CTA Case No. 5116 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY RAFAEL ARSENIO S. DIZON as C.T.A. CASE NO. 5116 Administrator of the Estate of Jose P. Fernandez, Promulgated: Petitioner, JUN 1 7 1997 - versus - COMMISSIONER OF INTERNAL REVENUE, Respondent. X---- DECISION This case refers to a deficiency estate tax assessment in the amount of P66,973,985.40, issued against the Estate of the late Jose P. Fernandez (herein after called the "estate") who died on November 7, 1987. Petitioner, Atty. Rafael Arsenio S. Dizon, is the duly appointed Administrator of the estate, as evidenced by the Letters of Administration (Exh. "L", Pet.; p. 102, CTA. rec.) issued by the Regional Trial Court, Branch 51, of Manila, in Special Proceedings No. 87-42980 entitled "In The Matter Of The Petition To Approve The WiII Of Jose P. Fernandez, Deceasec;:l, Carlos P. Fernandez, Petitioner." In a Ietter, dated March 14, 1990 (Exh. "I", Pet. ; p. 184, BIR rec.), Special Administrator, Arsenio P. 580

DECISION C.T.A. CASE NO. 5116 -2 - Dizon, authorized Atty. Jesus M. Gonzales to sign and fiIe on behaIf of the estate the required estate tax return and to represent the estate with the Bureau of Internal Revenue (BIR) for the issuance of a Certificate of Tax Clearance. Pursuant to said authority, through a letter, dated Apri 1 7' 1990 (Exh. "J"' Pet. ; p. 183, BIR rec.) addressed to the Regional Director of the BIR Regional Office in San Pablo City, Atty. J.M. Gonzales filed an estate tax return (Exh. "K" , Pet.; p. 182, BIR rec.) for and in behalf of the estate, showing therein a NIL estate tax liability, computed as follows: "COMPUTATION OF TAX Con j ugal Real Property (Sch. 1) p 10,855,020.00 Con j ugal Personal Property (Sch. 2) 3,460,591.34 Taxable Transfer (Sch. 3) 14 315 611.34 Gross Con j ugal Estate 187,822,576.06 Less: Deductions (Sch. 4) NIL NIL Net Con j ugaI Estate NIL Less: Share of Surviving Spouse NIL NIL Net Share in Con j ugaI Estate XXX Net Taxable Estate Estate Tax Due As a result of the fi I ing of the above-mentioned estate tax return, Certification Nos. 2052 and 2053, both dated ApriI 27, 1990 (Exhs. "M" and "M-1", respectively, Pet.; pp. 103 and 104, CTA rec.) were issued by Osmundo G. Umali, then Regional Director of the BIR in San Pablo City. Stated in said certifications was the statement 5 (. ' ) \... tJ

DEC I S I ON C.T.A. CASE NO. 5116 -3- that the taxes due on the transfer of the real properties of the late Jose P. Fernandez who died on November 7, 1987 have been fully paid and the same may be transferred to the heirs of the deceased. Notwithstanding the fiIing of the estate tax return and the issuance of certificates of tax clearance, the Assistant Commissioner for CoI I ection Mr . -- Th emi st oc I es Montalban, of the BIR, National Office, still issued on November 26, 1991, an Estate Tax Assessment Notice No. FAS-E-87-91-003269 <Exh. " 4 - a " , Resp.; p. 169, BIR rec.) demanding from the estate payment of the amount of P66,973,985.40, detaiIs of which are itemized hereunder: "Deficiency Estate Tax-1987 Estate tax P31 ,868,414.48 25% surcharge- Iate fiIing 7,967,103.62 7,967,103.62 late payment interest 19'121'048.68 compromise-non filing 25,000.00 25,000.00 non payment 15.00 no notice of death 300.00 no CPA Certificate Total amount due & collectible P66,973,985.40 In a Ietter, dated December 12, 1991 ( p. 171' BIR rec.) , Atty. Jesus M. Gonzales, as counsel for. the Administrator of the estate, requested that the estate tax assessment of the late Jose P. Fernandez be recalled and the same be referred back for re-investigation and/or re-verification. 5(\ � I u(

DECISION C.T.A. CASE NO. 5116 -4 - In her Ietter, dated ApriI 12, 1994 [UN-136-94] (pp. 277-278, BIR rec.) addressed to Atty. Jesus M. Gonzales, the Commissioner of InternaI Revenue, herein respondent, denied the former's request and reiterated the payment of the amount of P66,973,985.40 as deficiency estate tax I iabiIity of the sub j ect estate. The letter denial of the BIR was received by petitioner on May 3, 1994 (par. 15, Pet. for Review, pp.5-6, CTA rec.). On June 2, 1994, the instant petition for review was filed with this Court. Respondent's Answer was fi I ed on August 29, 1994 ( PP � 49-54, CTA rec.) al , I eging severaI specific and affirmative defenses, summarized as follows: 1. The estate tax I iability in the amount of P66,973,985.40 was determined after proper investigation; 2. Only the amounts of P20,000,000.00 and P4,000,000.00 paid by the estate to Banque De lndochine Et de Suez and Equitable Banking Corporation, respectively, should be allowed as deductible claims for they are the actual and existing claims against the estate; 3. ,The estate failed to file the required estate tax return for the year 1987, hence, it is liable not only for the basic tax of P31,868,414.48, but also for the 25% surcharge for Iate fiIing and I ate payment, for the interest and compromise penalty for non fiIing, for non-payment of tax, for not f i I i ng any notice of death and for no CPA certificate, or a total amount f P66,73,985.40; 5cu� ,- IJ

DECISION C.T.A. CASE NO. 5116 -5 - 4. Petitioner, despite several failed to refute the opportunities granted, examiners; and findings of respondent's 5. AII presumptions are in favor of the correctness of tax assessments and the burden of proof is on the taxpayer. In the hearings conducted, petitioner did not present testimonial evidence but merely documentary evidence consisting of the following: Nature of Document E x h i bit s 1. Letter dated October 13, 1988 "A" 2. from Arsenio P. Dizon addressed 3. to the Commissioner of Internal 4. Revenue informing the Iatter of 5. the special proceedings for the settlement of the estate (p. 126, BIR records); Petition for the probate of the "B" & "B-1" wiII and issuance of Ietter of administration filed with the Regional Trial Court (RTC) of ManiIa, docketed as Sp. Proc. No. 87-42980 (pp. 107-108, BIR records); Pleading entitled "Compliance" "C" filed with the probate Court submitting the final inventory of alI the properties of the deceased (p. 106, BIR records); Attachment to Exh. "C" which rec.); "C-1" to "C-17" is the detaiIed and compIete listing of the properties of the deceased (pp. 89-105, BIR Claims against the estate filed "D" to "D-24" by Equitable Banking Corp. with 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);

DECISION C.T.A. CASE NO. 5116 -6- 6. Claim filed by Banque de L' lndochine et de Suez with the probate Court in the amount of US $4,828,905. 90 as of January 31, 1988 (pp. 262-265, BIR records); "E" to "E-3" "F" to "F-3" 7. Claim of the Manila Banking "G" & "G-1�" Corporation (MBC) which as of "H" to "H-16" November 7, 1987 amounts to "I" "J,. 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 AsediIIo, 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 VII of Mani I a, docketed as CiviI 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 Atty. Jesus M. Gonzales, (p. 184, BIR records); 11. Letter dated April 17, 1990 from J.M. Gonzales addressed to the Regional Director of BIR in San Pablo City (p. 183, BIR records); 12. Estate Tax Return fiIed by the estate of the late Jose P.

DECISION C.T.A. CASE NO. 5116 -7- Fernandez through its authorized representative, Atty. Jesus M. Gonzales, for Arsenio P. Dizon, with attachments (pp. 177-182, BIR records); "K" to "K-5" 13. Certified true copy of the Letter of Administration issued by RTC ManiIa, Branch "L" 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 dated April 27, 1990, "M" to "M-5" issued by the Office of the RegionaI Director, Revenue Region No. 4-C, San Pablo City, with attachments (pp. 103-104, CTA records.). Respondent's 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/ BIR Record Signatures 1. Estate Tax Return prepared by p. 138 2. the BIR; - do - 3. Signatures of Ma. Anabella Abuloc and Alberto Enriquez, Jr. appearing at the lower portion of Exh. "1"; Memorandum for the Commissioner, dated July 19, 1991, prepared by 5 '{1 ...l

DECISION C.T.A. CASE NO. 5116 -8- revenue examiners, Ma. Anabe I Ia A. pp. 143-144 Abuloc, Alberto S. Enriquez and - do - Raymund S. Gallardo; Reviewed by - do - Maximino V. Tagle - do - - do - 4. Signature of Alberto S. p. 139 - do - Enriquez appearing at the - do - - do - lower portion on p. 2 of Exh. "2"; - do - 5. Signa ture of Ma. Anabel Ia A. p. 169 pp. 169-170 Abuloc appearing at the lower portion on p. 2 of Exh. "2"; 6. Signature of Raymund S. Gallardo appearing at the lower portion on p. 2 of Exh. "2"; 7. Signature of Maximino V. Tagle also appearing on p. 2 of Exh. "2"; 8. Summary of revenue Enforcement Officers Audit Report, dated July 19, 1991; 9. Signature of Alberto Enriquez at the Iower portion of Exh. "3"; 10. Signature of Ma. Anabel Ia A. Abuloc at the lower portion of Exh. "3"; 11. Signature of Raymond S. Gallardo at the lower portion of Exh. "3"; 12. Signature of Maximino V. Tagle at the lower portion of Exh. "3"; 13. Demand letter (FAS-E-87-91-00), signed by the Asst. 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 r�� � 1 � iJ { 1'-.-

DECIS I ON C.T.A. CASE NO. 5116 -9 - Although the above-mentioned documents were not forma I I y offered as evidence for respondent, considering that respondent has been declared to have waived the presentation thereof during the hearing on March 20, 1996, sti I I 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. This was the ruling laid down in the case of Vda. Onate vs. Court of Appeals and Taguba, G.R. No. 116149, promulgated on November 23, 1995, 250 SCRA 283, where the Supreme Court, citing the cases of People vs. Napat-a and People vs. Mate; 103 SCRA 484 (1981), relaxed the rule on evidence to be considered that shou I d be forma I I y offered and "a I I owed evidence not forma I I y 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." The sole issue to be resolved in this case is whether or not the respondent had basis to assess the estate for deficiency estate tax. 5I 1 ()

DECISION C.T.A. CASE NO. 5116 - 10 - Petitioner argues that respondent had no basis to file an Estate Tax Return for the estate of the late Jose P. Fernandez as there was already an Estate Tax Return filed by Arsenio P. Dizon (c/o Jesus M. Gonzales) the Special Administrator of the subject estate (Exhs. "K" to "K-5" , Pet.; pp. 177-182, BIR rec.). Respondent, on the contrary, denies that there was such Estate Tax Return fiI ed by petitioner (par. 9, Answer; p. 52 , CTA rec.). Precisely, this is the reason why in assessing the estate, surcharge and compromise penalty were imposed in addition to the basic estate tax due. The Court brushes aside the issue and/or argument raised by petitioner. It is of no moment whether or not there was an estate tax return filed �by the respondent's investigating examiners. For even if respondent did not make any estate tax return, and it is to be admitted that there was an estate tax return a I I eged Iy fi I ed by Mr. Jesus M. Gonzales, such estate tax return is stiI I subject to audit by respondent's examiners. Thus, considering that respondent's computation of the estate tax due did not tally with petitioner's computation, the Court deems it more proper to tackle the causes of the discrepancy in the estate tax due. Obviously, the discrepancy ies in the use of different valuations on

DECISION C.T.A. CASE NO. 5116 - 11 - the properties of the estate and the amounts of claims allowable as a deduction from the gross conjugal estate. Therefore, the more appropriate and vital questions to consider in the case at bar, are the following: 1. What is the correct vaIuation of the properties of the estate and why? 2. What are the claims allowable as deductions from the gross conjugal estate and why? 3. Is the estate IiabIe for surcharge, interest and other compromise penalties and why? The Court firmly believes that it is only after settIing the above-mentioned anciIIary issues, before it can determined, whether or not the subject estate is I iable for any deficiency estate tax, if any. If in the affirmative, what is the correct amount of estate tax liability? To have a clearer view of the estate tax IiabiIity as presented by both parties, we have summarized their decIaration as embedied in the Estate Tax Returns fiIed by both parties, to wit: Estate Tax Return Estate Tax Return filed by petitioner filed by the (Exh. "K" , Pet.; p. 182, BIR rec.) revenue examiners <p. 138, BIR rec.) Conjugal Real p 10,855,020.00 p 5,062,016.00 Property (SCH. 1) 3,460,591.34 33,021,999.93 Conjugal Personal Property (SCH. 2)

DECISION C.T.A. CASE NO. 5116 - 12 - Taxable Transfer p 14,315,611.34 p 38,084,015.93 (SCH. 3) 187,822,576.06 19,806,428.31 NIL Gross Conjugal Estate NIL p 18,277,587.62 Less: Deductions NIL 9,138,793.81 (SCH. 4) NIL p 9,138,793.81 44,652,813.66 Net ConjugaI Estate Less: Share of p 53,791,607.47 Surviving Spouse p 31,868,414.48 15,934,207.24 Net Share in Conjugal 19,121,048.68 Estate 50 315.00 Add: Capital Properties p 66,973,985.40 Less: Capital Deductions Net Taxable Estate Estate Tax Due NIL Add: Surcharge NIL Interest from 8-19-89 to 8-19-91 Compromise TOTAL AMOUNT DUE AND PAYABLE In petitioner's Estate Tax Return, the total value of the conjugal real property is P10,855,020.00, itemized as follows: (Exh. "K-4" , Pet.; p. 178, BIR rec.) 1� Baguio p 2,114,720.00 2. San Juan 1,239,370.00 3. Quezon City 2,597,240.00 4. Tagaytay 4,903,690.00 Total P10,855,020.00 NOTE: Above valuations are per TAX DECLARATIONS In the estate tax return prepared by respondent's examiners, the tota I vaIue of the conjugaI reaI property is only P5,062,016.00, which refers only to the total value of real properties located in Asisan, Tagaytay city. Details of the Computation are the following: 5' 1 f r.)

DECISION C.T.A. CASE NO. 5116 - 13 - Transfer FVIituMapltet Value Per Certificate Tax Declaration Investigation Title <TCT> No. and Court record p 192,016.00 1. 127770 p 174,560.00 4,870l000.00" 2. P5,062,016.00 (p. 129, BIR rec. > 7066 to 7069 1,527,670.00 (p. 132 BIR rec. ) TOTAL (Mortgaged Value) The valuation of P192,016.00 for the property covered by TCT No. 127770 was based on the value given in its Tax Declaration plus 10% increase as mandated by Revenue Audit Memorandum Order (RAMO) No. 3-86, pertinent provision of which states: 2. Sole basis for real property valuation during transitory period. Pending final determination of zonal values and as a short-run measure to establish more realistic basis for real property valuation, this Office hereby orders that the market value of real properties (land and/or improvement) appearing in the latest declaration of real property filed in the Provincial/City Assessor's Office, be increased by ten percent (10%) thereof to cover inflationary value, shalI be the sole basis in assessing the foIIowing interna I revenue taxes: 2.1 Capital gains tax; XXX 2.2 Estate tax; 2.3 Donor's tax; and 5 11 , (f

DECISION C.T.A. CASE NO. 5116 - 14 - 2.4 Documentary stamp tax and other applicable taxes." supplied) (Underlining The amount of P4,870,000.00 representing the mortgaged value of the properties covered by TCT Nos. 7066 to 7069, inclusive, was adopted by respondent's examiners it being higher than the value per tax declaration on the aforesaid properties amounting to P1,527,670.00 <Exh. C-17, Pet.; p. 89, BIR reo.). The computation and/or valuation for conjugal real property in the total amount of P5,062,016.00 should prevai I. It was made by respondent's examiners pursuant to paragraph 2 of RAMO 3-86 and also Section 91(b)(1 > of the Tax Code of 1987, as amended by P.O. No. 1994, which provides: "Sec. 91. Determination of value of the estate. (a) Usufruct - x x x. (b) Properties. The estate shall be appraised at its fair market value as of the time of death. However, the appraised value of real property as of the time of death shall be whichever is higher of - (1) The fair market value as --- determined by the Commissioner, or (2) The fair market value as shown in the schedule of values fixed by the Provincial and City Assessors." (Underlining supplied) The mortgage value used by respondent in appraising the conjugal real property of the estate is considered to . ,., v { ,.J

DECISION C.T.A. CASE NO. 5116 - 15 - be the fair market value of the properties. "Fair market value" has a relative meaning, thus: "In a case involving expropriation of property, the Supreme Court said that the market value may be fixed at the price which it wiII bring when it is offered for saIe by one who desi . res but is not obliged to sell it, and is bought by one who is under no imperative necessity of having it.' (The Mani Ia Rai Iroad Co. vs. Anastacio Alano, et al., 36 Phi I. 500; see also City of Mani Ia vs. Estrada, 25 PhiI. 200) In the case of real property, the fair market value is in accordance with the schedule of values approved by the Department of Finance in accordance with the provisions of Sections 15 and 17 of the Real Property Tax Code (PD No. 464) or that fair market value determined by the BIR Commissioner whichever is higher. The Real Property Code defines 'market value' as 'the highest price estimated in terms of money which the property wi I I buy if exposed for sale in the open market allowing a reasonable time to find a purchaser who buys with knowledge of all the uses to which it is adopted and for which it is capable of being used.' The same Code Iikewise defines 'market value', adopting the Supreme Court ruling (supra), as 'the price at which a willing seller would sell and a willing buyer would buy neither being under abnormal pressure.' (See Sec. 4(n), PD No. 464) If the valuation is fixed by the Commissioners appointed by the Court and approved by the latter, then such valuation, said the Supreme Court, shal I prevaiI. (Co IIector of Interna I Revenue vs. Lim de Bautista, 64 Phi I. 21; Suy Chong Key vs. Collector of Internal Revenue, 69 PhiI. 493)" [NOLLEDO, 1988 NIRC, 12th ed., pp. 432-433) From all of the above, fair market value is the price at which any seller wiII sell and any buyer wi I I 5 � �. 1 �' { )'

DECISION C.T.A. CASE NO. 5116 - 16 - buy, both wiIIingly without any force or intimidation. Mortgage value is an acceptable price to use in the valuation of the conjugal real properties located in Asisan, Tagaytay City, more particularly those covered by TCT Nos. 7066-7069, inclusive. The amounts of loan obtained from the ManiIa Banking Corporation was secured by a mortgage on these properties (see Exh. "C-17", Pet.; p. 89, BIR rec. >. In the Iight of the aforementioned definition of "fair market value" is the mortgage value or the value more acceptable to the heirs when sold in satisfaction of the mortgaged debt. On the observation why respondent's valuation of the conjugal real properties (P5,062,016.00) seemed to be much lower than petitioner's valuation (P10,855,020.00), the Court noted that respondent segregated the conjugal real properties from the capital properties of the deceased. Petitioner made no such segregation in his computation. He consoIidated or put together a II the conjugal and capital real properties of the deceased. Consequently, in the petitioner's computation, the value of the conjugal real property is almost double tile amount as declared in respondent's computation. The Court considers respondent's computation of the conjugal real property as proper and legal. . ,.. u 0 ',.J

DECISION C.T.A. CASE NO. 5116 - 17 - The second figure to consider in respondent's computation is P33,021,999.93, which is the value of conjugal personal properties. Summary of the detaiIs of the amount are shown hereunder as I ifted from the worksheets of respondent's examiners (see pp. 131-135, BIR rec.), thus: Investments in Shares P32,585,936.07 of Stocks 10,000.00 Gold Coins 426,063.86 Cash in Bank P33,021,999.93 It was explained in respondent's memorandum report (Exh. "2") page 2 thereof (p. 143, BIR rec.), that: "The personal properties consisting of mostly of shares of stocks were valued according to the stock quotation as of the time of death and for those not traded according to its (sic) book value. For shares and other personal properties were (sic) no value could be ascertained, the valuation of the taxpayer as fiIed in Court was taken. (PIease refer to worksheet ScheduIe II)." Again, the Court finds the valuation given to the shares of stocks in order. A review of respondent's pertinent worksheet reveals that most of the values were taken from taxpayer's (meaning, petitioner's) valuation as submitted in Court. Only a few of them were obtained from the ManiIa Stock Exchange (MSE) quotation and the rest were based on the shares' book value as of 1987. Petitioner presented no evidence to rebut the valuations

DECISION C.T.A. CASE NO. 5116 - 18 - done by respondent. Hence, the figure of P33,021,999.93 must be accepted as vaIid vaIuation or tota I amount of the estate's conjugal personal properties. There is no quarrel that if P5,062,016.00 (value of conjugal real property) is added to P33,021 ,999.93 <amount of conjugaI personaI property>, the resulting sum is P38,084,015.93 which is now the gross conjugal estate. The Court now comes to a discussion of the second issue which relates to the allowable deductions from the gross estate. Petitioner declared in his computation the sizeable amount of P187,822,576.06 as deduction from the estate's gross conjugal estate amounting only to P14,315,611.34. Obviously, the result was a "NIL" net taxable estate and Iikewise, a "NIL" estate tax due, as the deductions far exceeded the gross conjugal estate. On the contrary, in respondent's computation, the deduction appeared to be much lower as the amount was only P19,806,428.31. Naturally, if this amount is deducted from P38,084,015.93, the result would be entirely different from petitioner's computation , considering that there are sti I I capital properties that must be added to the net share of the deceased in the conjugal estate, in order to arrive at the net taxable estate.

DECISION C.T.A. CASE NO. 5116 - 19 - To resolve the issue as to which of the two computations is right, the Court has to take the tedious task of analyzing individually the claims as declared by petitioner in his estate tax return. The claims were listed in Exhibit "K-5" of petitioner (p. 177, BIR rec.), namely: "Jose P. Fernandez-Decedent Claim Against the Estate Banque Indosuez p 96,578,118.00 State Investment House, Inc. 6,280,006.21 Equitable Banking Corporation The ManiIa Banking Corporation 19,756,428.31 65,158,023.54 Funeral expenses P187,772,576.06 50,000.00 P187,822,576.06" To prove the first claim, petitioner presented Exhibit "E", which was the Claim filed against the estate by Atty. Rainier L. Madrid, as counsel for claimant Banque lndosuez, in the amount of US$4,828,905.90. The total amount of P96,578,118.00 cannot be allowed as deduction. Pursuant to a Memorandum of Agreement (pp. 254-260, BIR rec. l executed on ApriI 18, 1989 by Banque lndosuez, the heirs of Jose P. Fernandez and Fernandez Hermanos, Inc. ( FHI ) , the bank agreed to accept the amount of P20,000,000.00 as full and final settlement of all its claims against the estate of Jose P. Fernandez. FHI agreed to advance the amount of P20,000,000.00, and

DECISION C.T.A. CASE NO. 5116 - 20 - this was fully complied with on June 15, 1989 as evidenced by a Deed of Assignment (pp. 251-253, BIR rec.) executed by Banque lndosuez and FH I. In effect therefore, there was a partial condonation of P76,578,118.00 (P96,578,118.00 - 20,000,000.00) in the estate's obIigation to Banque lndosuez. Hence, such condoned amount is not deductible, but only the sum of P20,000,000.00 which was the amount actually paid to and accepted by Banque lndosuez, as fulI and final settlement of aII its claims against the estate of Jose P. Fernandez. In one of its previous decisions, this Court held that: "x x x The 'claims against the estate' which the law allows as deduction from the gross estate are existing claims against the estate. An indebtedness that has been condoned is in legal effect no indebtedness at all. If there is no more indebtedness by reason of the condonation, there is no claim against the estate which may be aIIowed as deduction. Whether or not the condonation resulted in a taxable gift need here be decided. x x x" (Bocanegra, et al. vs. Collector of Internal Revenue C.T.A. Case No. 420, Oct. 12, 1959) As evidence of the claim of State Investment House, Inc. (SIHI), petitioner presented Exhibits "H" to "H-16" (pp. 200-216, BIR rec.) which referred to the computation of the claims of SIHI in the total amount of P6,280,006.21, and the Amended Complaint filed with the

DECISION C.T.A. CASE NO. 5116 - 21 - RTC, ManiIa Branch VI I, captioned as "State Investment House, Inc. vs. Maritime Company Overseas, Inc. and/or Jose P. Fernandez," and docketed as CiviI Case No. 86- 38599. This claim was also settled thru a Memorandum of Agreement dated May 30, 1989 (pp. 188-189, BIR rec.) wherein parties agreed to settle the liability at a reduced amount of P2,200,000.00. That this amount was already paid is evidenced by Official Receipt No. 17025 A appearing on page 185, found in between pages 192 and 193 of the BIR records. Similar to the first claim, the second claim was also partly condoned and so, deductible only to the extent of P2,200,000.00 which was the amount actually paid by the estate. In proving the third claim of Equitable Banking Corporation (EBC) in the amount of P19, 756,428.31, petitioner presented Exhibits "D" to "D-24" which was the claim filed by EBC against the estate of Jose P. Fernandez. Just like the first two claims, this claim was also settled thru a Memorandum of Agreement, dated June 6, 1989 (pp. 240-244, BIR rec.) wherein EBC agreed to accept the payment of the sum of P4,000,000.00 as fulI and final settlement of its claim. DetaiIs of payment of this amount are shown hereunder: Official Date Amount Location Page in BIR records Receipt No. 5 o � u '.

DECISION C.T.A. CASE NO. 5116 22 - - 569258 6- 7-89 p 200,000.00 p. 232 569522 6-30-89 2,000,000.00 p. 239 575395 7- 8-89 1,700,000.00 p. 237 575392 7-31-89 1002000.00 p. 234 TOTAL P4,000,000.00 Again, as there was partial condonation in the estate's liability to EBC, the only amount of P4,000,000. wiII be allowed as valid deduction for similar reason previously mentioned. The claim of Manila Banking Corp. (MBC) against the estate in the amount of P65,158,023.54 was not clearly established by petitioner through presentation of Exhibits "F" to "F-3" (pp. 194-197, BIR rec.). Exh. "F" is the computation of MBC's claim. Exhs. "F-1" to "F-3" refer to the demand letter of MBC's counsel addressed to the administrator of the estate Jose P. Fernandez. This claim was disallowed in its totality by the respondent as there was no claim filed in Court (see respondent's remarks stated in worksheet, pp. 129 and 132, BIR rec.). The Court recognizes the disallowances of MBC's claim against the estate of Jose P. Fernandez as proper and legal. It is expressly provided under Section 1 of Rule 86, Rules of Court, that all money claims against the estate must be fiIed in court. Besides, in a letter, dated March 14, 1989 (Exh. "G" , Pet.; pp. 186-187, BIR rec.), the counseI of ManiIa Banking Corp. stated that the property of the deceased Jose P. Fernandez, covered 5 o �. u

DECISION C.T.A. CASE NO. 5116 - 23 - by TCT No. 47222 and located in Manila, which was mortgaged to MBC as security of the indebtedness of Maritime Company and Fernandez Hermanos, Inc., wiII be sold at public auction to the highest bidder on March 31, 1989, to satisfy the indebtedness in the grand total of P240,420,693.17 as of February 28, 1989. It is the Court's belief that the said sale pushed through. For, aside from the fact that MBC did not anymore file a claim in Court, the aforesaid real property in ManiIa covered by TCT No. 47222 was no I anger incIuded in the inventory of real properties submitted to the probate Court by the petitioner/administrator of the estate (see p. 221, BIR rec. ) � By way of summary, this court allows only the following claims as valid deductions from the estate of Jose P. Fernandez, to wit: Claimant Amount Allowed 1 Banque Indosuez P20,000,000.00 � State Investment House, Inc., 2,200,000.00 2. Equitable Banking Corp. 4,000,000.00 3. Funeral Expenses* 50,000.00 4. P26,250,000.00 TOTAL- *amount claimed by petitioner and was allowed by respondent as this is the maximum amount allowed by law (see worksheet, p. 135, BIR rec.) r- r. ,. . uOt

DECISION C.T.A. CASE NO . . 5116 - 24 - The capital properties of the deceased were valued by respondent at the total amount of P44,652,813.66, breakdown of which as found on page 135, BIR records, is as follows: Real Properties Items P22,410,006.12 Jewelries/Personal 40,000.00 Cash in Bank 22,202,807.54 TOTAL P44,652,813.66 It was already explained earlier, how respondent arrived at the valuations used for real properties, and the personal items which consisted mostly of shares of stocks. The detaiIs of the cash in bank are found on page 133, BIR records. The third issue relates to the surcharges and penalties imposed by respondent. As shown in respondent's Summary (p. 135, BIR rec.) the basic estate tax was subjected to 25% surcharge for late filing and another 25% surcharge for late payment. The Court agrees with the imposition of 25% surcharge for late fi Iing. The estate tax return of subject estate was fiIed only on Apri 17, 1990 (see Exhs. "J" and "K") or more than two ( 2) years from November 7, 1987, date of death of Jose p. Fernandez. Section 93 (b) of the Tax Code provides: "Sec. 93. Return.-(a) Requirements xxx XXX XXX (b) Time for fiIing.-For the purpose l.. ,-' 00\.J

DECISION C.T.A. CASE NO. 5116 - 25 - of determining the estate tax provided for in Section 87 of this Code, the estate tax return required under the preceding subsection (a) shall be filed within ninety days from the decedent's death." (Underscoring supplied) Clearly, the estate tax return was filed late or beyond the required 90-day period. Hence, the imposition of surcharge for late fi Iing is valid. Respondent's computation showed also that 20% interest was imposed for the period from August 19, 1989 to August 19, 1991, or for a period of two years on Iy. The Court does not agree. The interest should be assessed from the date prescribed for its payment unti I the full payment thereof as provided for under Section 283(b) which states: "Sec. 283. Interest. (a) In generai.- There sha I I be assessed and co I Iected on any unpaid amount of tax, interest at the rate of twenty percent (20%) per annum, or such higher rate as may be prescribed by regulations, from the date prescribed for payment unti I the amount is fully paid. (b) Deficiency interest.-Any def.iciency in the tax due, as the term is defined in this Code, sha I I be subject to the interest prescribed in paragraph (a) hereof, which interest sha I I be assessed and co I I ected from the date prescribed for its payment unti I the ful I payment thereof. (C) X X X (d) x x x." (Underscoring supplied) Compromise penalties for non-fi Iing and non-payment should not be imposed as there was an estate tax return

DECISION C.T.A. CASE NO. 5116 2 -6- filed with the BIR Regional Office in Laguna. There was no payment made as the petitioner's estate tax return indicated a "NIL" estate tax due. However, the compromise penalties for "no notice of death" and "no CPA certificate" may be imposed as these are required under Sections 92 and 93, respectively, of the 1987 Tax Code. Thus: "Sec. 92. Notice of death to be filed. In all cases of transfers subject to tax, or where, though exempt from tax, the gross value of the estate exceeds three thousand pesos, the executor, administrator, or any of the I ega I heirs as the case may be, within two months after the decedent's death, or within a like period after guaIifying as such executor or administrator, shalI give a written notice thereof to the Commissioner of Internal Revenue." (Underscoring supplied) "Sec. 93. Return. {a) Requirements XXX ( 1) XXX ( 2) XXX ( 3) such part of such information as may at the time be ascertainable and such supplemental data as may be necessary to establish the correct taxes; Provided, however, that estate returns showing a gross value of fifty thousand pesos or more shall be accompanied with a statement of ( 1) itern i zed assets of the decedent with their corresponding gross value at the time of his death, or in the case of a non-resident not a citizen of the Philippines, of that part of

DECISION C.T.A. CASE NO. 5116 - 27 - his gross estate situated in the Phi I ippines; (2) itemized deductions from gross estate a I I owed in Section 89; and (3) the amount of tax due and outstanding duly certified to bv a certified public accountant. (b) X X X (C) X X X (d) x x x." (Underscoring supplied) At this juncture, the Court is now ready to present its recomputation of the deficiency estate tax due against the estate and/or heirs of the deceased Jose P. Fernandez. Conjugal Real Property p 5,062,016.00 Conjuga I Persona I Prop. 33,021,999.93 38,084,015.93 Gross Conjugal Estate 26,250,000.00 Less: Deductions P11 ,834,015.93 Net Conjugal Estate Less: Share of Surviving 5,917,007.96 Spouse p 5,917,007.96 Net Share in Conjugal 44,652,813.66 Estate P50,569,821.62 Add: Capital/Paraphernal Properties-P44,652,813.66 Less: Capital/Paraphernal Deductions Net Taxable Estate Estate Tax Due P29,935,342.97 Add: 25% Surcharge 7,483,835.74 for Late Fi I ing Add: Penalties for- 15.00 300.00 No notice of death P37,419,493.71 No CPA certificate Total deficiency estate tax 5q<; .J..

DECISION C.T.A. CASE NO. 5116 - 28 - exclusive of 20% interest from 1987] due date of its payment unti full payment thereof. [Sec. 283 (b), Tax Code of 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 unti I fu I I payment thereof as estate tax I iabi I ity of the estate of Jose P. Fernandez who died on November 7, 1987. I t! ---? RAMON 0. DE VE A SO ORDERED. Associate Ju ge WE CONCUR: L-o4 I ERNESTO D. ACOSTA Presiding Judge a. (// ).-- Associate CERTIF CATION hereby certify that this decision was reached after due consultation among the members of the Court of (j I u u (...,

DECISION C.T.A. CASE NO. 5116 - 29 - Tax Appeals in accordance with Section 13, Article VIII of the Constitution. L-\Q- ERNESTO D. ACOSTA Presiding Judge Court of Tax Appeals 5t u