G.R. No. L-7253 - Descals vs. Administrador de Rentas Internas

Valentin Descals, an American citizen and resident of Manila, died on September 17, 1948.
He left as heirs his brothers Antonio and Ricardo, and his sister Angeles, all bearing the surname Descals.

Approximately two years before his death, Valentin and his brother Ricardo jointly purchased a piece of real estate property in Barcelona, Spain.
Disputes arose between the two brothers regarding the repair and remodeling of the property.
To settle these differences, the brothers agreed that Valentin would become the sole owner of the property by buying out Ricardo’s interest.

An accounting of the property led to the valuation of Ricardo’s interest at P46,000.
Valentin acknowledged this sum as a debt by executing a promissory note dated November 1, 1946.

After Valentin’s death, proceedings were initiated for the administration of his estate.
The estate administrator did not include the Spanish property in the inventory.
The gross value of the estate was initially estimated at P64,000 and, after payment of expenses, reduced to around P44,000.

Ricardo filed a claim before the probate court for P46,000 with interest, based on the promissory note.
The claim was approved by the court, and the administrator paid roughly P80,000 in settlement of the claim, leaving a reported balance that was eventually reduced to about P4,000 after delivery of shares of stock and cash from the estate.

The Collector assessed the estate for taxation without deducting Ricardo’s approved claim.
The estate was assessed for estate tax at P701.53 and for inheritance tax at P2,144.10, totaling P2,845.63.
The administrator paid the tax amount under protest.

The administrator then brought an action in the Court of First Instance of Manila seeking a refund.
The lower court dismissed the complaint with costs.
The case was appealed to the Court of Appeals and subsequently referred to the Supreme Court for questions of law.

Section 88 of the National Internal Revenue Code: Specifies that the gross estate includes all property of the decedent except real property situated outside of the Philippines.
Section 89: Provides that debts incurred in respect to property are deductible only if such property is included in the gross estate.
The decision references similar practices in United States taxation, where properties outside the jurisdiction—and associated indebtedness—are not considered in estate computations.

Whether real property located in Spain, being outside the Philippines, should be considered as part of the decedent’s gross estate for taxation purposes.

Whether the claim based on the promissory note executed by Valentin to acknowledge P46,000 (reflecting Ricardo’s interest in the property) can be deducted in computing the net estate, given that the property was excluded from the gross estate.

Whether the Collector’s assessment of the estate tax and inheritance tax—without deducting the approved claim—was in conformity with the provisions of Sections 88 and 89 of the National Internal Revenue Code.

Whether the administrator’s payment of the tax under protest entitles him to a refund, considering the proper interpretation of the tax laws applicable to international real property and related indebtedness.