G.R. No.
L-43082 June 18, 1937 Hanley, at Castlemore, Ballaghaderine, County of
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
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.
FERDINAND R. MARCOS II, petitioner, vs. COURT OF
APPEALS, THE COMMISSIONER OF THE BUREAU OF
INTERNAL REVENUE and HERMINIA D. DE GUZMAN,
respondents.
DECISION
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[1] of 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 0 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
(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
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
...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"
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.
RAFAEL ARSENIO S. DIZON, in his capacity as the
Judicial Administrator of the Estate of the deceased
JOSE P. FERNANDEZ v. COURT OF TAX APPEALS and
COMMISSIONER OF INTERNAL REVENUE. G.R. No.
140944. April 30, 2008
FACTS:
Decedent Jose P. Fernandez's estate was administered
by Arsenio P. Dizon and petitioner Rafael Dizon
(petitioner) as Special and Assistant Special
Administrator, respectively. Petitioner filed a request
for extension with the BIR to determine and collate the
assets and claims of the estate, which the BIR granted.
Jesus Gonzales, an agent of Arsenio filed the estate tax
return with the same BIR Regional Office, showing
therein a NIL estate tax liability.
The BIR then issued Certifications allowing decedent's
properties may be transferred to his heirs.
Petitioner requested the probate court's authority to
sell several properties forming part of the Estate, for the
purpose of paying its creditors. 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. However, the BIR issued an
Estate Tax Assessment Notice demanding the payment
of P66,973,985.40 as deficiency estate tax. Gonzales
moved for the reconsideration but was denied.
The CTA and CA who affirmed, ruled that the evidence
introduced by the BIR were admissible.
ISSUES:
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.
Whether the CA erred in affirming the CTA in the
latter's determination of the deficiency estate tax
imposed against the Estate.
RULING:
YES. 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. As such, those evidence submitted by the BIR has
no evidentiary weight, as the rules on documentary
evidence require that these documents must be
formally offered before the CTA. 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 and People v. Mate on the admission
and consideration of exhibits which were not formally
offered during the trial.
The Court reiterates 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.
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.
YES. 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.
The Court agreed with an American ruling relating to
the date-of-death valuation, 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, to be followed. Also the Court,
emphasized the definition of claims which are 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.
Therefore, the claims existing at the time of death are
significant to, and should be made the basis of, the
determination of allowable deductions.
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.
GONZAGA-REYES, J.: Supr-ema
Assailed in this petition for review on certiorari is the
December 21, 1995 Decision[1] of the Court of
Appeals[2] in CA-G.R. Sp. No. 34399 affirming the June
7, 1994 Resolution of the Court of Tax Appeals in CTA
Case No. 4381 granting private respondent Josefina P.
Pajonar, as administratrix of the estate of Pedro P.
Pajonar, a tax refund in the amount of P76,502.42,
representing erroneously paid estate taxes for the year On May 6, 1993, the CTA ordered the Commissioner of
1988. Internal Revenue to refund Josefina Pajonar the amount
of P252,585.59, representing erroneously paid estate
Pedro Pajonar, a member of the Philippine Scout,
tax for the year 1988.[5]
Bataan Contingent, during the second World War, was a
part of the infamous Death March by reason of which Among the deductions from the gross estate allowed by
he suffered shock and became insane. His sister the CTA were the amounts of P60,753 representing the
Josefina Pajonar became the guardian over his person, notarial fee for the Extrajudicial Settlement and the
while his property was placed under the guardianship of amount of P50,000 as the attorney's fees in Special
the Philippine National Bank (PNB) by the Regional Trial Proceedings No. 1254 for guardianship.[6]Juri-ssc
Court of Dumaguete City, Branch 31, in Special
On June 15, 1993, the Commissioner of Internal
Proceedings No. 1254. He died on January 10, 1988. He
Revenue filed a motion for reconsideration[7] of the
was survived by his two brothers Isidro P. Pajonar and
CTA's May 6, 1993 decision asserting, among others,
Gregorio Pajonar, his sister Josefina Pajonar, nephews
that the notarial fee for the Extrajudicial Settlement and
Concordio Jandog and Mario Jandog and niece Conchita
the attorney's fees in the guardianship proceedings are
Jandog.
not deductible expenses.
On May 11, 1988, the PNB filed an accounting of the
On June 7, 1994, the CTA issued the assailed
decedent's property under guardianship valued at
Resolution[8] ordering the Commissioner of Internal
P3,037,672.09 in Special Proceedings No. 1254.
Revenue to refund Josefina Pajonar, as administratrix of
However, the PNB did not file an estate tax return,
the estate of Pedro Pajonar, the amount of P76,502.42
instead it advised Pedro Pajonar's heirs to execute an
representing erroneously paid estate tax for the year
extrajudicial settlement and to pay the taxes on his
1988. Also, the CTA upheld the validity of the deduction
estate. On April 5, 1988, pursuant to the assessment by
of the notarial fee for the Extrajudicial Settlement and
the Bureau of Internal Revenue (BIR), the estate of
the attorney's fees in the guardianship proceedings.
Pedro Pajonar paid taxes in the amount of P2,557.
On July 5, 1994, the Commissioner of Internal Revenue
On May 19, 1988, Josefina Pajonar filed a petition with
filed with the Court of Appeals a petition for review of
the Regional Trial Court of Dumaguete City for the
the CTA's May 6, 1993 Decision and its June 7, 1994
issuance in her favor of letters of administration of the
Resolution, questioning the validity of the
estate of her brother. The case was docketed as Special
abovementioned deductions. On December 21, 1995,
Proceedings No. 2399. On July 18, 1988, the trial court
the Court of Appeals denied the Commissioner's
appointed Josefina Pajonar as the regular administratrix
petition.[9]
of Pedro Pajonar's estate.
Hence, the present appeal by the Commissioner of
On December 19, 1988, pursuant to a second
Internal Revenue.
assessment by the BIR for deficiency estate tax, the
estate of Pedro Pajonar paid estate tax in the amount of The sole issue in this case involves the construction of
P1,527,790.98. Josefina Pajonar, in her capacity as section 79[10] of the National Internal Revenue
administratrix and heir of Pedro Pajonar's estate, filed a Code[11] (Tax Code) which provides for the allowable
protest on January 11, 1989 with the BIR praying that deductions from the gross estate of the decedent. More
the estate tax payment in the amount of P1,527,790.98, particularly, the question is whether the notarial fee
or at least some portion of it, be returned to the paid for the extrajudicial settlement in the amount of
heirs.[3] Jur-is P60,753 and the attorney's fees in the guardianship
proceedings in the amount of P50,000 may be allowed
However, on August 15, 1989, without waiting for her
as deductions from the gross estate of decedent in
protest to be resolved by the BIR, Josefina Pajonar filed
order to arrive at the value of the net estate.
a petition for review with the Court of Tax Appeals
(CTA), praying for the refund of P1,527,790.98, or in the We answer this question in the affirmative, thereby
alternative, P840,202.06, as erroneously paid estate upholding the decisions of the appellate courts. J-jlex
tax.[4] The case was docketed as CTA Case No. 4381.
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. x x x
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. Sc-juris
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. ] Nc-mmis
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 estate 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: Newmiso
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. Acctmis
The amount of P50,000.00 was incurred as attorney's
fees in the guardianship proceedings in Spec. Proc. No.
1254. Petitioner contends that said amount are not
expenses of the testamentary or intestate proceedings
as the guardianship proceeding was instituted during
the lifetime of the decedent when there was yet no
estate to be settled.
Again , this contention must fail.
The guardianship proceeding in this case was necessary
for the distribution of the property of the deceased
Pedro Pajonar. As correctly pointed out by respondent
CTA, the PNB was appointed guardian over the assets of
the deceased, and that necessarily the assets of the
deceased formed part of his gross estate. x x x
xxx.....xxx.....xxx
 litigation incurred by the heirs in asserting their
respective rights be claimed as a deduction from the
It is clear therefore that the attorney's fees incurred in
gross estate.[24]
the guardianship proceeding in Spec. Proc. No. 1254
were essential to the distribution of the property to the Coming to the case at bar, the notarial fee paid for the
persons entitled thereto. Hence, the attorney's fees extrajudicial settlement is clearly a deductible expense
incurred in the guardianship proceedings in the amount since such settlement effected a distribution of Pedro
of P50,000.00 should be allowed as a deduction from Pajonar's estate to his lawful heirs. Similarly, the
the gross estate of the decedent.[15] attorney's fees paid to PNB for acting as the guardian of
Pedro Pajonar's property during his lifetime should also
The deductions from the gross estate permitted under
be considered as a deductible administration expense.
section 79 of the Tax Code basically reproduced the
PNB provided a detailed accounting of decedent's
deductions allowed under Commonwealth Act No. 466
property and gave advice as to the proper settlement of
(CA 466), otherwise known as the National Internal
the latter's estate, acts which contributed towards the
Revenue Code of 1939,[16] and which was the first
collection of decedent's assets and the subsequent
codification of Philippine tax laws. Section 89 (a) (1) (B)
settlement of the estate.
of CA 466 also provided for the deduction of the
"judicial expenses of the testamentary or intestate We find that the Court of Appeals did not commit
proceedings" for purposes of determining the value of reversible error in affirming the questioned resolution
the net estate. Philippine tax laws were, in turn, based of the Court of Tax Appeals.
on the federal tax laws of the United States.[17] In
WHEREFORE, the December 21, 1995 Decision of the
accord with established rules of statutory construction,
Court of Appeals is AFFIRMED. The notarial fee for the
the decisions of American courts construing the federal
extrajudicial settlement and the attorney's fees in the
tax code are entitled to great weight in the
guardianship proceedings are allowable deductions
interpretation of our own tax laws.[18] Scc-alr
from the gross estate of Pedro Pajonar.
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