G.R. No.

120721

February 23, 2005

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

CRUZ, petitioners,
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF APPEALS, respondents.
AZCUNA, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Civil
Procedure, assailing the decision of the Court of Appeals in CA G.R. SP No.
27134, entitled "Comissioner of Internal Revenue v. Manuel G. Abello, Jose C.
Concepcion, Teodoro D. Regala, Avelino V. Cruz and Court of Tax Appeals,"
which reversed and set aside the decision of the Court of Tax Appeals (CTA),
ordering the Commissioner of Internal Revenue (Commissioner) to withdraw his
letters dated April 21, 1988 and August 4, 1988 assessing donors taxes and to
desist from collecting donors taxes from petitioners.
During the 1987 national elections, petitioners, who are partners in the Angara,
Abello, Concepcion, Regala and Cruz (ACCRA) law firm, contributed P882,661.31
each to the campaign funds of Senator Edgardo Angara, then running for the
Senate. In letters dated April 21, 1988, the Bureau of Internal Revenue (BIR)
assessed each of the petitioners P263,032.66 for their contributions. On August
2, 1988, petitioners questioned the assessment through a letter to the BIR.
They claimed that political or electoral contributions are not considered gifts
under the National Internal Revenue Code (NIRC), and that, therefore, they are
not liable for donors tax. The claim for exemption was denied by the
Commissioner.11vvphi1.nt
On September 12, 1988, petitioners filed a petition for review with the CTA,
which was decided on October 7, 1991 in favor of the petitioners. As
aforestated, the CTA ordered the Commissioner to desist from collecting donors
taxes from the petitioners.2
On appeal, the Court of Appeals reversed and set aside the CTA decision on
April 20, 1994.3 The appellate Court ordered the petitioners to pay donors tax
amounting to P263,032.66 each, reasoning as follows:

indirect, and whether the property is real or personal, tangible or intangible, is

subject to donors or gift tax.
A gift is generally defined as a voluntary transfer of property by one to another
without any consideration or compensation therefor (28 C.J. 620; Santos vs.
Robledo, 28 Phil. 250).
In the instant case, the contributions are voluntary transfers of property in the
form of money from private respondents to Sen. Angara, without considerations
therefor. Hence, they squarely fall under the definition of donation or gift.
As correctly pointed out by the Solicitor General:
The fact that the contributions were given to be used as campaign funds of Sen.
Angara does not affect the character of the fund transfers as donation or gift.
There was thereby no retention of control over the disposition of the
contributions. There was simply an indication of the purpose for which they
were to be used. For as long as the contributions were used for the purpose for
which they were intended, Sen. Angara had complete and absolute power to
dispose of the contributions. He was fully entitled to the economic benefits of
the contributions.
Section 91 of the Tax Code is very clear. A donors or gift tax is imposed on the
transfer of property by gift.1awphi1.nt
The Bureau of Internal Revenue issued Ruling No. 344 on July 20, 1988, which
reads:
Political Contributions. For internal revenue purposes, political contributions in
the Philippines are considered taxable gift rather than taxable income. This is
so, because a political contribution is indubitably not intended by the giver or
contributor as a return of value or made because of any intent to repay another
what is his due, but bestowed only because of motives of philanthropy or
charity. His purpose is to give and to bolster the morals, the winning chance of
the candidate and/or his party, and not to employ or buy. On the other hand,
the recipient-donee does not regard himself as exchanging his services or his
product for the money contributed. But more importantly he receives financial
advantages gratuitously.

The National Internal Revenue Code, as amended, provides:

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

When the U.S. gift tax law was adopted in the Philippines (before May 7, 1974),
the taxability of political contributions was, admittedly, an unsettled issue;
hence, it cannot be presumed that the Philippine Congress then had intended to
consider or treat political contributions as non-taxable gifts when it adopted the
said gift tax law. Moreover, well-settled is the rule that the Philippines need not
necessarily adopt the present rule or construction in the United States on the
matter. Generally, statutes of different states relating to the same class of
persons or things or having the same purposes are not considered to be in pari
materia because it cannot be justifiably presumed that the legislature had them
in mind when enacting the provision being construed. (5206, Sutherland,

Statutory Construction, p. 546.) Accordingly, in the absence of an express

exempting provision of law, political contributions in the Philippines are subject
to the donors gift tax. (cited in National Internal Revenue Code Annotated by
Hector S. de Leon, 1991 ed., p. 290).

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

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

First, Fifth and Sixth Issues

Petitioners filed a motion for reconsideration, which the Court of Appeals denied
in its resolution of June 16, 1995.5
Petitioners thereupon filed the instant petition on July 26, 1995. Raised are the
following issues:
1. DID THE HONORABLE COURT OF APPEALS ERR WHEN IT FAILED TO CONSIDER
IN ITS DECISION THE PURPOSE BEHIND THE ENACTMENT OF OUR GIFT TAX
LAW?
2. DID THE HONORABLE COURT OF APPEALS ERR IN NOT CONSIDERING THE
INTENTION OF THE GIVERS IN DETERMINING WHETHER OR NOT THE
PETITIONERS POLITICAL CONTRIBUTIONS WERE GIFTS SUBJECT TO DONORS
TAX?
3. DID THE HONORABLE COURT OF APPEALS ERR WHEN IT FAILED TO CONSIDER
THE DEFINITION OF AN "ELECTORAL CONTRIBUTION" UNDER THE OMNIBUS
ELECTION CODE IN DETERMINING WHETHER OR NOT POLITICAL
CONTRIBUTIONS ARE TAXABLE?
4. DID THE HONORABLE COURT OF APPEALS ERR IN NOT CONSIDERING THE
ADMINISTRATIVE PRACTICE OF CLOSE TO HALF A CENTURY OF NOT SUBJECTING
POLITICAL CONTRIBUTIONS TO DONORS TAX?
5. DID THE HONORABLE COURT OF APPEALS ERR IN NOT CONSIDERING THE
AMERICAN JURISPRUDENCE RELIED UPON BY THE COURT OF TAX APPEALS AND
BY THE PETITIONERS TO THE EFFECT THAT POLITICAL CONTRIBUTIONS ARE NOT
TAXABLE GIFTS?
6. DID THE HONORABLE COURT OF APPEALS ERR IN NOT APPLYING AMERICAN
JURISPRUDENCE ON THE GROUND THAT THIS WAS NOT KNOWN AT THE TIME
THE PHILIPPINES GIFT TAX LAW WAS ADOPTED IN 1939?
7. DID THE HONORABLE COURT OF APPEALS ERR IN RESOLVING THE CASE
MAINLY ON THE BASIS OF A RULING ISSUED BY THE RESPONDENT ONLY AFTER
THE ASSESSMENTS HAD ALREADY BEEN MADE?

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

(A) There shall be levied, assessed, collected and paid upon the transfer by any
person, resident or nonresident, of the property by gift, a tax, computed as
provided in Section 92
(B) The tax shall apply whether the transfer is in trust or otherwise, whether the
gift is direct or indirect, and whether the property is real or personal, tangible or
intangible.
The NIRC does not define transfer of property by gift. However, Article 18 of the
Civil Code, states:
In matters which are governed by the Code of Commerce and special laws, their
deficiency shall be supplied by the provisions of this Code.
Thus, reference may be made to the definition of a donation in the Civil Code.
Article 725 of said Code defines donation as:
. . . an act of liberality whereby a person disposes gratuitously of a thing or
right in favor of another, who accepts it.
Donation has the following elements: (a) the reduction of the patrimony of the
donor; (b) the increase in the patrimony of the donee; and, (c) the intent to do
an act of liberality or animus donandi.7
The present case falls squarely within the definition of a donation. Petitioners,
the late Manuel G. Abello8 , Jose C. Concepcion, Teodoro D. Regala and Avelino
V. Cruz, each gave P882,661.31 to the campaign funds of Senator Edgardo
Angara, without any material consideration. All three elements of a donation
are present. The patrimony of the four petitioners were reduced by P882,661.31
each. Senator Edgardo Angaras patrimony correspondingly increased by
P3,530,645.249 . There was intent to do an act of liberality or animus donandi
was present since each of the petitioners gave their contributions without any
consideration.
Taken together with the Civil Code definition of donation, Section 91 of the NIRC
is clear and unambiguous, thereby leaving no room for construction. In Rizal
Commercial Banking Corporation v. Intermediate Appellate Court10 the Court
enunciated:

It bears stressing that the first and fundamental duty of the Court is to apply
the law. When the law is clear and free from any doubt or ambiguity, there is no
room for construction or interpretation. As has been our consistent ruling,
where the law speaks in clear and categorical language, there is no occasion for
interpretation; there is only room for application (Cebu Portland Cement Co. v.
Municipality of Naga, 24 SCRA 708 [1968])
Where the law is clear and unambiguous, it must be taken to mean exactly
what it says and the court has no choice but to see to it that its mandate is
obeyed (Chartered Bank Employees Association v. Ople, 138 SCRA 273 [1985];
Luzon Surety Co., Inc. v. De Garcia, 30 SCRA 111 [1969]; Quijano v.
Development Bank of the Philippines, 35 SCRA 270 [1970]).
Only when the law is ambiguous or of doubtful meaning may the court interpret
or construe its true intent.l^vvphi1.net Ambiguity is a condition of admitting
two or more meanings, of being understood in more than one way, or of
referring to two or more things at the same time. A statute is ambiguous if it is
admissible of two or more possible meanings, in which case, the Court is called
upon to exercise one of its judicial functions, which is to interpret the law
according to its true intent.
Second Issue
Since animus donandi or the intention to do an act of liberality is an essential
element of a donation, petitioners argue that it is important to look into the
intention of the giver to determine if a political contribution is a gift. Petitioners
argument is not tenable. First of all, donative intent is a creature of the mind. It
cannot be perceived except by the material and tangible acts which manifest
its presence. This being the case, donative intent is presumed present when
one gives a part of ones patrimony to another without consideration. Second,
donative intent is not negated when the person donating has other intentions,
motives or purposes which do not contradict donative intent. This Court is not
convinced that since the purpose of the contribution was to help elect a
candidate, there was no donative intent. Petitioners contribution of money
without any material consideration evinces animus donandi. The fact that their
purpose for donating was to aid in the election of the donee does not negate
the presence of donative intent.

without compensation by individuals volunteering a portion or all of their time

in behalf of a candidate or political party. It shall also include the use of facilities
voluntarily donated by other persons, the money value of which can be
assessed based on the rates prevailing in the area.
Since the purpose of an electoral contribution is to influence the results of the
election, petitioners again claim that donative intent is not present. Petitioners
attempt to place the barrier of mutual exclusivity between donative intent and
the purpose of political contributions. This Court reiterates that donative intent
is not negated by the presence of other intentions, motives or purposes which
do not contradict donative intent.
Petitioners would distinguish a gift from a political donation by saying that the
consideration for a gift is the liberality of the donor, while the consideration for
a political contribution is the desire of the giver to influence the result of an
election by supporting candidates who, in the perception of the giver, would
influence the shaping of government policies that would promote the general
welfare and economic well-being of the electorate, including the giver himself.
Petitioners attempt is strained. The fact that petitioners will somehow in the
future benefit from the election of the candidate to whom they contribute, in no
way amounts to a valuable material consideration so as to remove political
contributions from the purview of a donation. Senator Angara was under no
obligation to benefit the petitioners. The proper performance of his duties as a
legislator is his obligation as an elected public servant of the Filipino people and
not a consideration for the political contributions he received. In fact, as a
public servant, he may even be called to enact laws that are contrary to the
interests of his benefactors, for the benefit of the greater good.
In fine, the purpose for which the sums of money were given, which was to fund
the campaign of Senator Angara in his bid for a senatorial seat, cannot be
considered as a material consideration so as to negate a donation.
Fourth Issue
Petitioners raise the fact that since 1939 when the first Tax Code was enacted,
up to 1988 the BIR never attempted to subject political contributions to donors
tax. They argue that:

Third Issue
Petitioners maintain that the definition of an "electoral contribution" under the
Omnibus Election Code is essential to appreciate how a political contribution
differs from a taxable gift.11 Section 94(a) of the said Code defines electoral
contribution as follows:
The term "contribution" includes a gift, donation, subscription, loan, advance or
deposit of money or anything of value, or a contract, promise or agreement to
contribute, whether or not legally enforceable, made for the purpose of
influencing the results of the elections but shall not include services rendered

. . . It is a familiar principle of law that prolonged practice by the government

agency charged with the execution of a statute, acquiesced in and relied upon
by all concerned over an appreciable period of time, is an authoritative
interpretation thereof, entitled to great weight and the highest respect. . . .12
This Court holds that the BIR is not precluded from making a new interpretation
of the law, especially when the old interpretation was flawed. It is a wellentrenched rule that

. . . erroneous application and enforcement of the law by public officers do not

block subsequent correct application of the statute (PLDT v. Collector of Internal
Revenue, 90 Phil. 676), and that the Government is never estopped by mistake
or error on the part of its agents (Pineda v. Court of First Instance of Tayabas, 52
Phil. 803, 807; Benguet Consolidated Mining Co. v. Pineda, 98 Phil. 711, 724).13
Seventh Issue
Petitioners question the fact that the Court of Appeals decision is based on a
BIR ruling, namely BIR Ruling No. 88-344, which was issued after the petitioners
were assessed for donors tax. This Court does not need to delve into this issue.
It is immaterial whether or not the Court of Appeals based its decision on the
BIR ruling because it is not pivotal in deciding this case. As discussed above,
Section 91 (now Section 98) of the NIRC as supplemented by the definition of a
donation found in Article 725 of the Civil Code, is clear and unambiguous, and
needs no further elucidation.
Eighth Issue
Petitioners next contend that tax laws are construed liberally in favor of the
taxpayer and strictly against the government. This rule of construction,
however, does not benefit petitioners because, as stated, there is here no room
for construction since the law is clear and unambiguous.
Finally, this Court takes note of the fact that subsequent to the donations
involved in this case, Congress approved Republic Act No. 7166 on November
25, 1991, providing in Section 13 thereof that political/electoral contributions,
duly reported to the Commission on Elections, are not subject to the payment
of any gift tax. This all the more shows that the political contributions herein
made are subject to the payment of gift taxes, since the same were made prior
to the exempting legislation, and Republic Act No. 7166 provides no retroactive
effect on this point.
WHEREFORE, the petition is DENIED and the assailed Decision and Resolution of
the Court of Appeals are AFFIRMED.
No costs.
SO ORDERED.

G.R. No. L-5949

November 19, 1955

TANG HO, WILLIAM LEE, HENRI LEE, SOFIA LEE TEEHANKEE, THOMAS LEE,
ANTHONY LEE, JULIA LEE KAW, CHARLES LEE, VALERIANA LEE YU, VICTOR LEE,
SILVINO LEE, MARY LEE, JOHN LEE, and PETER LEE, for themselves and as heirs
of LI SENG GIAP, deceased, petitioners,
vs.
THE BOARD OF TAX APPEALS and THE COLLECTOR OF INTERNAL REVENUE,
respondents.
Ozaeta, Roxas, Lichauco and Picazo for petitioners.
Office of the Solicitor General Juan R. Liwag and Solicitor Jose P. Alejandro for
respondents.
REYES, J.B.L., J.:
This is a petition for the review of the petition of the defunct Board of Tax
Appeals holding petitioner Li Seng Giap, et al. liable for gift taxes in accordance
with the assessments made by the respondent Collector of Internal Revenue.
Petitioners Li Seng Giap (who died during the pendency of this appeal) and his
wife Tang Ho and their thirteen children appear to be the stockholder of two
close family corporations named Li Seng Giap & Sons, Inc. and Li Seng Giap &
Co. On or about May, 1951, examiners of the Bureau of Internal Revenue, then
detailed to the Allas Committee of the Congress of the Philippines, made an
examination of the books of the two corporation aforementioned and found that
each of Li Seng Giap's 13 children had a total investment therein of
approximately P63,195.00, in shares issued to them by their father Li Seng Giap
(who was the manager and controlling stockholder of the two corporations) in
the years 1940, 1942, 1948, 1949, and 1950 in the following amounts:
[omitted]
The Collector of Internal Revenue regarded these transfers as undeclared gifts
made in the respective years, and assessed against Li Seng Giap and his
children donor's and donee's taxes in the total amount of P76,995.31, including
penalties, surcharges, interests, and compromise fee due to the delayed
payment of the taxes. The petitioners paid the sum of P53,434.50, representing
the amount of the basic taxes, and put up a surety bond to guarantee payment
of the balance demanded. And on June 25, 1951, they requested the Collector
of Internal Revenue for a revision of their tax assessments, and submitted
donor's and donee's gift tax returns showing that each child received by way of
gift inter vivos, every year from 1939 to 1950 (except in 1947 and 1948) P4,000
in cash; that each of the eight children who married during the period aforesaid,
were given an additional P20,000 as dowry or gift propter nuptias; that the
unmarried children received roughly equivalent amount in 1949, also by way of
gifts inter vivos, so that the total donations made to each and every child, as of
1950, stood at P63,190. Appellants admit that these gifts were not reported;
but contend that as the cash donated came from the conjugal funds, they
constituted individual donations by each of the spouses Li Seng Giap and Tang

Ho of one half of the amount received by the donees in each instance, up to a

total of P31,505 to each of the thirteen children from each parent. They further
alleged that the children's stockholding in the two family corporations were
purchased by them with savings from the aforesaid cash donations received
from their parents.
Claiming the benefit of gift tax exemptions (under section 110 and 112 of the
Internal Revenue Code) at the rate of P2000 a year for each donation, plus
P10,000 for each gift propter nuptias made by either parent, and appellants'
aggregate tax liability, according to their returns, would only be P4,599.94 for
the year 1949, and P228,28 for the year 1950, or a total of P4,838.22,
computed as follows: [omitted]
The Collector refused to revise his original assessments; and the petitioners
appealed to the then Board of Tax Appeals (created by Executive Order 401-A,
in 1951) insisting that the entries in the books of the corporation do not prove
donations; that the true amount and date of the donation were those appearing
in their tax returns; and that the donees merely bought stocks in the
corporation out of savings made from the money received from their parents.
The Board of Tax Appeals upheld the decision of the respondent Collector of
Internal Revenue; hence, this petition for review.
The questions in this appeal may be summarized as follows:
(1)
Whether or not the dates and amounts of the donations taxable against
petitioners were as found by the Collector of Internal Revenue from the books of
the corporations Li Seng Giap & Sons, Inc. and Li Seng Giap & Co., or as set
forth in petitioners' gift tax returns;
(2)
Whether or not the donations made by petitioner Li Seng Giap to his
children from the conjugal property should be taxed against the husband alone,
or against husband and wife; and
(3)
Whether or not petitioners should be allowed the tax deduction claimed
by them.
On the first question, which is of fact the appellants take the preliminary stand
that because of Collector failed to specifically deny the allegation of their
petition in the Tax Board he must be deemed to have admitted the annual and
propter nuptias donations alleged by them, and that he is estopped from
denying their existence. As the proceedings before the Tax Board were
administrative in character, not governed by the Rules of Court (see Sec. 10,
Executive Order 401-A),and as the Collector actually submitted his own version
of the transactions, we do not consider that the Collector's failure to make
specific denials should be given the same binding effect as in strict court
pleadings.
Going now to the merits of the issue. The appealed findings of the Board of Tax
Appeals and of the Collector of Internal Revenue (that the stock transfers from

Li Seng Giap to his children were donations) appear supported by the following
circumstances:
(1)
That the transferor Li Seng Giap (now deceased) had in fact conveyed
shares to stock to his 13 children on the dates and in the amounts shown in the
table on page 2 of this decision.
(2)
That none of the transferees appeared to possess adequate
independent means to buy the shares, so much so that they claim now to have
purchased the shares with the cash donations made to them from time to time.
(3)
That the total of the alleged cash donations to each child is practically
identical to the value of the shares supposedly purchased by each donee.
(4)
That there is no evidence other than the belated sworn gift tax returns
of the spouses Li Seng Giap and Ang Tang Ho, and their children, appellants
herein, to support their contention that the shares were acquired by purchase.
No contracts of sale or other documents were presented, nor any witnesses
introduced; not even the claimants themselves have testified.
(5)
The claim that the shares were acquired by the children by purchase
was first advanced only after the assessment of gift taxes and penalties due
thereon (in the sum of P76,995.31) had been made, and after the appellants
had paid P53,434.50 on account, and had filed a bond to guarantee the
balance.
(6)
That for the parent to donate cash to enable the donee to buy from him
shares of equivalent value is, for all intents and purposes, a donation of such
shares to the purchaser donee.
We cannot say, under the circumstances, that there is no sufficient evidence on
record to support the findings of the Tax Board that the stock transfers above
indicated were made by way of donation, as would entitle us to disregard or
reverse the Board's finding.
The filing of the gift tax returns only after assessments and part payment of the
taxes demanded by the Collector, and the lack of corroboration of the alleged
donations in cash, amply justify the Tax Board's distrust of the veracity of the
appellants' belated tax returns "on or before the first of March following the
close of the calendar year" when the gifts were made (Sec. 115, par. [c]; and
besides the return a written notice to the Collector of each donation of P10,000
or more, must be given within thirty days after the donation, Sec. 114). These
yearly returns and notices are evidently designed to enable the Collector to
verify promptly their truth and correctness, while the gifts are still recent and
proof of the circumstances surrounding the making thereof is still fresh and
accessible. On their own admission, appellants failed to file for ten successive
years, the corresponding returns for the alleged yearly gifts of P4,000 to each
child, and likewise failed to give the notices for the P20,000 marriage gifts to
each married child. Hence, they are now scarcely in a position to complain if

their contentions are not accepted as truthful without satisfactory

corroboration. Any other view would leave the collection of taxes at the mercy
of explanations concocted ex post facto by evading taxpayers, drafted to suit
any facts disclosed upon investigation, and safe from contradiction because the
passing years have erased all trace of the truth.
The second and third issues in this appeal revolve around appellants' thesis
that inasmuch as the property donated was community property (gananciales),
and such property is jointly owned by their parents, the total amount of the
gifts made in each year should be divided between the father and the mother,
as separate donors, and should be taxed separately to each one of them.
In assessing the worth of this contention, it must be ever borne in mind that
appellants have not only failed to prove that the donations were actually made
by both spouses, Li Seng Giap and Tang Ho, but that precisely the contrary
appears from their own evidence. In the original claim for tax refund, filed with
the Collector of Internal Revenue, under date of June 25, 1951 (copied in pages
6 and 7 of the appellants' petition for review addressed to the Board of Tax
Appeals), the father, Li Seng Giap, describes himself as "the undersigned
donor" (par. 1) and speaks of "cash donations made by the undersigned" (par.
3), without in any way mentioning his wife as a co-participant in the donation.
The issue is thus reduced to the following: Is a donation of community property
by the father alone equivalent in law to a donation of one-half of its value by
the father and one-half by the mother? Appellants submit that all such
donations of community property are to be regarded, for tax purposes, as
donations by both spouses, for which two separate exemptions may be claimed
in each instance, one for each spouse.
This presentation should be viewed in the light of the provisions of the Spanish
Civil Code of 1889, which was the governing law in the years herein involved,
1939 to 1950. the determinative rule is that of Arts. 1409 and 1415, reading as
follows:
Art. 1409.
The conjugal partnership shall also be chargeable with anything
which may have been given or promised by the husband to the children born of
the marriage solely in order to obtain employment for them or give them a
profession, or by both spouses by common consent, should they not have
stipulated that such expenditures should be borne in whole or in part by the
separate property of one of them.
ART. 1415, p. 1. The husband may dispone of the property of the conjugal
partnership for the purposes mentioned in Art. 1409.
In effect, these Articles clearly refute the appellants' theory that because the
property donated is community property, the donations should be viewed as
made by both spouses. First, because the law clearly differentiates the
donations of such property "by the husband" from the "donations by both
spouses by common consent" ("por el marido . . . o por ambos conyuges de
comun acuerdo," in the Spanish text).

Next, the wording of Arts. 1409 and 1415 indicates that the lawful donations by
the husband to the common children are valid and are chargeable to the
community property, irrespective of whether the wife agrees or objects thereof.
Obviously, should the wife object to the donation, she can not be regarded as a
donor at all.
Even more: Suppose that the husband should make a donation of some
community property to a concubine or paramour. Undeniably, the wife cannot
be regarded as joining in any such donation. Yet under the old Civil Code, the
donation would stand, with the only limitation that the wife should not be
prejudiced in the division of the profits after the conjugal partnership affairs are
liquidated. So that if the value of the donation should be found to fit within the
limits of the husband's ultimate share in the conjugal partnership profits, the
donation by the husband would remain unassailable, over and against the nonparticipation of the wife therein. This Court has so ruled in Baello vs. Villanueva
(54 Phil. 213, 214):
According to article 1413 of the Civil Code, any transfer or agreement upon
conjugal property made by the husband in contravention of its provisions, shall
not prejudice his wife or her heirs. As the conjugal property belongs equally to
husband and wife, the donation of this property made by the husband
prejudices the wife in so far as it includes a part or the whole of the wife's half,
and is to that extent invalid. Hence article 1419, in providing for the liquidation
of the conjugal partnership, directs that all illegal donations made by the
husband be charged against his estates and deducted from his capital. But it is
only then, when the conjugal partnership is in the process of liquidation, that it
can be discovered whether or not an illegal donation made by the husband
prejudices the wife. And inasmuch as these gifts are only to be held invalid in so
far as they prejudice the wife, their nullity cannot be decided until after the
liquidation of the conjugal partnership and it is found that they encroach upon
the wife's portion.
Appellants herein are therefore in error when they contend that it is enough
that the property donated should belong to the conjugal partnership in order
that the donation be considered and taxed as a donation of both husband and
wife, even if the husband should appear as the sole donor. There is no blinking
the fact that, under the old Civil Code, to be a donation by both spouses,
taxable to both, the wife must expressly join the husband in making the gift;
her participation therein cannot be implied.
It is true, as appellants stress, that in Gibbs vs. Government of the Philippines,
59 Phil., 293, this Court ruled that "the wife, upon acquisition of any conjugal
property, becomes immediately vested with an interest and title equal to that
of the husband"; but this Court was careful to immediately add, "subject to the
power of management and disposition which the law vests on the husband." As
has been shown, this power of disposition may, within the legal limits, override
the objections of the wife and render the donation of the husband fully effective
without need of the wife's joining therein. (Civil Code of 1889, Arts 1409, 1415.)

It becomes unnecessary to discuss the nature of a conjugal partnership, there

being specific rules on donations of property belonging to it. The consequence
of the husband's legal power to donate community property is that, where
made by the husband alone, the donation is taxable as his own exclusive act.
Hence, only one exemption or deduction can be claimed for every such gift, and
not two, as claimed by appellants herein. In thus holding, the Board of Tax
Appeals committed no error.
Premises considered, we are of the opinion and so declare:
(a)
That the finding of the defunct Board of Tax Appeals to the effect that
shares transferred from Li Seng Giap to his children were conveyed to them by
way of donation inter vivos is supported by adequate evidence, and therefore
cannot be reviewed by this Court (Comm. of Internal Revenue. vs. Court Holding
Co., L. Ed. 981; Comm. of Internal Revenue vs. Scottish American Investment
Co., 89 L. Ed. 113; Comm. of Internal Revenue vs. Tower, 90 L. Ed. 670;
Helvering vs. Tax Penn. Oil Co., 81 L. Ed. 755).
(b)
That under the old Civil Code, a donation by the husband alone does
not become in law a donation by both spouses merely because it involves
property of the conjugal partnership;
(c)
That such a donation of property belonging to the conjugal partnership,
made during its existence, by the husband alone in favor of the common
children, is taxable to him exclusively as sole donor.
Wherefore, the decision appealed from is affirmed with costs to the appellants.
So ordered.

G.R. No. L-19865

July 31, 1965
MARIA CARLA PIROVANO, etc., et al., petitioners-appellants, vs. THE
COMMISSIONER OF INTERNAL REVENUE, respondent-appellee.
REYES, J.B.L., J.:
This case is a sequel to the case of Pirovano vs. De la Rama Steamship Co., 96 Phil.
335.
Briefly, the facts of the aforestated case may be stated as follows:
Enrico Pirovano was the father of the herein petitioners-appellants. Sometime in the
early part of 1941, De la Rama Steamship Co. insured the life of said Enrico
Pirovano, who was then its President and General Manager until the time of his
death, with various Philippine and American insurance companies for a total sum of
one million pesos, designating itself as the beneficiary of the policies, obtained by it.
Due to the Japanese occupation of the Philippines during the second World War, the
Company was unable to pay the premiums on the policies issued by its Philippine
insurers and these policies lapsed, while the policies issued by its American insurers
were kept effective and subsisting, the New York office of the Company having
continued paying its premiums from year to year.
During the Japanese occupation , or more particularly in the latter part of 1944, said
Enrico Pirovano died.
After the liberation of the Philippines from the Japanese forces, the Board of
Directors of De la Rama Steamship Co. adopted a resolution dated July 10, 1946
granting and setting aside, out of the proceeds expected to be collected on the
insurance policies taken on the life of said Enrico Pirovano, the sum of P400,000.00
for equal division among the four (4) minor children of the deceased, said sum of
money to be convertible into 4,000 shares of stock of the Company, at par, or 1,000
shares for each child. Shortly thereafter, the Company received the total sum of
P643,000.00 as proceeds of the said life insurance policies obtained from American
insurers.
Upon receipt of the last stated sum of money, the Board of Directors of the Company
modified, on January 6, 1947, the above-mentioned resolution by renouncing all its
rights title, and interest to the said amount of P643,000.00 in favor of the minor
children of the deceased, subject to the express condition that said amount should
be retained by the Company in the nature of a loan to it, drawing interest at the rate
of five per centum (5%) per annum, and payable to the Pirovano children after the
Company shall have first settled in full the balance of its present remaining bonded
indebtedness in the sum of approximately P5,000,000.00. This latter resolution was
carried out in a Memorandum Agreement on January 10, 1947 and June 17, 1947.,
respectively, executed by the Company and Mrs. Estefania R. Pirovano, the latter
acting in her capacity as guardian of her children (petitioners-appellants herein) find
pursuant to an express authority granted her by the court.
On June 24, 1947, the Board of Directors of the Company further modified the last
mentioned resolution providing therein that the Company shall pay the proceeds of
said life insurance policies to the heirs of the said Enrico Pirovano after the Company
shall have settled in full the balance of its present remaining bonded indebtedness,
but the annual interests accruing on the principal shall be paid to the heirs of the

said Enrico Pirovano, or their duly appointed representative, whenever the Company
is in a position to meet said obligation.
On February 26, 1948, Mrs. Estefania R. Pirovano, in behalf of her children, executed
a public document formally accepting the donation; and, on the same date, the
Company through its Board of Directors, took official notice of this formal
acceptance.
On September 13, 1949, the stockholders of the Company formally ratified the
various resolutions hereinabove mentioned with certain clarifying modifications that
the payment of the donation shall not be effected until such time as the Company
shall have first duly liquidated its present bonded indebtedness in the amount of
P3,260,855.77 with the National Development Company, or fully redeemed the
preferred shares of stock in the amount which shall be issued to the National
Development Company in lieu thereof; and that any and all taxes, legal fees, and
expenses in any way connected with the above transaction shall be chargeable and
deducted from the proceeds of the life insurance policies mentioned in the
resolutions of the Board of Directors.
On March 8, 1951, however, the majority stockholders of the Company voted to
revoke the resolution approving the donation in favor of the Pirovano children.
As a consequence of this revocation and refusal of the Company to pay the balance
of the donation amounting to P564,980.90 despite demands therefor, the herein
petitioners-appellants represented by their natural guardian, Mrs. Estefania R.
Pirovano, brought an action for the recovery of said amount, plus interest and
damages against De la Rama Steamship Co., in the Court of First Instance of Rizal,
which case ultimately culminated to an appeal to this Court. On December 29, 1954,
this court rendered its decision in the appealed case (96 Phil. 335) holding that the
donation was valid and remunerative in nature, the dispositive part of which reads:
Wherefore, the decision appealed from should be modified as follows: (a) that the
donation in favor of the children of the late Enrico Pirovano of the proceeds of the
insurance policies taken on his life is valid and binding on the defendant corporation;
(b) that said donation, which amounts to a total of P583,813.59, including interest,
as it appears in the books of the corporation as of August 31, 1951, plus interest
thereon at the rate of 5 per cent per annum from the filing of the complaint, should
be paid to the plaintiffs after the defendant corporation shall have fully redeemed
the preferred shares issued to the National Development Company under the terms
and conditions stared in the resolutions of the Board of Directors of January 6, 1947
and June 24, 1947, as amended by the resolution of the stockholders adopted on
September 13, 1949; and (c) defendant shall pay to plaintiffs an additional amount
equivalent to 10 per cent of said amount of P583,813.59 as damages by way of
attorney's fees, and to pay the costs of action. (Pirovano et al. vs. De la Rama
Steamship Co., 96 Phil. 367-368)
The above decision became final and executory. In compliance therewith, De la
Rama Steamship Co. made, on April 6, 1955, a partial payment on the amount of the
judgment and paid the balance thereof on May 12, 1955.
On March 6, 1955, respondent Commissioner of Internal Revenue assessed the
amount of P60,869.67 as donees' gift tax, inclusive of surcharges, interests and

other penalties, against each of the petitioners-appellants, or for the total sum of
P243,478.68; and, on April 23, 1955, a donor's gift tax in the total amount of
P34,371.76 was also assessed against De la Rama Steamship Co., which the latter
paid.
Petitioners-appellants herein contested respondent Commissioner's assessment and
imposition of the donees' gift taxes and donor's gift tax and also made a claim for
refund of the donor's gift tax so collected. Respondent Commissioner overruled
petitioners' claims; hence, the latter presented two (2) petitions for review against
respondent's rulings before the Court of Tax Appeals, said petitions having been
docketed as CTA Cases Nos. 347 and 375. CTA Case No. 347 relates to the petition
disputing the legality of the assessment of donees' gift taxes and donor's gift tax
while CTA Case No. 375 refers to the claim for refund of the donor's gift tax already
paid.
After the filing of respondent's usual answers to the petitions, the two cases, being
interrelated to each other, were tried jointly and terminated.
On January 31, 1962, the Court of Tax Appeals rendered its decision in the two
cases, the dispositive part of which reads:
In resume, we are of the opinion, that (1) the donor's gift tax in the sum of
P34,371.76 was erroneously assessed and collected, hence, petitioners are entitled
to the refund thereof; (2) the donees' gift taxes were correctly assessed; (3) the
imposition of the surcharge of 25% is not proper; (4) the surcharge of 5% is legally
due; and (5) the interest of 1% per month on the deficiency donees' gift taxes is due
from petitioners from March 8, 1955 until the taxes are paid.
IN LINE WITH THE FOREGOING OPINION, petitioners are hereby ordered to pay the
donees' gift taxes as assessed by respondent, plus 5% surcharge and interest at the
rate of 1% per month from March 8, 1955 to the date of payment of said donees' gift
taxes. Respondent is ordered to apply the sum of P34,371.76 which is refundable to
petitioners, against the amount due from petitioners. With costs against petitioners
in Case No. 347.
Petitioners-appellants herein filed a motion to reconsider the above decision, which
the lower court denied. Hence, this appeal before us.
In the instant appeal, petitioners-appellants herein question only that portion of the
decision of the lower court ordering the payment of donees' gift taxes as assessed
by respondent as well as the imposition of surcharge and interest on the amount of
donees' gift taxes.
In their brief and memorandum, they dispute the factual finding of the lower court
that De la Rama Steamship Company's renunciation of its rights, title, and interest
over the proceeds of said life insurance policies in favor of the Pirovano children
"was motivated solely and exclusively by its sense of gratitude, an act of pure
liberality, and not to pay additional compensation for services inadequately paid
for." Petitioners now contend that the lower court's finding was erroneous in
seemingly considering the disputed grant as a simple donation, since our previous
decision (96 Phil. 335) had already declared that the transfer to the Pirovano
children was a remuneratory donation. Petitioners further contend that the same

was made not for an insufficient or inadequate consideration but rather it a was
made for a full and adequate compensation for the valuable services rendered by
the late Enrico Pirovano to the De la Rama Steamship Co.; hence, the donation does
not constitute a taxable gift under the provisions of Section 108 of the National
Internal Revenue Code.
The argument for petitioners-appellants fails to take into account the fact that
neither in Spanish nor in Anglo-American law was it considered that past services,
rendered without relying on a coetaneous promise, express or implied, that such
services would be paid for in the future, constituted cause or consideration that
would make a conveyance of property anything else but a gift or donation. This
conclusion flows from the text of Article 619 of the Code of 1889 (identical with
Article 726 of the present Civil Code of the Philippines):
When a person gives to another a thing ... on account of the latter's merits or of the
services rendered by him to the donor, provided they do not constitute a
demandable debt, ..., there is also a donation. ... .
There is nothing on record to show that when the late Enrico Pirovano rendered
services as President and General Manager of the De la Rama Steamship Co. he was
not fully compensated for such services, or that, because they were "largely
responsible for the rapid and very successful development of the activities of the
company" (Res. of July 10, 1946). Pirovano expected or was promised further
compensation over and in addition to his regular emoluments as President and
General Manager. The fact that his services contributed in a large measure to the
success of the company did not give rise to a recoverable debt, and the
conveyances made by the company to his heirs remain a gift or donation. This is
emphasized by the directors' Resolution of January 6, 1947, that "out of gratitude"
the company decided to renounce in favor of Pirovano's heirs the proceeds of the life
insurance policies in question. The true consideration for the donation was,
therefore, the company's gratitude for his services, and not the services themselves.
That the tax court regarded the conveyance as a simple donation, instead of a
remuneratory one as it was declared to be in our previous decision, is but an
innocuous error; whether remuneratory or simple, the conveyance remained a gift,
taxable under Chapter 2, Title III of the Internal Revenue Code.
But then appellants contend, the entire property or right donated should not be
considered as a gift for taxation purposes; only that portion of the value of the
property or right transferred, if any, which is in excess of the value of the services
rendered should be considered as a taxable gift. They cite in support Section 111 of
the Tax Code which provides that
Where property is transferred for less, than an adequate and full consideration in
money or money's worth, then the amount by which the value of the property
exceeded the value of the consideration shall, for the purpose of the tax imposed by
this Chapter, be deemed a gift, ... .
The flaw in this argument lies in the fact that, as copied from American law, the
term consideration used in this section refers to the technical "consideration"
defined by the American Law Institute (Restatement of Contracts) as "anything that
is bargained for by the promisor and given by the promisee in exchange for the

promise" (Also, Corbin on Contracts, Vol. I, p. 359). But, as we have seen, Pirovano's
successful activities as officer of the De la Rama Steamship Co. cannot be deemed
such consideration for the gift to his heirs, since the services were rendered long
before the Company ceded the value of the life policies to said heirs; cession and
services were not the result of one bargain or of a mutual exchange of promises.
And the Anglo-American law treats a subsequent promise to pay for past services
(like one to pay for improvements already made without prior request from the
promisor) to be a nudum pactum (Roscorla vs. Thomas, 3 Q.B. 234; Peters vs. Poro,
25 ALR 615; Carson vs. Clark, 25 Am. Dec. 79; Boston vs. Dodge, 12 Am. Dec. 206),
i.e., one that is unenforceable in view of the common law rule that consideration
must consist in a legal benefit to the promisee or some legal detriment to the
promisor.
What is more, the actual consideration for the cession of the policies, as previously
shown, was the Company's gratitude to Pirovano; so that under section 111 of the
Code there is no consideration the value of which can be deducted from that of the
property transferred as a gift. Like "love and affection," gratitude has no economic
value and is not "consideration" in the sense that the word is used in this section of
the Tax Code.
As stated by Chief Justice Griffith of the Supreme Court of Mississippi in his wellknown book, "Outlines of the Law" (p. 204)
Love and affection are not considerations of value they are not estimable in terms
of value. Nor are sentiments of gratitude for gratuitous part favors or kindnesses;
nor are obligations which are merely moral. It has been well said that if a moral
obligation were alone sufficient it would remove the necessity for any consideration
at all, since the fact of making a promise impose, the moral obligation to perform it."
It is of course perfectly possible that a donation or gift should at the same time
impose a burden or condition on the donee involving some economic liability for
him. A, for example, may donate a parcel of land to B on condition that the latter
assume a mortgage existing on the donated land. In this case the donee may
rightfully insist that the gift tax be computed only on the value of the land less the
value of the mortgage. This, in fact, is contemplated by Article 619 of the Civil Code
of 1889 (Art. 726 of the Tax Code) when it provides that there is also a donation
"when the gift imposes upon the donee a burden which is less than the value of the
thing given." Section 111 of the Tax Code has in view situations of this kind, since it
also prescribes that "the amount by which the value of the property exceeded the
value of the consideration" shall be deemed a gift for the purpose of the tax. .
Petitioners finally contend that, even assuming that the donation in question is
subject to donees' gift taxes, the imposition of the surcharge of 5% and interest of
1% per month from March 8, 1955 was not justified because the proceeds of the life
insurance policies were actually received on April 6, 1955 and May 12, 1955 only
and in accordance with Section 115(c) of the Tax Code; the filing of the returns of
such tax became due on March 1, 1956 and the tax became payable on May 15,
1956, as provided for in Section 116(a) of the same Code. In other words, petitioners
maintain that the assessment and demand for donees' gift taxes was prematurely
made and of no legal effect; hence, they should not be held liable for such surcharge
and interest.

It is well to note, and it is not disputed, that petitioners-donees have failed to file
any gift tax return and that they also failed to pay the amount of the assessment
made against them by respondent in 1955. This situation is covered by Section
119(b) (1) and (c) and Section 120 of the Tax Code:
(b) Deficiency.
(1) Payment not extended. Where a deficiency, or any interest assessed in
connection therewith, or any addition to the taxes provided for in section one
hundred twenty is not paid in full within thirty days from the date of the notice and
demand from the Commissioner, there shall be collected as a part of the taxes,
interest upon the unpaid amount at the rate of one per centum a month from the
date of such notice and demand until it is paid. (section 119)
(c) Surcharge. If any amount of the taxes included in the notice and demand from
the Commissioner of Internal Revenue is not paid in full within thirty days after such
notice and demand, there shall be collected in addition to the interest prescribed
above as a part of the taxes a surcharge of five per centum of the unpaid amount.
(sec. 119)
The failure to file a return was found by the lower court to be due to reasonable
cause and not to willful neglect. On this score, the elimination by the lower court of
the 25% surcharge is ad valorem penalty which respondent Commissioner had
imposed pursuant to Section 120 of the Tax Code was proper, since said Section 120
vests in the Commissioner of Internal Revenue or in the tax court power and
authority to impose or not to impose such penalty depending upon whether or not
reasonable cause has been shown in the non-filing of such return.
On the other hand, unlike said Section 120, Section 119, paragraphs (b) (1) and (c)
of the Tax Code, does not confer on the Commissioner of Internal Revenue or on the
courts any power and discretion not to impose such interest and surcharge. It is
likewise provided for by law that an appeal to the Court of Tax Appeals from a
decision of the Commissioner of Internal Revenue shall not suspend the payment or
collection of the tax liability of the taxpayer unless a motion to that effect shall have
been presented to the court and granted by it on the ground that such collection will
jeopardize the interest of the taxpayer (Sec. 11, Republic Act No. 1125; Rule 12,
Rules of the Court of Tax Appeals). It should further be noted that
It has been the uniform holding of this Court that no suit for enjoining the collection
of a tax, disputed or undisputed, can be brought, the remedy being to pay the tax
first, formerly under protest and now without need of protect, file the claim with the
Collector, and if he denies it, bring an action for recovery against him. (David v.
Ramos, et al., 90 Phil. 351)
Section 306 of the National Internal Revenue Code ... lays down the procedure to be
followed in those cases wherein a taxpayer entertains some doubt about the
correctness of a tax sought to be collected. Said section provides that the tax,
should first be paid and the taxpayer should sue for its recovery afterwards. The
purpose of the law obviously is to prevent delay in the collection of taxes, upon
which the Government depends for its existence. To allow a taxpayer to first secure

a ruling as regards the validity of the tax before paying it would be to defeat this
purpose. (National Dental Supply Co. vs. Meer, 90 Phil. 265)
Petitioners did not file in the lower court any motion for the suspension of payment
or collection of the amount of assessment made against them.
On the basis of the above-stated provisions of law and applicable authorities, it is
evident that the imposition of 1% interest monthly and 5% surcharge is justified and
legal. As succinctly stated by the court below, said imposition is "mandatory and
may not be waived by the Commissioner of Internal Revenue or by the courts"
(Resolution on petitioners' motion for reconsideration, Annex XIV, petition). Hence,
said imposition of interest and surcharge by the lower court should be upheld.
WHEREFORE, the decision of the Court of Tax Appeals is affirmed. Costs against
petitioners Pirovano.

G.R. No. L-19201

June 16, 1965

REV. FR. CASIMIRO LLADOC, petitioner,

vs.
The COMMISSIONER OF INTERNAL REVENUE and The COURT of TAX APPEALS,
respondents.
Hilado and Hilado for petitioner.
Office of the Solicitor General for respondents.
PAREDES, J.:
Sometime in 1957, the M.B. Estate, Inc., of Bacolod City, donated P10,000.00 in
cash to Rev. Fr. Crispin Ruiz, then parish priest of Victorias, Negros Occidental,
and predecessor of herein petitioner, for the construction of a new Catholic
Church in the locality. The total amount was actually spent for the purpose
intended.
On March 3, 1958, the donor M.B. Estate, Inc., filed the donor's gift tax return.
Under date of April 29, 1960, the respondent Commissioner of Internal Revenue
issued an assessment for donee's gift tax against the Catholic Parish of
Victorias, Negros Occidental, of which petitioner was the priest. The tax
amounted to P1,370.00 including surcharges, interests of 1% monthly from May
15, 1958 to June 15, 1960, and the compromise for the late filing of the return.
Petitioner lodged a protest to the assessment and requested the withdrawal
thereof. The protest and the motion for reconsideration presented to the
Commissioner of Internal Revenue were denied. The petitioner appealed to the
Court of Tax Appeals on November 2, 1960. In the petition for review, the Rev.
Fr. Casimiro Lladoc claimed, among others, that at the time of the donation, he
was not the parish priest in Victorias; that there is no legal entity or juridical
person known as the "Catholic Parish Priest of Victorias," and, therefore, he
should not be liable for the donee's gift tax. It was also asserted that the
assessment of the gift tax, even against the Roman Catholic Church, would not
be valid, for such would be a clear violation of the provisions of the
Constitution.
After hearing, the CTA rendered judgment, the pertinent portions of which are
quoted below:
... . Parish priests of the Roman Catholic Church under canon laws are similarly
situated as its Archbishops and Bishops with respect to the properties of the
church within their parish. They are the guardians, superintendents or
administrators of these properties, with the right of succession and may sue
and be sued.
xxx

xxx

The petitioner impugns the, fairness of the assessment with the argument that
he should not be held liable for gift taxes on donation which he did not receive
personally since he was not yet the parish priest of Victorias in the year 1957
when said donation was given. It is intimated that if someone has to pay at all,
it should be petitioner's predecessor, the Rev. Fr. Crispin Ruiz, who received the
donation in behalf of the Catholic parish of Victorias or the Roman Catholic
Church. Following petitioner's line of thinking, we should be equally unfair to
hold that the assessment now in question should have been addressed to, and
collected from, the Rev. Fr. Crispin Ruiz to be paid from income derived from his
present parish where ever it may be. It does not seem right to indirectly burden
the present parishioners of Rev. Fr. Ruiz for donee's gift tax on a donation to
which they were not benefited.
xxx

xxx

xxx

We saw no legal basis then as we see none now, to include within the
Constitutional exemption, taxes which partake of the nature of an excise upon
the use made of the properties or upon the exercise of the privilege of receiving
the properties. (Phipps vs. Commissioner of Internal Revenue, 91 F [2d] 627;
1938, 302 U.S. 742.)
It is a cardinal rule in taxation that exemptions from payment thereof are highly
disfavored by law, and the party claiming exemption must justify his claim by a
clear, positive, or express grant of such privilege by law. (Collector vs. Manila
Jockey Club, G.R. No. L-8755, March 23, 1956; 53 O.G. 3762.)
The phrase "exempt from taxation" as employed in Section 22(3), Article VI of
the Constitution of the Philippines, should not be interpreted to mean
exemption from all kinds of taxes. Statutes exempting charitable and religious
property from taxation should be construed fairly though strictly and in such
manner as to give effect to the main intent of the lawmakers. (Roman Catholic
Church vs. Hastrings 5 Phil. 701.)
xxx

xxx

xxx

WHEREFORE, in view of the foregoing considerations, the decision of the

respondent Commissioner of Internal Revenue appealed from, is hereby
affirmed except with regard to the imposition of the compromise penalty in the
amount of P20.00 (Collector of Internal Revenue v. U.S.T., G.R. No. L-11274,
Nov. 28, 1958); ..., and the petitioner, the Rev. Fr. Casimiro Lladoc is hereby
ordered to pay to the respondent the amount of P900.00 as donee's gift tax,
plus the surcharge of five per centum (5%) as ad valorem penalty under Section
119 (c) of the Tax Code, and one per centum (1%) monthly interest from May
15, 1958 to the date of actual payment. The surcharge of 25% provided in
Section 120 for failure to file a return may not be imposed as the failure to file a
return was not due to willful neglect.( ... ) No costs.

xxx
The above judgment is now before us on appeal, petitioner assigning two (2)
errors allegedly committed by the Tax Court, all of which converge on the

singular issue of whether or not petitioner should be liable for the assessed
donee's gift tax on the P10,000.00 donated for the construction of the Victorias
Parish Church.
Section 22 (3), Art. VI of the Constitution of the Philippines, exempts from
taxation cemeteries, churches and parsonages or convents, appurtenant
thereto, and all lands, buildings, and improvements used exclusively for
religious purposes. The exemption is only from the payment of taxes assessed
on such properties enumerated, as property taxes, as contra distinguished from
excise taxes. In the present case, what the Collector assessed was a donee's
gift tax; the assessment was not on the properties themselves. It did not rest
upon general ownership; it was an excise upon the use made of the properties,
upon the exercise of the privilege of receiving the properties (Phipps vs. Com.
of Int. Rec. 91 F 2d 627). Manifestly, gift tax is not within the exempting
provisions of the section just mentioned. A gift tax is not a property tax, but an
excise tax imposed on the transfer of property by way of gift inter vivos, the
imposition of which on property used exclusively for religious purposes, does
not constitute an impairment of the Constitution. As well observed by the
learned respondent Court, the phrase "exempt from taxation," as employed in
the Constitution (supra) should not be interpreted to mean exemption from all
kinds of taxes. And there being no clear, positive or express grant of such
privilege by law, in favor of petitioner, the exemption herein must be denied.
The next issue which readily presents itself, in view of petitioner's thesis, and
Our finding that a tax liability exists, is, who should be called upon to pay the
gift tax? Petitioner postulates that he should not be liable, because at the time
of the donation he was not the priest of Victorias. We note the merit of the
above claim, and in order to put things in their proper light, this Court, in its
Resolution of March 15, 1965, ordered the parties to show cause why the Head
of the Diocese to which the parish of Victorias pertains, should not be
substituted in lieu of petitioner Rev. Fr. Casimiro Lladoc it appearing that the
Head of such Diocese is the real party in interest. The Solicitor General, in
representation of the Commissioner of Internal Revenue, interposed no
objection to such a substitution. Counsel for the petitioner did not also offer
objection thereto.
On April 30, 1965, in a resolution, We ordered the Head of the Diocese to
present whatever legal issues and/or defenses he might wish to raise, to which
resolution counsel for petitioner, who also appeared as counsel for the Head of
the Diocese, the Roman Catholic Bishop of Bacolod, manifested that it was
submitting itself to the jurisdiction and orders of this Court and that it was
presenting, by reference, the brief of petitioner Rev. Fr. Casimiro Lladoc as its
own and for all purposes.
In view here of and considering that as heretofore stated, the assessment at
bar had been properly made and the imposition of the tax is not a violation of
the constitutional provision exempting churches, parsonages or convents, etc.
(Art VI, sec. 22 [3], Constitution), the Head of the Diocese, to which the parish
Victorias Pertains, is liable for the payment thereof.

The decision appealed from should be, as it is hereby affirmed insofar as tax
liability is concerned; it is modified, in the sense that petitioner herein is not
personally liable for the said gift tax, and that the Head of the Diocese, herein
substitute petitioner, should pay, as he is presently ordered to pay, the said gift
tax, without special, pronouncement as to costs.

G.R. No. 140944

April 30, 2008

Taxable Transfer (Sch. 3)

RAFAEL ARSENIO S. DIZON, in his capacity as the Judicial Administrator of the

Estate of the deceased JOSE P. FERNANDEZ, petitioner,
vs.
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE,
respondents.

Gross Conjugal Estate

DECISION

187,822,576.06

NACHURA, J.:

Net Conjugal Estate

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

NIL

14,315,611.34
Less: Deductions (Sch. 4)

Less: Share of Surviving Spouse

NIL.

The Facts
Net Share in Conjugal Estate
On November 7, 1987, Jose P. Fernandez (Jose) died. Thereafter, a petition for
the probate of his will5 was filed with Branch 51 of the Regional Trial Court
(RTC) of Manila (probate court).[6] The probate court then appointed retired
Supreme Court Justice Arsenio P. Dizon (Justice Dizon) and petitioner, Atty.
Rafael Arsenio P. Dizon (petitioner) as Special and Assistant Special
Administrator, respectively, of the Estate of Jose (Estate). In a letter7 dated
October 13, 1988, Justice Dizon informed respondent Commissioner of the
Bureau of Internal Revenue (BIR) of the special proceedings for the Estate.

NIL
xxx
Net Taxable Estate
NIL.

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 letter8 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 letter9 addressed to the BIR Regional Director for San Pablo City and filed the
estate tax return10 with the same BIR Regional Office, showing therein a NIL
estate tax liability, computed as follows:

Estate Tax Due

COMPUTATION OF TAX

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

Conjugal Real Property (Sch. 1)

P10,855,020.00
Conjugal Personal Property (Sch.2)
3,460,591.34

NIL.11
On April 27, 1990, BIR Regional Director for San Pablo City, Osmundo G. Umali
issued Certification Nos. 2052[12] and 2053[13] stating that the taxes due on
the transfer of real and personal properties[14] of Jose had been fully paid and
said properties may be transferred to his heirs. Sometime in August 1990,
Justice Dizon passed away. Thus, on October 22, 1990, the probate court
appointed petitioner as the administrator of the Estate.15

However, on November 26, 1991, the Assistant Commissioner for Collection of

the BIR, Themistocles Montalban, issued Estate Tax Assessment Notice No. FASE-87-91-003269,17 demanding the payment of P66,973,985.40 as deficiency
estate tax, itemized as follows:

petitioner filed a petition for review21 before respondent CTA. Trial on the
merits ensued.
As found by the CTA, the respective parties presented the following pieces of
evidence, to wit:

Deficiency Estate Tax- 1987

Estate tax

In the hearings conducted, petitioner did not present testimonial evidence but
merely documentary evidence consisting of the following:

P31,868,414.48

Nature of Document (sic)

25% surcharge- late filing

Exhibits

7,967,103.62

1.

late payment
7,967,103.62

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);

Interest

"A"

19,121,048.68

2.

Compromise-non filing
25,000.00

Petition for the probate of the will and issuance of letter of administration filed
with the Regional Trial Court (RTC) of Manila, docketed as Sp. Proc. No. 8742980 (pp. 107-108, BIR records);

non payment

"B" & "B-1"

25,000.00

3.

no notice of death

Pleading entitled "Compliance" filed with the probate Court submitting the final
inventory of all the properties of the deceased (p. 106, BIR records);

15.00
"C"
no CPA Certificate
4.
300.00
Total amount due & collectible

Attachment to Exh. "C" which is the detailed and complete listing of the
properties of the deceased (pp. 89-105, BIR rec.);

P66,973,985.4018

"C-1" to "C-17"

In his letter19 dated December 12, 1991, Atty. Gonzales moved for the
reconsideration of the said estate tax assessment. However, in her letter20
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,

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"

"J"

6.

12.

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);

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);

"E" to "E-3"
"K" to "K-5"
7.
13.
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);

Certified true copy of the Letter of Administration issued by RTC Manila, Branch
51, in Sp. Proc. No. 87-42980 appointing Atty. Rafael S. Dizon as Judicial
Administrator of the estate of Jose P. Fernandez; (p. 102, CTA records) and
"L"

"F" to "F-3"
14.
8.
Demand letter of Manila Banking Corporation prepared by Asedillo, Ramos and
Associates Law Offices addressed to Fernandez Hermanos, Inc., represented by
Jose P. Fernandez, as mortgagors, in the total amount of P240,479,693.17 as of
February 28, 1989 (pp. 186-187, BIR records);
"G" & "G-1"
9.
Claim of State Investment House, Inc. filed with the RTC, Branch VII of Manila,
docketed as Civil Case No. 86-38599 entitled "State Investment House, Inc.,
Plaintiff, versus Maritime Company Overseas, Inc. and/or Jose P. Fernandez,
Defendants," (pp. 200-215, BIR records);

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.).
"M" to "M-5"
Respondent's [BIR] counsel presented on June 26, 1995 one witness in the
person of Alberto Enriquez, who was one of the revenue examiners who
conducted the investigation on the estate tax case of the late Jose P. Fernandez.
In the course of the direct examination of the witness, he identified the
following:
Documents/Signatures
BIR Record

"H" to "H-16"
1.
10.
Estate Tax Return prepared by the BIR;
Letter dated March 14, 1990 of Arsenio P. Dizon addressed to Atty. Jesus M.
Gonzales, (p. 184, BIR records);

p. 138

"I"

2.

11.

Signatures of Ma. Anabella Abuloc and Alberto Enriquez, Jr. appearing at the
lower Portion of Exh. "1";

Letter dated April 17, 1990 from J.M. Gonzales addressed to the Regional
Director of BIR in San Pablo City (p. 183, BIR records);

-do-

3.

Signature of Ma. Anabella A. Abuloc at the lower portion of Exh. "3";

Memorandum for the Commissioner, dated July 19, 1991, prepared by revenue
examiners, Ma. Anabella A. Abuloc, Alberto S. Enriquez and Raymund S.
Gallardo; Reviewed by Maximino V. Tagle

-do-

pp. 143-144

Signature of Raymond S. Gallardo at the lower portion of Exh. "3";

4.

-do-

Signature of Alberto S. Enriquez appearing at the lower portion on p. 2 of Exh.

"2";

12.

11.

Signature of Maximino V. Tagle at the lower portion of Exh. "3";

-do-do5.
13.
Signature of Ma. Anabella A. Abuloc appearing at the lower portion on p. 2 of
Exh. "2";
-do-

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

6.

p. 169

Signature of Raymund S. Gallardo appearing at the Lower portion on p. 2 of

Exh. "2";

14.
Assessment Notice FAS-E-87-91-00

-dopp. 169-17022
7.
The CTA's Ruling
Signature of Maximino V. Tagle also appearing on p. 2 of Exh. "2";
-do8.
Summary of revenue Enforcement Officers Audit Report, dated July 19, 1991;
p. 139
9.
Signature of Alberto Enriquez at the lower portion of Exh. "3";

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

-do10.

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

15.00

P 5,062,016.00

No CPA certificate

Conjugal Personal Prop.

300.00

33,021,999.93

Total deficiency estate tax

Gross Conjugal Estate

P 37,419,493.71
============

38,084,015.93
Less: Deductions

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

26,250,000.00

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

Net Conjugal Estate

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

P 11,834,015.93

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.

Less: Share of Surviving Spouse

5,917,007.96
Net Share in Conjugal Estate

SO ORDERED.26
P 5,917,007.96
Add: Capital/Paraphernal

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

review.27

Properties P44,652,813.66

The CA's Ruling

Less: Capital/Paraphernal Deductions

Net Taxable Estate

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

P 50,569,821.62
============

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

Estate Tax Due P 29,935,342.97

Hence, the instant Petition raising the following issues:

Add: 25% Surcharge for Late Filing

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;

44,652,813.66

7,483,835.74
Add: Penalties for-No notice of death

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;

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

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

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.

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

The Courts Ruling

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 crossexamine 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

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-a35 and People v. Mate36 on the
admission and consideration of exhibits which were not formally offered during
the trial. Although in a long line of cases many of which were decided after Vda.
de 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 crossexamination 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 evidence48 in
the hearing of February 21, 1996, but BIR's counsel failed to appear.49 The CTA
denied petitioner's motion to consider BIR's presentation of evidence as waived,
with a warning to BIR that such presentation would be considered waived if
BIR's evidence would not be presented at the next hearing. Again, in the
hearing of March 20, 1996, BIR's counsel failed to appear.50 Thus, in its
Resolution51 dated March 21, 1996, the CTA considered the BIR to have waived
presentation of its evidence. In the same Resolution, the parties were directed
to file their respective memorandum. Petitioner complied but BIR failed to do
so.52 In all of these proceedings, BIR was duly notified. Hence, in this case, we
are constrained to apply our ruling in Heirs of Pedro Pasag v. Parocha:53
A formal offer is necessary because judges are mandated to rest their findings
of facts and their judgment only and strictly upon the evidence offered by the
parties at the trial. Its function is to enable the trial judge to know the purpose
or purposes for which the proponent is presenting the evidence. On the other
hand, this allows opposing parties to examine the evidence and object to its
admissibility. Moreover, it facilitates review as the appellate court will not be
required to review documents not previously scrutinized by the trial court.
Strict adherence to the said rule is not a trivial matter. The Court in Constantino
v. Court of Appeals ruled that the formal offer of one's evidence is deemed
waived after failing to submit it within a considerable period of time. It
explained that the court cannot admit an offer of evidence made after a lapse
of three (3) months because to do so would "condone an inexcusable laxity if
not non-compliance with a court order which, in effect, would encourage
needless delays and derail the speedy administration of justice."
Applying the aforementioned principle in this case, we find that the trial court
had reasonable ground to consider that petitioners had waived their right to
make a formal offer of documentary or object evidence. Despite several
extensions of time to make their formal offer, petitioners failed to comply with
their commitment and allowed almost five months to lapse before finally
submitting it. Petitioners' failure to comply with the rule on admissibility of
evidence is anathema to the efficient, effective, and expeditious dispensation of
justice.
Having disposed of the foregoing procedural issue, we proceed to discuss the
merits of the case.

Ordinarily, the CTA's findings, as affirmed by the CA, are entitled to the highest
respect and will not be disturbed on appeal unless it is shown that the lower
courts committed gross error in the appreciation of facts.54 In this case,
however, we find the decision of the CA affirming that of the CTA tainted with
palpable error.
It is admitted that the claims of the Estate's aforementioned creditors have
been condoned. As a mode of extinguishing an obligation,55 condonation or
remission of debt56 is defined as:
an act of liberality, by virtue of which, without receiving any equivalent, the
creditor renounces the enforcement of the obligation, which is extinguished in
its entirety or in that part or aspect of the same to which the remission refers. It
is an essential characteristic of remission that it be gratuitous, that there is no
equivalent received for the benefit given; once such equivalent exists, the
nature of the act changes. It may become dation in payment when the creditor
receives a thing different from that stipulated; or novation, when the object or
principal conditions of the obligation should be changed; or compromise, when
the matter renounced is in litigation or dispute and in exchange of some
concession which the creditor receives.57
Verily, the second issue in this case involves the construction of Section 7958 of
the National Internal Revenue Code59 (Tax Code) which provides for the
allowable deductions from the gross estate of the decedent. The specific
question is whether the actual claims of the aforementioned creditors may be
fully allowed as deductions from the gross estate of Jose despite the fact that
the said claims were reduced or condoned through compromise agreements
entered into by the Estate with its creditors.
"Claims against the estate," as allowable deductions from the gross estate
under Section 79 of the Tax Code, are basically a reproduction of the deductions
allowed under Section 89 (a) (1) (C) and (E) of Commonwealth Act No. 466 (CA
466), otherwise known as the National Internal Revenue Code of 1939, and
which was the first codification of Philippine tax laws. Philippine tax laws were,
in turn, based on the federal tax laws of the United States. Thus, pursuant to
established rules of statutory construction, the decisions of American courts
construing the federal tax code are entitled to great weight in the interpretation
of our own tax laws.60
It is noteworthy that even in the United States, there is some dispute as to
whether the deductible amount for a claim against the estate is fixed as of the
decedent's death which is the general rule, or the same should be adjusted to
reflect post-death developments, such as where a settlement between the
parties results in the reduction of the amount actually paid.61 On one hand, the
U.S. court ruled that the appropriate deduction is the "value" that the claim had
at the date of the decedent's death.62 Also, as held in Propstra v. U.S., 63
where a lien claimed against the estate was certain and enforceable on the
date of the decedent's death, the fact that the claimant subsequently settled

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

SO ORDERED.

G.R. No. L-13250

October 29, 1971

THE COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
ANTONIO CAMPOS RUEDA, respondent..
Assistant Solicitor General Jose P. Alejandro and Special Attorney Jose G. Azurin,
(O.S.G.) for petitioner.
Ramirez and Ortigas for respondent.

FERNANDO, J.:
The basic issue posed by petitioner Collector of Internal Revenue in this appeal
from a decision of the Court of Tax Appeals as to whether or not the requisites
of statehood, or at least so much thereof as may be necessary for the
acquisition of an international personality, must be satisfied for a "foreign
country" to fall within the exemption of Section 122 of the National Internal
Revenue Code 1 is now ripe for adjudication. The Court of Tax Appeals
answered the question in the negative, and thus reversed the action taken by
petitioner Collector, who would hold respondent Antonio Campos Rueda, as
administrator of the estate of the late Estrella Soriano Vda. de Cerdeira, liable
for the sum of P161,874.95 as deficiency estate and inheritance taxes for the
transfer of intangible personal properties in the Philippines, the deceased, a
Spanish national having been a resident of Tangier, Morocco from 1931 up to
the time of her death in 1955. In an earlier resolution promulgated May 30,
1962, this Court on the assumption that the need for resolving the principal
question would be obviated, referred the matter back to the Court of Tax
Appeals to determine whether the alleged law of Tangier did grant the
reciprocal tax exemption required by the aforesaid Section 122. Then came an
order from the Court of Tax Appeals submitting copies of legislation of Tangier
that would manifest that the element of reciprocity was not lacking. It was not
until July 29, 1969 that the case was deemed submitted for decision. When the
petition for review was filed on January 2, 1958, the basic issue raised was
impressed with an element of novelty. Four days thereafter, however, on
January 6, 1958, it was held by this Court that the aforesaid provision does not
require that the "foreign country" possess an international personality to come
within its terms. 2 Accordingly, we have to affirm.
The decision of the Court of Tax Appeals, now under review, sets forth the
background facts as follows: "This is an appeal interposed by petitioner Antonio
Campos Rueda as administrator of the estate of the deceased Doa Maria de la
Estrella Soriano Vda. de Cerdeira, from the decision of the respondent Collector
of Internal Revenue, assessing against and demanding from the former the sum
P161,874.95 as deficiency estate and inheritance taxes, including interest and
penalties, on the transfer of intangible personal properties situated in the
Philippines and belonging to said Maria de la Estrella Soriano Vda. de Cerdeira.

Maria de la Estrella Soriano Vda. de Cerdeira (Maria Cerdeira for short) is a

Spanish national, by reason of her marriage to a Spanish citizen and was a
resident of Tangier, Morocco from 1931 up to her death on January 2, 1955. At
the time of her demise she left, among others, intangible personal properties in
the Philippines." 3 Then came this portion: "On September 29, 1955, petitioner
filed a provisional estate and inheritance tax return on all the properties of the
late Maria Cerdeira. On the same date, respondent, pending investigation,
issued an assessment for state and inheritance taxes in the respective amounts
of P111,592.48 and P157,791.48, or a total of P369,383.96 which tax liabilities
were paid by petitioner ... . On November 17, 1955, an amended return was
filed ... wherein intangible personal properties with the value of P396,308.90
were claimed as exempted from taxes. On November 23, 1955, respondent,
pending investigation, issued another assessment for estate and inheritance
taxes in the amounts of P202,262.40 and P267,402.84, respectively, or a total
of P469,665.24 ... . In a letter dated January 11, 1956, respondent denied the
request for exemption on the ground that the law of Tangier is not reciprocal to
Section 122 of the National Internal Revenue Code. Hence, respondent
demanded the payment of the sums of P239,439.49 representing deficiency
estate and inheritance taxes including ad valorem penalties, surcharges,
interests and compromise penalties ... . In a letter dated February 8, 1956, and
received by respondent on the following day, petitioner requested for the
reconsideration of the decision denying the claim for tax exemption of the
intangible personal properties and the imposition of the 25% and 5% ad
valorem penalties ... . However, respondent denied request, in his letter dated
May 5, 1956 ... and received by petitioner on May 21, 1956. Respondent
premised the denial on the grounds that there was no reciprocity [with Tangier,
which was moreover] a mere principality, not a foreign country. Consequently,
respondent demanded the payment of the sums of P73,851.21 and P88,023.74
respectively, or a total of P161,874.95 as deficiency estate and inheritance
taxes including surcharges, interests and compromise penalties." 4
The matter was then elevated to the Court of Tax Appeals. As there was no
dispute between the parties regarding the values of the properties and the
mathematical correctness of the deficiency assessments, the principal question
as noted dealt with the reciprocity aspect as well as the insisting by the
Collector of Internal Revenue that Tangier was not a foreign country within the
meaning of Section 122. In ruling against the contention of the Collector of
Internal Revenue, the appealed decision states: "In fine, we believe, and so
hold, that the expression "foreign country", used in the last proviso of Section
122 of the National Internal Revenue Code, refers to a government of that
foreign power which, although not an international person in the sense of
international law, does not impose transfer or death upon intangible person
properties of our citizens not residing therein, or whose law allows a similar
exemption from such taxes. It is, therefore, not necessary that Tangier should
have been recognized by our Government order to entitle the petitioner to the
exemption benefits of the proviso of Section 122 of our Tax. Code." 5
Hence appeal to this court by petitioner. The respective briefs of the parties
duly submitted, but as above indicated, instead of ruling definitely on the

question, this Court, on May 30, 1962, resolve to inquire further into the
question of reciprocity and sent back the case to the Court of Tax Appeals for
the motion of evidence thereon. The dispositive portion of such resolution reads
as follows: "While section 122 of the Philippine Tax Code aforequoted speaks of
'intangible personal property' in both subdivisions (a) and (b); the alleged laws
of Tangier refer to 'bienes muebles situados en Tanger', 'bienes muebles
radicantes en Tanger', 'movables' and 'movable property'. In order that this
Court may be able to determine whether the alleged laws of Tangier grant the
reciprocal tax exemptions required by Section 122 of the Tax Code, and without,
for the time being, going into the merits of the issues raised by the petitionerappellant, the case is [remanded] to the Court of Tax Appeals for the reception
of evidence or proof on whether or not the words `bienes muebles', 'movables'
and 'movable properties as used in the Tangier laws, include or embrace
'intangible person property', as used in the Tax Code." 6 In line with the above
resolution, the Court of Tax Appeals admitted evidence submitted by the
administrator petitioner Antonio Campos Rueda, consisting of exhibits of laws of
Tangier to the effect that "the transfers by reason of death of movable
properties, corporeal or incorporeal, including furniture and personal effects as
well as of securities, bonds, shares, ..., were not subject, on that date and in
said zone, to the payment of any death tax, whatever might have been the
nationality of the deceased or his heirs and legatees." It was further noted in an
order of such Court referring the matter back to us that such were duly
admitted in evidence during the hearing of the case on September 9, 1963.
Respondent presented no evidence." 7
The controlling legal provision as noted is a proviso in Section 122 of the
National Internal Revenue Code. It reads thus: "That no tax shall be collected
under this Title in respect of intangible personal property (a) if the decedent at
the time of his death was a resident of a foreign country which at the time of
his death did not impose a transfer tax or death tax of any character in respect
of intangible person property of the Philippines not residing in that foreign
country, or (b) if the laws of the foreign country of which the decedent was a
resident at the time of his death allow a similar exemption from transfer taxes
or death taxes of every character in respect of intangible personal property
owned by citizens of the Philippines not residing in that foreign country." 8 The
only obstacle therefore to a definitive ruling is whether or not as vigorously
insisted upon by petitioner the acquisition of internal personality is a condition
sine qua non to Tangier being considered a "foreign country". Deference to the
De Lara ruling, as was made clear in the opening paragraph of this opinion,
calls for an affirmance of the decision of the Court of Tax Appeals.
It does not admit of doubt that if a foreign country is to be identified with a
state, it is required in line with Pound's formulation that it be a politically
organized sovereign community independent of outside control bound by
penalties of nationhood, legally supreme within its territory, acting through a
government functioning under a regime of
law. 9 It is thus a sovereign person with the people composing it viewed as an
organized corporate society under a government with the legal competence to
exact obedience to its commands. 10 It has been referred to as a body-politic

organized by common consent for mutual defense and mutual safety and to
promote the general welfare. 11 Correctly has it been described by Esmein as
"the juridical personification of the nation." 12 This is to view it in the light of its
historical development. The stress is on its being a nation, its people occupying
a definite territory, politically organized, exercising by means of its government
its sovereign will over the individuals within it and maintaining its separate
international personality. Laski could speak of it then as a territorial society
divided into government and subjects, claiming within its allotted area a
supremacy over all other institutions. 13 McIver similarly would point to the
power entrusted to its government to maintain within its territory the conditions
of a legal order and to enter into international relations. 14 With the latter
requisite satisfied, international law do not exact independence as a condition
of statehood. So Hyde did opine. 15
Even on the assumption then that Tangier is bereft of international personality,
petitioner has not successfully made out a case. It bears repeating that four
days after the filing of this petition on January 6, 1958 in Collector of Internal
Revenue v. De Lara, 16 it was specifically held by us: "Considering the State of
California as a foreign country in relation to section 122 of our Tax Code we
believe and hold, as did the Tax Court, that the Ancilliary Administrator is
entitled the exemption from the inheritance tax on the intangible personal
property found in the Philippines." 17 There can be no doubt that California as a
state in the American Union was in the alleged requisite of international
personality. Nonetheless, it was held to be a foreign country within the meaning
of Section 122 of the National Internal Revenue Code. 18
What is undeniable is that even prior to the De Lara ruling, this Court did
commit itself to the doctrine that even a tiny principality, that of Liechtenstein,
hardly an international personality in the sense, did fall under this exempt
category. So it appears in an opinion of the Court by the then Acting Chief
Justicem Bengson who thereafter assumed that position in a permanent
capacity, in Kiene v. Collector of Internal Revenue. 19 As was therein noted:
'The Board found from the documents submitted to it proof of the laws of
Liechtenstein that said country does not impose estate, inheritance and gift
taxes on intangible property of Filipino citizens not residing in that country.
Wherefore, the Board declared that pursuant to the exemption above
established, no estate or inheritance taxes were collectible, Ludwig Kiene being
a resident of Liechtestein when he passed away." 20 Then came this definitive
ruling: "The Collector hereafter named the respondent cites decisions of
the United States Supreme Court and of this Court, holding that intangible
personal property in the Philippines belonging to a non-resident foreigner, who
died outside of this country is subject to the estate tax, in disregard of the
principle 'mobilia sequuntur personam'. Such property is admittedly taxable
here. Without the proviso above quoted, the shares of stock owned here by the
Ludwig Kiene would be concededly subject to estate and inheritance taxes.
Nevertheless our Congress chose to make an exemption where conditions are
such that demand reciprocity as in this case. And the exemption must be
honored." 21

WHEREFORE, the decision of the respondent Court of Tax Appeals of October

30, 1957 is affirmed. Without pronouncement as to costs.

G.R. No. L-17618

August 31, 1964

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
NORTON and HARRISON COMPANY, respondent.
Office of the Solicitor General for petitioner.
Pio Joven for respondent.
PAREDES, J.:
This is an appeal interposed by the Commissioner of Internal Revenue against
the following judgment of the Court of Tax Appeals:
IN VIEW OF THE FOREGOING, we find no legal basis to support the assessment
in question against petitioner. If at all, the assessment should have been
directed against JACKBILT, the manufacturer. Accordingly, the decision appealed
from is reversed, and the surety bond filed to guarantee payment of said
assessment is ordered cancelled. No pronouncement as to costs.
Norton and Harrison is a corporation organized in 1911, (1) to buy and sell at
wholesale and retail, all kinds of goods, wares, and merchandise; (2) to act as
agents of manufacturers in the United States and foreign countries; and (3) to
carry on and conduct a general wholesale and retail mercantile establishment
in the Philippines. Jackbilt is, likewise, a corporation organized on February 16,
1948 primarily for the purpose of making, producing and manufacturing
concrete blocks. Under date of July 27, 1948. Norton and Jackbilt entered into
an agreement whereby Norton was made the sole and exclusive distributor of
concrete blocks manufactured by Jackbilt. Pursuant to this agreement,
whenever an order for concrete blocks was received by the Norton & Harrison
Co. from a customer, the order was transmitted to Jackbilt which delivered the
merchandise direct to the customer. Payment for the goods is, however, made
to Norton, which in turn pays Jackbilt the amount charged the customer less a
certain amount, as its compensation or profit. To exemplify the sales procedures
adopted by the Norton and Jackbilt, the following may be cited. In the case of
the sale of 420 pieces of concrete blocks to the American Builders on April 1,
1952, the purchaser paid to Norton the sum of P189.00 the purchase price. Out
of this amount Norton paid Jackbilt P168.00, the difference obviously being its
compensation. As per records of Jackbilt, the transaction was considered a sale
to Norton. It was under this procedure that the sale of concrete blocks
manufactured by Jackbilt was conducted until May 1, 1953, when the agency
agreement was terminated and a management agreement between the parties
was entered into. The management agreement provided that Norton would sell
concrete blocks for Jackbilt, for a fixed monthly fee of P2,000.00, which was
later increased to P5,000.00.
During the existence of the distribution or agency agreement, or on June 10,
1949, Norton & Harrison acquired by purchase all the outstanding shares of
stock of Jackbilt. Apparently, due to this transaction, the Commissioner of

Internal Revenue, after conducting an investigation, assessed the respondent

Norton & Harrison for deficiency sales tax and surcharges in the amount of
P32,662.90, making as basis thereof the sales of Norton to the Public. In other
words, the Commissioner considered the sale of Norton to the public as the
original sale and not the transaction from Jackbilt. The period covered by the
assessment was from July 1, 1949 to May 31, 1953. As Norton and Harrison did
not conform with the assessment, the matter was brought to the Court of Tax
Appeals.
The Commissioner of Internal Revenue contends that since Jackbilt was owned
and controlled by Norton & Harrison, the corporate personality of the former
(Jackbilt) should be disregarded for sales tax purposes, and the sale of Jackbilt
blocks by petitioner to the public must be considered as the original sales from
which the sales tax should be computed. The Norton & Harrison Company
contended otherwise that is, the transaction subject to tax is the sale from
Jackbilt to Norton.
Wherefore, the parties respectfully pray that the foregoing stipulation of facts
be admitted and approved by this Honorable Court, without prejudice to the
parties adducing other evidence to prove their case not covered by this
stipulation of facts. 1wph1.t
The majority of the Tax Court, in relieving Norton & Harrison of liability under
the assessment, made the following observations:
The law applicable to the case is Section 186 of the National Internal Revenue
Code which imposes a percentage tax of 7% on every original sale of goods,
wares or merchandise, such tax to be based on the gross selling price of such
goods, wares or merchandise. The term "original sale" has been defined as the
first sale by every manufacturer, producer or importer. (Sec. 5, Com. Act No.
503.) Subsequent sales by persons other than the manufacturer, producer or
importer are not subject to the sales tax.
If JACKBILT actually sold concrete blocks manufactured by it to petitioner under
the distributorship or agency agreement of July 27, 1948, such sales constituted
the original sales which are taxable under Section 186 of the Revenue Code,
while the sales made to the public by petitioner are subsequent sales which are
not taxable. But it appears to us that there was no such sale by JACKBILT to
petitioner. Petitioner merely acted as agent for JACKBILT in the marketing of its
products. This is shown by the fact that petitioner merely accepted orders from
the public for the purchase of JACKBILT blocks. The purchase orders were
transmitted to JACKBILT which delivered the blocks to the purchaser directly.
There was no instance in which the blocks ordered by the purchasers were
delivered to the petitioner. Petitioner never purchased concrete blocks from
JACKBILT so that it never acquired ownership of such concrete blocks. This being
so, petitioner could not have sold JACKBILT blocks for its own account. It did so
merely as agent of JACKBILT. The distributorship agreement of July 27, 1948, is
denominated by the parties themselves as an "agency for marketing" JACKBILT
products. ... .

xxx

xxx

xxx

Therefore, the taxable selling price of JACKBILT blocks under the aforesaid
agreement is the price charged to the public and not the amount billed by
JACKBILT to petitioner. The deficiency sales tax should have been assessed
against JACKBILT and not against petitioner which merely acted as the former's
agent.
xxx

xxx

xxx

Presiding Judge Nable of the same Court expressed a partial dissent, stating:
Upon the aforestated circumstances, which disclose Norton's control over and
direction of Jackbilt's affairs, the corporate personality of Jackbilt should be
disregarded, and the transactions between these two corporations relative to
the concrete blocks should be ignored in determining the percentage tax for
which Norton is liable. Consequently, the percentage tax should be computed
on the basis of the sales of Jackbilt blocks to the public.
The majority opinion is now before Us on appeal by the Commissioner of
Internal Revenue, on four (4) assigned errors, all of which pose the following
propositions: (1) whether the acquisition of all the stocks of the Jackbilt by the
Norton & Harrison Co., merged the two corporations into a single corporation;
(2) whether the basis of the computation of the deficiency sales tax should be
the sale of the blocks to the public and not to Norton.
It has been settled that the ownership of all the stocks of a corporation by
another corporation does not necessarily breed an identity of corporate interest
between the two companies and be considered as a sufficient ground for
disregarding the distinct personalities (Liddell & Co., Inc. v. Coll. of Int. Rev. L9687, June 30, 1961). However, in the case at bar, we find sufficient grounds to
support the theory that the separate identities of the two companies should be
disregarded. Among these circumstances, which we find not successfully
refuted by appellee Norton are: (a) Norton and Harrison owned all the
outstanding stocks of Jackbilt; of the 15,000 authorized shares of Jackbilt on
March 31, 1958, 14,993 shares belonged to Norton and Harrison and one each
to seven others; (b) Norton constituted Jackbilt's board of directors in such a
way as to enable it to actually direct and manage the other's affairs by making
the same officers of the board for both companies. For instance, James E.
Norton is the President, Treasurer, Director and Stockholder of Norton. He also
occupies the same positions in Jackbilt corporation, the only change being, in
the Jackbilt, he is merely a nominal stockholder. The same is true with Mr.
Jordan, F. M. Domingo, Mr. Mantaring, Gilbert Golden and Gerardo Garcia, while
they are merely employees of the North they are Directors and nominal
stockholders of the Jackbilt (c) Norton financed the operations of the Jackbilt,
and this is shown by the fact that the loans obtained from the RFC and Bank of
America were used in the expansion program of Jackbilt, to pay advances for
the purchase of equipment, materials rations and salaries of employees of

Jackbilt and other sundry expenses. There was no limit to the advances given to
Jackbilt so much so that as of May 31, 1956, the unpaid advances amounted to
P757,652.45, which were not paid in cash by Jackbilt, but was offset by shares
of stock issued to Norton, the absolute and sole owner of Jackbilt; (d) Norton
treats Jackbilt employees as its own. Evidence shows that Norton paid the
salaries of Jackbilt employees and gave the same privileges as Norton
employees, an indication that Jackbilt employees were also Norton's employees.
Furthermore service rendered in any one of the two companies were taken into
account for purposes of promotion; (e) Compensation given to board members
of Jackbilt, indicate that Jackbilt is merely a department of Norton. The income
tax return of Norton for 1954 shows that as President and Treasurer of Norton
and Jackbilt, he received from Norton P56,929.95, but received from Jackbilt the
measly amount of P150.00, a circumstance which points out that remuneration
of purported officials of Jackbilt are deemed included in the salaries they
received from Norton. The same is true in the case of Eduardo Garcia, an
employee of Norton but a member of the Board of Jackbilt. His Income tax
return for 1956 reveals that he received from Norton in salaries and bonuses
P4,220.00, but received from Jackbilt, by way of entertainment, representation,
travelling and transportation allowances P3,000.00. However, in the withholding
statement (Exh. 28-A), it was shown that the total of P4,200.00 and P3,000.00
(P7,220.00) was received by Garcia from Norton, thus portraying the oneness of
the two companies. The Income Tax Returns of Albert Golden and Dioscoro
Ramos both employees of Norton but board members of Jackbilt, also disclose
the game method of payment of compensation and allowances. The offices of
Norton and Jackbilt are located in the same compound. Payments were effected
by Norton of accounts for Jackbilt and vice versa. Payments were also made to
Norton of accounts due or payable to Jackbilt and vice versa.
Norton and Harrison, while not denying the presence of the set up stated
above, tried to explain that the control over the affairs of Jackbilt was not made
in order to evade payment of taxes; that the loans obtained by it which were
given to Jackbilt, were necessary for the expansion of its business in the
manufacture of concrete blocks, which would ultimately benefit both
corporations; that the transactions and practices just mentioned, are not
unusual and extraordinary, but pursued in the regular course of business and
trade; that there could be no confusion in the present set up of the two
corporations, because they have separate Boards, their cash assets are entirely
and strictly separate; cashiers and official receipts and bank accounts are
distinct and different; they have separate income tax returns, separate balance
sheets and profit and loss statements. These explanations notwithstanding an
over-all appraisal of the circumstances presented by the facts of the case,
yields to the conclusion that the Jackbilt is merely an adjunct, business conduit
or alter ego, of Norton and Harrison and that the fiction of corporate entities,
separate and distinct from each, should be disregarded. This is a case where
the doctrine of piercing the veil of corporate fiction, should be made to apply. In
the case of Liddell & Co. Inc. v. Coll. of Int. Rev., supra, it was held:
There are quite a series of conspicuous circumstances that militates against the
separate and distinct personality of Liddell Motors Inc., from Liddell & Co. We

notice that the bulk of the business of Liddell & Co. was channel Red through
Liddell Motors, Inc. On the other hand, Liddell Motors Inc. pursued no activities
except to secure cars, trucks, and spare parts from Liddell & Co., Inc. and then
sell them to the general public. These sales of vehicles by Liddell & Co, to
Liddell Motors. Inc. for the most part were shown to have taken place on the
same day that Liddell Motors, Inc. sold such vehicles to the public. We may
even say that the cars and trucks merely touched the hands of Liddell Motors,
Inc. as a matter of formality.
xxx

xxx

xxx

Accordingly, the mere fact that Liddell & Co. and Liddell Motors, Inc. are
corporations owned and controlled by Frank Liddell directly or indirectly is not
by itself sufficient to justify the disregard of the separate corporate identity of
one from the other. There is however, in this instant case, a peculiar sequence
of the organization and activities of Liddell Motors, Inc.
As opined in the case of Gregory v. Helvering "the legal right of a tax payer to
decrease the amount of what otherwise would be his taxes, or altogether avoid
them, by means which the law permits, cannot be doubted". But as held in
another case, "where a corporation is a dummy, is unreal or a sham and serves
no business purpose and is intended only as a blind, the corporate form may be
ignored for the law cannot countenance a form that is bald and a mischievous
fictions".
... a taxpayer may gain advantage of doing business thru a corporation if he
pleases, but the revenue officers in proper cases, may disregard the separate
corporate entity where it serves but as a shield for tax evasion and treat the
person who actually may take benefits of the transactions as the person
accordingly taxable.
... to allow a taxpayer to deny tax liability on the ground that the sales were
made through another and distinct corporation when it is proved that the latter
is virtually owned by the former or that they are practically one and the same is
to sanction a circumvention of our tax laws. (and cases cited therein.)
In the case of Yutivo Sons Hardware Co. v. Court of Tax Appeals, L-13203, Jan.
28, 1961, this Court made a similar ruling where the circumstances of unity of
corporate identities have been shown and which are identical to those obtaining
in the case under consideration. Therein, this Court said:
We are, however, inclined to agree with the court below that SM was actually
owned and controlled by petitioner as to make it a mere subsidiary or branch of
the latter created for the purpose of selling the vehicles at retail (here concrete
blocks) ... .
It may not be amiss to state in this connection, the advantages to Norton in
maintaining a semblance of separate entities. If the income of Norton should be
considered separate from the income of Jackbilt, then each would declare such

earning separately for income tax purposes and thus pay lesser income tax.
The combined taxable Norton-Jackbilt income would subject Norton to a higher
tax. Based upon the 1954-1955 income tax return of Norton and Jackbilt (Exhs.
7 & 8), and assuming that both of them are operating on the same fiscal basis
and their returns are accurate, we would have the following result: Jackbilt
declared a taxable net income of P161,202.31 in which the income tax due was
computed at P37,137.00 (Exh. 8); whereas Norton declared as taxable, a net
income of P120,101.59, on which the income tax due was computed at
P25,628.00. The total of these liabilities is P50,764.84. On the other hand, if the
net taxable earnings of both corporations are combined, during the same
taxable year, the tax due on their total which is P281,303.90 would be
P70,764.00. So that, even on the question of income tax alone, it would be to
the advantages of Norton that the corporations should be regarded as separate
entities.
WHEREFORE, the decision appealed from should be as it is hereby reversed and
another entered making the appellee Norton & Harrison liable for the deficiency
sales taxes assessed against it by the appellant Commissioner of Internal
Revenue, plus 25% surcharge thereon. Costs against appellee Norton &
Harrison.

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.

4,870.88
(4) Cash, with the Chartered Bank of India, Australia & China
851.97
Total Gross Assets

x---------------------------------------------------------x
P130,792.85
G.R. No. L-11668

January 28, 1961.

DOUGLAS FISHER AND BETTINA FISHER, petitioner,

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

On May 22, 1951, ancillary administration proceedings were instituted in the

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

Gross Estate
Real Property 2 parcels of land in Baguio, covered by T.C.T. Nos. 378 and 379
P43,500.00
Personal Property

On September 27, 1952, the ancillary administrator filed in amended estate

and inheritance tax return in pursuance f his reservation made at the time of
filing of the preliminary return and for the purpose of availing of the right
granted by section 91 of the National Internal Revenue Code.

(2) 210,000 shares of stock of Mindanao Mother Lode Mines, Inc. at P0.38 per
share

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

79,800.00

Funeral expenses ($1,04326)

(3) Cash credit with Canacao Estate Inc.

P2,086.52

(1) 177 shares of stock of Canacao Estate at P10.00 each

1,770.00

Judicial Expenses:
(a) Administrator's Fee
P1,204.34
(b) Attorney's Fee
6.000.00
(c) Judicial and Administration expenses as of August 9, 1952

and inheritance taxes on the 210,000 shares of stock in the Mindanao Mother
Lode Mines, Inc. also pursuant to the reciprocity proviso of Section 122 of the
National Internal Revenue Code. In this last return, the estate claimed that it
was liable only for the amount of P525.34 for estate tax and P238.06 for
inheritance tax and that, as a consequence, it had overpaid the government.
The refund of the amount of P15,259.83, allegedly overpaid, was accordingly
requested by the estate. The Collector denied the claim. For this reason, action
was commenced in the Court of First Instance of Manila by respondents, as
assignees of Beatrice Mauricia Stevenson, for the recovery of said amount.
Pursuant to Republic Act No. 1125, the case was forwarded to the Court of Tax
Appeals which court, after hearing, rendered decision the dispositive portion of
which reads as follows:

1,400.05
8,604.39
Real Estate Tax for 1951 on Baguio real properties (O.R. No. B-1 686836)
652.50
Claims against the estate:
($5,000.00) P10,000.00
P10,000.00
Plus: 4% int. p.a. from Feb. 2 to 22, 1951

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

22.47
From this decision, both parties appealed.
10,022.47
Sub-Total
P21,365.88
In the meantime, on December 1, 1952, Beatrice Mauricia Stevenson assigned
all her rights and interests in the estate to the spouses, Douglas and Bettina
Fisher, respondents herein.
On September 7, 1953, the ancillary administrator filed a second amended
estate and inheritance tax return (Exh. "M-N"). This return declared the same
assets of the estate stated in the amended return of September 22, 1952,
except that it contained new claims for additional exemption and deduction to
wit: (1) deduction in the amount of P4,000.00 from the gross estate of the
decedent as provided for in Section 861 (4) of the U.S. Federal Internal Revenue
Code which the ancillary administrator averred was allowable by way of the
reciprocity granted by Section 122 of the National Internal Revenue Code, as
then held by the Board of Tax Appeals in case No. 71 entitled "Housman vs.
Collector," August 14, 1952; and (2) exemption from the imposition of estate

The Collector of Internal Revenue, hereinafter called petitioner assigned four

errors allegedly committed by the trial court, while the assignees, Douglas and
Bettina Fisher hereinafter called respondents, made six assignments of error.
Together, the assigned errors raise the following main issues for resolution by
this Court:
(1) Whether or not, in determining the taxable net estate of the decedent, onehalf () of the net estate should be deducted therefrom as the share of tile
surviving spouse in accordance with our law on conjugal partnership and in
relation to section 89 (c) of the National Internal revenue Code;
(2) Whether or not the estate can avail itself of the reciprocity proviso
embodied in Section 122 of the National Internal Revenue Code granting
exemption from the payment of estate and inheritance taxes on the 210,000
shares of stock in the Mindanao Mother Lode Mines Inc.;
(3) Whether or not the estate is entitled to the deduction of P4,000.00 allowed
by Section 861, U.S. Internal Revenue Code in relation to section 122 of the
National Internal Revenue Code;

(4) Whether or not the real estate properties of the decedent located in Baguio
City and the 210,000 shares of stock in the Mindanao Mother Lode Mines, Inc.,
were correctly appraised by the lower court;
(5) Whether or not the estate is entitled to the following deductions: P8,604.39
for judicial and administration expenses; P2,086.52 for funeral expenses;
P652.50 for real estate taxes; and P10,0,22.47 representing the amount of
indebtedness allegedly incurred by the decedent during his lifetime; and
(6) Whether or not the estate is entitled to the payment of interest on the
amount it claims to have overpaid the government and to be refundable to it.
In deciding the first issue, the lower court applied a well-known doctrine in our
civil law that in the absence of any ante-nuptial agreement, the contracting
parties are presumed to have adopted the system of conjugal partnership as to
the properties acquired during their marriage. The application of this doctrine to
the instant case is being disputed, however, by petitioner Collector of Internal
Revenue, who contends that pursuant to Article 124 of the New Civil Code, the
property relation of the spouses Stevensons ought not to be determined by the
Philippine law, but by the national law of the decedent husband, in this case,
the law of England. It is alleged by petitioner that English laws do not recognize
legal partnership between spouses, and that what obtains in that jurisdiction is
another regime of property relation, wherein all properties acquired during the
marriage pertain and belong Exclusively to the husband. In further support of
his stand, petitioner cites Article 16 of the New Civil Code (Art. 10 of the old) to
the effect that in testate and intestate proceedings, the amount of successional
rights, among others, is to be determined by the national law of the decedent.
In this connection, let it be noted that since the mariage of the Stevensons in
the Philippines took place in 1909, the applicable law is Article 1325 of the old
Civil Code and not Article 124 of the New Civil Code which became effective
only in 1950. It is true that both articles adhere to the so-called nationality
theory of determining the property relation of spouses where one of them is a
foreigner and they have made no prior agreement as to the administration
disposition, and ownership of their conjugal properties. In such a case, the
national law of the husband becomes the dominant law in determining the
property relation of the spouses. There is, however, a difference between the
two articles in that Article 1241 of the new Civil Code expressly provides that it
shall be applicable regardless of whether the marriage was celebrated in the
Philippines or abroad while Article 13252 of the old Civil Code is limited to
marriages contracted in a foreign land.
It must be noted, however, that what has just been said refers to mixed
marriages between a Filipino citizen and a foreigner. In the instant case, both
spouses are foreigners who married in the Philippines. Manresa,3 in his
Commentaries, has this to say on this point:

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

en Espana y entre espanoles. El 1.325, a las celebradas en el extranjero cuando
alguno de los conyuges es espanol. En cuanto a la regla procedente cuando dos
extranjeros se casan en Espana, o dos espanoles en el extranjero hay que
atender en el primer caso a la legislacion de pais a que aquellos pertenezean, y
en el segundo, a las reglas generales consignadas en los articulos 9 y 10 de
nuestro Codigo. (Emphasis supplied.)
If we adopt the view of Manresa, the law determinative of the property relation
of the Stevensons, married in 1909, would be the English law even if the
marriage was celebrated in the Philippines, both of them being foreigners. But,
as correctly observed by the Tax Court, the pertinent English law that allegedly
vests in the decedent husband full ownership of the properties acquired during
the marriage has not been proven by petitioner. Except for a mere allegation in
his answer, which is not sufficient, the record is bereft of any evidence as to
what English law says on the matter. In the absence of proof, the Court is
justified, therefore, in indulging in what Wharton calls "processual
presumption," in presuming that the law of England on this matter is the same
as our law.4
Nor do we believe petitioner can make use of Article 16 of the New Civil Code
(art. 10, old Civil Code) to bolster his stand. A reading of Article 10 of the old
Civil Code, which incidentally is the one applicable, shows that it does not
encompass or contemplate to govern the question of property relation between
spouses. Said article distinctly speaks of amount of successional rights and this
term, in speaks in our opinion, properly refers to the extent or amount of
property that each heir is legally entitled to inherit from the estate available for
distribution. It needs to be pointed out that the property relation of spouses, as
distinguished from their successional rights, is governed differently by the
specific and express provisions of Title VI, Chapter I of our new Civil Code (Title
III, Chapter I of the old Civil Code.) We, therefore, find that the lower court
correctly deducted the half of the conjugal property in determining the
hereditary estate left by the deceased Stevenson.
On the second issue, petitioner disputes the action of the Tax Court in the
exempting the respondents from paying inheritance tax on the 210,000 shares
of stock in the Mindanao Mother Lode Mines, Inc. in virtue of the reciprocity
proviso of Section 122 of the National Internal Revenue Code, in relation to
Section 13851 of the California Revenue and Taxation Code, on the ground that:
(1) the said proviso of the California Revenue and Taxation Code has not been
duly proven by the respondents; (2) the reciprocity exemptions granted by
section 122 of the National Internal Revenue Code can only be availed of by
residents of foreign countries and not of residents of a state in the United
States; and (3) there is no "total" reciprocity between the Philippines and the
state of California in that while the former exempts payment of both estate and
inheritance taxes on intangible personal properties, the latter only exempts the
payment of inheritance tax..

To prove the pertinent California law, Attorney Allison Gibbs, counsel for herein
respondents, testified that as an active member of the California Bar since
1931, he is familiar with the revenue and taxation laws of the State of
California. When asked by the lower court to state the pertinent California law
as regards exemption of intangible personal properties, the witness cited article
4, section 13851 (a) and (b) of the California Internal and Revenue Code as
published in Derring's California Code, a publication of the Bancroft-Whitney
Company inc. And as part of his testimony, a full quotation of the cited section
was offered in evidence as Exhibits "V-2" by the respondents.
It is well-settled that foreign laws do not prove themselves in our jurisdiction
and our courts are not authorized to take judicial notice of them.5 Like any
other fact, they must be alleged and proved.6
Section 41, Rule 123 of our Rules of Court prescribes the manner of proving
foreign laws before our tribunals. However, although we believe it desirable
that these laws be proved in accordance with said rule, we held in the case of
Willamette Iron and Steel Works v. Muzzal, 61 Phil. 471, that "a reading of
sections 300 and 301 of our Code of Civil Procedure (now section 41, Rule 123)
will convince one that these sections do not exclude the presentation of other
competent evidence to prove the existence of a foreign law." In that case, we
considered the testimony of an attorney-at-law of San Francisco, California who
quoted verbatim a section of California Civil Code and who stated that the same
was in force at the time the obligations were contracted, as sufficient evidence
to establish the existence of said law. In line with this view, we find no error,
therefore, on the part of the Tax Court in considering the pertinent California
law as proved by respondents' witness.

time of his death was a resident of a territory or another State of the United
States or of a foreign state or country which then imposed a legacy, succession,
or death tax in respect to intangible personal property of its own residents, but
either:.
(a) Did not impose a legacy, succession, or death tax of any character in
respect to intangible personal property of residents of this State, or
(b) Had in its laws a reciprocal provision under which intangible personal
property of a non-resident was exempt from legacy, succession, or death taxes
of every character if the Territory or other State of the United States or foreign
state or country in which the nonresident resided allowed a similar exemption in
respect to intangible personal property of residents of the Territory or State of
the United States or foreign state or country of residence of the decedent." (Id.)
It is clear from both these quoted provisions that the reciprocity must be total,
that is, with respect to transfer or death taxes of any and every character, in
the case of the Philippine law, and to legacy, succession, or death taxes of any
and every character, in the case of the California law. Therefore, if any of the
two states collects or imposes and does not exempt any transfer, death, legacy,
or succession tax of any character, the reciprocity does not work. This is the
underlying principle of the reciprocity clauses in both laws.

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

In the Philippines, upon the death of any citizen or resident, or non-resident

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

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

property is exempt from the tax imposed by this part if the decedent at the

We are not unaware of our ruling in the case of Collector of Internal Revenue vs.
Lara (G.R. Nos. L-9456 & L-9481, prom. January 6, 1958, 54 O.G. 2881)

We now take up the question of reciprocity in exemption from transfer or death

taxes, between the State of California and the Philippines.F
Section 122 of our National Internal Revenue Code, in pertinent part, provides:
... And, provided, further, That no tax shall be collected under this Title in
respect of intangible personal property (a) if the decedent at the time of his
death was a resident of a foreign country which at the time of his death did not
impose a transfer of tax or death tax of any character in respect of intangible
personal property of citizens of the Philippines not residing in that foreign
country, or (b) if the laws of the foreign country of which the decedent was a
resident at the time of his death allow a similar exemption from transfer taxes
or death taxes of every character in respect of intangible personal property
owned by citizens of the Philippines not residing in that foreign country."
(Emphasis supplied).

exempting the estate of the deceased Hugo H. Miller from payment of the
inheritance tax imposed by the Collector of Internal Revenue. It will be noted,
however, that the issue of reciprocity between the pertinent provisions of our
tax law and that of the State of California was not there squarely raised, and
the ruling therein cannot control the determination of the case at bar. Be that
as it may, we now declare that in view of the express provisions of both the
Philippine and California laws that the exemption would apply only if the law of
the other grants an exemption from legacy, succession, or death taxes of every
character, there could not be partial reciprocity. It would have to be total or
none at all.
With respect to the question of deduction or reduction in the amount of
P4,000.00 based on the U.S. Federal Estate Tax Law which is also being claimed
by respondents, we uphold and adhere to our ruling in the Lara case (supra)
that the amount of $2,000.00 allowed under the Federal Estate Tax Law is in the
nature of a deduction and not of an exemption regarding which reciprocity
cannot be claimed under the provision of Section 122 of our National Internal
Revenue Code. Nor is reciprocity authorized under the Federal Law. .
On the issue of the correctness of the appraisal of the two parcels of land
situated in Baguio City, it is contended that their assessed values, as appearing
in the tax rolls 6 months after the death of Stevenson, ought to have been
considered by petitioner as their fair market value, pursuant to section 91 of
the National Internal Revenue Code. It should be pointed out, however, that in
accordance with said proviso the properties are required to be appraised at
their fair market value and the assessed value thereof shall be considered as
the fair market value only when evidence to the contrary has not been shown.
After all review of the record, we are satisfied that such evidence exists to
justify the valuation made by petitioner which was sustained by the tax court,
for as the tax court aptly observed:
"The two parcels of land containing 36,264 square meters were valued by the
administrator of the estate in the Estate and Inheritance tax returns filed by
him at P43,500.00 which is the assessed value of said properties. On the other
hand, defendant appraised the same at P52,200.00. It is of common knowledge,
and this Court can take judicial notice of it, that assessments for real estate
taxation purposes are very much lower than the true and fair market value of
the properties at a given time and place. In fact one year after decedent's
death or in 1952 the said properties were sold for a price of P72,000.00 and
there is no showing that special or extraordinary circumstances caused the
sudden increase from the price of P43,500.00, if we were to accept this value as
a fair and reasonable one as of 1951. Even more, the counsel for plaintiffs
himself admitted in open court that he was willing to purchase the said
properties at P2.00 per square meter. In the light of these facts we believe and
therefore hold that the valuation of P52,200.00 of the real estate in Baguio
made by defendant is fair, reasonable and justified in the premises." (Decision,
p. 19).

In respect to the valuation of the 210,000 shares of stock in the Mindanao

Mother Lode Mines, Inc., (a domestic corporation), respondents contend that
their value should be fixed on the basis of the market quotation obtaining at the
San Francisco (California) Stock Exchange, on the theory that the certificates of
stocks were then held in that place and registered with the said stock
exchange. We cannot agree with respondents' argument. The situs of the
shares of stock, for purposes of taxation, being located here in the Philippines,
as respondents themselves concede and considering that they are sought to be
taxed in this jurisdiction, consistent with the exercise of our government's
taxing authority, their fair market value should be taxed on the basis of the
price prevailing in our country.
Upon the other hand, we find merit in respondents' other contention that the
said shares of stock commanded a lesser value at the Manila Stock Exchange
six months after the death of Stevenson. Through Atty. Allison Gibbs,
respondents have shown that at that time a share of said stock was bid for at
only P.325 (p. 103, t.s.n.). Significantly, the testimony of Atty. Gibbs in this
respect has never been questioned nor refuted by petitioner either before this
court or in the court below. In the absence of evidence to the contrary, we are,
therefore, constrained to reverse the Tax Court on this point and to hold that
the value of a share in the said mining company on August 22, 1951 in the
Philippine market was P.325 as claimed by respondents..
It should be noted that the petitioner and the Tax Court valued each share of
stock of P.38 on the basis of the declaration made by the estate in its
preliminary return. Patently, this should not have been the case, in view of the
fact that the ancillary administrator had reserved and availed of his legal right
to have the properties of the estate declared at their fair market value as of six
months from the time the decedent died..
On the fifth issue, we shall consider the various deductions, from the allowance
or disallowance of which by the Tax Court, both petitioner and respondents
have appealed..
Petitioner, in this regard, contends that no evidence of record exists to support
the allowance of the sum of P8,604.39 for the following expenses:.
1) Administrator's fee
P1,204.34
2) Attorney's fee
6,000.00
3) Judicial and Administrative expenses
2,052.55

Total Deductions
P8,604.39
An examination of the record discloses, however, that the foregoing items were
considered deductible by the Tax Court on the basis of their approval by the
probate court to which said expenses, we may presume, had also been
presented for consideration. It is to be supposed that the probate court would
not have approved said items were they not supported by evidence presented
by the estate. In allowing the items in question, the Tax Court had before it the
pertinent order of the probate court which was submitted in evidence by
respondents. (Exh. "AA-2", p. 100, record). As the Tax Court said, it found no
basis for departing from the findings of the probate court, as it must have been
satisfied that those expenses were actually incurred. Under the circumstances,
we see no ground to reverse this finding of fact which, under Republic Act of
California National Association, which it would appear, that while still living,
Walter G. Stevenson obtained we are not inclined to pass upon the claim of
respondents in respect to the additional amount of P86.52 for funeral expenses
which was disapproved by the court a quo for lack of evidence.
In connection with the deduction of P652.50 representing the amount of realty
taxes paid in 1951 on the decedent's two parcels of land in Baguio City, which
respondents claim was disallowed by the Tax Court, we find that this claim has
in fact been allowed. What happened here, which a careful review of the record
will reveal, was that the Tax Court, in itemizing the liabilities of the estate, viz:
1) Administrator's fee
P1,204.34
2) Attorney's fee
6,000.00
3) Judicial and Administration expenses as of August 9, 1952
2,052.55
Total
P9,256.89
added the P652.50 for realty taxes as a liability of the estate, to the P1,400.05
for judicial and administration expenses approved by the court, making a total
of P2,052.55, exactly the same figure which was arrived at by the Tax Court for
judicial and administration expenses. Hence, the difference between the total of
P9,256.98 allowed by the Tax Court as deductions, and the P8,604.39 as found
by the probate court, which is P652.50, the same amount allowed for realty
taxes. An evident oversight has involuntarily been made in omitting the

P2,000.00 for funeral expenses in the final computation. This amount has been
expressly allowed by the lower court and there is no reason why it should not
be. .
We come now to the other claim of respondents that pursuant to section 89(b)
(1) in relation to section 89(a) (1) (E) and section 89(d), National Internal
Revenue Code, the amount of P10,022.47 should have been allowed the estate
as a deduction, because it represented an indebtedness of the decedent
incurred during his lifetime. In support thereof, they offered in evidence a duly
certified claim, presented to the probate court in California by the Bank of
California National Association, which it would appear, that while still living,
Walter G. Stevenson obtained a loan of $5,000.00 secured by pledge on
140,000 of his shares of stock in the Mindanao Mother Lode Mines, Inc. (Exhs.
"Q-Q4", pp. 53-59, record). The Tax Court disallowed this item on the ground
that the local probate court had not approved the same as a valid claim against
the estate and because it constituted an indebtedness in respect to intangible
personal property which the Tax Court held to be exempt from inheritance tax.
For two reasons, we uphold the action of the lower court in disallowing the
deduction.
Firstly, we believe that the approval of the Philippine probate court of this
particular indebtedness of the decedent is necessary. This is so although the
same, it is averred has been already admitted and approved by the
corresponding probate court in California, situs of the principal or domiciliary
administration. It is true that we have here in the Philippines only an ancillary
administration in this case, but, it has been held, the distinction between
domiciliary or principal administration and ancillary administration serves only
to distinguish one administration from the other, for the two proceedings are
separate and independent.8 The reason for the ancillary administration is that,
a grant of administration does not ex proprio vigore, have any effect beyond
the limits of the country in which it was granted. Hence, we have the
requirement that before a will duly probated outside of the Philippines can have
effect here, it must first be proved and allowed before our courts, in much the
same manner as wills originally presented for allowance therein.9 And the
estate shall be administered under letters testamentary, or letters of
administration granted by the court, and disposed of according to the will as
probated, after payment of just debts and expenses of administration.10 In
other words, there is a regular administration under the control of the court,
where claims must be presented and approved, and expenses of administration
allowed before deductions from the estate can be authorized. Otherwise, we
would have the actuations of our own probate court, in the settlement and
distribution of the estate situated here, subject to the proceedings before the
foreign court over which our courts have no control. We do not believe such a
procedure is countenanced or contemplated in the Rules of Court.
Another reason for the disallowance of this indebtedness as a deduction,
springs from the provisions of Section 89, letter (d), number (1), of the National
Internal Revenue Code which reads:

(d) Miscellaneous provisions (1) No deductions shall be allowed in the case of

a non-resident not a citizen of the Philippines unless the executor, administrator
or anyone of the heirs, as the case may be, includes in the return required to be
filed under section ninety-three the value at the time of his death of that part of
the gross estate of the non-resident not situated in the Philippines."
In the case at bar, no such statement of the gross estate of the non-resident
Stevenson not situated in the Philippines appears in the three returns submitted
to the court or to the office of the petitioner Collector of Internal Revenue. The
purpose of this requirement is to enable the revenue officer to determine how
much of the indebtedness may be allowed to be deducted, pursuant to (b),
number (1) of the same section 89 of the Internal Revenue Code which
provides:
(b) Deductions allowed to non-resident estates. In the case of a non-resident
not a citizen of the Philippines, by deducting from the value of that part of his
gross estate which at the time of his death is situated in the Philippines
(1) Expenses, losses, indebtedness, and taxes. That proportion of the
deductions specified in paragraph (1) of subjection (a) of this section11 which
the value of such part bears the value of his entire gross estate wherever
situated;"
In other words, the allowable deduction is only to the extent of the portion of
the indebtedness which is equivalent to the proportion that the estate in the
Philippines bears to the total estate wherever situated. Stated differently, if the
properties in the Philippines constitute but 1/5 of the entire assets wherever
situated, then only 1/5 of the indebtedness may be deducted. But since, as
heretofore adverted to, there is no statement of the value of the estate situated
outside the Philippines, no part of the indebtedness can be allowed to be
deducted, pursuant to Section 89, letter (d), number (1) of the Internal Revenue
Code.
For the reasons thus stated, we affirm the ruling of the lower court disallowing
the deduction of the alleged indebtedness in the sum of P10,022.47.
In recapitulation, we hold and declare that:
(a) only the one-half (1/2) share of the decedent Stevenson in the conjugal
partnership property constitutes his hereditary estate subject to the estate and
inheritance taxes;
(b) the intangible personal property is not exempt from inheritance tax, there
existing no complete total reciprocity as required in section 122 of the National
Internal Revenue Code, nor is the decedent's estate entitled to an exemption of
P4,000.00 in the computation of the estate tax;

(c) for the purpose of the estate and inheritance taxes, the 210,000 shares of
stock in the Mindanao Mother Lode Mines, Inc. are to be appraised at P0.325
per share; and
(d) the P2,000.00 for funeral expenses should be deducted in the determination
of the net asset of the deceased Stevenson.
In all other respects, the decision of the Court of Tax Appeals is affirmed.
Respondent's claim for interest on the amount allegedly overpaid, if any
actually results after a recomputation on the basis of this decision is hereby
denied in line with our recent decision in Collector of Internal Revenue v. St.
Paul's Hospital (G.R. No. L-12127, May 29, 1959) wherein we held that, "in the
absence of a statutory provision clearly or expressly directing or authorizing
such payment, and none has been cited by respondents, the National
Government cannot be required to pay interest."
WHEREFORE, as modified in the manner heretofore indicated, the judgment of
the lower court is hereby affirmed in all other respects not inconsistent
herewith. No costs. So ordered.

[G.R. No. L-10128. November 13, 1956.]

MAMERTO C. CORRE, Plaintiff-Appellant, vs. GUADALUPE TAN CORRE,
Defendant-Appellee.

DECISION
BAUTISTA ANGELO, J.:
Plaintiff brought this action in the Court of First Instance of Manila seeking his
legal separation from Defendant, his wife, and the placing of their minor
children under the care and custody of a reputable womens dormitory or
institution as the court may recommend.
Defendant moved to dismiss the complaint on the ground that the venue is
improperly laid. She claims that since it appears in the complaint that neither
the Plaintiff nor the Defendant is a resident of the City of Manila the court
where the action was filed is not the proper court to take cognizance of the
case. The court upheld the contention of Defendant and, accordingly, dismissed
the case without pronouncement as to costs. This is an appeal from this
decision.
The pertinent portion of the complaint which refers to the residence of both
Plaintiff and Defendant is as follows:chanroblesvirtuallawlibrary
1. That Plaintiff is an American citizen, 44 years of age, resident of 114 North
Ist Street, Las Vegas, Nevada, United States of America, master sergeant in the
U. S. Army with military service address of Ro-6739431, Army Section, Military
Assistance Advisory Group (MAAG) Formosa, APO 63, San Francisco, California,
and for the purpose of filing and maintaining this suit, temporarily resides at
576 Paltoc, Santa Mesa, Manila;
2. That Defendant is a Filipino, 40 years of age and resident of the
municipality of Catbalogan, province of Samar, Philippines, where summons
may be served;
Section 1, Rule 5, of the Rules of Court provides that Civil actions in Courts of
First Instance may be commenced and tried where the Defendant or any of the
Defendants resides or may be found, or where the Plaintiff or any of the
Plaintiffs resides, at the election of the Plaintiff. From this rule it may be
inferred that Plaintiff can elect to file the action in the court he may choose if
both the Plaintiff and the Defendant have their residence in the Philippines.
Otherwise, the action can only be brought in the place where either one
resides.
It the present case, it clearly appears in the complaint that the Plaintiff is a
resident of Las Vegas, Nevada, U. S. A. while the Defendant is a resident of the

municipality of Catbalogan, province of Samar. Such being the case, Plaintiff

has no choice other than to file the action in the court of first instance of the
latter province. The allegation that the Plaintiff for the purpose of filing and
maintaining this suit, temporarily resides at 576 Paltoc, Santa Mesa, Manila
cannot serve as basis for the purpose of determining the venue for that is not
the residence contemplated by the rule. If that were allowed, we would create a
situation where a person may have his residence in one province and, to suit
his convenience, or to harass the Defendant, may bring the action in the court
of any other province. That cannot be the intendment of the rule.
Indeed, residence as used in said rule is synonymous with domicile. This is
define as the permanent home, the place to which, whenever absent for
business or pleasure, one intends to return, and depends on facts and
circumstances, in the sense that they disclose intent (67 C.J., 123-124). This is
what we said in the recent case of Evangelista vs. Santos, 86 Phil.,
387:chanroblesvirtuallawlibrary
The fact that Defendant was sojourning in Pasay at the time he was served
with summons does not make him a resident of that place for purposes of
venue. Residence is the permanent home, the place to which, whenever
absent for business or pleasure, one intends to return cralaw. (67 C.J. pp. 123124.) A man can have but one domicile at a time (Alcantara vs. Secretary of
Interior, 61 Phil. 459), and residence is synonymous with domicile under section
1 of Rule 5 (Morans Comments, supra, p. 104).
The case of Dela Rosa and Go Kee vs. De Borja, 53 Phil., 990, cited by Appellant
to support his contention, is not controlling. In that case, the Defendant
submitted to the jurisdiction of the court and did not raise the point of venue
until after judgment had been rendered. And so it was held that Defendant was
estopped to raise this point on appeal, although in passing the court insinuated
that residence for purposes of venue need not be permanent. At any rate, this
matter should now be regarded as modified by our decision in the aforesaid
case of Evangelista.
Wherefore, the decision appealed from is affirmed, with costs against Appellant.

G.R. No. L-43082

June 18, 1937

PABLO LORENZO, as trustee of the estate of Thomas Hanley, deceased,

plaintiff-appellant,
vs.
JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellant.
Pablo Lorenzo and Delfin Joven for plaintiff-appellant.
Office of the Solicitor-General Hilado for defendant-appellant.
LAUREL, J.:
On October 4, 1932, the plaintiff Pablo Lorenzo, in his capacity as trustee of the
estate of Thomas Hanley, deceased, brought this action in the Court of First
Instance of Zamboanga against the defendant, Juan Posadas, Jr., then the
Collector of Internal Revenue, for the refund of the amount of P2,052.74, paid
by the plaintiff as inheritance tax on the estate of the deceased, and for the
collection of interst thereon at the rate of 6 per cent per annum, computed from
September 15, 1932, the date when the aforesaid tax was [paid under protest.
The defendant set up a counterclaim for P1,191.27 alleged to be interest due
on the tax in question and which was not included in the original assessment.
From the decision of the Court of First Instance of Zamboanga dismissing both
the plaintiff's complaint and the defendant's counterclaim, both parties
appealed to this court.
It appears that on May 27, 1922, one Thomas Hanley died in Zamboanga,
Zamboanga, leaving a will (Exhibit 5) and considerable amount of real and
personal properties. On june 14, 1922, proceedings for the probate of his will
and the settlement and distribution of his estate were begun in the Court of
First Instance of Zamboanga. The will was admitted to probate. Said will
provides, among other things, as follows:
4. I direct that any money left by me be given to my nephew Matthew Hanley.

The Court of First Instance of Zamboanga considered it proper for the best
interests of ther estate to appoint a trustee to administer the real properties
which, under the will, were to pass to Matthew Hanley ten years after the two
executors named in the will, was, on March 8, 1924, appointed trustee. Moore
took his oath of office and gave bond on March 10, 1924. He acted as trustee
until February 29, 1932, when he resigned and the plaintiff herein was
appointed in his stead.
During the incumbency of the plaintiff as trustee, the defendant Collector of
Internal Revenue, alleging that the estate left by the deceased at the time of
his death consisted of realty valued at P27,920 and personalty valued at
P1,465, and allowing a deduction of P480.81, assessed against the estate an
inheritance tax in the amount of P1,434.24 which, together with the penalties
for deliquency in payment consisting of a 1 per cent monthly interest from July
1, 1931 to the date of payment and a surcharge of 25 per cent on the tax,
amounted to P2,052.74. On March 15, 1932, the defendant filed a motion in the
testamentary proceedings pending before the Court of First Instance of
Zamboanga (Special proceedings No. 302) praying that the trustee, plaintiff
herein, be ordered to pay to the Government the said sum of P2,052.74. The
motion was granted. On September 15, 1932, the plaintiff paid said amount
under protest, notifying the defendant at the same time that unless the amount
was promptly refunded suit would be brought for its recovery. The defendant
overruled the plaintiff's protest and refused to refund the said amount hausted,
plaintiff went to court with the result herein above indicated.
In his appeal, plaintiff contends that the lower court erred:
I. In holding that the real property of Thomas Hanley, deceased, passed to his
instituted heir, Matthew Hanley, from the moment of the death of the former,
and that from the time, the latter became the owner thereof.
II. In holding, in effect, that there was deliquency in the payment of inheritance
tax due on the estate of said deceased.

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

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

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

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

xxx

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

xxx

xxx

8. I state at this time I have one brother living, named Malachi Hanley, and that
my nephew, Matthew Hanley, is a son of my said brother, Malachi Hanley.

The defendant-appellant contradicts the theories of the plaintiff and assigns the
following error besides:
The lower court erred in not ordering the plaintiff to pay to the defendant the
sum of P1,191.27, representing part of the interest at the rate of 1 per cent per
month from April 10, 1924, to June 30, 1931, which the plaintiff had failed to
pay on the inheritance tax assessed by the defendant against the estate of
Thomas Hanley.
The following are the principal questions to be decided by this court in this
appeal: (a) When does the inheritance tax accrue and when must it be
satisfied? (b) Should the inheritance tax be computed on the basis of the value
of the estate at the time of the testator's death, or on its value ten years later?
(c) In determining the net value of the estate subject to tax, is it proper to
deduct the compensation due to trustees? (d) What law governs the case at
bar? Should the provisions of Act No. 3606 favorable to the tax-payer be given
retroactive effect? (e) Has there been deliquency in the payment of the
inheritance tax? If so, should the additional interest claimed by the defendant in
his appeal be paid by the estate? Other points of incidental importance, raised
by the parties in their briefs, will be touched upon in the course of this opinion.
(a) The accrual of the inheritance tax is distinct from the obligation to pay the
same. Section 1536 as amended, of the Administrative Code, imposes the tax
upon "every transmission by virtue of inheritance, devise, bequest, gift mortis
causa, or advance in anticipation of inheritance,devise, or bequest." The tax
therefore is upon transmission or the transfer or devolution of property of a
decedent, made effective by his death. (61 C. J., p. 1592.) It is in reality an
excise or privilege tax imposed on the right to succeed to, receive, or take
property by or under a will or the intestacy law, or deed, grant, or gift to
become operative at or after death. Acording to article 657 of the Civil Code,
"the rights to the succession of a person are transmitted from the moment of
his death." "In other words", said Arellano, C. J., ". . . the heirs succeed
immediately to all of the property of the deceased ancestor. The property
belongs to the heirs at the moment of the death of the ancestor as completely
as if the ancestor had executed and delivered to them a deed for the same
before his death." (Bondad vs. Bondad, 34 Phil., 232. See also, Mijares vs. Nery,
3 Phil., 195; Suilong & Co., vs. Chio-Taysan, 12 Phil., 13; Lubrico vs. Arbado, 12
Phil., 391; Innocencio vs. Gat-Pandan, 14 Phil., 491; Aliasas vs.Alcantara, 16
Phil., 489; Ilustre vs. Alaras Frondosa, 17 Phil., 321; Malahacan vs. Ignacio, 19
Phil., 434; Bowa vs. Briones, 38 Phil., 27; Osario vs. Osario & Yuchausti
Steamship Co., 41 Phil., 531; Fule vs. Fule, 46 Phil., 317; Dais vs. Court of First
Instance of Capiz, 51 Phil., 396; Baun vs. Heirs of Baun, 53 Phil., 654.)
Plaintiff, however, asserts that while article 657 of the Civil Code is applicable
to testate as well as intestate succession, it operates only in so far as forced
heirs are concerned. But the language of article 657 of the Civil Code is broad
and makes no distinction between different classes of heirs. That article does
not speak of forced heirs; it does not even use the word "heir". It speaks of the
rights of succession and the transmission thereof from the moment of death.

The provision of section 625 of the Code of Civil Procedure regarding the
authentication and probate of a will as a necessary condition to effect
transmission of property does not affect the general rule laid down in article
657 of the Civil Code. The authentication of a will implies its due execution but
once probated and allowed the transmission is effective as of the death of the
testator in accordance with article 657 of the Civil Code. Whatever may be the
time when actual transmission of the inheritance takes place, succession takes
place in any event at the moment of the decedent's death. The time when the
heirs legally succeed to the inheritance may differ from the time when the heirs
actually receive such inheritance. "Poco importa", says Manresa commenting on
article 657 of the Civil Code, "que desde el falleimiento del causante, hasta que
el heredero o legatario entre en posesion de los bienes de la herencia o del
legado, transcurra mucho o poco tiempo, pues la adquisicion ha de retrotraerse
al momento de la muerte, y asi lo ordena el articulo 989, que debe considerarse
como complemento del presente." (5 Manresa, 305; see also, art. 440, par. 1,
Civil Code.) Thomas Hanley having died on May 27, 1922, the inheritance tax
accrued as of the date.
From the fact, however, that Thomas Hanley died on May 27, 1922, it does not
follow that the obligation to pay the tax arose as of the date. The time for the
payment on inheritance tax is clearly fixed by section 1544 of the Revised
Administrative Code as amended by Act No. 3031, in relation to section 1543 of
the same Code. The two sections follow:
SEC. 1543. Exemption of certain acquisitions and transmissions. The
following shall not be taxed:
(a) The merger of the usufruct in the owner of the naked title.
(b) The transmission or delivery of the inheritance or legacy by the fiduciary
heir or legatee to the trustees.
(c) The transmission from the first heir, legatee, or donee in favor of another
beneficiary, in accordance with the desire of the predecessor.
In the last two cases, if the scale of taxation appropriate to the new beneficiary
is greater than that paid by the first, the former must pay the difference.
SEC. 1544. When tax to be paid. The tax fixed in this article shall be paid:
(a) In the second and third cases of the next preceding section, before entrance
into possession of the property.
(b) In other cases, within the six months subsequent to the death of the
predecessor; but if judicial testamentary or intestate proceedings shall be
instituted prior to the expiration of said period, the payment shall be made by
the executor or administrator before delivering to each beneficiary his share.

If the tax is not paid within the time hereinbefore prescribed, interest at the
rate of twelve per centum per annum shall be added as part of the tax; and to
the tax and interest due and unpaid within ten days after the date of notice and
demand thereof by the collector, there shall be further added a surcharge of
twenty-five per centum.
A certified of all letters testamentary or of admisitration shall be furnished the
Collector of Internal Revenue by the Clerk of Court within thirty days after their
issuance.
It should be observed in passing that the word "trustee", appearing in
subsection (b) of section 1543, should read "fideicommissary" or "cestui que
trust". There was an obvious mistake in translation from the Spanish to the
English version.
The instant case does fall under subsection (a), but under subsection (b), of
section 1544 above-quoted, as there is here no fiduciary heirs, first heirs,
legatee or donee. Under the subsection, the tax should have been paid before
the delivery of the properties in question to P. J. M. Moore as trustee on March
10, 1924.
(b) The plaintiff contends that the estate of Thomas Hanley, in so far as the real
properties are concerned, did not and could not legally pass to the instituted
heir, Matthew Hanley, until after the expiration of ten years from the death of
the testator on May 27, 1922 and, that the inheritance tax should be based on
the value of the estate in 1932, or ten years after the testator's death. The
plaintiff introduced evidence tending to show that in 1932 the real properties in
question had a reasonable value of only P5,787. This amount added to the
value of the personal property left by the deceased, which the plaintiff admits is
P1,465, would generate an inheritance tax which, excluding deductions,
interest and surcharge, would amount only to about P169.52.
If death is the generating source from which the power of the estate to impose
inheritance taxes takes its being and if, upon the death of the decedent,
succession takes place and the right of the estate to tax vests instantly, the tax
should be measured by the vlaue of the estate as it stood at the time of the
decedent's death, regardless of any subsequent contingency value of any
subsequent increase or decrease in value. (61 C. J., pp. 1692, 1693; 26 R. C. L.,
p. 232; Blakemore and Bancroft, Inheritance Taxes, p. 137. See also Knowlton
vs. Moore, 178 U.S., 41; 20 Sup. Ct. Rep., 747; 44 Law. ed., 969.) "The right of
the state to an inheritance tax accrues at the moment of death, and hence is
ordinarily measured as to any beneficiary by the value at that time of such
property as passes to him. Subsequent appreciation or depriciation is
immaterial." (Ross, Inheritance Taxation, p. 72.)
Our attention is directed to the statement of the rule in Cyclopedia of Law of
and Procedure (vol. 37, pp. 1574, 1575) that, in the case of contingent
remainders, taxation is postponed until the estate vests in possession or the
contingency is settled. This rule was formerly followed in New York and has

been adopted in Illinois, Minnesota, Massachusetts, Ohio, Pennsylvania and

Wisconsin. This rule, horever, is by no means entirely satisfactory either to the
estate or to those interested in the property (26 R. C. L., p. 231.). Realizing,
perhaps, the defects of its anterior system, we find upon examination of cases
and authorities that New York has varied and now requires the immediate
appraisal of the postponed estate at its clear market value and the payment
forthwith of the tax on its out of the corpus of the estate transferred. (In re
Vanderbilt, 172 N. Y., 69; 69 N. E., 782; In re Huber, 86 N. Y. App. Div., 458; 83
N. Y. Supp., 769; Estate of Tracy, 179 N. Y., 501; 72 N. Y., 519; Estate of Brez,
172 N. Y., 609; 64 N. E., 958; Estate of Post, 85 App. Div., 611; 82 N. Y. Supp.,
1079. Vide also, Saltoun vs. Lord Advocate, 1 Peter. Sc. App., 970; 3 Macq. H. L.,
659; 23 Eng. Rul. Cas., 888.) California adheres to this new rule (Stats. 1905,
sec. 5, p. 343).
But whatever may be the rule in other jurisdictions, we hold that a transmission
by inheritance is taxable at the time of the predecessor's death,
notwithstanding the postponement of the actual possession or enjoyment of the
estate by the beneficiary, and the tax measured by the value of the property
transmitted at that time regardless of its appreciation or depreciation.
(c) Certain items are required by law to be deducted from the appraised gross
in arriving at the net value of the estate on which the inheritance tax is to be
computed (sec. 1539, Revised Administrative Code). In the case at bar, the
defendant and the trial court allowed a deduction of only P480.81. This sum
represents the expenses and disbursements of the executors until March 10,
1924, among which were their fees and the proven debts of the deceased. The
plaintiff contends that the compensation and fees of the trustees, which
aggregate P1,187.28 (Exhibits C, AA, EE, PP, HH, JJ, LL, NN, OO), should also be
deducted under section 1539 of the Revised Administrative Code which
provides, in part, as follows: "In order to determine the net sum which must
bear the tax, when an inheritance is concerned, there shall be deducted, in
case of a resident, . . . the judicial expenses of the testamentary or intestate
proceedings, . . . ."
A trustee, no doubt, is entitled to receive a fair compensation for his services
(Barney vs. Saunders, 16 How., 535; 14 Law. ed., 1047). But from this it does
not follow that the compensation due him may lawfully be deducted in arriving
at the net value of the estate subject to tax. There is no statute in the
Philippines which requires trustees' commissions to be deducted in determining
the net value of the estate subject to inheritance tax (61 C. J., p. 1705).
Furthermore, though a testamentary trust has been created, it does not appear
that the testator intended that the duties of his executors and trustees should
be separated. (Ibid.; In re Vanneck's Estate, 161 N. Y. Supp., 893; 175 App. Div.,
363; In re Collard's Estate, 161 N. Y. Supp., 455.) On the contrary, in paragraph
5 of his will, the testator expressed the desire that his real estate be handled
and managed by his executors until the expiration of the period of ten years
therein provided. Judicial expenses are expenses of administration (61 C. J., p.
1705) but, in State vs. Hennepin County Probate Court (112 N. W., 878; 101
Minn., 485), it was said: ". . . The compensation of a trustee, earned, not in the

administration of the estate, but in the management thereof for the benefit of
the legatees or devises, does not come properly within the class or reason for
exempting administration expenses. . . . Service rendered in that behalf have
no reference to closing the estate for the purpose of a distribution thereof to
those entitled to it, and are not required or essential to the perfection of the
rights of the heirs or legatees. . . . Trusts . . . of the character of that here before
the court, are created for the the benefit of those to whom the property
ultimately passes, are of voluntary creation, and intended for the preservation
of the estate. No sound reason is given to support the contention that such
expenses should be taken into consideration in fixing the value of the estate for
the purpose of this tax."
(d) The defendant levied and assessed the inheritance tax due from the estate
of Thomas Hanley under the provisions of section 1544 of the Revised
Administrative Code, as amended by section 3 of Act No. 3606. But Act No.
3606 went into effect on January 1, 1930. It, therefore, was not the law in force
when the testator died on May 27, 1922. The law at the time was section 1544
above-mentioned, as amended by Act No. 3031, which took effect on March 9,
1922.
It is well-settled that inheritance taxation is governed by the statute in force at
the time of the death of the decedent (26 R. C. L., p. 206; 4 Cooley on Taxation,
4th ed., p. 3461). The taxpayer can not foresee and ought not to be required to
guess the outcome of pending measures. Of course, a tax statute may be made
retroactive in its operation. Liability for taxes under retroactive legislation has
been "one of the incidents of social life." (Seattle vs. Kelleher, 195 U. S., 360; 49
Law. ed., 232 Sup. Ct. Rep., 44.) But legislative intent that a tax statute should
operate retroactively should be perfectly clear. (Scwab vs. Doyle, 42 Sup. Ct.
Rep., 491; Smietanka vs. First Trust & Savings Bank, 257 U. S., 602; Stockdale
vs. Insurance Co., 20 Wall., 323; Lunch vs. Turrish, 247 U. S., 221.) "A statute
should be considered as prospective in its operation, whether it enacts,
amends, or repeals an inheritance tax, unless the language of the statute
clearly demands or expresses that it shall have a retroactive effect, . . . ." (61 C.
J., P. 1602.) Though the last paragraph of section 5 of Regulations No. 65 of the
Department of Finance makes section 3 of Act No. 3606, amending section
1544 of the Revised Administrative Code, applicable to all estates the
inheritance taxes due from which have not been paid, Act No. 3606 itself
contains no provisions indicating legislative intent to give it retroactive effect.
No such effect can begiven the statute by this court.
The defendant Collector of Internal Revenue maintains, however, that certain
provisions of Act No. 3606 are more favorable to the taxpayer than those of Act
No. 3031, that said provisions are penal in nature and, therefore, should
operate retroactively in conformity with the provisions of article 22 of the
Revised Penal Code. This is the reason why he applied Act No. 3606 instead of
Act No. 3031. Indeed, under Act No. 3606, (1) the surcharge of 25 per cent is
based on the tax only, instead of on both the tax and the interest, as provided
for in Act No. 3031, and (2) the taxpayer is allowed twenty days from notice and

demand by rthe Collector of Internal Revenue within which to pay the tax,
instead of ten days only as required by the old law.
Properly speaking, a statute is penal when it imposes punishment for an offense
committed against the state which, under the Constitution, the Executive has
the power to pardon. In common use, however, this sense has been enlarged to
include within the term "penal statutes" all status which command or prohibit
certain acts, and establish penalties for their violation, and even those which,
without expressly prohibiting certain acts, impose a penalty upon their
commission (59 C. J., p. 1110). Revenue laws, generally, which impose taxes
collected by the means ordinarily resorted to for the collection of taxes are not
classed as penal laws, although there are authorities to the contrary. (See
Sutherland, Statutory Construction, 361; Twine Co. vs. Worthington, 141 U. S.,
468; 12 Sup. Ct., 55; Rice vs. U. S., 4 C. C. A., 104; 53 Fed., 910; Com. vs.
Standard Oil Co., 101 Pa. St., 150; State vs. Wheeler, 44 P., 430; 25 Nev. 143.)
Article 22 of the Revised Penal Code is not applicable to the case at bar, and in
the absence of clear legislative intent, we cannot give Act No. 3606 a
retroactive effect.
(e) The plaintiff correctly states that the liability to pay a tax may arise at a
certain time and the tax may be paid within another given time. As stated by
this court, "the mere failure to pay one's tax does not render one delinqent until
and unless the entire period has eplased within which the taxpayer is
authorized by law to make such payment without being subjected to the
payment of penalties for fasilure to pay his taxes within the prescribed period."
(U. S. vs. Labadan, 26 Phil., 239.)
The defendant maintains that it was the duty of the executor to pay the
inheritance tax before the delivery of the decedent's property to the trustee.
Stated otherwise, the defendant contends that delivery to the trustee was
delivery to the cestui que trust, the beneficiery in this case, within the meaning
of the first paragraph of subsection (b) of section 1544 of the Revised
Administrative Code. This contention is well taken and is sustained. The
appointment of P. J. M. Moore as trustee was made by the trial court in
conformity with the wishes of the testator as expressed in his will. It is true that
the word "trust" is not mentioned or used in the will but the intention to create
one is clear. No particular or technical words are required to create a
testamentary trust (69 C. J., p. 711). The words "trust" and "trustee", though
apt for the purpose, are not necessary. In fact, the use of these two words is not
conclusive on the question that a trust is created (69 C. J., p. 714). "To create a
trust by will the testator must indicate in the will his intention so to do by using
language sufficient to separate the legal from the equitable estate, and with
sufficient certainty designate the beneficiaries, their interest in the ttrust, the
purpose or object of the trust, and the property or subject matter thereof.
Stated otherwise, to constitute a valid testamentary trust there must be a
concurrence of three circumstances: (1) Sufficient words to raise a trust; (2) a
definite subject; (3) a certain or ascertain object; statutes in some jurisdictions
expressly or in effect so providing." (69 C. J., pp. 705,706.) There is no doubt
that the testator intended to create a trust. He ordered in his will that certain of

his properties be kept together undisposed during a fixed period, for a stated
purpose. The probate court certainly exercised sound judgment in appointment
a trustee to carry into effect the provisions of the will (see sec. 582, Code of
Civil Procedure).
P. J. M. Moore became trustee on March 10, 1924. On that date trust estate
vested in him (sec. 582 in relation to sec. 590, Code of Civil Procedure). The
mere fact that the estate of the deceased was placed in trust did not remove it
from the operation of our inheritance tax laws or exempt it from the payment of
the inheritance tax. The corresponding inheritance tax should have been paid
on or before March 10, 1924, to escape the penalties of the laws. This is so for
the reason already stated that the delivery of the estate to the trustee was in
esse delivery of the same estate to the cestui que trust, the beneficiary in this
case. A trustee is but an instrument or agent for the cestui que trust (Shelton
vs. King, 299 U. S., 90; 33 Sup. Ct. Rep., 689; 57 Law. ed., 1086). When Moore
accepted the trust and took possesson of the trust estate he thereby admitted
that the estate belonged not to him but to his cestui que trust (Tolentino vs.
Vitug, 39 Phil.,126, cited in 65 C. J., p. 692, n. 63). He did not acquire any
beneficial interest in the estate. He took such legal estate only as the proper
execution of the trust required (65 C. J., p. 528) and, his estate ceased upon the
fulfillment of the testator's wishes. The estate then vested absolutely in the
beneficiary (65 C. J., p. 542).
The highest considerations of public policy also justify the conclusion we have
reached. Were we to hold that the payment of the tax could be postponed or
delayed by the creation of a trust of the type at hand, the result would be
plainly disastrous. Testators may provide, as Thomas Hanley has provided, that
their estates be not delivered to their beneficiaries until after the lapse of a
certain period of time. In the case at bar, the period is ten years. In other cases,
the trust may last for fifty years, or for a longer period which does not offend
the rule against petuities. The collection of the tax would then be left to the will
of a private individual. The mere suggestion of this result is a sufficient warning
against the accpetance of the essential to the very exeistence of government.
(Dobbins vs. Erie Country, 16 Pet., 435; 10 Law. ed., 1022; Kirkland vs.
Hotchkiss, 100 U. S., 491; 25 Law. ed., 558; Lane County vs. Oregon, 7 Wall.,
71; 19 Law. ed., 101; Union Refrigerator Transit Co. vs. Kentucky, 199 U. S., 194;
26 Sup. Ct. Rep., 36; 50 Law. ed., 150; Charles River Bridge vs. Warren Bridge,
11 Pet., 420; 9 Law. ed., 773.) The obligation to pay taxes rests not upon the
privileges enjoyed by, or the protection afforded to, a citizen by the government
but upon the necessity of money for the support of the state (Dobbins vs. Erie
Country, supra). For this reason, no one is allowed to object to or resist the
payment of taxes solely because no personal benefit to him can be pointed out.
(Thomas vs. Gay, 169 U. S., 264; 18 Sup. Ct. Rep., 340; 43 Law. ed., 740.) While
courts will not enlarge, by construction, the government's power of taxation
(Bromley vs. McCaughn, 280 U. S., 124; 74 Law. ed., 226; 50 Sup. Ct. Rep., 46)
they also will not place upon tax laws so loose a construction as to permit
evasions on merely fanciful and insubstantial distictions. (U. S. vs. Watts, 1
Bond., 580; Fed. Cas. No. 16,653; U. S. vs. Wigglesirth, 2 Story, 369; Fed. Cas.
No. 16,690, followed in Froelich & Kuttner vs. Collector of Customs, 18 Phil.,

461, 481; Castle Bros., Wolf & Sons vs. McCoy, 21 Phil., 300; Muoz & Co. vs.
Hord, 12 Phil., 624; Hongkong & Shanghai Banking Corporation vs. Rafferty, 39
Phil., 145; Luzon Stevedoring Co. vs. Trinidad, 43 Phil., 803.) When proper, a tax
statute should be construed to avoid the possibilities of tax evasion. Construed
this way, the statute, without resulting in injustice to the taxpayer, becomes fair
to the government.
That taxes must be collected promptly is a policy deeply intrenched in our tax
system. Thus, no court is allowed to grant injunction to restrain the collection of
any internal revenue tax ( sec. 1578, Revised Administrative Code; Sarasola vs.
Trinidad, 40 Phil., 252). In the case of Lim Co Chui vs. Posadas (47 Phil., 461),
this court had occassion to demonstrate trenchment adherence to this policy of
the law. It held that "the fact that on account of riots directed against the
Chinese on October 18, 19, and 20, 1924, they were prevented from praying
their internal revenue taxes on time and by mutual agreement closed their
homes and stores and remained therein, does not authorize the Collector of
Internal Revenue to extend the time prescribed for the payment of the taxes or
to accept them without the additional penalty of twenty five per cent."
(Syllabus, No. 3.)
". . . It is of the utmost importance," said the Supreme Court of the United
States, ". . . that the modes adopted to enforce the taxes levied should be
interfered with as little as possible. Any delay in the proceedings of the officers,
upon whom the duty is developed of collecting the taxes, may derange the
operations of government, and thereby, cause serious detriment to the public."
(Dows vs. Chicago, 11 Wall., 108; 20 Law. ed., 65, 66; Churchill and Tait vs.
Rafferty, 32 Phil., 580.)
It results that the estate which plaintiff represents has been delinquent in the
payment of inheritance tax and, therefore, liable for the payment of interest
and surcharge provided by law in such cases.
The delinquency in payment occurred on March 10, 1924, the date when Moore
became trustee. The interest due should be computed from that date and it is
error on the part of the defendant to compute it one month later. The provisions
cases is mandatory (see and cf. Lim Co Chui vs. Posadas, supra), and neither
the Collector of Internal Revenuen or this court may remit or decrease such
interest, no matter how heavily it may burden the taxpayer.
To the tax and interest due and unpaid within ten days after the date of notice
and demand thereof by the Collector of Internal Revenue, a surcharge of
twenty-five per centum should be added (sec. 1544, subsec. (b), par. 2, Revised
Administrative Code). Demand was made by the Deputy Collector of Internal
Revenue upon Moore in a communiction dated October 16, 1931 (Exhibit 29).
The date fixed for the payment of the tax and interest was November 30, 1931.
November 30 being an official holiday, the tenth day fell on December 1, 1931.
As the tax and interest due were not paid on that date, the estate became
liable for the payment of the surcharge.

In view of the foregoing, it becomes unnecessary for us to discuss the fifth error
assigned by the plaintiff in his brief.
We shall now compute the tax, together with the interest and surcharge due
from the estate of Thomas Hanley inaccordance with the conclusions we have
reached.
At the time of his death, the deceased left real properties valued at P27,920
and personal properties worth P1,465, or a total of P29,385. Deducting from
this amount the sum of P480.81, representing allowable deductions under
secftion 1539 of the Revised Administrative Code, we have P28,904.19 as the
net value of the estate subject to inheritance tax.
The primary tax, according to section 1536, subsection (c), of the Revised
Administrative Code, should be imposed at the rate of one per centum upon the
first ten thousand pesos and two per centum upon the amount by which the
share exceed thirty thousand pesos, plus an additional two hundred per
centum. One per centum of ten thousand pesos is P100. Two per centum of
P18,904.19 is P378.08. Adding to these two sums an additional two hundred per
centum, or P965.16, we have as primary tax, correctly computed by the
defendant, the sum of P1,434.24.

To the primary tax thus computed should be added the sums collectible under
section 1544 of the Revised Administrative Code. First should be added
P1,465.31 which stands for interest at the rate of twelve per centum per annum
from March 10, 1924, the date of delinquency, to September 15, 1932, the date
of payment under protest, a period covering 8 years, 6 months and 5 days. To
the tax and interest thus computed should be added the sum of P724.88,
representing a surhcarge of 25 per cent on both the tax and interest, and also
P10, the compromise sum fixed by the defendant (Exh. 29), giving a grand total
of P3,634.43.
As the plaintiff has already paid the sum of P2,052.74, only the sums of
P1,581.69 is legally due from the estate. This last sum is P390.42 more than the
amount demanded by the defendant in his counterclaim. But, as we cannot
give the defendant more than what he claims, we must hold that the plaintiff is
liable only in the sum of P1,191.27 the amount stated in the counterclaim.
The judgment of the lower court is accordingly modified, with costs against the
plaintiff in both instances. So ordered.