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

On March 14, 1951, Ludwig Kiene, a German citizen and resident of Liechtenstein, died. 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: (1) P143,201.10 as estate and inheritance taxes on Ludwig Kiene’s properties, and (2) P75,016.72 as donor’s gift tax and P90,979.05 as donees’ gift tax, treating the deed of trust as a donation by the mother to the children. The Kienes contested this before the Board of Tax Appeals, arguing: (a) no estate/inheritance tax was due under the reciprocity clause (Sec. 122, NIRC); (b) no gift tax was payable under the same clause; and (c) if payable, the donor’s tax should be deducted from the gift when computing the donee’s tax.
The Board ruled: (1) no estate/inheritance tax was due under the reciprocity clause; (2) the gift was taxable; and (3) the donor’s tax should be deducted when 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 gift taxes are exempt under the same reciprocity clause.
3. Whether the donor’s gift tax should be deducted from the donation when computing the donee’s gift tax.
4. Whether the deed of trust constituted a donation inter vivos or mortis causa.

RULING

1. On estate and inheritance taxes: YES, the exemption applies. Section 122 of the NIRC provides an exemption from estate/inheritance taxes on intangible personal property if the decedent was a resident of a foreign country that does not impose such taxes on intangible property of Filipino citizens not residing there, or if that country allows a similar exemption. The Board found that Liechtenstein imposes no such taxes on Filipino citizens’ intangible property. Therefore, Ludwig Kiene’s estate is exempt from Philippine estate and inheritance taxes. The Collector’s argument that such property is generally taxable is overridden by the specific statutory exemption based on reciprocity.
2. On gift taxes: NO, the reciprocity clause does not apply to gift taxes. The clause specifically refers to a “decedent” and “death,” conditions not present in a donation where both donor and donees are alive. Exemptions from taxation must be clearly expressed, and the statute’s wording limits the exemption to estate/inheritance taxes only. The argument that gift taxes supplement estate taxes and should be construed together is rejected due to the clear language of the law.
3. On deducting donor’s tax for donee’s tax computation: NO, the donor’s tax should not be deducted. The Revenue Code expressly directs deduction of the estate tax from the net estate before computing inheritance tax, but contains no similar provision for deducting the donor’s tax when computing the donee’s 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. Here, the donor (Maria Elizabeth Kiene) paid the tax, so the donated amount was not diminished. Therefore, the donee’s tax must be computed on the full gift amount.
4. On nature of the deed of trust: It is a donation inter vivos, not mortis causa. The issue was not raised before the Board, where both parties treated it as a gift inter vivos. The deed shows the donees’ acquisition of property rights took effect immediately upon execution, not upon the donor’s death, which is characteristic of inter vivos donations. Thus, it is taxable as a gift inter vivos under the Revenue Code.
DISPOSITIVE:
The decision of the Board of Tax Appeals is AFFIRMED, except for the portion ordering the deduction of the donor’s gift tax when computing the donee’s gift tax, which is REVERSED. Costs are taxed against the petitioners (Maria Elizabeth Kiene, et al.).