Philippine Heart Center vs. The Local Government of Quezon City

A government instrumentality vested with corporate powers is exempt from real property taxes under Section 133(o) and Section 234(a) of the Local Government Code; its properties are properties of public dominion not subject to levy or sale at public auction. Where the beneficial use of any portion of such property has been granted to a taxable private person, the real property tax liability attaches to the lessee, and the local government unit’s remedy for collection is a judicial action against that taxable person, not a levy on the government property.

The Philippine Heart Center was established in 1975 through Presidential Decree No. 673 as a specialty hospital mandated to provide comprehensive cardiovascular care to the public, especially the poor. The national government supplied the initial land, buildings, and equipment. PD 673 vested the PHC with all the powers of a juridical person, including the authority to acquire, hold, mortgage, lease, sell, and convey properties. Section 6 of PD 673 originally exempted the PHC from all taxes, charges, and fees imposed by the Government or any political subdivision for ten years; Letter of Instruction No. 1455, issued in 1985, extended the exemption without interruption. The PHC owned eleven land and building properties in Quezon City. In 2004, the Quezon City Government assessed the PHC for unpaid real property taxes amounting to Php36,530,545.00 and issued final notices of delinquency. The parties entered into two successive Memoranda of Agreement under which the PHC would provide free medical services to qualified Quezon City residents to cover the tax liability, but implementation was suspended after the PHC received an advisory from the Office of the Government Corporate Counsel citing the ruling in Manila International Airport Authority v. Court of Appeals (2006) that government instrumentalities are exempt from local taxes.

• Establishment and Mandate: The Philippine Heart Center was created in 1975 under Presidential Decree No. 673 as a specialty hospital to provide comprehensive cardiovascular care to the general public, especially the poor and less fortunate. The national government provided the initial land, building, equipment, and facilities. PD 673 enumerated eight governmental purposes focused on public health, research, training, and extension of medical services without regard to race, creed, or political belief.

• Corporate Powers and Tax Exemption: Section 5 of PD 673 vested the PHC with all the powers of a juridical person, including the capacity to acquire, hold, mortgage, lease, sell, convey, or dispose of properties. Section 6 originally exempted the PHC from all taxes, charges, and fees for ten years. LOI 1455 (1985) extended the exemption “without interruption.” The PHC owned eleven land and building properties in Quezon City covered by various tax declarations.

• Assessment and MOAs: In 2004, the Quezon City Government issued final notices of delinquency for unpaid real property taxes totaling Php36,530,545.00 on the eleven properties. The PHC entered into a Memorandum of Agreement with Quezon City to provide free medical services to qualified residents until the value covered the tax liability. After the 2006 ruling in MIAA and an OGCC advisory that government instrumentalities were exempt from local taxes, the PHC suspended the MOA. A second MOA with identical terms was forged in November 2010 but again suspended when a new Executive Director assumed office and reiterated the PHC’s exempt status.

• Levy and Auction Sale: Despite the PHC’s claim of exemption, the Quezon City Government issued Final Notices of Tax Delinquency on June 1, 2011, a Warrant of Levy on June 13, 2011, and, after due publication, sold all eleven properties at a public auction on July 7, 2011 to the Quezon City Government as the sole bidder.

• Petition before the Court of Appeals: The PHC filed a petition for certiorari with the Court of Appeals on September 1, 2011, arguing that the assessment, levy, and sale were void under the MIAA doctrine, its status as a charitable institution, and its character as a government instrumentality. Respondents moved to dismiss on grounds of failure to exhaust administrative remedies, defective verification and certification against forum shopping, and non-payment of the deposit required under Section 267 of RA 7160.

• Leased Portions Alleged: Respondents asserted that the PHC had granted beneficial use of its properties to commercial establishments, including Globe Telecom, Inc., Jollibee Foods Corporation, Course Development, Inc., and Proheart Food Corp. (Chowking), thereby forfeiting any tax exemption for those portions.

• Propriety of Certiorari: Petitioner maintained that certiorari under Rule 65 was the proper remedy to challenge the assessment, levy, and sale of its properties, invoking MIAA and MCIAA where the Court allowed review of similar acts under the expanded power of judicial review. Even if procedural defects existed, equity and substantial justice warranted a relaxation of procedural rules.

• Tax Exemption under Charter and LOI: Petitioner argued that PD 673 and LOI 1455 explicitly exempt it from all taxes, charges, and fees imposed by any political subdivision; this exemption had been indefinitely extended and never repealed.

• Constitutional Exemption as a Charitable Institution: Petitioner contended that under Article III, Section 28(3) of the 1987 Constitution and Section 234(b) of RA 7160, its properties actually, directly, and exclusively used for charitable purposes are exempt from real property tax.

• Exemption as a Government Instrumentality: Petitioner asserted that as a government instrumentality, it is exempt from local taxation under Section 133(o) of RA 7160, citing Philippine Fisheries Development Authority v. Central Board of Assessment Appeals, GSIS v. City of Manila, MIAA v. City of Pasay, and other analogous rulings.

• Defective Verification and Certification: Respondents argued that the petition did not attach a Board Resolution or Secretary’s Certificate authorizing Dr. Gerardo S. Manzo to sign the verification and certification against forum shopping, rendering the petition defective.

• Failure to Exhaust Administrative Remedies: Respondents contended that the PHC should have protested the assessment before the City Treasurer through the Board of Tax Appeals under Section 277 of the Quezon City Revenue Code and Section 252 of RA 7160, and that administrative appeal was a condition sine qua non to judicial action.

• Loss of Exemption through Lease to Private Entities: Respondents countered that the PHC was not exempt from real property taxes because it had granted the beneficial use of its properties to taxable commercial establishments, forfeiting any tax exemption under Section 234(a) of RA 7160. Respondents further argued that the PHC failed to prove its tax exemption with sufficient documentary evidence as required by Section 206 of RA 7160.

• Verification and Forum Shopping: Whether the PHC’s petition substantially complied with the verification and certification against forum shopping requirements despite the absence of a board resolution explicitly authorizing Dr. Manzo to sign.

• Propriety of Certiorari: Whether a petition for certiorari under Rule 65 is the proper remedy to challenge the assessment, levy, and sale of property for non-payment of real property taxes.

• Tax Exemption: Whether the PHC is exempt from real property taxes on its eleven properties in Quezon City under its charter, the Constitution, and the Local Government Code, and whether the lease of portions to private commercial establishments affects that exemption or the modes of collection.

• Verification and Forum Shopping: The verification and certification were in substantial compliance with the rules. Although no board resolution was attached specifically authorizing Dr. Manzo, he was the Officer-in-Charge Executive Director of the PHC by virtue of DOH Order No. 2016-2359-A and was indubitably in a position to verify the truthfulness of the petition’s allegations. The standard for substantial compliance is whether the signatory is in a position to verify the correctness of the pleadings, following Cagayan Valley Drug Corporation v. CIR and the line of cases recognizing the authority of corporate officers without a formal board authorization.

• Propriety of Certiorari: A petition for certiorari was proper. Article VIII, Section 1 of the 1987 Constitution vests courts with expanded judicial power to determine whether any branch or instrumentality of the Government has acted with grave abuse of discretion amounting to lack or excess of jurisdiction. Certiorari may issue not only against bodies exercising judicial, quasi-judicial, or ministerial functions but also to set right any act of grave abuse of discretion by any branch or instrumentality of government. Here, the PHC charged respondents with grave abuse of discretion in assessing and levying on its properties despite claimed tax exemption. The challenge was thus within the ambit of the expanded certiorari jurisdiction.

• Tax Exemption:

  • PHC is a Government Instrumentality with Corporate Powers: The PHC meets the twin criteria: it performs governmental functions — extending specialized cardiovascular care, research, and training — and it enjoys operational autonomy under its charter. PD 673 vests it with all powers of a juridical person, placing it within the category of “government instrumentality vested with corporate powers” recognized under EO 596, RA 10149, and the MIAA doctrine.
  • Exemption under the Local Government Code: Section 133(o) of RA 7160 prohibits local government units from imposing taxes, fees, or charges of any kind on the national government, its agencies, and instrumentalities. Section 234(a) exempts real property owned by the Republic from real property tax. The PHC, as a national government instrumentality, is covered by both provisions.
  • Properties are of Public Dominion: Under Article 420 of the Civil Code, the PHC’s properties are properties of public dominion devoted to public use or service, and are therefore exempt from levy, encumbrance, or disposition through public or private sale. Any levy or auction sale of such properties is void for being contrary to public policy.
  • Beneficial Use Exception — Taxable Person Liable: Where the beneficial use of government property has been granted, for consideration or otherwise, to a taxable person, the property loses its exemption from real property tax. However, the tax liability attaches to the lessee, not the government entity. Respondents’ bare allegation that the PHC leased portions to commercial establishments, without specifying which properties or portions, to whom, and for what periods, and without proving that valid assessments were served on the lessees, was insufficient to validate the blanket assessment on PHC or the levy on all its properties.
  • Levy and Sale Void; Remedy is Judicial Action against Lessee: Section 256 of RA 7160 allows local governments to collect real property tax by levy or judicial action. Reading it with Section 133(o) and Section 234, the levy remedy cannot be directed against government instrumentalities because the delinquent tax is owed by the taxable beneficial user, not the government entity. The proper remedy for the Quezon City Government is a judicial action for collection against the private lessees.

• Government Instrumentality Vested with Corporate Powers — An agency that (a) performs governmental functions and (b) enjoys operational autonomy under its charter, and is endowed with some or all corporate powers without being organized as a stock or non-stock corporation, belongs to a distinct category of government entities exempt from local taxation under Section 133(o) of the Local Government Code. Its corporate powers do not convert it into a government-owned or controlled corporation, nor do they divest it of its character as an instrumentality of the national government.

• Tax Exemption of National Government Instrumentalities — The taxing power of local government units does not extend to the national government, its agencies, and instrumentalities. The exemption is based on the principle that local governments cannot tax the sovereign from which their power to tax is derived. Any doubt about the power to tax national government instrumentalities is resolved strictly against the local government and liberally in favor of the instrumentality. Section 133(o) of RA 7160 codifies this inter-governmental immunity.

• Public Dominion Doctrine — Properties devoted to public use or public service are properties of public dominion under Article 420 of the Civil Code. They are outside the commerce of man and are exempt from levy, encumbrance, or disposition through public or private sale. Even if titled in the name of a government entity, the entity holds only the legal title for the benefit of the Republic.

• Beneficial Use Exception — Under Section 234(a) of RA 7160, real property owned by the Republic is exempt from real property tax except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person. In such case, the tax liability rests on the taxable beneficial user, not on the government owner. The local government unit must allege and prove the specific portions leased, identify the lessees, and serve the tax assessment on them.

• Remedy for Collection on Leased Government Property — When a government instrumentality leases portions of its tax-exempt property to private taxable persons, the local government unit’s remedy for collection of real property taxes is a judicial action in personam against the lessee, not a levy on the government property. Levy on property of public dominion is void.

• Expanded Certiorari Jurisdiction — The remedy of certiorari under Rule 65 is available to challenge acts of any branch or instrumentality of government that are tainted with grave abuse of discretion amounting to lack or excess of jurisdiction, even if the acts are not judicial or quasi-judicial in nature.

• Substantial Compliance with Verification and Certification — A pleading signed by a corporate officer who is in a position to verify the truthfulness and correctness of the allegations substantially complies with the verification and certification against forum shopping requirements, even without a formal board resolution authorizing the signatory, as long as the signatory’s position invests him with the requisite knowledge.

• “When local governments invoke the power to tax on national government instrumentalities, such power is construed strictly against local governments. The rule is that a tax is never presumed and there must be clear language in the law imposing the tax. Any doubt whether a person, article or activity is taxable is resolved against taxation. This rule applies with greater force when local governments seek to tax national government instrumentalities.”

• “The practical effect of an exemption is merely to reduce the amount of money that has to be handled by government in the course of its operations. For these reasons, provisions granting exemptions to government agencies may be construed liberally, in favor of non-tax‑liability of such agencies.”

• “Properties of public dominion, being for public use, are not subject to levy, encumbrance or disposition through public or private sale. Any encumbrance, levy on execution or auction sale of any property of public dominion is void for being contrary to public policy. Essential public services will stop if properties of public dominion are subject to encumbrances, foreclosures and auction sale.”

• “It would be the height of absurdity to levy the PHC’s properties to answer for taxes the PHC does not owe.”

• “The ‘power to destroy’ ought not be used against the very entity that wields it.”

• Manila International Airport Authority v. Court of Appeals, 528 Phil. 181 (2006) — Followed as controlling; defined the category of government instrumentality vested with corporate powers and established their exemption from local taxation under Section 133(o) of RA 7160.

• Mactan Cebu International Airport Authority v. City of Lapu-Lapu, 759 Phil. 296 (2015) — Followed; reaffirmed exemption and the remedy of certiorari under similar circumstances.

• Lung Center of the Philippines v. Quezon City, 477 Phil. 141 (2004) — Followed for the rule that portions leased to private entities are taxable but the hospital’s charitable-use portions remain exempt.

• GSIS v. City Treasurer and City Assessor of the City of Manila, 623 Phil. 964 (2009) — Followed; nullified assessments except for the portion leased to Manila Hotel, whose beneficial user was the taxable entity.

• Philippine Fisheries Development Authority v. Central Board of Assessment Appeals, 653 Phil. 328 (2010) — Followed; voided assessments except for portions leased to private parties.

• National Housing Authority v. Iloilo City, 584 Phil. 604 (2008) — Followed; ruled that the deposit requirement under Section 267 of RA 7160 does not apply to tax-exempt government agencies.

• Cagayan Valley Drug Corporation v. Commissioner of Internal Revenue, 568 Phil. 572 (2008) — Followed on substantial compliance with verification and certification requirements.

• Section 133(o), Republic Act No. 7160 (Local Government Code) — Prohibits local government units from levying taxes, fees, or charges of any kind on the national government, its agencies, and instrumentalities. Applied to bar Quezon City from taxing the PHC as a government instrumentality.

• Section 234(a), Republic Act No. 7160 — Exempts real property owned by the Republic or its political subdivisions from real property tax except when the beneficial use has been granted to a taxable person. Applied to declare the PHC’s properties exempt, with the exception of portions leased to private entities.

• Section 256, Republic Act No. 7160 — Provides the remedies of levy and judicial action for collection of real property tax. Interpreted to prohibit levy against government instrumentalities; only judicial action against the taxable lessee is available.

• Article III, Section 28(3), 1987 Constitution — Exempts charitable institutions and property actually, directly, and exclusively used for charitable purposes from taxation. Invoked by PHC, although the ruling rested primarily on its status as a government instrumentality.

• Article X, Section 5, 1987 Constitution — Authorizes local government units to levy taxes subject to guidelines and limitations provided by Congress. The limitation in Section 133(o) of RA 7160 was applied.

• Article 420, Civil Code — Defines properties of public dominion; applied to hold that PHC’s properties are outside the commerce of man and immune from levy.

• Sections 4 and 5, Presidential Decree No. 673 — Define the governmental purposes and corporate powers of the PHC; central to its classification as a government instrumentality vested with corporate powers.

• Section 2(10), Executive Order No. 292 (Administrative Code of 1987) — Defines “Instrumentality” as an agency vested with special functions, some corporate powers, special funds, and operational autonomy. Used to anchor the category of instrumentality with corporate powers.

• Section 1, Executive Order No. 596 (2006) — Acknowledged the new category of “government instrumentality vested with corporate powers” and placed it under the OGCC’s jurisdiction. Cited as legislative recognition of the MIAA doctrine.

• Section 3(n), Republic Act No. 10149 (GOCC Governance Act of 2011) — Formally defines Government Instrumentalities with Corporate Powers (GICP)/Government Corporate Entities (GCE). Reinforced the recognition of the category to which PHC belongs.

Chief Justice Peralta (Chairperson), Justice Caguioa, Justice J. Reyes, Jr., and Justice Lopez concurred.

None. The decision was unanimous.