G.R. No.

210987

November 24, 2014

THE PHILIPPINE AMERICAN LIFE AND GENERAL INSURANCE COMPANY, Petitioner,

vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL
REVENUE, Respondents.
DECISION
VELASCO, JR., J.:
Nature of the Case
Before the Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court
assailing and seeking the reversal of the Resolutions of the Court of Appeals (CA) in CAG.R. SP No. 127984, dated May 23, 2013 1 and January 21, 2014, which dismissed outright
the petitioner's appeal from the Secretary of Finance's review of BIR Ruling No. 015-12 2 for
lack of jurisdiction.

Commisioner held, donors tax became imposable on the price difference pursuant to Sec.
100 of the National Internal Revenue Code (NIRC), viz:
SEC. 100. Transfer for Less Than Adequate and full Consideration.- Where property, other
than real property referred to in Section 24(D), is transferred for less than an adequate
and full consideration in money or moneys worth, then the amount by which the fair
market value of the property exceeded the value of the consideration shall, for the
purpose of the tax imposed by this Chapter, be deemed a gift, and shall be included in
computing the amount of gifts made during the calendar year.
The afore-quoted provision, the Commissioner added, is implemented by Revenue
Regulation 6-2008 (RR 6-2008), which provides:
SEC. 7. SALE, BARTER OR EXCHANGE OF SHARES OF STOCK NOT TRADED THROUGH A
LOCAL STOCK EXCHANGE PURSUANT TO SECS. 24(C), 25(A)(3), 25(B), 27(D)(2), 28(A)(7)
(c), 28(B)(5)(c) OF THE TAX CODE, AS AMENDED.
xxxx

The Facts

(c) Determination of Amount and Recognition of Gain or Loss

Petitioner The Philippine American Life and General Insurance Company (Philamlife) used
to own 498,590 Class A shares in Philam Care Health Systems, Inc. (PhilamCare),
representing 49.89% of the latter's outstanding capital stock. In 2009, petitioner, in a bid
to divest itself of its interests in the health maintenance organization industry, offered to
sell its shareholdings in PhilamCare through competitive bidding. Thus, on September 24,
2009, petitioner's Class A shares were sold for USD 2,190,000, or PhP 104,259,330 based
on the prevailing exchange rate at the time of the sale, to STI Investments, Inc., who
emerged as the highest bidder. 3

(c.1) In the case of cash sale, the selling price shall be the consideration per deed of sale.

After the sale was completed and the necessary documentary stamp and capital gains
taxes were paid, Philamlife filed an application for a certificate authorizing registration/tax
clearance with the Bureau of Internal Revenue (BIR) Large Taxpayers Service Division to
facilitate the transfer of the shares. Months later, petitioner was informed that it needed to
secure a BIR ruling in connection with its application due to potential donors tax liability.
In compliance, petitioner, on January 4, 2012, requested a ruling 4 to confirm that the sale
was not subject to donors tax, pointing out, in its request, the following: that the
transaction cannot attract donors tax liability since there was no donative intent
and,ergo, no taxable donation, citing BIR Ruling [DA-(DT-065) 715-09] dated November 27,
2009;5 that the shares were sold at their actual fair market value and at arms length; that
as long as the transaction conducted is at arms lengthsuch that a bona fide business
arrangement of the dealings is done inthe ordinary course of businessa sale for less than
an adequate consideration is not subject to donors tax; and that donors tax does not
apply to saleof shares sold in an open bidding process.
On January 4, 2012, however, respondent Commissioner on Internal Revenue
(Commissioner) denied Philamlifes request through BIR Ruling No. 015-12. As determined
by the Commissioner, the selling price of the shares thus sold was lower than their book
value based on the financial statements of PhilamCare as of the end of 2008. 6 As such, the

xxxx
(c.1.4) In case the fair market value of the shares of stock sold, bartered, or exchanged is
greater than the amount of money and/or fair market value of the property received, the
excess of the fair market value of the shares of stock sold, bartered or exchanged overthe
amount of money and the fair market value of the property, if any, received as
consideration shall be deemed a gift subject to the donorstax under Section 100 of the
Tax Code, as amended.
xxxx
(c.2) Definition of fair market valueof Shares of Stock. For purposes of this Section, fair
market value of the share of stock sold shall be:
xxxx
(c.2.2) In the case of shares of stock not listed and traded in the local stock exchanges,
the book value of the shares of stock as shown in the financial statements duly certified by
an independent certified public accountant nearest to the date of sale shall be the fair
market value.
In view of the foregoing, the Commissioner ruled that the difference between the book
value and the selling price in the sales transaction is taxable donation subject to a 30%
donors tax under Section 99(B) of the NIRC.7Respondent Commissioner likewise held that
BIR Ruling [DA-(DT-065) 715-09], on which petitioner anchored its claim, has already been
revoked by Revenue Memorandum Circular (RMC) No. 25-2011.8

Aggrieved, petitioner requested respondent Secretary of Finance (Secretary) to review BIR

Ruling No. 015-12, but to no avail. For on November 26, 2012, respondent Secretary
affirmed the Commissioners assailed ruling in its entirety. 9
Ruling of the Court of Appeals
Not contented with the adverse results, petitioner elevated the case to the CA via a
petition for review under Rule 43, assigning the following errors: 10
A.
The Honorable Secretary of Finance gravely erred in not finding that the application of
Section 7(c.2.2) of RR 06-08 in the Assailed Ruling and RMC 25-11 is void insofar as it
altersthe meaning and scope of Section 100 of the Tax Code.
B.
The Honorable Secretary of Finance gravely erred in finding that Section 100 of the Tax
Code is applicable tothe sale of the Sale of Shares.

predicated on the postulate that BIR Ruling No. 015-12 was issued in the exercise of the
Commissioners power to interpret the NIRC and other tax laws. Consequently, requesting
for its review can be categorized as "other matters arising under the NIRC or other laws
administered by the BIR," which is under the jurisdiction of the CTA, not the CA.
Philamlife eventually sought reconsideration but the CA, in its equally assailed January 21,
2014 Resolution, maintained its earlier position. Hence, the instant recourse.
Issues
Stripped to the essentials, the petition raises the following issues in both procedure and
substance:
1. Whether or not the CA erred in dismissing the CA Petition for lack of jurisdiction; and
2. Whether or not the price difference in petitioners adverted sale of shares in PhilamCare
attracts donors tax.
Procedural Arguments

1.

a. Petitioners contentions

The Sale of Shares were sold at their fair market value and for fair and full consideration in
money or moneys worth.

Insisting on the propriety of the interposed CA petition, Philamlife, while conceding that
respondent Commissioner issued BIR Ruling No. 015-12 in accordance with her authority
to interpret tax laws, argued nonetheless that such ruling is subject to review by the
Secretary of Finance under Sec. 4 of the NIRC, to wit:

2.
The sale of the Sale Shares is a bona fide business transaction without any donative intent
and is therefore beyond the ambit of Section 100 of the Tax Code.
3.
It is superfluous for the BIR to require an express provision for the exemption of the sale of
the Sale Shares from donors tax since Section 100 of the Tax Code does not explicitly
subject the transaction to donors tax.
C.
The Honorable Secretary of Finance gravely erred in failing to find that in the absence of
any of the grounds mentioned in Section 246 of the Tax Code, rules and regulations,
rulings or circulars such as RMC 25-11 cannot be given retroactive application to the
prejudice of Philamlife.
On May 23, 2013, the CA issued the assailed Resolution dismissing the CA Petition, thusly:
WHEREFORE, the Petition for Review dated January 9, 2013 is DISMISSED for lack of
jurisdiction.
SO ORDERED.
In disposing of the CA petition, the appellate court ratiocinated that it is the Court of Tax
Appeals (CTA), pursuant to Sec. 7(a)(1) of Republic Act No. 1125 (RA 1125), 11 as amended,
which has jurisdiction over the issues raised. The outright dismissal, so the CA held, is

SECTION 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases.
The power to interpret the provisions of this Code and other tax laws shall be under the
exclusive and original jurisdiction of the Commissioner, subject to review by the Secretary
of Finance.
The power to decide disputed assessments, refunds of internal revenue taxes, fees or
other charges, penalties imposed in relation thereto, or other matters arising under this
Code orother laws or portions thereof administered by the Bureau of Internal Revenue is
vested in the Commissioner, subject to the exclusive appellate jurisdiction of the Court of
Tax Appeals. Petitioner postulates that there is a need to differentiate the rulings
promulgated by the respondent Commissioner relating to those rendered under the first
paragraph of Sec. 4 of the NIRC, which are appealable to the Secretary of Finance, from
those rendered under the second paragraph of Sec. 4 of the NIRC, which are subject to
review on appeal with the CTA.
This distinction, petitioner argues, is readily made apparent by Department Order No. 702,12 as circularized by RMC No. 40-A-02.

Philamlife further averred that Sec.7 of RA 1125, as amended, does not find application in
the case at bar since it only governs appeals from the Commissioners rulings under the
second paragraph and does not encompass rulings from the Secretary of Finance in the
exercise of his power of review under the first, as what was elevated to the CA. It added
that under RA 1125, as amended, the only decisions of the Secretary appealable to the
CTA are those rendered in customs cases elevated to him automatically under Section
2315 of the Tariff and Customs Code.13
There is, thus, a gap in the law when the NIRC, as couched, and RA 1125, as amended,
failed to supply where the rulings of the Secretary in its exercise of its power of review
under Sec. 4 of the NIRC are appealable to. This gap, petitioner submits, was remedied by
British American Tobacco v. Camacho14 wherein the Court ruled that where what is
assailed is the validity or constitutionality of a law, or a rule or regulation issued by the
administrative agency, the regular courts have jurisdiction to pass upon the same.
In sum, appeals questioning the decisions of the Secretary of Finance in the exercise of its
power of review under Sec. 4 of the NIRC are not within the CTAs limited special
jurisdiction and, according to petitioner, are appealable to the CA via a Rule 43 petition for
review.
b. Respondents contentions
Before the CA, respondents countered petitioners procedural arguments by claiming that
even assuming arguendo that the CTA does not have jurisdiction over the case, Philamlife,
nevertheless,committed a fatal error when it failed to appeal the Secretary of Finances
ruling to the Office of the President (OP). As made apparent by the rules, the Department
of Finance is not among the agencies and quasi-judicial bodies enumerated under Sec. 1,
Rule 43 of the Rules of Court whose decisions and rulings are appealable through a
petition for review.15 This is in stark contrast to the OPs specific mention under the same
provision, so respondents pointed out.
To further reinforce their argument, respondents cite the Presidents power of review
emanating from his power of control as enshrined under Sec. 17 of Article VII of the
Constitution, which reads:
Section 17.The President shall have control of all the executive departments, bureaus, and
offices. He shall ensure that the laws be faithfully executed.
The nature and extent of the Presidents constitutionally granted power of control have
beendefined in a plethora of cases, most recently in Elma v. Jacobi, 16 wherein it was held
that:
x x x This power of control, which even Congress cannot limit, let alone withdraw, means
the power of the Chief Executive to review, alter, modify, nullify, or set aside what a
subordinate, e.g., members of the Cabinet and heads of line agencies, had done in the
performance of their duties and to substitute the judgment of the former for that of the
latter.
In their Comment on the instant petition, however, respondents asseverate that the CA
did not err in its holding respecting the CTAs jurisdiction over the controversy.

The Courts Ruling

The petition is unmeritorious.
Reviews by the Secretary of Finance pursuant to Sec. 4 of the NIRC are appealable to the
CTA
To recapitulate, three different, if not conflicting, positions as indicated below have been
advanced by the parties and by the CA as the proper remedy open for assailing
respondents rulings:
1. Petitioners: The ruling of the Commissioner is subject to review by the Secretary under
Sec. 4 of the NIRC, and that of the Secretary to the CA via Rule 43;
2. Respondents: The ruling of the Commissioner is subject to review by the Secretary
under Sec. 4 of the NIRC, and that of the Secretary to the Office of the President before
appealing to the CA via a Rule 43 petition; and
3. CA: The ruling of the Commissioner is subject to review by the CTA.
We now resolve.
Preliminarily, it bears stressing that there is no dispute that what is involved herein is the
respondent Commissioners exercise of power under the first paragraph of Sec. 4 of the
NIRCthe power to interpret tax laws. This, in fact, was recognized by the appellate court
itself, but erroneously held that her action in the exercise of such power is appealable
directly to the CTA. As correctly pointed out by petitioner, Sec. 4 of the NIRC readily
provides that the Commissioners power to interpret the provisions of this Code and other
tax laws is subject to review by the Secretary of Finance. The issue that now arises is
thiswhere does one seek immediate recourse from the adverse ruling of the Secretary of
Finance in its exercise of its power of review under Sec. 4?
Admittedly, there is no provision in law that expressly provides where exactly the ruling of
the Secretary of Finance under the adverted NIRC provision is appealable to. However, We
find that Sec. 7(a)(1) of RA 1125, as amended, addresses the seeming gap in the law asit
vests the CTA, albeit impliedly, with jurisdiction over the CA petition as "other matters"
arising under the NIRC or other laws administered by the BIR. As stated:
Sec. 7. Jurisdiction.- The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
1. Decisions of the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation
thereto, or other matters arising under the National Internal Revenue or other laws
administered by the Bureau of Internal Revenue. (emphasis supplied)
Even though the provision suggests that it only covers rulings of the Commissioner, We
hold that it is, nonetheless, sufficient enough to include appeals from the Secretarys
review under Sec. 4 of the NIRC.

It is axiomatic that laws should be given a reasonable interpretation which does not defeat
the very purpose for which they were passed.17 Courts should not follow the letter of a
statute when to do so would depart from the true intent of the legislature or would
otherwise yield conclusions inconsistent with the purpose of the act. 18 This Court has, in
many cases involving the construction of statutes, cautioned against narrowly interpreting
a statute as to defeat the purpose of the legislator, and rejected the literal interpretation
of statutes if todo so would lead to unjust or absurd results. 19
Indeed, to leave undetermined the mode of appeal from the Secretary of Finance would be
an injustice to taxpayers prejudiced by his adverse rulings. To remedy this situation,
Weimply from the purpose of RA 1125 and its amendatory laws that the CTA is the proper
forum with which to institute the appeal. This is not, and should not, in any way, be taken
as a derogation of the power of the Office of President but merely as recognition that
matters calling for technical knowledge should be handled by the agency or quasi-judicial
body with specialization over the controversy. As the specialized quasi-judicial agency
mandated to adjudicate tax, customs, and assessment cases, there can be no other court
of appellate jurisdiction that can decide the issues raised inthe CA petition, which involves
the tax treatment of the shares of stocks sold. Petitioner, though, nextinvites attention to
the ruling in Ursal v. Court of Tax Appeals 20 to argue against granting the CTA jurisdiction
by implication, viz:
Republic Act No. 1125 creating the Court of Tax Appeals did not grant it blanket authority
to decide any and all tax disputes. Defining such special courts jurisdiction, the Act
necessarily limited its authority to those matters enumerated therein. Inline with this idea
we recently approved said courts order rejecting an appeal to it by Lopez & Sons from the
decision of the Collector ofCustoms, because in our opinion its jurisdiction extended only
to a review of the decisions of the Commissioner of Customs, as provided bythe statute
and not to decisions of the Collector of Customs. (Lopez & Sons vs. The Court of Tax
Appeals, 100 Phil., 850, 53 Off. Gaz., [10] 3065).
xxxx
x x x Republic Act No. 1125 is a complete law by itself and expressly enumerates the
matters which the Court of Tax Appeals may consider; such enumeration excludes all
others by implication. Expressio unius est exclusio alterius.
Petitioners contention is untenable. Lest the ruling in Ursalbe taken out of context, but
worse as a precedent, it must be noted that the primary reason for the dismissal of the
said case was that the petitioner therein lacked the personality to file the suit with the CTA
because he was not adversely affected by a decision or ruling of the Collector of Internal
Revenue, as was required under Sec. 11 of RA 1125.21 As held:
We share the view that the assessor had no personality to resort to the Court of Tax
Appeals. The rulings of the Board of Assessment Appeals did not "adversely affect" him. At
most it was the City of Cebu that had been adversely affected in the sense that it could
not thereafter collect higher realty taxes from the abovementioned property owners. His
opinion, it is true had been overruled; but the overruling inflicted no material damage
upon him or his office. And the Court of Tax Appeals was not created to decide mere
conflicts of opinion between administrative officers or agencies. Imagine an income tax

examiner resorting to the Court of Tax Appeals whenever the Collector of Internal Revenue
modifies, or lower his assessment on the return of a tax payer! 22
The appellate power of the CTA includes certiorari
Petitioner is quick to point out, however, that the grounds raised in its CA petition included
the nullity of Section 7(c.2.2) of RR 06-08 and RMC 25-11. In an attempt to divest the CTA
jurisdiction over the controversy, petitioner then cites British American Tobacco, wherein
this Court has expounded on the limited jurisdiction of the CTA in the following wise:
While the above statute confers on the CTA jurisdiction to resolve tax disputes in general,
this does not include cases where the constitutionality of a law or rule is challenged.
Where what is assailed is the validity or constitutionality of a law, or a rule or regulation
issued by the administrative agency in the performance of its quasi legislative function,
the regular courts have jurisdiction to pass upon the same. The determination of whether
a specific rule or set of rules issued by an administrative agency contravenes the law or
the constitution is within the jurisdiction of the regular courts. Indeed, the Constitution
vests the power of judicial review or the power to declare a law, treaty, international or
executive agreement, presidential decree, order, instruction, ordinance, or regulation inthe
courts, including the regional trial courts. This is within the scope of judicial power, which
includes the authority of the courts to determine inan appropriate action the validity of the
acts of the political departments. Judicial power includes the duty of the courts of justice
to settle actual controversies involving rights which are legally demandable and
enforceable, and to determine whether or not there has been a grave abuse of discretion
amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of
the Government.23
Vis-a-vis British American Tobacco, it bears to stress what appears to be a contrasting
ruling in Asia International Auctioneers, Inc. v. Parayno, Jr., to wit:
Similarly, in CIR v. Leal, pursuant to Section 116 of Presidential Decree No. 1158 (The
National Internal Revenue Code, as amended) which states that "[d]ealers in securities
shall pay a tax equivalent to six (6%) per centum of their gross income. Lending investors
shall pay a tax equivalent to five (5%) per cent, of their gross income," the CIR issued
Revenue Memorandum Order (RMO) No. 15-91 imposing 5% lending investors tax on
pawnshops based on their gross income and requiring all investigating units of the BIR to
investigate and assess the lending investors tax due from them. The issuance of RMO No.
15-91 was an offshoot of the CIRs finding that the pawnshop business is akin to that of
"lending investors" as defined in Section 157(u) of the Tax Code. Subsequently, the CIR
issued RMC No. 43-91 subjecting pawn tickets to documentary stamp tax. Respondent
therein, Josefina Leal, owner and operator of Josefinas Pawnshop, asked for a
reconsideration of both RMO No. 15-91 and RMC No. 43-91, but the same was denied by
petitioner CIR. Leal then filed a petition for prohibition with the RTC of San Mateo, Rizal,
seeking to prohibit petitioner CIR from implementing the revenue orders. The CIR, through
the OSG, filed a motion to dismiss on the ground of lack of jurisdiction. The RTC denied the
motion. Petitioner filed a petition for certiorari and prohibition with the CA which dismissed
the petition "for lack of basis." In reversing the CA, dissolving the Writ of Preliminary
Injunction issued by the trial court and ordering the dismissal of the case before the trial
court, the Supreme Court held that "[t]he questioned RMO No. 15-91 and RMC No. 43-91

are actually rulings or opinions of the Commissioner implementing the Tax Code on the
taxability of pawnshops." They were issued pursuant to the CIRs power under Section 245
of the Tax Code "to make rulings or opinions in connection with the implementation of the
provisions of internal revenue laws, including ruling on the classification of articles of sales
and similar purposes."The Court held that under R.A. No. 1125 (An Act Creating the Court
of Tax Appeals), as amended, such rulings of the CIR are appealable to the CTA.
In the case at bar, the assailed revenue regulations and revenue memorandum circulars
are actually rulings or opinions of the CIR on the tax treatment of motor vehicles sold at
public auction within the SSEZ to implement Section 12 of R.A. No. 7227 which provides
that "exportation or removal of goods from the territory of the [SSEZ] to the other parts of
the Philippine territory shall be subject to customs duties and taxes under the Customs
and Tariff Codeand other relevant tax laws of the Philippines." They were issued pursuant
to the power of the CIR under Section 4 of the National Internal Revenue Code x x
x.24 (emphasis added)
The respective teachings in British American Tobacco and Asia International Auctioneers,
at first blush, appear to bear no conflictthat when the validity or constitutionality of an
administrative rule or regulation is assailed, the regular courts have jurisdiction; and if
what is assailed are rulings or opinions of the Commissioner on tax treatments, jurisdiction
over the controversy is lodged with the CTA. The problem with the above postulates,
however, is that they failed to take into consideration one crucial pointa taxpayer can
raise both issues simultaneously.
Petitioner avers that there is now a trend wherein both the CTA and the CA disclaim
jurisdiction over tax cases: on the one hand, mere prayer for the declaration of a tax
measures unconstitutionality or invalidity before the CTA can result in a petitions outright
dismissal, and on the other hand, the CA will likewise dismiss the same petition should it
find that the primary issue is not the tax measures validity but the assessment or
taxability of the transaction or subject involved. To illustrate this point, petitioner cites the
assailed Resolution, thusly: Admittedly, in British American Tobacco vs. Camacho, the
Supreme Court has ruled that the determination of whether a specific rule or set of rules
issued by an administrative agency contravenes the law or the constitution is within the
jurisdiction of the regular courts, not the CTA.
xxxx
Petitioner essentially questions the CIRs ruling that Petitioners sale of shares is a taxable
donation under Sec. 100 of the NIRC. The validity of Sec. 100 of the NIRC, Sec. 7 (C.2.2)
and RMC 25-11 is merely questioned incidentally since it was used by the CIR as bases for
its unfavourable opinion. Clearly, the Petition involves an issue on the taxability of the
transaction rather than a direct attack on the constitutionality of Sec. 100, Sec.7 (c.2.2.) of
RR 06-08 and RMC 25-11. Thus, the instant Petition properly pertains to the CTA under
Sec. 7 of RA 9282.
As a result of the seemingly conflicting pronouncements, petitioner submits that taxpayers
are now at a quandary on what mode of appeal should be taken, to which court or agency
it should be filed, and which case law should be followed.

Petitioners above submission is specious.

In the recent case of City of Manila v. Grecia-Cuerdo,25 the Court en banc has ruled that
the CTA now has the power of certiorari in cases within its appellate jurisdiction. To
elucidate:
The prevailing doctrine is that the authority to issue writs of certiorari involves the
exercise of original jurisdiction which must be expressly conferred by the Constitution or
by law and cannot be implied from the mere existence of appellate jurisdiction. Thus, x x x
this Court has ruled against the jurisdiction of courts or tribunals over petitions for
certiorari on the ground that there is no law which expressly gives these tribunals such
power. Itmust be observed, however, that x x x these rulings pertain not to regular courts
but to tribunals exercising quasijudicial powers. With respect tothe Sandiganbayan,
Republic Act No. 8249 now provides that the special criminal court has exclusive original
jurisdiction over petitions for the issuance of the writs of mandamus, prohibition,
certiorari, habeas corpus, injunctions, and other ancillary writs and processes in aid of its
appellate jurisdiction.
In the same manner, Section 5 (1), Article VIII of the 1987 Constitution grants power to the
Supreme Court, in the exercise of its original jurisdiction, to issue writs of certiorari,
prohibition and mandamus. With respect to the Court of Appeals, Section 9 (1) of Batas
Pambansa Blg. 129 (BP 129) gives the appellate court, also in the exercise of its original
jurisdiction, the power to issue, among others, a writ of certiorari, whether or not in aid of
its appellate jurisdiction. As to Regional Trial Courts, the power to issue a writ of certiorari,
in the exercise of their original jurisdiction, is provided under Section 21 of BP 129.
The foregoing notwithstanding, while there is no express grant of such power, with respect
to the CTA, Section 1, Article VIII of the 1987 Constitution provides, nonetheless, that
judicial power shall be vested in one Supreme Court and in such lower courts as may be
established by law and that judicial power includes the duty of the courts of justice to
settle actual controversies involving rights which are legally demandable and enforceable,
and to determine whether or not there has been a grave abuse of discretion amounting to
lack or excess of jurisdiction on the part of any branch or instrumentality of the
Government.
On the strength of the above constitutional provisions, it can be fairly interpreted that the
power of the CTA includes that of determining whether or not there has been grave abuse
of discretion amounting to lack or excess of jurisdiction on the part of the RTC in issuing an
interlocutory order in cases falling within the exclusive appellate jurisdiction of the tax
court. It, thus, follows that the CTA, by constitutional mandate, is vested with jurisdiction
to issue writs of certiorari in these cases.
Indeed, in order for any appellate court to effectively exercise its appellate jurisdiction, it
must have the authority to issue, among others, a writ of certiorari. In transferring
exclusive jurisdiction over appealed tax cases to the CTA, it can reasonably be assumed
that the law intended to transfer also such power as is deemed necessary, if not
indispensable, in aid of such appellate jurisdiction. There is no perceivable reason why the
transfer should only be considered as partial, not total. (emphasis added)

Evidently, City of Manilacan be considered as a departure from Ursal in that in spite of

there being no express grant in law, the CTA is deemed granted with powers of certiorari
by implication. Moreover, City of Manila diametrically opposes British American Tobacco to
the effect that it is now within the power of the CTA, through its power of certiorari, to rule
on the validity of a particular administrative ruleor regulation so long as it is within its
appellate jurisdiction. Hence, it can now rule not only on the propriety of an assessment or
tax treatment of a certain transaction, but also on the validity of the revenue regulation or
revenue memorandum circular on which the said assessment is based.
Guided by the doctrinal teaching in resolving the case at bar, the fact that the CA petition
not only contested the applicability of Sec. 100 of the NIRC over the sales transaction but
likewise questioned the validity of Sec. 7 (c.2.2) of RR 06-08 and RMC 25-11 does not
divest the CTA of its jurisdiction over the controversy, contrary to petitioner's arguments.
The price difference is subject to donor's tax
Petitioner's substantive arguments are unavailing. The absence of donative intent, if that
be the case, does not exempt the sales of stock transaction from donor's tax since Sec.
100 of the NIRC categorically states that the amount by which the fair market value of the
property exceeded the value of the consideration shall be deemed a gift.1wphi1 Thus,
even if there is no actual donation, the difference in price is considered a donation by
fiction of law.
Moreover, Sec. 7(c.2.2) of RR 06-08 does not alter Sec. 100 of the NIRC but merely sets
the parameters for determining the "fair market value" of a sale of stocks. Such issuance
was made pursuant to the Commissioner's power to interpret tax laws and to promulgate
rules and regulations for their implementation.
Lastly, petitioner is mistaken in stating that RMC 25-11, having been issued after the sale,
was being applied retroactively in contravention to Sec. 246 of the NIRC. 26 Instead, it
merely called for the strict application of Sec. 100, which was already in force the moment
the NIRC was enacted.
WHEREFORE, the petition is hereby DISMISSED. The Resolutions of the Court of Appeals in
CA-G.R. SP No. 127984 dated May 23, 2013 and January 21, 2014 are hereby AFFIRMED.
SO ORDERED.

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.
DECISION
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.

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:

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

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.

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

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, wellsettled 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).

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:
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 indirect, and whether the
property is real or personal, tangible or intangible, is subject to donors or gift tax.

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

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).

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:

Thus, reference may be made to the definition of a donation in the Civil Code. Article 725
of said Code defines donation as:

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?

. . . an act of liberality whereby a person disposes gratuitously of a thing or right in favor

of another, who accepts it.

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?

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

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?

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.

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?
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
First, Fifth and Sixth Issues
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.

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.netAmbiguity 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.
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 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:
. . . 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 well-entrenched 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-19865

July 31, 1965

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

vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent-appellee.
Angel S. Gamboa for petitioners-appellants.
Office of the Solicitor General for respondent-appellee.
REYES, J.B.L., J.:
This case is a sequel to the case of Pirovano vs. De la Rama Steamship Co., 96 Phil. 335.
Briefly, the facts of the aforestated case may be stated as follows:
Enrico Pirovano was the father of the herein petitioners-appellants. Sometime in the early
part of 1941, De la Rama Steamship Co. insured the life of said Enrico Pirovano, who was
then its President and General Manager until the time of his death, with various Philippine
and American insurance companies for a total sum of one million pesos, designating itself
as the beneficiary of the policies, obtained by it. Due to the Japanese occupation of the
Philippines during the second World War, the Company was unable to pay the premiums
on the policies issued by its Philippine insurers and these policies lapsed, while the policies
issued by its American insurers were kept effective and subsisting, the New York office of
the Company having continued paying its premiums from year to year.
During the Japanese occupation , or more particularly in the latter part of 1944, said
Enrico Pirovano died.
After the liberation of the Philippines from the Japanese forces, the Board of Directors of
De la Rama Steamship Co. adopted a resolution dated July 10, 1946 granting and setting
aside, out of the proceeds expected to be collected on the insurance policies taken on the
life of said Enrico Pirovano, the sum of P400,000.00 for equal division among the four (4)
minor children of 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 petitionersappellants 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.

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.

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.

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):

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

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. ... .

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

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 well-known
book, "Outlines of the Law" (p. 204)
Love and affection are not considerations of value they are not estimable in terms of
value. Nor are sentiments of gratitude for gratuitous part favors or kindnesses; nor are
obligations which are merely moral. It has been well said that if a moral obligation were
alone sufficient it would remove the necessity for any consideration at all, since the fact of
making a promise impose, the moral obligation to perform it."
It is of course perfectly possible that a donation or gift should at the same time impose a
burden or condition on the donee involving some economic liability for him. A, for
example, may donate a parcel of land to B on condition that the latter assume a mortgage
existing on the donated land. In this case the donee may rightfully insist that the gift tax
be computed only on the value of the land less the value of the mortgage. This, in fact, is
contemplated by Article 619 of the Civil Code of 1889 (Art. 726 of the Tax Code) when it
provides that there is also a donation "when the gift imposes upon the donee a burden
which is less than the value of the thing given." Section 111 of the Tax Code has in view
situations of this kind, since it also prescribes that "the amount by which the value of the
property exceeded the value of the consideration" shall be deemed a gift for the purpose
of the tax. .
Petitioners finally contend that, even assuming that the donation in question is subject to
donees' gift taxes, the imposition of the surcharge of 5% and interest of 1% per month

from March 8, 1955 was not justified because the proceeds of the life insurance policies
were actually received on April 6, 1955 and May 12, 1955 only and in accordance with
Section 115(c) of the Tax Code; the filing of the returns of such tax became due on March
1, 1956 and the tax became payable on May 15, 1956, as provided for in Section 116(a) of
the same Code. In other words, petitioners maintain that the assessment and demand for
donees' gift taxes was prematurely made and of no legal effect; hence, they should not be
held liable for such surcharge and interest.
It is well to note, and it is not disputed, that petitioners-donees have failed to file any gift
tax return and that they also failed to pay the amount of the assessment made against
them by respondent in 1955. This situation is covered by Section 119(b) (1) and (c) and
Section 120 of the Tax Code:
(b) Deficiency.
(1) Payment not extended. Where a deficiency, or any interest assessed in connection
therewith, or any addition to the taxes provided for in section one hundred twenty is not
paid in full within thirty days from the date of the notice and demand from the
Commissioner, there shall be collected as a part of the taxes, interest upon the unpaid
amount at the rate of one per centum a month from the date of such notice and demand
until it is paid. (section 119)
(c) Surcharge. If any amount of the taxes included in the notice and demand from the
Commissioner of Internal Revenue is not paid in full within thirty days after such notice
and demand, there shall be collected in addition to the interest prescribed above as a part
of the taxes a surcharge of five per centum of the unpaid amount. (sec. 119)
The failure to file a return was found by the lower court to be due to reasonable cause and
not to willful neglect. On this score, the elimination by the lower court of the 25%
surcharge is ad valorem penalty which respondent Commissioner had imposed pursuant
to Section 120 of the Tax Code was proper, since said Section 120 vests in the
Commissioner of Internal Revenue or 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.

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

After hearing, the CTA rendered judgment, the pertinent portions of which are quoted
below:

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.

... . 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.

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.

xxx

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.

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

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 giftinter 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. 120880 June 5, 1997

FERDINAND R. MARCOS II, petitioner,
vs.
COURT OF APPEALS, THE COMMISSIONER OF THE BUREAU OF INTERNAL
REVENUE and HERMINIA D. DE GUZMAN, respondents.

TORRES, JR., J.:

In this Petition for Review on Certiorari, Government action is once again assailed as
precipitate and unfair, suffering the basic and oftly implored requisites of due process of
law. Specifically, the petition assails the Decision 1of the Court of Appeals dated November
29, 1994 in CA-G.R. SP No. 31363, where the said court held:
In view of all the foregoing, we rule that the deficiency income tax assessments and
estate tax assessment, are already final and (u)nappealable-and-the subsequent levy of
real properties is a tax remedy resorted to by the government, sanctioned by Section 213
and 218 of the National Internal Revenue Code. This summary tax remedy is distinct and
separate from the other tax remedies (such as Judicial Civil actions and Criminal actions),
and is not affected or precluded by the pendency of any other tax remedies instituted by
the government.
WHEREFORE, premises considered, judgment is hereby rendered DISMISSING the petition
forcertiorari with prayer for Restraining Order and Injunction.
No pronouncements as to costs.
SO ORDERED.
More than seven years since the demise of the late Ferdinand E. Marcos, the former
President of the Republic of the Philippines, the matter of the settlement of his estate, and
its dues to the government in estate taxes, are still unresolved, the latter issue being now
before this Court for resolution. Specifically, petitioner Ferdinand R. Marcos II, the eldest
son of the decedent, questions the actuations of the respondent Commissioner of Internal
Revenue in assessing, and collecting through the summary remedy of Levy on Real
Properties, estate and income tax delinquencies upon the estate and properties of his
father, despite the pendency of the proceedings on probate of the will of the late
president, which is docketed as Sp. Proc. No. 10279 in the Regional Trial Court of Pasig,
Branch 156.
Petitioner had filed with the respondent Court of Appeals a Petition for Certiorari and
Prohibition with an application for writ of preliminary injunction and/or temporary
restraining order on June 28, 1993, seeking to
I. Annul and set aside the Notices of Levy on real property dated February 22, 1993 and
May 20, 1993, issued by respondent Commissioner of Internal Revenue;
II. Annul and set aside the Notices of Sale dated May 26, 1993;

III. Enjoin the Head Revenue Executive Assistant Director II (Collection Service), from
proceeding with the Auction of the real properties covered by Notices of Sale.
After the parties had pleaded their case, the Court of Appeals rendered its Decision 2 on
November 29, 1994, ruling that the deficiency assessments for estate and income tax
made upon the petitioner and the estate of the deceased President Marcos have already
become final and unappealable, and may thus be enforced by the summary remedy of
levying upon the properties of the late President, as was done by the respondent
Commissioner of Internal Revenue.
WHEREFORE, premises considered judgment is hereby rendered DISMISSING the petition
forCertiorari with prayer for Restraining Order and Injunction.
No pronouncements as to cost.
SO ORDERED.
Unperturbed, petitioner is now before us assailing the validity of the appellate court's
decision, assigning the following as errors:
A. RESPONDENT COURT MANIFESTLY ERRED IN RULING THAT THE SUMMARY TAX
REMEDIES RESORTED TO BY THE GOVERNMENT ARE NOT AFFECTED AND PRECLUDED BY
THE PENDENCY OF THE SPECIAL PROCEEDING FOR THE ALLOWANCE OF THE LATE
PRESIDENT'S ALLEGED WILL. TO THE CONTRARY, THIS PROBATE PROCEEDING PRECISELY
PLACED ALL PROPERTIES WHICH FORM PART OF THE LATE PRESIDENT'S ESTATE IN
CUSTODIA LEGIS OF THE PROBATE COURT TO THE EXCLUSION OF ALL OTHER COURTS AND
ADMINISTRATIVE AGENCIES.
B. RESPONDENT COURT ARBITRARILY ERRED IN SWEEPINGLY DECIDING THAT SINCE THE
TAX ASSESSMENTS OF PETITIONER AND HIS PARENTS HAD ALREADY BECOME FINAL AND
UNAPPEALABLE, THERE WAS NO NEED TO GO INTO THE MERITS OF THE GROUNDS CITED
IN THE PETITION. INDEPENDENT OF WHETHER THE TAX ASSESSMENTS HAD ALREADY
BECOME FINAL, HOWEVER, PETITIONER HAS THE RIGHT TO QUESTION THE UNLAWFUL
MANNER AND METHOD IN WHICH TAX COLLECTION IS SOUGHT TO BE ENFORCED BY
RESPONDENTS COMMISSIONER AND DE GUZMAN. THUS, RESPONDENT COURT SHOULD
HAVE FAVORABLY CONSIDERED THE MERITS OF THE FOLLOWING GROUNDS IN THE
PETITION:
(1) The Notices of Levy on Real Property were issued beyond the period provided in the
Revenue Memorandum Circular No. 38-68.
(2) [a] The numerous pending court cases questioning the late President's ownership or
interests in several properties (both personal and real) make the total value of his estate,
and the consequent estate tax due, incapable of exact pecuniary determination at this
time. Thus, respondents' assessment of the estate tax and their issuance of the Notices of
Levy and Sale are premature, confiscatory and oppressive.
[b] Petitioner, as one of the late President's compulsory heirs, was never notified, much
less served with copies of the Notices of Levy, contrary to the mandate of Section 213 of

the NIRC. As such, petitioner was never given an opportunity to contest the Notices in
violation of his right to due process of law.
C. ON ACCOUNT OF THE CLEAR MERIT OF THE PETITION, RESPONDENT COURT MANIFESTLY
ERRED IN RULING THAT IT HAD NO POWER TO GRANT INJUNCTIVE RELIEF TO PETITIONER.
SECTION 219 OF THE NIRC NOTWITHSTANDING, COURTS POSSESS THE POWER TO ISSUE A
WRIT OF PRELIMINARY INJUNCTION TO RESTRAIN RESPONDENTS COMMISSIONER'S AND DE
GUZMAN'S ARBITRARY METHOD OF COLLECTING THE ALLEGED DEFICIENCY ESTATE AND
INCOME TAXES BY MEANS OF LEVY.
The facts as found by the appellate court are undisputed, and are hereby adopted:
On September 29, 1989, former President Ferdinand Marcos died in Honolulu, Hawaii, USA.
On June 27, 1990, a Special Tax Audit Team was created to conduct investigations and
examinations of the tax liabilities and obligations of the late president, as well as that of
his family, associates and "cronies". Said audit team concluded its investigation with a
Memorandum dated July 26, 1991. The investigation disclosed that the Marcoses failed to
file a written notice of the death of the decedent, an estate tax returns [sic], as well as
several income tax returns covering the years 1982 to 1986, all in violation of the
National Internal Revenue Code (NIRC).
Subsequently, criminal charges were filed against Mrs. Imelda R. Marcos before the
Regional Trial of Quezon City for violations of Sections 82, 83 and 84 (has penalized under
Sections 253 and 254 in relation to Section 252 a & b) of the National Internal Revenue
Code (NIRC).
The Commissioner of Internal Revenue thereby caused the preparation and filing of the
Estate Tax Return for the estate of the late president, the Income Tax Returns of the
Spouses Marcos for the years 1985 to 1986, and the Income Tax Returns of petitioner
Ferdinand "Bongbong" Marcos II for the years 1982 to 1985.
On July 26, 1991, the BIR issued the following: (1) Deficiency estate tax assessment no.
FAC-2-89-91-002464 (against the estate of the late president Ferdinand Marcos in the
amount of P23,293,607,638.00 Pesos); (2) Deficiency income tax assessment no. FAC-185-91-002452 and Deficiency income tax assessment no. FAC-1-86-91-002451 (against
the Spouses Ferdinand and Imelda Marcos in the amounts of P149,551.70 and
P184,009,737.40 representing deficiency income tax for the years 1985 and 1986); (3)
Deficiency income tax assessment nos. FAC-1-82-91-002460 to FAC-1-85-91-002463
(against petitioner Ferdinand "Bongbong" Marcos II in the amounts of P258.70 pesos;
P9,386.40 Pesos; P4,388.30 Pesos; and P6,376.60 Pesos representing his deficiency
income taxes for the years 1982 to 1985).
The Commissioner of Internal Revenue avers that copies of the deficiency estate and
income tax assessments were all personally and constructively served on August 26, 1991
and September 12, 1991 upon Mrs. Imelda Marcos (through her caretaker Mr. Martinez) at
her last known address at No. 204 Ortega St., San Juan, M.M. (Annexes "D" and "E" of the
Petition). Likewise, copies of the deficiency tax assessments issued against petitioner
Ferdinand "Bongbong" Marcos II were also personally and constructively served upon him
(through his caretaker) on September 12, 1991, at his last known address at Don Mariano

Marcos St. corner P. Guevarra St., San Juan, M.M. (Annexes "J" and "J-1" of the Petition).
Thereafter, Formal Assessment notices were served on October 20, 1992, upon Mrs.
Marcos c/o petitioner, at his office, House of Representatives, Batasan Pambansa, Quezon
City. Moreover, a notice to Taxpayer inviting Mrs. Marcos (or her duly authorized
representative or counsel), to a conference, was furnished the counsel of Mrs. Marcos,
Dean Antonio Coronel but to no avail.
The deficiency tax assessments were not protested administratively, by Mrs. Marcos and
the other heirs of the late president, within 30 days from service of said assessments.
On February 22, 1993, the BIR Commissioner issued twenty-two notices of levy on real
property against certain parcels of land owned by the Marcoses to satisfy the alleged
estate tax and deficiency income taxes of Spouses Marcos.
On May 20, 1993, four more Notices of Levy on real property were issued for the purpose
of satisfying the deficiency income taxes.
On May 26, 1993, additional four (4) notices of Levy on real property were again issued.
The foregoing tax remedies were resorted to pursuant to Sections 205 and 213 of the
National Internal Revenue Code (NIRC).
In response to a letter dated March 12, 1993 sent by Atty. Loreto Ata (counsel of herein
petitioner) calling the attention of the BIR and requesting that they be duly notified of any
action taken by the BIR affecting the interest of their client Ferdinand "Bongbong" Marcos
II, as well as the interest of the late president copies of the aforesaid notices were,
served on April 7, 1993 and on June 10, 1993, upon Mrs. Imelda Marcos, the petitioner,
and their counsel of record, "De Borja, Medialdea, Ata, Bello, Guevarra and Serapio Law
Office".
Notices of sale at public auction were posted on May 26, 1993, at the lobby of the City Hall
of Tacloban City. The public auction for the sale of the eleven (11) parcels of land took
place on July 5, 1993. There being no bidder, the lots were declared forfeited in favor of
the government.
On June 25, 1993, petitioner Ferdinand "Bongbong" Marcos II filed the instant petition
for certiorari and prohibition under Rule 65 of the Rules of Court, with prayer for temporary
restraining order and/or writ of preliminary injunction.
It has been repeatedly observed, and not without merit, that the enforcement of tax laws
and the collection of taxes, is of paramount importance for the sustenance of government.
Taxes are the lifeblood of the government and should be collected without unnecessary
hindrance. However, such collection should be made in accordance with law as any
arbitrariness will negate the very reason for government itself. It is therefore necessary to
reconcile the apparently conflicting interests of the authorities and the taxpayers so that
the real purpose of taxation, which is the promotion of the common good, may be
achieved. 3
Whether or not the proper avenues of assessment and collection of the said tax
obligations were taken by the respondent Bureau is now the subject of the Court's inquiry.

Petitioner posits that notices of levy, notices of sale, and subsequent sale of properties of
the late President Marcos effected by the BIR are null and void for disregarding the
established procedure for the enforcement of taxes due upon the estate of the deceased.
The case of Domingo vs. Garlitos 4 is specifically cited to bolster the argument that "the
ordinary procedure by which to settle claims of indebtedness against the estate of a
deceased, person, as in an inheritance (estate) tax, is for the claimant to present a claim
before the probate court so that said court may order the administrator to pay the amount
therefor." This remedy is allegedly, exclusive, and cannot be effected through any other
means.

indifference nor should it be ignored with impunity by the very parties invoking its
authority.

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

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

The case of Pineda vs. Court of First Instance of Tayabas and Collector of Internal Revenue
(52 Phil 803), relied upon by the petitioner-appellant is good authority on the proposition
that the court having control over the administration proceedings has jurisdiction to
entertain the claim presented by the government for taxes due and to order the
administrator to pay the tax should it find that the assessment was proper, and that the
tax was legal, due and collectible. And the rule laid down in that case must be understood
in relation to the case of Collector of Customs vs. Haygood, supra., as to the procedure to
be followed in a given case by the government to effectuate the collection of the tax.
Categorically stated, where during the pendency of judicial administration over the estate
of a deceased person a claim for taxes is presented by the government, the court has the
authority to order payment by the administrator; but, in the same way that it has
authority to order payment or satisfaction, it also has the negative authority to deny the
same. While there are cases where courts are required to perform certain duties
mandatory and ministerial in character, the function of the court in a case of the present
character is not one of them; and here, the court cannot be an organism endowed with
latitude of judgment in one direction, and converted into a mere mechanical contrivance
in another direction.
On the other hand, it is argued by the BIR, that the state's authority to collect internal
revenue taxes is paramount. Thus, the pendency of probate proceedings over the estate
of the deceased does not preclude the assessment and collection, through summary
remedies, of estate taxes over the same. According to the respondent, claims for payment
of estate and income taxes due and assessed after the death of the decedent need not be
presented in the form of a claim against the estate. These can and should be paid
immediately. The probate court is not the government agency to decide whether an estate
is liable for payment of estate of income taxes. Well-settled is the rule that the probate
court is a court with special and limited jurisdiction.
Concededly, the authority of the Regional Trial Court, sitting, albeit with limited
jurisdiction, as a probate court over estate of deceased individual, is not a trifling thing.
The court's jurisdiction, once invoked, and made effective, cannot be treated with

In testament to this, it has been held that it is within the jurisdiction of the probate court
to approve the sale of properties of a deceased person by his prospective heirs before
final adjudication; 5 to determine who are the heirs of the decedent; 6 the recognition of a
natural child; 7 the status of a woman claiming to be the legal wife of the decedent; 8 the
legality of disinheritance of an heir by the testator; 9 and to pass upon the validity of a
waiver of hereditary rights. 10

The nature of the process of estate tax collection has been described as follows:
Strictly speaking, the assessment of an inheritance tax does not directly involve the
administration of a decedent's estate, although it may be viewed as an incident to the
complete settlement of an estate, and, under some statutes, it is made the duty of the
probate court to make the amount of the inheritance tax a part of the final decree of
distribution of the estate. It is not against the property of decedent, nor is it a claim
against the estate as such, but it is against the interest or property right which the heir,
legatee, devisee, etc., has in the property formerly held by decedent. Further, under some
statutes, it has been held that it is not a suit or controversy between the parties, nor is it
an adversary proceeding between the state and the person who owes the tax on the
inheritance. However, under other statutes it has been held that the hearing and
determination of the cash value of the assets and the determination of the tax are
adversary proceedings. The proceeding has been held to be necessarily a proceeding in
rem. 11
In the Philippine experience, the enforcement and collection of estate tax, is executive in
character, as the legislature has seen it fit to ascribe this task to the Bureau of Internal
Revenue. Section 3 of the National Internal Revenue Code attests to this:
Sec. 3. Powers and duties of the Bureau. The powers and duties of the Bureau of
Internal Revenue shall comprehend the assessment and collection of all national internal
revenue taxes, fees, and charges, and the enforcement of all forfeitures, penalties, and
fines connected therewith, including the execution of judgments in all cases decided in its
favor by the Court of Tax Appeals and the ordinary courts. Said Bureau shall also give
effect to and administer the supervisory and police power conferred to it by this Code or
other laws.
Thus, it was in Vera vs. Fernandez 12 that the court recognized the liberal treatment of
claims for taxes charged against the estate of the decedent. Such taxes, we said, were
exempted from the application of the statute of non-claims, and this is justified by the
necessity of government funding, immortalized in the maxim that taxes are the lifeblood
of the government.Vectigalia nervi sunt rei publicae taxes are the sinews of the state.

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

Such assessment may be protested administratively by filing a request for reconsideration

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

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

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

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

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

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

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

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

From the foregoing, it is discernible that the approval of the court, sitting in probate, or as
a settlement tribunal over the deceased is not a mandatory requirement in the collection
of estate taxes. It cannot therefore be argued that the Tax Bureau erred in proceeding with
the levying and sale of the properties allegedly owned by the late President, on the ground
that it was required to seek first the probate court's sanction. There is nothing in the Tax
Code, and in the pertinent remedial laws that implies the necessity of the probate or
estate settlement court's approval of the state's claim for estate taxes, before the same
can be enforced and collected.
On the contrary, under Section 87 of the NIRC, it is the probate or settlement court which
is bidden not to authorize the executor or judicial administrator of the decedent's estate to
deliver any distributive share to any party interested in the estate, unless it is shown a
Certification by the Commissioner of Internal Revenue that the estate taxes have been
paid. This provision disproves the petitioner's contention that it is the probate court which
approves the assessment and collection of the estate tax.
If there is any issue as to the validity of the BIR's decision to assess the estate taxes, this
should have been pursued through the proper administrative and judicial avenues
provided for by law.
Section 229 of the NIRC tells us how:
Sec. 229. Protesting of assessment. When the Commissioner of Internal Revenue or his
duly authorized representative finds that proper taxes should be assessed, he shall first
notify the taxpayer of his findings. Within a period to be prescribed by implementing
regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails
to respond, the Commissioner shall issue an assessment based on his findings.

Petitioner specifically points out that applying Memorandum Circular No. 38-68,
implementing Sections 318 and 324 of the old tax code (Republic Act 5203), the BIR's
Notices of Levy on the Marcos properties, were issued beyond the allowed period, and are
therefore null and void:
. . . the Notices of Levy on Real Property (Annexes O to NN of Annex C of this Petition) in
satisfaction of said assessments were still issued by respondents well beyond the period
mandated in Revenue Memorandum Circular No. 38-68. These Notices of Levy were issued
only on 22 February 1993 and 20 May 1993 when at least seventeen (17) months had
already lapsed from the last service of tax assessment on 12 September 1991. As no
notices of distraint of personal property were first issued by respondents, the latter should
have complied with Revenue Memorandum Circular No. 38-68 and issued these Notices of
Levy not earlier than three (3) months nor later than six (6) months from 12 September
1991. In accordance with the Circular, respondents only had until 12 March 1992 (the last
day of the sixth month) within which to issue these Notices of Levy. The Notices of Levy,
having been issued beyond the period allowed by law, are thus void and of no effect. 15
We hold otherwise. The Notices of Levy upon real property were issued within the
prescriptive period and in accordance with the provisions of the present Tax Code. The
deficiency tax assessment, having already become final, executory, and demandable, the
same can now be collected through the summary remedy of distraint or levy pursuant to
Section 205 of the NIRC.
The applicable provision in regard to the prescriptive period for the assessment and
collection of tax deficiency in this instance is Article 223 of the NIRC, which pertinently
provides:

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

(a) In the case of a false or fraudulent return with intent to evade tax or of a failure to file
a return, the tax may be assessed, or a proceeding in court for the collection of such tax
may be begun without assessment, at any time within ten (10) years after the discovery of
the falsity, fraud, or omission: Provided, That, in a fraud assessment which has become
final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or
criminal action for the collection thereof.
xxx xxx xxx
(c) Any internal revenue tax which has been assessed within the period of limitation above
prescribed, may be collected by distraint or levy or by a proceeding in court within three
years following the assessment of the tax.
xxx xxx xxx
The omission to file an estate tax return, and the subsequent failure to contest or appeal
the assessment made by the BIR is fatal to the petitioner's cause, as under the abovecited provision, in case of failure to file a return, the tax may be assessed at any time
within ten years after the omission, and any tax so assessed may be collected by levy
upon real property within three years following the assessment of the tax. Since the estate
tax assessment had become final and unappealable by the petitioner's default as regards
protesting the validity of the said assessment, there is now no reason why the BIR cannot
continue with the collection of the said tax. Any objection against the assessment should
have been pursued following the avenue paved in Section 229 of the NIRC on protests on
assessments of internal revenue taxes.
Petitioner further argues that "the numerous pending court cases questioning the late
president's ownership or interests in several properties (both real and personal) make the
total value of his estate, and the consequent estate tax due, incapable of exact pecuniary
determination at this time. Thus, respondents' assessment of the estate tax and their
issuance of the Notices of Levy and sale are premature and oppressive." He points out the
pendency of Sandiganbayan Civil Case Nos. 0001-0034 and 0141, which were filed by the
government to question the ownership and interests of the late President in real and
personal properties located within and outside the Philippines. Petitioner, however, omits
to allege whether the properties levied upon by the BIR in the collection of estate taxes
upon the decedent's estate were among those involved in the said cases pending in the
Sandiganbayan. Indeed, the court is at a loss as to how these cases are relevant to the
matter at issue. The mere fact that the decedent has pending cases involving ill-gotten
wealth does not affect the enforcement of tax assessments over the properties indubitably
included in his estate.
Petitioner also expresses his reservation as to the propriety of the BIR's total assessment
of P23,292,607,638.00, stating that this amount deviates from the findings of the
Department of Justice's Panel of Prosecutors as per its resolution of 20 September 1991.
Allegedly, this is clear evidence of the uncertainty on the part of the Government as to the
total value of the estate of the late President.

This is, to our mind, the petitioner's last ditch effort to assail the assessment of estate tax
which had already become final and unappealable.
It is not the Department of Justice which is the government agency tasked to determine
the amount of taxes due upon the subject estate, but the Bureau of Internal
Revenue, 16 whose determinations and assessments are presumed correct and made in
good faith. 17 The taxpayer has the duty of proving otherwise. In the absence of proof of
any irregularities in the performance of official duties, an assessment will not be disturbed.
Even an assessment based on estimates is prima facie valid and lawful where it does not
appear to have been arrived at arbitrarily or capriciously. The burden of proof is upon the
complaining party to show clearly that the assessment is erroneous. Failure to present
proof of error in the assessment will justify the judicial affirmance of said assessment. 18 In
this instance, petitioner has not pointed out one single provision in the Memorandum of
the Special Audit Team which gave rise to the questioned assessment, which bears a trace
of falsity. Indeed, the petitioner's attack on the assessment bears mainly on the alleged
improbable and unconscionable amount of the taxes charged. But mere rhetoric cannot
supply the basis for the charge of impropriety of the assessments made.
Moreover, these objections to the assessments should have been raised, considering the
ample remedies afforded the taxpayer by the Tax Code, with the Bureau of Internal
Revenue and the Court of Tax Appeals, as described earlier, and cannot be raised now via
Petition for Certiorari, under the pretext of grave abuse of discretion. The course of action
taken by the petitioner reflects his disregard or even repugnance of the established
institutions for governance in the scheme of a well-ordered society. The subject tax
assessments having become final, executory and enforceable, the same can no longer be
contested by means of a disguised protest. In the main, Certiorari may not be used as a
substitute for a lost appeal or remedy. 19 This judicial policy becomes more pronounced in
view of the absence of sufficient attack against the actuations of government.
On the matter of sufficiency of service of Notices of Assessment to the petitioner, we find
the respondent appellate court's pronouncements sound and resilient to petitioner's
attacks.
Anent grounds 3(b) and (B) both alleging/claiming lack of notice We find, after
considering the facts and circumstances, as well as evidences, that there was sufficient,
constructive and/or actual notice of assessments, levy and sale, sent to herein petitioner
Ferdinand "Bongbong" Marcos as well as to his mother Mrs. Imelda Marcos.
Even if we are to rule out the notices of assessments personally given to the caretaker of
Mrs. Marcos at the latter's last known address, on August 26, 1991 and September 12,
1991, as well as the notices of assessment personally given to the caretaker of petitioner
also at his last known address on September 12, 1991 the subsequent notices given
thereafter could no longer be ignored as they were sent at a time when petitioner was
already here in the Philippines, and at a place where said notices would surely be called to
petitioner's attention, and received by responsible persons of sufficient age and discretion.
Thus, on October 20, 1992, formal assessment notices were served upon Mrs. Marcos c/o
the petitioner, at his office, House of Representatives, Batasan Pambansa, Q.C. (Annexes
"A", "A-1", "A-2", "A-3"; pp. 207-210, Comment/Memorandum of OSG). Moreover, a notice

to taxpayer dated October 8, 1992 inviting Mrs. Marcos to a conference relative to her tax
liabilities, was furnished the counsel of Mrs. Marcos Dean Antonio Coronel (Annex "B", p.
211, ibid). Thereafter, copies of Notices were also served upon Mrs. Imelda Marcos, the
petitioner and their counsel "De Borja, Medialdea, Ata, Bello, Guevarra and Serapio Law
Office", on April 7, 1993 and June 10, 1993. Despite all of these Notices, petitioner never
lifted a finger to protest the assessments, (upon which the Levy and sale of properties
were based), nor appealed the same to the Court of Tax Appeals.
There being sufficient service of Notices to herein petitioner (and his mother) and it
appearing that petitioner continuously ignored said Notices despite several opportunities
given him to file a protest and to thereafter appeal to the Court of Tax Appeals, the tax
assessments subject of this case, upon which the levy and sale of properties were based,
could no longer be contested (directly or indirectly) via this instant petition for certiorari. 20
Petitioner argues that all the questioned Notices of Levy, however, must be nullified for
having been issued without validly serving copies thereof to the petitioner. As a
mandatory heir of the decedent, petitioner avers that he has an interest in the subject
estate, and notices of levy upon its properties should have been served upon him.
We do not agree. In the case of notices of levy issued to satisfy the delinquent estate tax,
the delinquent taxpayer is the Estate of the decedent, and not necessarily, and
exclusively, the petitioner as heir of the deceased. In the same vein, in the matter of
income tax delinquency of the late president and his spouse, petitioner is not the taxpayer
liable. Thus, it follows that service of notices of levy in satisfaction of these tax
delinquencies upon the petitioner is not required by law, as under Section 213 of the NIRC,
which pertinently states:
xxx xxx xxx
. . . Levy shall be effected by writing upon said certificate a description of the property
upon which levy is made. At the same time, written notice of the levy shall be mailed to or
served upon the Register of Deeds of the province or city where the property is located
and upon the delinquent taxpayer, or if he be absent from the Philippines, to his agent or
the manager of the business in respect to which the liability arose, or if there be none, to
the occupant of the property in question.
xxx xxx xxx
The foregoing notwithstanding, the record shows that notices of warrants of distraint and
levy of sale were furnished the counsel of petitioner on April 7, 1993, and June 10, 1993,
and the petitioner himself on April 12, 1993 at his office at the Batasang Pambansa. 21 We
cannot therefore, countenance petitioner's insistence that he was denied due process.
Where there was an opportunity to raise objections to government action, and such
opportunity was disregarded, for no justifiable reason, the party claiming oppression then
becomes the oppressor of the orderly functions of government. He who comes to court
must come with clean hands. Otherwise, he not only taints his name, but ridicules the
very structure of established authority.
IN VIEW WHEREOF, the Court RESOLVED to DENY the present petition. The Decision of the
Court of Appeals dated November 29, 1994 is hereby AFFIRMED in all respects.

SO ORDERED.

G.R. No. L-22734

September 15, 1967

1957

COMMISSIONER OF INTERNAL REVENUE, petitioner,

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

Compro
mise for
late
filing
80.00

Office of the Solicitor General for petitioner.

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

Compro
mise for
late
paymen
t
40.00

BENGZON, J.P., J.:

On May 23, 1945 Atanasio Pineda died, survived by his wife, Felicisima Bagtas, and 15
children, the eldest of whom is Manuel B. Pineda, a lawyer. Estate proceedings were had in
the Court of First Instance of Manila (Case No. 71129) wherein the surviving widow was
appointed administratrix. The estate was divided among and awarded to the heirs and the
proceedings terminated on June 8, 1948. Manuel B. Pineda's share amounted to about
P2,500.00.
After the estate proceedings were closed, the Bureau of Internal Revenue investigated the
income tax liability of the estate for the years 1945, 1946, 1947 and 1948 and it found
that the corresponding income tax returns were not filed. Thereupon, the representative of
the Collector of Internal Revenue filed said returns for the estate on the basis of
information and data obtained from the aforesaid estate proceedings and issued an
assessment for the following:
1 Deficiency income tax
.
19
P135.83
45
19
436.95
46
19 1,206.9 P1,779.6
47 1
9
Add: 5%
surcharge

88.98

1%
720.77
monthly
interest
from
Novemb
er 30,
1953 to
April 15,

P2,707.4
Total
4
amount due
=====
=====
=
P14.50
Additional
2
=====
residence
.
=====
tax for 1945
=
3 Real Estate
. dealer's tax
for the
fourth
quarter of
P207.50
1946 and
=====
the whole
=====
year of 1947 =
Manuel B. Pineda, who received the assessment, contested the same. Subsequently, he
appealed to the Court of Tax Appeals alleging that he was appealing "only that
proportionate part or portion pertaining to him as one of the heirs."
After hearing the parties, the Court of Tax Appeals rendered judgment reversing the
decision of the Commissioner on the ground that his right to assess and collect the tax has
prescribed. The Commissioner appealed and this Court affirmed the findings of the Tax
Court in respect to the assessment for income tax for the year 1947 but held that the right
to assess and collect the taxes for 1945 and 1946 has not prescribed. For 1945 and 1946
the returns were filed on August 24, 1953; assessments for both taxable years were made
within five years therefrom or on October 19, 1953; and the action to collect the tax was
filed within five years from the latter date, on August 7, 1957. For taxable year 1947,
however, the return was filed on March 1, 1948; the assessment was made on October 19,
1953, more than five years from the date the return was filed; hence, the right to assess

income tax for 1947 had prescribed. Accordingly, We remanded the case to the Tax Court
for further appropriate proceedings.1
In the Tax Court, the parties submitted the case for decision without additional evidence.
On November 29, 1963 the Court of Tax Appeals rendered judgment holding Manuel B.
Pineda liable for the payment corresponding to his share of the following taxes:
Deficiency income tax
1945
1946

P135.8
3
436.9
5

Real
estate
dealer's
fixed
tax 4th
quarter
of 1946
and
whole
year of P187.
1947
50
The Commissioner of Internal Revenue has appealed to Us and has proposed to hold
Manuel B. Pineda liable for the payment of all the taxes found by the Tax Court to be due
from the estate in the total amount of P760.28 instead of only for the amount of taxes
corresponding to his share in the estate.1awphl.nt
Manuel B. Pineda opposes the proposition on the ground that as an heir he is liable for
unpaid income tax due the estate only up to the extent of and in proportion to any share
he received. He relies on Government of the Philippine Islands v. Pamintuan 2 where We
held that "after the partition of an estate, heirs and distributees are liable individually for
the payment of all lawful outstanding claims against the estate in proportion to the
amount or value of the property they have respectively received from the estate."
We hold that the Government can require Manuel B. Pineda to pay the full amount of the
taxes assessed.
Pineda is liable for the assessment as an heir and as a holder-transferee of property
belonging to the estate/taxpayer. As an heir he is individually answerable for the part of
the tax proportionate to the share he received from the inheritance. 3 His liability, however,
cannot exceed the amount of his share. 4
As a holder of property belonging to the estate, Pineda is liable for he tax up to the
amount of the property in his possession. The reason is that the Government has a lien on

the P2,500.00 received by him from the estate as his share in the inheritance, for unpaid
income taxes4a for which said estate is liable, pursuant to the last paragraph of Section
315 of the Tax Code, which we quote hereunder:
If any person, corporation, partnership, joint-account (cuenta en participacion),
association, or insurance company liable to pay the income tax, neglects or refuses to pay
the same after demand, the amount shall be a lien in favor of the Government of the
Philippines from the time when the assessment was made by the Commissioner of Internal
Revenue until paid with interest, penalties, and costs that may accrue in addition thereto
upon all property and rights to property belonging to the taxpayer: . . .
By virtue of such lien, the Government has the right to subject the property in Pineda's
possession, i.e., the P2,500.00, to satisfy the income tax assessment in the sum of
P760.28. After such payment, Pineda will have a right of contribution from his co-heirs, 5 to
achieve an adjustment of the proper share of each heir in the distributable estate.
All told, the Government has two ways of collecting the tax in question. One, by going
after all the heirs and collecting from each one of them the amount of the tax
proportionate to the inheritance received. This remedy was adopted in Government of the
Philippine Islands v. Pamintuan, supra. In said case, the Government filed an action
against all the heirs for the collection of the tax. This action rests on the concept that
hereditary property consists only of that part which remains after the settlement of all
lawful claims against the estate, for the settlement of which the entire estate is first
liable.6 The reason why in case suit is filed against all the heirs the tax due from the estate
is levied proportionately against them is to achieve thereby two results: first, payment of
the tax; and second, adjustment of the shares of each heir in the distributed estate
as lessened by the tax.
Another remedy, pursuant to the lien created by Section 315 of the Tax Code upon all
property and rights to property belonging to the taxpayer for unpaid income tax, is by
subjecting said property of the estate which is in the hands of an heir or transferee to the
payment of the tax due, the estate. This second remedy is the very avenue the
Government took in this case to collect the tax. The Bureau of Internal Revenue should be
given, in instances like the case at bar, the necessary discretion to avail itself of the most
expeditious way to collect the tax as may be envisioned in the particular provision of the
Tax Code above quoted, because taxes are the lifeblood of government and their prompt
and certain availability is an imperious need.7 And as afore-stated in this case the suit
seeks to achieve only one objective: payment of the tax. The adjustment of the respective
shares due to the heirs from the inheritance, as lessened by the tax, is left to await the
suit for contribution by the heir from whom the Government recovered said tax.
WHEREFORE, the decision appealed from is modified. Manuel B. Pineda is hereby ordered
to pay to the Commissioner of Internal Revenue the sum of P760.28 as deficiency income
tax for 1945 and 1946, and real estate dealer's fixed tax for the fourth quarter of 1946
and for the whole year 1947, without prejudice to his right of contribution for his co-heirs.
No costs. So ordered.

G.R. No. 155541

January 27, 2004

ESTATE OF THE LATE JULIANA DIEZ VDA. DE GABRIEL, petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION
YNARES-SANTIAGO, J.:
This petition for review on certiorari assails the decision of the Court of Appeals in CA-G.R.
CV No. 09107, dated September 30, 2002,1 which reversed the November 19, 1995 Order
of Regional Trial Court of Manila, Branch XXXVIII, in Sp. Proc. No. R-82-6994, entitled
"Testate Estate of Juliana Diez Vda. De Gabriel". The petition was filed by the Estate of the
Late Juliana Diez Vda. De Gabriel, represented by Prudential Bank as its duly appointed
and qualified Administrator.
As correctly summarized by the Court of Appeals, the relevant facts are as follows:
During the lifetime of the decedent, Juliana Vda. De Gabriel, her business affairs were
managed by the Philippine Trust Company (Philtrust). The decedent died on April 3, 1979.
Two days after her death, Philtrust, through its Trust Officer, Atty. Antonio M. Nuyles, filed
her Income Tax Return for 1978. The return did not indicate that the decedent had died.
On May 22, 1979, Philtrust also filed a verified petition for appointment as Special
Administrator with the Regional Trial Court of Manila, Branch XXXVIII, docketed as Sp. Proc.
No. R-82-6994. The court a quo appointed one of the heirs as Special Administrator.
Philtrusts motion for reconsideration was denied by the probate court.
On January 26, 1981, the court a quo issued an Order relieving Mr. Diez of his
appointment, and appointed Antonio Lantin to take over as Special Administrator.
Subsequently, on July 30, 1981, Mr. Lantin was also relieved of his appointment, and Atty.
Vicente Onosa was appointed in his stead.
In the meantime, the Bureau of Internal Revenue conducted an administrative
investigation on the decedents tax liability and found a deficiency income tax for the year
1977 in the amount of P318,233.93. Thus, on November 18, 1982, the BIR sent by
registered mail a demand letter and Assessment Notice No. NARD-78-82-00501 addressed
to the decedent "c/o Philippine Trust Company, Sta. Cruz, Manila" which was the address
stated in her 1978 Income Tax Return. No response was made by Philtrust. The BIR was
not informed that the decedent had actually passed away.
In an Order dated September 5, 1983, the court a quo appointed Antonio Ambrosio as the
Commissioner and Auditor Tax Consultant of the Estate of the decedent.
On June 18, 1984, respondent Commissioner of Internal Revenue issued warrants of
distraint and levy to enforce collection of the decedents deficiency income tax liability,
which were served upon her heir, Francisco Gabriel. On November 22, 1984, respondent
filed a "Motion for Allowance of Claim and for an Order of Payment of Taxes" with the court
a quo. On January 7, 1985, Mr. Ambrosio filed a letter of protest with the Litigation Division

of the BIR, which was not acted upon because the assessment notice had allegedly
become final, executory and incontestable.
On May 16, 1985, petitioner, the Estate of the decedent, through Mr. Ambrosio, filed a
formal opposition to the BIRs Motion for Allowance of Claim based on the ground that
there was no proper service of the assessment and that the filing of the aforesaid claim
had already prescribed. The BIR filed its Reply, contending that service to Philippine Trust
Company was sufficient service, and that the filing of the claim against the Estate on
November 22, 1984 was within the five-year prescriptive period for assessment and
collection of taxes under Section 318 of the 1977 National Internal Revenue Code (NIRC).
On November 19, 1985, the court a quo issued an Order denying respondents claim
against the Estate,2 after finding that there was no notice of its tax assessment on the
proper party.3
On July 2, 1986, respondent filed an appeal with the Court of Appeals, docketed as CA-G.R.
CV No. 09107,4assailing the Order of the probate court dated November 19, 1985. It was
claimed that Philtrust, in filing the decedents 1978 income tax return on April 5, 1979,
two days after the taxpayers death, had "constituted itself as the administrator of the
estate of the deceased at least insofar as said return is concerned." 5 Citing Basilan Estate
Inc. v. Commissioner of Internal Revenue,6 respondent argued that the legal requirement
of notice with respect to tax assessments7 requires merely that the Commissioner of
Internal Revenue release, mail and send the notice of the assessment to the taxpayer at
the address stated in the return filed, but not that the taxpayer actually receive said
assessment within the five-year prescriptive period. 8 Claiming that Philtrust had been
remiss in not notifying respondent of the decedents death, respondent therefore argued
that the deficiency tax assessment had already become final, executory and
incontestable, and that petitioner Estate was liable therefor.
On September 30, 2002, the Court of Appeals rendered a decision in favor of the
respondent. Although acknowledging that the bond of agency between Philtrust and the
decedent was severed upon the latters death, it was ruled that the administrator of the
Estate had failed in its legal duty to inform respondent of the decedents death, pursuant
to Section 104 of the National Internal Revenue Code of 1977. Consequently, the BIRs
service to Philtrust of the demand letter and Notice of Assessment was binding upon the
Estate, and, upon the lapse of the statutory thirty-day period to question this claim, the
assessment became final, executory and incontestable. The dispositive portion of said
decision reads:
WHEREFORE, finding merit in the appeal, the appealed decision is REVERSED AND SET
ASIDE. Another one is entered ordering the Administrator of the Estate to pay the
Commissioner of Internal Revenue the following:
a. The amount of P318,223.93, representing the deficiency income tax liability for the year
1978, plus 20% interest per annum from November 2, 1982 up to November 2, 1985 and
in addition thereto 10% surcharge on the basic tax of P169,155.34 pursuant to Section
51(e)(2) and (3) of the Tax Code as amended by PD 69 and 1705; and
b. The costs of the suit.

SO ORDERED.9
Hence, the instant petition, raising the following issues:
1. Whether or not the Court of Appeals erred in holding that the service of deficiency tax
assessment against Juliana Diez Vda. de Gabriel through the Philippine Trust Company was
a valid service in order to bind the Estate;
2. Whether or not the Court of Appeals erred in holding that the deficiency tax assessment
and final demand was already final, executory and incontestable.
Petitioner Estate denies that Philtrust had any legal personality to represent the decedent
after her death. As such, petitioner argues that there was no proper notice of the
assessment which, therefore, never became final, executory and
incontestable.10 Petitioner further contends that respondents failure to file its claim
against the Estate within the proper period prescribed by the Rules of Court is a fatal error,
which forever bars its claim against the Estate.11
Respondent, on the other hand, claims that because Philtrust filed the decedents income
tax return subsequent to her death, Philtrust was the de facto administrator of her
Estate.12 Consequently, when the Assessment Notice and demand letter dated November
18, 1982 were sent to Philtrust, there was proper service on the Estate. 13Respondent
further asserts that Philtrust had the legal obligation to inform petitioner of the decedents
death, which requirement is found in Section 104 of the NIRC of 1977. 14 Since Philtrust did
not, respondent contends that petitioner Estate should not be allowed to profit from this
omission.15 Respondent further argues that Philtrusts failure to protest the
aforementioned assessment within the 30-day period provided in Section 319-A of the
NIRC of 1977 meant that the assessment had already become final, executory and
incontestable.16
The resolution of this case hinges on the legal relationship between Philtrust and the
decedent, and, by extension, between Philtrust and petitioner Estate. Subsumed under
this primary issue is the sub-issue of whether or not service on Philtrust of the demand
letter and Assessment Notice No. NARD-78-82-00501 was valid service on petitioner, and
the issue of whether Philtrusts inaction thereon could bind petitioner. If both sub-issues
are answered in the affirmative, respondents contention as to the finality of Assessment
Notice No. NARD-78-82-00501 must be answered in the affirmative. This is because
Section 319-A of the NIRC of 1977 provides a clear 30-day period within which to protest
an assessment. Failure to file such a protest within said period means that the assessment
ipso jure becomes final and unappealable, as a consequence of which legal proceedings
may then be initiated for collection thereof.
We find in favor of the petitioner.
The first point to be considered is that the relationship between the decedent and Philtrust
was one of agency, which is a personal relationship between agent and principal. Under
Article 1919 (3) of the Civil Code, death of the agent or principal automatically terminates
the agency. In this instance, the death of the decedent on April 3, 1979 automatically
severed the legal relationship between her and Philtrust, and such could not be revived by

the mere fact that Philtrust continued to act as her agent when, on April 5, 1979, it filed
her Income Tax Return for the year 1978.
Since the relationship between Philtrust and the decedent was automatically severed at
the moment of the Taxpayers death, none of Philtrusts acts or omissions could bind the
estate of the Taxpayer. Service on Philtrust of the demand letter and Assessment Notice
No. NARD-78-82-00501 was improperly done.
It must be noted that Philtrust was never appointed as the administrator of the Estate of
the decedent, and, indeed, that the court a quo twice rejected Philtrusts motion to be
thus appointed. As of November 18, 1982, the date of the demand letter and Assessment
Notice, the legal relationship between the decedent and Philtrust had already been nonexistent for three years.
Respondent claims that Section 104 of the National Internal Revenue Code of 1977
imposed the legal obligation on Philtrust to inform respondent of the decedents death.
The said Section reads:
SEC. 104. Notice of death to be filed. In all cases of transfers subject to tax or where,
though exempt from tax, the gross value of the estate exceeds three thousand pesos, the
executor, administrator, or any of the legal heirs, as the case may be, within two months
after the decedents death, or within a like period after qualifying as such executor or
administrator, shall give written notice thereof to the Commissioner of Internal Revenue.
The foregoing provision falls in Title III, Chapter I of the National Internal Revenue Code of
1977, or the chapter on Estate Tax, and pertains to "all cases of transfers subject to tax"
or where the "gross value of the estate exceeds three thousand pesos". It has absolutely
no applicability to a case for deficiency income tax, such as the case at bar. It further lacks
applicability since Philtrust was never the executor, administrator of the decedents
estate, and, as such, never had the legal obligation, based on the above provision, to
inform respondent of her death.
Although the administrator of the estate may have been remiss in his legal obligation to
inform respondent of the decedents death, the consequences thereof, as provided in
Section 119 of the National Internal Revenue Code of 1977, merely refer to the imposition
of certain penal sanctions on the administrator. These do not include the indefinite tolling
of the prescriptive period for making deficiency tax assessments, or the waiver of the
notice requirement for such assessments.
Thus, as of November 18, 1982, the date of the demand letter and Assessment Notice No.
NARD-78-82-00501, there was absolutely no legal obligation on the part of Philtrust to
either (1) respond to the demand letter and assessment notice, (2) inform respondent of
the decedents death, or (3) inform petitioner that it had received said demand letter and
assessment notice. This lack of legal obligation was implicitly recognized by the Court of
Appeals, which, in fact, rendered its assailed decision on grounds of "equity". 17
Since there was never any valid notice of this assessment, it could not have become final,
executory and incontestable, and, for failure to make the assessment within the five-year
period provided in Section 318 of the National Internal Revenue Code of 1977,
respondents claim against the petitioner Estate is barred. Said Section 18 reads:

SEC. 318. Period of limitation upon assessment and collection. Except as provided in the
succeeding section, internal revenue taxes shall be assessed within five years after the
return was filed, and no proceeding in court without assessment for the collection of such
taxes shall be begun after the expiration of such period. For the purpose of this section, a
return filed before the last day prescribed by law for the filing thereof shall be considered
as filed on such last day: Provided, That this limitation shall not apply to cases already
investigated prior to the approval of this Code.
Respondent argues that an assessment is deemed made for the purpose of giving effect to
such assessment when the notice is released, mailed or sent to the taxpayer to effectuate
the assessment, and there is no legal requirement that the taxpayer actually receive said
notice within the five-year period.18 It must be noted, however, that the foregoing rule
requires that the notice be sent to the taxpayer, and not merely to a disinterested party.
Although there is no specific requirement that the taxpayer should receive the notice
within the said period, due process requires at the very least that such notice actually be
received. In Commissioner of Internal Revenue v. Pascor Realty and Development
Corporation,19 we had occasion to say:
An assessment contains not only a computation of tax liabilities, but also a demand for
payment within a prescribed period. It also signals the time when penalties and interests
begin to accrue against the taxpayer. To enable the taxpayer to determine his remedies
thereon, due process requires that it must be served on and received by the taxpayer.
In Republic v. De le Rama,20 we clarified that, when an estate is under administration,
notice must be sent to the administrator of the estate, since it is the said administrator, as
representative of the estate, who has the legal obligation to pay and discharge all debts of
the estate and to perform all orders of the court. In that case, legal notice of the
assessment was sent to two heirs, neither one of whom had any authority to represent the
estate. We said:
The notice was not sent to the taxpayer for the purpose of giving effect to the
assessment, and said notice could not produce any effect. In the case of Bautista and
Corrales Tan v. Collector of Internal Revenue this Court had occasion to state that "the
assessment is deemed made when the notice to this effect is released, mailed or sent to
the taxpayer for the purpose of giving effect to said assessment." It appearing that the
person liable for the payment of the tax did not receive the assessment, the assessment
could not become final and executory. (Citations omitted, emphasis supplied.)
In this case, the assessment was served not even on an heir of the Estate, but on a
completely disinterested third party. This improper service was clearly not binding on the
petitioner.
By arguing that (1) the demand letter and assessment notice were served on Philtrust, (2)
Philtrust was remiss in its obligation to respond to the demand letter and assessment
notice, (3) Philtrust was remiss in its obligation to inform respondent of the decedents
death, and (4) the assessment notice is therefore binding on the Estate, respondent is
arguing in circles. The most crucial point to be remembered is that Philtrust had absolutely
no legal relationship to the deceased, or to her Estate. There was therefore no assessment
served on the Estate as to the alleged underpayment of tax. Absent this assessment, no

proceedings could be initiated in court for the collection of said tax, 21 and respondents
claim for collection, filed with the probate court only on November 22, 1984, was barred
for having been made beyond the five-year prescriptive period set by law.
WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals in CA-G.R.
CV No. 09107, dated September 30, 2002, is REVERSED and SET ASIDE. The Order of the
Regional Trial Court of Manila, Branch XXXVIII, in Sp. Proc. No. R-82-6994, dated November
19, 1985, which denied the claim of the Bureau of Internal Revenue against the Estate of
Juliana Diez Vda. De Gabriel for the deficiency income tax of the decedent for the year
1977 in the amount of P318,223.93, is AFFIRMED.
No pronouncement as to costs.
SO ORDERED.

G.R. No. 123206

March 22, 2000

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
COURT OF APPEALS, COURT OF TAX APPEALS and JOSEFINA P. PAJONAR, as
Administratrix of the Estate of Pedro P. Pajonar, respondents.
RESOLUTION
GONZAGA-REYES, J.:
Assailed in this petition for review on certiorari is the December 21, 1995 Decision 1 of the
Court of Appeals2 in CA-G.R. Sp. No. 34399 affirming the June 7, 1994 Resolution of the
Court of Tax Appeals in CTA Case No. 4381 granting private respondent Josefina P. Pajonar,
as administratrix of the estate of Pedro P. Pajonar, a tax refund in the amount of
P76,502.42, representing erroneously paid estate taxes for the year 1988.
Pedro Pajonar, a member of the Philippine Scout, Bataan Contingent, during the second
World War, was a part of the infamous Death March by reason of which he suffered shock
and became insane. His sister Josefina Pajonar became the guardian over his person, while
his property was placed under the guardianship of the Philippine National Bank (PNB) by
the Regional Trial Court of Dumaguete City, Branch 31, in Special Proceedings No. 1254.
He died on January 10, 1988. He was survived by his two brothers Isidro P. Pajonar and
Gregorio Pajonar, his sister Josefina Pajonar, nephews Concordio Jandog and Mario Jandog
and niece Conchita Jandog.
On May 11, 1988, the PNB filed an accounting of the decedent's property under
guardianship valued at P3,037,672.09 in Special Proceedings No. 1254. However, the PNB
did not file an estate tax return, instead it advised Pedro Pajonar's heirs to execute an
extrajudicial settlement and to pay the taxes on his estate. On April 5, 1988, pursuant to
the assessment by the Bureau of Internal Revenue (BIR), the estate of Pedro Pajonar paid
taxes in the amount of P2,557.
On May 19, 1988, Josefina Pajonar filed a petition with the Regional Trial Court of
Dumaguete City for the issuance in her favor of letters of administration of the estate of
her brother. The case was docketed as Special Proceedings No. 2399. On July 18, 1988, the
trial court appointed Josefina Pajonar as the regular administratrix of Pedro Pajonar's
estate.
On December 19, 1988, pursuant to a second assessment by the BIR for deficiency estate
tax, the estate of Pedro Pajonar paid estate tax in the amount of P1,527,790.98. Josefina
Pajonar, in her capacity as administratrix and heir of Pedro Pajonar's estate, filed a protest
on January 11, 1989 with the BIR praying that the estate tax payment in the amount of
P1,527,790.98, or at least some portion of it, be returned to the heirs. 3
However, on August 15, 1989, without waiting for her protest to be resolved by the BIR,
Josefina Pajonar filed a petition for review with the Court of Tax Appeals (CTA), praying for
the refund of P1,527,790.98, or in the alternative, P840,202.06, as erroneously paid estate
tax. 4 The case was docketed as CTA Case No. 4381.

On May 6, 1993, the CTA ordered the Commissioner of Internal Revenue to refund Josefina
Pajonar the amount of P252,585.59, representing erroneously paid estate tax for the year
1988.5 Among the deductions from the gross estate allowed by the CTA were the amounts
of P60,753 representing the notarial fee for the Extrajudicial Settlement and the amount of
P50,000 as the attorney's fees in Special Proceedings No. 1254 for guardianship. 6
On June 15, 1993, the Commissioner of Internal Revenue filed a motion for
reconsideration7 of the CTA's May 6, 1993 decision asserting, among others, that the
notarial fee for the Extrajudicial Settlement and the attorney's fees in the guardianship
proceedings are not deductible expenses.
On June 7, 1994, the CTA issued the assailed Resolution 8 ordering the Commissioner of
Internal Revenue to refund Josefina Pajonar, as administratrix of the estate of Pedro
Pajonar, the amount of P76,502.42 representing erroneously paid estate tax for the year
1988. Also, the CTA upheld the validity of the deduction of the notarial fee for the
Extrajudicial Settlement and the attorney's fees in the guardianship proceedings.
On July 5, 1994, the Commissioner of Internal Revenue filed with the Court of Appeals a
petition for review of the CTA's May 6, 1993 Decision and its June 7, 1994 Resolution,
questioning the validity of the abovementioned deductions. On December 21, 1995, the
Court of Appeals denied the Commissioner's petition. 9
Hence, the present appeal by the Commissioner of Internal Revenue.
The sole issue in this case involves the construction of section 79 10 of the National
Internal Revenue Code 11 (Tax Code) which provides for the allowable deductions from the
gross estate of the decedent. More particularly, the question is whether the notarial fee
paid for the extrajudicial settlement in the amount of P60,753 and the attorney's fees in
the guardianship proceedings in the amount of P50,000 may be allowed as deductions
from the gross estate of decedent in order to arrive at the value of the net estate.
We answer this question in the affirmative, thereby upholding the decisions of the
appellate courts.
In its May 6, 1993 Decision, the Court of Tax Appeals ruled thus:
Respondent maintains that only judicial expenses of the testamentary or intestate
proceedings are allowed as a deduction to the gross estate. The amount of P60,753.00 is
quite extraordinary for a mere notarial fee.
This Court adopts the view under American jurisprudence that expenses incurred in the
extrajudicial settlement of the estate should be allowed as a deduction from the gross
estate. "There is no requirement of formal administration. It is sufficient that the expense
be a necessary contribution toward the settlement of the case." [ 34 Am. Jur. 2d, p. 765;
Nolledo, Bar Reviewer in Taxation, 10th Ed. (1990), p. 481]
xxx

xxx

xxx

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

xxx

xxx

xxx

The guardianship proceeding had been terminated upon delivery of the residuary estate to
the heirs entitled thereto. Thereafter, PNB was discharged of any further responsibility.
Attorney's fees in order to be deductible from the gross estate must be essential to the
collection of assets, payment of debts or the distribution of the property to the persons
entitled to it. The services for which the fees are charged must relate to the proper
settlement of the estate. [34 Am. Jur. 2d 767.] In this case, the guardianship proceeding
was necessary for the distribution of the property of the late Pedro Pajonar to his rightful
heirs.
xxx

xxx

xxx

PNB was appointed as guardian over the assets of the late Pedro Pajonar, who, even at the
time of his death, was incompetent by reason of insanity. The expenses incurred in the
guardianship proceeding was but a necessary expense in the settlement of the decedent's
estate. Therefore, the attorney's fee incurred in the guardianship proceedings amounting
to P50,000.00 is a reasonable and necessary business expense deductible from the gross
estate of the decedent. 12
Upon a motion for reconsideration filed by the Commissioner of Internal Revenue, the
Court of Tax Appeals modified its previous ruling by reducing the refundable amount to
P76,502.43 since it found that a deficiency interest should be imposed and the
compromise penalty excluded. 13 However, the tax court upheld its previous ruling
regarding the legality of the deductions
It is significant to note that the inclusion of the estate tax law in the codification of all our
national internal revenue laws with the enactment of the National Internal Revenue Code
in 1939 were copied from the Federal Law of the United States. [ UMALI, Reviewer in
Taxation (1985), p. 285 ] The 1977 Tax Code, promulgated by Presidential Decree No.
1158, effective June 3, 1977, reenacted substantially all the provisions of the old law on
estate and gift taxes, except the sections relating to the meaning of gross estate and gift.
[ Ibid, p. 286. ]
In the United States, [a]dministrative expenses, executor's commissions and attorney's
fees are considered allowable deductions from the Gross Estate. Administrative expenses
are limited to such expenses as are actually and necessarily incurred in the administration
of a decedent's estate. [PRENTICE-HALL, Federal Taxes Estate and Gift Taxes (1936), p.
120, 533.] Necessary expenses of administration are such expenses as are entailed for the
preservation and productivity of the estate and for its management for purposes of
liquidation, payment of debts and distribution of the residue among the persons entitled
thereto. [Lizarraga Hermanos vs. Abada, 40 Phil. 124.] They must be incurred for the
settlement of the estate as a whole. [34 Am. Jur. 2d, p. 765.] Thus, where there were no
substantial community debts and it was unnecessary to convert community property to
cash, the only practical purpose of administration being the payment of estate taxes, full
deduction was allowed for attorney's fees and miscellaneous expenses charged wholly to
decedent's estate. [Ibid., citing Estate of Helis, 26 T.C. 143 (A).]

Petitioner stated in her protest filed with the BIR that "upon the death of the ward, the
PNB, which was still the guardian of the estate, (Annex "Z"), did not file an estate tax
return; however, it advised the heirs to execute an extrajudicial settlement, to pay
taxes and to post a bond equal to the value of the estate, for which the state paid
P59,341.40 for the premiums. (See Annex "K")." [p. 17, CTA record.] Therefore, it would
appear from the records of the case that the only practical purpose of settling the estate
by means of an extrajudicial settlement pursuant to Section 1 of Rule 74 of the Rules of
Court was for the payment of taxes and the distribution of the estate to the heirs. A
fortiori, since our estate tax laws are of American origin, the interpretation adopted by
American Courts has some persuasive effect on the interpretation of our own estate tax
laws on the subject.
Anent the contention of respondent that the attorney's fees of P50,000.00 incurred in the
guardianship proceeding should not be deducted from the Gross Estate, We consider the
same unmeritorious. Attorneys' and guardians' fees incurred in a trustee's accounting of a
taxable inter vivos trust attributable to the usual issues involved in such an accounting
was held to be proper deductions because these are expenses incurred in terminating an
inter vivos trust that was includible in the decedent's estate. [Prentice Hall, Federal Taxes
on Estate and Gift, p. 120, 861] Attorney's fees are allowable deductions if incurred for the
settlement of the estate. It is noteworthy to point that PNB was appointed the guardian
over the assets of the deceased. Necessarily the assets of the deceased formed part of his
gross estate. Accordingly, all expenses incurred in relation to the estate of the deceased
will be deductible for estate tax purposes provided these are necessary and ordinary
expenses for administration of the settlement of the estate. 14
In upholding the June 7, 1994 Resolution of the Court of Tax Appeals, the Court of Appeals
held that:
2. Although the Tax Code specifies "judicial expenses of the testamentary or intestate
proceedings," there is no reason why expenses incurred in the administration and
settlement of an estate in extrajudicial proceedings should not be allowed. However,
deduction is limited to such administration expenses as are actually and necessarily
incurred in the collection of the assets of the estate, payment of the debts, and
distribution of the remainder among those entitled thereto. Such expenses may include
executor's or administrator's fees, attorney's fees, court fees and charges, appraiser's
fees, clerk hire, costs of preserving and distributing the estate and storing or maintaining
it, brokerage fees or commissions for selling or disposing of the estate, and the like.
Deductible attorney's fees are those incurred by the executor or administrator in the
settlement of the estate or in defending or prosecuting claims against or due the estate.
(Estate and Gift Taxation in the Philippines, T. P. Matic, Jr., 1981 Edition, p. 176).
xxx

xxx

xxx

It is clear then that the extrajudicial settlement was for the purpose of payment of taxes
and the distribution of the estate to the heirs. The execution of the extrajudicial
settlement necessitated the notarization of the same. Hence the Contract of Legal
Services of March 28, 1988 entered into between respondent Josefina Pajonar and counsel
was presented in evidence for the purpose of showing that the amount of P60,753.00 was
for the notarization of the Extrajudicial Settlement. It follows then that the notarial fee of

P60,753.00 was incurred primarily to settle the estate of the deceased Pedro Pajonar. Said
amount should then be considered an administration expenses actually and necessarily
incurred in the collection of the assets of the estate, payment of debts and distribution of
the remainder among those entitled thereto. Thus, the notarial fee of P60,753 incurred for
the Extrajudicial Settlement should be allowed as a deduction from the gross estate.
3. Attorney's fees, on the other hand, in order to be deductible from the gross estate must
be essential to the settlement of the estate.
The amount of P50,000.00 was incurred as attorney's fees in the guardianship
proceedings in Spec. Proc. No. 1254. Petitioner contends that said amount are not
expenses of the testamentary or intestate proceedings as the guardianship proceeding
was instituted during the lifetime of the decedent when there was yet no estate to be
settled.
Again, this contention must fail.
The guardianship proceeding in this case was necessary for the distribution of the
property of the deceased Pedro Pajonar. As correctly pointed out by respondent CTA, the
PNB was appointed guardian over the assets of the deceased, and that necessarily the
assets of the deceased formed part of his gross estate. . . .
xxx

xxx

xxx

It is clear therefore that the attorney's fees incurred in the guardianship proceeding in
Spec. Proc. No. 1254 were essential to the distribution of the property to the persons
entitled thereto. Hence, the attorney's fees incurred in the guardianship proceedings in
the amount of P50,000.00 should be allowed as a deduction from the gross estate of the
decedent. 15
The deductions from the gross estate permitted under section 79 of the Tax Code basically
reproduced the deductions allowed under Commonwealth Act No. 466 (CA 466), otherwise
known as the National Internal Revenue Code of 1939, 16 and which was the first
codification of Philippine tax laws. Section 89 (a) (1) (B) of CA 466 also provided for the
deduction of the "judicial expenses of the testamentary or intestate proceedings" for
purposes of determining the value of the net estate. Philippine tax laws were, in turn,
based on the federal tax laws of the United States. 17 In accord with established rules of
statutory construction, the decisions of American courts construing the federal tax code
are entitled to great weight in the interpretation of our own tax laws. 18
Judicial expenses are expenses of administration. 19 Administration expenses, as an
allowable deduction from the gross estate of the decedent for purposes of arriving at the
value of the net estate, have been construed by the federal and state courts of the United
States to include all expenses "essential to the collection of the assets, payment of debts
or the distribution of the property to the persons entitled to it." 20 In other words, the
expenses must be essential to the proper settlement of the estate. Expenditures incurred
for the individual benefit of the heirs, devisees or legatees are not deductible. 21 This
distinction has been carried over to our jurisdiction. Thus, inLorenzo v. Posadas 22 the
Court construed the phrase "judicial expenses of the testamentary or intestate
proceedings" as not including the compensation paid to a trustee of the decedent's estate

when it appeared that such trustee was appointed for the purpose of managing the
decedent's real estate for the benefit of the testamentary heir. In another case, the Court
disallowed the premiums paid on the bond filed by the administrator as an expense of
administration since the giving of a bond is in the nature of a qualification for the office,
and not necessary in the settlement of the estate. 23 Neither may attorney's fees incident
to litigation incurred by the heirs in asserting their respective rights be claimed as a
deduction from the gross estate. 241wphi1
Coming to the case at bar, the notarial fee paid for the extrajudicial settlement is clearly a
deductible expense since such settlement effected a distribution of Pedro Pajonar's estate
to his lawful heirs. Similarly, the attorney's fees paid to PNB for acting as the guardian of
Pedro Pajonar's property during his lifetime should also be considered as a deductible
administration expense. PNB provided a detailed accounting of decedent's property and
gave advice as to the proper settlement of the latter's estate, acts which contributed
towards the collection of decedent's assets and the subsequent settlement of the estate.
We find that the Court of Appeals did not commit reversible error in affirming the
questioned resolution of the Court of Tax Appeals.
WHEREFORE, the December 21, 1995 Decision of the Court of Appeals is AFFIRMED. The
notarial fee for the extrajudicial settlement and the attorney's fees in the guardianship
proceedings are allowable deductions from the gross estate of Pedro Pajonar.1wphi1.nt
SO ORDERED.

G.R. No. 140944

April 30, 2008

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

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

Less: Deductions
(Sch. 4)

187,822,57
6.06

Net Conjugal Estate NIL

Less: Share of
Surviving Spouse

NIL.

Net Share in
Conjugal Estate

NIL

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

xxx
Net Taxable Estate

NIL.

The Facts

Estate Tax Due

NIL.11

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

On April 27, 1990, BIR Regional Director for San Pablo City, Osmundo G. Umali issued
Certification Nos. 2052[12]and 2053[13] stating that the taxes due on the transfer of real and
personal properties[14] of Jose had been fully paid and said properties may be transferred
to his heirs. Sometime in August 1990, Justice Dizon passed away. Thus, on October 22,
1990, the probate court appointed petitioner as the administrator of the Estate. 15
Petitioner requested the probate court's authority to sell several properties forming part of
the Estate, for the purpose of paying its creditors, namely: Equitable Banking Corporation
(P19,756,428.31), Banque de L'Indochine et. de Suez (US$4,828,905.90 as of January 31,
1988), Manila Banking Corporation (P84,199,160.46 as of February 28, 1989) and State
Investment House, Inc. (P6,280,006.21). Petitioner manifested that Manila Bank, a major
creditor of the Estate was not included, as it did not file a claim with the probate court
since it had security over several real estate properties forming part of the Estate. 16
However, on November 26, 1991, the Assistant Commissioner for Collection of the BIR,
Themistocles Montalban, issued Estate Tax Assessment Notice No. FAS-E-87-91003269,17 demanding the payment of P66,973,985.40 as deficiency estate tax, itemized
as follows:

COMPUTATION OF TAX

Deficiency Estate Tax- 1987

Conjugal Real
Property (Sch. 1)

P10,855,02
0.00

Estate tax

Conjugal Personal
Property (Sch.2)

3,460,591.3
4

25% surcharge- late 7,967,103.62

filing

Taxable Transfer
(Sch. 3)
Gross Conjugal
Estate

P31,868,414.
48

late payment 7,967,103.62

14,315,611.
34

Interest

19,121,048.6
8

Compromise-non
filing

25,000.00

final inventory of all the

properties of the deceased
(p. 106, BIR records);

non payment 25,000.00

no notice of
death

15.00

no CPA
Certificate

300.00

Total amount due &

collectible

4. Attachment to Exh. "C" which "C-1" to

is the detailed and complete "C-17"
listing of the properties of the
deceased (pp. 89-105, BIR
rec.);

P66,973,985.
4018

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, petitioner filed a petition for review 21 before respondent CTA.
Trial on the merits ensued.
As found by the CTA, the respective parties presented the following pieces of evidence, to
wit:
In the hearings conducted, petitioner did not present testimonial evidence but merely
documentary evidence consisting of the following:
Nature of Document (sic)

Exhibits

1. Letter dated October 13,

"A"
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);
2. Petition for the probate of the "B" & "Bwill and issuance of letter of 1"
administration filed with the
Regional Trial Court (RTC) of
Manila, docketed as Sp. Proc.
No. 87-42980 (pp. 107-108,
BIR records);
3. Pleading entitled
"C"
"Compliance" filed with the
probate Court submitting the

5. Claims against the estate

"D" to
filed by Equitable Banking
"D-24"
Corp. with the probate Court
in the amount
ofP19,756,428.31 as of March
31, 1988, together with the
Annexes to the claim (pp. 6488, BIR records);
6. Claim filed by Banque de L'
"E" to "EIndochine et de Suez with the 3"
probate Court in the amount
of US $4,828,905.90 as of
January 31, 1988 (pp. 262265, BIR records);
7. Claim of the Manila Banking "F" to "FCorporation (MBC) which as 3"
of November 7, 1987
amounts to P65,158,023.54,
but recomputed as of
February 28, 1989 at a total
amount ofP84,199,160.46;
together with the demand
letter from MBC's lawyer (pp.
194-197, BIR records);
8. Demand letter of Manila
"G" & "GBanking Corporation
1"
prepared by Asedillo, Ramos
and Associates Law Offices
addressed to Fernandez
Hermanos, Inc., represented
by Jose P. Fernandez, as
mortgagors, in the total
amount ofP240,479,693.17
as of February 28, 1989 (pp.

186-187, BIR records);

9. Claim of State Investment
"H" to
House, Inc. filed with the RTC, "H-16"
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);
1 Letter dated March 14, 1990 "I"
0. of Arsenio P. Dizon addressed
to Atty. Jesus M. Gonzales, (p.
184, BIR records);
1 Letter dated April 17, 1990
"J"
1. from J.M. Gonzales addressed
to the Regional Director of
BIR in San Pablo City (p. 183,
BIR records);
1 Estate Tax Return filed by the "K" to "K2. estate of the late Jose P.
5"
Fernandez through its
authorized representative,
Atty. Jesus M. Gonzales, for
Arsenio P. Dizon, with
attachments (pp. 177-182,
BIR records);
1 Certified true copy of the
"L"
3. 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
1 Certification of Payment of
"M" to
4. estate taxes Nos. 2052 and
"M-5"
2053, both dated April 27,
1990, issued by the Office of

the Regional Director,

Revenue Region No. 4-C, San
Pablo City, with attachments
(pp. 103-104, CTA records.).
Respondent's [BIR] counsel presented on June 26, 1995 one witness in the
person of Alberto Enriquez, who was one of the revenue examiners who
conducted the investigation on the estate tax case of the late Jose P. Fernandez.
In the course of the direct examination of the witness, he identified the
following:
Documents/Signatures
1. Estate Tax Return prepared
by the BIR;

BIR
Record
p. 138

2. Signatures of Ma. Anabella

-doAbuloc and Alberto Enriquez,
Jr. appearing at the lower
Portion of Exh. "1";
3. Memorandum for the
pp. 143Commissioner, dated July 19, 144
1991, prepared by revenue
examiners, Ma. Anabella A.
Abuloc, Alberto S. Enriquez
and Raymund S. Gallardo;
Reviewed by Maximino V.
Tagle
4. Signature of Alberto S.
Enriquez appearing at the
lower portion on p. 2 of Exh.
"2";

-do-

5. Signature of Ma. Anabella A.

Abuloc appearing at the
lower portion on p. 2 of Exh.
"2";

-do-

6. Signature of Raymund S.
-doGallardo appearing at the
Lower portion on p. 2 of Exh.
"2";
7. Signature of Maximino V.
Tagle also appearing on p. 2

-do-

of Exh. "2";
8. Summary of revenue
Enforcement Officers Audit
Report, dated July 19, 1991;

p. 139

9. Signature of Alberto Enriquez -doat the lower portion of Exh.

"3";

Conjugal Real
Property

P 5,062,016.
00

Conjugal Personal
Prop.

33,021,999.
93

Gross Conjugal
Estate

38,084,015.
93

Less: Deductions

1 Signature of Ma. Anabella A. -do0. Abuloc at the lower portion of

Exh. "3";

26,250,000.
00

Net Conjugal Estate

P 11,834,01
5.93

1 Signature of Raymond S.
-do1. Gallardo at the lower portion
of Exh. "3";

Less: Share of
Surviving Spouse

5,917,007.9
6

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

-do-

1 Demand letter (FAS-E-87-91- p. 169

3. 00), signed by the Asst.
Commissioner for Collection
for the Commissioner of
Internal Revenue, demanding
payment of the amount
ofP66,973,985.40; and
1 Assessment Notice FAS-E-87- pp. 1694. 91-00
17022

Net Share in Conjugal P 5,917,007.

Estate
96
Add:
Capital/Paraphernal
Properties
P44,652,813.66
Less:
44,652,813.
Capital/Paraphe 66
rnal Deductions
Net Taxable Estate

The CTA's Ruling

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

P 50,569,82
1.62
=======
=====

Estate Tax
Due P 29,935,342.97
Add: 25% Surcharge 7,483,835.7
for Late Filing
4
Add: Penalties for-No 15.00
notice of death
No CPA
certificate

300.00

Total deficiency
estate tax

P 37,419,49
3.71
=======
=====

exclusive of 20% interest from due date of its payment until full payment thereof
[Sec. 283 (b), Tax Code of 1987].25
Thus, the CTA disposed of the case in this wise:
WHEREFORE, viewed from all the foregoing, the Court finds the petition unmeritorious
and denies the same. Petitioner and/or the heirs of Jose P. Fernandez are hereby ordered to
pay to respondent the amount ofP37,419,493.71 plus 20% interest from the due date of
its payment until full payment thereof as estate tax liability of the estate of Jose P.
Fernandez who died on November 7, 1987.
SO ORDERED.26
Aggrieved, petitioner, on March 2, 1998, went to the CA via a petition for review. 27
The CA's Ruling

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

On May 31, 1999, petitioner filed a Motion for Reconsideration 29 which the CA denied in its
Resolution30 dated November 3, 1999.

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

Hence, the instant Petition raising the following issues:

The Issues

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

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

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

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

First. Whether or not the CTA and the CA gravely erred in allowing the admission of the
pieces of evidence which were not formally offered by the BIR; and
Second. Whether or not the CA erred in affirming the CTA in the latter's determination of
the deficiency estate tax imposed against the Estate.
The Courts Ruling
The Petition is impressed with merit.
Under Section 8 of RA 1125, the CTA is categorically described as a court of record. As
cases filed before it are litigated de novo, party-litigants shall prove every minute aspect
of their cases. Indubitably, no evidentiary value can be given the pieces of evidence
submitted by the BIR, as the rules on documentary evidence require that these documents
must be formally offered before the CTA.34 Pertinent is Section 34, Rule 132 of the Revised
Rules on Evidence which reads:

SEC. 34. Offer of evidence. The court shall consider no evidence which has not been
formally offered. The purpose for which the evidence is offered must be specified.
The CTA and the CA rely solely on the case of Vda. de Oate, which reiterated this Court's
previous rulings inPeople 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,38this 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 Oatestill subsists in this
jurisdiction. In Vda. de Oate, we held that:
From the foregoing provision, it is clear that for evidence to be considered, the same must
be formally offered. Corollarily, the mere fact that a particular document is identified and
marked as an exhibit does not mean that it has already been offered as part of the
evidence of a party. In Interpacific Transit, Inc. v. Aviles [186 SCRA 385], we had the
occasion to make a distinction between identification of documentary evidence and its
formal offer as an exhibit. We said that the first is done in the course of the trial and is
accompanied by the marking of the evidence as an exhibit while the second is done only
when the party rests its case and not before. A party, therefore, may opt to formally offer
his evidence if he believes that it will advance his cause or not to do so at all. In the event
he chooses to do the latter, the trial court is not authorized by the Rules to consider the
same.
However, in People v. Napat-a [179 SCRA 403] citing People v. Mate [103 SCRA 484], we
relaxed the foregoing rule and allowed evidence not formally offered to be
admitted and considered by the trial court provided the following requirements
are present, viz.: first, the same must have been duly identified by testimony
duly recorded and, second, the same must have been incorporated in the
records of the case.40
From the foregoing declaration, however, it is clear that Vda. de Oate is merely an
exception to the general rule. Being an exception, it may be applied only when there is
strict compliance with the requisites mentioned therein; otherwise, the general rule in
Section 34 of Rule 132 of the Rules of Court should prevail.
In this case, we find that these requirements have not been satisfied. The assailed pieces
of evidence were presented and marked during the trial particularly when Alberto took the
witness stand. Alberto identified these pieces of evidence in his direct testimony. 41 He was
also subjected to cross-examination and re-cross examination by petitioner. 42 But Albertos
account and the exchanges between Alberto and petitioner did not sufficiently describe
the contents of the said pieces of evidence presented by the BIR. In fact, petitioner sought
that the lead examiner, one Ma. Anabella A. Abuloc, be summoned to testify, inasmuch as
Alberto was incompetent to answer questions relative to the working papers. 43 The lead

examiner never testified. Moreover, while Alberto's testimony identifying the BIR's
evidence was duly recorded, the BIR documents themselves were not incorporated in the
records of the case.
A common fact threads through Vda. de Oate and Ramos that does not exist at all in the
instant case. In the aforementioned cases, the exhibits were marked at the pre-trial
proceedings to warrant the pronouncement that the same were duly incorporated in the
records of the case. Thus, we held in Ramos:
In this case, we find and so rule that these requirements have been satisfied. The
exhibits in question were presented and marked during the pre-trial of the case
thus, they have been incorporated into the records. Further, Elpidio himself
explained the contents of these exhibits when he was interrogated by respondents'
counsel...
xxxx
But what further defeats petitioner's cause on this issue is that respondents' exhibits were
marked and admitted during the pre-trial stage as shown by the Pre-Trial Order quoted
earlier.44
While the CTA is not governed strictly by technical rules of evidence, 45 as rules of
procedure are not ends in themselves and are primarily intended as tools in the
administration of justice, the presentation of the BIR's evidence is not a mere procedural
technicality which may be disregarded considering that it is the only means by which the
CTA may ascertain and verify the truth of BIR's claims against the Estate. 46 The BIR's
failure to formally offer these pieces of evidence, despite CTA's directives, is fatal to its
cause.47 Such failure is aggravated by the fact that not even a single reason was advanced
by the BIR to justify such fatal omission. This, we take against the BIR.
Per the records of this case, the BIR was directed to present its evidence 48 in the hearing
of February 21, 1996, but BIR's counsel failed to appear. 49 The CTA denied petitioner's
motion to consider BIR's presentation of evidence as waived, with a warning to BIR that
such presentation would be considered waived if BIR's evidence would not be presented at
the next hearing. Again, in the hearing of March 20, 1996, BIR's counsel failed to
appear.50 Thus, in its 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 thatthe formal offer of one's evidence is deemed waived after
failing to submit it within a considerable period of time. It explained that the
court cannot admit an offer of evidence made after a lapse of three (3) months
because to do so would "condone an inexcusable laxity if not non-compliance
with a court order which, in effect, would encourage needless delays and derail
the speedy administration of justice."
Applying the aforementioned principle in this case, we find that the trial court had
reasonable ground to consider that petitioners had waived their right to make a formal
offer of documentary or object evidence. Despite several extensions of time to make their
formal offer, petitioners failed to comply with their commitment and allowed almost five
months to lapse before finally submitting it. Petitioners' failure to comply with the
rule on admissibility of evidence is anathema to the efficient, effective, and
expeditious dispensation of justice.
Having disposed of the foregoing procedural issue, we proceed to discuss the merits of the
case.
Ordinarily, the CTA's findings, as affirmed by the CA, are entitled to the highest respect
and will not be disturbed on appeal unless it is shown that the lower courts committed
gross error in the appreciation of facts.54 In this case, however, we find the decision of the
CA affirming that of the CTA tainted with palpable error.
It is admitted that the claims of the Estate's aforementioned creditors have been
condoned. As a mode of extinguishing an obligation, 55 condonation or remission of
debt56 is defined as:
an act of liberality, by virtue of which, without receiving any equivalent, the creditor
renounces the enforcement of the obligation, which is extinguished in its entirety or in that
part or aspect of the same to which the remission refers. It is an essential characteristic of
remission that it be gratuitous, that there is no equivalent received for the benefit given;
once such equivalent exists, the nature of the act changes. It may become dation in
payment when the creditor receives a thing different from that stipulated; or novation,
when the object or principal conditions of the obligation should be changed; or
compromise, when the matter renounced is in litigation or dispute and in exchange of
some concession which the creditor receives.57
Verily, the second issue in this case involves the construction of Section 79 58 of the
National Internal Revenue Code59 (Tax Code) which provides for the allowable deductions
from the gross estate of the decedent. The specific question is whether the actual claims
of the aforementioned creditors may be fully allowed as deductions from the gross estate
of Jose despite the fact that the said claims were reduced or condoned through
compromise agreements entered into by the Estate with its creditors.
"Claims against the estate," as allowable deductions from the gross estate under Section
79 of the Tax Code, are basically a reproduction of the deductions allowed under Section
89 (a) (1) (C) and (E) of Commonwealth Act No. 466 (CA 466), otherwise known as the
National Internal Revenue Code of 1939, and which was the first codification of Philippine

tax laws. Philippine tax laws were, in turn, based on the federal tax laws of the United
States. Thus, pursuant to established rules of statutory construction, the decisions of
American courts construing the federal tax code are entitled to great weight in the
interpretation of our own tax laws.60
It is noteworthy that even in the United States, there is some dispute as to whether the
deductible amount for a claim against the estate is fixed as of the decedent's death which
is the general rule, or the same should be adjusted to reflect post-death developments,
such as where a settlement between the parties results in the reduction of the amount
actually paid.61 On one hand, the U.S. court ruled that the appropriate deduction is the
"value" that the claim had at the date of the decedent's death. 62 Also, as held in Propstra
v. U.S., 63 where a lien claimed against the estate was certain and enforceable on the date
of the decedent's death, the fact that the claimant subsequently settled for lesser amount
did not preclude the estate from deducting the entire amount of the claim for estate tax
purposes. These pronouncements essentially confirm the general principle that post-death
developments are not material in determining the amount of the deduction.
On the other hand, the Internal Revenue Service (Service) opines that post-death
settlement should be taken into consideration and the claim should be allowed as a
deduction only to the extent of the amount actually paid.64Recognizing 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-ofdeath 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 CAG.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 petitioner-appellant, 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-11622

January 28, 1961

THE COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
DOUGLAS FISHER AND BETTINA FISHER, and the COURT OF TAX
APPEALS, respondents.
x---------------------------------------------------------x
G.R. No. L-11668

January 28, 1961.

DOUGLAS FISHER AND BETTINA FISHER, petitioner,

vs.
THE COLLECTOR OF INTERNAL REVENUE, and the COURT OF TAX
APPEALS, respondents.
BARRERA, J.:
This case relates to the determination and settlement of the hereditary estate left by the
deceased Walter G. Stevenson, and the laws applicable thereto. Walter G. Stevenson (born
in the Philippines on August 9, 1874 of British parents and married in the City of Manila on
January 23, 1909 to Beatrice Mauricia Stevenson another British subject) died on February
22, 1951 in San Francisco, California, U.S.A. whereto he and his wife moved and
established their permanent residence since May 10, 1945. In his will executed in San
Francisco on May 22, 1947, and which was duly probated in the Superior Court of
California on April 11, 1951, Stevenson instituted his wife Beatrice as his sole heiress to
the following real and personal properties acquired by the spouses while residing in the
Philippines, described and preliminary assessed as follows:
Gross Estate
Real Property 2
parcels of land in
Baguio, covered by
T.C.T. Nos. 378 and P43,500.0
379
0
Personal Property
(1) 177 shares of
stock of Canacao
Estate at P10.00
each
(2) 210,000 shares
of stock of
Mindanao Mother
Lode Mines, Inc. at
P0.38 per share

1,770.00

(3) Cash credit with

Canacao Estate Inc. 4,870.88
(4) Cash, with the
Chartered Bank of
India, Australia &
China
Total Gross
Assets

851.97
P130,792.
85

On May 22, 1951, ancillary administration proceedings were instituted in the Court of First
Instance of Manila for the settlement of the estate in the Philippines. In due time
Stevenson's will was duly admitted to probate by our court and Ian Murray Statt was
appointed ancillary administrator of the estate, who on July 11, 1951, filed a preliminary
estate and inheritance tax return with the reservation of having the properties declared
therein finally appraised at their values six months after the death of Stevenson.
Preliminary return was made by the ancillary administrator in order to secure the waiver of
the Collector of Internal Revenue on the inheritance tax due on the 210,000 shares of
stock in the Mindanao Mother Lode Mines Inc. which the estate then desired to dispose in
the United States. Acting upon said return, the Collector of Internal Revenue accepted the
valuation of the personal properties declared therein, but increased the appraisal of the
two parcels of land located in Baguio City by fixing their fair market value in the amount of
P52.200.00, instead of P43,500.00. After allowing the deductions claimed by the ancillary
administrator for funeral expenses in the amount of P2,000.00 and for judicial and
administration expenses in the sum of P5,500.00, the Collector assessed the state the
amount of P5,147.98 for estate tax and P10,875,26 or inheritance tax, or a total of
P16,023.23. Both of these assessments were paid by the estate on June 6, 1952.
On September 27, 1952, the ancillary administrator filed in amended estate and
inheritance tax return in pursuance f his reservation made at the time of filing of the
preliminary return and for the purpose of availing of the right granted by section 91 of the
National Internal Revenue Code.
In this amended return the valuation of the 210,000 shares of stock in the Mindanao
Mother Lode Mines, Inc. was reduced from 0.38 per share, as originally declared, to P0.20
per share, or from a total valuation of P79,800.00 to P42,000.00. This change in price per
share of stock was based by the ancillary administrator on the market notation of the
stock obtaining at the San Francisco California) Stock Exchange six months from the death
of Stevenson, that is, As of August 22, 1931. In addition, the ancillary administrator made
claim for the following deductions:
Funeral expenses
($1,04326)

79,800.0
0

P2,086.5
2

Judicial Expenses:
(a)
Administrator's

P1,204.3

Fee

(b) Attorney's
Fee

6.000.00

(c) Judicial and

Administration
expenses as of
August 9, 1952

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)
Claims against
the estate:
($5,000.00)
P10,000.00

652.50

From this decision, both parties appealed.

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

P10,000.
00

Plus: 4% int. p.a.

from Feb. 2 to
22, 1951
22.47
Sub-Total

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.

10,022.4
7
P21,365.
88

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

(1) Whether or not, in determining the taxable net estate of the decedent, one-half () 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.

We now take up the question of reciprocity in exemption from transfer or death taxes,
between the State of California and the Philippines.F
Section 122 of our National Internal Revenue Code, in pertinent part, provides:
... And, provided, further, That no tax shall be collected under this Title in respect of
intangible personal property (a) if the decedent at the time of his death was a resident of
a foreign country which at the time of his death did not impose a transfer of tax or death
tax of any character in respect of intangible personal property of citizens of the Philippines
not residing in that foreign country, or (b) if the laws of the foreign country of which the
decedent was a resident at the time of his death allow a similar exemption from transfer
taxes or death taxes of every character in respect of intangible personal property owned
by citizens of the Philippines not residing in that foreign country." (Emphasis supplied).
On the other hand, Section 13851 of the California Inheritance Tax Law, insofar as
pertinent, reads:.
"SEC. 13851, Intangibles of nonresident: Conditions. Intangible personal property is
exempt from the tax imposed by this part if the decedent at the time of his death was a
resident of a territory or another State of the United States or of a foreign state or country
which then imposed a legacy, succession, or death tax in respect to intangible personal
property of its own residents, but either:.
(a) Did not impose a legacy, succession, or death tax of any character in respect to
intangible personal property of residents of this State, or
(b) Had in its laws a reciprocal provision under which intangible personal property of a
non-resident was exempt from legacy, succession, or death taxes of every character if the
Territory or other State of the United States or foreign state or country in which the
nonresident resided allowed a similar exemption in respect to intangible personal property
of residents of the Territory or State of the United States or foreign state or country of
residence of the decedent." (Id.)
It is clear from both these quoted provisions that the reciprocity must be total, that is, with
respect to transfer or death taxes of any and every character, in the case of the Philippine
law, and to legacy, succession, or death taxes of any and every character, in the case of
the California law. Therefore, if any of the two states collects or imposes and does not
exempt any transfer, death, legacy, or succession tax of any character, the reciprocity
does not work. This is the underlying principle of the reciprocity clauses in both laws.
In the Philippines, upon the death of any citizen or resident, or non-resident with
properties therein, there are imposed upon his estate and its settlement, both an estate
and an inheritance tax. Under the laws of California, only inheritance tax is imposed. On
the other hand, the Federal Internal Revenue Code imposes an estate tax on non-residents
not citizens of the United States,7 but does not provide for any exemption on the basis of
reciprocity. Applying these laws in the manner the Court of Tax Appeals did in the instant
case, we will have a situation where a Californian, who is non-resident in the Philippines
but has intangible personal properties here, will the subject to the payment of an estate
tax, although exempt from the payment of the inheritance tax. This being the case, will a
Filipino, non-resident of California, but with intangible personal properties there, be

entitled to the exemption clause of the California law, since the Californian has not been
exempted from every character of legacy, succession, or death tax because he is, under
our law, under obligation to pay an estate tax? Upon the other hand, if we exempt the
Californian from paying the estate tax, we do not thereby entitle a Filipino to be exempt
from a similar estate tax in California because under the Federal Law, which is equally
enforceable in California he is bound to pay the same, there being no reciprocity
recognized in respect thereto. In both instances, the Filipino citizen is always at a
disadvantage. We do not believe that our legislature has intended such an unfair situation
to the detriment of our own government and people. We, therefore, find and declare that
the lower court erred in exempting the estate in question from payment of the inheritance
tax.
We are not unaware of our ruling in the case of Collector of Internal Revenue vs. Lara (G.R.
Nos. L-9456 & L-9481, prom. January 6, 1958, 54 O.G. 2881) exempting the estate of the
deceased Hugo H. Miller from payment of the inheritance tax imposed by the Collector of
Internal Revenue. It will be noted, however, that the issue of reciprocity between the
pertinent provisions of our tax law and that of the State of California was not there
squarely raised, and the ruling therein cannot control the determination of the case at bar.
Be that as it may, we now declare that in view of the express provisions of both the
Philippine and California laws that the exemption would apply only if the law of the other
grants an exemption from legacy, succession, or death taxes of every character, there
could not be partial reciprocity. It would have to be total or none at all.
With respect to the question of deduction or reduction in the amount of P4,000.00 based
on the U.S. Federal Estate Tax Law which is also being claimed by respondents, we uphold
and adhere to our ruling in the Lara case (supra) that the amount of $2,000.00 allowed
under the Federal Estate Tax Law is in the nature of a deduction and not of an exemption
regarding which reciprocity cannot be claimed under the provision of Section 122 of our
National Internal Revenue Code. Nor is reciprocity authorized under the Federal Law. .
On the issue of the correctness of the appraisal of the two parcels of land situated in
Baguio City, it is contended that their assessed values, as appearing in the tax rolls 6
months after the death of Stevenson, ought to have been considered by petitioner as their
fair market value, pursuant to section 91 of the National Internal Revenue Code. It should
be pointed out, however, that in accordance with said proviso the properties are required
to be appraised at their fair market value and the assessed value thereof shall be
considered as the fair market value only when evidence to the contrary has not been
shown. After all review of the record, we are satisfied that such evidence exists to justify
the valuation made by petitioner which was sustained by the tax court, for as the tax
court aptly observed:
"The two parcels of land containing 36,264 square meters were valued by the
administrator of the estate in the Estate and Inheritance tax returns filed by him at
P43,500.00 which is the assessed value of said properties. On the other hand, defendant
appraised the same at P52,200.00. It is of common knowledge, and this Court can take
judicial notice of it, that assessments for real estate taxation purposes are very much
lower than the true and fair market value of the properties at a given time and place. In
fact one year after decedent's death or in 1952 the said properties were sold for a price of
P72,000.00 and there is no showing that special or extraordinary circumstances caused

the sudden increase from the price of P43,500.00, if we were to accept this value as a fair
and reasonable one as of 1951. Even more, the counsel for plaintiffs himself admitted in
open court that he was willing to purchase the said properties at P2.00 per square meter.
In the light of these facts we believe and therefore hold that the valuation of P52,200.00 of
the real estate in Baguio made by defendant is fair, reasonable and justified in the
premises." (Decision, p. 19).
In respect to the valuation of the 210,000 shares of stock in the Mindanao Mother Lode
Mines, Inc., (a domestic corporation), respondents contend that their value should be fixed
on the basis of the market quotation obtaining at the San Francisco (California) Stock
Exchange, on the theory that the certificates of stocks were then held in that place and
registered with the said stock exchange. We cannot agree with respondents' argument.
The situs of the shares of stock, for purposes of taxation, being located here in the
Philippines, as respondents themselves concede and considering that they are sought to
be taxed in this jurisdiction, consistent with the exercise of our government's taxing
authority, their fair market value should be taxed on the basis of the price prevailing in our
country.
Upon the other hand, we find merit in respondents' other contention that the said shares
of stock commanded a lesser value at the Manila Stock Exchange six months after the
death of Stevenson. Through Atty. Allison Gibbs, respondents have shown that at that time
a share of said stock was bid for at only P.325 (p. 103, t.s.n.). Significantly, the testimony
of Atty. Gibbs in this respect has never been questioned nor refuted by petitioner either
before this court or in the court below. In the absence of evidence to the contrary, we are,
therefore, constrained to reverse the Tax Court on this point and to hold that the value of a
share in the said mining company on August 22, 1951 in the Philippine market was P.325
as claimed by respondents..
It should be noted that the petitioner and the Tax Court valued each share of stock of P.38
on the basis of the declaration made by the estate in its preliminary return. Patently, this
should not have been the case, in view of the fact that the ancillary administrator had
reserved and availed of his legal right to have the properties of the estate declared at
their fair market value as of six months from the time the decedent died..
On the fifth issue, we shall consider the various deductions, from the allowance or
disallowance of which by the Tax Court, both petitioner and respondents have appealed..
Petitioner, in this regard, contends that no evidence of record exists to support the
allowance of the sum of P8,604.39 for the following expenses:.
1) Administrator's fee P1,204.
34
2) Attorney's fee
3) Judicial and
Administrative
expenses

6,000.0
0
2,052.5
5

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

6,000.0
0

3) Judicial and
Administration expenses 2,052.5
as of August 9, 1952
5
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 nonresident 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 ninetythree 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.