PABLO LORENZO, as trustee of the estate of Thomas Hanley, deceased,

vs. JUAN POSADAS, JR., Collector of Internal Revenue LAUREL, J. G.R. No. L-43082 June 18, 1937

On October 4, 1932, the plaintiff Pablo Lorenzo, in his capacity as trustee of the estate of Thomas Hanley, deceased,
brought this action in the Court of First Instance of Zamboanga against the defendant, Juan Posadas, Jr., then the
Collector of Internal Revenue, for the refund of the amount of P2,052.74, paid by the plaintiff as inheritance tax on the
estate of the deceased, and for the collection of interst thereon at the rate of 6 per cent per annum, computed from
September 15, 1932, the date when the aforesaid tax was [paid under protest. The defendant set up a counterclaim
for P1,191.27 alleged to be interest due on the tax in question and which was not included in the original assessment.
From the decision of the Court of First Instance of Zamboanga dismissing both the plaintiff's complaint and the
defendant's counterclaim, both parties appealed to this court.

It appears that on May 27, 1922, one Thomas Hanley died in Zamboanga, Zamboanga, leaving a will (Exhibit 5) and
considerable amount of real and personal properties. On june 14, 1922, proceedings for the probate of his will and
the settlement and distribution of his estate were begun in the Court of First Instance of Zamboanga. The will was
admitted to probate. Said will provides, among other things, as follows:

4. I direct that any money left by me be given to my nephew Matthew Hanley.

5. I direct that all real estate owned by me at the time of my death be not sold or otherwise disposed of for a
period of ten (10) years after my death, and that the same be handled and managed by the executors, and
proceeds thereof to be given to my nephew, Matthew Hanley, at Castlemore, Ballaghaderine, County of
Rosecommon, Ireland, and that he be directed that the same be used only for the education of my brother's
children and their descendants.

6. I direct that ten (10) years after my death my property be given to the above mentioned Matthew Hanley to
be disposed of in the way he thinks most advantageous.

8. I state at this time I have one brother living, named Malachi Hanley, and that my nephew, Matthew Hanley,
is a son of my said brother, Malachi Hanley.

The Court of First Instance of Zamboanga considered it proper for the best interests of their estate to appoint a trustee
to administer the real properties which, under the will, were to pass to Matthew Hanley ten years after the two
executors named in the will, was, on March 8, 1924, appointed trustee. Moore took his oath of office and gave bond
on March 10, 1924. He acted as trustee until February 29, 1932, when he resigned and the plaintiff herein was
appointed in his stead.

During the incumbency of the plaintiff as trustee, the defendant Collector of Internal Revenue, alleging that the estate
left by the deceased at the time of his death consisted of realty valued at P27,920 and personalty valued at P1,465,
and allowing a deduction of P480.81, assessed against the estate an inheritance tax in the amount of P1,434.24
which, together with the penalties for deliquency in payment consisting of a 1 per cent monthly interest from July 1,
1931 to the date of payment and a surcharge of 25 per cent on the tax, amounted to P2,052.74. On March 15, 1932,
the defendant filed a motion in the testamentary proceedings pending before the Court of First Instance of Zamboanga
(Special proceedings No. 302) praying that the trustee, plaintiff herein, be ordered to pay to the Government the said
sum of P2,052.74. The motion was granted. On September 15, 1932, the plaintiff paid said amount under protest,
notifying the defendant at the same time that unless the amount was promptly refunded suit would be brought for its
recovery. The defendant overruled the plaintiff's protest and refused to refund the said amount hausted, plaintiff went
to court with the result herein above indicated.

In his appeal, plaintiff contends that the lower court erred:

I. In holding that the real property of Thomas Hanley, deceased, passed to his instituted heir, Matthew Hanley,
from the moment of the death of the former, and that from the time, the latter became the owner thereof.

II. In holding, in effect, that there was deliquency in the payment of inheritance tax due on the estate of said
deceased.
 III. In holding that the inheritance tax in question be based upon the value of the estate upon the death of the
testator, and not, as it should have been held, upon the value thereof at the expiration of the period of ten
years after which, according to the testator's will, the property could be and was to be delivered to the instituted
heir.

IV. In not allowing as lawful deductions, in the determination of the net amount of the estate subject to said
tax, the amounts allowed by the court as compensation to the "trustees" and paid to them from the decedent's
estate.

V. In not rendering judgment in favor of the plaintiff and in denying his motion for new trial.

The defendant-appellant contradicts the theories of the plaintiff and assigns the following error besides:

The lower court erred in not ordering the plaintiff to pay to the defendant the sum of P1,191.27, representing
part of the interest at the rate of 1 per cent per month from April 10, 1924, to June 30, 1931, which the plaintiff
had failed to pay on the inheritance tax assessed by the defendant against the estate of Thomas Hanley.

The following are the principal questions to be decided by this court in this appeal: (a) When does the inheritance tax
accrue and when must it be satisfied? (b) Should the inheritance tax be computed on the basis of the value of the
estate at the time of the testator's death, or on its value ten years later? (c) In determining the net value of the estate
subject to tax, is it proper to deduct the compensation due to trustees? (d) What law governs the case at bar? Should
the provisions of Act No. 3606 favorable to the tax-payer be given retroactive effect? (e) Has there been deliquency
in the payment of the inheritance tax? If so, should the additional interest claimed by the defendant in his appeal be
paid by the estate? Other points of incidental importance, raised by the parties in their briefs, will be touched upon in
the course of this opinion.

(a) The accrual of the inheritance tax is distinct from the obligation to pay the same. Section 1536 as amended, of the
Administrative Code, imposes the tax upon "every transmission by virtue of inheritance, devise, bequest, gift mortis
causa, or advance in anticipation of inheritance,devise, or bequest." The tax therefore is upon transmission or the
transfer or devolution of property of a decedent, made effective by his death. (61 C. J., p. 1592.) It is in reality an
excise or privilege tax imposed on the right to succeed to, receive, or take property by or under a will or the intestacy
law, or deed, grant, or gift to become operative at or after death. Acording to article 657 of the Civil Code, "the rights
to the succession of a person are transmitted from the moment of his death." "In other words", said Arellano, C. J., ".
. . the heirs succeed immediately to all of the property of the deceased ancestor. The property belongs to the heirs at
the moment of the death of the ancestor as completely as if the ancestor had executed and delivered to them a deed
for the same before his death." (Bondad vs. Bondad, 34 Phil., 232. See also, Mijares vs. Nery, 3 Phil., 195; Suilong &
Co., vs. Chio-Taysan, 12 Phil., 13; Lubrico vs. Arbado, 12 Phil., 391; Innocencio vs. Gat-Pandan, 14 Phil., 491; Aliasas
vs.Alcantara, 16 Phil., 489; Ilustre vs. Alaras Frondosa, 17 Phil., 321; Malahacan vs. Ignacio, 19 Phil., 434; Bowa vs.
Briones, 38 Phil., 27; Osario vs. Osario & Yuchausti Steamship Co., 41 Phil., 531; Fule vs. Fule, 46 Phil., 317; Dais
vs. Court of First Instance of Capiz, 51 Phil., 396; Baun vs. Heirs of Baun, 53 Phil., 654.) Plaintiff, however, asserts
that while article 657 of the Civil Code is applicable to testate as well as intestate succession, it operates only in so
far as forced heirs are concerned. But the language of article 657 of the Civil Code is broad and makes no distinction
between different classes of heirs. That article does not speak of forced heirs; it does not even use the word "heir". It
speaks of the rights of succession and the transmission thereof from the moment of death. The provision of section
625 of the Code of Civil Procedure regarding the authentication and probate of a will as a necessary condition to effect
transmission of property does not affect the general rule laid down in article 657 of the Civil Code. The authentication
of a will implies its due execution but once probated and allowed the transmission is effective as of the death of the
testator in accordance with article 657 of the Civil Code. Whatever may be the time when actual transmission of the
inheritance takes place, succession takes place in any event at the moment of the decedent's death. The time when
the heirs legally succeed to the inheritance may differ from the time when the heirs actually receive such inheritance.
"Poco importa", says Manresa commenting on article 657 of the Civil Code, "que desde el falleimiento del causante,
hasta que el heredero o legatario entre en posesion de los bienes de la herencia o del legado, transcurra mucho o
poco tiempo, pues la adquisicion ha de retrotraerse al momento de la muerte, y asi lo ordena el articulo 989, que
debe considerarse como complemento del presente." (5 Manresa, 305; see also, art. 440, par. 1, Civil Code.) Thomas
Hanley having died on May 27, 1922, the inheritance tax accrued as of the date.

From the fact, however, that Thomas Hanley died on May 27, 1922, it does not follow that the obligation to pay the
tax arose as of the date. The time for the payment on inheritance tax is clearly fixed by section 1544 of the Revised
Administrative Code as amended by Act No. 3031, in relation to section 1543 of the same Code. The two sections
follow:

SEC. 1543. Exemption of certain acquisitions and transmissions. — The following shall not be taxed:

(a) The merger of the usufruct in the owner of the naked title.

(b) The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the
trustees.

(c) The transmission from the first heir, legatee, or donee in favor of another beneficiary, in accordance
with the desire of the predecessor.

In the last two cases, if the scale of taxation appropriate to the new beneficiary is greater than that paid by the
first, the former must pay the difference.

SEC. 1544. When tax to be paid. — The tax fixed in this article shall be paid:

(a) In the second and third cases of the next preceding section, before entrance into possession of the
property.

(b) In other cases, within the six months subsequent to the death of the predecessor; but if judicial
testamentary or intestate proceedings shall be instituted prior to the expiration of said period, the
payment shall be made by the executor or administrator before delivering to each beneficiary his
share.

If the tax is not paid within the time hereinbefore prescribed, interest at the rate of twelve per centum per
annum shall be added as part of the tax; and to the tax and interest due and unpaid within ten days after the
date of notice and demand thereof by the collector, there shall be further added a surcharge of twenty-five per
centum.

A certified of all letters testamentary or of admisitration shall be furnished the Collector of Internal Revenue
by the Clerk of Court within thirty days after their issuance.

It should be observed in passing that the word "trustee", appearing in subsection (b) of section 1543, should read
"fideicommissary" or "cestui que trust". There was an obvious mistake in translation from the Spanish to the English
version.

The instant case does fall under subsection (a), but under subsection (b), of section 1544 above-quoted, as there is
here no fiduciary heirs, first heirs, legatee or donee. Under the subsection, the tax should have been paid before the
delivery of the properties in question to P. J. M. Moore as trustee on March 10, 1924.

(b) The plaintiff contends that the estate of Thomas Hanley, in so far as the real properties are concerned, did not and
could not legally pass to the instituted heir, Matthew Hanley, until after the expiration of ten years from the death of
the testator on May 27, 1922 and, that the inheritance tax should be based on the value of the estate in 1932, or ten
years after the testator's death. The plaintiff introduced evidence tending to show that in 1932 the real properties in
question had a reasonable value of only P5,787. This amount added to the value of the personal property left by the
deceased, which the plaintiff admits is P1,465, would generate an inheritance tax which, excluding deductions, interest
and surcharge, would amount only to about P169.52.

If death is the generating source from which the power of the estate to impose inheritance taxes takes its being and
if, upon the death of the decedent, succession takes place and the right of the estate to tax vests instantly, the tax
should be measured by the value of the estate as it stood at the time of the decedent's death, regardless of any
subsequent contingency value of any subsequent increase or decrease in value. (61 C. J., pp. 1692, 1693; 26 R. C.
L., p. 232; Blakemore and Bancroft, Inheritance Taxes, p. 137. See also Knowlton vs. Moore, 178 U.S., 41; 20 Sup.
Ct. Rep., 747; 44 Law. ed., 969.) "The right of the state to an inheritance tax accrues at the moment of death, and
hence is ordinarily measured as to any beneficiary by the value at that time of such property as passes to him.
Subsequent appreciation or depriciation is immaterial." (Ross, Inheritance Taxation, p. 72.)

Our attention is directed to the statement of the rule in Cyclopedia of Law of and Procedure (vol. 37, pp. 1574, 1575)
that, in the case of contingent remainders, taxation is postponed until the estate vests in possession or the contingency
is settled. This rule was formerly followed in New York and has been adopted in Illinois, Minnesota, Massachusetts,
Ohio, Pennsylvania and Wisconsin. This rule, horever, is by no means entirely satisfactory either to the estate or to
those interested in the property (26 R. C. L., p. 231.). Realizing, perhaps, the defects of its anterior system, we find
upon examination of cases and authorities that New York has varied and now requires the immediate appraisal of the
postponed estate at its clear market value and the payment forthwith of the tax on its out of the corpus of the estate
transferred. (In re Vanderbilt, 172 N. Y., 69; 69 N. E., 782; In re Huber, 86 N. Y. App. Div., 458; 83 N. Y. Supp., 769;
Estate of Tracy, 179 N. Y., 501; 72 N. Y., 519; Estate of Brez, 172 N. Y., 609; 64 N. E., 958; Estate of Post, 85 App.
Div., 611; 82 N. Y. Supp., 1079. Vide also, Saltoun vs. Lord Advocate, 1 Peter. Sc. App., 970; 3 Macq. H. L., 659; 23
Eng. Rul. Cas., 888.) California adheres to this new rule (Stats. 1905, sec. 5, p. 343).

But whatever may be the rule in other jurisdictions, we hold that a transmission by inheritance is taxable at the time
of the predecessor's death, notwithstanding the postponement of the actual possession or enjoyment of the estate by
the beneficiary, and the tax measured by the value of the property transmitted at that time regardless of its appreciation
or depreciation.

(c) Certain items are required by law to be deducted from the appraised gross in arriving at the net value of the estate
on which the inheritance tax is to be computed (sec. 1539, Revised Administrative Code). In the case at bar, the
defendant and the trial court allowed a deduction of only P480.81. This sum represents the expenses and
disbursements of the executors until March 10, 1924, among which were their fees and the proven debts of the
deceased. The plaintiff contends that the compensation and fees of the trustees, which aggregate P1,187.28 (Exhibits
C, AA, EE, PP, HH, JJ, LL, NN, OO), should also be deducted under section 1539 of the Revised Administrative Code
which provides, in part, as follows: "In order to determine the net sum which must bear the tax, when an inheritance
is concerned, there shall be deducted, in case of a resident, . . . the judicial expenses of the testamentary or intestate
proceedings, . . . ."

A trustee, no doubt, is entitled to receive a fair compensation for his services (Barney vs. Saunders, 16 How., 535; 14
Law. ed., 1047). But from this it does not follow that the compensation due him may lawfully be deducted in arriving
at the net value of the estate subject to tax. There is no statute in the Philippines which requires trustees' commissions
to be deducted in determining the net value of the estate subject to inheritance tax (61 C. J., p. 1705). Furthermore,
though a testamentary trust has been created, it does not appear that the testator intended that the duties of his
executors and trustees should be separated. (Ibid.; In re Vanneck's Estate, 161 N. Y. Supp., 893; 175 App. Div.,
363; In re Collard's Estate, 161 N. Y. Supp., 455.) On the contrary, in paragraph 5 of his will, the testator expressed
the desire that his real estate be handled and managed by his executors until the expiration of the period of ten years
therein provided. Judicial expenses are expenses of administration (61 C. J., p. 1705) but, in State vs. Hennepin
County Probate Court (112 N. W., 878; 101 Minn., 485), it was said: ". . . The compensation of a trustee, earned, not
in the administration of the estate, but in the management thereof for the benefit of the legatees or devises, does not
come properly within the class or reason for exempting administration expenses. . . . Service rendered in that behalf
have no reference to closing the estate for the purpose of a distribution thereof to those entitled to it, and are not
required or essential to the perfection of the rights of the heirs or legatees. . . . Trusts . . . of the character of that here
before the court, are created for the the benefit of those to whom the property ultimately passes, are of voluntary
creation, and intended for the preservation of the estate. No sound reason is given to support the contention that such
expenses should be taken into consideration in fixing the value of the estate for the purpose of this tax."

(d) The defendant levied and assessed the inheritance tax due from the estate of Thomas Hanley under the provisions
of section 1544 of the Revised Administrative Code, as amended by section 3 of Act No. 3606. But Act No. 3606 went
into effect on January 1, 1930. It, therefore, was not the law in force when the testator died on May 27, 1922. The law
at the time was section 1544 above-mentioned, as amended by Act No. 3031, which took effect on March 9, 1922.

It is well-settled that inheritance taxation is governed by the statute in force at the time of the death of the decedent
(26 R. C. L., p. 206; 4 Cooley on Taxation, 4th ed., p. 3461). The taxpayer cannot foresee and ought not to be required
to guess the outcome of pending measures. Of course, a tax statute may be made retroactive in its operation. Liability
for taxes under retroactive legislation has been "one of the incidents of social life." (Seattle vs. Kelleher, 195 U. S.,
360; 49 Law. ed., 232 Sup. Ct. Rep., 44.) But legislative intent that a tax statute should operate retroactively should
be perfectly clear. (Scwab vs. Doyle, 42 Sup. Ct. Rep., 491; Smietanka vs. First Trust & Savings Bank, 257 U. S.,
602; Stockdale vs. Insurance Co., 20 Wall., 323; Lunch vs. Turrish, 247 U. S., 221.) "A statute should be considered
as prospective in its operation, whether it enacts, amends, or repeals an inheritance tax, unless the language of the
statute clearly demands or expresses that it shall have a retroactive effect, ." (61 C. J., P. 1602.) Though the last
paragraph of section 5 of Regulations No. 65 of the Department of Finance makes section 3 of Act No. 3606, amending
section 1544 of the Revised Administrative Code, applicable to all estates the inheritance taxes due from which have
not been paid, Act No. 3606 itself contains no provisions indicating legislative intent to give it retroactive effect. No
such effect can begiven the statute by this court.

The defendant Collector of Internal Revenue maintains, however, that certain provisions of Act No. 3606 are more
favorable to the taxpayer than those of Act No. 3031, that said provisions are penal in nature and, therefore, should
operate retroactively in conformity with the provisions of article 22 of the Revised Penal Code. This is the reason why
he applied Act No. 3606 instead of Act No. 3031. Indeed, under Act No. 3606, (1) the surcharge of 25 per cent is
based on the tax only, instead of on both the tax and the interest, as provided for in Act No. 3031, and (2) the taxpayer
is allowed twenty days from notice and demand by rthe Collector of Internal Revenue within which to pay the tax,
instead of ten days only as required by the old law.

Properly speaking, a statute is penal when it imposes punishment for an offense committed against the state which,
under the Constitution, the Executive has the power to pardon. In common use, however, this sense has been
enlarged to include within the term "penal statutes" all status which command or prohibit certain acts, and establish
penalties for their violation, and even those which, without expressly prohibiting certain acts, impose a penalty upon
their commission (59 C. J., p. 1110). Revenue laws, generally, which impose taxes collected by the means ordinarily
resorted to for the collection of taxes are not classed as penal laws, although there are authorities to the contrary.
(See Sutherland, Statutory Construction, 361; Twine Co. vs. Worthington, 141 U. S., 468; 12 Sup. Ct., 55; Rice vs. U.
S., 4 C. C. A., 104; 53 Fed., 910; Com. vs. Standard Oil Co., 101 Pa. St., 150; State vs. Wheeler, 44 P., 430; 25 Nev.
143.) Article 22 of the Revised Penal Code is not applicable to the case at bar, and in the absence of clear legislative
intent, we cannot give Act No. 3606 a retroactive effect.

(e) The plaintiff correctly states that the liability to pay a tax may arise at a certain time and the tax may be paid within
another given time. As stated by this court, "the mere failure to pay one's tax does not render one delinqent until and
unless the entire period has eplased within which the taxpayer is authorized by law to make such payment without
being subjected to the payment of penalties for fasilure to pay his taxes within the prescribed period." (U. S. vs.
Labadan, 26 Phil., 239.)

The defendant maintains that it was the duty of the executor to pay the inheritance tax before the delivery of the
decedent's property to the trustee. Stated otherwise, the defendant contends that delivery to the trustee was delivery
to the cestui que trust, the beneficiery in this case, within the meaning of the first paragraph of subsection (b) of section
1544 of the Revised Administrative Code. This contention is well taken and is sustained. The appointment of P. J. M.
Moore as trustee was made by the trial court in conformity with the wishes of the testator as expressed in his will. It is
true that the word "trust" is not mentioned or used in the will but the intention to create one is clear. No particular or
technical words are required to create a testamentary trust (69 C. J., p. 711). The words "trust" and "trustee", though
apt for the purpose, are not necessary. In fact, the use of these two words is not conclusive on the question that a
trust is created (69 C. J., p. 714). "To create a trust by will the testator must indicate in the will his intention so to do
by using language sufficient to separate the legal from the equitable estate, and with sufficient certainty designate the
beneficiaries, their interest in the ttrust, the purpose or object of the trust, and the property or subject matter thereof.
Stated otherwise, to constitute a valid testamentary trust there must be a concurrence of three circumstances: (1)
Sufficient words to raise a trust; (2) a definite subject; (3) a certain or ascertain object; statutes in some jurisdictions
expressly or in effect so providing." (69 C. J., pp. 705,706.) There is no doubt that the testator intended to create a
trust. He ordered in his will that certain of his properties be kept together undisposed during a fixed period, for a stated
purpose. The probate court certainly exercised sound judgment in appointment a trustee to carry into effect the
provisions of the will (see sec. 582, Code of Civil Procedure).

P. J. M. Moore became trustee on March 10, 1924. On that date trust estate vested in him (sec. 582 in relation to sec.
590, Code of Civil Procedure). The mere fact that the estate of the deceased was placed in trust did not remove it
from the operation of our inheritance tax laws or exempt it from the payment of the inheritance tax. The corresponding
inheritance tax should have been paid on or before March 10, 1924, to escape the penalties of the laws. This is so for
the reason already stated that the delivery of the estate to the trustee was in esse delivery of the same estate to
the cestui que trust, the beneficiary in this case. A trustee is but an instrument or agent for the cestui que trust (Shelton
vs. King, 299 U. S., 90; 33 Sup. Ct. Rep., 689; 57 Law. ed., 1086). When Moore accepted the trust and took possesson
of the trust estate he thereby admitted that the estate belonged not to him but to his cestui que trust (Tolentino vs.
Vitug, 39 Phil.,126, cited in 65 C. J., p. 692, n. 63). He did not acquire any beneficial interest in the estate. He took
such legal estate only as the proper execution of the trust required (65 C. J., p. 528) and, his estate ceased upon the
fulfillment of the testator's wishes. The estate then vested absolutely in the beneficiary (65 C. J., p. 542).

The highest considerations of public policy also justify the conclusion we have reached. Were we to hold that the
payment of the tax could be postponed or delayed by the creation of a trust of the type at hand, the result would be
plainly disastrous. Testators may provide, as Thomas Hanley has provided, that their estates be not delivered to their
beneficiaries until after the lapse of a certain period of time. In the case at bar, the period is ten years. In other cases,
the trust may last for fifty years, or for a longer period which does not offend the rule against petuities. The collection
of the tax would then be left to the will of a private individual. The mere suggestion of this result is a sufficient warning
against the accpetance of the essential to the very exeistence of government. (Dobbins vs. Erie Country, 16 Pet., 435;
10 Law. ed., 1022; Kirkland vs. Hotchkiss, 100 U. S., 491; 25 Law. ed., 558; Lane County vs. Oregon, 7 Wall., 71; 19
Law. ed., 101; Union Refrigerator Transit Co. vs. Kentucky, 199 U. S., 194; 26 Sup. Ct. Rep., 36; 50 Law. ed., 150;
Charles River Bridge vs. Warren Bridge, 11 Pet., 420; 9 Law. ed., 773.) The obligation to pay taxes rests not upon the
privileges enjoyed by, or the protection afforded to, a citizen by the government but upon the necessity of money for
the support of the state (Dobbins vs. Erie Country, supra). For this reason, no one is allowed to object to or resist the
payment of taxes solely because no personal benefit to him can be pointed out. (Thomas vs. Gay, 169 U. S., 264; 18
Sup. Ct. Rep., 340; 43 Law. ed., 740.) While courts will not enlarge, by construction, the government's power of
taxation (Bromley vs. McCaughn, 280 U. S., 124; 74 Law. ed., 226; 50 Sup. Ct. Rep., 46) they also will not place upon
tax laws so loose a construction as to permit evasions on merely fanciful and insubstantial distictions. (U. S. vs. Watts,
1 Bond., 580; Fed. Cas. No. 16,653; U. S. vs. Wigglesirth, 2 Story, 369; Fed. Cas. No. 16,690, followed in Froelich &
Kuttner vs. Collector of Customs, 18 Phil., 461, 481; Castle Bros., Wolf & Sons vs. McCoy, 21 Phil., 300; Muñoz &
Co. vs. Hord, 12 Phil., 624; Hongkong & Shanghai Banking Corporation vs. Rafferty, 39 Phil., 145; Luzon Stevedoring
Co. vs. Trinidad, 43 Phil., 803.) When proper, a tax statute should be construed to avoid the possibilities of tax evasion.
Construed this way, the statute, without resulting in injustice to the taxpayer, becomes fair to the government.

That taxes must be collected promptly is a policy deeply intrenched in our tax system. Thus, no court is allowed to
grant injunction to restrain the collection of any internal revenue tax ( sec. 1578, Revised Administrative Code;
Sarasola vs. Trinidad, 40 Phil., 252). In the case of Lim Co Chui vs. Posadas (47 Phil., 461), this court had occassion
to demonstrate trenchment adherence to this policy of the law. It held that "the fact that on account of riots directed
against the Chinese on October 18, 19, and 20, 1924, they were prevented from praying their internal revenue taxes
on time and by mutual agreement closed their homes and stores and remained therein, does not authorize the
Collector of Internal Revenue to extend the time prescribed for the payment of the taxes or to accept them without the
additional penalty of twenty five per cent." (Syllabus, No. 3.)

". . . It is of the utmost importance," said the Supreme Court of the United States, ". . . that the modes adopted to
enforce the taxes levied should be interfered with as little as possible. Any delay in the proceedings of the officers,
upon whom the duty is developed of collecting the taxes, may derange the operations of government, and thereby,
cause serious detriment to the public." (Dows vs. Chicago, 11 Wall., 108; 20 Law. ed., 65, 66; Churchill and Tait vs.
Rafferty, 32 Phil., 580.)

It results that the estate which plaintiff represents has been delinquent in the payment of inheritance tax and, therefore,
liable for the payment of interest and surcharge provided by law in such cases.

The delinquency in payment occurred on March 10, 1924, the date when Moore became trustee. The interest due
should be computed from that date and it is error on the part of the defendant to compute it one month later. The
provisions cases is mandatory (see and cf. Lim Co Chui vs. Posadas, supra), and neither the Collector of Internal
Revenuen or this court may remit or decrease such interest, no matter how heavily it may burden the taxpayer.

To the tax and interest due and unpaid within ten days after the date of notice and demand thereof by the Collector
of Internal Revenue, a surcharge of twenty-five per centum should be added (sec. 1544, subsec. (b), par. 2, Revised
Administrative Code). Demand was made by the Deputy Collector of Internal Revenue upon Moore in a communiction
dated October 16, 1931 (Exhibit 29). The date fixed for the payment of the tax and interest was November 30, 1931.
November 30 being an official holiday, the tenth day fell on December 1, 1931. As the tax and interest due were not
paid on that date, the estate became liable for the payment of the surcharge.
In view of the foregoing, it becomes unnecessary for us to discuss the fifth error assigned by the plaintiff in his brief.

We shall now compute the tax, together with the interest and surcharge due from the estate of Thomas Hanley
inaccordance with the conclusions we have reached.

At the time of his death, the deceased left real properties valued at P27,920 and personal properties worth P1,465, or
a total of P29,385. Deducting from this amount the sum of P480.81, representing allowable deductions under secftion
1539 of the Revised Administrative Code, we have P28,904.19 as the net value of the estate subject to inheritance
tax.

The primary tax, according to section 1536, subsection (c), of the Revised Administrative Code, should be imposed
at the rate of one per centum upon the first ten thousand pesos and two per centum upon the amount by which the
share exceed thirty thousand pesos, plus an additional two hundred per centum. One per centum of ten thousand
pesos is P100. Two per centum of P18,904.19 is P378.08. Adding to these two sums an additional two hundred per
centum, or P965.16, we have as primary tax, correctly computed by the defendant, the sum of P1,434.24.

To the primary tax thus computed should be added the sums collectible under section 1544 of the Revised
Administrative Code. First should be added P1,465.31 which stands for interest at the rate of twelve per centum per
annum from March 10, 1924, the date of delinquency, to September 15, 1932, the date of payment under protest, a
period covering 8 years, 6 months and 5 days. To the tax and interest thus computed should be added the sum of
P724.88, representing a surhcarge of 25 per cent on both the tax and interest, and also P10, the compromise sum
fixed by the defendant (Exh. 29), giving a grand total of P3,634.43.

As the plaintiff has already paid the sum of P2,052.74, only the sums of P1,581.69 is legally due from the estate. This
last sum is P390.42 more than the amount demanded by the defendant in his counterclaim. But, as we cannot give
the defendant more than what he claims, we must hold that the plaintiff is liable only in the sum of P1,191.27 the
amount stated in the counterclaim.

The judgment of the lower court is accordingly modified, with costs against the plaintiff in both instances. So ordered.
Avanceña, C.J., Abad Santos, Imperial, Diaz and Concepcion, JJ., concur.
Villa-Real, J., concurs.

2. LUIS W. DISON vs. JUAN POSADAS, JR., Collector of Internal Revenue. G.R. No. L-36770 November 4, 1932
BUTTE, J.:

This is an appeal from the decision of the Court of First Instance of Pampanga in favor of the defendant Juan Posadas,
Jr., Collector of Internal Revenue, in a suit filed by the plaintiffs, Luis W. Dison, for the recovery of an inheritance tax
in the sum of P2,808.73 paid under protest. The petitioner alleged in his complaint that the tax is illegal because he
received the property, which is the basis of the tax, from his father before his death by a deed of gift inter vivos which
was duly accepted and registered before the death of his father. The defendant answered with a general denial and
with a counterdemand for the sum of P1,245.56 which it was alleged is a balance still due and unpaid on account of
said tax. The plaintiff replied to the counterdemand with a general denial. The court a quo held that the cause of action
set up in the counterdemand was not proven and dismissed the same. Both sides appealed to this court, but the
cross-complaint and appeal of the Collector of Internal Revenue were dismissed by this court on March 17, 1932, on
motion of the Attorney-General.1awphil.net

The only evidence introduced at the trial of this cause was the proof of payment of the tax under protest, as stated,
and the deed of gift executed by Felix Dison on April 9, 1928, in favor of his sons Luis W. Dison, the plaintiff-appellant.
This deed of gift transferred twenty-two tracts of land to the donee, reserving to the donor for his life the usufruct of
three tracts. This deed was acknowledged by the donor before a notary public on April 16, 1928. Luis W. Dison, on
April 17, 1928, formally accepted said gift by an instrument in writing which he acknowledged before a notary public
on April 20, 1928.

At the trial the parties agreed to and filed the following ingenious stipulation of fact:

1. That Don Felix Dison died on April 21, 1928;

 2. That Don Felix Dison, before his death, made a gift inter vivos in favor of the plaintiff Luis W. Dison of all
his property according to a deed of gift (Exhibit D) which includes all the property of Don Felix Dizon;

3. That the plaintiff did not receive property of any kind of Don Felix Dison upon the death of the latter;

4. That Don Luis W. Dison was the legitimate and only child of Don Felix Dison.

It is inferred from Exhibit D that Felix Dison was a widower at the time of his death.

The theory of the plaintiff-appellant is that he received and holds the property mentioned by a consummated gift and
that Act No. 2601 (Chapter 40 of the Administrative Code) being the inheritance tax statute, does not tax gifts. The
provision directly here involved is section 1540 of the Administrative Code which reads as follows:

Additions of Gifts and Advances. — After the aforementioned deductions have been made, there shall be
added to the resulting amount the value of all gifts or advances made by the predecessor to any of those who,
after his death, shall prove to be his heirs, devises, legatees, or donees mortis causa.

The question to be resolved may be stated thus: Does section 1540 of the Administrative Code subject the plaintiff-
appellant to the payment of an inheritance tax?

The appellant argues that there is no evidence in this case to support a finding that the gift was simulated and that it
was an artifice for evading the payment of the inheritance tax, as is intimated in the decision of the court below and
the brief of the Attorney-General. We see no reason why the court may not go behind the language in which the
transaction is masked in order to ascertain its true character and purpose. In this case the scanty facts before us may
not warrant the inference that the conveyance, acknowledged by the donor five days before his death and accepted
by the donee one day before the donor's death, was fraudulently made for the purpose of evading the inheritance tax.
But the facts, in our opinion, do warrant the inference that the transfer was an advancement upon the inheritance
which the donee, as the sole and forced heir of the donor, would be entitled to receive upon the death of the donor.

The argument advanced by the appellant that he is not an heir of his deceased father within the meaning of section
1540 of the Administrative Code because his father in his lifetime had given the appellant all his property and left no
property to be inherited, is so fallacious that the urging of it here casts a suspicion upon the appellants reason for
completing the legal formalities of the transfer on the eve of the latter's death. We do not know WoN the father in this
case left a will; in any event, this appellant could not be deprived of his share of the inheritance because the Civil
Code confers upon him the status of a forced heir. We construe the expression in section 1540 "any of those who,
after his death, shall prove to be his heirs", to include those who, by our law, are given the status and rights of heirs,
regardless of the quantity of property they may receive as such heirs. That the appellant in this case occupies the
status of heir to his deceased father cannot be questioned. Construing the conveyance here in question, under the
facts presented, as an advance made by Felix Dison to his only child, we hold section 1540 to be applicable and the
tax to have been properly assessed by the Collector of Internal Revenue.

This appeal was originally assigned to a Division of five but referred to the court in banc by reason of the appellant's
attack upon the constitutionality of section 1540. This attack is based on the sole ground that insofar as section 1540
levies a tax upon gifts inter vivos, it violates that provision of section 3 of the organic Act of the Philippine Islands (39
Stat. L., 545) which reads as follows: "That no bill which may be enacted into law shall embraced more than one
subject, and that subject shall be expressed in the title of the bill." Neither the title of Act No. 2601 nor chapter 40 of
the Administrative Code makes any reference to a tax on gifts. Perhaps it is enough to say of this contention that
section 1540 plainly does not tax gifts per se but only when those gifts are made to those who shall prove to be the
heirs, devisees, legatees or donees mortis causa of the donor. This court said in the case of Tuason and
Tuason vs. Posadas 954 Phil., 289):lawphil.net

When the law says all gifts, it doubtless refers to gifts inter vivos, and not mortis causa. Both the letter and the
spirit of the law leave no room for any other interpretation. Such, clearly, is the tenor of the language which
refers to donations that took effect before the donor's death, and not to mortis causa donations, which can
only be made with the formalities of a will, and can only take effect after the donor's death. Any other
construction would virtually change this provision into:
". . . there shall be added to the resulting amount the value of all gifts mortis causa . . . made by the predecessor to
those who, after his death, shall prove to be his . . . donees mortis causa." We cannot give to the law an interpretation
that would so vitiate its language. The truth of the matter is that in this section (1540) the law presumes that such gifts
have been made in anticipation of inheritance, devise, bequest, or gift mortis causa, when the donee, after the death
of the donor proves to be his heir, devisee or donee mortis causa, for the purpose of evading the tax, and it is to
prevent this that it provides that they shall be added to the resulting amount." However much appellant's argument on
this point may fit his preconceived notion that the transaction between him and his father was a consummated gift
with no relation to the inheritance, we hold that there is not merit in this attack upon the constitutionality of section
1540 under our view of the facts. No other constitutional questions were raised in this case. The judgment below is
affirmed with costs in this instance against the appellant. So ordered.

3. In re estate of the deceased DIEGO DE LA VIÑA. JOSE MA. DE LA VIÑA Y DE LA ROSA, ex-administrator-
appellant, vs. THE COLLECTOR OF INTERNAL REVENUE, creditor-appellee. G.R. No. 46242 October 20,
1939 VILLA-REAL, J.:

This is an appeal taken by the ex-administrator, Dr. Jose MA. de la Viña y de la Rosa, from the order of the Court of
First Instance of Negros Oriental, the dispositive part of which reads:

Wherefore the Court reiterates the order of March 7, 1933, only in so far as the claim of the Insular Government
is concerned, and orders the Administrator herein to pay from whatever available fund of the estate of the
deceased Diego de la Viña the sum of P18,420.93 with the corresponding legal interests from August 20,
1929 plus costs, to the Commonwealth of the Philippines.

It is also ordered that after the said claim shall have been fully paid, the administrator herein shall pay to Dr.
Jose de la Viña y De la Rosa the sum of P19,342.93 and to other claimants their respective claims in the order
established by law out of the residue.

In support of his appeal the appellant assigns three alleged errors committed by the trial court in its order, to wit:

1. The trial court erred in holding that the income tax claimed by the Collector of Internal Revenue, should be
paid before the administration expenses claimed by the appellant executor Dr. Jose Ma. de la Viña y de la
Rosa.

2. The trial court erred in applying article 1923 of the Civil Code and in not holding that the said article has
been repealed by section 735 of the Code of Civil Procedure (Act 190).

3. Granting for the sake of argument that the payment of income tax has preference over the payment of
administration expenses, the trial court erred in holding that said preference has been abandoned and lost
due to the time that has elapsed from 1925 to 1938.

The following are undisputed facts:

On April 8, 1920, after the death of Diego de la Viña, his brother, the herein appellant Dr. Jose Ma. de la Viña, was
appointed by the Court of First Instance of Negros Oriental as special administrator of the estate of the deceased; and
on the 20th of the same month and year he was appointed executor.

On January 23, 1926, this Court issued in civil case G.R. No. 23747, entitled "In re estate of Diego de la Viña,
deceased, Jose de la Viña v. Narcisa Geopano et al.," an order approving the accounts of the said Dr. Jose de la
Viña, as outgoing administrator of the estate of Diego de la Viña. It appears from the decision of this Court rendered
in said Civil Case G.R. No. 23747 that the following items were approved:

Special per diems of Jose de la Viña

as former adminstrator
.............................. P12,552.00
Legal Commission
............................... 4,141.33
 Total
............................................................ 16,693.33

In the bill of exceptions in said case it also appears that the following expenses of Jose de la Viña were approved:

Balance in his favor as executor

.................... P1,165.86
Balance on his aparceria
................................ 7,528.64
Total
...................................................................... 8,694.50

On July 16, 1927, the said Court of First Instance of Negros Oriental ordered in the present case the payment to Dr.
Jose de la Viña of the amount of 146.025 piculs of sugar belonging to him, which product was applied to the payment
of the administration expenses of the estate of Diego de la Viña. The price of said sugar was fixed at P20 per picul by
a subsequent order. Adding the sum of P2,925, the value of said 146.025 piculs of sugar, to the sum of P25,387.83,
the result is a total of P28,312.83. As the amount of P9,228.65 has been paid on account, there remains a balance of
P19,048.18 in favor of the appellant.

It also appears that on February 23, 1932, this Court rendered judgment in G.R. No. 33870, entitled "The Collector of
Internal Revenue vs. Espiridion Villegas, as administrator of the estate of Diego de la Viña", ordering the said
administrator to pay the Insular Government, by way of income tax for the year 1925, the sum of P18,420.93, with
interest from August 20, 1939 until fully paid, and the costs.

The estate of Diego de la Viña does not have sufficient funds or property to pay fully both judgments. When the Insular
Government attempted to collect the amount of the said judgment in its favor, Dr. Jose de la Viña objected on the
ground that the judgments obtained by him are preferred under section 735 of Act No. 190, and should first be paid.
After the corresponding trial, the trial court overruled the opposition and entered the above-quoted order.

The first question to be decided in this appeal, which is raised by the first assignments of error, is WoN the trial court
erred in holding that the income tax claimed by the Collector of Internal Revenue, should be paid before the
administration expenses claimed by the ex-executor, Dr. Jose Ma. de la Viña y de la Rosa.

Section 735 of the Code of Civil Procedure, as amended by Act No. 3960, provides as follows:

SEC. 735. Order of payment if estate insolvent. — If the assets which can be appropriated for the payment of
debts are not sufficient for that purpose, the executor or administrator shall, after pay the debts against the
estate in the following order:

1. The necessary funeral expenses;

2. The expenses of the last sickness;

3. What is owing to the laborer for salaries and wages earned and for indemnities due to him, for the last year;

4. Debts due to the United States;

5. Taxes and assessments due to the Government, or any branch or subdivision thereof;

6. Debts due to the province;

7. Debts due to other creditors.

In view of the legal provision just quoted, the question is whether the income tax which an estate owes the Insular
Government partakes of the nature of administration expenses for purposes of the order of payment established by
section 735 of Act No. 190 above quoted. Section 680 of the same code of Civil Procedure provides as follows:

SEC. 680. — How allowed for services. — The executor or administrator shall be allowed necessary expenses
in the care, management, and settlement of the estate, and for his services, two dollars per day for the time
actually and necessarily employed, and a commission of three per cent upon all sums disbursed in the
payment of debts, expenses, and distributive shares, if the amount of such disbursements does not exceed
one thousand dollars. If the amount exceeds one thousand dollars and does not exceed five thousand dollars
and one-half per cent upon the excess, if the whole amount does not exceed five thousand dollars, then the
percentage as above provided, and one per cent on the excess above five thousand dollars. But in any special
case, where the estate is large, and the settlement has been attended with great difficulty, and has required
a high degree of capacity on the part of the executor or administrator, a greater sum may be allowed. But if
objection to the fees allowed be taken, the allowance may be re-examined by the Supreme Court on appeal.

When the administrator or executor is a lawyer, he shall not be allowed to charge against the estate any
professional fees, as such, for services rendered by himself. When the deceased by will makes some other
provision for compensation to his executor, the provision shall be full satisfaction for his services, unless by a
written instrument filed in the court he renounces all claim to the compensation provided by the will.

The legal provision just quoted enumerates the services for which the administrator should be paid and the
commission to which he is entitled for collections and disbursement made by him. Among these payments, which
constitutes the expenses of administration, are not included pending debts of the estate, whatever may be their nature.
According to the said legal provision, only payments which the executor or administration may have made in the
discharge of his office and the commissions to which he may be entitled, partakes of the nature of administration
expenses. the expenses of administration are due only to the executor or administrator, and he alone, and no other,
may collect them.

The Collector of internal Revenue contends that the tax of P18,420.93 which he seeks to collect, having been laid on
the profits realized in the sale of the properties of the deceased Diego de la Viña, effected on September 29, 1925 by
the judicial administrator of the estate, the said tax partake of the nature of administration expenses. As we have said,
the necessary expenses of administration whose payment is given preference in the said section 735 of the Code of
Civil Procedure are those which the administrator may have incurred in the care, administration and liquidation of the
properties of the estate and the commissions due to him for collections and disbursements which he may have made,
and not those which he cold or might have wished to make out of his own pocket or but of the funds of the estate.
"Administration expenses," says Corpus Juris, volume 24, page 424, "include expenditures in discovering and
preserving assets, attorneys fees incurred in connection with the administration of the estate, incurred in connection
with the administration of the estate, cost recovered against the representative in an action to recover assets, to
established a claim against the estate, to try title to land, and insurance premiums expended for the protection of the
property and it has even been considered that expenditures in carrying on decedent's business may be regarded as
expenses of administration." And Woerner, volume 2, page 1197, paragraph 362, third edition, of his work entitled
"The American Law of Administration of the Estate," says the following:

It has already been stated, that for the expenses attending the accomplishment of the purpose of
administration growing out of the contract or obligation entered into by the personal representative he is to be
reimbursed out of the estate, and that his claim to reimbursed must be superior to the rights of the
beneficiaries. They are subject only to the lien of a mortgage executed on specific property by the deceased
in his lifetime. The expenses under this category include those paid for probate of the will, as well in the
Probate court as on appeal, or other proceeding in a contest, if carried on in good faith; and the executor
nominated in such will is entitled to a settlement of his account, and reimbursement for his expenses in
preserving the estate and for the funeral, although the will be finally pronounced invalid; and, generally, all
expenses necessary in the protection and preservation of the estate, which have been held to include the
costs of establishing a claim against the estate. But the general rule seems rather to be that costs incurred by
the administrator in defense of claims against the estate, or in prosecuting claims in favor of it, pertain to the
administration, and are to be allowed in full; but costs incurred by claimants in establishing their claims stand
on the same footing with the claims themselves. The allowance of counsel fees and costs is discussed in
connection with the subject of accounting. Repairs necessary upon real estate of which the executor or
administrator has lawful possession also constitute expenses of administration; if the expenses incurred is
 general, affecting all the property of the estate, it should be charged generally, but if attaching to a specific
portion or piece of property, it should be charged against such portion or piece.

The liability of the administrator as such cannot be treated as a continuation of a running account with the
deceased in his lifetime; nor can the defendant in an action by an administrator upon a contract made by him
as such, or to recover assets of the estate, set off or counterclaim a debt due him from the deceased. And it
is held that one who renders services for a trust has no recourse against the trust, except to subject an
equitable demand of the trustee to the payment of the debt.

The mere fact, therefore, that the income tax claimed by the Collector of Internal Revenue had been imposed upon
the profits obtained by the administrator of the estate in the sale of certain properties of the deceased Diego de la
Viña, after the latter's death, does not make the said tax a necessary expense of administration, unless the
administrator had paid it either from his own pocket or out of the funds of the estate: in the first case the tax paid is
converted into an expense of administration which the administrator may fully recover, plus his commission; in the
second case, he may only collect his commission, which partakes of the nature of an expense of administration.

In the decision promulgated on May 18, 1938, in the Estate of the deceased Claude E. Hoygood, The Collector of
Internal Revenue, claimant and appellee, vs. Annie Laurie Haygood, administratix and appellant, G.R. No. 44038, this
Court said:

In accordance with section 9, paragraph (a) of Act No. 2833, the assessment made by the Collector of Internal
Revenue within three years after the discovery of an erroneous declaration shall be paid by the maker of the
return immediately upon being notified of the assessment. The procedure prescribed by law is, therefore
summary, and collection must be made from the person liable is already dead, collection must necessarily be
made from the estate of the deceased, either in a state or intestate proceedings instituted before a competent
court, by motion together with the sworn statement of the taxes due filed with said court, so that it may require
the administrator to pay the claim if the latter has funds available therefor, that is, following the order of
preference provided in section 735 of the Code of Civil Procedure in case the said estate should insolvent. If
the testate or intestate is solvent, the court may order the payment of the claim without necessity of its being
substantiated by evidence since the sworn statement constitutes prima facie evidence of the existence of the
unpaid taxes, and the administrator is under obligation to pay such claim, under protest if he is not agreeable,
without prejudice to his right later to recover the taxes so paid, in the manner provided by law (Act No. 2711,
sec. 1579, as amended by Act No. 3685).

The Collector of Internal Revenue also contends that the income tax in question, being a lien created by the law
superior to any other existing upon the property on which it is imposed, under the provisions of section 1588 of the
Revised Administrative Code, as amended, enjoys preference over the necessary expenses of administration.

The lien created by the said section 1588 of the Revised Administrative Code, having reference to all internal revenue
taxes, including the income tax here in question, is general in character, and the order of its payment as a lien is
applicable to all properties subject to the payment of internal revenue tax; whereas the order of payment established
by section 735 of the Code of Civil Procedure, as amended by Act No. 3960, is special in character and is only
applicable to properties of deceased persons; consequently, in accordance with the cardinal rule of statutory
construction, the latter provision of law should prevail over the former. In section last mentioned, the taxes due to
government of any branch or subdivision thereof occupy the fifth place in the order of payment; wherefore, the
indebtedness of the estate of Diego de la Viña for income tax not being a necessary expense of administration, and
the claim of the ex-administrator Dr. Jose Ma. de la Viña y de la Rosa being such necessary expense of administration,
the latter has preference over the former.

The appellee denies that the first claim for P12,552 for special per diems partakes of the nature of necessary expenses
of administration, for lack of allegation or proof to that effect. Section 680 of the Code of Civil Procedure already cited
provides that "but in any special case, where the estate is large, and the settlement has been attended with great
difficulty, and has required a high decree of capacity on the part of the executor or administrator, a greater sum may
be allowed." There is no doubt that the estate of Diego de la Viña is large. The determination of whether the
administration and liquidation thereof have been attended with great difficulty and have required a high degree of
capacity on the part of the executor or administrator, rests in the sound discretion of the Court which took cognizance
of the said estate. It not appearing that the lower court committed an abuse of discretion in granting a greater
remuneration to the appellant, we do not feel warranted in interfering with the exercise of said discretion.
In view of the foregoing consideration, we are of the opinion and so hold: (1) that the income tax which an estate owes
to the insular government for profits obtained in the sale of properties belonging to it, after the death of the testator,
does not partake of the nature of necessary expenses of administration; (2) that the lien created by section 1588 of
the Revised Administrative Code for internal revenue tax on properties subject to it, being general in character, yields
to the preference established by section 735 of the Code of Civil Procedure, as amended by Act No. 3960, in favor of
the necessary expenses of administration of the estate of a deceased person; and, (3) that the claim of an
administrator for the necessary expenses of administration enjoys preference over the claim for payment of income
tax.

Wherefore, the remedy prayed for is granted, the appealed decision is reversed, and it is held that the claim of the
appellant, Dr. Jose Ma. de la Viña y de la Rosa, as ex-administrator of the estate of the deceased Diego de la Viña
has preference over that of the Collector of Internal Revenue for income tax, without special pronouncement as to
costs. So ordered.

Diaz, Concepcion and Moran, JJ., concur.

Separate Opinions

IMPERIAL, J., dissenting:

This appeal has to do with the order of the Court of First Instance of Negros Oriental of October 6, 1937, rendered in
Special Proceedings No. 7, entitled, Testate of the deceased Diego de la Viña, which directed the judicial administrator
to pay preferentially out of any funds of the estate the sum of P18,420.93, with legal interest thereon from August 20,
1929, plus the costs, which the Collector of Internal Revenue claimed as income tax which the estate should pay on
the profit which it obtained in the sale of certain property of the deceased; and after paying said amount, to pay also
the credits of Dr. Jose Ma. de la Viña y de la Rosa Amounting to P19,342.93.

On April 8, 1920, the appellant Dr. Jose Ma. de la Viña was appointed special administrator of the estate of his
deceased brother Diego de la Viña, Special Proceedings No. 7 of the Court of First Instance of Negros Oriental, and
on the 20th of the same month he discharged the office of executor. In the decision rendered on January 23, 1926, in
G.R. No. 23747 this Court held that Dr. Jose Ma. de la Viña was entitled to collect from the estate the following
amounts:

Balance due in his favor as executor

........ P1,165.86
Balance on his aparceria
........................... 7,528.64
Special per diem compensation
.............. 12,552.00
Legal commission
...................................... 4,141.33
Total
............................................................. 25,387.83
On July 16, 1927 the Court ordered in the same proceeding that Dr. de la Viña be paid the amount of 146.025 piculs
of sugar belonging to him, which amount, in money, he paid by way of expenses of administration of the estate. The
price of the sugar was fixed at P20 per picul, the value thereof amounting to P2,925. Adding this amount to the credit
approved in the decision rendered by this Court, the result is a total of P28,312.83. As Dr. de la Viña had been paid
on amount of his credit the sum of P9,228.65, a balance of P19,084.18 remained in his favor. On the other hand, on
February 23, 1932 this court rendered judgment in G.R. No. 33870, entitled the Collector on Internal Revenue vs.
Espiridion Villegas, as administrator to pay the Insular government, by way of income tax for the year 1925, the sum
of P18,420.93, with legal interest from August 20, 1929 until fully paid, and the costs.

The government asked for immediate payment of its credit and as the estate did not have sufficient funds to meet all
the credits admitted and allowed, DR. de la Viña filed an opposition on the allegation that his credit is preferred to that
of the Government because it represents expenses of administration. In the appealed order the Court held that the
claim of the Government is preferred and should be paid before that of Dr. de la Viña. This appellant maintains in his
brief that the Court erred: in holding that the tax sought to be revered by the government has preference of his claim
and that it should be paid before the expenses of administration of the estate, such as his credit; in improperly applying
article 1923 of the Civil Code, instead of section 735 of the Code of Civil Procedure; and not holding that the preference
of the credit of the Government has been abandoned and lost because of the time that has elapsed from 1925 to
1938, supposing that the said credit is really preferred.

To my mind the priority of the two credits is really depends upon the nature or concept which each has before the law.
The appellant contends that his claim, for expenses of administration of the estate allowed and approved by the trial
court and by this Court, is preferred and would first be paid. The Government, in turn, argues that its credit, which
consists in the tax due upon the profits which the estate obtained in the sale of one of its properties in 1925, is preferred
not only because it has to do with a tax which constitutes a lien, but also because it partakes of the nature of
administration expenses. As will be seen, independently of the lien, relied upon by the Government, the first question
to be decided is whether both credits should be considered as expenses of administration under the law.

It is admitted that the appellant's claim partakes of the nature of administration expenses, hence, it remains to find out
whether the credit of the Government is of the same nature. Section 735 of the Code of Civil Procedure, as amended
by Act No. 3960, reads:

SEC. 735. Order of payment if estate insolvent. — If the assets which can be appropriated for the payment of
debts are not sufficient for that purpose, the executor or administrator shall, after paying the necessary
expenses of administration, pay the debts against the estate in the following order:

1. The necessary funeral expenses;

2. The expenses of the last sickness;

3. What is owing to the laborer for salaries and wages earned and for the indemnities due to him, for the last
year;lâwphi1.nêt

4. Debts due to the United States;

5. Taxes and assessments due to the Government, or any branch or subdivision thereof;

6. Debts due to the province;

7. Debts due to other creditors.

Under this section, if the properties of a deceased person are insufficient to pay all his obligation, there shall be paid,
in the first place, all the expenses of administration and thereafter his admitted indebtedness in the order therein
mentioned. The said section, or any other section of the Code of Civil Procedure, does not define what is meant by
expenses of administration; but in Lizarraga Hernamos vs. Abada (40 Phil., 124), it was said that by expense of
administration should be understood the reasonable and necessary expense of caring for the property and managing
it till the debts are paid, as provided by law, and of dividing it, if necessary, so as to partition and deliver it to the heirs.
In this jurisdiction it has been invariably decided that the claims of the Government for income tax need not be filed
with the Committee on claims and should be paid directly by the executor or administrator out of the funds of the
estate of the deceased (Pineda vs. Court of First Instance of Tayabas, 52 Phil., 803; Government of the Philippine
Islands, 60 Phil., 461). And these claims need not be filed with the committee appointed by the Court because they
partake of the mature of administration expenses. If they were ordinary credits against the estate of a deceased
person, or debts of the latter, there is no doubt that they should be filed with and approved by the committee on claims.
In the first of the cited cases it was held that income taxes due from a deceased person, assessed during his lifetime
or after his death, are claims which not be submitted to the committee and that they are proper and necessary
expenses of administration of the estate of the deceased. In said case it was said.

To reply to these contentions in turn, we observe that, while there are few courts that have expressed
themselves to the effect that a claim for taxes due to the Government should be presented like other claims
to the committee appointed for the purpose of passing upon claims, the clear weight of judicial authority is to
the effect that claims for taxes and assessments, whether assessed before or after the death of the decedent,
are not required to be presented to the committee. (24 C.J., 325; People v. Olivera, 43 Cal., 492; Hancock v.
Whittemore, 50 Cal., 522; Findley v. Taylor, 97 Iowa, 420; Bogue v. Laughlin, 149 Wis., 271; 40 L.R. A. [N.S.],
927; Ann. Cas. 1913 C., p. 1367.)

In the case before us the tax now claimed by the Government was not due until it was assessed; and this
assessment was not made until after the individual against whom the tax was assessed had died. The claim
therefore arose during the course administration. The law imposes on the administrator of a deceased person
the duty to pay taxes assessed against the property of the deceased; and as well known, in case of insolvency,
such taxes constitute a preferential claim in the distribution of assets over ordinary debts, under section 735
of the Code of Civil procedure. In the case before us it is not suggested that the estate is insolvent, and there
is therefore no danger of imperiling the payment of funeral expenses or expenses of last sickness by ordering
the immediate payment of these taxes.

In the United States the same doctrine governs and incomes taxes have always been considered as expenses of
administration and not as debts of a deceased person which should be presented, for their approval, to the committee
on claims. Thus in People v. Olivera (43 Cal., 492, 494), the Supreme Court of California said:

Whatever may be the rule when taxes are assessed during the lifetime of the decedent—and we are not called
upon to express any opinion in reference to it—it is clear that taxes assessed against the property of an estate,
pending administration, and while it is in the possession and under the management and control of an
administrator, are not "claims" against the estate which must be presented, supported by an affidavit, and
allowed or rejected , under the provisions of sections one hundred and thirty and one hundred and thirty one
of the Probate Act. The undivided property of the deceased person may be listed to administrators, and the
taxes assessed are charges upon the property, which should be paid as all necessary expenses in the care,
management, and settlement of the estate are paid.

And in Brown's Estate v. Hoge, (199 N.W., 320, 323), the Supreme Court of Iowa said the following:

We think the federal tax is a charge or expense for which the estate is liable. We think the lower court was
right in holding that such tax was a part of the expense of administration this tax should be deducted before
computing the state inheritance tax.

. . . The country court, in assessing the state inheritance tax on that property, refused to deduct the federal
estate tax paid by the executor, amounting to P316,432.40. In the ruling the court erred. The federal estate
tax is charge or an expense against the estate of the decedent rather than against the shares of the legatees
or the distributees, and as part of the expense of administration this tax be deducted before computing the
state inheritance tax.

And in Corbin v. Townshend (103 A., 647, 649; 92 Conn., 501), the Supreme Court of Connecticut said:

The federal tax imposed by Revenue Act Sept. 8, 1916, c. 463, Sec. 201, 39 Stat. 1000, on the transfer of the
net estate of a decedent, being payable out of the estate before distribution, and inheritance taxes imposed
by other states on the same basis, are expenses of administration, within Succession Act 1915, Sec. 5,
 providing for deduction of such expenses, to determine the net estate subject to the succession tax; any
expense arising by operation of law which is a charge against or must be paid out of the estate being an
administration expense.

It may perhaps be argued that if taxes and assessments owing to the Government or to any of its branches or offices
were not debts against a decedent which should be filed with the committee on claims, section 735 would not have
mentioned them as the fifth in the enumeration. The answer to this is that the taxes and assessments specified in the
section are those which are not considered as administration expenses.

Considering what has already been decided by this Court in Pineda vs. Court of First Instance of Tayabas, Knowles
vs. Government of the Philippine Islands and Government of the Philippine Islands vs. Pamintuan, supra, and the
cited American precedents, I am of the opinion that the credit of the Government presented in this case partakes of
the nature of necessary expenses of the administration and such enjoys preference; and undersection 1588 of the
Revised Administrative Code providing that an income tax creates a legal lien superior to any other, it should be paid
before that of Dr. de la Viña. Avanceña, C. J., Laurel, JJ., concurs in the result.

4.
RAFAEL ARSENIO S. DIZON, in his capacity as the Judicial G.R. No. 140944
Administrator of the Estate of the deceased JOSE P.
FERNANDEZ, Present:
Petitioner,
YNARES-SANTIAGO, J.,
Chairperson,
- versus - AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
NACHURA, and
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REYES, JJ.
REVENUE,
Respondents. Promulgated:

April 30, 2008

NACHURA, J.:

Before this Court is a Petition for Review on Certiorari[1] under Rule 45 of the Rules of Civil Procedure seeking the
reversal of the Court of Appeals (CA) Decision[2] dated April 30, 1999 which affirmed the Decision[3] of the Court of
Tax Appeals (CTA) dated June 17, 1997.[4]

The Facts
On November 7, 1987, Jose P. Fernandez (Jose) died. Thereafter, a petition for the probate of his will[5] was filed with
Branch 51 of the Regional Trial Court (RTC) of Manila(probate court).[6] The probate court then appointed retired
Supreme Court Justice Arsenio P. Dizon (Justice Dizon) and petitioner, Atty. Rafael Arsenio P. Dizon (petitioner) as
Special and Assistant Special Administrator, respectively, of the Estate of Jose (Estate). In a letter [7] dated October
13, 1988, Justice Dizon informed respondent Commissioner of the Bureau of Internal Revenue (BIR) of the special
proceedings for the Estate.

Petitioner alleged that several requests for extension of the period to file the required estate tax return were granted
by the BIR since the assets of the estate, as well as the claims against it, had yet to be collated, determined and
identified. Thus, in a letter[8] dated March 14, 1990, Justice Dizon authorized Atty. Jesus M. Gonzales (Atty. Gonzales)
to sign and file on behalf of the Estate the required estate tax return and to represent the same in securing a Certificate
of Tax Clearance. Eventually, on April 17, 1990, Atty. Gonzales wrote a letter[9] addressed to the BIR Regional Director
for San Pablo City and filed the estate tax return[10] with the same BIR Regional Office, showing therein a NIL estate
tax liability, computed as follows:

COMPUTATION OF TAX

Conjugal Real Property (Sch. 1) P10,855,020.00

Conjugal Personal Property (Sch.2) 3,460,591.34
Taxable Transfer (Sch. 3)
Gross Conjugal Estate 14,315,611.34
Less: Deductions (Sch. 4) 187,822,576.06
Net Conjugal Estate NIL
Less: Share of Surviving Spouse NIL .
Net Share in Conjugal Estate NIL
xxx
Net Taxable Estate NIL .
Estate Tax Due NIL .[11]

On April 27, 1990, BIR Regional Director for San Pablo City, Osmundo G. Umali issued Certification Nos.
2052[12] and 2053[13] stating that the taxes due on the transfer of real and personal properties[14] of Jose had been fully
paid and said properties may be transferred to his heirs. Sometime in August 1990, Justice Dizon passed away. Thus,
on October 22, 1990, the probate court appointed petitioner as the administrator of the Estate.[15]

Petitioner requested the probate court's authority to sell several properties forming part of the Estate, for the
purpose of paying its creditors, namely: Equitable Banking Corporation (P19,756,428.31), Banque de L'Indochine et.
de Suez (US$4,828,905.90 as of January 31, 1988), Manila Banking Corporation (P84,199,160.46 as of February 28,
1989) and State Investment House, Inc. (P6,280,006.21). Petitioner manifested that Manila Bank, a major creditor of
the Estate was not included, as it did not file a claim with the probate court since it had security over several real
estate properties forming part of the Estate.[16]

However, on November 26, 1991, the Assistant Commissioner for Collection of the BIR, Themistocles
Montalban, issued Estate Tax Assessment Notice No. FAS-E-87-91-003269,[17] demanding the payment
of P66,973,985.40 as deficiency estate tax, itemized as follows:

Deficiency Estate Tax- 1987

Estate tax P31,868,414.48

25% surcharge- late filing 7,967,103.62
late payment 7,967,103.62
Interest 19,121,048.68
Compromise-non filing 25,000.00
non payment 25,000.00
no notice of death 15.00
no CPA Certificate 300.00

Total amount due & collectible P66,973,985.40[18]

In his letter[19] dated December 12, 1991, Atty. Gonzales moved for the reconsideration of the said estate tax
assessment. However, in her letter[20] dated April 12, 1994, the BIR Commissioner denied the request and reiterated
that the estate is liable for the payment of P66,973,985.40 as deficiency estate tax. On May 3, 1994, petitioner
received the letter of denial. On June 2, 1994, petitioner filed a petition for review[21] before respondent CTA. Trial on
the merits ensued.

As found by the CTA, the respective parties presented the following pieces of evidence, to wit:

In the hearings conducted, petitioner did not present testimonial evidence but merely documentary
evidence consisting of the following:

Nature of Document (sic) Exhibits

1. Letter dated October 13, 1988

from Arsenio P. Dizon addressed
to the Commissioner of Internal
Revenue informing the latter of
the special proceedings for the
settlement of the estate (p. 126,
BIR records); "A"

2. Petition for the probate of the

will and issuance of letter of
administration filed with the
Regional Trial Court (RTC) of
Manila, docketed as Sp. Proc.
No. 87-42980 (pp. 107-108, BIR
records); "B" & "B-1

3. Pleading entitled "Compliance"

filed with the probate Court
submitting the final inventory
of all the properties of the
deceased (p. 106, BIR records); "C"

4. Attachment to Exh. "C" which

is the detailed and complete
listing of the properties of
the deceased (pp. 89-105, BIR rec.); "C-1" to "C-17"

5. Claims against the estate filed

by Equitable Banking Corp. with
the probate Court in the amount
of P19,756,428.31 as of March 31,
1988, together with the Annexes
to the claim (pp. 64-88, BIR records); "D" to "D-24"

6. Claim filed by Banque de L'

Indochine et de Suez with the
probate Court in the amount of
US $4,828,905.90 as of January 31,
1988 (pp. 262-265, BIR records); "E" to "E-3"

7. Claim of the Manila Banking

Corporation (MBC) which as of
November 7, 1987 amounts to
P65,158,023.54, but recomputed
as of February 28, 1989 at a
total amount of P84,199,160.46;
together with the demand letter
from MBC's lawyer (pp. 194-197,
BIR records); "F" to "F-3"

8. Demand letter of Manila Banking

Corporation prepared by Asedillo,
Ramos and Associates Law Offices
addressed to Fernandez Hermanos,
Inc., represented by Jose P.
Fernandez, as mortgagors, in the
total amount of P240,479,693.17
as of February 28, 1989
(pp. 186-187, BIR records); "G" & "G-1"

9. Claim of State Investment

House, Inc. filed with the
RTC, Branch VII of Manila,
docketed as Civil Case No.
86-38599 entitled "State
Investment House, Inc.,
Plaintiff, versus Maritime
Company Overseas, Inc. and/or
Jose P. Fernandez, Defendants,"
(pp. 200-215, BIR records); "H" to "H-16"

10. Letter dated March 14, 1990

of Arsenio P. Dizon addressed
to Atty. Jesus M. Gonzales,
(p. 184, BIR records); "I"

11. Letter dated April 17, 1990

from J.M. Gonzales addressed
to the Regional Director of
BIR in San Pablo City
(p. 183, BIR records); "J"

12. Estate Tax Return filed by

the estate of the late Jose P.
Fernandez through its authorized
representative, Atty. Jesus M.
Gonzales, for Arsenio P. Dizon,
with attachments (pp. 177-182,
BIR records); "K" to "K-5"

13. Certified true copy of the

Letter of Administration
issued by RTC Manila, Branch
51, in Sp. Proc. No. 87-42980
appointing Atty. Rafael S.
Dizon as Judicial Administrator
of the estate of Jose P.
Fernandez; (p. 102, CTA records)
and "L"
14. Certification of Payment of
estate taxes Nos. 2052 and
2053, both dated April 27, 1990,
issued by the Office of the
Regional Director, Revenue
Region No. 4-C, San Pablo
City, with attachments
(pp. 103-104, CTA records.). "M" to "M-5"

Respondent's [BIR] counsel presented on June 26, 1995 one witness in the person of Alberto
Enriquez, who was one of the revenue examiners who conducted the investigation on the
estate tax case of the late Jose P. Fernandez. In the course of the direct examination of the
witness, he identified the following:

Documents/
Signatures BIR Record

1. Estate Tax Return prepared by

the BIR; p. 138

2. Signatures of Ma. Anabella

Abuloc and Alberto Enriquez,
Jr. appearing at the lower
Portion of Exh. "1"; -do-

3. Memorandum for the Commissioner,

dated July 19, 1991, prepared by
revenue examiners, Ma. Anabella A.
Abuloc, Alberto S. Enriquez and
Raymund S. Gallardo; Reviewed by
Maximino V. Tagle pp. 143-144

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

5. Signature of Ma. Anabella A.

Abuloc appearing at the
lower portion on p. 2 of Exh. "2"; -do-

6. Signature of Raymund S.
Gallardo appearing at the
Lower portion on p. 2 of Exh. "2"; -do-

7. Signature of Maximino V.
Tagle also appearing on
p. 2 of Exh. "2"; -do-

8. Summary of revenue
Enforcement Officers Audit
Report, dated July 19, 1991; p. 139

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

10. Signature of Ma. Anabella A.

Abuloc at the lower
 portion of Exh. "3"; -do-

11. Signature of Raymond S.

Gallardo at the lower
portion of Exh. "3"; -do-

12. Signature of Maximino

V. Tagle at the lower
portion of Exh. "3"; -do-

13. Demand letter (FAS-E-87-91-00),

signed by the Asst. Commissioner
for Collection for the Commissioner
of Internal Revenue, demanding
payment of the amount of
P66,973,985.40; and p. 169

14. Assessment Notice FAS-E-87-91-00 pp. 169-170[22]

The CTA's Ruling

On June 17, 1997, the CTA denied the said petition for review. Citing this Court's ruling in Vda. de 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:
Although the above-mentioned documents were not formally offered as evidence for respondent,
considering that respondent has been declared to have waived the presentation thereof during the
hearing on March 20, 1996, still they could be considered as evidence for respondent since they were
properly identified during the presentation of respondent's witness, whose testimony was duly
recorded as part of the records of this case. Besides, the documents marked as respondent's exhibits
formed part of the BIR records of the case.[24]

Nevertheless, the CTA did not fully adopt the assessment made by the BIR and it came up with its own computation
of the deficiency estate tax, to wit:

Conjugal Real Property P 5,062,016.00

Conjugal Personal Prop. 33,021,999.93
Gross Conjugal Estate 38,084,015.93
Less: Deductions 26,250,000.00
Net Conjugal Estate P 11,834,015.93
Less: Share of Surviving Spouse 5,917,007.96
Net Share in Conjugal Estate P 5,917,007.96
Add: Capital/Paraphernal
Properties P44,652,813.66
Less: Capital/Paraphernal
Deductions 44,652,813.66
Net Taxable Estate P 50,569,821.62
============

Estate Tax Due P 29,935,342.97

Add: 25% Surcharge for Late Filing 7,483,835.74
Add: Penalties for-No notice of death 15.00
No CPA certificate 300.00
 Total deficiency estate tax P 37,419,493.71
=============

exclusive of 20% interest from due date of its payment until full payment thereof
[Sec. 283 (b), Tax Code of 1987].[25]

Thus, the CTA disposed of the case in this wise:

WHEREFORE, viewed from all the foregoing, the Court finds the petition unmeritorious and denies
the same. Petitioner and/or the heirs of Jose P. Fernandez are hereby ordered to pay to respondent
the amount of P37,419,493.71 plus 20% interest from the due date of its payment until full payment
thereof as estate tax liability of the estate of Jose P. Fernandez who died on November 7, 1987.

SO ORDERED.[26]

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

The CA's Ruling

On April 30, 1999, the CA affirmed the CTA's ruling. Adopting in full the CTA's findings, the CA ruled that the
petitioner's act of filing an estate tax return with the BIR and the issuance of BIR Certification Nos. 2052 and 2053 did
not deprive the BIR Commissioner of her authority to re-examine or re-assess the said return filed on behalf of the
Estate.[28]

On May 31, 1999, petitioner filed a Motion for Reconsideration[29] which the CA denied in its Resolution[30] dated
November 3, 1999. issues:

1. WoN the admission of evidence which were not formally offered by the respondent BIR by the
Court of Tax Appeals which was subsequently upheld by the Court of Appeals is contrary to the
Rules of Court and rulings of this Honorable Court;

2. WoN the Court of Tax Appeals and the Court of Appeals erred in recognizing/considering the estate
tax return prepared and filed by respondent BIR knowing that the probate court appointed
administrator of the estate of Jose P. Fernandez had previously filed one as in fact, BIR Certification
Clearance Nos. 2052 and 2053 had been issued in the estate's favor;

3. WoN the Court of Tax Appeals and the Court of Appeals erred in disallowing the valid and
enforceable claims of creditors against the estate, as lawful deductions despite clear and
convincing evidence thereof; and

4. WoN the Court of Tax Appeals and the Court of Appeals erred in validating erroneous double
imputation of values on the very same estate properties in the estate tax return it prepared and
filed which effectively bloated the estate's assets.[31]
The petitioner claims that in as much as the valid claims of creditors against the Estate are in excess of the gross
estate, no estate tax was due; that the lack of a formal offer of evidence is fatal to BIR's cause; that the doctrine laid
down in Vda. de 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 testimony before
the CTA identified the pieces of evidence aforementioned such that the same were marked, BIR's failure to formally
offer said pieces of evidence and depriving petitioner the opportunity to cross-examine Alberto, render the same
inadmissible in evidence; that assuming arguendo that the ruling in Vda. de 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 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
First. WoN 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. WoN 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-a[35] and People v. Mate[36] on the admission and consideration of exhibits which were not formally
offered during the trial. Although in a long line of cases many of which were decided after Vda. de 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,[38] this
Court, applying the said doctrine, ruled that the trial court judge therein committed no error when he admitted and
considered the respondents' exhibits in the resolution of the case, notwithstanding the fact that the same
were not formally offered. Likewise, in Far East Bank & Trust Company v. Commissioner of Internal Revenue,[39] the
Court made reference to said doctrine in resolving the issues therein. Indubitably, the doctrine laid down in Vda. De
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...

But what further defeats petitioner's cause on this issue is that respondents' exhibits were marked and
admitted during the pre-trial stage as shown by the Pre-Trial Order quoted earlier.[44]
While the CTA is not governed strictly by technical rules of evidence,[45] as rules of procedure are not ends in
themselves and are primarily intended as tools in the administration of justice, the presentation of the BIR's evidence
is not a mere procedural technicality which may be disregarded considering that it is the only means by which the
CTA may ascertain and verify the truth of BIR's claims against the Estate.[46] The BIR's failure to formally offer these
pieces of evidence, despite CTA's directives, is fatal to its cause.[47] Such failure is aggravated by the fact that not
even a single reason was advanced by the BIR to justify such fatal omission. This, we take against the BIR.

Per the records of this case, the BIR was directed to present its evidence[48] in the hearing of February 21, 1996, but
BIR's counsel failed to appear.[49] The CTA denied petitioner's motion to consider BIR's presentation of evidence as
waived, with a warning to BIR that such presentation would be considered waived if BIR's evidence would not be
presented at the next hearing. Again, in the hearing of March 20, 1996, BIR's counsel failed to appear.[50] Thus, in its
Resolution[51] dated March 21, 1996, the CTA considered the BIR to have waived presentation of its evidence. In the
same Resolution, the parties were directed to file their respective memorandum. Petitioner complied but BIR failed to
do so.[52] In all of these proceedings, BIR was duly notified. Hence, in this case, we are constrained to apply our ruling
in Heirs of Pedro Pasag v. Parocha:[53]
A formal offer is necessary because judges are mandated to rest their findings of facts and
their judgment only and strictly upon the evidence offered by the parties at the trial. Its function is to
enable the trial judge to know the purpose or purposes for which the proponent is presenting the
evidence. On the other hand, this allows opposing parties to examine the evidence and object to its
admissibility. Moreover, it facilitates review as the appellate court will not be required to review
documents not previously scrutinized by the trial court.

Strict adherence to the said rule is not a trivial matter. The Court 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 debt[56] is defined as:

an act of liberality, by virtue of which, without receiving any equivalent, the creditor renounces the
enforcement of the obligation, which is extinguished in its entirety or in that part or aspect of the same
to which the remission refers. It is an essential characteristic of remission that it be gratuitous, that
there is no equivalent received for the benefit given; once such equivalent exists, the nature of the act
changes. It may become dation in payment when the creditor receives a thing different from that
stipulated; or novation, when the object or principal conditions of the obligation should be changed; or
compromise, when the matter renounced is in litigation or dispute and in exchange of some concession
which the creditor receives.[57]
Verily, the second issue in this case involves the construction of Section 79 [58] of the National Internal Revenue
Code[59] (Tax Code) which provides for the allowable deductions from the gross estate of the decedent. The specific
question is whether the actual claims of the aforementioned creditors may be fully allowed as deductions from the
gross estate of Jose despite the fact that the said claims were reduced or condoned through compromise agreements
entered into by the Estate with its creditors.
Claims against the estate, as allowable deductions from the gross estate under Section 79 of the Tax Code, are
basically a reproduction of the deductions allowed under Section 89 (a) (1) (C) and (E) of Commonwealth Act No. 466
(CA 466), otherwise known as the National Internal Revenue Code of 1939, and which was the first codification of
Philippine tax laws. Philippine tax laws were, in turn, based on the federal tax laws of the United States. Thus, pursuant
to established rules of statutory construction, the decisions of American courts construing the federal tax code are
entitled to great weight in the interpretation of our own tax laws.[60]
It is noteworthy that even in the United States, there is some dispute as to whether the deductible amount for a claim
against the estate is fixed as of the decedent's death which is the 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.[64] Recognizing the dispute, the Service released Proposed Regulations in 2007 mandating that the deduction
would be limited to the actual amount paid.[65]
In announcing its agreement with Propstra,[66] the U.S. 5th Circuit Court of Appeals held:
We are persuaded that the Ninth Circuit's decision...in Propstra correctly apply the Ithaca Trust date-
of-death valuation principle to enforceable claims against the estate. As we interpret Ithaca Trust,
when the Supreme Court announced the date-of-death valuation principle, it was making a judgment
about the nature of the 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.
5. REV. FR. CASIMIRO LLADOC vs. The COMMISSIONER OF INTERNAL REVENUE and The COURT of TAX
APPEALS G.R. No. L-19201 June 16, 1965 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.

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.

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.)

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.

6. THE PHILIPPINE AMERICAN LIFE AND GENERAL INSURANCE COMPANY vs. THE SECRETARY OF
FINANCE and THE COMMISSIONER OF INTERNAL REVENUE. VELASCO, JR., J.: G.R. No.
210987 November 24, 2014

Nature of the Case

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

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

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

On January 4, 2012, however, respondent Commissioner on Internal Revenue (Commissioner) denied Philamlife’s
request through BIR Ruling No. 015-12. As determined by the Commissioner, the selling price of the shares thus sold
was lower than their book value based on the financial statements of PhilamCare as of the end of 2008.6 As such, the
Commisioner held, donor’s tax became imposable on the price difference pursuant to Sec. 100 of the National Internal
Revenue Code (NIRC), viz:

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

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

SEC. 7. SALE, BARTER OR EXCHANGE OF SHARES OF STOCK NOT TRADED THROUGH A LOCAL STOCK
EXCHANGE PURSUANT TO SECS. 24(C), 25(A)(3), 25(B), 27(D)(2), 28(A)(7)(c), 28(B)(5)(c) OF THE TAX CODE,
AS AMENDED. —

xxxx

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

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

xxxx

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

xxxx

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

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

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

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

Ruling of the Court of Appeals

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

A.

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

B.

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

1.

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

2.

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

3.

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

C.

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

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

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

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

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

Issues

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

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

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

Procedural Arguments

a. Petitioner’s contentions

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

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

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

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

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

There is, thus, a gap in the law when the NIRC, as couched, and RA 1125, as amended, failed to supply where the
rulings of the Secretary in its exercise of its power of review under Sec. 4 of the NIRC are appealable to. This gap,
petitioner submits, was remedied by British American Tobacco v. Camacho14 wherein the Court ruled that where what
is assailed is the validity or constitutionality of a law, or a rule or regulation issued by the administrative agency, the
regular courts have jurisdiction to pass upon the same.
In sum, appeals questioning the decisions of the Secretary of Finance in the exercise of its power of review under
Sec. 4 of the NIRC are not within the CTA’s limited special jurisdiction and, according to petitioner, are appealable to
the CA via a Rule 43 petition for review.

b. Respondents’ contentions

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

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

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

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

x x x This power of control, which even Congress cannot limit, let alone withdraw, means the power of the Chief
Executive to review, alter, modify, nullify, or set aside what a subordinate, e.g., members of the Cabinet and heads of
line agencies, had done in the performance of their duties and to substitute the judgment of the former for that of the
latter.

In their Comment on the instant petition, however, respondents asseverate that the CA did not err in its holding
respecting the CTA’s jurisdiction over the controversy.

The Court’s Ruling

The petition is unmeritorious.

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

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

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

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

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

We now resolve.

Preliminarily, it bears stressing that there is no dispute that what is involved herein is the respondent Commissioner’s
exercise of power under the first paragraph of Sec. 4 of the NIRC––the power to interpret tax laws. This, in fact, was
recognized by the appellate court itself, but erroneously held that her action in the exercise of such power is appealable
directly to the CTA. As correctly pointed out by petitioner, Sec. 4 of the NIRC readily provides that the Commissioner’s
power to interpret the provisions of this Code and other tax laws is subject to review by the Secretary of Finance. The
issue that now arises is this––where does one seek immediate recourse from the adverse ruling of the Secretary of
Finance in its exercise of its power of review under Sec. 4?
Admittedly, there is no provision in law that expressly provides where exactly the ruling of the Secretary of Finance
under the adverted NIRC provision is appealable to. However, We find that Sec. 7(a)(1) of RA 1125, as amended,
addresses the seeming gap in the law asit vests the CTA, albeit impliedly, with jurisdiction over the CA petition as
"other matters" arising under the NIRC or other laws administered by the BIR. As stated:

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

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

1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal
Revenue or other laws administered by the Bureau of Internal Revenue. (emphasis supplied)

Even though the provision suggests that it only covers rulings of the Commissioner, We hold that it is, nonetheless,
sufficient enough to include appeals from the Secretary’s review under Sec. 4 of the NIRC.

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

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

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

xxxx

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

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

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

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

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

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

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

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

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

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

xxxx

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

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

Petitioner’s above submission is specious.

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

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

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

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

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

Indeed, in order for any appellate court to effectively exercise its appellate jurisdiction, it must have the authority to
issue, among others, a writ of certiorari. In transferring exclusive jurisdiction over appealed tax cases to the CTA, it
can reasonably be assumed that the law intended to transfer also such power as is deemed necessary, if not
indispensable, in aid of such appellate jurisdiction. There is no perceivable reason why the transfer should only be
considered as partial, not total. (emphasis added)
Evidently, City of Manilacan be considered as a departure from Ursal in that in spite of there being no express grant
in law, the CTA is deemed granted with powers of certiorari by implication. Moreover, City of Manila diametrically
opposes British American Tobacco to the effect that it is now within the power of the CTA, through its power of
certiorari, to rule on the validity of a particular administrative ruleor regulation so long as it is within its appellate
jurisdiction. Hence, it can now rule not only on the propriety of an assessment or tax treatment of a certain transaction,
but also on the validity of the revenue regulation or revenue memorandum circular on which the said assessment is
based.

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

The price difference is subject to donor's tax

Petitioner's substantive arguments are unavailing. The absence of donative intent, if that be the case, does not exempt
the sales of stock transaction from donor's tax since Sec. 100 of the NIRC categorically states that the amount by
which the fair market value of the property exceeded the value of the consideration shall be deemed a gift. Thus, 1âw phi 1

even if there is no actual donation, the difference in price is considered a donation by fiction of law.

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

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

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

Footnotes

* Acting member per Special Order No. 1878 dated November 21, 2014.

** Additional member per raffle dated September 24, 2014.

1
Penned by Associate Justice Noel G. Tijam and concurred in by Associate Justices Romeo F. Barza and
Ramon A. Cruz.

2
Rollo, pp. 189-193.

3
Id. at 6-7.

4
Id. at 94-99.

5
"The legislative intendment of the deemed gift provision under Section 100 of the Tax Code is to discourage
the parties to a sale from manipulating their selling price in order to save on income taxes. This is because
under the Tax Code, the measurement of gain from a disposition of property merely considers the amount
realized from the sale, which is the selling price minus the basis of the property sold. Hence, if the parties
would declare a lower selling price per document of sale than the actual amount of money which changed
hands, there is foregone revenue and the government is placed at a very disadvantageous position."

6
Rollo, p. 190.
7
NIRC, Sec. 99(B): Tax Payable by Donor if Donee is a Stranger. - When the donee or beneficiary is stranger,
the tax payable by the donor shall be thirty percent (30%) of the net gifts. For the purpose of this tax, a
"stranger", is a person who is not a:

(1) Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant; or

(2) Relative by consanguinity in the collateral line within the fourth degree of relationship.

8
"It is noteworthy to state that the above provision (Section 100 of the Tax Code) does not mention of any
exempt transaction. The above provision is clear and free from any doubt and/or ambiguity. Hence, there is
no room for interpretation. There is only room for application."

9
Rollo, pp. 91-93.

10
Id. at 71-72.

11
An Act Creating the Court of Tax Appeals.

12
Providing for the Implementing Rules of the First Paragraph of Section 4 of the National

Internal Revenue Code of 1997, Repealing for this Purpose Department Order No. 005-99 and
Revenue Administrative Order No. 1-99.

WHEREAS, Section 4 of Republic Act No. 8424 (the National Internal Revenue Code of 1997, ‘the
NIRC’ for brevity) vests with the Commissioner of Internal Revenue exclusive and original jurisdiction
to interpret its provisions and other tax laws, subject to review by the Secretary of Finance;

xxxx

WHEREAS, there is a need to further provide for the implementing rules of the first paragraph of

Section 4 of the NIRC.

xxxx

Section 1. Scope of this Order. – This Department Order shall apply to all rulings of the Bureau of
Internal Revenue (BIR) that implement the provisions of the NIRC and other tax laws.

Section 2. Validity of Rulings. – A ruling by the Commissioner of Internal Revenue shall be presumed
valid until overturned or modified by the Secretary of Finance.

Section 3. Rulings adverse to the taxpayer. – A taxpayer who receives an adverse ruling from the
Commissioner of Internal Revenue may, within thirty (30) days from the date of receipt of such ruling,
seek its review by the Secretary of Finance. x x x

13
Sec. 7(a)(6), RA 1125, as amended:

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

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

x x x x 6. Decisions of the Secretary of Finance on customs cases elevated to him automatically for
review from decisions of the Commissioner of Customs which are adverse to the Government under
Section 2315 of the Tariff and Customs Code.

14
G.R. No. 163583, August 20, 2008, 562 SCRA 511.
15
Section 1. Scope. — This Rule shall apply to appeals from judgments or final orders of the Court of Tax
Appeals and from awards, judgments, final orders or resolutions of or authorized by any quasi-judicial agency
in the exercise of its quasi-judicial functions. Among these agencies are the Civil Service Commission, Central
Board of Assessment Appeals, Securities and Exchange Commission, Office of the President, Land
Registration Authority, Social Security Commission, Civil Aeronautics Board, Bureau of Patents, Trademarks
and Technology Transfer, National Electrification Administration, Energy Regulatory Board, National
Telecommunications Commission, Department of Agrarian Reform under Republic Act No. 6657, Government
Service Insurance System, Employees Compensation Commission, Agricultural Invention Board, Insurance
Commission, Philippine Atomic Energy Commission, Board of Investments, Construction Industry Arbitration
Commission, and voluntary arbitrators authorized by law.

16
G.R. No. 155996, June 27, 2012, 675 SCRA 20.

Municipality of Nueva Era, Ilocos Norte v. Municipality of Marcos, Ilocos Norte, G.R. No. 169435, February
17

27, 2008, 547 SCRA 71.

18
Torres v. Limjap, 56 Phil. 141 (1931); citing Vol. II Sutherland, Statutory Construction, pp. 693-695.

19
The Secretary of Justice v. Koruga, G.R. No. 166199, April 24, 2009, 582 SCRA 513.

20
101 Phil. 209 (1957).

21
SEC. 11. Who may appeal; effect of appeal. — Any person, association or corporation adversely affected
by a decision or ruling of the Collector of Internal Revenue, the Collector of Customs or any provincial or city
Board of Assessment Appeals may file an appeal in the Court of Tax Appeals within thirty days after the receipt
of such decision or ruling.

22
Ursal v. Court of Tax Appeals, supra note 20.

23
Supra note 14, at 534.

24
G.R. No. 163445, December 18, 2007, 540 SCRA 536, 549-551.

25
G.R. No. 175723, February 4, 2014.

26
EC. 246. Non-Retroactivity of Rulings. - Any revocation, modification or reversal of any of the rules and
regulations promulgated in accordance with the preceding Sections or any of the rulings or circulars
promulgated by the Commissioner shall not be given retroactive application if the revocation, modification or
reversal will be prejudicial to the taxpayers, except in the following cases:

(a) Where the taxpayer deliberately misstates or omits material facts from his return or any document
required of him by the Bureau of Jnternal Revenue;

(b) Where the facts subsequently gathered by the Bureau of Internal Revenue are materially different
from the facts on which the ruling is based; or

(c) Where the taxpayer acted in bad faith.