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IS A SALE OF LAND FOR A PRICE LESS THAN FULL CONSIDERATION CONSIDERED

DONATION AT ALL TIMES?

Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

G.R. No. 104171 February 24, 1999

COMMISSIONER OF INTERNAL REVENUE, petitioner,vs.B.F. GOODRICH PHILS., INC. (now SIME DARBY INTERNATIONAL TIRE CO., INC.) andTHE COURT OF APPEALS, respondents.

PANGANIBAN, J.:

Notwithstanding the expiration of the five-year prescriptive period, may the Bureau ofInternal Revenue (BIR) still assess a taxpayer even after the latter has already paid the taxdue, on the ground that the previous assessment was insufficient or based on a "false"

return?

The Case

This is the main question raised before us in this Petition for Review on Certiorari assailingthe Decision 1dated February 14, 1992, promulgated by the Court of Appeals 2in CA-GR SPNo. 25100. The assailed Decision reversed the Court of Tax Appeals (CTA) 3which upheldthe BIR commissioner's assessments made beyond the five-year statute of limitations.

The Facts

The facts undisputed. 4Private Respondent BF Goodrich Phils., Inc. (now Sime DarbyInternational Tire Co, Inc.), was an American-owned and controlled corporation previous toJuly 3, 1974. As a condition for approving the manufacture by private respondent of tires andother rubber products, the Central Bank of the Philippines required that it should develop a

rubber plantation. In compliance with this requirement, private respondent purchased fromthe Philippine government in 1961, under the Public Land Act and the Parity Amendment tothe 1935 Constitution, certain parcels of land located in Tumajubong, Basilan, and theredeveloped a rubber plantation.

More than a decade later, on August 2, 1973, the justice secretary rendered an opinion statingthat, upon the expiration of the Parity Amendment on July 3, 1974, the ownership rights ofAmericans over public agricultural lands, including the right to dispose or sell their real estate,would be lost. On the basis of this Opinion, private respondent sold to Siltown Realty Philippines,Inc. on January 21, 1974, its Basilan landholding for P500,000 payable in installments. In accordwith the terms of the sale, Siltown Realty Philippines, Inc. leased the said parcels of land toprivate respondent for a period of 25 years, with an extension of another 25 years at the latter's

option.


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Based on the BIR's Letter of Authority No. 10115 dated April 14, 1975, the books and accountsof private respondent were examined for the purpose of determining its tax liability for taxableyear 1974. The examination resulted in the April 23, 1975 assessment of private respondent fordeficiency income tax in the amount of P6,005.35, which it duly paid.

Subsequently, the BIR also issued Letters of Authority Nos. 074420 RR and 074421 RR andMemorandum Authority Reference No. 749157 for the purpose of examining Siltown's business,income and tax liabilities. On the basis of this examination, the BIR commissioner issued againstprivate respondent on October 10, 1980, an assessment for deficiency in donor's tax in the

amount of P1,020,850, in relation to the previously mentioned sale of its Basilan landholdings toSiltown. Apparently, the BIR deemed the consideration for the sale insufficient, and thedifference between the fair market value and the actual purchase price a taxable donation.

In a letter dated November 24, 1980, private respondent contested this assessment. On April 9,1981, it received another assessment dated March 16, 1981, which increased to P 1,092,949 theamount demanded for the alleged deficiency donor's tax, surcharge, interest and compromisepenalty.

Private respondent appealed the correctness and the legality of these last two assessments tothe CTA. After trial in due course, the CTA rendered its Decision dated March 29, 1991, thedispositive portion of which reads as follows:

WHEREFORE, the decision of the Commissioner of Internal Revenue assessingpetitioner deficiency gift tax is MODIFIED land petitioner is ordered to pay theamount of P1,311,179.01 plus 10% surcharge and 20% annual interest fromMarch 16, 1981 until fully paid provided that the maximum amount that may becollected as interest on delinquency shall in no case exceed an amountcorresponding to a period of three years pursuant to Section 130(b)(l) and (c) ofthe 1977 Tax Code, as amended by P.D. No. 1705, which took effect on August1, 1980.

SO ORDERED. 5

Undaunted, private respondent elevated the matter to the Court of Appeals, which reversed theCTA, as follows:

What is involved here is not a first assessment; nor is it one within the 5-year periodstated in Section 331 above. Since what is involved in this case is a multipleassessment beyond the five-year period, the assessment must be based on thegrounds provided in Section 337, and not on Section 15 of the 1974 Tax Code.Section 337 utilizes the very specific terms "fraud, irregularity, and mistake". "Falsitydoes not appear to be included in this enumeration. Falsity suffices for an

assessment, which is a firstassessment made within the five-year period. When it is asubsequent assessment made beyond the five-year period, then, it may be validlyjustified only by "fraud, irregularity and mistake" on the part of thetaxpayer.6

Hence, this Petition for Review under Rule 45 of the Rules of Court. 7

The Issues

Before us, petitioner raises the following issues:

I


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Whether or not petitioner's right to assess herein deficiency donor's tax hasindeed prescribed as ruled by public respondent Court of Appeals

II

Whether or not the herein deficiency donor's tax assessment for 1974 is valid andin accordance with law

Prescription is the crucial issue in the resolution of this case.

The Court's Ruling

The petition has no merit.

Main Issue: Prescription

The petitioner contends that the Court of Appeals erred in reversing the CTA on the issue of

prescription, because its ruling was based on factual findings that should have been leftundisturbed on appeal, in the absence of any showing that it had been tainted with grosserror or grave abuse of

discretion. 8The Court is not persuaded.

True, the factual findings of the CTA are generally not disturbed on appeal when supportedby substantial evidence and in the absence of gross error or grave abuse of discretion.However, the CTA's application of the law to the facts of this controversy is an altogetherdifferent matter, for it involves a legal question. There is a question of law when the issue isthe application of the law to a given set of facts. On the other hand, a question of factinvolves the truth or falsehood of alleged facts.9In the present case, the Court of Appealsruled not on the truth or falsity of the facts found by the CTA, but on the latter's application ofthe law on prescription.

Sec. 331 of the National Internal Revenue Code provides:

Sec. 331. Period of limitation upon assessment and collection. Except asprovided in the succeeding section, internal-revenue taxes shall be assessedwithin five years after the return was filed, and no proceeding in court withoutassessment for the collection of such taxes shall be begun after expiration ofsuch period. For the purposes of this section, a return filed before the last dayprescribed by law for the filing thereof shall be considered as filed on such lastday: Provided, That this limitation shall not apply to cases already investigatedprior to the approval of this Code.

Applying this provision of law to the facts at hand, it is clear that the October 16, 1980 and theMarch 1981 assessments were issued by the BIR beyond the five-year statute of limitations. TheCourt has thoroughly studied the records of this case and found no basis to disregard the five-year period of prescription. As succinctly pronounced by the Court of Appeals:

The subsequent assessment made by the respondent Commissioner on October 40,1980, modified by that of March 16, 1981, violates the law. Involved in this petition isthe income of the petitioner for the year 1974, the returns for which were required tobe filed on or before April 15 of the succeeding year. The returns for the year 1974were duly filed by the petitioner, and assessment of taxes due for such year including that on the transfer of properties on June 21, 1974 was made on April 13,

1975 and acknowledged by Letter of Confirmation No. 101155 terminating theexamination on this subject. The subsequent assessment of October 10, 1980


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modified, by that of March 16, 1981, was made beyond the period expressly set in

Section 331 of the National Internal Revenue Code . . . . 10

Petitioner relies on the CTA ruling, the salient portion of which reads:

Falsity is what we have here, and for that matter, we hasten to add that thesecond assessment (March 16, 1981) of the Commissioner was well-advisedhaving been made in contemplation of his power under Section 15 of the 1974Code (now Section 16, of NIRC) to assess the proper tax on the best evidenceobtainable "when there is reason to believe that a report of a taxpayer is false,incomplete or erroneous. More, when there is falsity with intent to evade tax as inthis case, the ordinary period of limitation upon assessment and collection doesnot apply so that contrary to the averment of petitioner, the right to assessrespondent has not prescribed.

What is the considered falsity? The transfer through sale of the parcels of land inTumajubong, Lamitan, Basilan in favor of Siltown Realty for the sum of P500,000.00only whereas said lands had been sworn to under Presidential Decree No. 76 (Dec.

6, 1972) as having a value of P2,683,467 (P2,475,467 + P207,700) (seeDeclarationof Real Property form, p. 28, and p. 15, no. 5, BIR Record). 11

For the purpose of safeguarding taxpayers from any unreasonable examination,investigation or assessment, our tax law provides a statute of limitations in the collection oftaxes. Thus, the law on prescription, being a remedial measure, should be liberallyconstrued in order to afford such protection. 12As a corollary, the exceptions to the law onprescription should perforce be strictly construed.

Sec. 15 of the NIRC, on the other hand, provides that "[w]hen a report required by law as a basisfor the assessment of any national internal revenue tax shall not be forthcoming within the timefixed by law or regulation, or when there is reason to believe that any such report is false,

incomplete, or erroneous, the Commissioner of Internal Revenue shall assess the proper tax onthe best evidence obtainable." Clearly, Section 15 does not provide an exception to the statute oflimitations on the issuance of an assessment, by allowing the initial assessment to be made onthe basis of the best evidence available. Having made its initial assessment in the mannerprescribed, the commissioner could not have been authorized to issue, beyond the five-yearprescriptive period, the second and the third assessments under consideration before us.

Nor is petitioner's claim of falsity sufficient to take the questioned assessments out of the ambitof the statute of limitations. The relevant part of then Section 332 of the NIRC, which enumeratesthe exceptions to the period of prescription, provides:

Sec. 332. Exceptions as to period of limitation of assessment and collection of

taxes. (a) In the case of a false or fraudulent return with intent to evade a taxor of a failure to file a return, the tax may be assessed, or a proceeding in courtfor the collection of such tax may be begun without assessment, at any timewithin ten years after the discovery of the falsity, fraud, or omission: . . . .

Petitioner insists that private respondent committed "falsity" when it sold the property for aprice lesser than its declared fair market value. This fact alone did not constitute a falsereturn which contains wrong information due to mistake, carelessness or ignorance. 13It ispossible that real property may be sold for less than adequate consideration for a bonafide business purpose; in such event, the sale remains an "arm's length" transaction. In thepresent case, the private respondent was compelled to sell the property even at a price lessthan its market value, because it would have lost all ownership rights over it upon theexpiration of the parity amendment. In other words, private respondent was attempting to


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minimize its losses. At the same time, it was able to lease the property for 25 years,

renewable for another 25. This can be regarded as another consideration on the price.

Furthermore, the fact that private respondent sold its real property for a price less than itsdeclared fair market value did not by itself justify a finding of false return. Indeed, private

respondent declared the sale in its 1974 return submitted to the BIR.

14

Within the five-yearprescriptive period, the BIR could have issued the questioned assessment, because thedeclared fair market value of said property was of public record. This it did not do, however,during all those five years. Moreover, the BIR failed to prove that respondent's 1974 returnhad been filed fraudulently. Equally significant was its failure to prove respondent's intent toevade the payment of the correct amount of tax.

Ineludibly, the BIR failed to show that private respondent's 1974 return was filed fraudulentlywith intent to evade the payment of the correct amount of tax. 15Moreover, even though adonor's tax, which is defined as "a tax on the privilege of transmitting one's property orproperty rights to another or others without adequate and full valuable consideration," 16isdifferent from capital gains tax, a tax on the gain from the sale of the taxpayer's property

forming part of capital assets,17

the tax return filed by private respondent to report its incomefor the year 1974 was sufficient compliance with the legal requirement to file a return. Inother words, the fact that the sale transaction may have partly resulted in a donation doesnot change the fact that private respondent already reported its income for 1974 by filing anincome tax return.

Since the BIR failed to demonstrate clearly that private respondent had filed a fraudulent returnwith the intent to evade tax, or that it had failed to file a return at all, the period for assessmentshas obviously prescribed. Such instances of negligence or oversight on the part of the BIRcannot prejudice taxpayers, considering that the prescriptive period was precisely intended togive them peace of mind.

Based on the foregoing, a discussion of the validity and legality of the assailed assessments hasbecome moot and unnecessary.

WHEREFORE, the Petition for Review is DENIEDand the assailed Decision of the Court ofAppeals is AFFIRMED. No costs.

SO ORDERED.


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SHOULD DONATIONS INTER VIVOS TO COMPULSORY HEIRS BE SUBJECT TOINHERITANCE TAX?


Manila

EN BANC

G.R. No. L-36770 November 4, 1932

LUIS W. DISON,plaintiff-appellant,vs.JUAN POSADAS, JR., Collector of Internal Revenue,defendant-appellant.

Marcelino Aguas for plaintiff-appellant.Attorney-General Jaranilla for defendant-appellant.

BUTTE, J.:

This is an appeal from the decision of the Court of First Instance of Pampanga in favorof the defendant Juan Posadas, Jr., Collector of Internal Revenue, in a suit filed by theplaintiffs, Luis W. Dison, for the recovery of an inheritance tax in the sum of P2,808.73 paidunder protest. The petitioner alleged in his complaint that the tax is illegal because hereceived the property, which is the basis of the tax, from his father before his death by adeed 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 sumof 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 thatthe cause of action set up in the counterdemand was not proven and d ismissed the same.Both sides appealed to this court, but the cross-complaint and appeal of the Collector ofInternal Revenue were dismissed by this court on March 17, 1932, on motion of theAttorney-General.1awphil.net

The only evidence introduced at the trial of this cause was the proof of payment of thetax under protest, as stated, and the deed of gift executed by Felix Dison on April 9, 1928, infavor 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 heacknowledged 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 plaintiffLuis W. Dison of all his property according to a deed of gift (Exhibit D) which includes allthe property of Don Felix Dizon;

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


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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 AdministrativeCode) 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 havebeen made, there shall be added to the resulting amount the value of all gifts oradvances made by the predecessor to any of those who, after his death, shall prove tobe his heirs, devises, legatees, or donees mortis causa.

The question to be resolved may be stated thus: Does section 1540 of theAdministrative 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 thegift 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. Wesee no reason why the court may not go behind the language in which the transaction ismasked in order to ascertain its true character and purpose. In this case the scanty factsbefore us may not warrant the inference that the conveyance, acknowledged by the donorfive days before his death and accepted by the donee one day before the donor's death, wasfraudulently made for the purpose of evading the inheritance tax. But the facts, in ouropinion, do warrant the inference that the transfer was an advancement upon theinheritance which the donee, as the sole and forced heir of the donor, would beentitled to receive upon the death of the donor.

The argument advanced by the appellant that he is not an heir of his deceased fatherwithin the meaning of section 1540 of the Administrative Code because his father in hislifetime had given the appellant all his property and left no property to be inherited, is sofallacious that the urging of it here casts a suspicion upon the appellants reason forcompleting the legal formalities of the transfer on the eve of the latter's death. We do notknow whether or not the father in this case left a will; in any event, this appellant could not bedeprived of his share of the inheritance because the Civil Code confers upon him the statusof a forced heir. We construe the expression in section 1540 "any of those who, after hisdeath, shall prove to be his heirs", to include those who, by our law, are given the status andrights of heirs, regardless of the quantity of property they may receive as such heirs. Thatthe 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 anadvance made by Felix Dison to his only child, we hold section 1540 to be applicable andthe tax to have been properly assessed by the Collector of Internal Revenue.

This appeal was originally assigned to a Division of f ive but referred to the court inbancby reason of the appellant's attack upon the constitutionality of section 1540. Thisattack is based on the sole ground that insofar as section 1540 levies a tax upon gifts intervivos, it violates that provision of section 3 of the organic Act of the Philippine Islands (39Stat. L., 545) which reads as follows: "That no bill which may be enacted into law shallembraced 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 anyreference to a tax on gifts. Perhaps it is enough to say of this contention that section 1540

plainly does not tax giftsper se but only when those gifts are made to those who shall prove


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to be the heirs, devisees, legatees or donees mortis causa of the donor. This court said inthe 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 mortiscausa. 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 effectbefore the donor's death, and not to mortis causadonations, which can only be made withthe formalities of a will, and can only take effect after the donor's death. Any otherconstruction 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 suchgifts 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 mortiscausa, 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 pointmay fit his preconceived notion that the transaction between him and his father was aconsummated gift with no relation to the inheritance, we hold that there is not merit in thisattack upon the constitutionality of section 1540 under our view of the facts. No otherconstitutional questions were raised in this case.

The judgment below is affirmed with costs in this instance against the appellant. Soordered.


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ARE DONEES INTER VIVOS, WHO LATER TURN OUT TO BE LEGATEES/DEVISEESSUBJECT TO INHERITANCE TAX?


Manila

EN BANC

G.R. No. L-34937 March 13, 1933

CONCEPCION VIDAL DE ROCES and her husband,MARCOS ROCES, and ELVIRA VIDAL DE RICHARDS,plaintiff-appellants,vs.JUAN POSADAS, JR., Collector of Internal Revenue,defendant-appellee.

Feria and La O for appellants.

Attorney-General Jaranilla for appellee.

IMPERIAL, J .:

The plaintiffs herein brought this action to recover from the defendant, Collector of InternalRevenue, certain sums of money paid by them under protest as inheritance tax. Theyappealed from the judgment rendered by the Court of First Instance of Manila dismissing theaction, without costs.

On March 10 and 12, 1925, Esperanza Tuazon, by means of public documents, donatedcertain parcels of landsituated in Manila to the plaintiffs herein, who, with their respective

husbands, accepted them in the same public documents, which were duly recorded in theregistry of deeds. By virtue of said donations, the plaintiffs took possession of the said lands,received the fruits thereof and obtained the corresponding transfer certificates of title.

On January 5, 1926, the donor died in the City of Manila without leaving any forced heir andher will which was admitted to probate, she bequeathed to each of the donees the sum ofP5,000. After the estate had been distributed among the instituted legatees and beforedelivery of their respective shares, the appellee herein, as Collector of Internal Revenue,ruled that the appellants, as donees and legatees, should pay as inheritance tax the sums ofP16,673 and P13,951.45, respectively. Of these sums P15,191.48 was levied as tax on thedonation to Concepcion Vidal de Roces and P1,481.52 on her legacy, and, likewise,P12,388.95 was imposed upon the donation made to Elvira Vidal de Richards and

P1,462.50 on her legacy. At f irst the appellants refused to pay the aforementioned taxes but,at the insistence of the appellee and in order not to delay the adjudication of the legacies,they agreed at last, to pay them under protest.

The appellee filed a demurrer to the complaint on the ground that the facts alleged thereinwere not sufficient to constitute a cause of action. After the legal questions raised thereinhad been discussed, the court sustained the demurrer and ordered the amendment of thecomplaint which the appellants failed to do, whereupon the trial court dismissed the actionon the ground that the aforementioned appellants did not really have a right of action.

In their brief, the appellants assign only one alleged error, to wit: that the demurrer

interposed by the appellee was sustained without sufficient ground.


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The judgment appealed from was based on the provisions of section 1540 Administrative

Code which reads as follows:

SEC. 1540.Additions of gifts and advances. After the aforementioned deductionshave been made, there shall be added to the resulting amount the value of all gifts oradvances made by the predecessor to any those who, after his death, shall prove to behis heirs, devisees, legatees, or donees mortis causa.

The appellants contend that the above-mentioned legal provision does not includedonations inter vivosand if it does, it is unconstitutional, null and void for the followingreasons: first, because it violates section 3 of the Jones Law which provides that no lawshould embrace more than one subject, and that subject should be expressed in the titlethereof; second that the Legislature has no authority to impose inheritance tax ondonations in ter v ivos;and third, because a legal provision of this character contravenesthe fundamental rule of uniformityof taxation. The appellee, in turn, contends that thewords "all gifts" refer clearly to donations inter vivosand, in support of his theory, cites thedoctrine laid in the case of Tuason and Tuason vs. Posadas(54 Phil., 289). After a careful

study of the law and the authorities applicable thereto, we are the opinion that neither theoryreflects the true spirit of the aforementioned provision. The gifts referred to in section 1540 ofthe Revised Administration Code are, obviously, those donations inter vivosthat take effectimmediately or during the lifetime of the donor but are made in consideration or incontemplation of death.Gifts inter vivos, the transmission of which is not made in

contemplation of the donor's death should not be understood as included within the saidlegal provision for the reason that it would amount to imposing a direct tax on property andnot on the transmission thereof, which act does not come within the scope of the provisionscontained in Article XI of Chapter 40 of the Administrative Code which deals expressly withthe tax on inheritances, legacies and other acquisitions mortis causa.

Our interpretation of the law is not in conflict with the rule laid down in the case of Tuason

and Tuason vs. Posadas, supra. We said therein, as we say now, that the expression "allgifts" refers to gifts inter vivos inasmuch as the law considers them as advances oninheritance, in the sense that they are gifts inter vivos made in contemplation or in

consideration of death. In that case, it was not held that that kind of gifts consisted in thosemade completely independent of death or without regard to it.

Said legal provision is not null and void on the alleged ground that the subject matter thereofis not embraced in the title of the section under which it is enumerated. On the contrary, itsprovisions are perfectly summarized in the heading, "Tax on Inheritance, etc." which is thetitle of Article XI. Furthermore, the constitutional provision cited should not be strictlyconstrued as to make it necessary that the title contain a full index to all the contents of thelaw. It is sufficient if the language used therein is expressed in such a way that in case ofdoubt it would afford a means of determining the legislators intention. (Lewis' SutherlandStatutory Construction, Vol. II, p. 651.) Lastly, the circumstance that the Administrative Codewas prepared and compiled strictly in accordance with the provisions of the Jones Law onthat matter should not be overlooked and that, in a compilation of laws such as theAdministrative Code, it is but natural and proper that provisions referring to diverse mattersshould be found. (Ayson and Ignacio vs. Provincial Board of Rizal and Municipal Council of

Navotas, 39 Phil., 931.)

The appellants question the power of the Legislature to impose taxes on the transmission ofreal estate that takes effect immediately and during the lifetime of the donor, and allege astheir reason that such tax partakes of the nature of the land tax which the law has already

created in another part of the Administrative Code. Without making express pronouncementon this question, for it is unnecessary, we wish to state that such is not the case in these


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instance. The tax collected by the appellee on the properties donated in 1925 reallyconstitutes an inheritance tax imposed on the transmission of said properties incontemplation or in consideration of the donor's death and under the circumstance that thedonees were later instituted as the former's legatees. For this reason, the law considerssuch transmissions in the form of gifts inter vivos, as advances on inheritance and nothing

therein violates any constitutional provision, inasmuch as said legislation is within the powerof the Legislature.

Property Subject to Inheritance Tax. The inheritance tax ordinarily applies to allproperty within the power of the state to reach passing by will or the laws regulatingintestate succession or by gift inter vivosin the manner designated by statute, whethersuch property be real or personal, tangible or intangible, corporeal or incorporeal. (26R.C.L., p. 208, par. 177.)

In the case of Tuason and Tuason vs. Posadas, supra, it was also held that section 1540 ofthe Administrative Code did not violate the constitutional provision regarding uniformity oftaxation. It cannot be null and void on this ground because it equally subjects to the same

tax all of those donees who later become heirs, legatees or donees mortis causaby the willof the donor. There would be a repugnant and arbitrary exception if the provisions of the lawwere not applicable to all donees of the same kind. In the case cited above, it was said: "Atany rate the argument adduced against its constitutionality, which is the lack of Uniformity,does not seem to be well founded. It was said that under such an interpretation, while adonee inter vivoswho, after the predecessor's death proved to be an heir, a legatee, or adonee mortis causa, would have to pay the tax, another donee inter vivoswho did not proveto he an heir, a legatee, or a donee mortis causaof the predecessor, would be exempt fromsuch a tax. But as these are two different cases, the principle of uniformity is inapplicable tothem."

The last question of a procedural nature arising from the case at bar, which should be

passed upon, is whether the case, as it now stands, can be decided on the merits or shouldbe remanded to the court a quofor further proceedings. According to our view of the case, it

follows that, if the gifts received by the appellants would have the right to recover the sumsof money claimed by them. Hence the necessity of ascertaining whether the complaintcontains an allegation to that effect. We have examined said complaint and found nothing ofthat nature. On the contrary, it be may be inferred from the allegations contained inparagraphs 2 and 7 thereof that said donations inter vivoswere made in consideration of thedonor's death. We refer to the allegations that such transmissions were effected in themonth of March, 1925, that the donor died in January, 1926, and that the donees wereinstituted legatees in the donor's will which was admitted to probate. It is from theseallegations, especially the last, that we infer a presumptionjuris tantumthat said donations

were made mortis causaand, as such, are subject to the payment of inheritance tax.

Wherefore, the demurrer interposed by the appellee was well-founded because it appearsthat the complaint did not allege fact sufficient to constitute a cause of action. When theappellants refused to amend the same, spite of the court's order to that effect, theyvoluntarily waived the opportunity offered them and they are not now entitled to have thecase remanded for further proceedings, which would serve no purpose altogether in view ofthe insufficiency of the complaint.

Wherefore, the judgment appealed from is hereby affirmed, with costs of this instanceagainst the appellants. So ordered.

Avancea, C.J., Villamor, Ostrand, Abad Santos, Hull, Vickers and Buttes, JJ., concur.


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Separate Opinions

VILLA-REAL, J., dissenting:

I sustain my concurrence in Justice Street's dissenting opinion in the case of Tuason andTuason vs. Posadas(54 Phil., 289).

The majority opinion to distinguish the present case from above-mentioned case of Tuasonand Tuason vs. Posadas, by interpreting section 1540 of the Administrative Code in thesense that it establishes the legal presumptionjuris tantumthat all gifts inter vivosmade topersons who are not forced heirs but who are instituted legatees in the donor's will, havebeen made in contemplation of the donor's death. Presumptions are of two kinds: Onedetermined by law which is also called presumption of law or of right; and another which isformed by the judge from circumstances antecedent to, coincident with or subsequent to the

principal fact under investigation, which is also called presumption of man (presuncion dehombre). (Escriche, Vol. IV, p. 662.) The Civil Code as well as the code of Civil Procedureestablishes presumptionsjuris et de jureandjuris tantumwhich the courts should take intoaccount in deciding questions of law submitted to them for decision. The presumption whichmajority opinion wishes to draw from said section 1540 of the Administrative Code canneither be found in this Code nor in any of the aforementioned Civil Code and Code of CivilProcedure. Therefore, said presumption cannot be called legal or of law. Neither can it becalled a presumption of man(presuncion de hombre) inasmuch as the majority opinion didnot infer it f rom circumstances antecedent to, coincident with or subsequent to the princ ipalfact with is the donation itself. In view of the nature, mode of making and effects ofdonations inter vivos, the contrary presumption would be more reasonable and logical; inother words, donations inter vivosmade to persons who are not forced heirs, but who areinstituted legatees in the donor's will, should be presumed as not made mortis causa, unlessthe contrary is proven. In the case under consideration, the burden of the proof rests with theperson who contends that the donation inter vivoshas been made mortis causa.

It is therefore, the undersigned's humble opinion that the order appealed from should bereversed and the demurrer overruled, and the defendant ordered to file his answer to thecomplaint.

Street, J., concurs.


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ARE CONDONATIONS DONATIONS?

April 17, 1989

BIR RULING NO. 076-89

28 000-00 076-89

Gentlemen :

This refers to your letter dated February 24, 1989 stating that General Motors Pilipinas, Inc.(GMPI) is a domestic corporation organized under the laws of the Philippines; that it is a jointventure corporation owned 60% by General Motors Overseas Distribution Corporation (GM-US)and 40% by Isuzu Motors Limited of Japan (ISUZU); that GMPI was engaged in the manufactureof transmissions and components as well as in the assembly of cars and trucks (largely Isuzu)

under the former PCMP and PTMP programs of government; that in September 1985, due toeconomic recession in the Philippines and the depressed automotive market, plus the non-availability of foreign exchange for the importation of parts for car and truck assemblies, GMPIceased its manufacturing and assembly operations; that at the time operations were terminated,GMPI was insolvent and has since remained insolvent; that in meetings held in December 1985,the shareholders and the Board of Directors of GMPI recommended the dissolution of GMPI; thatin order to facilitate the liquidation and dissolution of the company, on September 30, 1986, thestockholders approved a resolution to shorten GMPI's corporate life to October 15, 1986; thatpursuant to said resolution, GMPI filed with the Securities and Exchange Commission, anapplication to amend its Articles of Incorporation to shorten GMPI's corporate life; that aliquidating trustee was designated to dispose the remaining assets, satisfy the obligations andwind up the affairs of the company; that based on the December 31, 1988 unaudited financialstatements of GMPI, it has outstanding liabilities/indebtedness to banks and affiliates in thefollowing amounts: cdasia

Bank Debt

Non-Trade Related Principal P280,150

Interest 54,522

Trade Related Principal 246,942

Interest 48,093

Due to Affiliated Companies

Isuzu Motors Limited P113,240

General Motors Corp. (GMC) 19,334 132,574

TOTAL P762,281

=======


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that the total outstanding liabilities to banks and GMC plus accrued interest amount toP649,041,000; that the 1987 unaudited financial statements, as submitted with GMPI's 1987income tax return, show that as of December 31, 1987 GMPI had a capital deficiency ofP664,522,000; that based on the December 31, 1988 unaudited financial statements, the capitaldeficiency is P739,057,000; that pursuant to liquidation accounting principles, the value of theproperty, plant and equipment was adjusted to P20,450,000; that since GM-US, has no further

interest to continue its ownership in the inactive corporate shell of GMPI, GM-US, will assign its60% shareholdings in GMPI to Isuzu; that in connection with the proposed acquisition of theGMPI shares from GM-US it was agreed that GMPI would "clean-up" the liabilities shown in thefinancial statements and that it would have no major current outstanding liabilities except theliability to Isuzu; that it is proposed that this would be accomplished when the shares aretransferred in three steps, as follows: (1) By having GMPI's creditor banks waive accrued interesttotalling P102,615,000 on the non-trade and trade related debt; (2) By having these banks assignto GM-US, its GMPI non-trade related receivables totalling P280,150,000. At that time GM-USwill condone the total GMPI indebtedness due to it amounting to P299,484,000 including theaforementioned non-trade debt as well as other non-trade liabilities due GMC totallingP19,334,999; (3) By having the banks grant a participation to GM-US in GMPI trade relatedreceivables totalling P246,942,000 GM-US would then assign these receivables to Isuzu. As

approved by the Central Bank of the Philippines and the SEC, Isuzu would accept pesos fromGMPI in repayment of the trade debt and simultaneously reinvest the pesos in GMPI as paid-insurplus; that subsequent to the three-step transaction outlined above, and after GM-USassignment of GMPI shares to Isuzu, the latter as the new 100% parent company may considerinfusing additional capital to restore the business into a viable operation and eliminate the capitaldeficiency; that inasmuch as the business operations of the company will be revived in the futureby Isuzu, the company will resume its "going concern" status following the transfer of share byGM-US; and that as a going concern, its assets previously adjusted to liquidation values shall berestored to its valuation prior to liquidation of P19,579,000 including depreciation andamortization up to December 31, 1988.

In connection therewith, you now request confirmation of your opinion to the effect that the

bank's waiver of accrued interest on the non-trade and trade related indebtedness ofGMPI and GM-US condonation or forgiveness of GMPI's non-trade related indebtednessare not subject to income tax nor to gift tax.

In reply, thereto, I have the honor to inform you that your opinion is hereby confirmed.Cancellation and forgiveness of indebtedness may amount to a payment of income, to a gift, orto a capital transaction, dependent upon the circumstances. If for example, an individualperforms services for a creditor who, in consideration thereof cancels the debt, income to thatamount is realized by the debtor as compensation for his services. If, however, a creditor merelydesires to benefit a debtor and without any consideration therefor cancels the debt, the amountof the debt is a gift from the creditor to the debtor and need not be included in the latter's grossincome. If a corporation to which a stockholder is indebted forgives the debt, the transaction has

the effect of the payment of a dividend. (Sec. 50 Revenue Regulations No. 2) The waiver ofinterest by the banks on non-trade and trade related indebtedness of GMPI is not subject toincome tax considering that the deduction of said interest as expense in prior years did not offsetnor reduce the taxable income of GMPI since it was in a financial loss position even without thededuction. (See Barnhart-Marrow Consolidated v. Commissioner of Internal Revenue, 47 BTA590) Moreover, when a creditor cancels a debt as part of a business transaction, the debtor isenriched or its net assets has been increased and, therefore, he realized taxable income(Philippine Fiber Processing Co. v. CIR, CTA Case No. 1407 Dec. 29, 1966). However, atransaction whereby nothing of exchangeable value comes to or is received by a taxpayer doesnot give rise to or create taxable income. (See Dallas Transfer and Terminal Warehouse Co. v.Commissioner of Internal Revenue 5 Cir. 70 F 2d 95, 13AFTR 930) Accordingly, the condonationof GMPI's indebtedness by GM-US is not subject to income tax since before and after thecondonation GMPI remains insolvent, i.e., in a capital deficiency position. The condonation is

likewise not subject to gift tax since there is no donative interest on the part of GM-US but solely


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for business consideration since Isuzu will only acquire the GMPI shares from GM-US if GMPIhas a "clean" balance sheet with no outstanding liabilities except those to Isuzu.

Moreover, a return to solvency due to a possible future additional capital infusion by Isuzu and/orsubsequent profitability in a different taxable year will not affect the non-taxability of thecondonation. cdta

Very truly yours,

(SGD.) JOSE U. ONG

Commissioner


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ARE ALLOWANCES RECEIVED FROM ABROAD TO FUND OPERATIONS OF THE IMAEXEMPT FROM DONORS TAXES?YES, BUT NOT SUBJECT TO INCOME TAX

February 5, 1999

BIR RULING [DA-060-99]

International Marinelife Philippines

17 San Juan St., Bo. Kapitolyo

Pasig City

Attention: Ms. Daliles S. Pratt

Treasurer

Gentlemen :

This refers to your letter dated October 13, 1998 requesting on behalf of your officers andemployees for a ruling as to whether the compensation in the form of allowances, i.e.,transportation, living quarters, meal allowances and other facilities which are of relatively of smallvalue received from donations coming directly from abroad is exempt from Philippine taxpursuant to Section 2.78.1 of Revenue Regulations No. 2-98. cdti

It is represented that the International Marinelife Alliance Philippines (IMA, Phils.) is a non-stock,non-government organization whose primary concern is the protection of living marine resources

and the conservation of their habitat; that IMA, Phils. is the branch office of InternationalMarinelife Alliance (IMA) which was founded and duly registered in 1985 in the State ofMassachusetts, U.S.A. for the following purposes:

"1) to help conserve bio-diversity, protect marine environments and promote the sustainableuse of marine resources around the world for the benefit of the local people;

"2) to provide education toward that end, to collect, disseminate, and publish relevant articlesand works, as well as to train people to reform practices destructive to marine life and habitats;and

"3) to receive donations for the furtherance of the same."

that IMA advocates judicious utilization of marine resources and the conservation of coral reefs inunderdeveloped countries; that it is the primary force behind the on-going initiatives in Indo-Pacific region to develop strategies to combat the growing threat of cyanide fishing; that in thePhilippines, IMA focuses on community-based coastal resources management programs designto catalyze the transformation of stake holders into resource managers; that in 1997, IMA, Phils.was able to mobilize 75,000 person-volunteers that include teachers, students, fisherfolks,professionals, NGO workers, politicians, law enforcers, civic leaders, boys and girls scouts,divers, beach resort owners, government employees in the 11th International Coastal Cleanup(ICC); that ICC is an initiative of the Center for Marine Conservation (CMC) in Washington, D.C.and is coordinated in the Philippines by IMA; that IMA, Phils. is internationally funded specificallyfrom USAID and from various donations around the world which includes the countries where it

has its local offices or headquarters; that the grant coming from USAID and donations locally arebeing used to finance the project which IMA, Phils. regularly undertakes such as but not limited


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to publication of educational articles relating to marine life conservation, coastal cleanup,educational training, etc.; that its local officers and employees in the Philippines solicit donationsfrom various individuals and NGOs abroad which are being coursed through IMA, Phils. and IMA,Mass. and are being released in the form of allowances which include diving gears,transportation, living quarters, meal allowances and other facilities which are relatively of smallvalue; that said facilities are being furnished and utilized by the said employees and officers in

order to pursue the object for which IMA, Phils. was organized; and that it is your opinion thatsuch "compensation and allowances" which are being allotted and paid to the localofficers and employees directly from donations abroad through IMA, Mass. are exemptfrom Philippine income tax and consequently from the withholding tax. Hence, thisrequest.

In reply, since the monthly financial support in the form of various allowances thus mentionedbeing allocated by the various donors and NGOs abroad and received by your officers andemployees through IMA, Mass. and IMA, Phils. are not compensation and/or salary per se, butdonations made by individuals and NGOs in the U.S.A. specifically to sustain the purpose forwhich IMA was organized and from which the officers and employees receive such kind ofbenefits to sustain them to such endeavors, said financial support are not, therefore, subject to

Philippine income tax prescribed under Section 24(A)(1)(c) of the Tax Code of 1997 andconsequently to withholding tax under Section 78 of the same Tax Code. (BIR Ruling No. 015-94dated January 12, 1994)

However, the net gift or donation to each and every local officer and employee by each andevery individual donor shall be subject to donors tax pursuant to Section 99(B) of the Tax Codeof 1997.

This ruling is being issued on the basis of the foregoing facts as represented. However, if uponinvestigation, it shall be disclosed that the facts are different, then this ruling shall be considerednull and void. prcd

Very truly yours,

(SGD.) SIXTO S. ESQUIVIAS IV

Deputy Commissioner

Legal and Enforcement Group


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CIR V. ABELLO (CA CASE)

During the 1987 national elections, petitioners, who are partners in the Angara, Abello,Concepcion, Regala and Cruz (ACCRA) law firm, contributed P882,661.31 each to the campaignfunds of Senator Edgardo Angara, then running for the Senate. In letters dated April 21, 1988,the Bureau of Internal Revenue (BIR) assessed each of the petitioners P263,032.66 for theircontributions. On August 2, 1988, petitioners questioned the assessment through a letter to theBIR. They claimed that political or electoral contributions are not considered gifts under theNational Internal Revenue Code (NIRC), and that, therefore, they are not liable for donors tax.The claim for exemption was denied by the Commissioner.[1]

On September 12, 1988, petitioners filed a petition for review with the CTA, which was decidedon October 7, 1991 in favor of the petitioners. As aforestated, the CTA ordered theCommissioner to desist from collecting donors taxes from the petitioners.[2]

On appeal, the Court of Appeals reversed and set aside the CTA decision on April 20, 1994.[3]The appellate Court ordered the petitioners to pay donors tax amounting to P263,032.66each, reasoning as follows:

The National Internal Revenue Code, as amended, provides:

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

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

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

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

As correctly pointed out by the Solicitor General:


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The fact that the contributions were given to be used as campaign funds of Sen. Angara does notaffect the character of the fund transfers as donation or gift. There was thereby no retention ofcontrol over the disposition of the contributions. There was simply an indication of thepurpose for which they were to be used. For as long as the contributions were used for the

purpose for which they were intended, Sen. Angara had complete and absolute power to disposeof the contributions. He was fully entitled to the economic benefits of the contributions.

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

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

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

When the U.S. gift tax law was adopted in the Philippines (before May 7, 1974), the taxability ofpolitical contributions was, admittedly, an unsettled issue; hence, it cannot be presumed that thePhilippine Congress then had intended to consider or treat political contributions as non-taxablegifts when it adopted the said gift tax law. Moreover, well-settled is the rule that the Philippinesneed not necessarily adopt the present rule or construction in the United States on the matter.Generally, statutes of different states relating to the same class of persons or things or havingthe same purposes are not considered to be in pari materia because it cannot be justifiablypresumed that the legislature had them in mind when enacting the provision being construed.(5206, Sutherland, Statutory Construction, p. 546.) Accordingly, in the absence of an expressexempting provision of law, political contributions in the Philippines are subject to the donors gift

tax. (cited in National Internal Revenue Code Annotated by Hector S. de Leon, 1991 ed., p. 290).

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

Petitioners filed a motion for reconsideration, which the Court of Appeals denied in its resolution

of June 16, 1995.[5]


20/37

PARENTS IN LAW ARE NOT STRANGERS

July 31, 1989


1st Indorsement

July 17, 1989

Returned to the Regional Director, Revenue Region No. 4-B-1, Quezon City, the within docketbearing on the internal revenue tax case of the Spouses Gumersindo Resurreccion Alba andVirginia T. Ildefonso, c/o 48 South Maya Drive, Philam Homes, Quezon City, involving theamount of P28,194.33 representing deficiency donor's tax, inclusive of interest, for the year1987.

Records of this case disclosed that on April 23, 1987, the aforesaid spouses (donors) both of

whom are American citizens residing at the City of San Francisco, California, U.S.A., made andexecuted a Deed of Donation in favor of the Spouses Lucio R. Ildefonso and Alajandra TagleIldefonso where they donated their real property covered by TCT No. 257118; that said Doneesare the parents of Donor, Virginia; that based on an investigation conducted on the Donor's TaxReturn which they filed, donors paid the sum of P3,254.63 as gift tax; that a re-investigationconducted by that Office considered the donees as strangers, resulting in the issuance by thatOffice of Assessment Notice No. RO4B-GA-30-23617-87/87 dated January 15, 1988 against thetaxpayers involving the amount of P28,194.33 as deficiency donor's tax inclusive of interestthereon for the year 1987; and that on February 19, 1988, taxpayers thru Mr. Lucio T. Ildefonso,Jr. returned the said Assessment Notice No. RO 4B-GA-30-23617-87/87 on the ground that theassessment issued against them by that Office has no legal basis. cd

Then Section 102(b) [now Section 92(b)] of the Tax Code provides, viz:

"SEC. 102(b). Tax Payable by Donor if Donee is a Stranger. When the donee orbeneficiary is a stranger, the tax payable by the donor shall be either the amount computed inaccordance with the preceding paragraph (a) or twenty percent (20%) of the net gifts, whicheveris higher. For the purpose of this tax, a stranger is a person who is not a:

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

(ii) A relative by consanguinity in the collateral line with the fourth degree of relationship."

Under the above-quoted provision, it is clear that, for donor's tax purposes, a relative by affinitylike the herein donees, who are the parents-in-law of the donor, Mr. Alba, are not included in theenumeration of those not considered as strangers. "Expressio unius est exclusio alterius."Accordingly, the donor's gift tax payable by the donor on the donation in question is that providedin the above-quoted provision.

In view thereof, the herein gift tax assessment should be, as it is hereby sustained. cdt

Very truly yours,

(SGD.) EUFRACIO D. SANTOS

Deputy Commissioner


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Should , the total amount of the gifts made in each year be divided between the father and themother, as separate donors, and should be taxed separately to each one of them?

Is a donation of community property by the father alone equivalent in law to a donation of one-half of its value by the father and one-half by the mother?

Republic of the Philippines

SUPREME COURT

Manila

EN BANC

G.R. No. L-5949 November 19, 1955

TANG HO, WILLIAM LEE, HENRI LEE, SOFIA LEE TEEHANKEE, THOMAS LEE, ANTHONY

LEE, JULIA LEE KAW, CHARLES LEE, VALERIANA LEE YU, VICTOR LEE, SILVINO LEE,MARY LEE, JOHN LEE, and PETER LEE, for themselves and as heirs of LI SENG GIAP,deceased, petitioners,

vs.

THE BOARD OF TAX APPEALS and THE COLLECTOR OF INTERNAL REVENUE,respondents.

Ozaeta, Roxas, Lichauco and Picazo for petitioners.

Office of the Solicitor General Juan R. Liwag and Solicitor Jose P. Alejandro for respondents.

REYES, J.B.L., J.:

This is a petition for the review of the petition of the defunct Board of Tax Appeals holdingpetitioner Li Seng Giap, et al. liable for gift taxes in accordance with the assessments made bythe respondent Collector of Internal Revenue.

Petitioners Li Seng Giap (who died during the pendency of this appeal) and his wife Tang Ho andtheir thirteen children appear to be the stockholder of two close family corporations named LiSeng Giap & Sons, Inc. and Li Seng Giap & Co. On or about May, 1951, examiners of theBureau of Internal Revenue, then detailed to the Allas Committee of the Congress of thePhilippines, made an examination of the books of the two corporation aforementioned and foundthat each of Li Seng Giap's 13 children had a total investment therein of approximatelyP63,195.00, in shares issued to them by their father Li Seng Giap (who was the manager andcontrolling stockholder of the two corporations) in the years 1940, 1942, 1948, 1949, and 1950 inthe following amounts:

Donees 1940 1942 1948 1949 1950

William Lee 7,500 12,500 6,750 27,940 7,500

Henry Lee 7,500 12,500 6,750 27,940 7,500

Sofia Lee 7,500 12,500 16,500 26,690


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Thomas Lee 7,500 12,500 7,500 28,190 7,500

Anthony Lee 18,000 7,500 28,190 7,500

Julia Lee 20,000 15,000 25,690 2,500

Charles Lee 20,000 7,500 60,690 7,500

Valeriana Lee 63,190 2,500

Victor Lee 63,190

Silvino Lee 63,190

Mary Lee 63,190

John Lee 63,190

Peter Lee 63,190

The Collector of Internal Revenue regarded these transfers as undeclared gifts made in therespective years, and assessed against Li Seng Giap and his children donor's and donee's taxesin the total amount of P76,995.31, including penalties, surcharges, interests, and compromise feedue to the delayed payment of the taxes. The petitioners paid the sum of P53,434.50,representing the amount of the basic taxes, and put up a surety bond to guarantee payment ofthe balance demanded. And on June 25, 1951, they requested the Collector of Internal Revenuefor a revision of their tax assessments, and submitted donor's and donee's gift tax returnsshowing that each child received by way of gift inter vivos, every year from 1939 to 1950 (exceptin 1947 and 1948) P4,000 in cash; that each of the eight children who married during the period

aforesaid, were given an additional P20,000 as dowry or gift propter nuptias; that the unmarriedchildren received roughly equivalent amount in 1949, also by way of gifts inter vivos, so that thetotal donations made to each and every child, as of 1950, stood at P63,190. Appellants admitthat these gifts were not reported; but contend that as the cash donated came from the conjugalfunds, they constituted individual donations by each of the spouses Li Seng Giap and Tang Ho ofone half of the amount received by the donees in each instance, up to a total of P31,505 to eachof the thirteen children from each parent. They further alleged that the children's stockholding inthe two family corporations were purchased by them with savings from the aforesaid cashdonations received from their parents.

Claiming the benefit of gift tax exemptions (under section 110 and 112 of the Internal RevenueCode) at the rate of P2000 a year for each donation, plus P10,000 for each gift propter nuptias

made by either parent, and appellants' aggregate tax liability, according to their returns, wouldonly be P4,599.94 for the year 1949, and P228,28 for the year 1950, or a total of P4,838.22,computed as follows:

DONORS 1939-44 1945-46 1949 1950 TOTAL

Li Seng Giap Exempt Exempt P1,110.72 P74.14 P1,184.86

Tang Ho Exempt Exempt 1,110.72 74.14 1,184.86

Total None None P2,221.44 P148.28 P2,369.72

William Lee Exempt Exempt P253.80 P30.00 P283.80


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Henry Lee Exempt Exempt Exempt 15.00 15.00

Sofia Lee Exempt Exempt P51.90 None 51.90

Thomas Lee Exempt Exempt Exempt 15.00 15.00

Anthony Lee Exempt Exempt Exempt 15.00 15.00

Julia Lee Exempt Exempt 26.90 Exempt 26.90

Charles Lee Exempt Exempt Exempt 15.00 15.00

Valeriana Lee Exempt Exempt 26.90 Exempt 26.90

Victor Lee Exempt Exempt 403.80 None 403.80

Silvino Lee Exempt Exempt 403.80 None 403.80

Mary Lee Exempt Exempt 403.80 None 403.80

John Lee Exempt Exempt 403.80 None 403.80

Peter Lee Exempt Exempt 403.80 None 403.80

Total None None P2,378.50 P90.00 P2,468.50

Grand total liability of Donors and Donees P4,599.94 P238.28 P4,838.22

The Collector refused to revise his original assessments; and the petitioners appealed to the thenBoard of Tax Appeals (created by Executive Order 401-A, in 1951) insisting that the entries in thebooks of the corporation do not prove donations; that the true amount and date of the donationwere those appearing in their tax returns; and that the donees merely bought stocks in thecorporation out of savings made from the money received from their parents. The Board of TaxAppeals upheld the decision of the respondent Collector of Internal Revenue; hence, this petitionfor review.

The questions in this appeal may be summarized as follows:

(1) Whether or not the dates and amounts of the donations taxable against petitioners were asfound by the Collector of Internal Revenue from the books of the corporations Li Seng Giap &

Sons, Inc. and Li Seng Giap & Co., or as set forth in petitioners' gift tax returns;

(2) Whether or not the donations made by petitioner Li Seng Giap to his children from theconjugal property should be taxed against the husband alone, or against husband and wife; and

(3) Whether or not petitioners should be allowed the tax deduction claimed by them.

On the first question, which is of fact the appellants take the preliminary stand that because ofCollector failed to specifically deny the allegation of their petition in the Tax Board he must bedeemed to have admitted the annual and propter nuptias donations alleged by them, and that heis estopped from denying their existence. As the proceedings before the Tax Board wereadministrative in character, not governed by the Rules of Court (see Sec. 10, Executive Order

401-A),and as the Collector actually submitted his own version of the transactions, we do not


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consider that the Collector's failure to make specific denials should be given the same bindingeffect as in strict court pleadings.

Going now to the merits of the issue. The appealed findings of the Board of Tax Appeals and ofthe Collector of Internal Revenue (that the stock transfers from Li Seng Giap to his children weredonations) appear supported by the following circumstances:

(1) That the transferor Li Seng Giap (now deceased) had in fact conveyed shares to stock to his13 children on the dates and in the amounts shown in the table on page 2 of this decision.

(2) That none of the transferees appeared to possess adequate independent means to buy theshares, so much so that they claim now to have purchased the shares with the cash donationsmade to them from time to time.

(3) That the total of the alleged cash donations to each child is practically identical to the value ofthe shares supposedly purchased by each donee.

(4) That there is no evidence other than the belated sworn gift tax returns of the spouses Li SengGiap and Ang Tang Ho, and their children, appellants herein, to support their contention that theshares were acquired by purchase. No contracts of sale or other documents were presented, norany witnesses introduced; not even the claimants themselves have testified.

(5) The claim that the shares were acquired by the children by purchase was first advanced onlyafter the assessment of gift taxes and penalties due thereon (in the sum of P76,995.31) hadbeen made, and after the appellants had paid P53,434.50 on account, and had filed a bond toguarantee the balance.

(6) That for the parent to donate cash to enable the donee to buy from him shares ofequivalent value is, for all intents and purposes, a donation of such shares to the

purchaser donee.

We cannot say, under the circumstances, that there is no sufficient evidence on record to supportthe findings of the Tax Board that the stock transfers above indicated were made by way ofdonation, as would entitle us to disregard or reverse the Board's finding.

The filing of the gift tax returns only after assessments and part payment of the taxes demandedby the Collector, and the lack of corroboration of the alleged donations in cash, amply justify theTax Board's distrust of the veracity of the appellants' belated tax returns "on or before the first ofMarch following the close of the calendar year" when the gifts were made (Sec. 115, par. [c]; andbesides the return a written notice to the Collector of each donation of P10,000 or more, must begiven within thirty days after the donation, Sec. 114). These yearly returns and notices are

evidently designed to enable the Collector to verify promptly their truth and correctness, while thegifts are still recent and proof of the circumstances surrounding the making thereof is still freshand accessible. On their own admission, appellants failed to file for ten successive years, thecorresponding returns for the alleged yearly gifts of P4,000 to each child, and likewise failed togive the notices for the P20,000 marriage gifts to each married child. Hence, they are nowscarcely in a position to complain if their contentions are not accepted as truthful withoutsatisfactory corroboration. Any other view would leave the collection of taxes at the mercy ofexplanations concocted ex post facto by evading taxpayers, drafted to suit any facts disclosedupon investigation, and safe from contradiction because the passing years have erased all traceof the truth.

The second and third issues in this appeal revolve around appellants' thesis that inasmuch asthe property donated was community property (gananciales), and such property is jointly ownedby their parents, the total amount of the gifts made in each year should be divided between


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the father and the mother, as separate donors, and should be taxed separately to eachone of them.

In assessing the worth of this contention, it must be ever borne in mind that appellants have notonly failed to prove that the donations were actually made by both spouses, Li Seng Giap andTang Ho, but that precisely the contrary appears from their own evidence. In the original claim fortax refund, filed with the Collector of Internal Revenue, under date of June 25, 1951 (copied inpages 6 and 7 of the appellants' petition for review addressed to the Board of Tax Appeals), thefather, Li Seng Giap, describes himself as "the undersigned donor" (par. 1) and speaks of "cashdonations made by the undersigned" (par. 3), without in any way mentioning his wife as a co-participant in the donation. The issue is thus reduced to the following: Is a donation of communityproperty by the father alone equivalent in law to a donation of one-half of its value by the fatherand one-half by the mother? Appellants submit that all such donations of community property areto be regarded, for tax purposes, as donations by both spouses, for which two separateexemptions may be claimed in each instance, one for each spouse.

This presentation should be viewed in the light of the provisions of the Spanish Civil Code of1889, which was the governing law in the years herein involved, 1939 to 1950. the determinative

rule is that of Arts. 1409 and 1415, reading as follows:

Art. 1409. The conjugal partnership shall also be chargeable with anything which may have beengiven or promised by the husband to the children born of the marriage solely in order to obtainemployment for them or give them a profession, or by both spouses by common consent, shouldthey not have stipulated that such expenditures should be borne in whole or in part by theseparate property of one of them.

ART. 1415, p. 1. The husband may dispone of the property of the conjugal partnership for thepurposes mentioned in Art. 1409.

In effect, these Articles clearly refute the appellants' theory that because the property donated iscommunity property, the donations should be viewed as made by both spouses. First, becausethe law clearly differentiates the donations of such property "by the husband" from the "donationsby both spouses by common consent" ("por el marido . . . o por ambos conyuges de comunacuerdo," in the Spanish text).

Next, the wording of Arts. 1409 and 1415 indicates that the lawful donations by the husband tothe common children are valid and are chargeable to the community property, irrespective ofwhether the wife agrees or objects thereof. Obviously, should the wife object to the donation, shecan not be regarded as a donor at all.

Even more: Suppose that the husband should make a donation of some community property to aconcubine or paramour. Undeniably, the wife cannot be regarded as joining in any suchdonation. Yet under the old Civil Code, the donation would stand, with the only limitation that thewife should not be prejudiced in the division of the profits after the conjugal partnership affairsare liquidated. So that if the value of the donation should be found to fit within the limits of thehusband's ultimate share in the conjugal partnership profits, the donation by the husband wouldremain unassailable, over and against the non-participation of the wife therein. This Court has soruled in Baello vs. Villanueva (54 Phil. 213, 214):

According to article 1413 of the Civil Code, any transfer or agreement upon conjugal propertymade by the husband in contravention of its provisions, shall not prejudice his wife or her heirs.As the conjugal property belongs equally to husband and wife, the donation of this property madeby the husband prejudices the wife in so far as it includes a part or the whole of the wife's half,and is to that extent invalid. Hence article 1419, in providing for the liquidation of the conjugal

partnership, directs that all illegal donations made by the husband be charged against his estatesand deducted from his capital. But it is only then, when the conjugal partnership is in the process


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of liquidation, that it can be discovered whether or not an illegal donation made by the husbandprejudices the wife. And inasmuch as these gifts are only to be held invalid in so far as theyprejudice the wife, their nullity cannot be decided until after the liquidation of the conjugalpartnership and it is found that they encroach upon the wife's portion.

Appellants herein are therefore in error when they contend that it is enough that the propertydonated should belong to the conjugal partnership in order that the donation be considered andtaxed as a donation of bothhusband and wife, even if the husband should appear as the soledonor. There is no blinking the fact that, under the old Civil Code, to be a donation by bothspouses, taxable to both, the wife must expressly join the husband in making the gift; herparticipation therein cannot be implied.

It is true, as appellants stress, that in Gibbs vs. Government of the Philippines, 59 Phil., 293, thisCourt ruled that "the wife, upon acquisition of any conjugal property, becomes immediatelyvested with an interest and title equal to that of the husband"; but this Court was careful toimmediately add, "subject to the power of managementand disposition which the law vests onthe husband." As has been shown, this power of disposition may, within the legal limits, overridethe objections of the wife and render the donation of the husband fully effective without need of

the wife's joining therein. (Civil Code of 1889, Arts 1409, 1415.)

It becomes unnecessary to discuss the nature of a conjugal partnership, there being specificrules on donations of property belonging to it. The consequence of the husband's legal powerto donate community property is that, where made by the husband alone, the donation istaxable as his own exclusive act. Hence, only one exemption or deduction can be claimedfor every such gift, and not two, as claimed by appellants herein. In thus holding, theBoard of Tax Appeals committed no error.

Premises considered, we are of the opinion and so declare:

(a) That the finding of the defunct Board of Tax Appeals to the effect that shares transferred fromLi Seng Giap to his children were conveyed to them by way of donation inter vivos is supportedby adequate evidence, and therefore cannot be reviewed by this Court (Comm. of InternalRevenue. vs. Court Holding Co., L. Ed. 981; Comm. of Internal Revenue vs. Scottish AmericanInvestment Co., 89 L. Ed. 113; Comm. of Internal Revenue vs.Tower, 90 L. Ed. 670; Helveringvs. Tax Penn. Oil Co., 81 L. Ed. 755).

(b) That under the old Civil Code, a donation by the husband alone does not become in law adonation by both spouses merely because it involves property of the conjugal partnership;

(c) That such a donation of property belonging to the conjugal partnership, made during itsexistence, by the husband alone in favor of the common children, is taxable to him exclusively assole donor.

Wherefore, the decision appealed from is affirmed with costs to the appellants. So ordered.

Paras, C.J., Bengzon, Padilla, Montemayor, Reyes, A., Bautista Angelo, Jugo, Labrador, andConcepcion, JJ.,concur.


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DONATION MORTIS CAUSA, REQUESTED TO BE EXEMPT FROM DONORS TAX: NO,ACTUALLY COVERED UNDER THE ESTATE TAX (IN CONTEMPLATION OF DEATH)

October 27, 1981


100-b 005-76 204-81

The Philippine Central Conference of

the United Methodist Church

900 United Nations Avenue

Ermita, Manila 2801

Attention: Mr. Cornelio Ferrer, Jr.

Treasurer

Gentlemen :

This refers to your letter dated September 22, 1981 requesting exemption from the payment ofdonor's tax pursuant to Section 123(a)(3) of the Tax Code, on the donation mortis causaexecuted in your favor by the late Silveria L. Cabacungan of a parcel of land with buildings andimprovements thereon, located in Quezon City, consisting of 349 square meters more or lessand covered by Transfer Certificate of Title No. 67186 of the Register of Deeds of Quezon City,which donation took effect upon the death of the donor on July 10, 1981.

In reply thereto, please be informed that since the above-named transaction is a donation mortiscausa, the tax exemption provisions of Section 123(a)(3) of the Tax Code does not apply. Sincesaid donation is in contemplation of death, the donated party forms part of the gross estate of thedeceased subject to the estate tax prescribed in Section 99, in relation to Section 100(b), of theTax Code, as amended by Section 16 of Presidential Decree No. 1705. Accordingly, forpurposes of effecting the registration of the deed of donation with the Register of Deeds ofQuezon City, it is necessary that an estate tax return be filed pursuant to Section 105 of the TaxCode, declaring therein as part of the gross estate of the decedent, the fair market value of thedonated property, and the estate tax due, if any, paid, in accordance with Section 107 of the Tax

Code, as amended. cda

In this connection, please be informed also that the foregoing acquisition by that religiousorganization is not one of those exempt from the estate tax, in accordance with Section 102 ofthe Tax Code.

Please be guided accordingly.

Very truly yours,

ROMULO M. VILLA

Acting Commissioner


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DONATION TO TAKE EFFECT AFTER DEATH, AND MAY BE REVOKED BY THE DONOR:CONSIDERED PART OF THE ESTATE BECAUSE SUCH IS DEEMED A TESTAMENTARYDISPOSITION OF THE DONOR/TESTATOR. THE DONOR RETAINS CONTROL TOAMEND/ALTER/REVOKE DURING HIS LIFETIME.

May 28, 1998


78-000-00-081-98

Atty. Amalia Yvonne Cario

508 Katarungan Street

Mandaluyong City

M a d a m :

This refers to your letter dated July 22, 1996 requesting for exemption from the payment of gifttax under Section 91 of the Tax Code, as amended, (now Section 98 of the Tax Code of 1997)for the donation mortis causa you executed in favor of your sister, Marijo B. Cario. cdrep

The Deed of Donation Mortis Causa made and executed by and between you, as the Donor, andMarijo B. Cario, as the Donee, provides that for and in consideration of the love and affectionand because of the uncertainty of life and the inevitableness of death and the desire to givesomething to the latter, you thereby give, transfer and convey, by way of donation to said Donee,your property covered by Transfer Certificate of Title No. 8610 and the one-third (1/3) undividedshare in the property covered by Transfer Certificate of Title No. 8613, including improvements

thereon; that the same is subject to the following conditions, viz:

"1. That this donation shall produce effects only by and because of the death of the Donor,the properties herein donated to pass title after the Donor's death."

"2. That the Donor reserves the right to amend or cancel this donation at any time during herlifetime."

and that the Donee received and accepted the gift and donation made in her favor subject to theabove-cited conditions, and thereby expressing her appreciation and gratefulness for yourkindness and generosity.

In reply, please be informed that pursuant to Section 78 of the Tax Code, as amended (nowSection 85 of the Tax Code of 1997), viz, all property, real or personal, . . . (b) to the extent ofany interest therein of which the decedent has at any time made a transfer, by trust or otherwise,in contemplation of or intended to take effect in possession or enjoyment at or after his death, . . .or (c) to the extent of any interest therein, of which the decedent has at any time made transfer(except in case of bona fide sale . . .) by trust or otherwise, where the enjoyment thereof wassubject at the date of his death to any change through the exercise of power by thedecedent alone . . . to alter, amend, revoke or terminate, or where any such power isrelinquished in contemplation of the decedent's death . . .", are included in determining the valueof the gross estate of the decedent. (Emphasis supplied.)

Parallel to the above provision is Article 728 of the New Civil Code stating that donations which

are to take effect upon the death of the donor partake of the nature of testamentary provisions.LexLib


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Accordingly, the donations/gifts made by you in favor of your sister, Marijo B. Cario, which are"intended to take effect upon the death of the donor" partake of the nature of testamentaryprovisions and the same shall remain part of the donor decedent's gross estate at the time ofhis/her death even if the same have been donated in favor of the donee. Therefore, theaforestated provisions relative to the imposition of estate tax on transfers in contemplation ofdeath shall apply in this case.

Such being the case, the instant donation/gifts are exempt from the donor's (gift) tax imposedunder Section 91 of the Tax Code, as amended, (Section 98 of the Tax Code of 1997) hence,your request for exemption is hereby granted.

It is however, emphasized that since a donation mortis causa takes effect only upon the death ofthe donor, the real properties subject of the donation cannot be transferred in the name of thedonee and shall thereby remain the properties of the donor during his/her lifetime. Meanwhile,the said "Donation Mortis Causa" can be properly annotated at the back of the TransferCertificates of Title (TCT) by the concerned Register of Deeds in order not to prejudice the rightof any person that may be affected by the said donation, including that of both the Donor and theDonee.

This ruling is being issued on the basis of the foregoing facts as represented. However, if uponinvestigation it will be disclosed that the facts are different, then this ruling shall be considerednull and void. Cdpr

Very truly yours,

(SGD.) LIWAYWAY VINZONS-CHATO

Commissioner of Internal Revenue


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May 21, 1998


R.A. 6657 (Sec. 66) 000-00 067-98

Ms. Gloria Solomon

Brgy. Amagbagan, Pozorrubio

Pangasinan

M a d a m :

This refers to your letter dated October 21, 1996 requesting, on behalf of Graciano and MaximinoSolomon, for tax exemption of agricultural lots redeemed by them pursuant to the Department ofAgrarian Reform Adjudication Board (DARAB) Decision promulgated on January 11, 1995. cda

Facts of the case as stated in the DARAB's Decision are as follows:

Graciano Solomon and Maximino Solomon filed the complaint for redemption on January 23,1989 alleging that the original case for redemption, was first filed on June 3, 1982 with the thenCourt of Industrial Relations against defendants Leonor Jovellanos and Elvira Sales asrepresented by Esperanza Natnat; that a counterclaim was filed on June 12, 1982 by the saiddefendants; that the said counterclaim was answered on July 16, 1982, where the amount ofForty Thousand Pesos (P40,000.00) was deposited as redemption price with the Clerk of Courtonly on January 16, 1984; that the aforesaid case was subsequently dismissed on October 11,1988 by the Regional Trial Court, Branch 47, Urdaneta for lack of jurisdiction; that further motionfor reconsideration was denied by the Court; that in view of the effectivity of Republic Act No.

6657 on June 15, 1988, the case was re-filed with the Department of Agrarian ReformAdjudication Board on the basis of the rights conferred by Section 12 of Republic Act No. 3844,as amended by said R.A. No. 6657; that in their complaint, plaintiffs-appellees alleged that theyare agricultural lessees in the portion of a parcel of land owned by defendant Leonor Jovellanosand possessed by defendant Elvira Sales, represented by Esperanza Natnat; that GracianoSolomon's farmholding is situated in Amagbagan, Pozorrubio, Pangasinan with an area ofEighteen Thousand Five Hundred Nine (18,509) square meters, more or less; that said land wasthe subject of a leasehold contract with Administratrix Natnat; that Maximino Solomon'sfarmholding is also situated in Amagbagan with a total area of Five Thousand Five Hundred FiftyEight (5,558) square meters, more or less; and also covered by a leasehold contract with saidAdministratrix; that on October 8, 1981, a Deed of Sale with pacto de retro was executed over aparcel of land by landowner Leonor Jovellanos in favor of Elvira Sales in the amount of Ten

Thousand Pesos (P10,000.00) consisting of Thirty Six Thousand Five Hundred Eighty Eight(36,588) square meters, more or less, and covered by Original Certificate of Title No. 19966; thaton March 25, 1982, portion of said property consisting of Twenty Five Thousand (25,000) squaremeters, more or less, was the subject of an Absolute Deed of Sale between Leonor Jovellanosand Elvira Sales, the latter represented by Esperanza Natnat, for a consideration of FortyThousand Pesos (P40,000.00); that the subject portion is the land area under leasehold by theplaintiffs-appellees; that fact antecedent to the said sale was proven that Jovellanos, in her letterto the Administratrix Natnat, directed the latter to sell the portion of the leased property to lesseeGraciano Solomon, who was then willing to buy the property at a higher price but Natnat withheldthis information and instead clandestinely sold the same to Elvira Sales; that the execution of theaforesaid deed was without the knowledge and consent of the plaintiffs nor were they informed ofthe sale; and that documents, i.e., Transfer Certificate of Title and Tax Declarations submitted tothis Office revealed that the aforesaid sale between landowner Jovellanos and transferee Saleswas not annotated in the TCT, nor was there any change of tax declarant pertaining to the soldportion.


31/37

In reply, please be informed that pursuant to paragraph 2, Section 31 of Republic Act No. 3844,otherwise known as "An Act to Ordain the Agricultural Land Reform Code and to Institute LandReforms in the Philippines, including the Abolition of Tenancy and the Channelling of Capital intoIndustry, Provide for the Necessary Implementing Agencies, Appropriate Funds Therefor and ForOther Purposes", as amended by R.A. No. 6657 (Comprehensive Agrarian Reform Law), whichreads, viz:

Sec. 31. Prohibitions to the Agricultural Lessors. It shall be unlawful for the agriculturallessors: cdlex

xxx xxx xxx

(2) To require the agricultural lessee to assume, directly or indirectly, the payment of thetaxes or part thereof levied by the government on the landholding:

xxx xxx xxx"

Conversely, an agricultural lessee does not assume, whether directly or indirectly, the paymentof any taxes or part thereof levied by the government.

It is noted that at the time of the effectivity of R.A. No. 6657 (CARL), the leasehold contractbetween landowner Leonor Jovellanos and Graciano Solomon and Maximino Solomon continuedto exist. There had never been a change in the parties in so far as the Regis

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