CORPORATION LAW | B2015

CASE DIGESTS

PIROVANO v. CIR
July 31, 1965
Reyes, JBL, J.
Diway

SUMMARY:
Enrico Pirovano was the President and General Manager of
Dela Rama Steamship Co. During his lifetime, he made
significant contributions to the success of the corporation.
His life was then insured by the corporation which paid the
premiums and is the beneficiary under the insurance
policy. When Enrico Pirovano died, the corporation donated
the proceeds of the life insurance policy to his 4 minor
children. The CIR then assessed donor and donees tax
against the corporation and the Pirovano children. The
children contested the imposition of the donees tax
arguing that the donation was a remuneratory one, made
in consideration of the services rendered by their father.
According to the children, the remuneratory donation is not
a taxable gift.
The SC ruled in favor of the CIR and affirmed the
imposition of the donees tax. The consideration for the
donation was the company's gratitude for the services, and
not the services themselves.
DOCTRINE: (Note: the court did not discuss income tax or
exclusions at all! Ill just add the doctrine in the future once
I know it. Right now, there is nothing about exclusions from
income tax.)
FACTS:
Enrico Pirovano was the father of the herein petitionersappellants.
Sometime in the early part of 1941, De la Rama Steamship
Co. insured the life of its President and General Manager
until the time of his death.

Insured: Enrico Pirovano (President and General

Manager)
Amount: P1M
Insurer: Various Philippine and American insurance
companies
Beneficiary: De la Rama Steamship Co. (Employer)
During the WW2, the Company was unable to pay the
premiums on the policies issued by its Philippine insurers
and these policies lapsed. Meanwhile, the policies issued by
its American insurers were kept effective and subsisting, the
New York office of the Company having continued paying its
premiums.
In 1944, during the Japanese occupation, Enrico Pirovano
died. Thereafter, the Board of Directors of De la Rama
Steamship Co. adopted 3 different resolutions:
First resolution:
The Board of Directors granted and set aside P400,000 out
of the proceeds expected to be collected on the insurance
policies. The P400,000 is for equal division among the 4
minor children of the deceased, convertible into shares of
stock.
Shortly thereafter, the Company received the total sum of
P643,000 as proceeds of the said life insurance policies
obtained from American insurers.
Second Resolution:
The Board of Directors of the Company modified the earlier
resolution. It renounced all its interest to the entire amount
of P643,000 in favor of the minor children of the deceased,
subject to the ff conditions:
1. The amount should be retained by the Company in
the nature of a loan to it, drawing interest at 5% per
annum
2. The amount is payable to the Pirovano children after
the Company shall have first settled its remaining
bonded indebtedness of P5M.

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CASE DIGESTS

This resolution was carried out in a Memorandum

Agreement executed by the Company and Mrs. Estefania
Pirovano (surviving spouse of deceased, mother and
guardian of the Pirovano children).
Third Resolution:
The Board of Directors of the Company added another
condition:
3. The 5% annual interest accruing on the principal
shall be paid to the heirs, whenever the Company is
in a position to meet said obligation.
Thereafter, Mrs. Estefania R. Pirovano, in behalf of her
children, executed a public document formally accepting the
donation.
Fourth Resolution:
The Directors imposed more conditions:
4. donation shall not be effected until the Company
shall
have
liquidated
its
present
bonded
indebtedness in the amount of P3.2M with the
National Development Company, or fully redeemed
the stock issued to the National Development
Company
5. Any and all taxes connected with the above
transaction shall be chargeable and deducted from
the proceeds of the life insurance policies of
Pirovano.
Fifth Resolution:
The majority stockholders voted to revoke and disapprove
the donation in favor of the Pirovano children.
The Company then refused to pay the balance of the
donation amounting to P565k despite demands therefor.
Hence, the minor heirs represented by mother brought an
action for the recovery of said amount against De la Rama
Steamship Co. The CFI ruled in favor of the Pirovano children
and held the corporation liable for:

The donation (P584k), plus 5% annual interest,

payable after the corporation shall have fully
redeemed the preferred shares issued to the National
Development Company
Damages: 10% of (P584k) as attorney's fees
Costs of the action

Thereafter, the CIR assessed a total of P243k for donees' gift

surcharges, interests and other penalties against the
Pirovano children. A donor's gift tax in the total amount of
P34k was also assessed against De la Rama Steamship Co.,
which the latter paid.
The Pirovano heirs then contested the CIRs 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.
COMMISSIONER RULING: In favor of CIR
CTA RULING:
Donor's gift tax (P34k) was erroneously assessed and
collected
Donees' gift taxes (P243k) were correctly assessed
o 5% surcharge, not 25% is proper
o 1% monthly interest on the deficiency donees'
gift taxes is due
ISSUES: Was the imposition of the donees gift tax
proper
RULING: YES, The imposition of donees tax is proper
RATIO:
CTA: The donation in favor of the Pirovano children was
motivated solely and exclusively by the corporations sense
of gratitude, an act of pure liberality, and not to pay
additional compensation for services inadequately paid for.

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CASE DIGESTS

Argument of Pirovano heirs: This is erroneous since a

previous SC decision had already declared that the transfer
to the Pirovano children was a remuneratory donation. The
donation was made for a full and adequate compensation
for the services rendered by the late Enrico Pirovano to the
De la Rama Steamship Co. Hence, the donation does not
constitute a taxable gift under Section 108, NIRC.
SC:
There is nothing on record to show that when the late Enrico
Pirovano was not fully compensated for services rendered to
the De la Rama Steamship Co. The fact that Pirovanos
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 Second
Resolution, that "out of gratitude" the company decided to
renounce its interest in the proceeds of the life insurance
policies. The true consideration for the donation was,
therefore, the company's gratitude for his services,
and not the services themselves.
Whether the donation was remuneratory or simple, the
conveyance remained a taxable gift under the NIRC.
Argument of Pirovano heirs: The entire property donated
should not be considered as a gift for taxation purposes;
only that portion, which is in excess of the value of the
services rendered by the deceased should be considered as
a taxable gift. Under Section 111 of the Tax Code:
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, ... .
SC: The term consideration used in this section refers to
"anything that is bargained for by the promisor and given by
the promisee in exchange for the promise. In this case,

Pirovano's successful activities as officer of the De la Rama

Steamship Co. cannot be deemed as consideration for the
donation, 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.
Moreover, the actual consideration for the cession of the
policies was the Company's gratitude to Pirovano. Hence,
under section 111 of the Code there is no consideration
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 the Tax Code.
According to Chief Justice Griffith of the Mississippi SC:
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 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. This, in
fact, is contemplated by Section 111 of the Tax Code which
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. .
Argument of Pirovano heirs:
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.
The assessment and demand for donees' gift taxes was
prematurely made and of no legal effect.

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CASE DIGESTS

SC: It is well to note, and it is not disputed, that petitionersdonees have failed to file any gift tax return and that they
also failed to pay the amount of the assessment made
against them.
Section 306, NIRC 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.
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.
Hence, the imposition of 1% interest monthly and 5%
surcharge is justified and legal.
DISPOSITIVE:
CTA Ruling is affirmed.
Donor's gift tax (P34k) was erroneously assessed and
collected
Donees' gift taxes (P243k) were correctly assessed
o 5% surcharge is proper
o 1% monthly interest on the deficiency donees'
gift taxes is due