G.R. No. L-5974 & L-5979; July 30, 1955
Case Parties:

MARIA ELIZABETH KIENE, ET AL., petitioners,
vs.
COLLECTOR OF INTERNAL REVENUE, respondent.
and
THE COLLECTOR OF INTERNAL REVENUE, petitioner,
vs.
MARIA ELIZABETH KIENE, ET AL., respondents.

FACTS

Ludwig Kiene, a German citizen and resident of Liechtenstein, died on March 14, 1951. He left intangible personal property in the Philippines (shares of stock in a domestic corporation) valued at P1,612,988.72, acquired during his marriage to Maria Elizabeth Kiene. They had three children. In September 1948, the spouses executed a joint will bequeathing all property to their children. On March 5, 1951, they executed a deed of trust establishing the “Ludwig Kiene Family Trust,” transferring the entire community property in trust for the benefit of the wife and children. The Collector of Internal Revenue assessed estate and inheritance taxes totaling P143,201.10 on Ludwig Kiene’s properties. Additionally, treating the deed of trust as a donation by the mother to the children, he assessed a donor’s gift tax of P75,016.72 and donees’ gift taxes of P90,979.05. The Kienes contested these assessments before the Board of Tax Appeals, arguing: (1) no estate or inheritance tax was due under the reciprocity clause (Section 122 of the National Internal Revenue Code); (2) no gift tax was payable under the same clause; and (3) if payable, the donor’s tax should be deducted from the gift when computing the donee’s tax. The Board sustained the first contention, held the gift taxable, and agreed that the donor’s tax should be deducted in computing the donee’s tax. Both parties appealed to the Supreme Court.

ISSUE

1. Whether the estate and inheritance taxes are exempt under the reciprocity clause of Section 122 of the National Internal Revenue Code.
2. Whether the donor’s gift tax should be deducted from the donation when computing the donee’s gift tax.
3. Whether the gift taxes are exempt under the same reciprocity clause applicable to estate taxes.
4. Whether the deed of trust constituted a donation mortis causa (and thus not subject to gift tax) rather than a donation inter vivos.

RULING

1. On estate and inheritance taxes: Yes, the exemption applies. The Supreme Court affirmed the Board’s decision. Section 122 of the National Internal Revenue Code provides an exemption from estate and inheritance taxes on intangible personal property if the decedent was a resident of a foreign country that, at the time of death, did not impose similar taxes on intangible property of Philippine citizens not residing there, or if that country’s laws allow a similar exemption. The Board found that Liechtenstein did not impose such taxes on Filipino citizens, thus the reciprocity condition was met. The exemption granted by Congress must be honored.
2. On deducting donor’s tax for donee’s tax computation: No, the donor’s tax should not be deducted. The Court reversed the Board on this point. Unlike the estate tax, which is expressly deductible from the net estate before computing the inheritance tax, the Revenue Code contains no such provision for deducting the donor’s tax when computing the donee’s gift tax. The donor’s tax is levied on the act of giving and may be paid by the donor from separate property, not necessarily reducing the gift received by the donee. Since the donor (Maria Elizabeth Kiene) paid the tax, the donated amount was not reduced. Therefore, the donee’s tax must be computed on the full amount of the gift without deduction.
3. On applying the reciprocity clause to gift taxes: No, the exemption does not extend to gift taxes. The reciprocity clause in Section 122 specifically refers to a “decedent” and conditions related to death, making it applicable only to estate and inheritance taxes. Exemptions from taxation must be clearly expressed, and there is no legislative intent to extend this reciprocity to gift taxes. The Court upheld the Board’s reasoning that the condition for exemption (involving a decedent) is not fulfilled in the case of a donation where both donor and donees are alive.
4. On the nature of the donation: The deed of trust constituted a donation inter vivos, not mortis causa, and is thus subject to gift tax. The Court noted that this issue was not raised before the Board, where both parties treated the document as a gift inter vivos. Regardless, the deed shows the donees’ acquisition of property rights took effect immediately upon the instrument’s execution and was not dependent on the donor’s death, which is characteristic of a donation inter vivos. The gift tax applies “whether the transfer is in trust or otherwise.”
DISPOSITIVE PORTION:
The decision of the Board of Tax Appeals is affirmed, except for the portion requiring deduction of the donor’s gift tax when computing the donee’s gift tax, which is reversed. Costs are imposed on the petitioners (Maria Elizabeth Kiene, et al.).