Propriety of the Automatic Application of Excess Estate Tax Payment to Deficiency Donor's Tax

November 24, 1997 BIR RULING NO. 125-97 204 (3)-000-00-125-9 7 Ms. Corazon C. Pangcog Revenue District Office No. 37 Revenue Region No. 7 Quezon City M a d a m : This refers to your Memorandum dated August 29, 1997 requesting, in effect, for a ruling as to whether or not automatic application of the excess estate tax payment of the Estate of Victoria S. Madrigal to its deficiency donor's tax is allowable under the following circumstances: "1. The legal counsel erroneously computed the estate tax paid per return due to lack of knowledge on the previous extra-judicial partition; "2. The deficiency estate tax was computed on the basis of the available documents submitted; "3. Payment of the total deficiency taxes has already been remitted to the government only that the respective amounts of estate and donor's taxes will not be classified accordingly; and "4. The subject taxpayer is one and the same except that for the donation the donor's tax return should be filed while the taxpayer was still living. For this, a penalty of 25% was imposed for failure to file on time and another 25% for failure to pay on time". It is represented that on April 28, 1997 the Estate of Victoria A.S. Madrigal who died on October 26, 1996 filed an Estate Tax Return reporting a gross estate of P413,197,267.00 and paid an estate tax of P89,779,042.00; that on May 13, 1997, Letter of Authority No. 154777 was issued to Revenue Officer Adolphus Floresca and Group Supervisor Madelyn Sacluti; that on July 30, 1997, the following deficiency taxes were computed upon the request of taxpayer's legal counsel, Jose Leynes, pending submission of other documents in order to stop the accumulation of interest: Estate Tax Donor's Tax Basic Tax P33,585,392.03 P5,009,907.00 25% Surcharge P8,396,348.01 1,252,476.75 Interest 2,191,446.83 909,924.36 Compromise 25,000.00 25,000.00 Tax Due and Payable ATAP Nos. 3504719/350424 P44,198,186.87 P7,197,308.11 =========== =========== that on August 8, 1997, taxpayer paid the amount of P21,000.00 as compromise penalty for failure to file Notice of Death and failure to attach the required CPA Certificate; that on August 11, 1997, an extra-judicial partition dated August 6, 1996 for the Estate of Jose Madrigal, the husband of Victoria A.S. Madrigal who died on August 26, 1995, was submitted by one of the heirs, the son of the decedent Spouses who recently arrived from abroad; that upon verification of this document, it was found out that various properties had already been transferred to the new owners thereof without payment of the donor's tax; that on the basis of the additional documents submitted, a recomputation was made to arrive at the correct amount of taxpayer's tax liabilities; and that the said recomputation resulted in an excess payment of estate tax and a deficiency donor's tax liability against the taxpayer, viz: Estate Tax Donor's Tax Paid per Return P89,779,042.00 None Paid Per Investigation Add: 44,198,186.87 P7,197,308.11 Total Amount Paid P133,977,228.87 P7,197,308.11 Amount Recomputed as a consequence of the extra-judicial settlement Less: 1,493,172.00 139,771,520.14 Excess Estate Tax Payment (P132,484,056.87) Deficiency Donor's Tax P139,771,520.14 It is noted that in the Memorandum dated August 14, 1997 of Revenue Officer II, Adolphus Floresca, it was stated therein that: "Also, with this extra-judicial settlement, the share of Vicente and Gerardo amounted to P632,187,593.41 and P336,818,732.77, respectively while the share of Victoria A.S. Madrigal was P155,319,191.25 considering the one-half (1/2) legal share of the late Victoria A.S. Madrigal from the total conjugal properties, as a renounced/donated portion amounting to P406,843,567.60 was conclusively considered. Deficiency donor's tax, inclusive of increments, in the amount of P137,220,607.14 was therefore assessed." Emphasis Supplied. prcd and that the remaining deficiency donor's tax in the amount of P90,155.16 has been paid on August 26, 1997 by the Estate of the late Victoria A.S. Madrigal under Authority To Accept Payment No. 3504840 dated August 22, 1997. In reply, please be informed that under Section 204(3) of the Tax Code, as amended, the Commissioner may credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund the value of internal revenue stamps when they are returned in good condition by the purchaser, and in his discretion, redeem or change unused stamps that have been rendered unfit for use and refund their value upon proof of destruction. No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax or penalty. From the foregoing provision of Section 204(3) of the Tax Code, as amended, it is clear that in cases of erroneous payment of taxes, the remedy is to claim a refund or credit of the taxes erroneously paid within two (2) years from payment. However, in the case of San Carlos Milling Co., Inc. vs. Commissioner of Internal Revenue (228 SCRA 135) an alternative remedy (to a refund) in cases where a contingent tax liability exist, requires the fulfillment of certain requirements, its prior verification and approval by the Commissioner of Internal Revenue. Thus " Automatic Tax Credit ; Option for either a refund or automatic tax credit scheme does not ipso facto confer on the taxpayer the right to avail the same . The correctness of the returns and the tax amount to be credited is determined first as a matter of procedure . It is difficult to see by what process of ratiocination petitioner insists on the literal interpretation of the word "automatic". Such literal interpretation has been discussed and precluded by the respondent court in its decision of 23 December 1991 where, as aforestated, it ruled that "once a taxpayer opts for either a refund or the automatic tax credit scheme , and signified his option in accordance with the regulation, this does not ipso facto confer on him the right to avail of the same immediately. An investigation, as a matter of procedure, is necessary to enable the Commissioner to determine the correctness of the petitioner's returns, and the tax amount to be credited." xxx xxx xxx " Tax credit under Section 7 , Revenue Regulation 10-77 is an alternative remedy to refund subject to prior verification and approval by Commissioner of Internal Revenue . The above rule is clear. It does not mean that reference to the amount "shown" in the final adjustment return prepared by the taxpayer implies that the taxpayer need not seek approval of the Commissioner prior to its effective availment of the tax credit scheme, it cannot simply credit an amount it deems as correct. Rather, it provides two (2) remedies, that is, the excess may either be refunded or credited, and, insofar as the option of tax credit is concerned, this right should not be construed as an alternative remedy (to a refund) subject to the fulfillment of certain requirements, i.e., prior verification and approval by the Commissioner of Internal Revenue ." Such being the case, and based on the examination, assessment and verification by the same Revenue District Office and as finally approved and determined by the Assessment Division of the Regional Office and that the remaining deficiency donor's tax in the amount of P90,155.16 has already been paid, the aforesaid tax crediting of the excess estate tax payment in the amount of P132,484,056.87 of the Estate of the late Victoria A.S. Madrigal against its deficiency donor's tax in the amount of P132,574,212.03 is hereby approved. Very truly yours, (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue