ESTATE TAXES

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-43082

June 18, 1937

PABLO LORENZO, as trustee of the estate of Thomas Hanley, deceased, plaintiff-appellant,

vs.
JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellant.
Pablo Lorenzo and Delfin Joven for plaintiff-appellant.
Office of the Solicitor-General Hilado for defendant-appellant.
LAUREL, J.:
On October 4, 1932, the plaintiff Pablo Lorenzo, in his capacity as trustee of the estate of Thomas Hanley, deceased, brought this action in
the Court of First Instance of Zamboanga against the defendant, Juan Posadas, Jr., then the Collector of Internal Revenue, for the refund
of the amount of P2,052.74, paid by the plaintiff as inheritance tax on the estate of the deceased, and for the collection of interst thereon at
the rate of 6 per cent per annum, computed from September 15, 1932, the date when the aforesaid tax was [paid under protest. The
defendant set up a counterclaim for P1,191.27 alleged to be interest due on the tax in question and which was not included in the original
assessment. From the decision of the Court of First Instance of Zamboanga dismissing both the plaintiff's complaint and the defendant's
counterclaim, both parties appealed to this court.
It appears that on May 27, 1922, one Thomas Hanley died in Zamboanga, Zamboanga, leaving a will (Exhibit 5) and considerable amount
of real and personal properties. On june 14, 1922, proceedings for the probate of his will and the settlement and distribution of his estate
were begun in the Court of First Instance of Zamboanga. The will was admitted to probate. Said will provides, among other things, as
follows:
4. I direct that any money left by me be given to my nephew Matthew Hanley.
5. I direct that all real estate owned by me at the time of my death be not sold or otherwise disposed of for a period of ten (10)
years after my death, and that the same be handled and managed by the executors, and proceeds thereof to be given to my
nephew, Matthew Hanley, at Castlemore, Ballaghaderine, County of Rosecommon, Ireland, and that he be directed that the same
be used only for the education of my brother's children and their descendants.
6. I direct that ten (10) years after my death my property be given to the above mentioned Matthew Hanley to be disposed of in
the way he thinks most advantageous.
xxx

xxx

xxx

8. I state at this time I have one brother living, named Malachi Hanley, and that my nephew, Matthew Hanley, is a son of my said
brother, Malachi Hanley.
The Court of First Instance of Zamboanga considered it proper for the best interests of ther estate to appoint a trustee to administer the
real properties which, under the will, were to pass to Matthew Hanley ten years after the two executors named in the will, was, on March 8,
1924, appointed trustee. Moore took his oath of office and gave bond on March 10, 1924. He acted as trustee until February 29, 1932,
when he resigned and the plaintiff herein was appointed in his stead.
During the incumbency of the plaintiff as trustee, the defendant Collector of Internal Revenue, alleging that the estate left by the deceased
at the time of his death consisted of realty valued at P27,920 and personalty valued at P1,465, and allowing a deduction of P480.81,
assessed against the estate an inheritance tax in the amount of P1,434.24 which, together with the penalties for deliquency in payment
consisting of a 1 per cent monthly interest from July 1, 1931 to the date of payment and a surcharge of 25 per cent on the tax, amounted to
P2,052.74. On March 15, 1932, the defendant filed a motion in the testamentary proceedings pending before the Court of First Instance of
Zamboanga (Special proceedings No. 302) praying that the trustee, plaintiff herein, be ordered to pay to the Government the said sum of

P2,052.74. The motion was granted. On September 15, 1932, the plaintiff paid said amount under protest, notifying the defendant at the
same time that unless the amount was promptly refunded suit would be brought for its recovery. The defendant overruled the plaintiff's
protest and refused to refund the said amount hausted, plaintiff went to court with the result herein above indicated.
In his appeal, plaintiff contends that the lower court erred:
I. In holding that the real property of Thomas Hanley, deceased, passed to his instituted heir, Matthew Hanley, from the moment of
the death of the former, and that from the time, the latter became the owner thereof.
II. In holding, in effect, that there was deliquency in the payment of inheritance tax due on the estate of said deceased.
III. In holding that the inheritance tax in question be based upon the value of the estate upon the death of the testator, and not, as
it should have been held, upon the value thereof at the expiration of the period of ten years after which, according to the testator's
will, the property could be and was to be delivered to the instituted heir.
IV. In not allowing as lawful deductions, in the determination of the net amount of the estate subject to said tax, the amounts
allowed by the court as compensation to the "trustees" and paid to them from the decedent's estate.
V. In not rendering judgment in favor of the plaintiff and in denying his motion for new trial.
The defendant-appellant contradicts the theories of the plaintiff and assigns the following error besides:
The lower court erred in not ordering the plaintiff to pay to the defendant the sum of P1,191.27, representing part of the interest at
the rate of 1 per cent per month from April 10, 1924, to June 30, 1931, which the plaintiff had failed to pay on the inheritance tax
assessed by the defendant against the estate of Thomas Hanley.
The following are the principal questions to be decided by this court in this appeal: (a) When does the inheritance tax accrue and when
must it be satisfied? (b) Should the inheritance tax be computed on the basis of the value of the estate at the time of the testator's death, or
on its value ten years later? (c) In determining the net value of the estate subject to tax, is it proper to deduct the compensation due to
trustees? (d) What law governs the case at bar? Should the provisions of Act No. 3606 favorable to the tax-payer be given retroactive
effect? (e) Has there been deliquency in the payment of the inheritance tax? If so, should the additional interest claimed by the defendant
in his appeal be paid by the estate? Other points of incidental importance, raised by the parties in their briefs, will be touched upon in the
course of this opinion.
(a) The accrual of the inheritance tax is distinct from the obligation to pay the same. Section 1536 as amended, of the Administrative Code,
imposes the tax upon "every transmission by virtue of inheritance, devise, bequest, giftmortis causa, or advance in anticipation of
inheritance,devise, or bequest." The tax therefore is upon transmission or the transfer or devolution of property of a decedent, made
effective by his death. (61 C. J., p. 1592.) It is in reality an excise or privilege tax imposed on the right to succeed to, receive, or take
property by or under a will or the intestacy law, or deed, grant, or gift to become operative at or after death. Acording to article 657 of the
Civil Code, "the rights to the succession of a person are transmitted from the moment of his death." "In other words", said Arellano, C. J.,
". . . the heirs succeed immediately to all of the property of the deceased ancestor. The property belongs to the heirs at the moment of the
death of the ancestor as completely as if the ancestor had executed and delivered to them a deed for the same before his death." (Bondad
vs. Bondad, 34 Phil., 232. See also, Mijares vs. Nery, 3 Phil., 195; Suilong & Co., vs. Chio-Taysan, 12 Phil., 13; Lubrico vs. Arbado, 12
Phil., 391; Innocencio vs. Gat-Pandan, 14 Phil., 491; Aliasas vs.Alcantara, 16 Phil., 489; Ilustre vs. Alaras Frondosa, 17 Phil., 321;
Malahacan vs. Ignacio, 19 Phil., 434; Bowa vs. Briones, 38 Phil., 27; Osario vs. Osario & Yuchausti Steamship Co., 41 Phil., 531; Fule vs.
Fule, 46 Phil., 317; Dais vs. Court of First Instance of Capiz, 51 Phil., 396; Baun vs. Heirs of Baun, 53 Phil., 654.) Plaintiff, however, asserts
that while article 657 of the Civil Code is applicable to testate as well as intestate succession, it operates only in so far as forced heirs are
concerned. But the language of article 657 of the Civil Code is broad and makes no distinction between different classes of heirs. That
article does not speak of forced heirs; it does not even use the word "heir". It speaks of the rights of succession and the transmission
thereof from the moment of death. The provision of section 625 of the Code of Civil Procedure regarding the authentication and probate of
a will as a necessary condition to effect transmission of property does not affect the general rule laid down in article 657 of the Civil Code.
The authentication of a will implies its due execution but once probated and allowed the transmission is effective as of the death of the
testator in accordance with article 657 of the Civil Code. Whatever may be the time when actual transmission of the inheritance takes
place, succession takes place in any event at the moment of the decedent's death. The time when the heirs legally succeed to the
inheritance may differ from the time when the heirs actually receive such inheritance. "Poco importa", says Manresa commenting on article
657 of the Civil Code, "que desde el falleimiento del causante, hasta que el heredero o legatario entre en posesion de los bienes de la
herencia o del legado, transcurra mucho o poco tiempo, pues la adquisicion ha de retrotraerse al momento de la muerte, y asi lo ordena el

articulo 989, que debe considerarse como complemento del presente." (5 Manresa, 305; see also, art. 440, par. 1, Civil Code.) Thomas
Hanley having died on May 27, 1922, the inheritance tax accrued as of the date.
From the fact, however, that Thomas Hanley died on May 27, 1922, it does not follow that the obligation to pay the tax arose as of the date.
The time for the payment on inheritance tax is clearly fixed by section 1544 of the Revised Administrative Code as amended by Act No.
3031, in relation to section 1543 of the same Code. The two sections follow:
SEC. 1543. Exemption of certain acquisitions and transmissions. The following shall not be taxed:
(a) The merger of the usufruct in the owner of the naked title.
(b) The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the trustees.
(c) The transmission from the first heir, legatee, or donee in favor of another beneficiary, in accordance with the desire of
the predecessor.
In the last two cases, if the scale of taxation appropriate to the new beneficiary is greater than that paid by the first, the former
must pay the difference.
SEC. 1544. When tax to be paid. The tax fixed in this article shall be paid:
(a) In the second and third cases of the next preceding section, before entrance into possession of the property.
(b) In other cases, within the six months subsequent to the death of the predecessor; but if judicial testamentary or
intestate proceedings shall be instituted prior to the expiration of said period, the payment shall be made by the executor
or administrator before delivering to each beneficiary his share.
If the tax is not paid within the time hereinbefore prescribed, interest at the rate of twelve per centum per annum shall be added
as part of the tax; and to the tax and interest due and unpaid within ten days after the date of notice and demand thereof by the
collector, there shall be further added a surcharge of twenty-five per centum.
A certified of all letters testamentary or of admisitration shall be furnished the Collector of Internal Revenue by the Clerk of Court
within thirty days after their issuance.
It should be observed in passing that the word "trustee", appearing in subsection (b) of section 1543, should read "fideicommissary" or
"cestui que trust". There was an obvious mistake in translation from the Spanish to the English version.
The instant case does fall under subsection (a), but under subsection (b), of section 1544 above-quoted, as there is here no fiduciary heirs,
first heirs, legatee or donee. Under the subsection, the tax should have been paid before the delivery of the properties in question to P. J.
M. Moore as trustee on March 10, 1924.
(b) The plaintiff contends that the estate of Thomas Hanley, in so far as the real properties are concerned, did not and could not legally
pass to the instituted heir, Matthew Hanley, until after the expiration of ten years from the death of the testator on May 27, 1922 and, that
the inheritance tax should be based on the value of the estate in 1932, or ten years after the testator's death. The plaintiff introduced
evidence tending to show that in 1932 the real properties in question had a reasonable value of only P5,787. This amount added to the
value of the personal property left by the deceased, which the plaintiff admits is P1,465, would generate an inheritance tax which,
excluding deductions, interest and surcharge, would amount only to about P169.52.
If death is the generating source from which the power of the estate to impose inheritance taxes takes its being and if, upon the death of
the decedent, succession takes place and the right of the estate to tax vests instantly, the tax should be measured by the vlaue of the
estate as it stood at the time of the decedent's death, regardless of any subsequent contingency value of any subsequent increase or
decrease in value. (61 C. J., pp. 1692, 1693; 26 R. C. L., p. 232; Blakemore and Bancroft, Inheritance Taxes, p. 137. See also Knowlton vs.
Moore, 178 U.S., 41; 20 Sup. Ct. Rep., 747; 44 Law. ed., 969.) "The right of the state to an inheritance tax accrues at the moment of death,
and hence is ordinarily measured as to any beneficiary by the value at that time of such property as passes to him. Subsequent
appreciation or depriciation is immaterial." (Ross, Inheritance Taxation, p. 72.)

Our attention is directed to the statement of the rule in Cyclopedia of Law of and Procedure (vol. 37, pp. 1574, 1575) that, in the case of
contingent remainders, taxation is postponed until the estate vests in possession or the contingency is settled. This rule was formerly
followed in New York and has been adopted in Illinois, Minnesota, Massachusetts, Ohio, Pennsylvania and Wisconsin. This rule, horever, is
by no means entirely satisfactory either to the estate or to those interested in the property (26 R. C. L., p. 231.). Realizing, perhaps, the
defects of its anterior system, we find upon examination of cases and authorities that New York has varied and now requires the immediate
appraisal of the postponed estate at its clear market value and the payment forthwith of the tax on its out of the corpus of the estate
transferred. (In re Vanderbilt, 172 N. Y., 69; 69 N. E., 782; In re Huber, 86 N. Y. App. Div., 458; 83 N. Y. Supp., 769; Estate of Tracy, 179 N.
Y., 501; 72 N. Y., 519; Estate of Brez, 172 N. Y., 609; 64 N. E., 958; Estate of Post, 85 App. Div., 611; 82 N. Y. Supp., 1079. Vide also,
Saltoun vs. Lord Advocate, 1 Peter. Sc. App., 970; 3 Macq. H. L., 659; 23 Eng. Rul. Cas., 888.) California adheres to this new rule (Stats.
1905, sec. 5, p. 343).
But whatever may be the rule in other jurisdictions, we hold that a transmission by inheritance is taxable at the time of the predecessor's
death, notwithstanding the postponement of the actual possession or enjoyment of the estate by the beneficiary, and the tax measured by
the value of the property transmitted at that time regardless of its appreciation or depreciation.
(c) Certain items are required by law to be deducted from the appraised gross in arriving at the net value of the estate on which the
inheritance tax is to be computed (sec. 1539, Revised Administrative Code). In the case at bar, the defendant and the trial court allowed a
deduction of only P480.81. This sum represents the expenses and disbursements of the executors until March 10, 1924, among which
were their fees and the proven debts of the deceased. The plaintiff contends that the compensation and fees of the trustees, which
aggregate P1,187.28 (Exhibits C, AA, EE, PP, HH, JJ, LL, NN, OO), should also be deducted under section 1539 of the Revised
Administrative Code which provides, in part, as follows: "In order to determine the net sum which must bear the tax, when an inheritance is
concerned, there shall be deducted, in case of a resident, . . . the judicial expenses of the testamentary or intestate proceedings, . . . ."
A trustee, no doubt, is entitled to receive a fair compensation for his services (Barney vs. Saunders, 16 How., 535; 14 Law. ed., 1047). But
from this it does not follow that the compensation due him may lawfully be deducted in arriving at the net value of the estate subject to tax.
There is no statute in the Philippines which requires trustees' commissions to be deducted in determining the net value of the estate
subject to inheritance tax (61 C. J., p. 1705). Furthermore, though a testamentary trust has been created, it does not appear that the
testator intended that the duties of his executors and trustees should be separated. (Ibid.; In re Vanneck's Estate, 161 N. Y. Supp., 893;
175 App. Div., 363; In re Collard's Estate, 161 N. Y. Supp., 455.) On the contrary, in paragraph 5 of his will, the testator expressed the
desire that his real estate be handled and managed by his executors until the expiration of the period of ten years therein provided. Judicial
expenses are expenses of administration (61 C. J., p. 1705) but, in State vs. Hennepin County Probate Court (112 N. W., 878; 101 Minn.,
485), it was said: ". . . The compensation of a trustee, earned, not in the administration of the estate, but in the management thereof for the
benefit of the legatees or devises, does not come properly within the class or reason for exempting administration expenses. . . . Service
rendered in that behalf have no reference to closing the estate for the purpose of a distribution thereof to those entitled to it, and are not
required or essential to the perfection of the rights of the heirs or legatees. . . . Trusts . . . of the character of that here before the court, are
created for the the benefit of those to whom the property ultimately passes, are of voluntary creation, and intended for the preservation of
the estate. No sound reason is given to support the contention that such expenses should be taken into consideration in fixing the value of
the estate for the purpose of this tax."
(d) The defendant levied and assessed the inheritance tax due from the estate of Thomas Hanley under the provisions of section 1544 of
the Revised Administrative Code, as amended by section 3 of Act No. 3606. But Act No. 3606 went into effect on January 1, 1930. It,
therefore, was not the law in force when the testator died on May 27, 1922. The law at the time was section 1544 above-mentioned, as
amended by Act No. 3031, which took effect on March 9, 1922.
It is well-settled that inheritance taxation is governed by the statute in force at the time of the death of the decedent (26 R. C. L., p. 206; 4
Cooley on Taxation, 4th ed., p. 3461). The taxpayer can not foresee and ought not to be required to guess the outcome of pending
measures. Of course, a tax statute may be made retroactive in its operation. Liability for taxes under retroactive legislation has been "one
of the incidents of social life." (Seattle vs. Kelleher, 195 U. S., 360; 49 Law. ed., 232 Sup. Ct. Rep., 44.) But legislative intent that a tax
statute should operate retroactively should be perfectly clear. (Scwab vs. Doyle, 42 Sup. Ct. Rep., 491; Smietanka vs. First Trust & Savings
Bank, 257 U. S., 602; Stockdale vs. Insurance Co., 20 Wall., 323; Lunch vs. Turrish, 247 U. S., 221.) "A statute should be considered as
prospective in its operation, whether it enacts, amends, or repeals an inheritance tax, unless the language of the statute clearly demands
or expresses that it shall have a retroactive effect, . . . ." (61 C. J., P. 1602.) Though the last paragraph of section 5 of Regulations No. 65
of the Department of Finance makes section 3 of Act No. 3606, amending section 1544 of the Revised Administrative Code, applicable to
all estates the inheritance taxes due from which have not been paid, Act No. 3606 itself contains no provisions indicating legislative intent
to give it retroactive effect. No such effect can begiven the statute by this court.
The defendant Collector of Internal Revenue maintains, however, that certain provisions of Act No. 3606 are more favorable to the
taxpayer than those of Act No. 3031, that said provisions are penal in nature and, therefore, should operate retroactively in conformity with
the provisions of article 22 of the Revised Penal Code. This is the reason why he applied Act No. 3606 instead of Act No. 3031. Indeed,

under Act No. 3606, (1) the surcharge of 25 per cent is based on the tax only, instead of on both the tax and the interest, as provided for in
Act No. 3031, and (2) the taxpayer is allowed twenty days from notice and demand by rthe Collector of Internal Revenue within which to
pay the tax, instead of ten days only as required by the old law.
Properly speaking, a statute is penal when it imposes punishment for an offense committed against the state which, under the Constitution,
the Executive has the power to pardon. In common use, however, this sense has been enlarged to include within the term "penal statutes"
all status which command or prohibit certain acts, and establish penalties for their violation, and even those which, without expressly
prohibiting certain acts, impose a penalty upon their commission (59 C. J., p. 1110). Revenue laws, generally, which impose taxes collected
by the means ordinarily resorted to for the collection of taxes are not classed as penal laws, although there are authorities to the contrary.
(See Sutherland, Statutory Construction, 361; Twine Co. vs. Worthington, 141 U. S., 468; 12 Sup. Ct., 55; Rice vs. U. S., 4 C. C. A., 104;
53 Fed., 910; Com. vs. Standard Oil Co., 101 Pa. St., 150; State vs. Wheeler, 44 P., 430; 25 Nev. 143.) Article 22 of the Revised Penal
Code is not applicable to the case at bar, and in the absence of clear legislative intent, we cannot give Act No. 3606 a retroactive effect.
(e) The plaintiff correctly states that the liability to pay a tax may arise at a certain time and the tax may be paid within another given time.
As stated by this court, "the mere failure to pay one's tax does not render one delinqent until and unless the entire period has eplased
within which the taxpayer is authorized by law to make such payment without being subjected to the payment of penalties for fasilure to
pay his taxes within the prescribed period." (U. S. vs. Labadan, 26 Phil., 239.)
The defendant maintains that it was the duty of the executor to pay the inheritance tax before the delivery of the decedent's property to the
trustee. Stated otherwise, the defendant contends that delivery to the trustee was delivery to the cestui que trust, the beneficiery in this
case, within the meaning of the first paragraph of subsection (b) of section 1544 of the Revised Administrative Code. This contention is well
taken and is sustained. The appointment of P. J. M. Moore as trustee was made by the trial court in conformity with the wishes of the
testator as expressed in his will. It is true that the word "trust" is not mentioned or used in the will but the intention to create one is clear. No
particular or technical words are required to create a testamentary trust (69 C. J., p. 711). The words "trust" and "trustee", though apt for
the purpose, are not necessary. In fact, the use of these two words is not conclusive on the question that a trust is created (69 C. J., p.
714). "To create a trust by will the testator must indicate in the will his intention so to do by using language sufficient to separate the legal
from the equitable estate, and with sufficient certainty designate the beneficiaries, their interest in the ttrust, the purpose or object of the
trust, and the property or subject matter thereof. Stated otherwise, to constitute a valid testamentary trust there must be a concurrence of
three circumstances: (1) Sufficient words to raise a trust; (2) a definite subject; (3) a certain or ascertain object; statutes in some
jurisdictions expressly or in effect so providing." (69 C. J., pp. 705,706.) There is no doubt that the testator intended to create a trust. He
ordered in his will that certain of his properties be kept together undisposed during a fixed period, for a stated purpose. The probate court
certainly exercised sound judgment in appointment a trustee to carry into effect the provisions of the will (see sec. 582, Code of Civil
Procedure).
P. J. M. Moore became trustee on March 10, 1924. On that date trust estate vested in him (sec. 582 in relation to sec. 590, Code of Civil
Procedure). The mere fact that the estate of the deceased was placed in trust did not remove it from the operation of our inheritance tax
laws or exempt it from the payment of the inheritance tax. The corresponding inheritance tax should have been paid on or before March
10, 1924, to escape the penalties of the laws. This is so for the reason already stated that the delivery of the estate to the trustee was in
esse delivery of the same estate to the cestui que trust, the beneficiary in this case. A trustee is but an instrument or agent for thecestui
que trust (Shelton vs. King, 299 U. S., 90; 33 Sup. Ct. Rep., 689; 57 Law. ed., 1086). When Moore accepted the trust and took possesson
of the trust estate he thereby admitted that the estate belonged not to him but to hiscestui que trust (Tolentino vs. Vitug, 39 Phil.,126, cited
in 65 C. J., p. 692, n. 63). He did not acquire any beneficial interest in the estate. He took such legal estate only as the proper execution of
the trust required (65 C. J., p. 528) and, his estate ceased upon the fulfillment of the testator's wishes. The estate then vested absolutely in
the beneficiary (65 C. J., p. 542).
The highest considerations of public policy also justify the conclusion we have reached. Were we to hold that the payment of the tax could
be postponed or delayed by the creation of a trust of the type at hand, the result would be plainly disastrous. Testators may provide, as
Thomas Hanley has provided, that their estates be not delivered to their beneficiaries until after the lapse of a certain period of time. In the
case at bar, the period is ten years. In other cases, the trust may last for fifty years, or for a longer period which does not offend the rule
against petuities. The collection of the tax would then be left to the will of a private individual. The mere suggestion of this result is a
sufficient warning against the accpetance of the essential to the very exeistence of government. (Dobbins vs. Erie Country, 16 Pet., 435; 10
Law. ed., 1022; Kirkland vs. Hotchkiss, 100 U. S., 491; 25 Law. ed., 558; Lane County vs. Oregon, 7 Wall., 71; 19 Law. ed., 101; Union
Refrigerator Transit Co. vs. Kentucky, 199 U. S., 194; 26 Sup. Ct. Rep., 36; 50 Law. ed., 150; Charles River Bridge vs. Warren Bridge, 11
Pet., 420; 9 Law. ed., 773.) The obligation to pay taxes rests not upon the privileges enjoyed by, or the protection afforded to, a citizen by
the government but upon the necessity of money for the support of the state (Dobbins vs. Erie Country, supra). For this reason, no one is
allowed to object to or resist the payment of taxes solely because no personal benefit to him can be pointed out. (Thomas vs. Gay, 169 U.
S., 264; 18 Sup. Ct. Rep., 340; 43 Law. ed., 740.) While courts will not enlarge, by construction, the government's power of taxation
(Bromley vs. McCaughn, 280 U. S., 124; 74 Law. ed., 226; 50 Sup. Ct. Rep., 46) they also will not place upon tax laws so loose a
construction as to permit evasions on merely fanciful and insubstantial distictions. (U. S. vs. Watts, 1 Bond., 580; Fed. Cas. No. 16,653; U.

S. vs. Wigglesirth, 2 Story, 369; Fed. Cas. No. 16,690, followed in Froelich & Kuttner vs. Collector of Customs, 18 Phil., 461, 481; Castle
Bros., Wolf & Sons vs. McCoy, 21 Phil., 300; Muoz & Co. vs. Hord, 12 Phil., 624; Hongkong & Shanghai Banking Corporation vs. Rafferty,
39 Phil., 145; Luzon Stevedoring Co. vs. Trinidad, 43 Phil., 803.) When proper, a tax statute should be construed to avoid the possibilities
of tax evasion. Construed this way, the statute, without resulting in injustice to the taxpayer, becomes fair to the government.
That taxes must be collected promptly is a policy deeply intrenched in our tax system. Thus, no court is allowed to grant injunction to
restrain the collection of any internal revenue tax ( sec. 1578, Revised Administrative Code; Sarasola vs. Trinidad, 40 Phil., 252). In the
case of Lim Co Chui vs. Posadas (47 Phil., 461), this court had occassion to demonstrate trenchment adherence to this policy of the law. It
held that "the fact that on account of riots directed against the Chinese on October 18, 19, and 20, 1924, they were prevented from praying
their internal revenue taxes on time and by mutual agreement closed their homes and stores and remained therein, does not authorize the
Collector of Internal Revenue to extend the time prescribed for the payment of the taxes or to accept them without the additional penalty of
twenty five per cent." (Syllabus, No. 3.)
". . . It is of the utmost importance," said the Supreme Court of the United States, ". . . that the modes adopted to enforce the taxes levied
should be interfered with as little as possible. Any delay in the proceedings of the officers, upon whom the duty is developed of collecting
the taxes, may derange the operations of government, and thereby, cause serious detriment to the public." (Dows vs. Chicago, 11 Wall.,
108; 20 Law. ed., 65, 66; Churchill and Tait vs. Rafferty, 32 Phil., 580.)
It results that the estate which plaintiff represents has been delinquent in the payment of inheritance tax and, therefore, liable for the
payment of interest and surcharge provided by law in such cases.
The delinquency in payment occurred on March 10, 1924, the date when Moore became trustee. The interest due should be computed
from that date and it is error on the part of the defendant to compute it one month later. The provisions cases is mandatory (see and cf. Lim
Co Chui vs. Posadas, supra), and neither the Collector of Internal Revenuen or this court may remit or decrease such interest, no matter
how heavily it may burden the taxpayer.
To the tax and interest due and unpaid within ten days after the date of notice and demand thereof by the Collector of Internal Revenue, a
surcharge of twenty-five per centum should be added (sec. 1544, subsec. (b), par. 2, Revised Administrative Code). Demand was made by
the Deputy Collector of Internal Revenue upon Moore in a communiction dated October 16, 1931 (Exhibit 29). The date fixed for the
payment of the tax and interest was November 30, 1931. November 30 being an official holiday, the tenth day fell on December 1, 1931. As
the tax and interest due were not paid on that date, the estate became liable for the payment of the surcharge.
In view of the foregoing, it becomes unnecessary for us to discuss the fifth error assigned by the plaintiff in his brief.
We shall now compute the tax, together with the interest and surcharge due from the estate of Thomas Hanley inaccordance with the
conclusions we have reached.
At the time of his death, the deceased left real properties valued at P27,920 and personal properties worth P1,465, or a total of P29,385.
Deducting from this amount the sum of P480.81, representing allowable deductions under secftion 1539 of the Revised Administrative
Code, we have P28,904.19 as the net value of the estate subject to inheritance tax.
The primary tax, according to section 1536, subsection (c), of the Revised Administrative Code, should be imposed at the rate of one per
centum upon the first ten thousand pesos and two per centum upon the amount by which the share exceed thirty thousand pesos, plus an
additional two hundred per centum. One per centum of ten thousand pesos is P100. Two per centum of P18,904.19 is P378.08. Adding to
these two sums an additional two hundred per centum, or P965.16, we have as primary tax, correctly computed by the defendant, the sum
of P1,434.24.
To the primary tax thus computed should be added the sums collectible under section 1544 of the Revised Administrative Code. First
should be added P1,465.31 which stands for interest at the rate of twelve per centum per annum from March 10, 1924, the date of
delinquency, to September 15, 1932, the date of payment under protest, a period covering 8 years, 6 months and 5 days. To the tax and
interest thus computed should be added the sum of P724.88, representing a surhcarge of 25 per cent on both the tax and interest, and
also P10, the compromise sum fixed by the defendant (Exh. 29), giving a grand total of P3,634.43.
As the plaintiff has already paid the sum of P2,052.74, only the sums of P1,581.69 is legally due from the estate. This last sum is P390.42
more than the amount demanded by the defendant in his counterclaim. But, as we cannot give the defendant more than what he claims,
we must hold that the plaintiff is liable only in the sum of P1,191.27 the amount stated in the counterclaim.
The judgment of the lower court is accordingly modified, with costs against the plaintiff in both instances. So ordered.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-34937

March 13, 1933

CONCEPCION VIDAL DE ROCES and her husband,

MARCOS ROCES, and ELVIRA VIDAL DE RICHARDS, plaintiff-appellants,
vs.
JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellee.
Feria and La O for appellants.
Attorney-General Jaranilla for appellee.
IMPERIAL, J.:
The plaintiffs herein brought this action to recover from the defendant, Collector of Internal Revenue, certain sums of money paid by them
under protest as inheritance tax. They appealed from the judgment rendered by the Court of First Instance of Manila dismissing the action,
without costs.
On March 10 and 12, 1925, Esperanza Tuazon, by means of public documents, donated certain parcels of land situated in Manila to the
plaintiffs herein, who, with their respective husbands, accepted them in the same public documents, which were duly recorded in the
registry of deeds. By virtue of said donations, the plaintiffs took possession of the said lands, received the fruits thereof and obtained the
corresponding transfer certificates of title.
On January 5, 1926, the donor died in the City of Manila without leaving any forced heir and her will which was admitted to probate, she
bequeathed to each of the donees the sum of P5,000. After the estate had been distributed among the instituted legatees and before
delivery of their respective shares, the appellee herein, as Collector of Internal Revenue, ruled that the appellants, as donees and
legatees, should pay as inheritance tax the sums of P16,673 and P13,951.45, respectively. Of these sums P15,191.48 was levied as tax
on the donation to Concepcion Vidal de Roces and P1,481.52 on her legacy, and, likewise, P12,388.95 was imposed upon the donation
made to Elvira Vidal de Richards and P1,462.50 on her legacy. At first the appellants refused to pay the aforementioned taxes but, at the
insistence of the appellee and in order not to delay the adjudication of the legacies, they agreed at last, to pay them under protest.
The appellee filed a demurrer to the complaint on the ground that the facts alleged therein were not sufficient to constitute a cause of
action. After the legal questions raised therein had been discussed, the court sustained the demurrer and ordered the amendment of the
complaint which the appellants failed to do, whereupon the trial court dismissed the action on the ground that the afore- mentioned
appellants did not really have a right of action.
In their brief, the appellants assign only one alleged error, to wit: that the demurrer interposed by the appellee was sustained without
sufficient ground.
The judgment appealed from was based on the provisions of section 1540 Administrative Code which reads as follows:
SEC. 1540. Additions of gifts and advances. After the aforementioned deductions have been made, there shall be added to the
resulting amount the value of all gifts or advances made by the predecessor to any those who, after his death, shall prove to be
his heirs, devisees, legatees, or donees mortis causa.
The appellants contend that the above-mentioned legal provision does not include donations inter vivos and if it does, it is unconstitutional,
null and void for the following reasons: first, because it violates section 3 of the Jones Law which provides that no law should embrace
more than one subject, and that subject should be expressed in the title thereof; second that the Legislature has no authority to impose
inheritance tax on donations inter vivos; and third, because a legal provision of this character contravenes the fundamental rule of
uniformity of taxation. The appellee, in turn, contends that the words "all gifts" refer clearly to donations inter vivos and, in support of his
theory, cites the doctrine laid in the case of Tuason and Tuason vs. Posadas (54 Phil., 289). After a careful study of the law and the
authorities applicable thereto, we are the opinion that neither theory reflects the true spirit of the aforementioned provision. The gifts
referred to in section 1540 of the Revised Administration Code are, obviously, those donations inter vivos that take effect immediately or
during the lifetime of the donor but are made in consideration or in contemplation of death. Gifts inter vivos, the transmission of which is not

made in contemplation of the donor's death should not be understood as included within the said legal provision for the reason that it would
amount to imposing a direct tax on property and not on the transmission thereof, which act does not come within the scope of the
provisions contained in Article XI of Chapter 40 of the Administrative Code which deals expressly with the tax on inheritances, legacies and
other acquisitions mortis causa.
Our interpretation of the law is not in conflict with the rule laid down in the case of Tuason and Tuason vs. Posadas, supra. We said therein,
as we say now, that the expression "all gifts" refers to gifts inter vivos inasmuch as the law considers them as advances on inheritance, in
the sense that they are gifts inter vivos made in contemplation or in consideration of death. In that case, it was not held that that kind of
gifts consisted in those made completely independent of death or without regard to it.
Said legal provision is not null and void on the alleged ground that the subject matter thereof is not embraced in the title of the section
under which it is enumerated. On the contrary, its provisions are perfectly summarized in the heading, "Tax on Inheritance, etc." which is
the title of Article XI. Furthermore, the constitutional provision cited should not be strictly construed as to make it necessary that the title
contain a full index to all the contents of the law. It is sufficient if the language used therein is expressed in such a way that in case of doubt
it would afford a means of determining the legislators intention. (Lewis' Sutherland Statutory Construction, Vol. II, p. 651.) Lastly, the
circumstance that the Administrative Code was prepared and compiled strictly in accordance with the provisions of the Jones Law on that
matter should not be overlooked and that, in a compilation of laws such as the Administrative Code, it is but natural and proper that
provisions referring to diverse matters should be found. (Ayson and Ignacio vs. Provincial Board of Rizal and Municipal Council of Navotas,
39 Phil., 931.)
The appellants question the power of the Legislature to impose taxes on the transmission of real estate that takes effect immediately and
during the lifetime of the donor, and allege as their reason that such tax partakes of the nature of the land tax which the law has already
created in another part of the Administrative Code. Without making express pronouncement on this question, for it is unnecessary, we wish
to state that such is not the case in these instance. The tax collected by the appellee on the properties donated in 1925 really constitutes
an inheritance tax imposed on the transmission of said properties in contemplation or in consideration of the donor's death and under the
circumstance that the donees were later instituted as the former's legatees. For this reason, the law considers such transmissions in the
form of gifts inter vivos, as advances on inheritance and nothing therein violates any constitutional provision, inasmuch as said legislation
is within the power of the Legislature.
Property Subject to Inheritance Tax. The inheritance tax ordinarily applies to all property within the power of the state to reach
passing by will or the laws regulating intestate succession or by gift inter vivos in the manner designated by statute, whether such
property be real or personal, tangible or intangible, corporeal or incorporeal. (26 R.C.L., p. 208, par. 177.)
In the case of Tuason and Tuason vs. Posadas, supra, it was also held that section 1540 of the Administrative Code did not violate the
constitutional provision regarding uniformity of taxation. It cannot be null and void on this ground because it equally subjects to the same
tax all of those donees who later become heirs, legatees or donees mortis causa by the will of the donor. There would be a repugnant and
arbitrary exception if the provisions of the law were not applicable to all donees of the same kind. In the case cited above, it was said: "At
any rate the argument adduced against its constitutionality, which is the lack of Uniformity, does not seem to be well founded. It was said
that under such an interpretation, while a donee inter vivos who, after the predecessor's death proved to be an heir, a legatee, or a
donee mortis causa, would have to pay the tax, another donee inter vivos who did not prove to he an heir, a legatee, or a donee mortis
causa of the predecessor, would be exempt from such a tax. But as these are two different cases, the principle of uniformity is inapplicable
to them."
The last question of a procedural nature arising from the case at bar, which should be passed upon, is whether the case, as it now stands,
can be decided on the merits or should be remanded to the court a quo for further proceedings. According to our view of the case, it follows
that, if the gifts received by the appellants would have the right to recover the sums of money claimed by them. Hence the necessity of
ascertaining whether the complaint contains an allegation to that effect. We have examined said complaint and found nothing of that
nature. On the contrary, it be may be inferred from the allegations contained in paragraphs 2 and 7 thereof that said donations inter
vivos were made in consideration of the donor's death. We refer to the allegations that such transmissions were effected in the month of
March, 1925, that the donor died in January, 1926, and that the donees were instituted legatees in the donor's will which was admitted to
probate. It is from these allegations, especially the last, that we infer a presumption juris tantum that said donations were made mortis
causa and, as such, are subject to the payment of inheritance tax.
Wherefore, the demurrer interposed by the appellee was well-founded because it appears that the complaint did not allege fact sufficient to
constitute a cause of action. When the appellants refused to amend the same, spite of the court's order to that effect, they voluntarily
waived the opportunity offered them and they are not now entitled to have the case remanded for further proceedings, which would serve
no purpose altogether in view of the insufficiency of the complaint.
Wherefore, the judgment appealed from is hereby affirmed, with costs of this instance against the appellants. So ordered.

Avancea, C.J., Villamor, Ostrand, Abad Santos, Hull, Vickers and Buttes, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-36770

November 4, 1932

LUIS W. DISON, plaintiff-appellant,

vs.
JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellant.
Marcelino Aguas for plaintiff-appellant.
Attorney-General Jaranilla for defendant-appellant.

BUTTE, J.:
This is an appeal from the decision of the Court of First Instance of Pampanga in favor of the defendant Juan Posadas, Jr., Collector of
Internal Revenue, in a suit filed by the plaintiffs, Luis W. Dison, for the recovery of an inheritance tax in the sum of P2,808.73 paid under
protest. The petitioner alleged in his complaint that the tax is illegal because he received the property, which is the basis of the tax, from his
father before his death by a deed of gift inter vivos which was duly accepted and registered before the death of his father. The defendant
answered with a general denial and with a counterdemand for the sum of P1,245.56 which it was alleged is a balance still due and unpaid
on account of said tax. The plaintiff replied to the counterdemand with a general denial. The courta quo held that the cause of action set up
in the counterdemand was not proven and dismissed the same. Both sides appealed to this court, but the cross-complaint and appeal of
the Collector of Internal Revenue were dismissed by this court on March 17, 1932, on motion of the Attorney-General.1awphil.net
The only evidence introduced at the trial of this cause was the proof of payment of the tax under protest, as stated, and the deed of gift
executed by Felix Dison on April 9, 1928, in favor of his sons Luis W. Dison, the plaintiff-appellant. This deed of gift transferred twenty-two
tracts of land to the donee, reserving to the donor for his life the usufruct of three tracts. This deed was acknowledged by the donor before
a notary public on April 16, 1928. Luis W. Dison, on April 17, 1928, formally accepted said gift by an instrument in writing which he
acknowledged before a notary public on April 20, 1928.
At the trial the parties agreed to and filed the following ingenious stipulation of fact:
1. That Don Felix Dison died on April 21, 1928;
2. That Don Felix Dison, before his death, made a gift inter vivos in favor of the plaintiff Luis W. Dison of all his property according
to a deed of gift (Exhibit D) which includes all the property of Don Felix Dizon;
3. That the plaintiff did not receive property of any kind of Don Felix Dison upon the death of the latter;
4. That Don Luis W. Dison was the legitimate and only child of Don Felix Dison.
It is inferred from Exhibit D that Felix Dison was a widower at the time of his death.
The theory of the plaintiff-appellant is that he received and holds the property mentioned by a consummated gift and that Act No. 2601
(Chapter 40 of the Administrative Code) being the inheritance tax statute, does not tax gifts. The provision directly here involved is section
1540 of the Administrative Code which reads as follows:
Additions of Gifts and Advances. After the aforementioned deductions have been made, there shall be added to the resulting
amount the value of all gifts or advances made by the predecessor to any of those who, after his death, shall prove to be his
heirs, devises, legatees, or donees mortis causa.

The question to be resolved may be stated thus: Does section 1540 of the Administrative Code subject the plaintiff-appellant to the
payment of an inheritance tax?
The appellant argues that there is no evidence in this case to support a finding that the gift was simulated and that it was an artifice for
evading the payment of the inheritance tax, as is intimated in the decision of the court below and the brief of the Attorney-General. We see
no reason why the court may not go behind the language in which the transaction is masked in order to ascertain its true character and
purpose. In this case the scanty facts before us may not warrant the inference that the conveyance, acknowledged by the donor five days
before his death and accepted by the donee one day before the donor's death, was fraudulently made for the purpose of evading the
inheritance tax. But the facts, in our opinion, do warrant the inference that the transfer was an advancement upon the inheritance which the
donee, as the sole and forced heir of the donor, would be entitled to receive upon the death of the donor.
The argument advanced by the appellant that he is not an heir of his deceased father within the meaning of section 1540 of the
Administrative Code because his father in his lifetime had given the appellant all his property and left no property to be inherited, is so
fallacious that the urging of it here casts a suspicion upon the appellants reason for completing the legal formalities of the transfer on the
eve of the latter's death. We do not know whether or not the father in this case left a will; in any event, this appellant could not be deprived
of his share of the inheritance because the Civil Code confers upon him the status of a forced heir. We construe the expression in section
1540 "any of those who, after his death, shall prove to be his heirs", to include those who, by our law, are given the status and rights of
heirs, regardless of the quantity of property they may receive as such heirs. That the appellant in this case occupies the status of heir to his
deceased father cannot be questioned. Construing the conveyance here in question, under the facts presented, as an advance made by
Felix Dison to his only child, we hold section 1540 to be applicable and the tax to have been properly assessed by the Collector of Internal
Revenue.
This appeal was originally assigned to a Division of five but referred to the court in banc by reason of the appellant's attack upon the
constitutionality of section 1540. This attack is based on the sole ground that insofar as section 1540 levies a tax upon gifts inter vivos, it
violates that provision of section 3 of the organic Act of the Philippine Islands (39 Stat. L., 545) which reads as follows: "That no bill which
may be enacted into law shall embraced more than one subject, and that subject shall be expressed in the title of the bill." Neither the title
of Act No. 2601 nor chapter 40 of the Administrative Code makes any reference to a tax on gifts. Perhaps it is enough to say of this
contention that section 1540 plainly does not tax gifts per se but only when those gifts are made to those who shall prove to be the heirs,
devisees, legatees or donees mortis causa of the donor. This court said in the case of Tuason and Tuason vs. Posadas 954 Phil.,
289):lawphil.net
When the law says all gifts, it doubtless refers to gifts inter vivos, and not mortis causa. Both the letter and the spirit of the law
leave no room for any other interpretation. Such, clearly, is the tenor of the language which refers to donations that took effect
before the donor's death, and not to mortis causa donations, which can only be made with the formalities of a will, and can only
take effect after the donor's death. Any other construction would virtually change this provision into:
". . . there shall be added to the resulting amount the value of all gifts mortis causa . . . made by the predecessor to those who, after his
death, shall prove to be his . . . donees mortis causa." We cannot give to the law an interpretation that would so vitiate its language. The
truth of the matter is that in this section (1540) the law presumes that such gifts have been made in anticipation of inheritance, devise,
bequest, or gift mortis causa, when the donee, after the death of the donor proves to be his heir, devisee or donee mortis causa, for the
purpose of evading the tax, and it is to prevent this that it provides that they shall be added to the resulting amount." However much
appellant's argument on this point may fit his preconceived notion that the transaction between him and his father was a consummated gift
with no relation to the inheritance, we hold that there is not merit in this attack upon the constitutionality of section 1540 under our view of
the facts. No other constitutional questions were raised in this case.
The judgment below is affirmed with costs in this instance against the appellant. So ordered.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-9271

March 29, 1957

In the matter of the testate estate of the late DA. MARGARITA DAVID. CARLOS MORAN SISON, Judicial Administrator, petitionerappellant,
vs.
NARCISA F. TEODORO, heiress, oppositor-appellee.

Teodoro R. Dominguez for appellant.

Manuel O. Chan for appellee.
BAUTISTA ANGELO, J.:
On December 20, 1948, the Court of First Instance of Manila, which has jurisdiction over the estate of the late Margarita David, issued an
order appointing Carlos Moran Sison as judicial administrator, without compensation, after filing a bond in the amount of P5,000. The next
day, Carlos Moran Sison took his oath of office and put up the requisite bond which was duly approved by the court. On the same day,
letters of administration were issued to him.
On January 19, 1955, the judicial administrator filed an accounting of his administration which contains, among others, the following
disbursement items:

13. Paid to Visayan Surety & Insurance Corporation on

August 6, 1954, as renewal premiums on the
Administrator's bond of Judicial Administrator Carlos
Moran Sison covering the period from December 20, 1949
to December 20, 1954, inclusive .................................

P380.70

15. Paid to Visayan Surety & Insurance Corporation on

December 21, 1954, for premiums due on the
Administrator's bond of judicial Administrator Carlos Moran
Sison for the period from December 21, 1954 to December
21, 1955 ...............................................................

76.14

Narcisa F. Teodoro, one of the heirs, objected to the approval of the above- quoted items on the grounds that they are not necessary
expenses of administration and should not be charged against the estate. On February 25, 1955, the court approved the report of the
administrator but disallowed the items objected to on the ground that they cannot be considered as expenses of administration. The
administrator filed a motion for reconsideration and when the same was denied, he took the present appeal.
The only issue to be determined is "whether a judicial administrator, serving without compensation, is entitled to charge as an expense of
administration the premiums paid on his bond."
The lower court did not consider the premiums paid on the bond filed by the administrator as an expense of administration taking into
account undoubtedly the ruling laid down in the case of Sulit vs. Santos, 56 Phil., 626. That is a case which also involves the payment of
certain premium on the bond put up by the judicial administrator and when he asked the court that the same be considered as an expense
of administration, it was disapproved for the same reasons advanced by the trial court. In sustaining this finding, this Court ruled that the
"expense incurred by an executor or administrator to produce a bond is not a proper charge against the estate. Section 680 of the Code of
Civil Procedure (similar to section 7, Rule 86) does not authorize the executor or administrator to charge against the estate the money
spent for the presentation, filing, and substitution of a bond." And elaborating on this matter, the Court made the following comment:
The aforementioned cases, in reality, seem superfluous in ascertaining the true principle. The position of an executor or
administrator is one of trust. In fact, the Philippine Code of Civil Procedure so mentions it. It is proper for the law to safeguard the
estate of deceased persons by requiring the executor or administrator to give a suitable bond. The ability to give this bond is in the
nature of a qualification for the office. The execution and approval of the bond constitute a condition precedent to acceptance of
the responsibilities of the trust. If an individual does not desire to assume the position of executor of administrator, he may refuse
to do so. On the other hand, when the individual prefers an adequate bond and has it approved by the probate court, he thereby
admits the adequacy of the compensation which is permitted him pursuant to law. It would be a very far-fetched construction to
deduce the giving of a bond in order to qualify for the office of executor or administrator is a necessary expense in the care,
management, and settlement of the estate within the meaning of section 680 of the Code of Civil Procedure, for these are
expenses incurred after the executor of administrator has met the requirements of the law and has entered upon the performance
of his duties. (See In re Eby's Estate [1894], 30 Atl., 124.)
We feel that the orders of Judge Mapa in this case rested on a fine sense of official duty, sometimes lacking in cases of this
character, to protect the residue of the estate of a deceased person from unjustifiable inroads by an executor, and that as these
orders conform to the facts and the law, they are entitled to be fortified by an explicit pronouncement from this court. We rule that
the expense incurred by an execution or administrator to procure a bond is not a proper charge against the estate, and that
section 680 of the Code of Civil Procedure does not authorize the executor or administrator to charge against the estate the
money spent for the presentation, filing, and substitution of a bond.

It is true that the Sulit case may be differentiated from the present in the sense that, in the former the administrator accepted the trust with
the emolument that the law allows, whereas in the latter the administrator accepted the same without compensation, but this difference is
of no moment, for there is nothing in the decision that may justify the conclusion that the allowance or disallowance of premiums paid on
the bond of the administrator is made dependent on the receipt of compensation. On the contrary, a different conclusion may be inferred
considering the ratio decidendi on which the ruling is predicated. Thus, it was there stated that the position of an executor or administrator
is one of trust: that it is proper for the law to safeguard the estates of deceased persons by requiring the administrator to give a suitable
bond, and that the ability to give this bond is in the nature of a qualification for the office. It is also intimated therein that "If an individual
does not desire to assume the position of executor or administrator, he may refuse to do so," and it is far-fetched to conclude that the
giving of a bond by an administrator is an necessary expense in the care, management and settlement of the estate within the meaning of
the law, because these expenses are incurred "after the executor or administrator has met the requirement of the law and has entered
upon the performance of his duties." Of course, a person may accept the position of executor or administrator with all the incident
appertaining thereto having in mind the compensation which the law allows for the purpose, but he may waive this compensation in the
same manner as he may refuse to serve without it. Appellant having waived compensation, he cannot now be heard to complain of the
expenses incident to his qualification.
The orders appealed from are hereby affirmed, without costs.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-29276 May 18, 1978
Testate Estate of the Late Felix J. de Guzman. VICTORINO G. DE GUZMAN, administrator-appellee,
vs.
CRISPINA DE GUZMAN-CARILLO, ARSENIO DE GUZMAN and HONORATA DE GUZMAN-MENDIOLA,oppositors-appellants.
Emiliano Samson & R. Balderama-Samson for appellants.
Cezar Paralejo for appellee.

AQUINO, J.:
This case is about the propriety of allowing as administration expenses certain disbursements made by the administrator of the testate
estate of the late Felix J. de Guzman of Gapan, Nueva Ecija.
The deceased testator was survived by eight children named Victorino, Librada, Severino, Margarita, Josefina, Honorata, Arsenio and
Crispina. His will was duly probated. Letters of administration were issued to his son, Doctor Victorino G. de Guzman, pursuant to the order
dated September 17, 1964 of the Court of First Instance of Nueva Ecija in Special Proceeding No. 1431.
One of the properties left by the dent was a residential house located in the poblacion. In conformity with his last will, that house and the lot
on which it stands were adjudicated to his eight children, each being given a one-eighthproindiviso share in the project of partition dated
March 19, 1966, which was signed by the eight heirs and which was approved in the lower court's order of April 14, 1967 but without
prejudice to the final outcome of the accounting.
The administrator submitted four accounting reports for the period from June 16, 1964 to September, 1967. Three heirs Crispina de
Guzmans-Carillo Honorata de Guzman-Mendiola and Arsenio de Guzman interposed objections to the administrator's disbursements in the
total sum of P13,610.48, broken down as follows:
I. Expense for the improvement and renovation of the decedent's residential house.
1. Construction of fence P3,082.07
2. Renovation of bathroom P1,389.52

3. Repair of terrace and

interior of house P5,928.00 P10,399.59
II. Living expenses of Librada de Guzman while occupying the family home without paying rent:
1. For house helper P1,170.00
2. Light bills 227.41
3. Water bills 150.80
4. Gas oil, floor wax
and switch nail 54.90 P 1,603.11
III. Other expenses:
1. Lawyer's subsistence P 19.30
2. Gratuity pay in lieu
of medical fee 144.00
3. For stenographic notes 100.00
4. For food served on
decedent's first
death anniversary 166.65
5. Cost of publication of
death anniversary
of decedent 102.00
6. Representation
expenses 26.25 P558.20
IV. Irrigation fee P1.049.58
TOTAL P13,610.48
It should be noted that the probate court in its order of August 29, 1966 directed the administrator "to refrain from spending the assets of
the estate for reconstructing and remodeling the house of the deceased and to stop spending (sic) any asset of the estate without first
during authority of the court to do so" (pp. 26-27, Record on Appeal).
The lower court in its order of April 29, 1968 allowed the d items as legitimate expenses of administration. From that order, the three
oppositors appealed to this Court. Their contention is that the probate court erred in approving the utilization of the income of the estate
(from rice harvests) to defray those expenditures which allegedly are not allowable under the Rules of Court.
An executor or administrator is allowed the necessary expenses in the care, management, and settlement of the estate. He is entitled to
possess and manage the decedent's real and personal estate as long as it is necessary for the payment of the debts and the expenses of

administration. He is accountable for the whole decedent's estate which has come into his possession, with all the interest, profit, and
income thereof, and with the proceeds of so much of such estate as is sold by him, at the price at which it was sold (Sec. 3, Rule 84; Secs.
1 and 7, Rule 85, Rules of Court).
One of the Conditions of the administrator's bond is that he should render a true and just account of his administration to the court. The
court may examine him upon oath With respect to every matter relating to his accounting 't and shall so examine him as to the correctness
of his account before the same is allowed, except when no objection is made to the allowance of the account and its correctness is
satisfactorily established by competent proof. The heirs, legatees, distributes, and creditors of the estate shall have the same privilege as
the executor or administrator of being examined on oath on any matter relating to an administration account." (Sec. 1[c] Rule 81 and secs.
8 and 9, Rule 85, Rules of Court).
A hearing is usually held before an administrator's account is approved, especially if an interested Party raises objections to certain items
in the accounting report (Sec. 10, Rule 85).
At that hearing, the practice is for the administrator to take the witness stand, testify under oath on his accounts and Identify the receipts,
vouchers and documents evidencing his disbursements which are offered as exhibits. He may be interrogated by the court and crossed by
the oppositors's counsel. The oppositors may present proofs to rebut the ad. administrator's evidence in support of his accounts.
I. Expenses for the renovation and improvement of the family residence P10,399.59. As already shown above, these expenses
consisted of disbursements for the repair of the terrace and interior of the family home, the renovation of the bathroom, and the
construction of a fence. The probate court allowed those expenses because an administrator has the duty to "maintain in tenantable repair
the houses and other structures and fences belonging to the estate, and deliver the same in such repair to the heirs or devises" when
directed to do so by the court (Sec. 2, Rule 84, Rules of Court).
On the other hand, the oppositors-appellants contend that the trial court erred in allowing those expenses because the same did not come
within the category of necessary expenses of administration which are understood to be the reasonable and necessary expenses of caring
for the property and managing it until the debts are paid and the estate is partitioned and distributed among the heirs (Lizarraga Hermanos
vs. Abada, 40 Phil. 124).
As clarified in the Lizarraga case, administration expenses should be those which are necessary for the management of the estate, for
protecting it against destruction or deterioration, and, possibly, for the production of fruits. They are expenses entailed for the preservation
and productivity of the estate and its management for purposes of liquidation, payment of debts, and distribution of the residue among the
persons entitled thereto.
It should be noted that the family residence was partitioned proindiviso among the decedent's eight children. Each one of them was given a
one-eighth share in conformity with the testator's will. Five of the eight co-owners consented to the use of the funds of the estate for repair
and improvement of the family home. It is obvious that the expenses in question were incurred to preserve the family home and to maintain
the family's social standing in the community.
Obviously, those expenses redounded to the benefit of an the co- owners. They were necessary for the preservation and use of the family
residence. As a result of those expenses, the co-owners, including the three oppositors, would be able to use the family home in comfort,
convenience and security.
We hold that the probate court did not err in approving the use of the income of the estate to defray those ex
II. Expenses incurred by Librada de Guzman as occupant of the family residence without paying rent P1 603.11 The probate court
allowed the income of the estate to be used for those expenses on the theory that the occupancy of the house by one heir did not deprive
the other seven heirs from living in it. Those expenses consist of the salaries of the house helper, light and water bills, and the cost of gas,
oil floor wax and switch nail
We are of the opinion that those expenses were personal expenses of Librada de Guzman, inuring y to her benefit. Those expenses, not
being reasonable administration expenses incurred by the administrator, should not be charged against the income of the estate.
Librada de Guzman, as an heir, is entitled to share in the net income of the estate. She occupied the house without paying rent. She
should use her income for her living expenses while occupying the family residence.
The trial court erred in approving those expenses in the administrator's accounts. They should be, as they are hereby, disallowed (See 33
C.J.S 1239-40).

III. Other expenses P558.20. Among these expenses is the sum of P100 for stenographic notes which, as admitted by the
administrator on page 24 of his brief, should be disallowed. Another item, "representation expenses" in the sum of P26.25 (2nd
accounting), was not explained. it should likewise be disallowed.
The probate court erred in allowing as expenses of ad. administration the sum of P268.65 which was incurred during the celebration of the
first death anniversary of the deceased. Those expenses are disallowed because they have no connection with the care, management and
settlement of the decedent's estate (Nicolas vs. Nicolas 63 Phil 332).
The other expenses, namely, P19.30 for the lawyer's subsistence and P144 as the cost of the gift to the physician who attended to the
testator during his last s are allowable expenses.
IV. Irrigation fee P1,049.58. The appellants question the deductibility of that expense on the ground that it seems to be a duplication of
the item of P1,320 as irrigation fee for the same 1966-67 crop-year.
The administrator in his comment filed on February 28, 1978 explained that the item of P1,320 represented the "allotments" for irrigation
fees to eight tenants who cultivated the Intan crop, which allotments were treated as "assumed expenses" deducted as farming expenses
from the value of the net harvests.
The explanation is not quite clear but it was not disputed by the appellants. The fact is that the said sum of P1,049.58 was paid by the
administrator to the Penaranda Irrigation System as shown in Official Receipt No. 3596378 dated April 28, 1967. It was included in his
accounting as part of the farming expenses. The amount was properly allowed as a legitimate expense of administration.
WHEREFORE, the lower court's order of April 29, 1968 is affirmed with the modifications that the sum of (a) P1,603.11 as the living
expenses of Librada de Guzman. (b) P100 for stenographic notes, (c) P26.25 as representation expenses, and (d) P268.65 as expenses
for the celebration of the first anniversary of the decedent's death are disallowed in the administrator's accounts. No costs.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-19153

June 30, 1922

B. E. JOHANNES, as principal administrator of the estate of Carmen Theodora Johannes, relator,

vs.
CARLOS A. IMPERIAL, as judge of the Court of First Instance, City of Manila, respondent.
Amzi B. Kelly for relator.
Fisher and De Witt and William C. Brady for respondent.
STATEMENT
Case No 18600,1 in which B. E. Johannes, husband of Carmen Theodora Johannes, deceased as administrator, et al., were relators, and
the Honorable George R. Harvey, as judge of the Court of First Instance of Manila, et al., were respondents was a petition for certiorari and
a temporary injunction, in which the relators prayed for an order this court:
(A) To annul the appointment of Alfred D' Almeida as administrator of said deposit in the Philippines; and all acts and a
proceedings taken by him as said administrator; and,
(B) To issue an order itself, or one to the said Judge George R. Harvey, directing the manager of the Philippine National Bank,' to
place to the credit B. E. Johannes, as administrator of the estate of Carmen Theodora Johannes, all of the funds of said Carmen
D' Almeida (Johannes), now on deposit, with said bank, subject to the order of said court. And, as the act of the said Alfred D'
Almeida in having himself appointed administrator was in evident bad faith, as clearly appears from the petition asking his
appointment, the court is requested to grant relators five thousand pesos (P5,000), as damages caused by delay, expensive and
unnecessary litigation, and such other relief as the court may deem in equity proper.

Upon a hearing, the prayer was denied, and the petition dismissed in an opinion written by Justice Malcolm and concurred in by all the
other members of this court.
After that opinion was rendered, B. E. Johannes, as principal administrator of the estate of Carmen Theodora Johannes, applied to his
Honor Carlos A. Imperial, as judge of the Court of Instance of the City of Manila, by petition, which, among other things, alleges:
That "he is the duly appointed principal administrator of the estate of his late wife at the place of her domicile, Singapore, Straits
Settlements, as appears from a certified copy of his appointment now on file . . .
Second. The said Carmen Theodora Johannes, at the time of her death, was a subject and citizen of Great Britain, domiciled in
Singapore, Straits Settlements, and your petitioner, the said B. E. Johannes, her lawful husband, at the time of her death was a
subject and citizen of Great Britain and resident of Singapore, Straits Settlements.
Third. Under British Law, (22 and 23, Charles II c-10, 29 Charles II c-3, and James II c-17), the husband of a deceased wife is the
sole heir, to the exclusion of all others, of the property of his wife when she dies intestate, as the said Carmen Theodora
Johannes did die.
Fourth. This Honorable Court at a prior date on application of Mr. Alfred D' Almeida, the brother of the deceased, appointed him as
administrator of the property of the deceased situated within Philippine Islands, in the absence of, and without notice, knowledge
or consent of her husband, your petitioner.
Fifth. Your petitioner is now within the jurisdiction of this court and has come here and established his residence at "The Manila
Hotel," in the City of Manila, for the sole purpose of taking over from the said Alfred D' Almeida the administration of said estate:
and
To relieve the said Alfred D' Almeida as administrator of said estate within the jurisdiction of this court and appoint in his stead
your petitioner, the said B. E. Johannes, and principal administrator, "the ancillary administrator" of said estate now subject to
administration within the Philippine Islands.
From an order denying and overruling the petition, the relator filed certiorari proceedings in this court against the respondent, as judge of
the Court of First Instance, and later made Alfred D'Almeida, a brother of the deceased, ancillary administrator, defendant, in which he pray
for an order of this court:
(a) To substitute your petitioner, the principal administrator, the husband of the deceased and the owner of the deposit, instead of
Alfred D'Almeida, as "the ancillary administrator' of said estate, in this jurisdiction; and
(b) Order the said Judge to disapprove and disallow all of the amounts claimed to have been paid for attorneys' fees to Messrs.
Fisher and DeWit, and cable, amounting to P2,860.05; and
(c) To disapproved and disallow the amount of P1,093.75, claimed due but proven false; and
(d) To cancel the appointment of the special administrator' appointed by virtue of these false claims; and
(e) Order the said Judge to order the manager of the Philippine National Bank to place to credit of the said substituted ancillary
administrator, Mr. B. E. Johannes, all of the funds now on deposit in said bank, the property of the deceased Carmen Theodora
Johannes.
The defendant claims that the petition here does not state sufficient facts, and that at the time the appointment was made, the court had
jurisdiction to appoint Alfred D'Almeida as ancillary administrator of the estate of the deceased Carmen Theodora Johannes, who was then
a resident of the Philippine Islands, and that his appointment is not subject to review in this court.

JOHNS, J.:
The legal questions presented are well stated in the former opinion court in case No. 18600. It appears that the petitioner is the husband of
Carmen Theodora Johannes, deceased, who, at the time of her death, was a resident of Singapore, Straits Settlements, and a citizen of
Great Britain; that he is also a foreigner and a citizen of Great Britain and an actual resident to Singapore; that Alfred D'Almeida is a
brother of the deceased Carmen Theodora Johannes, and a bona fide resident of the City of Manila; that at the time of her death Carmen
Theodora Johannes had P109,722.55 on deposit in one of the banks in the City of Manila; and that the petitioner, her surviving husband,
was indebted to a bank in Manila for about P20,000. That the deceased left no will in the absence of which the petitioner claims to be her
sole heir and entitled to all of her estate. That there were no debts against the estate of the deceased. Upon the death of his wife, the

petitioner was duly appointed as administrator of her estate by the court at Singapore, and qualified and entered upon the discharge of his
duties. After the decision was rendered by this court in case No. 18600, supra, the petitioner came to Manila and claims to have
established a temporary residence at the Manila Hotel, based upon which, in legal effect, he asked for an order of court that Alfred
D'Almeida be removed as ancillary administrator, and that he be appointed.
From an order of the lower court denying that petition, an original petition was filed here to review the proceedings of the lower court.
There is a marked legal distinction between the authority of a court to appoint and the authority to remove an administrator after he is
appointed. Here, the appointment was made and the administrator had qualified and entered upon the discharge of his duties. There was
no contest over the appointment, and the court had jurisdiction of the petition and of the subject-matter. It was not a case of where two or
more petitions were filed, in which each was claiming the right to appointed, or in which the court decided which one of the petitioners
should be appointed. It was a case in which only one petition was presented to the court, and to which no objections were file and in which
it appeared the petitioner was a brother of the deceased, and that the estate was the owner of property in the City of Manila. The court,
having jurisdiction and the appointment having been made, the only question here presented is whether Alfred D'Almeida should be
removed and the petitioner substituted as ancillary administrator.
As this court said case No 18600 (Johannes vs. Harvey, supra):
The ancillary administration is proper, whenever a person dies, leaving in a country other than that of his last domicile, property to
be administered in the nature of assets of the decedent, liable for his individual debts or to be distributed among his heirs.
It is almost a universal rule to give the surviving spouse a preference when and administrator is to be appointed, unless for strong
reason it is deemed advisable to name someone else. This preference has particular force under Spanish Law precedents.
However, the Code of Civil Procedure, in section 642, while naming the surviving spouse is unsuitable for the responsibility. . . .
Undoubtedly, if the husband should come into this jurisdiction, the court give consideration to his petition that he be named the
ancillary administrator for local purposes. Ancillary letters should ordinarily be granted to the domiciliary representative, if he
applies therefor, or to his nominee, or attorney; but in the absence of express statutory requirement the court may in its discretion
appoint some other person.
The real contention of the petitioner is that, because he had the legal right to apply for and be appointed in the first instance, such right is
continuous, and that he could be appointed any time on his own application. That is not the law. Although it is true that in the first instance
everything else being equal and upon the grounds of comity, in ordinary case, the court would appoint the petitioner or his nominee as
ancillary administrator, but even then, as stated in the above opinion the appointment is one of more or less legal discretion. But that is not
this case. Here, in legal effect, it is sought to oust an administrator who was appointed without protest or objection where the court had
jurisdiction of the petitioner and of the subject matter.
Again, it appears that Carmen Theodora Johannes died August 21, 1921, and on September 19, 1921, the petitioner was appointed
administrator of her estate by Supreme Court of Straits Settlements on his own petition, and on October 1, 1921, based upon his petition,
Alfred D'Almeida, the brother of the deceased, was appointed administrator of her estate in Manila. The initial proceeding against the
appointment of Alfred D'Almeida, as administrator, was filed in this court on January 21, 1922.
At time of the appointment here, the court had primary and original jurisdiction, and no objections were then made. The question as to who
should have been appointed ancillary administrator, if presented at the proper time and in the proper way, is not before this court. Here, the
appointment was made on the 1st day of October, 1921, and no formal objections were made until 21st day of January, 1922.
The petition is denied, the injunction dissolved and the case dismissed.
It appears that the debts of the state, if any, are nominal, and that the only asset here is the money on deposit in the bank. Hence, the
administration of the estate itself is matter of form only and should be very simple and inexpensive. Even though it is foreign money, it is
the duty of the court to protect it from any illegal, unjust, or unreasonable charges. All claims against the estate should be for just debts
only, or for the actual expenses of administration, and those should be reasonable. No other claims should be allowed.
If, as claimed, the real dispute here is whether the brothers and sisters of the deceased are entitled to share in her estate, or whether the
petitioner only, as the surviving husband, is entitle to all of it, that question is not one of administration, and any expense and attorneys'
fees incurred by either party for the settlement of that question is a personal matter to them, and should not be allowed as claims against
the estate. Claims against the estate should only be for just debts or expense for administration of the estate itself.
Costs in favor of the respondent. So ordered.
Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION
G.R. No. 123206

March 22, 2000

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
COURT OF APPEALS, COURT OF TAX APPEALS and JOSEFINA P. PAJONAR, as Administratrix of the Estate of Pedro P.
Pajonar, respondents.
RESOLUTION
GONZAGA-REYES, J.:
Assailed in this petition for review on certiorari is the December 21, 1995 Decision1 of the Court of Appeals2 in CA-G.R. Sp. No. 34399
affirming the June 7, 1994 Resolution of the Court of Tax Appeals in CTA Case No. 4381 granting private respondent Josefina P. Pajonar,
as administratrix of the estate of Pedro P. Pajonar, a tax refund in the amount of P76,502.42, representing erroneously paid estate taxes for
the year 1988.
Pedro Pajonar, a member of the Philippine Scout, Bataan Contingent, during the second World War, was a part of the infamous Death
March by reason of which he suffered shock and became insane. His sister Josefina Pajonar became the guardian over his person, while
his property was placed under the guardianship of the Philippine National Bank (PNB) by the Regional Trial Court of Dumaguete City,
Branch 31, in Special Proceedings No. 1254. He died on January 10, 1988. He was survived by his two brothers Isidro P. Pajonar and
Gregorio Pajonar, his sister Josefina Pajonar, nephews Concordio Jandog and Mario Jandog and niece Conchita Jandog.
On May 11, 1988, the PNB filed an accounting of the decedent's property under guardianship valued at P3,037,672.09 in Special
Proceedings No. 1254. However, the PNB did not file an estate tax return, instead it advised Pedro Pajonar's heirs to execute an
extrajudicial settlement and to pay the taxes on his estate. On April 5, 1988, pursuant to the assessment by the Bureau of Internal
Revenue (BIR), the estate of Pedro Pajonar paid taxes in the amount of P2,557.
On May 19, 1988, Josefina Pajonar filed a petition with the Regional Trial Court of Dumaguete City for the issuance in her favor of letters of
administration of the estate of her brother. The case was docketed as Special Proceedings No. 2399. On July 18, 1988, the trial court
appointed Josefina Pajonar as the regular administratrix of Pedro Pajonar's estate.
On December 19, 1988, pursuant to a second assessment by the BIR for deficiency estate tax, the estate of Pedro Pajonar paid estate tax
in the amount of P1,527,790.98. Josefina Pajonar, in her capacity as administratrix and heir of Pedro Pajonar's estate, filed a protest on
January 11, 1989 with the BIR praying that the estate tax payment in the amount of P1,527,790.98, or at least some portion of it, be
returned to the heirs. 3
However, on August 15, 1989, without waiting for her protest to be resolved by the BIR, Josefina Pajonar filed a petition for review with the
Court of Tax Appeals (CTA), praying for the refund of P1,527,790.98, or in the alternative, P840,202.06, as erroneously paid estate
tax. 4 The case was docketed as CTA Case No. 4381.
On May 6, 1993, the CTA ordered the Commissioner of Internal Revenue to refund Josefina Pajonar the amount of P252,585.59,
representing erroneously paid estate tax for the year 1988.5 Among the deductions from the gross estate allowed by the CTA were the
amounts of P60,753 representing the notarial fee for the Extrajudicial Settlement and the amount of P50,000 as the attorney's fees in
Special Proceedings No. 1254 for guardianship.6
On June 15, 1993, the Commissioner of Internal Revenue filed a motion for reconsideration7 of the CTA's May 6, 1993 decision asserting,
among others, that the notarial fee for the Extrajudicial Settlement and the attorney's fees in the guardianship proceedings are not
deductible expenses.
On June 7, 1994, the CTA issued the assailed Resolution8 ordering the Commissioner of Internal Revenue to refund Josefina Pajonar, as
administratrix of the estate of Pedro Pajonar, the amount of P76,502.42 representing erroneously paid estate tax for the year 1988. Also,
the CTA upheld the validity of the deduction of the notarial fee for the Extrajudicial Settlement and the attorney's fees in the guardianship
proceedings.

On July 5, 1994, the Commissioner of Internal Revenue filed with the Court of Appeals a petition for review of the CTA's May 6, 1993
Decision and its June 7, 1994 Resolution, questioning the validity of the abovementioned deductions. On December 21, 1995, the Court of
Appeals denied the Commissioner's petition.9
Hence, the present appeal by the Commissioner of Internal Revenue.
The sole issue in this case involves the construction of section 79 10 of the National Internal Revenue Code 11(Tax Code) which provides
for the allowable deductions from the gross estate of the decedent. More particularly, the question is whether the notarial fee paid for the
extrajudicial settlement in the amount of P60,753 and the attorney's fees in the guardianship proceedings in the amount of P50,000 may be
allowed as deductions from the gross estate of decedent in order to arrive at the value of the net estate.
We answer this question in the affirmative, thereby upholding the decisions of the appellate courts.
In its May 6, 1993 Decision, the Court of Tax Appeals ruled thus:
Respondent maintains that only judicial expenses of the testamentary or intestate proceedings are allowed as a deduction to the
gross estate. The amount of P60,753.00 is quite extraordinary for a mere notarial fee.
This Court adopts the view under American jurisprudence that expenses incurred in the extrajudicial settlement of the estate
should be allowed as a deduction from the gross estate. "There is no requirement of formal administration. It is sufficient that the
expense be a necessary contribution toward the settlement of the case." [ 34 Am. Jur. 2d, p. 765; Nolledo, Bar Reviewer in
Taxation, 10th Ed. (1990), p. 481]
xxx

xxx

xxx

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

xxx

xxx

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

xxx

xxx

PNB was appointed as guardian over the assets of the late Pedro Pajonar, who, even at the time of his death, was incompetent
by reason of insanity. The expenses incurred in the guardianship proceeding was but a necessary expense in the settlement of
the decedent's estate. Therefore, the attorney's fee incurred in the guardianship proceedings amounting to P50,000.00 is a
reasonable and necessary business expense deductible from the gross estate of the decedent. 12
Upon a motion for reconsideration filed by the Commissioner of Internal Revenue, the Court of Tax Appeals modified its previous ruling by
reducing the refundable amount to P76,502.43 since it found that a deficiency interest should be imposed and the compromise penalty
excluded. 13 However, the tax court upheld its previous ruling regarding the legality of the deductions
It is significant to note that the inclusion of the estate tax law in the codification of all our national internal revenue laws with the enactment
of the National Internal Revenue Code in 1939 were copied from the Federal Law of the United States. [ UMALI, Reviewer in Taxation
(1985), p. 285 ] The 1977 Tax Code, promulgated by Presidential Decree No. 1158, effective June 3, 1977, reenacted substantially all the
provisions of the old law on estate and gift taxes, except the sections relating to the meaning of gross estate and gift. [ Ibid, p. 286. ]
In the United States, [a]dministrative expenses, executor's commissions and attorney's fees are considered allowable deductions from the
Gross Estate. Administrative expenses are limited to such expenses as are actually and necessarily incurred in the administration of a

decedent's estate. [PRENTICE-HALL, Federal Taxes Estate and Gift Taxes (1936), p. 120, 533.] Necessary expenses of administration are
such expenses as are entailed for the preservation and productivity of the estate and for its management for purposes of liquidation,
payment of debts and distribution of the residue among the persons entitled thereto. [Lizarraga Hermanos vs. Abada, 40 Phil. 124.] They
must be incurred for the settlement of the estate as a whole. [34 Am. Jur. 2d, p. 765.] Thus, where there were no substantial community
debts and it was unnecessary to convert community property to cash, the only practical purpose of administration being the payment of
estate taxes, full deduction was allowed for attorney's fees and miscellaneous expenses charged wholly to decedent's estate. [Ibid., citing
Estate of Helis, 26 T.C. 143 (A).]
Petitioner stated in her protest filed with the BIR that "upon the death of the ward, the PNB, which was still the guardian of the estate,
(Annex "Z"), did not file an estate tax return; however, it advised the heirs to execute an extrajudicial settlement, to pay taxes and to post a
bond equal to the value of the estate, for which the state paid P59,341.40 for the premiums. (See Annex "K")." [p. 17, CTA record.]
Therefore, it would appear from the records of the case that the only practical purpose of settling the estate by means of an extrajudicial
settlement pursuant to Section 1 of Rule 74 of the Rules of Court was for the payment of taxes and the distribution of the estate to the
heirs. A fortiori, since our estate tax laws are of American origin, the interpretation adopted by American Courts has some persuasive effect
on the interpretation of our own estate tax laws on the subject.
Anent the contention of respondent that the attorney's fees of P50,000.00 incurred in the guardianship proceeding should not be deducted
from the Gross Estate, We consider the same unmeritorious. Attorneys' and guardians' fees incurred in a trustee's accounting of a taxable
inter vivos trust attributable to the usual issues involved in such an accounting was held to be proper deductions because these are
expenses incurred in terminating an inter vivos trust that was includible in the decedent's estate. [Prentice Hall, Federal Taxes on Estate
and Gift, p. 120, 861] Attorney's fees are allowable deductions if incurred for the settlement of the estate. It is noteworthy to point that PNB
was appointed the guardian over the assets of the deceased. Necessarily the assets of the deceased formed part of his gross estate.
Accordingly, all expenses incurred in relation to the estate of the deceased will be deductible for estate tax purposes provided these are
necessary and ordinary expenses for administration of the settlement of the estate. 14
In upholding the June 7, 1994 Resolution of the Court of Tax Appeals, the Court of Appeals held that:
2. Although the Tax Code specifies "judicial expenses of the testamentary or intestate proceedings," there is no reason why expenses
incurred in the administration and settlement of an estate in extrajudicial proceedings should not be allowed. However, deduction is limited
to such administration expenses as are actually and necessarily incurred in the collection of the assets of the estate, payment of the debts,
and distribution of the remainder among those entitled thereto. Such expenses may include executor's or administrator's fees, attorney's
fees, court fees and charges, appraiser's fees, clerk hire, costs of preserving and distributing the estate and storing or maintaining it,
brokerage fees or commissions for selling or disposing of the estate, and the like. Deductible attorney's fees are those incurred by the
executor or administrator in the settlement of the estate or in defending or prosecuting claims against or due the estate. (Estate and Gift
Taxation in the Philippines, T. P. Matic, Jr., 1981 Edition, p. 176).
xxx

xxx

xxx

It is clear then that the extrajudicial settlement was for the purpose of payment of taxes and the distribution of the estate to the heirs. The
execution of the extrajudicial settlement necessitated the notarization of the same. Hence the Contract of Legal Services of March 28,
1988 entered into between respondent Josefina Pajonar and counsel was presented in evidence for the purpose of showing that the
amount of P60,753.00 was for the notarization of the Extrajudicial Settlement. It follows then that the notarial fee of P60,753.00 was
incurred primarily to settle the estate of the deceased Pedro Pajonar. Said amount should then be considered an administration expenses
actually and necessarily incurred in the collection of the assets of the estate, payment of debts and distribution of the remainder among
those entitled thereto. Thus, the notarial fee of P60,753 incurred for the Extrajudicial Settlement should be allowed as a deduction from the
gross estate.
3. Attorney's fees, on the other hand, in order to be deductible from the gross estate must be essential to the settlement of the estate.
The amount of P50,000.00 was incurred as attorney's fees in the guardianship proceedings in Spec. Proc. No. 1254. Petitioner contends
that said amount are not expenses of the testamentary or intestate proceedings as the guardianship proceeding was instituted during the
lifetime of the decedent when there was yet no estate to be settled.
Again, this contention must fail.
The guardianship proceeding in this case was necessary for the distribution of the property of the deceased Pedro Pajonar. As correctly
pointed out by respondent CTA, the PNB was appointed guardian over the assets of the deceased, and that necessarily the assets of the
deceased formed part of his gross estate. . . .

xxx

xxx

xxx

It is clear therefore that the attorney's fees incurred in the guardianship proceeding in Spec. Proc. No. 1254 were essential to the
distribution of the property to the persons entitled thereto. Hence, the attorney's fees incurred in the guardianship proceedings in the
amount of P50,000.00 should be allowed as a deduction from the gross estate of the decedent. 15
The deductions from the gross estate permitted under section 79 of the Tax Code basically reproduced the deductions allowed under
Commonwealth Act No. 466 (CA 466), otherwise known as the National Internal Revenue Code of 1939, 16 and which was the first
codification of Philippine tax laws. Section 89 (a) (1) (B) of CA 466 also provided for the deduction of the "judicial expenses of the
testamentary or intestate proceedings" for purposes of determining the value of the net estate. Philippine tax laws were, in turn, based on
the federal tax laws of the United States. 17 In accord with established rules of statutory construction, the decisions of American courts
construing the federal tax code are entitled to great weight in the interpretation of our own tax laws. 18
Judicial expenses are expenses of administration. 19 Administration expenses, as an allowable deduction from the gross estate of the
decedent for purposes of arriving at the value of the net estate, have been construed by the federal and state courts of the United States to
include all expenses "essential to the collection of the assets, payment of debts or the distribution of the property to the persons entitled to
it." 20 In other words, the expenses must be essential to the proper settlement of the estate. Expenditures incurred for the individual benefit
of the heirs, devisees or legatees are not deductible. 21 This distinction has been carried over to our jurisdiction. Thus, 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. 241wphi1
Coming to the case at bar, the notarial fee paid for the extrajudicial settlement is clearly a deductible expense since such settlement
effected a distribution of Pedro Pajonar's estate to his lawful heirs. Similarly, the attorney's fees paid to PNB for acting as the guardian of
Pedro Pajonar's property during his lifetime should also be considered as a deductible administration expense. PNB provided a detailed
accounting of decedent's property and gave advice as to the proper settlement of the latter's estate, acts which contributed towards the
collection of decedent's assets and the subsequent settlement of the estate.
We find that the Court of Appeals did not commit reversible error in affirming the questioned resolution of the Court of Tax Appeals.
WHEREFORE, the December 21, 1995 Decision of the Court of Appeals is AFFIRMED. The notarial fee for the extrajudicial settlement and
the attorney's fees in the guardianship proceedings are allowable deductions from the gross estate of Pedro Pajonar.1wphi1.nt
SO ORDERED.
THIRD DIVISION

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 andCOMMISSIONER 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)
Conjugal Personal Property (Sch.2)
Taxable Transfer (Sch. 3)
Gross Conjugal Estate
Less: Deductions (Sch. 4)
Net Conjugal Estate
Less: Share of Surviving Spouse
Net Share in Conjugal Estate
xxx
Net Taxable Estate
Estate Tax Due

P10,855,020.00
3,460,591.34
14,315,611.34
187,822,576.06
NIL
NIL
NIL
NIL

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
25% surcharge- late filing
late payment
Interest
Compromise-non filing
non payment
no notice of death
no CPA Certificate
Total amount due & collectible

P31,868,414.48
7,967,103.62
7,967,103.62
19,121,048.68
25,000.00
25,000.00
15.00
300.00
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 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.
[20]

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)
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"

Exhibits
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.

2.

Petition for the probate of the

Pleading entitled "Compliance"

filed with the probate Court

submitting the final inventory

of all the properties of the
deceased
(p.
106,
records);
"C"

BIR

4.

Attachment to Exh. "C" which

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

BIR

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,
records);
"H" to "H-16"

BIR

10.
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,
records);
"E" to "E-3"

BIR

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 "F3"
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,
records);
"G" & "G-1"
9.

Letter dated March 14, 1990

of Arsenio P. Dizon addressed
to Atty. Jesus M. Gonzales,
(p.
184,
records);
"I"

BIR

11.

Letter dated April 17, 1990

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

BIR

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 "K5"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.

BIR

Claim of State Investment

House, Inc. filed with the

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,
records.).
"M" to "M-5"

CTA

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;
2.

"1";

3.

p. 138
Signatures of Ma. Anabella
Abuloc and Alberto Enriquez,
Jr. appearing at the lower
Portion
of
-do-

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
Tagle
pp. 143-144
4.

Exh.
"2";

Signature of Alberto S.
Enriquez appearing at the
lower portion on p.
-do-

of

V.

Exh.

10.
5.
"2";

Signature of Ma. Anabella A.

Abuloc appearing at the
lower portion on p. 2
-do-

of

Exh.

"3";
11.

6.
"2";

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

of

Exh.

"3";
12.

7.
"2";

Signature of Maximino V.
Tagle also appearing on
p.
2
of
-do-

Exh.

"3";
13.

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

"3";

Signature of Alberto
Enriquez at the lower
portion
of
-do-

Signature of Raymond S.
Gallardo at the lower
portion
of
-do-

Exh.

Signature of Maximino
V. Tagle at the lower
portion
of
-do-

Exh.

and
14.
00

Assessment
Notice
pp. 169-170[22]

19,

Exh.

Exh.

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;
p. 169

8.

9.

Signature of Ma. Anabella A.

Abuloc at the lower
portion
of
-do-

FAS-E-87-91-

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
Conjugal Personal Prop.
Gross Conjugal Estate
Less: Deductions
Net Conjugal Estate
Less: Share of Surviving Spouse
Net Share in Conjugal Estate
Add: Capital/Paraphernal
Properties P44,652,813.66
Less: Capital/Paraphernal
Deductions
Net Taxable Estate
Estate Tax Due P 29,935,342.97
Add: 25% Surcharge for Late Filing
Add: Penalties for-No notice of death
No CPA certificate
Total deficiency estate tax

P 5,062,016.00
33,021,999.93
38,084,015.93
26,250,000.00
P 11,834,015.93
5,917,007.96
P 5,917,007.96

44,652,813.66
P 50,569,821.62
============
7,483,835.74
15.00
300.00
P 37,419,493.71
=============

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 Oatehas 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 Issues
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 Oatehas 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. InInterpacific Transit, Inc. v. Aviles [186 SCRA 385], we had the occasion to make a distinction between
identification of documentary evidence and its formal offer as an exhibit. We said that the first is done in the course of the trial and is
accompanied by the marking of the evidence as an exhibit while the second is done only when the party rests its case and not before.
A party, therefore, may opt to formally offer his evidence if he believes that it will advance his cause or not to do so at all. In the
event he chooses to do the latter, the trial court is not authorized by the Rules to consider the same.
However, in People v. Napat-a [179 SCRA 403] citing People v. Mate [103 SCRA 484], we relaxed the foregoing rule and
allowed evidence not formally offered to be admitted and considered by the trial court provided the following requirements
are present, viz.: first, the same must have been duly identified by testimony duly recorded and, second, the same must have
been incorporated in the records of the case.[40]
From the foregoing declaration, however, it is clear that Vda. de Oate is merely an exception to the general rule. Being an exception, it may
be applied only when there is strict compliance with the requisites mentioned therein; otherwise, the general rule in Section 34 of Rule 132 of the Rules
of Court should prevail.
In this case, we find that these requirements have not been satisfied. The assailed pieces of evidence were presented and marked during the trial
particularly when Alberto took the witness stand. Alberto identified these pieces of evidence in his direct testimony. [41] He was also subjected to crossexamination and re-cross examination by petitioner.[42] But Albertos account and the exchanges between Alberto and petitioner did not sufficiently
describe the contents of the said pieces of evidence presented by the BIR. In fact, petitioner sought that the lead examiner, one Ma. Anabella A.
Abuloc, be summoned to testify, inasmuch as Alberto was incompetent to answer questions relative to the working papers. [43] The lead examiner never
testified. Moreover, while Alberto's testimony identifying the BIR's evidence was duly recorded, the BIR documents themselves were not incorporated in
the records of the case.
A common fact threads through Vda. de Oate and Ramos that does not exist at all in the instant case. In the aforementioned cases, the exhibits
were marked at the pre-trial proceedings to warrant the pronouncement that the same were duly incorporated in the records of the case. Thus, we held
in Ramos:
In this case, we find and so rule that these requirements have been satisfied. The exhibits in question were presented and
marked during the pre-trial of the case thus, they have been incorporated into the records. Further, Elpidio himself explained
the contents of these exhibits when he was interrogated by respondents' counsel...
xxxx
But what further defeats petitioner's cause on this issue is that respondents' exhibits were marked and admitted during the pre-trial
stage as shown by the Pre-Trial Order quoted earlier.[44]
While the CTA is not governed strictly by technical rules of evidence,
[45]
as rules of procedure are not ends in themselves and are primarily intended as tools in the administration of justice, the
presentation of the BIR's evidence is not a mere procedural technicality which may be disregarded considering that it is the only
means by which the CTA may ascertain and verify the truth of BIR's claims against the Estate. [46] The BIR's failure to formally offer
these pieces of evidence, despite CTA's directives, is fatal to its cause. [47] Such failure is aggravated by the fact that not even a single
reason was advanced by the BIR to justify such fatal omission. This, we take against the BIR.
Per the records of this case, the BIR was directed to present its evidence [48] in the hearing of February 21, 1996, but BIR's counsel failed to appear.
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]
[49]

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.
[55]

It is admitted that the claims of the Estate's aforementioned creditors have been condoned. As a mode of extinguishing an obligation,
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. 5th Circuit Court of Appeals held:
We are persuaded that the Ninth Circuit's decision...in Propstra correctly apply the Ithaca Trust date-of-death valuation principle to
enforceable claims against the estate. As we interpret Ithaca Trust, when the Supreme Court announced the date-of-death valuation
principle, it was making a judgment about the nature of the federal estate tax specifically, that it is a tax imposed on the act of
transferring property by will or intestacy and, because the act on which the tax is levied occurs at a discrete time, i.e., the instance of
death, the net value of the property transferred should be ascertained, as nearly as possible, as of that time. This analysis supports
broad application of the date-of-death valuation rule. [67]
We express our agreement with the date-of-death valuation rule, made pursuant to the ruling of the U.S. Supreme Court in Ithaca Trust Co. v.
United States.[68] First. There is no law, nor do we discern any legislative intent in our tax laws, which disregards the date-of-death valuation principle
and particularly provides that post-death developments must be considered in determining the net value of the estate. It bears emphasis that tax burdens
are not to be imposed, nor presumed to be imposed, beyond what the statute expressly and clearly imports, tax statutes being construed strictissimi

juris against the government.[69] Any doubt on whether a person, article or activity is taxable is generally resolved against taxation. [70] Second. Such
construction finds relevance and consistency in our Rules on Special Proceedings wherein the term "claims" required to be presented against a decedent's
estate is generally construed to mean debts or demands of a pecuniary nature which could have been enforced against the deceased in his lifetime, or
liability contracted by the deceased before his death.[71] Therefore, the claims existing at the time of death are significant to, and should be made the basis
of, the determination of allowable deductions.
WHEREFORE, the instant Petition is GRANTED. Accordingly, the assailed Decision dated April 30, 1999 and the Resolution dated November
3, 1999 of the Court of Appeals in CA-G.R. S.P. No. 46947 are REVERSED and SET ASIDE. The Bureau of Internal Revenue's deficiency estate tax
assessment against the Estate of Jose P. Fernandez is hereby NULLIFIED. No costs.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. L-69259 January 26, 1988
DELPHER TRADES CORPORATION, and DELPHIN PACHECO, petitioners,
vs.
INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES, INC., respondents.

GUTIERREZ, JR., J.:

The petitioners question the decision of the Intermediate Appellate Court which sustained the private respondent's contention that the deed
of exchange whereby Delfin Pacheco and Pelagia Pacheco conveyed a parcel of land to Delpher Trades Corporation in exchange for
2,500 shares of stock was actually a deed of sale which violated a right of first refusal under a lease contract.
Briefly, the facts of the case are summarized as follows:
In 1974, Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of 27,169 square meters of real estate
Identified as Lot. No. 1095, Malinta Estate, in the Municipality of Polo (now Valenzuela), Province of Bulacan (now Metro
Manila) which is covered by Transfer Certificate of Title No. T-4240 of the Bulacan land registry.
On April 3, 1974, the said co-owners leased to Construction Components International Inc. the same property and
providing that during the existence or after the term of this lease the lessor should he decide to sell the property leased
shall first offer the same to the lessee and the letter has the priority to buy under similar conditions (Exhibits A to A-5)
On August 3, 1974, lessee Construction Components International, Inc. assigned its rights and obligations under the
contract of lease in favor of Hydro Pipes Philippines, Inc. with the signed conformity and consent of lessors Delfin
Pacheco and Pelagia Pacheco (Exhs. B to B-6 inclusive)
The contract of lease, as well as the assignment of lease were annotated at he back of the title, as per stipulation of the
parties (Exhs. A to D-3 inclusive)
On January 3, 1976, a deed of exchange was executed between lessors Delfin and Pelagia Pacheco and defendant
Delpher Trades Corporation whereby the former conveyed to the latter the leased property (TCT No.T-4240) together
with another parcel of land also located in Malinta Estate, Valenzuela, Metro Manila (TCT No. 4273) for 2,500 shares of
stock of defendant corporation with a total value of P1,500,000.00 (Exhs. C to C-5, inclusive) (pp. 44-45, Rollo)
On the ground that it was not given the first option to buy the leased property pursuant to the proviso in the lease agreement, respondent
Hydro Pipes Philippines, Inc., filed an amended complaint for reconveyance of Lot. No. 1095 in its favor under conditions similar to those
whereby Delpher Trades Corporation acquired the property from Pelagia Pacheco and Delphin Pacheco.
After trial, the Court of First Instance of Bulacan ruled in favor of the plaintiff. The dispositive portion of the decision reads:

ACCORDINGLY, the judgment is hereby rendered declaring the valid existence of the plaintiffs preferential right to
acquire the subject property (right of first refusal) and ordering the defendants and all persons deriving rights therefrom
to convey the said property to plaintiff who may offer to acquire the same at the rate of P14.00 per square meter, more or
less, for Lot 1095 whose area is 27,169 square meters only. Without pronouncement as to attorney's fees and costs.
(Appendix I; Rec., pp. 246- 247). (Appellant's Brief, pp. 1-2; p. 134, Rollo)
The lower court's decision was affirmed on appeal by the Intermediate Appellate Court.
The defendants-appellants, now the petitioners, filed a petition for certiorari to review the appellate court's decision.
We initially denied the petition but upon motion for reconsideration, we set aside the resolution denying the petition and gave it due course.
The petitioners allege that:
The denial of the petition will work great injustice to the petitioners, in that:
1. Respondent Hydro Pipes Philippines, Inc, ("private respondent") will acquire from petitioners a parcel of industrial land
consisting of 27,169 square meters or 2.7 hectares (located right after the Valenzuela, Bulacan exit of the toll
expressway) for only P14/sq. meter, or a total of P380,366, although the prevailing value thereof is approximately
P300/sq. meter or P8.1 Million;
2. Private respondent is allowed to exercise its right of first refusal even if there is no "sale" or transfer of actual
ownership interests by petitioners to third parties; and
3. Assuming arguendo that there has been a transfer of actual ownership interests, private respondent will acquire the
land not under "similar conditions" by which it was transferred to petitioner Delpher Trades Corporation, as provided in
the same contractual provision invoked by private respondent. (pp. 251-252, Rollo)
The resolution of the case hinges on whether or not the "Deed of Exchange" of the properties executed by the Pachecos on the one hand
and the Delpher Trades Corporation on the other was meant to be a contract of sale which, in effect, prejudiced the private respondent's
right of first refusal over the leased property included in the "deed of exchange."
Eduardo Neria, a certified public accountant and son-in-law of the late Pelagia Pacheco testified that Delpher Trades Corporation is a
family corporation; that the corporation was organized by the children of the two spouses (spouses Pelagia Pacheco and Benjamin
Hernandez and spouses Delfin Pacheco and Pilar Angeles) who owned in common the parcel of land leased to Hydro Pipes Philippines in
order to perpetuate their control over the property through the corporation and to avoid taxes; that in order to accomplish this end, two
pieces of real estate, including Lot No. 1095 which had been leased to Hydro Pipes Philippines, were transferred to the corporation; that
the leased property was transferred to the corporation by virtue of a deed of exchange of property; that in exchange for these properties,
Pelagia and Delfin acquired 2,500 unissued no par value shares of stock which are equivalent to a 55% majority in the corporation
because the other owners only owned 2,000 shares; and that at the time of incorporation, he knew all about the contract of lease of Lot.
No. 1095 to Hydro Pipes Philippines. In the petitioners' motion for reconsideration, they refer to this scheme as "estate planning." (p. 252,
Rollo)
Under this factual backdrop, the petitioners contend that there was actually no transfer of ownership of the subject parcel of land since the
Pachecos remained in control of the property. Thus, the petitioners allege: "Considering that the beneficial ownership and control of
petitioner corporation remained in the hands of the original co-owners, there was no transfer of actual ownership interests over the land
when the same was transferred to petitioner corporation in exchange for the latter's shares of stock. The transfer of ownership, if anything,
was merely in form but not in substance. In reality, petitioner corporation is a mere alter ego or conduit of the Pacheco co-owners; hence
the corporation and the co-owners should be deemed to be the same, there being in substance and in effect an Identity of interest." (p.
254, Rollo)
The petitioners maintain that the Pachecos did not sell the property. They argue that there was no sale and that they exchanged the land
for shares of stocks in their own corporation. "Hence, such transfer is not within the letter, or even spirit of the contract. There is a sale
when ownership is transferred for a price certain in money or its equivalent (Art. 1468, Civil Code) while there is a barter or exchange when
one thing is given in consideration of another thing (Art. 1638, Civil Code)." (pp. 254-255, Rollo)
On the other hand, the private respondent argues that Delpher Trades Corporation is a corporate entity separate and distinct from the
Pachecos. Thus, it contends that it cannot be said that Delpher Trades Corporation is the Pacheco's same alter ego or conduit; that

petitioner Delfin Pacheco, having treated Delpher Trades Corporation as such a separate and distinct corporate entity, is not a party who
may allege that this separate corporate existence should be disregarded. It maintains that there was actual transfer of ownership interests
over the leased property when the same was transferred to Delpher Trades Corporation in exchange for the latter's shares of stock.
We rule for the petitioners.
After incorporation, one becomes a stockholder of a corporation by subscription or by purchasing stock directly from the corporation or
from individual owners thereof (Salmon, Dexter & Co. v. Unson, 47 Phil, 649, citing Bole v. Fulton [1912], 233 Pa., 609). In the case at bar,
in exchange for their properties, the Pachecos acquired 2,500 original unissued no par value shares of stocks of the Delpher Trades
Corporation. Consequently, the Pachecos became stockholders of the corporation by subscription "The essence of the stock subscription
is an agreement to take and pay for original unissued shares of a corporation, formed or to be formed." (Rohrlich 243, cited in Agbayani,
Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol. III, 1980 Edition, p. 430) It is significant that the
Pachecos took no par value shares in exchange for their properties.
A no-par value share does not purport to represent any stated proportionate interest in the capital stock measured by
value, but only an aliquot part of the whole number of such shares of the issuing corporation. The holder of no-par
shares may see from the certificate itself that he is only an aliquot sharer in the assets of the corporation. But this
character of proportionate interest is not hidden beneath a false appearance of a given sum in money, as in the case of
par value shares. The capital stock of a corporation issuing only no-par value shares is not set forth by a stated amount
of money, but instead is expressed to be divided into a stated number of shares, such as, 1,000 shares. This indicates
that a shareholder of 100 such shares is an aliquot sharer in the assets of the corporation, no matter what value they
may have, to the extent of 100/1,000 or 1/10. Thus, by removing the par value of shares, the attention of persons
interested in the financial condition of a corporation is focused upon the value of assets and the amount of its debts.
(Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol. III, 1980 Edition, p. 107).
Moreover, there was no attempt to state the true or current market value of the real estate. Land valued at P300.00 a square meter was
turned over to the family's corporation for only P14.00 a square meter.
It is to be stressed that by their ownership of the 2,500 no par shares of stock, the Pachecos have control of the corporation. Their equity
capital is 55% as against 45% of the other stockholders, who also belong to the same family group.
In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What they really did was to invest their properties and
change the nature of their ownership from unincorporated to incorporated form by organizing Delpher Trades Corporation to take control of
their properties and at the same time save on inheritance taxes.
As explained by Eduardo Neria:
xxx xxx xxx
ATTY. LINSANGAN:
Q Mr. Neria, from the point of view of taxation, is there any benefit to the spouses Hernandez and
Pacheco in connection with their execution of a deed of exchange on the properties for no par value
shares of the defendant corporation?
A Yes, sir.
COURT:
Q What do you mean by "point of view"?
A To take advantage for both spouses and corporation in entering in the deed of exchange.
ATTY. LINSANGAN:
Q (What do you mean by "point of view"?) What are these benefits to the spouses of this deed of
exchange?

A Continuous control of the property, tax exemption benefits, and other inherent benefits in a
corporation.
Q What are these advantages to the said spouses from the point of view of taxation in entering in the
deed of exchange?
A Having fulfilled the conditions in the income tax law, providing for tax free exchange of property, they
were able to execute the deed of exchange free from income tax and acquire a corporation.
Q What provision in the income tax law are you referring to?
A I refer to Section 35 of the National Internal Revenue Code under par. C-sub-par. (2) Exceptions
regarding the provision which I quote: "No gain or loss shall also be recognized if a person exchanges
his property for stock in a corporation of which as a result of such exchange said person alone or
together with others not exceeding four persons gains control of said corporation."
Q Did you explain to the spouses this benefit at the time you executed the deed of exchange?
A Yes, sir
Q You also, testified during the last hearing that the decision to have no par value share in the
defendant corporation was for the purpose of flexibility. Can you explain flexibility in connection with
the ownership of the property in question?
A There is flexibility in using no par value shares as the value is determined by the board of directors in
increasing capitalization. The board can fix the value of the shares equivalent to the capital
requirements of the corporation.
Q Now also from the point of taxation, is there any flexibility in the holding by the corporation of the
property in question?
A Yes, since a corporation does not die it can continue to hold on to the property indefinitely for a
period of at least 50 years. On the other hand, if the property is held by the spouse the property will be
tied up in succession proceedings and the consequential payments of estate and inheritance taxes
when an owner dies.
Q Now what advantage is this continuity in relation to ownership by a particular person of certain
properties in respect to taxation?
A The property is not subjected to taxes on succession as the corporation does not die.
Q So the benefit you are talking about are inheritance taxes?
A Yes, sir. (pp. 3-5, tsn., December 15, 1981)
The records do not point to anything wrong or objectionable about this "estate planning" scheme resorted to by the Pachecos. "The legal
right of a taxpayer to decrease the amount of what otherwise could be his taxes or altogether avoid them, by means which the law permits,
cannot be doubted." (Liddell & Co., Inc. v. The collector of Internal Revenue, 2 SCRA 632 citing Gregory v. Helvering, 293 U.S. 465, 7 L.
ed. 596).
The "Deed of Exchange" of property between the Pachecos and Delpher Trades Corporation cannot be considered a contract of sale.
There was no transfer of actual ownership interests by the Pachecos to a third party. The Pacheco family merely changed their ownership
from one form to another. The ownership remained in the same hands. Hence, the private respondent has no basis for its claim of a light of
first refusal under the lease contract.

WHEREFORE, the instant petition is hereby GRANTED, The questioned decision and resolution of the then Intermediate Appellate Court
are REVERSED and SET ASIDE. The amended complaint in Civil Case No. 885-V-79 of the then Court of First Instance of Bulacan is
DISMISSED. No costs.
SO ORDERED.