tax cases for january 30

8/9/2019 Tax Cases for January 30

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PHILIPPINE JURISPRUDENCE - FULL TEXTThe Lawphil Project - Arellano Law FoundationG.R. No. L-43082 June 18, 1937PABLO LORENZO vs. JUAN POSADAS, JR.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

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.

Pablo Lorenzo and Delfin Joven for plaintiff-appellant.

Office of the Solicitor-General Hilado for defendant-appellant.

LAUREL,J.:

On October 4, 1932, the plaintiff Pablo Lorenzo, in his capacity as trustee of the estate ofThomas Hanley, deceased, brought this action in the Court of First Instance of Zamboangaagainst the defendant, Juan Posadas, Jr., then the Collector of Internal Revenue, for therefund 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 underprotest. The defendant set up a counterclaim for P1,191.27 alleged to be interest due onthe tax in question and which was not included in the original assessment. From thedecision of the Court of First Instance of Zamboanga dismissing both the plaintiff'scomplaint 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. Onjune 14, 1922, proceedings for the probate of his will and the settlement and distributionof his estate were begun in the Court of First Instance of Zamboanga. The will wasadmitted 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 orotherwise disposed of for a period of ten (10) years after my death, and that thesame be handled and managed by the executors, and proceeds thereof to be givento my nephew, Matthew Hanley, at Castlemore, Ballaghaderine, County ofRosecommon, Ireland, and that he be directed that the same be used only for the


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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 abovementioned Matthew Hanley to be disposed of in the way he thinks mostadvantageous.

x x x x x x x x x

8. I state at this time I have one brother living, named Malachi Hanley, and that mynephew, 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 ofther 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 onMarch 10, 1924. He acted as trustee until February 29, 1932, when he resigned and theplaintiff herein was appointed in his stead.

During the incumbency of the plaintiff as trustee, the defendant Collector of InternalRevenue, alleging that the estate left by the deceased at the time of his death consisted ofrealty valued at P27,920 and personalty valued at P1,465, and allowing a deduction ofP480.81, 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 monthlyinterest from July 1, 1931 to the date of payment and a surcharge of 25 per cent on thetax, amounted to P2,052.74. On March 15, 1932, the defendant filed a motion in thetestamentary proceedings pending before the Court of First Instance of Zamboanga(Special proceedings No. 302) praying that the trustee, plaintiff herein, be ordered to payto 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 itsrecovery. The defendant overruled the plaintiff's protest and refused to refund the saidamount 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 hisinstituted heir, Matthew Hanley, from the moment of the death of the former, andthat 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 theestate upon the death of the testator, and not, as it should have been held, uponthe 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 tothe instituted heir.

IV. In not allowing as lawful deductions, in the determination of the net amount of


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the estate subject to said tax, the amounts allowed by the court as compensationto 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 fornew trial.

The defendant-appellant contradicts the theories of the plaintiff and assigns the followingerror besides:

The lower court erred in not ordering the plaintiff to pay to the defendant thesum of P1,191.27, representing part of the interest at the rate of 1 per cent permonth from April 10, 1924, to June 30, 1931, which the plaintiff had failed to payon the inheritance tax assessed by the defendant against the estate of ThomasHanley.

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 thetestator's death, or on its value ten years later? (c) In determining the net value of theestate subject to tax, is it proper to deduct the compensation due to trustees? (d) Whatlaw 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 theinheritance tax? If so, should the additional interest claimed by the defendant in hisappeal be paid by the estate? Other points of incidental importance, raised by the partiesin 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 "everytransmission by virtue of inheritance, devise, bequest, giftmortis causa, or advance in

anticipation of inheritance,devise, or bequest." The tax therefore is upon transmission orthe 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 tobecome operative at or after death. Acording to article 657 of the Civil Code, "the rights tothe succession of a person are transmitted from the moment of his death." "In otherwords", said Arellano, C. J., ". . . the heirs succeed immediately to all of the property of thedeceased ancestor. The property belongs to the heirs at the moment of the death of theancestor as completely as if the ancestor had executed and delivered to them a deed forthe same before his death." (Bondad vs. Bondad, 34 Phil., 232. See also, Mijares vs. Nery, 3Phil., 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, 38Phil., 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, 53Phil., 654.) Plaintiff, however, asserts that while article 657 of the Civil Code is applicableto testate as well as intestate succession, it operates only in so far as forced heirs areconcerned. But the language of article 657 of the Civil Code is broad and makes nodistinction 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


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transmission thereof from the moment of death. The provision of section 625 of the Codeof Civil Procedure regarding the authentication and probate of a will as a necessarycondition to effect transmission of property does not affect the general rule laid down inarticle 657 of the Civil Code. The authentication of a will implies its due execution butonce probated and allowed the transmission is effective as of the death of the testator inaccordance with article 657 of the Civil Code. Whatever may be the time when actualtransmission of the inheritance takes place, succession takes place in any event at themoment of the decedent's death. The time when the heirs legally succeed to theinheritance 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 elalleimiento 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 inheritancetax is clearly fixed by section 1544 of the Revised Administrative Code as amended by ActNo. 3031, in relation to section 1543 of the same Code. The two sections follow:

SEC. 1543. Exemption of certain acquisitions and transmissions. The followingshall 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 thefiduciary heir or legatee to the trustees.

(c) The transmission from the first heir, legatee, or donee in favor ofanother beneficiary, in accordance with the desire of the predecessor.

In the last two cases, if the scale of taxation appropriate to the new beneficiary isgreater 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, beforeentrance into possession of the property.

(b) In other cases, within the six months subsequent to the death of thepredecessor; but if judicial testamentary or intestate proceedings shall beinstituted prior to the expiration of said period, the payment shall bemade by the executor or administrator before delivering to eachbeneficiary his share.

If the tax is not paid within the time hereinbefore prescribed, interest at the rateof twelve per centum per annum shall be added as part of the tax; and to the taxand interest due and unpaid within ten days after the date of notice and demand


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thereof by the collector, there shall be further added a surcharge of twenty-fiveper centum.

A certified of all letters testamentary or of admisitration shall be furnished theCollector 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) ofsection 1543, should read "fideicommissary" or "cestui que trust". There was an obviousmistake in translation from the Spanish to the English version.

The instant case does fall under subsection (a), but under subsection (b), of section 1544above-quoted, as there is here no fiduciary heirs, first heirs, legatee or donee. Under thesubsection, the tax should have been paid before the delivery of the properties inquestion 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 onMay 27, 1922 and, that the inheritance tax should be based on the value of the estate in1932, or ten years after the testator's death. The plaintiff introduced evidence tending toshow 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 theplaintiff 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 imposeinheritance taxes takes its being and if, upon the death of the decedent, succession takesplace 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 anysubsequent 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. Seealso Knowlton vs. Moore, 178 U.S., 41; 20 Sup. Ct. Rep., 747; 44 Law. ed., 969.) "The rightof the state to an inheritance tax accrues at the moment of death, and hence is ordinarilymeasured as to any beneficiary by the value at that time of such property as passes tohim. 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 andProcedure (vol. 37, pp. 1574, 1575) that, in the case of contingent remainders, taxation ispostponed until the estate vests in possession or the contingency is settled. This rule wasformerly followed in New York and has been adopted in Illinois, Minnesota,Massachusetts, Ohio, Pennsylvania and Wisconsin. This rule, horever, is by no meansentirely 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 examinationof cases and authorities that New York has varied and now requires the immediateappraisal of the postponed estate at its clear market value and the payment forthwith ofthe tax on its out of the corpus of the estate transferred. (In re Vanderbilt, 172 N. Y., 69; 69N. E., 782; In re Huber, 86 N. Y. App. Div., 458; 83 N. Y. Supp., 769; Estate of Tracy, 179 N.


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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 byinheritance is taxable at the time of the predecessor's death, notwithstanding thepostponement of the actual possession or enjoyment of the estate by the beneficiary, andthe tax measured by the value of the property transmitted at that time regardless of itsappreciation or depreciation.

(c) Certain items are required by law to be deducted from the appraised gross in arrivingat 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 courtallowed a deduction of only P480.81. This sum represents the expenses anddisbursements of the executors until March 10, 1924, among which were their fees andthe 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 whichprovides, 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, . . . thejudicial 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 thecompensation due him may lawfully be deducted in arriving at the net value of the estatesubject to tax. There is no statute in the Philippines which requires trustees' commissionsto 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 beseparated. (Ibid.; In re Vanneck's Estate, 161 N. Y. Supp., 893; 175 App. Div., 363; In reCollard's Estate, 161 N. Y. Supp., 455.) On the contrary, in paragraph 5 of his will, thetestator expressed the desire that his real estate be handled and managed by hisexecutors until the expiration of the period of ten years therein provided. Judicialexpenses are expenses of administration (61 C. J., p. 1705) but, in State vs. HennepinCounty Probate Court (112 N. W., 878; 101 Minn., 485), it was said: ". . . Thecompensation of a trustee, earned, not in the administration of the estate, but in themanagement thereof for the benefit of the legatees or devises, does not come properlywithin the class or reason for exempting administration expenses. . . . Service rendered inthat behalf have no reference to closing the estate for the purpose of a distributionthereof 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 ofvoluntary creation, and intended for the preservation of the estate. No sound reason isgiven to support the contention that such expenses should be taken into consideration infixing 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 ThomasHanley under the provisions of section 1544 of the Revised Administrative Code, as


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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. Thelaw at the time was section 1544 above-mentioned, as amended by Act No. 3031, whichtook effect on March 9, 1922.

It is well-settled that inheritance taxation is governed by the statute in force at the time ofthe death of the decedent (26 R. C. L., p. 206; 4 Cooley on Taxation, 4th ed., p. 3461). Thetaxpayer can not foresee and ought not to be required to guess the outcome of pendingmeasures. Of course, a tax statute may be made retroactive in its operation. Liability fortaxes under retroactive legislation has been "one of the incidents of social life." (Seattlevs. Kelleher, 195 U. S., 360; 49 Law. ed., 232 Sup. Ct. Rep., 44.) But legislative intent that atax statute should operate retroactively should be perfectly clear. (Scwab vs. Doyle, 42Sup. 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 beconsidered as prospective in its operation, whether it enacts, amends, or repeals aninheritance tax, unless the language of the statute clearly demands or expresses that itshall 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 estatesthe inheritance taxes due from which have not been paid, Act No. 3606 itself contains noprovisions indicating legislative intent to give it retroactive effect. No such effect canbegiven the statute by this court.

The defendant Collector of Internal Revenue maintains, however, that certain provisionsof Act No. 3606 are more favorable to the taxpayer than those of Act No. 3031, that saidprovisions are penal in nature and, therefore, should operate retroactively in conformitywith the provisions of article 22 of the Revised Penal Code. This is the reason why heapplied Act No. 3606 instead of Act No. 3031. Indeed, under Act No. 3606, (1) thesurcharge 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 daysfrom notice and demand by rthe Collector of Internal Revenue within which to pay thetax, instead of ten days only as required by the old law.

Properly speaking, a statute is penal when it imposes punishment for an offensecommitted against the state which, under the Constitution, the Executive has the powerto pardon. In common use, however, this sense has been enlarged to include within theterm "penal statutes" all status which command or prohibit certain acts, and establishpenalties for their violation, and even those which, without expressly prohibiting certainacts, 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 oftaxes 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; 12Sup. 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 isnot applicable to the case at bar, and in the absence of clear legislative intent, we cannotgive Act No. 3606 a retroactive effect.

(e) The plaintiff correctly states that the liability to pay a tax may arise at a certain timeand the tax may be paid within another given time. As stated by this court, "the mere


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failure to pay one's tax does not render one delinqent until and unless the entire periodhas eplased within which the taxpayer is authorized by law to make such paymentwithout being subjected to the payment of penalties for fasilure to pay his taxes withinthe prescribed period." (U. S. vs. Labadan, 26 Phil., 239.)

The defendant maintains that it was the duty of the executor to pay the inheritance taxbefore the delivery of the decedent's property to the trustee. Stated otherwise, thedefendant contends that delivery to the trustee was delivery to the cestui que trust, thebeneficiery in this case, within the meaning of the first paragraph of subsection (b) ofsection 1544 of the Revised Administrative Code. This contention is well taken and issustained. The appointment of P. J. M. Moore as trustee was made by the trial court inconformity 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. Noparticular 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, theuse 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 withsufficient certainty designate the beneficiaries, their interest in the ttrust, the purpose orobject of the trust, and the property or subject matter thereof. Stated otherwise, toconstitute 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 ascertainobject; 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 hiswill that certain of his properties be kept together undisposed during a fixed period, for astated purpose. The probate court certainly exercised sound judgment in appointment atrustee to carry into effect the provisions of the will (see sec. 582, Code of CivilProcedure).

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 ofthe deceased was placed in trust did not remove it from the operation of our inheritancetax laws or exempt it from the payment of the inheritance tax. The correspondinginheritance tax should have been paid on or before March 10, 1924, to escape thepenalties of the laws. This is so for the reason already stated that the delivery of theestate to the trustee was in esse delivery of the same estate to the cestui que trust, thebeneficiary 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 Mooreaccepted the trust and took possesson of the trust estate he thereby admitted that theestate 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 vestedabsolutely 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 thecreation of a trust of the type at hand, the result would be plainly disastrous. Testatorsmay provide, as Thomas Hanley has provided, that their estates be not delivered to their


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beneficiaries until after the lapse of a certain period of time. In the case at bar, the periodis ten years. In other cases, the trust may last for fifty years, or for a longer period whichdoes not offend the rule against petuities. The collection of the tax would then be left tothe will of a private individual. The mere suggestion of this result is a sufficient warningagainst 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; 25Law. ed., 558; Lane County vs. Oregon, 7 Wall., 71; 19 Law. ed., 101; Union RefrigeratorTransit Co. vs. Kentucky, 199 U. S., 194; 26 Sup. Ct. Rep., 36; 50 Law. ed., 150; CharlesRiver Bridge vs. Warren Bridge, 11 Pet., 420; 9 Law. ed., 773.) The obligation to pay taxesrests not upon the privileges enjoyed by, or the protection afforded to, a citizen by thegovernment 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 paymentof 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, byconstruction, 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 aconstruction 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; Muoz & Co. vs. Hord, 12 Phil., 624;Hongkong & Shanghai Banking Corporation vs. Rafferty, 39 Phil., 145; Luzon StevedoringCo. vs. Trinidad, 43 Phil., 803.) When proper, a tax statute should be construed to avoidthe possibilities of tax evasion. Construed this way, the statute, without resulting ininjustice 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 internalrevenue 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 onaccount of riots directed against the Chinese on October 18, 19, and 20, 1924, they wereprevented from praying their internal revenue taxes on time and by mutual agreementclosed their homes and stores and remained therein, does not authorize the Collector ofInternal Revenue to extend the time prescribed for the payment of the taxes or to acceptthem 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, ". . . thatthe modes adopted to enforce the taxes levied should be interfered with as little aspossible. Any delay in the proceedings of the officers, upon whom the duty is developedof collecting the taxes, may derange the operations of government, and thereby, causeserious 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 ofinheritance tax and, therefore, liable for the payment of interest and surcharge providedby law in such cases.

The delinquency in payment occurred on March 10, 1924, the date when Moore becametrustee. The interest due should be computed from that date and it is error on the part of


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the defendant to compute it one month later. The provisions cases is mandatory (see andcf. Lim Co Chui vs. Posadas, supra), and neither the Collector of Internal Revenuen or thiscourt may remit or decrease such interest, no matter how heavily it may burden thetaxpayer.

To the tax and interest due and unpaid within ten days after the date of notice anddemand thereof by the Collector of Internal Revenue, a surcharge of twenty-five percentum 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 acommuniction dated October 16, 1931 (Exhibit 29). The date fixed for the payment of thetax and interest was November 30, 1931. November 30 being an official holiday, the tenthday fell on December 1, 1931. As the tax and interest due were not paid on that date, theestate became liable for the payment of the surcharge.

In view of the foregoing, it becomes unnecessary for us to discuss the fifth error assignedby the plaintiff in his brief.

We shall now compute the tax, together with the interest and surcharge due from theestate 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 personalproperties worth P1,465, or a total of P29,385. Deducting from this amount the sum ofP480.81, representing allowable deductions under secftion 1539 of the RevisedAdministrative Code, we have P28,904.19 as the net value of the estate subject toinheritance tax.

The primary tax, according to section 1536, subsection (c), of the Revised AdministrativeCode, should be imposed at the rate of one per centum upon the first ten thousand pesosand 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 isP100. Two per centum of P18,904.19 is P378.08. Adding to these two sums an additionaltwo hundred per centum, or P965.16, we have as primary tax, correctly computed by thedefendant, the sum of P1,434.24.

To the primary tax thus computed should be added the sums collectible under section1544 of the Revised Administrative Code. First should be added P1,465.31 which standsfor interest at the rate of twelve per centum per annum from March 10, 1924, the date ofdelinquency, to September 15, 1932, the date of payment under protest, a periodcovering 8 years, 6 months and 5 days. To the tax and interest thus computed should beadded the sum of P724.88, representing a surhcarge of 25 per cent on both the tax andinterest, and also P10, the compromise sum fixed by the defendant (Exh. 29), giving agrand total of P3,634.43.

As the plaintiff has already paid the sum of P2,052.74, only the sums of P1,581.69 islegally due from the estate. This last sum is P390.42 more than the amount demanded bythe defendant in his counterclaim. But, as we cannot give the defendant more than whathe claims, we must hold that the plaintiff is liable only in the sum of P1,191.27 theamount stated in the counterclaim.


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The judgment of the lower court is accordingly modified, with costs against the plaintiff inboth instances. So ordered.

Avancea, C.J., Abad Santos, Imperial, Diaz and Concepcion, JJ., concur.

Villa-Real, J., concurs.

The Lawphil Project - Arellano Law Foundation

PHILIPPINE JURISPRUDENCE - FULL TEXTThe Lawphil Project - Arellano Law FoundationG.R. No. L-11622 January 28, 1961COLLECTOR OF INTERNAL REVENUE vs. DOUGLAS FISHER, ET AL.


Manila

EN BANC

G.R. No. L-11622 January 28, 1961

THE COLLECTOR OF INTERNAL REVENUE, petitioner,vs.DOUGLAS FISHER AND BETTINA FISHER, and the COURT OF TAX APPEALS,respondents.

x---------------------------------------------------------x

G.R. No. L-11668 January 28, 1961.

DOUGLAS FISHER AND BETTINA FISHER, petitioner,vs.THE COLLECTOR OF INTERNAL REVENUE, and the COURT OF TAX APPEALS,respondents.

BARRERA,J.:

This case relates to the determination and settlement of the hereditary estate left by thedeceased Walter G. Stevenson, and the laws applicable thereto. Walter G. Stevenson (bornin the Philippines on August 9, 1874 of British parents and married in the City of Manilaon January 23, 1909 to Beatrice Mauricia Stevenson another British subject) died onFebruary 22, 1951 in San Francisco, California, U.S.A. whereto he and his wife moved andestablished their permanent residence since May 10, 1945. In his will executed in SanFrancisco on May 22, 1947, and which was duly probated in the Superior Court ofCalifornia on April 11, 1951, Stevenson instituted his wife Beatrice as his sole heiress tothe following real and personal properties acquired by the spouses while residing in the


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Philippines, described and preliminary assessed as follows:

Gross Estate

Real Property 2 parcels of land inBaguio, covered by T.C.T. Nos. 378 and

379 P43,500.00Personal Property

(1) 177 shares of stock of Canacao Estateat P10.00 each 1,770.00

(2) 210,000 shares of stock of MindanaoMother Lode Mines, Inc. at P0.38 per share 79,800.00

(3) Cash credit with Canacao Estate Inc. 4,870.88

(4) Cash, with the Chartered Bank of India,Australia & China 851.97

Total Gross Assets P130,792.85

On May 22, 1951, ancillary administration proceedings were instituted in the Court ofFirst Instance of Manila for the settlement of the estate in the Philippines. In due timeStevenson's will was duly admitted to probate by our court and Ian Murray Statt wasappointed ancillary administrator of the estate, who on July 11, 1951, filed a preliminaryestate and inheritance tax return with the reservation of having the properties declaredtherein finally appraised at their values six months after the death of Stevenson.Preliminary return was made by the ancillary administrator in order to secure the waiverof the Collector of Internal Revenue on the inheritance tax due on the 210,000 shares ofstock in the Mindanao Mother Lode Mines Inc. which the estate then desired to dispose inthe United States. Acting upon said return, the Collector of Internal Revenue accepted the

valuation of the personal properties declared therein, but increased the appraisal of thetwo parcels of land located in Baguio City by fixing their fair market value in the amountof P52.200.00, instead of P43,500.00. After allowing the deductions claimed by theancillary administrator for funeral expenses in the amount of P2,000.00 and for judicialand administration expenses in the sum of P5,500.00, the Collector assessed the state theamount of P5,147.98 for estate tax and P10,875,26 or inheritance tax, or a total ofP16,023.23. Both of these assessments were paid by the estate on June 6, 1952.

On September 27, 1952, the ancillary administrator filed in amended estate andinheritance tax return in pursuance f his reservation made at the time of filing of thepreliminary return and for the purpose of availing of the right granted by section 91 ofthe National Internal Revenue Code.

In this amended return the valuation of the 210,000 shares of stock in the MindanaoMother Lode Mines, Inc. was reduced from 0.38 per share, as originally declared, to P0.20per share, or from a total valuation of P79,800.00 to P42,000.00. This change in price pershare of stock was based by the ancillary administrator on the market notation of thestock obtaining at the San Francisco California) Stock Exchange six months from thedeath of Stevenson, that is, As of August 22, 1931. In addition, the ancillary administratormade claim for the following deductions:


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Funeral expenses ($1,04326) P2,086.52

Judicial Expenses:

(a) Administrator's Fee P1,204.34

(b) Attorney's Fee 6.000.00

(c) Judicial and Administrationexpenses as of August 9, 1952 1,400.05

8,604.39

Real Estate Tax for 1951 on Baguioreal properties (O.R. No. B-1686836) 652.50

Claims against the estate:($5,000.00) P10,000.00 P10,000.00

Plus: 4% int. p.a. from Feb. 2 to 22,1951 22.47 10,022.47

Sub-Total P21,365.88

In the meantime, on December 1, 1952, Beatrice Mauricia Stevenson assigned all herrights and interests in the estate to the spouses, Douglas and Bettina Fisher, respondentsherein.

On September 7, 1953, the ancillary administrator filed a second amended estate andinheritance tax return (Exh. "M-N"). This return declared the same assets of the estatestated in the amended return of September 22, 1952, except that it contained new claimsfor additional exemption and deduction to wit: (1) deduction in the amount of P4,000.00from the gross estate of the decedent as provided for in Section 861 (4) of the U.S. FederalInternal Revenue Code which the ancillary administrator averred was allowable by wayof the reciprocity granted by Section 122 of the National Internal Revenue Code, as thenheld by the Board of Tax Appeals in case No. 71 entitled "Housman vs. Collector," August14, 1952; and (2) exemption from the imposition of estate and inheritance taxes on the210,000 shares of stock in the Mindanao Mother Lode Mines, Inc. also pursuant to thereciprocity proviso of Section 122 of the National Internal Revenue Code. In this lastreturn, the estate claimed that it was liable only for the amount of P525.34 for estate taxand P238.06 for inheritance tax and that, as a consequence, it had overpaid thegovernment. The refund of the amount of P15,259.83, allegedly overpaid, wasaccordingly requested by the estate. The Collector denied the claim. For this reason,action was commenced in the Court of First Instance of Manila by respondents, asassignees of Beatrice Mauricia Stevenson, for the recovery of said amount. Pursuant to

Republic Act No. 1125, the case was forwarded to the Court of Tax Appeals which court,after hearing, rendered decision the dispositive portion of which reads as follows:

In fine, we are of the opinion and so hold that: (a) the one-half () share of thesurviving spouse in the conjugal partnership property as diminished by theobligations properly chargeable to such property should be deducted from the netestate of the deceased Walter G. Stevenson, pursuant to Section 89-C of theNational Internal Revenue Code; (b) the intangible personal property belongingto the estate of said Stevenson is exempt from inheritance tax, pursuant to the


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provision of section 122 of the National Internal Revenue Code in relation to theCalifornia Inheritance Tax Law but decedent's estate is not entitled to anexemption of P4,000.00 in the computation of the estate tax; (c) for purposes ofestate and inheritance taxation the Baguio real estate of the spouses should bevalued at P52,200.00, and 210,000 shares of stock in the Mindanao Mother LodeMines, Inc. should be appraised at P0.38 per share; and (d) the estate shall beentitled to a deduction of P2,000.00 for funeral expenses and judicial expenses ofP8,604.39.

From this decision, both parties appealed.

The Collector of Internal Revenue, hereinafter called petitioner assigned four errorsallegedly committed by the trial court, while the assignees, Douglas and Bettina Fisherhereinafter called respondents, made six assignments of error. Together, the assignederrors raise the following main issues for resolution by this Court:

(1) Whether or not, in determining the taxable net estate of the decedent, one-half () of

the net estate should be deducted therefrom as the share of tile surviving spouse inaccordance with our law on conjugal partnership and in relation to section 89 (c) of theNational Internal revenue Code;

(2) Whether or not the estate can avail itself of the reciprocity proviso embodied inSection 122 of the National Internal Revenue Code granting exemption from the paymentof estate and inheritance taxes on the 210,000 shares of stock in the Mindanao MotherLode Mines Inc.;

(3) Whether or not the estate is entitled to the deduction of P4,000.00 allowed by Section861, U.S. Internal Revenue Code in relation to section 122 of the National InternalRevenue Code;

(4) Whether or not the real estate properties of the decedent located in Baguio City andthe 210,000 shares of stock in the Mindanao Mother Lode Mines, Inc., were correctlyappraised by the lower court;

(5) Whether or not the estate is entitled to the following deductions: P8,604.39 forjudicial and administration expenses; P2,086.52 for funeral expenses; P652.50 for realestate taxes; and P10,0,22.47 representing the amount of indebtedness allegedly incurredby the decedent during his lifetime; and

(6) Whether or not the estate is entitled to the payment of interest on the amount it

claims to have overpaid the government and to be refundable to it.

In deciding the first issue, the lower court applied a well-known doctrine in our civil lawthat in the absence of any ante-nuptial agreement, the contracting parties are presumedto have adopted the system of conjugal partnership as to the properties acquired duringtheir marriage. The application of this doctrine to the instant case is being disputed,however, by petitioner Collector of Internal Revenue, who contends that pursuant toArticle 124 of the New Civil Code, the property relation of the spouses Stevensons oughtnot to be determined by the Philippine law, but by the national law of the decedent


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husband, in this case, the law of England. It is alleged by petitioner that English laws donot recognize legal partnership between spouses, and that what obtains in thatjurisdiction is another regime of property relation, wherein all properties acquiredduring the marriage pertain and belong Exclusively to the husband. In further support ofhis stand, petitioner cites Article 16 of the New Civil Code (Art. 10 of the old) to the effectthat in testate and intestate proceedings, the amount of successional rights, amongothers, is to be determined by the national law of the decedent.

In this connection, let it be noted that since the mariage of the Stevensons in thePhilippines took place in 1909, the applicable law is Article 1325 of the old Civil Code andnot Article 124 of the New Civil Code which became effective only in 1950. It is true thatboth articles adhere to the so-called nationality theory of determining the propertyrelation of spouses where one of them is a foreigner and they have made no prioragreement as to the administration disposition, and ownership of their conjugalproperties. In such a case, the national law of the husband becomes the dominant law indetermining the property relation of the spouses. There is, however, a difference betweenthe two articles in that Article 1241 of the new Civil Code expressly provides that it shall

be applicable regardless of whether the marriage was celebrated in the Philippines orabroad while Article 13252 of the old Civil Code is limited to marriages contracted in aforeign land.

It must be noted, however, that what has just been said refers to mixed marriagesbetween a Filipino citizen and a foreigner. In the instant case, both spouses are foreignerswho married in the Philippines. Manresa,3 in his Commentaries, has this to say on thispoint:

La regla establecida en el art. 1.315, se refiere a las capitulaciones otorgadas enEspana y entre espanoles. El 1.325, a las celebradas en el extranjero cuandoalguno de los conyuges es espanol. En cuanto a la regla procedente cuando dos

extranjeros se casan en Espana, o dos espanoles en el extranjero hay que atenderen el primer caso a la legislacion de pais a que aquellos pertenezean, y en elsegundo, a las reglas generales consignadas en los articulos 9 y 10 de nuestroCodigo. (Emphasis supplied.)

If we adopt the view of Manresa, the law determinative of the property relation of theStevensons, married in 1909, would be the English law even if the marriage wascelebrated in the Philippines, both of them being foreigners. But, as correctly observed bythe Tax Court, the pertinent English law that allegedly vests in the decedent husband fullownership of the properties acquired during the marriage has not been proven bypetitioner. Except for a mere allegation in his answer, which is not sufficient, the record isbereft of any evidence as to what English law says on the matter. In the absence of proof,

the Court is justified, therefore, in indulging in what Wharton calls "processualpresumption," in presuming that the law of England on this matter is the same as ourlaw.4

Nor do we believe petitioner can make use of Article 16 of the New Civil Code (art. 10, oldCivil Code) to bolster his stand. A reading of Article 10 of the old Civil Code, whichincidentally is the one applicable, shows that it does not encompass or contemplate togovern the question of property relation between spouses. Said article distinctly speaks


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ofamount of successional rights and this term, in speaks in our opinion, properly refers tothe extent or amount of property that each heir is legally entitled to inherit from theestate available for distribution. It needs to be pointed out that theproperty relation ofspouses, as distinguished from their successional rights, is governed differently by thespecific and express provisions of Title VI, Chapter I of our new Civil Code (Title III,Chapter I of the old Civil Code.) We, therefore, find that the lower court correctlydeducted the half of the conjugal property in determining the hereditary estate left by thedeceased Stevenson.

On the second issue, petitioner disputes the action of the Tax Court in the exempting therespondents from paying inheritance tax on the 210,000 shares of stock in the MindanaoMother Lode Mines, Inc. in virtue of the reciprocity proviso of Section 122 of the NationalInternal Revenue Code, in relation to Section 13851 of the California Revenue andTaxation Code, on the ground that: (1) the said proviso of the California Revenue andTaxation Code has not been duly proven by the respondents; (2) the reciprocityexemptions granted by section 122 of the National Internal Revenue Code can only beavailed of by residents of foreign countries and not of residents of a state in the United

States; and (3) there is no "total" reciprocity between the Philippines and the state ofCalifornia in that while the former exempts payment of both estate and inheritance taxeson intangible personal properties, the latter only exempts the payment of inheritance tax..

To prove the pertinent California law, Attorney Allison Gibbs, counsel for hereinrespondents, testified that as an active member of the California Bar since 1931, he isfamiliar with the revenue and taxation laws of the State of California. When asked by thelower court to state the pertinent California law as regards exemption of intangiblepersonal properties, the witness cited article 4, section 13851 (a) and (b) of the CaliforniaInternal and Revenue Code as published in Derring's California Code, a publication of theBancroft-Whitney Company inc. And as part of his testimony, a full quotation of the citedsection was offered in evidence as Exhibits "V-2" by the respondents.

It is well-settled that foreign laws do not prove themselves in our jurisdiction and ourcourts are not authorized to take judicial notice of them.5 Like any other fact, they mustbe alleged and proved.6

Section 41, Rule 123 of our Rules of Court prescribes the manner of proving foreign lawsbefore our tribunals. However, although we believe it desirable that these laws be provedin accordance with said rule, we held in the case ofWillamette Iron and Steel Works v.Muzzal, 61 Phil. 471, that "a reading of sections 300 and 301 of our Code of CivilProcedure (now section 41, Rule 123) will convince one that these sections do notexclude the presentation of other competent evidence to prove the existence of a foreignlaw." In that case, we considered the testimony of an attorney-at-law of San Francisco,

California who quoted verbatim a section of California Civil Code and who stated that thesame was in force at the time the obligations were contracted, as sufficient evidence toestablish the existence of said law. In line with this view, we find no error, therefore, onthe part of the Tax Court in considering the pertinent California law as proved byrespondents' witness.

We now take up the question of reciprocity in exemption from transfer or death taxes,between the State of California and the Philippines.F


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Section 122 of our National Internal Revenue Code, in pertinent part, provides:

... And, provided, further, That no tax shall be collected under this Title in respectof intangible personal property (a) if the decedent at the time of his death was aresident of a foreign country which at the time of his death did not impose atransfer of tax or death tax of any character in respect of intangible personalproperty of citizens of the Philippines not residing in that foreign country, or (b) ifthe laws of the foreign country of which the decedent was a resident at the time ofhis death allow a similar exemption from transfer taxes or death taxes of everycharacter in respect of intangible personal property owned by citizens of thePhilippines not residing in that foreign country." (Emphasis supplied).

On the other hand, Section 13851 of the California Inheritance Tax Law, insofar aspertinent, reads:.

"SEC. 13851, Intangibles of nonresident: Conditions. Intangible personal propertyis exempt from the tax imposed by this part if the decedent at the time of his

death was a resident of a territory or another State of the United States or of aforeign state or country which then imposed a legacy, succession, or death tax inrespect to intangible personal property of its own residents, but either:.

(a) Did not impose a legacy, succession, or death tax of any character in respect tointangible personal property of residents of this State, or

(b) Had in its laws a reciprocal provision under which intangible personalproperty of a non-resident was exempt from legacy, succession, or death taxes ofevery character if the Territory or other State of the United States or foreign stateor country in which the nonresident resided allowed a similar exemption inrespect to intangible personal property of residents of the Territory or State of

the United States or foreign state or country of residence of the decedent." (Id.)

It is clear from both these quoted provisions that the reciprocity must be total, that is,with respect to transfer or death taxes of any and every character, in the case of thePhilippine law, and to legacy, succession, or death taxes of any and every character, in thecase of the California law. Therefore, if any of the two states collects or imposes and doesnot exempt any transfer, death, legacy, or succession tax of any character, the reciprocitydoes not work. This is the underlying principle of the reciprocity clauses in both laws.

In the Philippines, upon the death of any citizen or resident, or non-resident withproperties therein, there are imposed upon his estate and its settlement, both an estateand an inheritance tax. Under the laws of California, only inheritance tax is imposed. Onthe other hand, the Federal Internal Revenue Code imposes an estate tax on non-residents not citizens of the United States,7 but does not provide for any exemption on thebasis of reciprocity. Applying these laws in the manner the Court of Tax Appeals did inthe instant case, we will have a situation where a Californian, who is non-resident in thePhilippines but has intangible personal properties here, will the subject to the payment ofan estate tax, although exempt from the payment of the inheritance tax. This being thecase, will a Filipino, non-resident of California, but with intangible personal propertiesthere, be entitled to the exemption clause of the California law, since the Californian has


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not been exempted from every character of legacy, succession, or death tax because he is,under our law, under obligation to pay an estate tax? Upon the other hand, if we exemptthe Californian from paying the estate tax, we do not thereby entitle a Filipino to beexempt from a similar estate tax in California because under the Federal Law, which isequally enforceable in California he is bound to pay the same, there being no reciprocityrecognized in respect thereto. In both instances, the Filipino citizen is always at adisadvantage. We do not believe that our legislature has intended such an unfair situationto the detriment of our own government and people. We, therefore, find and declare thatthe lower court erred in exempting the estate in question from payment of theinheritance tax.

We are not unaware of our ruling in the case ofCollector of Internal Revenue vs. Lara (G.R.Nos. L-9456 & L-9481, prom. January 6, 1958, 54 O.G. 2881) exempting the estate of thedeceased Hugo H. Miller from payment of the inheritance tax imposed by the Collector ofInternal Revenue. It will be noted, however, that the issue of reciprocity between thepertinent provisions of our tax law and that of the State of California was not theresquarely raised, and the ruling therein cannot control the determination of the case at

bar. Be that as it may, we now declare that in view of the express provisions of both thePhilippine and California laws that the exemption would apply only if the law of the othergrants an exemption from legacy, succession, or death taxes of every character, therecould not be partial reciprocity. It would have to be total or none at all.

With respect to the question of deduction or reduction in the amount of P4,000.00 basedon the U.S. Federal Estate Tax Law which is also being claimed by respondents, we upholdand adhere to our ruling in the Lara case (supra) that the amount of $2,000.00 allowedunder the Federal Estate Tax Law is in the nature of a deduction and not of an exemptionregarding which reciprocity cannot be claimed under the provision of Section 122 of ourNational Internal Revenue Code. Nor is reciprocity authorized under the Federal Law. .

On the issue of the correctness of the appraisal of the two parcels of land situated inBaguio City, it is contended that their assessed values, as appearing in the tax rolls 6months after the death of Stevenson, ought to have been considered by petitioner as theirfair market value, pursuant to section 91 of the National Internal Revenue Code. It shouldbe pointed out, however, that in accordance with said proviso the properties are requiredto be appraised at their fair market value and the assessed value thereof shall beconsidered as the fair market value only when evidence to the contrary has not beenshown. After all review of the record, we are satisfied that such evidence exists to justifythe valuation made by petitioner which was sustained by the tax court, for as the taxcourt aptly observed:

"The two parcels of land containing 36,264 square meters were valued by the

administrator of the estate in the Estate and Inheritance tax returns filed by himat P43,500.00 which is the assessed value of said properties. On the other hand,defendant appraised the same at P52,200.00. It is of common knowledge, and thisCourt can take judicial notice of it, that assessments for real estate taxationpurposes are very much lower than the true and fair market value of theproperties at a given time and place. In fact one year after decedent's death or in1952 the said properties were sold for a price of P72,000.00 and there is noshowing that special or extraordinary circumstances caused the sudden increase


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from the price of P43,500.00, if we were to accept this value as a fair andreasonable one as of 1951. Even more, the counsel for plaintiffs himself admittedin open court that he was willing to purchase the said properties at P2.00 persquare meter. In the light of these facts we believe and therefore hold that thevaluation of P52,200.00 of the real estate in Baguio made by defendant is fair,reasonable and justified in the premises." (Decision, p. 19).

In respect to the valuation of the 210,000 shares of stock in the Mindanao Mother LodeMines, Inc., (a domestic corporation), respondents contend that their value should befixed on the basis of the market quotation obtaining at the San Francisco (California)Stock Exchange, on the theory that the certificates of stocks were then held in that placeand registered with the said stock exchange. We cannot agree with respondents'argument. The situs of the shares of stock, for purposes of taxation, being located here inthe Philippines, as respondents themselves concede and considering that they are soughtto be taxed in this jurisdiction, consistent with the exercise of our government's taxingauthority, their fair market value should be taxed on the basis of the price prevailing inour country.

Upon the other hand, we find merit in respondents' other contention that the said sharesof stock commanded a lesser value at the Manila Stock Exchange six months after thedeath of Stevenson. Through Atty. Allison Gibbs, respondents have shown that at thattime a share of said stock was bid for at only P.325 (p. 103, t.s.n.). Significantly, thetestimony of Atty. Gibbs in this respect has never been questioned nor refuted bypetitioner either before this court or in the court below. In the absence of evidence to thecontrary, we are, therefore, constrained to reverse the Tax Court on this point and to holdthat the value of a share in the said mining company on August 22, 1951 in the Philippinemarket was P.325 as claimed by respondents..

It should be noted that the petitioner and the Tax Court valued each share of stock of P.38

on the basis of the declaration made by the estate in its preliminary return. Patently, thisshould not have been the case, in view of the fact that the ancillary administrator hadreserved and availed of his legal right to have the properties of the estate declared attheir fair market value as of six months from the time the decedent died..

On the fifth issue, we shall consider the various deductions, from the allowance ordisallowance of which by the Tax Court, both petitioner and respondents have appealed..

Petitioner, in this regard, contends that no evidence of record exists to support theallowance of the sum of P8,604.39 for the following expenses:.

1) Administrator's fee P1,204.342) Attorney's fee 6,000.00

3) Judicial and Administrative expenses 2,052.55

Total Deductions P8,604.39

An examination of the record discloses, however, that the foregoing items wereconsidered deductible by the Tax Court on the basis of their approval by the probate


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court to which said expenses, we may presume, had also been presented forconsideration. It is to be supposed that the probate court would not have approved saiditems were they not supported by evidence presented by the estate. In allowing the itemsin question, the Tax Court had before it the pertinent order of the probate court whichwas submitted in evidence by respondents. (Exh. "AA-2", p. 100, record). As the Tax Courtsaid, it found no basis for departing from the findings of the probate court, as it must havebeen satisfied that those expenses were actually incurred. Under the circumstances, wesee no ground to reverse this finding of fact which, under Republic Act of CaliforniaNational Association, which it would appear, that while still living, Walter G. Stevensonobtained we are not inclined to pass upon the claim of respondents in respect to theadditional amount of P86.52 for funeral expenses which was disapproved by the court aquo for lack of evidence.

In connection with the deduction of P652.50 representing the amount of realty taxes paidin 1951 on the decedent's two parcels of land in Baguio City, which respondents claimwas disallowed by the Tax Court, we find that this claim has in fact been allowed. Whathappened here, which a careful review of the record will reveal, was that the Tax Court, in

itemizing the liabilities of the estate, viz:

1) Administrator's fee P1,204.34

2) Attorney's fee 6,000.00

3) Judicial and Administration expenses as of August9, 1952 2,052.55

Total P9,256.89

added the P652.50 for realty taxes as a liability of the estate, to the P1,400.05 for judicialand administration expenses approved by the court, making a total of P2,052.55, exactlythe same figure which was arrived at by the Tax Court for judicial and administrationexpenses. Hence, the difference between the total of P9,256.98 allowed by the Tax Courtas deductions, and the P8,604.39 as found by the probate court, which is P652.50, thesame amount allowed for realty taxes. An evident oversight has involuntarily been madein omitting the P2,000.00 for funeral expenses in the final computation. This amount hasbeen expressly allowed by the lower court and there is no reason why it should not be. .

We come now to the other claim of respondents that pursuant to section 89(b) (1) inrelation to section 89(a) (1) (E) and section 89(d), National Internal Revenue Code, theamount of P10,022.47 should have been allowed the estate as a deduction, because itrepresented an indebtedness of the decedent incurred during his lifetime. In supportthereof, they offered in evidence a duly certified claim, presented to the probate court in

California by the Bank of California National Association, which it would appear, thatwhile still living, Walter G. Stevenson obtained a loan of $5,000.00 secured by pledge on140,000 of his shares of stock in the Mindanao Mother Lode Mines, Inc. (Exhs. "Q-Q4", pp.53-59, record). The Tax Court disallowed this item on the ground that the local probatecourt had not approved the same as a valid claim against the estate and because itconstituted an indebtedness in respect to intangible personal property which the TaxCourt held to be exempt from inheritance tax.

For two reasons, we uphold the action of the lower court in disallowing the deduction.


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Firstly, we believe that the approval of the Philippine probate court of this particularindebtedness of the decedent is necessary. This is so although the same, it is averred hasbeen already admitted and approved by the corresponding probate court in California,situs of the principal or domiciliary administration. It is true that we have here in thePhilippines only an ancillary administration in this case, but, it has been held, thedistinction between domiciliary or principal administration and ancillary administrationserves only to distinguish one administration from the other, for the two proceedings areseparate and independent.8 The reason for the ancillary administration is that, a grant ofadministration does notex proprio vigore, have any effect beyond the limits of the countryin which it was granted. Hence, we have the requirement that before a will duly probatedoutside of the Philippines can have effect here, it must first be proved and allowed beforeour courts, in much the same manner as wills originally presented for allowance therein.9And the estate shall be administered under letters testamentary, or letters ofadministration granted by the court, and disposed of according to the will as probated,after payment of just debts and expenses of administration.10 In other words, there is aregular administration under the control of the court, where claims must be presentedand approved, and expenses of administration allowed before deductions from the estate

can be authorized. Otherwise, we would have the actuations of our own probate court, inthe settlement and distribution of the estate situated here, subject to the proceedingsbefore the foreign court over which our courts have no control. We do not believe such aprocedure is countenanced or contemplated in the Rules of Court.

Another reason for the disallowance of this indebtedness as a deduction, springs from theprovisions of Section 89, letter (d), number (1), of the National Internal Revenue Codewhich reads:

(d) Miscellaneousprovisions (1) No deductions shall be allowed in the case of anon-resident not a citizen of the Philippines unless the executor, administrator oranyone of the heirs, as the case may be, includes in the return required to be filed

under section ninety-three the value at the time of his death of that part of thegross estate of the non-resident not situated in the Philippines."

In the case at bar, no such statement of the gross estate of the non-resident Stevenson notsituated in the Philippines appears in the three returns submitted to the court or to theoffice of the petitioner Collector of Internal Revenue. The purpose of this requirement isto enable the revenue officer to determine how much of the indebtedness may be allowedto be deducted, pursuant to (b), number (1) of the same section 89 of the InternalRevenue Code which provides:

(b) Deductions allowed to non-resident estates. In the case of a non-resident nota citizen of the Philippines, by deducting from the value of that part of his gross

estate which at the time of his death is situated in the Philippines

(1) Expenses, losses, indebtedness, and taxes. That proportion of the deductionsspecified in paragraph (1) of subjection (a) of this section11 which the value ofsuch part bears the value of his entire gross estate wherever situated;"

In other words, the allowable deduction is only to the extent of the portion of theindebtedness which is equivalent to the proportion that the estate in the Philippines


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bears to the total estate wherever situated. Stated differently, if the properties in thePhilippines constitute but 1/5 of the entire assets wherever situated, then only 1/5 of theindebtedness may be deducted. But since, as heretofore adverted to, there is nostatement of the value of the estate situated outside the Philippines, no part of theindebtedness can be allowed to be deducted, pursuant to Section 89, letter (d), number(1) of the Internal Revenue Code.

For the reasons thus stated, we affirm the ruling of the lower court disallowing thededuction of the alleged indebtedness in the sum of P10,022.47.

In recapitulation, we hold and declare that:

(a) only the one-half (1/2) share of the decedent Stevenson in the conjugalpartnership property constitutes his hereditary estate subject to the estate andinheritance taxes;

(b) the intangible personal property is not exempt from inheritance tax, there

existing no complete total reciprocity as required in section 122 of the NationalInternal Revenue Code, nor is the decedent's estate entitled to an exemption ofP4,000.00 in the computation of the estate tax;

(c) for the purpose of the estate and inheritance taxes, the 210,000 shares of stockin the Mindanao Mother Lode Mines, Inc. are to be appraised at P0.325 per share;and

(d) the P2,000.00 for funeral expenses should be deducted in the determination ofthe net asset of the deceased Stevenson.

In all other respects, the decision of the Court of Tax Appeals is affirmed.

Respondent's claim for interest on the amount allegedly overpaid, if any actually resultsafter a recomputation on the basis of this decision is hereby denied in line with our recentdecision in Collector of Internal Revenue v. St. Paul's Hospital(G.R. No. L-12127, May 29,1959) wherein we held that, "in the absence of a statutory provision clearly or expresslydirecting or authorizing such payment, and none has been cited by respondents, theNational Government cannot be required to pay interest."

WHEREFORE, as modified in the manner heretofore indicated, the judgment of the lowercourt is hereby affirmed in all other respects not inconsistent herewith. No costs. Soordered.

Paras, C.J., Bengzon, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Gutierrez David,

Paredes and Dizon, JJ., concur.

Footnotes


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1 ART. 124. If the marriage is between a citizen of the Philippines and a foreigner,whether celebrated in the Philippines or abroad, the following rules shall prevail:(1) If the husband is a citizen of the Philippines while the wife is a foreigner, theprovisions of this Code shall govern their property relations; (2) If the husband isa foreigner and the wife is a citizen of the Philippines, the laws of the husband'scountry shall be followed, without prejudice to the provisions of this Code withregard to immovable property."

2 ART. 1325. Should the marriage be contracted in a foreign country, between aSpaniard and a foreign woman or between a foreigner and a Spanish woman, andthe contracting parties should not make any statement or stipulation with respectto their property, it shall be understood, when the husband is a Spaniard, that hemarries under the system of the legal conjugal partnership, and when the wife is aSpaniard, that she marries under the system of law in force in the husband'scountry, all without prejudice to the provisions of this code with respect to realproperty. .

3

IX Manresa, Comentarios al Codigo Civil Espanol, p. 209. .

4 Yam Ka Lim vs. Collector of Customs, 30 Phil. 46; Lim & Lim vs. Collector ofCustoms, 36 Phil. 472; International Harvester Co. vs. Hamburg-American Line, 42Phil. 845; Beam vs. Yatco, 46 O.G. No. 2, p. 530.).

5 Lim vs. Collector of Customs, supra; International Harvester Co. vs. Hamburg-American Line, supra; Phil. Manufacturing Co. vs. Union Ins. Society of Canton, 42Phil. 378; Adong vs. Cheong Seng Gee, Phil. 53.

6 Sy Joc Leing vs. Sy Quia, 16 Phil. 138; Ching Huat vs. Co Heong, 77 Phil. 985;Adong vs. Cheong supra.

7See Sec. 860, Internal Revenue Code of 1939, 26 USCA 408.

8 In the matter of the testate estate of Basil Gordon Butler, G.R. No. L-3677, Nov.29, 1951. .

9 Rule 78, Sees. 1, 2 and 3, Rules of Court. See also Hix vs. Fluemer, 54 Phil. 610. .

10 Rule 78, See. 4, lbid.

11 Expense, losses, indebtedness, and taxes which may be deducted to determine

the net estate of a citizen or resident of the Philippines.


PHILIPPINE JURISPRUDENCE - FULL TEXTThe Lawphil Project - Arellano Law FoundationG.R. No. L-34937 March 13, 1933


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CONCEPCION VIDAL DE ROCES, ET AL. vs. JUAN POSADAS, JR.


Manila

EN BANC

G.R. No. L-34937 March 13, 1933

CONCEPCION VIDAL DE ROCES and her husband,MARCOS ROCES, and ELVIRA VIDAL DE RICHARDS, plaintiff-appellants,vs.JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellee.

Feria and La O for appellants.

Attorney-General Jaranilla for appellee.

IMPERIAL,J.:

The plaintiffs herein brought this action to recover from the defendant, Collector ofInternal Revenue, certain sums of money paid by them under protest as inheritance tax.They appealed from the judgment rendered by the Court of First Instance of Maniladismissing the action, without costs.

On March 10 and 12, 1925, Esperanza Tuazon, by means of public documents, donatedcertain parcels of land situated in Manila to the plaintiffs herein, who, with their

respective husbands, accepted them in the same public documents, which were dulyrecorded in the registry of deeds. By virtue of said donations, the plaintiffs tookpossession of the said lands, received the fruits thereof and obtained the correspondingtransfer certificates of title.

On January 5, 1926, the donor died in the City of Manila without leaving any forced heirand her will which was admitted to probate, she bequeathed to each of the donees thesum of P5,000. After the estate had been distributed among the instituted legatees andbefore delivery of their respective shares, the appellee herein, as Collector of InternalRevenue, ruled that the appellants, as donees and legatees, should pay as inheritance taxthe sums of P16,673 and P13,951.45, respectively. Of these sums P15,191.48 was leviedas tax on the donation to Concepcion Vidal de Roces and P1,481.52 on her legacy, and,

likewise, P12,388.95 was imposed upon the donation made to Elvira Vidal de Richardsand P1,462.50 on her legacy. At first the appellants refused to pay the aforementionedtaxes but, at the insistence of the appellee and in order not to delay the adjudication ofthe legacies, they agreed at last, to pay them under protest.

The appellee filed a demurrer to the complaint on the ground that the facts allegedtherein were not sufficient to constitute a cause of action. After the legal questions raisedtherein had been discussed, the court sustained the demurrer and ordered the


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amendment of the complaint which the appellants failed to do, whereupon the trial courtdismissed the action on the ground that the aforementioned appellants did not reallyhave a right of action.

In their brief, the appellants assign only one alleged error, to wit: that the demurrer

interposed by the appellee was sustained without sufficient ground.

The judgment appealed from was based on the provisions of section 1540 AdministrativeCode which reads as follows:

SEC. 1540. Additions of gifts and advances. After the aforementioneddeductions have been made, there shall be added to the resulting amount thevalue of all gifts or advances made by the predecessor to any those who, after hisdeath, shall prove to be his heirs, devisees, legatees, or donees mortis causa.

The appellants contend that the above-mentioned legal provision does not includedonations inter vivos and if it does, it is unconstitutional, null and void for the following

reasons: first, because it violates section 3 of the Jones Law which provides that no lawshould embrace more than one subject, and that subject should be expressed in the titlethereof; second that the Legislature has no authority to impose inheritance tax ondonations inter vivos; and third, because a legal provision of this character contravenesthe fundamental rule of uniformity of taxation. The appellee, in turn, contends that thewords "all gifts" refer clearly to donations inter vivos and, in support of his theory, citesthe doctrine laid in the case ofTuason and Tuason vs. Posadas (54 Phil., 289). After acareful study of the law and the authorities applicable thereto, we are the opinion thatneither theory reflects the true spirit of the aforementioned provision. The gifts referredto in section 1540 of the Revised Administration Code are, obviously, those donationsinter vivos that take effect immediately or during the lifetime of the donor but are made inconsideration or in contemplation of death. Gifts inter vivos, the transmission of which is

not made in contemplation of the donor's death should not be understood as includedwithin the said legal provision for the reason that it would amount to imposing a directtax on property and not on the transmission thereof, which act does not come within thescope of the provisions contained in Article XI of Chapter 40 of the Administrative Codewhich deals expressly with the tax on inheritances, legacies and other acquisitions mortiscausa.

Our interpretation of the law is not in conflict with the rule laid down in the case ofTuason and Tuason vs. Posadas, supra. We said therein, as we say now, that the expression"all gifts" refers to gifts inter vivos inasmuch as the law considers them as advances oninheritance, in the sense that they are gifts inter vivos made in contemplation or inconsideration of death. In that case, it was not held that that kind of gifts consisted inthose made completely independent of death or without regard to it.

Said legal provision is not null and void on the alleged ground that the subject matterthereof is not embraced in the title of the section under which it is enumerated. On thecontrary, its provisions are perfectly summarized in the heading, "Tax on Inheritance,etc." which is the title of Article XI. Furthermore, the constitutional provision cited shouldnot be strictly construed as to make it necessary that the title contain a full index to all thecontents of the law. It is sufficient if the language used therein is expressed in such a way


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that in case of doubt it would afford a means of determining the legislators intention.(Lewis' Sutherland Statutory Construction, Vol. II, p. 651.) Lastly, the circumstance thatthe Administrative Code was prepared and compiled strictly in accordance with theprovisions of the Jones Law on that matter should not be overlooked and that, in acompilation of laws such as the Administrative Code, it is but natural and proper thatprovisions referring to diverse matters should be found. (Ayson and Ignacio vs. ProvincialBoard of Rizal and Municipal Council of Navotas, 39 Phil., 931.)

The appellants question the power of the Legislature to impose taxes on the transmissionof real estate that takes effect immediately and during the lifetime of the donor, andallege as their reason that such tax partakes of the nature of the land tax which the lawhas already created in another part of the Administrative Code. Without making expresspronouncement on this question, for it is unnecessary, we wish to state that such is notthe case in these instance. The tax collected by the appellee on the properties donated in1925 really constitutes an inheritance tax imposed on the transmission of said propertiesin contemplation or in consideration of the donor's death and under the circumstancethat the donees were later instituted as the former's legatees. For this reason, the law

considers such transmissions in the form of gifts inter vivos, as advances on inheritanceand nothing therein violates any constitutional provision, inasmuch as said legislation iswithin the power of the Legislature.

Property Subject to Inheritance Tax. The inheritance tax ordinarily applies to allproperty within the power of the state to reach passing by will or the lawsregulating intestate succession or by giftinter vivos in the manner designated bystatute, whether such property be real or personal, tangible or intangible,corporeal or incorporeal. (26 R.C.L., p. 208, par. 177.)

In the case ofTuason and Tuason vs. Posadas, supra, it was also held that section 1540 ofthe Administrative Code did not violate the constitutional provision regarding uniformity

of taxation. It cannot be null and void on this ground because it equally subjects to thesame tax all of those donees who later become heirs, legatees or donees mortis causa bythe will of the donor. There would be a repugnant and arbitrary exception if theprovisions of the law were not applicable to all donees of the same kind. In the case citedabove, it was said: "At any rate the argument adduced against its constitutionality, whichis the lack of Uniformity, does not seem to be well founded. It was said that under such aninterpretation, while a donee inter vivos who, after the predecessor's death proved to bean heir, a legatee, or a donee mortis causa, would have to pay the tax, another donee intervivos who did not prove to he an heir, a legatee, or a donee mortis causa of thepredecessor, would be exempt from such a tax. But as these are two different cases, theprinciple of uniformity is inapplicable to them."

The last question of a procedural nature arising from the case at bar, which should bepassed upon, is whether the case, as it now stands, can be decided on the merits or shouldbe remanded to the courta quo for further proceedings. According to our view of thecase, it follows that, if the gifts received by the appellants would have the right to recoverthe sums of money claimed by them. Hence the necessity of ascertaining whether thecomplaint contains an allegation to that effect. We have examined said complaint andfound nothing of that nature. On the contrary, it be may be inferred from the allegationscontained in paragraphs 2 and 7 thereof that said donations inter vivos were made in


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consideration of the donor's death. We refer to the allegations that such transmissionswere effected in the month of March, 1925, that the donor died in January, 1926, and thatthe donees were instituted legatees in the donor's will which was admitted to probate. Itis from these allegations, especially the last, that we infer a presumption juris tantum thatsaid donations were made mortis causa and, as such, are subject to the payment ofinheritance tax.

Wherefore, the demurrer interposed by the appellee was well-founded because itappears that the complaint did not allege fact sufficient to constitute a cause of action.When the appellants refused to amend the same, spite of the court's order to that effect,they voluntarily waived the opportunity offered them and they are not now entitled tohave the case remanded for further proceedings, which would serve no purposealtogether in view of the insufficiency of the complaint.

Wherefore, the judgment appealed from is hereby affirmed, with costs of this instanceagainst the appellants. So ordered.

Avancea, C.J., Villamor, Ostrand, Abad Santos, Hull, Vickers and Buttes, JJ., concur.

Separate Opinions

VILLA-REAL,J., dissenting:

I sustain my concurrence in Justice Street's dissenting opinion in the case ofTuason andTuason vs. Posadas (54 Phil., 289).

The majority opinion to distinguish the present case from above-mentioned case ofTuason and Tuason vs. Posadas, by interpreting section 1540 of the Administrative Codein the sense that it establishes the legal presumption juris tantum that all gifts inter vivosmade to persons who are not forced heirs but who are instituted legatees in the donor'swill, have been made in contemplation of the donor's death. Presumptions are of twokinds: One determined by law which is also called presumption of law or of right; andanother which is formed by the judge from circumstances antecedent to, coincident withor subsequent to the principal fact under investigation, which is also called presumptionof man (presuncion de hombre). (Escriche, Vol. IV, p. 662.) The Civil Code as well as thecode of Civil Procedure establishes presumptions juris et de jure and juris tantum whichthe courts should take into account in deciding questions of law submitted to them fordecision. The presumption which majority opinion wishes to draw from said section

1540 of the Administrative Code can neither be found in this Code nor in any of theaforementioned Civil Code and Code of Civil Procedure. Therefore, said presumptioncannot be called legal or of law. Neither can it be called a presumption of man (presuncionde hombre) inasmuch as the majority opinion did not infer it from circumstancesantecedent to, coincident with or subsequent to the principal fact with is the donationitself. In view of the nature, mode of making and effects of donations inter vivos, thecontrary presumption would be more reasonable and logical; in other words, donationsinter vivos made to persons who are not forced heirs, but who are instituted legatees inthe donor's will, should be presumed as not made mortis causa, unless the contrary is


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proven. In the case under consideration, the burden of the proof rests with the personwho contends that the donation inter vivos has been made mortis causa.

It is therefore, the undersigned's humble opinion that the order appealed from should bereversed and the demurrer overruled, and the defendant ordered to file his answer to the

complaint.

Street, J., concurs.


PHILIPPINE JURISPRUDENCE - FULL TEXTThe Lawphil Project - Arellano Law FoundationG.R. No. L-36770 November 4, 1932LUIS W. DISON vs. JUAN POSADAS, JR.


Manila

EN BANC

G.R. No. L-36770 November 4, 1932

LUIS W. DISON, plaintiff-appellant,

vs.JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellant.

Marcelino Aguas for plaintiff-appellant.

Attorney-General Jaranilla for defendant-appellant.

BUTTE,J.:

This is an appeal from the decision of the Court of First Instance of Pampanga infavor of the defendant Juan Posadas, Jr., Collector of Internal Revenue, in a suit filed bythe plaintiffs, Luis W. Dison, for the recovery of an inheritance tax in the sum of P2,808.73paid under protest. The petitioner alleged in his complaint that the tax is illegal becausehe received the property, which is the basis of the tax, from his father before his death bya deed of giftinter vivos which was duly accepted and registered before the death of hisfather. The defendant answered with a general denial and with a

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