G.R. No.

L-34583 October 22, 1931

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

VILLA-REAL, J .:
The Bank of the Philippine Islands, as administrator of the
estate of the deceased Adolphe Oscar Schuetze, has
appealed to this court from the judgment of the Court of First
Instance of Manila absolving the defendant Juan Posadas, Jr.,
Collector of Internal Revenue, from the complaint filed against
him by said plaintiff bank, and dismissing the complaint with
costs.
The appellant has assigned the following alleged errors as
committed by the trial court in its judgment, to wit:
1. The lower court erred in holding that the testimony of Mrs.
Schuetze was inefficient to established the domicile of her
husband.
2. The lower court erred in holding that under section 1536 of
the Administrative Code the tax imposed by the defendant is
lawful and valid.
3. The lower court erred in not holding that one-half () of the
proceeds of the policy in question is community property and
that therefore no inheritance tax can be levied, at least on one-
half () of the said proceeds.
4. The lower court erred in not declaring that it would be
unconstitutional to impose an inheritance tax upon the
insurance policy here in question as it would be a taking of
property without due process of law.
The present complaint seeks to recover from the defendant
Juan Posadas, Jr., Collector of Internal Revenue, the amount
of P1,209 paid by the plaintiff under protest, in its capacity of
administrator of the estate of the late Adolphe Oscar Schuetze,
as inheritance tax upon the sum of P20,150, which is the
amount of an insurance policy on the deceased's life, wherein
his own estate was named the beneficiary.
At the hearing, in addition to documentary and parol evidence,
both parties submitted the following agreed statement of facts
of the court for consideration:
It is hereby stipulated and agreed by and between the parties
in the above-entitled action through their respective
undersigned attorneys:
1. That the plaintiff, Rosario Gelano Vda. de Schuetze, window
of the late Adolphe Oscar Schuetze, is of legal age, a native of
Manila, Philippine Islands, and is and was at all times
hereinafter mentioned a resident of Germany, and at the time
of the death of her husband, the late Adolphe Oscar Schuetze,
she was actually residing and living in Germany;
2. That the Bank of the Philippine Islands, is and was at all
times hereinafter mentioned a banking institution duly
organized and existing under and by virtue of the laws of the
Philippine Islands;
3. That on or about August 23, 1928, the herein plaintiff before
notary public Salvador Zaragoza, drew a general power
appointing the above-mentioned Bank of the Philippine Islands
as her attorney-in-fact, and among the powers conferred to
said attorney-in-fact was the power to represent her in all legal
actions instituted by or against her;
4. That the defendant, of legal age, is and at all times
hereinafter mentioned the duly appointed Collector of Internal
Revenue with offices at Manila, Philippine Islands;
5. That the deceased Adolphe Oscar Schuetze came to the
Philippine Islands for the first time of March 31, 1890, and
worked in the several German firms as a mere employee and
that from the year 1903 until the year 1918 he was partner in
the business of Alfredo Roensch;
6. That from 1903 to 1922 the said Adolphe Oscar Schuetze
was in the habit of making various trips to Europe;
7. That on December 3, 1927, the late Adolphe Oscar
Schuetze coming from Java, and with the intention of going to
Bremen, landed in the Philippine Islands where he met his
death on February 2, 1928;
8. That on March 31, 1926, the said Adolphe Oscar Schuetze,
while in Germany, executed a will, in accordance with its law,
wherein plaintiff was named his universal heir;
9. That the Bank of the Philippine Islands by order of the Court
of First Instance of Manila under date of May 24, 1928, was
appointed administrator of the estate of the deceased Adolphe
Oscar Schuetze;
10. That, according to the testamentary proceedings instituted
in the Court of First Instance of Manila, civil case No. 33089,
the deceased at the time of his death was possessed of not
only real property situated in the Philippine Islands, but also
personal property consisting of shares of stock in nineteen (19)
domestic corporations;
11. That the fair market value of all the property in the
Philippine Islands left by the deceased at the time of his death
in accordance with the inventory submitted to the Court of First
Instance of Manila, civil case No. 33089, was P217,560.38;
12. That the Bank of the Philippine Islands, as administrator of
the estate of the deceased rendered its final account on June
19, 1929, and that said estate was closed on July 16, 1929;
13. That among the personal property of the deceased was
found life-insurance policy No. 194538 issued at Manila,
Philippine Islands, on January 14, 1913, for the sum of
$10,000 by the Sun Life Assurance Company of Canada,
Manila branch, a foreign corporation duly organized and
existing under and by virtue of the laws of Canada, and duly
authorized to transact business in the Philippine Islands;
14. That in the insurance policy the estate of the said Adolphe
Oscar Schuetze was named the beneficiary without any
qualification whatsoever;
15. That for five consecutive years, the deceased Adolphe
Oscar Schuetze paid the premiums of said policy to the Sun
Life Assurance Company of Canada, Manila branch;
16. That on or about the year 1918, the Sun Life Assurance
Company of Canada, Manila branch, transferred said policy to
the Sun Life Assurance Company of Canada, London branch;
17. That due to said transfer the said Adolphe Oscar Schuetze
from 1918 to the time of his death paid the premiums of said
policy to the Sun Life Assurance Company of Canada, London
Branch;
18. That the sole and only heir of the deceased Adolphe Oscar
Schuetze is his widow, the plaintiff herein;
19. That at the time of the death of the deceased and at all
times thereafter including the date when the said insurance
policy was paid, the insurance policy was not in the hands or
possession of the Manila office of the Sun Life Assurance
Company of Canada, nor in the possession of the herein
plaintiff, nor in the possession of her attorney-in-fact the Bank
of the Philippine Islands, but the same was in the hands of the
Head Office of the Sun Life Assurance Company of Canada, at
Montreal, Canada;
20. That on July 13, 1928, the Bank of the Philippine Islands as
administrator of the decedent's estate received from the Sun
Life Assurance Company of Canada, Manila branch, the sum
of P20,150 representing the proceeds of the insurance policy,
as shown in the statement of income and expenses of the
estate of the deceased submitted on June 18, 1929, by the
administrator to the Court of First Instance of Manila, civil case
No. 33089;
21. That the Bank of the Philippine Islands delivered to the
plaintiff herein the said sum of P20,150;
22. That the herein defendant on or about July 5, 1929,
imposed an inheritance tax upon the transmission of the
proceeds of the policy in question in the sum of P20,150 from
the estate of the late Adolphe Oscar Schuetze to the sole heir
of the deceased, or the plaintiff herein, which inheritance tax
amounted to the sum of P1,209;
23. That the Bank of the Philippine Islands as administrator of
the decedent's estate and as attorney-in-fact of the herein
plaintiff, having been demanded by the herein defendant to pay
inheritance tax amounting to the sum of P1,209, paid to the
defendant under protest the above-mentioned sum;
24. That notwithstanding the various demands made by
plaintiff to the defendant, said defendant has refused and
refuses to refund to plaintiff the above mentioned sum of
P1,209;
25. That plaintiff reserves the right to adduce evidence as
regards the domicile of the deceased, and so the defendant,
the right to present rebuttal evidence;
26. That both plaintiff and defendant submit this stipulation of
facts without prejudice to their right to introduce such evidence,
on points not covered by the agreement, which they may deem
proper and necessary to support their respective contentions.
In as much as one of the question raised in the appeal is
whether an insurance policy on said Adolphe Oscar Schuetze's
life was, by reason of its ownership, subject to the inheritance
tax, it would be well to decide first whether the amount thereof
is paraphernal or community property.
According to the foregoing agreed statement of facts, the
estate of Adolphe Oscar Schuetze is the sole beneficiary
named in the life-insurance policy for $10,000, issued by the
Sun Life Assurance Company of Canada on January 14, 1913.
During the following five years the insured paid the premiums
at the Manila branch of the company, and in 1918 the policy
was transferred to the London branch.
The record shows that the deceased Adolphe Oscar Schuetze
married the plaintiff-appellant Rosario Gelano on January 16,
1914.
With the exception of the premium for the first year covering
the period from January 14, 1913 to January 14, 1914, all the
money used for paying the premiums, i. e., from the second
year, or January 16, 1914, or when the deceased Adolphe
Oscar Schuetze married the plaintiff-appellant Rosario Gelano,
until his death on February 2, 1929, is conjugal property
inasmuch as it does not appear to have exclusively belonged
to him or to his wife (art. 1407, Civil Code). As the sum of
P20,150 here in controversy is a product of such premium it
must also be deemed community property, because it was
acquired for a valuable consideration, during said Adolphe
Oscar Schuetze's marriage with Rosario Gelano at the
expense of the common fund (art. 1401, No. 1, Civil Code),
except for the small part corresponding to the first premium
paid with the deceased's own money.
In his Commentaries on the Civil Code, volume 9, page 589,
second edition, Manresa treats of life insurance in the following
terms, to wit:
The amount of the policy represents the premiums to be paid,
and the right to it arises the moment the contract is perfected,
for at the moment the power of disposing of it may be
exercised, and if death occurs payment may be demanded. It
is therefore something acquired for a valuable consideration
during the marriage, though the period of its fulfillment, depend
upon the death of one of the spouses, which terminates the
partnership. So considered, the question may be said to be
decided by articles 1396 and 1401: if the premiums are paid
with the exclusive property of husband or wife, the policy
belongs to the owner; if with conjugal property, or if the money
cannot be proved as coming from one or the other of the
spouses, the policy is community property.
The Supreme Court of Texas, United States, in the case of
Martin vs. Moran (11 Tex. Civ. A., 509) laid down the following
doctrine:
COMMUNITY PROPERTY LIFE INSURANCE POLICY.
A husband took out an endowment life insurance policy on his
life, payable "as directed by will." He paid the premiums
thereon out of community funds, and by his will made the
proceeds of the policy payable to his own estate. Held, that the
proceeds were community estate, one-half of which belonged
to the wife.
In In re Stan's Estate, Myr. Prob. (Cal.), 5, the Supreme Court
of California laid down the following doctrine:
A testator, after marriage, took out an insurance policy, on
which he paid the premiums from his salary. Held that the
insurance money was community property, to one-half of
which, the wife was entitled as survivor.
In In re Webb's Estate, Myr. Prob. (Cal.), 93, the same court
laid down the following doctrine:
A decedent paid the first third of the amount of the premiums
on his life-insurance policy out of his earnings before marriage,
and the remainder from his earnings received after marriage.
Held, that one-third of the policy belonged to his separate
estate, and the remainder to the community property.
Thus both according to our Civil Code and to the ruling of
those North American States where the Spanish Civil Code
once governed, the proceeds of a life-insurance policy
whereon the premiums were paid with conjugal money, belong
to the conjugal partnership.
The appellee alleges that it is a fundamental principle that a
life-insurance policy belongs exclusively to the beneficiary
upon the death of the person insured, and that in the present
case, as the late Adolphe Oscar Schuetze named his own
estate as the sole beneficiary of the insurance on his life, upon
his death the latter became the sole owner of the proceeds,
which therefore became subject to the inheritance tax, citing
Del Val vs. Del Val (29 Phil., 534), where the doctrine was laid
down that an heir appointed beneficiary to a life-insurance
policy taken out by the deceased, becomes the absolute owner
of the proceeds of such policy upon the death of the insured.
The estate of a deceased person cannot be placed on the
same footing as an individual heir. The proceeds of a life-
insurance policy payable to the estate of the insured passed to
the executor or administrator of such estate, and forms part of
its assets (37 Corpus Juris, 565, sec. 322); whereas the
proceeds of a life-insurance policy payable to an heir of the
insured as beneficiary belongs exclusively to said heir and
does not form part of the deceased's estate subject to
administrator. (Del Val vs. Del Val, supra; 37 Corpus Juris,
566, sec. 323, and articles 419 and 428 of the Code of
Commerce.)
Just as an individual beneficiary of a life-insurance policy taken
out by a married person becomes the exclusive owner of the
proceeds upon the death of the insured even if the premiums
were paid by the conjugal partnership, so, it is argued, where
the beneficiary named is the estate of the deceased whose life
is insured, the proceeds of the policy become a part of said
estate upon the death of the insured even if the premiums
have been paid with conjugal funds.
In a conjugal partnership the husband is the manager,
empowered to alienate the partnership property without the
wife's consent (art. 1413, Civil Code), a third person, therefore,
named beneficiary in a life-insurance policy becomes the
absolute owner of its proceeds upon the death of the insured
even if the premiums should have been paid with money
belonging to the community property. When a married man has
his life insured and names his own estate after death,
beneficiary, he makes no alienation of the proceeds of conjugal
funds to a third person, but appropriates them himself, adding
them to the assets of his estate, in contravention of the
provisions of article 1401, paragraph 1, of the Civil Code cited
above, which provides that "To the conjugal partnership
belongs" (1) Property acquired for a valuable consideration
during the marriage at the expense of the common fund,
whether the acquisition is made for the partnership or for one
of the spouses only." Furthermore, such appropriation is a
fraud practised upon the wife, which cannot be allowed to
prejudice her, according to article 1413, paragraph 2, of said
Code. Although the husband is the manager of the conjugal
partnership, he cannot of his own free will convert the
partnership property into his own exclusive property.
As all the premiums on the life-insurance policy taken out by
the late Adolphe Oscar Schuetze, were paid out of the conjugal
funds, with the exceptions of the first, the proceeds of the
policy, excluding the proportional part corresponding to the first
premium, constitute community property, notwithstanding the
fact that the policy was made payable to the deceased's
estate, so that one-half of said proceeds belongs to the estate,
and the other half to the deceased's widow, the plaintiff-
appellant Rosario Gelano Vda. de Schuetze.
The second point to decide in this appeal is whether the
Collector of Internal Revenue has authority, under the law, to
collect the inheritance tax upon one-half of the life-insurance
policy taken out by the late Adolphe Oscar Schuetze, which
belongs to him and is made payable to his estate.
According to the agreed statement of facts mentioned above,
the plaintiff-appellant, the Bank of the Philippine Islands, was
appointed administrator of the late Adolphe Oscar Schuetze's
testamentary estate by an order dated March 24, 1928,
entered by the Court of First Instance of Manila. On July 13,
1928, the Sun Life Assurance Company of Canada, whose
main office is in Montreal, Canada, paid Rosario Gelano Vda.
de Schuetze upon her arrival at Manila, the sum of P20,150,
which was the amount of the insurance policy on the life of said
deceased, payable to the latter's estate. On the same date
Rosario Gelano Vda. de Schuetze delivered the money to said
Bank of the Philippine Islands, as administrator of the
deceased's estate, which entered it in the inventory of the
testamentary estate, and then returned the money to said
widow.
Section 1536 of the Administrative Code, as amended by
section 10 of Act No. 2835 and section 1 of Act No. 3031,
contains the following relevant provision:
SEC. 1536. Conditions and rate of taxation. Every
transmission by virtue of inheritance, devise, bequest, gift
mortis causa or advance in anticipation of inheritance, devise,
or bequest of real property located in the Philippine Islands and
real rights in such property; of any franchise which must be
exercised in the Philippine Islands; of any shares, obligations,
or bonds issued by any corporation or sociedad anonima
organized or constituted in the Philippine Islands in accordance
with its laws; of any shares or rights in any partnership,
business or industry established in the Philippine Islands or of
any personal property located in the Philippine Islands shall be
subject to the following tax:
x x x x x x x x x
In as much as the proceeds of the insurance policy on the life
of the late Adolphe Oscar Schuetze were paid to the Bank of
the Philippine Islands, as administrator of the deceased's
estate, for management and partition, and as such proceeds
were turned over to the sole and universal testamentary
heiress Rosario Gelano Vda. de Schuetze, the plaintiff-
appellant, here in Manila, the situs of said proceeds is the
Philippine Islands.
In his work "The Law of Taxation," Cooley enunciates the
general rule governing the levying of taxes upon tangible
personal property, in the following words:
GENERAL RULE. The suits of tangible personal property,
for purposes of taxation may be where the owner is domiciled
but is not necessarily so. Unlike intangible personal property, it
may acquire a taxation situs in a state other than the one
where the owner is domiciled, merely because it is located
there. Its taxable situs is where it is more or less permanently
located, regardless of the domicile of the owner. It is well
settled that the state where it is more or less permanently
located has the power to tax it although the owner resides out
of the state, regardless of whether it has been taxed for the
same period at the domicile of the owner, provided there is
statutory authority for taxing such property. It is equally well
settled that the state where the owner is domiciled has no
power to tax it where the property has acquired an actual situs
in another state by reason of its more or less permanent
location in that state. ... (2 Cooley, The Law of Taxation, 4th
ed., p. 975, par. 451.)
With reference to the meaning of the words "permanent" and
"in transit," he has the following to say:
PERMANENCY OF LOCATION; PROPERTY IN TRANSIT.
In order to acquire a situs in a state or taxing district so as to
be taxable in the state or district regardless of the domicile of
the owner and not taxable in another state or district at the
domicile of the owner, tangible personal property must be more
or less permanently located in the state or district. In other
words, the situs of tangible personal property is where it is
more or less permanently located rather than where it is merely
in transit or temporarily and for no considerable length of time.
If tangible personal property is more or less permanently
located in a state other than the one where the owner is
domiciled, it is not taxable in the latter state but is taxable in
the state where it is located. If tangible personal property
belonging to one domiciled in one state is in another state
merely in transitu or for a short time, it is taxable in the former
state, and is not taxable in the state where it is for the time
being. . . . .
Property merely in transit through a state ordinarily is not
taxable there. Transit begins when an article is committed to a
carrier for transportation to the state of its destination, or
started on its ultimate passage. Transit ends when the goods
arrive at their destination. But intermediate these points
questions may arise as to when a temporary stop in transit is
such as to make the property taxable at the place of stoppage.
Whether the property is taxable in such a case usually
depends on the length of time and the purpose of the
interruption of transit. . . . .
. . . It has been held that property of a construction company,
used in construction of a railroad, acquires a situs at the place
where used for an indefinite period. So tangible personal
property in the state for the purpose of undergoing a partial
finishing process is not to be regarded as in the course of
transit nor as in the state for a mere temporary purpose. (2
Cooley, The Law of Taxation, 4th ed., pp. 982, 983 and 988,
par. 452.)
If the proceeds of the life-insurance policy taken out by the late
Adolphe Oscar Schuetze and made payable to his estate, were
delivered to the Bank of the Philippine Islands for
administration and distribution, they were not in transit but
were more or less permanently located in the Philippine
Islands, according to the foregoing rules. If this be so, half of
the proceeds which is community property, belongs to the
estate of the deceased and is subject to the inheritance tax, in
accordance with the legal provision quoted above, irrespective
of whether or not the late Adolphe Oscar Schuetze was
domiciled in the Philippine Islands at the time of his death.
By virtue of the foregoing, we are of opinion and so hold: (1)
That the proceeds of a life-insurance policy payable to the
insured's estate, on which the premiums were paid by the
conjugal partnership, constitute community property, and
belong one-half to the husband and the other half to the wife,
exclusively; (2) that if the premiums were paid partly with
paraphernal and partly conjugal funds, the proceeds are
likewise in like proportion paraphernal in part and conjugal in
part; and (3) that the proceeds of a life-insurance policy
payable to the insured's estate as the beneficiary, if delivered
to the testamentary administrator of the former as part of the
assets of said estate under probate administration, are subject
to the inheritance tax according to the law on the matter, if they
belong to the assured exclusively, and it is immaterial that the
insured was domiciled in these Islands or outside.1awphil.net
Wherefore, the judgment appealed from is reversed, and the
defendant is ordered to return to the plaintiff the one-half of the
tax collected upon the amount of P20,150, being the proceeds
of the insurance policy on the life of the late Adolphe Oscar
Schuetze, after deducting the proportional part corresponding
to the first premium, without special pronouncement of costs.
So ordered.
Avancea, C.J., Johnson, Street, Malcolm, Villamor, and
Ostrand, JJ., concur.






G.R. No. L-13250 October 29, 1971
THE COLLECTOR OF INTERNAL REVENUE, petitioner,
vs. ANTONIO CAMPOS RUEDA, respondent..
Assistant Solicitor General Jose P. Alejandro and Special
Attorney Jose G. Azurin, (O.S.G.) for petitioner.
Ramirez and Ortigas for respondent.

FERNANDO, J .:
The basic issue posed by petitioner Collector of Internal
Revenue in this appeal from a decision of the Court of Tax
Appeals as to whether or not the requisites of statehood, or at
least so much thereof as may be necessary for the acquisition
of an international personality, must be satisfied for a "foreign
country" to fall within the exemption of Section 122 of the
National Internal Revenue Code
1
is now ripe for adjudication.
The Court of Tax Appeals answered the question in the
negative, and thus reversed the action taken by petitioner
Collector, who would hold respondent Antonio Campos Rueda,
as administrator of the estate of the late Estrella Soriano Vda.
de Cerdeira, liable for the sum of P161,874.95 as deficiency
estate and inheritance taxes for the transfer of intangible
personal properties in the Philippines, the deceased, a Spanish
national having been a resident of Tangier, Morocco from 1931
up to the time of her death in 1955. In an earlier resolution
promulgated May 30, 1962, this Court on the assumption that
the need for resolving the principal question would be obviated,
referred the matter back to the Court of Tax Appeals to
determine whether the alleged law of Tangier did grant the
reciprocal tax exemption required by the aforesaid Section
122. Then came an order from the Court of Tax Appeals
submitting copies of legislation of Tangier that would manifest
that the element of reciprocity was not lacking. It was not until
July 29, 1969 that the case was deemed submitted for
decision. When the petition for review was filed on January 2,
1958, the basic issue raised was impressed with an element of
novelty. Four days thereafter, however, on January 6, 1958, it
was held by this Court that the aforesaid provision does not
require that the "foreign country" possess an international
personality to come within its terms.
2
Accordingly, we have to
affirm.
The decision of the Court of Tax Appeals, now under review,
sets forth the background facts as follows: "This is an appeal
interposed by petitioner Antonio Campos Rueda as
administrator of the estate of the deceased Doa Maria de la
Estrella Soriano Vda. de Cerdeira, from the decision of the
respondent Collector of Internal Revenue, assessing against
and demanding from the former the sum P161,874.95 as
deficiency estate and inheritance taxes, including interest and
penalties, on the transfer of intangible personal properties
situated in the Philippines and belonging to said Maria de la
Estrella Soriano Vda. de Cerdeira. Maria de la Estrella Soriano
Vda. de Cerdeira (Maria Cerdeira for short) is a Spanish
national, by reason of her marriage to a Spanish citizen and
was a resident of Tangier, Morocco from 1931 up to her death
on January 2, 1955. At the time of her demise she left, among
others, intangible personal properties in the Philippines."
3

Then came this portion: "On September 29, 1955, petitioner
filed a provisional estate and inheritance tax return on all the
properties of the late Maria Cerdeira. On the same date,
respondent, pending investigation, issued an assessment for
state and inheritance taxes in the respective amounts of
P111,592.48 and P157,791.48, or a total of P369,383.96 which
tax liabilities were paid by petitioner ... . On November 17,
1955, an amended return was filed ... wherein intangible
personal properties with the value of P396,308.90 were
claimed as exempted from taxes. On November 23, 1955,
respondent, pending investigation, issued another assessment
for estate and inheritance taxes in the amounts of P202,262.40
and P267,402.84, respectively, or a total of P469,665.24 ... . In
a letter dated January 11, 1956, respondent denied the request
for exemption on the ground that the law of Tangier is not
reciprocal to Section 122 of the National Internal Revenue
Code. Hence, respondent demanded the payment of the sums
of P239,439.49 representing deficiency estate and inheritance
taxes including ad valorem penalties, surcharges, interests and
compromise penalties ... . In a letter dated February 8, 1956,
and received by respondent on the following day, petitioner
requested for the reconsideration of the decision denying the
claim for tax exemption of the intangible personal properties
and the imposition of the 25% and 5% ad valorem penalties ...
. However, respondent denied request, in his letter dated May
5, 1956 ... and received by petitioner on May 21, 1956.
Respondent premised the denial on the grounds that there was
no reciprocity [with Tangier, which was moreover] a mere
principality, not a foreign country. Consequently, respondent
demanded the payment of the sums of P73,851.21 and
P88,023.74 respectively, or a total of P161,874.95 as
deficiency estate and inheritance taxes including surcharges,
interests and compromise penalties."
4

The matter was then elevated to the Court of Tax Appeals. As
there was no dispute between the parties regarding the values
of the properties and the mathematical correctness of the
deficiency assessments, the principal question as noted dealt
with the reciprocity aspect as well as the insisting by the
Collector of Internal Revenue that Tangier was not a foreign
country within the meaning of Section 122. In ruling against the
contention of the Collector of Internal Revenue, the appealed
decision states: "In fine, we believe, and so hold, that the
expression "foreign country", used in the last proviso of Section
122 of the National Internal Revenue Code, refers to a
government of that foreign power which, although not an
international person in the sense of international law, does not
impose transfer or death upon intangible person properties of
our citizens not residing therein, or whose law allows a similar
exemption from such taxes. It is, therefore, not necessary that
Tangier should have been recognized by our Government
order to entitle the petitioner to the exemption benefits of the
proviso of Section 122 of our Tax. Code."
5

Hence appeal to this court by petitioner. The respective briefs
of the parties duly submitted, but as above indicated, instead of
ruling definitely on the question, this Court, on May 30, 1962,
resolve to inquire further into the question of reciprocity and
sent back the case to the Court of Tax Appeals for the motion
of evidence thereon. The dispositive portion of such resolution
reads as follows: "While section 122 of the Philippine Tax Code
aforequoted speaks of 'intangible personal property' in both
subdivisions (a) and (b); the alleged laws of Tangier refer to
'bienes muebles situados en Tanger', 'bienes muebles
radicantes en Tanger', 'movables' and 'movable property'. In
order that this Court may be able to determine whether the
alleged laws of Tangier grant the reciprocal tax exemptions
required by Section 122 of the Tax Code, and without, for the
time being, going into the merits of the issues raised by the
petitioner-appellant, the case is [remanded] to the Court of Tax
Appeals for the reception of evidence or proof on whether or
not the words `bienes muebles', 'movables' and 'movable
properties as used in the Tangier laws, include or embrace
'intangible person property', as used in the Tax Code."
6
In line
with the above resolution, the Court of Tax Appeals admitted
evidence submitted by the administrator petitioner Antonio
Campos Rueda, consisting of exhibits of laws of Tangier to the
effect that "the transfers by reason of death of movable
properties, corporeal or incorporeal, including furniture and
personal effects as well as of securities, bonds, shares, ...,
were not subject, on that date and in said zone, to the payment
of any death tax, whatever might have been the nationality of
the deceased or his heirs and legatees." It was further noted in
an order of such Court referring the matter back to us that such
were duly admitted in evidence during the hearing of the case
on September 9, 1963. Respondent presented no evidence."
7

The controlling legal provision as noted is a proviso in Section
122 of the National Internal Revenue Code. It reads thus: "That
no tax shall be collected under this Title in respect of intangible
personal property (a) if the decedent at the time of his death
was a resident of a foreign country which at the time of his
death did not impose a transfer tax or death tax of any
character in respect of intangible person property of the
Philippines not residing in that foreign country, or (b) if the laws
of the foreign country of which the decedent was a resident at
the time of his death allow a similar exemption from transfer
taxes or death taxes of every character in respect of intangible
personal property owned by citizens of the Philippines not
residing in that foreign country."
8
The only obstacle therefore
to a definitive ruling is whether or not as vigorously insisted
upon by petitioner the acquisition of internal personality is a
condition sine qua non to Tangier being considered a "foreign
country". Deference to the De Lara ruling, as was made clear
in the opening paragraph of this opinion, calls for an affirmance
of the decision of the Court of Tax Appeals.
It does not admit of doubt that if a foreign country is to be
identified with a state, it is required in line with Pound's
formulation that it be a politically organized sovereign
community independent of outside control bound by penalties
of nationhood, legally supreme within its territory, acting
through a government functioning under a regime of law.
9
It
is thus a sovereign person with the people composing it viewed
as an organized corporate society under a government with the
legal competence to exact obedience to its commands.
10
It
has been referred to as a body-politic organized by common
consent for mutual defense and mutual safety and to promote
the general welfare.
11
Correctly has it been described by
Esmein as "the juridical personification of the nation."
12
This is
to view it in the light of its historical development. The stress is
on its being a nation, its people occupying a definite territory,
politically organized, exercising by means of its government its
sovereign will over the individuals within it and maintaining its
separate international personality. Laski could speak of it then
as a territorial society divided into government and subjects,
claiming within its allotted area a supremacy over all other
institutions.
13
McIver similarly would point to the power
entrusted to its government to maintain within its territory the
conditions of a legal order and to enter into international
relations.
14
With the latter requisite satisfied, international law
do not exact independence as a condition of statehood. So
Hyde did opine.
15

Even on the assumption then that Tangier is bereft of
international personality, petitioner has not successfully made
out a case. It bears repeating that four days after the filing of
this petition on January 6, 1958 in Collector of Internal
Revenue v. De Lara,
16
it was specifically held by us:
"Considering the State of California as a foreign country in
relation to section 122 of our Tax Code we believe and hold, as
did the Tax Court, that the Ancilliary Administrator is entitled
the exemption from the inheritance tax on the intangible
personal property found in the Philippines."
17
There can be no
doubt that California as a state in the American Union was in
the alleged requisite of international personality. Nonetheless,
it was held to be a foreign country within the meaning of
Section 122 of the National Internal Revenue Code.
18

What is undeniable is that even prior to the De Lara ruling, this
Court did commit itself to the doctrine that even a tiny
principality, that of Liechtenstein, hardly an international
personality in the sense, did fall under this exempt category.
So it appears in an opinion of the Court by the then Acting
Chief Justicem Bengson who thereafter assumed that position
in a permanent capacity, in Kiene v. Collector of Internal
Revenue.
19
As was therein noted: 'The Board found from the
documents submitted to it proof of the laws of Liechtenstein
that said country does not impose estate, inheritance and
gift taxes on intangible property of Filipino citizens not residing
in that country. Wherefore, the Board declared that pursuant to
the exemption above established, no estate or inheritance
taxes were collectible, Ludwig Kiene being a resident of
Liechtestein when he passed away."
20
Then came this
definitive ruling: "The Collector hereafter named the
respondent cites decisions of the United States Supreme
Court and of this Court, holding that intangible personal
property in the Philippines belonging to a non-resident
foreigner, who died outside of this country is subject to the
estate tax, in disregard of the principle 'mobilia sequuntur
personam'. Such property is admittedly taxable here. Without
the proviso above quoted, the shares of stock owned here by
the Ludwig Kiene would be concededly subject to estate and
inheritance taxes. Nevertheless our Congress chose to make
an exemption where conditions are such that demand
reciprocity as in this case. And the exemption must be
honored."
21

WHEREFORE, the decision of the respondent Court of Tax
Appeals of October 30, 1957 is affirmed. Without
pronouncement as to costs.














G.R. No. L-46720 June 28, 1940
WELLS FARGO BANK & UNION TRUST COMPANY,
petitioner-appellant, vs. THE COLLECTOR OF INTERNAL
REVENUE, respondent-appellee.
De Witt, Perkins and Ponce Enrile for appellant. Office of the
Solicitor-General Ozaeta and Assistant Solicitor-General
Concepcion for appellee. Ross, Lawrence, Selph and
Carrascoso, James Madison Ross and Federico Agrava as
amici curi.
MORAN, J .:
An appeal from a declaratory judgment rendered by the Court
of First Instance of Manila.
Birdie Lillian Eye, wife of Clyde Milton Eye, died on September
16, 1932, at Los Angeles, California, the place of her alleged
last residence and domicile. Among the properties she left her
one-half conjugal share in 70,000 shares of stock in the
Benguet Consolidated Mining Company, an anonymous
partnership (sociedad anonima), organized and existing under
the laws of the Philippines, with is principal office in the City of
Manila. She left a will which was duly admitted to probate in
California where her estate was administered and settled.
Petitioner-appellant, Wells Fargo Bank & Union Trust
Company, was duly appointed trustee of the created by the
said will. The Federal and State of California's inheritance
taxes due on said shares have been duly paid. Respondent
Collector of Internal Revenue sought to subject anew the
aforesaid shares of stock to the Philippine inheritance tax, to
which petitioner-appellant objected. Wherefore, a petition for a
declaratory judgment was filed in the lower court, with the
statement that, "if it should be held by a final declaratory
judgment that the transfer of the aforesaid shares of stock is
legally subject to the Philippine inheritance tax, the petitioner
will pay such tax, interest and penalties (saving error in
computation) without protest and will not file to recover the
same; and the petitioner believes and t herefore alleges that it
should be held that such transfer is not subject to said tax, the
respondent will not proceed to assess and collect the same."
The Court of First Instance of Manila rendered judgment,
holding that the transmission by will of the said 35,000 shares
of stock is subject to Philippine inheritance tax. Hence, this
appeal by the petitioner.
Petitioner concedes (1) that the Philippine inheritance tax is not
a tax property, but upon transmission by inheritance (Lorenzo
vs. Posadas, 35 Off. Gaz., 2393, 2395), and (2) that as to real
and tangible personal property of a non-resident decedent,
located in the Philippines, the Philippine inheritance tax may be
imposed upon their transmission by death, for the self-evident
reason that, being a property situated in this country, its
transfer is, in some way, defendant, for its effectiveness, upon
Philippine laws. It is contended, however, that, as to
intangibles, like the shares of stock in question, their situs is in
the domicile of the owner thereof, and, therefore, their
transmission by death necessarily takes place under his
domiciliary laws.
Section 1536 of the Administrative Code, as amended,
provides that every transmission by virtue of inheritance of any
share issued by any corporation of sociedad anonima
organized or constituted in the Philippines, is subject to the tax
therein provided. This provision has already been applied to
shares of stock in a domestic corporation which were owned
by a British subject residing and domiciled in Great Britain.
(Knowles vs. Yatco, G. R. No. 42967. See also Gibbs vs.
Government of P. I., G. R. No. 35694.) Petitioner, however,
invokes the rule laid down by the United States Supreme Court
in four cases (Farmers Loan & Trust Company vs. Minnesota,
280 U.S. 204; 74 Law. ed., 371; Baldwin vs. Missouri, 281
U.S., 586; 74 Law. ed., 1056, Beidler vs. South Carolina Tax
Commission 282 U. S., 1; 75 Law. ed., 131; First National
Bank of Boston vs. Maine, 284 U. S., 312; 52 S. Ct., 174, 76
Law. ed., 313; 77 A. L. R., 1401), to the effect that an
inheritance tax can be imposed with respect to intangibles only
by the State where the decedent was domiciled at the time of
his death, and that, under the due-process clause, the State in
which a corporation has been incorporated has no power to
impose such tax if the shares of stock in such corporation are
owned by a non-resident decedent. It is to be observed,
however, that in a later case (Burnet vs. Brooks, 288 U. S.,
378; 77 Law. ed., 844), the United States Supreme Court
upheld the authority of the Federal Government to impose an
inheritance tax on the transmission, by death of a non-resident,
of stock in a domestic (America) corporation, irrespective of the
situs of the corresponding certificates of stock. But it is
contended that the doctrine in the foregoing case is not
applicable, because the due-process clause is directed at the
State and not at the Federal Government, and that the federal
or national power of the United States is to be determined in
relation to other countries and their subjects by applying the
principles of jurisdiction recognized in international relations.
Be that as it may, the truth is that the due-process clause is
"directed at the protection of the individual and he is entitled to
its immunity as much against the state as against the national
government." (Curry vs. McCanless, 307 U. S., 357, 370; 83
Law. ed., 1339, 1349.) Indeed, the rule laid down in the four
cases relied upon by the appellant was predicated on a proper
regard for the relation of the states of the American Union,
which requires that property should be taxed in only one state
and that jurisdiction to tax is restricted accordingly. In other
words, the application to the states of the due-process rule
springs from a proper distribution of their powers and spheres
of activity as ordained by the United States Constitution, and
such distribution is enforced and protected by not allowing one
state to reach out and tax property in another. And these
considerations do not apply to the Philippines. Our status rests
upon a wholly distinct basis and no analogy, however remote,
cam be suggested in the relation of one state of the Union with
another or with the United States. The status of the Philippines
has been aptly defined as one which, though a part of the
United States in the international sense, is, nevertheless,
foreign thereto in a domestic sense. (Downes vs. Bidwell, 182
U. S., 244, 341.)
At any rate, we see nothing of consequence in drawing any
distinct between the operation and effect of the due-process
clause as it applies to the individual states and to the national
government of the United States. The question here involved is
essentially not one of due-process, but of the power of the
Philippine Government to tax. If that power be conceded, the
guaranty of due process cannot certainly be invoked to
frustrate it, unless the law involved is challenged, which is not,
on considerations repugnant to such guaranty of due process
of that of the equal protection of the laws, as, when the law is
alleged to be arbitrary, oppressive or discriminatory.
Originally, the settled law in the United States is that
intangibles have only one situs for the purpose of inheritance
tax, and that such situs is in the domicile of the decedent at the
time of his death. But this rule has, of late, been relaxed. The
maxim mobilia sequuntur personam, upon which the rule rests,
has been described as a mere "fiction of law having its origin in
consideration of general convenience and public policy, and
cannot be applied to limit or control the right of the state to tax
property within its jurisdiction" (State Board of Assessors vs.
Comptoir National D'Escompte, 191 U. S., 388, 403, 404), and
must "yield to established fact of legal ownership, actual
presence and control elsewhere, and cannot be applied if to do
so result in inescapable and patent injustice." (Safe Deposit &
Trust Co. vs. Virginia, 280 U. S., 83, 91-92) There is thus a
marked shift from artificial postulates of law, formulated for
reasons of convenience, to the actualities of each case.
An examination of the adjudged cases will disclose that the
relaxation of the original rule rests on either of two fundamental
considerations: (1) upon the recognition of the inherent power
of each government to tax persons, properties and rights within
its jurisdiction and enjoying, thus, the protection of its laws; and
(2) upon the principle that as o intangibles, a single location in
space is hardly possible, considering the multiple, distinct
relationships which may be entered into with respect thereto. It
is on the basis of the first consideration that the case of Burnet
vs. Brooks, supra, was decided by the Federal Supreme Court,
sustaining the power of the Government to impose an
inheritance tax upon transmission, by death of a non-resident,
of shares of stock in a domestic (America) corporation,
regardless of the situs of their corresponding certificates; and
on the basis of the second consideration, the case of Cury vs.
McCanless, supra.
In Burnet vs. Brooks, the court, in disposing of the argument
that the imposition of the federal estate tax is precluded by the
due-process clause of the Fifth Amendment, held:
The point, being solely one of jurisdiction to tax, involves none
of the other consideration raised by confiscatory or arbitrary
legislation inconsistent with the fundamental conceptions of
justice which are embodied in the due-process clause for the
protection of life, liberty, and property of all persons citizens
and friendly aliens alike. Russian Volunteer Fleet vs. United
States, 282 U. S., 481, 489; 75 Law ed., 473, 476; 41 S. Ct.,
229; Nicholas vs. Coolidge, 274 U. S., 531; 542, 71 Law ed.,
1184, 1192; 47 S. Ct., 710; 52 A. L. R., 1081; Heiner vs.
Donnon, 285 U.S., 312, 326; 76 Law ed., 772, 779; 52 S. Ct.,
358. If in the instant case the Federal Government had
jurisdiction to impose the tax, there is manifestly no ground for
assailing it. Knowlton vs. Moore, 178 U.S., 41, 109; 44 Law.
ed., 969, 996; 20 S. Ct., 747; MaGray vs. United States, 195
U.S., 27, 61; 49 Law. ed., 78; 97; 24 S. Ct., 769; 1 Ann. Cas.,
561; Flint vs. Stone Tracy Co., 220 U.S., 107, 153, 154; 55
Law. ed., 389, 414, 415; 31 S. Ct., 342; Ann. Cas., 1912B,
1312; Brushaber vs. Union p. R. Co., 240 U.S., 1, 24; 60 Law.
ed., 493, 504; 36 S. Ct., 236; L. R. A., 1917 D; 414, Ann. Cas,
1917B, 713; United States vs. Doremus, 249 U. S., 86, 93; 63
Law. ed., 439, 496; 39 S. Ct., 214. (Emphasis ours.)
And, in sustaining the power of the Federal Government to tax
properties within its borders, wherever its owner may have
been domiciled at the time of his death, the court ruled:
. . . There does not appear, a priori, to be anything contrary to
the principles of international law, or hurtful to the polity of
nations, in a State's taxing property physically situated within
its borders, wherever its owner may have been domiciled at
the time of his death. . . .
As jurisdiction may exist in more than one government, that is,
jurisdiction based on distinct grounds the citizenship of the
owner, his domicile, the source of income, the situs of the
property efforts have been made to preclude multiple
taxation through the negotiation of appropriate international
conventions. These endeavors, however, have proceeded
upon express or implied recognition, and not in denial, of the
sovereign taxing power as exerted by governments in the
exercise of jurisdiction upon any one of these grounds. . . .
(See pages 396-397; 399.)
In Curry vs. McCanless, supra, the court, in deciding the
question of whether the States of Alabama and Tennessee
may each constitutionally impose death taxes upon the transfer
of an interest in intangibles held in trust by an Alabama trustee
but passing under the will of a beneficiary decedent domiciles
in Tennessee, sustained the power of each State to impose the
tax. In arriving at this conclusion, the court made the following
observations:
In cases where the owner of intangibles confines his activity to
the place of his domicile it has been found convenient to
substitute a rule for a reason, cf. New York ex rel., Cohn vs.
Graves, 300 U.S., 308, 313; 81 Law. ed., 666, 670; 57 S. Ct.,
466; 108 A. L. R., 721; First Bank Stock Corp. vs. Minnesota,
301 U. S., 234, 241; 81 Law. ed., 1061, 1065; 57 S. Ct., 677;
113 A. L. R., 228, by saying that his intangibles are taxed at
their situs and not elsewhere, or perhaps less artificially, by
invoking the maxim mobilia sequuntur personam. Blodgett vs.
Silberman, 277 U.S., 1; 72 Law. ed., 749; S. Ct., 410, supra;
Baldwin vs. Missouri, 281 U. S., 568; 74 Law. ed., 1056; 50 S.
Ct., 436; 72 A. L. R., 1303, supra, which means only that it is
the identify owner at his domicile which gives jurisdiction to tax.
But when the taxpayer extends his activities with respect to his
intangibles, so as to avail himself of the protection and benefit
of the laws of another state, in such a way as to bring his
person or properly within the reach of the tax gatherer there,
the reason for a single place of taxation no longer obtains, and
the rule even workable substitute for the reasons may exist in
any particular case to support the constitutional power of each
state concerned to tax. Whether we regard the right of a state
to tax as founded on power over the object taxed, as declared
by Chief Justice Marshall in McCulloch vs. Maryland, 4 Wheat.,
316; 4 Law. ed., 579, supra, through dominion over tangibles
or over persons whose relationships are source of intangibles
rights, or on the benefit and protection conferred by the taxing
sovereignty, or both, it is undeniable that the state of domicile
is not deprived, by the taxpayer's activities elsewhere, of its
constitutional jurisdiction to tax, and consequently that there
are many circumstances in which more than one state may
have jurisdiction to impose a tax and measure it by some or all
of the taxpayer's intangibles. Shares or corporate stock be
taxed at the domicile of the shareholder and also at that of the
corporation which the taxing state has created and controls;
and income may be taxed both by the state where it is earned
and by the state of the recipient's domicile. protection, benefit,
and power over the subject matter are not confined to either
state. . . .(p. 1347-1349.)
. . . We find it impossible to say that taxation of intangibles can
be reduced in every case to the mere mechanical operation of
locating at a single place, and there taxing, every legal interest
growing out of all the complex legal relationships which may be
entered into between persons. This is the case because in
point of actuality those interests may be too diverse in their
relationships to various taxing jurisdictions to admit of unitary
treatment without discarding modes of taxation long accepted
and applied before the Fourteen Amendment was adopted,
and still recognized by this Court as valid. (P. 1351.)
We need not belabor the doctrines of the foregoing cases. We
believe, and so hold, that the issue here involved is controlled
by those doctrines. In the instant case, the actual situs of the
shares of stock is in the Philippines, the corporation being
domiciled therein. And besides, the certificates of stock have
remained in this country up to the time when the deceased
died in California, and they were in possession of one Syrena
McKee, secretary of the Benguet Consolidated Mining
Company, to whom they have been delivered and indorsed in
blank. This indorsement gave Syrena McKee the right to vote
the certificates at the general meetings of the stockholders, to
collect dividends, and dispose of the shares in the manner she
may deem fit, without prejudice to her liability to the owner for
violation of instructions. For all practical purposes, then,
Syrena McKee had the legal title to the certificates of stock
held in trust for the true owner thereof. In other words, the
owner residing in California has extended here her activities
with respect to her intangibles so as to avail herself of the
protection and benefit of the Philippine laws. Accordingly, the
jurisdiction of the Philippine Government to tax must be
upheld.
G.R. No. 82027 March 29, 1990
ROMARICO G. VITUG, petitioner, vs. THE HONORABLE
COURT OF APPEALS and ROWENA FAUSTINO-CORONA,
respondents.
Rufino B. Javier Law Office for petitioner.
Quisumbing, Torres & Evangelista for private respondent.

SARMIENTO, J .:
This case is a chapter in an earlier suit decided by this Court
1

involving the probate of the two wills of the late Dolores
Luchangco Vitug, who died in New York, U. S.A., on November
10, 1980, naming private respondent Rowena Faustino-Corona
executrix. In our said decision, we upheld the appointment of
Nenita Alonte as co-special administrator of Mrs. Vitug's estate
with her (Mrs. Vitug's) widower, petitioner Romarico G. Vitug,
pending probate.
On January 13, 1985, Romarico G. Vitug filed a motion asking
for authority from the probate court to sell certain shares of
stock and real properties belonging to the estate to cover
allegedly his advances to the estate in the sum of
P667,731.66, plus interests, which he claimed were personal
funds. As found by the Court of Appeals,
2
the alleged
advances consisted of P58,147.40 spent for the payment of
estate tax, P518,834.27 as deficiency estate tax, and
P90,749.99 as "increment thereto."
3
According to Mr. Vitug, he
withdrew the sums of P518,834.27 and P90,749.99 from
savings account No. 35342-038 of the Bank of America,
Makati, Metro Manila.
On April 12, 1985, Rowena Corona opposed the motion to sell
on the ground that the same funds withdrawn from savings
account No. 35342-038 were conjugal partnership properties
and part of the estate, and hence, there was allegedly no
ground for reimbursement. She also sought his ouster for
failure to include the sums in question for inventory and for
"concealment of funds belonging to the estate."
4

Vitug insists that the said funds are his exclusive property
having acquired the same through a survivorship agreement
executed with his late wife and the bank on June 19, 1970. The
agreement provides:
We hereby agree with each other and with the BANK OF
AMERICAN NATIONAL TRUST AND SAVINGS
ASSOCIATION (hereinafter referred to as the BANK), that all
money now or hereafter deposited by us or any or either of us
with the BANK in our joint savings current account shall be the
property of all or both of us and shall be payable to and
collectible or withdrawable by either or any of us during our
lifetime, and after the death of either or any of us shall belong
to and be the sole property of the survivor or survivors, and
shall be payable to and collectible or withdrawable by such
survivor or survivors.
We further agree with each other and the BANK that the
receipt or check of either, any or all of us during our lifetime, or
the receipt or check of the survivor or survivors, for any
payment or withdrawal made for our above-mentioned account
shall be valid and sufficient release and discharge of the BANK
for such payment or withdrawal.
5

The trial courts
6
upheld the validity of this agreement and
granted "the motion to sell some of the estate of Dolores L.
Vitug, the proceeds of which shall be used to pay the personal
funds of Romarico Vitug in the total sum of P667,731.66 ... ."
7

On the other hand, the Court of Appeals, in the petition for
certiorari filed by the herein private respondent, held that the
above-quoted survivorship agreement constitutes a
conveyance mortis causa which "did not comply with the
formalities of a valid will as prescribed by Article 805 of the
Civil Code,"
8
and secondly, assuming that it is a mere
donation inter vivos, it is a prohibited donation under the
provisions of Article 133 of the Civil Code.
9

The dispositive portion of the decision of the Court of Appeals
states:
WHEREFORE, the order of respondent Judge dated
November 26, 1985 (Annex II, petition) is hereby set aside
insofar as it granted private respondent's motion to sell certain
properties of the estate of Dolores L. Vitug for reimbursement
of his alleged advances to the estate, but the same order is
sustained in all other respects. In addition, respondent Judge is
directed to include provisionally the deposits in Savings
Account No. 35342-038 with the Bank of America, Makati, in
the inventory of actual properties possessed by the spouses at
the time of the decedent's death. With costs against private
respondent.
10

In his petition, Vitug, the surviving spouse, assails the
appellate court's ruling on the strength of our decisions in
Rivera v. People's Bank and Trust Co.
11
and Macam v.
Gatmaitan
12
in which we sustained the validity of "survivorship
agreements" and considering them as aleatory contracts.
13

The petition is meritorious.
The conveyance in question is not, first of all, one of mortis
causa, which should be embodied in a will. A will has been
defined as "a personal, solemn, revocable and free act by
which a capacitated person disposes of his property and rights
and declares or complies with duties to take effect after his
death."
14
In other words, the bequest or device must pertain to
the testator.
15
In this case, the monies subject of savings
account No. 35342-038 were in the nature of conjugal funds In
the case relied on, Rivera v. People's Bank and Trust Co.,
16

we rejected claims that a survivorship agreement purports to
deliver one party's separate properties in favor of the other, but
simply, their joint holdings:
xxx xxx xxx
... Such conclusion is evidently predicated on the assumption
that Stephenson was the exclusive owner of the funds-
deposited in the bank, which assumption was in turn based on
the facts (1) that the account was originally opened in the
name of Stephenson alone and (2) that Ana Rivera "served
only as housemaid of the deceased." But it not infrequently
happens that a person deposits money in the bank in the name
of another; and in the instant case it also appears that Ana
Rivera served her master for about nineteen years without
actually receiving her salary from him. The fact that
subsequently Stephenson transferred the account to the name
of himself and/or Ana Rivera and executed with the latter the
survivorship agreement in question although there was no
relation of kinship between them but only that of master and
servant, nullifies the assumption that Stephenson was the
exclusive owner of the bank account. In the absence, then, of
clear proof to the contrary, we must give full faith and credit to
the certificate of deposit which recites in effect that the funds in
question belonged to Edgar Stephenson and Ana Rivera; that
they were joint (and several) owners thereof; and that either of
them could withdraw any part or the whole of said account
during the lifetime of both, and the balance, if any, upon the
death of either, belonged to the survivor.
17

xxx xxx xxx
In Macam v. Gatmaitan,
18
it was held:
xxx xxx xxx
This Court is of the opinion that Exhibit C is an aleatory
contract whereby, according to article 1790 of the Civil Code,
one of the parties or both reciprocally bind themselves to give
or do something as an equivalent for that which the other party
is to give or do in case of the occurrence of an event which is
uncertain or will happen at an indeterminate time. As already
stated, Leonarda was the owner of the house and Juana of the
Buick automobile and most of the furniture. By virtue of Exhibit
C, Juana would become the owner of the house in case
Leonarda died first, and Leonarda would become the owner of
the automobile and the furniture if Juana were to die first. In
this manner Leonarda and Juana reciprocally assigned their
respective property to one another conditioned upon who might
die first, the time of death determining the event upon which
the acquisition of such right by the one or the other depended.
This contract, as any other contract, is binding upon the parties
thereto. Inasmuch as Leonarda had died before Juana, the
latter thereupon acquired the ownership of the house, in the
same manner as Leonarda would have acquired the ownership
of the automobile and of the furniture if Juana had died first.
19

xxx xxx xxx
There is no showing that the funds exclusively belonged to one
party, and hence it must be presumed to be conjugal, having
been acquired during the existence of the marita. relations.
20

Neither is the survivorship agreement a donation inter vivos,
for obvious reasons, because it was to take effect after the
death of one party. Secondly, it is not a donation between the
spouses because it involved no conveyance of a spouse's own
properties to the other.
It is also our opinion that the agreement involves no
modification petition of the conjugal partnership, as held by the
Court of Appeals,
21
by "mere stipulation"
22
and that it is no
"cloak"
23
to circumvent the law on conjugal property relations.
Certainly, the spouses are not prohibited by law to invest
conjugal property, say, by way of a joint and several bank
account, more commonly denominated in banking parlance as
an "and/or" account. In the case at bar, when the spouses
Vitug opened savings account No. 35342-038, they merely put
what rightfully belonged to them in a money-making venture.
They did not dispose of it in favor of the other, which would
have arguably been sanctionable as a prohibited donation. And
since the funds were conjugal, it can not be said that one
spouse could have pressured the other in placing his or her
deposits in the money pool.
The validity of the contract seems debatable by reason of its
"survivor-take-all" feature, but in reality, that contract imposed
a mere obligation with a term, the term being death. Such
agreements are permitted by the Civil Code.
24

Under Article 2010 of the Code:
ART. 2010. By an aleatory contract, one of the parties or both
reciprocally bind themselves to give or to do something in
consideration of what the other shall give or do upon the
happening of an event which is uncertain, or which is to occur
at an indeterminate time.
Under the aforequoted provision, the fulfillment of an aleatory
contract depends on either the happening of an event which is
(1) "uncertain," (2) "which is to occur at an indeterminate time."
A survivorship agreement, the sale of a sweepstake ticket, a
transaction stipulating on the value of currency, and insurance
have been held to fall under the first category, while a contract
for life annuity or pension under Article 2021, et sequentia, has
been categorized under the second.
25
In either case, the
element of risk is present. In the case at bar, the risk was the
death of one party and survivorship of the other.
However, as we have warned:
xxx xxx xxx
But although the survivorship agreement is per se not contrary
to law its operation or effect may be violative of the law. For
instance, if it be shown in a given case that such agreement is
a mere cloak to hide an inofficious donation, to transfer
property in fraud of creditors, or to defeat the legitime of a
forced heir, it may be assailed and annulled upon such
grounds. No such vice has been imputed and established
against the agreement involved in this case.
26

xxx xxx xxx
There is no demonstration here that the survivorship
agreement had been executed for such unlawful purposes, or,
as held by the respondent court, in order to frustrate our laws
on wills, donations, and conjugal partnership.
The conclusion is accordingly unavoidable that Mrs. Vitug
having predeceased her husband, the latter has acquired upon
her death a vested right over the amounts under savings
account No. 35342-038 of the Bank of America. Insofar as the
respondent court ordered their inclusion in the inventory of
assets left by Mrs. Vitug, we hold that the court was in error.
Being the separate property of petitioner, it forms no more part
of the estate of the deceased.
WHEREFORE, the decision of the respondent appellate court,
dated June 29, 1987, and its resolution, dated February 9,
1988, are SET ASIDE.
No costs.
SO ORDERED.
RAFAEL ARSENIO S. DIZON, in his capacity as the Judicial Administrator of the
Estate of the deceased JOSE P. FERNANDEZ,
Petitioner,


- versus -


COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE,
Respondents.
G.R. No. 140944

Present:

YNARES-SANTIAGO, J.,
Chairperson,
AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
NACHURA, and
REYES, JJ.

Promulgated:

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


DECISION

NACHURA, J .:


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

The Facts


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

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



COMPUTATION OF TAX

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



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

Petitioner requested the probate court's authority to sell
several properties forming part of the Estate, for the purpose of
paying its creditors, namely: Equitable Banking Corporation
(P19,756,428.31), Banque de L'Indochine et. de Suez
(US$4,828,905.90 as of January 31, 1988), Manila Banking
Corporation (P84,199,160.46 as of February 28, 1989) and State
Investment House, Inc. (P6,280,006.21). Petitioner manifested that
Manila Bank, a major creditor of the Estate was not included, as it
did not file a claim with the probate court since it had security over
several real estate properties forming part of the Estate.[16]


However, on November 26, 1991, the Assistant
Commissioner for Collection of the BIR, Themistocles Montalban,
issued Estate Tax Assessment Notice No. FAS-E-87-91-003269,[17]
demanding the payment of P66,973,985.40 as deficiency estate tax,
itemized as follows:

Deficiency Estate Tax- 1987

Estate
tax P31,868,414.48
25% surcharge- late
filing 7,967,103.62
late payment 7,967,103.62
Interest 19,121,048.68
Compromise-non
filing 25,000.00
non payment 25,000.00
no notice of death 15.00
no CPA Certificate 300.00

Total amount due &
collectible P66,973,985.40[18]



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


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

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

Nature of Document
(sic)
Exhibits

1. Letter dated October 13, 1988
from Arsenio P. Dizon addressed
to the Commissioner of Internal
Revenue informing the latter of
the special proceedings for the
settlement of the estate (p. 126,
BIR
records); "
A"

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

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

4. Attachment to Exh. "C" which
is the detailed and complete
listing of the properties of
the deceased (pp. 89-105, BIR
rec.); "C-1" to "C-17"

5. Claims against the estate filed
by Equitable Banking Corp. with
the probate Court in the amount
of P19,756,428.31 as of March 31,
1988, together with the Annexes
to the claim (pp. 64-88, BIR
records); "D" to "D-24"

6. Claim filed by Banque de L'
Indochine et de Suez with the
probate Court in the amount of
US $4,828,905.90 as of January 31,
1988 (pp. 262-265, BIR
records); "E" to "E-3"

7. Claim of the Manila Banking
Corporation (MBC) which as of
November 7, 1987 amounts to
P65,158,023.54, but recomputed
as of February 28, 1989 at a
total amount of P84,199,160.46;
together with the demand letter
from MBC's lawyer (pp. 194-197,
BIR
records); "F
" to "F-3"

8. Demand letter of Manila Banking
Corporation prepared by Asedillo,
Ramos and Associates Law Offices
addressed to Fernandez Hermanos,
Inc., represented by Jose P.
Fernandez, as mortgagors, in the
total amount of P240,479,693.17
as of February 28, 1989
(pp. 186-187, BIR
records); "G" & "G-1"

9. Claim of State Investment
House, Inc. filed with the
RTC, Branch VII of Manila,
docketed as Civil Case No.
86-38599 entitled "State
Investment House, Inc.,
Plaintiff, versus Maritime
Company Overseas, Inc. and/or
Jose P. Fernandez, Defendants,"
(pp. 200-215, BIR
records); "H" to "H-16"

10. Letter dated March 14, 1990
of Arsenio P. Dizon addressed
to Atty. Jesus M. Gonzales,
(p. 184, BIR
records); "I"

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

12. Estate Tax Return filed by
the estate of the late Jose P.
Fernandez through its authorized
representative, Atty. Jesus M.
Gonzales, for Arsenio P. Dizon,
with attachments (pp. 177-182,
BIR
records); "
K" to "K-5"

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

14. Certification of Payment of
estate taxes Nos. 2052 and
2053, both dated April 27, 1990,
issued by the Office of the
Regional Director, Revenue
Region No. 4-C, San Pablo
City, with attachments
(pp. 103-104, CTA
records.). "M" to "M-5"

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

Documents/
Signatures
BIR Record

1. Estate Tax Return prepared by
the
BIR; p
. 138

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

3. Memorandum for the
Commissioner,
dated July 19, 1991, prepared by
revenue examiners, Ma. Anabella
A.
Abuloc, Alberto S. Enriquez and
Raymund S. Gallardo; Reviewed
by
Maximino V.
Tagle pp. 143-
144

4. Signature of Alberto S.
Enriquez appearing at the
lower portion on p. 2 of Exh.
"2"; -do-

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

6. Signature of Raymund S.
Gallardo appearing at the
Lower portion on p. 2 of Exh.
"2"; -do-

7. Signature of Maximino V.
Tagle also appearing on
p. 2 of Exh.
"2"; -do-

8. Summary of revenue
Enforcement Officers Audit
Report, dated July 19,
1991; p. 139

9. Signature of Alberto
Enriquez at the lower
portion of Exh.
"3"; -do-

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

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

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

13. Demand letter (FAS-E-87-91-00),
signed by the Asst. Commissioner
for Collection for the
Commissioner
of Internal Revenue, demanding
payment of the amount of
P66,973,985.40;
and p. 169

14. Assessment Notice FAS-E-87-91-
00 pp. 169-170[22]


The CTA's Ruling


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



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

Conjugal Real
Property P 5,
062,016.00
Conjugal Personal
Prop. 33,021,
999.93
Gross Conjugal
Estate 38,08
4,015.93
Less: Deductions
26,250,000.00
Net Conjugal
Estate P 11
,834,015.93
Less: Share of Surviving
Spouse 5,917,007.96
Net Share in Conjugal
Estate P 5,917,007
.96
Add: Capital/Paraphernal
Properties P44,652,813.66
Less: Capital/Paraphernal
Deductions
44,652,813.66
Net Taxable
Estate P 5
0,569,821.62

============

Estate Tax Due P 29,935,342.97
Add: 25% Surcharge for Late
Filing 7,483,835.74
Add: Penalties for-No notice of
death 15.00
No CPA
certificate 300.00
Total deficiency estate
tax P 37,419,49
3.71

=============

exclusive of 20% interest from due date of
its payment until full payment thereof
[Sec. 283 (b), Tax Code of 1987].[25]


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


WHEREFORE, viewed from all
the foregoing, the Court finds the petition
unmeritorious and denies the same.
Petitioner and/or the heirs of Jose P.
Fernandez are hereby ordered to pay to
respondent the amount of P37,419,493.71
plus 20% interest from the due date of its
payment until full payment thereof as
estate tax liability of the estate of Jose P.
Fernandez who died on November 7, 1987.

SO ORDERED.[26]


Aggrieved, petitioner, on March 2, 1998, went to the CA via a
petition for review.[27]

The CA's Ruling
On April 30, 1999, the CA affirmed the CTA's ruling.
Adopting in full the CTA's findings, the CA ruled that the petitioner's
act of filing an estate tax return with the BIR and the issuance of BIR
Certification Nos. 2052 and 2053 did not deprive the BIR
Commissioner of her authority to re-examine or re-assess the said
return filed on behalf of the Estate.[28]


On May 31, 1999, petitioner filed a Motion for
Reconsideration[29]

which the CA denied in its Resolution[30] dated
November 3, 1999.

Hence, the instant Petition raising the following issues:

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

2. Whether or not the Court of Tax
Appeals and the Court of Appeals
erred in recognizing/considering the
estate tax return prepared and filed by
respondent BIR knowing that the
probate court appointed administrator
of the estate of Jose P. Fernandez had
previously filed one as in fact, BIR
Certification Clearance Nos. 2052
and 2053 had been issued in the
estate's favor;

3. Whether or not the Court of Tax
Appeals and the Court of Appeals
erred in disallowing the valid and
enforceable claims of creditors
against the estate, as lawful
deductions despite clear and
convincing evidence thereof; and

4. Whether or not the Court of Tax
Appeals and the Court of Appeals
erred in validating erroneous double
imputation of values on the very
same estate properties in the estate
tax return it prepared and filed
which effectively bloated the
estate's assets.[31]


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


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

The I ssues

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

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

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

The Courts Ruling

The Petition is impressed with merit.

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

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



The CTA and the CA rely solely on the case of Vda. de
Oate, which reiterated this Court's previous rulings in People v.
Napat-a[35] and People v. Mate[36] on the admission and
consideration of exhibits which were not formally offered during the
trial. Although in a long line of cases many of which were decided
after Vda. de Oate, we held that courts cannot consider evidence
which has not been formally offered,[37] nevertheless, petitioner
cannot validly assume that the doctrine laid down in Vda. de Oate
has already been abandoned. Recently, in Ramos v. Dizon,[38] this
Court, applying the said doctrine, ruled that the trial court judge
therein committed no error when he admitted and considered the
respondents' exhibits in the resolution of the case, notwithstanding
the fact that the same were not formally offered. Likewise, in Far
East Bank & Trust Company v. Commissioner of Internal
Revenue,[39] the Court made reference to said doctrine in resolving
the issues therein. Indubitably, the doctrine laid down in Vda. De
Oate still subsists in this jurisdiction. In Vda. de Oate, we held
that:


From the foregoing provision, it is
clear that for evidence to be considered,
the same must be formally offered.
Corollarily, the mere fact that a particular
document is identified and marked as an
exhibit does not mean that it has already
been offered as part of the evidence of a
party. In Interpacific Transit, Inc. v. Aviles
[186 SCRA 385], we had the occasion to
make a distinction between identification
of documentary evidence and its formal
offer as an exhibit. We said that the first is
done in the course of the trial and is
accompanied by the marking of the
evidence as an exhibit while the second is
done only when the party rests its case and
not before. A party, therefore, may opt to
formally offer his evidence if he believes
that it will advance his cause or not to do
so at all. In the event he chooses to do the
latter, the trial court is not authorized by
the Rules to consider the same.

However, in People v. Napat-a
[179 SCRA 403] citing People v. Mate
[103 SCRA 484], we relaxed the
foregoing rule and allowed evidence not
formally offered to be admitted and
considered by the trial court provided
the following requirements are present,
viz.: first, the same must have been duly
identified by testimony duly recorded
and, second, the same must have been
incorporated in the records of the
case.[40]


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

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

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


In this case, we find and so rule that
these requirements have been satisfied.
The exhibits in question were presented
and marked during the pre-trial of the
case thus, they have been incorporated
into the records. Further, Elpidio himself
explained the contents of these exhibits
when he was interrogated by respondents'
counsel...

x x x x

But what further defeats petitioner's cause
on this issue is that respondents' exhibits
were marked and admitted during the pre-
trial stage as shown by the Pre-Trial Order
quoted earlier.[44]



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

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

A formal offer is necessary
because judges are mandated to rest their
findings of facts and their judgment only
and strictly upon the evidence offered by
the parties at the trial. Its function is to
enable the trial judge to know the purpose
or purposes for which the proponent is
presenting the evidence. On the other
hand, this allows opposing parties to
examine the evidence and object to its
admissibility. Moreover, it facilitates
review as the appellate court will not be
required to review documents not
previously scrutinized by the trial court.

Strict adherence to the said rule is
not a trivial matter. The Court in
Constantino v. Court of Appeals ruled that
the formal offer of one's evidence is
deemed waived after failing to submit it
within a considerable period of time. It
explained that the court cannot admit
an offer of evidence made after a lapse
of three (3) months because to do so
would "condone an inexcusable laxity if
not non-compliance with a court order
which, in effect, would encourage
needless delays and derail the speedy
administration of justice."

Applying the aforementioned
principle in this case, we find that the trial
court had reasonable ground to consider
that petitioners had waived their right to
make a formal offer of documentary or
object evidence. Despite several
extensions of time to make their formal
offer, petitioners failed to comply with
their commitment and allowed almost five
months to lapse before finally submitting
it. Petitioners' failure to comply with the
rule on admissibility of evidence is
anathema to the efficient, effective, and
expeditious dispensation of justice.



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

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

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

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


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

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

It is noteworthy that even in the United States, there is some
dispute as to whether the deductible amount for a claim against the
estate is fixed as of the decedent's death which is the general rule, or
the same should be adjusted to reflect post-death developments, such
as where a settlement between the parties results in the reduction of
the amount actually paid.[61] On one hand, the U.S. court ruled that
the appropriate deduction is the value that the claim had at the date
of the decedent's death.[62] Also, as held in Propstra v. U.S., [63]
where a lien claimed against the estate was certain and enforceable
on the date of the decedent's death, the fact that the claimant
subsequently settled for lesser amount did not preclude the estate
from deducting the entire amount of the claim for estate tax purposes.
These pronouncements essentially confirm the general principle that
post-death developments are not material in determining the amount
of the deduction.


On the other hand, the Internal Revenue Service
(Service) opines that post-death settlement should be taken into
consideration and the claim should be allowed as a deduction only to
the extent of the amount actually paid.[64] Recognizing the dispute,
the Service released Proposed Regulations in 2007 mandating that the
deduction would be limited to the actual amount paid.[65]

In announcing its agreement with Propstra,[66] the
U.S. 5
th
Circuit Court of Appeals held:

We are persuaded that the Ninth Circuit's
decision...in Propstra correctly apply the
Ithaca Trust date-of-death valuation
principle to enforceable claims against the
estate. As we interpret Ithaca Trust, when
the Supreme Court announced the date-of-
death valuation principle, it was making a
judgment about the nature of the federal
estate tax specifically, that it is a tax
imposed on the act of transferring property
by will or intestacy and, because the act on
which the tax is levied occurs at a discrete
time, i.e., the instance of death, the net
value of the property transferred should be
ascertained, as nearly as possible, as of
that time. This analysis supports broad
application of the date-of-death valuation
rule.[67]


We express our agreement with the date-of-death valuation
rule, made pursuant to the ruling of the U.S. Supreme Court in Ithaca
Trust Co. v. United States.[68] First. There is no law, nor do we
discern any legislative intent in our tax laws, which disregards the
date-of-death valuation principle and particularly provides that post-
death developments must be considered in determining the net value
of the estate. It bears emphasis that tax burdens are not to be
imposed, nor presumed to be imposed, beyond what the statute
expressly and clearly imports, tax statutes being construed strictissimi
juris against the government.[69] Any doubt on whether a person,
article or activity is taxable is generally resolved against taxation.[70]
Second. Such construction finds relevance and consistency in our
Rules on Special Proceedings wherein the term "claims" required to
be presented against a decedent's estate is generally construed to
mean debts or demands of a pecuniary nature which could have been
enforced against the deceased in his lifetime, or liability contracted
by the deceased before his death.[71] Therefore, the claims existing
at the time of death are significant to, and should be made the basis
of, the determination of allowable deductions.

WHEREFORE, the instant Petition is GRANTED.
Accordingly, the assailed Decision dated April 30, 1999 and the
Resolution dated November 3, 1999 of the Court of Appeals in CA-
G.R. S.P. No. 46947 are REVERSED and SET ASIDE. The Bureau
of Internal Revenue's deficiency estate tax assessment against the
Estate of Jose P. Fernandez is hereby NULLIFIED. No costs.
[G.R. No. 111904. October 5, 2000]

SPS. AGRIPINO GESTOPA and ISABEL SILARIO
GESTOPA, petitioners, vs. COURT OF
APPEALS and MERCEDES DANLAG y PILAPIL,
respondents.
D E C I S I O N
QUISUMBING, J .:
This petition for review,[1] under Rule 45 of the Rules of
Court, assails the decision[2]of the Court of Appeals dated
August 31, 1993, in CA-G.R. CV No. 38266, which reversed
the judgment[3] of the Regional Trial Court of Cebu City,
Branch 5.
The facts, as culled from the records, are as follows:
Spouses Diego and Catalina Danlag were the owners
of six parcels of unregistered lands. They executed three
deeds of donation mortis causa, two of which are dated March
4, 1965 and another dated October 13, 1966, in favor of private
respondent Mercedes Danlag-Pilapil.[4] The first deed
pertained to parcels 1 & 2 with Tax Declaration Nos. 11345
and 11347, respectively. The second deed pertained to parcel
3, with TD No. 018613. The last deed pertained to parcel 4
with TD No. 016821. All deeds contained the reservation of the
rights of the donors (1) to amend, cancel or revoke the
donation during their lifetime, and (2) to sell, mortgage, or
encumber the properties donated during the donors' lifetime, if
deemed necessary.
On January 16, 1973, Diego Danlag, with the consent
of his wife, Catalina Danlag, executed a deed of donation inter
vivos[5] covering the aforementioned parcels of land plus two
other parcels with TD Nos. 11351 and 11343, respectively,
again in favor of private respondent Mercedes. This contained
two conditions, that (1) the Danlag spouses shall continue to
enjoy the fruits of the land during their lifetime, and that (2) the
donee can not sell or dispose of the land during the lifetime of
the said spouses, without their prior consent and approval.
Mercedes caused the transfer of the parcels' tax declaration to
her name and paid the taxes on them.
On June 28, 1979 and August 21, 1979, Diego and
Catalina Danlag sold parcels 3 and 4 to herein petitioners, Mr.
and Mrs. Agripino Gestopa. On September 29, 1979, the
Danlags executed a deed of revocation[6]recovering the six
parcels of land subject of the aforecited deed of donation inter
vivos.
On March 1, 1983, Mercedes Pilapil (herein private
respondent) filed with the RTC a petition against the Gestopas
and the Danlags, for quieting of title[7] over the above parcels
of land. She alleged that she was an illegitimate daughter of
Diego Danlag; that she lived and rendered incalculable
beneficial services to Diego and his mother, Maura Danlag,
when the latter was still alive. In recognition of the services she
rendered, Diego executed a Deed of Donation on March 20,
1973, conveying to her the six (6) parcels of land. She
accepted the donation in the same instrument, openly and
publicly exercised rights of ownership over the donated
properties, and caused the transfer of the tax declarations to
her name. Through machination, intimidation and undue
influence, Diego persuaded the husband of Mercedes, Eulalio
Pilapil, to buy two of the six parcels covered by the deed of
donation. Said donation inter vivos was coupled with conditions
and, according to Mercedes, since its perfection, she had
complied with all of them; that she had not been guilty of any
act of ingratitude; and that respondent Diego had no legal
basis in revoking the subject donation and then in selling the
two parcels of land to the Gestopas.
In their opposition, the Gestopas and the Danlags
averred that the deed of donation dated January 16, 1973 was
null and void because it was obtained by Mercedes through
machinations and undue influence. Even assuming it was
validly executed, the intention was for the donation to take
effect upon the death of the donor. Further, the donation was
void for it left the donor, Diego Danlag, without any property at
all.
On December 27, 1991, the trial court rendered its
decision, thus:
"WHEREFORE, the foregoing considered, the Court hereby renders
judgment in favor of the defendants and against the plaintiff:
1. Declaring the Donations Mortis Causa and
Inter Vivos as revoked, and, therefore, has
(sic) no legal effect and force of law.
2. Declaring Diego Danlag the absolute and
exclusive owner of the six (6) parcels of
land mentioned in the Deed of revocation
(Exh. P-plaintiff, Exh. 6-defendant Diego
Danlag).
3. Declaring the Deeds of Sale executed by
Diego Danlag in favor of spouses Agripino
Gestopa and Isabel Gestopa dated June
28, 1979 (Exh. S-plaintiff; Exh. 18-
defendant); Deed of Sale dated December
18, 1979 (Exh. T plaintiff; Exh. 9-
defendant); Deed of Sale dated September
14, 1979 (Exh. 8); Deed of Sale dated June
30, 1975 (Exh. U); Deed of Sale dated
March 13, 1978 (Exh. X) as valid and
enforceable duly executed in accordance
with the formalities required by law.
4. Ordering all tax declaration issued in the
name of Mercedes Danlag Y Pilapil
covering the parcel of land donated
cancelled and further restoring all the tax
declarations previously cancelled, except
parcels nos. 1 and 5 described, in the Deed
of Donation Inter Vivos (Exh. "1") and Deed
of Sale (Exh. "2") executed by defendant in
favor of plaintiff and her husband.
[5.] With respect to the contract of sale of
abovestated parcels of land, vendor Diego
Danlag and spouse or their estate have the
alternative remedies of demanding the
balance of the agreed price with legal
interest, or rescission of the contract of
sale.
SO ORDERED."[8]
In rendering the above decision, the trial court found
that the reservation clause in all the deeds of donation
indicated that Diego Danlag did not make any donation; that
the purchase by Mercedes of the two parcels of land covered
by the Deed of Donation Inter Vivos bolstered this conclusion;
that Mercedes failed to rebut the allegations of ingratitude she
committed against Diego Danlag; and that Mercedes
committed fraud and machination in preparing all the deeds of
donation without explaining to Diego Danlag their contents.
Mercedes appealed to the Court of Appeals and argued
that the trial court erred in (1) declaring the donation dated
January 16, 1973 as mortis causa and that the same was
already revoked on the ground of ingratitude; (2) finding that
Mercedes purchased from Diego Danlag the two parcels of
land already covered by the above donation and that she was
only able to pay three thousand pesos, out of the total amount
of twenty thousand pesos; (3) failing to declare that Mercedes
was an acknowledged natural child of Diego Danlag.
On August 31, 1993, the appellate court reversed the
trial court. It ruled:
"PREMISES CONSIDERED, the decision appealed from is
REVERSED and a new judgment is hereby rendered as follows:
1. Declaring the deed of donation inter vivos dated January 16, 1973
as not having been revoked and consequently the same remains in
full force and effect;
2. Declaring the Revocation of Donation dated June 4, 1979 to be
null and void and therefore of no force and effect;
3. Declaring Mercedes Danlag Pilapil as the absolute and exclusive
owner of the six (6) parcels of land specified in the above-cited deed
of donation inter vivos;
4. Declaring the Deed of Sale executed by Diego Danlag in favor of
spouses Agripino and Isabel Gestopa dated June 28, 1979 (Exhibits S
and 18), Deed of Sale dated December 18, 1979 (Exhibits T and 19),
Deed of Sale dated September 14, 1979 (Exhibit 8), Deed of Sale
dated June 30, 1975 (Exhibit U), Deed of Sale dated March 13, 1978
(Exhibit X) as well as the Deed of Sale in favor of Eulalio Danlag
dated December 27, 1978 (Exhibit 2) not to have been validly
executed;
5. Declaring the above-mentioned deeds of sale to be null and void
and therefore of no force and effect;
6. Ordering spouses Agripino Gestopa and Isabel Silerio Gestopa to
reconvey within thirty (30) days from the finality of the instant
judgment to Mercedes Danlag Pilapil the parcels of land above-
specified, regarding which titles have been subsequently fraudulently
secured, namely those covered by O.C.T. T-17836 and O.C.T. No.
17523.
7. Failing to do so, ordering the Branch Clerk of Court of the
Regional Trial Court (Branch V) at Cebu City to effect such
reconveyance of the parcels of land covered by O.C.T. T-17836 and
17523.
SO ORDERED."[9]
The Court of Appeals held that the reservation by the
donor of lifetime usufruct indicated that he transferred to
Mercedes the ownership over the donated properties; that the
right to sell belonged to the donee, and the donor's right
referred to that of merely giving consent; that the donor
changed his intention by donating inter vivos properties already
donated mortis causa; that the transfer to Mercedes' name of
the tax declarations pertaining to the donated properties
implied that the donation was inter vivos; and that Mercedes
did not purchase two of the six parcels of land donated to her.
Hence, this instant petition for review filed by the
Gestopa spouses, asserting that:
"THE HONORABLE COURT OF APPEALS, TWELFTH
DIVISION, HAS GRAVELY ERRED IN REVERSING THE
DECISION OF THE COURT A QUO."[10]
Before us, petitioners allege that the appellate court
overlooked the fact that the donor did not only reserve the right
to enjoy the fruits of the properties, but also prohibited the
donee from selling or disposing the land without the consent
and approval of the Danlag spouses. This implied that the
donor still had control and ownership over the donated
properties. Hence, the donation was post mortem.
Crucial in resolving whether the donation was inter
vivos or mortis causa is the determination of whether the donor
intended to transfer the ownership over the properties upon the
execution of the deed.[11]
In ascertaining the intention of the donor, all of the
deed's provisions must be read together.[12] The deed of
donation dated January 16, 1973, in favor of Mercedes
contained the following:
"That for and in consideration of the love and affection which the
Donor inspires in the Donee and as an act of liberality and generosity,
the Donor hereby gives, donates, transfer and conveys by way of
donation unto the herein Donee, her heirs, assigns and successors, the
above-described parcels of land;
That it is the condition of this donation that the Donor shall continue
to enjoy all the fruits of the land during his lifetime and that of his
spouse and that the donee cannot sell or otherwise, dispose of the
lands without the prior consent and approval by the Donor and her
spouse during their lifetime.
x x x
That for the same purpose as hereinbefore stated, the Donor further
states that he has reserved for himself sufficient properties in full
ownership or in usufruct enough for his maintenance of a decent
livelihood in consonance with his standing in society.
That the Donee hereby accepts the donation and expresses her thanks
and gratitude for the kindness and generosity of the Donor."[13]
Note first that the granting clause shows that Diego donated
the properties out of love and affection for the donee. This is a
mark of a donation inter vivos.[14] Second, the reservation of
lifetime usufruct indicates that the donor intended to transfer
the naked ownership over the properties. As correctly posed by
the Court of Appeals, what was the need for such reservation if
the donor and his spouse remained the owners of the
properties? Third, the donor reserved sufficient properties for
his maintenance in accordance with his standing in society,
indicating that the donor intended to part with the six parcels of
land.[15] Lastly, the donee accepted the donation. In the case
of Alejandro vs. Geraldez, 78 SCRA 245 (1977), we said that
an acceptance clause is a mark that the donation is inter vivos.
Acceptance is a requirement for donations inter vivos.
Donations mortis causa, being in the form of a will, are not
required to be accepted by the donees during the donors'
lifetime.
Consequently, the Court of Appeals did not err in
concluding that the right to dispose of the properties belonged
to the donee. The donor's right to give consent was merely
intended to protect his usufructuary interests. In Alejandro, we
ruled that a limitation on the right to sell during the donors'
lifetime implied that ownership had passed to the donees and
donation was already effective during the donors' lifetime.
The attending circumstances in the execution of the
subject donation also demonstrated the real intent of the donor
to transfer the ownership over the subject properties upon its
execution.[16] Prior to the execution of donation inter vivos, the
Danlag spouses already executed three donations mortis
causa. As correctly observed by the Court of Appeals, the
Danlag spouses were aware of the difference between the two
donations. If they did not intend to donate inter vivos, they
would not again donate the four lots already donated mortis
causa. Petitioners' counter argument that this proposition was
erroneous because six years after, the spouses changed their
intention with the deed of revocation, is not only disingenious
but also fallacious. Petitioners cannot use the deed of
revocation to show the spouses' intent because its validity is
one of the issues in this case.
Petitioners aver that Mercedes' tax declarations in her
name can not be a basis in determining the donor's intent.
They claim that it is easy to get tax declarations from the
government offices such that tax declarations are not
considered proofs of ownership. However, unless proven
otherwise, there is a presumption of regularity in the
performance of official duties.[17] We find that petitioners did
not overcome this presumption of regularity in the issuance of
the tax declarations. We also note that the Court of Appeals
did not refer to the tax declarations as proofs of ownership but
only as evidence of the intent by the donor to transfer
ownership.
Petitioners assert that since private respondent
purchased two of the six parcels of land from the donor, she
herself did not believe the donation was inter vivos. As aptly
noted by the Court of Appeals, however, it was private
respondent's husband who purchased the two parcels of land.
As a rule, a finding of fact by the appellate court,
especially when it is supported by evidence on record, is
binding on us.[18] On the alleged purchase by her husband of
two parcels, it is reasonable to infer that the purchase was
without private respondent's consent. Purchase by her
husband would make the properties conjugal to her own
disadvantage. That the purchase is against her self-interest,
weighs strongly in her favor and gives credence to her claim
that her husband was manipulated and unduly influenced to
make the purchase, in the first place.
Was the revocation valid? A valid donation, once
accepted, becomes irrevocable, except on account of
officiousness, failure by the donee to comply with the charges
imposed in the donation, or ingratitude.[19] The donor-spouses
did not invoke any of these reasons in the deed of revocation.
The deed merely stated:
"WHEREAS, while the said donation was a donation Inter Vivos, our
intention thereof is that of Mortis Causa so as we could be sure that in
case of our death, the above-described properties will be inherited
and/or succeeded by Mercedes Danlag de Pilapil; and that said
intention is clearly shown in paragraph 3 of said donation to the
effect that the Donee cannot dispose and/or sell the properties
donated during our life-time, and that we are the one enjoying all the
fruits thereof."[20]
Petitioners cited Mercedes' vehemence in prohibiting
the donor to gather coconut trees and her filing of instant
petition for quieting of title. There is nothing on record,
however, showing that private respondent prohibited the
donors from gathering coconuts. Even assuming that
Mercedes prevented the donor from gathering coconuts, this
could hardly be considered an act covered by Article 765 of the
Civil Code.[21] Nor does this Article cover respondent's filing of
the petition for quieting of title, where she merely asserted
what she believed was her right under the law.
Finally, the records do not show that the donor-spouses
instituted any action to revoke the donation in accordance with
Article 769 of the Civil Code.[22] Consequently, the supposed
revocation on September 29, 1979, had no legal effect.
WHEREFORE, the instant petition for review is
DENIED. The assailed decision of the Court of Appeals dated
August 31, 1993, is AFFIRMED.
Costs against petitioners.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ.,
concur.

G.R. No. 123206 March 22, 2000
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs. COURT OF APPEALS, COURT OF TAX APPEALS
and JOSEFINA P. PAJONAR, as Administratrix of the
Estate of Pedro P. Pajonar, respondents.
R E S O L U T I O N
GONZAGA-REYES, J .:
Assailed in this petition for review on certiorari is the December
21, 1995 Decision
1
of the Court of Appeals
2
in CA-G.R. Sp. No.
34399 affirming the June 7, 1994 Resolution of the Court of
Tax Appeals in CTA Case No. 4381 granting private
respondent Josefina P. Pajonar, as administratrix of the estate
of Pedro P. Pajonar, a tax refund in the amount of P76,502.42,
representing erroneously paid estate taxes for the year 1988.
Pedro Pajonar, a member of the Philippine Scout, Bataan
Contingent, during the second World War, was a part of the
infamous Death March by reason of which he suffered shock
and became insane. His sister Josefina Pajonar became the
guardian over his person, while his property was placed under
the guardianship of the Philippine National Bank (PNB) by the
Regional Trial Court of Dumaguete City, Branch 31, in Special
Proceedings No. 1254. He died on January 10, 1988. He was
survived by his two brothers Isidro P. Pajonar and Gregorio
Pajonar, his sister Josefina Pajonar, nephews Concordio
Jandog and Mario Jandog and niece Conchita Jandog.
On May 11, 1988, the PNB filed an accounting of the
decedent's property under guardianship valued at
P3,037,672.09 in Special Proceedings No. 1254. However, the
PNB did not file an estate tax return, instead it advised Pedro
Pajonar's heirs to execute an extrajudicial settlement and to
pay the taxes on his estate. On April 5, 1988, pursuant to the
assessment by the Bureau of Internal Revenue (BIR), the
estate of Pedro Pajonar paid taxes in the amount of P2,557.
On May 19, 1988, Josefina Pajonar filed a petition with the
Regional Trial Court of Dumaguete City for the issuance in her
favor of letters of administration of the estate of her brother.
The case was docketed as Special Proceedings No. 2399. On
July 18, 1988, the trial court appointed Josefina Pajonar as the
regular administratrix of Pedro Pajonar's estate.
On December 19, 1988, pursuant to a second assessment by
the BIR for deficiency estate tax, the estate of Pedro Pajonar
paid estate tax in the amount of P1,527,790.98. Josefina
Pajonar, in her capacity as administratrix and heir of Pedro
Pajonar's estate, filed a protest on January 11, 1989 with the
BIR praying that the estate tax payment in the amount of
P1,527,790.98, or at least some portion of it, be returned to the
heirs.
3

However, on August 15, 1989, without waiting for her protest to
be resolved by the BIR, Josefina Pajonar filed a petition for
review with the Court of Tax Appeals (CTA), praying for the
refund of P1,527,790.98, or in the alternative, P840,202.06, as
erroneously paid estate tax.
4
The case was docketed as CTA
Case No. 4381.
On May 6, 1993, the CTA ordered the Commissioner of
Internal Revenue to refund Josefina Pajonar the amount of
P252,585.59, representing erroneously paid estate tax for the
year 1988.
5
Among the deductions from the gross estate
allowed by the CTA were the amounts of P60,753 representing
the notarial fee for the Extrajudicial Settlement and the amount
of P50,000 as the attorney's fees in Special Proceedings No.
1254 for guardianship.
6

On June 15, 1993, the Commissioner of Internal Revenue filed
a motion for reconsideration
7
of the CTA's May 6, 1993
decision asserting, among others, that the notarial fee for the
Extrajudicial Settlement and the attorney's fees in the
guardianship proceedings are not deductible expenses.
On June 7, 1994, the CTA issued the assailed Resolution
8

ordering the Commissioner of Internal Revenue to refund
Josefina Pajonar, as administratrix of the estate of Pedro
Pajonar, the amount of P76,502.42 representing erroneously
paid estate tax for the year 1988. Also, the CTA upheld the
validity of the deduction of the notarial fee for the Extrajudicial
Settlement and the attorney's fees in the guardianship
proceedings.
On July 5, 1994, the Commissioner of Internal Revenue filed
with the Court of Appeals a petition for review of the CTA's
May 6, 1993 Decision and its June 7, 1994 Resolution,
questioning the validity of the abovementioned deductions. On
December 21, 1995, the Court of Appeals denied the
Commissioner's petition.
9

Hence, the present appeal by the Commissioner of Internal
Revenue.
The sole issue in this case involves the construction of section
79 10 of the National Internal Revenue Code
11
(Tax Code)
which provides for the allowable deductions from the gross
estate of the decedent. More particularly, the question is
whether the notarial fee paid for the extrajudicial settlement in
the amount of P60,753 and the attorney's fees in the
guardianship proceedings in the amount of P50,000 may be
allowed as deductions from the gross estate of decedent in
order to arrive at the value of the net estate.
We answer this question in the affirmative, thereby upholding
the decisions of the appellate courts.
In its May 6, 1993 Decision, the Court of Tax Appeals ruled
thus:
Respondent maintains that only judicial expenses of the
testamentary or intestate proceedings are allowed as a
deduction to the gross estate. The amount of P60,753.00 is
quite extraordinary for a mere notarial fee.
This Court adopts the view under American jurisprudence that
expenses incurred in the extrajudicial settlement of the estate
should be allowed as a deduction from the gross estate. "There
is no requirement of formal administration. It is sufficient that
the expense be a necessary contribution toward the settlement
of the case." [ 34 Am. Jur. 2d, p. 765; Nolledo, Bar Reviewer in
Taxation, 10th Ed. (1990), p. 481]
x x x x x x x x x
The attorney's fees of P50,000.00, which were already incurred
but not yet paid, refers to the guardianship proceeding filed by
PNB, as guardian over the ward of Pedro Pajonar, docketed as
Special Proceeding No. 1254 in the RTC (Branch XXXI) of
Dumaguete City. . . .
x x x x x x x x x
The guardianship proceeding had been terminated upon
delivery of the residuary estate to the heirs entitled thereto.
Thereafter, PNB was discharged of any further responsibility.
Attorney's fees in order to be deductible from the gross estate
must be essential to the collection of assets, payment of debts
or the distribution of the property to the persons entitled to it.
The services for which the fees are charged must relate to the
proper settlement of the estate. [34 Am. Jur. 2d 767.] In this
case, the guardianship proceeding was necessary for the
distribution of the property of the late Pedro Pajonar to his
rightful heirs.
x x x x x x x x x
PNB was appointed as guardian over the assets of the late
Pedro Pajonar, who, even at the time of his death, was
incompetent by reason of insanity. The expenses incurred in
the guardianship proceeding was but a necessary expense in
the settlement of the decedent's estate. Therefore, the
attorney's fee incurred in the guardianship proceedings
amounting to P50,000.00 is a reasonable and necessary
business expense deductible from the gross estate of the
decedent.
12

Upon a motion for reconsideration filed by the Commissioner of
Internal Revenue, the Court of Tax Appeals modified its
previous ruling by reducing the refundable amount to
P76,502.43 since it found that a deficiency interest should be
imposed and the compromise penalty excluded.
13
However,
the tax court upheld its previous ruling regarding the legality of
the deductions
It is significant to note that the inclusion of the estate tax law in
the codification of all our national internal revenue laws with
the enactment of the National Internal Revenue Code in 1939
were copied from the Federal Law of the United States. [
UMALI, Reviewer in Taxation (1985), p. 285 ] The 1977 Tax
Code, promulgated by Presidential Decree No. 1158, effective
June 3, 1977, reenacted substantially all the provisions of the
old law on estate and gift taxes, except the sections relating to
the meaning of gross estate and gift. [ Ibid, p. 286. ]
In the United States, [a]dministrative expenses, executor's
commissions and attorney's fees are considered allowable
deductions from the Gross Estate. Administrative expenses are
limited to such expenses as are actually and necessarily
incurred in the administration of a decedent's estate.
[PRENTICE-HALL, Federal Taxes Estate and Gift Taxes
(1936), p. 120, 533.] Necessary expenses of administration are
such expenses as are entailed for the preservation and
productivity of the estate and for its management for purposes
of liquidation, payment of debts and distribution of the residue
among the persons entitled thereto. [Lizarraga Hermanos vs.
Abada, 40 Phil. 124.] They must be incurred for the settlement
of the estate as a whole. [34 Am. Jur. 2d, p. 765.] Thus, where
there were no substantial community debts and it was
unnecessary to convert community property to cash, the only
practical purpose of administration being the payment of estate
taxes, full deduction was allowed for attorney's fees and
miscellaneous expenses charged wholly to decedent's estate.
[Ibid., citing Estate of Helis, 26 T.C. 143 (A).]
Petitioner stated in her protest filed with the BIR that "upon the
death of the ward, the PNB, which was still the guardian of the
estate, (Annex "Z"), did not file an estate tax return; however, it
advised the heirs to execute an extrajudicial settlement, to pay
taxes and to post a bond equal to the value of the estate, for
which the state paid P59,341.40 for the premiums. (See Annex
"K")." [p. 17, CTA record.] Therefore, it would appear from the
records of the case that the only practical purpose of settling
the estate by means of an extrajudicial settlement pursuant to
Section 1 of Rule 74 of the Rules of Court was for the payment
of taxes and the distribution of the estate to the heirs. A fortiori,
since our estate tax laws are of American origin, the
interpretation adopted by American Courts has some
persuasive effect on the interpretation of our own estate tax
laws on the subject.
Anent the contention of respondent that the attorney's fees of
P50,000.00 incurred in the guardianship proceeding should not
be deducted from the Gross Estate, We consider the same
unmeritorious. Attorneys' and guardians' fees incurred in a
trustee's accounting of a taxable inter vivos trust attributable to
the usual issues involved in such an accounting was held to be
proper deductions because these are expenses incurred in
terminating an inter vivos trust that was includible in the
decedent's estate. [Prentice Hall, Federal Taxes on Estate and
Gift, p. 120, 861] Attorney's fees are allowable deductions if
incurred for the settlement of the estate. It is noteworthy to
point that PNB was appointed the guardian over the assets of
the deceased. Necessarily the assets of the deceased formed
part of his gross estate. Accordingly, all expenses incurred in
relation to the estate of the deceased will be deductible for
estate tax purposes provided these are necessary and ordinary
expenses for administration of the settlement of the estate.
14

In upholding the June 7, 1994 Resolution of the Court of Tax
Appeals, the Court of Appeals held that:
2. Although the Tax Code specifies "judicial expenses of the
testamentary or intestate proceedings," there is no reason why
expenses incurred in the administration and settlement of an
estate in extrajudicial proceedings should not be allowed.
However, deduction is limited to such administration expenses
as are actually and necessarily incurred in the collection of the
assets of the estate, payment of the debts, and distribution of
the remainder among those entitled thereto. Such expenses
may include executor's or administrator's fees, attorney's fees,
court fees and charges, appraiser's fees, clerk hire, costs of
preserving and distributing the estate and storing or
maintaining it, brokerage fees or commissions for selling or
disposing of the estate, and the like. Deductible attorney's fees
are those incurred by the executor or administrator in the
settlement of the estate or in defending or prosecuting claims
against or due the estate. (Estate and Gift Taxation in the
Philippines, T. P. Matic, Jr., 1981 Edition, p. 176).
x x x x x x x x x
It is clear then that the extrajudicial settlement was for the
purpose of payment of taxes and the distribution of the estate
to the heirs. The execution of the extrajudicial settlement
necessitated the notarization of the same. Hence the Contract
of Legal Services of March 28, 1988 entered into between
respondent Josefina Pajonar and counsel was presented in
evidence for the purpose of showing that the amount of
P60,753.00 was for the notarization of the Extrajudicial
Settlement. It follows then that the notarial fee of P60,753.00
was incurred primarily to settle the estate of the deceased
Pedro Pajonar. Said amount should then be considered an
administration expenses actually and necessarily incurred in
the collection of the assets of the estate, payment of debts and
distribution of the remainder among those entitled thereto.
Thus, the notarial fee of P60,753 incurred for the Extrajudicial
Settlement should be allowed as a deduction from the gross
estate.
3. Attorney's fees, on the other hand, in order to be deductible
from the gross estate must be essential to the settlement of the
estate.
The amount of P50,000.00 was incurred as attorney's fees in
the guardianship proceedings in Spec. Proc. No. 1254.
Petitioner contends that said amount are not expenses of the
testamentary or intestate proceedings as the guardianship
proceeding was instituted during the lifetime of the decedent
when there was yet no estate to be settled.
Again, this contention must fail.
The guardianship proceeding in this case was necessary for
the distribution of the property of the deceased Pedro Pajonar.
As correctly pointed out by respondent CTA, the PNB was
appointed guardian over the assets of the deceased, and that
necessarily the assets of the deceased formed part of his
gross estate. . . .
x x x x x x x x x
It is clear therefore that the attorney's fees incurred in the
guardianship proceeding in Spec. Proc. No. 1254 were
essential to the distribution of the property to the persons
entitled thereto. Hence, the attorney's fees incurred in the
guardianship proceedings in the amount of P50,000.00 should
be allowed as a deduction from the gross estate of the
decedent.
15

The deductions from the gross estate permitted under section
79 of the Tax Code basically reproduced the deductions
allowed under Commonwealth Act No. 466 (CA 466),
otherwise known as the National Internal Revenue Code of
1939,
16
and which was the first codification of Philippine tax
laws. Section 89 (a) (1) (B) of CA 466 also provided for the
deduction of the "judicial expenses of the testamentary or
intestate proceedings" for purposes of determining the value of
the net estate. Philippine tax laws were, in turn, based on the
federal tax laws of the United States.
17
In accord with
established rules of statutory construction, the decisions of
American courts construing the federal tax code are entitled to
great weight in the interpretation of our own tax laws.
18

Judicial expenses are expenses of administration.
19

Administration expenses, as an allowable deduction from the
gross estate of the decedent for purposes of arriving at the
value of the net estate, have been construed by the federal
and state courts of the United States to include all expenses
"essential to the collection of the assets, payment of debts or
the distribution of the property to the persons entitled to it."
20

In other words, the expenses must be essential to the proper
settlement of the estate. Expenditures incurred for the
individual benefit of the heirs, devisees or legatees are not
deductible.
21
This distinction has been carried over to our
jurisdiction. Thus, in Lorenzo v. Posadas
22
the Court
construed the phrase "judicial expenses of the testamentary or
intestate proceedings" as not including the compensation paid
to a trustee of the decedent's estate when it appeared that
such trustee was appointed for the purpose of managing the
decedent's real estate for the benefit of the testamentary heir.
In another case, the Court disallowed the premiums paid on
the bond filed by the administrator as an expense of
administration since the giving of a bond is in the nature of a
qualification for the office, and not necessary in the settlement
of the estate.
23
Neither may attorney's fees incident to
litigation incurred by the heirs in asserting their respective
rights be claimed as a deduction from the gross estate.
24
1wphi1
Coming to the case at bar, the notarial fee paid for the
extrajudicial settlement is clearly a deductible expense since
such settlement effected a distribution of Pedro Pajonar's
estate to his lawful heirs. Similarly, the attorney's fees paid to
PNB for acting as the guardian of Pedro Pajonar's property
during his lifetime should also be considered as a deductible
administration expense. PNB provided a detailed accounting of
decedent's property and gave advice as to the proper
settlement of the latter's estate, acts which contributed towards
the collection of decedent's assets and the subsequent
settlement of the estate.
We find that the Court of Appeals did not commit reversible
error in affirming the questioned resolution of the Court of Tax
Appeals.
WHEREFORE, the December 21, 1995 Decision of the Court
of Appeals is AFFIRMED. The notarial fee for the extrajudicial
settlement and the attorney's fees in the guardianship
proceedings are allowable deductions from the gross estate of
Pedro Pajonar.1wphi1.nt
SO ORDERED.