COLLECTOR OF INTERNAL REVENUE, PETITIONER, VS. JAMES E. NORTON, ET Al., RESPONDENTS.

On or about April 13, 1952, Lionel D. Hargis, an American citizen, died in
the City of Oakland, County of Alameda, California, U.S.A. He left real and
personal properties in the United. States apprised at P430,952.14 and personal
properties in the Philippines consisting mostly of shares of stock and equities
finally appraised at P927,835.07. The respondents are the heirs of the deceased
except Thomas M. Jordan who is merely a legatee and the ancillary executor in
the Philippines of his Testate Estate. In view of the reappraisal of the estate,
an amended assessment notice was issued on May 21, 1954, demanding the payment
of (1) an estate tax in the amount of P87,397.54, instead of the original
P88,270.46 which had been paid and (2) a total deficiency inheritance tax,
surcharge, interest and penalty from the heirs and legatee in the amount of
P147,192.19, after crediting the estate with a previous partial payment of
P25,715.53. The respondents contested the assessment of the deficiency
inheritance tax in the sum of P147,192.19 and requested the refund of the sum of
P25,715,53. Upon refusal of the petitioner, the case was brought before the
Court of Tax Appeals which rendered a decision in favor of the respondents. The
petitioner has appealed.

In claiming exemption from the inheritance tax on the transmission of
intangible personal properties of the deceased in the Philippines, the
respondents rely on the reciprocity prevision contained in section 122 of the
Tax Code which reads as follows;

“xxx And provided, further, That no tax shall be collected under this Title
in respect of intangible personal property (a) if the decedent at the time of
his death was a resident of a foreign country which at the time of his death did not impose a transfer tax or death tax cf any character in respect of Intangible
personal property of citizens of the Philippines not residing in that country,
or (b) if the laws of the foreign country of which the decedent was a resident
at the time of his death allow a similar exemption from transfer taxes or death
taxes of every character in respect of intangible personal property owned by
citizens of the Philippines net residing in that foreign country,”

The foregoing reciprocity provision, according to the respondents, finds its
complement in Section 13351 of the Revenue and Taxation Code of California (of
which the deceased was a citizen and resident) which provides as follows;

“Intangible personal property is exempt from the tax imposed by this
part if the decedent at the time of his death was a resident of territory or
another State of the United States or of a foreign state or country which then
imposed a legacy, succession, or death tax in respect to intangible personal
property of its own residents but either: (a) Did not impose a legacy,
succession, or death tax of any character in respect to intangible personal
property of residents of this State; or (b) Had in its laws a reciprocal
provision under which intangible personal property of a nonresident was exempt
from legacy, succession, or death taxes of every character if the Territory or
other State of United States or foreign state or country in which the
nonresident reside allowed a similar exemption in respect to intangible personal
property of residents of the Territory or State of tho United States or foreign
state or country of residence of the decedent.”

Section 122 of the Tax Code imposes the following conditions for exemption from estate and inheritance
taxes:

Under provision (a)-

	(1)	That the decedent was a resident of a foreign country at the time of his death;
	(2)	That said foreign country did not impose a transfer or death tax of any character; and
	(3)	That intangible personal property of nonresident Filipinos situated in that foreign country is exempt from transfer or death taxes of any character

Under provision (b)

	(1)	That the laws of the foreign country of a nonresident decedent allow a similar exemption from transfer taxes or death taxes cf every character; and
	(2)	that the intangible personal property of nonresident Filipino situated in that foreign country is exempt from transfer taxes or death taxes of every character.

Section 122 (b), mainly relied upon by the respondents requires that “the laws
cf the foreign country x x x allow a similar exemption.” Contrary to
petitioner’s theory, foreign country as thus used may refer either to the
Federal Government or to the individual States of the Union like California; for
each State of the United States is supreme and independent, and has its own
government with full powers of taxation and appropriation cf the revenue derived
therefrom.^[1]

Section 13851 very clearly employs
words allowing a similar exemption from transfer taxes or death taxes in respect
to intangible personal property of residents of the “Territory or State of the
United States or foreign state or country. By express phraseology, it accurately
contemplates, aside from territory or other state of the United States, foreign
state or country. Petitioner’s contention, therefore, that the exemption in said
section was intended only for states or territories of the United States is
untenable. Reciprocity exists also with any “foreign state or country.”

The petitioner further invoices the grammatical interpretation of the
conjunction “or” in arguing that for reciprocity to exist, the exemption in one
laws concerned must be on both inheritance and estate taxes. This is erroneous
because section 122(b) plainly uses “or” in its ordinary meaning, to convey
alternative relations. At any rate, the state of California does not impose
“estate tax”; it is the Federal Government that imposes and collects the same
under Section 860 (53 Stat. 129; see also Federal Code Annotated, Vol. 6, 1063)
of the U. S. Federal Estate Tax Law. Under this promise, only exemption from the
inheritance tax can be granted by the State of California. Moreover, as pointed
out by the respondents, at the time of adoption of the National Internal Revenue
Code in 1939, the Philippines was a dependency of the United States and there
were many non-resident Filipinos owning intangible personal properties in
several states of the United States, and on the other hand there were numerous
American non-residents who owned similar properties here. The reciprocity
involved was undoubtedly conceived for their benefit.

Wherefore, the decision appealed from is hereby, affirmed, without costs. So
ordered.

Bengzon, Montemayor, Reyes, A., Bautista Angelo, Labrador,
Concepcion, Reyes, J.B.L., Endencia, and Felix, JJ., concur.

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^[1]“Under State’s sovereign power to tax,
it may lawfully tax all properties within the state.” (Teche Linos v. Board of
Sup’rs of Forest County, 142, So, 24, 165, Miss.)

“When dealing with their proper domestic concerns, and not trenching upon the
prerogatives of the national government or violating the guaranties of the
Federal Constitution, the states have the attributes of sovereign powers in
devising their fiscal system to insure revenue and foster their local interests.
(Ohio Oil Co. vs. Conway. 281 U. S. 146, 74 L. Ed, 782.)