You are on page 1of 4

Republic v. Hizon MENDOZA, J.

: This is a petition for review of the decision [1] of the Regional Trial Court, Branch 44, San Fernando, Pampanga, dismissing the suit filed by the Bureau of Internal Revenue for collection of tax. The facts are as follows: On July 18, 1986, the BIR issued to respondent Salud V. Hizon a deficiency income tax assessment of P1,113,359.68 covering the fiscal year 1981-1982. Respondent not having contested the assessment, petitioner, on January 12, 1989, served warrants of distraint and levy to collect the tax deficiency. However, for reasons not known, it did not proceed to dispose of the attached properties. More than three years later, or on November 3, 1992, respondent wrote the BIR requesting a reconsideration of her tax deficiency assessment. The BIR, in a letter dated August 11, 1994, denied the request. On January 1, 1997, it filed a case with the Regional Trial Court, Branch 44, San Fernando, Pampanga to collect the tax deficiency. The complaint was signed by Norberto Salud, Chief of the Legal Division, BIR Region 4, and verified by Amancio Saga, the Bureaus Regional Director in Pampanga. Respondent moved to dismiss the case on two grounds: (1) that the complaint was not filed upon authority of the BIR Commissioner as required by 221[2] of the National Internal Revenue Code, and (2) that the action had already prescribed. Over petitioners objection, the trial court, on August 28, 1997, granted the motion and dismissed the complaint. Hence, this petition. Petitioner raises the following issues:[3] I. WHETHER OR NOT THE INSTITUTION OF THE CIVIL CASE FOR COLLECTION OF TAXES WAS WITHOUT THE APPROVAL OF THE COMMISSIONER IN VIOLATION OF SECTION 221 OF THE NATIONAL INTERNAL REVENUE CODE. II. WHETHER OR NOT THE ACTION FOR COLLECTION OF TAXES FILED AGAINST RESPONDENT HAD ALREADY BEEN BARRED BY THE STATUTE OF LIMITATIONS. First. In sustaining respondents contention that petitioners complaint was filed without the authority of the BIR Commissioner, the trial court stated:[4] There is no question that the National Internal Revenue Code explicitly provides that in the matter of filing cases in Court, civil or criminal, for the collection of taxes, etc., the approval of the commissioner must first be secured. . . . [A]n action will not prosper in the absence of the commissioners approval. Thus, in the instant case, the absence of the approval of the commissioner in the institution of the action is fatal to the cause of the plaintiff . . . . The trial court arrived at this conclusion because the complaint filed by the BIR was not signed by then Commissioner Liwayway Chato. Sec. 221 of the NIRC provides: Form and mode of proceeding in actions arising under this Code. Civil and criminal actions and proceedings instituted in behalf of the Government under the authority of this Code or other law enforced by the Bureau of Internal Revenue shall be brought in the name of the Government of the Philippines and shall be conducted by the provincial or city fiscal, or the Solicitor General, or by the legal officers of the Bureau of Internal Revenue deputized by the Secretary of Justice, but no civil and criminal actions for the recovery of taxes or the enforcement of any fine, penalty or forfeiture under this Code shall be begun without the approval of the Commissioner. (Emphasis supplied) To implement this provision Revenue Administrative Order No. 5-83 of the BIR provides in pertinent portions: The following civil and criminal cases are to be handled by Special Attorneys and Special Counsels assigned in the Legal Branches of Revenue Regions: II. Civil Cases 1. Complaints for collection on cases falling within the jurisdiction of the Region . . . . In all the abovementioned cases, the Regional Director is authorized to sign all pleadings filed in connection therewith which, otherwise, requires the signature of the Commissioner. Revenue Administrative Order No. 10-95 specifically authorizes the Litigation and Prosecution Section of the Legal Division of regional district offices to institute the necessary civil and criminal actions for tax collection. As the complaint filed in this case was signed by the BIRs Chief of Legal Division for Region 4 and verified by the Regional Director, there was, therefore, compliance with the law. However, the lower court refused to recognize RAO No. 10-95 and, by implication, RAO No. 5-83. It held: [M]emorand[a], circulars and orders emanating from bureaus and agencies whether in the purely public or quasi-public corporations are mere guidelines for the internal functioning of the said offices. They are not laws which courts can take judicial notice of. As such, they have no binding effect upon the courts for such memorand[a] and circulars are not the official acts of the legislative, executive and judicial departments of the Philippines . . . . [5] This is erroneous. The rule is that as long as administrative issuances relate solely to carrying into effect the provisions of the law, they are valid and have the force of law.[6] The governing statutory provision in this case is 4(d) of the NIRC which provides:

Specific provisions to be contained in regulations. - The regulations of the Bureau of Internal Revenue shall, among other things, contain provisions specifying, prescribing, or defining: (d) The conditions to be observed by revenue officers, provincial fiscals and other officials respecting the institution and conduct of legal actions and proceedings. RAO Nos. 5-83 and 10-95 are in harmony with this statutory mandate. As amended by R.A. No. 8424, the NIRC is now even more categorical. Sec. 7 of the present Code authorizes the BIR Commissioner to delegate the powers vested in him under the pertinent provisions of the Code to any subordinate official with the rank equivalent to a division chief or higher, except the following: (a) The power to recommend the promulgation of rules and regulations by the Secretary of Finance; (b) The power to issue rulings of first impression or to reverse, revoke or modify any existing ruling of the Bureau; (c) The power to compromise or abate under 204(A) and (B) of this Code, any tax deficiency: Provided, however, that assessments issued by the Regional Offices involving basic deficiency taxes of five hundred thousand pesos (P500,000.00) or less, and minor criminal violations as may be determined by rules and regulations to be promulgated by the Secretary of Finance, upon the recommendation of the Commissioner, discovered by regional and district officials, may be compromised by a regional evaluation board which shall be composed of the Regional Director as Chairman, the Assistant Regional Director, heads of the Legal, Assessment and Collection Divisions and the Revenue District Officer having jurisdiction over the taxpayer, as members; and (d) The power to assign or reassign internal revenue officers to establishments where articles subject to excise tax are produced or kept. None of the exceptions relates to the Commissioners power to approve the filing of tax collection cases. Second. With regard to the issue that the case filed by petitioner for the collection of respondents tax deficiency is barred by prescription, 223(c) of the NIRC provides: Any internal revenue tax which has been assessed within the period of limitation above-prescribed may be collected by distraint or levy or by a proceeding in court within three years[7]following the assessment of the tax. The running of the three-year prescriptive period is suspended[8]for the period during which the Commissioner is prohibited from making the assessment or beginning distraint or levy or a proceeding in court and for sixty days thereafter; when the taxpayer requests for a reinvestigation which is granted by the Commissioner; when the taxpayer cannot be located in the address given by him in the return filed upon which the tax is being assessed or collected; provided, that, if the taxpayer informs the Commissioner of any change in address, the running of the statute of limitations will not be suspended; when the warrant of distraint or levy is duly served upon the taxpayer, his authorized representative or a member of his household with sufficient discretion, and no property could be located; and when the taxpayer is out of the Philippines. Petitioner argues that, in accordance with this provision, respondents request for reinvestigation of her tax deficiency assessment on November 3, 1992 effectively suspended the running of the period of prescription such that the government could still file a case for tax collection. [9] The contention has no merit. Sec. 229[10] of the Code mandates that a request for reconsideration must be made within 30 days from the taxpayers receipt of the tax deficiency assessment, otherwise the assessment becomes final, unappealable and, therefore, demandable. [11] The notice of assessment for respondents tax deficiency was issued by petitioner on July 18, 1986. On the other hand, respondent made her request for reconsideration thereof only on November 3, 1992, without stating when she received the notice of tax assessment. She explained that she was constrained to ask for a reconsideration in order to avoid the harassment of BIR collectors. [12] In all likelihood, she must have been referring to the distraint and levy of her properties by petitioners agents which took place on January 12, 1989. Even assuming that she first learned of the deficiency assessment on this date, her request for reconsideration was nonetheless filed late since she made it more than 30 days thereafter. Hence, her request for reconsideration did not suspend the running of the prescriptive period provided under 223(c). Although the Commissioner acted on her request by eventually denying it on August 11, 1994, this is of no moment and does not detract from the fact that the assessment had long become demandable. Nonetheless, it is contended that the running of the prescriptive period under 223(c) was suspended when the BIR timely served the warrants of distraint and levy on respondent on January 12, 1989. [13] Petitioner cites for this purpose our ruling in Advertising Associates Inc. v. Court of Appeals. [14] Because of the suspension, it is argued that the BIR could still avail of the other remedy under 223(c) of filing a case in court for collection of the tax deficiency, as the BIR in fact did on January 1, 1997. Petitioners reliance on the Courts ruling in Advertising Associates Inc. v. Court of Appeals is misplaced. What the Court stated in that case and, indeed, in the earlier case of Palanca v. Commissioner of Internal Revenue,[15] is that the timely service of a warrant of distraint or levy suspends the running of the period to collect the tax deficiency in the sense that the disposition of the attached properties might well take time to accomplish, extending even after the lapse of the statutory period for collection. In those cases, the BIR did not file any collection case but merely relied on the summary remedy of distraint and levy to collect the tax deficiency. The importance of this fact was not lost on the Court. Thus, in Advertising Associates, it was held:[16] It should be noted that the Commissioner did not institute any judicial proceeding to collect the tax. He relied on the warrants of distraint and levy to interrupt the running of the statute of limitations. Moreover, if, as petitioner in effect says, the prescriptive period was suspended twice, i.e., when the warrants of distraint and levy were served on respondent on January 12, 1989 and then when respondent made her request for reinvestigation of the tax deficiency assessment on November 3, 1992, the three-year prescriptive period must have commenced running again sometime after the service of the warrants of distraint and levy. Petitioner, however, does not state when or why this took place and, indeed, there appears to be no reason for such. It is noteworthy that petitioner raised this point before the lower court apparently as an alternative theory, which, however, is untenable.

For the foregoing reasons, we hold that petitioners contention that the action in this case had not prescribed when filed has no merit. Our holding, however, is without prejudice to the disposition of the properties covered by the warrants of distraint and levy which petitioner served on respondent, as such would be a mere continuation of the summary remedy it had timely begun. Although considerable time has passed since then, as held in Advertising Associates Inc. v. Court of Appeals [17] and Palanca v. Commissioner of Internal Revenue ,[18] the enforcement of tax collection through summary proceedings may be carried out beyond the statutory period considering that such remedy was seasonably availed of. WHEREFORE, the petition is DENIED. Bellosillo, (Chairman), Quisumbing, Buena, and De Leon, Jr., JJ., concur.

Hongkong Shanghai Bank vs. Rafferty O P I N I O N. 1. Major Issue; Tax Liens. Taxation is an attribute of sovereignty. The power to tax is the strongest of all the powers of government. If approximate equality in taxation is to be attained, all property subject to a tax must respond, or there is resultant inequality. Under the most favorable circumstances, an enormous amount of property escapes taxation altogether. To prevent such a lamentable situation, the law ordains that the claim of the State upon the property of the tax debtor shall be superior to that of any other creditor. A lien in its modern-acceptation is understood to denote a legal claim or charge on property, either real or personal, as security for the payment of some debt or obligation. Its meaning is more extensive than the jus retentionis (derecho de retencion) of the civil law. (2 Giorgi, Teoria de las Obligaciones, 419; Ames vs. Dyer, 41 Me., 397.) Unless the statute is otherwise, the rule is that a valid lien created on real or personal estate is enforceable against property in the hands of any person, other than a bona fide purchaser for value without notice, who subsequently acquires the estate. (25 Cyc., 680, citing cases.) The general rule of the Civil Law may be different. Possession of movables is not necessary to the validity of a lien, whether created by contract or by act of law. Such lien will attach upon movable property, even in the hands of a bona fide purchaser without notice. (Tatham vs. Andree [1863], 1 Moore, P.C. [N. S.], 386; The Bold Buccleugh [1850], 7 Moore, P.C., 267.) The law of taxation establishes principles which generally, although not exactly, conform to the law of liens. The tax lien does not establish itself upon property which has been transferred to an innocent purchaser prior to demand. In a decision relating to the United States Internal Revenue Law, Mr. Justice Miller held that a demand is necessary to create and bring the lien into operation. (U. S. vs. Pacific Railroad Co. [1877], Fed. Cas. No. 15,984; U. S. vs. Pacific Railroad Co. [1880], 1 Fed., 97.) Where a statute makes taxes on personal property a lien thereon, a purchaser of such property takes the same free from any lien for taxes if the title passes before such a lien attaches by levy, distraint, or otherwise. (Shelby vs. Tiddy [1896], 118 N. C., 792.) In order that the lien may follow the property into the hands of a third party, it is further essential that the latter should have notice, either actual or constructive. The reason is the benevolence of our Constitution which prohibits the taking of property without due process of law. In the case of real estate or special assessment taxation a man cannot get rid of his liability to a tax by buying without notice. (City of Seattle vs. Kelleher [1904], 195 U. S., 351.) The rule, however, is different where the vendee has no knowledge of the taxes on personality existing at the time, or had no means of knowing from the public records that such taxes had accrued. The authorities relied upon by the Government will be found on examination to concern real estate taxation. Internal revenue laws are to be construed fairly for the government and justly for the citizen. They should receive a liberal construction to carry out the purposes of their enactment; they should not receive so loose a construction as to permit evasions on merely fanciful and insubstantial distinctions. "The internal revenue laws cannot be so construed as to extend their meaning beyond the clear import of the words used." (U. S. vs. Watts [1865], Fed. Cas. No. 16653. See also U. S. vs. Hodson [1870], 10 Wall., 395; U. S. vs. Kallstrom [1887], 30 Fed., 184; Hubbard vs. Brainard [1869], Conn., 563, and Muoz & Co. vs. Hord [1909], 12 Phil., 624.) With such general principles in mind, we should first ascertain the legislative intention. One detail indicative of such intent is noted in the more limited scope of the law pertaining to liens for internal revenue taxes as contrasted with the law pertaining to liens for real estate taxes. The municipal law in part provides that liens for real property taxes "shall be enforceable against the property whether in the possession of the delinquent or any subsequent owner." (Now section 364, Administrative Code of 1917.) No mention of the subsequent owner is found in the Internal Revenue Law. Nor does this law provide that the lien shall not be divested by alienation. Again, we can very well look to the policy of the law in respect to liens. Liens, it has well been said, are of too sacred character to be impaired by vague and uncertain implications. The lien which the law favors is the specific or particular lien and not the general lien. However, the policy of the law is against upholding secret liens and charges against the property of innocent purchasers or encumbrances for value. (See Palmer vs. Howard [1887], 72 Cal., 293; 17 R. C. L., 599.) Keeping the foregoing statement of facts, issues, and law before us, the present case offers no serious difficulty. The plaintiff was not of course personally liable for any part of the internal revenue taxes due the Government from Pujalte & Co. On the date the railroad ties were transferred from Pujalte & Co. to the Hongkong & Shanghai Banking Corporation no demand for payment of the tax had been made. The bonds in favor of the Government were still presumably subsisting. No demand in fact was made until over a year later when distraint proceedings were initiated. When the Hongkong & Shanghai Banking Corporation purchased and acquired these 2,000 ties in February, 1915, there was nothing to show that Pujalte & Co. were delinquent tax payers. No public record could be consulted to protect the purchaser from loss by reason of the existence of a secret lien. A businessman of ordinary prudence could not be expected to foresee that the personal property which he had taken in satisfaction of a debt was

burdened by a tax. On this date, because no demand had been made and because the plaintiff had no notice of the tax, there was no valid subsisting lien upon the ties. 2. Minor Issue; Interest upon Judgments to Recover Taxes. Plaintiff-appellant in assignment of error No. 4 also claims interest upon the amount of the judgment from the 3d day of June, 1916, in place and instead of allowing interest thereon from the first day of February, 1917. The first date is that of the illegal exaction; the second date is that of the commencement of the action. Interest should be allowed from the day when the taxpayer lost the income from the funds by payment under protest, or not at all. (Viuda e Hijos De Pedro P. Roxas vs. Rafferty [1918], 37 Phil., 957; H. E. Heacock Co. vs. Collector of Customs [1918], 37 Phil., 970.) On the other hand, the second assignment of error of the defendant-appellant is to the effect that no interest at all should have been allowed by the trial court because of section 1579 of the present Administrative Code. Plaintiff-appellant in answer challenges the validity of this section. Section 1579 of the Administrative Code of 1917 in part authorizes the taxpayer who has paid an internal revenue tax under protest, at any time within two years after the payment of the tax, "to bring an action against the Collector of Internal Revenue for the recovery without interest of the sum alleged to have been illegally collected." As this provision was enacted by the Philippine Legislature subsequent to the institution of the present action in the lower court, and subsequent to the judgment therein rendered, we do not feel that the law should be given a retroactive effect. Whether section 1579 of the Administrative Code is valid or not is left for decision when a case arises after the Code became effective. In this instance, we allow interest at the legal rate from the date of payment. 3. Minor Issue; Costs against the Government. Plaintiff-appellant further claims that the trial court erred in declining to allow the recovery of costs. The right to recover costs is governed by statute. In the United States, the rule is that unless expressly authorized by statute, a judgment for costs, either in a civil or criminal case, cannot be rendered against the United States or a State. The principle is that the sovereign power is not amenable to judgments for damages or costs without its consent. (U. S. vs. Barker [1817], 2 Wheat., 395; Stanley vs. Schwalby [1896], 162 U. S., 255; State vs. Williams [1905], 101 Md., 529; 4 A. & E. Ann. Cas., 970; Deneen vs. Unverzagt [1907], 225 Ill., 378; 8 A. & E. Ann. Cas., 396 and note; Townsend's Succession [1888], 40 La. Ann., 66.) The Code of Civil Procedure of the Philippine Islands provides that costs shall ordinarily follow the result of the suit. They are to be recovered by "the prevailing party." (Code of Civil Procedure, chapter 21.) In the ordinary case between private individuals or entities, or where the government is successful, no particular difficulty is experienced applying the Code provisions. The practice has, however, been not to allow costs in cases in which the Government of the Philippine Islands or a nominal representative of the Government is the unsuccessful party. And this is right for the Government of the Philippine Islands is sovereign in the sense that a State of the American Union or Porto Rico is sovereign, and this paramount power has not by statute permitted itself to be taxed with costs. No costs should be allowed plaintiff in either instance. RULE 10 SUSPENSION OF COLLECTION OF TAX SECTION 1. No suspension of collection of tax, except as herein prescribed. No appeal taken to the Court shall suspend the payment, levy, distraint, or sale of any property of the taxpayer for the satisfaction of his tax liability as provided under existing laws, except as hereinafter prescribed. (n) SEC. 2. Who may file. Where the collection of the amount of the taxpayers liability, sought by means of a demand for payment, by levy, distraint or sale of any property of the taxpayer, or by whatever means, as provided under existing laws, may jeopardized the interest of the Government or the taxpayer, an interested party may file a motion for the suspension of the collection of the tax liability. (RCTA, Rule 12, sec. 1a) SEC. 3. When to file. The motion for the suspension of the collection of the tax may be filed together with the petition for review or with the answer, or in a separate motion filed by the interested party at any stage of the proceedings. (RCTA, Rule 12, sec. 2) SEC. 4. Contents and attachments of the motion. The motion for the suspension of the collection of the tax shall be verified and shall state clearly and distinctly the facts and the grounds relied upon in support of the motion. Affidavits and other documentary evidence in support thereof shall be attached thereto, which, if uncontroverted, would be admissible in evidence as proof of the facts alleged in the motion. (RCTA, Rule 12, sec. 3a) SEC. 5. Opposition. Unless a shorter period is fixed by the Court because of the urgency of the motion, the adverse party shall, within five days after receipt of a copy of the motion, file an opposition thereto, if any, which shall state clearly and distinctly the facts and the grounds relied upon in support of the opposition. (RCTA, Rule 12, sec. 4) SEC. 6. Hearing of the motion. The movant shall, upon receipt of the opposition, set the motion for hearing at the next available motion day, and the Court shall give preference to the motion over all other cases, except criminal cases. At the hearing, both parties shall submit their respective evidence. If warranted, the Court may grant the motion if the movant shall deposit with the Court an amount in cash equal to the value of the property or goods under dispute or filing with the Court of an acceptable surety bond in an amount not more than double the disputed amount or value. However, for the sake of expediency, the Court, motu proprio or upon motion of the parties, may consolidate the hearing of the motion for the suspension of the collection of the tax with the hearing on the merits of the case. (RCTA, Rule 12, sec. 5a) SEC. 7. Corporate surety bonds. In the selection and qualification of surety companies, the parties and the Court shall be guided by Supreme Court Circular A.M. No. 04-7-02-SC, dated July 20, 2004. (n)