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Pablo Lorenzo vs. Collector of Internal Revenue Juan Posadas Jr. (G.R. No. 43082, 18 June 1937, 64 Phil 353)

Type of Action/Appeal Appeal from decision of Court of First Instance Zamboanga which dismissed both plaintiff Pablo Lorenzo’s complaint and defendant Juan Posadas’ Jr. (in his capacity as Collector of Internal Revenue) counterclaim.

Facts Plaintiff Pablo Lorenzo (in his capacity as trustee of deceased Thomas Hanley’s estate) brought action in Court of First Instance Zamboanga on 4 October 1932 for refund of PhP2,052.74 that he paid as inheritance tax on Hanley’s estate and for the collection of interest thereon at 6% per annum computed from 15 September 1932 (when the aforesaid tax was paid under protest), against defendant Juan Posadas, Jr., then Collector of Internal Revenue.

During Lorenzo’s incumbency as trustee, Collector of Internal Revenue Posadas alleged that Thomas left on his death an estate consisting of real properties at PhP27,920 and personal properties at PhP1,465.

(Allowing deduction of P480.81, assessed against the estate an inheritance tax in the amount of P1,434.24 which, together with the penalties for delinquency in payment consisting of 1% monthly interest from 1 July 1931 to the date of payment and a surcharge of 25% on the tax, amounted to P2,052.74.)

On 15 March 1932, Posadas filed a motion in pending testamentary proceedings before the Court of First Instance of Zamboanga (Special Proceedings No. 302), where he asked that the trustee and plaintiff Pablo Lorenzo be ordered to pay the Government the sum of P2,052.74. Defendant’s motion was granted and on 15 September 1932, the plaintiff paid that amount under protest. Lorenzo also notified Posadas at the same time that unless the amount was promptly refunded, a suit would be brought for its recovery. The defendant overruled the plaintiff's protest and refused to refund the tax paid or any part of it.

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.

Issued and Held by the Supreme Court

The following questions were raised in the appeal,

(1) When does estate (also known as inheritance) tax accrue and when must it be satisfied?

The Court held that accrual of estate tax is distinct from the obligation to pay it. Estate tax was also defined as “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.

It held that as per Article 657 of 1889 Spanish Civil Code that 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

/archibald.manansala Archibald Jose T. Manansala CEU School of Law and Jurisprudence

Pablo Lorenzo vs. Collector of Internal Revenue Juan Posadas Jr. (G.R. No. 43082, 18 June 1937, 64 Phil 353)

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.

Thus, estate tax accrued on Thomas Hanley’s death on 27 May 1922.

(2) Should estate 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?

Pablo Lorenzo contended that inheritance (estate) tax should be based on the estate’s value in 1932 or 10 years after Thomas Hanley’s death, for as far as real properties are concerned, the estate did not and could not legally pass to the instituted heir Matthew Hanley until after expiration of ten years from death of testator Thomas Hanley on 22 May 1922.

The Court held that 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 depreciation is immaterial.

If death is the generating source from which the power of the state to impose inheritance taxes its being and if, upon the death of the decedent, succession takes place and the right of the state to tax vests instantly, the tax should be measured by the value of the estate as it stood at the time of the decedent's death, regardless of any subsequent contingency affecting value or any subsequent increase or decrease in value.

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

The Court held that Lorenzo is entitled to fair compensation for his services, but it does mean that his compensation may lawfully be deducted in arriving at the net value of the estate subject to tax.

There is no Philippine statute which requires trustees' commissions to be deducted in determining net value of the estate subject to inheritance tax.

(4) What law governs the case at bar? Should the provisions of Act No. 3606 favorable to the taxpayer be given retroactive effect? Has there been delinquency in the payment of the estate tax? If so, should the additional interest claimed by the defendant in his appeal be paid by the estate?

The Court stated that inheritance taxation is governed by the statute in force at the time of decedent’s death. However, a tax statute may be made retroactive in its operation. But legislative intent that a tax statute should operate retroactively should be perfectly clear. Since Act No. 3606 itself contains no provisions indicating legislative intent to give retroactive effect, no such effect can be given by the Court.

/archibald.manansala Archibald Jose T. Manansala CEU School of Law and Jurisprudence

Pablo Lorenzo vs. Collector of Internal Revenue Juan Posadas Jr. (G.R. No. 43082, 18 June 1937, 64 Phil 353)

Verdict The Supreme Court MODIFIED the CFI Zamboanga’s judgment, with costs against plaintiff Pablo Lorenzo in both instances.

It held that since he has already paid PhP2,052.74, only PhP1,581.69 is legally due from the estate. However, the Court held that Lorenzo is only liable for PhP1,191.27, the amount stated in defendant’s counterclaim.

/archibald.manansala Archibald Jose T. Manansala CEU School of Law and Jurisprudence