Lorenzo v. Posadas, G.R. No.

43082, 18 June 1937

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

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

vs.
JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellant.

Pablo Lorenzo and Delfin Joven for plaintiff-appellant.

Office of the Solicitor-General Hilado for defendant-appellant.

LAUREL, J.:

On October 4, 1932, the plaintiff Pablo Lorenzo, in his capacity as trustee of the estate of
Thomas Hanley, deceased, brought this action in the Court of First Instance of Zamboanga
against the defendant, Juan Posadas, Jr., then the Collector of Internal Revenue, for the refund
of the amount of P2,052.74, paid by the plaintiff as inheritance tax on the estate of the
deceased, and for the collection of interst thereon at the rate of 6 per cent per annum, computed
from September 15, 1932, the date when the aforesaid tax was [paid under protest. The
defendant set up a counterclaim for P1,191.27 alleged to be interest due on the tax in question
and which was not included in the original assessment. From the decision of the Court of First
Instance of Zamboanga dismissing both the plaintiff's complaint and the defendant's
counterclaim, both parties appealed to this court.

It appears that on May 27, 1922, one Thomas Hanley died in Zamboanga, Zamboanga, leaving
a will (Exhibit 5) and considerable amount of real and personal properties. On june 14, 1922,
proceedings for the probate of his will and the settlement and distribution of his estate were
begun in the Court of First Instance of Zamboanga. The will was admitted to probate. Said will
provides, among other things, as follows:

4. I direct that any money left by me be given to my nephew Matthew Hanley.

5. I direct that all real estate owned by me at the time of my death be not sold or
otherwise disposed of for a period of ten (10) years after my death, and that the same be
handled and managed by the executors, and proceeds thereof to be given to my
nephew, Matthew Hanley, at Castlemore, Ballaghaderine, County of Rosecommon,
Ireland, and that he be directed that the same be used only for the education of my
brother's children and their descendants.

6. I direct that ten (10) years after my death my property be given to the above
mentioned Matthew Hanley to be disposed of in the way he thinks most advantageous.

xxx     xxx     xxx

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

During the incumbency of the plaintiff as trustee, the defendant Collector of Internal Revenue,
alleging that the estate left by the deceased at the time of his death consisted of realty valued at
P27,920 and personalty valued at P1,465, and allowing a deduction of P480.81, assessed
against the estate an inheritance tax in the amount of P1,434.24 which, together with the
penalties for deliquency in payment consisting of a 1 per cent monthly interest from July 1, 1931
to the date of payment and a surcharge of 25 per cent on the tax, amounted to P2,052.74. On
March 15, 1932, the defendant filed a motion in the testamentary proceedings pending before
the Court of First Instance of Zamboanga (Special proceedings No. 302) praying that the
trustee, plaintiff herein, be ordered to pay to the Government the said sum of P2,052.74. The
motion was granted. On September 15, 1932, the plaintiff paid said amount under protest,
notifying the defendant at the same time that unless the amount was promptly refunded suit
would be brought for its recovery. The defendant overruled the plaintiff's protest and refused to
refund the said amount hausted, plaintiff went to court with the result herein above indicated.

In his appeal, plaintiff contends that the lower court erred:

I. In holding that the real property of Thomas Hanley, deceased, passed to his instituted
heir, Matthew Hanley, from the moment of the death of the former, and that from the
time, the latter became the owner thereof.

II. In holding, in effect, that there was deliquency in the payment of inheritance tax due
on the estate of said deceased.

III. In holding that the inheritance tax in question be based upon the value of the estate
upon the death of the testator, and not, as it should have been held, upon the value
thereof at the expiration of the period of ten years after which, according to the testator's
will, the property could be and was to be delivered to the instituted heir.

IV. In not allowing as lawful deductions, in the determination of the net amount of the
estate subject to said tax, the amounts allowed by the court as compensation to the
"trustees" and paid to them from the decedent's estate.

V. In not rendering judgment in favor of the plaintiff and in denying his motion for new
trial.

The defendant-appellant contradicts the theories of the plaintiff and assigns the following error
besides:

The lower court erred in not ordering the plaintiff to pay to the defendant the sum of
P1,191.27, representing part of the interest at the rate of 1 per cent per month from April
10, 1924, to June 30, 1931, which the plaintiff had failed to pay on the inheritance tax
assessed by the defendant against the estate of Thomas Hanley.
The following are the principal questions to be decided by this court in this appeal:

(a) When does the inheritance tax accrue and when must it be satisfied?

(b) Should the inheritance tax be computed on the basis of the value of the
estate at the time of the testator's death, or on its value ten years later?

(c) In determining the net value of the estate subject to tax, is it proper to deduct
the compensation due to trustees?

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

(e) Has there been deliquency in the payment of the inheritance tax? If so,
should the additional interest claimed by the defendant in his appeal be paid by
the estate? Other points of incidental importance, raised by the parties in their
briefs, will be touched upon in the course of this opinion.

(a) The accrual of the inheritance tax is distinct from the obligation to pay the same. Section
1536 as amended, of the Administrative Code, imposes the tax upon "every transmission by
virtue of inheritance, devise, bequest, gift mortis causa, or advance in anticipation of
inheritance,devise, or bequest." The tax therefore is upon transmission or the transfer or
devolution of property of a decedent, made effective by his death. (61 C. J., p. 1592.) It is in
reality an excise or privilege tax imposed on the right to succeed to, receive, or take property by
or under a will or the intestacy law, or deed, grant, or gift to become operative at or after death.
Acording to article 657 of the Civil Code, "the rights to the succession of a person are
transmitted from the moment of his death." "In other words", said Arellano, C. J., ". . . the heirs
succeed immediately to all of the property of the deceased ancestor. The property belongs to
the heirs at the moment of the death of the ancestor as completely as if the ancestor had
executed and delivered to them a deed for the same before his death." (Bondad vs. Bondad, 34
Phil., 232. See also, Mijares vs. Nery, 3 Phil., 195; Suilong & Co., vs. Chio-Taysan, 12 Phil., 13;
Lubrico vs. Arbado, 12 Phil., 391; Innocencio vs. Gat-Pandan, 14 Phil., 491; Aliasas
vs.Alcantara, 16 Phil., 489; Ilustre vs. Alaras Frondosa, 17 Phil., 321; Malahacan vs. Ignacio, 19
Phil., 434; Bowa vs. Briones, 38 Phil., 27; Osario vs. Osario & Yuchausti Steamship Co., 41
Phil., 531; Fule vs. Fule, 46 Phil., 317; Dais vs. Court of First Instance of Capiz, 51 Phil., 396;
Baun vs. Heirs of Baun, 53 Phil., 654.) Plaintiff, however, asserts that while article 657 of the
Civil Code is applicable to testate as well as intestate succession, it operates only in so far as
forced heirs are concerned. But the language of article 657 of the Civil Code is broad and
makes no distinction between different classes of heirs. That article does not speak of forced
heirs; it does not even use the word "heir". It speaks of the rights of succession and the
transmission thereof from the moment of death. The provision of section 625 of the Code of Civil
Procedure regarding the authentication and probate of a will as a necessary condition to effect
transmission of property does not affect the general rule laid down in article 657 of the Civil
Code. The authentication of a will implies its due execution but once probated and allowed the
transmission is effective as of the death of the testator in accordance with article 657 of the Civil
Code. Whatever may be the time when actual transmission of the inheritance takes place,
succession takes place in any event at the moment of the decedent's death. The time when the
heirs legally succeed to the inheritance may differ from the time when the heirs actually receive
such inheritance. "Poco importa", says Manresa commenting on article 657 of the Civil Code,
"que desde el falleimiento del causante, hasta que el heredero o legatario entre en posesion de
los bienes de la herencia o del legado, transcurra mucho o poco tiempo, pues la adquisicion ha
de retrotraerse al momento de la muerte, y asi lo ordena el articulo 989, que debe considerarse
como complemento del presente." (5 Manresa, 305; see also, art. 440, par. 1, Civil Code.)
Thomas Hanley having died on May 27, 1922, the inheritance tax accrued as of the date.

From the fact, however, that Thomas Hanley died on May 27, 1922, it does not follow that the
obligation to pay the tax arose as of the date. The time for the payment on inheritance tax is
clearly fixed by section 1544 of the Revised Administrative Code as amended by Act No. 3031,
in relation to section 1543 of the same Code. The two sections follow:

SEC. 1543. Exemption of certain acquisitions and transmissions. — The following shall

not be taxed:

(a) The merger of the usufruct in the owner of the naked title.

(b) The transmission or delivery of the inheritance or legacy by the fiduciary heir
or legatee to the trustees.

(c) The transmission from the first heir, legatee, or donee in favor of another
beneficiary, in accordance with the desire of the predecessor.

In the last two cases, if the scale of taxation appropriate to the new beneficiary is greater
than that paid by the first, the former must pay the difference.

SEC. 1544. When tax to be paid. — The tax fixed in this article shall be paid:

(a) In the second and third cases of the next preceding section, before entrance
into possession of the property.

(b) In other cases, within the six months subsequent to the death of the
predecessor; but if judicial testamentary or intestate proceedings shall be
instituted prior to the expiration of said period, the payment shall be made by the
executor or administrator before delivering to each beneficiary his share.

If the tax is not paid within the time hereinbefore prescribed, interest at the rate of twelve
per centum per annum shall be added as part of the tax; and to the tax and interest due
and unpaid within ten days after the date of notice and demand thereof by the collector,
there shall be further added a surcharge of twenty-five per centum.

A certified of all letters testamentary or of admisitration shall be furnished the Collector of

Internal Revenue by the Clerk of Court within thirty days after their issuance.

It should be observed in passing that the word "trustee", appearing in subsection (b) of section
1543, should read "fideicommissary" or "cestui que trust". There was an obvious mistake in
translation from the Spanish to the English version.

The instant case does fall under subsection (a), but under subsection (b), of section 1544
above-quoted, as there is here no fiduciary heirs, first heirs, legatee or donee. Under the
subsection, the tax should have been paid before the delivery of the properties in question to P.
J. M. Moore as trustee on March 10, 1924.

(b) The plaintiff contends that the estate of Thomas Hanley, in so far as the real properties are
concerned, did not and could not legally pass to the instituted heir, Matthew Hanley, until after
the expiration of ten years from the death of the testator on May 27, 1922 and, that the
inheritance tax should be based on the value of the estate in 1932, or ten years after the
testator's death. The plaintiff introduced evidence tending to show that in 1932 the real
properties in question had a reasonable value of only P5,787. This amount added to the value
of the personal property left by the deceased, which the plaintiff admits is P1,465, would
generate an inheritance tax which, excluding deductions, interest and surcharge, would amount
only to about P169.52.

If death is the generating source from which the power of the estate to impose inheritance taxes
takes its being and if, upon the death of the decedent, succession takes place and the right of
the estate to tax vests instantly, the tax should be measured by the vlaue of the estate as it
stood at the time of the decedent's death, regardless of any subsequent contingency value of
any subsequent increase or decrease in value. (61 C. J., pp. 1692, 1693; 26 R. C. L., p. 232;
Blakemore and Bancroft, Inheritance Taxes, p. 137. See also Knowlton vs. Moore, 178 U.S., 41;
20 Sup. Ct. Rep., 747; 44 Law. ed., 969.) "The right of the state to an inheritance tax accrues at
the moment of death, and hence is ordinarily measured as to any beneficiary by the value at
that time of such property as passes to him. Subsequent appreciation or depriciation is
immaterial." (Ross, Inheritance Taxation, p. 72.)

Our attention is directed to the statement of the rule in Cyclopedia of Law of and Procedure (vol.
37, pp. 1574, 1575) that, in the case of contingent remainders, taxation is postponed until the
estate vests in possession or the contingency is settled. This rule was formerly followed in New
York and has been adopted in Illinois, Minnesota, Massachusetts, Ohio, Pennsylvania and
Wisconsin. This rule, horever, is by no means entirely satisfactory either to the estate or to
those interested in the property (26 R. C. L., p. 231.). Realizing, perhaps, the defects of its
anterior system, we find upon examination of cases and authorities that New York has varied
and now requires the immediate appraisal of the postponed estate at its clear market value and
the payment forthwith of the tax on its out of the corpus of the estate transferred. (In
re Vanderbilt, 172 N. Y., 69; 69 N. E., 782; In re Huber, 86 N. Y. App. Div., 458; 83 N. Y. Supp.,
769; Estate of Tracy, 179 N. Y., 501; 72 N. Y., 519; Estate of Brez, 172 N. Y., 609; 64 N. E.,
958; Estate of Post, 85 App. Div., 611; 82 N. Y. Supp., 1079. Vide also, Saltoun vs. Lord
Advocate, 1 Peter. Sc. App., 970; 3 Macq. H. L., 659; 23 Eng. Rul. Cas., 888.) California
adheres to this new rule (Stats. 1905, sec. 5, p. 343).

But whatever may be the rule in other jurisdictions, we hold that a transmission by inheritance is
taxable at the time of the predecessor's death, notwithstanding the postponement of the actual
possession or enjoyment of the estate by the beneficiary, and the tax measured by the value of
the property transmitted at that time regardless of its appreciation or depreciation.

(c) Certain items are required by law to be deducted from the appraised gross in arriving at the
net value of the estate on which the inheritance tax is to be computed (sec. 1539, Revised
Administrative Code). In the case at bar, the defendant and the trial court allowed a deduction of
only P480.81. This sum represents the expenses and disbursements of the executors until
March 10, 1924, among which were their fees and the proven debts of the deceased. The
plaintiff contends that the compensation and fees of the trustees, which aggregate P1,187.28
(Exhibits C, AA, EE, PP, HH, JJ, LL, NN, OO), should also be deducted under section 1539 of
the Revised Administrative Code which provides, in part, as follows: "In order to determine the
net sum which must bear the tax, when an inheritance is concerned, there shall be deducted, in
case of a resident, . . . the judicial expenses of the testamentary or intestate proceedings, . . . ."

A trustee, no doubt, is entitled to receive a fair compensation for his services (Barney vs.
Saunders, 16 How., 535; 14 Law. ed., 1047). But from this it does not follow that the
compensation due him may lawfully be deducted in arriving at the net value of the estate subject
to tax. There is no statute in the Philippines which requires trustees' commissions to be
deducted in determining the net value of the estate subject to inheritance tax (61 C. J., p. 1705).
Furthermore, though a testamentary trust has been created, it does not appear that the testator
intended that the duties of his executors and trustees should be separated. (Ibid.; In
re Vanneck's Estate, 161 N. Y. Supp., 893; 175 App. Div., 363; In re Collard's Estate, 161 N. Y.
Supp., 455.) On the contrary, in paragraph 5 of his will, the testator expressed the desire that
his real estate be handled and managed by his executors until the expiration of the period of ten
years therein provided. Judicial expenses are expenses of administration (61 C. J., p. 1705) but,
in State vs. Hennepin County Probate Court (112 N. W., 878; 101 Minn., 485), it was said: ". . .
The compensation of a trustee, earned, not in the administration of the estate, but in the
management thereof for the benefit of the legatees or devises, does not come properly within
the class or reason for exempting administration expenses. . . . Service rendered in that behalf
have no reference to closing the estate for the purpose of a distribution thereof to those entitled
to it, and are not required or essential to the perfection of the rights of the heirs or legatees. . . .
Trusts . . . of the character of that here before the court, are created for the the benefit of those
to whom the property ultimately passes, are of voluntary creation, and intended for the
preservation of the estate. No sound reason is given to support the contention that such
expenses should be taken into consideration in fixing the value of the estate for the purpose of
this tax."

(d) The defendant levied and assessed the inheritance tax due from the estate of Thomas
Hanley under the provisions of section 1544 of the Revised Administrative Code, as amended
by section 3 of Act No. 3606. But Act No. 3606 went into effect on January 1, 1930. It, therefore,
was not the law in force when the testator died on May 27, 1922. The law at the time was
section 1544 above-mentioned, as amended by Act No. 3031, which took effect on March 9,
1922.

It is well-settled that inheritance taxation is governed by the statute in force at the time of the
death of the decedent (26 R. C. L., p. 206; 4 Cooley on Taxation, 4th ed., p. 3461). The
taxpayer can not foresee and ought not to be required to guess the outcome of pending
measures. Of course, a tax statute may be made retroactive in its operation. Liability for taxes
under retroactive legislation has been "one of the incidents of social life." (Seattle vs. Kelleher,
195 U. S., 360; 49 Law. ed., 232 Sup. Ct. Rep., 44.) But legislative intent that a tax statute
should operate retroactively should be perfectly clear. (Scwab vs. Doyle, 42 Sup. Ct. Rep., 491;
Smietanka vs. First Trust & Savings Bank, 257 U. S., 602; Stockdale vs. Insurance Co., 20
Wall., 323; Lunch vs. Turrish, 247 U. S., 221.) "A statute should be considered as prospective in
its operation, whether it enacts, amends, or repeals an inheritance tax, unless the language of
the statute clearly demands or expresses that it shall have a retroactive effect, . . . ." (61 C. J.,
P. 1602.) Though the last paragraph of section 5 of Regulations No. 65 of the Department of
Finance makes section 3 of Act No. 3606, amending section 1544 of the Revised Administrative
Code, applicable to all estates the inheritance taxes due from which have not been paid, Act No.
3606 itself contains no provisions indicating legislative intent to give it retroactive effect. No such
effect can begiven the statute by this court.

The defendant Collector of Internal Revenue maintains, however, that certain provisions of Act
No. 3606 are more favorable to the taxpayer than those of Act No. 3031, that said provisions
are penal in nature and, therefore, should operate retroactively in conformity with the provisions
of article 22 of the Revised Penal Code. This is the reason why he applied Act No. 3606 instead
of Act No. 3031. Indeed, under Act No. 3606, (1) the surcharge of 25 per cent is based on the
tax only, instead of on both the tax and the interest, as provided for in Act No. 3031, and (2) the
taxpayer is allowed twenty days from notice and demand by rthe Collector of Internal Revenue
within which to pay the tax, instead of ten days only as required by the old law.

Properly speaking, a statute is penal when it imposes punishment for an offense committed
against the state which, under the Constitution, the Executive has the power to pardon. In
common use, however, this sense has been enlarged to include within the term "penal statutes"
all status which command or prohibit certain acts, and establish penalties for their violation, and
even those which, without expressly prohibiting certain acts, impose a penalty upon their
commission (59 C. J., p. 1110). Revenue laws, generally, which impose taxes collected by the
means ordinarily resorted to for the collection of taxes are not classed as penal laws, although
there are authorities to the contrary. (See Sutherland, Statutory Construction, 361; Twine Co.
vs. Worthington, 141 U. S., 468; 12 Sup. Ct., 55; Rice vs. U. S., 4 C. C. A., 104; 53 Fed., 910;
Com. vs. Standard Oil Co., 101 Pa. St., 150; State vs. Wheeler, 44 P., 430; 25 Nev. 143.) Article
22 of the Revised Penal Code is not applicable to the case at bar, and in the absence of clear
legislative intent, we cannot give Act No. 3606 a retroactive effect.

(e) The plaintiff correctly states that the liability to pay a tax may arise at a certain time and the
tax may be paid within another given time. As stated by this court, "the mere failure to pay one's
tax does not render one delinqent until and unless the entire period has eplased within which
the taxpayer is authorized by law to make such payment without being subjected to the payment
of penalties for fasilure to pay his taxes within the prescribed period." (U. S. vs. Labadan, 26
Phil., 239.)

The defendant maintains that it was the duty of the executor to pay the inheritance tax before
the delivery of the decedent's property to the trustee. Stated otherwise, the defendant contends
that delivery to the trustee was delivery to the cestui que trust, the beneficiery in this case,
within the meaning of the first paragraph of subsection (b) of section 1544 of the Revised
Administrative Code. This contention is well taken and is sustained. The appointment of P. J. M.
Moore as trustee was made by the trial court in conformity with the wishes of the testator as
expressed in his will. It is true that the word "trust" is not mentioned or used in the will but the
intention to create one is clear. No particular or technical words are required to create a
testamentary trust (69 C. J., p. 711). The words "trust" and "trustee", though apt for the purpose,
are not necessary. In fact, the use of these two words is not conclusive on the question that a
trust is created (69 C. J., p. 714). "To create a trust by will the testator must indicate in the will
his intention so to do by using language sufficient to separate the legal from the equitable
estate, and with sufficient certainty designate the beneficiaries, their interest in the ttrust, the
purpose or object of the trust, and the property or subject matter thereof. Stated otherwise, to
constitute a valid testamentary trust there must be a concurrence of three circumstances: (1)
Sufficient words to raise a trust; (2) a definite subject; (3) a certain or ascertain object; statutes
in some jurisdictions expressly or in effect so providing." (69 C. J., pp. 705,706.) There is no
doubt that the testator intended to create a trust. He ordered in his will that certain of his
properties be kept together undisposed during a fixed period, for a stated purpose. The probate
court certainly exercised sound judgment in appointment a trustee to carry into effect the
provisions of the will (see sec. 582, Code of Civil Procedure).

P. J. M. Moore became trustee on March 10, 1924. On that date trust estate vested in him (sec.
582 in relation to sec. 590, Code of Civil Procedure). The mere fact that the estate of the
deceased was placed in trust did not remove it from the operation of our inheritance tax laws or
exempt it from the payment of the inheritance tax. The corresponding inheritance tax should
have been paid on or before March 10, 1924, to escape the penalties of the laws. This is so for
the reason already stated that the delivery of the estate to the trustee was in esse delivery of
the same estate to the cestui que trust, the beneficiary in this case. A trustee is but an
instrument or agent for the cestui que trust (Shelton vs. King, 299 U. S., 90; 33 Sup. Ct. Rep.,
689; 57 Law. ed., 1086). When Moore accepted the trust and took possesson of the trust estate
he thereby admitted that the estate belonged not to him but to his cestui que trust (Tolentino vs.
Vitug, 39 Phil.,126, cited in 65 C. J., p. 692, n. 63). He did not acquire any beneficial interest in
the estate. He took such legal estate only as the proper execution of the trust required (65 C. J.,
p. 528) and, his estate ceased upon the fulfillment of the testator's wishes. The estate then
vested absolutely in the beneficiary (65 C. J., p. 542).

The highest considerations of public policy also justify the conclusion we have reached. Were
we to hold that the payment of the tax could be postponed or delayed by the creation of a trust
of the type at hand, the result would be plainly disastrous. Testators may provide, as Thomas
Hanley has provided, that their estates be not delivered to their beneficiaries until after the lapse
of a certain period of time. In the case at bar, the period is ten years. In other cases, the trust
may last for fifty years, or for a longer period which does not offend the rule against petuities.
The collection of the tax would then be left to the will of a private individual. The mere
suggestion of this result is a sufficient warning against the accpetance of the essential to the
very exeistence of government. (Dobbins vs. Erie Country, 16 Pet., 435; 10 Law. ed., 1022;
Kirkland vs. Hotchkiss, 100 U. S., 491; 25 Law. ed., 558; Lane County vs. Oregon, 7 Wall., 71;
19 Law. ed., 101; Union Refrigerator Transit Co. vs. Kentucky, 199 U. S., 194; 26 Sup. Ct. Rep.,
36; 50 Law. ed., 150; Charles River Bridge vs. Warren Bridge, 11 Pet., 420; 9 Law. ed., 773.)
The obligation to pay taxes rests not upon the privileges enjoyed by, or the protection afforded
to, a citizen by the government but upon the necessity of money for the support of the state
(Dobbins vs. Erie Country, supra). For this reason, no one is allowed to object to or resist the
payment of taxes solely because no personal benefit to him can be pointed out. (Thomas vs.
Gay, 169 U. S., 264; 18 Sup. Ct. Rep., 340; 43 Law. ed., 740.) While courts will not enlarge, by
construction, the government's power of taxation (Bromley vs. McCaughn, 280 U. S., 124; 74
Law. ed., 226; 50 Sup. Ct. Rep., 46) they also will not place upon tax laws so loose a
construction as to permit evasions on merely fanciful and insubstantial distictions. (U. S. vs.
Watts, 1 Bond., 580; Fed. Cas. No. 16,653; U. S. vs. Wigglesirth, 2 Story, 369; Fed. Cas. No.
16,690, followed in Froelich & Kuttner vs. Collector of Customs, 18 Phil., 461, 481; Castle Bros.,
Wolf & Sons vs. McCoy, 21 Phil., 300; Muñoz & Co. vs. Hord, 12 Phil., 624; Hongkong &
Shanghai Banking Corporation vs. Rafferty, 39 Phil., 145; Luzon Stevedoring Co. vs. Trinidad,
43 Phil., 803.) When proper, a tax statute should be construed to avoid the possibilities of tax
evasion. Construed this way, the statute, without resulting in injustice to the taxpayer, becomes
fair to the government.
That taxes must be collected promptly is a policy deeply intrenched in our tax system. Thus, no
court is allowed to grant injunction to restrain the collection of any internal revenue tax ( sec.
1578, Revised Administrative Code; Sarasola vs. Trinidad, 40 Phil., 252). In the case of Lim Co
Chui vs. Posadas (47 Phil., 461), this court had occassion to demonstrate trenchment
adherence to this policy of the law. It held that "the fact that on account of riots directed against
the Chinese on October 18, 19, and 20, 1924, they were prevented from praying their internal
revenue taxes on time and by mutual agreement closed their homes and stores and remained
therein, does not authorize the Collector of Internal Revenue to extend the time prescribed for
the payment of the taxes or to accept them without the additional penalty of twenty five per
cent." (Syllabus, No. 3.)

". . . It is of the utmost importance," said the Supreme Court of the United States, ". . . that the
modes adopted to enforce the taxes levied should be interfered with as little as possible. Any
delay in the proceedings of the officers, upon whom the duty is developed of collecting the
taxes, may derange the operations of government, and thereby, cause serious detriment to the
public." (Dows vs. Chicago, 11 Wall., 108; 20 Law. ed., 65, 66; Churchill and Tait vs. Rafferty,
32 Phil., 580.)

It results that the estate which plaintiff represents has been delinquent in the payment of
inheritance tax and, therefore, liable for the payment of interest and surcharge provided by law
in such cases.

The delinquency in payment occurred on March 10, 1924, the date when Moore became
trustee. The interest due should be computed from that date and it is error on the part of the
defendant to compute it one month later. The provisions cases is mandatory (see and cf. Lim
Co Chui vs. Posadas, supra), and neither the Collector of Internal Revenuen or this court may
remit or decrease such interest, no matter how heavily it may burden the taxpayer.

To the tax and interest due and unpaid within ten days after the date of notice and demand
thereof by the Collector of Internal Revenue, a surcharge of twenty-five per centum should be
added (sec. 1544, subsec. (b), par. 2, Revised Administrative Code). Demand was made by the
Deputy Collector of Internal Revenue upon Moore in a communiction dated October 16, 1931
(Exhibit 29). The date fixed for the payment of the tax and interest was November 30, 1931.
November 30 being an official holiday, the tenth day fell on December 1, 1931. As the tax and
interest due were not paid on that date, the estate became liable for the payment of the
surcharge.

In view of the foregoing, it becomes unnecessary for us to discuss the fifth error assigned by the
plaintiff in his brief.

We shall now compute the tax, together with the interest and surcharge due from the estate of
Thomas Hanley inaccordance with the conclusions we have reached.

At the time of his death, the deceased left real properties valued at P27,920 and personal
properties worth P1,465, or a total of P29,385. Deducting from this amount the sum of P480.81,
representing allowable deductions under secftion 1539 of the Revised Administrative Code, we
have P28,904.19 as the net value of the estate subject to inheritance tax.

The primary tax, according to section 1536, subsection (c), of the Revised Administrative Code,
should be imposed at the rate of one per centum upon the first ten thousand pesos and two per
centum upon the amount by which the share exceed thirty thousand pesos, plus an additional
two hundred per centum. One per centum of ten thousand pesos is P100. Two per centum of
P18,904.19 is P378.08. Adding to these two sums an additional two hundred per centum, or
P965.16, we have as primary tax, correctly computed by the defendant, the sum of P1,434.24.

To the primary tax thus computed should be added the sums collectible under section 1544 of
the Revised Administrative Code. First should be added P1,465.31 which stands for interest at
the rate of twelve per centum per annum from March 10, 1924, the date of delinquency, to
September 15, 1932, the date of payment under protest, a period covering 8 years, 6 months
and 5 days. To the tax and interest thus computed should be added the sum of P724.88,
representing a surhcarge of 25 per cent on both the tax and interest, and also P10, the
compromise sum fixed by the defendant (Exh. 29), giving a grand total of P3,634.43.

As the plaintiff has already paid the sum of P2,052.74, only the sums of P1,581.69 is legally due
from the estate. This last sum is P390.42 more than the amount demanded by the defendant in
his counterclaim. But, as we cannot give the defendant more than what he claims, we must hold
that the plaintiff is liable only in the sum of P1,191.27 the amount stated in the counterclaim.

The judgment of the lower court is accordingly modified, with costs against the plaintiff in both
instances. So ordered.

Avanceña, C.J., Abad Santos, Imperial, Diaz and Concepcion, JJ., concur.
Villa-Real, J., concurs.

Collector v. Fisher, 1 SCRA 93

G.R. No. L-11622             January 28, 1961

THE COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
DOUGLAS FISHER AND BETTINA FISHER, and the COURT OF TAX
APPEALS, respondents.

x---------------------------------------------------------x

G.R. No. L-11668             January 28, 1961.

DOUGLAS FISHER AND BETTINA FISHER, petitioner,

vs.
THE COLLECTOR OF INTERNAL REVENUE, and the COURT OF TAX
APPEALS, respondents.

BARRERA, J.:

This case relates to the determination and settlement of the hereditary estate left by the
deceased Walter G. Stevenson, and the laws applicable thereto. Walter G. Stevenson (born in
the Philippines on August 9, 1874 of British parents and married in the City of Manila on
January 23, 1909 to Beatrice Mauricia Stevenson another British subject) died on February 22,
1951 in San Francisco, California, U.S.A. whereto he and his wife moved and established their
permanent residence since May 10, 1945. In his will executed in San Francisco on May 22,
1947, and which was duly probated in the Superior Court of California on April 11, 1951,
Stevenson instituted his wife Beatrice as his sole heiress to the following real and personal
properties acquired by the spouses while residing in the Philippines, described and preliminary
assessed as follows:

Gross Estate
Real Property — 2
parcels of land in
Baguio, covered by
T.C.T. Nos. 378 and 379 P43,500.00
Personal Property
(1) 177 shares of stock
of Canacao Estate at
P10.00 each 1,770.00
(2) 210,000 shares of
stock of Mindanao
Mother Lode Mines, Inc.
at P0.38 per share 79,800.00
(3) Cash credit with
Canacao Estate Inc. 4,870.88
(4) Cash, with the
Chartered Bank of India,
Australia & China           851.97
            Total Gross
Assets P130,792.85

On May 22, 1951, ancillary administration proceedings were instituted in the Court of First
Instance of Manila for the settlement of the estate in the Philippines. In due time Stevenson's
will was duly admitted to probate by our court and Ian Murray Statt was appointed ancillary
administrator of the estate, who on July 11, 1951, filed a preliminary estate and inheritance tax
return with the reservation of having the properties declared therein finally appraised at their
values six months after the death of Stevenson. Preliminary return was made by the ancillary
administrator in order to secure the waiver of the Collector of Internal Revenue on the
inheritance tax due on the 210,000 shares of stock in the Mindanao Mother Lode Mines Inc.
which the estate then desired to dispose in the United States. Acting upon said return, the
Collector of Internal Revenue accepted the valuation of the personal properties declared
therein, but increased the appraisal of the two parcels of land located in Baguio City by fixing
their fair market value in the amount of P52.200.00, instead of P43,500.00. After allowing the
deductions claimed by the ancillary administrator for funeral expenses in the amount of
P2,000.00 and for judicial and administration expenses in the sum of P5,500.00, the Collector
assessed the state the amount of P5,147.98 for estate tax and P10,875,26 or inheritance tax, or
a total of P16,023.23. Both of these assessments were paid by the estate on June 6, 1952.
On September 27, 1952, the ancillary administrator filed in amended estate and inheritance tax
return in pursuance f his reservation made at the time of filing of the preliminary return and for
the purpose of availing of the right granted by section 91 of the National Internal Revenue Code.

In this amended return the valuation of the 210,000 shares of stock in the Mindanao Mother
Lode Mines, Inc. was reduced from 0.38 per share, as originally declared, to P0.20 per share, or
from a total valuation of P79,800.00 to P42,000.00. This change in price per share of stock was
based by the ancillary administrator on the market notation of the stock obtaining at the San
Francisco California) Stock Exchange six months from the death of Stevenson, that is, As of
August 22, 1931. In addition, the ancillary administrator made claim for the following deductions:

Funeral expenses ($1,04326) P2,086.52

Judicial Expenses:
(a) Administrator's
Fee P1,204.34
(b) Attorney's Fee 6.000.00
(c) Judicial and
Administration
expenses as of
August 9, 1952 1,400.05
8,604.39
Real Estate Tax for
1951 on Baguio real
properties (O.R. No.
B-1 686836) 652.50
Claims against the
estate:
($5,000.00) P10,000.0
P10,000.00 0
Plus: 4% int. p.a.
from Feb. 2 to 22,
1951 22.47   10,022.47
Sub-Total P21,365.88

In the meantime, on December 1, 1952, Beatrice Mauricia Stevenson assigned all her rights
and interests in the estate to the spouses, Douglas and Bettina Fisher, respondents herein.

On September 7, 1953, the ancillary administrator filed a second amended estate and
inheritance tax return (Exh. "M-N"). This return declared the same assets of the estate stated in
the amended return of September 22, 1952, except that it contained new claims for additional
exemption and deduction to wit: (1) deduction in the amount of P4,000.00 from the gross estate
of the decedent as provided for in Section 861 (4) of the U.S. Federal Internal Revenue Code
which the ancillary administrator averred was allowable by way of the reciprocity granted by
Section 122 of the National Internal Revenue Code, as then held by the Board of Tax Appeals in
case No. 71 entitled "Housman vs. Collector," August 14, 1952; and (2) exemption from the
imposition of estate and inheritance taxes on the 210,000 shares of stock in the Mindanao
Mother Lode Mines, Inc. also pursuant to the reciprocity proviso of Section 122 of the National
Internal Revenue Code. In this last return, the estate claimed that it was liable only for the
amount of P525.34 for estate tax and P238.06 for inheritance tax and that, as a consequence, it
had overpaid the government. The refund of the amount of P15,259.83, allegedly overpaid, was
accordingly requested by the estate. The Collector denied the claim. For this reason, action was
commenced in the Court of First Instance of Manila by respondents, as assignees of Beatrice
Mauricia Stevenson, for the recovery of said amount. Pursuant to Republic Act No. 1125, the
case was forwarded to the Court of Tax Appeals which court, after hearing, rendered decision
the dispositive portion of which reads as follows:

In fine, we are of the opinion and so hold that: (a) the one-half (½) share of the surviving
spouse in the conjugal partnership property as diminished by the obligations properly
chargeable to such property should be deducted from the net estate of the deceased
Walter G. Stevenson, pursuant to Section 89-C of the National Internal Revenue Code;
(b) the intangible personal property belonging to the estate of said Stevenson is exempt
from inheritance tax, pursuant to the provision of section 122 of the National Internal
Revenue Code in relation to the California Inheritance Tax Law but decedent's estate is
not entitled to an exemption of P4,000.00 in the computation of the estate tax; (c) for
purposes of estate and inheritance taxation the Baguio real estate of the spouses should
be valued at P52,200.00, and 210,000 shares of stock in the Mindanao Mother Lode
Mines, Inc. should be appraised at P0.38 per share; and (d) the estate shall be entitled
to a deduction of P2,000.00 for funeral expenses and judicial expenses of P8,604.39.

From this decision, both parties appealed.

The Collector of Internal Revenue, hereinafter called petitioner assigned four errors allegedly
committed by the trial court, while the assignees, Douglas and Bettina Fisher hereinafter called
respondents, made six assignments of error. Together, the assigned errors raise the following
main issues for resolution by this Court:

(1) Whether or not, in determining the taxable net estate of the decedent, one-half (½) of the net
estate should be deducted therefrom as the share of tile surviving spouse in accordance with
our law on conjugal partnership and in relation to section 89 (c) of the National Internal revenue
Code;

(2) Whether or not the estate can avail itself of the reciprocity proviso embodied in Section 122
of the National Internal Revenue Code granting exemption from the payment of estate and
inheritance taxes on the 210,000 shares of stock in the Mindanao Mother Lode Mines Inc.;

(3) Whether or not the estate is entitled to the deduction of P4,000.00 allowed by Section 861,
U.S. Internal Revenue Code in relation to section 122 of the National Internal Revenue Code;

(4) Whether or not the real estate properties of the decedent located in Baguio City and the
210,000 shares of stock in the Mindanao Mother Lode Mines, Inc., were correctly appraised by
the lower court;

(5) Whether or not the estate is entitled to the following deductions: P8,604.39 for judicial and
administration expenses; P2,086.52 for funeral expenses; P652.50 for real estate taxes; and
P10,0,22.47 representing the amount of indebtedness allegedly incurred by the decedent during
his lifetime; and
(6) Whether or not the estate is entitled to the payment of interest on the amount it claims to
have overpaid the government and to be refundable to it.

In deciding the first issue, the lower court applied a well-known doctrine in our civil law that in
the absence of any ante-nuptial agreement, the contracting parties are presumed to have
adopted the system of conjugal partnership as to the properties acquired during their marriage.
The application of this doctrine to the instant case is being disputed, however, by petitioner
Collector of Internal Revenue, who contends that pursuant to Article 124 of the New Civil Code,
the property relation of the spouses Stevensons ought not to be determined by the Philippine
law, but by the national law of the decedent husband, in this case, the law of England. It is
alleged by petitioner that English laws do not recognize legal partnership between spouses, and
that what obtains in that jurisdiction is another regime of property relation, wherein all properties
acquired during the marriage pertain and belong Exclusively to the husband. In further support
of his stand, petitioner cites Article 16 of the New Civil Code (Art. 10 of the old) to the effect that
in testate and intestate proceedings, the amount of successional rights, among others, is to be
determined by the national law of the decedent.

In this connection, let it be noted that since the mariage of the Stevensons in the Philippines
took place in 1909, the applicable law is Article 1325 of the old Civil Code and not Article 124 of
the New Civil Code which became effective only in 1950. It is true that both articles adhere to
the so-called nationality theory of determining the property relation of spouses where one of
them is a foreigner and they have made no prior agreement as to the administration disposition,
and ownership of their conjugal properties. In such a case, the national law of the husband
becomes the dominant law in determining the property relation of the spouses. There is,
however, a difference between the two articles in that Article 124 1 of the new Civil Code
expressly provides that it shall be applicable regardless of whether the marriage was celebrated
in the Philippines or abroad while Article 13252 of the old Civil Code is limited to marriages
contracted in a foreign land.

It must be noted, however, that what has just been said refers to mixed marriages between a
Filipino citizen and a foreigner. In the instant case, both spouses are foreigners who married in
the Philippines. Manresa,3 in his Commentaries, has this to say on this point:

La regla establecida en el art. 1.315, se refiere a las capitulaciones otorgadas en

Espana y entre espanoles. El 1.325, a las celebradas en el extranjero cuando alguno de
los conyuges es espanol. En cuanto a la regla procedente cuando dos extranjeros se
casan en Espana, o dos espanoles en el extranjero hay que atender en el primer caso a
la legislacion de pais a que aquellos pertenezean, y en el segundo, a las reglas
generales consignadas en los articulos 9 y 10 de nuestro Codigo. (Emphasis supplied.)

If we adopt the view of Manresa, the law determinative of the property relation of the
Stevensons, married in 1909, would be the English law even if the marriage was celebrated in
the Philippines, both of them being foreigners. But, as correctly observed by the Tax Court, the
pertinent English law that allegedly vests in the decedent husband full ownership of the
properties acquired during the marriage has not been proven by petitioner. Except for a mere
allegation in his answer, which is not sufficient, the record is bereft of any evidence as to what
English law says on the matter. In the absence of proof, the Court is justified, therefore, in
indulging in what Wharton calls "processual presumption," in presuming that the law of England
on this matter is the same as our law.4
Nor do we believe petitioner can make use of Article 16 of the New Civil Code (art. 10, old Civil
Code) to bolster his stand. A reading of Article 10 of the old Civil Code, which incidentally is the
one applicable, shows that it does not encompass or contemplate to govern the question of
property relation between spouses. Said article distinctly speaks of amount of successional
rights and this term, in speaks in our opinion, properly refers to the extent or amount of property
that each heir is legally entitled to inherit from the estate available for distribution. It needs to be
pointed out that the property relation of spouses, as distinguished from their successional rights,
is governed differently by the specific and express provisions of Title VI, Chapter I of our new
Civil Code (Title III, Chapter I of the old Civil Code.) We, therefore, find that the lower court
correctly deducted the half of the conjugal property in determining the hereditary estate left by
the deceased Stevenson.

On the second issue, petitioner disputes the action of the Tax Court in the exempting the
respondents from paying inheritance tax on the 210,000 shares of stock in the Mindanao Mother
Lode Mines, Inc. in virtue of the reciprocity proviso of Section 122 of the National Internal
Revenue Code, in relation to Section 13851 of the California Revenue and Taxation Code, on
the ground that: (1) the said proviso of the California Revenue and Taxation Code has not been
duly proven by the respondents; (2) the reciprocity exemptions granted by section 122 of the
National Internal Revenue Code can only be availed of by residents of foreign countries and not
of residents of a state in the United States; and (3) there is no "total" reciprocity between the
Philippines and the state of California in that while the former exempts payment of both estate
and inheritance taxes on intangible personal properties, the latter only exempts the payment of
inheritance tax..

To prove the pertinent California law, Attorney Allison Gibbs, counsel for herein respondents,
testified that as an active member of the California Bar since 1931, he is familiar with the
revenue and taxation laws of the State of California. When asked by the lower court to state the
pertinent California law as regards exemption of intangible personal properties, the witness cited
article 4, section 13851 (a) and (b) of the California Internal and Revenue Code as published in
Derring's California Code, a publication of the Bancroft-Whitney Company inc. And as part of his
testimony, a full quotation of the cited section was offered in evidence as Exhibits "V-2" by the
respondents.

It is well-settled that foreign laws do not prove themselves in our jurisdiction and our courts are
not authorized to take judicial notice of them.5 Like any other fact, they must be alleged and
proved.6

Section 41, Rule 123 of our Rules of Court prescribes the manner of proving foreign laws before
our tribunals. However, although we believe it desirable that these laws be proved in
accordance with said rule, we held in the case of Willamette Iron and Steel Works v. Muzzal, 61
Phil. 471, that "a reading of sections 300 and 301 of our Code of Civil Procedure (now section
41, Rule 123) will convince one that these sections do not exclude the presentation of other
competent evidence to prove the existence of a foreign law." In that case, we considered the
testimony of an attorney-at-law of San Francisco, California who quoted verbatim a section of
California Civil Code and who stated that the same was in force at the time the obligations were
contracted, as sufficient evidence to establish the existence of said law. In line with this view, we
find no error, therefore, on the part of the Tax Court in considering the pertinent California law
as proved by respondents' witness.
We now take up the question of reciprocity in exemption from transfer or death taxes, between
the State of California and the Philippines.F

Section 122 of our National Internal Revenue Code, in pertinent part, provides:

... And, provided, further, That no tax shall be collected under this Title in respect of
intangible personal property (a) if the decedent at the time of his death was a resident of
a foreign country which at the time of his death did not impose a transfer of tax or death
tax of any character in respect of intangible personal property of citizens of the
Philippines not residing in that foreign country, or (b) if the laws of the foreign country of
which the decedent was a resident at the time of his death allow a similar exemption
from transfer taxes or death taxes of every character in respect of intangible personal
property owned by citizens of the Philippines not residing in that foreign country."
(Emphasis supplied).

On the other hand, Section 13851 of the California Inheritance Tax Law, insofar as pertinent,
reads:.

"SEC. 13851, Intangibles of nonresident: Conditions. Intangible personal property is

exempt from the tax imposed by this part if the decedent at the time of his death was a
resident of a territory or another State of the United States or of a foreign state or
country which then imposed a legacy, succession, or death tax in respect to intangible
personal property of its own residents, but either:.

(a) Did not impose a legacy, succession, or death tax of any character in respect to
intangible personal property of residents of this State, or

(b) Had in its laws a reciprocal provision under which intangible personal property of a
non-resident was exempt from legacy, succession, or death taxes of every character if
the Territory or other State of the United States or foreign state or country in which the
nonresident resided allowed a similar exemption in respect to intangible personal
property of residents of the Territory or State of the United States or foreign state or
country of residence of the decedent." (Id.)

It is clear from both these quoted provisions that the reciprocity must be total, that is, with
respect to transfer or death taxes of any and every character, in the case of the Philippine law,
and to legacy, succession, or death taxes of any and every character, in the case of the
California law. Therefore, if any of the two states collects or imposes and does not exempt any
transfer, death, legacy, or succession tax of any character, the reciprocity does not work. This is
the underlying principle of the reciprocity clauses in both laws.

In the Philippines, upon the death of any citizen or resident, or non-resident with properties
therein, there are imposed upon his estate and its settlement, both an estate and an inheritance
tax. Under the laws of California, only inheritance tax is imposed. On the other hand, the
Federal Internal Revenue Code imposes an estate tax on non-residents not citizens of the
United States,7 but does not provide for any exemption on the basis of reciprocity. Applying
these laws in the manner the Court of Tax Appeals did in the instant case, we will have a
situation where a Californian, who is non-resident in the Philippines but has intangible personal
properties here, will the subject to the payment of an estate tax, although exempt from the
payment of the inheritance tax. This being the case, will a Filipino, non-resident of California, but
with intangible personal properties there, be entitled to the exemption clause of the California
law, since the Californian has not been exempted from every character of legacy, succession, or
death tax because he is, under our law, under obligation to pay an estate tax? Upon the other
hand, if we exempt the Californian from paying the estate tax, we do not thereby entitle a
Filipino to be exempt from a similar estate tax in California because under the Federal Law,
which is equally enforceable in California he is bound to pay the same, there being no
reciprocity recognized in respect thereto. In both instances, the Filipino citizen is always at a
disadvantage. We do not believe that our legislature has intended such an unfair situation to the
detriment of our own government and people. We, therefore, find and declare that the lower
court erred in exempting the estate in question from payment of the inheritance tax.

We are not unaware of our ruling in the case of Collector of Internal Revenue vs. Lara (G.R.
Nos. L-9456 & L-9481, prom. January 6, 1958, 54 O.G. 2881) exempting the estate of the
deceased Hugo H. Miller from payment of the inheritance tax imposed by the Collector of
Internal Revenue. It will be noted, however, that the issue of reciprocity between the pertinent
provisions of our tax law and that of the State of California was not there squarely raised, and
the ruling therein cannot control the determination of the case at bar. Be that as it may, we now
declare that in view of the express provisions of both the Philippine and California laws that the
exemption would apply only if the law of the other grants an exemption from legacy, succession,
or death taxes of every character, there could not be partial reciprocity. It would have to be total
or none at all.

With respect to the question of deduction or reduction in the amount of P4,000.00 based on the
U.S. Federal Estate Tax Law which is also being claimed by respondents, we uphold and
adhere to our ruling in the Lara case (supra) that the amount of $2,000.00 allowed under the
Federal Estate Tax Law is in the nature of a deduction and not of an exemption regarding which
reciprocity cannot be claimed under the provision of Section 122 of our National Internal
Revenue Code. Nor is reciprocity authorized under the Federal Law. .

On the issue of the correctness of the appraisal of the two parcels of land situated in Baguio
City, it is contended that their assessed values, as appearing in the tax rolls 6 months after the
death of Stevenson, ought to have been considered by petitioner as their fair market value,
pursuant to section 91 of the National Internal Revenue Code. It should be pointed out,
however, that in accordance with said proviso the properties are required to be appraised at
their fair market value and the assessed value thereof shall be considered as the fair market
value only when evidence to the contrary has not been shown. After all review of the record, we
are satisfied that such evidence exists to justify the valuation made by petitioner which was
sustained by the tax court, for as the tax court aptly observed:

"The two parcels of land containing 36,264 square meters were valued by the
administrator of the estate in the Estate and Inheritance tax returns filed by him at
P43,500.00 which is the assessed value of said properties. On the other hand,
defendant appraised the same at P52,200.00. It is of common knowledge, and this Court
can take judicial notice of it, that assessments for real estate taxation purposes are very
much lower than the true and fair market value of the properties at a given time and
place. In fact one year after decedent's death or in 1952 the said properties were sold for
a price of P72,000.00 and there is no showing that special or extraordinary
circumstances caused the sudden increase from the price of P43,500.00, if we were to
accept this value as a fair and reasonable one as of 1951. Even more, the counsel for
plaintiffs himself admitted in open court that he was willing to purchase the said
 properties at P2.00 per square meter. In the light of these facts we believe and therefore
hold that the valuation of P52,200.00 of the real estate in Baguio made by defendant is
fair, reasonable and justified in the premises." (Decision, p. 19).

In respect to the valuation of the 210,000 shares of stock in the Mindanao Mother Lode Mines,
Inc., (a domestic corporation), respondents contend that their value should be fixed on the basis
of the market quotation obtaining at the San Francisco (California) Stock Exchange, on the
theory that the certificates of stocks were then held in that place and registered with the said
stock exchange. We cannot agree with respondents' argument. The situs of the shares of stock,
for purposes of taxation, being located here in the Philippines, as respondents themselves
concede and considering that they are sought to be taxed in this jurisdiction, consistent with the
exercise of our government's taxing authority, their fair market value should be taxed on the
basis of the price prevailing in our country.

Upon the other hand, we find merit in respondents' other contention that the said shares of
stock commanded a lesser value at the Manila Stock Exchange six months after the death of
Stevenson. Through Atty. Allison Gibbs, respondents have shown that at that time a share of
said stock was bid for at only P.325 (p. 103, t.s.n.). Significantly, the testimony of Atty. Gibbs in
this respect has never been questioned nor refuted by petitioner either before this court or in the
court below. In the absence of evidence to the contrary, we are, therefore, constrained to
reverse the Tax Court on this point and to hold that the value of a share in the said mining
company on August 22, 1951 in the Philippine market was P.325 as claimed by respondents..

It should be noted that the petitioner and the Tax Court valued each share of stock of P.38 on
the basis of the declaration made by the estate in its preliminary return. Patently, this should not
have been the case, in view of the fact that the ancillary administrator had reserved and availed
of his legal right to have the properties of the estate declared at their fair market value as of six
months from the time the decedent died..

On the fifth issue, we shall consider the various deductions, from the allowance or disallowance
of which by the Tax Court, both petitioner and respondents have appealed..

Petitioner, in this regard, contends that no evidence of record exists to support the allowance of
the sum of P8,604.39 for the following expenses:.

1) Administrator's fee P1,204.34

2) Attorney's fee 6,000.00
3) Judicial and   2,052.55
Administrative expenses
            Total Deductions P8,604.39

An examination of the record discloses, however, that the foregoing items were considered
deductible by the Tax Court on the basis of their approval by the probate court to which said
expenses, we may presume, had also been presented for consideration. It is to be supposed
that the probate court would not have approved said items were they not supported by evidence
presented by the estate. In allowing the items in question, the Tax Court had before it the
pertinent order of the probate court which was submitted in evidence by respondents. (Exh.
"AA-2", p. 100, record). As the Tax Court said, it found no basis for departing from the findings
of the probate court, as it must have been satisfied that those expenses were actually incurred.
Under the circumstances, we see no ground to reverse this finding of fact which, under Republic
Act of California National Association, which it would appear, that while still living, Walter G.
Stevenson obtained we are not inclined to pass upon the claim of respondents in respect to the
additional amount of P86.52 for funeral expenses which was disapproved by the court a quo for
lack of evidence.

In connection with the deduction of P652.50 representing the amount of realty taxes paid in
1951 on the decedent's two parcels of land in Baguio City, which respondents claim was
disallowed by the Tax Court, we find that this claim has in fact been allowed. What happened
here, which a careful review of the record will reveal, was that the Tax Court, in itemizing the
liabilities of the estate, viz:

1) Administrator's fee P1,204.34

2) Attorney's fee 6,000.00
3) Judicial and Administration
expenses as of August 9,
1952   2,052.55
            Total P9,256.89

added the P652.50 for realty taxes as a liability of the estate, to the P1,400.05 for judicial and
administration expenses approved by the court, making a total of P2,052.55, exactly the same
figure which was arrived at by the Tax Court for judicial and administration expenses. Hence,
the difference between the total of P9,256.98 allowed by the Tax Court as deductions, and the
P8,604.39 as found by the probate court, which is P652.50, the same amount allowed for realty
taxes. An evident oversight has involuntarily been made in omitting the P2,000.00 for funeral
expenses in the final computation. This amount has been expressly allowed by the lower court
and there is no reason why it should not be. .

We come now to the other claim of respondents that pursuant to section 89(b) (1) in relation to
section 89(a) (1) (E) and section 89(d), National Internal Revenue Code, the amount of
P10,022.47 should have been allowed the estate as a deduction, because it represented an
indebtedness of the decedent incurred during his lifetime. In support thereof, they offered in
evidence a duly certified claim, presented to the probate court in California by the Bank of
California National Association, which it would appear, that while still living, Walter G.
Stevenson obtained a loan of $5,000.00 secured by pledge on 140,000 of his shares of stock in
the Mindanao Mother Lode Mines, Inc. (Exhs. "Q-Q4", pp. 53-59, record). The Tax Court
disallowed this item on the ground that the local probate court had not approved the same as a
valid claim against the estate and because it constituted an indebtedness in respect to
intangible personal property which the Tax Court held to be exempt from inheritance tax.

For two reasons, we uphold the action of the lower court in disallowing the deduction.

Firstly, we believe that the approval of the Philippine probate court of this particular
indebtedness of the decedent is necessary. This is so although the same, it is averred has been
already admitted and approved by the corresponding probate court in California, situs of the
principal or domiciliary administration. It is true that we have here in the Philippines only an
ancillary administration in this case, but, it has been held, the distinction between domiciliary or
principal administration and ancillary administration serves only to distinguish one administration
from the other, for the two proceedings are separate and independent. 8 The reason for the
ancillary administration is that, a grant of administration does not ex proprio vigore, have any
effect beyond the limits of the country in which it was granted. Hence, we have the requirement
that before a will duly probated outside of the Philippines can have effect here, it must first be
proved and allowed before our courts, in much the same manner as wills originally presented for
allowance therein.9 And the estate shall be administered under letters testamentary, or letters of
administration granted by the court, and disposed of according to the will as probated, after
payment of just debts and expenses of administration. 10 In other words, there is a regular
administration under the control of the court, where claims must be presented and approved,
and expenses of administration allowed before deductions from the estate can be authorized.
Otherwise, we would have the actuations of our own probate court, in the settlement and
distribution of the estate situated here, subject to the proceedings before the foreign court over
which our courts have no control. We do not believe such a procedure is countenanced or
contemplated in the Rules of Court.

Another reason for the disallowance of this indebtedness as a deduction, springs from the
provisions of Section 89, letter (d), number (1), of the National Internal Revenue Code which
reads:

(d) Miscellaneous provisions — (1) No deductions shall be allowed in the case of a non-

resident not a citizen of the Philippines unless the executor, administrator or anyone of
the heirs, as the case may be, includes in the return required to be filed under section
ninety-three the value at the time of his death of that part of the gross estate of the non-
resident not situated in the Philippines."

In the case at bar, no such statement of the gross estate of the non-resident Stevenson not
situated in the Philippines appears in the three returns submitted to the court or to the office of
the petitioner Collector of Internal Revenue. The purpose of this requirement is to enable the
revenue officer to determine how much of the indebtedness may be allowed to be deducted,
pursuant to (b), number (1) of the same section 89 of the Internal Revenue Code which
provides:

(b) Deductions allowed to non-resident estates. — In the case of a non-resident not a

citizen of the Philippines, by deducting from the value of that part of his gross estate
which at the time of his death is situated in the Philippines —

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

specified in paragraph (1) of subjection (a) of this section11 which the value of such part
bears the value of his entire gross estate wherever situated;"

In other words, the allowable deduction is only to the extent of the portion of the indebtedness
which is equivalent to the proportion that the estate in the Philippines bears to the total estate
wherever situated. Stated differently, if the properties in the Philippines constitute but 1/5 of the
entire assets wherever situated, then only 1/5 of the indebtedness may be deducted. But since,
as heretofore adverted to, there is no statement of the value of the estate situated outside the
Philippines, no part of the indebtedness can be allowed to be deducted, pursuant to Section 89,
letter (d), number (1) of the Internal Revenue Code.

For the reasons thus stated, we affirm the ruling of the lower court disallowing the deduction of
the alleged indebtedness in the sum of P10,022.47.
In recapitulation, we hold and declare that:

(a) only the one-half (1/2) share of the decedent Stevenson in the conjugal partnership
property constitutes his hereditary estate subject to the estate and inheritance taxes;

(b) the intangible personal property is not exempt from inheritance tax, there existing no
complete total reciprocity as required in section 122 of the National Internal Revenue
Code, nor is the decedent's estate entitled to an exemption of P4,000.00 in the
computation of the estate tax;

(c) for the purpose of the estate and inheritance taxes, the 210,000 shares of stock in
the Mindanao Mother Lode Mines, Inc. are to be appraised at P0.325 per share; and

(d) the P2,000.00 for funeral expenses should be deducted in the determination of the
net asset of the deceased Stevenson.

In all other respects, the decision of the Court of Tax Appeals is affirmed.

Respondent's claim for interest on the amount allegedly overpaid, if any actually results after a
recomputation on the basis of this decision is hereby denied in line with our recent decision
in Collector of Internal Revenue v. St. Paul's Hospital (G.R. No. L-12127, May 29, 1959)
wherein we held that, "in the absence of a statutory provision clearly or expressly directing or
authorizing such payment, and none has been cited by respondents, the National Government
cannot be required to pay interest."

WHEREFORE, as modified in the manner heretofore indicated, the judgment of the lower court
is hereby affirmed in all other respects not inconsistent herewith. No costs. So ordered.

Marcos v. CA and CIR, G.R. No. 120880 June 5, 1997

G.R. No. 120880 June 5, 1997

FERDINAND R. MARCOS II, petitioner,

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

TORRES, JR., J.:

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

31363, where the said court held:

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

WHEREFORE, premises considered, judgment is hereby rendered DISMISSING the

petition for certiorari with prayer for Restraining Order and Injunction.

No pronouncements as to costs.

SO ORDERED.

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

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

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

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

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

After the parties had pleaded their case, the Court of Appeals rendered its Decision    on November
2

29, 1994, ruling that the deficiency assessments for estate and income tax made upon the petitioner
and the estate of the deceased President Marcos have already become final and unappealable, and
may thus be enforced by the summary remedy of levying upon the properties of the late President,
as was done by the respondent Commissioner of Internal Revenue.

WHEREFORE, premises considered judgment is hereby rendered DISMISSING the

petition for Certiorari with prayer for Restraining Order and Injunction.

No pronouncements as to cost.

SO ORDERED.

Unperturbed, petitioner is now before us assailing the validity of the appellate court's decision,
assigning the following as errors:
 A. RESPONDENT COURT MANIFESTLY ERRED IN RULING THAT THE
SUMMARY TAX REMEDIES RESORTED TO BY THE GOVERNMENT ARE NOT
AFFECTED AND PRECLUDED BY THE PENDENCY OF THE SPECIAL
PROCEEDING FOR THE ALLOWANCE OF THE LATE PRESIDENT'S ALLEGED
WILL. TO THE CONTRARY, THIS PROBATE PROCEEDING PRECISELY PLACED
ALL PROPERTIES WHICH FORM PART OF THE LATE PRESIDENT'S ESTATE IN
CUSTODIA LEGIS OF THE PROBATE COURT TO THE EXCLUSION OF ALL
OTHER COURTS AND ADMINISTRATIVE AGENCIES.

B. RESPONDENT COURT ARBITRARILY ERRED IN SWEEPINGLY DECIDING

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

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

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

[b] Petitioner, as one of the late President's compulsory heirs, was

never notified, much less served with copies of the Notices of Levy,
contrary to the mandate of Section 213 of the NIRC. As such,
petitioner was never given an opportunity to contest the Notices in
violation of his right to due process of law.

C. ON ACCOUNT OF THE CLEAR MERIT OF THE PETITION, RESPONDENT

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

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

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

Hawaii, USA.

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

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

The Commissioner of Internal Revenue thereby caused the preparation and filing of
the Estate Tax Return for the estate of the late president, the Income Tax Returns of
the Spouses Marcos for the years 1985 to 1986, and the Income Tax Returns of
petitioner Ferdinand "Bongbong" Marcos II for the years 1982 to 1985.

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

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

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

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

On May 20, 1993, four more Notices of Levy on real property were issued for the
purpose of satisfying the deficiency income taxes.
 On May 26, 1993, additional four (4) notices of Levy on real property were again
issued. The foregoing tax remedies were resorted to pursuant to Sections 205 and
213 of the National Internal Revenue Code (NIRC).

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

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

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

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

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

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

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

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

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

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

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

In testament to this, it has been held that it is within the jurisdiction of the probate court to approve
the sale of properties of a deceased person by his prospective heirs before final adjudication;   to 5

determine who are the heirs of the decedent;   the recognition of a natural child;   the status of a
6 7

woman claiming to be the legal wife of the decedent;   the legality of disinheritance of an heir by the
8

testator;   and to pass upon the validity of a waiver of hereditary rights. 

9 10

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

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

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

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

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

Thus, it was in Vera vs. Fernandez   that the court recognized the liberal treatment of claims for
12

taxes charged against the estate of the decedent. Such taxes, we said, were exempted from the
application of the statute of non-claims, and this is justified by the necessity of government funding,
immortalized in the maxim that taxes are the lifeblood of the government. Vectigalia nervi sunt rei
publicae — taxes are the sinews of the state.

Taxes assessed against the estate of a deceased person, after administration is

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

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

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

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

From the foregoing, it is discernible that the approval of the court, sitting in probate, or as a
settlement tribunal over the deceased is not a mandatory requirement in the collection of estate
taxes. It cannot therefore be argued that the Tax Bureau erred in proceeding with the levying and
sale of the properties allegedly owned by the late President, on the ground that it was required to
seek first the probate court's sanction. There is nothing in the Tax Code, and in the pertinent
remedial laws that implies the necessity of the probate or estate settlement court's approval of the
state's claim for estate taxes, before the same can be enforced and collected.
On the contrary, under Section 87 of the NIRC, it is the probate or settlement court which is bidden
not to authorize the executor or judicial administrator of the decedent's estate to deliver any
distributive share to any party interested in the estate, unless it is shown a Certification by the
Commissioner of Internal Revenue that the estate taxes have been paid. This provision disproves
the petitioner's contention that it is the probate court which approves the assessment and collection
of the estate tax.

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

Section 229 of the NIRC tells us how:

Sec. 229. Protesting of assessment. — When the Commissioner of Internal Revenue

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

Such assessment may be protested administratively by filing a request for

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

If the protest is denied in whole or in part, the individual, association or corporation

adversely affected by the decision on the protest may appeal to the Court of Tax
Appeals within thirty (30) days from receipt of said decision; otherwise, the decision
shall become final, executory and demandable. (As inserted by P.D. 1773)

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

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

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

. . . the Notices of Levy on Real Property (Annexes O to NN of Annex C of this

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

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

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

Sec. 223. Exceptions as to a period of limitation of assessment and collection of

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

xxx xxx xxx

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

xxx xxx xxx

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

Petitioner further argues that "the numerous pending court cases questioning the late president's
ownership or interests in several properties (both real and personal) make the total value of his
estate, and the consequent estate tax due, incapable of exact pecuniary determination at this time.
Thus, respondents' assessment of the estate tax and their issuance of the Notices of Levy and sale
are premature and oppressive." He points out the pendency of Sandiganbayan Civil Case Nos.
0001-0034 and 0141, which were filed by the government to question the ownership and interests of
the late President in real and personal properties located within and outside the Philippines.
Petitioner, however, omits to allege whether the properties levied upon by the BIR in the collection of
estate taxes upon the decedent's estate were among those involved in the said cases pending in the
Sandiganbayan. Indeed, the court is at a loss as to how these cases are relevant to the matter at
issue. The mere fact that the decedent has pending cases involving ill-gotten wealth does not affect
the enforcement of tax assessments over the properties indubitably included in his estate.
Petitioner also expresses his reservation as to the propriety of the BIR's total assessment of
P23,292,607,638.00, stating that this amount deviates from the findings of the Department of
Justice's Panel of Prosecutors as per its resolution of 20 September 1991. Allegedly, this is clear
evidence of the uncertainty on the part of the Government as to the total value of the estate of the
late President.

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

It is not the Department of Justice which is the government agency tasked to determine the amount
of taxes due upon the subject estate, but the Bureau of Internal Revenue,   whose determinations
16

and assessments are presumed correct and made in good faith.   The taxpayer has the duty of
17

proving otherwise. In the absence of proof of any irregularities in the performance of official duties,
an assessment will not be disturbed. Even an assessment based on estimates is prima facie valid
and lawful where it does not appear to have been arrived at arbitrarily or capriciously. The burden of
proof is upon the complaining party to show clearly that the assessment is erroneous. Failure to
present proof of error in the assessment will justify the judicial affirmance of said assessment.    In
18

this instance, petitioner has not pointed out one single provision in the Memorandum of the Special
Audit Team which gave rise to the questioned assessment, which bears a trace of falsity. Indeed,
the petitioner's attack on the assessment bears mainly on the alleged improbable and
unconscionable amount of the taxes charged. But mere rhetoric cannot supply the basis for the
charge of impropriety of the assessments made.

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

in view of the absence of sufficient attack against the actuations of government.

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

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

Even if we are to rule out the notices of assessments personally given to the
caretaker of Mrs. Marcos at the latter's last known address, on August 26, 1991 and
September 12, 1991, as well as the notices of assessment personally given to the
caretaker of petitioner also at his last known address on September 12, 1991 — the
subsequent notices given thereafter could no longer be ignored as they were sent at
a time when petitioner was already here in the Philippines, and at a place where said
notices would surely be called to petitioner's attention, and received by responsible
persons of sufficient age and discretion.
 Thus, on October 20, 1992, formal assessment notices were served upon Mrs.
Marcos c/o the petitioner, at his office, House of Representatives, Batasan
Pambansa, Q.C. (Annexes "A", "A-1", "A-2", "A-3"; pp. 207-210,
Comment/Memorandum of OSG). Moreover, a notice to taxpayer dated October 8,
1992 inviting Mrs. Marcos to a conference relative to her tax liabilities, was furnished
the counsel of Mrs. Marcos — Dean Antonio Coronel (Annex "B", p. 211, ibid).
Thereafter, copies of Notices were also served upon Mrs. Imelda Marcos, the
petitioner and their counsel "De Borja, Medialdea, Ata, Bello, Guevarra and Serapio
Law Office", on April 7, 1993 and June 10, 1993. Despite all of these Notices,
petitioner never lifted a finger to protest the assessments, (upon which the Levy and
sale of properties were based), nor appealed the same to the Court of Tax Appeals.

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

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

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

xxx xxx xxx

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

xxx xxx xxx

The foregoing notwithstanding, the record shows that notices of warrants of distraint and levy of sale
were furnished the counsel of petitioner on April 7, 1993, and June 10, 1993, and the petitioner
himself on April 12, 1993 at his office at the Batasang Pambansa.   We cannot therefore,
21

countenance petitioner's insistence that he was denied due process. Where there was an
opportunity to raise objections to government action, and such opportunity was disregarded, for no
justifiable reason, the party claiming oppression then becomes the oppressor of the orderly functions
of government. He who comes to court must come with clean hands. Otherwise, he not only taints
his name, but ridicules the very structure of established authority.
IN VIEW WHEREOF, the Court RESOLVED to DENY the present petition. The Decision of the Court
of Appeals dated November 29, 1994 is hereby AFFIRMED in all respects.

SO ORDERED.

CIR v. Estate of Toda, G.R. No. 147188 Sept. 14, 2004

G.R. No. 147188             September 14, 2004

COMMISSIONER OF INTERNAL REVENUE, petitioner,

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

DECISION

DAVIDE, JR., C.J.:

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

The petitioner seeks the reversal of the Decision 1 of the Court of Appeals of 31 January 2001 in CA-
G.R. SP No. 57799 affirming the 3 January 2000 Decision 2 of the Court of Tax Appeals (CTA) in
C.T.A. Case No. 5328, 3 which held that the respondent Estate of Benigno P. Toda, Jr. is not liable
for the deficiency income tax of Cibeles Insurance Corporation (CIC) in the amount of
₱79,099,999.22 for the year 1989, and ordered the cancellation and setting aside of the assessment
issued by Commissioner of Internal Revenue Liwayway Vinzons-Chato on 9 January 1995.

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

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

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

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

On 16 April 1990, CIC filed its corporate annual income tax return 7 for the year 1989, declaring,
among other things, its gain from the sale of real property in the amount of ₱75,728.021. After
crediting withholding taxes of ₱254,497.00, it paid ₱26,341,207 8 for its net taxable income of
₱75,987,725.
On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for ₱12.5 million,
as evidenced by a Deed of Sale of Shares of Stocks. 9 Three and a half years later, or on 16 January
1994, Toda died.

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

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

On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by special co-administrators
Lorna Kapunan and Mario Luza Bautista, received a Notice of Assessment 12 dated 9 January 1995
from the Commissioner of Internal Revenue for deficiency income tax for the year 1989 in the
amount of ₱79,099,999.22, computed as follows:

Income Tax – 1989

Net Income per

  ₱75,987,725.00  
return
Add: Additional gain on sale
of real property taxable under
ordinary corporate income but
were substituted with
individual capital 100,000,000.00
gains(₱200M – 100M)
Total Net Taxable Income per
₱175,987,725.00
investigation
Tax Due thereof at
₱ 61,595,703.75
35%
Less: Payment
already made
1. Per return ₱26,595,704.00
2. Thru Capital
Gains Tax made Balance
    by R.A. Altonaga 10,000,000.00 36,595,704.00 of tax due

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

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

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

==============

The Estate thereafter filed a letter of protest.13

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

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

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

In its decision18 of 3 January 2000, the CTA held that the Commissioner failed to prove that CIC
committed fraud to deprive the government of the taxes due it. It ruled that even assuming that a
pre-conceived scheme was adopted by CIC, the same constituted mere tax avoidance, and not tax
evasion. There being no proof of fraudulent transaction, the applicable period for the BIR to assess
CIC is that prescribed in Section 203 of the NIRC of 1986, which is three years after the last day
prescribed by law for the filing of the return. Thus, the government’s right to assess CIC prescribed
on 15 April 1993. The assessment issued on 9 January 1995 was, therefore, no longer valid. The
CTA also ruled that the mere ownership by Toda of 99.991% of the capital stock of CIC was not in
itself sufficient ground for piercing the separate corporate personality of CIC. Hence, the CTA
declared that the Estate is not liable for deficiency income tax of ₱79,099,999.22 and, accordingly,
cancelled and set aside the assessment issued by the Commissioner on 9 January 1995.

In its motion for reconsideration, 19 the Commissioner insisted that the sale of the property owned by
CIC was the result of the connivance between Toda and Altonaga. She further alleged that the latter
was a representative, dummy, and a close business associate of the former, having held his office in
a property owned by CIC and derived his salary from a foreign corporation (Aerobin, Inc.) duly
owned by Toda for representation services rendered. The CTA denied 20 the motion for
reconsideration, prompting the Commissioner to file a petition for review 21 with the Court of Appeals.

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

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

I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT COMMITTED

NO FRAUD WITH INTENT TO EVADE THE TAX ON THE SALE OF THE PROPERTIES OF
CIBELES INSURANCE CORPORATION.

II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE SEPARATE

CORPORATE PERSONALITY OF CIBELES INSURANCE CORPORATION.

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

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

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

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

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

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

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

We shall discuss these questions in seriatim.

Is this a case of tax evasion or tax avoidance?

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

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

All these factors are present in the instant case. It is significant to note that as early as 4 May 1989,
prior to the purported sale of the Cibeles property by CIC to Altonaga on 30 August 1989, CIC
received ₱40 million from RMI,25 and not from Altonaga. That ₱40 million was debited by RMI and
reflected in its trial balance 26 as "other inv. – Cibeles Bldg." Also, as of 31 July 1989, another ₱40
million was debited and reflected in RMI’s trial balance as "other inv. – Cibeles Bldg." This would
show that the real buyer of the properties was RMI, and not the intermediary Altonaga. lavvphi1.net

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

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

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

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

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

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

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

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

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

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

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

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

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

CIC is therefore liable to pay a 35% corporate tax for its taxable net income in 1989. The 5%
individual capital gains tax provided for in Section 34 (h) of the NIRC of 1986 35 (now 6% under
Section 24 (D) (1) of the Tax Reform Act of 1997) is inapplicable. Hence, the assessment for the
deficiency income tax issued by the BIR must be upheld.

Has the period of assessment prescribed?

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

Sec. 269. Exceptions as to period of limitation of assessment and collection of taxes.-(a) In

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

Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3)
failure to file a return, the period within which to assess tax is ten years from discovery of the fraud,
falsification or omission, as the case may be.

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

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

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

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

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

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

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

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

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

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

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

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

Costs against respondent.

SO ORDERED.

Estate of Alcantara v. BIR, CTA Case No. 3714, June 7, 1990

Dizon v. Court of Tax Appeals, G.R. No. 140944, April 30, 2008

G.R. No. 140944             April 30, 2008

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

DECISION

NACHURA, J.:

Before this Court is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Civil Procedure
seeking the reversal of the Court of Appeals (CA) Decision 2 dated April 30, 1999 which affirmed the
Decision3 of the Court of Tax Appeals (CTA) dated June 17, 1997. 4

The Facts
On November 7, 1987, Jose P. Fernandez (Jose) died. Thereafter, a petition for the probate of his
will5 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
Conjugal Real Property P10,855,020.00
(Sch. 1)
Conjugal Personal 3,460,591.34
Property (Sch.2)
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 NIL.  
Spouse
Net Share in Conjugal NIL  
Estate
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 & P66,973,985.4018
collectible

In his letter19 dated December 12, 1991, Atty. Gonzales moved for the reconsideration of the said
estate tax assessment. However, in her letter 20 dated April 12, 1994, the BIR Commissioner denied
the request and reiterated that the estate is liable for the payment of P66,973,985.40 as deficiency
estate tax. On May 3, 1994, petitioner received the letter of denial. On June 2, 1994, petitioner filed a
petition for review21 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 "A"
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);
2. Petition for the probate of the will and "B" & "B-1"
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);
3. Pleading entitled "Compliance" filed "C"
with the probate Court submitting the
final inventory of all the properties of
the deceased (p. 106, BIR records);
4. Attachment to Exh. "C" which is the "C-1" to "C-
detailed and complete listing of the 17"
properties of the deceased (pp. 89-
105, BIR rec.);
5. Claims against the estate filed by "D" to "D-
Equitable Banking Corp. with the 24"
probate Court in the amount
of P19,756,428.31 as of March 31,
1988, together with the Annexes to the
claim (pp. 64-88, BIR records);
6. Claim filed by Banque de L' Indochine "E" to "E-3"
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);
7. Claim of the Manila Banking "F" to "F-3"
Corporation (MBC) which as of
November 7, 1987 amounts
to P65,158,023.54, but recomputed as
of February 28, 1989 at a total amount
of P84,199,160.46; together with the
demand letter from MBC's lawyer (pp.
194-197, BIR records);
8. Demand letter of Manila Banking "G" & "G-1"
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);
9. Claim of State Investment House, Inc. "H" to "H-
filed with the RTC, Branch VII of 16"
Manila, docketed as Civil Case No.
86-38599 entitled "State Investment
House, Inc., Plaintiff, versus Maritime
Company Overseas, Inc. and/or Jose
P. Fernandez, Defendants," (pp. 200-
215, BIR records);
10. Letter dated March 14, 1990 of "I"
Arsenio P. Dizon addressed to Atty.
Jesus M. Gonzales, (p. 184, BIR
records);
11. Letter dated April 17, 1990 from J.M. "J"
Gonzales addressed to the Regional
Director of BIR in San Pablo City (p.
183, BIR records);
12. Estate Tax Return filed by the estate "K" to "K-5"
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);
13. Certified true copy of the Letter of "L"
 Administration issued by RTC Manila,
Branch 51, in Sp. Proc. No. 87-42980
appointing Atty. Rafael S. Dizon as
Judicial Administrator of the estate of
Jose P. Fernandez; (p. 102, CTA
records) and
14. Certification of Payment of estate "M" to "M-5"
taxes Nos. 2052 and 2053, both dated
April 27, 1990, issued by the Office of
the Regional Director, Revenue
Region No. 4-C, San Pablo City, with
attachments (pp. 103-104, CTA
records.).

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

The CTA's Ruling

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

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

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

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 5,917,007.96
Spouse
Net Share in Conjugal P 5,917,007.96
Estate
Add: Capital/Paraphernal
Properties
– P44,652,813.66
Less: 44,652,813.66
Capital/Paraphernal
Deductions
Net Taxable Estate P 50,569,821.62
============

Estate Tax
Due P 29,935,342.97
 Add: 25% Surcharge for 7,483,835.74
Late Filing
Add: Penalties for-No notice 15.00
of death
No CPA 300.00
certificate
Total deficiency estate tax P 37,419,493.71
============

exclusive of 20% interest from due date of its payment until full payment thereof

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

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

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
Resolution30 dated November 3, 1999.

Hence, the instant Petition raising the following issues:

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

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

3. Whether or not the Court of Tax Appeals and the Court of Appeals erred in disallowing the
valid and enforceable claims of creditors against the estate, as lawful deductions despite
clear and convincing evidence thereof; and
 4. Whether or not the Court of Tax Appeals and the Court of Appeals erred in validating
erroneous double imputation of values on the very same estate properties in the estate tax
return it prepared and filed which effectively bloated the estate's assets. 31

The petitioner claims that in as much as the valid claims of creditors against the Estate are in excess
of the gross estate, no estate tax was due; that the lack of a formal offer of evidence is fatal to BIR's
cause; that the doctrine laid down in Vda. de Oñate has already been abandoned in a long line of
cases in which the Court held that evidence not formally offered is without any weight or value; that
Section 34 of Rule 132 of the Rules on Evidence requiring a formal offer of evidence is mandatory in
character; that, while BIR's witness Alberto Enriquez (Alberto) in his testimony before the CTA
identified the pieces of evidence aforementioned such that the same were marked, BIR's failure to
formally offer said pieces of evidence and depriving petitioner the opportunity to cross-examine
Alberto, render the same inadmissible in evidence; that assuming arguendo that the ruling in Vda.
de Oñate is still applicable, BIR failed to comply with the doctrine's requisites because the
documents herein remained simply part of the BIR records and were not duly incorporated in the
court records; that the BIR failed to consider that although the actual payments made to the Estate
creditors were lower than their respective claims, such were compromise agreements reached long
after the Estate's liability had been settled by the filing of its estate tax return and the issuance of BIR
Certification Nos. 2052 and 2053; and that the reckoning date of the claims against the Estate and
the settlement of the estate tax due should be at the time the estate tax return was filed by the
judicial administrator and the issuance of said BIR Certifications and not at the time the
aforementioned Compromise Agreements were entered into with the Estate's creditors. 32

On the other hand, respondent counters that the documents, being part of the records of the case
and duly identified in a duly recorded testimony are considered evidence even if the same were not
formally offered; that the filing of the estate tax return by the Estate and the issuance of BIR
Certification Nos. 2052 and 2053 did not deprive the BIR of its authority to examine the return and
assess the estate tax; and that the factual findings of the CTA as affirmed by the CA may no longer
be reviewed by this Court via a petition for review. 33

The Issues

There are two ultimate issues which require resolution in this case:

First. Whether or not the CTA and the CA gravely erred in allowing the admission of the pieces of
evidence which were not formally offered by the BIR; and

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

The Court’s Ruling

The Petition is impressed with merit.

Under Section 8 of RA 1125, the CTA is categorically described as a court of record. As cases filed
before it are litigated de novo, party-litigants shall prove every minute aspect of their cases.
Indubitably, no evidentiary value can be given the pieces of evidence submitted by the BIR, as the
rules on documentary evidence require that these documents must be formally offered before the
CTA.34 Pertinent is Section 34, Rule 132 of the Revised Rules on Evidence which reads:
 SEC. 34. Offer of evidence. — The court shall consider no evidence which has not been
formally offered. The purpose for which the evidence is offered must be specified.

The CTA and the CA rely solely on the case of Vda. de Oñate, which reiterated this Court's previous
rulings in People v. Napat-a35 and People v. Mate36 on the admission and consideration of exhibits
which were not formally offered during the trial. Although in a long line of cases many of which were
decided after Vda. de Oñate, we held that courts cannot consider evidence which has not been
formally offered,37 nevertheless, petitioner cannot validly assume that the doctrine laid down in Vda.
de Oñate has already been abandoned. Recently, in Ramos v. Dizon,38 this Court, applying the said
doctrine, ruled that the trial court judge therein committed no error when he admitted and considered
the respondents' exhibits in the resolution of the case, notwithstanding the fact that the same were
not formally offered. Likewise, in Far East Bank & Trust Company v. Commissioner of Internal
Revenue,39 the Court made reference to said doctrine in resolving the issues therein. Indubitably, the
doctrine laid down in Vda. De Oñate still subsists in this jurisdiction. In Vda. de Oñate, we held that:

From the foregoing provision, it is clear that for evidence to be considered, the same must be
formally offered. Corollarily, the mere fact that a particular document is identified and marked
as an exhibit does not mean that it has already been offered as part of the evidence of a
party. In Interpacific Transit, Inc. v. Aviles [186 SCRA 385], we had the occasion to make a
distinction between identification of documentary evidence and its formal offer as an exhibit.
We said that the first is done in the course of the trial and is accompanied by the marking of
the evidence as an exhibit while the second is done only when the party rests its case and
not before. A party, therefore, may opt to formally offer his evidence if he believes that it will
advance his cause or not to do so at all. In the event he chooses to do the latter, the trial
court is not authorized by the Rules to consider the same.

However, in People v. Napat-a [179 SCRA 403] citing People v. Mate [103 SCRA 484], we

relaxed the foregoing rule and allowed evidence not formally offered to be admitted
and considered by the trial court provided the following requirements are present,
viz.: first, the same must have been duly identified by testimony duly recorded and,
second, the same must have been incorporated in the records of the case.40

From the foregoing declaration, however, it is clear that Vda. de Oñate is merely an exception to the
general rule. Being an exception, it may be applied only when there is strict compliance with the
requisites mentioned therein; otherwise, the general rule in Section 34 of Rule 132 of the Rules of
Court should prevail.

In this case, we find that these requirements have not been satisfied. The assailed pieces of
evidence were presented and marked during the trial particularly when Alberto took the witness
stand. Alberto identified these pieces of evidence in his direct testimony. 41 He was also subjected to
cross-examination and re-cross examination by petitioner. 42 But Alberto’s account and the
exchanges between Alberto and petitioner did not sufficiently describe the contents of the said
pieces of evidence presented by the BIR. In fact, petitioner sought that the lead examiner, one Ma.
Anabella A. Abuloc, be summoned to testify, inasmuch as Alberto was incompetent to answer
questions relative to the working papers. 43 The lead examiner never testified. Moreover, while
Alberto's testimony identifying the BIR's evidence was duly recorded, the BIR documents
themselves were not incorporated in the records of the case.

A common fact threads through Vda. de Oñate and Ramos that does not exist at all in the instant
case. In the aforementioned cases, the exhibits were marked at the pre-trial proceedings to warrant
the pronouncement that the same were duly incorporated in the records of the case. Thus, we held
in Ramos:
 In this case, we find and so rule that these requirements have been satisfied.  The exhibits
in question were presented and marked during the pre-trial of the case thus, they have
been incorporated into the records. Further, Elpidio himself explained the contents of
these exhibits when he was interrogated by respondents' counsel...

xxxx

But what further defeats petitioner's cause on this issue is that respondents' exhibits were
marked and admitted during the pre-trial stage as shown by the Pre-Trial Order quoted
earlier.44

While the CTA is not governed strictly by technical rules of evidence, 45 as rules of procedure are not
ends in themselves and are primarily intended as tools in the administration of justice, the
presentation of the BIR's evidence is not a mere procedural technicality which may be disregarded
considering that it is the only means by which the CTA may ascertain and verify the truth of BIR's
claims against the Estate.46 The BIR's failure to formally offer these pieces of evidence, despite
CTA's directives, is fatal to its cause. 47 Such failure is aggravated by the fact that not even a single
reason was advanced by the BIR to justify such fatal omission. This, we take against the BIR.

Per the records of this case, the BIR was directed to present its evidence 48 in the hearing of February
21, 1996, but BIR's counsel failed to appear. 49 The CTA denied petitioner's motion to consider BIR's
presentation of evidence as waived, with a warning to BIR that such presentation would be
considered waived if BIR's evidence would not be presented at the next hearing. Again, in the
hearing of March 20, 1996, BIR's counsel failed to appear. 50 Thus, in its Resolution51 dated March 21,
1996, the CTA considered the BIR to have waived presentation of its evidence. In the same
Resolution, the parties were directed to file their respective memorandum. Petitioner complied but
BIR failed to do so. 52 In all of these proceedings, BIR was duly notified. Hence, in this case, we are
constrained to apply our ruling in Heirs of Pedro Pasag v. Parocha: 53

A formal offer is necessary because judges are mandated to rest their findings of facts and
their judgment only and strictly upon the evidence offered by the parties at the trial. Its
function is to enable the trial judge to know the purpose or purposes for which the proponent
is presenting the evidence. On the other hand, this allows opposing parties to examine the
evidence and object to its admissibility. Moreover, it facilitates review as the appellate court
will not be required to review documents not previously scrutinized by the trial court.

Strict adherence to the said rule is not a trivial matter. The Court in  Constantino v. Court of
Appeals ruled that the formal offer of one's evidence is deemed waived after failing to
submit it within a considerable period of time. It explained that the court cannot admit
an offer of evidence made after a lapse of three (3) months because to do so would
"condone an inexcusable laxity if not non-compliance with a court order which, in
effect, would encourage needless delays and derail the speedy administration of
justice."

Applying the aforementioned principle in this case, we find that the trial court had reasonable
ground to consider that petitioners had waived their right to make a formal offer of
documentary or object evidence. Despite several extensions of time to make their formal
offer, petitioners failed to comply with their commitment and allowed almost five months to
lapse before finally submitting it. Petitioners' failure to comply with the rule on
admissibility of evidence is anathema to the efficient, effective, and expeditious
dispensation of justice.
Having disposed of the foregoing procedural issue, we proceed to discuss the merits of the case.

Ordinarily, the CTA's findings, as affirmed by the CA, are entitled to the highest respect and will not
be disturbed on appeal unless it is shown that the lower courts committed gross error in the
appreciation of facts.54 In this case, however, we find the decision of the CA affirming that of the CTA
tainted with palpable error.

It is admitted that the claims of the Estate's aforementioned creditors have been condoned. As a
mode of extinguishing an obligation,55 condonation or remission of debt56 is defined as:

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

Verily, the second issue in this case involves the construction of Section 79 58 of the National Internal
Revenue Code59 (Tax Code) which provides for the allowable deductions from the gross estate of the
decedent. The specific question is whether the actual claims of the aforementioned creditors may be
fully allowed as deductions from the gross estate of Jose despite the fact that the said claims were
reduced or condoned through compromise agreements entered into by the Estate with its creditors.

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

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

On the other hand, the Internal Revenue Service (Service) opines that post-death settlement should
be taken into consideration and the claim should be allowed as a deduction only to the extent of the
amount actually paid.64 Recognizing the dispute, the Service released Proposed Regulations in 2007
mandating that the deduction would be limited to the actual amount paid. 65

In announcing its agreement with Propstra,66 the U.S. 5th Circuit Court of Appeals held:

 We are persuaded that the Ninth Circuit's decision...in Propstra correctly apply the Ithaca
Trust date-of-death valuation principle to enforceable claims against the estate. As we
interpret Ithaca Trust, when the Supreme Court announced the date-of-death valuation
principle, it was making a judgment about the nature of the federal estate tax specifically,
that it is a tax imposed on the act of transferring property by will or intestacy and, because
the act on which the tax is levied occurs at a discrete time, i.e., the instance of death, the net
value of the property transferred should be ascertained, as nearly as possible, as of that
time. This analysis supports broad application of the date-of-death valuation rule. 67

We express our agreement with the date-of-death valuation rule, made pursuant to the ruling of the
U.S. Supreme Court in Ithaca Trust Co. v. United States.68 First. There is no law, nor do we discern
any legislative intent in our tax laws, which disregards the date-of-death valuation principle and
particularly provides that post-death developments must be considered in determining the net value
of the estate. It bears emphasis that tax burdens are not to be imposed, nor presumed to be
imposed, beyond what the statute expressly and clearly imports, tax statutes being
construed strictissimi juris against the government.69 Any doubt on whether a person, article or
activity is taxable is generally resolved against taxation. 70 Second. Such construction finds relevance
and consistency in our Rules on Special Proceedings wherein the term "claims" required to be
presented against a decedent's estate is generally construed to mean debts or demands of a
pecuniary nature which could have been enforced against the deceased in his lifetime, or liability
contracted by the deceased before his death.71 Therefore, the claims existing at the time of death are
significant to, and should be made the basis of, the determination of allowable deductions.

WHEREFORE, the instant Petition is GRANTED. Accordingly, the assailed Decision dated April 30,
1999 and the Resolution dated November 3, 1999 of the Court of Appeals in CA-G.R. S.P. No.
46947 are REVERSED and SET ASIDE. The Bureau of Internal Revenue's deficiency estate tax
assessment against the Estate of Jose P. Fernandez is hereby NULLIFIED. No costs.

SO ORDERED.