CTA Case No. 12823 (Decision)

BN L. CHUY end L.E& SIN laintiffs, - vezsua - P SINAN CIVIL CASB O. 12823 THB COLLECT P mTE At O.fendant. REVENUE , X� � � � - � - ~ � - � � X DiCI lOt The plaintiffs, Ben. L. uy and ee Sin, ere ~. benef1c1a~i�� of twe inau~ance policies issued on the life of Dee Se by th� Lincoln National Life� Insurance C any, each with a face value ef 25 ,ro>. Ben L. Q\uy ��� alse the beneficiary ef two inauz- ance pel!ciea issued by the Philippine ~lean Life Insu%ance Ce.pany allo en the life of Dee e with a tetal face value of ~.ooo. In all the .aid in- su%ance peliciea , the insured reaervtd the p.we~ to chant� the beneficiaries. e Se died en JWle 22, 19~1. laintiffa sought to cellect the pnceeds of the 1nsur~ce policies froa the Lincoln Nltion�l Life Insur1nc� C.-pany aftd the rb111ppine C.-pany but ~heae ce.panies zefused te pay en the greund that the insured made false representatiens in his eppl1catlens for insurance. Accerdingly, the twe companies advised the beneficiaries that they were cancelling the cent~acts. At the same tlme � the c~anie1 r�t\.lrned the reraiu.s paid by 287

DICISlai � CIVIL CASB � 12823 - 2- I inatitut~ the cerreapending actions for ~ecev�ry of the face val �� of said p�liciea (Civil Caset ��� 1 33 d 12034 f the Ceurt f Pirat Inetance of an asJ.nan ). The C.urt �f Pi:rat Innance of angaalnan endered jud ent fer t e pt.lnt1ffs. (Ex � - 1. ) The t � lnauzence co aniea appeal.cl. eal of the L1nceln National Life ln- a\a ce C any could be erfectecl, th� aaid c any and plaintiffs ca ly aettled the caae, tha fo~r agnelng to pay to the latte~ the face val- ues ef the twe peliciea isaued by it. Plaintiffs ere pei en y 23, 1~3. In the ease ef the p eal ef the hilip lne erican Life nau~ nc:e c..,any , tba decision of t e l��r court aa affi~ by the upr �~ � ti 1n 1~. and plaintiff� were paid by said c any in th � year. It a eara that t � deeaaa d, Die Se , left no preperty at th tl of his death, except t � four insurance peliclet alzeady entiened. � the law, the eMw.t 'receivable by any beneficiary asignated in th palicy of inauranca� whare the in- sur reaervecl te blasalf tb� p��~ te change er evoke tbe na ef the beneficiary duzing b1a llf�� ti , whether or n t be haa, d\Ll'in his lifet!M, exerc1�ed such er If ~�v cation� is includible in the groas eatate of the deceaa � ( ctien (�), enue Cede. ) Punuant te thia p"v1a1 f 1 , the Collector f Internal .nue iaau d a 28

DSCISI � - ... . CIVIL CASE NO. 12823 ice ef as t d t d Jenua 9. 1952 1 k- in to coll ect f plaintiffs th � as estate t x and 3 , 95 69 �� inherit ance tax. or .. ,12 . 19. ( xh. J. ) Thi ��� s nt a total of y 2 , l 5S ( � ) ' re ul ��� ravia of which s of ~ . 967 . ~ . and inheri ance taxes. including p n l t i s, w IOU ht te c llect f plaintiffs. Thi lat~ ter assess t as a ain revl in t he lett r of I t e:.mal en dated u uat 27, 1953, i as rece ved by counsel fe plaint iffs en � r 22, 1953, by re e1ng t � f er a � aess nt � 5,867. to 2, 1. 11. The aid s ef 2,841.11 aa id nder zete t n t er 23 , 19~3. (Pa~. 19, tip lati of t � ) The aasess ent ef the su. of 2 ,841. 11 is it ized as fellows� ~In%hes ui tr c hea er gtea x - - - - - ' 645. - � - - - - 1% . t 1 t re t r y 23 , 1~2 te ~ 23... 06 2� e- f- il�in- - C ise - lat r estate a d i ri - I - - - ...... - anc tax retum - - .. _...c.;:;:;a.o;:;~ Total rote ng aga nst t e i ait on f t l- ties - ~% sure r �, 1 nt y interest and prollise - plaintiffs filed a clai f r efun 29

� 12823 ... 4 ... sal p alt1ea. � ~laia fo~ ~�fun havin �n �ni�d, plaintiffs instituted the present tton ~~ t e Ceu%t f �1zst Instance of Panga�1n~ .n .!anu ry � 1954 f ~ r covo~ of � ll tb unt pa as penalties, urc ar a and 1 er � �a . e � nt ng t ~ � than aoo.� < ~ �� ~ cf the Oll\ple!nt. ) :1\ile the cas 'S p 9 n th� C urt of First In ance f rtrl�n � n ce r 10, 1 54, th ;r fort � s of 1.26. in � dit1 of 2, 1.11 hicn ~ r vi ualy p !d de p st. in l y, n x consider t ion of aid �� ess ent. a r s t �� !d n ril ~. 19 ~ er in tfen ant ug t to col. t f plain iff th� of ,61~. c1. aft e~ er~iitin t �lt � ith tbe ef ,841.11 previ u�ly !d. ril e, 195~. t � sua ef 3 ,61&.0 1 ��� paid by &intif �� ef re t tase ul ea rn h ~rits, th Curt of ~ ir t I s ee of an a in t ended the c a t this Court pU%'$\Ulnt o cti n ~. 1n r 1 ti t r.ect1 n 7 l R bl1c Act t �� :1 1~. r 6, 1957, d f ant fil 1th hi CeuT\. � &up l rl 1,9 7. 1 ie - r�c ve ed fla1 - tiffs by ay of ' c:ou tercl 1 pent uon h� fin 1 � s � t dt zi! 1~ , 19~~. 1. o ceunterclaim f Pl,927.1 is i t ~� d c 290

� 12823 - !> - � f 11 � 25ataated taaxl - - - n-a l-ty- -- -� -- -- -- -- ,-. 1'1 ,312. 31 p 32 08 51 �urehar � oft � l,l '2.9 for lata ~~- - �- ~ - - ~~ ~. 1~ l pay i nn tt . o- n- 448. 18 f� 3/22/!)2 � . 67 1� ~ t �91/2n3t./5on- 6- M- . - -f-r - -3/-22-~2- - te" 1i2n/2�/~on- � 4- . 2- 0- fr- � 1 - 2- /- ~- - .21 JS~ �to� 4s/.nt/.54 - 2- 09- . 3� 3- fr- - -3/2- 2-/5-2 - 179.7 233� t /15/ 5fe5 ~ - n- n- e-tic- �- o-f - � - t - - - �� h - - .93 C 1 fo~ lnt p nt � � - - � C 142. total aaount ue .. � - - - ... - Less unta p 1 ' 9/ZII'3 .. - - - - !). n 4/18/55 � - - 6 .13 BALANCB TILL DUE - � - � - .. - Inher1tence tex - � - .. - - - - - - - � a valo.r n lty - .. - - - - .. 5 surcharge o 3 .~93. 93 for late pa� 1nntt. on- -1,-~3. 7- 2- fZ-'OID- -/2-2-/52- to� 9i/n23t/. ~en- -2,- - . -21-fr- . - /-22- /5� 2- .t .. 12n/2t�/ .4n- 2� .-9~-1. 9- 1-fr- . - 1-2-/-~- tS t o�4/in~ tI. o5n- 7- 10- .6- 7-f-r. - -/22-/':-J2� - C r 4/1��/5fo5 r- la- t- f- il-in- - -- -- -- -- �- C .ro 15 for lot ----- l ot L T � pla1nti f1 parently agre t � c rrect- n��� of the ��eesa.nt wit respect t the ba&i t.~t� and 1 �~itance ta es in th swas of .312. 31 � � ey ar � ely estt1en � h pen - the � x � the only 1��ue t re- selv in this ea h o the estate and inheritance t&xes, sur- e erg � inte.:re~t d pen lti & c- �crue en the insurance proceeds in quea- ti t i. �� wheth r thy CC%U i 291

o� - ~~ - � 12823 CIVIL CA~ -6- th� at�� pr acrtbed 1n �ection 9~ (a) (1) of the attonal lnte~nal �venu� Code or on the 4at�� of ~ctual receipt of the 1na\lrance J)Hce�d� � ( age 6, St1pulat1on of F t ) Therefor , the s le ~Jest1o pr sented for ou~ cona1d�rat1on relates o the 1 11ty of the 1mpoa1- t1on o~ the following penalti s' (a) ~ aurQharge on a 1c ate ax 1n the a of l . 12.~1 �������� - 28. ( ) ~ aurcharg on c th t- ance tex 1n tt.. li.l:ll 0 f 4 . � � � _......r..lloli..... 2. Jill sureharge on 179.70 234.85 2. 1,102. for late ayment � � �������� urc arge on 3 , ~93.93 for late pa ent ���������� � ir\tereat on eatate tax ������� ( ) ~ on 1nMr1t� a � t1x ��������� (a) 1/2 nterest on 145. 12 eet t tax ������� 414. 63 (b) l/2) 1nteres on ln er1t nee t x �� C r 1se.. for no rotiee o �� !>. taC r011111a" f o late paytMnt o � estate tax ������� 20. (c) ompromiae� or late filing of 20.00 ( ) retuprnr01�1�1�a�e����fo��r�, � late pa ent f er1t nee tax �� rotal of question�~ ') penalt �� ���������� ��� � ����� 2,766. 7 292

D�C1Sl � CIVIL C E � 12823 - 7- The fiht 1t ef l , . 23 -2!> aurcba e for failure te f11e an estate and inbexit.nce tax J'etum - 1a ao t, to he colleetltd by defendent under ion 102 �f the enue Code� which re- vides l c. 102. A4 vtltlll Plft�li~'f� � 1ft case of any failUre t� aake anile a ntuzn within the ti� nauibed by law or .., the Collector flf intemal Rev- et neunet,yt-hf41lvCe .lllledc.tosJe."nt.aol l add to the t f ita �eunt, ekcept at ,--.-tlen a return is vol tazo- lly and without nfjtiee fJ'Oil the Collect- or filed fter such ti � and it ia sbo.n that the failure to file it ... du� to a reaaonable cause. no such ad- dition shall made to the tax� . x x x.� lt ia elai on behalf f plaintiffs that they aJ:e net required to file � ..tate and nher.lt- ance tax return cau e the ty of f1lin ze- uzn fo~ e estate of a eceaaed person dev vea u on t e executor, a 1n1atntor, or anyone of be1rs. pur�uant te cti n 93 (a) ef the 411'\ � Code, and anyone of the plaintiff� 1� aelther executor, a~�trater OJ." heir. It ia also al- eged that plaintiffs could not have fil~ a ~tuzn becaus� at the tiM that the ntum was due 51th- in 6 aontlla after dec:eclent '� death en June 22, 1~1, pU~IUiftt tO tien 93 (b.J7. th" r� not eerta1 whether they ceuld collect o~ not the prGe.eda ef the inauranc:e p�Uciea in question. In fact � th polici�� w .re cancelled by t � inau~ance c-.paniea and plaintiff� ad to go to court t .,.force their claiu. hey . ..re able t collect ~ proc..da of the policies long after the due date for th filing ��' 293

� 12823 - 8- � �~ ft u � It is ti'Ue that Wldex ction 93 (a ) only t �axe tor, adainittl'at � . o:r anyon. of t � beua are qui~ed to file the eatete nd 1nh xitance tax c ezin � gross estete f t � dec� aed. H ���r� c\.10!' 95 (c ) def1nea t uto:r o~ ad. ainistrator ointe � qualified, and act- in wlthift the h111ppines, h.n y person 1n actual or constructive possession of eny preperty of the dec n � � J.nce t � proceeds of a lif� ina\lrance oltcy �zecelvable by any beneficiary design t in � olJ.cy of ln urance en the inautM :re- ��~ect to !IMaelf th r t change or %evo � � ef1c1 ~ durin his lifetime, �~ or as , d~ing his lifetu.e. exere1Hd s nvocaUon,� fom part of the rosa eata � Of � .cedent ( ctlon (e)), pla ntiffa, as en�f1c1arle f t � life insu:r co policie f � eceas strators within the anint ef cti 93 (a). . lJ ( e Est ate of ry 1lsen, 2 TC 1 It foll � that laint1ffs ..r� under o ligation to fila the c er1ng the astat et the ceaa d � HMtfiVe , we find that the failure . , plain- tiff� o file an estate and 1nhe~itance tax retv ��� u� to a reasonable cause. t the tt.e b t the returtt was due, they hacl not received ev a potUon of the proceeds of the f u~ ins r co ol- .�

lSI � 12823 ClVIL C - 9- ie.t��~ In fact. tl ey had every reaa n t doubt ethe~ th-r could ~�~ collect unde2 the po11c1e� at the 1naU%anc� co � 1�� cen~elled ��1d p�llColaa and. mused to pay til after eo xoce i a wen inttltutedJ and J.n the c-a the h!lipp1ne ric�n Life lnaurane plaintiff l Cbuy was 1d only � t 954 after the uprea. C .t decided the ca�� in hi e- are ef t � ln1 th t the i Mitt d tb� 25 surCharge f r fail r f p1�1nt1ffs ta fil � ratuzn f .r t �� at �ot th decaas�d D.� Se 1 n~ in o~er. In � case SUI~r.- C.un under a tildlar r - Tax Law ( ction 72 �of � enu C e), l was helda � az. aatlafied that t f ilur t tax � m for the Joint eration waa due to re s n- 1� c use. e onast belief of re~ond t c.e.paniea that there ��� no such c. rp t o th n � � ning f t e Tax Code, d that thei:r a ar tin- e x t n au ic1ent 1 ance with the 1... That thla ~11 f ��� n w��anti ly w out a ion and that it tartalned in good faith, it ab t1 f ct t h� Ceun Tax itself subac~ibed to the idea that t Jein cy �~tlon ��� not a cor- ration, and so avatain h eontentl of z ta. P rtheX~~Gre, then &h autb rlti�� to th eff�ct t et 11 f in o fa � adv ce f reputal>l� ax au�unt.ts and attorney�, that a c oration wa� not a ersonal oldin9 ee any taxable a� su~h c tltutea �~asonable cause' fo~ failur to file old!n c. any surtax r t m� � d that sud\ � c���� t � osition ef penalties for failure to fil� r.turn, is n w rant~. � Co l�ctor f Inter- nal ven tangaa Tr~n� ortation � - 92 , J nuary 6. 1~8. ) CG., 295

- 10- The ~ aurch�%9� 1.n th� � of J234. 85 has ~ blpos undeZ" et an 0 ( e ) , which p%'0Y1de�� ~~~~�in- If noyticae W andlt dofe- th � th oe only f unt of the e t t ta., � id tn f 11 ..,.....""'*'~~............,~;.....Mola..&~~& en .e th �n tiee and d d aade l 1nt1ff 1 It JS -peer tha t er e seve �1 notic n nd he fi otiee " d e de in ".a - ebl 1ved 1 !ntiff on Ap ~11 1 , 19e0. b - ca �� 1 �� n hat te that they _pald the sua �f 3,61S. Ol -.ntlon.a 1 al as aame t n ice.� aaMa&lhlnt n tie� f ril , 195~ e e lle � r ed the rev!~ � �� sa nt notice � �Th� two assess t notices both be ring Ne. 4641 EA-14827~1 fe� th -"~t� of � 7. ,862. !W. 4ated r y 2, 1953 nd Ma~eh 23, 19,~, n-r�etiv ly, have lready be., u er- sed~ by � ~�c ut tion made i ~~. ~ �� indieeted hereinabove.� ( age 2 , Exh. 1, p � 108, DlR r c rd � } � h ����� ent n tlce f April ~~. 1955 can~lle and u rs p%evl s sa as t ic s, t n tiee f ril 15, 195 notice d a ing f cti 101 29 6

- ISI CIVIL SE � 12823 - 11 ""' Cc ) idl st h. "t ken into ace.ou.nt f r- the pur- sttton of th� ~- aurchazg � � Thia ~ t an ����� t that ha i� no � �� nt all. ( uyoc C - � 11 Aining � � C 11. f nt. � , C. T. � No. 1 9, t. 21. 19 J Gancaye v. 11. t Int� � , C. T. � o. 81, � v. 14 , 19~7 C rl r . � ��� is v. 1.1. of I t . .� c.; . � e� 2' ) The� � Of st.ate t �t.in t � ���� � l 5 ia 12. 3 � � in erit ce � X �' r a to a of � of 1 1 t 19~5, la ntiff� ha p t � � () 2, 841. 11 ( ( d n ~ t � 23, 1953) nd a total of . 12. � x � l n of n ant. ) re z , t ��tate in � it- n~a ta��� ������ by t ndant against lainti � were ... lly d �� of r11 1 � 19~ , 11 wit in the hi rit- a peri pr acz-.1 ed lOl (~ ). �� Cons ntly, � � sit of s r~ba rd � c t the 1ntexes f 1 er int �wnt o � /xn 2. tb � c se, n l' t m 1� y t ��-- p int f a. eref re, t � ��� ��� f ice of r 1 1~. 1~~ ia a 11 efir;i n~y . .n t n n r u ti 8 (b)J 1 nt �l ���� ~adal 297

- 12 - X XX (b) If n a unt 1� sb �� the taxes b the 4UCecuto~ � dlrd.nlats-ater �~ anY. �f th� betn on 1a turn , r if no return it ada by th� �~ c- uto�� administrator� Ol' any h�1r, then the a ount by which the tax s ex t � DO'-flte "v1o~ly ��� aaed (u wbuitth�suucth� ����� en.t) �� � c lleeted r egll ..e,du nts p re vaissu de- it �fi�c�l�e�n��cdyJ� t a�ly�- tl �hall firet deere�� d by tb unta pftV oualy abat d, refunded, or otherwis r aid in e ct f u tb i s !ape ed upon a deficiency estate o~ � her tan � tax in case such d� iCieJ'lcy tax is n t pai 1n f 11 with1n thi - ty days f~ the dat of tb notice Md d nd fr� the Coll~toxo ot Inte:mal Revenu., pursuant to et1on l 1 (b } ( 1 ) � Ttl esta d inherit nc ax s a es r11 � 19!)5 au in t � a unt f ~.616. 91. Plain- ti fe n,4 p d tot 1 Pl ,4 .12 aa of il 18, 1 . ;ITb� f~l ount f t e ta an er1tanc taxes as sted ing en pa d it in the tbi y-d y riod r - vi ed in e~t 101 (b) (1), c ll ti in- th s of 5, l . 91, 2 9 8 :."'

� 12823 or on ny portion - 13 - not in o~.Q there�f , 11 ala� 1ft connect! ft with the tere1t a the zate of 15% �� 11 eet1on 1 � ich plicable � tu ry r 1s1 - pnvidea d�r cticn 9~ (a the estate l�ft by t � �c .nt ia du and payabl within 9 nth ft r the d cedent � d ath, ile the ln � ltanc� tax ia � nd ay ble wt ntha aft�~ 'the ec ent � de th ,irtNIHaA4.et ethe~ �r n�t the pr erty ha$ been di tr t er ~eceived y the e1ra, le atees oz bene i- ciaries. Th ec dent n th~G c ~ died n ~ � 1 st t t was � d payable n t ater th �~ � 19~2. d .tnh�r1 ence ax not later th .1un 21, 1952. t ber 23 , 19 ' la1ntiffs p ld th s f 2 , 84 . 11, of wbic 4!>. p i.e! t. h p Y- t f tbe estat tex a lti � n the ance of 2 ,1~. 21 to e in �~ita c t nd 1- tiea. T er�foxe, th Lift Jtld 1 - f he ciency estate tax IS f,..ep 23. l9!)2 a . ..1. nd t aid balan" �f th inhe itance t �� f t � � date was 2,1 � ' � 2 9 !)

DI!CISl - CIVIL CAS& � 12823 - 14- ril 18 , 1~5 another payment w � made in the sua of 3,615.01, .t hich 4.13 �� applied to the deficiency estate ta~ and penalties. and 2; � was p lled t the defici rit ce tax n penel t ��� p1 in et o o the case r� at ba~, the tnt t t t � ~�t cf 6J per on the deflci ey �� arch 22, 1 52 to z11 1 � l 5 � �nd e in- terest at t � � � n the f1eiency in trit- ance tax fr June 22, 1 ~2 e il 1 � 1955 t t� 23. 13. A e aticn ef tb efici cy � tate and 1nb rltance t akes inter st at t e rat Ctf pel" n atea of t t xes t the atea ef pa the pl aintiffs de n ove a,..nt of 1 t r in the � o 134. 72 �� indicated b 1 � 300

� 12sa3 .., 15- J npHsentin al-4eqed c � r failu t file notice of a , 1 t o � a x. l�t� fil g o et � d 1 nt erit� ce tax. I � pear� he of to !r ff� a p l � ... 1 ed 1 1 t 5 3 )� nd 101 (� } (1 ) v � p aliz eetio �i re r impria ( � lat n f n ern l venue s o in a ga- in&n, a 1 , 9M, pp. 47-49, I - j 11 ,1, 1a tr � t � h C 1 ec r at.aalone ) ln emal v r pr.ise :a y enue -�l' The t Jd�� efendant intended to veat n i the abaulute power t f1 any unt in ~�ttl n f � cr nal 301

� 12 23 - 16 - v1olat1 wi out th eon nt of t ta y r c - ee eel. uld no ar~i of the it ld b t eo in & or p n l i n ex'-!re1 � � xi ing l � ( t 1 se ,� hich is not p t 1tted by � T J.nid d , un y 44 bil. 649� tver it of to. T s v. l. f I nt. � , C. T� � �o. 10, t . 10, 19 � ) f �- fend t in s s n 1 oaing or x ctin or alt1�� in th uis f c -..-,.- Ot e l h X� oae hi elf to be ch ~ e of tion f � judicial functio c fe r up co xtt rl ju:ritdi ion.] th x f nee to the as � cit y c 1 fo~ be ining t f the def n n t 1 uit f :r se , e do n t think i 1s n c:.s� ry t - eat here at e at t in th cas of ivera1ty t � T �� v. c ll. � � ., au zoa. ea��� cite II 6 ly not int. 1 fo the t cite ct � on 7(1) of ct Mo. ~~ c fu �o t .t. daci .1 ourt ;Juritdict.ic to r.vi c- lector f Internal vt ats � n �� refun of tnt t- ��� f��� or co iti c the of t � llecto:r t very atrained inte. t ti ich is w rra � Th� �� mit one t on f t or auth rlty f th C llecto f te 1 v ~ 0 �) v-

� ISI � CIVIL Q E � 12823 - 17- it �et t enaltie rovid in � N ti al C~a. Internal evenue frnera a t kinds of enal- t1�� rrovlde in aa1d ode - tn lve nd criminal penaltie � Th adMin!s ~ tiv like the suzcha of , er and tnte.re � are 1 oae by t l.w it elf. They never y t e ollect r of Int rna venu r by ficer der b1JL The lle tor is mer ly aut .ri&ed teraine � and c � a !d pen lti are applicable, nd to eoll u .j To qu � fro~~ a io of the ia often ei ed in l e dec! i ntli � th Cell eto� of Intern� ee �� r viol 1 ns t pe al r vision � .. c l ! � provi nt el ccnv ct .p � � nary co u oft e vl 1 t off nd 1 cri al p c in � T a t Collect r ... er c uch 303

1 1-..I - IVIL C SE fl � 12823 � lS - a f e t h 1nst1tut1 o r1 in 1 r c .d- n t 1 ly th t h� y 1 �- � sue penal� �� without c lyln ith t ��n i~ to th perfect! n f co r 1 at t d 1. c talino I n io v. C llector o I nt - nal .. ve.n\.4 , , . ! . A. ro. �17 , rch t 9~

-E � 1~823 19 sent1ng e c int re c ll ct c by d f n nt . which ia r d l e. t~Tl , d f n ant ia el'e er d to r fund to la tif a t a ef 134. 72. o cost. < ~aED. I ni a, July 1 � 19..l .i 305