Tax 2 Case Digests Part 2 Transfer Taxes.pdf

Taxation II Case Digests based on Atty. Bobby Lock’s Course Outline Part II: TRANSFER OF TAXES

ESTATE TAX A. RULE ON RECIPROCITY Collector of Internal Revenue vs. Campos Rueda, 42 SCRA 23(1971) FERNANDO, J. Taxation; Estate and inheritance taxes; Reciprocity in exemption does not require the “foreign country” to possess international personality.—The fact that the laws of Tangier, Morocco, do not impose transfer or death taxes upon intangible personal properties of our citizens not residing therein, entitles to a reciprocal exemption similar properties belonging to the decedent who at the time of his death resides in Tangiers, no matter that the latter country does not possess international personality in the traditional sense. Facts: Collector of Internal Revenue held Antonio Campos Rueda, as administrator of the estate of the late EstrellaSoriano Vda. De Cerdeira, liable for the stun of P161,974.95 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. Rueda’s request for exemption was denied on the ground that the law of Tangier is not reciprocal to Section 122 of the National Internal Revenue Code. Rueda requested for the reconsideration of the decision denying the claim for tax exemption. However, respondent denied this request on the grounds that there was no reciprocity with Tangier, which was moreover a mere principality, not a foreign country. Court of Tax Appeals ruled 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 taxes upon intangible personal 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 in order to entitle the petitioner to the exemption benefits of the last provision of Section 122 of our Tax Code. Issue: 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 Section122 of the National Internal Revenue Code Held: Supreme Court affirmed Court of tax Appeals Ruling. If a foreign country is to be identified with a state, it 1|Ms. Nolaida Aguirre

Taxation II Case Digests based on Atty. Bobby Lock’s Course Outline Part II: TRANSFER OF TAXES

is required in line with Pound's formulation that it be apolitically organized sovereign community independent of outside control bound by ties of nationhood, legally supreme within its territory, acting through a government functioning under a regime of law. 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. 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. State is a territorial society divided into government and subjects, claiming within its allotted area a supremacy over all other institutions. Moreover, 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. With the latter requisite satisfied, international law does not exact independence as a condition of statehood. This Court did commit itself to the doctrine that even a tiny principality that of Liechtenstein, hardly an international personality in the traditional sense, did fall under this exempt category. Collector of Internal Revenue vs. Fisher, 1 SCRA 93(1961) BARRERA, J. Husband and wife; Conjugal partnership.—In the absence of any ante-nuptial agreement, the husband and wife are presumed to have adopted the system of conjugal partnership. Civil Code of the Philippines; Husband and wife; Marriage.—The property relations of husband and wife who were married in 1909 are governed by article 1325 of the Spanish Civil Code and not by article 124 of the New Civil Code. Same; Private International Law (Conflict of laws).—Artide 1325 of the Old Civil Code and article 124 of the New Civil Code both adhere to the so-called nationality theory of determining the property relations of spouses where one of them is a foreigner and they have made no prior agreement as to the administration, disposition and ownership of their conjugal properties. In such a case, the national law of the husband becomes the dominant law in determining the property relations of the spouses. However, there is a difference between two articles. Article 124 expressly provides that it applies regardless of where the marriage was celebrated, while article 1325 is limited to marriages contracted abroad. Both articles apply only to mixed marriages between a Filipino and a foreigner. Same; Old law; Property relations of British citizens who were, married in Manila in 1909.—English law governs the property relations of a man and woman, both British citizens, who were married in Manila 1909. Evidence; Foreign laws; Processual presumption.—In the absence of proof of a foreign law, the processual presumption is that it is the same as the law of the forum. Private International Law; Article 10 of the old Civil Code; Husband and wife.—Article 10 of the old Civil Code does not govern the property relations of husband and wife. It refers to successional rights, which are distinct from the property relations of the spouses.

2|Ms. Nolaida Aguirre

Taxation II Case Digests based on Atty. Bobby Lock’s Course Outline Part II: TRANSFER OF TAXES

Taxation; Estate and inheritance taxes; Share of surviving spouse is deductible.—In determining- the net taxable estate of a deceased British subject, for purposes of the estate and inheritance taxes, where said deceased was married to another British citizen in Manila in 1909, the one-half conjugal share of the surviving wife should be deducted inasmuch as they are presumed to have adopted the system of conjugal partnership in the absence of an ante-nuptial agreement. Evidence; Proof of foreign laws.—Foreign laws do not prove themselves in our courts. They are not a matter of judicial notice. Like any other fact, they must be alleged and proven. Same.—The provisions of the Rules of Court on proof of foreign laws do not exclude the presentation of other competent evidence to prove the existence of a foreign law. The testimony of a lawyer, practising in California, together with a quotation from a publication of Bancroft-Whitney, is sufficient to prove the certain provisions of the California Internal Revenue Code. Taxation; Estate and inheritance taxes; Reciprocity in exemption.—Under section 122 of the Tax Code and section 13851 of the California Inheritance Tax Law, the reciprocity must be total, that is, with respect to transfer or death taxes of any and every character, in the case of the Philippine law, and to legacy, succession, or death taxes of any and every character, in the case of the California law. Therefore, if any of the two states collects or imposes and does not exempt any transfer, death, legacy, or succession tax of any character, the reciprocity does not work. The shares of stock in the Philippines, left by a deceased resident of California, are subject to the Philippine inheritance tax. The reciprocity provisions of section 122 of the Tax Code are not applicable because there is no total reciprocity under the two laws. Same; Deduction under Federal Estate Tax Law.—The amount allowed under the Federal Estate Tax Law is in the nature of a deduction and not of an exemption, regarding which reciprocity cannot be claimed under section 122 of the Philippine Tax Code. Nor is reciprocity allowed under the Federal Law. Taxation; Estate and inheritance taxes; Assessed value is not the controlling market value.—For purposes of the estate and inheritance taxes, the assessed value of real estate is considered as the fair market value only when evidence to the contrary has not been submitted. If there is such contrary evidence, the assessed value will not be considered the fair market value. Same; Market value of shares of stock.—Shares of stock of a Philippine (domestic) corporation have a situs here for purposes of taxation. Their situs is not California where the certificates were located and in whose stock exchange the shares were registered. Their fair market value should be based on the price prevailing in this country where they are sought to be taxed. Same; Deductibility of expenses allowed by the probate court.—The Supreme Court will not disturb the ruling of the Tax Court, allowing the administrator's fee, lawyer's fee and judicial and administration expenses as liabilities of the estate, it appearing the said items were likewise allowed by the probate court. The ruling of the Tax Court, disallowing an additional amount for funeral expenses, for lack of evidence, should be upheld. The Supreme Court will set aside the factual findings of the Tax Court only in case they are not supported by any evidence.

3|Ms. Nolaida Aguirre

Taxation II Case Digests based on Atty. Bobby Lock’s Course Outline Part II: TRANSFER OF TAXES

Executors and administrators; Settlement of decedent's estates; Ancillary and domiciliary adminintration.—The distinction between a domiciliary and an ancillary administration serves only to distinguish one administration from the other, for the two proceedings are separate and independent. The reason for the ancillary administration is that a grant of administration does not, ex proprio vigore, have any effect beyond the limits of the country in which it was granted. In other words, there is a regular administration under the control of the court, where claims must be presented and approved and expenses of administration allowed before the deductions from the estate can be authorized. Same; California debt of decedent should be presented to Philippine court for allowance.--A debt of the decedent, which was incurred in California and which was allowed by the California court, having jurisdiction over the domiciliary administration, should, nevertheless, be presented to the Philippine probate court for allowance in order that it may constitute a valid claim against the Philippine estate under ancillary administration. Same; Deductions allowed the estate of nonresident aliens.—No deduction from the estate of a nonresident alien is allowed unless the value of his gross estate not situated in the Philippines is stated in the return. This requirement is intended to enable the revenue officer to determine how much of the debt may be deducted pursuant to section 89(b)(l) of the Tax Code. The deduction is allowed only to the extent of that portion of the debt, which is equivalent to the proportion that the Philippine estate bears to the total estate wherever situated. If the Philippine estate constitutes but 1/5 of the entire estate, wherever situated, then only 1/5 of the debt may be deducted. If no statement of the estate situated outside the Philippines is attached to the return, then no part of the debt may be deducted from the decedents' estate. Taxation; Interest on amount overpaid.—In the absence of any statutory provision clearly or expressly directing or authorizing the payment of interest on taxes overpaid, the National Government cannot be required to pay interest. Facts: This case relates to the determination and settlement of the hereditary estate left by the deceased Walter G. Stevenson, and the laws applicable thereto. Walter G. Stevenson (born in the Philippines on August 9, 1874 of British parents and married in the City of Manila on January 23, 1909 to Beatrice Mauricia Stevenson another British subject) died on February 22, 1951 in San Francisco, California, U.S.A. whereto he and his wife moved and established their permanent residence since May 10, 1945. In his will executed in San Francisco on May 22, 1947, and which was duly probated in the Superior Court of California on April 11, 1951, Stevenson instituted his wife Beatrice as his sole heiress to the following real and personal properties acquired by the spouses while residing in the Philippines. On May 22, 1951, ancillary administration proceedings were instituted in the Court of First Instance of Manila for the settlement of the estate in the Philippines. In due time Stevenson's will was duly admitted to probate by our court and Ian Murray Statt was appointed ancillary administrator of the estate, who on July 11, 1951, filed a preliminary estate and inheritance tax return with the reservation of having the properties declared therein finally appraised at their values six months after the death of Stevenson. Preliminary return was made by the ancillary administrator in order to secure the waiver of the Collector of Internal Revenue 4|Ms. Nolaida Aguirre

Taxation II Case Digests based on Atty. Bobby Lock’s Course Outline Part II: TRANSFER OF TAXES

on the inheritance tax due on the 210,000 shares of stock in the Mindanao Mother Lode Mines Inc. which the estate then desired to dispose in the United States. Acting upon said return, the Collector of Internal Revenue accepted the valuation of the personal properties declared therein, but increased the appraisal of the two parcels of land located in Baguio City by fixing their fair market value in the amount of P52.200.00, instead of P43,500.00. After allowing the deductions claimed by the ancillary administrator for funeral expenses in the amount of P2,000.00 and for judicial and administration expenses in the sum of P5,500.00, the Collector assessed the state the amount of P5,147.98 for estate tax and P10,875,26 or inheritance tax, or a total of P16,023.23. Both of these assessments were paid by the estate on June 6, 1952. On September 27, 1952, the ancillary administrator filed in amended estate and inheritance tax return in pursuance f his reservation made at the time of filing of the preliminary return and for the purpose of availing of the right granted by section 91 of the National Internal Revenue Code. In this amended return the valuation of the 210,000 shares of stock in the Mindanao Mother Lode Mines, Inc. was reduced from 0.38 per share, as originally declared, to P0.20 per share, or from a total valuation of P79,800.00 to P42,000.00. This change in price per share of stock was based by the ancillary administrator on the market notation of the stock obtaining at the San Francisco California) Stock Exchange six months from the death of Stevenson, that is, As of August 22, 1931. In the meantime, on December 1, 1952, Beatrice Mauricia Stevenson assigned all her rights and interests in the estate to the spouses, Douglas and Bettina Fisher, respondents herein.

Issues: (1) Whether or not, in determining the taxable net estate of the decedent, one-half (½) of the net estate should be deducted therefrom as the share of tile surviving spouse in accordance with our law on conjugal partnership and in relation to section 89 (c) of the National Internal revenue Code; (2) Whether or not the estate can avail itself of the reciprocity proviso embodied in Section 122 of the National Internal Revenue Code granting exemption from the payment of estate and inheritance taxes on the 210,000 shares of stock in the Mindanao Mother Lode Mines Inc.; (3) Whether or not the estate is entitled to the deduction of P4,000.00 allowed by Section 861, U.S. Internal Revenue Code in relation to section 122 of the National Internal Revenue Code; (4) Whether or not the estate is entitled to the payment of interest on the amount it claims to have overpaid the government and to be refundable to it. Held: First Issue: The pertinent English law that allegedly vests in the decedent husband full ownership of the properties acquired during the marriage has not been proven by petitioner. Except for a mere allegation in his answer, which is not sufficient, the record is bereft of any evidence as to what English law says on the matter. In the absence of proof, the Court is justified, therefore, in indulging in what Wharton calls "processual 5|Ms. Nolaida Aguirre

Taxation II Case Digests based on Atty. Bobby Lock’s Course Outline Part II: TRANSFER OF TAXES

presumption," in presuming that the law of England on this matter is the same as our law Nor do we believe petitioner can make use of Article 16 of the New Civil Code (art. 10, old Civil Code) to bolster his stand. A reading of Article 10 of the old Civil Code, which incidentally is the one applicable, shows that it does not encompass or contemplate to govern the question of property relation between spouses. Said article distinctly speaks of amount of successional rights and this term, in speaks in our opinion, properly refers to the extent or amount of property that each heir is legally entitled to inherit from the estate available for distribution. It needs to be pointed out that the property relation of spouses, as distinguished from their successional rights, is governed differently by the specific and express provisions of Title VI, Chapter I of our new Civil Code (Title III, Chapter I of the old Civil Code.) We, therefore, find that the lower court correctly deducted the half of the conjugal property in determining the hereditary estate left by the deceased Stevenson. Second Issue: Section 122 of our National Internal Revenue Code, in pertinent part, provides: ... And, provided, further, That no tax shall be collected under this Title in 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 of tax or death tax of any character in respect of intangible personal property of citizens 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." (Emphasis supplied). On the other hand, Section 13851 of the California Inheritance Tax Law, insofar as pertinent, reads:. "SEC. 13851, Intangibles of nonresident: Conditions. Intangible personal property is exempt from the tax imposed by this part if the decedent at the time of his death was a resident of a territory or another State of the United States or of a foreign state or country which then imposed a legacy, succession, or death tax in respect to intangible personal property of its own residents, but either:. (a) Did not impose a legacy, succession, or death tax of any character in respect to intangible personal property of residents of this State, or (b) Had in its laws a reciprocal provision under which intangible personal property of a non-resident was exempt from legacy, succession, or death taxes of every character if the Territory or other State of the United States or foreign state or country in which the nonresident resided allowed a similar exemption in respect to intangible personal property of residents of the Territory or State of the United States or foreign state or country of residence of the decedent." (Id.) It is clear from both these quoted provisions that the reciprocity must be total, that is, with respect to transfer or death taxes of any and every character, in the case of the Philippine law, and to legacy, succession, or death taxes of any and every character, in the case of the California law. Therefore, if any of the two states collects or imposes and does not exempt any transfer, death, legacy, or succession tax of any 6|Ms. Nolaida Aguirre

Taxation II Case Digests based on Atty. Bobby Lock’s Course Outline Part II: TRANSFER OF TAXES

character, the reciprocity does not work. This is the underlying principle of the reciprocity clauses in both laws. In the Philippines, upon the death of any citizen or resident, or non-resident with properties therein, there are imposed upon his estate and its settlement, both an estate and an inheritance tax. Under the laws of California, only inheritance tax is imposed. On the other hand, the Federal Internal Revenue Code imposes an estate tax on non-residents not citizens of the United States, but does not provide for any exemption on the basis of reciprocity. Applying these laws in the manner the Court of Tax Appeals did in the instant case, we will have a situation where a Californian, who is non-resident in the Philippines but has intangible personal properties here, will the subject to the payment of an estate tax, although exempt from the payment of the inheritance tax. This being the case, will a Filipino, non-resident of California, but with intangible personal properties there, be entitled to the exemption clause of the California law, since the Californian has not been exempted from every character of legacy, succession, or death tax because he is, under our law, under obligation to pay an estate tax? Upon the other hand, if we exempt the Californian from paying the estate tax, we do not thereby entitle a Filipino to be exempt from a similar estate tax in California because under the Federal Law, which is equally enforceable in California he is bound to pay the same, there being no reciprocity recognized in respect thereto. In both instances, the Filipino citizen is always at a disadvantage. We do not believe that our legislature has intended such an unfair situation to the detriment of our own government and people. We, therefore, find and declare that the lower court erred in exempting the estate in question from payment of the inheritance tax. Third Issue: With respect to the question of deduction or reduction in the amount of P4,000.00 based on the U.S. Federal Estate Tax Law which is also being claimed by respondents, we uphold and adhere to our ruling in the Lara case (supra) that the amount of $2,000.00 allowed under the Federal Estate Tax Law is in the nature of a deduction and not of an exemption regarding which reciprocity cannot be claimed under the provision of Section 122 of our National Internal Revenue Code. Nor is reciprocity authorized under the Federal Law. . Fourth Issue: For two reasons, we uphold the action of the lower court in disallowing the deduction. Firstly, we believe that the approval of the Philippine probate court of this particular indebtedness of the decedent is necessary. This is so although the same, it is averred has been already admitted and approved by the corresponding probate court in California, situs of the principal or domiciliary administration. It is true that we have here in the Philippines only an ancillary administration in this case, but, it has been held, the distinction between domiciliary or principal administration and ancillary administration serves only to distinguish one administration from the other, for the two proceedings are separate and independent. 8 The reason for the ancillary administration is that, a grant of administration does not ex proprio vigore, have any effect beyond the limits of the country in which it was granted. Hence, we have the requirement that before a will duly probated outside of the Philippines can have effect here, it must first be proved and allowed before our courts, in much the same manner as wills originally presented for allowance therein. 9

7|Ms. Nolaida Aguirre

Taxation II Case Digests based on Atty. Bobby Lock’s Course Outline Part II: TRANSFER OF TAXES

And the estate shall be administered under letters testamentary, or letters of administration granted by the court, and disposed of according to the will as probated, after payment of just debts and expenses of administration.10 In other words, there is a regular administration under the control of the court, where claims must be presented and approved, and expenses of administration allowed before deductions from the estate can be authorized. Otherwise, we would have the actuations of our own probate court, in the settlement and distribution of the estate situated here, subject to the proceedings before the foreign court over which our courts have no control. We do not believe such a procedure is countenanced or contemplated in the Rules of Court. Another reason for the disallowance of this indebtedness as a deduction, springs from the provisions of Section 89, letter (d), number (1), of the National Internal Revenue Code which reads: (c) Miscellaneous provisions — (1) No deductions shall be allowed in the case of a non-resident not a citizen of the Philippines unless the executor, administrator or anyone of the heirs, as the case may be, includes in the return required to be filed under section ninety-three the value at the time of his death of that part of the gross estate of the non-resident not situated in the Philippines." In the case at bar, no such statement of the gross estate of the non-resident Stevenson not situated in the Philippines appears in the three returns submitted to the court or to the office of the petitioner Collector of Internal Revenue. The purpose of this requirement is to enable the revenue officer to determine how much of the indebtedness may be allowed to be deducted, pursuant to (b), number (1) of the same section 89 of the Internal Revenue Code which provides: (b) Deductions allowed to non-resident estates. — In the case of a non-resident not a citizen of the Philippines, by deducting from the value of that part of his gross estate which at the time of his death is situated in the Philippines — (1) Expenses, losses, indebtedness, and taxes. — That proportion of the deductions specified in paragraph (1) of subjection (a) of this section11 which the value of such part bears the value of his entire gross estate wherever situated;" In other words, the allowable deduction is only to the extent of the portion of the indebtedness which is equivalent to the proportion that the estate in the Philippines bears to the total estate wherever situated. Stated differently, if the properties in the Philippines constitute but 1/5 of the entire assets wherever situated, then only 1/5 of the indebtedness may be deducted. But since, as heretofore adverted to, there is no statement of the value of the estate situated outside the Philippines, no part of the indebtedness can be allowed to be deducted, pursuant to Section 89, letter (d), number (1) of the Internal Revenue Code.

B. JUDICIAL EXPENSES Commissioner of Internal Revenue vs. Court of Appeals and Pajonar, 328 SCRA 666(2000) GONZAGA-REYES, J.

8|Ms. Nolaida Aguirre

Taxation II Case Digests based on Atty. Bobby Lock’s Course Outline Part II: TRANSFER OF TAXES

Taxation; Administration expenses construed 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.—Judicial expenses are expenses of administration. 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.” 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.

Facts: Private respondent Josefina Pajonar was the guardian of the person of decedent Pedro Pajonar. The property of the decedent was put by the RTC- Dumaguete, under the guardianship of the Philippine National Bank via special proceeding, wherein 50, 000 was spent therein for payment of attorney's fees. When the decedent died, instead of filing a estate tax return, PNB advised Josefina to extra-judicially settle the estate of his brother. The decedent's estate was extra-judicially settled and the heirs paid an amount of 60, 753 for the notarization of the deed of extra-judicial settlement of estate. The private paid the estate tax, however, they were subsequently assessed of deficiency taxes because the amount paid in the special proceeding [50, 000] and the notarization fee [60, 753] cannot be claimed as a deduction to the decedent's estate. Private respondent paid the said taxes under protest. While the case is under review by the BIR, she filed a claim for refund in the CTA which was granted. Issue: whether or not 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. Held: Yes .As to the deductibility of the amount spent for notarization of the deed of extra-judicial settlement of estate- Explained the SC, 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 [which the law on allowable deductions from gross estate was copied] 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." 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. This distinction has been carried over to our jurisdiction. Thus, in Lorenzo v. Posadas 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 9|Ms. Nolaida Aguirre

Taxation II Case Digests based on Atty. Bobby Lock’s Course Outline Part II: TRANSFER OF TAXES

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. 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. In this case, it is clear 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. 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. Deductible expenses of administration of the estate 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. As to the deductibility of attorney's fees in the Special proceedings- As a rule 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. 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. Hence the attorney's fees of 50, 000 is deductible from the gross estate of the decedent.

C. CLAIMS AGAINST THE ESTATE Dizon vs. Court of Tax Appeals, 553 SCRA 111(2008) NACHURA, J. Civil Law; Obligations; Condonation or Remission of Debt; Words and Phrases; Definition of condonation or remission of debt.—It is admitted that the claims of the Estate’s aforementioned creditors have been condoned. As a mode of extinguishing an obligation, condonation or remission of debt 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 10 | M s . N o l a i d a A g u i r r e

Taxation II Case Digests based on Atty. Bobby Lock’s Course Outline Part II: TRANSFER OF TAXES

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. Taxation; Statutory Construction; Court agrees with the date-of-death valuation rule; 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.—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, 279 U.S. 151, 49 S. Ct. 291, 73 L.Ed. 647 (1929). 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. Any doubt on whether a person, article or activity is taxable is generally resolved against taxation. 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. Therefore, the claims existing at the time of death are significant to, and should be made the basis of, the determination of allowable deductions.

Facts: Jose P. Fernandez died in November 7, 1987. Thereafter, a petition for the probate of his will was filed. The probate court appointed Atty. Rafael Arsenio P. Dizon as administrator of the Estate of Jose Fernandez. An estate tax return was filed later on which showed ZERO estate tax liability. BIR thereafter issued a deficiency estate tax assessment, demanding payment of Php 66.97 million as deficiency estate tax. This was subsequently reduced by CTA to Php 37.42 million. The CA affirmed the CTA’s ruling, hence, the instant petition. 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. On the other hand, respondents argue that since the claims of the Estate’s creditors have been condoned, such claims may no longer be deducted from the gross estate of the decedent. Issue: Whether the actual claims of 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 Held: 11 | M s . N o l a i d a A g u i r r e

Taxation II Case Digests based on Atty. Bobby Lock’s Course Outline Part II: TRANSFER OF TAXES

YES. Following the US Supreme Court’s ruling in Ithaca Trust Co. v. United States, the Court held that post-death developments are not material in determining the amount of deduction. This is because estate tax 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 the that time. This is the date-of-death valuation rule. The Court, in adopting the date-of-death valuation principle, explained that: 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. 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. Therefore, the claims existing at the time of death are significant to, and should be made the basis of, the determination of allowable deductions. D. WHO IS LIABLE TO PAY? Estate of the Late Juliana Diez Vda. de Gabriel vs.CIR, 421 SCRA 266(2004) YNARES-SANTIAGO, J. Taxation; Agency; The death of a taxpayer automatically severed the legal relationship between her and her agent, and such could not be revived by the mere fact that the agent continued to act as such when, two days after the principal’s death, the agent filed the principal’s Income Tax Return.—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 nonexistent for three years. Same; Estate Tax; Section 104 of the Internal Revenue Code of 1977, requiring notice of death of taxpayer to be filed, falls in Title III, Chapter 1 and pertains to “all cases of transfers subject to tax” or

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Taxation II Case Digests based on Atty. Bobby Lock’s Course Outline Part II: TRANSFER OF TAXES

where the “gross value of the estate exceeds three thousand pesos” and has absolutely no applicability to a case for deficiency income tax.—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. Same; Same; 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.—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. Same; Tax Assessments; Prescription; Where there was never any valid notice of an 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, the Commissioner of Internal Revenue’s claim against the taxpayer is barred.—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. Same; Same; Due Process; The rule 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 requires that the notice be sent to the taxpayer, and not merely to a disinterested party.— 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. It must be noted, 13 | M s . N o l a i d a A g u i r r e

Taxation II Case Digests based on Atty. Bobby Lock’s Course Outline Part II: TRANSFER OF TAXES

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, 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. Same; Same; Same; When an estate is under administration, notice must be sent to the administrator of the estate.—In Republic v. De le Rama, 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.) Facts: 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. 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. 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. 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. 14 | M s . N o l a i d a A g u i r r e

Taxation II Case Digests based on Atty. Bobby Lock’s Course Outline Part II: TRANSFER OF TAXES

Held: The Supreme Court ruled 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. 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. 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. 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. Commissioner of Internal Revenue vs. Pineda, 21 SCRA 105(1967) BENGZON, J.P., J.: Taxation; Income tax; Liability of an heir for tax.—An heir 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. His liability, however, cannot exceed the amount of his share (Art. 1311, Civil Code). As a holder of the property belonging to the estate, he is liable for the tax up to the amount of the property in his possession. The reason is that the Government has a lien on such property. But after payment of such amount, he will have a right to contribution from his co-heirs.

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Taxation II Case Digests based on Atty. Bobby Lock’s Course Outline Part II: TRANSFER OF TAXES

Same; Ways available to government to collect the tax.—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. Facts: Atanasio Pineda died, survived by his wife, Felicisima Bagtas, and 15 children, the eldest of whom is Atty. Manuel Pineda. Estate proceedings were had in Court so that the estate was divided among and awarded to the heirs. Atty Pineda's share amounted to about P2,500.00. After the estate proceedings were closed, the BIR 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 issued an assessment and charged the full amount to the inheritance due to Atty. Pineda who argued that he is liable only to extent of his proportional share in the inheritance. Issue: Whether Pineda may be held for all the estate taxes Held: Yes. 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. His liability, however, cannot exceed the amount of his share. 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 taxes. 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, to achieve an adjustment of the proper share of each heir in the distributable estate. E. PAYMENT BEFORE DELIVERY BE EXECUTOR Marcos II vs. Court of Appeals, 273 SCRA 47(1997) TORRES, JR., J. Same; 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.—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 16 | M s . N o l a i d a A g u i r r e

Taxation II Case Digests based on Atty. Bobby Lock’s Course Outline Part II: TRANSFER OF TAXES

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 (now Section 94 under the NIRC OF 1997 as amended) 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.

------------------supra-----------------Dispositive portion: 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.”

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Taxation II Case Digests based on Atty. Bobby Lock’s Course Outline Part II: TRANSFER OF TAXES

Thus, it was in Vera vs. Fernandez12 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.

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Taxation II Case Digests based on Atty. Bobby Lock’s Course Outline Part II: TRANSFER OF TAXES

DONOR’S TAX A. NATURE OF DONOR’S TAX Lladoc vs. Commissioner of Internal Revenue, 14 SCRA 292(1965) Paredes, J. Taxation; Constitutional exemption for religious purposes refers only to property taxes- Section 22(3) Article VI of the Constitution of the Philippines, exempts from taxation cemeteries, churches and parsonages or convents, appurtenant thereto and all lands, buildings, and improvements used exclusively for religious purposes. The exemption is only from the payment of taxes assessed on such properties enumerated, as property taxes, as contra-distinguished from excise taxes. Same;Same Gift tax; Imposition of gift tax on property used for religious purposes not violation of constitution- A gift tax is not a property tax, but an excise tax imposed on the transfer of property by way of gift inter vivos, the imposition of which on property used exclusively for religious purposes, does not constitute an impairment of the Constitution. A gift tax is not a property tax, but an excise tax imposed on the transfer of property by way of gift inter vivos. Facts: Sometime in 1957, M.B. Estate Inc., of Bacolod City, donated 10,000.00 pesos in cash to Fr. Crispin Ruiz, the parish priest of Victorias, Negros Occidental, and predecessor of Fr. Lladoc, for the construction of a new Catholic church in the locality. The donated amount was spent for such purpose. On March 3, 1958, the donor M.B. Estate filed the donor's gift tax return. Under date of April 29, 1960. Commissioner of Internal Revenue issued an assessment for the donee's gift tax against the Catholic Parish of Victorias of which petitioner was the parish priest. Issue: Whether or not the imposition of gift tax is valid despite the fact that the Constitution provides an exemptions and that Fr. Lladoc was not the Parish priest at the time of donation. Held: Yes, the imposition of the gift tax was valid. Section 22(3) Article VI of the Constitution contemplates exemption only from payment of taxes assessed on such properties as Property taxes contra distinguished from Excise taxes. The imposition of the gift tax on the property used for religious purpose is not a violation of the Constitution. A gift tax is not a property by way of gift inter vivos, the imposition of which on property used exclusively for religious purposes, does not constitute an impairment of the Constitution. As well observed by the learned respondent Court, the phrase "exempt from taxation," as employed in the Constitution (supra) should not be interpreted to mean exemption from all kinds of taxes. And there being 19 | M s . N o l a i d a A g u i r r e

Taxation II Case Digests based on Atty. Bobby Lock’s Course Outline Part II: TRANSFER OF TAXES

no clear, positive or express grant of such privilege by law, in favor of petitioner, the exemption herein must be denied. Pirovano vs. Commissioner of Internal Revenue, 14 SCRA 832(1965)

Taxation; Gift tax; Donation out of gratitude for past services taxable.—A donation made by a corporation to the heirs of a deceased officer out of gratitude for his past services is subject to the donees’ gift tax. Same; Same; Same; No deduction for value of past services.—A donation made out of gratitude for past services is not subject to deduction for the value of said services which do not constitute a recoverable debt. Same; Same; Same; Gratitude not consideration under tax code.—Gratitude has no economic value and is not “consideration” in the sense that the word is used under Section 311 of the Tax Code. Sec. 32[B] of the NIRC provides that Gifts, bequests and devises are excluded from gross income liable to tax. Instead, such donations are subject to estate or gift taxes. However, if the amount is received on account of services rendered, whether constituting a demandable debt or not (such as remuneratory donations under Civil Law), the donation is considered taxable income. Facts: De la Rama Steamship Co. insured the life of Enrico Pirovano who was then its President and General Manager. The company initially designated itself as the beneficiary of the policies but, after Pirovano’s death, it renounced all its rights, title and interest therein, in favor of Pirovano’s heirs. The CIR subjected the donation to gift tax. Pirovano’s heirs contended that the grant was not subject to such donee’s tax because it was not a simple donation, as it was made for a full and adequate compensation for the valuable services by the late Priovano (i.e. that it was remuneratory). Issue: Whether or not the donation is remuneratory and therefore not subject to donee’s tax, but rather taxable as part of gross income. Held: No. the donation is not remuneratory. 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. and was “largely responsible for the rapid and very successful development of the activities of the company", he was not fully compensated for such services. 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 a donation. The company’s gratitude was the true consideration for the donation, and not the services themselves. C. OTHER MATTERS 20 | M s . N o l a i d a A g u i r r e

Taxation II Case Digests based on Atty. Bobby Lock’s Course Outline Part II: TRANSFER OF TAXES

Abello vs. Commissioner of Internal Revenue, 452 SCRA 162(2005) Azcuna, J. Civil Law; Donations; Elements of Donations- Donation has the following elements: (a) the reduction of the patrimony of the donor; (b) the increase in the patrimony of the done; and , (C) the intent to do an act of liberality or animus donandi. Same; Same; Same; Petitioner’s contribution of money without any material consideration evinces animus donandi; the fact that their purpose for donating was to aid in the election of the done does not negate the presence of donative intent.- Since animus donandi or the intention to do an act of liberality is an essential element of a donation, petitioners argue that it is important to look into the intention of the giver to determine if a political contribution is a gift. Petitioners’ argument is not tenable. First of all, donative intent is a creature of the mind. It cannot be perceived except by the material and tangible acts which manifest its presence. This being the case, donative intent is presumed present when one gives a part of ones patrimony to another without consideration. Second, donative intent is not negated when the person donating has other intentions, motives or purposes which do not contradict donative intent. This Court is not convinced that since the purpose of the contribution was to help elect a candidate, there was no donative intent. Petitioners’ contribution of money without any material consideration evinces animus donandi. The fact that their purpose for donating was to aid in the election of the donee does not negate the presence of donative intent. Same; Same; Same; Donative intent is not negated by the presence of another intentions,motives or purposes which do not contradict donative intent. - Since the purpose of an electoral contribution is to influence the results of the election, petitioners again claim that donative intent is not present. Petitioners attempt to place the barrier of mutual exclusivity between donative intent and the purpose of political contributions. This Court reiterates that donative intent is not negated by the presence of other intentions, motives or purposes which do not contradict donative intent. Facts: During the 1987 national elections, petitioners who are partners in the Angara , Abello, Concepcion, Regala, and Cruz (ACCRA) law firm contributed P882,661.31 each to the campaign funds of Senator Edgardo Angara, then running for the Senate, BIR assessed each of the petitioners P263,032.66 for their contributions. Petitioners questioned the assessment to the BIR , claiming that political or electoral contributions are not considered gifts under the NIRC so they are not liable for donor’s tax. The claim for exemption was denied by the Commissioner. The CTA ruled in favor of the petitioners, but such ruling was overturned by the CA, thus this petition for review. Issue: Whether or not electoral contributions are subject to donor’s tax. Held: Yes. The NIRC does not define transfer of property by gift. However, Article 18 of the Civil Code, states: 21 | M s . N o l a i d a A g u i r r e

Taxation II Case Digests based on Atty. Bobby Lock’s Course Outline Part II: TRANSFER OF TAXES

In matters which are governed by the Code of Commerce and special laws, their deficiency shall be supplied by the provisions of this Code. Thus, reference may be made to the definition of a donation in the Civil Code. Article 725 of said Code defines donation as:. . . an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another, who accepts it. Donation has the following elements: (a) the reduction of the patrimony of the donor; (b) the increase in the patrimony of the donee; and, (c) the intent to do an act of liberality or animus donandi The present case falls squarely within the definition of a donation. Petitioners, the late Manuel G. Abello, Jose C. Concepcion, Teodoro D. Regala and Avelino V. Cruz, each gave P882,661.31 to the campaign funds of Senator Edgardo Angara, without any material consideration. All three elements of a donation are present. The patrimony of the four petitioners were reduced by P882,661.31 each. Senator Edgardo Angara’s patrimony correspondingly increased by P3,530,645.24. There was intent to do an act of liberality or animus donandi was present since each of the petitioners gave their contributions without any consideration.Taken together with the Civil Code definition of donation, Section 91 of the NIRC is clear and unambiguous, thereby leaving no room for construction. Since animus donandi or the intention to do an act of liberality is an essential element of a donation, petitioners argue that it is important to look into the intention of the giver to determine if a political contribution is a gift. Petitioners’ argument is not tenable. First of all, donative intent is a creature of the mind. It cannot be perceived except by the material and tangible acts which manifest its presence. This being the case, donative intent is presumed present when one gives a part of ones patrimony to another without consideration. Second, donative intent is not negated when the person donating has other intentions, motives or purposes which do not contradict donative intent. This Court is not convinced that since the purpose of the contribution was to help elect a candidate, there was no donative intent. Petitioners’ contribution of money without any material consideration evinces animus donandi. Petitioner’s claim that since the purpose of electoral contributions is to influence the results of election, donative intent is not present. They claim that the purpose of electoral contributions is brought on by the desire of the giver to influence the result of an election by supporting candidates who, in the perception of the giver, would influence the shaping of government policies that would promote the general welfare and economic well-being of the electorate, including the giver himself. Petitioners’ attempt is strained. The fact that petitioners will somehow in the future benefit from the election of the candidate to whom they contribute, in no way amounts to a valuable material consideration so as to remove political contributions from the purview of a donation. Senator Angara was under no obligation to benefit the petitioners. The proper performance of his duties as a legislator is his obligation as an elected public servant of the Filipino people and not a consideration for the political contributions he received. In fact, as a public servant, he may even be called to enact laws that are contrary to the interests of his benefactors, for the benefit of the greater good. Spouses Evono vs. DOF, CTA EB Case No. 705, June 4, 2012

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Taxation II Case Digests based on Atty. Bobby Lock’s Course Outline Part II: TRANSFER OF TAXES Palanca- Enriquez, J. Facts: Tthe Court of Tax Appeals (CTA) en banc denied a petition questioning the legality of the BIR’s assessment of donor’s tax resulting from the processing of the Certificates Authorizing Registration (CAR) covering three properties purchased by the petitioners. The petitioner-spouses secured the CARs in the name of the mother pursuant to two separate deeds of absolute sale between her and the sellers of the properties. Subsequently, the respective deeds of sale were amended to acknowledge receipt by the sellers of the full payment from the petitioner and her three minor children. The petitioner then requested the BIR to issue amended CARs for the same properties, so that the names of the children could be affixed to the titles of the properties that they bought. The BIR assessed the petitioner-spouses donor’s tax, which the latter paid under protest. The BIR subsequently issued the amended CARs by including the names of the three minor children. The petitioner-spouses then instituted the administrative and judicial proceedings to rescind the BIR’s assessment of donor’s tax. To support the tax assessment, the Commissioner of Internal Revenue argued that the petitioners’ allegations -- that the funds used to purchase the properties included not only theirs but those of their minor children’s as well -- are mere afterthoughts and that since it was only the mother who bought the property, the request to include the minor children in the CAR as transferees is in effect a donation equivalent to three-fourths of the property. On the other hand, the petitioner-spouses argued that there was no transfer of property from them to their children since they did not own the properties; instead, the properties were purchased from the sellers using funds owned by the spouses and the savings of their children from their allowances. Isssue: Whether the inclusion of the petitioners’ children in the CAR and the transfer certificates of titles may be deemed a donation from the petitioners, and may be subject to donor’s tax. Held: The CTA ruled that clearly, there was animus donandi or donative intent on the part of the petitioners in this case. According to the Court, donation is defined as “a gift; a transfer of the title to property to one who receives it without paying for it; the act by which the owner of a thing voluntarily transfers the title and possession of the same from himself to another person, without any consideration.” In this

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Taxation II Case Digests based on Atty. Bobby Lock’s Course Outline Part II: TRANSFER OF TAXES regard, Section 98 of the Tax Code of 1997, as amended, provides that the transfer of property by gift is taxable, whether the same is direct or indirect, real or personal, tangible or intangible. The true intention of the parties is ascertained to determine whether or not there is a donation. In this case, although various contracts were presented by the petitioner-spouses to prove that their children were also buyers of the subject properties, the Court considered the external factors surrounding the transaction as a measure to prevent avoidance of the tax due. One factor is the capacity of the buyer to acquire the property. The petitioner-spouses admitted that, although not earning income, their children are financially capable of purchasing the subject properties from their

own

savings.

Unfortunately for the petitioners, the Court only had to note the age of the children to vote for the dismissal of the case. As ruled by the Court: “True, children can save money from their allowances and would be able to purchase properties from their savings; however, in this case, records show that the petitioners’ children were only 11, 10 and 5 years old at the time of the sale of the subject properties, the consideration of which amounted to the total amount of P5.4 million. x x x.. Logically, at such young ages, the three minor children would not be able to save such substantial amount, even if they were receiving enormous allowances from their parents.” Thus, without a source of income or an acceptable form of acquisition of a substantial amount to purchase the properties, the inclusion of the names of the minor children in the CARs was deemed a donation. Incidentally, the Court noted that the gift tax was enacted mainly to prevent the loss of revenue due to the practice of wealthy individuals of donating inter vivos or otherwise gratuitously disposing of their properties during their lifetime for the purpose of reducing their estate and, thus, avoiding payment of the estate tax upon their death. The decision of the Court in the Evono case is logical, but it also got me thinking: did the Court limit the application of the concept of animus donandi or donative intent of the parents to minor children? There was no such limitation. In fact -- and this is what is perhaps impressive -- the Court emphasized that the existence of donative intent shall be determined in light of external factors surrounding the transaction. A proper determination of the existence (or nonexistence) of donative intent may even curb the practice of tax avoidance in wealth or estate planning. One can just think of the not-so-uncommon situations among Filipinos, wherein the substantial portion of family wealth is appropriated by only one or some of the children, sadly with the help of the parents themselves. Other parties having legal right or interest therein but who have lost their claims can say, “Ok, we did not get anything, but at least the Government should benefit from the donor’s tax.” The concept of donative intent can be used in general for transactions whenever applicable. But when the Government looks too far beyond the evidence and considers irrelevant factors to make a

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Taxation II Case Digests based on Atty. Bobby Lock’s Course Outline Part II: TRANSFER OF TAXES case for donation, the application of the concept can be misused. In this case, the taxpayer should protest the assessment of donor’s tax.

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