G.R. No.

172804 January 24, 2011

GONZALO VILLANUEVA, represented by his heirs, Petitioner,

vs.
SPOUSES FROILAN and LEONILA BRANOCO, Respondents.

The Case

This resolves the petition for review 1 of the ruling2 of the Court of Appeals dismissing a suit to
recover a realty.

The Facts

Petitioner Gonzalo Villanueva (petitioner), here represented by his heirs, 3 sued respondents,
spouses Froilan and Leonila Branoco (respondents), in the Regional Trial Court of Naval, Biliran
(trial court) to recover a 3,492 square-meter parcel of land in Amambajag, Culaba, Leyte
(Property) and collect damages. Petitioner claimed ownership over the Property through
purchase in July 1971 from Casimiro Vere (Vere), who, in turn, bought the Property from Alvegia
Rodrigo (Rodrigo) in August 1970. Petitioner declared the Property in his name for tax purposes
soon after acquiring it.

In their Answer, respondents similarly claimed ownership over the Property through purchase in
July 1983 from Eufracia Rodriguez (Rodriguez) to whom Rodrigo donated the Property in May
1965. The two-page deed of donation (Deed), signed at the bottom by the parties and two
witnesses, reads in full:

KNOW ALL MEN BY THESE PRESENTS:

That I, ALVEGIA RODRIGO, Filipino, of legal age, widow of the late Juan Arcillas, a resident of
Barrio Bool, municipality of Culaba, subprovince of Biliran, Leyte del Norte, Philippines, hereby
depose and say:

That as we live[d] together as husband and wife with Juan Arcillas, we begot children, namely:
LUCIO, VICENTA, SEGUNDINA, and ADELAIDA, all surnamed ARCILLAS, and by reason of poverty
which I suffered while our children were still young; and because my husband Juan Arcillas aware
as he was with our destitution separated us [sic] and left for Cebu; and from then on never cared
what happened to his family; and because of that one EUFRACIA RODRIGUEZ, one of my nieces
who also suffered with our poverty, obedient as she was to all the works in our house, and
because of the love and affection which I feel [for] her, I have one parcel of land located at Sitio
Amambajag, Culaba, Leyte bearing Tax Decl. No. 1878 declared in the name of Alvegia Rodrigo, I
give (devise) said land in favor of EUFRACIA RODRIGUEZ, her heirs, successors, and assigns
together with all the improvements existing thereon, which parcel of land is more or less
described and bounded as follows:

1. Bounded North by Amambajag River; East, Benito Picao; South, Teofilo Uyvico; and West, by
Public land; 2. It has an area of 3,492 square meters more or less; 3. It is planted to coconuts
now bearing fruits; 4. Having an assessed value of P240.00; 5. It is now in the possession of
EUFRACIA RODRIGUEZ since May 21, 1962 in the concept of an owner, but the Deed of Donation
or that ownership be vested on her upon my demise.
That I FURTHER DECLARE, and I reiterate that the land above described, I already devise in favor
of EUFRACIA RODRIGUEZ since May 21, 1962, her heirs, assigns, and that if the herein Donee
predeceases me, the same land will not be reverted to the Donor, but will be inherited by the
heirs of EUFRACIA RODRIGUEZ;

That I EUFRACIA RODRIGUEZ, hereby accept the land above described from Inay Alvegia Rodrigo
and I am much grateful to her and praying further for a longer life; however, I will give one half
(1/2) of the produce of the land to Apoy Alve during her lifetime. 4

Respondents entered the Property in 1983 and paid taxes afterwards.

The Ruling of the Trial Court

The trial court ruled for petitioner, declared him owner of the Property, and ordered respondents
to surrender possession to petitioner, and to pay damages, the value of the Propertys produce
since 1982 until petitioners repossession and the costs. 5 The trial court rejected respondents
claim of ownership after treating the Deed as a donation mortis causa which Rodrigo effectively
cancelled by selling the Property to Vere in 1970. 6 Thus, by the time Rodriguez sold the Property
to respondents in 1983, she had no title to transfer.

Respondents appealed to the Court of Appeals (CA), imputing error in the trial courts
interpretation of the Deed as a testamentary disposition instead of an inter vivos donation,
passing title to Rodriguez upon its execution.

Ruling of the Court of Appeals

The CA granted respondents appeal and set aside the trial courts ruling. While conceding that
the "language of the [Deed is] x x x confusing and which could admit of possible different
interpretations,"7 the CA found the following factors pivotal to its reading of the Deed as donation
inter vivos: (1) Rodriguez had been in possession of the Property as owner since 21 May 1962,
subject to the delivery of part of the produce to Apoy Alve; (2) the Deeds consideration was not
Rodrigos death but her "love and affection" for Rodriguez, considering the services the latter
rendered; (3) Rodrigo waived dominion over the Property in case Rodriguez predeceases her,
implying its inclusion in Rodriguezs estate; and (4) Rodriguez accepted the donation in the Deed
itself, an act necessary to effectuate donations inter vivos, not devises.8 Accordingly, the CA
upheld the sale between Rodriguez and respondents, and, conversely found the sale between
Rodrigo and petitioners predecessor-in-interest, Vere, void for Rodrigos lack of title.

In this petition, petitioner seeks the reinstatement of the trial courts ruling. Alternatively,
petitioner claims ownership over the Property through acquisitive prescription, having allegedly
occupied it for more than 10 years.9

Respondents see no reversible error in the CAs ruling and pray for its affirmance.

The Issue

The threshold question is whether petitioners title over the Property is superior to respondents.
The resolution of this issue rests, in turn, on whether the contract between the parties
predecessors-in-interest, Rodrigo and Rodriguez, was a donation or a devise. If the former,
respondents hold superior title, having bought the Property from Rodriguez. If the latter,
petitioner prevails, having obtained title from Rodrigo under a deed of sale the execution of
which impliedly revoked the earlier devise to Rodriguez.

The Ruling of the Court

We find respondents title superior, and thus, affirm the CA.

Naked Title Passed from Rodrigo to Rodriguez Under a Perfected Donation

We examine the juridical nature of the Deed whether it passed title to Rodriguez upon its
execution or is effective only upon Rodrigos death using principles distilled from relevant
jurisprudence. Post-mortem dispositions typically

(1) Convey no title or ownership to the transferee before the death of the transferor; or,
what amounts to the same thing, that the transferor should retain the ownership (full or
naked) and control of the property while alive;

(2) That before the [donors] death, the transfer should be revocable by the transferor at
will, ad nutum; but revocability may be provided for indirectly by means of a reserved
power in the donor to dispose of the properties conveyed;

(3) That the transfer should be void if the transferor should survive the transferee. 10

Further

[4] [T]he specification in a deed of the causes whereby the act may be revoked by the
donor indicates that the donation is inter vivos, rather than a disposition mortis causa[;]

[5] That the designation of the donation as mortis causa, or a provision in the deed to the
effect that the donation is "to take effect at the death of the donor" are not controlling
criteria; such statements are to be construed together with the rest of the instrument, in
order to give effect to the real intent of the transferor[;] [and]

(6) That in case of doubt, the conveyance should be deemed donation inter vivos rather
than mortis causa, in order to avoid uncertainty as to the ownership of the property
subject of the deed.11

It is immediately apparent that Rodrigo passed naked title to Rodriguez under a perfected
donation inter vivos. First. Rodrigo stipulated that "if the herein Donee predeceases me, the
[Property] will not be reverted to the Donor, but will be inherited by the heirs of x x x Rodriguez,"
signaling the irrevocability of the passage of title to Rodriguezs estate, waiving Rodrigos right to
reclaim title. This transfer of title was perfected the moment Rodrigo learned of Rodriguezs
acceptance of the disposition12 which, being reflected in the Deed, took place on the day of its
execution on 3 May 1965. Rodrigos acceptance of the transfer underscores its essence as a gift
in presenti, not in futuro, as only donations inter vivos need acceptance by the recipient.13
Indeed, had Rodrigo wished to retain full title over the Property, she could have easily stipulated,
as the testator did in another case, that "the donor, may transfer, sell, or encumber to any
person or entity the properties here donated x x x" 14 or used words to that effect. Instead,
Rodrigo expressly waived title over the Property in case Rodriguez predeceases her.

In a bid to diffuse the non-reversion stipulations damning effect on his case, petitioner tries to
profit from it, contending it is a fideicommissary substitution clause. 15 Petitioner assumes the fact
he is laboring to prove. The question of the Deeds juridical nature, whether it is a will or a
donation, is the crux of the present controversy. By treating the clause in question as mandating
fideicommissary substitution, a mode of testamentary disposition by which the first heir
instituted is entrusted with the obligation to preserve and to transmit to a second heir the whole
or part of the inheritance, 16 petitioner assumes that the Deed is a will. Neither the Deeds text
nor the import of the contested clause supports petitioners theory.

Second. What Rodrigo reserved for herself was only the beneficial title to the Property, evident
from Rodriguezs undertaking to "give one [half] x x x of the produce of the land to Apoy Alve
during her lifetime."17 Thus, the Deeds stipulation that "the ownership shall be vested on
[Rodriguez] upon my demise," taking into account the non-reversion clause, could only refer to
Rodrigos beneficial title. We arrived at the same conclusion in Balaqui v. Dongso18 where, as
here, the donor, while "b[inding] herself to answer to the [donor] and her heirs x x x that none
shall question or disturb [the donees] right," also stipulated that the donation "does not pass
title to [the donee] during my lifetime; but when I die, [the donee] shall be the true owner" of the
donated parcels of land. In finding the disposition as a gift inter vivos, the Court reasoned:

Taking the deed x x x as a whole, x x x x it is noted that in the same deed [the donor]
guaranteed to [the donee] and her heirs and successors, the right to said property thus
conferred. From the moment [the donor] guaranteed the right granted by her to [the donee] to
the two parcels of land by virtue of the deed of gift, she surrendered such right; otherwise there
would be no need to guarantee said right. Therefore, when [the donor] used the words upon
which the appellants base their contention that the gift in question is a donation mortis causa
[that the gift "does not pass title during my lifetime; but when I die, she shall be the true owner
of the two aforementioned parcels"] the donor meant nothing else than that she reserved
of herself the possession and usufruct of said two parcels of land until her death, at
which time the donee would be able to dispose of them freely.19 (Emphasis supplied)

Indeed, if Rodrigo still retained full ownership over the Property, it was unnecessary for her to
reserve partial usufructuary right over it.20

Third. The existence of consideration other than the donors death, such as the donors love and
affection to the donee and the services the latter rendered, while also true of devises,
nevertheless "corroborates the express irrevocability of x x x [inter vivos] transfers."21 Thus, the
CA committed no error in giving weight to Rodrigos statement of "love and affection" for
Rodriguez, her niece, as consideration for the gift, to underscore its finding.

It will not do, therefore, for petitioner to cherry-pick stipulations from the Deed tending to serve
his cause (e.g. "the ownership shall be vested on [Rodriguez] upon my demise" and "devise").
Dispositions bearing contradictory stipulations are interpreted wholistically, to give effect to the
donors intent. In no less than seven cases featuring deeds of donations styled as "mortis causa"
dispositions, the Court, after going over the deeds, eventually considered the transfers inter
vivos,22 consistent with the principle that "the designation of the donation as mortis causa, or a
provision in the deed to the effect that the donation is to take effect at the death of the donor
are not controlling criteria [but] x x x are to be construed together with the rest of the
instrument, in order to give effect to the real intent of the transferor." 23 Indeed, doubts on the
nature of dispositions are resolved to favor inter vivos transfers "to avoid uncertainty as to the
ownership of the property subject of the deed." 24

Nor can petitioner capitalize on Rodrigos post-donation transfer of the Property to Vere as proof
of her retention of ownership. If such were the barometer in interpreting deeds of donation, not
only will great legal uncertainty be visited on gratuitous dispositions, this will give license to
rogue property owners to set at naught perfected transfers of titles, which, while founded on
liberality, is a valid mode of passing ownership. The interest of settled property dispositions
counsels against licensing such practice. 25

Accordingly, having irrevocably transferred naked title over the Property to Rodriguez in 1965,
Rodrigo "cannot afterwards revoke the donation nor dispose of the said property in favor of
another."26 Thus, Rodrigos post-donation sale of the Property vested no title to Vere. As Veres
successor-in-interest, petitioner acquired no better right than him. On the other hand,
respondents bought the Property from Rodriguez, thus acquiring the latters title which they may
invoke against all adverse claimants, including petitioner.

Petitioner Acquired No Title Over the Property

Alternatively, petitioner grounds his claim of ownership over the Property through his and Veres
combined possession of the Property for more than ten years, counted from Veres purchase of
the Property from Rodrigo in 1970 until petitioner initiated his suit in the trial court in February
1986.27 Petitioner anchors his contention on an unfounded legal assumption. The ten year
ordinary prescriptive period to acquire title through possession of real property in the concept of
an owner requires uninterrupted possession coupled with just title and good faith.28 There is just
title when the adverse claimant came into possession of the property through one of the modes
recognized by law for the acquisition of ownership or other real rights, but the grantor was not
the owner or could not transmit any right. 29 Good faith, on the other hand, consists in the
reasonable belief that the person from whom the possessor received the thing was the owner
thereof, and could transmit his ownership. 30

Although Vere and petitioner arguably had just title having successively acquired the Property
through sale, neither was a good faith possessor. As Rodrigo herself disclosed in the Deed,
Rodriguez already occupied and possessed the Property "in the concept of an owner" ("como
tag-iya"31) since 21 May 1962, nearly three years before Rodrigos donation in 3 May 1965 and
seven years before Vere bought the Property from Rodrigo. This admission against interest binds
Rodrigo and all those tracing title to the Property through her, including Vere and petitioner.
Indeed, petitioners insistent claim that Rodriguez occupied the Property only in 1982, when she
started paying taxes, finds no basis in the records. In short, when Vere bought the Property from
Rodrigo in 1970, Rodriguez was in possession of the Property, a fact that prevented Vere from
being a buyer in good faith.

Lacking good faith possession, petitioners only other recourse to maintain his claim of ownership
by prescription is to show open, continuous and adverse possession of the Property for 30
years.32 Undeniably, petitioner is unable to meet this requirement.1avvphil

Ancillary Matters Petitioner Raises Irrelevant

Petitioner brings to the Courts attention facts which, according to him, support his theory that
Rodrigo never passed ownership over the Property to Rodriguez, namely, that Rodriguez
registered the Deed and paid taxes on the Property only in 1982 and Rodriguez obtained from
Vere in 1981 a waiver of the latters "right of ownership" over the Property. None of these facts
detract from our conclusion that under the text of the Deed and based on the contemporaneous
acts of Rodrigo and Rodriguez, the latter, already in possession of the Property since 1962 as
Rodrigo admitted, obtained naked title over it upon the Deeds execution in 1965. Neither
registration nor tax payment is required to perfect donations. On the relevance of the waiver
agreement, suffice it to say that Vere had nothing to waive to Rodriguez, having obtained no title
from Rodrigo. Irrespective of Rodriguezs motivation in obtaining the waiver, that document,
legally a scrap of paper, added nothing to the title Rodriguez obtained from Rodrigo under the
Deed.

WHEREFORE, we DENY the petition. We AFFIRM the Decision dated 6 June 2005 and the
Resolution dated 5 May 2006 of the Court of Appeals.

SO ORDERED.

G.R. No. 82027 March 29, 1990

ROMARICO G. VITUG, petitioner,

vs.
THE HONORABLE COURT OF APPEALS and ROWENA FAUSTINO-CORONA, respondents.

SARMIENTO, J.:

This case is a chapter in an earlier suit decided by this Court 1 involving the probate of the two
wills of the late Dolores Luchangco Vitug, who died in New York, U. S.A., on November 10, 1980,
naming private respondent Rowena Faustino-Corona executrix. In our said decision, we upheld
the appointment of Nenita Alonte as co-special administrator of Mrs. Vitug's estate with her (Mrs.
Vitug's) widower, petitioner Romarico G. Vitug, pending probate.

On January 13, 1985, Romarico G. Vitug filed a motion asking for authority from the probate court
to sell certain shares of stock and real properties belonging to the estate to cover allegedly his
advances to the estate in the sum of P667,731.66, plus interests, which he claimed were
personal funds. As found by the Court of Appeals, 2 the alleged advances consisted of P58,147.40
spent for the payment of estate tax, P518,834.27 as deficiency estate tax, and P90,749.99 as
"increment thereto." 3 According to Mr. Vitug, he withdrew the sums of P518,834.27 and
P90,749.99 from savings account No. 35342-038 of the Bank of America, Makati, Metro Manila.

On April 12, 1985, Rowena Corona opposed the motion to sell on the ground that the same funds
withdrawn from savings account No. 35342-038 were conjugal partnership properties and part of
the estate, and hence, there was allegedly no ground for reimbursement. She also sought his
ouster for failure to include the sums in question for inventory and for "concealment of funds
belonging to the estate." 4

Vitug insists that the said funds are his exclusive property having acquired the same through a
survivorship agreement executed with his late wife and the bank on June 19, 1970. The
agreement provides:
 We hereby agree with each other and with the BANK OF AMERICAN NATIONAL
TRUST AND SAVINGS ASSOCIATION (hereinafter referred to as the BANK), that all
money now or hereafter deposited by us or any or either of us with the BANK in our
joint savings current account shall be the property of all or both of us and shall be
payable to and collectible or withdrawable by either or any of us during our lifetime,
and after the death of either or any of us shall belong to and be the sole property of
the survivor or survivors, and shall be payable to and collectible or withdrawable by
such survivor or survivors.

We further agree with each other and the BANK that the receipt or check of either,
any or all of us during our lifetime, or the receipt or check of the survivor or
survivors, for any payment or withdrawal made for our above-mentioned account
shall be valid and sufficient release and discharge of the BANK for such payment or
withdrawal. 5

The trial courts 6 upheld the validity of this agreement and granted "the motion to sell some of
the estate of Dolores L. Vitug, the proceeds of which shall be used to pay the personal funds of
Romarico Vitug in the total sum of P667,731.66 ... ." 7

On the other hand, the Court of Appeals, in the petition for certiorari filed by the herein private
respondent, held that the above-quoted survivorship agreement constitutes a conveyance mortis
causa which "did not comply with the formalities of a valid will as prescribed by Article 805 of the
Civil Code," 8 and secondly, assuming that it is a mere donation inter vivos, it is a prohibited
donation under the provisions of Article 133 of the Civil Code. 9

The dispositive portion of the decision of the Court of Appeals states:

WHEREFORE, the order of respondent Judge dated November 26, 1985 (Annex II,
petition) is hereby set aside insofar as it granted private respondent's motion to sell
certain properties of the estate of Dolores L. Vitug for reimbursement of his alleged
advances to the estate, but the same order is sustained in all other respects. In
addition, respondent Judge is directed to include provisionally the deposits in
Savings Account No. 35342-038 with the Bank of America, Makati, in the inventory
of actual properties possessed by the spouses at the time of the decedent's death.
With costs against private respondent. 10

In his petition, Vitug, the surviving spouse, assails the appellate court's ruling on the strength of
our decisions in Rivera v. People's Bank and Trust Co. 11 and Macam v. Gatmaitan 12 in which we
sustained the validity of "survivorship agreements" and considering them as aleatory contracts.
13

The petition is meritorious.

The conveyance in question is not, first of all, one of mortis causa, which should be embodied in
a will. A will has been defined as "a personal, solemn, revocable and free act by which a
capacitated person disposes of his property and rights and declares or complies with duties to
take effect after his death." 14 In other words, the bequest or device must pertain to the testator.
15
In this case, the monies subject of savings account No. 35342-038 were in the nature of
conjugal funds In the case relied on, Rivera v. People's Bank and Trust Co., 16 we rejected claims
that a survivorship agreement purports to deliver one party's separate properties in favor of the
other, but simply, their joint holdings:

xxx xxx xxx

... Such conclusion is evidently predicated on the assumption that Stephenson was
the exclusive owner of the funds-deposited in the bank, which assumption was in
turn based on the facts (1) that the account was originally opened in the name of
Stephenson alone and (2) that Ana Rivera "served only as housemaid of the
deceased." But it not infrequently happens that a person deposits money in the
bank in the name of another; and in the instant case it also appears that Ana Rivera
served her master for about nineteen years without actually receiving her salary
from him. The fact that subsequently Stephenson transferred the account to the
name of himself and/or Ana Rivera and executed with the latter the survivorship
agreement in question although there was no relation of kinship between them but
only that of master and servant, nullifies the assumption that Stephenson was the
exclusive owner of the bank account. In the absence, then, of clear proof to the
contrary, we must give full faith and credit to the certificate of deposit which recites
in effect that the funds in question belonged to Edgar Stephenson and Ana Rivera;
that they were joint (and several) owners thereof; and that either of them could
withdraw any part or the whole of said account during the lifetime of both, and the
balance, if any, upon the death of either, belonged to the survivor. 17

xxx xxx xxx

18
In Macam v. Gatmaitan, it was held:

xxx xxx xxx

This Court is of the opinion that Exhibit C is an aleatory contract whereby, according
to article 1790 of the Civil Code, one of the parties or both reciprocally bind
themselves to give or do something as an equivalent for that which the other party
is to give or do in case of the occurrence of an event which is uncertain or will
happen at an indeterminate time. As already stated, Leonarda was the owner of the
house and Juana of the Buick automobile and most of the furniture. By virtue of
Exhibit C, Juana would become the owner of the house in case Leonarda died first,
and Leonarda would become the owner of the automobile and the furniture if Juana
were to die first. In this manner Leonarda and Juana reciprocally assigned their
respective property to one another conditioned upon who might die first, the time of
death determining the event upon which the acquisition of such right by the one or
the other depended. This contract, as any other contract, is binding upon the
parties thereto. Inasmuch as Leonarda had died before Juana, the latter thereupon
acquired the ownership of the house, in the same manner as Leonarda would have
acquired the ownership of the automobile and of the furniture if Juana had died first.
19

xxx xxx xxx

There is no showing that the funds exclusively belonged to one party, and hence it must be
20
presumed to be conjugal, having been acquired during the existence of the marita. relations.

Neither is the survivorship agreement a donation inter vivos, for obvious reasons, because it was
to take effect after the death of one party. Secondly, it is not a donation between the spouses
because it involved no conveyance of a spouse's own properties to the other.

It is also our opinion that the agreement involves no modification petition of the conjugal
partnership, as held by the Court of Appeals, 21 by "mere stipulation" 22 and that it is no "cloak" 23
to circumvent the law on conjugal property relations. Certainly, the spouses are not prohibited by
law to invest conjugal property, say, by way of a joint and several bank account, more commonly
denominated in banking parlance as an "and/or" account. In the case at bar, when the spouses
Vitug opened savings account No. 35342-038, they merely put what rightfully belonged to them
in a money-making venture. They did not dispose of it in favor of the other, which would have
arguably been sanctionable as a prohibited donation. And since the funds were conjugal, it can
not be said that one spouse could have pressured the other in placing his or her deposits in the
money pool.

The validity of the contract seems debatable by reason of its "survivor-take-all" feature, but in
reality, that contract imposed a mere obligation with a term, the term being death. Such
agreements are permitted by the Civil Code. 24

Under Article 2010 of the Code:

ART. 2010. By an aleatory contract, one of the parties or both reciprocally bind
themselves to give or to do something in consideration of what the other shall give
or do upon the happening of an event which is uncertain, or which is to occur at an
indeterminate time.

Under the aforequoted provision, the fulfillment of an aleatory contract depends on either the
happening of an event which is (1) "uncertain," (2) "which is to occur at an indeterminate time."
A survivorship agreement, the sale of a sweepstake ticket, a transaction stipulating on the value
of currency, and insurance have been held to fall under the first category, while a contract for life
annuity or pension under Article 2021, et sequentia, has been categorized under the second. 25
In either case, the element of risk is present. In the case at bar, the risk was the death of one
party and survivorship of the other.

However, as we have warned:

xxx xxx xxx

But although the survivorship agreement is per se not contrary to law its operation
or effect may be violative of the law. For instance, if it be shown in a given case that
such agreement is a mere cloak to hide an inofficious donation, to transfer property
in fraud of creditors, or to defeat the legitime of a forced heir, it may be assailed
and annulled upon such grounds. No such vice has been imputed and established
against the agreement involved in this case. 26

xxx xxx xxx

There is no demonstration here that the survivorship agreement had been executed for such
unlawful purposes, or, as held by the respondent court, in order to frustrate our laws on wills,
donations, and conjugal partnership.

The conclusion is accordingly unavoidable that Mrs. Vitug having predeceased her husband, the
latter has acquired upon her death a vested right over the amounts under savings account No.
35342-038 of the Bank of America. Insofar as the respondent court ordered their inclusion in the
inventory of assets left by Mrs. Vitug, we hold that the court was in error. Being the separate
property of petitioner, it forms no more part of the estate of the deceased.

WHEREFORE, the decision of the respondent appellate court, dated June 29, 1987, and its
resolution, dated February 9, 1988, are SET ASIDE.

No costs.

SO ORDERED.

G.R. No. 140944 April 30, 2008

RAFAEL ARSENIO S. DIZON, in his capacity as the Judicial Administrator of the Estate
of the deceased JOSE P. FERNANDEZ, petitioner,
vs.
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.

DECISION

NACHURA, J.:

Before this Court is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Civil
Procedure seeking the reversal of the Court of Appeals (CA) Decision 2 dated April 30, 1999 which
affirmed the Decision3 of the Court of Tax Appeals (CTA) dated June 17, 1997. 4

The Facts

On November 7, 1987, Jose P. Fernandez (Jose) died. Thereafter, a petition for the probate of his
will5 was filed with Branch 51 of the Regional Trial Court (RTC) of Manila (probate court). [6] The
probate court then appointed retired Supreme Court Justice Arsenio P. Dizon (Justice Dizon) and
petitioner, Atty. Rafael Arsenio P. Dizon (petitioner) as Special and Assistant Special
Administrator, respectively, of the Estate of Jose (Estate). In a letter 7 dated October 13, 1988,
Justice Dizon informed respondent Commissioner of the Bureau of Internal Revenue (BIR) of the
special proceedings for the Estate.

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

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

Conjugal Personal Property (Sch.2) 3,460,591.34

Taxable Transfer (Sch. 3)

Gross Conjugal Estate 14,315,611.34

Less: Deductions (Sch. 4) 187,822,576.06

Net Conjugal Estate NIL

Less: Share of Surviving Spouse NIL.

Net Share in Conjugal Estate NIL

xxx

Net Taxable Estate NIL.

Estate Tax Due NIL.11

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

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

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

Deficiency Estate Tax- 1987

Estate tax P31,868,414.48

25% surcharge- late filing 7,967,103.62

late payment 7,967,103.62

Interest 19,121,048.68

Compromise-non filing 25,000.00

non payment 25,000.00

no notice of death 15.00

no CPA Certificate 300.00

Total amount due & collectible P66,973,985.4018

In his letter19 dated December 12, 1991, Atty. Gonzales moved for the reconsideration of the said
estate tax assessment. However, in her letter20 dated April 12, 1994, the BIR Commissioner
denied the request and reiterated that the estate is liable for the payment of P66,973,985.40 as
deficiency estate tax. On May 3, 1994, petitioner received the letter of denial. On June 2, 1994,
petitioner filed a petition for review21 before respondent CTA. Trial on the merits ensued.

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

In the hearings conducted, petitioner did not present testimonial evidence but merely
documentary evidence consisting of the following:
 Nature of Document (sic) Exhibits

1. Letter dated October 13, 1988 from Arsenio P. "A"

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

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

3. Pleading entitled "Compliance" filed with the "C"

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

4. Attachment to Exh. "C" which is the detailed and "C-1" to "C-17"

complete listing of the properties of the
deceased (pp. 89-105, BIR rec.);

5. Claims against the estate filed by Equitable "D" to "D-24"

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

6. Claim filed by Banque de L' Indochine et de Suez "E" to "E-3"

with the probate Court in the amount of US
$4,828,905.90 as of January 31, 1988 (pp. 262-
265, BIR records);

7. Claim of the Manila Banking Corporation (MBC) "F" to "F-3"

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

8. Demand letter of Manila Banking Corporation "G" & "G-1"

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

9. Claim of State Investment House, Inc. filed with "H" to "H-16"

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

10. Letter dated March 14, 1990 of Arsenio P. Dizon "I"

addressed to Atty. Jesus M. Gonzales, (p. 184,
BIR records);

11. Letter dated April 17, 1990 from J.M. Gonzales "J"
addressed to the Regional Director of BIR in San
Pablo City (p. 183, BIR records);

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

13. Certified true copy of the Letter of "L"

Administration issued by RTC Manila, Branch 51,
in Sp. Proc. No. 87-42980 appointing Atty. Rafael
S. Dizon as Judicial Administrator of the estate
of Jose P. Fernandez; (p. 102, CTA records) and

14. Certification of Payment of estate taxes Nos. "M" to "M-5"

2052 and 2053, both dated April 27, 1990,
issued by the Office of the Regional Director,
Revenue Region No. 4-C, San Pablo City, with
attachments (pp. 103-104, CTA records.).

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

1. Estate Tax Return prepared by the BIR; p. 138

2. Signatures of Ma. Anabella Abuloc and Alberto -do-

Enriquez, Jr. appearing at the lower Portion of
Exh. "1";

3. Memorandum for the Commissioner, dated July pp. 143-144

19, 1991, prepared by revenue examiners, Ma.
Anabella A. Abuloc, Alberto S. Enriquez and
Raymund S. Gallardo; Reviewed by Maximino V.
Tagle

4. Signature of Alberto S. Enriquez appearing at -do-

the lower portion on p. 2 of Exh. "2";

5. Signature of Ma. Anabella A. Abuloc appearing -do-

at the lower portion on p. 2 of Exh. "2";

6. Signature of Raymund S. Gallardo appearing at -do-

the Lower portion on p. 2 of Exh. "2";

7. Signature of Maximino V. Tagle also appearing -do-

on p. 2 of Exh. "2";

8. Summary of revenue Enforcement Officers Audit p. 139

Report, dated July 19, 1991;

9. Signature of Alberto Enriquez at the lower -do-

portion of Exh. "3";

10. Signature of Ma. Anabella A. Abuloc at the lower -do-

portion of Exh. "3";

11. Signature of Raymond S. Gallardo at the lower -do-

 portion of Exh. "3";

12. Signature of Maximino V. Tagle at the lower -do-

portion of Exh. "3";

13. Demand letter (FAS-E-87-91-00), signed by the p. 169

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

14. Assessment Notice FAS-E-87-91-00 pp. 169-17022

The CTA's Ruling

On June 17, 1997, the CTA denied the said petition for review. Citing this Court's ruling in Vda. de
Oate v. Court of Appeals,23 the CTA opined that the aforementioned pieces of evidence
introduced by the BIR were admissible in evidence. The CTA ratiocinated:

Although the above-mentioned documents were not formally offered as evidence for respondent,
considering that respondent has been declared to have waived the presentation thereof during
the hearing on March 20, 1996, still they could be considered as evidence for respondent since
they were properly identified during the presentation of respondent's witness, whose testimony
was duly recorded as part of the records of this case. Besides, the documents marked as
respondent's exhibits formed part of the BIR records of the case. 24

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

Conjugal Real Property P 5,062,016.00

Conjugal Personal Prop. 33,021,999.93

Gross Conjugal Estate 38,084,015.93

Less: Deductions 26,250,000.00

Net Conjugal Estate P

11,834,015.93
 Less: Share of Surviving Spouse 5,917,007.96

Net Share in Conjugal Estate P 5,917,007.96

Add: Capital/Paraphernal

Properties P44,652,813.66

Less: Capital/Paraphernal 44,652,813.66

Deductions

Net Taxable Estate P

50,569,821.62
=========
===

Estate Tax Due P 29,935,342.97

Add: 25% Surcharge for Late Filing 7,483,835.74

Add: Penalties for-No notice of death 15.00

No CPA certificate 300.00

Total deficiency estate tax P

37,419,493.71
=========
===

exclusive of 20% interest from due date of its payment until full payment thereof

[Sec. 283 (b), Tax Code of 1987].25

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

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

SO ORDERED.26

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

The CA's Ruling

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

On May 31, 1999, petitioner filed a Motion for Reconsideration 29 which the CA denied in its
Resolution30 dated November 3, 1999.

Hence, the instant Petition raising the following issues:

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

2. Whether or not the Court of Tax Appeals and the Court of Appeals erred in
recognizing/considering the estate tax return prepared and filed by respondent BIR
knowing that the probate court appointed administrator of the estate of Jose P. Fernandez
had previously filed one as in fact, BIR Certification Clearance Nos. 2052 and 2053 had
been issued in the estate's favor;

3. Whether or not the Court of Tax Appeals and the Court of Appeals erred in disallowing
the valid and enforceable claims of creditors against the estate, as lawful deductions
despite clear and convincing evidence thereof; and

4. Whether or not the Court of Tax Appeals and the Court of Appeals erred in validating
erroneous double imputation of values on the very same estate properties in the estate
tax return it prepared and filed which effectively bloated the estate's assets. 31

The petitioner claims that in as much as the valid claims of creditors against the Estate are in
excess of the gross estate, no estate tax was due; that the lack of a formal offer of evidence is
fatal to BIR's cause; that the doctrine laid down in Vda. de Oate has already been abandoned in
a long line of cases in which the Court held that evidence not formally offered is without any
weight or value; that Section 34 of Rule 132 of the Rules on Evidence requiring a formal offer of
evidence is mandatory in character; that, while BIR's witness Alberto Enriquez (Alberto) in his
testimony before the CTA identified the pieces of evidence aforementioned such that the same
were marked, BIR's failure to formally offer said pieces of evidence and depriving petitioner the
opportunity to cross-examine Alberto, render the same inadmissible in evidence; that assuming
arguendo that the ruling in Vda. de Oate is still applicable, BIR failed to comply with the
doctrine's requisites because the documents herein remained simply part of the BIR records and
were not duly incorporated in the court records; that the BIR failed to consider that although the
actual payments made to the Estate creditors were lower than their respective claims, such were
compromise agreements reached long after the Estate's liability had been settled by the filing of
its estate tax return and the issuance of BIR Certification Nos. 2052 and 2053; and that the
reckoning date of the claims against the Estate and the settlement of the estate tax due should
be at the time the estate tax return was filed by the judicial administrator and the issuance of
said BIR Certifications and not at the time the aforementioned Compromise Agreements were
entered into with the Estate's creditors.32

On the other hand, respondent counters that the documents, being part of the records of the
case and duly identified in a duly recorded testimony are considered evidence even if the same
were not formally offered; that the filing of the estate tax return by the Estate and the issuance
of BIR Certification Nos. 2052 and 2053 did not deprive the BIR of its authority to examine the
return and assess the estate tax; and that the factual findings of the CTA as affirmed by the CA
may no longer be reviewed by this Court via a petition for review. 33

The Issues

There are two ultimate issues which require resolution in this case:

First. 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

Second. Whether or not the CA erred in affirming the CTA in the latter's determination of the
deficiency estate tax imposed against the Estate.

The Courts Ruling

The Petition is impressed with merit.

Under Section 8 of RA 1125, the CTA is categorically described as a court of record. As cases filed
before it are litigated de novo, party-litigants shall prove every minute aspect of their cases.
Indubitably, no evidentiary value can be given the pieces of evidence submitted by the BIR, as
the rules on documentary evidence require that these documents must be formally offered
before the CTA.34 Pertinent is Section 34, Rule 132 of the Revised Rules on Evidence which reads:

SEC. 34. Offer of evidence. The court shall consider no evidence which has not been
formally offered. The purpose for which the evidence is offered must be specified.

The CTA and the CA rely solely on the case of Vda. de Oate, which reiterated this Court's
previous rulings in People v. Napat-a35 and People v. Mate36 on the admission and consideration
of exhibits which were not formally offered during the trial. Although in a long line of cases many
of which were decided after Vda. de Oate, we held that courts cannot consider evidence which
has not been formally offered,37 nevertheless, petitioner cannot validly assume that the doctrine
laid down in Vda. de Oate has already been abandoned. Recently, in Ramos v. Dizon,38 this
Court, applying the said doctrine, ruled that the trial court judge therein committed no error
when he admitted and considered the respondents' exhibits in the resolution of the case,
notwithstanding the fact that the same were not formally offered. Likewise, in Far East Bank &
Trust Company v. Commissioner of Internal Revenue,39 the Court made reference to said doctrine
in resolving the issues therein. Indubitably, the doctrine laid down in Vda. De Oate still subsists
in this jurisdiction. In Vda. de Oate, we held that:

From the foregoing provision, it is clear that for evidence to be considered, the same must
be formally offered. Corollarily, the mere fact that a particular document is identified and
marked as an exhibit does not mean that it has already been offered as part of the
evidence of a party. In Interpacific Transit, Inc. v. Aviles [186 SCRA 385], we had the
occasion to make a distinction between identification of documentary evidence and its
formal offer as an exhibit. We said that the first is done in the course of the trial and is
accompanied by the marking of the evidence as an exhibit while the second is done only
 when the party rests its case and not before. A party, therefore, may opt to formally offer
his evidence if he believes that it will advance his cause or not to do so at all. In the event
he chooses to do the latter, the trial court is not authorized by the Rules to consider the
same.

However, in People v. Napat-a [179 SCRA 403] citing People v. Mate [103 SCRA 484], we
relaxed the foregoing rule and allowed evidence not formally offered to be
admitted and considered by the trial court provided the following requirements
are present, viz.: first, the same must have been duly identified by testimony
duly recorded and, second, the same must have been incorporated in the
records of the case.40

From the foregoing declaration, however, it is clear that Vda. de Oate is merely an exception to
the general rule. Being an exception, it may be applied only when there is strict compliance with
the requisites mentioned therein; otherwise, the general rule in Section 34 of Rule 132 of the
Rules of Court should prevail.

In this case, we find that these requirements have not been satisfied. The assailed pieces of
evidence were presented and marked during the trial particularly when Alberto took the witness
stand. Alberto identified these pieces of evidence in his direct testimony. 41 He was also subjected
to cross-examination and re-cross examination by petitioner. 42 But Albertos account and the
exchanges between Alberto and petitioner did not sufficiently describe the contents of the said
pieces of evidence presented by the BIR. In fact, petitioner sought that the lead examiner, one
Ma. Anabella A. Abuloc, be summoned to testify, inasmuch as Alberto was incompetent to
answer questions relative to the working papers. 43 The lead examiner never testified. Moreover,
while Alberto's testimony identifying the BIR's evidence was duly recorded, the BIR documents
themselves were not incorporated in the records of the case.

A common fact threads through Vda. de Oate and Ramos that does not exist at all in the instant
case. In the aforementioned cases, the exhibits were marked at the pre-trial proceedings to
warrant the pronouncement that the same were duly incorporated in the records of the case.
Thus, we held in Ramos:

In this case, we find and so rule that these requirements have been satisfied. The
exhibits in question were presented and marked during the pre-trial of the case
thus, they have been incorporated into the records. Further, Elpidio himself
explained the contents of these exhibits when he was interrogated by respondents'
counsel...

xxxx

But what further defeats petitioner's cause on this issue is that respondents' exhibits were
marked and admitted during the pre-trial stage as shown by the Pre-Trial Order quoted
earlier.44

While the CTA is not governed strictly by technical rules of evidence, 45 as rules of procedure are
not ends in themselves and are primarily intended as tools in the administration of justice, the
presentation of the BIR's evidence is not a mere procedural technicality which may be
disregarded considering that it is the only means by which the CTA may ascertain and verify the
truth of BIR's claims against the Estate.46 The BIR's failure to formally offer these pieces of
evidence, despite CTA's directives, is fatal to its cause. 47 Such failure is aggravated by the fact
that not even a single reason was advanced by the BIR to justify such fatal omission. This, we
take against the BIR.
Per the records of this case, the BIR was directed to present its evidence 48 in the hearing of
February 21, 1996, but BIR's counsel failed to appear. 49 The CTA denied petitioner's motion to
consider BIR's presentation of evidence as waived, with a warning to BIR that such presentation
would be considered waived if BIR's evidence would not be presented at the next hearing. Again,
in the hearing of March 20, 1996, BIR's counsel failed to appear. 50 Thus, in its Resolution51 dated
March 21, 1996, the CTA considered the BIR to have waived presentation of its evidence. In the
same Resolution, the parties were directed to file their respective memorandum. Petitioner
complied but BIR failed to do so.52 In all of these proceedings, BIR was duly notified. Hence, in
this case, we are constrained to apply our ruling in Heirs of Pedro Pasag v. Parocha:53

A formal offer is necessary because judges are mandated to rest their findings of facts and
their judgment only and strictly upon the evidence offered by the parties at the trial. Its
function is to enable the trial judge to know the purpose or purposes for which the
proponent is presenting the evidence. On the other hand, this allows opposing parties to
examine the evidence and object to its admissibility. Moreover, it facilitates review as the
appellate court will not be required to review documents not previously scrutinized by the
trial court.

Strict adherence to the said rule is not a trivial matter. The Court in Constantino v. Court of
Appeals ruled that the formal offer of one's evidence is deemed waived after
failing to submit it within a considerable period of time. It explained that the
court cannot admit an offer of evidence made after a lapse of three (3) months
because to do so would "condone an inexcusable laxity if not non-compliance
with a court order which, in effect, would encourage needless delays and derail
the speedy administration of justice."

Applying the aforementioned principle in this case, we find that the trial court had
reasonable ground to consider that petitioners had waived their right to make a formal
offer of documentary or object evidence. Despite several extensions of time to make their
formal offer, petitioners failed to comply with their commitment and allowed almost five
months to lapse before finally submitting it. Petitioners' failure to comply with the
rule on admissibility of evidence is anathema to the efficient, effective, and
expeditious dispensation of justice.

Having disposed of the foregoing procedural issue, we proceed to discuss the merits of the case.

Ordinarily, the CTA's findings, as affirmed by the CA, are entitled to the highest respect and will
not be disturbed on appeal unless it is shown that the lower courts committed gross error in the
appreciation of facts.54 In this case, however, we find the decision of the CA affirming that of the
CTA tainted with palpable error.

It is admitted that the claims of the Estate's aforementioned creditors have been condoned. As a
mode of extinguishing an obligation, 55 condonation or remission of debt56 is defined as:

an act of liberality, by virtue of which, without receiving any equivalent, the creditor
renounces the enforcement of the obligation, which is extinguished in its entirety or in that
part or aspect of the same to which the remission refers. It is an essential characteristic of
remission that it be gratuitous, that there is no equivalent received for the benefit given;
once such equivalent exists, the nature of the act changes. It may become dation in
payment when the creditor receives a thing different from that stipulated; or novation,
when the object or principal conditions of the obligation should be changed; or
compromise, when the matter renounced is in litigation or dispute and in exchange of
some concession which the creditor receives. 57
Verily, the second issue in this case involves the construction of Section 79 58 of the National
Internal Revenue Code59 (Tax Code) which provides for the allowable deductions from the gross
estate of the decedent. The specific question is whether the actual claims of the aforementioned
creditors may be fully allowed as deductions from the gross estate of Jose despite the fact that
the said claims were reduced or condoned through compromise agreements entered into by the
Estate with its creditors.

"Claims against the estate," as allowable deductions from the gross estate under Section 79 of
the Tax Code, are basically a reproduction of the deductions allowed under Section 89 (a) (1) (C)
and (E) of Commonwealth Act No. 466 (CA 466), otherwise known as the National Internal
Revenue Code of 1939, and which was the first codification of Philippine tax laws. Philippine tax
laws were, in turn, based on the federal tax laws of the United States. Thus, pursuant to
established rules of statutory construction, the decisions of American courts construing the
federal tax code are entitled to great weight in the interpretation of our own tax laws. 60

It is noteworthy that even in the United States, there is some dispute as to whether the
deductible amount for a claim against the estate is fixed as of the decedent's death which is the
general rule, or the same should be adjusted to reflect post-death developments, such as where
a settlement between the parties results in the reduction of the amount actually paid. 61 On one
hand, the U.S. court ruled that the appropriate deduction is the "value" that the claim had at the
date of the decedent's death. 62 Also, as held in Propstra v. U.S., 63 where a lien claimed against
the estate was certain and enforceable on the date of the decedent's death, the fact that the
claimant subsequently settled for lesser amount did not preclude the estate from deducting the
entire amount of the claim for estate tax purposes. These pronouncements essentially confirm
the general principle that post-death developments are not material in determining the amount
of the deduction.

On the other hand, the Internal Revenue Service (Service) opines that post-death settlement
should be taken into consideration and the claim should be allowed as a deduction only to the
extent of the amount actually paid.64 Recognizing the dispute, the Service released Proposed
Regulations in 2007 mandating that the deduction would be limited to the actual amount paid. 65

In announcing its agreement with Propstra,66 the U.S. 5th Circuit Court of Appeals held:

We are persuaded that the Ninth Circuit's decision...in Propstra correctly apply the Ithaca
Trust date-of-death valuation principle to enforceable claims against the estate. As we
interpret Ithaca Trust, when the Supreme Court announced the date-of-death valuation
principle, it was making a judgment about the nature of the federal estate tax specifically,
that it is a tax imposed on the act of transferring property by will or intestacy and,
because the act on which the tax is levied occurs at a discrete time, i.e., the instance of
death, the net value of the property transferred should be ascertained, as nearly as
possible, as of that time. This analysis supports broad application of the date-of-death
valuation rule.67

We express our agreement with the date-of-death valuation rule, made pursuant to the ruling of
the U.S. Supreme Court in Ithaca Trust Co. v. United States.68 First. There is no law, nor do we
discern any legislative intent in our tax laws, which disregards the date-of-death valuation
principle and particularly provides that post-death developments must be considered in
determining the net value of the estate. It bears emphasis that tax burdens are not to be
imposed, nor presumed to be imposed, beyond what the statute expressly and clearly imports,
tax statutes being construed strictissimi juris against the government.69 Any doubt on whether a
person, article or activity is taxable is generally resolved against taxation. 70 Second. Such
construction finds relevance and consistency in our Rules on Special Proceedings wherein the
term "claims" required to be presented against a decedent's estate is generally construed to
mean debts or demands of a pecuniary nature which could have been enforced against the
deceased in his lifetime, or liability contracted by the deceased before his death.71 Therefore, the
claims existing at the time of death are significant to, and should be made the basis of, the
determination of allowable deductions.

WHEREFORE, the instant Petition is GRANTED. Accordingly, the assailed Decision dated April
30, 1999 and the Resolution dated November 3, 1999 of the Court of Appeals in CA-G.R. S.P. No.
46947 are REVERSED and SET ASIDE. The Bureau of Internal Revenue's deficiency estate tax
assessment against the Estate of Jose P. Fernandez is hereby NULLIFIED. No costs.

SO ORDERED.

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.:

Assailed in this petition for review on certiorari is the December 21, 1995 Decision1 of the Court
of Appeals2 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

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

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.

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. . . .

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.

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. ]

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 state 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:

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.

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. . . .

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

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. 241wphi1

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.1wphi1.nt

SO ORDERED.