171478120 tax-cases-1

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G.R. No. L-34937 March 13, 1933
CONCEPCION VIDAL DE ROCES and her husband,
MARCOS ROCES, and ELVIRA VIDAL DE RICHARDS, plaintiff-
appellants,
vs.
JUAN POSADAS, JR., Collector of Internal Revenue, defendant-
appellee.
Feria and La O for appellants.
Attorney-General Jaranilla for appellee.
IMPERIAL, J.:
The plaintiffs herein brought this action to recover from the
defendant,Collector of InternalRevenue,certain sums of money paid
by them under protest as inheritance tax. They appealed from the
judgment rendered by the Court of First Instance of Manila
dismissing the action, without costs.
On March 10 and 12, 1925, Esperanza Tuazon, by means of public
documents, donated certain parcels of land situated in Manila to the
plaintiffs herein, who, with their respective husbands,accepted them
in the same public documents, which were duly recorded in the
registry of deeds. By virtue of said donations, the plaintiffs took
possession of the said lands, received the fruits thereof and obtained
the corresponding transfer certificates of title.
On January 5, 1926, the donor died in the City of Manila without
leaving any forced heir and her will which was admitted to probate,
she bequeathed to each of the donees the sum of P5,000. After the
estate had been distributed among the instituted legatees and before
delivery of their respective shares, the appellee herein, as Collector
of Internal Revenue, ruled that the appellants, as donees and
legatees, should pay as inheritance tax the sums of P16,673 and
P13,951.45,respectively. Of these sums P15,191.48 was levied as tax
on the donation to Concepcion Vidal de Roces and P1,481.52 on her
legacy, and, likewise, P12,388.95 was imposed upon the donation
made to Elvira Vidal de Richards and P1,462.50 on her legacy. At first

the appellants refused to pay the aforementioned taxes but, at the
insistence of the appellee and in order not to delay the adjudication
of the legacies, they agreed at last, to pay them under protest.
The appellee filed a demurrer to the complaint on the ground that
the facts alleged therein were not sufficient to constitute a cause of
action. After the legal questions raised therein had been discussed,
the court sustained the demurrer and ordered the amendment of the
complaint which the appellants failed to do, whereupon the trial
court dismissed the action on the ground that the aforementioned
appellants did not really have a right of action.
In their brief, the appellants assign only one alleged error, to wit:
that the demurrer interposed by the appellee was sustained without
sufficient ground.
The judgment appealed from was based on the provisions of section
1540 Administrative Code which reads as follows:
SEC. 1540. Additions of gifts and advances. — After the
aforementioned deductions have been made, there shall be
added to the resulting amount the value of all gifts or
advances made by the predecessor to any those who, after
his death, shall prove to be his heirs, devisees, legatees, or
donees mortis causa.
The appellants contend that the above-mentioned legal provision
does not include donations inter vivos and if it does, it is
unconstitutional, null and void for the following reasons: first,
because it violates section 3 of the Jones Law which provides that no
law should embrace more than one subject, and that subject should
be expressed in the title thereof; second that the Legislature has no
authority to impose inheritance tax on donations inter vivos; and
third, because a legal provision of this character contravenes the
fundamental rule of uniformity of taxation. The appellee, in turn,
contends that the words "all gifts" refer clearly to donations inter
vivos and, in support of his theory, cites the doctrine laid in the case
of Tuason and Tuason vs.Posadas (54 Phil., 289).After a carefulstudy
of the law and the authorities applicable thereto, we are the opinion
that neither theory reflects the true spirit of the aforementioned
provision. The gifts referred to in section 1540 of the Revised
Administration Code are, obviously, those donations inter vivos that
take effect immediately or during the lifetime of the donor but are
made in consideration or in contemplation of death. Gifts inter vivos,
the transmission of which is not made in contemplation of the
donor's death should not be understood as included within the said
legal provision for the reason that it would amount to imposing a
direct tax on property and not on the transmission thereof, which act
does not come within the scope of the provisions contained in Article
XI of Chapter 40 of the Administrative Code which deals expressly
with the tax on inheritances, legacies and other acquisitions mortis
causa.
Our interpretation of the law is not in conflict with the rule laid down
in the case of Tuason and Tuason vs. Posadas, supra. We said therein,
as we say now, that the expression "all gifts" refers to gifts inter
vivos inasmuch as the law considers them as advances on
inheritance, in the sense that they are gifts inter vivos made in
contemplation or in consideration of death. In that case, it was not
held that that kind of gifts consisted in those made completely
independent of death or without regard to it.
Said legal provision is not null and void on the alleged ground that
the subject matter thereof is not embraced in the title of the section
under which it is enumerated. On the contrary, its provisions are
perfectly summarized in the heading, "Tax on Inheritance, etc."
which is the title of Article XI. Furthermore, the constitutional
provision cited should not be strictly construed as to make it
necessary that the title contain a full index to all the contents of the
law. It is sufficient if the language used therein is expressed in such a
way that in case of doubt it would afford a means of determining the
legislators intention. (Lewis' Sutherland Statutory Construction, Vol.
II, p. 651.) Lastly, the circumstance that the Administrative Code was
prepared and compiled strictly in accordance with the provisions of
the Jones Law on that matter should not be overlooked and that, in a
compilation of laws such as the Administrative Code, it is but natural
and proper that provisions referring to diverse matters should be
found.(Ayson and Ignacio vs. Provincial Board of Rizal and Municipal
Council of Navotas, 39 Phil., 931.)
The appellants question the power of the Legislature to impose taxes
on the transmission of real estate that takes effect immediately and
during the lifetime of the donor, and allege as their reason that such
tax partakes of the nature of the land tax which the law has already
created in another part of the Administrative Code. Without making
express pronouncement on this question, for it is unnecessary, we
wish to state that such is not the case in these instance. The tax
collected by the appellee on the properties donated in 1925 really
constitutes an inheritance tax imposed on the transmission of said
properties in contemplation or in consideration of the donor's death
and under the circumstance that the donees were later instituted as

the former's legatees. For this reason, the law considers such
transmissions in the form of gifts inter vivos, as advances on
inheritance and nothing therein violates any constitutional
provision, inasmuch as said legislation is within the power of the
Legislature.
Property Subject to Inheritance Tax. — The inheritance tax
ordinarily applies to all property within the power of the
state to reach passing by will or the laws regulating
intestate succession or by gift inter vivos in the manner
designated by statute, whether such property be real or
personal, tangible or intangible, corporeal or incorporeal.
(26 R.C.L., p. 208, par. 177.)
In the case of Tuason and Tuason vs. Posadas, supra, it was also held
that section 1540 of the Administrative Code did not violate the
constitutional provision regarding uniformity of taxation. It cannot
be null and void on this ground because it equally subjects to the
same tax all of those donees who later become heirs, legatees or
donees mortis causa by the will of the donor. There would be a
repugnant and arbitrary exception if the provisions of the law were
not applicable to all donees of the same kind. In the case cited above,
it was said: "At any rate the argument adduced against its
constitutionality, which is the lack of Uniformity, does not seem to be
well founded. It was said that under such an interpretation, while a
donee inter vivos who, after the predecessor's death proved to be an
heir, a legatee, or a donee mortis causa, would have to pay the tax,
another donee inter vivos who did not prove to he an heir, a legatee,
or a donee mortis causa of the predecessor, would be exempt from
such a tax. But as these are two different cases, the principle of
uniformity is inapplicable to them."
The last question of a procedural nature arising from the case at bar,
which should be passed upon, is whether the case, as it now stands,
can be decided on the merits or should be remanded to the court a
quo for further proceedings. According to our view of the case, it
follows that, if the gifts received by the appellants would have the
right to recover the sums of money claimed by them. Hence the
necessity of ascertaining whether the complaint contains an
allegation to that effect. We have examined said complaint and found
nothing of that nature. On the contrary, it be may be inferred from
the allegations contained in paragraphs 2 and 7 thereof that said
donations inter vivos were made in consideration of the donor's
death. We refer to the allegations that such transmissions were
effected in the month of March, 1925,that the donor died in January,
1926,and that the donees were instituted legatees in the donor's will
which was admitted to probate. It is from these allegations,
especially the last, that we infer a presumption juris tantum that said
donations were made mortis causa and, as such, are subject to the
payment of inheritance tax.
Wherefore, the demurrer interposed by the appellee was well-
founded because it appears that the complaint did not allege fact
sufficient to constitute a cause of action. When the appellants refused
to amend the same, spite of the court's order to that effect, they
voluntarily waived the opportunity offered them and they are not
now entitled to have the case remanded for further proceedings,
which would serve no purpose altogether in view of the insufficiency
of the complaint.
Wherefore, the judgment appealed from is hereby affirmed, with
costs of this instance against the appellants. So ordered.
Avanceña, C.J., Villamor, Ostrand, Abad Santos, Hull, Vickers and
Buttes, JJ., concur.
Separate Opinions
VILLA-REAL, J., dissenting:
I sustain my concurrence in Justice Street's dissenting opinion in the
case of Tuason and Tuason vs. Posadas (54 Phil., 289).
The majority opinion to distinguish the present case from above-
mentioned case of Tuason and Tuason vs. Posadas, by interpreting
section 1540 of the Administrative Code in the sense that it
establishes the legal presumption juris tantum that all gifts inter
vivos made to persons who are not forced heirs but who are
instituted legatees in the donor's will, have been made in
contemplation of the donor's death. Presumptions are of two kinds:
One determined by law which is also called presumption of law or of
right; and another which is formed by the judge from circumstances
antecedent to, coincident with or subsequent to the principal fact
under investigation, which is also called presumption of
man (presuncion de hombre). (Escriche, Vol. IV, p. 662.) The Civil
Code as well as the code of Civil Procedure establishes
presumptions juris et de jure and juris tantum which the courts
should take into account in deciding questions of law submitted to
them for decision. The presumption which majority opinion wishes
to draw from said section 1540 of the Administrative Code can
neither be found in this Code nor in any of the aforementioned Civil

Code and Code of Civil Procedure. Therefore, said presumption
cannot be called legal or of law. Neither can it be called a
presumption of man (presuncion de hombre) inasmuch as the
majority opinion did not infer it from circumstances antecedent to,
coincident with or subsequent to the principal fact with is the
donation itself. In view of the nature, mode of making and effects of
donations inter vivos, the contrary presumption would be more
reasonable and logical; in other words, donations inter vivos made to
persons who are not forced heirs, but who are instituted legatees in
the donor's will, should be presumed as not made mortis causa,
unless the contrary is proven. In the case under consideration, the
burden of the proof rests with the person who contends that the
donation inter vivos has been made mortis causa.
It is therefore, the undersigned's humble opinion that the order
appealed from should be reversed and the demurrer overruled, and
the defendant ordered to file his answer to the complaint.
Street, J., concurs.
G.R. No. L-36770 November 4, 1932
LUIS W. DISON, plaintiff-appellant,
vs.
JUAN POSADAS, JR., Collector of Internal Revenue, defendant-
appellant.
Marcelino Aguas for plaintiff-appellant.
Attorney-General Jaranilla for defendant-appellant.
BUTTE, J.:
This is an appealfrom the decision of the Court of First Instance
of Pampanga in favor of the defendant Juan Posadas, Jr., Collector of
Internal Revenue, in a suit filed by the plaintiffs, Luis W. Dison, for
the recovery of an inheritance tax in the sum of P2,808.73 paid under
protest. The petitioner alleged in his complaint that the tax is illegal
because he received the property, which is the basis of the tax, from
his father before his death by a deed of gift inter vivos which was
duly accepted and registered before the death of his father. The
defendant answered with a general denial and with a
counterdemand for the sum of P1,245.56 which it was alleged is a
balance still due and unpaid on account of said tax. The plaintiff
replied to the counterdemand with a general denial. The courta
quo held that the cause of action set up in the counterdemand was
not proven and dismissed the same. Both sides appealed to this
court, but the cross-complaint and appeal of the Collector of Internal
Revenue were dismissed by this court on March 17, 1932, on motion
of the Attorney-General.1awphil.net
The only evidence introduced at the trial of this cause was the
proof of payment of the tax under protest, as stated, and the deed of
gift executed by Felix Dison on April 9, 1928, in favor of his sons Luis
W. Dison, the plaintiff-appellant.This deed of gift transferred twenty-
two tracts of land to the donee, reserving to the donor for his life the
usufruct of three tracts. This deed was acknowledged by the donor
before a notary public on April 16, 1928. Luis W. Dison, on April 17,
1928, formally accepted said gift by an instrument in writing which
he acknowledged before a notary public on April 20, 1928.

At the trial the parties agreed to and filed the following
ingenious stipulation of fact:
1. That Don Felix Dison died on April 21, 1928;
2. That Don Felix Dison, before his death, made a gift inter
vivos in favor of the plaintiff Luis W. Dison of all his
property according to a deed of gift (Exhibit D) which
includes all the property of Don Felix Dizon;
3. That the plaintiff did not receive property of any kind of
Don Felix Dison upon the death of the latter;
4. That Don Luis W. Dison was the legitimate and only child
of Don Felix Dison.
It is inferred from Exhibit D that Felix Dison was a widower at
the time of his death.
The theory of the plaintiff-appellant is that he received and
holds the property mentioned by a consummated gift and that Act
No. 2601 (Chapter 40 of the Administrative Code) being the
inheritance tax statute, does not tax gifts. The provision directly here
involved is section 1540 of the Administrative Code which reads as
follows:
Additions of Gifts and Advances. — After the
aforementioned deductions have been made, there shall be
added to the resulting amount the value of all gifts or
advances made by the predecessor to any of those who,
after his death, shall prove to be his heirs, devises, legatees,
or donees mortis causa.
The question to be resolved may be stated thus: Does section
1540 of the Administrative Code subject the plaintiff-appellant to the
payment of an inheritance tax?
The appellant argues that there is no evidence in this case to
support a finding that the gift was simulated and that it was an
artifice for evading the payment of the inheritance tax, as is
intimated in the decision of the court below and the brief of the
Attorney-General. We see no reason why the court may not go
behind the language in which the transaction is masked in order to
ascertain its true character and purpose. In this case the scanty facts
before us may not warrant the inference that the conveyance,
acknowledged by the donor five days before his death and accepted
by the donee one day before the donor's death, was fraudulently
made for the purpose of evading the inheritance tax. But the facts, in
our opinion, do warrant the inference that the transfer was an
advancement upon the inheritance which the donee, as the sole and
forced heir of the donor, would be entitled to receive upon the death
of the donor.
The argument advanced by the appellant that he is not an heir
of his deceased father within the meaning of section 1540 of the
Administrative Code because his father in his lifetime had given the
appellant all his property and left no property to be inherited, is so
fallacious that the urging of it here casts a suspicion upon the
appellants reason for completing the legal formalities of the transfer
on the eve of the latter's death. We do not know whether or not the
father in this case left a will; in any event, this appellant could not be
deprived of his share of the inheritance because the Civil Code
confers upon him the status of a forced heir. We construe the
expression in section 1540 "any of those who, after his death, shall
prove to be his heirs", to include those who, by our law, are given the
status and rights of heirs, regardless of the quantity of property they
may receive as such heirs. That the appellant in this case occupies
the status of heir to his deceased father cannot be questioned.
Construing the conveyance here in question, under the facts
presented, as an advance made by Felix Dison to his only child, we
hold section 1540 tobe applicable and the tax to have been properly
assessed by the Collector of Internal Revenue.
This appeal was originally assigned to a Division of five but
referred tothe court in banc by reason of the appellant's attack upon
the constitutionality of section 1540. This attack is based on the sole
ground that insofar as section 1540 levies a tax upon gifts inter vivos,
it violates that provision of section 3 of the organic Act of the
Philippine Islands (39 Stat. L., 545) which reads as follows: "That no
bill which may be enacted into law shall embraced more than one
subject, and that subject shall be expressed in the title of the bill."
Neither the title of Act No. 2601 nor chapter 40 of the Administrative
Code makes any reference to a tax on gifts. Perhaps it is enough to
say of this contention that section 1540 plainly does not tax gifts per
se but only when those gifts are made to those who shall prove to be
the heirs, devisees, legatees or donees mortis causa of the donor. This
court said in the case of Tuason and Tuason vs. Posadas 954 Phil.,
289):lawphil.net

When the law says all gifts, it doubtless refers to
gifts inter vivos, and not mortis causa. Both the letter and
the spirit of the law leave no room for any other
interpretation. Such, clearly, is the tenor of the language
which refers to donations that took effect before the
donor's death, and not to mortis causadonations, which can
only be made with the formalities of a will, and can only
take effect after the donor's death. Any other construction
would virtually change this provision into:
". . . there shall be added to the resulting amount the value of all
gifts mortis causa . . . made by the predecessor to those who, after his
death, shall prove to be his . . . donees mortis causa." We cannot give
to the law an interpretation that would so vitiate its language. The
truth of the matter is that in this section (1540) the law presumes
that such gifts have been made in anticipation of inheritance, devise,
bequest, or gift mortis causa, when the donee, after the death of the
donor proves to be his heir, devisee or donee mortis causa, for the
purpose of evading the tax, and it is to prevent this that it provides
that they shall be added to the resulting amount." However much
appellant's argument on this point may fit his preconceived notion
that the transaction between him and his father was a consummated
gift with no relation to the inheritance, we hold that there is not
merit in this attack upon the constitutionality of section 1540 under
our view of the facts. No other constitutional questions were raised
in this case.
The judgment below is affirmed with costs in this instance
against the appellant. So ordered.
Avanceña, C.J., Street, Malcolm, Ostrand, Abad Santos, Vickers and
Imperial, JJ., concur.
[G.R. No. 123206. March 22, 2000]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT
OF APPEALS, COURT OF TAX APPEALS and JOSEFINA P.
PAJONAR, as Administratrixof the Estate of Pedro P.
Pajonar, respondents.
R E S O L U T I O N
GONZAGA-REYES, J.: Supr-ema
Assailed in this petition for review on certiorari is the December 21,
1995 Decision[1] of the Court of Appeals[2] in CA-G.R. Sp. No. 34399
affirming the June 7, 1994 Resolution of the Court of Tax Appeals in
CTA Case No. 4381 granting private respondent Josefina P. Pajonar,
as administratrix of the estate of Pedro P. Pajonar, a tax refund in the
amount of P76,502.42, representing erroneously paid estate taxes
for the year 1988.
PedroPajonar, a member of the Philippine Scout, Bataan Contingent,
during the second World War, was a part of the infamous Death
March by reason of which he suffered shock and became insane. His
sister Josefina Pajonar became the guardian over his person, while
his property was placed under the guardianship of the Philippine
National Bank (PNB) by the Regional Trial Court of Dumaguete City,
Branch 31, in Special Proceedings No. 1254. He died on January 10,
1988. He was survived by his two brothers Isidro P. Pajonar and
Gregorio Pajonar, his sister Josefina Pajonar, nephews Concordio
Jandog and Mario Jandog and niece Conchita Jandog.
On May 11, 1988, the PNB filed an accounting of the decedent's
property under guardianship valued at P3,037,672.09 in Special
Proceedings No. 1254. However, the PNB did not file an estate tax
return, instead it advised Pedro Pajonar's heirs to execute an
extrajudicial settlement and to pay the taxes on his estate. On April 5,
1988,pursuant tothe assessment by the Bureau of Internal Revenue
(BIR), the estate of Pedro Pajonar paid taxes in the amount of P2,557.

On May 19, 1988, Josefina Pajonar filed a petition with the Regional
Trial Court of Dumaguete City for the issuance in her favor of letters
of administration of the estate of her brother. The case was docketed
as Special Proceedings No. 2399. On July 18, 1988, the trial court
appointed Josefina Pajonar as the regular administratrix of Pedro
Pajonar's estate.
On December 19, 1988, pursuant to a second assessment by the BIR
for deficiency estate tax, the estate of Pedro Pajonar paid estate tax
in the amount of P1,527,790.98. Josefina Pajonar, in her capacity as
administratrix and heir of Pedro Pajonar's estate, filed a protest on
January 11,1989 with the BIR praying that the estate tax payment in
the amount of P1,527,790.98, or at least some portion of it, be
returned to the heirs.[3] Jur-is
However, on August 15, 1989, without waiting for her protest to be
resolved by the BIR, Josefina Pajonar filed a petition for review with
the Court of Tax Appeals (CTA), praying for the refund of
P1,527,790.98, or in the alternative, P840,202.06, as erroneously
paid estate tax.[4] The case was docketed as CTA Case No. 4381.
On May 6, 1993, the CTA ordered the Commissioner of Internal
Revenue to refund Josefina Pajonar the amount of P252,585.59,
representing erroneously paid estate tax for the year 1988.[5]
Among the deductions from the gross estate allowed by the CTA
were the amounts of P60,753 representing the notarial fee for the
Extrajudicial Settlement and the amount of P50,000 as the attorney's
fees in Special Proceedings No. 1254 for guardianship.[6]Juri-ssc
On June 15, 1993, the Commissioner of Internal Revenue filed a
motion for reconsideration[7] of the CTA's May 6, 1993 decision
asserting, among others, that the notarial fee for the Extrajudicial
Settlement and the attorney's fees in the guardianship proceedings
are not deductible expenses.
On June 7, 1994, the CTA issued the assailed Resolution[8] ordering
the Commissioner of Internal Revenue to refund Josefina Pajonar, as
administratrix of the estate of Pedro Pajonar, the amount of
P76,502.42 representing erroneously paid estate tax for the year
1988. Also, the CTA upheld the validity of the deduction of the
notarial fee for the Extrajudicial Settlement and the attorney's fees in
the guardianship proceedings.
On July 5, 1994,the Commissioner of Internal Revenue filed with the
Court of Appeals a petition for review of the CTA's May 6, 1993
Decision and its June 7, 1994 Resolution, questioning the validity of
the abovementioned deductions. On December 21,1995,the Court of
Appeals denied the Commissioner's petition.[9]
Hence, the present appeal by the Commissioner of Internal Revenue.
The sole issue in this case involves the construction of section
79[10] of the National Internal Revenue Code[11] (Tax Code) which
provides for the allowable deductions from the gross estate of the
decedent. More particularly, the question is whether the notarial fee
paid for the extrajudicial settlement in the amount of P60,753 and
the attorney's fees in the guardianship proceedings in the amount of
P50,000 may be allowed as deductions from the gross estate of
decedent in order to arrive at the value of the net estate.
We answer this question in the affirmative, thereby upholding the
decisions of the appellate courts. J-jlex
In its May 6, 1993 Decision, the Court of Tax Appeals ruled thus:
Respondent maintains that only judicial expenses
of the testamentary or intestate proceedings are
allowed as a deduction to the gross estate. The
amount of P60,753.00 is quite extraordinary for a
mere notarial fee.
This Court adopts the view under American
jurisprudence that expenses incurred in the
extrajudicial settlement of the estate should be
allowed as a deduction from the gross estate.
"There is no requirement of formal
administration. It is sufficient that the expense be
a necessary contribution toward the settlement of
the case." [ 34 Am. Jur. 2d, p. 765; Nolledo, Bar
Reviewer in Taxation, 10thEd. (1990), p. 481 ]
xxx.....xxx.....xxx
The attorney's fees of P50,000.00, which were
already incurred but not yet paid, refers to the
guardianship proceeding filed by PNB, as
guardian over the ward of Pedro Pajonar,

docketed as Special Proceeding No. 1254 in the
RTC (Branch XXXI) of Dumaguete City. x x x
xxx.....xxx.....xxx
The guardianship proceeding had been
terminated upon delivery of the residuary estate
to the heirs entitled thereto. Thereafter, PNB was
discharged of any further responsibility.
Attorney's fees in order to be deductible from the
gross estate must be essential to the collection of
assets, payment of debts orthe distribution of the
property to the persons entitled to it. The services
for which the fees are charged must relate to the
proper settlement of the estate. [ 34 Am. Jur. 2d
767. ] In this case, the guardianship proceeding
was necessary for the distribution of the property
of the late Pedro Pajonar to his rightful heirs. Sc-
juris
xxx.....xxx.....xxx
PNB was appointed as guardian over the assets of
the late Pedro Pajonar, who, even at the time of
his death, was incompetent by reason of insanity.
The expenses incurred in the guardianship
proceeding was but a necessary expense in the
settlement of the decedent's estate. Therefore, the
attorney's fee incurred in the guardianship
proceedings amounting to P50,000.00 is a
reasonable and necessary business expense
deductible from the gross estate of the
decedent.[12]
Upon a motion for reconsideration filed by the Commissioner of
Internal Revenue, the Court of Tax Appeals modified its previous
ruling by reducing the refundable amount to P76,502.43 since it
found that a deficiency interest should be imposed and the
compromise penalty excluded.[13] However, the tax court upheld its
previous ruling regarding the legality of the deductions -
It is significant to note that the inclusion of the
estate tax law in the codification of all our
national internal revenue laws with the
enactment of the National Internal Revenue Code
in 1939 were copied from the Federal Law of the
United States. [UMALI, Reviewer in Taxation
(1985),p.285 ] The 1977 Tax Code, promulgated
by Presidential Decree No. 1158, effective June 3,
1977, reenacted substantially all the provisions of
the old law on estate and gift taxes, except the
sections relating to the meaning of gross estate
and gift. [ Ibid, p. 286. ] Nc-mmis
In the United States, [a]dministrative expenses,
executor's commissions and attorney's fees are
considered allowable deductions from the Gross
Estate. Administrative expenses are limited to
such expenses as are actually and necessarily
incurred in the administration of a decedent's
estate. [PRENTICE-HALL, Federal Taxes Estate
and Gift Taxes (1936), p. 120, 533. ] Necessary
expenses of administration are such expenses as
are entailed for the preservation and productivity
of the estate and for its management for purposes
of liquidation, payment of debts and distribution
of the residue among the persons entitled
thereto.[Lizarraga Hermanos vs. Abada, 40 Phil.
124.] They must be incurred for the settlement of
the estate as a whole. [34 Am. Jur. 2d, p. 765. ]
Thus, where there were nosubstantial community
debts and it was unnecessary to convert
community property to cash, the only practical
purpose of administration being the payment of
estate taxes, full deduction was allowed for
attorney's fees and miscellaneous expenses
charged wholly to decedent's estate. [ Ibid., citing
Estate of Helis, 26 T .C. 143 (A). ]
Petitioner stated in her protest filed with the BIR
that "upon the death of the ward, the PNB, which
was still the guardian of the estate, (Annex 'Z' ),
did not file an estate tax return; however, it
advised the heirs to execute an extrajudicial
settlement, to pay taxes and to post a bond equal
to the value of the estate, for which the estate paid
P59,341.40 for the premiums.(See Annex 'K')." [p.
17, CTA record. ] Therefore, it would appear from
the records of the case that the only practical
purpose of settling the estate by means of an

extrajudicial settlement pursuant to Section 1 of
Rule 74 of the Rules of Court was for the payment
of taxes and the distribution of the estate to the
heirs. A fortiori, since our estate tax laws are of
American origin, the interpretation adopted by
American Courts has some persuasive effect on
the interpretation of our own estate tax laws on
the subject.
Anent the contention of respondent that the
attorney's fees of P50,000.00 incurred in the
guardianship proceeding should not be deducted
from the Gross Estate, We consider the same
unmeritorious. Attorneys' and guardians' fees
incurred in a trustee's accounting of a
taxable inter vivos trust attributable to the usual
issues involved in such an accounting was held to
be proper deductions because these are expenses
incurred in terminating an inter vivos trust that
was includible in the decedent's estate. (Prentice
Hall, Federal Taxes on Estate and Gift, p.120, 861]
Attorney's fees are allowable deductions if
incurred for the settlement of the estate. It is
noteworthy to point that PNB was appointed the
guardian over the assets of the deceased.
Necessarily the assets of the deceased formed part
of his gross estate. Accordingly, all expenses
incurred in relation to the estate of the deceased
will be deductible for estate tax purposes
provided these are necessary and ordinary
expenses for administration of the settlement of
the estate.[14]
In upholding the June 7, 1994 Resolution of the Court of Tax Appeals,
the Court of Appeals held that: Newmiso
2. Although the Tax Code specifies "judicial
expenses of the testamentary or intestate
proceedings," there is no reason why expenses
incurred in the administration and settlement of
an estate in extrajudicial proceedings should not
be allowed. However, deduction is limited to such
administration expenses as are actually and
necessarily incurred in the collection of the assets
of the estate, payment of the debts, and
distribution of the remainder among those
entitled thereto. Such expenses may include
executor's or administrator's fees, attorney's fees,
court fees and charges, appraiser's fees, clerk hire,
costs of preserving and distributing the estate and
storing or maintaining it, brokerage fees or
commissions for selling or disposing of the estate,
and the like. Deductible attorney's fees are those
incurred by the executor or administrator in the
settlement of the estate or in defending or
prosecuting claims against or due the estate.
(Estate and Gift Taxation in the Philippines, T. P.
Matic, Jr., 1981 Edition, p. 176 ).
xxx.....xxx.....xxx
It is clear then that the extrajudicial settlement
was for the purpose of payment of taxes and the
distribution of the estate to the heirs. The
execution of the extrajudicial settlement
necessitated the notarization of the same. Hence
the Contract of Legal Services of March 28, 1988
entered into between respondent Josefina Pajonar
and counsel was presented in evidence for the
purpose of showing that the amount of
P60,753.00 was for the notarization of the
Extrajudicial Settlement. It follows then that the
notarial fee of P60,753.00 was incurred primarily
to settle the estate of the deceased Pedro Pajonar.
Said amount should then be considered an
administration expenses actually and necessarily
incurred in the collection of the assets of the
estate, payment of debts and distribution of the
remainder among those entitled thereto. Thus, the
notarial fee of P60,753 incurred for the
Extrajudicial Settlement should be allowed as a
deduction from the gross estate.
3. Attorney's fees, on the other hand, in order to
be deductible from the gross estate must be
essential to the settlement of the estate. Acctmis
The amount of P50,000.00 was incurred as
attorney's fees in the guardianship proceedings in
Spec. Proc. No. 1254.Petitioner contends that said
amount are not expenses of the testamentary or
intestate proceedings as the guardianship

proceeding was instituted during the lifetime of
the decedent when there was yet no estate to be
settled.
Again , this contention must fail.
The guardianship proceeding in this case was
necessary for the distribution of the property of
the deceased Pedro Pajonar. As correctly pointed
out by respondent CTA, the PNB was appointed
guardian over the assets of the deceased, and that
necessarily the assets of the deceased formed part
of his gross estate. x x x
xxx.....xxx.....xxx
It is clear therefore that the attorney's fees
incurred in the guardianship proceeding in Spec.
Proc. No. 1254 were essential to the distribution
of the property to the persons entitled thereto.
Hence, the attorney's fees incurred in the
guardianship proceedings in the amount of
P50,000.00 should be allowed as a deduction from
the gross estate of the decedent.[15]
The deductions from the gross estate permitted under section 79 of
the Tax Code basically reproduced the deductions allowed under
Commonwealth Act No. 466 (CA 466), otherwise known as the
National Internal Revenue Code of 1939,[16] and which was the first
codification of Philippine tax laws. Section 89 (a) (1) (B) of CA 466
also provided for the deduction of the "judicial expenses of the
testamentary or intestate proceedings" for purposes of determining
the value of the net estate. Philippine tax laws were, in turn, based on
the federal tax laws of the United States.[17] In accord with
established rules of statutory construction, the decisions of American
courts construing the federal tax code are entitled to great weight in
the interpretation of our own tax laws.[18] Scc-alr
Judicial expenses are expenses of administration.[19] Administration
expenses, as an allowable deduction from the gross estate of the
decedent for purposes of arriving at the value of the net estate, have
been construed by the federaland state courts of the United States to
include all expenses "essential to the collection of the assets,
payment of debts or the distribution of the property to the persons
entitled to it."[20] In other words, the expenses must be essential to
the proper settlement of the estate. Expenditures incurred for the
individual benefit of the heirs, devisees or legatees are not
deductible.[21] This distinction has been carried over to our
jurisdiction. Thus, in Lorenzo v. Posadas[22] the Court construed the
phrase "judicial expenses of the testamentary or intestate
proceedings" as not including the compensation paid to a trustee of
the decedent's estate when it appeared that such trustee was
appointed for the purpose of managing the decedent's real estate for
the benefit of the testamentary heir. In another case, the Court
disallowed the premiums paid on the bond filed by the administrator
as an expense of administration since the giving of a bond is in the
nature of a qualification for the office, and not necessary in the
settlement of the estate.[23]Neither may attorney's fees incident to
litigation incurred by the heirs in asserting their respective rights be
claimed as a deduction from the gross estate.[24]
Coming to the case at bar, the notarial fee paid for the extrajudicial
settlement is clearly a deductible expense since such settlement
effected a distribution of Pedro Pajonar's estate to his lawful heirs.
Similarly, the attorney's fees paid to PNB for acting as the guardian of
Pedro Pajonar's property during his lifetime should also be
considered as a deductible administration expense. PNB provided a
detailed accounting of decedent's property and gave advice as to the
proper settlement of the latter's estate, acts which contributed
towards the collection of decedent's assets and the subsequent
settlement of the estate.
We find that the Court of Appeals did not commit reversible error in
affirming the questioned resolution of the Court of Tax Appeals.
WHEREFORE, the December 21, 1995 Decision of the Court of
Appeals is AFFIRMED. The notarial fee for the extrajudicial
settlement and the attorney's fees in the guardianship proceedings
are allowable deductions from the gross estate of Pedro Pajonar.
SO ORDERED.
Melo, (Chairman), Vitug, Panganiban, and Purisima, JJ., concur. Calrs-
pped
[1] Entitled "Commissioner of Internal Revenue v. Josefina P. Pajonar, as Administratrix of
the Estate of Pedro P. Pajonar, and Court of Tax Appeals." Rollo, 35-46.

[2] Eighth Division composed of J. Jaime M. Lantin, ponente; and JJ Eduardo G. Montenegro
and Jose C. De la Rama, concurring.
[3] CA Records, 45-53.
[4] Ibid., 37-44.
[5] The CTA made the following computations¾
Estate of Pedro P. Pajonar
Lagtangon, Siaton, Negros Oriental
Died January 10, 1998
I.Real
Properties
P102,966.59
II.Personal
Properties
a. Refrigerator P7,500.00
b. Wall Clock, Esso Gasul Tables and
Chairs
3,090.00
c.Beddings, Stereo Cassette, TV,
Betamax
15,700.00
d. Karaoke, Electric Iron,
Fan,Transformer and Corner Set
7,400.00
e. Toyota Tamaraw 27,500.00 61,190.00
Additional Personal Properties:
f. Time Deposit-PNB P200,000.00
g. Stocks and Bonds-PNB 201,232.37
h. Money Market 2,300,000.00
i. Cash Deposit 114,101.83 2,815,334.20
GROSS ESTATE P
2,979,490.79
Less: Deductions:
Aa. Funeral expenses P50,000.00
b. Commission to Trustee (PNB) 18,335.93
Bc. Notarial Fee for the Extra-judicial
Settlement
60,753.00
d. Attorney’s Fees in Special Proceeding
No. 1254 for guardianship
50,000.00
e.Filing Fees in Special Proceeding No.
2399
6,374.88
f.Publication of Notice to Creditors
September 7, 14 and 21, 1988 issues of
the Dumaguete Star Informer
600.00
g.Certification fee for Publication on the
Bulletin Board of the Municipal
Building of Siaton, Negros Oriental
2.00
h.Certification fee for Publication in the
Capitol
5.00
i.Certification fee for publication of
Notice to Creditors
5.00 186,075.81
NET ESTATE 2,793,414.98
Estate Tax Due P1,277,762.3
9
Less: Estate Tax Paid:
CB Confirmation Receipt Nos.
.....B 14268064 P2,557.00
.....B 15517625 1,527,790.98 1,530,347.98
AMOUNT REFUNDABLE P252,585.59
Rollo, 86-88.
[6] Ibid., 78-79, 81-83.
[7] CA Records, 118-130.
[8] Rollo, 47-56.
[9] Ibid., 35-46.
[10] SEC. 79 Computation of net estate and estate tax. – For the purpose of the tax
imposed in this Chapter, the value of the net estate shall be determined:
(a).....In the case of a citizen or resident of the Philippines, by deducting from the value of
the gross estate-
(1)..... Expenses, losses, indebtedness, and taxes. – Such amounts-
(A).....For funeral expenses in an amount equal to five per centum of the gross estate but
in no case to exceed P50,000.00;
(B).....For judicial expenses of the testamentary or intestate proceedings;
xxx.....xxx.....xxx
[11] This refers to the 1977 National Internal Revenue Code, as amended. On the date of
decedent’s death (January 10, 1988), the latest amendment to the Tax Code was
introduced by Executive Order No. 273, which became effective on January 1, 1988.
[12] Rollo, 78-79, 81-83.
[13]
Estate tax Due P1,277,762.39
Less : estate tax paid 04.05.88
........ [CBCR No. 14268054]
2,557.00
Deficiency estate tax P1,275,205.39
Add: Additions to tax
........Interest on deficiency [Sec. 249 (b)]
........04.12.88 to 12.19.88
........(1,275,205.39 x 20% x 252/365)
176,083.16
Total deficiency tax P1,451,288.55
Less: estate tax paid 12.19.88
........ (CBCR No. 15517625)
1,527,790.98
Amount Refundable P76,502.43

[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 TAXAPPEALS AND
COMMISSIONER OF INTERNAL REVENUE, RESPONDENTS.
DECISION
NACHURA, J.:
Before this Court is a Petition for Review on Certiorari[1] under Rule
45 of the Rules of Civil Procedure seeking the reversal of the Court of
Appeals (CA) Decision[2] dated April 30, 1999 which affirmed the
Decision[3] 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 will[5] 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 letter[7] dated October
13, 1988, Justice Dizon informed respondent Commissioner of the
Bureau of Internal Revenue (BIR) of the special proceedings for the
Estate.
Petitioner alleged that severalrequests 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 letter[8] 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
letter[9] addressed to the BIR Regional Director for San Pablo City
and filed the estate tax return[10] 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
x x x
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 payment7,967,103.62
Interest 19,121,048.68
Compromise-non filing 25,000.00
non payment25,000.00
no notice of
death
15.00
no CPA
Certificate
300.00
Total amount due & collectible P66,973,985.40[18]
In his letter[19] dated December 12, 1991, Atty. Gonzales moved for
the reconsideration of the said estate tax assessment. However, in
her letter[20] 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 review[21] 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 addressed to the
Commissioner of Internal Revenue
informing the latter of the special
proceedings for the settlement of the
estate (p. 126, BIR records);
"A"
2. Petition for the probate of the will and
issuance of letter of administration
filed with the Regional Trial Court
(RTC) of Manila, docketed as Sp. Proc.
No. 87-42980 (pp. 107-108, BIR
records);
"B" & "B-1"
3. Pleading entitled "Compliance" filed
with the probate Court submitting the
final inventory of all the properties of
the deceased (p. 106, BIR records);
"C"
4. Attachment to Exh. "C" which is the "C-1" to "C-17"

detailed and complete listing of the
properties of the deceased (pp. 89-
105, BIR rec.);
5. Claims against the estate filed by
Equitable Banking Corp. with the
probate Court in the amount of
P19,756,428.31 as of March 31, 1988,
together with the Annexes to the claim
(pp. 64-88, BIR records);
"D" to "D-24"
6. Claim filed by Banque de L' Indochine
et de Suez with the probate Court in
the amount of US $4,828,905.90 as of
January 31, 1988 (pp. 262-265, BIR
records);
"E" to "E-3"
7. Claim of the Manila Banking
Corporation (MBC) which as of
November 7, 1987 amounts to
P65,158,023.54, but recomputed as of
February 28,1989 at a total amount of
P84,199,160.46; together with the
demand letter from MBC's lawyer (pp.
194-197, BIR records);
"F" to "F-3"
8. Demand letter of Manila Banking
Corporation prepared by Asedillo,
Ramos and Associates Law Offices
addressed to Fernandez Hermanos,
Inc., represented by Jose P. Fernandez,
as mortgagors, in the total amount of
P240,479,693.17 as of February 28,
1989 (pp. 186-187, BIR records);
"G" & "G-1"
9. Claim of State Investment House, Inc.
filed with the RTC, Branch VII of
Manila, docketed as Civil Case No. 86-
38599 entitled "State Investment
House, Inc., Plaintiff, versus Maritime
Company Overseas, Inc. and/or Jose P.
Fernandez, Defendants," (pp. 200-215,
BIR records);
"H" to "H-16"
10. Letter dated March 14, 1990 of
Arsenio P. Dizon addressed to Atty.
Jesus M. Gonzales, (p. 184, BIR
records);
"I"
11. Letter dated April 17, 1990 from J.M.
Gonzales addressed to the Regional
Director of BIR in San Pablo City (p.
183, BIR records);
"J"
12. Estate Tax Return filed by the estate of
the late Jose P. Fernandez through its
authorized representative, Atty. Jesus
M. Gonzales, for Arsenio P. Dizon, with
attachments (pp. 177-182, BIR
records);
"K" to "K-5"
13. Certified true copy of the Letter of
Administration issued by RTC Manila,
Branch 51, in Sp. Proc. No. 87-42980
appointing Atty. Rafael S. Dizon as
Judicial Administrator of the estate of
Jose P. Fernandez; (p. 102, CTA
records) and
"L"
14. Certification of Payment of estate taxes
Nos. 2052 and 2053, both dated April
27, 1990, issued by the Office of the
Regional Director, Revenue Region No.
4-C, San Pablo City, with attachments
(pp. 103-104, CTA records.).
"M" to "M-5"
Respondent's [BIR] counsel presented on June 26, 1995 one
witness in the person of Alberto Enriquez, who was one of the
revenue examiners who conducted the investigation on the
estate tax case of the late Jose P. Fernandez. In the course of the
direct examination of the witness, he identified the following:
Documents/Signatures BIR Record
1. Estate Tax Return prepared by the BIR; p. 138
2. Signatures of Ma. Anabella Abuloc and
Alberto Enriquez, Jr. appearing at the
lower Portion of Exh. "1";
-do-
3. Memorandum for the Commissioner,
dated July 19, 1991, prepared by
revenue examiners, Ma. Anabella A.
Abuloc, Alberto S. Enriquez and
Raymund S. Gallardo; Reviewed by
Maximino V. Tagle
pp. 143-144
4. Signature of Alberto S. Enriquez
appearing at the lower portion on p. 2
of Exh. "2";
-do-
5. Signature of Ma. Anabella A. Abuloc
appearing at the lower portion on p. 2
of Exh. "2";
-do-
6. Signature of Raymund S. Gallardo
appearing at the Lower portion on p. 2
-do-

of Exh. "2";
7. Signature of Maximino V. Tagle also
appearing on p. 2 of Exh. "2";
-do-
8. Summary of revenue Enforcement
Officers Audit Report, dated July 19,
1991;
p. 139
9. Signature of Alberto Enriquez at the
lower portion of Exh. "3";
-do-
10. Signature of Ma. Anabella A. Abuloc at
the lower portion of Exh. "3";
-do-
11. Signature of Raymond S. Gallardo at
the lower portion of Exh. "3";
-do-
12. Signature of Maximino V. Tagle at the
lower portion of Exh. "3";
-do-
13. Demand letter (FAS-E-87-91-00),
signed by the Asst. Commissioner for
Collection for the Commissioner of
InternalRevenue,demanding payment
of the amount of P66,973,985.40; and
p. 169
14. Assessment Notice FAS-E-87-91-00 pp. 169-170[22]
The CTA's Ruling
On June 17, 1997, the CTA denied the said petition for review. Citing
this Court's ruling in Vda. de OÃ±ate v. Court of Appeals,[23] the CTA
opined that the aforementioned pieces of evidence introduced by the
BIR were admissible in evidence. The CTA ratiocinated:
Although the above-mentioned documents were not formally offered
as evidence for respondent, considering that respondent has been
declared to have waived the presentation thereof during the hearing
on March 20, 1996, still they could be considered as evidence for
respondent since they were properly identified during the
presentation of respondent's witness, whose testimony was duly
recorded as part of the records of this case. Besides, the documents
marked as respondent's exhibits formed part of the BIR records of
the case.[24]
Nevertheless, the CTA did not fully adopt the assessment made by
the BIR and it came up with its own computation of the deficiency
estate tax, to wit:
Conjugal Real Property P 5,062,016.00
Conjugal Personal Prop. 33,021,999.93
Gross Conjugal Estate 38,084,015.93
Less: Deductions 26,250,000.00
Net Conjugal Estate P 11,834,015.93
Less: Share of Surviving Spouse 5,917,007.96
Net Share in Conjugal Estate P 5,917,007.96
Add: Capital/Paraphernal
Properties - P44,652,813.66
Less: Capital/Paraphernal
Deductions 44,652,813.66
Net Taxable Estate P 50,569,821.62
Estate Tax Due P 29,935,342.97
Add: 25% Surcharge for Late
Filing
7,483,835.74
Add: Penalties for-No notice of
death
15.00
No CPA certificate 300.00
Total deficiency estate tax P 37,419,493.71
exclusive of 20% interest from due date of its payment until full
payment thereof [Sec. 283 (b), Tax Code of 1987].[25]
Thus, the CTA disposed of the case in this wise:
WHEREFORE, viewed from all theforegoing, theCourt finds
the petition unmeritorious and denies the same. Petitioner
and/or the heirs of JoseP. Fernandez are hereby ordered to
pay to respondent the amount of P37,419,493.71 plus 20%
interest from the due dateof 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
Reconsideration[29] which the CA denied in its Resolution[30] 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;
Appeals erred in disallowing the valid and enforceable
claims of creditors against the estate, as lawful deductions
despite clear and convincing evidence thereof; and
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 OÃ±atehas 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 OÃ±ate 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 OÃ±ate, which
reiterated this Court's previous rulings in People v. Napat-
a[35] and People v. Mate[36] 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 OÃ±ate, 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 OÃ±ate has already
been abandoned. Recently, in Ramos v. Dizon,[38] this Court, applying
the said doctrine, ruled that the trial court judge therein committed
no error when he admitted and considered the respondents' exhibits
in the resolution of the case, notwithstanding the fact that the same
were not formally offered. Likewise, in Far East Bank & Trust
Company v. Commissioner of Internal Revenue,[39] the Court made
reference to said doctrine in resolving the issues therein.
Indubitably, the doctrine laid down in Vda. De OÃ±ate still subsists in
this jurisdiction. In Vda. de OÃ±ate, 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
OÃ±ate 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 OÃ±ate 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...

x x x x
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
evidence[48] 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
Resolution[51] 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
inConstantino 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' failureto complywith 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 debt[56] 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 79[58] of the National Internal Revenue Code[59] (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 generalrule, or the same
should be adjusted to reflect post-death developments, such as
where a settlement between the parties results in the reduction of
the amount actually paid.[61] On one hand, the U.S. court ruled that
the appropriate deduction is the "value" that the claim had at the
date of the decedent's death.[62] Also, as held in Propstra v.
U.S., [63] where a lien claimed against the estate was certain and
enforceable on the date of the decedent's death, the fact that the
claimant subsequently settled for lesser amount did not preclude the
estate from deducting the entire amount of the claim for estate tax
purposes. These pronouncements essentially confirm the general
principle that post-death developments are not material in
determining the amount of the deduction.
On the other hand, the Internal Revenue Service (Service) opines
that post-death settlement should be taken into consideration and
the claim should be allowed as a deduction only to the extent of the
amount actually paid.[64] Recognizing the dispute, the Service
released Proposed Regulations in 2007 mandating that the
deduction would be limited to the actual amount paid.[65]
In announcing its agreement with Propstra,[66] the U.S. 5th Circuit
Court of Appeals held:
We are persuaded that the Ninth Circuit's
decision...in Propstra correctly apply the Ithaca Trust date-of-death
valuation principle to enforceable claims against the estate. As we
interpret Ithaca Trust, when the Supreme Court announced the date-
of-death valuation principle, it was making a judgment about the
nature of the federalestate 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 tothe 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 tobe imposed, beyond what the statute expressly and
clearly imports, tax statutes being construedstrictissimi 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.
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 newCatholic 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.
x x x x x x x x x
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.
x x x x x x x x x
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.)
x x x x x x x x x
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 giftinter 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-69259 January 26, 1988
DELPHER TRADES CORPORATION, and DELPHIN
PACHECO, petitioners,
vs.
INTERMEDIATE APPELLATE COURT and HYDRO PIPES
PHILIPPINES, INC., respondents.
GUTIERREZ, JR., J.:
The petitioners question the decision of the Intermediate Appellate
Court which sustained the private respondent's contention that the
deed of exchange whereby Delfin Pacheco and Pelagia Pacheco
conveyed a parcel of land to Delpher Trades Corporation in exchange
for 2,500 shares of stock was actually a deed of sale which violated a
right of first refusal under a lease contract.
Briefly, the facts of the case are summarized as follows:
In 1974, Delfin Pacheco and his sister, Pelagia
Pacheco, were the owners of 27,169 square
meters of real estate Identified as Lot. No. 1095,
Malinta Estate, in the Municipality of Polo (now
Valenzuela), Province of Bulacan (now Metro
Manila) which is covered by Transfer Certificate
of Title No. T-4240 of the Bulacan land registry.
On April 3, 1974, the said co-owners leased to
Construction Components International Inc. the
same property and providing that during the
existence or after the term of this lease the lessor
should he decide to sell the property leased shall
first offer the same to the lessee and the letter has
the priority to buy under similar conditions
(Exhibits A to A-5)
On August 3, 1974, lessee Construction
Components International, Inc. assigned its rights
and obligations under the contract of lease in
favor of Hydro Pipes Philippines, Inc. with the

signed conformity and consent of lessors Delfin
Pacheco and Pelagia Pacheco (Exhs. B to B-6
inclusive)
The contract of lease, as well as the assignment of
lease were annotated at he back of the title, as per
stipulation of the parties (Exhs.A to D-3 inclusive)
On January 3, 1976, a deed of exchange was
executed between lessors Delfin and Pelagia
Pacheco and defendant Delpher Trades
Corporation whereby the former conveyed to the
latter the leased property (TCT No.T-4240)
together with another parcel of land also located
in Malinta Estate, Valenzuela, Metro Manila (TCT
No. 4273) for 2,500 shares of stock of defendant
corporation with a total value of P1,500,000.00
(Exhs. C to C-5, inclusive) (pp. 44-45, Rollo)
On the ground that it was not given the first option to buy the leased
property pursuant to the proviso in the lease agreement, respondent
Hydro Pipes Philippines, Inc., filed an amended complaint for
reconveyance of Lot. No. 1095 in its favor under conditions similar to
those whereby Delpher Trades Corporation acquired the property
from Pelagia Pacheco and Delphin Pacheco.
After trial, the Court of First Instance of Bulacan ruled in favor of the
plaintiff. The dispositive portion of the decision reads:
ACCORDINGLY, the judgment is hereby rendered
declaring the valid existence of the plaintiffs
preferential right to acquire the subject property
(right of first refusal) and ordering the defendants
and all persons deriving rights therefrom to
convey the said property to plaintiff who may
offer to acquire the same at the rate of P14.00 per
square meter, more or less, for Lot 1095 whose
area is 27,169 square meters only. Without
pronouncement as to attorney's fees and costs.
(Appendix I; Rec., pp. 246- 247). (Appellant's
Brief, pp. 1-2; p. 134, Rollo)
The lower court's decision was affirmed on appeal by the
Intermediate Appellate Court.
The defendants-appellants, now the petitioners, filed a petition for
certiorari to review the appellate court's decision.
We initially denied the petition but upon motion for reconsideration,
we set aside the resolution denying the petition and gave it due
course.
The petitioners allege that:
The denial of the petition will work great injustice
to the petitioners, in that:
1. Respondent Hydro Pipes Philippines, Inc,
("private respondent") will acquire from
petitioners a parcel of industrial land consisting of
27,169 square meters or 2.7 hectares (located
right after the Valenzuela, Bulacan exit of the toll
expressway) for only P14/sq. meter, or a total
of P380,366, although the prevailing value thereof
is approximately P300/sq. meter or P8.1 Million;
2. Private respondent is allowed to exercise its
right of first refusal even if there is no "sale" or
transfer of actual ownership interests by
petitioners to third parties; and
3. Assuming arguendo that there has been a
transfer of actual ownership interests, private
respondent will acquire the land not under
"similar conditions" by which it was transferred
to petitioner Delpher Trades Corporation, as
provided in the same contractual provision
invoked by private respondent. (pp. 251-252,
Rollo)
The resolution of the case hinges on whether or not the "Deed of
Exchange" of the properties executed by the Pachecos on the one
hand and the Delpher Trades Corporation on the other was meant to
be a contract of sale which, in effect, prejudiced the private
respondent's right of first refusal over the leased property included
in the "deed of exchange."
Eduardo Neria, a certified public accountant and son-in-law of the
late Pelagia Pacheco testified that Delpher Trades Corporation is a

family corporation; that the corporation was organized by the
children of the two spouses (spouses Pelagia Pacheco and Benjamin
Hernandez and spouses Delfin Pacheco and Pilar Angeles) who
owned in common the parcel of land leased to Hydro Pipes
Philippines in order to perpetuate their control over the property
through the corporation and to avoid taxes; that in order to
accomplish this end, two pieces of real estate, including Lot No. 1095
which had been leased to Hydro Pipes Philippines, were transferred
to the corporation; that the leased property was transferred to the
corporation by virtue of a deed of exchange of property; that in
exchange for these properties, Pelagia and Delfin acquired 2,500
unissued nopar value shares of stock which are equivalent to a 55%
majority in the corporation because the other owners only owned
2,000 shares; and that at the time of incorporation, he knew all about
the contract of lease of Lot. No. 1095 to Hydro Pipes Philippines. In
the petitioners' motion for reconsideration, they refer to this scheme
as "estate planning." (p. 252, Rollo)
Under this factual backdrop, the petitioners contend that there was
actually no transfer of ownership of the subject parcel of land since
the Pachecos remained in control of the property. Thus, the
petitioners allege: "Considering that the beneficial ownership and
control of petitioner corporation remained in the hands of the
original co-owners, there was no transfer of actual ownership
interests over the land when the same was transferred to petitioner
corporation in exchange for the latter's shares of stock. The transfer
of ownership, if anything, was merely in form but not in substance.In
reality, petitioner corporation is a mere alter ego or conduit of the
Pacheco co-owners; hence the corporation and the co-owners should
be deemed to be the same, there being in substance and in effect an
Identity of interest." (p. 254, Rollo)
The petitioners maintain that the Pachecos did not sell the property.
They argue that there was no sale and that they exchanged the land
for shares of stocks in their own corporation. "Hence, such transfer is
not within the letter, or even spirit of the contract. There is a sale
when ownership is transferred for a price certain in money or its
equivalent (Art. 1468,Civil Code) while there is a barter or exchange
when one thing is given in consideration of another thing (Art. 1638,
Civil Code)." (pp. 254-255, Rollo)
On the other hand, the private respondent argues that Delpher
Trades Corporation is a corporate entity separate and distinct from
the Pachecos. Thus, it contends that it cannot be said that Delpher
Trades Corporation is the Pacheco's same alter ego or conduit; that
petitioner Delfin Pacheco, having treated Delpher Trades
Corporation as such a separate and distinct corporate entity, is not a
party who may allege that this separate corporate existence should
be disregarded. It maintains that there was actual transfer of
ownership interests over the leased property when the same was
transferred to Delpher Trades Corporation in exchange for the
latter's shares of stock.
We rule for the petitioners.
After incorporation, one becomes a stockholder of a corporation by
subscription or by purchasing stock directly from the corporation or
from individual owners thereof (Salmon, Dexter & Co. v. Unson, 47
Phil, 649, citing Bole v. Fulton [1912], 233 Pa., 609). In the case at
bar, in exchange for their properties, the Pachecos acquired 2,500
original unissued no par value shares of stocks of the Delpher Trades
Corporation. Consequently,the Pachecos became stockholders of the
corporation by subscription "The essence of the stock subscription is
an agreement to take and pay for original unissued shares of a
corporation, formed or to be formed." (Rohrlich 243, cited in
Agbayani, Commentaries and Jurisprudence on the Commercial Laws
of the Philippines, Vol. III, 1980 Edition, p. 430) It is significant that
the Pachecos took no par value shares in exchange for their
properties.
A no-par value share does not purport to
represent any stated proportionate interest in the
capital stock measured by value, but only an
aliquot part of the whole number of such shares of
the issuing corporation. The holder of no-par
shares may see from the certificate itself that he is
only an aliquot sharer in the assets of the
corporation. But this character of proportionate
interest is not hidden beneath a false appearance
of a given sum in money, as in the case of par
value shares. The capital stock of a corporation
issuing only no-par value shares is not set forth by
a stated amount of money, but instead is
expressed to be divided into a stated number of
shares, such as, 1,000 shares. This indicates that a
shareholder of 100 such shares is an aliquot
sharer in the assets of the corporation, no matter
what value they may have, to the extent of
100/1,000 or 1/10. Thus, by removing the par
value of shares, the attention of persons
interested in the financial condition of a
corporation is focused upon the value of assets

and the amount of its debts. (Agbayani,
Commentaries and Jurisprudence on the
Commercial Laws of the Philippines, Vol. III, 1980
Edition, p. 107).
Moreover, there was no attempt to state the true or current market
value of the real estate. Land valued at P300.00 a square meter was
turned over to the family's corporation for only P14.00 a square
meter.
It is to be stressed that by their ownership of the 2,500 no par shares
of stock, the Pachecos have control of the corporation. Their equity
capital is 55% as against 45% of the other stockholders, who also
belong to the same family group.
In effect, the Delpher Trades Corporation is a business conduit of the
Pachecos. What they really did was to invest their properties and
change the nature of their ownership from unincorporated to
incorporated form by organizing Delpher Trades Corporation to take
control of their properties and at the same time save on inheritance
taxes.
As explained by Eduardo Neria:
xxx xxx xxx
ATTY. LINSANGAN:
Q Mr. Neria, from the point of
view of taxation, is there any
benefit to the spouses
Hernandez and Pacheco in
connection with their
execution of a deed of exchange
on the properties for no par
value shares of the defendant
corporation?
A Yes, sir.
COURT:
Q What do you mean by "point
of view"?
A To take advantage for both
spouses and corporation in
entering in the deed of
exchange.
ATTY. LINSANGAN:
Q (What do you mean by "point
of view"?) What are these
benefits to the spouses of this
deed of exchange?
A Continuous control of the
property, tax exemption
benefits, and other inherent
benefits in a corporation.
Q What are these advantages to
the said spouses from the point
of view of taxation in entering
in the deed of exchange?
A Having fulfilled the
conditions in the income tax
law, providing for tax free
exchange of property, they
were able to execute the deed
of exchange free from income
tax and acquire a corporation.
Q What provision in the income
tax law are you referring to?
A I refer to Section 35 of the
National Internal Revenue
Code under par. C-sub-par. (2)
Exceptions regarding the
provision which I quote: "No
gain or loss shall also be
recognized if a person
exchanges his property for
stock in a corporation of which
as a result of such exchange
said person alone or together
with others not exceeding four

persons gains control of said
corporation."
Q Did you explain to the
spouses this benefit at the time
you executed the deed of
exchange?
A Yes, sir
Q You also, testified during the
last hearing that the decision to
have no par value share in the
defendant corporation was for
the purpose of flexibility. Can
you explain flexibility in
connection with the ownership
of the property in question?
A There is flexibility in using no
par value shares as the value is
determined by the board of
directors in increasing
capitalization. The board can
fix the value of the shares
equivalent to the capital
requirements of the
corporation.
Q Now also from the point of
taxation, is there any flexibility
in the holding by the
corporation of the property in
question?
A Yes, since a corporation does
not die it can continue to hold
on to the property indefinitely
for a period of at least 50 years.
On the other hand, if the
property is held by the spouse
the property will be tied up in
succession proceedings and the
consequential payments of
estate and inheritance taxes
when an owner dies.
Q Now what advantage is this
continuity in relation to
ownership by a particular
person of certain properties in
respect to taxation?
A The property is not subjected
to taxes on succession as the
corporation does not die.
Q So the benefit you are talking
about are inheritance taxes?
A Yes, sir. (pp. 3-5, tsn.,
December 15, 1981)
The records do not point to anything wrong or objectionable about
this "estate planning" scheme resorted to by the Pachecos. "The legal
right of a taxpayer to decrease the amount of what otherwise could
be his taxes or altogether avoid them, by means which the law
permits, cannot be doubted." (Liddell & Co., Inc. v. The collector of
Internal Revenue, 2 SCRA 632 citing Gregory v. Helvering, 293 U.S.
465, 7 L. ed. 596).
The "Deed of Exchange" of property between the Pachecos and
Delpher Trades Corporation cannot be considered a contract of sale.
There was no transfer of actual ownership interests by the Pachecos
to a third party. The Pacheco family merely changed their ownership
from one form to another. The ownership remained in the same
hands. Hence, the private respondent has no basis for its claim of a
light of first refusal under the lease contract.
WHEREFORE, the instant petition is hereby GRANTED, The
questioned decision and resolution of the then Intermediate
Appellate Court are REVERSED and SET ASIDE. The amended
complaint in Civil Case No. 885-V-79 of the then Court of First
Instance of Bulacan is DISMISSED. No costs.
SO ORDERED.

G.R. No. 120721 February 23, 2005
MANUEL G. ABELLO, JOSE C. CONCEPCION, TEODORO D. REGALA,
AVELINOV. CRUZ, petitioners,
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF
APPEALS, respondents.
D E C I S I O N
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 donor’s
taxes and to desist from collecting donor’s 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 donor’s tax. The claim for
exemption was denied by the Commissioner.11ªvvphi1.nét
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 donor’s taxes from the petitioners.2

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