G.R. No.

L-34937

March 13, 1933

CONCEPCION VIDAL DE ROCES and her husband, MARCOS ROCES, and ELVIRA VIDAL DE RICHARDS, plaintiff-appellants, vs. JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellee. Feria and La O for appellants. Attorney-General Jaranilla for appellee. IMPERIAL, J.:

The plaintiffs herein brought this action to recover from the defendant, Collector of Internal Revenue, certain sums money paid by them under protest as inheritance tax. They appealed from the judgment rendered by the Court of F Instance of Manila dismissing the action, without costs.

On March 10 and 12, 1925, Esperanza Tuazon, by means of public documents, donated certain parcels of land situated Manila to the plaintiffs herein, who, with their respective husbands, accepted them in the same public documents, wh were duly recorded in the registry of deeds. By virtue of said donations, the plaintiffs took possession of the said lan received the fruits thereof and obtained the corresponding transfer certificates of title.

On January 5, 1926, the donor died in the City of Manila without leaving any forced heir and her will which was admit to probate, she bequeathed to each of the donees the sum of P5,000. After the estate had been distributed among instituted legatees and before delivery of their respective shares, the appellee herein, as Collector of Internal Reven ruled that the appellants, as donees and legatees, should pay as inheritance tax the sums of P16,673 and P13,951. respectively. Of these sums P15,191.48 was levied as tax on the donation to Concepcion Vidal de Roces and P1,481.52 her legacy, and, likewise, P12,388.95 was imposed upon the donation made to Elvira Vidal de Richards and P1,462.50 her legacy. At first the appellants refused to pay the aforementioned taxes but, at the insistence of the appellee and in or not to delay the adjudication of the legacies, they agreed at last, to pay them under protest.

The appellee filed a demurrer to the complaint on the ground that the facts alleged therein were not sufficient to constit a cause of action. After the legal questions raised therein had been discussed, the court sustained the demurrer and orde the amendment of the complaint which the appellants failed to do, whereupon the trial court dismissed the action on ground that the afore- mentioned appellants did not really have a right of action.

In their brief, the appellants assign only one alleged error, to wit: that the demurrer interposed by the appellee w sustained without sufficient ground. The judgment appealed from was based on the provisions of section 1540 Administrative Code which reads as follows:

SEC. 1540. Additions of gifts and advances. After the aforementioned deductions have been made, there sh be added to the resulting amount the value of all gifts or advances made by the predecessor to any those who, a his death, shall prove to be his heirs, devisees, legatees, or donees mortis causa.

The appellants contend that the above-mentioned legal provision does not include donations inter vivos and if it does, i unconstitutional, null and void for the following reasons: first, because it violates section 3 of the Jones Law wh provides that no law should embrace more than one subject, and that subject should be expressed in the title there second that the Legislature has no authority to impose inheritance tax on donations inter vivos; and third, because a le provision of this character contravenes the fundamental rule of uniformity of taxation. The appellee, in turn, contends t the words "all gifts" refer clearly to donations inter vivos and, in support of his theory, cites the doctrine laid in the case Tuason and Tuason vs. Posadas (54 Phil., 289). After a careful study of the law and the authorities applicable thereto,

are the opinion that neither theory reflects the true spirit of the aforementioned provision. The gifts referred to in sect 1540 of the Revised Administration Code are, obviously, those donations inter vivos that take effect immediately or dur the lifetime of the donor but are made in consideration or in contemplation of death. Gifts inter vivos, the transmission which is not made in contemplation of the donor's death should not be understood as included within the said le provision for the reason that it would amount to imposing a direct tax on property and not on the transmission there which act does not come within the scope of the provisions contained in Article XI of Chapter 40 of the Administrat Code which deals expressly with the tax on inheritances, legacies and other acquisitions mortis causa.

Our interpretation of the law is not in conflict with the rule laid down in the case of Tuason and Tuason vs. Posadas, sup We said therein, as we say now, that the expression "all gifts" refers to gifts inter vivos inasmuch as the law considers th as advances on inheritance, in the sense that they are gifts inter vivos made in contemplation or in consideration of dea In that case, it was not held that that kind of gifts consisted in those made completely independent of death or with regard to it.

Said legal provision is not null and void on the alleged ground that the subject matter thereof is not embraced in the title the section under which it is enumerated. On the contrary, its provisions are perfectly summarized in the heading, "Tax Inheritance, etc." which is the title of Article XI. Furthermore, the constitutional provision cited should not be stric construed as to make it necessary that the title contain a full index to all the contents of the law. It is sufficient if language used therein is expressed in such a way that in case of doubt it would afford a means of determining legislators intention. (Lewis' Sutherland Statutory Construction, Vol. II, p. 651.) Lastly, the circumstance that Administrative Code was prepared and compiled strictly in accordance with the provisions of the Jones Law on that ma should not be overlooked and that, in a compilation of laws such as the Administrative Code, it is but natural and pro that provisions referring to diverse matters should be found. (Ayson and Ignacio vs. Provincial Board of Rizal Municipal Council of Navotas, 39 Phil., 931.)

The appellants question the power of the Legislature to impose taxes on the transmission of real estate that takes eff immediately and during the lifetime of the donor, and allege as their reason that such tax partakes of the nature of the la tax which the law has already created in another part of the Administrative Code. Without making express pronouncem on this question, for it is unnecessary, we wish to state that such is not the case in these instance. The tax collected by appellee on the properties donated in 1925 really constitutes an inheritance tax imposed on the transmission of s properties in contemplation or in consideration of the donor's death and under the circumstance that the donees were la instituted as the former's legatees. For this reason, the law considers such transmissions in the form of gifts inter vivos advances on inheritance and nothing therein violates any constitutional provision, inasmuch as said legislation is within power of the Legislature.

Property Subject to Inheritance Tax. The inheritance tax ordinarily applies to all property within the power the state to reach passing by will or the laws regulating intestate succession or by gift inter vivos in the man designated by statute, whether such property be real or personal, tangible or intangible, corporeal or incorpor (26 R.C.L., p. 208, par. 177.)

In the case of Tuason and Tuason vs. Posadas, supra, it was also held that section 1540 of the Administrative Code did violate the constitutional provision regarding uniformity of taxation. It cannot be null and void on this ground becaus equally subjects to the same tax all of those donees who later become heirs, legatees or donees mortis causa by the wil the donor. There would be a repugnant and arbitrary exception if the provisions of the law were not applicable to all don of the same kind. In the case cited above, it was said: "At any rate the argument adduced against its constitutionality, wh is the lack of Uniformity, does not seem to be well founded. It was said that under such an interpretation, while a do inter vivos who, after the predecessor's death proved to be an heir, a legatee, or a donee mortis causa, would have to the tax, another donee inter vivos who did not prove to he an heir, a legatee, or a donee mortis causa of the predeces would be exempt from such a tax. But as these are two different cases, the principle of uniformity is inapplicable to them

The last question of a procedural nature arising from the case at bar, which should be passed upon, is whether the case, a now stands, can be decided on the merits or should be remanded to the court a quo for further proceedings. According

our view of the case, it follows that, if the gifts received by the appellants would have the right to recover the sums money claimed by them. Hence the necessity of ascertaining whether the complaint contains an allegation to that eff We have examined said complaint and found nothing of that nature. On the contrary, it be may be inferred from allegations contained in paragraphs 2 and 7 thereof that said donations inter vivos were made in consideration of donor's death. We refer to the allegations that such transmissions were effected in the month of March, 1925, that the do died in January, 1926, and that the donees were instituted legatees in the donor's will which was admitted to probate. I from these allegations, especially the last, that we infer a presumption juris tantum that said donations were made mo causa and, as such, are subject to the payment of inheritance tax.

Wherefore, the demurrer interposed by the appellee was well-founded because it appears that the complaint did not all fact sufficient to constitute a cause of action. When the appellants refused to amend the same, spite of the court's orde that effect, they voluntarily waived the opportunity offered them and they are not now entitled to have the case reman for further proceedings, which would serve no purpose altogether in view of the insufficiency of the complaint.

Wherefore, the judgment appealed from is hereby affirmed, with costs of this instance against the appellants. So ordered Avancea, C.J., Villamor, Ostrand, Abad Santos, Hull, Vickers and Buttes, JJ., concur.

Separate Opinions VILLA-REAL, J., dissenting:

I sustain my concurrence in Justice Street's dissenting opinion in the case of Tuason and Tuason vs. Posadas (54 Ph 289).

The majority opinion to distinguish the present case from above-mentioned case of Tuason and Tuason vs. Posadas, interpreting section 1540 of the Administrative Code in the sense that it establishes the legal presumption juris tantum all gifts inter vivos made to persons who are not forced heirs but who are instituted legatees in the donor's will, have b made in contemplation of the donor's death. Presumptions are of two kinds: One determined by law which is also cal presumption of law or of right; and another which is formed by the judge from circumstances antecedent to, coincid with or subsequent to the principal fact under investigation, which is also called presumption of man (presuncion hombre). (Escriche, Vol. IV, p. 662.) The Civil Code as well as the code of Civil Procedure establishes presumptions ju et de jure and juris tantum which the courts should take into account in deciding questions of law submitted to them decision. The presumption which majority opinion wishes to draw from said section 1540 of the Administrative Code neither be found in this Code nor in any of the aforementioned Civil Code and Code of Civil Procedure. Therefore, s presumption cannot be called legal or of law. Neither can it be called a presumption of man (presuncion de homb inasmuch as the majority opinion did not infer it from circumstances antecedent to, coincident with or subsequent to principal fact with is the donation itself. In view of the nature, mode of making and effects of donations inter vivos, contrary presumption would be more reasonable and logical; in other words, donations inter vivos made to persons who not forced heirs, but who are instituted legatees in the donor's will, should be presumed as not made mortis causa, unl the contrary is proven. In the case under consideration, the burden of the proof rests with the person who contends that donation inter vivos has been made mortis causa.

It is therefore, the undersigned's humble opinion that the order appealed from should be reversed and the demu overruled, and the defendant ordered to file his answer to the complaint. Street, J., concurs.

G.R. No. L-36770

November 4, 1932

LUIS W. DISON, plaintiff-appellant, vs. JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellant. Marcelino Aguas for plaintiff-appellant. Attorney-General Jaranilla for defendant-appellant.

BUTTE, J.:

This is an appeal from the decision of the Court of First Instance of Pampanga in favor of the defendant Ju Posadas, Jr., Collector of Internal Revenue, in a suit filed by the plaintiffs, Luis W. Dison, for the recovery of inheritance tax in the sum of P2,808.73 paid under protest. The petitioner alleged in his complaint that the tax is ille because he received the property, which is the basis of the tax, from his father before his death by a deed of gift inter vi which was duly accepted and registered before the death of his father. The defendant answered with a general denial with a counterdemand for the sum of P1,245.56 which it was alleged is a balance still due and unpaid on account of s tax. The plaintiff replied to the counterdemand with a general denial. The court a quo held that the cause of action set up the counterdemand was not proven and dismissed the same. Both sides appealed to this court, but the cross-complaint appeal of the Collector of Internal Revenue were dismissed by this court on March 17, 1932, on motion of the Attorn General.1awphil.net

The only evidence introduced at the trial of this cause was the proof of payment of the tax under protest, as sta and the deed of gift executed by Felix Dison on April 9, 1928, in favor of his sons Luis W. Dison, the plaintiff-appell This deed of gift transferred twenty-two tracts of land to the donee, reserving to the donor for his life the usufruct of th tracts. This deed was acknowledged by the donor before a notary public on April 16, 1928. Luis W. Dison, on April 1928, formally accepted said gift by an instrument in writing which he acknowledged before a notary public on April 1928. At the trial the parties agreed to and filed the following ingenious stipulation of fact: 1. That Don Felix Dison died on April 21, 1928;

2. That Don Felix Dison, before his death, made a gift inter vivos in favor of the plaintiff Luis W. Dison of all property according to a deed of gift (Exhibit D) which includes all the property of Don Felix Dizon; 3. That the plaintiff did not receive property of any kind of Don Felix Dison upon the death of the latter; 4. That Don Luis W. Dison was the legitimate and only child of Don Felix Dison. It is inferred from Exhibit D that Felix Dison was a widower at the time of his death.

The theory of the plaintiff-appellant is that he received and holds the property mentioned by a consummated gift that Act No. 2601 (Chapter 40 of the Administrative Code) being the inheritance tax statute, does not tax gifts. T provision directly here involved is section 1540 of the Administrative Code which reads as follows:

Additions of Gifts and Advances. After the aforementioned deductions have been made, there shall

added to the resulting amount the value of all gifts or advances made by the predecessor to any of those who, a his death, shall prove to be his heirs, devises, legatees, or donees mortis causa.

The question to be resolved may be stated thus: Does section 1540 of the Administrative Code subject the plaint appellant to the payment of an inheritance tax?

The appellant argues that there is no evidence in this case to support a finding that the gift was simulated and tha was an artifice for evading the payment of the inheritance tax, as is intimated in the decision of the court below and brief of the Attorney-General. We see no reason why the court may not go behind the language in which the transactio masked in order to ascertain its true character and purpose. In this case the scanty facts before us may not warrant inference that the conveyance, acknowledged by the donor five days before his death and accepted by the donee one before the donor's death, was fraudulently made for the purpose of evading the inheritance tax. But the facts, in opinion, do warrant the inference that the transfer was an advancement upon the inheritance which the donee, as the s and forced heir of the donor, would be entitled to receive upon the death of the donor.

The argument advanced by the appellant that he is not an heir of his deceased father within the meaning of sect 1540 of the Administrative Code because his father in his lifetime had given the appellant all his property and left property to be inherited, is so fallacious that the urging of it here casts a suspicion upon the appellants reason completing the legal formalities of the transfer on the eve of the latter's death. We do not know whether or not the fathe this case left a will; in any event, this appellant could not be deprived of his share of the inheritance because the Civil C confers upon him the status of a forced heir. We construe the expression in section 1540 "any of those who, after his dea shall prove to be his heirs", to include those who, by our law, are given the status and rights of heirs, regardless of quantity of property they may receive as such heirs. That the appellant in this case occupies the status of heir to deceased father cannot be questioned. Construing the conveyance here in question, under the facts presented, as advance made by Felix Dison to his only child, we hold section 1540 to be applicable and the tax to have been prope assessed by the Collector of Internal Revenue.

This appeal was originally assigned to a Division of five but referred to the court in banc by reason of the appella attack upon the constitutionality of section 1540. This attack is based on the sole ground that insofar as section 1540 lev a tax upon gifts inter vivos, it violates that provision of section 3 of the organic Act of the Philippine Islands (39 Stat. 545) which reads as follows: "That no bill which may be enacted into law shall embraced more than one subject, and t subject shall be expressed in the title of the bill." Neither the title of Act No. 2601 nor chapter 40 of the Administrat Code makes any reference to a tax on gifts. Perhaps it is enough to say of this contention that section 1540 plainly does tax gifts per se but only when those gifts are made to those who shall prove to be the heirs, devisees, legatees or don mortis causa of the donor. This court said in the case of Tuason and Tuason vs. Posadas 954 Phil., 289):lawphil.net

When the law says all gifts, it doubtless refers to gifts inter vivos, and not mortis causa. Both the letter the spirit of the law leave no room for any other interpretation. Such, clearly, is the tenor of the language wh refers to donations that took effect before the donor's death, and not to mortis causa donations, which can only made with the formalities of a will, and can only take effect after the donor's death. Any other construction wo virtually change this provision into:

". . . there shall be added to the resulting amount the value of all gifts mortis causa . . . made by the predecesso those who, after his death, shall prove to be his . . . donees mortis causa." We cannot give to the law an interpretation t would so vitiate its language. The truth of the matter is that in this section (1540) the law presumes that such gifts h been made in anticipation of inheritance, devise, bequest, or gift mortis causa, when the donee, after the death of the do proves to be his heir, devisee or donee mortis causa, for the purpose of evading the tax, and it is to prevent this tha provides that they shall be added to the resulting amount." However much appellant's argument on this point may fit preconceived notion that the transaction between him and his father was a consummated gift with no relation to inheritance, we hold that there is not merit in this attack upon the constitutionality of section 1540 under our view of facts. No other constitutional questions were raised in this case.

The judgment below is affirmed with costs in this instance against the appellant. So ordered. Avancea, C.J., Street, Malcolm, Ostrand, Abad Santos, Vickers and Imperial, JJ., concur.

G.R. No. L-34583

October 22, 1931

THE BANK OF THE PHILIPPINE ISLANDS, administrator of the estate of the late Adolphe Oscar Schuetze, plaintiff-appellant, vs. JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellee. Araneta, De Joya, Zaragoza and Araneta for appellant. Attorney-General Jaranilla for appellee.

VILLA-REAL, J.:

The Bank of the Philippine Islands, as administrator of the estate of the deceased Adolphe Oscar Schuetze, appealed to this court from the judgment of the Court of First Instance of Manila absolving the defendant Juan Posadas, Collector of Internal Revenue, from the complaint filed against him by said plaintiff bank, and dismissing the compla with costs. The appellant has assigned the following alleged errors as committed by the trial court in its judgment, to wit:

1. The lower court erred in holding that the testimony of Mrs. Schuetze was inefficient to established the domi of her husband. 2. The lower court erred in holding that under section 1536 of the Administrative Code the tax imposed by defendant is lawful and valid.

3. The lower court erred in not holding that one-half () of the proceeds of the policy in question is commun property and that therefore no inheritance tax can be levied, at least on one-half () of the said proceeds. 4. The lower court erred in not declaring that it would be unconstitutional to impose an inheritance tax upon insurance policy here in question as it would be a taking of property without due process of law.

The present complaint seeks to recover from the defendant Juan Posadas, Jr., Collector of Internal Revenue, amount of P1,209 paid by the plaintiff under protest, in its capacity of administrator of the estate of the late Adolphe Os Schuetze, as inheritance tax upon the sum of P20,150, which is the amount of an insurance policy on the deceased's l

wherein his own estate was named the beneficiary.

At the hearing, in addition to documentary and parol evidence, both parties submitted the following agreed statem of facts of the court for consideration:

It is hereby stipulated and agreed by and between the parties in the above-entitled action through their respect undersigned attorneys:

1. That the plaintiff, Rosario Gelano Vda. de Schuetze, window of the late Adolphe Oscar Schuetze, is of legal a a native of Manila, Philippine Islands, and is and was at all times hereinafter mentioned a resident of Germany, at the time of the death of her husband, the late Adolphe Oscar Schuetze, she was actually residing and living Germany;

2. That the Bank of the Philippine Islands, is and was at all times hereinafter mentioned a banking institution d organized and existing under and by virtue of the laws of the Philippine Islands;

3. That on or about August 23, 1928, the herein plaintiff before notary public Salvador Zaragoza, drew a gene power appointing the above-mentioned Bank of the Philippine Islands as her attorney-in-fact, and among powers conferred to said attorney-in-fact was the power to represent her in all legal actions instituted by or aga her;

4. That the defendant, of legal age, is and at all times hereinafter mentioned the duly appointed Collector Internal Revenue with offices at Manila, Philippine Islands;

5. That the deceased Adolphe Oscar Schuetze came to the Philippine Islands for the first time of March 31, 18 and worked in the several German firms as a mere employee and that from the year 1903 until the year 1918 was partner in the business of Alfredo Roensch; 6. That from 1903 to 1922 the said Adolphe Oscar Schuetze was in the habit of making various trips to Europe;

7. That on December 3, 1927, the late Adolphe Oscar Schuetze coming from Java, and with the intention of go to Bremen, landed in the Philippine Islands where he met his death on February 2, 1928;

8. That on March 31, 1926, the said Adolphe Oscar Schuetze, while in Germany, executed a will, in accorda with its law, wherein plaintiff was named his universal heir; 9. That the Bank of the Philippine Islands by order of the Court of First Instance of Manila under date of May 1928, was appointed administrator of the estate of the deceased Adolphe Oscar Schuetze;

10. That, according to the testamentary proceedings instituted in the Court of First Instance of Manila, civil c No. 33089, the deceased at the time of his death was possessed of not only real property situated in the Philipp Islands, but also personal property consisting of shares of stock in nineteen (19) domestic corporations;

11. That the fair market value of all the property in the Philippine Islands left by the deceased at the time of death in accordance with the inventory submitted to the Court of First Instance of Manila, civil case No. 330 was P217,560.38;

12. That the Bank of the Philippine Islands, as administrator of the estate of the deceased rendered its final acco on June 19, 1929, and that said estate was closed on July 16, 1929;

13. That among the personal property of the deceased was found life-insurance policy No. 194538 issued

Manila, Philippine Islands, on January 14, 1913, for the sum of $10,000 by the Sun Life Assurance Company Canada, Manila branch, a foreign corporation duly organized and existing under and by virtue of the laws Canada, and duly authorized to transact business in the Philippine Islands;

14. That in the insurance policy the estate of the said Adolphe Oscar Schuetze was named the beneficiary with any qualification whatsoever; 15. That for five consecutive years, the deceased Adolphe Oscar Schuetze paid the premiums of said policy to Sun Life Assurance Company of Canada, Manila branch;

16. That on or about the year 1918, the Sun Life Assurance Company of Canada, Manila branch, transferred s policy to the Sun Life Assurance Company of Canada, London branch; 17. That due to said transfer the said Adolphe Oscar Schuetze from 1918 to the time of his death paid premiums of said policy to the Sun Life Assurance Company of Canada, London Branch; 18. That the sole and only heir of the deceased Adolphe Oscar Schuetze is his widow, the plaintiff herein;

19. That at the time of the death of the deceased and at all times thereafter including the date when the s insurance policy was paid, the insurance policy was not in the hands or possession of the Manila office of the S Life Assurance Company of Canada, nor in the possession of the herein plaintiff, nor in the possession of attorney-in-fact the Bank of the Philippine Islands, but the same was in the hands of the Head Office of the S Life Assurance Company of Canada, at Montreal, Canada;

20. That on July 13, 1928, the Bank of the Philippine Islands as administrator of the decedent's estate recei from the Sun Life Assurance Company of Canada, Manila branch, the sum of P20,150 representing the proceeds the insurance policy, as shown in the statement of income and expenses of the estate of the deceased submitted June 18, 1929, by the administrator to the Court of First Instance of Manila, civil case No. 33089; 21. That the Bank of the Philippine Islands delivered to the plaintiff herein the said sum of P20,150; 22. That the herein defendant on or about July 5, 1929, imposed an inheritance tax upon the transmission of proceeds of the policy in question in the sum of P20,150 from the estate of the late Adolphe Oscar Schuetze to sole heir of the deceased, or the plaintiff herein, which inheritance tax amounted to the sum of P1,209;

23. That the Bank of the Philippine Islands as administrator of the decedent's estate and as attorney-in-fact of herein plaintiff, having been demanded by the herein defendant to pay inheritance tax amounting to the sum P1,209, paid to the defendant under protest the above-mentioned sum; 24. That notwithstanding the various demands made by plaintiff to the defendant, said defendant has refused refuses to refund to plaintiff the above mentioned sum of P1,209; 25. That plaintiff reserves the right to adduce evidence as regards the domicile of the deceased, and so defendant, the right to present rebuttal evidence;

26. That both plaintiff and defendant submit this stipulation of facts without prejudice to their right to introd such evidence, on points not covered by the agreement, which they may deem proper and necessary to supp their respective contentions.

In as much as one of the question raised in the appeal is whether an insurance policy on said Adolphe Os Schuetze's life was, by reason of its ownership, subject to the inheritance tax, it would be well to decide first whether

amount thereof is paraphernal or community property.

According to the foregoing agreed statement of facts, the estate of Adolphe Oscar Schuetze is the sole benefici named in the life-insurance policy for $10,000, issued by the Sun Life Assurance Company of Canada on January 1913. During the following five years the insured paid the premiums at the Manila branch of the company, and in 1918 policy was transferred to the London branch.

The record shows that the deceased Adolphe Oscar Schuetze married the plaintiff-appellant Rosario Gelano January 16, 1914.

With the exception of the premium for the first year covering the period from January 14, 1913 to January 14, 19 all the money used for paying the premiums, i. e., from the second year, or January 16, 1914, or when the decea Adolphe Oscar Schuetze married the plaintiff-appellant Rosario Gelano, until his death on February 2, 1929, is conju property inasmuch as it does not appear to have exclusively belonged to him or to his wife (art. 1407, Civil Code). As sum of P20,150 here in controversy is a product of such premium it must also be deemed community property, becaus was acquired for a valuable consideration, during said Adolphe Oscar Schuetze's marriage with Rosario Gelano at expense of the common fund (art. 1401, No. 1, Civil Code), except for the small part corresponding to the first premi paid with the deceased's own money. In his Commentaries on the Civil Code, volume 9, page 589, second edition, Manresa treats of life insurance in following terms, to wit:

The amount of the policy represents the premiums to be paid, and the right to it arises the moment contract is perfected, for at the moment the power of disposing of it may be exercised, and if death occurs paym may be demanded. It is therefore something acquired for a valuable consideration during the marriage, though period of its fulfillment, depend upon the death of one of the spouses, which terminates the partnership. considered, the question may be said to be decided by articles 1396 and 1401: if the premiums are paid with exclusive property of husband or wife, the policy belongs to the owner; if with conjugal property, or if the mon cannot be proved as coming from one or the other of the spouses, the policy is community property. The Supreme Court of Texas, United States, in the case of Martin vs. Moran (11 Tex. Civ. A., 509) laid down following doctrine:

COMMUNITY PROPERTY LIFE INSURANCE POLICY. A husband took out an endowment insurance policy on his life, payable "as directed by will." He paid the premiums thereon out of community fun and by his will made the proceeds of the policy payable to his own estate. Held, that the proceeds were commun estate, one-half of which belonged to the wife. In In re Stan's Estate, Myr. Prob. (Cal.), 5, the Supreme Court of California laid down the following doctrine:

A testator, after marriage, took out an insurance policy, on which he paid the premiums from his salary. H that the insurance money was community property, to one-half of which, the wife was entitled as survivor. In In re Webb's Estate, Myr. Prob. (Cal.), 93, the same court laid down the following doctrine:

A decedent paid the first third of the amount of the premiums on his life-insurance policy out of his earni before marriage, and the remainder from his earnings received after marriage. Held, that one-third of the po belonged to his separate estate, and the remainder to the community property.

Thus both according to our Civil Code and to the ruling of those North American States where the Spanish C Code once governed, the proceeds of a life-insurance policy whereon the premiums were paid with conjugal mon

belong to the conjugal partnership.

The appellee alleges that it is a fundamental principle that a life-insurance policy belongs exclusively to beneficiary upon the death of the person insured, and that in the present case, as the late Adolphe Oscar Schuetze nam his own estate as the sole beneficiary of the insurance on his life, upon his death the latter became the sole owner of proceeds, which therefore became subject to the inheritance tax, citing Del Val vs. Del Val (29 Phil., 534), where doctrine was laid down that an heir appointed beneficiary to a life-insurance policy taken out by the deceased, becomes absolute owner of the proceeds of such policy upon the death of the insured.

The estate of a deceased person cannot be placed on the same footing as an individual heir. The proceeds of a l insurance policy payable to the estate of the insured passed to the executor or administrator of such estate, and forms p of its assets (37 Corpus Juris, 565, sec. 322); whereas the proceeds of a life-insurance policy payable to an heir of insured as beneficiary belongs exclusively to said heir and does not form part of the deceased's estate subject administrator. (Del Val vs. Del Val, supra; 37 Corpus Juris, 566, sec. 323, and articles 419 and 428 of the Code Commerce.)

Just as an individual beneficiary of a life-insurance policy taken out by a married person becomes the exclus owner of the proceeds upon the death of the insured even if the premiums were paid by the conjugal partnership, so, i argued, where the beneficiary named is the estate of the deceased whose life is insured, the proceeds of the policy beco a part of said estate upon the death of the insured even if the premiums have been paid with conjugal funds.

In a conjugal partnership the husband is the manager, empowered to alienate the partnership property without wife's consent (art. 1413, Civil Code), a third person, therefore, named beneficiary in a life-insurance policy becomes absolute owner of its proceeds upon the death of the insured even if the premiums should have been paid with mo belonging to the community property. When a married man has his life insured and names his own estate after dea beneficiary, he makes no alienation of the proceeds of conjugal funds to a third person, but appropriates them hims adding them to the assets of his estate, in contravention of the provisions of article 1401, paragraph 1, of the Civil C cited above, which provides that "To the conjugal partnership belongs" (1) Property acquired for a valuable considerat during the marriage at the expense of the common fund, whether the acquisition is made for the partnership or for one the spouses only." Furthermore, such appropriation is a fraud practised upon the wife, which cannot be allowed prejudice her, according to article 1413, paragraph 2, of said Code. Although the husband is the manager of the conju partnership, he cannot of his own free will convert the partnership property into his own exclusive property.

As all the premiums on the life-insurance policy taken out by the late Adolphe Oscar Schuetze, were paid out of conjugal funds, with the exceptions of the first, the proceeds of the policy, excluding the proportional part corresponding the first premium, constitute community property, notwithstanding the fact that the policy was made payable to deceased's estate, so that one-half of said proceeds belongs to the estate, and the other half to the deceased's widow, plaintiff-appellant Rosario Gelano Vda. de Schuetze.

The second point to decide in this appeal is whether the Collector of Internal Revenue has authority, under the l to collect the inheritance tax upon one-half of the life-insurance policy taken out by the late Adolphe Oscar Schue which belongs to him and is made payable to his estate.

According to the agreed statement of facts mentioned above, the plaintiff-appellant, the Bank of the Philipp Islands, was appointed administrator of the late Adolphe Oscar Schuetze's testamentary estate by an order dated March 1928, entered by the Court of First Instance of Manila. On July 13, 1928, the Sun Life Assurance Company of Cana whose main office is in Montreal, Canada, paid Rosario Gelano Vda. de Schuetze upon her arrival at Manila, the sum P20,150, which was the amount of the insurance policy on the life of said deceased, payable to the latter's estate. On same date Rosario Gelano Vda. de Schuetze delivered the money to said Bank of the Philippine Islands, as administrato the deceased's estate, which entered it in the inventory of the testamentary estate, and then returned the money to s widow.

Section 1536 of the Administrative Code, as amended by section 10 of Act No. 2835 and section 1 of Act No. 30 contains the following relevant provision:

SEC. 1536. Conditions and rate of taxation. Every transmission by virtue of inheritance, devise, bequ gift mortis causa or advance in anticipation of inheritance, devise, or bequest of real property located in Philippine Islands and real rights in such property; of any franchise which must be exercised in the Philipp Islands; of any shares, obligations, or bonds issued by any corporation or sociedad anonima organized constituted in the Philippine Islands in accordance with its laws; of any shares or rights in any partnersh business or industry established in the Philippine Islands or of any personal property located in the Philipp Islands shall be subject to the following tax: xxx xxx xxx

In as much as the proceeds of the insurance policy on the life of the late Adolphe Oscar Schuetze were paid to Bank of the Philippine Islands, as administrator of the deceased's estate, for management and partition, and as s proceeds were turned over to the sole and universal testamentary heiress Rosario Gelano Vda. de Schuetze, the plaint appellant, here in Manila, the situs of said proceeds is the Philippine Islands.

In his work "The Law of Taxation," Cooley enunciates the general rule governing the levying of taxes upon tangi personal property, in the following words:

GENERAL RULE. The suits of tangible personal property, for purposes of taxation may be where owner is domiciled but is not necessarily so. Unlike intangible personal property, it may acquire a taxation situ a state other than the one where the owner is domiciled, merely because it is located there. Its taxable situ where it is more or less permanently located, regardless of the domicile of the owner. It is well settled that the s where it is more or less permanently located has the power to tax it although the owner resides out of the st regardless of whether it has been taxed for the same period at the domicile of the owner, provided there is statut authority for taxing such property. It is equally well settled that the state where the owner is domiciled has power to tax it where the property has acquired an actual situs in another state by reason of its more or l permanent location in that state. ... (2 Cooley, The Law of Taxation, 4th ed., p. 975, par. 451.) With reference to the meaning of the words "permanent" and "in transit," he has the following to say:

PERMANENCY OF LOCATION; PROPERTY IN TRANSIT. In order to acquire a situs in a state taxing district so as to be taxable in the state or district regardless of the domicile of the owner and not taxable another state or district at the domicile of the owner, tangible personal property must be more or less permanen located in the state or district. In other words, the situs of tangible personal property is where it is more or l permanently located rather than where it is merely in transit or temporarily and for no considerable length of ti If tangible personal property is more or less permanently located in a state other than the one where the owne domiciled, it is not taxable in the latter state but is taxable in the state where it is located. If tangible perso property belonging to one domiciled in one state is in another state merely in transitu or for a short time, i taxable in the former state, and is not taxable in the state where it is for the time being. . . . .

Property merely in transit through a state ordinarily is not taxable there. Transit begins when an articl committed to a carrier for transportation to the state of its destination, or started on its ultimate passage. Tra ends when the goods arrive at their destination. But intermediate these points questions may arise as to whe temporary stop in transit is such as to make the property taxable at the place of stoppage. Whether the property taxable in such a case usually depends on the length of time and the purpose of the interruption of transit. . . . .

. . . It has been held that property of a construction company, used in construction of a railroad, acquire situs at the place where used for an indefinite period. So tangible personal property in the state for the purpose undergoing a partial finishing process is not to be regarded as in the course of transit nor as in the state for a m

temporary purpose. (2 Cooley, The Law of Taxation, 4th ed., pp. 982, 983 and 988, par. 452.)

If the proceeds of the life-insurance policy taken out by the late Adolphe Oscar Schuetze and made payable to estate, were delivered to the Bank of the Philippine Islands for administration and distribution, they were not in transit were more or less permanently located in the Philippine Islands, according to the foregoing rules. If this be so, half of proceeds which is community property, belongs to the estate of the deceased and is subject to the inheritance tax accordance with the legal provision quoted above, irrespective of whether or not the late Adolphe Oscar Schuetze w domiciled in the Philippine Islands at the time of his death.

By virtue of the foregoing, we are of opinion and so hold: (1) That the proceeds of a life-insurance policy payable the insured's estate, on which the premiums were paid by the conjugal partnership, constitute community property, belong one-half to the husband and the other half to the wife, exclusively; (2) that if the premiums were paid partly w paraphernal and partly conjugal funds, the proceeds are likewise in like proportion paraphernal in part and conjugal in p and (3) that the proceeds of a life-insurance policy payable to the insured's estate as the beneficiary, if delivered to testamentary administrator of the former as part of the assets of said estate under probate administration, are subject to inheritance tax according to the law on the matter, if they belong to the assured exclusively, and it is immaterial that insured was domiciled in these Islands or outside.1awphil.net

Wherefore, the judgment appealed from is reversed, and the defendant is ordered to return to the plaintiff the o half of the tax collected upon the amount of P20,150, being the proceeds of the insurance policy on the life of the Adolphe Oscar Schuetze, after deducting the proportional part corresponding to the first premium, without spe pronouncement of costs. So ordered. Avancea, C.J., Johnson, Street, Malcolm, Villamor, and Ostrand, JJ., concur.

Separate Opinions

IMPERIAL, J., dissenting:

I cannot concur with the majority in holding that one-half of the insurance policy on the life of the late Adol Oscar Schuetze, excepting the proportional part corresponding to the first year's premium is community property belong to the deceased's widow, named Rosario Gelano, and as such is not subject to the inheritance tax.

There is no question in regard to the facts: It is admitted that Schuetze insured himself in the Sun Life Insura Company of Canada in Manila, and that the policy was issued on January 14, 1913, payable to his estate after death. died in Manila on February 2, 1928, leaving his widow as his sole testamentary heiress. The appellant, the Bank of Philippine Islands, as administrator of the late Schuetze's testamentary estate, received from the insurer the amount of t policy, or the net sum of P20,150.

It is an established and generally recognized principle that in a life-insurance policy where the insured has name beneficiary, the proceeds belong to said beneficiary, and to him alone. "Vested Interest of Beneficiary. In practica every jurisdiction it is the rule that in an ordinary life insurance policy made payable to a beneficiary, and which does authorize a change of beneficiary, the named beneficiary has an absolute, vested interest in the policy from the date of issuance, delivery and acceptance, and this is true of a policy payable to the children of the insured equally, with

naming them, or their executors, administrators or assigns." (14 R.C.L., 1376.) (Del Val vs. Del Val, 29 Phil., 534 et s Gercio vs. Sun Life Assurance Co. of Canada, 48 Phil., 53 et seq.) When in a life-insurance policy the insured's estat named beneficiary, the proceeds must be delivered not to the decedent's heirs, but to his administrator or le representative. "Policy Payable to Insured, His Estate, or Legal Representatives. ... Ordinarily the proceeds of a insurance policy are payable to the executor or administrator of insured as assets of his estate where by the terms of policy the proceeds are payable to insured, his estate, his legal representatives, his executors or administrators, "executors, administrators, or assigns," or even his "heirs, executors, administrators, or assigns." ..." (37 C.J., 56 "Personal Representatives or Legal Representatives. While there is some authority to the effect that "le representatives" means the persons entitled to the estate of the insured, and not his executor or administrator, the be view is that ordinarily the proceeds of such a policy pass to his executor or administrator." (14 R.C.L., 1372.)

If the foregoing are the principles which should govern life-insurance policies with reference to beneficiaries and right to the proceeds of such policies, it is evident that Schuetze's estate, and not his widow or the conjugal partnership entitled to the proceeds of said policy exclusively, and may receive them from the insurer. The parties must have understood it when the insurer delivered the net amount of the policy to the Bank of the Philippine Islands, as judi administrator of the insured.

It is stated in the majority opinion that the money with which the premiums were paid during the marriage of Schuetzes is presumed to have been taken from the conjugal funds, according to article 1407 of the Civil Code, wh provides that "All the property of the spouses shall be deemed partnership property in the absence of proof that it belo exclusively to the husband or to the wife." This is the very argument which led to the settlement of the point of law rais The provisions of the Civil Code on conjugal property have been improperly applied without considering that a l insurance contract is a peculiar contract governed by special laws, such as Act No. 2427 with its amendments, and Code of Commerce, which is still in force. In Del Val, supra, it was already held:

We cannot agree with these contentions. The contract of life insurance is a special contract and destination of the proceeds thereof is determined by special laws which deal exclusively with that subject. T Civil Code has no provisions which relate directly and specially to life insurance contracts or to the destination life insurance proceeds. That subject is regulated exclusively by the Code of Commerce which provides for terms of the contract, the relations of the parties and the destination of the proceeds of the policy.

The main point to be decided was not whether the premiums were paid out of conjugal or personal funds of one the spouses, but whether or not the proceeds of the policy became assets of the insured's estate. If it be admitted that estate is the sole owner of the aforesaid proceeds, which cannot be denied, inasmuch as the policy itself names the estate the beneficiary, it is beside the point to discuss the nature and origin of the amounts used to pay the premiums, as the t to the proceeds of the policy is vested in the insured's estate, and any right the widow might have should be vindicated another action. In such a case she might be entitled to reimbursement of her share in the conjugal funds, but not in present case, for she has been instituted the sole testamentary heiress.

From the foregoing, it follows that as the proceeds of the policy belong to Schuetze's estate, and inasmuch as inheritance tax is levied upon the transmission of a deceased person's estate upon, or, on the occasion of his death, i clear that the whole proceeds, and not one-half thereof, are subject to such tax. In my opinion the judgment appealed from should have been affirmed in its entirely. Romualdez, J., concurs.

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, the laws applicable thereto. Walter G. Stevenson (born in the Philippines on August 9, 1874 of British parents and marr in the City of Manila on January 23, 1909 to Beatrice Mauricia Stevenson another British subject) died on February 1951 in San Francisco, California, U.S.A. whereto he and his wife moved and established their permanent residence si May 10, 1945. In his will executed in San Francisco on May 22, 1947, and which was duly probated in the Superior Co of California on April 11, 1951, Stevenson instituted his wife Beatrice as his sole heiress to the following real and perso 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 Personal Property (1) 177 shares of stock of Canacao Estate at P10.00 each (2) 210,000 shares of stock of Mindanao Mother Lode Mines, Inc. at P0.38 per share (3) Cash credit with Canacao Estate Inc. (4) Cash, with the Chartered Bank of India, Australia & China Total Gross Assets

P43,500.00

1,770.00

79,800.00 4,870.88

851.97 P130,792.85

On May 22, 1951, ancillary administration proceedings were instituted in the Court of First Instance of Manila for settlement of the estate in the Philippines. In due time Stevenson's will was duly admitted to probate by our court and Murray Statt was appointed ancillary administrator of the estate, who on July 11, 1951, filed a preliminary estate inheritance tax return with the reservation of having the properties declared therein finally appraised at their values months after the death of Stevenson. Preliminary return was made by the ancillary administrator in order to secure

waiver of the Collector of Internal Revenue on the inheritance tax due on the 210,000 shares of stock in the Minda Mother Lode Mines Inc. which the estate then desired to dispose in the United States. Acting upon said return, Collector of Internal Revenue accepted the valuation of the personal properties declared therein, but increased the appra of the two parcels of land located in Baguio City by fixing their fair market value in the amount of P52.200.00, instead P43,500.00. After allowing the deductions claimed by the ancillary administrator for funeral expenses in the amount P2,000.00 and for judicial and administration expenses in the sum of P5,500.00, the Collector assessed the state 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 assessme 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 reservation made at the time of filing of the preliminary return and for the purpose of availing of the right granted 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 redu 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. T change in price per share of stock was based by the ancillary administrator on the market notation of the stock obtaining the San Francisco California) Stock Exchange six months from the death of Stevenson, that is, As of August 22, 1931 addition, the ancillary administrator made claim for the following deductions: Funeral expenses ($1,04326) Judicial Expenses: (a) Administrator's Fee (b) Attorney's Fee (c) Judicial and Administration expenses as of August 9, 1952 P1,204.34 6.000.00 P2,086.52

1,400.05 8,604.39

Real Estate Tax for 1951 on Baguio real properties (O.R. No. B-1 686836) Claims against the estate: ($5,000.00) P10,000.00 Plus: 4% int. p.a. from Feb. 2 to 22, 1951 Sub-Total

652.50

P10,000.00

22.47

10,022.47 P21,365.88

In the meantime, on December 1, 1952, Beatrice Mauricia Stevenson assigned all her rights and interests in the estate 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 tha

contained new claims for additional exemption and deduction to wit: (1) deduction in the amount of P4,000.00 from gross estate of the decedent as provided for in Section 861 (4) of the U.S. Federal Internal Revenue Code which ancillary administrator averred was allowable by way of the reciprocity granted by Section 122 of the National Inter Revenue Code, as then held by the Board of Tax Appeals in case No. 71 entitled "Housman vs. Collector," August 1952; and (2) exemption from the imposition of estate and inheritance taxes on the 210,000 shares of stock in Mindanao Mother Lode Mines, Inc. also pursuant to the reciprocity proviso of Section 122 of the National Inter Revenue Code. In this last return, the estate claimed that it was liable only for the amount of P525.34 for estate tax P238.06 for inheritance tax and that, as a consequence, it had overpaid the government. The refund of the amount P15,259.83, allegedly overpaid, was accordingly requested by the estate. The Collector denied the claim. For this reas action was commenced in the Court of First Instance of Manila by respondents, as assignees of Beatrice Maur Stevenson, for the recovery of said amount. Pursuant to Republic Act No. 1125, the case was forwarded to the Court of T 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 () share of the surviving spouse in the conju partnership property as diminished by the obligations properly chargeable to such property should be deduc from the net estate of the deceased Walter G. Stevenson, pursuant to Section 89-C of the National Internal Reve Code; (b) the intangible personal property belonging to the estate of said Stevenson is exempt from inheritance t pursuant to the provision of section 122 of the National Internal Revenue Code in relation to the Califor Inheritance Tax Law but decedent's estate is not entitled to an exemption of P4,000.00 in the computation of estate tax; (c) for purposes of estate and inheritance taxation the Baguio real estate of the spouses should be val at P52,200.00, and 210,000 shares of stock in the Mindanao Mother Lode Mines, Inc. should be appraised at P0 per share; and (d) the estate shall be entitled to a deduction of P2,000.00 for funeral expenses and judicial expen 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 co while the assignees, Douglas and Bettina Fisher hereinafter called respondents, made six assignments of error. Togeth 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 () of the net estate should be deduc therefrom as the share of tile surviving spouse in accordance with our law on conjugal partnership and in relation to sect 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 Inter Revenue Code granting exemption from the payment of estate and inheritance taxes on the 210,000 shares of stock in 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 C 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 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 expens P2,086.52 for funeral expenses; P652.50 for real estate taxes; and P10,0,22.47 representing the amount of indebtedn 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 governm 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 an

nuptial agreement, the contracting parties are presumed to have adopted the system of conjugal partnership as to properties acquired during their marriage. The application of this doctrine to the instant case is being disputed, however, petitioner Collector of Internal Revenue, who contends that pursuant to Article 124 of the New Civil Code, the prope relation of the spouses Stevensons ought not to be determined by the Philippine law, but by the national law of decedent husband, in this case, the law of England. It is alleged by petitioner that English laws do not recognize le partnership between spouses, and that what obtains in that jurisdiction is another regime of property relation, wherein properties acquired during the marriage pertain and belong Exclusively to the husband. In further support of his sta petitioner cites Article 16 of the New Civil Code (Art. 10 of the old) to the effect that in testate and intestate proceedin 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, applicable law is Article 1325 of the old Civil Code and not Article 124 of the New Civil Code which became effect only in 1950. It is true that both articles adhere to the so-called nationality theory of determining the property relation spouses where one of them is a foreigner and they have made no prior agreement as to the administration disposition, ownership of their conjugal properties. In such a case, the national law of the husband becomes the dominant law determining the property relation of the spouses. There is, however, a difference between the two articles in that Art 1241 of the new Civil Code expressly provides that it shall be applicable regardless of whether the marriage was celebra 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 an foreigner. In the instant case, both spouses are foreigners who married in the Philippines. Manresa,3 in his Commentar 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 1.3 a las celebradas en el extranjero cuando alguno de los conyuges es espanol. En cuanto a la regla procedente cuan dos extranjeros se casan en Espana, o dos espanoles en el extranjero hay que atender en el primer caso a legislacion de pais a que aquellos pertenezean, y en el segundo, a las reglas generales consignadas en los articu 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, wo be the English law even if the marriage was celebrated in the Philippines, both of them being foreigners. But, as correc observed by the Tax Court, the pertinent English law that allegedly vests in the decedent husband full ownership of properties acquired during the marriage has not been proven by petitioner. Except for a mere allegation in his answ which is not sufficient, the record is bereft of any evidence as to what English law says on the matter. In the absence proof, the Court is justified, therefore, in indulging in what Wharton calls "processual presumption," in presuming that 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 stand. A reading of Article 10 of the old Civil Code, which incidentally is the one applicable, shows that it does encompass or contemplate to govern the question of property relation between spouses. Said article distinctly speaks amount of successional rights and this term, in speaks in our opinion, properly refers to the extent or amount of prope that each heir is legally entitled to inherit from the estate available for distribution. It needs to be pointed out that property relation of spouses, as distinguished from their successional rights, is governed differently by the specific express provisions of Title VI, Chapter I of our new Civil Code (Title III, Chapter I of the old Civil Code.) We, therefo find that the lower court correctly deducted the half of the conjugal property in determining the hereditary estate left by deceased Stevenson.

On the second issue, petitioner disputes the action of the Tax Court in the exempting the respondents from pay inheritance tax on the 210,000 shares of stock in the Mindanao Mother Lode Mines, Inc. in virtue of the reciproc proviso of Section 122 of the National Internal Revenue Code, in relation to Section 13851 of the California Revenue Taxation Code, on the ground that: (1) the said proviso of the California Revenue and Taxation Code has not been d

proven by the respondents; (2) the reciprocity exemptions granted by section 122 of the National Internal Revenue C can only be availed of by residents of foreign countries and not of residents of a state in the United States; and (3) ther no "total" reciprocity between the Philippines and the state of California in that while the former exempts payment of b 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 act member of the California Bar since 1931, he is familiar with the revenue and taxation laws of the State of California. W asked by the lower court to state the pertinent California law as regards exemption of intangible personal properties, witness cited article 4, section 13851 (a) and (b) of the California Internal and Revenue Code as published in Derrin California Code, a publication of the Bancroft-Whitney Company inc. And as part of his testimony, a full quotation of 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 t 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. Howev although we believe it desirable that these laws be proved in accordance with said rule, we held in the case of Willam Iron and Steel Works v. Muzzal, 61 Phil. 471, that "a reading of sections 300 and 301 of our Code of Civil Procedure (n section 41, Rule 123) will convince one that these sections do not exclude the presentation of other competent evidence prove the existence of a foreign law." In that case, we considered the testimony of an attorney-at-law of San Francis California who quoted verbatim a section of California Civil Code and who stated that the same was in force at the ti the obligations were contracted, as sufficient evidence to establish the existence of said law. In line with this view, we f no error, therefore, on the part of the Tax Court in considering the pertinent California law as proved by responde witness. We now take up the question of reciprocity in exemption from transfer or death taxes, between the State of California 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 prope (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 impose a transfer of tax or death tax of any character in respect of intangible personal property of citizens of Philippines not residing in that foreign country, or (b) if the laws of the foreign country of which the decedent w a resident at the time of his death allow a similar exemption from transfer taxes or death taxes of every characte respect of intangible personal property owned by citizens of the Philippines not residing in that foreign count (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 impo by this part if the decedent at the time of his death was a resident of a territory or another State of the United Sta or of a foreign state or country which then imposed a legacy, succession, or death tax in respect to intangi 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 residents of this State, or

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

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 ta of any and every character, in the case of the Philippine law, and to legacy, succession, or death taxes of any and ev character, in the case of the California law. Therefore, if any of the two states collects or imposes and does not exempt transfer, death, legacy, or succession tax of any character, the reciprocity does not work. This is the underlying principle 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 up his estate and its settlement, both an estate and an inheritance tax. Under the laws of California, only inheritance tax imposed. On the other hand, the Federal Internal Revenue Code imposes an estate tax on non-residents not citizens of United States,7 but does not provide for any exemption on the basis of reciprocity. Applying these laws in the manner Court of Tax Appeals did in the instant case, we will have a situation where a Californian, who is non-resident in Philippines but has intangible personal properties here, will the subject to the payment of an estate tax, although exem from the payment of the inheritance tax. This being the case, will a Filipino, non-resident of California, but with intangi personal properties there, be entitled to the exemption clause of the California law, since the Californian has not b exempted from every character of legacy, succession, or death tax because he is, under our law, under obligation to pay estate tax? Upon the other hand, if we exempt the Californian from paying the estate tax, we do not thereby entitl Filipino to be exempt from a similar estate tax in California because under the Federal Law, which is equally enforcea in California he is bound to pay the same, there being no reciprocity recognized in respect thereto. In both instances, Filipino citizen is always at a disadvantage. We do not believe that our legislature has intended such an unfair situation the detriment of our own government and people. We, therefore, find and declare that the lower court erred in exempt 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, pro January 6, 1958, 54 O.G. 2881) exempting the estate of the deceased Hugo H. Miller from payment of the inheritance imposed by the Collector of Internal Revenue. It will be noted, however, that the issue of reciprocity between the pertin provisions of our tax law and that of the State of California was not there squarely raised, and the ruling therein can control the determination of the case at bar. Be that as it may, we now declare that in view of the express provisions of b the Philippine and California laws that the exemption would apply only if the law of the other grants an exemption fr legacy, succession, or death taxes of every character, there could not be partial reciprocity. It would have to be total or n 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 T Law which is also being claimed by respondents, we uphold and adhere to our ruling in the Lara case (supra) that amount of $2,000.00 allowed under the Federal Estate Tax Law is in the nature of a deduction and not of an exempt regarding which reciprocity cannot be claimed under the provision of Section 122 of our National Internal Revenue Co 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 th assessed values, as appearing in the tax rolls 6 months after the death of Stevenson, ought to have been considered petitioner as their fair market value, pursuant to section 91 of the National Internal Revenue Code. It should be pointed o however, that in accordance with said proviso the properties are required to be appraised at their fair market value and assessed value thereof shall be considered as the fair market value only when evidence to the contrary has not been show After all review of the record, we are satisfied that such evidence exists to justify the valuation made by petitioner wh 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 Estate and Inheritance tax returns filed by him at P43,500.00 which is the assessed value of said properties. On other hand, defendant appraised the same at P52,200.00. It is of common knowledge, and this Court can t judicial notice of it, that assessments for real estate taxation purposes are very much lower than the true and market value of the properties at a given time and place. In fact one year after decedent's death or in 1952 the s

properties were sold for a price of P72,000.00 and there is no showing that special or extraordinary circumstan caused the sudden increase from the price of P43,500.00, if we were to accept this value as a fair and reasona one as of 1951. Even more, the counsel for plaintiffs himself admitted in open court that he was willing purchase the said properties at P2.00 per square meter. In the light of these facts we believe and therefore hold t the valuation of P52,200.00 of the real estate in Baguio made by defendant is fair, reasonable and justified in premises." (Decision, p. 19).

In respect to the valuation of the 210,000 shares of stock in the Mindanao Mother Lode Mines, Inc., (a dome corporation), respondents contend that their value should be fixed on the basis of the market quotation obtaining at the S Francisco (California) Stock Exchange, on the theory that the certificates of stocks were then held in that place registered with the said stock exchange. We cannot agree with respondents' argument. The situs of the shares of stock, purposes of taxation, being located here in the Philippines, as respondents themselves concede and considering that t are sought to be taxed in this jurisdiction, consistent with the exercise of our government's taxing authority, their 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 va at the Manila Stock Exchange six months after the death of Stevenson. Through Atty. Allison Gibbs, respondents h 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 A Gibbs in this respect has never been questioned nor refuted by petitioner either before this court or in the court below the absence of evidence to the contrary, we are, therefore, constrained to reverse the Tax Court on this point and to h that the value of a share in the said mining company on August 22, 1951 in the Philippine market was P.325 as claimed 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 declarat made by the estate in its preliminary return. Patently, this should not have been the case, in view of the fact that ancillary administrator had reserved and availed of his legal right to have the properties of the estate declared at their 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 Co 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 the following expenses:. 1) Administrator's fee 2) Attorney's fee 3) Judicial and Administrative expenses Total Deductions P1,204.34 6,000.00 2,052.55 P8,604.39

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

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 t parcels of land in Baguio City, which respondents claim was disallowed by the Tax Court, we find that this claim has fact been allowed. What happened here, which a careful review of the record will reveal, was that the Tax Court itemizing the liabilities of the estate, viz: 1) Administrator's fee 2) Attorney's fee 3) Judicial and Administration expenses as of August 9, 1952 Total P1,204.34 6,000.00

2,052.55 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 expen approved by the court, making a total of P2,052.55, exactly the same figure which was arrived at by the Tax Court judicial and administration expenses. Hence, the difference between the total of P9,256.98 allowed by the Tax Court deductions, and the P8,604.39 as found by the probate court, which is P652.50, the same amount allowed for realty tax An evident oversight has involuntarily been made in omitting the P2,000.00 for funeral expenses in the final computati 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) section 89(d), National Internal Revenue Code, the amount of P10,022.47 should have been allowed the estate a deduction, because it represented an indebtedness of the decedent incurred during his lifetime. In support thereof, t offered in evidence a duly certified claim, presented to the probate court in California by the Bank of California Natio Association, which it would appear, that while still living, Walter G. Stevenson obtained a loan of $5,000.00 secured pledge on 140,000 of his shares of stock in the Mindanao Mother Lode Mines, Inc. (Exhs. "Q-Q4", pp. 53-59, record). T Tax Court disallowed this item on the ground that the local probate court had not approved the same as a valid cla against the estate and because it constituted an indebtedness in respect to intangible personal property which the Tax Co 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 deceden necessary. This is so although the same, it is averred has been already admitted and approved by the corresponding prob court in California, situs of the principal or domiciliary administration. It is true that we have here in the Philippines o an ancillary administration in this case, but, it has been held, the distinction between domiciliary or princi administration and ancillary administration serves only to distinguish one administration from the other, for the t proceedings are separate and independent.8 The reason for the ancillary administration is that, a grant of administrat does not ex proprio vigore, have any effect beyond the limits of the country in which it was granted. Hence, we have requirement that before a will duly probated outside of the Philippines can have effect here, it must first be proved allowed before our courts, in much the same manner as wills originally presented for allowance therein. 9 And the es shall be administered under letters testamentary, or letters of administration granted by the court, and disposed according to the will as probated, after payment of just debts and expenses of administration. 10 In other words, there regular administration under the control of the court, where claims must be presented and approved, and expenses administration allowed before deductions from the estate can be authorized. Otherwise, we would have the actuations our own probate court, in the settlement and distribution of the estate situated here, subject to the proceedings before foreign court over which our courts have no control. We do not believe such a procedure is countenanced or contempla

in the Rules of Court.

Another reason for the disallowance of this indebtedness as a deduction, springs from the provisions of Section 89, le (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 the Philippines unless the executor, administrator or anyone of the heirs, as the case may be, includes in the ret required to be filed under section ninety-three the value at the time of his death of that part of the gross estate 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 Philippi appears in the three returns submitted to the court or to the office of the petitioner Collector of Internal Revenue. T purpose of this requirement is to enable the revenue officer to determine how much of the indebtedness may be allowed 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, deducting from the value of that part of his gross estate which at the time of his death is situated in the Philippi

(1) Expenses, losses, indebtedness, and taxes. That proportion of the deductions specified in paragraph (1) subjection (a) of this section11 which the value of such part bears the value of his entire gross estate where situated;"

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

For the reasons thus stated, we affirm the ruling of the lower court disallowing the deduction of the alleged indebtednes 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 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 reciproc as required in section 122 of the National Internal Revenue Code, nor is the decedent's estate entitled to 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 L 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 decea 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 ba

of this decision is hereby denied in line with our recent decision in Collector of Internal Revenue v. St. Paul's Hosp (G.R. No. L-12127, May 29, 1959) wherein we held that, "in the absence of a statutory provision clearly or expres directing or authorizing such payment, and none has been cited by respondents, the National Government cannot required to pay interest."

WHEREFORE, as modified in the manner heretofore indicated, the judgment of the lower court is hereby affirmed in other respects not inconsistent herewith. No costs. So ordered. Paras, C.J., Bengzon, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Gutierrez David, Paredes and Dizon, concur.

G.R. No. 123206

March 22, 2000

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF APPEALS, COURT OF TAX APPEALS and JOSEFINA P. PAJONAR, as Administratrix of the Esta of Pedro P. Pajonar, respondents. RESOLUTION GONZAGA-REYES, J.:

Assailed in this petition for review on certiorari is the December 21, 1995 Decision1 of the Court of Appeals2 in CA-G Sp. No. 34399 affirming the June 7, 1994 Resolution of the Court of Tax Appeals in CTA Case No. 4381 granting priv respondent Josefina P. Pajonar, as administratrix of the estate of Pedro P. Pajonar, a tax refund in the amount P76,502.42, representing erroneously paid estate taxes for the year 1988.

Pedro Pajonar, a member of the Philippine Scout, Bataan Contingent, during the second World War, was a part of infamous Death March by reason of which he suffered shock and became insane. His sister Josefina Pajonar became guardian over his person, while his property was placed under the guardianship of the Philippine National Bank (PNB) the Regional Trial Court of Dumaguete City, Branch 31, in Special Proceedings No. 1254. He died on January 10, 19 He was survived by his two brothers Isidro P. Pajonar and Gregorio Pajonar, his sister Josefina Pajonar, nephe Concordio Jandog and Mario Jandog and niece Conchita Jandog.

On May 11, 1988, the PNB filed an accounting of the decedent's property under guardianship valued at P3,037,672.09 Special Proceedings No. 1254. However, the PNB did not file an estate tax return, instead it advised Pedro Pajonar's h to execute an extrajudicial settlement and to pay the taxes on his estate. On April 5, 1988, pursuant to the assessment the Bureau of Internal Revenue (BIR), the estate of Pedro Pajonar paid taxes in the amount of P2,557. On May 19, 1988, Josefina Pajonar filed a petition with the Regional Trial Court of Dumaguete City for the issuance in favor of letters of administration of the estate of her brother. The case was docketed as Special Proceedings No. 2399. July 18, 1988, the trial court appointed Josefina Pajonar as the regular administratrix of Pedro Pajonar's estate.

On December 19, 1988, pursuant to a second assessment by the BIR for deficiency estate tax, the estate of Pedro Pajo paid estate tax in the amount of P1,527,790.98. Josefina Pajonar, in her capacity as administratrix and heir of Pe Pajonar's estate, filed a protest on January 11, 1989 with the BIR praying that the estate tax payment in the amoun

P1,527,790.98, or at least some portion of it, be returned to the heirs. 3

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

On May 6, 1993, the CTA ordered the Commissioner of Internal Revenue to refund Josefina Pajonar the amount P252,585.59, representing erroneously paid estate tax for the year 1988.5 Among the deductions from the gross es allowed by the CTA were the amounts of P60,753 representing the notarial fee for the Extrajudicial Settlement and amount of P50,000 as the attorney's fees in Special Proceedings No. 1254 for guardianship.6

On June 15, 1993, the Commissioner of Internal Revenue filed a motion for reconsideration7 of the CTA's May 6, 19 decision asserting, among others, that the notarial fee for the Extrajudicial Settlement and the attorney's fees in guardianship proceedings are not deductible expenses.

On June 7, 1994, the CTA issued the assailed Resolution8 ordering the Commissioner of Internal Revenue to refu Josefina Pajonar, as administratrix of the estate of Pedro Pajonar, the amount of P76,502.42 representing erroneously p estate tax for the year 1988. Also, the CTA upheld the validity of the deduction of the notarial fee for the Extrajudi Settlement and the attorney's fees in the guardianship proceedings.

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

The sole issue in this case involves the construction of section 79 10 of the National Internal Revenue Code 11 (Tax Co which provides for the allowable deductions from the gross estate of the decedent. More particularly, the question whether the notarial fee paid for the extrajudicial settlement in the amount of P60,753 and the attorney's fees in guardianship proceedings in the amount of P50,000 may be allowed as deductions from the gross estate of deceden order to arrive at the value of the net estate. We answer this question in the affirmative, thereby upholding the decisions of the appellate courts. In its May 6, 1993 Decision, the Court of Tax Appeals ruled thus:

Respondent maintains that only judicial expenses of the testamentary or intestate proceedings are allowed a deduction to the gross estate. The amount of P60,753.00 is quite extraordinary for a mere notarial fee.

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

The attorney's fees of P50,000.00, which were already incurred but not yet paid, refers to the guardians proceeding filed by PNB, as guardian over the ward of Pedro Pajonar, docketed as Special Proceeding No. 1254

the RTC (Branch XXXI) of Dumaguete City. . . . xxx xxx xxx

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

Attorney's fees in order to be deductible from the gross estate must be essential to the collection of assets, paym of debts or the distribution of the property to the persons entitled to it. The services for which the fees are char must relate to the proper settlement of the estate. [34 Am. Jur. 2d 767.] In this case, the guardianship proceed was necessary for the distribution of the property of the late Pedro Pajonar to his rightful heirs. xxx xxx xxx

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

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

It is significant to note that the inclusion of the estate tax law in the codification of all our national internal revenue la with the enactment of the National Internal Revenue Code in 1939 were copied from the Federal Law of the United Sta [ UMALI, Reviewer in Taxation (1985), p. 285 ] The 1977 Tax Code, promulgated by Presidential Decree No. 11 effective June 3, 1977, reenacted substantially all the provisions of the old law on estate and gift taxes, except the secti relating to the meaning of gross estate and gift. [ Ibid, p. 286. ]

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

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

Anent the contention of respondent that the attorney's fees of P50,000.00 incurred in the guardianship proceeding sho not be deducted from the Gross Estate, We consider the same unmeritorious. Attorneys' and guardians' fees incurred i trustee's accounting of a taxable inter vivos trust attributable to the usual issues involved in such an accounting was held be proper deductions because these are expenses incurred in terminating an inter vivos trust that was includible in decedent's estate. [Prentice Hall, Federal Taxes on Estate and Gift, p. 120, 861] Attorney's fees are allowable deduction incurred for the settlement of the estate. It is noteworthy to point that PNB was appointed the guardian over the assets the deceased. Necessarily the assets of the deceased formed part of his gross estate. Accordingly, all expenses incurred relation to the estate of the deceased will be deductible for estate tax purposes provided these are necessary and ordin expenses for administration of the settlement of the estate. 14 In upholding the June 7, 1994 Resolution of the Court of Tax Appeals, the Court of Appeals held that:

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

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

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

The amount of P50,000.00 was incurred as attorney's fees in the guardianship proceedings in Spec. Proc. No. 12 Petitioner contends that said amount are not expenses of the testamentary or intestate proceedings as the guardians proceeding was instituted during the lifetime of the decedent when there was yet no estate to be settled. Again, this contention must fail.

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

It is clear therefore that the attorney's fees incurred in the guardianship proceeding in Spec. Proc. No. 1254 were essen to the distribution of the property to the persons entitled thereto. Hence, the attorney's fees incurred in the guardians

proceedings in the amount of P50,000.00 should be allowed as a deduction from the gross estate of the decedent. 15

The deductions from the gross estate permitted under section 79 of the Tax Code basically reproduced the deducti

allowed under 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. Section 89 (a) (1) (B) of CA 466 also provided for deduction of the "judicial expenses of the testamentary or intestate proceedings" for purposes of determining the value the net estate. Philippine tax laws were, in turn, based on the federal tax laws of the United States. 17 In accord w established rules of statutory construction, the decisions of American courts construing the federal tax code are entitled great weight in the interpretation of our own tax laws. 18

Judicial expenses are expenses of administration. 19 Administration expenses, as an allowable deduction from the gr estate of the decedent for purposes of arriving at the value of the net estate, have been construed by the federal and st courts of the United States to include all expenses "essential to the collection of the assets, payment of debts or distribution of the property to the persons entitled to it." 20 In other words, the expenses must be essential to the pro

settlement of the estate. Expenditures incurred for the individual benefit of the heirs, devisees or legatees are deductible. 21 This distinction has been carried over to our jurisdiction. Thus, in Lorenzo v. Posadas 22 the Co construed the phrase "judicial expenses of the testamentary or intestate proceedings" as not including the compensat paid to a trustee of the decedent's estate when it appeared that such trustee was appointed for the purpose of managing decedent's real estate for the benefit of the testamentary heir. In another case, the Court disallowed the premiums paid the bond filed by the administrator as an expense of administration since the giving of a bond is in the nature o qualification for the office, and not necessary in the settlement of the estate. 23 Neither may attorney's fees inciden litigation incurred by the heirs in asserting their respective rights be claimed as a deduction from the gross est 241wphi1

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

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

WHEREFORE, the December 21, 1995 Decision of the Court of Appeals is AFFIRMED. The notarial fee for extrajudicial settlement and the attorney's fees in the guardianship proceedings are allowable deductions from the gr estate of Pedro Pajonar.1wphi1.nt SO ORDERED. Melo, Vitug, Panganiban and Purisima, JJ., concur.

G.R. No. L-9271

March 29, 1957

In the matter of the testate estate of the late DA. MARGARITA DAVID. CARLOS MORAN SISON, Judicial

Administrator, petitioner-appellant, vs. NARCISA F. TEODORO, heiress, oppositor-appellee. Teodoro R. Dominguez for appellant. Manuel O. Chan for appellee. BAUTISTA ANGELO, J.:

On December 20, 1948, the Court of First Instance of Manila, which has jurisdiction over the estate of the late Marga David, issued an order appointing Carlos Moran Sison as judicial administrator, without compensation, after filing a bo in the amount of P5,000. The next day, Carlos Moran Sison took his oath of office and put up the requisite bond which w duly approved by the court. On the same day, letters of administration were issued to him. On January 19, 1955, the judicial administrator filed an accounting of his administration which contains, among others, following disbursement items: 13. Paid to Visayan Surety & Insurance Corporation on August 6, 1954, as renewal premiums on the Administrator's bond of Judicial Administrator Carlos Moran Sison covering the period from December 20, 1949 to December 20, 1954, inclusive ................................. 15. Paid to Visayan Surety & Insurance Corporation on December 21, 1954, for premiums due on the Administrator's bond of judicial Administrator Carlos Moran Sison for the period from December 21, 1954 to December 21, 1955 ...............................................................

P380.70

76.14

Narcisa F. Teodoro, one of the heirs, objected to the approval of the above- quoted items on the grounds that they are necessary expenses of administration and should not be charged against the estate. On February 25, 1955, the co approved the report of the administrator but disallowed the items objected to on the ground that they cannot be conside as expenses of administration. The administrator filed a motion for reconsideration and when the same was denied, he to the present appeal.

The only issue to be determined is "whether a judicial administrator, serving without compensation, is entitled to charge an expense of administration the premiums paid on his bond."

The lower court did not consider the premiums paid on the bond filed by the administrator as an expense of administrat taking into account undoubtedly the ruling laid down in the case of Sulit vs. Santos, 56 Phil., 626. That is a case which a involves the payment of certain premium on the bond put up by the judicial administrator and when he asked the court t the same be considered as an expense of administration, it was disapproved for the same reasons advanced by the t court. In sustaining this finding, this Court ruled that the "expense incurred by an executor or administrator to produc bond is not a proper charge against the estate. Section 680 of the Code of Civil Procedure (similar to section 7, Rule does not authorize the executor or administrator to charge against the estate the money spent for the presentation, fili and substitution of a bond." And elaborating on this matter, the Court made the following comment:

The aforementioned cases, in reality, seem superfluous in ascertaining the true principle. The position of executor or administrator is one of trust. In fact, the Philippine Code of Civil Procedure so mentions it. It is pro

for the law to safeguard the estate of deceased persons by requiring the executor or administrator to give a suita bond. The ability to give this bond is in the nature of a qualification for the office. The execution and approva the bond constitute a condition precedent to acceptance of the responsibilities of the trust. If an individual does desire to assume the position of executor of administrator, he may refuse to do so. On the other hand, when individual prefers an adequate bond and has it approved by the probate court, he thereby admits the adequacy the compensation which is permitted him pursuant to law. It would be a very far-fetched construction to deduce giving of a bond in order to qualify for the office of executor or administrator is a necessary expense in the c management, and settlement of the estate within the meaning of section 680 of the Code of Civil Procedure, these are expenses incurred after the executor of administrator has met the requirements of the law and has ente upon the performance of his duties. (See In re Eby's Estate [1894], 30 Atl., 124.)

We feel that the orders of Judge Mapa in this case rested on a fine sense of official duty, sometimes lacking cases of this character, to protect the residue of the estate of a deceased person from unjustifiable inroads by executor, and that as these orders conform to the facts and the law, they are entitled to be fortified by an expl pronouncement from this court. We rule that the expense incurred by an execution or administrator to procur bond is not a proper charge against the estate, and that section 680 of the Code of Civil Procedure does authorize the executor or administrator to charge against the estate the money spent for the presentation, filing, a substitution of a bond.

It is true that the Sulit case may be differentiated from the present in the sense that, in the former the administra accepted the trust with the emolument that the law allows, whereas in the latter the administrator accepted the sa without compensation, but this difference is of no moment, for there is nothing in the decision that may justify conclusion that the allowance or disallowance of premiums paid on the bond of the administrator is made dependent on receipt of compensation. On the contrary, a different conclusion may be inferred considering the ratio decidendi on wh the ruling is predicated. Thus, it was there stated that the position of an executor or administrator is one of trust: that i proper for the law to safeguard the estates of deceased persons by requiring the administrator to give a suitable bond, that the ability to give this bond is in the nature of a qualification for the office. It is also intimated therein that "If individual does not desire to assume the position of executor or administrator, he may refuse to do so," and it is far-fetc to conclude that the giving of a bond by an administrator is an necessary expense in the care, management and settlem of the estate within the meaning of the law, because these expenses are incurred "after the executor or administrator met the requirement of the law and has entered upon the performance of his duties." Of course, a person may accept position of executor or administrator with all the incident appertaining thereto having in mind the compensation which law allows for the purpose, but he may waive this compensation in the same manner as he may refuse to serve withou Appellant having waived compensation, he cannot now be heard to complain of the expenses incident to his qualificatio The orders appealed from are hereby affirmed, without costs. Paras. C.J., Bengzon, Reyes, A., Labrador, Concepcion, Reyes, J.B.L., Endencia and Felix, JJ., concur.

G.R. No. L-17175

July 31, 1962

RICARDO M. GUTIERREZ, plaintiff-appellant, vs. LUCIA MILAGROS BARRETTO-DATU, Executrix of the Testate Estate of the deceased MARIA GERARDO VDA. DE BARRETTO, defendant-appellee. Teofilo Sison and Mariano G. Bustos and Associates for plaintiff-appellant.

Deogracias T. Reyes and Luison and Associates for defendant-appellee. MAKALINTAL, J.:

Ricardo M. Gutierrez appeals from the orders of Court of First Instance of Rizal (1) dismissing his complaint against Lu Milagros Barretto-Datu, as executive of the estate of the deceased Maria Gerardo Vda. de Barreto, and (2) denying motion for reconsideration the dismissal.

The relevant facts alleged by appellant are as follows; In 1940, Maria Gerardo Vda. de Barretto, owner of hectares fishpond lands in Pampanga, leased the same to appellant Gutierrez for a term to expire on May 1, 1947. On Novembe 1941, pursuant to a decision of Department of Public Works rendered after due investigation the dikes of the fishpo were opened at several points, resulting in their destruction and in the loss great quantities of fish inside, to the damage prejudice of the lessee.

In 1956, the lessor having died in 1948 and the corresponding testate proceeding to settle her estate having been ope (Sp. Proc. No. 5002, C.F.I., Manila), Gutierrez filed a claim therein for two items: first, for the sum of P32,000 representing advance rentals he had to the decedent (the possession of the leased property is alleged, having been retur to her after the open of the dikes ordered by the government); and second, the sum of P60,000.00 as damages in concept of earned profits, that is, profits which the claimant failed to realize because of the breach of the lease contr allegedly committed by the lessor.

On June 7, 1957 appellant commenced the instant ordinary civil action in the Court of First Instance of Rizal (Quezon C branch) against the executrix of the testate for the recovery of the same amount of P60,000 referred to as the second it claimed in the administration proceeding. The complaint specifically charges decedent Manila Gerardo Vda. de Barretto lessor, was having violated a warranty in the lease contract again any damages the lessee might suffer by reason of claim of the government that several rivers and creeks of the public domain were included in the fishponds.

In July 1957 appellant amended his claim in the testate proceeding by withdrawing therefrom the item of P60,000. leaving only the one for refund of advance rentals in the sum of P32,000.00.

After the issues were joined in the present case with the filing of the defendant's answer, together with a counterclaim, after two postponements of the trial were granted, the second of which was in January 1958, the court dismissed the act for abandonment by both parties in an order dated July 31, 1959. Appellant moved to reconsider; appellee opposed motion; and after considerable written argument the court, on March 7, 1960, denied the motion for reconsideration on ground that the claim should have been prosecuted in the testate proceeding and not by ordinary civil action.

Appellant submits his case on this lone legal question: whether or not his claim for damages based on unrealized profit a money claim against the estate of the deceased Maria Gerardo Vda. de Barretto within the purview of Rule 87, Section This section states:

SEC. 5. Claims which must be filed under the notice. If not filed, barred; exception. All claims for mo against the decedent, arising from contract, express or implied, whether the same be due, not due, or contingent, claims for funeral expenses and expenses of the last sickness of the decedent, and judgment for money against decedent, must be filed within the time limited in the notice; otherwise they are barred forever, except that t may be set forth as counterclaims in any action that the executor or administrator may bring against the claima Where an executor or administrator commences an action, or prosecutes an action already commenced by deceased in his lifetime, the debtor may set forth by answer the claims he has against the decedent, instead presenting them independently to the court as herein provided, and mutual claims may be set off against each ot in such action; and if final judgment is rendered in favor of the defendant, the amount so determined shall considered the true balance against the estate, as though the claim had been presented directly before the cour the administration proceedings. Claims not yet due, or contingent, may be approved at their present value.

The word "claims" as used in statutes requiring the presentation of claims against a decedent's estate is generally constr to mean debts or demands of a pecuniary nature which could have been enforced against the deceased in his lifetime could have been reduced to simple money judgments; and among these are those founded upon contract. 21 Am. Jur. 5 The claim in this case is based on contract specifically, on a breach thereof. It falls squarely under section 5 of Rule "Upon all contracts by the decedent broken during his lifetime, even though they were personal to the decedent in liabil the personal representative is answerable for the breach out of the assets." 3 Schouler on Wills, Executors Administrators, 6th Ed., 2395. A claim for breach of a covenant in a deed of the decedent must be presented under a stat requiring such presentment of all claims grounded on contract. Id. 2461; Clayton v. Dinwoody, 93 P. 723; James v. Cor 51 P. 2nd 689.1

The only actions that may be instituted against the executor or administrator are those to recover real or personal prope from the estate, or to enforce a lien thereon, and actions to recover damages for an injury to person or property, rea personal. Rule 88, section 1. The instant suit is not one of them.

Appellant invokes Gavin v. Melliza, 84 Phil. 794, in support of his contention that this action is proper against executrix. The citation is not in point. The claim therein, which was filed in the testate proceeding, was based upo breach of contract committed by the executrix herself, in dismissing the claimant as administrator of the hacienda of deceased. While the contract was with the decedent, its violation was by the executrix and hence personal to her. Besid the claim was for indemnity in the form of a certain quantity of palay every year for the unexpired portion of the term the contract. The denial of the claim was affirmed by this Court on the grounds that it was not a money claim and tha arose after the decedent's demise, placing it outside the scope of Rule 87, Section 5. The orders appealed from are affirmed, with costs against appellant. Bengzon, C.J., Labrador, Concepcion, Barrera, Paredes, Dizon and Regala, JJ., concur. Padilla, J., took no part.

RAFAEL ARSENIO S. DIZON, in his capacity as the Judicial Administrator of the Estate of the deceased JOSE P. FERNANDEZ, Petitioner,

G.R. No. 140944

Present:

YNARES-SANTIAGO, J., - versus Chairperson, AUSTRIA-MARTINEZ, CHICO-NAZARIO, COURT OF TAX APPEALS and COMMISSIONER OF NACHURA, and INTERNAL REVENUE,

Respondents.

REYES, JJ.

Promulgated:

April 30, 2008 x------------------------------------------------------------------------------------x

DECISION NACHURA, J.:

Before this Court is a Petition for Review on Certiorari[1] under Rule 45 of the Rules of Civil Procedure seeking the reversal of the Court of Appeals (CA) Decision[2] dated April 30, 1999 which affirmed the Decision[3] of the Court of Tax Appeals (CTA) dated June 17, 1997.[4]

The Facts

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

Petitioner alleged that several requests for extension of the period to file the required estate tax return were granted by the BIR since the assets of the estate, as well as the claims against it, had yet to be collated, determined and identified. Thus, in a letter[8] dated March 14, 1990, Justice Dizon authorized Atty. Jesus M. Gonzales (Atty. Gonzales) to sign and file on behalf of the Estate the required estate tax return and to represent the same in securing a Certificate of Tax Clearance. Eventually, on April 17, 1990, Atty. Gonzales wrote a letter[9] addressed to the BIR Regional Director for San Pablo City and filed the estate tax return[10] with the

same BIR Regional Office, showing therein a NIL estate tax liability, computed as follows:

COMPUTATION OF TAX Conjugal Real Property (Sch. 1) Conjugal Personal Property (Sch.2) Taxable Transfer (Sch. 3) Gross Conjugal Estate Less: Deductions (Sch. 4) Net Conjugal Estate Less: Share of Surviving Spouse Net Share in Conjugal Estate xxx Net Taxable Estate Estate Tax Due NIL NIL .[11] . 14,315,611.34 187,822,576.06 NIL NIL NIL . P10,855,020.00 3,460,591.34

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 25% surcharge- late filing late payment Interest Compromise-non filing non payment no notice of death no CPA Certificate Total amount due & collectible P31,868,414.48 7,967,103.62 7,967,103.62 19,121,048.68 25,000.00 25,000.00 15.00 300.00 P66,973,985.40[18]

In his letter[19] dated December 12, 1991, Atty. Gonzales moved for the reconsideration of the said estate tax assessment. However, in her letter[20] dated April 12, 1994, the BIR Commissioner denied the request and reiterated that the estate is liable for the payment of P66,973,985.40 as deficiency estate tax. On May 3, 1994, petitioner received the letter of denial. On June 2, 1994, petitioner filed a petition for review[21] before respondent CTA. Trial on the merits ensued.

As found by the CTA, the respective parties presented the following pieces of evidence, to wit:

In the hearings conducted, petitioner did not present testimonial evidence but merely documentary evidence consisting of the following: Nature of Document (sic) 1. Letter dated October 13, 1988 from Arsenio P. Dizon addressed to the Commissioner of Internal Revenue informing the latter of the special proceedings for the settlement of the estate (p. 126, BIR records); Petition for the probate of the Exhibits

"A"

2.

will and issuance of letter of administration filed with the Regional Trial Court (RTC) of Manila, docketed as Sp. Proc. No. 87-42980 (pp. 107-108, BIR records); 3. Pleading entitled "Compliance" filed with the probate Court submitting the final inventory of all the properties of the deceased (p. 106, BIR records); Attachment to Exh. "C" which is the detailed and complete listing of the properties of the deceased (pp. 89-105, BIR rec.);

"B"& "B-1

"C"

4.

"C-1" to "C-17"

5.

Claims against the estate filed by Equitable Banking Corp. with the probate Court in the amount of P19,756,428.31 as of March 31, 1988, together with the Annexes to the claim (pp. 64-88, BIR records); "D" to "D-24" Claim filed by Banque de L' Indochine et de Suez with the probate Court in the amount of US $4,828,905.90 as of January 31, 1988 (pp. 262-265, BIR records); Claim of the Manila Banking Corporation (MBC) which as of November 7, 1987 amounts to P65,158,023.54, but recomputed as of February 28, 1989 at a total amount of P84,199,160.46; together with the demand letter from MBC's lawyer (pp. 194-197, BIR records); Demand letter of Manila Banking Corporation prepared by Asedillo, Ramos and Associates Law Offices addressed to Fernandez Hermanos, Inc., represented by Jose P. Fernandez, as mortgagors, in the total amount of P240,479,693.17 as of February 28, 1989 (pp. 186-187, BIR records); Claim of State Investment House, Inc. filed with the

6.

"E" to "E-3"

7.

"F" to "F-3"

8.

"G"& "G-1"

9.

RTC, Branch VII of Manila, docketed as Civil Case No. 86-38599 entitled "State Investment House, Inc., Plaintiff, versus Maritime Company Overseas, Inc. and/or Jose P. Fernandez, Defendants," (pp. 200-215, BIR records); 10. Letter dated March 14, 1990 of Arsenio P. Dizon addressed to Atty. Jesus M. Gonzales, (p. 184, BIR records); Letter dated April 17, 1990 from J.M. Gonzales addressed to the Regional Director of BIR in San Pablo City (p. 183, BIR records); Estate Tax Return filed by the estate of the late Jose P. Fernandez through its authorized representative, Atty. Jesus M. Gonzales, for Arsenio P. Dizon, with attachments (pp. 177-182, BIR records);

"H" to "H-16"

"I"

11.

"J"

12.

"K" to "K-5"

13.

Certified true copy of the Letter of Administration issued by RTC Manila, Branch 51, in Sp. Proc. No. 87-42980 appointing Atty. Rafael S. Dizon as Judicial Administrator of the estate of Jose P. Fernandez; (p. 102, CTA records) and Certification of Payment of estate taxes Nos. 2052 and 2053, both dated April 27, 1990, issued by the Office of the Regional Director, Revenue Region No. 4-C, San Pablo City, with attachments (pp. 103-104, CTA records.).

"L"

14.

"M" to "M-5"

Respondent's [BIR] counsel presented on June 26, 1995 one witness in the person of Alberto Enriquez, who was one of the revenue examiners who conducted the investigation on the estate tax case of the late Jose P. Fernandez. In the course of the direct examination of the witness, he identified the following: Documents/ Signatures 1. Estate Tax Return prepared by the BIR; Signatures of Ma. Anabella Abuloc and Alberto Enriquez, Jr. appearing at the lower Portion of Exh. "1"; Memorandum for the Commissioner, dated July 19, 1991, prepared by revenue examiners, Ma. Anabella A. Abuloc, Alberto S. Enriquez and Raymund S. Gallardo; Reviewed by Maximino V. Tagle Signature of Alberto S. Enriquez appearing at the lower portion on p. 2 of Exh. "2"; Signature of Ma. Anabella A. Abuloc appearing at the lower portion on p. 2 of Exh. "2"; Signature of Raymund S. Gallardo appearing at the

BIR Record

p. 138

2.

-do-

3.

pp. 143-144

4.

-do-

5.

-do-

6.

Lower portion on p. 2 of Exh. "2"; 7. Signature of Maximino V. Tagle also appearing on p. 2 of Exh. "2"; Summary of revenue Enforcement Officers Audit Report, dated July 19, 1991; Signature of Alberto Enriquez at the lower portion of Exh. "3"; Signature of Ma. Anabella A. Abuloc at the lower portion of Exh. "3"; Signature of Raymond S. Gallardo at the lower portion of Exh. "3"; Signature of Maximino V. Tagle at the lower portion of Exh. "3"; Demand letter (FAS-E-87-91-00), signed by the Asst. Commissioner for Collection for the Commissioner of Internal Revenue, demanding payment of the amount of P66,973,985.40; and Assessment Notice FAS-E-87-91-00

-do-

-do-

8.

p. 139

9.

-do-

10.

-do-

11.

-do-

12.

-do-

13.

p. 169 pp. 169-170[22]

14.

The CTA's Ruling

On June 17, 1997, the CTA denied the said petition for review. Citing this Court's ruling in Vda. de Oate v. Court of Appeals,[23] the CTA opined that the aforementioned pieces of evidence introduced by the BIR were admissible in evidence. The CTA ratiocinated: Although the above-mentioned documents were not formally offered as evidence for respondent, considering that respondent has been declared to have waived the presentation thereof during the hearing on March 20, 1996, still they could be considered as evidence for respondent since they were properly identified during the presentation of respondent's witness, whose testimony was duly recorded as part of the records of this case. Besides, the documents marked as respondent's exhibits formed part of the BIR records of the case.[24]

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

Conjugal Real Property Conjugal Personal Prop. Gross Conjugal Estate Less: Deductions Net Conjugal Estate Less: Share of Surviving Spouse Net Share in Conjugal Estate Add: Capital/Paraphernal Properties P44,652,813.66 Less: Capital/Paraphernal Deductions Net Taxable Estate

P 5,062,016.00 33,021,999.93 38,084,015.93 26,250,000.00 P 11,834,015.93 5,917,007.96 P 5,917,007.96

44,652,813.66 P 50,569,821.62 ============

Estate Tax Due P 29,935,342.97 Add: 25% Surcharge for Late Filing Add: Penalties for-No notice of death No CPA certificate Total deficiency estate tax

7,483,835.74 15.00 300.00 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 Resolution[30] dated November 3, 1999.

Hence, the instant Petition raising the following issues:

1.

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

2. Whether or not the Court of Tax Appeals and the Court of Appeals erred in recognizing/considering the estate tax return prepared and filed by respondent BIR knowing that the probate court appointed administrator of the estate of Jose P. Fernandez had previously filed one as in fact, BIR Certification Clearance Nos. 2052 and 2053 had been issued in the estate's favor; 3. Whether or not the Court of Tax Appeals and the Court of Appeals erred in disallowing the valid and enforceable claims of creditors against the estate, as lawful deductions despite clear and convincing evidence thereof; and 4. Whether or not the Court of Tax Appeals and the Court of Appeals erred in validating erroneous double imputation of values on the very same estate properties in the estate tax return it prepared and filed which effectively bloated the estate's assets.[31]

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

settled by the filing of its estate tax return and the issuance of BIR Certification Nos. 2052 and 2053; and that the reckoning date of the claims against the Estate and the settlement of the estate tax due should be at the time the estate tax return was filed by the judicial administrator and the issuance of said BIR Certifications and not at the time the aforementioned Compromise Agreements were entered into with the Estate's creditors.[32]

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

The Issues

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

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

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

The Courts Ruling

The Petition is impressed with merit.

Under Section 8 of RA 1125, the CTA is categorically described as a court of record. As cases filed before it are litigated de novo, party-litigants shall prove every minute aspect of their cases. Indubitably, no evidentiary value can be given the pieces of evidence submitted by the BIR, as the rules on documentary evidence require that these documents must be formally offered before the CTA.[34] Pertinent is Section 34, Rule 132 of the Revised Rules on Evidence which reads:

SEC. 34. Offer of evidence. The court shall consider no evidence which has not been formally offered. The purpose for which the evidence is offered must be specified.

The CTA and the CA rely solely on the case of Vda. de Oate, which reiterated this Court's previous rulings in People v. Napat-a[35] and People v. Mate[36] on the admission and consideration of exhibits which were not formally offered during the trial. Although in a long line of cases many of which were decided after Vda. de Oate, we held that courts cannot consider evidence which has not been formally offered,[37] nevertheless, petitioner cannot validly assume that the doctrine laid down in Vda. de Oate has already been abandoned. Recently, in Ramos v. Dizon,[38] this Court, applying the said doctrine, ruled that the trial court judge therein committed no error when he admitted and considered the respondents' exhibits in the resolution of the case, notwithstanding the fact that the same

were not formally offered. Likewise, in Far East Bank & Trust Company v. Commissioner of Internal Revenue,[39] the Court made reference to said doctrine in resolving the issues therein. Indubitably, the doctrine laid down in Vda. De Oate still subsists in this jurisdiction. In Vda. de Oate, we held that:

From the foregoing provision, it is clear that for evidence to be considered, the same must be formally offered. Corollarily, the mere fact that a particular document is identified and marked as an exhibit does not mean that it has already been offered as part of the evidence of a party. In Interpacific Transit, Inc. v. Aviles [186 SCRA 385], we had the occasion to make a distinction between identification of documentary evidence and its formal offer as an exhibit. We said that the first is done in the course of the trial and is accompanied by the marking of the evidence as an exhibit while the second is done only when the party rests its case and not before. A party, therefore, may opt to formally offer his evidence if he believes that it will advance his cause or not to do so at all. In the event he chooses to do the latter, the trial court is not authorized by the Rules to consider the same. However, in People v. Napat-a [179 SCRA 403] citing People v. Mate [103 SCRA 484], we relaxed the foregoing rule and allowed evidence not formally offered to be admitted and considered by the trial court provided the following requirements are present, viz.: first, the same must have been duly identified by testimony duly recorded and, second, the same must have been incorporated in the records of the case.[40]

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

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

A common fact threads through Vda. de Oate and Ramos that does not exist at all in the instant case. In the aforementioned cases, the exhibits were marked at the pre-trial proceedings to warrant the pronouncement that the same were duly incorporated in the records of the case. Thus, we held in Ramos:

In this case, we find and so rule that these requirements have been satisfied. The exhibits in question were presented and marked during the pre-trial of the case thus, they have been incorporated into the records. Further, Elpidio himself explained the contents of these exhibits when he was interrogated by respondents' counsel... xxxx But what further defeats petitioner's cause on this issue is that respondents' exhibits were marked and admitted during the pre-trial stage as shown by the Pre-Trial Order quoted earlier.[44]

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

Per the records of this case, the BIR was directed to present its evidence[48] in the hearing of February 21, 1996, but BIR's counsel failed to appear.[49] The CTA denied petitioner's motion to consider BIR's presentation of evidence as waived, with a warning to BIR that such presentation would be considered waived if BIR's evidence would not be presented at the next hearing. Again, in the hearing of March 20, 1996, BIR's counsel failed to appear.[50] Thus, in its Resolution[51] dated March 21, 1996, the CTA considered the BIR to have waived presentation of its evidence. In the same Resolution, the parties were directed to file their respective memorandum. Petitioner complied but BIR failed to do so.[52] In all of these proceedings, BIR was duly notified. Hence, in this case, we are constrained to apply our ruling in Heirs of Pedro Pasag v. Parocha:[53]

A formal offer is necessary because judges are mandated to rest their findings of facts and their judgment only and strictly upon the evidence offered by the parties at the trial. Its function is to enable the trial judge to know the purpose or purposes for which the proponent is presenting the evidence. On the other hand, this allows opposing parties to examine the evidence and object to its admissibility. Moreover, it facilitates review as the appellate court will not be required to review documents not previously scrutinized by the trial court. Strict adherence to the said rule is not a trivial matter. The Court in Constantino v. Court of Appeals ruled that the formal offer of one's evidence is deemed waived after failing to submit it within a considerable period of time. It explained that the court cannot admit an offer of evidence made after a lapse of three (3) months because to do so would "condone an inexcusable laxity if not non-compliance with a court order which, in effect, would encourage needless delays and derail the speedy administration of justice." Applying the aforementioned principle in this case, we find that the trial court had reasonable ground to consider that petitioners had waived their right to make a formal offer of documentary or object evidence. Despite several extensions of time to make their formal offer, petitioners failed to comply with their commitment and allowed almost five months to lapse before finally submitting it. Petitioners' failure to comply with the rule on admissibility of evidence is anathema to the efficient, effective, and expeditious dispensation of justice.

Having disposed of the foregoing procedural issue, we proceed to discuss the merits of the case.

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

It is admitted that the claims of the Estate's aforementioned creditors have been condoned. As a mode of extinguishing an obligation,[55] condonation or remission of debt[56] is defined as:

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

Verily, the second issue in this case involves the construction of Section 79[58] of the National Internal Revenue Code[59] (Tax Code) which provides for the allowable deductions from the gross estate of the decedent. The specific question is whether the actual claims of the aforementioned creditors may be fully allowed as deductions from the gross estate of Jose despite the fact that the said claims were reduced or condoned through compromise agreements entered into by the Estate with its creditors.

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

It is noteworthy that even in the United States, there is some dispute as to whether the deductible amount for a claim against the estate is fixed as of the decedent's death which is the general rule, or the same should be adjusted to reflect post-death developments, such as where a settlement between the parties results in the reduction of the amount actually paid.[61] On one hand, the U.S. court ruled that the appropriate deduction is the

value that the claim had at the date of the decedent's death.[62] Also, as held in Propstra v. U.S., [63] where a lien claimed against 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 postdeath 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.

ANTONIO EDUARDO B. NACHURA Associate Justice

WE CONCUR:

CONSUELO YNARES-SANTIAGO Associate Justice Chairperson

MA. ALICIA AUSTRIA-MARTINEZ Associate Justice

MINITA V. CHICO-NAZARIO Associate Justice

RUBEN T. REYES Associate Justice

ATT E S TAT I O N

I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

CONSUELO YNARES-SANTIAGO Associate Justice Chairperson, Third Division

C E R T I F I CAT I O N Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, I certify that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

REYNATO S. PUNO Chief Justice

REPUBLIC OF THE PHILIPPINES Court ofT ax Appeals QUEZON CITY ENBANC ESTATE OF FIDEL F. REYES and ESTATE OF TERESITA R. REYES, Petitioners, -versusCOMMISSIONER OF INTERNAL REVENUE, Respondent. C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) Present: A COST A, Presiding Justice, CASTANEDA, JR., BAUTISTA, UY, CASANOVA, and P ALANCAENRIQUEZ, JJ. Promulgated: X ------------------------------------------------------------------------------------ X DECISION PALANCA-ENRIQUEZ, J:.: Central in this controversy is the issue as to whether or not the petitioners are liable to pay the 50% fraud penalty for filing false returns. THE CASE This question is the subject of this Petition for Review filed by the Estates of Fidel F. Reyes and Teresita R. Reyes (hereafter "petitione~ C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION 2 under Section 11 of Republic Act No. 9282 (An Act Expanding the Jurisdiction of the Court of Tax Appeals), in relation to Rule 43 of the 1997 Rules of Civil Procedure, as amended, which seeks the review of the Decision dated January 16, 2006 of the First Division of this Court in C.T.A. Case No. 6747 entitled "Estate of Fidel F. Reyes and Estate of Teresita R. Reyes vs. Commissioner of Internal Revenue", the dispositive portion of which reads as follows: "WHEREFORE, premises considered, the assessments against the estates of Spouses Fidel and Teresita Reyes are hereby AFFIRMED but in the reduced amounts of P1 ,286,751.53 and P1,508,326.84, respectively, computed as follows: I. ESTATE OF FIDEL REYES Real Properties - Conjugal Real Properties - Exclusive Personal Properties -Conjugal Personal Properties -

Exclusive Gross Estate Per Respondent's Review p 13,160,494.00 5,813,532.33 10,000.00 1,353,041 .69 P20,337,068.02 Add/(Deduct) Adjustments (P 481 ,307.00) ( 2,249,793.00) 1,353,041.69 ( 1,353.041.69) (P2,731,1 00.00) Per Court's Finding P12,679,187.00 3,563,739.33 1,363,041 .69 0.00 P17,605,968.02 ------------- ------------ ------------- ------------ Less: Exclusive Properties 3,563,739.33 Gross Conjugal Estate P14,042,228.69 Less: Conjugal Deductions a. Funeral Expenses (P59,260.00) b. Claims against the Estate ( 1,358,412.36) Net Conjugal Estate P12,624,556.33 Less: 1/2 share of surviving spouse (P12,624,556.33/2) 6,312,278.16 Net Estate P 6,312,278.17 Add: Exclusive Properties 3,563,739.33 Total Net Estate P 9,876,017.50 ~ C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION Less: Family Home Net Taxable Estate Estate Tax Due Less: Payment on 12/29/1997 Payment on 7/29/1998 Deficiency Estate Tax Add: 50% Surcharge 20% Interest (7/24/97 to 12/30/02) Total Amount Due II. ESTATE OF TERESITA REYES Gross Estate (Share from exclusive and conjugal properties) Less: Deductions a. Funeral Expense b. Accrued/Unpaid taxes c. Claim against the Estate Subtotal d. Vanishing Deductions Net Estate Less: Family Home Standard Deductions Medical Expenses Net Taxable Estate Estate Tax Due Less: Payment on 2/24/1999 Payment on 10/17/2001 Deficiency Estate Tax Add: 50% Surcharge 20% Interest (2/25/99 to 12/30/02) Total Amount Due p 200,000.00 422,486.59 100,000.00 p 722,486.59 663,027.01 P1 ,000,000.00 1,000,000.00 95,801.47 p 268,377.60 53,672.52 ( 1 ,000,000.00) p 8,876,017.50 ============ p 1 ,046,402.63 251 ,031.51 297,582.00 p 497,789.12 ============ 248,894.56 540,067.85 p 1,286,751 .53 ============ p 11,959,390.99 1,385,513.60 P1 0,573,877.39 2,095,801.47 p 8,478,075.92 ------------ ------------ p 986,711 .39 322,050.12 p 664,661 .27 ------------ ------------ 332,330.64 511 ,334.93 p 1 ,508,326.84 ============ Accordingly, the estates of Fidel F. Reyes and Teresita R. Reyes are hereby ORDERED TO PAY the respondent the amounts of P1,286,751.53 and P1 ,508,326.84, respectively, representing deficiency/delinquency estate taxes for taxable years 1997 & 1998. In addition, 20% delinquency ~ 3 C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION interest is imposed thereon from December 31, 2002 until the respective amounts are fully paid pursuant to Section 249 (C) (3) of the 1997 NIRC. However, the assessments for deficiency donor's tax in the amount of P216,632.54 and compromise penalty in the amount of P37,900 are hereby CANCELLED.

SO ORDERED." 4 and the Resolution dated May 22, 2006, denying petitioner's "Motion for Partial Reconsideration" and "Supplement to the Motion for Partial Reconsideration", the dispositive portion of which reads: "WHEREFORE, there being no justifiable reason to overturn Our Decision, petitioner's Motion for Partial Reconsideration and Supplement to the Motion for Partial Reconsideration are hereby DENIED for lack of merit. SO ORDERED." THE FACTS In their "Joint Stipulation of Facts and Issues", the parties stipulated as follows: "1. Petitioners are represented by Priscilla Reyes- Pacheco, as Administrator of the two estates. 2. An estate tax return pursuant to the Voluntary Assessment Program (V AP) under Revenue Memorandum Order No. 58-97 was filed for the estate of Fidel F. Reyes on 29 December 1997. C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION 3. Again on 29 June 1998, an amended estate tax return was filed for the same estate of Fidel F. Reyes. 4. On 24 February 1999, an estate tax return was filed for the estate of Teresita R. Reyes. 5. On 17 October 2001, the estate of Teresita R. Reyes paid an additional estate tax pursuant to the Voluntary Assessment Program (V AP) under Revenue Regulation No. 8-2001. 6. On April 21 , 2002, a Preliminary Assessment Notice (PAN) was issued to the petitioners. 7. On 29 November 2002, respondent issued two (2) sets of "Formal Letter of Demand" with their corresponding Final Assessment Notices (FAN) attached therewith to the petitioners which the latter received. 8. Consequently, Petitioners filed their administrative protest against the Final Assessment Notices with the Office of the Regional Director of Revenue Region No. 7, Quezon City, Metro Manila on 4 February 2003. 9. On 28 February 2003, respondent wrote a letter to petitioners through undersigned counsel in reply to their abovementioned protest dated 3 February 2003 advising the former that said protest has been forwarded to the Revenue District Office No. 40 of Cubao, Quezon City, for appropriate action. 10. The investigation of the petitioner's estate tax liabilities revealed a tax obligation of P8,814, 179.17 as deficiency/delinquency estate tax, donor's tax, and compromise penalty." 5 C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION 6 In his answer filed on October 21, 2003, respondent Commissioner of Internal Revenue (hereafter "respondent") alleged by way of special and affirmative defenses: that the investigation of petitioner's estate tax liabilities revealed a tax obligation of P8,814, 179.17 as deficiency/delinquency estate tax, donor's tax, and compromise penalty; that the subject deficiency/delinquency tax assessments were issued in accordance with law and pertinent regulations and have substantially complied with the provisions of Section 228 of the National Internal Revenue Code of 1997 (hereafter "NJRC of 1997 "), as amended, relative to the taxpayer being informed in writing of the facts and law in which the assessment is based; that the deficiency/delinquency tax assessments were based on the following: (a) deficiency/delinquency estate tax in the amount ofP6,766,193.05 for the Estate of Fidel F. Reyes was assessed on the basis of the failure to declare exclusive/capital and conjugal properties left by the late Fidel F. Reyes, but the same is without any legal justification, being neither recorded nor declared in the estate tax return resulting to the understatement of the reported taxable estate; (b) deficiency/delinquency estate tax in the amount ofP1,793,453.58 for the Estate of Teresita R. Reyes was assessed on the basis of the existence of ~ C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION

7 some discrepancy in the estate tax return of the late Teresita R. Reyes and the verification disclosed that some of the conjugal properties reported to the estate tax return belong to her late husband, Fidel F. Reyes and there was also an overstatement of vanishing deductions claimed; (c) that in view of the foregoing, such failure and omission renders the estate tax returns filed false returns which can be assessed within 1 0 years from the discovery of falsity, fraud or omission; (d) deficiency/delinquency donor's tax in the amount ofP216,632.54 was assessed as a result of the partition of the estate, per extrajudicial settlement concurred by all the parties, pursuant to Sections 98 to 104 of the NIRC of 1997; (e) Compromise Penalty in the amount ofP37,900.00 for violation of Section 255, in relation to Section 275 of the NIRC relative to late filing/payment of estate and donor's tax; (f) the 50% surcharge was imposed, pursuant to the provisions of Section 248(B) of the NIRC, in relation to Section 332 [now 222(a)] of the NIRC; and (g) the 20% interest per annum has been imposed, pursuant to the provisions of Section 249(b), now Section 249(B) of the NIRC; and (h) finally, that all presumptions are in favor of the correctness of tax assessments and the burden of proof to prove otherwise is upon the petitioner. ~ C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION 8 After trial on the merits, the First Division rendered the assailed decision in the terms earlier set forth. Not satisfied, petitioner moved for a partial reconsideration of the same, which the First Division denied in its Resolution dated May 22, 2006. Hence, the present Petition for Review. ISSUES Petitioners raised the following assignment of errors: I THE FIRST DIVISION ERRED WHEN IT RULED THAT THE RIGHT OF RESPONDENT TO ASSESS PETITIONERS OF DEFICIENCY ESTATE TAXES HAS NOT YET PRESCRIBED. II THE FIRST DIVISION LIKEWISE ERRED WHEN IT IMPOSED THE 50% SURCHARGE ON THE DEFICIENCY ESTATE TAXES DUE ON THE ESTATES OF BOTH FIDEL F. REYES AND TERESITA R. REYES WITHOUT LEGAL BASIS. On July 19, 2006, without necessarily giving due course to the petition, We required respondent to file his comment on the petition, within ten (10) days from notice. w C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION 9 For failure of respondent to file his comment despite the expiration of the prescribed period, the petition was deemed submitted for decision. THE COURT EN BANC'S RULING The petition is partly meritorious. First Issue: Prescription ofthe Period to Assess in Relation to the Definition of a "False Return" The first vital issue to be decided here is whether the right of the Commissioner of Internal Revenue to assess deficiency estate taxes had already prescribed at the time the final Assessment Notice was issued on November 29, 2002. Petitioners mainly argue that respondent's right to assess deficiency estate taxes due had long prescribed considering that the Final Assessment Notice against the estates of Fidel Reyes and Teresita Reyes was issued only on November 29, 2002, when the estate tax return of

Fidel Reyes was filed on December 29, 1997, while the estate tax return of Teresita Reyes was filed and paid on February 24, 1999, which was apparently beyond the three (3) year period to assess. Petitioners further argue that the returns should not be treated as a false return under Section 222 of the National Internal Revenue Code of 1997 (hereafter "NIRC of @);)-C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION 10 1997"), as amended, as the underdeclaration of properties was a result of failure to correctly classifY and declare in the estate tax return the properties of the late Fidel F. Reyes as conjugal or exclusive. Respondent, on the other hand, maintains that the failure and omission of petitioners to declare exclusive/capital and conjugal properties left by Fidel Reyes renders the estate tax returns filed as false returns, which can be assessed within ten (1 0) years from the discovery of the falsity, fraud or omission. What, therefore, constitutes "false return" to warrant the application of the ten-year prescriptive period? The applicable laws are Sections 203 and 222 of the NIRC of 1997, as amended, which provide: "SEC. 203. Period of Limitation Upon Assessment and Collection. - Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided, That in a case where a return is filed beyond the period prescribed by law, the three (3)-year period shall be counted from the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day."~ C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION "SEC. 222. 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 for the collection of such tax may be filed 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. (b) If before the expiration of the time prescribed in Section 203 for the assessment of the tax, both the Commissioner and the taxpayer have agreed in writing to its assessment after such time, the tax may be assessed within the period agreed upon. The period so agreed upon may be extended by subsequent written agreement made before the expiration of the period previously agreed upon. (c) Any internal revenue tax which has been assessed within the period of limitation as prescribed in paragraph (a) hereof may be collected by distraint or levy or by a proceeding in court within five (5) years following the assessment of the tax. (d) Any internal revenue tax, which has been assessed within the period agreed upon as provided in paragraph (b) hereinabove, may be collected by distraint or levy or by a proceeding in court within the period agreed upon in writing before the expiration of the five (5)-year period. The period so agreed upon may be extended by subsequent written agreements made before the expiration of the period previously agreed upon. ( e) Provided, however, That nothing in the immediately preceding Section and paragraph (a) hereof shall be construed to authorize the examination and investigation 11 C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION or inquiry into any tax return filed in accordance with the provisions of any tax amnesty law or decree." 12 Pursuant to the above provisions, respondent has three (3) years from the filing of the returns to assess petitioners of any internal revenue tax. The exception is when there is a finding of falsity or fraud in the filing of said returns, in which case, the prescriptive period to assess is ten ( 10) years from the discovery of such falsity or fraud. The main question lies on the correct interpretation of the

application of the qualifying words "with intent to evade tax" to a false return and fraudulent return under Section 222 (a) of the NIRC of 1997, as amended, to warrant the application of the ten (1 0) year prescriptive period to assess the taxpayer. Petitioners invoke the decision of the Court of Appeals in Commissioner of Internal Revenue vs. Ayala Hotels, Inc. (CA-G.R. SP. No. 70025, Apri/19, 2004), pertinent portion of which reads as follows: "In interpreting the above provision, it is important to note that commentaries consider two (2) groups of exceptions provided for in Section 222: The first, where there is a failure to file the required return; and the second, where there is a return filed but the same is false or fraudulent and made with intent to evade tax. It appears that the phrase 'with intent to evade tax' qualifies not o~ C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION the word 'fraudulent' but also the word 'false', having been grouped together as one category under the exceptions. Under the rules of statutory construction, the qualifying words 'with intent to evade tax' should refer to both the words 'false' and 'fraudulent' since these words are not separated by a comma. If it was the intent of the lawmakers to qualify only the word 'fraudulent' then the same should have been treated separately or at the very least, the words 'false' and 'fraudulent' should have been separated by a comma to show separate treatment of the two." 13 On the other hand, the First Division citing the case of Aznar vs. Court of Tax Appeals (58 SCRA 519) ruled: "The Supreme Court in the case of Aznar vs. Court of Tax Appeals, already resolved this issue when it made a distinction between 'false' and 'fraudulent' returns as provided for by the law. To quote: '[W]e believe that the proper and reasonable interpretation of said provision should be that in the three different cases of (1) false return, (2) fraudulent return with intent to evade tax, (3) failure to file a return, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time within ten years after the discovery of the (1) falsity, (fraud), (3) omission. Our stand that the law should be interpreted to mean a separation of the three different situations of false return, fraudulent return with intent to evade tax, and failure to file a return is strengthened immeasurably by the last portion of the provision which segregates the situations into three different classes, namely -'falsity', 'fraud' and 'omission'. That there is a difference between 'false return' and 'fraudulent return' cannot be denied. While the first merely implies deviation from the truth, whether intentional or not, the second implies intentional or deceitful entry with intent to evade the taxes due. ~ C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION The ordinary period of prescription of five ( 5) years [now three (3) years] within which to assess tax liabilities under Section 331 of the NIRC [now Section 203] should be applicable to normal circumstances, but whenever the government is placed at a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities due to false returns, fraudulent return intended to evade payment of tax or failure to file return, the period of ten years provided for in Section 332 (a) NIRC [now Section 222(a)], from the time of the discovery of the falsity, fraud or omission even seems to be inadequate and should be the one enforced.' Based on the above pronouncements, false returns do not necessary mean with intent to evade taxes, otherwise, there will be no distinction between false and fraudulent returns and the law would not have provided for the distinct situations. Simply put, whenever intent to evade taxes exists, fraud already exists. To apply petitioners' interpretation that both false and fraudulent returns require the 'intent to evade taxes' element would mean that in false returns, fraud also necessarily exists because of the requirement of the intent to evade payment correct taxes accompanying the falsity." 14 In the Aznar case, the Supreme Court ruled that no 50% final surcharge under the then Section 72, now Section 247 (b) of the NIRC of 1997, is applicable in the absence of fraud on the part of the taxpayer, notwithstanding the applicability of the ten-year prescriptive period from discovery of the fraud, falsity or omission under the then Section 332 (a), now Section 222 of the NIRC of 1997.

Petitioners' contention that the Aznar case cannot be applied in this present case has no basis. Although in this case, there ~ C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION 15 recurrence of underdeclaration of taxes due, as compared with the Aznar case, still, there are substantial underdeclaration of taxable estate and overstatement of vanishing deductions, which renders the estate tax returns filed a "false return" contemplated under Section 222 (a) that warrants the application of the ten (10) year period to assess. In this case, petitioners, in fact, candidly stated in their Petition For Review that they committed mistakes in the interpretation of the law and in the declaration of the property that made the estate tax return filed a false return, but maintained that these mistakes were done in good faith. However, the law does not make any qualification as to the falsity of the return which would render the return a "false return". The law does not distinguish a false return made in good faith or false return made in bad faith, as long as a false return is filed, the taxpayer is covered by Section 222 (a) . Moreover, the errors committed by petitioners, even considering that it was a simple mistake or a mere oversight, cannot be disregarded because of the substantial amount of deficiency in the estate tax. Section 248 (B) of the NIRC of 1997, as amended, provides that a substantial underdeclaration of receipts or a substantial overstatement of ~ C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION 16 deductions shall constitute prima facie evidence of a false or fraudulent return. After a careful evaluation of the evidence on record, We find that there is a clear substantial overstatement of vanishing deductions. Petitioners claim a total of P10,680,355.43, as vanishing deductions (Exhibit "C-2 ''), when in fact only the amount of P663,027.01 (Decision of the First Division dated January 16, 2006) can be claimed as vanishing deductions in the computation of the taxable estate of Teresita Reyes. The glaring difference of more than ten (1 0) million pesos, which is actually more than 30% of the actual deductions, renders petitioners liable for overstatement of deductions pursuant to Section 248 (B) of the NIRC of 1997, as amended. Further, the underdeclaration of the properties of Fidel Reyes for the determination of the proper estate tax due of more than one ( 1) million pesos is also substantial, in conformity with the above ruling. As aptly ruled by the First Division: "In the case at bar, the bases for the falsity of the returns are the substantial underdeclaration of properties in the amounts of P497,789.12 and P664,661.27 for the estates of Fidel F. Reyes and Teresita R. Reyes and overstatement of vanishing deductions in the amount o~ C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION Pl0,680,355.43 for the estate of Teresita R. Reyes. In the case of Packaging Products Corporation, the absence of falsity of the return stemmed from different interpretation of the law with regard to the availment of tax credits on sales taxes. Indeed, there is no indicia of fraud in the instant case. The estates of Fidel and Teresita Reyes, through Administrator Pacheco, availed of the VA P of the government and even included properties not forming part of the estates which negate any deceitful intention to defraud the government of revenues. However, the Court is convinced that petitioners filed false returns taking into account that: 1) Despite having reported conjugal and paraphernal properties, both real and personal, the estate of Fidel Reyes failed to declare basic deficiency estate

tax worth P497,789.12; 2) Instead of the vanishing deductions claimed of Pl0,680,355.43, the estate of Teresita R. Reyes may only claim vanishing deductions of P663,027.01. The failure to correctly include deductions actually incurred by the taxpayer, in effect lowered deficiency estate tax of the estate of Teresita Reyes; and 3) The estate of Teresita R. Reyes did not report basic deficiency estate tax in the sum ofP664,661.27. To reiterate, in the filing of false returns, intention to evade taxes need not exist. A fraudulent return is always an attempt to evade a tax, but a merely false return may not be. The filing of a false return is sufficient to warrant assessment of ten (1 0) years from date of discovery of the falsity. Having established that petitioners filed false returns, We therefore hold that the subject deficiency estate tax (g)JV 17 C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION assessments were issued within the prescribed period mandated by law. Under Section 203 of the 1997 NIRC, the assessment period for estate tax deficiency is within three (3) years from the expiration of the due date or the actual date of the return, whichever is later. Petitioners are required to file estate tax returns within six ( 6) months from the demise of the decedents. Pursuant to Section 222( a), there are three instances when the three (3)-year prescriptive period to assess deficiency taxes do not apply, namely: a) false returns; b) fraudulent returns with intent to evade tax; and c) failure to file returns. In any of these situations, the Commissioner of Internal Revenue is given the option to dispense with assessment and proceed to collect delinquency taxes or he may assess the taxpayer within ten (10) years from discovery of the falsity, fraud or omission. In the case at bar, the assessments dated November 29, 2002 and received by the petitioners on January 7, 2003, although issued beyond three (3) years from the filing of the estate returns of the estates of Fidel F. Reyes and Teresita R. Reyes on December 29, 1997 and February 24, 1999, respectively, were issued within the prescribed period of ten (1 0) years. xxx" 18 Accordingly, We sustain the findings of the First Division that the Final Assessment Notice against the estates of Fidel Reyes and Teresita Reyes, which was issued on November 29, 2002, was well within the ten ( 1 0) year prescriptive period to assess. C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION Second Issue: Imposition of the 50% surcharge 19 The second issue which appears to be of vital importance in this case centers on the First Division's imposition of the 50% surcharge authorized by law as fraud penalty. Petitioners insist that the 50% surcharge under Section 248 (B) of the NIRC of 1997, as amended, should not be imposed by the First Division as the intent to evade tax was already ruled out in its assailed Decision when it found "no indicia of fraud in the instant case". Further, petitioners' interpretation of the law is that the presence of the qualifying word "willfully" necessarily implies that it is possible that false or fraudulent returns are not willfully filed. Thus, for the 50% penalty to be imposed, the filing of the false or fraudulent return must have been willfully or intentionally made. And since Section 248 (B) is a penal provision, the same must be liberally construed in favor of the taxpayer. We agree with the petitioners. Section 248 of the NIRC of 1997, as amended, provides: "SEC. 248. Civil Penalties. XXX XXX C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION (B) In case of willful neglect to file the return within the period prescribed by this Code or by rules and regulations, or in case a false or fraudulent return is willfully made, the penalty to be imposed shall be fifty percent (50%) of the tax or of the deficiency tax, in case any payment has been made on the basis of such return

before the discovery of the falsity or fraud: Provided, That a substantial under declaration of taxable sales, receipts or income, or a substantial overstatement of deductions, as determined by the Commissioner pursuant to the rules and regulations to be promulgated by the Secretary of Finance, shall constitute prima facie evidence of a false or fraudulent return: Provided, further, That failure to report sales, receipts or income in an amount exceeding thirty percent (30%) of that declared per return, and a claim of deductions in an amount exceeding thirty percent (30%) of actual deductions, shall render the taxpayer liable for substantial underdeclaration of sales, receipts or income or for overstatement of deductions, as mentioned herein." 20 In interpreting Section 248 (B), the First Division ruled m its Resolution dated May 22, 2006: "A perusal of the foregoing shows that the law affixes the disjunctive article "or" to delineate false from fraudulent returns. When "or" is used the various members of the sentence are to be taken separately. Thus, the filing of a false return or fraudulent return cannot be classified as one act which should be qualified "with intent to evade taxes". xxx" We agree with the First Division in so far as its interpretation that the aforequoted Section 248 (B) applies to both false and fraudulent returns. However, it bears stressing that Section 248 (B) contains the ~ C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION 21 qualifying words "willfully made". A careful reading of Section 248 (B) shows that the law is very explicit in imposing the civil penalty of 50% surcharge in case a false or fraudulent return is willfully made. It cannot be said that the qualifying word "willfully" is only applicable to fraudulent returns because of the presence of the conjunction word "or" between false and fraudulent return. The word "or" is a coordinating conjunction which is a linking word used to connect words, phrases, or group of words in a sentence (Mauricio C. Ulep, Basic Legal Writing, rr Edition 2002, p.II2). Consequently, as applied in Section 248 (B), the word "or" denotes the intention of the framers of the Tax Code to connect both false and fraudulent; likewise, the presence of the linking verb "is" associates both types of return to the qualifying words "willfully made". In this sense, the words "willfully made" should be interpreted to refer to both false and fraudulent returns. Section 248 (B) imposes the surcharge of fifty percent (50%) only in two instances. First, in case of willful neglect to file the return within the period prescribed, and second, in case a false or fraudulent return is willfully made. Thus, it is not enough that the taxpayer failed to file the required tax return or that the return is false to justify the imposition of ~ C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION 22 the 50% for fraud. The law is clear that "a false or fraudulent return is willfully made". It must be emphasized that respondent did not present evidence to directly prove that there was a willful intention on the part of petitioners to evade the payment of taxes. What is evident in this case is the negligence and mistake of the petitioners in the interpretation of the law that caused the deficiencies found by the respondent in his assessments. However, We find no actual and intentional fraud through willful and deliberate misleading of the government agency concerned, the Bureau of Internal Revenue. The government was not induced to give up some legal right and place itself at a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities because petitioners did not conceal anything. Error or mistake of law is not fraud (Commissioner of Internal Revenue vs. Javier, Jr., 199 SCRA 824).

The word "willfully" carries the idea, when used in connection with an act forbidden by law, that the act must be done knowingly or intentionally; that, with knowledge, the will consented to, designed, and directed the act (U.S. vs. Bull, 15 Phil 19). Further, a willful act may be described as one done intentionally, knowingly, and purposely, without justifiable excuse, as distinguished from an act done carelessly, @JJV C.T.A. E.B. NO. 189 23 (C.T.A. CASE NO. 6747) DECISION thoughtlessly, heedlessly, or inadvertently. A willful act differs essentially from a negligent act. The one is positive and the other negative (Black's Law Dictionary, 61h Edition, p. I 599). The Supreme Court has ruled that the word willful in a statute means "not merely voluntary but with a bad purpose; in other words, corruptly" (US vs. Ah Chong, I 5 SCRA 498) and "premedidated; malicious; done with intent, or with bad motive or purpose, or with indifference to the natural consequence" (Commissioner of Internal Revenue vs. Court of Appeals, 257 SCRA 224). The First Division in its decision ruled out the element of fraud in this instant case, thus, petitioners have no intention to willfully file a false return to evade payment of taxes. The following circumstances attendant to the case at bar show that in filing the questioned returns, the petitioners were guided not by that "willful and deliberate intent to prevent the Government from making a proper assessment" which constitute fraud: First, the availment of a Voluntary Assessment Program of the BIR, thereby exposing itself to further investigation of its books of account and other accounting records by the governm~ C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION 24 Second, the other errors in computing the taxes paid by the estates, such as the inclusion of other properties no longer owned by the estate or have no more market value and failure to deduct the standard deduction of Pl,OOO,OOO.OO and family home which were all beneficial to the government; Third, the petitioners further paid additional taxes under the V AP. In the Aznar case, fraud in relation to the filing of income tax return, was discussed in this manner: "xxx the fraud contemplated by law is actual and not constructive. It must be intentional fraud, consisting of deception willfully and deliberately done or resorted to in order to induce another to give up some legal right. Negligence, whether slight or gross, is not equivalent to the fraud with intent to evade the tax contemplated by law. It must amount to intentional wrong-doing with the sole object of avoiding the tax. It necessarily follows that a mere mistake cannot be considered as fraudulent intent, and if both petitioner and respondent Commissioner of Internal Revenue committed mistakes in making entries in the returns and in the assessment, respectively, under the inventory method of determining tax liability, it would be unfair to treat the mistakes of the petitioner as tainted with fraud and those of the respondent as made in good faith." To reiterate, the fraud contemplated by law IS actual not constructive. Fraud is never imputed and the courts never sustain findings of fraud upon circumstances which, at most, create only ~ C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION 25 suspicion and the mere understatement of a tax is not itself proof of fraud for the purpose of tax evasion (Yutivo Sons Hardware Co. vs. Court of Tax Appeals, 1 SCRA 160; Commissioner of Internal Revenue vs. Javier, Jr., 199 SCRA 824). Negligence, whether slight or gross, is not equivalent to the fraud with intent to evade the tax contemplated by the law. It must amount to

intentional wrong-doing with the sole object of avoiding the tax (Aznar vs. Court of Tax Appeals, 58 SCRA 519). It necessarily follows that a mere mistake cannot be considered as fraudulent intent to evade tax. For all the foregoing, We hold, therefore, that the imposition of the fraud penalty in this case is not justified by the extant facts. With the conclusion of the First Division and affirmed by Us that petitioners had filed a false return, but there was no fraud, it is evident that the false return was not willfully made, hence petitioners should not be held liable for the 50% fraud surcharge under Section 248 (B). The conclusion that petitioners should not be held to pay for the 50% fraud surcharge is coherent with the ruling out of the existence of fraud by the First Division. We conclude that the 50% surcharge, as fraud penalty authorized under Section 248 (B) of the NIRC of 1997, should not be imposed, but [pJJl C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION 26 eliminated from the deficiency estate taxes for the taxable years 1997 and 1998. Therefore, the penalty that is applicable in the case at bar is the 25% late payment surcharge pursuant to Section 248 (A) of the NIRC of 1997, as amended, which provides: "SEC. 248. Civil Penalties. - (A) There shall be imposed, in addition to the tax required to be paid, a penalty equivalent to twenty-five percent (25%) of the amount due, in the following cases: XXX XXX (3) Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment; or XXX XXX." WHEREFORE, premises considered, the decision of the First Division, dated January 16, 2006, in C.T.A. Case No. 6747 is MODIFIED in so far as the imposition of the 50% fraud penalty is concerned, and AFFIRMED in all other respects. Accordingly, petitioners are ORDERED TO PAY to the Commissioner of Internal Revenue the sums of P1,162,304.25 C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION 27 P1 ,342,161.52 respectively, representing deficiency/delinquency estate taxes for taxable years 1997 and 1998, computed as follows: I. ESTATE OF FIDEL REYES Real Properties - Conjugal Real Properties - Exclusive Personal Properties - Conjugal Personal Properties Exclusive Gross Estate Less: Exclusive Properties Gross Conjugal Estate Less: Conjugal Deductions a. Funeral Expenses b. Claims against the Estate Net Conjugal Estate Less: 1/2 share of surviving spouse (P12,624,556.33/2) Net Estate Add: Exclusive Properties Total Net Estate Less: Family Home Net Taxable Estate Estate Tax Due Less: Payment on 12/29/1997 Payment on 7/29/1998 Deficiency Estate Tax Add: 25% Surcharge Per Respondent's Review p 13,160,494.00 5,813,532.33 10,000.00 1,353,041 .69 P20,337,068.02 ============= 20% Interest (7/24/97 to 12/30/02) Total Amount Due II. ESTATE OF TERESITA REYES

Add/(Deduct) Adjustments (P481 ,307.00) ( 2,249,793.00) 1,353,041 .69 ( 1 ,353.041 .69) ( P2,731,100.00) ============= Gross Estate (Share from exclusive and conjugal properties) Less: Deductions a. Funeral Expense b. Accrued/Unpaid taxes p 200,000.00 422,486.59 Per Court's Finding P12,679, 187.00 3,563,739.33 1 ,363,041.69 0.00 P17,605,968.02 3,563,739.33 P14,042,228.69 (P59,260.00) ( 1 ,358,412.36) P12,624,556.33 6,312,278.16 p 6,312,278.17 3,563,739.33 p 9,876,017.50 ( 1 ,000,000.00) p 8,876,017.50 ============ p 1,046,402.63 251,031 .51 297,582.00 p 497,789.12 124,447.28 540,067.85 p 1,162,304.25 ------------ -----------p 11 ,959,390.99 c. Claim against the Estate 100,000.00 ~ C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION Subtotal d. Vanishing Deductions Net Estate Less: Family Home Standard Deductions Medical Expenses Net Taxable Estate Estate Tax Due Less: Payment on 2/24/1999 Payment on 10/17/2001 Deficiency Estate Tax Add: 25% Surcharge 28 p 722,486.59 663,027.01 1,385,513.60 P1 0,573,877.39 P1 ,000,000.00 1,000,000.00 95,801.47 2,095,801.47 p 8,478,075.92 ============ p 986,711.39 p 268,377.60 53,672.52 322,050.12 20% Interest (2/25/99 to 12/30/02) p 664,661 .27 166,165.32 511,334.93 Total Amount Due p 1,342,161.52 ============ In addition, 20% delinquency interest is hereby imposed thereon from December 31, 2002 until the respective amounts are fully paid pursuant to Section 249 (C) (3) of the NIRC of 1997, as amended. SO ORDERED. WE CONCUR: ~d~~E~QUEZ Associate Justice ~~. ~ ERNESTO D. ACOSTA Presiding Justice C.T.A. E.B. NO. 189 (C.T.A. CASE NO. 6747) DECISION ~~CL~~. <1UANITO C. CASTANED~, JR. Associate Justice ER~UY A~~tice . BAUTISTA CAES~SANOVA Associate Justice CERTIFICATION 29 Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the above Decision has been reached in consultation with the members of the Court En Bane before the case was assigned to the writer of the opinion of the Court. Q__ '---4 . C-v,__ ERNESTO D. ACOSTA Presiding Justice

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 Hanl deceased, brought this action in the Court of First Instance of Zamboanga against the defendant, Juan Posad Jr., then the Collector of Internal Revenue, for the refund of the amount of P2,052.74, paid by the plaintiff inheritance tax on the estate of the deceased, and for the collection of interst thereon at the rate of 6 per cent annum, computed from September 15, 1932, the date when the aforesaid tax was [paid under protest. T defendant set up a counterclaim for P1,191.27 alleged to be interest due on the tax in question and which was included in the original assessment. From the decision of the Court of First Instance of Zamboanga dismiss 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 and considerable amount of real and personal properties. On june 14, 1922, proceedings for the probate of will and the settlement and distribution of his estate were begun in the Court of First Instance of Zamboan 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 for a period of ten (10) years after my death, and that the same be handled and managed by the executo and proceeds thereof to be given to my nephew, Matthew Hanley, at Castlemore, Ballaghaderine, Cou of Rosecommon, Ireland, and that he be directed that the same be used only for the education of brother's children and their descendants.

6. I direct that ten (10) years after my death my property be given to the above mentioned Matth 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, Matth 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 appoin trustee to administer the real properties which, under the will, were to pass to Matthew Hanley ten years after two executors named in the will, was, on March 8, 1924, appointed trustee. Moore took his oath of office a gave bond on March 10, 1924. He acted as trustee until February 29, 1932, when he resigned and the plain herein was appointed in his stead. During the incumbency of the plaintiff as trustee, the defendant Collector of Internal Revenue, alleging that

estate left by the deceased at the time of his death consisted of realty valued at P27,920 and personalty valued P1,465, and allowing a deduction of P480.81, assessed against the estate an inheritance tax in the amount P1,434.24 which, together with the penalties for deliquency in payment consisting of a 1 per cent mont interest from July 1, 1931 to the date of payment and a surcharge of 25 per cent on the tax, amounted P2,052.74. On March 15, 1932, the defendant filed a motion in the testamentary proceedings pending before Court of First Instance of Zamboanga (Special proceedings No. 302) praying that the trustee, plaintiff herein, ordered to pay to the Government the said sum of P2,052.74. The motion was granted. On September 15, 19 the plaintiff paid said amount under protest, notifying the defendant at the same time that unless the amount w promptly refunded suit would be brought for its recovery. The defendant overruled the plaintiff's protest a 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, Matth Hanley, from the moment of the death of the former, and that from the time, the latter became the ow thereof.

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

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

IV. In not allowing as lawful deductions, in the determination of the net amount of the estate subject said tax, the amounts allowed by the court as compensation to the "trustees" and paid to them from 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. representing part of the interest at the rate of 1 per cent per month from April 10, 1924, to June 30, 19 which the plaintiff had failed to pay on the inheritance tax assessed by the defendant against the estate Thomas Hanley.

The following are the principal questions to be decided by this court in this appeal: (a) When does inheritance tax accrue and when must it be satisfied? (b) Should the inheritance tax be computed on the basis the value of the estate at the time of the testator's death, or on its value ten years later? (c) In determining the value of the estate subject to tax, is it proper to deduct the compensation due to trustees? (d) What law gove the case at bar? Should the provisions of Act No. 3606 favorable to the tax-payer be given retroactive effect? Has there been deliquency in the payment of the inheritance tax? If so, should the additional interest claimed the defendant in his appeal be paid by the estate? Other points of incidental importance, raised by the parties 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 amend

of the Administrative Code, imposes the tax upon "every transmission by virtue of inheritance, devise, beque gift mortis causa, or advance in anticipation of inheritance,devise, or bequest." The tax therefore is up transmission or the transfer or devolution of property of a decedent, made effective by his death. (61 C. J., 1592.) It is in reality an excise or privilege tax imposed on the right to succeed to, receive, or take property by under a will or the intestacy law, or deed, grant, or gift to become operative at or after death. Acording to arti 657 of the Civil Code, "the rights to the succession of a person are transmitted from the moment of his deat "In other words", said Arellano, C. J., ". . . the heirs succeed immediately to all of the property of the deceas ancestor. The property belongs to the heirs at the moment of the death of the ancestor as completely as if ancestor had executed and delivered to them a deed for the same before his death." (Bondad vs. Bondad, Phil., 232. See also, Mijares vs. Nery, 3 Phil., 195; Suilong & Co., vs. Chio-Taysan, 12 Phil., 13; Lubrico Arbado, 12 Phil., 391; Innocencio vs. Gat-Pandan, 14 Phil., 491; Aliasas vs.Alcantara, 16 Phil., 489; Ilustre Alaras Frondosa, 17 Phil., 321; Malahacan vs. Ignacio, 19 Phil., 434; Bowa vs. Briones, 38 Phil., 27; Osario Osario & Yuchausti Steamship Co., 41 Phil., 531; Fule vs. Fule, 46 Phil., 317; Dais vs. Court of First Instance Capiz, 51 Phil., 396; Baun vs. Heirs of Baun, 53 Phil., 654.) Plaintiff, however, asserts that while article 657 the Civil Code is applicable to testate as well as intestate succession, it operates only in so far as forced heirs concerned. But the language of article 657 of the Civil Code is broad and makes no distinction between differ classes of heirs. That article does not speak of forced heirs; it does not even use the word "heir". It speaks of rights of succession and the transmission thereof from the moment of death. The provision of section 625 of Code of Civil Procedure regarding the authentication and probate of a will as a necessary condition to eff transmission of property does not affect the general rule laid down in article 657 of the Civil Code. T authentication of a will implies its due execution but once probated and allowed the transmission is effective of the death of the testator in accordance with article 657 of the Civil Code. Whatever may be the time wh actual transmission of the inheritance takes place, succession takes place in any event at the moment of decedent's death. The time when the heirs legally succeed to the inheritance may differ from the time when heirs actually receive such inheritance. "Poco importa", says Manresa commenting on article 657 of the Ci Code, "que desde el falleimiento del causante, hasta que el heredero o legatario entre en posesion de los bien de la herencia o del legado, transcurra mucho o poco tiempo, pues la adquisicion ha de retrotraerse al mome de la muerte, y asi lo ordena el articulo 989, que debe considerarse como complemento del presente." Manresa, 305; see also, art. 440, par. 1, Civil Code.) Thomas Hanley having died on May 27, 1922, 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 p the tax arose as of the date. The time for the payment on inheritance tax is clearly fixed by section 1544 of Revised Administrative Code as amended by Act No. 3031, in relation to section 1543 of the same Code. T 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 trustees.

(c) The transmission from the first heir, legatee, or donee in favor of another beneficiary, 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 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 the property.

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

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

A certified of all letters testamentary or of admisitration shall be furnished the Collector of Inter 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 re "fideicommissary" or "cestui que trust". There was an obvious mistake in translation from the Spanish to English version.

The instant case does fall under subsection (a), but under subsection (b), of section 1544 above-quoted, as th is here no fiduciary heirs, first heirs, legatee or donee. Under the subsection, the tax should have been p 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 and could not legally pass to the instituted heir, Matthew Hanley, until after the expiration of ten years from death of the testator on May 27, 1922 and, that the inheritance tax should be based on the value of the estate 1932, or ten years after the testator's death. The plaintiff introduced evidence tending to show that in 1932 real properties in question had a reasonable value of only P5,787. This amount added to the value of the perso property left by the deceased, which the plaintiff admits is P1,465, would generate an inheritance tax whi 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 be and if, upon the death of the decedent, succession takes place and the right of the estate to tax vests instantly, tax should be measured by the vlaue of the estate as it stood at the time of the decedent's death, regardless of a subsequent contingency value of any subsequent increase or decrease in value. (61 C. J., pp. 1692, 1693; 26 C. L., p. 232; Blakemore and Bancroft, Inheritance Taxes, p. 137. See also Knowlton vs. Moore, 178 U.S., 20 Sup. Ct. Rep., 747; 44 Law. ed., 969.) "The right of the state to an inheritance tax accrues at the moment death, and hence is ordinarily measured as to any beneficiary by the value at that time of such property as pas 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. 15 1575) that, in the case of contingent remainders, taxation is postponed until the estate vests in possession or contingency is settled. This rule was formerly followed in New York and has been adopted in Illino Minnesota, Massachusetts, Ohio, Pennsylvania and Wisconsin. This rule, horever, is by no means entir satisfactory either to the estate or to those interested in the property (26 R. C. L., p. 231.). Realizing, perhaps,

defects of its anterior system, we find upon examination of cases and authorities that New York has varied a now requires the immediate appraisal of the postponed estate at its clear market value and the payment forthw 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 Huber, 86 N. Y. App. Div., 458; 83 N. Y. Supp., 769; Estate of Tracy, 179 N. Y., 501; 72 N. Y., 519; Estate Brez, 172 N. Y., 609; 64 N. E., 958; Estate of Post, 85 App. Div., 611; 82 N. Y. Supp., 1079. Vide also, Salto vs. Lord Advocate, 1 Peter. Sc. App., 970; 3 Macq. H. L., 659; 23 Eng. Rul. Cas., 888.) California adheres to t 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 time of the predecessor's death, notwithstanding the postponement of the actual possession or enjoyment of estate by the beneficiary, and the tax measured by the value of the property transmitted at that time regardless 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 estate on which the inheritance tax is to be computed (sec. 1539, Revised Administrative Code). In the case bar, the defendant and the trial court allowed a deduction of only P480.81. This sum represents the expenses a disbursements of the executors until March 10, 1924, among which were their fees and the proven debts of deceased. The plaintiff contends that the compensation and fees of the trustees, which aggregate P1,187 (Exhibits C, AA, EE, PP, HH, JJ, LL, NN, OO), should also be deducted under section 1539 of the Revis Administrative Code which provides, in part, as follows: "In order to determine the net sum which must bear tax, when an inheritance is concerned, there shall be deducted, in case of a resident, . . . the judicial expenses the testamentary or intestate proceedings, . . . ."

A trustee, no doubt, is entitled to receive a fair compensation for his services (Barney vs. Saunders, 16 Ho 535; 14 Law. ed., 1047). But from this it does not follow that the compensation due him may lawfully deducted in arriving at the net value of the estate subject to tax. There is no statute in the Philippines wh requires trustees' commissions to be deducted in determining the net value of the estate subject to inheritance (61 C. J., p. 1705). Furthermore, though a testamentary trust has been created, it does not appear that the testa intended that the duties of his executors and trustees should be separated. (Ibid.; In re Vanneck's Estate, 161 Y. Supp., 893; 175 App. Div., 363; In re Collard's Estate, 161 N. Y. Supp., 455.) On the contrary, in paragrap of his will, the testator expressed the desire that his real estate be handled and managed by his executors until expiration of the period of ten years therein provided. Judicial expenses are expenses of administration (61 C. p. 1705) but, in State vs. Hennepin County Probate Court (112 N. W., 878; 101 Minn., 485), it was said: ". . . T compensation of a trustee, earned, not in the administration of the estate, but in the management thereof for benefit of the legatees or devises, does not come properly within the class or reason for exempt administration expenses. . . . Service rendered in that behalf have no reference to closing the estate for purpose of a distribution thereof to those entitled to it, and are not required or essential to the perfection of 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 preservation of the estate. No sound reason is given to support the contention that such expenses should be tak 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 provisions of section 1544 of the Revised Administrative Code, as amended by section 3 of Act No. 3606. B Act No. 3606 went into effect on January 1, 1930. It, therefore, was not the law in force when the testator d on May 27, 1922. The law at the time was section 1544 above-mentioned, as amended by Act No. 3031, wh 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

decedent (26 R. C. L., p. 206; 4 Cooley on Taxation, 4th ed., p. 3461). The taxpayer can not foresee and ou not to be required to guess the outcome of pending measures. Of course, a tax statute may be made retroactive its operation. Liability for taxes under retroactive legislation has been "one of the incidents of social lif (Seattle vs. Kelleher, 195 U. S., 360; 49 Law. ed., 232 Sup. Ct. Rep., 44.) But legislative intent that a tax stat should operate retroactively should be perfectly clear. (Scwab vs. Doyle, 42 Sup. Ct. Rep., 491; Smietanka First Trust & Savings Bank, 257 U. S., 602; Stockdale vs. Insurance Co., 20 Wall., 323; Lunch vs. Turrish, 2 U. S., 221.) "A statute should be considered as prospective in its operation, whether it enacts, amends, or repe an inheritance tax, unless the language of the statute clearly demands or expresses that it shall have a retroact effect, . . . ." (61 C. J., P. 1602.) Though the last paragraph of section 5 of Regulations No. 65 of the Departm of Finance makes section 3 of Act No. 3606, amending section 1544 of the Revised Administrative Co applicable to all estates the inheritance taxes due from which have not been paid, Act No. 3606 itself contains provisions indicating legislative intent to give it retroactive effect. No such effect can begiven the statute by t court.

The defendant Collector of Internal Revenue maintains, however, that certain provisions of Act No. 3606 more favorable to the taxpayer than those of Act No. 3031, that said provisions are penal in nature a therefore, should operate retroactively in conformity with the provisions of article 22 of the Revised Penal Co This is the reason why he applied Act No. 3606 instead of Act No. 3031. Indeed, under Act No. 3606, (1) surcharge of 25 per cent is based on the tax only, instead of on both the tax and the interest, as provided for Act No. 3031, and (2) the taxpayer is allowed twenty days from notice and demand by rthe Collector of Inter 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 st which, under the Constitution, the Executive has the power to pardon. In common use, however, this sense been enlarged to include within the term "penal statutes" all status which command or prohibit certain acts, a establish penalties for their violation, and even those which, without expressly prohibiting certain acts, impos penalty upon their commission (59 C. J., p. 1110). Revenue laws, generally, which impose taxes collected by means ordinarily resorted to for the collection of taxes are not classed as penal laws, although there authorities to the contrary. (See Sutherland, Statutory Construction, 361; Twine Co. vs. Worthington, 141 U. 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., 1 State vs. Wheeler, 44 P., 430; 25 Nev. 143.) Article 22 of the Revised Penal Code is not applicable to the case 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 p within another given time. As stated by this court, "the mere failure to pay one's tax does not render o delinqent until and unless the entire period has eplased within which the taxpayer is authorized by law to ma such payment without being subjected to the payment of penalties for fasilure to pay his taxes within 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 decedent's property to the trustee. Stated otherwise, the defendant contends that delivery to the trustee w delivery to the cestui que trust, the beneficiery in this case, within the meaning of the first paragraph subsection (b) of section 1544 of the Revised Administrative Code. This contention is well taken and sustained. The appointment of P. J. M. Moore as trustee was made by the trial court in conformity with wishes of the testator as expressed in his will. It is true that the word "trust" is not mentioned or used in the w but the intention to create one is clear. No particular or technical words are required to create a testamentary tr (69 C. J., p. 711). The words "trust" and "trustee", though apt for the purpose, are not necessary. In fact, the u of these two words is not conclusive on the question that a trust is created (69 C. J., p. 714). "To create a trust will the testator must indicate in the will his intention so to do by using language sufficient to separate the le

from the equitable estate, and with sufficient certainty designate the beneficiaries, their interest in the ttrust, purpose or object of the trust, and the property or subject matter thereof. Stated otherwise, to constitute a va testamentary trust there must be a concurrence of three circumstances: (1) Sufficient words to raise a trust; (2 definite subject; (3) a certain or ascertain object; statutes in some jurisdictions expressly or in effect providing." (69 C. J., pp. 705,706.) There is no doubt that the testator intended to create a trust. He ordered in will that certain of his properties be kept together undisposed during a fixed period, for a stated purpose. T probate court certainly exercised sound judgment in appointment a trustee to carry into effect the provisions 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 sec. 590, Code of Civil Procedure). The mere fact that the estate of the deceased was placed in trust did remove it from the operation of our inheritance tax laws or exempt it from the payment of the inheritance t The corresponding inheritance tax should have been paid on or before March 10, 1924, to escape the penalties the laws. This is so for the reason already stated that the delivery of the estate to the trustee was in esse deliv of the same estate to the cestui que trust, the beneficiary in this case. A trustee is but an instrument or agent the cestui que trust (Shelton vs. King, 299 U. S., 90; 33 Sup. Ct. Rep., 689; 57 Law. ed., 1086). When Mo accepted the trust and took possesson of the trust estate he thereby admitted that the estate belonged not to h but to his cestui que trust (Tolentino vs. Vitug, 39 Phil.,126, cited in 65 C. J., p. 692, n. 63). He did not acqu any beneficial interest in the estate. He took such legal estate only as the proper execution of the trust requi (65 C. J., p. 528) and, his estate ceased upon the fulfillment of the testator's wishes. The estate then ves 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 payment of the tax could be postponed or delayed by the creation of a trust of the type at hand, the result wo be plainly disastrous. Testators may provide, as Thomas Hanley has provided, that their estates be not delive to their beneficiaries until after the lapse of a certain period of time. In the case at bar, the period is ten years. other cases, the trust may last for fifty years, or for a longer period which does not offend the rule agai petuities. The collection of the tax would then be left to the will of a private individual. The mere suggestion this result is a sufficient warning against the accpetance of the essential to the very exeistence of governme (Dobbins vs. Erie Country, 16 Pet., 435; 10 Law. ed., 1022; Kirkland vs. Hotchkiss, 100 U. S., 491; 25 Law. e 558; Lane County vs. Oregon, 7 Wall., 71; 19 Law. ed., 101; Union Refrigerator Transit Co. vs. Kentucky, 1 U. S., 194; 26 Sup. Ct. Rep., 36; 50 Law. ed., 150; Charles River Bridge vs. Warren Bridge, 11 Pet., 420; 9 La ed., 773.) The obligation to pay taxes rests not upon the privileges enjoyed by, or the protection afforded to citizen by the government but upon the necessity of money for the support of the state (Dobbins vs. E Country, supra). For this reason, no one is allowed to object to or resist the payment of taxes solely because personal benefit to him can be pointed out. (Thomas vs. Gay, 169 U. S., 264; 18 Sup. Ct. Rep., 340; 43 Law. e 740.) While courts will not enlarge, by construction, the government's power of taxation (Bromley McCaughn, 280 U. S., 124; 74 Law. ed., 226; 50 Sup. Ct. Rep., 46) they also will not place upon tax laws loose a construction as to permit evasions on merely fanciful and insubstantial distictions. (U. S. vs. Watts Bond., 580; Fed. Cas. No. 16,653; U. S. vs. Wigglesirth, 2 Story, 369; Fed. Cas. No. 16,690, followed in Froel & Kuttner vs. Collector of Customs, 18 Phil., 461, 481; Castle Bros., Wolf & Sons vs. McCoy, 21 Phil., 3 Muoz & Co. vs. Hord, 12 Phil., 624; Hongkong & Shanghai Banking Corporation vs. Rafferty, 39 Phil., 1 Luzon Stevedoring Co. vs. Trinidad, 43 Phil., 803.) When proper, a tax statute should be construed to avoid possibilities of tax evasion. Construed this way, the statute, without resulting in injustice to the taxpay becomes fair to the government.

That taxes must be collected promptly is a policy deeply intrenched in our tax system. Thus, no court is allow to grant injunction to restrain the collection of any internal revenue tax ( sec. 1578, Revised Administrat Code; Sarasola vs. Trinidad, 40 Phil., 252). In the case of Lim Co Chui vs. Posadas (47 Phil., 461), this court h

occassion to demonstrate trenchment adherence to this policy of the law. It held that "the fact that on account riots directed against the Chinese on October 18, 19, and 20, 1924, they were prevented from praying th internal revenue taxes on time and by mutual agreement closed their homes and stores and remained there does not authorize the Collector of Internal Revenue to extend the time prescribed for the payment of the ta 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 enforce the taxes levied should be interfered with as little as possible. Any delay in the proceedings of officers, upon whom the duty is developed of collecting the taxes, may derange the operations of governme and thereby, cause serious detriment to the public." (Dows vs. Chicago, 11 Wall., 108; 20 Law. ed., 65, 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 a 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 d should be computed from that date and it is error on the part of the defendant to compute it one month later. T provisions cases is mandatory (see and cf. Lim Co Chui vs. Posadas, supra), and neither the Collector of Inter 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 Collector of Internal Revenue, a surcharge of twenty-five per centum should be added (sec. 1544, subsec. ( par. 2, Revised Administrative Code). Demand was made by the Deputy Collector of Internal Revenue up Moore in a communiction dated October 16, 1931 (Exhibit 29). The date fixed for the payment of the tax a interest was November 30, 1931. November 30 being an official holiday, the tenth day fell on December 1, 19 As the tax and interest due were not paid on that date, the estate became liable for the payment of the surcharg In view of the foregoing, it becomes unnecessary for us to discuss the fifth error assigned by the plaintiff in brief.

We shall now compute the tax, together with the interest and surcharge due from the estate of Thomas Han 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 wo P1,465, or a total of P29,385. Deducting from this amount the sum of P480.81, representing allowa deductions under secftion 1539 of the Revised Administrative Code, we have P28,904.19 as the net value of estate subject to inheritance tax.

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

To the primary tax thus computed should be added the sums collectible under section 1544 of the Revi Administrative Code. First should be added P1,465.31 which stands for interest at the rate of twelve per cent per annum from March 10, 1924, the date of delinquency, to September 15, 1932, the date of payment un

protest, a period covering 8 years, 6 months and 5 days. To the tax and interest thus computed should be add the sum of P724.88, representing a surhcarge of 25 per cent on both the tax and interest, and also P10, 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 esta This last sum is P390.42 more than the amount demanded by the defendant in his counterclaim. But, as cannot give the defendant more than what he claims, we must hold that the plaintiff is liable only in the sum 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. ordered. Avancea, C.J., Abad Santos, Imperial, Diaz and Concepcion, JJ., concur. Villa-Real, J., concurs.

.R. No. 155541

January 27, 2004

ESTATE OF THE LATE JULIANA DIEZ VDA. DE GABRIEL, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent. DECISION YNARES-SANTIAGO, J.:

This petition for review on certiorari assails the decision of the Court of Appeals in CA-G.R. CV No. 091 dated September 30, 2002,1 which reversed the November 19, 1995 Order of Regional Trial Court of Man Branch XXXVIII, in Sp. Proc. No. R-82-6994, entitled "Testate Estate of Juliana Diez Vda. De Gabriel". T petition was filed by the Estate of the Late Juliana Diez Vda. De Gabriel, represented by Prudential Bank as duly appointed and qualified Administrator. As correctly summarized by the Court of Appeals, the relevant facts are as follows:

During the lifetime of the decedent, Juliana Vda. De Gabriel, her business affairs were managed by Philippine Trust Company (Philtrust). The decedent died on April 3, 1979. Two days after her dea Philtrust, through its Trust Officer, Atty. Antonio M. Nuyles, filed her Income Tax Return for 1978. T return did not indicate that the decedent had died.

On May 22, 1979, Philtrust also filed a verified petition for appointment as Special Administrator with Regional Trial Court of Manila, Branch XXXVIII, docketed as Sp. Proc. No. R-82-6994. The court a q appointed one of the heirs as Special Administrator. Philtrusts motion for reconsideration was denied by probate court.

On January 26, 1981, the court a quo issued an Order relieving Mr. Diez of his appointment, and appoin Antonio Lantin to take over as Special Administrator. Subsequently, on July 30, 1981, Mr. Lantin was a

relieved of his appointment, and Atty. Vicente Onosa was appointed in his stead.

In the meantime, the Bureau of Internal Revenue conducted an administrative investigation on the decedents liability and found a deficiency income tax for the year 1977 in the amount of P318,233.93. Thus, on Novem 18, 1982, the BIR sent by registered mail a demand letter and Assessment Notice No. NARD-78-82-005 addressed to the decedent "c/o Philippine Trust Company, Sta. Cruz, Manila" which was the address stated in 1978 Income Tax Return. No response was made by Philtrust. The BIR was not informed that the decedent h actually passed away.

In an Order dated September 5, 1983, the court a quo appointed Antonio Ambrosio as the Commissioner a Auditor Tax Consultant of the Estate of the decedent.

On June 18, 1984, respondent Commissioner of Internal Revenue issued warrants of distraint and levy to enfo collection of the decedents deficiency income tax liability, which were s erved upon her heir, Francisco Gabr On November 22, 1984, respondent filed a "Motion for Allowance of Claim and for an Order of Payment Taxes" with the court a quo. On January 7, 1985, Mr. Ambrosio filed a letter of protest with the Litigat Division of the BIR, which was not acted upon because the assessment notice had allegedly become fin executory and incontestable.

On May 16, 1985, petitioner, the Estate of the decedent, through Mr. Ambrosio, filed a formal opposition to BIRs Motion for Allowance of Claim based on the ground that there was no proper service of the assessm and that the filing of the aforesaid claim had already prescribed. The BIR filed its Reply, contending that serv to Philippine Trust Company was sufficient service, and that the filing of the claim against the Estate November 22, 1984 was within the five-year prescriptive period for assessment and collection of taxes un Section 318 of the 1977 National Internal Revenue Code (NIRC).

On November 19, 1985, the court a quo issued an Order denying respondents claim against the Estate,2 af finding that there was no notice of its tax assessment on the proper party.3

On July 2, 1986, respondent filed an appeal with the Court of Appeals, docketed as CA-G.R. CV No. 0910 assailing the Order of the probate court dated November 19, 1985. It was claimed that Philtrust, in filing decedents 1978 income tax return on April 5, 1979, two days after the taxpayers death, had "constituted its as the administrator of the estate of the deceased at least insofar as said return is concerned."5 Citing Basi Estate Inc. v. Commissioner of Internal Revenue,6 respondent argued that the legal requirement of notice w respect to tax assessments7 requires merely that the Commissioner of Internal Revenue release, mail and se the notice of the assessment to the taxpayer at the address stated in the return filed, but not that the taxpa actually receive said assessment within the five-year prescriptive period.8 Claiming that Philtrust had be remiss in not notifying respondent of the decedents death, respondent therefore argued that the deficiency assessment had already become final, executory and incontestable, and that petitioner Estate was liable therefo

On September 30, 2002, the Court of Appeals rendered a decision in favor of the respondent. Althou acknowledging that the bond of agency between Philtrust and the decedent was severed upon the latters death was ruled that the administrator of the Estate had failed in its legal duty to inform respondent of the deceden death, pursuant to Section 104 of the National Internal Revenue Code of 1977. Consequently, the BIRs serv to Philtrust of the demand letter and Notice of Assessment was binding upon the Estate, and, upon the lapse the statutory thirty-day period to question this claim, the assessment became final, executory and incontestab The dispositive portion of said decision reads:

WHEREFORE, finding merit in the appeal, the appealed decision is REVERSED AND SET ASID Another one is entered ordering the Administrator of the Estate to pay the Commissioner of Inter Revenue the following:

a. The amount of P318,223.93, representing the deficiency income tax liability for the year 19 plus 20% interest per annum from November 2, 1982 up to November 2, 1985 and in addit thereto 10% surcharge on the basic tax of P169,155.34 pursuant to Section 51(e)(2) and (3) of Tax Code as amended by PD 69 and 1705; and b. The costs of the suit. SO ORDERED.9 Hence, the instant petition, raising the following issues:

1. Whether or not the Court of Appeals erred in holding that the service of deficiency tax assessm against Juliana Diez Vda. de Gabriel through the Philippine Trust Company was a valid service in or to bind the Estate;

2. Whether or not the Court of Appeals erred in holding that the deficiency tax assessment and fi demand was already final, executory and incontestable.

Petitioner Estate denies that Philtrust had any legal personality to represent the decedent after her death. As su petitioner argues that there was no proper notice of the assessment which, therefore, never became fin executory and incontestable.10 Petitioner further contends that respondents failure to file its claim against Estate within the proper period prescribed by the Rules of Court is a fatal error, which forever bars its cla against the Estate.11

Respondent, on the other hand, claims that because Philtrust filed the decedents income tax return subsequen her death, Philtrust was the de facto administrator of her Estate.12 Consequently, when the Assessment Not and demand letter dated November 18, 1982 were sent to Philtrust, there was proper service on the Estate Respondent further asserts that Philtrust had the legal obligation to inform petitioner of the decedents dea which requirement is found in Section 104 of the NIRC of 1977.14 Since Philtrust did not, respondent conten that petitioner Estate should not be allowed to profit from this omission.15 Respondent further argues t Philtrusts failure to protest the aforementioned assessment within the 30-day period provided in Section 319 of the NIRC of 1977 meant that the assessment had already become final, executory and incontestable.16

The resolution of this case hinges on the legal relationship between Philtrust and the decedent, and, by extensi between Philtrust and petitioner Estate. Subsumed under this primary issue is the sub-issue of whether or service on Philtrust of the demand letter and Assessment Notice No. NARD-78-82-00501 was valid service petitioner, and the issue of whether Philtrusts inaction thereon could bind petitioner. If both sub -issues answered in the affirmative, respondents contention as to the finality of Assessment Notice No. NARD-7800501 must be answered in the affirmative. This is because Section 319-A of the NIRC of 1977 provides a cl 30-day period within which to protest an assessment. Failure to file such a protest within said period means t the assessment ipso jure becomes final and unappealable, as a consequence of which legal proceedings may th be initiated for collection thereof.

We find in favor of the petitioner.

The first point to be considered is that the relationship between the decedent and Philtrust was one of agen which is a personal relationship between agent and principal. Under Article 1919 (3) of the Civil Code, death the agent or principal automatically terminates the agency. In this instance, the death of the decedent on Apri 1979 automatically severed the legal relationship between her and Philtrust, and such could not be revived by mere fact that Philtrust continued to act as her agent when, on April 5, 1979, it filed her Income Tax Return the year 1978.

Since the relationship between Philtrust and the decedent was automatically severed at the moment of Taxpayers death, none of Philtrusts acts or omissions could bind the estate of the Taxpayer. Service on Philtr of the demand letter and Assessment Notice No. NARD-78-82-00501 was improperly done.

It must be noted that Philtrust was never appointed as the administrator of the Estate of the decedent, a indeed, that the court a quo twice rejected Philtrusts motion to be thus appointed. As of November 18, 1982, date of the demand letter and Assessment Notice, the legal relationship between the decedent and Philtrust h already been non-existent for three years.

Respondent claims that Section 104 of the National Internal Revenue Code of 1977 imposed the legal obligat on Philtrust to inform respondent of the decedents death. The said Section reads:

SEC. 104. Notice of death to be filed. In all cases of transfers subject to tax or where, though exem from tax, the gross value of the estate exceeds three thousand pesos, the executor, administrator, or any the legal heirs, as the case may be, within two months after the decedents death, or within a like per after qualifying as such executor or administrator, shall give written notice thereof to the Commissio of Internal Revenue.

The foregoing provision falls in Title III, Chapter I of the National Internal Revenue Code of 1977, or chapter on Estate Tax, and pertains to "all cases of transfers subject to tax" or where the "gross value the estate exceeds three thousand pesos". It has absolutely no applicability to a case for deficien income tax, such as the case at bar. It further lacks applicability since Philtrust was never the execu administrator of the decedents estate, and, as such, never had the legal obligation, based on the abo provision, to inform respondent of her death.

Although the administrator of the estate may have been remiss in his legal obligation to info respondent of the decedents death, the consequences thereof, as provided in Section 119 of the Natio Internal Revenue Code of 1977, merely refer to the imposition of certain penal sanctions on administrator. These do not include the indefinite tolling of the prescriptive period for making deficien tax assessments, or the waiver of the notice requirement for such assessments.

Thus, as of November 18, 1982, the date of the demand letter and Assessment Notice No. NARD-7800501, there was absolutely no legal obligation on the part of Philtrust to either (1) respond to demand letter and assessment notice, (2) inform respondent of the decedents death, or (3) info petitioner that it had received said demand letter and assessment notice. This lack of legal obligation w implicitly recognized by the Court of Appeals, which, in fact, rendered its assailed decision on grounds "equity".17

Since there was never any valid notice of this assessment, it could not have become final, executory a

incontestable, and, for failure to make the assessment within the five-year period provided in Section 318 of National Internal Revenue Code of 1977, respondents claim against the petitioner Estate is barred. Said Sect 18 reads:

SEC. 318. Period of limitation upon assessment and collection. Except as provided in the succeed section, internal revenue taxes shall be assessed within five years after the return was filed, and proceeding in court without assessment for the collection of such taxes shall be begun after the expirat of such period. For the purpose of this section, a return filed before the last day prescribed by law for filing thereof shall be considered as filed on such last day: Provided, That this limitation shall not ap to cases already investigated prior to the approval of this Code.

Respondent argues that an assessment is deemed made for the purpose of giving effect to such assessment wh the notice is released, mailed or sent to the taxpayer to effectuate the assessment, and there is no le requirement that the taxpayer actually receive said notice within the five-year period.18 It must be not however, that the foregoing rule requires that the notice be sent to the taxpayer, and not merely to a disinteres party. Although there is no specific requirement that the taxpayer should receive the notice within the s period, due process requires at the very least that such notice actually be received. In Commissioner of Inter Revenue v. Pascor Realty and Development Corporation,19 we had occasion to say:

An assessment contains not only a computation of tax liabilities, but also a demand for payment withi prescribed period. It also signals the time when penalties and interests begin to accrue against taxpayer. To enable the taxpayer to determine his remedies thereon, due process requires that it must served on and received by the taxpayer.

In Republic v. De le Rama,20 we clarified that, when an estate is under administration, notice must be sent to administrator of the estate, since it is the said administrator, as representative of the estate, who has the le obligation to pay and discharge all debts of the estate and to perform all orders of the court. In that case, le notice of the assessment was sent to two heirs, neither one of whom had any authority to represent the estate. said:

The notice was not sent to the taxpayer for the purpose of giving effect to the assessment, and said not could not produce any effect. In the case of Bautista and Corrales Tan v. Collector of Internal Revenue this Court had occasion to state that "the assessment is deemed made when the notice to this effec released, mailed or sent to the taxpayer for the purpose of giving effect to said assessment." It appear that the person liable for the payment of the tax did not receive the assessment, the assessment could become final and executory. (Citations omitted, emphasis supplied.)

In this case, the assessment was served not even on an heir of the Estate, but on a completely disinterested th party. This improper service was clearly not binding on the petitioner.

By arguing that (1) the demand letter and assessment notice were served on Philtrust, (2) Philtrust was remiss its obligation to respond to the demand letter and assessment notice, (3) Philtrust was remiss in its obligation inform respondent of the decedents death, and (4) the assessment notice is therefore binding on the Esta respondent is arguing in circles. The most crucial point to be remembered is that Philtrust had absolutely no le relationship to the deceased, or to her Estate. There was therefore no assessment served on the Estate as to alleged underpayment of tax. Absent this assessment, no proceedings could be initiated in court for the collect of said tax,21 and respondents claim for collection, filed with the probate court only on November 22, 1984, w

barred for having been made beyond the five-year prescriptive period set by law.

WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals in CA-G.R. CV No. 091 dated September 30, 2002, is REVERSED and SET ASIDE. The Order of the Regional Trial Court of Man Branch XXXVIII, in Sp. Proc. No. R-82-6994, dated November 19, 1985, which denied the claim of the Bure of Internal Revenue against the Estate of Juliana Diez Vda. De Gabriel for the deficiency income tax of decedent for the year 1977 in the amount of P318,223.93, is AFFIRMED. No pronouncement as to costs. SO ORDERED. Davide, Jr., C.J., (Chairman), Panganiban, and Carpio, JJ., concur. Azcuna, J., on official leave.

G.R. No. L-19495

November 24, 1966

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. LILIA YUSAY GONZALES and THE COURT OF TAX APPEALS, respondents. Office of the Solicitor General for the petitioner. Ramon A. Gonzales for respondent Lilia Yusay Gonzales. BENGZON, J.P., J.:

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

On May 11, 1949 Jose S. Yusay filed with the Bureau of Internal Revenue an estate and inheritance tax ret declaring therein the following properties: Personal properties Palay Carabaos Real properties: Capital, 74 parcels ) P6,444.00 1,000.00

P7,444.00

Conjugal 19 parcels) Total gross estate The return mentioned no heir.

assessed at

P179,760.00 P187,204.00

Upon investigation however the Bureau of Internal Revenue found the following properties: Personal properties: Palay Carabaos Packard Automobile 2 Aparadors Real properties: Capital, 25 parcels assessed at 1/2 of Conjugal, 130 parcels assessed at Total P6,444.00 1,500.00 2,000.00 500.00

P10,444.00

P87,715.32

P121,425.00

P209,140.32 P219,584.32

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

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

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

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

On May 20, 1955 the Provincial Treasurer of Iloilo requested the BIR Provincial Revenue Officer to furnish h copies of the assessment notices to support a motion for payment of taxes which the Provincial Fiscal would f

in Special Proceedings No. 459 before the Court of First Instance of Iloilo. The papers requested were sent the Commissioner of Internal Revenue to the Provincial Revenue Officer of Iloilo to be transmitted to Provincial Treasurer. The records do not however show whether the Provincial Fiscal filed a claim with Court of First Instance for the taxes due.

On May 30, 1956 the commissioner appointed by the Court of First Instance for the purpose, submitted reamended project of partition which listed the following properties: Personal properties: Buick Sedan Packard car Aparadors Cash in Bank (PNB) Palay Carabaos Real properties: Land, 174 parcels assessed at Buildings Total

P8,100.00 2,000.00 500.00 8,858.46 6,444.00 1,500.00

P27,402.46

P324,797.21 4,500.00 P329,297.21 P356,699.67

More than a year later, particularly on July 12, 1957, an agent of the Bureau of Internal Revenue apprised Commissioner of Internal Revenue of the existence of said reamended project of partition. Whereupon, Internal Revenue Commissioner caused the estate of Matias Yusay to be reinvestigated for estate and inheritan tax liability. Accordingly, on February 13, 1958 he issued the following assessment: Estate tax 5% surcharge Delinquency interest Compromise No notice of death P16,246.04 411.29

11,868.90 55.00 P15.00

Late payment Total Inheritance Tax 5% surcharge Delinquency interest

40.00 P28,581.23 P38,178.12 1,105.86

28,808.75 50.00 P69,142.73

Compromise for late payment Total Total estate and inheritance taxes

P97,723.96

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

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

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

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

On November 17, 1959 Lilia Yusay disputed the legality of the assessment dated February 13, 1958. S claimed that the right to make the same had prescribed inasmuch as more than five years had elapsed since filing of the estate and inheritance tax return on May 11, 1949. She therefore requested that the assessment declared invalid and without force and effect. This request was rejected by the Commissioner in his letter da January 20, 1960, received by Lilia Yusay on March 14, 1960, for the reasons, namely, (1) that the right to ass the taxes in question has not been lost by prescription since the return which did not name the heirs cannot considered a true and complete return sufficient to start the running of the period of limitations of five ye

under Section 331 of the Tax Code and pursuant to Section 332 of the same Code he has ten years within wh to make the assessment counted from the discovery on September 24, 1953 of the identity of the heirs; and that the estate's administrator waived the defense of prescription when he filed a surety bond on March 3, 19 to guarantee payment of the taxes in question and when he requested postponement of the payment of the tax pending determination of who the heirs are by the settlement court.

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

WHEREFORE, the decision of respondent assessing against the estate of the late Matias Yusay estate a inheritance taxes is hereby reversed. No costs. The Commissioner of Internal Revenue appealed to this Court and raises the following issues:

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

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

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

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

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

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

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

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

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

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

Fraud is a question of fact.8 The circumstances constituting it must be alleged and proved in the court belo And the finding of said court as to its existence and non-existence is final unless clearly shown to erroneous.10 As the court a quo found that no fraud was alleged and proved therein, We see no reason entertain the Commissioner's assertion that the return was fraudulent. The conclusion, however, that the return filed by Jose S. Yusay was sufficient to commence the running of prescriptive period under Section 331 of the Tax Code rests on no solid ground. Paragraph (a) of Section 93 of the Tax Code lists the requirements of a valid return. It states:

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

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

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

First, it was incomplete. It declared only ninety-three parcels of land representing about 400 hectares and left ninety-two parcels covering 503 hectares. Said huge under declaration could not have been the result of an ov

sight or mistake. As found in L-11378, supra note 7, Jose S. Yusay very well knew of the existence of ommited properties. Perhaps his motive in under declaring the inventory of properties attached to the return w to deprive Lilia Yusay from inheriting her legal share in the hereditary estate, but certainly not because honestly believed that they did not form part of the gross estate.

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

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

The return filed in this case was so deficient that it prevented the Commissioner from computing the taxes d on the estate. It was as though no return was made. The Commissioner had to determine and assess the taxes data obtained, not from the return, but from other sources. We therefore hold the view that the return in quest was no return at all as required in Section 93 of the Tax Code.

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

Accordingly, for purposes of determining whether or not the Commissioner's assessment of February 13, 1958 barred by prescription, Section 332(a) which is an exception to Section 331 of the Tax Code finds application We quote Section 332(a):

SEC. 332. Exceptions as to period of limitation of assessment and collection of taxes. (a) In the case a false or fraudulent return with intent to evade tax or of a failure to file a return, the tax may be assess or a proceeding in court for the collection of such tax may be begun without assessment, at any ti within ten years after the discovery of the falsity, fraud or omission.

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

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

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

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

RES OLUTION

April 24, 19 BENGZON, J.P., J.:

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

Firstly, movant maintains that the issue of whether or not the estate and inheritance tax return filed by J Yusay on May 13, 1949 was sufficient to start the running of the statute of limitations on assessment, was neit raised in the Court of Tax Appeals nor assigned as error before this Court. The records in the Court of T Appeals however show the contrary. Paragraph 2 of the answer filed by the Commissioner of Internal Reven states:

2. That he likewise admits, as alleged in paragraph 1 thereof having received the letter of the petitio dated November 27, 1959 (Annex "A" of the Petition for Review), contesting the assessment of est and inheritance taxes levied against the Intestate Estate of the late Matias Yusay, Special Proceedings N 459, Court of First Instance of Iloilo, on the ground that the said assessment has already prescribed, specifically denies the allegation that the assessment have already prescribed, the truth of the ma being that the returns filed on May 11, 1949 cannot be considered as a true, and complete ret sufficient to start the running of the period of five (5) years prescribed in Sec. 331 of the Tax Code; This point was discussed in the memorandum of the Commissioner of Internal Revenue, thus:

In the estate and inheritance tax return filed by Jose S. Yusay (Exhibits B & 1, pp. 14-20, B.I.R. recor

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

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

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

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

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

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

In his appeal, the Commissioner of Internal Revenue assigned as third error of the Court of Tax Appeals finding that the assessment in question was "made beyond the five-year statutory period provided in Section 3 (a) of the Tax Code," and that the right of the Commissioner of Internal Revenue to assess the estate a inheritance taxes has already prescribed. To sustain his side, the Commissioner ventilated in his brief, fraud the filing of the return, absence of certain data from the return which prevented him from assessing thereon tax due and the pendency in this Court of L-11374 entitled "Intestate Estate of the late Matias Yusay, Jose Yusay, Administrator vs. Lilia Yusay Gonzales" which allegedly had the effect of suspending the running of

period of limitations on assessment.

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

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

Third. Movant insists that since she administers only one-third of the estate of Matias Yusay, she should not liable for the whole tax. And she suggests that We hold the intestate estate of Matias Yusay liable for said tax one-third to be paid by Lilia Yusay Gonzales and two-thirds to be paid by Florencia P. Vda. de Yusay. The foregoing suggestion to require payment of two-thirds of the total taxes by Florencia P. Vda. de Yusay is acceptable, for she (Florencia P. Vda. de Yusay) is not a party in this case.

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

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

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

It is immaterial therefore that Lilia Yusay Gonzales administers only one-third of the estate and will receive her share only said portion, for her right to the estate comes after taxes.4 As an administratrix, she is liable the entire estate tax. As an heir, she is liable for the entire inheritance tax although her liability would not exce the amount of her share in the estate.5 The entire inheritance tax which amounts to P39,178.12 exclud penalties is obviously much less than her distributive share. Motion for reconsideration denied. Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal, Sanchez Zaldivar, J., took no part.

and Castro, JJ., conc

G.R. No. L-27745 October 18, 1977 MISAEL P. VERA, as Commissioner of Internal Revenue, petitioner, vs. Hon. Judge PEDRO C. NAVARRO, in his capacity as Judge of the Court of First Instance of Pasig, Rizal (Branch V MAGDALENA ABANTO and CAMILO ERIBAL, as voluntary residual heirs of the Estate of the deceased ELSIE M. GACHES; DELIA P. MEDINA, as attorney-in-fact of said heirs; BIENVENIDO A. TAN, SR., as Executor of the Estate of ELSIE M. GACHES; PHILIPPINE NATIONAL BANK; PHILIPPINE BANKING CORPORATION; THE OVERSEAS BANK OF MANILA; and BANCO FILIPINO SAVINGS AND MORTGAGE BANK, respondents.

CASTRO, C.J.:t.hqw This is a petition for certiorari, mandamus, prohibition and injunction filed by the herein petitioner Misael P. Vera, in his capacity as Commissioner of Internal Revenue (hereinafter referred to as "Commissioner"), against the Honorable Judge Pedro C. Navarro, in his capacity as Judge of the Court of First Instance of Pasig, Rizal (hereinafter referred to as "respondent Judge"), on account of three orders dated June 5, 8 and 9, 1967, which the latter issued in Special Proceedings No. 5249 entitled "In the Matter of the Testate Estate of Elsie M. Gaches Bienvenido Tan, Executor," which the Commissioner maintains were issued without or in excess of jurisdiction or with grave abuse of discretion. It appears that one Elsie M. Gaches died on March 9, 1966 without a child. The deceased, however, left a last will and testament in which she made the following relevant disposition of her estate, to wit: +.wph!1 3. After payment of my just debts and funeral expenses I intact that the balance of my property, both real and personal in the Philippines, he distributed as follows: +.wph!1 'a) to my driver, PACITO TROCIO Ten Thousand Pesos (P10,000.00); b) to my lavandero, VICENTE JERODIAS One Thousand Pesos (P1,000.00); c) to my gardener, CRISANTO SALIPOT, JR. Five Hundred Pesos (P500.00); d) the balance of my estate in the Philippines shall then be divided in half; One-half (1/2) to be given to CAMILO ERIBAL and the other half to MISS MAGDALENA ABANTO; e) to MISS CONSUELO L. TAN My office table and chair now in the library of my house, and one of the carpets in my house to be selected by her;' 4. All my property in the United States consisting of furs, jewelry and stocks I leave to my sister BESS LAUER widow, and at present a resident of San Francisco, California. On March 11, 1966, the herein respondent Judge Bienvenido Tan, Sr. (hereinafter referred to as "Judge Tan") filed with the Court of First instance of Pasig, Rizal a petition for the probate of the aforesaid will On Aped 21, Judge Tan was appointed as executor of the testate estate of Elsie M. Gaches without a bond. In a letter, dated June 3, 1966, Judge Tan informed the Commissioner that the testate estate was worth about ten

million (P10 million) pesos and that the estate and inheritance taxes due thereon were about P9.5 million. On June 11, 1966, the herein respondent Atty. Delia P. Medina (hereinafter referred to as "Atty. Medina"), representing herself as the attorney-in-fact of the herein respondents Camilo Eribal and Magdalena Abanto, filed with the probate court a motion praying that the executor of the estate be authority to give a monthly allowance to the voluntary heirs Abanto and Eribal from the month of May, 1966 until "the receipt of the recommended advance of inheritance of P100,000.00 each recommended by the Executor in his motion of June 6, 1966 and/or final distribution has been made to said heirs of their respective shares in the estate." This prayer was granted by the probate court in an order dated June 25, 1966 (subsequently clarified in an order dated August 11, 1966). On July 9, 1966, the Commissioner filed with the probate court a proof of claim for the sum "of P192,364.00 as income tax for 1965 and 1% monthly interest due from the d Elsie M. Gaches." On July 19, 1966, Judge Tan filed with the probate court a motion praying for authority to make the following additional advance payments (1) To Abanto and Eribal, P150,000.00; (2) To Bess Lauer, $75,000.00; (3) To Judge Tan as advance executor's fees, P50,000.00; and (4) To Attys. Medina and Bienvenido Tan, Jr., P75,000.00 each as advance attomey's fees. In this motion, Judge Tan claimed that the estate was very liquid and that "any claims whatsoever against the Estate and the Government shall be amply protected since over P7,000,000.00 worth of shares shall still remain to answer therefor (Sec. 1, Rule 90, Rules of Court)." The respondent Judge granted Judge Tan's prayer in an order dated July 23, 1966, In a letter, dated November 4, 1966, the Commissioner advised Judge Tan to Pay to the Bureau of Internal Revenue the sum of P1,398,436.30 as estate tax and P7,140,060.69 as inheritance tax, the investigation of his office having allegedly disclosed that the next value of the testate estate was P10,212,899.20. 1 Judge Tan disputed the correctness of the assessment in a letter sent to the Commissioner. On November 26, 1966, the Commissioner filed with the probate court a proof of claim for the death taxes stated in the assessment notice sent to Judge Tan. On the same date, the Commissioner also submitted to the probate court for its resolution a motion praying: (1) for the revocation of the court's orders dated June 25, July 6, July 23 and August 11, 1966 and all other orders granting the payment of advance inheritance, allowances and fees; (2) for the appointment of a co-administrator of the estate to represent the Government; and (3) for the nondisbursement of funds of the estate without prior notice to the Commissioner. Although the records do not disclose that the probate court specifically disposed of this motion, the said court, from its subsequent actuations, may be considered to have impliedly denied the Commissioner's prayers for the appointment of a coadministrator and the non-payment of advance allowances and fees. On January 19, 1967, the probate court authorized the conversion of the amount of P75,000.00 previously ruled to be paid to Atty. Medina as advance attomey's fees in its order of July 23, 1966 into allowances for Eribal and Abanto. On April 14, 1967, with the Probate court's approval, Judge Tan paid to the Bureau of Internal Revenue the amount of ?185,286.93 as estate tax and, on April 24, 1967, the amount of P1,055,776.00 as inheritance tax. These payments were based on a tax return filed by Atty. Medina on March 8, 1967 with the Bureau of Internal Revenue. On June 3, 1967, Judge Tan submitted to the probate court for approval a final accounting and project of partition of the testate estate. Acting thereon, the respondent Judge issued an order, dated June 5, 1967, for the partial distribution of the estate as follows: +.wph!1 Submitted for resolution of this Court is the Amended Final Accounting and Project of Partition dated May 27, 1967, presented by The executor. Atty. Paredes manifested that he has no objection to the approval thereof provided that certain items enumerated

therein be corrected or modified, as follows: the amount of shares in the Lepanto consolidated Mining Co. should be 6,105,429 instead of 6,015,429, as reported; the amount of P11,537.60 reported as expenses made on January 30, 1967 should be cancelled or excluded . . . and that the time appearing as expenses made on May 10, 1967 payable to Apolonio manifastation illegal should be only P114,000.00 instead of P135,000.00 . . . which manifestations were also adopted by Atty. Virgilio Saldajeno of the Bureau of Internal Revenue, and in addition, he objected in principle to the Executor Fees and to the Attorney's Fees as excessive but left the matter to the discretion of the Court. Considering, further, the manifestations of Atty. Saidajeno that him has no objection to the partial distribution of the estate as long as it an he shown that the rights and interests of the government can be full protected, and it appearing from the subsequent manifestation of Atty. Paredes, counsel for the heirs, that sufficient assets with a nutrient market value of at least P8,000,000.00 will be left to the estate even if a partial distribution in the amount of P3,000,000.00 is made for which reason the rights of the government to collect whatever deficiency, taxes, if any may be asses it may be assessed in the future the heirs have already paid in good faith even ahead of its due dates transfer taxes in the total amount of P1,241,062.93, the Amended Final Accounting and Project of Partition dated May 27, 1967 may be approved, subject Lo this following, terms and conditions: 1. The Executor is hereby discharged from any and all responsibilities that lie has pertaining to the estate; 2. The voluntary heirs Magdalena Abanto and Camilo Eribal shill be responsible for all taxes of any nature whatsoever which may be due the government arising out of the transaction of the properties ol' the estate and the environment can, if it so desires, register its tax lien in the remaining assets after a partial distribution of the estate; 3. Bess Lauer, sister and heir of the deceased shall be fully for, all United States taxes pertaining to her share in the estate. WHEREFORE, subject to the above terms and conditions, entitled Final Accounting and Project of Partition dated May 27, 1967 submitted by the Executor. as modified in the, manifestation of Atty. Paredes and Saidajeno, is hereby approved.

1. Pacita Trocio P10,000.00

2. To Vicente Jerodias 1,000.00

3. To Vicente Crisanto salipot, Jr. 500.00

4. To Magdalena Abanto and Camilo Eribal, share and share alike thru their attorney-in-fact Delia P. Medina, cash in the amont of 2,330.00

5. To Judge Bienvenido A. Tan, Sr. 120,000.00

6. To Atty. Bienvenido A. Tan, Jr. 150,000.00

The aforesaid amount is hereby ordered to be taken from the funds of the estate deposited with the Philippine National bank. As to the other properties remaining after this partial distribution, consisting of the following: A. BANK DEPOSITS:

1. Philippine Banking Corporation 559,147.41

2. Philippine National Bank 238,5000.00

3. Overseas Bank of Manila 700,000.00

4. Banco Filipino Savings & Mortgage Bank 581.00

5. Refund from expenses

32,537.60

B. HOUSE AND LOT LOCATED AT NO. 50 TAMARIND ROAD, FORBES PARK, MAKATI, RIZAL; C. SHARES OF STOCK IN THE FOLLOWING:

1. Lepanto Consolidated Mining Co. 1,105,429 shares

2. San Miguel Corp. 16,692 shares

(common)

3. San Miguel Corp. 500 shares

(preferred)

4. Central Azucarera del Pilar 17,755 shares

5. Manufacturas Textile Industriales de Filipinas, Inc. 10,368 shares

6. Consolidated Mines, Inc. 85,858 shares

7. Mayon Metal Corporation

5,000 shares

8. Soliangco & Co Inc. 25 shares

9. San Juan Heights 5 shares

10. Metropolitan Insurance Co. 443 shares

11. Realty Investment Inc. 652 shares

(10 shares, management & 642 common) The same shall be turned over and delivered to the attorney-in-fact of the voluntary heirs. Atty. Delia P. Medina, to be held by her to answer for whatever deficiency estate and inheritance taxes may still be due from the estate and the heirs in favor of the government. SO ORDERED. Pasig, Rizal, June 5,1967.+.wph!1 (Sgd.) PEDRO C. NAVARRO+.wph!1 Judge On the same day (that is, June 5, 1967), the Commissioner, having been informed in advance about the foregoing order by certain undisclosed sources, issued warrants of garnishment against the funds of the estate deposited with the Philippine National Manial, the overseas Bank of Manila, and the Philippine Banking Corporation, on the strength of sections 315-330 of the National Internal Revenue Code. On June 7, 1967, Atty. Medina filed in the probate court a petition for the discharge of the writs of punishment issued by the commissioner. On June 8, 1967, the respondent Judge issued an order lifting the wants in question. On June 9, 1967, the Philippine National Bank filed a motion in the probate court praying that it be authority to deposit with the said court the money in its hands in view of the conflicting claims of the parties over the funds in dispute. On the same day (that is, June 9, 1967), the respondent Judge issued an order denying the said motion and threatening the bank officials who refuse to implement its orders of June 5 and 8, 1967 with contempt. Atty. Medina was consequently able to withdraw the sum of P2,330,000.00 from the PNB. A copy of this order of June 9, 1967 as well as the orders of June 5 and 8, 1967 were received by the Commissioner on June 13, 1967.

On June 16, 1967, the Commissioner filed a motion for reconsideration (supplemented on June 22, 1967) of the orders of the probate court dated June 5, 8 and 9, 1967. On July 6, 1967, however, the Commissioner, on the belief that the probate court's resolution on its motion was not legally necessary, filed with this Court the instant petition for certiorari, mandamus, prohibition and injunction against the aforesaid orders of the respondent Judge. The petition at bar is based on the following propositions: (1) That the distributive shares of an heir can only be paid after full payment of the death taxes. As this case subsequently progressed before this Court, the position of the Commissioner would seem to be that the deficiency income taxes due and payable during the lifetime of the deceased should also be paid first. (2) While partial distribution of the estate of a deceased may allowed, a bond must be filed by the distributees to secure the payment of the transfer taxes. Subsequently, however, the Commissioner changed his position, stating that such distribute may be made so long as the payment of the taxes due the government is "provided for," citing section 1, rule go of the Rules of Court in relation to sections 95 (c), 97, 103, 106 and 107 (c) the National lnternal Revenue Code. (3) That the executor of an estate cannot be discharged without the payment of estate and inheritance taxes. The Commissioner later modified his stand on this ProPosition in line with the view that it is sufficient if the payment of the said taxes is "Provided for.,, (4) That the delivery of properties of the estate to a stranger [that is, to the voluntary heirs herein] is not sanctioned by law. Later, as the case at bar Progressed, and in view of a compromise offer made by the respondents Abanto and Eribal to pay the taxes being claimed by the Bureau of Internal Revenue, the Commissioner advanced the view that this proposition is already moot and academic. (5) That the respondent Judge has no authority to quash or dissolve writs of garnishment issued by the Commissioner. Subsequently, however, the Commissioner reversed his stand on this point and stated that the probate court may so dissolve said writs of punishment as the assets in question were then in custodia legis, citing Collector vs. Vda. de Codeniera L-9675, Sept. 28, 1957. Taking stock of the Commissioner's complaint that the disputed orders Were issued without or in excess of jurisdiction or with grave abuse of discretion, the herein respondents Atty. Medina and Judge Tan put up a number of factual and legal arguments, the material ones of which may be stated, in sum, as follows: (1) The Commissioner's notice of assessment, dated November 10, 966, was based on wrong premises and valuation of the assets in question; in fact, the Commissioner had agreed during the pretrial conference in the probate court to reconsider certain items therein; (2) The allowance granted to Abanto and Eribal were taken solely from the income of the estate, a fact admitted by Atty. Saldajeno of the Bureau of Internal Revenue; it is claimed that in 1965 the estate had an income of P41 1,000.00 and over P750,000.00 in 1966, which could more than cover the questioned allowances; (3) Eribal and Abanto are willing and bound themselves to assume the responsibility for the payment of the taxes due against the estate except for the properties located in the United States which should be charged against Bess Lauer; (4) The Commissioner does not object to the partition of the estate in question provided that enough assets are left to pay the taxes against the estate; (5) The estate has sufficient assets with which to pay the taxes being claimed by the government; (6) There was nothing unusual in the institution of Abanto and Eribal as residual heirs of the deceased; Abanto

was the testator's special nurse, companion, secretary and cook from 1945 until Elsie M. Gaches death in March, 1966; Eribal, on the other hand, was the deceased's cook, caretaker, companion and driver since 1929; (7) The grant of allowances was never contested below and cannot now be raised in the-instant proceedings; (8) Adequate safeguards were specified in the probate court's order of June 5, 1967 to cover the tax claims; and (9) There had been no full distribution of the estate in question without payment of the transfer taxes since the said taxes are being disputed by the heirs. In a reply filed on September 7, 1967, the Commissioner stated that he had issued a revised assessment dated August 24, 1967 and that, furthermore, there were due from the estate deficiency income taxes for the years 1961 to 1965 in the total sum of P1,182,296.16, for which reason the estate should not be ordered distributed until the same is fully satisfied. In a rejoinder, Judge Tan claimed that the August 24, 1967 assessment could still be reduced considerably. The contents of the mentioned revised assessment which was addressed to Atty. Medina are, inter alia, as follows: +.wph!1 Madam: ... I have the honor to advise that in a reinvestigation conducted by this Office, for transfer tax purposes, it was ascertained that she left real and personal properties in the sums of P377,912.50 and P5,963,822.31 respectively, or a gross estate of P9,341,734.81. The amounts of P193,892.38, P462,022.83 and Pl,226,783.53, representing accrued household and medical expenses, funeral expenses and income taxes (1961-1965) payable, respectively, or a total of P1,882,198.74, were allowed as deductions resulting in a net taxable estate in,the sum of P7,459.536.07 subject to estate and inheritance taxes. In view thereof, there are hereby further assessed the sums of P891,673.68 and P4,353,972.87 as deficiency estate and inheritance taxes and penalty still due on the transmission of the decedent's estate, after, crediting the sums of P185,286.73 and P1,055,776.00, which were paid on April 4, 1967 and April 24, 1967, details of which are shown hereunder:

Estate tax Pl,076.960.41

Less: Amount Paid 185,286.7

Total P891,673.69

Inheritance tax 5,448.87

Corporation CPA Certificate 300.00

Total P5,409,748.87

Less Amount Paid 1,055,776.00

Deficiency Inheritance Tax & Penalty P4,353,972.87

xxx xxx xxx The deadlines for the payment of the aforementioned transfer taxes without penalty were December 9, 1967 for the estate tax and March 9, 1968 for the inherit tax. On Sepember 9, 1967, Atty. Medina riled with this Court a pleading captioned "Compliance and Offer of Compromise to Terminate this Case" in which she stated the following:+.wph!1 xxx xxx xxx 4. Although respondents voluntary heirs intend to assail and question the correctness of said assessment only insofar as the same has disallowed the deductions claimed by them for personal services rendered by various persons in the total sum of P366,800.00, foregoing thereby other possible objections to the other items just so this case can be earlier disposed of, said repondents, nevertheless, are willing to pay even before these due dates the entire amount-specified in said assessment, but under protest insofar as the same has disallowance is concerned, in order to already terminate and dispose of this case before this Honorable Court. To pay the taxes in question, Atty. Medina prayed in her offer of that she and Abanto and Eribal be authorize to make use of the funds of the estate on deposit with the Philippine National (P238,500.00), the Banking Corporation (P559,147.41), the Banco Filipino savings and Mortgage Bank (P581.00), and the Bank of Manila (P700,000.00), and to gradually dispose of and sell the shares of stock representing of the delegate with an

estimated market value of P2,154,026.36. Also included among the assets for which authority to sell was being procured in the said offer of were 2,442,000 Lepanto Consolidated Co. which Abanto and Eribal with the probate court niether this Court issued a pre injunction in the case at bar on july 10, 1967 ordering, among others, Atty. Medina, Abanto and Eribal to restore to the court a quo the amount of P2,330,000.00 withdrawn from the Philippine National Bank pursuant to the questioned orders of the probate court, and every other money or property revived by them by of said questioned orders. The mentioned Lepanto shares had then an estimated market value of P2,588,520.00. It should bear mention, at this point, that the money withdrawn from the Philippine National Bank was not returned by Atty. Medina, Abanto or Eribal to the probate court, these respondents having prayed this Court that the deposit of the mentioned stocks be as full compliance by them with the writ of pre injunction issued by this Court. On September 19, 1967, this Court issued a resolution requiring the Commissioner to submit a memorandum on how he arrived at his original assessment of more than ?8.83 million and the revised assessment of only about ?6.48 million, showing a reduced difference of more than P2 million. The Commissioner submitted to this Court the required memorandum on May 25, 1968, the important items and figures described in which may be summed up comparatively as follows: +.wph!1 ESTATE OF ELSIER GACHES

ASSETS ORIGINAL REVISED

ASSESSMENT ASSESSMENT

Cash in bank -

Philippine Pl,172.635.62 P1,172,635.62

Foreign (US$ P3.95) 559,335.00 559,335.00

Cars-

Lincoln Pl8,000.00

Volkswagen 7,000.00

(Vauxhalll) 25.000.00 12,000.00

Furnitures 30,000.00 30,000.00

Shares of stock 7,923,576.23 7,189,851.69 Forbes Park lot

(at P144.73/sq. in.)

383,202.35

(at P97.50/sq.m.)

258,862.50

House ------- P111,850.00

Swimming Pool 5,000.00

Fence -------- 2,200.00 119,050.00 119,050.00

TOTAL ASSETS P10,212,899.20 P9,341,734.81

+.wph!1 LIABILITIES AND DEDUCTIONS

Estimated Income Tax

Payable (1965) P192,364.00

(1961-1965)

P1,882,783.53

Aaccrued medical expenses 13,000.00)

Funeral expenses 73,320.00) 193,392.38

Judicial exercises 331,026.40 462,022.83

TOTAL LIABS. &

DEDUCTIONS P610,190.60 P1,882,198.74

TRANSFER TAXES PAYABLE

Gross Estate P10,212,899.20 P9,341,734.81

Less: Laibs. & Deductions 610,190.60 1,882,198.74

Net Taxable Estate P9,602,708.60 P7,459,536.07

Less Estate'tax Due P 1,398,436.30 Pl,076,960.41

Estate Subj. to Inh. Tax P 8,204,272.30 P6,382,575.66

Distribution of Hereditary

Estate

C. Salipot, Jr. P 500.00 P 500.00

V. Jerodias 1,000.00 1,000.00

P. Trocio 10,000.00 10,000.00

Bess Lauer 672,305.00 672,305.00

M. Abanto 3,760,233.65 2,849,385.33

C. Eribal 3,760,233.65 2,849,385.33

Inheritance Tax Due

C. Salipot, Jr. P10.00 P 10.00

V. Jerodias 20.00 20.00

P. Trocio 600.00 600.00

Bess Lauer 192,186.75 192,186.75

M. Abanto 3,473,621.97 2,608,316.06

C. Eribal 3,473,621.97 2,698,316.06

Total inheritance Tax due P 7,140,060.69 P5,409,448.87

Add: Estate Tax Due P 1,398,436.30

Pl,076,960.41

TOTAL TRANSFER

TAXES DUE P8,538,496.99 P6,486,409.28

On November 17, 1967, this Court authorized the herein respondents Abanto, Eribal and Atty. Medina to withdraw funds of the estate deposited with the Philippine Banking Corporation (P191,673,68) and the Overseas Bank of Manila (P700,000.00) in the form of cashier's checks payable to the Commissioner for the payment of the estate tax still unpaid under the terms of the revised assessment. On November 23, 1967, the Solicitor General filed with this court a manifestation expressing his conformity, in behalf of the Commissioner, to the offer of compromise dated September 9, 1967 made by Atty. Medina, subject to certain conditions, such as, that the cash in the banks of the estate as well as the proceeds to be realized from the sale of the shares of stock should be turned over to the Commissioner for the payment of the taxes due against the estate and the heirs thereof. This manifestation was first opposed by the Acting Commissioner of Internal Revenue on the ground that the Commissioner (who was then abroad) had actually requested the Solicitor General not to agree to the mentioned offer of compromise; however, the Solicitor General subsequently said that the Commissioner's conformity was given to him orally. On December 5, 1967, Atty. Medina filed with this Court a petition to declare the Overseas Bank of Manila in contempt for allowing the renewal, without court authority, of the time deposit of P700,000.00 with the said bank for another year. In a supplemental motion filed on December 8, 1967, Atty. Medina also prayed that the said bank and those responsible for extending the maturity date of said time deposit be held liable for the payment of whatever surcharges, interest and penalties may be imposed as a consequence of the late payment of the balance of the estate tax assessed against the estate. It appears that the time deposit in question was held by the said bank under two certificates, one for P100,000.00 to mature on May 12, 1967, and the other, for P600,000.00 to mature on June 16, 1967. Judge Tan, however, extended the maturity date of said time deposits to May 12, 1968. The certificates of time deposit covering the said funds had been endorsed in favor of the Commissioner in payment of the unpaid balance of the estate then December 7, 1967) amounted to P700,000.00. Commmoner, however. mentioned the respondents End an Abanto through their counsel that his Office +.wph!1 ... regrets that the same cannot be accepted as payment of the deficiency estate tax in this case since they cannot, at present or on before December 9, 1967, be. converted into cash. However, we are holding said certificates of time deposit for possible application in payment of the unpaid balance of the deficiency estate tax in this case as soon as said certificates can be converted into cash. It will be understood in this connection that if the balance of the deficiency estate tax in this case is not paid on or before December 9, 1967, the same shall be subject to the interest on deficiency, 5% surcharge and 1% monthly interest for deliquency.

According to Judge Tan, he caused the extension of the maturity date of the said deposit but that in doing so he acted in good faith in that the testate estate then had ample funds and assets and the said time deposit earned a higher interest than a savings deposit; that he needed no specific court authority for the purpose; and that he had a gentleman's agreement with the officials of the bank that said deposit could be withdrawn in advance, such being the custom in banking circles. The Overseas Bank of Manila, on the other hand, in answer to Atty. Medina's mentioned petition, claimed that the deposit in question was renewed before the bank received any letter demanding its release. In view of this impasse and the fast approaching deadline for the payment of the estate tax, Atty. Medina requested the Commissioner to credit P700,000.00 to the amount previously paid as inheritance tax; but, apparently, this request was not honored by the Commissioner. On January 26, 1968, Atty. Medina filed with this Court a manifestation in which she alleged that even as the proposed joint manifestation between the parties which was supposed to describe the matters agreed upon between them and the Commissioner during a conference hearing held on January 24, 1968 had not yet been shown to her, she already wished to express her principals, conformity to pay, but under protest, the deficiency estate tax of P700,000.00 plus surcharges, interest and penalties due thereon and the inheritance tax in the amount of P4,161,986.12 appearing, to Atty. Medina, in the mentioned assessment notice dated August 24, 1967; that she was likewise agreeable to pay, under protest however, the income taxes for 1961 to 1965 against the estate in the demand letter of the Commissioner dated August 29, 1967 in the amount of P1,175,974.51 plus whatever interest, surcharges and penalties were due'thereon; and that she was also agreeable to being authority to sell such properties of the estate as may be necessary for the mentioned On the following day, however, that is, January 27, 1968, the herein respondents Eribal, Abanto and Atty. Medina, on the one hand, and the Commissioner and the Solicitor General, on the other, filed with this Court a joint manifestation which, inter alia, reads as follows:+.wph!1 l. That the respondent taxpayers will pay the estate, inheritance and deficiency income taxes covered by existing assessments; which are due and collectible from the estate of Elsie M. Gaches, including the delinquency penaltiesthereon, but without prejudice to any right of the taxpayer to contest or protest the said assessments at the proper time and in the proper court; 2. That the respondents Delia P. Medina, Magdalena Abanto and Camilo Eribal shall submit to this Honorable Court an inventory of all the properties and assets of the estate ... ; 3. That is order to generate the necessary funds for the purpose of paying the said taxes and delinquency penalties, so much of the assets of the estate ... shall be sold ... 4. That respondent Delia P. Medina, . and. Mr. Rodolfo U. Arrano Supervising Revenue Examiner of the Bureau of Internal Revenue, ... are hereby proposed to be constituted as the authorized agents of the parties herein to effect the sale ...; 5. That the said agents shall be direct to sell the assets of the estate ... ; 6. That all negotiations and transactions for the sale of the assets of the estate shall be made jointly by the authorized agents ... ; 7. That no disposition of any property or assets of the estate shall be effected except for the foregoing purpose; 8. That this case shall not be terminated until ... the above mentioned ... taxes and delinquency penalties are fully paid; and liquidated; 9. That the parties pray for the approval of the foregoing propositions. On February 6, 1968, this Court, acting on the abovement manifestation of Atty. Medina and the at manifestation

of the Parties, issued a resolution authorizing Atty. Medina to pay, amt, under at, the transfer and in taxes collectible from the estate, including the accopanying delinquency penalties. A Medina was given the necessary authority to collect and receive funds payable to the estate in question and to sell such a thereof as may be necessary. On February 10, 1968, a motion to declare in contempt Lepanto Consolidated Mining Co. was filed by Atty. Medina on t ground that the said corporation refused to tum over to dividends payable to the testate estate unless the Commissioner first lifted his garnishment order on said dividends. On February 16, 1968, this Court issued a resolution suspendi the writs to preliminary junction issued by this Court on July and 17, 1967 and all warrants of garnishment issued by the Commissioner relative to the estate of Elsie M. Gaches, said suspension to be effective until such time that Atty. Medina, End and Abanto shall save fully paid the transfer and income tax including the penalties thereon, covered by existing assessment Atty. Medina thereafter submitted to this Court performance reports on her activities relative to the authority given her. On March 9, 1968, Atty. Medina filed with this Court manifestation stating that she received a demand letter dated March 9, 1968 from the Commissioner for the payment of the following 1'756 900- 00 as estate tax, including penalties; (2) P192,186.75 as inheritance tax corresponding to the share of Bess Lauer; and (3) P451.435.91 as balance of the income tax for the years 1961 to 1965 Atty. Medina claimed the said demands to be erroneous for the following reasons' (1) as to the estate tax, the time deposit in the Overseas Bank of Manila of P700,000.00 plus interest earned of P60,000.00 as of March 9, 1968 would more than cover the said tax and the certificates of time deposits were already endorsed to the Cmmissioner on December 6, 1967; (2) as to the inheritance tax, she (that is. he principals Abanto and Eribal) was not responsible therefore, as the resolution of this Court dated February 6, 1968 required her "to pay only the estate, inheritance and in income taxes, under protest covered by existing assessments, against the Estate, and against the heirs Magdalena Abanto and Camilo Eribal;" in a supplemental motion, Atty. medina further argued that Bess Lauer alone was solely responsible for the payment of the inheritance tax on her share and not the decedent's estate in the Philippines, and that the properties of the testate estate in the United States of America which consisted of shares of stock and deposits in banks, being personal properties, were to be excluded from the computation of the gross estate of the deceased in the Philippines and the computation of the Philippine estate and inheritance taxes because, under philippine law, the sites of those properties is the place where they are located, citing Article 16 of the new Civil Code which she she argued, abandoned the doctrine of mobilia sequuntur personal embodied in Article 19 of the old Civil Code; and (3) as to tile deficiency income tax for 1961-1965, she had paid the same in the total amount of P1,182,296.16 as of March 9, 1968, which was the amount stated in the assessment letter of the Commissioner cited August 9, 1967. According to Atty. Medina, the payment of the taxes was made in the following manner: on February 27, she paid a total of ?838,518.62 as follows: the income tax (P715,619.46) in full; interest (P106,855.29) in full, compromise penalty (P5.,000.00) in full and surcharges P1,052.07) in. part only; and, on March 8, 1968. the amount of P343,773.54 as payment of the remaining surcharges, Consequently, she argued the the surcharges and interest, if any were still due, could legally, accrue only from September 29, 1967 up to February 27, 1968 and only on the tax proper. On April 16, 1968, a counter-manifestation was filed with this court by the Commissiorner to the abovemetioned manifestation according to the Commissioner, (that is under existing assessments that is under the letter of demand of August 24 and 29, 1967)

Estate tax (BalanceP700,000.00 (x)

Inheritance tax 4,353,927.87 (xx)

Total Estate and

Inheritance taxes

P5,053,927.87

Deficiency income taxes

for 1961 to 1965 P1,175,974.51 (xxx)

Delinquency penalties for late filing

of income tax return and late payment of

income tax for 1965 per return filed6,321.65 (xxxx)

Total deficiency income taxes for

1961 to 1965 and the delinquency

penalties of income tax 1965 per

return

P1,182,296.16

GRAND TOTAL

P6,236,269.03

+.wph!1 (x) pIus 5% surcharge and 1% monthly interest thereon from December 9, 1967 until full payment thereof; (xx) plus 5% surcharge and 1%, monthly interest thereon, if the same is not paid in full on or before March 9, 1968; (xxx) plus 5% surcharge and 1% monthly interest thereon from August 29, 1967 until full payment thereof; and (xxxx) pIus additional 1% monthly interest from September 29, 1967 until full payment thereof. Further, the Commissioner alleged that after taking into consideration the payments made by Atty. Medina, the balances as of March 9, 1968 of the death and income taxes still compatible were as follows:

Estate Tax

Balance of the estate tax P700,000.00

5%, surcharge 35,000.00

1% monthly interest from

12/9/67 to 3/9/68 21,000.00

Total P 756,000.00

plus additional 1% monthly interest

from March 9, 1968 until full payment

thereof.

Inheritance Tax

Inheritance tax due and collectible

per letter of demand dated August 24,

1967 (Annex "A") P4,353,972.87

Less: Payments of inheritance Tax

on March 1 and March 6, 1968 per O.R.

2519938 and 2520026, respectively 4,161,986.12

Inheritance taxs due and collectible P191,986.75

plus 5% surcharge and 1% monthly

interest thereon from March 8, 1968

until full payment.

Deficiency Income Taxes

Deficiency income taxes from 1961

to 1965 per letter of demand dated

August 29, 1967 plus 5% surcharge and

1% monthly interest up to March 1968 P1,289,818.17

Less: Payments made on February

27, 1968 and March 8, 1968 under O.R.

207001 and 207002 P1,182,296.16

Deficiency income taxes still due

and collectivele P107,522.01

plus additional 1% monthly interest

thereon from March 8, 1968 until full

payment.

The Commissioner also explained that the i taxes paid by Atty. Medina in the total amount of P1,182,296.16 "included only the 1/2% monthly interest On deficiency with respect to the deficiency income taxes for 1961 to 1965 and the 1% monthly Interest for delinquency up to September 29, 1967 with respect to the income tax for 1965 which was paid per return, Out did not include the 5% surcharge and 1% monthly interest for delinquency from August 29, 1967 until full Payment with respect to the income tax for the 1965 return." The Commissioner consequently prayed that Atty. Medina be ordered to pay: +.wph!1 (1) The amount of P756,000.00 as balance of the estate tax, 5% surcharge and 1% monthly interest from December 9, 1967 to March 9, 1968, plus additional 1% monthly interest from March 9, 1968 until full payment; (2) The amount of P191,986.75 as balance of the inheritance tax, plus 5% surcharge and 1% monthly interest thereon from March 9, 1968 until full payment; and (3) The amount of P107,522.01 as balance of the deficiency income taxes, 5% surcharge and 1% monthly interest for delinquency up to M arch 8, 1968, plus additional 1% monthly interest thereon from March 8, 1968 until full payment ... ; On August 23, 1968, Atty. Medina filed a manifestation with this Court adverting to the refusal of the Overseas Bank of Manila to permit the withdrawal of the time deposit of the testate estate in the said bank in spite of the fact that the extended maturity date of said deposit had may expired. Atty. Medina payed that the bank Ida as one boss able the deposit of the funds of is well as the who made i of the estate of Elsie M. Gaches with the said bank be declared in contempt. on September 18, 1968, the Central Bank Of the Philippines filed with this Court a comment on the urgent manifestation of Atty. Medina concerning the deposit in question. The Central Bank, which according to the Overseas Bank of Manila had restrained it from paying its time deposits to the bank's depositors, averred that this Court's resolution of November 17, 1967 merely authorized Atty. Medina to withdraw the deposit from the said bank and did not order the bank to pay the time deposit in question. Moreover, according to the Central Bank, the nonpayment of the said deposit was not wilful as the Overseas Bank of Manila was in a state of insolvency. A comment was filed on October 11 1968 by the Overseas Bank of Manila stating that the majority stockholders of the bank filed a petition against the Central Bank for certiorari. prohibition and mandamus in this Court in L-29352 entitled "Emerito M. Ramos, et at. vs. Central Bank;" 2 that the time deposit in question was an unrecorded transaction; and that the Central Bank prohibited the bank to do business due to its distressed financial condition, for which reason it could not give preference of the payment of the said deposit as it might prejudice other creditors of the bank. On November 11, 19681, Atty. Medina filed with this Court a M. motion ,- reiterating a previous one to allow the payment of the announced of P6.000.00 to Atty. Manuel M. Paredes whom she and tile other herein respondent herein Abanto and Eribal hired as counsel in collection with the settlement proceedings of Elsie M. Gaches estate. On March 29, 1969. pursuant to a resolution of this Court, Atty. Paredes ssubmitted knitted a memorandum on the nature and extent for the legal services he had rendered to tile herein respondents Atty. Medina Eribal and Abanto. On June 26, 1971, Abanto and Eribal Jointly wrote the Chief Justice, expressing willingness and agreement to pay the amount due tile government as taxes against the estate and the heirs thereof, however, the two respondents herein subsequently retracted their statement in the said letter, claiming they signed and sent the same without knowing and understanding its effect and consequences. A perusal in depth of the facts of the instant case discloses quite plainly that the respondent Judge committed a grave abuse of discretion amounting to lack of jurisdiction in issuing its orders of June 5, 8 and 9, 1967. Section

103 of the National Internal Revenue Code (hereinafter referred to as "Tax Code") unequivocally provides that "No judge shall authorize the executor or judicial administrator to deliver a distributive share to any party interested in the estate unless it shall appear that the estate tax has been paid." 3 The aforesaid orders of the respondent Judge are clearly in diametric opposition to the mentioned Section 103 of the Tax Code and, consequently, the same cannot merit approval of this Court. While this Court thus holds that the questioned orders are not in accordance with statutory requirements, the fundamental question raised herein regarding the objectionable character of the probate court's mentioned orders has opened other issues which, not alone their importance to jurisprudence, but the indispensability of forestalling needless delays when those issues are raised anew, have, perforce, persuaded this Court that their complete and final adjudication here and now is properly called for. Said issues may be specificaly framed as follows: (1) Should the herein respondent heirs be required to pay first the inheritance tax before the probate court may authorize the delivery of the hereditary share pertaining to each of them? (2) Are the respondent heirs herein who are citizens and residents of the Philippines liable for the payment of the Philippine inheritance tax corresponding to the hereditary share of another heir who is a citizen and resident of the United States of America. said share of the latter consisting of personal (cash deposits and, shares) properties located in the mentioned court (3) Does the assignment of a certificate of time deposit to the comissioner of Internal Revenue for the purpose of paying t I hereby the estate tax constitute payment of such tax? (4) Should the herein respondent heirs be held liable for the payment of surcharge and interest on the amount (P700,000.00) representing the face value of time deposit certificates assigned to the Commissioner which could not be converted into cash? Aside from the foregoing, there are also other incidental questions which are raised in the present recourse, viz., (5) What should be the liability of the respondents herein on the contempt charges respectively lodged against them? (6) What should be a reasonable fee for the counsel of the respondents Atty. Medina, Eribal and Abanto for professional services rendered In connection with the settlement of the estate of Elsie M. Gaches? 1. On the matter of the authority of a probate court to allow distribution of an estate prior to the complete Nuidation of the inheritance tax, the Tax Code apparently lacks any provision substantially Identical to the mentioned Section 103 thereof. There are provisions of the Tax Code, e.g., Section 104, which makes it the duty of registers of deeds not to register the transfer to any new owner of a hereditary estate unless payment of the death taxes sham be shown; Section 106, which imposes a similar obligation on business establishments; and Section 107, which penalizes the executor who delivers to an heir or devise, and the officers and employees of business establishments who transfer in their books to any new owner, any property forming part of a hereditary estate without the payment of the death taxes first being shown; but those provisions by themselves do not clearly establish that the purchase and object of the statute is to make the payment of the inheritance tax a precondition to an order for the distribution and delivery of the decedent's estate to the lawful heirs there. The cloud of vagueness in the statute, however, is not entirely unreachable. Section 1, Rule 90 of the Rules of Court erases this hiatus in the statute by providing thus: +.wph!1 Section 1. When order for distribution of residue made. When the debts, funeral charges, and expenses of administration, the allowance to the widow, and inheritance tax, if any, chargeable to the estate in accordance with law, have been paid, the court, on the application of the executor or administrator, or of a person interested in the estate, and after hearing upon notice, shall assign the residue of the estate to the persons entitled to the

same, naming them and the proportions, or parts, to which each is entitled, and such persons may demand and recover their respective shares from the executor or administrator, or any person having the same in his possession. If there is a controversy before the court as to who are the lawful heirs of the deceased person or as to the distributive shares to which each person is entitled under the law, the controversy shall be beard and decided as in ordinary cases. No distribution shall be allowed until the payment of the obligations above mentioned has been made or provided for, unless the distributees, or any of them, give a bond, in a sum to be fixed by the court, conditioned for the payment of said obligations within such time as the court directs. Under the provisions Of the aforequoted Rule, the distribution of a decedent's assets may only be ordered under any of the following three circumstances, namely, (1) when the inheritance tax, among others, is paid; (2) who bond a suffered bond is given to meet the payment of the tax and all the other options of the nature enumerated in the above-cited provision; or (3) when the payment of the said tax and at the other obligations mentioned in the said Rule has been provided for one of these thru camar as the satisfaction of the when tax due from the festate is were present when the question orders were issued in the case at bar. Although the respondent Judo did make a condition in its order of June 5, 1967 that the distribution of the estate of Elsie M. Gaches (except the cash deposits of more than P2 million) shall be trusted to Atty. Medina for the payment of whatever taxes may be due to the government from the estate and the heirs them to, this Court cannot subscribe to the proposition that the payment of the tax due was thereby adequately provided for. In the first place, the order of June 5, l967 was, for all intents and , a complete distribution of the estate to the heirs for, the executor who is supposed to take care of the estate was absolutely discharged the attorney's fees for the of a lawyer who presumably acted as legal counsel for the estate in the court below were ordered paid as were also the fees for the executor's the cash funds of the estate were red paid to the cash and the non-cash (real property and shares of stock) properties were likewise ordered delivered to Atty. Medina whose participation in the said proceedings was in the capacity of an attorney-in-fact of the herein respondent Eribal and Abanto. In short, the probate court virtually withdrew its custodial jurisdiction over the estate which is the subject of settlement before it. In the second place the respondent Judge, in the distribution of the properties of the estate in question, relief solely upon the mere mandestation of the counsel for the heirs Eribal and Abanto that them were affiant of the estate with which to pay the taxes due to the government. There is no evidence on record that would show that the probate court ever made a serious attempt to de what the values of the different assets the correctness of that such properties shall be preserved for the satisfaction of those case In the third place that main of pesos taxes were being called by the Bureau of Inc. Revenue, the least reasonable thing that the probate court should have done was to require the heirs to deposit the amount of inheritance tax being claimed in a suitable institution or to authorize the sale of non-cash assets under the court's control and supervision. The record is likewise bereft of any evidence to show that sufficient bond has been filed to meet this particular outstanding obligation. 2. The liability of the herein respondents Eribal and Abanto to pay the inheritance tax corresponding to the share of Bess Lauer in the inheritance must be negated, The inheritance tax is an imposition created by law on the privilege to receive property. 4 Consequently, the scope and subjects of this tax and other related matters in which it is involved must be traced and sought in the law itself. An analysis of our tax statutes supplies no sufficient indication that the inheritance tax, as a rule, was meant to be the joint and solidary liability of the heirs of a decedent. Section 95(c) of the Tax Code, in fact, indicates that the general presumption must be otherwise. The said subsection reads thus: +.wph!1 (c) xxx xxx xxx The inheritance tax imposed by Section 86 shall, in the absence of contrary disposition by the predecessor, be charged to the account of each beneficiary, in proportion to the value of the benefit received, and in accordance with the scale fixed for the class or group to which is pertains: Provided, That in cases where the heirs divide extrajudicially the property left to them by their predecessor or otherwise convey, sell, transfer, mortgage, or

encumber the same without being the estate or inheritance taxes within the period prescribed in the preceding subsections (a) and (b), they shall be solidarity liable for the payment of the said taxes to the extent of the estate they have received. The statute's enumeration of the specific cases when the heirs may be held solidarity liable for the payment of the inheritance tax is, in the opinion of this Court, a clear indication that beyond those cases, the payment of the inheritance tax should be taken as'the individual responsibility, to the extent of the benefits received, of each heir. 3. And the effect of the indorsement of the time deposit certificates to the Commissioner, the same cannot be held to have extinguished the estate's liability for the estate tax. In the first place,in accepting the indorsement and delivery of the said certificates, the Commissioner expressly gave notice that his Office +.wph!1 ... Regrets that the same cannot be accepted as payment of the deficiency estate tax in this case may they cannot, at present or on or therefore December 9, 1967, be converted into cash. However, we are holding said certificates of time deposit for possible application in payment of the unpaid balance of the deficiency estate tax in this case ,is soon as said certificates can be converted into cash. ... In the second place, a time deposit certificate is a mercantile document and is essentially a promissory note. 5 By the express terms of Article 1249 of the Civil Code of the Philippines, the use of this medium to clear an obligation will "produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired." From the records of the case at bar, the Commissioner as well as the herein respondents Atty. Medina, Eribal and Abanto spared no time trying to collect the value of said certificates from the Overseas Bank of Manila but all to no avail. Consequently, the value of the said certificates (P700,000.00) should still be considered outstanding. 4. The estate of Elsie M. Gaches is likewise liable for the payment of the interest and surcharges on the said amount of P700.000.00 imposed under Section 101 (a) (1) and (c), respectively, of the Tax Code. 6 The Interest charge for 1% per month imposed under Section 101 (a) (1) of the Tax Code is essentially a commotion to the State for delay in the payment of the tax due thereto7 As for the accountant use by the tax payer of funds that nightday shall be in the government's funds. 8 As the indorsement and delivery of the mentioned time deposit certificates to the did not result in the payment of the estate tax (for which it was in the respondents estate is fluently liable for the interest charge imposed in the Tax Code. The estate cannot likewise be exempted from the payment of the 5% surcharge imposed by Section 101 (c) of the Tax Code. While there are cases in this jurisdiction holding that a surcharge shall not be visited upon a taxpayer whose failure to pay the tax on time is in good faith, 9 this element does not appear to be present in the case at bar. The Commissioner, as aforesaid, fully informed the respondents Atty. Medina, Eribal and Abanto of the condition to this acceptance of the said time deposit certificates. The Commissioner, in fact, advised them in the same letter that "It will be understood in this connection that if the balance of the deficiency estate tax in this case is not paid on or before December 9, 1967, the name shall be subject to the interest on deficiency, 5% surcharge and 1% monthly interest for deficiency." Moreover, Judge Tan himself, as executor of the estate of Elsie M. Gaches, specifically admitted that he was the one who caused the extension (and consolidation) of the maturity dates of the two time deposit certificates in question (one for P100,000.00 to mature on May 12, 1967 and the other for P600,000.00 to mature on June 16, 1967) to May 12, 1968, It will be worthwhile to mention also, in this connection, that when Atty. Medina applied to this Court for authorize to the amount of P700,000.00 from the Overseas Bank of Manila on September 9, 1967, the resolution of this Court dated November 17, 1967, approve her request authorized her to withdraw the said amount in the form of cashier's checks payable to the Commissioner. Apparently, because the Overseas Bank of Manila refused to issue such checks or to allow her to withdraw said amount in view of the extension of the nuturity date of the deposit in question, Atty. Medina thought that by simply assigning the time deposit certificates to the Commissioner, she would be deemed to have paid the estate's obligation in its corresponding amount. However,

as aforesaid the Commissioner was also unable to convert said amount to cash and he gave announce to that effect to Atty. Medina. Since the refusal of the Overseas Bank of Manila to snow the withdrawal of the said deposit was then well-known to the parties, it saw to reas that the tentatives of the estate who stand to be benefited. therefrom, such as the respondents Eribal and Abanto, should have forthwith asked for authority to pay the from other funds of the estate. Atty. Medina was, in fact, given the authority by this Court to sell assets of the estate for the payment of the taxes due to the State, but she never tried to pay the equivalent amount of P700,000.00 in question from the proceeds of the Wm she made afterwards. Moreover, it will also be noted that the respondents EAbal and Abanto, during the pendency of this case, had in their actual ion at least P2.3 million (the amount they were able to withdraw from the Philippine National Bank on account of the questioned orders) which they could have very well used for the payment of the estate tax. They, however, opted to put the same to other uses. 5. We now consider the several petitions for contempt riled in the case at bar, namely, (a) against the Philippine National Bank on account for allowing Atty. Medina to withdraw P2,330,000.00 in contravention of the writ of punishment issued by the Commissioner; (b) against the officer of the Overseas Bank of Manila for allowing the extension of the maturity date of the mentioned time deposit of P700,000.00 and for refusing to pay the same after the extended term expired; (c) against Judge Tan who renewed the maturity date of the said time deposits; (d) against the Lepanto Consolidated Mining Co. for refusing to turn over dividends payable to the estate of Elsie M. Gaches unless the Commissioner first lifted his punishment order; and (e) against the herein respondents Atty. Medina, Eribal and Abonto for citing shares of stock with the probate court instead of the cash amount of P2,330,000.00 which they withdrew from the renewed National Bank on account of the questioned orders of the probate court, contrary to the resolutions of this Court dated July 10 and 17, 1967. (a) The contempt charge against the officials of the Philippine National Bank is without merit, it appearing to the satisfaction of this Court that they excited reasonable efforts not to disobey the writ of garnishing issued by the Commissioner. Indeed, said officials merely acted in obedience to the order of the probate court which threatened them with contempt of court after they moved to be allowed to deposit with the said probate court the money of the of Elsie Gaches deposited with the said bank. The commssioner himself, through the Solicitor General, admitted later that its writ of garnishment cannot be superior to that of the probate court,s order as the estate in Question was then in custodia legis. (b) The contempt charges against the officials of the Overseas Bank of Manila likewise merit dismissal. In the case of the renewal of the term of the time deposits in question, the said extension was made by no less than the executor of the estate himself- The renewal of said term may be considered as purely an act of administration for the enhancement (due to the higher interest rates) of the value of the estate, and the officials of the bank cannot consequently be blamed or acting favorably on the executor's application. Judge Tan himself explained that he did what he did honest the belief that it would redound to the benefit of the estate on the account of the higher interest rate on time deposits. With reference, to the refuse of the bank's officials to allow the witldrawal of time deposit in question after the extended term expired on May 12, 1968, this Court takes notice of the fact, as stated in our decision in Ramos vs. Central Bank (L-293250, Oct. 4, 1971; 41 SCRA 565), that as early as November 20, 1967 the Central Bank required the Overseas Bank of Manila, in view of its distressed financial condition, to execute a voting trust agreement in order to bail it out through a change of management and the promise of fresh funds to replenish the bank's financial portfolio. The Overseas Bank of Manila was not able to normalize its operations in spite of the voting trust agreement for, on July 31, 1968, it was excluded by the Central Bank from inter-bank clearing; on August 1, 1968, its operations were suspended; and on August 13, 1968, it was completely forbidden by the Central Bank to do business preparatory to its forcible liquidation. Under the circumstances, this Court is satisfied with the explanation that to allow Atty. Medina to withdraw the said time deposits after the extended term would have worked an undue prejudice to the other depositors and creditors of the bank. (c) The contempt charge against Judge Tan is also not meritorious. There is no sufficient and convincing evidence to show that he renewed the maturity date of the time deposits in question maliciously or to the

prejudice of the interest of the estate. (d) The Lepanto Consolidated Mining Company is likewise entitled to exoneration from the contempt charge lodged against it. It is refusing to turn over to Atty. Medina stock dividends payable to the estate of Elsie M. Gaches, it is evident that the said corporation acted in good faith in view of the writ of garnishment issued to it by the Commissioner. Moreover, on February 16, 1968, this Court passed a resolution suspending temporarily the warrants of punishment issued by the Commissioner, and it does not appear that thereafter the turnover of the stock dividends to the estate was refused. (e) With reference to the charge for contempt against the respondents Atty. Medina, Eribal and Abanto, although admittedly the resolutions of this Court dated July 10 and 17, 1967 were not strictly complied with by the said respondents, it appears clearly that they immediately deposited with the probate court shares of stock with a fairly stable liquidity value of P2,588,520.00. In any case, the main objective of the instant petition is to assure the State that the assessed tax obligations shall be paid and, from the records, more than P2 million had already been paid to the State during the pendency of the instant proceeding, in this Court. 6. With reference to the attorney's fees to be paid to Atty. Manuel M. Paredes, this court is of the opinion, after a careful study of the statement of services rendered by said counsel to the respondents Eribal and Abanto which was submitted to this Court, that the amount of Fifty Thousand Pesos (P50,000.00) is fair and reasonable. The payment of this amount, however, is the personal liability of the said respondents Eribal and Abanto. and not that of the estate of Elsie M. Gaches, as the said counsel was hired by the said respondents to give legal aid to them in connection with the settlement of the various claims preferred in the probate court and in this Court. 7. The Court's intended adjudication of the main issue has been rendered academic by supervening events which dictate that the court refrain from issuing any further order relating thereto. On July 18, 1977 a "Manifestation and Compliance" was filed by the, respondent Delia P. Medina which states that a compromise payment of P700,000 as all estate tax, evidence by an official receipt (annex A of the Manifestation), was accepted and duly approved by Acting Commissioner of Internal Revenue Efren I. Plana (annex B of the same Manifestation), and that "with the said compromise payment of P700,000, all estate, inheritance and deficiency income taxes . . . including pertinent delinquency penalties thereof have been fully paid and liquidated, aggregating to P7,929,498.55 ..." No objection thereto was interpored by any of this parties concerned despite due notice thereof. This was further supplemented by a communication, dated July 19, 1977, of Deputy Commissioner Conrado P. Diaz, informing the Register of Deeds of Pasig, Metro Manila, that the Gaches estate has already paid all the estate and inheritance taxes assessed against it, and that, consequently, the notice of tax then inscribed on the property and property rights of the estate can now be considered cancelled. With the full settlement of the tax claims, the requirements of the law have been fully met, and it has unnecessary for the Court to issue orders relative to the main issue. ACCORDINGLY, the respondent Delia P. Medina is to deliver the remaining assets of the estate to the voluntary heirs in the proportions adjudicated in the will and to submit a report of compliance. On the incidental issues, the Court renders judgment as for: (1) The amount of FIFTY THOUSAND (P50,000.00) PESOS is hereby awarded to Manuel M. Paredes as legal fee for his services, the same to be Paid by the respondent End will the estate of Abanto, now (2) The contempt charges against the officials of the Philippine National Bank and the Overseas Bank of Manila, Judge Bienvenido Tan, Sr., and Lepanto Consolidated Co. are hereby ordered dismissed; (3) The authority given to the respondent Delia P. Medina in the resolution of the court dated February 6, 1968, to pay the death and income taxes, including delinquency penalties, claimed by the State and, for that, to withdraw all cash deposits in various banks and sell such properties of the estate as my be necessary, is hereby

terminated; and (4) The writs of preliminary injunction issued by the Court pursuant to its resolutions dated July 10 and 17, 1967 are hereby dissolved. No costs. Antonio, Mu;oz Palma, Concepcion Jr., Martin, Santos, Fernandez and Guerrero, JJ., concur.1wph1.t Fernando, J., is on leave. Aquino, Makasiar, JJ., took no part.

Separate Opinions

TEEHANKEE, J., concur: I concur in the disposition of the incidental issues regarding the payment of Atty. Paredes' attorney's fees due from respondents Eribal and Abanto's estate and the contempt charges as set forth in the Court's judgment. I reserve my vote as to the Court's "intended adjudication of the main issues (Nos.[1] to [4] as discussed in the Chief Justice's main opinion at pages 25- 33), since as stated in the main opinion itself (at page 36) the said issues have been rendered academic with the full settlement of the Internal Revenue Commissioner's tax claims and it has therefore become unnecessary to advance an opinion thereon or resolve the same.

Separate Opinions TEEHANKEE, J., concur: I concur in the disposition of the incidental issues regarding the payment of Atty. Paredes' attorney's fees due from respondents Eribal and Abanto's estate and the contempt charges as set forth in the Court's judgment. I reserve my vote as to the Court's "intended adjudication of the main issues (Nos.[1] to [4] as discussed in the Chief Justice's main opinion at pages 25- 33), since as stated in the main opinion itself (at page 36) the said issues have been rendered academic with the full settlement of the Internal Revenue Commissioner's tax claims and it has therefore become unnecessary to advance an opinion thereon or resolve the same.

G.R. No. L-22734

September 15, 1967

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs. MANUEL B. PINEDA, as one of the heirs of deceased ATANASIO PINEDA, respondent. Office of the Solicitor General for petitioner. Manuel B. Pineda for and in his own behalf as respondent.

BENGZON, J.P., J.:

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

After the estate proceedings were closed, the Bureau of Internal Revenue investigated the income liability of the estate for the years 1945, 1946, 1947 and 1948 and it found that the corresponding income returns were not filed. Thereupon, the representative of the Collector of Internal Revenue filed said returns the estate on the basis of information and data obtained from the aforesaid estate proceedings and issued assessment for the following: 1. Deficiency income tax 1945 P135.83 1946 436.95 1947 1,206.91 Add: 5% surcharge 1% monthly interest from November 30, 1953 to April 15, 1957 Compromise for late filing Compromise for late payment Total amount due

P1,779.69 88.98

720.77 80.00 40.00 P2,707.44 =========== P14.50 ===========

Additional residence tax for 1945 3. Real Estate dealer's tax for the fourth quarter of 1946 and the whole year P207.50 of 1947 =========== Manuel B. Pineda, who received the assessment, contested the same. Subsequently, he appealed to 2.

Court of Tax Appeals alleging that he was appealing "only that proportionate part or portion pertaining to him one of the heirs."

After hearing the parties, the Court of Tax Appeals rendered judgment reversing the decision of Commissioner on the ground that his right to assess and collect the tax has prescribed. The Commissio appealed and this Court affirmed the findings of the Tax Court in respect to the assessment for income tax for year 1947 but held that the right to assess and collect the taxes for 1945 and 1946 has not prescribed. For 19 and 1946 the returns were filed on August 24, 1953; assessments for both taxable years were made within f years therefrom or on October 19, 1953; and the action to collect the tax was filed within five years from latter date, on August 7, 1957. For taxable year 1947, however, the return was filed on March 1, 1948; assessment was made on October 19, 1953, more than five years from the date the return was filed; hence, right to assess income tax for 1947 had prescribed. Accordingly, We remanded the case to the Tax Court further appropriate proceedings.1 In the Tax Court, the parties submitted the case for decision without additional evidence. On November 29, 1963 the Court of Tax Appeals rendered judgment holding Manuel B. Pineda liable the payment corresponding to his share of the following taxes: Deficiency income tax

1945 P135.83 1946 436.95 Real estate dealer's fixed tax 4th quarter of 1946 and whole year of 1947 P187.50 The Commissioner of Internal Revenue has appealed to Us and has proposed to hold Manuel B. Pine liable for the payment of all the taxes found by the Tax Court to be due from the estate in the total amount P760.28 instead of only for the amount of taxes corresponding to his share in the estate.1awphl.nt

Manuel B. Pineda opposes the proposition on the ground that as an heir he is liable for unpaid income due the estate only up to the extent of and in proportion to any share he received. He relies on Government of Philippine Islands v. Pamintuan2 where We held that "after the partition of an estate, heirs and distributees liable individually for the payment of all lawful outstanding claims against the estate in proportion to the amo or value of the property they have respectively received from the estate."

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

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

As a holder of property belonging to the estate, Pineda is liable for he tax up to the amount of the prope in his possession. The reason is that the Government has a lien on the P2,500.00 received by him from the est as his share in the inheritance, for unpaid income taxes4a for which said estate is liable, pursuant to the l

paragraph of Section 315 of the Tax Code, which we quote hereunder:

If any person, corporation, partnership, joint-account (cuenta en participacion), association, insurance company liable to pay the income tax, neglects or refuses to pay the same after demand, amount shall be a lien in favor of the Government of the Philippines from the time when the assessm was made by the Commissioner of Internal Revenue until paid with interest, penalties, and costs that m accrue in addition thereto upon all property and rights to property belonging to the taxpayer: . . .

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

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

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

WHEREFORE, the decision appealed from is modified. Manuel B. Pineda is hereby ordered to pay to Commissioner of Internal Revenue the sum of P760.28 as deficiency income tax for 1945 and 1946, and r estate dealer's fixed tax for the fourth quarter of 1946 and for the whole year 1947, without prejudice to his ri of contribution for his co-heirs. No costs. So ordered. Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ., concur.

G.R. No. L-56340 June 24, 1983 SPOUSES ALVARO PASTOR, JR. and MA. ELENA ACHAVAL DE PASTOR, petitioners, vs. THE COURT OF APPEALS, JUAN Y. REYES, JUDGE OF BRANCH I, COURT OF FIRST INSTANCE OF

CEBU and LEWELLYN BARLITO QUEMADA, respondents. Pelaez, Pelaez, & Pelaez Law Office for petitioners. Ceniza, Rama & Associates for private respondents.

PLANA, J.: I. FACTS: This is a case of hereditary succession.

Alvaro Pastor, Sr. (PASTOR, SR.), a Spanish subject, died in Cebu City on June 5, 1966, survived by his Spanish w Sofia Bossio (who also died on October 21, 1966), their two legitimate children Alvaro Pastor, Jr. (PASTOR, JR.) Sofia Pastor de Midgely (SOFIA), and an illegitimate child, not natural, by the name of Lewellyn Barlito Quem QUEMADA PASTOR, JR. is a Philippine citizen, having been naturalized in 1936. SOFIA is a Spanish subj QUEMADA is a Filipino by his mother's citizenship.

On November 13, 1970, QUEMADA filed a petition for the probate and allowance of an alleged holographic will PASTOR, SR. with the Court of First Instance of Cebu, Branch I (PROBATE COURT), docketed as SP No. 3128-R. T will contained only one testamentary disposition: a legacy in favor of QUEMADA consisting of 30% of PASTOR, SR 42% share in the operation by Atlas Consolidated Mining and Development Corporation (ATLAS) of some mining cla in Pina-Barot, Cebu.

On November 21, 1970, the PROBATE COURT, upon motion of QUEMADA and after an ex parte hearing, appointed h special administrator of the entire estate of PASTOR, SR., whether or not covered or affected by the holographic will. assumed office as such on December 4, 1970 after filing a bond of P 5,000.00.

On December 7, 1970, QUEMADA as special administrator, instituted against PASTOR, JR. and his wife an action reconveyance of alleged properties of the estate, which included the properties subject of the legacy and which were in names of the spouses PASTOR, JR. and his wife, Maria Elena Achaval de Pastor, who claimed to be the owners thereo their own rights, and not by inheritance. The action, docketed as Civil Case No. 274-R, was filed with the Court of F Instance of Cebu, Branch IX.

On February 2, 1971, PASTOR, JR. and his sister SOFIA filed their opposition to the petition for probate and the or appointing QUEMADA as special administrator.

On December 5, 1972, the PROBATE COURT issued an order allowing the will to probate. Appealed to the Cour Appeals in CA-G.R. No. 52961- R, the order was affirmed in a decision dated May 9, 1977. On petition for review, Supreme Court in G.R. No. L-46645 dismissed the petition in a minute resolution dated November 1, 1977 and reman the same to the PROBATE COURT after denying reconsideration on January 11, 1978.

For two years after remand of the case to the PROBATE COURT, QUEMADA filed pleading after pleading asking payment of his legacy and seizure of the properties subject of said legacy. PASTOR, JR. and SOFIA opposed th pleadings on the ground of pendency of the reconveyance suit with another branch of the Cebu Court of First Instance. pleadings remained unacted upon by the PROBATE COURT.

On March 5, 1980, the PROBATE COURT set the hearing on the intrinsic validity of the will for March 25, 1980, but up objection of PASTOR, JR. and SOFIA on the e ground of pendency of the reconveyance suit, no hearing was held

March 25. Instead, the PROBATE COURT required the parties to submit their respective position papers as to how m inheritance QUEMADA was entitled to receive under the wig. Pursuant thereto, PASTOR. JR. and SOFIA submitted th Memorandum of authorities dated April 10, which in effect showed that determination of how much QUEMADA sho receive was still premature. QUEMADA submitted his Position paper dated April 20, 1980. ATLAS, upon order of Court, submitted a sworn statement of royalties paid to the Pastor Group of tsn from June 1966 (when Pastor, Sr. died February 1980. The statement revealed that of the mining claims being operated by ATLAS, 60% pertained to the Pas Group distributed as follows: 1. A. Pastor, Jr. ...................................40.5% 2. E. Pelaez, Sr. ...................................15.0% 3. B. Quemada .......................................4.5%

On August 20, 1980, while the reconveyance suit was still being litigated in Branch IX of the Court of First Instance Cebu, the PROBATE COURT issued the now assailed Order of Execution and Garnishment, resolving the question ownership of the royalties payable by ATLAS and ruling in effect that the legacy to QUEMADA was not inofficio [There was absolutely no statement or claim in the Order that the Probate Order of December 5, 1972 had previou resolved the issue of ownership of the mining rights of royalties thereon, nor the intrinsic validity of the holographic wil

The order of August 20, 1980 found that as per the holographic will and a written acknowledgment of PASTOR, JR. da June 17, 1962, of the above 60% interest in the mining claims belonging to the Pastor Group, 42% belonged to PASTO SR. and only 33% belonged to PASTOR, JR. The remaining 25% belonged to E. Pelaez, also of the Pastor Group. T PROBATE COURT thus directed ATLAS to remit directly to QUEMADA the 42% royalties due decedent's estate, which QUEMADA was authorized to retain 75% for himself as legatee and to deposit 25% with a reputable bank institution for payment of the estate taxes and other obligations of the estate. The 33% share of PASTOR, JR. and/or assignees was ordered garnished to answer for the accumulated legacy of QUEMADA from the time of PASTOR, SR death, which amounted to over two million pesos.

The order being "immediately executory", QUEMADA succeeded in obtaining a Writ of Execution and Garnishment September 4, 1980, and in serving the same on ATLAS on the same day. Notified of the Order on September 6, 1980, oppositors sought reconsideration thereof on the same date primarily on the ground that the PROBATE COURT grav abused its discretion when it resolved the question of ownership of the royalties and ordered the payment of QUEMAD legacy after prematurely passing upon the intrinsic validity of the will. In the meantime, the PROBATE COURT orde suspension of payment of all royalties due PASTOR, JR. and/or his assignees until after resolution of oppositors' mot for reconsideration.

Before the Motion for Reconsideration could be resolved, however, PASTOR, JR., this time joined by his wife M ELENA ACHAVAL DE PASTOR, filed with the Court of Appeals a Petition for certiorari and Prohibition with a prayer writ of preliminary injunction (CA-G.R. No. SP- 11373-R). They assailed the Order dated August 20, 1980 and the wri execution and garnishment issued pursuant thereto. The petition was denied on November 18, 1980 on the grounds (1) t its filing was premature because the Motion for Reconsideration of the questioned Order was still pending determinat by the PROBATE COURT; and (2) that although "the rule that a motion for reconsideration is prerequisite for an action certiorari is never an absolute rule," the Order assailed is "legally valid. "

On December 9, 1980, PASTOR, JR. and his wife moved for reconsideration of the Court of Appeal's decision November 18, 1980, calling the attention of the appellate court to another order of the Probate Court dated November 1980 (i.e., while their petition for certiorari was pending decision in the appellate court), by which the oppositors' mot for reconsideration of the Probate Court's Order of August 20, 1980 was denied. [The November 11 Order declared that questions of intrinsic validity of the will and of ownership over the mining claims (not the royalties alone) had been fina adjudicated by the final and executory Order of December 5, 1972, as affirmed by the Court of Appeals and the Supre Court, thereby rendering moot and academic the suit for reconveyance then pending in the Court of First Instance of Ce

Branch IX. It clarified that only the 33% share of PASTOR, JR. in the royalties (less than 7.5% share which he assigned to QUEMADA before PASTOR, SR. died) was to be garnished and that as regards PASTOR, SR.'s 42% sha what was ordered was just the transfer of its possession to the custody of the PROBATE COURT through the spe administrator. Further, the Order granted QUEMADA 6% interest on his unpaid legacy from August 1980 until fully pa Nonetheless, the Court of Appeals denied reconsideration.

Hence, this Petition for Review by certiorari with prayer for a writ of pre y injunction, assailing the decision of the Co of Appeals dated November 18, 1980 as well as the orders of the Probate Court dated August 20, 1980, November 11, 19 and December 17, 1980, Med by petitioners on March 26, 1981, followed by a Supplemental Petition with Urgent Pra for Restraining Order.

In April 1981, the Court (First Division) issued a writ of preliminary injunction, the lifting of which was denied in Resolution of the same Division dated October 18, 1982, although the bond of petitioners was increased from P50,000 to P100,000.00.

Between December 21, 1981 and October 12, 1982, private respondent filed seven successive motions for early resoluti Five of these motions expressly prayed for the resolution of the question as to whether or not the petition should be gi due course.

On October 18, 1982, the Court (First Division) adopted a resolution stating that "the petition in fact and in effect w given due course when this case was heard on the merits on September 7, (should be October 21, 1981) and conc memoranda in amplification of their oral arguments on the merits of the case were filed by the parties pursuant to resolution of October 21, 1981 . . . " and denied in a resolution dated December 13, 1982, private respondent's "Omni motion to set aside resolution dated October 18, 1982 and to submit the matter of due course to the present membership the Division; and to reassign the case to another ponente."

Upon Motion for Reconsideration of the October 18, 1982 and December 13, 1982 Resolutions, the Court en banc resol to CONFIRM the questioned resolutions insofar as hey resolved that the petition in fact and in effect had been given course. II. ISSUES:

Assailed by the petitioners in these proceedings is the validity of the Order of execution and garnishment dated August 1980 as well as the Orders subsequently issued allegedly to implement the Probate Order of December 5, 1972, to wit: Order of November 11, 1980 declaring that the Probate Order of 1972 indeed resolved the issues of ownership intrinsic validity of the will, and reiterating the Order of Execution dated August 20, 1980; and the Order of December 1980 reducing to P2,251,516.74 the amount payable to QUEMADA representing the royalties he should have recei from the death of PASTOR, SR. in 1966 up to February 1980.

The Probate Order itself, insofar as it merely allowed the holographic will in probate, is not questioned. But petition denounce the Probate Court for having acted beyond its jurisdiction or with grave abuse of discretion when it issued assailed Orders. Their argument runs this way: Before the provisions of the holographic win can be implemented, questions of ownership of the mining properties and the intrinsic validity of the holographic will must first be resol with finality. Now, contrary to the position taken by the Probate Court in 1980 i.e., almost eight years after the prob of the will in 1972 the Probate Order did not resolve the two said issues. Therefore, the Probate Order could not h resolved and actually did not decide QUEMADA's entitlement to the legacy. This being so, the Orders for the paymen the legacy in alleged implementation of the Probate Order of 1972 are unwarranted for lack of basis.

Closely related to the foregoing is the issue raised by QUEMADA The Probate Order of 1972 having become final executory, how can its implementation (payment of legacy) be restrained? Of course, the question assumes t QUEMADA's entitlement to the legacy was finally adjudged in the Probate Order.

On the merits, therefore, the basic issue is whether the Probate Order of December 5, 1972 resolved with finality questions of ownership and intrinsic validity. A negative finding will necessarily render moot and academic the other iss raised by the parties, such as the jurisdiction of the Probate Court to conclusively resolve title to property, and constitutionality and repercussions of a ruling that the mining properties in dispute, although in the name of PASTOR, and his wife, really belonged to the decedent despite the latter's constitutional disqualification as an alien.

On the procedural aspect, placed in issue is the propriety of certiorari as a means to assail the validity of the order execution and the implementing writ. III. DISCUSSION: 1. Issue of Ownership

(a) In a special proceeding for the probate of a will, the issue by and large is restricted to the extrinsic validity of the w i.e., whether the testator, being of sound mind, freely executed the will in accordance with the formalities prescribed law. (Rules of Court, Rule 75, Section 1; Rule 76, Section 9.) As a rule, the question of ownership is an extraneous ma which the Probate Court cannot resolve with finality. Thus, for the purpose of determining whether a certain prope should or should not be included in the inventory of estate properties, the Probate Court may pass upon the title thereto, such determination is provisional, not conclusive, and is subject to the final decision in a separate action to resolve title Moran, Comments on the Rules of Court (1980 ed.), p. 458; Valero Vda. de Rodriguez vs. Court of Appeals, 91 SC 540.]

(b) The rule is that execution of a judgment must conform to that decreed in the dispositive part of the decisi (Philippine-American Insurance Co. vs. Honorable Flores, 97 SCRA 811.) However, in case of ambiguity or uncertai the body of the decision may be scanned for guidance in construing the judgment. (Heirs of Presto vs. Galang, 78 SC 534; Fabular vs. Court of Appeals, 119 SCRA 329; Robles vs. Timario. 107 Phil. 809.)

The Order sought to be executed by the assailed Order of execution is the Probate Order of December 5, 1972 wh allegedly resolved the question of ownership of the disputed mining properties. The said Probate Order enumerated issues before the Probate Court, thus:

Unmistakably, there are three aspects in these proceedings: (1) the probate of the holographic will (2) intestate estate aspect; and (3) the administration proceedings for the purported estate of the deceden the Philippines. In its broad and total perspective the whole proceedings are being impugned by the oppositors jurisdictional grounds, i.e., that the fact of the decedent's residence and existence of properties in Philippines have not been established.

Specifically placed in issue with respect to the probate proceedings are: (a) whether or not the holograp will (Exhibit "J") has lost its efficacy as the last will and testament upon the death of Alvaro Pastor, Sr. June 5, 1966, in Cebu City, Philippines; (b) Whether or not the said will has been executed with all formalities required by law; and (c) Did the late presentation of the holographic will affect the validity the same?

Issues In the Administration Proceedings are as follows: (1) Was the ex- parte appointment of the petitio as special administrator valid and proper? (2) Is there any indispensable necessity for the estate of decedent to be placed under administration? (3) Whether or not petition is qualified to be a spe administrator of the estate; and (4) Whether or not the properties listed in the inventory (submitted by special administrator but not approved by the Probate Court) are to be excluded.

Then came what purports to be the dispositive portion:

Upon the foregoing premises, this Court rules on and resolves some of the problems and issues presen in these proceedings, as follows:

(a) The Court has acquired jurisdiction over the probate proceedings as it hereby allows and approves so-called holographic will of testator Alvaro Pastor, Sr., executed on July 31, 1961 with respect to extrinsic validity, the same having been duly authenticated pursuant to the requisites or solemni prescribed by law. Let, therefore, a certificate of its allowance be prepared by the Branch Clerk of Court to be signed by this Presiding Judge, and attested by the seal of the Court, and thereafter attached the will, and the will and certificate filed and recorded by the clerk. Let attested copies of the will and the certificate of allowance thereof be sent to Atlas Consolidated Mining & Development Corporati Goodrich Bldg., Cebu City, and the Register of Deeds of Cebu or of Toledo City, as the case may be, recording.

(b) There was a delay in the granting of the letters testamentary or of administration for as a matter of f no regular executor and/or administrator has been appointed up to this time and - the appointment o special administrator was, and still is, justified under the circumstances to take possession and charge the estate of the deceased in the Philippines (particularly in Cebu) until the problems causing the delay decided and the regular executor and/or administrator appointed.

(c) There is a necessity and propriety of a special administrator and later on an executor and administrator in these proceedings, in spite of this Court's declaration that the oppositors are the for heirs and the petitioner is merely vested with the character of a voluntary heir to the extent of the bou given to him (under) the will insofar as the same will not prejudice the legitimes of the oppositor for following reasons:

1. To submit a complete inventory of the estate of the decedent-testa Alvaro Pastor, Sr. 2. To administer and to continue to put to prolific utilization of properties of the decedent;

3. To keep and maintain the houses and other structures and belonging the estate, since the forced heirs are residing in Spain, and prepare th for delivery to the heirs in good order after partition and when directed the Court, but only after the payment of estate and inheritance taxes;

(d) Subject to the outcome of the suit for reconveyance of ownership and possession of real and perso properties in Civil Case No. 274-T before Branch IX of the Court of First Instance of Cebu, the intest estate administration aspect must proceed, unless, however, it is duly proven by the oppositors that de of the decedent have already been paid, that there had been an extrajudicial partition or summary o between the forced heirs, that the legacy to be given and delivered to the petitioner does not exceed free portion of the estate of the testator, that the respective shares of the forced heirs have been fa apportioned, distributed and delivered to the two forced heirs of Alvaro Pastor, Sr., after deducting property willed to the petitioner, and the estate and inheritance taxes have already been paid to Government thru the Bureau of Internal Revenue.

The suitability and propriety of allowing petitioner to remain as special administrator or administrator the other properties of the estate of the decedent, which properties are not directly or indirectly affected the provisions of the holographic will (such as bank deposits, land in Mactan etc.), will be resolved another order as separate incident, considering that this order should have been properly issued solely a

resolution on the issue of whether or not to allow and approve the aforestated will. (Emphasis supplied.)

Nowhere in the dispositive portion is there a declaration of ownership of specific properties. On the contrary, it is mani therein that ownership was not resolved. For it confined itself to the question of extrinsic validity of the win, and the n for and propriety of appointing a special administrator. Thus it allowed and approved the holographic win "with respec its extrinsic validity, the same having been duly authenticated pursuant to the requisites or solemnities prescribed by la It declared that the intestate estate administration aspect must proceed " subject to the outcome of the suit for reconveya of ownership and possession of real and personal properties in Civil Case 274-T before Branch IX of the CFI of Ceb [Parenthetically, although the statement refers only to the "intestate" aspect, it defies understanding how ownership by estate of some properties could be deemed finally resolved for purposes of testate administration, but not so for intest purposes. Can the estate be the owner of a property for testate but not for intestate purposes?] Then again, the Prob Order (while indeed it does not direct the implementation of the legacy) conditionally stated that the intest administration aspect must proceed "unless . . . it is proven . . . that the legacy to be given and delivered to the petitio does not exceed the free portion of the estate of the testator," which clearly implies that the issue of impairment of legiti (an aspect of intrinsic validity) was in fact not resolved. Finally, the Probate Order did not rule on the propriety of allow QUEMADA to remain as special administrator of estate properties not covered by the holographic will, "considering t this (Probate) Order should have been properly issued solely as a resolution on the issue of whether or not to allow approve the aforestated will. "

(c) That the Probate Order did not resolve the question of ownership of the properties listed in the estate inventory w appropriate, considering that the issue of ownership was the very subject of controversy in the reconveyance suit that w still pending in Branch IX of the Court of First Instance of Cebu. (d) What, therefore, the Court of Appeals and, in effect, the Supreme Court affirmed en toto when they reviewed Probable Order were only the matters properly adjudged in the said Order.

(e) In an attempt to justify the issuance of the Order of execution dated August 20, 1980, the Probate Court in its Orde November 11, 1980 explained that the basis for its conclusion that the question of ownership had been formally resol by the Probate Order of 1972 are the findings in the latter Order that (1) during the lifetime of the decedent, he w receiving royalties from ATLAS; (2) he had resided in the Philippines since pre-war days and was engaged in the m prospecting business since 1937 particularly in the City of Toledo; and (3) PASTOR, JR. was only acting as dummy for father because the latter was a Spaniard. Based on the premises laid, the conclusion is obviously far-fetched.

(f) It was, therefore, error for the assailed implementing Orders to conclude that the Probate Order adjudged with fina the question of ownership of the mining properties and royalties, and that, premised on this conclusion, the disposit portion of the said Probate Order directed the special administrator to pay the legacy in dispute. 2. Issue of Intrinsic Validity of the Holographic Will -

(a) When PASTOR, SR. died in 1966, he was survived by his wife, aside from his two legitimate children and illegitimate son. There is therefore a need to liquidate the conjugal partnership and set apart the share of PASTOR, SR wife in the conjugal partnership preparatory to the administration and liquidation of the estate of PASTOR, SR. which w include, among others, the determination of the extent of the statutory usufructuary right of his wife until her death When the disputed Probate order was issued on December 5, 1972, there had been no liquidation of the commun properties of PASTOR, SR. and his wife.

(b) So, also, as of the same date, there had been no prior definitive determination of the assets of the estate of PASTO SR. There was an inventory of his properties presumably prepared by the special administrator, but it does not appear t it was ever the subject of a hearing or that it was judicially approved. The reconveyance or recovery of properties allege

owned but not in the name of PASTOR, SR. was still being litigated in another court.

(c) There was no appropriate determination, much less payment, of the debts of the decedent and his estate. Indeed, it w only in the Probate Order of December 5, 1972 where the Probate Court ordered that-

... a notice be issued and published pursuant to the provisions of Rule 86 of the Rules of Court, requir all persons having money claims against the decedent to file them in the office of the Branch Clerk of t Court." (d) Nor had the estate tax been determined and paid, or at least provided for, as of December 5, 1972.

(e) The net assets of the estate not having been determined, the legitime of the forced heirs in concrete figures could not ascertained.

(f) All the foregoing deficiencies considered, it was not possible to determine whether the legacy of QUEMADA - a fi share in a specific property rather than an aliquot part of the entire net estate of the deceased - would produce impairment of the legitime of the compulsory heirs.

(g) Finally, there actually was no determination of the intrinsic validity of the will in other respects. It was obviously this reason that as late as March 5, 1980 - more than 7 years after the Probate Order was issued the Probate Co scheduled on March 25, 1980 a hearing on the intrinsic validity of the will. 3. Propriety of certiorari

Private respondent challenges the propriety of certiorari as a means to assail the validity of the disputed Order execution. He contends that the error, if any, is one of judgment, not jurisdiction, and properly correctible only by app not certiorari.

Under the circumstances of the case at bar, the challenge must be rejected. Grave abuse of discretion amounting to lack jurisdiction is much too evident in the actuations of the probate court to be overlooked or condoned.

(a) Without a final, authoritative adjudication of the issue as to what properties compose the estate of PASTOR, SR. in face of conflicting claims made by heirs and a non-heir (MA. ELENA ACHAVAL DE PASTOR) involving properties in the name of the decedent, and in the absence of a resolution on the intrinsic validity of the will here in question, th was no basis for the Probate Court to hold in its Probate Order of 1972, which it did not, that private respondent is entit to the payment of the questioned legacy. Therefore, the Order of Execution of August 20, 1980 and the subsequ implementing orders for the payment of QUEMADA's legacy, in alleged implementation of the dispositive part of Probate Order of December 5, 1972, must fall for lack of basis.

(b) The ordered payment of legacy would be violative of the rule requiring prior liquidation of the estate of the deceas i.e., the determination of the assets of the estate and payment of all debts and expenses, before apportionment distribution of the residue among the heirs and legatees. (Bernardo vs. Court of Appeals, 7 SCRA 367.)

(c) Neither has the estate tax been paid on the estate of PASTOR, SR. Payment therefore of the legacy to QUEMA would collide with the provision of the National Internal Revenue Code requiring payment of estate tax before delivery any beneficiary of his distributive share of the estate (Section 107 [c]) (d) The assailed order of execution was unauthorized, having been issued purportedly under Rule 88, Section 6 of Rules of Court which reads:

Sec. 6. Court to fix contributive shares where devisees, legatees, or heirs have been in possession.

Where devisees, legatees, or heirs have entered into possession of portions of the estate before the de and expenses have been settled and paid and have become liable to contribute for the payment of s debts and expenses, the court having jurisdiction of the estate may, by order for that purpose, after heari settle the amount of their several liabilities, and order how much and in what manner each person sh contribute, and may issue execution as circumstances require.

The above provision clearly authorizes execution to enforce payment of debts of estate. A legacy is not a debt of the est indeed, legatees are among those against whom execution is authorized to be issued.

... there is merit in the petitioners' contention that the probate court generally cannot issue a writ execution. It is not supposed to issue a writ of execution because its orders usually refer to the adjudicat of claims against the estate which the executor or administrator may satisfy without the necessity resorting to a writ of execution. The probate court, as such, does not render any judgment enforceable execution.

The circumstances that the Rules of Court expressly specifies that the probate court may issue execut (a) to satisfy (debts of the estate out of) the contributive shares of devisees, legatees and heirs in possess of the decedent's assets (Sec. 6. Rule 88), (b) to enforce payment of the expenses of partition (Sec. 3, R 90), and (c) to satisfy the costs when a person is cited for examination in probate proceedings (Sec. Rule 142) may mean, under the rule of inclusion unius est exclusion alterius, that those are the o instances when it can issue a writ of execution. (Vda. de Valera vs. Ofilada, 59 SCRA 96, 108.)

(d) It is within a court's competence to order the execution of a final judgment; but to order the execution of a final or (which is not even meant to be executed) by reading into it terms that are not there and in utter disregard of existing ru and law, is manifest grave abuse of discretion tantamount to lack of jurisdiction. Consequently, the rule that certiorari m not be invoked to defeat the right of a prevailing party to the execution of a valid and final judgment, is inapplicable. when an order of execution is issued with grave abuse of discretion or is at variance with the judgment sought to enforced (PVTA vs. Honorable Gonzales, 92 SCRA 172), certiorari will lie to abate the order of execution.

(e) Aside from the propriety of resorting to certiorari to assail an order of execution which varies the terms of the judgm sought to be executed or does not find support in the dispositive part of the latter, there are circumstances in the inst case which justify the remedy applied for.

Petitioner MA. ELENA ACHAVAL DE PASTOR, wife of PASTOR, JR., is the holder in her own right of three min claims which are one of the objects of conflicting claims of ownership. She is not an heir of PASTOR, SR. and was no party to the probate proceedings. Therefore, she could not appeal from the Order of execution issued by the Probate Co On the other hand, after the issuance of the execution order, the urgency of the relief she and her co-petitioner husb seek in the petition for certiorari states against requiring her to go through the cumbersome procedure of asking for leave intervene in the probate proceedings to enable her, if leave is granted, to appeal from the challenged order of execut which has ordered the immediate transfer and/or garnishment of the royalties derived from mineral properties of which is the duly registered owner and/or grantee together with her husband. She could not have intervened before the issuance the assailed orders because she had no valid ground to intervene. The matter of ownership over the properties subject of execution was then still being litigated in another court in a reconveyance suit filed by the special administrator of estate of PASTOR, SR.

Likewise, at the time petitioner PASTOR, JR. Med the petition for certiorari with the Court of Appeals, appeal was available to him since his motion for reconsideration of the execution order was still pending resolution by the Prob Court. But in the face of actual garnishment of their major source of income, petitioners could no longer wait for resolution of their motion for reconsideration. They needed prompt relief from the injurious effects of the execution or Under the circumstances, recourse to certiorari was the feasible remedy.

WHEREFORE, the decision of the Court of Appeals in CA G.R. No. SP-11373-R is reversed. The Order of execut

issued by the probate Court dated August 20, 1980, as well as all the Orders issued subsequent thereto in alle implementation of the Probate Order dated December 5, 1972, particularly the Orders dated November 11, 1980 December 17, 1980, are hereby set aside; and this case is remanded to the appropriate Regional Trial Court for pro proceedings, subject to the judgment to be rendered in Civil Case No. 274-R. SO ORDERED. Teehankee (Chairman), Melencio-Herrera Vasquez and Relova JJ., concur. Gutierrez, J., took no part.

G.R. No. 170632

July 10, 2007

EUGENIA D. POLIDO, Petitioner, vs. HON. COURT OF APPEALS and MARIANO P. GASAT, Respondents. DECISION CARPIO MORALES, J.:

After the death of her husband Jacinto Polido (Polido), Eugenia Duque Polido, petitioner, tried to withdraw joint savings deposit they maintained at the Philippine National Bank, Camiling, Tarlac Branch, but fai because one Mariano Gasat (Gasat), herein respondent who claimed to be the couples adopted child, objec thereto. Petitioner thus filed on January 21, 2004 a complaint before the Regional Trial Court of Tarlac, with Motion the Issuance of a Writ of Preliminary Injunction, against Gasat. In her complaint, petitioner prayed for the following reliefs:

1. An Order granting the issuance of [a] writ of preliminary injunction enjoining and restraining defendant and all persons acting under him from preventing the officers or employee[s] of the Philipp National Bank, Camiling, Tarlac Branch from releasing in favor of the plaintiff the money deposited w the said bank upon posting of a bond by the plaintiff in an amount to be fixed by the Court;

2. After trial, to declare the defendant not the adopted child of the plaintiff and her husband Jaci Polido;

3. Directing the defendant to pay plaintiff attorneys fees and litigation expenses in the amount P100,000.00 and moral damages in the amount of P50,000.00.

Other reliefs which are just and equitable under the premises are likewise prayed for.1 (Underscoring supplied

In his Answer with Compulsory Counterclaim,2 Gasat alleged that petitioner and her late husband had adop

him as their child, annexing as proof thereof a photocopy of an Order dated September 23, 1970 of Municipal Trial Court (MTC) of Camiling in Civil Case No. 2497, "In the Matter of the Adoption of the Mino Lea D. Tomas and Mariano Gasat, JACINTO POLIDO AND EUGENIA POLIDO, Petitioners,"3 and a copy o Certification4 from the MTC Clerk of Court that a "[c]opy of the decree of adoption dated September 23, 19 was furnished to the Office of the Local Civil Registrar" and said decree had become final and executory; a that petitioner cannot withdraw any amount from the bank account because she should follow legal procedu governing settlement of the estate of a deceased, unless a competent court issues an order allowing her withdraw from said account.5 In his Opposition to the Issuance of Preliminary Injunction and Motion to Set the Affirmative Defenses Preliminary Hearing,6 Gasat argued that: xxxx

3. Even assuming but without admitting that the defendants adoption paper is ineffective, still he can be deprived of his inheritance from the Estate of Jacinto Polido because said deceased and the plain are childless and all the properties subject of inheritance are exclusive properties of the late Jaci Polido, the same being inherited from his late father, NARCISO POLIDO[,] who died in Hawaii, USA

4. The Estate of Narciso Polido was inherited by his two children, namely, said JACINTO POLIDO a PETRA P. GASAT, also deceased and the latter was survived by her husband and SEVEN (7) children which the defendant (MARIANO D. POLIDO) is one . . .;

5. Thus, by virtue of the provision of Art. 1001 of the Civil Code of the Philippines, which reads follows:

"ART. 1001. Should brothers and sisters or their children survive with the widow or widower, the latter shall entitled to one-half of the inheritance and the brothers and sisters or their children to the other half."

[T]he heirs of the late Jacinto Polido are his WIFE (plaintiff) [who is entitled to] one-half (1/2) and Petra Gasats SEVEN (7) CHILDREN which would include the defendant[, who are entitled to] one-half (1/2).

HENCE, THERE IS NO WAY WHATSOEVER TO JUSTIFY THE ISSUANCE OF PRELIMINARY INJUNCTION AGAINST THE DEFENDANT EVEN IF HIS ADOPTION WOULD BE NULLIFIED OR OF NO EFFECT WHATSOEVER.7 (Emphasis in the original; underscoring supplied)

Gasat subsequently filed an Omnibus Motion8 withdrawing 1) the allegation he had made in various pleadin that he is an adopted son of the couple and 2) his Motion to Set the Affirmative Defenses for Prelimin Hearing. And he moved to convert the case to an action for partition, at his instance, of the estate of grandfather Narciso Polido,9 father of petitioners husband and Gasats mother, and to require petitioner to income tax returns and pay the estate tax due.

To Gasats prayer to convert the action to one for partition and to require her to file Estate Tax Retur petitioner filed an Opposition.10 And she moved for Judgment on the Pleadings.11

To justify her motion for judgment on the pleadings, petitioner argued that Gasat, in withdrawing his claim a allegation that he is an adopted child, "practically admitted [her] material allegations [in the Complaint] that [

is not an adopted child."12 By Order13 dated December 7, 2004, the trial court denied Gasats motion to convert the case to an action partition and granted petitioners motion for judgment on the pleadings in this wise:

On November 30, 2004, the plaintiff filed a Motion for Judgment on the ground that by withdrawing all allegations that he is [an] adopted child of the plaintiff, defendant practically admitted all the material allegatio in the complaint and prayed that judgment be rendered as the complaint may warrant.

This Court resolves to grant the motion for judgment on the ground that the defense that he is an adopted ch of the plaintiff is withdrawn by the defendant himself. By withdrawing his defense, he is deemed to ha admitted the main allegation of the plaintiff that he is not an adopted child. On the motion of the defendant t the instant action be converted into a partition and that the plaintiff be ordered to file her real estate tax retu the same is denied for lack of merit.14 (Underscoring supplied) Accordingly, the trial court disposed as follows: WHEREFORE, judgment is hereby rendered: 1. Declaring the defendant not the adopted child of the plaintiff,

2. Ordering the Manager of the Philippine National Bank, Camiling Branch or any other branch to rele to plaintiff upon her request the money she deposited or her deceased husband Jacinto Polido;

3. Directing the defendant to pay the plaintiff moral damages in the amount of P25,000.00 and attorne fee[s] in the amount of P25,000.00. SO ORDERED.15 (Underscoring supplied)

Gasat filed a Notice of Appeal.16 On May 26, 2005, before the Court of Appeals, he filed an Ex-Parte Motion Admit Payment of Docket Fee,17 explaining that being jobless, it took some time for him to raise the docket f He added that he had to borrow at an exorbitant interest rate. Finally, he explained that when he went to the tr court to pay the docket fee, he was advised to pay the same at the Court of Appeals, the records having alrea been forwarded to it.

The Court of Appeals denied his motion and dismissed his appeal.18 On Motion for Reconsideration, however the Court of Appeals, by Resolution dated July 19, 2005, admitted Gasats docket fee.19 Petitioner filed a Mot for Reconsideration, which the Court of Appeals denied in this wise: 20

It is settled that "delay in the payment of the docket fees confers a discretionary, and not mandatory, power dismiss the proposed appeal." While the payment of the prescribed docket fee is a jurisdictional requirement, non-payment at the time of filing does not automatically cause the dismissal of the case, as long as the fee is p within the applicable prescriptive or reglementary period, moreso, when the party involved demonstrate willingness to abide by the rules prescribing such payment. On this score is the case of Spouses Gregorio Go a Juan Tan Go v. Johnson Y. Tong, et. al., where the Supreme Court ruled that:

While the cause of action of the private respondent was supposed to prescribe in four (4) years, he was allow

to pay; and he in fact paid the docket fee in a years time. We do not see h ow this period can be deem unreasonable. Moreover, on his part there is no showing of any pattern or intent to defraud the government of required docket fee.

In the instant case, the period between the filing of the notice of appeal on February 28, 2005 and the payment docket fee on May 26, 2005 is deemed reasonable. Moreover, justice will be better served with the admission such belated payment.21 (Underscoring supplied)

Hence, the present Petition for Certiorari and Prohibition with Urgent Motion for Injunction and Tempor Restraining Order,22 petitioner faulting the Court of Appeals for committing grave abuse of discretion relaxing the rule on the payment of docket fees on the ground of substantial justice.23 The petition fails. Indeed, jurisprudence allows the relaxation of the Rule on non-payment of appellate docket fees.

Notwithstanding the mandatory nature of the requirement of payment of appellate docket fees, we also recogn that its strict application is qualified by the following: first, failure to pay those fees within the reglement period allows only discretionary, not automatic, dismissal; second, such power should be used by the court conjunction with its exercise of sound discretion in accordance with the tenets of justice and fair play, as well with a great deal of circumspection in consideration of all attendant circumstances.24

The relaxation by the appellate court of the rule on non-payment of the appellate docket fee appears justified a perusal of the records of the case shows persuasive and weighty reasons to give due course to the appeal.25

Instead of remanding the case to the appellate court, however, this Court, in the interest of speedy dispensat of justice,26 especially given that the main issue is a question of law, now passes on the merits of the appeal Gasat. Section 1 of Rule 34 of the Rules of Court provides:

SECTION 1. Judgment on the Pleadings. Where an answer fails to tender an issue, or otherwise admits material allegations of the adverse partys pleading, the court may, on motion of that party, direct judgment such pleading. However, in actions for declaration of nullity or annulment of marriage or for legal separati the material facts alleged in the complaint shall always be proved. (Emphasis and underscoring supplied) Passing on this rule, the Court declared:

x x x The answer would fail to tender an issue x x x if it does not comply with the requirements for a speci denial set out in Section 10 (or Section 8) of Rule 8; and it would admit the material allegations of the adve partys pleadings not only where it expressly confesses the truthfulness thereof but also if it omits to deal w them at all.

Now, if an answer does in fact specifically deny the material averments of the complaint in the manner indica by said Section 10 of Rule 8, and/or asserts affirmative defenses (allegations of new matter which, wh admitting the material allegations of the complaint expressly or impliedly, would nevertheless bar recovery the plaintiff) x x x, a judgment on the pleadings would naturally not be proper.27

In the case at bar, the trial court granted petitioners motion for judgment on the pleadings on petitione argument that in withdrawing Gasats allegation of her having adopted him, he "practically admitted her mate allegations [in her Complaint] that [he] is not an adopted child."

Gasats Answer with Compulsory Counterclaim raised other issues, however, which are independent of his cla of adoptive filiation and which would defeat petitioners main cause of action for the court to enjoin Ga "and all persons acting under him from preventing the officers or employees of the [PNB] from releasing" deposit to her.

11. . . Further, defendant has all the rights to prohibit the plaintiff from personally withdrawing [from] the s bank account because, it is mandated by law that after the death of the owner of the said account, any withdraw is prohibited except by order of the Court or upon presentation of an Extrajudicial Settlement executed by legal heirs and after compliance with all the requirements of the law. Likewise the bank is prohibited to all any withdrawal without submitting to it said requirements. xxxx 13. With respect to the allegations of said paragraph 14, to wit Unless an injunction be issued against the defendant restraining him from claiming in the bank account, plaintiff would suffer irreparable damage. The plaintiff is willing to post a bond in an amount to be fixed by Honorable Court.

this allegation is UNFOUNDED AND BASELESS and the court cannot use [it] as a ground for the issuance any restraining order. Even assuming that the court will issue an Order restraining defendant from claiming bank account, the plaintiff still cannot withdraw any amount thereof, because it is a part of the ESTATE Jacinto Polido, and as provided for by laws before the bank allows any withdrawal, the plaintiff has to foll certain procedures required by other laws governing estate settlement, that is, - (a) Payment of Estate Tax, if a (b) BIR Tax Clearance; (c) Present a duly published Extrajudicial Partition executed by the heirs adjudicat said amount to such heir, unless a competent Court issues an Order allowing the plaintiff to withdraw [from] s account. 28 (Underscoring supplied)

It bears noting that petitioner and her deceased husband Polido were childless; hence, Gasat, who is a son Polidos sister Petra P. Gasat, could inherit from Polido. Parenthetically, Section 97 of the National Internal Revenue Code states: xxxx

If a bank has knowledge of the death of a person, who maintained a bank deposit account alone, or jointly w another, it shall not allow any withdrawal from the said deposit account unless the Commissioner had certif that the taxes imposed thereon by this Title have been paid; Provided, however, That the administrator of estate or any one (1) of the heirs of the decedent may, upon authorization by the Commissioner, withdraw amount not exceeding Twenty thousand pesos (P20,000) without the said certification. For this purpose, withdrawal slips shall contain a statement to the effect that all of the joint depositors are still living at the time withdrawal by any one of the joint depositors and such statement shall be under oath by the said depositors.

There being no ground to merit petitioners Motion for Judgment on the Pleadings, the trial court erred

granting the same.lawphil.net

WHEREFORE, the assailed petition is DENIED. The Court of Appeals Resolution admitting responden payment of docket fee is upheld.

The Order of the Regional Trial Court of Camiling, Tarlac, Branch 68 dated December 7, 2004 grant petitioners Motion for Judgment on the Pleadings is REVERSED and SET ASIDE. Let the case be REMANDED to the trial court which is directed to continue with dispatch its proceedings and/or resolve the case in light of the foregoing discussions. Costs against petitioner. SO ORDERED. CONCHITA CARPIO MORALES Associate Justice WE CONCUR: (ON OFFICIAL LEAVE) LEONARDO A. QUISUMBING* Associate Justice Chairperson ANTONIO T. CARPIO** Associate Justice Acting Chairperson DANTE O. TINGA Associate Justice PRESBITERO J. VELASCO, JR. Associate Justice AT T E S TAT I O N

I attest that the conclusions in the above Decision had been reached in consultation before the case was assign to the writer of the opinion of the Courts Division. ANTONIO T. CARPIO Associate Justice Acting Chairperson C E R T I F I CAT I O N

Pursuant to Section 13, Article VIII of the Constitution and the Division Acting Chairpersons Attestation certify that the conclusions in the above decision had been reached in consultation before the case was assign to the writer of the opinion of the Courts Division. REYNATO S. PUNO

Chief Justice

G.R. No. 104171 February 24, 1999

COMMISSIONER OF INTERNAL REVENUE, petitio vs. B.F. GOODRICH PHILS., INC. (now SIME DARBY INTERNATIONAL TIRE CO., INC.) and THE COURT APPEALS, respondents.

PANGANIBAN, J.:

Notwithstanding the expiration of the five-year prescriptive period, may the Bureau of Internal Revenue (BIR) still asses taxpayer even after the latter has already paid the tax due, on the ground that the previous assessment was insufficien based on a "false" return? The Case

This is the main question raised before us in this Petition for Review on Certiorari assailing the Decision 1 dated Febru 14, 1992, promulgated by the Court of Appeals 2 in CA-GR SP No. 25100. The assailed Decision reversed the Cour Tax Appeals (CTA) 3 which upheld the BIR commissioner's assessments made beyond the five-year statute of limitation The Facts

The facts undisputed. 4 Private Respondent BF Goodrich Phils., Inc. (now Sime Darby International Tire Co, Inc.), was American-owned and controlled corporation previous to July 3, 1974. As a condition for approving the manufacture private respondent of tires and other rubber products, the Central Bank of the Philippines required that it should develo rubber plantation. In compliance with this requirement, private respondent purchased from the Philippine governmen 1961, under the Public Land Act and the Parity Amendment to the 1935 Constitution, certain parcels of land located Tumajubong, Basilan, and there developed a rubber plantation.

More than a decade later, on August 2, 1973, the justice secretary rendered an opinion stating that, upon the expiration the Parity Amendment on July 3, 1974, the ownership rights of Americans over public agricultural lands, including right to dispose or sell their real estate, would be lost. On the basis of this Opinion, private respondent sold to Silto Realty Philippines, Inc. on January 21, 1974, its Basilan landholding for P500,000 payable in installments. In accord w the terms of the sale, Siltown Realty Philippines, Inc. leased the said parcels of land to private respondent for a period 25 years, with an extension of another 25 years at the latter's option.

Based on the BIR's Letter of Authority No. 10115 dated April 14, 1975, the books and accounts of private respondent w examined for the purpose of determining its tax liability for taxable year 1974. The examination resulted in the April 1975 assessment of private respondent for deficiency income tax in the amount of P6,005.35, which it duly paid.

Subsequently, the BIR also issued Letters of Authority Nos. 074420 RR and 074421 RR and Memorandum Autho Reference No. 749157 for the purpose of examining Siltown's business, income and tax liabilities. On the basis of examination, the BIR commissioner issued against private respondent on October 10, 1980, an assessment for deficien in donor's tax in the amount of P1,020,850, in relation to the previously mentioned sale of its Basilan landholdings

Siltown. Apparently, the BIR deemed the consideration for the sale insufficient, and the difference between the fair mar value and the actual purchase price a taxable donation.

In a letter dated November 24, 1980, private respondent contested this assessment. On April 9, 1981, it received anot assessment dated March 16, 1981, which increased to P 1,092,949 the amount demanded for the alleged deficiency don tax, surcharge, interest and compromise penalty. Private respondent appealed the correctness and the legality of these last two assessments to the CTA. After trial in course, the CTA rendered its Decision dated March 29, 1991, the dispositive portion of which reads as follows:

WHEREFORE, the decision of the Commissioner of Internal Revenue assessing petitioner deficiency tax is MODIFIED land petitioner is ordered to pay the amount of P1,311,179.01 plus 10% surcharge 20% annual interest from March 16, 1981 until fully paid provided that the maximum amount that may collected as interest on delinquency shall in no case exceed an amount corresponding to a period of th years pursuant to Section 130(b)(l) and (c) of the 1977 Tax Code, as amended by P.D. No. 1705, wh took effect on August 1, 1980. SO ORDERED. 5 Undaunted, private respondent elevated the matter to the Court of Appeals, which reversed the CTA, as follows:

What is involved here is not a first assessment; nor is it one within the 5-year period stated in Section 3 above. Since what is involved in this case is a multiple assessment beyond the five-year period, assessment must be based on the grounds provided in Section 337, and not on Section 15 of the 1974 T Code. Section 337 utilizes the very specific terms "fraud, irregularity, and mistake". "Falsity does appear to be included in this enumeration. Falsity suffices for an assessment, which is a first assessm made within the five-year period. When it is a subsequent assessment made beyond the five-year peri then, it may be validly justified only by "fraud, irregularity and mistake" on the part of taxpayer. 6 Hence, this Petition for Review under Rule 45 of the Rules of Court. 7 The Issues Before us, petitioner raises the following issues: I

Whether or not petitioner's right to assess herein deficiency donor's tax has indeed prescribed as ruled public respondent Court of Appeals II

Whether or not the herein deficiency donor's tax assessment for 1974 is valid and in accordance with law Prescription is the crucial issue in the resolution of this case. The Court's Ruling

The petition has no merit. Main Issue: Prescription

The petitioner contends that the Court of Appeals erred in reversing the CTA on the issue of prescription, because its rul was based on factual findings that should have been left undisturbed on appeal, in the absence of any showing that it been tainted with gross error or grave abuse 8 discretion. The Court is not persuaded.

True, the factual findings of the CTA are generally not disturbed on appeal when supported by substantial evidence and the absence of gross error or grave abuse of discretion. However, the CTA's application of the law to the facts of t controversy is an altogether different matter, for it involves a legal question. There is a question of law when the issu the application of the law to a given set of facts. On the other hand, a question of fact involves the truth or falsehood alleged facts. 9 In the present case, the Court of Appeals ruled not on the truth or falsity of the facts found by the CTA, on the latter's application of the law on prescription. Sec. 331 of the National Internal Revenue Code provides:

Sec. 331. Period of limitation upon assessment and collection. Except as provided in the succeed section, internal-revenue taxes shall be assessed within five years after the return was filed, and proceeding in court without assessment for the collection of such taxes shall be begun after expiration such period. For the purposes of this section, a return filed before the last day prescribed by law for filing thereof shall be considered as filed on such last day: Provided, That this limitation shall not apply cases already investigated prior to the approval of this Code.

Applying this provision of law to the facts at hand, it is clear that the October 16, 1980 and the March 1981 assessme were issued by the BIR beyond the five-year statute of limitations. The Court has thoroughly studied the records of case and found no basis to disregard the five-year period of prescription. As succinctly pronounced by the Court Appeals:

The subsequent assessment made by the respondent Commissioner on October 40, 1980, modified by t of March 16, 1981, violates the law. Involved in this petition is the income of the petitioner for the y 1974, the returns for which were required to be filed on or before April 15 of the succeeding year. T returns for the year 1974 were duly filed by the petitioner, and assessment of taxes due for such year including that on the transfer of properties on June 21, 1974 was made on April 13, 1975 acknowledged by Letter of Confirmation No. 101155 terminating the examination on this subject. T subsequent assessment of October 10, 1980 modified, by that of March 16, 1981, was made beyond period expressly set in Section 331 of the National Internal Revenue Code . . . . 10 Petitioner relies on the CTA ruling, the salient portion of which reads:

Falsity is what we have here, and for that matter, we hasten to add that the second assessment (March 1981) of the Commissioner was well-advised having been made in contemplation of his power un Section 15 of the 1974 Code (now Section 16, of NIRC) to assess the proper tax on the best evide obtainable "when there is reason to believe that a report of a taxpayer is false, incomplete or erroneo More, when there is falsity with intent to evade tax as in this case, the ordinary period of limitation up assessment and collection does not apply so that contrary to the averment of petitioner, the right to ass respondent has not prescribed.

What is the considered falsity? The transfer through sale of the parcels of land in Tumajubong, Lamit Basilan in favor of Siltown Realty for the sum of P500,000.00 only whereas said lands had been sworn

under Presidential Decree No. 76 (Dec. 6, 1972) as having a value of P2,683,467 (P2,475,467 + P207,7 (see Declaration of Real Property form, p. 28, and p. 15, no. 5, BIR Record). 11

For the purpose of safeguarding taxpayers from any unreasonable examination, investigation or assessment, our tax provides a statute of limitations in the collection of taxes. Thus, the law on prescription, being a remedial measure, sho be liberally construed in order to afford such protection. 12 As a corollary, the exceptions to the law on prescription sho perforce be strictly construed.

Sec. 15 of the NIRC, on the other hand, provides that "[w]hen a report required by law as a basis for the assessment of national internal revenue tax shall not be forthcoming within the time fixed by law or regulation, or when there is reason believe that any such report is false, incomplete, or erroneous, the Commissioner of Internal Revenue shall assess proper tax on the best evidence obtainable." Clearly, Section 15 does not provide an exception to the statute of limitati on the issuance of an assessment, by allowing the initial assessment to be made on the basis of the best evidence availab Having made its initial assessment in the manner prescribed, the commissioner could not have been authorized to iss beyond the five-year prescriptive period, the second and the third assessments under consideration before us.

Nor is petitioner's claim of falsity sufficient to take the questioned assessments out of the ambit of the statute limitations. The relevant part of then Section 332 of the NIRC, which enumerates the exceptions to the period prescription, provides:

Sec. 332. Exceptions as to period of limitation of assessment and collection of taxes . (a) In the case o false or fraudulent return with intent to evade a tax or of a failure to file a return, the tax may be assess or a proceeding in court for the collection of such tax may be begun without assessment, at any time wit ten years after the discovery of the falsity, fraud, or omission: . . . .

Petitioner insists that private respondent committed "falsity" when it sold the property for a price lesser than its decla fair market value. This fact alone did not constitute a false return which contains wrong information due to mista carelessness or ignorance. 13 It is possible that real property may be sold for less than adequate consideration for a bo fide business purpose; in such event, the sale remains an "arm's length" transaction. In the present case, the priv respondent was compelled to sell the property even at a price less than its market value, because it would have lost ownership rights over it upon the expiration of the parity amendment. In other words, private respondent was attempting minimize its losses. At the same time, it was able to lease the property for 25 years, renewable for another 25. This can regarded as another consideration on the price.

Furthermore, the fact that private respondent sold its real property for a price less than its declared fair market value not by itself justify a finding of false return. Indeed, private respondent declared the sale in its 1974 return submitted to BIR. 14 Within the five-year prescriptive period, the BIR could have issued the questioned assessment, because declared fair market value of said property was of public record. This it did not do, however, during all those five ye Moreover, the BIR failed to prove that respondent's 1974 return had been filed fraudulently. Equally significant was failure to prove respondent's intent to evade the payment of the correct amount of tax.

Ineludibly, the BIR failed to show that private respondent's 1974 return was filed fraudulently with intent to evade payment of the correct amount of tax. 15 Moreover, even though a donor's tax, which is defined as "a tax on the privil of transmitting one's property or property rights to another or others without adequate and full valuable consideration," is different from capital gains tax, a tax on the gain from the sale of the taxpayer's property forming part of capital ass 17 the tax return filed by private respondent to report its income for the year 1974 was sufficient compliance with the le requirement to file a return. In other words, the fact that the sale transaction may have partly resulted in a donation d not change the fact that private respondent already reported its income for 1974 by filing an income tax return.

Since the BIR failed to demonstrate clearly that private respondent had filed a fraudulent return with the intent to ev

tax, or that it had failed to file a return at all, the period for assessments has obviously prescribed. Such instances negligence or oversight on the part of the BIR cannot prejudice taxpayers, considering that the prescriptive period w precisely intended to give them peace of mind.

Based on the foregoing, a discussion of the validity and legality of the assailed assessments has become moot a unnecessary. WHEREFORE, the Petition for Review is DENIED and the assailed Decision of the Court of Appeals is AFFIRMED. costs. SO ORDERED. Romero, Purisima and Gonzaga-Reyes, JJ., concur. Vitug, J., on official leave.