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124Phil.1493

[G.R.No.21108,November29,1966]
REPUBLICOFTHEPHILIPPINES,PLAINTIFFAPPELLANT,VS.
LEONORDELARAMA,ETAL.,RESPONDENTSAPPELLEES.
DECISION
ZALDIVAR.J.:
ThisisanappealfromthedecisionoftheCourtofFirstInstanceofManila,datedDecember
23, 1961, in its Civil Case No. 46494, dismissing the complaint of the Republic of the
PhilippinesagainsttheheirsofthelateEstebandelaRamaforthecollectionof956,032.50
asdeficiencyincometax,inclusiveof50%surcharge,fortheyear1950.
TheestateofthelateEstebandelaRamawasthesubjectofSpecialProceedingsNo.401of
the Court of First Instance of Iloilo. The executoradministrator, Eliseo Hervas, filed on
March12,1951,incometaxreturnsoftheestatecorrespondingtothetaxableyear1950,
declaringanetincomeof922,796.59,onthebasisofwhichtheamountofP3,919.00 was
assessedandwaspaidbytheestateasincometax.TheBureauofInternalRevenuelater
claimedthatithadfoundoutthattherehadbeenreceivedbytheestatein1950fromthe
De la Rama Steamship Company, Inc. cash dividends amounting to 966,800.00, which
amount was not declared in the income tax return of the estate for the year 1950. The
Bureau of Internal Revenue then, on March 7, 1956, made an assessment as deficiency
incometaxagainsttheestateinthesumof956,032.50,ofwhichamount937,355.00was
thedeficiencyand918,677.50wasthe50%surcharge.
TheCollectorofInternalRevenuewrotealetter,datedFebruary29,1956,toMrs.Lourdes
delaRamaOsmeainformingherofthedeficiencyincometaxandaskingpaymentthereof.
OnMarch13,1956theletter'scounselwrotetotheCollectoracknowledgingreceiptofthe
assessment,butcontendedthatLourdesdelaRamaOsmeahadnoauthoritytorepresent
theestate,andthattheassessmentshouldbesenttoLeonordelaRamawhowaspointed
tobysaidcounselastheadministratrixoftheestateofherlatefather.Onthebasisofthis
informationtheDeputyCollectorofInternalRevenue,onNovember22,1956,sentaletter
toLeonordelaRamaasadministratrixoftheestate,askingpayment.Thetax,asassessed,
not having been paid, the Deputy Commissioner of Internal Revenue, on September 7,
1959,wrote another letter to Mrs. Lourdes de la RamaOsmea demanding, through her,
upon the heirs, the payment of the deficiency income tax within the period of thirty days
from receipt thereof. The counsel of Lourdes de la RamaOsmea, in a letter dated
September 25, 1959, insisted that the letter should be sent to Leonor de la Rama. The
DeputyCommissionerofInternalRevenuewrotetoLeonordelaRamaanotherletter,dated
February11,1960,demanding,throughherasadministratrix,upontheheirsofEstebande
laRama,thepaymentofthesumofP56,032.50,asdeficiencyincometaxincludingthe50%
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surcharge,totheCityTreasurerofPasayCitywithinthirtydaysfromreceiptthereof.
The deficiency income tax not having been paid, the Republic of the Philippines filed on
March 6, 1961 with the Court of First Instance of Manila a complaint against the heirs of
Esteban de la Rama, Making to collect from each heir his/her proportionate share in the
income tax liability of the estate. An amended complaint dated August 31, 1961, was
admittedbythecourt.
Thedefendantsappellees,LourdesdelaRamaOsmea,LeonordelaRama,Estefanla de
laRamaPirovano,DoloresdelaRamaLopez,CharlesMiller,andAnicetadelaRamaSian,
thru counsel, filed their respective answers, the gist of their allegations and/or defenses
being(1)thatnocashdividendsof966,800.00hadbeenpaidtotheestate(2)thatthe
administration of the estate had been extended by the probate court precisely for the
purpose of collecting said dividends (3) that Leonor de la Rama had never been
administratrixoftheestate(4)thattheexecutoroftheestate,EliseoHervas, had never
beengivennoticeoftheassessment,andconsequentlytheassessmenthadneverbecome
finaland(5)thatthecollectionoftheallegeddeficiencyincometaxhadprescribed.Fausto
F.Gonzales,Jr.,oneofthedefendants,nothavingfiledananswer,wasdeclaredindefault.
Fromtheevidenceintroducedatthetrial,bothoralanddocumentary,thelowercourtfound
thatthedividendof966,800.00declaredbytheDelaRamaSteamshipCo.infavorofthe
late Esteban de la Rama was applied to the obligation of the estate to the company
declaringthedividendsthatLeonordelaRamawasnottheadministratrixoftheestate,but
itwasthelateEliseoHervaswhowastheexecutoradministratorthattheadministrationof
theestatewasextendedforthepurposeofrecoveringfortheestatesaiddividendsfromthe
DelaRamaSteamshipCo.,IncandthatthequestionofwhetherthedeceasedEstebande
laRamawasadebtortotheentity known as the Hijos de I. de la Rama, which was also
indebtedtotheDelaRamaSteamshipCo.,Inc.,wasnotasettledone.
Aftertrial,thelowercourtrendereditsdecision,datedDecember23,1961,dismissing the
complaint. The Republic of the Philippines appealed from said decision to the Court of
Appeals,buttheappealwaslatercertifiedtothisCourtbecauseonlyquestionsoflaware
involved.
Plaintiffappellantcontendsthatthetrialcourterred(1)inholdingthattherewasnobasis
fortheassessmentuponthegroundthatitwaanotprovedthattheincomeinquestionwas
received by the estate of Esteban de la Rama or by his heirs (2) in not holding that the
incomewasconstructivelyreceivedbytheestateofthelateEstebandelaRama(3)innot
holding that the heirs and legatees of the late Esteban de la Rama were liable for the
paymentofthedeficiencyincometax(4)innotholdingthattheassessmentinvolvedinthe
casehadlongbecomefinal(5)innotholdingthattheserviceofthenoticeofassessment
onLourdesdelaRamaOsmeaandLeonordelaRamawasproperandvalidand(6)innot
holdingthatsaidcourthadnojurisdictiontotakecognizanceofappellees1defensethatthe
assessmentinquestionwaserroneous.
Plaintiffappellant argues that the deficiency income tax in this case was assessed in the
sum of 986,800. 00 representing cash dividends declared in 1950 by the De la Rama
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SteamshipCo.,Inc.infavorofthelateEstebandelaRamaandwasappliedaspaymentof
thelatter'saccountwiththeformer.Theapplicationofpaymentappearsinthebooksofsaid
creditorcompanyasfollows:
"Againstaccountsreceivableduefrom
P25,255.24
EstebandelaRama..........
"AgainsttheaccountduefromHijosdeI.de
laRama,Inc.,ofwhichDonEstebandela
P61,544.76
Ramawastheprincipalowner..........
...........
Total.........P86,800.00"
Theplaintiffappellantmaintainsthatthiscreditingofaccountsinthebooksofthecompany
constitutedaconstructivereceiptbytheestateortheheirsofEstebandelaRamaofthe
dividends,andthisdividendwasanincomeoftheestateandwastherefore,taxable.
Itisnotdisputedthatthedividendsinquestionwerenotactuallypaideithertotheestate,
ortotheheirs,ofthelateEstebandelaRama.Thequestiontoberesolvediswhetheror
notthesaidapplicationofthedividendstothepersonalaccountsofthedeceasedEsteban
delaRamaconstitutedconstructivepaymentto,andhence,constructivelyreceivedby,the
estateortheheirs.Ifthedebtstowhichthedividendswereappliedreallyexisted,andwere
legallydemandableandchargeableagainstthedeceased,therewasconstructivereceiptof
thedividendsiftherewerenosuchdebts,thentherewasnoconstructivereceipt.
Thefirstdebt,asaboveIndicated,hadbeencontestedbytheexecutoradministratorofthe
estate.ItdoesnotevenappearthattheDelaRamaSteamshipCo.,Inc.hadeverfileda
claimagainsttheestateinconnectionwiththatindebtedness.Theexistenceandthevalidity
ofthedebtis,therefore,indispute,andtherewasnoproofadducedtoshowtheexistence
andvalidityofthedebt.
Theseconddebttowhichthedividendswerepartlyappliedwereaccounts"duefromHijos
deI.delaRama,Inc."Theallegeddebtorherewasanentityseparateanddistinctfromthe
deceased.Ifthatwasso,itsdebtscouldnotbechargedagainstthedeceased,evenifthe
deceasedwastheprincipalownerthereof,intheabsenceofproofofsubstitutionofdebtor.
ThereisnoevidenceintheinstantcasethatthelateEstebandelaRama substituted the
"HijosdeI.delaRama"asdebtortotheDelaRamaSteamshipCo.,Inc.norwasthere
evidencethattheestateofthelateEstebandelaRamaownedthe"HijosdeI.delaRama,
Inc.,"thisfactbeing,asfoundbythelowercourt,notasettledquestionbecausethesame
wasdeniedbytheadministrator.
UndertheNationalInternalRevenueCode,incometaxisassessedonincomethathasbeen
received. Thus, Section 21 of the Code requires that the income must be received by an
individualbeforeataxcanbeleviedthereon.
"Sec.21.Ratesoftaxoncitizensorresidents.Thereshallbelevied,collected,
andpaidannuallyupontheentireincomereceivedintheprecedingtaxableyear
fromallsourcesbyeveryindividual,orcitizenorresidentofthePhilippines,xx
x."

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Section 56 also requires receipt of income by an estate before an Income tax can be
assessedthereon.Itprovides:
"Sec.56.Impositionoftax(a)Applicationoftax.Thetaxesimposedbythis
Title upon individuals shall apply to the income of estates or of any kind of
propertyheldintrustincluding
(3) Income received by estate of deceased persons during the period of
administrationorsettlementoftheestatexxx."
Hence,ifincomehasnotbeenreceived,noincometaxcanbeassessedthereon.Inasmuch
astheincomewasnotreceivedeitherbytheestate,orbytheheirs,neithertheestatenor
theheirscanbeliableforthepaymentofincometaxtherefor.
Thetrialcourt,therefore,didnoterrwhenitheldinitsdecisionthat:
"Afterastudyoftheproofs,theCourtisconstrainedtosustainthepositionof
thedefendantsonthefundamentalissuethattherecouldhavebeennocorrect
andrealbasisfortheassessmentorthatthereisnoproofthattheincomein
questionhadbeenreceiveditwasnotactuallydelivereduntotheEstatesince
it was retained by the De la Rama Steamship Co., Inc. which applied said
dividendstocertainaccountsreceivableduefromthedeceasedallegedly,Exh.
Al now if truly there had been such indebtedness owing from the deceased
untosaidDelaRamaSteamshipCo.,Inc.,theCourtwillagreewithplaintiffthat
the offsetting of the dividends against such indebtedness amounted to
constructivedeliverybutherehasnotbeenpresentedanyprooftothateffect,
i.e.,thattherewassuchanindebtednessduefromdeceasedonthecontrary
what the evidence shows is that the former administrator of the Estate had
challenged the validity of said indebtedness,Exh. D, motion of 4 June, 1951
thisbeingthecase,thereisnoclearshowingthatincomeintheformofsaid
dividendshadreallybeenreceived,whichistheverbusedinSection21ofthe
Internal Revenue Code, by the Estate whether actually or constructively and
the income tax being collected by the Government on income received, the
Government's position is here without a clear basis the position becomes
worsewhenitbeconsideredthatitisnoteventheEstatethatisbeingsuedbut
the heirs themselves, who admittedly had not received any of said dividends
themselvesthefictionoftransferofownershipbysuccessionfromthedeathof
thedecedantwillhavetogivewayto.acttualfactthatthedividendshavenot
beenadjudicatedatalltotheheirsuptonowatleastsofarastheevidence
shows.ThisbeingtheconclusionoftheCourt,therewillbenoneedtodiscuss
thequestionofwhethertheactionhasorhasnotprescribed."
Thefactualfindingsofthetrialcourt,asstatedintheabovequotedportionofthedecision,
isdecisiveinthedeterminationofthelegalissuesinthiscase.
AppellantcitesthecaseofHerbertv.ConmisslonerofInternalRevenue81F(2d)912 as
authority that the crediting of dividends against accounts constitutes payment and
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constructivereceiptofthedividends.Thecitationofauthoritymissesthepointinissue.In
that case the existence of the indebtedness of Leon S. Herbert to the corporation that
declared the dividends and against which indebtedness the dividends were applied, was
neverputinissue,andwasadmitted.Intheinstantcase,theexistenceoftheobligations
hasbeendisputedand,asthetrialcourtfound,hasnotbeenproved.Ithavingbeenshown
in the instant case that there was no basis for the assessment of the income tax, the
assessmentitselfandthesendingofnoticesregardingtheassessmentwouldneitherhave
basis,andsotheassessmentandthenoticesproducednolegaleffectthatwouldwarrant
thecollectionofthetax.
Theappellantalsocontendsthattheassessmenthadbecomefinal,becausethedecisionof
the Collector of Internal Revenue was sent in a letter dated February 11, 1960 and
addressed to the heirs of the late Esteban de la Rama, through Leonor de la Rama as
administratrixoftheestate,andwasnotdisputedorcontestedbywayofappealwithinthirty
days from receipt thereof to the Court of Tax Appeals. This contention is untenable. The
lowercourtfoundthatLeonordelaRamawasnottheadministratrixoftheestateofEsteban
delaRama.Theallegeddeficiencyincometaxfor1950waschargeableagainsttheestate
ofthedeceasedEstebandelaRama.OnDecember5,1955,whentheletterofnoticefor
theassessmentofthedeficiencyincometaxwasfirstsenttoLeonordelaRama(SeeAnnex
"A"ofAnswerofdefendantLourdesdelaRamaOsmea,pp.1617,RecordonAppeal),the
administrationproceedings,inSpecialProceedingsNo.401oftheCourtofFirstInstanceof
Iloilo,werestillopenwithrespecttothecontrovertedmatterregardingthecashdividends
uponwhichthedeficiencyassessmentwaslevied.ThisisclearfromtheorderdatedJune
21,1951(Exhibit"E")oftheCourtofFirstInstanceofIloilowhichinpartprovides:
"El albaceaadministrador hace constar, sin embargo, que quedan por cobrar
ciertosdividendosdeclaradosydevengadosporlasaccionesdelfinadoEsteban
delaRama en The De la Rama Steamship Co., Inc., que los funcionarios de
dichacorporationxxxnonanpagadoaunxxxyqueportalesmotivoshabria
necesidad de prolongar la administracion, solamente para que esta contine
atendiendo,conautorizacion,atalesmenesteres.
"Se ordena el cierre de la Administracin pero se provee, sin embargo, la
extensindelamisma,solamenteparaelpropositodeiniciaryproseguirhasta
euterminacionunaaccioncontraTheDelaRamaSteamshipCo.,Inc.para el
cobro de dividendos declarados por dicha corporacin en Diciembre 31, 1950
sobrelas869accionesdelfinadoEstebandelaRamaenlamismaxxx.
"Y finalmente, queda relevado al Administrador Sr. Eliseo Hervas de toda
responsibilidadenrelaci&nconsuadministracin,exceptoenloquerespecta
alcobrodedividendosxxx."
The estate was still under the administrationofEliseo Hervas as regards the collection of
saiddividends.Theadministratorwastherepresentativeoftheestate,whosedutyitwasto
payanddischargealldebtsandchargesontheestateandtoperformallordersofthecourt
byhimtobeperformed(Rule81,Section1),andtopaythetaxesandassessmentsdueto
the Government or any branch or subdivision thereof (Section 7, Rule 89, Old Rules of
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Court). The tax must be collected from the estate of the deceased, md it is the
administrator who is under obligation to pay such claim (Estate of Claude E. Haygood,
Collector of Internal Revenue v. Haygood, 65 Phil., 520). The notice of assessment,
therefore,shouldhavebeensenttotheadministrator.Inthiscase,noticewasfirstsentto
Lourdes de la RamaOsmea on February 29, 1956, and later to Leonor de la Rama on
November 27, 1956, neither of whom had authority to representtheestate.As the lower
courtsaidinitsdecision:"LeonordelaRamawasnottheadministratrixoftheestateofthe
lateEstebandelaRamaandassuchthedemanduntoher,Exh.Def.8,p.112,wasnota
correct demand before November 27, 1956, because the real administrator was the late
EliseoHervasxxx."(p.45,RecordonAppeal)Thenoticewasnotsenttothetaxpayerfor
the purpose of giving effect to the assessment, and said notice could not produce any
effect.InthecaseofBautistaandCorralesTanv.CollectorofInternalRevenue,L12259,
May27,1959,thisCourthadoccasiontostatethat"theassessmentisdeemedmadewhen
thenoticetothiseffectisreleased,mailedorsenttothetaxpayerforthepurposeofgiving
effecttosaidassessment."Itappearingthatthepersonliableforthepaymentofthetaxdid
notreceivetheassessment,theassessmentcouldnotbecomefinalandexecutory (R. A.
1125,Section11).
Plaintiffappellant also contends that the lower court could not take cognizance of the
defensethattheassessmentwaserroneous,thisbeingamatterthatiswithintheexclusive
jurisdictionoftheCourtofTaxAppeals.Thiscontentionhasnomerit.AccordingtoRepublic
Act1125,theCourtofTaxAppealshasexclusivejurisdictiontoreviewbyappealdecisionsof
theCollectorofInternalRevenueincasesinvolvingdisputedassessments,andthedisputed
assessmentmustbeappealedbythepersonadverselyaffectedbythedecisionwithinthirty
days after the receipt of the decision. In the instant case, the person adversely affected
shouldhavebeentheadministratoroftheestate,andthenoticeoftheassessmentshould
havebeensenttohim.Theadministratorhadnotreceivedthenoticeofassessment,and
hecouldnotappealtheassessmenttotheCourtofTaxAppealswithin30daysfromnotice.
Hence the assessment did not fall within the exclusive jurisdiction of the Court of Tax
Appeals.
IN VIEW OF THE FOREGOING, the decision appealed from should be, as it is hereby,
affirmed,withoutcosts.
Concepcion,C.J.,Reyes,J.B.L.,Barrera,Dizon,Regala,Makalintal,Bengzon,J.P.,Sanchez
andRuizCastro,JJ.,concur.

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