testamentary proceedings pending before the Court of First Instance of Zamboanga (Special
G.R. No. L-43082 June 18, 1937
PABLO LORENZO, as trustee of the estate of Thomas Hanley, deceased, plaintiff-
appellant, vs.
JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellant.
LAUREL, J.:
On October 4, 1932, the plaintiff Pablo Lorenzo, in his capacity as trustee of the estate of
Thomas Hanley, deceased, brought this action in the Court of First Instance of Zamboanga
against the defendant, Juan Posadas, Jr., then the Collector of Internal Revenue, for the
refund of the amount of P2,052.74, paid by the plaintiff as inheritance tax on the estate of
the deceased, and for the collection of interst thereon at the rate of 6 per cent per annum,
computed from September 15, 1932, the date when the aforesaid tax was [paid under
protest. The defendant set up a counterclaim for P1,191.27 alleged to be interest due on the
tax in question and which was not included in the original assessment. From the decision of
the Court of First Instance of Zamboanga dismissing both the plaintiff's complaint and the
defendant's counterclaim, both parties appealed to this court.
It appears that on May 27, 1922, one Thomas Hanley died in Zamboanga, Zamboanga,
leaving a will (Exhibit 5) and considerable amount of real and personal properties. On june
14, 1922, proceedings for the probate of his will and the settlement and distribution of his
estate were begun in the Court of First Instance of Zamboanga. The will was admitted to
probate. Said will provides, among other things, as follows:
4. I direct that any money left by me be given to my nephew Matthew Hanley.
5. I direct that all real estate owned by me at the time of my death be not sold or
otherwise disposed of for a period of ten (10) years after my death, and that the
same be handled and managed by the executors, and proceeds thereof to be given
to my nephew, Matthew Hanley, at Castlemore, Ballaghaderine, County of
Rosecommon, Ireland, and that he be directed that the same be used only for the
education of my brother's children and their descendants.
6. I direct that ten (10) years after my death my property be given to the above
mentioned Matthew Hanley to be disposed of in the way he thinks most
advantageous.
xxx xxx xxx
8. I state at this time I have one brother living, named Malachi Hanley, and that
my nephew, Matthew Hanley, is a son of my said brother, Malachi Hanley.
The Court of First Instance of Zamboanga considered it proper for the best interests of ther
estate to appoint a trustee to administer the real properties which, under the will, were to
pass to Matthew Hanley ten years after the two executors named in the will, was, on March
8, 1924, appointed trustee. Moore took his oath of office and gave bond on March 10, 1924.
He acted as trustee until February 29, 1932, when he resigned and the plaintiff herein was
appointed in his stead.
During the incumbency of the plaintiff as trustee, the defendant Collector of Internal
Revenue, alleging that the estate left by the deceased at the time of his death consisted of
realty valued at P27,920 and personalty valued at P1,465, and allowing a deduction of
P480.81, assessed against the estate an inheritance tax in the amount of P1,434.24 which,
together with the penalties for deliquency in payment consisting of a 1 per cent monthly
interest from July 1, 1931 to the date of payment and a surcharge of 25 per cent on the tax,
amounted to P2,052.74. On March 15, 1932, the defendant filed a motion in the
proceedings No. 302) praying that the trustee, plaintiff herein, be ordered to pay to the
Government the said sum of P2,052.74. The motion was granted. On September 15, 1932,
the plaintiff paid said amount under protest, notifying the defendant at the same time that
unless the amount was promptly refunded suit would be brought for its recovery. The
defendant overruled the plaintiff's protest and refused to refund the said amount hausted,
plaintiff went to court with the result herein above indicated.
In his appeal, plaintiff contends that the lower court erred:
I. In holding that the real property of Thomas Hanley, deceased, passed to his
instituted heir, Matthew Hanley, from the moment of the death of the former, and
that from the time, the latter became the owner thereof.
II. In holding, in effect, that there was deliquency in the payment of inheritance
tax due on the estate of said deceased.
III. In holding that the inheritance tax in question be based upon the value of the
estate upon the death of the testator, and not, as it should have been held, upon the
value thereof at the expiration of the period of ten years after which, according to
the testator's will, the property could be and was to be delivered to the instituted
heir.
IV. In not allowing as lawful deductions, in the determination of the net amount
of the estate subject to said tax, the amounts allowed by the court as compensation
to the "trustees" and paid to them from the decedent's estate.
V. In not rendering judgment in favor of the plaintiff and in denying his motion
for new trial.
The defendant-appellant contradicts the theories of the plaintiff and assigns the following
error besides:
The lower court erred in not ordering the plaintiff to pay to the defendant the sum
of P1,191.27, representing part of the interest at the rate of 1 per cent per month
from April 10, 1924, to June 30, 1931, which the plaintiff had failed to pay on the
inheritance tax assessed by the defendant against the estate of Thomas Hanley.
The following are the principal questions to be decided by this court in this appeal: (a)
When does the inheritance tax accrue and when must it be satisfied? (b) Should the
inheritance tax be computed on the basis of the value of the estate at the time of the
testator's death, or on its value ten years later? (c) In determining the net value of the estate
subject to tax, is it proper to deduct the compensation due to trustees? (d) What law governs
the case at bar? Should the provisions of Act No. 3606 favorable to the tax-payer be given
retroactive effect? (e) Has there been deliquency in the payment of the inheritance tax? If
so, should the additional interest claimed by the defendant in his appeal be paid by the
estate? Other points of incidental importance, raised by the parties in their briefs, will be
touched upon in the course of this opinion.
(a) The accrual of the inheritance tax is distinct from the obligation to pay the same. Section
1536 as amended, of the Administrative Code, imposes the tax upon "every transmission by
virtue of inheritance, devise, bequest, gift mortis causa, or advance in anticipation of
inheritance,devise, or bequest." The tax therefore is upon transmission or the transfer or
devolution of property of a decedent, made effective by his death. (61 C. J., p. 1592.) It is in
reality an excise or privilege tax imposed on the right to succeed to, receive, or take
property by or under a will or the intestacy law, or deed, grant, or gift to become operative
at or after death. Acording to article 657 of the Civil Code, "the rights to the succession of a
person are transmitted from the moment of his death." "In other words", said Arellano, C. J.,
". . . the heirs succeed immediately to all of the property of the deceased ancestor. The
property belongs to the heirs at the moment of the death of the ancestor as completely as if
the ancestor had executed and delivered to them a deed for the same before his death."
(Bondad vs. Bondad, 34 Phil., 232. See also, Mijares vs. Nery, 3 Phil., 195; Suilong & Co.,
vs. Chio-Taysan, 12 Phil., 13; Lubrico vs. Arbado, 12 Phil., 391; Innocencio vs. Gat-
Pandan, 14 Phil., 491; Aliasas vs.Alcantara, 16 Phil., 489; Ilustre vs. Alaras Frondosa, 17
Phil., 321; Malahacan vs. Ignacio, 19 Phil., 434; Bowa vs. Briones, 38 Phil., 27; Osario vs.
Osario & Yuchausti Steamship Co., 41 Phil., 531; Fule vs. Fule, 46 Phil., 317; Dais vs.
Court of First Instance of Capiz, 51 Phil., 396; Baun vs. Heirs of Baun, 53 Phil., 654.)
Plaintiff, however, asserts that while article 657 of the Civil Code is applicable to testate as
well as intestate succession, it operates only in so far as forced heirs are concerned. But the
language of article 657 of the Civil Code is broad and makes no distinction between
different classes of heirs. That article does not speak of forced heirs; it does not even use the
word "heir". It speaks of the rights of succession and the transmission thereof from the
moment of death. The provision of section 625 of the Code of Civil Procedure regarding the
authentication and probate of a will as a necessary condition to effect transmission of
property does not affect the general rule laid down in article 657 of the Civil Code. The
authentication of a will implies its due execution but once probated and allowed the
transmission is effective as of the death of the testator in accordance with article 657 of the
Civil Code. Whatever may be the time when actual transmission of the inheritance takes
place, succession takes place in any event at the moment of the decedent's death. The time
when the heirs legally succeed to the inheritance may differ from the time when the heirs
actually receive such inheritance. "Poco importa", says Manresa commenting on article 657
of the Civil Code, "que desde el falleimiento del causante, hasta que el heredero o legatario
entre en posesion de los bienes de la herencia o del legado, transcurra mucho o poco
tiempo, pues la adquisicion ha de retrotraerse al momento de la muerte, y asi lo ordena el
articulo 989, que debe considerarse como complemento del presente." (5 Manresa, 305; see
also, art. 440, par. 1, Civil Code.) Thomas Hanley having died on May 27, 1922, the
inheritance tax accrued as of the date.
From the fact, however, that Thomas Hanley died on May 27, 1922, it does not follow that
the obligation to pay the tax arose as of the date. The time for the payment on inheritance
tax is clearly fixed by section 1544 of the Revised Administrative Code as amended by Act
No. 3031, in relation to section 1543 of the same Code. The two sections follow:
SEC. 1543. Exemption of certain acquisitions and transmissions. — The
following shall not be taxed:
(a) The merger of the usufruct in the owner of the naked title.
(b) The transmission or delivery of the inheritance or legacy by the
fiduciary heir or legatee to the trustees.
(c) The transmission from the first heir, legatee, or donee in favor of
another beneficiary, in accordance with the desire of the predecessor.
In the last two cases, if the scale of taxation appropriate to the new beneficiary is
greater than that paid by the first, the former must pay the difference.
SEC. 1544. When tax to be paid. — The tax fixed in this article shall be paid:
(a) In the second and third cases of the next preceding section, before
entrance into possession of the property.
(b) In other cases, within the six months subsequent to the death of the
predecessor; but if judicial testamentary or intestate proceedings shall
be instituted prior to the expiration of said period, the payment shall be
made by the executor or administrator before delivering to each
beneficiary his share.
If the tax is not paid within the time hereinbefore prescribed, interest at the rate of
twelve per centum per annum shall be added as part of the tax; and to the tax and
interest due and unpaid within ten days after the date of notice and demand
thereof by the collector, there shall be further added a surcharge of twenty-five
per centum.
A certified of all letters testamentary or of admisitration shall be furnished the
Collector of Internal Revenue by the Clerk of Court within thirty days after their
issuance.
It should be observed in passing that the word "trustee", appearing in subsection (b) of
section 1543, should read "fideicommissary" or "cestui que trust". There was an obvious
mistake in translation from the Spanish to the English version.
The instant case does fall under subsection (a), but under subsection (b), of section 1544
above-quoted, as there is here no fiduciary heirs, first heirs, legatee or donee. Under the
subsection, the tax should have been paid before the delivery of the properties in question to
P. J. M. Moore as trustee on March 10, 1924.
(b) The plaintiff contends that the estate of Thomas Hanley, in so far as the real properties
are concerned, did not and could not legally pass to the instituted heir, Matthew Hanley,
until after the expiration of ten years from the death of the testator on May 27, 1922 and,
that the inheritance tax should be based on the value of the estate in 1932, or ten years after
the testator's death. The plaintiff introduced evidence tending to show that in 1932 the real
properties in question had a reasonable value of only P5,787. This amount added to the
value of the personal property left by the deceased, which the plaintiff admits is P1,465,
would generate an inheritance tax which, excluding deductions, interest and surcharge,
would amount only to about P169.52.
If death is the generating source from which the power of the estate to impose inheritance
taxes takes its being and if, upon the death of the decedent, succession takes place and the
right of the estate to tax vests instantly, the tax should be measured by the vlaue of the
estate as it stood at the time of the decedent's death, regardless of any subsequent
contingency value of any subsequent increase or decrease in value. (61 C. J., pp. 1692,
1693; 26 R. C. L., p. 232; Blakemore and Bancroft, Inheritance Taxes, p. 137. See also
Knowlton vs. Moore, 178 U.S., 41; 20 Sup. Ct. Rep., 747; 44 Law. ed., 969.) "The right of
the state to an inheritance tax accrues at the moment of death, and hence is ordinarily
measured as to any beneficiary by the value at that time of such property as passes to him.
Subsequent appreciation or depriciation is immaterial." (Ross, Inheritance Taxation, p. 72.)
Our attention is directed to the statement of the rule in Cyclopedia of Law of and Procedure
(vol. 37, pp. 1574, 1575) that, in the case of contingent remainders, taxation is postponed
until the estate vests in possession or the contingency is settled. This rule was formerly
followed in New York and has been adopted in Illinois, Minnesota, Massachusetts, Ohio,
Pennsylvania and Wisconsin. This rule, horever, is by no means entirely satisfactory either
to the estate or to those interested in the property (26 R. C. L., p. 231.). Realizing, perhaps,
the defects of its anterior system, we find upon examination of cases and authorities that
New York has varied and now requires the immediate appraisal of the postponed estate at
its clear market value and the payment forthwith of the tax on its out of the corpus of the
estate transferred. (In re Vanderbilt, 172 N. Y., 69; 69 N. E., 782; In re Huber, 86 N. Y.
App. Div., 458; 83 N. Y. Supp., 769; Estate of Tracy, 179 N. Y., 501; 72 N. Y., 519; Estate
of Brez, 172 N. Y., 609; 64 N. E., 958; Estate of Post, 85 App. Div., 611; 82 N. Y. Supp.,
1079. Vide also, Saltoun vs. Lord Advocate, 1 Peter. Sc. App., 970; 3 Macq. H. L., 659; 23
Eng. Rul. Cas., 888.) California adheres to this new rule (Stats. 1905, sec. 5, p. 343).
But whatever may be the rule in other jurisdictions, we hold that a transmission by
inheritance is taxable at the time of the predecessor's death, notwithstanding the
postponement of the actual possession or enjoyment of the estate by the beneficiary, and the
tax measured by the value of the property transmitted at that time regardless of its
appreciation or depreciation.
(c) Certain items are required by law to be deducted from the appraised gross in arriving at
the net value of the estate on which the inheritance tax is to be computed (sec. 1539,
Revised Administrative Code). In the case at bar, the defendant and the trial court allowed a
deduction of only P480.81. This sum represents the expenses and disbursements of the
executors until March 10, 1924, among which were their fees and the proven debts of the
deceased. The plaintiff contends that the compensation and fees of the trustees, which
aggregate P1,187.28 (Exhibits C, AA, EE, PP, HH, JJ, LL, NN, OO), should also be
deducted under section 1539 of the Revised Administrative Code which provides, in part, as
follows: "In order to determine the net sum which must bear the tax, when an inheritance is
concerned, there shall be deducted, in case of a resident, . . . the judicial expenses of the
testamentary or intestate proceedings, . . . ."
A trustee, no doubt, is entitled to receive a fair compensation for his services (Barney vs.
Saunders, 16 How., 535; 14 Law. ed., 1047). But from this it does not follow that the
compensation due him may lawfully be deducted in arriving at the net value of the estate
subject to tax. There is no statute in the Philippines which requires trustees' commissions to
be deducted in determining the net value of the estate subject to inheritance tax (61 C. J., p.
1705). Furthermore, though a testamentary trust has been created, it does not appear that the
testator intended that the duties of his executors and trustees should be separated. (Ibid.; In
re Vanneck's Estate, 161 N. Y. Supp., 893; 175 App. Div., 363; In re Collard's Estate, 161
N. Y. Supp., 455.) On the contrary, in paragraph 5 of his will, the testator expressed the
desire that his real estate be handled and managed by his executors until the expiration of
the period of ten years therein provided. Judicial expenses are expenses of administration
(61 C. J., p. 1705) but, in State vs. Hennepin County Probate Court (112 N. W., 878; 101
Minn., 485), it was said: ". . . The compensation of a trustee, earned, not in the
administration of the estate, but in the management thereof for the benefit of the legatees or
devises, does not come properly within the class or reason for exempting administration
expenses. . . . Service rendered in that behalf have no reference to closing the estate for the
purpose of a distribution thereof to those entitled to it, and are not required or essential to
the perfection of the rights of the heirs or legatees. . . . Trusts . . . of the character of that
here before the court, are created for the the benefit of those to whom the property
ultimately passes, are of voluntary creation, and intended for the preservation of the estate.
No sound reason is given to support the contention that such expenses should be taken into
consideration in fixing the value of the estate for the purpose of this tax."
(d) The defendant levied and assessed the inheritance tax due from the estate of Thomas
Hanley under the provisions of section 1544 of the Revised Administrative Code, as
amended by section 3 of Act No. 3606. But Act No. 3606 went into effect on January 1,
1930. It, therefore, was not the law in force when the testator died on May 27, 1922. The
law at the time was section 1544 above-mentioned, as amended by Act No. 3031, which
took effect on March 9, 1922.
It is well-settled that inheritance taxation is governed by the statute in force at the time of
the death of the decedent (26 R. C. L., p. 206; 4 Cooley on Taxation, 4th ed., p. 3461). The
taxpayer can not foresee and ought not to be required to guess the outcome of pending
measures. Of course, a tax statute may be made retroactive in its operation. Liability for
taxes under retroactive legislation has been "one of the incidents of social life." (Seattle vs.
Kelleher, 195 U. S., 360; 49 Law. ed., 232 Sup. Ct. Rep., 44.) But legislative intent that a
tax statute should operate retroactively should be perfectly clear. (Scwab vs. Doyle, 42 Sup.
Ct. Rep., 491; Smietanka vs. First Trust & Savings Bank, 257 U. S., 602; Stockdale vs.
Insurance Co., 20 Wall., 323; Lunch vs. Turrish, 247 U. S., 221.) "A statute should be
considered as prospective in its operation, whether it enacts, amends, or repeals an
inheritance tax, unless the language of the statute clearly demands or expresses that it shall
have a retroactive effect, . . . ." (61 C. J., P. 1602.) Though the last paragraph of section 5 of
Regulations No. 65 of the Department of Finance makes section 3 of Act No. 3606,
amending section 1544 of the Revised Administrative Code, applicable to all estates the
inheritance taxes due from which have not been paid, Act No. 3606 itself contains no
provisions indicating legislative intent to give it retroactive effect. No such effect can
begiven the statute by this court.
The defendant Collector of Internal Revenue maintains, however, that certain provisions of
Act No. 3606 are more favorable to the taxpayer than those of Act No. 3031, that said
provisions are penal in nature and, therefore, should operate retroactively in conformity
with the provisions of article 22 of the Revised Penal Code. This is the reason why he
applied Act No. 3606 instead of Act No. 3031. Indeed, under Act No. 3606, (1) the
surcharge of 25 per cent is based on the tax only, instead of on both the tax and the interest,
as provided for in Act No. 3031, and (2) the taxpayer is allowed twenty days from notice
and demand by rthe Collector of Internal Revenue within which to pay the tax, instead of
ten days only as required by the old law.
Properly speaking, a statute is penal when it imposes punishment for an offense committed
against the state which, under the Constitution, the Executive has the power to pardon. In
common use, however, this sense has been enlarged to include within the term "penal
statutes" all status which command or prohibit certain acts, and establish penalties for their
violation, and even those which, without expressly prohibiting certain acts, impose a
penalty upon their commission (59 C. J., p. 1110). Revenue laws, generally, which impose
taxes collected by the means ordinarily resorted to for the collection of taxes are not classed
as penal laws, although there are authorities to the contrary. (See Sutherland, Statutory
Construction, 361; Twine Co. vs. Worthington, 141 U. S., 468; 12 Sup. Ct., 55; Rice vs. U.
S., 4 C. C. A., 104; 53 Fed., 910; Com. vs. Standard Oil Co., 101 Pa. St., 150; State vs.
Wheeler, 44 P., 430; 25 Nev. 143.) Article 22 of the Revised Penal Code is not applicable to
the case at bar, and in the absence of clear legislative intent, we cannot give Act No. 3606 a
retroactive effect.
(e) The plaintiff correctly states that the liability to pay a tax may arise at a certain time and
the tax may be paid within another given time. As stated by this court, "the mere failure to
pay one's tax does not render one delinqent until and unless the entire period has eplased
within which the taxpayer is authorized by law to make such payment without being
subjected to the payment of penalties for fasilure to pay his taxes within the prescribed
period." (U. S. vs. Labadan, 26 Phil., 239.)
The defendant maintains that it was the duty of the executor to pay the inheritance tax
before the delivery of the decedent's property to the trustee. Stated otherwise, the defendant
contends that delivery to the trustee was delivery to the cestui que trust, the beneficiery in
this case, within the meaning of the first paragraph of subsection (b) of section 1544 of the
Revised Administrative Code. This contention is well taken and is sustained. The
appointment of P. J. M. Moore as trustee was made by the trial court in conformity with the
wishes of the testator as expressed in his will. It is true that the word "trust" is not
mentioned or used in the will but the intention to create one is clear. No particular or
technical words are required to create a testamentary trust (69 C. J., p. 711). The words
"trust" and "trustee", though apt for the purpose, are not necessary. In fact, the use of these
two words is not conclusive on the question that a trust is created (69 C. J., p. 714). "To
create a trust by will the testator must indicate in the will his intention so to do by using
language sufficient to separate the legal from the equitable estate, and with sufficient
certainty designate the beneficiaries, their interest in the ttrust, the purpose or object of the
trust, and the property or subject matter thereof. Stated otherwise, to constitute a valid
testamentary trust there must be a concurrence of three circumstances: (1) Sufficient words
to raise a trust; (2) a definite subject; (3) a certain or ascertain object; statutes in some
jurisdictions expressly or in effect so providing." (69 C. J., pp. 705,706.) There is no doubt
that the testator intended to create a trust. He ordered in his will that certain of his properties
be kept together undisposed during a fixed period, for a stated purpose. The probate court
certainly exercised sound judgment in appointment a trustee to carry into effect the
provisions of the will (see sec. 582, Code of Civil Procedure).
P. J. M. Moore became trustee on March 10, 1924. On that date trust estate vested in him
(sec. 582 in relation to sec. 590, Code of Civil Procedure). The mere fact that the estate of
the deceased was placed in trust did not remove it from the operation of our inheritance tax
laws or exempt it from the payment of the inheritance tax. The corresponding inheritance
tax should have been paid on or before March 10, 1924, to escape the penalties of the laws.
This is so for the reason already stated that the delivery of the estate to the trustee was in
esse delivery of the same estate to the cestui que trust, the beneficiary in this case. A trustee
is but an instrument or agent for the cestui que trust (Shelton vs. King, 299 U. S., 90; 33
Sup. Ct. Rep., 689; 57 Law. ed., 1086). When Moore accepted the trust and took possesson
of the trust estate he thereby admitted that the estate belonged not to him but to his cestui
que trust (Tolentino vs. Vitug, 39 Phil.,126, cited in 65 C. J., p. 692, n. 63). He did not
acquire any beneficial interest in the estate. He took such legal estate only as the proper
execution of the trust required (65 C. J., p. 528) and, his estate ceased upon the fulfillment
of the testator's wishes. The estate then vested absolutely in the beneficiary (65 C. J., p.
542).
The highest considerations of public policy also justify the conclusion we have reached.
Were we to hold that the payment of the tax could be postponed or delayed by the creation
of a trust of the type at hand, the result would be plainly disastrous. Testators may provide,
as Thomas Hanley has provided, that their estates be not delivered to their beneficiaries
until after the lapse of a certain period of time. In the case at bar, the period is ten years. In
other cases, the trust may last for fifty years, or for a longer period which does not offend
the rule against petuities. The collection of the tax would then be left to the will of a private
individual. The mere suggestion of this result is a sufficient warning against the accpetance
of the essential to the very exeistence of government. (Dobbins vs. Erie Country, 16 Pet.,
435; 10 Law. ed., 1022; Kirkland vs. Hotchkiss, 100 U. S., 491; 25 Law. ed., 558; Lane
County vs. Oregon, 7 Wall., 71; 19 Law. ed., 101; Union Refrigerator Transit Co. vs.
Kentucky, 199 U. S., 194; 26 Sup. Ct. Rep., 36; 50 Law. ed., 150; Charles River Bridge vs.
Warren Bridge, 11 Pet., 420; 9 Law. ed., 773.) The obligation to pay taxes rests not upon
the privileges enjoyed by, or the protection afforded to, a citizen by the government but
upon the necessity of money for the support of the state (Dobbins vs. Erie Country, supra).
For this reason, no one is allowed to object to or resist the payment of taxes solely because
no personal benefit to him can be pointed out. (Thomas vs. Gay, 169 U. S., 264; 18 Sup. Ct.
Rep., 340; 43 Law. ed., 740.) While courts will not enlarge, by construction, the
government's power of taxation (Bromley vs. McCaughn, 280 U. S., 124; 74 Law. ed., 226;
50 Sup. Ct. Rep., 46) they also will not place upon tax laws so loose a construction as to
permit evasions on merely fanciful and insubstantial distictions. (U. S. vs. Watts, 1 Bond.,
580; Fed. Cas. No. 16,653; U. S. vs. Wigglesirth, 2 Story, 369; Fed. Cas. No. 16,690,
followed in Froelich & Kuttner vs. Collector of Customs, 18 Phil., 461, 481; Castle Bros.,
Wolf & Sons vs. McCoy, 21 Phil., 300; Muñoz & Co. vs. Hord, 12 Phil., 624; Hongkong &
Shanghai Banking Corporation vs. Rafferty, 39 Phil., 145; Luzon Stevedoring Co. vs.
Trinidad, 43 Phil., 803.) When proper, a tax statute should be construed to avoid the
possibilities of tax evasion. Construed this way, the statute, without resulting in injustice to
the taxpayer, becomes fair to the government.
That taxes must be collected promptly is a policy deeply intrenched in our tax system. Thus,
no court is allowed to grant injunction to restrain the collection of any internal revenue tax (
sec. 1578, Revised Administrative Code; Sarasola vs. Trinidad, 40 Phil., 252). In the case of
Lim Co Chui vs. Posadas (47 Phil., 461), this court had occassion to demonstrate
trenchment adherence to this policy of the law. It held that "the fact that on account of riots
directed against the Chinese on October 18, 19, and 20, 1924, they were prevented from
praying their internal revenue taxes on time and by mutual agreement closed their homes
and stores and remained therein, does not authorize the Collector of Internal Revenue to
extend the time prescribed for the payment of the taxes or to accept them without the
additional penalty of twenty five per cent." (Syllabus, No. 3.)
". . . It is of the utmost importance," said the Supreme Court of the United States, ". . . that
the modes adopted to enforce the taxes levied should be interfered with as little as possible.
Any delay in the proceedings of the officers, upon whom the duty is developed of collecting
the taxes, may derange the operations of government, and thereby, cause serious detriment
to the public." (Dows vs. Chicago, 11 Wall., 108; 20 Law. ed., 65, 66; Churchill and Tait vs.
Rafferty, 32 Phil., 580.)
It results that the estate which plaintiff represents has been delinquent in the payment of
inheritance tax and, therefore, liable for the payment of interest and surcharge provided by
law in such cases.
The delinquency in payment occurred on March 10, 1924, the date when Moore became
trustee. The interest due should be computed from that date and it is error on the part of the
defendant to compute it one month later. The provisions cases is mandatory (see and cf.
Lim Co Chui vs. Posadas, supra), and neither the Collector of Internal Revenuen or this
court may remit or decrease such interest, no matter how heavily it may burden the
taxpayer.
To the tax and interest due and unpaid within ten days after the date of notice and demand
thereof by the Collector of Internal Revenue, a surcharge of twenty-five per centum should
be added (sec. 1544, subsec. (b), par. 2, Revised Administrative Code). Demand was made
by the Deputy Collector of Internal Revenue upon Moore in a communiction dated October
16, 1931 (Exhibit 29). The date fixed for the payment of the tax and interest was November
30, 1931. November 30 being an official holiday, the tenth day fell on December 1, 1931.
As the tax and interest due were not paid on that date, the estate became liable for the
payment of the surcharge.
In view of the foregoing, it becomes unnecessary for us to discuss the fifth error assigned by
the plaintiff in his brief.
We shall now compute the tax, together with the interest and surcharge due from the estate
of Thomas Hanley inaccordance with the conclusions we have reached.
At the time of his death, the deceased left real properties valued at P27,920 and personal
properties worth P1,465, or a total of P29,385. Deducting from this amount the sum of
P480.81, representing allowable deductions under secftion 1539 of the Revised
Administrative Code, we have P28,904.19 as the net value of the estate subject to
inheritance tax.
The primary tax, according to section 1536, subsection (c), of the Revised Administrative
Code, should be imposed at the rate of one per centum upon the first ten thousand pesos and
two per centum upon the amount by which the share exceed thirty thousand pesos, plus an
additional two hundred per centum. One per centum of ten thousand pesos is P100. Two per
centum of P18,904.19 is P378.08. Adding to these two sums an additional two hundred per
centum, or P965.16, we have as primary tax, correctly computed by the defendant, the sum
of P1,434.24.
To the primary tax thus computed should be added the sums collectible under section 1544
of the Revised Administrative Code. First should be added P1,465.31 which stands for
interest at the rate of twelve per centum per annum from March 10, 1924, the date of
delinquency, to September 15, 1932, the date of payment under protest, a period covering 8
years, 6 months and 5 days. To the tax and interest thus computed should be added the sum
of P724.88, representing a surhcarge of 25 per cent on both the tax and interest, and also
P10, the compromise sum fixed by the defendant (Exh. 29), giving a grand total of
P3,634.43.
As the plaintiff has already paid the sum of P2,052.74, only the sums of P1,581.69 is legally
due from the estate. This last sum is P390.42 more than the amount demanded by the
defendant in his counterclaim. But, as we cannot give the defendant more than what he
claims, we must hold that the plaintiff is liable only in the sum of P1,191.27 the amount
stated in the counterclaim.
The judgment of the lower court is accordingly modified, with costs against the plaintiff in
both instances. So ordered.
G.R. No. L-68385 May 12, 1989
ILDEFONSO O. ELEGADO, as Ancillary Administrator of the Testate Estate of the
late WARREN TAYLOR GRAHAM, petitioner
vs.
HON. COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE respondents.
Taxation; Assessments; Estate Tax; It is illogical to suggestthat a provisional
assessment can supersede an earlier assessment which had become final and
executory. -- It is noted that in the letter of July 3, 1980, imposing the second
assessment of P72,948.87, the Commissioner made it clear that “the aforesaidamount
is considered provisional only based on the estate taxreturn filed subject to
investigation by this Office for finaldetermination of the correct estate tax due from
the estate. Anyamount that may be found due after said investigation will beassessed
and collected later.” It is illogical to suggest that aprovisional assessment can
supersede an earlier assessmentwhich had clearly become final and executory
CRUZ, J.:
What the petitioner presents as a rather complicated problem is in reality a very
simple question from the viewpoint of the Solicitor General. We agree with the
latter. There is actually only one issue to be resolved in this action. That issue is
whether or not the respondent Court of Tax Appeals erred in dismissing the
petitioner's appeal on grounds of jurisdiction and lack of a cause of action.
Appeal from what? That indeed is the question.
But first the facts.
On March 14, 1976, Warren Taylor Graham, an American national formerly
resident in the Philippines, died in Oregon, U.S.A. 1 As he left certain shares of
stock in the Philippines, his son, Ward Graham, filed an estate tax return on
September 16, 1976, with the Philippine Revenue Representative in San Francisco,
U.S.A. 2
On the basis of this return, the respondent Commissioner of Internal Revenue
assessed the decedent's estate an estate tax in the amount of P96,509.35 on
February 9, 1978. 3 This assessment was protested on March 7, 1978, by the law
firm of Bump, Young and Walker on behalf of the estate . 4 The protest was denied
by the Commissioner on July 7, 1978. 5 No further action was taken by the estate in
pursuit of that protest.
Meanwhile, on January 18, 1977, the decedent's will had been admitted to probate
in the Circuit Court of Oregon 6 Ward Graham, the designated executor, then
appointed Ildefonso Elegado, the herein petitioner, as his attorney-in-fact for the
allowance of the will in the Philippines. 7
Pursuant to such authority, the petitioner commenced probate proceedings in the
Court of First Instance of Rizal. 8 The will was allowed on December 18, 1978, with
the petitioner as ancillary administrator. 9 As such, he filed a second estate tax
return with the Bureau of Internal Revenue on June 4, 1980. 10
On the basis of this second return, the Commissioner imposed an assessment on
the estate in the amount of P72,948.87. 11 This was protested on behalf of the
estate by the Agrava, Lucero and Gineta Law Office on August 13, 1980. 12
While this protest was pending, the Commissioner filed in the probate proceedings
a motion for the allowance of the basic estate tax of P96,509.35 as assessed on
February 9, 1978. 13 He said that this liability had not yet been paid although the
assessment had long become final and executory.
The petitioner regarded this motion as an implied denial of the protest filed on
August 13, 1980, against the second assessment of P72,948.87. 14 On this
understanding, he filed on September 15, 1981, a petition for review with the Court
of Tax Appeals challenging the said assessment. 15
The Commissioner did not immediately answer (in fact, as the petitioner stressed,
no answer was filed during a delay of 195 days) and in the end instead cancelled
the protested assessment in a letter to the decedent's estate dated March 31, 1982.
16 This cancellation was notified to the Court of Tax Appeals in a motion to dismiss
on the ground that the protest had become moot and academic. 17
The motion was granted and the petition dismissed on April 25, 1984. 18 The
petitioner then came to this Court on certiorari under Rule 45 of the Rules of Court.
The petitioner raises three basic questions, to wit, (1) whether the shares of stocks
left by the decedent should be treated as his exclusive, and not conjugal, property;
(2) whether the said stocks should be assessed as of the time of the owner's death
or six months thereafter; and (3) whether the appeal filed with the respondent court
should be considered moot and academic.
We deal first with the third issue as it is decisive of this case.
In the letter to the decedent's estate dated March 31, 1982, the Commissioner of
Internal Revenue wrote as follows:
Estate of WARREN T. GRAHAM c/o Mr. ILDEFENSO O. ELEGADO Ancillary
Administrator Philex Building cor. Brixton & Fairlane Sts. Pasig, Metro Manila
Sir:
This is with regard to the estate of the late WARREN TAYLOR
GRAHAM, who died a resident of Oregon, U.S.A. on March 14,
1976. It appears that two (2) letters of demand were issued by
this Bureau. One is for the amount of P96,509.35 based on the
first return filed, and the other in the amount of P72,948.87,
based on the second return filed.
It appears that the first assessment of P96,509.35 was issued on
February 9, 1978 on the basis of the estate tax return filed on
September 16, 1976. The said assessment was, however,
protested in a letter dated March 7, 1978 but was denied on July
7, 1978. Since no appeal was made within the regulatory period,
the same has become final.
In view thereof, it is requested that you settle the aforesaid
assessment for P96,509.35 within fifteen (15) days upon receipt
hereof to the Receivable Accounts Division, this Bureau, BIR
National Office Building, Diliman, Quezon City. The assessment
for P72,949.57 dated July 3, 1980, referred to above is hereby
cancelled.
Very truly yours,
(SGD.) RUBEN B. ANCHETA Acting Commissioner 19
It is obvious from the express cancellation of the second assessment for
P72,948.87 that the petitioner had been deprived of a cause of action as it was
precisely from this assessment that he was appealing.
In its decision, the Court of Tax Appeals said that the petition questioning the
assessment of July 3, 1980, was "premature" since the protest to the assessment
had not yet been resolved. 20 As a matter of fact it had: the said assessment had
been cancelled by virtue of the above-quoted letter. The respondent court was on
surer ground, however, when it followed with the finding that the said cancellation
had rendered the petition moot and academic. There was really no more
assessment to review.
The petitioner argues that the issuance of the second assessment on July 3, 1980,
had the effect of canceling the first assessment of February 9, 1978, and that the
subsequent cancellation of the second assessment did not have the effect of
automatically reviving the first. Moreover, the first assessment is not binding on him
because it was based on a return filed by foreign lawyers who had no knowledge of
our tax laws or access to the Court of Tax Appeals.
The petitioner is clutching at straws.
It is noted that in the letter of July 3, 1980, imposing the second assessment of
P72,948.87, the Commissioner made it clear that "the aforesaid amount is
considered provisional only based on the estate tax return filed subject to
investigation by this Office for final determination of the correct estate tax due from
the estate. Any amount that may be found due after said investigation will be
assessed and collected later." 21 It is illogical to suggest that a provisional
assessment can supersede an earlier assessment which had clearly become final
and executory.
The second contention is no less flimsy. The petitioner cannot be serious when he
argues that the first assessment was invalid because the foreign lawyers who filed
the return on which it was based were not familiar with our tax laws and procedure.
Is the petitioner suggesting that they are excused from compliance therewith
because of their ignorance?
If our own lawyers and taxpayers cannot claim a similar preference because they
are not allowed to claim a like ignorance, it stands to reason that foreigners cannot
be any less bound by our own laws in our own country. A more obvious and
shallow discrimination than that suggested by the petitioner is indeed difficult to
find.
But the most compelling consideration in this case is the fact that the first
assessment is already final and executory and can no longer be questioned at this
late hour. The assessment was made on February 9, 1978. It was protested on
March 7, 1978. The protest was denied on July 7, 1978. As no further action was
taken thereon by the decedent's estate, there is no question that the assessment
has become final and executory.
In fact, the law firm that had lodged the protest appears to have accepted its denial.
In his motion with the probate court, the respondent Commissioner stressed that "in
a letter dated January 29, 1980, the Estate of Warren Taylor Graham thru the
aforesaid foreign law firm informed claimant that they have paid said tax liability
thru the Agrava, Velarde, Lucero and Puno, Philippine law firm of 313 Buendia
Avenue Ext., Makati, Metro Manila that initiated the instant ancillary proceedings"
although he added that such payment had not yet been received. 22 This letter was
an acknowledgment by the estate of the validity and finality of the first assessment.
Significantly, it has not been denied by the petitioner.
In view of the finality of the first assessment, the petitioner cannot now raise the
question of its validity before this Court any more than he could have done so
before the Court of Tax Appeals. What the estate of the decedent should have
done earlier, following the denial of its protest on July 7, 1978, was to appeal to the
Court of Tax Appeals within the reglementary period of 30 days after it received
notice of said denial. It was in such appeal that the petitioner could then have
raised the first two issues he now raises without basis in the present petition.
The question of whether or not the shares of stock left by the decedent should be
considered conjugal property or belonging to him alone is immaterial in these
proceedings. So too is the time at which the assessment of these shares of stock
should have been made by the BIR. These questions were not resolved by the
Court of Tax Appeals because it had no jurisdiction to act on the petitioner's appeal
from an assessment that had already been cancelled. The assessment being no
longer controversial or reviewable, there was no justification for the respondent
court to rule on the petition except to dismiss it.
If indeed the Commissioner of Internal Revenue committed an error in the
computation of the estate tax, as the petitioner insists, that error can no longer be
rectified because the original assessment has long become final and executory. If
that assessment was not challenged on time and in accordance with the prescribed
procedure, that error — for error it was — was committed not by the respondents
but by the decedent's estate itself which the petitioner represents. So how can he
now complain.
WHEREFORE, the petition is DENIED, with costs against the petitioner. It is so
ordered
GR 140944 April 30, 2008
RAFAEL ARSENIO S. DIZON, in his capacity as the Judicial Administrator of the Estate
of the deceased JOSE P. FERNANDEZ, VS COURT OF TAX APPEALS and
COMMISSIONER OF INTERNAL REVENUE,
NACHURA, J.:
Before this Court is a Petition for Review on Certiorari1[1] under Rule 45 of the
Rules of Civil Procedure seeking the reversal of the Court of Appeals (CA) Decision2[2]
dated April 30, 1999 which affirmed the Decision3[3] of the Court of Tax Appeals (CTA)
dated June 17, 1997.4[4]
The Facts
On November 7, 1987, Jose P. Fernandez (Jose) died. Thereafter, a petition for
the probate of his will5[5] was filed with Branch 51 of the Regional Trial Court (RTC) of
Manila (probate court).6[6] The probate court then appointed retired Supreme Court Justice
Arsenio P. Dizon (Justice Dizon) and petitioner, Atty. Rafael Arsenio P. Dizon (petitioner)
as Special and Assistant Special Administrator, respectively, of the Estate of Jose (Estate).
In a letter7[7] dated October 13, 1988, Justice Dizon informed respondent Commissioner of
the Bureau of Internal Revenue (BIR) of the special proceedings for the Estate.
Petitioner alleged that several requests for extension of the period to file the
required estate tax return were granted by the BIR since the assets of the estate, as well as
the claims against it, had yet to be collated, determined and identified. Thus, in a letter8[8]
dated March 14, 1990, Justice Dizon authorized Atty. Jesus M. Gonzales (Atty. Gonzales)
to sign and file on behalf of the Estate the required estate tax return and to represent the
same in securing a Certificate of Tax Clearance. Eventually, on April 17, 1990, Atty.
Gonzales wrote a letter9[9] addressed to the BIR Regional Director for San Pablo City and
filed the estate tax return10[10] with the same BIR Regional Office, showing therein a NIL
estate tax liability, computed as follows:
COMPUTATION OF TAX
Conjugal Real Property (Sch. 1) P10,855,020.00
Conjugal Personal Property (Sch.2) 3,460,591.34
Taxable Transfer (Sch. 3)
Gross Conjugal Estate 14,315,611.34
 Less: Deductions (Sch. 4) 187,822,576.06 court since it had security over several real estate properties forming part of the
Net Conjugal Estate NIL Estate.16[16]
Less: Share of Surviving Spouse NIL .
Net Share in Conjugal Estate NIL
xxx However, on November 26, 1991, the Assistant Commissioner for Collection of
Net Taxable Estate NIL . the BIR, Themistocles Montalban, issued Estate Tax Assessment Notice No. FAS-E-87-91-
Estate Tax Due NIL .11[11] 003269,17[17] demanding the payment of P66,973,985.40 as deficiency estate tax, itemized
as follows:

Deficiency Estate Tax- 1987

On April 27, 1990, BIR Regional Director for San Pablo City, Osmundo G. Umali
issued Certification Nos. 205212[12] and 205313[13] stating that the taxes due on the transfer of Estate tax P31,868,414.48
real and personal properties14[14] of Jose had been fully paid and said properties may be 25% surcharge- late filing 7,967,103.62
transferred to his heirs. Sometime in August 1990, Justice Dizon passed away. Thus, on late payment 7,967,103.62
October 22, 1990, the probate court appointed petitioner as the administrator of the Interest 19,121,048.68
Estate.15[15] Compromise-non filing 25,000.00
non payment 25,000.00
Petitioner requested the probate court's authority to sell several properties forming no notice of death 15.00
part of the Estate, for the purpose of paying its creditors, namely: Equitable Banking no CPA Certificate 300.00
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) Total amount due & collectible P66,973,985.4018[18]
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

In his letter19[19] dated December 12, 1991, Atty. Gonzales moved for the
reconsideration of the said estate tax assessment. However, in her letter20[20] dated April
12, 1994, the BIR Commissioner denied the request and reiterated that the estate is liable is the detailed and complete
for the payment of P66,973,985.40 as deficiency estate tax. On May 3, 1994, petitioner listing of the properties of
received the letter of denial. On June 2, 1994, petitioner filed a petition for review21[21] the deceased (pp. 89-105, BIR rec.); "C-1" to
before respondent CTA. Trial on the merits ensued. "C-17"

5. Claims against the estate filed

As found by the CTA, the respective parties presented the following pieces of
evidence, to wit:
In the hearings conducted, petitioner did not present
testimonial evidence but merely documentary evidence consisting of the
following:
Nature of Document (sic)
Exhibits
1. Letter dated October 13, 1988
from Arsenio P. Dizon addressed
to the Commissioner of Internal
Revenue informing the latter of
the special proceedings for the
settlement of the estate (p. 126,
BIR records);
"A"
2. Petition for the probate of the
will and issuance of letter of
administration filed with the
Regional Trial Court (RTC) of
Manila, docketed as Sp. Proc.
No. 87-42980 (pp. 107-108, BIR
records);
3. Pleading entitled "Compliance"
filed with the probate Court
submitting the final inventory
of all the properties of the
deceased (p. 106, BIR records);
4. Attachment to Exh. "C" which
by Equitable Banking Corp. with
the probate Court in the amount
of P19,756,428.31 as of March 31,
1988, together with the Annexes
to the claim (pp. 64-88, BIR records); "D" to "D-24"
6. Claim filed by Banque de L'
Indochine et de Suez with the
probate Court in the amount of
US $4,828,905.90 as of January 31,
1988 (pp. 262-265, BIR records); "E" to "E-3"
7. Claim of the Manila Banking
Corporation (MBC) which as of
November 7, 1987 amounts to
P65,158,023.54, but recomputed
as of February 28, 1989 at a
total amount of P84,199,160.46;
together with the demand letter
from MBC's lawyer (pp. 194-197,
BIR records);
"F" to "F-3"
8. Demand letter of Manila Banking
Corporation prepared by Asedillo,
"B" & "B-1 Ramos and Associates Law Offices
addressed to Fernandez Hermanos,
Inc., represented by Jose P.
Fernandez, as mortgagors, in the
total amount of P240,479,693.17
as of February 28, 1989
"C" (pp. 186-187, BIR records); "G" & "G-
1"
9. Claim of State Investment
House, Inc. filed with the
RTC, Branch VII of Manila,
docketed as Civil Case No.
86-38599 entitled "State
Investment House, Inc.,
Plaintiff, versus Maritime
Company Overseas, Inc. and/or
 Jose P. Fernandez, Defendants," examiners who conducted the investigation on the estate tax case of the
(pp. 200-215, BIR records); "H" to "H- late Jose P. Fernandez. In the course of the direct examination of the
16" witness, he identified the following:

10. Letter dated March 14, 1990 Documents/

of Arsenio P. Dizon addressed Signatures
to Atty. Jesus M. Gonzales, BIR Record
(p. 184, BIR records);
"I" 1. Estate Tax Return prepared by
the BIR; p. 138
11. Letter dated April 17, 1990
from J.M. Gonzales addressed 2. Signatures of Ma. Anabella
to the Regional Director of Abuloc and Alberto Enriquez,
BIR in San Pablo City Jr. appearing at the lower
(p. 183, BIR records); Portion of Exh. "1"; -do-
"J"
3. Memorandum for the Commissioner,
12. Estate Tax Return filed by dated July 19, 1991, prepared by
the estate of the late Jose P. revenue examiners, Ma. Anabella A.
Fernandez through its authorized Abuloc, Alberto S. Enriquez and
representative, Atty. Jesus M. Raymund S. Gallardo; Reviewed by
Gonzales, for Arsenio P. Dizon, Maximino V. Tagle pp. 143-144
with attachments (pp. 177-182,
BIR records); 4. Signature of Alberto S.
"K" to "K-5" Enriquez appearing at the
13. Certified true copy of the lower portion on p. 2 of Exh. "2"; -do-
Letter of Administration
issued by RTC Manila, Branch 5. Signature of Ma. Anabella A.
51, in Sp. Proc. No. 87-42980 Abuloc appearing at the
appointing Atty. Rafael S. lower portion on p. 2 of Exh. "2"; -do-
Dizon as Judicial Administrator
of the estate of Jose P. 6. Signature of Raymund S.
Fernandez; (p. 102, CTA records) Gallardo appearing at the
and Lower portion on p. 2 of Exh. "2"; -do-
"L"
7. Signature of Maximino V.
14. Certification of Payment of Tagle also appearing on
estate taxes Nos. 2052 and p. 2 of Exh. "2"; -do-
2053, both dated April 27, 1990,
issued by the Office of the 8. Summary of revenue
Regional Director, Revenue Enforcement Officers Audit
Region No. 4-C, San Pablo Report, dated July 19, 1991; p. 139
City, with attachments
(pp. 103-104, CTA records.). "M" to "M- 9. Signature of Alberto
5" Enriquez at the lower
portion of Exh. "3"; -do-
Respondent's [BIR] counsel presented on June 26, 1995 one
witness in the person of Alberto Enriquez, who was one of the revenue 10. Signature of Ma. Anabella A.
 Abuloc at the lower this case. Besides, the documents marked as respondent's exhibits
portion of Exh. "3"; -do- formed part of the BIR records of the case.24[24]

11. Signature of Raymond S.

Gallardo at the lower
portion of Exh. "3"; -do- Nevertheless, the CTA did not fully adopt the assessment made by the BIR and it came up
with its own computation of the deficiency estate tax, to wit:
12. Signature of Maximino
V. Tagle at the lower Conjugal Real Property P
portion of Exh. "3"; -do- 5,062,016.00
Conjugal Personal Prop.
13. Demand letter (FAS-E-87-91-00), 33,021,999.93
signed by the Asst. Commissioner Gross Conjugal Estate
for Collection for the Commissioner 38,084,015.93
of Internal Revenue, demanding Less: Deductions
payment of the amount of 26,250,000.00
P66,973,985.40; and p. Net Conjugal Estate P
169 11,834,015.93
Less: Share of Surviving Spouse 5,917,007.96
14. Assessment Notice FAS-E-87-91-00 pp. 169- Net Share in Conjugal Estate P
17022[22] 5,917,007.96
Add: Capital/Paraphernal
Properties P44,652,813.66
The CTA's Ruling Less: Capital/Paraphernal
Deductions 44,652,813.66
Net Taxable Estate P 50,569,821.62
On June 17, 1997, the CTA denied the said petition for review. Citing this Court's ============
ruling in Vda. de Oate v. Court of Appeals,23[23] the CTA opined that the aforementioned
pieces of evidence introduced by the BIR were admissible in evidence. The CTA Estate Tax Due P 29,935,342.97
ratiocinated: Add: 25% Surcharge for Late Filing
Although the above-mentioned documents were not formally offered as 7,483,835.74
evidence for respondent, considering that respondent has been declared Add: Penalties for-No notice of death 15.00
to have waived the presentation thereof during the hearing on March 20, No CPA certificate 300.00
1996, still they could be considered as evidence for respondent since Total deficiency estate tax P
they were properly identified during the presentation of respondent's 37,419,493.71
witness, whose testimony was duly recorded as part of the records of =============

exclusive of 20% interest from due date of its payment until full
payment thereof
[Sec. 283 (b), Tax Code of 1987].25[25]
 On May 31, 1999, petitioner filed a Motion for Reconsideration29[29] which the
CA denied in its Resolution30[30] dated November 3, 1999.
Thus, the CTA disposed of the case in this wise:
Hence, the instant Petition raising the following issues:

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[26]
Aggrieved, petitioner, on March 2, 1998, went to the CA via a petition for
review.27[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[28]
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[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[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[33]
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[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-a35[35] and People v. Mate36[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[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[38] this Court, applying the
said doctrine, ruled that the trial court judge therein committed no error when he admitted

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

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[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[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[41] He was also subjected to cross-examination and re-cross examination by
petitioner.42[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[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[44]
 While the CTA is not governed strictly by technical rules of evidence,45[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[46] The BIR's
failure to formally offer these pieces of evidence, despite CTA's directives, is fatal to its
cause.47[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 evidence48[48] in
the hearing of February 21, 1996, but BIR's counsel failed to appear.49[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[50] Thus, in its Resolution51[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[52] In all of these proceedings, BIR was duly notified. Hence, in this
case, we are constrained to apply our ruling in Heirs of Pedro Pasag v. Parocha:53[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[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[55] condonation or remission of
debt56[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[57]
Verily, the second issue in this case involves the construction of Section 7958[58]
of the National Internal Revenue Code59[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[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[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[62] Also, as held in Propstra v.
U.S., 63[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[64] Recognizing the dispute, the
Service released Proposed Regulations in 2007 mandating that the deduction would be
limited to the actual amount paid.65[65]
In announcing its agreement with Propstra,66[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[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[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[69] Any doubt on whether a person, article or activity is taxable is generally
resolved against taxation.70[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[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-20569 August 23, 1974
JOSE B. AZNAR, in his capacity as Administrator of the Estate of the deceased,
Matias H. Aznar, petitioner,
vs.
COURT OF TAX APPEALS and COLLECTOR OF INTERNAL REVENUE, Section 38 of the National Internal Revenue Code, caused B.I.R. Examiner Honorio
respondents. Guerrero to ascertain the taxpayer's true income for said years by using the net
worth and expenditures method of tax investigation. The assets and liabilities of the
ESGUERRA, J.:p taxpayer during the above-mentioned years were ascertained and it was
Petitioner, as administrator of the estate of the deceased, Matias H. Aznar, seeks a discovered that from 1946 to 1951, his net worth had increased every year, which
review and nullification of the decision of the Court of Tax Appeals in C.T.A. Case increases in net worth was very much more than the income reported during said
No. 109, modifying the decision of respondent Commissioner of Internal Revenue years. The findings clearly indicated that the taxpayer did not declare correctly the
and ordering the petitioner to pay the government the sum of P227,691.77 income reported in his income tax returns for the aforesaid years.
representing deficiency income taxes for the years 1946 to 1951, inclusive, with the Based on the above findings of Examiner Guerrero, respondent Commissioner, in
condition that if the said amount is not paid within thirty days from the date the his letter dated November 28, 1952, notified the taxpayer (Matias H. Aznar) of the
decision becomes final, there shall be added to the unpaid amount the surcharge of assessed tax delinquency to the amount of P723,032.66, plus compromise penalty.
5%, plus interest at the rate of 12% per annum from the date of delinquency to the The taxpayer requested a reinvestigation which was granted for the purpose of
date of payment, in accordance with Section 51 of the National Internal Revenue verifying the merits of the various objections of the taxpayer to the deficiency
Code, plus costs against the petitioner. income tax assessment of November 28, 1952.
It is established that the late Matias H. Aznar who died on May 18, 1958, After the reinvestigation, another deficiency assessment to the reduced amount of
predecessor in interest of herein petitioner, during his lifetime as a resident of Cebu P381,096.07 dated February 16, 1955, superseded the previous assessment and
City, filed his income tax returns on the cash and disbursement basis, reporting notice thereof was received by Matias H. Aznar on March 2, 1955.
therein the following: The new deficiency assessment was based on the following computations:
1946
Net Income Amount Exhibit Net income per return ........................ P9,910.94
of Tax Add: Under declared income .............. 22,559.94
Paid Net income per investigation............... 32,470.45
Deduct: Income tax liability
P12,822.00 P114.66 pp. 85-88 B.I.R. per return as assessed ...................................................... 114.66
rec. Balance of tax due ........................................................... P3,687.10
Add: 50% surcharge ........................................................ 1,843.55
DEFICIENCY INCOME TAX ...................................... P5,530.65
9,910.94 114.66 38-A (pp. 329-
1947
332 B.I.R rec.)
Net income per return ..................................................... P10,200.00
Add: Under declared income ............................................ 90,413.56
10,200.00 132.00 39 (pp. 75-78 Net income per reinvestigation ....................................... P100,613.56
B.I.R rec.) Deduct: Personal and additional exemption ...................... 7,000.00
Amount of income subject to tax ...................................... P93,613.56
9,148.34 68.90 40 (pp. 70-73 Total tax liability ............................................................... P24,753.15
B.I.R. rec.) Deduct: Income tax liability per return as assessed ............ 132.00
Balance of tax due ........................................................... P24,621.15
Add: 50% surcharge ........................................................ 12,310.58 DEFICIENCY
8,990.66 59.72 41 (pp. 64-67 INCOME TAX ...................................... P36,931.73
B.I.R. rec.) 1948
Net income per return ...................................................... P9,148.34
8,364.50 28.22 42 (pp. 59-62, Add: Under declared income ............................................. 15,624.63
BIR rec.) Net income per reinvestigation .......................................... P24,772.97
Deduct: Personal and additional exemptions ...................... 7,000.00
6,800.00 none 43 (pp. 54-57 BIR Amount of income subject to tax ....................................... P17,772.97
rec.). Total tax liability ............................................................... 2,201.40
Deduct: Income tax liability per return as assessed ............ 68.90
The Commissioner of Internal Revenue having his doubts on the veracity of the Balance of tax due ........................................................... P2,132.500
reported income of one obviously wealthy, pursuant to the authority granted him by
Add: 50% surcharge ........................................................ 1,066.25 DEFICIENCY
INCOME TAX ...................................... P3,198.75
1949
Net income per return ....................................................... P9,990.66
Add: Under declared income ............................................. 105,418.53
Net income per reinvestigation .......................................... 114,409.19
Deduct: Personal and additional exemptions ...................... P7,000.00
Amount of income subject to tax ....................................... P107,409.19
Total tax liability ............................................................... P30,143.68
Deduct: Income tax liability per return as assessed ............. 59.72
Balance of tax due ............................................................ P30,083.96
Add: 50% surcharge ......................................................... 15,041.98 DEFICIENCY
INCOME TAX ....................................... P45,125.94
1950
Net income per return ....................................................... P8,364.50
Add: Under declared income ............................................. 365,578.76
Net income per reinvestigation .......................................... P373,943.26
Deduct: Personal and additional exemptions ...................... 7,800.00
Amount of income subject to tax ....................................... P366,143.26
Total tax liability ............................................................... P185,883.00
Deduct: Income tax liability per return as assessed ............. 28.00
Balance of tax due ............................................................ P185,855.00
Add: 50% surcharge ......................................................... 92,928.00 DEFICIENCY
INCOME TAX ....................................... P278,783.00
1951
Net income per return ........................................................ P6,800.00
Add: Under declared income ............................................... 33,355.80
Net income per reinvestigation ............................................ P40,155.80
Deduct: Personal and additional exemptions ........................ 7,200.00
Amount of income subject to tax ......................................... P32,955.80
Total tax liability .................................................................. P7,684.00
Deduct: Income tax liability per return as assessed ............... - o - .
Balance of tax due .............................................................. P7,684.00
Add: 50% surcharge ........................................................... 3,842.00 DEFICIENCY
INCOME TAX .......................................... P11,526.00
SUMMARY
1946 .... P5,530.65
1947 .... 36,931.73
1948 .... 3,198.75
1949 .... 45,125.94
1950 .... 278,783.00
1951 .... 11,526.00
Total .... P381,096.07
In determining the unreported income, the respondent Commissioner of Internal
Revenue resorted to the networth method which is based on the following
computations:
1945
Real estate inventory ................................ P64,738.00
Other assets ............................................. 37,606.87
Total assets ............................................ P102,344.87
Less: Depreciation allowed ...................... 2,027.00
Networth as of Dec. 31, 1945 ................ P100,316.97
1946
Real estate inventory ................................. P86,944.18
Other assets ............................................. 60,801.65
Total assets ............................................. P147,745.83
Less: Depreciation allowed ...................... 4,875.41
Net assets ................................................ P142,870.42
Less: Liabilities .................. P17,000.00
Net Worth as of
Jan. 1, 1946 ................... P100,316.97 P117,316.97
Increase in networth ................................. 25,553.45
Add: Estimated living expenses ................. 6,917.00
Net income .............................................. P32,470.45
1947
Real estate inventory .................................. P237,824.18
Other assets ............................................... 54,495.52
Total assets ............................................... P292,319.70
Less: Depreciation allowed ......................... 12,835.72
Net assets .................................................. 279,483.98
Less: Liabilities ................... P60,000.00
Networth as of
Jan. 1, 1947 ........................ 125,870.42 P185,870.42
Increase in networth ................................... P93,613.56
Add: Estimated living expenses ................... 7,000.00
Net income ................................................P100,613.56
1948
Real estate inventory .................................. P244,824.18
Other assets .............................................. 118,720.60
Total assets ............................................... P363,544.78
Less: Depreciation allowed ........................ 20,936.03
Net assets ................................................. P342,608.75
Less: Liabilities ................... P105,351.80
Networth as of
Jan. 1, 1948 ...................... 219,483.98 P324,835.78
Increase in networth ................................... P17,772.97
Add: Estimated living expenses ................... 7,000.00
Net income ................................................ P24,772.97
1949
Real estate inventory ................................. P400,515.52
Investment in schools and other colleges .... 23,105.29
Other assets ............................................. 70,311.00
Total assets ............................................... P493,931.81
Less: Depreciation allowed ........................ 32,657.08
Net assets ................................................. P461.274.73
Less; Liabilities .................. P116,608.59
Networth as of
Jan. 1, 1949 ...................... 237,256.95 P353,865.54
Increase in networth .................................. P107,409.19
Add: Estimated living expenses .................. 7,000.00
Net income ............................................... P114,409.19
1950
Real estate inventory .................................. P412,465.52
Investment in Schools and
other colleges ................................ 193,460.99
October assets .......................................... 310,788.87
Total assets ............................................... P916,715.38
Less; Depreciation allowed ........................ 47,561.99
Net assets ................................................. P869,153.39
Less: Liabilities .................. P158,343.99
Networth as of Jan. 1, 1950 ... 344,666.14 P503,010.13
Increase in networth ................................... P366,143.26
Add: Estimated living expenses ................... 7,800.00
Net income ................................................. P373,943.26
1951
Real estate inventory ................................... P412,465.52
Investment in schools and other colleges ..... 214,016.21
Other assets ............................................... 320,209.40
Total assets ................................................ P946,691.13
Less: Depreciation allowed ......................... 62,466.90
Net assets .................................................. P884,224.23
Less: Liabilities ........................................... P140,459.03
Networth as of
Jan. 1, 1951 ................ 710,809.40 P851,268.43
Increase in networth .................................... P32,955.80
Add: Estimated living expenses .................... 7,200.00
Net income ................................................. P40,155.80
(Exh. 45-B, BIR rec. p. 188)
On February 20, 1953, respondent Commissioner of Internal Revenue, thru the City
Treasurer of Cebu, placed the properties of Matias H. Aznar under distraint and
levy to secure payment of the deficiency income tax in question. Matias H. Aznar
filed his petition for review of the case with the Court of Tax Appeals on April 1,
1955, with a subsequent petition immediately thereafter to restrain respondent from
collecting the deficiency tax by summary method, the latter petition being granted
on February 8, 1956, per C.T.A. resolution, without requiring petitioner to file a
bond. Upon review, this Court set aside the C.T.A. resolution and required the
petitioner to deposit with the Court of Tax Appeals the amount demanded by the
Commissioner of Internal Revenue for the years 1949 to 1951 or furnish a surety
bond for not more than double the amount.
On March 5, 1962, in a decision signed by the presiding judge and the two
associate judges of the Court of Tax Appeals, the lower court concluded that the
tax liability of the late Matias H. Aznar for the year 1946 to 1951, inclusive should
be P227,788.64 minus P96.87 representing the tax credit for 1945, or P227,691.77,
computed as follows:
1946
Net income per return .............................................. P9,910.94
Add: Under declared income ..................................... 22,559.51
Net income ............................................................ P32,470.45
Less: Personal and additional exemptions .................. 6,917.00
Income subject to tax ............................................. P25,553.45
Tax due thereon ...................................................... P3,801.76
Less: Tax already assessed ...................................... 114.66
Balance of tax due .................................................... P3,687.10
Add: 50% surcharge ................................................. 1,843.55
Deficiency income tax ................................................ P5,530.65
1947
Net income per return ............................................ P10,200.00
Add: Under declared income .................................. 57,551.19
Net income ........................................................... P67,751.19
Less: Personal and additional exemptions ............... 7,000.00
Income subject to tax ............................................. P60,751.19
Tax due thereon ..................................................... P13,420.38
Less: Tax already assessed ..................................... P132.00
Balance of tax due ................................................... P13,288.38
Add: 50% surcharge ................................................ 6,644.19
Deficiency income tax .............................................. P19,932.57
1948
Net income per return .............................................. P9,148.34
Add: Under declared income ..................................... 8,732.10
Net income ............................................................ P17,880.44
Less: Personal and additional exemptions ................. 7,000.00
Income subject to tax .............................................. P10,880.44
Tax due thereon ...................................................... P1,029.67
Less: Tax already assessed ....................................... 68.90
Balance of tax due .................................................... 960.77
Add: 50% surcharge ................................................. 480.38
Deficiency income tax ............................................... P1,441.15
1949
Net income per return ................................................. P8,990.66
Add: under declared income ......................................... 43,718.53
Net income ............................................................... P52,709.19
Less: Personal and additional exemptions .................... 7,000.00
Income subject to tax ................................................. P45,709.19
Tax due thereon ......................................................... P8,978.57
Less: Tax already assessed ......................................... 59.72
Balance of tax due ....................................................... P8,918.85
Add: 50% surcharge .................................................... 4,459.42
Deficiency income tax ................................................. P13,378.27
1950
Net income per return .................................................. P6,800.00
Add: Under declared income ......................................... 33,355.80
Net income ................................................................. P40,155.80
Less: Personal and additional exemptions ...................... 7,200.00
Income subject to tax .................................................. P32,955.80
Tax due thereon ........................................................... P7,684.00
Less: Tax already assessed ........................................... -o- .
Balance of tax due ........................................................ P7,684.00
Add: 50% surcharge .................................................... 3,842.00
Deficiency income tax .................................................. P11,526.00
1951
Net income per return ................................................... P8,364.50
Add: Under declared income ........................................ 246,449.06
Net income ............................................................... P254.813.56
Less: Personal and additional exemptions .................... 7,800.00
Income subject to tax ................................................ P247,013.56
Tax due thereon ........................................................ P117,348.00
Less: Tax already assessed ........................................ 28.00
Balance of tax due ..................................................... P117,320.00
Add: 50% surcharge .................................................. 58,660.00
Deficiency income tax ................................................ P175 980.00
SUMMARY
1946 P5,530.65
1947 19,932.57
1948 1,441.15
1949 13,378.27
1950 175,980.00
1951 11,526.00
P227,788.64.
I years provided for in Sec. 332 (a) NIRC, from the time of the discovery of the
The first vital issue to be decided here is whether or not the right of the
Commissioner of Internal Revenue to assess deficiency income taxes of the late
Matias H. Aznar for the years 1946, 1947, and 1948 had already prescribed at the
time the assessment was made on November 28, 1952.
Petitioner's contention is that the provision of law applicable to this case is the
period of five years limitation upon assessment and collection from the filing of the
returns provided for in See. 331 of the National Internal Revenue Code. He argues
that since the 1946 income tax return could be presumed filed before March 1,
1947 and the notice of final and last assessment was received by the taxpayer on
March 2, 1955, a period of about 8 years had elapsed and the five year period
provided by law (Sec. 331 of the National Internal Revenue Code) had already
expired. The same argument is advanced on the taxpayer's return for 1947, which
was filed on March 1, 1948, and the return for 1948, which was filed on February
28, 1949. Respondents, on the other hand, are of the firm belief that regarding the
prescriptive period for assessment of tax returns, Section 332 of the National
Internal Revenue Code should apply because, as in this case, "(a) In the case of a
false or fraudulent return with intent to evade tax or of a failure to file a return, the
tax may be assessed, or a proceeding in court for the collection of such tax may be
begun without assessment, at any time within ten years after the discovery of the
falsity, fraud or omission" (Sec. 332 (a) of the NIRC).
Petitioner argues that Sec. 332 of the NIRC does not apply because the taxpayer
did not file false and fraudulent returns with intent to evade tax, while respondent
Commissioner of Internal Revenue insists contrariwise, with respondent Court of
Tax Appeals concluding that the very "substantial under declarations of income for
six consecutive years eloquently demonstrate the falsity or fraudulence of the
income tax returns with an intent to evade the payment of tax."
To our minds we can dispense with these controversial arguments on facts,
although we do not deny that the findings of facts by the Court of Tax Appeals,
supported as they are by very substantial evidence, carry great weight, by resorting
to a proper interpretation of Section 332 of the NIRC. We believe that the proper
and reasonable interpretation of said provision should be that in the three different
cases of (1) false return, (2) fraudulent return with intent to evade tax, (3) failure to
file a return, the tax may be assessed, or a proceeding in court for the collection of
such tax may be begun without assessment, at any time within ten years after the
discovery of the (1) falsity, (2) fraud, (3) omission. Our stand that the law should be
interpreted to mean a separation of the three different situations of false return,
fraudulent return with intent to evade tax, and failure to file a return is strengthened
immeasurably by the last portion of the provision which segregates the situations
into three different classes, namely "falsity", "fraud" and "omission". That there is a
difference between "false return" and "fraudulent return" cannot be denied. While
the first merely implies deviation from the truth, whether intentional or not, the
second implies intentional or deceitful entry with intent to evade the taxes due.
The ordinary period of prescription of 5 years within which to assess tax liabilities
under Sec. 331 of the NIRC should be applicable to normal circumstances, but
whenever the government is placed at a disadvantage so as to prevent its lawful
agents from proper assessment of tax liabilities due to false returns, fraudulent
return intended to evade payment of tax or failure to file returns, the period of ten
falsity, fraud or omission even seems to be inadequate and should be the one
enforced.
There being undoubtedly false tax returns in this case, We affirm the conclusion of
the respondent Court of Tax Appeals that Sec. 332 (a) of the NIRC should apply
and that the period of ten years within which to assess petitioner's tax liability had
not expired at the time said assessment was made.
II
As to the alleged errors committed by the Court of Tax Appeals in not deducting
from the alleged undeclared income of the taxpayer for 1946 the proceeds from the
sale of jewelries valued at P30,000; in not excluding from other schedules of assets
of the taxpayer (a) accounts receivable from customers in the amount of P38,000
for 1948, P126,816.50 for 1950, and provisions for doubtful accounts in the amount
of P41,810.56 for 1950; (b) over valuation of hospital and dental buildings for 1949
in the amount of P32,000 and P6,191.32 respectively; (c) investment in hollow
block business in the amount of P8,603.22 for 1949; (d) over valuation of surplus
goods in the amount of P23,000 for the year 1949; (e) various lands and buildings
included in the schedule of assets for the years 1950 and 1951 in the total amount
of P243,717.42 for 1950 and P62,564.00 for 1951, these issues would depend for
their resolution on determination of questions of facts based on an evaluation of
evidence, and the general rule is that the findings of fact of the Court of Tax
Appeals supported by substantial evidence should not be disturbed upon review of
its decision (Section 2, Rule 44, Rules of Court).
On the question of the alleged sale of P30,000 worth of jewelries in 1946, which
amount petitioner contends should be deducted from the taxpayer's net worth as of
December 31, 1946, the record shows that Matias H. Aznar, when interviewed by
B.I.R. Examiner Guerrero, stated that at the beginning of 1945 he had P60,000
worth of jewelries inherited from his ancestors and were disposed off as follows:
1945, P10,000; 1946, P20,000; 1947, P10,000; 1948, P10,000; 1949, P7,000;
(Report of B.I.R. Examiner Guerrero, B.I.R. rec. pp. 90-94).
During the hearing of this case in the Court of Tax Appeals, petitioner's accountant
testified that on January 1, 1945, Matias H. Aznar had jewelries worth P60,000
which were acquired by purchase during the Japanese occupation (World War II)
and sold on various occasions, as follows: 1945, P5,000 and 1946, P30,000. To
corroborate the testimony of the accountant, Mrs. Ramona Agustines testified that
she bought from the wife of Matias H. Aznar in 1946 a diamond ring and a pair of
earrings for P30,000; and in 1947 a wrist watch with diamonds, together with
antique jewelries, for P15,000. Matias H. Aznar, on the other hand testified that in
1945, his wife sold to Sards Parino jewelries for P5,000 and question, Mr. Aznar
stated that his transaction with Sards Parino, with respect to the sale of jewelries,
amounted to P15,000.
The lower court did not err in finding material inconsistencies in the testimonies of
Matias H. Aznar and his witnesses with respect to the values of the jewelries
allegedly disposed off as stated by the witnesses. Thus, Mr. Aznar stated to the
B.I.R. examiner that jewelries worth P10,000 were sold in 1945, while his own
accountant testified that the same jewelries were sold for only P5,000. Mr. Aznar
also testified that Mrs. Agustines purchased from his wife jewelries for P35,000,
and yet Mrs. Agustines herself testified that she bought jewelries for P30,000 and
P15,000 on two occasions, or a total of P45,000.
We do not see any plausible reason to challenge the fundamentally sound basis
advanced by the Court of Tax Appeals in considering the inconsistencies of the
witnesses' testimony as material, in the following words:
We do not say that witnesses testifying on the same transaction
should give identical testimonies. Because of the frailties and the
limitations of the human mind, witnesses' statements are apt to
be inconsistent in certain points, but usually the inconsistencies
refer to the minor phases of the transaction. It is the
insignificance of the detail of an occurrence that fails to impress
the human mind. When that same mind, made to recall what
actually happened, the significant point which it failed to take
note is naturally left out. But it is otherwise as regards significant
matters, for they leave indelible imprints upon the human mind.
Hence, testimonial inconsistencies on the minor details of an
occurrence are dismissed lightly by the courts, while
discrepancies on significant points are taken seriously and weigh
adversely to the party affected thereby.
There is no sound basis for deviating from the lower court's conclusion that:
"Taxwise in view of the aforesaid inconsistencies, which we deem material and
significant, we dismiss as without factual basis petitioner's allegation that jewelries
form part of his inventory of assets for the purpose of establishing his net worth at
the beginning of 1946."
As to the accounts receivable from the United States government for the amount of
P38,254.90, representing a claim for goods commandered by the U.S. Army during
World War II, and which amount petitioner claimed should be included in his net
worth as of January 1, 1946, the Court of Tax Appeals correctly concluded that the
uncontradicted evidence showed that "the collectible accounts of Mr. Aznar from
the U.S. Government in the sum of P38,254.90 should be added to his assets
(under accounts receivable) as of January 1, 1946. As of December 31, 1947, and
December 31, 1948, the years within which the accounts were paid to him, the
'accounts receivable shall decrease by P31,362.37 and P6,892.53, respectively."
Regarding a house in Talisay Cebu, (covered by Tax Declaration No. 8165) which
was listed as an asset during the years 1945 and 1947 to 1951, but which was not
listed as an asset in 1946 because of a notation in the tax declaration that it was
reconstructed in 1947, the lower court correctly concluded that the reconstruction of
the property did not render it valueless during the time it was being reconstructed
and consequently it should be listed as an asset as of January 1, 1946, with the
same valuation as in 1945, that is P1,500.
On the question of accounts receivable from customers in the amount of P38,000
for 1948, and P123,816.58 for the years 1950 and 1951, which were included in the
assets of Mr. Aznar for those years by the respondent Commissioner of Internal
Revenue, it is very clear that those figures were taken from the statements (Exhs.
31 and 32) filed by Mr. Matias H. Aznar with the Philippine National Bank when he
was intending to obtain a loan. These statements were under oath and the natural
implication is that the information therein reflected must be the true and accurate
financial condition of the one who executed those statements. To believe the
petitioner's argument that the late Mr. Aznar included those figures in his sworn
statement only for the purpose of obtaining a bigger credit from the bank is to cast
suspicion on the character of a man who can no longer defend himself. It would be
as if pointing the finger of accusation on the late Mr. Aznar that he intentionally
falsified his sworn statements (Exhs. 31 and 32) to make it appear that there were
non-existent accounts receivable just to increase his assets by fictitious entries so
that his credit with the Philippine National Bank could be enhanced. Besides, We
do not lose sight of the fact that those statements (Exhs. 31 and 32) were executed
before this tax controversy arose and the disputable presumptions that a person is
innocent of crime or wrong; that a person intends the ordinary consequences of his
voluntary act; that a person takes ordinary care of his concerns; that private
transaction have been fair and regular; that the ordinary course of business has
been followed; that things have happened according to the ordinary course of
nature and the ordinary habits of life; that the law has been obeyed (Sec. 5, (a), (c),
(d), (p), (q), (z), (ff), Rule 131 of the Rules of Court), together with the conclusive
presumption that "whenever a party has, by his own declaration, act, or omission,
intentionally and deliberately led another to believe a particular thing true, and to
act upon such belief, he cannot, in any litigation arising out of such declaration, act
or omission, be permitted to falsify it" (Sec. 3 (a), Rule 131, Rules of Court),
convincingly indicate that the accounts receivable stated by Mr. Aznar in Exhibits
31 and 32 were true, in existence, and accurate to the very amounts mentioned.
There is no merit to petitioners argument that those statements were only for the
purpose of obtaining a bigger credit from the bank (impliedly stating that those
statements were false) and those accounts were allegedly back accounts of
students of the Southwestern Colleges and were worthless, and if collected, would
go to the funds of the school. The statement of the late Mr. Aznar that they were
accounts receivable from customers should prevail over the mere allegation of
petitioner, unsupported as they are by convincing evidence. There is no reason to
disturb the lower court's conclusion that the amounts of P38,000 and P123,816.58
were accounts receivable from customers and as such must be included as
petitioner's assets for the years indicated.
As to the questions of doubtful accounts (bad debts), for the amount of P41,810.56,
it is clear that said amount is taken from Exhibit 31, the sworn statement of financial
condition filed by Mr. Matias H. Aznar with the Philippine National Bank. The lower
court did not commit any error in again giving much weight to the statement of Mr.
Aznar and in concluding that inasmuch as this is an item separate and apart from
the taxpayer's accounts receivable and non-deductible expense, it should be
reverted to the accounts receivable and, consequently, considered as an asset in
1950.
On the alleged over valuation of two buildings (hospital building which respondent
Commissioner of Internal Revenue listed as an asset from 1949-1951 at the basic
valuation of P130,000, and which petitioner claims to be over valued by P32,000;
dentistry building valued by respondent Commissioner of Internal Revenue at
P36,191.34, which petitioner claims to be over valued by P6,191.34), We find no
sufficient reason to alter the conclusion of respondent Court of Tax Appeals
sustaining the respondent Commissioner of Internal Revenue's valuation of both
properties.
Respondent Commissioner of Internal Revenue based his valuation of the hospital
building on the representation of Mr. Matias H. Aznar himself who, in his letter (Exh.
35) to the Philippine National Bank dated September 5, 1949, stated that the
hospital building cost him P132,000. However in view of the effect of a typhoon in
1949 upon the building, the value allowed was P130,000. Exhibit 35, contrary to
petitioner's contention, should be given probative value because, although it is an
unsigned plain copy, that exhibit was taken by the investigating examiner of the
B.I.R. from the files of the Southwestern Colleges and formed part of his report of
investigation as a public official. The estimates of an architect and a civil engineer
who agreed that a value of P84,240 is fair for the hospital building, made years
after the building was constructed, cannot prevail over the petitioner's own estimate
of his property's value.
Respondent Commissioner of Internal Revenue's valuation of P36,191.34 of the
Dentistry Building is based on the letter of Mr. and Mrs. Matias H. Aznar to the
Southwestern Colleges, dated December 15, 1950, which is embodied in the
minutes of the meeting of the Board of Trustees of the Southwestern Colleges held
on May 7, 1951 (Exhibit G-1). In Exhibit 26 A, which is the cash book of the
Southwestern Colleges, this building was listed as of the same amount. Petitioner's
estimate of P30,000 for this building, based on Architect Paca's opinion, cannot
stand against the owner's estimate and that which appears in the cash book of the
Southwestern Colleges, if we take into consideration that the owner's (Mr. Matias
H. Aznar) letter was written long before this tax proceeding was initiated, while
architect Paca's estimate was made upon petitioner's request solely for the purpose
of evidence in this tax case.
In the inventory of assets of petitioner, respondent Commissioner of Internal
Revenue included the administrative building valued at P19,200 for the years 1947
and 1948, and P16,700 for the years 1949 to 1951; and a high school building
valued at P48,000 for 1947 and 1948, and P45,000 for 1949, 1950 and 1951. The
reduced valuation for the latter years are due to allowance for partial loss resulting
from the 1949 typhoon. Petitioner did not question the inclusion of these buildings
in the inventory for the years prior to 1950, but objected to their inclusion as assets
as of January 1, 1950, because both buildings were destroyed by a typhoon in
November of 1949. There is sufficient evidence (Exh. G-1, affidavit of Jesus S.
Intan, employee in the office of City Assessor of Cebu City, Exh. 18, Mr. Intan's
testimony, a copy of a letter of the City Assessor of Cebu City) to prove that the two
buildings were really destroyed by typhoon in 1949 and, therefore, should be
eliminated from the petitioner's inventory of assets beginning December 31, 1949.
On the issue of investment in the hollow blocks business, We see no compelling
reason to alter the lower court's conclusion that "whatever was spent in the hollow
blocks business is an investment, and being an investment, the same should be
treated as an asset. With respect to the amount representing the value of the
building, there is no duplication in the listing as the inventory of real property does
not include the building in question."
Respondent Commissioner of Internal Revenue included in the inventory, under the
heading of other asset, the amount of P8,663.22, treated as investment in the
hollow block business. Petitioner objects to the inclusion of P1,683.42 which was
spent on the building and in the business and of P674.35 which was spent for
labor, fuel, raw materials, office supplies etc., contending that the former amount is
a duplication of inventory (included among the list of properties) and the latter is a
business expense which should be eliminated from the list of assets.
The inclusion of expenses (labor and raw materials) as part of the hollow block
business is sanctioned in the inventory method of tax verification. It is a sound
accounting practice to include raw materials that will be used for future
manufacture. Inclusion of direct labor is also proper, as all these items are to be
embodied in a summary of assets (investment by the taxpayer credited to his
capital account as reflected in Exhibit 72-A, which is a working sheet with entries
taken from the journal of the petitioner concerning his hollow blocks business).
There is no evidence to show that there was duplication in the inclusion of the
building used for hollow blocks business as part of petitioner's investment as this
building was not included in the listing of real properties of petitioner (Exh. 45-C p.
187 B.I.R. rec.).
As to the question of the real value of the surplus goods purchased by Mr. Matias
H. Aznar from the U.S. Army, the best evidence, as observed correctly by the lower
court, is the statement of Mr. Matias H. Aznar, himself, as appearing Exh. 35 (copy
of a letter dated September 5, 1949 to the Philippine National Bank), to the effect
"as part of my assets I have different merchandise from Warehouse 35, Tacloban,
Leyte at a total cost of P43,000.00 and valued at no less than P20,000 at present
market value." Petitioner's claim that the goods should be valued at only P20,000 in
accordance with an alleged invoice is not supported by evidence since the invoice
was not presented as exhibit. The lower court's act in giving more credence to the
statement of Mr. Aznar cannot be questioned in the light of clear indications that it
was never controverted and it was given at a time long before the tax controversy
arose.
The last issue on propriety of inclusion in petitioner's assets made by respondent
Commissioner of Internal Revenue concerns several buildings which were included
in the list of petitioner's assets as of December 31, 1950. Petitioner contends that
those buildings were conveyed and ceded to Southwestern Colleges on December
15, 1950, in consideration of P100,723.99 to be paid in cash. The value of the
different buildings are listed as: hospital building, P130,000; gymnasium, P43,000;
dentistry building, P36,191.34; bodega 1, P781.18; bodega 2, P7,250; college of
law, P10,950; laboratory building, P8,164; home economics, P5,621; morgue,
P2,400; science building, P23,600; faculty house, P5,760. It is suggested that the
value of the buildings be eliminated from the real estate inventory and the sum of
P100,723.99 be included as asset as of December 31, 1950.
The lower court could not find any evidence of said alleged transfer of ownership
from the taxpayer to the Southwestern Colleges as of December 15, 1950, an
allegation which if true could easily be proven. What is evident is that those
buildings were used by the Southwestern Colleges. It is true that Exhibit G-1 shows
that Mr. and Mrs. Matias H. Aznar offered those properties in exchange for shares
of stocks of the Southwestern Colleges, and Exhibit "G" which is the minutes of the
meeting of the Board of Trustees of the Southwestern Colleges held on August 6,
1951, shows that Mr. Aznar was amenable to the value fixed by the board of
trustees and that he requested to be paid in cash instead of shares of stock. But
those are not sufficient evidence to prove that transfer of ownership actually
happened on December 15, 1950. Hence, the lower court did not commit any error
in sustaining the respondent Commissioner of Internal Revenue's act of including
those buildings as part of the assets of petitioner as of December 31, 1950.
Petitioner also contends that properties allegedly ceded to the Southwestern
Colleges in 1951 for P150,000 worth of shares of stocks, consisting of: land,
P22,684; house, P13,700; group of houses, P8,000; building, P12,000; nurses
home, P4,100; nurses home, P2,080, should be excluded from the inventory of
assets as of December 31, 1951. The evidence (Exh. H), however, clearly shows
that said properties were formally conveyed to the Southwestern Colleges only on
September 25, 1952. Undoubtedly, petitioner was the owner of those properties
prior to September 25, 1952 and said properties should form part of his assets as
of December 31, 1951.
The uncontested portions of the lower court's decision consisting of its conclusions
that library books valued at P7,041.03, appearing in a journal of the Southwestern
Colleges marked as' Exhibit 25-A, being an investment, should be treated as an
asset beginning December 31, 1950; that the expenses for construction to the
amount of P113,353.70, which were spent for the improvement of the buildings
appearing in Exhibit 24 are deemed absorbed in the increased value of the
buildings as appraised by respondent Commissioner of Internal Revenue at cost
after improvements were made, and should be taken out as additional assets; that
the amount receivable of P5,776 from a certain Benito Chan should be treated as
petitioner's asset but the amount of P5,776 representing the value of a house and
lot given as collateral to secure said loan should not be considered as an asset of
petitioner since to do so would result in a glaring duplication of items, are all
affirmed. There seems to be no controversy as to the rest of the items listed in the
inventory of assets.
III
The second issue which appears to be of vital importance in this case centers on
the lower court's imposition of the fraud penalty (surcharge of 50% authorized in
Section 72 of the Tax Code). The petitioner insists that there might have been false
returns by mistake filed by Mr. Matias H. Aznar as those returns were prepared by
his accountant employees, but there were no proven fraudulent returns with intent
to evade taxes that would justify the imposition of the 50% surcharge authorized by
law as fraud penalty.
The lower court based its conclusion that the 50% fraud penalty must be imposed
on the following reasoning: .
It appears that Matias H. Aznar declared net income of
P9,910.94, P10,200, P9,148.34, P8,990.66, P8,364.50 and
P6,800 for the years 1946, 1947, 1948, 1949, 1950 and 1951,
respectively. Using the net worth method of determining the net
income of a taxpayer, we find that he had net incomes of
P32,470.45, P67,751.19, P17,880.44, P52,709.11, P254,813.56
and P40,155.80 during the respective years 1946, 1947, 1948,
1949, 1950, and 1951. In consequence, he underdeclared his
income by 227% for 1946, 564% for 1947, 95%, for 1948, 486%
for 1949, 2,946% for 1950 and 490% for 1951. These substantial
under declarations of income for six consecutive years eloquently
demonstrate the falsity or fraudulence of the income tax return
with an intent to evade the payment of tax. Hence, the imposition
of the fraud penalty is proper (Perez vs. Court of Tax Appeals,
G.R. No. L-10507, May 30, 1958). (Emphasis supplied)
As could be readily seen from the above rationalization of the lower court, no
distinction has been made between false returns (due to mistake, carelessness or
ignorance) and fraudulent returns (with intent to evade taxes). The lower court
based its conclusion on the petitioner's alleged fraudulent intent to evade taxes on
the substantial difference between the amounts of net income on the face of the
returns as filed by him in the years 1946 to 1951 and the net income as determined
by the inventory method utilized by both respondents for the same years. The lower
court based its conclusion on a presumption that fraud can be deduced from the
very substantial disparity of incomes as reported and determined by the inventory
method and on the similarity of consecutive disparities for six years. Such a basis
for determining the existence of fraud (intent to evade payment of tax) suffers from
an inherent flaw when applied to this case. It is very apparent here that the
respondent Commissioner of Internal Revenue, when the inventory method was
resorted to in the first assessment, concluded that the correct tax liability of Mr.
Aznar amounted to P723,032.66 (Exh. 1, B.I.R. rec. pp. 126-129). After a
reinvestigation the same respondent, in another assessment dated February 16,
1955, concluded that the tax liability should be reduced to P381,096.07. This is a
crystal-clear, indication that even the respondent Commissioner of Internal
Revenue with the use of the inventory method can commit a glaring mistake in the
assessment of petitioner's tax liability. When the respondent Court of Tax Appeals
reviewed this case on appeal, it concluded that petitioner's tax liability should be
only P227,788.64. The lower court in three instances (elimination of two buildings in
the list of petitioner's assets beginning December 31, 1949, because they were
destroyed by fire; elimination of expenses for construction in petitioner's assets as
duplication of increased value in buildings, and elimination of value of house and lot
in petitioner's assets because said property was only given as collateral) supported
petitioner's stand on the wrong inclusions in his lists of assets made by the
respondent Commissioner of Internal Revenue, resulting in the very substantial
reduction of petitioner's tax liability by the lower court. The foregoing shows that it
was not only Mr. Matias H. Aznar who committed mistakes in his report of his
income but also the respondent Commissioner of Internal Revenue who committed
mistakes in his use of the inventory method to determine the petitioner's tax liability.
The mistakes committed by the Commissioner of Internal Revenue which also
involve very substantial amounts were also repeated yearly, and yet we cannot
presume therefrom the existence of any taint of official fraud.
From the above exposition of facts, we cannot but emphatically reiterate the well
established doctrine that fraud cannot be presumed but must be proven. As a
corollary thereto, we can also state that fraudulent intent could not be deduced from
mistakes however frequent they may be, especially if such mistakes emanate from
erroneous entries or erroneous classification of items in accounting methods
utilized for determination of tax liabilities The predecessor of the petitioner
undoubtedly filed his income tax returns for "the years 1946 to 1951 and those tax
returns were prepared for him by his accountant and employees. It also appears
that petitioner in his lifetime and during the investigation of his tax liabilities
cooperated readily with the B.I.R. and there is no indication in the record of any act
of bad faith committed by him.
The lower court's conclusion regarding the existence of fraudulent intent to evade
payment of taxes was based merely on a presumption and not on evidence
establishing a willful filing of false and fraudulent returns so as to warrant the
imposition of the fraud penalty. The fraud contemplated by law is actual and not
constructive. It must be intentional fraud, consisting of deception willfully and
deliberately done or resorted to in order to induce another to give up some legal
right. Negligence, whether slight or gross, is not equivalent to the fraud with intent
to evade the tax contemplated by the law. It must amount to intentional wrong-
doing with the sole object of avoiding the tax. It necessarily follows that a mere
mistake cannot be considered as fraudulent intent, and if both petitioner and
respondent Commissioner of Internal Revenue committed mistakes in making
entries in the returns and in the assessment, respectively, under the inventory
method of determining tax liability, it would be unfair to treat the mistakes of the
petitioner as tainted with fraud and those of the respondent as made in good faith.
We conclude that the 50% surcharge as fraud penalty authorized under Section 72
of the Tax Code should not be imposed, but eliminated from the income tax
deficiency for each year from 1946 to 1951, inclusive. The tax liability of the
petitioner for each year should, therefore, be:
1946 P 3,687.10
1947 13,288.38
1948 960.77
1949 8,918.85
1950 117,320.00
1951 7,684.00
P151,859.10
The total sum of P151,859.10 should be decreased by P96.87 representing the tax
credit for 1945, thereby leaving a balance of P151,762.23.
WHEREFORE, the decision of the Court of Tax Appeals is modified in so far as the
imposition of the 50% fraud penalty is concerned, and affirmed in all other respects.
The petitioner is ordered to pay to the Commissioner of Internal Revenue, or his
duly authorized representative, the sum of P151,762.23, representing deficiency
income taxes for the years 1946 to 1951, inclusive, within 30 days from the date
this decision becomes final. If the said amount is not paid within said period, there
shall be added to the unpaid amount the surcharge of 5%, plus interest at the rate
of 12% per annum from the date of delinquency to the date of payment, in
accordance with Section 51 of the National Internal Revenue Code.
With costs against the petitioner.
[G.R. No. 138485. September 10, 2001]
DR . FELISA L. VDA. DE SAN AGUSTIN, in substitution of JOSE Y. FERIA, in his
capacity as Executor of the Estate of JOSE SAN AGUSTIN, petitioner, vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION
VITUG, J.:
Before the Court is a petition for review seeking to set aside the decision of 24 February
1999 of the Court of Appeals, as well as its resolution of 27 April 1999, in CA-G.R. SP No.
34156, which has reversed that of the Court of Tax Appeals in CTA Case No. 4956, entitled
Jose Y. Feria, in his capacity as Executor of the Estate of Jose San Agustin versus
Commissioner of Internal Revenue. The tax courts decision has modified the deficiency
assessment of the Commission of Internal Revenue for surcharge, interests and other
penalties imposed against the estate of the late Jose San Agustin.
The facts of the case narrated by the appellate court would appear, by and large, to be
uncontroverted; thus viz:
Atty. Jose San Agustin of 2904 Kakarong St., Olympia, Makati died on June 27, 1990
leaving his wife Dra. Felisa L. San Agustin as sole heir. He left a holographic will executed
on April 21, 1980 giving all his estate to his widow, and naming retired Justice Jose Y.
Feria as Executor thereof.
Probate proceedings were instituted on August 22, 1990, in the Regional Trial Court (RTC)
of Makati, Branch 139, docketed as Sp. Proc. No. M-2554. Pursuantly, notice of decedents
death was sent to the Commissioner of Internal Revenue on August 30, 1990.
On September 3, 1990, an estate tax return reporting an estate tax due of P1,676,432.00 was
filed on behalf of the estate, with a request for an extension of two years for the payment of
the tax, inasmuch as the decedents widow (did) not personally have sufficient funds, and
that the payment (would) have to come from the estate.
In his letter/answer, dated September 4, 1990, BIR Deputy Commissioner Victor A.
Deoferio, Jr., granted the heirs an extension of only six (6) months, subject to the imposition
of penalties and interests under Sections 248 and 249 of the National Internal Revenue
Code, as amended.
In the probate proceedings, on October 11, 1990, the RTC allowed the will and appointed
Jose Feria as Executor of the estate. On December 5, 1990, the executor submitted to the
probate court an inventory of the estate with a motion for authority to withdraw funds for
the payment of the estate tax. Such authority was granted by the probate court on March 5,
1991. Thereafter, on March 8, 1991, the executor paid the estate tax in the amount of
P1,676,432 as reported in the Tax Return filed with the BIR. This was well within the six
(6) months extension period granted by the BIR.
On September 23, 1991, the widow of the deceased, Felisa L. San Agustin, received a Pre-
Assessment Notice from the BIR, dated August 29, 1991, showing a deficiency estate tax of
P538,509.50, which, including surcharge, interest and penalties, amounted to P976,540.00.
On October 1, 1991, within the ten-day period given in the pre-assessment notice, the
executor filed a letter with the petitioner Commissioner expressing readiness to pay the
basic deficiency estate tax of P538,509.50 as soon as the Regional Trial Court approves
withdrawal thereof, but, requesting that the surcharge, interest, and other penalties,
amounting to P438,040.38 be waived, considering that the assessed deficiency arose only
on account of the difference in zonal valuation used by the Estate and the BIR, and that the
estate tax due per return of P1,676,432.00 was already paid in due time within the extension
period.
On October 4, 1991, the Commissioner issued an Assessment Notice reiterating the demand
in the pre-assessment notice and requesting payment on or before thirty (30) days upon
receipt thereof.
In a letter, dated October 31, 1991, the executor requested the Commissioner a
reconsideration of the assessment of P976,549.00 and waiver of the surcharge, interest, etc.
On December 18, 1991, the Commissioner accepted payment of the basic deficiency tax in
the amount of P538,509.50 through its Receivable Accounts Billing Division.
The request for reconsideration was not acted upon until January 21, 1993, when the
executor received a letter, dated September 21, 1992, signed by the Commissioner, stating
that there is no legal justification for the waiver of the interests, surcharge and compromise
penalty in this case, and requiring full payment of P438,040.38 representing such charges
within ten (10) days from receipt thereof.
In view thereof, the respondent estate paid the amount of P438,040.38 under protest on
January 25, 1993.
On February 18, 1993, a Petition for Review was filed by the executor with the CTA with
the prayer that the Commissioners letter/decision, dated September 21, 1992 be reversed
and that a refund of the amount of P438,040.38 be ordered.
The Commissioner opposed the said petition, alleging that the CTAs jurisdiction was not
properly invoked inasmuch as no claim for a tax refund of the deficiency tax collected was
filed with the Bureau of Internal Revenue before the petition was filed, in violation of
Sections 204 and 230 of the National Internal Revenue Code. Moreover, there is no
statutory basis for the refund of the deficiency surcharges, interests and penalties charged by
the Commissioner upon the estate of the decedent.
Upholding its jurisdiction over the dispute, the CTA rendered its Decision, dated April 21,
1994, modifying the CIRs assessment for surcharge, interests and other penalties from
P438,040.38 to P13,462.74, representing interest on the deficiency estate tax, for which
reason the CTA ordered the reimbursement to the respondent estate the balance of
P423,577.64, to wit:
`WHEREFORE, respondents deficiency assessment for surcharge, interests, and other
penalties is hereby modified and since petitioner has clearly paid the full amount of
P438,040.38, respondent is hereby ordered to refund to the Estate of Jose San Agustin the
overpayment amounting to P423,577.64.i[1]
On 30 May 1994, the decision of the Court of Tax Appeals was appealed by the
Commissioner of Internal Revenue to the Court of Appeals. There, the petition for review
raised the following issues:
1. Whether respondent Tax Court has jurisdiction to take cognizance of the case
considering the failure of private respondent to comply with the mandatory requirements of
Sections 204 and 230 of the National Internal Revenue Code.
2. Whether or not respondent Tax Court was correct in ordering the refund to the
Estate of Jose San Agustin the reduced amount of P423,577.64 as alleged overpaid
surcharge, interests and compromise penalty imposed on the basic deficiency estate tax of
P538,509.50 due on the transmission of the said Estate to the sole heir in 1990.ii[2]
In its decision of 24 February 1999, the Court of Appeals granted the petition of the
Commissioner of Internal Revenue and held that the Court of Tax Appeals did not acquire
jurisdiction over the subject matter and that, accordingly, its decision was null and void.
Hence, the instant petition where petitioner submits that -
1. The filing of a claim for refund [is] not essential before the filing of the petition
for review.
2. The imposition by the respondent of surcharge, interest and penalties on the
deficiency estate tax is not in accord with the law and therefore illegal.iii[3]
The Court finds the petition partly meritorious.
The case has a striking resemblance to the controversy in Roman Catholic Archbishop of
Cebu vs. Collector of Internal Revenue.iv[4]
The petitioner in that case paid under protest the sum of P5,201.52 by way of income tax,
surcharge and interest and, forthwith, filed a petition for review before the Court of Tax
Appeals. Then respondent Collector (now Commissioner) of Internal Revenue set up
several defenses, one of which was that petitioner had failed to first file a written claim for
refund, pursuant to Section 306 of the Tax Code, of the amounts paid. Convinced that the
lack of a written claim for refund was fatal to petitioners recourse to it, the Court of Tax
Appeals dismissed the petition for lack of jurisdiction. On appeal to this Court, the tax
courts ruling was reversed; the Court held:
We agree with petitioner that Section 7 of Republic Act No. 1125, creating the Court of Tax
Appeals, in providing for appeals from -
`(1) Decisions of the Collector of Internal Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties imposed in relation
thereto, or other matters arising under the National Internal Revenue Code or other law or
part of the law administered by the Bureau of Internal Revenue -
allows an appeal from a decision of the Collector in cases involving `disputed assessments
as distinguished from cases involving `refunds of internal revenue taxes, fees or other
charges, x x x; that the present action involves a disputed assessment; because from the time
petitioner received assessments Nos. 17-EC-00301-55 and 17-AC-600107-56 disallowing
certain deductions claimed by him in his income tax returns for the years 1955 and 1956, he
already protested and refused to pay the same, questioning the correctness and legality of
such assessments; and that the petitioner paid the disputed assessments under protest before
filing his petition for review with the Court a quo, only to forestall the sale of his properties
that had been placed under distraint by the respondent Collector since December 4, 1957.
To hold that the taxpayer has now lost the right to appeal from the ruling on the disputed
assessment but must prosecute his appeal under section 306 of the Tax Code, which
requires a taxpayer to file a claim for refund of the taxes paid as a condition precedent to his
right to appeal, would in effect require of him to go through a useless and needless
ceremony that would only delay the disposition of the case, for the Collector (now
Commissioner) would certainly disallow the claim for refund in the same way as he
disallowed the protest against the assessment. The law, should not be interpreted as to result
in absurdities.v[5]
The Court sees no cogent reason to abandon the above dictum and to require a useless
formality that can serve the interest of neither the government nor the taxpayer. The tax
court has aptly acted in taking cognizance of the taxpayers appeal to it.
On the second issue, the National Internal Revenue Code, relative to the imposition of
surcharges, interests, and penalties, provides thusly:
Sec. 248. Civil Penalties. -
(a) There shall be imposed, in addition to the tax required to be paid, a penalty
equivalent to twenty-five percent (25%) of the amount due, in the following cases:
(1) Failure to file any return and pay the tax due thereon as required under the
provisions of this Code or rules and regulations on the date prescribed; or
(2) Unless otherwise authorized by the Commissioner, filing a return with an internal
revenue officer other than those with whom the return is required to be filed; or
(3) Failure to pay the deficiency tax within the time prescribed for its payment in the
notice of assessment; or
(4) Failure to pay the full or part of the amount of tax shown on any return required to
be filed under the provisions of this Code or rules and regulations, or the full amount of tax
due for which no return is required to be filed, on or before the date prescribed for its
payment.
Sec. 249. Interest. -
(A) In General. - There shall be assessed and collected on any unpaid amount of tax,
interest at the rate of twenty percent (20%) per annum, or such higher rate as may be
prescribed by rules and regulations, from the date prescribed for payment until the amount
is fully paid.
(B) Deficiency Interest. - Any deficiency in the tax due, as the term is defined in this
Code, shall be subject to the interest prescribed in Subsection (A) hereof, which interest
shall be assessed and collected from the date prescribed for its payment until the full
payment thereof.
(C) Delinquency Interest. - In case of failure to pay:
(1) The amount of the tax due on any return to be filed, or
(2) The amount of the tax due for which no return is required, or
(3) A deficiency tax, or any surcharge or interest thereon on the due date appearing in
the notice and demand of the Commissioner, there shall be assessed and collected on the
unpaid amount, interest at the rate prescribed in Subsection (A) hereof until the amount is
fully paid, which interest shall form part of the tax.
(D) Interest on Extended Payment. - If any person required to pay the tax is qualified
and elects to pay the tax on installment under the provisions of this Code, but fails to pay
the tax or any installment hereof, or any part of such amount or installment on or before the
date prescribed for its payment, or where the Commissioner has authorized an extension of
time within which to pay a tax or a deficiency tax or any part thereof, there shall be assessed
and collected interest at the rate hereinabove prescribed on the tax or deficiency tax or any
part thereof unpaid from the date of notice and demand until it is paid.
It would appear that, as early as 23 September 1991, the estate already received a pre-
assessment notice indicating a deficiency estate tax of P538,509.50. Within the ten-day
period given in the pre-assessment notice, respondent Commissioner received a letter from
petitioner expressing the latters readiness to pay the basic deficiency estate tax of
P538,509.50 as soon as the trial court would have approved the withdrawal of that sum
from the estate but requesting that the surcharge, interests and penalties be waived. On 04
October 1991, however, petitioner received from the Commissioner notice insisting
payment of the tax due on or before the lapse of thirty (30) days from receipt thereof. The
deficiency estate tax of P538,509.50 was not paid until 19 December 1991.vi[6]
The delay in the payment of the deficiency tax within the time prescribed for its payment in
the notice of assessment justifies the imposition of a 25% surcharge in consonance with
Section 248A(3) of the Tax Code. The basic deficiency tax in this case being P538,509.50,
the twenty-five percent thereof comes to P134,627.37. Section 249 of the Tax Code states
that any deficiency in the tax due would be subject to interest at the rate of twenty percent
(20%) per annum, which interest shall be assessed and collected from the date prescribed
for its payment until full payment is made. The computation of interest by the Court of Tax
Appeals -
Deficiency estate tax x Interest Rate x Terms
P538,509.50 20% per annum 11/2 mo./12 mos
(11/04/91 to 12/19/91)
= P13,462.74vii[7]
conforms with the law, i.e., computed on the deficiency tax from the date prescribed for its
payment until it is paid.
The Court of Tax Appeals correctly held that the compromise penalty of P20,000.00 could
not be imposed on petitioner, a compromise being, by its nature, mutual in essence. The
payment made under protest by petitioner could only signify that there was no agreement
that had effectively been reached between the parties.
Regrettably for petitioner, the need for an authority from the probate court in the payment of
the deficiency estate tax, over which respondent Commissioner has hardly any control, is
not one that can negate the application of the Tax Code provisions aforequoted. Taxes, the
lifeblood of the government, are meant to be paid without delay and often oblivious to
contingencies or conditions.
In sum, the tax liability of the estate includes a surcharge of P134,627.37 and interest of
P13,462.74 or a total of P148,090.00.
WHEREFORE, the instant petition is partly GRANTED. The deficiency assessment for
surcharge, interest and penalties is modified and recomputed to be in the amount of
P148,090.00 surcharge of P134,627.37 and interest of P13,462.74. Petitioner estate having
since paid the sum of P438,040.38, respondent Commissioner is hereby ordered to refund to
the Estate of Jose San Agustin the overpaid amount of P289,950.38. No costs.
SO ORDERED.
 "On July 8, 1993, Maria C. Tancinco (or ‘decedent’) died, leaving a 1,292 square-
meter residential lot and an old house thereon (or ‘subject property’) located at
4931 Pasay Road, Dasmariñas Village, Makati City.
G.R. No. 159694 January 27, 2006 "On the basis of a sworn information-for-reward filed on February 17, 1997 by a
certain Raymond Abad (or ‘Abad’), Revenue District Office No. 50 (South
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
Makati) conducted an investigation on the decedent’s estate (or ‘estate’).
vs.
Subsequently, it issued a Return Verification Order. But without the required
AZUCENA T. REYES, Respondent.
preliminary findings being submitted, it issued Letter of Authority No. 132963 for
x -- -- -- -- -- -- -- -- -- -- -- -- -- x the regular investigation of the estate tax case. Azucena T. Reyes (or ‘[Reyes]’),
one of the decedent’s heirs, received the Letter of Authority on March 14, 1997.
G.R. No. 163581 January 27, 2006
"On February 12, 1998, the Chief, Assessment Division, Bureau of Internal
AZUCENA T. REYES, Petitioner, Revenue (or ‘BIR’), issued a preliminary assessment notice against the estate in
vs. the amount of P14,580,618.67. On May 10, 1998, the heirs of the decedent (or
COMMISSIONER OF INTERNAL REVENUE, Respondent. ‘heirs’) received a final estate tax assessment notice and a demand letter, both
dated April 22, 1998, for the amount of P14,912,205.47, inclusive of surcharge
DECISION and interest.

PANGANIBAN, CJ.:
Under the present provisions of the Tax Code and pursuant to elementary due
process, taxpayers must be informed in writing of the law and the facts upon which
a tax assessment is based; otherwise, the assessment is void. Being invalid, the
assessment cannot in turn be used as a basis for the perfection of a tax
compromise.
"On June 1, 1998, a certain Felix M. Sumbillo (or ‘Sumbillo’) protested the
assessment [o]n behalf of the heirs on the ground that the subject property had
already been sold by the decedent sometime in 1990.
"On November 12, 1998, the Commissioner of Internal Revenue (or ‘[CIR]’)
issued a preliminary collection letter to [Reyes], followed by a Final Notice Before
Seizure dated December 4, 1998.

The Case
Before us are two consolidated1 Petitions for Review2 filed under Rule 45 of the
Rules of Court, assailing the August 8, 2003 Decision3 of the Court of Appeals
(CA) in CA-GR SP No. 71392. The dispositive portion of the assailed Decision
reads as follows:
"On January 5, 1999, a Warrant of Distraint and/or Levy was served upon the
estate, followed on February 11, 1999 by Notices of Levy on Real Property and
Tax Lien against it.
"On March 2, 1999, [Reyes] protested the notice of levy. However, on March 11,
1999, the heirs proposed a compromise settlement of P1,000,000.00.

"WHEREFORE, the petition is GRANTED. The assailed decision of the Court of
Tax Appeals is ANNULLED and SET ASIDE without prejudice to the action of
the National Evaluation Board on the proposed compromise settlement of the
Maria C. Tancinco estate’s tax liability." 4
The Facts
The CA narrated the facts as follows:
"In a letter to [the CIR] dated January 27, 2000, [Reyes] proposed to pay 50% of
the basic tax due, citing the heirs’ inability to pay the tax assessment. On March
20, 2000, [the CIR] rejected [Reyes’s] offer, pointing out that since the estate tax is
a charge on the estate and not on the heirs, the latter’s financial incapacity is
immaterial as, in fact, the gross value of the estate amounting to P32,420,360.00 is
more than sufficient to settle the tax liability. Thus, [the CIR] demanded payment
of the amount of P18,034,382.13 on or before April 15, 2000[;] otherwise, the
notice of sale of the subject property would be published.
"On April 11, 2000, [Reyes] again wrote to [the CIR], this time proposing to pay
100% of the basic tax due in the amount of P5,313,891.00. She reiterated the
proposal in a letter dated May 18, 2000.
"As the estate failed to pay its tax liability within the April 15, 2000 deadline, the
Chief, Collection Enforcement Division, BIR, notified [Reyes] on June 6, 2000
that the subject property would be sold at public auction on August 8, 2000.
"On June 13, 2000, [Reyes] filed a protest with the BIR Appellate Division.
Assailing the scheduled auction sale, she asserted that x x x the assessment, letter
of demand[,] and the whole tax proceedings against the estate are void ab initio.
She offered to file the corresponding estate tax return and pay the correct amount
of tax without surcharge [or] interest.
"Without acting on [Reyes’s] protest and offer, [the CIR] instructed the Collection
Enforcement Division to proceed with the August 8, 2000 auction sale.
Consequently, on June 28, 2000, [Reyes] filed a [P]etition for [R]eview with the
Court of Tax Appeals (or ‘CTA’), docketed as CTA Case No. 6124.
"On July 17, 2000, [Reyes] filed a Motion for the Issuance of a Writ of
Preliminary Injunction or Status Quo Order, which was granted by the CTA on
July 26, 2000. Upon [Reyes’s] filing of a surety bond in the amount of
P27,000,000.00, the CTA issued a [R]esolution dated August 16, 2000 ordering
[the CIR] to desist and refrain from proceeding with the auction sale of the subject
property or from issuing a [W]arrant of [D]istraint or [G]arnishment of [B]ank
[A]ccount[,] pending determination of the case and/or unless a contrary order is
issued.
"[The CIR] filed a [M]otion to [D]ismiss the petition on the grounds (i) that the
CTA no longer has jurisdiction over the case[,] because the assessment against the
estate is already final and executory; and (ii) that the petition was filed out of time.
In a [R]esolution dated November 23, 2000, the CTA denied [the CIR’s] motion.
"During the pendency of the [P]etition for [R]eview with the CTA, however, the
BIR issued Revenue Regulation (or ‘RR’) No. 6-2000 and Revenue Memorandum
Order (or ‘RMO’) No. 42-2000 offering certain taxpayers with delinquent
accounts and disputed assessments an opportunity to compromise their tax
liability.
"On November 25, 2000, [Reyes] filed an application with the BIR for the
compromise settlement (or ‘compromise’) of the assessment against the estate
pursuant to Sec. 204(A) of the Tax Code, as implemented by RR No. 6-2000 and
RMO No. 42-2000.
"On December 26, 2000, [Reyes] filed an Ex-Parte Motion for Postponement of
the hearing before the CTA scheduled on January 9, 2001, citing her pending
application for compromise with the BIR. The motion was granted and the hearing
was reset to February 6, 2001.
"On January 29, 2001, [Reyes] moved for postponement of the hearing set on
February 6, 2001, this time on the ground that she had already paid the
compromise amount of P1,062,778.20 but was still awaiting approval of the
National Evaluation Board (or ‘NEB’). The CTA granted the motion and reset the
hearing to February 27, 2001.
"On February 19, 2001, [Reyes] filed a Motion to Declare Application for the
Settlement of Disputed Assessment as a Perfected Compromise. In said motion,
she alleged that [the CIR] had not yet signed the compromise[,] because of
procedural red tape requiring the initials of four Deputy Commissioners on
relevant documents before the compromise is signed by the [CIR]. [Reyes] posited
that the absence of the requisite initials and signature[s] on said documents does
not vitiate the perfected compromise.
"Commenting on the motion, [the CIR] countered that[,] without the approval of
the NEB, [Reyes’s] application for compromise with the BIR cannot be considered
a perfected or consummated compromise.
"On March 9, 2001, the CTA denied [Reyes’s] motion, prompting her to file a
Motion for Reconsideration Ad Cautelam. In a [R]esolution dated April 10, 2001,
the CTA denied the [M]otion for [R]econsideration with the suggestion that[,] for
an orderly presentation of her case and to prevent piecemeal resolutions of
different issues, [Reyes] should file a [S]upplemental [P]etition for [R]eview[,]
setting forth the new issue of whether there was already a perfected compromise.
"On May 2, 2001, [Reyes] filed a Supplemental Petition for Review with the CTA,
followed on June 4, 2001 by its Amplificatory Arguments (for the Supplemental
Petition for Review), raising the following issues:
‘1. Whether or not an offer to compromise by the [CIR], with the acquiescence by
the Secretary of Finance, of a tax liability pending in court, that was accepted and
paid by the taxpayer, is a perfected and consummated compromise.
‘2. Whether this compromise is covered by the provisions of Section 204 of the
Tax Code (CTRP) that requires approval by the BIR [NEB].’
"Answering the Supplemental Petition, [the CIR] averred that an application for
compromise of a tax liability under RR No. 6-2000 and RMO No. 42-2000
requires the evaluation and approval of either the NEB or the Regional Evaluation
Board (or ‘REB’), as the case may be.
"On June 14, 2001, [Reyes] filed a Motion for Judgment on the Pleadings; the
motion was granted on July 11, 2001. After submission of memoranda, the case
was submitted for [D]ecision.
"On June 19, 2002, the CTA rendered a [D]ecision, the decretal portion of which
pertinently reads:
‘WHEREFORE, in view of all the foregoing, the instant [P]etition for [R]eview is
hereby DENIED. Accordingly, [Reyes] is hereby ORDERED to PAY deficiency
estate tax in the amount of Nineteen Million Five Hundred Twenty Four Thousand
Nine Hundred Nine and 78/100 (P19,524,909.78), computed as follows:
xxxxxxxxx
‘[Reyes] is likewise ORDERED to PAY 20% delinquency interest on deficiency
estate tax due of P17,934,382.13 from January 11, 2001 until full payment thereof
pursuant to Section 249(c) of the Tax Code, as amended.’
"In arriving at its decision, the CTA ratiocinated that there can only be a perfected
and consummated compromise of the estate’s tax liability[,] if the NEB has
approved [Reyes’s] application for compromise in accordance with RR No. 6-
2000, as implemented by RMO No. 42-2000.
"Anent the validity of the assessment notice and letter of demand against the
estate, the CTA stated that ‘at the time the questioned assessment notice and letter
of demand were issued, the heirs knew very well the law and the facts on which
the same were based.’ It also observed that the petition was not filed within the 30-
day reglementary period provided under Sec. 11 of Rep. Act No. 1125 and Sec.
228 of the Tax Code."5
Ruling of the Court of Appeals
In partly granting the Petition, the CA said that Section 228 of the Tax Code and
RR 12-99 were mandatory and unequivocal in their requirement. The assessment
notice and the demand letter should have stated the facts and the law on which
they were based; otherwise, they were deemed void.6 The appellate court held that
while administrative agencies, like the BIR, were not bound by procedural
requirements, they were still required by law and equity to observe substantive due
process. The reason behind this requirement, said the CA, was to ensure that
taxpayers would be duly apprised of -- and could effectively protest -- the basis of
tax assessments against them.7 Since the assessment and the demand were void,
the proceedings emanating from them were likewise void, and any order
emanating from them could never attain finality.
The appellate court added, however, that it was premature to declare as perfected
and consummated the compromise of the estate’s tax liability. It explained that,
where the basic tax assessed exceeded P1 million, or where the settlement offer
was less than the prescribed minimum rates, the National Evaluation Board’s
(NEB) prior evaluation and approval were the conditio sine qua non to the
perfection and consummation of any compromise. 8 Besides, the CA pointed out,
Section 204(A) of the Tax Code applied to all compromises, whether government-
initiated or not.9 Where the law did not distinguish, courts too should not
distinguish.
Hence, this Petition.10
The Issues
In GR No. 159694, petitioner raises the following issues for the Court’s
consideration:
"I.
Whether petitioner’s assessment against the estate is valid.
"II.
Whether respondent can validly argue that she, as well as the other heirs, was not
aware of the facts and the law on which the assessment in question is based, after
she had opted to propose several compromises on the estate tax due, and even
prematurely acting on such proposal by paying 20% of the basic estate tax due."11
The foregoing issues can be simplified as follows: first, whether the assessment
against the estate is valid; and, second, whether the compromise entered into is
also valid.
The Court’s Ruling
The Petition is unmeritorious.
First Issue:
Validity of the Assessment Against the Estate
The second paragraph of Section 228 of the Tax Code 12 is clear and mandatory. It
provides as follows:
"Sec. 228. Protesting of Assessment. --
xxxxxxxxx
"The taxpayers shall be informed in writing of the law and the facts on which the
assessment is made: otherwise, the assessment shall be void."
In the present case, Reyes was not informed in writing of the law and the facts on
which the assessment of estate taxes had been made. She was merely notified of
the findings by the CIR, who had simply relied upon the provisions of former
Section 22913 prior to its amendment by Republic Act (RA) No. 8424, otherwise
known as the Tax Reform Act of 1997.
First, RA 8424 has already amended the provision of Section 229 on protesting an
assessment. The old requirement of merely notifying the taxpayer of the CIR’s
findings was changed in 1998 to informing the taxpayer of not only the law, but
also of the facts on which an assessment would be made; otherwise, the
assessment itself would be invalid.
It was on February 12, 1998, that a preliminary assessment notice was issued
against the estate. On April 22, 1998, the final estate tax assessment notice, as well
as demand letter, was also issued. During those dates, RA 8424 was already in
effect. The notice required under the old law was no longer sufficient under the
new law.
To be simply informed in writing of the investigation being conducted and of the
recommendation for the assessment of the estate taxes due is nothing but a
perfunctory discharge of the tax function of correctly assessing a taxpayer. The act
cannot be taken to mean that Reyes already knew the law and the facts on which
the assessment was based. It does not at all conform to the compulsory
requirement under Section 228. Moreover, the Letter of Authority received by
respondent on March 14, 1997 was for the sheer purpose of investigation and was
not even the requisite notice under the law.
The procedure for protesting an assessment under the Tax Code is found in
Chapter III of Title VIII, which deals with remedies. Being procedural in nature,
can its provision then be applied retroactively? The answer is yes.
The general rule is that statutes are prospective. However, statutes that are
remedial, or that do not create new or take away vested rights, do not fall under the
general rule against the retroactive operation of statutes.14 Clearly, Section 228
provides for the procedure in case an assessment is protested. The provision does
not create new or take away vested rights. In both instances, it can surely be
applied retroactively. Moreover, RA 8424 does not state, either expressly or by
necessary implication, that pending actions are excepted from the operation of
Section 228, or that applying it to pending proceedings would impair vested rights.
Second, the non-retroactive application of Revenue Regulation (RR) No. 12-99 is
of no moment, considering that it merely implements the law.
A tax regulation is promulgated by the finance secretary to implement the
provisions of the Tax Code.15 While it is desirable for the government authority or
administrative agency to have one immediately issued after a law is passed, the
absence of the regulation does not automatically mean that the law itself would
become inoperative.
At the time the pre-assessment notice was issued to Reyes, RA 8424 already stated
that the taxpayer must be informed of both the law and facts on which the
assessment was based. Thus, the CIR should have required the assessment officers
of the Bureau of Internal Revenue (BIR) to follow the clear mandate of the new
law. The old regulation governing the issuance of estate tax assessment notices ran
afoul of the rule that tax regulations -- old as they were -- should be in harmony
with, and not supplant or modify, the law.16
It may be argued that the Tax Code provisions are not self-executory. It would be
too wide a stretch of the imagination, though, to still issue a regulation that would
simply require tax officials to inform the taxpayer, in any manner, of the law and
the facts on which an assessment was based. That requirement is neither difficult
to make nor its desired results hard to achieve.
Moreover, an administrative rule interpretive of a statute, and not declarative of
certain rights and corresponding obligations, is given retroactive effect as of the
date of the effectivity of the statute.17 RR 12-99 is one such rule. Being
interpretive of the provisions of the Tax Code, even if it was issued only on
September 6, 1999, this regulation was to retroact to January 1, 1998 -- a date prior
to the issuance of the preliminary assessment notice and demand letter.
Third, neither Section 229 nor RR 12-85 can prevail over Section 228 of the Tax
Code.
No doubt, Section 228 has replaced Section 229. The provision on protesting an
assessment has been amended. Furthermore, in case of discrepancy between the
law as amended and its implementing but old regulation, the former necessarily
prevails.18 Thus, between Section 228 of the Tax Code and the pertinent provisions
of RR 12-85, the latter cannot stand because it cannot go beyond the provision of
the law. The law must still be followed, even though the existing tax regulation at
that time provided for a different procedure. The regulation then simply provided
that notice be sent to the respondent in the form prescribed, and that no
consequence would ensue for failure to comply with that form.
Fourth, petitioner violated the cardinal rule in administrative law that the taxpayer
be accorded due process. Not only was the law here disregarded, but no valid
notice was sent, either. A void assessment bears no valid fruit.
The law imposes a substantive, not merely a formal, requirement. To proceed
heedlessly with tax collection without first establishing a valid assessment is
evidently violative of the cardinal principle in administrative investigations: that
taxpayers should be able to present their case and adduce supporting evidence. 19 In
the instant case, respondent has not been informed of the basis of the estate tax
liability. Without complying with the unequivocal mandate of first informing the
taxpayer of the government’s claim, there can be no deprivation of property,
because no effective protest can be made.20 The haphazard shot at slapping an
assessment, supposedly based on estate taxation’s general provisions that are
expected to be known by the taxpayer, is utter chicanery.
Even a cursory review of the preliminary assessment notice, as well as the demand
letter sent, reveals the lack of basis for -- not to mention the insufficiency of -- the
gross figures and details of the itemized deductions indicated in the notice and the
letter. This Court cannot countenance an assessment based on estimates that
appear to have been arbitrarily or capriciously arrived at. Although taxes are the
lifeblood of the government, their assessment and collection "should be made in
accordance with law as any arbitrariness will negate the very reason for
government itself."21
Fifth, the rule against estoppel does not apply. Although the government cannot be
estopped by the negligence or omission of its agents, the obligatory provision on
protesting a tax assessment cannot be rendered nugatory by a mere act of the CIR .
Tax laws are civil in nature.22 Under our Civil Code, acts executed against the
mandatory provisions of law are void, except when the law itself authorizes the
validity of those acts.23 Failure to comply with Section 228 does not only render
the assessment void, but also finds no validation in any provision in the Tax Code.
We cannot condone errant or enterprising tax officials, as they are expected to be
vigilant and law-abiding.
Second Issue:
Validity of Compromise
It would be premature for this Court to declare that the compromise on the estate
tax liability has been perfected and consummated, considering the earlier
determination that the assessment against the estate was void. Nothing has been
settled or finalized. Under Section 204(A) of the Tax Code, where the basic tax
involved exceeds one million pesos or the settlement offered is less than the
prescribed minimum rates, the compromise shall be subject to the approval of the
NEB composed of the petitioner and four deputy commissioners.
Finally, as correctly held by the appellate court, this provision applies to all
compromises, whether government-initiated or not. Ubi lex non distinguit, nec nos
distinguere debemos. Where the law does not distinguish, we should not
distinguish.
WHEREFORE, the Petition is hereby DENIED and the assailed Decision
AFFIRMED. No pronouncement as to costs.
SO ORDERED
[G.R. No. 120880. June 5, 1997]
FERDINAND R. MARCOS II, petitioner, vs. COURT OF APPEALS, THE
COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE and
HERMINIA D. DE GUZMAN, respondents.
DECISION
TORRES, JR., J.:
In this Petition for Review on Certiorari, Government action is once again assailed
as precipitate and unfair, suffering the basic and oftly implored requisites of due
process of law. Specifically, the petition assails the Decision v[1] of the Court of
Appeals dated November 29, 1994 in CA-G.R. SP No. 31363, where the said court
held:
"In view of all the foregoing, we rule that the deficiency income tax assessments
and estate tax assessment, are already final and (u)nappealable -and- the
subsequent levy of real properties is a tax remedy resorted to by the government,
sanctioned by Section 213 and 218 of the National Internal Revenue Code. This
summary tax remedy is distinct and separate from the other tax remedies (such as
Judicial Civil actions and Criminal actions), and is not affected or precluded by the
pendency of any other tax remedies instituted by the government.
WHEREFORE, premises considered, judgment is hereby rendered DISMISSING
the petition for certiorari with prayer for Restraining Order and Injunction.
No pronouncements as to costs.
SO ORDERED."
More than seven years since the demise of the late Ferdinand E. Marcos, the
former President of the Republic of the Philippines, the matter of the settlement of
his estate, and its dues to the government in estate taxes, are still unresolved, the
latter issue being now before this Court for resolution. Specifically, petitioner
Ferdinand R. Marcos II, the eldest son of the decedent, questions the actuations of
the respondent Commissioner of Internal Revenue in assessing, and collecting
through the summary remedy of Levy on Real Properties, estate and income tax
delinquencies upon the estate and properties of his father, despite the pendency of
the proceedings on probate of the will of the late president, which is docketed as
Sp. Proc. No. 10279 in the Regional Trial Court of Pasig, Branch 156.
Petitioner had filed with the respondent Court of Appeals a Petition for Certiorari
and Prohibition with an application for writ of preliminary injunction and/or
temporary restraining order on June 28, 1993, seeking to -
I. Annul and set aside the Notices of Levy on real property dated February 22,
1993 and May 20, 1993, issued by respondent Commissioner of Internal Revenue;
II. Annul and set aside the Notices of Sale dated May 26, 1993;
III. Enjoin the Head Revenue Executive Assistant Director II (Collection Service),
from proceeding with the Auction of the real properties covered by Notices of
Sale.
After the parties had pleaded their case, the Court of Appeals rendered its
Decisionv[2] on November 29, 1994, ruling that the deficiency assessments for
estate and income tax made upon the petitioner and the estate of the deceased
President Marcos have already become final and unappealable, and may thus be
enforced by the summary remedy of levying upon the properties of the late
President, as was done by the respondent Commissioner of Internal Revenue.
"WHEREFORE, premises considered judgment is hereby rendered DISMISSING
the petition for Certiorari with prayer for Restraining Order and Injunction.
No pronouncements as to cost.
SO ORDERED."
Unperturbed, petitioner is now before us assailing the validity of the appellate
court's decision, assigning the following as errors:
A. RESPONDENT COURT MANIFESTLY ERRED IN RULING THAT
THE SUMMARY TAX REMEDIES RESORTED TO BY THE GOVERNMENT
ARE NOT AFFECTED AND PRECLUDED BY THE PENDENCY OF THE
SPECIAL PROCEEDING FOR THE ALLOWANCE OF THE LATE
PRESIDENT'S ALLEGED WILL. TO THE CONTRARY, THIS PROBATE
PROCEEDING PRECISELY PLACED ALL PROPERTIES WHICH FORM
PART OF THE LATE PRESIDENT'S ESTATE IN CUSTODIA LEGIS OF THE
PROBATE COURT TO THE EXCLUSION OF ALL OTHER COURTS AND
ADMINISTRATIVE AGENCIES.
B. RESPONDENT COURT ARBITRARILY ERRED IN SWEEPINGLY
DECIDING THAT SINCE THE TAX ASSESSMENTS OF PETITIONER AND
HIS PARENTS HAD ALREADY BECOME FINAL AND UNAPPEALABLE,
THERE WAS NO NEED TO GO INTO THE MERITS OF THE GROUNDS
CITED IN THE PETITION. INDEPENDENT OF WHETHER THE TAX
ASSESSMENTS HAD ALREADY BECOME FINAL, HOWEVER,
PETITIONER HAS THE RIGHT TO QUESTION THE UNLAWFUL MANNER
AND METHOD IN WHICH TAX COLLECTION IS SOUGHT TO BE
ENFORCED BY RESPONDENTS COMMISSIONER AND DE GUZMAN.
THUS, RESPONDENT COURT SHOULD HAVE FAVORABLY
CONSIDERED THE MERITS OF THE FOLLOWING GROUNDS IN THE
PETITION:
(1) The Notices of Levy on Real Property were issued beyond the period
provided in the Revenue Memorandum Circular No. 38-68.
(2) [a] The numerous pending court cases questioning the late President's
ownership or interests in several properties (both personal and real) make the
total value of his estate, and the consequent estate tax due, incapable of exact
pecuniary determination at this time. Thus, respondents assessment of the
estate tax and their issuance of the Notices of Levy and Sale are premature,
confiscatory and oppressive.
[b] Petitioner, as one of the late President's compulsory heirs, was never
notified, much less served with copies of the Notices of Levy, contrary to the
mandate of Section 213 of the NIRC. As such, petitioner was never given an
opportunity to contest the Notices in violation of his right to due process of
law.
C. ON ACCOUNT OF THE CLEAR MERIT OF THE PETITION,
RESPONDENT COURT MANIFESTLY ERRED IN RULING THAT IT HAD
NO POWER TO GRANT INJUNCTIVE RELIEF TO PETITIONER. SECTION
219 OF THE NIRC NOTWITHSTANDING, COURTS POSSESS THE POWER
TO ISSUE A WRIT OF PRELIMINARY INJUNCTION TO RESTRAIN
RESPONDENTS COMMISSIONER'S AND DE GUZMAN'S ARBITRARY
METHOD OF COLLECTING THE ALLEGED DEFICIENCY ESTATE AND
INCOME TAXES BY MEANS OF LEVY.
The facts as found by the appellate court are undisputed, and are hereby adopted:
"On September 29, 1989, former President Ferdinand Marcos died in Honolulu,
Hawaii, USA.
On June 27, 1990, a Special Tax Audit Team was created to conduct investigations
and examinations of the tax liabilities and obligations of the late president, as well
as that of his family, associates and "cronies". Said audit team concluded its
investigation with a Memorandum dated July 26, 1991. The investigation
disclosed that the Marcoses failed to file a written notice of the death of the
decedent, an estate tax returns [sic], as well as several income tax returns covering
the years 1982 to 1986, -all in violation of the National Internal Revenue Code
(NIRC).
Subsequently, criminal charges were filed against Mrs. Imelda R. Marcos before
the Regional Trial of Quezon City for violations of Sections 82, 83 and 84 (has
penalized under Sections 253 and 254 in relation to Section 252- a & b) of the
National Internal Revenue Code (NIRC).
The Commissioner of Internal Revenue thereby caused the preparation and filing
of the Estate Tax Return for the estate of the late president, the Income Tax
Returns of the Spouses Marcos for the years 1985 to 1986, and the Income Tax
Returns of petitioner Ferdinand 'Bongbong' Marcos II for the years 1982 to 1985.
On July 26, 1991, the BIR issued the following: (1) Deficiency estate tax
assessment no. FAC-2-89-91-002464 (against the estate of the late president
Ferdinand Marcos in the amount of P23,293,607,638.00 Pesos); (2) Deficiency
income tax assessment no. FAC-1-85-91-002452 and Deficiency income tax
assessment no. FAC-1-86-91-002451 (against the Spouses Ferdinand and Imelda
Marcos in the amounts of P149,551.70 and P184,009,737.40 representing
deficiency income tax for the years 1985 and 1986); (3) Deficiency income tax
assessment nos. FAC-1-82-91-002460 to FAC-1-85-91-002463 (against petitioner
Ferdinand 'Bongbong' Marcos II in the amounts of P258.70 pesos; P9,386.40
Pesos; P4,388.30 Pesos; and P6,376.60 Pesos representing his deficiency income
taxes for the years 1982 to 1985).
The Commissioner of Internal Revenue avers that copies of the deficiency estate
and income tax assessments were all personally and constructively served on
August 26, 1991 and September 12, 1991 upon Mrs. Imelda Marcos (through her
caretaker Mr. Martinez) at her last known address at No. 204 Ortega St., San Juan,
M.M. (Annexes 'D' and 'E' of the Petition). Likewise, copies of the deficiency tax
assessments issued against petitioner Ferdinand 'Bongbong' Marcos II were also
personally and constructively served upon him (through his caretaker) on
September 12, 1991, at his last known address at Don Mariano Marcos St. corner
P. Guevarra St., San Juan, M.M. (Annexes 'J' and 'J-1' of the Petition). Thereafter,
Formal Assessment notices were served on October 20, 1992, upon Mrs. Marcos
c/o petitioner, at his office, House of Representatives, Batasan Pambansa, Quezon
City. Moreover, a notice to Taxpayer inviting Mrs. Marcos (or her duly authorized
representative or counsel), to a conference, was furnished the counsel of Mrs.
Marcos, Dean Antonio Coronel - but to no avail.
The deficiency tax assessments were not protested administratively, by Mrs.
Marcos and the other heirs of the late president, within 30 days from service of
said assessments.
On February 22, 1993, the BIR Commissioner issued twenty-two notices of levy
on real property against certain parcels of land owned by the Marcoses - to satisfy
the alleged estate tax and deficiency income taxes of Spouses Marcos.
On May 20, 1993, four more Notices of Levy on real property were issued for the
purpose of satisfying the deficiency income taxes.
On May 26, 1993, additional four (4) notices of Levy on real property were again
issued. The foregoing tax remedies were resorted to pursuant to Sections 205 and
213 of the National Internal Revenue Code (NIRC).
In response to a letter dated March 12, 1993 sent by Atty. Loreto Ata (counsel of
herein petitioner) calling the attention of the BIR and requesting that they be duly
notified of any action taken by the BIR affecting the interest of their client
Ferdinand 'Bongbong Marcos II, as well as the interest of the late president -
copies of the aforesaid notices were served on April 7, 1993 and on June 10, 1993,
upon Mrs. Imelda Marcos, the petitioner, and their counsel of record, 'De Borja,
Medialdea, Ata, Bello, Guevarra and Serapio Law Office'.
Notices of sale at public auction were posted on May 26, 1993, at the lobby of the
City Hall of Tacloban City. The public auction for the sale of the eleven (11)
parcels of land took place on July 5, 1993. There being no bidder, the lots were
declared forfeited in favor of the government.
On June 25, 1993, petitioner Ferdinand 'Bongbong' Marcos II filed the instant
petition for certiorari and prohibition under Rule 65 of the Rules of Court, with
prayer for temporary restraining order and/or writ of preliminary injunction."
It has been repeatedly observed, and not without merit, that the enforcement of tax
laws and the collection of taxes, is of paramount importance for the sustenance of
government. Taxes are the lifeblood of the government and should be collected
without unnecessary hindrance. However, such collection should be made in
accordance with law as any arbitrariness will negate the very reason for
government itself. It is therefore necessary to reconcile the apparently conflicting
interests of the authorities and the taxpayers so that the real purpose of taxation,
which is the promotion of the common good, may be achieved." v[3]
Whether or not the proper avenues of assessment and collection of the said tax
obligations were taken by the respondent Bureau is now the subject of the Court's
inquiry.
Petitioner posits that notices of levy, notices of sale, and subsequent sale of
properties of the late President Marcos effected by the BIR are null and void for
disregarding the established procedure for the enforcement of taxes due upon the
estate of the deceased. The case of Domingo vs. Garlitos v[4] is specifically cited to
bolster the argument that "the ordinary procedure by which to settle claims of
indebtedness against the estate of a deceased, person, as in an inheritance (estate)
tax, is for the claimant to present a claim before the probate court so that said court
may order the administrator to pay the amount therefor." This remedy is allegedly,
exclusive, and cannot be effected through any other means.
Petitioner goes further, submitting that the probate court is not precluded from
denying a request by the government for the immediate payment of taxes, and
should order the payment of the same only within the period fixed by the probate
court for the payment of all the debts of the decedent. In this regard, petitioner
cites the case of Collector of Internal Revenue vs. The Administratrix of the Estate
of Echarri (67 Phil 502), where it was held that:
"The case of Pineda vs. Court of First Instance of Tayabas and Collector of
Internal Revenue (52 Phil 803), relied upon by the petitioner-appellant is good
authority on the proposition that the court having control over the administration
proceedings has jurisdiction to entertain the claim presented by the government for
taxes due and to order the administrator to pay the tax should it find that the
assessment was proper, and that the tax was legal, due and collectible. And the rule
laid down in that case must be understood in relation to the case of Collector of
Customs vs. Haygood, supra., as to the procedure to be followed in a given case by
the government to effectuate the collection of the tax. Categorically stated, where
during the pendency of judicial administration over the estate of a deceased person
a claim for taxes is presented by the government, the court has the authority to
order payment by the administrator; but, in the same way that it has authority to
order payment or satisfaction, it also has the negative authority to deny the same.
While there are cases where courts are required to perform certain duties
mandatory and ministerial in character, the function of the court in a case of the
present character is not one of them; and here, the court cannot be an organism
endowed with latitude of judgment in one direction, and converted into a mere
mechanical contrivance in another direction."
On the other hand, it is argued by the BIR, that the state's authority to collect
internal revenue taxes is paramount. Thus, the pendency of probate proceedings
over the estate of the deceased does not preclude the assessment and collection,
through summary remedies, of estate taxes over the same. According to the
respondent, claims for payment of estate and income taxes due and assessed after
the death of the decedent need not be presented in the form of a claim against the
estate. These can and should be paid immediately. The probate court is not the
government agency to decide whether an estate is liable for payment of estate of
income taxes. Well-settled is the rule that the probate court is a court with special
and limited jurisdiction.
Concededly, the authority of the Regional Trial Court, sitting, albeit with limited
jurisdiction, as a probate court over estate of deceased individual, is not a trifling
thing. The court's jurisdiction, once invoked, and made effective, cannot be treated
with indifference nor should it be ignored with impunity by the very parties
invoking its authority.
In testament to this, it has been held that it is within the jurisdiction of the probate
court to approve the sale of properties of a deceased person by his prospective
heirs before final adjudication;v[5] to determine who are the heirs of the
decedent;v[6] the recognition of a natural child;v[7] the status of a woman claiming
to be the legal wife of the decedent;v[8] the legality of disinheritance of an heir by
the testator;v[9] and to pass upon the validity of a waiver of hereditary rights. v[10]
The pivotal question the court is tasked to resolve refers to the authority of the
Bureau of Internal Revenue to collect by the summary remedy of levying upon,
and sale of real properties of the decedent, estate tax deficiencies, without the
cognition and authority of the court sitting in probate over the supposed will of the
deceased.
The nature of the process of estate tax collection has been described as follows:
"Strictly speaking, the assessment of an inheritance tax does not directly involve
the administration of a decedent's estate, although it may be viewed as an incident
to the complete settlement of an estate, and, under some statutes, it is made the
duty of the probate court to make the amount of the inheritance tax a part of the
final decree of distribution of the estate. It is not against the property of decedent,
nor is it a claim against the estate as such, but it is against the interest or property
right which the heir, legatee, devisee, etc., has in the property formerly held by
decedent. Further, under some statutes, it has been held that it is not a suit or
controversy between the parties, nor is it an adversary proceeding between the
state and the person who owes the tax on the inheritance. However, under other
statutes it has been held that the hearing and determination of the cash value of the
assets and the determination of the tax are adversary proceedings. The proceeding
has been held to be necessarily a proceeding in rem. v[11]
In the Philippine experience, the enforcement and collection of estate tax, is
executive in character, as the legislature has seen it fit to ascribe this task to the
Bureau of Internal Revenue. Section 3 of the National Internal Revenue Code
attests to this:
"Sec. 3. Powers and duties of the Bureau.-The powers and duties of the Bureau of
Internal Revenue shall comprehend the assessment and collection of all national
internal revenue taxes, fees, and charges, and the enforcement of all forfeitures,
penalties, and fines connected therewith, including the execution of judgments in
all cases decided in its favor by the Court of Tax Appeals and the ordinary courts.
Said Bureau shall also give effect to and administer the supervisory and police
power conferred to it by this Code or other laws."
Thus, it was in Vera vs. Fernandezv[12] that the court recognized the liberal
treatment of claims for taxes charged against the estate of the decedent. Such
taxes, we said, were exempted from the application of the statute of non-claims,
and this is justified by the necessity of government funding, immortalized in the
maxim that taxes are the lifeblood of the government. Vectigalia nervi sunt rei
publicae - taxes are the sinews of the state.
"Taxes assessed against the estate of a deceased person, after administration is
opened, need not be submitted to the committee on claims in the ordinary course
of administration. In the exercise of its control over the administrator, the court
may direct the payment of such taxes upon motion showing that the taxes have
been assessed against the estate."
Such liberal treatment of internal revenue taxes in the probate proceedings extends
so far, even to allowing the enforcement of tax obligations against the heirs of the
decedent, even after distribution of the estate's properties.
"Claims for taxes, whether assessed before or after the death of the deceased, can
be collected from the heirs even after the distribution of the properties of the
decedent. They are exempted from the application of the statute of non-claims.
The heirs shall be liable therefor, in proportion to their share in the
inheritance."v[13]
"Thus, the Government has two ways of collecting the taxes in question. One, by
going after all the heirs and collecting from each one of them the amount of the tax
proportionate to the inheritance received. Another remedy, pursuant to the lien
created by Section 315 of the Tax Code upon all property and rights to property
belong to the taxpayer for unpaid income tax, is by subjecting said property of the
estate which is in the hands of an heir or transferee to the payment of the tax due
the estate. (Commissioner of Internal Revenue vs. Pineda, 21 SCRA 105,
September 15, 1967.)
From the foregoing, it is discernible that the approval of the court, sitting in
probate, or as a settlement tribunal over the deceased is not a mandatory
requirement in the collection of estate taxes. It cannot therefore be argued that the
Tax Bureau erred in proceeding with the levying and sale of the properties
allegedly owned by the late President, on the ground that it was required to seek
first the probate court's sanction. There is nothing in the Tax Code, and in the
pertinent remedial laws that implies the necessity of the probate or estate
settlement court's approval of the state's claim for estate taxes, before the same can
be enforced and collected.
On the contrary, under Section 87 of the NIRC, it is the probate or settlement court
which is bidden not to authorize the executor or judicial administrator of the
decedent's estate to deliver any distributive share to any party interested in the
estate, unless it is shown a Certification by the Commissioner of Internal Revenue
that the estate taxes have been paid. This provision disproves the petitioner's
contention that it is the probate court which approves the assessment and
collection of the estate tax.
If there is any issue as to the validity of the BIR's decision to assess the estate
taxes, this should have been pursued through the proper administrative and judicial
avenues provided for by law.
Section 229 of the NIRC tells us how:
"Sec. 229. Protesting of assessment.-When the Commissioner of Internal Revenue
or his duly authorized representative finds that proper taxes should be assessed, he
shall first notify the taxpayer of his findings. Within a period to be prescribed by
implementing regulations, the taxpayer shall be required to respond to said notice.
If the taxpayer fails to respond, the Commissioner shall issue an assessment based
on his findings.
Such assessment may be protested administratively by filing a request for
reconsideration or reinvestigation in such form and manner as may be prescribed
by implementing regulations within (30) days from receipt of the assessment;
otherwise, the assessment shall become final and unappealable.
If the protest is denied in whole or in part, the individual, association or
corporation adversely affected by the decision on the protest may appeal to the
Court of Tax Appeals within thirty (30) days from receipt of said decision;
otherwise, the decision shall become final, executory and demandable. (As
inserted by P.D. 1773)"
Apart from failing to file the required estate tax return within the time required for
the filing of the same, petitioner, and the other heirs never questioned the
assessments served upon them, allowing the same to lapse into finality, and
prompting the BIR to collect the said taxes by levying upon the properties left by
President Marcos.
Petitioner submits, however, that "while the assessment of taxes may have been
validly undertaken by the Government, collection thereof may have been done in
violation of the law. Thus, the manner and method in which the latter is enforced
may be questioned separately, and irrespective of the finality of the former,
because the Government does not have the unbridled discretion to enforce
collection without regard to the clear provision of law." v[14]
Petitioner specifically points out that applying Memorandum Circular No. 38-68,
implementing Sections 318 and 324 of the old tax code (Republic Act 5203), the
BIR's Notices of Levy on the Marcos properties, were issued beyond the allowed
period, and are therefore null and void:
"...the Notices of Levy on Real Property (Annexes 0 to NN of Annex C of this
Petition) in satisfaction of said assessments were still issued by respondents well
beyond the period mandated in Revenue Memorandum Circular No. 38-68. These
Notices of Levy were issued only on 22 February 1993 and 20 May 1993 when at
least seventeen (17) months had already lapsed from the last service of tax
assessment on 12 September 1991. As no notices of distraint of personal property
were first issued by respondents, the latter should have complied with Revenue
Memorandum Circular No. 38-68 and issued these Notices of Levy not earlier than
three (3) months nor later than six (6) months from 12 September 1991. In
accordance with the Circular, respondents only had until 12 March 1992 (the last
day of the sixth month) within which to issue these Notices of Levy. The Notices
of Levy, having been issued beyond the period allowed by law, are thus void and
of no effect."v[15]
We hold otherwise. The Notices of Levy upon real property were issued within the
prescriptive period and in accordance with the provisions of the present Tax Code.
The deficiency tax assessment, having already become final, executory, and
demandable, the same can now be collected through the summary remedy of
distraint or levy pursuant to Section 205 of the NIRC.
The applicable provision in regard to the prescriptive period for the assessment
and collection of tax deficiency in this instance is Article 223 of the NIRC, which
pertinently provides:
"Sec. 223. Exceptions as to a period of limitation of assessment and collection of
taxes.- (a) In the case of a false or fraudulent return with intent to evade tax or of a
failure to file a return, the tax may be assessed, or a proceeding in court for the
collection of such tax may be begun without assessment, at any time within ten
(10) years after the discovery of the falsity, fraud, or omission: Provided, That, in
a fraud assessment which has become final and executory, the fact of fraud shall
be judicially taken cognizance of in the civil or criminal action for the collection
thereof.
xxx
(c) Any internal revenue tax which has been assessed within the period of
limitation above prescribed, may be collected by distraint or levy or by a
proceeding in court within three years following the assessment of the tax.
xxx
The omission to file an estate tax return, and the subsequent failure to contest or
appeal the assessment made by the BIR is fatal to the petitioner's cause, as under
the above-cited provision, in case of failure to file a return, the tax may be assessed
at any time within ten years after the omission, and any tax so assessed may be
collected by levy upon real property within three years following the assessment of
the tax. Since the estate tax assessment had become final and unappealable by the
petitioner's default as regards protesting the validity of the said assessment, there is
now no reason why the BIR cannot continue with the collection of the said tax.
Any objection against the assessment should have been pursued following the
avenue paved in Section 229 of the NIRC on protests on assessments of internal
revenue taxes.
Petitioner further argues that "the numerous pending court cases questioning the
late president's ownership or interests in several properties (both real and personal)
make the total value of his estate, and the consequent estate tax due, incapable of
exact pecuniary determination at this time. Thus, respondents' assessment of the
estate tax and their issuance of the Notices of Levy and sale are premature and
oppressive." He points out the pendency of Sandiganbayan Civil Case Nos. 0001-
0034 and 0141, which were filed by the government to question the ownership and
interests of the late President in real and personal properties located within and
outside the Philippines. Petitioner, however, omits to allege whether the properties
levied upon by the BIR in the collection of estate taxes upon the decedent's estate
were among those involved in the said cases pending in the Sandiganbayan.
Indeed, the court is at a loss as to how these cases are relevant to the matter at
issue. The mere fact that the decedent has pending cases involving ill-gotten
wealth does not affect the enforcement of tax assessments over the properties
indubitably included in his estate.
Petitioner also expresses his reservation as to the propriety of the BIR's total
assessment of P23,292,607,638.00, stating that this amount deviates from the
findings of the Department of Justice's Panel of Prosecutors as per its resolution of
20 September 1991. Allegedly, this is clear evidence of the uncertainty on the part
of the Government as to the total value of the estate of the late President.
This is, to our mind, the petitioner's last ditch effort to assail the assessment of
estate tax which had already become final and unappealable.
It is not the Department of Justice which is the government agency tasked to
determine the amount of taxes due upon the subject estate, but the Bureau of
Internal Revenuev[16] whose determinations and assessments are presumed correct
and made in good faith.v[17] The taxpayer has the duty of proving otherwise. In the
absence of proof of any irregularities in the performance of official duties, an
assessment will not be disturbed. Even an assessment based on estimates is prima
facie valid and lawful where it does not appear to have been arrived at arbitrarily
or capriciously. The burden of proof is upon the complaining party to show clearly
that the assessment is erroneous. Failure to present proof of error in the assessment
will justify the judicial affirmance of said assessment. v[18] In this instance,
petitioner has not pointed out one single provision in the Memorandum of the
Special Audit Team which gave rise to the questioned assessment, which bears a
trace of falsity. Indeed, the petitioner's attack on the assessment bears mainly on
the alleged improbable and unconscionable amount of the taxes charged. But mere
rhetoric cannot supply the basis for the charge of impropriety of the assessments
made.
Moreover, these objections to the assessments should have been raised,
considering the ample remedies afforded the taxpayer by the Tax Code, with the
Bureau of Internal Revenue and the Court of Tax Appeals, as described earlier,
and cannot be raised now via Petition for Certiorari, under the pretext of grave
abuse of discretion. The course of action taken by the petitioner reflects his
disregard or even repugnance of the established institutions for governance in the
scheme of a well-ordered society. The subject tax assessments having become
final, executory and enforceable, the same can no longer be contested by means of
a disguised protest. In the main, Certiorari may not be used as a substitute for a
lost appeal or remedy.v[19] This judicial policy becomes more pronounced in view
of the absence of sufficient attack against the actuations of government.
On the matter of sufficiency of service of Notices of Assessment to the petitioner,
we find the respondent appellate court's pronouncements sound and resilient to
petitioner's attacks.
"Anent grounds 3(b) and (B) - both alleging/claiming lack of notice - We find,
after considering the facts and circumstances, as well as evidences, that there was
sufficient, constructive and/or actual notice of assessments, levy and sale, sent to
herein petitioner Ferdinand "Bongbong" Marcos as well as to his mother Mrs.
Imelda Marcos.
Even if we are to rule out the notices of assessments personally given to the
caretaker of Mrs. Marcos at the latter's last known address, on August 26, 1991
and September 12, 1991, as well as the notices of assessment personally given to
the caretaker of petitioner also at his last known address on September 12, 1991 -
the subsequent notices given thereafter could no longer be ignored as they were
sent at a time when petitioner was already here in the Philippines, and at a place
where said notices would surely be called to petitioner's attention, and received by
responsible persons of sufficient age and discretion.
Thus, on October 20, 1992, formal assessment notices were served upon Mrs.
Marcos c/o the petitioner, at his office, House of Representatives, Batasan
Pambansa, Q.C. (Annexes "A", "A-1", "A-2", "A-3"; pp. 207-210,
Comment/Memorandum of OSG). Moreover, a notice to taxpayer dated October 8,
1992 inviting Mrs. Marcos to a conference relative to her tax liabilities, was
furnished the counsel of Mrs. Marcos - Dean Antonio Coronel (Annex "B", p. 211,
ibid). Thereafter, copies of Notices were also served upon Mrs. Imelda Marcos, the
petitioner and their counsel "De Borja, Medialdea, Ata, Bello, Guevarra and
Serapio Law Office", on April 7, 1993 and June 10, 1993. Despite all of these
Notices, petitioner never lifted a finger to protest the assessments, (upon which the
Levy and sale of properties were based), nor appealed the same to the Court of Tax
Appeals.
There being sufficient service of Notices to herein petitioner (and his mother) and
it appearing that petitioner continuously ignored said Notices despite several
opportunities given him to file a protest and to thereafter appeal to the Court of
Tax Appeals, - the tax assessments subject of this case, upon which the levy and
sale of properties were based, could no longer be contested (directly or indirectly)
via this instant petition for certiorari."v[20]
Petitioner argues that all the questioned Notices of Levy, however, must be
nullified for having been issued without validly serving copies thereof to the
petitioner. As a mandatory heir of the decedent, petitioner avers that he has an
interest in the subject estate, and notices of levy upon its properties should have
been served upon him.
We do not agree. In the case of notices of levy issued to satisfy the delinquent
estate tax, the delinquent taxpayer is the Estate of the decedent, and not
necessarily, and exclusively, the petitioner as heir of the deceased. In the same
vein, in the matter of income tax delinquency of the late president and his spouse,
petitioner is not the taxpayer liable. Thus, it follows that service of notices of levy
in satisfaction of these tax delinquencies upon the petitioner is not required by law,
as under Section 213 of the NIRC, which pertinently states:
"xxx
...Levy shall be effected by writing upon said certificate a description of the
property upon which levy is made. At the same time, written notice of the levy
shall be mailed to or served upon the Register of Deeds of the province or city
where the property is located and upon the delinquent taxpayer, or if he be absent
from the Philippines, to his agent or the manager of the business in respect to
which the liability arose, or if there be none, to the occupant of the property in
question.
xxx"
The foregoing notwithstanding, the record shows that notices of warrants of
distraint and levy of sale were furnished the counsel of petitioner on April 7, 1993,
and June 10, 1993, and the petitioner himself on April 12, 1993 at his office at the
Batasang Pambansa.v[21] We cannot therefore, countenance petitioner's insistence
that he was denied due process. Where there was an opportunity to raise objections
to government action, and such opportunity was disregarded, for no justifiable
reason, the party claiming oppression then becomes the oppressor of the orderly
functions of government. He who comes to court must come with clean hands.
Otherwise, he not only taints his name, but ridicules the very structure of
established authority.
IN VIEW WHEREOF, the Court RESOLVED to DENY the present petition. The
Decision of the Court of Appeals dated November 29, 1994 is hereby AFFIRMED
in all respects.
SO ORDERED.
G.R. No. 208293, December 10, 2014
PHILIPPINE NATIONAL BANK, PETITIONER, VS.
CARMELITA S. SANTOS, REYME L. SANTOS, ANGEL
L. SANTOS, NONENG S. DIANCO, ET AL.,
RESPONDENTS.
[G.R. No. 208295]
LINA B. AGUILAR, PETITIONER, VS. CARMELITA S.
SANTOS, REYME L. SANTOS, ANGEL L. SANTOS,
 BUENVENIDO L. SANTOS, ET AL., RESPONDENTS.
DECISION
LEONEN, J.:
The standard of diligence required of banks is higher than the degree of diligence
of a good father of a family.
Respondents are children of Angel C. Santos who died on March 21, 1991. [1]
Sometime in May 1996, respondents discovered that their father maintained a
premium savings account with Philippine National Bank (PNB), Sta. Elena-
Marikina City Branch.[2] As of July 14, 1996, the deposit amounted to
P1,759,082.63.[3] Later, respondents would discover that their father also had a
time deposit of P1,000,000.00 with PNB.[4]
Respondents went to PNB to withdraw their father's deposit. [5]
Lina B. Aguilar, the Branch Manager of PNB-Sta. Elena-Marikina City Branch,
required them to submit the following: "(1) original or certified true copy of the
Death Certificate of Angel C. Santos; (2) certificate of payment of, or exemption
from, estate tax issued by the Bureau of Internal Revenue (BIR); (3) Deed of
Extrajudicial Settlement; (4) Publisher's Affidavit of publication of the Deed of
Extrajudicial Settlement; and (5) Surety bond effective for two (2) years and in an
amount equal to the balance of the deposit to be withdrawn." [6]
By April 26, 1998, respondents had already obtained the necessary documents. [7]
They tried to withdraw the deposit.[8] However, Aguilar informed them that the
deposit had already "been released to a certain Bernardito Manimbo (Manimbo) on
April 1, 1997."[9] An amount of PI,882,002.05 was released upon presentation of:
(a) an affidavit of self-adjudication purportedly executed by one of the
respondents, Reyme L. Santos; (b) a certificate of time deposit dated December 14,
1989 amounting to P1,000,000.00; and (c) the death certificate of Angel C. Santos,
among others.[10] A special power of attorney was purportedly executed by Reyme
L. Santos in favor of Manimbo and a certain Angel P. Santos for purposes of
withdrawing and receiving the proceeds of the certificate of time deposit. [11]
On May 20, 1998, respondents filed before the Regional Trial Court of Marikina
City a complaint for sum of money and damages against PNB, Lina B. Aguilar,
and a John Doe.[12] Respondents questioned the release of the deposit amount to
Manimbo who had no authority from them to withdraw their father's deposit and
who failed to present to PNB all the requirements for such withdrawal. [13]
Respondents prayed that they be paid: (a) the premium deposit amount; (b) the
certificate of time deposit amount; and (c) moral and exemplary damages,
attorney's fees, and costs of suit.[14]
PNB and Aguilar denied that Angel C. Santos had two separate accounts (premium
deposit account and time deposit account) with PNB.[15] They alleged that Angel
C. Santos' deposit account was originally a time deposit account that was
subsequently converted into a premium savings account.[16] They also alleged that
Aguilar did not know about Angel C. Santos' death in 1991 because she only
assumed office in 1996.[17] Manimbo was able to submit an affidavit of self-
adjudication and the required surety bond.[18] He also submitted a certificate of
payment of estate tax dated March 31, 1997.[19] All documents he submitted
appeared to be regular.[20]
PNB and Aguilar filed a third-party complaint against Manimbo, Angel P. Santos,
and Capital Insurance and Surety Co., Inc.[21]
Angel P. Santos denied having anything to do with the special power of attorney
and affidavit of self-adjudication presented by Manimbo.[22] He also alleged that
Manimbo presented the certificate of time deposit without his knowledge and
consent.[23]
Capital Insurance and Surety Co., Inc. alleged that its undertaking was to pay
claims only when persons who were unduly deprived of their lawful participation
in the estate filed an action in court for their claims.[24] It did not undertake to pay
claims resulting from PNB's negligence.[25]
In the decision[26] dated February 22, 2011, the trial court held that PNB and
Aguilar were jointly and severally liable to pay respondents the amount of
P1,882,002.05 with an interest rate of 6% starting May 20, 1998.[27] PNB and
Aguilar were also declared jointly and severally liable for moral and exemplary
damages, attorney's fees, and costs of suit.[28] Manimbo, Angel P. Santos, and
Capital Insurance and Surety Co., Inc. were held jointly and severally liable to pay
PNB P1,877,438.83 pursuant to the heir's bond and P50,000.00 as attorney's fees
and the costs of suit.[29] The dispositive portion of the trial court's decision reads:
WHEREFORE, foregoing premises considered, judgment is hereby rendered as
follows:
1. ordering the defendants PNB and LIN A B. AGUILAR jointly and
severally liable to pay the plaintiffs the amount of P1,882,002.05,
representing the face value of PNB Manager's Check No. AF-974686B as
balance of the total deposits of decedent Angel C. Santos at the time of its
issue, with interest thereon at the rate of 6% starting on May 20, 1998, the
date when the complaint was filed, until fully paid;
 2. ordering both defendants jointly and severally liable to pay plaintiffs the
amount of Php 100,000.00 as moral damages, another Php 100,000.00 as
exemplary damages and Php 50,000.00 as attorney's fees and the costs of
suit;
On the Third party complaint:
3. Ordering the third party defendants Bernardito P. Manimbo, Angel P.
Santos and Capital Insurance & Surety Co., Inc., jointly and severally
liable to pay third party plaintiff PNB, the amount of Php 1,877,438.83
pursuant to the Heir's Bond and the amount of Php 50,000.00 as attorney's
fees and the costs of suit.
SO ORDERED.[30]
The trial court found that Angel C. Santos had only one account with PNB. [31] The
account was originally a time deposit, which was converted into a premium
savings account when it was not renewed on maturity.[32] The trial court took
judicial notice that in 1989, automatic rollover of time deposit was not yet
prevailing.[33]
On the liability of PNB and Aguilar, the trial court held that they were both
negligent in releasing the deposit to Manimbo.[34] The trial court noted PNB's
failure to notify the depositor about the maturity of the time deposit and the
conversion of the time deposit into a premium savings account. [35] The trial court
also noted PNB's failure to cancel the certificate of time deposit despite
conversion.[36] PNB and Aguilar also failed to require the production of birth
certificates to prove claimants' relationship to the depositor. [37] Further, they relied
on the affidavit of self-adjudication when several persons claiming to be heirs had
already approached them previously.[38]
Aguilar filed a motion for reconsideration[39] of the February 22, 2011 Regional
Trial Court decision. This was denied in the June 21, 2011 Regional Trial Court
order.[40]
PNB and Aguilar appealed before the Court of Appeals. [41]
Aguilar contended that she was not negligent and should not have been made
jointly and severally liable with PNB.[42] She merely implemented PNB's Legal
Department's directive to release the deposit to Manimbo. [43]
PNB argued that it was not negligent.[44] The release of the deposit to Manimbo
was pursuant to an existing policy.[45] Moreover, the documents submitted by
Manimbo were more substantial than those submitted by respondents. [46]
Respondents could have avoided the incident "had they accomplished the required
documents immediately."[47]
In the decision[48] promulgated on July 25, 2013, the Court of Appeals sustained
the trial court's finding that there was only one account. [49] Angel C. Santos could
not have possibly opened the premium savings account in 1994 since he already
died in 1991.[50] The Court of Appeals also held that PNB and Aguilar were
negligent in handling the deposit.[51] The deposit amount was released to Manimbo
who did not present all the requirements, particularly the Bureau of Internal
Revenue (BIR) certification that estate taxes had already been paid.[52] They should
also not have honored the affidavit of self-adjudication.[53]
The Court of Appeals ruled that Aguilar could not escape liability by pointing her
finger at PNB's Legal Department.[54] As the Bank Manager, she should have
given the Legal Department all the necessary information that must be known in
order to protect both the depositors' and the bank's interests. [55]
The Court of Appeals removed the award of exemplary damages, upon finding that
there was no malice or bad faith.[56]
The Court of Appeals considered the deposit as an ordinary loan by the bank from
Angel C. Santos or his heirs.[57] Therefore, the deposit was a forbearance which
should earn an interest of 12% per annum.[58] The dispositive portion of the Court
of Appeals' decision reads:
WHEREFORE, premises considered, the assailed decision of the court a quo dated
February 22, 2011 is AFFIRMED with the MODIFICATIONS in that the rate of
interest shall be twelve percent (12%) per annum computed from the filing of the
case until fully satisfied. The interest due shall further earn an interest of 12% per
annum to be computed from the date of the filing of the complaint until fully paid.
Meanwhile, the award of exemplary damages is DELETED.
SO ORDERED.[59]
PNB and Aguilar filed their separate petitions for review of the Court of Appeals'
July 25, 2013 decision.[60]
We resolve the following issues:
I. Whether Philippine National Bank was negligent in releasing the deposit
to Bernardito Manimbo;
II. Whether Lina B. Aguilar is jointly and severally liable with Philippine
National Bank for the release of the deposit to Bernardito Manimbo; and
III. Whether respondents were properly awarded damages.
Petitioner Aguilar argued that the Court of Appeals had already found no malice or
bad faith on her part.[61] Moreover, as a mere officer of the bank, she cannot be
made personally liable for acts that she was authorized to do.[62] These acts were
mere directives to her by her superiors.[63] Hence, she should not be held solidarity
liable with PNB.[64]
Petitioner PNB argued that it was the presumptuousness and cavalier attitude of
respondents that gave rise to the controversy and not its judgment call. [65]
Respondents were lacking in sufficient documentation.[66] Petitioner PNB also
argued that respondents failed to show any justification for the award of moral
damages.[67] No bad faith can be attributed to Aguilar.[68]
In their separate comments to the petitions, respondents argued that the trial court
and the Court of Appeals did not err in finding that petitioners PNB and Aguilar
were negligent in handling their father's deposit.[69] The acceptance of invalid and
incomplete documents to support the deposit's release to Manimbo was a violation
of the bank's fiduciary duty to its clients.[70] These acts constituted grcss
negligence on the part of petitioners PNB and Aguilar. [71]
However, according to respondents, the Court of Appeals erred in deleting the
award for exemplary damages because the acts in violation of the bank's fiduciary
were done in bad faith.[72]
We rule for the respondents.
The trial court and the Court of Appeals correctly found that petitioners PNB and
Aguilar were negligent in handling the deposit of Angel C. Santos.
The contractual relationship between banks and their depositors is governed by the
Civil Code provisions on simple loan.[73] Once a person makes a deposit of his or
her money to the bank, he or she is considered to have lent the bank that money. [74]
The bank becomes his or her debtor, and he or she becomes the creditor of the
bank, which is obligated to pay him or her on demand. [75]
The default standard of diligence in the performance of obligations is "diligence of
a good father of a family." Thus, the Civil Code provides:
ART. 1163. Every person obliged to give something is also obliged to take care of
it with the proper diligence of a good father of a family, unless the law or the
stipulation of the parties requires another standard of care.
ART. 1173. The fault or negligence of the obligor consists in the omission of that
diligence which is required by the nature of the obligation and corresponds with
the circumstances of the persons, of the time and of the place. When negligence
shows bad faith, the provisions of articles 1171 and 2201, paragraph 2, shall apply.
If the law or contract does not state the diligence which is to be observed in the
performance, that which is expected of a good father of a family shall be required.
(Emphasis supplied)
"Diligence of a good father of a family" is the standard of diligence expected of,
among others, usufructuaries,[76] passengers of common carriers,[77] agents,[78]
depositaries,[79] pledgees,[80] officious managers,[81] and persons deemed by law as
responsible for the acts of others.[82] "The diligence of a good father of a family
requires only that diligence which an ordinary prudent man would exercise with
regard to his own property." [83]
Other industries, because of their nature, are bound by law to observe higher
standards of diligence. Common carriers, for example, must observe
"extraordinary diligence in the vigilance over the goods and for the safety of
[their] passengers"[84] because it is considered a business affected with public
interest. "Extraordinary diligence" with respect to passenger safety is further
qualified as "carrying the passengers safely as far as human care and foresight can
provide, using the utmost diligence of very cautious persons, with a due regard for
all the circumstances."[85]
Similar to common carriers, banking is a business that is impressed with public
interest. It affects economies and plays a significant role in businesses and
commerce.[86] The public reposes its faith and confidence upon banks, such that
"even the humble wage-earner has not hesitated to entrust his life's savings to the
bank of his choice, knowing that they will be safe in its custody and will even earn
some interest for him."[87] This is why we have recognized the fiduciary nature of
the banks' functions, and attached a special standard of diligence for the exercise
of their functions.
In Simex International (Manila), Inc. v. Court of Appeals,[88] this court described
the nature of banks' functions and the attitude expected of banks in handling their
depositors' accounts, thus:
In every case, the depositor expects the bank to treat his account with the utmost
fidelity, whether such account consists only of a few hundred pesos or of millions.
...
The point is that as a business affected with public interest and because of the
nature of its functions, the bank is under obligation to treat the accounts of its
depositors with meticulous care, always having in mind the fiduciary nature of
their relationship.[89] (Emphasis supplied)
The fiduciary nature of banking is affirmed in Republic Act No. 8791 or The
General Banking Law, thus:
SEC. 2. Declaration of Policy. — The State recognizes the vital role of banks in
providing an environment conducive to the sustained development of the national
economy and the fiduciary nature of banking that requires high standards of
integrity and performance. In furtherance thereof, the State shall promote and
maintain a stable and efficient banking and financial system that is globally
competitive, dynamic and responsive to the demands of a developing economy.
(Emphasis supplied)
In The Consolidated Bank and Trust Corporation v. Court of Appeals,[90] this court
explained the meaning of fiduciary relationship and the standard of diligence
assumed by banks:
This fiduciary relationship means that the bank's obligation to observe "high
standards of integrity and performance" is deemed written into every deposit
agreement between a bank and its depositor. The fiduciary nature of banking
requires banks to assume a degree of diligence higher than that of a good father of
a family. Article 1172 of the Civil Code states that the degree of diligence required
of an obligor is that prescribed by law or contract, and absent such stipulation then
the diligence of a good father of a family. [91] (Emphasis supplied, citation omitted)
Petitioners PNB and Aguilar's treatment of Angel C. Santos' account is
inconsistent with the high standard of diligence required of banks. They accepted
Manimbo's representations despite knowledge of the existence of circumstances
that should have raised doubts on such representations. As a result, Angel C.
Santos' deposit was given to a person stranger to him.
Petitioner PNB pointed out that since petitioner Aguilar assumed office as PNB-
Sta. Elena-Marikina City Branch Manager only five (5) years from Angel C.
Santos' death, she was not in the position to know that respondents were the heirs
of Angel C. Santos.[92] She could not have accepted the unsigned and unnotarized
extrajudicial settlement deed that respondents had first showed her. [93] She was not
competent to make a conclusion whether that deed was genuine.[94] Neither could
petitioners PNB and Aguilar pass judgment on a letter from respondents' lawyer
stating that respondents were the nine heirs of Angel C. Santos. [95]
Petitioners PNB and Aguilar's negligence is not based on their failure to accept
respondents' documents as evidence of their right to claim Angel C. Santos'
deposit. Rather, it is based on their failure to exercise the diligence required of
banks when they accepted the fraudulent representations of Manimbo.
Petitioners PNB and Aguilar disregarded their own requirements for the release of
the deposit to persons claiming to be heirs of a deceased depositor. When
respondents asked for the release of Angel C. Santos' deposit, they were required
to present the following: "(1) original or certified true copy of the Death
Certificate of Angel C. Santos; (2) certificate of payment of, or exemption from,
estate tax issued by the Bureau of Internal Revenue (BIR); (3) Deed of
Extrajudicial Settlement; (4) Publisher's Affidavit of publication of the Deed of
Extrajudicial Settlement; and (5) Surety bond effective for two (2) years and in an
amount equal to the balance of the deposit to be withdrawn." [96]
Petitioners PNB and Aguilar, however, accepted Manimbo's representations, and
they released Angel C. Santos' deposit based on only the following documents:
1. Death certificate of Angel C. Santos;
2. Birth certificate of Reyme L. Santos;
3. Affidavit of self-adjudication of Reyme L. Santos;
4. Affidavit of publication;
5. Special power of attorney that Reyme L. Santos executed in favor of
Bernardito Manimbo and Angel P. Santos;
6. Personal items of Angel C. Santos, such as photocopies or originals of
passport, residence certificate for year 1990, SSS I.D., etc.;
7. Surety good for two (2) years; and
8. Certificate of Time Deposit No. 341306.[97]
Based on these enumerations, petitioners PNB and Aguilar either have no fixed
standards for the release of their deceased clients' deposits or they have standards
that they disregard for convenience, favor, or upon exercise of discretion. Both are
inconsistent with the required diligence of banks. These threaten the safety of the
depositors' accounts as they provide avenues for fraudulent practices by third
persons or by bank officers themselves.
In this case, petitioners PNB and Aguilar released Angel C. Santos' deposit to
Manimbo without having been presented the BIR-issued certificate of payment of,
or exception from, estate tax. This is a legal requirement before the deposit of a
decedent is released. Presidential Decree No. 1158,[98] the tax code applicable
when Angel C. Santos died in 1991, provides:
SEC. 118. Payment of tax antecedent to the transfer of shares, bonds, or rights. —
There shall not be transferred to any new owner in the books of any corporation,
sociedad anonima, partnership, business, or industry organized or established in
the Philippines, any shares, obligations, bonds or rights by way of gift inter vivos
or mortis causa, legacy, or inheritance unless a certification from the
Commissioner that the taxes fixed in this Title and due thereon have been paid is
shown.
If a bank has knowledge of the death of a person who maintained a hank deposit
account alone, or jointly with another, it shall not allow any withdrawal from the
said deposit account, unless the Commissioner has certified that the taxes imposed
thereon by this Title have been paid; Provided, however, That the administrator of
the estate or any one of the heirs of the decedent may upon authorization by the
Commissioner of Internal Revenue, withdraw an amount not exceeding P10,000
without the said certification. For this purpose, all withdrawal slips shall contain a
statement to the effect that all of the joint depositors are still living at the time of
withdrawal by any one of the joint depositors and such statement shall be under
oath by the said depositors.[99] (Emphasis supplied)
This provision was reproduced in Section 97 of the 1997 National Internal
Revenue Code, thus:
SEC. 97. Payment of Tax Antecedent to the Transfer of Shares, Bonds or Rights.
— There shall not be transferred to any new owner in the books of any
corporation, sociedad anonima, partnership, business, or industry organized or
established in the Philippines any share, obligation, bond or right by way of gift
inter vivos or mortis causa, legacy or inheritance, unless a certification from the
Commissioner that the taxes fixed in this Title and due thereon have been paid is
shown.
If a bank has knowledge of the death of a person, who maintained a bank deposit
account alone, or jointly with another, it shall not allow any withdrawal from the
said deposit account, unless the Commissioner has certified that the taxes imposed
thereon by this Title have been paid: Provided, however, That the administrator of
the estate or any one (1) of the heirs of the decedent may, upon authorization by
the Commissioner, withdraw an amount not exceeding Twenty thousand pesos
(P20,000) without the said certification. For this purpose, all withdrawal slips shall
contain a statement to the effect that all of the joint depositors are still living at the
time of withdrawal by any one of the joint depositors and such statement shall be
under oath by the said depositors. (Emphasis supplied)
Taxes are created primarily to generate revenues for the maintenance of the
government. However, this particular tax may also serve as guard against the
release of deposits to persons who have no sufficient and valid claim over the
deposits. Based on the assumption that only those with sufficient and valid claim
to the deposit will pay the taxes for it, requiring the certificate from the BIR
increases the chance that the deposit will be released only to them.
In their compulsory counterclaim,[100] petitioners PNB and Aguilar claimed that
Manimbo presented a certificate of payment of estate tax. [101] During trial,
however, it turned out that this certificate was instead an authority to accept
payment, which is not the certificate required for the release of bank deposits.[102]
It appears that Manimbo was not even required to submit the BIR certificate. [103]
He, thus, failed to present such certificate. Petitioners PNB and Aguilar provided
no satisfactory explanation why Angel C. Santos' deposit was released without it.
Petitioners PNB and Aguilar's negligence is also clear when they accepted as bases
for the release of the deposit to Manimbo: (a) a mere photocopy of Angel C.
Santos' death certificate;[104] (b) the falsified affidavit of self-adjudication and
special power of attorney purportedly executed by Reyme L. Santos; [105] and (c)
the certificate of time deposit.[106]
Petitioner Aguilar was aware that there were other claimants to Angel C. Santos'
deposit. Respondents had already communicated with petitioner Aguilar regarding
Angel C. Santos' account before Manimbo appeared. Petitioner Aguilar even gave
respondents the updated passbook of Angel C. Santos' account. [107] Yet, petitioners
PNB and Aguilar did not think twice before they released the deposit to Manimbo.
They did not doubt why no original death certificate could be submitted. They did
not doubt why Reyme L. Santos would execute an affidavit of self-adjudication
when he, together with others, had previously asked for the release of Angel C.
Santos' deposit. They also relied on the certificate of time deposit and on
Manimbo's representation that the passbook was lost when the passbook had just
been previously presented to Aguilar for updating. [108]
During the trial, petitioner PNB's counsel only reasoned that the photocopy of the
death certificate was also submitted with other documents, which led him to no
other conclusion than that Angel C. Santos was already dead. [109] On petitioners
PNB and Aguilar's reliance special power of attorney allegedly executed by
Reyme L. Santos, Aguilar admitted that she did not contact Reyme L. Santos for
verification. Her reason was that Reyme L. Santos was not their client. Therefore,
they had no obligation to do so.[110]
Given the circumstances, "diligence of a good father of a family" would have
required petitioners PNB and Aguilar to verify. A prudent man would have
inquired why Reyme L. Santos would issue an affidavit of self-adjudication when
others had also claimed to be heirs of Angel C. Santos. Contrary to petitioner
Aguilar's reasoning, the fact that Reyme L. Santos was not petitioner PNB's client
should have moved her to take measures to ensure the veracity of Manimbo's
documents and representations. This is because she had no previous knowledge of
Reyme L. Santos his representatives, and his signature.
Petitioner PNB is a bank from which a degree of diligence higher than that of a
good father of a family is expected. Petitioner PNB and its manager, petitioner
Aguilar, failed to meet even the standard of diligence of a good father of a family.
Their actions and inactions constitute gross negligence. It is for this reason that we
sustain the trial court's and the Court of Appeals' rulings that petitioners PNB and
Aguilar are solidarity liable with each other.[111]
For the same reason, we sustain the award for moral damages. Petitioners PNB and
Aguilar's gross negligence deprived Angel C. Santos' heirs what is rightfully
theirs. Respondents also testified that they experienced anger and embarrassment
when petitioners PNB and Aguilar refused to release Angel C. Santos' deposit. [112]
"The bank's negligence was the result of lack of due care and caution required of
managers and employees of a firm engaged in so sensitive and demanding
business as banking."[113]
exemplary damages. Further, the interest rate for the amount of P1,882,002.05,
representing the face value of PNB Manager's Check No. AF-974686B is modified
to 12% from April 26, 1998 until June 30, 2013, and 6% from July 1, 2013 until
satisfaction. All monetary awards shall then earn interest at the rate of 6% per
annum from finality of the decision until full satisfaction.

Exemplary damages should also be awarded. "The law allows the grant of SO ORDERED
exemplary damages by way of example for the public good. The public relies on
the banks' sworn profession of diligence and meticulousness in giving
irreproachable service. The level of meticulousness must be maintained at all times
by the banking sector."[114]

Since exemplary damages are awarded and since respondents were compelled to
litigate to protect their interests,[115] the award of attorney's fees is also proper.

The Court of Appeals' award of interest should be modified to 12% from demand
on April 26, 1998 until June 30, 2013, and 6% from July 1, 2013 until fully paid.
In Nacar v. Gallery Frames:[116]
Thus, from the foregoing, in the absence of an express stipulation as to the rate of
interest that would govern the parties, the rate of legal interest for loans or
forbearance of any money. . . shall no longer be twelve percent (12%) per annum. .
. but will now be six percent (6%) per annum effective July 1, 2013. It should be
noted, nonetheless, that. . . the twelve percent (12%) per annum legal interest shall
apply only until June 30, 2013. Come July 1, 2013 the new rate of six percent (6%)
per annum shall be the prevailing rate of interest when applicable.

....
1. When the obligation is breached, and it consists in the payment of a sum
of money, i.e., a loan or forbearance of money, the interest due should be
that which may have been stipulated in writing. Furthermore, the interest
due shall itself earn legal interest from the time it is judicially demanded.
In the absence of stipulation, the rate of interest shall be 6% per annum to
be computed from default, i.e., from judicial or extrajudicial demand. . .
....
3.When the judgment of the court awarding a sum of money becomes final
and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 6% per annum from such
finality until its satisfaction, this interim period being deemed to be by
then an equivalent to a forbearance of credit.[117]
WHEREFORE, the Court of Appeals' decision dated July 25, 2013 is AFFIRMED
with the MODIFICATIONS in that petitioners Philippine National Bank and Lina
B. Aguilar are ordered solidarity liable to pay respondents P100,000.00 as