G.R. No.

188497 February 19, 2014

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
PILIPINAS SHELL PETROLEUM CORPORATION, Respondent.

RESOLUTION

VILLARAMA, JR., J.:

For resolution are the Motion for Reconsideration dated May 22, 2012 and Supplemental Motion for
Reconsideration dated December 12, 2012 filed by Pilipinas Shell Petroleum Corporation (respondent).
As directed, the Solicitor General on behalf of petitioner Commissioner of Internal Revenue filed their
Comment, to which respondent filed its Reply.

In our Decision promulgated on April 25, 2012, we ruled that the Court of Tax Appeals (CTA) erred in
granting respondent's claim for tax refund because the latter failed to establish a tax exemption in its
favor under Section 135(a) of the National Internal Revenue Code of 1997 (NIRC).

WHEREFORE, the petition for review on certiorari is GRANTED. The Decision dated March 25, 2009
and Resolution dated June 24, 2009 of the Court of Tax Appeals En Banc in CTA EB No. 415 are
hereby REVERSED and SET ASIDE. The claims for tax refund or credit filed by respondent Pilipinas
Shell Petroleum Corporation are DENIED for lack of basis.

No pronouncement as to costs.

SO ORDERED.1

Respondent argues that a plain reading of Section 135 of the NIRC reveals that it is the petroleum
products sold to international carriers which are exempt from excise tax for which reason no excise
taxes are deemed to have been due in the first place. It points out that excise tax being an indirect tax,
Section 135 in relation to Section 148 should be interpreted as referring to a tax exemption from the
point of production and removal from the place of production considering that it is only at that point that
an excise tax is imposed. The situation is unlike the value-added tax (VAT) which is imposed at every
point of turnover – from production to wholesale, to retail and to end-consumer. Respondent thus
concludes that exemption could only refer to the imposition of the tax on the statutory seller, in this
case the respondent. This is because when a tax paid by the statutory seller is passed on to the buyer
it is no longer in the nature of a tax but an added cost to the purchase price of the product sold.

Respondent also contends that our ruling that Section 135 only prohibits local petroleum
manufacturers like respondent from shifting the burden of excise tax to international carriers has
adverse economic impact as it severely curtails the domestic oil industry. Requiring local petroleum
manufacturers to absorb the tax burden in the sale of its products to international carriers is contrary to
the State’s policy of "protecting gasoline dealers and distributors from unfair and onerous trade
conditions," and places them at a competitive disadvantage since foreign oil producers, particularly
those whose governments with which we have entered into bilateral service agreements, are not
subject to excise tax for the same transaction. Respondent fears this could lead to cessation of supply
of petroleum products to international carriers, retrenchment of employees of domestic
manufacturers/producers to prevent further losses, or worse, shutting down of their production of jet A-
1 fuel and aviation gas due to unprofitability of sustaining operations. Under this scenario, participation
of Filipino capital, management and labor in the domestic oil industry is effectively diminished.

Lastly, respondent asserts that the imposition by the Philippine Government of excise tax on petroleum
products sold to international carriers is in violation of the Chicago Convention on International Aviation
("Chicago Convention") to which it is a signatory, as well as other international agreements (the
Republic of the Philippines’ air transport agreements with the United States of America, Netherlands,
Belgium and Japan).

In his Comment, the Solicitor General underscores the statutory basis of this Court’s ruling that the
exemption under Section 135 does not attach to the products. Citing Exxonmobil Petroleum &
Chemical Holdings, Inc.-Philippine Branch v. Commissioner of Internal Revenue,2 which held that the
excise tax, when passed on to the purchaser, becomes part of the purchase price, the Solicitor
General claims this refutes respondent’s theory that the exemption attaches to the petroleum product
itself and not to the purchaser for it would have been erroneous for the seller to pay the excise tax and
inequitable to pass it on to the purchaser if the excise tax exemption attaches to the product.

As to respondent’s reliance in the cases of Silkair (Singapore) Pte. Ltd. v. Commissioner of Internal
Revenue3 and Exxonmobil Petroleum & Chemical Holdings, Inc.-Philippine Branch v. Commissioner of
Internal Revenue,4 the Solicitor General points out that there was no pronouncement in these cases
that petroleum manufacturers selling petroleum products to international carriers are exempt from
paying excise taxes. In fact, Exxonmobil even cited the case of Philippine Acetylene Co, Inc. v.
Commissioner of Internal Revenue.5 Further, the ruling in Maceda v. Macaraig, Jr.6 which confirms that
Section 135 does not intend to exempt manufacturers or producers of petroleum products from the
payment of excise tax.

The Court will now address the principal arguments proffered by respondent: (1) Section 135 intended
the tax exemption to apply to petroleum products at the point of production; (2) Philippine Acetylene
Co., Inc. v. Commissioner of Internal Revenue and Maceda v. Macaraig, Jr. are inapplicable in the light
of previous rulings of the Bureau of Internal Revenue (BIR) and the CTA that the excise tax on
petroleum products sold to international carriers for use or consumption outside the Philippines
attaches to the article when sold to said international carriers, as it is the article which is exempt from
the tax, not the international carrier; and (3) the Decision of this Court will not only have adverse impact
on the domestic oil industry but is also in violation of international agreements on aviation.

Under Section 129 of the NIRC, excise taxes are those applied to goods manufactured or produced in
the Philippines for domestic sale or consumption or for any other disposition and to things imported.
Excise taxes as used in our Tax Code fall under two types – (1) specific tax which is based on weight
or volume capacity and other physical unit of measurement, and (2) ad valorem tax which is based on
selling price or other specified value of the goods. Aviation fuel is subject to specific tax under Section
148 (g) which attaches to said product "as soon as they are in existence as such."

On this point, the clarification made by our esteemed colleague, Associate Justice Lucas P. Bersamin
regarding the traditional meaning of excise tax adopted in our Decision, is well-taken.

The transformation undergone by the term "excise tax" from its traditional concept up to its current
definition in our Tax Code was explained in the case of Petron Corporation v. Tiangco,7 as follows:
Admittedly, the proffered definition of an excise tax as "a tax upon the performance, carrying on, or
exercise of some right, privilege, activity, calling or occupation" derives from the compendium
American Jurisprudence, popularly referred to as Am Jur and has been cited in previous decisions of
this Court, including those cited by Petron itself. Such a definition would not have been inconsistent
with previous incarnations of our Tax Code, such as the NIRC of 1939, as amended, or the NIRC of
1977 because in those laws the term "excise tax" was not used at all. In contrast, the nomenclature
used in those prior laws in referring to taxes imposed on specific articles was "specific tax." Yet
beginning with the National Internal Revenue Code of 1986, as amended, the term "excise taxes" was
used and defined as applicable "to goods manufactured or produced in the Philippines… and to things
imported." This definition was carried over into the present NIRC of 1997. Further, these two latest
codes categorize two different kinds of excise taxes: "specific tax" which is imposed and based on
weight or volume capacity or any other physical unit of measurement; and "ad valorem tax" which is
imposed and based on the selling price or other specified value of the goods. In other words, the
meaning of "excise tax" has undergone a transformation, morphing from the Am Jur definition to its
current signification which is a tax on certain specified goods or articles.

The change in perspective brought forth by the use of the term "excise tax" in a different connotation
was not lost on the departed author Jose Nolledo as he accorded divergent treatments in his 1973 and
1994 commentaries on our tax laws. Writing in 1973, and essentially alluding to the Am Jur definition of
"excise tax," Nolledo observed:

Are specific taxes, taxes on property or excise taxes –

In the case of Meralco v. Trinidad ([G.R.] 16738, 1925) it was held that specific taxes are property
taxes, a ruling which seems to be erroneous. Specific taxes are truly excise taxes for the fact that the
value of the property taxed is taken into account will not change the nature of the tax. It is correct to
say that specific taxes are taxes on the privilege to import, manufacture and remove from storage
certain articles specified by law.

In contrast, after the tax code was amended to classify specific taxes as a subset of excise taxes,
Nolledo, in his 1994 commentaries, wrote:

1. Excise taxes, as used in the Tax Code, refers to taxes applicable to certain specified goods
or articles manufactured or produced in the Philippines for domestic sale or consumption or for
any other disposition and to things imported into the Philippines. They are either specific or ad
valorem.

2. Nature of excise taxes. – They are imposed directly on certain specified goods. (infra) They
are, therefore, taxes on property. (see Medina vs. City of Baguio, 91 Phil. 854.)

A tax is not excise where it does not subject directly the produce or goods to tax but indirectly as an
incident to, or in connection with, the business to be taxed.

In their 2004 commentaries, De Leon and De Leon restate the Am Jur definition of excise tax, and
observe that the term is "synonymous with ‘privilege tax’ and [both terms] are often used
interchangeably." At the same time, they offer a caveat that "[e]xcise tax, as [defined by Am Jur], is not
to be confused with excise tax imposed [by the NIRC] on certain specified articles manufactured or
produced in, or imported into, the Philippines, ‘for domestic sale or consumption or for any other
disposition.’"

It is evident that Am Jur aside, the current definition of an excise tax is that of a tax levied on a specific
article, rather than one "upon the performance, carrying on, or the exercise of an activity."

This current definition was already in place when the Code was enacted in 1991, and we can only
presume that it was what the Congress had intended as it specified that local government units could
not impose "excise taxes on articles enumerated under the [NIRC]." This prohibition must pertain to the
same kind of excise taxes as imposed by the NIRC, and not those previously defined "excise taxes"
which were not integrated or denominated as such in our present tax law.8 (Emphasis supplied.)

That excise tax as presently understood is a tax on property has no bearing at all on the issue of
respondent’s entitlement to refund. Nor does the nature of excise tax as an indirect tax supports
respondent’s postulation that the tax exemption provided in Sec. 135 attaches to the petroleum
products themselves and consequently the domestic petroleum manufacturer is not liable for the
payment of excise tax at the point of production. As already discussed in our Decision, to which Justice
Bersamin concurs, "the accrual and payment of the excise tax on the goods enumerated under Title VI
of the NIRC prior to their removal at the place of production are absolute and admit of no exception."
This also underscores the fact that the exemption from payment of excise tax is conferred on
international carriers who purchased the petroleum products of respondent.

On the basis of Philippine Acetylene, we held that a tax exemption being enjoyed by the buyer cannot
be the basis of a claim for tax exemption by the manufacturer or seller of the goods for any tax due to it
as the manufacturer or seller. The excise tax imposed on petroleum products under Section 148 is the
direct liability of the manufacturer who cannot thus invoke the excise tax exemption granted to its
buyers who are international carriers. And following our pronouncement in Maceda v. Macarig, Jr. we
further ruled that Section 135(a) should be construed as prohibiting the shifting of the burden of the
excise tax to the international carriers who buy petroleum products from the local manufacturers. Said
international carriers are thus allowed to purchase the petroleum products without the excise tax
component which otherwise would have been added to the cost or price fixed by the local
manufacturers or distributors/sellers.

Excise tax on aviation fuel used for international flights is practically nil as most countries are
signatories to the 1944 Chicago Convention on International Aviation (Chicago Convention). Article
249 of the Convention has been interpreted to prohibit taxation of aircraft fuel consumed for
international transport. Taxation of international air travel is presently at such low level that there has
been an intensified debate on whether these should be increased to "finance development rather than
simply to augment national tax revenue" considering the "cross-border environmental damage" caused
by aircraft emissions that contribute to global warming, not to mention noise pollution and congestion
at airports).10 Mutual exemptions given under bilateral air service agreements are seen as main legal
obstacles to the imposition of indirect taxes on aviation fuel. In response to present realities, the
International Civil Aviation Organization (ICAO) has adopted policies on charges and emission-related
taxes and charges.11

Section 135(a) of the NIRC and earlier amendments to the Tax Code represent our Governments’
compliance with the Chicago Convention, its subsequent resolutions/annexes, and the air transport
agreements entered into by the Philippine Government with various countries. The rationale for
exemption of fuel from national and local taxes was expressed by ICAO as follows:

...The Council in 1951 adopted a Resolution and Recommendation on the taxation of fuel, a Resolution
on the taxation of income and of aircraft, and a Resolution on taxes related to the sale or use of
international air transport (cf. Doc 7145) which were further amended and amplified by the policy
statements in Doc 8632 published in 1966. The Resolutions and Recommendation concerned were
designed to recognize the uniqueness of civil aviation and the need to accord tax exempt status to
certain aspects of the operations of international air transport and were adopted because multiple
taxation on the aircraft, fuel, technical supplies and the income of international air transport, as well as
taxes on its sale and use, were considered as major obstacles to the further development of
international air transport. Non-observance of the principle of reciprocal exemption envisaged in these
policies was also seen as risking retaliatory action with adverse repercussions on international air
transport which plays a major role in the development and expansion of international trade and travel.12

In the 6th Meeting of the Worldwide Air Transport Conference (ATCONF) held on March 18-22, 2013
at Montreal, among matters agreed upon was that "the proliferation of various taxes and duties on air
transport could have negative impact on the sustainable development of air transport and on
consumers." Confirming that ICAO’s policies on taxation remain valid, the Conference recommended
that "ICAO promote more vigorously its policies and with industry stakeholders to develop analysis and
guidance to States on the impact of taxes and other levies on air transport."13 Even as said conference
was being held, on March 7, 2013, President Benigno Aquino III has signed into law Republic Act
(R.A.) No. 1037814 granting tax incentives to foreign carriers which include exemption from the 12%
value-added tax (VAT) and 2.5% gross Philippine billings tax (GPBT). GPBT is a form of income tax
applied to international airlines or shipping companies. The law, based on reciprocal grant of similar tax
exemptions to Philippine carriers, is expected to increase foreign tourist arrivals in the country.

Indeed, the avowed purpose of a tax exemption is always "some public benefit or interest, which the
law-making body considers sufficient to offset the monetary loss entailed in the grant of the
exemption."15 The exemption from excise tax of aviation fuel purchased by international carriers for
consumption outside the Philippines fulfills a treaty obligation pursuant to which our Government
supports the promotion and expansion of international travel through avoidance of multiple taxation
and ensuring the viability and safety of international air travel. In recent years, developing economies
such as ours focused more serious attention to significant gains for business and tourism sectors as
well. Even without such recent incidental benefit, States had long accepted the need for international
cooperation in maintaining a capital intensive, labor intensive and fuel intensive airline industry, and
recognized the major role of international air transport in the development of international trade and
travel.

Under the basic international law principle of pacta sunt servanda, we have the duty to fulfill our treaty
obligations in good faith. This entails harmonization of national legislation with treaty provisions. In this
case, Sec. 135(a) of the NIRC embodies our compliance with our undertakings under the Chicago
Convention and various bilateral air service agreements not to impose excise tax on aviation fuel
purchased by international carriers from domestic manufacturers or suppliers. In our Decision in this
case, we interpreted Section 135 (a) as prohibiting domestic manufacturer or producer to pass on to
international carriers the excise tax it had paid on petroleum products upon their removal from the
place of production, pursuant to Article 148 and pertinent BIR regulations. Ruling on respondent’s
claim for tax refund of such paid excise taxes on petroleum products sold to tax-exempt international
carriers, we found no basis in the Tax Code and jurisprudence to grant the refund of an "erroneously or
illegally paid" tax.

Justice Bersamin argues that "(T)he shifting of the tax burden by manufacturers-sellers is a business
prerogative resulting from the collective impact of market forces," and that it is "erroneous to construe
Section 135(a) only as a prohibition against the shifting by the manufacturers-sellers of petroleum
products of the tax burden to international carriers, for such construction will deprive the
manufacturers-sellers of their business prerogative to determine the prices at which they can sell their
products."

We maintain that Section 135 (a), in fulfillment of international agreement and practice to exempt
aviation fuel from excise tax and other impositions, prohibits the passing of the excise tax to
international carriers who buys petroleum products from local manufacturers/sellers such as
respondent. However, we agree that there is a need to reexamine the effect of denying the domestic
manufacturers/sellers’ claim for refund of the excise taxes they already paid on petroleum products
sold to international carriers, and its serious implications on our Government’s commitment to the goals
and objectives of the Chicago Convention.

The Chicago Convention, which established the legal framework for international civil aviation, did not
deal comprehensively with tax matters. Article 24 (a) of the Convention simply provides that fuel and
lubricating oils on board an aircraft of a Contracting State, on arrival in the territory of another
Contracting State and retained on board on leaving the territory of that State, shall be exempt from
customs duty, inspection fees or similar national or local duties and charges. Subsequently, the
exemption of airlines from national taxes and customs duties on spare parts and fuel has become a
standard element of bilateral air service agreements (ASAs) between individual countries.

The importance of exemption from aviation fuel tax was underscored in the following observation made
by a British author16 in a paper assessing the debate on using tax to control aviation emissions and the
obstacles to introducing excise duty on aviation fuel, thus:

Without any international agreement on taxing fuel, it is highly likely that moves to impose duty on
international flights, either at a domestic or European level, would encourage 'tankering': carriers filling
their aircraft as full as possible whenever they landed outside the EU to avoid paying
tax.1âwphi1 Clearly this would be entirely counterproductive. Aircraft would be travelling further than
necessary to fill up in low-tax jurisdictions; in addition they would be burning up more fuel when
carrying the extra weight of a full fuel tank.

With the prospect of declining sales of aviation jet fuel sales to international carriers on account of
major domestic oil companies' unwillingness to shoulder the burden of excise tax, or of petroleum
products being sold to said carriers by local manufacturers or sellers at still high prices , the practice of
"tankering" would not be discouraged. This scenario does not augur well for the Philippines' growing
economy and the booming tourism industry. Worse, our Government would be risking retaliatory action
under several bilateral agreements with various countries. Evidently, construction of the tax exemption
provision in question should give primary consideration to its broad implications on our commitment
under international agreements.

In view of the foregoing reasons, we find merit in respondent's motion for reconsideration. We
therefore hold that respondent, as the statutory taxpayer who is directly liable to pay the excise tax on
its petroleum products, is entitled to a refund or credit of the excise taxes it paid for petroleum products
sold to international carriers, the latter having been granted exemption from the payment of said excise
tax under Sec. 135 (a) of the NIRC.

WHEREFORE, the Court hereby resolves to:

(1) GRANT the original and supplemental motions for reconsideration filed by respondent
Pilipinas Shell Petroleum Corporation; and

(2) AFFIRM the Decision dated March 25, 2009 and Resolution dated June 24, 2009 of the
Court of Tax Appeals En Banc in CT A EB No. 415; and DIRECT petitioner Commissioner of
Internal Revenue to refund or to issue a tax credit certificate to Pilipinas Shell Petroleum
Corporation in the amount of J195,014,283.00 representing the excise taxes it paid on
petroleum products sold to international carriers from October 2001 to June 2002.

SO ORDERED.

MARTIN S. VILLARAMA, JR.

Associate Justice

WE CONCUR:

MARIA LOURDES P. A. SERENO

Chief Justice
Chairperson

Please see Separate Opinion

TERESITA J. LEONARDO-DE CASTRO
LUCAS P. BERSAMIN
Associate Justice
Associate Justice

BIENVENIDO L. REYES
Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the 1987 Constitution, I certify that the conclusions in the above
Resolution had been reached in consultation before the case was assigned to the writer of the opinion
of the Court's Division.

MARIA LOURDES P. A. SERENO

Chief Justice

Footnotes
1Commissioner of Internal Revenue v. Pilipinas Shell Petroleum Corporation, G.R. No. 188497,
April 25, 2012, 671 SCRA 241, 264.
2 G.R. No. 180909, January 19, 2011, 640 SCRA 203.
3 G.R. No. 166482, January 25, 2012, 664 SCRA 33.
4 Supra note 2.
5 No. L-19707, August 17, 1967, 20 SCRA 1056.
6 G.R. No. 88291, June 8, 1993, 223 SCRA 217.
7 G.R. No. 158881, April 16, 2008, 551 SCRA 484.
8 Id. at 492-493.
9 Art. 24. Customs Duty

(a) Aircraft on a flight to, from, or across the territory of another contracting State shall be
admitted temporarily free of duty, subject to the customs regulations of the State. Fuel,
lubricating oils, spare parts, regular equipment and aircraft stores on board an aircraft of
a contracting State, on arrival in the territory of another contracting State and retained on
board on leaving the territory of that State shall be exempt from customs duty, inspection
fees or similar national or local duties and charges. This exemption shall not apply to any
quantities or articles unloaded, except in accordance with the customs regulations of the
State, which may require that they shall be kept under customs supervision.

xxxx
10 See "Indirect Taxes on International Aviation" by Michael Keen and Jon Strand, IMF Working
Paper published in May 2006, sourced from Internet -
http://www.imf.org/external/pubs/ft/wp/2006/wp06124.pdf
11Set out in the Statements by the Council to Contracting States for Airports and Air Navigation
Services (Doc 9082) and Council Resolution on environmental charges adopted in December
1996.
12ICAO’s Policies on Taxation in the Field of International Air Transport (Document 8632-
C/968), Introduction, Second Edition, January 1994. Sourced from Internet -

http://www.icao.int/publications/Documents/8632_2ed_en.pdf
13 Outcome of the Sixth Worldwide Air Transport Conference, Item 2.6, accessed at -

http://www.icao.int/Meetings/a38/Documents/WP/wp056_rev1_en.pdf
14AN ACT RECOGNIZING THE PRINCIPLE OF RECIPROCITY AS BASIS FOR THE GRANT
OF INCOME TAX EXEMPTIONS TO INTERNATIONAL CARRIERS AND RATIONALIZING
OTHER TAXES IMPOSED THEREON BY AMENDING SECTIONS 28(A)(3)(a), 109, 118 AND
236 OF THE NATIONAL REVENUE CODE (NIRC), AS AMENDED, AND FOR OTHER
PURPOSES (Approved on
 15 Commissioner of Internal Revenue, et al. v. Botelho Shipping Corp., et al., 126 Phil. 846, 851.

Antony Seely, Taxing Aviation Fuel (Standard Note SN00523, last updated 02 October 2012),
16

House of Commons Library, accessed at ww,parliament.uk/briefing-paper/SN00523.pdf

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

THE COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
DOUGLAS FISHER AND BETTINA FISHER, and the COURT OF TAX APPEALS, respondents.

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

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

DOUGLAS FISHER AND BETTINA FISHER, petitioner,

vs.
THE COLLECTOR OF INTERNAL REVENUE, and the COURT OF TAX APPEALS, respondents.

BARRERA, J.:

This case relates to the determination and settlement of the hereditary estate left by 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,
described and preliminary assessed as follows:

Gross Estate
Real Property — 2 parcels of land in
Baguio, covered by T.C.T. Nos. 378
and 379 P43,500.00
Personal Property
(1) 177 shares of stock of Canacao
Estate at P10.00 each 1,770.00
(2) 210,000 shares of stock of
Mindanao Mother Lode Mines, Inc. at
P0.38 per share 79,800.00
(3) Cash credit with Canacao Estate
Inc. 4,870.88
(4) Cash, with the Chartered Bank of
India, Australia & China 851.97
Total Gross Assets P130,792.85
On May 22, 1951, ancillary administration proceedings were instituted in the Court 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 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 addition,
the ancillary administrator made claim for the following deductions:

Funeral expenses ($1,04326) P2,086.52

Judicial Expenses:
(a) Administrator's Fee P1,204.34
(b) Attorney's Fee 6.000.00
(c) Judicial and Administration
expenses as of August 9, 1952 1,400.05
8,604.39
Real Estate Tax for 1951 on
Baguio real properties (O.R. No.
B-1 686836) 652.50
Claims against the estate:
($5,000.00) P10,000.00 P10,000.00
Plus: 4% int. p.a. from Feb. 2 to
22, 1951 22.47 10,022.47
Sub-Total P21,365.88

In the meantime, on December 1, 1952, Beatrice Mauricia Stevenson assigned all her rights and
interests in the estate to the spouses, Douglas and Bettina Fisher, respondents herein.
On September 7, 1953, the ancillary administrator filed a second amended estate and inheritance tax
return (Exh. "M-N"). This return declared the same assets of the estate stated in the amended return of
September 22, 1952, except that it contained new claims for additional exemption and deduction to wit:
(1) deduction in the amount of P4,000.00 from the gross estate of the decedent as provided for in
Section 861 (4) of the U.S. Federal Internal Revenue Code which the ancillary administrator averred
was allowable by way of the reciprocity granted by Section 122 of the National Internal Revenue Code,
as then held by the Board of Tax Appeals in case No. 71 entitled "Housman vs. Collector," August 14,
1952; and (2) exemption from the imposition of estate and inheritance taxes on the 210,000 shares of
stock in the Mindanao Mother Lode Mines, Inc. also pursuant to the reciprocity proviso of Section 122
of the National Internal Revenue Code. In this last return, the estate claimed that it was liable only for
the amount of P525.34 for estate tax and P238.06 for inheritance tax and that, as a consequence, it
had overpaid the government. The refund of the amount of P15,259.83, allegedly overpaid, was
accordingly requested by the estate. The Collector denied the claim. For this reason, action was
commenced in the Court of First Instance of Manila by respondents, as assignees of Beatrice Mauricia
Stevenson, for the recovery of said amount. Pursuant to Republic Act No. 1125, the case was
forwarded to the Court of Tax Appeals which court, after hearing, rendered decision the dispositive
portion of which reads as follows:

In fine, we are of the opinion and so hold that: (a) the one-half (½) share of the surviving spouse
in the conjugal partnership property as diminished by the obligations properly chargeable to
such property should be deducted from the net estate of the deceased Walter G. Stevenson,
pursuant to Section 89-C of the National Internal Revenue Code; (b) the intangible personal
property belonging to the estate of said Stevenson is exempt from inheritance tax, pursuant to
the provision of section 122 of the National Internal Revenue Code in relation to the California
Inheritance Tax Law but decedent's estate is not entitled to an exemption of P4,000.00 in the
computation of the estate tax; (c) for purposes of estate and inheritance taxation the Baguio real
estate of the spouses should be valued at P52,200.00, and 210,000 shares of stock in the
Mindanao Mother Lode Mines, Inc. should be appraised at P0.38 per share; and (d) the estate
shall be entitled to a deduction of P2,000.00 for funeral expenses and judicial expenses of
P8,604.39.

From this decision, both parties appealed.

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

(1) Whether or not, in determining the taxable net estate of the decedent, one-half (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 real estate properties of the decedent located in Baguio City and the 210,000
shares of stock in the Mindanao Mother Lode Mines, Inc., were correctly appraised by the lower court;

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

(6) Whether or not the estate is entitled to the payment of interest on the amount it claims to have
overpaid the government and to be refundable to it.

In deciding the first issue, the lower court applied a well-known doctrine in our civil law that in the
absence of any ante-nuptial agreement, the contracting parties are presumed to have adopted the
system of conjugal partnership as to the properties acquired during their marriage. The application of
this doctrine to the instant case is being disputed, however, by petitioner Collector of Internal Revenue,
who contends that pursuant to Article 124 of the New Civil Code, the property relation of the spouses
Stevensons ought not to be determined by the Philippine law, but by the national law of the decedent
husband, in this case, the law of England. It is alleged by petitioner that English laws do not recognize
legal partnership between spouses, and that what obtains in that jurisdiction is another regime of
property relation, wherein all properties acquired during the marriage pertain and belong Exclusively to
the husband. In further support of his stand, petitioner cites Article 16 of the New Civil Code (Art. 10 of
the old) to the effect that in testate and intestate proceedings, the amount of successional rights,
among others, is to be determined by the national law of the decedent.

In this connection, let it be noted that since the mariage of the Stevensons in the Philippines took place
in 1909, the applicable law is Article 1325 of the old Civil Code and not Article 124 of the New Civil
Code which became effective only in 1950. It is true that both articles adhere to the so-called
nationality theory of determining the property relation 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 relation of the spouses. There is, however, a difference between the two
articles in that Article 1241 of the new Civil Code expressly provides that it shall be applicable
regardless of whether the marriage was celebrated in the Philippines or abroad while Article 13252 of
the old Civil Code is limited to marriages contracted in a foreign land.

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

La regla establecida en el art. 1.315, se refiere a las capitulaciones otorgadas en Espana y

entre espanoles. El 1.325, a las celebradas en el extranjero cuando alguno de los conyuges es
espanol. En cuanto a la regla procedente cuando dos extranjeros se casan en Espana, o dos
espanoles en el extranjero hay que atender en el primer caso a la legislacion de pais a que
aquellos pertenezean, y en el segundo, a las reglas generales consignadas en los articulos 9 y
10 de nuestro Codigo. (Emphasis supplied.)

If we adopt the view of Manresa, the law determinative of the property relation of the Stevensons,
married in 1909, would be the English law even if the marriage was celebrated in the Philippines, both
of them being foreigners. But, as correctly observed by the Tax Court, 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 presumption," in
presuming that the law of England on this matter is the same as our law.4

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.

On the second issue, petitioner disputes the action of the Tax Court in the exempting the respondents
from paying inheritance tax on the 210,000 shares of stock in the Mindanao Mother Lode Mines, Inc. in
virtue of the reciprocity proviso of Section 122 of the National Internal Revenue Code, in relation to
Section 13851 of the California Revenue and Taxation Code, on the ground that: (1) the said proviso of
the California Revenue and Taxation Code has not been duly proven by the respondents; (2) the
reciprocity exemptions granted by section 122 of the National Internal Revenue Code can only be
availed of by residents of foreign countries and not of residents of a state in the United States; and (3)
there is no "total" reciprocity between the Philippines and the state of California in that while the former
exempts payment of both estate and inheritance taxes on intangible personal properties, the latter only
exempts the payment of inheritance tax..

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

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

Section 41, Rule 123 of our Rules of Court prescribes the manner of proving foreign laws before our
tribunals. However, although we believe it desirable that these laws be proved in accordance with said
rule, we held in the case of Willamette Iron and Steel Works v. Muzzal, 61 Phil. 471, that "a reading of
sections 300 and 301 of our Code of Civil Procedure (now section 41, Rule 123) will convince one that
these sections do not exclude the presentation of other competent evidence to prove the existence of a
foreign law." In that case, we considered the testimony of an attorney-at-law of San Francisco,
California who quoted verbatim a section of California Civil Code and who stated that the same was in
force at the time the obligations were contracted, as sufficient evidence to establish the existence of
said law. In line with this view, we find no error, therefore, on the part of the Tax Court in considering
the pertinent California law as proved by respondents' witness.

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

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 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,7 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.

We are not unaware of our ruling in the case of Collector of Internal Revenue vs. Lara (G.R. Nos. L-
9456 & L-9481, prom. January 6, 1958, 54 O.G. 2881) exempting the estate of the deceased Hugo H.
Miller from payment of the inheritance tax imposed by the Collector of Internal Revenue. It will be
noted, however, that the issue of reciprocity between the pertinent provisions of our tax law and that of
the State of California was not there squarely raised, and the ruling therein cannot control the
determination of the case at bar. Be that as it may, we now declare that in view of the express
provisions of both the Philippine and California laws that the exemption would apply only if the law of
the other grants an exemption from legacy, succession, or death taxes of every character, there could
not be partial reciprocity. It would have to be total or none at all.

With respect to the question of deduction or reduction in the amount of P4,000.00 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. .

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

"The two parcels of land containing 36,264 square meters were valued by the administrator of
the estate in the Estate and Inheritance tax returns filed by him at P43,500.00 which is the
assessed value of said properties. On the other hand, defendant appraised the same at
P52,200.00. It is of common knowledge, and this Court can take judicial notice of it, that
assessments for real estate taxation purposes are very much lower than the true and fair
market value of the properties at a given time and place. In fact one year after decedent's death
or in 1952 the said properties were sold for a price of P72,000.00 and there is no showing that
special or extraordinary circumstances caused the sudden increase from the price of
P43,500.00, if we were to accept this value as a fair and reasonable one as of 1951. Even
more, the counsel for plaintiffs himself admitted in open court that he was willing to purchase
 the said properties at P2.00 per square meter. In the light of these facts we believe and
therefore hold that the valuation of P52,200.00 of the real estate in Baguio made by defendant
is fair, reasonable and justified in the premises." (Decision, p. 19).

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

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

It should be noted that the petitioner and the Tax Court valued each share of stock of P.38 on the basis
of the declaration made by the estate in its preliminary return. Patently, this should not have been the
case, in view of the fact that the ancillary administrator had reserved and availed of his legal right to
have the properties of the estate declared at their fair market value as of six months from the time the
decedent died..

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

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

1) Administrator's fee P1,204.34

2) Attorney's fee 6,000.00
3) Judicial and Administrative expenses 2,052.55
Total Deductions P8,604.39

An examination of the record discloses, however, that the foregoing items were considered deductible
by the Tax Court on the basis of their approval by the probate court to which said expenses, we may
presume, had also been presented for consideration. It is to be supposed that the probate court would
not have approved said items were they not supported by evidence presented by the estate. In
allowing the items in question, the Tax Court had before it the pertinent order of the probate court
which was submitted in evidence by respondents. (Exh. "AA-2", p. 100, record). As the Tax Court said,
it found no basis for departing from the findings of the probate court, as it must have been satisfied that
those expenses were actually incurred. Under the circumstances, we see no ground to reverse this
finding of fact which, under Republic Act of California National Association, which it would appear, that
while still living, Walter G. Stevenson obtained we are not inclined to pass upon the claim of
respondents in respect to the additional amount of P86.52 for funeral expenses which was
disapproved by the court a quo for lack of evidence.

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

1) Administrator's fee P1,204.34

2) Attorney's fee 6,000.00
3) Judicial and Administration expenses as of
August 9, 1952 2,052.55
Total P9,256.89

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

We come now to the other claim of respondents that pursuant to section 89(b) (1) in relation to section
89(a) (1) (E) and section 89(d), National Internal Revenue Code, the amount of P10,022.47 should
have been allowed the estate as a deduction, because it represented an indebtedness of the decedent
incurred during his lifetime. In support thereof, they offered in evidence a duly certified claim,
presented to the probate court in California by the Bank of California National Association, which it
would appear, that while still living, Walter G. Stevenson obtained a loan of $5,000.00 secured by
pledge on 140,000 of his shares of stock in the Mindanao Mother Lode Mines, Inc. (Exhs. "Q-Q4", pp.
53-59, record). The Tax Court disallowed this item on the ground that the local probate court had not
approved the same as a valid claim against the estate and because it constituted an indebtedness in
respect to intangible personal property which the Tax Court held to be exempt from inheritance tax.

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 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:

(d) 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.

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

In recapitulation, we hold and declare that:

(a) only the one-half (1/2) share of the decedent Stevenson in the conjugal partnership property
constitutes his hereditary estate subject to the estate and inheritance taxes;
 (b) the intangible personal property is not exempt from inheritance tax, there existing no
complete total reciprocity as required in section 122 of the National Internal Revenue Code, nor
is the decedent's estate entitled to an exemption of P4,000.00 in the computation of the estate
tax;

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

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

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

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

WHEREFORE, as modified in the manner heretofore indicated, the judgment of the lower court is
hereby affirmed in all other respects not inconsistent herewith. No costs. So ordered.

Paras, C.J., Bengzon, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Gutierrez David,
Paredes and Dizon, JJ., concur.

Footnotes
1 ART. 124. If the marriage is between a citizen of the Philippines and a foreigner, whether
celebrated in the Philippines or abroad, the following rules shall prevail: (1) If the husband is a
citizen of the Philippines while the wife is a foreigner, the provisions of this Code shall govern
their property relations; (2) If the husband is a foreigner and the wife is a citizen of the
Philippines, the laws of the husband's country shall be followed, without prejudice to the
provisions of this Code with regard to immovable property."
2 ART. 1325. Should the marriage be contracted in a foreign country, between a Spaniard and a
foreign woman or between a foreigner and a Spanish woman, and the contracting parties
should not make any statement or stipulation with respect to their property, it shall be
understood, when the husband is a Spaniard, that he marries under the system of the legal
conjugal partnership, and when the wife is a Spaniard, that she marries under the system of law
in force in the husband's country, all without prejudice to the provisions of this code with respect
to real property. .
3 IX Manresa, Comentarios al Codigo Civil Espanol, p. 209. .
 4Yam Ka Lim vs. Collector of Customs, 30 Phil. 46; Lim & Lim vs. Collector of Customs, 36
Phil. 472; International Harvester Co. vs. Hamburg-American Line, 42 Phil. 845; Beam vs.
Yatco, 46 O.G. No. 2, p. 530.).
5Lim vs. Collector of Customs, supra; International Harvester Co. vs. Hamburg-American
Line, supra; Phil. Manufacturing Co. vs. Union Ins. Society of Canton, 42 Phil. 378; Adong vs.
Cheong Seng Gee, Phil. 53.
6Sy Joc Leing vs. Sy Quia, 16 Phil. 138; Ching Huat vs. Co Heong, 77 Phil. 985; Adong vs.
Cheong supra.
7 See Sec. 860, Internal Revenue Code of 1939, 26 USCA 408.
8 In the matter of the testate estate of Basil Gordon Butler, G.R. No. L-3677, Nov. 29, 1951. .
9 Rule 78, Sees. 1, 2 and 3, Rules of Court. See also Hix vs. Fluemer, 54 Phil. 610. .
10 Rule 78, See. 4, lbid.
11Expense, losses, indebtedness, and taxes which may be deducted to determine the net
estate of a citizen or resident of the Philippines.

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.

DECISION

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 letter7dated 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
xxx
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 P66,973,985.4018

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

1. Letter dated October 13, 1988 from Arsenio P. Dizon "A"
addressed to the Commissioner of Internal Revenue
informing the latter of the special proceedings for the
settlement of the estate (p. 126, BIR records);
2. Petition for the probate of the will and issuance of "B" & "B-1"
letter of administration filed with the Regional Trial
Court (RTC) of Manila, docketed as Sp. Proc. No.
87-42980 (pp. 107-108, BIR records);
3. Pleading entitled "Compliance" filed with the probate "C"
Court submitting the final inventory of all the
properties of the deceased (p. 106, BIR records);
4. Attachment to Exh. "C" which is the detailed and "C-1" to "C-17"
complete listing of the properties of the deceased
(pp. 89-105, BIR rec.);
5. Claims against the estate filed by Equitable Banking "D" to "D-24"
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);
6. Claim filed by Banque de L' Indochine et de Suez "E" to "E-3"
with the probate Court in the amount of US
$4,828,905.90 as of January 31, 1988 (pp. 262-265,
BIR records);
7. Claim of the Manila Banking Corporation (MBC) "F" to "F-3"
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);
8. Demand letter of Manila Banking Corporation "G" & "G-1"
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);
9. Claim of State Investment House, Inc. filed with the "H" to "H-16"
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);
10. Letter dated March 14, 1990 of Arsenio P. Dizon "I"
addressed to Atty. Jesus M. Gonzales, (p. 184, BIR
records);
11. Letter dated April 17, 1990 from J.M. Gonzales "J"
addressed to the Regional Director of BIR in San
Pablo City (p. 183, BIR records);
12. Estate Tax Return filed by the estate of the late Jose "K" to "K-5"
P. Fernandez through its authorized representative,
Atty. Jesus M. Gonzales, for Arsenio P. Dizon, with
attachments (pp. 177-182, BIR records);
13. Certified true copy of the Letter of Administration "L"
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
14. Certification of Payment of estate taxes Nos. 2052 "M" to "M-5"
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.).

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

1. Estate Tax Return prepared by the BIR; p. 138
 2. Signatures of Ma. Anabella Abuloc and Alberto -do-
Enriquez, Jr. appearing at the lower Portion of Exh.
"1";
3. Memorandum for the Commissioner, dated July 19, pp. 143-144
1991, prepared by revenue examiners, Ma. Anabella
A. Abuloc, Alberto S. Enriquez and Raymund S.
Gallardo; Reviewed by Maximino V. Tagle
4. Signature of Alberto S. Enriquez appearing at the -do-
lower portion on p. 2 of Exh. "2";
5. Signature of Ma. Anabella A. Abuloc appearing at -do-
the lower portion on p. 2 of Exh. "2";
6. Signature of Raymund S. Gallardo appearing at the -do-
Lower portion on p. 2 of Exh. "2";
7. Signature of Maximino V. Tagle also appearing on p. -do-
2 of Exh. "2";
8. Summary of revenue Enforcement Officers Audit p. 139
Report, dated July 19, 1991;
9. Signature of Alberto Enriquez at the lower portion of -do-
Exh. "3";
10. Signature of Ma. Anabella A. Abuloc at the lower -do-
portion of Exh. "3";
11. Signature of Raymond S. Gallardo at the lower -do-
portion of Exh. "3";
12. Signature of Maximino V. Tagle at the lower portion -do-
of Exh. "3";
13. Demand letter (FAS-E-87-91-00), signed by the Asst. p. 169
Commissioner for Collection for the Commissioner of
Internal Revenue, demanding payment of the
amount of P66,973,985.40; and
14. 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 44,652,813.66
Deductions
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,38this 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...

xxxx

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.64Recognizing 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.

ANTONIO EDUARDO B. NACHURA

Associate Justice

WE CONCUR:

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson
MA. ALICIA AUSTRIA-MARTINEZ MINITA V. CHICO-NAZARIO
Associate Justice Associate Justice
RUBEN T. REYES
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Court’s Division.

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson, Third Division

CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson’s Attestation, I
certify that the conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Court’s Division.

REYNATO S. PUNO
Chief Justice

G.R. No. 155541 January 27, 2004

ESTATE OF THE LATE JULIANA DIEZ VDA. DE GABRIEL, petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

DECISION

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.
09107,4assailing 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.13Respondent 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. 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:

1. Deficiency income tax

1945 P135.83
1946 436.95
1947 1,206.91 P1,779.69
Add: 5% surcharge 88.98
1% monthly interest
from November 30,
1953 to April 15,
1957 720.77
 Compromise for
late filing 80.00
Compromise for
late payment 40.00

Total amount due P2,707.44

===========
Additional residence tax P14.50
2.
for 1945 ===========
3. Real Estate dealer's tax
for the fourth quarter of
1946 and the whole year P207.50
of 1947 ===========

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

P135.8
1945
3
1946 436.95
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.

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

DECISION
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 Code. This summary tax remedy is distinct and separate from the other tax remedies (such
as Judicial Civil actions and Criminal actions), and is not affected 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 Injunction.

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 0 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

(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
 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
...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"
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, (Chairman), Romero, Puno, and Mendoza, JJ., concur.

LEONEN, J.:
The standard of diligence required of banks is higher than the degree of diligence of a good father of a
family.

Respondents are children of Angel C. Santos who died on March 21, 1991.[1]

Sometime in May 1996, respondents discovered that their father maintained a premium savings
account with Philippine National Bank (PNB), Sta. Elena-Marikina City Branch.[2] As of July 14, 1996,
the deposit amounted to P1,759,082.63.[3] Later, respondents would discover that their father also had
a time deposit of P1,000,000.00 with PNB.[4]

Respondents went to PNB to withdraw their father's deposit.[5]

Lina B. Aguilar, the Branch Manager of PNB-Sta. Elena-Marikina City Branch, required them to submit
the following: "(1) original or certified true copy of the Death Certificate of Angel C. Santos; (2)
certificate of payment of, or exemption from, estate tax issued by the Bureau of Internal Revenue
(BIR); (3) Deed of Extrajudicial Settlement; (4) Publisher's Affidavit of publication of the Deed of
Extrajudicial Settlement; and (5) Surety bond effective for two (2) years and in an amount equal to the
balance of the deposit to be withdrawn."[6]

By April 26, 1998, respondents had already obtained the necessary documents.[7] They tried to
withdraw the deposit.[8] However, Aguilar informed them that the deposit had already "been released to
a certain Bernardito Manimbo (Manimbo) on April 1, 1997."[9] An amount of PI,882,002.05 was
released upon presentation of: (a) an affidavit of self-adjudication purportedly executed by one of the
respondents, Reyme L. Santos; (b) a certificate of time deposit dated December 14, 1989 amounting
to P1,000,000.00; and (c) the death certificate of Angel C. Santos, among others.[10] A special power of
attorney was purportedly executed by Reyme L. Santos in favor of Manimbo and a certain Angel P.
Santos for purposes of withdrawing and receiving the proceeds of the certificate of time deposit.[11]

On May 20, 1998, respondents filed before the Regional Trial Court of Marikina City a complaint for
sum of money and damages against PNB, Lina B. Aguilar, and a John Doe.[12] Respondents
questioned the release of the deposit amount to Manimbo who had no authority from them to withdraw
their father's deposit and who failed to present to PNB all the requirements for such
withdrawal.[13] Respondents prayed that they be paid: (a) the premium deposit amount; (b) the
certificate of time deposit amount; and (c) moral and exemplary damages, attorney's fees, and costs of
suit.[14]

PNB and Aguilar denied that Angel C. Santos had two separate accounts (premium deposit account
and time deposit account) with PNB.[15] They alleged that Angel C. Santos' deposit account was
originally a time deposit account that was subsequently converted into a premium savings
account.[16] They also alleged that Aguilar did not know about Angel C. Santos' death in 1991 because
she only assumed office in 1996.[17]Manimbo was able to submit an affidavit of self-adjudication and
the required surety bond.[18] He also submitted a certificate of payment of estate tax dated March 31,
1997.[19] All documents he submitted appeared to be regular.[20]

PNB and Aguilar filed a third-party complaint against Manimbo, Angel P. Santos, and Capital Insurance
and Surety Co., Inc.[21]

Angel P. Santos denied having anything to do with the special power of attorney and affidavit of self-
adjudication presented by Manimbo.[22] He also alleged that Manimbo presented the certificate of time
deposit without his knowledge and consent.[23]

Capital Insurance and Surety Co., Inc. alleged that its undertaking was to pay claims only when
persons who were unduly deprived of their lawful participation in the estate filed an action in court for
their claims.[24] It did not undertake to pay claims resulting from PNB's negligence.[25]

In the decision[26] dated February 22, 2011, the trial court held that PNB and Aguilar were jointly and
severally liable to pay respondents the amount of P1,882,002.05 with an interest rate of 6% starting
May 20, 1998.[27] PNB and Aguilar were also declared jointly and severally liable for moral and
exemplary damages, attorney's fees, and costs of suit.[28] Manimbo, Angel P. Santos, and Capital
Insurance and Surety Co., Inc. were held jointly and severally liable to pay PNB P1,877,438.83
pursuant to the heir's bond and P50,000.00 as attorney's fees and the costs of suit.[29] The dispositive
portion of the trial court's decision reads:

WHEREFORE, foregoing premises considered, judgment is hereby rendered as follows:

1. ordering the defendants PNB and LIN A B. AGUILAR jointly and severally liable to pay the
plaintiffs the amount of P1,882,002.05, representing the face value of PNB Manager's Check
No. AF-974686B as balance of the total deposits of decedent Angel C. Santos at the time of its
issue, with interest thereon at the rate of 6% starting on May 20, 1998, the date when the
 complaint was filed, until fully paid;

2. ordering both defendants jointly and severally liable to pay plaintiffs the amount of Php
100,000.00 as moral damages, another Php 100,000.00 as exemplary damages and Php
50,000.00 as attorney's fees and the costs of suit;

On the Third party complaint:

3. Ordering the third party defendants Bernardito P. Manimbo, Angel P. Santos and Capital
Insurance & Surety Co., Inc., jointly and severally liable to pay third party plaintiff PNB, the
amount of Php 1,877,438.83 pursuant to the Heir's Bond and the amount of Php 50,000.00 as
attorney's fees and the costs of suit.

SO ORDERED.[30]
The trial court found that Angel C. Santos had only one account with PNB.[31] The account was
originally a time deposit, which was converted into a premium savings account when it was not
renewed on maturity.[32] The trial court took judicial notice that in 1989, automatic rollover of time
deposit was not yet prevailing.[33]

On the liability of PNB and Aguilar, the trial court held that they were both negligent in releasing the
deposit to Manimbo.[34] The trial court noted PNB's failure to notify the depositor about the maturity of
the time deposit and the conversion of the time deposit into a premium savings account.[35] The trial
court also noted PNB's failure to cancel the certificate of time deposit despite conversion.[36] PNB and
Aguilar also failed to require the production of birth certificates to prove claimants' relationship to the
depositor.[37] Further, they relied on the affidavit of self-adjudication when several persons claiming to
be heirs had already approached them previously.[38]

Aguilar filed a motion for reconsideration[39] of the February 22, 2011 Regional Trial Court decision.
This was denied in the June 21, 2011 Regional Trial Court order.[40]

PNB and Aguilar appealed before the Court of Appeals.[41]

Aguilar contended that she was not negligent and should not have been made jointly and severally
liable with PNB.[42] She merely implemented PNB's Legal Department's directive to release the deposit
to Manimbo.[43]

PNB argued that it was not negligent.[44] The release of the deposit to Manimbo was pursuant to an
existing policy.[45] Moreover, the documents submitted by Manimbo were more substantial than those
submitted by respondents.[46] Respondents could have avoided the incident "had they accomplished
the required documents immediately."[47]

In the decision[48] promulgated on July 25, 2013, the Court of Appeals sustained the trial court's finding
that there was only one account.[49] Angel C. Santos could not have possibly opened the premium
savings account in 1994 since he already died in 1991.[50] The Court of Appeals also held that PNB
and Aguilar were negligent in handling the deposit.[51] The deposit amount was released to Manimbo
who did not present all the requirements, particularly the Bureau of Internal Revenue (BIR) certification
that estate taxes had already been paid.[52] They should also not have honored the affidavit of self-
adjudication.[53]

The Court of Appeals ruled that Aguilar could not escape liability by pointing her finger at PNB's Legal
Department.[54] As the Bank Manager, she should have given the Legal Department all the necessary
information that must be known in order to protect both the depositors' and the bank's interests.[55]

The Court of Appeals removed the award of exemplary damages, upon finding that there was no
malice or bad faith.[56]

The Court of Appeals considered the deposit as an ordinary loan by the bank from Angel C. Santos or
his heirs.[57] Therefore, the deposit was a forbearance which should earn an interest of 12% per
annum.[58] The dispositive portion of the Court of Appeals' decision reads:

WHEREFORE, premises considered, the assailed decision of the court a quo dated February 22, 2011
is AFFIRMED with the MODIFICATIONS in that the rate of interest shall be twelve percent (12%) per
annum computed from the filing of the case until fully satisfied. The interest due shall further earn an
interest of 12% per annum to be computed from the date of the filing of the complaint until fully paid.
Meanwhile, the award of exemplary damages is DELETED.

SO ORDERED.[59]
PNB and Aguilar filed their separate petitions for review of the Court of Appeals' July 25, 2013
decision.[60]

We resolve the following issues:

I. Whether Philippine National Bank was negligent in releasing the deposit to Bernardito
Manimbo;

II. Whether Lina B. Aguilar is jointly and severally liable with Philippine National Bank for the
release of the deposit to Bernardito Manimbo; and

III. Whether respondents were properly awarded damages.

Petitioner Aguilar argued that the Court of Appeals had already found no malice or bad faith on her
part.[61] Moreover, as a mere officer of the bank, she cannot be made personally liable for acts that she
was authorized to do.[62] These acts were mere directives to her by her superiors.[63] Hence, she should
not be held solidarity liable with PNB.[64]

Petitioner PNB argued that it was the presumptuousness and cavalier attitude of respondents that
gave rise to the controversy and not its judgment call.[65]Respondents were lacking in sufficient
documentation.[66] Petitioner PNB also argued that respondents failed to show any justification for the
award of moral damages.[67]No bad faith can be attributed to Aguilar.[68]

In their separate comments to the petitions, respondents argued that the trial court and the Court of
Appeals did not err in finding that petitioners PNB and Aguilar were negligent in handling their father's
deposit.[69] The acceptance of invalid and incomplete documents to support the deposit's release to
Manimbo was a violation of the bank's fiduciary duty to its clients.[70] These acts constituted grcss
negligence on the part of petitioners PNB and Aguilar.[71]

However, according to respondents, the Court of Appeals erred in deleting the award for exemplary
damages because the acts in violation of the bank's fiduciary were done in bad faith.[72]

We rule for the respondents.

The trial court and the Court of Appeals correctly found that petitioners PNB and Aguilar were negligent
in handling the deposit of Angel C. Santos.

The contractual relationship between banks and their depositors is governed by the Civil Code
provisions on simple loan.[73] Once a person makes a deposit of his or her money to the bank, he or
she is considered to have lent the bank that money.[74] The bank becomes his or her debtor, and he or
she becomes the creditor of the bank, which is obligated to pay him or her on demand.[75]

The default standard of diligence in the performance of obligations is "diligence of a good father of a
family." Thus, the Civil Code provides:

ART. 1163. Every person obliged to give something is also obliged to take care of it with the proper
diligence of a good father of a family, unless the law or the stipulation of the parties requires another
standard of care.

ART. 1173. The fault or negligence of the obligor consists in the omission of that diligence which is
required by the nature of the obligation and corresponds with the circumstances of the persons, of the
time and of the place. When negligence shows bad faith, the provisions of articles 1171 and 2201,
paragraph 2, shall apply.

If the law or contract does not state the diligence which is to be observed in the performance, that
which is expected of a good father of a family shall be required. (Emphasis supplied)
"Diligence of a good father of a family" is the standard of diligence expected of, among others,
usufructuaries,[76] passengers of common carriers,[77] agents,[78]depositaries,[79] pledgees,[80] officious
managers,[81] and persons deemed by law as responsible for the acts of others.[82] "The diligence of a
good father of a family requires only that diligence which an ordinary prudent man would exercise with
regard to his own property."[83]

Other industries, because of their nature, are bound by law to observe higher standards of diligence.
Common carriers, for example, must observe "extraordinary diligence in the vigilance over the goods
and for the safety of [their] passengers"[84] because it is considered a business affected with public
interest. "Extraordinary diligence" with respect to passenger safety is further qualified as "carrying the
passengers safely as far as human care and foresight can provide, using the utmost diligence of very
cautious persons, with a due regard for all the circumstances."[85]

Similar to common carriers, banking is a business that is impressed with public interest. It affects
economies and plays a significant role in businesses and commerce.[86] The public reposes its faith
and confidence upon banks, such that "even the humble wage-earner has not hesitated to entrust his
life's savings to the bank of his choice, knowing that they will be safe in its custody and will even earn
some interest for him."[87] This is why we have recognized the fiduciary nature of the banks' functions,
and attached a special standard of diligence for the exercise of their functions.

In Simex International (Manila), Inc. v. Court of Appeals,[88] this court described the nature of banks'
functions and the attitude expected of banks in handling their depositors' accounts, thus:

In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether such
account consists only of a few hundred pesos or of millions. . . .

The point is that as a business affected with public interest and because of the nature of its functions,
the bank is under obligation to treat the accounts of its depositors with meticulous care, always having
in mind the fiduciary nature of their relationship.[89] (Emphasis supplied)
The fiduciary nature of banking is affirmed in Republic Act No. 8791 or The General Banking Law,
thus:

SEC. 2. Declaration of Policy. — The State recognizes the vital role of banks in providing an
environment conducive to the sustained development of the national economy and the fiduciary nature
of banking that requires high standards of integrity and performance. In furtherance thereof, the State
shall promote and maintain a stable and efficient banking and financial system that is globally
competitive, dynamic and responsive to the demands of a developing economy. (Emphasis supplied)
In The Consolidated Bank and Trust Corporation v. Court of Appeals,[90] this court explained the
meaning of fiduciary relationship and the standard of diligence assumed by banks:

This fiduciary relationship means that the bank's obligation to observe "high standards of integrity and
performance" is deemed written into every deposit agreement between a bank and its depositor. The
fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a good
father of a family. Article 1172 of the Civil Code states that the degree of diligence required of an
obligor is that prescribed by law or contract, and absent such stipulation then the diligence of a good
father of a family.[91] (Emphasis supplied, citation omitted)
Petitioners PNB and Aguilar's treatment of Angel C. Santos' account is inconsistent with the high
standard of diligence required of banks. They accepted Manimbo's representations despite knowledge
of the existence of circumstances that should have raised doubts on such representations. As a result,
Angel C. Santos' deposit was given to a person stranger to him.

Petitioner PNB pointed out that since petitioner Aguilar assumed office as PNB-Sta. Elena-Marikina
City Branch Manager only five (5) years from Angel C. Santos' death, she was not in the position to
know that respondents were the heirs of Angel C. Santos.[92] She could not have accepted the
unsigned and unnotarized extrajudicial settlement deed that respondents had first showed her.[93] She
was not competent to make a conclusion whether that deed was genuine.[94] Neither could petitioners
PNB and Aguilar pass judgment on a letter from respondents' lawyer stating that respondents were the
nine heirs of Angel C. Santos.[95]

Petitioners PNB and Aguilar's negligence is not based on their failure to accept respondents'
documents as evidence of their right to claim Angel C. Santos' deposit. Rather, it is based on their
failure to exercise the diligence required of banks when they accepted the fraudulent representations
of Manimbo.

Petitioners PNB and Aguilar disregarded their own requirements for the release of the deposit to
persons claiming to be heirs of a deceased depositor. When respondents asked for the release of
Angel C. Santos' deposit, they were required to present the following: "(1) original or certified true copy
of the Death Certificate of Angel C. Santos; (2) certificate of payment of, or exemption from, estate tax
issued by the Bureau of Internal Revenue (BIR); (3) Deed of Extrajudicial Settlement; (4) Publisher's
Affidavit of publication of the Deed of Extrajudicial Settlement; and (5) Surety bond effective for two (2)
years and in an amount equal to the balance of the deposit to be withdrawn."[96]

Petitioners PNB and Aguilar, however, accepted Manimbo's representations, and they released Angel
C. Santos' deposit based on only the following documents:

1. Death certificate of Angel C. Santos;

2. Birth certificate of Reyme L. Santos;

3. Affidavit of self-adjudication of Reyme L. Santos;

4. Affidavit of publication;

5. Special power of attorney that Reyme L. Santos executed in favor of Bernardito Manimbo and
Angel P. Santos;

6. Personal items of Angel C. Santos, such as photocopies or originals of passport, residence

certificate for year 1990, SSS I.D., etc.;

7. Surety good for two (2) years; and

8. Certificate of Time Deposit No. 341306.[97]

Based on these enumerations, petitioners PNB and Aguilar either have no fixed standards for the
release of their deceased clients' deposits or they have standards that they disregard for convenience,
favor, or upon exercise of discretion. Both are inconsistent with the required diligence of banks. These
threaten the safety of the depositors' accounts as they provide avenues for fraudulent practices by third
persons or by bank officers themselves.

In this case, petitioners PNB and Aguilar released Angel C. Santos' deposit to Manimbo without having
been presented the BIR-issued certificate of payment of, or exception from, estate tax. This is a legal
requirement before the deposit of a decedent is released. Presidential Decree No. 1158,[98] the tax
code applicable when Angel C. Santos died in 1991, provides:

SEC. 118. Payment of tax antecedent to the transfer of shares, bonds, or rights. — There shall not be
transferred to any new owner in the books of any corporation, sociedad anonima, partnership,
business, or industry organized or established in the Philippines, any shares, obligations, bonds or
rights by way of gift inter vivosor mortis causa, legacy, or inheritance unless a certification from the
Commissioner that the taxes fixed in this Title and due thereon have been paid is shown.
If a bank has knowledge of the death of a person who maintained a hank deposit account alone, or
jointly with another, it shall not allow any withdrawal from the said deposit account, unless the
Commissioner has certified that the taxes imposed thereon by this Title have been paid; Provided,
however, That the administrator of the estate or any one of the heirs of the decedent may upon
authorization by the Commissioner of Internal Revenue, withdraw an amount not exceeding P10,000
without the said certification. For this purpose, all withdrawal slips shall contain a statement to the
effect that all of the joint depositors are still living at the time of withdrawal by any one of the joint
depositors and such statement shall be under oath by the said depositors.[99] (Emphasis supplied)
This provision was reproduced in Section 97 of the 1997 National Internal Revenue Code, thus:

SEC. 97. Payment of Tax Antecedent to the Transfer of Shares, Bonds or Rights. — There shall
not be transferred to any new owner in the books of any corporation, sociedad anonima, partnership,
business, or industry organized or established in the Philippines any share, obligation, bond or right by
way of gift inter vivos or mortis causa, legacy or inheritance, unless a certification from the
Commissioner that the taxes fixed in this Title and due thereon have been paid is shown.

If a bank has knowledge of the death of a person, who maintained a bank deposit account alone, or
jointly with another, it shall not allow any withdrawal from the said deposit account, unless the
Commissioner has certified that the taxes imposed thereon by this Title have been paid: Provided,
however, That the administrator of the estate or any one (1) of the heirs of the decedent may, upon
authorization by the Commissioner, withdraw an amount not exceeding Twenty thousand pesos
(P20,000) without the said certification. For this purpose, all withdrawal slips shall contain a statement
to the effect that all of the joint depositors are still living at the time of withdrawal by any one of the joint
depositors and such statement shall be under oath by the said depositors. (Emphasis supplied)
Taxes are created primarily to generate revenues for the maintenance of the government. However,
this particular tax may also serve as guard against the release of deposits to persons who have no
sufficient and valid claim over the deposits. Based on the assumption that only those with sufficient
and valid claim to the deposit will pay the taxes for it, requiring the certificate from the BIR increases
the chance that the deposit will be released only to them.

In their compulsory counterclaim,[100] petitioners PNB and Aguilar claimed that Manimbo presented a
certificate of payment of estate tax.[101] During trial, however, it turned out that this certificate was
instead an authority to accept payment, which is not the certificate required for the release of bank
deposits.[102] It appears that Manimbo was not even required to submit the BIR certificate.[103] He, thus,
failed to present such certificate. Petitioners PNB and Aguilar provided no satisfactory explanation why
Angel C. Santos' deposit was released without it.

Petitioners PNB and Aguilar's negligence is also clear when they accepted as bases for the release of
the deposit to Manimbo: (a) a mere photocopy of Angel C. Santos' death certificate;[104] (b) the falsified
affidavit of self-adjudication and special power of attorney purportedly executed by Reyme L.
Santos;[105] and (c) the certificate of time deposit.[106]

Petitioner Aguilar was aware that there were other claimants to Angel C. Santos' deposit. Respondents
had already communicated with petitioner Aguilar regarding Angel C. Santos' account before Manimbo
appeared. Petitioner Aguilar even gave respondents the updated passbook of Angel C. Santos'
account.[107] Yet, petitioners PNB and Aguilar did not think twice before they released the deposit to
Manimbo. They did not doubt why no original death certificate could be submitted. They did not doubt
why Reyme L. Santos would execute an affidavit of self-adjudication when he, together with others,
had previously asked for the release of Angel C. Santos' deposit. They also relied on the certificate of
time deposit and on Manimbo's representation that the passbook was lost when the passbook had just
been previously presented to Aguilar for updating.[108]

During the trial, petitioner PNB's counsel only reasoned that the photocopy of the death certificate was
also submitted with other documents, which led him to no other conclusion than that Angel C. Santos
was already dead.[109] On petitioners PNB and Aguilar's reliance special power of attorney allegedly
executed by Reyme L. Santos, Aguilar admitted that she did not contact Reyme L. Santos for
verification. Her reason was that Reyme L. Santos was not their client. Therefore, they had no
obligation to do so.[110]

Given the circumstances, "diligence of a good father of a family" would have required petitioners PNB
and Aguilar to verify. A prudent man would have inquired why Reyme L. Santos would issue an
affidavit of self-adjudication when others had also claimed to be heirs of Angel C. Santos. Contrary to
petitioner Aguilar's reasoning, the fact that Reyme L. Santos was not petitioner PNB's client should
have moved her to take measures to ensure the veracity of Manimbo's documents and
representations. This is because she had no previous knowledge of Reyme L. Santos his
representatives, and his signature.

Petitioner PNB is a bank from which a degree of diligence higher than that of a good father of a family
is expected. Petitioner PNB and its manager, petitioner Aguilar, failed to meet even the standard of
diligence of a good father of a family. Their actions and inactions constitute gross negligence. It is for
this reason that we sustain the trial court's and the Court of Appeals' rulings that petitioners PNB and
Aguilar are solidarity liable with each other.[111]

For the same reason, we sustain the award for moral damages. Petitioners PNB and Aguilar's gross
negligence deprived Angel C. Santos' heirs what is rightfully theirs. Respondents also testified that
they experienced anger and embarrassment when petitioners PNB and Aguilar refused to release
Angel C. Santos' deposit.[112] "The bank's negligence was the result of lack of due care and caution
required of managers and employees of a firm engaged in so sensitive and demanding business as
banking."[113]

Exemplary damages should also be awarded. "The law allows the grant of exemplary damages by way
of example for the public good. The public relies on the banks' sworn profession of diligence and
meticulousness in giving irreproachable service. The level of meticulousness must be maintained at all
times by the banking sector."[114]

Since exemplary damages are awarded and since respondents were compelled to litigate to protect
their interests,[115] the award of attorney's fees is also proper.

The Court of Appeals' award of interest should be modified to 12% from demand on April 26, 1998 until
June 30, 2013, and 6% from July 1, 2013 until fully paid. In Nacar v. Gallery Frames:[116]
Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that would
govern the parties, the rate of legal interest for loans or forbearance of any money. . . shall no longer
be twelve percent (12%) per annum. . . but will now be six percent (6%) per annum effective July 1,
2013. It should be noted, nonetheless, that. . . the twelve percent (12%) per annum legal interest shall
apply only until June 30, 2013. Come July 1, 2013 the new rate of six percent (6%) per annum shall be
the prevailing rate of interest when applicable.

....

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan
or forbearance of money, the interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 6% per annum to be
computed from default, i.e., from judicial or extrajudicial demand. . .

....

3. When the judgment of the court awarding a sum of money becomes final and executory, the
rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be
6% per annum from such finality until its satisfaction, this interim period being deemed to be by
then an equivalent to a forbearance of credit.[117]

WHEREFORE, the Court of Appeals' decision dated July 25, 2013 is AFFIRMEDwith
the MODIFICATIONS in that petitioners Philippine National Bank and Lina B. Aguilar are ordered
solidarity liable to pay respondents P100,000.00 as exemplary damages. Further, the interest rate for
the amount of P1,882,002.05, representing the face value of PNB Manager's Check No. AF-974686B
is modified to 12% from April 26, 1998 until June 30, 2013, and 6% from July 1, 2013 until satisfaction.
All monetary awards shall then earn interest at the rate of 6% per annum from finality of the decision
until full satisfaction.

SO ORDERED.

Carpio, (Chairperson), Del Castillo, Villarama, Jr.,* and Mendoza, JJ., concur.

G.R. No. L-19201 June 16, 1965

REV. FR. CASIMIRO LLADOC, petitioner,

vs.
The COMMISSIONER OF INTERNAL REVENUE and The COURT of TAX APPEALS, respondents.

Hilado and Hilado for petitioner.

Office of the Solicitor General for respondents.

PAREDES, J.:
Sometime in 1957, the M.B. Estate, Inc., of Bacolod City, donated P10,000.00 in cash to Rev. Fr.
Crispin Ruiz, then parish priest of Victorias, Negros Occidental, and predecessor of herein petitioner,
for the construction of a new Catholic Church in the locality. The total amount was actually spent for
the purpose intended.

On March 3, 1958, the donor M.B. Estate, Inc., filed the donor's gift tax return. Under date of April 29,
1960, the respondent Commissioner of Internal Revenue issued an assessment for donee's gift tax
against the Catholic Parish of Victorias, Negros Occidental, of which petitioner was the priest. The tax
amounted to P1,370.00 including surcharges, interests of 1% monthly from May 15, 1958 to June 15,
1960, and the compromise for the late filing of the return.

Petitioner lodged a protest to the assessment and requested the withdrawal thereof. The protest and
the motion for reconsideration presented to the Commissioner of Internal Revenue were denied. The
petitioner appealed to the Court of Tax Appeals on November 2, 1960. In the petition for review, the
Rev. Fr. Casimiro Lladoc claimed, among others, that at the time of the donation, he was not the parish
priest in Victorias; that there is no legal entity or juridical person known as the "Catholic Parish Priest of
Victorias," and, therefore, he should not be liable for the donee's gift tax. It was also asserted that the
assessment of the gift tax, even against the Roman Catholic Church, would not be valid, for such
would be a clear violation of the provisions of the Constitution.

After hearing, the CTA rendered judgment, the pertinent portions of which are quoted below:

... . Parish priests of the Roman Catholic Church under canon laws are similarly situated as its
Archbishops and Bishops with respect to the properties of the church within their parish. They
are the guardians, superintendents or administrators of these properties, with the right of
succession and may sue and be sued.

xxx xxx xxx

The petitioner impugns the, fairness of the assessment with the argument that he should not be
held liable for gift taxes on donation which he did not receive personally since he was not yet
the parish priest of Victorias in the year 1957 when said donation was given. It is intimated that
if someone has to pay at all, it should be petitioner's predecessor, the Rev. Fr. Crispin Ruiz,
who received the donation in behalf of the Catholic parish of Victorias or the Roman Catholic
Church. Following petitioner's line of thinking, we should be equally unfair to hold that the
assessment now in question should have been addressed to, and collected from, the Rev. Fr.
Crispin Ruiz to be paid from income derived from his present parish where ever it may be. It
does not seem right to indirectly burden the present parishioners of Rev. Fr. Ruiz for donee's
gift tax on a donation to which they were not benefited.

xxx xxx xxx

We saw no legal basis then as we see none now, to include within the Constitutional exemption,
taxes which partake of the nature of an excise upon the use made of the properties or upon the
exercise of the privilege of receiving the properties. (Phipps vs. Commissioner of Internal
Revenue, 91 F [2d] 627; 1938, 302 U.S. 742.)

It is a cardinal rule in taxation that exemptions from payment thereof are highly disfavored by
law, and the party claiming exemption must justify his claim by a clear, positive, or express
 grant of such privilege by law. (Collector vs. Manila Jockey Club, G.R. No. L-8755, March 23,
1956; 53 O.G. 3762.)

The phrase "exempt from taxation" as employed in Section 22(3), Article VI of the Constitution
of the Philippines, should not be interpreted to mean exemption from all kinds of taxes. Statutes
exempting charitable and religious property from taxation should be construed fairly though
strictly and in such manner as to give effect to the main intent of the lawmakers. (Roman
Catholic Church vs. Hastrings 5 Phil. 701.)

xxx xxx xxx

WHEREFORE, in view of the foregoing considerations, the decision of the respondent

Commissioner of Internal Revenue appealed from, is hereby affirmed except with regard to the
imposition of the compromise penalty in the amount of P20.00 (Collector of Internal Revenue v.
U.S.T., G.R. No. L-11274, Nov. 28, 1958); ..., and the petitioner, the Rev. Fr. Casimiro Lladoc is
hereby ordered to pay to the respondent the amount of P900.00 as donee's gift tax, plus the
surcharge of five per centum (5%) as ad valorem penalty under Section 119 (c) of the Tax
Code, and one per centum (1%) monthly interest from May 15, 1958 to the date of actual
payment. The surcharge of 25% provided in Section 120 for failure to file a return may not be
imposed as the failure to file a return was not due to willful neglect.( ... ) No costs.

The above judgment is now before us on appeal, petitioner assigning two (2) errors allegedly
committed by the Tax Court, all of which converge on the singular issue of whether or not petitioner
should be liable for the assessed donee's gift tax on the P10,000.00 donated for the construction of the
Victorias Parish Church.

Section 22 (3), Art. 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. In the present case, what the Collector assessed was a donee's gift tax; the assessment was
not on the properties themselves. It did not rest upon general ownership; it was an excise upon the use
made of the properties, upon the exercise of the privilege of receiving the properties (Phipps vs. Com.
of Int. Rec. 91 F 2d 627). Manifestly, gift tax is not within the exempting provisions of the section just
mentioned. 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. 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 no clear, positive or express grant of such
privilege by law, in favor of petitioner, the exemption herein must be denied.

The next issue which readily presents itself, in view of petitioner's thesis, and Our finding that a tax
liability exists, is, who should be called upon to pay the gift tax? Petitioner postulates that he should not
be liable, because at the time of the donation he was not the priest of Victorias. We note the merit of
the above claim, and in order to put things in their proper light, this Court, in its Resolution of March 15,
1965, ordered the parties to show cause why the Head of the Diocese to which the parish of Victorias
pertains, should not be substituted in lieu of petitioner Rev. Fr. Casimiro Lladoc it appearing that the
Head of such Diocese is the real party in interest. The Solicitor General, in representation of the
Commissioner of Internal Revenue, interposed no objection to such a substitution. Counsel for the
petitioner did not also offer objection thereto.

On April 30, 1965, in a resolution, We ordered the Head of the Diocese to present whatever legal
issues and/or defenses he might wish to raise, to which resolution counsel for petitioner, who also
appeared as counsel for the Head of the Diocese, the Roman Catholic Bishop of Bacolod, manifested
that it was submitting itself to the jurisdiction and orders of this Court and that it was presenting, by
reference, the brief of petitioner Rev. Fr. Casimiro Lladoc as its own and for all purposes.

In view here of and considering that as heretofore stated, the assessment at bar had been properly
made and the imposition of the tax is not a violation of the constitutional provision exempting churches,
parsonages or convents, etc. (Art VI, sec. 22 [3], Constitution), the Head of the Diocese, to which the
parish Victorias Pertains, is liable for the payment thereof.

The decision appealed from should be, as it is hereby affirmed insofar as tax liability is concerned; it is
modified, in the sense that petitioner herein is not personally liable for the said gift tax, and that the
Head of the Diocese, herein substitute petitioner, should pay, as he is presently ordered to pay, the
said gift tax, without special, pronouncement as to costs.

Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon, J.P.,
and Zaldivar, JJ., concur.
Barrera, J., took no part.

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. 120721. February 23, 2005]

MANUEL G. ABELLO, JOSE C. CONCEPCION, TEODORO D. REGALA, AVELINO V.

CRUZ, petitioners, vs. COMMISSIONER OF INTERNAL REVENUE and COURT OF
APPEALS, respondents.

DECISION
AZCUNA, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Civil Procedure, assailing the
decision of the Court of Appeals in CA G.R. SP No. 27134, entitled Comissioner of Internal Revenue v.
Manuel G. Abello, Jose C. Concepcion, Teodoro D. Regala, Avelino V. Cruz and Court of Tax Appeals,
which reversed and set aside the decision of the Court of Tax Appeals (CTA), ordering the Commissioner
of Internal Revenue (Commissioner) to withdraw his letters dated April 21, 1988 and August 4, 1988
assessing donors taxes and to desist from collecting donors taxes from petitioners.
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. In letters dated April 21, 1988, the Bureau of Internal
Revenue (BIR) assessed each of the petitioners P263,032.66 for their contributions. On August 2, 1988,
petitioners questioned the assessment through a letter to the BIR. They claimed that political or electoral
contributions are not considered gifts under the National Internal Revenue Code (NIRC), and that,
therefore, they are not liable for donors tax. The claim for exemption was denied by the Commissioner.[1]
On September 12, 1988, petitioners filed a petition for review with the CTA, which was decided on
October 7, 1991 in favor of the petitioners. As aforestated, the CTA ordered the Commissioner to desist
from collecting donors taxes from the petitioners.[2]
On appeal, the Court of Appeals reversed and set aside the CTA decision on April 20, 1994. [3]The
appellate Court ordered the petitioners to pay donors tax amounting to P263,032.66 each, reasoning as
follows:

The National Internal Revenue Code, as amended, provides:

Sec. 91. Imposition of Tax. (a) There shall be levied, assessed, collected, and paid upon the transfer
by any person, resident, or non-resident, of the property by gift, a tax, computed as provided in Section
92. (b) The tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or
indirect, and whether the property is real or personal, tangible or intangible.

Pursuant to the above-quoted provisions of law, the transfer of property by gift, whether the transfer is
in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal,
tangible or intangible, is subject to donors or gift tax.

A gift is generally defined as a voluntary transfer of property by one to another without any
consideration or compensation therefor (28 C.J. 620; Santos vs. Robledo, 28 Phil. 250).

In the instant case, the contributions are voluntary transfers of property in the form of money from
private respondents to Sen. Angara, without considerations therefor. Hence, they squarely fall under
the definition of donation or gift.

As correctly pointed out by the Solicitor General:

The fact that the contributions were given to be used as campaign funds of Sen. Angara does not
affect the character of the fund transfers as donation or gift. There was thereby no retention of control
over the disposition of the contributions. There was simply an indication of the purpose for which they
were to be used. For as long as the contributions were used for the purpose for which they were
intended, Sen. Angara had complete and absolute power to dispose of the contributions. He was fully
entitled to the economic benefits of the contributions.

Section 91 of the Tax Code is very clear. A donors or gift tax is imposed on the transfer of property by
gift.

The Bureau of Internal Revenue issued Ruling No. 344 on July 20, 1988, which reads:

Political Contributions. For internal revenue purposes, political contributions in the Philippines are
considered taxable gift rather than taxable income. This is so, because a political contribution is
indubitably not intended by the giver or contributor as a return of value or made because of any intent
to repay another what is his due, but bestowed only because of motives of philanthropy or charity. His
purpose is to give and to bolster the morals, the winning chance of the candidate and/or his party, and
not to employ or buy. On the other hand, the recipient-donee does not regard himself as exchanging
his services or his product for the money contributed. But more importantly he receives financial
advantages gratuitously.

When the U.S. gift tax law was adopted in the Philippines (before May 7, 1974), the taxability of
political contributions was, admittedly, an unsettled issue; hence, it cannot be presumed that the
Philippine Congress then had intended to consider or treat political contributions as non-taxable gifts
when it adopted the said gift tax law. Moreover, well-settled is the rule that the Philippines need not
necessarily adopt the present rule or construction in the United States on the matter. Generally,
statutes of different states relating to the same class of persons or things or having the same purposes
are not considered to be in pari materiabecause it cannot be justifiably presumed that the legislature
had them in mind when enacting the provision being construed. (5206, Sutherland, Statutory
Construction, p. 546.) Accordingly, in the absence of an express exempting provision of law, political
contributions in the Philippines are subject to the donors gift tax. (cited in National Internal Revenue
Code Annotated by Hector S. de Leon, 1991 ed., p. 290).

In the light of the above BIR Ruling, it is clear that the political contributions of the private respondents
to Sen. Edgardo Angara are taxable gifts. The vagueness of the law as to what comprise the gift
subject to tax was made concrete by the above-quoted BIR ruling. Hence, there is no doubt that
political contributions are taxable gifts.[4]

Petitioners filed a motion for reconsideration, which the Court of Appeals denied in its resolution of
June 16, 1995.[5]
Petitioners thereupon filed the instant petition on July 26, 1995. Raised are the following issues:
1. DID THE HONORABLE COURT OF APPEALS ERR WHEN IT FAILED TO CONSIDER IN
ITS DECISION THE PURPOSE BEHIND THE ENACTMENT OF OUR GIFT TAX LAW?
2. DID THE HONORABLE COURT OF APPEALS ERR IN NOT CONSIDERING THE
INTENTION OF THE GIVERS IN DETERMINING WHETHER OR NOT THE
PETITIONERS POLITICAL CONTRIBUTIONS WERE GIFTS SUBJECT TO DONORS
TAX?
3. DID THE HONORABLE COURT OF APPEALS ERR WHEN IT FAILED TO CONSIDER THE
DEFINITION OF AN ELECTORAL CONTRIBUTION UNDER THE OMNIBUS ELECTION
CODE IN DETERMINING WHETHER OR NOT POLITICAL CONTRIBUTIONS ARE
TAXABLE?
4. DID THE HONORABLE COURT OF APPEALS ERR IN NOT CONSIDERING THE
ADMINISTRATIVE PRACTICE OF CLOSE TO HALF A CENTURY OF NOT SUBJECTING
POLITICAL CONTRIBUTIONS TO DONORS TAX?
5. DID THE HONORABLE COURT OF APPEALS ERR IN NOT CONSIDERING THE
AMERICAN JURISPRUDENCE RELIED UPON BY THE COURT OF TAX APPEALS AND
BY THE PETITIONERS TO THE EFFECT THAT POLITICAL CONTRIBUTIONS ARE NOT
TAXABLE GIFTS?
6. DID THE HONORABLE COURT OF APPEALS ERR IN NOT APPLYING AMERICAN
JURISPRUDENCE ON THE GROUND THAT THIS WAS NOT KNOWN AT THE TIME THE
PHILIPPINES GIFT TAX LAW WAS ADOPTED IN 1939?
 7. DID THE HONORABLE COURT OF APPEALS ERR IN RESOLVING THE CASE MAINLY
ON THE BASIS OF A RULING ISSUED BY THE RESPONDENT ONLY AFTER THE
ASSESSMENTS HAD ALREADY BEEN MADE?
8. DID THE HONORABLE COURT OF APPEALS ERR WHEN IT DID NOT CONSTRUE THE
GIFT TAX LAW LIBERALLY IN FAVOR OF THE TAXPAYER AND STRICLTY AGAINST
THE GOVERNMENT IN ACCORDANCE WITH APPLICABLE PRINCIPLES OF
STATUTORY CONSTRUCTION?[6]

First, Fifth and Sixth Issues

Section 91 of the National Internal Revenue Code (NIRC) reads:

(A) There shall be levied, assessed, collected and paid upon the transfer by any person,
resident or nonresident, of the property by gift, a tax, computed as provided in Section
92

(B) The tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or
indirect, and whether the property is real or personal, tangible or intangible.

The NIRC does not define transfer of property by gift. However, Article 18 of the Civil Code, states:

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.[7]
The present case falls squarely within the definition of a donation. Petitioners, the late Manuel G.
Abello[8], 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 Angaras patrimony correspondingly increased by P3,530,645.24[9]. 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. In Rizal Commercial Banking Corporation v.
Intermediate Appellate Court[10] the Court enunciated:

It bears stressing that the first and fundamental duty of the Court is to apply the law. When the law is
clear and free from any doubt or ambiguity, there is no room for construction or interpretation. As has
been our consistent ruling, where the law speaks in clear and categorical language, there is no
occasion for interpretation; there is only room for application (Cebu Portland Cement Co. v.
Municipality of Naga, 24 SCRA 708 [1968])

Where the law is clear and unambiguous, it must be taken to mean exactly what it says and the court
has no choice but to see to it that its mandate is obeyed (Chartered Bank Employees Association v.
Ople, 138 SCRA 273 [1985]; Luzon Surety Co., Inc. v. De Garcia, 30 SCRA 111 [1969]; Quijano v.
Development Bank of the Philippines, 35 SCRA 270 [1970]).

Only when the law is ambiguous or of doubtful meaning may the court interpret or construe its true
intent. Ambiguity is a condition of admitting two or more meanings, of being understood in more than
one way, or of referring to two or more things at the same time. A statute is ambiguous if it is
admissible of two or more possible meanings, in which case, the Court is called upon to exercise one
of its judicial functions, which is to interpret the law according to its true intent.

Second Issue

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.

Third Issue

Petitioners maintain that the definition of an electoral contribution under the Omnibus Election Code
is essential to appreciate how a political contribution differs from a taxable gift. [11] Section 94(a) of the
said Code defines electoral contribution as follows:

The term "contribution" includes a gift, donation, subscription, loan, advance or deposit of money or
anything of value, or a contract, promise or agreement to contribute, whether or not legally
enforceable, made for the purpose of influencing the results of the elections but shall not include
services rendered without compensation by individuals volunteering a portion or all of their time in
behalf of a candidate or political party. It shall also include the use of facilities voluntarily donated by
other persons, the money value of which can be assessed based on the rates prevailing in the area.

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.
 Petitioners would distinguish a gift from a political donation by saying that the consideration for a gift
is the liberality of the donor, while the consideration for a political contribution is 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.
In fine, the purpose for which the sums of money were given, which was to fund the campaign of
Senator Angara in his bid for a senatorial seat, cannot be considered as a material consideration so as
to negate a donation.

Fourth Issue

Petitioners raise the fact that since 1939 when the first Tax Code was enacted, up to 1988 the BIR
never attempted to subject political contributions to donors tax. They argue that:

. . . It is a familiar principle of law that prolonged practice by the government agency charged with the
execution of a statute, acquiesced in and relied upon by all concerned over an appreciable period of
time, is an authoritative interpretation thereof, entitled to great weight and the highest respect. . . .[12]

This Court holds that the BIR is not precluded from making a new interpretation of the law, especially
when the old interpretation was flawed. It is a well-entrenched rule that

. . . erroneous application and enforcement of the law by public officers do not block subsequent
correct application of the statute (PLDT v. Collector of Internal Revenue, 90 Phil. 676), and that the
Government is never estopped by mistake or error on the part of its agents (Pineda v. Court of First
Instance of Tayabas, 52 Phil. 803, 807; Benguet Consolidated Mining Co. v. Pineda, 98 Phil. 711,
724).[13]

Seventh Issue

Petitioners question the fact that the Court of Appeals decision is based on a BIR ruling, namely BIR
Ruling No. 88-344, which was issued after the petitioners were assessed for donors tax. This Court does
not need to delve into this issue. It is immaterial whether or not the Court of Appeals based its decision
on the BIR ruling because it is not pivotal in deciding this case. As discussed above, Section 91 (now
Section 98) of the NIRC as supplemented by the definition of a donation found in Article 725 of the Civil
Code, is clear and unambiguous, and needs no further elucidation.

Eighth Issue
 Petitioners next contend that tax laws are construed liberally in favor of the taxpayer and strictly
against the government. This rule of construction, however, does not benefit petitioners because, as
stated, there is here no room for construction since the law is clear and unambiguous.
Finally, this Court takes note of the fact that subsequent to the donations involved in this case,
Congress approved Republic Act No. 7166 on November 25, 1991, providing in Section 13 thereof that
political/electoral contributions, duly reported to the Commission on Elections, are not subject to the
payment of any gift tax. This all the more shows that the political contributions herein made are subject
to the payment of gift taxes, since the same were made prior to the exempting legislation, and Republic
Act No. 7166 provides no retroactive effect on this point.
WHEREFORE, the petition is DENIED and the assailed Decision and Resolution of the Court of
Appeals are AFFIRMED.
No costs.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Quisumbing, and Carpio, JJ., concur.
Ynares-Santiago, J., no part.

G.R. No. 210987 November 24, 2014

THE PHILIPPINE AMERICAN LIFE AND GENERAL INSURANCE COMPANY, Petitioner,

vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL
REVENUE, Respondents.

DECISION

VELASCO, JR., J.:

Nature of the Case

Before the Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court assailing
and seeking the reversal of the Resolutions of the Court of Appeals (CA) in CA-G.R. SP No. 127984,
dated May 23, 20131 and January 21, 2014, which dismissed outright the petitioner's appeal from the
Secretary of Finance's review of BIR Ruling No. 015-122 for lack of jurisdiction.

The Facts

Petitioner The Philippine American Life and General Insurance Company (Philamlife) used to own
498,590 Class A shares in Philam Care Health Systems, Inc. (PhilamCare), representing 49.89% of
the latter's outstanding capital stock. In 2009, petitioner, in a bid to divest itself of its interests in the
health maintenance organization industry, offered to sell its shareholdings in PhilamCare through
competitive bidding. Thus, on September 24, 2009, petitioner's Class A shares were sold for USD
2,190,000, or PhP 104,259,330 based on the prevailing exchange rate at the time of the sale, to STI
Investments, Inc., who emerged as the highest bidder.3

After the sale was completed and the necessary documentary stamp and capital gains taxes were
paid, Philamlife filed an application for a certificate authorizing registration/tax clearance with the
Bureau of Internal Revenue (BIR) Large Taxpayers Service Division to facilitate the transfer of the
shares. Months later, petitioner was informed that it needed to secure a BIR ruling in connection with
its application due to potential donor’s tax liability. In compliance, petitioner, on January 4, 2012,
requested a ruling4 to confirm that the sale was not subject to donor’s tax, pointing out, in its request,
the following: that the transaction cannot attract donor’s tax liability since there was no donative intent
and,ergo, no taxable donation, citing BIR Ruling [DA-(DT-065) 715-09] dated November 27, 2009;5 that
the shares were sold at their actual fair market value and at arm’s length; that as long as the
transaction conducted is at arm’s length––such that a bona fide business arrangement of the dealings
is done inthe ordinary course of business––a sale for less than an adequate consideration is not
subject to donor’s tax; and that donor’s tax does not apply to saleof shares sold in an open bidding
process.

On January 4, 2012, however, respondent Commissioner on Internal Revenue (Commissioner) denied

Philamlife’s request through BIR Ruling No. 015-12. As determined by the Commissioner, the selling
price of the shares thus sold was lower than their book value based on the financial statements of
PhilamCare as of the end of 2008.6 As such, the Commisioner held, donor’s tax became imposable on
the price difference pursuant to Sec. 100 of the National Internal Revenue Code (NIRC), viz:

SEC. 100. Transfer for Less Than Adequate and full Consideration.- Where property, other than real
property referred to in Section 24(D), is transferred for less than an adequate and full consideration in
money or money’s worth, then the amount by which the fair market 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,
and shall be included in computing the amount of gifts made during the calendar year.

The afore-quoted provision, the Commissioner added, is implemented by Revenue Regulation 6-2008
(RR 6-2008), which provides:

SEC. 7. SALE, BARTER OR EXCHANGE OF SHARES OF STOCK NOT TRADED THROUGH A

LOCAL STOCK EXCHANGE PURSUANT TO SECS. 24(C), 25(A)(3), 25(B), 27(D)(2), 28(A)(7)(c),
28(B)(5)(c) OF THE TAX CODE, AS AMENDED. —

xxxx

(c) Determination of Amount and Recognition of Gain or Loss –

(c.1) In the case of cash sale, the selling price shall be the consideration per deed of sale.

xxxx

(c.1.4) In case the fair market value of the shares of stock sold, bartered, or exchanged is greater than
the amount of money and/or fair market value of the property received, the excess of the fair market
value of the shares of stock sold, bartered or exchanged overthe amount of money and the fair market
value of the property, if any, received as consideration shall be deemed a gift subject to the donor’stax
under Section 100 of the Tax Code, as amended.

xxxx

(c.2) Definition of ‘fair market value’of Shares of Stock. – For purposes of this Section, ‘fair market
value’ of the share of stock sold shall be:
 xxxx

(c.2.2) In the case of shares of stock not listed and traded in the local stock exchanges, the book value
of the shares of stock as shown in the financial statements duly certified by an independent certified
public accountant nearest to the date of sale shall be the fair market value.

In view of the foregoing, the Commissioner ruled that the difference between the book value and the
selling price in the sales transaction is taxable donation subject to a 30% donor’s tax under Section
99(B) of the NIRC.7Respondent Commissioner likewise held that BIR Ruling [DA-(DT-065) 715-09], on
which petitioner anchored its claim, has already been revoked by Revenue Memorandum Circular
(RMC) No. 25-2011.8

Aggrieved, petitioner requested respondent Secretary of Finance (Secretary) to review BIR Ruling No.
015-12, but to no avail. For on November 26, 2012, respondent Secretary affirmed the Commissioner’s
assailed ruling in its entirety.9

Ruling of the Court of Appeals

Not contented with the adverse results, petitioner elevated the case to the CA via a petition for review
under Rule 43, assigning the following errors:10

A.

The Honorable Secretary of Finance gravely erred in not finding that the application of Section 7(c.2.2)
of RR 06-08 in the Assailed Ruling and RMC 25-11 is void insofar as it altersthe meaning and scope of
Section 100 of the Tax Code.

B.

The Honorable Secretary of Finance gravely erred in finding that Section 100 of the Tax Code is
applicable tothe sale of the Sale of Shares.

1.

The Sale of Shares were sold at their fair market value and for fair and full consideration
in money or money’s worth.

2.

The sale of the Sale Shares is a bona fide business transaction without any donative
intent and is therefore beyond the ambit of Section 100 of the Tax Code.

3.

It is superfluous for the BIR to require an express provision for the exemption of the sale
of the Sale Shares from donor’s tax since Section 100 of the Tax Code does not
explicitly subject the transaction to donor’s tax.

C.
The Honorable Secretary of Finance gravely erred in failing to find that in the absence of any of the
grounds mentioned in Section 246 of the Tax Code, rules and regulations, rulings or circulars – such
as RMC 25-11 – cannot be given retroactive application to the prejudice of Philamlife.

On May 23, 2013, the CA issued the assailed Resolution dismissing the CA Petition, thusly:

WHEREFORE, the Petition for Review dated January 9, 2013 is DISMISSED for lack of jurisdiction.

SO ORDERED.

In disposing of the CA petition, the appellate court ratiocinated that it is the Court of Tax Appeals
(CTA), pursuant to Sec. 7(a)(1) of Republic Act No. 1125 (RA 1125),11 as amended, which has
jurisdiction over the issues raised. The outright dismissal, so the CA held, is predicated on the
postulate that BIR Ruling No. 015-12 was issued in the exercise of the Commissioner’s power to
interpret the NIRC and other tax laws. Consequently, requesting for its review can be categorized as
"other matters arising under the NIRC or other laws administered by the BIR," which is under the
jurisdiction of the CTA, not the CA.

Philamlife eventually sought reconsideration but the CA, in its equally assailed January 21, 2014
Resolution, maintained its earlier position. Hence, the instant recourse.

Issues

Stripped to the essentials, the petition raises the following issues in both procedure and substance:

1. Whether or not the CA erred in dismissing the CA Petition for lack of jurisdiction; and

2. Whether or not the price difference in petitioner’s adverted sale of shares in PhilamCare
attracts donor’s tax.

Procedural Arguments

a. Petitioner’s contentions

Insisting on the propriety of the interposed CA petition, Philamlife, while conceding that respondent
Commissioner issued BIR Ruling No. 015-12 in accordance with her authority to interpret tax laws,
argued nonetheless that such ruling is subject to review by the Secretary of Finance under Sec. 4 of
the NIRC, to wit:

SECTION 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. – The power
to interpret the provisions of this Code and other tax laws shall be under the exclusive and original
jurisdiction of the Commissioner, subject to review by the Secretary of Finance.

The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges,
penalties imposed in relation thereto, or other matters arising under this Code orother laws or portions
thereof administered by the Bureau of Internal Revenue is vested in the Commissioner, subject to the
exclusive appellate jurisdiction of the Court of Tax Appeals. Petitioner postulates that there is a need to
differentiate the rulings promulgated by the respondent Commissioner relating to those rendered under
the first paragraph of Sec. 4 of the NIRC, which are appealable to the Secretary of Finance, from those
rendered under the second paragraph of Sec. 4 of the NIRC, which are subject to review on appeal
with the CTA.

This distinction, petitioner argues, is readily made apparent by Department Order No. 7-02,12 as
circularized by RMC No. 40-A-02.

Philamlife further averred that Sec.7 of RA 1125, as amended, does not find application in the case at
bar since it only governs appeals from the Commissioner’s rulings under the second paragraph and
does not encompass rulings from the Secretary of Finance in the exercise of his power of review under
the first, as what was elevated to the CA. It added that under RA 1125, as amended, the only decisions
of the Secretary appealable to the CTA are those rendered in customs cases elevated to him
automatically under Section 2315 of the Tariff and Customs Code.13

There is, thus, a gap in the law when the NIRC, as couched, and RA 1125, as amended, failed to
supply where the rulings of the Secretary in its exercise of its power of review under Sec. 4 of the NIRC
are appealable to. This gap, petitioner submits, was remedied by British American Tobacco v.
Camacho14 wherein the Court ruled that where what is assailed is the validity or constitutionality of a
law, or a rule or regulation issued by the administrative agency, the regular courts have jurisdiction to
pass upon the same.

In sum, appeals questioning the decisions of the Secretary of Finance in the exercise of its power of
review under Sec. 4 of the NIRC are not within the CTA’s limited special jurisdiction and, according to
petitioner, are appealable to the CA via a Rule 43 petition for review.

b. Respondents’ contentions

Before the CA, respondents countered petitioner’s procedural arguments by claiming that even
assuming arguendo that the CTA does not have jurisdiction over the case, Philamlife,
nevertheless,committed a fatal error when it failed to appeal the Secretary of Finance’s ruling to the
Office of the President (OP). As made apparent by the rules, the Department of Finance is not among
the agencies and quasi-judicial bodies enumerated under Sec. 1, Rule 43 of the Rules of Court whose
decisions and rulings are appealable through a petition for review.15 This is in stark contrast to the OP’s
specific mention under the same provision, so respondents pointed out.

To further reinforce their argument, respondents cite the President’s power of review emanating from
his power of control as enshrined under Sec. 17 of Article VII of the Constitution, which reads:

Section 17.The President shall have control of all the executive departments, bureaus, and offices. He
shall ensure that the laws be faithfully executed.

The nature and extent of the President’s constitutionally granted power of control have beendefined in
a plethora of cases, most recently in Elma v. Jacobi,16 wherein it was held that:

x x x This power of control, which even Congress cannot limit, let alone withdraw, means the power of
the Chief Executive to review, alter, modify, nullify, or set aside what a subordinate, e.g., members of
the Cabinet and heads of line agencies, had done in the performance of their duties and to substitute
the judgment of the former for that of the latter.
In their Comment on the instant petition, however, respondents asseverate that the CA did not err in its
holding respecting the CTA’s jurisdiction over the controversy.

The Court’s Ruling

The petition is unmeritorious.

Reviews by the Secretary of Finance pursuant to Sec. 4 of the NIRC are appealable to the CTA

To recapitulate, three different, if not conflicting, positions as indicated below have been advanced by
the parties and by the CA as the proper remedy open for assailing respondents’ rulings:

1. Petitioners: The ruling of the Commissioner is subject to review by the Secretary under Sec.
4 of the NIRC, and that of the Secretary to the CA via Rule 43;

2. Respondents: The ruling of the Commissioner is subject to review by the Secretary under
Sec. 4 of the NIRC, and that of the Secretary to the Office of the President before appealing to
the CA via a Rule 43 petition; and

3. CA: The ruling of the Commissioner is subject to review by the CTA.

We now resolve.

Preliminarily, it bears stressing that there is no dispute that what is involved herein is the respondent
Commissioner’s exercise of power under the first paragraph of Sec. 4 of the NIRC––the power to
interpret tax laws. This, in fact, was recognized by the appellate court itself, but erroneously held that
her action in the exercise of such power is appealable directly to the CTA. As correctly pointed out by
petitioner, Sec. 4 of the NIRC readily provides that the Commissioner’s power to interpret the
provisions of this Code and other tax laws is subject to review by the Secretary of Finance. The issue
that now arises is this––where does one seek immediate recourse from the adverse ruling of the
Secretary of Finance in its exercise of its power of review under Sec. 4?

Admittedly, there is no provision in law that expressly provides where exactly the ruling of the
Secretary of Finance under the adverted NIRC provision is appealable to. However, We find that Sec.
7(a)(1) of RA 1125, as amended, addresses the seeming gap in the law asit vests the CTA, albeit
impliedly, with jurisdiction over the CA petition as "other matters" arising under the NIRC or other laws
administered by the BIR. As stated:

Sec. 7. Jurisdiction.- The CTA shall exercise:

a. Exclusive appellate jurisdiction to review by appeal, as herein provided:

1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments,

refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters
arising under the National Internal Revenue or other laws administered by the Bureau of Internal
Revenue. (emphasis supplied)
Even though the provision suggests that it only covers rulings of the Commissioner, We hold that it is,
nonetheless, sufficient enough to include appeals from the Secretary’s review under Sec. 4 of the
NIRC.

It is axiomatic that laws should be given a reasonable interpretation which does not defeat the very
purpose for which they were passed.17 Courts should not follow the letter of a statute when to do so
would depart from the true intent of the legislature or would otherwise yield conclusions inconsistent
with the purpose of the act.18 This Court has, in many cases involving the construction of statutes,
cautioned against narrowly interpreting a statute as to defeat the purpose of the legislator, and rejected
the literal interpretation of statutes if todo so would lead to unjust or absurd results.19

Indeed, to leave undetermined the mode of appeal from the Secretary of Finance would be an injustice
to taxpayers prejudiced by his adverse rulings. To remedy this situation, Weimply from the purpose of
RA 1125 and its amendatory laws that the CTA is the proper forum with which to institute the appeal.
This is not, and should not, in any way, be taken as a derogation of the power of the Office of
President but merely as recognition that matters calling for technical knowledge should be handled by
the agency or quasi-judicial body with specialization over the controversy. As the specialized quasi-
judicial agency mandated to adjudicate tax, customs, and assessment cases, there can be no other
court of appellate jurisdiction that can decide the issues raised inthe CA petition, which involves the tax
treatment of the shares of stocks sold. Petitioner, though, nextinvites attention to the ruling in Ursal v.
Court of Tax Appeals20 to argue against granting the CTA jurisdiction by implication, viz:

Republic Act No. 1125 creating the Court of Tax Appeals did not grant it blanket authority to decide
any and all tax disputes. Defining such special court’s jurisdiction, the Act necessarily limited its
authority to those matters enumerated therein. Inline with this idea we recently approved said court’s
order rejecting an appeal to it by Lopez & Sons from the decision of the Collector ofCustoms, because
in our opinion its jurisdiction extended only to a review of the decisions of the Commissioner of
Customs, as provided bythe statute — and not to decisions of the Collector of Customs. (Lopez & Sons
vs. The Court of Tax Appeals, 100 Phil., 850, 53 Off. Gaz., [10] 3065).

xxxx

x x x Republic Act No. 1125 is a complete law by itself and expressly enumerates the matters which
the Court of Tax Appeals may consider; such enumeration excludes all others by implication.
Expressio unius est exclusio alterius.

Petitioner’s contention is untenable. Lest the ruling in Ursalbe taken out of context, but worse as a
precedent, it must be noted that the primary reason for the dismissal of the said case was that the
petitioner therein lacked the personality to file the suit with the CTA because he was not adversely
affected by a decision or ruling of the Collector of Internal Revenue, as was required under Sec. 11 of
RA 1125.21 As held:

We share the view that the assessor had no personality to resort to the Court of Tax Appeals. The
rulings of the Board of Assessment Appeals did not "adversely affect" him. At most it was the City of
Cebu that had been adversely affected in the sense that it could not thereafter collect higher realty
taxes from the abovementioned property owners. His opinion, it is true had been overruled; but the
overruling inflicted no material damage upon him or his office. And the Court of Tax Appeals was not
created to decide mere conflicts of opinion between administrative officers or agencies. Imagine an
income tax examiner resorting to the Court of Tax Appeals whenever the Collector of Internal Revenue
modifies, or lower his assessment on the return of a tax payer!22

The appellate power of the CTA includes certiorari

Petitioner is quick to point out, however, that the grounds raised in its CA petition included the nullity of
Section 7(c.2.2) of RR 06-08 and RMC 25-11. In an attempt to divest the CTA jurisdiction over the
controversy, petitioner then cites British American Tobacco, wherein this Court has expounded on the
limited jurisdiction of the CTA in the following wise:

While the above statute confers on the CTA jurisdiction to resolve tax disputes in general, this does not
include cases where the constitutionality of a law or rule is challenged. Where what is assailed is the
validity or constitutionality of a law, or a rule or regulation issued by the administrative agency in the
performance of its quasi legislative function, the regular courts have jurisdiction to pass upon the
same. The determination of whether a specific rule or set of rules issued by an administrative agency
contravenes the law or the constitution is within the jurisdiction of the regular courts. Indeed, the
Constitution vests the power of judicial review or the power to declare a law, treaty, international or
executive agreement, presidential decree, order, instruction, ordinance, or regulation inthe courts,
including the regional trial courts. This is within the scope of judicial power, which includes the authority
of the courts to determine inan appropriate action the validity of the acts of the political departments.
Judicial power includes the duty of the courts of justice to settle actual controversies involving rights
which are legally demandable and enforceable, and to determine whether or not there has been a
grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or
instrumentality of the Government.23

Vis-a-vis British American Tobacco, it bears to stress what appears to be a contrasting ruling in Asia
International Auctioneers, Inc. v. Parayno, Jr., to wit:

Similarly, in CIR v. Leal, pursuant to Section 116 of Presidential Decree No. 1158 (The National
Internal Revenue Code, as amended) which states that "[d]ealers in securities shall pay a tax
equivalent to six (6%) per centum of their gross income. Lending investors shall pay a tax equivalent to
five (5%) per cent, of their gross income," the CIR issued Revenue Memorandum Order (RMO) No. 15-
91 imposing 5% lending investor’s tax on pawnshops based on their gross income and requiring all
investigating units of the BIR to investigate and assess the lending investor’s tax due from them. The
issuance of RMO No. 15-91 was an offshoot of the CIR’s finding that the pawnshop business is akin to
that of "lending investors" as defined in Section 157(u) of the Tax Code. Subsequently, the CIR issued
RMC No. 43-91 subjecting pawn tickets to documentary stamp tax. Respondent therein, Josefina Leal,
owner and operator of Josefina’s Pawnshop, asked for a reconsideration of both RMO No. 15-91 and
RMC No. 43-91, but the same was denied by petitioner CIR. Leal then filed a petition for prohibition
with the RTC of San Mateo, Rizal, seeking to prohibit petitioner CIR from implementing the revenue
orders. The CIR, through the OSG, filed a motion to dismiss on the ground of lack of jurisdiction. The
RTC denied the motion. Petitioner filed a petition for certiorari and prohibition with the CA which
dismissed the petition "for lack of basis." In reversing the CA, dissolving the Writ of Preliminary
Injunction issued by the trial court and ordering the dismissal of the case before the trial court, the
Supreme Court held that "[t]he questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or
opinions of the Commissioner implementing the Tax Code on the taxability of pawnshops." They were
issued pursuant to the CIR’s power under Section 245 of the Tax Code "to make rulings or opinions in
connection with the implementation of the provisions of internal revenue laws, including ruling on the
classification of articles of sales and similar purposes."The Court held that under R.A. No. 1125 (An
Act Creating the Court of Tax Appeals), as amended, such rulings of the CIR are appealable to the
CTA.

In the case at bar, the assailed revenue regulations and revenue memorandum circulars are actually
rulings or opinions of the CIR on the tax treatment of motor vehicles sold at public auction within the
SSEZ to implement Section 12 of R.A. No. 7227 which provides that "exportation or removal of goods
from the territory of the [SSEZ] to the other parts of the Philippine territory shall be subject to customs
duties and taxes under the Customs and Tariff Codeand other relevant tax laws of the Philippines."
They were issued pursuant to the power of the CIR under Section 4 of the National Internal Revenue
Code x x x.24 (emphasis added)

The respective teachings in British American Tobacco and Asia International Auctioneers, at first blush,
appear to bear no conflict––that when the validity or constitutionality of an administrative rule or
regulation is assailed, the regular courts have jurisdiction; and if what is assailed are rulings or opinions
of the Commissioner on tax treatments, jurisdiction over the controversy is lodged with the CTA. The
problem with the above postulates, however, is that they failed to take into consideration one crucial
point––a taxpayer can raise both issues simultaneously.

Petitioner avers that there is now a trend wherein both the CTA and the CA disclaim jurisdiction over
tax cases: on the one hand, mere prayer for the declaration of a tax measure’s unconstitutionality or
invalidity before the CTA can result in a petition’s outright dismissal, and on the other hand, the CA will
likewise dismiss the same petition should it find that the primary issue is not the tax measure’s validity
but the assessment or taxability of the transaction or subject involved. To illustrate this point, petitioner
cites the assailed Resolution, thusly: Admittedly, in British American Tobacco vs. Camacho, the
Supreme Court has ruled that the determination of whether a specific rule or set of rules issued by an
administrative agency contravenes the law or the constitution is within the jurisdiction of the regular
courts, not the CTA.

xxxx

Petitioner essentially questions the CIR’s ruling that Petitioner’s sale of shares is a taxable donation
under Sec. 100 of the NIRC. The validity of Sec. 100 of the NIRC, Sec. 7 (C.2.2) and RMC 25-11 is
merely questioned incidentally since it was used by the CIR as bases for its unfavourable opinion.
Clearly, the Petition involves an issue on the taxability of the transaction rather than a direct attack on
the constitutionality of Sec. 100, Sec.7 (c.2.2.) of RR 06-08 and RMC 25-11. Thus, the instant Petition
properly pertains to the CTA under Sec. 7 of RA 9282.

As a result of the seemingly conflicting pronouncements, petitioner submits that taxpayers are now at a
quandary on what mode of appeal should be taken, to which court or agency it should be filed, and
which case law should be followed.

Petitioner’s above submission is specious.

In the recent case of City of Manila v. Grecia-Cuerdo,25 the Court en banc has ruled that the CTA now
has the power of certiorari in cases within its appellate jurisdiction. To elucidate:

The prevailing doctrine is that the authority to issue writs of certiorari involves the exercise of original
jurisdiction which must be expressly conferred by the Constitution or by law and cannot be implied from
the mere existence of appellate jurisdiction. Thus, x x x this Court has ruled against the jurisdiction of
courts or tribunals over petitions for certiorari on the ground that there is no law which expressly gives
these tribunals such power. Itmust be observed, however, that x x x these rulings pertain not to regular
courts but to tribunals exercising quasijudicial powers. With respect tothe Sandiganbayan, Republic Act
No. 8249 now provides that the special criminal court has exclusive original jurisdiction over petitions
for the issuance of the writs of mandamus, prohibition, certiorari, habeas corpus, injunctions, and other
ancillary writs and processes in aid of its appellate jurisdiction.

In the same manner, Section 5 (1), Article VIII of the 1987 Constitution grants power to the Supreme
Court, in the exercise of its original jurisdiction, to issue writs of certiorari, prohibition and mandamus.
With respect to the Court of Appeals, Section 9 (1) of Batas Pambansa Blg. 129 (BP 129) gives the
appellate court, also in the exercise of its original jurisdiction, the power to issue, among others, a writ
of certiorari, whether or not in aid of its appellate jurisdiction. As to Regional Trial Courts, the power to
issue a writ of certiorari, in the exercise of their original jurisdiction, is provided under Section 21 of BP
129.

The foregoing notwithstanding, while there is no express grant of such power, with respect to the CTA,
Section 1, Article VIII of the 1987 Constitution provides, nonetheless, that judicial power shall be
vested in one Supreme Court and in such lower courts as may be established by law and that judicial
power includes the duty of the courts of justice to settle actual controversies involving rights which are
legally demandable and enforceable, and to determine whether or not there has been a grave abuse of
discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of the
Government.

On the strength of the above constitutional provisions, it can be fairly interpreted that the power of the
CTA includes that of determining whether or not there has been grave abuse of discretion amounting
to lack or excess of jurisdiction on the part of the RTC in issuing an interlocutory order in cases falling
within the exclusive appellate jurisdiction of the tax court. It, thus, follows that the CTA, by
constitutional mandate, is vested with jurisdiction to issue writs of certiorari in these cases.

Indeed, in order for any appellate court to effectively exercise its appellate jurisdiction, it must have the
authority to issue, among others, a writ of certiorari. In transferring exclusive jurisdiction over appealed
tax cases to the CTA, it can reasonably be assumed that the law intended to transfer also such power
as is deemed necessary, if not indispensable, in aid of such appellate jurisdiction. There is no
perceivable reason why the transfer should only be considered as partial, not total. (emphasis added)

Evidently, City of Manilacan be considered as a departure from Ursal in that in spite of there being no
express grant in law, the CTA is deemed granted with powers of certiorari by implication. Moreover,
City of Manila diametrically opposes British American Tobacco to the effect that it is now within the
power of the CTA, through its power of certiorari, to rule on the validity of a particular administrative
ruleor regulation so long as it is within its appellate jurisdiction. Hence, it can now rule not only on the
propriety of an assessment or tax treatment of a certain transaction, but also on the validity of the
revenue regulation or revenue memorandum circular on which the said assessment is based.

Guided by the doctrinal teaching in resolving the case at bar, the fact that the CA petition not only
contested the applicability of Sec. 100 of the NIRC over the sales transaction but likewise questioned
the validity of Sec. 7 (c.2.2) of RR 06-08 and RMC 25-11 does not divest the CTA of its jurisdiction
over the controversy, contrary to petitioner's arguments.
The price difference is subject to donor's tax

Petitioner's substantive arguments are unavailing. The absence of donative intent, if that be the case,
does not exempt the sales of stock transaction from donor's tax since Sec. 100 of the NIRC
categorically states that the amount by which the fair market value of the property exceeded the value
of the consideration shall be deemed a gift.1âwphi1 Thus, even if there is no actual donation, the
difference in price is considered a donation by fiction of law.

Moreover, Sec. 7(c.2.2) of RR 06-08 does not alter Sec. 100 of the NIRC but merely sets the
parameters for determining the "fair market value" of a sale of stocks. Such issuance was made
pursuant to the Commissioner's power to interpret tax laws and to promulgate rules and regulations for
their implementation.

Lastly, petitioner is mistaken in stating that RMC 25-11, having been issued after the sale, was being
applied retroactively in contravention to Sec. 246 of the NIRC.26 Instead, it merely called for the strict
application of Sec. 100, which was already in force the moment the NIRC was enacted.

WHEREFORE, the petition is hereby DISMISSED. The Resolutions of the Court of Appeals in CA-G.R.
SP No. 127984 dated May 23, 2013 and January 21, 2014 are hereby AFFIRMED.

SO ORDERED.

PRESBITERO J. VELASCO, JR.

Associate Justice

WE CONCUR:

DIOSDADO M. PERALTA
Associate Justice

MARTIN S. VILLARAMA, JR. JOSE CATRAL MENDOZA*

Associate Justice Associate Justice

MARVIC MARIO VICTOR F. LEONEN**

Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Court's Division.

PRESBITERO J. VELASCO, JR.

Associate Justice
Chairperson

CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, I
certify that the conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Court's Division.

MARIA LOURDES P.A. SERENO

Chief Justice