Dizon v CTA (Taxation)

Dizon v CTA G.R. No. 140944 April 30, 2008

FACTS:
On November 7, 1987, Jose P. Fernandez (Jose) died. Thereafter, a petition for the probate of his will
was filed with Branch 51 of the Regional Trial Court (RTC) of Manila (probate court). The probate court
then appointed retired Supreme Court Justice Arsenio P. Dizon (Justice Dizon) and petitioner, Atty.
Rafael Arsenio P. Dizon (petitioner) as Special and Assistant Special Administrator, respectively, of the
Estate of Jose (Estate). Petitioner alleged that several requests for extension of the period to file the
required estate tax return were granted by the BIR since the assets of the estate, as well as the claims
against it, had yet to be collated, determined and identified.
ISSUES:
1. Whether or not the CTA and the CA gravely erred in allowing the admission of the pieces of evidence
which were not formally offered by the BIR; and
2. Whether the actual claims of the aforementioned creditors may be fully allowed as deductions from the
gross estate of Jose despite the fact that the said claims were reduced or condoned through compromise
agreements entered into by the Estate with its creditors Or Whether or not the CA erred in affirming the
CTA in the latter's determination of the deficiency estate tax imposed against the Estate.
RULING:
1. Yes. While the CTA is not governed strictly by technical rules of evidence, as rules of procedure are
not ends in themselves and are primarily intended as tools in the administration of justice, the
presentation of the BIR's evidence is not a mere procedural technicality which may be disregarded
considering that it is the only means by which the CTA may ascertain and verify the truth of BIR's claims
against the Estate. The BIR's failure to formally offer these pieces of evidence, despite CTA's directives,
is fatal to its cause

2. Yes. The claims existing at the time of death are significant to, and should be made the basis of, the
determination of allowable deductions. Also, as held in Propstra v. U.S., where a lien claimed against the
estate was certain and enforceable on the date of the decedent's death, the fact that the claimant
subsequently settled for lesser amount did not preclude the estate from deducting the entire amount of
the claim for estate tax purposes. This is called the date-of-death valuation rule.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 140944 April 30, 2008

RAFAEL ARSENIO S. DIZON, in his capacity as the Judicial Administrator of the Estate of the deceased
JOSE P. FERNANDEZ, petitioner,
vs.
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.

DECISION

NACHURA, J.:

Before this Court is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Civil Procedure seeking the
reversal of the Court of Appeals (CA) Decision2 dated April 30, 1999 which affirmed the Decision3 of the Court of
Tax Appeals (CTA) dated June 17, 1997.4
 The Facts

On November 7, 1987, Jose P. Fernandez (Jose) died. Thereafter, a petition for the probate of his will 5 was filed
with Branch 51 of the Regional Trial Court (RTC) of Manila (probate court). [6] The probate court then appointed
retired Supreme Court Justice Arsenio P. Dizon (Justice Dizon) and petitioner, Atty. Rafael Arsenio P. Dizon
(petitioner) as Special and Assistant Special Administrator, respectively, of the Estate of Jose (Estate). In a letter7
dated October 13, 1988, Justice Dizon informed respondent Commissioner of the Bureau of Internal Revenue (BIR)
of the special proceedings for the Estate.

Petitioner alleged that several requests for extension of the period to file the required estate tax return were granted
by the BIR since the assets of the estate, as well as the claims against it, had yet to be collated, determined and
identified. Thus, in a letter8 dated March 14, 1990, Justice Dizon authorized Atty. Jesus M. Gonzales (Atty.
Gonzales) to sign and file on behalf of the Estate the required estate tax return and to represent the same in securing
a Certificate of Tax Clearance. Eventually, on April 17, 1990, Atty. Gonzales wrote a letter 9 addressed to the BIR
Regional Director for San Pablo City and filed the estate tax return10 with the same BIR Regional Office, showing
therein a NIL estate tax liability, computed as follows:

COMPUTATION OF TAX

Conjugal Real Property (Sch. 1) P10,855,020.00

Conjugal Personal Property (Sch.2) 3,460,591.34

Taxable Transfer (Sch. 3)

Gross Conjugal Estate 14,315,611.34

Less: Deductions (Sch. 4) 187,822,576.06

Net Conjugal Estate NIL

Less: Share of Surviving Spouse NIL.

Net Share in Conjugal Estate NIL

xxx

Net Taxable Estate NIL.

Estate Tax Due NIL.11

On April 27, 1990, BIR Regional Director for San Pablo City, Osmundo G. Umali issued Certification Nos. 2052 [12]
and 2053[13] stating that the taxes due on the transfer of real and personal properties [14] of Jose had been fully paid
and said properties may be transferred to his heirs. Sometime in August 1990, Justice Dizon passed away. Thus, on
October 22, 1990, the probate court appointed petitioner as the administrator of the Estate. 15

Petitioner requested the probate court's authority to sell several properties forming part of the Estate, for the purpose
of paying its creditors, namely: Equitable Banking Corporation (P19,756,428.31), Banque de L'Indochine et. de
Suez (US$4,828,905.90 as of January 31, 1988), Manila Banking Corporation (P84,199,160.46 as of February 28,
1989) and State Investment House, Inc. (P6,280,006.21). Petitioner manifested that Manila Bank, a major creditor of
the Estate was not included, as it did not file a claim with the probate court since it had security over several real
estate properties forming part of the Estate.16

However, on November 26, 1991, the Assistant Commissioner for Collection of the BIR, Themistocles Montalban,
issued Estate Tax Assessment Notice No. FAS-E-87-91-003269,17 demanding the payment of P66,973,985.40 as
deficiency estate tax, itemized as follows:
 Deficiency Estate Tax- 1987

Estate tax P31,868,414.48

25% surcharge- late filing 7,967,103.62

late payment 7,967,103.62

Interest 19,121,048.68
Compromise-non filing 25,000.00

non payment 25,000.00

no notice of death 15.00

no CPA Certificate 300.00

Total amount due & collectible P66,973,985.4018

In his letter19 dated December 12, 1991, Atty. Gonzales moved for the reconsideration of the said estate tax
assessment. However, in her letter20 dated April 12, 1994, the BIR Commissioner denied the request and reiterated
that the estate is liable for the payment of P66,973,985.40 as deficiency estate tax. On May 3, 1994, petitioner
received the letter of denial. On June 2, 1994, petitioner filed a petition for review 21 before respondent CTA. Trial
on the merits ensued.

As found by the CTA, the respective parties presented the following pieces of evidence, to wit:

In the hearings conducted, petitioner did not present testimonial evidence but merely documentary evidence
consisting of the following:

Nature of Document (sic) Exhibits

1. Letter dated October 13, 1988 from Arsenio P. Dizon addressed to "A"
the Commissioner of Internal Revenue informing the latter of the
special proceedings for the settlement of the estate (p. 126, BIR
records);
2. Petition for the probate of the will and issuance of letter of "B" & "B-1"
administration filed with the Regional Trial Court (RTC) of
Manila, docketed as Sp. Proc. No. 87-42980 (pp. 107-108, BIR
records);
3. Pleading entitled "Compliance" filed with the probate Court "C"
submitting the final inventory of all the properties of the deceased
(p. 106, BIR records);
4. Attachment to Exh. "C" which is the detailed and complete listing "C-1" to "C-17"
of the properties of the deceased (pp. 89-105, BIR rec.);
5. Claims against the estate filed by Equitable Banking Corp. with "D" to "D-24"
the probate Court in the amount of P19,756,428.31 as of March
31, 1988, together with the Annexes to the claim (pp. 64-88, BIR
records);
6. Claim filed by Banque de L' Indochine et de Suez with the probate "E" to "E-3"
Court in the amount of US $4,828,905.90 as of January 31, 1988
(pp. 262-265, BIR records);
 7. Claim of the Manila Banking Corporation (MBC) which as of "F" to "F-3"
November 7, 1987 amounts to P65,158,023.54, but recomputed as
of February 28, 1989 at a total amount of P84,199,160.46; together
with the demand letter from MBC's lawyer (pp. 194-197, BIR
records);
8. Demand letter of Manila Banking Corporation prepared by "G" & "G-1"
Asedillo, Ramos and Associates Law Offices addressed to
Fernandez Hermanos, Inc., represented by Jose P. Fernandez, as
mortgagors, in the total amount of P240,479,693.17 as of February
28, 1989 (pp. 186-187, BIR records);
9. Claim of State Investment House, Inc. filed with the RTC, Branch "H" to "H-16"
VII of Manila, docketed as Civil Case No. 86-38599 entitled
"State Investment House, Inc., Plaintiff, versus Maritime
Company Overseas, Inc. and/or Jose P. Fernandez, Defendants,"
(pp. 200-215, BIR records);
10. Letter dated March 14, 1990 of Arsenio P. Dizon addressed to "I"
Atty. Jesus M. Gonzales, (p. 184, BIR records);
11. Letter dated April 17, 1990 from J.M. Gonzales addressed to the "J"
Regional Director of BIR in San Pablo City (p. 183, BIR records);
12. Estate Tax Return filed by the estate of the late Jose P. Fernandez "K" to "K-5"
through its authorized representative, Atty. Jesus M. Gonzales, for
Arsenio P. Dizon, with attachments (pp. 177-182, BIR records);
13. Certified true copy of the Letter of Administration issued by RTC "L"
Manila, Branch 51, in Sp. Proc. No. 87-42980 appointing Atty.
Rafael S. Dizon as Judicial Administrator of the estate of Jose P.
Fernandez; (p. 102, CTA records) and
14. Certification of Payment of estate taxes Nos. 2052 and 2053, both "M" to "M-5"
dated April 27, 1990, issued by the Office of the Regional
Director, Revenue Region No. 4-C, San Pablo City, with
attachments (pp. 103-104, CTA records.).

Respondent's [BIR] counsel presented on June 26, 1995 one witness in the person of Alberto
Enriquez, who was one of the revenue examiners who conducted the investigation on the estate tax
case of the late Jose P. Fernandez. In the course of the direct examination of the witness, he identified
the following:

Documents/Signatures BIR Record

1. Estate Tax Return prepared by the BIR; p. 138

2. Signatures of Ma. Anabella Abuloc and Alberto Enriquez, Jr. -do-

appearing at the lower Portion of Exh. "1";
3. Memorandum for the Commissioner, dated July 19, 1991, pp. 143-144
prepared by revenue examiners, Ma. Anabella A. Abuloc, Alberto
S. Enriquez and Raymund S. Gallardo; Reviewed by Maximino V.
Tagle
4. Signature of Alberto S. Enriquez appearing at the lower portion on -do-
p. 2 of Exh. "2";
 5. Signature of Ma. Anabella A. Abuloc appearing at the lower -do-
portion on p. 2 of Exh. "2";
6. Signature of Raymund S. Gallardo appearing at the Lower portion -do-
on p. 2 of Exh. "2";
7. Signature of Maximino V. Tagle also appearing on p. 2 of Exh. -do-
"2";
8. Summary of revenue Enforcement Officers Audit Report, dated p. 139
July 19, 1991;
9. Signature of Alberto Enriquez at the lower portion of Exh. "3"; -do-

10. Signature of Ma. Anabella A. Abuloc at the lower portion of Exh. -do-
"3";
11. Signature of Raymond S. Gallardo at the lower portion of Exh. -do-
"3";
12. Signature of Maximino V. Tagle at the lower portion of Exh. "3"; -do-

13. Demand letter (FAS-E-87-91-00), signed by the Asst. p. 169

Commissioner for Collection for the Commissioner of Internal
Revenue, demanding payment of the amount of P66,973,985.40;
and
14. Assessment Notice FAS-E-87-91-00 pp. 169-17022

The CTA's Ruling

On June 17, 1997, the CTA denied the said petition for review. Citing this Court's ruling in Vda. de Oñate v. Court
of Appeals,23 the CTA opined that the aforementioned pieces of evidence introduced by the BIR were admissible in
evidence. The CTA ratiocinated:

Although the above-mentioned documents were not formally offered as evidence for respondent, considering that
respondent has been declared to have waived the presentation thereof during the hearing on March 20, 1996, still
they could be considered as evidence for respondent since they were properly identified during the presentation of
respondent's witness, whose testimony was duly recorded as part of the records of this case. Besides, the documents
marked as respondent's exhibits formed part of the BIR records of the case. 24

Nevertheless, the CTA did not fully adopt the assessment made by the BIR and it came up with its own computation
of the deficiency estate tax, to wit:

Conjugal Real Property P 5,062,016.00

Conjugal Personal Prop. 33,021,999.93
Gross Conjugal Estate 38,084,015.93
Less: Deductions 26,250,000.00
Net Conjugal Estate P 11,834,015.93
Less: Share of Surviving Spouse 5,917,007.96
Net Share in Conjugal Estate P 5,917,007.96
Add: Capital/Paraphernal
 Properties – P44,652,813.66
Less: Capital/Paraphernal Deductions 44,652,813.66
Net Taxable Estate P 50,569,821.62
============

Estate Tax Due P 29,935,342.97

Add: 25% Surcharge for Late Filing 7,483,835.74
Add: Penalties for-No notice of death 15.00
No CPA certificate 300.00
Total deficiency estate tax P 37,419,493.71
============

exclusive of 20% interest from due date of its payment until full payment thereof

[Sec. 283 (b), Tax Code of 1987].25

Thus, the CTA disposed of the case in this wise:

WHEREFORE, viewed from all the foregoing, the Court finds the petition unmeritorious and denies the
same. Petitioner and/or the heirs of Jose P. Fernandez are hereby ordered to pay to respondent the amount
of P37,419,493.71 plus 20% interest from the due date of its payment until full payment thereof as estate
tax liability of the estate of Jose P. Fernandez who died on November 7, 1987.

SO ORDERED.26

Aggrieved, petitioner, on March 2, 1998, went to the CA via a petition for review. 27

The CA's Ruling

On April 30, 1999, the CA affirmed the CTA's ruling. Adopting in full the CTA's findings, the CA ruled that the
petitioner's act of filing an estate tax return with the BIR and the issuance of BIR Certification Nos. 2052 and 2053
did not deprive the BIR Commissioner of her authority to re-examine or re-assess the said return filed on behalf of
the Estate.28

On May 31, 1999, petitioner filed a Motion for Reconsideration 29 which the CA denied in its Resolution30 dated
November 3, 1999.

Hence, the instant Petition raising the following issues:

1. Whether or not the admission of evidence which were not formally offered by the respondent BIR by the
Court of Tax Appeals which was subsequently upheld by the Court of Appeals is contrary to the Rules of
Court and rulings of this Honorable Court;

2. Whether or not the Court of Tax Appeals and the Court of Appeals erred in recognizing/considering the
estate tax return prepared and filed by respondent BIR knowing that the probate court appointed
administrator of the estate of Jose P. Fernandez had previously filed one as in fact, BIR Certification
Clearance Nos. 2052 and 2053 had been issued in the estate's favor;
 3. Whether or not the Court of Tax Appeals and the Court of Appeals erred in disallowing the valid and
enforceable claims of creditors against the estate, as lawful deductions despite clear and convincing
evidence thereof; and

4. Whether or not the Court of Tax Appeals and the Court of Appeals erred in validating erroneous double
imputation of values on the very same estate properties in the estate tax return it prepared and filed which
effectively bloated the estate's assets.31

The petitioner claims that in as much as the valid claims of creditors against the Estate are in excess of the gross
estate, no estate tax was due; that the lack of a formal offer of evidence is fatal to BIR's cause; that the doctrine laid
down in Vda. de Oñate has already been abandoned in a long line of cases in which the Court held that evidence not
formally offered is without any weight or value; that Section 34 of Rule 132 of the Rules on Evidence requiring a
formal offer of evidence is mandatory in character; that, while BIR's witness Alberto Enriquez (Alberto) in his
testimony before the CTA identified the pieces of evidence aforementioned such that the same were marked, BIR's
failure to formally offer said pieces of evidence and depriving petitioner the opportunity to cross-examine Alberto,
render the same inadmissible in evidence; that assuming arguendo that the ruling in Vda. de Oñate is still applicable,
BIR failed to comply with the doctrine's requisites because the documents herein remained simply part of the BIR
records and were not duly incorporated in the court records; that the BIR failed to consider that although the actual
payments made to the Estate creditors were lower than their respective claims, such were compromise agreements
reached long after the Estate's liability had been settled by the filing of its estate tax return and the issuance of BIR
Certification Nos. 2052 and 2053; and that the reckoning date of the claims against the Estate and the settlement of
the estate tax due should be at the time the estate tax return was filed by the judicial administrator and the issuance
of said BIR Certifications and not at the time the aforementioned Compromise Agreements were entered into with
the Estate's creditors.32

On the other hand, respondent counters that the documents, being part of the records of the case and duly identified
in a duly recorded testimony are considered evidence even if the same were not formally offered; that the filing of
the estate tax return by the Estate and the issuance of BIR Certification Nos. 2052 and 2053 did not deprive the BIR
of its authority to examine the return and assess the estate tax; and that the factual findings of the CTA as affirmed
by the CA may no longer be reviewed by this Court via a petition for review. 33

The Issues

There are two ultimate issues which require resolution in this case:

First. Whether or not the CTA and the CA gravely erred in allowing the admission of the pieces of evidence which
were not formally offered by the BIR; and

Second. Whether or not the CA erred in affirming the CTA in the latter's determination of the deficiency estate tax
imposed against the Estate.

The Court’s Ruling

The Petition is impressed with merit.

Under Section 8 of RA 1125, the CTA is categorically described as a court of record. As cases filed before it are
litigated de novo, party-litigants shall prove every minute aspect of their cases. Indubitably, no evidentiary value can
be given the pieces of evidence submitted by the BIR, as the rules on documentary evidence require that these
documents must be formally offered before the CTA.34 Pertinent is Section 34, Rule 132 of the Revised Rules on
Evidence which reads:

SEC. 34. Offer of evidence. — The court shall consider no evidence which has not been formally offered.
The purpose for which the evidence is offered must be specified.
The CTA and the CA rely solely on the case of Vda. de Oñate, which reiterated this Court's previous rulings in
People v. Napat-a35 and People v. Mate36 on the admission and consideration of exhibits which were not formally
offered during the trial. Although in a long line of cases many of which were decided after Vda. de Oñate, we held
that courts cannot consider evidence which has not been formally offered, 37 nevertheless, petitioner cannot validly
assume that the doctrine laid down in Vda. de Oñate has already been abandoned. Recently, in Ramos v. Dizon,38
this Court, applying the said doctrine, ruled that the trial court judge therein committed no error when he admitted
and considered the respondents' exhibits in the resolution of the case, notwithstanding the fact that the same were
not formally offered. Likewise, in Far East Bank & Trust Company v. Commissioner of Internal Revenue,39 the
Court made reference to said doctrine in resolving the issues therein. Indubitably, the doctrine laid down in Vda. De
Oñate still subsists in this jurisdiction. In Vda. de Oñate, we held that:

From the foregoing provision, it is clear that for evidence to be considered, the same must be formally
offered. Corollarily, the mere fact that a particular document is identified and marked as an exhibit does not
mean that it has already been offered as part of the evidence of a party. In Interpacific Transit, Inc. v. Aviles
[186 SCRA 385], we had the occasion to make a distinction between identification of documentary
evidence and its formal offer as an exhibit. We said that the first is done in the course of the trial and is
accompanied by the marking of the evidence as an exhibit while the second is done only when the party
rests its case and not before. A party, therefore, may opt to formally offer his evidence if he believes that it
will advance his cause or not to do so at all. In the event he chooses to do the latter, the trial court is not
authorized by the Rules to consider the same.

However, in People v. Napat-a [179 SCRA 403] citing People v. Mate [103 SCRA 484], we relaxed the
foregoing rule and allowed evidence not formally offered to be admitted and considered by the trial
court provided the following requirements are present, viz.: first, the same must have been duly
identified by testimony duly recorded and, second, the same must have been incorporated in the
records of the case.40

From the foregoing declaration, however, it is clear that Vda. de Oñate is merely an exception to the general rule.
Being an exception, it may be applied only when there is strict compliance with the requisites mentioned therein;
otherwise, the general rule in Section 34 of Rule 132 of the Rules of Court should prevail.

In this case, we find that these requirements have not been satisfied. The assailed pieces of evidence were presented
and marked during the trial particularly when Alberto took the witness stand. Alberto identified these pieces of
evidence in his direct testimony.41 He was also subjected to cross-examination and re-cross examination by
petitioner.42 But Alberto’s account and the exchanges between Alberto and petitioner did not sufficiently describe
the contents of the said pieces of evidence presented by the BIR. In fact, petitioner sought that the lead examiner,
one Ma. Anabella A. Abuloc, be summoned to testify, inasmuch as Alberto was incompetent to answer questions
relative to the working papers.43 The lead examiner never testified. Moreover, while Alberto's testimony identifying
the BIR's evidence was duly recorded, the BIR documents themselves were not incorporated in the records of the
case.

A common fact threads through Vda. de Oñate and Ramos that does not exist at all in the instant case. In the
aforementioned cases, the exhibits were marked at the pre-trial proceedings to warrant the pronouncement that the
same were duly incorporated in the records of the case. Thus, we held in Ramos:

In this case, we find and so rule that these requirements have been satisfied. The exhibits in question were
presented and marked during the pre-trial of the case thus, they have been incorporated into the
records. Further, Elpidio himself explained the contents of these exhibits when he was interrogated by
respondents' counsel...

xxxx

But what further defeats petitioner's cause on this issue is that respondents' exhibits were marked and
admitted during the pre-trial stage as shown by the Pre-Trial Order quoted earlier.44
While the CTA is not governed strictly by technical rules of evidence,45 as rules of procedure are not ends in
themselves and are primarily intended as tools in the administration of justice, the presentation of the BIR's evidence
is not a mere procedural technicality which may be disregarded considering that it is the only means by which the
CTA may ascertain and verify the truth of BIR's claims against the Estate. 46 The BIR's failure to formally offer these
pieces of evidence, despite CTA's directives, is fatal to its cause.47 Such failure is aggravated by the fact that not
even a single reason was advanced by the BIR to justify such fatal omission. This, we take against the BIR.

Per the records of this case, the BIR was directed to present its evidence 48 in the hearing of February 21, 1996, but
BIR's counsel failed to appear.49 The CTA denied petitioner's motion to consider BIR's presentation of evidence as
waived, with a warning to BIR that such presentation would be considered waived if BIR's evidence would not be
presented at the next hearing. Again, in the hearing of March 20, 1996, BIR's counsel failed to appear. 50 Thus, in its
Resolution51 dated March 21, 1996, the CTA considered the BIR to have waived presentation of its evidence. In the
same Resolution, the parties were directed to file their respective memorandum. Petitioner complied but BIR failed
to do so.52 In all of these proceedings, BIR was duly notified. Hence, in this case, we are constrained to apply our
ruling in Heirs of Pedro Pasag v. Parocha:53

A formal offer is necessary because judges are mandated to rest their findings of facts and their judgment
only and strictly upon the evidence offered by the parties at the trial. Its function is to enable the trial judge
to know the purpose or purposes for which the proponent is presenting the evidence. On the other hand, this
allows opposing parties to examine the evidence and object to its admissibility. Moreover, it facilitates
review as the appellate court will not be required to review documents not previously scrutinized by the
trial court.

Strict adherence to the said rule is not a trivial matter. The Court in Constantino v. Court of Appeals ruled
that the formal offer of one's evidence is deemed waived after failing to submit it within a
considerable period of time. It explained that the court cannot admit an offer of evidence made after
a lapse of three (3) months because to do so would "condone an inexcusable laxity if not non-
compliance with a court order which, in effect, would encourage needless delays and derail the
speedy administration of justice."

Applying the aforementioned principle in this case, we find that the trial court had reasonable ground to
consider that petitioners had waived their right to make a formal offer of documentary or object evidence.
Despite several extensions of time to make their formal offer, petitioners failed to comply with their
commitment and allowed almost five months to lapse before finally submitting it. Petitioners' failure to
comply with the rule on admissibility of evidence is anathema to the efficient, effective, and
expeditious dispensation of justice.

Having disposed of the foregoing procedural issue, we proceed to discuss the merits of the case.

Ordinarily, the CTA's findings, as affirmed by the CA, are entitled to the highest respect and will not be disturbed on
appeal unless it is shown that the lower courts committed gross error in the appreciation of facts. 54 In this case,
however, we find the decision of the CA affirming that of the CTA tainted with palpable error.

It is admitted that the claims of the Estate's aforementioned creditors have been condoned. As a mode of
extinguishing an obligation,55 condonation or remission of debt56 is defined as:

an act of liberality, by virtue of which, without receiving any equivalent, the creditor renounces the
enforcement of the obligation, which is extinguished in its entirety or in that part or aspect of the same to
which the remission refers. It is an essential characteristic of remission that it be gratuitous, that there is no
equivalent received for the benefit given; once such equivalent exists, the nature of the act changes. It may
become dation in payment when the creditor receives a thing different from that stipulated; or novation,
when the object or principal conditions of the obligation should be changed; or compromise, when the
matter renounced is in litigation or dispute and in exchange of some concession which the creditor
receives.57
Verily, the second issue in this case involves the construction of Section 79 58 of the National Internal Revenue
Code59 (Tax Code) which provides for the allowable deductions from the gross estate of the decedent. The specific
question is whether the actual claims of the aforementioned creditors may be fully allowed as deductions from the
gross estate of Jose despite the fact that the said claims were reduced or condoned through compromise agreements
entered into by the Estate with its creditors.

"Claims against the estate," as allowable deductions from the gross estate under Section 79 of the Tax Code, are
basically a reproduction of the deductions allowed under Section 89 (a) (1) (C) and (E) of Commonwealth Act No.
466 (CA 466), otherwise known as the National Internal Revenue Code of 1939, and which was the first codification
of Philippine tax laws. Philippine tax laws were, in turn, based on the federal tax laws of the United States. Thus,
pursuant to established rules of statutory construction, the decisions of American courts construing the federal tax
code are entitled to great weight in the interpretation of our own tax laws. 60

It is noteworthy that even in the United States, there is some dispute as to whether the deductible amount for a claim
against the estate is fixed as of the decedent's death which is the general rule, or the same should be adjusted to
reflect post-death developments, such as where a settlement between the parties results in the reduction of the
amount actually paid.61 On one hand, the U.S. court ruled that the appropriate deduction is the "value" that the claim
had at the date of the decedent's death.62 Also, as held in Propstra v. U.S., 63 where a lien claimed against the estate
was certain and enforceable on the date of the decedent's death, the fact that the claimant subsequently settled for
lesser amount did not preclude the estate from deducting the entire amount of the claim for estate tax purposes.
These pronouncements essentially confirm the general principle that post-death developments are not material in
determining the amount of the deduction.

On the other hand, the Internal Revenue Service (Service) opines that post-death settlement should be taken into
consideration and the claim should be allowed as a deduction only to the extent of the amount actually paid. 64
Recognizing the dispute, the Service released Proposed Regulations in 2007 mandating that the deduction would be
limited to the actual amount paid.65

In announcing its agreement with Propstra,66 the U.S. 5th Circuit Court of Appeals held:

We are persuaded that the Ninth Circuit's decision...in Propstra correctly apply the Ithaca Trust date-of-
death valuation principle to enforceable claims against the estate. As we interpret Ithaca Trust, when the
Supreme Court announced the date-of-death valuation principle, it was making a judgment about the nature
of the federal estate tax specifically, that it is a tax imposed on the act of transferring property by will or
intestacy and, because the act on which the tax is levied occurs at a discrete time, i.e., the instance of death,
the net value of the property transferred should be ascertained, as nearly as possible, as of that time. This
analysis supports broad application of the date-of-death valuation rule.67

We express our agreement with the date-of-death valuation rule, made pursuant to the ruling of the U.S. Supreme
Court in Ithaca Trust Co. v. United States.68 First. There is no law, nor do we discern any legislative intent in our tax
laws, which disregards the date-of-death valuation principle and particularly provides that post-death developments
must be considered in determining the net value of the estate. It bears emphasis that tax burdens are not to be
imposed, nor presumed to be imposed, beyond what the statute expressly and clearly imports, tax statutes being
construed strictissimi juris against the government.69 Any doubt on whether a person, article or activity is taxable is
generally resolved against taxation.70 Second. Such construction finds relevance and consistency in our Rules on
Special Proceedings wherein the term "claims" required to be presented against a decedent's estate is generally
construed to mean debts or demands of a pecuniary nature which could have been enforced against the deceased in
his lifetime, or liability contracted by the deceased before his death.71 Therefore, the claims existing at the time of
death are significant to, and should be made the basis of, the determination of allowable deductions.

WHEREFORE, the instant Petition is GRANTED. Accordingly, the assailed Decision dated April 30, 1999 and
the Resolution dated November 3, 1999 of the Court of Appeals in CA-G.R. S.P. No. 46947 are REVERSED and
SET ASIDE. The Bureau of Internal Revenue's deficiency estate tax assessment against the Estate of Jose P.
Fernandez is hereby NULLIFIED. No costs.
SO ORDERED.