Title
Lorenzo vs. Posadas, Jr.
Case
G.R. No. 43082
Decision Date
Jun 18, 1937
Estate inheritance tax liability hinges on property value at testator's death, not distribution, with penalties for delayed payment.

Case Summary (G.R. No. 43082)

Applicable law and constitutional basis

Relevant statutory provisions: Revised Administrative Code — §§ 1536, 1539, 1543, 1544 (as amended by Act No. 3031); Act No. 3606 (amending § 1544, effective Jan. 1, 1930); Regulations No. 65 (Department of Finance); Civil Code art. 657; Code of Civil Procedure provisions governing appointment and powers of trustees/executors (referenced: secs. 582, 590, 625). Applicable constitution: the 1935 Philippine Constitution is the constitution in force at the time of this decision and is the appropriate constitutional backdrop for the decision.

Procedural posture

Plaintiff filed suit (Oct. 4, 1932) seeking refund of P2,052.74 paid as inheritance tax (together with interest) and the Collector counterclaimed for P1,191.27 as additional interest. The trial court dismissed both claims. On appeal, the Supreme Court reviewed multiple legal questions concerning accrual and computation of the inheritance tax, proper valuation date, allowable deductions, applicable law (including retroactivity issues), and the date and consequences of delinquency.

Primary legal issues presented

(1) When does the inheritance tax accrue and when must it be paid? (2) Whether the tax base should be the estate’s value at the decedent’s death or its value at the expiration of the ten‑year postponement established by the will. (3) Whether trustee compensation may be deducted in calculating the net estate subject to tax. (4) Which statutory regime governs the assessment (Act No. 3031 in force at death or Act No. 3606 enacted later), and whether amendments favorable to the taxpayer could be applied retroactively. (5) Whether there was delinquency and, if so, the correct date from which interest and surcharge run and the proper computation of amounts due.

Accrual of the tax versus obligation to pay

The court distinguished accrual of the tax from the obligation to pay. Under Civil Code art. 657, rights of succession are transmitted from the moment of death; therefore the right of the state to tax the transmission (an excise or privilege tax on succession) accrues at the decedent’s death (here, May 27, 1922). However, the statutory obligation to pay is governed by § 1544 of the Revised Administrative Code (as amended by Act No. 3031), which prescribes when the tax must be paid. Because this estate involved delivery to a trustee (a fideicommissary or cestui que trust situation), payment was required before delivery to the trustee — here, before the trustee (P. J. M. Moore) took possession on March 10, 1924. Thus: accrual at death; payment required on or before the date of delivery to the trustee.

Valuation date for the tax base (death versus postponed possession)

The Court held that the proper valuation date for the inheritance tax is the time the succession takes effect — the decedent’s death — even where possession or enjoyment is postponed by will. The right to tax vests at death and is measured by the estate’s value at that time; subsequent appreciation or depreciation is immaterial. The Court rejected the plaintiff’s argument that, because the will postponed possession for ten years, the tax should be computed on the estate’s value at the ten‑year expiration (1932). The Court emphasized policy considerations: allowing postponement of tax payment by creating trusts that delay possession would permit tax evasion and frustrate the governmental need for prompt collection of revenue.

Deductibility of trustees’ compensation and allowable deductions

Section 1539 allows deduction of judicial expenses of testamentary or intestate proceedings in determining the net estate. The Court held that compensation paid to trustees for post‑devolution management of property is not a proper deduction under § 1539. Trustees’ compensation in this case related to management for the benefit of the eventual beneficiaries, not to administration expenses required to close and distribute the estate. There was no Philippine statute requiring deduction of trustees’ commissions in calculating the net estate subject to the inheritance tax; accordingly the trial court correctly disallowed deductions for trustees’ fees beyond the P480.81 it permitted as allowable expenses and disbursements of the executors up to March 10, 1924.

Applicable statutory regime and retroactivity of Act No. 3606

Because the testator died in 1922, the governing tax law is the statute in force at death: § 1544 as amended by Act No. 3031 (effective March 9, 1922). Act No. 3606 (effective Jan. 1, 1930) postdated the death and thus cannot be applied retroactively unless the statute clearly manifests a retroactive intent. The Court found no clear legislative intent in Act No. 3606 to operate retroactively; Regulations No. 65 cannot supply retroactivity absent legislative authorization. The Collector’s contention that certain provisions of Act No. 3606 are penal and thus should be applied retroactively under art. 22 of the Revised Penal Code was rejected: revenue laws are not properly treated as penal statutes for this purpose, and in any event retroactivity must appear plainly in the statute. Consequently Act No. 3031 governs the assessment and penalties.

Creation of the trust, effect of appointment of trustee, and delivery

The probate court’s appointment of Moore as trustee effectuated the testator’s testamentary trust; the legal estate vested in the trustee on March 10, 1924 when he took oath and possession. The Court found the appointment and acceptance to be delivery to the trustee and equivalent to delivery to the cestui que trust (beneficiary) for purposes of the tax statutes. A trustee acts as an agent or instrument for the beneficiary and does not acquire beneficial interest; placing the estate in trust did not remove it from the operation of inheritance tax law. Accordingly, the trust’s creation fixed the statutory deadline for payment: the corresponding inheritance tax should have been paid on or before Moore’s receipt of the estate (March 10, 1924) to avoid penalties.

Delinquency, interest, surcharge, and demand

Because payment was not made before delivery to the trustee, the estate became delinquent on March 10, 1924 (the date the trustee accepted possession). Interest under the statute (as applicable under Act No. 3031) is mandatory and runs from the date of delinquency. The Collector cannot remit or reduce statutory interest. A surcharge of 25% attaches where tax and interest remain unpaid within the prescribed period after notice and demand. Here the deputy collector made demand on Moore by communication dated October 16, 1931, fixing November 30, 1931 as the payment date. The ten‑day period for surcharge calculation expired on December 1, 1931 (since Nov. 30 was an official holiday), and the estate’s failure to pay by that date rendered it liable to the surcharge.

Computation of tax, interest, surcharge, and net liability

  • Gross estate value at death: real property P27,920 + personal property P1,465 = P29,385.
  • Allowed deductions (executors’ expenses and disbursements up to March 10, 1924): P480.81.
  • Net estate subject to tax: P29,385 − P480.81 = P28,904.19.
  • Primary tax (per § 1536, subsec. (c)): 1% on first P10,000 = P100.00; 2% on excess up to P30,000: 2% of P18,904.19 = P378.08; plus an additional 200% (as provided by statute in the cited provision) of P956.16, yielding a primary tax total of P1,434.24 (as the Collector computed).

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