that the amount of P60,753.00 was for the notarization of the Extrajudicial
Settlement. It follows then that the notarial fee of P60,753.00 was incurred
primarily to settle the estate of the deceased Pedro Pajonar. Said amount should
then be considered an administration expenses actually and necessarily incurred
in the collection of the assets of the estate, payment of debts and distribution of
the remainder among those entitled thereto. Thus, the notarial fee of P60,753
incurred for the Extrajudicial Settlement should be allowed as a deduction from the
gross estate.

3. Attorney's fees, on the other hand, in order to be deductible from the gross
estate must be essential to the settlement of the estate. Acctmis

The amount of P50,000.00 was incurred as attorney's fees in the guardianship

proceedings in Spec. Proc. No. 1254. Petitioner contends that said amount are not
expenses of the testamentary or intestate proceedings as the guardianship
proceeding was instituted during the lifetime of the decedent when there was yet
no estate to be settled.

Again , this contention must fail.

The guardianship proceeding in this case was necessary for the distribution of the
property of the deceased Pedro Pajonar. As correctly pointed out by respondent
CTA, the PNB was appointed guardian over the assets of the deceased, and that
necessarily the assets of the deceased formed part of his gross estate. x x x

xxx.....xxx.....xxx

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 It is clear therefore that the attorney's fees incurred in the guardianship proceeding
in Spec. Proc. No. 1254 were essential to the distribution of the property to the
persons entitled thereto. Hence, the attorney's fees incurred in the guardianship
proceedings in the amount of P50,000.00 should be allowed as a deduction from
the gross estate of the decedent.[15]

The deductions from the gross estate permitted under section 79 of the Tax Code basically
reproduced the deductions allowed under Commonwealth Act No. 466 (CA 466), otherwise
known as the National Internal Revenue Code of 1939,[16] and which was the first codification of
Philippine tax laws. Section 89 (a) (1) (B) of CA 466 also provided for the deduction of the
"judicial expenses of the testamentary or intestate proceedings" for purposes of determining the
value of the net estate. Philippine tax laws were, in turn, based on the federal tax laws of the
United States.[17] In accord with established rules of statutory construction, the decisions of
American courts construing the federal tax code are entitled to great weight in the interpretation
of our own tax laws.[18] Scc-alr

Judicial expenses are expenses of administration.[19] Administration expenses, as an allowable

deduction from the gross estate of the decedent for purposes of arriving at the value of the net
estate, have been construed by the federal and state courts of the United States to include all
expenses "essential to the collection of the assets, payment of debts or the distribution of the
property to the persons entitled to it."[20] In other words, the expenses must be essential to the
proper settlement of the estate. Expenditures incurred for the individual benefit of the heirs,
devisees or legatees are not deductible.[21] This distinction has been carried over to our
jurisdiction. Thus, in Lorenzo v. Posadas[22] the Court construed the phrase "judicial expenses of
the testamentary or intestate proceedings" as not including the compensation paid to a trustee
of the decedent's estate when it appeared that such trustee was appointed for the purpose of
managing the decedent's real estate for the benefit of the testamentary heir. In another case,
the Court disallowed the premiums paid on the bond filed by the administrator as an expense of
administration since the giving of a bond is in the nature of a qualification for the office, and not
necessary in the settlement of the estate.[23] Neither may attorney's fees incident to litigation
incurred by the heirs in asserting their respective rights be claimed as a deduction from the
gross estate.[24]

Coming to the case at bar, the notarial fee paid for the extrajudicial settlement is clearly a
deductible expense since such settlement effected a distribution of Pedro Pajonar's estate to his
lawful heirs. Similarly, the attorney's fees paid to PNB for acting as the guardian of Pedro
Pajonar's property during his lifetime should also be considered as a deductible administration
expense. PNB provided a detailed accounting of decedent's property and gave advice as to the
proper settlement of the latter's estate, acts which contributed towards the collection of
decedent's assets and the subsequent settlement of the estate.

We find that the Court of Appeals did not commit reversible error in affirming the questioned
resolution of the Court of Tax Appeals.

WHEREFORE, the December 21, 1995 Decision of the Court of Appeals is AFFIRMED. The
notarial fee for the extrajudicial settlement and the attorney's fees in the guardianship
proceedings are allowable deductions from the gross estate of Pedro Pajonar.

SO ORDERED.

5
#2

G.R. No. L-29276 May 18, 1978

Testate Estate of the Late Felix J. de Guzman. VICTORINO G. DE GUZMAN,  administrator-

appellee, 
vs.
CRISPINA DE GUZMAN-CARILLO, ARSENIO DE GUZMAN and HONORATA DE GUZMAN-
MENDIOLA, oppositors-appellants.

Emiliano Samson & R. Balderama-Samson for appellants.

Cezar Paralejo for appellee.

AQUINO, J.:

This case is about the propriety of allowing as administration expenses certain disbursements
made by the administrator of the testate estate of the late Felix J. de Guzman of Gapan, Nueva
Ecija.

The deceased testator was survived by eight children named Victorino, Librada, Severino,
Margarita, Josefina, Honorata, Arsenio and Crispina. His will was duly probated. Letters of
administration were issued to his son, Doctor Victorino G. de Guzman, pursuant to the order
dated September 17, 1964 of the Court of First Instance of Nueva Ecija in Special Proceeding
No. 1431.

One of the properties left by the dent was a residential house located in the poblacion. In
conformity with his last will, that house and the lot on which it stands were adjudicated to his
eight children, each being given a one-eighth proindiviso share in the project of partition dated
March 19, 1966, which was signed by the eight heirs and which was approved in the lower
court's order of April 14, 1967 but without prejudice to the final outcome of the accounting.

The administrator submitted four accounting reports for the period from June 16, 1964 to
September, 1967. Three heirs Crispina de Guzmans-Carillo Honorata de Guzman-Mendiola and
Arsenio de Guzman interposed objections to the administrator's disbursements in the total sum
of P13,610.48, broken down as follows:

I. Expense for the improvement and renovation of the decedent's residential house.

1. Construction of fence — P3,082.07

2. Renovation of bathroom — P1,389.52

3. Repair of terrace and

interior of house — P5,928.00 — P10,399.59

II. Living expenses of Librada de Guzman while occupying the family home without paying rent:

1. For house helper — P1,170.00

2. Light bills — 227.41

3. Water bills — 150.80

4. Gas oil, floor wax

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and switch nail — 54.90 — P 1,603.11

III. Other expenses:

1. Lawyer's subsistence — P 19.30

2. Gratuity pay in lieu

of medical fee — 144.00

3. For stenographic notes — 100.00

4. For food served on

decedent's first

death anniversary — 166.65

5. Cost of publication of

death anniversary

of decedent — 102.00

6. Representation

expenses — 26.25 — P558.20

IV. Irrigation fee P1.049.58

TOTAL P13,610.48

It should be noted that the probate court in its order of August 29, 1966 directed the
administrator "to refrain from spending the assets of the estate for reconstructing and
remodeling the house of the deceased and to stop spending (sic) any asset of the estate without
first during authority of the court to do so" (pp. 26-27, Record on Appeal).

The lower court in its order of April 29, 1968 allowed the d items as legitimate expenses of
administration. From that order, the three oppositors appealed to this Court. Their contention is
that the probate court erred in approving the utilization of the income of the estate (from rice
harvests) to defray those expenditures which allegedly are not allowable under the Rules of
Court.

An executor or administrator is allowed the necessary expenses in the care, management, and
settlement of the estate. He is entitled to possess and manage the decedent's real and personal
estate as long as it is necessary for the payment of the debts and the expenses of
administration. He is accountable for the whole decedent's estate which has come into his
possession, with all the interest, profit, and income thereof, and with the proceeds of so much of
such estate as is sold by him, at the price at which it was sold (Sec. 3, Rule 84; Secs. 1 and 7,
Rule 85, Rules of Court).

One of the Conditions of the administrator's bond is that he should render a true and just
account of his administration to the court. The court may examine him upon oath With respect to
every matter relating to his accounting 't and shall so examine him as to the correctness of his
account before the same is allowed, except when no objection is made to the allowance of the
account and its correctness is satisfactorily established by competent proof. The heirs, legatees,
distributes, and creditors of the estate shall have the same privilege as the executor or
administrator of being examined on oath on any matter relating to an administration account."
(Sec. 1[c] Rule 81 and secs. 8 and 9, Rule 85, Rules of Court).

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A hearing is usually held before an administrator's account is approved, especially if an
interested Party raises objections to certain items in the accounting report (Sec. 10, Rule 85).

At that hearing, the practice is for the administrator to take the witness stand, testify under oath
on his accounts and Identify the receipts, vouchers and documents evidencing his
disbursements which are offered as exhibits. He may be interrogated by the court and crossed
by the oppositors's counsel. The oppositors may present proofs to rebut the ad. administrator's
evidence in support of his accounts.

I. Expenses for the renovation and improvement of the family residence — P10,399.59. — As
already shown above, these expenses consisted of disbursements for the repair of the terrace
and interior of the family home, the renovation of the bathroom, and the construction of a fence.
The probate court allowed those expenses because an administrator has the duty to "maintain
in tenantable repair the houses and other structures and fences belonging to the estate, and
deliver the same in such repair to the heirs or devises" when directed to do so by the court (Sec.
2, Rule 84, Rules of Court).

On the other hand, the oppositors-appellants contend that the trial court erred in allowing those
expenses because the same did not come within the category of necessary expenses of
administration which are understood to be the reasonable and necessary expenses of caring for
the property and managing it until the debts are paid and the estate is partitioned and distributed
among the heirs (Lizarraga Hermanos vs. Abada, 40 Phil. 124).

As clarified in the Lizarraga case, administration expenses should be those which are necessary
for the management of the estate, for protecting it against destruction or deterioration, and,
possibly, for the production of fruits. They are expenses entailed for the preservation and
productivity of the estate and its management for purposes of liquidation, payment of debts, and
distribution of the residue among the persons entitled thereto.

It should be noted that the family residence was partitioned proindiviso among the decedent's
eight children. Each one of them was given a one-eighth share in conformity with the testator's
will. Five of the eight co-owners consented to the use of the funds of the estate for repair and
improvement of the family home. It is obvious that the expenses in question were incurred to
preserve the family home and to maintain the family's social standing in the community.

Obviously, those expenses redounded to the benefit of an the co- owners. They were necessary
for the preservation and use of the family residence. As a result of those expenses, the co-
owners, including the three oppositors, would be able to use the family home in comfort,
convenience and security.

We hold that the probate court did not err in approving the use of the income of the estate to
defray those ex

II. Expenses incurred by Librada de Guzman as occupant of the family residence without paying
rent — P1 603.11 — The probate court allowed the income of the estate to be used for those
expenses on the theory that the occupancy of the house by one heir did not deprive the other
seven heirs from living in it. Those expenses consist of the salaries of the house helper, light
and water bills, and the cost of gas, oil floor wax and switch nail

We are of the opinion that those expenses were personal expenses of Librada de Guzman,
inuring y to her benefit. Those expenses, not being reasonable administration expenses
incurred by the administrator, should not be charged against the income of the estate.

Librada de Guzman, as an heir, is entitled to share in the net income of the estate. She
occupied the house without paying rent. She should use her income for her living expenses
while occupying the family residence.

The trial court erred in approving those expenses in the administrator's accounts. They should
be, as they are hereby, disallowed (See 33 C.J.S 1239-40).

8
III. Other expenses — P558.20. — Among these expenses is the sum of P100 for stenographic
notes which, as admitted by the administrator on page 24 of his brief, should be disallowed.
Another item, "representation expenses" in the sum of P26.25 (2nd accounting), was not
explained. it should likewise be disallowed.

The probate court erred in allowing as expenses of ad. administration the sum of P268.65 which
was incurred during the celebration of the first death anniversary of the deceased. Those
expenses are disallowed because they have no connection with the care, management and
settlement of the decedent's estate (Nicolas vs. Nicolas 63 Phil 332).

The other expenses, namely, P19.30 for the lawyer's subsistence and P144 as the cost of the
gift to the physician who attended to the testator during his last s are allowable expenses.

IV. Irrigation fee — P1,049.58. —The appellants question the deductibility of that expense on
the ground that it seems to be a duplication of the item of P1,320 as irrigation fee for the same
1966-67 crop-year.

The administrator in his comment filed on February 28, 1978 explained that the item of P1,320
represented the "allotments" for irrigation fees to eight tenants who cultivated the Intan crop,
which allotments were treated as "assumed expenses" deducted as farming expenses from the
value of the net harvests.

The explanation is not quite clear but it was not disputed by the appellants. The fact is that the
said sum of P1,049.58 was paid by the administrator to the Penaranda Irrigation System as
shown in Official Receipt No. 3596378 dated April 28, 1967. It was included in his accounting as
part of the farming expenses. The amount was properly allowed as a legitimate expense of
administration.

WHEREFORE, the lower court's order of April 29, 1968 is affirmed with the modifications that
the sum of (a) P1,603.11 as the living expenses of Librada de Guzman. (b) P100 for
stenographic notes, (c) P26.25 as representation expenses, and (d) P268.65 as expenses for
the celebration of the first anniversary of the decedent's death are disallowed in the
administrator's accounts. No costs.

SO ORDERED.

9
#3

 
RAFAEL ARSENIO S. DIZON, in his capacity G.R. No. 140944
as the Judicial Administrator of the Estate  
of the deceased JOSE P. FERNANDEZ, Present:
Petitioner,  
  Promulgated:
- versus -  
  April 30, 2008
COURT OF TAX APPEALS
and COMMISSIONER OF INTERNAL
REVENUE,
Respondents.

x------------------------------------------------------------------------------------x
 
 
DECISION
 
NACHURA, J.:
 
Before this Court is a Petition for Review on Certiorari[1] under Rule 45 of the Rules of Civil
Procedure seeking the reversal of the Court of Appeals (CA) Decision [2] dated April 30,
1999 which affirmed the Decision[3] 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 letter [7] dated October 13, 1988,
Justice Dizon informed respondent Commissioner of the Bureau of Internal Revenue (BIR) of
the special proceedings for the Estate.
 
Petitioner alleged that several requests for extension of the period to file the required estate tax
return were granted by the BIR since the assets of the estate, as well as the claims against it,
had yet to be collated, determined and identified. Thus, in a letter [8] dated March 14, 1990,
Justice Dizon authorized Atty. Jesus M. Gonzales (Atty. Gonzales) to sign and file on behalf of
the Estate the required estate tax return and to represent the same in securing a Certificate of
Tax Clearance. Eventually, on April 17, 1990, Atty. Gonzales wrote a letter[9] addressed to the
BIR Regional Director for San Pablo City and filed the estate tax return[10] with the same BIR
Regional Office, showing therein a NIL estate tax liability, computed as follows:
 

 
COMPUTATION OF TAX
 

10
 Conjugal Real Property (Sch. 1) P10,855,020.00
Conjugal Personal Property (Sch.2) 3,460,591.34
Taxable Transfer (Sch. 3)
Gross Conjugal Estate 14,315,611.34
Less: Deductions (Sch. 4) 187,822,576.06
Net Conjugal Estate NIL
Less: Share of Surviving Spouse NIL .
Net Share in Conjugal Estate NIL
xxx
Net Taxable Estate NIL .
Estate Tax Due NIL .[11]
 
 
 
On April 27, 1990, BIR Regional Director for San Pablo City, Osmundo G. Umali issued
Certification Nos. 2052[12] and 2053[13] stating that the taxes due on the transfer of real and
personal properties[14] of Jose had been fully paid and said properties may be transferred to his
heirs. Sometime in August 1990, Justice Dizon passed away. Thus, 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 P66,973,985.40[18]
 
 
In his letter[19] dated December 12, 1991, Atty. Gonzales moved for the reconsideration of the
said estate tax assessment. However, in her letter[20] dated April 12, 1994, the BIR
Commissioner denied the request and reiterated that the estate is liable for the payment
of P66,973,985.40 as deficiency estate tax. On May 3, 1994, petitioner received the letter of

11
denial. On June 2, 1994, petitioner filed a petition for review[21] before respondent CTA. Trial on
the merits ensued.
 
 
As found by the CTA, the respective parties presented the following pieces of evidence, to wit:
 
In the hearings conducted, petitioner did not present testimonial evidence but
merely documentary evidence consisting of the following:
 
Nature of Document (sic) Exhibits
 
1. Letter dated October 13, 1988
from Arsenio P. Dizon addressed
to the Commissioner of Internal
Revenue informing the latter of
the special proceedings for the
settlement of the estate (p. 126,
BIR records); "A"
 
2. Petition for the probate of the
will and issuance of letter of
administration filed with the
Regional Trial Court (RTC) of
Manila, docketed as Sp. Proc.
No. 87-42980 (pp. 107-108, BIR
records); "B" & "B-1
 
3. Pleading entitled "Compliance"
filed with the probate Court
submitting the final inventory
of all the properties of the
deceased (p. 106, BIR records); "C"
 
4. Attachment to Exh. "C" which
is the detailed and complete
listing of the properties of
the deceased (pp. 89-105, BIR rec.); "C-1" to "C-17"
 
5. Claims against the estate filed
by Equitable Banking Corp. with
the probate Court in the amount
of P19,756,428.31 as of March 31,
1988, together with the Annexes
to the claim (pp. 64-88, BIR records); "D" to "D-24"
 
6. Claim filed by Banque de L'
Indochine et de Suez with the
probate Court in the amount of
US $4,828,905.90 as of January 31,
1988 (pp. 262-265, BIR records); "E" to "E-3"
 
7. Claim of the Manila Banking
Corporation (MBC) which as of
November 7, 1987 amounts to
P65,158,023.54, but recomputed
as of February 28, 1989 at a
total amount of P84,199,160.46;
together with the demand letter

12
from MBC's lawyer (pp. 194-197,
BIR records); "F" to "F-3"
 
8. Demand letter of Manila Banking
Corporation prepared by Asedillo,
Ramos and Associates Law Offices
addressed to Fernandez Hermanos,
Inc., represented by Jose P.
Fernandez, as mortgagors, in the
total amount of P240,479,693.17
as of February 28, 1989
(pp. 186-187, BIR records); "G" & "G-1"
 
9. Claim of State Investment
House, Inc. filed with the
RTC, Branch VII of Manila,
docketed as Civil Case No.
86-38599 entitled "State
Investment House, Inc.,
Plaintiff, versus Maritime
Company Overseas, Inc. and/or
Jose P. Fernandez, Defendants,"
(pp. 200-215, BIR records); "H" to "H-16"
 
10. Letter dated March 14, 1990
of Arsenio P. Dizon addressed
to Atty. Jesus M. Gonzales,
(p. 184, BIR records); "I"
 
11. Letter dated April 17, 1990
from J.M. Gonzales addressed
to the Regional Director of
BIR in San Pablo City
(p. 183, BIR records); "J"
 
12. Estate Tax Return filed by
the estate of the late Jose P.
Fernandez through its authorized
representative, Atty. Jesus M.
Gonzales, for Arsenio P. Dizon,
with attachments (pp. 177-182,
BIR records); "K" to "K-5"

13. Certified true copy of the

Letter of Administration
issued by RTC Manila, Branch
51, in Sp. Proc. No. 87-42980
appointing Atty. Rafael S.
Dizon as Judicial Administrator
of the estate of Jose P.
Fernandez; (p. 102, CTA records)
and "L"
 
14. Certification of Payment of
estate taxes Nos. 2052 and
2053, both dated April 27, 1990,
issued by the Office of the
Regional Director, Revenue

13
 Region No. 4-C, San Pablo
City, with attachments
(pp. 103-104, CTA records.). "M" to "M-5"
 
Respondent's [BIR] counsel presented on June 26, 1995 one witness in the
person of Alberto Enriquez, who was one of the revenue examiners who
conducted the investigation on the estate tax case of the late Jose P.
Fernandez. In the course of the direct examination of the witness, he
identified the following:
 
Documents/
Signatures BIR Record
 
1. Estate Tax Return prepared by
the BIR; p. 138
 
2. Signatures of Ma. Anabella
Abuloc and Alberto Enriquez,
Jr. appearing at the lower
Portion of Exh. "1"; -do-
 
3. Memorandum for the Commissioner,
dated July 19, 1991, prepared by
revenue examiners, Ma. Anabella A.
Abuloc, Alberto S. Enriquez and
Raymund S. Gallardo; Reviewed by
Maximino V. Tagle pp. 143-144
 
4. Signature of Alberto S.
Enriquez appearing at the
lower portion on p. 2 of Exh. "2"; -do-
 
5. Signature of Ma. Anabella A.
Abuloc appearing at the
lower portion on p. 2 of Exh. "2"; -do-
 
6. Signature of Raymund S.
Gallardo appearing at the
Lower portion on p. 2 of Exh. "2"; -do-
 
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 19, 1991; p. 139
 
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. "3"; -do-
 
11. Signature of Raymond S.
Gallardo at the lower
portion of Exh. "3"; -do-

14
  
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. Commissioner
for Collection for the Commissioner
of Internal Revenue, demanding
payment of the amount of
P66,973,985.40; and p. 169
 
14. Assessment Notice FAS-E-87-91-00 pp. 169-170[22]
 
 
The CTA's Ruling
 
 
On June 17, 1997, the CTA denied the said petition for review. Citing this Court's ruling in Vda.
de Oate v. Court of Appeals,[23] the CTA opined that the aforementioned pieces of evidence
introduced by the BIR were admissible in evidence. The CTA ratiocinated:
Although the above-mentioned documents were not formally offered as evidence
for respondent, considering that respondent has been declared to have waived the
presentation thereof during the hearing on March 20, 1996, still they could be
considered as evidence for respondent since they were properly identified during
the presentation of respondent's witness, whose testimony was duly recorded as
part of the records of this case. Besides, the documents marked as respondent's
exhibits formed part of the BIR records of the case.[24]
 
 
 
Nevertheless, the CTA did not fully adopt the assessment made by the BIR and it came up with
its own computation of the deficiency estate tax, to wit:
 
Conjugal Real Property P 5,062,016.00
Conjugal Personal Prop. 33,021,999.93
Gross Conjugal Estate 38,084,015.93
Less: Deductions 26,250,000.00
Net Conjugal Estate P 11,834,015.93
Less: Share of Surviving Spouse 5,917,007.96
Net Share in Conjugal Estate P 5,917,007.96
Add: Capital/Paraphernal
Properties P44,652,813.66
Less: Capital/Paraphernal
Deductions 44,652,813.66
Net Taxable Estate P 50,569,821.62
============
 
Estate Tax Due P 29,935,342.97
Add: 25% Surcharge for Late Filing 7,483,835.74
Add: Penalties for-No notice of death 15.00
No CPA certificate 300.00
Total deficiency estate tax P 37,419,493.71
=============
 
exclusive of 20% interest from due date of its payment until full payment thereof
[Sec. 283 (b), Tax Code of 1987].[25]

15
  
 
Thus, the CTA disposed of the case in this wise:
 
 
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 Reconsideration [29] which the CA denied in its
Resolution[30] 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 Oate has already been abandoned in

16
a long line of cases in which the Court held that evidence not formally offered is without any
weight or value; that Section 34 of Rule 132 of the Rules on Evidence requiring a formal offer of
evidence is mandatory in character; that, while BIR's witness Alberto Enriquez (Alberto) in his
testimony before the CTA identified the pieces of evidence aforementioned such that the same
were marked, BIR's failure to formally offer said pieces of evidence and depriving petitioner the
opportunity to cross-examine Alberto, render the same inadmissible in evidence; that
assuming arguendo that the ruling in Vda. de Oate is still applicable, BIR failed to comply with
the doctrine's requisites because the documents herein remained simply part of the BIR records
and were not duly incorporated in the court records; that the BIR failed to consider that although
the actual payments made to the Estate creditors were lower than their respective claims, such
were compromise agreements reached long after the Estate's liability had been settled by the
filing of its estate tax return and the issuance of BIR Certification Nos. 2052 and 2053; and that
the reckoning date of the claims against the Estate and the settlement of the estate tax due
should be at the time the estate tax return was filed by the judicial administrator and the
issuance of said BIR Certifications and not at the time the aforementioned Compromise
Agreements were entered into with the Estate's creditors.[32]
  
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 Courts Ruling
 
The Petition is impressed with merit.
 Under Section 8 of RA 1125, the CTA is categorically described as a court of record. As cases
filed before it are litigated de novo, party-litigants shall prove every minute aspect of their cases.
Indubitably, no evidentiary value can be given the pieces of evidence submitted by the BIR, as
the rules on documentary evidence require that these documents must be formally offered
before the CTA.[34] Pertinent is Section 34, Rule 132 of the Revised Rules on Evidence which
reads:
 
SEC. 34. Offer of evidence. The court shall consider no evidence which has not
been formally offered. The purpose for which the evidence is offered must be
specified.

17
   
The CTA and the CA rely solely on the case of Vda. de Oate, which reiterated this
Court's previous rulings in People v. Napat-a[35] and People v. Mate[36] on the admission and
consideration of exhibits which were not formally offered during the trial. Although in a long line
of cases many of which were decided after Vda. de Oate, we held that courts cannot consider
evidence which has not been formally offered,[37] nevertheless, petitioner cannot validly assume
that the doctrine laid down in Vda. de Oate has already been abandoned. Recently, in Ramos
v. Dizon,[38] this Court, applying the said doctrine, ruled that the trial court judge therein
committed no error when he admitted and considered the respondents' exhibits in the resolution
of the case, notwithstanding the fact that the same 
were not formally offered. Likewise, in Far East Bank & Trust Company v. Commissioner of
Internal Revenue,[39] the Court made reference to said doctrine in resolving the issues therein.
Indubitably, the doctrine laid down in Vda. De Oate still subsists in this jurisdiction. In Vda. de
Oate, we held that:
  
From the foregoing provision, it is clear that for evidence to be considered, the
same must be formally offered. Corollarily, the mere fact that a particular
document is identified and marked as an exhibit does not mean that it has already
been offered as part of the evidence of a party. In Interpacific Transit, Inc. v.
Aviles [186 SCRA 385], we had the occasion to make a distinction between
identification of documentary evidence and its formal offer as an exhibit. We said
that the first is done in the course of the trial and is accompanied by the marking of
the evidence as an exhibit while the second is done only when the party rests its
case and not before. A party, therefore, may opt to formally offer his evidence if he
believes that it will advance his cause or not to do so at all. In the event he
chooses to do the latter, the trial court is not authorized by the Rules to consider
the same.
 
However, in People v. Napat-a [179 SCRA 403] citing People v. Mate [103 SCRA
484], we relaxed the foregoing rule and allowed evidence not formally
offered to be admitted and considered by the trial court provided the
following requirements are present, viz.: first, the same must have been duly
identified by testimony duly recorded and, second, the same must have
been incorporated in the records of the case.[40]
 
From the foregoing declaration, however, it is clear that Vda. de Oate is merely an
exception to the general rule. Being an exception, it may be applied only when there is strict
compliance with the requisites mentioned therein; otherwise, the general rule in Section 34 of
Rule 132 of the Rules of Court should prevail.
 
In this case, we find that these requirements have not been satisfied. The assailed pieces of
evidence were presented and marked during the trial particularly when Alberto took the witness
stand. Alberto identified these pieces of evidence in his direct testimony.[41] He was also
subjected to cross-examination and re-cross examination by petitioner.[42]But Albertos account
and the exchanges between Alberto and petitioner did not sufficiently describe the contents of
the said pieces of evidence presented by the BIR. In fact, petitioner sought that the lead
examiner, one Ma. Anabella A. Abuloc, be summoned to testify, inasmuch as Alberto was
incompetent to answer questions relative to the working papers.[43] The lead examiner never
testified. Moreover, while Alberto's testimony identifying the BIR's evidence was duly recorded,
the BIR documents themselves were not incorporated in the records of the case.

18
 
A common fact threads through Vda. de Oate and Ramos that does not exist at all in the instant
case. In the aforementioned cases, the exhibits were marked at the pre-trial proceedings to
warrant the pronouncement that the same were duly incorporated in the records of the case.
Thus, we held in Ramos:
 
In this case, we find and so rule that these requirements have been satisfied. The
exhibits in question were presented and marked during the pre-trial of the
case thus, they have been incorporated into the records. Further, Elpidio
himself explained the contents of these exhibits when he was interrogated by
respondents' counsel...
 
xxxx
 
But what further defeats petitioner's cause on this issue is that respondents'
exhibits were marked and admitted during the pre-trial stage as shown by the Pre-
Trial Order quoted earlier.[44]
  
While the CTA is not governed strictly by technical rules of evidence, [45] as rules of procedure
are not ends in themselves and are primarily intended as tools in the administration of justice,
the presentation of the BIR's evidence is not a mere procedural technicality which may be
disregarded considering that it is the only means by which the CTA may ascertain and verify the
truth of BIR's claims against the Estate.[46] The BIR's failure to formally offer these pieces of
evidence, despite CTA's directives, is fatal to its cause.[47] Such failure is aggravated by the fact
that not even a single reason was advanced by the BIR to justify such fatal omission. This, we
take against the BIR.
 
Per the records of this case, the BIR was directed to present its evidence[48] in the hearing of
February 21, 1996, but BIR's counsel failed to appear.[49] The CTA denied petitioner's motion to
consider BIR's presentation of evidence as waived, with a warning to BIR that such presentation
would be considered waived if BIR's evidence would not be presented at the next hearing.
Again, in the hearing of March 20, 1996, BIR's counsel failed to appear.[50] Thus, in its
Resolution[51] dated March 21, 1996, the CTA considered the BIR to have waived presentation of
its evidence. In the same Resolution, the parties were directed to file their respective
memorandum. Petitioner complied but BIR failed to do so. [52] In all of these proceedings, BIR
was duly notified. Hence, in this case, we are constrained to apply our ruling in Heirs of Pedro
Pasag v. Parocha:[53]
A formal offer is necessary because judges are mandated to rest their
findings of facts and their judgment only and strictly upon the evidence offered by
the parties at the trial. Its function is to enable the trial judge to know the purpose
or purposes for which the proponent is presenting the evidence. On the other
hand, this allows opposing parties to examine the evidence and object to its
admissibility. Moreover, it facilitates review as the appellate court will not be
required to review documents not previously scrutinized by the trial court.
 
Strict adherence to the said rule is not a trivial matter. The Court in Constantino v.
Court of Appeals ruled that the formal offer of one's evidence is deemed
waived after failing to submit it within a considerable period of time. It
explained that the court cannot admit an offer of evidence made after a lapse
of three (3) months because to do so would "condone an inexcusable laxity
if not non-compliance with a court order which, in effect, would encourage
needless delays and derail the speedy administration of justice."

19
 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 debt[56] is defined as:
 
an act of liberality, by virtue of which, without receiving any equivalent, the creditor
renounces the enforcement of the obligation, which is extinguished in its entirety or
in that part or aspect of the same to which the remission refers. It is an essential
characteristic of remission that it be gratuitous, that there is no equivalent received
for the benefit given; once such equivalent exists, the nature of the act changes. It
may become dation in payment when the creditor receives a thing different from
that stipulated; or novation, when the object or principal conditions of the obligation
should be changed; or compromise, when the matter renounced is in litigation or
dispute and in exchange of some concession which the creditor receives.[57]
 
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

20
the estate was certain and enforceable on the date of the decedent's death, the fact that the
claimant subsequently settled for lesser amount did not preclude the estate from deducting the
entire amount of the claim for estate tax purposes. These pronouncements essentially confirm
the general principle that post-death developments are not material in determining the amount
of the deduction.
  
On the other hand, the Internal Revenue Service (Service) opines that post-death
settlement should be taken into consideration and the claim should be allowed as a deduction
only to the extent of the amount actually paid.[64] Recognizing the dispute, the Service released
Proposed Regulations in 2007 mandating that the deduction would be limited to the actual
amount paid.[65]
 
In announcing its agreement with Propstra,[66] the U.S. 5th Circuit Court of Appeals held:
 
We are persuaded that the Ninth Circuit's decision...in Propstra correctly apply
the Ithaca Trust date-of-death valuation principle to enforceable claims against the
estate. As we interpret Ithaca Trust, when the Supreme Court announced the
date-of-death valuation principle, it was making a judgment about the nature of the
federal estate tax specifically, that it is a tax imposed on the act of transferring
property by will or intestacy and, because the act on which the tax is levied occurs
at a discrete time, i.e., the instance of death, the net value of the property
transferred should be ascertained, as nearly as possible, as of that time. This
analysis supports broad application of the date-of-death valuation rule.[67]
 
We express our agreement with the date-of-death valuation rule, made pursuant to the ruling of
the U.S. Supreme Court in Ithaca Trust Co. v. United States.[68] First. There is no law, nor do we
discern any legislative intent in our tax laws, which disregards the date-of-death valuation
principle and particularly provides that post-death developments must be considered in
determining the net value of the estate. It bears emphasis that tax burdens are not to be
imposed, nor presumed to be imposed, beyond what the statute expressly and clearly imports,
tax statutes being construed strictissimi juris against the government.[69] Any doubt on whether a
person, article or activity is taxable is generally resolved against taxation.[70] Second. Such
construction finds relevance and consistency in our Rules on Special Proceedings wherein the
term "claims" required to be presented against a decedent's estate is generally construed to
mean debts or demands of a pecuniary nature which could have been enforced against the
deceased in his lifetime, or liability contracted by the deceased before his death.[71] Therefore,
the claims existing at the time of death are significant to, and should be made the basis of, the
determination of allowable deductions.
 
WHEREFORE, the instant Petition is GRANTED. Accordingly, the assailed Decision dated April
30, 1999 and the Resolution dated November 3, 1999 of the Court of Appeals in CA-G.R. S.P.
No. 46947 are REVERSED and SET ASIDE. The Bureau of Internal Revenue's deficiency
estate tax assessment against the Estate of Jose P. Fernandez is hereby NULLIFIED. No costs.
 
SO ORDERED.

21
ADMINISTRATIVE REQUIREMENTS

#1

G.R. No. L-33139             October 11, 1930

THE GOVERNMENT OF THE PHILIPPINE ISLANDS, plaintiff-appellants, 

vs.
JOSE MA. PAMINTUAN, ET AL., defendants-appellees.

Attorney-General Jaranilla for appellant. 

Jose Ma.Cavanna for appellees.

VILLA-REAL, J.:

This is an appeal taken by the Government of the Philippine Islands from the judgment of the
Court of First Instance of Manila dismissing its complaint and absolving the defendants, without
costs. In support of the appeal the following alleged errors have been assigned to the court
below in its judgment:

1. The lower court erred in holding that the failure of the plaintiff to file its claim with the
committee on claims and appraisals barred it from collecting the tax in questions in this
action.

2. The lower court erred in holding that this case is governed by the principle laid down in
the case of the Government of the Philippine Islands vs. Inchausti & Co. (24 Phil., 315).

3. The lower court erred in absolving the defendants from the complaint and in denying
the plaintiff's motion for new trial.

The present case was submitted to the court below upon the following agreed statement of
facts:

I. That on February 27, 1920, Florentino Pamintuan, represented by J. V. Ramirez or his

attorney-in-fact charged with the administration of his property, filed income-tax return for
the year 1919, paying the amount of P 672.99 on the basis of said return, and the
additional sum of P151.01 as a result of a subsequent assessment received from the
Collector of Internal Revenue.

II. That on April 24, 1925, Florentino Pamintuan died in Washington, D. C., U. S. A.,
leaving the defendants herein as his heirs.

III. That on April 24, 1925, intestate proceedings were instituted in the Court of First
Instance of Manila in civil case No. 27948, intestate of the late Florentino Pamintuan.

IV. That on April 28,1925, the Court of First Instance of Manila appointed Maximo de la
Paz and Candido Ilagan commissioners of appraisal of the property left by the deceased
Pamintuan, the said appointees taking their oaths of office on May 4 and May 9, 1925,
respectively, and letters of appointment to the committee on claims and appraisals were
made on May 9,1925. 1awph!l.net

V. That the said committee on claims and appraisals after the publications of the notices
required by law held the necessary sessions in accordance with said notices for the
presentation and determination of all claims and credits against the estate of the
deceased Pamintuan.

VI. That on December 1, 1925, the above-mentioned committee rendered its report which
was duly approved by the court, and in which report it appears that he only claims

22
 presented and that were approved were those of Tomasa Centeno, Jose, Paz, Caridad,
and Natividad Pamintuan and Cavanna, Aboitiz and Agan.

VII. That on June 12, 1926, Jose V. Ramirez, the duly appointed judicial administrator of
the estate of the deceased Florentino Pamintuan presented a proposed partition of the
decedent's estate which proposed partition was approved by the court on July 6,1926,
the court ordering the delivery to the heirs, the defendants herein, of their respective
shares of the inheritance after paying the corresponding inheritance taxes which were
duly paid on September 2, 1926, in the amount of P25,047.19 as appears on the official
receipt No. 4421361.

VIII. That the defendants herein inherited from the deceased Florentino Pamintuan in the
following proportions: Tomasa Pamintuan inherited 0.0571 per cent of the decedent's
estate and the other defendants 0.0784 per cent each according to the partition approved
by the court in civil case No. 27948.

IX. That during the pendency of the intestate proceedings, the administrator filed income-
tax returns for the estate of the deceased corresponding to the years 1925 and 1926.

X. That the intestate proceedings in civil case No. 27948 were definitely closed on
October 27, 1926, by order of the court of the same date.

XI. That subsequent to the distribution of the decedent's estate to the defendants herein,
that is, on February 16, 1927, the plaintiff discovered the fact that the deceased
Florentino Pamintuan has not paid the amount of four hundred and sixty-two pesos
(P462) as additional income tax and surcharge for the calendar year 1919, on account of
the sale made by him on November 14, 1919, of his house and lot located at 922 M. H.
del Pilar, Manila, from which sale he realized a net profit or income of P11,000, which
was not included in his income-tax return filed for said year 1919.

XII. That the defendants cannot disprove that the deceased Florentino Pamintuan made
a profit of P11,000 in the sale of the house referred to in paragraph Xl hereof because
they have destroyed the voluminous records and evidences regarding the sale in
question and other similar transactions which might show repairs on the house,
commissions, and other expenses tending to reduce the profit obtained as mentioned
above.

XIII. That demand for the payment of the income tax referred to herein was made on
February 24, 1927, on the defendants but they refused and still refuse to pay the same
either in full or in part.

With regard to the first assignment of error, this court held in Pineda vs. Court of First Instance
of Tayabas and Collector of Internal Revenue (52 Phil., 803):

To reply to these contentions in turn , we observe that, while there are a few courts that
have expressed themselves to the effect that a claim for taxes due to the Government
should be presented like other claims to the committee appointed for the purpose of
passing upon claims, the clear weight of judicial authority is to the effect that claims for
taxes and assessments, whether assessed before or after the death of the decedent, are
not required to be presented to the committee. (24 C. J., 325; People vs. Olvera, 43 Cal.,
492; Hancock vs.Whittemore, 50 Cal., 522; Findley vs. Taylor, 97 Iowa, 420; Bogue
vs.Laughlin,149 Wis., 271; 40 L. R. A. [N.S.], 927; Ann. Cas.1913 C.,p.1367.)

See also In re Estate of Frank H.Goulette (G. R. No. 32361, 1 decided on September 22,1930.)

The administration proceedings of the late Florentino Pamintuan having been closed, and his
estate distributed among his heirs, the defendants herein, the latter are responsible for the
payment of the income tax here in question in proportion to the share of each in said estate, in

23
accordance with section 731 of the Code of Civil Procedure, and the doctrine of this court laid
down in Lopez vs. Enriquez (16 Phil.,336) as follows:

ESTATE; LIABILITY OF HEIRS AND DISTRIBUTEES. — Heirs are not required to

respond with their own property for the debts of their deceased ancestors. But even after
the partition of an estate, heirs and distributees are liable individually for the payment of
all lawful outstanding claims against the estate in proportion to the amount or value of the
property they have respectively received from the estate. The hereditary property
consists only of that part which remains after the settlement of all lawful claims against
the estate, for the settlement of which the entire estate is first liable. The heirs cannot, by
any act of their own or by agreement among themselves, reduce the creditors' security
for the payment of their claims. (Pavia vs. De la Rosa, 8 Phil.,70; secs. 731, 749, Code of
Civil Procedure; art,1257, Civil Code.)

For the reasons stated, we are of opinion and so hold that claims for income taxes need not be
filed with the committee on claims and appraisals appointed in the course of testate proceedings
and may be collected even after the distribution of the decedent's estate among his heirs, who
shall be liable therefor in proportion to their share in the inheritance.

Wherefore, let the defendants pay the plaintiff the sum of P462, with 1 per centum monthly
interest from August 19, 1927 until fully paid, as follows: Tomasa Centeno 0.0571 per cent, and
each one of the other defendants 0.0784 per cent, with costs against the appellees. So ordered.

#2

G.R. No. L-22734             September 15, 1967

COMMISSIONER OF INTERNAL REVENUE, petitioner, 

vs.
MANUEL B. PINEDA, as one of the heirs of deceased ATANASIO PINEDA, respondent.

Office of the Solicitor General for petitioner.

Manuel B. Pineda for and in his own behalf as respondent.

BENGZON, J.P., J.:

On May 23, 1945 Atanasio Pineda died, survived by his wife, Felicisima Bagtas, and 15
children, the eldest of whom is Manuel B. Pineda, a lawyer. Estate proceedings were had in the
Court of First Instance of Manila (Case No. 71129) wherein the surviving widow was appointed
administratrix. The estate was divided among and awarded to the heirs and the proceedings
terminated on June 8, 1948. Manuel B. Pineda's share amounted to about P2,500.00.

After the estate proceedings were closed, the Bureau of Internal Revenue investigated the
income tax liability of the estate for the years 1945, 1946, 1947 and 1948 and it found that the
corresponding income tax returns were not filed. Thereupon, the representative of the Collector
of Internal Revenue filed said returns for the estate on the basis of information and data
obtained from the aforesaid estate proceedings and issued an assessment for the following:

1. Deficiency income tax

1945 P135.83
1946 436.95
1947 1,206.91 P1,779.69
  Add: 5% surcharge 88.98
1% monthly 720.77
interest from
November 30,
1953 to April 15,
1957

24
 Compromise for
late filing 80.00
Compromise for
late payment 40.00

Total amount due P2,707.44

===========
Additional residence tax P14.50
2.
for 1945 ===========
3. Real Estate dealer's tax
for the fourth quarter of
1946 and the whole P207.50
year of 1947 ===========

Manuel B. Pineda, who received the assessment, contested the same. Subsequently, he
appealed to the Court of Tax Appeals alleging that he was appealing "only that proportionate
part or portion pertaining to him as one of the heirs."

After hearing the parties, the Court of Tax Appeals rendered judgment reversing the decision of
the Commissioner on the ground that his right to assess and collect the tax has prescribed. The
Commissioner appealed and this Court affirmed the findings of the Tax Court in respect to the
assessment for income tax for the year 1947 but held that the right to assess and collect the
taxes for 1945 and 1946 has not prescribed. For 1945 and 1946 the returns were filed on
August 24, 1953; assessments for both taxable years were made within five years therefrom or
on October 19, 1953; and the action to collect the tax was filed within five years from the latter
date, on August 7, 1957. For taxable year 1947, however, the return was filed on March 1, 1948;
the assessment was made on October 19, 1953, more than five years from the date the return
was filed; hence, the right to assess income tax for 1947 had prescribed. Accordingly, We
remanded the case to the Tax Court for further appropriate proceedings.1

In the Tax Court, the parties submitted the case for decision without additional evidence.

On November 29, 1963 the Court of Tax Appeals rendered judgment holding Manuel B. Pineda
liable for the payment corresponding to his share of the following taxes:

Deficiency income tax

1945 P135.83
1946 436.95
Real estate
dealer's fixed tax
4th quarter of
1946 and whole
year of 1947 P187.50

The Commissioner of Internal Revenue has appealed to Us and has proposed to hold Manuel
B. Pineda liable for the payment of all the taxes found by the Tax Court to be due from the
estate in the total amount of P760.28 instead of only for the amount of taxes corresponding to
his share in the estate.1awphîl.nèt

Manuel B. Pineda opposes the proposition on the ground that as an heir he is liable for unpaid
income tax due the estate only up to the extent of and in proportion to any share he received.
He relies on Government of the Philippine Islands v. Pamintuan 2 where We held that "after the
partition of an estate, heirs and distributees are liable individually for the payment of all lawful
outstanding claims against the estate in proportion to the amount or value of the property they
have respectively received from the estate."

25
We hold that the Government can require Manuel B. Pineda to pay the full amount of the taxes
assessed.

Pineda is liable for the assessment as an heir and as a holder-transferee of property belonging
to the estate/taxpayer. As an heir he is individually answerable for the part of the tax
proportionate to the share he received from the inheritance.3 His liability, however, cannot
exceed the amount of his share.4

As a holder of property belonging to the estate, Pineda is liable for he tax up to the amount of
the property in his possession. The reason is that the Government has a lien on the P2,500.00
received by him from the estate as his share in the inheritance, for unpaid income taxes4a for
which said estate is liable, pursuant to the last paragraph of Section 315 of the Tax Code, which
we quote hereunder:

If any person, corporation, partnership, joint-account (cuenta en participacion),

association, or insurance company liable to pay the income tax, neglects or refuses to
pay the same after demand, the amount shall be a lien in favor of the Government of the
Philippines from the time when the assessment was made by the Commissioner of
Internal Revenue until paid with interest, penalties, and costs that may accrue in addition
thereto upon all property and rights to property belonging to the taxpayer: . . .

By virtue of such lien, the Government has the right to subject the property in Pineda's
possession, i.e., the P2,500.00, to satisfy the income tax assessment in the sum of P760.28.
After such payment, Pineda will have a right of contribution from his co-heirs, 5 to achieve an
adjustment of the proper share of each heir in the distributable estate.

All told, the Government has two ways of collecting the tax in question. One, by going after all
the heirs and collecting from each one of them the amount of the tax proportionate to the
inheritance received. This remedy was adopted in Government of the Philippine Islands v.
Pamintuan, supra. In said case, the Government filed an action against all the heirs for the
collection of the tax. This action rests on the concept that hereditary property consists only of
that part which remains after the settlement of all lawful claims against the estate, for the
settlement of which the entire estate is first liable.6 The reason why in case suit is filed against
all the heirs the tax due from the estate is levied proportionately against them is to achieve
thereby two results: first, payment of the tax; and second, adjustment of the shares of each heir
in the distributed estate as lessened by the tax.

Another remedy, pursuant to the lien created by Section 315 of the Tax Code upon all property
and rights to property belonging to the taxpayer for unpaid income tax, is by subjecting said
property of the estate which is in the hands of an heir or transferee to the payment of the tax
due, the estate. This second remedy is the very avenue the Government took in this case to
collect the tax. The Bureau of Internal Revenue should be given, in instances like the case at
bar, the necessary discretion to avail itself of the most expeditious way to collect the tax as may
be envisioned in the particular provision of the Tax Code above quoted, because taxes are the
lifeblood of government and their prompt and certain availability is an imperious need.7 And as
afore-stated in this case the suit seeks to achieve only one objective: payment of the tax. The
adjustment of the respective shares due to the heirs from the inheritance, as lessened by the
tax, is left to await the suit for contribution by the heir from whom the Government recovered
said tax.

WHEREFORE, the decision appealed from is modified. Manuel B. Pineda is hereby ordered to
pay to the Commissioner of Internal Revenue the sum of P760.28 as deficiency income tax for
1945 and 1946, and real estate dealer's fixed tax for the fourth quarter of 1946 and for the whole
year 1947, without prejudice to his right of contribution for his co-heirs. No costs. So ordered.

#3

26
G.R. No. L-19495           November 24, 1966

COMMISSIONER OF INTERNAL REVENUE, petitioner, 

vs.
LILIA YUSAY GONZALES and THE COURT OF TAX APPEALS, respondents.

Office of the Solicitor General for the petitioner.

Ramon A. Gonzales for respondent Lilia Yusay Gonzales.

BENGZON, J.P., J.:

Matias Yusay, a resident of Pototan, Iloilo, died intestate on May 13, 1948, leaving two heirs,
namely, Jose S. Yusay, a legitimate child, and Lilia Yusay Gonzales, an acknowledged natural
child. Intestate proceedings for the settlement of his estate were instituted in the Court of First
Instance of Iloilo (Special Proceedings No. 459). Jose S. Yusay was therein appointed
administrator.

On May 11, 1949 Jose S. Yusay filed with the Bureau of Internal Revenue an estate and
inheritance tax return declaring therein the following properties:

Personal properties

Palay P6,444.00
Carabaos 1,000.00 P7,444.00

Real properties:
Capital, 74 parcels )

assessed
Conjugal 19 parcels) at P179,760.00

Total gross estate P187,204.00

The return mentioned no heir.

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

Personal properties:

Palay P6,444.00
Carabaos 1,500.00
Packard Automobile 2,000.00
2 Aparadors 500.00 P10,444.00

Real properties:
Capital, 25 parcels
assessed at P87,715.32

1/2 of Conjugal, 130

parcels assessed at P121,425.00 P209,140.32

Total P219,584.32

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

Based on the above findings, the Bureau of Internal Revenue assessed on October 29, 1953
estate and inheritance taxes in the sums of P6,849.78 and P16,970.63, respectively.

27
On January 25, 1955 the Bureau of Internal Revenue increased the assessment to P8,225.89
as estate tax and P22,117.10 as inheritance tax plus delinquency interest and demanded
payment thereof on or before February 28, 1955. Meanwhile, on February 16, 1955, the Court of
First Instance of Iloilo required Jose S. Yusay to show proof of payment of said estate and
inheritance taxes.

On March 3, 1955 Jose S. Yusay requested an extension of time within which to pay the tax. He
posted a surety bond to guarantee payment of the taxes in question within one year. The
Commissioner of Internal Revenue however denied the request. Then he issued a warrant of
distraint and levy which he transmitted to the Municipal Treasurer of Pototan for execution. This
warrant was not enforced because all the personal properties subject to distraint were located in
Iloilo City.

On May 20, 1955 the Provincial Treasurer of Iloilo requested the BIR Provincial Revenue Officer
to furnish him copies of the assessment notices to support a motion for payment of taxes which
the Provincial Fiscal would file in Special Proceedings No. 459 before the Court of First Instance
of Iloilo. The papers requested were sent by the Commissioner of Internal Revenue to the
Provincial Revenue Officer of Iloilo to be transmitted to the Provincial Treasurer. The records do
not however show whether the Provincial Fiscal filed a claim with the Court of First Instance for
the taxes due.

On May 30, 1956 the commissioner appointed by the Court of First Instance for the purpose,
submitted a reamended project of partition which listed the following properties:

 Personal
properties:

Buick Sedan
Packard car P8,100.00
Aparadors 2,000.00
Cash in Bank 500.00
(PNB) 8,858.46
Palay 6,444.00
Carabaos      1,500.00 P27,402.46

Real properties:

Land, 174 parcels

assessed at P324,797.21
Buildings      4,500.00 P329,297.21

Total P356,699.67

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

Estate tax P16,246.04

5% surcharge 411.29

Delinquency
interest 11,868.90

Compromise
No notice of death P15.00
Late payment 40.00            55.00

28
 Total P28,581.23

Inheritance Tax P38,178.12

5% surcharge 1,105.86

Delinquency
interest 28,808.75

Compromise for late payment            50.00

Total P69,142.73

Total estate and inheritance

taxes P97,723.96

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

In view of the demise of Jose S. Yusay, said assessment was sent to his widow, Mrs. Florencia
Piccio Vda. de Yusay, who succeeded him in the administration of the estate of Matias Yusay.

No payment having been made despite repeated demands, the Commissioner of Internal
Revenue filed a proof of claim for the estate and inheritance taxes due and a motion for its
allowance with the settlement court in voting priority of lien pursuant to Section 315 of the Tax
Code.

On June 1, 1959, Lilia Yusay, through her counsel, Ramon Gonzales, filed an answer to the
proof of claim alleging non-receipt of the assessment of February 13, 1958, the existence of two
administrators, namely Florencia Piccio Vda. de Yusay who administered two-thirds of the
estate, and Lilia Yusay, who administered the remaining one-third, and her willingness to pay
the taxes corresponding to her share, and praying for deferment of the resolution on the motion
for the payment of taxes until after a new assessment corresponding to her share was issued.

On November 17, 1959 Lilia Yusay disputed the legality of the assessment dated February 13,
1958. She claimed that the right to make the same had prescribed inasmuch as more than five
years had elapsed since the filing of the estate and inheritance tax return on May 11, 1949. She
therefore requested that the assessment be declared invalid and without force and effect. This
request was rejected by the Commissioner in his letter dates January 20, 1960, received by Lilia
Yusay on March 14, 1960, for the reasons, namely, (1) that the right to assess the taxes in
question has not been lost by prescription since the return which did not name the heirs cannot
be considered a true and complete return sufficient to start the running of the period of
limitations of five years under Section 331 of the Tax Code and pursuant to Section 332 of the
same Code he has ten years within which to make the assessment counted from the discovery
on September 24, 1953 of the identity of the heirs; and (2) that the estate's administrator waived
the defense of prescription when he filed a surety bond on March 3, 1955 to guarantee payment
of the taxes in question and when he requested postponement of the payment of the taxes
pending determination of who the heirs are by the settlement court.

On April 13, 1960 Lilia Yusay filed a petition for review in the Court of Tax Appeals assailing the
legality of the assessment dated February 13, 1958. After hearing the parties, said Court
declared the right of the Commissioner of Internal Revenue to assess the estate and inheritance
taxes in question to have prescribed and rendered the following judgment:

WHEREFORE, the decision of respondent assessing against the estate of the late Matias
Yusay estate and inheritance taxes is hereby reversed. No costs.

The Commissioner of Internal Revenue appealed to this Court and raises the following issues:

29
1. Was the petition for review in the Court of Tax Appeals within the 30-day period provided for
in Section 11 of Republic Act 1125?

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

3. Has the right of the Commissioner of Internal Revenue to assess the estate and inheritance
taxes in question prescribed?

On November 17, 1959 Lilia Yusay disputed the legality of the assessment of February 13,
1958. On March 14, 1960 she received the decision of the Commissioner of Internal Revenue
on the disputed assessment. On April 13, 1960 she filed her petition for review in the Court of
Tax Appeals. Said Court correctly held that the appeal was seasonably interposed pursuant to
Section 11 of Republic Act 1125. We already ruled in St. Stephen's Association v. Collector of
Internal Revenue,1 that the counting of the thirty days within which to institute an appeal in the
Court of Tax Appeals should commence from the date of receipt of the decision of the
Commissioner on the disputed assessment, not from the date the assessment was issued.

Accordingly, the thirty-day period should begin running from March 14, 1960, the date Lilia
Yusay received the appealable decision. From said date to April 13, 1960, when she filed her
appeal in the Court of Tax Appeals, is exactly thirty days. Hence, the appeal was timely.

Next, the Commissioner attacks the jurisdiction of the Court of Tax Appeals to take cognizance
of Lilia Yusay's appeal on the ground of lis pendens. He maintains that the pendency of his
motion for allowance of claim and for order of payment of taxes in the Court of First Instance of
Iloilo would preclude the Court of Tax Appeals from acquiring jurisdiction over Lilia Yusay's
appeal. This contention lacks merit.

Lilia Yusay's cause seeks to resist the legality of the assessment in question. Should she
maintain it in the settlement court or should she elevate her cause to the Court of Tax Appeals?
We say, she acted correctly by appealing to the latter court. An action involving a disputed
assessment for internal revenue taxes falls within the exclusive jurisdiction of the Court of Tax
Appeals.2 It is in that forum, to the exclusion of the Court of First Instance,3where she could
ventilate her defenses against the assessment.

Moreover, the settlement court, where the Commissioner would wish Lilia Yusay to contest the
assessment, is of limited jurisdiction. And under the Rules,4 its authority relates only to matters
having to do with the settlement of estates and probate of wills of deceased persons.5 Said court
has no jurisdiction to adjudicate the contentions in question, which — assuming they do not
come exclusively under the Tax Court's cognizance — must be submitted to the Court of First
Instance in the exercise of its general jurisdiction.6

We now come to the issue of prescription. Lilia Yusay claims that since the latest assessment
was issued only on February 13, 1958 or eight years, nine months and two days from the filing
of the estate and inheritance tax return, the Commissioner's right to make it has expired. She
would rest her stand on Section 331 of the Tax Code which limits the right of the Commissioner
to assess the tax within five years from the filing of the return.

The Commissioner claims that fraud attended the filing of the return; that this being so, Section
332(a) of the Tax Code would apply.7 It may be well to note that the assessment letter itself
(Exhibit 22) did not impute fraud in the return with intent to evade payment of tax. Precisely, no
surcharge for fraud was imposed. In his answer to the petition for review filed by Lilia Yusay in
the Court of Tax Appeals, the Commissioner alleged no fraud. Instead, he broached the
insufficiency of the return as barring the commencement of the running of the statute of
limitations. He raised the point of fraud for the first time in the proceedings, only in his
memorandum filed with the Tax Court subsequent to resting his case. Said Court rejected the

30
plea of fraud for lack of allegation and proof, and ruled that the return, although not accurate,
was sufficient to start the period of prescription.

Fraud is a question of fact.8 The circumstances constituting it must be alleged and proved in the
court below.9 And the finding of said court as to its existence and non-existence is final unless
clearly shown to be erroneous.10 As the court a quo found that no fraud was alleged and proved
therein, We see no reason to entertain the Commissioner's assertion that the return was
fraudulent.

The conclusion, however, that the return filed by Jose S. Yusay was sufficient to commence the
running of the prescriptive period under Section 331 of the Tax Code rests on no solid ground.

Paragraph (a) of Section 93 of the Tax Code lists the requirements of a valid return. It states:

(a) Requirements.—In all cases of inheritance or transfers subject to either the estate tax
or the inheritance tax, or both, or where, though exempt from both taxes, the gross value
of the estate exceeds three thousand pesos, the executor, administrator, or anyone of the
heirs, as the case may be, shall file a return under oath in duplicate, setting forth (1) the
value of the gross estate of the decedent at the time of his death, or, in case of a
nonresident not a citizen of the Philippines ; (2) the deductions allowed from gross estate
in determining net estate as defined in section eighty-nine; (3) such part of such
information as may at the time be ascertainable and such supplemental data as may be
necessary to establish the correct taxes.

A return need not be complete in all particulars. It is sufficient if it complies substantially with the
law. There is substantial compliance (1) when the return is made in good faith and is not false or
fraudulent; (2) when it covers the entire period involved; and (3) when it contains information as
to the various items of income, deduction and credit with such definiteness as to permit the
computation and assessment of the tax.11

There is no question that the state and inheritance tax return filed by Jose S. Yusay was
substantially defective.

First, it was incomplete. It declared only ninety-three parcels of land representing about 400
hectares and left out ninety-two parcels covering 503 hectares. Said huge under declaration
could not have been the result of an over-sight or mistake. As found in L-11378, supra note 7,
Jose S. Yusay very well knew of the existence of the ommited properties. Perhaps his motive in
under declaring the inventory of properties attached to the return was to deprive Lilia Yusay
from inheriting her legal share in the hereditary estate, but certainly not because he honestly
believed that they did not form part of the gross estate.

Second, the return mentioned no heir. Thus, no inheritance tax could be assessed. As a matter
of law, on the basis of the return, there would be no occasion for the imposition of estate and
inheritance taxes. When there is no heir - the return showed none - the intestate estate is
escheated to the State.12 The State taxes not itself.

In a case where the return was made on the wrong form, the Supreme Court of the United
States held that the filing thereof did not start the running of the period of limitations. 13 The
reason is that the return submitted did not contain the necessary information required in the
correct form. In this jurisdiction, however, the Supreme Court refrained from applying the said
ruling of the United States Supreme Court in Collector of Internal Revenue v. Central Azucarera
de Tarlac, L-11760-61, July 31, 1958, on the ground that the return was complete in itself
although inaccurate. To our mind, it would not make much difference where a return is made on
the correct form prescribed by the Bureau of Internal Revenue if the data therein required are
not supplied by the taxpayer. Just the same, the necessary information for the assessment of
the tax would be missing.

The return filed in this case was so deficient that it prevented the Commissioner from computing
the taxes due on the estate. It was as though no return was made. The Commissioner had to

31
determine and assess the taxes on data obtained, not from the return, but from other sources.
We therefore hold the view that the return in question was no return at all as required in Section
93 of the Tax Code.

The law imposes upon the taxpayer the burden of supplying by the return the information upon
which an assessment would be based.14 His duty complied with, the taxpayer is not bound to do
anything more than to wait for the Commissioner to assess the tax. However, he is not required
to wait forever. Section 331 of the Tax Code gives the Commissioner five years within which to
make his assessment.15 Except, of course, if the taxpayer failed to observe the law, in which
case Section 332 of the same Code grants the Commissioner a longer period. Non-observance
consists in filing a false or fraudulent return with intent to evade the tax or in filing no return at
all.

Accordingly, for purposes of determining whether or not the Commissioner's assessment of

February 13, 1958 is barred by prescription, Section 332(a) which is an exception to Section
331 of the Tax Code finds application.16 We quote Section 332(a):

SEC. 332. Exceptions as to period of limitation of assessment and collection of taxes.—

(a) In the case of a false or fraudulent return with intent to evade tax or of a failure to file
a return, the tax may be assessed, or a proceeding in court for the collection of such tax
may be begun without assessment, at any time within ten years after the discovery of the
falsity, fraud or omission.

As stated, the Commissioner came to know of the identity of the heirs on September 24, 1953
and the huge underdeclaration in the gross estate on July 12, 1957. From the latter date,
Section 94 of the Tax Code obligated him to make a return or amend one already filed based on
his own knowledge and information obtained through testimony or otherwise, and subsequently
to assess thereon the taxes due. The running of the period of limitations under Section 332(a) of
the Tax Code should therefore be reckoned from said date for, as aforesaid, it is from that time
that the Commissioner was expected by law to make his return and assess the tax due thereon.
From July 12, 1957 to February 13, 1958, the date of the assessment now in dispute, less than
ten years have elapsed. Hence, prescription did not abate the Commissioner's right to issue
said assessment.

Anent the Commissioner's contention that Lilia Yusay is estopped from raising the defense of
prescription because she failed to raise the same in her answer to the motion for allowance of
claim and for the payment of taxes filed in the settlement court (Court of First Instance of Iloilo),
suffice it to state that it would be unjust to the taxpayer if We were to sustain such a view. The
Court of First Instance acting as a settlement court is not the proper tribunal to pass upon such
defense, therefore it would be but futile to raise it therein. Moreover, the Tax Code does not bar
the right to contest the legality of the tax after a taxpayer pays it. Under Section 306 thereof, he
can pay the tax and claim a refund therefor. A fortiori his willingness to pay the tax is no waiver
to raise defenses against the tax's legality.

WHEREFORE, the judgment appealed from is set aside and another entered affirming the
assessment of the Commissioner of Internal Revenue dated February 13, 1958. Lilia Yusay
Gonzales, as administratrix of the intestate estate of Matias Yusay, is hereby ordered to pay the
sums of P16,246.04 and P39,178.12 as estate and inheritance taxes, respectively, plus interest
and surcharge for delinquency in accordance with Section 101 of the National Internal Revenue
Code, without prejudice to reimbursement from her co-administratrix, Florencia Piccio Vda. de
Yusay for the latter's corresponding tax liability. No costs. So ordered.

Concepcion, C.J., Reyes, J.B.L., Barrera, Dizon, Regala, Makalintal, Sanchez and Castro,
JJ., concur.
Zaldivar, J., took no part.

RESOLUTION

32
April 24, 1967

BENGZON, J.P., J.:

Respondent Lilia Yusay Gonzales seeks reconsideration of our decision holding her liable for
the payment of P97,723.96 as estate and inheritance taxes plus delinquency penalties as
administratrix of the intestate estate of Matias Yusay. The grounds raised by her deserve this
extended resolution.

Firstly, movant maintains that the issue of whether or not the estate and inheritance tax return
filed by Jose Yusay on May 13, 1949 was sufficient to start the running of the statute of
limitations on assessment, was neither raised in the Court of Tax Appeals nor assigned as error
before this Court. The records in the Court of Tax Appeals however show the contrary.
Paragraph 2 of the answer filed by the Commissioner of Internal Revenue states:

2. That he likewise admits, as alleged in paragraph 1 thereof having received the letter of
the petitioner dated November 27, 1959 (Annex "A" of the Petition for Review), contesting
the assessment of estate and inheritance taxes levied against the Intestate Estate of the
late Matias Yusay, Special Proceedings No. 459, Court of First Instance of Iloilo, on the
ground that the said assessment has already prescribed, but specifically denies the
allegation that the assessment have already prescribed, the truth of the matter being that
the returns filed on May 11, 1949 cannot be considered as a true, and complete return
sufficient to start the running of the period of five (5) years prescribed in Sec. 331 of the
Tax Code;

This point was discussed in the memorandum of the Commissioner of Internal Revenue, thus:

In the estate and inheritance tax return filed by Jose S. Yusay (Exhibits B & 1, pp. 14-20,
B.I.R. records) the net value of the estate of the deceased was claimed to be
P203,354.00 and no inheritance tax was shown as the heirs were not indicated. In the
final computation of the estate by an examiner of the respondent, the net estate was
found to be worth P410,518.38 (p. 105, B.I.R. records) or about more than twice the
original amount declared in the return. In the subsequent investigation of this case, it was
also determined that the heirs of the deceased were Jose S. Yusay, a legitimate son, and
Lilia Yusay, an acknowledged natural child, (petitioner herein).

Under the circumstances, we believe the return filed on May 11, 1949 was false or
fraudulent in the sense that the value of the properties were underdeclared and that the
said return was also incomplete as the heirs to the estate were not specified. Inasmuch
as the respondent was not furnished adequate data upon which to base an assessment,
the said return cannot be considered a true and complete return sufficient to start the
running of the period of limitations of five (5) years prescribed in Section 331 of the Tax
Code.

In the lower court the defense of the Commissioner of Internal Revenue against Lilia Yusay
Gonzales' plea of prescription, centered on the insufficiency and fraudulence or falsity of the
return filed by Jose Yusay. The Court of Tax Appeals overruled the Commissioner of Internal
Revenue. Said the Tax Code:

The provision of Section 332(a) of the Tax Code cannot be invoked in this case as it was
neither alleged in respondent's answer, nor proved during the hearing that the return was
false or fraudulent with intent to evade the payment of tax. Moreover, the failure of
respondent to charge fraud and impose the penalty thereof in the assessments made in
1953, 1955 and 1956 is an eloquent demonstration that the filing of petitioner's transfer
tax return was not attended by falsity or fraud with intent to evade tax.

xxx           xxx           xxx

33
 But respondent urges upon us that the filing of the return did not start the running of the
five (5) year period for the reason that the return did not disclose the heirs of the
deceased Matias Yusay, and contained inadequate data regarding the value of the
estate. We believe that these mere omissions do not require additional returns for the
same. Altho incomplete for being deficient on these matters, the return cannot be
regarded as a case of failure to file a return where want of good faith and intent to evade
the tax on the part of petitioner are not charged. It served as a sufficient notice to the
Commissioner of Internal Revenue to make his assessment and start the running, of the
period of limitation. In this connection, it must be borne in mind that the Commissioner is
not confined to the taxpayer's return in making assessment of the tax, and for this
purpose he may secure additional information from other sources. As was done in the
case at bar, he sends investigators to examine the taxpayer's records and other pertinent
data. His assessment is based upon the facts uncovered by the investigation (Collector
vs. Central Azucarera de Tarlac, G.R. Nos. L-11760 and L-11761, July 31, 1958).

Furthermore, the failure to state the heirs in the return can be attributed to the then
unsettled conflict raging before the probate court as to who are the heirs of the estate.
Such failure could not have been a deliberate attempt to mislead the government in the
assessment of the correct taxes.

In his appeal, the Commissioner of Internal Revenue assigned as third error of the Court of Tax
Appeals the finding that the assessment in question was "made beyond the five-year statutory
period provided in Section 332 (a) of the Tax Code," and that the right of the Commissioner of
Internal Revenue to assess the estate and inheritance taxes has already prescribed. To sustain
his side, the Commissioner ventilated in his brief, fraud in the filing of the return, absence of
certain data from the return which prevented him from assessing thereon the tax due and the
pendency in this Court of L-11374 entitled "Intestate Estate of the late Matias Yusay, Jose C.
Yusay, Administrator vs. Lilia Yusay Gonzales" which allegedly had the effect of suspending the
running of the period of limitations on assessment.

Clearly, therefore, it would be incorrect to say that the question of whether or not the return filed
by Jose Yusay was sufficient to start the running of the statute of limitations to assess the
corresponding tax, was not raised by the Commissioner in the Court of Tax Appeals and in this
Court.

Second. Movant contend that contrary to Our ruling, the return filed by Jose Yusay was
sufficient to start the statute of limitations on assessment. Inasmuch as this question was amply
discussed in Our decision sought to be reconsidered, and no new argument was advanced, We
deem it unnecessary to pass upon the same. There is no reason for any change on Our stand
on this point.

Third. Movant insists that since she administers only one-third of the estate of Matias Yusay,
she should not be liable for the whole tax. And she suggests that We hold the intestate estate of
Matias Yusay liable for said taxes, one-third to be paid by Lilia Yusay Gonzales and two-thirds
to be paid by Florencia P. Vda. de Yusay.

The foregoing suggestion to require payment of two-thirds of the total taxes by Florencia P. Vda.
de Yusay is not acceptable, for she (Florencia P. Vda. de Yusay) is not a party in this case.

It should be pointed out that Lilia Yusay Gonzales appealed the whole assessment to the Court
of Tax Appeals. Thereupon, the Commissioner of Internal Revenue questioned her legal
capacity to institute the appeal on the ground that she administered only one-third of the estate
of Matias Yusay. In opposition, she espoused the view, which was sustained by the Tax Court,
that in co-administration, the administratrices are regarded as one person and the acts of one of
them in relation to the regular administration of the estate are deemed to be the acts of all;
hence, each administratrix can represent the whole estate. In advancing such proposition, Lilia
Yusay Gonzales represented the whole estate and hoped to benefit from the favorable outcome
of the case. For the same reason that she represented her co-administratrix and the whole

34
estate of Matias Yusay, she risked being ordered to pay the whole assessment, should the
assessment be sustained.

Her change of stand adopted in the motion for reconsideration to the effect that she should be
made liable for only one-third of the total tax, would negate her aforesaid proposition before the
Court of Tax Appeals. She is now estopped from denying liability for the whole tax.

At any rate, estate and inheritance taxes are satisfied from the estate and are to be paid by the
executor or administrator.1 Where there are two or more executors, all of them are severally
liable for the payment of the estate tax.2 The inheritance tax, although charged against the
account of each beneficiary, should be paid by the executor or administrator.3 Failure to pay the
estate and inheritance taxes before distribution of the estate would subject the executor or
administrator to criminal liability under Section 107(c) of the Tax Code.

It is immaterial therefore that Lilia Yusay Gonzales administers only one-third of the estate and
will receive as her share only said portion, for her right to the estate comes after taxes. 4 As an
administratrix, she is liable for the entire estate tax. As an heir, she is liable for the entire
inheritance tax although her liability would not exceed the amount of her share in the
estate.5 The entire inheritance tax which amounts to P39,178.12 excluding penalties is obviously
much less than her distributive share.

Motion for reconsideration denied.

Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal, Sanchez and Castro, JJ., concur.
Zaldivar, J., took no part.

B. DONOR’S TAX

GENERAL PRINCIPLES & DETERMINATION OF THE DONOR’S TAX

#1

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, 20131 and January 21, 2014, which dismissed outright the
petitioner's appeal from the Secretary of Finance's review of BIR Ruling No. 015-12 2 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

35
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 ruling 4 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 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

36
(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.7Respondent Commissioner likewise held that BIR Ruling [DA-(DT-
065) 715-09], 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.

SO ORDERED.

37
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

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

38
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;

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––

39
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 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

40
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 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,

41
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 the Constitution or by law and cannot

42
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

43
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.

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.

44
#3

[G.R. No. 111904. October 5, 2000]

SPS. AGRIPINO GESTOPA and ISABEL SILARIO GESTOPA, petitioners, vs. COURT OF
APPEALS and MERCEDES DANLAG y PILAPIL, respondents.

DECISION
QUISUMBING, J.:

This petition for review,[1] under Rule 45 of the Rules of Court, assails the decision[2]of the
Court of Appeals dated August 31, 1993, in CA-G.R. CV No. 38266, which reversed the
judgment[3] of the Regional Trial Court of Cebu City, Branch 5.
The facts, as culled from the records, are as follows:
Spouses Diego and Catalina Danlag were the owners of six parcels of unregistered
lands. They executed three deeds of donation mortis causa, two of which are dated March 4,
1965 and another dated October 13, 1966, in favor of private respondent Mercedes Danlag-
Pilapil.[4] The first deed pertained to parcels 1 & 2 with Tax Declaration Nos. 11345 and 11347,
respectively. The second deed pertained to parcel 3, with TD No. 018613. The last deed
pertained to parcel 4 with TD No. 016821. All deeds contained the reservation of the rights of
the donors (1) to amend, cancel or revoke the donation during their lifetime, and (2) to sell,
mortgage, or encumber the properties donated during the donors' lifetime, if deemed necessary.
On January 16, 1973, Diego Danlag, with the consent of his wife, Catalina Danlag, executed
a deed of donation inter vivos[5] covering the aforementioned parcels of land plus two other
parcels with TD Nos. 11351 and 11343, respectively, again in favor of private respondent
Mercedes. This contained two conditions, that (1) the Danlag spouses shall continue to enjoy
the fruits of the land during their lifetime, and that (2) the donee can not sell or dispose of the
land during the lifetime of the said spouses, without their prior consent and approval. Mercedes
caused the transfer of the parcels' tax declaration to her name and paid the taxes on them.
On June 28, 1979 and August 21, 1979, Diego and Catalina Danlag sold parcels 3 and 4 to
herein petitioners, Mr. and Mrs. Agripino Gestopa. On September 29, 1979, the Danlags
executed a deed of revocation[6]recovering the six parcels of land subject of the aforecited deed
of donation inter vivos.
On March 1, 1983, Mercedes Pilapil (herein private respondent) filed with the RTC a petition
against the Gestopas and the Danlags, for quieting of title[7] over the above parcels of land.She
alleged that she was an illegitimate daughter of Diego Danlag; that she lived and rendered
incalculable beneficial services to Diego and his mother, Maura Danlag, when the latter was still
alive. In recognition of the services she rendered, Diego executed a Deed of Donation on March
20, 1973, conveying to her the six (6) parcels of land. She accepted the donation in the same
instrument, openly and publicly exercised rights of ownership over the donated properties, and
caused the transfer of the tax declarations to her name. Through machination, intimidation and
undue influence, Diego persuaded the husband of Mercedes, Eulalio Pilapil, to buy two of the
six parcels covered by the deed of donation. Said donation inter vivos was coupled with
conditions and, according to Mercedes, since its perfection, she had complied with all of them;
that she had not been guilty of any act of ingratitude; and that respondent Diego had no legal
basis in revoking the subject donation and then in selling the two parcels of land to the
Gestopas.
In their opposition, the Gestopas and the Danlags averred that the deed of donation dated
January 16, 1973 was null and void because it was obtained by Mercedes through machinations
and undue influence. Even assuming it was validly executed, the intention was for the donation
to take effect upon the death of the donor. Further, the donation was void for it left the donor,
Diego Danlag, without any property at all.
On December 27, 1991, the trial court rendered its decision, thus:

"WHEREFORE, the foregoing considered, the Court hereby renders judgment in favor of the
defendants and against the plaintiff:

45
 1. Declaring the Donations Mortis Causa and Inter Vivos as revoked, and, therefore,
has (sic) no legal effect and force of law.
2. Declaring Diego Danlag the absolute and exclusive owner of the six (6) parcels of
land mentioned in the Deed of revocation (Exh. P-plaintiff, Exh. 6-defendant Diego
Danlag).
3. Declaring the Deeds of Sale executed by Diego Danlag in favor of spouses Agripino
Gestopa and Isabel Gestopa dated June 28, 1979 (Exh. S-plaintiff; Exh. 18-
defendant); Deed of Sale dated December 18, 1979 (Exh. T plaintiff; Exh. 9-
defendant); Deed of Sale dated September 14, 1979 (Exh. 8); Deed of Sale dated
June 30, 1975 (Exh. U); Deed of Sale dated March 13, 1978 (Exh. X) as valid and
enforceable duly executed in accordance with the formalities required by law.
4. Ordering all tax declaration issued in the name of Mercedes Danlag Y Pilapil covering
the parcel of land donated cancelled and further restoring all the tax declarations
previously cancelled, except parcels nos. 1 and 5 described, in the Deed of Donation
Inter Vivos (Exh. "1") and Deed of Sale (Exh. "2") executed by defendant in favor of
plaintiff and her husband.
[5.] With respect to the contract of sale of abovestated parcels of land, vendor Diego
Danlag and spouse or their estate have the alternative remedies of demanding the
balance of the agreed price with legal interest, or rescission of the contract of sale.

SO ORDERED."[8]

In rendering the above decision, the trial court found that the reservation clause in all the
deeds of donation indicated that Diego Danlag did not make any donation; that the purchase by
Mercedes of the two parcels of land covered by the Deed of Donation Inter Vivos bolstered this
conclusion; that Mercedes failed to rebut the allegations of ingratitude she committed against
Diego Danlag; and that Mercedes committed fraud and machination in preparing all the deeds of
donation without explaining to Diego Danlag their contents.
Mercedes appealed to the Court of Appeals and argued that the trial court erred in (1)
declaring the donation dated January 16, 1973 as mortis causa and that the same was already
revoked on the ground of ingratitude; (2) finding that Mercedes purchased from Diego Danlag
the two parcels of land already covered by the above donation and that she was only able to
pay three thousand pesos, out of the total amount of twenty thousand pesos; (3) failing to
declare that Mercedes was an acknowledged natural child of Diego Danlag.
On August 31, 1993, the appellate court reversed the trial court. It ruled:

"PREMISES CONSIDERED, the decision appealed from is REVERSED and a new judgment is
hereby rendered as follows:

1. Declaring the deed of donation inter vivos dated January 16, 1973 as not having been
revoked and consequently the same remains in full force and effect;

2. Declaring the Revocation of Donation dated June 4, 1979 to be null and void and therefore of
no force and effect;

3. Declaring Mercedes Danlag Pilapil as the absolute and exclusive owner of the six (6) parcels
of land specified in the above-cited deed of donation inter vivos;

4. Declaring the Deed of Sale executed by Diego Danlag in favor of spouses Agripino and Isabel
Gestopa dated June 28, 1979 (Exhibits S and 18), Deed of Sale dated December 18, 1979
(Exhibits T and 19), Deed of Sale dated September 14, 1979 (Exhibit 8), Deed of Sale dated
June 30, 1975 (Exhibit U), Deed of Sale dated March 13, 1978 (Exhibit X) as well as the Deed
of Sale in favor of Eulalio Danlag dated December 27, 1978 (Exhibit 2) not to have been validly
executed;

46
5. Declaring the above-mentioned deeds of sale to be null and void and therefore of no force
and effect;

6. Ordering spouses Agripino Gestopa and Isabel Silerio Gestopa to reconvey within thirty (30)
days from the finality of the instant judgment to Mercedes Danlag Pilapil the parcels of land
above-specified, regarding which titles have been subsequently fraudulently secured, namely
those covered by O.C.T. T-17836 and O.C.T. No. 17523.

7. Failing to do so, ordering the Branch Clerk of Court of the Regional Trial Court (Branch V) at
Cebu City to effect such reconveyance of the parcels of land covered by O.C.T. T-17836 and
17523.

SO ORDERED."[9]

The Court of Appeals held that the reservation by the donor of lifetime usufruct indicated
that he transferred to Mercedes the ownership over the donated properties; that the right to sell
belonged to the donee, and the donor's right referred to that of merely giving consent; that the
donor changed his intention by donating inter vivos properties already donated mortis causa;
that the transfer to Mercedes' name of the tax declarations pertaining to the donated properties
implied that the donation was inter vivos; and that Mercedes did not purchase two of the six
parcels of land donated to her.
Hence, this instant petition for review filed by the Gestopa spouses, asserting that:

"THE HONORABLE COURT OF APPEALS, TWELFTH DIVISION, HAS GRAVELY ERRED IN

REVERSING THE DECISION OF THE COURT A QUO."[10]

Before us, petitioners allege that the appellate court overlooked the fact that the donor did
not only reserve the right to enjoy the fruits of the properties, but also prohibited the donee from
selling or disposing the land without the consent and approval of the Danlag spouses. This
implied that the donor still had control and ownership over the donated properties. Hence, the
donation was post mortem.
Crucial in resolving whether the donation was inter vivos or mortis causa is the
determination of whether the donor intended to transfer the ownership over the properties upon
the execution of the deed.[11]
In ascertaining the intention of the donor, all of the deed's provisions must be read together.
[12]
 The deed of donation dated January 16, 1973, in favor of Mercedes contained the following:

"That for and in consideration of the love and affection which the Donor inspires in the Donee
and as an act of liberality and generosity, the Donor hereby gives, donates, transfer and
conveys by way of donation unto the herein Donee, her heirs, assigns and successors, the
above-described parcels of land;

That it is the condition of this donation that the Donor shall continue to enjoy all the fruits of the
land during his lifetime and that of his spouse and that the donee cannot sell or otherwise,
dispose of the lands without the prior consent and approval by the Donor and her spouse during
their lifetime.

xxx

That for the same purpose as hereinbefore stated, the Donor further states that he has reserved
for himself sufficient properties in full ownership or in usufruct enough for his maintenance of a
decent livelihood in consonance with his standing in society.

That the Donee hereby accepts the donation and expresses her thanks and gratitude for the
kindness and generosity of the Donor."[13]

47
Note first that the granting clause shows that Diego donated the properties out of love and
affection for the donee. This is a mark of a donation inter vivos.[14] Second, the reservation of
lifetime usufruct indicates that the donor intended to transfer the naked ownership over the
properties. As correctly posed by the Court of Appeals, what was the need for such reservation
if the donor and his spouse remained the owners of the properties? Third, the donor reserved
sufficient properties for his maintenance in accordance with his standing in society, indicating
that the donor intended to part with the six parcels of land. [15] Lastly, the donee accepted the
donation. In the case of Alejandro vs. Geraldez, 78 SCRA 245 (1977), we said that an
acceptance clause is a mark that the donation is inter vivos. Acceptance is a requirement for
donations inter vivos. Donations mortis causa, being in the form of a will, are not required to be
accepted by the donees during the donors' lifetime.
Consequently, the Court of Appeals did not err in concluding that the right to dispose of the
properties belonged to the donee. The donor's right to give consent was merely intended to
protect his usufructuary interests. In Alejandro, we ruled that a limitation on the right to sell
during the donors' lifetime implied that ownership had passed to the donees and donation was
already effective during the donors' lifetime.
The attending circumstances in the execution of the subject donation also demonstrated the
real intent of the donor to transfer the ownership over the subject properties upon its execution.
[16]
 Prior to the execution of donation inter vivos, the Danlag spouses already executed three
donations mortis causa. As correctly observed by the Court of Appeals, the Danlag spouses
were aware of the difference between the two donations. If they did not intend to donate inter
vivos, they would not again donate the four lots already donated mortis causa.Petitioners'
counter argument that this proposition was erroneous because six years after, the spouses
changed their intention with the deed of revocation, is not only disingenious but also
fallacious. Petitioners cannot use the deed of revocation to show the spouses' intent because its
validity is one of the issues in this case.
Petitioners aver that Mercedes' tax declarations in her name can not be a basis in
determining the donor's intent. They claim that it is easy to get tax declarations from the
government offices such that tax declarations are not considered proofs of ownership. However,
unless proven otherwise, there is a presumption of regularity in the performance of official
duties.[17] We find that petitioners did not overcome this presumption of regularity in the issuance
of the tax declarations. We also note that the Court of Appeals did not refer to the tax
declarations as proofs of ownership but only as evidence of the intent by the donor to transfer
ownership.
Petitioners assert that since private respondent purchased two of the six parcels of land
from the donor, she herself did not believe the donation was inter vivos. As aptly noted by the
Court of Appeals, however, it was private respondent's husband who purchased the two parcels
of land.
As a rule, a finding of fact by the appellate court, especially when it is supported by
evidence on record, is binding on us.[18] On the alleged purchase by her husband of two parcels,
it is reasonable to infer that the purchase was without private respondent's consent. Purchase
by her husband would make the properties conjugal to her own disadvantage. That the
purchase is against her self-interest, weighs strongly in her favor and gives credence to her
claim that her husband was manipulated and unduly influenced to make the purchase, in the
first place.
Was the revocation valid? A valid donation, once accepted, becomes irrevocable, except on
account of officiousness, failure by the donee to comply with the charges imposed in the
donation, or ingratitude.[19] The donor-spouses did not invoke any of these reasons in the deed
of revocation. The deed merely stated:

"WHEREAS, while the said donation was a donation Inter Vivos, our intention thereof is that of
Mortis Causa so as we could be sure that in case of our death, the above-described properties
will be inherited and/or succeeded by Mercedes Danlag de Pilapil; and that said intention is
clearly shown in paragraph 3 of said donation to the effect that the Donee cannot dispose and/or
sell the properties donated during our life-time, and that we are the one enjoying all the fruits
thereof."[20]

48
 Petitioners cited Mercedes' vehemence in prohibiting the donor to gather coconut trees and
her filing of instant petition for quieting of title. There is nothing on record, however, showing that
private respondent prohibited the donors from gathering coconuts. Even assuming that
Mercedes prevented the donor from gathering coconuts, this could hardly be considered an act
covered by Article 765 of the Civil Code.[21] Nor does this Article cover respondent's filing of the
petition for quieting of title, where she merely asserted what she believed was her right under
the law.
Finally, the records do not show that the donor-spouses instituted any action to revoke the
donation in accordance with Article 769 of the Civil Code. [22] Consequently, the supposed
revocation on September 29, 1979, had no legal effect.
WHEREFORE, the instant petition for review is DENIED. The assailed decision of the Court
of Appeals dated August 31, 1993, is AFFIRMED.
Costs against petitioners.
SO ORDERED.

#4

G.R. No. L-5949           November 19, 1955

TANG HO, WILLIAM LEE, HENRI LEE, SOFIA LEE TEEHANKEE, THOMAS LEE, ANTHONY
LEE, JULIA LEE KAW, CHARLES LEE, VALERIANA LEE YU, VICTOR LEE, SILVINO LEE,
MARY LEE, JOHN LEE, and PETER LEE, for themselves and as heirs of LI SENG GIAP,
deceased, petitioners, 
vs.
THE BOARD OF TAX APPEALS and THE COLLECTOR OF INTERNAL
REVENUE, respondents.

Ozaeta, Roxas, Lichauco and Picazo for petitioners.

Office of the Solicitor General Juan R. Liwag and Solicitor Jose P. Alejandro for respondents.

REYES, J.B.L., J.:

This is a petition for the review of the petition of the defunct Board of Tax Appeals holding
petitioner Li Seng Giap, et al. liable for gift taxes in accordance with the assessments made by
the respondent Collector of Internal Revenue.

Petitioners Li Seng Giap (who died during the pendency of this appeal) and his wife Tang Ho
and their thirteen children appear to be the stockholder of two close family corporations named
Li Seng Giap & Sons, Inc. and Li Seng Giap & Co. On or about May, 1951, examiners of the
Bureau of Internal Revenue, then detailed to the Allas Committee of the Congress of the
Philippines, made an examination of the books of the two corporation aforementioned and found
that each of Li Seng Giap's 13 children had a total investment therein of approximately
P63,195.00, in shares issued to them by their father Li Seng Giap (who was the manager and
controlling stockholder of the two corporations) in the years 1940, 1942, 1948, 1949, and 1950
in the following amounts:

Donees 1940 1942 1948 1949 1950

William Lee 7,500 12,500 6,750 27,940 7,500

Henry Lee 7,500 12,500 6,750 27,940 7,500

Sofia Lee 7,500 12,500 16,500 26,690

Thomas 7,500 12,500 7,500 28,190 7,500

49
 Lee

Anthony 18,000 7,500 28,190 7,500

Lee

Julia Lee 20,000 15,000 25,690 2,500

Charles Lee 20,000 7,500 60,690 7,500

Valeriana 63,190 2,500

Lee

Victor Lee 63,190

Silvino Lee 63,190

Mary Lee 63,190

John Lee 63,190

Peter Lee 63,190

The Collector of Internal Revenue regarded these transfers as undeclared gifts made in the
respective years, and assessed against Li Seng Giap and his children donor's and donee's
taxes in the total amount of P76,995.31, including penalties, surcharges, interests, and
compromise fee due to the delayed payment of the taxes. The petitioners paid the sum of
P53,434.50, representing the amount of the basic taxes, and put up a surety bond to guarantee
payment of the balance demanded. And on June 25, 1951, they requested the Collector of
Internal Revenue for a revision of their tax assessments, and submitted donor's and donee's gift
tax returns showing that each child received by way of gift inter vivos, every year from 1939 to
1950 (except in 1947 and 1948) P4,000 in cash; that each of the eight children who married
during the period aforesaid, were given an additional P20,000 as dowry or gift propter
nuptias; that the unmarried children received roughly equivalent amount in 1949, also by way of
gifts inter vivos, so that the total donations made to each and every child, as of 1950, stood at
P63,190. Appellants admit that these gifts were not reported; but contend that as the cash
donated came from the conjugal funds, they constituted individual donations by each of the
spouses Li Seng Giap and Tang Ho of one half of the amount received by the donees in each
instance, up to a total of P31,505 to each of the thirteen children from each parent. They further
alleged that the children's stockholding in the two family corporations were purchased by them
with savings from the aforesaid cash donations received from their parents.

Claiming the benefit of gift tax exemptions (under section 110 and 112 of the Internal Revenue
Code) at the rate of P2000 a year for each donation, plus P10,000 for each gift propter
nuptias made by either parent, and appellants' aggregate tax liability, according to their returns,
would only be P4,599.94 for the year 1949, and P228,28 for the year 1950, or a total of
P4,838.22, computed as follows:

DONORS 1939-44 1945-46 1949 1950 TOTAL

Li Seng Exempt Exempt P1,110.72 P74.14 P1,184.86

Giap

Tang Ho Exempt Exempt 1,110.72 74.14 1,184.86

Total None None P2,221.44 P148.28 P2,369.72

William Lee Exempt Exempt P253.80 P30.00 P283.80

Henry Lee Exempt Exempt Exempt 15.00 15.00

Sofia Lee Exempt Exempt P51.90 None 51.90

50
 Thomas Lee Exempt Exempt Exempt 15.00 15.00

Anthony Lee Exempt Exempt Exempt 15.00 15.00

Julia Lee Exempt Exempt 26.90 Exempt 26.90

Charles Lee Exempt Exempt Exempt 15.00 15.00

Valeriana Exempt Exempt 26.90 Exempt 26.90

Lee

Victor Lee Exempt Exempt 403.80 None 403.80

Silvino Lee Exempt Exempt 403.80 None 403.80

Mary Lee Exempt Exempt 403.80 None 403.80

John Lee Exempt Exempt 403.80 None 403.80

Peter Lee Exempt Exempt 403.80 None 403.80

Total None None P2,378.50 P90.00 P2,468.50

Grand total liability of Donors and P4,599.94 P238.28 P4,838.22

Donees

The Collector refused to revise his original assessments; and the petitioners appealed to the
then Board of Tax Appeals (created by Executive Order 401-A, in 1951) insisting that the entries
in the books of the corporation do not prove donations; that the true amount and date of the
donation were those appearing in their tax returns; and that the donees merely bought stocks in
the corporation out of savings made from the money received from their parents. The Board of
Tax Appeals upheld the decision of the respondent Collector of Internal Revenue; hence, this
petition for review.

The questions in this appeal may be summarized as follows:

(1) Whether or not the dates and amounts of the donations taxable against petitioners were as
found by the Collector of Internal Revenue from the books of the corporations Li Seng Giap &
Sons, Inc. and Li Seng Giap & Co., or as set forth in petitioners' gift tax returns;

(2) Whether or not the donations made by petitioner Li Seng Giap to his children from the
conjugal property should be taxed against the husband alone, or against husband and wife; and

(3) Whether or not petitioners should be allowed the tax deduction claimed by them.

On the first question, which is of fact the appellants take the preliminary stand that because of
Collector failed to specifically deny the allegation of their petition in the Tax Board he must be
deemed to have admitted the annual and propter nuptias donations alleged by them, and that
he is estopped from denying their existence. As the proceedings before the Tax Board were
administrative in character, not governed by the Rules of Court (see Sec. 10, Executive Order
401-A),and as the Collector actually submitted his own version of the transactions, we do not
consider that the Collector's failure to make specific denials should be given the same binding
effect as in strict court pleadings.

Going now to the merits of the issue. The appealed findings of the Board of Tax Appeals and of
the Collector of Internal Revenue (that the stock transfers from Li Seng Giap to his children were
donations) appear supported by the following circumstances:

(1) That the transferor Li Seng Giap (now deceased) had in fact conveyed shares to stock to his
13 children on the dates and in the amounts shown in the table on page 2 of this decision.

51
(2) That none of the transferees appeared to possess adequate independent means to buy the
shares, so much so that they claim now to have purchased the shares with the cash donations
made to them from time to time.

(3) That the total of the alleged cash donations to each child is practically identical to the value
of the shares supposedly purchased by each donee.

(4) That there is no evidence other than the belated sworn gift tax returns of the spouses Li
Seng Giap and Ang Tang Ho, and their children, appellants herein, to support their contention
that the shares were acquired by purchase. No contracts of sale or other documents were
presented, nor any witnesses introduced; not even the claimants themselves have testified.

(5) The claim that the shares were acquired by the children by purchase was first advanced only
after the assessment of gift taxes and penalties due thereon (in the sum of P76,995.31) had
been made, and after the appellants had paid P53,434.50 on account, and had filed a bond to
guarantee the balance.

(6) That for the parent to donate cash to enable the donee to buy from him shares of equivalent
value is, for all intents and purposes, a donation of such shares to the purchaser donee.

We cannot say, under the circumstances, that there is no sufficient evidence on record to
support the findings of the Tax Board that the stock transfers above indicated were made by
way of donation, as would entitle us to disregard or reverse the Board's finding.

The filing of the gift tax returns only after assessments and part payment of the taxes demanded
by the Collector, and the lack of corroboration of the alleged donations in cash, amply justify the
Tax Board's distrust of the veracity of the appellants' belated tax returns "on or before the first of
March following the close of the calendar year" when the gifts were made (Sec. 115, par. [c];
and besides the return a written notice to the Collector of each donation of P10,000 or more,
must be given within thirty days after the donation, Sec. 114). These yearly returns and notices
are evidently designed to enable the Collector to verify promptly their truth and correctness,
while the gifts are still recent and proof of the circumstances surrounding the making thereof is
still fresh and accessible. On their own admission, appellants failed to file for ten successive
years, the corresponding returns for the alleged yearly gifts of P4,000 to each child, and likewise
failed to give the notices for the P20,000 marriage gifts to each married child. Hence, they are
now scarcely in a position to complain if their contentions are not accepted as truthful without
satisfactory corroboration. Any other view would leave the collection of taxes at the mercy of
explanations concoctedex post facto by evading taxpayers, drafted to suit any facts disclosed
upon investigation, and safe from contradiction because the passing years have erased all trace
of the truth.

The second and third issues in this appeal revolve around appellants' thesis that inasmuch as
the property donated was community property (gananciales), and such property is jointly owned
by their parents, the total amount of the gifts made in each year should be divided between the
father and the mother, as separate donors, and should be taxed separately to each one of them.

In assessing the worth of this contention, it must be ever borne in mind that appellants have not
only failed to prove that the donations were actually made by both spouses, Li Seng Giap and
Tang Ho, but that precisely the contrary appears from their own evidence. In the original claim
for tax refund, filed with the Collector of Internal Revenue, under date of June 25, 1951 (copied
in pages 6 and 7 of the appellants' petition for review addressed to the Board of Tax Appeals),
the father, Li Seng Giap, describes himself as "the undersigned donor" (par. 1) and speaks of
"cash donations made by the undersigned" (par. 3), without in any way mentioning his wife as a
co-participant in the donation. The issue is thus reduced to the following: Is a donation of
community property by the father alone equivalent in law to a donation of one-half of its value by
the father and one-half by the mother? Appellants submit that all such donations of community
property are to be regarded, for tax purposes, as donations by both spouses, for which two
separate exemptions may be claimed in each instance, one for each spouse.

52
This presentation should be viewed in the light of the provisions of the Spanish Civil Code of
1889, which was the governing law in the years herein involved, 1939 to 1950. the determinative
rule is that of Arts. 1409 and 1415, reading as follows:

Art. 1409. The conjugal partnership shall also be chargeable with anything which may
have been given or promised by the husband to the children born of the marriage solely
in order to obtain employment for them or give them a profession, or by both spouses by
common consent, should they not have stipulated that such expenditures should be
borne in whole or in part by the separate property of one of them.

ART. 1415, p. 1. — The husband may dispone of the property of the conjugal partnership
for the purposes mentioned in Art. 1409.

In effect, these Articles clearly refute the appellants' theory that because the property donated is
community property, the donations should be viewed as made by both spouses. First, because
the law clearly differentiates the donations of such property "by the husband" from the
"donations by both spouses by common consent" ("por el marido . . . o por ambos conyuges de
comun acuerdo," in the Spanish text).

Next, the wording of Arts. 1409 and 1415 indicates that the lawful donations by the husband to
the common children are valid and are chargeable to the community property, irrespective of
whether the wife agrees or objects thereof. Obviously, should the wife object to the donation,
she can not be regarded as a donor at all.

Even more: Suppose that the husband should make a donation of some community property to
a concubine or paramour. Undeniably, the wife cannot be regarded as joining in any such
donation. Yet under the old Civil Code, the donation would stand, with the only limitation that the
wife should not be prejudiced in the division of the profits after the conjugal partnership affairs
are liquidated. So that if the value of the donation should be found to fit within the limits of the
husband's ultimate share in the conjugal partnership profits, the donation by the husband would
remain unassailable, over and against the non-participation of the wife therein. This Court has
so ruled in Baello vs. Villanueva (54 Phil. 213, 214):

According to article 1413 of the Civil Code, any transfer or agreement upon conjugal
property made by the husband in contravention of its provisions, shall not prejudice his
wife or her heirs. As the conjugal property belongs equally to husband and wife, the
donation of this property made by the husband prejudices the wife in so far as it includes
a part or the whole of the wife's half, and is to that extent invalid. Hence article 1419, in
providing for the liquidation of the conjugal partnership, directs that all illegal donations
made by the husband be charged against his estates and deducted from his capital. But
it is only then, when the conjugal partnership is in the process of liquidation, that it can be
discovered whether or not an illegal donation made by the husband prejudices the wife.
And inasmuch as these gifts are only to be held invalid in so far as they prejudice the
wife, their nullity cannot be decided until after the liquidation of the conjugal partnership
and it is found that they encroach upon the wife's portion.

Appellants herein are therefore in error when they contend that it is enough that the property
donated should belong to the conjugal partnership in order that the donation be considered and
taxed as a donation of both husband and wife, even if the husband should appear as the sole
donor. There is no blinking the fact that, under the old Civil Code, to be a donation by both
spouses, taxable to both, the wife must expressly join the husband in making the gift; her
participation therein cannot be implied.

It is true, as appellants stress, that in Gibbs vs. Government of the Philippines, 59 Phil., 293,

this Court ruled that "the wife, upon acquisition of any conjugal property, becomes immediately
vested with an interest and title equal to that of the husband"; but this Court was careful to
immediately add, "subject to the power of management and disposition which the law vests on
the husband." As has been shown, this power of disposition may, within the legal limits, override

53
the objections of the wife and render the donation of the husband fully effective without need of
the wife's joining therein. (Civil Code of 1889, Arts 1409, 1415.)

It becomes unnecessary to discuss the nature of a conjugal partnership, there being specific
rules on donations of property belonging to it. The consequence of the husband's legal power to
donate community property is that, where made by the husband alone, the donation is taxable
as his own exclusive act. Hence, only one exemption or deduction can be claimed for every
such gift, and not two, as claimed by appellants herein. In thus holding, the Board of Tax
Appeals committed no error.

Premises considered, we are of the opinion and so declare:

(a) That the finding of the defunct Board of Tax Appeals to the effect that shares transferred
from Li Seng Giap to his children were conveyed to them by way of donation inter vivos is
supported by adequate evidence, and therefore cannot be reviewed by this Court (Comm. of
Internal Revenue. vs. Court Holding Co., L. Ed. 981; Comm. of Internal Revenue vs. Scottish
American Investment Co., 89 L. Ed. 113; Comm. of Internal Revenue vs. Tower, 90 L. Ed. 670;
Helvering vs. Tax Penn. Oil Co., 81 L. Ed. 755).

(b) That under the old Civil Code, a donation by the husband alone does not become in law a
donation by both spouses merely because it involves property of the conjugal partnership;

(c) That such a donation of property belonging to the conjugal partnership, made during its
existence, by the husband alone in favor of the common children, is taxable to him exclusively
as sole donor.

Wherefore, the decision appealed from is affirmed with costs to the appellants. So ordered.

Paras, C.J., Bengzon, Padilla, Montemayor, Reyes, A., Bautista Angelo, Jugo, Labrador, and
Concepcion, JJ.,concur.

#5

G.R. No. L-14166             April 28, 1962

FINLEY J. GIBBS, as Trustee for JOHNSON KELLEY GIBBS, ALLISON DEFRANCE

GIBBS, 
CANDACE GIBBS, DOUGLAS FLETCHER GIBBS, and REGINALD KELLEY
GIBBS, plaintiff-petitioner; 
ALLISON J. GIBBS and ESTHER K. GIBBS, intervenors-petitioners, 
vs.
COLLECTOR OF INTERNAL REVENUE and COURT of TAX APPEALS, respondents.

-----------------------------

G.R. No. L-14320             April 28, 1962

COLLECTOR OF INTERNAL REVENUE, petitioner, 

vs.
FINLEY J. GIBBS, as Trustee for JOHNSON KELLEY GIBBS, ALLISON DEFRANCE
GIBBS, 
CANDACE GIBBS, DOUGLAS FLETCHER GIBBS and REGINALD KELLEY
GIBBS, respondent; 
ALLISON J. GIBBS and ESTHER K. GIBBS, respondents-intervenors.

Ozaeta, Gibbs and Ozaeta for petitioner Finley J. Gibbs, et al.

Office of the Solicitor General for respondent Collector of Internal Revenue.

54
CONCEPCION, J.:

These are two (2) appeals, one by the plaintiff and the plaintiffs-intervenors and the other by the
Government, from a decision of the Court of Tax Appeals, hereafter referred to as the lower
court, promulgated on February 28, 1958, the dispositive part of which reads:

IN VIEW OF THE FOREGOING, the decision appeal from is modified, and the defendant
Collector of Internal Revenue is hereby ordered to refund to the plaintiff the sum
P5,381.88, as computed in Annex "A" hereof, with interest the legal rate from date of
payment, Without special pronouncement as to costs.

as amended by a resolution of said lower court, dated July 25, 1958, the concluding paragraph
of which is as follows:

WHEREFORE, our decision of February 28, 1958 is modified in the sense that the
delinquency interest of one-half (1/2) of one (1%) percent should be computed on the
deficiency taxes only from July 1, 1954 to July 30, 1954, and the defendant Collector of
Internal Revenue is hereby ordered refund to plaintiff the sum of P9,387.54 as computed
in Annex "A" hereof, with interest at the legal rate from date of payment. Without special
pronouncement as to costs. 1äwphï1.ñët

On September 25, 1950, Allison J. Gibbs and his wife Esther K. Gibbs, hereinafter referred to as
trustors, executed five (5) separate documents each, entitled "Deed of Sale and Declaration of
Trust", whereby the respective trustors transferred, sold and assigned, in trust, 53,000 shares of
stock of the Lepanto Consolidated Mining Co., in favor of each one of their five (5) children,
namely Johnson Kelley Gibbs, Allison Defrance Gibbs, Candace Gibbs, Douglas Fletcher Gibbs
and Reginald Kelley Gibbs in consideration of the sum of P26,227.70, to be paid "on or before
December 23, 1950, by selling, mortgaging, hypothecating or pledging part or all of the corpus
of the trust." The market value of said 53,000 shares on September 25, 1950 was P34,980.00.

The terms and conditions of the ten (10) deeds trust were identical. Instituted trustee, without
bond, in said ten (10) deeds, was Finley J. Gibbs, a brother of trustor Allison J. Gibbs, who, as
attorney-in-fact of the former, accepted the trust, in his (Finley J. Gibbs') name, for and on
behalf of the aforementioned beneficiaries. The trust was to terminate upon the respective
beneficiary reaching the age of 35. If the beneficiary died before reaching that age, leaving
legitimate issue the trust would continue, but for the benefit of the latter, and the full distribution
and termination of the trust with respect to such issue would be effected not later than 20 years
after the death of said beneficiary. If the beneficiary died before reaching the age of 35 leaving
no legitimate issue, the trustee would turn over the trust corpus or the remainder thereof and
any accumulated income, share and share alike, to the other beneficiaries or children of the
trustors.

On October 24, 1950, the trustors gave notice to the then Collector of Internal Revenue,
hereafter referred to as defendant, of the execution of the ten (10) deeds of trust and requested
a ruling on whether or not gift taxes were due thereon. Soon, thereafter, or on December 14,
1950, defendant assessed a donee gift tax of P75.00 on each of the beneficiaries in said trust
agreements, or a total of P750.40, and a donor gift tax of P774.04 on each of the trustors, or
P1,548.08 for both. These assessments were based upon the difference between said market
value of the shares of stock and the stipulated consideration for transfer thereof. On December
22, 1950, defendant revised his assessment of the donor gift tax by increasing it from P774.04
to P342.84 for each trustor, or a total of P1,685.68. The next day, the donee gift taxes were,
also, increased, from the aforementioned total sum of P750.40 to P17,856.90.

Within the period fixed by law, or on May 15, 1951, said donor and donee gift taxes in the sums
of P1,685.68 and P17,856.90, respectively, were paid. Subsequently, the refund of P17,106.50,
representing the difference between the amount if the first assessment (P750.40) for donee gift
taxes and that of the second assessment thereof (P17,856.90), was demanded, but the demand
was, on August 23, 1951, turned down by the defendant. The trustee appealed to the Secretary
of Finance. Before the latter could pass upon the appeal, however, the Board of Tax Appeals

55
was created by Executive Order No. 401 of the President of the Philippines. The pertinent
records were then forwarded to said Board. Alleging fear of expiration of the two-year period for
the refund of said sum of P17,106.50, on May 12, 1953, the trustee instituted Civil Case No.
19541 of the Court of First Instance of Manila against the defendant for the recovery of such
amount.

Meanwhile, or on December 28, 1951, the trustors, by five (5) separate documents each, had
created ten (10) additional and separate trusts, each involving 22,400 shares of stock of the
same mining company, in favor of each of the aforementioned beneficiaries, for the stipulated
consideration of P17,430, to be paid by the trustees within 120 days after the transfer of said
stock has been effected in the books of the mining company. In all other respects, the terms and
conditions of this second set of deeds of trusts are identical to those of the first set. Admittedly,
the market value of said 22,400 shares was then P19,264.00.

These additional deeds of trust impelled the defendant to assess, on April 8, 1952, a donor gift
tax of P304.42 on each trustor, or a total of P608.84 for both trustors, and a donee gift tax of
P36.69, on each of the beneficiaries, or a total of P366.90. These amounts were paid on May
15, 1952, within the statutory period therefor.

Holding that gift taxes are available on the full market value of all the shares of stock thus
placed in trust — instead of upon the difference between said market value and the stipulated
considerations — on June 16, 1954, defendant assessed additional donor gift taxes in the sums
of P5,093.71 on each trustor, or a total of P10,187.42, for the ten (10) trusts created on
September 25, 1950, and P8,788.78, on each trustor, or a total of P17,577.56 for the trusts
created on December 28, 1951. Additional donee gift taxes were, likewise, assessed in the sum
of P12,040.30 for the ten (10) additional trusts created on December 28, 1951. The
corresponding assessment notices demanded that these three (3) sums be paid on or before
June 30, 1954. Upon request of the taxpayers, they were given an extension up to July 31,
1954, on which date said sums were paid under protest. Thus, the amounts paid under protest
for the two (2) sets of trusts in question aggregate P56,911.78, itemized as follows: .

Donee gift taxes on the trusts created on September 25, 1950 P17,106.50
Donor gift taxes on the trusts created on September 25, 1950 10,187.42
Donee gift taxes on the trusts created on December 28, 1951 12,040.30
Donor gift taxes on the trusts created on December 28, 1951 17,577.56

TOTAL....................... P56,911.78
============

In the meantime, or on June 16, 1954, Republic Act No. 1125, creating the Court of Tax
Appeals, had been approved and become effective. Pursuant to section 22 of said Act, the
records of Civil Case No. 19541 of the Court of First Instance of Manila were, on August 26,
1954, forwarded to the Court of Tax Appeals. In October, 1955, the trustors intervened in the
case as plaintiffs-intervenors. In their complaint in intervention they prayed for the refund of the
additional donor gift taxes paid by them in the aggregate sum of P27,764.98, with interest and
attorney's fees. In July, 1956, the trustee amended his complaint to include therein the claim for
refund of the aggregate sum of P50,911.78 specified above. In due course, thereafter, the Court
of Tax Appeals rendered its aforementioned decision, which on motion for reconsideration was
amended as adverted to above. Hence, these appeals, one by the trustee (plaintiff) and the
trustors (plaintiffs-intervenors), G. R. No. L-14166, and another by the defendant, G. R. No. L-
14320.

The main issue raised in the first appeal is whether the gift taxes on the transfer of the shares of
stock aforementioned should be based on the full market value of said shares of stock at the
time of the respective transfers thereof or only upon the difference between said market value
and the consideration stipulated in the trust agreements. The defendant adhered to the first
alternative, which the Court of Tax Appeals, likewise, adopted, upon the ground that the

56
stipulated considerations were — except as to the aggregate sum of P52,277.00 allegedly paid
by the trustee in June 1953 — in effect, simulated.

Indeed, the stipulated consideration of P262,277.00, for the transfer of the 530,000 shares of
stock involved in first set of deeds of trust were to be paid, pursuant thereto, "on or before
December 23, 1950, by selling, mortgaging, hypothecating or pledging part or all of the corpus
the trust". On December 2, 1950, the Central Bank granted plaintiff's application for license to
sell, assign or encumber said shares of stock. Yet nothing was done pay the stipulated
consideration on the date set therefor. What is more, the trustors did not demand payment of, or
do anything to collect, said consideration.

It is true that on June 15, 1953, or about three and a half years (3-1/2) after the latter had
become due, Allison Gibbs, as one of the trustors and as attorney-in-fact for the trustee, as well
as the other trustor, his wife, Esther K. Gibbs, executed ten (10) documents entitled
Compromise Agreement", stating that the parties had agreed to suspend and defer payment of
the sum of P26,277.70 stipulated in each of the first ten (10) trust agreements, and to liquidate
the obligation to make said payment as follows: (a) the trustee would pay P5,227.70 on or
before June 30, 1953; and (b) the balance of P21,000.00 would be paid on or before the 21st
birthday of the respective beneficiaries or the date of termination of the trust, which ever date
came first. The trustee and the trustors have likewise, introduced in evidence, ten (10)
promissory notes of the trustee, for said sum of P21,000, allegedly executed in compliance with
said compromise agreements.

These did not merit, however, full faith and credence from the Court of Tax Appeals, which
regarded such agreements, as well as said promissory notes, as a mere devise to avoid and
evade payment of the corresponding gift taxes. Considering that the trustee is a brother of
trustor Allison J. Gibbs; that the ten (10) cash payment of P5,277.70 each, referred to in the
compromise agreements aforementioned, were seemingly made to trustors Esther K. Gibbs and
Allison J. Gibbs by the latter as attorney-in-fact of the trustee, his brother Finley J. Gibbs; that
there was absolutely no consideration for the release of the trustee from the obligation to pay
P26,227.70 on or before December 23, 1950, under each of the deeds of trust executed on
September 25, 1950; that the promissory notes adverted to above bear no date and were not
executed before any witness; and that the date of maturity therein set is so distant, in relation to
the due dates under said deeds of trust, we find no justification for disturbing the conclusion
reached by the lower court. In fact, said conclusion is borne out by the following
circumstances: .

1. In answer to the following question propounded by a Judge of said court .

If the trusts were created for the benefit of your children and as you said, one of the
consequences of which was your love and affection for your children, what need was
there for you to impose this burden of requiring them to pay for those shares?

trustor Allison J. Gibbs answered:

Well, there were tax considerations involved, Your Honor, I have not only to think of the
Philippine tax problems but also the United States tax problems. I very carefully went into
the whole matter before my wife and I decided on doing what we did. I studied and came
to the conclusion that we could not afford to make an outright gift of these shares, that
the taxes that would result not only to the Philippine government but to the United States
government would be too big for us to shoulder, considering the fact that we also are
letting off our control of transfers of our right into these substantial portion of our assets.
We could not have afforded to do it. It calls by way of future interest under the United
States gift tax laws for payment of gift taxes. We are allowed an exemption both — for
both my wife — for each of my wife and myself of $30,000.00 under the United States
Federal gift tax law. But these gifts, had they been accepted ... had they been made
100% rather, these transfers had they been made without any consideration would have
been taxable 100% at the market value on that date. That would have resulted on a
tremendous tax both to the Philippine government and to the United States government.

57
 We could not afford to pay those taxes, and that is fundamentally one reason for fixing
the price that we did fix which was premised upon our cost.

2. The deeds of trust state that the purpose thereof is "to establish an endowment for the
support, maintenance, care, health, higher education and travel of the beneficiary and the
launching of his career after he becomes of age". These purposes would be materially impaired,
if not entirely defeated, if the beneficiaries were to pay the stipulated consideration aggregating
P262,277, under the first set of deeds of trust, and P174,300 under the second set, or a total of
P436,577. If we deduct this sum from the aggregate market value of all the shares of stock in
question — which is P542,540 — the net value of the whole trust would be reduced to P105,863
and the net value of the aggregate trust for each beneficiary would be no more than P21,172.60.
And, if as the trustee and the trustors maintain, the taxes under consideration (P56,911.78)
should be deducted from the corpus of the trust, the net value of the aggregate trust for each
beneficiary would be further reduced to P9,790.244. Certainly, this amount, as well as the
aforementioned sum of P21,172.60 could hardly be sufficient for the "support, maintenance,
care, health, higher education and travel" of each beneficiary and "the launching of his career
after he has become of age." .

3. The trustors are financially well off. When the first set of deeds of trust were executed
(September 25, 1950), their assets in the Philippines and United States were worth
P1,500,000.00 and P500,000.00, respectively, at the rate of P2.00 to a $1.00. If the trustors
were earnestly concerned, as they seemingly were, in providing ample funds to assure the
support, maintenance, care, health, higher education and travel of their children and the
launching of their career after they had become of age, the trustors would not have really meant
to require them to pay the consideration stipulated in the trust agreements. The subsequent acts
of the trustors showed that they did not intend to collect said consideration. As the lower court
had correctly observed:

... We assume that the trustors were indeed serious about the purpose of the trusts. With
this in mind, we cannot conceive how the purpose of the trust may readily and liberally be
achieved if the trust were to be burdened by such onerous monetary consideration.
Without the consideration, the purpose or purposes of the trusts could have been more
readily obtained. Consequently, we feel constrained to treat the monetary considerations
of the trusts as an intended superfluity if not a subtlety, to becloud the donative intent of
trustors.

4. The corpus of the trust was never totally or partially sold, hypothecated or encumbered.
Instead, after December 7, 1950, when the Central Bank authorized the conversion of the
shares of stock covered by the first set of trust agreements from resident stocks to non-resident
stocks, the corresponding cash dividends and stock dividends declared by the mining company
were sent directly to the trustee in the United States, thus enabling the trustors to create dollar
assets in the United States. The testimony of trustor Allison J. Gibbs on this point is illuminating.

JUDGE LUCIANO

If, as you said, one of the purposes of imposing a consideration on the trustee in
your favor and that of your wife, was to protect the interest of both you and your
wife, why is it that when these dividends were declared by the Lepanto
Consolidated Mining Company, and were so declared, you did not collect the
consideration from these dividends to offset the stipulated consideration in the
series of trust agreements? .

A — Because that would defeat the very objectives for which we created the trusts
and at least, one of the objectives was to transfer as much as possible of our
Philippine assets to the United States in the form of dollars so as to create dollar
assets in the United States on which our children could rely under the trust
indentures. In fact, that was the prime basis upon which I secured the eventual
licensing by the Central Bank of the transactions. In fact, I told the Central Bank if
they did not license it on the basis on which I had proposed which I considered

58
 absolutely legal, then I would find some other way of accomplishing the objective.
If necessary, I would leave the Philippine Islands and become a resident of the
United States. And, in that instance, under their regulations, there could be no
question that all of my assets in the Philippines which were earning dividends
would be entitled to have the dividends remitted to the United States. They saw
the logic of my reasoning and they finally agreed on the transaction of issuing the
license, XL-530 on December 2, 1950, Exhibit J-2, plaintiff. There has been no
question from the very beginning of one of the prime purposes of this transaction
— it was to create a dollar estate for our children in the United States, premised
upon our conviction that Lepanto Consolidated Mining Company was going to pay
dividends and that the Central Bank regulations would allow the remittance of
dividends to non-resident stockholders.

The trustors could have easily collected the stipulated consideration or part of it from said
dividends, yet they did not do so — they even saw to it that the dividends were sent to the
United States.

In connection with the trust agreements executed on December 28, 1951, the trustee,
represented by his attorney-in-fact, Allison J. Gibbs, and the latter, as one of the trustors, as well
as his wife, trustor Esther K. Gibbs, executed on July 15, 1953, another set of deeds, entitled
"Compromise Agreement", stating that the trustee thereby resold, retransferred and reassigned
to the trustor the 22,400 shares covered by each of said trust agreements, for and in
consideration of the sum of P19,264 to be paid by the trustors by crediting to the trustee the
sum of P17,430, the consideration stipulated in each one of said trust agreements, thereby
leaving a balance of P1,843 to be paid to the trustee upon the trustor's repossession of the
corresponding stock certificates.

The main reason given in said compromise agreements for the provisions thereof is the alleged
inability of the trustee to sell, mortgage, hypothecate, or pledge the said shares of stock or
otherwise deal with third parties with a view to raising funds for the payment of the consideration
stipulated in the trust agreements, pending registration of the transfer of said stock, in the books
of the mining company, in view of the conditions — not described in the compromise
agreements — imposed by the Central Bank for the issuance of a license authorizing said
transfer, which — according to the compromise agreements — are rightly unacceptable to the
trustee.

This reason is clearly artificious. The stock involved in the trust agreements of September 25,
1950 were so transferred. Still no payment was made thereon. Moreover, the trustee could have
authorized the trustors to sell, mortgage, hypothecate or otherwise dispose of said stock to raise
the necessary funds, if the intent was really that the stipulated consideration be paid. Indeed, as
attorney in-fact for the trustee, trustor Allison J. Gibbs, with the ample powers that his acts
revealed he had, could have simply granted such authority to himself and his wife, Esther K.
Gibbs, as trustors. Considering that one of the prime objectives of the trustors in executing the
trust agreements was "to transfer as much as possible of our Philippine assets to the United
States in the form of dollars", it is understandable that they did not wish the stock in question to
be disposed of in the Philippines, for this would surely defeat the accomplishment of said
objectives. At the same time, it is apparent that the reason given in said compromise
agreements for the execution thereof is not true.

It may not be amiss to note, also, that the compromise agreements affecting the trusts
constituted on December 28, 1951, virtually revoked said trusts, contrary to the explicit provision
in the trust agreements, to the effect that the trusts therein established are "irrevocable".

Another factor that affects adversely the credence and weight due to all of the compromise
agreements is that the same were made with knowledge of the fact that the defendant was
already investigating whether the stipulated consideration was real or fictitious and entertaining
the idea of assessing the corresponding gift taxes on the basis of the full market value of the
stock involved.

59
The trustee and the trustors maintain that the lower court erred in not deducting the amount of
the donor gift taxes from the value of the property subject to the donee gift taxes, in view of the
provision of the trust agreement to the effect —

In addition to the foregoing, the TRUSTEE shall pay out of the property and/or the gross
income of the trust estate all income, estate, gift, succession or inheritance taxes, if any,
payable by the VENDOR, TRUSTEE or BENEFICIARY by reason of this trust.

We find no merit in this pretense. The questions as to who shall pay any given tax and what
shall be the basis thereof are determined by law, the operation of which can not be affected by
the provisions of a contract to which the Government is not a party. This, of course, is without
prejudice to the right, if any, of a party to the trust agreements to demand reimbursement from
the other party. But such right of reimbursement is independent of, and foreign to, the right and
duty of the defendant to collect the taxes in the manner and under the conditions prescribed by
law.

The appeal taken up by the defendant refers to the interest chargeable on the amounts
representing the taxes in question, and the interest on the sum to be refunded by the
Government.

In its resolution of June 25, 1958, the Court of Tax Appeals held that interest of one-half (1/2) of
one (1%) percent should be charged on the deficiency taxes only from July 1, 1954 to July 30,
1954, because the defendant had demanded payment on or before June 30, 1954, of the
deficiency donor gift taxes — amounting to P10,187.42 and P17,577.56 — assessed on the first
and the second set of trust agreements, respectively, and the deficiency donee gift taxes of
P12,040.30, assessed on the second set of trust agreements. The defendant maintains that said
interest should be charged from the 15th day of May following the calendar year in which the
gifts in question had been made, for section 116 of the tax Code provides —

The gift taxes imposed by section one hundred nine and one hundred ten of this Chapter
shall be due and payable on or before the fifteenth day of May following the close of the
calendar year and shall be paid by the donor or donee, as the case may be, to the
Collector of Internal Revenue or the treasurer of the province city or municipality of which
the donor or the donee is a resident.

Upon the other hand, section 118 (b) of the same Code, on which the lower court relied, reads: .

In case an extension for the payment of a deficiency is granted, there shall be collected,
as a part of the taxes, interest on the part of the deficiency the time for payment of which
is so extended, at the rate of six per centum per annum for the period of the extensions.
(Emphasis supplied.) .

At this juncture, it should be noted that the taxes assessed on the basis of the difference
between the market value and the consideration were paid within the period fixed by law or on
May 15, 1951, as regards to trusts created in 1950, and on May 15, 1952, as regards the trusts
constituted in 1951. Even the donor gift taxes, under a revised assessment, and the deficiency
donor gift taxes due on the first set of trusts were paid in due time (May 15, 1951). With respect
to the deficiency donor gift taxes on the two sets of trust agreements and the deficiency donee
gifts taxes assessed on the second set of trust agreements, the defendant demanded payment
thereof on or before June 30, 1954. Had these assessments been paid on that date, no interest
whatsoever would have been due thereon. It is but fair and just, therefore, that interest be
charged only for the period of the extension secured for the payment of the trust assessments,
pursuant to section 118(b).

In support of the theory that interest is due, not only for said period of extension but, also, from
the fifteenth day of May of the year following that in which the trust had been constituted,
defendant cites section 119(b) (2) of the Tax Code, according to which: .

60
 If the part of the deficiency the time for payment of which is extended is not paid in
accordance with the terms of the extension, there shall be collected, as a part of the
taxes, interest on such unpaid amount at the rate of one per centum a month from the
date the same was originally due until it is paid.

This provision applies only when the taxes are not paid within the extension granted by the
Collector or Commissioner of Internal Revenue. It is inapplicable to the case at bar, for the taxes
involved herein were paid within said extension of time.

It is urged by the defendant that the Government should not be required to pay interest on the
amount refundable to the trustee and the trustors. The matter of payment of interest on sums
collected by way of taxes, which the Government is subsequently sentenced to refund to the
taxpayer, depends upon whether or not the collection of said sums is manifestly unwarranted
(Collector of Internal Revenue vs. Convention of the Philippine Baptist Churches, et al., L-
11807, May 19, 1961 [Resolution]; Collector of Internal Revenue vs. Sweeney, L-12178, August
21, 1959; Collector of Internal Revenue vs. St. Paul's Hospital, etc., L-12127, May 21, 1959). In
the case at bar, it is clearly not so, in the light of the attending circumstances. Hence, the
amount refundable by the Government, pursuant to the decision appealed from, should draw no
interest, and said decision should be modified accordingly.

Thus modified, said decision should be, as it is hereby affirmed, in all other respects, without
pronouncement as to costs. It is so ordered.

#6

G.R. No. L-19865             July 31, 1965

MARIA CARLA PIROVANO, etc., et al., petitioners-appellants, 

vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent-appellee.

Angel S. Gamboa for petitioners-appellants.

Office of the Solicitor General for respondent-appellee.

REYES, J.B.L., J.:

This case is a sequel to the case of Pirovano vs. De la Rama Steamship Co., 96 Phil. 335.

Briefly, the facts of the aforestated case may be stated as follows:

Enrico Pirovano was the father of the herein petitioners-appellants. Sometime in the early part of
1941, De la Rama Steamship Co. insured the life of said Enrico Pirovano, who was then its
President and General Manager until the time of his death, with various Philippine and American
insurance companies for a total sum of one million pesos, designating itself as the beneficiary of
the policies, obtained by it. Due to the Japanese occupation of the Philippines during the second
World War, the Company was unable to pay the premiums on the policies issued by its
Philippine insurers and these policies lapsed, while the policies issued by its American insurers
were kept effective and subsisting, the New York office of the Company having continued
paying its premiums from year to year.

During the Japanese occupation , or more particularly in the latter part of 1944, said Enrico
Pirovano died.

After the liberation of the Philippines from the Japanese forces, the Board of Directors of De la
Rama Steamship Co. adopted a resolution dated July 10, 1946 granting and setting aside, out
of the proceeds expected to be collected on the insurance policies taken on the life of said
Enrico Pirovano, the sum of P400,000.00 for equal division among the four (4) minor children of

61
the deceased, said sum of money to be convertible into 4,000 shares of stock of the Company,
at par, or 1,000 shares for each child. Shortly thereafter, the Company received the total sum of
P643,000.00 as proceeds of the said life insurance policies obtained from American insurers.

Upon receipt of the last stated sum of money, the Board of Directors of the Company modified,
on January 6, 1947, the above-mentioned resolution by renouncing all its rights title, and interest
to the said amount of P643,000.00 in favor of the minor children of the deceased, subject to the
express condition that said amount should be retained by the Company in the nature of a loan to
it, drawing interest at the rate of five per centum (5%) per annum, and payable to the Pirovano
children after the Company shall have first settled in full the balance of its present remaining
bonded indebtedness in the sum of approximately P5,000,000.00. This latter resolution was
carried out in a Memorandum Agreement on January 10, 1947 and June 17, 1947., respectively,
executed by the Company and Mrs. Estefania R. Pirovano, the latter acting in her capacity as
guardian of her children (petitioners-appellants herein) find pursuant to an express authority
granted her by the court.

On June 24, 1947, the Board of Directors of the Company further modified the last mentioned
resolution providing therein that the Company shall pay the proceeds of said life insurance
policies to the heirs of the said Enrico Pirovano after the Company shall have settled in full the
balance of its present remaining bonded indebtedness, but the annual interests accruing on the
principal shall be paid to the heirs of the said Enrico Pirovano, or their duly appointed
representative, whenever the Company is in a position to meet said obligation.

On February 26, 1948, Mrs. Estefania R. Pirovano, in behalf of her children, executed a public
document formally accepting the donation; and, on the same date, the Company through its
Board of Directors, took official notice of this formal acceptance.

On September 13, 1949, the stockholders of the Company formally ratified the various
resolutions hereinabove mentioned with certain clarifying modifications that the payment of the
donation shall not be effected until such time as the Company shall have first duly liquidated its
present bonded indebtedness in the amount of P3,260,855.77 with the National Development
Company, or fully redeemed the preferred shares of stock in the amount which shall be issued
to the National Development Company in lieu thereof; and that any and all taxes, legal fees, and
expenses in any way connected with the above transaction shall be chargeable and deducted
from the proceeds of the life insurance policies mentioned in the resolutions of the Board of
Directors.

On March 8, 1951, however, the majority stockholders of the Company voted to revoke the
resolution approving the donation in favor of the Pirovano children.

As a consequence of this revocation and refusal of the Company to pay the balance of the
donation amounting to P564,980.90 despite demands therefor, the herein petitioners-appellants
represented by their natural guardian, Mrs. Estefania R. Pirovano, brought an action for the
recovery of said amount, plus interest and damages against De la Rama Steamship Co., in the
Court of First Instance of Rizal, which case ultimately culminated to an appeal to this Court. On
December 29, 1954, this court rendered its decision in the appealed case (96 Phil. 335) holding
that the donation was valid and remunerative in nature, the dispositive part of which reads:

Wherefore, the decision appealed from should be modified as follows: (a) that the
donation in favor of the children of the late Enrico Pirovano of the proceeds of the
insurance policies taken on his life is valid and binding on the defendant corporation; (b)
that said donation, which amounts to a total of P583,813.59, including interest, as it
appears in the books of the corporation as of August 31, 1951, plus interest thereon at
the rate of 5 per cent per annum from the filing of the complaint, should be paid to the
plaintiffs after the defendant corporation shall have fully redeemed the preferred shares
issued to the National Development Company under the terms and conditions stared in
the resolutions of the Board of Directors of January 6, 1947 and June 24, 1947, as
amended by the resolution of the stockholders adopted on September 13, 1949; and (c)
defendant shall pay to plaintiffs an additional amount equivalent to 10 per cent of said

62
 amount of P583,813.59 as damages by way of attorney's fees, and to pay the costs of
action. (Pirovano et al. vs. De la Rama Steamship Co., 96 Phil. 367-368)

The above decision became final and executory. In compliance therewith, De la Rama
Steamship Co. made, on April 6, 1955, a partial payment on the amount of the judgment and
paid the balance thereof on May 12, 1955.

On March 6, 1955, respondent Commissioner of Internal Revenue assessed the amount of

P60,869.67 as donees' gift tax, inclusive of surcharges, interests and other penalties, against
each of the petitioners-appellants, or for the total sum of P243,478.68; and, on April 23, 1955, a
donor's gift tax in the total amount of P34,371.76 was also assessed against De la Rama
Steamship Co., which the latter paid.

Petitioners-appellants herein contested respondent Commissioner's assessment and imposition

of the donees' gift taxes and donor's gift tax and also made a claim for refund of the donor's gift
tax so collected. Respondent Commissioner overruled petitioners' claims; hence, the latter
presented two (2) petitions for review against respondent's rulings before the Court of Tax
Appeals, said petitions having been docketed as CTA Cases Nos. 347 and 375. CTA Case No.
347 relates to the petition disputing the legality of the assessment of donees' gift taxes and
donor's gift tax while CTA Case No. 375 refers to the claim for refund of the donor's gift tax
already paid.

After the filing of respondent's usual answers to the petitions, the two cases, being interrelated
to each other, were tried jointly and terminated.

On January 31, 1962, the Court of Tax Appeals rendered its decision in the two cases, the
dispositive part of which reads:

In resume, we are of the opinion, that (1) the donor's gift tax in the sum of P34,371.76
was erroneously assessed and collected, hence, petitioners are entitled to the refund
thereof; (2) the donees' gift taxes were correctly assessed; (3) the imposition of the
surcharge of 25% is not proper; (4) the surcharge of 5% is legally due; and (5) the
interest of 1% per month on the deficiency donees' gift taxes is due from petitioners from
March 8, 1955 until the taxes are paid.

IN LINE WITH THE FOREGOING OPINION, petitioners are hereby ordered to pay the
donees' gift taxes as assessed by respondent, plus 5% surcharge and interest at the rate
of 1% per month from March 8, 1955 to the date of payment of said donees' gift taxes.
Respondent is ordered to apply the sum of P34,371.76 which is refundable to petitioners,
against the amount due from petitioners. With costs against petitioners in Case No. 347.

Petitioners-appellants herein filed a motion to reconsider the above decision, which the lower
court denied. Hence, this appeal before us.

In the instant appeal, petitioners-appellants herein question only that portion of the decision of
the lower court ordering the payment of donees' gift taxes as assessed by respondent as well as
the imposition of surcharge and interest on the amount of donees' gift taxes.

In their brief and memorandum, they dispute the factual finding of the lower court that De la
Rama Steamship Company's renunciation of its rights, title, and interest over the proceeds of
said life insurance policies in favor of the Pirovano children "was motivated solely and
exclusively by its sense of gratitude, an act of pure liberality, and not to pay additional
compensation for services inadequately paid for." Petitioners now contend that the lower court's
finding was erroneous in seemingly considering the disputed grant as a simple donation, since
our previous decision (96 Phil. 335) had already declared that the transfer to the Pirovano
children was a remuneratory donation. Petitioners further contend that the same was made not
for an insufficient or inadequate consideration but rather it a was made for a full and adequate
compensation for the valuable services rendered by the late Enrico Pirovano to the De la Rama

63
Steamship Co.; hence, the donation does not constitute a taxable gift under the provisions of
Section 108 of the National Internal Revenue Code.

The argument for petitioners-appellants fails to take into account the fact that neither in Spanish
nor in Anglo-American law was it considered that past services, rendered without relying on a
coetaneous promise, express or implied, that such services would be paid for in the future,
constituted cause or consideration that would make a conveyance of property anything else but
a gift or donation. This conclusion flows from the text of Article 619 of the Code of 1889
(identical with Article 726 of the present Civil Code of the Philippines):

When a person gives to another a thing ... on account of the latter's merits or of the
services rendered by him to the donor, provided they do not constitute a demandable
debt, ..., there is also a donation. ... .

There is nothing on record to show that when the late Enrico Pirovano rendered services as
President and General Manager of the De la Rama Steamship Co. he was not fully
compensated for such services, or that, because they were "largely responsible for the rapid
and very successful development of the activities of the company" (Res. of July 10, 1946).
Pirovano expected or was promised further compensation over and in addition to his regular
emoluments as President and General Manager. The fact that his services contributed in a large
measure to the success of the company did not give rise to a recoverable debt, and the
conveyances made by the company to his heirs remain a gift or donation. This is emphasized by
the directors' Resolution of January 6, 1947, that "out of gratitude" the company decided to
renounce in favor of Pirovano's heirs the proceeds of the life insurance policies in question. The
true consideration for the donation was, therefore, the company's gratitude for his services, and
not the services themselves.

That the tax court regarded the conveyance as a simple donation, instead of a remuneratory
one as it was declared to be in our previous decision, is but an innocuous error; whether
remuneratory or simple, the conveyance remained a gift, taxable under Chapter 2, Title III of the
Internal Revenue Code.

But then appellants contend, the entire property or right donated should not be considered as a
gift for taxation purposes; only that portion of the value of the property or right transferred, if any,
which is in excess of the value of the services rendered should be considered as a taxable gift.
They cite in support Section 111 of the Tax Code which provides that —

Where property is transferred for less, than an adequate and full consideration in money
or money's worth, then the amount by which the 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, ... .

The flaw in this argument lies in the fact that, as copied from American law, the term
consideration used in this section refers to the technical "consideration" defined by the American
Law Institute (Restatement of Contracts) as "anything that is bargained for by the promisor and
given by the promisee in exchange for the promise" (Also, Corbin on Contracts, Vol. I, p. 359).
But, as we have seen, Pirovano's successful activities as officer of the De la Rama Steamship
Co. cannot be deemed such consideration for the gift to his heirs, since the services were
rendered long before the Company ceded the value of the life policies to said heirs; cession and
services were not the result of one bargain or of a mutual exchange of promises.

And the Anglo-American law treats a subsequent promise to pay for past services (like one to
pay for improvements already made without prior request from the promisor) to be a nudum
pactum (Roscorla vs. Thomas, 3 Q.B. 234; Peters vs. Poro, 25 ALR 615; Carson vs. Clark, 25
Am. Dec. 79; Boston vs. Dodge, 12 Am. Dec. 206), i.e., one that is unenforceable in view of the
common law rule that consideration must consist in a legal benefit to the promisee or some legal
detriment to the promisor.

64
What is more, the actual consideration for the cession of the policies, as previously shown, was
the Company's gratitude to Pirovano; so that under section 111 of the Code there is no
consideration the value of which can be deducted from that of the property transferred as a gift.
Like "love and affection," gratitude has no economic value and is not "consideration" in the
sense that the word is used in this section of the Tax Code.

As stated by Chief Justice Griffith of the Supreme Court of Mississippi in his well-known book,
"Outlines of the Law" (p. 204) —

Love and affection are not considerations of value — they are not estimable in terms of value.
Nor are sentiments of gratitude for gratuitous part favors or kindnesses; nor are obligations
which are merely moral. It has been well said that if a moral obligation were alone sufficient it
would remove the necessity for any consideration at all, since the fact of making a promise
impose, the moral obligation to perform it."

It is of course perfectly possible that a donation or gift should at the same time impose a burden
or condition on the donee involving some economic liability for him. A, for example, may donate
a parcel of land to B on condition that the latter assume a mortgage existing on the donated
land. In this case the donee may rightfully insist that the gift tax be computed only on the value
of the land less the value of the mortgage. This, in fact, is contemplated by Article 619 of the
Civil Code of 1889 (Art. 726 of the Tax Code) when it provides that there is also a donation
"when the gift imposes upon the donee a burden which is less than the value of the thing given."
Section 111 of the Tax Code has in view situations of this kind, since it also prescribes that "the
amount by which the value of the property exceeded the value of the consideration" shall be
deemed a gift for the purpose of the tax. .

Petitioners finally contend that, even assuming that the donation in question is subject to
donees' gift taxes, the imposition of the surcharge of 5% and interest of 1% per month from
March 8, 1955 was not justified because the proceeds of the life insurance policies were actually
received on April 6, 1955 and May 12, 1955 only and in accordance with Section 115(c) of the
Tax Code; the filing of the returns of such tax became due on March 1, 1956 and the tax
became payable on May 15, 1956, as provided for in Section 116(a) of the same Code. In other
words, petitioners maintain that the assessment and demand for donees' gift taxes was
prematurely made and of no legal effect; hence, they should not be held liable for such
surcharge and interest.

It is well to note, and it is not disputed, that petitioners-donees have failed to file any gift tax
return and that they also failed to pay the amount of the assessment made against them by
respondent in 1955. This situation is covered by Section 119(b) (1) and (c) and Section 120 of
the Tax Code:

(b) Deficiency.

(1) Payment not extended. — Where a deficiency, or any interest assessed in connection

therewith, or any addition to the taxes provided for in section one hundred twenty is not
paid in full within thirty days from the date of the notice and demand from the
Commissioner, there shall be collected as a part of the taxes, interest upon the unpaid
amount at the rate of one per centum a month from the date of such notice and demand
until it is paid. (section 119)

(c) Surcharge. — If any amount of the taxes included in the notice and demand from the
Commissioner of Internal Revenue is not paid in full within thirty days after such notice
and demand, there shall be collected in addition to the interest prescribed above as a
part of the taxes a surcharge of five per centum of the unpaid amount. (sec. 119)

The failure to file a return was found by the lower court to be due to reasonable cause and not to
willful neglect. On this score, the elimination by the lower court of the 25% surcharge is ad
valorem penalty which respondent Commissioner had imposed pursuant to Section 120 of the
Tax Code was proper, since said Section 120 vests in the Commissioner of Internal Revenue or

65
in the tax court power and authority to impose or not to impose such penalty depending upon
whether or not reasonable cause has been shown in the non-filing of such return.

On the other hand, unlike said Section 120, Section 119, paragraphs (b) (1) and (c) of the Tax
Code, does not confer on the Commissioner of Internal Revenue or on the courts any power
and discretion not to impose such interest and surcharge. It is likewise provided for by law that
an appeal to the Court of Tax Appeals from a decision of the Commissioner of Internal Revenue
shall not suspend the payment or collection of the tax liability of the taxpayer unless a motion to
that effect shall have been presented to the court and granted by it on the ground that such
collection will jeopardize the interest of the taxpayer (Sec. 11, Republic Act No. 1125; Rule 12,
Rules of the Court of Tax Appeals). It should further be noted that —

It has been the uniform holding of this Court that no suit for enjoining the collection of a
tax, disputed or undisputed, can be brought, the remedy being to pay the tax first,
formerly under protest and now without need of protect, file the claim with the Collector,
and if he denies it, bring an action for recovery against him. (David v. Ramos, et al., 90
Phil. 351)

Section 306 of the National Internal Revenue Code ... lays down the procedure to be
followed in those cases wherein a taxpayer entertains some doubt about the correctness
of a tax sought to be collected. Said section provides that the tax, should first be paid and
the taxpayer should sue for its recovery afterwards. The purpose of the law obviously is
to prevent delay in the collection of taxes, upon which the Government depends for its
existence. To allow a taxpayer to first secure a ruling as regards the validity of the tax
before paying it would be to defeat this purpose. (National Dental Supply Co. vs. Meer,
90 Phil. 265)

Petitioners did not file in the lower court any motion for the suspension of payment or collection
of the amount of assessment made against them.

On the basis of the above-stated provisions of law and applicable authorities, it is evident that
the imposition of 1% interest monthly and 5% surcharge is justified and legal. As succinctly
stated by the court below, said imposition is "mandatory and may not be waived by the
Commissioner of Internal Revenue or by the courts" (Resolution on petitioners' motion for
reconsideration, Annex XIV, petition). Hence, said imposition of interest and surcharge by the
lower court should be upheld.

WHEREFORE, the decision of the Court of Tax Appeals is affirmed. Costs against petitioners
Pirovano.

66
Republic Act No. 7166             November 26, 1991

AN ACT PROVIDING FOR SYNCHRONIZED NATIONAL AND LOCAL ELECTIONS AND

FOR ELECTORAL REFORMS, AUTHORIZING APPROPRIATIONS THEREFOR, AND FOR
OTHER PURPOSES

Section 13. Authorized Expenses of Candidates and Political Parties. - The agreement amount
that a candidate or registered political party may spend for election campaign shall be as
follows:

(a) For candidates. - Ten pesos (P10.00) for President and Vice-President; and for other
candidates Three Pesos (P3.00) for every voter currently registered in the constituency
where he filed his certificate of candidacy: Provided, That a candidate without any
political party and without support from any political party may be allowed to spend Five
Pesos (P5.00) for every such voter; and

(b) For political parties. - Five pesos (P5.00) for every voter currently registered in the
constituency or constituencies where it has official candidates.

Any provision of law to the contrary notwithstanding any contribution in cash or in kind to any
candidate or political party or coalition of parties for campaign purposes, duly reported to the
Commission shall not be subject to the payment of any gift tax.

Republic Act No. 9500             April 29, 2008

AN ACT TO STRENGTHEN THE UNIVERSITY OF THE PHILIPPINES AS THE NATIONAL

UNIVERSITY

SEC. 25. Tax Exemptions. - The provisions of any general or special law to the contrary
notwithstanding:

(a) All revenues and assets of the University of the Philippines used for educational
purposes or in support thereof shall be exempt from all taxes and duties;

(b) Gifts and donations of real and personal properties of all kinds shall be exempt from
the donor's tax and the same shall be considered as allowable deductions from the gross
income of the donor, in accordance with the provisions of the National Internal Revenue
Code of 1997, as amended: Provided, That the allowable deductions shall be equivalent
to 150 percent of the value of such donation. Valuation of assistance other than money
shall be based on the acquisition cost of the property. Such valuation shall take into
consideration the depreciated value of property in case said property has been used;

(c) Importation of economic, technical, vocational, scientific, philosophical, historical and

cultural books, supplies and materials duly certified by the Board, including scientific and
educational computer and software equipment, shall be exempt from customs duties;

(d) The University shall only pay 0% value-added tax for all transactions subject to this
tax; and

(e) All academic awards shall be exempt from taxes.

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Republic Act No. 9521             March 05, 2009

AN ACT CREATING A NATIONAL BOOK DEVELOPMENT TRUST FUND TO SUPPORT

FILIPINO AUTHORSHIP

Section 3. The National Book Development Trust Fund. - A National Book Development
Trust Fund, hereafter referred to as the Fund, is hereby established exclusively for the support
and promotion of Filipino authorship especially in science and technology and in subject areas
wherein locally authored books are either few or nonexistent. The Fund shall be subject to the
following;

(a) The contribution to the Fund shall be sourced from the following:

(1) The amount of Fifty million pesos (P50,000,000.00) shall be alloted in the
annual General Appropriation Act (GAA) for the next five (5) years starting from
the enactment of this law;

(2) The amount of Fifty million pesos (P50,000,000.00) shall be taken from the
Philippine Amusement and Gaming Corporation (PAGCOR) fund at Five million
pesos (P5,000,000.00) per month for ten (10) months;

(3) Another amount of Fifty million pesos (P50,000,000.00) shall be taken from the
Philippine Charity Sweepstakes Office (PCSO) at Five million pesos
(P5,000,000.00) per month for ten (10) months;

(b) Only the interest drawn from the Fund from sources cited in Section 3 (a1), (a2) and
(a3) shall be awarded as grants to promote Filipino authorship and to support the
completion of local manuscripts or research works for publication;

(c) The grants can be awarded only after one (1) year from the organization of the Fund,
and the grants shall be awarded equitably among the regions.

(d) Government corporations are hereby authorized to give grants to the Fund at their
discretion;

(e) The private portion of the Fund shall be raised from donations and other conveyances
including funds, materials, property and services, by gratuitous title;

(f) Contributions to the Fund shall be exempt from the donor's tax and the same shall be
considered as allowable deductions from the gross income of the donor, in accordance
with the provisions of the National Internal Revenue Code of 1997, as
amended: Provided, That the allowable deductions shall be equivalent to one hundred
fifty percent (150%) of the value of such donation;

(g) The National Book Development Board(NBDB) shall be the administrator of the Fund;

(h) For the sound and judicious management of the Fund, the NBDB shall appoint a
government financial institution, with sound track record on fund management, as
portfolio manager of the Fund, subject to guidelines promulgated by the NBDB; and

(i) The NBDB shall prepare the implementing guidelines and decision-making
mechanisms, subject to the following:

(1) No part of the seed capital of the Fun, including earnings thereof, shall be used
to underwrite overhead expenses for the administration; and

(2) There shall be an external auditor to perform an annual audit of the Fund's
performance.

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REPUBLIC ACT NO. 10165       June 11, 2012

AN ACT TO STRENGTHEN AND PROPAGATE FOSTER CARE AND TO PROVIDE FUNDS

THEREFOR

Section 3. Definition of Terms. – For purposes of this Act, the following terms are defined:

(a) Agency refers to any child-caring or child-placing institution licensed and accredited
by the Department of Social Welfare and Development (DSWD) to implement the foster
care program.

(b) Child refers to a person below eighteen (18) years of age, or one who is over eighteen
(18) but is unable to fully take care of or protect oneself from abuse, neglect, cruelty,
exploitation or discrimination because of a physical or mental disability or condition.

(c) Child Case Study Report refers to a written report prepared by a social worker
containing all the necessary information about a child.

(d) Child with Special Needs refers to a child with developmental or physical disability.

(e) Family refers to the parents or brothers and sisters, whether of the full or half-blood, of
the child.

(f) Foster Care refers to the provision of planned temporary substitute parental care to a
child by a foster parent.

(g) Foster Child refers to a child placed under foster care.

(h) Foster Family Care License refers to the document issued by the DSWD authorizing
the foster parent to provide foster care.

(i) Foster Parent refers to a person, duly licensed by the DSWD, to provide foster care.

(j) Foster Placement Authority (FPA) refers to the document issued by the DSWD
authorizing the placement of a particular child with the foster parent.

(k) Home Study Report refers to a written report prepared by a social worker containing
the necessary information on a prospective parent or family member.

(l) Matching refers to the judicious pairing of a child with foster parent and family
members based on the capacity and commitment of the foster parent to meet the
individual needs of the particular child and the capacity of the child to benefit from the
placement.

(m) Parent refers to the biological or adoptive parent or legal guardian of a child.

(n) Placement refers to the physical transfer of the child with the foster parent.

(o) Relatives refer to the relatives of a child, other than family members, within the fourth
degree of consanguinity or affinity.

(p) Social Worker refers to the registered and licensed social worker of the DSWD, local
government unit (LGU) or agency.

ARTICLE II
ELIGIBILITY

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Section 4. Who May Be Placed Under Foster Care. – The following may be placed in foster
care:

(a) A child who is abandoned, surrendered, neglected, dependent or orphaned;

(b) A child who is a victim of sexual, physical, or any other form of abuse or exploitation;

(c) A child with special needs;

(d) A child whose family members are temporarily or permanently unable or unwilling to
provide the child with adequate care;

(e) A child awaiting adoptive placement and who would have to be prepared for family
life;

(f) A child who needs long-term care and close family ties but who cannot be placed for
domestic adoption;

(g) A child whose adoption has been disrupted;

(h) A child who is under socially difficult circumstances such as, but not limited to, a street
child, a child in armed conflict or a victim of child labor or trafficking;

(i) A child who committed a minor offense but is released on recognizance, or who is in
custody supervision or whose case is dismissed; and

(j) A child who is in need of special protection as assessed by a social worker, an agency
or the DSWD.

Provided, That in the case of (b), (c), (f), (h), (i), and (j), the child must have no family willing and
capable of caring and providing for him.

Section 5. Who May Be a Foster Parent. – An applicant who meets all of the following
qualifications may be a foster parent:

(a) Must be of legal age;

(b) Must be at least sixteen (16) years older than the child unless the foster parent is a
relative;

(c) Must have a genuine interest, capacity and commitment in parenting and is able to
provide a familial atmosphere for the child;

(d) Must have a healthy and harmonious relationship with each family member living with
him or her;

(e) Must be of good moral character;

(f) Must be physically and mentally capable and emotionally mature;

(g) Must have sufficient resources to be able to provide for the family’s needs;

(h) Must be willing to further hone or be trained on knowledge, attitudes and skills in
caring for a child; and

(i) Must not already have the maximum number of children under his foster care at the
time of application or award, as may be provided in the implementing rules and
regulations (IRR) of this Act.

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Provided, That in determining who is the best suited foster parent, the relatives of the child shall
be given priority, so long as they meet the above qualifications: Provided, further, That an alien
possessing the above qualifications and who has resided in the Philippines for at least twelve
(12) continuous months and maintains such residence until the termination of placement by the
DSWD or expiration of the foster family license, may qualify as a foster parent.

Section 22. Assistance and Incentives to Foster Parent. –

(a) Support Care Services. – The DSWD, the social service units of LGUs and agencies
shall provide support care services to include, but not limited to, counseling, visits,
training on child care and development, respite care, skills training and livelihood
assistance.

(b) Additional Exemption for Dependents. – For purposes of claiming the Twenty-five
thousand pesos (PhP 25,000.00) additional exemption for foster parents for each
dependent not exceeding four (4) as provided for by Republic Act No. 9504, the definition
of the term "dependent" under Section 35(B) of the National Internal Revenue Code
(NIRC) of 1997 shall be amended to include "foster child": Provided, That all other
conditions provided for under the aforesaid section of the NIRC of 1997 must be
complied with: Provided, further. That this additional exemption shall be allowed only if
the period of foster care is at least a continuous period of one (1) taxable year.

For purposes of this section, only one (1) foster parent can treat the foster child as a dependent
for a particular taxable year. As such, no other parent or foster parent can claim the said child as
a dependent for that period.

Section 23. Incentives to Agencies. – Agencies shall be entitled to the following tax incentives:

(a) Exemption from Income Tax. – Agencies shall be exempt from income tax on the
income derived by it as such organization pursuant to Section 30 of the NIRC of 1997, as
implemented by Revenue Regulation (RR) No. 13-98; and

(b) Qualification as a Donee Institution. – Agencies can also apply for qualification as a
donee institution.

Section 24. Incentives to Donors. – Donors of an agency shall be entitled to the following:

(a) Allowable Deductions. – Donors shall be granted allowable deductions from its gross
income to the extent of the amount donated to agencies in accordance with Section
34(H) of the NIRC of 1997; and

(b) Exemption from Donor’s Tax. – Donors shall be exempted from donor’s tax under
Section 101 of the NIRC of 1997: Provided, That not more than thirty percent (30%) of
the amount of donations shall be spent for administrative expenses.

REVENUE REGULATIONS NO. 02-40

February 10, 1940

INCOME TAX REGULATIONS

SECTION 207. Estates and trusts. — "Fiduciary" is a term which applies to all persons or
corporations that occupy positions of peculiar confidence towards others, such as trustees,
executors, or administrators; and a fiduciary, for income tax purposes, is any person or
corporation that holds in trust an estate of another person or persons. In order that a fiduciary
relationship may exist, it is necessary that a legal trust be created.

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In general, the income of a trust for the taxable year which is to be distributed to the
beneficiaries must be returned by and will be taxed to the respective beneficiaries, but the
income of a trust which is to be accumulated or held for future distribution, whether consisting of
ordinary income or gain from the sale of assets included in the corpus of the trust, must be
returned by and will be taxed to the trustee. Three exceptions to this general rule are found in
the law: (1) in the case of revocable trust (Section 59); (2) in the case of a trust the income of
which, in whole or in part, may be held or distributed for the benefit of the grantor (Section 60);
and (3) in the case of a trust administered in a foreign country [Section 57(c)]. In the first case,
the income from such part of the trust estate title to which may be revested in the grantor should
be included in the grantor's return. In the second case, part of the income of the trust, which
may be held or distributed for the benefit of the grantor, should be included in the grantor's
return. In the third case, the trustee is not entitled to the deductions mentioned in subsections
(a) and (b) of Section 57 and the net income of the trust undiminished by any amounts
distributed, paid or credited to beneficiaries will be taxed to the trustees; however, the income
included in the return of the trustees is not to be included in computing the income of the
beneficiaries.

SECTION 208. Consolidation of incomes of two or more trusts. — Section 56(b)(2)

expressly requires the consolidation of the income of two or more trusts where the creator of the
trust in each instance is the same person and the beneficiary in each instance is the same. The
tax due on the consolidated income will be collected from the trustees in proportion to the net
income of the of the respective trusts. (See Section 215 of these regulations.)

SECTION 209. Estates and trusts taxed to fiduciary. — In the case of a decedent's estate
the settlement of which is the object of testamentary or intestate proceedings, the fiduciary,
executor, or administrator is required to file an annual return for the estate up to the final
settlement thereof. In the same manner, the fiduciary is required to file a yearly return covering
the income of a trust, whether created by will or deed, for accumulation of income, whether for
unascertained persons or persons with contingent interests or otherwise. In both cases the
income of the estate or trust is taxed to the fiduciary. Where under the terms of a will or deed,
the trustee, may in his discretion, distribute the income or accumulate it, the income is taxed to
the trustee, irrespective of the exercise of his discretion. The imposition of the tax is not affected
by the fact that an ultimate beneficiary may be a person exempt from tax.

SECTION 210. Estate and trust taxed to beneficiaries. — In the case of (a) a trust the
income of which is to be distributed annually or regularly; (b) an estate of a decedent the
settlement of which is not the object of judicial testamentary or intestate proceedings; and (c)
properties held under a co-ownership or tenancy in common, the income is taxable directly to
the beneficiary or beneficiaries. Each beneficiary must include in his return his distributive share
of the net income of the trust, estate, or co-ownership. In the case of trusts which are in whole or
in part subject to revocation by the grantor, or which are for the benefit of the grantor, the
income of the trust is to be included in computing the net income of the grantor.

SECTION 211. Decedent's estate administration. — The "period of administration or

settlement of the estate" is the period required by the executor or administrator to perform the
ordinary duties pertaining to administration, in particular, the collection of assets and the
payment of debts and legacies. Estates during the period of administration have but one
beneficiary and that beneficiary is the estate.

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No taxable income is realized from the passage of property to the executor or administrator on
the death of the decedent, even though it may have appreciated in value since the decedent
acquired it. In the event of delivery of property in kind to a legatee or distributee, no income is
realized. Where, however, prior to the settlement of the estate, the executor or administrator
sells property of a decedent's estate for more than the appraised value placed upon it at the
death of the decedent, the excess is income, taxable to the estate. Where property is sold after
the settlement of the estate by the devisee, legatee or heir at a price greater than the appraised
value placed upon it at the time he inherited the property from the decedent, he is taxable
individually on any profit derived. An allowance paid a widow or heir out of the corpus of the
estate is not deductible from gross income.

SECTION 212. Liability for tax on estate or trusts. — Liability for payment of the tax
attaches to the person of an executor or administrator up to and after his discharge, where prior
to distribution and discharge he had notice of his tax obligations or failed to exercise due
diligence in determining whether or not such obligations existed. Liability for the tax also follows
the estate itself, and when the estate has been distributed, the heirs, devisees, legatees, and
distributors may be required to discharge the amount of the tax due and unpaid, to the extent of
and in proportion to any share received. The same consideration apply to other trusts. Where
the tax has been paid on the net income of an estate or trust by the fiduciary, the net income on
which the tax is paid is free from tax when distributed to the beneficiaries.

SECTION 213. Exemption allowed to estate or trusts. — An estate or a trust is allowed a

personal exemption of P1,800. Each beneficiary is entitled to but one personal exemption, no
matter from how many trusts he may receive income.

(Section 61 of the Code)

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