Privatization and Management Office vs. Court of Tax Appeals

When the method employed by the government in collecting taxes is not sanctioned by law—such as the levy and intended public auction of property of public dominion—the requirement to post a surety bond as a condition for suspending tax collection under Section 11 of Republic Act No. 1125 (as amended) is dispensed with; moreover, national government agencies are exempt from posting such bonds because the Republic of the Philippines is presumed solvent.

The Leyte Park Hotel, Inc. (LPHI) is a real property with improvements situated in Tacloban City, co-owned by the Privatization and Management Office (PMO), the Province of Leyte, and the Philippine Tourism Authority (PTA, now TIEZA). The facilities were leased to Unimaster Conglomeration, Inc. (UCI), a private entity, under a Contract of Lease dated September 15, 1994, for a monthly rental of ₱300,000.00 for a period of 12 years. The City Government of Tacloban assessed real property taxes on the property and demanded payment from UCI, which remained unpaid despite repeated demands.

• Nature of the Property and Ownership: The Leyte Park Hotel, Inc. (LPHI) is a real property with improvements situated in Tacloban City, co-owned by petitioner Privatization and Management Office (PMO), the Province of Leyte, and the Philippine Tourism Authority (PTA, now Tourism Infrastructure and Enterprise Zone Authority or TIEZA).

• Lease Agreement: The facilities of LPHI were leased to Unimaster Conglomeration, Inc. (UCI), a private entity, pursuant to a Contract of Lease dated September 15, 1994, for a monthly rental of ₱300,000.00 for a period of 12 years.

• Tax Assessment and Demand: Respondent City Government of Tacloban assessed real property taxes on the property amounting to ₱23,377,353.08 and sent several demand letters to UCI as the lessee. Despite repeated demands, the taxes remained unpaid.

• Collection Proceedings: On December 15, 2004, respondent City filed a complaint for Collection of Sum of Money before the CTA Special First Division against LPHI and UCI, subsequently amending the complaint to include PMO, the Province of Leyte, and PTA as defendants. Petitioner filed an Answer arguing that liability for real property taxes devolved on UCI pursuant to Section 234 of the Local Government Code.

• CTA Special First Division Ruling: On November 15, 2011, the CTA Special First Division rendered a Decision holding UCI liable for the payment of the unpaid real property taxes. UCI moved for reconsideration but was denied.

• Appeal and Execution Attempts: UCI filed a Petition for Review with the CTA En Banc. During the pendency of the appeal, respondent City filed a Motion for Execution Pending Appeal before the CTA Special First Division, which was denied. Despite this denial, respondent City issued warrants of levy against the properties of petitioner, allegedly to place the subject properties for public auction.

• Motion for Suspension: On December 6, 2012, petitioner filed a Motion for Suspension of Collection of Real Property Tax and Cancellation of Warrants of Levy before the CTA En Banc, arguing that as a government agency, it was exempt from real property taxes and that the levy on public property was illegal.

• CTA En Banc Resolutions: On February 7, 2013, the CTA En Banc granted the motion for suspension but required petitioner to post a surety bond equivalent to one and one-half of the amount sought to be collected. On February 14, 2013, petitioner filed a Motion for Exemption from Posting of Surety Bond on the ground that national government agencies are presumed solvent. As a precautionary measure, petitioner filed a Compliance Ad Cautelam on February 15, 2013, posting a GSIS Surety Bond. On March 1, 2013, the CTA En Banc declared the Motion for Exemption moot in view of the filing of the bond. On January 29, 2014, the CTA En Banc denied petitioner's Motion for Reconsideration.

• Exemption from Bond Requirement: Petitioner maintained that as an agency of the national government organized under the Department of Finance, it is exempt from posting a surety bond because the Republic of the Philippines is presumed solvent and able to meet its obligations, citing Republic v. Garcia, Republic v. Court of Appeals, Araneta v. Gatmaitan, and Spouses Badillo v. Tayag.

• Illegality of Collection Method: Petitioner argued that the method employed by respondent City—issuing warrants of levy to place the property under public auction—is not sanctioned by law because the subject property is owned by the government and is property of public dominion under Article 420 of the Civil Code, which cannot be subject to levy or auction sale.

• Beneficial User Liability: Petitioner recognized that under Section 234(a) of the Local Government Code, when beneficial use is vested in a taxable person (UCI), the property is subject to tax, and under National Power Corporation v. Province of Quezon, UCI as the actual and beneficial user is directly liable for the taxes, not the government owner.

• Non-Mootness of the Issue: Petitioner contended that its compliance with posting the GSIS Surety Bond did not render the case moot, as a final resolution on the exemption of government agencies from posting bonds was necessary to settle the legal issue.

• Reliance on Precedent: Petitioner cited The Collector of Internal Revenue v. Reyes and Spouses Pacquiao v. Court of Tax Appeals to support the proposition that when the method of collection is illegal or when prescription has set in, the bond requirement should be dispensed with.

• Statutory Requirement: Respondent CTA maintained that Section 11 of Republic Act No. 1125 (as amended by Section 9 of Republic Act No. 9282) clearly provides that suspension of tax collection requires either a deposit of the amount claimed or a surety bond for not more than double the amount, and this applies to all taxpayers including government agencies.

• Mootness: Respondent CTA argued that petitioner's Motion for Exemption from Posting of Surety Bond was rendered moot by the filing of the GSIS Surety Bond, making the resolution of the exemption issue academic.

• Jurisdiction and Discretion: Respondent CTA asserted that it acted within its jurisdiction and discretion in requiring the bond to guarantee payment of the deficiency taxes if the case were decided against the taxpayer, pursuant to the condition precedents established by law.

• Surety Bond Exemption for Government Agencies: Whether a national government agency is exempt from the requirement of posting a surety bond as a condition for suspending the collection of real property tax under Section 11 of Republic Act No. 1125 (as amended).

• Dispensing with Bond Requirement: Whether the bond requirement may be dispensed with when the method of tax collection employed by the government is not sanctioned by law.

• Validity of Levy on Public Dominion Property: Whether properties of public dominion owned by the government may be subject to warrants of levy and public auction to satisfy real property tax claims against the beneficial user.

• Surety Bond Exemption for Government Agencies: National government agencies are exempt from posting surety bonds in tax cases because the Republic of the Philippines is presumed solvent and always able to meet its obligations; requiring a government agency to post a bond would indirectly require the State to submit such security.

• Dispensing with Bond Requirement: The bond requirement under Section 11 of Republic Act No. 1125 is dispensed with when the method employed by the government in collecting taxes is not sanctioned by law, such as when the collection involves the levy and intended public auction of property of public dominion, which is void for being contrary to public policy.

• Validity of Levy on Public Dominion Property: Properties of public dominion, being outside the commerce of man, cannot be the subject of auction sale, levy, encumbrance, or disposition through public or private sale; any levy or auction sale of such property is void. The government entity satisfies its tax claims by serving the assessment upon the taxable beneficial user (UCI), and in case of non-payment, through means other than the sale at public auction of the leased government property.

• Presumption of State Solvency and Exemption from Bonds: The Republic of the Philippines is presumed to be always solvent and able to meet its obligations. Consequently, national government agencies and instrumentalities are not required to post surety bonds as a condition for suspending the collection of taxes under Section 11 of Republic Act No. 1125, as amended. To require such would be to indirectly require the State to submit security.

• Dispensing with Bond When Collection Method is Illegal: The authority of courts to issue injunctive writs to restrain the collection of tax and to dispense with the deposit of the amount claimed or the filing of the required bond is not confined to cases where prescription has set in. Whenever it is determined that the method employed by the Collector of Internal Revenue (or other tax authorities) in the collection of tax is not sanctioned by law, the bond requirement should be dispensed with.

• Inalienability of Public Dominion Property: Property of public dominion, being outside the commerce of man, cannot be the subject of an auction sale, 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. Under Article 420 of the Civil Code, properties belonging to the State without being for public use but intended for public service or for the development of national wealth are properties of public dominion.

• Liability of Beneficial User for Taxes on Government Property: While real property owned by the Republic or its political subdivisions is exempt from real property tax under Section 234(a) of the Local Government Code, when the beneficial use thereof is granted to a taxable person, the tax attaches to the property but is directly chargeable against the taxable person who has actual and beneficial use and possession of the property regardless of whether or not that person is the owner.

• "It certainly would be an absurdity on the part of the Court of Tax Appeals to declare that the collection by the summary methods of distraint and levy was violative of the law, and then, on the same breath require the petitioner to deposit or file a bond as a prerequisite for the issuance of a writ of injunction." — Cited from The Collector of Internal Revenue v. Reyes, explaining why bond requirements are dispensed with when collection methods are illegal.

• "From all the foregoing, it is clear that the authority of the courts to issue injunctive writs to restrain the collection of tax and to dispense with the deposit of the amount claimed or the filing of the required bond is not simply confined to cases where prescription has set in. As explained by the Court in those cases, whenever it is determined by the courts that the method employed by the Collector of Internal Revenue in the collection of tax is not sanctioned by law, the bond requirement under Section 11 of R.A. No. 1125 should be dispensed with." — Articulating the ratio for dispensing with bond requirements when collection methods are illegal.

• "It is a settled rule that property of public dominion, being outside the commerce of man, cannot be the subject of an auction sale, 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." — Establishing the inalienability of public dominion property.

• "Verily, since the method employed by the respondent City in collecting the realty taxes due - through the warrant of levy and the eventual public auction of a property of public dominion - is not sanctioned by law, then it is no longer necessary for the petitioner to file a surety bond as a condition precedent to suspend the tax collection." — Application of the doctrine to the facts.

• "Indeed, the Republic of the Philippines need not give this security as it is presumed to be always solvent and able to meet its obligations. Thus, the petitioner, being an agent of the national government, is not required to put up a bond because to do so would be to indirectly require the state to submit such bond." — Basis for government exemption from bond requirements.

• The Collector of Internal Revenue v. Reyes, 100 Phil. 822 (1957) — Followed for the principle that bond requirements are dispensed with when the collection method (distraint and levy) is violative of law; established the absurdity of requiring bonds when the collection method itself is illegal.

• Spouses Pacquiao v. Court of Tax Appeals, 784 Phil. 220 (2016) — Followed for the expanded rule that dispensing with bond requirements applies not only to prescription cases but whenever the collection method is not sanctioned by law.

• National Power Corporation v. Province of Quezon, 610 Phil. 456 (2009) — Followed for the doctrine that while the beneficial user of government property is directly liable for real property taxes, the tax attaches to the property but is chargeable against the entity with actual and beneficial use.

• Philippine Fisheries Development Authority v. Court of Appeals, 555 Phil. 661 (2007) — Followed for the principle that properties of public dominion cannot be sold at public auction to satisfy tax delinquencies even if leased to private entities; tax delinquencies must be satisfied through other means.

• Manila International Airport Authority v. Court of Appeals, 528 Phil. 181 (2006) — Cited for the rule that property of public dominion cannot be subject to levy or auction sale.

• Republic v. Garcia, 554 Phil. 371 (2007) — Cited for the presumption that the State is solvent and need not post bonds.

• Republic v. Court of Appeals, 160-A Phil. 465 (1975) — Cited for the presumption of state solvency.

• Araneta v. Gatmaitan, 101 Phil. 328 (1957) — Cited for the presumption of state solvency.

• Spouses Badillo v. Tayag, 448 Phil. 606 (2003) — Cited for the presumption of state solvency.

• Section 11, Republic Act No. 1125 (as amended by Section 9, Republic Act No. 9282) — Provides that no appeal to the CTA shall suspend the payment, levy, distraint, and/or sale of property for tax satisfaction unless the Court suspends collection and requires the taxpayer to either deposit the amount claimed or file a surety bond for not more than double the amount; interpreted to allow dispensing with the bond when collection methods are illegal.

• Section 234(a), Republic Act No. 7160 (Local Government Code of 1991) — Exempts real property owned by the Republic or its political subdivisions from real property tax, except when the beneficial use thereof has been granted to a taxable person; establishes that the beneficial user becomes liable for the tax.

• Article 420, Civil Code of the Philippines — Defines property of public dominion as those belonging to the State without being for public use but intended for some public service or for the development of the national wealth; applied to classify the subject property as inalienable and immune from levy or auction.

Carpio (Acting C.J., Chairperson), Perlas-Bernabe, Caguioa, and Lazaro-Javier, JJ.