G.R. No.

140944 April 30, 2008 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
RAFAEL ARSENIO S. DIZON, in his capacity as the Judicial Administrator of the Estate of
heirs. Sometime in August 1990, Justice Dizon passed away. Thus, on October 22, 1990, the
the deceased JOSE P. FERNANDEZ, petitioner,
probate court appointed petitioner as the administrator of the Estate.15
vs.
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.
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
NACHURA, J.:
(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
Before this Court is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Civil House, Inc. (P6,280,006.21). Petitioner manifested that Manila Bank, a major creditor of the
Procedure seeking the reversal of the Court of Appeals (CA) Decision 2 dated April 30, 1999 which Estate was not included, as it did not file a claim with the probate court since it had security over
affirmed the Decision3 of the Court of Tax Appeals (CTA) dated June 17, 1997.4 several real estate properties forming part of the Estate.16

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

Petitioner alleged that several requests for extension of the period to file the required estate tax
return were granted by the BIR since the assets of the estate, as well as the claims against it, had Estate tax P31,868,414.48
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 25% surcharge- late filing 7,967,103.62
Office, showing therein a NIL estate tax liability, computed as follows:

COMPUTATION OF TAX
late payment 7,967,103.62
Conjugal Real Property (Sch. 1) P10,855,020.00
Conjugal Personal Property (Sch.2) 3,460,591.34
Taxable Transfer (Sch. 3) Interest 19,121,048.68
Gross Conjugal Estate 14,315,611.34
Less: Deductions (Sch. 4) 187,822,576.06
Net Conjugal Estate NIL Compromise-non filing 25,000.00
Less: Share of Surviving Spouse NIL.
Net Share in Conjugal Estate NIL
xxx non payment 25,000.00

Net Taxable Estate NIL.

Estate Tax Due NIL.11
no notice of death 15.00
 Claim filed by Banque de L' Indochine et de Suez with the probate Cour
$4,828,905.90 as of January 31, 1988 (pp. 262-265, BIR records);
6.

Claim of the Manila Banking Corporation (MBC) which as of Novem

to P65,158,023.54, but recomputed as of February 28, 1989 at a total amo
7.
no CPA Certificate 300.00 together with the demand letter from MBC's lawyer (pp. 194-197, BIR records)

Demand letter of Manila Banking Corporation prepared by Asedillo, Ramo

Offices addressed to Fernandez Hermanos, Inc., represented by Jose P. Fer
8.
Total amount due & collectible P66,973,985.40 in the total amount of P240,479,693.17 as of February 28, 1989 (pp. 186-187,

In his letter19 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 review21 before respondent CTA. Trial on the merits ensued.
Claim of State Investment House, Inc. filed with the RTC, Branch VII of M
Case No. 86-38599 entitled "State Investment House, Inc., Plaintiff, vers
9.
Overseas, Inc. and/or Jose P. Fernandez, Defendants," (pp. 200-215, BIR rec
Letter dated March 14, 1990 of Arsenio P. Dizon addressed to Atty. Jesus M.
records);
10.

As found by the CTA, the respective parties presented the following pieces of evidence, to wit:
Letter dated April 17, 1990 from J.M. Gonzales addressed to the Regional
In the hearings conducted, petitioner did not present testimonial evidence but merely Pablo City (p. 183, BIR records);
11.
documentary evidence consisting of the following:

Estate Tax Return filed by the estate of the late Jose P. Fernandez
Nature of Document (sic)
representative, Atty. Jesus M. Gonzales, for Arsenio P. Dizon, with attachm
12.
records);

Certified true copy of the Letter of Administration issued by RTC Manila, Bran
Letter dated October 13, 1988 from Arsenio P. Dizon addressed to the Commissioner of Internal
87-42980 appointing Atty. Rafael S. Dizon as Judicial Administrator of
Revenue informing the latter of the special proceedings for the settlement of the estate (p. 126,
13.BIR
1. Fernandez; (p. 102, CTA records) and
records);

Certification of Payment of estate taxes Nos. 2052 and 2053, both dated April
Petition for the probate of the will and issuance of letter of administration filed with the Regional Trial
Office of the Regional Director, Revenue Region No. 4-C, San Pablo City, wit
Court (RTC) of Manila, docketed as Sp. Proc. No. 87-42980 (pp. 107-108, BIR records); 14.
2. 104, CTA records.).

Pleading entitled "Compliance" filed with the probate Court submitting the final inventory of all the
properties of the deceased (p. 106, BIR records); Respondent's [BIR] counsel presented on June 26, 1995 one witness in the
3. 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:
Attachment to Exh. "C" which is the detailed and complete listing of the properties of the deceased
(pp. 89-105, BIR rec.);
4.

Documents/Signatures
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
5.
records);
1. Estate Tax Return prepared by the BIR;
2. Signatures of Ma. Anabella Abuloc and Alberto Enriquez, Jr. appearing at the lower Portion of Exh. Commissioner of Internal Revenue, demanding payment of the amount of P66
"1";

14. Assessment Notice FAS-E-87-91-00

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

The CTA's Ruling

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

On "2";
June 17, 1997, the CTA denied the said petition for review. Citing this Court's ruling in Vda. de
Oate 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:

5. Signature of Ma. Anabella A. Abuloc appearing at the lower portion on p. 2 of Exh. "2";
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
6. Signature of Raymund S. Gallardo appearing at the Lower portion on p. 2 ofrespondent's
Exh. "2"; 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:
7. Signature of Maximino V. Tagle also appearing on p. 2 of Exh. "2";

Conjugal Real Property P 5,062,016

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

Conjugal Personal Prop. 33,021,999

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

Gross Conjugal Estate 38,084,015

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

Less: Deductions 26,250,000

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

Net Conjugal Estate P 11,834,01

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

Less: Share of Surviving Spouse 5,917,007.9

13. Demand letter (FAS-E-87-91-00), signed by the Asst. Commissioner for Collection for the
 WHEREFORE, viewed from all the foregoing, the Court finds the petition unmeritorious
and denies the same. Petitioner and/or the heirs of Jose P. Fernandez are hereby
Net Share in Conjugal Estate P 5,917,007.96 ordered to pay to respondent the amount of P37,419,493.71 plus 20% interest from the
due date of its payment until full payment thereof as estate tax liability of the estate of
Jose P. Fernandez who died on November 7, 1987.

Add: Capital/Paraphernal SO ORDERED.26

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

Properties P44,652,813.66 The CA's Ruling

Less: Capital/Paraphernal Deductions
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
44,652,813.66
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
Net Taxable Estate Resolution30 dated November 3, 1999.
P 50,569,821.62
============
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
Estate Tax Due P 29,935,342.97 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.
Add: 25% Surcharge for Late Filing 7,483,835.74
Fernandez had previously filed one as in fact, BIR Certification Clearance Nos. 2052
and 2053 had been issued in the estate's favor;

3. Whether or not the Court of Tax Appeals and the Court of Appeals erred in
Add: Penalties for-No notice of death 15.00 disallowing the valid and enforceable claims of creditors against the estate, as lawful
deductions despite clear and convincing evidence thereof; and

4. Whether or not the Court of Tax Appeals and the Court of Appeals erred in validating
No CPA certificate 300.00 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
Total deficiency estate tax excess of the gross estate, no estate tax was due; that the lack of a formal offer of evidence is
P 37,419,493.71
fatal to BIR's cause; that the doctrine laid down in Vda. de Oate has already been abandoned in
============
a long line of cases in which the Court held that evidence not formally offered is without any
weight or value; that Section 34 of Rule 132 of the Rules on Evidence requiring a formal offer of
evidence is mandatory in character; that, while BIR's witness Alberto Enriquez (Alberto) in his
exclusive of 20% interest from due date of its payment until full payment thereof 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
[Sec. 283 (b), Tax Code of 1987].25 assuming arguendo that the ruling in Vda. de Oate 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
Thus, the CTA disposed of the case in this wise:
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 Courts 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 Oate, which reiterated this Court's
previous rulings in People v. Napat-a35 and People v. Mate36 on the admission and consideration
of exhibits which were not formally offered during the trial. Although in a long line of cases many
of which were decided after Vda. de Oate, 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 Oate has already been abandoned. Recently, in Ramos v. Dizon,38this
Court, applying the said doctrine, ruled that the trial court judge therein committed no error when
he admitted and considered the respondents' exhibits in the resolution of the case,
notwithstanding the fact that the same were not formally offered. Likewise, in Far East Bank &
Trust Company v. Commissioner of Internal Revenue,39 the Court made reference to said doctrine
in resolving the issues therein. Indubitably, the doctrine laid down in Vda. De Oate still subsists
in this jurisdiction. In Vda. de Oate, 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 Oate 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 Albertos 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 Oate and Ramos that does not exist at all in the instant
case. In the aforementioned cases, the exhibits were marked at the pre-trial proceedings to
warrant the pronouncement that the same were duly incorporated in the records of the case.
Thus, we held in Ramos:
In this case, we find and so rule that these requirements have been satisfied. The
exhibits in question were presented and marked during the pre-trial of the case
thus, they have been incorporated into the records. Further, Elpidio himself
explained the contents of these exhibits when he was interrogated by respondents'
counsel...
xxxx
But what further defeats petitioner's cause on this issue is that respondents' exhibits
were marked and admitted during the pre-trial stage as shown by the Pre-Trial Order
quoted earlier.44
While the CTA is not governed strictly by technical rules of evidence, 45 as rules of procedure are
not ends in themselves and are primarily intended as tools in the administration of justice, the
presentation of the BIR's evidence is not a mere procedural technicality which may be
disregarded considering that it is the only means by which the CTA may ascertain and verify the
truth of BIR's claims against the Estate. 46 The BIR's failure to formally offer these pieces of
evidence, despite CTA's directives, is fatal to its cause. 47 Such failure is aggravated by the fact
that not even a single reason was advanced by the BIR to justify such fatal omission. This, we
take against the BIR.
Per the records of this case, the BIR was directed to present its 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 Resolution51 dated
March 21, 1996, the CTA considered the BIR to have waived presentation of its evidence. In the
same Resolution, the parties were directed to file their respective memorandum. Petitioner
complied but BIR failed to do so.52 In all of these proceedings, BIR was duly notified. Hence, in
this case, we are constrained to apply our ruling in Heirs of Pedro Pasag v. Parocha:53
A formal offer is necessary because judges are mandated to rest their findings of facts
and their judgment only and strictly upon the evidence offered by the parties at the trial.
Its function is to enable the trial judge to know the purpose or purposes for which the
proponent is presenting the evidence. On the other hand, this allows opposing parties
to examine the evidence and object to its admissibility. Moreover, it facilitates review as
the appellate court will not be required to review documents not previously scrutinized
by the trial court.
Strict adherence to the said rule is not a trivial matter. The Court in Constantino v. Court
of Appeals ruled that the formal offer of one's evidence is deemed waived after
failing to submit it within a considerable period of time. It explained that the court
cannot admit an offer of evidence made after a lapse of three (3) months because
to do so would "condone an inexcusable laxity if not non-compliance with a court
order which, in effect, would encourage needless delays and derail the speedy
administration of justice."
Applying the aforementioned principle in this case, we find that the trial court had
reasonable ground to consider that petitioners had waived their right to make a formal
offer of documentary or object evidence. Despite several extensions of time to make
their formal offer, petitioners failed to comply with their commitment and allowed almost
five months to lapse before finally submitting it. Petitioners' failure to comply with the
rule on admissibility of evidence is anathema to the efficient, effective, and
expeditious dispensation of justice.
Having disposed of the foregoing procedural issue, we proceed to discuss the merits of the case.
Ordinarily, the CTA's findings, as affirmed by the CA, are entitled to the highest respect and will
not be disturbed on appeal unless it is shown that the lower courts committed gross error in the
appreciation of facts.54 In this case, however, we find the decision of the CA affirming that of the
CTA tainted with palpable error.
It is admitted that the claims of the Estate's aforementioned creditors have been condoned. As a
mode of extinguishing an obligation,55 condonation or remission of debt56 is defined as:
an act of liberality, by virtue of which, without receiving any equivalent, the creditor
renounces the enforcement of the obligation, which is extinguished in its entirety or in
that part or aspect of the same to which the remission refers. It is an essential
characteristic of remission that it be gratuitous, that there is no equivalent received for
the benefit given; once such equivalent exists, the nature of the act changes. It may
become dation in payment when the creditor receives a thing different from that
stipulated; or novation, when the object or principal conditions of the obligation should
be changed; or compromise, when the matter renounced is in litigation or dispute and
in exchange of some concession which the creditor receives.57
Verily, the second issue in this case involves the construction of Section 79 58 of the National
Internal Revenue Code59 (Tax Code) which provides for the allowable deductions from the gross
estate of the decedent. The specific question is whether the actual claims of the aforementioned
creditors may be fully allowed as deductions from the gross estate of Jose despite the fact that
the said claims were reduced or condoned through compromise agreements entered into by the
Estate with its creditors.
"Claims against the estate," as allowable deductions from the gross estate under Section 79 of
the Tax Code, are basically a reproduction of the deductions allowed under Section 89 (a) (1) (C)
and (E) of Commonwealth Act No. 466 (CA 466), otherwise known as the National Internal
Revenue Code of 1939, and which was the first codification of Philippine tax laws. Philippine tax
laws were, in turn, based on the federal tax laws of the United States. Thus, pursuant to
established rules of statutory construction, the decisions of American courts construing the federal
tax code are entitled to great weight in the interpretation of our own tax laws. 60
It is noteworthy that even in the United States, there is some dispute as to whether the deductible
amount for a claim against the estate is fixed as of the decedent's death which is the general rule,
or the same should be adjusted to reflect post-death developments, such as where a settlement
between the parties results in the reduction of the amount actually paid.61 On one hand, the U.S.
court ruled that the appropriate deduction is the "value" that the claim had at the date of the
decedent's death.62 Also, as held in Propstra v. U.S., 63 where a lien claimed against the estate
was certain and enforceable on the date of the decedent's death, the fact that the claimant
subsequently settled for lesser amount did not preclude the estate from deducting the entire
amount of the claim for estate tax purposes. These pronouncements essentially confirm the
general principle that post-death developments are not material in determining the amount of the
deduction.
On the other hand, the Internal Revenue Service (Service) opines that post-death settlement
should be taken into consideration and the claim should be allowed as a deduction only to the
extent of the amount actually paid. 64Recognizing the dispute, the Service released Proposed
Regulations in 2007 mandating that the deduction would be limited to the actual amount paid.65
In announcing its agreement with Propstra,66 the U.S. 5th Circuit Court of Appeals held:
We are persuaded that the Ninth Circuit's decision...in Propstra correctly apply
the Ithaca Trust date-of-death valuation principle to enforceable claims against the
estate. As we interpret Ithaca Trust, when the Supreme Court announced the date-of-
death valuation principle, it was making a judgment about the nature of the federal
estate tax specifically, that it is a tax imposed on the act of transferring property by will
or intestacy and, because the act on which the tax is levied occurs at a discrete
time, i.e., the instance of death, the net value of the property transferred should be
ascertained, as nearly as possible, as of that time. This analysis supports broad
application of the date-of-death valuation rule.67
We express our agreement with the date-of-death valuation rule, made pursuant to the ruling of
the U.S. Supreme Court in Ithaca Trust Co. v. United States.68 First. There is no law, nor do we
discern any legislative intent in our tax laws, which disregards the date-of-death valuation
principle and particularly provides that post-death developments must be considered in
determining the net value of the estate. It bears emphasis that tax burdens are not to be imposed,
nor presumed to be imposed, beyond what the statute expressly and clearly imports, tax statutes
being construed strictissimi juris against the government.69 Any doubt on whether a person, article
or activity is taxable is generally resolved against taxation. 70 Second. Such construction finds
relevance and consistency in our Rules on Special Proceedings wherein the term "claims"
required to be presented against a decedent's estate is generally construed to mean debts or
demands of a pecuniary nature which could have been enforced against the deceased in his
lifetime, or liability contracted by the deceased before his death.71 Therefore, the claims existing at
the time of death are significant to, and should be made the basis of, the determination of
allowable deductions.
WHEREFORE, the instant Petition is GRANTED. Accordingly, the assailed Decision dated April
30, 1999 and the Resolution dated November 3, 1999 of the Court of Appeals in CA-G.R. S.P. No.
46947 are REVERSED and SET ASIDE. The Bureau of Internal Revenue's deficiency estate tax
assessment against the Estate of Jose P. Fernandez is hereby NULLIFIED. No costs.
SO ORDERED.
G.R. No. L-10701 January 16, 1959
MARIA CANO, applicant-appellee,
vs.
DIRECTOR OF LANDS, EUSTAQUIA GUERRERO, ET AL., oppositors-appellants.
JOSE FERNANDEZ, ET AL., oppositors-appellants.
Ramon C. Fernandez for appellants.
Jose B. Dealca for appellee.
REYES, J.B.L., J.:
In an amended decision dated October 9, 1951, issued in Land Registration Case No. 12,
G.L.R.O. Rec. No. 2835, the Court of First Instance of Sorsogon decreed the registration of Lots
Nos. 1798 and 1799 of the Juban (Sorsogon) Cadastre, under the following terms and conditions:
In view of the foregoing, and it appearing that the notices have been duly published and
posted as required by law, and that the title of the applicant to the above-mentioned two
parcels of land is registrable in law, it is hereby adjudged and decreed, and with
reaffirmation of the order of general default, that the two parcels of land described in
plan SWO-24152, known as Lots Nos. 1798 and 1799 of the Cadastral Survey of
Juban, with their improvements, be registered in the name of Maria Cano, Filipina, 71
years of age, widow and resident of Juban, province of Sorsogon, with the
understanding that Lot No. 1799 shall be subject to the right of reservation in favor of
Eustaquia Guerrero pursuant to Article 891 of the Civil code. After this decision shall
have become final for lack of appeal therefrom within the 30-day period from its
promulgation, let the corresponding decree issue.
So ordered. (Rec. App. pp. 18-19)
The decision having become final, the decree and the Certificate of Title (No. 0-20) were issued in
the name of Maria Cano, subject to reserva troncal in favor of Eustaquia Guerrero. In October
1955, counsel for the reserve (reservatorio) Guerrero filed a motion with the Cadastral Court,
alleging the death of the original registered owner and reservista, Maria Cano, on September 8,
1955, and praying that the original Certificate of Title be ordered cancelled and a new one issued
in favor of movant Eustaquia Guerrero; and that the Sheriff be ordered to place her in possession
of the property. The motion was opposed by Jose and Teotimo Fernandez, sons of
the reservista Maria Cano, who contended that the application and operation of the reserva
troncal should be ventilated in an ordinary contentious proceeding, and that the Registration
Court did not have jurisdiction to grant the motion.
In view of the recorded reserva in favor of the appellee, as expressly noted in the final decree of
registration, the lower court granted the petition for the issuance of a new certificate, for the
reason that the death of the reservista vested the ownership of the property in the petitioner as
the sole reservatorio troncal.
The oppositors, heirs of the reservista Maria Cano, duly appealed from the order, insisting that the
ownership of the reservatorio can not be decreed in a mere proceeding under sec. 112 of Act 496,
but requires a judicial administration proceedings, wherein the rights of appellee, as
the reservatorio entitled to the reservable property, are to be declared. In this connection,
appellants argue that the reversion in favor of the reservatorio requires the declaration of the
existence of the following facts:
(1) The property was received by a descendant by gratuitous title from an ascendant or
from a brother or sister;
(2) Said descendant dies without issue;
(3) The property is inherited by another ascendant by operation of law; and
(4) The existence of relatives within the third degree belonging the line from which said
property came. (Appellants' Brief, p. 8)
We find the appeal untenable. The requisites enumerated by appellants have already been
declared to exist by the decree of registration wherein the rights of the appellee as reservatario
troncal were expressly recognized:
From the above-quoted agreed stipulation of facts, it is evident that Lot No. 1799 was
acquired by the Appellant Maria Cano by inheritance from her deceased daughter,
Lourdes Guerrero who, in turn, inherited the same from her father Evaristo Guerrero
and, hence, falls squarely under the provisions of Article 891 of the Civil Code; and that
each and everyone of the private oppositors are within the third degree of consaguinity
of the decedent Evaristo Guerrero, and who belonging to the same line from which the
property came.
It appears however, from the agreed stipulation of facts that with the exception of
Eustaquia Guerrero, who is the only living daughter of the decedent Evaristo Guerrero,
by his former marriage, all the other oppositors are grandchildren of the said Evaristo
Guerrero by his former marriages. Eustaquia Guerrero, being the nearest of kin,
excludes all the other private oppositors, whose decree of relationship to the decedent
is remoter (Article 962, Civil Code; Director of Lands vs. Aguas, 62 Phil., 279). (Rec.
App. pp. 16-17)
This decree having become final, all persons (appellees included) are bared thereby from
contesting the existence of the constituent elements of the reserva. The only requisites for the
passing of the title from the reservista to the appellee are: (1) the death of the reservista; and (2)
the fact that the reservatario has survived the reservista. Both facts are admitted, and their
existence is nowhere questioned.
The contention that an intestacy proceeding is still necessary rests upon the assumption that
the reservatario will succeed in, or inherit, the reservable property from the reservista. This is not
true. The reservatario is not the reservista's successor mortis causa nor is the reservable property
part of the reservista's estate; the reservatario receives the property as a conditional heir of the
descendant ( prepositus), said property merely reverting to the line of origin from which it had
temporarily and accidentally strayed during the reservista's lifetime. The authorities are all agreed
that there being reservatarios that survive the reservista, the latter must be deemed to have
enjoined no more than a life interest in the reservable property.
It is a consequence of these principles that upon the death of the reservista,
the reservatario nearest to the prepositus (the appellee in this case) becomes, automatically and
by operation of law, the owner of the reservable property. As already stated, that property is no
part of the estate of the reservista, and does not even answer for the debts of the latter. Hence, its
acquisition by the reservatario may be entered in the property records without necessity of estate
proceedings, since the basic requisites therefor appear of record. It is equally well settled that
the reservable property can not be transmitted by a reservista to her or his own
successors mortis causa,(like appellants herein) so long as a reservatario within the third degree
from the prepositus and belonging to the line whence the property came, is in existence when
the reservista dies.
Of course, where the registration decree merely specifies the reservable character of the property,
without determining the identity of the reservatario (as in the case of Director of Lands vs. Aguas,
63 Phil., 279) or where several reservatarios dispute the property among themselves, further
proceedings would be unavoidable. But this is not the case. The rights of
the reservataria Eustaquia Guerrero have been expressly recognized, and it is nowhere claimed
that there are other reservatarios of equal or nearer degree. It is thus apparent that the heirs of
the reservista are merely endeavoring to prolong their enjoyment of the reservable property to the
detriment of the party lawfully entitled thereto.
We find no error in the order appealed from and therefore, the same is affirmed with costs against
appellants in both instances. So ordered.
G.R. No. L-34395 May 19, 1981
BEATRIZ L. GONZALES, petitioner,
vs.
COURT OF FIRST INSTANCE OF MANILA (BRANCH V), BENITO F. LEGARDA, ROSARIO L.
VALDEZ, ALEJANDRO LEGARDA, TERESA LEGARDA, JOSE LEGARDA, BENITO
LEGARDA Y FERNANDEZ, CARMEN LEGARDA Y FERNANDEZ, FILOMENA LEGARDA Y
HERNANDEZ, CARMEN LEGARDA Y HERNANDEZ, ALEJANDRO LEGARDA Y
HERNANDEZ, RAMON LEGARDA Y HERNANDEZ, FILOMENA LEGARDA Y LOBREGAT,
JAIME LEGARDA Y LOBREGAT, CELSO LEGARDA Y LOBREGAT, ALEJANDRO LEGARDA
Y LOBREGAT, MA. TERESA LEGARDA Y LOBREGAT, MA. ANTONIA LEGARDA Y
LOBREGAT, JOSE LEGARDA Y LOBREGAT, ROSARIO LEGARDA Y LOBREGAT, BENITO
LEGARDA Y LOBREGAT, EDUARDO LEGARDA Y LOBREGAT, TRINIDAD F. LEGARDA, and
the ESTATE OF DONA FILOMENA ROCES DE LEGARDA, respondents.
AQUINO, J.:
Beatriz Legarda Gonzales appealed from the decision of the Court of First Instance of Manila,
dismissing her complaint for partition, accounting, reconveyance and damages and holding, as
not subject to reserve troncal, the properties which her mother Filomena Races inherited in 1943
from Filomena Legarda (Civil Case No. 73335). The facts are as follows:
Benito Legarda y De la Paz, the son of Benito Legarda y Tuason, died [Manila] on June 17, 1933.
He was survived by his widow, Filomena Races, and their seven children: four daughters named
Beatriz, Rosario, Teresa and Filomena and three sons named Benito, Alejandro and Jose.
On July 12, 1939, the real properties left by Benito Legarda y Tuason were partitioned in three
equal portions by his daughters, Consuelo and Rita, and the heirs of his deceased son Benito
Legarda y De la Paz who were represented by Benito F. Legarda.
Filomena Legarda y Races died intestate and without issue on March 19, 1943. Her sole heiress
was her mother, Filomena Races Vda. de Legarda.
Mrs. Legarda executed on May 12, 1947 an affidavit adjudicating extrajudicially to herself the
properties which she inherited from her deceased daughter, Filomena Legarda. The said
properties consist of the following: 1wph1.t
(a) Savings deposit in the National City Bank of New York with a credit
balance of P3,699.63.
(b) 1,429 shares of the Benguet Consolidated Mining Company and a 1/7
interest in certain shares of the San Miguel Brewery, Tuason & Legarda, Ltd.,
Philippine Guaranty Company, Insular Life Assurance Company and
the Manila Times.
(c) 1/7 of the properties described in TCT Nos. 80226, 80237 to 80243 (7
titles), 80260, 80261 and 57512 of the Manila registry of deeds.
1/21st of the properties covered by TCT Nos. 48164, 84714, 48201, 48202,
48205, 48203, 48206, 48160 and 48192 of the Manila registry of deeds;
1/21st of the property described in TCT No. 4475 of the registry of deeds of
Rizal, now Quezon City; 1/14th of the property described in TCT No. 966 of
the registry of deeds of Baguio;
1/7th of the lot and improvements at 127 Aviles described in TCT No. 41862
of the Manila registry of deeds; 1/7th of the lots and improvements at 181
San Rafael describe in TCT Nos. 50495 and 48161 of the Manila registry of
deeds;
1/7th of the property described in TCT No. 48163 of the Manila registry of
deeds (Streets);
l/21st of the properties described in TCT Nos. 48199 and 57551 of the Manila
registry of deeds (Streets and Estero):
2/21st of the property described in TCT No. 13458 of tile registry of deeds of
T0ayabas.
These are the properties in litigation in this case. As a result of the affidavit of adjudication,
Filomena Races succeeded her deceased daughter Filomena Legarda as co-owner of the
properties held proindiviso by her other six children.
Mrs. Legarda on March 6, 1953 executed two handwritten Identical documents wherein she
disposed of the properties, which she inherited from her daughter, in favor of the children of her
sons, Benito, Alejandro and Jose (sixteen grandchildren in all). The document reads: 1wph1.t the lower court erred in not holding that Mrs. Legarda acquired the estate of her daughter
A mis hijos :
Dispongo que se reparta a todos mis nietos hijos de Ben, Mandu y Pepito,
los bienes que he heredado de mi difunta hija Filomena y tambien los
acciones de la Destileria La Rosario' recientemente comprada a los
hermanos Values Legarda.
De los bienes de mi hija Filomena se deducira un tote de terreno que yo he
0donada a las Hijas de Jesus, en Guipit
La case No. 181 San Rafael, la cede a mi hijo Mandu solo la casa; proque
ella esta construida sobre terreno de los hermanos Legarda
Races. 1wph1.t
(Sgd.)
FILOMENA
ROCES
LEGARDA
6 Marzo 1953
During the period from July, 1958 to February, 1959 Mrs. Legarda and her six surviving children
partitioned the properties consisting of the one-third share in the estate of Benito Legarda y
Tuason which the children inherited in representation of their father, Benito Legarda y De la Paz.
Mrs. Legarda died on September 22, 1967. Her will was admitted to probate as a holographic will
in the order dated July 16, 1968 of the Court of First Instance of Manila in Special Proceeding No.
70878, Testate Estate of Filomena Races Vda. de Legarda. The decree of probate was affirmed
by the Court of Appeals in Legarda vs. Gonzales, CA-G.R. No. 43480-R, July 30,1976.
In the testate proceeding, Beatriz Legarda Gonzales, a daughter of the testatrix, filed on May 20,
1968 a motion to exclude from the inventory of her mother's estate the properties which she
inherited from her deceased daughter, Filomena, on the ground that said properties
are reservable properties which should be inherited by Filomena Legarda's three sisters and three
brothers and not by the children of Benito, Alejandro and Jose, all surnamed Legarda. That
motion was opposed by the administrator, Benito F. Legarda.
Without awaiting the resolution on that motion, Mrs. Gonzales filed on June 20, 1968 an ordinary
civil action against her brothers, sisters, nephews and nieces and her mother's estate for the
purpose of securing a declaration that the said properties are reservable properties which Mrs.
Legarda could not bequeath in her holographic will to her grandchildren to the exclusion of her
three daughters and her three sons (See Paz vs. Madrigal, 100 Phil. 1085).
As already stated, the lower court dismissed the action of Mrs. Gonzales. ln this appeal under
Republic Act No. 5440 she contends in her six assignments of error that the lower court erred in
not regarding the properties in question as reservable properties under article 891 of the Civil
Code.
On the other hand, defendants-appellees in their six counter-assignments of error contend that
Filomena] Legarda in exchange for her conjugal and hereditary shares in the estate of her
husband Benito Legarda y De la Paz and in not holding that Mrs. Gonzales waived her right to the
reservable properties and that her claim is barred by estoppel, laches and prescription.
The preliminary issue raised by the private respondents as to the timeliness of Mrs. Gonzales'
petition for review is a closed matter. This Court in its resolution of December 16, 1971 denied
respondents' motion to dismiss and gave due course to the petition for review.
In an appeal under Republic Act No. 5440 only legal issues can be raised under undisputed facts.
Since on the basis of the stipulated facts the lower court resolved only the issue of whether the
properties in question are subject to reserva troncal that is the only legal issue to be resolved in
this appeal.
The other issues raised by the defendants-appellees, particularly those involving factual matters,
cannot be resolved in this appeal. As the trial court did not pass upon those issues, there is no
ruling which can be reviewed by this Court.
The question is whether the disputed properties are reservable properties under article 891 of the
Civil Code, formerly article 811, and whether Filomena Races Vda. de Legarda could dispose of
them in his will in favor of her grandchildren to the exclusion of her six children.
Did Mrs. Legarda have the right to convey mortis causa what she inherited from her daughter
Filomena to the reservees within the third degree and to bypass the reservees in the second
degree or should that inheritance automatically go to the reservees in the second degree, the six
children of Mrs. Legarda?
As will hereinafter be shown that is not a novel issue or a question of first impression. lt was
resolved in Florentino vs. Florentino, 40 Phil. 480. Before discussing the applicability to this case
of the doctrine in the Florentino case and other pertinent rulings, it may be useful to make a brief
discourse on the nature of reserve troncal, also called lineal, familiar, extraordinaria o semi-
troncal.
Much time, effort and energy were spent by the parties in their five briefs in descanting on the
nature of reserve troncal which together with the reserva viudal and reversion legal, was
abolished by the Code Commission to prevent the decedent's estate from being entailed, to
eliminate the uncertainty in ownership caused by the reservation (which uncertainty impedes the
improvement of the reservable property) and to discourage the confinement of property within a
certain family for generations which situation allegedly leads to economic oligarchy, and is
incompatible with the socialization of ownership.
The Code Commission regarded the reservas as remnants of feudalism which fomented agrarian
unrest. Moreover, the reserves, insofar as they penalize legitimate relationship, is considered
unjust and inequitable.
However, the lawmaking body, not agreeing entirely with the Code Commission, restored
the reserve troncal, a legal institution which, according to Manresa and Castan Tobenas has
provoked questions and doubts that are difficult to resolve.
Reserva troncal is provided for in article 811 of the Spanish Civil Code, now article 891, which
reads: 1wph1.t
ART. 811. El ascendiente que heredare de su descendiente bienes que este
hubiese adquirido por titulo lucrative de otro ascendiente, o de un hermano,
se halla obligado a reservas los que hubiere adquirido por ministerio de la ley
en favor de los parientes que eaten dentro del tercer grade y pertenezcan a
la linea de donde los bienes proceden
ART. 891. The ascendant who inherits from his descendant any property
which the latter may have acquired by gratuitous title from another
ascendant, or a brother or sister, is obliged to reserve such property as he
may have acquired by operation of law for the benefit of relatives who are
within the third degree and who belong to the line from which said property
came.
In reserve troncal (1) a descendant inherited or acquired by gratuitous title property from an
ascendant or from a brother or sister; (2) the same property is inherited by another ascendant or
is acquired by him by operation of law from the said descendant, and (3) the said ascendant
should reserve the said property for the benefit of relatives who are within the third degree from
the deceased descendant (prepositus) and who belong to the line from which the said property
came.
So, three transmissions are involved: (I) a first transmission by lucrative title (inheritance or
donation) from an ascendant or brother or sister to the deceased descendant; (2) a posterior
transmission, by operation of law (intestate succession or legitime) from the deceased
descendant (causante de la reserve) in favor of another ascendant, the reservor or reservista,
which two transmissions precede the reservation, and (3) a third transmissions of the same
property (in consequence of the reservation) from the reservor to the reservees (reservatarios) or
the relatives within the third degree from the deceased descendant belonging to the line of the
first ascendant, brother or sister of the deceased descendant (6 Castan Tobenas Derecho Civil,
Part l, 1960, 6th Ed., pp. 198-9).
If there are only two transmissions there is no reserve. Thus, where one Bonifacia Lacerna died
and her properties were inherited by her son, Juan Marbebe, upon the death of Juan, those lands
should be inherited by his half-sister, to the exclusion of his maternal first cousins. The said lands
are not reservable property within the meaning of article 811 (Lacerna vs. Vda. de Corcino, l l l
Phil. 872).
The persons involved in reserve troncal are (1) the ascendant or brother or sister from whom the
property was received by the descendant by lucrative or gratuitous title, (2) the descendant
or prepositus (prepositus) who received the property, (3) the reservor (reservista) the other
ascendant who obtained the property from the (prepositus) by operation of law and (4) the
reserves (reservatario) who is within the third degree from the prepositus and who belongs to the
(line o tronco) from which the property came and for whom the property should be reserved by
the reservor.
The reservees may be half-brothers and sisters (Rodriguez vs. Rodriguez, 101 Phil. 1098; Chua
vs. Court of First Instance of Negros Occidental, L-29901, August 31, 1977, 78 SCRA 412).
Fourth degree relatives are not included (Jardin vs. Villamayor, 72 Phil. 392).
The rationale of reserve troncal is to avoid "el peligro de que bienes poseidos secularmente por
una familia pasen bruscamente a titulo gratuito a manos extraas por el azar de los enlaces y
muertes prematuras or impeder que, por un azar de la vide personas extranas a una familia
puedan adquirir bienes que sin aquel hubieran quedado en ella (6 Castan Tobenas Derecho Civil,
Part l, 6th Ed., 1980, p. 203; Padura vs. Baldovino, 104 Phil. 1065).
An illustration of reserve troncal is found in Edroso vs. Sablan, 25 Phil. 295. ln that case, Pedro
Sablan inherited two parcels of land from his father Victorians. Pedro died in 1902, single and
without issue. His mother, Marcelina Edroso, inherited from him the two parcels of land.
It was held that the land was reservable property in the hands of Marcelina. The reservees were
Pablo Sablan and Basilio Sablan, the paternal uncles of Pedro Sablan, the prepositus. Marcelina
could register the land under the Torrens system in her name but the fact that the land was
reservable property in favor of her two brothers-in-law, should they survive her, should be noted in
the title.
In another case, it appears that Maria Aglibot died intestate in 1906. Her one-half share of a
parcel of conjugal land was inherited by her daughter, Juliana Maalac. When Juliana died
intestate in 1920, said one-half share was inherited by her father, Anacleto Maalac who owned
the other one-half portion.
Anacleto died intestate in 1942, survived by his second wife and their six children. lt was held that
the said one-half portion was reservable property in the hands of Anacleto Maalac and, upon his
death, should be inherited by Leona Aglibot and Evarista Aglibot, sisters of Maria and materna
aunts of Juliana Maalac, who belonged to the line from which said one-half portion came
(Aglibot vs. Maalac 114 Phil. 964).
Other illustrations of reserva troncal are found in Florentino vs Florentino, 40 Phil. 480; Nieva and
Alcala vs. Alcala and Deocampo, 41 Phil. 915; Maghirang and Gutierrez vs. Balcita 46 Phil.
551; Lunsod vs. Ortega, 46 Phil. 664; Dizon vs. Galang, 48 Phil. 601; Riosa vs. Rocha, 48 Phil.
737; Centeno vs. Centeno 52 Phil. 322; Velayo Bernardo vs. Siojo, 58 Phil. 89; Director of Lands
vs. Aguas, 63 Phil. 279; Fallorfina vs. Abille, CA 39 O.G. 1784.
The person from whom the degree should be reckoned is the descendant, or the one at the end
of the line from which the property came and upon whom the property last revolved by descent.
He is called the prepositus (Cabardo vs. Villanueva. 44 Phil. 186, 190).
In the Cabardo case, one Cornelia Abordo inherited property from her mother, Basilia Cabardo.
When Cornelia died, her estate passed to her father, Lorenzo Abordo. ln his hands, the property
was reservable property. Upon the death of Lorenzo, the person entitled to the property was Rosa
Cabardo, a maternal aunt of Cornelia, who was her nearest relative within the third degree.
First cousins of the prepositus are in the fourth degree and are not reservees. They cannot even
represent their parents because representation is confined to relatives within the third degree
(Florentino vs. Florentino, 40 Phil. 480).
Within the third degree, the nearest relatives exclude the more remote subject to the rule of
representation. But the representative should be within the third degree from
the prepositus (Padura vs. Baldovino, 104 Phil. 1065).
Reserva troncal contemplates legitimate relationship. illegitimate relationship and relationship by
affinity are excluded.
Gratuitous title or titulo lucrativo refers to a transmission wherein the recipient gives nothing in
return such as donacion and succession (Cabardo vs. Villanueva, 44 Phil. 186, 189-190, citing 6
Manresa, Codigo Civil, 7th Ed., 195 l, p. 360).
The reserva creates two resolutory conditions, namely, (1) the death of the ascendant obliged to
reserve and (2) the survival, at the time of his death, of relatives within the third degree belonging
to the line from which the property came
(Sienes vs. E Esparcia l l l Phil. 349, 353).
The reservor has the legal title and dominion to the reservable property but subject to the
resolutory condition that such title is extinguished if the reservor predeceased the reservee. The
reservor is a usufructuary of the reservable property. He may alienate it subject to the reservation.
The transferee gets the revocable and conditional ownership of the reservor. The transferee's
rights are revoked upon the survival of the reservees at the time of the death of the reservor but
become indefeasible when the reservees predecease the reservor. (Sienes vs. Esparcia, 111 Phil.
349, 353; Edroso vs. Sablan, 25 Phil. 295; Lunsod vs. Ortega, 46 Phil. 664; Florentino vs.
Florentino, 40 Phil. 480: Director of Lands vs. Aguas, 63 Phil. 279.)
The reservor's title has been compared with that of the vendee a retro in a pacta de retro sale or
to a fideicomiso conditional.
The reservor's alienation of the reservable property is subject to a resolutory condition, meaning
that if at the time of the reservor's death, there are reservees, the transferee of the property
should deliver it to the reservees. lf there are no reservees at the time of the reservor's death, the
transferee's title would become absolute. (Lunsod vs. Ortega, 46 Phil. 664; Gueco vs. Lacson,
118 Phil. 944; Mono vs. Nequia 93 Phil. 120).
On the other hand, the reserves has only an inchoate, expectant or contingent right. His
expectant right would disappear if he predeceased the reservor. lt would become absolute should
the reservor predecease the reserves.
The reserves cannot impugn any conveyance made by the reservor but he can require that the
reservable character of the property be recognized by the purchaser (Riosa vs. Rocha 48 Phil.
737; Edroso vs. Sablan, 25 Phil. 295, 312-3; Gueco vs. Lacson, 118 Phil. 944).
There is a holding that the renunciation of the reservee's right to the reservable property is illegal
for being a contract regarding future inheritance (Velayo Bernardo vs. Siojo, 58 Phil. 89, 96).
And there is a dictum that the reservee's right is a real right which he may alienate and dispose of
conditionally. The condition is that the alienation shall transfer ownership to the vendee only if and
when the reserves survives the reservor (Sienes vs. Esparcia, 111 Phil. 349, 353). 1wph1.t Article 891 clearly indicates that the reservable properties should be inherited by all the nearest
The reservatario receives the property as a conditional heir of the
descendant (prepositus) said property merely reverting to the line of origin
from which it had temporarily and accidentally stayed during
the reservista's lifetime. The authorities are all agreed that there being
reservatarios that survive the reservists, the latter must be deemed to have
enjoyed no more than a than interest in the reservable property. (J. J. B. L.
Reyes in Cane vs. Director of Lands, 105 Phil. l5.)
Even during the reservista's lifetime, the reservatarios, who are the ultimate
acquirers of the property, can already assert the right to prevent
the reservista from doing anything that might frustrate their reversionary right,
and, for this purpose, they can compel the annotation of their right in the
registry of property even while the (reservista) is alive (Ley Hipotecaria de
Ultramar, Arts. 168, 199; Edroso vs. Sablan, 25 Phil. 295).
This right is incompatible with the mere expectancy that corresponds to the
natural heirs of the reservista lt is likewise clear that the reservable property
is no part of the estate of the reservista who may not dispose of them (it) by
will, so long as there are reservatarios existing (Arroyo vs. Gerona, 58 Phil.
226, 237).
The latter, therefore, do not inherit from the reservista but from the
descendant (prepositus) of whom the reservatarios are the heirs mortis
causa, subject to the condition that they must survive the reservista.
(Sanchez Roman, Vol. VI Tomo 2, p. 286; Manresa, Commentaries, Vol. 6,
6th Ed., pp. 274, 310, cited by J. J.B.L. Reyes in Padura vs. Baldovino, L-
11960, December 27, 1958, 104 Phil. 1065).
Hence, upon the reservista's death, the reservatario nearest to the prepositus becomes,
"automatically and by operation of law, the owner of the reservable property." (Cane vs. Director
of Lands, 105 Phil. l5.)
In the instant case, the properties in question were indubitably reservable properties in the hands
of Mrs. Legarda. Undoubtedly, she was a reservor. The reservation became a certainty when at
the time of her death the reservees or relatives within the third degree of the prepositus Filomena
Legarda were living or they survived Mrs. Legarda.
So, the ultimate issue in this case is whether Mrs. Legarda, as reservor, could convey the
reservable properties by will or mortis causa to the reservees within the third degree (her sixteen
grandchildren) to the exclusion of the reservees in the second degree, her three daughters and
three sons. As indicated at the outset, that issue is already res judicata or cosa juzgada.
We hold that Mrs. Legarda could not convey in her holographic will to her sixteen grandchildren
the reservable properties which she had inherited from her daughter Filomena because the
reservable properties did not form part of her estate (Cabardo vs. Villanueva, 44 Phil. 186, 191).
The reservor cannot make a disposition mortis causa of the reservable properties as long as the
reservees survived the reservor.
As repeatedly held in the Cano and Padura cases, the reservees inherit the reservable properties
from the prepositus, not from the reservor.
relatives within the third degree from the prepositus who in this case are the six children of Mrs.
Legarda. She could not select the reservees to whom the reservable property should be given
and deprive the other reservees of their share therein.
To allow the reservor in this case to make a testamentary disposition of the reservable properties
in favor of the reservees in the third degree and, consequently, to ignore the reservees in
the second degree would be a glaring violation of article 891. That testamentary disposition
cannot be allowed.
We have stated earlier that this case is governed by the doctrine of Florentino vs. Florentino, 40
Phil. 480, a similar case, where it was ruled: 1wph1.t
 Reservable property left, through a will or otherwise, by the death of
ascendant (reservista) together with his own property in favor of another of
his descendants as forced heir, forms no part of the latter's lawful inheritance
nor of the legitime, for the reason that, as said property continued to be
reservable, the heir receiving the same as an inheritance from his ascendant
has the strict obligation of its delivery to the relatives, within the third degree,
of the predecessor in interest (prepositus), without prejudicing the right of the
heir to an aliquot part of the property, if he has at the same time the right of
a reservatario (reserves).
In rejecting that contention, this Court held that the reservable property bequeathed by the
reservor to her daughter does not form part of the reservor's estate nor of the daughter's estate
but should be given to all the seven reservees or nearest relatives of the prepositus within the
third degree.
This Court noted that, while it is true that by giving the reservable property to only one reserves it
did not pass into the hands of strangers, nevertheless, it is likewise true that the heiress of the
reservor was only one of the reservees and there is no reason founded upon law and justice why
the other reservees should be deprived of their shares in the reservable property (pp. 894-5).

ln the Florentino case, it appears that Apolonio Florentino II and his second wife Severina Faz de
Applying that doctrine to this case, it results that Mrs. Legarda could not dispose of in her will the
Leon begot two children, Mercedes and Apolonio III. These two inherited properties from their
properties in question even if the disposition is in favor of the relatives within the third degree from
father. Upon Apolonio III death in 1891, his properties were inherited by his mother, Severina, who
Filomena Legarda. The said properties, by operation of Article 891, should go to Mrs. Legarda's
died in 1908. ln her will, she instituted her daughter Mercedes as heiress to all her properties,
six children as reservees within the second degree from Filomena Legarda.
including those coming from her deceased husband through their son, Apolonio III.

It should be repeated that the reservees do not inherit from the reservor but from the reservor but
The surviving children, begotten by Apolonio II with his first wife Antonia Faz de Leon and the
from the prepositus, of whom the reservees are the heirs mortis causa subject to the condition
descendants of the deceased children of his first marriage, sued Mercedes Florentino for the
that they must survive the reservor (Padura vs. Baldovino, L-11960, December 27, 1958, 104
recovery of their share in the reservable properties, which Severina de Leon had inherited from
Phil. 1065).
Apolonio III which the latter had inherited from his father Apolonio II and which Severina willed to
her daughter Mercedes.
The trial court said that the disputed properties lost their reservable character due to the non-
existence of third-degree relatives of Filomena Legarda at the time of the death of the reservor,
Plaintiff's theory was that the said properties, as reservable properties, could not be disposed of in
Mrs. Legarda, belonging to the Legarda family, "except third-degree relatives who pertain to both"
Severina's will in favor of Mercedes only. That theory was sustained by this Court.
the Legarda and Races lines.

It was held that the said properties, being reservable properties, did not form part of Severina's
estate and could not be inherited from her by her daughter Mercedes alone.
As there were seven reservees, Mercedes was entitled, as a reserves, to one-seventh of the
properties. The other six sevenths portions were adjudicated to the other six reservees.
Under the rule of stare decisis et non quieta movere, we are bound to follow in this case the
doctrine of the Florentino case. That doctrine means that as long as during the reservor's lifetime
and upon his death there are relatives within the third degree of the prepositus regardless of
whether those reservees are common descendants of the reservor and the ascendant from whom
the property came, the property retains its reservable character. The property should go to the
nearest reservees. The reservor cannot, by means of his will, choose the reserves to whom the
reservable property should be awarded.
The alleged opinion of Sanchez Roman that there is no reserva troncal when the only relatives
within the third degree are the common descendants of the predeceased ascendant and the
ascendant who would be obliged to reserve is irrelevant and sans binding force in the light of the
ruling in the Florentino case.
That holding is erroneous. The reservation could have been extinguished only by the absence of
reservees at the time of Mrs. Legarda's death. Since at the time of her death, there were (and still
are) reservees belonging to the second and third degrees, the disputed properties did not lose
their reservable character. The disposition of the said properties should be made in accordance
with article 891 or the rule on reserva troncal and not in accordance with the reservor's
holographic will. The said properties did not form part of Mrs. Legarda's estate. (Cane vs. Director
of Lands, 105 Phil. l, 4).
WHEREFORE, the lower court's decision is reversed and set aside. lt is hereby adjudged that the
properties inherited by Filomena Roces Vda. de Legarda from her daughter Filomena Legarda,
with all the fruits and accessions thereof, are reservable properties which belong to Beatriz,
Rosario, Teresa, Benito, Alejandro and Jose, all surnamed Legarda y Roces, as reservees. The
shares of Rosario L. Valdes and Benito F. Legarda, who died in 1969 and 1973, respectively,
should pertain to their respective heirs. Costs against the private respondents.
SO ORDERED.
G.R. No. L-15270 September 30, 1961

It is contended by the appellees herein that the properties in question are not reservable
JOSE V. HERRERA and ESTER OCHANGCO HERRERA, petitioners,
properties because only relatives within the third degree from the paternal line have survived and
vs.
that when Mrs. Legarda willed the said properties to her sixteen grandchildren, who are third-
THE QUEZON CITY BOARD OF ASSESSMENT APPEALS, respondent.
degree relatives of Filomena Legarda and who belong to the paternal line, the reason for
the reserva troncal has been satisfied: "to prevent persons outside a family from securing, by
some special accident of life, property that would otherwise have remained therein". CONCEPCION, J.:

That same contention was advanced in the Florentino case where the reservor willed the
reservable properties to her daughter, a full-blood sister of the prepositus and ignored the other
six reservors, the relatives of the half-blood of the prepositus.
Appeal, by petitioners Jose V. Herrera and Ester Ochangco Herrera, from a decision of the Court
of Tax Appeals affirming that of the Board of Assessment Appeals of Quezon City, which held that
certain properties of said petitioners are subject to assessment for purposes of real estate tax.
The facts and the issue are set forth in the aforementioned decision of the Court of Tax Appeals,
from which we quote:
that kept by the hospital. The petitioners alleged that the accounts of the school are not
included in Exhibits "A", "A-1", "A-2", "B", "B-1", "B-2", "C", "C-1" and "C-2" which relate
to the hospital only. However, the petitioners have refused to submit a separate
statement of accounts of the school. A brief tabulation indicating the amount of income
of the hospital for the years 1954, 1955 and 1956, and its operational expenses, is as
follows:

On July 24, 1952, the Director of the Bureau of Hospitals authorized the petitioners to
establish and operate the "St. Catherine's Hospital", located at 58 D. Tuazon, Sta. 1954
Mesa Heights, Quezon City (Exhibit "F-1", p. 7, BIR rec.). On or about January 3, 1953,
the petitioners sent a letter to the Quezon City Assessor requesting exemption from Income Expenses Deficit
payment of real estate tax on the lot, building and other improvements comprising the
hospital stating that the same was established for charitable and humanitarian P 5,280.04 P1,303.80
purposes and not for commercial gain (Exhibit "F-2", pp. 8-9, BIR rec.). After an P10,803.26
Charity Ward
inspection of the premises in question and after a careful study of the case, the P14,779.50
Pay Ward
exemption from real property taxes was granted effective the years 1953, 1954 and
1955. P16,083.30

(Exhibits "A", "A-1" and "A-2")

Subsequently, however, in a letter dated August 10, 1955 (Exhibit "E", p. 65, CTA rec.)
the Quezon City Assessor notified the petitioners that the aforesaid properties were re-
classified from exempt to "taxable" and thus assessed for real property taxes effective 1955
1956, enclosing therewith copies of Tax Declarations Nos. 19321 to 19322 covering the
said properties. The petitioners appealed the assessment to the Quezon City Board of
Income Expenses Deficit
Assessment Appeals, which, in a decision dated March 31, 1956 and received by the
former on May 17, 1956, affirmed the decision of the City Assessor. A motion for
P 6,859.32
reconsideration thereof was denied on March 8, 1957. From this decision, the
Charity Ward 14,038.92
petitioners instituted the instant appeal.1awphl.nt P17,433.30 P3,464.94
Pay Ward
P20,898.24
The building involved in this case is principally used as a hospital. It is mainly a surgical
and orthopedic hospital with emphasis on obstetrical cases, the latter constituting 90%
of the total number of cases registered therein. The hospital has thirty-two (32) beds, of (Exhibits "B", "B-1" and "B-2")
which twenty (20) are for charity-patients and twelve (12) for pay-patients. From the
evidence presented by petitioners, it is made to appear that there are two kinds of
charity patients (a) those who come for consultation only ("out-charity patients"); and 1956
(b) those who remain in the hospital for treatment ("lying-in-patients"). The out-charity
patients are given free consultation and prescription, although sometimes they are Income Expenses Deficit
furnished with free medicines which are not costly like aspirin, sulfatiazole, etc. The
charity lying-in-patients are given free medical service and medicine although the food P 5,559.89 P 341.53
served to the pay-patients is very much better than that given to the former. Although no Charity Ward 16,249.04
condition is imposed by the hospital on the admission of charity lying-in-patients, they P21,467.40
Pay Ward
however, usually give donations to the hospital. On the other hand, the pay-patients are P21,809.93
required to pay for hospital services ranging from the minimum charge of P5.00 to the
maximum of P40.00 for each day of stay in the hospital. The income realized from pay-
(Exhibits "C", "C-1" and "C-2")
patients is spent for the improvement of the charity wards. The hospital personnel is
composed of three nurses, two graduate midwives, a resident physician receiving a
salary of P170.00 a month and the petitioner, Dr. Ester Ochangco Herrera, as
Aside from the St. Catherine and St. Mary hospitals, the petitioners declared that they also own
directress. As such directress, the latter does not receive any salary.
lands and coconut plantations in Quezon Province, and other real estate in the City of Manila
consisting of apartments for rent. The petitioner, Jose V. Herrera, is an architect, actively engaged
Petitioners also operate within the premises of the hospital the "St. Catherine's School in the practice of his profession, with office at Tuason Building, Escolta, Manila. He was formerly
of Midwifery" which was granted government recognition by the Secretary of Education Chairman, Board of Examiners for Architects and Chairman, Board of Architects connected with
on February 1, 1955 (Exhibit "F-3", p. 10, BIR rec.) This school has an enrollment of the United Nations. He was also connected with the Allied Technologists which constructed the
about two hundred students. The students are charged a matriculation fee of P300.00 Veterans Hospital in Quezon City.
for 1- years, plus P50.00 a month for board and lodging, which includes
transportation to the St. Mary's Hospital. The students practice in the St. Catherine's
The only issue raised, is whether or not the lot, building and other improvements occupied by the
Hospital, as well as in the St. Mary's Hospital, which is also owned by the petitioners. A
St. Catherine Hospital are exempt from the real property tax. The resolution of this question boils
separate set of accounting books is maintained by the school for midwifery distinct from
down to the corollary issue as to whether or not the said properties are used exclusively for nurses, interns and residents" (84 C.J.S., 621), such as "athletic fields," including "a farm used for
charitable or educational purposes. (Petitioners' brief, pp. 24-29). the inmates of the institution" (Cooley on Taxation, Vol. 2, p. 1430).

The Court of Tax Appeals decided the issue in the negative, upon the ground that the St.
Catherine's Hospital "has a pay ward for ... pay-patients, who are charged for the use of the
private rooms, operating room, laboratory room, delivery room, etc., like other hospitals operated
for profit" and that "petitioners and their family occupy a portion of the building for their residence."
With respect to petitioners' claim for exemption based upon the operation of the school of
midwifery, the Court conceded that "the proposition might be proper if the property used for the
school of midwifery were separate and distinct from the hospital." It added, however, that, "in the
instant case, the portions of the building used for classrooms of the school of midwifery have not
been shown to be exclusively for school purposes"; that said portions "rather ... have a dual use,
i.e., for classroom and for hospital use, the latter not being a purpose that renders the property
tax exempt;" that part of the building and lot in question "is used as a hospital, part as residence
of the petitioners, part as garage, part as dormitory and part as school"; and that "the portion
dedicated to educational and charitable purposes can not be identified from those destined to
other uses; and the building is itself an indivisible unit of property."
It should be noted, however, that, according to the very statement of facts made in the decision
appealed from, of the thirty-two (32) beds in the hospital, twenty (20) are for charity-patients; that
"the income realized from pay-patients is spent for improvement of the charity wards;" and that
"petitioners, Dr. Ester Ochangco Herrera, as directress" of said hospital, "does not receive any
salary," although its resident physician gets a monthly salary of P170.00. It is well settled, in this
connection, that the admission of pay-patients does not detract from the charitable character of a
hospital, if all its funds are devoted "exclusively to the maintenance of the institution" as a "public
charity" (84 C.J.S., 617; see, also, 51 Am. Jur. 607; Cooley on Taxation, Vol. 2, p. 1562; 144
A.L.R., 1489-1492). "In other words, where rendering charity is its primary object, and the funds
derived from payments made by patients able to pay are devoted to the benevolent purposes of
the institution, the mere fact that a profit has been made will not deprive the hospital of its
benevolent character" (Prairie Du Chien Sanitarium Co. vs. City of Prairie Du Chien, 242 Wis.
262, 7 NW [2d] 832, 144 A.L.R. 1480).
Within the purview of the Constitutional exemption from taxation, the St. Catherine's Hospital is,
therefore, a charitable institution, and the fact that it admits pay-patients does not bar it from
claiming that it is devoted exclusively to benevolent purposes, it being admitted that the income
derived from pay-patients is devoted to the improvement of the charity wards, which represent
almost two-thirds (2/3) of the bed capacity of the hospital, aside from "out-charity patients" who
come only for consultation.
Again, the existence of "St. Catherine's School of Midwifery", with an enrollment of about 200
students, who practice partly in St. Catherine's Hospital and partly in St. Mary's Hospital, which,
likewise, belongs to petitioners herein, does not, and cannot, affect the exemption to which St.
Catherine's Hospital is entitled under our fundamental law. On the contrary, it furnishes another
ground for exemption. Seemingly, the Court of Tax Appeals was impressed by the fact that the
size of said enrollment and the matriculation fee charged from the students of midwifery, aside
from the amount they paid for board and lodging, including transportation to St. Mary's Hospital,
warrants the belief that petitioners derive a substantial profit from the operation of the school
aforementioned. Such factor is, however, immaterial to the issue in the case at bar, for "all lands,
building and improvements used exclusively for religious, charitable or educational purposes shall
be exempt from taxation," pursuant to the Constitution, regardless of whether or not material
profits are derived from the operation of the institutions in question. In other words, Congress
may, if it deems fit to do so, impose taxes upon such "profits", but said "lands, buildings and
improvements" are beyond its taxing power.
Similarly, the garage in the building above referred to which was obviously essential to the
operation of the school of midwifery, for the students therein enrolled practiced, not only in St.
Catherine's Hospital, but, also, in St. Mary's Hospital, and were entitled to transportation thereto
for Mrs. Herrera received no compensation as directress of St. Catherine's Hospital were
incidental to the operation of the latter and of said school, and, accordingly, did not affect the
charitable character of said hospital and the educational nature of said school.

Thus, we have held that the U.S.T. Hospital was not established for profit-making purposes,
WHEREFORE, the decision of the Court of Tax Appeals, as well as that of the Assessment Board
although it had 140 paying beds maintained only to partly finance the expenses of the free wards,
of Appeals of Quezon City, are hereby reversed and set aside, and another one entered declaring
containing 203 beds for charity patients (U.S.T. Hospital Employees Association vs. Sto. Tomas
that the lot, building and improvements constituting the St. Catherine's Hospital are exempt from
University Hospital, L-6988, May 24, 1954), that St. Paul's Hospital of Iloilo, a corporation
taxation under the provisions of the Constitution, without special pronouncement as to costs. It is
organized for "charitable educational and religious purposes" can not be considered as engaged
so ordered.
in business merely because its pharmacy department charges paying patients the cost of their
medicine, plus 10% thereof, to partly offset the cost of medicines supplied free of charge to
charity patients (Collector of Internal Revenue vs. St. Paul's Hospital of Iloilo, L-12127, May 25, G.R. No. L-19445 August 31, 1965
1959), and that the amendment of the original articles of incorporation of the University of Visayas
to convert it from a non-stock to a stock corporation and the increase of its assets from P9,000 to
COMMISSIONER OF INTERNAL REVENUE, petitioner,
P50,000, distributed among the members of the original non-stock corporation in terms of shares
vs.
of stock, as well as the subsequent move of its board of trustees to double the stock dividends of
BISHOP OF THE MISSIONARY DISTRICT OF THE PHILIPPINE ISLANDS OF THE
the corporation, in view of a gain of P200,000.00 in property, besides good-will, which was not
PROTESTANT EPISCOPAL CHURCH IN THE U.S.A. and THE COURT OF TAX
carried out, does not justify the inference that the corporation has become one for business and
APPEALS, respondents.
profit, none of its profits having inured to the benefit of any stockholder or individual (Collector of
Internal Revenue vs. University of Visayas, L-13554, February 28, 1961).
REGALA, J.:
Moreover, the exemption in favor of property used exclusively for charitable or educational
purposes is "not limited to property actually indispensable" therefor (Cooley on Taxation, Vol. 2, p. This is an appeal taken from the Commissioner of Internal Revenue from a decision of the Court
1430), but extends to facilities which are "incidental to and reasonably necessary for" the of Tax Appeals ordering him to refund to the Bishop of the Missionary District of the Philippines
accomplishment of said purposes, such as, in the case of hospitals, "a school for training nurses, Islands of the Protestant Episcopal in the U.S.A. the sum of P118,847 which the latter had paid by
a nurses' home, property use to provide housing facilities for interns, resident doctors, way of compensating tax.
superintendents, and other members of the hospital staff, and recreational facilities for student
Respondent Bishop of the Missionary District of the Philippines Islands of the Protestant,
Episcopal Church in the U.S.A. is a corporation sole duly registered with the Securities and
Exchange Commission. He is in charge of the administration of the temporalities and the
management of the estates and properties in the Philippines of the Domestic and Foreign
Missionary Society of the Protestant Episcopal Church in the United States (hereinafter referred
to as Missionary Society). On the other hand, the Missionary District of the Philippine Islands of
the Protestant Episcopal Church the U.S.A. (hereinafter referred to as Missionary District) is a
duly incorporated and established religious society. It owns and operates the St. Luke's Hospital
in Quezon City, the Brent Hospital in Zamboanga City and the St. Stephen's High School in
Manila.
On different dates in 1957, 1958 and 1959, the Missionary District in the Philippines received from
the Missionary Society in the United States various shipments of materials, supplies, equipment
and other articles intended for use in the construction and operation of the new St. Luke's
Hospital in Quezon City and the Brent Hospital and St. Stephen's High School. The Missionary
District also received from a certain William Minnis of Canada a stove for the use of the Brent
Hospital.
On these shipments, the Commissioner of Internal Revenue levied and collected the total amount
of P118,847 as compensating tax.
The Bishop of the Missionary District filed claims for refund of the amount he had paid on the
ground that under Republic Act No. 1916, the materials and articles received by him were exempt
from the payment of compensating tax. As the two-year period for recovery of tax was about to
expire, the Bishop of the Missionary District filed a petition for review in the Court of Tax Appeals,
without awaiting action on his claim for refund. Subsequently, he also filed two supplemental
petitions for review covering other shipments received by him and on which he had paid
compensating taxes.
On August 21, 1959, the petitioner, the Commissioner of Internal Revenue denied respondent's
claim for refund on the ground that St. Luke's Hospital was not a charitable institution and,
therefore, was not exempt under the law. This is also the position he maintained in his answer to
the first supplemental petition for review in the Tax Court.
After trial, the Tax Court rendered a decision holding the shipments exempt from taxation ordering
the petitioner to refund to the respondent the amount of P118,847. It denied a motion for
reconsideration of its decision, prompting petitioner to interpose this appeal.
Petitioner makes the following assignment of errors:
1. The shipments cannot be considered donations because the Missionary District is merely a
branch of the Missionary Society. The two hold identical interests.
2. The Tax Court's holding that the real donors are the people who contributed money to the
Missionary Society in America is based on the uncorroborated testimony of Robert Meyer,
Treasurer of the Missionary District in the Philippines, who did not have personal knowledge of
the alleged contribution. The alleged contributors were not even identified.
3. The St. Luke's Hospital is not a charitable institution and, therefore, is not exempt from taxation
because its admits pay patients. The Secretary of Finance states in his Dept. Order No. 18 that
hospitals admitting pay patients and charity patients are not charitable institutions.
This order was issued pursuant to the power given him by the last proviso of Republic Act No.
1916 which provides:
SECTION 1. The provisions of existing laws to the contrary notwithstanding, all
donations in any form and all articles imported into the Philippines, consigned to a duly
incorporated or established international civic organization, religious or charitable
society or institution for civic, religious or charitable purposes shall be exempt from the
payment of all taxes and duties upon proof satisfactory to the Commissioner of
Customs and/or Collector of Internal Revenue that such donations in any form and
articles so imported are donations for its use or for free distribution and not for barter,
sale or hire: Provided, however, That in case such are subsequently conveyed or
transferred to other parties for a consideration, taxes and duties shall be collected
thereon at double the rate provided under existing laws payable by the
transferor: Provided, further, That rules and regulation, shall be promulgated by the
Department of Finance for the implementation of this Act.
This Court has already held that the following requisites must concur in order that a taxpayer may
claim exemption under the law (1) the imported articles must have been donated; (2) the donee
must be a duly incorporated or established international civic organization, religious or charitable
society, or institution for civic religious or charitable purposes; and (3) the articles so imported
must have been donated for the use of the organization, society or institution or for free
distribution and not for barter, sale or hire. (Commissioner v. Church of Jesus Christ "New
Jerusalem," G.R. No. L-15772, Oct. 31, 1961)
In this appeal, the petitioner contends that the importations in question cannot be considered
"donations" because the Missionary Society, which made the shipments, and the Missionary
District in the Philippines are not different persons but rather are one and the same, the latter
being a mere branch of the former.
It should be enough to point out that by stipulation of the parties, the respondent Bishop is
admitted to be a corporation sole duly registered with the Securities and Exchange Commission
and that the Missionary District is a "duly incorporated and established religious society." They
are, therefore, entities separate and distinct from the Missionary Society whose address is at 281
Fourth South, New York 10, N.Y., U.S.A. The fact that the Missionary District, of which respondent
is the Bishop, is a branch of the Missionary Society is of no moment. For that matter, so is the
Roman Catholic Church in the Philippines a branch of the Universal Roman Catholic Apostolic
Church, but it is a branch only in religious matters, in matters of faith and dogma. In other
respects, it is independent. (Roman Catholic Apostolic Administrator v. Land Registration
Commissioner, G.R. No. L-8451, December 20, 1957)
The Tax Court's finding that the materials and supplies were purchased by the Missionary Society
with money obtained from contributions from other people who should be considered the real
donors is also assailed as being based on the uncorroborated testimony of Robert Meyer,
Treasurer of the Missionary District, who it is said, did not have personal knowledge of the matter
testified to by him. This is not so. As respondent points out, the various deeds of donation state in
paragraph 3 that the "Missionary Society is a non-profit organization and derives its support from
voluntary contributions."
Petitioner's other point is that St. Luke's Hospital is not a charitable institution considering that it
admits paying patients. Indeed, it was on this ground that petitioner denied respondent's claim for
refund. It is argued that pursuant to the last proviso of Republic Act No. 1916, the Secretary of
Finance issued Department Order No. 18 on October 20, 1958, stating that
Hospitals that admit pay patients and charity patients ... are not charitable institutions
for purposes of Republic Act No 1916.
Again, it should be enough to point out that the admission of pay patients does not detract from
the charitable character of a hospital, if, as in the case of St. Luke's Hospital, its funds are
devoted exclusively to the Maintenance of the institution (Cf., e.g., Herrera v. Quezon City Board
of Assessment Appeals, G.R. No. 15270, September 30, 1961). The Secretary of Finance cannot
limit or otherwise qualify the enjoyment of this exemption granted under Republic Act No. 1916 in
implementing the law.
Pursuant to the above-quoted provisions of law, the transfer of property by gift, whether the
transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is
real or personal, tangible or intangible, is subject to donors or gift tax.
A gift is generally defined as a voluntary transfer of property by one to another without any
consideration or compensation therefor (28 C.J. 620; Santos vs. Robledo, 28 Phil. 250).

WHEREFORE, the decision appealed from is hereby affirmed with costs.

In the instant case, the contributions are voluntary transfers of property in the form of money from
private respondents to Sen. Angara, without considerations therefor. Hence, they squarely fall
G.R. No. 120721 February 23, 2005 under the definition of donation or gift.

MANUEL G. ABELLO, JOSE C. CONCEPCION, TEODORO D. REGALA, AVELINO V. As correctly pointed out by the Solicitor General:
CRUZ, petitioners,
vs.
The fact that the contributions were given to be used as campaign funds of Sen. Angara does not
COMMISSIONER OF INTERNAL REVENUE and COURT OF APPEALS, respondents.
affect the character of the fund transfers as donation or gift. There was thereby no retention of
control over the disposition of the contributions. There was simply an indication of the purpose for
AZCUNA, J.: which they were to be used. For as long as the contributions were used for the purpose for which
they were intended, Sen. Angara had complete and absolute power to dispose of the
contributions. He was fully entitled to the economic benefits of the contributions.
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 Section 91 of the Tax Code is very clear. A donors or gift tax is imposed on the transfer of
of Tax Appeals," which reversed and set aside the decision of the Court of Tax Appeals (CTA), property by gift.1awphi1.nt
ordering the Commissioner of Internal Revenue (Commissioner) to withdraw his letters dated April
21, 1988 and August 4, 1988 assessing donors taxes and to desist from collecting donors taxes
The Bureau of Internal Revenue issued Ruling No. 344 on July 20, 1988, which reads:
from petitioners.

Political Contributions. For internal revenue purposes, political contributions in the Philippines
During the 1987 national elections, petitioners, who are partners in the Angara, Abello,
are considered taxable gift rather than taxable income. This is so, because a political contribution
Concepcion, Regala and Cruz (ACCRA) law firm, contributed P882,661.31 each to the campaign
is indubitably not intended by the giver or contributor as a return of value or made because of any
funds of Senator Edgardo Angara, then running for the Senate. In letters dated April 21, 1988, the
intent to repay another what is his due, but bestowed only because of motives of philanthropy or
Bureau of Internal Revenue (BIR) assessed each of the petitioners P263,032.66 for their
charity. His purpose is to give and to bolster the morals, the winning chance of the candidate
contributions. On August 2, 1988, petitioners questioned the assessment through a letter to the
and/or his party, and not to employ or buy. On the other hand, the recipient-donee does not
BIR. They claimed that political or electoral contributions are not considered gifts under the
regard himself as exchanging his services or his product for the money contributed. But more
National Internal Revenue Code (NIRC), and that, therefore, they are not liable for donors tax.
importantly he receives financial advantages gratuitously.
The claim for exemption was denied by the Commissioner.11vvphi1.nt

On September 12, 1988, petitioners filed a petition for review with the CTA, which was decided on
October 7, 1991 in favor of the petitioners. As aforestated, the CTA ordered the Commissioner to
desist from collecting donors taxes from the petitioners.2
On appeal, the Court of Appeals reversed and set aside the CTA decision on April 20, 1994. 3 The
appellate Court ordered the petitioners to pay donors tax amounting to P263,032.66 each,
reasoning as follows:
The National Internal Revenue Code, as amended, provides:
When the U.S. gift tax law was adopted in the Philippines (before May 7, 1974), the taxability of
political contributions was, admittedly, an unsettled issue; hence, it cannot be presumed that the
Philippine Congress then had intended to consider or treat political contributions as non-taxable
gifts when it adopted the said gift tax law. Moreover, well-settled is the rule that the Philippines
need not necessarily adopt the present rule or construction in the United States on the matter.
Generally, statutes of different states relating to the same class of persons or things or having the
same purposes are not considered to be in pari materia because it cannot be justifiably presumed
that the legislature had them in mind when enacting the provision being construed. (5206,
Sutherland, Statutory Construction, p. 546.) Accordingly, in the absence of an express exempting
provision of law, political contributions in the Philippines are subject to the donor s gift tax. (cited
in National Internal Revenue Code Annotated by Hector S. de Leon, 1991 ed., p. 290).

Sec. 91. Imposition of Tax. (a) There shall be levied, assessed, collected, and paid upon the
In the light of the above BIR Ruling, it is clear that the political contributions of the private
transfer by any person, resident, or non-resident, of the property by gift, a tax, computed as
respondents to Sen. Edgardo Angara are taxable gifts. The vagueness of the law as to what
provided in Section 92. (b) The tax shall apply whether the transfer is in trust or otherwise,
comprise the gift subject to tax was made concrete by the above-quoted BIR ruling. Hence, there
whether the gift is direct or indirect, and whether the property is real or personal, tangible or
is no doubt that political contributions are taxable gifts.4
intangible.

Petitioners filed a motion for reconsideration, which the Court of Appeals denied in its resolution of
June 16, 1995.5
Petitioners thereupon filed the instant petition on July 26, 1995. Raised are the following issues:
1. DID THE HONORABLE COURT OF APPEALS ERR WHEN IT FAILED TO
CONSIDER IN ITS DECISION THE PURPOSE BEHIND THE ENACTMENT OF OUR
GIFT TAX LAW?
2. DID THE HONORABLE COURT OF APPEALS ERR IN NOT CONSIDERING THE
INTENTION OF THE GIVERS IN DETERMINING WHETHER OR NOT THE
PETITIONERS POLITICAL CONTRIBUTIONS WERE GIFTS SUBJECT TO DONORS
TAX?
3. DID THE HONORABLE COURT OF APPEALS ERR WHEN IT FAILED TO
CONSIDER THE DEFINITION OF AN "ELECTORAL CONTRIBUTION" UNDER THE
OMNIBUS ELECTION CODE IN DETERMINING WHETHER OR NOT POLITICAL
CONTRIBUTIONS ARE TAXABLE?
4. DID THE HONORABLE COURT OF APPEALS ERR IN NOT CONSIDERING THE
ADMINISTRATIVE PRACTICE OF CLOSE TO HALF A CENTURY OF NOT
SUBJECTING POLITICAL CONTRIBUTIONS TO DONORS TAX?
5. DID THE HONORABLE COURT OF APPEALS ERR IN NOT CONSIDERING THE
AMERICAN JURISPRUDENCE RELIED UPON BY THE COURT OF TAX APPEALS
AND BY THE PETITIONERS TO THE EFFECT THAT POLITICAL CONTRIBUTIONS
ARE NOT TAXABLE GIFTS?
6. DID THE HONORABLE COURT OF APPEALS ERR IN NOT APPLYING AMERICAN
JURISPRUDENCE ON THE GROUND THAT THIS WAS NOT KNOWN AT THE TIME
THE PHILIPPINES GIFT TAX LAW WAS ADOPTED IN 1939?
7. DID THE HONORABLE COURT OF APPEALS ERR IN RESOLVING THE CASE
MAINLY ON THE BASIS OF A RULING ISSUED BY THE RESPONDENT ONLY
AFTER THE ASSESSMENTS HAD ALREADY BEEN MADE?
8. DID THE HONORABLE COURT OF APPEALS ERR WHEN IT DID NOT
CONSTRUE THE GIFT TAX LAW LIBERALLY IN FAVOR OF THE TAXPAYER AND
STRICLTY AGAINST THE GOVERNMENT IN ACCORDANCE WITH APPLICABLE
PRINCIPLES OF STATUTORY CONSTRUCTION?6
First, Fifth and Sixth Issues
Section 91 of the National Internal Revenue Code (NIRC) reads:
(A) There shall be levied, assessed, collected and paid upon the transfer by any
person, resident or nonresident, of the property by gift, a tax, computed as provided in
Section 92
(B) The tax shall apply whether the transfer is in trust or otherwise, whether the gift is
direct or indirect, and whether the property is real or personal, tangible or intangible.
The NIRC does not define transfer of property by gift. However, Article 18 of the Civil Code,
states:
In matters which are governed by the Code of Commerce and special laws, their deficiency shall
be supplied by the provisions of this Code.
Thus, reference may be made to the definition of a donation in the Civil Code. Article 725 of said
Code defines donation as:
. . . an act of liberality whereby a person disposes gratuitously of a thing or right in favor of
another, who accepts it.
Donation has the following elements: (a) the reduction of the patrimony of the donor; (b) the
increase in the patrimony of the donee; and, (c) the intent to do an act of liberality or animus
donandi.7
The present case falls squarely within the definition of a donation. Petitioners, the late Manuel G.
Abello8 , Jose C. Concepcion, Teodoro D. Regala and Avelino V. Cruz, each gave P882,661.31 to
the campaign funds of Senator Edgardo Angara, without any material consideration. All three
elements of a donation are present. The patrimony of the four petitioners were reduced
by P882,661.31 each. Senator Edgardo Angaras patrimony correspondingly increased
by P3,530,645.249 . There was intent to do an act of liberality or animus donandi was present
since each of the petitioners gave their contributions without any consideration.
Taken together with the Civil Code definition of donation, Section 91 of the NIRC is clear and
unambiguous, thereby leaving no room for construction. In Rizal Commercial Banking
Corporation v. Intermediate Appellate Court10 the Court enunciated:
It bears stressing that the first and fundamental duty of the Court is to apply the law. When the
law is clear and free from any doubt or ambiguity, there is no room for construction or
interpretation. As has been our consistent ruling, where the law speaks in clear and categorical
language, there is no occasion for interpretation; there is only room for application (Cebu Portland
Cement Co. v. Municipality of Naga, 24 SCRA 708 [1968])
Where the law is clear and unambiguous, it must be taken to mean exactly what it says and the
court has no choice but to see to it that its mandate is obeyed ( Chartered Bank Employees
Association v. Ople, 138 SCRA 273 [1985]; Luzon Surety Co., Inc. v. De Garcia, 30 SCRA 111
[1969]; Quijano v. Development Bank of the Philippines, 35 SCRA 270 [1970]).
Only when the law is ambiguous or of doubtful meaning may the court interpret or construe its
true intent.l^vvphi1.net Ambiguity is a condition of admitting two or more meanings, of being
understood in more than one way, or of referring to two or more things at the same time. A statute
is ambiguous if it is admissible of two or more possible meanings, in which case, the Court is
called upon to exercise one of its judicial functions, which is to interpret the law according to its
true intent.
Second Issue
Since animus donandi or the intention to do an act of liberality is an essential element of a
donation, petitioners argue that it is important to look into the intention of the giver to determine if
a political contribution is a gift. Petitioners argument is not tenable. First of all, donative intent is a
creature of the mind. It cannot be perceived except by the material and tangible acts which
manifest its presence. This being the case, donative intent is presumed present when one gives a
part of ones patrimony to another without consideration. Second, donative intent is not negated
when the person donating has other intentions, motives or purposes which do not contradict
donative intent. This Court is not convinced that since the purpose of the contribution was to help
elect a candidate, there was no donative intent. Petitioners contribution of money without any
material consideration evinces animus donandi. The fact that their purpose for donating was to
aid in the election of the donee does not negate the presence of donative intent.
Third Issue
Petitioners maintain that the definition of an "electoral contribution" under the Omnibus Election
Code is essential to appreciate how a political contribution differs from a taxable gift. 11 Section
94(a) of the said Code defines electoral contribution as follows:
The term "contribution" includes a gift, donation, subscription, loan, advance or deposit of money
or anything of value, or a contract, promise or agreement to contribute, whether or not legally
enforceable, made for the purpose of influencing the results of the elections but shall not include
services rendered without compensation by individuals volunteering a portion or all of their time in
behalf of a candidate or political party. It shall also include the use of facilities voluntarily donated
by other persons, the money value of which can be assessed based on the rates prevailing in the
area.
This Court holds that the BIR is not precluded from making a new interpretation of the law,
especially when the old interpretation was flawed. It is a well-entrenched rule that
. . . erroneous application and enforcement of the law by public officers do not block subsequent
correct application of the statute (PLDT v. Collector of Internal Revenue, 90 Phil. 676), and that
the Government is never estopped by mistake or error on the part of its agents (Pineda v. Court of
First Instance of Tayabas, 52 Phil. 803, 807; Benguet Consolidated Mining Co. v. Pineda, 98 Phil.
711, 724).13
Seventh Issue
Petitioners question the fact that the Court of Appeals decision is based on a BIR ruling, namely
BIR Ruling No. 88-344, which was issued after the petitioners were assessed for donor s tax. This
Court does not need to delve into this issue. It is immaterial whether or not the Court of Appeals
based its decision on the BIR ruling because it is not pivotal in deciding this case. As discussed
above, Section 91 (now Section 98) of the NIRC as supplemented by the definition of a donation
found in Article 725 of the Civil Code, is clear and unambiguous, and needs no further elucidation.

Since the purpose of an electoral contribution is to influence the results of the election, petitioners Eighth Issue
again claim that donative intent is not present. Petitioners attempt to place the barrier of mutual
exclusivity between donative intent and the purpose of political contributions. This Court reiterates
Petitioners next contend that tax laws are construed liberally in favor of the taxpayer and strictly
that donative intent is not negated by the presence of other intentions, motives or purposes which
against the government. This rule of construction, however, does not benefit petitioners because,
do not contradict donative intent.
as stated, there is here no room for construction since the law is clear and unambiguous.

Petitioners would distinguish a gift from a political donation by saying that the consideration for a
Finally, this Court takes note of the fact that subsequent to the donations involved in this case,
gift is the liberality of the donor, while the consideration for a political contribution is the desire of
Congress approved Republic Act No. 7166 on November 25, 1991, providing in Section 13
the giver to influence the result of an election by supporting candidates who, in the perception of
thereof that political/electoral contributions, duly reported to the Commission on Elections, are not
the giver, would influence the shaping of government policies that would promote the general
subject to the payment of any gift tax. This all the more shows that the political contributions
welfare and economic well-being of the electorate, including the giver himself.
herein made are subject to the payment of gift taxes, since the same were made prior to the
exempting legislation, and Republic Act No. 7166 provides no retroactive effect on this point.
Petitioners attempt is strained. The fact that petitioners will somehow in the future benefit from
the election of the candidate to whom they contribute, in no way amounts to a valuable material
WHEREFORE, the petition is DENIED and the assailed Decision and Resolution of the Court of
consideration so as to remove political contributions from the purview of a donation. Senator
Appeals are AFFIRMED.
Angara was under no obligation to benefit the petitioners. The proper performance of his duties as
a legislator is his obligation as an elected public servant of the Filipino people and not a
consideration for the political contributions he received. In fact, as a public servant, he may even No costs.
be called to enact laws that are contrary to the interests of his benefactors, for the benefit of the
greater good.
SO ORDERED.

In fine, the purpose for which the sums of money were given, which was to fund the campaign of
G.R. No. L-19865 July 31, 1965
Senator Angara in his bid for a senatorial seat, cannot be considered as a material consideration
so as to negate a donation.
MARIA CARLA PIROVANO, etc., et al., petitioners-appellants,
vs.
Fourth Issue
THE COMMISSIONER OF INTERNAL REVENUE, respondent-appellee.

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

This case is a sequel to the case of Pirovano vs. De la Rama Steamship Co., 96 Phil. 335.
. . . It is a familiar principle of law that prolonged practice by the government agency charged with
the execution of a statute, acquiesced in and relied upon by all concerned over an appreciable
period of time, is an authoritative interpretation thereof, entitled to great weight and the highest Briefly, the facts of the aforestated case may be stated as follows:
respect. . . .12
Enrico Pirovano was the father of the herein petitioners-appellants. Sometime in the early part of
1941, De la Rama Steamship Co. insured the life of said Enrico Pirovano, who was then its
President and General Manager until the time of his death, with various Philippine and American
insurance companies for a total sum of one million pesos, designating itself as the beneficiary of
the policies, obtained by it. Due to the Japanese occupation of the Philippines during the second
World War, the Company was unable to pay the premiums on the policies issued by its Philippine
insurers and these policies lapsed, while the policies issued by its American insurers were kept
effective and subsisting, the New York office of the Company having continued paying its
premiums from year to year.
During the Japanese occupation , or more particularly in the latter part of 1944, said Enrico
Pirovano died.
After the liberation of the Philippines from the Japanese forces, the Board of Directors of De la
Rama Steamship Co. adopted a resolution dated July 10, 1946 granting and setting aside, out of
the proceeds expected to be collected on the insurance policies taken on the life of said Enrico
Pirovano, the sum of P400,000.00 for equal division among the four (4) minor children of the
deceased, said sum of money to be convertible into 4,000 shares of stock of the Company, at par,
or 1,000 shares for each child. Shortly thereafter, the Company received the total sum of
P643,000.00 as proceeds of the said life insurance policies obtained from American insurers.
Upon receipt of the last stated sum of money, the Board of Directors of the Company modified, on
January 6, 1947, the above-mentioned resolution by renouncing all its rights title, and interest to
the said amount of P643,000.00 in favor of the minor children of the deceased, subject to the
express condition that said amount should be retained by the Company in the nature of a loan to
it, drawing interest at the rate of five per centum (5%) per annum, and payable to the Pirovano
children after the Company shall have first settled in full the balance of its present remaining
bonded indebtedness in the sum of approximately P5,000,000.00. This latter resolution was
carried out in a Memorandum Agreement on January 10, 1947 and June 17, 1947., respectively,
executed by the Company and Mrs. Estefania R. Pirovano, the latter acting in her capacity as
guardian of her children (petitioners-appellants herein) find pursuant to an express authority
granted her by the court.
On June 24, 1947, the Board of Directors of the Company further modified the last mentioned
resolution providing therein that the Company shall pay the proceeds of said life insurance
policies to the heirs of the said Enrico Pirovano after the Company shall have settled in full the
balance of its present remaining bonded indebtedness, but the annual interests accruing on the
principal shall be paid to the heirs of the said Enrico Pirovano, or their duly appointed
representative, whenever the Company is in a position to meet said obligation.
On February 26, 1948, Mrs. Estefania R. Pirovano, in behalf of her children, executed a public
document formally accepting the donation; and, on the same date, the Company through its
Board of Directors, took official notice of this formal acceptance.
On September 13, 1949, the stockholders of the Company formally ratified the various resolutions
hereinabove mentioned with certain clarifying modifications that the payment of the donation shall
not be effected until such time as the Company shall have first duly liquidated its present bonded
indebtedness in the amount of P3,260,855.77 with the National Development Company, or fully
redeemed the preferred shares of stock in the amount which shall be issued to the National
Development Company in lieu thereof; and that any and all taxes, legal fees, and expenses in any
way connected with the above transaction shall be chargeable and deducted from the proceeds
of the life insurance policies mentioned in the resolutions of the Board of Directors.
On March 8, 1951, however, the majority stockholders of the Company voted to revoke the
resolution approving the donation in favor of the Pirovano children.
As a consequence of this revocation and refusal of the Company to pay the balance of the
donation amounting to P564,980.90 despite demands therefor, the herein petitioners-appellants
represented by their natural guardian, Mrs. Estefania R. Pirovano, brought an action for the
recovery of said amount, plus interest and damages against De la Rama Steamship Co., in the
Court of First Instance of Rizal, which case ultimately culminated to an appeal to this Court. On
December 29, 1954, this court rendered its decision in the appealed case (96 Phil. 335) holding
that the donation was valid and remunerative in nature, the dispositive part of which reads:
Wherefore, the decision appealed from should be modified as follows: (a) that the
donation in favor of the children of the late Enrico Pirovano of the proceeds of the
insurance policies taken on his life is valid and binding on the defendant corporation; (b)
that said donation, which amounts to a total of P583,813.59, including interest, as it
appears in the books of the corporation as of August 31, 1951, plus interest thereon at
the rate of 5 per cent per annum from the filing of the complaint, should be paid to the
plaintiffs after the defendant corporation shall have fully redeemed the preferred shares
issued to the National Development Company under the terms and conditions stared in
the resolutions of the Board of Directors of January 6, 1947 and June 24, 1947, as
amended by the resolution of the stockholders adopted on September 13, 1949; and (c)
defendant shall pay to plaintiffs an additional amount equivalent to 10 per cent of said
amount of P583,813.59 as damages by way of attorney's fees, and to pay the costs of
action. (Pirovano et al. vs. De la Rama Steamship Co., 96 Phil. 367-368)
The above decision became final and executory. In compliance therewith, De la Rama Steamship
Co. made, on April 6, 1955, a partial payment on the amount of the judgment and paid the
balance thereof on May 12, 1955.
On March 6, 1955, respondent Commissioner of Internal Revenue assessed the amount of
P60,869.67 as donees' gift tax, inclusive of surcharges, interests and other penalties, against
each of the petitioners-appellants, or for the total sum of P243,478.68; and, on April 23, 1955, a
donor's gift tax in the total amount of P34,371.76 was also assessed against De la Rama
Steamship Co., which the latter paid.
Petitioners-appellants herein contested respondent Commissioner's assessment and imposition
of the donees' gift taxes and donor's gift tax and also made a claim for refund of the donor's gift
tax so collected. Respondent Commissioner overruled petitioners' claims; hence, the latter
presented two (2) petitions for review against respondent's rulings before the Court of Tax
Appeals, said petitions having been docketed as CTA Cases Nos. 347 and 375. CTA Case No.
347 relates to the petition disputing the legality of the assessment of donees' gift taxes and
donor's gift tax while CTA Case No. 375 refers to the claim for refund of the donor's gift tax
already paid.
After the filing of respondent's usual answers to the petitions, the two cases, being interrelated to
each other, were tried jointly and terminated.
On January 31, 1962, the Court of Tax Appeals rendered its decision in the two cases, the
dispositive part of which reads:
In resume, we are of the opinion, that (1) the donor's gift tax in the sum of P34,371.76
was erroneously assessed and collected, hence, petitioners are entitled to the refund
thereof; (2) the donees' gift taxes were correctly assessed; (3) the imposition of the
surcharge of 25% is not proper; (4) the surcharge of 5% is legally due; and (5) the
interest of 1% per month on the deficiency donees' gift taxes is due from petitioners
from March 8, 1955 until the taxes are paid.
 IN LINE WITH THE FOREGOING OPINION, petitioners are hereby ordered to pay the
donees' gift taxes as assessed by respondent, plus 5% surcharge and interest at the
rate of 1% per month from March 8, 1955 to the date of payment of said donees' gift
taxes. Respondent is ordered to apply the sum of P34,371.76 which is refundable to
petitioners, against the amount due from petitioners. With costs against petitioners in
Case No. 347.
Petitioners-appellants herein filed a motion to reconsider the above decision, which the lower
court denied. Hence, this appeal before us.
In the instant appeal, petitioners-appellants herein question only that portion of the decision of the
lower court ordering the payment of donees' gift taxes as assessed by respondent as well as the
imposition of surcharge and interest on the amount of donees' gift taxes.
In their brief and memorandum, they dispute the factual finding of the lower court that De la Rama
Steamship Company's renunciation of its rights, title, and interest over the proceeds of said life
insurance policies in favor of the Pirovano children "was motivated solely and exclusively by its
sense of gratitude, an act of pure liberality, and not to pay additional compensation for services
inadequately paid for." Petitioners now contend that the lower court's finding was erroneous in
seemingly considering the disputed grant as a simple donation, since our previous decision (96
Phil. 335) had already declared that the transfer to the Pirovano children was a remuneratory
donation. Petitioners further contend that the same was made not for an insufficient or inadequate
consideration but rather it a was made for a full and adequate compensation for the valuable
services rendered by the late Enrico Pirovano to the De la Rama Steamship Co.; hence, the
donation does not constitute a taxable gift under the provisions of Section 108 of the National
Internal Revenue Code.
The argument for petitioners-appellants fails to take into account the fact that neither in Spanish
nor in Anglo-American law was it considered that past services, rendered without relying on a
coetaneous promise, express or implied, that such services would be paid for in the future,
constituted cause or consideration that would make a conveyance of property anything else but a
gift or donation. This conclusion flows from the text of Article 619 of the Code of 1889 (identical
with Article 726 of the present Civil Code of the Philippines):
When a person gives to another a thing ... on account of the latter's merits or of the
services rendered by him to the donor, provided they do not constitute a demandable
debt, ..., there is also a donation. ... .
There is nothing on record to show that when the late Enrico Pirovano rendered services as
President and General Manager of the De la Rama Steamship Co. he was not fully compensated
for such services, or that, because they were "largely responsible for the rapid and very
successful development of the activities of the company" (Res. of July 10, 1946). Pirovano
expected or was promised further compensation over and in addition to his regular emoluments
as President and General Manager. The fact that his services contributed in a large measure to
the success of the company did not give rise to a recoverable debt, and the conveyances made
by the company to his heirs remain a gift or donation. This is emphasized by the directors'
Resolution of January 6, 1947, that "out of gratitude" the company decided to renounce in favor of
Pirovano's heirs the proceeds of the life insurance policies in question. The true consideration for
the donation was, therefore, the company's gratitude for his services, and not the services
themselves.
That the tax court regarded the conveyance as a simple donation, instead of a remuneratory one
as it was declared to be in our previous decision, is but an innocuous error; whether remuneratory
or simple, the conveyance remained a gift, taxable under Chapter 2, Title III of the Internal
Revenue Code.
But then appellants contend, the entire property or right donated should not be considered as a
gift for taxation purposes; only that portion of the value of the property or right transferred, if any,
which is in excess of the value of the services rendered should be considered as a taxable gift.
They cite in support Section 111 of the Tax Code which provides that
Where property is transferred for less, than an adequate and full consideration in
money or money's worth, then the amount by which the value of the property exceeded
the value of the consideration shall, for the purpose of the tax imposed by this Chapter,
be deemed a gift, ... .
The flaw in this argument lies in the fact that, as copied from American law, the term consideration
used in this section refers to the technical "consideration" defined by the American Law Institute
(Restatement of Contracts) as "anything that is bargained for by the promisor and given by the
promisee in exchange for the promise" (Also, Corbin on Contracts, Vol. I, p. 359). But, as we have
seen, Pirovano's successful activities as officer of the De la Rama Steamship Co. cannot be
deemed such consideration for the gift to his heirs, since the services were rendered long before
the Company ceded the value of the life policies to said heirs; cession and services were not the
result of one bargain or of a mutual exchange of promises.
And the Anglo-American law treats a subsequent promise to pay for past services (like one to pay
for improvements already made without prior request from the promisor) to be a nudum
pactum (Roscorla vs. Thomas, 3 Q.B. 234; Peters vs. Poro, 25 ALR 615; Carson vs. Clark, 25
Am. Dec. 79; Boston vs. Dodge, 12 Am. Dec. 206), i.e., one that is unenforceable in view of the
common law rule that consideration must consist in a legal benefit to the promisee or some legal
detriment to the promisor.
What is more, the actual consideration for the cession of the policies, as previously shown, was
the Company's gratitude to Pirovano; so that under section 111 of the Code there is no
consideration the value of which can be deducted from that of the property transferred as a gift.
Like "love and affection," gratitude has no economic value and is not "consideration" in the sense
that the word is used in this section of the Tax Code.
As stated by Chief Justice Griffith of the Supreme Court of Mississippi in his well-known book,
"Outlines of the Law" (p. 204)
Love and affection are not considerations of value they are not estimable in terms of value. Nor
are sentiments of gratitude for gratuitous part favors or kindnesses; nor are obligations which are
merely moral. It has been well said that if a moral obligation were alone sufficient it would remove
the necessity for any consideration at all, since the fact of making a promise impose, the moral
obligation to perform it."
It is of course perfectly possible that a donation or gift should at the same time impose a burden
or condition on the donee involving some economic liability for him. A, for example, may donate a
parcel of land to B on condition that the latter assume a mortgage existing on the donated land. In
this case the donee may rightfully insist that the gift tax be computed only on the value of the land
less the value of the mortgage. This, in fact, is contemplated by Article 619 of the Civil Code of
1889 (Art. 726 of the Tax Code) when it provides that there is also a donation "when the gift
imposes upon the donee a burden which is less than the value of the thing given." Section 111 of
the Tax Code has in view situations of this kind, since it also prescribes that "the amount by which
the value of the property exceeded the value of the consideration" shall be deemed a gift for the
purpose of the tax. .
Petitioners finally contend that, even assuming that the donation in question is subject to donees'
gift taxes, the imposition of the surcharge of 5% and interest of 1% per month from March 8, 1955
was not justified because the proceeds of the life insurance policies were actually received on
April 6, 1955 and May 12, 1955 only and in accordance with Section 115(c) of the Tax Code; the
filing of the returns of such tax became due on March 1, 1956 and the tax became payable on
May 15, 1956, as provided for in Section 116(a) of the same Code. In other words, petitioners
maintain that the assessment and demand for donees' gift taxes was prematurely made and of no
legal effect; hence, they should not be held liable for such surcharge and interest.
It is well to note, and it is not disputed, that petitioners-donees have failed to file any gift tax return
and that they also failed to pay the amount of the assessment made against them by respondent
in 1955. This situation is covered by Section 119(b) (1) and (c) and Section 120 of the Tax Code:
(b) Deficiency.
(1) Payment not extended. Where a deficiency, or any interest assessed in
connection therewith, or any addition to the taxes provided for in section one hundred
twenty is not paid in full within thirty days from the date of the notice and demand from
the Commissioner, there shall be collected as a part of the taxes, interest upon the
unpaid amount at the rate of one per centum a month from the date of such notice and
demand until it is paid. (section 119)
(c) Surcharge. If any amount of the taxes included in the notice and demand from
the Commissioner of Internal Revenue is not paid in full within thirty days after such
notice and demand, there shall be collected in addition to the interest prescribed above
as a part of the taxes a surcharge of five per centum of the unpaid amount. (sec. 119)
The failure to file a return was found by the lower court to be due to reasonable cause and not to
willful neglect. On this score, the elimination by the lower court of the 25% surcharge is ad
valorem penalty which respondent Commissioner had imposed pursuant to Section 120 of the Tax
Code was proper, since said Section 120 vests in the Commissioner of Internal Revenue or in the
tax court power and authority to impose or not to impose such penalty depending upon whether
or not reasonable cause has been shown in the non-filing of such return.
On the other hand, unlike said Section 120, Section 119, paragraphs (b) (1) and (c) of the Tax
Code, does not confer on the Commissioner of Internal Revenue or on the courts any power and
discretion not to impose such interest and surcharge. It is likewise provided for by law that an
appeal to the Court of Tax Appeals from a decision of the Commissioner of Internal Revenue shall
not suspend the payment or collection of the tax liability of the taxpayer unless a motion to that
effect shall have been presented to the court and granted by it on the ground that such collection
will jeopardize the interest of the taxpayer (Sec. 11, Republic Act No. 1125; Rule 12, Rules of the
Court of Tax Appeals). It should further be noted that
It has been the uniform holding of this Court that no suit for enjoining the collection of a
tax, disputed or undisputed, can be brought, the remedy being to pay the tax first,
formerly under protest and now without need of protect, file the claim with the Collector,
and if he denies it, bring an action for recovery against him. (David v. Ramos, et al., 90
Phil. 351)
Section 306 of the National Internal Revenue Code ... lays down the procedure to be
followed in those cases wherein a taxpayer entertains some doubt about the
correctness of a tax sought to be collected. Said section provides that the tax, should
first be paid and the taxpayer should sue for its recovery afterwards. The purpose of the
law obviously is to prevent delay in the collection of taxes, upon which the Government
depends for its existence. To allow a taxpayer to first secure a ruling as regards the
validity of the tax before paying it would be to defeat this purpose. (National Dental
Supply Co. vs. Meer, 90 Phil. 265)
Petitioners did not file in the lower court any motion for the suspension of payment or collection of
the amount of assessment made against them.
On the basis of the above-stated provisions of law and applicable authorities, it is evident that the
imposition of 1% interest monthly and 5% surcharge is justified and legal. As succinctly stated by
the court below, said imposition is "mandatory and may not be waived by the Commissioner of
Internal Revenue or by the courts" (Resolution on petitioners' motion for reconsideration, Annex
XIV, petition). Hence, said imposition of interest and surcharge by the lower court should be
upheld.
WHEREFORE, the decision of the Court of Tax Appeals is affirmed. Costs against petitioners
Pirovano.
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.
PAREDES, J.:
Sometime in 1957, the M.B. Estate, Inc., of Bacolod City, donated P10,000.00 in cash to Rev. Fr.
Crispin Ruiz, then parish priest of Victorias, Negros Occidental, and predecessor of herein
petitioner, for the construction of a new Catholic Church in the locality. The total amount was
actually spent for the purpose intended.
On March 3, 1958, the donor M.B. Estate, Inc., filed the donor's gift tax return. Under date of April
29, 1960, the respondent Commissioner of Internal Revenue issued an assessment for donee's
gift tax against the Catholic Parish of Victorias, Negros Occidental, of which petitioner was the
priest. The tax amounted to P1,370.00 including surcharges, interests of 1% monthly from May
15, 1958 to June 15, 1960, and the compromise for the late filing of the return.
Petitioner lodged a protest to the assessment and requested the withdrawal thereof. The protest
and the motion for reconsideration presented to the Commissioner of Internal Revenue were
denied. The petitioner appealed to the Court of Tax Appeals on November 2, 1960. In the petition
for review, the Rev. Fr. Casimiro Lladoc claimed, among others, that at the time of the donation,
he was not the parish priest in Victorias; that there is no legal entity or juridical person known as
the "Catholic Parish Priest of Victorias," and, therefore, he should not be liable for the donee's gift
tax. It was also asserted that the assessment of the gift tax, even against the Roman Catholic
Church, would not be valid, for such would be a clear violation of the provisions of the
Constitution.
After hearing, the CTA rendered judgment, the pertinent portions of which are quoted below:
... . Parish priests of the Roman Catholic Church under canon laws are similarly
situated as its Archbishops and Bishops with respect to the properties of the church
within their parish. They are the guardians, superintendents or administrators of these
properties, with the right of succession and may sue and be sued.
 xxx xxx xxx
The petitioner impugns the, fairness of the assessment with the argument that he
should not be held liable for gift taxes on donation which he did not receive personally
since he was not yet the parish priest of Victorias in the year 1957 when said donation
was given. It is intimated that if someone has to pay at all, it should be petitioner's
predecessor, the Rev. Fr. Crispin Ruiz, who received the donation in behalf of the
Catholic parish of Victorias or the Roman Catholic Church. Following petitioner's line of
thinking, we should be equally unfair to hold that the assessment now in question
should have been addressed to, and collected from, the Rev. Fr. Crispin Ruiz to be paid
from income derived from his present parish where ever it may be. It does not seem
right to indirectly burden the present parishioners of Rev. Fr. Ruiz for donee's gift tax on
a donation to which they were not benefited.
xxx xxx xxx
We saw no legal basis then as we see none now, to include within the Constitutional
exemption, taxes which partake of the nature of an excise upon the use made of the
properties or upon the exercise of the privilege of receiving the properties. (Phipps vs.
Commissioner of Internal Revenue, 91 F [2d] 627; 1938, 302 U.S. 742.)
It is a cardinal rule in taxation that exemptions from payment thereof are highly
disfavored by law, and the party claiming exemption must justify his claim by a clear,
positive, or express grant of such privilege by law. (Collector vs. Manila Jockey Club,
G.R. No. L-8755, March 23, 1956; 53 O.G. 3762.)
The phrase "exempt from taxation" as employed in Section 22(3), Article VI of the
Constitution of the Philippines, should not be interpreted to mean exemption from all
kinds of taxes. Statutes exempting charitable and religious property from taxation
should be construed fairly though strictly and in such manner as to give effect to the
main intent of the lawmakers. (Roman Catholic Church vs. Hastrings 5 Phil. 701.)
xxx xxx xxx
WHEREFORE, in view of the foregoing considerations, the decision of the respondent
Commissioner of Internal Revenue appealed from, is hereby affirmed except with
regard to the imposition of the compromise penalty in the amount of P20.00 (Collector
of Internal Revenue v. U.S.T., G.R. No. L-11274, Nov. 28, 1958); ..., and the petitioner,
the Rev. Fr. Casimiro Lladoc is hereby ordered to pay to the respondent the amount of
P900.00 as donee's gift tax, plus the surcharge of five per centum (5%) as ad
valorem penalty under Section 119 (c) of the Tax Code, and one per centum (1%)
monthly interest from May 15, 1958 to the date of actual payment. The surcharge of
25% provided in Section 120 for failure to file a return may not be imposed as the
failure to file a return was not due to willful neglect.( ... ) No costs.
The above judgment is now before us on appeal, petitioner assigning two (2) errors allegedly
committed by the Tax Court, all of which converge on the singular issue of whether or not
petitioner should be liable for the assessed donee's gift tax on the P10,000.00 donated for the
construction of the Victorias Parish Church.
Section 22 (3), Art. VI of the Constitution of the Philippines, exempts from taxation
cemeteries, churches and parsonages or convents, appurtenant thereto, and all lands, buildings,
and improvements used exclusively for religious purposes. The exemption is only from the
payment of taxes assessed on such properties enumerated, as property taxes, as contra
distinguished from excise taxes. In the present case, what the Collector assessed was a donee's
gift tax; the assessment was not on the properties themselves. It did not rest upon general
ownership; it was an excise upon the use made of the properties, upon the exercise of the
privilege of receiving the properties (Phipps vs. Com. of Int. Rec. 91 F 2d 627). Manifestly, gift tax
is not within the exempting provisions of the section just mentioned. A gift tax is not a property tax,
but an excise tax imposed on the transfer of property by way of gift inter vivos, the imposition of
which on property used exclusively for religious purposes, does not constitute an impairment of
the Constitution. As well observed by the learned respondent Court, the phrase "exempt from
taxation," as employed in the Constitution (supra) should not be interpreted to mean exemption
from all kinds of taxes. And there being no clear, positive or express grant of such privilege by law,
in favor of petitioner, the exemption herein must be denied.
The next issue which readily presents itself, in view of petitioner's thesis, and Our finding that a
tax liability exists, is, who should be called upon to pay the gift tax? Petitioner postulates that he
should not be liable, because at the time of the donation he was not the priest of Victorias. We
note the merit of the above claim, and in order to put things in their proper light, this Court, in its
Resolution of March 15, 1965, ordered the parties to show cause why the Head of the Diocese to
which the parish of Victorias pertains, should not be substituted in lieu of petitioner Rev. Fr.
Casimiro Lladoc it appearing that the Head of such Diocese is the real party in interest. The
Solicitor General, in representation of the Commissioner of Internal Revenue, interposed no
objection to such a substitution. Counsel for the petitioner did not also offer objection thereto.
On April 30, 1965, in a resolution, We ordered the Head of the Diocese to present whatever legal
issues and/or defenses he might wish to raise, to which resolution counsel for petitioner, who also
appeared as counsel for the Head of the Diocese, the Roman Catholic Bishop of Bacolod,
manifested that it was submitting itself to the jurisdiction and orders of this Court and that it was
presenting, by reference, the brief of petitioner Rev. Fr. Casimiro Lladoc as its own and for all
purposes.
In view here of and considering that as heretofore stated, the assessment at bar had been
properly made and the imposition of the tax is not a violation of the constitutional provision
exempting churches, parsonages or convents, etc. (Art VI, sec. 22 [3], Constitution), the Head of
the Diocese, to which the parish Victorias Pertains, is liable for the payment thereof.
The decision appealed from should be, as it is hereby affirmed insofar as tax liability is concerned;
it is modified, in the sense that petitioner herein is not personally liable for the said gift tax, and
that the Head of the Diocese, herein substitute petitioner, should pay, as he is presently ordered
to pay, the said gift tax, without special, pronouncement as to costs.
G.R. No. 210987 November 24, 2014
THE PHILIPPINE AMERICAN LIFE AND GENERAL INSURANCE COMPANY, Petitioner,
vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL
REVENUE, Respondents.
VELASCO, JR., J.:
Nature of the Case
Before the Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court
assailing and seeking the reversal of the Resolutions of the Court of Appeals (CA) in CA-G.R. SP
No. 127984, dated May 23, 20131 and January 21, 2014, which dismissed outright the petitioner's xxxx
appeal from the Secretary of Finance's review of BIR Ruling No. 015-122 for lack of jurisdiction.
(c.1.4) In case the fair market value of the shares of stock sold, bartered, or exchanged is greater
The Facts than the amount of money and/or fair market value of the property received, the excess of the fair
market value of the shares of stock sold, bartered or exchanged overthe amount of money and
the fair market value of the property, if any, received as consideration shall be deemed a gift
Petitioner The Philippine American Life and General Insurance Company (Philamlife) used to own
subject to the donorstax under Section 100 of the Tax Code, as amended.
498,590 Class A shares in Philam Care Health Systems, Inc. (PhilamCare), representing 49.89%
of the latter's outstanding capital stock. In 2009, petitioner, in a bid to divest itself of its interests in
the health maintenance organization industry, offered to sell its shareholdings in PhilamCare xxxx
through competitive bidding. Thus, on September 24, 2009, petitioner's Class A shares were sold
for USD 2,190,000, or PhP 104,259,330 based on the prevailing exchange rate at the time of the
(c.2) Definition of fair market valueof Shares of Stock. For purposes of this Section, fair market
sale, to STI Investments, Inc., who emerged as the highest bidder.3
value of the share of stock sold shall be:

After the sale was completed and the necessary documentary stamp and capital gains taxes were
xxxx
paid, Philamlife filed an application for a certificate authorizing registration/tax clearance with the
Bureau of Internal Revenue (BIR) Large Taxpayers Service Division to facilitate the transfer of the
shares. Months later, petitioner was informed that it needed to secure a BIR ruling in connection (c.2.2) In the case of shares of stock not listed and traded in the local stock exchanges, the book
with its application due to potential donors tax liability. In compliance, petitioner, on January 4, value of the shares of stock as shown in the financial statements duly certified by an independent
2012, requested a ruling4 to confirm that the sale was not subject to donors tax, pointing out, in certified public accountant nearest to the date of sale shall be the fair market value.
its request, the following: that the transaction cannot attract donors tax liability since there was no
donative intent and,ergo, no taxable donation, citing BIR Ruling [DA-(DT-065) 715-09] dated
In view of the foregoing, the Commissioner ruled that the difference between the book value and
November 27, 2009;5 that the shares were sold at their actual fair market value and at arms
the selling price in the sales transaction is taxable donation subject to a 30% donors tax under
length; that as long as the transaction conducted is at arms lengthsuch that a bona fide
Section 99(B) of the NIRC. 7Respondent Commissioner likewise held that BIR Ruling [DA-(DT-
business arrangement of the dealings is done inthe ordinary course of businessa sale for less
065) 715-09], on which petitioner anchored its claim, has already been revoked by Revenue
than an adequate consideration is not subject to donors tax; and that donors tax does not apply
Memorandum Circular (RMC) No. 25-2011.8
to saleof shares sold in an open bidding process.

Aggrieved, petitioner requested respondent Secretary of Finance (Secretary) to review BIR Ruling
On January 4, 2012, however, respondent Commissioner on Internal Revenue (Commissioner)
No. 015-12, but to no avail. For on November 26, 2012, respondent Secretary affirmed the
denied Philamlifes request through BIR Ruling No. 015-12. As determined by the Commissioner,
Commissioners assailed ruling in its entirety.9
the selling price of the shares thus sold was lower than their book value based on the financial
statements of PhilamCare as of the end of 2008. 6 As such, the Commisioner held, donors tax
became imposable on the price difference pursuant to Sec. 100 of the National Internal Revenue Ruling of the Court of Appeals
Code (NIRC), viz:
Not contented with the adverse results, petitioner elevated the case to the CA via a petition for
SEC. 100. Transfer for Less Than Adequate and full Consideration.- Where property, other than review under Rule 43, assigning the following errors:10
real property referred to in Section 24(D), is transferred for less than an adequate and full
consideration in money or moneys worth, then the amount by which the fair market value of the
property exceeded the value of the consideration shall, for the purpose of the tax imposed by this A.
Chapter, be deemed a gift, and shall be included in computing the amount of gifts made during
the calendar year. The Honorable Secretary of Finance gravely erred in not finding that the application of Section
7(c.2.2) of RR 06-08 in the Assailed Ruling and RMC 25-11 is void insofar as it altersthe meaning
The afore-quoted provision, the Commissioner added, is implemented by Revenue Regulation 6- and scope of Section 100 of the Tax Code.
2008 (RR 6-2008), which provides:
B.
SEC. 7. SALE, BARTER OR EXCHANGE OF SHARES OF STOCK NOT TRADED THROUGH A
LOCAL STOCK EXCHANGE PURSUANT TO SECS. 24(C), 25(A)(3), 25(B), 27(D)(2), 28(A)(7) The Honorable Secretary of Finance gravely erred in finding that Section 100 of the Tax Code is
(c), 28(B)(5)(c) OF THE TAX CODE, AS AMENDED. applicable tothe sale of the Sale of Shares.

xxxx 1.

(c) Determination of Amount and Recognition of Gain or Loss The Sale of Shares were sold at their fair market value and for fair and full
consideration in money or moneys worth.
(c.1) In the case of cash sale, the selling price shall be the consideration per deed of sale.
 2.
The sale of the Sale Shares is a bona fide business transaction without any donative
intent and is therefore beyond the ambit of Section 100 of the Tax Code.
3.
It is superfluous for the BIR to require an express provision for the exemption of the
sale of the Sale Shares from donors tax since Section 100 of the Tax Code does not
explicitly subject the transaction to donors tax.
C.
The Honorable Secretary of Finance gravely erred in failing to find that in the absence of any of
the grounds mentioned in Section 246 of the Tax Code, rules and regulations, rulings or circulars
such as RMC 25-11 cannot be given retroactive application to the prejudice of Philamlife.
On May 23, 2013, the CA issued the assailed Resolution dismissing the CA Petition, thusly:
WHEREFORE, the Petition for Review dated January 9, 2013 is DISMISSED for lack of
jurisdiction.
SO ORDERED.
In disposing of the CA petition, the appellate court ratiocinated that it is the Court of Tax Appeals
(CTA), pursuant to Sec. 7(a)(1) of Republic Act No. 1125 (RA 1125), 11 as amended, which has
jurisdiction over the issues raised. The outright dismissal, so the CA held, is predicated on the
postulate that BIR Ruling No. 015-12 was issued in the exercise of the Commissioner s power to
interpret the NIRC and other tax laws. Consequently, requesting for its review can be categorized
as "other matters arising under the NIRC or other laws administered by the BIR," which is under
the jurisdiction of the CTA, not the CA.
Philamlife eventually sought reconsideration but the CA, in its equally assailed January 21, 2014
Resolution, maintained its earlier position. Hence, the instant recourse.
Issues
Stripped to the essentials, the petition raises the following issues in both procedure and
substance:
1. Whether or not the CA erred in dismissing the CA Petition for lack of jurisdiction; and
2. Whether or not the price difference in petitioners adverted sale of shares in
PhilamCare attracts donors tax.
Procedural Arguments
a. Petitioners contentions
Insisting on the propriety of the interposed CA petition, Philamlife, while conceding that
respondent Commissioner issued BIR Ruling No. 015-12 in accordance with her authority to
interpret tax laws, argued nonetheless that such ruling is subject to review by the Secretary of
Finance under Sec. 4 of the NIRC, to wit:
SECTION 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. The
power to interpret the provisions of this Code and other tax laws shall be under the exclusive and
original jurisdiction of the Commissioner, subject to review by the Secretary of Finance.
The power to decide disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties imposed in relation thereto, or other matters arising under this Code orother
laws or portions thereof administered by the Bureau of Internal Revenue is vested in the
Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals.
Petitioner postulates that there is a need to differentiate the rulings promulgated by the
respondent Commissioner relating to those rendered under the first paragraph of Sec. 4 of the
NIRC, which are appealable to the Secretary of Finance, from those rendered under the second
paragraph of Sec. 4 of the NIRC, which are subject to review on appeal with the CTA.
This distinction, petitioner argues, is readily made apparent by Department Order No. 7-02, 12 as
circularized by RMC No. 40-A-02.
Philamlife further averred that Sec.7 of RA 1125, as amended, does not find application in the
case at bar since it only governs appeals from the Commissioners rulings under the second
paragraph and does not encompass rulings from the Secretary of Finance in the exercise of his
power of review under the first, as what was elevated to the CA. It added that under RA 1125, as
amended, the only decisions of the Secretary appealable to the CTA are those rendered in
customs cases elevated to him automatically under Section 2315 of the Tariff and Customs
Code.13
There is, thus, a gap in the law when the NIRC, as couched, and RA 1125, as amended, failed to
supply where the rulings of the Secretary in its exercise of its power of review under Sec. 4 of the
NIRC are appealable to. This gap, petitioner submits, was remedied by British American Tobacco
v. Camacho14 wherein the Court ruled that where what is assailed is the validity or constitutionality
of a law, or a rule or regulation issued by the administrative agency, the regular courts have
jurisdiction to pass upon the same.
In sum, appeals questioning the decisions of the Secretary of Finance in the exercise of its power
of review under Sec. 4 of the NIRC are not within the CTAs limited special jurisdiction and,
according to petitioner, are appealable to the CA via a Rule 43 petition for review.
b. Respondents contentions
Before the CA, respondents countered petitioners procedural arguments by claiming that even
assuming arguendo that the CTA does not have jurisdiction over the case, Philamlife,
nevertheless,committed a fatal error when it failed to appeal the Secretary of Finances ruling to
the Office of the President (OP). As made apparent by the rules, the Department of Finance is not
among the agencies and quasi-judicial bodies enumerated under Sec. 1, Rule 43 of the Rules of
Court whose decisions and rulings are appealable through a petition for review. 15 This is in stark
contrast to the OPs specific mention under the same provision, so respondents pointed out.
To further reinforce their argument, respondents cite the Presidents power of review emanating
from his power of control as enshrined under Sec. 17 of Article VII of the Constitution, which
reads:
Section 17.The President shall have control of all the executive departments, bureaus, and
offices. He shall ensure that the laws be faithfully executed.
The nature and extent of the Presidents constitutionally granted power of control have
beendefined in a plethora of cases, most recently in Elma v. Jacobi,16 wherein it was held that:
x x x This power of control, which even Congress cannot limit, let alone withdraw, means the
power of the Chief Executive to review, alter, modify, nullify, or set aside what a subordinate, e.g.,
members of the Cabinet and heads of line agencies, had done in the performance of their duties
and to substitute the judgment of the former for that of the latter.
In their Comment on the instant petition, however, respondents asseverate that the CA did not err
in its holding respecting the CTAs jurisdiction over the controversy.
The Courts Ruling
The petition is unmeritorious.
Reviews by the Secretary of Finance pursuant to Sec. 4 of the NIRC are appealable to the CTA
To recapitulate, three different, if not conflicting, positions as indicated below have been advanced
by the parties and by the CA as the proper remedy open for assailing respondents rulings:
1. Petitioners: The ruling of the Commissioner is subject to review by the Secretary
under Sec. 4 of the NIRC, and that of the Secretary to the CA via Rule 43;
2. Respondents: The ruling of the Commissioner is subject to review by the Secretary
under Sec. 4 of the NIRC, and that of the Secretary to the Office of the President before
appealing to the CA via a Rule 43 petition; and
3. CA: The ruling of the Commissioner is subject to review by the CTA.
We now resolve.
Preliminarily, it bears stressing that there is no dispute that what is involved herein is the
respondent Commissioners exercise of power under the first paragraph of Sec. 4 of the NIRC
the power to interpret tax laws. This, in fact, was recognized by the appellate court itself, but
erroneously held that her action in the exercise of such power is appealable directly to the CTA.
As correctly pointed out by petitioner, Sec. 4 of the NIRC readily provides that the
Commissioners power to interpret the provisions of this Code and other tax laws is subject to
review by the Secretary of Finance. The issue that now arises is thiswhere does one seek
immediate recourse from the adverse ruling of the Secretary of Finance in its exercise of its
power of review under Sec. 4?
Admittedly, there is no provision in law that expressly provides where exactly the ruling of the
Secretary of Finance under the adverted NIRC provision is appealable to. However, We find that
Sec. 7(a)(1) of RA 1125, as amended, addresses the seeming gap in the law asit vests the CTA,
albeit impliedly, with jurisdiction over the CA petition as "other matters" arising under the NIRC or
other laws administered by the BIR. As stated:
Sec. 7. Jurisdiction.- The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other
matters arising under the National Internal Revenue or other laws administered by the Bureau of
Internal Revenue. (emphasis supplied)
Even though the provision suggests that it only covers rulings of the Commissioner, We hold that
it is, nonetheless, sufficient enough to include appeals from the Secretarys review under Sec. 4
of the NIRC.
It is axiomatic that laws should be given a reasonable interpretation which does not defeat the
very purpose for which they were passed. 17 Courts should not follow the letter of a statute when to
do so would depart from the true intent of the legislature or would otherwise yield conclusions
inconsistent with the purpose of the act. 18 This Court has, in many cases involving the
construction of statutes, cautioned against narrowly interpreting a statute as to defeat the purpose
of the legislator, and rejected the literal interpretation of statutes if todo so would lead to unjust or
absurd results.19
Indeed, to leave undetermined the mode of appeal from the Secretary of Finance would be an
injustice to taxpayers prejudiced by his adverse rulings. To remedy this situation, Weimply from
the purpose of RA 1125 and its amendatory laws that the CTA is the proper forum with which to
institute the appeal. This is not, and should not, in any way, be taken as a derogation of the power
of the Office of President but merely as recognition that matters calling for technical knowledge
should be handled by the agency or quasi-judicial body with specialization over the controversy.
As the specialized quasi-judicial agency mandated to adjudicate tax, customs, and assessment
cases, there can be no other court of appellate jurisdiction that can decide the issues raised inthe
CA petition, which involves the tax treatment of the shares of stocks sold. Petitioner, though,
nextinvites attention to the ruling in Ursal v. Court of Tax Appeals 20 to argue against granting the
CTA jurisdiction by implication, viz:
Republic Act No. 1125 creating the Court of Tax Appeals did not grant it blanket authority to
decide any and all tax disputes. Defining such special courts jurisdiction, the Act necessarily
limited its authority to those matters enumerated therein. Inline with this idea we recently
approved said courts order rejecting an appeal to it by Lopez & Sons from the decision of the
Collector ofCustoms, because in our opinion its jurisdiction extended only to a review of the
decisions of the Commissioner of Customs, as provided bythe statute and not to decisions of
the Collector of Customs. (Lopez & Sons vs. The Court of Tax Appeals, 100 Phil., 850, 53 Off.
Gaz., [10] 3065).
xxxx
x x x Republic Act No. 1125 is a complete law by itself and expressly enumerates the matters
which the Court of Tax Appeals may consider; such enumeration excludes all others by
implication. Expressio unius est exclusio alterius.
Petitioners contention is untenable. Lest the ruling in Ursalbe taken out of context, but worse as a
precedent, it must be noted that the primary reason for the dismissal of the said case was that the
petitioner therein lacked the personality to file the suit with the CTA because he was not adversely
affected by a decision or ruling of the Collector of Internal Revenue, as was required under Sec.
11 of RA 1125.21 As held:
We share the view that the assessor had no personality to resort to the Court of Tax Appeals. The
rulings of the Board of Assessment Appeals did not "adversely affect" him. At most it was the City
of Cebu that had been adversely affected in the sense that it could not thereafter collect higher
realty taxes from the abovementioned property owners. His opinion, it is true had been overruled;
but the overruling inflicted no material damage upon him or his office. And the Court of Tax
Appeals was not created to decide mere conflicts of opinion between administrative officers or
agencies. Imagine an income tax examiner resorting to the Court of Tax Appeals whenever the
Collector of Internal Revenue modifies, or lower his assessment on the return of a tax payer! 22
The appellate power of the CTA includes certiorari
Petitioner is quick to point out, however, that the grounds raised in its CA petition included the
nullity of Section 7(c.2.2) of RR 06-08 and RMC 25-11. In an attempt to divest the CTA jurisdiction
over the controversy, petitioner then cites British American Tobacco, wherein this Court has
expounded on the limited jurisdiction of the CTA in the following wise:
While the above statute confers on the CTA jurisdiction to resolve tax disputes in general, this
does not include cases where the constitutionality of a law or rule is challenged. Where what is
assailed is the validity or constitutionality of a law, or a rule or regulation issued by the
administrative agency in the performance of its quasi legislative function, the regular courts have
jurisdiction to pass upon the same. The determination of whether a specific rule or set of rules
issued by an administrative agency contravenes the law or the constitution is within the
jurisdiction of the regular courts. Indeed, the Constitution vests the power of judicial review or the
power to declare a law, treaty, international or executive agreement, presidential decree, order,
instruction, ordinance, or regulation inthe courts, including the regional trial courts. This is within
the scope of judicial power, which includes the authority of the courts to determine inan
appropriate action the validity of the acts of the political departments. Judicial power includes the
duty of the courts of justice to settle actual controversies involving rights which are legally
demandable and enforceable, and to determine whether or not there has been a grave abuse of
discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality
of the Government.23
Vis-a-vis British American Tobacco, it bears to stress what appears to be a contrasting ruling in
Asia International Auctioneers, Inc. v. Parayno, Jr., to wit:
Similarly, in CIR v. Leal, pursuant to Section 116 of Presidential Decree No. 1158 (The National
Internal Revenue Code, as amended) which states that "[d]ealers in securities shall pay a tax
equivalent to six (6%) per centum of their gross income. Lending investors shall pay a tax
equivalent to five (5%) per cent, of their gross income," the CIR issued Revenue Memorandum
Order (RMO) No. 15-91 imposing 5% lending investors tax on pawnshops based on their gross
income and requiring all investigating units of the BIR to investigate and assess the lending
investors tax due from them. The issuance of RMO No. 15-91 was an offshoot of the CIRs
finding that the pawnshop business is akin to that of "lending investors" as defined in Section
157(u) of the Tax Code. Subsequently, the CIR issued RMC No. 43-91 subjecting pawn tickets to
documentary stamp tax. Respondent therein, Josefina Leal, owner and operator of Josefinas
Pawnshop, asked for a reconsideration of both RMO No. 15-91 and RMC No. 43-91, but the
same was denied by petitioner CIR. Leal then filed a petition for prohibition with the RTC of San
Mateo, Rizal, seeking to prohibit petitioner CIR from implementing the revenue orders. The CIR,
through the OSG, filed a motion to dismiss on the ground of lack of jurisdiction. The RTC denied
the motion. Petitioner filed a petition for certiorari and prohibition with the CA which dismissed the
petition "for lack of basis." In reversing the CA, dissolving the Writ of Preliminary Injunction issued
by the trial court and ordering the dismissal of the case before the trial court, the Supreme Court
held that "[t]he questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or opinions of
the Commissioner implementing the Tax Code on the taxability of pawnshops." They were issued
pursuant to the CIRs power under Section 245 of the Tax Code "to make rulings or opinions in
connection with the implementation of the provisions of internal revenue laws, including ruling on
the classification of articles of sales and similar purposes."The Court held that under R.A. No.
1125 (An Act Creating the Court of Tax Appeals), as amended, such rulings of the CIR are
appealable to the CTA.
In the case at bar, the assailed revenue regulations and revenue memorandum circulars are
actually rulings or opinions of the CIR on the tax treatment of motor vehicles sold at public auction
within the SSEZ to implement Section 12 of R.A. No. 7227 which provides that "exportation or
removal of goods from the territory of the [SSEZ] to the other parts of the Philippine territory shall
be subject to customs duties and taxes under the Customs and Tariff Codeand other relevant tax
laws of the Philippines." They were issued pursuant to the power of the CIR under Section 4 of
the National Internal Revenue Code x x x.24 (emphasis added)
The respective teachings in British American Tobacco and Asia International Auctioneers, at first
blush, appear to bear no conflictthat when the validity or constitutionality of an administrative
rule or regulation is assailed, the regular courts have jurisdiction; and if what is assailed are
rulings or opinions of the Commissioner on tax treatments, jurisdiction over the controversy is
lodged with the CTA. The problem with the above postulates, however, is that they failed to take
into consideration one crucial pointa taxpayer can raise both issues simultaneously.
Petitioner avers that there is now a trend wherein both the CTA and the CA disclaim jurisdiction
over tax cases: on the one hand, mere prayer for the declaration of a tax measures
unconstitutionality or invalidity before the CTA can result in a petitions outright dismissal, and on
the other hand, the CA will likewise dismiss the same petition should it find that the primary issue
is not the tax measures validity but the assessment or taxability of the transaction or subject
involved. To illustrate this point, petitioner cites the assailed Resolution, thusly: Admittedly, in
British American Tobacco vs. Camacho, the Supreme Court has ruled that the determination of
whether a specific rule or set of rules issued by an administrative agency contravenes the law or
the constitution is within the jurisdiction of the regular courts, not the CTA.
xxxx
Petitioner essentially questions the CIRs ruling that Petitioners sale of shares is a taxable
donation under Sec. 100 of the NIRC. The validity of Sec. 100 of the NIRC, Sec. 7 (C.2.2) and
RMC 25-11 is merely questioned incidentally since it was used by the CIR as bases for its
unfavourable opinion. Clearly, the Petition involves an issue on the taxability of the transaction
rather than a direct attack on the constitutionality of Sec. 100, Sec.7 (c.2.2.) of RR 06-08 and
RMC 25-11. Thus, the instant Petition properly pertains to the CTA under Sec. 7 of RA 9282.
As a result of the seemingly conflicting pronouncements, petitioner submits that taxpayers are
now at a quandary on what mode of appeal should be taken, to which court or agency it should
be filed, and which case law should be followed.
Petitioners above submission is specious.
In the recent case of City of Manila v. Grecia-Cuerdo, 25 the Court en banc has ruled that the CTA
now has the power of certiorari in cases within its appellate jurisdiction. To elucidate:
The prevailing doctrine is that the authority to issue writs of certiorari involves the exercise of
original jurisdiction which must be expressly conferred by the Constitution or by law and cannot
be implied from the mere existence of appellate jurisdiction. Thus, x x x this Court has ruled
against the jurisdiction of courts or tribunals over petitions for certiorari on the ground that there is
no law which expressly gives these tribunals such power. Itmust be observed, however, that x x x
these rulings pertain not to regular courts but to tribunals exercising quasijudicial powers. With
respect tothe Sandiganbayan, Republic Act No. 8249 now provides that the special criminal court
has exclusive original jurisdiction over petitions for the issuance of the writs of mandamus,
prohibition, certiorari, habeas corpus, injunctions, and other ancillary writs and processes in aid of
its appellate jurisdiction.
In the same manner, Section 5 (1), Article VIII of the 1987 Constitution grants power to the
Supreme Court, in the exercise of its original jurisdiction, to issue writs of certiorari, prohibition
and mandamus. With respect to the Court of Appeals, Section 9 (1) of Batas Pambansa Blg. 129
(BP 129) gives the appellate court, also in the exercise of its original jurisdiction, the power to
issue, among others, a writ of certiorari, whether or not in aid of its appellate jurisdiction. As to
Regional Trial Courts, the power to issue a writ of certiorari, in the exercise of their original
jurisdiction, is provided under Section 21 of BP 129.
now within the power of the CTA, through its power of certiorari, to rule on the validity of a
particular administrative ruleor regulation so long as it is within its appellate jurisdiction. Hence, it
can now rule not only on the propriety of an assessment or tax treatment of a certain transaction,
but also on the validity of the revenue regulation or revenue memorandum circular on which the
said assessment is based.
Guided by the doctrinal teaching in resolving the case at bar, the fact that the CA petition not only
contested the applicability of Sec. 100 of the NIRC over the sales transaction but likewise
questioned the validity of Sec. 7 (c.2.2) of RR 06-08 and RMC 25-11 does not divest the CTA of
its jurisdiction over the controversy, contrary to petitioner's arguments.

The foregoing notwithstanding, while there is no express grant of such power, with respect to the The price difference is subject to donor's tax
CTA, Section 1, Article VIII of the 1987 Constitution provides, nonetheless, that judicial power
shall be vested in one Supreme Court and in such lower courts as may be established by law and
Petitioner's substantive arguments are unavailing. The absence of donative intent, if that be the
that judicial power includes the duty of the courts of justice to settle actual controversies involving
case, does not exempt the sales of stock transaction from donor's tax since Sec. 100 of the NIRC
rights which are legally demandable and enforceable, and to determine whether or not there has
categorically states that the amount by which the fair market value of the property exceeded the
been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any
value of the consideration shall be deemed a gift.1wphi1 Thus, even if there is no actual
branch or instrumentality of the Government.
donation, the difference in price is considered a donation by fiction of law.

On the strength of the above constitutional provisions, it can be fairly interpreted that the power of
Moreover, Sec. 7(c.2.2) of RR 06-08 does not alter Sec. 100 of the NIRC but merely sets the
the CTA includes that of determining whether or not there has been grave abuse of discretion
parameters for determining the "fair market value" of a sale of stocks. Such issuance was made
amounting to lack or excess of jurisdiction on the part of the RTC in issuing an interlocutory order
pursuant to the Commissioner's power to interpret tax laws and to promulgate rules and
in cases falling within the exclusive appellate jurisdiction of the tax court. It, thus, follows that the
regulations for their implementation.
CTA, by constitutional mandate, is vested with jurisdiction to issue writs of certiorari in these
cases.
Lastly, petitioner is mistaken in stating that RMC 25-11, having been issued after the sale, was
being applied retroactively in contravention to Sec. 246 of the NIRC. 26 Instead, it merely called for
Indeed, in order for any appellate court to effectively exercise its appellate jurisdiction, it must
the strict application of Sec. 100, which was already in force the moment the NIRC was enacted.
have the authority to issue, among others, a writ of certiorari. In transferring exclusive jurisdiction
over appealed tax cases to the CTA, it can reasonably be assumed that the law intended to
transfer also such power as is deemed necessary, if not indispensable, in aid of such appellate WHEREFORE, the petition is hereby DISMISSED. The Resolutions of the Court of Appeals in
jurisdiction. There is no perceivable reason why the transfer should only be considered as partial, CA-G.R. SP No. 127984 dated May 23, 2013 and January 21, 2014 are hereby AFFIRMED.
not total. (emphasis added)
SO ORDERED.
Evidently, City of Manilacan be considered as a departure from Ursal in that in spite of there being
no express grant in law, the CTA is deemed granted with powers of certiorari by implication.
Moreover, City of Manila diametrically opposes British American Tobacco to the effect that it is