ESTATE TAX

GUILLERMO A. CRUZ, vs CA                   G.R. No. 156894

QUISUMBING, J.:

          This petition for review on certiorari seeks to annul the resolutions dated September 9, 2002[1] and January 15, 2003[2] of the Court of Appeals in CA-G.R. CV No. 72600.  The first resolution dismissed petitioner’s appeal, while the second denied his motion for reconsideration.

          The antecedent facts, as borne by the records, are as follows:

          Spouses Salvador and Carmencita Valle filed an action for Annulment of Affidavit of Self-adjudication, Cancellation of Tax Declaration and Quieting of Title, docketed as Civil Case No. 17720 against the petitioner.  The case was consolidated with Civil Case No. 17785.  The latter case was an appeal by the petitioner from the judgment of the Municipal Trial Court (MTC) in an ejectment case filed by the respondent spouses against him.

          On July 31, 2001, the Regional Trial Court (RTC) rendered a Decision[3] which affirmed the judgment of the MTC, annulled the Affidavit of Self-Adjudication, ordered the cancellation of Tax Declaration No. 5752, and declared Spouses Salvador and Carmencita Valle as the absolute owner of the land in dispute.  The RTC ruled that the deed of donation, on which the respondents based their claim, was a donation inter vivos because, other than the title and the phrase “to take effect after her death”, the deed, as it was worded, clearly disposed of the property with finality and without reservation.  It cited the landmark case of Laureta v. Mata and Magno[4] stating that one who donates with a term, such as the donation effecting at one’s death, but without reservation, already disposes of the thing donated and cannot again dispose of the thing in favor of another.

          Petitioner appealed said decision of the trial court to the Court of Appeals.  On March 19, 2002, he received notice to file a brief within 45 days from receipt of said notice.  Within the period, petitioner filed a motion for extension of at least 90 days from May 3, 2002 or until August 1, 2002 to file the Appellant’s Brief.  The appellate court granted the motion.  However, petitioner filed the required Appellant’s Brief only on August 21, 2002, with an explanation that his collaborating counsel was sick with acute periodontosis.

On September 9, 2002, the appellate court dismissed the appeal for failure to file the required brief within the prescribed period.  Petitioner sought reconsideration but it was denied.

          Petitioner now comes before us raising the sole issue that:

THE HONORABLE COURT OF APPEALS GRAVELY ABUSED ITS DISCRETION IN DISMISSING THE APPEAL IN CA-G.R. CV No. 72600 DESPITE THE ATTENDANT JUSTIFYING REASON(S) IN THE BELATED SUBMISSION OF APPELLANT’S BRIEF WITH APPROPRIATE MOTION TO ADMIT AND IN GROSS DISREGARD TO THE MERITS FAVORING APPELLANT THEREIN.[5]

          Simply, the only issue for our resolution is whether the Court of Appeals erred in dismissing the appeal.

Petitioner explains that he sought the services of a collaborating counsel when, in the middle of July 2002, he discovered that his counsel of record had not yet started the preparation of his brief.  He said that by then, there was only a short time left before the deadline.  The lack of time was compounded by the illness (acute periodontosis) of his collaborating counsel.

          Petitioner contends that the failure of an appellant to file his brief within the prescribed time does not result in the automatic dismissal of the appeal since the appellate court has discretion to dismiss it or not.  He suggests that procedural rules may be relaxed in the interest of justice.  He invokes the case of Baylon v. Fact-Finding Intelligence Bureau,[6] where the Court suspended the rules with the following to serve as guidelines:  (1) the case involves life, liberty, honor or property; (2) counsel’s negligence without any participatory negligence on the part of the client caused the delay; (3) there are compelling circumstances; (4) there is merit in the case; (5) the cause is not entirely attributable to the fault or negligence of the party favored by the suspension of the Rules; (6) there is lack of any showing that the review sought is merely frivolous and dilatory; and (7) the other party will not be unjustly prejudiced.  He argues that since there were compelling reasons for his delay, substantial rights and interests are at stake, and there could neither be any injury nor prejudice to appellees, the appellate court should have allowed his appeal.

          Respondents Salvador and Carmencita Valle argue that the right to appeal is neither a natural right nor a part of due process.  As a statutory privilege, it is exercised only in the manner and in accordance with the provisions of law.  They maintain that petitioner’s excuse is unacceptable, considering that he actually had 135 days within which to file his brief.

          Respondents argue that even petitioner’s allegation – that it was only in the middle of July 2002 when he discovered that his counsel of record had not started working on his brief – is unacceptable since a client is bound by the negligence of his counsel and that a prudent party should constantly be in touch with his counsel.  Respondents also question the claimed appearance of petitioner’s collaborating counsel.  They aver that in all prior proceedings there was only one lawyer representing the petitioner and that the collaborating counsel had never entered his appearance formally.

          We find the instant petition bereft of merit.

          Petitioner does not deny the procedural infraction on his part, but he asks for the relaxation of the rules.  Granting his plea, however, would be to fault the appellate court for acting in faithful compliance with the rules of procedure which the court has been mandated to observe.[7]

          The Rules of Court are designed for the proper and prompt disposition of cases before the appellate court.  We cannot just turn a blind eye and tolerate its contravention.[8]  Section 7,[9] Rule 44 of the Rules of Court provides that it shall be the duty of the appellant to file his brief within 45 days from receipt of notice.  His failure to comply with this mandate is a ground for the dismissal of his appeal as provided under Section 1(e), Rule 50[10] of the Rules of Court.  Petitioner actually had 135 days to prepare his brief which is a considerable period of time.

          In not a few instances, we relaxed the rigid application of the rules of procedure, so that the ends of justice may be better served.  However, such liberality may not be invoked if it would result in the wanton disregard of the rules, and cause needless delay.  Save for the most persuasive of reasons, strict compliance with the rules is enjoined to facilitate the orderly administration of justice.[11]  Negligence of petitioner’s counsel and his own failure to enter the appearance of his collaborating counsel are, to our mind, unacceptable reasons for relaxing the observance of the period set for filing briefs.

          Further, Baylon cannot be applied in this case.  In Baylon, there was no negligence on the part of the client.  Moreover, here we must stress that negligence of counsel binds the client.  This is especially true where the client has been as negligent as the lawyer.[12]

          We note, at this juncture, that petitioner’s counsel failed to distinguish between a petition for review on certiorari under Rule 45 from a petition for certiorari under Rule 65 of the Rules of Court.  Under Rule 45, the court a quo’s grave abuse of discretion is not a proper issue.  Under Rule 45, the issue involves reversible error of law, if any.

          In this case, we find that the Court of Appeals committed no reversible error of law when it dismissed the appeal for petitioner’s failure to file the appellant’s brief on time.

          WHEREFORE, the instant petition is DENIED.  The assailed resolutions dated September 9, 2002 and January 15, 2003 of the Court of Appeals in CA-G.R. CV No. 72600 are AFFIRMED.  Costs against petitioner.

          SO ORDERED.

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 of Internal 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 Manila dismissing the action, without costs.

On March 10 and 12, 1925, Esperanza Tuazon, by means of public documents, donated certain parcels of land situated in Manila to the plaintiffs herein, who, with their respective husbands, accepted them in the same public documents, which were duly recorded in the registry of deeds. By virtue of said donations, the plaintiffs took possession of the said lands, received the fruits thereof and obtained the corresponding transfer certificates of title.

On January 5, 1926, the donor died in the City of Manila without leaving any forced heir and her will which was admitted to probate, she bequeathed to each of the donees the sum of P5,000. After the estate had been distributed among the instituted legatees and before delivery of their respective shares, the appellee herein, as Collector of Internal Revenue, ruled that the appellants, as donees and legatees, should pay as inheritance tax the sums of P16,673 and P13,951.45, respectively. Of these sums P15,191.48 was levied as 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 Richards and P1,462.50 on her legacy. At first the appellants refused to pay the aforementioned taxes but, at the insistence of the appellee and in order not to delay the adjudication of the legacies, they agreed at last, to pay them under protest.

The appellee filed a demurrer to the complaint on the ground that the facts alleged therein were not sufficient to constitute a cause of action. After the legal questions raised therein had been discussed, the court sustained the demurrer and ordered the amendment of the complaint which the appellants failed to do, whereupon the trial court dismissed the action on the ground that the afore- mentioned appellants did not really have 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 Administrative Code which reads as follows:

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

The appellants contend that the above-mentioned legal provision does not include donations 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 law should embrace more than one subject, and that subject should be expressed in the title thereof; second that the Legislature has no authority to impose inheritance tax on donations inter vivos; and third, because a legal provision of this character contravenes the fundamental rule of uniformity of taxation. The appellee, in turn, contends that the words "all gifts" refer clearly to donations inter vivos and, in support of his theory, cites the doctrine laid in the case of Tuason and Tuason vs. Posadas (54 Phil., 289). After a careful study of the law and the authorities applicable thereto, we are the opinion that neither theory reflects the true spirit of the aforementioned provision. The gifts referred to in section 1540 of the Revised Administration Code are, obviously, those donations inter vivos that take effect immediately or during the lifetime of the donor but are made in consideration 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 included within the said legal provision for the reason that it would amount to imposing a direct tax on property and not on the transmission thereof, which act does not come within the scope of the provisions contained in Article XI of Chapter 40 of the Administrative Code which deals expressly with the tax on inheritances, legacies and other acquisitions mortis causa.

Our interpretation of the law is not in conflict with the rule laid down in the case of Tuason 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 on inheritance, in the sense that they are gifts inter vivos made in contemplation or in consideration of death. In that case, it was not held that that kind of gifts consisted in those 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 matter thereof is not embraced in the title of the section under which it is enumerated. On the contrary, its provisions are perfectly summarized in the heading, "Tax on Inheritance, etc." which is the title of Article XI. Furthermore, the constitutional provision cited should not be strictly construed as to make it necessary that the title contain a full index to all the contents of the law. It is sufficient if the language used therein is expressed in such a way 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 that the Administrative Code was prepared and compiled strictly in accordance with the

provisions of the Jones Law on that matter should not be overlooked and that, in a compilation of laws such as the Administrative Code, it is but natural and proper that provisions referring to diverse matters should be found. (Ayson and Ignacio vs. Provincial Board of Rizal and Municipal Council of Navotas, 39 Phil., 931.)

The appellants question the power of the Legislature to impose taxes on the transmission of real estate that takes effect immediately and during the lifetime of the donor, and allege as their reason that such tax partakes of the nature of the land tax which the law has already created in another part of the Administrative Code. Without making express pronouncement on this question, for it is unnecessary, we wish to state that such is not the case in these instance. The tax collected by the appellee on the properties donated in 1925 really constitutes an inheritance tax imposed on the transmission of said properties in contemplation or in consideration of the donor's death and under the circumstance that 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 inheritance and nothing therein violates any constitutional provision, inasmuch as said legislation is within the power of the Legislature.

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

In the case of Tuason and Tuason vs. Posadas, supra, it was also held that section 1540 of the 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 the same tax all of those donees who later become heirs, legatees or donees mortis causa by the will of the donor. There would be a repugnant and arbitrary exception if the provisions of the law were not applicable to all donees of the same kind. In the case cited above, it was said: "At any rate the argument adduced against its constitutionality, which is the lack of Uniformity, does not seem to be well founded. It was said that under such an interpretation, while a donee inter vivos who, after the predecessor's death proved to be an heir, a legatee, or a donee mortis causa, would have to pay the tax, another donee inter vivos who did not prove to he an heir, a legatee, or a donee mortis causa of the predecessor, would be exempt from such a tax. But as these are two different cases, the principle of uniformity is inapplicable to them."

The last question of a procedural nature arising from the case at bar, which should be passed upon, is whether the case, as it now stands, can be decided on the merits or should be remanded to the court a quo for further proceedings. According to our view of the case, it follows that, if the gifts received by the appellants would have the right to recover the sums of money claimed by them. Hence the necessity of ascertaining whether the complaint contains an allegation to that effect. We have examined said complaint and found nothing of that nature. On the contrary, it be may be inferred from

the allegations contained in paragraphs 2 and 7 thereof that said donations inter vivos were made in consideration of the donor's death. We refer to the allegations that such transmissions were effected in the month of March, 1925, that the donor died in January, 1926, and that the donees were instituted legatees in the donor's will which was admitted to probate. It is from these allegations, especially the last, that we infer a presumption juris tantum that said donations were made mortis causa and, as such, are subject to the payment of inheritance tax.

Wherefore, the demurrer interposed by the appellee was well-founded because it appears 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 to have the case remanded for further proceedings, which would serve no purpose altogether in view of the insufficiency of the complaint.

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

Avanceña, 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 of Tuason and Tuason vs. Posadas (54 Phil., 289).

The majority opinion to distinguish the present case from above-mentioned case of Tuason and Tuason vs. Posadas, by interpreting section 1540 of the Administrative Code in the sense that it establishes the legal presumption juris tantum that all gifts inter vivos made to persons who are not forced heirs but who are instituted legatees in the donor's will, have been made in contemplation of the donor's death. Presumptions are of two kinds: One determined by law which is also called presumption of law or of right; and another which is formed by the judge from circumstances antecedent to, coincident with or subsequent to the principal fact under investigation, which is also called presumption of man (presuncion de hombre). (Escriche, Vol. IV, p. 662.) The Civil Code as well as the code of Civil Procedure establishes presumptions juris et de jure and juris tantum which the courts should take into account in deciding questions of law submitted to them for decision. 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 the aforementioned Civil Code and Code of Civil Procedure. Therefore, said presumption cannot be called legal or of law. Neither can it be called a presumption of man (presuncion de hombre) inasmuch as the majority opinion did not infer it from

circumstances antecedent to, coincident with or subsequent to the principal fact with is the donation itself. In view of the nature, mode of making and effects of donations inter vivos, the contrary presumption would be more reasonable and logical; in other words, donations inter vivos made to persons who are not forced heirs, but who are instituted legatees in the donor's will, should be presumed as not made mortis causa, unless the contrary is proven. In the case under consideration, the burden of the proof rests with the person who 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 be reversed and the demurrer overruled, and the defendant ordered to file his answer to the complaint.

Street, J., concurs

 

G.R. No. 123206 March 22, 2000

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.COURT OF APPEALS, COURT OF TAX APPEALS and JOSEFINA P. PAJONAR, as Administratrix of the Estate of Pedro P. Pajonar, respondents.

R E S O L U T I O N

 

GONZAGA-REYES, J.:

Assailed in this petition for review on certiorari is the December 21, 1995 Decision 1 of the Court of Appeals 2 in CA-G.R. Sp. No. 34399 affirming the June 7, 1994 Resolution of the Court of Tax Appeals in CTA Case No. 4381 granting private respondent Josefina P. Pajonar, as administratrix of the estate of Pedro P. Pajonar, a tax refund in the amount of P76,502.42, representing erroneously paid estate taxes for the year 1988.

Pedro Pajonar, a member of the Philippine Scout, Bataan Contingent, during the second World War, was a part of the infamous Death March by reason of which he suffered shock and became insane. His sister Josefina Pajonar became the guardian over his person, while his property was placed under the guardianship of the Philippine National Bank (PNB) by the Regional Trial Court of Dumaguete City, Branch 31, in Special Proceedings No. 1254. He died on January 10, 1988. He was survived by his two brothers Isidro P. Pajonar and Gregorio Pajonar, his sister Josefina Pajonar, nephews Concordio Jandog and Mario Jandog and niece Conchita Jandog.

On May 11, 1988, the PNB filed an accounting of the decedent's property under guardianship valued at P3,037,672.09 in Special Proceedings No. 1254. However, the

PNB did not file an estate tax return, instead it advised Pedro Pajonar's heirs to execute an extrajudicial settlement and to pay the taxes on his estate. On April 5, 1988, pursuant to the assessment by the Bureau of Internal Revenue (BIR), the estate of Pedro Pajonar paid taxes in the amount of P2,557.

On May 19, 1988, Josefina Pajonar filed a petition with the Regional Trial Court of Dumaguete City for the issuance in her favor of letters of administration of the estate of her brother. The case was docketed as Special Proceedings No. 2399. On July 18, 1988, the trial court appointed Josefina Pajonar as the regular administratrix of Pedro Pajonar's estate.

On December 19, 1988, pursuant to a second assessment by the BIR for deficiency estate tax, the estate of Pedro Pajonar paid estate tax in the amount of P1,527,790.98. Josefina Pajonar, in her capacity as administratrix and heir of Pedro Pajonar's estate, filed a protest on January 11, 1989 with the BIR praying that the estate tax payment in the amount of P1,527,790.98, or at least some portion of it, be returned to the heirs. 3

However, on August 15, 1989, without waiting for her protest to be resolved by the BIR, Josefina Pajonar filed a petition for review with the Court of Tax Appeals (CTA), praying for the refund of P1,527,790.98, or in the alternative, P840,202.06, as erroneously paid estate tax. 4 The case was docketed as CTA Case No. 4381.

On May 6, 1993, the CTA ordered the Commissioner of Internal Revenue to refund Josefina Pajonar the amount of P252,585.59, representing erroneously paid estate tax for the year 1988. 5 Among the deductions from the gross estate allowed by the CTA were the amounts of P60,753 representing the notarial fee for the Extrajudicial Settlement and the amount of P50,000 as the attorney's fees in Special Proceedings No. 1254 for guardianship. 6

On June 15, 1993, the Commissioner of Internal Revenue filed a motion for reconsideration 7 of the CTA's May 6, 1993 decision asserting, among others, that the notarial fee for the Extrajudicial Settlement and the attorney's fees in the guardianship proceedings are not deductible expenses.

On June 7, 1994, the CTA issued the assailed Resolution 8 ordering the Commissioner of Internal Revenue to refund Josefina Pajonar, as administratrix of the estate of Pedro Pajonar, the amount of P76,502.42 representing erroneously paid estate tax for the year 1988. Also, the CTA upheld the validity of the deduction of the notarial fee for the Extrajudicial Settlement and the attorney's fees in the guardianship proceedings.

On July 5, 1994, the Commissioner of Internal Revenue filed with the Court of Appeals a petition for review of the CTA's May 6, 1993 Decision and its June 7, 1994 Resolution, questioning the validity of the abovementioned deductions. On December 21, 1995, the Court of Appeals denied the Commissioner's petition. 9

Hence, the present appeal by the Commissioner of Internal Revenue.

The sole issue in this case involves the construction of section 79 10 of the National Internal Revenue Code 11 (Tax Code) which provides for the allowable deductions from the gross estate of the decedent. More particularly, the question is whether the notarial fee paid for the extrajudicial settlement in the amount of P60,753 and the attorney's fees in the guardianship proceedings in the amount of P50,000 may be allowed as deductions from the gross estate of decedent in order to arrive at the value of the net estate.

We answer this question in the affirmative, thereby upholding the decisions of the appellate courts.

In its May 6, 1993 Decision, the Court of Tax Appeals ruled thus:

Respondent maintains that only judicial expenses of the testamentary or intestate proceedings are allowed as a deduction to the gross estate. The amount of P60,753.00 is quite extraordinary for a mere notarial fee.

This Court adopts the view under American jurisprudence that expenses incurred in the extrajudicial settlement of the estate should be allowed as a deduction from the gross estate. "There is no requirement of formal administration. It is sufficient that the expense be a necessary contribution toward the settlement of the case." [ 34 Am. Jur. 2d, p. 765; Nolledo, Bar Reviewer in Taxation, 10th Ed. (1990), p. 481]

xxx xxx xxx

The attorney's fees of P50,000.00, which were already incurred but not yet paid, refers to the guardianship proceeding filed by PNB, as guardian over the ward of Pedro Pajonar, docketed as Special Proceeding No. 1254 in the RTC (Branch XXXI) of Dumaguete City. . . .

xxx xxx xxx

The guardianship proceeding had been terminated upon delivery of the residuary estate to the heirs entitled thereto. Thereafter, PNB was discharged of any further responsibility.

Attorney's fees in order to be deductible from the gross estate must be essential to the collection of assets, payment of debts or the distribution of the property to the persons entitled to it. The services for which the fees are charged must relate to the proper settlement of the estate. [34 Am. Jur. 2d 767.] In this case, the guardianship proceeding was necessary for the distribution of the property of the late Pedro Pajonar to his rightful heirs.

xxx xxx xxx

PNB was appointed as guardian over the assets of the late Pedro Pajonar, who, even at the time of his death, was incompetent by reason of insanity. The expenses incurred in the guardianship proceeding was but a necessary expense in the settlement of the decedent's estate. Therefore, the attorney's fee incurred in the guardianship proceedings amounting to P50,000.00 is a reasonable and necessary business expense deductible from the gross estate of the decedent. 12

Upon a motion for reconsideration filed by the Commissioner of Internal Revenue, the Court of Tax Appeals modified its previous ruling by reducing the refundable amount to P76,502.43 since it found that a deficiency interest should be imposed and the compromise penalty excluded. 13 However, the tax court upheld its previous ruling regarding the legality of the deductions —

It is significant to note that the inclusion of the estate tax law in the codification of all our national internal revenue laws with the enactment of the National Internal Revenue Code in 1939 were copied from the Federal Law of the United States. [ UMALI, Reviewer in Taxation (1985), p. 285 ] The 1977 Tax Code, promulgated by Presidential Decree No. 1158, effective June 3, 1977, reenacted substantially all the provisions of the old law on estate and gift taxes, except the sections relating to the meaning of gross estate and gift. [ Ibid, p. 286. ]

In the United States, [a]dministrative expenses, executor's commissions and attorney's fees are considered allowable deductions from the Gross Estate. Administrative expenses are limited to such expenses as are actually and necessarily incurred in the administration of a decedent's estate. [PRENTICE-HALL, Federal Taxes Estate and Gift Taxes (1936), p. 120, 533.] Necessary expenses of administration are such expenses as are entailed for the preservation and productivity of the estate and for its management for purposes of liquidation, payment of debts and distribution of the residue among the persons entitled thereto. [Lizarraga Hermanos vs. Abada, 40 Phil. 124.] They must be incurred for the settlement of the estate as a whole. [34 Am. Jur. 2d, p. 765.] Thus, where there were no substantial community debts and it was unnecessary to convert community property to cash, the only practical purpose of administration being the payment of estate taxes, full deduction was allowed for attorney's fees and miscellaneous expenses charged wholly to decedent's estate. [Ibid., citing Estate of Helis, 26 T.C. 143 (A).]

Petitioner stated in her protest filed with the BIR that "upon the death of the ward, the PNB, 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 bond equal to the value of the estate, for which the state paid P59,341.40 for the premiums. (See Annex "K")." [p. 17, CTA record.] Therefore, it would appear from the records of the case that the only practical purpose of settling the estate by means of an extrajudicial settlement pursuant to Section 1 of Rule 74 of the Rules of Court was for the payment of taxes and the distribution of the estate to the heirs. A fortiori, since our estate tax laws are of American origin, the interpretation adopted by American Courts

has some persuasive effect on the interpretation of our own estate tax laws on the subject.

Anent the contention of respondent that the attorney's fees of P50,000.00 incurred in the guardianship proceeding should not be deducted from the Gross Estate, We consider the same unmeritorious. Attorneys' and guardians' fees incurred in a trustee's accounting of a taxable inter vivos trust attributable to the usual issues involved in such an accounting was 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 settlement of the estate. It is noteworthy to point that PNB was appointed the guardian over the assets of the deceased. Necessarily the assets of the deceased formed part of his gross estate. Accordingly, all expenses incurred in relation to the estate of the deceased will be deductible for estate tax purposes provided these are necessary and ordinary expenses for administration of the settlement of the estate. 14

In upholding the June 7, 1994 Resolution of the Court of Tax Appeals, the Court of Appeals held that:

2. Although the Tax Code specifies "judicial expenses of the testamentary or intestate proceedings," there is no reason why expenses incurred in the administration and settlement of an estate in extrajudicial proceedings should not be allowed. However, deduction is limited to such administration expenses as are actually and necessarily incurred in the collection of the assets of the estate, payment of the debts, and distribution of the remainder among those entitled thereto. Such expenses may include executor's or administrator's fees, attorney's fees, court fees and charges, appraiser's fees, clerk hire, costs of preserving and distributing the estate and storing or maintaining it, brokerage fees or commissions for selling or disposing of the estate, and the like. Deductible attorney's fees are those incurred by the executor or administrator in the settlement of the estate or in defending or prosecuting claims against or due the estate. (Estate and Gift Taxation in the Philippines, T. P. Matic, Jr., 1981 Edition, p. 176).

xxx xxx xxx

It is clear then that the extrajudicial settlement was for the purpose of payment of taxes and the distribution of the estate to the heirs. The execution of the extrajudicial settlement necessitated the notarization of the same. Hence the Contract of Legal Services of March 28, 1988 entered into between respondent Josefina Pajonar and counsel was presented in evidence for the purpose of showing that the amount of P60,753.00 was for the notarization of the Extrajudicial Settlement. It follows then that the notarial fee of P60,753.00 was incurred primarily to settle the estate of the deceased Pedro Pajonar. Said amount should then be considered an administration expenses actually and necessarily incurred in the collection of the assets of the estate, payment of debts and distribution of the remainder among those entitled thereto. Thus, the notarial

fee of P60,753 incurred for the Extrajudicial Settlement should be allowed as a deduction from the gross estate.

3. Attorney's fees, on the other hand, in order to be deductible from the gross estate must be essential to the settlement of the estate.

The amount of P50,000.00 was incurred as attorney's fees in the guardianship proceedings in Spec. Proc. No. 1254. Petitioner contends that said amount are not expenses of the testamentary or intestate proceedings as the guardianship proceeding was instituted during the lifetime of the decedent when there was yet no estate to be settled.

Again, this contention must fail.

The guardianship proceeding in this case was necessary for the distribution of the property of the deceased Pedro Pajonar. As correctly pointed out by respondent CTA, the PNB was appointed guardian over the assets of the deceased, and that necessarily the assets of the deceased formed part of his gross estate. . . .

xxx xxx xxx

It is clear therefore that the attorney's fees incurred in the guardianship proceeding in Spec. Proc. No. 1254 were essential to the distribution of the property to the persons entitled thereto. Hence, the attorney's fees incurred in the guardianship proceedings in the amount of P50,000.00 should be allowed as a deduction from the gross estate of the decedent. 15

The deductions from the gross estate permitted under section 79 of the Tax Code basically reproduced the deductions allowed under Commonwealth Act No. 466 (CA 466), otherwise known as the National Internal Revenue Code of 1939, 16 and which was the first codification of Philippine tax laws. Section 89 (a) (1) (B) of CA 466 also provided for the deduction of the "judicial expenses of the testamentary or intestate proceedings" for purposes of determining the value of the net estate. Philippine tax laws were, in turn, based on the federal tax laws of the United States. 17 In accord with established rules of statutory construction, the decisions of American courts construing the federal tax code are entitled to great weight in the interpretation of our own tax laws. 18

Judicial expenses are expenses of administration. 19 Administration expenses, as an allowable deduction from the gross estate of the decedent for purposes of arriving at the value of the net estate, have been construed by the federal and state courts of the United States to include all expenses "essential to the collection of the assets, payment of debts or the distribution of the property to the persons entitled to it." 20 In other words, the expenses must be essential to the proper settlement of the estate. Expenditures incurred for the individual benefit of the heirs, devisees or legatees are not deductible. 21

This distinction has been carried over to our jurisdiction. Thus, in Lorenzo v. Posadas 22 the Court construed the phrase "judicial expenses of the testamentary or intestate proceedings" as not including the compensation paid to a trustee of the decedent's estate when it appeared that such trustee was appointed for the purpose of managing the decedent's real estate for the benefit of the testamentary heir. In another case, the Court disallowed the premiums paid on the bond filed by the administrator as an expense of administration since the giving of a bond is in the nature of a qualification for the office, and not necessary in the settlement of the estate. 23 Neither may attorney's fees incident to litigation incurred by the heirs in asserting their respective rights be claimed as a deduction from the gross estate. 24

Coming to the case at bar, the notarial fee paid for the extrajudicial settlement is clearly a deductible expense since such settlement effected a distribution of Pedro Pajonar's estate to his lawful heirs. Similarly, the attorney's fees paid to PNB for acting as the guardian of Pedro 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 advice as to the proper settlement of the latter's estate, acts which contributed towards the collection of decedent's assets and the subsequent settlement of the estate.

We find that the Court of Appeals did not commit reversible error in affirming the questioned resolution of the Court of Tax Appeals.

WHEREFORE, the December 21, 1995 Decision of the Court of Appeals is AFFIRMED. The 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.1âwphi1.nêt

SO ORDERED.

Melo, Vitug, Panganiban and Purisima, JJ., concur.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-22734             September 15, 1967

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.

MANUEL B. PINEDA, as one of the heirs of deceased ATANASIO PINEDA, respondent.

Office of the Solicitor General for petitioner.Manuel B. Pineda for and in his own behalf as respondent.

 

BENGZON, J.P., J.:

          On May 23, 1945 Atanasio Pineda died, survived by his wife, Felicisima Bagtas, and 15 children, the eldest of whom is Manuel B. Pineda, a lawyer. Estate proceedings were had in the Court of First Instance of Manila (Case No. 71129) wherein the surviving widow was appointed administratrix. The estate was divided among and awarded to the heirs and the proceedings terminated on June 8, 1948. Manuel B. Pineda's share amounted to about P2,500.00.

          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:

Deficiency income taxP135.83

436.951,206.91P1,779.69

Add: 5% surcharge 88.981% monthly interest from November 30, 1953 to April 15, 1957 720.77Compromise for late filing 80.00Compromise for late payment 40.00

Total amount due P2,707.44===========

Additional residence tax for 1945P14.50

===========Real Estate dealer's tax for the fourth quarter of 1946 and the whole

year of 1947P207.50

===========

          Manuel B. Pineda, who received the assessment, contested the same. Subsequently, he appealed to the Court of Tax Appeals alleging that he was appealing "only that proportionate part or portion pertaining to him as one of the heirs."

          After hearing the parties, the Court of Tax Appeals rendered judgment reversing the decision of the Commissioner on the ground that his right to assess and collect the tax has prescribed. The Commissioner appealed and this Court affirmed the findings of the Tax Court in respect to the assessment for income tax for the year 1947 but held that the right to assess and collect the taxes for 1945 and 1946 has not prescribed. For 1945 and 1946 the returns were filed on August 24, 1953; assessments for both taxable years were made within five years therefrom or on October 19, 1953; and the action to collect the tax was filed within five years from the latter date, on August 7, 1957. For taxable year 1947, however, the return was filed on March 1, 1948; the assessment was made on October 19, 1953, more than five years from the date the return was filed; hence, the right to assess income tax for 1947 had prescribed. Accordingly, We remanded the case to the Tax Court for further appropriate proceedings.1

          In the Tax Court, the parties submitted the case for decision without additional evidence.

          On November 29, 1963 the Court of Tax Appeals rendered judgment holding Manuel B. Pineda liable for the payment corresponding to his share of the following taxes:

Deficiency income tax

P135.83436.95

Real estate dealer's fixed tax 4th quarter of 1946 and whole year of 1947 P187.50

          The Commissioner of Internal Revenue has appealed to Us and has proposed to hold Manuel B. Pineda liable for the payment of all the taxes found by the Tax Court to be due from the estate in the total amount of P760.28 instead of only for the amount of taxes corresponding to his share in the estate.1awphîl.nèt

          Manuel B. Pineda opposes the proposition on the ground that as an heir he is liable for unpaid income tax due the estate only up to the extent of and in proportion to any share he received. He relies on Government of the Philippine Islands v. Pamintuan2 where We held that "after the partition of an estate, heirs and distributees are liable individually for the payment of all lawful outstanding claims against the estate in proportion to the amount or value of the property they have respectively received from the estate."

          We hold that the Government can require Manuel B. Pineda to pay the full amount of the taxes assessed.

          Pineda is liable for the assessment as an heir and as a holder-transferee of property belonging to the estate/taxpayer. As an heir he is individually answerable for

the part of the tax proportionate to the share he received from the inheritance.3 His liability, however, cannot exceed the amount of his share.4

          As a holder of property belonging to the estate, Pineda is liable for he tax up to the amount of the property in his possession. The reason is that the Government has a lien on the P2,500.00 received by him from the estate as his share in the inheritance, for unpaid income taxes4a for which said estate is liable, pursuant to the last paragraph of Section 315 of the Tax Code, which we quote hereunder:

          If any person, corporation, partnership, joint-account (cuenta en participacion), association, or insurance company liable to pay the income tax, neglects or refuses to pay the same after demand, the amount shall be a lien in favor of the Government of the Philippines from the time when the assessment was made by the Commissioner of Internal Revenue until paid with interest, penalties, and costs that may accrue in addition thereto upon all property and rights to property belonging to the taxpayer: . . .

          By virtue of such lien, the Government has the right to subject the property in Pineda's possession, i.e., the P2,500.00, to satisfy the income tax assessment in the sum of P760.28. After such payment, Pineda will have a right of contribution from his co-heirs,5 to achieve an adjustment of the proper share of each heir in the distributable estate.

          All told, the Government has two ways of collecting the tax in question. One, by going after all the heirs and collecting from each one of them the amount of the tax proportionate to the inheritance received. This remedy was adopted in Government of the Philippine Islands v. Pamintuan, supra. In said case, the Government filed an action against all the heirs for the collection of the tax. This action rests on the concept that hereditary property consists only of that part which remains after the settlement of all lawful claims against the estate, for the settlement of which the entire estate is first liable.6 The reason why in case suit is filed against all the heirs the tax due from the estate is levied proportionately against them is to achieve thereby two results: first, payment of the tax; and second, adjustment of the shares of each heir in the distributed estate as lessened by the tax.

          Another remedy, pursuant to the lien created by Section 315 of the Tax Code upon all property and rights to property belonging to the taxpayer for unpaid income tax, is by subjecting said property of the estate which is in the hands of an heir or transferee to the payment of the tax due, the estate. This second remedy is the very avenue the Government took in this case to collect the tax. The Bureau of Internal Revenue should be given, in instances like the case at bar, the necessary discretion to avail itself of the most expeditious way to collect the tax as may be envisioned in the particular provision of the Tax Code above quoted, because taxes are the lifeblood of government and their prompt and certain availability is an imperious need.7 And as afore-stated in this case the suit seeks to achieve only one objective: payment of the tax. The adjustment of the

respective shares due to the heirs from the inheritance, as lessened by the tax, is left to await the suit for contribution by the heir from whom the Government recovered said tax.

          WHEREFORE, the decision appealed from is modified. Manuel B. Pineda is hereby ordered to pay to the Commissioner of Internal Revenue the sum of P760.28 as deficiency income tax for 1945 and 1946, and real estate dealer's fixed tax for the fourth quarter of 1946 and for the whole year 1947, without prejudice to his right of contribution for his co-heirs. No costs. So ordered.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ., concur.

Republic of the PhilippinesSUPREME COURT

Manila

FIRST DIVISION

G.R. No. L-31364 March 30, 1979

MISAEL P. VERA, as Commissioner of Internal Revenue, and JAIME ARANETA, as Regional Director, Revenue Region No. 14, Bureau of Internal Revenue, petitioners,

vs.HON. JOSE F. FERNANDEZ, Judge of the Court of First Instance of Negros Occidental, Branch V, and FRANCIS A. TONGOY, Administrator of the Estate of the late LUIS D. TONGOY respondents.

 

DE CASTRO, J.:

Appeal from two orders of the Court of First Instance of Negros Occidental, Branch V in Special Proceedings No. 7794, entitled: "Intestate Estate of Luis D. Tongoy," the first dated July 29, 1969 dismissing the Motion for Allowance of Claim and for an Order of Payment of Taxes by the Government of the Republic of the Philippines against the Estate of the late Luis D. Tongoy, for deficiency income taxes for the years 1963 and 1964 of the decedent in the total amount of P3,254.80, inclusive 5% surcharge, 1% monthly interest and compromise penalties, and the second, dated October 7, 1969, denying the Motion for reconsideration of the Order of dismissal.

The Motion for allowance of claim and for payment of taxes dated May 28, 1969 was filed on June 3, 1969 in the abovementioned special proceedings, (par. 3, Annex A, Petition, pp. 1920, Rollo). The claim represents the indebtedness to the Government of the late Luis D. Tongoy for deficiency income taxes in the total sum of P3,254.80 as above stated, covered by Assessment Notices Nos. 11-50-29-1-11061-21-63 and 11-50-

291-1 10875-64, to which motion was attached Proof of Claim (Annex B, Petition, pp. 21-22, Rollo). The Administrator opposed the motion solely on the ground that the claim was barred under Section 5, Rule 86 of the Rules of Court (par. 4, Opposition to Motion for Allowance of Claim, pp. 23-24, Rollo). Finding the opposition well-founded, the respondent Judge, Jose F. Fernandez, dismissed the motion for allowance of claim filed by herein petitioner, Regional Director of the Bureau of Internal Revenue, in an order dated July 29, 1969 (Annex D, Petition, p. 26, Rollo). On September 18, 1969, a motion for reconsideration was filed, of the order of July 29, 1969, but was denied in an Order dated October 7, 1969.

Hence, this appeal on certiorari, petitioner assigning the following errors:

1. The lower court erred in holding that the claim for taxes by the government against the estate of Luis D. Tongoy was filed beyond the period provided in Section 2, Rule 86 of the Rules of Court.

2. The lower court erred in holding that the claim for taxes of the government was already barred under Section 5, Rule 86 of the Rules of Court.

which raise the sole issue of whether or not the statute of non-claims Section 5, Rule 86 of the New Rule of Court, bars claim of the government for unpaid taxes, still within the period of limitation prescribed in Section 331 and 332 of the National Internal Revenue Code.

Section 5, Rule 86, as invoked by the respondent Administrator in hid Oppositions to the Motion for Allowance of Claim, etc. of the petitioners reads as follows:

All claims for money against the decedent, arising from contracts, express or implied, whether the same be due, not due, or contingent, all claims for funeral expenses and expenses for the last sickness of the decedent, and judgment for money against the decedent, must be filed within the time limited in they notice; otherwise they are barred forever, except that they may be set forth as counter claims in any action that the executor or administrator may bring against the claimants. Where the executor or administrator commence an action, or prosecutes an action already commenced by the deceased in his lifetime, the debtor may set forth may answer the claims he has against the decedents, instead of presenting them independently to the court has herein provided, and mutual claims may be set off against each other in such action; and in final judgment is rendered in favored of the decedent, the amount to determined shall be considered the true balance against the estate, as though the claim has been presented directly before the court in the administration proceedings. Claims not yet due, or contingent may be approved at their present value.

A perusal of the aforequoted provisions shows that it makes no mention of claims for monetary obligation of the decedent created by law, such as taxes which is entirely of different character from the claims expressly enumerated therein, such as: "all claims for

money against the decedent arising from contract, express or implied, whether the same be due, not due or contingent, all claim for funeral expenses and expenses for the last sickness of the decedent and judgment for money against the decedent." Under the familiar rule of statutory construction of expressio unius est exclusio alterius, the mention of one thing implies the exclusion of another thing not mentioned. Thus, if a statute enumerates the things upon which it is to operate, everything else must necessarily, and by implication be excluded from its operation and effect (Crawford, Statutory Construction, pp. 334-335).

In the case of Commissioner of Internal Revenue vs. Ilagan Electric & Ice Plant, et al., G.R. No. L-23081, December 30, 1969, it was held that the assessment, collection and recovery of taxes, as well as the matter of prescription thereof are governed by the provisions of the National Internal revenue Code, particularly Sections 331 and 332 thereof, and not by other provisions of law. (See also Lim Tio, Dy Heng and Dee Jue vs. Court of Tax Appeals & Collector of Internal Revenue, G.R. No. L-10681, March 29, 1958). Even without being specifically mentioned, the provisions of Section 2 of Rule 86 of the Rules of Court may reasonably be presumed to have been also in the mind of the Court as not affecting the aforecited Section of the National Internal Revenue Code.

In the case of Pineda vs. CFI of Tayabas, 52 Phil. 803, it was even more pointedly held that "taxes assessed against the estate of a deceased person ... need not be submitted to the committee on claims in the ordinary course of administration. In the exercise of its control over the administrator, the court may direct the payment of such taxes upon motion showing that the taxes have been assessed against the estate." The abolition of the Committee on Claims does not alter the basic ruling laid down giving exception to the claim for taxes from being filed as the other claims mentioned in the Rule should be filed before the Court. Claims for taxes may be collected even after the distribution of the decedent's estate among his heirs who shall be liable therefor in proportion of their share in the inheritance. (Government of the Philippines vs. Pamintuan, 55 Phil. 13).

The reason for the more liberal treatment of claims for taxes against a decedent's estate in the form of exception from the application of the statute of non-claims, is not hard to find. Taxes are the lifeblood of the Government and their prompt and certain availability are imperious need. (Commissioner of Internal Revenue vs. Pineda, G. R. No. L-22734, September 15, 1967, 21 SCRA 105). Upon taxation depends the Government ability to serve the people for whose benefit taxes are collected. To safeguard such interest, neglect or omission of government officials entrusted with the collection of taxes should not be allowed to bring harm or detriment to the people, in the same manner as private persons may be made to suffer individually on account of his own negligence, the presumption being that they take good care of their personal affairs. This should not hold true to government officials with respect to matters not of their own personal concern. This is the philosophy behind the government's exception, as a general rule, from the operation of the principle of estoppel. (Republic vs. Caballero, L-27437, September 30, 1977, 79 SCRA 177; Manila Lodge No. 761, Benevolent and Protective Order of the Elks Inc. vs. Court of Appeals, L-41001, September 30, 1976, 73 SCRA 162; Sy vs.

Central Bank of the Philippines, L-41480, April 30,1976, 70 SCRA 571; Balmaceda vs. Corominas & Co., Inc., 66 SCRA 553; Auyong Hian vs. Court of Tax Appeals, 59 SCRA 110; Republic vs. Philippine Rabbit Bus Lines, Inc., 66 SCRA 553; Republic vs. Philippine Long Distance Telephone Company, L-18841, January 27, 1969, 26 SCRA 620; Zamora vs. Court of Tax Appeals, L-23272, November 26, 1970, 36 SCRA 77; E. Rodriguez, Inc. vs. Collector of Internal Revenue, L- 23041, July 31, 1969, 28 SCRA 119.) As already shown, taxes may be collected even after the distribution of the estate of the decedent among his heirs (Government of the Philippines vs. Pamintuan, supra; Pineda vs. CFI of Tayabas, supra Clara Diluangco Palanca vs. Commissioner of Internal Revenue, G. R. No. L-16661, January 31, 1962).

Furthermore, as held in Commissioner of Internal Revenue vs. Pineda, supra, citing the last paragraph of Section 315 of the Tax Code payment of income tax shall be a lien in favor of the Government of the Philippines from the time the assessment was made by the Commissioner of Internal Revenue until paid with interests, penalties, etc. By virtue of such lien, this court held that the property of the estate already in the hands of an heir or transferee may be subject to the payment of the tax due the estate. A fortiori before the inheritance has passed to the heirs, the unpaid taxes due the decedent may be collected, even without its having been presented under Section 2 of Rule 86 of the Rules of Court. It may truly be said that until the property of the estate of the decedent has vested in the heirs, the decedent, represented by his estate, continues as if he were still alive, subject to the payment of such taxes as would be collectible from the estate even after his death. Thus in the case above cited, the income taxes sought to be collected were due from the estate, for the three years 1946, 1947 and 1948 following his death in May, 1945.

Even assuming arguendo that claims for taxes have to be filed within the time prescribed in Section 2, Rule 86 of the Rules of Court, the claim in question may be filed even after the expiration of the time originally fixed therein, as may be gleaned from the italicized portion of the Rule herein cited which reads:

Section 2. Time within which claims shall be filed. - In the notice provided in the preceding section, the court shall state the time for the filing of claims against the estate, which shall not be more than twelve (12) nor less than six (6) months after the date of the first publication of the notice. However, at any time before an order of distribution is entered, on application of a creditor who has failed to file his claim within the time previously limited the court may, for cause shown and on such terms as are equitable, allow such claim to be flied within a time not exceeding one (1) month. (Emphasis supplied)

In the instant case, petitioners filed an application (Motion for Allowance of Claim and for an Order of Payment of Taxes) which, though filed after the expiration of the time previously limited but before an order of the distribution is entered, should have been granted by the respondent court, in the absence of any valid ground, as none was shown, justifying denial of the motion, specially considering that it was for allowance Of

claim for taxes due from the estate, which in effect represents a claim of the people at large, the only reason given for the denial that the claim was filed out of the previously limited period, sustaining thereby private respondents' contention, erroneously as has been demonstrated.

WHEREFORE, the order appealed from is reverse. Since the Tax Commissioner's assessment in the total amount of P3,254.80 with 5 % surcharge and 1 % monthly interest as provided in the Tax Code is a final one and the respondent estate's sole defense of prescription has been herein overruled, the Motion for Allowance of Claim is herein granted and respondent estate is ordered to pay and discharge the same, subject only to the limitation of the interest collectible thereon as provided by the Tax Code. No pronouncement as to costs.

SO ORDERED.

Teehankee (Chairman), Makasiar, Fernandez, Guerrero, and Melencio-Herrera, JJ., concur.

Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

 

G.R. No. 120880 June 5, 1997

FERDINAND R. MARCOS II, petitioner, vs.COURT OF APPEALS, THE COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE and HERMINIA D. DE GUZMAN, respondents.

 

TORRES, JR., J.:

In this Petition for Review on Certiorari, Government action is once again assailed as precipitate and unfair, suffering the basic and oftly implored requisites of due process of law. Specifically, the petition assails the Decision 1 of the Court of Appeals dated November 29, 1994 in CA-G.R. SP No. 31363, where the said court held:

In view of all the foregoing, we rule that the deficiency income tax assessments and estate tax assessment, are already final and (u)nappealable-and-the subsequent levy of real properties is a tax remedy resorted to by the government, sanctioned by Section 213 and 218 of the National Internal Revenue Codeaffected or precluded by the pendency of any other tax remedies instituted by the government.

WHEREFORE, premises considered, judgment is hereby rendered DISMISSING the petition for certiorari with prayer for Restraining Order and Injunc. This summary tax remedy is distinct and separate from the other tax remedies (such as Judicial Civil actions and Criminal actions), and is not tion.

No pronouncements as to costs.

SO ORDERED.

More than seven years since the demise of the late Ferdinand E. Marcos, the former President of the Republic of the Philippines, the matter of the settlement of his estate, and its dues to the government in estate taxes, are still unresolved, the latter issue being now before this Court for resolution. Specifically, petitioner Ferdinand R. Marcos II, the eldest son of the decedent, questions the actuations of the respondent Commissioner of Internal Revenue in assessing, and collecting through the summary remedy of Levy on Real Properties, estate and income tax delinquencies upon the estate and properties of

his father, despite the pendency of the proceedings on probate of the will of the late president, which is docketed as Sp. Proc. No. 10279 in the Regional Trial Court of Pasig, Branch 156.

Petitioner had filed with the respondent Court of Appeals a Petition for Certiorari and Prohibition with an application for writ of preliminary injunction and/or temporary restraining order on June 28, 1993, seeking to —

I. Annul and set aside the Notices of Levy on real property dated February 22, 1993 and May 20, 1993, issued by respondent Commissioner of Internal Revenue;

II. Annul and set aside the Notices of Sale dated May 26, 1993;

III. Enjoin the Head Revenue Executive Assistant Director II (Collection Service), from proceeding with the Auction of the real properties covered by Notices of Sale.

After the parties had pleaded their case, the Court of Appeals rendered its Decision 2 on November 29, 1994, ruling that the deficiency assessments for estate and income tax made upon the petitioner and the estate of the deceased President Marcos have already become final and unappealable, and may thus be enforced by the summary remedy of levying upon the properties of the late President, as was done by the respondent Commissioner of Internal Revenue.

WHEREFORE, premises considered judgment is hereby rendered DISMISSING the petition for Certiorari with prayer for Restraining Order and Injunction.

No pronouncements as to cost.

SO ORDERED.

Unperturbed, petitioner is now before us assailing the validity of the appellate court's decision, assigning the following as errors:

A. RESPONDENT COURT MANIFESTLY ERRED IN RULING THAT THE SUMMARY TAX REMEDIES RESORTED TO BY THE GOVERNMENT ARE NOT AFFECTED AND PRECLUDED BY THE PENDENCY OF THE SPECIAL PROCEEDING FOR THE ALLOWANCE OF THE LATE PRESIDENT'S ALLEGED WILL. TO THE CONTRARY, THIS PROBATE PROCEEDING PRECISELY PLACED ALL PROPERTIES WHICH FORM PART OF THE LATE PRESIDENT'S ESTATE IN CUSTODIA LEGIS OF THE PROBATE COURT TO THE EXCLUSION OF ALL OTHER COURTS AND ADMINISTRATIVE AGENCIES.

B. RESPONDENT COURT ARBITRARILY ERRED IN SWEEPINGLY DECIDING THAT SINCE THE TAX ASSESSMENTS OF PETITIONER AND HIS PARENTS HAD ALREADY BECOME FINAL AND UNAPPEALABLE, THERE WAS NO NEED TO GO INTO THE MERITS OF THE GROUNDS CITED IN THE PETITION. INDEPENDENT OF

WHETHER THE TAX ASSESSMENTS HAD ALREADY BECOME FINAL, HOWEVER, PETITIONER HAS THE RIGHT TO QUESTION THE UNLAWFUL MANNER AND METHOD IN WHICH TAX COLLECTION IS SOUGHT TO BE ENFORCED BY RESPONDENTS COMMISSIONER AND DE GUZMAN. THUS, RESPONDENT COURT SHOULD HAVE FAVORABLY CONSIDERED THE MERITS OF THE FOLLOWING GROUNDS IN THE PETITION:

(1) The Notices of Levy on Real Property were issued beyond the period provided in the Revenue Memorandum Circular No. 38-68.

(2) [a] The numerous pending court cases questioning the late President's ownership or interests in several properties (both personal and real) make the total value of his estate, and the consequent estate tax due, incapable of exact pecuniary determination at this time. Thus, respondents' assessment of the estate tax and their issuance of the Notices of Levy and Sale are premature, confiscatory and oppressive.

[b] Petitioner, as one of the late President's compulsory heirs, was never notified, much less served with copies of the Notices of Levy, contrary to the mandate of Section 213 of the NIRC. As such, petitioner was never given an opportunity to contest the Notices in violation of his right to due process of law.

C. ON ACCOUNT OF THE CLEAR MERIT OF THE PETITION, RESPONDENT COURT MANIFESTLY ERRED IN RULING THAT IT HAD NO POWER TO GRANT INJUNCTIVE RELIEF TO PETITIONER. SECTION 219 OF THE NIRC NOTWITHSTANDING, COURTS POSSESS THE POWER TO ISSUE A WRIT OF PRELIMINARY INJUNCTION TO RESTRAIN RESPONDENTS COMMISSIONER'S AND DE GUZMAN'S ARBITRARY METHOD OF COLLECTING THE ALLEGED DEFICIENCY ESTATE AND INCOME TAXES BY MEANS OF LEVY.

The facts as found by the appellate court are undisputed, and are hereby adopted:

On September 29, 1989, former President Ferdinand Marcos died in Honolulu, Hawaii, USA.

On June 27, 1990, a Special Tax Audit Team was created to conduct investigations and examinations of the tax liabilities and obligations of the late president, as well as that of his family, associates and "cronies". Said audit team concluded its investigation with a Memorandum dated July 26, 1991. The investigation disclosed that the Marcoses failed to file a written notice of the death of the decedent, an estate tax returns [sic], as well as several income tax returns covering the years 1982 to 1986, — all in violation of the National Internal Revenue Code (NIRC).

Subsequently, criminal charges were filed against Mrs. Imelda R. Marcos before the Regional Trial of Quezon City for violations of Sections 82, 83 and 84 (has penalized

under Sections 253 and 254 in relation to Section 252 — a & b) of the National Internal Revenue Code (NIRC).

The Commissioner of Internal Revenue thereby caused the preparation and filing of the Estate Tax Return for the estate of the late president, the Income Tax Returns of the Spouses Marcos for the years 1985 to 1986, and the Income Tax Returns of petitioner Ferdinand "Bongbong" Marcos II for the years 1982 to 1985.

On July 26, 1991, the BIR issued the following: (1) Deficiency estate tax assessment no. FAC-2-89-91-002464 (against the estate of the late president Ferdinand Marcos in the amount of P23,293,607,638.00 Pesos); (2) Deficiency income tax assessment no. FAC-1-85-91-002452 and Deficiency income tax assessment no. FAC-1-86-91-002451 (against the Spouses Ferdinand and Imelda Marcos in the amounts of P149,551.70 and P184,009,737.40 representing deficiency income tax for the years 1985 and 1986); (3) Deficiency income tax assessment nos. FAC-1-82-91-002460 to FAC-1-85-91-002463 (against petitioner Ferdinand "Bongbong" Marcos II in the amounts of P258.70 pesos; P9,386.40 Pesos; P4,388.30 Pesos; and P6,376.60 Pesos representing his deficiency income taxes for the years 1982 to 1985).

The Commissioner of Internal Revenue avers that copies of the deficiency estate and income tax assessments were all personally and constructively served on August 26, 1991 and September 12, 1991 upon Mrs. Imelda Marcos (through her caretaker Mr. Martinez) at her last known address at No. 204 Ortega St., San Juan, M.M. (Annexes "D" and "E" of the Petition). Likewise, copies of the deficiency tax assessments issued against petitioner Ferdinand "Bongbong" Marcos II were also personally and constructively served upon him (through his caretaker) on September 12, 1991, at his last known address at Don Mariano Marcos St. corner P. Guevarra St., San Juan, M.M. (Annexes "J" and "J-1" of the Petition). Thereafter, Formal Assessment notices were served on October 20, 1992, upon Mrs. Marcos c/o petitioner, at his office, House of Representatives, Batasan Pambansa, Quezon City. Moreover, a notice to Taxpayer inviting Mrs. Marcos (or her duly authorized representative or counsel), to a conference, was furnished the counsel of Mrs. Marcos, Dean Antonio Coronel — but to no avail.

The deficiency tax assessments were not protested administratively, by Mrs. Marcos and the other heirs of the late president, within 30 days from service of said assessments.

On February 22, 1993, the BIR Commissioner issued twenty-two notices of levy on real property against certain parcels of land owned by the Marcoses — to satisfy the alleged estate tax and deficiency income taxes of Spouses Marcos.

On May 20, 1993, four more Notices of Levy on real property were issued for the purpose of satisfying the deficiency income taxes.

On May 26, 1993, additional four (4) notices of Levy on real property were again issued. The foregoing tax remedies were resorted to pursuant to Sections 205 and 213 of the National Internal Revenue Code (NIRC).

In response to a letter dated March 12, 1993 sent by Atty. Loreto Ata (counsel of herein petitioner) calling the attention of the BIR and requesting that they be duly notified of any action taken by the BIR affecting the interest of their client Ferdinand "Bongbong" Marcos II, as well as the interest of the late president — copies of the aforesaid notices were, served on April 7, 1993 and on June 10, 1993, upon Mrs. Imelda Marcos, the petitioner, and their counsel of record, "De Borja, Medialdea, Ata, Bello, Guevarra and Serapio Law Office".

Notices of sale at public auction were posted on May 26, 1993, at the lobby of the City Hall of Tacloban City. The public auction for the sale of the eleven (11) parcels of land took place on July 5, 1993. There being no bidder, the lots were declared forfeited in favor of the government.

On June 25, 1993, petitioner Ferdinand "Bongbong" Marcos II filed the instant petition for certiorari and prohibition under Rule 65 of the Rules of Court, with prayer for temporary restraining order and/or writ of preliminary injunction.

It has been repeatedly observed, and not without merit, that the enforcement of tax laws and the collection of taxes, is of paramount importance for the sustenance of government. Taxes are the lifeblood of the government and should be collected without unnecessary hindrance. However, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved. 3

Whether or not the proper avenues of assessment and collection of the said tax obligations were taken by the respondent Bureau is now the subject of the Court's inquiry.

Petitioner posits that notices of levy, notices of sale, and subsequent sale of properties of the late President Marcos effected by the BIR are null and void for disregarding the established procedure for the enforcement of taxes due upon the estate of the deceased. The case of Domingo vs. Garlitos 4 is specifically cited to bolster the argument that "the ordinary procedure by which to settle claims of indebtedness against the estate of a deceased, person, as in an inheritance (estate) tax, is for the claimant to present a claim before the probate court so that said court may order the administrator to pay the amount therefor." This remedy is allegedly, exclusive, and cannot be effected through any other means.

Petitioner goes further, submitting that the probate court is not precluded from denying a request by the government for the immediate payment of taxes, and should order the payment of the same only within the period fixed by the probate court for the payment of all the debts of the decedent. In this regard, petitioner cites the case of Collector of Internal Revenue vs. The Administratrix of the Estate of Echarri (67 Phil 502), where it was held that:

The case of Pineda vs. Court of First Instance of Tayabas and Collector of Internal Revenue (52 Phil 803), relied upon by the petitioner-appellant is good authority on the proposition that the court having control over the administration proceedings has jurisdiction to entertain the claim presented by the government for taxes due and to order the administrator to pay the tax should it find that the assessment was proper, and that the tax was legal, due and collectible. And the rule laid down in that case must be understood in relation to the case of Collector of Customs vs. Haygood, supra., as to the procedure to be followed in a given case by the government to effectuate the collection of the tax. Categorically stated, where during the pendency of judicial administration over the estate of a deceased person a claim for taxes is presented by the government, the court has the authority to order payment by the administrator; but, in the same way that it has authority to order payment or satisfaction, it also has the negative authority to deny the same. While there are cases where courts are required to perform certain duties mandatory and ministerial in character, the function of the court in a case of the present character is not one of them; and here, the court cannot be an organism endowed with latitude of judgment in one direction, and converted into a mere mechanical contrivance in another direction.

On the other hand, it is argued by the BIR, that the state's authority to collect internal revenue taxes is paramount. Thus, the pendency of probate proceedings over the estate of the deceased does not preclude the assessment and collection, through summary remedies, of estate taxes over the same. According to the respondent, claims for payment of estate and income taxes due and assessed after the death of the decedent need not be presented in the form of a claim against the estate. These can and should be paid immediately. The probate court is not the government agency to decide whether an estate is liable for payment of estate of income taxes. Well-settled is the rule that the probate court is a court with special and limited jurisdiction.

Concededly, the authority of the Regional Trial Court, sitting, albeit with limited jurisdiction, as a probate court over estate of deceased individual, is not a trifling thing. The court's jurisdiction, once invoked, and made effective, cannot be treated with indifference nor should it be ignored with impunity by the very parties invoking its authority.

In testament to this, it has been held that it is within the jurisdiction of the probate court to approve the sale of properties of a deceased person by his prospective heirs before final adjudication; 5 to determine who are the heirs of the decedent; 6 the recognition of a natural child; 7 the status of a woman claiming to be the legal wife of the decedent; 8 the

legality of disinheritance of an heir by the testator; 9 and to pass upon the validity of a waiver of hereditary rights. 10

The pivotal question the court is tasked to resolve refers to the authority of the Bureau of Internal Revenue to collect by the summary remedy of levying upon, and sale of real properties of the decedent, estate tax deficiencies, without the cognition and authority of the court sitting in probate over the supposed will of the deceased.

The nature of the process of estate tax collection has been described as follows:

Strictly speaking, the assessment of an inheritance tax does not directly involve the administration of a decedent's estate, although it may be viewed as an incident to the complete settlement of an estate, and, under some statutes, it is made the duty of the probate court to make the amount of the inheritance tax a part of the final decree of distribution of the estate. It is not against the property of decedent, nor is it a claim against the estate as such, but it is against the interest or property right which the heir, legatee, devisee, etc., has in the property formerly held by decedent. Further, under some statutes, it has been held that it is not a suit or controversy between the parties, nor is it an adversary proceeding between the state and the person who owes the tax on the inheritance. However, under other statutes it has been held that the hearing and determination of the cash value of the assets and the determination of the tax are adversary proceedings. The proceeding has been held to be necessarily a proceeding in rem. 11

In the Philippine experience, the enforcement and collection of estate tax, is executive in character, as the legislature has seen it fit to ascribe this task to the Bureau of Internal Revenue. Section 3 of the National Internal Revenue Code attests to this:

Sec. 3. Powers and duties of the Bureau. — The powers and duties of the Bureau of Internal Revenue shall comprehend the assessment and collection of all national internal revenue taxes, fees, and charges, and the enforcement of all forfeitures, penalties, and fines connected therewith, including the execution of judgments in all cases decided in its favor by the Court of Tax Appeals and the ordinary courts. Said Bureau shall also give effect to and administer the supervisory and police power conferred to it by this Code or other laws.

Thus, it was in Vera vs. Fernandez 12 that the court recognized the liberal treatment of claims for taxes charged against the estate of the decedent. Such taxes, we said, were exempted from the application of the statute of non-claims, and this is justified by the necessity of government funding, immortalized in the maxim that taxes are the lifeblood of the government. Vectigalia nervi sunt rei publicae — taxes are the sinews of the state.

Taxes assessed against the estate of a deceased person, after administration is opened, need not be submitted to the committee on claims in the ordinary course of administration. In the exercise of its control over the administrator, the court may direct

the payment of such taxes upon motion showing that the taxes have been assessed against the estate.

Such liberal treatment of internal revenue taxes in the probate proceedings extends so far, even to allowing the enforcement of tax obligations against the heirs of the decedent, even after distribution of the estate's properties.

Claims for taxes, whether assessed before or after the death of the deceased, can be collected from the heirs even after the distribution of the properties of the decedent. They are exempted from the application of the statute of non-claims. The heirs shall be liable therefor, in proportion to their share in the inheritance. 13

Thus, the Government has two ways of collecting the taxes in question. One, by going after all the heirs and collecting from each one of them the amount of the tax proportionate to the inheritance received. Another remedy, pursuant to the lien created by Section 315 of the Tax Code upon all property and rights to property belong to the taxpayer for unpaid income tax, is by subjecting said property of the estate which is in the hands of an heir or transferee to the payment of the tax due the estate. (Commissioner of Internal Revenue vs. Pineda, 21 SCRA 105, September 15, 1967.)

From the foregoing, it is discernible that the approval of the court, sitting in probate, or as a settlement tribunal over the deceased is not a mandatory requirement in the collection of estate taxes. It cannot therefore be argued that the Tax Bureau erred in proceeding with the levying and sale of the properties allegedly owned by the late President, on the ground that it was required to seek first the probate court's sanction. There is nothing in the Tax Code, and in the pertinent remedial laws that implies the necessity of the probate or estate settlement court's approval of the state's claim for estate taxes, before the same can be enforced and collected.

On the contrary, under Section 87 of the NIRC, it is the probate or settlement court which is bidden not to authorize the executor or judicial administrator of the decedent's estate to deliver any distributive share to any party interested in the estate, unless it is shown a Certification by the Commissioner of Internal Revenue that the estate taxes have been paid. This provision disproves the petitioner's contention that it is the probate court which approves the assessment and collection of the estate tax.

If there is any issue as to the validity of the BIR's decision to assess the estate taxes, this should have been pursued through the proper administrative and judicial avenues provided for by law.

Section 229 of the NIRC tells us how:

Sec. 229. Protesting of assessment. — When the Commissioner of Internal Revenue or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings. Within a period to be prescribed by implementing

regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner shall issue an assessment based on his findings.

Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation in such form and manner as may be prescribed by implementing regulations within (30) days from receipt of the assessment; otherwise, the assessment shall become final and unappealable.

If the protest is denied in whole or in part, the individual, association or corporation adversely affected by the decision on the protest may appeal to the Court of Tax Appeals within thirty (30) days from receipt of said decision; otherwise, the decision shall become final, executory and demandable. (As inserted by P.D. 1773)

Apart from failing to file the required estate tax return within the time required for the filing of the same, petitioner, and the other heirs never questioned the assessments served upon them, allowing the same to lapse into finality, and prompting the BIR to collect the said taxes by levying upon the properties left by President Marcos.

Petitioner submits, however, that "while the assessment of taxes may have been validly undertaken by the Government, collection thereof may have been done in violation of the law. Thus, the manner and method in which the latter is enforced may be questioned separately, and irrespective of the finality of the former, because the Government does not have the unbridled discretion to enforce collection without regard to the clear provision of law." 14

Petitioner specifically points out that applying Memorandum Circular No. 38-68, implementing Sections 318 and 324 of the old tax code (Republic Act 5203), the BIR's Notices of Levy on the Marcos properties, were issued beyond the allowed period, and are therefore null and void:

. . . the Notices of Levy on Real Property (Annexes O to NN of Annex C of this Petition) in satisfaction of said assessments were still issued by respondents well beyond the period mandated in Revenue Memorandum Circular No. 38-68. These Notices of Levy were issued only on 22 February 1993 and 20 May 1993 when at least seventeen (17) months had already lapsed from the last service of tax assessment on 12 September 1991. As no notices of distraint of personal property were first issued by respondents, the latter should have complied with Revenue Memorandum Circular No. 38-68 and issued these Notices of Levy not earlier than three (3) months nor later than six (6) months from 12 September 1991. In accordance with the Circular, respondents only had until 12 March 1992 (the last day of the sixth month) within which to issue these Notices of Levy. The Notices of Levy, having been issued beyond the period allowed by law, are thus void and of no effect. 15

We hold otherwise. The Notices of Levy upon real property were issued within the prescriptive period and in accordance with the provisions of the present Tax Code. The

deficiency tax assessment, having already become final, executory, and demandable, the same can now be collected through the summary remedy of distraint or levy pursuant to Section 205 of the NIRC.

The applicable provision in regard to the prescriptive period for the assessment and collection of tax deficiency in this instance is Article 223 of the NIRC, which pertinently provides:

Sec. 223. Exceptions as to a period of limitation of assessment and collection of taxes. — (a) In the case of a false or fraudulent return with intent to evade tax or of a failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within ten (10) years after the discovery of the falsity, fraud, or omission: Provided, That, in a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof.

xxx xxx xxx

(c) Any internal revenue tax which has been assessed within the period of limitation above prescribed, may be collected by distraint or levy or by a proceeding in court within three years following the assessment of the tax.

xxx xxx xxx

The omission to file an estate tax return, and the subsequent failure to contest or appeal the assessment made by the BIR is fatal to the petitioner's cause, as under the above-cited provision, in case of failure to file a return, the tax may be assessed at any time within ten years after the omission, and any tax so assessed may be collected by levy upon real property within three years following the assessment of the tax. Since the estate tax assessment had become final and unappealable by the petitioner's default as regards protesting the validity of the said assessment, there is now no reason why the BIR cannot continue with the collection of the said tax. Any objection against the assessment should have been pursued following the avenue paved in Section 229 of the NIRC on protests on assessments of internal revenue taxes.

Petitioner further argues that "the numerous pending court cases questioning the late president's ownership or interests in several properties (both real and personal) make the total value of his estate, and the consequent estate tax due, incapable of exact pecuniary determination at this time. Thus, respondents' assessment of the estate tax and their issuance of the Notices of Levy and sale are premature and oppressive." He points out the pendency of Sandiganbayan Civil Case Nos. 0001-0034 and 0141, which were filed by the government to question the ownership and interests of the late President in real and personal properties located within and outside the Philippines. Petitioner, however, omits to allege whether the properties levied upon by the BIR in the collection of estate taxes upon the decedent's estate were among those involved in the

said cases pending in the Sandiganbayan. Indeed, the court is at a loss as to how these cases are relevant to the matter at issue. The mere fact that the decedent has pending cases involving ill-gotten wealth does not affect the enforcement of tax assessments over the properties indubitably included in his estate.

Petitioner also expresses his reservation as to the propriety of the BIR's total assessment of P23,292,607,638.00, stating that this amount deviates from the findings of the Department of Justice's Panel of Prosecutors as per its resolution of 20 September 1991. Allegedly, this is clear evidence of the uncertainty on the part of the Government as to the total value of the estate of the late President.

This is, to our mind, the petitioner's last ditch effort to assail the assessment of estate tax which had already become final and unappealable.

It is not the Department of Justice which is the government agency tasked to determine the amount of taxes due upon the subject estate, but the Bureau of Internal Revenue, 16 whose determinations and assessments are presumed correct and made in good faith. 17

The taxpayer has the duty of proving otherwise. In the absence of proof of any irregularities in the performance of official duties, an assessment will not be disturbed. Even an assessment based on estimates is prima facie valid and lawful where it does not appear to have been arrived at arbitrarily or capriciously. The burden of proof is upon the complaining party to show clearly that the assessment is erroneous. Failure to present proof of error in the assessment will justify the judicial affirmance of said assessment. 18 In this instance, petitioner has not pointed out one single provision in the Memorandum of the Special Audit Team which gave rise to the questioned assessment, which bears a trace of falsity. Indeed, the petitioner's attack on the assessment bears mainly on the alleged improbable and unconscionable amount of the taxes charged. But mere rhetoric cannot supply the basis for the charge of impropriety of the assessments made.

Moreover, these objections to the assessments should have been raised, considering the ample remedies afforded the taxpayer by the Tax Code, with the Bureau of Internal Revenue and the Court of Tax Appeals, as described earlier, and cannot be raised now via Petition for Certiorari, under the pretext of grave abuse of discretion. The course of action taken by the petitioner reflects his disregard or even repugnance of the established institutions for governance in the scheme of a well-ordered society. The subject tax assessments having become final, executory and enforceable, the same can no longer be contested by means of a disguised protest. In the main, Certiorari may not be used as a substitute for a lost appeal or remedy. 19 This judicial policy becomes more pronounced in view of the absence of sufficient attack against the actuations of government.

On the matter of sufficiency of service of Notices of Assessment to the petitioner, we find the respondent appellate court's pronouncements sound and resilient to petitioner's attacks.

Anent grounds 3(b) and (B) — both alleging/claiming lack of notice — We find, after considering the facts and circumstances, as well as evidences, that there was sufficient, constructive and/or actual notice of assessments, levy and sale, sent to herein petitioner Ferdinand "Bongbong" Marcos as well as to his mother Mrs. Imelda Marcos.

Even if we are to rule out the notices of assessments personally given to the caretaker of Mrs. Marcos at the latter's last known address, on August 26, 1991 and September 12, 1991, as well as the notices of assessment personally given to the caretaker of petitioner also at his last known address on September 12, 1991 — the subsequent notices given thereafter could no longer be ignored as they were sent at a time when petitioner was already here in the Philippines, and at a place where said notices would surely be called to petitioner's attention, and received by responsible persons of sufficient age and discretion.

Thus, on October 20, 1992, formal assessment notices were served upon Mrs. Marcos c/o the petitioner, at his office, House of Representatives, Batasan Pambansa, Q.C. (Annexes "A", "A-1", "A-2", "A-3"; pp. 207-210, Comment/Memorandum of OSG). Moreover, a notice to taxpayer dated October 8, 1992 inviting Mrs. Marcos to a conference relative to her tax liabilities, was furnished the counsel of Mrs. Marcos — Dean Antonio Coronel (Annex "B", p. 211, ibid). Thereafter, copies of Notices were also served upon Mrs. Imelda Marcos, the petitioner and their counsel "De Borja, Medialdea, Ata, Bello, Guevarra and Serapio Law Office", on April 7, 1993 and June 10, 1993. Despite all of these Notices, petitioner never lifted a finger to protest the assessments, (upon which the Levy and sale of properties were based), nor appealed the same to the Court of Tax Appeals.

There being sufficient service of Notices to herein petitioner (and his mother) and it appearing that petitioner continuously ignored said Notices despite several opportunities given him to file a protest and to thereafter appeal to the Court of Tax Appeals, — the tax assessments subject of this case, upon which the levy and sale of properties were based, could no longer be contested (directly or indirectly) via this instant petition for certiorari. 20

Petitioner argues that all the questioned Notices of Levy, however, must be nullified for having been issued without validly serving copies thereof to the petitioner. As a mandatory heir of the decedent, petitioner avers that he has an interest in the subject estate, and notices of levy upon its properties should have been served upon him.

We do not agree. In the case of notices of levy issued to satisfy the delinquent estate tax, the delinquent taxpayer is the Estate of the decedent, and not necessarily, and exclusively, the petitioner as heir of the deceased. In the same vein, in the matter of income tax delinquency of the late president and his spouse, petitioner is not the taxpayer liable. Thus, it follows that service of notices of levy in satisfaction of these tax delinquencies upon the petitioner is not required by law, as under Section 213 of the NIRC, which pertinently states:

xxx xxx xxx

. . . Levy shall be effected by writing upon said certificate a description of the property upon which levy is made. At the same time, written notice of the levy shall be mailed to or served upon the Register of Deeds of the province or city where the property is located and upon the delinquent taxpayer, or if he be absent from the Philippines, to his agent or the manager of the business in respect to which the liability arose, or if there be none, to the occupant of the property in question.

xxx xxx xxx

The foregoing notwithstanding, the record shows that notices of warrants of distraint and levy of sale were furnished the counsel of petitioner on April 7, 1993, and June 10, 1993, and the petitioner himself on April 12, 1993 at his office at the Batasang Pambansa. 21 We cannot therefore, countenance petitioner's insistence that he was denied due process. Where there was an opportunity to raise objections to government action, and such opportunity was disregarded, for no justifiable reason, the party claiming oppression then becomes the oppressor of the orderly functions of government. He who comes to court must come with clean hands. Otherwise, he not only taints his name, but ridicules the very structure of established authority.

IN VIEW WHEREOF, the Court RESOLVED to DENY the present petition. The Decision of the Court of Appeals dated November 29, 1994 is hereby AFFIRMED in all respects.

SO ORDERED.

Regalado, Romero, Puno and Mendoza, JJ., concur.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-19865             July 31, 1965

MARIA CARLA PIROVANO, etc., et al., petitioners-appellants, vs.THE COMMISSIONER OF INTERNAL REVENUE, respondent-appellee.

Angel S. Gamboa for petitioners-appellants.Office of the Solicitor General for respondent-appellee.

REYES, J.B.L., J.:

This case is a sequel to the case of Pirovano vs. De la Rama Steamship Co., 96 Phil. 335.

Briefly, the facts of the aforestated case may be stated as follows:

Enrico Pirovano was the father of the herein petitioners-appellants. Sometime in the early part of 1941, De la Rama Steamship Co. insured the life of said Enrico Pirovano, who was then its President and General Manager until the time of his death, with various Philippine and American insurance companies for a total sum of one million pesos, designating itself as the beneficiary of the policies, obtained by it. Due to the Japanese occupation of the Philippines during the second World War, the Company was unable to pay the premiums on the policies issued by its Philippine insurers and these policies lapsed, while the policies issued by its American insurers were kept effective and subsisting, the New York office of the Company having continued paying its premiums from year to year.

During the Japanese occupation , or more particularly in the latter part of 1944, said Enrico Pirovano died.

After the liberation of the Philippines from the Japanese forces, the Board of Directors of De la Rama Steamship Co. adopted a resolution dated July 10, 1946 granting and setting aside, out of the proceeds expected to be collected on the insurance policies taken on the life of said Enrico Pirovano, the sum of P400,000.00 for equal division among the four (4) minor children of the deceased, said sum of money to be convertible into 4,000 shares of stock of the Company, at par, or 1,000 shares for each child. Shortly thereafter, the Company received the total sum of P643,000.00 as proceeds of the said life insurance policies obtained from American insurers.

Upon receipt of the last stated sum of money, the Board of Directors of the Company modified, on January 6, 1947, the above-mentioned resolution by renouncing all its rights title, and interest to the said amount of P643,000.00 in favor of the minor children of the deceased, subject to the express condition that said amount should be retained by the Company in the nature of a loan to it, drawing interest at the rate of five per centum (5%) per annum, and payable to the Pirovano children after the Company shall have first settled in full the balance of its present remaining bonded indebtedness in the sum of approximately P5,000,000.00. This latter resolution was carried out in a Memorandum Agreement on January 10, 1947 and June 17, 1947., respectively, executed by the Company and Mrs. Estefania R. Pirovano, the latter acting in her capacity as guardian of her children (petitioners-appellants herein) find pursuant to an express authority granted her by the court.

On June 24, 1947, the Board of Directors of the Company further modified the last mentioned resolution providing therein that the Company shall pay the proceeds of said life insurance policies to the heirs of the said Enrico Pirovano after the Company shall have settled in full the balance of its present remaining bonded indebtedness, but the annual interests accruing on the principal shall be paid to the heirs of the said Enrico Pirovano, or their duly appointed representative, whenever the Company is in a position to meet said obligation.

On February 26, 1948, Mrs. Estefania R. Pirovano, in behalf of her children, executed a public document formally accepting the donation; and, on the same date, the Company through its Board of Directors, took official notice of this formal acceptance.

On September 13, 1949, the stockholders of the Company formally ratified the various resolutions hereinabove mentioned with certain clarifying modifications that the payment of the donation shall not be effected until such time as the Company shall have first duly liquidated its present bonded indebtedness in the amount of P3,260,855.77 with the National Development Company, or fully redeemed the preferred shares of stock in the amount which shall be issued to the National Development Company in lieu thereof; and that any and all taxes, legal fees, and expenses in any way connected with the above transaction shall be chargeable and deducted from the proceeds of the life insurance policies mentioned in the resolutions of the Board of Directors.

On March 8, 1951, however, the majority stockholders of the Company voted to revoke the resolution approving the donation in favor of the Pirovano children.

As a consequence of this revocation and refusal of the Company to pay the balance of the donation amounting to P564,980.90 despite demands therefor, the herein petitioners-appellants represented by their natural guardian, Mrs. Estefania R. Pirovano, brought an action for the recovery of said amount, plus interest and damages against De la Rama Steamship Co., in the Court of First Instance of Rizal, which case ultimately culminated to an appeal to this Court. On December 29, 1954, this court rendered its

decision in the appealed case (96 Phil. 335) holding that the donation was valid and remunerative in nature, the dispositive part of which reads:

Wherefore, the decision appealed from should be modified as follows: (a) that the donation in favor of the children of the late Enrico Pirovano of the proceeds of the insurance policies taken on his life is valid and binding on the defendant corporation; (b) that said donation, which amounts to a total of P583,813.59, including interest, as it appears in the books of the corporation as of August 31, 1951, plus interest thereon at the rate of 5 per cent per annum from the filing of the complaint, should be paid to the plaintiffs after the defendant corporation shall have fully redeemed the preferred shares issued to the National Development Company under the terms and conditions stared in the resolutions of the Board of Directors of January 6, 1947 and June 24, 1947, as amended by the resolution of the stockholders adopted on September 13, 1949; and (c) defendant shall pay to plaintiffs an additional amount equivalent to 10 per cent of said amount of P583,813.59 as damages by way of attorney's fees, and to pay the costs of action. (Pirovano et al. vs. De la Rama Steamship Co., 96 Phil. 367-368)

The above decision became final and executory. In compliance therewith, De la Rama Steamship Co. made, on April 6, 1955, a partial payment on the amount of the judgment and paid the balance thereof on May 12, 1955.

On March 6, 1955, respondent Commissioner of Internal Revenue assessed the amount of P60,869.67 as donees' gift tax, inclusive of surcharges, interests and other penalties, against each of the petitioners-appellants, or for the total sum of P243,478.68; and, on April 23, 1955, a donor's gift tax in the total amount of P34,371.76 was also assessed against De la Rama Steamship Co., which the latter paid.

Petitioners-appellants herein contested respondent Commissioner's assessment and imposition of the donees' gift taxes and donor's gift tax and also made a claim for refund of the donor's gift tax so collected. Respondent Commissioner overruled petitioners' claims; hence, the latter presented two (2) petitions for review against respondent's rulings before the Court of Tax Appeals, said petitions having been docketed as CTA Cases Nos. 347 and 375. CTA Case No. 347 relates to the petition disputing the legality of the assessment of donees' gift taxes and donor's gift tax while CTA Case No. 375 refers to the claim for refund of the donor's gift tax already paid.

After the filing of respondent's usual answers to the petitions, the two cases, being interrelated to each other, were tried jointly and terminated.

On January 31, 1962, the Court of Tax Appeals rendered its decision in the two cases, the dispositive part of which reads:

In resume, we are of the opinion, that (1) the donor's gift tax in the sum of P34,371.76 was erroneously assessed and collected, hence, petitioners are entitled to the refund thereof; (2) the donees' gift taxes were correctly assessed; (3) the imposition of the

surcharge of 25% is not proper; (4) the surcharge of 5% is legally due; and (5) the interest of 1% per month on the deficiency donees' gift taxes is due from petitioners from March 8, 1955 until the taxes are paid.

IN LINE WITH THE FOREGOING OPINION, petitioners are hereby ordered to pay the donees' gift taxes as assessed by respondent, plus 5% surcharge and interest at the rate of 1% per month from March 8, 1955 to the date of payment of said donees' gift taxes. Respondent is ordered to apply the sum of P34,371.76 which is refundable to petitioners, against the amount due from petitioners. With costs against petitioners in Case No. 347.

Petitioners-appellants herein filed a motion to reconsider the above decision, which the lower court denied. Hence, this appeal before us.

In the instant appeal, petitioners-appellants herein question only that portion of the decision of the lower court ordering the payment of donees' gift taxes as assessed by respondent as well as the imposition of surcharge and interest on the amount of donees' gift taxes.

In their brief and memorandum, they dispute the factual finding of the lower court that De la Rama Steamship Company's renunciation of its rights, title, and interest over the proceeds of said life insurance policies in favor of the Pirovano children "was motivated solely and exclusively by its sense of gratitude, an act of pure liberality, and not to pay additional compensation for services inadequately paid for." Petitioners now contend that the lower court's finding was erroneous in seemingly considering the disputed grant as a simple donation, since our previous decision (96 Phil. 335) had already declared that the transfer to the Pirovano children was a remuneratory donation. Petitioners further contend that the same was made not for an insufficient or inadequate consideration but rather it a was made for a full and adequate compensation for the valuable services rendered by the late Enrico Pirovano to the De la Rama Steamship Co.; hence, the donation does not constitute a taxable gift under the provisions of Section 108 of the National Internal Revenue Code.

The argument for petitioners-appellants fails to take into account the fact that neither in Spanish nor in Anglo-American law was it considered that past services, rendered without relying on a coetaneous promise, express or implied, that such services would be paid for in the future, constituted cause or consideration that would make a conveyance of property anything else but a gift or donation. This conclusion flows from the text of Article 619 of the Code of 1889 (identical with Article 726 of the present Civil Code of the Philippines):

When a person gives to another a thing ... on account of the latter's merits or of the services rendered by him to the donor, provided they do not constitute a demandable debt, ..., there is also a donation. ... .

There is nothing on record to show that when the late Enrico Pirovano rendered services as President and General Manager of the De la Rama Steamship Co. he was not fully compensated for such services, or that, because they were "largely responsible for the rapid and very successful development of the activities of the company" (Res. of July 10, 1946). Pirovano expected or was promised further compensation over and in addition to his regular emoluments as President and General Manager. The fact that his services contributed in a large measure to the success of the company did not give rise to a recoverable debt, and the conveyances made by the company to his heirs remain a gift or donation. This is emphasized by the directors' Resolution of January 6, 1947, that "out of gratitude" the company decided to renounce in favor of Pirovano's heirs the proceeds of the life insurance policies in question. The true consideration for the donation was, therefore, the company's gratitude for his services, and not the services themselves.

That the tax court regarded the conveyance as a simple donation, instead of a remuneratory one as it was declared to be in our previous decision, is but an innocuous error; whether remuneratory or simple, the conveyance remained a gift, taxable under Chapter 2, Title III of the Internal Revenue Code.

But then appellants contend, the entire property or right donated should not be considered as a gift for taxation purposes; only that portion of the value of the property or right transferred, if any, which is in excess of the value of the services rendered should be considered as a taxable gift. They cite in support Section 111 of the Tax Code which provides that —

Where property is transferred for less, than an adequate and full consideration in money or money's worth, then the amount by which the value of the property exceeded the value of the consideration shall, for the purpose of the tax imposed by this Chapter, be deemed a gift, ... .

The flaw in this argument lies in the fact that, as copied from American law, the term consideration used in this section refers to the technical "consideration" defined by the American Law Institute (Restatement of Contracts) as "anything that is bargained for by the promisor and given by the promisee in exchange for the promise" (Also, Corbin on Contracts, Vol. I, p. 359). But, as we have seen, Pirovano's successful activities as officer of the De la Rama Steamship Co. cannot be deemed such consideration for the gift to his heirs, since the services were rendered long before the Company ceded the value of the life policies to said heirs; cession and services were not the result of one bargain or of a mutual exchange of promises.

And the Anglo-American law treats a subsequent promise to pay for past services (like one to pay for improvements already made without prior request from the promisor) to be a nudum pactum (Roscorla vs. Thomas, 3 Q.B. 234; Peters vs. Poro, 25 ALR 615; Carson vs. Clark, 25 Am. Dec. 79; Boston vs. Dodge, 12 Am. Dec. 206), i.e., one that is

unenforceable in view of the common law rule that consideration must consist in a legal benefit to the promisee or some legal detriment to the promisor.

What is more, the actual consideration for the cession of the policies, as previously shown, was the Company's gratitude to Pirovano; so that under section 111 of the Code there is no consideration the value of which can be deducted from that of the property transferred as a gift. Like "love and affection," gratitude has no economic value and is not "consideration" in the sense that the word is used in this section of the Tax Code.

As stated by Chief Justice Griffith of the Supreme Court of Mississippi in his well-known book, "Outlines of the Law" (p. 204) —

Love and affection are not considerations of value — they are not estimable in terms of value. Nor are sentiments of gratitude for gratuitous part favors or kindnesses; nor are obligations which are merely moral. It has been well said that if a moral obligation were alone sufficient it would remove the necessity for any consideration at all, since the fact of making a promise impose, the moral obligation to perform it."

It is of course perfectly possible that a donation or gift should at the same time impose a burden or condition on the donee involving some economic liability for him. A, for example, may donate a parcel of land to B on condition that the latter assume a mortgage existing on the donated land. In this case the donee may rightfully insist that the gift tax be computed only on the value of the land less the value of the mortgage. This, in fact, is contemplated by Article 619 of the Civil Code of 1889 (Art. 726 of the Tax Code) when it provides that there is also a donation "when the gift imposes upon the donee a burden which is less than the value of the thing given." Section 111 of the Tax Code has in view situations of this kind, since it also prescribes that "the amount by which the value of the property exceeded the value of the consideration" shall be deemed a gift for the purpose of the tax. .

Petitioners finally contend that, even assuming that the donation in question is subject to donees' gift taxes, the imposition of the surcharge of 5% and interest of 1% per month from March 8, 1955 was not justified because the proceeds of the life insurance policies were actually received on April 6, 1955 and May 12, 1955 only and in accordance with Section 115(c) of the Tax Code; the filing of the returns of such tax became due on March 1, 1956 and the tax became payable on May 15, 1956, as provided for in Section 116(a) of the same Code. In other words, petitioners maintain that the assessment and demand for donees' gift taxes was prematurely made and of no legal effect; hence, they should not be held liable for such surcharge and interest.

It is well to note, and it is not disputed, that petitioners-donees have failed to file any gift tax return and that they also failed to pay the amount of the assessment made against them by respondent in 1955. This situation is covered by Section 119(b) (1) and (c) and Section 120 of the Tax Code:

(b) Deficiency.

(1) Payment not extended. — Where a deficiency, or any interest assessed in connection therewith, or any addition to the taxes provided for in section one hundred twenty is not paid in full within thirty days from the date of the notice and demand from the Commissioner, there shall be collected as a part of the taxes, interest upon the unpaid amount at the rate of one per centum a month from the date of such notice and demand until it is paid. (section 119)

(c) Surcharge. — If any amount of the taxes included in the notice and demand from the Commissioner of Internal Revenue is not paid in full within thirty days after such notice and demand, there shall be collected in addition to the interest prescribed above as a part of the taxes a surcharge of five per centum of the unpaid amount. (sec. 119)

The failure to file a return was found by the lower court to be due to reasonable cause and not to willful neglect. On this score, the elimination by the lower court of the 25% surcharge is ad valorem penalty which respondent Commissioner had imposed pursuant to Section 120 of the Tax Code was proper, since said Section 120 vests in the Commissioner of Internal Revenue or in the tax court power and authority to impose or not to impose such penalty depending upon whether or not reasonable cause has been shown in the non-filing of such return.

On the other hand, unlike said Section 120, Section 119, paragraphs (b) (1) and (c) of the Tax Code, does not confer on the Commissioner of Internal Revenue or on the courts any power and discretion not to impose such interest and surcharge. It is likewise provided for by law that an appeal to the Court of Tax Appeals from a decision of the Commissioner of Internal Revenue shall not suspend the payment or collection of the tax liability of the taxpayer unless a motion to that effect shall have been presented to the court and granted by it on the ground that such collection will jeopardize the interest of the taxpayer (Sec. 11, Republic Act No. 1125; Rule 12, Rules of the Court of Tax Appeals). It should further be noted that —

It has been the uniform holding of this Court that no suit for enjoining the collection of a tax, disputed or undisputed, can be brought, the remedy being to pay the tax first, formerly under protest and now without need of protect, file the claim with the Collector, and if he denies it, bring an action for recovery against him. (David v. Ramos, et al., 90 Phil. 351)

Section 306 of the National Internal Revenue Code ... lays down the procedure to be followed in those cases wherein a taxpayer entertains some doubt about the correctness of a tax sought to be collected. Said section provides that the tax, should first be paid and the taxpayer should sue for its recovery afterwards. The purpose of the law obviously is to prevent delay in the collection of taxes, upon which the Government depends for its existence. To allow a taxpayer to first secure a ruling as regards the

validity of the tax before paying it would be to defeat this purpose. (National Dental Supply Co. vs. Meer, 90 Phil. 265)

Petitioners did not file in the lower court any motion for the suspension of payment or collection of the amount of assessment made against them.

On the basis of the above-stated provisions of law and applicable authorities, it is evident that the imposition of 1% interest monthly and 5% surcharge is justified and legal. As succinctly stated by the court below, said imposition is "mandatory and may not be waived by the Commissioner of Internal Revenue or by the courts" (Resolution on petitioners' motion for reconsideration, Annex XIV, petition). Hence, said imposition of interest and surcharge by the lower court should be upheld.

WHEREFORE, the decision of the Court of Tax Appeals is affirmed. Costs against petitioners Pirovano.

Bengzon, C.J., Bautista Angelo, Paredes, Dizon, Regala, Makalintal, Bengzon, J.P., and Zaldivar, JJ., concur.Concepcion, J., took no part.Barrera, J., is on leave.

 

G.R. No. L-13250 October 29, 1971

THE COLLECTOR OF INTERNAL REVENUE, petitioner, vs.ANTONIO CAMPOS RUEDA, respondent..

Assistant Solicitor General Jose P. Alejandro and Special Attorney Jose G. Azurin, (O.S.G.) for petitioner.

Ramirez and Ortigas for respondent.

 

FERNANDO, J.:

The basic issue posed by petitioner Collector of Internal Revenue in this appeal from a decision of the Court of Tax Appeals as to whether or not the requisites of statehood, or at least so much thereof as may be necessary for the acquisition of an international personality, must be satisfied for a "foreign country" to fall within the exemption of Section 122 of the National Internal Revenue Code 1 is now ripe for adjudication. The Court of Tax Appeals answered the question in the negative, and thus reversed the

action taken by petitioner Collector, who would hold respondent Antonio Campos Rueda, as administrator of the estate of the late Estrella Soriano Vda. de Cerdeira, liable for the sum of P161,874.95 as deficiency estate and inheritance taxes for the transfer of intangible personal properties in the Philippines, the deceased, a Spanish national having been a resident of Tangier, Morocco from 1931 up to the time of her death in 1955. In an earlier resolution promulgated May 30, 1962, this Court on the assumption that the need for resolving the principal question would be obviated, referred the matter back to the Court of Tax Appeals to determine whether the alleged law of Tangier did grant the reciprocal tax exemption required by the aforesaid Section 122. Then came an order from the Court of Tax Appeals submitting copies of legislation of Tangier that would manifest that the element of reciprocity was not lacking. It was not until July 29, 1969 that the case was deemed submitted for decision. When the petition for review was filed on January 2, 1958, the basic issue raised was impressed with an element of novelty. Four days thereafter, however, on January 6, 1958, it was held by this Court that the aforesaid provision does not require that the "foreign country" possess an international personality to come within its terms. 2 Accordingly, we have to affirm.

The decision of the Court of Tax Appeals, now under review, sets forth the background facts as follows: "This is an appeal interposed by petitioner Antonio Campos Rueda as administrator of the estate of the deceased Doña Maria de la Estrella Soriano Vda. de Cerdeira, from the decision of the respondent Collector of Internal Revenue, assessing against and demanding from the former the sum P161,874.95 as deficiency estate and inheritance taxes, including interest and penalties, on the transfer of intangible personal properties situated in the Philippines and belonging to said Maria de la Estrella Soriano Vda. de Cerdeira. Maria de la Estrella Soriano Vda. de Cerdeira (Maria Cerdeira for short) is a Spanish national, by reason of her marriage to a Spanish citizen and was a resident of Tangier, Morocco from 1931 up to her death on January 2, 1955. At the time of her demise she left, among others, intangible personal properties in the Philippines." 3 Then came this portion: "On September 29, 1955, petitioner filed a provisional estate and inheritance tax return on all the properties of the late Maria Cerdeira. On the same date, respondent, pending investigation, issued an assessment for state and inheritance taxes in the respective amounts of P111,592.48 and P157,791.48, or a total of P369,383.96 which tax liabilities were paid by petitioner ... . On November 17, 1955, an amended return was filed ... wherein intangible personal properties with the value of P396,308.90 were claimed as exempted from taxes. On November 23, 1955, respondent, pending investigation, issued another assessment for estate and inheritance taxes in the amounts of P202,262.40 and P267,402.84, respectively, or a total of P469,665.24 ... . In a letter dated January 11, 1956, respondent denied the request for exemption on the ground that the law of Tangier is not reciprocal to Section 122 of the National Internal Revenue Code. Hence, respondent demanded the payment of the sums of P239,439.49 representing deficiency estate and inheritance taxes including ad valorem penalties, surcharges, interests and compromise penalties ... . In a letter dated February 8, 1956, and received by respondent on the following day, petitioner requested for the reconsideration of the decision denying the claim for tax

exemption of the intangible personal properties and the imposition of the 25% and 5% ad valorem penalties ... . However, respondent denied request, in his letter dated May 5, 1956 ... and received by petitioner on May 21, 1956. Respondent premised the denial on the grounds that there was no reciprocity [with Tangier, which was moreover] a mere principality, not a foreign country. Consequently, respondent demanded the payment of the sums of P73,851.21 and P88,023.74 respectively, or a total of P161,874.95 as deficiency estate and inheritance taxes including surcharges, interests and compromise penalties." 4

The matter was then elevated to the Court of Tax Appeals. As there was no dispute between the parties regarding the values of the properties and the mathematical correctness of the deficiency assessments, the principal question as noted dealt with the reciprocity aspect as well as the insisting by the Collector of Internal Revenue that Tangier was not a foreign country within the meaning of Section 122. In ruling against the contention of the Collector of Internal Revenue, the appealed decision states: "In fine, we believe, and so hold, that the expression "foreign country", used in the last proviso of Section 122 of the National Internal Revenue Code, refers to a government of that foreign power which, although not an international person in the sense of international law, does not impose transfer or death upon intangible person properties of our citizens not residing therein, or whose law allows a similar exemption from such taxes. It is, therefore, not necessary that Tangier should have been recognized by our Government order to entitle the petitioner to the exemption benefits of the proviso of Section 122 of our Tax. Code." 5

Hence appeal to this court by petitioner. The respective briefs of the parties duly submitted, but as above indicated, instead of ruling definitely on the question, this Court, on May 30, 1962, resolve to inquire further into the question of reciprocity and sent back the case to the Court of Tax Appeals for the motion of evidence thereon. The dispositive portion of such resolution reads as follows: "While section 122 of the Philippine Tax Code aforequoted speaks of 'intangible personal property' in both subdivisions (a) and (b); the alleged laws of Tangier refer to 'bienes muebles situados en Tanger', 'bienes muebles radicantes en Tanger', 'movables' and 'movable property'. In order that this Court may be able to determine whether the alleged laws of Tangier grant the reciprocal tax exemptions required by Section 122 of the Tax Code, and without, for the time being, going into the merits of the issues raised by the petitioner-appellant, the case is [remanded] to the Court of Tax Appeals for the reception of evidence or proof on whether or not the words `bienes muebles', 'movables' and 'movable properties as used in the Tangier laws, include or embrace 'intangible person property', as used in the Tax Code." 6 In line with the above resolution, the Court of Tax Appeals admitted evidence submitted by the administrator petitioner Antonio Campos Rueda, consisting of exhibits of laws of Tangier to the effect that "the transfers by reason of death of movable properties, corporeal or incorporeal, including furniture and personal effects as well as of securities, bonds, shares, ..., were not subject, on that date and in said zone, to the payment of any death tax, whatever might have been the nationality of the deceased or

his heirs and legatees." It was further noted in an order of such Court referring the matter back to us that such were duly admitted in evidence during the hearing of the case on September 9, 1963. Respondent presented no evidence." 7

The controlling legal provision as noted is a proviso in Section 122 of the National Internal Revenue Code. It reads thus: "That no tax shall be collected under this Title in respect of intangible personal property (a) if the decedent at the time of his death was a resident of a foreign country which at the time of his death did not impose a transfer tax or death tax of any character in respect of intangible person property of the Philippines not residing in that foreign country, or (b) if the laws of the foreign country of which the decedent was a resident at the time of his death allow a similar exemption from transfer taxes or death taxes of every character in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country." 8 The only obstacle therefore to a definitive ruling is whether or not as vigorously insisted upon by petitioner the acquisition of internal personality is a condition sine qua non to Tangier being considered a "foreign country". Deference to the De Lara ruling, as was made clear in the opening paragraph of this opinion, calls for an affirmance of the decision of the Court of Tax Appeals.

It does not admit of doubt that if a foreign country is to be identified with a state, it is required in line with Pound's formulation that it be a politically organized sovereign community independent of outside control bound by penalties of nationhood, legally supreme within its territory, acting through a government functioning under a regime of law. 9 It is thus a sovereign person with the people composing it viewed as an organized corporate society under a government with the legal competence to exact obedience to its commands. 10 It has been referred to as a body-politic organized by common consent for mutual defense and mutual safety and to promote the general welfare. 11 Correctly has it been described by Esmein as "the juridical personification of the nation." 12 This is to view it in the light of its historical development. The stress is on its being a nation, its people occupying a definite territory, politically organized, exercising by means of its government its sovereign will over the individuals within it and maintaining its separate international personality. Laski could speak of it then as a territorial society divided into government and subjects, claiming within its allotted area a supremacy over all other institutions. 13 McIver similarly would point to the power entrusted to its government to maintain within its territory the conditions of a legal order and to enter into international relations. 14 With the latter requisite satisfied, international law do not exact independence as a condition of statehood. So Hyde did opine. 15

Even on the assumption then that Tangier is bereft of international personality, petitioner has not successfully made out a case. It bears repeating that four days after the filing of this petition on January 6, 1958 in Collector of Internal Revenue v. De Lara, 16 it was specifically held by us: "Considering the State of California as a foreign country in relation to section 122 of our Tax Code we believe and hold, as did the Tax Court, that the Ancilliary Administrator is entitled the exemption from the inheritance tax on the intangible personal property found in the Philippines." 17 There can be no doubt that

California as a state in the American Union was in the alleged requisite of international personality. Nonetheless, it was held to be a foreign country within the meaning of Section 122 of the National Internal Revenue Code. 18

What is undeniable is that even prior to the De Lara ruling, this Court did commit itself to the doctrine that even a tiny principality, that of Liechtenstein, hardly an international personality in the sense, did fall under this exempt category. So it appears in an opinion of the Court by the then Acting Chief Justicem Bengson who thereafter assumed that position in a permanent capacity, in Kiene v. Collector of Internal Revenue. 19 As was therein noted: 'The Board found from the documents submitted to it — proof of the laws of Liechtenstein — that said country does not impose estate, inheritance and gift taxes on intangible property of Filipino citizens not residing in that country. Wherefore, the Board declared that pursuant to the exemption above established, no estate or inheritance taxes were collectible, Ludwig Kiene being a resident of Liechtestein when he passed away." 20 Then came this definitive ruling: "The Collector — hereafter named the respondent — cites decisions of the United States Supreme Court and of this Court, holding that intangible personal property in the Philippines belonging to a non-resident foreigner, who died outside of this country is subject to the estate tax, in disregard of the principle 'mobilia sequuntur personam'. Such property is admittedly taxable here. Without the proviso above quoted, the shares of stock owned here by the Ludwig Kiene would be concededly subject to estate and inheritance taxes. Nevertheless our Congress chose to make an exemption where conditions are such that demand reciprocity — as in this case. And the exemption must be honored." 21

WHEREFORE, the decision of the respondent Court of Tax Appeals of October 30, 1957 is affirmed. Without pronouncement as to costs.

Concepcion, C.J., Makalintal, Zaldivar, Castro, Villamor and Makasiar, JJ., concur.

Reyes, J.B.L., J., concurs in the result.

Teehankee and Barredo, JJ., took no part.

G.R. No. 155541             January 27, 2004

ESTATE OF THE LATE JULIANA DIEZ VDA. DE GABRIEL, petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, respondent.

D E C I S I O N

YNARES-SANTIAGO, J.:

This petition for review on certiorari assails the decision of the Court of Appeals in CA-G.R. CV No. 09107, dated September 30, 2002,1 which reversed the November 19, 1995 Order of Regional Trial Court of Manila, Branch XXXVIII, in Sp. Proc. No. R-82-6994, entitled "Testate Estate of Juliana Diez Vda. De Gabriel". The petition was filed by the Estate of the Late Juliana Diez Vda. De Gabriel, represented by Prudential Bank as its duly appointed and qualified Administrator.

As correctly summarized by the Court of Appeals, the relevant facts are as follows:

During the lifetime of the decedent, Juliana Vda. De Gabriel, her business affairs were managed by the Philippine Trust Company (Philtrust). The decedent died on April 3, 1979. Two days after her death, Philtrust, through its Trust Officer, Atty. Antonio M. Nuyles, filed her Income Tax Return for 1978. The return did not indicate that the decedent had died.

On May 22, 1979, Philtrust also filed a verified petition for appointment as Special Administrator with the Regional Trial Court of Manila, Branch XXXVIII, docketed as Sp. Proc. No. R-82-6994. The court a quo appointed one of the heirs as Special Administrator. Philtrust’s motion for reconsideration was denied by the probate court.

On January 26, 1981, the court a quo issued an Order relieving Mr. Diez of his appointment, and appointed Antonio Lantin to take over as Special Administrator. Subsequently, on July 30, 1981, Mr. Lantin was also relieved of his appointment, and Atty. Vicente Onosa was appointed in his stead.

In the meantime, the Bureau of Internal Revenue conducted an administrative investigation on the decedent’s tax liability and found a deficiency income tax for the year 1977 in the amount of P318,233.93. Thus, on November 18, 1982, the BIR sent by registered mail a demand letter and Assessment Notice No. NARD-78-82-00501 addressed to the decedent "c/o Philippine Trust Company, Sta. Cruz, Manila" which was the address stated in her 1978 Income Tax Return. No response was made by Philtrust. The BIR was not informed that the decedent had actually passed away.

In an Order dated September 5, 1983, the court a quo appointed Antonio Ambrosio as the Commissioner and Auditor Tax Consultant of the Estate of the decedent.

On June 18, 1984, respondent Commissioner of Internal Revenue issued warrants of distraint and levy to enforce collection of the decedent’s deficiency income tax liability, which were served upon her heir, Francisco Gabriel. On November 22, 1984, respondent filed a "Motion for Allowance of Claim and for an Order of Payment of Taxes" with the court a quo. On January 7, 1985, Mr. Ambrosio filed a letter of protest with the Litigation Division of the BIR, which was not acted upon because the assessment notice had allegedly become final, executory and incontestable.

On May 16, 1985, petitioner, the Estate of the decedent, through Mr. Ambrosio, filed a formal opposition to the BIR’s Motion for Allowance of Claim based on the ground that there was no proper service of the assessment and that the filing of the aforesaid claim had already prescribed. The BIR filed its Reply, contending that service to Philippine Trust Company was sufficient service, and that the filing of the claim against the Estate on November 22, 1984 was within the five-year prescriptive period for assessment and collection of taxes under Section 318 of the 1977 National Internal Revenue Code (NIRC).

On November 19, 1985, the court a quo issued an Order denying respondent’s claim against the Estate,2 after finding that there was no notice of its tax assessment on the proper party.3

On July 2, 1986, respondent filed an appeal with the Court of Appeals, docketed as CA-G.R. CV No. 09107,4 assailing the Order of the probate court dated November 19, 1985. It was claimed that Philtrust, in filing the decedent’s 1978 income tax return on April 5, 1979, two days after the taxpayer’s death, had "constituted itself as the administrator of the estate of the deceased at least insofar as said return is concerned."5 Citing Basilan Estate Inc. v. Commissioner of Internal Revenue,6 respondent argued that the legal requirement of notice with respect to tax assessments7 requires merely that the Commissioner of Internal Revenue release, mail and send the notice of the assessment to the taxpayer at the address stated in the return filed, but not that the taxpayer actually receive said assessment within the five-year prescriptive period.8 Claiming that Philtrust had been remiss in not notifying respondent of the decedent’s death, respondent therefore argued that the deficiency tax assessment had already become final, executory and incontestable, and that petitioner Estate was liable therefor.

On September 30, 2002, the Court of Appeals rendered a decision in favor of the respondent. Although acknowledging that the bond of agency between Philtrust and the decedent was severed upon the latter’s death, it was ruled that the administrator of the Estate had failed in its legal duty to inform respondent of the decedent’s death, pursuant to Section 104 of the National Internal Revenue Code of 1977. Consequently, the BIR’s service to Philtrust of the demand letter and Notice of Assessment was binding upon the Estate, and, upon the lapse of the statutory thirty-day period to question this claim, the assessment became final, executory and incontestable. The dispositive portion of said decision reads:

WHEREFORE, finding merit in the appeal, the appealed decision is REVERSED AND SET ASIDE. Another one is entered ordering the Administrator of the Estate to pay the Commissioner of Internal Revenue the following:

a. The amount of P318,223.93, representing the deficiency income tax liability for the year 1978, plus 20% interest per annum from November 2, 1982 up to November 2, 1985 and in addition thereto 10% surcharge on the basic tax of P169,155.34 pursuant to Section 51(e)(2) and (3) of the Tax Code as amended by PD 69 and 1705; and

b. The costs of the suit.

SO ORDERED.9

Hence, the instant petition, raising the following issues:

1. Whether or not the Court of Appeals erred in holding that the service of deficiency tax assessment against Juliana Diez Vda. de Gabriel through the Philippine Trust Company was a valid service in order to bind the Estate;

2. Whether or not the Court of Appeals erred in holding that the deficiency tax assessment and final demand was already final, executory and incontestable.

Petitioner Estate denies that Philtrust had any legal personality to represent the decedent after her death. As such, petitioner argues that there was no proper notice of the assessment which, therefore, never became final, executory and incontestable.10 Petitioner further contends that respondent’s failure to file its claim against the Estate within the proper period prescribed by the Rules of Court is a fatal error, which forever bars its claim against the Estate.11

Respondent, on the other hand, claims that because Philtrust filed the decedent’s income tax return subsequent to her death, Philtrust was the de facto administrator of her Estate.12 Consequently, when the Assessment Notice and demand letter dated November 18, 1982 were sent to Philtrust, there was proper service on the Estate.13 Respondent further asserts that Philtrust had the legal obligation to inform petitioner of the decedent’s death, which requirement is found in Section 104 of the NIRC of 1977.14 Since Philtrust did not, respondent contends that petitioner Estate should not be allowed to profit from this omission.15 Respondent further argues that Philtrust’s failure to protest the aforementioned assessment within the 30-day period provided in Section 319-A of the NIRC of 1977 meant that the assessment had already become final, executory and incontestable.16

The resolution of this case hinges on the legal relationship between Philtrust and the decedent, and, by extension, between Philtrust and petitioner Estate. Subsumed under this primary issue is the sub-issue of whether or not service on Philtrust of the demand letter and Assessment Notice No. NARD-78-82-00501 was valid service on petitioner,

and the issue of whether Philtrust’s inaction thereon could bind petitioner. If both sub-issues are answered in the affirmative, respondent’s contention as to the finality of Assessment Notice No. NARD-78-82-00501 must be answered in the affirmative. This is because Section 319-A of the NIRC of 1977 provides a clear 30-day period within which to protest an assessment. Failure to file such a protest within said period means that the assessment ipso jure becomes final and unappealable, as a consequence of which legal proceedings may then be initiated for collection thereof.

We find in favor of the petitioner.

The first point to be considered is that the relationship between the decedent and Philtrust was one of agency, which is a personal relationship between agent and principal. Under Article 1919 (3) of the Civil Code, death of the agent or principal automatically terminates the agency. In this instance, the death of the decedent on April 3, 1979 automatically severed the legal relationship between her and Philtrust, and such could not be revived by the mere fact that Philtrust continued to act as her agent when, on April 5, 1979, it filed her Income Tax Return for the year 1978.

Since the relationship between Philtrust and the decedent was automatically severed at the moment of the Taxpayer’s death, none of Philtrust’s acts or omissions could bind the estate of the Taxpayer. Service on Philtrust of the demand letter and Assessment Notice No. NARD-78-82-00501 was improperly done.

It must be noted that Philtrust was never appointed as the administrator of the Estate of the decedent, and, indeed, that the court a quo twice rejected Philtrust’s motion to be thus appointed. As of November 18, 1982, the date of the demand letter and Assessment Notice, the legal relationship between the decedent and Philtrust had already been non-existent for three years.

Respondent claims that Section 104 of the National Internal Revenue Code of 1977 imposed the legal obligation on Philtrust to inform respondent of the decedent’s death. The said Section reads:

SEC. 104. Notice of death to be filed. – In all cases of transfers subject to tax or where, though exempt from tax, the gross value of the estate exceeds three thousand pesos, the executor, administrator, or any of the legal heirs, as the case may be, within two months after the decedent’s death, or within a like period after qualifying as such executor or administrator, shall give written notice thereof to the Commissioner of Internal Revenue.

The foregoing provision falls in Title III, Chapter I of the National Internal Revenue Code of 1977, or the chapter on Estate Tax, and pertains to "all cases of transfers subject to tax" or where the "gross value of the estate exceeds three thousand pesos". It has absolutely no applicability to a case for deficiency income tax, such as the case at bar. It further lacks applicability since Philtrust was never the executor, administrator of the

decedent’s estate, and, as such, never had the legal obligation, based on the above provision, to inform respondent of her death.

Although the administrator of the estate may have been remiss in his legal obligation to inform respondent of the decedent’s death, the consequences thereof, as provided in Section 119 of the National Internal Revenue Code of 1977, merely refer to the imposition of certain penal sanctions on the administrator. These do not include the indefinite tolling of the prescriptive period for making deficiency tax assessments, or the waiver of the notice requirement for such assessments.

Thus, as of November 18, 1982, the date of the demand letter and Assessment Notice No. NARD-78-82-00501, there was absolutely no legal obligation on the part of Philtrust to either (1) respond to the demand letter and assessment notice, (2) inform respondent of the decedent’s death, or (3) inform petitioner that it had received said demand letter and assessment notice. This lack of legal obligation was implicitly recognized by the Court of Appeals, which, in fact, rendered its assailed decision on grounds of "equity".17

Since there was never any valid notice of this assessment, it could not have become final, executory and incontestable, and, for failure to make the assessment within the five-year period provided in Section 318 of the National Internal Revenue Code of 1977, respondent’s claim against the petitioner Estate is barred. Said Section 18 reads:

SEC. 318. Period of limitation upon assessment and collection. – Except as provided in the succeeding section, internal revenue taxes shall be assessed within five years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period. For the purpose of this section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day: Provided, That this limitation shall not apply to cases already investigated prior to the approval of this Code.

Respondent argues that an assessment is deemed made for the purpose of giving effect to such assessment when the notice is released, mailed or sent to the taxpayer to effectuate the assessment, and there is no legal requirement that the taxpayer actually receive said notice within the five-year period.18 It must be noted, however, that the foregoing rule requires that the notice be sent to the taxpayer, and not merely to a disinterested party. Although there is no specific requirement that the taxpayer should receive the notice within the said period, due process requires at the very least that such notice actually be received. In Commissioner of Internal Revenue v. Pascor Realty and Development Corporation,19 we had occasion to say:

An assessment contains not only a computation of tax liabilities, but also a demand for payment within a prescribed period. It also signals the time when penalties and interests begin to accrue against the taxpayer. To enable the taxpayer to determine his remedies thereon, due process requires that it must be served on and received by the taxpayer.

In Republic v. De le Rama,20 we clarified that, when an estate is under administration, notice must be sent to the administrator of the estate, since it is the said administrator, as representative of the estate, who has the legal obligation to pay and discharge all debts of the estate and to perform all orders of the court. In that case, legal notice of the assessment was sent to two heirs, neither one of whom had any authority to represent the estate. We said:

The notice was not sent to the taxpayer for the purpose of giving effect to the assessment, and said notice could not produce any effect. In the case of Bautista and Corrales Tan v. Collector of Internal Revenue … this Court had occasion to state that "the assessment is deemed made when the notice to this effect is released, mailed or sent to the taxpayer for the purpose of giving effect to said assessment." It appearing that the person liable for the payment of the tax did not receive the assessment, the assessment could not become final and executory. (Citations omitted, emphasis supplied.)

In this case, the assessment was served not even on an heir of the Estate, but on a completely disinterested third party. This improper service was clearly not binding on the petitioner.

By arguing that (1) the demand letter and assessment notice were served on Philtrust, (2) Philtrust was remiss in its obligation to respond to the demand letter and assessment notice, (3) Philtrust was remiss in its obligation to inform respondent of the decedent’s death, and (4) the assessment notice is therefore binding on the Estate, respondent is arguing in circles. The most crucial point to be remembered is that Philtrust had absolutely no legal relationship to the deceased, or to her Estate. There was therefore no assessment served on the Estate as to the alleged underpayment of tax. Absent this assessment, no proceedings could be initiated in court for the collection of said tax,21 and respondent’s claim for collection, filed with the probate court only on November 22, 1984, was barred for having been made beyond the five-year prescriptive period set by law.

WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals in CA-G.R. CV No. 09107, dated September 30, 2002, is REVERSED and SET ASIDE. The Order of the Regional Trial Court of Manila, Branch XXXVIII, in Sp. Proc. No. R-82-6994, dated November 19, 1985, which denied the claim of the Bureau of Internal Revenue against the Estate of Juliana Diez Vda. De Gabriel for the deficiency income tax of the decedent for the year 1977 in the amount of P318,223.93, is AFFIRMED.

No pronouncement as to costs.

SO ORDERED.

Davide, Jr., C.J., (Chairman), Panganiban, and Carpio, JJ., concur.Azcuna, J., on official leave.

G.R. No. 147188             September 14, 2004

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE ESTATE OF BENIGNO P. TODA, JR., Represented by Special Co-administrators Lorna Kapunan and Mario Luza Bautista, respondents.

D E C I S I O N

DAVIDE, JR., C.J.:

This Court is called upon to determine in this case whether the tax planning scheme adopted by a corporation constitutes tax evasion that would justify an assessment of deficiency income tax.

The petitioner seeks the reversal of the Decision1 of the Court of Appeals of 31 January 2001 in CA-G.R. SP No. 57799 affirming the 3 January 2000 Decision2 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 5328,3 which held that the respondent Estate of Benigno P. Toda, Jr. is not liable for the deficiency income tax of Cibeles Insurance Corporation (CIC) in the amount of P79,099,999.22 for the year 1989, and ordered the cancellation and setting aside of the assessment issued by Commissioner of Internal Revenue Liwayway Vinzons-Chato on 9 January 1995.

The case at bar stemmed from a Notice of Assessment sent to CIC by the Commissioner of Internal Revenue for deficiency income tax arising from an alleged simulated sale of a 16-storey commercial building known as Cibeles Building, situated on two parcels of land on Ayala Avenue, Makati City.

On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of its issued and outstanding capital stock, to sell the Cibeles Building and the two parcels of land on which the building stands for an amount of not less than P90 million.4

On 30 August 1989, Toda purportedly sold the property for P100 million to Rafael A. Altonaga, who, in turn, sold the same property on the same day to Royal Match Inc. (RMI) for P200 million. These two transactions were evidenced by Deeds of Absolute Sale notarized on the same day by the same notary public.5

For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of P10 million.6

On 16 April 1990, CIC filed its corporate annual income tax return7 for the year 1989, declaring, among other things, its gain from the sale of real property in the amount of P75,728.021. After crediting withholding taxes of P254,497.00, it paid P26,341,2078 for its net taxable income of P75,987,725.

On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for P12.5 million, as evidenced by a Deed of Sale of Shares of Stocks.9 Three and a half years later, or on 16 January 1994, Toda died.

On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an assessment notice10 and demand letter to the CIC for deficiency income tax for the year 1989 in the amount of P79,099,999.22.

The new CIC asked for a reconsideration, asserting that the assessment should be directed against the old CIC, and not against the new CIC, which is owned by an entirely different set of stockholders; moreover, Toda had undertaken to hold the buyer of his stockholdings and the CIC free from all tax liabilities for the fiscal years 1987-1989.11

On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by special co-administrators Lorna Kapunan and Mario Luza Bautista, received a Notice of Assessment12 dated 9 January 1995 from the Commissioner of Internal Revenue for deficiency income tax for the year 1989 in the amount of P79,099,999.22, computed as follows:

Income Tax – 1989

Net Income per return 75,987,725.00

Add: Additional gain on sale of real property taxable under ordinary corporate income but were substituted with individual capital gains(P200M – 100M)

100,000,000.00

Total Net Taxable Income per investigation 175,987,725.00

Tax Due thereof at 35% P 61,595,703.75

Less: Payment already made

1. Per return 26,595,704.00

2. Thru Capital Gains Tax made     by R.A. Altonaga 10,000,000.0036,595,704.00

Balance of tax

24,999,999.75

Add: 50% Surcharge 12,499,999.88

25% Surcharge 6,249,999.94

Total 43,749,999.57

Add: Interest 20% from

4/16/90-4/30/94 (.808) 35,349,999.65

TOTAL AMT. DUE & COLLECTIBLE 79,099,999.22==============

The Estate thereafter filed a letter of protest.13

In the letter dated 19 October 1995,14 the Commissioner dismissed the protest, stating that a fraudulent scheme was deliberately perpetuated by the CIC wholly owned and controlled by Toda by covering up the additional gain of P100 million, which resulted in the change in the income structure of the proceeds of the sale of the two parcels of land and the building thereon to an individual capital gains, thus evading the higher corporate income tax rate of 35%.

On 15 February 1996, the Estate filed a petition for review15 with the CTA alleging that the Commissioner erred in holding the Estate liable for income tax deficiency; that the inference of fraud of the sale of the properties is unreasonable and unsupported; and that the right of the Commissioner to assess CIC had already prescribed.

In his Answer16 and Amended Answer,17 the Commissioner argued that the two transactions actually constituted a single sale of the property by CIC to RMI, and that Altonaga was neither the buyer of the property from CIC nor the seller of the same property to RMI. The additional gain of P100 million (the difference between the second simulated sale for P200 million and the first simulated sale for P100 million) realized by CIC was taxed at the rate of only 5% purportedly as capital gains tax of Altonaga, instead of at the rate of 35% as corporate income tax of CIC. The income tax return filed by CIC for 1989 with intent to evade payment of the tax was thus false or fraudulent. Since such falsity or fraud was discovered by the BIR only on 8 March 1991, the assessment issued on 9 January 1995 was well within the prescriptive period prescribed by Section 223 (a) of the National Internal Revenue Code of 1986, which provides that tax may be assessed within ten years from the discovery of the falsity or fraud. With the sale being tainted with fraud, the separate corporate personality of CIC should be disregarded. Toda, being the registered owner of the 99.991% shares of stock of CIC and the beneficial owner of the remaining 0.009% shares registered in the name of the individual directors of CIC, should be held liable for the deficiency income tax, especially because the gains realized from the sale were withdrawn by him as cash advances or paid to him as cash dividends. Since he is already dead, his estate shall answer for his liability.

In its decision18 of 3 January 2000, the CTA held that the Commissioner failed to prove that CIC committed fraud to deprive the government of the taxes due it. It ruled that even assuming that a pre-conceived scheme was adopted by CIC, the same constituted mere tax avoidance, and not tax evasion. There being no proof of fraudulent transaction, the

applicable period for the BIR to assess CIC is that prescribed in Section 203 of the NIRC of 1986, which is three years after the last day prescribed by law for the filing of the return. Thus, the government’s right to assess CIC prescribed on 15 April 1993. The assessment issued on 9 January 1995 was, therefore, no longer valid. The CTA also ruled that the mere ownership by Toda of 99.991% of the capital stock of CIC was not in itself sufficient ground for piercing the separate corporate personality of CIC. Hence, the CTA declared that the Estate is not liable for deficiency income tax of P79,099,999.22 and, accordingly, cancelled and set aside the assessment issued by the Commissioner on 9 January 1995.

In its motion for reconsideration,19 the Commissioner insisted that the sale of the property owned by CIC was the result of the connivance between Toda and Altonaga. She further alleged that the latter was a representative, dummy, and a close business associate of the former, having held his office in a property owned by CIC and derived his salary from a foreign corporation (Aerobin, Inc.) duly owned by Toda for representation services rendered. The CTA denied20 the motion for reconsideration, prompting the Commissioner to file a petition for review21 with the Court of Appeals.

In its challenged Decision of 31 January 2001, the Court of Appeals affirmed the decision of the CTA, reasoning that the CTA, being more advantageously situated and having the necessary expertise in matters of taxation, is "better situated to determine the correctness, propriety, and legality of the income tax assessments assailed by the Toda Estate."22

Unsatisfied with the decision of the Court of Appeals, the Commissioner filed the present petition invoking the following grounds:

I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT COMMITTED NO FRAUD WITH INTENT TO EVADE THE TAX ON THE SALE OF THE PROPERTIES OF CIBELES INSURANCE CORPORATION.

II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE SEPARATE CORPORATE PERSONALITY OF CIBELES INSURANCE CORPORATION.

III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF PETITIONER TO ASSESS RESPONDENT FOR DEFICIENCY INCOME TAX FOR THE YEAR 1989 HAD PRESCRIBED.

The Commissioner reiterates her arguments in her previous pleadings and insists that the sale by CIC of the Cibeles property was in connivance with its dummy Rafael Altonaga, who was financially incapable of purchasing it. She further points out that the documents themselves prove the fact of fraud in that (1) the two sales were done simultaneously on the same date, 30 August 1989; (2) the Deed of Absolute Sale between Altonaga and RMI was notarized ahead of the alleged sale between CIC and Altonaga, with the former registered in the Notarial Register of Jocelyn H. Arreza

Pabelana as Doc. 91, Page 20, Book I, Series of 1989; and the latter, as Doc. No. 92, Page 20, Book I, Series of 1989, of the same Notary Public; (3) as early as 4 May 1989, CIC received P40 million from RMI, and not from Altonaga. The said amount was debited by RMI in its trial balance as of 30 June 1989 as investment in Cibeles Building. The substantial portion of P40 million was withdrawn by Toda through the declaration of cash dividends to all its stockholders.

For its part, respondent Estate asserts that the Commissioner failed to present the income tax return of Altonaga to prove that the latter is financially incapable of purchasing the Cibeles property.

To resolve the grounds raised by the Commissioner, the following questions are pertinent:

1. Is this a case of tax evasion or tax avoidance?

2. Has the period for assessment of deficiency income tax for the year 1989 prescribed? and

3. Can respondent Estate be held liable for the deficiency income tax of CIC for the year 1989, if any?

We shall discuss these questions in seriatim.

Is this a case of tax evasion or tax avoidance?

Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation. Tax avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayer in good faith and at arms length. Tax evasion, on the other hand, is a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities.23

Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; (2) an accompanying state of mind which is described as being "evil," in "bad faith," "willfull," or "deliberate and not accidental"; and (3) a course of action or failure of action which is unlawful.24

All these factors are present in the instant case. It is significant to note that as early as 4 May 1989, prior to the purported sale of the Cibeles property by CIC to Altonaga on 30 August 1989, CIC received P40 million from RMI,25 and not from Altonaga. That P40 million was debited by RMI and reflected in its trial balance26 as "other inv. – Cibeles Bldg." Also, as of 31 July 1989, another P40 million was debited and reflected in RMI’s trial balance as "other inv. – Cibeles Bldg." This would show that the real buyer of the properties was RMI, and not the intermediary Altonaga.lavvphi1.net

The investigation conducted by the BIR disclosed that Altonaga was a close business associate and one of the many trusted corporate executives of Toda. This information was revealed by Mr. Boy Prieto, the assistant accountant of CIC and an old timer in the company.27 But Mr. Prieto did not testify on this matter, hence, that information remains to be hearsay and is thus inadmissible in evidence. It was not verified either, since the letter-request for investigation of Altonaga was unserved,28 Altonaga having left for the United States of America in January 1990. Nevertheless, that Altonaga was a mere conduit finds support in the admission of respondent Estate that the sale to him was part of the tax planning scheme of CIC. That admission is borne by the records. In its Memorandum, respondent Estate declared:

Petitioner, however, claims there was a "change of structure" of the proceeds of sale. Admitted one hundred percent. But isn’t this precisely the definition of tax planning? Change the structure of the funds and pay a lower tax. Precisely, Sec. 40 (2) of the Tax Code exists, allowing tax free transfers of property for stock, changing the structure of the property and the tax to be paid. As long as it is done legally, changing the structure of a transaction to achieve a lower tax is not against the law. It is absolutely allowed.

Tax planning is by definition to reduce, if not eliminate altogether, a tax. Surely petitioner [sic] cannot be faulted for wanting to reduce the tax from 35% to 5%.29 [Underscoring supplied].

The scheme resorted to by CIC in making it appear that there were two sales of the subject properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot be considered a legitimate tax planning. Such scheme is tainted with fraud.

Fraud in its general sense, "is deemed to comprise anything calculated to deceive, including all acts, omissions, and concealment involving a breach of legal or equitable duty, trust or confidence justly reposed, resulting in the damage to another, or by which an undue and unconscionable advantage is taken of another."30

Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid especially that the transfer from him to RMI would then subject the income to only 5% individual capital gains tax, and not the 35% corporate income tax. Altonaga’s sole purpose of acquiring and transferring title of the subject properties on the same day was to create a tax shelter. Altonaga never controlled the property and did not enjoy the normal benefits and burdens of ownership. The sale to him was merely a tax ploy, a sham, and without business purpose and economic substance. Doubtless, the execution of the two sales was calculated to mislead the BIR with the end in view of reducing the consequent income tax liability.lavvphi1.net

In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was prompted more on the mitigation of tax liabilities than for legitimate business purposes constitutes one of tax evasion.31

Generally, a sale or exchange of assets will have an income tax incidence only when it is consummated.32 The incidence of taxation depends upon the substance of a transaction. The tax consequences arising from gains from a sale of property are not finally to be determined solely by the means employed to transfer legal title. Rather, the transaction must be viewed as a whole, and each step from the commencement of negotiations to the consummation of the sale is relevant. A sale by one person cannot be transformed for tax purposes into a sale by another by using the latter as a conduit through which to pass title. To permit the true nature of the transaction to be disguised by mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective administration of the tax policies of Congress.33

To allow a taxpayer to deny tax liability on the ground that the sale was made through another and distinct entity when it is proved that the latter was merely a conduit is to sanction a circumvention of our tax laws. Hence, the sale to Altonaga should be disregarded for income tax purposes.34 The two sale transactions should be treated as a single direct sale by CIC to RMI.

Accordingly, the tax liability of CIC is governed by then Section 24 of the NIRC of 1986, as amended (now 27 (A) of the Tax Reform Act of 1997), which stated as follows:

Sec. 24. Rates of tax on corporations. – (a) Tax on domestic corporations.- A tax is hereby imposed upon the taxable net income received during each taxable year from all sources by every corporation organized in, or existing under the laws of the Philippines, and partnerships, no matter how created or organized but not including general professional partnerships, in accordance with the following:

Twenty-five percent upon the amount by which the taxable net income does not exceed one hundred thousand pesos; and

Thirty-five percent upon the amount by which the taxable net income exceeds one hundred thousand pesos.

CIC is therefore liable to pay a 35% corporate tax for its taxable net income in 1989. The 5% individual capital gains tax provided for in Section 34 (h) of the NIRC of 198635 (now 6% under Section 24 (D) (1) of the Tax Reform Act of 1997) is inapplicable. Hence, the assessment for the deficiency income tax issued by the BIR must be upheld.

Has the period of assessment prescribed?

No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform Act of 1997) read:

Sec. 269. Exceptions as to period of limitation of assessment and collection of taxes.-(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding in court after the collection of such tax

may be begun without assessment, at any time within ten years after the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for collection thereof… .

Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3) failure to file a return, the period within which to assess tax is ten years from discovery of the fraud, falsification or omission, as the case may be.

It is true that in a query dated 24 August 1989, Altonaga, through his counsel, asked the Opinion of the BIR on the tax consequence of the two sale transactions.36 Thus, the BIR was amply informed of the transactions even prior to the execution of the necessary documents to effect the transfer. Subsequently, the two sales were openly made with the execution of public documents and the declaration of taxes for 1989. However, these circumstances do not negate the existence of fraud. As earlier discussed those two transactions were tainted with fraud. And even assuming arguendo that there was no fraud, we find that the income tax return filed by CIC for the year 1989 was false. It did not reflect the true or actual amount gained from the sale of the Cibeles property. Obviously, such was done with intent to evade or reduce tax liability.

As stated above, the prescriptive period to assess the correct taxes in case of false returns is ten years from the discovery of the falsity. The false return was filed on 15 April 1990, and the falsity thereof was claimed to have been discovered only on 8 March 1991.37 The assessment for the 1989 deficiency income tax of CIC was issued on 9 January 1995. Clearly, the issuance of the correct assessment for deficiency income tax was well within the prescriptive period.

Is respondent Estate liable for the 1989 deficiency income tax of Cibeles Insurance Corporation?

A corporation has a juridical personality distinct and separate from the persons owning or composing it. Thus, the owners or stockholders of a corporation may not generally be made to answer for the liabilities of a corporation and vice versa. There are, however, certain instances in which personal liability may arise. It has been held in a number of cases that personal liability of a corporate director, trustee, or officer along, albeit not necessarily, with the corporation may validly attach when:

1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross negligence in directing its affairs, or (c) conflict of interest, resulting in damages to the corporation, its stockholders, or other persons;

2. He consents to the issuance of watered down stocks or, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto;

3. He agrees to hold himself personally and solidarily liable with the corporation; or

4. He is made, by specific provision of law, to personally answer for his corporate action.38

It is worth noting that when the late Toda sold his shares of stock to Le Hun T. Choa, he knowingly and voluntarily held himself personally liable for all the tax liabilities of CIC and the buyer for the years 1987, 1988, and 1989. Paragraph g of the Deed of Sale of Shares of Stocks specifically provides:

g. Except for transactions occurring in the ordinary course of business, Cibeles has no liabilities or obligations, contingent or otherwise, for taxes, sums of money or insurance claims other than those reported in its audited financial statement as of December 31, 1989, attached hereto as "Annex B" and made a part hereof. The business of Cibeles has at all times been conducted in full compliance with all applicable laws, rules and regulations. SELLER undertakes and agrees to hold the BUYER and Cibeles free from any and all income tax liabilities of Cibeles for the fiscal years 1987, 1988 and 1989.39 [Underscoring Supplied].

When the late Toda undertook and agreed "to hold the BUYER and Cibeles free from any all income tax liabilities of Cibeles for the fiscal years 1987, 1988, and 1989," he thereby voluntarily held himself personally liable therefor. Respondent estate cannot, therefore, deny liability for CIC’s deficiency income tax for the year 1989 by invoking the separate corporate personality of CIC, since its obligation arose from Toda’s contractual undertaking, as contained in the Deed of Sale of Shares of Stock.

WHEREFORE, in view of all the foregoing, the petition is hereby GRANTED. The decision of the Court of Appeals of 31 January 2001 in CA-G.R. SP No. 57799 is REVERSED and SET ASIDE, and another one is hereby rendered ordering respondent Estate of Benigno P. Toda Jr. to pay P79,099,999.22 as deficiency income tax of Cibeles Insurance Corporation for the year 1989, plus legal interest from 1 May 1994 until the amount is fully paid.

Costs against respondent.

SO ORDERED.

Quisumbing, Ynares-Santiago, Carpio, and Azcuna, JJ., concur.

G.R. No. 147188

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.THE ESTATE OF BENIGNO P. TODA, JR., Represented by Special Co-administrators Lorna Kapunan and Mario Luza Bautista, respondents.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-18994             June 29, 1963

MELECIO R. DOMINGO, as Commissioner of Internal Revenue, petitioner, vs.HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance of Leyte, and SIMEONA K. PRICE, as Administratrix of the Intestate Estate of the late Walter Scott Price, respondents.

Office of the Solicitor General and Atty. G. H. Mantolino for petitioner.Benedicto and Martinez for respondents.

LABRADOR, J.:

This is a petition for certiorari and mandamus against the Judge of the Court of First Instance of Leyte, Ron. Lorenzo C. Garlitos, presiding, seeking to annul certain orders of the court and for an order in this Court directing the respondent court below to execute the judgment in favor of the Government against the estate of Walter Scott Price for internal revenue taxes.

It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No. L-14674, January 30, 1960, this Court declared as final and executory the order for the payment by the estate of the estate and inheritance taxes, charges and penalties, amounting to P40,058.55, issued by the Court of First Instance of Leyte in, special proceedings No. 14 entitled "In the matter of the Intestate Estate of the Late Walter Scott Price." In order to enforce the claims against the estate the fiscal presented a petition dated June 21, 1961, to the court below for the execution of the judgment. The petition was, however, denied by the court which held that the execution is not justifiable as the Government is indebted to the estate under administration in the amount of P262,200. The orders of the court below dated August 20, 1960 and September 28, 1960, respectively, are as follows:

Atty. Benedicto submitted a copy of the contract between Mrs. Simeona K. Price, Administratrix of the estate of her late husband Walter Scott Price and Director Zoilo Castrillo of the Bureau of Lands dated September 19, 1956 and acknowledged before Notary Public Salvador V. Esguerra, legal adviser in Malacañang to Executive Secretary De Leon dated December 14, 1956, the note of His Excellency, Pres. Carlos P. Garcia, to Director Castrillo dated August 2, 1958, directing the latter to pay to Mrs. Price the sum ofP368,140.00, and an extract of page 765 of Republic Act No. 2700 appropriating the sum of P262.200.00 for the payment to the Leyte Cadastral Survey, Inc., represented by the administratrix Simeona K. Price, as directed in the above note of the President. Considering these facts, the Court orders that the payment of inheritance taxes in the sum of P40,058.55 due the Collector of Internal Revenue as ordered paid by this Court on July 5, 1960 in accordance with the order of the Supreme Court promulgated July 30, 1960 in G.R. No. L-14674, be deducted from the amount of P262,200.00 due and payable to the Administratrix Simeona K. Price, in this estate, the balance to be paid by the Government to her without further delay. (Order of August 20, 1960)

The Court has nothing further to add to its order dated August 20, 1960 and it orders that the payment of the claim of the Collector of Internal Revenue be deferred until the Government shall have paid its accounts to the administratrix herein amounting to P262,200.00. It may not be amiss to repeat that it is only fair for the Government, as a debtor, to its accounts to its citizens-creditors before it can insist in the prompt payment of the latter's account to it, specially taking into consideration that the amount due to the Government draws interests while the credit due to the present state does not accrue any interest. (Order of September 28, 1960)

The petition to set aside the above orders of the court below and for the execution of the claim of the Government against the estate must be denied for lack of merit. The ordinary procedure by which to settle claims of indebtedness against the estate of a deceased person, as an inheritance tax, is for the claimant to present a claim before the probate court so that said court may order the administrator to pay the amount thereof. To such effect is the decision of this Court in Aldamiz vs. Judge of the Court of First Instance of Mindoro, G.R. No. L-2360, Dec. 29, 1949, thus:

. . . a writ of execution is not the proper procedure allowed by the Rules of Court for the payment of debts and expenses of administration. The proper procedure is for the court to order the sale of personal estate or the sale or mortgage of real property of the deceased and all debts or expenses of administrator and with the written notice to all the heirs legatees and devisees residing in the Philippines, according to Rule 89, section 3, and Rule 90, section 2. And when sale or mortgage of real estate is to be made, the regulations contained in Rule 90, section 7, should be complied with.1äwphï1.ñët

Execution may issue only where the devisees, legatees or heirs have entered into possession of their respective portions in the estate prior to settlement and payment of the debts and expenses of administration and it is later ascertained that there are such

debts and expenses to be paid, in which case "the court having jurisdiction of the estate may, by order for that purpose, after hearing, settle the amount of their several liabilities, and order how much and in what manner each person shall contribute, and may issue execution if circumstances require" (Rule 89, section 6; see also Rule 74, Section 4; Emphasis supplied.) And this is not the instant case.

The legal basis for such a procedure is the fact that in the testate or intestate proceedings to settle the estate of a deceased person, the properties belonging to the estate are under the jurisdiction of the court and such jurisdiction continues until said properties have been distributed among the heirs entitled thereto. During the pendency of the proceedings all the estate is in custodia legis and the proper procedure is not to allow the sheriff, in case of the court judgment, to seize the properties but to ask the court for an order to require the administrator to pay the amount due from the estate and required to be paid.

Another ground for denying the petition of the provincial fiscal is the fact that the court having jurisdiction of the estate had found that the claim of the estate against the Government has been recognized and an amount of P262,200 has already been appropriated for the purpose by a corresponding law (Rep. Act No. 2700). Under the above circumstances, both the claim of the Government for inheritance taxes and the claim of the intestate for services rendered have already become overdue and demandable is well as fully liquidated. Compensation, therefore, takes place by operation of law, in accordance with the provisions of Articles 1279 and 1290 of the Civil Code, and both debts are extinguished to the concurrent amount, thus:

ART. 1200. When all the requisites mentioned in article 1279 are present, compensation takes effect by operation of law, and extinguished both debts to the concurrent amount, eventhough the creditors and debtors are not aware of the compensation.

It is clear, therefore, that the petitioner has no clear right to execute the judgment for taxes against the estate of the deceased Walter Scott Price. Furthermore, the petition for certiorari and mandamus is not the proper remedy for the petitioner. Appeal is the remedy.

The petition is, therefore, dismissed, without costs.

Padilla, Bautista Angelo, Concepcion, Barrera, Paredes, Dizon, Regala and Makalintal, JJ., concur.Bengzon, C.J., took no part.

G.R. No. 140944             April 30, 2008

RAFAEL ARSENIO S. DIZON, in his capacity as the Judicial Administrator of the Estate of the deceased JOSE P. FERNANDEZ, petitioner, vs.COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.

D E C I S I O N

NACHURA, J.:

Before this Court is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Civil Procedure seeking the reversal of the Court of Appeals (CA) Decision2 dated April 30, 1999 which affirmed the Decision3 of the Court of Tax Appeals (CTA) dated June 17, 1997.4

The Facts

On November 7, 1987, Jose P. Fernandez (Jose) died. Thereafter, a petition for the probate of his will5 was filed with Branch 51 of the Regional Trial Court (RTC) of Manila (probate court).[6] The probate court then appointed retired Supreme Court Justice Arsenio P. Dizon (Justice Dizon) and petitioner, Atty. Rafael Arsenio P. Dizon (petitioner) as Special and Assistant Special Administrator, respectively, of the Estate of Jose (Estate). In a letter7 dated October 13, 1988, Justice Dizon informed respondent Commissioner of the Bureau of Internal Revenue (BIR) of the special proceedings for the Estate.

Petitioner alleged that several requests for extension of the period to file the required estate tax return were granted by the BIR since the assets of the estate, as well as the claims against it, had yet to be collated, determined and identified. Thus, in a letter8 dated March 14, 1990, Justice Dizon authorized Atty. Jesus M. Gonzales (Atty. Gonzales) to sign and file on behalf of the Estate the required estate tax return and to represent the same in securing a Certificate of Tax Clearance. Eventually, on April 17, 1990, Atty. Gonzales wrote a letter9 addressed 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, computed as follows:

COMPUTATION OF TAX

Conjugal Real Property (Sch. 1) P10,855,020.00

Conjugal Personal Property (Sch.2) 3,460,591.34

Taxable Transfer (Sch. 3)

Gross Conjugal Estate 14,315,611.34

Less: Deductions (Sch. 4) 187,822,576.06

Net Conjugal Estate NIL  

Less: Share of Surviving Spouse NIL.  

Net Share in Conjugal Estate NIL  

Net Taxable Estate NIL.  

Estate Tax Due NIL.11

On April 27, 1990, BIR Regional Director for San Pablo City, Osmundo G. Umali issued Certification Nos. 2052[12] and 2053[13] stating that the taxes due on the transfer of real and personal properties[14] of Jose had been fully paid and said properties may be transferred to his heirs. Sometime in August 1990, Justice Dizon passed away. Thus, on October 22, 1990, the probate court appointed petitioner as the administrator of the Estate.15

Petitioner requested the probate court's authority to sell several properties forming part of the Estate, for the purpose of paying its creditors, namely: Equitable Banking Corporation (P19,756,428.31), Banque de L'Indochine et. de Suez (US$4,828,905.90 as of January 31, 1988), Manila Banking Corporation (P84,199,160.46 as of February 28, 1989) and State Investment House, Inc. (P6,280,006.21). Petitioner manifested that Manila Bank, a major creditor of the Estate was not included, as it did not file a claim with the probate court since it had security over several real estate properties forming part of the Estate.16

However, on November 26, 1991, the Assistant Commissioner for Collection of the BIR, Themistocles Montalban, issued Estate Tax Assessment Notice No. FAS-E-87-91-003269,17 demanding the payment of P66,973,985.40 as deficiency estate tax, itemized as follows:

Deficiency Estate Tax- 1987

Estate tax P31,868,414.48

25% surcharge- late filing 7,967,103.62

late payment 7,967,103.62

Interest 19,121,048.68

Compromise-non filing 25,000.00

non payment 25,000.00

no notice of death 15.00

no CPA Certificate 300.00

Total amount due & collectible P 66,973,985.40

In his letter19 dated December 12, 1991, Atty. Gonzales moved for the reconsideration of the said estate tax assessment. However, in her letter20 dated April 12, 1994, the BIR Commissioner denied the request and reiterated that the estate is liable for the payment of P66,973,985.40 as deficiency estate tax. On May 3, 1994, petitioner received the letter of denial. On June 2, 1994, petitioner filed a petition for review21 before respondent CTA. Trial on the merits ensued.

As found by the CTA, the respective parties presented the following pieces of evidence, to wit:

In the hearings conducted, petitioner did not present testimonial evidence but merely documentary evidence consisting of the following:

Nature of Document (sic) Exhibits

Letter dated October 13, 1988 from Arsenio P. Dizon addressed to the Commissioner of Internal Revenue informing the latter of the special proceedings for the settlement of the estate (p. 126, BIR records);

"A"

Petition for the probate of the will and issuance of letter of administration filed with the Regional Trial Court (RTC) of Manila, docketed as Sp. Proc. No. 87-42980 (pp. 107-108, BIR records);

"B" & "B-1"

Pleading entitled "Compliance" filed with the probate Court submitting the final inventory of all the properties of the deceased (p. 106, BIR records);

"C"

Attachment to Exh. "C" which is the detailed and complete listing of the properties of the deceased (pp. 89-105, BIR rec.);

"C-1" to "C-17"

Claims against the estate filed by Equitable Banking Corp. with the probate Court in the amount of P19,756,428.31 as of March 31, 1988, together with the Annexes to the claim (pp. 64-88, BIR records);

"D" to "D-24"

Claim filed by Banque de L' Indochine et de Suez with the probate Court in the amount of US $4,828,905.90 as of January 31, 1988 (pp. 262-265, BIR

"E" to "E-3"

records);

Claim of the Manila Banking Corporation (MBC) which as of November 7, 1987 amounts to P65,158,023.54, but recomputed as of February 28, 1989 at a total amount of P84,199,160.46; together with the demand letter from MBC's lawyer (pp. 194-197, BIR records);

"F" to "F-3"

Demand letter of Manila Banking Corporation prepared by Asedillo, Ramos and Associates Law Offices addressed to Fernandez Hermanos, Inc., represented by Jose P. Fernandez, as mortgagors, in the total amount of P240,479,693.17 as of February 28, 1989 (pp. 186-187, BIR records);

"G" & "G-1"

Claim of State Investment House, Inc. filed with the RTC, Branch VII of Manila, docketed as Civil Case No. 86-38599 entitled "State Investment House, Inc., Plaintiff, versus Maritime Company Overseas, Inc. and/or Jose P. Fernandez, Defendants," (pp. 200-215, BIR records);

"H" to "H-16"

Letter dated March 14, 1990 of Arsenio P. Dizon addressed to Atty. Jesus M. Gonzales, (p. 184, BIR records);

"I"

Letter dated April 17, 1990 from J.M. Gonzales addressed to the Regional Director of BIR in San Pablo City (p. 183, BIR records);

"J"

Estate Tax Return filed by the estate of the late Jose P. Fernandez through its authorized representative, Atty. Jesus M. Gonzales, for Arsenio P. Dizon, with attachments (pp. 177-182, BIR records);

"K" to "K-5"

Certified true copy of the Letter of Administration issued by RTC Manila, Branch 51, in Sp. Proc. No. 87-42980 appointing Atty. Rafael S. Dizon as Judicial Administrator of the estate of Jose P. Fernandez; (p. 102, CTA records) and

"L"

Certification of Payment of estate taxes Nos. 2052 and 2053, both dated April 27, 1990, issued by the Office of the Regional Director, Revenue Region No. 4-C, San Pablo City, with attachments (pp. 103-104, CTA records.).

"M" to "M-5"

Respondent's [BIR] counsel presented on June 26, 1995 one witness in the person of 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 direct examination of the witness, he identified the following:

Documents/Signatures BIR Record

Estate Tax Return prepared by the BIR; p. 138

Signatures of Ma. Anabella Abuloc and Alberto Enriquez, Jr. appearing at the lower Portion of Exh. "1";

-do-

Memorandum for the Commissioner, dated July 19, 1991, prepared by revenue examiners, Ma. Anabella A. Abuloc, Alberto S. Enriquez and Raymund S. Gallardo;

pp. 143-144

Reviewed by Maximino V. Tagle

Signature of Alberto S. Enriquez appearing at the lower portion on p. 2 of Exh. "2";

-do-

Signature of Ma. Anabella A. Abuloc appearing at the lower portion on p. 2 of Exh. "2";

-do-

Signature of Raymund S. Gallardo appearing at the Lower portion on p. 2 of Exh. "2";

-do-

Signature of Maximino V. Tagle also appearing on p. 2 of Exh. "2";

-do-

Summary of revenue Enforcement Officers Audit Report, dated July 19, 1991;

p. 139

Signature of Alberto Enriquez at the lower portion of Exh. "3";

-do-

Signature of Ma. Anabella A. Abuloc at the lower portion of Exh. "3";

-do-

Signature of Raymond S. Gallardo at the lower portion of Exh. "3";

-do-

Signature of Maximino V. Tagle at the lower portion of Exh. "3";

-do-

Demand letter (FAS-E-87-91-00), signed by the Asst. Commissioner for Collection for the Commissioner of Internal Revenue, demanding payment of the amount of

66,973,985.40; and

p. 169

Assessment Notice FAS-E-87-91-00 pp. 169-17022

The CTA's Ruling

On June 17, 1997, the CTA denied the said petition for review. Citing this Court's ruling in Vda. de Oñate 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:

Although the above-mentioned documents were not formally offered as evidence for 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 respondent since they were properly identified during the presentation of respondent's witness, whose testimony was duly recorded as part of the records of this case. Besides, the documents marked as respondent's exhibits formed part of the BIR records of the case.24 Nevertheless, the CTA did not fully adopt the assessment made by the BIR and it came up with its own computation of the deficiency estate tax, to wit:

Conjugal Real Property P 5,062,016.00

Conjugal Personal Prop. 33,021,999.93

Gross Conjugal Estate 38,084,015.93

Less: Deductions 26,250,000.00

Net Conjugal Estate P 11,834,015.93

Less: Share of Surviving Spouse 5,917,007.96

Net Share in Conjugal Estate P 5,917,007.96

Add: Capital/Paraphernal

Properties – P44,652,813.66

Less: Capital/Paraphernal Deductions 44,652,813.66

Net Taxable Estate P 50,569,821.62============

Estate Tax Due P 29,935,342.97

Add: 25% Surcharge for Late Filing 7,483,835.74

Add: Penalties for-No notice of death 15.00

No CPA certificate 300.00

Total deficiency estate tax P 37,419,493.71============

exclusive of 20% interest from due date of its payment until full payment thereof

[Sec. 283 (b), Tax Code of 1987].25

Thus, the CTA disposed of the case in this wise:

WHEREFORE, viewed from all the foregoing, the Court finds the petition unmeritorious and denies the same. Petitioner and/or the heirs of Jose P. Fernandez are hereby ordered to pay to respondent the amount of P37,419,493.71 plus 20% interest from the due date of its payment until full payment thereof as estate tax liability of the estate of Jose P. Fernandez who died on November 7, 1987.

SO ORDERED.26

Aggrieved, petitioner, on March 2, 1998, went to the CA via a petition for review.27

The CA's Ruling

On April 30, 1999, the CA affirmed the CTA's ruling. Adopting in full the CTA's findings, the CA ruled that the petitioner's act of filing an estate tax return with the BIR and the

issuance of BIR Certification Nos. 2052 and 2053 did not deprive the BIR Commissioner of her authority to re-examine or re-assess the said return filed on behalf of the Estate.28

On May 31, 1999, petitioner filed a Motion for Reconsideration29 which the CA denied in its Resolution30 dated November 3, 1999.

Hence, the instant Petition raising the following issues:

1. Whether or not the admission of evidence which were not formally offered by the respondent BIR by the Court of Tax Appeals which was subsequently upheld by the Court of Appeals is contrary to the Rules of Court and rulings of this Honorable Court;

2. Whether or not the Court of Tax Appeals and the Court of Appeals erred in recognizing/considering the estate tax return prepared and filed by respondent BIR knowing that the probate court appointed administrator of the estate of Jose P. Fernandez had previously filed one as in fact, BIR Certification Clearance Nos. 2052 and 2053 had been issued in the estate's favor;

3. Whether or not the Court of Tax Appeals and the Court of Appeals erred in disallowing the valid and enforceable claims of creditors against the estate, as lawful deductions despite clear and convincing evidence thereof; and

4. Whether or not the Court of Tax Appeals and the Court of Appeals erred in validating erroneous double imputation of values on the very same estate properties in the estate tax return it prepared and filed which effectively bloated the estate's assets.31

The petitioner claims that in as much as the valid claims of creditors against the Estate are in excess of the gross estate, no estate tax was due; that the lack of a formal offer of evidence is fatal to BIR's cause; that the doctrine laid down in Vda. de Oñate has already been abandoned in a long line of cases in which the Court held that evidence not formally offered is without any weight or value; that Section 34 of Rule 132 of the Rules on Evidence requiring a formal offer of evidence is mandatory in character; that, while BIR's witness Alberto Enriquez (Alberto) in his testimony before the CTA identified the pieces of evidence aforementioned such that the same were marked, BIR's failure to formally offer said pieces of evidence and depriving petitioner the opportunity to cross-examine Alberto, render the same inadmissible in evidence; that assuming arguendo that the ruling in Vda. de Oñate is still applicable, BIR failed to comply with the doctrine's requisites because the documents herein remained simply part of the BIR records and were not duly incorporated in the court records; that the BIR failed to consider that although the actual payments made to the Estate creditors were lower than their respective claims, such were compromise agreements reached long after the Estate's liability had been settled by the filing of its estate tax return and the issuance of BIR Certification Nos. 2052 and 2053; and that the reckoning date of the claims against the Estate and the settlement of the estate tax due should be at the time the estate tax return was filed by the judicial administrator and the issuance of said BIR Certifications

and not at the time the aforementioned Compromise Agreements were entered into with the Estate's creditors.32

On the other hand, respondent counters that the documents, being part of the records of the case and duly identified in a duly recorded testimony are considered evidence even if the same were not formally offered; that the filing of the estate tax return by the Estate and the issuance of BIR Certification Nos. 2052 and 2053 did not deprive the BIR of its authority to examine the return and assess the estate tax; and that the factual findings of the CTA as affirmed by the CA may no longer be reviewed by this Court via a petition for review.33

The Issues

There are two ultimate issues which require resolution in this case:

First. Whether or not the CTA and the CA gravely erred in allowing the admission of the pieces of evidence which were not formally offered by the BIR; and

Second. Whether or not the CA erred in affirming the CTA in the latter's determination of the deficiency estate tax imposed against the Estate.

The Court’s Ruling

The Petition is impressed with merit.

Under Section 8 of RA 1125, the CTA is categorically described as a court of record. As cases filed before it are litigated de novo, party-litigants shall prove every minute aspect of their cases. Indubitably, no evidentiary value can be given the pieces of evidence submitted by the BIR, as the rules on documentary evidence require that these documents must be formally offered before the CTA.34 Pertinent is Section 34, Rule 132 of the Revised Rules on Evidence which reads:

SEC. 34. Offer of evidence. — The court shall consider no evidence which has not been formally offered. The purpose for which the evidence is offered must be specified.

The CTA and the CA rely solely on the case of Vda. de Oñate, which reiterated this Court's previous rulings in People v. Napat-a35 and People v. Mate36 on the admission and consideration of exhibits which were not formally offered during the trial. Although in a long line of cases many of which were decided after Vda. de Oñate, we held that courts cannot consider evidence which has not been formally offered,37 nevertheless, petitioner cannot validly assume that the doctrine laid down in Vda. de Oñate has already been abandoned. Recently, in Ramos v. Dizon,38 this Court, applying the said doctrine, ruled that the trial court judge therein committed no error when he admitted and considered the respondents' exhibits in the resolution of the case, notwithstanding the fact that the same were not formally offered. Likewise, in Far East Bank & Trust Company v. Commissioner of Internal Revenue,39 the Court made reference to said

doctrine in resolving the issues therein. Indubitably, the doctrine laid down in Vda. De Oñate still subsists in this jurisdiction. In Vda. de Oñate, we held that:

From the foregoing provision, it is clear that for evidence to be considered, the same must be formally offered. Corollarily, the mere fact that a particular document is identified and marked as an exhibit does not mean that it has already been offered as part of the evidence of a party. In Interpacific Transit, Inc. v. Aviles [186 SCRA 385], we had the occasion to make a distinction between identification of documentary evidence and its formal offer as an exhibit. We said that the first is done in the course of the trial and is accompanied by the marking of the evidence as an exhibit while the second is done only when the party rests its case and not before. A party, therefore, may opt to formally offer his evidence if he believes that it will advance his cause or not to do so at all. In the event he chooses to do the latter, the trial court is not authorized by the Rules to consider the same.

However, in People v. Napat-a [179 SCRA 403] citing People v. Mate [103 SCRA 484], we relaxed the foregoing rule and allowed evidence not formally offered to be admitted and considered by the trial court provided the following requirements are present, viz.: first, the same must have been duly identified by testimony duly recorded and, second, the same must have been incorporated in the records of the case.40

From the foregoing declaration, however, it is clear that Vda. de Oñate is merely an exception to the general rule. Being an exception, it may be applied only when there is strict compliance with the requisites mentioned therein; otherwise, the general rule in Section 34 of Rule 132 of the Rules of Court should prevail.

In this case, we find that these requirements have not been satisfied. The assailed pieces of evidence were presented and marked during the trial particularly when Alberto took the witness stand. Alberto identified these pieces of evidence in his direct testimony.41 He was also subjected to cross-examination and re-cross examination by petitioner.42 But Alberto’s account and the exchanges between Alberto and petitioner did not sufficiently describe the contents of the said pieces of evidence presented by the BIR. In fact, petitioner sought that the lead examiner, one Ma. Anabella A. Abuloc, be summoned to testify, inasmuch as Alberto was incompetent to answer questions relative to the working papers.43 The lead examiner never testified. Moreover, while Alberto's testimony identifying the BIR's evidence was duly recorded, the BIR documents themselves were not incorporated in the records of the case.

A common fact threads through Vda. de Oñate and Ramos that does not exist at all in the instant case. In the aforementioned cases, the exhibits were marked at the pre-trial proceedings to warrant the pronouncement that the same were duly incorporated in the records of the case. Thus, we held in Ramos:

In this case, we find and so rule that these requirements have been satisfied. The exhibits in question were presented and marked during the pre-trial of the case thus, they have been incorporated into the records. Further, Elpidio himself explained the contents of these exhibits when he was interrogated by respondents' counsel...

But what further defeats petitioner's cause on this issue is that respondents' exhibits were marked and admitted during the pre-trial stage as shown by the Pre-Trial Order quoted earlier.44

While the CTA is not governed strictly by technical rules of evidence,45 as rules of procedure are not ends in themselves and are primarily intended as tools in the administration of justice, the presentation of the BIR's evidence is not a mere procedural technicality which may be disregarded considering that it is the only means by which the CTA may ascertain and verify the truth of BIR's claims against the Estate.46 The BIR's failure to formally offer these pieces of evidence, despite CTA's directives, is fatal to its cause.47 Such failure is aggravated by the fact that not even a single reason was advanced by the BIR to justify such fatal omission. This, we take against the BIR.

Per the records of this case, the BIR was directed to present its evidence48 in the hearing of February 21, 1996, but BIR's counsel failed to appear.49 The CTA denied petitioner's motion to consider BIR's presentation of evidence as waived, with a warning to BIR that such presentation would be considered waived if BIR's evidence would not be presented at the next hearing. Again, in the hearing of March 20, 1996, BIR's counsel failed to appear.50 Thus, in its Resolution51 dated March 21, 1996, the CTA considered the BIR to have waived presentation of its evidence. In the same Resolution, the parties were directed to file their respective memorandum. Petitioner complied but BIR failed to do so.52 In all of these proceedings, BIR was duly notified. Hence, in this case, we are constrained to apply our ruling in Heirs of Pedro Pasag v. Parocha:53

A formal offer is necessary because judges are mandated to rest their findings of facts and their judgment only and strictly upon the evidence offered by the parties at the trial. Its function is to enable the trial judge to know the purpose or purposes for which the proponent is presenting the evidence. On the other hand, this allows opposing parties to examine the evidence and object to its admissibility. Moreover, it facilitates review as the appellate court will not be required to review documents not previously scrutinized by the trial court.

Strict adherence to the said rule is not a trivial matter. The Court in Constantino v. Court of Appeals ruled that the formal offer of one's evidence is deemed waived after failing to submit it within a considerable period of time. It explained that the court cannot admit an offer of evidence made after a lapse of three (3) months because to do so would "condone an inexcusable laxity if not non-compliance with a court order which, in effect, would encourage needless delays and derail the speedy administration of justice."

Applying the aforementioned principle in this case, we find that the trial court had reasonable ground to consider that petitioners had waived their right to make a formal offer of documentary or object evidence. Despite several extensions of time to make their formal offer, petitioners failed to comply with their commitment and allowed almost five months to lapse before finally submitting it. Petitioners' failure to comply with the rule on admissibility of evidence is anathema to the efficient, effective, and expeditious dispensation of justice.

Having disposed of the foregoing procedural issue, we proceed to discuss the merits of the case.

Ordinarily, the CTA's findings, as affirmed by the CA, are entitled to the highest respect and will not be disturbed on appeal unless it is shown that the lower courts committed gross error in the appreciation of facts.54 In this case, however, we find the decision of the CA affirming that of the CTA tainted with palpable error.

It is admitted that the claims of the Estate's aforementioned creditors have been condoned. As a mode of extinguishing an obligation,55 condonation or remission of debt56 is defined as:

an act of liberality, by virtue of which, without receiving any equivalent, the creditor renounces the enforcement of the obligation, which is extinguished in its entirety or in that part or aspect of the same to which the remission refers. It is an essential characteristic of remission that it be gratuitous, that there is no equivalent received for the benefit given; once such equivalent exists, the nature of the act changes. It may become dation in payment when the creditor receives a thing different from that stipulated; or novation, when the object or principal conditions of the obligation should be changed; or compromise, when the matter renounced is in litigation or dispute and in exchange of some concession which the creditor receives.57

Verily, the second issue in this case involves the construction of Section 7958 of the National Internal Revenue Code59 (Tax Code) which provides for the allowable deductions from the gross estate of the decedent. The specific question is whether the actual claims of the aforementioned creditors may be fully allowed as deductions from the gross estate of Jose despite the fact that the said claims were reduced or condoned through compromise agreements entered into by the Estate with its creditors.

"Claims against the estate," as allowable deductions from the gross estate under Section 79 of the Tax Code, are basically a reproduction of the deductions allowed under Section 89 (a) (1) (C) and (E) of Commonwealth Act No. 466 (CA 466), otherwise known as the National Internal Revenue Code of 1939, and which was the first codification of Philippine tax laws. Philippine tax laws were, in turn, based on the federal tax laws of the United States. Thus, pursuant to established rules of statutory construction, the decisions of American courts construing the federal tax code are entitled to great weight in the interpretation of our own tax laws.60

It is noteworthy that even in the United States, there is some dispute as to whether the deductible amount for a claim against the estate is fixed as of the decedent's death which is the general rule, or the same should be adjusted to reflect post-death developments, such as where a settlement between the parties results in the reduction of the amount actually paid.61 On one hand, the U.S. court ruled that the appropriate deduction is the "value" that the claim had at the date of the decedent's death.62 Also, as held in Propstra v. U.S., 63 where a lien claimed against the estate was certain and enforceable on the date of the decedent's death, the fact that the claimant subsequently settled for lesser amount did not preclude the estate from deducting the entire amount of the claim for estate tax purposes. These pronouncements essentially confirm the general principle that post-death developments are not material in determining the amount of the deduction.

On the other hand, the Internal Revenue Service (Service) opines that post-death settlement should be taken into consideration and the claim should be allowed as a deduction only to the extent of the amount actually paid.64 Recognizing the dispute, the Service released Proposed Regulations in 2007 mandating that the deduction would be limited to the actual amount paid.65

In announcing its agreement with Propstra,66 the U.S. 5th Circuit Court of Appeals held:

We are persuaded that the Ninth Circuit's decision...in Propstra correctly apply the Ithaca Trust date-of-death valuation principle to enforceable claims against the estate. As we interpret Ithaca Trust, when the Supreme Court announced the date-of-death valuation principle, it was making a judgment about the nature of the federal estate tax specifically, that it is a tax imposed on the act of transferring property by will or intestacy and, because the act on which the tax is levied occurs at a discrete time, i.e., the instance of death, the net value of the property transferred should be ascertained, as nearly as possible, as of that time. This analysis supports broad application of the date-of-death valuation rule.67

We express our agreement with the date-of-death valuation rule, made pursuant to the ruling of the U.S. Supreme Court in Ithaca Trust Co. v. United States.68 First. There is no law, nor do we discern any legislative intent in our tax laws, which disregards the date-of-death valuation principle and particularly provides that post-death developments must be considered in determining the net value of the estate. It bears emphasis that tax burdens are not to be imposed, nor presumed to be imposed, beyond what the statute expressly and clearly imports, tax statutes being construed strictissimi juris against the government.69 Any doubt on whether a person, article or activity is taxable is generally resolved against taxation.70 Second. Such construction finds relevance and consistency in our Rules on Special Proceedings wherein the term "claims" required to be presented against a decedent's estate is generally construed to mean debts or demands of a pecuniary nature which could have been enforced against the deceased in his lifetime, or liability contracted by the deceased before his death.71 Therefore, the claims existing

at the time of death are significant to, and should be made the basis of, the determination of allowable deductions.

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

SO ORDERED.