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PHILIPPINE JURISPRUDENCE - FULL TEXTThe Lawphil Project - Arellano Law FoundationG.R. No. L-13188 November 15, 1918HONGKONG & SHANGHAI BANKING CORP. vs. JAMES J.RAFFERTYRepublic of the Philippines
 ManilaEN BANC
G.R. No. L-13188 November 15, 1918
JAMES J. RAFFERTY, as Collector of Internal Revenue of the PhilippineIslands,
Cohn & Fisher for plaintiff-appellant. Acting Attorney-General Paredes for defendant-appellant.
 The important subject of tax liens is to be discussed on this appeal.F A C T SDuring the years 1912-1915 inclusive, Pujalte & Co., a general mercantilepartnership, was engaged in the business of lumbering in Mindanao. The companyremoved from the forest and milled at its say mills during this period, a total of 6,087.54 cubic meters of timber. The forest charges amounted to P8,328.93. Uponthe execution of bonds in the aggregate sum of P2,000 to secure the payment of the forest charges due the government, the Collector of Internal Revenuepermitted Pujalte & Co. to remove this timber from the public forests for shipment by sea on saw mill invoices without prior payment of the forest charges. From thetimber so removed by Pujalte & Co., railroad ties were manufactured in its sawmills at Manila for the Manila Railroad Co. Six thousand three hundred and fiverailroad ties so manufactured were rejected by the Manila Railroad Co.In February, 1915, the firm of Pujalte & Co. was indebted to the Hongkongand Shanghai Banking Corporation in a large sum of money. Being unable to pay
its debt in specie, the company assigned to the bank, among other things, a largequantity of the railroad ties manufactured at its mills. The bank sold and disposedof these ties at various times until in May, 1916, there remained with it some2,000 railroads ties of the lot acquired.The internal revenue charges on the forest products removed from thepublic forests of Mindanao by Pujalte & Co. not having been paid, on May 2, 1916,the Collector of Internal Revenue caused delinquency proceedings to becommenced and had issued a distress warrant. Later, on May 15, 1916, theCollector of Internal Revenue caused an additional distress levy to be made uponthe 6,305 ties, which it will be remembered, had been assigned by Pujalte & Co. tothe Hongkong & Shanghai Banking Corporation. Proceeding in accordance withthis action, the Collector of Internal Revenue seized the 2,000 ties in thepossession of the bank. Until the date last mentioned, the bank had no notice of the tax.Payment under protest, institution of complaint to recover back the sumpaid, answer by the Government, trial, and judgment followed in due course. Inthis judgment, handed down by the Honorable James A. Ostrand, it was declaredthat a lien for taxes existed on the 2,000 railroad ties levied upon by the Collectorof Internal Revenue and claimed as its property by the Hongkong & ShanghaiBanking Corporation, not for the full sum of P8,328.93 due as forest charges onthe timber removed from the forests of Mindanao by Pujalte & Co., but only for thesum of P316.43, which is the tax upon the timber used for the manufacture of theties. The court ordered the Collector of Internal Revenue to refund to theHongkong and Shanghai Banking Corporation the sum of P8,012.50, with interest at 6 per cent per annum from February 1, 1917. No costs were allowed. Followingtimely motions for a new trial, denial, and exceptions thereto, both parties haveappealed.This brings us to a statement of theL A W.Among the sources of taxes, fees; and charges, in the nature of internalrevenue taxes, the Internal Revenue Law enumerates charges for forest products.(Sec. 21 (
), Act 2339, now sec. 1438 (
), Administrative Code of 1917.) TheInternal Revenue Law of 1914 also contains the following provisions relative tothe nature and extent of tax liens:Every internal-revenue tax on property or on any business oroccupation and every tax on resources and receipts, and any increment toany of them incident to delinquency, shall constitute a lien superior to allother charges or liens not only on the property itself upon which such taxmay be imposed but also upon the property used in any business or
occupation upon which the tax is imposed and upon all property rightstherein.The lien of the tax on inheritances, legacies and other acquisitions
ortis causa
shall have preference over any real right created thereonsubsequent to the death of the predecessor, but this preference will beextinguished at the end of five years from the date when the tax becomespayable upon real property, and three years upon any other kind of property. (Sec. 149, Act No. 2339, now section 1588, Administrative Codeof 1917.)The succeeding section of the same law authorizes two civil remedies for thecollection of internal revenue taxes: (
) by distraint of personal property andupon exhaustion thereof by levy upon real property, and (
) by legal action. (Sec.150, Act No. 2339, now section 1589, Administrative Code of 1917.) Relative tothe first remedy by distraint of personal property, the same law in section 151provides:The remedy by distraint shall proceed as follows: Upon the failure of the person owing any delinquent tax or delinquent revenue to pay thesame, at the time required, the Collector of Internal Revenue or his deputymay seize and distrain any personal property belonging to such person orany property subject to the tax lien, in sufficient quantity to satisfy the tax,or charge, together with any increment thereto incident to delinquency,and the expenses of the distraint. (Now section 1590, Administrative Codeof 1917.)One fact stands out prominently on examination of these provisions of theInternal Revenue Law  the internal revenue tax constitutes a paramount lieneither on the property upon which the tax is imposed or on any other propertyused in any business or occupation upon which the tax is imposed. Thegovernment has here chosen to levy on the property itself  in the hands of apurchaser for value.
 This brings us to a statement of theI S S U E S.Does the lien follow the property subject to the tax into the hands of a thirdparty when at the time of transfer, no demand for payment had been made andwhen the purchaser had no notice of the existence of the lien? Counsel for plaintiff argues that it does not. Or, does the lien follow the property subject to the taxeven though transferred to a third party who had no notice of the existence of thelien so as to make this property respond for the specific unpaid internal revenuetaxes due on it? The trial court so found. Or, does the lien follow the property

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