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G.R. No. 123206

March 22, 2000 THIRD DIVISION

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. 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 order of RTC. Upon Pedros death in 1988, PNB advised the heirs to execute an extrajudicial settlement and pay estate tax for the 3Million property under PNBs guardianship. BIR assessed taxes and the estate paid 2,500 as estate tax. A second assessment was issued for deficiency tax and the estate paid the tax in the amount of 1.5Million. In 1989, Josefina sought refund of the whole 1.5Million or a portion of it. Without waiting for BIRs action on the protest, petitioner filed a petition for review before the CTA. CTA rendered a decision ordering BIR to refund 60,000 representing notarial fee for the extrajudicial settlement and 50,000 for attorneys fees for the guardianship proceedings. According to CIR, in its MR, notarial fee is in an extraordinary amount and the attorneys fees for guardianship proceeding which was instituted during the lifetime of the decedent when there was yet no estate to be settled are not deductible expenses. MR denied, hence, CIR sought relief from CA but was denied by CA. Thus, the present petition. HELD: We answer this question in the affirmative, thereby upholding the decisions of the appellate courts. 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. 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 - 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. 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. 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. 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)

Judicial expenses are expenses of administration. 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." 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. This distinction has been carried over to our jurisdiction. Thus, in Lorenzo v. Posadas 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. 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. G.R. No. L-43082 June 18, 1937 EN BANC

PABLO LORENZO, as trustee of the estate of Thomas Hanley, deceased, plaintiff-appellant, vs. JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellant. LAUREL, J.: It appears that on May 27, 1922, one Thomas Hanley died in Zamboanga, Zamboanga, leaving a will which was admitted in probate. In his will, Thomas bequeathed his money and real properties to his nephew, Mathew Hanley, though admitting that he has a brother whose son is Mathew. The estate was assessed deficiency inheritance tax. Pablo Lorenzo, in his capacity as trustee of the estate of Thomas Hanley, deceased, brought the action before CFI to refund inheritance tax and for collection of interest from date of payment under protest. CIR set up a counterclaim for interest due upon the inheritance tax which was not included in the previous assessment. CFI dismissed Lorenzos claim for refund and CIRs counterclaim. The following are the principal questions to be decided by this court in this appeal: (a) When does the inheritance tax accrue and when must it be satisfied? (b) Should the inheritance tax be computed on the basis of the value of the estate at the time of the testator's death, or on its value ten years later? (c) In determining the net value of the estate subject to tax, is it proper to deduct the compensation due to trustees? (d) What law governs the case at bar? Should the provisions of Act No. 3606 favorable to the tax-payer be given retroactive effect? (e) Has there been deliquency in the payment of the inheritance tax? If so, should the additional interest claimed by the defendant in his appeal be paid by the estate? HELD: (a) The accrual of the inheritance tax is distinct from the obligation to pay the same. Section 1536 as amended, of the Administrative Code, imposes the tax upon "every transmission by virtue of inheritance, devise, bequest, gift mortis causa, or advance in anticipation of inheritance,devise, or bequest." The tax therefore is upon transmission or the transfer or devolution of property of a decedent, made effective by his death. It is in reality an excise or privilege tax imposed on the right to succeed to, receive, or take property by or under a will or the intestacy law, or deed, grant, or gift to become operative at or after death. Acording to article 657 of the Civil Code, "the rights to the succession of a person are transmitted from the moment of his death." "In other words", said Arellano, C. J., ". . . the heirs succeed immediately to all of the property of the deceased ancestor. The property belongs to the heirs at the moment of the death of the ancestor as completely as if the ancestor had executed and delivered to them a deed for the same before his death." Plaintiff, however, asserts that while article 657 of the Civil Code is applicable to testate as well as intestate succession, it operates only in so far as forced heirs are concerned. But the language of article 657 of the Civil Code is broad and makes no distinction between different classes of heirs. The provision of section 625 of the Code of Civil Procedure regarding the authentication and probate of a will as a necessary condition to effect transmission of property does not affect the general rule laid down in article 657 of the Civil Code. The authentication of a will implies its due execution but once probated and allowed the transmission is effective as of the death of the testator in accordance with article 657 of the Civil Code. Whatever may be the time when actual transmission of the inheritance takes place, succession takes place in any event at the moment of the decedent's death. The time when the heirs legally succeed to the inheritance may differ from the time when the heirs actually receive such inheritance. "Poco importa", says Manresa commenting on article 657 of the Civil Code,

From the fact, however, that Thomas Hanley died on May 27, 1922, it does not follow that the obligation to pay the tax arose as of the date. The time for the payment on inheritance tax is clearly fixed by section 1544 of the Revised Administrative Code as amended by Act No. 3031, in relation to section 1543 of the same Code. The two sections follow:
SEC. 1543. Exemption of certain acquisitions and transmissions. The following shall not be taxed: (a) The merger of the usufruct in the owner of the naked title. (b) The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the trustees. (c) The transmission from the first heir, legatee, or donee in favor of another beneficiary, in accordance with the desire of the predecessor. In the last two cases, if the scale of taxation appropriate to the new beneficiary is greater than that paid by the first, the former must pay the difference. SEC. 1544. When tax to be paid. The tax fixed in this article shall be paid: (a) In the second and third cases of the next preceding section, before entrance into possession of the property. (b) In other cases, within the six months subsequent to the death of the predecessor; but if judicial testamentary or intestate proceedings shall be instituted prior to the expiration of said period, the payment shall be made by the executor or administrator before delivering to each beneficiary his share. If the tax is not paid within the time hereinbefore prescribed, interest at the rate of twelve per centum per annum shall be added as part of the tax; and to the tax and interest due and unpaid within ten days after the date of notice and demand thereof by the collector, there shall be further added a surcharge of twenty-five per centum. A certified of all letters testamentary or of admisitration shall be furnished the Collector of Internal Revenue by the Clerk of Court within thirty days after their issuance.

It should be observed in passing that the word "trustee", appearing in subsection (b) of section 1543, should read "fideicommissary" or "cestui que trust". There was an obvious mistake in translation from the Spanish to the English version. The instant case does fall under subsection (a), but under subsection (b), of section 1544 above-quoted, as there is here no fiduciary heirs, first heirs, legatee or donee. Under the subsection, the tax should have been paid before the delivery of the properties in question to P. J. M. Moore as trustee on March 10, 1924. (b) The plaintiff contends that the estate of Thomas Hanley, in so far as the real properties are concerned, did not and could not legally pass to the instituted heir, Matthew Hanley, until after the expiration of ten years from the death of the testator on May 27, 1922 and, that the inheritance tax should be based on the value of the estate in 1932, or ten years after the testator's death. The plaintiff introduced evidence tending to show that in 1932 the real properties in question had a reasonable value of only P5,787. This amount added to the value of the personal property left by the deceased, which the plaintiff admits is P1,465, would generate an inheritance tax which, excluding deductions, interest and surcharge, would amount only to about P169.52. If death is the generating source from which the power of the estate to impose inheritance taxes takes its being and if, upon the death of the decedent, succession takes place and the right of the estate to tax vests instantly, the tax should be measured by the vlaue of the estate as it stood at the time of the decedent's death, regardless of any subsequent contingency value of any subsequent increase or decrease in value. "The right of the state to an inheritance tax accrues at the moment of death, and hence is ordinarily measured as to any beneficiary by the value at that time of such property as passes to him. Subsequent appreciation or depriciation is immaterial." A transmission by inheritance is taxable at the time of the predecessor's death, notwithstanding the postponement of the actual possession or enjoyment of the estate by the beneficiary, and the tax measured by the value of the property transmitted at that time regardless of its appreciation or depreciation. (c) Certain items are required by law to be deducted from the appraised gross in arriving at the net value of the estate on which the inheritance tax is to be computed (sec. 1539, Revised Administrative Code). In the case at bar, the defendant and the trial court allowed a deduction of only P480.81. This sum represents the expenses and disbursements of the executors until March 10, 1924, among which were their fees and the proven debts of the deceased. The plaintiff

contends that the compensation and fees of the trustees, which aggregate P1,187.28 should also be deducted under section 1539 of the Revised Administrative Code which provides, in part, as follows: "In order to determine the net sum which must bear the tax, when an inheritance is concerned, there shall be deducted, in case of a resident, . . . the judicial expenses of the testamentary or intestate proceedings, . . . ." A trustee, no doubt, is entitled to receive a fair compensation for his services. But from this it does not follow that the compensation due him may lawfully be deducted in arriving at the net value of the estate subject to tax. There is no statute in the Philippines which requires trustees' commissions to be deducted in determining the net value of the estate subject to inheritance tax. Furthermore, though a testamentary trust has been created, it does not appear that the testator intended that the duties of his executors and trustees should be separated. On the contrary, in paragraph 5 of his will, the testator expressed the desire that his real estate be handled and managed by his executors until the expiration of the period of ten years therein provided. Judicial expenses are expenses of administration, in State vs. Hennepin County Probate Court, it was said: ". . . The compensation of a trustee, earned, not in the administration of the estate, but in the management thereof for the benefit of the legatees or devises, does not come properly within the class or reason for exempting administration expenses. . . . Service rendered in that behalf have no reference to closing the estate for the purpose of a distribution thereof to those entitled to it, and are not required or essential to the perfection of the rights of the heirs or legatees. . . . Trusts . . . of the character of that here before the court, are created for the the benefit of those to whom the property ultimately passes, are of voluntary creation, and intended for the preservation of the estate. No sound reason is given to support the contention that such expenses should be taken into consideration in fixing the value of the estate for the purpose of this tax." (d) The defendant levied and assessed the inheritance tax due from the estate of Thomas Hanley under the provisions of section 1544 of the Revised Administrative Code, as amended by section 3 of Act No. 3606. But Act No. 3606 went into effect on January 1, 1930. It, therefore, was not the law in force when the testator died on May 27, 1922. The law at the time was section 1544 above-mentioned, as amended by Act No. 3031, which took effect on March 9, 1922. It is well-settled that inheritance taxation is governed by the statute in force at the time of the death of the decedent. The taxpayer cannot foresee and ought not to be required to guess the outcome of pending measures. Of course, a tax statute may be made retroactive in its operation. Liability for taxes under retroactive legislation has been "one of the incidents of social life." But legislative intent that a tax statute should operate retroactively should be perfectly clear. "A statute should be considered as prospective in its operation, whether it enacts, amends, or repeals an inheritance tax, unless the language of the statute clearly demands or expresses that it shall have a retroactive effect, . . . ." Though the last paragraph of section 5 of Regulations No. 65 of the Department of Finance makes section 3 of Act No. 3606, amending section 1544 of the Revised Administrative Code, applicable to all estates the inheritance taxes due from which have not been paid, Act No. 3606 itself contains no provisions indicating legislative intent to give it retroactive effect. No such effect can be given the statute by this court. The defendant Collector of Internal Revenue maintains, however, that certain provisions of Act No. 3606 are more favorable to the taxpayer than those of Act No. 3031, that said provisions are penal in nature and, therefore, should operate retroactively in conformity with the provisions of article 22 of the Revised Penal Code. This is the reason why he applied Act No. 3606 instead of Act No. 3031. Indeed, under Act No. 3606, (1) the surcharge of 25 per cent is based on the tax only, instead of on both the tax and the interest, as provided for in Act No. 3031, and (2) the taxpayer is allowed twenty days from notice and demand by rthe Collector of Internal Revenue within which to pay the tax, instead of ten days only as required by the old law. Properly speaking, a statute is penal when it imposes punishment for an offense committed against the state which, under the Constitution, the Executive has the power to pardon. In common use, however, this sense has been enlarged to include within the term "penal statutes" all status which command or prohibit certain acts, and establish penalties for their violation, and even those which, without expressly prohibiting certain acts, impose a penalty upon their commission. Revenue laws, generally, which impose taxes collected by the means ordinarily resorted to for the collection of taxes are not classed as penal laws, although there are authorities to the contrary. Article 22 of the Revised Penal Code is not applicable to the case at bar, and in the absence of clear legislative intent, we cannot give Act No. 3606 a retroactive effect.

(e) The plaintiff correctly states that the liability to pay a tax may arise at a certain time and the tax may be paid within another given time. As stated by this court, "the mere failure to pay one's tax does not render one delinqent until and unless the entire period has eplased within which the taxpayer is authorized by law to make such payment without being subjected to the payment of penalties for fasilure to pay his taxes within the prescribed period." The defendant maintains that it was the duty of the executor to pay the inheritance tax before the delivery of the decedent's property to the trustee. Stated otherwise, the defendant contends that delivery to the trustee was delivery to the cestui que trust, the beneficiery in this case, within the meaning of the first paragraph of subsection (b) of section 1544 of the Revised Administrative Code. This contention is well taken and is sustained. The appointment of P. J. M. Moore as trustee was made by the trial court in conformity with the wishes of the testator as expressed in his will. It is true that the word "trust" is not mentioned or used in the will but the intention to create one is clear. The words "trust" and "trustee", though apt for the purpose, are not necessary. In fact, the use of these two words is not conclusive on the question that a trust is created. "To constitute a valid testamentary trust there must be a concurrence of three circumstances: (1) Sufficient words to raise a trust; (2) a definite subject; (3) a certain or ascertain object; statutes in some jurisdictions expressly or in effect so providing." There is no doubt that the testator intended to create a trust. He ordered in his will that certain of his properties be kept together undisposed during a fixed period, for a stated purpose. The mere fact that the estate of the deceased was placed in trust did not remove it from the operation of our inheritance tax laws or exempt it from the payment of the inheritance tax. The corresponding inheritance tax should have been paid on or before March 10, 1924, to escape the penalties of the laws. This is so for the reason already stated that the delivery of the estate to the trustee was in esse delivery of the same estate to the cestui que trust, the beneficiary in this case. A trustee is but an instrument or agent for the cestui que trust. When Moore accepted the trust and took possesson of the trust estate he thereby admitted that the estate belonged not to him but to his cestui que trust. He did not acquire any beneficial interest in the estate. He took such legal estate only as the proper execution of the trust required and, his estate ceased upon the fulfillment of the testator's wishes. The estate then vested absolutely in the beneficiary. The highest considerations of public policy also justify the conclusion we have reached. Were we to hold that the payment of the tax could be postponed or delayed by the creation of a trust of the type at hand, the result would be plainly disastrous. Testators may provide, as Thomas Hanley has provided, that their estates be not delivered to their beneficiaries until after the lapse of a certain period of time. In the case at bar, the period is ten years. In other cases, the trust may last for fifty years, or for a longer period which does not offend the rule against petuities. The collection of the tax would then be left to the will of a private individual. The mere suggestion of this result is a sufficient warning against the accpetance of the essential to the very exeistence of government. The obligation to pay taxes rests not upon the privileges enjoyed by, or the protection afforded to, a citizen by the government but upon the necessity of money for the support of the state. For this reason, no one is allowed to object to or resist the payment of taxes solely because no personal benefit to him can be pointed out.

EN BANC G.R. No. L-9271 March 29, 1957 In the matter of the testate estate of the late DA. MARGARITA DAVID. CARLOS MORAN SISON, Judicial Administrator, petitioner-appellant, vs.NARCISA F. TEODORO, heiress, oppositor-appellee. BAUTISTA ANGELO, J.: Sison was appointed as the adminuistator of the estate of Margarita David withiut comoensation and for a bond of 5,000pesos, Sison accepted and posted a bond. Subsequently, Sison filed an accounting of his administration which contains, among others, disbursement for premiums for administrator's bond. The court agreed with the objection of one of the heird and disallowed the items objected to on the ground that they cannot be considered as expenses of administration. The administrator filed a motion for reconsideration and when the same was denied, he took the present appeal - Whether a judicial administrator, serving without compensation, is entitled to charge as an expense of administration the premiums paid on his bond HELD: The lower court did not consider the premiums paid on the bond filed by the administrator as an expense of administration taking into account undoubtedly the ruling laid down in the case of Sulit vs. Santos, 56 Phil., 626. That is a

case which also involves the payment of certain premium on the bond put up by the judicial administrator and when he asked the court that the same be considered as an expense of administration, it was disapproved for the same reasons advanced by the trial court. In sustaining this finding, this Court ruled that the "expense incurred by an executor or administrator to produce a bond is not a proper charge against the estate. Section 680 of the Code of Civil Procedure (similar to section 7, Rule 86) does not authorize the executor or administrator to charge against the estate the money spent for the presentation, filing, and substitution of a bond." And elaborating on this matter, the Court made the following comment: The position of an executor or administrator is one of trust. It is proper for the law to safeguard the estate of deceased persons by requiring the executor or administrator to give a suitable bond. The ability to give this bond is in the nature of a qualification for the office. The execution and approval of the bond constitute a condition precedent to acceptance of the responsibilities of the trust. If an individual does not desire to assume the position of executor of administrator, he may refuse to do so. On the other hand, when the individual prefers an adequate bond and has it approved by the probate court, he thereby admits the adequacy of the compensation which is permitted him pursuant to law. It is true that the Sulit case may be differentiated from the present in the sense that, in the former the administrator accepted the trust with the emolument that the law allows, whereas in the latter the administrator accepted the same without compensation, but this difference is of no moment, for there is nothing in the decision that may justify the conclusion that the allowance or disallowance of premiums paid on the bond of the administrator is made dependent on the receipt of compensation. Of course, a person may accept the position of executor or administrator with all the incident appertaining thereto having in mind the compensation which the law allows for the purpose, but he may waive this compensation in the same manner as he may refuse to serve without it. Appellant having waived compensation, he cannot now be heard to complain of the expenses incident to his qualification. The orders appealed from are hereby affirmed, without costs.

FIRST DIVISION G.R. No. 155541 January 27, 2004 ESTATE OF THE LATE JULIANA DIEZ VDA. DE GABRIEL, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent. YNARES-SANTIAGO, J.: 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 filed her Income Tax Return for 1978 but did not state that decedent had died. Philtrust also filed a verified petition for appointment as Special Administrator but one of the heirs was appointed instead. Philtrust's motion for reconsideration was denied by the probate court. Upon investigation by BIR , it found income tax liability for 1977 and sent demand and assessment notices on the address stated in the 1978 ITR. Philtrust did not respond and BIR was not informed that the decedent has passed away. CIR issued warrants of distraint and levy to enforce collection of the decedent's deficiency income tax liability, which were served upon her heir, Francisco Gabriel. 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. Petitioner, the Estate of the decedent, through Mr. Ambrosio, filed a formal opposition to the BIR's Motion for Allowance of Claim based on the ground that there was no proper service of the assessment while BIR contends that service to Philippine Trust Company was sufficient service. CTA denied BIR's claim against the Estate, after finding that there was no notice of its tax assessment on the proper party. BIR filed an appeal with the Court of Appeals claiming that Philtrust, in filing the decedent's 1978 income tax return on April 5, 1979, two days after the taxpayer's death, had "constituted itself as the administrator of the estate of the deceased at least insofar as said return is concerned." Citing Basilan Estate Inc. v. Commissioner of Internal Revenue, respondent argued that the legal requirement of notice with respect to tax assessments 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. Claiming that Philtrust had been remiss in not notifying respondent of the decedent's death, respondent therefore argued that the deficiency tax assessment had already become final, executory and incontestable, and that petitioner Estate was liable therefor. Court of Appeals rendered a decision in favor of BIR ordering the estate to pay. Although acknowledging that the bond of agency between Philtrust and the decedent was severed upon the latter's death, it was ruled that the administrator of the Estate had failed in its legal duty to inform respondent of the decedent's death, pursuant to Section 104 of the National Internal Revenue Code of 1977. Consequently, the BIR's 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. 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. Petitioner further contends that respondent's 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 HELD: The resolution of this case hinges on the legal relationship between Philtrust and the decedent, and, by extension, between Philtrust and petitioner Estate. 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 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 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 Taxpayer's death, none of Philtrust's acts or omissions could bind the estate of the Taxpayer. Service on Philtrust of the demand and the assessment letter 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 Philtrust's motion to be thus appointed. As of the date of the demand letter and Assessment Notice, the legal relationship between the decedent and Philtrust had already been non-existent for three years. BIR claims that Section 104 of the National Internal Revenue Code of 1977 imposed the legal obligation on Philtrust to inform respondent of the decedent's 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 decedent's 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 decedent's 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 decedent's 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 the date of the demand letter and Assessment Notice, 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 decedent's 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". 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 the claim against the petitioner Estate is barred. BIR 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. 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. 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. SECOND DIVISION 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.: On September 29, 1989, former President Ferdinand Marcos died in Honolulu, Hawaii, USA. Upon investigation by BIR, it was discovered that the Marcoses failed to file notice of death and estate tax returns as well as income tax returns for 1982 to 1986. BIR caused the preparation of the estate tax returns and ITRs. Copies of the assessment notices were allegedly sent to Mrs. Marcos' last known address in San Juan City through her caretaker, Mr. Martinez. Likewise, BIR avers that deficiency income tax assessment against Bongbong were sent to his last known address also in San Juan City. Thereafter, Formal Assessment Notices were sent at Bongbong's office at Batasang Pambansa. The assessments were not protested within 30 days. BIR then issued several notices of levy. 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 upon Mrs. Imelda Marcos, the petitioner, and their counsel of record, "De Borja, Medialdea, Ata, Bello, Guevarra and Serapio Law Office". The public auction for the sale of the eleven (11) parcels of land took place and 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 certiorariand prohibition under Rule 65. 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 - that BIR should file a claim against the estate. This remedy is allegedly, exclusive, and cannot be effected through any other means. 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:

9 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. 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.

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. HELD: It was in Vera vs. Fernandez 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. 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. 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. 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. 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." 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:
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.

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

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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. 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 above-cited 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. 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. 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. 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. 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, whose determinations and assessments are presumed correct and made in good faith. 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. 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. 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, as well as the notices of assessment personally given to the caretaker of petitioner also at his last known address - 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.. Moreover, a notice to taxpayer inviting Mrs. Marcos to a conference relative to her tax liabilities, was furnished the counsel of Mrs. Marcos Dean Antonio Coronel. 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. Despite all of these Notices, petitioner never lifted a finger to protest the assessments, 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. 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.

11

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, and the petitioner himself at his office at the Batasang Pambansa. 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.

EN BANC G.R. No. 144104 June 29, 2004 LUNG CENTER OF THE PHILIPPINES, petitioner, vs. QUEZON CITY and CONSTANTINO P. ROSAS, in his capacity as City Assessor of Quezon City,respondents. CALLEJO, SR., J. The petitioner Lung Center of the Philippines is a non-stock and non-profit entity established by virtue of Presidential Decree No. 1823.2 It is the registered owner of a parcel of land, located at Quezon Avenue corner Elliptical Road, Central District, Quezon City. The lot has an area of 121,463 square meters. Erected in the middle of the aforesaid lot is a hospital known as the Lung Center of the Philippines. A big space at the ground floor is being leased to private parties, for canteen and small store spaces, and to medical or professional practitioners who use the same as their private clinics for their patients whom they charge for their professional services. Almost one-half of the entire area on the left side of the building along Quezon Avenue is vacant and idle, while a big portion on the right side, at the corner of Quezon Avenue and Elliptical Road, is being leased for commercial purposes to a private enterprise known as the Elliptical Orchids and Garden Center. The petitioner accepts paying and non-paying patients. It also renders medical services to out-patients, both paying and non-paying. Aside from its income from paying patients, the petitioner receives annual subsidies from the government. Both the land and the hospital building of the petitioner were assessed for real property taxes in the amount of P4,554,860 by the City Assessor of Quezon City. On August 25, 1993, the petitioner filed a Claim for Exemption from real property taxes with the City Assessor, predicated on its claim that it is a charitable institution. The petitioner's request was denied, and a petition was, thereafter, filed before the Local Board of Assessment Appeals. The petitioner alleged that under Section 28, paragraph 3 of the 1987 Constitution, the property is exempt from real property taxes. It averred that a minimum of 60% of its hospital beds are exclusively used for charity patients and that the major thrust of its hospital operation is to serve charity patients. The petitioner contends that it is a charitable institution and, as such, is exempt from real property taxes. The QC-LBAA rendered judgment dismissing the petition and holding the petitioner liable for real property taxes. The QC-LBAA's decision was, likewise, affirmed on appeal by the Central Board of Assessment Appeals of Quezon City (CBAA, for brevity) which ruled that the petitioner was not a charitable institution and that its real properties were not actually, directly and exclusively used for charitable purposes; hence, it was not entitled to real property tax

12

exemption under the constitution and the law. The petitioner sought relief from the Court of Appeals, which rendered judgment affirming the decision of the CBAA. Undaunted, the petitioner filed its petition in this Court contending that it is a charitable institution within the context of the 1987 Constitution. It asserts that its character as a charitable institution is not altered by the fact that it admits paying patients and renders medical services to them, leases portions of the land to private parties, and rents out portions of the hospital to private medical practitioners from which it derives income to be used for operational expenses. The petitioner points out that for the years 1995 to 1999, 100% of its out-patients were charity patients and of the hospital's 282-bed capacity, 60% thereof, or 170 beds, is allotted to charity patients. It asserts that the fact that it receives subsidies from the government attests to its character as a charitable institution. It contends that the "exclusivity" required in the Constitution does not necessarily mean "solely." Hence, even if a portion of its real estate is leased out to private individuals from whom it derives income, it does not lose its character as a charitable institution, and its exemption from the payment of real estate taxes on its real property. The issues for resolution are the following: (a) whether the petitioner is a charitable institution within the context of Presidential Decree No. 1823 and the 1973 and 1987 Constitutions and Section 234(b) of Republic Act No. 7160; and (b) whether the real properties of the petitioner are exempt from real property taxes. HELD: The petition is partially granted. On the first issue, we hold that the petitioner is a charitable institution within the context of the 1973 and 1987 Constitutions. To determine whether an enterprise is a charitable institution/entity or not, the elements which should be considered include the statute creating the enterprise, its corporate purposes, its constitution and by-laws, the methods of administration, the nature of the actual work performed, the character of the services rendered, the indefiniteness of the beneficiaries, and the use and occupation of the properties. In the legal sense, a charity may be fully defined as a gift, to be applied consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing their minds and hearts under the influence of education or religion, by assisting them to establish themselves in life or otherwise lessening the burden of government. It may be applied to almost anything that tend to promote the well-doing and well-being of social man. It embraces the improvement and promotion of the happiness of man. The word "charitable" is not restricted to relief of the poor or sick. The test of a charity and a charitable organization are in law the same. The test whether an enterprise is charitable or not is whether it exists to carry out a purpose reorganized in law as charitable or whether it is maintained for gain, profit, or private advantage. Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation which, subject to the provisions of the decree, is to be administered by the Office of the President of the Philippines with the Ministry of Health and the Ministry of Human Settlements. It was organized for the welfare and benefit of the Filipino people principally to help combat the high incidence of lung and pulmonary diseases in the Philippines. Hence, the medical services of the petitioner are to be rendered to the public in general in any and all walks of life including those who are poor and the needy without discrimination. After all, any person, the rich as well as the poor, may fall sick or be injured or wounded and become a subject of charity.17 As a general principle, a charitable institution does not lose its character as such and its exemption from taxes simply because it derives income from paying patients, whether out-patient, or confined in the hospital, or receives subsidies from the government, so long as the money received is devoted or used altogether to the charitable object which it is intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution. In Congregational Sunday School, etc. v. Board of Review, the State Supreme Court of Illinois held, thus:
The fundamental ground upon which all exemptions in favor of charitable institutions are based is the benefit conferred upon the public by them, and a consequent relief, to some extent, of the burden upon the state to care for and advance the interests of its citizens.

As aptly stated by the State Supreme Court of South Dakota in Lutheran Hospital Association of South Dakota v. Baker:
The fact of receiving money from some of the patients does not, we think, at all impair the character of the charity, so long as the money thus received is devoted altogether to the charitable object which the institution is intended to further .

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The money received by the petitioner becomes a part of the trust fund and must be devoted to public trust purposes and cannot be diverted to private profit or benefit. Under P.D. No. 1823, the petitioner is entitled to receive donations. The petitioner does not lose its character as a charitable institution simply because the gift or donation is in the form of subsidies granted by the government. In this case, the petitioner adduced substantial evidence that it spent its income, including the subsidies from the government for 1991 and 1992 for its patients and for the operation of the hospital. It even incurred a net loss in 1991 and 1992 from its operations. Even as we find that the petitioner is a charitable institution, we hold, anent the second issue, that those portions of its real property that are leased to private entities are not exempt from real property taxes as these are not actually, directly and exclusively used for charitable purposes. The settled rule in this jurisdiction is that laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is the exception. The effect of an exemption is equivalent to an appropriation. Hence, a claim for exemption from tax payments must be clearly shown and based on language in the law too plain to be mistaken. Section 2 of Presidential Decree No. 1823, relied upon by the petitioner, specifically provides that the petitioner shall enjoy the income and gift tax exemptions and privileges . It is plain as day that under the decree, the petitioner does not enjoy any property tax exemption privileges for its real properties as well as the building constructed thereon . The exemption must not be so enlarged by construction since the reasonable presumption is that the State has granted in express terms all it intended to grant at all, and that unless the privilege is limited to the very terms of the statute the favor would be intended beyond what was meant. Section 28(3), Article VI of the 1987 Philippine Constitution provides, thus:
Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly and exclusively used for religious, charitable or educational purposes shall be exempt from taxation.

The tax exemption under this constitutional provision covers property taxes only. As Chief Justice Hilario G. Davide, Jr., then a member of the 1986 Constitutional Commission, explained: ". . . what is exempted is not the institution itself . . .; those exempted from real estate taxes are lands, buildings and improvements actually, directly and exclusively used for religious, charitable or educational purposes."34 Consequently, the constitutional provision is implemented by Section 234(b) of Republic Act No. 7160 (otherwise known as the Local Government Code of 1991) as follows:
SECTION 234. Exemptions from Real Property Tax. - The following are exempted from payment of the real property tax: ... (b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-profit or religious cemeteries and all lands, buildings, and improvements actually, directly, and exclusively used for religious, charitable or educational purposes.

We note that under the 1935 Constitution, "... all lands, buildings, and improvements used exclusively' for charitable purposes shall be exempt from taxation." However, under the 1973 and the present Constitutions, for "lands, buildings, and improvements" of the charitable institution to be considered exempt, the same should not only be "exclusively" used for charitable purposes; it is required that such property be used "actually" and "directly" for such purposes.37 Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a charitable institution; and (b) its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. "Exclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; and "exclusively" is defined, "in a manner to exclude; as enjoying a privilege exclusively." If real property is used for one or more commercial purposes, it is not exclusively used for the exempted purposes but is subject to taxation. The words "dominant use" or "principal use" cannot be substituted for the words "used exclusively" without doing violence to the Constitutions and the law. Solely is synonymous with exclusively. Accordingly, we hold that the portions of the land leased to private entities as well as those parts of the hospital leased to private individuals are not exempt from such taxes. 45 On the other hand, the portions of the land occupied by the

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hospital and portions of the hospital used for its patients, whether paying or non-paying, are exempt from real property taxes. IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The respondent Quezon City Assessor is hereby DIRECTED to determine, after due hearing, the precise portions of the land and the area thereof which are leased to private persons, and to compute the real property taxes due thereon as provided for by law. SO ORDERED. SECOND DIVISION G.R. No. 155810 August 13, 2004 LYDIA SUMIPAT, LAURITO SUMIPAT, ALEJANDRO SUMIPAT, ALICIA SUMIPAT, and LIRAFE SUMIPAT,petitioners, vs.BRIGIDO BANGA, HERMINIGILDO TABOTABO, VIVIANO TABOTABO, BERNARDITA ANION, and LEONIDA TABOTABO, respondents. TINGA, J.: The spouses Placida Tabo-tabo and Lauro Sumipat, who contracted marriage, acquired three parcels of land. The couple was childless. Lauro Sumipat, however, sired five illegitimate children out of an extra-marital affair with Pedra Dacola, namely: herein defendants-appellees. On January 5, 1983, Lauro Sumipat executed a document denominated "DEED OF ABSOLUTE TRANSFER AND/OR QUIT-CLAIM OVER REAL PROPERTIES" (the assailed document) in favor of his illegitimate children covering the three parcels of land (the properties). On the document appears the signature of his wife Placida which indicates that she gave her marital consent thereto. It appears that on January 5, 1983 when the assailed document was executed, Lauro Sumipat was already very sick and bedridden; that upon defendant-appellee Lydia's request, their neighbor Benjamin Rivera lifted the body of Lauro Sumipat whereupon Lydia guided his (Lauro Sumipat's) hand in affixing his signature on the assailed document which she had brought; that Lydia thereafter left but later returned on the same day and requested Lauro's unlettered wife Placida to sign on the assailed document, as she did in haste, even without the latter getting a responsive answer to her query on what it was all about. After Lauro Sumipat's death on January 30, 1984, his wife Placida, and defendants-appellees jointly administered the properties 50% of the produce of which went to Placida. As Placida's share in the produce of the properties dwindled until she no longer received any and learning that the titles to the properties in question were already transferred/made in favor of the defendants-appellees, she filed a complaint for declaration of nullity of titles, contracts, partition, recovery of ownership now the subject of the present appeal. Regional Trial Court of Dipolog City decided the case in favor of defendants-appellees, it holding that by virtue of the assailed document the due execution of which was not contested by Placida, the properties were absolutely transferred to defendants-appellees. The trial court found that the subject properties are conjugal having been acquired during the marriage of Lauro Sumipat and Placida Tabotabo (Placida). However, because Placida failed to question the genuineness and due execution of the deed and even admitted having affixed her signature thereon, the trial court declared that the entirety of the subject properties, and not just Lauro Sumipat's conjugal share, were validly transferred to the defendants, the petitioners herein. On appeal, the appellate court held that Placida did not understand the full import of the deed because the terms thereof were not explained to her either by the petitioners or by the notary public before whom the deed was acknowledged. According to the appellate court, Judge Pacifico Garcia (Judge Garcia), before whom the deed was acknowledged, did not identify Placida as having appeared before him on January 5, 1983 to acknowledge the deed. The jurat indicates that it was only Lauro Sumipat who appeared before Judge Garcia and to whom he explained the contents of the deed. Further, the appellate court noted that Judge Garcia himself was under the impression that the deed conveyed the exclusive properties of Lauro Sumipat. Hence, he could not have explained to Placida that the deed actually transferred the conjugal properties of Lauro Sumipat and Placida. The Court of Appeals, therefore, annulled the deed insofar as it covers Placida's conjugal share in the subject properties because the latter's consent thereto was vitiated by mistake when she affixed her signature on the document. The petitioners filed a Motion for Reconsideration and the appellate court denied such. Anent the ground of prescription, the appellate court held that since the properties were acquired through fraud or mistake, the petitioners are considered trustees of an implied trust for the benefit of Placida. Citing jurisprudence, the Court of Appeals ruled that actions based on implied or constructive trust prescribe 10 years from the issuance of a Torrens Title over the property.

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Since two (2) of the subject properties were issued on August 18, 1987, the Complaint for declaration of nullity of titles, partition, recovery of ownership and possession, reconveyance, accounting and damages, which was filed on March 3, 1993, was filed well within the prescriptive period. The petitioners are now before this Court principally claiming that Placida freely consented to the execution of the deed and that they did not commit fraudulent acts in connection with its execution. They also reiterate their argument that the Court of Appeals should have dismissed the case on the ground of prescription. It is their contention that the present action being one to annul a contract on the ground of fraud, it should have been filed within four (4) years from the discovery of fraud or registration of the instrument with the Registry of Deeds. HELD: At bottom, the crux of the controversy is whether the questioned deed by its terms or under the surrounding circumstances has validly transferred title to the disputed properties to the petitioners. A perusal of the deed reveals that it is actually a gratuitous disposition of property - a donation - although Lauro Sumipat imposed upon the petitioners the condition that he and his wife, Placida, shall be entitled to one-half (1/2) of all the fruits or produce of the parcels of land for their subsistence and support. The preliminary clauses of the deed read:
That conscious of my advanced age and failing health, I feel that I am not capable anymore of attending to and maintaining and keeping in continuous cultivation my above described properties; That my children are all desirous of taking over the task of maintaining my properties and have demonstrated since childhood the needed industry and hard work as they have in fact established possession over my real properties and introduced more improvements over my lands, the fruit of which through their concerted efforts and labors, I myself and my family have enjoyed; That it would be to the best interest of my above mentioned children that the ownership over my above described properties be transferred in their names, thereby encouraging them more in developing the lands to its fullest productivity.

The deed covers three (3) parcels of land. Being a donation of immovable property, the requirements for validity set forth in Article 749 of the Civil Code should have been followed, viz:
Art. 749. In order that the donation of the immovable may be valid, it must be made in a public document, specifying therein the property donated and the value of the charges which the donee must satisfy. The acceptance may be made in the same deed of donation or in a separate public document, but it shall not take effect unless it is done during the lifetime of the donor. If the acceptance is made in a separate instrument, the donor shall be notified thereof in an authentic form, and this step shall be noted in both instruments.

In this case, the donees' acceptance of the donation is not manifested either in the deed itself or in a separate document. Hence, the deed as an instrument of donation is patently void. We also note the absence of any proof of filing of the necessary return, payment of donor's taxes on the transfer, or exemption from payment thereof. Under the National Internal Revenue Code of 1977, the tax code in force at the time of the execution of the deed, an individual who makes any transfer by gift shall make a return and file the same within 30 days after the date the gift is made with the Revenue District Officer, Collection Agent or duly authorized Treasurer of the municipality in which the donor was domiciled at the time of the transfer. The filing of the return and payment of donor's taxes are mandatory. In fact, the registrar of deeds is mandated not to register in the registry of property any document transferring real property by way of gifts inter vivos unless a certification that the taxes fixed and actually due on the transfer had been paid or that the transaction is tax exempt from the Commissioner of Internal Revenue, in either case, is presented. Neither can we give effect to the deed as a sale, barter or any other onerous conveyance, in the absence of valid cause or consideration and consent competently and validly given. While it is true that the appellate court found Placida's consent to have been vitiated by mistake, her testimony on the matter actually makes out a case of total absence of consent, not merely vitiation thereof. During cross-examination, Placida again denied any knowledge of the nature of the deed. Being an absolute nullity, both as a donation and as a sale, the deed is subject to attack at any time, in accordance with the rule in Article 1410 of the Civil Code that an action to declare the inexistence of a void contract does not

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prescribe. We are thus unimpressed by the petitioners' contention that the appellate court should have dismissed Placida's appeal on the ground of prescription. Passage of time cannot cure the fatal flaw in an inexistent and void contract. The defect of inexistence of a contract is permanent and incurable; hence, it cannot be cured either by ratification or by prescription. Turning now to the effects of the absolute nullity of the deed, it is well-settled that when there is a showing of illegality, the property registered is deemed to be simply held in trust for the real owner by the person in whose name it is registered, and the former then has the right to sue for the reconveyance of the property. The action for the purpose is also imprescriptible. As long as the land wrongfully registered under the Torrens system is still in the name of the person who caused such registration, an action in personam will lie to compel him to reconvey the property to the real owner. WHEREFORE, the instant Petition for Review on Certiorari is DENIED. The Decision of the Regional Trial Court dated September 29, 1997 and the Decision of the Court of Appeals dated April 11, 2002, as well as its Resolution dated October 16, 2002, are VACATED. In lieu thereof, judgment is hereby rendered in favor of the respondents, to wit: (i) DECLARING the Deed of Absolute Transfer and/or Quitclaim dated January 5, 1983 NULL AND VOID; and (ii) ORDERING the CANCELLATION of Transfer Certificates of Title. Costs against the petitioners. SO ORDERED.