MARIA CARLA PIROVANO, ETC., ET AL., PETITIONER AND APPELLANTS, VS. THE COMMISSIONER OF INTERNAL REVENUE, RESPONDENT AND APPELLEE.

Pirovano versus Commissioner of Internal Revenue

The Case

This is a petition brought by the children of the late Enrico Pirovano against the Commissioner of Internal Revenue, questioning the assessment of donees' gift taxes on a conveyance made to them by the De la Rama Steamship Company. The case matters because it fixes the tax treatment of a remuneratory donation — a gift made out of gratitude for past services — and settles that gratitude, like love and affection, has no economic value that may be deducted from the value of the thing given. It is the sequel to an earlier decision of the Supreme Court that had already declared the donation valid and binding.

Procedural History

The Commissioner assessed donees' gift taxes against each of the Pirovano children, and a donor's gift tax against the company, which the company paid. The children contested the assessment and claimed a refund of the donor's tax. The Commissioner denied the claim, so two petitions for review were filed with the Court of Tax Appeals, which tried them jointly. The Court of Tax Appeals ruled that the donor's gift tax had been erroneously collected and was refundable, that the donees' gift taxes were correctly assessed, that the twenty five percent surcharge was not proper, but that the five percent surcharge and one percent monthly interest were due. The children moved for reconsideration, which was denied. They then appealed to the Supreme Court, questioning only the donees' gift taxes and the surcharge and interest imposed on them.

Facts

In the early part of 1941, De la Rama Steamship Company insured the life of Enrico Pirovano, then its President and General Manager, for a total of one million pesos, naming itself as beneficiary. During the Japanese occupation the Philippine policies lapsed, but the American policies were kept alive by premium payments from the company's New York office. Enrico Pirovano died in the latter part of 1944.

After liberation, the board of directors resolved to set aside four hundred thousand pesos out of the expected insurance proceeds for his four minor children. Upon receiving six hundred forty three thousand pesos from the American insurers, the board renounced all its rights to that amount in favor of the children, subject to the condition that the sum be retained by the company as an interest bearing loan, payable after it had settled its bonded indebtedness. The mother, as guardian, accepted the donation, and the stockholders ratified it. In 1951, however, the majority stockholder voted to revoke the donation, and the company refused to pay the balance.

The children sued, and the Supreme Court in 1954 held the donation valid and remunerative, ordering payment after the company had redeemed its preferred shares. The company paid in 1955. The Commissioner then assessed donees' gift taxes of sixty thousand eight hundred sixty nine pesos and sixty seven centavos against each child, and a donor's gift tax against the company, which the company paid.

Issues

• Whether or not the conveyance to the Pirovano children is a taxable gift, given that the Court had earlier declared it a remunerative donation for past services.
• Whether or not only the excess of the value of the property over the value of the services rendered should be treated as a taxable gift.
• Whether or not the five percent surcharge and one percent monthly interest were validly imposed despite the alleged prematurity of the assessment.

Applicable Provisions

Article 619 of the old Civil Code, now Article 726 of the Civil Code of the Philippines, provides:

A thing given to a person in consideration of his merits or for services rendered to the donor provided they do not constitute recoverable debts, is also a donation.

This is the provision that classifies the conveyance as a donation notwithstanding the services rendered.

Section 111 of the Tax Code provides:

When property is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the value of the property exceeded the value of the consideration shall, for the purpose of the tax imposed by this chapter, be deemed a gift.

This is the provision the petitioners invoke to argue that only the excess over the value of the services should be taxed.

Ruling

On the first issue, the Court held that the donation remains taxable whether simple or remuneratory. Past services, rendered without a contemporaneous promise that they would be paid for, do not constitute cause or consideration that would make a conveyance anything other than a gift. There was no showing that Pirovano was not fully compensated or that he expected further compensation. The true consideration was the company's gratitude, not the services themselves.

On the second issue, the Court rejected the argument. The term consideration in Section 111 refers to the technical consideration of the American Law Institute, meaning anything bargained for by the promisor and given by the promisee in exchange for the promise. Pirovano's services were rendered long before the cession and were not the result of any bargain. A subsequent promise to pay for past services is a nudum pactum, an unenforceable promise. The Court quoted Chief Justice Griffith:

Love and affection are not considerations of value. They are not estimable in terms of value. Nor are sentiments of gratitude for gratuitous past favors or kindnesses; nor are obligations which are merely moral.

Since gratitude has no economic value, there is no consideration to deduct from the value of the gift.

On the third issue, the Court held that the imposition of interest and surcharge under Section 119 is mandatory and may not be waived by the Commissioner or the courts, unlike the twenty five percent penalty under Section 120, which allows discretion where reasonable cause is shown. The petitioners filed no return, paid nothing, and sought no suspension of collection.

Doctrine

A donation made in consideration of past services that do not constitute recoverable debts is a donation under Article 619 of the old Civil Code, now Article 726 of the Civil Code, and is taxable as a gift whether simple or remuneratory. Gratitude for past services, like love and affection, is not consideration in money or money's worth under Section 111 of the Tax Code, so the entire value of the property transferred is subject to gift tax. The five percent surcharge and one percent monthly interest under Section 119 are mandatory and cannot be waived.

Disposition

The Supreme Court affirmed the decision of the Court of Tax Appeals, with costs against the petitioners.

Remember This

Memorize this line: gratitude for past services is not consideration in money or money's worth, so a remuneratory donation is taxed on its full value. Examiners use this case to test the distinction between a remuneratory donation and a transfer for adequate consideration, and the mandatory nature of the surcharge and interest under the Tax Code.