1. CIR vs. CA and Pajonar; Estate Tax G.R. No.

123206 March 22, 2000

Facts: Private respondent Josefina Pajonar was the guardian of the person of decedent Pedro Pajonar. The property of the decedent was put by the RTC- Dumaguete, under the guardianship of the Philippine National Bank via special proceeding, wherein 50, 000 was spent therein for payment of attorney's fees. When the decedent died, instead of filing a estate tax return, PNB advised Josefina to extra-judicially settle the estate of his brother. The decedent's estate was extra-judicially settled and the heirs paid an amount of 60, 753 for the notarization of the deed of extra-judicial settlement of estate. The private paid the estate tax, however, they were subsequently assessed of deficiency taxes because the amount paid in the special proceeding [50, 000] and the notarization fee [60, 753] cannot be claimed as a deduction to the decedent's estate. Private respondent paid the said taxes under protest. While the case is under review by the BIR, she filed a claim for refund in the CTA which was granted. Issue: whether or not 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. Held: Yes. As to the deductibility of the amount spent for notarization of the deed of extra-judicial settlement of estate- Explained the SC, 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 [which the law on allowable deductions from gross estate was copied!] 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." 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. This distinction has been carried over to our jurisdiction. Thus, in Lorenzo v. Posadas the Court construed the phrase "judicial expenses of the testamentary or intestate proceedings" as not including the compensation paid to a trustee of the decedent's estate when it appeared that such trustee was appointed for the purpose of managing the decedent's real estate for the benefit of the testamentary heir. In another case, the Court disallowed the premiums paid on the bond filed by the administrator as an expense of administration since the giving of a bond is in the nature of a qualification for the office, and not necessary in the settlement of the estate. Neither may attorney's fees incident to litigation incurred by the heirs in asserting their respective rights be claimed as a deduction from the gross estate. In this case, it is clear 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. 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. Deductible expenses of administration of the estate 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. As to the deductibility of attorney's fees in the Special proceedings- As a rule 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. 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. Hence the attorney's fees of 50, 000 is deductible from the gross estate of the decedent. 2. Marcos II vs. CA GR No. 120880, June 5, 1997 "The approval of the court sitting in probate is not a mandatory requirement in the collection of estate taxes." "In case of failure to file a return, the tax may be assessed at anytime within 10 years after the omission." FACTS: Bongbong Marcos sought for the reversal of the ruling of the Court of Appeals to grant CIR's petition to levy the properties of the late Pres. Marcos to cover the payment of his tax delinquencies during the period of his exile in the US. The Marcos family was assessed by the BIR after it failed to file estate tax returns. However the assessment were not protested administratively by Mrs. Marcos and the heirs of the late president so that they became final and unappealable after the period for filing of opposition has prescribed. Marcos contends that the properties could not be levied to cover the tax dues because they are still pending probate with the court, and settlement of tax deficiencies could not be had, unless there is an order by the probate court or until the probate proceedings are terminated. Petitioner also pointed out that applying Memorandum Circular No. 38-68, the BIR's Notices of Levy on the Marcos properties were issued beyond the allowed period, and are therefore null and void. ISSUE: Are the contentions of Bongbong Marcos correct? HELD: No. The deficiency income tax assessments and estate tax assessment are already final and unappealable -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.

The approval of the court, sitting in probate, or as a settlement tribunal over the deceased's estate is not a mandatory requirement in the collection of estate taxes. 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. On the issue of prescription, 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 Sec.223 of the NIRC, in case of failure to file a return, the tax may be assessed at anytime within 10 years after the omission, and any tax so assessed may be collected by levy upon real property within 3 years (now 5 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 no reason why the BIR cannot continue with the collection of the said tax 3. CIR v. PINEDA GR No. L-22734, September 15, 1967 21 SCRA 105 FACTS: Atanasio Pineda died, survived by his wife, Felicisima Bagtas, and 15 children, the eldest of whom is Atty. Manuel Pineda. Estate proceedings were had in Court so that the estate was divided among and awarded to the heirs. Atty Pineda's share amounted to about P2,500.00. After the estate proceedings were closed, the BIR 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 issued an assessment and charged the full amount to the inheritance due to Atty. Pineda who argued that he is liable only to extent of his proportional share in the inheritance. ISSUE: Can BIR collect the full amount of estate taxes from an heir's inheritance. HELD: Yes. The Government can require Atty. Pineda to pay the full amount of the taxes assessed. 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 for which said estate is liable. By virtue of such lien, the Government has the right to subject the property in Pineda's possession to satisfy the income tax assessment. After such payment, Pineda will have a right of contribution from his co-heirs, 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; and second, 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. 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.

4. LORENZO vs. POSADAS JR.

G.R. No. L-43082 June 18, 1937 FACTS: Thomas Hanley died, leaving a will and a considerable amount of real and personal properties. Proceedings for the probate of his will and the settlement and distribution of his estate were begun in the CFI of Zamboanga. The will was admitted to probate. The CFI considered it proper for the best interests of the estate to appoint a trustee to administer the real properties which, under the will, were to pass to nephew Matthew ten years after the two executors named in the will was appointed trustee. Moore acted as trustee until he resigned and the plaintiff Lorenzo herein was appointed in his stead. During the incumbency of the plaintiff as trustee, the defendant Collector of Internal Revenue (Posadas) assessed against the estate an inheritance tax, together with the penalties for deliquency in payment. Lorenzo paid said amount under protest, notifying Posadas at the same time that unless the amount was promptly refunded suit would be brought for its recovery. Posadas overruled Lorenzos protest and refused to refund the said amount. Plaintiff went to court. The CFI dismissed Lorenzos complaint and Posadas counterclaim. Both parties appealed to this court. ISSUE: (e) Has there been delinquency in the payment of the inheritance tax? HELD: The judgment of the lower court is accordingly modified, with costs against the plaintiff in both instances YES The defendant maintains that it was the duty of the executor to pay the inheritance tax before the delivery of the decedents property to the trustee. Stated otherwise, the defendant contends that delivery to the trustee was delivery to the cestui que trust, the beneficiary in this case, within the meaning of the first paragraph of subsection ( b) of section 1544 of the Revised Administrative Code. This contention is well taken and is sustained. A trustee is but an instrument or agent for the cestui que trust

The appointment of 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. 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. 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.

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 appointmening a trustee to carry into effect the provisions of the will

As the existence of the trust was already proven, 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. On that date trust estate vested in him. The interest due should be computed from that date. NOTES: Other issues:

(a) When does the inheritance tax accrue and when must it be satisfied? The accrual of the inheritance tax is distinct from the obligation to pay the same. 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. Whatever may be the time when actual transmission of the inheritance takes place, succession takes place in any event at the moment of the decedents death. The time when the heirs legally succeed to the inheritance may differ from the time when the heirs actually receive such inheritance. Thomas Hanley having died on May 27, 1922, the inheritance tax accrued as of the date.

From the fact, however, that Thomas Hanley died on May 27, 1922, it does not follow that the obligation to pay the tax arose as of the date. The time for the payment on inheritance tax is clearly fixed by section 1544 of the Revised Administrative Code as amended by Act No. 3031, in relation to section 1543 of the same Code. The two sections follow: SEC. 1543. Exemption of certain acquisitions and transmissions. The following shall not be taxed: (a) The merger of the usufruct in the owner of the naked title. (b) The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the trustees. (c) The transmission from the first heir, legatee, or donee in favor of another beneficiary, in accordance with the desire of the predecessor. xx 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. The instant case does[not] 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 Moore as trustee. (b) Should the inheritance tax be computed on the basis of the value of the estate at the time of the testators death, or on its value ten years later?

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 value of the estate as it stood at the time of the decedents death, regardless of any subsequent contingency value of any subsequent increase or decrease in value

(c) In determining the net value of the estate subject to tax, is it proper to deduct the compensation due to trustees?

A trustee, no doubt, is entitled to receive a fair compensation for his services. 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

(d) What law governs the case at bar? Should the provisions of Act No. 3606 favorable to the tax-payer be given retroactive effect?

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, . . . . Act No. 3606 itself contains no provisions indicating legislative intent to give it retroactive effect. No such effect can be given the statute by this court.

5. RAFAEL ARSENIO S. DIZON, in his capacity as the Judicial Administrator of the Estate of the deceased JOSE P. FERNANDEZ, Petitioner vs. COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE

J. Nachura. 3rd Division

Facts: On November 7, 1987, Jose P. Fernandez (Jose) died. Thereafter, a petition for the probate of his will was filed with Branch 51 of the Regional Trial Court (RTC) of Manila (probate court). 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 dated October 13, 1988, Justice Dizon informed respondent Commissioner of the Bureau of Internal Revenue (BIR) of the special proceedings for the Estate. After several extensions, on April 17, 1990, Atty. Gonzales wrote a letter addressed to the BIR Regional Director for San Pablo City and filed the estate tax return with the same BIR Regional Office, showing therein a NIL estate tax liability. A Certification stating that the taxes due on the transfer of real and personal properties of Jose had been fully paid and said properties may be transferred to his heirs was issued. Sometime in August 1990, Justice Dizon passed away. Thus, on October 22, 1990, the probate court appointed petitioner as the administrator of the Estate. 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, Banque de L'Indochine et. de Suez, Manila Banking Corporation and State Investment House, Inc. Petitioner manifested that Manila Bank, a major creditor of the Estate was not included, as it did not file a claim with the probate court since it had security over several real estate properties forming part of the Estate. However, on November 26, 1991, the Assistant Commissioner for Collection of the BIR, Themistocles Montalban, issued Estate Tax Assessment Notice demanding the payment of P66,973,985.40 as deficiency estate tax. The petition for review was denied by CTA. 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. CA affirmed CTAs ruling.

Issues: 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.

Held: Yes. 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.

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. 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. Also, as held in Propstra v. U.S., 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. The Propstra case applied the Ithaca Trust date-of-death valuation principle to enforceable claims against the estate. 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. 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. Any doubt on whether a person, article or activity is taxable is generally resolved against taxation. 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. 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.

6. 149909 : October 11. MARIA CHRISTINA. Due to certain disagreements between Atty. Manila to
William Lee for Php18. in relation to Section 3 pars. 2007 . Allegedly. 79. all surnamed RONQUILLO. CRISPIN JR. a portion of the proceeds in the amount of Php1. Gabriel on March 19. The said sum included the compensation of Atty. 2. Gabriel. 2 & 3. Due to certain disagreements between Atty. prohibition and mandamus is hereby DENIED DUE COURSE and accordingly DISMISSED.00 was deposited with the probate court.000. with prior approval of the probate court. GENARO III. 2007 TERESA. Gabriel and the respondents. Gabriel and the respondents. to prevent the release of the compensation.00 a month thereafter until the final liquidation of the estate.00.00 as of December 1992. 78. to prevent the release of the compensation. sold three parcels of land situated at Quiapo. Rule 65. a portion of the proceeds in the amount of Php1.While still acting as executor. 167848 : April 27. MARIA LUISA. Rule 46 and Section 11. par.422. 1998. 2001. per Resolution dated May 25. Atty.000. G. Upon the death of Atty. the petition for certiorari .000. EMMA. there has been no final liquidation of the Ronquillo estate. For failure of petitioners to cure the defects that resulted in the dismissal of their petition. G. respondents filed a notice with the probate court that there was a pending tax investigation with the Bureau of Internal Revenue concerning unpaid taxes of the estate from the sale of the land. ISSUE: Whether or not the BIR is correct? HELD: YES.R. Manila to William Lee for Php18.000. HON.00 was deposited with the probate court. No. VINCENT and RASCHEL.R. Respondents. the probate court issued an Order4 fixing the amount of compensation of Atty. Gabriel. FACTS: On July 26. for being insufficient in form and substance pursuant to Section 1.422. his uncollected compensation reached Php648. with prior approval of the probate court. Gabriel as executor in the amount of Php426. Rule 13 both of the 1997 Rules of Civil Procedure.000. No. v.00. all surnamed GABRIEL. 2001.000.000. 1993. COURT OF APPEALS. is hereby DENIED for lack of merit. plus Php3.00. CORAZON and RAMONA.000. the "Motion for Reconsideration" of the Resolution dated June 6. At the time of the filing of the present petition. The said sum included the compensation of Atty. Gabriel.7 chanroblesvirtuallawlibary ISSUE: Whether or not the petition for the certificate of title is valid HELD: Premises considered. 3 & 5. Atty. Gabriel. Petitioners. Allegedly. sold three parcels of land situated at Quiapo.. While still acting as executor.000. respondents filed a notice with the probate court that there was a pending tax investigation with the Bureau of Internal Revenue concerning unpaid taxes of the estate from the sale of the land.