G.R. No.

L-17725 February 28, 1962

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
MAMBULAO LUMBER COMPANY, ET AL., defendants-appellants.

Office of the Solicitor General for plaintiff-appellee.

Arthur Tordesillas for defendants-appellants.

BARRERA, J.:

From the decision of the Court of First Instance of Manila (in Civil Case No. 34100) ordering it to pay to
plaintiff Republic of the Philippines the sum of P4,802.37 with 6% interest thereon from the date of the
filing of the complaint until fully paid, plus costs, defendant Mambulao Lumber Company interposed the
present appeal.1

The facts of the case are briefly stated in the decision of the trial court, to wit: .

The facts of this case are not contested and may be briefly summarized as follows: (a) under the
first cause of action, for forest charges covering the period from September 10, 1952 to May 24,
1953, defendants admitted that they have a liability of P587.37, which liability is covered by a
bond executed by defendant General Insurance & Surety Corporation for Mambulao Lumber
Company, jointly and severally in character, on July 29, 1953, in favor of herein plaintiff; (b)
under the second cause of action, both defendants admitted a joint and several liability in favor of
plaintiff in the sum of P296.70, also covered by a bond dated November 27, 1953; and (c) under
the third cause of action, both defendants admitted a joint and several liability in favor of plaintiff
for P3,928.30, also covered by a bond dated July 20, 1954. These three liabilities aggregate to
P4,802.37. If the liability of defendants in favor of plaintiff in the amount already mentioned is
admitted, then what is the defense interposed by the defendants? The defense presented by the
defendants is quite unusual in more ways than one. It appears from Exh. 3 that from July 31, 1948
to December 29, 1956, defendant Mambulao Lumber Company paid to the Republic of the
Philippines P8,200.52 for 'reforestation charges' and for the period commencing from April 30,
1947 to June 24, 1948, said defendant paid P927.08 to the Republic of the Philippines for
'reforestation charges'. These reforestation were paid to the plaintiff in pursuance of Section 1 of
Republic Act 115 which provides that there shall be collected, in addition to the regular forest
charges provided under Section 264 of Commonwealth Act 466 known as the National Internal
Revenue Code, the amount of P0.50 on each cubic meter of timber... cut out and removed from
any public forest for commercial purposes. The amount collected shall be expended by the director
of forestry, with the approval of the secretary of agriculture and commerce, for reforestation and
afforestation of watersheds, denuded areas ... and other public forest lands, which upon
investigation, are found needing reforestation or afforestation .... The total amount of the
reforestation charges paid by Mambulao Lumber Company is P9,127.50, and it is the contention
of the defendant Mambulao Lumber Company that since the Republic of the Philippines has not
made use of those reforestation charges collected from it for reforesting the denuded area of the
land covered by its license, the Republic of the Philippines should refund said amount, or, if it
cannot be refunded, at least it should be compensated with what Mambulao Lumber Company
owed the Republic of the Philippines for reforestation charges. In line with this thought, defendant
Mambulao Lumber Company wrote the director of forestry, on February 21, 1957 letter Exh. 1, in
paragraph 4 of which said defendant requested "that our account with your bureau be credited with
all the reforestation charges that you have imposed on us from July 1, 1947 to June 14, 1956,
amounting to around P2,988.62 ...". This letter of defendant Mambulao Lumber Company was
answered by the director of forestry on March 12, 1957, marked Exh. 2, in which the director of
forestry quoted an opinion of the secretary of justice, to the effect that he has no discretion to
extend the time for paying the reforestation charges and also explained why not all denuded areas
are being reforested.
The only issue to be resolved in this appeal is whether the sum of P9,127.50 paid by defendant-appellant
company to plaintiff-appellee as reforestation charges from 1947 to 1956 may be set off or applied to the
payment of the sum of P4,802.37 as forest charges due and owing from appellant to appellee. It is
appellant's contention that said sum of P9,127.50, not having been used in the reforestation of the area
covered by its license, the same is refundable to it or may be applied in compensation of said sum of
P4,802.37 due from it as forest charges.1äwphï1.ñët

We find appellant's claim devoid of any merit. Section 1 of Republic Act No. 115, provides:

SECTION 1. There shall be collected, in addition to the regular forest charges provided for under
Section two hundred and sixty-four of Commonwealth Act Numbered Four Hundred Sixty-six,
known as the National Internal Revenue Code, the amount of fifty centavos on each cubic meter of
timber for the first and second groups and forty centavos for the third and fourth groups cut out
and removed from any public forest for commercial purposes. The amount collected shall be
expended by the Director of Forestry, with the approval of the Secretary of Agriculture and
Natural Resources (commerce), for reforestation and afforestation of watersheds, denuded areas
and cogon and open lands within forest reserves, communal forest, national parks, timber lands,
sand dunes, and other public forest lands, which upon investigation, are found needing
reforestation or afforestation, or needing to be under forest cover for the growing of economic
trees for timber, tanning, oils, gums, and other minor forest products or medicinal plants, or for
watersheds protection, or for prevention of erosion and floods and preparation of necessary plans
and estimate of costs and for reconnaisance survey of public forest lands and for such other
expenses as may be deemed necessary for the proper carrying out of the purposes of this Act.

All revenues collected by virtue of, and pursuant to, the provisions of the preceding paragraph and
from the sale of barks, medical plants and other products derived from plantations as herein
provided shall constitute a fund to be known as Reforestation Fund, to be expended exclusively in
carrying out the purposes provided for under this Act. All provincial or city treasurers and their
deputies shall act as agents of the Director of Forestry for the collection of the revenues or
incomes derived from the provisions of this Act. (Emphasis supplied.)

Under this provision, it seems quite clear that the amount collected as reforestation charges from a timber
licenses or concessionaire shall constitute a fund to be known as the Reforestation Fund, and that the same
shall be expended by the Director of Forestry, with the approval of the Secretary of Agriculture and Natural
Resources for the reforestation or afforestation, among others, of denuded areas which, upon investigation,
are found to be needing reforestation or afforestation. Note that there is nothing in the law which requires
that the amount collected as reforestation charges should be used exclusively for the reforestation of the
area covered by the license of a licensee or concessionaire, and that if not so used, the same should be
refunded to him. Observe too, that the licensee's area may or may not be reforested at all, depending on
whether the investigation thereof by the Director of Forestry shows that said area needs reforestation. The
conclusion seems to be that the amount paid by a licensee as reforestation charges is in the nature of a tax
which forms a part of the Reforestation Fund, payable by him irrespective of whether the area covered by
his license is reforested or not. Said fund, as the law expressly provides, shall be expended in carrying out
the purposes provided for thereunder, namely, the reforestation or afforestation, among others, of denuded
areas needing reforestation or afforestation.

Appellant maintains that the principle of a compensation in Article 1278 of the new Civil Code 2 is
applicable, such that the sum of P9,127.50 paid by it as reforestation charges may compensate its
indebtedness to appellee in the sum of P4,802.37 as forest charges. But in the view we take of this case,
appellant and appellee are not mutually creditors and debtors of each other. Consequently, the law on
compensation is inapplicable. On this point, the trial court correctly observed: .

Under Article 1278, NCC, compensation should take place when two persons in their own right
are creditors and debtors of each other. With respect to the forest charges which the defendant
Mambulao Lumber Company has paid to the government, they are in the coffers of the
 government as taxes collected, and the government does not owe anything, crystal clear that the
Republic of the Philippines and the Mambulao Lumber Company are not creditors and debtors of
each other, because compensation refers to mutual debts. ..

And the weight of authority is to the effect that internal revenue taxes, such as the forest charges in
question, can be the subject of set-off or compensation.

A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off
under the statutes of set-off, which are construed uniformly, in the light of public policy, to
exclude the remedy in an action or any indebtedness of the state or municipality to one who is
liable to the state or municipality for taxes. Neither are they a proper subject of recoupment since
they do not arise out of the contract or transaction sued on. ... (80 C.J.S. 73-74. ) .

The general rule, based on grounds of public policy is well-settled that no set-off is admissible
against demands for taxes levied for general or local governmental purposes. The reason on which
the general rule is based, is that taxes are not in the nature of contracts between the party and party
but grow out of a duty to, and are the positive acts of the government, to the making and enforcing
of which, the personal consent of individual taxpayers is not required. ... If the taxpayer can
properly refuse to pay his tax when called upon by the Collector, because he has a claim against
the governmental body which is not included in the tax levy, it is plain that some legitimate and
necessary expenditure must be curtailed. If the taxpayer's claim is disputed, the collection of the
tax must await and abide the result of a lawsuit, and meanwhile the financial affairs of the
government will be thrown into great confusion. (47 Am. Jur. 766-767.)

WHEREFORE, the judgment of the trial court appealed from is hereby affirmed in all respects, with costs
against the defendant-appellant. So ordered.

Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Paredes, Dizon and De
Leon, JJ., concur.

ENGRACIO FRANCIA, petitioner,

vs.
INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents.

GUTIERREZ, JR., J.:

The petitioner invokes legal and equitable grounds to reverse the questioned decision of the Intermediate
Appellate Court, to set aside the auction sale of his property which took place on December 5, 1977, and to
allow him to recover a 203 square meter lot which was, sold at public auction to Ho Fernandez and ordered
titled in the latter's name.

The antecedent facts are as follows:

Engracio Francia is the registered owner of a residential lot and a two-story house built upon it situated at
Barrio San Isidro, now District of Sta. Clara, Pasay City, Metro Manila. The lot, with an area of about 328
square meters, is described and covered by Transfer Certificate of Title No. 4739 (37795) of the Registry of
Deeds of Pasay City.

On October 15, 1977, a 125 square meter portion of Francia's property was expropriated by the Republic of
the Philippines for the sum of P4,116.00 representing the estimated amount equivalent to the assessed value
of the aforesaid portion.
Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on December 5, 1977, his
property was sold at public auction by the City Treasurer of Pasay City pursuant to Section 73 of
Presidential Decree No. 464 known as the Real Property Tax Code in order to satisfy a tax delinquency of
P2,400.00. Ho Fernandez was the highest bidder for the property.

Francia was not present during the auction sale since he was in Iligan City at that time helping his uncle
ship bananas.

On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P "In re: Petition for Entry
of New Certificate of Title" filed by Ho Fernandez, seeking the cancellation of TCT No. 4739 (37795) and
the issuance in his name of a new certificate of title. Upon verification through his lawyer, Francia
discovered that a Final Bill of Sale had been issued in favor of Ho Fernandez by the City Treasurer on
December 11, 1978. The auction sale and the final bill of sale were both annotated at the back of TCT No.
4739 (37795) by the Register of Deeds.

On March 20, 1979, Francia filed a complaint to annul the auction sale. He later amended his complaint on
January 24, 1980.

On April 23, 1981, the lower court rendered a decision, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered dismissing the

amended complaint and ordering:

(a) The Register of Deeds of Pasay City to issue a new Transfer

Certificate of Title in favor of the defendant Ho Fernandez over the
parcel of land including the improvements thereon, subject to whatever
encumbrances appearing at the back of TCT No. 4739 (37795) and
ordering the same TCT No. 4739 (37795) cancelled.

(b) The plaintiff to pay defendant Ho Fernandez the sum of P1,000.00

as attorney's fees. (p. 30, Record on Appeal)

The Intermediate Appellate Court affirmed the decision of the lower court in toto.

Hence, this petition for review.

Francia prefaced his arguments with the following assignments of grave errors of law:

RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE ERROR OF LAW

IN NOT HOLDING PETITIONER'S OBLIGATION TO PAY P2,400.00 FOR SUPPOSED TAX
DELINQUENCY WAS SET-OFF BY THE AMOUNT OF P4,116.00 WHICH THE GOVERNMENT IS
INDEBTED TO THE FORMER.

II

RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE AND SERIOUS

ERROR IN NOT HOLDING THAT PETITIONER WAS NOT PROPERLY AND DULY NOTIFIED
THAT AN AUCTION SALE OF HIS PROPERTY WAS TO TAKE PLACE ON DECEMBER 5, 1977
TO SATISFY AN ALLEGED TAX DELINQUENCY OF P2,400.00.

III
RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER COMMITTED A SERIOUS
ERROR AND GRAVE ABUSE OF DISCRETION IN NOT HOLDING THAT THE PRICE OF P2,400.00
PAID BY RESPONTDENT HO FERNANDEZ WAS GROSSLY INADEQUATE AS TO SHOCK ONE'S
CONSCIENCE AMOUNTING TO FRAUD AND A DEPRIVATION OF PROPERTY WITHOUT DUE
PROCESS OF LAW, AND CONSEQUENTLY, THE AUCTION SALE MADE THEREOF IS VOID. (pp.
10, 17, 20-21, Rollo)

We gave due course to the petition for a more thorough inquiry into the petitioner's allegations that his
property was sold at public auction without notice to him and that the price paid for the property was
shockingly inadequate, amounting to fraud and deprivation without due process of law.

A careful review of the case, however, discloses that Mr. Francia brought the problems raised in his
petition upon himself. While we commiserate with him at the loss of his property, the law and the facts
militate against the grant of his petition. We are constrained to dismiss it.

Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal compensation. He
claims that the government owed him P4,116.00 when a portion of his land was expropriated on October
15, 1977. Hence, his tax obligation had been set-off by operation of law as of October 15, 1977.

There is no legal basis for the contention. By legal compensation, obligations of persons, who in their own
right are reciprocally debtors and creditors of each other, are extinguished (Art. 1278, Civil Code). The
circumstances of the case do not satisfy the requirements provided by Article 1279, to wit:

(1) that each one of the obligors be bound principally and that he be at the same time a
principal creditor of the other;

xxx xxx xxx

(3) that the two debts be due.

xxx xxx xxx

This principal contention of the petitioner has no merit. We have consistently ruled that there can be no off-
setting of taxes against the claims that the taxpayer may have against the government. A person cannot
refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax
being collected. The collection of a tax cannot await the results of a lawsuit against the government.

In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that Internal Revenue
Taxes can not be the subject of set-off or compensation. We stated that:

A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-
off under the statutes of set-off, which are construed uniformly, in the light of public
policy, to exclude the remedy in an action or any indebtedness of the state or municipality
to one who is liable to the state or municipality for taxes. Neither are they a proper
subject of recoupment since they do not arise out of the contract or transaction sued on. ...
(80 C.J.S., 7374). "The general rule based on grounds of public policy is well-settled that
no set-off admissible against demands for taxes levied for general or local governmental
purposes. The reason on which the general rule is based, is that taxes are not in the nature
of contracts between the party and party but grow out of duty to, and are the positive acts
of the government to the making and enforcing of which, the personal consent of
individual taxpayers is not required. ..."
We stated that a taxpayer cannot refuse to pay his tax when called upon by the collector because he has a
claim against the governmental body not included in the tax levy.

This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) where we stated that: "... internal
revenue taxes can not be the subject of compensation: Reason: government and taxpayer are not mutually
creditors and debtors of each other' under Article 1278 of the Civil Code and a "claim for taxes is not such
a debt, demand, contract or judgment as is allowed to be set-off."

There are other factors which compel us to rule against the petitioner. The tax was due to the city
government while the expropriation was effected by the national government. Moreover, the amount of
P4,116.00 paid by the national government for the 125 square meter portion of his lot was deposited with
the Philippine National Bank long before the sale at public auction of his remaining property. Notice of the
deposit dated September 28, 1977 was received by the petitioner on September 30, 1977. The petitioner
admitted in his testimony that he knew about the P4,116.00 deposited with the bank but he did not
withdraw it. It would have been an easy matter to withdraw P2,400.00 from the deposit so that he could pay
the tax obligation thus aborting the sale at public auction.

Petitioner had one year within which to redeem his property although, as well be shown later, he claimed
that he pocketed the notice of the auction sale without reading it.

Petitioner contends that "the auction sale in question was made without complying with the mandatory
provisions of the statute governing tax sale. No evidence, oral or otherwise, was presented that the
procedure outlined by law on sales of property for tax delinquency was followed. ... Since defendant Ho
Fernandez has the affirmative of this issue, the burden of proof therefore rests upon him to show that
plaintiff was duly and properly notified ... .(Petition for Review, Rollo p. 18; emphasis supplied)

We agree with the petitioner's claim that Ho Fernandez, the purchaser at the auction sale, has the burden of
proof to show that there was compliance with all the prescribed requisites for a tax sale.

The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that:

xxx xxx xxx

... [D]ue process of law to be followed in tax proceedings must be established by proof
and the general rule is that the purchaser of a tax title is bound to take upon himself the
burden of showing the regularity of all proceedings leading up to the sale. (emphasis
supplied)

There is no presumption of the regularity of any administrative action which results in depriving a taxpayer
of his property through a tax sale. (Camo v. Riosa Boyco, 29 Phil. 437); Denoga v. Insular Government, 19
Phil. 261). This is actually an exception to the rule that administrative proceedings are presumed to be
regular.

But even if the burden of proof lies with the purchaser to show that all legal prerequisites have been
complied with, the petitioner can not, however, deny that he did receive the notice for the auction sale. The
records sustain the lower court's finding that:

[T]he plaintiff claimed that it was illegal and irregular. He insisted that he was not
properly notified of the auction sale. Surprisingly, however, he admitted in his testimony
that he received the letter dated November 21, 1977 (Exhibit "I") as shown by his
signature (Exhibit "I-A") thereof. He claimed further that he was not present on
December 5, 1977 the date of the auction sale because he went to Iligan City. As long as
 there was substantial compliance with the requirements of the notice, the validity of the
auction sale can not be assailed ... .

We quote the following testimony of the petitioner on cross-examination, to wit:

Q. My question to you is this letter marked as Exhibit I for Ho

Fernandez notified you that the property in question shall be sold at
public auction to the highest bidder on December 5, 1977 pursuant to
Sec. 74 of PD 464. Will you tell the Court whether you received the
original of this letter?

A. I just signed it because I was not able to read the same. It was just
sent by mail carrier.

Q. So you admit that you received the original of Exhibit I and you
signed upon receipt thereof but you did not read the contents of it?

A. Yes, sir, as I was in a hurry.

Q. After you received that original where did you place it?

A. I placed it in the usual place where I place my mails.

Petitioner, therefore, was notified about the auction sale. It was negligence on his part when he ignored
such notice. By his very own admission that he received the notice, his now coming to court assailing the
validity of the auction sale loses its force.

Petitioner's third assignment of grave error likewise lacks merit. As a general rule, gross inadequacy of
price is not material (De Leon v. Salvador, 36 SCRA 567; Ponce de Leon v. Rehabilitation Finance
Corporation, 36 SCRA 289; Tolentino v. Agcaoili, 91 Phil. 917 Unrep.). See also Barrozo Vda. de Gordon
v. Court of Appeals (109 SCRA 388) we held that "alleged gross inadequacy of price is not material when
the law gives the owner the right to redeem as when a sale is made at public auction, upon the theory that
the lesser the price, the easier it is for the owner to effect redemption." In Velasquez v. Coronel (5 SCRA
985), this Court held:

... [R]espondent treasurer now claims that the prices for which the lands were sold are
unconscionable considering the wide divergence between their assessed values and the
amounts for which they had been actually sold. However, while in ordinary sales for
reasons of equity a transaction may be invalidated on the ground of inadequacy of price,
or when such inadequacy shocks one's conscience as to justify the courts to interfere,
such does not follow when the law gives to the owner the right to redeem, as when a sale
is made at public auction, upon the theory that the lesser the price the easier it is for the
owner to effect the redemption. And so it was aptly said: "When there is the right to
redeem, inadequacy of price should not be material, because the judgment debtor may
reacquire the property or also sell his right to redeem and thus recover the loss he claims
to have suffered by reason of the price obtained at the auction sale."

The reason behind the above rulings is well enunciated in the case of Hilton et. ux. v. De Long, et al. (188
Wash. 162, 61 P. 2d, 1290):

If mere inadequacy of price is held to be a valid objection to a sale for taxes, the
collection of taxes in this manner would be greatly embarrassed, if not rendered
altogether impracticable. In Black on Tax Titles (2nd Ed.) 238, the correct rule is stated
 as follows: "where land is sold for taxes, the inadequacy of the price given is not a valid
objection to the sale." This rule arises from necessity, for, if a fair price for the land were
essential to the sale, it would be useless to offer the property. Indeed, it is notorious that
the prices habitually paid by purchasers at tax sales are grossly out of proportion to the
value of the land. (Rothchild Bros. v. Rollinger, 32 Wash. 307, 73 P. 367, 369).

In this case now before us, we can aptly use the language of McGuire, et al. v. Bean, et al. (267 P. 555):

Like most cases of this character there is here a certain element of hardship from which
we would be glad to relieve, but do so would unsettle long-established rules and lead to
uncertainty and difficulty in the collection of taxes which are the life blood of the state.
We are convinced that the present rules are just, and that they bring hardship only to
those who have invited it by their own neglect.

We are inclined to believe the petitioner's claim that the value of the lot has greatly appreciated in value.
Precisely because of the widening of Buendia Avenue in Pasay City, which necessitated the expropriation
of adjoining areas, real estate values have gone up in the area. However, the price quoted by the petitioner
for a 203 square meter lot appears quite exaggerated. At any rate, the foregoing reasons which answer the
petitioner's claims lead us to deny the petition.

And finally, even if we are inclined to give relief to the petitioner on equitable grounds, there are no strong
considerations of substantial justice in his favor. Mr. Francia failed to pay his taxes for 14 years from 1963
up to the date of the auction sale. He claims to have pocketed the notice of sale without reading it which, if
true, is still an act of inexplicable negligence. He did not withdraw from the expropriation payment
deposited with the Philippine National Bank an amount sufficient to pay for the back taxes. The petitioner
did not pay attention to another notice sent by the City Treasurer on November 3, 1978, during the period
of redemption, regarding his tax delinquency. There is furthermore no showing of bad faith or collusion in
the purchase of the property by Mr. Fernandez. The petitioner has no standing to invoke equity in his
attempt to regain the property by belatedly asking for the annulment of the sale.

WHEREFORE, IN VIEW OF THE FOREGOING, the petition for review is DISMISSED. The decision of
the respondent court is affirmed.

SO ORDERED.

G.R. No. L-18994 June 29, 1963

MELECIO R. DOMINGO, as Commissioner of Internal Revenue, petitioner,

vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance of Leyte,
and SIMEONA K. PRICE, as Administratrix of the Intestate Estate of the late Walter Scott Price,
respondents.

Office of the Solicitor General and Atty. G. H. Mantolino for petitioner.

Benedicto and Martinez for respondents.

LABRADOR, J.:

This is a petition for certiorari and mandamus against the Judge of the Court of First Instance of Leyte,
Ron. Lorenzo C. Garlitos, presiding, seeking to annul certain orders of the court and for an order in this
Court directing the respondent court below to execute the judgment in favor of the Government against the
estate of Walter Scott Price for internal revenue taxes.
It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No. L-14674, January 30, 1960,
this Court declared as final and executory the order for the payment by the estate of the estate and
inheritance taxes, charges and penalties, amounting to P40,058.55, issued by the Court of First Instance of
Leyte in, special proceedings No. 14 entitled "In the matter of the Intestate Estate of the Late Walter Scott
Price." In order to enforce the claims against the estate the fiscal presented a petition dated June 21, 1961,
to the court below for the execution of the judgment. The petition was, however, denied by the court which
held that the execution is not justifiable as the Government is indebted to the estate under administration in
the amount of P262,200. The orders of the court below dated August 20, 1960 and September 28, 1960,
respectively, are as follows:

Atty. Benedicto submitted a copy of the contract between Mrs. Simeona K. Price, Administratrix
of the estate of her late husband Walter Scott Price and Director Zoilo Castrillo of the Bureau of
Lands dated September 19, 1956 and acknowledged before Notary Public Salvador V. Esguerra,
legal adviser in Malacañang to Executive Secretary De Leon dated December 14, 1956, the note of
His Excellency, Pres. Carlos P. Garcia, to Director Castrillo dated August 2, 1958, directing the
latter to pay to Mrs. Price the sum ofP368,140.00, and an extract of page 765 of Republic Act No.
2700 appropriating the sum of P262.200.00 for the payment to the Leyte Cadastral Survey, Inc.,
represented by the administratrix Simeona K. Price, as directed in the above note of the President.
Considering these facts, the Court orders that the payment of inheritance taxes in the sum of
P40,058.55 due the Collector of Internal Revenue as ordered paid by this Court on July 5, 1960 in
accordance with the order of the Supreme Court promulgated July 30, 1960 in G.R. No. L-14674,
be deducted from the amount of P262,200.00 due and payable to the Administratrix Simeona K.
Price, in this estate, the balance to be paid by the Government to her without further delay. (Order
of August 20, 1960)

The Court has nothing further to add to its order dated August 20, 1960 and it orders that the
payment of the claim of the Collector of Internal Revenue be deferred until the Government shall
have paid its accounts to the administratrix herein amounting to P262,200.00. It may not be amiss
to repeat that it is only fair for the Government, as a debtor, to its accounts to its citizens-creditors
before it can insist in the prompt payment of the latter's account to it, specially taking into
consideration that the amount due to the Government draws interests while the credit due to the
present state does not accrue any interest. (Order of September 28, 1960)

The petition to set aside the above orders of the court below and for the execution of the claim of the
Government against the estate must be denied for lack of merit. The ordinary procedure by which to settle
claims of indebtedness against the estate of a deceased person, as an inheritance 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
thereof. To such effect is the decision of this Court in Aldamiz vs. Judge of the Court of First Instance of
Mindoro, G.R. No. L-2360, Dec. 29, 1949, thus:

. . . a writ of execution is not the proper procedure allowed by the Rules of Court for the payment
of debts and expenses of administration. The proper procedure is for the court to order the sale of
personal estate or the sale or mortgage of real property of the deceased and all debts or expenses of
administrator and with the written notice to all the heirs legatees and devisees residing in the
Philippines, according to Rule 89, section 3, and Rule 90, section 2. And when sale or mortgage of
real estate is to be made, the regulations contained in Rule 90, section 7, should be complied
with.1äwphï1.ñët

Execution may issue only where the devisees, legatees or heirs have entered into possession of
their respective portions in the estate prior to settlement and payment of the debts and expenses of
administration and it is later ascertained that there are such debts and expenses to be paid, in which
case "the court having jurisdiction of the estate may, by order for that purpose, after hearing, settle
the amount of their several liabilities, and order how much and in what manner each person shall
contribute, and may issue execution if circumstances require" (Rule 89, section 6; see also Rule
74, Section 4; Emphasis supplied.) And this is not the instant case.
The legal basis for such a procedure is the fact that in the testate or intestate proceedings to settle the estate
of a deceased person, the properties belonging to the estate are under the jurisdiction of the court and such
jurisdiction continues until said properties have been distributed among the heirs entitled thereto. During
the pendency of the proceedings all the estate is in custodia legis and the proper procedure is not to allow
the sheriff, in case of the court judgment, to seize the properties but to ask the court for an order to require
the administrator to pay the amount due from the estate and required to be paid.

Another ground for denying the petition of the provincial fiscal is the fact that the court having jurisdiction
of the estate had found that the claim of the estate against the Government has been recognized and an
amount of P262,200 has already been appropriated for the purpose by a corresponding law (Rep. Act No.
2700). Under the above circumstances, both the claim of the Government for inheritance taxes and the
claim of the intestate for services rendered have already become overdue and demandable is well as fully
liquidated. Compensation, therefore, takes place by operation of law, in accordance with the provisions of
Articles 1279 and 1290 of the Civil Code, and both debts are extinguished to the concurrent amount, thus:

ART. 1200. When all the requisites mentioned in article 1279 are present, compensation takes
effect by operation of law, and extinguished both debts to the concurrent amount, eventhough the
creditors and debtors are not aware of the compensation.

It is clear, therefore, that the petitioner has no clear right to execute the judgment for taxes against the estate
of the deceased Walter Scott Price. Furthermore, the petition for certiorari and mandamus is not the proper
remedy for the petitioner. Appeal is the remedy.

The petition is, therefore, dismissed, without costs

G.R. No. L-15778 April 23, 1962

TAN TIONG BIO, ET AL., petitioners,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

Sycip, Salazar and Associates for petitioners.

Office of the Solicitor General for respondent.

BAUTISTA ANGELO, J.:

On October 19, 1946, the Central Syndicate, a corporation organized under the laws of the Philippines, thru
its General Manager, David Sycip, sent a letter to the Collector of Internal Revenue advising the latter that
it purchased from Dee Hong Lue the entire stock of surplus properties which the said Dee Hong Lue had
bought from the Foreign Liquidation Commission and that as it assumed Dee Hong Lue's obligation to pay
the 3-1/2% sales tax on said surplus goods, it was remitting the sum of P43,750.00 in his behalf as deposit
to answer for the payment of said sales tax with the understanding that it would later be adjusted after the
determination of the exact consideration of the sale.

On January 31, 1948, the syndicate again wrote the Collector requesting the refund of P1,103.28
representing alleged excess payment of sales tax due to the adjustment and reduction of the purchase price
in the amount of P31,522.18. Said letter was referred to an agent for verification and report. On September
18, 1951, after a thorough investigation of the facts and circumstances surrounding the transaction, the
agent reported (1) that Dee Hong Lue purchased the surplus goods as trustee for the Central Syndicate
which was in the process of organization at the time of the bidding; (2) that it was the representatives of the
Central Syndicate that removed the surplus goods from their base at Leyte on February 21, 1947; (3) that
the syndicate must have realized a gross profit of 18.8% from its sales thereof; and (4) that if the sales tax
were to be assessed on its gross sales it would still be liable for the amount of P33,797.88 as deficiency
sales tax and surcharge in addition to the amount of P43,750.00 which the corporation had deposited in the
name of Dee Hong Lue as estimated sales tax due from the latter.

Based on the above findings of the agent in charge of the investigation, the Collector decided that the
Central Syndicate was the importer and original seller of the surplus goods in question and, therefore, the
one liable to pay the sales tax. Accordingly, on January 4, 1952, the Collector assessed against the
syndicate the amount of P33,797.88 and P300.00 as deficiency sales tax, inclusive of the 25% surcharge
and compromise penalty, respectively, and on the same date, in a separate letter, he denied the request of
the syndicate for the refund of the sum of P1,103.28.

On September 8, 1954, the Central Syndicate elevated the case to the Court of Tax Appeals questioning the
ruling of the Collector which denies its claim for refund as well as the assessment made against it of the
sum of P33,797.88, plus the sum of P300.00 as compromise penalty, as stated above. The Collector filed
his answer thereto wherein he reiterated his ruling and prayed that the Central Syndicate be ordered to pay
the deficiency sales tax and surcharge as demanded in his letters dated January 4, 1952 and August 5, 1954.
On October 28, 1954, the syndicate filed a motion requesting that the issue of prescription it has raised
against the collection of the tax be first determined as a preliminary question, but action thereon was
deferred by the Court of Tax Appeals until after the trial of the case on the merits.

On November 5, 1954, the Collector filed a motion requiring the syndicate to file a bond to guarantee the
payment of the tax assessed against it which motion was denied by the Court of Tax Appeals on the ground
that cannot be legally done it appearing that the syndicate is already a non-existing entity due to the
expiration of its corporate existence. In view of this development, the Collector filed a motion to dismiss
the appeal on the ground of lack of personality on the part of the syndicate, which met an opposition on the
part of the latter, but on January 25, 1955, the Court of Tax Appeals issued a resolution dismissing the
appeal primarily on the ground that the Central Syndicate has no personality to maintain the action then
pending before it. From this order the syndicate appealed to the Supreme Court wherein it intimated that
the appeal should not be dismissed because it could be substituted by its successors-in-interest, to wit: Tan
Tiong Bio, Yu Khe Thai, Alfonso Sycip, Dee Hong Lue, Lim Shui Ty, Sy Seng Tong, Sy En, Co Giap and
David Sycip. And taking cue from this suggestion, this Court ruled against the dismissal and held: "The
resolution appealed from is set aside and the respondent court is ordered to permit the substitution of the
officers and directors of the defunct Central Syndicate as appellants, and to proceed with the hearing of the
appeal upon its merits." In permitting the substitution, this Court labored under the premise that said
officers and directors "may be held personally liable for the unpaid deficiency assessments made by the
Collector of Internal Revenue against the defunct syndicate."

After trial, the Court of Tax Appeals rendered decision the dispositive part of which reads as follows:

WHEREFORE, in view of the foregoing considerations, the decision of the Collector of Internal
Revenue appealed from is hereby affirmed, except with regard to the imposition of the
compromise penalty of P300.00 the collection of which is unauthorized and illegal in the absence
of a compromise agreement between the parties. (Collector of Internal Revenue vs. University of
Sto. Tomas, G. R. No. L-11274, November 28, 1958; Collector of Internal Revenue vs. Bautista &
Tan, G.R. No. L-12250, May 27, 1959.) .

The petitioners Tan Tiong Bio, Yu Khe Thai, Lim Shui Ty, Alfonso Sycip, Sy En alias Sy Seng
Sui, Dee Hong Lue, and Sy Seng Tong, who appear in the Articles of Incorporation of the Central
Syndicate Annex A (pp. 60-66, CTA rec.) as incorporators and directors of the corporation, the
second named being in addition its President and the seventh its Treasurer, are hereby ordered to
pay jointly and severally, to the Collector of Internal Revenue, the sum of P33,797.88 as
deficiency sales tax and surcharge on the surplus goods purchased by them from the Foreign
Liquidation Commission on July 5, 1946, from which they realized an estimated gross sales of
P1,447,551.65, with costs. ..
Petitioners interposed the present appeal.

The important issues to be determined in this appeal are: (1) whether the importer of the surplus goods in
question the sale of which is subject to the present tax liability is Dee Hong Lue or the Central Syndicate
who has been substituted by the present petitioners; (2) whether the deficiency sales tax which is now
sought to be collected has already prescribed; and (3) the Central Syndicate having already been dissolved
because of the expiration of its corporate existence, whether the sales tax in question can be enforced
against its successors-in-interest who are the present petitioners.

1. Petitioners contend that the Central Syndicate cannot be held liable for the deficiency sales tax in
question because it is not the importer of the surplus goods purchased from the Foreign Liquidation
Commission for the reason that said surplus goods were purchased by Dee Hong Lue as shown by the
contract executed between him and the Foreign Liquidation Commission and the fact that the Central
Syndicate only purchased the same from Dee Hong Lue and not from the Foreign Liquidation Commission
as shown by Exhibit 13.

This contention cannot be sustained. As correctly observed by the Court of Tax Appeals, the overwhelming
evidence presented by the Collector points to the conclusion that Dee Hong Lue purchased the surplus
goods in question not for himself but for the Central Syndicate which was then in the process of
incorporation such that the deed of sale Exhibit 13 which purports to show that Dee Hong Lue sold said
goods to the syndicate for a consideration of P1,250,000.00 (the same amount paid by Dee Hong Lue to the
Foreign Liquidation Commission) "is but a ruse to evade payment of a greater amount of percentage tax."
The aforesaid conclusion of the lower court was arrived at after a thorough analysis of the evidence on
record, pertinent portion of which we quote hereunder with approval:

Exhibit "38-A" for the respondent (p. 178, BIR rec.) shows that as early as July 23, 1946, or
before the organization and incorporation of Central Syndicate, Mr. David Sycip, who was
subsequently appointed General Manager of the corporation, together with Messrs. Sy En alias Sy
Seng Sui (one of the incorporators of Central Syndicate), Serge Gordeof and Chin Siu Bun (an
employee of the same corporation), for and in the name of Central Syndicate then in the process of
organization, went to Leyte to take over the surplus properties sold by the FLC to Dee Hong Lue,
which the latter held in trust for the corporation. Exhibit 38-A, which is a certificate issued by no
less than David Sycip himself who was subsequently appointed General Manager of the
corporation admits in express terms the following "... the surplus property sold by the Foreign
Liquidation Commission to Dee Hong Lue (and held in trust by the latter for the Syndicate ...."
(Emphasis ours.) We give full weight and credence to the adverse admissions made by David
Sycip against the petitioners as appearing in his certificate Exhibit 38-A (p. 178, BIR rec.)
considering that at the time he made them, he was a person jointly interested with the petitioners
in the transaction over which there was yet no controversy over any sales tax liability. (Secs. 11
and 33, Rule 123, Rules of Court; Clem vs. Forbeso, Tex. Cir App. 10 S.W. 2d 223; Street vs.
Masterson, Tex. Cir. App. 277 S.W. 407.) .

Exhibit '39' for the respondent (pp. 184-187, BIR rec.) which is a letter of Mr. Yu Khe Thai
President, Director and biggest stockholder of Central Syndicate (Exhibit A, pp. 60-65, CTA rec.)
dated September 17, 1946 and addressed to the Commanding General AFWESPAC, Manila,
contains the following categorical admissions which corroborate the admissions made by David
Sycip; that the so-called Leyte 'Mystery Pile' surplus properties were owned by Central Syndicate
by virtue of a purchase from the FLC, effected in the name of Dee Hong Lue on July 5, 1946,
inasmuch as Central Syndicate was then still in the process of organization; that Dee Hong Lue
held the said surplus properties in trust until the mere formal turnover to the corporation on
August 20, 1946, when the corporation had already been organized and incorporated under the
laws of the Philippines; and that on July 23, 1946 viz., twenty-two (22) days before the
incorporation of Central Syndicate on August 15, 1946 'our General Manager, Mr. David Sycip
accompanied by one of our directors, Mr. Sy En, arrived in Leyte to take over the properties.'
Before passing on to the rest of the evidence supporting the finding of respondent, we would like
to call attention to this significant detail. It is stated in the letter, Exhibit 39 (pp. 184-187, BIR
rec.) of Mr. Yu Khe Thai that 'on July 23, 1946, our General Manager, Mr. David Sycip,
accompanied by one of our directors, Mr. Sy En, arrived in Leyte to take over the properties,' We
ask: Why was there such a hurry on the part of the promoters of Central Syndicate in taking over
the surplus properties when the formal agreement, Exhibit 13 (p. 66, BIR rec.), purporting to be a
contract of sale of the 'Mystery Pile' between Dee Hong Lue as vendor, and the Central Syndicate,
as vendee, for the amount of P1,250,000.00, was effected twenty-eight (28) days later viz., on
August 20, 1946? Is this not another clear and unmistakable indication that from the very start, as
is the theory of the respondent, the real purchasers of the 'Mystery Pile' from the FLC and as such
the 'importers' of the goods, were the Central Syndicate and/or the group of big financiers
composing it before said corporation was incorporated on August 15, 1946; and, that Dee Hong
Lue acted merely as agent of these persons when he purchased the pile from the FLC? As a
general rule, one does not exercise all the acts of ownership over a property especially if it
involves a big amount until after the documents evidencing such ownership are fully
accomplished.

Moreover, it appears that on October 3, 1946, Dee Hong Lue was investigated by Major Primitivo
San Agustin, Jr., G-2 of the Philippine Army, because of the discovery of some gun parts found in
his shipment of surplus material from Palo, Leyte.

In his sworn statement, Exhibit 16 (pp. 133-139, BIR rec.) before said officer, Dee Hong Lue
admitted the following: That he paid the FLC the amount of P1,250,000.00 "with the checks of Yu
Khe Thai, maybe also Alfonso Sycip and my checks with many others"; that "at the beginning I
was trying to buy the pile for myself without telling other people and other friends of mine."
"Watkins came to me and he bid for me for P600,000 or P700,000, but later on when the price
went up to P1,250,000, I talked to my friends who said I could get money." "So, I bought it with
their checks and mine" (Exhibit 16-B, p. 138, BIR rec.) and, that after buying the "Mystery Pile",
he (Dee Hong Lue) never inspected the same personally. (p. 141, BIR rec.)

In his affidavit, Exhibit 15 (p. 144, BIR rec.) Dee Hong Lue admitted that of the amount of
P1,250,000.00 which he paid in two installments sometime in July, 1946, to the FLC,
P1,181,250.00 (should be P1,181,000.00) of the amount came from the following: Yu Khe Thai
who advanced to him P250,000.00; Sy Seng Tong — P375,000.00; Alfonso Z. Sycip -
P375,000.00; Tan Tiong Bio - P125,000.00; Robert Dee Se Wee — P25,000.00; and, Jose S. Lim
— P31,000.00 that his understanding with these persons was that should they eventually join him
in Central Syndicate, such advances would be adjusted to constitute their investments; and, that
soon after the "Mystery Pile" was purchased from the FLC, all the above-named persons with the
exception of Robert Dee Se Wee and Jose S. Lim, formed the Central Syndicate and a re-
allocation of shares was made corresponding to the amounts advanced by them.

Added to these, we have before us other documentary evidence for the respondent consisting of
Exhibits 18, 19, 20, 21, 23, 24, 25, 26, 27, 28 and 29 (pp. 85, 88, 92-96, 99-103, 117-128, 119-
120, 121-128, BIR rec.) all tending to prove the same thing - that the Central Syndicate and/or the
group of big financiers composing it and not Dee Hong Lue was the real purchaser (importer) of
the "Mystery Pile" from the FLC; that in the contract of sale between Dee Hong Lue and the FLC
the former acted principally as agent (Article 1930, New Civil Code) of the petitioners Yu Khe
Thai, Sy Seng Tong, Alfonso Z. Sycip and Tan Tiong Bio who advanced the purchased price of
P1,125,000.00 out of the P1,250,000.00 paid to the FLC, Dee Hong Lue being the purchaser in his
own right only with respect to the amount of P69,000.00; and, that the deed, Exhibit 13 (p. 77,
BIR rec.) purporting to show that Dee Hong Lue sold the "Mystery Pile" to the Central Syndicate
for consideration of P1,250.000.00 is but a ruse to evade payment of a greater amount of
percentage tax. 1äwphï1.ñët
To our mind, the deed of sale, Exhibit 13 (p. 66, BIR rec.) as well as the circumstances
surrounding the incorporation of the Central Syndicate, are shrouded with as much mystery as the
so-called "Mystery Pile" subject of the transaction. But, as oil is to water, the truth and underlying
motives behind these transactions have to surface in the end. Petitioners would want us to believe
that Dee Hong Lue bought in his own right and for himself the surplus goods in question for
P1,250,000.00 from the FLC and then, by virtue of a valid contract of sale, Exhibit 13 (p. 66, BIR
rec.) transferred and conveyed the same to the Central Syndicate at cost. If this be so, what need
was there for Dee Hong Lue to agree in the immediate organization and incorporation of the
Central Syndicate with six other capitalists when he could very well have disposed of the surplus
goods to the public in his individual capacity and keep all the profits to himself without sharing
9/10th of it to the other six incorporators and stockholders of the newly incorporated Syndicate.

It appears that Dee Hong Lue "sold" the pile to the Central Syndicate for exactly the same price
barely forty-six (46) days after acquiring it from FLC and exactly five (5) days after the Syndicate
was registered with the Securities and Exchange Commission on August 19, 1946. This is indeed
most unusual for a businessman like Dee Hong Lue who, it is to be presumed, was out to make a
killing when he acquired the surplus goods from the FLC for the staggering amount of
P1,750,000.00 in cash.

Again, why did Dee Hong Lue waste all his time and effort not to say his good connections with
the FLC by acquiring the goods from that agency only to sell it for the same amount to the Central
Syndicate? This would have been understandable if Dee Hong Lue were the biggest and
controlling stockholder of the Syndicate. He could perhaps reason out to himself, "the profits
which I am sacrificing now in this sale to the Syndicate, I will get it anyway in the form of
dividends from it after it shall have disposed of all the "Mystery Pile" to the public.' But then, how
could this be possible when Dee Hong Lue was the smallest subscriber to the capital stock of the
Syndicate? It appears from the Articles of Incorporation that of the authorized capital stock of the
corporation in the amount of P500,000.00, Dee Hong Lue subscribes to only P20,000.00 or 1/25th
of the capital stock authorized and of this amount only P5,000.00 was paid by him at the time of
incorporation. So here is an experienced businessman like Dee Hong Lue who, following the
theory of petitioners' counsel, bought the "'Mystery Pile" for himself for P1,250,000.00 in cash,
and after a few days sold the same at cost to a corporation wherein he owned only 1/25th of the
authorized capital stock and wherein he was not even an officer, thus doling out to the other six
incorporators and stockholders net profits in the sum conservatively estimated by the respondent
to be P206,116.45 out of a total of P229,073.83 which normally could all go to him. We take
judicial notice of the fact that as a result of our immense losses in property throughout the
archipelago the during the Japanese occupation, either through destruction or systematic
commandering by the enemy and our forces, surplus properties commanded a very good price in
the open market after the liberation and that quite a number of surplus dealers made immense
fortunes out of it. We believe the respondent was quite charitable if not more than fair to the
Central Syndicate in computing the profits realized by it in the resale of the "Mystery Pile" to the
public at only 18.8% of the acquisition price.

Now, from the side of the Central Syndicate. This corporation, as its articles of incorporation,
Exhibit A (pp. 60-66, CTA rec.) will show, was incorporated on August 15, 1946 with an
authorized capital stock of P500,000.00 of which P200,000.00 worth was subscribed by seven (7)
persons and P50,000.00 paid-up in cash at the time of incorporation. Five (5) days after its
incorporation, as the Deed of Sale, Exhibit 13 (p. 66, BIR rec.) purports to show, the said
corporation bought from Dee Hong Lue the "Mystery Pile" for P1,250,000.00 in cash. This is
indeed quite phenomenal and fantastic not to say the utmost degree of finance considering that the
corporation had a subscribed capital stock of only P200,000.00 of which only P50,000.00 was
paid-up at the time of incorporation and with not the least proof showing that it never borrowed
money in its own name from outside source to raise the enormous amount allegedly paid to Dee
Hong Lue nor evidence to show that it had by then in so short a time is five (5) days accumulated
a substantial reserve to meet Dee Hong Lue's selling price.
Furthermore, at first blush it would seem quite difficult to understand why the seven (7)
incorporators and stockholders of the Central Syndicate formed a corporation with a subscribed
capital stock of only P200,000.00, and with cash on hand of only P50,000.00 knowing fully well
that there was a transaction awaiting the newly registered corporation involving an outlay of
P1,250,000.00 in cash. We believe this was done after mature deliberation and for some ulterior
motive. As we see it, the only logical answer is that the incorporator wanted to limit whatever civil
liability that might arise in favor of third persons, as the present tax liability has now arisen, up to
the amount of their subscriptions, although the surplus deal they transacted and which we believe
was the only purpose in the incorporation of the Central Syndicate, was very much over and above
their authorized capital. Moreover, by limiting its capital, the corporation was also able to save on
incidental expenses, such as attorney's fee and the filing fee paid to the Securities and Exchange
Commission, which were based on the amount of the authorized capital stock.

Another mystery worth unravelling is what happened to the P1,181,240.00 (should be

P1,181,000.00) which Dee Hong Lue in his affidavit, Exhibit 15 (p. 144, BIR rec.) claims to have
received from Messrs. Uy Khe Thai, Sy Seng Tong, Alfonso Z. Sycip, Tan Tiong Bio (all
incorporators of the Syndicate) and two others as 'advances' with which to pay the FLC. There is
no evidence on record to show that Dee Hong Lue ever returned this amount to those six (6)
persons after he supposedly received P1,250,000.00 from the newly incorporated Syndicate by
virtue of the Deed of Sale, Exhibit 13. This is the explanation that Dee Hong Lue gave in this
regard as appearing in his affidavit, Exhibit 15: "That soon after the above-mentioned property
was purchased, the above parties, with the exception of Robert Dee Se Wee and Jose S. Lim
decided to join the proposed Central Syndicate and a re-allocation of shares was made for the
reason that some of the above parties in turn had to get advances from third parties." If this were
true, why was it that Messrs. Yu Khe Thai, Sy Seng Tong, Alfonso Z. Sycip and Tan Tiong Bio
who advanced P250,000.00; P375,000.00 and P125,000.00 to Dee Hong Lue were made to appear
in the Articles of incorporation of the Central Syndicate as having subscribed to shares worth only
P40,000.00; P30,000.00; P30,000.00 and P20,000.00 and of having paid only P10,000.00,
P7,500.00, P7,500.00, and P5,000.00 on their subscriptions, respectively? Would it not be more in
keeping with corporate practice, following the explanation of Dee Hong Lue, to just credit those
four (4) persons in the corporation with shares worth the amount advanced by them to Dee Hong
Lue?

On the basis of the above figures, the re-allocation of shares in favor of the four (4) incorporators
who advanced enormous sums for the Syndicate seems at first glance to be totally disproportionate
and unfair to them. However, in the final analysis it is not so as we will now show. Immediately
after the incorporation of the Syndicate, as the evidence shows, Dee Hong Lue was made to
execute a deed of transfer under the guise of a contract of sale, conveying full and complete
ownership of the "Mystery Pile" to the newly organized corporation. So we have, on the face of
the Articles of Incorporation and Exhibit 13, a corporation with assets worth only P50,000.00 cash
owning properties worth over a million pesos. Obviously, the incorporators of the Syndicate,
particularly those four who advanced enormous sums to Dee Hong Lue, are not ordinary
businessmen who could easily be taken for a ride. With the precipitated execution of the "Deed of
Sale" by Dee Hong Lue in favor of the Syndicate, transferring and conveying ownership over the
entire pile to the latter, the recoupment of their advances from the newly acquired assets of the
corporation was sufficiently secured, and at the same time, by making the document appear to be a
deed of sale instead of a deed of transfer as it should be under Article 1891 of the New Civil Code,
they have reduced (at least attempted to) their sales tax liability with the argument that Dee Hong
Lue was the original "purchaser" or "importer" of the goods and therefore the taxable sale was that
one made by him to the Syndicate and not the sales made by the latter to the public. After going
over the Articles of Incorporation of the Central Syndicate and the other circumstances of this
case, we draw the conclusion that it was organized just for this particular transaction that its life
span was expressly limited to two (2) years from and after the date of incorporation just to give it
time to dispose of the "Mystery Pile" to the public and then liquidate all its assets among the seven
incorporators-stockholders as in fact it was done on August 15, 1948; that from the very start, the
 seven (7) incorporators had intended it to be a closed corporation without the least intention of
ever selling to other persons the remaining authorized capital stock of P300,000.00 still
unsubscribed; and, that upon its liquidation, the seven (7) incorporators composing it got much
more than their investments including those who advanced P1,181,000.00 to the FLC for the
corporation.

Petitioners would dispute the finding that Dee Hong Lue merely acted as a trustee of the Central Syndicate
when he purchased the surplus goods in question from the Foreign Liquidation Commission on July 5,
1946 considering that on that date the syndicate has not yet been incorporated on the theory that no legal
relation may exist between parties one of whom has yet no legal existence. Technically this may be true,
but the fact remains that it cannot be denied that Dee Hong Lue purchased the goods on behalf of those
who advanced the money for the purchase thereof who later became the incorporators and only
stockholders of the syndicate with the understanding that the amounts they had respectively advanced
would be their investment and would represent their interest in the corporation. And this is further
evidenced by the fact that this purchase made by Dee Hong Lue was later approved and adopted as the act
of the Central Syndicate itself as can be gleaned from the certificate executed by David Sycip, general
manager of said syndicate, on September 16, 1946, wherein he emphasized that the persons named therein
(from whom Dee Hong Lue obtained the money) merely acted on behalf of the syndicate and in fact were
the ones who went to Leyte to take over the aforesaid surplus goods. In any event, even if Dee Hong Lue
may be deemed as the purchaser of the surplus goods in his own right, nevertheless, the corporation still
may be regarded as the importer of the same goods for the reason that Dee Hong Lue transferred to it all his
rights and interests in the contract with the Foreign Liquidation Commission, and it was said corporation
that took delivery thereof from the place where they were stored in Leyte as may be seen from the letter of
Dee Hong Lue to the Foreign Liquidation Commission dated September 2, 1946 and the letter of the
Central Syndicate to the said Commission bearing the same date. Under these facts, it is clear that the
Central Syndicate is the importer of the surplus goods as correctly observed by Judge Umali in his
concurring opinion, from which we quote: .

It is now well settled that a person who bought surplus goods from the Foreign Liquidation
Commission and who removed the goods bought from the U.S. military bases in the Philippines is
considered an importer of such goods and is subject to the sales tax or compensating tax, as the
case may be. (Go Cheng Tee v. Meer, 47 O.G. 269; Saura Import and Export v. Meer, G.R. No. L-
2927, Jan. 26, 1951; P.M.P. Navigation v. Meer, G.R. No. L-4621, March 24, 1953; Soriano y Cia
v. Coll. of Int. Rev., 51 O.G. 4548.) In this case it appearing that the Central Syndicate was the
owner of the 'Mystery Pile' before its removal from Base K and that it was the one which actually
took delivery thereof and removed the same from the U.S. military base, it is the importer within
the meaning of Section 186 of the Revenue Code, as it stood before the enactment of Republic Act
No. 594, and its sales of the surplus goods are the original sales taxable under said section and not
the sale to it by Dee Hong Lue.

2. Since the Central Syndicate, as we have already pointed out, was the importer of the surplus goods in
question, it was its duty under Section 183 of the Internal Revenue Code to file a return of its gross sales
within 20 days after the end of each quarter in order that the office of the internal revenue may assess the
sales tax that may be due thereon, but, as the record shows, the Central Syndicate failed to file any return of
its quarterly sales on the pretext that it was Dee Hong Lue who imported the surplus goods and it merely
purchased them from said importer. This is in fact what the syndicate intended to impress upon the
Collector when it wrote to him its letter of October 19, 1946 informing him that it purchased from Dee
Hong Lue the entire stock of the surplus goods which the latter had bought from the Foreign Liquidation
Commission and was therefore depositing in his name the sum of P43,750.00 to answer for his sales tax
liability, but this letter certainly cannot be considered as a return that may set in operation the application of
the prescriptive period provided for in Section 331 of the Tax Code, for, evidently, said letter if at all could
only be considered as such in behalf of Dee Hong Lue and not in behalf of the Central Syndicate because
such is the only nature and import of the letter. Besides, how can such letter be considered as a return of the
sales of the Central Syndicate when it was only on February 21, 1947 when it removed the surplus goods in
question from their base at Leyte? How can such return inure to the benefit of the syndicate when the same
surplus goods which were removed on said date could not have been sold by the corporation earlier than
the aforesaid date? It is obvious that the letter of October 19, 1946 cannot possibly be considered as a
return filed by the syndicate and so cannot serve as basis for the computation of the prescriptive period of
five years prescribed by law.

Nor can the fact that the Collector did not include in the assessment a surcharge of 50% serve as an
argument that a return had already been filed, for such failure can only mean that an oversight had been
committed in the non-inclusion of said surcharge. The syndicate having failed to file its quarterly returns as
required by Section 183 of the Tax Code, the period that has to be reckoned with is that embodied in
Section 332 of the same Code which provides that in case of failure to file the return the tax may be
assessed within 10 years after discovery of the falsity, fraud or omission of the payment of the proper tax.
Since it appears that the Collector discovered the failure of the syndicate to file the return only on
September 12, 1951 he has therefore up to September 18, 1961 within which to assess or collect the
deficiency tax in question. Consequently the assessment made on January 4, 1952 was made within the
prescribed period.

3. Petitioners argue (1) that the Court of Tax Appeals acted in excess of its jurisdiction in holding them
liable as officers or directors of the defunct Central Syndicate for the tax liability of the latter; (2) that
petitioners cannot be held liable for said tax liability there being no statutory provision in this jurisdiction
authorizing the government to proceed against the stockholders of a defunct corporation as transferees of
the corporate assets upon liquidation; (3) that assuming that the stockholders can be held so liable, they are
only liable to the extent of the benefits derived by them from the corporation and there is no evidence
showing that petitioners had been the beneficiaries of the defunct syndicate; (4) that considering that the
Collector instituted the present action on September 23, 1954 when he filed his answer to the appeal of
petitioners, said action was already barred by prescription pursuant to Sections 77 and 78 of the
Corporation Law which allows corporations to continue as a body corporate only for three years from its
dissolution; and (5) that assuming that petitioners are liable to pay the tax, their liability is not solidary, but
only limited to the benefits derived by them from the corporation.

It should be stated at the outset that it was petitioners themselves who caused their substitution as parties in
the present case, being the successors-in-interest of the defunct syndicate, when they appealed this case to
the Supreme Court for which reason the latter Court declared that "the respondent Court of Tax Appeals
should have allowed the substitution of its former officers and directors is parties-appellants, since they are
proper parties in interest insofar as they may be (and in fact are) held personally liable for the unpaid
deficiency assessments made by the Collector of Internal Revenue against the defunct Syndicate." In fact,
because of this directive their substitution was effected. They cannot, therefore, be now heard to complain
if they are made responsible for the tax liability of the defunct syndicate whose representation they
assumed and whose assets were distributed among them.

In the second place, there is good authority to the effect that the creditor of a dissolved corporation may
follow its assets once they passed into the hands of the stockholders. Thus, recognized are the following
rules in American jurisprudence: The dissolution of a corporation does not extinguish the debts due or
owing to it (Bacon v. Robertson, 18 How. 480, 15 L. Ed., 406; Curron v. State, 16 How. 304, 14 L. Ed.,
705). A creditor of a dissolve corporation may follow its assets, as in the nature of a trust fund, into the
hands of its stockholders (MacWilliams v. Excelsier Coal Co. [1924] 298 Fed. 384). An indebtedness of a
corporation to the federal government for income and excess profit taxes is not extinguished by the
dissolution of the corporation (Quinn v. McLeudon, 152 Ark. 271, 238 S.W., 32). And it has been stated,
with reference to the effect of dissolution upon taxes due from a corporation, "that the hands of the
government cannot, of course, collect taxes from a defunct corporation, it loses thereby none of its rights to
assess taxes which had been due from the corporation, and to collect them from persons, who by reason of
transactions with the corporation, hold property against which the tax can be enforced and that the legal
death of the corporation no more prevents such action than would the physical death of an individual
prevent the government from assessing taxes against him and collecting them from his administrator, who
holds the property which the decedent had formerly possessed" (Wonder Bakeries Co. v. U.S. [1934] Ct.
Cl. 6 F. Supp. 288). Bearing in mind that our corporation law is of American origin, the foregoing
authorities have persuasive effect in considering similar cases in this jurisdiction. This must have been
taken into account when in G.R. No. L-8800 this Court said that petitioners could be held personally liable
for the taxes in question as successors-in-interest of the defunct corporation.

Considering that the Central Syndicate realized from the sale of the surplus goods a net profit of
P229,073.83, and that the sale of said goods was the only transaction undertaken by said syndicate, there
being no evidence to the contrary, the conclusion is that said net profit remained intact and was distributed
among the stockholders when the corporation liquidated and distributed its assets on August 15, 1948,
immediately after the sale of the said surplus goods. Petitioners are therefore the beneficiaries of the
defunct corporation and as such should be held liable to pay the taxes in question. However, there being no
express provision requiring the stockholders of the corporation to be solidarily liable for its debts which
liability must be express and cannot be presumed, petitioners should be held to be liable for the tax in
question only in proportion to their shares in the distribution of the assets of the defunct corporation. The
decision of the trial court should be modified accordingly.

WHEREFORE, with the above modification, we hereby affirm the decision appealed from, with costs
against petitioners.

COMMISSIONER OF INTERNAL REVENUE, petitioner,

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

Office of the Solicitor General for petitioner.

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

BENGZON, J.P., J.:

On May 23, 1945 Atanasio Pineda died, survived by his wife, Felicisima Bagtas, and 15 children, 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

1945 P135.83
1946 436.95
1947 1,206.91 P1,779.69
Add: 5% surcharge 88.98
1% monthly interest from November 30, 1953
to April 15, 1957 720.77
Compromise for late filing 80.00
Compromise for late payment 40.00
Total amount due
 P2,707.44
===========
P14.50
2. Additional residence tax for 1945
===========
3. Real Estate dealer's tax for the fourth quarter of 1946 P207.50
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

P135.8
1945
3
1946 436.95
Real estate dealer's fixed tax 4th
quarter of 1946 and whole year of
1947 P187.50

The Commissioner of Internal Revenue has appealed to Us and has proposed to hold Manuel B. 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.1awphîl.nèt

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. Pamintuan2 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 taxes 4a 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.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ.,
concur.