G.R. No.

L-43082 June 18, 1937

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

vs.
JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellant.

Pablo Lorenzo and Delfin Joven for plaintiff-appellant.

Office of the Solicitor-General Hilado for defendant-appellant.

LAUREL, J.:

On October 4, 1932, the plaintiff Pablo Lorenzo, in his capacity as trustee of the estate of Thomas Hanley,
deceased, brought this action in the Court of First Instance of Zamboanga against the defendant, Juan
Posadas, Jr., then the Collector of Internal Revenue, for the refund of the amount of P2,052.74, paid by
the plaintiff as inheritance tax on the estate of the deceased, and for the collection of interst thereon at
the rate of 6 per cent per annum, computed from September 15, 1932, the date when the aforesaid tax
was [paid under protest. The defendant set up a counterclaim for P1,191.27 alleged to be interest due on
the tax in question and which was not included in the original assessment. From the decision of the Court
of First Instance of Zamboanga dismissing both the plaintiff's complaint and the defendant's counterclaim,
both parties appealed to this court.

It appears that on May 27, 1922, one Thomas Hanley died in Zamboanga, Zamboanga, leaving a will
(Exhibit 5) and considerable amount of real and personal properties. On june 14, 1922, proceedings for
the probate of his will and the settlement and distribution of his estate were begun in the Court of First
Instance of Zamboanga. The will was admitted to probate. Said will provides, among other things, as
follows:

4. I direct that any money left by me be given to my nephew Matthew Hanley.

5. I direct that all real estate owned by me at the time of my death be not sold or otherwise
disposed of for a period of ten (10) years after my death, and that the same be handled and
managed by the executors, and proceeds thereof to be given to my nephew, Matthew Hanley, at
Castlemore, Ballaghaderine, County of Rosecommon, Ireland, and that he be directed that the
same be used only for the education of my brother's children and their descendants.

6. I direct that ten (10) years after my death my property be given to the above mentioned
Matthew Hanley to be disposed of in the way he thinks most advantageous.

xxx xxx xxx

8. I state at this time I have one brother living, named Malachi Hanley, and that my nephew,
Matthew Hanley, is a son of my said brother, Malachi Hanley.

The Court of First Instance of Zamboanga considered it proper for the best interests of ther estate to
appoint a trustee to administer the real properties which, under the will, were to pass to Matthew Hanley
ten years after the two executors named in the will, was, on March 8, 1924, appointed trustee. Moore
took his oath of office and gave bond on March 10, 1924. He acted as trustee until February 29, 1932,
when he resigned and the plaintiff herein was appointed in his stead.
During the incumbency of the plaintiff as trustee, the defendant Collector of Internal Revenue, alleging
that the estate left by the deceased at the time of his death consisted of realty valued at P27,920 and
personalty valued at P1,465, and allowing a deduction of P480.81, assessed against the estate an
inheritance tax in the amount of P1,434.24 which, together with the penalties for deliquency in payment
consisting of a 1 per cent monthly interest from July 1, 1931 to the date of payment and a surcharge of
25 per cent on the tax, amounted to P2,052.74. On March 15, 1932, the defendant filed a motion in the
testamentary proceedings pending before the Court of First Instance of Zamboanga (Special proceedings
No. 302) praying that the trustee, plaintiff herein, be ordered to pay to the Government the said sum of
P2,052.74. The motion was granted. On September 15, 1932, the plaintiff paid said amount under protest,
notifying the defendant at the same time that unless the amount was promptly refunded suit would be
brought for its recovery. The defendant overruled the plaintiff's protest and refused to refund the said
amount hausted, plaintiff went to court with the result herein above indicated.

In his appeal, plaintiff contends that the lower court erred:

I. In holding that the real property of Thomas Hanley, deceased, passed to his instituted heir,
Matthew Hanley, from the moment of the death of the former, and that from the time, the latter
became the owner thereof.

II. In holding, in effect, that there was deliquency in the payment of inheritance tax due on the
estate of said deceased.

III. In holding that the inheritance tax in question be based upon the value of the estate upon the
death of the testator, and not, as it should have been held, upon the value thereof at the
expiration of the period of ten years after which, according to the testator's will, the property
could be and was to be delivered to the instituted heir.

IV. In not allowing as lawful deductions, in the determination of the net amount of the estate
subject to said tax, the amounts allowed by the court as compensation to the "trustees" and paid
to them from the decedent's estate.

V. In not rendering judgment in favor of the plaintiff and in denying his motion for new trial.

The defendant-appellant contradicts the theories of the plaintiff and assigns the following error besides:

The lower court erred in not ordering the plaintiff to pay to the defendant the sum of P1,191.27,
representing part of the interest at the rate of 1 per cent per month from April 10, 1924, to June
30, 1931, which the plaintiff had failed to pay on the inheritance tax assessed by the defendant
against the estate of Thomas Hanley.

The following are the principal questions to be decided by this court in this appeal: (a) When does the
inheritance tax accrue and when must it be satisfied? (b) Should the inheritance tax be computed on the
basis of the value of the estate at the time of the testator's death, or on its value ten years later? (c) In
determining the net value of the estate subject to tax, is it proper to deduct the compensation due to
trustees? (d) What law governs the case at bar? Should the provisions of Act No. 3606 favorable to the
tax-payer be given retroactive effect? (e) Has there been deliquency in the payment of the inheritance
tax? If so, should the additional interest claimed by the defendant in his appeal be paid by the estate?
Other points of incidental importance, raised by the parties in their briefs, will be touched upon in the
course of this opinion.
(a) The accrual of the inheritance tax is distinct from the obligation to pay the same. Section 1536 as
amended, of the Administrative Code, imposes the tax upon "every transmission by virtue of inheritance,
devise, bequest, 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; Muñoz & 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.

G.R. No. 120880 June 5, 1997

FERDINAND R. MARCOS II, petitioner,

vs.
COURT OF APPEALS, THE COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE and HERMINIA D. DE
GUZMAN, respondents.

TORRES, JR., J.:

In this Petition for Review on Certiorari, Government action is once again assailed as precipitate and
unfair, suffering the basic and oftly implored requisites of due process of law. Specifically, the petition
assails the Decision 1of the Court of Appeals dated November 29, 1994 in CA-G.R. SP No. 31363, where
the said court held:

In view of all the foregoing, we rule that the deficiency income tax assessments and estate
tax assessment, are already final and (u)nappealable-and-the subsequent levy of real
properties is a tax remedy resorted to by the government, sanctioned by Section 213 and
 218 of the National Internal Revenue Code. This summary tax remedy is distinct and
separate from the other tax remedies (such as Judicial Civil actions and Criminal actions),
and is not affected or precluded by the pendency of any other tax remedies instituted by
the government.

WHEREFORE, premises considered, judgment is hereby rendered DISMISSING the petition

for certiorari with prayer for Restraining Order and Injunction.

No pronouncements as to costs.

SO ORDERED.

More than seven years since the demise of the late Ferdinand E. Marcos, the former President of the
Republic of the Philippines, the matter of the settlement of his estate, and its dues to the government in
estate taxes, are still unresolved, the latter issue being now before this Court for resolution. Specifically,
petitioner Ferdinand R. Marcos II, the eldest son of the decedent, questions the actuations of the
respondent Commissioner of Internal Revenue in assessing, and collecting through the summary remedy
of Levy on Real Properties, estate and income tax delinquencies upon the estate and properties of his
father, despite the pendency of the proceedings on probate of the will of the late president, which is
docketed as Sp. Proc. No. 10279 in the Regional Trial Court of Pasig, Branch 156.

Petitioner had filed with the respondent Court of Appeals a Petition for Certiorari and Prohibition with an
application for writ of preliminary injunction and/or temporary restraining order on June 28, 1993, seeking
to —

I. Annul and set aside the Notices of Levy on real property dated February 22, 1993 and
May 20, 1993, issued by respondent Commissioner of Internal Revenue;

II. Annul and set aside the Notices of Sale dated May 26, 1993;

III. Enjoin the Head Revenue Executive Assistant Director II (Collection Service), from
proceeding with the Auction of the real properties covered by Notices of Sale.

After the parties had pleaded their case, the Court of Appeals rendered its Decision 2 on November 29,
1994, ruling that the deficiency assessments for estate and income tax made upon the petitioner and the
estate of the deceased President Marcos have already become final and unappealable, and may thus be
enforced by the summary remedy of levying upon the properties of the late President, as was done by the
respondent Commissioner of Internal Revenue.

WHEREFORE, premises considered judgment is hereby rendered DISMISSING the petition

for Certiorari with prayer for Restraining Order and Injunction.

No pronouncements as to cost.

SO ORDERED.

Unperturbed, petitioner is now before us assailing the validity of the appellate court's decision, assigning
the following as errors:
 A. RESPONDENT COURT MANIFESTLY ERRED IN RULING THAT THE SUMMARY TAX
REMEDIES RESORTED TO BY THE GOVERNMENT ARE NOT AFFECTED AND PRECLUDED BY
THE PENDENCY OF THE SPECIAL PROCEEDING FOR THE ALLOWANCE OF THE LATE
PRESIDENT'S ALLEGED WILL. TO THE CONTRARY, THIS PROBATE PROCEEDING PRECISELY
PLACED ALL PROPERTIES WHICH FORM PART OF THE LATE PRESIDENT'S ESTATE IN
CUSTODIA LEGIS OF THE PROBATE COURT TO THE EXCLUSION OF ALL OTHER COURTS AND
ADMINISTRATIVE AGENCIES.

B. RESPONDENT COURT ARBITRARILY ERRED IN SWEEPINGLY DECIDING THAT SINCE THE

TAX ASSESSMENTS OF PETITIONER AND HIS PARENTS HAD ALREADY BECOME FINAL AND
UNAPPEALABLE, THERE WAS NO NEED TO GO INTO THE MERITS OF THE GROUNDS CITED
IN THE PETITION. INDEPENDENT OF WHETHER THE TAX ASSESSMENTS HAD ALREADY
BECOME FINAL, HOWEVER, PETITIONER HAS THE RIGHT TO QUESTION THE UNLAWFUL
MANNER AND METHOD IN WHICH TAX COLLECTION IS SOUGHT TO BE ENFORCED BY
RESPONDENTS COMMISSIONER AND DE GUZMAN. THUS, RESPONDENT COURT SHOULD
HAVE FAVORABLY CONSIDERED THE MERITS OF THE FOLLOWING GROUNDS IN THE
PETITION:

(1) The Notices of Levy on Real Property were issued beyond the period
provided in the Revenue Memorandum Circular No. 38-68.

(2) [a] The numerous pending court cases questioning the late President's
ownership or interests in several properties (both personal and real)
make the total value of his estate, and the consequent estate tax due,
incapable of exact pecuniary determination at this time. Thus,
respondents' assessment of the estate tax and their issuance of the
Notices of Levy and Sale are premature, confiscatory and oppressive.

[b] Petitioner, as one of the late President's compulsory heirs, was never
notified, much less served with copies of the Notices of Levy, contrary to
the mandate of Section 213 of the NIRC. As such, petitioner was never
given an opportunity to contest the Notices in violation of his right to due
process of law.

C. ON ACCOUNT OF THE CLEAR MERIT OF THE PETITION, RESPONDENT COURT

MANIFESTLY ERRED IN RULING THAT IT HAD NO POWER TO GRANT INJUNCTIVE RELIEF
TO PETITIONER. SECTION 219 OF THE NIRC NOTWITHSTANDING, COURTS POSSESS THE
POWER TO ISSUE A WRIT OF PRELIMINARY INJUNCTION TO RESTRAIN RESPONDENTS
COMMISSIONER'S AND DE GUZMAN'S ARBITRARY METHOD OF COLLECTING THE
ALLEGED DEFICIENCY ESTATE AND INCOME TAXES BY MEANS OF LEVY.

The facts as found by the appellate court are undisputed, and are hereby adopted:

On September 29, 1989, former President Ferdinand Marcos died in Honolulu, Hawaii,
USA.

On June 27, 1990, a Special Tax Audit Team was created to conduct investigations and
examinations of the tax liabilities and obligations of the late president, as well as that of
his family, associates and "cronies". Said audit team concluded its investigation with a
Memorandum dated July 26, 1991. The investigation disclosed that the Marcoses failed
to file a written notice of the death of the decedent, an estate tax returns [sic], as well as
several income tax returns covering the years 1982 to 1986, — all in violation of the
National Internal Revenue Code (NIRC).

Subsequently, criminal charges were filed against Mrs. Imelda R. Marcos before the
Regional Trial of Quezon City for violations of Sections 82, 83 and 84 (has penalized under
Sections 253 and 254 in relation to Section 252 — a & b) of the National Internal Revenue
Code (NIRC).

The Commissioner of Internal Revenue thereby caused the preparation and filing of the
Estate Tax Return for the estate of the late president, the Income Tax Returns of the
Spouses Marcos for the years 1985 to 1986, and the Income Tax Returns of petitioner
Ferdinand "Bongbong" Marcos II for the years 1982 to 1985.

On July 26, 1991, the BIR issued the following: (1) Deficiency estate tax assessment no.
FAC-2-89-91-002464 (against the estate of the late president Ferdinand Marcos in the
amount of P23,293,607,638.00 Pesos); (2) Deficiency income tax assessment no. FAC-1-
85-91-002452 and Deficiency income tax assessment no. FAC-1-86-91-002451 (against
the Spouses Ferdinand and Imelda Marcos in the amounts of P149,551.70 and
P184,009,737.40 representing deficiency income tax for the years 1985 and 1986); (3)
Deficiency income tax assessment nos. FAC-1-82-91-002460 to FAC-1-85-91-002463
(against petitioner Ferdinand "Bongbong" Marcos II in the amounts of P258.70 pesos;
P9,386.40 Pesos; P4,388.30 Pesos; and P6,376.60 Pesos representing his deficiency
income taxes for the years 1982 to 1985).

The Commissioner of Internal Revenue avers that copies of the deficiency estate and
income tax assessments were all personally and constructively served on August 26, 1991
and September 12, 1991 upon Mrs. Imelda Marcos (through her caretaker Mr. Martinez)
at her last known address at No. 204 Ortega St., San Juan, M.M. (Annexes "D" and "E" of
the Petition). Likewise, copies of the deficiency tax assessments issued against petitioner
Ferdinand "Bongbong" Marcos II were also personally and constructively served upon him
(through his caretaker) on September 12, 1991, at his last known address at Don Mariano
Marcos St. corner P. Guevarra St., San Juan, M.M. (Annexes "J" and "J-1" of the Petition).
Thereafter, Formal Assessment notices were served on October 20, 1992, upon Mrs.
Marcos c/o petitioner, at his office, House of Representatives, Batasan Pambansa,
Quezon City. Moreover, a notice to Taxpayer inviting Mrs. Marcos (or her duly authorized
representative or counsel), to a conference, was furnished the counsel of Mrs. Marcos,
Dean Antonio Coronel — but to no avail.

The deficiency tax assessments were not protested administratively, by Mrs. Marcos and
the other heirs of the late president, within 30 days from service of said assessments.

On February 22, 1993, the BIR Commissioner issued twenty-two notices of levy on real
property against certain parcels of land owned by the Marcoses — to satisfy the alleged
estate tax and deficiency income taxes of Spouses Marcos.

On May 20, 1993, four more Notices of Levy on real property were issued for the purpose
of satisfying the deficiency income taxes.
 On May 26, 1993, additional four (4) notices of Levy on real property were again issued.
The foregoing tax remedies were resorted to pursuant to Sections 205 and 213 of the
National Internal Revenue Code (NIRC).

In response to a letter dated March 12, 1993 sent by Atty. Loreto Ata (counsel of herein
petitioner) calling the attention of the BIR and requesting that they be duly notified of
any action taken by the BIR affecting the interest of their client Ferdinand "Bongbong"
Marcos II, as well as the interest of the late president — copies of the aforesaid notices
were, served on April 7, 1993 and on June 10, 1993, upon Mrs. Imelda Marcos, the
petitioner, and their counsel of record, "De Borja, Medialdea, Ata, Bello, Guevarra and
Serapio Law Office".

Notices of sale at public auction were posted on May 26, 1993, at the lobby of the City
Hall of Tacloban City. The public auction for the sale of the eleven (11) parcels of land took
place on July 5, 1993. There being no bidder, the lots were declared forfeited in favor of
the government.

On June 25, 1993, petitioner Ferdinand "Bongbong" Marcos II filed the instant petition
for certiorari and prohibition under Rule 65 of the Rules of Court, with prayer for
temporary restraining order and/or writ of preliminary injunction.

It has been repeatedly observed, and not without merit, that the enforcement of tax laws and the
collection of taxes, is of paramount importance for the sustenance of government. Taxes are the lifeblood
of the government and should be collected without unnecessary hindrance. However, such collection
should be made in accordance with law as any arbitrariness will negate the very reason for government
itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the
taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be
achieved. 3

Whether or not the proper avenues of assessment and collection of the said tax obligations were taken
by the respondent Bureau is now the subject of the Court's inquiry.

Petitioner posits that notices of levy, notices of sale, and subsequent sale of properties of the late
President Marcos effected by the BIR are null and void for disregarding the established procedure for the
enforcement of taxes due upon the estate of the deceased. The case of Domingo vs. Garlitos 4 is
specifically cited to bolster the argument that "the ordinary procedure by which to settle claims of
indebtedness against the estate of a deceased, person, as in an inheritance (estate) tax, is for the claimant
to present a claim before the probate court so that said court may order the administrator to pay the
amount therefor." This remedy is allegedly, exclusive, and cannot be effected through any other means.

Petitioner goes further, submitting that the probate court is not precluded from denying a request by the
government for the immediate payment of taxes, and should order the payment of the same only within
the period fixed by the probate court for the payment of all the debts of the decedent. In this regard,
petitioner cites the case of Collector of Internal Revenue vs. The Administratrix of the Estate of Echarri (67
Phil 502), where it was held that:

The case of Pineda vs. Court of First Instance of Tayabas and Collector of Internal Revenue
(52 Phil 803), relied upon by the petitioner-appellant is good authority on the proposition
that the court having control over the administration proceedings has jurisdiction to
 entertain the claim presented by the government for taxes due and to order the
administrator to pay the tax should it find that the assessment was proper, and that the
tax was legal, due and collectible. And the rule laid down in that case must be understood
in relation to the case of Collector of Customs vs. Haygood, supra., as to the procedure to
be followed in a given case by the government to effectuate the collection of the tax.
Categorically stated, where during the pendency of judicial administration over the estate
of a deceased person a claim for taxes is presented by the government, the court has the
authority to order payment by the administrator; but, in the same way that it has
authority to order payment or satisfaction, it also has the negative authority to deny the
same. While there are cases where courts are required to perform certain duties
mandatory and ministerial in character, the function of the court in a case of the present
character is not one of them; and here, the court cannot be an organism endowed with
latitude of judgment in one direction, and converted into a mere mechanical contrivance
in another direction.

On the other hand, it is argued by the BIR, that the state's authority to collect internal revenue taxes is
paramount. Thus, the pendency of probate proceedings over the estate of the deceased does not preclude
the assessment and collection, through summary remedies, of estate taxes over the same. According to
the respondent, claims for payment of estate and income taxes due and assessed after the death of the
decedent need not be presented in the form of a claim against the estate. These can and should be paid
immediately. The probate court is not the government agency to decide whether an estate is liable for
payment of estate of income taxes. Well-settled is the rule that the probate court is a court with special
and limited jurisdiction.

Concededly, the authority of the Regional Trial Court, sitting, albeit with limited jurisdiction, as a probate
court over estate of deceased individual, is not a trifling thing. The court's jurisdiction, once invoked, and
made effective, cannot be treated with indifference nor should it be ignored with impunity by the very
parties invoking its authority.

In testament to this, it has been held that it is within the jurisdiction of the probate court to approve the
sale of properties of a deceased person by his prospective heirs before final adjudication; 5 to determine
who are the heirs of the decedent; 6 the recognition of a natural child; 7 the status of a woman claiming
to be the legal wife of the decedent; 8 the legality of disinheritance of an heir by the testator; 9 and to pass
upon the validity of a waiver of hereditary rights. 10

The pivotal question the court is tasked to resolve refers to the authority of the Bureau of Internal
Revenue to collect by the summary remedy of levying upon, and sale of real properties of the decedent,
estate tax deficiencies, without the cognition and authority of the court sitting in probate over the
supposed will of the deceased.

The nature of the process of estate tax collection has been described as follows:

Strictly speaking, the assessment of an inheritance tax does not directly involve the
administration of a decedent's estate, although it may be viewed as an incident to the
complete settlement of an estate, and, under some statutes, it is made the duty of the
probate court to make the amount of the inheritance tax a part of the final decree of
distribution of the estate. It is not against the property of decedent, nor is it a claim
against the estate as such, but it is against the interest or property right which the heir,
 legatee, devisee, etc., has in the property formerly held by decedent. Further, under some
statutes, it has been held that it is not a suit or controversy between the parties, nor is it
an adversary proceeding between the state and the person who owes the tax on the
inheritance. However, under other statutes it has been held that the hearing and
determination of the cash value of the assets and the determination of the tax are
adversary proceedings. The proceeding has been held to be necessarily a proceeding in
rem. 11

In the Philippine experience, the enforcement and collection of estate tax, is executive in character, as the
legislature has seen it fit to ascribe this task to the Bureau of Internal Revenue. Section 3 of the National
Internal Revenue Code attests to this:

Sec. 3. Powers and duties of the Bureau. — The powers and duties of the Bureau of
Internal Revenue shall comprehend the assessment and collection of all national internal
revenue taxes, fees, and charges, and the enforcement of all forfeitures, penalties, and
fines connected therewith, including the execution of judgments in all cases decided in its
favor by the Court of Tax Appeals and the ordinary courts. Said Bureau shall also give
effect to and administer the supervisory and police power conferred to it by this Code or
other laws.

Thus, it was in Vera vs. Fernandez 12 that the court recognized the liberal treatment of claims for taxes
charged against the estate of the decedent. Such taxes, we said, were exempted from the application of
the statute of non-claims, and this is justified by the necessity of government funding, immortalized in the
maxim that taxes are the lifeblood of the government. Vectigalia nervi sunt rei publicae — taxes are the
sinews of the state.

Taxes assessed against the estate of a deceased person, after administration is opened,
need not be submitted to the committee on claims in the ordinary course of
administration. In the exercise of its control over the administrator, the court may direct
the payment of such taxes upon motion showing that the taxes have been assessed
against the estate.

Such liberal treatment of internal revenue taxes in the probate proceedings extends so far, even to
allowing the enforcement of tax obligations against the heirs of the decedent, even after distribution of
the estate's properties.

Claims for taxes, whether assessed before or after the death of the deceased, can be
collected from the heirs even after the distribution of the properties of the decedent.
They are exempted from the application of the statute of non-claims. The heirs shall be
liable therefor, in proportion to their share in the inheritance. 13

Thus, the Government has two ways of collecting the taxes 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. Another remedy, pursuant to the lien created
by Section 315 of the Tax Code upon all property and rights to property belong 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. (Commissioner
of Internal Revenue vs. Pineda, 21 SCRA 105, September 15, 1967.)
From the foregoing, it is discernible that the approval of the court, sitting in probate, or as a settlement
tribunal over the deceased is not a mandatory requirement in the collection of estate taxes. It cannot
therefore be argued that the Tax Bureau erred in proceeding with the levying and sale of the properties
allegedly owned by the late President, on the ground that it was required to seek first the probate court's
sanction. There is nothing in the Tax Code, and in the pertinent remedial laws that implies the necessity
of the probate or estate settlement court's approval of the state's claim for estate taxes, before the same
can be enforced and collected.

On the contrary, under Section 87 of the NIRC, it is the probate or settlement court which is bidden not
to authorize the executor or judicial administrator of the decedent's estate to deliver any distributive
share to any party interested in the estate, unless it is shown a Certification by the Commissioner of
Internal Revenue that the estate taxes have been paid. This provision disproves the petitioner's
contention that it is the probate court which approves the assessment and collection of the estate tax.

If there is any issue as to the validity of the BIR's decision to assess the estate taxes, this should have been
pursued through the proper administrative and judicial avenues provided for by law.

Section 229 of the NIRC tells us how:

Sec. 229. Protesting of assessment. — When the Commissioner of Internal Revenue or his
duly authorized representative finds that proper taxes should be assessed, he shall first
notify the taxpayer of his findings. Within a period to be prescribed by implementing
regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails
to respond, the Commissioner shall issue an assessment based on his findings.

Such assessment may be protested administratively by filing a request for reconsideration

or reinvestigation in such form and manner as may be prescribed by implementing
regulations within (30) days from receipt of the assessment; otherwise, the assessment
shall become final and unappealable.

If the protest is denied in whole or in part, the individual, association or corporation

adversely affected by the decision on the protest may appeal to the Court of Tax Appeals
within thirty (30) days from receipt of said decision; otherwise, the decision shall become
final, executory and demandable. (As inserted by P.D. 1773)

Apart from failing to file the required estate tax return within the time required for the filing of the same,
petitioner, and the other heirs never questioned the assessments served upon them, allowing the same
to lapse into finality, and prompting the BIR to collect the said taxes by levying upon the properties left by
President Marcos.

Petitioner submits, however, that "while the assessment of taxes may have been validly undertaken by
the Government, collection thereof may have been done in violation of the law. Thus, the manner and
method in which the latter is enforced may be questioned separately, and irrespective of the finality of
the former, because the Government does not have the unbridled discretion to enforce collection without
regard to the clear provision of law." 14

Petitioner specifically points out that applying Memorandum Circular No. 38-68, implementing Sections
318 and 324 of the old tax code (Republic Act 5203), the BIR's Notices of Levy on the Marcos properties,
were issued beyond the allowed period, and are therefore null and void:
 . . . the Notices of Levy on Real Property (Annexes O to NN of Annex C of this Petition) in
satisfaction of said assessments were still issued by respondents well beyond the period
mandated in Revenue Memorandum Circular No. 38-68. These Notices of Levy were
issued only on 22 February 1993 and 20 May 1993 when at least seventeen (17) months
had already lapsed from the last service of tax assessment on 12 September 1991. As no
notices of distraint of personal property were first issued by respondents, the latter
should have complied with Revenue Memorandum Circular No. 38-68 and issued these
Notices of Levy not earlier than three (3) months nor later than six (6) months from 12
September 1991. In accordance with the Circular, respondents only had until 12 March
1992 (the last day of the sixth month) within which to issue these Notices of Levy. The
Notices of Levy, having been issued beyond the period allowed by law, are thus void and
of no effect. 15

We hold otherwise. The Notices of Levy upon real property were issued within the prescriptive period and
in accordance with the provisions of the present Tax Code. The deficiency tax assessment, having already
become final, executory, and demandable, the same can now be collected through the summary remedy
of distraint or levy pursuant to Section 205 of the NIRC.

The applicable provision in regard to the prescriptive period for the assessment and collection of tax
deficiency in this instance is Article 223 of the NIRC, which pertinently provides:

Sec. 223. Exceptions as to a period of limitation of assessment and collection of taxes. —

(a) In the case of a false or fraudulent return with intent to evade tax or of a failure to file
a return, the tax may be assessed, or a proceeding in court for the collection of such tax
may be begun without assessment, at any time within ten (10) years after the discovery
of the falsity, fraud, or omission: Provided, That, in a fraud assessment which has become
final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or
criminal action for the collection thereof.

xxx xxx xxx

(c) Any internal revenue tax which has been assessed within the period of limitation above
prescribed, may be collected by distraint or levy or by a proceeding in court within three
years following the assessment of the tax.

xxx xxx xxx

The omission to file an estate tax return, and the subsequent failure to contest or appeal the assessment
made by the BIR is fatal to the petitioner's cause, as under the above-cited provision, in case of failure to
file a return, the tax may be assessed at any time within ten years after the omission, and any tax so
assessed may be collected by levy upon real property within three years following the assessment of the
tax. Since the estate tax assessment had become final and unappealable by the petitioner's default as
regards protesting the validity of the said assessment, there is now no reason why the BIR cannot continue
with the collection of the said tax. Any objection against the assessment should have been pursued
following the avenue paved in Section 229 of the NIRC on protests on assessments of internal revenue
taxes.

Petitioner further argues that "the numerous pending court cases questioning the late president's
ownership or interests in several properties (both real and personal) make the total value of his estate,
and the consequent estate tax due, incapable of exact pecuniary determination at this time. Thus,
respondents' assessment of the estate tax and their issuance of the Notices of Levy and sale are premature
and oppressive." He points out the pendency of Sandiganbayan Civil Case Nos. 0001-0034 and 0141, which
were filed by the government to question the ownership and interests of the late President in real and
personal properties located within and outside the Philippines. Petitioner, however, omits to allege
whether the properties levied upon by the BIR in the collection of estate taxes upon the decedent's estate
were among those involved in the said cases pending in the Sandiganbayan. Indeed, the court is at a loss
as to how these cases are relevant to the matter at issue. The mere fact that the decedent has pending
cases involving ill-gotten wealth does not affect the enforcement of tax assessments over the properties
indubitably included in his estate.

Petitioner also expresses his reservation as to the propriety of the BIR's total assessment of
P23,292,607,638.00, stating that this amount deviates from the findings of the Department of Justice's
Panel of Prosecutors as per its resolution of 20 September 1991. Allegedly, this is clear evidence of the
uncertainty on the part of the Government as to the total value of the estate of the late President.

This is, to our mind, the petitioner's last ditch effort to assail the assessment of estate tax which had
already become final and unappealable.

It is not the Department of Justice which is the government agency tasked to determine the amount of
taxes due upon the subject estate, but the Bureau of Internal Revenue, 16 whose determinations and
assessments are presumed correct and made in good faith. 17 The taxpayer has the duty of proving
otherwise. In the absence of proof of any irregularities in the performance of official duties, an assessment
will not be disturbed. Even an assessment based on estimates is prima facie valid and lawful where it does
not appear to have been arrived at arbitrarily or capriciously. The burden of proof is upon the complaining
party to show clearly that the assessment is erroneous. Failure to present proof of error in the assessment
will justify the judicial affirmance of said assessment. 18 In this instance, petitioner has not pointed out
one single provision in the Memorandum of the Special Audit Team which gave rise to the questioned
assessment, which bears a trace of falsity. Indeed, the petitioner's attack on the assessment bears mainly
on the alleged improbable and unconscionable amount of the taxes charged. But mere rhetoric cannot
supply the basis for the charge of impropriety of the assessments made.

Moreover, these objections to the assessments should have been raised, considering the ample remedies
afforded the taxpayer by the Tax Code, with the Bureau of Internal Revenue and the Court of Tax Appeals,
as described earlier, and cannot be raised now via Petition for Certiorari, under the pretext of grave abuse
of discretion. The course of action taken by the petitioner reflects his disregard or even repugnance of the
established institutions for governance in the scheme of a well-ordered society. The subject tax
assessments having become final, executory and enforceable, the same can no longer be contested by
means of a disguised protest. In the main, Certiorari may not be used as a substitute for a lost appeal or
remedy. 19 This judicial policy becomes more pronounced in view of the absence of sufficient attack
against the actuations of government.

On the matter of sufficiency of service of Notices of Assessment to the petitioner, we find the respondent
appellate court's pronouncements sound and resilient to petitioner's attacks.

Anent grounds 3(b) and (B) — both alleging/claiming lack of notice — We find, after
considering the facts and circumstances, as well as evidences, that there was sufficient,
 constructive and/or actual notice of assessments, levy and sale, sent to herein petitioner
Ferdinand "Bongbong" Marcos as well as to his mother Mrs. Imelda Marcos.

Even if we are to rule out the notices of assessments personally given to the caretaker of
Mrs. Marcos at the latter's last known address, on August 26, 1991 and September 12,
1991, as well as the notices of assessment personally given to the caretaker of petitioner
also at his last known address on September 12, 1991 — the subsequent notices given
thereafter could no longer be ignored as they were sent at a time when petitioner was
already here in the Philippines, and at a place where said notices would surely be called
to petitioner's attention, and received by responsible persons of sufficient age and
discretion.

Thus, on October 20, 1992, formal assessment notices were served upon Mrs. Marcos c/o
the petitioner, at his office, House of Representatives, Batasan Pambansa, Q.C. (Annexes
"A", "A-1", "A-2", "A-3"; pp. 207-210, Comment/Memorandum of OSG). Moreover, a
notice to taxpayer dated October 8, 1992 inviting Mrs. Marcos to a conference relative to
her tax liabilities, was furnished the counsel of Mrs. Marcos — Dean Antonio Coronel
(Annex "B", p. 211, ibid). Thereafter, copies of Notices were also served upon Mrs. Imelda
Marcos, the petitioner and their counsel "De Borja, Medialdea, Ata, Bello, Guevarra and
Serapio Law Office", on April 7, 1993 and June 10, 1993. Despite all of these Notices,
petitioner never lifted a finger to protest the assessments, (upon which the Levy and sale
of properties were based), nor appealed the same to the Court of Tax Appeals.

There being sufficient service of Notices to herein petitioner (and his mother) and it
appearing that petitioner continuously ignored said Notices despite several opportunities
given him to file a protest and to thereafter appeal to the Court of Tax Appeals, — the tax
assessments subject of this case, upon which the levy and sale of properties were based,
could no longer be contested (directly or indirectly) via this instant petition
for certiorari. 20

Petitioner argues that all the questioned Notices of Levy, however, must be nullified for having been
issued without validly serving copies thereof to the petitioner. As a mandatory heir of the decedent,
petitioner avers that he has an interest in the subject estate, and notices of levy upon its properties should
have been served upon him.

We do not agree. In the case of notices of levy issued to satisfy the delinquent estate tax, the delinquent
taxpayer is the Estate of the decedent, and not necessarily, and exclusively, the petitioner as heir of the
deceased. In the same vein, in the matter of income tax delinquency of the late president and his spouse,
petitioner is not the taxpayer liable. Thus, it follows that service of notices of levy in satisfaction of these
tax delinquencies upon the petitioner is not required by law, as under Section 213 of the NIRC, which
pertinently states:

xxx xxx xxx

. . . Levy shall be effected by writing upon said certificate a description of the property
upon which levy is made. At the same time, written notice of the levy shall be mailed to
or served upon the Register of Deeds of the province or city where the property is located
and upon the delinquent taxpayer, or if he be absent from the Philippines, to his agent or
 the manager of the business in respect to which the liability arose, or if there be none, to
the occupant of the property in question.

xxx xxx xxx

The foregoing notwithstanding, the record shows that notices of warrants of distraint and levy of sale
were furnished the counsel of petitioner on April 7, 1993, and June 10, 1993, and the petitioner himself
on April 12, 1993 at his office at the Batasang Pambansa. 21 We cannot therefore, countenance
petitioner's insistence that he was denied due process. Where there was an opportunity to raise
objections to government action, and such opportunity was disregarded, for no justifiable reason, the
party claiming oppression then becomes the oppressor of the orderly functions of government. He who
comes to court must come with clean hands. Otherwise, he not only taints his name, but ridicules the very
structure of established authority.

IN VIEW WHEREOF, the Court RESOLVED to DENY the present petition. The Decision of the Court of
Appeals dated November 29, 1994 is hereby AFFIRMED in all respects.

SO ORDERED.

G.R. No. 123206 March 22, 2000

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
COURT OF APPEALS, COURT OF TAX APPEALS and JOSEFINA P. PAJONAR, as Administratrix of the Estate
of Pedro P. Pajonar, respondents.

RESOLUTION

GONZAGA-REYES, J.:

Assailed in this petition for review on certiorari is the December 21, 1995 Decision1 of the Court of
Appeals2 in CA-G.R. Sp. No. 34399 affirming the June 7, 1994 Resolution of the Court of Tax Appeals in CTA
Case No. 4381 granting private respondent Josefina P. Pajonar, as administratrix of the estate of Pedro P.
Pajonar, a tax refund in the amount of P76,502.42, representing erroneously paid estate taxes for the year
1988.

Pedro Pajonar, a member of the Philippine Scout, Bataan Contingent, during the second World War, was
a part of the infamous Death March by reason of which he suffered shock and became insane. His sister
Josefina Pajonar became the guardian over his person, while his property was placed under the
guardianship of the Philippine National Bank (PNB) by the Regional Trial Court of Dumaguete City, Branch
31, in Special Proceedings No. 1254. He died on January 10, 1988. He was survived by his two brothers
Isidro P. Pajonar and Gregorio Pajonar, his sister Josefina Pajonar, nephews Concordio Jandog and Mario
Jandog and niece Conchita Jandog.

On May 11, 1988, the PNB filed an accounting of the decedent's property under guardianship valued at
P3,037,672.09 in Special Proceedings No. 1254. However, the PNB did not file an estate tax return, instead
it advised Pedro Pajonar's heirs to execute an extrajudicial settlement and to pay the taxes on his estate.
On April 5, 1988, pursuant to the assessment by the Bureau of Internal Revenue (BIR), the estate of Pedro
Pajonar paid taxes in the amount of P2,557.

On May 19, 1988, Josefina Pajonar filed a petition with the Regional Trial Court of Dumaguete City for the
issuance in her favor of letters of administration of the estate of her brother. The case was docketed as
Special Proceedings No. 2399. On July 18, 1988, the trial court appointed Josefina Pajonar as the regular
administratrix of Pedro Pajonar's estate.

On December 19, 1988, pursuant to a second assessment by the BIR for deficiency estate tax, the estate
of Pedro Pajonar paid estate tax in the amount of P1,527,790.98. Josefina Pajonar, in her capacity as
administratrix and heir of Pedro Pajonar's estate, filed a protest on January 11, 1989 with the BIR praying
that the estate tax payment in the amount of P1,527,790.98, or at least some portion of it, be returned
to the heirs. 3

However, on August 15, 1989, without waiting for her protest to be resolved by the BIR, Josefina Pajonar
filed a petition for review with the Court of Tax Appeals (CTA), praying for the refund of P1,527,790.98, or
in the alternative, P840,202.06, as erroneously paid estate tax. 4 The case was docketed as CTA Case No.
4381.

On May 6, 1993, the CTA ordered the Commissioner of Internal Revenue to refund Josefina Pajonar the
amount of P252,585.59, representing erroneously paid estate tax for the year 1988.5 Among the
deductions from the gross estate allowed by the CTA were the amounts of P60,753 representing the
notarial fee for the Extrajudicial Settlement and the amount of P50,000 as the attorney's fees in Special
Proceedings No. 1254 for guardianship.6

On June 15, 1993, the Commissioner of Internal Revenue filed a motion for reconsideration7 of the CTA's
May 6, 1993 decision asserting, among others, that the notarial fee for the Extrajudicial Settlement and
the attorney's fees in the guardianship proceedings are not deductible expenses.

On June 7, 1994, the CTA issued the assailed Resolution8 ordering the Commissioner of Internal Revenue
to refund Josefina Pajonar, as administratrix of the estate of Pedro Pajonar, the amount of P76,502.42
representing erroneously paid estate tax for the year 1988. Also, the CTA upheld the validity of the
deduction of the notarial fee for the Extrajudicial Settlement and the attorney's fees in the guardianship
proceedings.

On July 5, 1994, the Commissioner of Internal Revenue filed with the Court of Appeals a petition for review
of the CTA's May 6, 1993 Decision and its June 7, 1994 Resolution, questioning the validity of the
abovementioned deductions. On December 21, 1995, the Court of Appeals denied the Commissioner's
petition.9

Hence, the present appeal by the Commissioner of Internal Revenue.

The sole issue in this case involves the construction of section 79 10 of the National Internal Revenue
Code 11 (Tax Code) which provides for the allowable deductions from the gross estate of the decedent.
More particularly, the question is whether the notarial fee paid for the extrajudicial settlement in the
amount of P60,753 and the attorney's fees in the guardianship proceedings in the amount of P50,000 may
be allowed as deductions from the gross estate of decedent in order to arrive at the value of the net
estate.
We answer this question in the affirmative, thereby upholding the decisions of the appellate courts.

In its May 6, 1993 Decision, the Court of Tax Appeals ruled thus:

Respondent maintains that only judicial expenses of the testamentary or intestate proceedings
are allowed as a deduction to the gross estate. The amount of P60,753.00 is quite extraordinary
for a mere notarial fee.

This Court adopts the view under American jurisprudence that expenses incurred in the
extrajudicial settlement of the estate should be allowed as a deduction from the gross estate.
"There is no requirement of formal administration. It is sufficient that the expense be a necessary
contribution toward the settlement of the case." [ 34 Am. Jur. 2d, p. 765; Nolledo, Bar Reviewer
in Taxation, 10th Ed. (1990), p. 481]

xxx xxx xxx

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

xxx xxx xxx

The guardianship proceeding had been terminated upon delivery of the residuary estate to the
heirs entitled thereto. Thereafter, PNB was discharged of any further responsibility.

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

xxx xxx xxx

PNB was appointed as guardian over the assets of the late Pedro Pajonar, who, even at the time
of his death, was incompetent by reason of insanity. The expenses incurred in the guardianship
proceeding was but a necessary expense in the settlement of the decedent's estate. Therefore,
the attorney's fee incurred in the guardianship proceedings amounting to P50,000.00 is a
reasonable and necessary business expense deductible from the gross estate of the decedent. 12

Upon a motion for reconsideration filed by the Commissioner of Internal Revenue, the Court of Tax
Appeals modified its previous ruling by reducing the refundable amount to P76,502.43 since it found that
a deficiency interest should be imposed and the compromise penalty excluded. 13 However, the tax court
upheld its previous ruling regarding the legality of the deductions —

It is significant to note that the inclusion of the estate tax law in the codification of all our national internal
revenue laws with the enactment of the National Internal Revenue Code in 1939 were copied from the
Federal Law of the United States. [ UMALI, Reviewer in Taxation (1985), p. 285 ] The 1977 Tax Code,
promulgated by Presidential Decree No. 1158, effective June 3, 1977, reenacted substantially all the
provisions of the old law on estate and gift taxes, except the sections relating to the meaning of gross
estate and gift. [ Ibid, p. 286. ]

In the United States, [a]dministrative expenses, executor's commissions and attorney's fees are
considered allowable deductions from the Gross Estate. Administrative expenses are limited to such
expenses as are actually and necessarily incurred in the administration of a decedent's estate. [PRENTICE-
HALL, Federal Taxes Estate and Gift Taxes (1936), p. 120, 533.] Necessary expenses of administration are
such expenses as are entailed for the preservation and productivity of the estate and for its
management for purposes of liquidation, payment of debts and distribution of the residue among the
persons entitled thereto. [Lizarraga Hermanos vs. Abada, 40 Phil. 124.] They must be incurred for the
settlement of the estate as a whole. [34 Am. Jur. 2d, p. 765.] Thus, where there were no substantial
community debts and it was unnecessary to convert community property to cash, the only practical
purpose of administration being the payment of estate taxes, full deduction was allowed for attorney's
fees and miscellaneous expenses charged wholly to decedent's estate. [Ibid., citing Estate of Helis, 26 T.C.
143 (A).]

Petitioner stated in her protest filed with the BIR that "upon the death of the ward, the PNB, which was
still the guardian of the estate, (Annex "Z"), did not file an estate tax return; however, it advised the heirs
to execute an extrajudicial settlement, to pay taxes and to post a bond equal to the value of the estate,
for which the state paid P59,341.40 for the premiums. (See Annex "K")." [p. 17, CTA record.] Therefore, it
would appear from the records of the case that the only practical purpose of settling the estate by means
of an extrajudicial settlement pursuant to Section 1 of Rule 74 of the Rules of Court was for the payment
of taxes and the distribution of the estate to the heirs. A fortiori, since our estate tax laws are of American
origin, the interpretation adopted by American Courts has some persuasive effect on the interpretation
of our own estate tax laws on the subject.

Anent the contention of respondent that the attorney's fees of P50,000.00 incurred in the guardianship
proceeding should not be deducted from the Gross Estate, We consider the same unmeritorious.
Attorneys' and guardians' fees incurred in a trustee's accounting of a taxable inter vivos trust attributable
to the usual issues involved in such an accounting was held to be proper deductions because these are
expenses incurred in terminating an inter vivos trust that was includible in the decedent's estate. [Prentice
Hall, Federal Taxes on Estate and Gift, p. 120, 861] Attorney's fees are allowable deductions if incurred for
the settlement of the estate. It is noteworthy to point that PNB was appointed the guardian over the
assets of the deceased. Necessarily the assets of the deceased formed part of his gross estate. Accordingly,
all expenses incurred in relation to the estate of the deceased will be deductible for estate tax purposes
provided these are necessary and ordinary expenses for administration of the settlement of the estate. 14

In upholding the June 7, 1994 Resolution of the Court of Tax Appeals, the Court of Appeals held that:

2. Although the Tax Code specifies "judicial expenses of the testamentary or intestate proceedings," there
is no reason why expenses incurred in the administration and settlement of an estate in extrajudicial
proceedings should not be allowed. However, deduction is limited to such administration expenses as are
actually and necessarily incurred in the collection of the assets of the estate, payment of the debts, and
distribution of the remainder among those entitled thereto. Such expenses may include executor's or
administrator's fees, attorney's fees, court fees and charges, appraiser's fees, clerk hire, costs of
preserving and distributing the estate and storing or maintaining it, brokerage fees or commissions for
selling or disposing of the estate, and the like. Deductible attorney's fees are those incurred by the
executor or administrator in the settlement of the estate or in defending or prosecuting claims against or
due the estate. (Estate and Gift Taxation in the Philippines, T. P. Matic, Jr., 1981 Edition, p. 176).

xxx xxx xxx

It is clear then that the extrajudicial settlement was for the purpose of payment of taxes and the
distribution of the estate to the heirs. The execution of the extrajudicial settlement necessitated the
notarization of the same. Hence the Contract of Legal Services of March 28, 1988 entered into between
respondent Josefina Pajonar and counsel was presented in evidence for the purpose of showing that the
amount of P60,753.00 was for the notarization of the Extrajudicial Settlement. It follows then that the
notarial fee of P60,753.00 was incurred primarily to settle the estate of the deceased Pedro Pajonar. Said
amount should then be considered an administration expenses actually and necessarily incurred in the
collection of the assets of the estate, payment of debts and distribution of the remainder among those
entitled thereto. Thus, the notarial fee of P60,753 incurred for the Extrajudicial Settlement should be
allowed as a deduction from the gross estate.

3. Attorney's fees, on the other hand, in order to be deductible from the gross estate must be essential to
the settlement of the estate.

The amount of P50,000.00 was incurred as attorney's fees in the guardianship proceedings in Spec. Proc.
No. 1254. Petitioner contends that said amount are not expenses of the testamentary or intestate
proceedings as the guardianship proceeding was instituted during the lifetime of the decedent when there
was yet no estate to be settled.

Again, this contention must fail.

The guardianship proceeding in this case was necessary for the distribution of the property of the
deceased Pedro Pajonar. As correctly pointed out by respondent CTA, the PNB was appointed guardian
over the assets of the deceased, and that necessarily the assets of the deceased formed part of his gross
estate. . . .

xxx xxx xxx

It is clear therefore that the attorney's fees incurred in the guardianship proceeding in Spec. Proc. No.
1254 were essential to the distribution of the property to the persons entitled thereto. Hence, the
attorney's fees incurred in the guardianship proceedings in the amount of P50,000.00 should be allowed
as a deduction from the gross estate of the decedent. 15

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

Judicial expenses are expenses of administration. 19 Administration expenses, as an allowable deduction

from the gross estate of the decedent for purposes of arriving at the value of the net estate, have been
construed by the federal and state courts of the United States to include all expenses "essential to the
collection of the assets, payment of debts or the distribution of the property to the persons entitled to
it." 20 In other words, the expenses must be essential to the proper settlement of the estate. Expenditures
incurred for the individual benefit of the heirs, devisees or legatees are not deductible. 21 This distinction
has been carried over to our jurisdiction. Thus, in Lorenzo v. Posadas 22 the Court construed the phrase
"judicial expenses of the testamentary or intestate proceedings" as not including the compensation paid
to a trustee of the decedent's estate when it appeared that such trustee was appointed for the purpose
of managing the decedent's real estate for the benefit of the testamentary heir. In another case, the Court
disallowed the premiums paid on the bond filed by the administrator as an expense of administration
since the giving of a bond is in the nature of a qualification for the office, and not necessary in the
settlement of the estate. 23 Neither may attorney's fees incident to litigation incurred by the heirs in
asserting their respective rights be claimed as a deduction from the gross estate. 24 1âwphi1

Coming to the case at bar, the notarial fee paid for the extrajudicial settlement is clearly a deductible
expense since such settlement effected a distribution of Pedro Pajonar's estate to his lawful heirs.
Similarly, the attorney's fees paid to PNB for acting as the guardian of Pedro Pajonar's property during his
lifetime should also be considered as a deductible administration expense. PNB provided a detailed
accounting of decedent's property and gave advice as to the proper settlement of the latter's estate, acts
which contributed towards the collection of decedent's assets and the subsequent settlement of the
estate.

We find that the Court of Appeals did not commit reversible error in affirming the questioned resolution
of the Court of Tax Appeals.

WHEREFORE, the December 21, 1995 Decision of the Court of Appeals is AFFIRMED. The notarial fee for
the extrajudicial settlement and the attorney's fees in the guardianship proceedings are allowable
deductions from the gross estate of Pedro Pajonar.1âwphi1.nêt

SO ORDERED.

Melo, Vitug, Panganiban and Purisima, JJ., concur.

Footnotes
1
Entitled "Commissioner of Internal Revenue v. Josefina P. Pajonar, as Administratrix of the Estate
of Pedro P. Pajonar, and Court of Tax Appeals." Rollo, 35-46.
2
Eighth Division composed of J. Jaime M. Lantin, ponente; and JJ Eduardo G. Montenegro and Jose
C. De la Rama, concurring.
3
CA Records, 45-53.
4
Ibid., 37-44.
5
The CTA made the following computations —
 Estate of Pedro P. Pajonar
Lagtangon, Siaton, Negros Oriental
Died January 10, 1988

I. Real Properties P102,966.59

II. Personal Properties

a. Refrigerator P7,500.00

b. Wall Clock, Esso Gasul.

Tables and Chairs 3,090.00

c. Beddings, Stereo Cassette,

TV, Betamax 15,700.00

d. Karaoke, Electric Iron, Fan,

Transformer and Corner Set 7,400.00

e. Toyota Tamaraw 27,500.00 61,190.00

Additional Personal Properties:

f. Time Deposit - PNB P200,000.00

g. Stocks and Bonds - PNB 201,232.37

h. Money Market 2,300,000.00

i. Cash Deposit 114,101.83 2,815,334.20

GROSS ESTATE P2,979,490.79

Less: Deductions:
A a. Funeral expenses P50,000.00

b. Commission to Trustee (PNB) 18,335.93

B c. Notarial Fee for the Extrajudicial Settlement 60,753.00

d. Attorney's Fees in Special Proceeding No.

1254 for Guardianship 50,000.00

e. Filing Fees in Special Proceeding No. 2399 6,374.88

f. Publication of Notice to Creditors

September 7, 14 and 21, 1988 issues of the
Dumaguete Star Informer 600.00

g. Certification fee for publication on the

Bulletin Board of the Municipal Building of
Siaton, Negros Oriental 2.00

h. Certification fee for Publication in the

Capitol 5.00

i. Certification fee for publication of Notice to 5.00 186,075.81

Creditors

NET ESTATE 2,793,414.98

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

Estate Tax Due P1,277,762.39

Less: Estate Tax Paid:

CB Confirmation Receipt Nos.

B 14268064 P2,557.00

B 15517625 1,527,790.98 1,530,347.98

 AMOUNT REFUNDABLE P252,585.59
===========

Rollo, 86-88.
6
Ibid., 78-79, 81-83.
7
CA Records, 118-130.
8
Rollo, 47-56.
9
Ibid., 35-46.
10
Sec. 79 Computation of net estate and estate tax. — For the purpose of the tax 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 in an amount equal to five per centum of the gross estate but in
no case to exceed P50,000.00;

(B) For judicial expenses of the testamentary or intestate proceedings;

xxx xxx xxx

11
This refers to the 1977 National Internal Revenue Code, as amended. On the date of decedent's
death (January 10, 1988), the latest amendment to the Tax Code was introduced by Executive
Order No. 273, which became effective on January 1, 1988.
12
Rollo, 78-79, 81-83.
13
Estate tax due P1,277,762.39

2,557.00
Less: estate tax paid 04.05.88
[CBCR No. 14268054]

Deficiency estate tax P1,275,205.39

Add: Additions to tax Interest 176,083.16

on deficiency [Sec. 249 (b)]
 04.12.88 to 12.19.88
(1,275,205.39 x 20% x 252/365)

Total deficiency tax P1,451,288.55

Less: estate tax paid 12.19.88

[CBCR No. 15517625] 1,527,790.98

Amount refundable
P76,502.43
===========

Ibid., 54.
14
Ibid., 49-51.
15
Ibid., 43-45.
16
Approved on June 15, 1939.
17
Wise & Co. v. Meer, 78 Phil 655 (1947),
18
Carolina Industries, Inc. v. CMS Stock Brokerage, Inc., 97 SCRA 734 (1980).
19
Lorenzo v. Posada, 64 Phil 353 (1937).
20
34A Am Jur 2d, Federal Taxation (1995), sec. 144, 288, citing Union Commerce Bank, trans,
(1963) 39 TC 973, affd & revd on other issues (1964, CA6) 339 F2d 163, 65-1 USTC p 12279, 15
AFTR 2d 1281.
21
Ibid., sec. 144,272, citing Bretzfelder, Charles, exr v. Com., (1936, CA2) 86 F2d 713, 36-2 USTC
sec. 9548, 18 AFTR 653.
22
Lorenzo v. Posada, supra.
23
Sison vs. Teodoro, 100 Phil. 1055 (1957).
24
Johannes v. Imperial, 43 Phil 597 (1922).

G.R. No. L-22734 September 15, 1967

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
MANUEL B. PINEDA, as one of the heirs of deceased ATANASIO PINEDA, respondent.

Office of the Solicitor General for petitioner.

Manuel B. Pineda for and in his own behalf as respondent.

BENGZON, J.P., J.:

On May 23, 1945 Atanasio Pineda died, survived by his wife, Felicisima Bagtas, and 15 children, the eldest
of whom is Manuel B. Pineda, a lawyer. Estate proceedings were had in the Court of First Instance of
Manila (Case No. 71129) wherein the surviving widow was appointed administratrix. The estate was
divided among and awarded to the heirs and the proceedings terminated on June 8, 1948. Manuel B.
Pineda's share amounted to about P2,500.00.

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
===========

P14.50
2. Additional residence tax for 1945
===========

3. Real Estate dealer's tax for the

fourth quarter of 1946 and the P207.50
whole year of 1947 ===========

Manuel B. Pineda, who received the assessment, contested the same. Subsequently, he appealed to the
Court of Tax Appeals alleging that he was appealing "only that proportionate 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 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 to the assessment for income
tax for the year 1947 but held that the right to assess and collect the taxes for 1945 and 1946 has not
prescribed. For 1945 and 1946 the returns were filed on August 24, 1953; assessments for both taxable
years were made within five years therefrom or on October 19, 1953; and the action to collect the tax was
filed within five years from the latter date, on August 7, 1957. For taxable year 1947, however, the return
was filed 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

P135.8
1945
3

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.1awphîl.nèt

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. Pamintuan2 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.

RAFAEL ARSENIO S. DIZON, in his capacity as the Judicial G.R. No. 140944
Administrator of the Estate of the deceased JOSE P.
FERNANDEZ,

Petitioner, Present:

YNARES-SANTIAGO, J.,

- versus - Chairperson,

AUSTRIA-MARTINEZ,

CHICO-NAZARIO,

COURT OF TAX APPEALS and COMMISSIONER OF NACHURA, and

INTERNAL REVENUE,
REYES, JJ.
Respondents.

Promulgated:

April 30, 2008

x------------------------------------------------------------------------------------x

DECISION

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

The Facts

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

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

COMPUTATION OF TAX

Conjugal Real Property (Sch. 1) P10,855,020.00

Conjugal Personal Property (Sch.2) 3,460,591.34

Taxable Transfer (Sch. 3)

Gross Conjugal Estate 14,315,611.34

Less: Deductions (Sch. 4) 187,822,576.06

 Net Conjugal Estate NIL

Less: Share of Surviving Spouse NIL .

Net Share in Conjugal Estate NIL

xxx

Net Taxable Estate NIL .

Estate Tax Due NIL .[11]

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

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

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

Deficiency Estate Tax- 1987

Estate tax P31,868,414.48

25% surcharge- late filing 7,967,103.62

 late payment 7,967,103.62

Interest 19,121,048.68

Compromise-non filing 25,000.00

non payment 25,000.00

no notice of death 15.00

no CPA Certificate 300.00

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

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

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

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

Nature of Document (sic) Exhibits

1. Letter dated October 13, 1988

from Arsenio P. Dizon addressed

to the Commissioner of Internal

Revenue informing the latter of

the special proceedings for the

settlement of the estate (p. 126,

BIR records); "A"

2. Petition for the probate of the

will and issuance of letter of

administration filed with the

Regional Trial Court (RTC) of

Manila, docketed as Sp. Proc.

No. 87-42980 (pp. 107-108, BIR

records); "B" & "B-1

3. Pleading entitled "Compliance"

filed with the probate Court

submitting the final inventory

of all the properties of the

deceased (p. 106, BIR records); "C"

4. Attachment to Exh. "C" which

is the detailed and complete

listing of the properties of

the deceased (pp. 89-105, BIR rec.); "C-1" to "C-17"

5. Claims against the estate filed

by Equitable Banking Corp. with

the probate Court in the amount

of P19,756,428.31 as of March 31,

1988, together with the Annexes

to the claim (pp. 64-88, BIR records); "D" to "D-24"

6. Claim filed by Banque de L'

Indochine et de Suez with the

probate Court in the amount of

US $4,828,905.90 as of January 31,

1988 (pp. 262-265, BIR records); "E" to "E-3"

7. Claim of the Manila Banking

Corporation (MBC) which as of

November 7, 1987 amounts to

P65,158,023.54, but recomputed

as of February 28, 1989 at a

total amount of P84,199,160.46;

together with the demand letter

from MBC's lawyer (pp. 194-197,

BIR records); "F" to "F-3"

8. Demand letter of Manila Banking

Corporation prepared by Asedillo,

Ramos and Associates Law Offices

addressed to Fernandez Hermanos,

Inc., represented by Jose P.

Fernandez, as mortgagors, in the

total amount of P240,479,693.17

as of February 28, 1989

(pp. 186-187, BIR records); "G" & "G-1"

9. Claim of State Investment

House, Inc. filed with the

RTC, Branch VII of Manila,

docketed as Civil Case No.

86-38599 entitled "State

Investment House, Inc.,

Plaintiff, versus Maritime

Company Overseas, Inc. and/or

Jose P. Fernandez, Defendants,"

(pp. 200-215, BIR records); "H" to "H-16"

10. Letter dated March 14, 1990

of Arsenio P. Dizon addressed

to Atty. Jesus M. Gonzales,

(p. 184, BIR records); "I"

11. Letter dated April 17, 1990

from J.M. Gonzales addressed

to the Regional Director of

BIR in San Pablo City

(p. 183, BIR records); "J"

12. Estate Tax Return filed by

the estate of the late Jose P.

Fernandez through its authorized

representative, Atty. Jesus M.

Gonzales, for Arsenio P. Dizon,

with attachments (pp. 177-182,

BIR records); "K" to "K-5"

13. Certified true copy of the

Letter of Administration

issued by RTC Manila, Branch

51, in Sp. Proc. No. 87-42980

appointing Atty. Rafael S.

Dizon as Judicial Administrator

of the estate of Jose P.

Fernandez; (p. 102, CTA records)

and "L"

14. Certification of Payment of

estate taxes Nos. 2052 and

2053, both dated April 27, 1990,

issued by the Office of the

Regional Director, Revenue

Region No. 4-C, San Pablo

City, with attachments

(pp. 103-104, CTA records.). "M" to "M-5"

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

Documents/

Signatures BIR Record

1. Estate Tax Return prepared by

the BIR; p. 138

2. Signatures of Ma. Anabella

Abuloc and Alberto Enriquez,

Jr. appearing at the lower

Portion of Exh. "1"; -do-

3. Memorandum for the Commissioner,

dated July 19, 1991, prepared by

revenue examiners, Ma. Anabella A.

Abuloc, Alberto S. Enriquez and

Raymund S. Gallardo; Reviewed by

Maximino V. Tagle pp. 143-144

4. Signature of Alberto S.

Enriquez appearing at the

lower portion on p. 2 of Exh. "2"; -do-

5. Signature of Ma. Anabella A.

Abuloc appearing at the

lower portion on p. 2 of Exh. "2"; -do-

6. Signature of Raymund S.

Gallardo appearing at the

Lower portion on p. 2 of Exh. "2"; -do-

7. Signature of Maximino V.

Tagle also appearing on

p. 2 of Exh. "2"; -do-

8. Summary of revenue

Enforcement Officers Audit

Report, dated July 19, 1991; p. 139

9. Signature of Alberto

Enriquez at the lower

portion of Exh. "3"; -do-

 10. Signature of Ma. Anabella A.

Abuloc at the lower

portion of Exh. "3"; -do-

11. Signature of Raymond S.

Gallardo at the lower

portion of Exh. "3"; -do-

12. Signature of Maximino

V. Tagle at the lower

portion of Exh. "3"; -do-

13. Demand letter (FAS-E-87-91-00),

signed by the Asst. Commissioner

for Collection for the Commissioner

of Internal Revenue, demanding

payment of the amount of

P66,973,985.40; and p. 169

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

The CTA's Ruling

On June 17, 1997, the CTA denied the said petition for review. Citing this Court's ruling in Vda. de Oate v.
Court of Appeals,[23] the CTA opined that the aforementioned pieces of evidence introduced by the BIR
were admissible in evidence. The CTA ratiocinated:

Although the above-mentioned documents were not formally offered as evidence for
respondent, considering that respondent has been declared to have waived the
presentation thereof during the hearing on March 20, 1996, still they could be considered
as evidence for respondent since they were properly identified during the presentation
of respondent's witness, whose testimony was duly recorded as part of the records of this
case. Besides, the documents marked as respondent's exhibits formed part of the BIR
records of the case.[24]

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

Conjugal Real Property P 5,062,016.00

Conjugal Personal Prop. 33,021,999.93

Gross Conjugal Estate 38,084,015.93

Less: Deductions 26,250,000.00

Net Conjugal Estate P 11,834,015.93

Less: Share of Surviving Spouse 5,917,007.96

Net Share in Conjugal Estate P 5,917,007.96

Add: Capital/Paraphernal

Properties P44,652,813.66

Less: Capital/Paraphernal

Deductions 44,652,813.66

Net Taxable Estate P 50,569,821.62

============
 Estate Tax Due P 29,935,342.97

Add: 25% Surcharge for Late Filing 7,483,835.74

Add: Penalties for-No notice of death 15.00

No CPA certificate 300.00

Total deficiency estate tax P 37,419,493.71

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

exclusive of 20% interest from due date of its payment until full payment thereof

[Sec. 283 (b), Tax Code of 1987].[25]

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

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

SO ORDERED.[26]

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

The CA's Ruling

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

On May 31, 1999, petitioner filed a Motion for Reconsideration[29] which the CA denied in its
Resolution[30] dated November 3, 1999.

Hence, the instant Petition raising the following issues:

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

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

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

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

The petitioner claims that in as much as the valid claims of creditors against the Estate are in excess of the
gross estate, no estate tax was due; that the lack of a formal offer of evidence is fatal to BIR's cause; that
the doctrine laid down in Vda. de 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-a[35] and People v. Mate[36] on the admission and consideration of exhibits which
were not formally offered during the trial. Although in a long line of cases many of which were decided
after Vda. de Oate, we held that courts cannot consider evidence which has not been formally
offered,[37] nevertheless, petitioner cannot validly assume that the doctrine laid down in Vda. de Oate has
already been abandoned. Recently, in Ramos v. Dizon,[38] this Court, applying the said doctrine, ruled that
the trial court judge therein committed no error when he admitted and considered the respondents'
exhibits in the resolution of the case, notwithstanding the fact that the same
were not formally offered. Likewise, in Far East Bank & Trust Company v. Commissioner of Internal
Revenue,[39] the Court made reference to said doctrine in resolving the issues therein. Indubitably, the
doctrine laid down in Vda. De Oate still subsists in this jurisdiction. In Vda. de Oate, we held that:

From the foregoing provision, it is clear that for evidence to be considered, the same must
be formally offered. Corollarily, the mere fact that a particular document is identified and
marked as an exhibit does not mean that it has already been offered as part of the
evidence of a party. In Interpacific Transit, Inc. v. Aviles [186 SCRA 385], we had the
occasion to make a distinction between identification of documentary evidence and its
formal offer as an exhibit. We said that the first is done in the course of the trial and is
accompanied by the marking of the evidence as an exhibit while the second is done only
when the party rests its case and not before. A party, therefore, may opt to formally offer
his evidence if he believes that it will advance his cause or not to do so at all. In the event
he chooses to do the latter, the trial court is not authorized by the Rules to consider the
same.
 However, in People v. Napat-a [179 SCRA 403] citing People v. Mate [103 SCRA 484], we
relaxed the foregoing rule and allowed evidence not formally offered to be admitted
and considered by the trial court provided the following requirements are present, viz.:
first, the same must have been duly identified by testimony duly recorded and, second,
the same must have been incorporated in the records of the case.[40]

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

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

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

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

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 Resolution[51] dated March 21, 1996, the CTA
considered the BIR to have waived presentation of its evidence. In the same Resolution, the parties were
directed to file their respective memorandum. Petitioner complied but BIR failed to do so.[52] In all of these
proceedings, BIR was duly notified. Hence, in this case, we are constrained to apply our ruling in Heirs of
Pedro Pasag v. Parocha:[53]

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

Strict adherence to the said rule is not a trivial matter. The Court in Constantino v. Court
of Appeals ruled that the formal offer of one's evidence is deemed waived after failing
to submit it within a considerable period of time. It explained that the court cannot
admit an offer of evidence made after a lapse of three (3) months because to do so
would "condone an inexcusable laxity if not non-compliance with a court order which,
in effect, would encourage needless delays and derail the speedy administration of
justice."
 Applying the aforementioned principle in this case, we find that the trial court had
reasonable ground to consider that petitioners had waived their right to make a formal
offer of documentary or object evidence. Despite several extensions of time to make their
formal offer, petitioners failed to comply with their commitment and allowed almost five
months to lapse before finally submitting it. Petitioners' failure to comply with the rule
on admissibility of evidence is anathema to the efficient, effective, and expeditious
dispensation of justice.

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

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

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

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

Verily, the second issue in this case involves the construction of Section 79[58] of the National Internal
Revenue Code[59] (Tax Code) which provides for the allowable deductions from the gross estate of the
decedent. The specific question is whether the actual claims of the aforementioned creditors may be fully
allowed as deductions from the gross estate of Jose despite the fact that the said claims were reduced or
condoned through compromise agreements entered into by the Estate with its creditors.
Claims against the estate, as allowable deductions from the gross estate under Section 79 of the Tax Code,
are basically a reproduction of the deductions allowed under Section 89 (a) (1) (C) and (E) of
Commonwealth Act No. 466 (CA 466), otherwise known as the National Internal Revenue Code of 1939,
and which was the first codification of Philippine tax laws. Philippine tax laws were, in turn, based on the
federal tax laws of the United States. Thus, pursuant to established rules of statutory construction, the
decisions of American courts construing the federal tax code are entitled to great weight in the
interpretation of our own tax laws.[60]

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

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

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

We are persuaded that the Ninth Circuit's decision...in Propstra correctly apply the Ithaca
Trust date-of-death valuation principle to enforceable claims against the estate. As we
interpret Ithaca Trust, when the Supreme Court announced the date-of-death valuation
principle, it was making a judgment about the nature of the federal estate tax specifically,
that it is a tax imposed on the act of transferring property by will or intestacy and, because
the act on which the tax is levied occurs at a discrete time, i.e., the instance of death, the
net value of the property transferred should be ascertained, as nearly as possible, as of
that time. This analysis supports broad application of the date-of-death valuation rule.[67]
We express our agreement with the date-of-death valuation rule, made pursuant to the ruling of the U.S.
Supreme Court in Ithaca Trust Co. v. United States.[68] First. There is no law, nor do we discern any
legislative intent in our tax laws, which disregards the date-of-death valuation principle and particularly
provides that post-death developments must be considered in determining the net value of the estate. It
bears emphasis that tax burdens are not to be imposed, nor presumed to be imposed, beyond what the
statute expressly and clearly imports, tax statutes being construed strictissimi juris against the
government.[69] Any doubt on whether a person, article or activity is taxable is generally resolved against
taxation.[70] Second. Such construction finds relevance and consistency in our Rules on Special Proceedings
wherein the term "claims" required to be presented against a decedent's estate is generally construed to
mean debts or demands of a pecuniary nature which could have been enforced against the deceased in
his lifetime, or liability contracted by the deceased before his death.[71] Therefore, the claims existing at
the time of death are significant to, and should be made the basis of, the determination of allowable
deductions.

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

SO ORDERED.

COMMISSIONER OF G.R. No. 159694

INTERNAL REVENUE,

Petitioner, Present:

Panganiban, CJ,

- versus - Chairman,

Ynares-Santiago,

Austria-Martinez,

AZUCENA T. REYES, Callejo, Sr., and

Respondent. Chico-Nazario, JJ

x -- -- -- -- -- -- -- -- -- -- -- -- -- x
AZUCENA T. REYES, G.R. No. 163581

Petitioner,

- versus -

COMMISSIONER OF Promulgated:

INTERNAL REVENUE,

Respondent. January 27, 2006

x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x

DECISION

PANGANIBAN, CJ.:

U nder the present provisions of the Tax Code and pursuant to elementary due process, taxpayers
must be informed in writing of the law and the facts upon which a tax assessment is based;
otherwise, the assessment is void. Being invalid, the assessment cannot in turn be used as a basis for the
perfection of a tax compromise.

The Case

Before us are two consolidated[1] Petitions for Review[2] filed under Rule 45 of the Rules of Court, assailing
the August 8, 2003 Decision[3] of the Court of Appeals (CA) in CA-GR SP No. 71392. The dispositive portion
of the assailed Decision reads as follows:

WHEREFORE, the petition is GRANTED. The assailed decision of the Court of Tax
Appeals is ANNULLED and SET ASIDE without prejudice to the action of the National
Evaluation Board on the proposed compromise settlement of the Maria
C. Tancinco estates tax liability.[4]
The Facts

The CA narrated the facts as follows:

On July 8, 1993, Maria C. Tancinco (or decedent) died, leaving a 1,292 square-meter
residential lot and an old house thereon (or subject property) located
at 4931 Pasay Road, Dasmarias Village, Makati City.

On the basis of a sworn information-for-reward filed on February 17, 1997 by a certain

Raymond Abad (or Abad), Revenue District Office No. 50 (South Makati) conducted an
investigation on the decedents estate (or estate). Subsequently, it issued a Return
Verification Order. But without the required preliminary findings being submitted, it
issued Letter of Authority No. 132963 for the regular investigation of the estate tax
case. Azucena T. Reyes (or [Reyes]), one of the decedents heirs, received the Letter of
Authority on March 14, 1997.

On February 12, 1998, the Chief, Assessment Division, Bureau of Internal Revenue (or
BIR), issued a preliminary assessment notice against the estate in the amount
of P14,580,618.67. On May 10, 1998, the heirs of the decedent (or heirs) received a final
estate tax assessment notice and a demand letter, both dated April 22, 1998, for the
amount of P14,912,205.47, inclusive of surcharge and interest.

On June 1, 1998, a certain Felix M. Sumbillo (or Sumbillo) protested the assessment [o]n
behalf of the heirs on the ground that the subject property had already been sold by the
decedent sometime in 1990.

On November 12, 1998, the Commissioner of Internal Revenue (or [CIR]) issued a
preliminary collection letter to [Reyes], followed by a Final Notice Before Seizure
dated December 4, 1998.
On January 5, 1999, a Warrant of Distraint and/or Levy was served upon the estate,
followed on February 11, 1999 by Notices of Levy on Real Property and Tax Lien against
it.

On March 2, 1999, [Reyes] protested the notice of levy. However, on March 11, 1999, the
heirs proposed a compromise settlement of P1,000,000.00.

In a letter to [the CIR] dated January 27, 2000, [Reyes] proposed to pay 50% of the basic
tax due, citing the heirs inability to pay the tax assessment. On March 20, 2000, [the CIR]
rejected [Reyess] offer, pointing out that since the estate tax is a charge on the estate and
not on the heirs, the latters financial incapacity is immaterial as, in fact, the gross value
of the estate amounting to P32,420,360.00 is more than sufficient to settle the tax
liability. Thus, [the CIR] demanded payment of the amount of P18,034,382.13 on or
before April 15, 2000[;] otherwise, the notice of sale of the subject property would be
published.

On April 11, 2000, [Reyes] again wrote to [the CIR], this time proposing to pay 100% of
the basic tax due in the amount of P5,313,891.00. She reiterated the proposal in a letter
dated May 18, 2000.

As the estate failed to pay its tax liability within the April 15, 2000 deadline, the Chief,
Collection Enforcement Division, BIR, notified [Reyes] on June 6, 2000 that the subject
property would be sold at public auction on August 8, 2000.

On June 13, 2000, [Reyes] filed a protest with the BIR Appellate Division. Assailing the
scheduled auction sale, she asserted that x x x the assessment, letter of demand[,] and
the whole tax proceedings against the estate are void ab initio. She offered to file the
corresponding estate tax return and pay the correct amount of tax without surcharge [or]
interest.

Without acting on [Reyess] protest and offer, [the CIR] instructed the Collection
Enforcement Division to proceed with the August 8, 2000 auction sale.Consequently,
on June 28, 2000, [Reyes] filed a [P]etition for [R]eview with the Court of Tax Appeals (or
CTA), docketed as CTA Case No. 6124.
On July 17, 2000, [Reyes] filed a Motion for the Issuance of a Writ of Preliminary Injunction
or Status Quo Order, which was granted by the CTA on July 26, 2000.Upon [Reyess] filing
of a surety bond in the amount of P27,000,000.00, the CTA issued a [R]esolution dated
August 16, 2000 ordering [the CIR] to desist and refrain from proceeding with the auction
sale of the subject property or from issuing a [W]arrant of [D]istraint or [G]arnishment of
[B]ank [A]ccount[,] pending determination of the case and/or unless a contrary order is
issued.

[The CIR] filed a [M]otion to [D]ismiss the petition on the grounds (i) that the CTA no
longer has jurisdiction over the case[,] because the assessment against the estate is
already final and executory; and (ii) that the petition was filed out of time. In a
[R]esolution dated November 23, 2000, the CTA denied [the CIRs] motion.

During the pendency of the [P]etition for [R]eview with the CTA, however, the BIR issued
Revenue Regulation (or RR) No. 6-2000 and Revenue Memorandum Order (or RMO) No.
42-2000 offering certain taxpayers with delinquent accounts and disputed assessments
an opportunity to compromise their tax liability.

On November 25, 2000, [Reyes] filed an application with the BIR for the compromise
settlement (or compromise) of the assessment against the estate pursuant to Sec. 204(A)
of the Tax Code, as implemented by RR No. 6-2000 and RMO No. 42-2000.

On December 26, 2000, [Reyes] filed an Ex-Parte Motion for Postponement of the hearing
before the CTA scheduled on January 9, 2001, citing her pending application for
compromise with the BIR. The motion was granted and the hearing was reset to February
6, 2001.

On January 29, 2001, [Reyes] moved for postponement of the hearing set on February 6,
2001, this time on the ground that she had already paid the compromise amount
of P1,062,778.20 but was still awaiting approval of the National Evaluation Board (or
NEB). The CTA granted the motion and reset the hearing to February 27, 2001.

On February 19, 2001, [Reyes] filed a Motion to Declare Application for the Settlement of
Disputed Assessment as a Perfected Compromise. In said motion, she alleged that [the
CIR] had not yet signed the compromise[,] because of procedural red tape requiring the
initials of four Deputy Commissioners on relevant documents before the compromise is
signed by the [CIR]. [Reyes] posited that the absence of the requisite initials and
signature[s] on said documents does not vitiate the perfected compromise.

Commenting on the motion, [the CIR] countered that[,] without the approval of the NEB,
[Reyess] application for compromise with the BIR cannot be considered a perfected or
consummated compromise.

On March 9, 2001, the CTA denied [Reyess] motion, prompting her to file a Motion for
Reconsideration Ad Cautelam. In a [R]esolution dated April 10, 2001, the CTA denied the
[M]otion for [R]econsideration with the suggestion that[,] for an orderly presentation of
her case and to prevent piecemeal resolutions of different issues, [Reyes] should file a
[S]upplemental [P]etition for [R]eview[,] setting forth the new issue of whether there was
already a perfected compromise.

On May 2, 2001, [Reyes] filed a Supplemental Petition for Review with the CTA, followed
on June 4, 2001 by its Amplificatory Arguments (for the Supplemental Petition for
Review), raising the following issues:

1. Whether or not an offer to compromise by the [CIR], with the

acquiescence by the Secretary of Finance, of a tax liability pending in
court, that was accepted and paid by the taxpayer, is a perfected and
consummated compromise.

2. Whether this compromise is covered by the provisions of Section 204

of the Tax Code (CTRP) that requires approval by the BIR [NEB].

Answering the Supplemental Petition, [the CIR] averred that an application for
compromise of a tax liability under RR No. 6-2000 and RMO No. 42-2000 requires the
evaluation and approval of either the NEB or the Regional Evaluation Board (or REB), as
the case may be.

On June 14, 2001, [Reyes] filed a Motion for Judgment on the Pleadings; the
motion was granted on July 11, 2001. After submission of memoranda, the case was
submitted for [D]ecision.
 On June 19, 2002, the CTA rendered a [D]ecision, the decretal portion of which
pertinently reads:

WHEREFORE, in view of all the foregoing, the instant

[P]etition for [R]eview is hereby DENIED. Accordingly, [Reyes] is hereby
ORDERED to PAY deficiency estate tax in the amount of Nineteen Million
Five Hundred Twenty Four Thousand Nine Hundred Nine and 78/100
(P19,524,909.78), computed as follows:

xxxxxxxxx

[Reyes] is likewise ORDERED to PAY 20% delinquency interest on

deficiency estate tax due of P17,934,382.13 from January 11, 2001 until
full payment thereof pursuant to Section 249(c) of the Tax Code, as
amended.

In arriving at its decision, the CTA ratiocinated that there can only be a perfected and
consummated compromise of the estates tax liability[,] if the NEB has approved [Reyess]
application for compromise in accordance with RR No. 6-2000, as implemented by RMO
No. 42-2000.

Anent the validity of the assessment notice and letter of demand against the estate, the
CTA stated that at the time the questioned assessment notice and letter of demand were
issued, the heirs knew very well the law and the facts on which the same were based. It
also observed that the petition was not filed within the 30-day reglementary period
provided under Sec. 11 of Rep. Act No. 1125 and Sec. 228 of the Tax Code.[5]

Ruling of the Court of Appeals

In partly granting the Petition, the CA said that Section 228 of the Tax Code and RR 12-99 were mandatory
and unequivocal in their requirement. The assessment notice and the demand letter should have stated
the facts and the law on which they were based; otherwise, they were deemed void.[6] The appellate court
held that while administrative agencies, like the BIR, were not bound by procedural requirements, they
were still required by law and equity to observe substantive due process. The reason behind this
requirement, said the CA, was to ensure that taxpayers would be duly apprised of -- and could effectively
protest -- the basis of tax assessments against them.[7] Since the assessment and the demand were void,
the proceedings emanating from them were likewise void, and any order emanating from them could
never attain finality.

The appellate court added, however, that it was premature to declare as perfected and consummated the
compromise of the estates tax liability. It explained that, where the basic tax assessed exceeded P1
million, or where the settlement offer was less than the prescribed minimum rates, the National
Evaluation Boards (NEB) prior evaluation and approval were the conditio sine qua non to the perfection
and consummation of any compromise.[8] Besides, the CA pointed out, Section 204(A) of the Tax Code
applied to all compromises, whether government-initiated or not.[9] Where the law did not distinguish,
courts too should not distinguish.

Hence, this Petition.[10]

The Issues

In GR No. 159694, petitioner raises the following issues for the Courts consideration:

I.

Whether petitioners assessment against the estate is valid.

II.
 Whether respondent can validly argue that she, as well as the other heirs, was not aware
of the facts and the law on which the assessment in question is based, after she had opted
to propose several compromises on the estate tax due, and even prematurely acting on
such proposal by paying 20% of the basic estate tax due.[11]

The foregoing issues can be simplified as follows: first, whether the assessment against the estate is
valid; and, second, whether the compromise entered into is also valid.

The Courts Ruling

The Petition is unmeritorious.

First Issue:

Validity of the Assessment Against the Estate

The second paragraph of Section 228 of the Tax Code[12] is clear and mandatory. It provides as follows:

Sec. 228. Protesting of Assessment. --

xxxxxxxxx

The taxpayers shall be informed in writing of the law and the facts on which the
assessment is made: otherwise, the assessment shall be void.
In the present case, Reyes was not informed in writing of the law and the facts on which the assessment
of estate taxes had been made. She was merely notified of the findings by the CIR, who had simply relied
upon the provisions of former Section 229[13] prior to its amendment by Republic Act (RA) No. 8424,
otherwise known as the Tax Reform Act of 1997.

First, RA 8424 has already amended the provision of Section 229 on protesting an assessment. The old
requirement of merely notifying the taxpayer of the CIRsfindings was changed in 1998 to informing the
taxpayer of not only the law, but also of the facts on which an assessment would be made; otherwise, the
assessment itself would be invalid.

It was on February 12, 1998, that a preliminary assessment notice was issued against the estate. On April
22, 1998, the final estate tax assessment notice, as well as demand letter, was also issued. During those
dates, RA 8424 was already in effect. The notice required under the old law was no longer sufficient under
the newlaw.

To be simply informed in writing of the investigation being conducted and of the recommendation for the
assessment of the estate taxes due is nothing but a perfunctory discharge of the tax function of correctly
assessing a taxpayer. The act cannot be taken to mean that Reyes already knew the law and the facts on
which the assessment was based. It does not at all conform to the compulsory requirement under
Section 228. Moreover, the Letter of Authority received by respondent on March 14, 1997 was for the
sheer purpose of investigation and was not even the requisite notice under the law.

The procedure for protesting an assessment under the Tax Code is found in Chapter III of Title VIII, which
deals with remedies. Being procedural in nature, can its provision then be applied retroactively? The
answer is yes.

The general rule is that statutes are prospective. However, statutes that are remedial, or that do not
create new or take away vested rights, do not fall under the general rule against the retroactive operation
of statutes.[14] Clearly, Section 228 provides for the procedure in case an assessment is protested. The
provision does not create new or take away vested rights. In both instances, it can surely be applied
retroactively. Moreover, RA 8424 does not state, either expressly or by necessary implication, that
pending actions are excepted from the operation of Section 228, or that applying it to pending
proceedings would impair vested rights.
Second, the non-retroactive application of Revenue Regulation (RR) No. 12-99 is of no moment,
considering that it merely implements the law.

A tax regulation is promulgated by the finance secretary to implement the provisions of the Tax
Code.[15] While it is desirable for the government authority or administrative agency to have one
immediately issued after a law is passed, the absence of the regulation does not automatically mean that
the law itself would become inoperative.

At the time the pre-assessment notice was issued to Reyes, RA 8424 already stated that the taxpayer must
be informed of both the law and facts on which the assessment was based. Thus, the CIR should have
required the assessment officers of the Bureau of Internal Revenue (BIR) to follow the clear mandate of
the new law. The old regulation governing the issuance of estate tax assessment notices ran afoul of the
rule that tax regulations -- old as they were -- should be in harmony with, and not supplant or modify, the
law.[16]

It may be argued that the Tax Code provisions are not self-executory. It would be too wide a stretch of
the imagination, though, to still issue a regulation that would simply require tax officials to inform the
taxpayer, in any manner, of the law and the facts on which an assessment was based. That requirement
is neither difficult to make nor its desired results hard to achieve.

Moreover, an administrative rule interpretive of a statute, and not declarative of certain rights and
corresponding obligations, is given retroactive effect as of the date of the effectivity of the statute.[17] RR
12-99 is one such rule. Being interpretive of the provisions of the Tax Code, even if it was issued only
on September 6, 1999, this regulation was to retroact to January 1, 1998 -- a date prior to the issuance of
the preliminary assessment notice and demand letter.

Third, neither Section 229 nor RR 12-85 can prevail over Section 228 of the Tax Code.

No doubt, Section 228 has replaced Section 229. The provision on protesting an assessment has been
amended. Furthermore, in case of discrepancy between the law as amended and its implementing but old
regulation, the former necessarily prevails.[18] Thus, between Section 228 of the Tax Code and the
pertinent provisions of RR 12-85, the latter cannot stand because it cannot go beyond the provision of the
law. The law must still be followed, even though the existing tax regulation at that time provided for a
different procedure. The regulation then simply provided that notice be sent to the respondent in the
form prescribed, and that no consequence would ensue for failure to comply with that form.
Fourth, petitioner violated the cardinal rule in administrative law that the taxpayer be accorded due
process. Not only was the law here disregarded, but no valid notice was sent, either. A void assessment
bears no valid fruit.

The law imposes a substantive, not merely a formal, requirement. To proceed heedlessly with tax
collection without first establishing a valid assessment is evidently violative of the cardinal principle in
administrative investigations: that taxpayers should be able to present their case and adduce supporting
evidence.[19] In the instant case, respondent has not been informed of the basis of the estate tax
liability. Without complying with the unequivocal mandate of first informing the taxpayer of the
governments claim, there can be no deprivation of property, because no effective protest can be
made.[20] The haphazard shot at slapping an assessment, supposedly based on estate taxations general
provisions that are expected to be known by the taxpayer, is utter chicanery.

Even a cursory review of the preliminary assessment notice, as well as the demand letter sent, reveals the
lack of basis for -- not to mention the insufficiency of -- the gross figures and details of the itemized
deductions indicated in the notice and the letter. This Court cannot countenance an assessment based on
estimates that appear to have been arbitrarily or capriciously arrived at. Although taxes are
the lifeblood of the government, their assessment and collection should be made in accordance with law
as any arbitrariness will negate the very reason for government itself.[21]

Fifth, the rule against estoppel does not apply. Although the government cannot be estopped by the
negligence or omission of its agents, the obligatory provision on protesting a tax assessment cannot be
rendered nugatory by a mere act of the CIR .

Tax laws are civil in nature.[22] Under our Civil Code, acts executed against the mandatory provisions of
law are void, except when the law itself authorizes the validity of those acts.[23] Failure to comply with
Section 228 does not only render the assessment void, but also finds no validation in any provision in the
Tax Code. We cannot condone errant or enterprising tax officials, as they are expected to be vigilant and
law-abiding.

Second Issue:

Validity of Compromise
It would be premature for this Court to declare that the compromise on the estate tax liability has been
perfected and consummated, considering the earlier determination that the assessment against the
estate was void. Nothing has been settled or finalized. Under Section 204(A) of the Tax Code, where the
basic tax involved exceeds one million pesos or the settlement offered is less than the prescribed
minimum rates, the compromise shall be subject to the approval of the NEB composed of the petitioner
and four deputy commissioners.

Finally, as correctly held by the appellate court, this provision applies to all compromises, whether
government-initiated or not. Ubi lex non distinguit, nec nosdistinguere debemos. Where the law does not
distinguish, we should not distinguish.

WHEREFORE, the Petition is hereby DENIED and the assailed Decision AFFIRMED. No pronouncement as
to costs.

SO ORDERED.