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

G.R. No. 140944 April 30, 2008

Facts:

1. On November 7, 1987, Jose P. Fernandez died.

2. Thereafter, a petition for the probate of his will was filed.

3. The probate court then appointed retired Supreme Court Justice Arsenio P. Dizon and petitioner, Atty. Rafael Arsenio P. Dizon as Special and Assistant Special Administrator.

4. 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.

5. On April 27, 1990, BIR Regional Director issued Certification stating that the taxes due on the transfer of real and personal properties of Jose had been fully paid and said properties may be transferred to his heirs.

6. Petitioner requested the probate court's authority to sell several properties forming part of the Estate, for the purpose of paying its creditors.

7. 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.

8. However, on November 26, 1991, the Assistant Commissioner for Collection of the BIR, issued Estate Tax Assessment Notice demanding the payment of P66,973,985.40 as deficiency estate tax.

Issue:

Whether the actual claims of the 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

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Ruling:

It is admitted that the claims of the Estate's aforementioned creditors have been condoned - mode of extinguishing an obligation.

The U.S. court ruled that the appropriate deduction is the value that the claim had at the date of the decedent's death. 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. These pronouncements essentially confirm the general principle that post-death developments are not material in determining the amount of the deduction.

The court expresses its agreement with the date-of-death valuation rule.

First. There is no law, nor do we discern any legislative intent in our tax laws, which disregard the date-of-death valuation principle and particularly provide 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. Any doubt on whether a person, article or activity is taxable is generally resolved against taxation.

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.

Therefore, the claims existing at the time of death are significant to, and should be made the basis of, the determination of allowable deductions.