LORENZO v. POSADAS

G.R. No. 43082, June 18, 1937

FACTS: Thomas Hanley died, leaving a will and a considerable amount of real and personal properties. Proceedings for the probate of his will and the settlement and distribution of his estate were begun in the CFI of Zamboanga. The will was admitted to probate.

The CFI considered it proper for the best interests of the estate to appoint a trustee to administer the real properties which, under the will, were to pass to nephew Matthew ten years after the two executors named in the will was appointed trustee. Moore acted as trustee until he resigned and the plaintiff Lorenzo herein was appointed in his stead.

During the incumbency of the plaintiff as trustee, the defendant Collector of Internal Revenue (Posadas) assessed against the estate an inheritance tax, together with the penalties for delinquency in payment consisting of a 1% monthly interest from July 1, 1931 to the date of payment and a surcharge of 25% on the tax. Lorenzo paid said amount under protest, notifying Posadas at the same time that unless the amount was promptly refunded suit would be brought for its recovery. Posadas overruled Lorenzo’s protest and refused to refund the said amount. Plaintiff went to court. The CFI dismissed Lorenzo’s complaint and Posadas’ counterclaim. Both parties appealed to this court.

In his appeal, plaintiff contends that the lower court erred:

I. In holding that the real property of Thomas Hanley, deceased, passed to his instituted heir, Matthew Hanley, from the moment of the death of the former, and that from the time, the latter became the owner thereof.

II. In holding, in effect, that there was delinquency in the payment of inheritance tax due on the estate of said deceased.

III. In holding that the inheritance tax in question be based upon the value of the estate upon the death of the testator, and not, as it should have been held, upon the value thereof at the expiration of the period of ten years after which, according to the testator's will, the property could be and was to be delivered to the instituted heir.

IV. In not allowing as lawful deductions, in the determination of the net amount of the estate subject to said tax, the amounts allowed by the court as compensation to the "trustees" and paid to them from the decedent's estate.

V. In not rendering judgment in favor of the plaintiff and in denying his motion for new trial.

The defendant-appellant contradicts the theories of the plaintiff and assigns that the lower court erred in not ordering the plaintiff to pay to the defendant the sum representing part of the interest at the rate of 1 per cent per month from April 10, 1924, to June 30, 1931, which the plaintiff had failed to pay on the inheritance tax assessed by the defendant against the estate of Thomas Hanley.

There were various issues decided by the court:

1st, when does the inheritance tax accrue and when must it be satisfied?

The accrual of the inheritance tax is distinct from the obligation to pay the same. Section 1536 as amended, of the Administrative Code, imposes the tax upon "every transmission by virtue of inheritance, devise, bequest, gift mortis causa, or advance in anticipation of inheritance, devise, or bequest." The tax therefore is upon transmission or the transfer or devolution of property of a decedent, made effective by his death. Thomas Hanley died on May 27, 1922, it does not follow that the obligation to pay the tax arose as of the date. The time for the payment on inheritance tax is clearly fixed by section 1544 of the Revised Administrative Code as amended by Act No. 3031, in relation to section 1543 of the same Code. The two sections follow:

SEC. 1543 (b) provides that the transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the trustees. SEC. 1544 (a) provides that the tax for SEC. 1543 (b) shall be paid before entrance into possession of the property. The tax should have been paid before the delivery of the properties in question to P. J. M. Moore as trustee on March 10, 1924.

2nd, should the inheritance tax be computed on the basis of the value of the estate at the time of the testator's death, or on its value ten years later?

The court ruled that a transmission by inheritance is taxable at the time of the predecessor's death, notwithstanding the postponement of the actual possession or enjoyment of the estate by the beneficiary, and the tax measured by the value of the property transmitted at that time regardless of its appreciation or depreciation.

3rd, in determining the net value of the estate subject to tax, is it proper to deduct the compensation due to trustees?

The court ruled that while a trustee is entitled to receive a fair compensation for his services it does not follow that the compensation due him may lawfully be deducted in arriving at the net value of the estate subject to tax. 

4th, what law governs the case at bar? Should the provisions of Act No. 3606 favorable to the tax-payer be given retroactive effect?

It is well-settled that inheritance taxation is governed by the statute in force at the time of the death of the decedent 

Lastly, has there been delinquency in the payment of the inheritance tax?

Yes, the estate which plaintiff represents has been delinquent in the payment of inheritance tax and, therefore, liable for the payment of interest and surcharge provided by law in such cases. The delinquency in payment occurred on March 10, 1924, the date when Moore became trustee. The interest due should be computed from that date. The provisions cases is mandatory and neither the Collector of Internal Revenue or this court may remit or decrease such interest, no matter how heavily it may burden the taxpayer.