Pablo Lorenzo vs. Collector of Internal Revenue Juan Posadas Jr.

(G.R. No. 43082, 18 June 1937, 64 Phil 353)

Type of Action/Appeal Appeal from decision of Court of First Instance Zamboanga which
dismissed both plaintiff Pablo Lorenzos complaint and defendant Juan Posadas Jr. (in his
capacity as Collector of Internal Revenue) counterclaim.
Facts Plaintiff Pablo Lorenzo (in his capacity as trustee of deceased Thomas Hanleys estate)
brought action in Court of First Instance Zamboanga on 4 October 1932 for refund of
PhP2,052.74 that he paid as inheritance tax on Hanleys estate and for the collection of interest
thereon at 6% per annum computed from 15 September 1932 (when the aforesaid tax was paid
under protest), against defendant Juan Posadas, Jr., then Collector of Internal Revenue.
During Lorenzos incumbency as trustee, Collector of Internal Revenue Posadas alleged that
Thomas left on his death an estate consisting of real properties at PhP27,920 and personal
properties at PhP1,465.
(Allowing deduction of P480.81, assessed against the estate an inheritance tax in the amount of
P1,434.24 which, together with the penalties for delinquency in payment consisting of 1%
monthly interest from 1 July 1931 to the date of payment and a surcharge of 25% on the tax,
amounted to P2,052.74.)
On 15 March 1932, Posadas filed a motion in pending testamentary proceedings before the Court
of First Instance of Zamboanga (Special Proceedings No. 302), where he asked that the trustee
and plaintiff Pablo Lorenzo be ordered to pay the Government the sum of P2,052.74.
Defendants motion was granted and on 15 September 1932, the plaintiff paid that amount under
protest. Lorenzo also notified Posadas at the same time that unless the amount was promptly
refunded, a suit would be brought for its recovery. The defendant overruled the plaintiff's protest
and refused to refund the tax paid or any part of it.
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.
Issued and Held by the Supreme Court
The following questions were raised in the appeal,
(1) When does estate (also known as inheritance) tax accrue and when must it be satisfied?
The Court held that accrual of estate tax is distinct from the obligation to pay it. Estate tax was
also defined as 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.
It held that as per Article 657 of 1889 Spanish Civil Code that 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
/archibald.manansala
Archibald Jose T. Manansala
CEU School of Law and Jurisprudence

Pablo Lorenzo vs. Collector of Internal Revenue Juan Posadas Jr.

(G.R. No. 43082, 18 June 1937, 64 Phil 353)
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.
Thus, estate tax accrued on Thomas Hanleys death on 27 May 1922.
(2) Should estate 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?
Pablo Lorenzo contended that inheritance (estate) tax should be based on the estates value in
1932 or 10 years after Thomas Hanleys death, for as far as real properties are concerned, the
estate did not and could not legally pass to the instituted heir Matthew Hanley until after
expiration of ten years from death of testator Thomas Hanley on 22 May 1922.
The Court held that 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 depreciation is immaterial.
If death is the generating source from which the power of the state to impose inheritance taxes
its being and if, upon the death of the decedent, succession takes place and the right of the state
to tax vests instantly, the tax should be measured by the value of the estate as it stood at the time
of the decedent's death, regardless of any subsequent contingency affecting value or any
subsequent increase or decrease in value.
(3) In determining net value of the estate subject to tax, is it proper to deduct the compensation
due to trustees?
The Court held that Lorenzo is entitled to fair compensation for his services, but it does mean
that his compensation may lawfully be deducted in arriving at the net value of the estate subject
to tax.
There is no Philippine statute which requires trustees' commissions to be deducted in
determining net value of the estate subject to inheritance tax.
(4) What law governs the case at bar? Should the provisions of Act No. 3606 favorable to the
taxpayer be given retroactive effect? Has there been delinquency in the payment of the estate
tax? If so, should the additional interest claimed by the defendant in his appeal be paid by the
estate?
The Court stated that inheritance taxation is governed by the statute in force at the time of
decedents death. However, a tax statute may be made retroactive in its operation. But legislative
intent that a tax statute should operate retroactively should be perfectly clear. Since Act No. 3606
itself contains no provisions indicating legislative intent to give retroactive effect, no such effect
can be given by the Court.

/archibald.manansala
Archibald Jose T. Manansala
CEU School of Law and Jurisprudence

Pablo Lorenzo vs. Collector of Internal Revenue Juan Posadas Jr.

(G.R. No. 43082, 18 June 1937, 64 Phil 353)
Verdict The Supreme Court MODIFIED the CFI Zamboangas judgment, with costs against
plaintiff Pablo Lorenzo in both instances.
It held that since he has already paid PhP2,052.74, only PhP1,581.69 is legally due from the
estate. However, the Court held that Lorenzo is only liable for PhP1,191.27, the amount stated in
defendants counterclaim.

/archibald.manansala
Archibald Jose T. Manansala
CEU School of Law and Jurisprudence