Tax Midterm Cases
Tax Midterm Cases
Tax Midterm Cases
8, 1937 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
PABLO LORENZO, as trustee of the estate of Thomas Hanley, deceased, plaintiff- advantageous.
appellant,
vs. xxx xxx xxx
JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellant.
8. I state at this time I have one brother living, named Malachi Hanley, and that my
Pablo Lorenzo and Delfin Joven for plaintiff-appellant. nephew, Matthew Hanley, is a son of my said brother, Malachi Hanley.
Office of the Solicitor-General Hilado for defendant-appellant.
The Court of First Instance of Zamboanga considered it proper for the best interests of ther
LAUREL, J.: 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,
On October 4, 1932, the plaintiff Pablo Lorenzo, in his capacity as trustee of the estate of 1924, appointed trustee. Moore took his oath of office and gave bond on March 10, 1924. He
Thomas Hanley, deceased, brought this action in the Court of First Instance of Zamboanga acted as trustee until February 29, 1932, when he resigned and the plaintiff herein was
against the defendant, Juan Posadas, Jr., then the Collector of Internal Revenue, for the appointed in his stead.
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, During the incumbency of the plaintiff as trustee, the defendant Collector of Internal Revenue,
computed from September 15, 1932, the date when the aforesaid tax was [paid under alleging that the estate left by the deceased at the time of his death consisted of realty valued
protest. The defendant set up a counterclaim for P1,191.27 alleged to be interest due on the at P27,920 and personalty valued at P1,465, and allowing a deduction of P480.81, assessed
tax in question and which was not included in the original assessment. From the decision of against the estate an inheritance tax in the amount of P1,434.24 which, together with the
the Court of First Instance of Zamboanga dismissing both the plaintiff's complaint and the penalties for deliquency in payment consisting of a 1 per cent monthly interest from July 1,
defendant's counterclaim, both parties appealed to this court. 1931 to the date of payment and a surcharge of 25 per cent on the tax, amounted to
P2,052.74. On March 15, 1932, the defendant filed a motion in the testamentary proceedings
It appears that on May 27, 1922, one Thomas Hanley died in Zamboanga, Zamboanga, pending before the Court of First Instance of Zamboanga (Special proceedings No. 302)
leaving a will (Exhibit 5) and considerable amount of real and personal properties. On june praying that the trustee, plaintiff herein, be ordered to pay to the Government the said sum of
14, 1922, proceedings for the probate of his will and the settlement and distribution of his P2,052.74. The motion was granted. On September 15, 1932, the plaintiff paid said amount
estate were begun in the Court of First Instance of Zamboanga. The will was admitted to under protest, notifying the defendant at the same time that unless the amount was promptly
probate. Said will provides, among other things, as follows: 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
4. I direct that any money left by me be given to my nephew Matthew Hanley. above indicated.
5. I direct that all real estate owned by me at the time of my death be not sold or In his appeal, plaintiff contends that the lower court erred:
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 I. In holding that the real property of Thomas Hanley, deceased, passed to his
nephew, Matthew Hanley, at Castlemore, Ballaghaderine, County of Rosecommon, instituted heir, Matthew Hanley, from the moment of the death of the former, and that
Ireland, and that he be directed that the same be used only for the education of my from the time, the latter became the owner thereof.
brother's children and their descendants.
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 heirs succeed immediately to all of the property of the deceased ancestor. The property
estate upon the death of the testator, and not, as it should have been held, upon the belongs to the heirs at the moment of the death of the ancestor as completely as if the
value thereof at the expiration of the period of ten years after which, according to the ancestor had executed and delivered to them a deed for the same before his death." (Bondad
testator's will, the property could be and was to be delivered to the instituted heir. 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.,
IV. In not allowing as lawful deductions, in the determination of the net amount of the 491; Aliasas vs.Alcantara, 16 Phil., 489; Ilustre vs. Alaras Frondosa, 17 Phil., 321; Malahacan
estate subject to said tax, the amounts allowed by the court as compensation to the vs. Ignacio, 19 Phil., 434; Bowa vs. Briones, 38 Phil., 27; Osario vs. Osario & Yuchausti
"trustees" and paid to them from the decedent's estate. 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
V. In not rendering judgment in favor of the plaintiff and in denying his motion for new while article 657 of the Civil Code is applicable to testate as well as intestate succession, it
trial. 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
The defendant-appellant contradicts the theories of the plaintiff and assigns the following does not speak of forced heirs; it does not even use the word "heir". It speaks of the rights of
error besides: 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
The lower court erred in not ordering the plaintiff to pay to the defendant the sum of necessary condition to effect transmission of property does not affect the general rule laid
P1,191.27, representing part of the interest at the rate of 1 per cent per month from down in article 657 of the Civil Code. The authentication of a will implies its due execution but
April 10, 1924, to June 30, 1931, which the plaintiff had failed to pay on the once probated and allowed the transmission is effective as of the death of the testator in
inheritance tax assessed by the defendant against the estate of Thomas Hanley. 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
The following are the principal questions to be decided by this court in this appeal: ( a) When moment of the decedent's death. The time when the heirs legally succeed to the inheritance
does the inheritance tax accrue and when must it be satisfied? (b) Should the inheritance tax may differ from the time when the heirs actually receive such inheritance. "Poco importa",
be computed on the basis of the value of the estate at the time of the testator's death, or on says Manresa commenting on article 657 of the Civil Code, "que desde el falleimiento del
its value ten years later? (c) In determining the net value of the estate subject to tax, is it causante, hasta que el heredero o legatario entre en posesion de los bienes de la herencia o
proper to deduct the compensation due to trustees? (d) What law governs the case at bar? del legado, transcurra mucho o poco tiempo, pues la adquisicion ha de retrotraerse al
Should the provisions of Act No. 3606 favorable to the tax-payer be given retroactive effect? momento de la muerte, y asi lo ordena el articulo 989, que debe considerarse como
(e) Has there been deliquency in the payment of the inheritance tax? If so, should the complemento del presente." (5 Manresa, 305; see also, art. 440, par. 1, Civil Code.) Thomas
additional interest claimed by the defendant in his appeal be paid by the estate? Other points Hanley having died on May 27, 1922, the inheritance tax accrued as of the date.
of incidental importance, raised by the parties in their briefs, will be touched upon in the
course of this opinion. 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
(a) The accrual of the inheritance tax is distinct from the obligation to pay the same. Section clearly fixed by section 1544 of the Revised Administrative Code as amended by Act No.
1536 as amended, of the Administrative Code, imposes the tax upon "every transmission by 3031, in relation to section 1543 of the same Code. The two sections follow:
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 SEC. 1543. Exemption of certain acquisitions and transmissions. The following
devolution of property of a decedent, made effective by his death. (61 C. J., p. 1592.) It is in shall not be taxed:
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 (a) The merger of the usufruct in the owner of the naked title.
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
(b) The transmission or delivery of the inheritance or legacy by the fiduciary inheritance tax should be based on the value of the estate in 1932, or ten years after the
heir or legatee to the trustees. 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
(c) The transmission from the first heir, legatee, or donee in favor of another value of the personal property left by the deceased, which the plaintiff admits is P1,465,
beneficiary, in accordance with the desire of the predecessor. would generate an inheritance tax which, excluding deductions, interest and surcharge, would
amount only to about P169.52.
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. 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
SEC. 1544. When tax to be paid. The tax fixed in this article shall be paid: 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
(a) In the second and third cases of the next preceding section, before value of any subsequent increase or decrease in value. (61 C. J., pp. 1692, 1693; 26 R. C. L.,
entrance into possession of the property. 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
(b) In other cases, within the six months subsequent to the death of the inheritance tax accrues at the moment of death, and hence is ordinarily measured as to any
predecessor; but if judicial testamentary or intestate proceedings shall be beneficiary by the value at that time of such property as passes to him. Subsequent
instituted prior to the expiration of said period, the payment shall be made by appreciation or depriciation is immaterial." (Ross, Inheritance Taxation, p. 72.)
the executor or administrator before delivering to each beneficiary his share.
Our attention is directed to the statement of the rule in Cyclopedia of Law of and Procedure
If the tax is not paid within the time hereinbefore prescribed, interest at the rate of (vol. 37, pp. 1574, 1575) that, in the case of contingent remainders, taxation is postponed
twelve per centum per annum shall be added as part of the tax; and to the tax and until the estate vests in possession or the contingency is settled. This rule was formerly
interest due and unpaid within ten days after the date of notice and demand thereof followed in New York and has been adopted in Illinois, Minnesota, Massachusetts, Ohio,
by the collector, there shall be further added a surcharge of twenty-five per centum. 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
A certified of all letters testamentary or of admisitration shall be furnished the defects of its anterior system, we find upon examination of cases and authorities that New
Collector of Internal Revenue by the Clerk of Court within thirty days after their York has varied and now requires the immediate appraisal of the postponed estate at its clear
issuance. 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;
It should be observed in passing that the word "trustee", appearing in subsection (b) of 83 N. Y. Supp., 769; Estate of Tracy, 179 N. Y., 501; 72 N. Y., 519; Estate of Brez, 172 N. Y.,
section 1543, should read "fideicommissary" or "cestui que trust". There was an obvious 609; 64 N. E., 958; Estate of Post, 85 App. Div., 611; 82 N. Y. Supp., 1079. Vide also, Saltoun
mistake in translation from the Spanish to the English version. 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).
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 But whatever may be the rule in other jurisdictions, we hold that a transmission by inheritance
subsection, the tax should have been paid before the delivery of the properties in question to is taxable at the time of the predecessor's death, notwithstanding the postponement of the
P. J. M. Moore as trustee on March 10, 1924. 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.
(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 (c) Certain items are required by law to be deducted from the appraised gross in arriving at
the expiration of ten years from the death of the testator on May 27, 1922 and, that the 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 It is well-settled that inheritance taxation is governed by the statute in force at the time of the
deduction of only P480.81. This sum represents the expenses and disbursements of the death of the decedent (26 R. C. L., p. 206; 4 Cooley on Taxation, 4th ed., p. 3461). The
executors until March 10, 1924, among which were their fees and the proven debts of the taxpayer can not foresee and ought not to be required to guess the outcome of pending
deceased. The plaintiff contends that the compensation and fees of the trustees, which measures. Of course, a tax statute may be made retroactive in its operation. Liability for taxes
aggregate P1,187.28 (Exhibits C, AA, EE, PP, HH, JJ, LL, NN, OO), should also be deducted under retroactive legislation has been "one of the incidents of social life." (Seattle vs.
under section 1539 of the Revised Administrative Code which provides, in part, as follows: "In Kelleher, 195 U. S., 360; 49 Law. ed., 232 Sup. Ct. Rep., 44.) But legislative intent that a tax
order to determine the net sum which must bear the tax, when an inheritance is concerned, statute should operate retroactively should be perfectly clear. (Scwab vs. Doyle, 42 Sup. Ct.
there shall be deducted, in case of a resident, . . . the judicial expenses of the testamentary or Rep., 491; Smietanka vs. First Trust & Savings Bank, 257 U. S., 602; Stockdale vs. Insurance
intestate proceedings, . . . ." 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
A trustee, no doubt, is entitled to receive a fair compensation for his services (Barney vs. the language of the statute clearly demands or expresses that it shall have a retroactive
Saunders, 16 How., 535; 14 Law. ed., 1047). But from this it does not follow that the effect, . . . ." (61 C. J., P. 1602.) Though the last paragraph of section 5 of Regulations No. 65
compensation due him may lawfully be deducted in arriving at the net value of the estate of the Department of Finance makes section 3 of Act No. 3606, amending section 1544 of the
subject to tax. There is no statute in the Philippines which requires trustees' commissions to Revised Administrative Code, applicable to all estates the inheritance taxes due from which
be deducted in determining the net value of the estate subject to inheritance tax (61 C. J., p. have not been paid, Act No. 3606 itself contains no provisions indicating legislative intent to
1705). Furthermore, though a testamentary trust has been created, it does not appear that give it retroactive effect. No such effect can begiven the statute by this court.
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, The defendant Collector of Internal Revenue maintains, however, that certain provisions of
161 N. Y. Supp., 455.) On the contrary, in paragraph 5 of his will, the testator expressed the Act No. 3606 are more favorable to the taxpayer than those of Act No. 3031, that said
desire that his real estate be handled and managed by his executors until the expiration of provisions are penal in nature and, therefore, should operate retroactively in conformity with
the period of ten years therein provided. Judicial expenses are expenses of administration the provisions of article 22 of the Revised Penal Code. This is the reason why he applied Act
(61 C. J., p. 1705) but, in State vs. Hennepin County Probate Court (112 N. W., 878; 101 No. 3606 instead of Act No. 3031. Indeed, under Act No. 3606, (1) the surcharge of 25 per
Minn., 485), it was said: ". . . The compensation of a trustee, earned, not in the administration cent is based on the tax only, instead of on both the tax and the interest, as provided for in
of the estate, but in the management thereof for the benefit of the legatees or devises, does Act No. 3031, and (2) the taxpayer is allowed twenty days from notice and demand by rthe
not come properly within the class or reason for exempting administration expenses. . . . Collector of Internal Revenue within which to pay the tax, instead of ten days only as required
Service rendered in that behalf have no reference to closing the estate for the purpose of a by the old law.
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, Properly speaking, a statute is penal when it imposes punishment for an offense committed
are created for the the benefit of those to whom the property ultimately passes, are of against the state which, under the Constitution, the Executive has the power to pardon. In
voluntary creation, and intended for the preservation of the estate. No sound reason is given common use, however, this sense has been enlarged to include within the term "penal
to support the contention that such expenses should be taken into consideration in fixing the statutes" all status which command or prohibit certain acts, and establish penalties for their
value of the estate for the purpose of this tax." 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
(d) The defendant levied and assessed the inheritance tax due from the estate of Thomas collected by the means ordinarily resorted to for the collection of taxes are not classed as
Hanley under the provisions of section 1544 of the Revised Administrative Code, as amended penal laws, although there are authorities to the contrary. (See Sutherland, Statutory
by section 3 of Act No. 3606. But Act No. 3606 went into effect on January 1, 1930. It, Construction, 361; Twine Co. vs. Worthington, 141 U. S., 468; 12 Sup. Ct., 55; Rice vs. U. S.,
therefore, was not the law in force when the testator died on May 27, 1922. The law at the 4 C. C. A., 104; 53 Fed., 910; Com. vs. Standard Oil Co., 101 Pa. St., 150; State vs. Wheeler,
time was section 1544 above-mentioned, as amended by Act No. 3031, which took effect on 44 P., 430; 25 Nev. 143.) Article 22 of the Revised Penal Code is not applicable to the case at
March 9, 1922. 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 trust (Tolentino vs. Vitug, 39 Phil.,126, cited in 65 C. J., p. 692, n. 63). He did not acquire any
the tax may be paid within another given time. As stated by this court, "the mere failure to pay beneficial interest in the estate. He took such legal estate only as the proper execution of the
one's tax does not render one delinqent until and unless the entire period has eplased within trust required (65 C. J., p. 528) and, his estate ceased upon the fulfillment of the testator's
which the taxpayer is authorized by law to make such payment without being subjected to the wishes. The estate then vested absolutely in the beneficiary (65 C. J., p. 542).
payment of penalties for fasilure to pay his taxes within the prescribed period." (U. S. vs.
Labadan, 26 Phil., 239.) 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
The defendant maintains that it was the duty of the executor to pay the inheritance tax before trust of the type at hand, the result would be plainly disastrous. Testators may provide, as
the delivery of the decedent's property to the trustee. Stated otherwise, the defendant Thomas Hanley has provided, that their estates be not delivered to their beneficiaries until
contends that delivery to the trustee was delivery to the cestui que trust, the beneficiery in this after the lapse of a certain period of time. In the case at bar, the period is ten years. In other
case, within the meaning of the first paragraph of subsection (b) of section 1544 of the cases, the trust may last for fifty years, or for a longer period which does not offend the rule
Revised Administrative Code. This contention is well taken and is sustained. The appointment against petuities. The collection of the tax would then be left to the will of a private individual.
of P. J. M. Moore as trustee was made by the trial court in conformity with the wishes of the The mere suggestion of this result is a sufficient warning against the accpetance of the
testator as expressed in his will. It is true that the word "trust" is not mentioned or used in the essential to the very exeistence of government. (Dobbins vs. Erie Country, 16 Pet., 435; 10
will but the intention to create one is clear. No particular or technical words are required to Law. ed., 1022; Kirkland vs. Hotchkiss, 100 U. S., 491; 25 Law. ed., 558; Lane County vs.
create a testamentary trust (69 C. J., p. 711). The words "trust" and "trustee", though apt for Oregon, 7 Wall., 71; 19 Law. ed., 101; Union Refrigerator Transit Co. vs. Kentucky, 199 U. S.,
the purpose, are not necessary. In fact, the use of these two words is not conclusive on the 194; 26 Sup. Ct. Rep., 36; 50 Law. ed., 150; Charles River Bridge vs. Warren Bridge, 11 Pet.,
question that a trust is created (69 C. J., p. 714). "To create a trust by will the testator must 420; 9 Law. ed., 773.) The obligation to pay taxes rests not upon the privileges enjoyed by, or
indicate in the will his intention so to do by using language sufficient to separate the legal the protection afforded to, a citizen by the government but upon the necessity of money for
from the equitable estate, and with sufficient certainty designate the beneficiaries, their the support of the state (Dobbins vs. Erie Country, supra). For this reason, no one is allowed
interest in the ttrust, the purpose or object of the trust, and the property or subject matter to object to or resist the payment of taxes solely because no personal benefit to him can be
thereof. Stated otherwise, to constitute a valid testamentary trust there must be a pointed out. (Thomas vs. Gay, 169 U. S., 264; 18 Sup. Ct. Rep., 340; 43 Law. ed., 740.)
concurrence of three circumstances: (1) Sufficient words to raise a trust; (2) a definite subject; While courts will not enlarge, by construction, the government's power of taxation (Bromley
(3) a certain or ascertain object; statutes in some jurisdictions expressly or in effect so vs. McCaughn, 280 U. S., 124; 74 Law. ed., 226; 50 Sup. Ct. Rep., 46) they also will not
providing." (69 C. J., pp. 705,706.) There is no doubt that the testator intended to create a place upon tax laws so loose a construction as to permit evasions on merely fanciful and
trust. He ordered in his will that certain of his properties be kept together undisposed during a insubstantial distictions. (U. S. vs. Watts, 1 Bond., 580; Fed. Cas. No. 16,653; U. S. vs.
fixed period, for a stated purpose. The probate court certainly exercised sound judgment in Wigglesirth, 2 Story, 369; Fed. Cas. No. 16,690, followed in Froelich & Kuttner vs. Collector of
appointment a trustee to carry into effect the provisions of the will (see sec. 582, Code of Civil Customs, 18 Phil., 461, 481; Castle Bros., Wolf & Sons vs. McCoy, 21 Phil., 300; Muoz &
Procedure). 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
P. J. M. Moore became trustee on March 10, 1924. On that date trust estate vested in him construed to avoid the possibilities of tax evasion. Construed this way, the statute, without
(sec. 582 in relation to sec. 590, Code of Civil Procedure). The mere fact that the estate of resulting in injustice to the taxpayer, becomes fair to the government.
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 That taxes must be collected promptly is a policy deeply intrenched in our tax system. Thus,
should have been paid on or before March 10, 1924, to escape the penalties of the laws. This no court is allowed to grant injunction to restrain the collection of any internal revenue tax
is so for the reason already stated that the delivery of the estate to the trustee was in ( sec. 1578, Revised Administrative Code; Sarasola vs. Trinidad, 40 Phil., 252). In the case of
esse delivery of the same estate to the cestui que trust, the beneficiary in this case. A trustee Lim Co Chui vs. Posadas (47 Phil., 461), this court had occassion to demonstrate trenchment
is but an instrument or agent for the cestui que trust (Shelton vs. King, 299 U. S., 90; 33 Sup. adherence to this policy of the law. It held that "the fact that on account of riots directed
Ct. Rep., 689; 57 Law. ed., 1086). When Moore accepted the trust and took possesson of the against the Chinese on October 18, 19, and 20, 1924, they were prevented from praying their
trust estate he thereby admitted that the estate belonged not to him but to his cestui que 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 Administrative Code, we have P28,904.19 as the net value of the estate subject to
prescribed for the payment of the taxes or to accept them without the additional penalty of inheritance tax.
twenty five per cent." (Syllabus, No. 3.)
The primary tax, according to section 1536, subsection (c), of the Revised Administrative
". . . It is of the utmost importance," said the Supreme Court of the United States, ". . . that the Code, should be imposed at the rate of one per centum upon the first ten thousand pesos
modes adopted to enforce the taxes levied should be interfered with as little as possible. Any and two per centum upon the amount by which the share exceed thirty thousand pesos, plus
delay in the proceedings of the officers, upon whom the duty is developed of collecting the an additional two hundred per centum. One per centum of ten thousand pesos is P100. Two
taxes, may derange the operations of government, and thereby, cause serious detriment to per centum of P18,904.19 is P378.08. Adding to these two sums an additional two hundred
the public." (Dows vs. Chicago, 11 Wall., 108; 20 Law. ed., 65, 66; Churchill and Tait vs. per centum, or P965.16, we have as primary tax, correctly computed by the defendant, the
Rafferty, 32 Phil., 580.) sum of P1,434.24.
It results that the estate which plaintiff represents has been delinquent in the payment of To the primary tax thus computed should be added the sums collectible under section 1544 of
inheritance tax and, therefore, liable for the payment of interest and surcharge provided by the Revised Administrative Code. First should be added P1,465.31 which stands for interest
law in such cases. 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
The delinquency in payment occurred on March 10, 1924, the date when Moore became and 5 days. To the tax and interest thus computed should be added the sum of P724.88,
trustee. The interest due should be computed from that date and it is error on the part of the representing a surhcarge of 25 per cent on both the tax and interest, and also P10, the
defendant to compute it one month later. The provisions cases is mandatory (see and cf. Lim compromise sum fixed by the defendant (Exh. 29), giving a grand total of P3,634.43.
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. 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
To the tax and interest due and unpaid within ten days after the date of notice and demand defendant in his counterclaim. But, as we cannot give the defendant more than what he
thereof by the Collector of Internal Revenue, a surcharge of twenty-five per centum should be claims, we must hold that the plaintiff is liable only in the sum of P1,191.27 the amount stated
added (sec. 1544, subsec. (b), par. 2, Revised Administrative Code). Demand was made by in the counterclaim.
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, The judgment of the lower court is accordingly modified, with costs against the plaintiff in both
1931. November 30 being an official holiday, the tenth day fell on December 1, 1931. As the instances. So ordered.
tax and interest due were not paid on that date, the estate became liable for the payment of
the surcharge. Avancea, C.J., Abad Santos, Imperial, Diaz and Concepcion, JJ., concur.
Villa-Real, J., concurs.
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
After the estate proceedings were closed, the Bureau of Internal Revenue investigated the
income tax liability of the estate for the years 1945, 1946, 1947 and 1948 and it found that the
corresponding income tax returns were not filed. Thereupon, the representative of the
Collector of Internal Revenue filed said returns for the estate on the basis of information and
data obtained from the aforesaid estate proceedings and issued an assessment for the
following:
1. Deficiency income tax
1945 P135.83
1946 436.95
1947 1,206.91 P1,779.69
Add: 5% surcharge 88.98
1% monthly interest from
November 30, 1953 to
April 15, 1957 720.77
Compromise for late filing 80.00
Compromise for late
payment 40.00
The guardianship proceeding had been terminated upon delivery of the residuary estate to Petitioner stated in her protest filed with the BIR that "upon the death of the ward, the PNB,
the heirs entitled thereto. Thereafter, PNB was discharged of any further responsibility. which was still the guardian of the estate, (Annex "Z"), did not file an estate tax return;
however, it advised the heirs to execute an extrajudicial settlement, to pay taxes and to post a
Attorney's fees in order to be deductible from the gross estate must be essential to the
bond equal to the value of the estate, for which the state paid P59,341.40 for the premiums.
collection of assets, payment of debts or the distribution of the property to the persons
(See Annex "K")." [p. 17, CTA record.] Therefore, it would appear from the records of the case
entitled to it. The services for which the fees are charged must relate to the proper settlement
that the only practical purpose of settling the estate by means of an extrajudicial settlement
of the estate. [34 Am. Jur. 2d 767.] In this case, the guardianship proceeding was necessary
pursuant to Section 1 of Rule 74 of the Rules of Court was for the payment of taxes and the
for the distribution of the property of the late Pedro Pajonar to his rightful heirs.
distribution of the estate to the heirs. A fortiori, since our estate tax laws are of American
xxx xxx xxx origin, the interpretation adopted by American Courts has some persuasive effect on the
PNB was appointed as guardian over the assets of the late Pedro Pajonar, who, even at the interpretation of our own estate tax laws on the subject.
time of his death, was incompetent by reason of insanity. The expenses incurred in the Anent the contention of respondent that the attorney's fees of P50,000.00 incurred in the
guardianship proceeding was but a necessary expense in the settlement of the decedent's guardianship proceeding should not be deducted from the Gross Estate, We consider the
estate. Therefore, the attorney's fee incurred in the guardianship proceedings amounting to same unmeritorious. Attorneys' and guardians' fees incurred in a trustee's accounting of a
P50,000.00 is a reasonable and necessary business expense deductible from the gross taxable inter vivos trust attributable to the usual issues involved in such an accounting was
estate of the decedent. 12 held to be proper deductions because these are expenses incurred in terminating an inter
vivos trust that was includible in the decedent's estate. [Prentice Hall, Federal Taxes on
Estate and Gift, p. 120, 861] Attorney's fees are allowable deductions if incurred for the The guardianship proceeding in this case was necessary for the distribution of the property of
settlement of the estate. It is noteworthy to point that PNB was appointed the guardian over the deceased Pedro Pajonar. As correctly pointed out by respondent CTA, the PNB was
the assets of the deceased. Necessarily the assets of the deceased formed part of his gross appointed guardian over the assets of the deceased, and that necessarily the assets of the
estate. Accordingly, all expenses incurred in relation to the estate of the deceased will be deceased formed part of his gross estate. . . .
deductible for estate tax purposes provided these are necessary and ordinary expenses for xxx xxx xxx
administration of the settlement of the estate. 14
It is clear therefore that the attorney's fees incurred in the guardianship proceeding in Spec.
In upholding the June 7, 1994 Resolution of the Court of Tax Appeals, the Court of Appeals Proc. No. 1254 were essential to the distribution of the property to the persons entitled
held that: thereto. Hence, the attorney's fees incurred in the guardianship proceedings in the amount of
2. Although the Tax Code specifies "judicial expenses of the testamentary or intestate P50,000.00 should be allowed as a deduction from the gross estate of the decedent. 15
proceedings," there is no reason why expenses incurred in the administration and settlement The deductions from the gross estate permitted under section 79 of the Tax Code basically
of an estate in extrajudicial proceedings should not be allowed. However, deduction is limited reproduced the deductions allowed under Commonwealth Act No. 466 (CA 466), otherwise
to such administration expenses as are actually and necessarily incurred in the collection of known as the National Internal Revenue Code of 1939, 16 and which was the first codification
the assets of the estate, payment of the debts, and distribution of the remainder among those of Philippine tax laws. Section 89 (a) (1) (B) of CA 466 also provided for the deduction of the
entitled thereto. Such expenses may include executor's or administrator's fees, attorney's "judicial expenses of the testamentary or intestate proceedings" for purposes of determining
fees, court fees and charges, appraiser's fees, clerk hire, costs of preserving and distributing the value of the net estate. Philippine tax laws were, in turn, based on the federal tax laws of
the estate and storing or maintaining it, brokerage fees or commissions for selling or the United States. 17 In accord with established rules of statutory construction, the decisions
disposing of the estate, and the like. Deductible attorney's fees are those incurred by the of American courts construing the federal tax code are entitled to great weight in the
executor or administrator in the settlement of the estate or in defending or prosecuting claims interpretation of our own tax laws. 18
against or due the estate. (Estate and Gift Taxation in the Philippines, T. P. Matic, Jr., 1981
Judicial expenses are expenses of administration. 19 Administration expenses, as an
Edition, p. 176).
allowable deduction from the gross estate of the decedent for purposes of arriving at the
xxx xxx xxx value of the net estate, have been construed by the federal and state courts of the United
It is clear then that the extrajudicial settlement was for the purpose of payment of taxes and States to include all expenses "essential to the collection of the assets, payment of debts or
the distribution of the estate to the heirs. The execution of the extrajudicial settlement the distribution of the property to the persons entitled to it." 20 In other words, the expenses
necessitated the notarization of the same. Hence the Contract of Legal Services of March 28, must be essential to the proper settlement of the estate. Expenditures incurred for the
1988 entered into between respondent Josefina Pajonar and counsel was presented in individual benefit of the heirs, devisees or legatees are not deductible. 21 This distinction has
evidence for the purpose of showing that the amount of P60,753.00 was for the notarization been carried over to our jurisdiction. Thus, in Lorenzo v. Posadas 22 the Court construed the
of the Extrajudicial Settlement. It follows then that the notarial fee of P60,753.00 was incurred phrase "judicial expenses of the testamentary or intestate proceedings" as not including the
primarily to settle the estate of the deceased Pedro Pajonar. Said amount should then be compensation paid to a trustee of the decedent's estate when it appeared that such trustee
considered an administration expenses actually and necessarily incurred in the collection of was appointed for the purpose of managing the decedent's real estate for the benefit of the
the assets of the estate, payment of debts and distribution of the remainder among those testamentary heir. In another case, the Court disallowed the premiums paid on the bond filed
entitled thereto. Thus, the notarial fee of P60,753 incurred for the Extrajudicial Settlement by the administrator as an expense of administration since the giving of a bond is in the
should be allowed as a deduction from the gross estate. nature of a qualification for the office, and not necessary in the settlement of the
3. Attorney's fees, on the other hand, in order to be deductible from the gross estate must be estate. 23 Neither may attorney's fees incident to litigation incurred by the heirs in asserting
essential to the settlement of the estate. their respective rights be claimed as a deduction from the gross estate. 241wphi1
The amount of P50,000.00 was incurred as attorney's fees in the guardianship proceedings in Coming to the case at bar, the notarial fee paid for the extrajudicial settlement is clearly a
Spec. Proc. No. 1254. Petitioner contends that said amount are not expenses of the deductible expense since such settlement effected a distribution of Pedro Pajonar's estate to
testamentary or intestate proceedings as the guardianship proceeding was instituted during his lawful heirs. Similarly, the attorney's fees paid to PNB for acting as the guardian of Pedro
the lifetime of the decedent when there was yet no estate to be settled. Pajonar's property during his lifetime should also be considered as a deductible
administration expense. PNB provided a detailed accounting of decedent's property and gave
Again, this contention must fail.
advice as to the proper settlement of the latter's estate, acts which contributed towards the 1990, Justice Dizon authorized Atty. Jesus M. Gonzales (Atty. Gonzales) to sign and file on
collection of decedent's assets and the subsequent settlement of the estate. behalf of the Estate the required estate tax return and to represent the same in securing a
We find that the Court of Appeals did not commit reversible error in affirming the questioned Certificate of Tax Clearance. Eventually, on April 17, 1990, Atty. Gonzales wrote a
resolution of the Court of Tax Appeals. letter9addressed to the BIR Regional Director for San Pablo City and filed the estate tax
return10 with the same BIR Regional Office, showing therein a NIL estate tax liability,
WHEREFORE, the December 21, 1995 Decision of the Court of Appeals is AFFIRMED. The
computed as follows:
notarial fee for the extrajudicial settlement and the attorney's fees in the guardianship
proceedings are allowable deductions from the gross estate of Pedro Pajonar.1wphi1.nt COMPUTATION OF TAX
SO ORDERED. Conjugal Real Property (Sch. 1) P10,855,020.00
Melo, Vitug, Panganiban and Purisima, JJ., concur. Conjugal Personal Property (Sch.2) 3,460,591.34
Taxable Transfer (Sch. 3)
Gross Conjugal Estate 14,315,611.34
Less: Deductions (Sch. 4) 187,822,576.06
Net Conjugal Estate NIL
Less: Share of Surviving Spouse NIL.
G.R. No. 140944 April 30, 2008
Net Share in Conjugal Estate NIL
RAFAEL ARSENIO S. DIZON, in his capacity as the Judicial Administrator of the Estate
xxx
of the deceased JOSE P. FERNANDEZ, petitioner,
vs. Net Taxable Estate NIL.
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.
Estate Tax Due NIL.11
DECISION
On April 27, 1990, BIR Regional Director for San Pablo City, Osmundo G. Umali issued
NACHURA, J.: Certification Nos. 2052[12]and 2053[13] stating that the taxes due on the transfer of real and
Before this Court is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Civil personal properties[14] of Jose had been fully paid and said properties may be transferred to
Procedure seeking the reversal of the Court of Appeals (CA) Decision 2 dated April 30, 1999 his heirs. Sometime in August 1990, Justice Dizon passed away. Thus, on October 22, 1990,
which affirmed the Decision3 of the Court of Tax Appeals (CTA) dated June 17, 1997.4 the probate court appointed petitioner as the administrator of the Estate. 15
The Facts Petitioner requested the probate court's authority to sell several properties forming part of the
On November 7, 1987, Jose P. Fernandez (Jose) died. Thereafter, a petition for the probate Estate, for the purpose of paying its creditors, namely: Equitable Banking Corporation
of his will5 was filed with Branch 51 of the Regional Trial Court (RTC) of Manila (probate (P19,756,428.31), Banque de L'Indochine et. de Suez (US$4,828,905.90 as of January 31,
court).[6] The probate court then appointed retired Supreme Court Justice Arsenio P. Dizon 1988), Manila Banking Corporation (P84,199,160.46 as of February 28, 1989) and State
(Justice Dizon) and petitioner, Atty. Rafael Arsenio P. Dizon (petitioner) as Special and Investment House, Inc. (P6,280,006.21). Petitioner manifested that Manila Bank, a major
Assistant Special Administrator, respectively, of the Estate of Jose (Estate). In a letter 7dated creditor of the Estate was not included, as it did not file a claim with the probate court since it
October 13, 1988, Justice Dizon informed respondent Commissioner of the Bureau of Internal had security over several real estate properties forming part of the Estate. 16
Revenue (BIR) of the special proceedings for the Estate. However, on November 26, 1991, the Assistant Commissioner for Collection of the BIR,
Petitioner alleged that several requests for extension of the period to file the required estate Themistocles Montalban, issued Estate Tax Assessment Notice No. FAS-E-87-91-
tax return were granted by the BIR since the assets of the estate, as well as the claims 003269,17 demanding the payment of P66,973,985.40 as deficiency estate tax, itemized as
against it, had yet to be collated, determined and identified. Thus, in a letter 8 dated March 14, follows:
Deficiency Estate Tax- 1987 listing of the properties of the deceased (pp. 89-105, BIR
rec.);
Estate tax P31,868,414.48
5. Claims against the estate filed by Equitable Banking Corp. "D" to "D-24"
25% surcharge- late filing 7,967,103.62
with the probate Court in the amount of P19,756,428.31 as
late payment 7,967,103.62 of March 31, 1988, together with the Annexes to the claim
Interest 19,121,048.68 (pp. 64-88, BIR records);
Compromise-non filing 25,000.00 6. Claim filed by Banque de L' Indochine et de Suez with the "E" to "E-3"
probate Court in the amount of US $4,828,905.90 as of
non payment 25,000.00 January 31, 1988 (pp. 262-265, BIR records);
no notice of death 15.00 7. Claim of the Manila Banking Corporation (MBC) which as of "F" to "F-3"
no CPA Certificate 300.00 November 7, 1987 amounts to P65,158,023.54, but
recomputed as of February 28, 1989 at a total amount
Total amount due & collectible P66,973,985.4018 of P84,199,160.46; together with the demand letter from
In his letter19 dated December 12, 1991, Atty. Gonzales moved for the reconsideration of the MBC's lawyer (pp. 194-197, BIR records);
said estate tax assessment. However, in her letter 20 dated April 12, 1994, the BIR
8. Demand letter of Manila Banking Corporation prepared by "G" & "G-1"
Commissioner denied the request and reiterated that the estate is liable for the payment
Asedillo, Ramos and Associates Law Offices addressed to
of P66,973,985.40 as deficiency estate tax. On May 3, 1994, petitioner received the letter of
Fernandez Hermanos, Inc., represented by Jose P.
denial. On June 2, 1994, petitioner filed a petition for review 21 before respondent CTA. Trial
Fernandez, as mortgagors, in the total amount
on the merits ensued.
of P240,479,693.17 as of February 28, 1989 (pp. 186-187,
As found by the CTA, the respective parties presented the following pieces of evidence, to BIR records);
wit:
9. Claim of State Investment House, Inc. filed with the RTC, "H" to "H-16"
In the hearings conducted, petitioner did not present testimonial evidence but merely
Branch VII of Manila, docketed as Civil Case No. 86-38599
documentary evidence consisting of the following:
entitled "State Investment House, Inc., Plaintiff, versus
Nature of Document (sic) Exhibits Maritime Company Overseas, Inc. and/or Jose P.
1. Letter dated October 13, 1988 from Arsenio P. Dizon "A" Fernandez, Defendants," (pp. 200-215, BIR records);
addressed to the Commissioner of Internal Revenue 10. Letter dated March 14, 1990 of Arsenio P. Dizon addressed "I"
informing the latter of the special proceedings for the to Atty. Jesus M. Gonzales, (p. 184, BIR records);
settlement of the estate (p. 126, BIR records);
11. Letter dated April 17, 1990 from J.M. Gonzales addressed to "J"
2. Petition for the probate of the will and issuance of letter of "B" & "B-1" the Regional Director of BIR in San Pablo City (p. 183, BIR
administration filed with the Regional Trial Court (RTC) of records);
Manila, docketed as Sp. Proc. No. 87-42980 (pp. 107-108,
12. Estate Tax Return filed by the estate of the late Jose P. "K" to "K-5"
BIR records);
Fernandez through its authorized representative, Atty. Jesus
3. Pleading entitled "Compliance" filed with the probate Court "C" M. Gonzales, for Arsenio P. Dizon, with attachments (pp.
submitting the final inventory of all the properties of the 177-182, BIR records);
deceased (p. 106, BIR records);
13. Certified true copy of the Letter of Administration issued by "L"
4. Attachment to Exh. "C" which is the detailed and complete "C-1" to "C-17" RTC Manila, Branch 51, in Sp. Proc. No. 87-42980
appointing Atty. Rafael S. Dizon as Judicial Administrator of "3";
the estate of Jose P. Fernandez; (p. 102, CTA records) and
13. Demand letter (FAS-E-87-91-00), signed by the Asst. p. 169
14. Certification of Payment of estate taxes Nos. 2052 and 2053, "M" to "M-5" Commissioner for Collection for the Commissioner of
both dated April 27, 1990, issued by the Office of the Internal Revenue, demanding payment of the amount
Regional Director, Revenue Region No. 4-C, San Pablo City, of P66,973,985.40; and
with attachments (pp. 103-104, CTA records.).
14. Assessment Notice FAS-E-87-91-00 pp. 169-17022
Respondent's [BIR] counsel presented on June 26, 1995 one witness in the person of
The CTA's Ruling
Alberto Enriquez, who was one of the revenue examiners who conducted the
investigation on the estate tax case of the late Jose P. Fernandez. In the course of the On June 17, 1997, the CTA denied the said petition for review. Citing this Court's ruling
direct examination of the witness, he identified the following: in Vda. de Oate v. Court of Appeals,23 the CTA opined that the aforementioned pieces of
evidence introduced by the BIR were admissible in evidence. The CTA ratiocinated:
Documents/Signatures BIR Record
Although the above-mentioned documents were not formally offered as evidence for
1. Estate Tax Return prepared by the BIR; p. 138 respondent, considering that respondent has been declared to have waived the presentation
thereof during the hearing on March 20, 1996, still they could be considered as evidence for
2. Signatures of Ma. Anabella Abuloc and Alberto Enriquez, Jr. -do-
respondent since they were properly identified during the presentation of respondent's
appearing at the lower Portion of Exh. "1";
witness, whose testimony was duly recorded as part of the records of this case. Besides, the
3. Memorandum for the Commissioner, dated July 19, 1991, pp. 143-144 documents marked as respondent's exhibits formed part of the BIR records of the case. 24
prepared by revenue examiners, Ma. Anabella A. Abuloc,
Nevertheless, the CTA did not fully adopt the assessment made by the BIR and it came up
Alberto S. Enriquez and Raymund S. Gallardo; Reviewed by
with its own computation of the deficiency estate tax, to wit:
Maximino V. Tagle
Conjugal Real Property P 5,062,016.00
4. Signature of Alberto S. Enriquez appearing at the lower -do-
portion on p. 2 of Exh. "2"; Conjugal Personal Prop. 33,021,999.93
5. Signature of Ma. Anabella A. Abuloc appearing at the lower -do- Gross Conjugal Estate 38,084,015.93
portion on p. 2 of Exh. "2"; Less: Deductions 26,250,000.00
6. Signature of Raymund S. Gallardo appearing at the Lower -do- Net Conjugal Estate P 11,834,015.93
portion on p. 2 of Exh. "2";
Less: Share of Surviving Spouse 5,917,007.96
7. Signature of Maximino V. Tagle also appearing on p. 2 of -do-
Exh. "2"; Net Share in Conjugal Estate P 5,917,007.96