Case-digest-estate-1.docx

ESTATE CASE DIGEST G.R. No. L-43082 June 18, 1937 PABLO LORENZO, as trustee of the estate of Thomas Hanley, deceased, vs. JUAN POSADAS, JR., Collector of Internal Revenue 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: (e) 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.

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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. Facts: On 27 May 1922, Thomas Hanley died in Zamboanga, leaving a will and considerable amount of real and personal properties. Hanley’s

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will provides the following: his money will be given to his nephew, Matthew Hanley, as well as the real estate owned by him. It further provided that the property will only be given ten years after Thomas Hanley’s death. Thus, in the testamentary proceedings, the Court of First Instance of Zamboanga appointed P.J.M. Moore as trustee of the estate. Moore took oath of office on March 10, 1924, and resigned on Feb. 29, 1932. Pablo Lorenzo was appointed in his stead. Juan Posadas, Collector of Internal Revenue, assessed inheritance tax against the estate amounting to P2,057.74 which includes penalty and surcharge. He filed a motion in the testamentary proceedings so that Lorenzo will be ordered to pay the amount due. Lorenzo paid the amount in protest after CFI granted Posadas’ motion. He claimed that the inheritance tax should have been assessed after 10 years. He asked for a refund but Posadas declined to do so. The latter counterclaimed for the additional amount of P1,191.27 which represents interest due on the tax and which was not included in the original assessment. However, CFI dismissed this counterclaim. It also denied Lorenzo’s claim for refund against Posadas. Hence, both appealed. Issue: Whether the estate was delinquent in paying the inheritance tax and therefore liable for the P1,191.27 that Posadas is asking for? Held: Yes. It was delinquent because according to Sec. 1544 (b) of the Revised Administrative Code, payment of the inheritance tax shall be made before delivering to each beneficiary his share. This payment should have been made before March 10, 1924, the date when P.J.M. Moore formally assumed the function of trustee. Although the property was only to be given after 10 years from the death of Hanley, the court considered that delivery to the trustee is delivery to cestui que trust, the beneficiary within the meaning of Sec. 1544 (b). Even though there was no express mention of the word “trust” in the will, the court of first instance was correct in appointing a trustee because no particular or technical words are required to create a testamentary trust (69 C.J.,p. 711). The requisites of a valid testamentary trust are: 1) sufficient words to raise a trust, 2) a

definite subject, 3) a certain or ascertained object. There is no doubt that Hanley intended to create a trust since he ordered in his will that certain of his properties be kept together undisposed during a fixed period or for a stated purpose. G.R. No. L-68385 May 12, 1989 ILDEFONSO O. ELEGADO, as Ancillary Administrator of the Testate Estate of the late WARREN TAYLOR GRAHAM, petitioner vs. CTA and COMMISSIONER OF INTERNAL REVENUE GR 140944 April 30, 2008 RAFAEL ARSENIO S. DIZON, in his capacity as the Judicial Administrator of the Estate of the deceased JOSE P. FERNANDEZ, VS COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE FACTS: On November 7, 1987, Jose P. Fernandez (Jose) died. Thereafter, a petition for the probate of his will was filed with Branch 51 of the Regional Trial Court (RTC) of Manila (probate court). The probate court then appointed retired Supreme Court Justice Arsenio P. Dizon (Justice Dizon) and petitioner, Atty. Rafael Arsenio P. Dizon (petitioner) as Special and Assistant Special Administrator, respectively, of the Estate of Jose (Estate). Petitioner alleged that several requests for extension of the period to file the required estate tax return were granted by the BIR since the assets of the estate, as well as the claims against it, had yet to be collated, determined and identified. ISSUES: 1. Whether or not the CTA and the CA gravely erred in allowing the admission of the pieces of evidence which were not formally offered by the BIR; and 2. Whether the actual claims of the aforementioned creditors may be fully allowed as deductions from the gross estate of Jose despite the fact that the said claims were reduced or condoned through compromise agreements entered into by the Estate with its creditors

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Or Whether or not the CA erred in affirming the CTA in the latter's determination of the deficiency estate tax imposed against the Estate. RULING: 1. Yes. While the CTA is not governed strictly by technical rules of evidence, as rules of procedure are not ends in themselves and are primarily intended as tools in the administration of justice, the presentation of the BIR's evidence is not a mere procedural technicality which may be disregarded considering that it is the only means by which the CTA may ascertain and verify the truth of BIR's claims against the Estate. The BIR's failure to formally offer these pieces of evidence, despite CTA's directives, is fatal to its cause 2. Yes. The claims existing at the time of death are significant to, and should be made the basis of, the determination of allowable deductions. Also, as held in Propstra v. U.S., where a lien claimed against the estate was certain and enforceable on the date of the decedent's death, the fact that the claimant subsequently settled for lesser amount did not preclude the estate from deducting the entire amount of the claim for estate tax purposes. This is called the dateof-death valuation rule. G.R. No. L-20569 August 23, 1974 JOSE B. AZNAR, in his capacity as Administrator of the Estate of the deceased, Matias H. Aznar, petitioner, vs. CTA and COLLECTOR OF INTERNAL REVENUE, respondents Facts: Petitioner, as administrator of the estate of the deceased, Matias H. Aznar, seeks a review and nullification of the decision of the Court of Tax Appeals ordering the petitioner to pay the government the sum of P227,691.77 representing deficiency income taxes for the years 1946 to 1951. An investigation by the Commissioner of Internal Revenue (CIR) ascertained the assets and liabilities of the taxpayer and it was discovered that from 1946 to 1951, his net worth had increased every year, which increases in net worth was very much more than the income reported during said years. The findings clearly indicated that the taxpayer did not declare correctly

the income reported in his income tax returns for the aforesaid years. Petitioner avers that according to the NIRC, the right of the CIR to assess deficiency income taxes of the late Aznar for the years 1946, 1947, and 1948 had already prescribed at the time the assessment was made on November 28, 1952; there being a five year limitation upon assessment and collection from the filing of the returns. Meanwhile, respondents believe that the prescription period in the case at bar that is applicable is under Sec. 332 of the NIRC which provides that: "(a) In the case of a false or fraudulent return with intent to evade tax or of a failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within ten years after the discovery of the falsity, fraud or omission". Petitioner argues said provision does not apply because the taxpayer did not file false and fraudulent returns with intent to evade tax. Issue: Whether or not the deceased Aznar filed false or fraudulent income tax returns and subsequently, whether the action has not prescribed. Held: The petition is without merit. The respondent CTA concluded that the very "substantial under declarations of income for six consecutive years eloquently demonstrate the falsity or fraudulence of the income tax returns with an intent to evade the payment of tax." The ordinary period of prescription of 5 years within which to assess tax liabilities under Sec. 331 of the NIRC should be applicable to normal circumstances, but whenever the government is placed at a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities due to false returns, fraudulent return intended to evade payment of tax, or failure to file returns, the period of ten years from the time of the discovery of the falsity, fraud or omission even seems to be inadequate. There being undoubtedly false tax returns in this case, We affirm the conclusion of the respondent Court of Tax Appeals that Sec. 332 (a) of the NIRC should apply and that the period of ten

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years within which to assess petitioner's tax liability had not expired at the time said assessment was made.

deviation is highly inordinate or when the return falsified pertains to several years.

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The Court of Tax Appeals (CTA), however, has differing views. In the most recent case of Next Mobile, Inc. vs. Commissioner of Internal Revenue, the CTA, applying the Aznar ruling, interpreted that any deviation from the truth, even a 5% under-declaration of the reported gross revenues, already constitutes a false return and warrants the application of the 10-year prescriptive period to assess.

What constitutes “falsity of returns”? In the landmark case of Aznar vs. Court of Tax Appeals, the Supreme Court defined a false return as a deviation from the truth or fact, whether intentional or not. There being substantial underdeclaration of income ranging from 170% to 4,370% of the reported income for six years, Aznar was found to have filed false returns. The definition of false returns becomes vital and relevant in determining the application of the 10-year prescriptive period to assess under Section 222 of the Tax Code, and the 50% surcharge under Section 248 of the same law. In general, the Commissioner of Internal Revenue is given three years to assess deficiency taxes. However, when the assessment involves false returns, the assessment period is extended to 10 years from its discovery. Also, the normal surcharge imposed under the Tax Code is 25%. The higher rate of 50% is applied only when there is willful neglect to file returns or when false or fraudulent returns are filed. Clearly, the filing of false returns is heavily penalized under the law. Jurisprudence is not replete with cases concerning falsity of returns. Other than the Aznar case, the issue of false returns was only discussed by the Supreme Court in Samar-I Electric Cooperative vs Commissioner of Internal Revenue. Here, there was substantial under-declaration of withholding tax on compensation for three years, which was considered by the Supreme Court to constitute falsity in returns. With the factual milieu of these cases and given the grave penalties imposed by law, one would think that a return is false only when the

However, in Commissioner of Internal Revenue vs. Ayala Hotels, Inc., the CTA ruled against the sweeping application of the Aznar ruling. The CTA reasoned that otherwise, any mistake, however slight in a return filed by a taxpayer in good faith, would justify the application of the 10-year prescriptive period for assessment. The CTA held that only false returns which are filed by a taxpayer with intent to evade tax should warrant an application of the 10-year prescriptive period. Also, in San Miguel Corporation vs. Commissioner of Internal Revenue, the CTA acknowledged that there is nothing in the Aznar case which establishes a hard and fast rule that every deviation from the truth necessarily brings a particular return under the coverage of Section 222. Thus, there appears to be no concrete and consistent rule as to what constitutes false returns. A strict interpretation of the definition in the Aznar case would make a mere deviation from the truth, such as a P1 difference, a “false return.” If that were the case, the threeyear prescriptive period will be rendered nugatory, as every deviation from the truth, which is always present in a deficiency tax assessment, will result in a falsity in the return. Effectively, the exception under Section 222 of the Tax Code becomes the general rule, and the general rule of three years the exception. This interpretation clearly runs counter to what Congress intended when these provisions were drafted. Section 248 (b) of the Tax Code even provides that substantial under-declaration of taxable sales, receipts or income is required to

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constitute a prima facie evidence of false returns, wherein underdeclared receipts must be in an amount exceeding 30% of the receipts declared per return to constitute substantial underdeclaration.

period and unduly prejudice the taxpayer, Congress should revise the law and clearly define what constitutes false returns. Mhealler T. Ycong is an associate of the Angara Abello Concepcion Regala & Cruz Law Offices -Cebu Branch.

Moreover, the issue of whether a design to mislead or deceive on the part of the taxpayer, or at least culpable negligence, comes to fore in interpreting what renders a return “false.” In Section 222 of the Tax Code, the phrase “with intent to evade tax” qualifies both the “false” and “fraudulent” as it is grouped under one category. As pronounced by the CTA in the Ayala Hotels case, following the rules of statutory construction as well as the rules on grammatical construction, the qualifying words “with intent to evade tax” should refer to both the words “false” and “fraudulent” since these words are not separated by a comma. If it was the intent of the lawmakers to qualify only the word “fraudulent,” then this should have been treated separately or, at the very least, the words “false” and “fraudulent” should have been separated by a comma to show separate treatment of the two. It appears, therefore, that applying the rules of statutory construction contradicts the definition of false returns laid by the Supreme Court in the Aznar case, wherein intent is not relevant to constitute false returns. However, since the latest case of Samar-I Electric adopts the same definition held in Aznar, the question as to the conclusiveness of the meaning of false returns still stays. When the law has not specified and the Supreme Court has not extensively discussed or clarified the parameters of the meaning of false returns, more than ever, the taxpayer should ensure that each and every item stated in a return is correct. Any discrepancy or deviation from the truth may already render a return false and subject the taxpayer to the heavy penalties provided by law. To prevent inconsistent interpretation, which may open the floodgates of assessments issued beyond the normal three-year

G.R. No. 138485. September 10, 2001 DR . FELISA L. VDA. DE SAN AGUSTIN, in substitution of JOSE Y. FERIA, in his capacity as Executor of the Estate of JOSE SAN AGUSTIN, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent. Taxation; Actions; Tax Refunds; To hold that the taxpayer has lost the right to appeal from the ruling on the disputed assessment but must prosecute his appeal under Section 306 of the Tax Code, which requires a taxpayer to file a claim for refund of the taxes paid as a condition precedent to his right to appeal, would in effect require of him to go through a useless and needless ceremony that would only delay the disposition of the case—the law should not be interpreted as to result in absurdities.—The case has a striking resemblance to the controversy in Roman Catholic Archbishop of Cebu vs. Collector of Internal Revenue. The petitioner in that case paid under protest the sum of P5,201.52 by way of income tax, surcharge and interest and, forthwith, filed a petition for review before the Court of Tax Appeals. Then respondent Collector (now Commissioner) of Internal Revenue set up several defenses, one of which was that petitioner had failed to first file a written claim for refund, pursuant to Section 306 of the Tax Code, of the amounts paid. Convinced that the lack of a written claim for refund was fatal to petitioner’s recourse to it, the Court of Tax Appeal Facts: “Atty. Jose San died on June 27, 1990 leaving his wife Dra. Felisa L. San Agustin as sole heir. He left a holographic will executed on April 21, 1980 giving all his estate to his widow, and naming retired Justice Jose Y. Feria as Executor thereof. On September 1990, an estate tax return reporting an estate tax due of P1,676,432.00 was filed on behalf of the estate, with a request for an extension of two years for the payment of the tax, inasmuch

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as the decedent’s widow (did) not personally have sufficient funds, and that the payment (would) have to come from the estate. BIR Deputy Commissioner Victor A. Deoferio, Jr., granted the heirs an extension of only six (6) months, subject to the imposition of penalties and interests under Sections 248 and 249 of the National Internal Revenue Code, as amended. In the probate proceedings, the RTC allowed the will and appointed Jose Feria as Executor of the estate. On December 5, 1990, the executor submitted to the probate court an inventory of the estate with a motion for authority to withdraw funds for the payment of the estate tax. Such authority was granted by the probate court on March 5, 1991. Thereafter, the executor paid the estate tax in the amount of P1,676,432 as reported in the Tax Return filed with the BIR. This was well within the six (6) months extension period granted by the BIR. On September 23, 1991, the widow of the deceased, Felisa L. San Agustin, received a PreAssessment Notice from the BIR, dated August 29, 1991, showing a deficiency estate tax of P538,509.50, which, including surcharge, interest and penalties, amounted to P976,540.00. On October 1, 1991, within the ten-day period given in the pre-assessment notice, the executor filed a letter with the petitioner Commissioner expressing readiness to pay the basic deficiency estate tax of P538,509.50 as soon as the Regional Trial Court approves withdrawal thereof, but, requesting that the surcharge, interest, and other penalties, amounting to P438,040.38 be waived, considering that the assessed deficiency arose only on account of the difference in zonal valuation used by the Estate and the BIR, and that the estate tax due per return of P1,676,432.00 was already paid in due time within the extension period. “In a letter, dated October 31, 1991, the executor requested the Commissioner a reconsideration of the assessment of P976,549.00 and waiver of the surcharge, interest, etc. “On December 18, 1991, the Commissioner accepted payment of the basic deficiency tax in the amount of P538,509.50. “The request for reconsideration was not acted upon until January 21, 1993, when the executor received a letter, dated September 21, 1992, signed by the Commissioner, stating that there is no legal justification for the waiver of the interests, surcharge and compromise penalty in this case, and requiring full payment of P438,040.38 representing such charges within ten (10) days from receipt thereof. In view thereof, the respondent estate paid the amount of P438,040.38 under protest on January 25, 1993. On February 18, 1993, a Petition for Review

was filed by the executor with the CTA with the prayer that the Commissioner’s letter/decision, dated September 21, 1992 be reversed and that a refund of the amount of P438,040.38 be ordered. The Commissioner opposed the said petition, alleging that the CTA’s jurisdiction was not properly invoked inasmuch as no claim for a tax refund of the deficiency tax collected was filed with the Bureau of Internal Revenue before the petition was filed, in violation of Sections 204 and 230 of the National Internal Revenue Code.

G.R. No. 159694 January 27, 2006 COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. AZUCENA T. REYES, Respondent. x -- -- -- -- -- -- -- -- -- -- -- -- -- x G.R. No. 163581 January 27, 2006 AZUCENA T. REYES, Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent. [G.R. No. 120880. June 5, 1997] In 1993, Maria Tancino died leaving behind an estate worth P32 million. In 1997, a tax audit was conducted on the estate. Meanwhile, the National Internal Revenue Code (NIRC) of 1997 was passed. Eventually in 1998, the estate was issued a final assessment notice (FAN) demanding the estate to pay P14.9 million in taxes inclusive of surcharge and interest; the estate’s liability was based on Section 229 of the [old] Tax Code. Azucena Reyes, one of the heirs, protested the FAN. The Commissioner of Internal Revenue (CIR) nevertheless issued a warrant of distraint and/or levy. Reyes again protested the warrant but in March 1999, she offered a compromise and was willing to pay P1 million in taxes. Her offer was denied. She continued to work on another compromise but was eventually denied. The case reached the Court of Tax Appeals where Reyes was also denied. In the Court of Appeals, Reyes received a favorable judgment. ISSUE: Whether or not the formal assessment notice is valid.

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HELD: No. The NIRC of 1997 was already in effect when the FAN was issued. Under Section 228 of the NIRC, taxpayers shall be informed in writing of the law and the facts on which the assessment is made: otherwise, the assessment shall be void. In the case at bar, the FAN merely stated the amount of liability to be shouldered by the estate and the law upon which such liability is based. However, the estate was not informed in writing of the facts on which the assessment of estate taxes had been made. The estate was merely informed of the findings of the CIR. Section 228 of the NIRC being remedial in nature can be applied retroactively even though the tax investigation was conducted prior to the law’s passage. Consequently, the invalid FAN cannot be a basis of a compromise, any proceeding emanating from the invalid FAN is void including the issuance of the warrant of distraint and/or levy.

caretaker. Likewise, copies of the deficiency income tax assessments against petitioner Marcos II were personally and constructively served at his last known address. Formal assessment notices were served upon Mrs. Marcos c/o petitioner at his office in the house of representatives on Oct. 20, 1992, as well as a notice of tax payer to attend a conference furnished through her counsel.

GR 120880 June 5, 1997 FERDINAND R. MARCOS II, petitioner, vs. COURT OF APPEALS, THE COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE and HERMINIA D. DE GUZMAN, respondents.

Ferdinand R. Marcos II assailed the decision of the Court of Appeals declaring the deficiency income tax assessments and estate tax assessments upon the estate and properties of his late father despite the pendency of the probate proceedings of the will of the late President. On the other hand, the BIR argued that the State’s authority to collect internal revenue taxes is paramount.

Facts: following the death of former Pres. Marcos in 1989, a Special Tax Audit Team was created on june 27, 1990 to conduct investigations and examination of tax liabilities of the late president, his family, associates and cronies. The investigation disclosed that the Marcoses failed to file a written of death of the decedent, estate tax return and income tax returns for the years 1982 to 1986, all in violation of the Tax Code. Criminal charges were filed against Mrs. Marcos for the violation of Secs. 82, 83 and 84, NIRC. The commissioner of Internal Revenue thereby caused the preparation of the estate tax return for the late president, the income returns of the Marcos spouses for the 1985 and 1986, and the income tax returns of the petitioner Marcos II for the 1982 10 1985. on July 26,1991, the BIR issued deficiency estate tax assessment and the corresponding deficiency income tax assessments. Copies of said deficiency estate and income tax assessments were served personally and constructively on august 26.1991 and September 12, 1991 upon Mrs. Marcos at her last known address through her

The deficiency tax assessments were not administratively protested by the Marcoses w/ in 30 days from service thereof. subsequently., a commissioner issued a total of 30 notices to levy on real property against certain parcels of land and other real property owned by the Marcoses, pursuant to Secs. 205 and 213, NIRC. In response to a letter dated March 12, 1993 of the marcoses new counsel, copies of the afore said notices were serve on April 7, 1993 and June 10.1993 upon the Marcoses on their counsel of record.

Petitioner further argues that "the numerous pending court cases questioning the late president's ownership or interests in several properties (both real and personal) make the total value of his estate, and the consequent estate tax due, incapable of exact pecuniary determination at this time. Thus, respondents' assessment of the estate tax and their issuance of the Notices of Levy and sale are premature and oppressive." He points out the pendency of Sandiganbayan Civil Case Nos. 0001-0034 and 0141, which were filed by the government to question the ownership and interests of the late President in real and personal properties located within and outside the Philippines. Petitioner, however, omits to allege whether the properties levied upon by the BIR in the collection of estate taxes upon the decedent's estate were among those involved in the said cases pending in the Sandiganbayan. Indeed, the court is at a loss as to how these cases are relevant to the matter at issue. The mere fact that the decedent has pending

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cases involving ill-gotten wealth does not affect the enforcement of tax assessments over the properties indubitably included in his estate.

petitioner's attack on the assessment bears mainly on the alleged improbable and unconscionable amount of the taxes charged. But mere rhetoric cannot supply the basis for the charge of impropriety of the assessments made.

Issue: Is the contention of Marcos correct? Held: No. The approval of the court, sitting in probate or as a settlement tribunal over the deceased’s estate, is not a mandatory requirement in the collection of estate taxes. There is nothing in the Tax Code, and in the pertinent remedial laws that implies the necessity of the probate or estate settlement court's approval of the state's claim for estate taxes, before the same can be enforced and collected. The enforcement of tax laws and the collection of taxes are of paramount importance for the sustenance of government. Taxes are the lifeblood of government and should be collected without unnecessary hindrance. However, such collection should be made in accordance with law as any arbitrariness will negate the existence of government itself. It is not the Department of Justice which is the government agency tasked to determine the amount of taxes due upon the subject estate, but the Bureau of Internal Revenue whose determinations and assessments are presumed correct and made in good faith. The taxpayer has the duty of proving otherwise. In the absence of proof of any irregularities in the performance of official duties, an assessment will not be disturbed. Even an assessment based on estimates is prima facie valid and lawful where it does not appear to have been arrived at arbitrarily or capriciously. The burden of proof is upon the complaining party to show clearly that the assessment is erroneous. Failure to present proof of error in the assessment will justify the judicial affirmance of said assessment. In this instance, petitioner has not pointed out one single provision in the Memorandum of the Special Audit Team which gave rise to the questioned assessment, which bears a trace of falsity. Indeed, the

G.R. No. 208293, December 10, 2014 PHILIPPINE NATIONAL BANK, PETITIONER, VS. CARMELITA S. SANTOS, REYME L. SANTOS, ANGEL L. SANTOS, NONENG S. DIANCO, ET AL., RESPONDENTS.

Respondents, heirs of Angel C. Santos, who died on March 21, 1991, discovered that their father had a premium savings account (P1,759,082.634), and a time deposit (P1,000,000.00) with the Philippine National Bank Sta. Elena,-Marikina City branch. They tried to withdraw the deposits but were required to submit the necessary documents. It was only after two years that they were able to complete the required documents, but were shocked to discover that the money was released to a certain Bernardito Manimbo, who submitted the following documents: (a) an affidavit of self-adjudication purportedly executed by one of the respondents, Reyme L. Santos; (b) a certificate of time deposit dated December 14, 1989 amounting to P1,000,000.00; and (c) the death certificate of Angel C. Santos, among others, and a special power of attorney purportedly executed by Reyme L. Santos in favor of Manimbo and a certain Angel P. Santos for purposes of withdrawing and receiving the proceeds of the certificate of time deposit. Thus, the respondents filed a complaint for sum of money against PNB, Lina Aguilar, and a certain John Doe, to compel them to pay the premium deposit amount; the certificate of time deposit, and moral and exemplary damages. In their answer, PNB denied liability, maintaing that Santos only had one deposit with the bank, a time deposit that was converted into a premium savings account upon maturity; that they did not know of Angel’s death in 1991; and Manimbo was able to submit documents which appeared to be regular. They also filed third-party complaints against Manimbo, Angel Santos and Capital Insurance and Surety Co; Angel denied knowing about the SPA; Capital Insurance on the other hand denied

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liability for PNB’s negligence, as its undertaking was only to persons who were unduly deprived of their participation in the estate. The RTC after trial held PNM and Aguilar jointly and severally liable; it ruled that Santos only had one account with PNB, a time deposit which was converted into a premium savings account. Further, it found PNB and Aguilar negligent in releasing the proceeds of the deposit, and its failure to notify the depositor about the maturity of the time deposit and its conversion into a savings deposit. It also failed to require the production of birth certificates to prove the claimant relationship to the depositor, and its reliance on the affidavit of self-adjudication when several claimants had already approached them beforehand. Both PNB and Aguilar appealed to the Court of Appeals, which also affirmed the decision of the RTC. PNB was negligent when it did not require all the documents from Manimbo, particularly the BIR certification that estate taxes had been paid. On the other hand, Aguilar cannot point her finger at the Legal Department of the PNB to whom she should have provided all the necessary documents as Branch Manager. Dissatisfied with the CA ruling, both PNB and Aguilar appealed to the Supreme Court. The Issue: Whether or not PNB and Aguilar were negligent is releasing the proceeds of the savings deposit to a person other than the heirs of the depositor The Ruling: We rule for the respondents. The trial court and the Court of Appeals correctly found that petitioners PNB and Aguilar were negligent in handling the deposit of Angel C. Santos.

The contractual relationship between banks and their depositors is governed by the Civil Code provisions on simple loan.⁠1 Once a person makes a deposit of his or her money to the bank, he or she is considered to have lent the bank that money.⁠2 The bank becomes his or her debtor, and he or she becomes the creditor of the bank, which is obligated to pay him or her on demand.⁠3 The default standard of diligence in the performance of obligations is “diligence of a good father of a family.” Thus, the Civil Code provides: ART. 1163. Every person obliged to give something is also obliged to take care of it with the proper diligence of a good father of a family, unless the law or the stipulation of the parties requires another standard of care. ART. 1173. The fault or negligence of the obligor consists in the omission of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the persons, of the time and of the place. When negligence shows bad faith, the provisions of articles 1171 and 2201, paragraph 2, shall apply. If the law or contract does not state the diligence which is to be observed in the performance, that which is expected of a good father of a family shall be required. (Emphasis supplied) “Diligence of a good father of a family” is the standard of diligence expected of, among others, usufructuaries,⁠4 passengers of common carriers,⁠5 agents,⁠6 depositaries,⁠7 pledgees,⁠8 officious managers,⁠9 and persons deemed by law as responsible for the acts of others.⁠10 “The diligence of a good father of a family requires only that diligence which an ordinary prudent man would exercise with regard to his own property.”⁠11 Other industries, because of their nature, are bound by law to observe higher standards of diligence. Common carriers, for example, must observe “extraordinary diligence in the vigilance over the goods and for the safety of [their] passengers”⁠12 because it is considered a business affected with public interest. “Extraordinary diligence” with respect to passenger safety is further qualified as “carrying the passengers safely as far as human care and foresight can provide, using the utmost diligence of very cautious persons, with a due regard for all the circumstances.”⁠13

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Similar to common carriers, banking is a business that is impressed with public interest. It affects economies and plays a significant role in businesses and commerce.⁠14 The public reposes its faith and confidence upon banks, such that “even the humble wage-earner has not hesitated to entrust his life’s savings to the bank of his choice, knowing that they will be safe in its custody and will even earn some interest for him.”⁠15 This is why we have recognized the fiduciary nature of the banks’ functions, and attached a special standard of diligence for the exercise of their functions. In Simex International (Manila), Inc. v. Court of Appeals,⁠16 this court described the nature of banks’ functions and the attitude expected of banks in handling their depositors’ accounts, thus: In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether such account consists only of a few hundred pesos or of millions. . . . The point is that as a business affected with public interest and because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship.⁠17 (Emphasis supplied) The fiduciary nature of banking is affirmed in Republic Act No. 8791 or The General Banking Law, thus: SEC. 2. Declaration of Policy. — The State recognizes the vital role of banks in providing an environment conducive to the sustained development of the national economy and the fiduciary nature of banking that requires high standards of integrity and performance. In furtherance thereof, the State shall promote and maintain a stable and efficient banking and financial system that is globally competitive, dynamic and responsive to the demands of a developing economy. (Emphasis supplied) In The Consolidated Bank and Trust Corporation v. Court of Appeals,⁠18 this court explained the meaning of fiduciary relationship and the standard of diligence assumed by banks:

This fiduciary relationship means that the bank’s obligation to observe “high standards of integrity and performance” is deemed written into every deposit agreement between a bank and its depositor. The fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a good father of a family. Article 1172 of the Civil Code states that the degree of diligence required of an obligor is that prescribed by law or contract, and absent such stipulation then the diligence of a good father of a family.⁠19 (Emphasis supplied, citation omitted) Petitioners PNB and Aguilar’s treatment of Angel C. Santos’ account is inconsistent with the high standard of diligence required of banks. They accepted Manimbo’s representations despite knowledge of the existence of circumstances that should have raised doubts on such representations. As a result, Angel C. Santos’ deposit was given to a person stranger to him. Petitioner PNB pointed out that since petitioner Aguilar assumed office as PNB-Sta. Elena-Marikina City Branch Manager only five (5) years from Angel C. Santos’ death, she was not in the position to know that respondents were the heirs of Angel C. Santos.⁠20 She could not have accepted the unsigned and unnotarized extrajudicial settlement deed that respondents had first showed her. She was not competent to make a conclusion whether that deed was genuine.⁠22 Neither could petitioners PNB and Aguilar pass judgment on a letter from respondents’ lawyer stating that respondents were the nine heirs of Angel C. Santos.⁠23 Petitioners PNB and Aguilar’s negligence is not based on their failure to accept respondents’ documents as evidence of their right to claim Angel C. Santos’ deposit. Rather, it is based on their failure to exercise the diligence required of banks when they accepted the fraudulent representations of Manimbo.

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Petitioners PNB and Aguilar disregarded their own requirements for the release of the deposit to persons claiming to be heirs of a deceased depositor. When respondents asked for the release of Angel C. Santos’ deposit, they were required to present the following: “(1) original or certified true copy of the Death Certificate of Angel C. Santos; (2) certificate of payment of, or exemption from, estate tax issued by the Bureau of Internal Revenue (BIR); (3) Deed of Extrajudicial Settlement; (4) Publisher’s Affidavit of publication of the Deed of Extrajudicial Settlement; and (5) Surety bond effective for two (2) years and in an amount equal to the balance of the deposit to be withdrawn.”⁠24 Petitioners PNB and Aguilar, however, accepted Manimbo’s representations, and they released Angel C. Santos’ deposit based on only the following documents: 1. Death certificate of Angel C. Santos; 2. Birth certificate of Reyme L. Santos; 3. Affidavit of self-adjudication of Reyme L. Santos; 4. Affidavit of publication; 5. Special power of attorney that Reyme L. Santos executed in favor of Bernardito Manimbo and Angel P. Santos; 6. Personal items of Angel C. Santos, such as photocopies or originals of passport, residence certificate for year 1990, SSS I.D., etc.; 7. Surety good for two (2) years; and 8. Certificate of Time Deposit No. 341306

Based on these enumerations, petitioners PNB and Aguilar either have no fixed standards for the release of their deceased clients’ deposits or they have standards that they disregard for convenience, favor, or upon exercise of discretion. Both are inconsistent with the required diligence of banks. These threaten the safety of the depositors’ accounts as they provide avenues for fraudulent practices by third persons or by bank officers themselves. In this case, petitioners PNB and Aguilar released Angel C. Santos’ deposit to Manimbo without having been presented the BIR-issued certificate of payment of, or exception from, estate tax. This is a legal requirement before the deposit of a decedent is released. Presidential Decree No. 1158,⁠26 the tax code applicable when Angel C. Santos died in 1991, provides: SEC. 118. Payment of tax antecedent to the transfer of shares, bonds, or rights. — There shall not be transferred to any new owner in the books of any corporation, sociedad anonima, partnership, business, or industry organized or established in the Philippines, any shares, obligations, bonds or rights by way of gift inter vivos or mortis causa, legacy, or inheritance unless a certification from the Commissioner that the taxes fixed in this Title and due thereon have been paid is shown. If a bank has knowledge of the death of a person who maintained a hank deposit account alone, or jointly with another, it shall not allow any withdrawal from the said deposit account, unless the Commissioner has certified that the taxes imposed thereon by this Title have been paid; Provided, however, That the administrator of the estate or any one of the heirs of the decedent may upon authorization by the Commissioner of Internal Revenue, withdraw an amount not exceeding P10,000 without the said certification. For this purpose, all withdrawal slips shall contain a statement to the effect that all of the joint depositors are still living at the time of withdrawal by any one of the joint depositors and such statement shall be under oath by the said depositors.⁠27 (Emphasis supplied) This provision was reproduced in Section 97 of the 1997 National Internal Revenue Code, thus:

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SEC. 97. Payment of Tax Antecedent to the Transfer of Shares, Bonds or Rights. — There shall not be transferred to any new owner in the books of any corporation, sociedad anonima, partnership, business, or industry organized or established in the Philippines any share, obligation, bond or right by way of gift inter vivos or mortis causa, legacy or inheritance, unless a certification from the Commissioner that the taxes fixed in this Title and due thereon have been paid is shown. If a bank has knowledge of the death of a person, who maintained a bank deposit account alone, or jointly with another, it shall not allow any withdrawal from the said deposit account, unless the Commissioner has certified that the taxes imposed thereon by this Title have been paid: Provided, however, That the administrator of the estate or any one (1) of the heirs of the decedent may, upon authorization by the Commissioner, withdraw an amount not exceeding Twenty thousand pesos (P20,000) without the said certification. For this purpose, all withdrawal slips shall contain a statement to the effect that all of the joint depositors are still living at the time of withdrawal by any one of the joint depositors and such statement shall be under oath by the said depositors. (Emphasis supplied) Taxes are created primarily to generate revenues for the maintenance of the government. However, this particular tax may also serve as guard against the release of deposits to persons who have no sufficient and valid claim over the deposits. Based on the assumption that only those with sufficient and valid claim to the deposit will pay the taxes for it, requiring the certificate from the BIR increases the chance that the deposit will be released only to them. In their compulsory counterclaim,⁠28 petitioners PNB and Aguilar claimed that Manimbo presented a certificate of payment of estate tax.⁠29 During trial, however, it turned out that this certificate was instead an authority to accept payment, which is not the certificate required for the release of bank deposits.⁠30 It appears that Manimbo was not even required to submit the BIR certificate⁠31. He, thus, failed to present such certificate. Petitioners PNB and Aguilar provided no satisfactory explanation why Angel C. Santos’ deposit was released without it.

Petitioners PNB and Aguilar’s negligence is also clear when they accepted as bases for the release of the deposit to Manimbo: (a) a mere photocopy of Angel C. Santos’ death certificate;⁠32 (b) the falsified affidavit of self-adjudication and special power of attorney purportedly executed by Reyme L. Santos;⁠33 and (c) the certificate of time deposit.⁠34 Petitioner Aguilar was aware that there were other claimants to Angel C. Santos’ deposit. Respondents had already communicated with petitioner Aguilar regarding Angel C. Santos’ account before Manimbo appeared. Petitioner Aguilar even gave respondents the updated passbook of Angel C. Santos’ account.⁠35 Yet, petitioners PNB and Aguilar did not think twice before they released the deposit to Manimbo. They did not doubt why no original death certificate could be submitted. They did not doubt why Reyme L. Santos would execute an affidavit of self-adjudication when he, together with others, had previously asked for the release of Angel C. Santos’ deposit. They also relied on the certificate of time deposit and on Manimbo’s representation that the passbook was lost when the passbook had just been previously presented to Aguilar for updating.⁠36 During the trial, petitioner PNB’s counsel only reasoned that the photocopy of the death certificate was also submitted with other documents, which led him to no other conclusion than that Angel C. Santos was already dead.⁠37 On petitioners PNB and Aguilar’s reliance special power of attorney allegedly executed by Reyme L. Santos, Aguilar admitted that she did not contact Reyme L. Santos for verification. Her reason was that Reyme L. Santos was not their client. Therefore, they had no obligation to do so.⁠38 Given the circumstances, “diligence of a good father of a family” would have required petitioners PNB and Aguilar to verify. A prudent man would have inquired why Reyme L. Santos would issue an affidavit of self-adjudication when others had also claimed to be heirs of Angel C. Santos. Contrary to petitioner Aguilar’s reasoning, the fact that Reyme L. Santos was not petitioner PNB’s client should have moved her to take measures to ensure the veracity of Manimbo’s documents and representations. This is because she had no previous knowledge of Reyme L. Santos his representatives, and his signature.

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Petitioner PNB is a bank from which a degree of diligence higher than that of a good father of a family is expected. Petitioner PNB and its manager, petitioner Aguilar, failed to meet even the standard of diligence of a good father of a family. Their actions and inactions constitute gross negligence. It is for this reason that we sustain the trial court’s and the Court of Appeals’ rulings that petitioners PNB and Aguilar are solidarity liable with each other.⁠39 For the same reason, we sustain the award for moral damages. Petitioners PNB and Aguilar’s gross negligence deprived Angel C. Santos’ heirs what is rightfully theirs. Respondents also testified that they experienced anger and embarrassment when petitioners PNB and Aguilar refused to release Angel C. Santos’ deposit.⁠40 “The bank’s negligence was the result of lack of due care and caution required of managers and employees of a firm engaged in so sensitive and demanding business as banking.”⁠41 Exemplary damages should also be awarded. “The law allows the grant of exemplary damages by way of example for the public good. The public relies on the banks’ sworn profession of diligence and meticulousness in giving irreproachable service. The level of meticulousness must be maintained at all times by the banking sector.”⁠42 Since exemplary damages are awarded and since respondents were compelled to litigate to protect their interests,⁠43 the award of attorney’s fees is also proper. The Court of Appeals’ award of interest should be modified to 12% from demand on April 26, 1998 until June 30, 2013, and 6% from July 1, 2013 until fully paid. In Nacar v. Gallery Frames:⁠44 Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that would govern the parties, the rate of legal interest for loans or forbearance of any money. . . shall no longer be twelve percent (12%) per annum. . . but will now be six percent (6%) per annum effective July 1, 2013. It should be noted, nonetheless, that. . . the twelve percent (12%) per annum legal interest shall apply only until June 30, 2013. Come July 1, 2013 the new rate of six percent (6%) per annum shall be the prevailing rate of interest when applicable. …. 1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of

money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 6% per annum to be computed from default, i.e., from judicial or extrajudicial demand. . . …. 1. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.⁠45 WHEREFORE, the Court of Appeals’ decision dated July 25, 2013 is AFFIRMED with the MODIFICATIONS in that petitioners Philippine National Bank and Lina B. Aguilar are ordered solidarity liable to pay respondents P100,000.00 as exemplary damages. Further, the interest rate for the amount of P1,882,002.05, representing the face value of PNB Manager’s Check No. AF974686B is modified to 12% from April 26, 1998 until June 30, 2013, and 6% from July 1, 2013 until satisfaction. All monetary awards shall then earn interest at the rate of 6% per annum from finality of the decision until full satisfaction. SO ORDERED.

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