Trusteeship of the Minors Perez y Tuason vs. Araneta

Proceeds realized by a trustee from the sale of trust property are part of the trust capital and not income of the trust, so that a beneficiary entitled under the instrument only to the "income and profits" or net rentals of the trust estate is not entitled to their delivery, particularly where the instrument expressly authorizes the trustee to sell the trust property and to acquire other property with the proceeds.

Angela S. Tuason died sometime in 1948 leaving a will, paragraph 4 of which instituted her three children as her sole heirs at one-ninth of the hereditary estate each, and legated to her son Antonio an additional portion equivalent to two-ninth parts, and to the grandchildren who might be born to each of her daughters Nieves and Angela another portion equivalent to two-ninth parts each. The three legacies were made subject to the manda in the succeeding paragraph, under which the two legacies in favor of the grandchildren were to be administered by the executor, J. Antonio Araneta — or, in his default, by his brother Salvador Araneta — with ample powers to sell the same and to acquire other property with the proceeds, and with the right to collect reasonable fees for the administration. The administrator's powers were declared to be those of a trustee with the amplest powers permitted by law, subject to the duty to render quarterly accounts of the administration to the legatees who were of age and to deliver to them the participation corresponding to each legatee in the net rents of the administration. Administration over a group would cease when all the grandchildren of that group reached the age of majority and a majority of them agreed to terminate the administration, and the term "nietos" was defined to include both male and female grandchildren.

In conformity with paragraph 4 of the will of the decedent Angela S. Tuason, the trusteeship proceedings was instituted, and certain properties of the estate of the deceased, valued at P900,000, were turned over in 1950 to J. Antonio Araneta as trustee for the benefit of Benigno, Angela and Antonio, all surnamed Perez y Tuason, the grandchildren of the decedent referred to in her will. The trust was thus constituted over estate property of substantial value, with Araneta acting as trustee under the powers and duties fixed by the testatrix in the paragraph quoted above.

Portions of the properties constituting the trust were thereafter sold in 1956, 1957 and 1958 at prices exceeding by P13,418.42, P4,023.52 and P81,386.94, respectively, the original appraised value of the property sold. The excesses aggregated P98,828.88 over the three years.

On September 28, 1959, the judicial guardian and father of the minors filed a motion in the trusteeship proceedings alleging that the sum of P98,828.88 represented profits or income of the trusteeship to which the minors were entitled, pursuant to the provision of the will requiring the trustee to deliver to each legatee the participation corresponding to him in the net rents of the administration, and praying that the trustee be accordingly instructed to deliver the sum to the movant. The trustee objected to the motion. After due hearing, the motion was denied by an order dated March 10, 1960, and the judicial guardian appealed from that order.

• Income Tax Treatment of the Sum: The judicial guardian maintained that the P98,828.88 was profit or income of the trusteeship to which the minors were entitled, because the same sum had been included as profit in the statements of profits and losses attached to the corresponding income tax returns.

• Characterization of Sale Proceeds: Whether the sum of P98,828.88 realized from the trustee's sales of portions of the trust real estate in 1956, 1957 and 1958 constitutes profit or income of the trusteeship that the trustee must deliver to the guardian of the minors under the will, or forms part of the trust capital.

• Characterization of Sale Proceeds: No. The proceeds of the sale of trust property are part of the trust capital and not income, and the beneficiaries are not entitled to their delivery as net rentals under the will.

• Characterization of Sale Proceeds: The entitlement of the minors to the delivery of the P98,828.88 depended exclusively upon the conditions upon which the trust had been established in paragraph 4 of the decedent's will, which in turn depended upon the testatrix's intent as set forth in that paragraph. Whether the same sum was a profit under the internal revenue law was a distinct question governed by the provisions of that law regardless of the will of the decedent. The guardian's reliance on the income tax returns was therefore untenable, since the inclusion of the sum as profit in the statements of profits and losses attached to those returns could not control the construction of the trust instrument.
• Proceeds Take the Place of the Property Sold: The proceeds of the sale of portions of the real estate held in trust merely took the place of the property sold. The will explicitly authorized the trustee to sell the property held in trust and to acquire other property with the proceeds of the sale ("con amplios poderes de vender los mismos, y con su producto adquirir otros bienes"), which left no room for doubt about the intent of the testatrix to keep the proceeds of the sale as part of the trust and not to turn the same over to the beneficiaries as net rentals ("rentas netas"). The obligation of the trustee under the will ran only to the delivery of each legatee's participation in the net rents of the administration, a category into which the gains on the sale of corpus did not fall.
• General Law on Trusts: Under Article 1442 of the Civil Code of the Philippines, the principles of the general law on trust, insofar as they are not in conflict with the Civil Code, the Code of Commerce, the Rules of Court and special laws, are part of Philippine law. Pursuant to that general law, a provision in the instrument to the effect that the beneficiary shall be entitled to the "income and profits" of the trust estate is not ordinarily sufficient to indicate an intention that he should be entitled to receive gains arising from the sale of trust property. The corpus of the estate, no matter what changes of form it undergoes, should be regarded as the same property; that the trust property is originally money, later becomes bonds, and still later real estate, ought not to affect the status of the property as the capital fund. It is thus well settled that profits realized in the sale of trust properties are part of the capital held in trust to which the beneficiaries are not entitled as income. The Restatement of the Law, Trusts, is to the same effect: subject to the allocation of receipts from unproductive or wasting property, money or other property received by the trustee as the proceeds of a sale or exchange of the principal of trust property is principal, and where the terms of the trust provide that the "income and profits" of the trust estate shall be paid to the beneficiary, the ordinary inference is that he is not to receive more than he would receive if only the "income" were payable to him, so that a profit on the sale of trust property is principal.

• Proceeds of Sale of Trust Property Are Capital, Not Income — Gains realized by a trustee from the sale of trust property, including the excess of the sale price over the original appraised value of the property sold, form part of the trust capital or corpus and are not distributable to the beneficiary as income. The Court applied the doctrine to hold that the P98,828.88 realized from the 1956, 1957 and 1958 sales of portions of the trust real estate was not deliverable to the minors' guardian as profits or income under the will.
• Corpus Retains Its Identity Through Changes of Form — The corpus of the estate, no matter what changes of form it undergoes, is regarded as the same property; that the trust property is originally money, later becomes bonds, and still later real estate, does not affect its status as the capital fund. Because the will authorized the trustee to sell the trust property and to acquire other property with the proceeds, the proceeds of sale merely took the place of the property sold and remained capital.
• Construction of "Income and Profits" in a Trust Instrument — A provision in the instrument entitling the beneficiary to the "income and profits" of the trust estate is not ordinarily sufficient to indicate an intention that he should be entitled to receive gains arising from the sale of trust property. The Court applied this rule of interpretation to the will's grant to the legatees of their participation in the "rentas netas" of the administration, holding that the grant did not reach gains on the sale of corpus.
• Independence of Tax Characterization from Trust Entitlement — Whether a sum is a profit under the internal revenue law depends upon the provisions of that law regardless of the will of the decedent, whereas whether a beneficiary is entitled to its delivery depends exclusively upon the conditions upon which the trust was established and upon the testator's intent. The inclusion of the sum as profit in the statements of profits and losses attached to the income tax returns did not establish the minors' entitlement under the trust instrument.
• Article 1442, Civil Code — Reception of the General Law on Trusts — The principles of the general law on trust, insofar as they are not in conflict with the Civil Code, the Code of Commerce, the Rules of Court and special laws, are part of Philippine law. This provision supplied the doctrinal basis for applying Anglo-American trust principles on the allocation of sale proceeds between principal and income.

• "The corpus of the estate, no matter what changes of form it undergoes, should be regarded as the same property. That the trust property is originally money, later becomes bonds, and still later real estate, ought not to affect the status of the property as the capital fund." — This passage states the ratio for treating the sale proceeds as capital notwithstanding the change in the form of the trust assets, and is the formulation of the identity-of-corpus principle applied to the reinvestment power granted in the will.
• "Hence, it is well settled that profits realized in the sale of trust properties are part of the capital held in trust to which the beneficiaries are not entitled as income." — This is the operative holding of the case, directly resolving the question of whether the P98,828.88 was deliverable to the minors as income.
• "Pursuant to the general law on trust, 'a provision in the instrument to the effect that the beneficiary shall be entitled to the "income and profits of" of the trust estate is not ordinarily sufficient to indicate an intention that he should be entitled to receive gains arising from the sale of trust property ...'" — This passage supplies the canon of construction applied to the will's grant of the "rentas netas" of the administration to the legatees, and is the rule most often invoked in later cases involving the principal-income allocation of trust receipts.
• "Subject to the allocation of receipts from unproductive or wasting property, and except as stated in Comment c, money or other property received by the trustee as the proceeds of a sale or exchange of the principal of trust property is principal." — This quotation from the Restatement of the Law, Trusts, is the canonical statement of the default allocation rule that the Court adopted as part of the general law on trusts under Article 1442 of the Civil Code.

• In re Graham's Estate, 198 Pa. 216, 219, 47 A. 1108 — Cited as authority for the proposition that the corpus of the estate, whatever changes of form it undergoes, is regarded as the same property and retains its status as the capital fund.
• In re Account of Houston's Trustees, 165 Atl. 132 — Cited, together with Lauman vs. Foster, Guthrie's Trustee vs. Akers and Estate of Gartenlaule, as authority that a provision entitling the beneficiary to the "income and profits" of the trust estate is not ordinarily sufficient to show an intention that he receive gains from the sale of trust property.
• Lauman vs. Foster, 50 A.L.R. 531 — Cited in the same line of authority on the construction of "income and profits" clauses in trust instruments.
• Guthrie's Trustee vs. Akers, 157 Ky. 649 — Cited in the same line of authority on the non-distribution of sale gains as income.
• Estate of Gartenlaule, 198 Cal. 204, 244 Pac. 348, 48 A.L.R. 793 — Cited in the same line of authority on the construction of "income and profits" clauses.
• First Nat. Bank of Carlisle vs. Lee, 23 Ky. L. Rep. 1897 — Cited, with Coleman vs. Grimes, Bains vs. Globe Bank & Trust Co., Smith vs. Hooper, Chase vs. Union National Bank, First National Bank of Canton vs. Mulholland, Stewart vs. Phelps, Rathbun vs. Colton and Gibson vs. Cooke, as authority that profits realized in the sale of trust properties are part of the capital held in trust to which beneficiaries are not entitled as income.
• Bains vs. Globe Bank & Trust Co., 136 Ky. 332 — Cited in the same line of authority on the allocation of sale profits to trust capital.
• Smith vs. Hooper, 95 Md. 16 — Cited in the same line of authority on the allocation of sale profits to trust capital.
• Chase vs. Union National Bank, 275 Mass. 503 — Cited in the same line of authority on the allocation of sale profits to trust capital.
• First National Bank of Canton vs. Mulholland, 13 A.L.R. 1000 [1920] — Cited in the same line of authority, in a parenthetical marked as involving land.
• Rathbun vs. Colton, 15 Pick. 471 — Cited in the same line of authority on the allocation of sale profits to trust capital.
• Gibson vs. Cooke, 1 Met. 75 — Cited in the same line of authority on the allocation of sale profits to trust capital.
• Bogert on Trusts, 2d Ed., p. 436 — Cited as a treatise supporting the identity-of-corpus principle.
• Scott on Trusts, Vol. 2, p. 1259 — Cited as a treatise supporting the rule that profits on the sale of trust property belong to capital.
• Restatement of the Law, Trusts, Vol. I, pp. 682 and 691 — Cited as the canonical statement of the rule that proceeds of a sale or exchange of the principal of trust property are principal, and that a grant of "income and profits" ordinarily does not entitle the beneficiary to gains on the sale of trust property.

• Article 1442, Civil Code of the Philippines — Provides that the principles of the general law on trust, insofar as they are not in conflict with the Civil Code, the Code of Commerce, the Rules of Court and special laws, are part of Philippine law. The Court invoked this provision to receive and apply the Anglo-American trust rules on the allocation of sale proceeds between principal and income, which supplied the doctrinal basis for denying the guardian's motion.

Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Reyes, J.B.L., Barrera, Paredes, Dizon and De Leon, JJ.