Republic vs. Salvador

Capital gains tax in expropriation proceedings is a liability of the seller, not the expropriating authority, and cannot be awarded as consequential damages. Consequential damages are only awarded if, as a result of the expropriation, the remaining property of the owner suffers from an impairment or decrease in value, and the payment of capital gains tax has no effect on the increase or decrease in value of the remaining property.

Respondents spouses Senando F. Salvador and Josefina R. Salvador were the registered owners of a parcel of land with a total land area of 229 square meters, located in Kaingin Street, Barangay Parada, Valenzuela City, covered by Transfer Certificate of Title No. V-77660. The Republic, represented by the Department of Public Works and Highways (DPWH), sought to expropriate 83 square meters of the property, as well as the improvements thereon, for the construction of the C-5 Northern Link Road Project Phase 2 (Segment 9) from the North Luzon Expressway (NLEX) to McArthur Highway. The expropriation was undertaken pursuant to the State's sovereign power of eminent domain.

Respondents spouses Senando F. Salvador and Josefina R. Salvador were the registered owners of a parcel of land with a total land area of 229 square meters, located in Kaingin Street, Barangay Parada, Valenzuela City, and covered by Transfer Certificate of Title No. V-77660. On November 9, 2011, the Republic, represented by the DPWH, filed a verified Complaint before the RTC for the expropriation of 83 square meters of said parcel of land, as well as the improvements thereon, for the construction of the C-5 Northern Link Road Project Phase 2 (Segment 9) from the North Luzon Expressway (NLEX) to McArthur Highway.

On February 10, 2012, respondents received two checks from the DPWH representing 100% of the zonal value of the subject property and the cost of the one-storey semi-concrete residential house erected on the property, amounting to P161,850.00 and P523,449.22, respectively. The RTC thereafter issued the corresponding Writ of Possession in favor of the Republic. On the same day, respondents signified in open court that they recognized the purpose for which their property was being expropriated and interposed no objection thereto. They also manifested that they had already received the total sum of P685,349.22 from the DPWH and were no longer intending to claim any just compensation.

In its Decision dated August 23, 2012, the RTC rendered judgment in favor of the Republic, condemning the subject property for the purpose of implementing the construction of the C-5 Northern Link Road Project Phase 2 (Segment 9) from NLEX to McArthur Highway, Valenzuela City. The RTC likewise directed the Republic to pay respondents consequential damages equivalent to the value of the capital gains tax and other taxes necessary for the transfer of the subject property in the Republic's name. The RTC deemed it "fair and just" that whatever is the value of the capital gains tax and all other taxes necessary for the transfer of the subject property to the Republic are but consequential damages that should be paid by the latter, citing the case of Capitol Subdivision, Inc. vs. Province of Negros Occidental.

The Republic moved for partial reconsideration, specifically on the issue relating to the payment of the capital gains tax, but the RTC denied the motion in its Order dated January 10, 2013 for having been belatedly filed. The RTC also found no justifiable basis to reconsider its award of consequential damages in favor of respondents, as the payment of capital gains tax and other transfer taxes is but a consequence of the expropriation proceedings. As a result, the Republic filed the present Petition for Review on Certiorari assailing the RTC's August 23, 2012 Decision and January 10, 2013 Order.

• Timeliness of Motion for Partial Reconsideration: The Republic argued that the RTC erred in denying its Motion for Partial Reconsideration for having been filed out of time, since under Section 3, Rule 13 of the Rules of Court, if a pleading is filed by registered mail, the date of mailing shall be considered as the date of filing, and it does not matter when the court actually receives the mailed pleading.
• Capital Gains Tax as Consequential Damages: The Republic argued that the capital gains tax on the transfer of the expropriated property cannot be considered as consequential damages that may be awarded to respondents, since the transfer of property through expropriation proceedings is a sale or exchange within the meaning of Sections 24(D) and 56(A)(3) of the National Internal Revenue Code, and the capital gains tax remains a liability of the seller.

• Consequential Damages Award: Respondents argued that they were merely forced by circumstances to be dispossessed of the subject property owing to the exercise of the State of its sovereign power to expropriate, and that the payment of capital gains tax and other transfer taxes is a consequence of the expropriation proceedings, making the award equitable, just, and fair, as upheld in Capitol Subdivision, Inc. vs. Province of Negros Occidental.

• Timeliness of Motion for Partial Reconsideration: Whether the RTC correctly denied the Republic's Motion for Partial Reconsideration for having been filed out of time.
• Capital Gains Tax as Consequential Damages: Whether the capital gains tax on the transfer of the expropriated property can be considered as consequential damages that may be awarded to respondents.

• Timeliness of Motion for Partial Reconsideration: No. The RTC erred in denying the Republic's Motion for Partial Reconsideration for having been filed out of time, because under Section 3, Rule 13 of the Rules of Court, the date of mailing shall be considered as the date of filing when a pleading is filed by registered mail.
• Capital Gains Tax as Consequential Damages: No. The capital gains tax on the transfer of the expropriated property cannot be considered as consequential damages, because the transfer of property through expropriation proceedings is a sale or exchange within the meaning of Sections 24(D) and 56(A)(3) of the National Internal Revenue Code, and the capital gains tax remains a liability of the seller.

• Timeliness of Motion for Partial Reconsideration: Section 3, Rule 13 of the Rules of Court provides that if a pleading is filed by registered mail, the date of mailing shall be considered as the date of filing, and it does not matter when the court actually receives the mailed pleading. The records show that the Republic filed its Motion for Partial Reconsideration before the RTC via registered mail on September 28, 2012. Although the trial court received the Republic's motion only on October 5, 2012, it should have considered the pleading to have been filed on September 28, 2012, the date of its mailing, which is clearly within the reglementary period of 15 days to file said motion, counted from September 13, 2012, or the date of the Republic's receipt of the assailed Decision. Given these circumstances, the RTC erred in denying the Republic's Motion for Partial Reconsideration for having been filed out of time.

• Capital Gains Tax as Consequential Damages: Just compensation is defined as the full and fair equivalent of the property sought to be expropriated; the measure is not the taker's gain but the owner's loss, and the compensation, to be just, must be fair not only to the owner but also to the taker. To determine just compensation, the trial court should first ascertain the market value of the property by considering the cost of acquisition, the current value of like properties, its actual or potential uses, and in the particular case of lands, their size, shape, location, and the tax declarations thereon. If as a result of the expropriation, the remaining lot suffers from an impairment or decrease in value, consequential damages may be awarded by the trial court, provided that the consequential benefits which may arise from the expropriation do not exceed said damages suffered by the owner of the property. While the determination of the amount of just compensation is within the court's discretion, it should not be done arbitrarily or capriciously; it must always be based on all established rules, upon correct legal principles and competent evidence, and the court cannot base its judgment on mere speculations and surmises.

It is settled that the transfer of property through expropriation proceedings is a sale or exchange within the meaning of Sections 24(D) and 56(A)(3) of the National Internal Revenue Code, and profit from the transaction constitutes capital gain. Since capital gains tax is a tax on passive income, it is the seller, or respondents in this case, who are liable to shoulder the tax. The Bureau of Internal Revenue (BIR), in BIR Ruling No. 476-2013 dated December 18, 2013, has constituted the DPWH as a withholding agent tasked to withhold the 6% final withholding tax in the expropriation of real property for infrastructure projects. Thus, as far as the government is concerned, the capital gains tax in expropriation proceedings remains a liability of the seller, as it is a tax on the seller's gain from the sale of real property. Besides, consequential damages are only awarded if as a result of the expropriation, the remaining property of the owner suffers from an impairment or decrease in value. In this case, no evidence was submitted to prove any impairment or decrease in value of the subject property as a result of the expropriation. More significantly, given that the payment of capital gains tax on the transfer of the subject property has no effect on the increase or decrease in value of the remaining property, it can hardly be considered as consequential damages that may be awarded to respondents.

• Consequential Damages in Expropriation — Consequential damages may be awarded to the property owner if, as a result of the expropriation, the remaining property suffers from an impairment or decrease in value, provided that the consequential benefits which may arise from the expropriation do not exceed said damages. In this case, the Court applied this doctrine to hold that capital gains tax cannot be considered consequential damages because no evidence was submitted to prove any impairment or decrease in value of the remaining property, and the payment of capital gains tax has no effect on the increase or decrease in value of the remaining property.

• Capital Gains Tax in Expropriation Proceedings — The transfer of property through expropriation proceedings is a sale or exchange within the meaning of Sections 24(D) and 56(A)(3) of the National Internal Revenue Code, and profit from the transaction constitutes capital gain. Since capital gains tax is a tax on passive income, it is the seller who is liable to shoulder the tax. The Court applied this doctrine to hold that the capital gains tax in expropriation proceedings remains a liability of the seller, as it is a tax on the seller's gain from the sale of real property.

• Just Compensation — Just compensation is the full and fair equivalent of the property sought to be expropriated; the measure is not the taker's gain but the owner's loss, and the compensation, to be just, must be fair not only to the owner but also to the taker. The determination of the amount of just compensation is within the court's discretion, but it should not be done arbitrarily or capriciously; it must always be based on all established rules, upon correct legal principles and competent evidence.

• Date of Filing by Registered Mail — Under Section 3, Rule 13 of the Rules of Court, if a pleading is filed by registered mail, the date of mailing shall be considered as the date of filing, and it does not matter when the court actually receives the mailed pleading. The Court applied this doctrine to hold that the RTC erred in denying the Republic's Motion for Partial Reconsideration for having been filed out of time, since the motion was filed via registered mail on September 28, 2012, within the reglementary period.

• "Just compensation [is defined as] the full and fair equivalent of the property sought to be expropriated. x x x The measure is not the taker's gain but the owner's loss. [The compensation, to be just,] must be fair not only to the owner but also to the taker." — This passage defines the canonical formulation of just compensation in expropriation proceedings, emphasizing that the measure is the owner's loss, not the taker's gain.

• "It is settled that the transfer of property through expropriation proceedings is a sale or exchange within the meaning of Sections 24(D) and 56(A)(3) of the National Internal Revenue Code, and profit from the transaction constitutes capital gain." — This passage establishes the controlling rule that expropriation is treated as a sale or exchange for tax purposes, making the capital gains tax the seller's liability.

• "Since capital gains tax is a tax on passive income, it is the seller, or respondents in this case, who are liable to shoulder the tax." — This passage articulates the ratio decidendi for deleting the award of consequential damages, holding that the seller bears the capital gains tax liability.

• "Besides, as previously explained, consequential damages are only awarded if as a result of the expropriation, the remaining property of the owner suffers from an impairment or decrease in value." — This passage states the controlling doctrine on consequential damages, requiring proof of impairment or decrease in value of the remaining property.

• Russel vs. Ebasan, 633 Phil. 384 (2010) — Cited as controlling authority for the rule that under Section 3, Rule 13 of the Rules of Court, the date of mailing shall be considered as the date of filing when a pleading is filed by registered mail.

• Republic vs. Court of Appeals, 612 Phil. 965 (2009) — Cited as controlling authority for the definition of just compensation and the rule that consequential damages may be awarded if the remaining property suffers from an impairment or decrease in value.

• B.H. Berkenkotter & Co. vs. Court of Appeals, 290-A Phil. 371 (1992) — Cited in support of the rule that consequential damages may be awarded if the remaining lot suffers from an impairment or decrease in value as a result of the expropriation.

• National Power Corporation vs. Dr. Bongbong, 549 Phil. 93 (2007) — Cited for the rule that the determination of just compensation must be based on all established rules, upon correct legal principles and competent evidence, and should not be done arbitrarily or capriciously.

• Manansan vs. Republic, 530 Phil. 104 (2005) — Cited for the rule that the court cannot base its judgment on mere speculations and surmises in determining just compensation.

• Gutierrez vs. Court of Tax Appeals, 101 Phil. 713 (1957) — Cited as authority for the rule that the transfer of property through expropriation proceedings is a sale or exchange within the meaning of Sections 24(D) and 56(A)(3) of the National Internal Revenue Code.

• Republic vs. Soriano, G.R. No. 211666, February 25, 2015, 752 SCRA 71 — Cited for the rule that the capital gains tax in expropriation proceedings remains a liability of the seller, as it is a tax on the seller's gain from the sale of real property.

• Capitol Subdivision, Inc. vs. Province of Negros Occidental, G.R. No. L-16257, January 31, 1963 — Cited by the RTC in support of its award of consequential damages, but the Supreme Court found this citation to be erroneous.

• Section 3, Rule 13, Rules of Court — Provides that if a pleading is filed by registered mail, the date of mailing shall be considered as the date of filing, and it does not matter when the court actually receives the mailed pleading. Applied to hold that the Republic's Motion for Partial Reconsideration was timely filed.

• Section 1, Rule 37, in relation to Section 3, Rule 41, Rules of Court — Provides the reglementary period of 15 days to file a motion for partial reconsideration. Applied to determine that the Republic's motion was filed within the reglementary period.

• Sections 24(D) and 56(A)(3), National Internal Revenue Code — Provides that the transfer of property through expropriation proceedings is a sale or exchange, and profit from the transaction constitutes capital gain. Applied to hold that the capital gains tax remains a liability of the seller.

• Sereno, C.J. (Chairperson)
• Leonardo-De Castro, J.
• Perlas-Bernabe, J.
• Caguioa, J.