G.R. No.
L-43082 June 18, 1937 The Court of First Instance of Zamboanga considered it proper for the best interests of ther
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.
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 From the fact, however, that Thomas Hanley died on May 27, 1922, it does not follow that the
of P1,191.27, representing part of the interest at the rate of 1 per cent per month obligation to pay the tax arose as of the date. The time for the payment on inheritance tax is
from April 10, 1924, to June 30, 1931, which the plaintiff had failed to pay on the clearly fixed by section 1544 of the Revised Administrative Code as amended by Act No.
inheritance tax assessed by the defendant against the estate of Thomas Hanley. 3031, in relation to section 1543 of the same Code. The two sections follow:

The following are the principal questions to be decided by this court in this appeal: (a) When SEC. 1543. Exemption of certain acquisitions and transmissions. — The following
does the inheritance tax accrue and when must it be satisfied? (b) Should the inheritance tax shall not be taxed:
Issues 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? (a) The merger of the usufruct in the owner of the naked title.
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 (b) The transmission or delivery of the inheritance or legacy by the
additional interest claimed by the defendant in his appeal be paid by the estate? Other points fiduciary heir or legatee to the trustees.
of incidental importance, raised by the parties in their briefs, will be touched upon in the course
of this opinion.
(c) The transmission from the first heir, legatee, or donee in favor of
another beneficiary, in accordance with the desire of the predecessor.
(a) The accrual of the inheritance tax is distinct from the obligation to pay the same. Section
Ruling 1 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 In the last two cases, if the scale of taxation appropriate to the new beneficiary is
inheritance,devise, or bequest." The tax therefore is upon transmission or the transfer or greater than that paid by the first, the former must pay the difference.
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
SEC. 1544. When tax to be paid. — The tax fixed in this article shall be paid:
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 (a) In the second and third cases of the next preceding section, before
succeed immediately to all of the property of the deceased ancestor. The property belongs to entrance into possession of the property.
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 (b) In other cases, within the six months subsequent to the death of the
Phil., 13; Lubrico vs. Arbado, 12 Phil., 391; Innocencio vs. Gat-Pandan, 14 Phil., 491; Aliasas predecessor; but if judicial testamentary or intestate proceedings shall
vs.Alcantara, 16 Phil., 489; Ilustre vs. Alaras Frondosa, 17 Phil., 321; Malahacan vs. Ignacio, be instituted prior to the expiration of said period, the payment shall be
19 Phil., 434; Bowa vs. Briones, 38 Phil., 27; Osario vs. Osario & Yuchausti Steamship Co., made by the executor or administrator before delivering to each
41 Phil., 531; Fule vs. Fule, 46 Phil., 317; Dais vs. Court of First Instance of Capiz, 51 Phil., beneficiary his share.
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 If the tax is not paid within the time hereinbefore prescribed, interest at the rate of
far as forced heirs are concerned. But the language of article 657 of the Civil Code is broad twelve per centum per annum shall be added as part of the tax; and to the tax and
and makes no distinction between different classes of heirs. That article does not speak of interest due and unpaid within ten days after the date of notice and demand thereof
forced heirs; it does not even use the word "heir". It speaks of the rights of succession and by the collector, there shall be further added a surcharge of twenty-five per centum.
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 A certified of all letters testamentary or of admisitration shall be furnished the
the Civil Code. The authentication of a will implies its due execution but once probated and Collector of Internal Revenue by the Clerk of Court within thirty days after their
allowed the transmission is effective as of the death of the testator in accordance with article issuance.
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 It should be observed in passing that the word "trustee", appearing in subsection (b) of section
actually receive such inheritance. "Poco importa", says Manresa commenting on article 657 1543, should read "fideicommissary" or "cestui que trust". There was an obvious mistake in
of the Civil Code, "que desde el falleimiento del causante, hasta que el heredero o legatario translation from the Spanish to the English version.
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 The instant case does fall under subsection (a), but under subsection (b), of section 1544
989, que debe considerarse como complemento del presente." (5 Manresa, 305; see also, above-quoted, as there is here no fiduciary heirs, first heirs, legatee or donee. Under the
art. 440, par. 1, Civil Code.) Thomas Hanley having died on May 27, 1922, the inheritance tax
accrued as of the date.
 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.
Ruling 2 (b) The plaintiff contends that the estate of Thomas Hanley, in so far as the real properties
are concerned, did not and could not legally pass to the instituted heir, Matthew Hanley, until
after the expiration of ten years from the death of the testator on May 27, 1922 and, that the
inheritance tax should be based on the value of the estate in 1932, or ten years after the
testator's death. The plaintiff introduced evidence tending to show that in 1932 the real
properties in question had a reasonable value of only P5,787. This amount added to the value
of the personal property left by the deceased, which the plaintiff admits is P1,465, would
generate an inheritance tax which, excluding deductions, interest and surcharge, would
amount only to about P169.52.
If death is the generating source from which the power of the estate to impose inheritance
taxes takes its being and if, upon the death of the decedent, succession takes place and the
right of the estate to tax vests instantly, the tax should be measured by the vlaue of the estate
as it stood at the time of the decedent's death, regardless of any subsequent contingency
value of any subsequent increase or decrease in value. (61 C. J., pp. 1692, 1693; 26 R. C.
L., p. 232; Blakemore and Bancroft, Inheritance Taxes, p. 137. See also Knowlton vs. Moore,
178 U.S., 41; 20 Sup. Ct. Rep., 747; 44 Law. ed., 969.) "The right of the state to an inheritance
tax accrues at the moment of death, and hence is ordinarily measured as to any beneficiary
by the value at that time of such property as passes to him. Subsequent appreciation or
depriciation is immaterial." (Ross, Inheritance Taxation, p. 72.)
Our attention is directed to the statement of the rule in Cyclopedia of Law of and Procedure
(vol. 37, pp. 1574, 1575) that, in the case of contingent remainders, taxation is postponed
until the estate vests in possession or the contingency is settled. This rule was formerly
followed in New York and has been adopted in Illinois, Minnesota, Massachusetts, Ohio,
Pennsylvania and Wisconsin. This rule, horever, is by no means entirely satisfactory either to
the estate or to those interested in the property (26 R. C. L., p. 231.). Realizing, perhaps, the
defects of its anterior system, we find upon examination of cases and authorities that New
York has varied and now requires the immediate appraisal of the postponed estate at its clear
market value and the payment forthwith of the tax on its out of the corpus of the estate
transferred. (In re Vanderbilt, 172 N. Y., 69; 69 N. E., 782; In re Huber, 86 N. Y. App. Div.,
458; 83 N. Y. Supp., 769; Estate of Tracy, 179 N. Y., 501; 72 N. Y., 519; Estate of Brez, 172
N. Y., 609; 64 N. E., 958; Estate of Post, 85 App. Div., 611; 82 N. Y. Supp., 1079. Vide also,
Saltoun vs. Lord Advocate, 1 Peter. Sc. App., 970; 3 Macq. H. L., 659; 23 Eng. Rul. Cas.,
888.) California adheres to this new rule (Stats. 1905, sec. 5, p. 343).
But whatever may be the rule in other jurisdictions, we hold that a transmission by inheritance
is taxable at the time of the predecessor's death, notwithstanding the postponement of the
actual possession or enjoyment of the estate by the beneficiary, and the tax measured by the
value of the property transmitted at that time regardless of its appreciation or depreciation.
(c) Certain items are required by law to be deducted from the appraised gross in arriving at
Ruling 3 the net value of the estate on which the inheritance tax is to be computed (sec. 1539, Revised
Administrative Code). In the case at bar, the defendant and the trial court allowed a deduction
of only P480.81. This sum represents the expenses and disbursements of the executors until
March 10, 1924, among which were their fees and the proven debts of the deceased. The
plaintiff contends that the compensation and fees of the trustees, which aggregate P1,187.28
(Exhibits C, AA, EE, PP, HH, JJ, LL, NN, OO), should also be deducted under section 1539
of the Revised Administrative Code which provides, in part, as follows: "In order to determine
the net sum which must bear the tax, when an inheritance is concerned, there shall be
deducted, in case of a resident, . . . the judicial expenses of the testamentary or intestate
proceedings, . . . ."
A trustee, no doubt, is entitled to receive a fair compensation for his services (Barney vs.
Saunders, 16 How., 535; 14 Law. ed., 1047). But from this it does not follow that the
compensation due him may lawfully be deducted in arriving at the net value of the estate
subject to tax. There is no statute in the Philippines which requires trustees' commissions to
be deducted in determining the net value of the estate subject to inheritance tax (61 C. J., p.
1705). Furthermore, though a testamentary trust has been created, it does not appear that
the testator intended that the duties of his executors and trustees should be separated.
(Ibid.; In re Vanneck's Estate, 161 N. Y. Supp., 893; 175 App. Div., 363; In re Collard's Estate,
161 N. Y. Supp., 455.) On the contrary, in paragraph 5 of his will, the testator expressed the
desire that his real estate be handled and managed by his executors until the expiration of
the period of ten years therein provided. Judicial expenses are expenses of administration
(61 C. J., p. 1705) but, in State vs. Hennepin County Probate Court (112 N. W., 878; 101
Minn., 485), it was said: ". . . The compensation of a trustee, earned, not in the administration
of the estate, but in the management thereof for the benefit of the legatees or devises, does
not come properly within the class or reason for exempting administration expenses. . . .
Service rendered in that behalf have no reference to closing the estate for the purpose of a
distribution thereof to those entitled to it, and are not required or essential to the perfection of
the rights of the heirs or legatees. . . . Trusts . . . of the character of that here before the court,
are created for the the benefit of those to whom the property ultimately passes, are of
voluntary creation, and intended for the preservation of the estate. No sound reason is given
to support the contention that such expenses should be taken into consideration in fixing the
value of the estate for the purpose of this tax."
(d) The defendant levied and assessed the inheritance tax due from the estate of Thomas
Hanley under the provisions of section 1544 of the Revised Administrative Code, as amended
Ruling 4
by section 3 of Act No. 3606. But Act No. 3606 went into effect on January 1, 1930. It,
therefore, was not the law in force when the testator died on May 27, 1922. The law at the
time was section 1544 above-mentioned, as amended by Act No. 3031, which took effect on
March 9, 1922.
It is well-settled that inheritance taxation is governed by the statute in force at the time of the
death of the decedent (26 R. C. L., p. 206; 4 Cooley on Taxation, 4th ed., p. 3461). The
taxpayer can not foresee and ought not to be required to guess the outcome of pending
measures. Of course, a tax statute may be made retroactive in its operation. Liability for taxes
under retroactive legislation has been "one of the incidents of social life." (Seattle vs. Kelleher,
195 U. S., 360; 49 Law. ed., 232 Sup. Ct. Rep., 44.) But legislative intent that a tax statute
should operate retroactively should be perfectly clear. (Scwab vs. Doyle, 42 Sup. Ct. Rep.,
491; Smietanka vs. First Trust & Savings Bank, 257 U. S., 602; Stockdale vs. Insurance Co.,
20 Wall., 323; Lunch vs. Turrish, 247 U. S., 221.) "A statute should be considered as
prospective in its operation, whether it enacts, amends, or repeals an inheritance tax, unless
the language of the statute clearly demands or expresses that it shall have a retroactive effect,
. . . ." (61 C. J., P. 1602.) Though the last paragraph of section 5 of Regulations No. 65 of the
Department of Finance makes section 3 of Act No. 3606, amending section 1544 of the
Revised Administrative Code, applicable to all estates the inheritance taxes due from which
have not been paid, Act No. 3606 itself contains no provisions indicating legislative intent to
give it retroactive effect. No such effect can begiven the statute by this court.
The defendant Collector of Internal Revenue maintains, however, that certain provisions of
Act No. 3606 are more favorable to the taxpayer than those of Act No. 3031, that said
provisions are penal in nature and, therefore, should operate retroactively in conformity with
the provisions of article 22 of the Revised Penal Code. This is the reason why he applied Act
No. 3606 instead of Act No. 3031. Indeed, under Act No. 3606, (1) the surcharge of 25 per
cent is based on the tax only, instead of on both the tax and the interest, as provided for in
Act No. 3031, and (2) the taxpayer is allowed twenty days from notice and demand by rthe
Collector of Internal Revenue within which to pay the tax, instead of ten days only as required
by the old law.
Properly speaking, a statute is penal when it imposes punishment for an offense committed
against the state which, under the Constitution, the Executive has the power to pardon. In
common use, however, this sense has been enlarged to include within the term "penal
statutes" all status which command or prohibit certain acts, and establish penalties for their
violation, and even those which, without expressly prohibiting certain acts, impose a penalty
upon their commission (59 C. J., p. 1110). Revenue laws, generally, which impose taxes
collected by the means ordinarily resorted to for the collection of taxes are not classed as
penal laws, although there are authorities to the contrary. (See Sutherland, Statutory
Construction, 361; Twine Co. vs. Worthington, 141 U. S., 468; 12 Sup. Ct., 55; Rice vs. U. S.,
4 C. C. A., 104; 53 Fed., 910; Com. vs. Standard Oil Co., 101 Pa. St., 150; State vs. Wheeler,
44 P., 430; 25 Nev. 143.) Article 22 of the Revised Penal Code is not applicable to the case
at bar, and in the absence of clear legislative intent, we cannot give Act No. 3606 a retroactive
effect.
(e) The plaintiff correctly states that the liability to pay a tax may arise at a certain time and
the tax may be paid within another given time. As stated by this court, "the mere failure to pay
one's tax does not render one delinqent until and unless the entire period has eplased within
which the taxpayer is authorized by law to make such payment without being subjected to the
payment of penalties for fasilure to pay his taxes within the prescribed period." (U. S. vs.
Labadan, 26 Phil., 239.)
The defendant maintains that it was the duty of the executor to pay the inheritance tax before
the delivery of the decedent's property to the trustee. Stated otherwise, the defendant
contends that delivery to the trustee was delivery to the cestui que trust, the beneficiery in this
case, within the meaning of the first paragraph of subsection (b) of section 1544 of the Revised
Administrative Code. This contention is well taken and is sustained. The appointment of P. J.
M. Moore as trustee was made by the trial court in conformity with the wishes of the testator
as expressed in his will. It is true that the word "trust" is not mentioned or used in the will but
the intention to create one is clear. No particular or technical words are required to create a
testamentary trust (69 C. J., p. 711). The words "trust" and "trustee", though apt for the
purpose, are not necessary. In fact, the use of these two words is not conclusive on the
question that a trust is created (69 C. J., p. 714). "To create a trust by will the testator must
indicate in the will his intention so to do by using language sufficient to separate the legal from
the equitable estate, and with sufficient certainty designate the beneficiaries, their interest in
the ttrust, the purpose or object of the trust, and the property or subject matter thereof. Stated
otherwise, to constitute a valid testamentary trust there must be a concurrence of three
circumstances: (1) Sufficient words to raise a trust; (2) a definite subject; (3) a certain or
ascertain object; statutes in some jurisdictions expressly or in effect so providing." (69 C. J.,
pp. 705,706.) There is no doubt that the testator intended to create a trust. He ordered in his
will that certain of his properties be kept together undisposed during a fixed period, for a stated
purpose. The probate court certainly exercised sound judgment in appointment a trustee to
carry into effect the provisions of the will (see sec. 582, Code of Civil Procedure).
P. J. M. Moore became trustee on March 10, 1924. On that date trust estate vested in him
(sec. 582 in relation to sec. 590, Code of Civil Procedure). The mere fact that the estate of
the deceased was placed in trust did not remove it from the operation of our inheritance tax
laws or exempt it from the payment of the inheritance tax. The corresponding inheritance tax
should have been paid on or before March 10, 1924, to escape the penalties of the laws. This
is so for the reason already stated that the delivery of the estate to the trustee was in
esse delivery of the same estate to the cestui que trust, the beneficiary in this case. A trustee
is but an instrument or agent for the cestui que trust (Shelton vs. King, 299 U. S., 90; 33 Sup.
Ct. Rep., 689; 57 Law. ed., 1086). When Moore accepted the trust and took possesson of the
trust estate he thereby admitted that the estate belonged not to him but to his cestui que
trust (Tolentino vs. Vitug, 39 Phil.,126, cited in 65 C. J., p. 692, n. 63). He did not acquire any
beneficial interest in the estate. He took such legal estate only as the proper execution of the
trust required (65 C. J., p. 528) and, his estate ceased upon the fulfillment of the testator's
wishes. The estate then vested absolutely in the beneficiary (65 C. J., p. 542).
The highest considerations of public policy also justify the conclusion we have reached. Were
we to hold that the payment of the tax could be postponed or delayed by the creation of a
trust of the type at hand, the result would be plainly disastrous. Testators may provide, as
Thomas Hanley has provided, that their estates be not delivered to their beneficiaries until
after the lapse of a certain period of time. In the case at bar, the period is ten years. In other
cases, the trust may last for fifty years, or for a longer period which does not offend the rule
against petuities. The collection of the tax would then be left to the will of a private individual.
The mere suggestion of this result is a sufficient warning against the accpetance of the
essential to the very exeistence of government. (Dobbins vs. Erie Country, 16 Pet., 435; 10
Law. ed., 1022; Kirkland vs. Hotchkiss, 100 U. S., 491; 25 Law. ed., 558; Lane County vs.
Oregon, 7 Wall., 71; 19 Law. ed., 101; Union Refrigerator Transit Co. vs. Kentucky, 199 U.
S., 194; 26 Sup. Ct. Rep., 36; 50 Law. ed., 150; Charles River Bridge vs. Warren Bridge, 11
Pet., 420; 9 Law. ed., 773.) The obligation to pay taxes rests not upon the privileges enjoyed
by, or the protection afforded to, a citizen by the government but upon the necessity of money
for the support of the state (Dobbins vs. Erie Country, supra). For this reason, no one is
allowed to object to or resist the payment of taxes solely because no personal benefit to him
can be pointed out. (Thomas vs. Gay, 169 U. S., 264; 18 Sup. Ct. Rep., 340; 43 Law. ed.,
740.) While courts will not enlarge, by construction, the government's power of taxation
(Bromley vs. McCaughn, 280 U. S., 124; 74 Law. ed., 226; 50 Sup. Ct. Rep., 46) they also
will not place upon tax laws so loose a construction as to permit evasions on merely fanciful
and insubstantial distictions. (U. S. vs. Watts, 1 Bond., 580; Fed. Cas. No. 16,653; U. S. vs.
Wigglesirth, 2 Story, 369; Fed. Cas. No. 16,690, followed in Froelich & Kuttner vs. Collector
of Customs, 18 Phil., 461, 481; Castle Bros., Wolf & Sons vs. McCoy, 21 Phil., 300; Muñoz &
Co. vs. Hord, 12 Phil., 624; Hongkong & Shanghai Banking Corporation vs. Rafferty, 39 Phil.,
145; Luzon Stevedoring Co. vs. Trinidad, 43 Phil., 803.) When proper, a tax statute should be
construed to avoid the possibilities of tax evasion. Construed this way, the statute, without
resulting in injustice to the taxpayer, becomes fair to the government.
That taxes must be collected promptly is a policy deeply intrenched in our tax system. Thus,
no court is allowed to grant injunction to restrain the collection of any internal revenue tax (
sec. 1578, Revised Administrative Code; Sarasola vs. Trinidad, 40 Phil., 252). In the case of
Lim Co Chui vs. Posadas (47 Phil., 461), this court had occassion to demonstrate trenchment
adherence to this policy of the law. It held that "the fact that on account of riots directed against
the Chinese on October 18, 19, and 20, 1924, they were prevented from praying their internal
revenue taxes on time and by mutual agreement closed their homes and stores and remained
therein, does not authorize the Collector of Internal Revenue to extend the time prescribed
for the payment of the taxes or to accept them without the additional penalty of twenty five per
cent." (Syllabus, No. 3.)
". . . It is of the utmost importance," said the Supreme Court of the United States, ". . . that the
modes adopted to enforce the taxes levied should be interfered with as little as possible. Any
delay in the proceedings of the officers, upon whom the duty is developed of collecting the
taxes, may derange the operations of government, and thereby, cause serious detriment to
the public." (Dows vs. Chicago, 11 Wall., 108; 20 Law. ed., 65, 66; Churchill and Tait vs.
Rafferty, 32 Phil., 580.)
It results that the estate which plaintiff represents has been delinquent in the payment of
inheritance tax and, therefore, liable for the payment of interest and surcharge provided by
law in such cases.
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 delinquency in payment occurred on March 10, 1924, the date when Moore became The judgment of the lower court is accordingly modified, with costs against the plaintiff in both
trustee. The interest due should be computed from that date and it is error on the part of the instances. So ordered.
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. Avanceña, C.J., Abad Santos, Imperial, Diaz and Concepcion, JJ., concur.
Villa-Real, J., concurs.

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 the tax payable
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
G.R. No. L-36770 November 4, 1932
LUIS W. DISON, plaintiff-appellant,
vs.
JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellant.
Marcelino Aguas for plaintiff-appellant.
Attorney-General Jaranilla for defendant-appellant.
BUTTE, J.:
This is an appeal from the decision of the Court of First Instance of Pampanga in favor of the
defendant Juan Posadas, Jr., Collector of Internal Revenue, in a suit filed by the plaintiffs,
Luis W. Dison, for the recovery of an inheritance tax in the sum of P2,808.73 paid under
protest. The petitioner alleged in his complaint that the tax is illegal because he received the
property, which is the basis of the tax, from his father before his death by a deed of gift inter
vivos which was duly accepted and registered before the death of his father. The defendant
answered with a general denial and with a counterdemand for the sum of P1,245.56 which it
was alleged is a balance still due and unpaid on account of said tax. The plaintiff replied to
the counterdemand with a general denial. The court a quo held that the cause of action set
up in the counterdemand was not proven and dismissed the same. Both sides appealed to
this court, but the cross-complaint and appeal of the Collector of Internal Revenue were
dismissed by this court on March 17, 1932, on motion of the Attorney-General.1awphil.net
The only evidence introduced at the trial of this cause was the proof of payment of the tax
under protest, as stated, and the deed of gift executed by Felix Dison on April 9, 1928, in favor
of his sons Luis W. Dison, the plaintiff-appellant. This deed of gift transferred twenty-two tracts
of land to the donee, reserving to the donor for his life the usufruct of three tracts. This deed
was acknowledged by the donor before a notary public on April 16, 1928. Luis W. Dison, on
April 17, 1928, formally accepted said gift by an instrument in writing which he acknowledged
before a notary public on April 20, 1928.
At the trial the parties agreed to and filed the following ingenious stipulation of fact:
1. That Don Felix Dison died on April 21, 1928;
2. That Don Felix Dison, before his death, made a gift inter vivos in favor of the
plaintiff Luis W. Dison of all his property according to a deed of gift (Exhibit D)
which includes all the property of Don Felix Dizon;
3. That the plaintiff did not receive property of any kind of Don Felix Dison upon
the death of the latter;
4. That Don Luis W. Dison was the legitimate and only child of Don Felix Dison.
It is inferred from Exhibit D that Felix Dison was a widower at the time of his death.
The theory of the plaintiff-appellant is that he received and holds the property mentioned by
a consummated gift and that Act No. 2601 (Chapter 40 of the Administrative Code) being the
inheritance tax statute, does not tax gifts. The provision directly here involved is section 1540
of the Administrative Code which reads as follows:
Additions of Gifts and Advances. — After the aforementioned deductions have
been made, there shall be added to the resulting amount the value of all gifts or
advances made by the predecessor to any of those who, after his death, shall
prove to be his heirs, devises, legatees, or donees mortis causa.
The question to be resolved may be stated thus: Does section 1540 of the Administrative
Code subject the plaintiff-appellant to the payment of an inheritance tax?
The appellant argues that there is no evidence in this case to support a finding that the gift
was simulated and that it was an artifice for evading the payment of the inheritance tax, as is
intimated in the decision of the court below and the brief of the Attorney-General. We see no
reason why the court may not go behind the language in which the transaction is masked in
order to ascertain its true character and purpose. In this case the scanty facts before us may
not warrant the inference that the conveyance, acknowledged by the donor five days before
his death and accepted by the donee one day before the donor's death, was fraudulently
made for the purpose of evading the inheritance tax. But the facts, in our opinion, do warrant
the inference that the transfer was an advancement upon the inheritance which the donee, as
the sole and forced heir of the donor, would be entitled to receive upon the death of the donor.
The argument advanced by the appellant that he is not an heir of his deceased father within
the meaning of section 1540 of the Administrative Code because his father in his lifetime had
given the appellant all his property and left no property to be inherited, is so fallacious that the
urging of it here casts a suspicion upon the appellants reason for completing the legal
formalities of the transfer on the eve of the latter's death. We do not know whether or not the
father in this case left a will; in any event, this appellant could not be deprived of his share of
the inheritance because the Civil Code confers upon him the status of a forced heir. We
construe the expression in section 1540 "any of those who, after his death, shall prove to be
his heirs", to include those who, by our law, are given the status and rights of heirs, regardless
of the quantity of property they may receive as such heirs. That the appellant in this case
occupies the status of heir to his deceased father cannot be questioned. Construing the
conveyance here in question, under the facts presented, as an advance made by Felix Dison
to his only child, we hold section 1540 to be applicable and the tax to have been properly
assessed by the Collector of Internal Revenue.
This appeal was originally assigned to a Division of five but referred to the court in banc by
reason of the appellant's attack upon the constitutionality of section 1540. This attack is based
on the sole ground that insofar as section 1540 levies a tax upon gifts inter vivos, it violates
that provision of section 3 of the organic Act of the Philippine Islands (39 Stat. L., 545) which
reads as follows: "That no bill which may be enacted into law shall embraced more than one
subject, and that subject shall be expressed in the title of the bill." Neither the title of Act No.
2601 nor chapter 40 of the Administrative Code makes any reference to a tax on gifts. Perhaps
it is enough to say of this contention that section 1540 plainly does not tax gifts per se but
only when those gifts are made to those who shall prove to be the heirs, devisees, legatees
or donees mortis causa of the donor. This court said in the case of Tuason and
Tuason vs. Posadas 954 Phil., 289):lawphil.net
 When the law says all gifts, it doubtless refers to gifts inter vivos, and not mortis
causa. Both the letter and the spirit of the law leave no room for any other
interpretation. Such, clearly, is the tenor of the language which refers to donations
that took effect before the donor's death, and not to mortis causa donations, which
can only be made with the formalities of a will, and can only take effect after the
donor's death. Any other construction would virtually change this provision into:

". . . there shall be added to the resulting amount the value of all gifts mortis causa . . . made
by the predecessor to those who, after his death, shall prove to be his . . . donees mortis
causa." We cannot give to the law an interpretation that would so vitiate its language. The
truth of the matter is that in this section (1540) the law presumes that such gifts have been
made in anticipation of inheritance, devise, bequest, or gift mortis causa, when the donee,
after the death of the donor proves to be his heir, devisee or donee mortis causa, for the
purpose of evading the tax, and it is to prevent this that it provides that they shall be added to
the resulting amount." However much appellant's argument on this point may fit his
preconceived notion that the transaction between him and his father was a consummated gift
with no relation to the inheritance, we hold that there is not merit in this attack upon the
constitutionality of section 1540 under our view of the facts. No other constitutional questions
were raised in this case.

The judgment below is affirmed with costs in this instance against the appellant. So ordered.

Avanceña, C.J., Street, Malcolm, Ostrand, Abad Santos, Vickers and Imperial, JJ., concur.
G.R. No. 46242 October 20, 1939 On April 8, 1920, after the death of Diego de la Viña, his brother, the herein appellant Dr. Jose
Ma. de la Viña, was appointed by the Court of First Instance of Negros Oriental as special
administrator of the estate of the deceased; and on the 20th of the same month and year he
In re estate of the deceased DIEGO DE LA VIÑA. was appointed executor.
JOSE MA. DE LA VIÑA Y DE LA ROSA, ex-administrator-appellant,
vs.
THE COLLECTOR OF INTERNAL REVENUE, creditor-appellee. On January 23, 1926, this Court issued in civil case G.R. No. 23747, entitled "In re estate of
Diego de la Viña, deceased, Jose de la Viña v. Narcisa Geopano et al.," an order approving
the accounts of the said Dr. Jose de la Viña, as outgoing administrator of the estate of Diego
Enrique Medina for appellant. de la Viña. It appears from the decision of this Court rendered in said Civil Case G.R. No.
Raymundo Villanueva for the administrator of the estate of De la Viña. 23747 that the following items were approved:
Office of the Solicitor-General Ozaeta and Assistant Solicitor-General Concepcion for
appellee.
Special per diems of Jose de la Viña as former adminstrator
VILLA-REAL, J.: .............................. P12,552.00

Legal Commission ............................... 4,141.33

This is an appeal taken by the ex-administrator, Dr. Jose MA. de la Viña y de la Rosa, from
the order of the Court of First Instance of Negros Oriental, the dispositive part of which reads:
Total ............................................................ 16,693.33
Wherefore the Court reiterates the order of March 7, 1933, only in so far as the
claim of the Insular Government is concerned, and orders the Administrator herein
to pay from whatever available fund of the estate of the deceased Diego de la Viña In the bill of exceptions in said case it also appears that the following expenses of Jose de la
the sum of P18,420.93 with the corresponding legal interests from August 20, 1929 Viña were approved:
plus costs, to the Commonwealth of the Philippines.

It is also ordered that after the said claim shall have been fully paid, the Balance in his favor as executor .................... P1,165.86
administrator herein shall pay to Dr. Jose de la Viña y De la Rosa the sum of
P19,342.93 and to other claimants their respective claims in the order established Balance on his aparceria ................................ 7,528.64
by law out of the residue.

Total ...................................................................... 8,694.50

In support of his appeal the appellant assigns three alleged errors committed by the trial court
in its order, to wit:
On July 16, 1927, the said Court of First Instance of Negros Oriental ordered in the present
1. The trial court erred in holding that the income tax claimed by the Collector of case the payment to Dr. Jose de la Viña of the amount of 146.025 piculs of sugar belonging
Internal Revenue, should be paid before the administration expenses claimed by to him, which product was applied to the payment of the administration expenses of the estate
the appellant executor Dr. Jose Ma. de la Viña y de la Rosa. of Diego de la Viña. The price of said sugar was fixed at P20 per picul by a subsequent order.
Adding the sum of P2,925, the value of said 146.025 piculs of sugar, to the sum of P25,387.83,
the result is a total of P28,312.83. As the amount of P9,228.65 has been paid on account,
2. The trial court erred in applying article 1923 of the Civil Code and in not holding
there remains a balance of P19,048.18 in favor of the appellant.
that the said article has been repealed by section 735 of the Code of Civil
Procedure (Act 190).
It also appears that on February 23, 1932, this Court rendered judgment in G.R. No. 33870,
entitled "The Collector of Internal Revenue vs. Espiridion Villegas, as administrator of the
3. Granting for the sake of argument that the payment of income tax has preference
estate of Diego de la Viña", ordering the said administrator to pay the Insular Government, by
over the payment of administration expenses, the trial court erred in holding that
way of income tax for the year 1925, the sum of P18,420.93, with interest from August 20,
said preference has been abandoned and lost due to the time that has elapsed
1939 until fully paid, and the costs.
from 1925 to 1938.

The estate of Diego de la Viña does not have sufficient funds or property to pay fully both
The following are undisputed facts: judgments. When the Insular Government attempted to collect the amount of the said
judgment in its favor, Dr. Jose de la Viña objected on the ground that the judgments obtained
by him are preferred under section 735 of Act No. 190, and should first be paid. After the
corresponding trial, the trial court overruled the opposition and entered the above-quoted
order.
The first question to be decided in this appeal, which is raised by the first assignments of
error, is whether or not the trial court erred in holding that the income tax claimed by the
Collector of Internal Revenue, should be paid before the administration expenses claimed by
the ex-executor, Dr. Jose Ma. de la Viña y de la Rosa.
Section 735 of the Code of Civil Procedure, as amended by Act No. 3960, provides as follows:
SEC. 735. Order of payment if estate insolvent. — If the assets which can be
appropriated for the payment of debts are not sufficient for that purpose, the
executor or administrator shall, after pay the debts against the estate in the
following order:
1. The necessary funeral expenses;
2. The expenses of the last sickness;
3. What is owing to the laborer for salaries and wages earned and for indemnities
due to him, for the last year;
4. Debts due to the United States;
5. Taxes and assessments due to the Government, or any branch or subdivision
thereof;
6. Debts due to the province;
7. Debts due to other creditors.
In view of the legal provision just quoted, the question is whether the income tax which an
estate owes the Insular Government partakes of the nature of administration expenses for
purposes of the order of payment established by section 735 of Act No. 190 above quoted.
Section 680 of the same code of Civil Procedure provides as follows:
SEC. 680. — How allowed for services. — The executor or administrator shall be
allowed necessary expenses in the care, management, and settlement of the
estate, and for his services, two dollars per day for the time actually and
necessarily employed, and a commission of three per cent upon all sums disbursed
in the payment of debts, expenses, and distributive shares, if the amount of such
disbursements does not exceed one thousand dollars. If the amount exceeds one
thousand dollars and does not exceed five thousand dollars and one-half per cent
upon the excess, if the whole amount does not exceed five thousand dollars, then
the percentage as above provided, and one per cent on the excess above five
thousand dollars. But in any special case, where the estate is large, and the
settlement has been attended with great difficulty, and has required a high degree
of capacity on the part of the executor or administrator, a greater sum may be
allowed. But if objection to the fees allowed be taken, the allowance may be re-
examined by the Supreme Court on appeal.
When the administrator or executor is a lawyer, he shall not be allowed to charge
against the estate any professional fees, as such, for services rendered by himself.
When the deceased by will makes some other provision for compensation to his
executor, the provision shall be full satisfaction for his services, unless by a written
instrument filed in the court he renounces all claim to the compensation provided
by the will.
The legal provision just quoted enumerates the services for which the administrator should
be paid and the commission to which he is entitled for collections and disbursement made by
him. Among these payments, which constitutes the expenses of administration, are not
included pending debts of the estate, whatever may be their nature. According to the said
legal provision, only payments which the executor or administration may have made in the
discharge of his office and the commissions to which he may be entitled, partakes of the
nature of administration expenses. the expenses of administration are due only to the
executor or administrator, and he alone, and no other, may collect them.
The Collector of internal Revenue contends that the tax of P18,420.93 which he seeks to
collect, having been laid on the profits realized in the sale of the properties of the deceased
Diego de la Viña, effected on September 29, 1925 by the judicial administrator of the estate,
the said tax partake of the nature of administration expenses. As we have said, the necessary
expenses of administration whose payment is given preference in the said section 735 of the
Code of Civil Procedure are those which the administrator may have incurred in the care,
administration and liquidation of the properties of the estate and the commissions due to him
for collections and disbursements which he may have made, and not those which he cold or
might have wished to make out of his own pocket or but of the funds of the estate.
"Administration expenses," says Corpus Juris, volume 24, page 424, "include expenditures in
discovering and preserving assets, attorneys fees incurred in connection with the
administration of the estate, incurred in connection with the administration of the estate, cost
recovered against the representative in an action to recover assets, to established a claim
against the estate, to try title to land, and insurance premiums expended for the protection of
the property and it has even been considered that expenditures in carrying on decedent's
business may be regarded as expenses of administration." And Woerner, volume 2, page
1197, paragraph 362, third edition, of his work entitled "The American Law of Administration
of the Estate," says the following:
It has already been stated, that for the expenses attending the accomplishment of
the purpose of administration growing out of the contract or obligation entered into
by the personal representative he is to be reimbursed out of the estate, and that
his claim to reimbursed must be superior to the rights of the beneficiaries. They
are subject only to the lien of a mortgage executed on specific property by the
deceased in his lifetime. The expenses under this category include those paid for
probate of the will, as well in the Probate court as on appeal, or other proceeding
in a contest, if carried on in good faith; and the executor nominated in such will is
entitled to a settlement of his account, and reimbursement for his expenses in
preserving the estate and for the funeral, although the will be finally pronounced
 invalid; and, generally, all expenses necessary in the protection and preservation
of the estate, which have been held to include the costs of establishing a claim
against the estate. But the general rule seems rather to be that costs incurred by
the administrator in defense of claims against the estate, or in prosecuting claims
in favor of it, pertain to the administration, and are to be allowed in full; but costs
incurred by claimants in establishing their claims stand on the same footing with
the claims themselves. The allowance of counsel fees and costs is discussed in
connection with the subject of accounting. Repairs necessary upon real estate of
which the executor or administrator has lawful possession also constitute
expenses of administration; if the expenses incurred is general, affecting all the
property of the estate, it should be charged generally, but if attaching to a specific
portion or piece of property, it should be charged against such portion or piece.
The liability of the administrator as such cannot be treated as a continuation of a
running account with the deceased in his lifetime; nor can the defendant in an
action by an administrator upon a contract made by him as such, or to recover
assets of the estate, set off or counterclaim a debt due him from the deceased.
And it is held that one who renders services for a trust has no recourse against the
trust, except to subject an equitable demand of the trustee to the payment of the
debt.
The mere fact, therefore, that the income tax claimed by the Collector of Internal Revenue
had been imposed upon the profits obtained by the administrator of the estate in the sale of
certain properties of the deceased Diego de la Viña, after the latter's death, does not make
the said tax a necessary expense of administration, unless the administrator had paid it either
from his own pocket or out of the funds of the estate: in the first case the tax paid is converted
into an expense of administration which the administrator may fully recover, plus his
commission; in the second case, he may only collect his commission, which partakes of the
nature of an expense of administration.
In the decision promulgated on May 18, 1938, in the Estate of the deceased Claude E.
Hoygood, The Collector of Internal Revenue, claimant and appellee, vs. Annie Laurie
Haygood, administratix and appellant, G.R. No. 44038, this Court said:
In accordance with section 9, paragraph (a) of Act No. 2833, the assessment made
by the Collector of Internal Revenue within three years after the discovery of an
erroneous declaration shall be paid by the maker of the return immediately upon
being notified of the assessment. The procedure prescribed by law is, therefore
summary, and collection must be made from the person liable is already dead,
collection must necessarily be made from the estate of the deceased, either in a
state or intestate proceedings instituted before a competent court, by motion
together with the sworn statement of the taxes due filed with said court, so that it
may require the administrator to pay the claim if the latter has funds available
therefor, that is, following the order of preference provided in section 735 of the
Code of Civil Procedure in case the said estate should insolvent. If the testate or
intestate is solvent, the court may order the payment of the claim without necessity
of its being substantiated by evidence since the sworn statement constitutes prima
facie evidence of the existence of the unpaid taxes, and the administrator is under
obligation to pay such claim, under protest if he is not agreeable, without prejudice
to his right later to recover the taxes so paid, in the manner provided by law (Act
No. 2711, sec. 1579, as amended by Act No. 3685).
The Collector of Internal Revenue also contends that the income tax in question, being a lien
created by the law superior to any other existing upon the property on which it is imposed,
under the provisions of section 1588 of the Revised Administrative Code, as amended, enjoys
preference over the necessary expenses of administration.
The lien created by the said section 1588 of the Revised Administrative Code, having
reference to all internal revenue taxes, including the income tax here in question, is general
in character, and the order of its payment as a lien is applicable to all properties subject to the
payment of internal revenue tax; whereas the order of payment established by section 735 of
the Code of Civil Procedure, as amended by Act No. 3960, is special in character and is only
applicable to properties of deceased persons; consequently, in accordance with the cardinal
rule of statutory construction, the latter provision of law should prevail over the former. In
section last mentioned, the taxes due to government of any branch or subdivision thereof
occupy the fifth place in the order of payment; wherefore, the indebtedness of the estate of
Diego de la Viña for income tax not being a necessary expense of administration, and the
claim of the ex-administrator Dr. Jose Ma. de la Viña y de la Rosa being such necessary
expense of administration, the latter has preference over the former.
The appellee denies that the first claim for P12,552 for special per diems partakes of the
nature of necessary expenses of administration, for lack of allegation or proof to that effect.
Section 680 of the Code of Civil Procedure already cited provides that "but in any special
case, where the estate is large, and the settlement has been attended with great difficulty,
and has required a high decree of capacity on the part of the executor or administrator, a
greater sum may be allowed." There is no doubt that the estate of Diego de la Viña is large.
The determination of whether the administration and liquidation thereof have been attended
with great difficulty and have required a high degree of capacity on the part of the executor or
administrator, rests in the sound discretion of the Court which took cognizance of the said
estate. It not appearing that the lower court committed an abuse of discretion in granting a
greater remuneration to the appellant, we do not feel warranted in interfering with the exercise
of said discretion.
Ruling
In view of the foregoing consideration, we are of the opinion and so hold: (1) that the income
tax which an estate owes to the insular government for profits obtained in the sale of
properties belonging to it, after the death of the testator, does not partake of the nature of
necessary expenses of administration; (2) that the lien created by section 1588 of the Revised
Administrative Code for internal revenue tax on properties subject to it, being general in
character, yields to the preference established by section 735 of the Code of Civil Procedure,
as amended by Act No. 3960, in favor of the necessary expenses of administration of the
estate of a deceased person; and, (3) that the claim of an administrator for the necessary
expenses of administration enjoys preference over the claim for payment of income tax.
Wherefore, the remedy prayed for is granted, the appealed decision is reversed, and it is held
that the claim of the appellant, Dr. Jose Ma. de la Viña y de la Rosa, as ex-administrator of
the estate of the deceased Diego de la Viña has preference over that of the Collector of
Internal Revenue for income tax, without special pronouncement as to costs. So ordered.
Diaz, Concepcion and Moran, JJ., concur.
THIRD DIVISION Conjugal Personal Property (Sch.2) 3,460,591.34
Taxable Transfer (Sch. 3)
RAFAEL ARSENIO S. DIZON, in his capacity as the Judicial G.R. No. 140944 Gross Conjugal Estate 14,315,611.34
Administrator of the Estate of the deceased JOSE P. Less: Deductions (Sch. 4) 187,822,576.06
FERNANDEZ, Present: Net Conjugal Estate NIL
Petitioner, Less: Share of Surviving Spouse NIL .
YNARES-SANTIAGO, J., Net Share in Conjugal Estate NIL
Chairperson, xxx
- versus - AUSTRIA-MARTINEZ, Net Taxable Estate NIL .
CHICO-NAZARIO, Estate Tax Due NIL .[11]
NACHURA, and
COURT OF TAX APPEALS and COMMISSIONER OF REYES, JJ.
INTERNAL REVENUE,
Respondents. Promulgated: 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
April 30, 2008 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,
x------------------------------------------------------------------------------------x 1990, the probate court appointed petitioner as the administrator of the Estate.[15]

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]
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]

The Facts 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-
[17]
003269, demanding the payment of P66,973,985.40 as deficiency estate tax, itemized as
On November 7, 1987, Jose P. Fernandez (Jose) died. Thereafter, a petition for the probate follows:
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 Deficiency Estate Tax- 1987
(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
Estate tax P31,868,414.48
letter[7] dated October 13, 1988, Justice Dizon informed respondent Commissioner of the
25% surcharge- late filing 7,967,103.62
Bureau of Internal Revenue (BIR) of the special proceedings for the Estate.
late payment 7,967,103.62
Interest 19,121,048.68
Petitioner alleged that several requests for extension of the period to file the required estate Compromise-non filing 25,000.00
tax return were granted by the BIR since the assets of the estate, as well as the claims against non payment 25,000.00
it, had yet to be collated, determined and identified. Thus, in a letter[8] dated March 14, 1990, no notice of death 15.00
Justice Dizon authorized Atty. Jesus M. Gonzales (Atty. Gonzales) to sign and file on behalf no CPA Certificate 300.00
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 Total amount due & collectible P66,973,985.40[18]
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:
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
COMPUTATION OF TAX
denial. On June 2, 1994, petitioner filed a petition for review[21] before respondent CTA. Trial
on the merits ensued.
Conjugal Real Property (Sch. 1) P10,855,020.00
 total amount of P84,199,160.46;
As found by the CTA, the respective parties presented the following pieces of evidence, to together with the demand letter
wit: from MBC's lawyer (pp. 194-197,
BIR records); "F" to "F-3"
In the hearings conducted, petitioner did not present testimonial
evidence but merely documentary evidence consisting of the following: 8. Demand letter of Manila Banking
Corporation prepared by Asedillo,
Nature of Document (sic) Exhibits Ramos and Associates Law Offices
addressed to Fernandez Hermanos,
1. Letter dated October 13, 1988 Inc., represented by Jose P.
from Arsenio P. Dizon addressed Fernandez, as mortgagors, in the
to the Commissioner of Internal total amount of P240,479,693.17
Revenue informing the latter of as of February 28, 1989
the special proceedings for the (pp. 186-187, BIR records); "G" & "G-1"
settlement of the estate (p. 126,
BIR records); "A" 9. Claim of State Investment
House, Inc. filed with the
2. Petition for the probate of the RTC, Branch VII of Manila,
will and issuance of letter of docketed as Civil Case No.
administration filed with the 86-38599 entitled "State
Regional Trial Court (RTC) of Investment House, Inc.,
Manila, docketed as Sp. Proc. Plaintiff, versus Maritime
No. 87-42980 (pp. 107-108, BIR Company Overseas, Inc. and/or
records); "B" & "B-1 Jose P. Fernandez, Defendants,"
(pp. 200-215, BIR records); "H" to "H-16"
3. Pleading entitled "Compliance"
filed with the probate Court 10. Letter dated March 14, 1990
submitting the final inventory of Arsenio P. Dizon addressed
of all the properties of the to Atty. Jesus M. Gonzales,
deceased (p. 106, BIR records); "C" (p. 184, BIR records); "I"

4. Attachment to Exh. "C" which 11. Letter dated April 17, 1990
is the detailed and complete from J.M. Gonzales addressed
listing of the properties of to the Regional Director of
the deceased (pp. 89-105, BIR rec.); "C-1" to "C-17" BIR in San Pablo City
(p. 183, BIR records); "J"
5. Claims against the estate filed
by Equitable Banking Corp. with 12. Estate Tax Return filed by
the probate Court in the amount the estate of the late Jose P.
of P19,756,428.31 as of March 31, Fernandez through its authorized
1988, together with the Annexes representative, Atty. Jesus M.
to the claim (pp. 64-88, BIR records); "D" to "D-24" Gonzales, for Arsenio P. Dizon,
with attachments (pp. 177-182,
6. Claim filed by Banque de L' BIR records); "K" to "K-5"
Indochine et de Suez with the
probate Court in the amount of
US $4,828,905.90 as of January 31, 13. Certified true copy of the
1988 (pp. 262-265, BIR records); "E" to "E-3" Letter of Administration
issued by RTC Manila, Branch
7. Claim of the Manila Banking 51, in Sp. Proc. No. 87-42980
Corporation (MBC) which as of appointing Atty. Rafael S.
November 7, 1987 amounts to Dizon as Judicial Administrator
P65,158,023.54, but recomputed of the estate of Jose P.
as of February 28, 1989 at a Fernandez; (p. 102, CTA records)
and "L"
9. Signature of Alberto
14. Certification of Payment of Enriquez at the lower
estate taxes Nos. 2052 and portion of Exh. "3"; -do-
2053, both dated April 27, 1990,
issued by the Office of the 10. Signature of Ma. Anabella A.
Regional Director, Revenue Abuloc at the lower
Region No. 4-C, San Pablo portion of Exh. "3"; -do-
City, with attachments
(pp. 103-104, CTA records.). "M" to "M-5" 11. Signature of Raymond S.
Gallardo at the lower
Respondent's [BIR] counsel presented on June 26, 1995 one portion of Exh. "3"; -do-
witness in the person of Alberto Enriquez, who was one of the
revenue examiners who conducted the investigation on the estate 12. Signature of Maximino
tax case of the late Jose P. Fernandez. In the course of the direct V. Tagle at the lower
examination of the witness, he identified the following: portion of Exh. "3"; -do-

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

Signatures BIR Record signed by the Asst. Commissioner
for Collection for the Commissioner
1. Estate Tax Return prepared by of Internal Revenue, demanding
the BIR; p. 138 payment of the amount of
P66,973,985.40; and p. 169
2. Signatures of Ma. Anabella
Abuloc and Alberto Enriquez, 14. Assessment Notice FAS-E-87-91-00 pp. 169-170[22]
Jr. appearing at the lower
Portion of Exh. "1"; -do-
The CTA's Ruling
3. Memorandum for the Commissioner,
dated July 19, 1991, prepared by
revenue examiners, Ma. Anabella A. On June 17, 1997, the CTA denied the said petition for review. Citing this Court's ruling in Vda.
Abuloc, Alberto S. Enriquez and de Oate v. Court of Appeals,[23] the CTA opined that the aforementioned pieces of evidence
Raymund S. Gallardo; Reviewed by introduced by the BIR were admissible in evidence. The CTA ratiocinated:
Maximino V. Tagle pp. 143-144 Although the above-mentioned documents were not formally offered as
evidence for respondent, considering that respondent has been
4. Signature of Alberto S. declared to have waived the presentation thereof during the hearing on
Enriquez appearing at the March 20, 1996, still they could be considered as evidence for
lower portion on p. 2 of Exh. "2"; -do- respondent since they were properly identified during the presentation
of respondent's witness, whose testimony was duly recorded as part of
5. Signature of Ma. Anabella A. the records of this case. Besides, the documents marked as
Abuloc appearing at the respondent's exhibits formed part of the BIR records of the case.[24]
lower portion on p. 2 of Exh. "2"; -do-

6. Signature of Raymund S.
Gallardo appearing at the Nevertheless, the CTA did not fully adopt the assessment made by the BIR and it came up
Lower portion on p. 2 of Exh. "2"; -do- with its own computation of the deficiency estate tax, to wit:

7. Signature of Maximino V. Conjugal Real Property P 5,062,016.00

Tagle also appearing on Conjugal Personal Prop. 33,021,999.93
p. 2 of Exh. "2"; -do- Gross Conjugal Estate 38,084,015.93
Less: Deductions 26,250,000.00
8. Summary of revenue Net Conjugal Estate P 11,834,015.93
Enforcement Officers Audit Less: Share of Surviving Spouse 5,917,007.96
Report, dated July 19, 1991; p. 139 Net Share in Conjugal Estate P 5,917,007.96
 Add: Capital/Paraphernal
Properties P44,652,813.66
Less: Capital/Paraphernal
Deductions 44,652,813.66
Net Taxable Estate P 50,569,821.62
============
Estate Tax Due P 29,935,342.97
Add: 25% Surcharge for Late Filing 7,483,835.74
Add: Penalties for-No notice of death 15.00
No CPA certificate 300.00
Total deficiency estate tax P 37,419,493.71
=============
exclusive of 20% interest from due date of its payment until full payment
thereof
[Sec. 283 (b), Tax Code of 1987].[25]
Thus, the CTA disposed of the case in this wise:
WHEREFORE, viewed from all the foregoing, the Court finds the
petition unmeritorious and denies the same. Petitioner and/or the heirs
of Jose P. Fernandez are hereby ordered to pay to respondent the
amount of P37,419,493.71 plus 20% interest from the due date of its
payment until full payment thereof as estate tax liability of the estate of
Jose P. Fernandez who died on November 7, 1987.
SO ORDERED.[26]
Aggrieved, petitioner, on March 2, 1998, went to the CA via a petition for review.[27]
The CA's Ruling
On April 30, 1999, the CA affirmed the CTA's ruling. Adopting in full the CTA's findings, the
CA ruled that the petitioner's act of filing an estate tax return with the BIR and the issuance of
BIR Certification Nos. 2052 and 2053 did not deprive the BIR Commissioner of her authority
to re-examine or re-assess the said return filed on behalf of the Estate.[28]
On May 31, 1999, petitioner filed a Motion for Reconsideration[29] which the CA denied in its
Resolution[30] dated November 3, 1999.
Hence, the instant Petition raising the following issues:
1. Whether or not the admission of evidence which were not formally
offered by the respondent BIR by the Court of Tax Appeals which
was subsequently upheld by the Court of Appeals is contrary to
the Rules of Court and rulings of this Honorable Court;
2. Whether or not the Court of Tax Appeals and the Court of Appeals
erred in recognizing/considering the estate tax return prepared and
filed by respondent BIR knowing that the probate court appointed
administrator of the estate of Jose P. Fernandez had previously
filed one as in fact, BIR Certification Clearance Nos. 2052 and 2053
had been issued in the estate's favor;
3. Whether or not the Court of Tax Appeals and the Court of Appeals
erred in disallowing the valid and enforceable claims of creditors
against the estate, as lawful deductions despite clear and
convincing evidence thereof; and
4. Whether or not the Court of Tax Appeals and the Court of Appeals
erred in validating erroneous double imputation of values on the
very same estate properties in the estate tax return it prepared
and filed which effectively bloated the estate's assets.[31]
The petitioner claims that in as much as the valid claims of creditors against the Estate are in
excess of the gross estate, no estate tax was due; that the lack of a formal offer of evidence
is fatal to BIR's cause; that the doctrine laid down in Vda. de Oate has already been
abandoned in a long line of cases in which the Court held that evidence not formally offered
is without any weight or value; that Section 34 of Rule 132 of the Rules on Evidence requiring
a formal offer of evidence is mandatory in character; that, while BIR's witness Alberto Enriquez
(Alberto) in his testimony before the CTA identified the pieces of evidence aforementioned
such that the same were marked, BIR's failure to formally offer said pieces of evidence and
depriving petitioner the opportunity to cross-examine Alberto, render the same inadmissible
in evidence; that assuming arguendo that the ruling in Vda. de Oate is still applicable, BIR
failed to comply with the doctrine's requisites because the documents herein remained simply
part of the BIR records and were not duly incorporated in the court records; that the BIR failed
to consider that although the actual payments made to the Estate creditors were lower than
their respective claims, such were compromise agreements reached long after the Estate's
liability had been settled by the filing of its estate tax return and the issuance of
BIR Certification Nos. 2052 and 2053; and that the reckoning date of the claims against the
Estate and the settlement of the estate tax due should be at the time the estate tax return was
filed by the judicial administrator and the issuance of said BIR Certifications and not at the
time the aforementioned Compromise Agreements were entered into with the Estate's
creditors.[32]
On the other hand, respondent counters that the documents, being part of the records of the
case and duly identified in a duly recorded testimony are considered evidence even if the
same were not formally offered; that the filing of the estate tax return by the Estate and the
issuance of BIR Certification Nos. 2052 and 2053 did not deprive the BIR of its authority to
examine the return and assess the estate tax; and that the factual findings of the CTA as
affirmed by the CA may no longer be reviewed by this Court via a petition for review.[33]
The Issues
There are two ultimate issues which require resolution in this case:
First. Whether or not the CTA and the CA gravely erred in allowing the admission of the pieces
of evidence which were not formally offered by the BIR; and
Second. Whether or not the CA erred in affirming the CTA in the latter's determination of the
deficiency estate tax imposed against the Estate.
The Courts Ruling
The Petition is impressed with merit.
Under Section 8 of RA 1125, the CTA is categorically described as a court of record. As cases
filed before it are litigated de novo, party-litigants shall prove every minute aspect of their
cases. Indubitably, no evidentiary value can be given the pieces of evidence submitted by the
BIR, as the rules on documentary evidence require that these documents must be formally
offered before the CTA.[34] Pertinent is Section 34, Rule 132 of the Revised Rules on Evidence
which reads:
SEC. 34. Offer of evidence. The court shall consider no evidence which
has not been formally offered. The purpose for which the evidence is
offered must be specified.
The CTA and the CA rely solely on the case of Vda. de Oate, which reiterated this
Court's previous rulings in People v. Napat-a[35] and People v. Mate[36] on the admission and
consideration of exhibits which were not formally offered during the trial. Although in a long
line of cases many of which were decided after Vda. de Oate, we held that courts cannot
consider evidence which has not been formally offered,[37] nevertheless, petitioner cannot
validly assume that the doctrine laid down in Vda. de Oate has already been abandoned.
Recently, in Ramos v. Dizon,[38] this Court, applying the said doctrine, ruled that the trial court
judge therein committed no error when he admitted and considered the respondents' exhibits
in the resolution of the case, notwithstanding the fact that the same
were not formally offered. Likewise, in Far East Bank & Trust Company v. Commissioner of
Internal Revenue,[39] the Court made reference to said doctrine in resolving the issues therein.
Indubitably, the doctrine laid down in Vda. De Oate still subsists in this jurisdiction. In Vda. de
Oate, we held that:
From the foregoing provision, it is clear that for evidence to be
considered, the same must be formally offered. Corollarily, the mere
fact that a particular document is identified and marked as an exhibit
does not mean that it has already been offered as part of the evidence
of a party. In Interpacific Transit, Inc. v. Aviles [186 SCRA 385], we had
the occasion to make a distinction between identification of
documentary evidence and its formal offer as an exhibit. We said that
the first is done in the course of the trial and is accompanied by the
marking of the evidence as an exhibit while the second is done only
when the party rests its case and not before. A party, therefore, may opt
to formally offer his evidence if he believes that it will advance his cause
or not to do so at all. In the event he chooses to do the latter, the trial
court is not authorized by the Rules to consider the same.
However, in People v. Napat-a [179 SCRA 403] citing People v.
Mate [103 SCRA 484], we relaxed the foregoing rule and allowed
evidence not formally offered to be admitted and considered by
the trial court provided the following requirements are present,
viz.: first, the same must have been duly identified by testimony
duly recorded and, second, the same must have been incorporated
in the records of the case.[40]
From the foregoing declaration, however, it is clear that Vda. de Oate is merely an
exception to the general rule. Being an exception, it may be applied only when there is strict
compliance with the requisites mentioned therein; otherwise, the general rule in Section 34 of
Rule 132 of the Rules of Court should prevail.
In this case, we find that these requirements have not been satisfied. The assailed pieces of
evidence were presented and marked during the trial particularly when Alberto took the
witness stand. Alberto identified these pieces of evidence in his direct testimony.[41] He was
also subjected to cross-examination and re-cross examination by petitioner.[42]But Albertos
account and the exchanges between Alberto and petitioner did not sufficiently describe the
contents of the said pieces of evidence presented by the BIR. In fact, petitioner sought that
the lead examiner, one Ma. Anabella A. Abuloc, be summoned to testify, inasmuch as Alberto
was incompetent to answer questions relative to the working papers.[43] The lead examiner
never testified. Moreover, while Alberto's testimony identifying the BIR's evidence was duly
recorded, the BIR documents themselves were not incorporated in the records of the case.
A common fact threads through Vda. de Oate and Ramos that does not exist at all in the
instant case. In the aforementioned cases, the exhibits were marked at the pre-trial
proceedings to warrant the pronouncement that the same were duly incorporated in the
records of the case. Thus, we held in Ramos:
In this case, we find and so rule that these requirements have been
satisfied. The exhibits in question were presented and marked
during the pre-trial of the case thus, they have been incorporated
into the records. Further, Elpidio himself explained the contents of
these exhibits when he was interrogated by respondents' counsel...
xxxx
But what further defeats petitioner's cause on this issue is that
respondents' exhibits were marked and admitted during the pre-trial
stage as shown by the Pre-Trial Order quoted earlier.[44]
While the CTA is not governed strictly by technical rules of evidence,[45] as rules of procedure
are not ends in themselves and are primarily intended as tools in the administration of justice,
the presentation of the BIR's evidence is not a mere procedural technicality which may be
disregarded considering that it is the only means by which the CTA may ascertain and verify
the truth of BIR's claims against the Estate.[46] The BIR's failure to formally offer these pieces
of evidence, despite CTA's directives, is fatal to its cause.[47] Such failure is aggravated by the
fact that not even a single reason was advanced by the BIR to justify such fatal omission.
This, we take against the BIR.
Per the records of this case, the BIR was directed to present its evidence[48] in the hearing of
February 21, 1996, but BIR's counsel failed to appear.[49] The CTA denied petitioner's motion
to consider BIR's presentation of evidence as waived, with a warning to BIR that such
presentation would be considered waived if BIR's evidence would not be presented at the
next hearing. Again, in the hearing of March 20, 1996, BIR's counsel failed to appear.[50] Thus,
in its Resolution[51] dated March 21, 1996, the CTA considered the BIR to have waived
presentation of its evidence. In the same Resolution, the parties were directed to file their
respective memorandum. Petitioner complied but BIR failed to do so.[52] In all of these
proceedings, BIR was duly notified. Hence, in this case, we are constrained to apply our ruling
Lesson ruling lol
in Heirs of Pedro Pasag v. Parocha:[53]
A formal offer is necessary because judges are mandated to
rest their findings of facts and their judgment only and strictly upon the
evidence offered by the parties at the trial. Its function is to enable the
trial judge to know the purpose or purposes for which the proponent is
presenting the evidence. On the other hand, this allows opposing
parties to examine the evidence and object to its admissibility.
Moreover, it facilitates review as the appellate court will not be required
to review documents not previously scrutinized by the trial court.
Strict adherence to the said rule is not a trivial matter. The Court
in Constantino v. Court of Appeals ruled that the formal offer of one's
evidence is deemed waived after failing to submit it within a
considerable period of time. It explained that the court cannot
admit an offer of evidence made after a lapse of three (3) months
because to do so would "condone an inexcusable laxity if not non-
compliance with a court order which, in effect, would encourage
needless delays and derail the speedy administration of justice."
Applying the aforementioned principle in this case, we find that the trial
court had reasonable ground to consider that petitioners had waived
their right to make a formal offer of documentary or object evidence.
Despite several extensions of time to make their formal offer, petitioners
failed to comply with their commitment and allowed almost five months
to lapse before finally submitting it. Petitioners' failure to comply with
the rule on admissibility of evidence is anathema to the efficient,
effective, and expeditious dispensation of justice.
Having disposed of the foregoing procedural issue, we proceed to discuss the merits of the
case.
Ordinarily, the CTA's findings, as affirmed by the CA, are entitled to the highest
respect and will not be disturbed on appeal unless it is shown that the lower courts committed
gross error in the appreciation of facts.[54] In this case, however, we find the decision of the
CA affirming that of the CTA tainted with palpable error.
It is admitted that the claims of the Estate's aforementioned creditors have been condoned.
As a mode of extinguishing an obligation,[55] condonation or remission of debt[56] is defined
as:
an act of liberality, by virtue of which, without receiving any equivalent,
the creditor renounces the enforcement of the obligation, which is
extinguished in its entirety or in that part or aspect of the same to which
the remission refers. It is an essential characteristic of remission that it
be gratuitous, that there is no equivalent received for the benefit given;
once such equivalent exists, the nature of the act changes. It may
become dation in payment when the creditor receives a thing different
from that stipulated; or novation, when the object or principal conditions
of the obligation should be changed; or compromise, when the matter
renounced is in litigation or dispute and in exchange of some
concession which the creditor receives.[57]
Verily, the second issue in this case involves the construction of Section 79[58] of the National
Internal Revenue Code[59] (Tax Code) which provides for the allowable deductions from the
gross estate of the decedent. The specific question is whether the actual claims of the
aforementioned creditors may be fully allowed as deductions from the gross estate of Jose
despite the fact that the said claims were reduced or condoned through compromise
agreements entered into by the Estate with its creditors.
Claims against the estate, as allowable deductions from the gross estate under Section 79 of
the Tax Code, are basically a reproduction of the deductions allowed under Section 89 (a) (1)
(C) and (E) of Commonwealth Act No. 466 (CA 466), otherwise known as the National Internal
Revenue Code of 1939, and which was the first codification of Philippine tax laws. Philippine
tax laws were, in turn, based on the federal tax laws of the United States. Thus, pursuant to
established rules of statutory construction, the decisions of American courts construing the
federal tax code are entitled to great weight in the interpretation of our own tax laws.[60]
It is noteworthy that even in the United States, there is some dispute as to whether the
deductible amount for a claim against the estate is fixed as of the decedent's death which is
the general rule, or the same should be adjusted to reflect post-death developments, such as
where a settlement between the parties results in the reduction of the amount actually
paid.[61] On one hand, the U.S. court ruled that the appropriate deduction is the value that the
claim had at the date of the decedent's death.[62] Also, as held in Propstra v. U.S.,[63] where a
lien claimed against the estate was certain and enforceable on the date of the decedent's
death, the fact that the claimant subsequently settled for lesser amount did not preclude the
estate from deducting the entire amount of the claim for estate tax purposes. These
pronouncements essentially confirm the general principle that post-death developments are
not material in determining the amount of the deduction.
On the other hand, the Internal Revenue Service (Service) opines that post-death
settlement should be taken into consideration and the claim should be allowed as a deduction
only to the extent of the amount actually paid.[64] Recognizing the dispute, the Service
released Proposed Regulations in 2007 mandating that the deduction would be limited to the
actual amount paid.[65]
In announcing its agreement with Propstra,[66] the U.S. 5th Circuit Court of Appeals
held:
We are persuaded that the Ninth Circuit's
decision...in Propstra correctly apply the Ithaca Trust date-of-death
valuation principle to enforceable claims against the estate. As we
interpret Ithaca Trust, when the Supreme Court announced the date-of-
death valuation principle, it was making a judgment about the nature of
the federal estate tax specifically, that it is a tax imposed on the act of
transferring property by will or intestacy and, because the act on which
the tax is levied occurs at a discrete time, i.e., the instance of death, the
net value of the property transferred should be ascertained, as nearly
as possible, as of that time. This analysis supports broad application of
the date-of-death valuation rule.[67]
We express our agreement with the date-of-death valuation rule, made pursuant to the ruling
of the U.S. Supreme Court in Ithaca Trust Co. v. United States.[68] First. There is no law, nor
do we discern any legislative intent in our tax laws, which disregards the date-of-death
valuation principle and particularly provides that post-death developments must be
considered in determining the net value of the estate. It bears emphasis that tax burdens are
not to be imposed, nor presumed to be imposed, beyond what the statute expressly and
clearly imports, tax statutes being construed strictissimi juris against the government.[69] Any
doubt on whether a person, article or activity is taxable is generally resolved against
taxation.[70] Second. Such construction finds relevance and consistency in our Rules on
Special Proceedings wherein the term "claims" required to be presented against a decedent's
estate is generally construed to mean debts or demands of a pecuniary nature which could
have been enforced against the deceased in his lifetime, or liability contracted by the
deceased before his death.[71] Therefore, the claims existing at the time of death are significant
to, and should be made the basis of, the determination of allowable deductions.

WHEREFORE, the instant Petition is GRANTED. Accordingly, the assailed Decision

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

SO ORDERED.
G.R. No. L-19201 June 16, 1965
REV. FR. CASIMIRO LLADOC, petitioner,
vs.
The COMMISSIONER OF INTERNAL REVENUE and The COURT of TAX
APPEALS, respondents.
Hilado and Hilado for petitioner.
Office of the Solicitor General for respondents.
PAREDES, J.:
Sometime in 1957, the M.B. Estate, Inc., of Bacolod City, donated P10,000.00 in cash to Rev.
Fr. Crispin Ruiz, then parish priest of Victorias, Negros Occidental, and predecessor of herein
petitioner, for the construction of a new Catholic Church in the locality. The total amount was
actually spent for the purpose intended.
On March 3, 1958, the donor M.B. Estate, Inc., filed the donor's gift tax return. Under date of
April 29, 1960, the respondent Commissioner of Internal Revenue issued an assessment for
donee's gift tax against the Catholic Parish of Victorias, Negros Occidental, of which petitioner
was the priest. The tax amounted to P1,370.00 including surcharges, interests of 1% monthly
from May 15, 1958 to June 15, 1960, and the compromise for the late filing of the return.
Petitioner lodged a protest to the assessment and requested the withdrawal thereof. The
protest and the motion for reconsideration presented to the Commissioner of Internal
Revenue were denied. The petitioner appealed to the Court of Tax Appeals on November 2,
1960. In the petition for review, the Rev. Fr. Casimiro Lladoc claimed, among others, that at
the time of the donation, he was not the parish priest in Victorias; that there is no legal entity
or juridical person known as the "Catholic Parish Priest of Victorias," and, therefore, he should
not be liable for the donee's gift tax. It was also asserted that the assessment of the gift tax,
even against the Roman Catholic Church, would not be valid, for such would be a clear
violation of the provisions of the Constitution.
After hearing, the CTA rendered judgment, the pertinent portions of which are quoted below:
... . Parish priests of the Roman Catholic Church under canon laws are similarly
situated as its Archbishops and Bishops with respect to the properties of the church
within their parish. They are the guardians, superintendents or administrators of
these properties, with the right of succession and may sue and be sued.
xxx xxx xxx
The petitioner impugns the, fairness of the assessment with the argument that he
should not be held liable for gift taxes on donation which he did not receive
personally since he was not yet the parish priest of Victorias in the year 1957 when
said donation was given. It is intimated that if someone has to pay at all, it should
be petitioner's predecessor, the Rev. Fr. Crispin Ruiz, who received the donation
in behalf of the Catholic parish of Victorias or the Roman Catholic Church.
Following petitioner's line of thinking, we should be equally unfair to hold that the
assessment now in question should have been addressed to, and collected from,
the Rev. Fr. Crispin Ruiz to be paid from income derived from his present parish
where ever it may be. It does not seem right to indirectly burden the present
parishioners of Rev. Fr. Ruiz for donee's gift tax on a donation to which they were
not benefited.
xxx xxx xxx
We saw no legal basis then as we see none now, to include within the
Constitutional exemption, taxes which partake of the nature of an excise upon the
use made of the properties or upon the exercise of the privilege of receiving the
properties. (Phipps vs. Commissioner of Internal Revenue, 91 F [2d] 627; 1938,
302 U.S. 742.)
It is a cardinal rule in taxation that exemptions from payment thereof are highly
disfavored by law, and the party claiming exemption must justify his claim by
a clear, positive, or express grant of such privilege by law. (Collector vs. Manila
Jockey Club, G.R. No. L-8755, March 23, 1956; 53 O.G. 3762.)
The phrase "exempt from taxation" as employed in Section 22(3), Article VI of the
Constitution of the Philippines, should not be interpreted to mean exemption from
all kinds of taxes. Statutes exempting charitable and religious property from
taxation should be construed fairly though strictly and in such manner as to give
effect to the main intent of the lawmakers. (Roman Catholic Church vs. Hastrings
5 Phil. 701.)
xxx xxx xxx
WHEREFORE, in view of the foregoing considerations, the decision of the
respondent Commissioner of Internal Revenue appealed from, is hereby affirmed
except with regard to the imposition of the compromise penalty in the amount of
P20.00 (Collector of Internal Revenue v. U.S.T., G.R. No. L-11274, Nov. 28, 1958);
..., and the petitioner, the Rev. Fr. Casimiro Lladoc is hereby ordered to pay to the
respondent the amount of P900.00 as donee's gift tax, plus the surcharge of
five per centum (5%) as ad valorem penalty under Section 119 (c) of the Tax Code,
and one per centum (1%) monthly interest from May 15, 1958 to the date of actual
payment. The surcharge of 25% provided in Section 120 for failure to file a return
may not be imposed as the failure to file a return was not due to willful neglect.( ...
) No costs.
The above judgment is now before us on appeal, petitioner assigning two (2) errors allegedly
committed by the Tax Court, all of which converge on the singular issue of whether or not
petitioner should be liable for the assessed donee's gift tax on the P10,000.00 donated for the
construction of the Victorias Parish Church.
Section 22 (3), Art. VI of the Constitution of the Philippines, exempts from taxation
cemeteries, churches and parsonages or convents, appurtenant thereto, and
all lands, buildings, and improvements used exclusively for religious purposes. The exemption
is only from the payment of taxes assessed on such properties enumerated, as property taxes,
as contra distinguished from excise taxes. In the present case, what the Collector assessed
was a donee's gift tax; the assessment was not on the properties themselves. It did not rest
upon general ownership; it was an excise upon the use made of the properties, upon the
exercise of the privilege of receiving the properties (Phipps vs. Com. of Int. Rec. 91 F 2d 627).
Manifestly, gift tax is not within the exempting provisions of the section just mentioned. A gift
tax is not a property tax, but an excise tax imposed on the transfer of property by way of
gift inter vivos, the imposition of which on property used exclusively for religious purposes,
does not constitute an impairment of the Constitution. As well observed by the learned
respondent Court, the phrase "exempt from taxation," as employed in the Constitution (supra)
should not be interpreted to mean exemption from all kinds of taxes. And there being no clear,
positive or express grant of such privilege by law, in favor of petitioner, the exemption herein
must be denied.

The next issue which readily presents itself, in view of petitioner's thesis, and Our finding that
a tax liability exists, is, who should be called upon to pay the gift tax? Petitioner postulates
that he should not be liable, because at the time of the donation he was not the priest of
Victorias. We note the merit of the above claim, and in order to put things in their proper light,
this Court, in its Resolution of March 15, 1965, ordered the parties to show cause why the
Head of the Diocese to which the parish of Victorias pertains, should not be substituted in lieu
of petitioner Rev. Fr. Casimiro Lladoc it appearing that the Head of such Diocese is the real
party in interest. The Solicitor General, in representation of the Commissioner of Internal
Revenue, interposed no objection to such a substitution. Counsel for the petitioner did not
also offer objection thereto.

On April 30, 1965, in a resolution, We ordered the Head of the Diocese to present whatever
legal issues and/or defenses he might wish to raise, to which resolution counsel for petitioner,
who also appeared as counsel for the Head of the Diocese, the Roman Catholic Bishop of
Bacolod, manifested that it was submitting itself to the jurisdiction and orders of this Court and
that it was presenting, by reference, the brief of petitioner Rev. Fr. Casimiro Lladoc as its own
and for all purposes.

In view here of and considering that as heretofore stated, the assessment at bar had been
properly made and the imposition of the tax is not a violation of the constitutional provision
exempting churches, parsonages or convents, etc. (Art VI, sec. 22 [3], Constitution), the Head
of the Diocese, to which the parish Victorias Pertains, is liable for the payment thereof.

The decision appealed from should be, as it is hereby affirmed insofar as tax liability is
concerned; it is modified, in the sense that petitioner herein is not personally liable for the said
gift tax, and that the Head of the Diocese, herein substitute petitioner, should pay, as he is
presently ordered to pay, the said gift tax, without special, pronouncement as to costs.

Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Dizon, Regala, Makalintal,
Bengzon, J.P., and Zaldivar, JJ., concur.
Barrera, J., took no part.
G.R. No. 210987 November 24, 2014
THE PHILIPPINE AMERICAN LIFE AND GENERAL INSURANCE COMPANY, Petitioner,
vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL
REVENUE, Respondents.
DECISION
VELASCO, JR., J.:
Nature of the Case
Before the Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court
assailing and seeking the reversal of the Resolutions of the Court of Appeals (CA) in CA-G.R.
SP No. 127984, dated May 23, 20131 and January 21, 2014, which dismissed outright the
petitioner's appeal from the Secretary of Finance's review of BIR Ruling No. 015-122 for lack
of jurisdiction.
The Facts
Petitioner The Philippine American Life and General Insurance Company (Philamlife) used to
own 498,590 Class A shares in Philam Care Health Systems, Inc. (PhilamCare), representing
49.89% of the latter's outstanding capital stock. In 2009, petitioner, in a bid to divest itself of
its interests in the health maintenance organization industry, offered to sell its shareholdings
in PhilamCare through competitive bidding. Thus, on September 24, 2009, petitioner's Class
A shares were sold for USD 2,190,000, or PhP 104,259,330 based on the prevailing exchange
rate at the time of the sale, to STI Investments, Inc., who emerged as the highest bidder.3
After the sale was completed and the necessary documentary stamp and capital gains taxes
were paid, Philamlife filed an application for a certificate authorizing registration/tax clearance
with the Bureau of Internal Revenue (BIR) Large Taxpayers Service Division to facilitate the
transfer of the shares. Months later, petitioner was informed that it needed to secure a BIR
ruling in connection with its application due to potential donor’s tax liability. In compliance,
petitioner, on January 4, 2012, requested a ruling4 to confirm that the sale was not subject to
donor’s tax, pointing out, in its request, the following: that the transaction cannot attract
donor’s tax liability since there was no donative intent and,ergo, no taxable donation, citing
BIR Ruling [DA-(DT-065) 715-09] dated November 27, 2009;5 that the shares were sold at
their actual fair market value and at arm’s length; that as long as the transaction conducted is
at arm’s length––such that a bona fide business arrangement of the dealings is done inthe
ordinary course of business––a sale for less than an adequate consideration is not subject to
donor’s tax; and that donor’s tax does not apply to saleof shares sold in an open bidding
process.
On January 4, 2012, however, respondent Commissioner on Internal Revenue
(Commissioner) denied Philamlife’s request through BIR Ruling No. 015-12. As determined
by the Commissioner, the selling price of the shares thus sold was lower than their book value
based on the financial statements of PhilamCare as of the end of 2008.6 As such, the
Commisioner held, donor’s tax became imposable on the price difference pursuant to Sec.
100 of the National Internal Revenue Code (NIRC), viz:
SEC. 100. Transfer for Less Than Adequate and full Consideration.- Where property, other
than real property referred to in Section 24(D), is transferred for less than an adequate and
full consideration in money or money’s worth, then the amount by which the fair market value
of the property exceeded the value of the consideration shall, for the purpose of the tax
imposed by this Chapter, be deemed a gift, and shall be included in computing the amount of
gifts made during the calendar year.
The afore-quoted provision, the Commissioner added, is implemented by Revenue
Regulation 6-2008 (RR 6-2008), which provides:
SEC. 7. SALE, BARTER OR EXCHANGE OF SHARES OF STOCK NOT TRADED
THROUGH A LOCAL STOCK EXCHANGE PURSUANT TO SECS. 24(C), 25(A)(3), 25(B),
27(D)(2), 28(A)(7)(c), 28(B)(5)(c) OF THE TAX CODE, AS AMENDED. —
xxxx
(c) Determination of Amount and Recognition of Gain or Loss –
(c.1) In the case of cash sale, the selling price shall be the consideration per deed of sale.
xxxx
(c.1.4) In case the fair market value of the shares of stock sold, bartered, or exchanged is
greater than the amount of money and/or fair market value of the property received, the
excess of the fair market value of the shares of stock sold, bartered or exchanged overthe
amount of money and the fair market value of the property, if any, received as consideration
shall be deemed a gift subject to the donor’stax under Section 100 of the Tax Code, as
amended.
xxxx
(c.2) Definition of ‘fair market value’of Shares of Stock. – For purposes of this Section, ‘fair
market value’ of the share of stock sold shall be:
xxxx
(c.2.2) In the case of shares of stock not listed and traded in the local stock exchanges, the
book value of the shares of stock as shown in the financial statements duly certified by an
independent certified public accountant nearest to the date of sale shall be the fair market
value.
In view of the foregoing, the Commissioner ruled that the difference between the book value
and the selling price in the sales transaction is taxable donation subject to a 30% donor’s tax
under Section 99(B) of the NIRC.7Respondent Commissioner likewise held that BIR Ruling
[DA-(DT-065) 715-09], on which petitioner anchored its claim, has already been revoked by
Revenue Memorandum Circular (RMC) No. 25-2011.8
Aggrieved, petitioner requested respondent Secretary of Finance (Secretary) to review BIR
Ruling No. 015-12, but to no avail. For on November 26, 2012, respondent Secretary affirmed
the Commissioner’s assailed ruling in its entirety.9
Ruling of the Court of Appeals
Not contented with the adverse results, petitioner elevated the case to the CA via a petition
for review under Rule 43, assigning the following errors:10
A.
The Honorable Secretary of Finance gravely erred in not finding that the application of Section
7(c.2.2) of RR 06-08 in the Assailed Ruling and RMC 25-11 is void insofar as it altersthe
meaning and scope of Section 100 of the Tax Code.
B.
The Honorable Secretary of Finance gravely erred in finding that Section 100 of the Tax Code
is applicable tothe sale of the Sale of Shares.
1.
The Sale of Shares were sold at their fair market value and for fair and
full consideration in money or money’s worth.
2.
The sale of the Sale Shares is a bona fide business transaction without
any donative intent and is therefore beyond the ambit of Section 100 of
the Tax Code.
3.
It is superfluous for the BIR to require an express provision for the
exemption of the sale of the Sale Shares from donor’s tax since Section
100 of the Tax Code does not explicitly subject the transaction to
donor’s tax.
C.
The Honorable Secretary of Finance gravely erred in failing to find that in the absence of any
of the grounds mentioned in Section 246 of the Tax Code, rules and regulations, rulings or
circulars – such as RMC 25-11 – cannot be given retroactive application to the prejudice of
Philamlife.
On May 23, 2013, the CA issued the assailed Resolution dismissing the CA Petition, thusly:
WHEREFORE, the Petition for Review dated January 9, 2013 is DISMISSED for lack of
jurisdiction.
SO ORDERED.
In disposing of the CA petition, the appellate court ratiocinated that it is the Court of Tax
Appeals (CTA), pursuant to Sec. 7(a)(1) of Republic Act No. 1125 (RA 1125),11 as amended,
which has jurisdiction over the issues raised. The outright dismissal, so the CA held, is
predicated on the postulate that BIR Ruling No. 015-12 was issued in the exercise of the
Commissioner’s power to interpret the NIRC and other tax laws. Consequently, requesting for
its review can be categorized as "other matters arising under the NIRC or other laws
administered by the BIR," which is under the jurisdiction of the CTA, not the CA.
Philamlife eventually sought reconsideration but the CA, in its equally assailed January 21,
2014 Resolution, maintained its earlier position. Hence, the instant recourse.
Issues
Stripped to the essentials, the petition raises the following issues in both procedure and
substance:
1. Whether or not the CA erred in dismissing the CA Petition for lack of jurisdiction;
and
2. Whether or not the price difference in petitioner’s adverted sale of shares in
PhilamCare attracts donor’s tax.
Procedural Arguments
a. Petitioner’s contentions
Insisting on the propriety of the interposed CA petition, Philamlife, while conceding that
respondent Commissioner issued BIR Ruling No. 015-12 in accordance with her authority to
interpret tax laws, argued nonetheless that such ruling is subject to review by the Secretary
of Finance under Sec. 4 of the NIRC, to wit:
SECTION 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. –
The power to interpret the provisions of this Code and other tax laws shall be under the
exclusive and original jurisdiction of the Commissioner, subject to review by the Secretary of
Finance.
The power to decide disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties imposed in relation thereto, or other matters arising under this Code
orother laws or portions thereof administered by the Bureau of Internal Revenue is vested in
the Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals.
Petitioner postulates that there is a need to differentiate the rulings promulgated by the
respondent Commissioner relating to those rendered under the first paragraph of Sec. 4 of
the NIRC, which are appealable to the Secretary of Finance, from those rendered under the
second paragraph of Sec. 4 of the NIRC, which are subject to review on appeal with the CTA.
This distinction, petitioner argues, is readily made apparent by Department Order No. 7-
02,12 as circularized by RMC No. 40-A-02.
Philamlife further averred that Sec.7 of RA 1125, as amended, does not find application in the
case at bar since it only governs appeals from the Commissioner’s rulings under the second
paragraph and does not encompass rulings from the Secretary of Finance in the exercise of
his power of review under the first, as what was elevated to the CA. It added that under RA
1125, as amended, the only decisions of the Secretary appealable to the CTA are those
rendered in customs cases elevated to him automatically under Section 2315 of the Tariff and
Customs Code.13
There is, thus, a gap in the law when the NIRC, as couched, and RA 1125, as amended, failed
to supply where the rulings of the Secretary in its exercise of its power of review under Sec.
4 of the NIRC are appealable to. This gap, petitioner submits, was remedied by British
American Tobacco v. Camacho14 wherein the Court ruled that where what is assailed is the
validity or constitutionality of a law, or a rule or regulation issued by the administrative agency,
the regular courts have jurisdiction to pass upon the same.
In sum, appeals questioning the decisions of the Secretary of Finance in the exercise of its
power of review under Sec. 4 of the NIRC are not within the CTA’s limited special jurisdiction
and, according to petitioner, are appealable to the CA via a Rule 43 petition for review.
b. Respondents’ contentions
Before the CA, respondents countered petitioner’s procedural arguments by claiming that
even assuming arguendo that the CTA does not have jurisdiction over the case, Philamlife,
nevertheless,committed a fatal error when it failed to appeal the Secretary of Finance’s ruling
to the Office of the President (OP). As made apparent by the rules, the Department of Finance
is not among the agencies and quasi-judicial bodies enumerated under Sec. 1, Rule 43 of the
Rules of Court whose decisions and rulings are appealable through a petition for
review.15 This is in stark contrast to the OP’s specific mention under the same provision, so
respondents pointed out.
To further reinforce their argument, respondents cite the President’s power of review
emanating from his power of control as enshrined under Sec. 17 of Article VII of the
Constitution, which reads:
Section 17.The President shall have control of all the executive departments, bureaus, and
offices. He shall ensure that the laws be faithfully executed.
The nature and extent of the President’s constitutionally granted power of control have
beendefined in a plethora of cases, most recently in Elma v. Jacobi,16 wherein it was held
that:
x x x This power of control, which even Congress cannot limit, let alone withdraw, means the
power of the Chief Executive to review, alter, modify, nullify, or set aside what a subordinate,
e.g., members of the Cabinet and heads of line agencies, had done in the performance of
their duties and to substitute the judgment of the former for that of the latter.
In their Comment on the instant petition, however, respondents asseverate that the CA did
not err in its holding respecting the CTA’s jurisdiction over the controversy.
The Court’s Ruling
The petition is unmeritorious.
Reviews by the Secretary of Finance pursuant to Sec. 4 of the NIRC are appealable to the
CTA
To recapitulate, three different, if not conflicting, positions as indicated below have been
advanced by the parties and by the CA as the proper remedy open for assailing respondents’
rulings:
1. Petitioners: The ruling of the Commissioner is subject to review by the Secretary
under Sec. 4 of the NIRC, and that of the Secretary to the CA via Rule 43;
2. Respondents: The ruling of the Commissioner is subject to review by the
Secretary under Sec. 4 of the NIRC, and that of the Secretary to the Office of the
President before appealing to the CA via a Rule 43 petition; and
3. CA: The ruling of the Commissioner is subject to review by the CTA.
We now resolve.
Preliminarily, it bears stressing that there is no dispute that what is involved herein is the
respondent Commissioner’s exercise of power under the first paragraph of Sec. 4 of the
NIRC––the power to interpret tax laws. This, in fact, was recognized by the appellate court
itself, but erroneously held that her action in the exercise of such power is appealable directly
to the CTA. As correctly pointed out by petitioner, Sec. 4 of the NIRC readily provides that the
Commissioner’s power to interpret the provisions of this Code and other tax laws is subject to
review by the Secretary of Finance. The issue that now arises is this––where does one seek
immediate recourse from the adverse ruling of the Secretary of Finance in its exercise of its
power of review under Sec. 4?
Admittedly, there is no provision in law that expressly provides where exactly the ruling of the
Secretary of Finance under the adverted NIRC provision is appealable to. However, We find
that Sec. 7(a)(1) of RA 1125, as amended, addresses the seeming gap in the law asit vests
the CTA, albeit impliedly, with jurisdiction over the CA petition as "other matters" arising under
the NIRC or other laws administered by the BIR. As stated:
Sec. 7. Jurisdiction.- The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
1. Decisions of the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation
thereto, or other matters arising under the National Internal Revenue or other laws
administered by the Bureau of Internal Revenue. (emphasis supplied)
Even though the provision suggests that it only covers rulings of the Commissioner, We hold
that it is, nonetheless, sufficient enough to include appeals from the Secretary’s review under
Sec. 4 of the NIRC.
It is axiomatic that laws should be given a reasonable interpretation which does not defeat the
very purpose for which they were passed.17 Courts should not follow the letter of a statute
when to do so would depart from the true intent of the legislature or would otherwise yield
conclusions inconsistent with the purpose of the act.18 This Court has, in many cases involving
the construction of statutes, cautioned against narrowly interpreting a statute as to defeat the
purpose of the legislator, and rejected the literal interpretation of statutes if todo so would lead
to unjust or absurd results.19
Indeed, to leave undetermined the mode of appeal from the Secretary of Finance would be
an injustice to taxpayers prejudiced by his adverse rulings. To remedy this situation, Weimply
from the purpose of RA 1125 and its amendatory laws that the CTA is the proper forum with
which to institute the appeal. This is not, and should not, in any way, be taken as a derogation
of the power of the Office of President but merely as recognition that matters calling for
technical knowledge should be handled by the agency or quasi-judicial body with
specialization over the controversy. As the specialized quasi-judicial agency mandated to
adjudicate tax, customs, and assessment cases, there can be no other court of appellate
jurisdiction that can decide the issues raised inthe CA petition, which involves the tax
treatment of the shares of stocks sold. Petitioner, though, nextinvites attention to the ruling in
Ursal v. Court of Tax Appeals20 to argue against granting the CTA jurisdiction by implication,
viz:
Republic Act No. 1125 creating the Court of Tax Appeals did not grant it blanket authority to
decide any and all tax disputes. Defining such special court’s jurisdiction, the Act necessarily
limited its authority to those matters enumerated therein. Inline with this idea we recently
approved said court’s order rejecting an appeal to it by Lopez & Sons from the decision of the
Collector ofCustoms, because in our opinion its jurisdiction extended only to a review of the
decisions of the Commissioner of Customs, as provided bythe statute — and not to decisions
of the Collector of Customs. (Lopez & Sons vs. The Court of Tax Appeals, 100 Phil., 850, 53
Off. Gaz., [10] 3065).
xxxx
x x x Republic Act No. 1125 is a complete law by itself and expressly enumerates the matters
which the Court of Tax Appeals may consider; such enumeration excludes all others by
implication. Expressio unius est exclusio alterius.
Petitioner’s contention is untenable. Lest the ruling in Ursalbe taken out of context, but worse
as a precedent, it must be noted that the primary reason for the dismissal of the said case
was that the petitioner therein lacked the personality to file the suit with the CTA because he
was not adversely affected by a decision or ruling of the Collector of Internal Revenue, as was
required under Sec. 11 of RA 1125.21 As held:
We share the view that the assessor had no personality to resort to the Court of Tax Appeals.
The rulings of the Board of Assessment Appeals did not "adversely affect" him. At most it was
the City of Cebu that had been adversely affected in the sense that it could not thereafter
collect higher realty taxes from the abovementioned property owners. His opinion, it is true
had been overruled; but the overruling inflicted no material damage upon him or his office.
And the Court of Tax Appeals was not created to decide mere conflicts of opinion between
administrative officers or agencies. Imagine an income tax examiner resorting to the Court of
Tax Appeals whenever the Collector of Internal Revenue modifies, or lower his assessment
on the return of a tax payer!22
The appellate power of the CTA includes certiorari
Petitioner is quick to point out, however, that the grounds raised in its CA petition included the
nullity of Section 7(c.2.2) of RR 06-08 and RMC 25-11. In an attempt to divest the CTA
jurisdiction over the controversy, petitioner then cites British American Tobacco, wherein this
Court has expounded on the limited jurisdiction of the CTA in the following wise:
While the above statute confers on the CTA jurisdiction to resolve tax disputes in general, this
does not include cases where the constitutionality of a law or rule is challenged. Where what
is assailed is the validity or constitutionality of a law, or a rule or regulation issued by the
administrative agency in the performance of its quasi legislative function, the regular courts
have jurisdiction to pass upon the same. The determination of whether a specific rule or set
of rules issued by an administrative agency contravenes the law or the constitution is within
the jurisdiction of the regular courts. Indeed, the Constitution vests the power of judicial review
or the power to declare a law, treaty, international or executive agreement, presidential
decree, order, instruction, ordinance, or regulation inthe courts, including the regional trial
courts. This is within the scope of judicial power, which includes the authority of the courts to
determine inan appropriate action the validity of the acts of the political departments. Judicial
power includes the duty of the courts of justice to settle actual controversies involving rights
which are legally demandable and enforceable, and to determine whether or not there has
been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any
branch or instrumentality of the Government.23
Vis-a-vis British American Tobacco, it bears to stress what appears to be a contrasting ruling
in Asia International Auctioneers, Inc. v. Parayno, Jr., to wit:
Similarly, in CIR v. Leal, pursuant to Section 116 of Presidential Decree No. 1158 (The xxxx
National Internal Revenue Code, as amended) which states that "[d]ealers in securities shall
pay a tax equivalent to six (6%) per centum of their gross income. Lending investors shall pay
a tax equivalent to five (5%) per cent, of their gross income," the CIR issued Revenue Petitioner essentially questions the CIR’s ruling that Petitioner’s sale of shares is a taxable
Memorandum Order (RMO) No. 15-91 imposing 5% lending investor’s tax on pawnshops donation under Sec. 100 of the NIRC. The validity of Sec. 100 of the NIRC, Sec. 7 (C.2.2)
based on their gross income and requiring all investigating units of the BIR to investigate and and RMC 25-11 is merely questioned incidentally since it was used by the CIR as bases for
assess the lending investor’s tax due from them. The issuance of RMO No. 15-91 was an its unfavourable opinion. Clearly, the Petition involves an issue on the taxability of the
offshoot of the CIR’s finding that the pawnshop business is akin to that of "lending investors" transaction rather than a direct attack on the constitutionality of Sec. 100, Sec.7 (c.2.2.) of RR
as defined in Section 157(u) of the Tax Code. Subsequently, the CIR issued RMC No. 43-91 06-08 and RMC 25-11. Thus, the instant Petition properly pertains to the CTA under Sec. 7
subjecting pawn tickets to documentary stamp tax. Respondent therein, Josefina Leal, owner of RA 9282.
and operator of Josefina’s Pawnshop, asked for a reconsideration of both RMO No. 15-91
and RMC No. 43-91, but the same was denied by petitioner CIR. Leal then filed a petition for As a result of the seemingly conflicting pronouncements, petitioner submits that taxpayers are
prohibition with the RTC of San Mateo, Rizal, seeking to prohibit petitioner CIR from now at a quandary on what mode of appeal should be taken, to which court or agency it should
implementing the revenue orders. The CIR, through the OSG, filed a motion to dismiss on the be filed, and which case law should be followed.
ground of lack of jurisdiction. The RTC denied the motion. Petitioner filed a petition for
certiorari and prohibition with the CA which dismissed the petition "for lack of basis." In
reversing the CA, dissolving the Writ of Preliminary Injunction issued by the trial court and Petitioner’s above submission is specious.
ordering the dismissal of the case before the trial court, the Supreme Court held that "[t]he
questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or opinions of the
In the recent case of City of Manila v. Grecia-Cuerdo,25 the Court en banc has ruled that the
Commissioner implementing the Tax Code on the taxability of pawnshops." They were issued
CTA now has the power of certiorari in cases within its appellate jurisdiction. To elucidate:
pursuant to the CIR’s power under Section 245 of the Tax Code "to make rulings or opinions
in connection with the implementation of the provisions of internal revenue laws, including
ruling on the classification of articles of sales and similar purposes."The Court held that under The prevailing doctrine is that the authority to issue writs of certiorari involves the exercise of
R.A. No. 1125 (An Act Creating the Court of Tax Appeals), as amended, such rulings of the original jurisdiction which must be expressly conferred by the Constitution or by law and
CIR are appealable to the CTA. cannot be implied from the mere existence of appellate jurisdiction. Thus, x x x this Court has
ruled against the jurisdiction of courts or tribunals over petitions for certiorari on the ground
that there is no law which expressly gives these tribunals such power. Itmust be observed,
In the case at bar, the assailed revenue regulations and revenue memorandum circulars are
however, that x x x these rulings pertain not to regular courts but to tribunals exercising
actually rulings or opinions of the CIR on the tax treatment of motor vehicles sold at public
quasijudicial powers. With respect tothe Sandiganbayan, Republic Act No. 8249 now provides
auction within the SSEZ to implement Section 12 of R.A. No. 7227 which provides that
that the special criminal court has exclusive original jurisdiction over petitions for the issuance
"exportation or removal of goods from the territory of the [SSEZ] to the other parts of the
of the writs of mandamus, prohibition, certiorari, habeas corpus, injunctions, and other
Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff
ancillary writs and processes in aid of its appellate jurisdiction.
Codeand other relevant tax laws of the Philippines." They were issued pursuant to the power
of the CIR under Section 4 of the National Internal Revenue Code x x x.24 (emphasis added)
In the same manner, Section 5 (1), Article VIII of the 1987 Constitution grants power to the
Supreme Court, in the exercise of its original jurisdiction, to issue writs of certiorari, prohibition
The respective teachings in British American Tobacco and Asia International Auctioneers, at
and mandamus. With respect to the Court of Appeals, Section 9 (1) of Batas Pambansa Blg.
first blush, appear to bear no conflict––that when the validity or constitutionality of an
129 (BP 129) gives the appellate court, also in the exercise of its original jurisdiction, the
administrative rule or regulation is assailed, the regular courts have jurisdiction; and if what is
power to issue, among others, a writ of certiorari, whether or not in aid of its appellate
assailed are rulings or opinions of the Commissioner on tax treatments, jurisdiction over the
jurisdiction. As to Regional Trial Courts, the power to issue a writ of certiorari, in the exercise
controversy is lodged with the CTA. The problem with the above postulates, however, is that
of their original jurisdiction, is provided under Section 21 of BP 129.
they failed to take into consideration one crucial point––a taxpayer can raise both issues
simultaneously.
The foregoing notwithstanding, while there is no express grant of such power, with respect to
the CTA, Section 1, Article VIII of the 1987 Constitution provides, nonetheless, that judicial
Petitioner avers that there is now a trend wherein both the CTA and the CA disclaim
power shall be vested in one Supreme Court and in such lower courts as may be established
jurisdiction over tax cases: on the one hand, mere prayer for the declaration of a tax measure’s
by law and that judicial power includes the duty of the courts of justice to settle actual
unconstitutionality or invalidity before the CTA can result in a petition’s outright dismissal, and
controversies involving rights which are legally demandable and enforceable, and to
on the other hand, the CA will likewise dismiss the same petition should it find that the primary
determine whether or not there has been a grave abuse of discretion amounting to lack or
issue is not the tax measure’s validity but the assessment or taxability of the transaction or
excess of jurisdiction on the part of any branch or instrumentality of the Government.
subject involved. To illustrate this point, petitioner cites the assailed Resolution, thusly:
Admittedly, in British American Tobacco vs. Camacho, the Supreme Court has ruled that the
determination of whether a specific rule or set of rules issued by an administrative agency On the strength of the above constitutional provisions, it can be fairly interpreted that the
contravenes the law or the constitution is within the jurisdiction of the regular courts, not the power of the CTA includes that of determining whether or not there has been grave abuse of
CTA. discretion amounting to lack or excess of jurisdiction on the part of the RTC in issuing an
interlocutory order in cases falling within the exclusive appellate jurisdiction of the tax court. PRESBITERO J. VELASCO, JR.
It, thus, follows that the CTA, by constitutional mandate, is vested with jurisdiction to issue Associate Justice
writs of certiorari in these cases.

Indeed, in order for any appellate court to effectively exercise its appellate jurisdiction, it must
have the authority to issue, among others, a writ of certiorari. In transferring exclusive
jurisdiction over appealed tax cases to the CTA, it can reasonably be assumed that the law
intended to transfer also such power as is deemed necessary, if not indispensable, in aid of
such appellate jurisdiction. There is no perceivable reason why the transfer should only be
considered as partial, not total. (emphasis added)

Evidently, City of Manilacan be considered as a departure from Ursal in that in spite of there
being no express grant in law, the CTA is deemed granted with powers of certiorari by
implication. Moreover, City of Manila diametrically opposes British American Tobacco to the
effect that it is now within the power of the CTA, through its power of certiorari, to rule on the
validity of a particular administrative ruleor regulation so long as it is within its appellate
jurisdiction. Hence, it can now rule not only on the propriety of an assessment or tax treatment
of a certain transaction, but also on the validity of the revenue regulation or revenue
memorandum circular on which the said assessment is based.

Guided by the doctrinal teaching in resolving the case at bar, the fact that the CA petition not
only contested the applicability of Sec. 100 of the NIRC over the sales transaction but likewise
questioned the validity of Sec. 7 (c.2.2) of RR 06-08 and RMC 25-11 does not divest the CTA
of its jurisdiction over the controversy, contrary to petitioner's arguments.

The price difference is subject to donor's tax

Petitioner's substantive arguments are unavailing. The absence of donative intent, if that be
the case, does not exempt the sales of stock transaction from donor's tax since Sec. 100 of
the NIRC categorically states that the amount by which the fair market value of the property
exceeded the value of the consideration shall be deemed a gift.1âwphi1 Thus, even if there
is no actual donation, the difference in price is considered a donation by fiction of law.

Moreover, Sec. 7(c.2.2) of RR 06-08 does not alter Sec. 100 of the NIRC but merely sets the
parameters for determining the "fair market value" of a sale of stocks. Such issuance was
made pursuant to the Commissioner's power to interpret tax laws and to promulgate rules and
regulations for their implementation.

Lastly, petitioner is mistaken in stating that RMC 25-11, having been issued after the sale,
was being applied retroactively in contravention to Sec. 246 of the NIRC.26 Instead, it merely
called for the strict application of Sec. 100, which was already in force the moment the NIRC
was enacted.

WHEREFORE, the petition is hereby DISMISSED. The Resolutions of the Court of Appeals
in CA-G.R. SP No. 127984 dated May 23, 2013 and January 21, 2014 are hereby AFFIRMED.

SO ORDERED.