G.R. No. L-21108 November 29, 1966
REPUBLIC OF THE PHILIPPINES, plaintiff-appellant, vs. LEONOR DE LA RAMA, ET AL., respondents-appellees.

FACTS

The estate of the late Esteban de la Rama, under administration in Special Proceedings No. 401 of the Court of First Instance of Iloilo with executor-administrator Eliseo Hervas, filed an income tax return for 1950 declaring a net income of P22,796.59 and paid P3,919.00 in tax. The Bureau of Internal Revenue later asserted that the estate received P86,800.00 in cash dividends from De la Rama Steamship Co., Inc. in 1950, which was not declared. On March 7, 1956, the Bureau assessed a deficiency income tax of P56,032.50 (P37,355.00 deficiency plus a 50% surcharge of P18,677.50). Notices of assessment and demand were sent to Lourdes de la Rama-Osmeña and later to Leonor de la Rama, but not to the executor-administrator Eliseo Hervas. The heirs defended that no cash dividends were actually paid to the estate; the dividends were applied by the steamship company to alleged debts of the deceased and the Hijos de I. de la Rama, Inc.; Leonor de la Rama was not the administratrix; the executor was never notified; and the collection had prescribed. The trial court found the dividends were applied to contested obligations, Leonor de la Rama was not administratrix, and the administration was extended to recover said dividends. It dismissed the complaint. The Republic appealed.

ISSUE

1. Whether the application of the dividends to alleged debts constituted constructive receipt of income taxable to the estate or heirs.
2. Whether the notice of assessment was properly served to make the assessment final and executory.
3. Whether the lower court had jurisdiction to consider the defense that the assessment was erroneous.

RULING

1. No constructive receipt. Under Sections 21 and 56 of the National Internal Revenue Code, income tax is levied on income received. The P86,800.00 dividends were not actually paid to the estate or heirs. Their application to debts required the debts to be existent, legally demandable, and chargeable against the deceased. The first debt (P25,255.24) was contested by the administrator, and no claim was filed against the estate. The second (P61,544.76) was a debt of Hijos de I. de la Rama, Inc., a separate entity, not proven to have been substituted by the deceased or owned by his estate. Without proof of valid debts, no constructive receipt occurred. Thus, no taxable income was received by the estate or heirs.
2. Assessment not final. The notice of assessment must be sent to the taxpayer for the purpose of giving effect to the assessment. The person liable was the estate, represented by the executor-administrator Eliseo Hervas. Notices sent to Lourdes de la Rama-Osmeña and Leonor de la Rama, who lacked authority, were invalid. Since the administrator did not receive the notice, the assessment never became final and executory.
3. Lower court had jurisdiction. The Court of Tax Appeals has exclusive jurisdiction to review disputed assessments upon appeal by the person adversely affected within 30 days from notice. Here, the administrator, the proper person, did not receive notice and could not appeal. Therefore, the assessment did not fall under the exclusive jurisdiction of the Court of Tax Appeals, and the lower court could properly take cognizance of the defense.
The decision of the lower court dismissing the complaint is affirmed.