Wells Fargo Bank & Union Trust Company vs. Collector of Internal Revenue

Shares of stock in a domestic corporation organized under Philippine law are subject to Philippine inheritance tax upon the death of a non-resident decedent, where the actual situs of the shares is in the Philippines and the decedent has extended activities with respect to such intangibles so as to avail of the protection and benefit of Philippine laws.

Birdie Lillian Eye, wife of Clyde Milton Eye, was domiciled in Los Angeles, California, where she died on September 16, 1932. Her estate included a one-half conjugal share in 70,000 shares of stock in Benguet Consolidated Mining Company, a sociedad anonima organized under Philippine law with its principal office in Manila. Her will was probated in California, and Wells Fargo Bank & Union Trust Company was appointed trustee under the will. Federal and California inheritance taxes on the shares were duly paid. The Collector of Internal Revenue sought to subject the same shares to Philippine inheritance tax, prompting the filing of a petition for declaratory judgment.

Birdie Lillian Eye, wife of Clyde Milton Eye, died on September 16, 1932, at Los Angeles, California, her place of alleged last residence and domicile. Among the properties she left was her one-half conjugal share in 70,000 shares of stock in Benguet Consolidated Mining Company, an anonymous partnership (sociedad anonima) organized and existing under the laws of the Philippines, with its principal office in the City of Manila. She left a will duly admitted to probate in California, where her estate was administered and settled. Wells Fargo Bank & Union Trust Company was duly appointed trustee of the trust created by the will. The Federal and State of California inheritance taxes due on the shares were duly paid.

The stock certificates had remained in the Philippines up to the time of the decedent's death in California, in the possession of one Syrena McKee, secretary of Benguet Consolidated Mining Company, to whom they had been delivered and indorsed in blank. This indorsement gave McKee the right to vote the certificates at general meetings of stockholders, collect dividends, and dispose of the shares as she deemed fit, without prejudice to her liability to the owner for violation of instructions. For all practical purposes, McKee held legal title to the certificates in trust for the true owner.

Respondent Collector of Internal Revenue sought to subject the shares anew to Philippine inheritance tax. Petitioner objected, and a petition for declaratory judgment was filed in the Court of First Instance of Manila, with the parties stipulating that if the court held the transfer subject to Philippine inheritance tax, the petitioner would pay such tax, interest, and penalties without protest, and if held otherwise, the respondent would not proceed to assess and collect. The Court of First Instance of Manila rendered judgment holding that the transmission by will of the 35,000 shares of stock is subject to Philippine inheritance tax, prompting the appeal.

• Situs of Intangibles: Petitioner argued that as to intangibles like shares of stock, their situs is in the domicile of the owner, and therefore their transmission by death necessarily takes place under the owner's domiciliary laws.
• U.S. Due-Process Doctrine: Petitioner invoked four U.S. Supreme Court cases (Farmers Loan & Trust Company vs. Minnesota, Baldwin vs. Missouri, Beidler vs. South Carolina Tax Commission, and First National Bank of Boston vs. Maine) for the rule that an inheritance tax on intangibles can be imposed only by the state of the decedent's domicile, and that the state of incorporation has no power to impose such tax on shares owned by a non-resident decedent under the due-process clause.
• Inapplicability of Burnet vs. Brooks: Petitioner contended that the doctrine in Burnet vs. Brooks — which upheld the federal estate tax on a non-resident's stock in a domestic corporation — was not applicable because the due-process clause is directed at the states and not at the federal government, and that the federal or national power is to be determined by applying principles of jurisdiction recognized in international relations.

• Jurisdiction to Tax Intangibles: Whether the Philippine government has jurisdiction to impose inheritance tax on the transmission by death of shares of stock in a Philippine domestic corporation owned by a non-resident decedent domiciled in California.
• Applicability of U.S. Due-Process Doctrine: Whether the U.S. Supreme Court doctrine restricting inheritance taxation of intangibles to the state of domicile applies to the Philippines so as to preclude Philippine inheritance tax on the shares.

• Jurisdiction to Tax Intangibles: Yes. The Philippine government has jurisdiction to impose inheritance tax on the transmission of shares of stock in a domestic corporation, the actual situs of the shares being in the Philippines and the decedent having availed of the protection and benefit of Philippine laws.
• Applicability of U.S. Due-Process Doctrine: No. The due-process restrictions on U.S. state taxation of intangibles spring from the federal distribution of powers among the states of the American Union and do not apply to the Philippines, whose status rests on a wholly distinct basis.

• Jurisdiction to Tax Intangibles: The Court relied on two fundamental considerations supporting the relaxation of the single-situs rule for intangibles: (1) the inherent power of each government to tax persons, properties, and rights within its jurisdiction enjoying the protection of its laws; and (2) the principle that intangibles, given their multiple distinct relationships, cannot always be reduced to a single location for taxation. The maxim mobilia sequuntur personam was described as a mere fiction of law originating in considerations of general convenience and public policy, which must yield to established facts of legal ownership, actual presence, and control elsewhere. In the instant case, the actual situs of the shares was in the Philippines, the corporation being domiciled therein. The certificates had remained in the country in the possession of Syrena McKee, secretary of Benguet Consolidated Mining Company, to whom they were delivered and indorsed in blank, giving her legal title for all practical purposes. The decedent had thus extended her activities to the Philippines, availing herself of the protection and benefit of Philippine laws. Accordingly, Philippine jurisdiction to tax was upheld, following the doctrines in Burnet vs. Brooks and Curry vs. McCanless.
• Applicability of U.S. Due-Process Doctrine: The four U.S. Supreme Court cases relied upon by the petitioner were predicated on a proper regard for the relation of the states of the American Union, requiring that property be taxed in only one state and that jurisdiction to tax be restricted accordingly. This distribution of powers is enforced by the U.S. Constitution and does not apply to the Philippines, whose status was defined as part of the United States in the international sense but foreign thereto in a domestic sense (Downes vs. Bidwell). The question was essentially one of the power of the Philippine government to tax, not of due process. If that power is conceded, the guaranty of due process cannot be invoked to frustrate it unless the law is challenged as arbitrary, oppressive, or discriminatory — which was not the case. The Court further noted that the due-process clause is directed at the protection of the individual, who is entitled to its immunity as much against the state as against the national government (Curry vs. McCanless), and that no analogy, however remote, can be suggested between the relation of one state of the Union with another and the status of the Philippines.

• Mobilia sequuntur personam as a fiction subject to relaxation — The maxim mobilia sequuntur personam, holding that intangibles have only one situs at the domicile of the decedent, is a mere fiction of law having its origin in considerations of general convenience and public policy. It cannot be applied to limit or control the right of the state to tax property within its jurisdiction, and must yield to established facts of legal ownership, actual presence, and control elsewhere. The relaxation of the single-situs rule rests on two considerations: (1) the inherent power of each government to tax persons, properties, and rights within its jurisdiction enjoying the protection of its laws; and (2) the principle that intangibles, given their multiple distinct relationships, may properly be subject to taxation by more than one jurisdiction.

• Jurisdiction to tax based on protection and benefit — A government has jurisdiction to tax intangibles where the owner has extended activities with respect to such intangibles so as to avail of the protection and benefit of the taxing government's laws. The state of domicile is not deprived of its jurisdiction to tax by the taxpayer's activities elsewhere, and consequently more than one state may have jurisdiction to impose a tax and measure it by some or all of the taxpayer's intangibles. Protection, benefit, and power over the subject matter are not confined to either jurisdiction.

• "The maxim mobilia sequuntur personam, upon which the rule rests, has been described as a mere 'fiction of law having its origin in consideration of general convenience and public policy, and cannot be applied to limit or control the right of the state to tax property within its jurisdiction'" — This passage articulates the Court's rejection of the single-situs fiction as a limit on the sovereign taxing power, drawing from U.S. jurisprudence to justify the relaxation of the rule.

• "In the instant case, the actual situs of the shares of stock is in the Philippines, the corporation being domiciled therein. ... the owner residing in California has extended here her activities with respect to her intangibles so as to avail herself of the protection and benefit of the Philippine laws. Accordingly, the jurisdiction of the Philippine Government to tax must be upheld." — This is the ratio decidendi, applying the protection-benefit principle to the facts and sustaining Philippine taxing jurisdiction over the shares.

• Lorenzo vs. Posadas, 35 Off. Gaz., 2393 — Cited for the concession that the Philippine inheritance tax is not a tax on property but upon transmission by inheritance; foundational to the analysis of the tax's nature.
• Knowles vs. Yatco, G.R. No. 42967 — Previously applied Section 1536 of the Administrative Code to shares of stock in a domestic corporation owned by a non-resident; followed as precedent for the proposition that domestic corporation shares are subject to Philippine inheritance tax.
• Gibbs vs. Government of P.I., G.R. No. 35694 — Cited alongside Knowles for the same proposition regarding application of the inheritance tax to domestic corporation shares.
• Farmers Loan & Trust Company vs. Minnesota, 280 U.S. 204; Baldwin vs. Missouri, 281 U.S. 586; Beidler vs. South Carolina Tax Commission, 282 U.S. 1; First National Bank of Boston vs. Maine, 284 U.S. 312 — The four U.S. Supreme Court cases invoked by petitioner for the single-situs rule; distinguished and rejected as inapplicable to the Philippines because they were predicated on the federal distribution of powers among American states.
• Burnet vs. Brooks, 288 U.S. 378 — U.S. Supreme Court case upholding the federal estate tax on a non-resident's stock in a domestic corporation; followed for the principle that jurisdiction to tax rests on the protection and benefit conferred by the taxing sovereignty, and that jurisdiction may exist in more than one government based on distinct grounds.
• Curry vs. McCanless, 307 U.S. 357 — U.S. Supreme Court case sustaining the power of both Alabama and Tennessee to impose death taxes on intangibles held in trust; followed for the principle that multiple jurisdictions may tax intangibles based on distinct relationships and that taxation of intangibles cannot be reduced to a single mechanical situs.
• Downes vs. Bidwell, 182 U.S. 244 — Cited for the definition of the Philippines' status as part of the United States in the international sense but foreign thereto in a domestic sense, establishing that the U.S. federal-state power distribution rationale does not apply.

• Section 1536, Administrative Code (as amended) — Provides that every transmission by virtue of inheritance of any share issued by any corporation or sociedad anonima organized or constituted in the Philippines is subject to the inheritance tax therein provided. Applied to the 35,000 shares of stock in Benguet Consolidated Mining Company, a Philippine-organized corporation, transmitted by will upon the death of Birdie Lillian Eye.

Avanceña, C.J., Imperial, Diaz, and Concepcion, JJ., concurred.