Reversing BIR Ruling No 63-0039

June 20, 1966 BIR RULING NO. 024-66 MEMORANDUM FOR : The Revenue Operations Head (Assessment) Returned herewith are the papers consisting of sixty five (65) pages, relative to your request for clarification and/or reconsideration of B. I. R. Ruling No 63-0039 dated April 26, 1963 which was issued by this Office in resolving a question on the tax consequence of the death on July 2, 1953 in Philadelphia of one of the joint tenants or owners of shares of stock located in the Philippines. The said shares of stock are owned by non-resident American citizens, and are registered in the latter's names by the domestic corporation issuing them as "joint tenants with right of survivorship." cdtech In recapitulation, it is informed that this Office with the assent of the then Chief Counsel Patrocinio F. Landas ruled that the consequent transfer of property to the surviving tenant or co-owner under the above stated facts and circumstances, is not subject to Philippine estate and inheritance taxes for the reason that according to the national law (Article 16, New Civil Code) of the decedent which was applied in this particular case (Aznar vs. Garcia, L-16749, prom. January 31, 1963), the surviving co-owner or joint tenant is subrogated in the rights of the deceased co-owner immediately upon the death of the latter, by the mere fact of said death. In other words, the said ruling which, in effect, exempts from Philippine estate and inheritance taxes the transmission and acquisition by non-resident American citizens of property which is situated in this country and held in joint tenancy with right of survivorship, is predicated on the theory that under the national law of the decedent adverted to above, there is no actual taxable transfer of property from one tenant to another upon the death of one of the joint tenants, because the surviving tenant becomes the sole owner of the property which is the subject matter of the joint tenancy, not by inheritance but by operation of the law on joint tenancy with right of survivorship. (B. I. R. Ruling No. 63-0039 dated April 26, 1963) Actually, however, this is not so, because as pointed out by now Revenue Attache Patrocinio F. Landas, the United States has, in fact, a contrary view as may be gleaned from section 2040 of the 1954 U. S. Internal Revenue Code. After a restudy of this case, it is believed that there is sufficient justification to reverse B. I. R. Ruling No. 63-0039. It appears, therefore, that while we grant such exemption from transfer taxes to non-resident American citizens under the ruling in question, a Filipino citizen, resident or non-resident of the United States, is, taxwise, at a disadvantage because he does not enjoy a similar exemption under the U. S. Internal Revenue Code in respect of any transmission or acquisition or property situated in the United States, jointly held by him with other tenants in joint tenancy with right of survivorship. There is no question that in the case under consideration, the national law of the decedent which is the law of the State of Pennsylvania, is applicable with respect to the inheritance tax, and the Internal Revenue Code of the United States with respect to the estate tax. On the question of the applicability of the national law of the decedent, Article 16, paragraph 2 of the New Civil Code of this country, provides that "intestate and testamentary successions, both with respect to the order of succession and the amount of successional rights and to the intrinsic validity of testamentary provisions, shall be regulated by the National law of the person whose succession is under consideration, whatever may be the nature of the property and regardless of the country wherein said property may be found." The "national law" indicated in Article 16 of the New Civil Code does not mean or apply to any general American law, like the 1939 or 1954 U. S. Internal Revenue Code. By "national law" here is meant the law of the decedent's State. (Aznar vs. Garcia, supra ; see also Maria Elizabeth Kiene, et. al. vs. Collector of Internal Revenue, G. R. Nos. L-5974, L-5979, prom. July 30, 1955) This provision of our New Civil Code applies when the deceased is vested with a descendible interest in property within the jurisdiction of the Philippines. In this case, the deceased tenant who is a non-resident American citizen, no doubt, possessed a descendible interest in the shares of stock which are the subject matter of a joint tenancy with right of survivorship within the jurisdiction of the Philippines. In this connection, however, the rule is well-settled that when it is proposed to invoke the laws of a foreign country, the law upon which reliance is placed must be pleaded and proved; otherwise, it will be presumed that the law prevailing in the foreign country is the same as that which prevails in this jurisdiction (International Harvester Co. vs. Hamburg-American Line, 42 Phil. 845, Yan Ka Lim vs. Collector of Customs, 30 Phil 46). Be that as it may, this Office believes that a check-up on the private laws of the State of Pennsylvania is not necessary inasmuch as assuming arguendo that the law of that state exempts the surviving tenant (non-resident American citizen) from the payment of transfer or death taxes on transfers to him of shares of stock situated in the Philippines and held in joint tenancy with right of survivorship, still the same property would be subject to the estate tax imposed by the U. S. Internal Revenue Code, which, of course, a part of the law of that state. The pertinent provisions of the U.S. Internal Revenue Code of 1954 read as follows: "SEC. 2103. DEFINITION OF GROSS ESTATE . For the purpose of the tax imposed by section 2101, the value of the gross estate of every decedent nonresident not a citizen of the United States shall be that part of his gross estate (determined as provided in section 2031) which at the time of his death is situated in the United States." "SEC. 2104. PROPERTY WITHIN THE UNITED STATES . (a) STOCK IN CORPORATION . For purposes of this subchapter shares of stock owned and held by a nonresident not a citizen of the United States shall be deemed property within the United States only if issued by a domestic corporation." xxx xxx xxx "SEC. 2040. JOINT INTERESTS . The value of the gross estate shall include the value of all property (except real property situated outside of the United States) to the extent of the interest therein held as joint tenants by the decedent and any other person, or as tenants by the entirely by the decedent and spouse, or deposited with any person carrying on the banking business, in their joint names and payable to either or the survivors, except such part thereof as may be shown to have originally belonged to such other person and never to have been received or acquired by the latter from the decedent for less than an adequate and full consideration in money or money's worth:" xxx xxx xxx It will thus be seen that contrary to the opinion of this Office as expressed in B. I. R. Ruling No. 63-0039 the U. S. Internal Revenue Code requires, subject to certain exceptions, the inclusion in a decedent's gross estate of the full value of property held jointly by the decedent and another person or persons with the right of survivorship. The taxpayer has the burden of proving the applications of the statutory exceptions to the general rule requiring the inclusion of the full value of the joint interest in decedent's estate. The entire value of jointly held property is included in a decedent's gross estate unless the executor submits evidence sufficient to show that the property was not acquired entirely with consideration furnished by the decedent. Section 2040 of the 1954 U. S. Internal Revenue Code applies to all classes of property, whether real or personal, (except real property situated outside of the U. S. ) and to all persons, whether citizens, residents or non-residents of the U. S., and regardless of when the joint interest were created. (Mertens' Law of Federal Gift and Estate Taxation, Vol. 2; See also "Federal Estate and Gift Taxation Cases and Materials" (1952) by Warren & Survey). Moreover, in the case of the "Estate of So Gua Hing and Chua Chai Ngo vs. Collector of Internal Revenue" (B. T. A. Case No. 191, prom. January 15, 1955), the Court of Tax Appeals ruled that "a foreign law will not be applied where its enforcement would run counter to some important policy of the estate of the forum or contrary to the direct and paramount interest of the state in the allocation of its wealth resources. Mindful that a great part of the business and wealth in personal property of the Philippines is in the hands of aliens, Congress must have deemed it unwise and dangerous to our economic security to retain the philosophy under Article 10 of our Old Civil Code, of subjecting personal properties to the law of the State of the owner. Hence, in approving Article 16 of our New Civil Code, Congress disregarded entirely the recommendation of the Code Commission, and instead adopted the nationalistic rule of subjecting real as well as personal property to the law of the country where it is situated." It has been held that where the shares of stock of a non-resident owner are situated and used by him in his business activities in this country so as to avail himself of the protection and benefit of Philippine laws, the jurisdiction of the Philippine Government to tax must be upheld. Wells Fargo Band & Union Trust Co. vs. Collector of Internal Revenue, 70 Phil. 325) In view of all the foregoing considerations, this Office is of the opinion and so holds that upon the death of a non-resident alien joint tenant, all transfers to a surviving non-resident alien tenant or co-owner of property situated in the Philippines and which is the subject matter of a joint tenancy shall henceforth be subject to Philippine estate and inheritance taxes, subject to the proviso of section 122 of the Tax Code, which reads as follows: ". . . And provided, further, That no tax shall be collected under this Title in respect of intangible personal property (a) if the decedent at the time of his death was a resident of a foreign country which at the time of his death did not impose a transfer tax or death tax of any character in respect of intangible personal property of citizens of the Philippines not residing in that foreign country, or (b) if the laws of the foreign country of which the decedent was a resident at the time of his death allow a similar exemption from transfer taxes or death taxes of every character in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country." LLphil This supersedes B. I. R. Ruling No. 63-0039 dated April 26, 1963. (SGD.) MISAEL P. VERA Commissioner of Internal Revenue