LORENZO vs. POSADAS JR.

G.R. No. L-43082 June 18, 1937

FACTS:

Thomas Hanley died, leaving a will and a considerable amount of real and personal properties.
Proceedings for the probate of his will and the settlement and distribution of his estate were begun in
the CFI of Zamboanga. The will was admitted to probate.

The CFI considered it proper for the best interests of the estate to appoint a trustee to administer the
real properties which, under the will, were to pass to nephew Matthew ten years after the two
executors named in the will was appointed trustee. Moore acted as trustee until he resigned and the
plaintiff Lorenzo herein was appointed in his stead.

During the incumbency of the plaintiff as trustee, the defendant Collector of Internal Revenue (Posadas)
assessed against the estate an inheritance tax, together with the penalties for deliquency in payment.
Lorenzo paid said amount under protest, notifying Posadas at the same time that unless the amount was
promptly refunded suit would be brought for its recovery. Posadas overruled Lorenzo’s protest and
refused to refund the said amount. Plaintiff went to court. The CFI dismissed Lorenzo’s complaint and
Posadas’ counterclaim. Both parties appealed to this court.

ISSUE:

Has there been delinquency in the payment of the inheritance tax?

HELD:

The judgment of the lower court is accordingly modified, with costs against the plaintiff in both
instances

YES. The defendant maintains that it was the duty of the executor to pay the inheritance tax before the
delivery of the decedent’s property to the trustee. Stated otherwise, the defendant contends that
delivery to the trustee was delivery to the cestui que trust, the beneficiary in this case, within the
meaning of the first paragraph of subsection (b) of section 1544 of the Revised Administrative Code. This
contention is well taken and is sustained. A trustee is but an instrument or agent for the cestui que trust
The appointment of Moore as trustee was made by the trial court in conformity with the wishes of the
testator as expressed in his will. It is true that the word “trust” is not mentioned or used in the will but
the intention to create one is clear. No particular or technical words are required to create a
testamentary trust. The words “trust” and “trustee”, though apt for the purpose, are not necessary. In
fact, the use of these two words is not conclusive on the question that a trust is created. ” To constitute
a valid testamentary trust there must be a concurrence of three circumstances:

(1) Sufficient words to raise a trust;

(2) a definite subject;
(3) a certain or ascertain object; statutes in some jurisdictions expressly or in effect so providing.”

There is no doubt that the testator intended to create a trust. He ordered in his will that certain of his
properties be kept together undisposed during a fixed period, for a stated purpose. The probate court
certainly exercised sound judgment in appointmening a trustee to carry into effect the provisions of the
will

As the existence of the trust was already proven, it results that the estate which plaintiff represents has
been delinquent in the payment of inheritance tax and, therefore, liable for the payment of interest and
surcharge provided by law in such cases.

The delinquency in payment occurred on March 10, 1924, the date when Moore became trustee. On
that date trust estate vested in him. The interest due should be computed from that date.

NOTES: Other issues:

(a) When does the inheritance tax accrue and when must it be satisfied?

The accrual of the inheritance tax is distinct from the obligation to pay the same.

Acording to article 657 of the Civil Code, “the rights to the succession of a person are transmitted from
the moment of his death.” “In other words”, said Arellano, C. J., “. . . the heirs succeed immediately to
all of the property of the deceased ancestor. The property belongs to the heirs at the moment of the
death of the ancestor as completely as if the ancestor had executed and delivered to them a deed for
the same before his death.”

Whatever may be the time when actual transmission of the inheritance takes place, succession takes
place in any event at the moment of the decedent’s death. The time when the heirs legally succeed to
the inheritance may differ from the time when the heirs actually receive such inheritance. ” Thomas
Hanley having died on May 27, 1922, the inheritance tax accrued as of the date.

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

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

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

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

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

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

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

The instant case does[not] fall under subsection (a), but under subsection (b), of section 1544 above-
quoted, as there is here no fiduciary heirs, first heirs, legatee or donee. Under the subsection, the tax
should have been paid before the delivery of the properties in question to Moore as trustee.

(b) Should the inheritance tax be computed on the basis of the value of the estate at the time of the
testator’s death, or on its value ten years later?

If death is the generating source from which the power of the estate to impose inheritance taxes takes
its being and if, upon the death of the decedent, succession takes place and the right of the estate to tax
vests instantly, the tax should be measured by the value of the estate as it stood at the time of the
decedent’s death, regardless of any subsequent contingency value of any subsequent increase or
decrease in value

(c) In determining the net value of the estate subject to tax, is it proper to deduct the compensation due
to trustees?

A trustee, no doubt, is entitled to receive a fair compensation for his services. But from this it does not
follow that the compensation due him may lawfully be deducted in arriving at the net value of the
estate subject to tax. There is no statute in the Philippines which requires trustees’ commissions to be
deducted in determining the net value of the estate subject to inheritance tax

(d) What law governs the case at bar? Should the provisions of Act No. 3606 favorable to the tax-payer
be given retroactive effect?

A statute should be considered as prospective in its operation, whether it enacts, amends, or repeals an
inheritance tax, unless the language of the statute clearly demands or expresses that it shall have a
retroactive effect, . . . .” Act No. 3606 itself contains no provisions indicating legislative intent to give it
retroactive effect. No such effect can be given the statute by this court.

On its face there nothing on section 105 of the old NIRC that prohibits the inclusion of real properties,
together

with the improvements thereon, in the beginning inventory of goods, materials and supplies, based
on which the inventory the transitional input tax credit is computed. Under Section 105, the beginning
inventory of "goods" forms part of the valuation of the transitional input tax credit. Goods, as commonly
understood in the business sense, refers to the product which the VAT-registered person offers for sale
to the public. With respect to real estate dealers, it isthe real properties themselves which constitute
their "goods." Such real properties are the operating assets of the realestate dealer. 2. NO. It is
apparent that the transitional input tax credit operates to benefit newly VAT-registered persons,
whether or not they previously paid taxes in the acquisition of their beginning inventory of goods,
materials and supplies. During that period of transition from non-VAT to VAT status, the transitional
input tax credit serves to alleviate the impact of the VAT on the taxpayer. At the very beginning,
the VAT-registered taxpayer is obliged to remit a significant portion of the income it derived from
its sales as output VAT. The transitional input tax credit mitigates this initial diminution of the taxpayer’s
income by affording the opportunity to offset the losses incurred through the remittance of the output
VAT at a stage when the person is yet unable to credit input VAT payments. As pointed out in Our
Decision of April 2, 2009, to give Section 105 a restrictive construction that transitional input tax credit
applies only when taxes were previously paid on the properties in the beginning inventory and there is a
law imposing the tax which is presumed to have been paid, is to impose conditions or requisites to the
application of the transitional tax input credit which are not found in the law. The courts must not read
into the law what is not there. To do so will violate the principle of separation of powers
which prohibits this Court from engaging in judiciallegislation.6DISSENTING OPINIONCARPIO, J.:I
vote to grant the motion for reconsideration filed by the Commissioner of Internal Revenue. The
decision dated 2 April 2009 grants to petitioner a tax credit or refund of ₱347,741,695.74 when
petitioner never in fact paid a single centavo of tax to the Bureau of Internal Revenue. A tax credit or tax
refund requires that a previous tax was paid by the taxpayer. There can be no tax credit or refund if no
prior tax was paid. In this case, the decision dated 2 April 2009 grants to petitioner hundreds of millions
in tax credit or refund without the taxpayer ever having paid any previous tax to the government. Who
will bear this burden of tax credit or refund? It is all taxpayers in this country except, of course,
petitioner. What makes petitioner so privileged?