Facts:

The case involves the Republic of the Philippines as the plaintiff-appellant against Leonor de la Rama and other heirs of the late Esteban de la Rama as respondents-appellees. The events leading to the case began with the filing of a complaint on March 6, 1961, by the Republic of the Philippines in the Court of First Instance of Manila, seeking to collect a deficiency income tax amounting to P956,032.50, which included a 50% surcharge for the year 1950. The estate of Esteban de la Rama was under Special Proceedings No. 401 in the Court of First Instance of Iloilo, where Eliseo Hervas served as the executor-administrator. On March 12, 1951, Hervas filed income tax returns for the estate, declaring a net income of P922,796.59, leading to an assessment of P3,919.00, which was duly paid. However, the Bureau of Internal Revenue later discovered that the estate had received cash dividends of P966,800.00 from the De la Rama Steamship Company, Inc. in 1950, which had not been declare...

Facts:

Background of the Case

• The case involves an appeal by the Republic of the Philippines against the heirs of the late Esteban de la Rama for the collection of a deficiency income tax amounting to P956,032.50, inclusive of a 50% surcharge, for the year 1950.
• The estate of Esteban de la Rama was under Special Proceedings No. 401 in the Court of First Instance of Iloilo. The executor-administrator, Eliseo Hervas, filed income tax returns for the estate for 1950, declaring a net income of P922,796.59, on which P3,919.00 was paid as income tax.

Discovery of Undeclared Income

• The Bureau of Internal Revenue (BIR) later discovered that the estate had received cash dividends of P966,800.00 from the De la Rama Steamship Company, Inc. in 1950, which were not declared in the income tax return.
• On March 7, 1956, the BIR assessed a deficiency income tax of P956,032.50 against the estate, consisting of P937,355.00 as the deficiency and P918,677.50 as the 50% surcharge.

Notices and Disputes Over Authority

• The Collector of Internal Revenue sent a letter on February 29, 1956, to Lourdes de la Rama-Osmeña, informing her of the deficiency tax and requesting payment. Her counsel responded, stating that Lourdes had no authority to represent the estate and that the notice should be sent to Leonor de la Rama, who was allegedly the administratrix.
• On November 22, 1956, the Deputy Collector of Internal Revenue sent a letter to Leonor de la Rama as administratrix, demanding payment. However, the tax remained unpaid.

Filing of the Complaint

• On March 6, 1961, the Republic filed a complaint in the Court of First Instance of Manila against the heirs of Esteban de la Rama to collect the deficiency tax. The heirs raised several defenses, including:
  1. No cash dividends of P966,800.00 were paid to the estate.
  2. The administration of the estate was extended to collect the dividends.
  3. Leonor de la Rama was never the administratrix.
  4. The executor, Eliseo Hervas, was never notified of the assessment.
  5. The collection of the deficiency tax had prescribed.

Trial Court Findings

• The trial court found that:
  • The P966,800.00 dividend was applied to the estate’s obligation to the De la Rama Steamship Co.
  • Leonor de la Rama was not the administratrix; Eliseo Hervas was the executor-administrator.
  • The administration was extended to recover the dividends.
  • The existence of the debts to which the dividends were applied was disputed and not proven.
• The trial court dismissed the complaint, and the Republic appealed.

Issue:

• (Unlock)

Ruling:

• (Unlock)

Ratio:

1. Constructive Receipt of Income: Under the National Internal Revenue Code, income tax is assessed on income that has been received. Constructive receipt occurs only if the income is applied to legally demandable debts. In this case, the debts to which the dividends were applied were disputed and not proven, so there was no constructive receipt.
2. Liability for Income Tax: The estate or heirs cannot be liable for income tax if the income was not received, either actually or constructively.
3. Finality of Assessment: An assessment becomes final only when the proper taxpayer (in this case, the administrator of the estate) is notified. Since the administrator was not notified, the assessment did not become final.
4. Jurisdiction of the Trial Court: The trial court had jurisdiction to consider the defense that the assessment was erroneous because the assessment was not properly made, and the administrator did not receive notice to appeal to the Court of Tax Appeals.