Velilla vs. Posadas

A person’s domicile is not abandoned by mere absence; there must be a deliberate and provable choice of a new domicile, coupled with actual residence and an intent to make it a fixed and permanent home. Applying that rule, Moody’s Philippine domicile and the Philippine situs of his property made the inheritance tax valid, and the additional income tax on dividends received by the estate was upheld.

A.L. Velilla was the administrator of the estate of Arthur Graydon Moody, while Juan Posadas, Jr. was the Collector of Internal Revenue. The estate’s tax liability depended on Section 1536 of the Revised Administrative Code, which taxes transmissions by inheritance, devise, bequest, gift mortis causa, or advance in anticipation of inheritance of, among others, shares, obligations, or bonds issued by a Philippine corporation and personal property located in the Philippines; the Civil Code defined domicile as the place of usual residence, and Section 4 of Act No. 2833, as amended, addressed income from exempt property.

Arthur Graydon Moody, an American citizen, came to the Philippine Islands in 1902 or 1903 and engaged actively in business there until his death in Calcutta, India, on February 18, 1931. He never married, had his legal domicile in the Philippine Islands from that time forward, accumulated a fortune from his business, and lived at the Elks’ Club in Manila for many years. He was afflicted with leprosy in an advanced stage and was informed by Dr. Wade that he would be reported to the Philippine authorities for confinement in the Culion Leper Colony as required by law. Distressed at the thought of segregation and in violation of his promise to Dr. Wade that he would voluntarily go to Culion, he surreptitiously left the Islands in the latter part of February 1928, under cover of night, on a freighter, without ticket, passport, or tax clearance certificate.

The record does not show where Moody was during the remainder of 1928. He lived with a friend in Paris, France, during March and April 1929, where he was receiving treatment for leprosy at the Pasteur Institute. The record does not show where he was between April 1929 and November 26, 1930, on which date he wrote a letter, Exhibit B, to Harry Wendt of Manila offering to sell his interest in the Camera Supply Company, a Philippine corporation in which Moody owned 599 out of 603 shares. In that letter he stated, among other things, “Certainly I’ll never return there to live or enter business again,” and he also explained his wish to know as soon as possible about the purchase because he had very recently decided either to sell or put in a line of school or office supplies, and he did not wish the business to be peddled around as being for sale. He wrote letters dated December 12, 1930, and January 3, 1931, along the same line to Wendt.

Moody died of leprosy in Calcutta on February 18, 1931, less than two months after those letters were written. He had executed in the Philippine Islands a will, without date, in accordance with the formalities of Philippine law, in which he bequeathed all his property to his only sister, Ida M. Palmer, then and still a citizen and resident of New York; in the will he stated that he was a citizen of the United States of America residing in the Philippine Islands. His estate consisted principally of bonds and shares of stock of corporations organized under Philippine laws, bank deposits, and other intangible and personal property valued by the commissioners of appraisal and claims at P609,767.58 and by the Collector of Internal Revenue for inheritance tax purposes at P653,657.47. All of that property at the time of his death was located and had its situs within the Philippine Islands, and the record showed no property of any kind located anywhere else.

On February 24, 1931, W. Maxwell Thebaut filed a petition for appointment of special administrator of Moody’s estate with the Court of First Instance of Manila, docketed as case No. 39113. The will was probated by decree dated May 5, 1931, and on July 14, 1931, Ida M. Palmer was declared the sole and only heiress; during the hearing for declaration of heirs she presented a letter dated February 28, 1925, addressed to her by Moody. The special administrator filed an inventory on April 17, 1931. On July 22, 1931, the Bureau of Internal Revenue prepared an inheritance tax return for the estate, and on September 9, 1931, it prepared an income tax return for the fractional period from January 1, 1931, to June 30, 1931. The committee on claims and appraisals filed its report on December 3, 1931.

The Bureau of Internal Revenue sent letters to the attorney for Ida M. Palmer on September 15, 1931, and November 4, 1931; the attorney replied on October 15, 1931, and December 7, 1931. The estate paid under protest P50,000 on July 22, 1931, and P40,019.75 on January 19, 1932, making the assessment for inheritance tax, while the sum of P13,001.41 covered the income tax assessment against the estate. On January 21, 1932, the Collector of Internal Revenue overruled the protest made by Ida M. Palmer through her attorney. The complaint alleged that at the time of his death Moody was a non-resident of the Philippine Islands and that no valid law authorized an inheritance tax on the transfer by death and succession of intangible personal property of a person not domiciled in the Philippines; the answer, besides general denial, set up as a special defense that Moody was and prior to his death a resident in the City of Manila, where he was engaged actively in business. The parties submitted an agreed statement of facts and also introduced oral and documentary evidence, and issue was joined on the question where Moody’s legal domicile was at the time of his death.

• Domicile / Non-Residence: Petitioner alleged that at the time of his death Arthur G. Moody was a non-resident of the Philippine Islands.
• Inheritance Tax / Due Process: Petitioner argued that there was no valid law or regulation under which inheritance tax may be levied, assessed, or collected upon transfer by death and succession of intangible personal property of a person not domiciled in the Philippine Islands, and that the levy and collection of inheritance tax computed upon the value of stocks, bonds, credits, and other intangible properties constituted a taking and deprivation of property without due process of law contrary to the Bill of Rights and organic law.
• Income Tax / Double Taxation: Petitioner argued that the P13,001.41 income tax assessment was illegal because the corporation had paid income tax on the same amount during the years it was accumulated as surplus, an inheritance tax on the same amount was assessed against the estate, and the same amount was assessed as income of the estate.

• Residence / Domicile: Respondent countered, by special defense, that Moody was and prior to the date of his death a resident in the City of Manila, Philippine Islands, where he was engaged actively in business.
• Preliminary Objection / Scope of Protest: Respondent Solicitor-General objected to the consideration of any evidence that Moody’s domicile was elsewhere than in Manila at the time of his death because no such objection was made before the Collector of Internal Revenue as one of the grounds of the protest against payment of the tax, relying on W.C. Tucker vs. A.C. Alexander, Collector.

• Preliminary Objection / Scope of Protest: Whether the Collector’s preliminary objection to evidence that Moody’s domicile was elsewhere—because that ground was not raised in the protest—can be sustained.
• Domicile: Whether Arthur G. Moody was legally domiciled in the Philippine Islands at the time of his death.
• Inheritance Tax: Whether the inheritance tax assessment on Moody’s estate was valid, in light of the claim that the property was intangible personal property of a non-domiciliary and that the levy violated due process.
• Income Tax / Double Taxation: Whether the P13,001.41 income tax assessment against the estate was illegal because the corporation had paid income tax on the same amount, an inheritance tax was assessed on it, and the same amount was assessed as income of the estate.

• Preliminary Objection / Scope of Protest: No. The objection does not lie; no copy of the protest is in the record, and the Tucker ruling relied on was reversed on the ground that the collector had waived the requirement that the action be based only on the protest’s grounds.
• Domicile: Yes. Moody remained legally domiciled in the Philippine Islands; his usual residence was Manila, and no deliberate and provable choice of a new domicile, coupled with actual residence and intent to make it a fixed and permanent home, was shown.
• Inheritance Tax: Yes. The inheritance tax was valid because the property in Moody’s estate had its situs in the Philippines and his legal domicile was also in the Philippines, bringing the transmission within Section 1536 of the Revised Administrative Code.
• Income Tax / Double Taxation: No. The income tax assessment was not illegal; the estate received dividends out of surplus, the normal tax paid at source was allowed as a deduction, and the inheritance tax and additional income tax were distinct, assessed under different statutes.

• Preliminary Objection / Scope of Protest: The Solicitor-General’s preliminary objection rested on the proposition that because no objection to Moody’s domicile was made before the Collector as a ground of protest, evidence that his domicile was elsewhere could not be considered in the suit to recover taxes paid under protest. The SC noted that the Tucker decision relied on had been reversed in 275 U.S., 232; 72 Law. ed., 256, and remanded for trial on the merits on the ground that the requirement that the action be based upon the same grounds, and only such, as were presented in the protest had been waived by the collector. In the case before it, no copy of the taxpayer’s protest was included in the record, so the SC had no means of knowing its contents. The preliminary objection therefore did not lie.

• Domicile: Article 40 of the Civil Code defines the domicile of natural persons as the place of their usual residence. The record showed that Moody had his legal domicile in the Philippines from 1902 or 1903, accumulated a fortune from business there, and lived at the Elks’ Club in Manila for many years until he left in the latter part of February 1928. His departure was surreptitious, under cover of night, on a freighter, without ticket, passport, or tax clearance certificate, because he was afflicted with advanced leprosy and had been informed by Dr. Wade that he would be reported to the Philippine authorities for confinement in the Culion Leper Colony. The record did not show where he was during the remainder of 1928; he lived with a friend in Paris in March and April 1929 while receiving treatment at the Pasteur Institute, and the record did not show where he was between April 1929 and November 26, 1930. In his November 26, 1930 letter to Harry Wendt, he offered to sell his interest in the Camera Supply Company and said he would never return there to live or enter business again; he wrote similar letters on December 12, 1930, and January 3, 1931. He died of leprosy less than two months after those letters, and had he returned to the Philippines he would have been immediately segregated at Culion. The SC held that he was a fugitive, not from justice, but from confinement in the Culion Leper Colony in accordance with Philippine law. There was no statement, oral or written, that he had adopted a new domicile while absent. The appellant did not claim that Moody had a domicile in Calcutta, and the Paris stay did not establish one: there was no writing from Paris, no evidence of a fixed abode intended as a permanent home, no property or settled business there, and the negative evidence that he told Cooley he did not intend to return to Manila did not prove a Paris domicile. His short stay of three months in Paris was consistent with being a transient for treatment. His continued absence from his legal domicile was due to and reasonably accounted for by the same motive that caused his surreptitious departure—to evade confinement at Culion. To effect abandonment of domicile, there must be a deliberate and provable choice of a new domicile, coupled with actual residence in the place chosen, with a declared or provable intent that it should be one’s fixed and permanent place of abode, one’s home; there was a complete dearth of evidence that Moody established a new domicile in a foreign country. His usual residence was therefore Manila, not any foreign country he visited before his death in Calcutta.

• Inheritance Tax: The complaint’s due process challenge was premised on Moody being a non-resident and on the property being intangible personal property of a non-domiciliary. The SC found no merit in the assignments of error because the property in Moody’s estate at the time of his death was located and had its situs within the Philippine Islands and because his legal domicile up to the time of his death was within the Philippine Islands. Section 1536 of the Revised Administrative Code, as amended, taxes every transmission by virtue of inheritance, devise, bequest, gift mortis causa, or advance in anticipation of inheritance of, among others, shares, obligations, or bonds issued by a corporation organized or constituted in the Philippine Islands in accordance with its laws, and of any personal property located in the Philippine Islands. Since the estate consisted principally of bonds and shares of stock of Philippine corporations, bank deposits, and other personal property all located and with situs in the Philippines, and since Moody remained domiciled in the Philippines, the inheritance tax assessment was proper.

• Income Tax / Double Taxation: The SC found the grounds for the P13,001.41 income tax assessment, as stated by the Collector in his letter, Exhibit NN, to be sound. The evidence clearly established that the estate received P59,986.69 as dividends declared out of surplus by the Camera Supply Company. On the first objection, the collector’s assessment, Exhibit 11, allowed the estate a deduction of the normal income tax on that amount because it had already been paid at the source by the Camera Supply Company; the only income tax assessed against the estate was the additional tax or surtax that the corporation had not paid, for which the estate, having actually received the income, was clearly liable. On the second alleged double taxation, the inheritance tax and the additional income tax were entirely distinct, assessed under different statutes, and the SC was not convinced that the estate which received the dividends should not be liable for the income tax because the operation was simply the conversion of the corporation’s surplus into the property of the individual stockholders; it cited U.S. vs. Phellis, 257 U.S., 171, and Taft vs. Bowers, 278 U.S., 460. Section 4 of Act No. 2833, as amended, relied on by the appellant, plainly provides that income from exempt property shall be included as income subject to tax.

• Domicile and abandonment — Domicile of natural persons is the place of their usual residence. Abandonment requires a deliberate and provable choice of a new domicile, coupled with actual residence in the chosen place and a declared or provable intent that it be the fixed and permanent place of abode, one’s home. The SC applied this to hold that Moody’s long residence in Manila, his surreptitious departure to avoid Culion, and the absence of any proof of a new domicile in Calcutta or Paris kept his legal domicile in the Philippines.
• Inheritance tax — domicile and situs — Under Section 1536 of the Revised Administrative Code, as amended, inheritance tax attaches to transmissions by inheritance, devise, bequest, gift mortis causa, or advance in anticipation of inheritance of shares, obligations, or bonds issued by Philippine corporations and personal property located in the Philippines. The SC applied it because Moody’s estate consisted of such Philippine-situs property and because his legal domicile remained in the Philippines.
• Income tax on dividends from corporate surplus — Dividends declared out of corporate surplus and received by the estate are income taxable to the estate; the normal income tax paid at source by the corporation is allowed as a deduction, leaving the additional tax or surtax for which the estate is liable. The SC applied this to the P59,986.69 dividends from the Camera Supply Company.
• No double taxation between inheritance tax and income tax — An inheritance tax and an additional income tax on the same dividends are distinct, being assessed under different statutes; the conversion of corporate surplus into stockholder property does not exempt the estate from income tax on the dividends received. The SC applied this to reject the appellant’s double taxation argument.
• Protest requirement may be waived — The requirement that a suit to recover taxes paid under protest be based on the same grounds as the protest may be waived by the collector; where no copy of the protest is in the record, a preliminary objection grounded on that requirement cannot be sustained. The SC applied this to overrule the Solicitor-General’s objection to the domicile evidence.

• “To effect the abandonment of one's domicile, there must be a deliberate and provable choice of a new domicile, coupled with actual residence in the place chosen, with a declared or provable intent that it should be one's fixed and permanent place of abode, one's home.” — This is the SC’s formulation of the rule on abandoning domicile; it supplied the standard that defeated the claim that Moody had acquired a new domicile abroad.
• “As to the second alleged double taxation, it is clear that the inheritance tax and the additional income tax in question are entirely distinct. They are assessed under different statutes and we are not convinced by the appellant's argument that the estate which received these dividends should not be held liable for the payment of the income tax thereon because the operation was simply the conversion of the surplus of the corporation into the property of the individual stockholders.” — The SC used this to reject the argument that the inheritance tax and the additional income tax on the same dividends amounted to double taxation.
• “Finding no merit in any of the assignments of error of the appellant, we affirm the judgment of the trial court, first, because the property in the estate of Arthur G. Moody at the time of his death was located and had its situs within the Philippine Islands and, second, because his legal domicile up to the time of his death was within the Philippine Islands. Costs against the appellant.” — The SC’s final rationale ties the affirmance to the two findings that controlled the tax liability: Philippine situs of the estate and Philippine domicile of Moody.

• W.C. Tucker vs. A.C. Alexander, Collector, 15 Fed. [21, 356 — Cited by the Solicitor-General for the rule that the action must be based on the grounds raised in the protest; the SC noted it was reversed in 275 U.S., 232, 72 Law. ed., 256, and remanded for trial on the merits because the collector had waived that requirement.
• U.S. vs. Phellis, 257 U.S., 171 — Cited with “Cf.” in support of the income tax treatment of the conversion of corporate surplus into stockholder property.
• Taft vs. Bowers, 278 U.S., 460 — Cited with “Cf.” alongside Phellis in support of the same income tax conclusion.

• Section 1536, Revised Administrative Code (as amended) — Taxes every transmission by virtue of inheritance, devise, bequest, gift mortis causa, or advance in anticipation of inheritance of real property located in the Philippine Islands and real rights in such property; franchises exercised in the Philippine Islands; shares, obligations, or bonds issued by a corporation or sociedad anonima organized or constituted in the Philippine Islands in accordance with its laws; shares or rights in any partnership or business; and any personal property located in the Philippine Islands. Applied to Moody’s estate because its bonds, shares, bank deposits, and other personal property were all located and had situs in the Philippines, and Moody remained domiciled there.
• Article 40, Civil Code — Defines the domicile of natural persons as the place of their usual residence. Applied to hold that Moody’s usual residence remained Manila and that no new domicile was established abroad.
• Section 4, Act No. 2833 (as amended) — Provides that income from exempt property shall be included as income subject to tax. Applied to uphold the income tax on the dividends received by the estate.
• Bill of Rights / organic law (due process) — Invoked by the petitioner against the inheritance tax on intangible personal property of a non-domiciliary. The SC rejected the challenge because the factual premises—non-domicile and absence of Philippine situs—failed: Moody was domiciled in the Philippines and his property had its situs there.

• Justice Goddard (Concurring) — He concurred in the result but thought the evidence clearly established that Moody had permanently abandoned his residence in the Philippine Islands. Even so, he would hold the estate liable because Section 1536 of the Revised Administrative Code makes no distinction between the estates of residents and non-residents of the Philippine Islands. He distinguished First National Bank of Boston vs. State of Maine, 284 U.S., 312; 76 Law. ed., 313, relied on by the appellant, because there the estate was actually taxed in both the domicile (Massachusetts) and the situs of the shares (Maine), while in the case before the SC there was no evidence that Moody’s estate had been taxed anywhere but in the Philippines; he cited Burnet, Commissioner vs. Brooks, 288 U.S., 378.