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.

FACTS:
Thomas Hanley died, leaving a will and a considerable amount of real and personal properties.
Proceedings for the probate of his will and the settlement and distribution of his estate were
begun in the CFI of Zamboanga. The will was admitted to probate.

The CFI considered it proper for the best interests of the estate to appoint a trustee to
administer the real properties which, under the will, were to pass to nephew Matthew ten years
after the two executors named in the will was appointed trustee. Moore acted as trustee until
he resigned and the plaintiff Lorenzo herein was appointed in his stead.

During the incumbency of the plaintiff as trustee, the defendant Collector of Internal Revenue
(Posadas) assessed against the estate an inheritance tax, together with the penalties for
delinquency in payment. Lorenzo paid said amount under protest, notifying Posadas at the
same time that unless the amount was promptly refunded suit would be brought for its
recovery. Posadas overruled Lorenzo’s protest and refused to refund the said amount. Plaintiff
went to court. The CFI dismissed Lorenzo’s complaint and Posadas’ counterclaim. Both parties
appealed to this court.

ISSUES AND RULING:

1. When does the inheritance tax accrue and when must it be satisfied?

The accrual of the inheritance tax is distinct from the obligation to pay the 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. It is in reality an excise or privilege
tax imposed on the right to succeed to, receive, or take property by or under a will or the
intestacy law, or deed, grant, or gift to become operative at or after death. According to article
657 of the Civil Code, "the rights to the succession of a person are transmitted from the
moment of his death." "In other words", said Arellano, C. J., ". . . the heirs succeed immediately
to all of the property of the deceased ancestor. The property belongs to the heirs at the
moment of the death of the ancestor as completely as if the ancestor had executed and
delivered to them a deed for the same before his death." 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. Thomas Hanley having died on May 27, 1922,
the inheritance tax accrued as of the date.

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

If death is the generating source from which the power of the estate to impose inheritance
taxes takes its being and if, upon the death of the decedent, succession takes place and the
right of the estate to tax vests instantly, the tax should be measured by the value of the
estate as it stood at the time of the decedent's death, regardless of any subsequent
contingency value of any subsequent increase or decrease in value. "The right of the
state to an inheritance tax accrues at the moment of death, and hence is ordinarily measured
as to any beneficiary by the value at that time of such property as passes to him. Subsequent
appreciation or depreciation is immaterial."

3. In determining the net value of the estate subject to tax, is it proper to deduct the
compensation due to trustees?

A trustee, no doubt, is entitled to receive a fair compensation for his services. But from this it
does not follow that the compensation due him may lawfully be deducted in arriving at the net
value of the estate subject to tax. There is no statute in the Philippines which requires
trustees' commissions to be deducted in determining the net value of the estate
subject to inheritance tax. 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. 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 but, in State vs.
Hennepin County Probate Court, 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 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."

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

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. The taxpayer cannot 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." But legislative intent that a tax statute should operate retroactively
should be perfectly clear. "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, . . . ." 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 effects can
begiven the statute by this court.

5. Has there been delinquency in the payment of the inheritance tax? If so, should the
additional interest claimed by the defendant in his appeal be paid by the estate?

P. J. M. Moore became trustee on March 10, 1924. On that date trust estate vested in him. 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. When Moore accepted the trust and took possession of the trust estate he thereby
admitted that the estate belonged not to him but to his cestui que trust. He did not acquire any
beneficial interest in the estate. He took such legal estate only as the proper execution of the
trust required and, his estate ceased upon the fulfillment of the testator's wishes. The estate
then vested absolutely in the beneficiary.

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 Revenue or this court may
remit or decrease such interest, no matter how heavily it may burden the taxpayer.