Case Summary (G.R. No. L-19865)
Petitioner and Respondent
• Petitioners-Appellants – The four Pirovano children (through their guardian) contesting the imposition of donee’s gift taxes, surcharges, and interest.
• Respondent-Appellee – Commissioner of Internal Revenue, assessor of gift taxes.
Key Dates
• Early 1941 – Insurance policies procured on Enrico Pirovano’s life (Philippine policies lapsed; U.S. policies maintained).
• Late 1944 – Death of Enrico Pirovano.
• July 10, 1946 – Board resolution setting aside ₱400,000 for Pirovano’s children.
• January & June 1947 – Resolutions and agreements modifying terms into a ₱643,000 loan-like donation, subject to bonded‐debt settlement.
• June 24, 1947 – Further modification ensuring interest payments pending debt redemption.
• February 26, 1948 – Formal acceptance of donation by Mrs. Pirovano; noted by the Company.
• September 13, 1949 – Stockholders’ ratification with conditions on debt redemption and deduction of transaction expenses.
• March 8, 1951 – Supreme Court decision in Pirovano v. De la Rama Steamship Co. validating the donation (96 Phil. 335).
• April–May 1955 – Company’s compliance payments under the final judgment.
• March & April 1955 – Commissioner assesses donee’s gift tax (₱243,478.68) and donor’s gift tax (₱34,871.76).
• January 31, 1962 – Court of Tax Appeals (CTA) decision: refund donor’s gift tax, uphold donee’s tax, strike 25% surcharge, impose 5% surcharge and 1% monthly interest.
• July 31, 1965 – Supreme Court decision affirming CTA.
Applicable Law
• Civil Code of 1889 (Arts. 619/726) – Defines donation, including “remunerative” donations for services, but still treats them as gifts if not constituting enforceable debts.
• National Internal Revenue Code (pre-1987):
– Sec. 108 – Taxability of gifts.
– Secs. 115(c), 116(a) – Due dates for return filing and payment.
– Sec. 119(b)(1), 119(c) – Mandatory interest (1% per month) and surcharge (5%) on deficiencies.
– Sec. 120 – Discretionary ad valorem penalty (25%) for failure to file without reasonable cause.
Facts and Procedural History
- De la Rama procured and later renounced proceeds of U.S. insurance policies on Pirovano’s life, pledging ₱643,000 to his children under resolutions and formal agreements subject to corporate debt redemption.
- Supreme Court (96 Phil. 335) held the donation valid and binding, awarded ₱583,813.59 plus interest and attorney’s fees, and the company paid in 1955.
- Commissioner assessed donee’s gift tax and donor’s gift tax; company paid the latter, children contested both assessments and sought refund of donor’s gift tax.
- CTA: granted donor’s tax refund, upheld donee’s tax liability, struck 25% penalty for reasonable cause, imposed 5% surcharge and 1% monthly interest on donee’s deficiency.
Issues on Appeal
- Whether the transfer constituted a taxable gift under Sec. 108.
- Whether the value of Pirovano’s past services should offset the taxable gift.
- Whether the 5% surcharge and 1% monthly interest were improperly imposed as premature or discretionary.
Analysis and Ruling
• Nature of Donation – Under Civil Code Art. 619 (Art. 726 of the New Code), a transfer for past services remains a donation if those services did not create a recoverable debt. The Company’s own resolution cited “gratitude” as true consideration. Whether labeled “remunerative” or “simple,” the transfer is a gift subject to tax.
• No Deduction for Past Services – Section III of the Tax Code permits deduction of “consideration” in a bar
Case Syllabus (G.R. No. L-19865)
Facts of the Case
- Enrico Pirovano served as President and General Manager of De la Rama Steamship Co. until his death in late 1944 during the Japanese occupation of the Philippines.
- In early 1941, the Company insured his life for a total of ₱1,000,000 with various Philippine and American insurers, naming itself as beneficiary.
- Premiums on Philippine policies lapsed due to occupation; American policies remained in force through payments by the Company’s New York office.
- After liberation, the Board of Directors (July 10, 1946) resolved to set aside ₱400,000 of expected insurance proceeds for equal division among Enrico’s four minor children, convertible into Company shares.
Insurance Proceeds Resolutions and Agreements
- January 6, 1947: Board renounced its rights over the ₱643,000 received, in favor of the minor children, as a loan bearing 5% interest, payable after settling bonded indebtedness (~₱5,000,000).
- January 10 and June 17, 1947: Memoranda executed by the Company and Mrs. Estefania R. Pirovano (guardian) formalized the renunciation under court authority.
- June 24, 1947: Further resolution provided that principal be paid after debt settlement, while annual interest be paid to the heirs as Company finances permitted.
- February 26, 1948: Formal public acceptance of the donation by Mrs. Pirovano on behalf of her children, officially noted by the Board.
- September 13, 1949: Stockholders ratified all resolutions, adding that debt liquidation or redemption of preferred shares (₱3,260,855.77) precede payment and that transaction expenses be deducted from insurance proceeds.
Revocation and First Judicial Proceedings
- March 8, 1951: Majority stockholder voted to revoke the donation resolution.
- Petitioners, through their guardian, sued De la Rama Steamship Co. in the Court of First Instance of Rizal for ₱564,980.90 plus interest and damages.
- December 29, 1954: Supreme Court decision (96 Phil. 385) held the donation valid and binding, awarding approximately ₱583,813.59 plus interest at 5% per annum and 10% attorney’s fees, subject to prior redemption of preferred shares.
- April 6 and May 12, 1955: Partial and final payments made by the Company in compliance with th