United States Supreme Court

MORGAN v. COMMISSIONER OF INTERNAL REVENUE, (1940)

No. 210
Argued: Decided: January 29, 1940
As Amended on Denial of Rehearing Feb. 26, 1940.

Mr. Brode B. Davis, of Chicago, Ill., for petitioner. [309 U.S. 78, 79] Mr. Richard H.
Demuth, of New York City, for respondent.

Mr. Justice ROBERTS, delivered the opinion of the Court.

We took this case because it raises an important question as to the construction of the
Revenue Act of 1926, 302(f), amended by the Revenue Act of 1932, 803(b).1

The question is to what extent and in what sense the law of the decedent's domicile governs
in determining whether a power of appointment exercised by him is a general power within
the meaning of the statute.

The petitioner is the executor of Elizabeth S. Morgan who was the donee of two powers of
appointment over property held in two trusts created by her father by will and by deed. The
persons named are, or were, at death, citizens of Wisconsin. It is unnecessary to recite the
terms of the trusts. Suffice it to say that under each, property remaining in the trustees'
hands for Elizabeth S. Morgan was given at her death, to the appointee or appointees
named in her will, with gifts over in case she failed to appoint. Under both trusts, if in the
judgment[309 U.S. 78, 80] of the trustees, property going to any beneficiary would be
dissipated for any reason, or improvidently handled, the trustees were to withhold any part
of such property; with directions for disposition, in such event, of what was withheld. The
decedent appointed in favor of her husband.

The Commissioner ruled that the value of the appointed property should be included in the
gross estate and determined a tax deficiency. The Board of Tax Appeals approved his
action. 2 The Circuit Court of Appeals affirmed the Board's decision. 3

Under the law of Wisconsin, the decedent could have appointed anyone to receive the trust
property, including her estate and her creditors, the petitioner urges that, by statute and
decision, Wisconsin has defined as special a power such as she held. 4 The respondent
urges that this is not a correct interpretation of the State law. We find it unnecessary to
resolve the issue, since we hold that the powers are general within the intent of the
Revenue Act, notwithstanding they may be classified as special by the law of Wisconsin.

State law creates legal interests and rights. The federal revenue acts designate what
interests or rights, so created, shall be taxed. Our duty is to ascertain the [309 U.S. 78,
81] meaning of the words used to specify the thing taxes. If it is found in a given case that
an interest or right created by local law was the object intended to be taxes, the federal law
must prevail no matter what name is given to the interest or right by state law. 5

None of the revenue acts has defined the phrase 'general power of appointment'. The
distinction usually made between a general and a special power lies in the circumstance
that, under the former, the donee may appoint to anyone, including his own estate or his
creditors, thus having as full dominion over the property as if he owned it; whereas, under
the latter, the donee may appoint only amongst a restricted or designated class of persons
other than himself. 6

We should expect, therefore, that Congress had this distinction in mind when it used the
adjective 'general'. The legislative history indicates that this is so.7 The Treasury regulations
have provided that a power is within the purview of the statute, if the donee may appoint to
any person. 8

With these regulations outstanding Congress has several times reeacted Sec. 302(f), and
has thus adopted the administrative construction. That construction is in accord with the
opinion of several federal courts. 9 [309 U.S. 78, 82] The petitioner claims, however, that
the decision below is in conflict with two by other Circuit Courts of Appeal. 10 The
contention is based on certain phrases found in the opinions. We think it clear that, in both
cases, the courts examined the local law to ascertain whether a power would be construed
by the state court to permit the appointment of the donee, his estate or his creditors, and
on the basis of the answer to that question determined whether the power was general
within the intent of the federal act.

As the decedent in this case could have appointed to her estate, or to her creditors, we hold
that she had a general power within the meaning of Sec. 302(f). This conclusion is not
inconsistent with authorities on which the petitioner relies,11 holding that, in the application
of a federal revenue act, state law controls in determining the nature of the legal interest
which the taxpayer had in the property or income sought to be reached by the ststute.

The petitioner's section position is that, inasmuch as the trustees had an unfettered
discretion to withhold principal or income from any beneficiary, they could exercise their
discretion as respects any appointee of the decedent. This fact, they say, renders the power
a special one. Assuming that the trustees could withhold the appointed property from an
appointee, we think the power must still be held general. The quantum or character of the
interest appointed, or the conditions imposed by the terms of the trust upon its enjoyment,
do not render the powers in question special within the purport [309 U.S. 78, 83] of
302(f). The important consideration is the breadth of the control the decedent could
exercise over the property, whatever the nature or extent of the appointee's interest.

The judgment is affirmed.

Footnotes
[ Footnote 1 ] 44 Stat. 9, 71, 47 Stat. 169, 279, 26 U.S.C. 411(f), 26 U.S.C.A. Int.Rev.Acts,
pages 227, 230.

'Sec. 302. The value of the gross estate of the decedent shall be determined by including
the value at the time of his death of all property, real or personal, tangible or intangible,
wherever situated-

'(f) To the extent of any property passing under a general power of appointment exercised
by the decedent (1) by will, or (2) by deed executed in contemplation of or intended to take
effect in possession or enjoyment at or after his death, ... except in case of a bona fide sale
for an adequate and full consideration in money or money's worth; ...'

[ Footnote 2 ] 36 B.T.A. 588.

[ Footnote 3 ] 7 Cir., 103 F.2d 636.

[ Footnote 4 ] 'Sec. 232.05 General power. A power is general when it authorizes the
alienation in fee, by means of a conveyance, will, or charge of the lands embraced in the
power, to any alienee whatever.

'232.06. Special power. A power is special:

'(1) When the person or class of persons to whom the disposition of the lands under the
power to be made are designated.

'(2) When the power authorizes the alienation by means of a conveyance, will, or charge of
a particular estate or interest less than a fee.'

See Will of Zweifel, 194 Wis. 428, 216 N.W. 840; Cawker v. Dreutzer, 197 Wis. 98, 221
N.W. 401.

[ Footnote 5 ] Burnet v. Harmel, 287 U.S. 103, 110 , 53 S.Ct. 74, 77; Bankers' Coal Co. v.
Burnet, 287 U.S. 308, 310 , 53 S.Ct. 150; Palmer v. Bender, 287 U.S. 551, 555 , 53 S.Ct.
225, 226; Thomas v. Perkins, 301 U.S. 655, 659 , 57 S.Ct. 911, 912; Heiner v. Mellon, 304
U.S. 271, 279 , 58 S.Ct. 926, 930; Lyeth v. Hoey, 305 U.S. 188, 193, 59 S.Ct. 155, 158,
119 A.L. R. 410.

[ Footnote 6 ] Sugden on Powers (8th Ed.) p. 394; Farwell on Powers (2d Ed.) p. 7.

[ Footnote 7 ] House Rep.No. 767, 65th Cong., 2nd Sess., pp. 21, 22.

[ Footnote 8 ] Regulations 63 (1922 Ed.) Art. 25; Regulations 68 (1924 Ed.) Art. 24;
Regulations 70 (1926 and 1929 Eds.), Art. 24; Regulations 80 (1935 Ed.) Art. 24.

[ Footnote 9 ] Fidelity-Philadelphia Trust Co. v. McCaughn, 3 Cir., 34 F.2d 600; Stratton v.

United States, 1 Cir., 50 F.2d 48; Old Colony Trust Co. v. Commissioner, 1 Cir., 73 F.2d
970; Johnstone v. Commissioner, 9 Cir., 76 F. 2d 55.

[ Footnote 10 ] Whitlock-Rose v. McCaughn, 3 Cir., 21 F.2d 164; Leser v. Burnet, 4 Cir., 46

F.2d 756.

[ Footnote 11 ] Poe v. Seaborn, 282 U.S. 101 , 51 S.Ct. 58; Freuler v. Helvering, 291 U.S.
35 , 54 S.Ct. 308; Blair v. Commissioner, 300 U.S. 5 , 57 S.Ct. 330; Lang v.
Commissioner, 304 U.S. 264 , 58 S.Ct. 880, 118 A.L.R. 319.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-34583 October 22, 1931

THE BANK OF THE PHILIPPINE ISLANDS, administrator of the estate of the

late Adolphe Oscar Schuetze,plaintiff-appellant,
vs.
JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellee.

Araneta, De Joya, Zaragoza and Araneta for appellant.

Attorney-General Jaranilla for appellee.

VILLA-REAL, J.:

The Bank of the Philippine Islands, as administrator of the estate of the deceased
Adolphe Oscar Schuetze, has appealed to this court from the judgment of the Court of
First Instance of Manila absolving the defendant Juan Posadas, Jr., Collector of Internal
Revenue, from the complaint filed against him by said plaintiff bank, and dismissing the
complaint with costs.

The appellant has assigned the following alleged errors as committed by the trial court
in its judgment, to wit:
 1. The lower court erred in holding that the testimony of Mrs. Schuetze was
inefficient to established the domicile of her husband.

2. The lower court erred in holding that under section 1536 of the Administrative
Code the tax imposed by the defendant is lawful and valid.

3. The lower court erred in not holding that one-half (½) of the proceeds of the
policy in question is community property and that therefore no inheritance tax
can be levied, at least on one-half (½) of the said proceeds.

4. The lower court erred in not declaring that it would be unconstitutional to

impose an inheritance tax upon the insurance policy here in question as it would
be a taking of property without due process of law.

The present complaint seeks to recover from the defendant Juan Posadas, Jr., Collector
of Internal Revenue, the amount of P1,209 paid by the plaintiff under protest, in its
capacity of administrator of the estate of the late Adolphe Oscar Schuetze, as
inheritance tax upon the sum of P20,150, which is the amount of an insurance policy on
the deceased's life, wherein his own estate was named the beneficiary.

At the hearing, in addition to documentary and parol evidence, both parties submitted
the following agreed statement of facts of the court for consideration:

It is hereby stipulated and agreed by and between the parties in the above-
entitled action through their respective undersigned attorneys:

1. That the plaintiff, Rosario Gelano Vda. de Schuetze, window of the late
Adolphe Oscar Schuetze, is of legal age, a native of Manila, Philippine Islands,
and is and was at all times hereinafter mentioned a resident of Germany, and at
the time of the death of her husband, the late Adolphe Oscar Schuetze, she was
actually residing and living in Germany;

2. That the Bank of the Philippine Islands, is and was at all times hereinafter
mentioned a banking institution duly organized and existing under and by virtue
of the laws of the Philippine Islands;

3. That on or about August 23, 1928, the herein plaintiff before notary public
Salvador Zaragoza, drew a general power appointing the above-mentioned Bank
of the Philippine Islands as her attorney-in-fact, and among the powers
conferred to said attorney-in-fact was the power to represent her in all legal
actions instituted by or against her;

4. That the defendant, of legal age, is and at all times hereinafter mentioned the
duly appointed Collector of Internal Revenue with offices at Manila, Philippine
Islands;

5. That the deceased Adolphe Oscar Schuetze came to the Philippine Islands for
the first time of March 31, 1890, and worked in the several German firms as a
mere employee and that from the year 1903 until the year 1918 he was partner
in the business of Alfredo Roensch;

6. That from 1903 to 1922 the said Adolphe Oscar Schuetze was in the habit of
making various trips to Europe;

7. That on December 3, 1927, the late Adolphe Oscar Schuetze coming from
Java, and with the intention of going to Bremen, landed in the Philippine Islands
where he met his death on February 2, 1928;

8. That on March 31, 1926, the said Adolphe Oscar Schuetze, while in Germany,
executed a will, in accordance with its law, wherein plaintiff was named his
universal heir;

9. That the Bank of the Philippine Islands by order of the Court of First Instance
of Manila under date of May 24, 1928, was appointed administrator of the estate
of the deceased Adolphe Oscar Schuetze;

10. That, according to the testamentary proceedings instituted in the Court of

First Instance of Manila, civil case No. 33089, the deceased at the time of his
death was possessed of not only real property situated in the Philippine Islands,
but also personal property consisting of shares of stock in nineteen (19)
domestic corporations;

11. That the fair market value of all the property in the Philippine Islands left by
the deceased at the time of his death in accordance with the inventory submitted
to the Court of First Instance of Manila, civil case No. 33089, was P217,560.38;

12. That the Bank of the Philippine Islands, as administrator of the estate of the
deceased rendered its final account on June 19, 1929, and that said estate was
closed on July 16, 1929;

13. That among the personal property of the deceased was found life-insurance
policy No. 194538 issued at Manila, Philippine Islands, on January 14, 1913, for
the sum of $10,000 by the Sun Life Assurance Company of Canada, Manila
branch, a foreign corporation duly organized and existing under and by virtue of
the laws of Canada, and duly authorized to transact business in the Philippine
Islands;

14. That in the insurance policy the estate of the said Adolphe Oscar Schuetze
was named the beneficiary without any qualification whatsoever;

15. That for five consecutive years, the deceased Adolphe Oscar Schuetze paid
the premiums of said policy to the Sun Life Assurance Company of Canada,
Manila branch;

16. That on or about the year 1918, the Sun Life Assurance Company of Canada,
Manila branch, transferred said policy to the Sun Life Assurance Company of
Canada, London branch;
17. That due to said transfer the said Adolphe Oscar Schuetze from 1918 to the
time of his death paid the premiums of said policy to the Sun Life Assurance
Company of Canada, London Branch;

18. That the sole and only heir of the deceased Adolphe Oscar Schuetze is his
widow, the plaintiff herein;

19. That at the time of the death of the deceased and at all times thereafter
including the date when the said insurance policy was paid, the insurance policy
was not in the hands or possession of the Manila office of the Sun Life Assurance
Company of Canada, nor in the possession of the herein plaintiff, nor in the
possession of her attorney-in-fact the Bank of the Philippine Islands, but the
same was in the hands of the Head Office of the Sun Life Assurance Company of
Canada, at Montreal, Canada;

20. That on July 13, 1928, the Bank of the Philippine Islands as administrator of
the decedent's estate received from the Sun Life Assurance Company of Canada,
Manila branch, the sum of P20,150 representing the proceeds of the insurance
policy, as shown in the statement of income and expenses of the estate of the
deceased submitted on June 18, 1929, by the administrator to the Court of First
Instance of Manila, civil case No. 33089;

21. That the Bank of the Philippine Islands delivered to the plaintiff herein the
said sum of P20,150;

22. That the herein defendant on or about July 5, 1929, imposed an inheritance
tax upon the transmission of the proceeds of the policy in question in the sum of
P20,150 from the estate of the late Adolphe Oscar Schuetze to the sole heir of
the deceased, or the plaintiff herein, which inheritance tax amounted to the sum
of P1,209;

23. That the Bank of the Philippine Islands as administrator of the decedent's
estate and as attorney-in-fact of the herein plaintiff, having been demanded by
the herein defendant to pay inheritance tax amounting to the sum of P1,209,
paid to the defendant under protest the above-mentioned sum;

24. That notwithstanding the various demands made by plaintiff to the

defendant, said defendant has refused and refuses to refund to plaintiff the
above mentioned sum of P1,209;

25. That plaintiff reserves the right to adduce evidence as regards the domicile
of the deceased, and so the defendant, the right to present rebuttal evidence;

26. That both plaintiff and defendant submit this stipulation of facts without
prejudice to their right to introduce such evidence, on points not covered by the
agreement, which they may deem proper and necessary to support their
respective contentions.
In as much as one of the question raised in the appeal is whether an insurance policy
on said Adolphe Oscar Schuetze's life was, by reason of its ownership, subject to the
inheritance tax, it would be well to decide first whether the amount thereof is
paraphernal or community property.

According to the foregoing agreed statement of facts, the estate of Adolphe Oscar
Schuetze is the sole beneficiary named in the life-insurance policy for $10,000, issued
by the Sun Life Assurance Company of Canada on January 14, 1913. During the
following five years the insured paid the premiums at the Manila branch of the
company, and in 1918 the policy was transferred to the London branch.

The record shows that the deceased Adolphe Oscar Schuetze married the plaintiff-
appellant Rosario Gelano on January 16, 1914.

With the exception of the premium for the first year covering the period from January
14, 1913 to January 14, 1914, all the money used for paying the premiums, i. e., from
the second year, or January 16, 1914, or when the deceased Adolphe Oscar Schuetze
married the plaintiff-appellant Rosario Gelano, until his death on February 2, 1929, is
conjugal property inasmuch as it does not appear to have exclusively belonged to him
or to his wife (art. 1407, Civil Code). As the sum of P20,150 here in controversy is a
product of such premium it must also be deemed community property, because it was
acquired for a valuable consideration, during said Adolphe Oscar Schuetze's marriage
with Rosario Gelano at the expense of the common fund (art. 1401, No. 1, Civil Code),
except for the small part corresponding to the first premium paid with the deceased's
own money.

In his Commentaries on the Civil Code, volume 9, page 589, second edition, Manresa
treats of life insurance in the following terms, to wit:

The amount of the policy represents the premiums to be paid, and the right to it
arises the moment the contract is perfected, for at the moment the power of
disposing of it may be exercised, and if death occurs payment may be
demanded. It is therefore something acquired for a valuable consideration during
the marriage, though the period of its fulfillment, depend upon the death of one
of the spouses, which terminates the partnership. So considered, the question
may be said to be decided by articles 1396 and 1401: if the premiums are paid
with the exclusive property of husband or wife, the policy belongs to the owner;
if with conjugal property, or if the money cannot be proved as coming from one
or the other of the spouses, the policy is community property.

The Supreme Court of Texas, United States, in the case of Martin vs. Moran (11 Tex.
Civ. A., 509) laid down the following doctrine:

COMMUNITY PROPERTY — LIFE INSURANCE POLICY. — A husband took out an

endowment life insurance policy on his life, payable "as directed by will." He paid
the premiums thereon out of community funds, and by his will made the
proceeds of the policy payable to his own estate. Held, that the proceeds were
community estate, one-half of which belonged to the wife.
In In re Stan's Estate, Myr. Prob. (Cal.), 5, the Supreme Court of California laid down
the following doctrine:

A testator, after marriage, took out an insurance policy, on which he paid the
premiums from his salary. Held that the insurance money was community
property, to one-half of which, the wife was entitled as survivor.

In In re Webb's Estate, Myr. Prob. (Cal.), 93, the same court laid down the following
doctrine:

A decedent paid the first third of the amount of the premiums on his life-
insurance policy out of his earnings before marriage, and the remainder from his
earnings received after marriage. Held, that one-third of the policy belonged to
his separate estate, and the remainder to the community property.

Thus both according to our Civil Code and to the ruling of those North American States
where the Spanish Civil Code once governed, the proceeds of a life-insurance policy
whereon the premiums were paid with conjugal money, belong to the conjugal
partnership.

The appellee alleges that it is a fundamental principle that a life-insurance policy

belongs exclusively to the beneficiary upon the death of the person insured, and that in
the present case, as the late Adolphe Oscar Schuetze named his own estate as the sole
beneficiary of the insurance on his life, upon his death the latter became the sole owner
of the proceeds, which therefore became subject to the inheritance tax, citing Del Val
vs. Del Val (29 Phil., 534), where the doctrine was laid down that an heir appointed
beneficiary to a life-insurance policy taken out by the deceased, becomes the absolute
owner of the proceeds of such policy upon the death of the insured.

The estate of a deceased person cannot be placed on the same footing as an individual
heir. The proceeds of a life-insurance policy payable to the estate of the insured passed
to the executor or administrator of such estate, and forms part of its assets (37 Corpus
Juris, 565, sec. 322); whereas the proceeds of a life-insurance policy payable to an heir
of the insured as beneficiary belongs exclusively to said heir and does not form part of
the deceased's estate subject to administrator. (Del Val vs. Del Val, supra; 37 Corpus
Juris, 566, sec. 323, and articles 419 and 428 of the Code of Commerce.)

Just as an individual beneficiary of a life-insurance policy taken out by a married person

becomes the exclusive owner of the proceeds upon the death of the insured even if the
premiums were paid by the conjugal partnership, so, it is argued, where the beneficiary
named is the estate of the deceased whose life is insured, the proceeds of the policy
become a part of said estate upon the death of the insured even if the premiums have
been paid with conjugal funds.

In a conjugal partnership the husband is the manager, empowered to alienate the

partnership property without the wife's consent (art. 1413, Civil Code), a third person,
therefore, named beneficiary in a life-insurance policy becomes the absolute owner of
its proceeds upon the death of the insured even if the premiums should have been paid
with money belonging to the community property. When a married man has his life
insured and names his own estate after death, beneficiary, he makes no alienation of
the proceeds of conjugal funds to a third person, but appropriates them himself, adding
them to the assets of his estate, in contravention of the provisions of article 1401,
paragraph 1, of the Civil Code cited above, which provides that "To the conjugal
partnership belongs" (1) Property acquired for a valuable consideration during the
marriage at the expense of the common fund, whether the acquisition is made for the
partnership or for one of the spouses only." Furthermore, such appropriation is a fraud
practised upon the wife, which cannot be allowed to prejudice her, according to article
1413, paragraph 2, of said Code. Although the husband is the manager of the conjugal
partnership, he cannot of his own free will convert the partnership property into his own
exclusive property.

As all the premiums on the life-insurance policy taken out by the late Adolphe Oscar
Schuetze, were paid out of the conjugal funds, with the exceptions of the first, the
proceeds of the policy, excluding the proportional part corresponding to the first
premium, constitute community property, notwithstanding the fact that the policy was
made payable to the deceased's estate, so that one-half of said proceeds belongs to the
estate, and the other half to the deceased's widow, the plaintiff-appellant Rosario
Gelano Vda. de Schuetze.

The second point to decide in this appeal is whether the Collector of Internal Revenue
has authority, under the law, to collect the inheritance tax upon one-half of the life-
insurance policy taken out by the late Adolphe Oscar Schuetze, which belongs to him
and is made payable to his estate.

According to the agreed statement of facts mentioned above, the plaintiff-appellant, the
Bank of the Philippine Islands, was appointed administrator of the late Adolphe Oscar
Schuetze's testamentary estate by an order dated March 24, 1928, entered by the
Court of First Instance of Manila. On July 13, 1928, the Sun Life Assurance Company of
Canada, whose main office is in Montreal, Canada, paid Rosario Gelano Vda. de
Schuetze upon her arrival at Manila, the sum of P20,150, which was the amount of the
insurance policy on the life of said deceased, payable to the latter's estate. On the
same date Rosario Gelano Vda. de Schuetze delivered the money to said Bank of the
Philippine Islands, as administrator of the deceased's estate, which entered it in the
inventory of the testamentary estate, and then returned the money to said widow.

Section 1536 of the Administrative Code, as amended by section 10 of Act No. 2835
and section 1 of Act No. 3031, contains the following relevant provision:

SEC. 1536. Conditions and rate of taxation. — Every transmission by virtue of

inheritance, devise, bequest, gift mortis causa or advance in anticipation of
inheritance, devise, or bequest of real property located in the Philippine Islands
and real rights in such property; of any franchise which must be exercised in the
Philippine Islands; of any shares, obligations, or bonds issued by any corporation
or sociedad anonima organized or constituted in the Philippine Islands in
accordance with its laws; of any shares or rights in any partnership, business or
industry established in the Philippine Islands or of any personal property located
in the Philippine Islands shall be subject to the following tax:

xxx xxx xxx

In as much as the proceeds of the insurance policy on the life of the late Adolphe Oscar
Schuetze were paid to the Bank of the Philippine Islands, as administrator of the
deceased's estate, for management and partition, and as such proceeds were turned
over to the sole and universal testamentary heiress Rosario Gelano Vda. de Schuetze,
the plaintiff-appellant, here in Manila, the situs of said proceeds is the Philippine
Islands.

In his work "The Law of Taxation," Cooley enunciates the general rule governing the
levying of taxes upon tangible personal property, in the following words:

GENERAL RULE. — The suits of tangible personal property, for purposes of

taxation may be where the owner is domiciled but is not necessarily so. Unlike
intangible personal property, it may acquire a taxation situs in a state other than
the one where the owner is domiciled, merely because it is located there. Its
taxable situs is where it is more or less permanently located, regardless of the
domicile of the owner. It is well settled that the state where it is more or less
permanently located has the power to tax it although the owner resides out of
the state, regardless of whether it has been taxed for the same period at the
domicile of the owner, provided there is statutory authority for taxing such
property. It is equally well settled that the state where the owner is domiciled
has no power to tax it where the property has acquired an actual situs in another
state by reason of its more or less permanent location in that state. ... (2
Cooley, The Law of Taxation, 4th ed., p. 975, par. 451.)

With reference to the meaning of the words "permanent" and "in transit," he has the
following to say:

PERMANENCY OF LOCATION; PROPERTY IN TRANSIT. — In order to acquire a

situs in a state or taxing district so as to be taxable in the state or district
regardless of the domicile of the owner and not taxable in another state or
district at the domicile of the owner, tangible personal property must be more or
less permanently located in the state or district. In other words, the situs of
tangible personal property is where it is more or less permanently located rather
than where it is merely in transit or temporarily and for no considerable length of
time. If tangible personal property is more or less permanently located in a state
other than the one where the owner is domiciled, it is not taxable in the latter
state but is taxable in the state where it is located. If tangible personal property
belonging to one domiciled in one state is in another state merely in transitu or
for a short time, it is taxable in the former state, and is not taxable in the state
where it is for the time being. . . . .

Property merely in transit through a state ordinarily is not taxable there. Transit
begins when an article is committed to a carrier for transportation to the state of
its destination, or started on its ultimate passage. Transit ends when the goods
arrive at their destination. But intermediate these points questions may arise as
to when a temporary stop in transit is such as to make the property taxable at
the place of stoppage. Whether the property is taxable in such a case usually
depends on the length of time and the purpose of the interruption of transit. . . .
.
 . . . It has been held that property of a construction company, used in
construction of a railroad, acquires a situs at the place where used for an
indefinite period. So tangible personal property in the state for the purpose of
undergoing a partial finishing process is not to be regarded as in the course of
transit nor as in the state for a mere temporary purpose. (2 Cooley, The Law of
Taxation, 4th ed., pp. 982, 983 and 988, par. 452.)

If the proceeds of the life-insurance policy taken out by the late Adolphe Oscar
Schuetze and made payable to his estate, were delivered to the Bank of the Philippine
Islands for administration and distribution, they were not in transit but were more or
less permanently located in the Philippine Islands, according to the foregoing rules. If
this be so, half of the proceeds which is community property, belongs to the estate of
the deceased and is subject to the inheritance tax, in accordance with the legal
provision quoted above, irrespective of whether or not the late Adolphe Oscar Schuetze
was domiciled in the Philippine Islands at the time of his death.

By virtue of the foregoing, we are of opinion and so hold: (1) That the proceeds of a
life-insurance policy payable to the insured's estate, on which the premiums were paid
by the conjugal partnership, constitute community property, and belong one-half to the
husband and the other half to the wife, exclusively; (2) that if the premiums were paid
partly with paraphernal and partly conjugal funds, the proceeds are likewise in like
proportion paraphernal in part and conjugal in part; and (3) that the proceeds of a life-
insurance policy payable to the insured's estate as the beneficiary, if delivered to the
testamentary administrator of the former as part of the assets of said estate under
probate administration, are subject to the inheritance tax according to the law on the
matter, if they belong to the assured exclusively, and it is immaterial that the insured
was domiciled in these Islands or outside.1awphil.net

Wherefore, the judgment appealed from is reversed, and the defendant is ordered to
return to the plaintiff the one-half of the tax collected upon the amount of P20,150,
being the proceeds of the insurance policy on the life of the late Adolphe Oscar
Schuetze, after deducting the proportional part corresponding to the first premium,
without special pronouncement of costs. So ordered.

Avanceña, C.J., Johnson, Street, Malcolm, Villamor, and Ostrand, JJ., concur.

Separate Opinions

IMPERIAL, J., dissenting:

I cannot concur with the majority in holding that one-half of the insurance policy on the
life of the late Adolphe Oscar Schuetze, excepting the proportional part corresponding
to the first year's premium is community property belonging to the deceased's widow,
named Rosario Gelano, and as such is not subject to the inheritance tax.

There is no question in regard to the facts: It is admitted that Schuetze insured himself
in the Sun Life Insurance Company of Canada in Manila, and that the policy was issued
on January 14, 1913, payable to his estate after death. He died in Manila on February
2, 1928, leaving his widow as his sole testamentary heiress. The appellant, the Bank of
the Philippine Islands, as administrator of the late Schuetze's testamentary estate,
received from the insurer the amount of this policy, or the net sum of P20,150.

It is an established and generally recognized principle that in a life-insurance policy

where the insured has named a beneficiary, the proceeds belong to said beneficiary,
and to him alone. "Vested Interest of Beneficiary. — In practically every jurisdiction it is
the rule that in an ordinary life insurance policy made payable to a beneficiary, and
which does not authorize a change of beneficiary, the named beneficiary has an
absolute, vested interest in the policy from the date of its issuance, delivery and
acceptance, and this is true of a policy payable to the children of the insured equally,
without naming them, or their executors, administrators or assigns." (14 R.C.L., 1376.)
(Del Val vs. Del Val, 29 Phil., 534 et seq.; Gercio vs. Sun Life Assurance Co. of Canada,
48 Phil., 53 et seq.) When in a life-insurance policy the insured's estate is named
beneficiary, the proceeds must be delivered not to the decedent's heirs, but to his
administrator or legal representative. "Policy Payable to Insured, His Estate, or Legal
Representatives. ... Ordinarily the proceeds of a life insurance policy are payable to the
executor or administrator of insured as assets of his estate where by the terms of the
policy the proceeds are payable to insured, his estate, his legal representatives, his
executors or administrators, his "executors, administrators, or assigns," or even his
"heirs, executors, administrators, or assigns." ..." (37 C.J., 565.) "Personal
Representatives or Legal Representatives. — While there is some authority to the effect
that "legal representatives" means the persons entitled to the estate of the insured, and
not his executor or administrator, the better view is that ordinarily the proceeds of such
a policy pass to his executor or administrator." (14 R.C.L., 1372.)

If the foregoing are the principles which should govern life-insurance policies with
reference to beneficiaries and the right to the proceeds of such policies, it is evident
that Schuetze's estate, and not his widow or the conjugal partnership, is entitled to the
proceeds of said policy exclusively, and may receive them from the insurer. The parties
must have so understood it when the insurer delivered the net amount of the policy to
the Bank of the Philippine Islands, as judicial administrator of the insured.

It is stated in the majority opinion that the money with which the premiums were paid
during the marriage of the Schuetzes is presumed to have been taken from the
conjugal funds, according to article 1407 of the Civil Code, which provides that "All the
property of the spouses shall be deemed partnership property in the absence of proof
that it belongs exclusively to the husband or to the wife." This is the very argument
which led to the settlement of the point of law raised. The provisions of the Civil Code
on conjugal property have been improperly applied without considering that a life-
insurance contract is a peculiar contract governed by special laws, such as Act No. 2427
with its amendments, and the Code of Commerce, which is still in force. In Del
Val, supra, it was already held:

We cannot agree with these contentions. The contract of life insurance is a

special contract and the destination of the proceeds thereof is determined by
special laws which deal exclusively with that subject. The Civil Code has no
provisions which relate directly and specially to life insurance contracts or to the
destination of life insurance proceeds. That subject is regulated exclusively by
the Code of Commerce which provides for the terms of the contract, the relations
of the parties and the destination of the proceeds of the policy.

The main point to be decided was not whether the premiums were paid out of conjugal
or personal funds of one of the spouses, but whether or not the proceeds of the policy
became assets of the insured's estate. If it be admitted that the estate is the sole
owner of the aforesaid proceeds, which cannot be denied, inasmuch as the policy itself
names the estate as the beneficiary, it is beside the point to discuss the nature and
origin of the amounts used to pay the premiums, as the title to the proceeds of the
policy is vested in the insured's estate, and any right the widow might have should be
vindicated in another action. In such a case she might be entitled to reimbursement of
her share in the conjugal funds, but not in the present case, for she has been instituted
the sole testamentary heiress.

From the foregoing, it follows that as the proceeds of the policy belong to Schuetze's
estate, and inasmuch as the inheritance tax is levied upon the transmission of a
deceased person's estate upon, or, on the occasion of his death, it is clear that the
whole proceeds, and not one-half thereof, are subject to such tax.

In my opinion the judgment appealed from should have been affirmed in its entirely.

Romualdez, J., concurs.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-29276 May 18, 1978

Testate Estate of the Late Felix J. de Guzman. VICTORINO G. DE

GUZMAN, administrator-appellee,
vs.
CRISPINA DE GUZMAN-CARILLO, ARSENIO DE GUZMAN and HONORATA DE
GUZMAN-MENDIOLA, oppositors-appellants.

Emiliano Samson & R. Balderama-Samson for appellants.

Cezar Paralejo for appellee.

AQUINO, J.:

This case is about the propriety of allowing as administration expenses certain

disbursements made by the administrator of the testate estate of the late Felix J. de
Guzman of Gapan, Nueva Ecija.

The deceased testator was survived by eight children named Victorino, Librada,
Severino, Margarita, Josefina, Honorata, Arsenio and Crispina. His will was duly
probated. Letters of administration were issued to his son, Doctor Victorino G. de
Guzman, pursuant to the order dated September 17, 1964 of the Court of First Instance
of Nueva Ecija in Special Proceeding No. 1431.

One of the properties left by the dent was a residential house located in the poblacion.
In conformity with his last will, that house and the lot on which it stands were
adjudicated to his eight children, each being given a one-eighth proindiviso share in the
project of partition dated March 19, 1966, which was signed by the eight heirs and
which was approved in the lower court's order of April 14, 1967 but without prejudice to
the final outcome of the accounting.

The administrator submitted four accounting reports for the period from June 16, 1964
to September, 1967. Three heirs Crispina de Guzmans-Carillo Honorata de Guzman-
Mendiola and Arsenio de Guzman interposed objections to the administrator's
disbursements in the total sum of P13,610.48, broken down as follows:

I. Expense for the improvement and renovation of the decedent's residential house.

1. Construction of fence — P3,082.07

2. Renovation of bathroom — P1,389.52

3. Repair of terrace and

interior of house — P5,928.00 — P10,399.59

II. Living expenses of Librada de Guzman while occupying the family home without
paying rent:

1. For house helper — P1,170.00

2. Light bills — 227.41

3. Water bills — 150.80

4. Gas oil, floor wax

and switch nail — 54.90 — P 1,603.11

III. Other expenses:

1. Lawyer's subsistence — P 19.30

2. Gratuity pay in lieu

of medical fee — 144.00

3. For stenographic notes — 100.00

4. For food served on

decedent's first

death anniversary — 166.65

5. Cost of publication of

death anniversary

of decedent — 102.00

6. Representation

expenses — 26.25 — P558.20

IV. Irrigation fee P1.049.58

TOTAL P13,610.48

It should be noted that the probate court in its order of August 29, 1966 directed the
administrator "to refrain from spending the assets of the estate for reconstructing and
remodeling the house of the deceased and to stop spending (sic) any asset of the
estate without first during authority of the court to do so" (pp. 26-27, Record on
Appeal).

The lower court in its order of April 29, 1968 allowed the d items as legitimate expenses
of administration. From that order, the three oppositors appealed to this Court. Their
contention is that the probate court erred in approving the utilization of the income of
the estate (from rice harvests) to defray those expenditures which allegedly are not
allowable under the Rules of Court.
An executor or administrator is allowed the necessary expenses in the care,
management, and settlement of the estate. He is entitled to possess and manage the
decedent's real and personal estate as long as it is necessary for the payment of the
debts and the expenses of administration. He is accountable for the whole decedent's
estate which has come into his possession, with all the interest, profit, and income
thereof, and with the proceeds of so much of such estate as is sold by him, at the price
at which it was sold (Sec. 3, Rule 84; Secs. 1 and 7, Rule 85, Rules of Court).

One of the Conditions of the administrator's bond is that he should render a true and
just account of his administration to the court. The court may examine him upon oath
With respect to every matter relating to his accounting 't and shall so examine him as
to the correctness of his account before the same is allowed, except when no objection
is made to the allowance of the account and its correctness is satisfactorily established
by competent proof. The heirs, legatees, distributes, and creditors of the estate shall
have the same privilege as the executor or administrator of being examined on oath on
any matter relating to an administration account." (Sec. 1[c] Rule 81 and secs. 8 and 9,
Rule 85, Rules of Court).

A hearing is usually held before an administrator's account is approved, especially if an

interested Party raises objections to certain items in the accounting report (Sec. 10,
Rule 85).

At that hearing, the practice is for the administrator to take the witness stand, testify
under oath on his accounts and Identify the receipts, vouchers and documents
evidencing his disbursements which are offered as exhibits. He may be interrogated by
the court and crossed by the oppositors's counsel. The oppositors may present proofs to
rebut the ad. administrator's evidence in support of his accounts.

I. Expenses for the renovation and improvement of the family residence — P10,399.59.
— As already shown above, these expenses consisted of disbursements for the repair of
the terrace and interior of the family home, the renovation of the bathroom, and the
construction of a fence. The probate court allowed those expenses because an
administrator has the duty to "maintain in tenantable repair the houses and other
structures and fences belonging to the estate, and deliver the same in such repair to
the heirs or devises" when directed to do so by the court (Sec. 2, Rule 84, Rules of
Court).

On the other hand, the oppositors-appellants contend that the trial court erred in
allowing those expenses because the same did not come within the category of
necessary expenses of administration which are understood to be the reasonable and
necessary expenses of caring for the property and managing it until the debts are paid
and the estate is partitioned and distributed among the heirs (Lizarraga Hermanos vs.
Abada, 40 Phil. 124).

As clarified in the Lizarraga case, administration expenses should be those which are
necessary for the management of the estate, for protecting it against destruction or
deterioration, and, possibly, for the production of fruits. They are expenses entailed for
the preservation and productivity of the estate and its management for purposes of
liquidation, payment of debts, and distribution of the residue among the persons
entitled thereto.
It should be noted that the family residence was partitioned proindiviso among the
decedent's eight children. Each one of them was given a one-eighth share in conformity
with the testator's will. Five of the eight co-owners consented to the use of the funds of
the estate for repair and improvement of the family home. It is obvious that the
expenses in question were incurred to preserve the family home and to maintain the
family's social standing in the community.

Obviously, those expenses redounded to the benefit of an the co- owners. They were
necessary for the preservation and use of the family residence. As a result of those
expenses, the co-owners, including the three oppositors, would be able to use the
family home in comfort, convenience and security.

We hold that the probate court did not err in approving the use of the income of the
estate to defray those ex

II. Expenses incurred by Librada de Guzman as occupant of the family residence

without paying rent — P1 603.11 — The probate court allowed the income of the estate
to be used for those expenses on the theory that the occupancy of the house by one
heir did not deprive the other seven heirs from living in it. Those expenses consist of
the salaries of the house helper, light and water bills, and the cost of gas, oil floor wax
and switch nail

We are of the opinion that those expenses were personal expenses of Librada de
Guzman, inuring y to her benefit. Those expenses, not being reasonable administration
expenses incurred by the administrator, should not be charged against the income of
the estate.

Librada de Guzman, as an heir, is entitled to share in the net income of the estate. She
occupied the house without paying rent. She should use her income for her living
expenses while occupying the family residence.

The trial court erred in approving those expenses in the administrator's accounts. They
should be, as they are hereby, disallowed (See 33 C.J.S 1239-40).

III. Other expenses — P558.20. — Among these expenses is the sum of P100 for
stenographic notes which, as admitted by the administrator on page 24 of his brief,
should be disallowed. Another item, "representation expenses" in the sum of P26.25
(2nd accounting), was not explained. it should likewise be disallowed.

The probate court erred in allowing as expenses of ad. administration the sum of
P268.65 which was incurred during the celebration of the first death anniversary of the
deceased. Those expenses are disallowed because they have no connection with the
care, management and settlement of the decedent's estate (Nicolas vs. Nicolas 63 Phil
332).

The other expenses, namely, P19.30 for the lawyer's subsistence and P144 as the cost
of the gift to the physician who attended to the testator during his last s are allowable
expenses.
IV. Irrigation fee — P1,049.58. —The appellants question the deductibility of that
expense on the ground that it seems to be a duplication of the item of P1,320 as
irrigation fee for the same 1966-67 crop-year.

The administrator in his comment filed on February 28, 1978 explained that the item of
P1,320 represented the "allotments" for irrigation fees to eight tenants who cultivated
the Intan crop, which allotments were treated as "assumed expenses" deducted as
farming expenses from the value of the net harvests.

The explanation is not quite clear but it was not disputed by the appellants. The fact is
that the said sum of P1,049.58 was paid by the administrator to the Penaranda
Irrigation System as shown in Official Receipt No. 3596378 dated April 28, 1967. It was
included in his accounting as part of the farming expenses. The amount was properly
allowed as a legitimate expense of administration.

WHEREFORE, the lower court's order of April 29, 1968 is affirmed with the modifications
that the sum of (a) P1,603.11 as the living expenses of Librada de Guzman. (b) P100
for stenographic notes, (c) P26.25 as representation expenses, and (d) P268.65 as
expenses for the celebration of the first anniversary of the decedent's death are
disallowed in the administrator's accounts. No costs.

SO ORDERED.

Fernando (Chairman), Barredo, Antonio, Concepcion, Jr., and Santos, JJ., concur.
 THIRD DIVISION

[G.R. No. 123206. March 22, 2000]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.

COURT OF APPEALS, COURT OF TAX APPEALS and JOSEFINA
P. PAJONAR, as Administratrix of the Estate of Pedro P.
Pajonar, respondents.

RESOLUTION

GONZAGA-REYES, J.: Supr-ema

Assailed in this petition for review on certiorari is the December 21, 1995
Decision[1] of the Court of Appeals[2] in CA-G.R. Sp. No. 34399 affirming the
June 7, 1994 Resolution of the Court of Tax Appeals in CTA Case No. 4381
granting private respondent Josefina P. Pajonar, as administratrix of the
estate of Pedro P. Pajonar, a tax refund in the amount of P76,502.42,
representing erroneously paid estate taxes for the year 1988.

Pedro Pajonar, a member of the Philippine Scout, Bataan Contingent, during

the second World War, was a part of the infamous Death March by reason of
which he suffered shock and became insane. His sister Josefina Pajonar
became the guardian over his person, while his property was placed under
the guardianship of the Philippine National Bank (PNB) by the Regional Trial
Court of Dumaguete City, Branch 31, in Special Proceedings No. 1254. He
died on January 10, 1988. He was survived by his two brothers Isidro P.
Pajonar and Gregorio Pajonar, his sister Josefina Pajonar, nephews
Concordio Jandog and Mario Jandog and niece Conchita Jandog.

On May 11, 1988, the PNB filed an accounting of the decedent's property
under guardianship valued at P3,037,672.09 in Special Proceedings No.
1254. However, the PNB did not file an estate tax return, instead it advised
Pedro Pajonar's heirs to execute an extrajudicial settlement and to pay the
taxes on his estate. On April 5, 1988, pursuant to the assessment by the
Bureau of Internal Revenue (BIR), the estate of Pedro Pajonar paid taxes in
the amount of P2,557.

On May 19, 1988, Josefina Pajonar filed a petition with the Regional Trial
Court of Dumaguete City for the issuance in her favor of letters of
administration of the estate of her brother. The case was docketed as
Special Proceedings No. 2399. On July 18, 1988, the trial court appointed
Josefina Pajonar as the regular administratrix of Pedro Pajonar's estate.

On December 19, 1988, pursuant to a second assessment by the BIR for

deficiency estate tax, the estate of Pedro Pajonar paid estate tax in the
amount of P1,527,790.98. Josefina Pajonar, in her capacity as administratrix
and heir of Pedro Pajonar's estate, filed a protest on January 11, 1989 with
the BIR praying that the estate tax payment in the amount of
P1,527,790.98, or at least some portion of it, be returned to the heirs.[3] Jur-is

However, on August 15, 1989, without waiting for her protest to be resolved
by the BIR, Josefina Pajonar filed a petition for review with the Court of Tax
Appeals (CTA), praying for the refund of P1,527,790.98, or in the
alternative, P840,202.06, as erroneously paid estate tax.[4] The case was
docketed as CTA Case No. 4381.

On May 6, 1993, the CTA ordered the Commissioner of Internal Revenue to

refund Josefina Pajonar the amount of P252,585.59, representing
erroneously paid estate tax for the year 1988.[5]

Among the deductions from the gross estate allowed by the CTA were the
amounts of P60,753 representing the notarial fee for the Extrajudicial
Settlement and the amount of P50,000 as the attorney's fees in Special
Proceedings No. 1254 for guardianship.[6]Juri-ssc

On June 15, 1993, the Commissioner of Internal Revenue filed a motion for
reconsideration[7] of the CTA's May 6, 1993 decision asserting, among others,
that the notarial fee for the Extrajudicial Settlement and the attorney's fees
in the guardianship proceedings are not deductible expenses.

On June 7, 1994, the CTA issued the assailed Resolution[8] ordering the
Commissioner of Internal Revenue to refund Josefina Pajonar, as
administratrix of the estate of Pedro Pajonar, the amount of P76,502.42
representing erroneously paid estate tax for the year 1988. Also, the CTA
upheld the validity of the deduction of the notarial fee for the Extrajudicial
Settlement and the attorney's fees in the guardianship proceedings.
On July 5, 1994, the Commissioner of Internal Revenue filed with the Court
of Appeals a petition for review of the CTA's May 6, 1993 Decision and its
June 7, 1994 Resolution, questioning the validity of the abovementioned
deductions. On December 21, 1995, the Court of Appeals denied the
Commissioner's petition.[9]

Hence, the present appeal by the Commissioner of Internal Revenue.

The sole issue in this case involves the construction of section 79[10] of the
National Internal Revenue Code[11] (Tax Code) which provides for the
allowable deductions from the gross estate of the decedent. More
particularly, the question is whether the notarial fee paid for the extrajudicial
settlement in the amount of P60,753 and the attorney's fees in the
guardianship proceedings in the amount of P50,000 may be allowed as
deductions from the gross estate of decedent in order to arrive at the value
of the net estate.

We answer this question in the affirmative, thereby upholding the decisions

of the appellate courts. J-jlex

In its May 6, 1993 Decision, the Court of Tax Appeals ruled thus:

Respondent maintains that only judicial expenses of the

testamentary or intestate proceedings are allowed as a
deduction to the gross estate. The amount of P60,753.00 is quite
extraordinary for a mere notarial fee.

This Court adopts the view under American jurisprudence that

expenses incurred in the extrajudicial settlement of the estate
should be allowed as a deduction from the gross estate. "There
is no requirement of formal administration. It is sufficient that
the expense be a necessary contribution toward the settlement
of the case." [ 34 Am. Jur. 2d, p.765; Nolledo, Bar Reviewer in
Taxation, 10th Ed. (1990), p. 481 ]

xxx.....xxx.....xxx

The attorney's fees of P50,000.00, which were already incurred

but not yet paid, refers to the guardianship proceeding filed by
PNB, as guardian over the ward of Pedro Pajonar, docketed as
Special Proceeding No. 1254 in the RTC (Branch XXXI) of
Dumaguete City. x x x

xxx.....xxx.....xxx
 The guardianship proceeding had been terminated upon delivery
of the residuary estate to the heirs entitled thereto. Thereafter,
PNB was discharged of any further responsibility.

Attorney's fees in order to be deductible from the gross estate

must be essential to the collection of assets, payment of debts
or the distribution of the property to the persons entitled to
it. The services for which the fees are charged must relate to the
proper settlement of the estate. [ 34 Am. Jur. 2d 767. ] In this
case, the guardianship proceeding was necessary for the
distribution of the property of the late Pedro Pajonar to his
rightful heirs. Sc-juris

xxx.....xxx.....xxx

PNB was appointed as guardian over the assets of the late Pedro
Pajonar, who, even at the time of his death, was incompetent by
reason of insanity. The expenses incurred in the guardianship
proceeding was but a necessary expense in the settlement of the
decedent's estate. Therefore, the attorney's fee incurred in the
guardianship proceedings amounting to P50,000.00 is a
reasonable and necessary business expense deductible from the
gross estate of the decedent.[12]

Upon a motion for reconsideration filed by the Commissioner of Internal

Revenue, the Court of Tax Appeals modified its previous ruling by reducing
the refundable amount to P76,502.43 since it found that a deficiency interest
should be imposed and the compromise penalty excluded.[13] However, the
tax court upheld its previous ruling regarding the legality of the deductions -

It is significant to note that the inclusion of the estate tax law in

the codification of all our national internal revenue laws with the
enactment of the National Internal Revenue Code in 1939 were
copied from the Federal Law of the United States. [UMALI,
Reviewer in Taxation (1985), p. 285 ] The 1977 Tax Code,
promulgated by Presidential Decree No. 1158, effective June 3,
1977, reenacted substantially all the provisions of the old law on
estate and gift taxes, except the sections relating to the meaning
of gross estate and gift. [ Ibid, p. 286. ] Nc-mmis

In the United States, [a]dministrative expenses, executor's

commissions and attorney's fees are considered allowable
deductions from the Gross Estate. Administrative expenses are
limited to such expenses as are actually and necessarily incurred
in the administration of a decedent's estate. [PRENTICE-HALL,
Federal Taxes Estate and Gift Taxes (1936), p. 120, 533. ]
Necessary expenses of administration are such expenses as are
entailed for the preservation and productivity of the estate and
for its management for purposes of liquidation, payment of debts
and distribution of the residue among the persons entitled
thereto. [Lizarraga Hermanos vs. Abada, 40 Phil. 124. ] They
must be incurred for the settlement of the estate as a whole. [34
Am. Jur. 2d, p. 765. ] Thus, where there were no substantial
community debts and it was unnecessary to convert community
property to cash, the only practical purpose of administration
being the payment of estate taxes, full deduction was allowed for
attorney's fees and miscellaneous expenses charged wholly to
decedent's estate. [ Ibid., citing Estate of Helis, 26 T .C. 143 (A).
]

Petitioner stated in her protest filed with the BIR that "upon the
death of the ward, the PNB, which was still the guardian of the
estate, (Annex 'Z' ), did not file an estate tax return; however, it
advised the heirs to execute an extrajudicial settlement, to pay
taxes and to post a bond equal to the value of the estate, for
which the estate paid P59,341.40 for the premiums. (See Annex
'K')." [p. 17, CTA record. ] Therefore, it would appear from the
records of the case that the only practical purpose of settling the
estate by means of an extrajudicial settlement pursuant to
Section 1 of Rule 74 of the Rules of Court was for the payment
of taxes and the distribution of the estate to the heirs. A fortiori,
since our estate tax laws are of American origin, the
interpretation adopted by American Courts has some persuasive
effect on the interpretation of our own estate tax laws on the
subject.

Anent the contention of respondent that the attorney's fees of

P50,000.00 incurred in the guardianship proceeding should not
be deducted from the Gross Estate, We consider the same
unmeritorious. Attorneys' and guardians' fees incurred in a
trustee's accounting of a taxable inter vivos trust attributable to
the usual issues involved in such an accounting was held to be
proper deductions because these are expenses incurred in
terminating an inter vivos trust that was includible in the
decedent's estate. (Prentice Hall, Federal Taxes on Estate and
Gift, p.120, 861] Attorney's fees are allowable deductions if
incurred for the settlement of the estate. It is noteworthy to
point that PNB was appointed the guardian over the assets of the
 deceased. Necessarily the assets of the deceased formed part of
his gross estate. Accordingly, all expenses incurred in relation to
the estate of the deceased will be deductible for estate tax
purposes provided these are necessary and ordinary expenses
for administration of the settlement of the estate.[14]

In upholding the June 7, 1994 Resolution of the Court of Tax Appeals, the
Court of Appeals held that: Newmiso

2. Although the Tax Code specifies "judicial expenses of the

testamentary or intestate proceedings," there is no reason why
expenses incurred in the administration and settlement of an
estate in extrajudicial proceedings should not be allowed.
However, deduction is limited to such administration expenses
as are actually and necessarily incurred in the collection of the
assets of the estate, payment of the debts, and distribution of
the remainder among those entitled thereto. Such expenses may
include executor's or administrator's fees, attorney's fees, court
fees and charges, appraiser's fees, clerk hire, costs of preserving
and distributing the estate and storing or maintaining it,
brokerage fees or commissions for selling or disposing of the
estate, and the like. Deductible attorney's fees are those
incurred by the executor or administrator in the settlement of
the estate or in defending or prosecuting claims against or due
the estate. (Estate and Gift Taxation in the Philippines, T. P.
Matic, Jr., 1981 Edition, p. 176 ).

xxx.....xxx.....xxx

It is clear then that the extrajudicial settlement was for the

purpose of payment of taxes and the distribution of the estate to
the heirs. The execution of the extrajudicial settlement
necessitated the notarization of the same. Hence the Contract of
Legal Services of March 28, 1988 entered into between
respondent Josefina Pajonar and counsel was presented in
evidence for the purpose of showing that the amount of
P60,753.00 was for the notarization of the Extrajudicial
Settlement. It follows then that the notarial fee of P60,753.00
was incurred primarily to settle the estate of the deceased Pedro
Pajonar. Said amount should then be considered an
administration expenses actually and necessarily incurred in the
collection of the assets of the estate, payment of debts and
distribution of the remainder among those entitled thereto. Thus,
the notarial fee of P60,753 incurred for the Extrajudicial
 Settlement should be allowed as a deduction from the gross
estate.

3. Attorney's fees, on the other hand, in order to be deductible

from the gross estate must be essential to the settlement of the
estate. Acctmis

The amount of P50,000.00 was incurred as attorney's fees in the

guardianship proceedings in Spec. Proc. No. 1254. Petitioner
contends that said amount are not expenses of the testamentary
or intestate proceedings as the guardianship proceeding was
instituted during the lifetime of the decedent when there was yet
no estate to be settled.

Again , this contention must fail.

The guardianship proceeding in this case was necessary for the

distribution of the property of the deceased Pedro Pajonar. As
correctly pointed out by respondent CTA, the PNB was appointed
guardian over the assets of the deceased, and that necessarily
the assets of the deceased formed part of his gross estate. x x x

xxx.....xxx.....xxx

It is clear therefore that the attorney's fees incurred in the

guardianship proceeding in Spec. Proc. No. 1254 were essential
to the distribution of the property to the persons entitled
thereto. Hence, the attorney's fees incurred in the guardianship
proceedings in the amount of P50,000.00 should be allowed as a
deduction from the gross estate of the decedent.[15]

The deductions from the gross estate permitted under section 79 of the Tax
Code basically reproduced the deductions allowed under Commonwealth Act
No. 466 (CA 466), otherwise known as the National Internal Revenue Code
of 1939,[16] and which was the first codification of Philippine tax laws. Section
89 (a) (1) (B) of CA 466 also provided for the deduction of the "judicial
expenses of the testamentary or intestate proceedings" for purposes of
determining the value of the net estate. Philippine tax laws were, in turn,
based on the federal tax laws of the United States.[17] In accord with
established rules of statutory construction, the decisions of American courts
construing the federal tax code are entitled to great weight in the
interpretation of our own tax laws.[18] Scc-alr
Judicial expenses are expenses of administration.[19] Administration expenses,
as an allowable deduction from the gross estate of the decedent for
purposes of arriving at the value of the net estate, have been construed by
the federal and state courts of the United States to include all expenses
"essential to the collection of the assets, payment of debts or the distribution
of the property to the persons entitled to it."[20] In other words, the expenses
must be essential to the proper settlement of the estate. Expenditures
incurred for the individual benefit of the heirs, devisees or legatees are not
deductible.[21] This distinction has been carried over to our jurisdiction. Thus,
in Lorenzo v. Posadas[22] the Court construed the phrase "judicial expenses of
the testamentary or intestate proceedings" as not including the
compensation paid to a trustee of the decedent's estate when it appeared
that such trustee was appointed for the purpose of managing the decedent's
real estate for the benefit of the testamentary heir. In another case, the
Court disallowed the premiums paid on the bond filed by the administrator
as an expense of administration since the giving of a bond is in the nature of
a qualification for the office, and not necessary in the settlement of the
estate.[23] Neither may attorney's fees incident to litigation incurred by the
heirs in asserting their respective rights be claimed as a deduction from the
gross estate.[24]

Coming to the case at bar, the notarial fee paid for the extrajudicial
settlement is clearly a deductible expense since such settlement effected a
distribution of Pedro Pajonar's estate to his lawful heirs. Similarly, the
attorney's fees paid to PNB for acting as the guardian of Pedro Pajonar's
property during his lifetime should also be considered as a deductible
administration expense. PNB provided a detailed accounting of decedent's
property and gave advice as to the proper settlement of the latter's estate,
acts which contributed towards the collection of decedent's assets and the
subsequent settlement of the estate.

We find that the Court of Appeals did not commit reversible error in
affirming the questioned resolution of the Court of Tax Appeals.

WHEREFORE, the December 21, 1995 Decision of the Court of Appeals is

AFFIRMED. The notarial fee for the extrajudicial settlement and the
attorney's fees in the guardianship proceedings are allowable deductions
from the gross estate of Pedro Pajonar.

SO ORDERED.

Melo, (Chairman), Vitug, Panganiban, and Purisima, JJ., concur. Calrs-pped

[1]
Entitled "Commissioner of Internal Revenue v. Josefina P. Pajonar, as Administratrix of
the Estate of Pedro P. Pajonar, and Court of Tax Appeals." Rollo, 35-46.
[2]
Eighth Division composed of J. Jaime M. Lantin, ponente; and JJ Eduardo G. Montenegro
and Jose C. De la Rama, concurring.
[3]
CA Records, 45-53.
[4]
Ibid., 37-44.

[5]
The CTA made the following computations

Estate of Pedro P. Pajonar

Lagtangon, Siaton, Negros Oriental
Died January 10, 1998

I. Real
Properties P102,966.59

II. Personal Properties

a. Refrigerator P7,500.00

b. Wall Clock, Esso Gasul

Tables and Chairs 3,090.00

c.Beddings, Stereo Cassette,

TV, Betamax 15,700.00

d. Karaoke, Electric Iron,

Fan,Transformer and Corner
Set 7,400.00

e. Toyota Tamaraw 27,500.00 61,190.00

Additional Personal
Properties:

f. Time Deposit-PNB P200,000.00

g. Stocks and Bonds-PNB 201,232.37

h. Money Market 2,300,000.00

i. Cash Deposit 114,101.83 2,815,334.20

GROSS P
ESTATE 2,979,490.79

Less: Deductions:

A a. Funeral expenses P50,000.00

 b. Commission to Trustee
(PNB) 18,335.93

c. Notarial Fee for the Extra-

B judicial Settlement 60,753.00

d. Attorneys Fees in Special

Proceeding No. 1254 for
guardianship 50,000.00

e.Filing Fees in Special

Proceeding No. 2399 6,374.88

f.Publication of Notice to
Creditors September 7, 14
and 21, 1988 issues of the
Dumaguete Star Informer 600.00

g.Certification fee for

Publication on the Bulletin
Board of the Municipal
Building of Siaton, Negros
Oriental 2.00

h.Certification fee for

Publication in the Capitol 5.00

i.Certification fee for

publication of Notice to
Creditors 5.00 186,075.81

NET ESTATE 2,793,414.98

Estate Tax Due P1,277,762.39

Less: Estate Tax Paid:

CB Confirmation Receipt Nos.

.....B 14268064 P2,557.00

.....B 15517625 1,527,790.98 1,530,347.98

AMOUNT REFUNDABLE P252,585.59

Rollo, 86-88.

[6]
Ibid., 78-79, 81-83.
[7]
CA Records, 118-130.
[8]
Rollo, 47-56.
[9]
Ibid., 35-46.

SEC. 79 Computation of net estate and estate tax. For the purpose of the tax imposed in
[10]

this Chapter, the value of the net estate shall be determined:

(a).....In the case of a citizen or resident of the Philippines, by deducting from the value of
the gross estate-

(1)..... Expenses, losses, indebtedness, and taxes. Such amounts-

(A).....For funeral expenses in an amount equal to five per centum of the gross estate but in
no case to exceed P50,000.00;

(B).....For judicial expenses of the testamentary or intestate proceedings;

xxx.....xxx.....xxx
[11]
This refers to the 1977 National Internal Revenue Code, as amended. On the date of
decedents death (January 10, 1988), the latest amendment to the Tax Code was introduced
by Executive Order No. 273, which became effective on January 1, 1988.
[12]
Rollo, 78-79, 81-83.
[13]

Estate tax Due P1,277,762.39

Less : estate tax paid

04.05.88
........ [CBCR No.
14268054] 2,557.00

Deficiency estate tax P1,275,205.39

Add: Additions to tax

........Interest on deficiency
[Sec. 249 (b)]
........04.12.88 to
12.19.88
........(1,275,205.39 x 20%
x 252/365) 176,083.16

Total deficiency tax P1,451,288.55

Less: estate tax paid

12.19.88
........ (CBCR No.
15517625) 1,527,790.98

Amount Refundable P76,502.43

Ibid., 54.
[14]
Ibid., 49-51.
[15]
Ibid., 43-45.
[16]
Approved on June 15, 1939.
[17]
Wise & Co. v. Meer, 78 Phil 655 (1947)
[18]
Carolina Industries, Inc. v. CMS Stock Brokerage, Inc., 97 SCRA 734 (1980)
[19]
Lorenzo v. Posada, 64 Phil 353 (1937)
[20]
34A Am Jur 2d, Federal Taxation (1995), sec. 144, 288, citing Union Commerce Bank,
trans, (1963) 39 TC 973, affd & revd on other issues (1964, CA6) 339 F2d 163, 65-1 USTC
p 12279, 15 AFTR 2d 1281.
[21]
Ibid., sec. 144,272, citing Bretzfelder, Charles, exr v. Com., (1936, CA2) 86 F2d 713, 36-
2 USTC sec. 9548, 18 AFTR 653.
[22]
Lorenzo v. Posada, supra.
[23]
Sison vs. Teodoro, 100 Phil. 1055 (1957)
[24]
Johannes v. Imperial, 43 Phil 597 (1922)

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-19153 June 30, 1922

B. E. JOHANNES, as principal administrator of the estate of Carmen Theodora

Johannes, relator,
vs.
CARLOS A. IMPERIAL, as judge of the Court of First Instance, City of
Manila, respondent.
Amzi B. Kelly for relator.
Fisher and De Witt and William C. Brady for respondent.

STATEMENT

Case No 18600,1 in which B. E. Johannes, husband of Carmen Theodora Johannes,

deceased as administrator, et al., were relators, and the Honorable George R. Harvey,
as judge of the Court of First Instance of Manila, et al., were respondents was a petition
for certiorari and a temporary injunction, in which the relators prayed for an order this
court:

(A) To annul the appointment of Alfred D' Almeida as administrator of said

deposit in the Philippines; and all acts and a proceedings taken by him as said
administrator; and, —

(B) To issue an order itself, or one to the said Judge George R. Harvey, directing
the manager of the Philippine National Bank,' to place to the credit B. E.
Johannes, as administrator of the estate of Carmen Theodora Johannes, all of
the funds of said Carmen D' Almeida (Johannes), now on deposit, with said bank,
subject to the order of said court. And, as the act of the said Alfred D' Almeida in
having himself appointed administrator was in evident bad faith, as clearly
appears from the petition asking his appointment, the court is requested to grant
relators five thousand pesos (P5,000), as damages caused by delay, expensive
and unnecessary litigation, and such other relief as the court may deem in equity
proper.

Upon a hearing, the prayer was denied, and the petition dismissed in an opinion written
by Justice Malcolm and concurred in by all the other members of this court.

After that opinion was rendered, B. E. Johannes, as principal administrator of the estate
of Carmen Theodora Johannes, applied to his Honor Carlos A. Imperial, as judge of the
Court of Instance of the City of Manila, by petition, which, among other things, alleges:

That "he is the duly appointed principal administrator of the estate of his late wife at
the place of her domicile, Singapore, Straits Settlements, as appears from a certified
copy of his appointment now on file . . .

Second. The said Carmen Theodora Johannes, at the time of her death, was a
subject and citizen of Great Britain, domiciled in Singapore, Straits Settlements,
and your petitioner, the said B. E. Johannes, her lawful husband, at the time of
her death was a subject and citizen of Great Britain and resident of Singapore,
Straits Settlements.

Third. Under British Law, (22 and 23, Charles II c-10, 29 Charles II c-3, and
James II c-17), the husband of a deceased wife is the sole heir, to the exclusion
of all others, of the property of his wife when she dies intestate, as the said
Carmen Theodora Johannes did die.
 Fourth. This Honorable Court at a prior date on application of Mr. Alfred D'
Almeida, the brother of the deceased, appointed him as administrator of the
property of the deceased situated within Philippine Islands, in the absence of,
and without notice, knowledge or consent of her husband, your petitioner.

Fifth. Your petitioner is now within the jurisdiction of this court and has come
here and established his residence at "The Manila Hotel," in the City of Manila,
for the sole purpose of taking over from the said Alfred D' Almeida the
administration of said estate: and

To relieve the said Alfred D' Almeida as administrator of said estate within the
jurisdiction of this court and appoint in his stead your petitioner, the said B. E.
Johannes, and principal administrator, "the ancillary administrator" of said estate
now subject to administration within the Philippine Islands.

From an order denying and overruling the petition, the relator filed certiorari
proceedings in this court against the respondent, as judge of the Court of First
Instance, and later made Alfred D'Almeida, a brother of the deceased, ancillary
administrator, defendant, in which he pray for an order of this court:

(a) To substitute your petitioner, the principal administrator, the husband of the
deceased and the owner of the deposit, instead of Alfred D'Almeida, as "the
ancillary administrator' of said estate, in this jurisdiction; and —

(b) Order the said Judge to disapprove and disallow all of the amounts claimed
to have been paid for attorneys' fees to Messrs. Fisher and DeWit, and cable,
amounting to P2,860.05; and —

(c) To disapproved and disallow the amount of P1,093.75, claimed due

but proven false; and —

(d) To cancel the appointment of the special administrator' appointed by virtue

of these false claims; and —

(e) Order the said Judge to order the manager of the Philippine National Bank to
place to credit of the said substituted ancillary administrator, Mr. B. E. Johannes,
all of the funds now on deposit in said bank, the property of the deceased
Carmen Theodora Johannes.

The defendant claims that the petition here does not state sufficient facts, and that at
the time the appointment was made, the court had jurisdiction to appoint Alfred
D'Almeida as ancillary administrator of the estate of the deceased Carmen Theodora
Johannes, who was then a resident of the Philippine Islands, and that his appointment
is not subject to review in this court.

JOHNS, J.:
The legal questions presented are well stated in the former opinion court in case No.
18600. It appears that the petitioner is the husband of Carmen Theodora Johannes,
deceased, who, at the time of her death, was a resident of Singapore, Straits
Settlements, and a citizen of Great Britain; that he is also a foreigner and a citizen of
Great Britain and an actual resident to Singapore; that Alfred D'Almeida is a brother of
the deceased Carmen Theodora Johannes, and a bona fide resident of the City of
Manila; that at the time of her death Carmen Theodora Johannes had P109,722.55 on
deposit in one of the banks in the City of Manila; and that the petitioner, her surviving
husband, was indebted to a bank in Manila for about P20,000. That the deceased left no
will in the absence of which the petitioner claims to be her sole heir and entitled to all
of her estate. That there were no debts against the estate of the deceased. Upon the
death of his wife, the petitioner was duly appointed as administrator of her estate by
the court at Singapore, and qualified and entered upon the discharge of his duties. After
the decision was rendered by this court in case No. 18600, supra, the petitioner came
to Manila and claims to have established a temporary residence at the Manila Hotel,
based upon which, in legal effect, he asked for an order of court that Alfred D'Almeida
be removed as ancillary administrator, and that he be appointed.

From an order of the lower court denying that petition, an original petition was filed
here to review the proceedings of the lower court.

There is a marked legal distinction between the authority of a court to appoint and the
authority to remove an administrator after he is appointed. Here, the appointment was
made and the administrator had qualified and entered upon the discharge of his duties.
There was no contest over the appointment, and the court had jurisdiction of the
petition and of the subject-matter. It was not a case of where two or more petitions
were filed, in which each was claiming the right to appointed, or in which the court
decided which one of the petitioners should be appointed. It was a case in which only
one petition was presented to the court, and to which no objections were file and in
which it appeared the petitioner was a brother of the deceased, and that the estate was
the owner of property in the City of Manila. The court, having jurisdiction and the
appointment having been made, the only question here presented is whether Alfred
D'Almeida should be removed and the petitioner substituted as ancillary administrator.

As this court said case No 18600 (Johannes vs. Harvey, supra):

The ancillary administration is proper, whenever a person dies, leaving in a

country other than that of his last domicile, property to be administered in the
nature of assets of the decedent, liable for his individual debts or to be
distributed among his heirs.

It is almost a universal rule to give the surviving spouse a preference when and
administrator is to be appointed, unless for strong reason it is deemed advisable
to name someone else. This preference has particular force under Spanish Law
precedents. However, the Code of Civil Procedure, in section 642, while naming
the surviving spouse is unsuitable for the responsibility. . . .

Undoubtedly, if the husband should come into this jurisdiction, the court give
consideration to his petition that he be named the ancillary administrator for
local purposes. Ancillary letters should ordinarily be granted to the domiciliary
 representative, if he applies therefor, or to his nominee, or attorney; but in the
absence of express statutory requirement the court may in its discretion appoint
some other person.

The real contention of the petitioner is that, because he had the legal right to apply for
and be appointed in the first instance, such right is continuous, and that he could be
appointed any time on his own application. That is not the law. Although it is true that
in the first instance everything else being equal and upon the grounds of comity, in
ordinary case, the court would appoint the petitioner or his nominee as ancillary
administrator, but even then, as stated in the above opinion the appointment is one of
more or less legal discretion. But that is not this case. Here, in legal effect, it is sought
to oust an administrator who was appointed without protest or objection where the
court had jurisdiction of the petitioner and of the subject matter.

Again, it appears that Carmen Theodora Johannes died August 21, 1921, and on
September 19, 1921, the petitioner was appointed administrator of her estate by
Supreme Court of Straits Settlements on his own petition, and on October 1, 1921,
based upon his petition, Alfred D'Almeida, the brother of the deceased, was appointed
administrator of her estate in Manila. The initial proceeding against the appointment of
Alfred D'Almeida, as administrator, was filed in this court on January 21, 1922.

At time of the appointment here, the court had primary and original jurisdiction, and no
objections were then made. The question as to who should have been appointed
ancillary administrator, if presented at the proper time and in the proper way, is not
before this court. Here, the appointment was made on the 1st day of October, 1921,
and no formal objections were made until 21st day of January, 1922.

The petition is denied, the injunction dissolved and the case dismissed.

It appears that the debts of the state, if any, are nominal, and that the only asset here
is the money on deposit in the bank. Hence, the administration of the estate itself is
matter of form only and should be very simple and inexpensive. Even though it is
foreign money, it is the duty of the court to protect it from any illegal, unjust, or
unreasonable charges. All claims against the estate should be for just debts only, or for
the actual expenses of administration, and those should be reasonable. No other claims
should be allowed.

If, as claimed, the real dispute here is whether the brothers and sisters of the deceased
are entitled to share in her estate, or whether the petitioner only, as the surviving
husband, is entitle to all of it, that question is not one of administration, and any
expense and attorneys' fees incurred by either party for the settlement of that question
is a personal matter to them, and should not be allowed as claims against the estate.
Claims against the estate should only be for just debts or expense for administration of
the estate itself.

Costs in favor of the respondent. So ordered.

Araullo, C.J., Avanceña, Villamor, Ostrand and Romualdez, JJ., concur.

Footnotes

1 Johannes vs. Harvey, p. 175, ante.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-27396 September 30, 1974

JESUS V. OCCEÑA and SAMUEL C. OCCEÑA, petitioners,

vs.
HON. PAULINO S. MARQUEZ, District Judge, Court of First Instance of Bohol,
Branch I, respondent. I.V. BINAMIRA, Co-Executor, Estate of W.C. Ogan, Sp.
Proc. No. 423, CFI of Bohol, Intervenor.

Jesus V. Occeña and Samuel C. Occeña in their own behalf.

Hon. Paulino S. Marquez for and in his own behalf.

I.V. Binamira for and in his own behalf as intervenor.

ANTONIO, J.:p

In this petition for certiorari with mandamus, petitioners seek (1) to nullify the order of respondent Judge Paulino S.
Marquez of the Court of First Instance of Bohol, Branch I, in Sp. Proc. No. 423 entitled "In the Matter of the Testate Estate
of William C. Ogan," in relation to petitioners' claim for partial payment of attorney's fees in the amount of P30,000.00,
dated November 2, 1966, fixing at P20,000.00 petitioners' attorney's fees, "which would cover the period March 1963 to
December 1965," and directing its immediate payment minus the amount of P4,000.00 previously received by petitioners,
and his second order, dated January 12, 1967, denying petitioners' motion for reconsideration and modifying the
November 2, 1966 order by deleting therefrom the above-quoted phrase; (2) to direct the said court to approve the
release to them as attorney's fees the amount of P30,000.00 minus the amount of P4,000.00 already advanced to them by
the executrix; and (3) to allow petitioners to submit evidence to establish the total attorney's fees to which they are
entitled, in case no agreement thereon is reached between them and the instituted heirs.

The gross value of the estate of the late William C. Ogan subject matter of the probate
proceeding in Sp. Proc. No. 423 is more than P2 million. Petitioners, Atty. Jesus V.
Occeña and Atty. Samuel C. Occeña, are the lawyers for the estate executrix, Mrs.
Necitas Ogan Occeña, and they had been representing the said executrix since 1963,
defending the estate against claims and protecting the interests of the estate. In order
to expedite the settlement of their deceased father's estate, the seven instituted heirs
decided to enter into compromise with the claimants, as a result of which the total
amount of P220,000.00 in cash was awarded to the claimants, including co-executor
Atty. Isabelo V. Binamira, his lawyers and his wife. A partial distribution of
the corpus and income of the estate was made to the heirs in the total amount of
P450,000.00. On November 18, 1966, the estate and inheritance taxes were completely
settled by the executrix and the requisite tax clearance and discharge from liability was
issued by the Commissioner of Internal Revenue.

Petitioners filed a Motion for Partial Payment of Attorneys' Fees, dated November 18,
1965, asking the court to approve payment to them of P30,000.00, as part payment of
their fees for their services as counsel for the executrix since 1963, and to authorize
the executrix to withdraw the amount from the deposits of the estate and pay
petitioners. Three of the heirs, Lily Ogan Peralta, William Ogan, Jr. and Ruth Ogan,
moved to defer consideration of the motion until after the total amounts for the
executrix's fees and the attorney's fees of her counsel shall have been agreed upon by
all the heirs. In July, 1966, five of the seven instituted heirs, namely, Lily Ogan Peralta,
Necitas Ogan Occena, Federico M. Ogan, Liboria Ogan Garcia and Nancy Ogan Gibson,
filed with the court a Manifestation stating that they had no objection to the release of
P30,000.00 to petitioners as partial payment of attorney's fees and recommending
approval of petitioners' motion.

Their first motion dated November 18, 1965 being still unresolved, petitioners filed a
second Motion for Payment of Partial Attorneys' Fees, dated July 5, 1966, praying for
the release to them of the amount of P30,000.00 previously prayed for by them. Action
on the matter was, however, deferred in an order dated August 6, 1966, upon the
request of the Quijano and Arroyo Law Offices in behalf of heirs William Ogan, Jr. and
Ruth Ogan for deferment until after all the instituted heirs shall have agreed in writing
on the total attorney's fees. Petitioners filed a Motion for Reconsideration under date of
September 12, 1966, asking the court to reconsider its deferment order and praying
that payment to them of P30,000.00 be approved on the understanding that whatever
amounts were paid to them would be chargeable against the fees which they and the
instituted heirs might agree to be petitioners' total fees.

On November 2, 1966, respondent Judge issued an order fixing the total fees of
petitioners for the period March, 1963 to December, 1965 at P20,000.00. Petitioners
moved to reconsider that order. On January 12, 1967, respondent issued an order not
only denying petitioners' Motion for Reconsideration but also modifying the original
order by fixing petitioners' fees for the entire testate proceedings at P20,000.00.

Petitioners contend that respondent Judge acted with grave abuse of discretion or in
excess of jurisdiction in fixing the entire attorney's fees to which they are entitled as
counsel for the executrix, and in fixing the said fees in the amount of P20,000.00. The
reasons given by petitioners in support of their contention are: (1) the motion
submitted by petitioners for the court's resolution was only for partied payment of their
attorney's fees, without prejudice to any agreement that might later be reached
between them and the instituted heirs on the question of total attorney's fees, yet
respondent Judge resolved the question of total attorney's fees; (2) considering that
the only question raised by petitioners for the court's determination was that of partial
attorney's fees, they never expected the court to make a ruling on the question of total
attorney's fees; consequently, petitioners did not have the opportunity to prove to total
fees to which they were entitled, and, hence, they were denied due process of law; (3)
of the seven heirs to the estate, five had agreed to petitioners' motion for partial
payment to them of attorney's fees in the amount of P30,000.00, while the remaining
two did not oppose the motion; (4) in his order, respondent Judge stated that he based
the amount of P20,000.00 on the records of the case, but the amount of attorney's fees
to which a lawyer is entitled cannot be determined on the sole basis of the records for
there are other circumstances that should be taken into consideration; and (5) contrary
to respondent Judge's opinion, the mere fact that one of the attorneys for the executrix
is the husband of said executrix, is not a ground for denying the said attorneys the
right to the fees to which they are otherwise entitled.

Only Judge Paulino S. Marquez is named respondent in the present petition, for,
according to petitioners, "no proper party is interested in sustaining the questioned
proceedings in the Lower Court."

In his Answer to the petition, respondent Judge alleged that (a) petitioners' proper
remedy is appeal and not a special civil action, considering that there is already a final
order on the motion for payment of fees; (b) petitioner Atty. Samuel Occeña is the
husband of executrix Necitas Ogan Occeña, hence, Samuel Occeña's pecuniary interest
now goes against the pecuniary interest of the four heirs he is representing in the
special proceeding; (c) one reason why respondent Judge ordered the deletion of the
phrase containing the period March, 1963 to December, 1965 from his November 2,
1966 order is that there are miscellaneous payments appearing in the compromise
agreement and in the executrix's accounting which cover expenses incurred by
petitioners for the estate; (d) co-executor I. V. Binamira should be included as party
respondent to comply with Section 5, Rule 65 of the Revised Rules of Court; and (e) it
is the duty of respondent Judge not to be very liberal to the attorney representing the
executrix, who is at the same time the wife of said counsel and is herself an heir to a
sizable portion of the estate, for respondent Judge's duty is to see to it that the estate
is administered "frugally," "as economically as possible," and to avoid "that a
considerable portion of the estate is absorbed in the process of such division," in order
that there may be a worthy residue for the heirs. As special defenses, respondent Judge
alleged that the seven instituted heirs are indispensable parties in this case;
that mandamus cannot control the actuations of the trial court because they involved
matters of discretion; and that no abuse of discretion can be imputed to respondent
Judge for trying his best to administer the estate frugally.

On the arguments that he had opposed in the lower court petitioners' motion for
payment of partial attorney's fees in the amount of P30,000.00, and that since
petitioners Samuel C. Occeña and Jesus V. Occeña are the husband and father-in-law,
respectively, of executrix Necitas Ogan Occeña, the latter cannot be expected to oppose
petitioners' claims for attorney's fees, thus leaving the co-executor as the lone party to
represent and defend the interests of the estate, Atty. I. V. Binamira, who claims to be
co-executor of the Ogan estate, filed with this Court on July, 1967, a Motion for Leave
to Intervene, which was granted in a resolution of August 9, 1967. Petitioners filed a
Motion for Reconsideration of Resolution of August 9, 1967 and an Opposition to
"Motion for Leave to Intervene," contending that Atty. Binamira ceased to be a co-
executor upon his resignation effective October 29, 1965. On August 15, 1967, Atty.
Binamira filed Intervenor's Opposition to Petition (answer in intervention) traversing the
material averments of the petition.

On August 25, 1967, intervenor filed a Reply to Executrix's Opposition and Opposition
to Exicutrix's Motion for Reconsideration. On September 18, 1967, intervenor filed
Intervenor's Comments on Petitioners' Motion for Reconsideration of the Resolution
dated August 9, 1961. On September 21, 1967, petitioners filed against intervenor a
Petition for Contempt asking this Court to hold intervenor in contempt of court. We
required intervenor to comment thereon. On October 9, 1967, petitioners filed a
Supplemental Petition for Contempt. Invervenor filed on October 20, 1967, Intervenor's
Comments and Counter Petition, asking this Court to dismiss petitioners' motion for
indirect contempt and instead to hold petitioners guilty of indirect contempt for gross
breach of legal ethics. We deferred action on the contempt motion until the case is
considered on the merits. On January 15, 1968. Intervenor I. V. Binamira filed an
Answer to Supplemental Petition. This was followed on February 12, 1968, by another
Petition for Contempt, this time against one Generoso L. Pacquiao for allegedly
executing a perjured affidavit dated December 20, 1967, to aid intervenor I. V.
Binamira to escape liability for his deliberate falsehoods, which affidavit intervenor
attached to his Answer to Supplemental Petition. On the same date, February 12, 1968,
petitioners filed against intervenor a Second Supplemental Petition for Contempt. On
February 19, 1968, petitioners filed Petitioners' Manifestation Re Documentary Evidence
Supporting Charges.

We shall now consider the merits of the basic petition and the petitions for contempt.

The rule is that when a lawyer has rendered legal services to the executor or
administrator to assist him in the execution of his trust, his attorney's fees may be
allowed as expenses of administration. The estate is, however, not directly liable for his
fees, the liability for payment resting primarily on the executor or administrator. If the
administrator had paid the fees, he would be entitled to reimbursement from the
estate. The procedure to be followed by counsel in order to collect his fees is to request
the administrator to make payment, and should the latter fail to pay, either to (a) file
an action against him in his personal capacity, and not as administrator,1 or (b) file a
petition in the testate or intestate proceedings asking the court, after notice to all the
heirs and interested parties, to direct the payment of his fees as expenses of
administration.2 Whichever course is adopted, the heirs and other persons interested in
the estate will have the right to inquire into the value, of the services of the lawyer and
on the necessity of his employment. In the case at bar, petitioner filed his petition
directly with the probate court.

There is no question that the probate court acts as a trustee of the estate, and as such
trustee it should jealously guard the estate under administration and see to it that it is
wisely and economically administered and not dissipated.3 This rule, however, does not
authorize the court, in the discharge of its function as trustee of the estate, to act in a
whimsical and capricious manner or to fix the amount of fees which a lawyer is entitled
to without according to the latter opportunity to prove the legitimate value of his
services. Opportunity of a party to be heard is admittedly the essence of procedural due
process.

What petitioners filed with the lower court was a motion for partial payment of
attorney's fees in the amount of P30,000.00 as lawyers for the executrix for the period
February, 1963, up to the date of filing of the motion on or about November 18, 1965.
Five of the seven heirs had manifested conformity to petitioners' motion, while the
remaining two merely requested deferment of the resolution of the motion "until the
total amount for Executrix's fees and attorney's fees of her counsel is agreed upon by
all the heirs." The court, however, in spite of such conformity, and without affording
petitioners the opportunity to establish how much attorney's fees they are entitled to
for their entire legal services to the executrix, issued an order fixing at P20,000.00
the entire attorney's fees of petitioners.

In his Order of January 12, 1967, respondent Judge explained:

The records of this case are before the Court and the work rendered by
Atty. Samuel Occeña, within each given period, is easily visible from
them; his work as revealed by those records is the factual basis for this
Court's orders as to attorney's fees.

Whatever attorney's fees may have been approved by the Court on

October 28, 1965 were as a result of compromise and were with the
written consent of all the heirs and of all the signatories of the
compromise agreement of October 27, 1965. That is not so with respect
to Atty. Occeña's thirty-thousand peso claim for fees; and so, this Court,
after a view of the record, had to fix it at P20,000.00. The record can
reflect what an attorney of record has done.

In fixing petitioners' attorney's fees solely on the basis of the records of the case,
without allowing petitioners to adduce evidence to prove what is the proper amount of
attorney's fees to which they are entitled for their entire legal services to the estate,
respondent Judge committed a grave abuse of discretion correctable by certiorari.
Evidently, such fees could not be adequately fixed on the basis of the record alone
considering that there are other factors necessary in assessing the fee of a lawyer, such
as: (1) the amount and character of the service rendered; (2) the labor, time and
trouble involved; (3) the nature and importance of the litigation or business in which
the services were rendered; (4) the responsibility imposed; (5) the amount of money or
the value of the property affected by the controversy or involved in the employment;
(6) the skill and experience called for in the performance of the services; (7) the
professional character and social standing of the attorney; and (8) the results secured,
it being a recognized rule that an attorney may properly charge a much larger fee when
it is contingent than when it is not.4

It should be noted that some of the reasons submitted by petitioners in support of their
fees do not appear in the records of the case. For instance, they claim that in
connection with their legal services to the executrix and to the estate, petitioner
Samuel C. Occeña had been travelling from Davao to Tagbilaran from 1965 to March,
1967, and from Davao to Cebu and Manila from 1963 to March, 1967, and that in fact
he and his family had to stay for almost a year in Dumaguete City. These claims
apparently bear strongly on the labor, time and trouble involved in petitioners' legal
undertaking, and, consequently, should have been subject to a formal judicial inquiry.
Considering, furthermore, that two of the heirs have not given their conformity to
petitioners' motion, the need for a hearing becomes doubly necessary. This is also the
reason why at this stage it would be premature to grant petitioners' prayer for the
release to them of the amount of P30,000.00 as partial payment of their fees.

II

As stated above, petitioners have filed petitions for indirect contempt of court against
intervenor I. V. Binamira charging the latter of having made false averments in this
Court.

We have carefully considered these charges and the answers of intervenor, and, on the
basis of the evidence, We conclude that intervenor I. V. Binamira has deliberately made
false allegations before this Court which tend to impede or obstruct the administration
of justice, to wit:

1. To bolster his claim that the executrix, without approval of the court, loaned
P100,000.00 to the Bohol Land Transportation Company, Inc., intervenor submitted as
Annex 5 of his Answer to Supplemental Petition a so-called "Real Estate Mortgage"
which he made to appear was signed by Atty. Vicente de la Serna and the executrix.
The certification of the Deputy Clerk of Court (Annex A-Contempt) shows that what
intervenor claims to be a duly executed mortgage is in reality only a proposed
mortgage not even signed by the parties.

2. Intervenor, in his Intervenor's Opposition to Petition, also stated that in December,

1965, the executrix, without the court's approval or of the co-executor's consent, but
with petitioners' consent, loaned P100,000.00 to the Bohol Land Transportation
Company, Inc. out of the estate's funds. The record shows that only P50,000.00 was
loaned to the company to protect the investment of the estate therein, and that the
same was granted pursuant to a joint motion signed among others, by intervenor, and
approved by the court.

3. To discredit petitioner Samuel C. Occeña and his wife, the executrix, intervenor
stated in his Intervenor's Opposition to Petition that less than a month after the loan of
P100,000.00 had been granted to the transportation company, petitioner Samuel C.
Occeña was elected president by directors of his own choosing in the Bohol Land
Transportation Company, Inc., insinuating that in effect the executrix loaned to her
husband the said sum of money. The certification of the corporate secretary of the
Bohol Land Transportation Company, Inc. (Annex D-Contempt) states that petitioner
Samuel C. Occeña was not the president of the company at the time, nor did he act as
president or treasurer thereof, and that the president was Atty. Vicente de la Serna.
This last fact is also shown in intervenor's own Annex 5 of his Answer to Supplemental
Petition.

4. In intervenor's Opposition to this petition for certiorari, he stated that contrary to the
executrix's statement in the 1965 income tax return of the estate that an estate
"income of P90,770.05 was distributed among the heirs in 1965, there was in fact no
such distribution of income. The executrix's project of partition (Annex E-Contempt)
shows that there was a distribution of the 1965 income of the estate.

5. To discredit petitioner and the executrix, intervenor alleged in his Intervenor's

Opposition to Petition that petitioners caused to be filed with the court the executrix's
verified inventory which failed to include as assets of the estate certain loans granted to
petitioner Samuel C. Occeña in the sum of P4,000.00 and to the executrix various sums
totalling P6,000.00. The letters written by the late W. C. Ogan to his daughter, the
executrix (Annexes F, G. and H-Contempt), show that the said sums totalling
P10,000.00 were in reality partly given to her as a gift and partly for the payment of
certain furniture and equipment.

6. Intervenor, in Order to further discredit petitioners and the executrix, stated in his
Reply to Executrix's and Opposition to Executrix's Motion for Reconsideration that the
executrix and petitioners refused to pay and deliver to him all that he was entitled to
under the compromise agreement. The receipt dated October 29, 1965, signed by
intervenor himself (Annex I-Contempt), shows that he acknowledged receipt from
petitioner Samuel C. Occeña, lawyer for the executrix, the sum of P141,000.00 "in full
payment of all claims and fees against the Estate, pursuant to the Agreement dated
October 27, 1965."

7. In his Reply to Executrix's Opposition and Opposition to Executrix's Motion for

Reconsideration, intervenor alleged that he signed Atty. Occeña's prepared receipt
without receiving payment, trusting that Atty. Occeña would pay the amount in full, but
later Atty. Occeña withheld Chartered Bank Check No. 55384 for P8,000.00 drawn in
favor of intervenor and P15,000.00 in cash. A receipt signed by intervenor I. V.
Binamira (Annex K-Contempt) shows that he acknowledged receipt of the check in
question in the amount of P8,000-00 "intended for Mrs. Lila Ogan Castillo ... ." Anent
the sum of P15,000.00 in cash, Annex J-Contempt (Reply to the Opposition for
Authority to Annotate Interest, etc. filed by intervenor with the probate court) shows
that intervenor, as movant, himself had alleged that "no check was issued to movant,
but withdrawn amount of P15,000.00 was included in purchasing Manager's check No.
55398 for the Clerk of Court (deposit) for P75,000.00," for the said amount was
voluntarily extended by intervenor as a favor and gesture of goodwill to form part of
the total cash bond of P75,000.00 deposited with the Clerk of Court, as shown by a
receipt signed by Atty. Samuel C. Occeña (Annex K-11-Contempt) which forms part of
the record in the court below.

8. In his intervenor's Comments and Counter-Petition, intervenor denied the truth of

petitioners' claim that intervenor had voluntarily and willingly extended the sum of
P15,000.00 as a favor and gesture of goodwill to form part of the P75,000.00-deposit.
In the Opposition to Motion of Executrix for Reconsideration of Order of February 19,
1966, dated April 16, 1966 (Annex K-2-Contempt), intervenor had, however, admitted
that "out of the goodness of his heart ... in the nature of help," he had "willingly
extended as a favor and gesture of goodwill" the said sum of P15,000.00.

9. To impugn the claim of petitioner Samuel C. Occeña that he stayed in Dumaguete

City for almost one year to attend to the affairs of the estate, intervenor, in his
intervenor's Opposition to Petition, alleged that said petitioner's stay in Dumaguete City
was not to attend to the affairs of the estate, but to enable him to teach in Silliman
University. The certification of the Director of the personnel office of Silliman University,
dated December 4, 1967 (Annex V-Contempt) is, however, to the effect that their
"records do not show that Atty. Samuel C. Occeña was teaching at Silliman University
or employed in any other capacity in 1963, or at any time before or after 1963."

The foregoing are only some of the twenty-one instances cited by petitioners which
clearly show that intervenor had deliberately made false allegations in his pleadings.

We find no rule of law or of ethics which would justify the conduct of a lawyer in any
case, whether civil or criminal, in endeavoring by dishonest means to mislead the court,
even if to do so might work to the advantage of his client. The conduct of the lawyer
before the court and with other lawyers should be characterized by candor and fairness.
It is neither candid nor fair for a lawyer to knowingly make false allegations in a judicial
pleading or to misquote the contents of a document, the testimony of a witness, the
argument of opposing counsel or the contents of a decision. Before his admission to the
practice of law, he took the solemn oath that he will do no falsehood nor consent to the
doing of any in court, nor wittingly or willingly promote or sue any false, groundless or
unlawful suit, and conduct himself as a lawyer with all good fidelity to courts as well as
to his clients. We find that Atty. Binamira, in having deliberately made these false
allegations in his pleadings, has been recreant to his oath.

The charges contained in the counter-petition for indirect contempt of intervenor I. V.

Binamira against petitioners have not been substantiated by evidence, and they must,
therefore, be dismissed.

We note that no further action was taken on the petition for contempt filed by
petitioners against Generoso L. Pacquiao, who executed the affidavit attached to
intervenor's Answer to Supplemental Petition, the contents of which petitioners claim to
be deliberate falsehoods. The said respondent Pacquiao not having been afforded an
opportunity to defend himself against the contempt charge, the charge must be
dismissed.

WHEREFORE, (1) the petition for certiorari is granted, and the court a quo is directed to
hold a hearing to determine how much the total attorney's fees petitioners are entitled
to, and (2) Atty. Isabelo V. Binamira, who appeared as intervenor in this case, is
hereby declared guilty of contempt and sentenced to pay to this Court within ten (10)
days from notice hereof a fine in the sum of Five Hundred Pesos (P500.00). Costs
against intervenor.

Fernando, Barredo, Fernandez and Aquino, JJ., concur.

Footnotes

1 Aldamis v. Judge of the Court of First Instance, 85 Phil., 228; Palileo v.

Mendoza, 70 Phil., 292.

2 Escueta v. Sy Juiliong, 5 Phil., 405; Piliin v. Joson, et al., 41 Phil., 26.

 3 Tambunting de Tengco v. San Jose, etc., et al., 97 Phil., 491. 503.

4 Francisco v. Matias, L-16349, January 31, 1964, 10 SCRA 89,

98, citing Hausserman v. Rahmeyer, 12 Phil., 350; Martinez v. Banogon,
et al., L-15698, April 30, 1963, 7 SCRA 913, 916, citing Delgado v. De la
Rama, 43 Phil., 419.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. 13910 September 17, 1919

SOCIEDAD DE LIZARRAGA HERMANOS, plaintiffs-appellants,

vs.
FELICISIMA ABADA, ET AL., defendants-appellants.

Charles C. Cohn for plaintiff and appellant.

Crossfield and O'Brien for defendants and appellants.

MOIR, J.:

This case is before the court on appeal by plaintiffs from a judgment of the Court of
First Instance of Occidental Negros, Honorable Norberto Romualdez, judge.

For a better understanding of the facts the history of the case is given.

Francisco Caponong died in October, 1906, owing the plaintiffs a sum of money which
was then less than the amount allowed by the commissioners.

His widow, Felicisima Abada, was appointed administratrix of the estate, commissioners
to appraise the estate and to pass on the claims against the estate were duly
appointed, and plaintiffs presented their claim which was allowed by the commissioners
in the sum of P12,783.74. The commissioner's report was dated in February, 1909.
The administratrix leased the hacienda [farm] known as "Coronacion" to Hilario Zayco
for a term of years, but afterwards she married Vicente Alvarez, one of the defendants,
and the lease was transferred to Alvarez by Zayco, October 2, 1908.

On the 11th of April, 1913, nearly seven years after the death of Caponong, the
plaintiffs herein filed a suit in the Court of First Instance of Occidental Negros against
Felicisima Abada personally and as administratrix of the estate of Francisco Caponong,
alleging that Francisco Caponong owed plaintiffs P12,783.74, and that Felicisima Abada
in her own name and as administratrix, had been receiving from the plaintiffs money
and effects from 1908 to 1912 which money and effects were used by the defendant in
"the expense of cultivation and the exploitation of the Hacienda 'Coronacion,' "and that
defendant had delivered to plaintiffs the sugar produced until the last crop which she
refused to deliver to them. And that due to "los contratiempos agricolas y a la poca
produccion de la hacienda[drought and poor crops of the farm],' and after deducting for
the sugar delivered, the account of the defendant showed a balance in favor of plaintiffs
on the 27th of August, 1912, of P62,437.15; that of this amount they were informed
the defendant recognized as due from the estate only "about P14,000" which however
had not been paid; that it had been agreed by Francisco Caponong that the "amounts"
taken should draw interest at the rate of 12 per cent from the date of each, and that in
case it was necessary to bring suit P1,500 would be paid by defendant to plaintiffs for
their expenses and attorney's fees, and they asked for judgment for P62,437.15 with
interest at 12 per cent and P1,500 for attorney's fee.

A copy of the account of the administratrix, dated August 27, 1912, showing the same
balance due plaintiffs, seems to have been filed with that suit.

The defendant's answer in that case (No. 969, Neg. Occi.) admits she owed P8,555.78
as administratrix, and alleges that the balance was due by her personally.

The guardian of the minor children of Francisco Caponong asked permission of the court
to intervene in that suit, and this being granted, he denied the claim under oath, and
alleged that the estate of Francisco Caponong did not owe plaintiffs anything.

On the 25th of August, 1914, the parties, including the guardian of the minors,
presented a motion in court stating that they had made an amicable settlement of the
litigation, and prayed the court to dismiss the action, which was done.

The record shows that the plaintiffs in that suit had a motion pending in the intestate
proceedings of Francisco Caponong, petitioning the court to the same effect as the
complaint in suit No. 969.

The settlement agreed upon was, briefly, that the defendants, including the guardian of
the minor children, "recognized that the deceased Francisco Caponong's estate was
indebted to the plaintiffs, according to a liquidation of the accounts on the 30th of June,
1913, in the sum of P68,611.01, which was to be paid with 10 per cent interest in
seven equal annual installments;" and to secure this debt, the defendants agreed to
give plaintiffs a first mortgage on all the property of Francisco Caponong, except the
growing sugar cane, and on all the property belonging exclusively to Felicisima Abada,
and the defendants agreed to secure judicial approval of the settlement. The
defendants also agreed to mortgage the carabaos then on the hacienda to plaintiffs.
The contract is dated the 27th of April, 1914.

The mortgage of the hacienda was duly executed by Felicisima Abada for herself and as
administratrix, and the guardian of the children and Vicente Alvarez, the husband of
Felicisima Abada, signed the mortgage which is also dated the 27th of April, 1914. The
carabaos were not mortgaged.

The compromise was approved by the court as well as the mortgage.

The mortgage given was not recorded in the registry of property up to time of the
institution of this suit, June 24, 1916.

Coming now to the present action, the plaintiffs allege in the complaint in this suit, the
former suit and its settlement with judicial approval; the amount due thereunder; i.
e., P68,611.01; that defendants had let two installments go by without paying
anything; that the amount due them with accrued interest was P90,383.49; that
besides the property mortgaged, as per Exhibit B, another parcel of land was
mortgaged, and that defendants promised to mortgage the carabaos on the
hacienda 'Coronacion," and that this promise was one of the motives and considerations
including the plaintiffs to accept the compromise agreement, but that defendants
refused to sign the agreement mortgaging the carabaos with the object and intent of
reducing the security of plaintiffs; that defendants were about to transfer their property
not mortgaged, and they prayed for an attachment on property of defendants not to
exceed P20,000 in value, and for judgment for P90, 383.49 with interest, and that if
this amount should not be paid that the mortgaged property be sold, and if not
sufficient to pay the debts, that the property levied on under the attachment be sold.

The court granted the attachment order the 24th of July, 1916, and the provincial
sheriff attached one parcel of land, the growing crops, certain products of the soil, and
various animals.

On the 16th of February, 1917, the plaintiffs filed a motion in court alleging that the
property mortgaged to secure their debt was not sufficient to secure the debt; that
defendants, with the intention of prejudicing the interest of the plaintiffs, were
negligent in the conservation and care of the property, and they asked the court to
appoint a receiver for the property that was mortgaged. The court granted this motion
on the 20th of February, 1917, as to all the property attached, and on the 26th of
February, extended the receivership to all the mortgaged property.

The receiver took charge of the property and the defendants were ousted from the
house they had been occupyingon the premises.

The defendants, Felicisima Abada, administratrix, and Januario Granada, the guardian,
filed an amended answer in which they allege their representative capacity; that the
claim of the plaintiffs against the intestate proceedings of Francisco Caponong had been
allowed in the sum of P12,783.74 by the commissioners; that the property belonged to
the children of the deceased; that the only interest of Felicisima Abada personally was
her usufructuary interest in one-sixth of the property; that all the property was
in custodia legis, and could not lawfully be attached; that the administratrix had not
contracted any other obligation, and that, if any existed, it was the personal debt of her
present husband, Vicente Alvarez; that Exhibits A and B, (the compromise agreement
and the mortgage executed in conformity therewith) made a part of the complaint,
were obtained through fraud and false representation; that the approval of the court
was obtained through fraud and deceit, and was illegal and of no value; that defendants
have never attempted to sell or conceal their property, and prayed the court to declare
Exhibits A and B null and void; and that the attachment was malicious and illegal, and
they presented a counterclaim based on the wrongful issuance, on false affidavits of the
attachment, laying their damages in the sum of P89,960 for which they asked
judgment. And a second counterclaim was presented based on the unwarranted
appointment of a receiver for property already in custody of the court, through the
administratrix and they alleged their damages in this count in the sum of P28,120.

The Honorable Norberto Romualdez, judge, in his decision largely sustained defendants'
claim, and declared that plaintiffs should pay as damages

For improperly causing the appointment of a receiver P 500.00

For the attachment of carabaos, etc 500.00

For damages to the sugar because of the attachment 4,462.50

and the appointment of a receiver

For damages to land by reason of being left to grow 5,000.00

up in bushes

For damages to palay crop 2,800.00

13,262.50

A further sum of P1,000 damages was awarded to Felicisima Abada for having been put
out of her house when the receiver was appointed.

The attachment was dissolved and the receiver discharged, and he was ordered to
return the property to defendants.

Judgment was given for the plaintiffs to recover from defendant administratrix the sum
of P8,555.78 with interest which, added to the principal, brought the amount to
P11,392.99 with 10 per cent interest on that sum till paid.

A personal judgment was also given plaintiffs against the defendants Abada and Alvarez
for P79,970.21.

The plaintiffs' claim against the guardian of the children was dismissed.

From this judgment Felicisima Abada appealed personally and as administratrix alleging
that the trial court should have granted greater damages. The questions presented by
her appeal will be sufficiently treated in the appeal of plaintiffs.
The plaintiffs allege nineteen different errors of the trial court. It seems that all the
questions are involved in errors Nos. 1, 2, 4, 5, 10, 12, 13 and 18, which are as
follows:

1. The court erred in holding that the obligation set forth in Exhibits A and B
should be understood as limited to the sum of P8,555.78, instead of the sum of
P68, 611.01 therein stated.

2. The court erred in reducing the amount of the mortgage, Exhibit B, from
P68,611.01 to P8,555,78.

4. The court erred in finding that just and sufficient grounds did not exist for the
attachment of the properties which are the subject-matter of this action.

5. The court erred in finding that just and sufficient grounds did not exist for the
appointment of a receiver for the properties which are the subject-matter of this
action.

10. The court erred in finding that the defendants, or either or any of them, were
damaged in the sum of P5,000 by reason of injury to the sugar lands which are
the subject-matter of this action.

12. The court erred in declining and refusing to foreclose the mortgages which
are the subject-matter of the present action.

13. The court erred in reducing the indebtedness of the Estate of Francisco
Caponong from P90,383.49 to P11,392.99.

18. The court erred in absolving from the complaint herein the defendant
Januario Granada as guardian of the minors, Juan Buenaventura, Jose, Nicanor
and Carlos Caponong y Abada.

As to the first error. — Exhibit A was the compromise agreement made in action No.
969, Lizarraga Hermanos against Felicisima Abada personally and as administratrix, in
which the guardian of the minor children intervened, as defendant, by permission of the
court. Exhibit B was the mortgage given to secure the amount agreed upon in that
settlement.

The claim of the plaintiffs herein against the estate of Francisco Caponong had been
fixed by the commissioners. The amount so determined was all the estate owed
plaintiffs. The court says in its decision that in approving the settlement of action No.
969, its approval was meant to include only the amount actually due by the estate, and
that the balance of the claim was intended to be approved as against Felicisima Abada
personally.

It is argued that "this is sheer and unequivocal repudiation of a solemn and formal act"
of the court.
The record in case No. 969 is presented as Exhibit C by plaintiffs. In their complaint in
that action (which suit should never have been filed as all the property was in the
custody of the court), plaintiffs allege that their original claim against the estate of
Francisco Caponong was only P12,783.74, and that the balance of the claim was due
from Felicisima Abada as administratrix and personally without stating how much was
owed by her personally and how much was owed by her as administratrix.

Whether the court in approving the compromise intended to hold the defendant
estate liable only for the original debt, and defendant Abada for the balance, is not
material. The language used by the court is very clear and seems to be an outright
approval of the "transaccion" (compromise), and would, so far as the language goes,
leave no room for doubt of the court's approval of the agreement in full and as written.

But could the court approve such an agreement? Could the court authorize a mortgage
of the state?

The law declares that commissioners shall pass upon all claims against the estate. They
had done so in this case. The law fixed the limit of the estate's liability. The court could
not charge it with debts that were never owed by it. The administratrix could only
charge the estate with the reasonable and proper expenses of administration.

The estate owed plaintiffs less than P13,000 when the commissioners passed on their
claim. Part of this has been paid, and there was a balance due plaintiffs of P8,555.78 at
the time of the trial, plus interest. The plaintiffs, after their claim had been presented
and allowed by the commissioners, made advances to the administratrix till their claim
was more than P68,000.

It is urged that the major part of this debt of P68,000 is administration expenses, and
as such is chargeable against the assets of the estate. No reason is given why the
expense of administration should be so great, and the evidence fails to sustain this
position.

The administration expense would be the necessary expenses of handling the property,
of protecting it against destruction or deterioration, and possibly producing a crop, but
if plaintiffs, holding a claim originally for less than P13,000 against the estate, let the
administratrix have money and effects till their claim grow to P68,000 they can not be
permitted to charge this amount as expense of administration. They might be allowed
to charge it against the current revenue from the hacienda or the net proceeds of the
"exploitation of the hacienda" for which it was obtained and used, as plaintiffs allege,
but it cannot relate back to the presenting of their claim to the commissioners, and be a
charge against the inheritance of the heirs, or even a claim to prorate with other
creditors' claims allowed by the commissioners. By expense of administration we
understand to be 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 it and deliver to the heirs.

The court could not approve a settlement saddling upon the estate debts it never owed,
and if it did, its approval would be a nullity.
To give effect to the compromise as written would result in great wrong, and destroy
every chance the minor children had to participate in the inheritance of their father.

The contract was clearly a dead letter, and the approval of the court could not breathe
the breath of life into it.

That the mortgage given at the same time and as a result of the agreement was
without legal warrant is equally clear. No mortgage can be placed by an administrator
on the estate of a descendant, unless it is specifically authorized by statute.

There is no statute in the Philippine Islands authorizing it.

It may be stated as a general proposition, that neither executors, unless

specially authorized by will, nor administrators, have the power to bind the
estate of the deceased by borrowing money. (The American Law of
Administration, Woerner, Vol. 2, sec. 345.)

In the case of Johnson vs. Davidson, the Supreme Court of Illinois (Vol. 162, at page
235) said:

The argument on behalf of appellants seems to proceed upon the supposition

that an administrator may bind the heirs by his mortgage of real estate for the
purpose of raising money with which to pay the debts of the ancestors, and that
a court of equity will sustain the mortgage, or a title derived under it, if it be
shown that the borrowed money was honestly applied to the payment of debts.
No authority is cited in support of this position, and none, we believe, can be
found. (See also Smith vs. Hutchinson, 108 Ill., at p. 668.)

In the case of Black vs. Dressel's Heirs, the Supreme Court of Kansas (Vol. 20, at page
154) said:

. . . That the statute grants no power to an administrator to borrow money upon

a mortgage of the real estate of the decedent, is not controverted. Indeed, such
an act is foreign to the policy and purpose of administration, which aims to close
up, not to continue an estate. . . .

In 151 N. Y. Reports, Duryea vs. Mackey, it is said at p. 207:

The mortgage executed by the temporary administrator in this case which

purported to bind the whole estate, was therefore ineffectual to charge the
interest of the devises in remainder, unless the order of the surrogate
authorizing the mortgage was a lawful exercise of his jurisdiction or unless they
have estopped themselves from questioning its validity. It is very clear that the
order of the surrogate was without jurisdiction.

The learned counsels for appellants in their brief do not cite a single authority for the
placing of a mortgage on an estate in administration, and none has been found. It must
be held that the mortgage was void.
The court should have closed up the estate.

So many courts seem to violate the law on this point that it may serve a useful purpose
to call attention to our statutes on the subject of estates.

Section 743 of the Code of Civil Procedure declares:

The court, at the time of granting letters testamentary or of administration, shall

allow to the executor or administrator a time for disposing of the estate and
paying the debts and legacies of the deceased person, which time shall not, in
the first instance, exceed one year; but the court may, on application of the
executor or administrator, from time to time, as the circumstances of the estate
require, extend the time not exceeding six months at a time, nor so that the
whole time allowed to the original executor or administrator shall exceed three
years.

Section 745 provides that if the executor or administrator dies, the new administrator
appointed shall give the same notice for an extension of time which shall not exceed six
months beyond the time which might have been allowed the first administrator.

While these sections may be considered as only directory, all Courts of First Instance
should exert themselves to close up estates within twelve months from the time they
are presented, and they may refuse to allow any compensation to executors and
administrators who do not actively labor to that end, and they may even adopt harsher
measures.

The second assignment of error is that the court should not have reduced the amount
of the mortgage (Exhibit B) from P68,611.01 to P8,555.78. The court did err, but its
error consisted in not declaring the mortgage void.

The court was without jurisdiction to approve the mortgage in the first place, and its
approval was a nullity. Plaintiff's claim against the estate was P8,555.78 with interest
as added by the court. This claim should be paid pro rata with any other unpaid claims
against the estate.

The other errors of appellant need only brief consideration.

That an attachment should not have been levied on the carabaos in administration is
too plain to need discussion. If they were in the name and possession of the
administratrix, they were in custodia legis, and could not be lawfully attached. The
plaintiffs as creditors of the estate could have petitioned the court to compel the
administratrix to take any steps necessary and proper to protect the interest of all
concerned.

The appointment of a receiver was equally unjustified and improper. The property being
under the court's control, the court should have removed the administratrix, if
necessary, and it could have taken other means to protect the creditors and wind up
the estate.
The plaintiffs assign as error No. 10 that the court should not have allowed the sum of
P5,000 damages for injury to the sugar lands.

The evidence as to this damage is not considered as clear and satisfactory as it should
be.

It seems this claim should have been wholly denied by the trial court, and we think the
judgment in favor of the administratrix and against the plaintiffs should be reduced
from P13,262.50 to P8,262.50 with interest as provided therein. The other damages
allowed by the trial court are so fully sustained by the evidence, it is not necessary to
discuss them.

With the above modification and with a declaration that the mortgage, exhibit B, was
absolutely void, the judgment appealed from is affirmed, with costs against the
appellants. So ordered.

Arellano, C.J., Torres, Johnson, Araullo, Street, Malcolm and Avanceña, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-17175 July 31, 1962

RICARDO M. GUTIERREZ, plaintiff-appellant,

vs.
LUCIA MILAGROS BARRETTO-DATU, Executrix of the Testate Estate of the
deceased MARIA GERARDO VDA. DE BARRETTO, defendant-appellee.

Teofilo Sison and Mariano G. Bustos and Associates for plaintiff-appellant.

Deogracias T. Reyes and Luison and Associates for defendant-appellee.

MAKALINTAL, J.:

Ricardo M. Gutierrez appeals from the orders of Court of First Instance of Rizal (1)
dismissing his complaint against Lucia Milagros Barretto-Datu, as executive of the
estate of the deceased Maria Gerardo Vda. de Barreto, and (2) denying his motion for
reconsideration the dismissal.

The relevant facts alleged by appellant are as follows; In 1940, Maria Gerardo Vda. de
Barretto, owner of hectares of fishpond lands in Pampanga, leased the same to
appellant Gutierrez for a term to expire on May 1, 1947. On November 1, 1941,
pursuant to a decision of Department of Public Works rendered after due investigation
the dikes of the fishponds were opened at several points, resulting in their destruction
and in the loss great quantities of fish inside, to the damage and prejudice of the
lessee.
In 1956, the lessor having died in 1948 and the corresponding testate proceeding to
settle her estate having been opened (Sp. Proc. No. 5002, C.F.I., Manila), Gutierrez
filed a claim therein for two items: first, for the sum of P32,000.00 representing
advance rentals he had to the decedent (the possession of the leased property is
alleged, having been returned to her after the open of the dikes ordered by the
government); and second, the sum of P60,000.00 as damages in the concept of earned
profits, that is, profits which the claimant failed to realize because of the breach of the
lease contract allegedly committed by the lessor.

On June 7, 1957 appellant commenced the instant ordinary civil action in the Court of
First Instance of Rizal (Quezon City branch) against the executrix of the testate for the
recovery of the same amount of P60,000 referred to as the second item claimed in the
administration proceeding. The complaint specifically charges decedent Manila Gerardo
Vda. de Barretto, is lessor, was having violated a warranty in the lease contract again
any damages the lessee might suffer by reason of the claim of the government that
several rivers and creeks of the public domain were included in the fishponds.

In July 1957 appellant amended his claim in the testate proceeding by withdrawing
therefrom the item of P60,000.00, leaving only the one for refund of advance rentals in
the sum of P32,000.00.

After the issues were joined in the present case with the filing of the defendant's
answer, together with a counterclaim, and after two postponements of the trial were
granted, the second of which was in January 1958, the court dismissed the action for
abandonment by both parties in an order dated July 31, 1959. Appellant moved to
reconsider; appellee opposed the motion; and after considerable written argument the
court, on March 7, 1960, denied the motion for reconsideration on the ground that the
claim should have been prosecuted in the testate proceeding and not by ordinary civil
action.

Appellant submits his case on this lone legal question: whether or not his claim for
damages based on unrealized profits is a money claim against the estate of the
deceased Maria Gerardo Vda. de Barretto within the purview of Rule 87, Section 5. This
section states:

SEC. 5. Claims which must be filed under the notice. If not filed, barred;
exception. — All claims for money against the decedent, arising from contract,
express or implied, whether the same be due, not due, or contingent, all claims
for funeral expenses and expenses of the last sickness of the decedent, and
judgment for money against the decedent, must be filed within the time limited
in the notice; otherwise they are barred forever, except that they may be set
forth as counterclaims in any action that the executor or administrator may bring
against the claimants. Where an executor or administrator commences an action,
or prosecutes an action already commenced by the deceased in his lifetime, the
debtor may set forth by answer the claims he has against the decedent, instead
of presenting them independently to the court as herein provided, and mutual
claims may be set off against each other in such action; and if final judgment is
rendered in favor of the defendant, the amount so determined shall be
considered the true balance against the estate, as though the claim had been
 presented directly before the court in the administration proceedings. Claims not
yet due, or contingent, may be approved at their present value.

The word "claims" as used in statutes requiring the presentation of claims 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 and could
have been reduced to simple money judgments; and among these are those founded
upon contract. 21 Am. Jur. 579. The claim in this case is based on contract —
specifically, on a breach thereof. It falls squarely under section 5 of Rule 87 "Upon all
contracts by the decedent broken during his lifetime, even though they were personal
to the decedent in liability, the personal representative is answerable for the breach out
of the assets." 3 Schouler on Wills, Executors and Administrators, 6th Ed., 2395. A
claim for breach of a covenant in a deed of the decedent must be presented under a
statute requiring such presentment of all claims grounded on contract. Id.
2461; Clayton v. Dinwoody, 93 P. 723; James v. Corvin, 51 P. 2nd 689.1

The only actions that may be instituted against the executor or administrator are those
to recover real or personal property from the estate, or to enforce a lien thereon, and
actions to recover damages for an injury to person or property, real or personal. Rule
88, section 1. The instant suit is not one of them.

Appellant invokes Gavin v. Melliza, 84 Phil. 794, in support of his contention that this
action is proper against the executrix. The citation is not in point. The claim therein,
which was filed in the testate proceeding, was based upon a breach of contract
committed by the executrix herself, in dismissing the claimant as administrator of
the hacienda of the deceased. While the contract was with the decedent, its violation
was by the executrix and hence personal to her. Besides, the claim was for indemnity in
the form of a certain quantity of palay every year for the unexpired portion of the term
of the contract. The denial of the claim was affirmed by this Court on the grounds that
it was not a money claim and that it arose after the decedent's demise, placing it
outside the scope of Rule 87, Section 5.

The orders appealed from are affirmed, with costs against appellant.

Bengzon, C.J., Labrador, Concepcion, Barrera, Paredes, Dizon and Regala, JJ., concur.
Padilla, J., took no part.

Footnotes

1Plaintiff's claim arose from a breach of a covenant in the deed. It is very clearly
expressed by the statute that all claims arising on contracts whether due, not
due, or contingent, must be presented. The only exception made by the statute
is that a mortgage or lien "against the property of the estate subject thereto"
may be enforced without first presenting a claim to the executor or administrator
"where all recourse against any other property of the estate is expressly waived
in the complaint." But this was not an action to enforce a lien. It was not one
seeking to have the claim satisfied out of specific property of the estate, or to
subject any particular property of the estate to the satisfaction thereof. Clayton
v. Dinwoody, 93 P. 723.
 The claim for damages for the unexpired portion of the lease is not an
obligation incurred by the administratrix in the course of her
administration of the estate. It arises out of a contractual obligation
incurred by Louis Johnson and is governed by the statute of nonclaim. By
the terms of the lease, he obligated himself, his heirs, executors,
administrators and assigns to pay $4,860 for the premises for a term of
five years, covering the time involved in this action. A claim for damages
for a breach of that contract arises out of that obligation requiring as
prerequisite to a suit thereon, that the claim be served on the
administratrix and filed with the clerk of court. James v. Corvin, 51 P (2d)
689.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-18107 August 30, 1962

MARIA G. AGUAS, FELIX GUARDINO and FRANCISCO SALINAS, plaintiffs-

appellants,
vs.
HERMOGENES LLEMOS, deceased defendant substituted by his representatives,
PERPETUA YERRO-LLEMOS, HERMENEGILDO LLEMOS, FELINO LLEMOS and
AMADO LLEMOS,defendants-appellees.

Jesus M. Aguas for plaintiffs-appellants.

Serafin P. Ramento for defendants-appellees.

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

On 14 March 1960, Francisco Salinas and the spouses Felix Guardino and Maria Aguas
jointly filed an action in the Court of First Instance of Catbalogan, Samar (Civil Case No.
4824), to recover damages from Hermogenes Llemos, averring that the latter had
served them by registered mail with a copy of a petition for a writ of possession, with
notice that the same would be submitted to the said court of Samar on February 23,
1960 at 8: 00 a.m.; that in view of the copy and notice served, plaintiffs proceeded to
the court from their residence in Manila accompanied by their lawyers, only to discover
that no such petition had been filed; and that defendant Llemos maliciously failed to
appear in court, so that plaintiffs' expenditure and trouble turned out to be in vain,
causing them mental anguish and undue embarrassment.

On 1 April 1960, before he could answer the complaint, the defendant died. Upon leave
of court, plaintiffs amended their complaint to include the heirs of the deceased. On 21
July 1960, the heirs filed a motion to dismiss, and by order of 12 August 1960, the
court below dismissed it, on the ground that the legal representative, and not the heirs,
should have been made the party defendant; and that anyway the action being for
recovery of money, testate or intestate proceedings should be initiated and the claim
filed therein (Rec. on Appeal, pp. 26-27).

Motion for reconsideration having been denied, the case was appealed to us on points
of law.
1äwphï1.ñët

Plaintiffs argue with considerable cogency that contrasting the correlated provisions of
the Rules of Court, those concerning claims that are barred if not filed in the estate
settlement proceedings (Rule 87, sec. 5) and those defining actions that survive and
may be prosecuted against the executor or administrator (Rule 88, sec. 1), it is
apparent that actions for damages caused by tortious conduct of a defendant (as in the
case at bar) survive the death of the latter. Under Rule 87, section 5, the actions that
are abated by death are: (1) claims for funeral expenses and those for the last sickness
of the decedent; (2) judgments for money; and (3) "all claims for money against the
decedent, arising from contract express or implied". None of these includes that of the
plaintiffs-appellants; for it is not enough that the claim against the deceased party be
for money, but it must arise from "contract express or implied", and these words (also
used by the Rules in connection with attachments and derived from the common law)
were construed in Leung Ben vs. O'Brien, 38 Phil., 182, 189-194.

to include all purely personal obligations other than those which have their
source in delict or tort.

Upon the other hand, Rule 88, section 1, enumerates actions that survive against a
decedent's executors or administrators, and they are: (1) actions to recover real and
personal property from the estate; (2) actions to enforce a lien thereon; and (3) actions
to recover damages for an injury to person or property. The present suit is one for
damages under the last class, it having been held that "injury to property" is not limited
to injuries to specific property, but extends to other wrongs by which personal estate is
injured or diminished (Baker vs. Crandall, 47 Am. Rep. 126; also 171 A.L.R., 1395). To
maliciously cause a party to incur unnecessary expenses, as charged in this case, is
certainly injurious to that party's property (Javier vs. Araneta, L-4369, Aug. 31, 1953).

Be that as it may, it now appears from a communication from the Court of First
Instance of Samar that the parties have arrived at an amicable settlement of their
differences, and that they have agreed to dismiss this appeal. The settlement has been
approved and embodied in an order of the Court of First Instance.

The case having thus become moot, it becomes unnecessary to resolve the questions
raised therein. This appeal is, therefore, ordered dismissed, without special
pronouncement as to costs.

Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Barrera, Paredes, Dizon,
Regala and Makalintal, JJ., concur.
 United States Court of Appeals,Fifth Circuit.
ESTATE OF Algerine Allen SMITH, Deceased, James Allen Smith,
Executor, Petitioner-Appellee, v. COMMISSIONER OF INTERNAL
REVENUE, Respondent-Appellant.

04-60911. No.
Decided: October 31, 2005
Before DAVIS, JONES and GARZA, Circuit Judges.Harold A. Chamberlain (argued), Michael
Christopher Riddle, Riddle & Brazil, Houston, TX, for Petitioner-Appellee. John A. Dudeck,
Jr., Frank P. Cihlar (argued), Tax Div., Eileen J. O'Connor, Asst. Atty. Gen., U.S. Dept. of
Justice, Robert R. Di Trolio, U.S. Tax Court, Donald L. Korb, Chief Counsel, IRS,
Washington, DC, for CIR.

Based on our conclusion that the Tax Court was without jurisdiction to review the offset, we
vacate its judgment. In granting that motion, the Tax Court concluded that the parties'
Rule 155 calculation and stipulation of overpayment of estate tax included the IRS's claim
for additional unpaid interest which precluded the Commissioner from offsetting the unpaid
interest against the overpayment due to the Estate. The Commissioner of the Internal
Revenue Service appeals the Tax Court's order granting the Estate of Algerine Allen Smith's
Rule 260 Motion.

I.

In February 1998, the Tax Court held that there was a deficiency in estate taxes in the
amount of $564,429, but no accuracy-related penalty. The Estate filed a petition in Tax
Court seeking redetermination of the deficiency. In 1994, the Commissioner issued a
notice of deficiency of $663,785, and an accuracy-related penalty of $132,785. The Estate
filed its initial tax return on July 12, 1991, and included a payment of $60,164 to satisfy the
tax due reported on the return. The decedent, Algerine Allen Smith, died on November 16,
1990.

In May 1998, the Commissioner assessed the $564,429 estate tax deficiency, plus
underpayment interest of $410,848. The Estate then remitted a payment of $646,325 in
March 1998 to cover the Commissioner's estimate of tax and interest due. 1 The
Commissioner applied $501,377 of the Estate's March 1998 payment and an income tax
overpayment credit of $63,052 from the Estate's 1992 return to satisfy the estate tax
deficiency. 2 The balance of the March 1998 payment, $144,947 ($646,325 less $501,377),
was applied to the assessed interest.

In January 2002, after the remand, the parties entered a stipulated computation under Tax
Court Rule 155. Estate of Smith v. Commissioner, 82 T.C.M. (CCH) 909, 2001 WL 1505917
(2001). In November 2001, the Tax Court issued its opinion on remand. Estate of Smith
v. Commissioner, 198 F.3d 515 (5th Cir.1999). In December 1999, this court reversed the
Tax Court's judgment and remanded for further proceedings. Litigation continued
throughout this period. 3

Although the parties agreed on the amount of Total Federal Interest Deduction of $209,943
on page six of the computation, the interest assessment was not adjusted and the interest
column on Form 3623 Statement of Account contains only the original assessment and
March 1998 payment “For Information Only.” Form 3623, Statement of Account, on page
seven, presents a summary of tax assessments and payments resulting in the computed
overpayment of $238,847. This is the agreed amount of underpayment interest due by the
Estate that was allowed to be deducted in the computation of the stipulated estate tax
liability. Pages four, five and six are computations leading to the determination of the
“Total Federal Interest Deduction” of $209,943. Pages two and three detail the
recomputed estate tax and adjustments. The attached computation consists of seven
pages starting with a summary Computation Statement on Remand, reflecting the agreed
tax liability and overpayment, with a statement that the details of the computation are set
forth on the attached pages 2 through 7. Pursuant to the agreement, the Commissioner
and the Estate agreed to an estate tax liability of $385,747 and an overpayment of
$238,847. The Respondent's Computation for Entry of Decision, which documents the
parties' stipulation under Rule 155, presents the parties' agreement that the attached
computation is in accordance with the opinion of the Tax Court, but without prejudice to the
Commissioner to contest the correctness of that decision.

A summary of the tax overpayment computation is set forth below:

Estate of Smith v. Commissioner, 54 Fed.Appx. 413 (5th Cir.2002). The Estate appealed to
this court, which affirmed. In accordance with this computation, on January 24, 2002, the
Tax Court entered its judgment that the Estate had an “overpayment in estate tax” of
$238,847.

As a result, the Estate's account reflected a balance of $85,336 of assessed, but unpaid
interest. The Commissioner also abated $180,564 in underpayment interest on the Estate's
account. It made a tax abatement of $238,847 to the Estate's account so the account
properly reflected the agreed overpayment of tax. In May 2002, the Commissioner entered
adjustments to its own accounts to reflect the Tax Court's judgment.

The difference, $64,996 represents the balance of interest that was allowed to be deducted
by the Estate in determining the final agreed estate tax liability and overpayment, but had
not been paid as summarized below. The net result was that the Estate received $173,851
of the $238,847 overpayment. To correct the error, the Commissioner abated and
refunded $20,341 of the underpayment interest. Later in May 2002, the Commissioner
discovered a timing error in applying the 1992 income tax overpayment to the estate tax
liability which resulted in an error in the calculation of interest to the Estate. The same
month the Commissioner refunded $153,510 to the Estate, crediting the difference between
the refund and the overpayment of $85,336 against the assessed but unpaid underpayment
interest owed by the Estate.

Estate of Smith v. Commissioner, 123 T.C. 15, 2004 WL 1559205 (2004). The full Tax
Court participated in the decision, with thirteen holding in favor of the Estate and five
dissenting. In July 2004, the Tax Court granted the motion and ordered the Commissioner
to refund the full amount of the taxpayer's overpayment plus interest, less any amounts
that had previously been refunded. The Commissioner opposed the motion. The Estate
filed a Motion for Proceeding to Enforce Overpayment Decision under IRC 6512(b)(1) and
Tax Court rule 260, seeking an additional $85,336 plus interest, from the Commissioner.

Judge Laro's concurring opinion contended that the Tax Court was not powerless to change
a final decision, but that any claim for additional relief must meet the requirements of
Fed.R.Civ.P. 60(b). Because neither of these exceptions was present here, the Tax Court
held that it could not alter the judgment and the litigation had come to an end (even if it
resulted in a windfall for the Estate). The majority opinion rested on the premise that the
overpayment determination in the stipulation and judgment included interest due, and
absent evidence of fraud on the court or a clerical error discovered after the decision had
become final, this decision could not be altered. The majority opinion begins with a holding
that an “overpayment” of tax includes any underpayment interest due thereon. 4

Additionally, Judge Goeke contended that the Tax Court lacked jurisdiction to consider the
Estate's challenge to the Commissioner's crediting of the unpaid interest against the agreed
overpayment of tax. This dissent agreed with the Commissioner that the Rule 155
computation did not take the past interest into account, and thus construed the stipulation
as silent on the question of interest. Judge Goeke's dissent took issue with the majority's
interpretation of Tax Court Rule 155 and the Tax Court's jurisdiction. 5

The Commissioner now appeals to this court. The Tax Court denied this motion. Following
the Tax Court's opinion, the Commissioner, acting on the cue offered by Judge Laro's
concurrence, filed a motion for leave to file a motion to vacate the January 24, 2002
decision under Fed.R.Civ.P. 60(b)(6). 6

II.

Treaty Pines Invs. P'ship v. Commissioner, 967 F.2d 206, 210 (5th Cir.1992). Jurisdictional
questions are questions of law which are reviewed de novo. We must first consider the
Commissioner's argument that the Tax Court was without jurisdiction to review the
Commissioner's offset of unpaid interest against the previously determined overpayment of
tax.

Commissioner v. McCoy, 484 U.S. 3, 7, 108 S.Ct. 217, 98 L.Ed.2d 2 (1987). The Tax Court
may exercise jurisdiction only to the extent that jurisdiction has been conferred upon it by
Congress. 7442 (“The Tax Court ․ shall have such jurisdiction that is conferred on ․ [it] by
this title ․”). See 26 U.S.C. (I.R.C.) § The Tax Court is an Article I court of limited
jurisdiction.

6211, 6213;  Wright, Miller 26 U.S.C. §§ The Tax Court originally acquired jurisdiction over
this case when the Estate appealed the notice of deficiency asserted by the Commissioner.
To determine whether the Tax Court had jurisdiction in this situation it is helpful to review
the bases of the Tax Court's jurisdiction throughout this case. & Cooper, Federal Practice
& 6512(b)(1). 26 U.S.C. § When that judgment of the Tax Court became final, the
Commissioner was required to credit or refund that amount to the Estate. The Tax Court
did so when it approved and entered judgment on the Rule 155 stipulation of the parties
that the overpayment of tax in this case was $238,847. 6512(b). 26 U.S.C. § When the
Tax Court found that there was a deficiency but that the taxpayer had made an
overpayment of tax, the Tax Court had jurisdiction to determine the amount of the
overpayment. 4102. Procedure:  Jurisdiction 2d §

6512(b)(4) is a jurisdictional bar to the Tax Court's reviewing the merits of the
Commissioner's assessment of that liability.) 6512(b)(4);  see also Savage v.
Commissioner, 112 T.C. 46, 1999 WL 71571 (1999) (holding that, after the Commissioner
has offset an overpayment against some other tax liability, § 26 U.S.C. § 6512(b)(4), which
provides that “The Tax Court shall have no jurisdiction under this subsection to restrain or
review any credit or reduction made by the Secretary under section 6402.” If the
Commissioner is correct, the Tax Court has no jurisdiction to review that offset under 26
U.S.C. § 6402(a). 26 U.S.C. § This section allows the Commissioner to credit the amount
of an overpayment against “any liability in respect of an internal revenue tax” and to refund
only the balance remaining, if any, after such crediting. The Commissioner argues that
this practice is specifically allowed under Section 6402(a). The Commissioner argues that it
complied with the judgment by crediting a portion of the overpayment towards the assessed
unpaid interest expense and refunding the remainder.

That section reads, in pertinent part, 6512(b)(2). Accordingly, it held that it had
jurisdiction to hear and adjudicate the Estate's motion under I.R.C. § In its view, the
Commissioner had no right to offset interest already taken into account and incorporated in
its judgment because the offset had the effect of decreasing the refund due the Estate
under the Tax Court judgment. The Tax Court held that overpayment judgments
necessarily include both interest and tax due by the Estate.

Jurisdiction to enforce.-If, after 120 days after a decision of the Tax Court has become final,
the Secretary has failed to refund the overpayment determined by the Tax Court, together
with the interest thereon as provided in subchapter B of chapter 67, then the Tax Court,
upon motion by the taxpayer, shall have jurisdiction to order the refund of such
overpayment and interest. (2)

Based on our review of the above provisions and other provisions relating to the Tax
Court's jurisdiction, we conclude that the Tax Court erred in holding that an overpayment of
tax always includes any underpayment interest due thereon. The Commissioner's and the
Tax Court's differing views on jurisdiction are a product of their differing views regarding
whether an overpayment judgment covers only overpayment of the estate tax or whether it
resolves a taxpayer's total overpayment of both tax and underpayment interest.

As stated by Judge Goeke, 7481(c)(3). 26 U.S.C. § If the Tax Court determines that
there has been an overpayment of interest or the Commissioner has made an
underpayment of interest, “that determination shall be treated under section 6512(b)(1) as
a determination of an overpayment of tax” which order is then reviewable in the same
manner as a decision of the Tax Court. 7481(c)(1) and(2)(B). 26 U.S.C. § Section 7481 of
the Internal Revenue Code allows the Tax Court to determine any interest overpayment or
underpayment after the Tax Court has determined that there is an overpayment of tax
pursuant to section 6512(b). Any issues related to overpayment or underpayment of
interest can be raised in a subsequent proceeding. As pointed out by Judge Goeke's
dissent, the statutory scheme related to review of taxpayer overpayments “is intended to
permit the offset of overpayments with interest liabilities even arising in the same statutory
year.”

This congressional action would have been unnecessary if overpayment decisions included
interest liability. In adding interest disputes to this Court's jurisdiction, Congress deemed it
necessary to include section 6512(b) determinations and to provide that our interest
determinations would be reviewable similar to our “overpayment of tax” determinations. It
is telling that Congress did not simply say “overpayment.” would be unnecessary if the
adopted opinion were correct, and the reference to the term “overpayment of tax” in section
7481(c)(3) is inconsistent with the whole rationale of the report and points out the inherent
ambiguity in the term “overpayment.” Section 7481(c)(2)(B)

In other words, the statutes specifically contemplate that the Tax Court can make a final
determination of a tax overpayment without incorporating a final determination of interest
due, because procedures are in place to consider, sequentially if necessary, any
overpayment or underpayment of interest related to the original tax deficiency under
section 7481. 123 T.C. 15, 31, 2004 WL 1559205 (2004).

6512(b)(2). 26 U.S.C. § In that circumstance, the Commission would have “failed to

refund the overpayment determined by the Tax Court” and the court would have jurisdiction
“to order the refund of such overpayment and interest.” If interest was already
incorporated into the judgment and the Commissioner offset the interest liability against the
refund, the Estate would have received less than the overpayment due to it under the
court's judgment. 6512(b)(2) would be correct. If that had occurred in this case, the Tax
Court's view of its jurisdiction under 26 U.S.C. § In Estate of Baumgardner v.
Commissioner, 85 T.C. 445, 1985 WL 15391 (1985), the Tax Court held that, at least when
interest has been assessed and paid, it has jurisdiction to determine an overpayment of
interest as part of its jurisdiction to determine an overpayment of tax on which the interest
was paid. It is true however that the Tax Court can determine overpayment interest as
part of its jurisdiction to determine an overpayment of tax, at least in some circumstances.
The above outlined statutes indicate that the Tax Court erred in its initial holding in this
case that an overpayment determination necessarily decides any underpayment interest
due thereon. 7

Also, as set forth above, the overpayment computation incorporated into the stipulation
and judgment dealt only with tax assessments, abatements and payments allocated to the
tax liability, not interest. The interest computations in the stipulation were clearly marked
“For Information Only” and did not reflect the final interest deduction allowed. Although
the parties were in possession of information that would have allowed the interest
underpayment to be decided, i.e., the interest expense deduction allowed and interest
payments made, the issue was not in fact incorporated in the stipulation and judgment.
Based on our review of the record however, it is clear that the overpayment decision in this
case did not decide the question of underpayment interest.

6512(b)(4). Similarly, in this situation, the Tax Court's actions constitute a review of the
Commissioner's offset, which the Tax Court specifically lacks jurisdiction to do under §
Because the Tax Court had not decided the Estate's liability for underpayment interest in its
overpayment determination, its jurisdiction to enforce that determination did not include
ordering the Commissioner not to offset the refund against that liability. 6402 to offset the
unpaid interest against the overpayment of tax. The Commissioner properly exercised his
authority under § 6512(b)(2) by ordering the Commissioner to refund the full amount of the
overpayment. In this case, where the record reflects that the Estate's liability for
underpayment interest was not decided in determining the taxpayer's overpayment, we
conclude that the Tax Court exceeded its jurisdiction under §

III.

For the foregoing reasons, the judgment of the Tax Court is

VACATED.

FOOTNOTES

1 It accrues from the due date of the return until the date paid. “Underpayment interest” is
interest the IRS charges taxpayers who fail to pay the correct amount of tax on the date
due. .

2 These arguments are without merit as a different allocation simply changes the balance of
over and underpayments between interest and tax, but not the net amount due to the
Estate. The $501,377 applied to the tax deficiency was the balance due on the $564,429
deficiency after applying the overpayment credit of $63,052.The Estate makes arguments
that seem to suggest that the interest liability disputed in this case arose merely as a result
of the Commissioner's bookkeeping allocations of payments between tax and interest. .
3 Where the Court has filed or stated its opinion determining the issues in a case, it may
withhold entry of its decision for the purpose of permitting the parties to submit
computations pursuant to the Court's determination of the issues, showing the correct
amount of the deficiency, li Agreed Computations. Rule 155 reads, in relevant part,(a) .
The Court will then enter its decision.T.C.R. 155(a). In the case of an overpayment, the
computation shall also include the amount and date of each payment made by the
petitioner. If the parties are in agreement as to the amount of the deficiency or
overpayment to be entered as the decision pursuant to the findings and conclusions of the
Court, then they, or either of them, shall file promptly with the Court an original and two
copies of a computation showing the amount of the deficiency, liability, or overpayment and
that there is no disagreement that the figures shown are in accordance with the findings
and conclusions of the Court. ability, or overpayment to be entered as the decision.

4Judge Thornton also wrote a concurring opinion in which he noted that the decision should
not be construed as resolving this issue with respect to unassessed underpayment interest.
.

5 Judge Holmes opined that the Estate was improperly trying to avoid the consequences of
its acquiescence in the Rule 155 calculation which did not resolve the question of interest
and thus placed no limitation on the Commissioner's ability to apply the overpayment to
unpaid interest of the Estate. Judge Holmes' dissent agreed with the majority that the Tax
Court had jurisdiction but disagreed with the result. .

6 The cases were consolidated for purposes of this appeal. The Tax Court's decision on the
Commissioner's Rule 60 Motion was appealed separately in Case No. 04-61176. The Tax
Court's decision on the merits was appealed in Case No. 04-60911. .

7 Our opinion does not conflict with that holding. 6512(b)(4) inapplicable “where [that
court's] final decision in the same case precludes the existence of tax liabilities to which the
Commissioner attempts to apply the overpayment.” The Tax Court held § 6512(b)(4)
would not remove the Tax Court's jurisdiction. We also note that in that circumstance, §
.

W. EUGENE DAVIS, Circuit Judge:

THIRD DIVISION
 [G.R. No. 107135. February 23, 1999]

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs. THE COURT OF APPEALS CENTRAL VEGETABLE
MANUFACTURING CO., INC., and THE COURT OF TAX
APPEALS, respondents.

DECISION
PURISIMA, J.:

Before the Court is a Petition for Review on Certiorari from the judgment
of the Court of Appeals affirming in toto the decision of the Court of Tax
Appeals which required the Commissioner of Internal Revenue to credit the
sales taxes paid by Central Vegetable Oil Manufacturing Co., Inc.
(CENVOCO) on containers and packaging materials of its milled products,
against the deficiency miller's tax due thereon for the year 1986.
As culled in the decision of the Court of Tax Appeals, the undisputed
facts are, as follows:

"Petitioner (private respondent CENVOCO herein) is a manufacturer

of edible and coconut/coprameal cake and such other coconut
related oil subject to the miller's tax of 3%. Petitioner also
manufactures lard, detergent and laundry soap subject to the sales
tax of 10%.

In 1986, petitioner purchased a specified number of containers and

packaging materials for its edible oil from its suppliers and paid the
sales tax due thereon.

After an investigation conducted by respondent's Revenue

Examiner, Assessment Notice No. FAS-B-86-88-001661-001664
dated April 22, 1988 was issued against petitioner for deficiency
miller's tax in the total amount of P1,575,514.70 x x x .

On June 29, 1988, petitioner filed with respondent a letter dated

June 27, 1988 requesting for reconsideration of the above
deficiency miller's tax assessments, contending that the final
provision of Section 168 of the Tax Code does not apply to sales tax
paid on containers and packaging materials, hence, the amount paid
therefor should have been credited against the miller's tax assessed
against it. Again, thru letter dated September 28, 1988, petitioner
reiterated its request for reconsideration.

On November 17, 1988, respondent wrote CENVOCO, the full text of

which letter reads

November 17, 1988

Central Vegetable Oil

Manufacturing Co. Inc.
P.O. Box 2816
Manila
Attention: Mr. James Chua
President

Gentlemen:

We have received your letter of September 28, 1988, relative to our

assessment against your company in the amount of P1,575,514.75,
as deficiency miller's tax for the year 1986.

Section 168 of the Tax Code provides that sales, miller's or excise
taxes paid on raw materials or supplies used in the milling process
shall not be allowed against the miller's tax due. You contend that
since packaging materials are not used in the milling process then,
the sales taxes paid thereon should be allowed as a credit against
the miller's tax due because they do not fall within the scope of the
prohibition.

It is our position, however, that since the law specifically does not
allow taxes paid on the raw materials or supplies used in the milling
process as a credit against the miller's tax due, with more reason
should the sales taxes paid on materials not used in the milling
process be allowed as a credit against the miller's tax due. There is
no provision of law which allows such a credit-to-be made.

In view of the above, we are reiterating the assessment referred to

above. We request that you make payment immediately so that this
case may be considered closed and terminated.
 Very truly yours,
(SGD) EUFRACIO D. SANTOS
Deputy Commissioner

(CA Decision, pp.31-33 Rollo)

Dissatisfied with the adverse action taken by the BIR, CENVOCO filed a
petition for review with the Court of Tax Appeals, which came out with a
decision, dated December 3, 1990, in favor of CENVOCO, disposing, thus:

"WHEREFORE, in view of the foregoing, petitioner Central Vegetable

Oil Manufacturing Co., Inc., is not liable for deficiency miller's tax
for the year 1986 in the amount of P1,575,514.70.

No pronouncement as to costs.

SO ORDERED." (Rollo, p. 53)

Appealed to the Court of Appeals, the said decision was affirmed in

toto. (Rollo, p. 38)
The Court of Appeals adopted the reasons cited and ratiocination by the
Court of Tax Appeals for allowing the sales tax paid by CENVOCO on the
containers and packaging materials of its millled products to be credited
against the miller's tax due thereon, viz -

"The main issue in this case is whether or not respondent CENVOCO

is liable for deficiency miller's tax for the year 1986 in the amount
of P1,575,514.70. This in turn hinges on whether or not containers
and packaging materials are raw materials used in the milling
process within the contemplation of the final proviso of Section 168
of the National Internal Revenue Code, which reads:

'Provided, finally, that credit for any sales, miller's or excise taxes
paid on raw materials or supplies used in the milling process shall
not be allowed against the miller's tax due, except in the case of a
proprietor or operator of a refined sugar factory as provided
hereunder.'

xxx xxx xxx

"xxx We agree with respondent Court that containers and packages
cannot be considered "raw materials" utilized in the milling
process. In arriving at the conclusion, respondent Court quoted with
approval the reasons cited by CENVOCO, as follows:

'FIRST; The raw materials used by Cenvoco in manufacturing edible

oil are copra and/or coconut oil. In other words, the term "used" in
the final proviso of Section 168 of the NIRC refers or is strictly
confined to "raw materials" or supplies fed, supplied or put into the
apparatus, equipment, machinery or its adjuncts that cause or
execute the milling process. On the other hand, the containers, such
as tin cans, and/or packages are not used or fed into the milling
machinery nor were ever intended for conversion to form part of the
finished product, i.e., refined coconut/edible oil. Consequently, it
would be absurd to say that said containers and packages are "used
in the milling process", for the process involves "grinding, crushing,
stamping, cutting, shaping or polishing". (See THE DICTIONARY, by
TIME, COPYRIGHT 1974, p. 444) x x x

'SECOND; Petitioner's interpretation of the term raw materials is

contrary to law and jurisprudence. Thus, raw materials as used in
the definition of " manufacture", denotes materials from which final
product is made (Black's Law Dictionary, 4th ed. citing State
vs. Hennessy Co., 71 Mont. 301, 230, p. 64, 65). And consistent
with said definition, Revenue Regulations Nos. 2-86 and 11-86
[effective January 1, 1986 and August 1, 1986, respectively] which
govern the filing of quarterly percentage tax returns and payment
thereof under the provisions, inter alia, of Section 168 of the NIRC,
define raw materials or material, to wit:

Any article which when used in the MANUFACTURE of another article

becomes a homogenous part thereof, such that it can no longer be
identified in its original state nor may be removed therefrom
without destroying or rendering useless the finished article to which
it has been merged, mixed or dissolved. x x x'

"Tested in the light of the foregoing statutory definition, it is evident

that containers and packages used by Cenvoco are not 'raw
materials' and do not fall within the purview of the final proviso of
Section 168 of the NIRC. x x x As a coup de grace, it is pertinent to
note the case of Caltex (Phils.) Inc. vs. Manila Port Service (17
SCRA 1075) where the Supreme Court aptly defined containers
and/or packages.

'x x x a package or a bundle made up for transportation; a packet;

a bale; a parcel; or that in which anything is packed: box, case,
barrel, crate, etc. in which goods are packed: a
container.' (Underscoring Ours)

"The definition is an emphatic rejection of petitioner's construction

that Cenvoco's containers and packages are raw materials used in
the milling process. x x x

"xxx Moreover, Section 168 of the Revenue Code expressly limits

the articles subject to percentage tax (miller's tax) to: 'rope, sugar,
coconut oil, palm oil, cassava flour or starch, desiccated coconuts,
manufactured, processed or milled by them, including the by-
product of the raw materials, from which said articles are produced,
processed or manufactured'. x x x "

(CA Decision, Rollo pp. 34-36)

Hence, the petition under consideration, posing the issue:

WHETHER OR NOT THE SALES TAX PAID BY CENVOCO WHEN IT

PURCHASED CONTAINERS AND PACKAGING MATERIALS FOR ITS
MILLED PRODUCTS CAN BE CREDITED AGAINST THE DEFICIENCY
MILLER'S TAX DUE THEREON.

Resolution of the issue posited by the petitioner hinges on the proper

application of Section 168 of the then applicable National Internal Revenue
Code, particularly the last proviso of said section, which reads:

"Sec. 168. Percentage tax upon proprietors or operators of rope

factories, sugar centrals and mills, coconut oil mills, palm oil mills,
casava mills and desiccated coconut factories. Proprietors or
operators of rope factories, sugar centrals and mills, coconut oil
mills, palm oil mills, cassava mills, and desiccated coconut factories,
shall pay a tax equivalent to three (3) percent of the gross value of
money of all the rope, sugar, coconut, oil, palm oil, cassava flour or
starch, dessiccated coconut, manufactured, processed or milled by
them, including the by-product of the raw materials, from which
said articles are produced, processed or manufactured, such tax to
be based on the actual selling price or market value of these articles
at the time they leave the factory or mill warehouse: Provided,
however, that this tax shall not apply to rope, coconut oil, palm oil
and the by-product of copra from which it is produced or
manufactured, and dessicated coconuts, if such rope, coconut oil,
palm oil, copra by-products and dessicated coconuts, shall be
removed for exportation by the proprietor of operator or the factory
or mill himself, and are actually exported without returning to the
Philippines, whether in their original state or as an ingredient or part
of any manufactured article or product: Provided further, That
where the planter or the owner of the raw materials is the exporter
of the aforementioned milled or manufactured products, he shall be
entitled to a tax credit of the miller's taxes withheld by the
proprietor or operator of the factory or mill, corresponding to the
quantity exported, which may be used against any internal revenue
tax directly due from him: and Provided, finally, That credit for any
sales, miller's or excise taxes paid on raw materials or supplies used
in the milling process shall not be allowed against the miller's tax
due, except in the case of a proprietor or operator of a refined sugar
factory as provided hereunder." (underscoring supplied)

Notably, the law relied upon by the BIR Commissioner as the basis for
not allowing Cenvoco's tax credit is just a proviso of Section 168 of the old
Tax Code. The restriction in the said proviso, however, is limited only to
sales, miller's or excise taxes paid "on raw materials used in the milling
process".
Under the rules of statutory construction, exceptions, as a general rule,
should be strictly but reasonably construed. They extend only so far as their
language fairly warrants, and all doubts should be resolved in favor of the
general provisions rather than the exception. Where a general rule is
established by statute with exceptions, the court will not curtail the former
nor add to the latter by implication. x x x (Samson vs. Court of Appeals, 145
SCRA 659 [1986]).
The exception provided for in Section 168 of the old Tax Code should
thus be strictly construed. Conformably, the sales, miller's and excise taxes
paid on all other materials (except on raw materials used in the milling
process), such as the sales taxes paid on containers and packaging materials
of the milled products under consideration, may be credited against the
miller's tax due therefor.
It is a basic rule of interpretation that words and phrases used in the
statute, in the absence of a clear legislative intent to the contrary, should be
given their plain, ordinary and common usage or meaning. (Mustang Lumber
Inc. v. CA, 257 SCRA 430 [1996] citing Ruben E. Agpalo, Statutory
Construction, second ed. [1990], 131).
From the disquisition and rationalization aforequoted, containers and
packaging materials are certainly not raw materials. Cans and tetrakpaks are
not used in the manufacture of Cenvoco's finished products which are
coconut, edible oil or coprameal cake. Such finished products are packed in
cans and tetrapaks.
Petitioner laments the pronouncement by the Court of Appeals that
Deputy Commissioner Eufracio Santos' 1988 ruling may not reverse
Commissioner Ruben Ancheta's favorable ruling on a similar claim of
CENVOCO of October, 1984, which reads in part:

"x x x This refers to your letter dated September 5, 1984 requesting

that the 10% sales tax paid on container cans purchased by you, be
credited against the 2% (now 3%) miller's tax due on the refined
coconut edible oil.

It is represented that you process copra and/or coconut oil and sell
the refined edible oil in cans; that said cans are purchased from can
manufacturers who in turn bill to you the price of the cans and the
10% tax paid thereon which are separately shown on the invoice;
and that the cost of the cans, including the 2% millier's tax is
computed.

In reply, I have the honor to inform you that your request is hereby
granted. x x x (Pacific Oxygen & Acetylene Co. vs. Commissioner,
GR No. L-17708, April 30, 1965)." (Rollo p. 36)

According to petitioner, to hold, as what the Court of Appeals did, that a

reversal of the aforesaid ruling would be violative of the rule on non-
retroactivity of rulings of tax officials when prejudicial to the taxpayer
(Section 278 of the old Tax Code) would, in effect, create a perpetual
exemption in favor of CENVOCO although there may be subsequent changes
in circumstances warranting a reversal.
 This Court is mindful of the well-entrenched principle that the
government is never estopped from collecting taxes because of mistakes or
errors on the part of its agents, but this rule admits of exceptions in the
interest of justice and fairplay. (ABS CBN Broadcasting Corp. vs. Court of
Tax Appeals, 108 SCRA 151 [1981]) More so in the present case, where we
discern no error in allowing the sales taxes paid by CENVOCO on the
containers and packages of its milled products, to be credited against the
deficiency miller's tax due thereon, for a proper application of the law.
It bears stressing 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. (The
Province of Bulacan, et. al, vs. Hon. CA, et. al., GR No. 126232, November
27, 1998; Republic vs. IAC, 196 SCRA 335[1991]; CIR vs. Firemen's Fund
Ins. Co., 148 SCRA 315 (1987); CIR vs. CA, 204 SCRA 182 [1991])
Then, too, it has been the long standing policy and practice of this Court
to respect conclusions arrived at by quasi-judicial agencies, especially the
Court of Tax Appeals which, by the nature of its functions, is dedicated
exclusively to the study and consideration of tax problems, and which has
thus developed an expertise on the subject, unless an abuse or improvident
exercise of its authority is shown.Finding no such abuse or improvident
exercise of authority or discretion under the premises, the decision of the
Court of Appeals, affirming that of the Court of Tax Appeals, should be
upheld. (Commissioner of Internal Revenue vs. Court of Appeals, 204 SCRA
189 [1991])
WHEREFORE, the petition is hereby DISMISSED and the decision of the
Court of Appeals AFFIRMED. No pronouncement as to costs.
SO ORDERED.
Romero (Chairman), Panganiban, and Gonzaga-Reyes, JJ., concur.
Vitug, J., on official leave.
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-69344 April 26, 1991

REPUBLIC OF THE PHILIPPINES, petitioner,

vs.
INTERMEDIATE APPELLATE COURT and SPOUSES ANTONIO and CLARA
PASTOR, respondents.

Roberto L. Bautista for private respondents.

GRIÑO-AQUINO, J.:

The legal issue presented in this petition for review is whether or not the tax amnesty
payments made by the private respondents on October 23, 1973 bar an action for
recovery of deficiency income taxes under P.D.'s Nos. 23, 213 and 370.

On April 15, 1980, the Republic of the Philippines, through the Bureau of Internal
Revenue, commenced an action in the Court of First Instance (now Regional Trial Court)
of Manila, Branch XVI, to collect from the spouses Antonio Pastor and Clara Reyes-
Pastor deficiency income taxes for the years 1955 to 1959 in the amount of P17,117.08
with a 5% surcharge and 1% monthly interest, and costs.
The Pastors filed a motion to dismiss the complaint, but the motion was denied. On 1âwphi1

August 2, 1975, they filed an answer admitting there was an assessment against them
of P17,117.08 for income tax deficiency but denying liability therefor. They contended
that they had availed of the tax amnesty under P.D.'s Nos. 23, 213 and 370 and had
paid the corresponding amnesty taxes amounting to P10,400 or 10% of their reported
untaxed income under P.D. 23, P2,951.20 or 20% of the reported untaxed income
under P.D. 213, and a final payment on October 26, 1973 under P.D. 370 evidenced by
the Government's Official Receipt No. 1052388. Consequently, the Government is in
estoppel to demand and compel further payment of income taxes by them.

The parties agreed that there were no issues of fact to be litigated, hence, the case was
submitted for decision upon the pleadings and memoranda on the lone legal question
of: whether or not the payment of deficiency income tax under the tax amnesty, P.D.
23, and its acceptance by the Government operated to divest the Government of the
right to further recover from the taxpayer, even if there was an existing assessment
against the latter at the time he paid the amnesty tax.

It is not disputed that as a result of an investigation made by the Bureau of Internal

Revenue in 1963, it was found that the private respondents owed the Government
P1,283,621.63 as income taxes for the years 1955 to 1959, inclusive of the 50%
surcharge and 1% monthly interest. The defendants protested against the assessment.
A reinvestigation was conducted resulting in the drastic reduction of the assessment to
only P17,117.08.

It appears that on April 27, 1978, the private respondents offered to pay the Bureau of
Internal Revenue the sum of P5,000 by way of compromise settlement of their income
tax deficiency for the questioned years, but Assistant Commissioner Bernardo Carpio, in
a letter addressed to the Pastor spouses, rejected the offer stating that there was no
legal or factual justification for accepting it. The Government filed the action against the
spouses in 1980, ten (10) years after the assessment of the income tax deficiency was
made.

On a motion for judgment on the pleadings filed by the Government, which the spouses
did not oppose, the trial court rendered a decision on February 28, 1980, holding that
the defendants spouses had settled their income tax deficiency for the years 1955 to
1959, not under P.D. 23 or P.D. 370, but under P.D. 213, as shown in the Amnesty
Income Tax Returns' Summary Statement and the tax Payment Acceptance Order for
P2,951.20 with its corresponding official receipt, which returns also contain the very
assessment for the questioned years. By accepting the payment of the amnesty income
taxes, the Government, therefore, waived its right to further recover deficiency incomes
taxes "from the defendants under the existing assessment against them because:

1. the defendants' amnesty income tax returns' Summary Statement included

therein the deficiency assessment for the years 1955 to 1959;

2. tax amnesty payment was made by the defendants under Presidential Decree
No. 213, hence, it had the effect of remission of the income tax deficiency for the
years 1955 to 1959;
 3. P.D. No. 23 as well as P.D. No. 213 do not make any exceptions nor impose
any conditions for their application, hence, Revenue Regulation No. 7-73 which
excludes certain taxpayers from the coverage of P.D. No. 213 is null and void,
and

4. the acceptance of tax amnesty payment by the plaintiff-appellant bars the

recovery of deficiency taxes. (pp. 3-4, IAC Decision, pp. 031-032, Rollo.)

The Government appealed to the Intermediate Appellant Court (AC G.R. CV No. 68371
entitled, "Republic of the Philippines vs. Antonio Pastor, et al."), alleging that the
private respondents were not qualified to avail of the tax amnesty under P.D. 213 for
the benefits of that decree are available only to persons who had no pending
assessment for unpaid taxes, as provided in Revenue Regulations Nos. 8-72 and 7-73.
Since the Pastors did in fact have a pending assessment against them, they were
precluded from availing of the amnesty granted in P.D.'s Nos. 23 and 213. The
Government further argued that "tax exemptions should be interpreted strictissimi
juris against the taxpayer."

The respondent spouses, on the other hand, alleged that P.D. 213 contains no
exemptions from its coverage and that, under Letter of Instruction LOI 129 dated
September 18, 1973, the immunities granted by P.D. 213 include:

II-Immunities Granted.

Upon payment of the amounts specified in the Decree, the following shall be
observed:

1. . . . .

2. The taxpayer shall not be subject to any investigation, whether civil, criminal
or administrative, insofar as his declarations in the income tax returns are
concerned nor shall the same be used as evidence against, or to the prejudice of
the declarant in any proceeding before any court of law or body, whether
judicial, quasi-judicial or administrative, in which he is a defendant or
respondent, and he shall be exempt from any liability arising from or incident to
his failure to file his income tax return and to pay the tax due thereon, as well as
to any liability for any other tax that may be due as a result of business
transactions from which such income, now voluntarily declared may have been
derived. (Emphasis supplied; p. 040, Rollo.)

There is nothing in the LOI which can be construed as authority for the Bureau of
Internal Revenue to introduce exceptions and/or conditions to the coverage of the law.

On November 23, 1984, the Intermediate Appellate Court (now Court of Appeals)
rendered a decision dismissing the Government's appeal and holding that the payment
of deficiency income taxes by the Pastors under PD. No. 213, and the acceptance
thereof by the Government, operated to divest the latter of its right to further recover
deficiency income taxes from the private respondents pursuant to the existing
deficiency tax assessment against them. The appellate court held that if Revenue
Regulation No. 7-73 did provide an exception to the coverage of P.D. 213, such
provision was null and void for being contrary to, or restrictive of, the clear mandate of
P.D. No. 213 which the regulation should implement. Said revenue regulation may not
prevail over the provisions of the decree, for it would then be an act of administrative
legislation, not mere implementation, by the Bureau of Internal Revenue.

On February 4, 1986, the Republic of the Philippines, through the Solicitor General, filed
this petition for review of the decision dated November 23, 1984 of the Intermediate
Appellate Court affirming the dismissal, by the Court of First Instance of Manila, of the
Government's complaint against the respondent spouses.

The petition is devoid of merit.

Even assuming that the deficiency tax assessment of P17,117.08 against the Pastor
spouses were correct, since the latter have already paid almost the equivalent amount
to the Government by way of amnesty taxes under P.D. No. 213, and were granted not
merely an exemption, but an amnesty, for their past tax failings, the Government is
estopped from collecting the difference between the deficiency tax assessment and the
amount already paid by them as amnesty tax.

A tax amnesty, being a general pardon or intentional overlooking by the State of

its authority to impose penalties on persons otherwise guilty of evasion or
violation of a revenue or tax law, partakes of an absolute forgiveness or waiver
by the Government of its right to collect what otherwise would be due it, and in
this sense, prejudicial thereto, particularly to give tax evaders, who wish to
relent and are willing to reform a chance to do so and thereby become a part of
the new society with a clean slate (Commission of Internal Revenue vs. Botelho
Corp. and Shipping Co., Inc., 20 SCRA 487).

The finding of the appellate court that the deficiency income taxes were paid by the
Pastors, and accepted by the Government, under P.D. 213, granting amnesty to
persons who are required by law to file income tax returns but who failed to do so, is
entitled to the highest respect and may not be disturbed except under exceptional
circumstances which have already become familiar (Rule 45, Sec. 4, Rules of Court;
e.g., where: (1) the conclusion is a finding grounded entirely on speculation, surmise
and conjecture; (2) the inference made is manifestly mistaken; (3) there is grave
abuse of discretion; (4) the judgment is based on misapprehension of facts; (5) the
Court of Appeals went beyond the issues of the case and its findings are contrary to the
admissions of both the appellant and the appellee; (6) the findings of fact of the Court
of Appeals are contrary to those of the trial court; (7) said findings of fact are
conclusions without citation of specific evidence in which they are based; (8) the facts
set forth in the petition as well as in the petitioner's main and reply briefs are not
disputed by the respondents; and (9) when the finding of fact of the Court of Appeals is
premised on the absense of evidence and is contradicted by the evidence on record
(Thelma Fernan vs. CA, et al., 181 SCRA 546, citing Tolentino vs. de Jesus, 56 SCRA
67; People vs. Traya, 147 SCRA 381), none of which is present in this case.

The rule is that in case of doubt, tax statutes are to be construed strictly against the
Government and liberally in favor of the taxpayer, for taxes, being burdens, are not to
be presumed beyond what the applicable statute (in this case P.D. 213) expressly and
clearly declares (Commission of Internal Revenue vs. La Tondena, Inc. and CTA, 5
SCRA 665, citing Manila Railroad Company vs. Collector of Customs, 52 Phil, 950).

WHEREFORE, the petition for review is denied. No costs.

SO ORDERED.

Narvasa, Cruz, Gancayco and Medialdea, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-30644 March 9, 1987

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
FIREMAN'S FUND INSURANCE COMPANY and the COURT OF TAX
APPEALS, respondents.

B.V. Abela, M.C. Gutierrez & F.J. Malate, Jr., for respondents.

PARAS, J.:

This is an appeal from the decision of the respondent Court of Tax Appeals dated May
24, 1969, in C.T.A. Case No. 1629, entitled "FIREMAN'S FUND INSURANCE COMPANY v.
COMMISSIONER OF INTERNAL REVENUE," which reversed the decision of petitioner
Commissioner of Internal Revenue holding private respondent Fireman's Fund
Insurance Company liable for the payment of the amount of P81,406.87 as
documentary stamp taxes and compromise penalties for the years 1952 to 1958.

Private respondent is a resident foreign insurance corporation organized under the laws
of the United States, authorized and duly licensed to do business in the Philippines. It is
a member of the American Foreign Insurance Association, through which its business is
cleared (Brief for Respondents, pp. 1-2)

The antecedent facts of this case are as follows:

From January, 1952 to December, 1958, herein private respondent Fireman's Fund
Insurance Company entered into various insurance contracts involving casualty, fire
and marine risks, for which the corresponding insurance policies were issued. From
January, 1952 to 1956, documentary stamps were bought and affixed to the monthly
statements of policies issues; and from 1957 to 1958 documentary stamps were bought
and affixed to the corresponding pages of the policy register, instead of on the
insurance policies issued. On July 3, 1959, respondent company discovered that its
monthly statements of business and policy register were lost. The loss was reported to
the Building Administration of Ayala Building and the National Bureau of Investigation
on July 6, 1959. Herein petitioner was also informed of such loss by respondent
company, through the latter's auditors, Sycip, Gorres and Velayo, in a letter dated July
14, 1959. After conducting an investigation of said loss, petitioner's examiner
ascertained that respondent company failed to affix the required documentary stamps
to the insurance policies issued by it and failed to preserve its accounting records within
the time prescribed by Section 337 of the Revenue Code by using loose leaf forms as
registers of documentary stamps without written authority from the Commissioner of
Internal Revenue as required by Section 4 of Revenue Regulations No. V-1. As a
consequence of these findings, petitioner, in a letter dated December 7, 1962, assessed
and demanded from petitioner the payment of documentary stamp taxes for the years
1952 to 1958 in the total amount of P 79,806.87 and plus compromise penalties, a total
of P 81,406.87.

A breakdown of the amount of taxes due and collectible are as follows:

 YEAR AMOUNT

1952 P 6,500.00

1953 9,977.72

1954 10,908.89

1955 14,204.52

1956 12,108.26

1957 7,880.68

1958 16,257.60

Total stamp taxes due on policies issued from 1952 to 1958 77,837.67

Add: Stamp taxes on monthly statements during:

1957.............................................................................
.............1,218.35

1958.............................................................................
.............3,264.39

Total.............................................................................
......P 82,320.41

Less: Stamp taxes paid per voucher shown:

1957............................................................... p 416.82

1958................................................................2,096.72
2,513.54

AMOUNT DUE & COLLECTIBLE.............................................P 79,906.87

(CTA Decision, Rollo, pp. 16-17).

The compromise penalties consisted of the sum of P1,000.00 as penalty for the alleged
failure to affix documentary stamps and the further sum of P 600.00 as penalty for an
alleged violation of Revenue Regulations No. V-1 otherwise known as the Bookkeeping
Regulations (Brief for Respondents, p. 4)

In a letter dated January 14, 1963, respondent company contested the assessment.
After petitioner denied the protest in a decision dated March 17, 1965, respondent
company appealed to the respondent Court of Tax Appeals on May 8, 1965. After
hearing respondent court rendered its decision dated May 24, 1969 (Rollo, pp. 16-21)
reversing the decision of the Commissioner of Internal Revenue. The assailed decision
reads in part:

The affixture of documentary stamps to papers other than those

authorized by law is not tantamount to failure to pay the same. It is true
that the mode of affixing the stamps as prescribed by law was not
followed, but the fact remains that the documentary stamps
corresponding to the various insurance policies were purchased and paid
by petitioner. There is no legal justification for respondent to require
petitioner to pay again the documentary stamp tax which it had already
paid. To sustain respondent's stand would require petitioner to pay the
same tax twice. If at all, the petitioner should be proceeded against for
failure to comply with the requirement of affixing the documentary stamps
to the taxable insurance policies and not for failure to pay the tax. (See
Sec. 239 and 332, Rev. Code).

It should be observed that the law allows the affixture of documentary

stamps' to such other paper as may be indicated by law or regulations as
the proper recipient of the stamp.' It appears from this provision that
respondent has authority to allow documentary stamps to be affixed to
papers other than the documents or instruments taxed. Although the
practice adopted by petitioner in affixing the documentary stamps to the
business statements and policy register was without specific permission
from respondent but only on the strength of his ruling given to Wise &
Company (see Petitioner's Memorandum, p. 176, CTA rec.; p. 24, t.s.n.),
one of the general agents of petitioner, however, considering that
petitioner actually purchased the documentary stamps, affixed them to
the business statements and policy register and cancelled the stamps by
perforating them, we hold that petitioner cannot be held liable to pay
again the same tax.

With respect to the 'compromise penalties' in the total sum of P 1,600.00,

suffice it to say that penalties cannot be imposed in the absence of a
showing that petitioner consented thereto. A compromise implies
agreement. If the offer is rejected by the taxpayer, as in this case,
respondent cannot enforce it except through a criminal action. (See
Comm. of Int. Rev. vs. Abad, L-19627, June 27, 1968.) (CTA Decision,
Rollo, pp. 20-21).

Hence, this petition filed on June 26, 1969 (Rollo, pp. 1-8).

The petition is devoid of merit.

The principal issue in this case is whether or not respondent company may be required
to pay again the documentary stamps it has actually purchased, affixed and cancelled.

The relevant provisions of the National Internal Revenue Code provide:

SEC. 210. Stamp taxes upon documents, instruments, and papers. —

Upon documents, instruments, and papers, and upon acceptances,
assignments, sales, and transfers of the obligation, right, or property
incident thereto, there shall be levied, collected and paid for and in
respect of the transaction so had or accomplished, the corresponding
documentary stamp taxes prescribed in the following sections of this Title,
by the person making, signing, issuing, accepting, or transferring the
same, and at the same time such act is done or transaction had. (Now.
Sec. 222).

SEC. 232. Stamp tax on life insurance policies. — On all policies of

insurance or other instruments by whatever name the same may be
called, whereby any insurance shall be made or renewed upon any life or
lives, there shall be collected a documentary stamp tax of thirty-five
centavos on each two hundred pesos or fractional part thereof, of the
amount issued by any such policy. (220) (As amended by PD 1457)

Insurance policies issued by a Philippine company to persons in other

countries are not subject to documentary stamp tax. (Rev. Regs. No. 26)

Medical certificate attached to an insurance policy is not a part of the said

policy. Insurance policy is subject to Section 232 of the Tax Code while
medical certificate is taxable under Section 237 of the same Code.

Insurance policies are issued in the place where delivered to the person
insured. (As amended.)

SEC. 221. Stamp tax on policies of insurance upon property. — On all

policies of insurance or other instruments by whatever name the same
may be called, by which insurance shall be made or renewed upon
property of any description, including rents or profits, against peril by sea
or on inland waters, or by fire or lightning, there shall be collected a
documentary stamp tax of six centavos on each four persons, or fractional
part thereof, of the amount of premium charged," (Now Sec. 233.)

SEC. 237. Payment of documentary stamp tax. — Documentary stamp

taxes shall be paid by the purchase and affixture of documentary stamps
to the document or instrument taxed or to such other paper as may be
indicated by law or regulations as the proper recipient of the stamp, and
by the subsequent cancellation of same, such cancellation to be
accomplished by writing, stamping, or perforating the date of the
cancellation across the face of each stamp in such manner that part of the
writing, impression, or perforation shall be on the stamp itself and part on
the paper to which it is attached; Provided, That if the cancellation is
accomplished by writing or stamping the date of cancellation, a hole
sufficiently large to be visible to the naked eye shall be punched, cut or
perforated on both the stamp and the document either by the use of a
hand punch, knife, perforating machine, scissors, or any other cutting
instrument; but if the cancellation is accomplished by perforating the date
of cancellation, no other hole need be made on the stamp. (Now Sec.
249.)
 SEC. 239. Failure to affix or cancel documentary stamps. — Any person
who fails to affix the correct amount of documentary stamps to any
taxable document, instrument, or paper, or to cancel in the manner
prescribed by section 237 any documentary stamp affixed to any
document, instrument, or paper, shall be subject to a fine of not less than
twenty pesos or more than three hundred pesos. (Emphasis supplied.)
(Now Sec. 250.)

As correctly pointed out by respondent Court of Tax Appeals, under the above-quoted
provisions of law, documentary tax is deemed paid by: (a) the purchase of
documentary stamps; (b) affixture of documentary stamps to the document or
instrument taxed or to such other paper as may be indicated by law or regulations; and
(c) cancellation of the stamps as required by law (Rollo, p. 18).

It will be observed however, that the over-riding purpose of these provisions of law is
the collection of taxes. The three steps above-mentioned are but the means to that
end. Thus, the purchase of the stamps is the form of payment made; the affixture
thereof on the document or instrument taxed is to insure that the corresponding tax
has been paid for such document while the cancellation of the stamps is to obviate the
possibility that said stamps will be reused for similar documents for similar purposes.

In the case at bar, there appears to be no dispute on the fact that the documentary
stamps corresponding to the various policies were purchased and paid for by the
respondent Company. Neither is there any argument that the same were cancelled as
required by law. In fact such were the findings of petitioner's examiner Amando B.
Melgar who stated as follows:

Investigation disclosed that the subject insurance company is a duly

organized corporation doing business in the Philippines. It keeps the
necessary books of accounts and other accounting records needed by the
business. Further verification revealed that it has, since July, 1959, been
using a "HASLER" franking machine, Model F88, which stamps the
documentary stamps on the duplicates of the policies issued. Prior to the
acquisition of the said machine, the company buys its stamps by allowing
the Manager to issue a Manager's check drawn against the National City
Bank of New York and payable to the City Treasurer of Manila. It was also
found out that during this period (1952 to 1958), the total purchases of
documentary stamps amounted to P77,837.67, while the value of the
used stamps lost amounted to P65,901.11. Verification with the files
revealed that most of the monthly statements of business and registers of
documentary stamps corresponding to insurance policies issued were
missing while some where the punched documentary stamps affixed were
small in amount are still intact.

The taxpayer was found to be negligent in the preservation and keeping of

its records. Although the loss was found by the company's private
investigator (see attached true copies of his reports) was not an "Inside
Job," still the company should be held liable for its negligence, it
appearing that the said records were placed in a bodega, where almost all
patrons of the coffee shop nearby could see them. The company also
 violated the provision of Section 221 of the National Internal Revenue
Code which provides that the documentary stamps should be affixed and
cancelled on the duplicates of bonds and policies issued. In this case, the
said stamps were affixed on the register of documentary stamps. (pp. 35-
36, BIR rec.; Emphasis supplied.) (CTA Decision, Rollo, pp, 18-19.)

Such findings were confirmed by the Memorandum of Acting Commissioner of Internal

Revenue Jose B. Lingad, dated November 7, 1962 to the Chief, Business Tax Division,
which states:

The records show that the FIREMAN'S FUND INSURANCE COMPANY

allegedly paid P 77,837.67 in documentary stamp taxes for the policies of
insurance issued by it for the years 1952 to 1958 but could only present
as proof of payment Pll,936.56 of said taxes as the rest of the amount of
P 65,901.11 were lost due to robbery. Upon verification of this payment
however it was found that the FIREMAN'S FUND INSURANCE COMPANY
affixed the documentary stamps not on the individual insurance policies
issued by it but on a monthly statement of business and a register of
documentary stamps, the use of which was not authorized by this Office.
It was claimed that the same procedure was used in the case of the lost
documentary stamps aforementioned. As this practice is irregular and the
remaining records are not conclusive proofs of the payment of the
corresponding documentary stamp tax on the policies, the FIREMAN'S
FUND AND INSURANCE COMPANY is still liable for the payment of the
documentary stamp taxes on the policies found not affixed with stamps.
(Original B I R Record, p. 87).

Later, respondent Court of Tax Appeals correctly observed that the purchase of
documentary stamps and their being affixed to the monthly statements of business and
policy registers were also admitted by counsel for the Government as could clearly be
gleaned from his Memorandum submitted to the respondent Court. (Decision, CTA
Rollo, pp. 4-5).

Thus, all investigations made by the petitioner show the same factual findings that
respondent company purchased documentary stamps for the various policies it has
issued for the period in question although it has attached the same on documents not
authorized by law.

There is no argument to petitioner's contention that the insurance policies with the
corresponding documentary stamps affixed are the best evidence to prove payment of
said documentary stamp tax. This rule however does not preclude the admissibility of
other proofs which are uncontradicted and of considerable weight, such as: copies of
the applications for manager's checks, copies of the manager's check vouchers of the
bank showing the purchases of documentary stamps corresponding to the various
insurance policies issued during the years 1952-1958 duly and properly Identified by
the witnesses for respondent company during the hearing and admitted by the
respondent Court of Tax Appeals (Brief for Respondent, p. 15).

It is a general rule in the interpretation of statutes levying taxes or duties, that in case
of doubt, such statutes are to be construed most strongly against the government and
in favor of the subjects or citizens, because burdens are not to be imposed, nor
presumed to be imposed beyond what statutes expressly and clearly import (Manila
Railroad Co. v. Collector of Customs, 52 Phil. 950 [1929]).

There appears to be no question that the purpose of imposing documentary stamp

taxes is to raise revenue and the corresponding amount has already been paid by
respondent and has actually become part of the revenue of the government. In the
same manner, it is evident that the affixture of the stamps on documents not
authorized by law is not attended by bad faith as the practice was adopted from the
authority granted to Wise & Company, one of respondent's general agents (CTA
Decision, Rollo, p. 20). Indeed, petitioner argued that such authority was not given to
respondent company specifically, but under the general principle of agency, where the
acts of the agents bind the principal, the conclusion is inescapable that the justification
for the acts of the agents may also be claimed for the acts of the principal itself (Brief
for the Respondents, pp. 12-13).

Be that as it may, there is no justification for the government which has already
realized the revenue which is the object of the imposition of subject stamp tax, to
require the payment of the same tax for the same documents. Enshrined in our basic
legal principles is the time honored doctrine that no person shall unjustly enrich himself
at the expense of another. It goes without saying that the government is not exempted
from the application of this doctrine (Ramie Textiles, Inc. v. Mathay Sr., 89 SCRA 587
[1979]).

Under the circumstances, this court RESOLVED to DISMISS this petition and to AFFIRM
the assailed decision of the Court of Tax Appeals.

Fernan (Chairman), Gutierrez, Jr., Padilla, Bidin and Cortes, JJ., concur.

Alampay, J., is on leave.