G.R. No. L-43082 June 18, 1937 6.
8, 1937 6. I direct that ten (10) years after my death my property be given to the above
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.
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, gift mortis causa, or advance in anticipation of
inheritance,devise, or bequest." The tax therefore is upon transmission or the transfer or
devolution of property of a decedent, made effective by his death. (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 the cestui 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 his cestui 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.
Avancea, C.J., Abad Santos, Imperial, Diaz and Concepcion, JJ., concur.
Villa-Real, J., concurs.
 After the estate proceedings were closed, the Bureau of Internal Revenue investigated the
income tax liability of the estate for the years 1945, 1946, 1947 and 1948 and it found that the
corresponding income tax returns were not filed. Thereupon, the representative of the
Collector of Internal Revenue filed said returns for the estate on the basis of information and
data obtained from the aforesaid estate proceedings and issued an assessment for the
following:
1. Deficiency income tax
1945 P135.83
1946 436.95
1947 1,206.91 P1,779.69
Add: 5% surcharge 88.98
1% monthly interest from
November 30, 1953 to
April 15, 1957 720.77
Compromise for late filing 80.00
Compromise for late
payment 40.00

Total amount due P2,707.44

===========
Additional residence tax for P14.50
2.
1945 ===========
G.R. No. L-22734 September 15, 1967 3. Real Estate dealer's tax for the
COMMISSIONER OF INTERNAL REVENUE, petitioner, fourth quarter of 1946 and the P207.50
vs. whole year of 1947 ===========
MANUEL B. PINEDA, as one of the heirs of deceased ATANASIO PINEDA, respondent. Manuel B. Pineda, who received the assessment, contested the same. Subsequently, he
Office of the Solicitor General for petitioner. appealed to the Court of Tax Appeals alleging that he was appealing "only that proportionate
Manuel B. Pineda for and in his own behalf as respondent. part or portion pertaining to him as one of the heirs."
After hearing the parties, the Court of Tax Appeals rendered judgment reversing the decision
BENGZON, J.P., J.: of the Commissioner on the ground that his right to assess and collect the tax has prescribed.
The Commissioner appealed and this Court affirmed the findings of the Tax Court in respect
On May 23, 1945 Atanasio Pineda died, survived by his wife, Felicisima Bagtas, and 15
to the assessment for income tax for the year 1947 but held that the right to assess and
children, the eldest of whom is Manuel B. Pineda, a lawyer. Estate proceedings were had in
collect the taxes for 1945 and 1946 has not prescribed. For 1945 and 1946 the returns were
the Court of First Instance of Manila (Case No. 71129) wherein the surviving widow was
filed on August 24, 1953; assessments for both taxable years were made within five years
appointed administratrix. The estate was divided among and awarded to the heirs and the
therefrom or on October 19, 1953; and the action to collect the tax was filed within five years
proceedings terminated on June 8, 1948. Manuel B. Pineda's share amounted to about
from the latter date, on August 7, 1957. For taxable year 1947, however, the return was filed
P2,500.00.
on March 1, 1948; the assessment was made on October 19, 1953, more than five years
from the date the return was filed; hence, the right to assess income tax for 1947 had
prescribed. Accordingly, We remanded the case to the Tax Court for further appropriate
proceedings.1
In the Tax Court, the parties submitted the case for decision without additional evidence.
On November 29, 1963 the Court of Tax Appeals rendered judgment holding Manuel B.
Pineda liable for the payment corresponding to his share of the following taxes:
Deficiency income tax
1945 P135.83
1946 436.95
Real estate dealer's
fixed tax 4th quarter of
1946 and whole year of
1947 P187.50
The Commissioner of Internal Revenue has appealed to Us and has proposed to hold Manuel
B. Pineda liable for the payment of all the taxes found by the Tax Court to be due from the
estate in the total amount of P760.28 instead of only for the amount of taxes corresponding to
his share in the estate.1awphl.nt
Manuel B. Pineda opposes the proposition on the ground that as an heir he is liable for
unpaid income tax due the estate only up to the extent of and in proportion to any share he
received. He relies on Government of the Philippine Islands v. Pamintuan 2 where We held
that "after the partition of an estate, heirs and distributees are liable individually for the
payment of all lawful outstanding claims against the estate in proportion to the amount or
value of the property they have respectively received from the estate."
We hold that the Government can require Manuel B. Pineda to pay the full amount of the
taxes assessed.
Pineda is liable for the assessment as an heir and as a holder-transferee of property
belonging to the estate/taxpayer. As an heir he is individually answerable for the part of the
tax proportionate to the share he received from the inheritance. 3 His liability, however, cannot
exceed the amount of his share.4
As a holder of property belonging to the estate, Pineda is liable for he tax up to the amount of
the property in his possession. The reason is that the Government has a lien on the
P2,500.00 received by him from the estate as his share in the inheritance, for unpaid income
taxes4a for which said estate is liable, pursuant to the last paragraph of Section 315 of the Tax
Code, which we quote hereunder:
If any person, corporation, partnership, joint-account (cuenta en participacion), association, or
insurance company liable to pay the income tax, neglects or refuses to pay the same after
demand, the amount shall be a lien in favor of the Government of the Philippines from the
time when the assessment was made by the Commissioner of Internal Revenue until paid
with interest, penalties, and costs that may accrue in addition thereto upon all property and
rights to property belonging to the taxpayer: . . .
By virtue of such lien, the Government has the right to subject the property in Pineda's
possession, i.e., the P2,500.00, to satisfy the income tax assessment in the sum of P760.28.
After such payment, Pineda will have a right of contribution from his co-heirs, 5 to achieve an
adjustment of the proper share of each heir in the distributable estate.
All told, the Government has two ways of collecting the tax in question. One, by going after all
the heirs and collecting from each one of them the amount of the tax proportionate to the
inheritance received. This remedy was adopted in Government of the Philippine Islands v.
Pamintuan, supra. In said case, the Government filed an action against all the heirs for the
collection of the tax. This action rests on the concept that hereditary property consists only of
that part which remains after the settlement of all lawful claims against the estate, for the
settlement of which the entire estate is first liable. 6 The reason why in case suit is filed against
all the heirs the tax due from the estate is levied proportionately against them is to achieve
thereby two results: first, payment of the tax; and second, adjustment of the shares of each
heir in the distributed estate as lessened by the tax.
Another remedy, pursuant to the lien created by Section 315 of the Tax Code upon all
property and rights to property belonging to the taxpayer for unpaid income tax, is by
subjecting said property of the estate which is in the hands of an heir or transferee to the
payment of the tax due, the estate. This second remedy is the very avenue the Government
took in this case to collect the tax. The Bureau of Internal Revenue should be given, in
instances like the case at bar, the necessary discretion to avail itself of the most expeditious
way to collect the tax as may be envisioned in the particular provision of the Tax Code above
quoted, because taxes are the lifeblood of government and their prompt and certain
availability is an imperious need. 7 And as afore-stated in this case the suit seeks to achieve
only one objective: payment of the tax. The adjustment of the respective shares due to the
heirs from the inheritance, as lessened by the tax, is left to await the suit for contribution by
the heir from whom the Government recovered said tax.
WHEREFORE, the decision appealed from is modified. Manuel B. Pineda is hereby ordered
to pay to the Commissioner of Internal Revenue the sum of P760.28 as deficiency income tax
for 1945 and 1946, and real estate dealer's fixed tax for the fourth quarter of 1946 and for the
whole year 1947, without prejudice to his right of contribution for his co-heirs. No costs. So
ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and
Fernando, JJ., concur.

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 Decision 1 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 Resolution 8 ordering the Commissioner of
Internal Revenue to refund Josefina Pajonar, as administratrix of the estate of Pedro Pajonar,
the amount of P76,502.42 representing erroneously paid estate tax for the year 1988. Also,
the CTA upheld the validity of the deduction of the notarial fee for the Extrajudicial Settlement
and the attorney's fees in the guardianship proceedings.
On July 5, 1994, the Commissioner of Internal Revenue filed with the Court of Appeals a
petition for review of the CTA's May 6, 1993 Decision and its June 7, 1994 Resolution,
questioning the validity of the abovementioned deductions. On December 21, 1995, the Court
of Appeals denied the Commissioner's petition.9
Hence, the present appeal by the Commissioner of Internal Revenue.
The sole issue in this case involves the construction of section 79 10 of the National Internal
Revenue Code 11(Tax Code) which provides for the allowable deductions from the gross
estate of the decedent. More particularly, the question is whether the notarial fee paid for the
extrajudicial settlement in the amount of P60,753 and the attorney's fees in the guardianship
proceedings in the amount of P50,000 may be allowed as deductions from the gross estate of
decedent in order to arrive at the value of the net estate.
We answer this question in the affirmative, thereby upholding the decisions of the appellate
courts.
In its May 6, 1993 Decision, the Court of Tax Appeals ruled thus:
Respondent maintains that only judicial expenses of the testamentary or intestate
proceedings are allowed as a deduction to the gross estate. The amount of P60,753.00 is
quite extraordinary for a mere notarial fee.
This Court adopts the view under American jurisprudence that expenses incurred in the
extrajudicial settlement of the estate should be allowed as a deduction from the gross estate.
"There is no requirement of formal administration. It is sufficient that the expense be a
necessary contribution toward the settlement of the case." [ 34 Am. Jur. 2d, p. 765; Nolledo,
Bar Reviewer in Taxation, 10th Ed. (1990), p. 481]
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 1990, Justice Dizon authorized Atty. Jesus M. Gonzales (Atty. Gonzales) to sign and file on
collection of decedent's assets and the subsequent settlement of the estate. behalf of the Estate the required estate tax return and to represent the same in securing a
We find that the Court of Appeals did not commit reversible error in affirming the questioned Certificate of Tax Clearance. Eventually, on April 17, 1990, Atty. Gonzales wrote a
resolution of the Court of Tax Appeals. letter9addressed to the BIR Regional Director for San Pablo City and filed the estate tax
return10 with the same BIR Regional Office, showing therein a NIL estate tax liability,
WHEREFORE, the December 21, 1995 Decision of the Court of Appeals is AFFIRMED. The
computed as follows:
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 COMPUTATION OF TAX
SO ORDERED. Conjugal Real Property (Sch. 1) P10,855,020.00
Melo, Vitug, Panganiban and Purisima, JJ., concur. Conjugal Personal Property (Sch.2) 3,460,591.34
Taxable Transfer (Sch. 3)
Gross Conjugal Estate 14,315,611.34
Less: Deductions (Sch. 4) 187,822,576.06
Net Conjugal Estate NIL
Less: Share of Surviving Spouse NIL.
G.R. No. 140944 April 30, 2008
Net Share in Conjugal Estate NIL
RAFAEL ARSENIO S. DIZON, in his capacity as the Judicial Administrator of the Estate
xxx
of the deceased JOSE P. FERNANDEZ, petitioner,
vs. Net Taxable Estate NIL.
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.
Estate Tax Due NIL.11
DECISION
On April 27, 1990, BIR Regional Director for San Pablo City, Osmundo G. Umali issued
NACHURA, J.: Certification Nos. 2052[12]and 2053[13] stating that the taxes due on the transfer of real and
Before this Court is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Civil personal properties[14] of Jose had been fully paid and said properties may be transferred to
Procedure seeking the reversal of the Court of Appeals (CA) Decision 2 dated April 30, 1999 his heirs. Sometime in August 1990, Justice Dizon passed away. Thus, on October 22, 1990,
which affirmed the Decision3 of the Court of Tax Appeals (CTA) dated June 17, 1997.4 the probate court appointed petitioner as the administrator of the Estate. 15
The Facts Petitioner requested the probate court's authority to sell several properties forming part of the
On November 7, 1987, Jose P. Fernandez (Jose) died. Thereafter, a petition for the probate Estate, for the purpose of paying its creditors, namely: Equitable Banking Corporation
of his will5 was filed with Branch 51 of the Regional Trial Court (RTC) of Manila (probate (P19,756,428.31), Banque de L'Indochine et. de Suez (US$4,828,905.90 as of January 31,
court).[6] The probate court then appointed retired Supreme Court Justice Arsenio P. Dizon 1988), Manila Banking Corporation (P84,199,160.46 as of February 28, 1989) and State
(Justice Dizon) and petitioner, Atty. Rafael Arsenio P. Dizon (petitioner) as Special and Investment House, Inc. (P6,280,006.21). Petitioner manifested that Manila Bank, a major
Assistant Special Administrator, respectively, of the Estate of Jose (Estate). In a letter 7dated creditor of the Estate was not included, as it did not file a claim with the probate court since it
October 13, 1988, Justice Dizon informed respondent Commissioner of the Bureau of Internal had security over several real estate properties forming part of the Estate. 16
Revenue (BIR) of the special proceedings for the Estate. However, on November 26, 1991, the Assistant Commissioner for Collection of the BIR,
Petitioner alleged that several requests for extension of the period to file the required estate Themistocles Montalban, issued Estate Tax Assessment Notice No. FAS-E-87-91-
tax return were granted by the BIR since the assets of the estate, as well as the claims 003269,17 demanding the payment of P66,973,985.40 as deficiency estate tax, itemized as
against it, had yet to be collated, determined and identified. Thus, in a letter 8 dated March 14, follows:
 Deficiency Estate Tax- 1987 listing of the properties of the deceased (pp. 89-105, BIR
rec.);
Estate tax P31,868,414.48
5. Claims against the estate filed by Equitable Banking Corp. "D" to "D-24"
25% surcharge- late filing 7,967,103.62
with the probate Court in the amount of P19,756,428.31 as
late payment 7,967,103.62 of March 31, 1988, together with the Annexes to the claim
Interest 19,121,048.68 (pp. 64-88, BIR records);

Compromise-non filing 25,000.00 6. Claim filed by Banque de L' Indochine et de Suez with the "E" to "E-3"
probate Court in the amount of US $4,828,905.90 as of
non payment 25,000.00 January 31, 1988 (pp. 262-265, BIR records);
no notice of death 15.00 7. Claim of the Manila Banking Corporation (MBC) which as of "F" to "F-3"
no CPA Certificate 300.00 November 7, 1987 amounts to P65,158,023.54, but
recomputed as of February 28, 1989 at a total amount
Total amount due & collectible P66,973,985.4018 of P84,199,160.46; together with the demand letter from
In his letter19 dated December 12, 1991, Atty. Gonzales moved for the reconsideration of the MBC's lawyer (pp. 194-197, BIR records);
said estate tax assessment. However, in her letter 20 dated April 12, 1994, the BIR
8. Demand letter of Manila Banking Corporation prepared by "G" & "G-1"
Commissioner denied the request and reiterated that the estate is liable for the payment
Asedillo, Ramos and Associates Law Offices addressed to
of P66,973,985.40 as deficiency estate tax. On May 3, 1994, petitioner received the letter of
Fernandez Hermanos, Inc., represented by Jose P.
denial. On June 2, 1994, petitioner filed a petition for review 21 before respondent CTA. Trial
Fernandez, as mortgagors, in the total amount
on the merits ensued.
of P240,479,693.17 as of February 28, 1989 (pp. 186-187,
As found by the CTA, the respective parties presented the following pieces of evidence, to BIR records);
wit:
9. Claim of State Investment House, Inc. filed with the RTC, "H" to "H-16"
In the hearings conducted, petitioner did not present testimonial evidence but merely
Branch VII of Manila, docketed as Civil Case No. 86-38599
documentary evidence consisting of the following:
entitled "State Investment House, Inc., Plaintiff, versus
Nature of Document (sic) Exhibits Maritime Company Overseas, Inc. and/or Jose P.
1. Letter dated October 13, 1988 from Arsenio P. Dizon "A" Fernandez, Defendants," (pp. 200-215, BIR records);
addressed to the Commissioner of Internal Revenue 10. Letter dated March 14, 1990 of Arsenio P. Dizon addressed "I"
informing the latter of the special proceedings for the to Atty. Jesus M. Gonzales, (p. 184, BIR records);
settlement of the estate (p. 126, BIR records);
11. Letter dated April 17, 1990 from J.M. Gonzales addressed to "J"
2. Petition for the probate of the will and issuance of letter of "B" & "B-1" the Regional Director of BIR in San Pablo City (p. 183, BIR
administration filed with the Regional Trial Court (RTC) of records);
Manila, docketed as Sp. Proc. No. 87-42980 (pp. 107-108,
12. Estate Tax Return filed by the estate of the late Jose P. "K" to "K-5"
BIR records);
Fernandez through its authorized representative, Atty. Jesus
3. Pleading entitled "Compliance" filed with the probate Court "C" M. Gonzales, for Arsenio P. Dizon, with attachments (pp.
submitting the final inventory of all the properties of the 177-182, BIR records);
deceased (p. 106, BIR records);
13. Certified true copy of the Letter of Administration issued by "L"
4. Attachment to Exh. "C" which is the detailed and complete "C-1" to "C-17" 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
14. Certification of Payment of estate taxes Nos. 2052 and 2053, "M" to "M-5"
both dated April 27, 1990, issued by the Office of the
Regional Director, Revenue Region No. 4-C, San Pablo City,
with attachments (pp. 103-104, CTA records.).
Respondent's [BIR] counsel presented on June 26, 1995 one witness in the person of
Alberto Enriquez, who was one of the revenue examiners who conducted the
investigation on the estate tax case of the late Jose P. Fernandez. In the course of the
direct examination of the witness, he identified the following:
Documents/Signatures BIR Record
1. Estate Tax Return prepared by the BIR; p. 138
2. Signatures of Ma. Anabella Abuloc and Alberto Enriquez, Jr. -do-
appearing at the lower Portion of Exh. "1";
3. Memorandum for the Commissioner, dated July 19, 1991, pp. 143-144
prepared by revenue examiners, Ma. Anabella A. Abuloc,
Alberto S. Enriquez and Raymund S. Gallardo; Reviewed by
Maximino V. Tagle
4. Signature of Alberto S. Enriquez appearing at the lower -do-
portion on p. 2 of Exh. "2";
"3";
13. Demand letter (FAS-E-87-91-00), signed by the Asst. p. 169
Commissioner for Collection for the Commissioner of
Internal Revenue, demanding payment of the amount
of P66,973,985.40; and
14. Assessment Notice FAS-E-87-91-00 pp. 169-17022
The CTA's Ruling
On June 17, 1997, the CTA denied the said petition for review. Citing this Court's ruling
in Vda. de Oate v. Court of Appeals,23 the CTA opined that the aforementioned pieces of
evidence introduced by the BIR were admissible in evidence. The CTA ratiocinated:
Although the above-mentioned documents were not formally offered as evidence for
respondent, considering that respondent has been declared to have waived the presentation
thereof during the hearing on March 20, 1996, still they could be considered as evidence for
respondent since they were properly identified during the presentation of respondent's
witness, whose testimony was duly recorded as part of the records of this case. Besides, the
documents marked as respondent's exhibits formed part of the BIR records of the case. 24
Nevertheless, the CTA did not fully adopt the assessment made by the BIR and it came up
with its own computation of the deficiency estate tax, to wit:
Conjugal Real Property P 5,062,016.00
Conjugal Personal Prop. 33,021,999.93

5. Signature of Ma. Anabella A. Abuloc appearing at the lower -do- Gross Conjugal Estate 38,084,015.93
portion on p. 2 of Exh. "2"; Less: Deductions 26,250,000.00
6. Signature of Raymund S. Gallardo appearing at the Lower -do- Net Conjugal Estate P 11,834,015.93
portion on p. 2 of Exh. "2";
Less: Share of Surviving Spouse 5,917,007.96
7. Signature of Maximino V. Tagle also appearing on p. 2 of -do-
Exh. "2"; Net Share in Conjugal Estate P 5,917,007.96

8. Summary of revenue Enforcement Officers Audit Report, p. 139 Add: Capital/Paraphernal

dated July 19, 1991; Properties P44,652,813.66
9. Signature of Alberto Enriquez at the lower portion of Exh. "3"; -do- Less: Capital/Paraphernal 44,652,813.66
10. Signature of Ma. Anabella A. Abuloc at the lower portion of -do- Deductions
Exh. "3"; Net Taxable Estate P 50,569,821.62
11. Signature of Raymond S. Gallardo at the lower portion of -do- ============
Exh. "3";
12. Signature of Maximino V. Tagle at the lower portion of Exh. -do-
 Estate Tax Due P 29,935,342.97
Add: 25% Surcharge for Late Filing 7,483,835.74
Add: Penalties for-No notice of death 15.00
No CPA certificate 300.00
Total deficiency estate tax P 37,419,493.71
============
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
Resolution30 dated November 3, 1999.
Hence, the instant Petition raising the following issues:
1. Whether or not the admission of evidence which were not formally offered by the
respondent BIR by the Court of Tax Appeals which was subsequently upheld by the Court of
Appeals is contrary to the Rules of Court and rulings of this Honorable Court;
2. Whether or not the Court of Tax Appeals and the Court of Appeals erred in
recognizing/considering the estate tax return prepared and filed by respondent BIR knowing
that the probate court appointed administrator of the estate of Jose P. Fernandez had
previously filed one as in fact, BIR Certification Clearance Nos. 2052 and 2053 had been
issued in the estate's favor;
3. Whether or not the Court of Tax Appeals and the Court of Appeals erred in disallowing the
valid and enforceable claims of creditors against the estate, as lawful deductions despite
clear and convincing evidence thereof; and
4. Whether or not the Court of Tax Appeals and the Court of Appeals erred in validating
erroneous double imputation of values on the very same estate properties in the estate tax
return it prepared and filed which effectively bloated the estate's assets. 31
The petitioner claims that in as much as the valid claims of creditors against the Estate are in
excess of the gross estate, no estate tax was due; that the lack of a formal offer of evidence
is fatal to BIR's cause; that the doctrine laid down in Vda. de Oate has already been
abandoned in a long line of cases in which the Court held that evidence not formally offered is
without any weight or value; that Section 34 of Rule 132 of the Rules on Evidence requiring a
formal offer of evidence is mandatory in character; that, while BIR's witness Alberto Enriquez
(Alberto) in his testimony before the CTA identified the pieces of evidence aforementioned
such that the same were marked, BIR's failure to formally offer said pieces of evidence and
depriving petitioner the opportunity to cross-examine Alberto, render the same inadmissible in
evidence; that assuming arguendo that the ruling in Vda. de Oate is still applicable, BIR
failed to comply with the doctrine's requisites because the documents herein remained simply
part of the BIR records and were not duly incorporated in the court records; that the BIR failed
to consider that although the actual payments made to the Estate creditors were lower than
their respective claims, such were compromise agreements reached long after the Estate's
liability had been settled by the filing of its estate tax return and the issuance of BIR
Certification Nos. 2052 and 2053; and that the reckoning date of the claims against the Estate
and the settlement of the estate tax due should be at the time the estate tax return was filed
by the judicial administrator and the issuance of said BIR Certifications and not at the time the
aforementioned Compromise Agreements were entered into with the Estate's creditors. 32
On the other hand, respondent counters that the documents, being part of the records of the
case and duly identified in a duly recorded testimony are considered evidence even if the
same were not formally offered; that the filing of the estate tax return by the Estate and the
issuance of BIR Certification Nos. 2052 and 2053 did not deprive the BIR of its authority to
examine the return and assess the estate tax; and that the factual findings of the CTA as
affirmed by the CA may no longer be reviewed by this Court via a petition for review.33
The 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-a35 and People v. Mate36 on the admission and
consideration of exhibits which were not formally offered during the trial. Although in a long
line of cases many of which were decided after Vda. de Oate, we held that courts cannot
consider evidence which has not been formally offered, 37 nevertheless, petitioner cannot
validly assume that the doctrine laid down in Vda. de Oate has already been abandoned.
Recently, in Ramos v. Dizon,38 this Court, applying the said doctrine, ruled that the trial court
judge therein committed no error when he admitted and considered the respondents' exhibits
in the resolution of the case, notwithstanding the fact that the same were not formally offered.
Likewise, in Far East Bank & Trust Company v. Commissioner of Internal Revenue,39 the
Court made reference to said doctrine in resolving the issues therein. Indubitably, the doctrine
laid down in Vda. De Oate still subsists in this jurisdiction. In Vda. de Oate, we held that:
From the foregoing provision, it is clear that for evidence to be considered, the same must be
formally offered. Corollarily, the mere fact that a particular document is identified and marked
as an exhibit does not mean that it has already been offered as part of the evidence of a
party. In Interpacific Transit, Inc. v. Aviles[186 SCRA 385], we had the occasion to make a
distinction between identification of documentary evidence and its formal offer as an exhibit.
We said that the first is done in the course of the trial and is accompanied by the marking of
the evidence as an exhibit while the second is done only when the party rests its case and
not before. A party, therefore, may opt to formally offer his evidence if he believes that it will
advance his cause or not to do so at all. In the event he chooses to do the latter, the trial
court is not authorized by the Rules to consider the same.
However, in People v. Napat-a [179 SCRA 403] citing People v. Mate [103 SCRA 484], we
relaxed the foregoing rule and allowed evidence not formally offered to be admitted
and considered by the trial court provided the following requirements are present, viz.:
first, the same must have been duly identified by testimony duly recorded and, second,
the same must have been incorporated in the records of the case.40
From the foregoing declaration, however, it is clear that Vda. de Oate is merely an exception
to the general rule. Being an exception, it may be applied only when there is strict compliance
with the requisites mentioned therein; otherwise, the general rule in Section 34 of Rule 132 of
the Rules of Court should prevail.
In this case, we find that these requirements have not been satisfied. The assailed pieces of
evidence were presented and marked during the trial particularly when Alberto took the
witness stand. Alberto identified these pieces of evidence in his direct testimony. 41 He was
also subjected to cross-examination and re-cross examination by petitioner.42 But Albertos
account and the exchanges between Alberto and petitioner did not sufficiently describe the
contents of the said pieces of evidence presented by the BIR. In fact, petitioner sought that
the lead examiner, one Ma. Anabella A. Abuloc, be summoned to testify, inasmuch as Alberto
was incompetent to answer questions relative to the working papers. 43 The lead examiner
never testified. Moreover, while Alberto's testimony identifying the BIR's evidence was duly
recorded, the BIR documents themselves were not incorporated in the records of the case.
A common fact threads through Vda. de Oate and Ramos that does not exist at all in the
instant case. In the aforementioned cases, the exhibits were marked at the pre-trial
proceedings to warrant the pronouncement that the same were duly incorporated in the
records of the case. Thus, we held in Ramos:
In this case, we find and so rule that these requirements have been satisfied. The exhibits in
question were presented and marked during the pre-trial of the case thus, they have
been incorporated into the records. Further, Elpidio himself explained the contents of these
exhibits when he was interrogated by respondents' counsel...
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.49 The CTA denied petitioner's motion
to consider BIR's presentation of evidence as waived, with a warning to BIR that such
presentation would be considered waived if BIR's evidence would not be presented at the
next hearing. Again, in the hearing of March 20, 1996, BIR's counsel failed to appear. 50 Thus,
in its Resolution51 dated March 21, 1996, the CTA considered the BIR to have waived
presentation of its evidence. In the same Resolution, the parties were directed to file their
respective memorandum. Petitioner complied but BIR failed to do so. 52 In all of these
proceedings, BIR was duly notified. Hence, in this case, we are constrained to apply our
ruling in Heirs of Pedro Pasag v. Parocha:53
A formal offer is necessary because judges are mandated to rest their findings of facts and
their judgment only and strictly upon the evidence offered by the parties at the trial. Its
function is to enable the trial judge to know the purpose or purposes for which the proponent
is presenting the evidence. On the other hand, this allows opposing parties to examine the
evidence and object to its admissibility. Moreover, it facilitates review as the appellate court
will not be required to review documents not previously scrutinized by the trial court.
Strict adherence to the said rule is not a trivial matter. The Court in Constantino v. Court of
Appeals ruled that the formal offer of one's evidence is deemed waived after failing to
submit it within a considerable period of time. It explained that the court cannot admit
an offer of evidence made after a lapse of three (3) months because to do so would
"condone an inexcusable laxity if not non-compliance with a court order which, in
effect, would encourage needless delays and derail the speedy administration of
justice."
Applying the aforementioned principle in this case, we find that the trial court had reasonable
ground to consider that petitioners had waived their right to make a formal offer of
documentary or object evidence. Despite several extensions of time to make their formal
offer, petitioners failed to comply with their commitment and allowed almost five months to
lapse before finally submitting it. Petitioners' failure to comply with the rule on
admissibility of evidence is anathema to the efficient, effective, and expeditious
dispensation of justice.
Having disposed of the foregoing procedural issue, we proceed to discuss the merits of the
case.
Ordinarily, the CTA's findings, as affirmed by the CA, are entitled to the highest respect and
will not be disturbed on appeal unless it is shown that the lower courts committed gross error
in the appreciation of facts.54 In this case, however, we find the decision of the CA affirming
that of the CTA tainted with palpable error.
It is admitted that the claims of the Estate's aforementioned creditors have been condoned.
As a mode of extinguishing an obligation,55 condonation or remission of debt56 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 Code59 (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. 64Recognizing 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.71Therefore, 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.
ANTONIO EDUARDO B. NACHURA
Associate Justice

[G.R. No. L-7253. March 26, 1956.]
INTESTADO DE DON VALENTIN DESCALS, Plaintiff-Appellant, vs. ADMINISTRADOR
DE RENTAS INTERNAS, Defendant-Appellee.
DECISION
MONTEMAYOR, J.:
The facts in this case are not disputed. Valentin Descals, an American citizen, died on
September 17, 1948, in the City of Manila where he was a resident. He left as heirs his
brothers Antonio and Ricardo and a sister Angeles, all surnamed Descals. About two years
before his death he and his brother Ricardo jointly bought a piece of real estate property
situated in the city of Barcelona, Spain. In the course of the administration of said property in
Spain, the two brothers had differences, particularly about the repair and remodeling of the
same, and to settle said differences, they agreed that Valentin become the owner of the entire
property by buying his brother Ricardos interest in it. After an accounting, said interest of
Ricardo was valued at P46,000 and Valentin acknowledged the said sum as a debt by means
of a promissory note dated November 1, 1946.
After the death of Valentin, proceedings were initiated in the City of Manila for the
administration of his estate. The administrator did not include in his inventory that property in
Spain. According to his accounts the gross value of the estate was P64,000 but after the
payment of the expenses, this was rendered to around P44,000. Ricardo filed before the
probate court a claim for P46,000 with interest based on the promissory note executed by his
brother in 1946. Said claim was approved. The administrator paid about P30,000 on account
of this claim with interest leaving a balance of about P26,000. The balance in favor of Ricardo
was later reduced to about P4,000 after the administrator had delivered to him certain shares
of stock and cash belonging to the estate. On the basis of this accounting and report of the
administrator, there, apparently, was no property left in the estate subject to estate and
inheritance tax.
The Collector of Internal Revenue, however, assessed the estate for purposes of taxation
without deducting the claim filed by Ricardo despite its approval by the probate court and
fixed and demanded the payment of P701.53 by way of estate tax and P2,144.10 as
inheritance tax, or a total of P2,845.63. The administrator paid this amount under protest and
later brought the present action in the Court of First Instance of Manila to get its refund. After
hearing, the lower court dismissed the complaint with costs. The administrator appealed to
the Court of Appeals, which court later indorsed the appeal to us as involving only questions
of law.
For purposes of reference we are reproducing sections 88 and 89 of the National Internal
Revenue Code, to wit: SEC. 88. Gross estate. The value of the gross estate of the
decedent shall be determined by including the value at the time of his death of all property,
real or personal, tangible or intangible, wherever situated except real property situated
outside the Philippines. (Italics ours.)
SEC. 89. Net estate. For the purpose of the taxes imposed in this Chapter, the value of the net estate shall be
determined:
(a) In the case of a citizen or resident of the Philippines, by deducting from the value of the gross estate
(1) Expenses, losses, indebtedness and taxes: Such amounts
(A) For funeral expenses which shall, in no case, exceed five percentum of the gross estate;
(B) For judicial expenses of the testamentary or intestate proceedings:
(C) For claims against the estate;
(D) For claims of the deceased against insolvent persons where the value of decendents interest therein is included
in the value of the gross estate; and
(E) For unpaid mortgages upon or any indebtedness in respect to, property where the value of decedents interest
therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estate. (Italics ours.)
It will be seen that under section 88, real property situated outside the Philippines is not
included in the value of the gross estate of a deceased resident. Not being included as part of
the estate, it cannot be subject to taxation such as estate tax and inheritance tax. Because of
this, section 89 (e) provides that for the purpose of the taxes imposed under that chapter of
the Tax Code, in the determination of the value of the net estate, in order that indebtedness in
respect to property may be allowed to be deducted from the value of the gross estate, the
value of decedents interest in said property, undiminished by said indebtedness must be
included in the value of the gross estate. Where however, in the determination of the gross
estate the law (section 88) does not permit the inclusion of property outside of the Philippines,
then it is but just and reasonable that the indebtedness incurred by the decedent by reason of
said property or in the acquisition thereof should also not be discounted from the gross estate
for purpose of taxation. This is also the rule and practice in the United States where in the
determination of the gross and net estate of a decedent, properties outside the jurisdiction,
and indebtedness incurred in respect to or by reason of said property, are not considered,
being regarded as impossible items.
Inasmuch as real property situated outside of the United States does not form a part of the
gross estate, no deduction may be taken of any mortgage thereon or any indebtedness in
respect thereof. (Reg. Sec. 81.38. (Vol. 2, Rabkin and Johnson, Federal Income, Gift and
Estate Taxation, 1954 ed., Sec. 53.03(10), p. 5319).
now the deduction is allowed only in case the mortgaged property was included in the gross
estate; (Rodiek vs. Helvering, 87 Fed. (2d) 328, 331 [1937].)
 among the deductions allowed were unpaid mortgages, an impossible item unless the We deem it unnecessary to discuss the other points raised in this appeal.
whole value of the mortgaged property is to be included in the gross estate under section Finding no reversible error in the decision appealed from, the same is hereby affirmed, with
402(a), 40 Stat. 1097, as an interest subject to the payment of charges against his estate. costs in both Instances.
(City Bank Farmers Trust Co. vs. Bowers, 68 Fed. (2d) 909, 913 [1934].)