Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-43082 June 18, 1937

PABLO LORENZO, as trustee of the estate of Thomas Hanley,

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

Pablo Lorenzo and Delfin Joven for plaintiff-appellant.

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

LAUREL, J.:

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

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

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

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

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

xxx xxx xxx

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

The Court of First Instance of Zamboanga considered it proper for the best
interests of ther estate to appoint a trustee to administer the real properties
which, under the will, were to pass to Matthew Hanley ten years after the two
executors named in the will, was, on March 8, 1924, appointed trustee. Moore
took his oath of office and gave bond on March 10, 1924. He acted as trustee
until February 29, 1932, when he resigned and the plaintiff herein was
appointed in his stead.

During the incumbency of the plaintiff as trustee, the defendant Collector of

Internal Revenue, alleging that the estate left by the deceased at the time of
his death consisted of realty valued at P27,920 and personalty valued at P1,465,
and allowing a deduction of P480.81, assessed against the estate an
inheritance tax in the amount of P1,434.24 which, together with the penalties
for deliquency in payment consisting of a 1 per cent monthly interest from July
1, 1931 to the date of payment and a surcharge of 25 per cent on the tax,
amounted to P2,052.74. On March 15, 1932, the defendant filed a motion in the
testamentary proceedings pending before the Court of First Instance of
Zamboanga (Special proceedings No. 302) praying that the trustee, plaintiff
herein, be ordered to pay to the Government the said sum of P2,052.74. The
motion was granted. On September 15, 1932, the plaintiff paid said amount
under protest, notifying the defendant at the same time that unless the amount
was promptly refunded suit would be brought for its recovery. The defendant
overruled the plaintiff's protest and refused to refund the said amount hausted,
plaintiff went to court with the result herein above indicated.

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

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

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

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

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

The defendant-appellant contradicts the theories of the plaintiff and assigns

the following error besides:

The lower court erred in not ordering the plaintiff to pay to the defendant the
sum of P1,191.27, representing part of the interest at the rate of 1 per cent per
month from April 10, 1924, to June 30, 1931, which the plaintiff had failed to pay
on the inheritance tax assessed by the defendant against the estate of
Thomas Hanley.
Issues
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:
Answer to Issue #1:
The inheritance tax accrued as of the time
of death of Thomas Hanley. However, the
obligation to pay the same only arose
before entrance into possession of the
property was had.
(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.)
Succession
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).
Answer to Issue #2
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, . . . ." Answer to Issue #3:
No, it cannot be deducted.
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. Answer to Issue #4

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 Trustee =
inheritance tax before the delivery of the decedent's property to the trustee. cestui que
Stated otherwise, the defendant contends that delivery to the trustee was trust =
delivery to the cestui que trust, the beneficiery in this case, within the meaning beneficiary
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
Note:
The cestui que trust is the person entitled to an equitable, as opposed to a legal, estate in the trust assets. Thus, if land is
granted to A, for the use of B while in trust, with remainder to C when the trust terminates, A is the trustee, B is cestui que use,
and C the cestui que trust.

He who has a right to a beneficial interest in and out of an estate the legal title to which is vested in another.

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.
Computation of Tax
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.

Avanceña, C.J., Abad Santos, Imperial, Diaz and Concepcion, JJ., concur.
Villa-Real, J., concurs.
 SECOND DIVISION
[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.
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
byNotices 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’s Contention
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."
Respondent’s Contention
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]
Issue
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 anheir 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:
Memorize this!
"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 contends that...
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.
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.
Marcos lost in the case as his
SO ORDERED.
petition was denied.
Regalado, (Chairman), Romero, Puno, and Mendoza, JJ., concur.

THIRD DIVISION

[G.R. No. 123206. March 22, 2000]

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

RESOLUTION

GONZAGA-REYES, J.: 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 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] Jur-is
 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] Juri-ssc

On June 15, 1993, the Commissioner of Internal Revenue filed a motion for
reconsideration[7] of the CTA's May 6, 1993 decision asserting, among others,
that the notarial fee for the Extrajudicial Settlement and the attorney's fees in
the guardianship proceedings are not deductible expenses.

On June 7, 1994, the CTA issued the assailed Resolution [8] ordering the
Commissioner of Internal Revenue to refund Josefina Pajonar, as
administratrix of the estate of Pedro Pajonar, the amount of P76,502.42
representing erroneously paid estate tax for the year 1988. Also, the CTA
upheld the validity of the deduction of the notarial fee for the Extrajudicial
Settlement and the attorney's fees in the guardianship proceedings.

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

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

Issue
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.

Yes! We answer this question in the affirmative, thereby upholding the decisions of
the appellate courts. J-jlex
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 Memorize!
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
 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] Scc-alr

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
Cases purpose of managing the decedent's real estate for the benefit of the
where the
expenses testamentary heir. In another case, the Court disallowed the premiums paid on
incurred the bond filed by the administrator as an expense of administration since the
were not giving of a bond is in the nature of a qualification for the office, and not
considered
allowable necessary in the settlement of the estate. [23] Neither may attorney's fees
deductions incident to litigation incurred by the heirs in asserting their respective rights be
claimed as a deduction from the gross estate. [24]

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.

SO ORDERED.

Melo, (Chairman), Vitug, Panganiban, and Purisima, JJ., concur. Calrs-pped

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

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

P2,707.44
Total amount due
==========
=
P14.50
Additional residence
2. ==========
tax for 1945
=
3. Real Estate dealer's tax P207.50
for the fourth quarter of ==========
1946 and the 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 P187.5
year of 1947 0

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’s
Contention Manuel B. Pineda opposes the proposition on the ground that as an heir he is
liable for unpaid income tax due the estate only up to the extent of and in
proportion to any share he received. He relies on Government of the Philippine
Islands v. Pamintuan 2 where We held that "after the partition of an estate, heirs
and distributees are liable individually for the payment of all lawful outstanding
claims against the estate in proportion to the amount or value of the property
they have respectively received from the estate."
RULING
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 taxes 4a for which said estate is
liable, pursuant to the last paragraph of Section 315 of the Tax Code, which we
quote hereunder:

If any person, corporation, partnership, joint-account (cuenta en participacion),

association, or insurance company liable to pay the income tax, neglects or
refuses to pay the same after demand, the amount shall be a lien in favor of
the Government of the Philippines from the time when the assessment was
made by the Commissioner of Internal Revenue until paid with interest,
penalties, and costs that may accrue in addition thereto upon all property and
rights to property belonging to the taxpayer: . . .

By virtue of such lien, the Government has the right to subject the property in
Pineda's possession, i.e., the P2,500.00, to satisfy the income tax assessment
in the sum of P760.28. After such payment, Pineda will have a right of
contribution from his co-heirs, 5 to achieve an adjustment of the proper share of
each heir in the distributable estate.

All told, the Government has two ways of collecting the tax in question. One,
by going after all the heirs and collecting from each one of them the amount of
the tax proportionate to the inheritance received. This remedy was adopted
in Government of the Philippine Islands v. Pamintuan, supra . In said case, the
Government filed an action against all the heirs for the collection of the tax.
This action rests on the concept that hereditary property consists only of that
part which remains after the settlement of all lawful claims against the estate,
for the settlement of which the entire estate is first liable.6 The reason why in
case suit is filed against all the heirs the tax due from the estate is levied
proportionately against them is to achieve thereby two results: first, payment of
the tax; and second, adjustment of the shares of each heir in the distributed
estate as lessened by the tax.

Another remedy, pursuant to the lien created by Section 315 of the Tax Code
upon all property and rights to property belonging to the taxpayer for unpaid
income tax, is by subjecting said property of the estate which is in the hands of
an heir or transferee to the payment of the tax due, the estate. This second
remedy is the very avenue the Government took in this case to collect the tax.
The Bureau of Internal Revenue should be given, in instances like the case at
bar, the necessary discretion to avail itself of the most expeditious way to
collect the tax as may be envisioned in the particular provision of the Tax Code
above quoted, because taxes are the lifeblood of government and their prompt
and certain availability is an imperious need. 7 And as afore-stated in this case
the suit seeks to achieve only one objective: payment of the tax. The
adjustment of the respective shares due to the heirs from the inheritance, as
lessened by the tax, is left to await the suit for contribution by the heir from
whom the Government recovered said tax.

WHEREFORE, the decision appealed from is modified. Manuel B. Pineda is

hereby ordered to pay to the Commissioner of Internal Revenue the sum of
P760.28 as deficiency income tax for 1945 and 1946, and real estate dealer's
fixed tax for the fourth quarter of 1946 and for the whole year 1947, without
prejudice to his right of contribution for his co-heirs. No costs. So ordered.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro,

Angeles and Fernando, JJ., concur.

THIRD DIVISION
RAFAEL ARSENIO S. DIZON, in his capacity G.R. No. 140944
as the Judicial Administrator of the Estate of
the deceased JOSE P. FERNANDEZ, Present:
Petitioner,
YNARES-SANTIAGO, J.,
Chairperson,
- versus - AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
NACHURA, and
COURT OF TAX APPEALS REYES, JJ.
and COMMISSIONER OF INTERNAL
REVENUE, Promulgated:
Respondents.
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 Dizoninformed
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]
Creditors’ claims are greater than the
deceased’s Gross Estate
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
Alberto was not able to duly identify the pieces of
evidence.
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: To satisfy the second requirement

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.

G.R. No. 159694 January 27, 2006

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
AZUCENA T. REYES, Respondent.

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

G.R. No. 163581 January 27, 2006

AZUCENA T. REYES, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION
PANGANIBAN, CJ.:

Under 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 estate’s 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, Dasmariñas 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 decedent’s 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 decedent’s 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 [Reyes’s] offer, pointing out that since the
estate tax is a charge on the estate and not on the heirs, the latter’s 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 [Reyes ’s] 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 [Reyes ’s] 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 CIR’s] 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, [Reyes’s] application for compromise with the BIR cannot be
considered a perfected or consummated compromise.

"On March 9, 2001, the CTA denied [Reyes ’s] 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 estate’s tax liability[,] if the
NEB has approved [Reyes’s] 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
Wrong
letter of demand were issued, the heirs knew very well the law and the facts on
contention
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. 7Since 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 estate’s 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 Board’s (NEB) prior evaluation and approval were the conditio sine
qua non to the perfection and consummation of any compromise. 8Besides, 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 Court’s
consideration:

"I.

Whether petitioner’s 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 Court’s 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 22913 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
CIR’s findings 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 new law.

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 government’s 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
taxation’s 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
nos distinguere debemos. Where the law does not distinguish, we should not
distinguish. CIR lost
WHEREFORE, the Petition is hereby DENIED and the assailed Decision
AFFIRMED. No pronouncement as to costs.
SO ORDERED.

ARTEMIO V. PANGANIBAN
Chief Justice
Chairperson, First Division