Republic vs. Spouses Bunsay

Consequential damages in expropriation proceedings are limited to the impairment or decrease in value of the remaining portion not taken, and cannot include capital gains tax and other transfer taxes; however, such taxes may be factored into just compensation as incidental costs of the forced sale, and the expropriating authority may be directed to shoulder them to ensure the affected owner is fully rehabilitated.

The DPWH is the Republic's engineering and construction arm responsible for planning, designing, constructing, and maintaining infrastructure facilities, including national highways. Among its projects is the C-5 Northern Link Road Project Phase 2 (Segment 9), connecting the North Luzon Expressway to McArthur Highway in Valenzuela City. In connection with this project, the DPWH sought to expropriate a 100-square meter lot in Valenzuela City covered by TCT No. V-16548, registered in the name of Spouses Marcelino and Nenita Bunsay.

The DPWH, as the Republic's engineering and construction arm, undertook the C-5 Northern Link Road Project Phase 2 (Segment 9) connecting the North Luzon Expressway to McArthur Highway in Valenzuela City. In connection with this project, the DPWH filed a Complaint for Expropriation with Urgent Prayer for the Issuance of a Writ of Possession before the RTC of Valenzuela City, Branch 270, against Spouses Marcelino and Nenita Bunsay, concerning a 100-square meter lot covered by TCT No. V-16548 (the Disputed Property).

Notices sent to Spouses Bunsay were returned with the notation "party moved," and they did not file an Answer. During the hearing on the issuance of the writ of possession, DPWH deposited checks totaling Php200,000.00, representing the sum of the Disputed Property's zonal value and the replacement cost of improvements built thereon. The RTC thereafter issued a Writ of Possession on February 20, 2012.

The RTC later directed the parties to submit nominees to the Board of Commissioners for the determination of just compensation. During the hearing on August 23, 2012, DPWH manifested that while all notices to Spouses Bunsay were returned unserved, the spouses had already claimed the deposited checks. DPWH moved that the amount received be deemed just compensation. The RTC granted the motion through the assailed Resolution, condemning the Disputed Property for public use and directing DPWH to pay Php505,374.74 representing the total valuation of improvements, and as consequential damages, to pay the value of CGT and other taxes necessary for the transfer of the property in DPWH's name.

DPWH filed a Motion for Partial Reconsideration, praying that the award corresponding to the replacement cost of improvements and the value of CGT and other transfer taxes be deleted. The RTC issued the assailed Order granting the MPR in part, excluding the replacement cost of improvements since Spouses Bunsay acknowledged having already received payment for these. However, the RTC maintained the award of consequential damages equivalent to the value of CGT and transfer taxes, clarifying that it had not ordered DPWH to pay the taxes directly but rather to pay consequential damages constituting the value of those taxes.

• Improper Award of Consequential Damages: Petitioner insisted that by directing it to pay consequential damages equivalent to the value of CGT and other transfer taxes, the RTC indirectly held DPWH liable for payment of taxes for which it cannot be charged.

• Broad Interpretation of Consequential Damages: Respondents argued that consequential damages should be understood in its general sense so as to permit recovery of damages arising from "some involuntary act which is prejudicial to the person entitled to the same."

• Consequential Damages in Expropriation: Whether the RTC erred in awarding consequential damages equivalent to the value of capital gains tax and transfer taxes in favor of Spouses Bunsay.

• Consequential Damages in Expropriation: Yes. The RTC erred in awarding consequential damages equivalent to the value of CGT and transfer taxes. Consequential damages in expropriation are limited to the impairment or decrease in value of the remaining portion not taken, which did not exist here since the entire property was expropriated.

• Consequential Damages in Expropriation: Section 6 of Rule 67 of the Rules of Court governs the assessment of consequential damages in expropriation proceedings, providing that commissioners shall assess consequential damages to the property not taken and deduct therefrom consequential benefits. In Republic vs. Court of Appeals, the Court explained that consequential damages may be awarded to the owner if, as a result of the expropriation, the remaining portion not expropriated suffers an impairment or decrease in value. Here, the expropriation covered the entire 100-square meter lot, leaving no "remaining portion" to speak of, and thus no basis for an award of consequential damages. Even if a remaining portion existed, no evidence was submitted showing any impairment or decrease in value of such portion as a result of the expropriation. The Court's ruling in Republic vs. Spouses Salvador, involving the same expropriating authority, project, and handling court, was on all fours: CGT may not be awarded as consequential damages because the term assumes a fixed definition limited to the impairment or decrease in value of the portion remaining with the owner after expropriation. CGT is a tax on passive income imposed on the seller as a consequence of presumed income from the sale or exchange of real property, and the BIR has constituted DPWH as a withholding agent for the 6% final withholding tax in expropriation of real property for infrastructure projects. However, the Court clarified that while CGT cannot be awarded as consequential damages, its value may be considered in determining just compensation. Expropriation is akin to a "forced sale" arising not from consensual agreement but by compulsion of law. Just compensation, defined as the full and fair equivalent of the property taken, must be real, substantial, full, and ample. The loss incurred by the affected owner necessarily includes all incidental costs to facilitate the transfer of the expropriated property, including CGT, other taxes, and fees due on the forced sale. Since the value of CGT and transfer taxes was not factored into the amount paid to Spouses Bunsay but was instead separately and erroneously awarded as consequential damages, the Court deemed it just and equitable to direct the Republic to shoulder such taxes as part of just compensation to preserve the compensation awarded and ensure the affected owner is made whole.

• Consequential Damages in Expropriation — Consequential damages in expropriation proceedings refer exclusively to the impairment or decrease in value of the remaining portion not taken, as distinguished from consequential benefits derived by the owner from the public use or purpose of the property taken. The award requires proof of actual impairment or decrease in value of the remaining property. Where the entire property is expropriated, there is no "remaining portion" and thus no basis for consequential damages. The Court applied this doctrine to strike down the RTC's award of consequential damages equivalent to CGT and transfer taxes, there being no remaining portion and no evidence of impairment.

• Just Compensation as Full and Fair Equivalent — Just compensation is the full and fair equivalent of the property taken from its owner by the expropriator; the true measure is not the taker's gain but the owner's loss. The word "just" modifies "compensation" to convey that the equivalent given shall be real, substantial, full, and ample. Since just compensation must fully rehabilitate the affected owner, the loss incurred necessarily includes all incidental costs to facilitate the transfer of the expropriated property, including CGT, other taxes, and fees due on the forced sale. The Court applied this principle to direct the Republic to shoulder CGT and transfer taxes as part of just compensation, even though they could not be awarded as consequential damages.

• Expropriation as Forced Sale — The transfer of real property by way of expropriation is not an ordinary sale contemplated under Article 1458 of the Civil Code but is akin to a "forced sale" arising not from the consensual agreement of the parties but by compulsion of law. Unlike an ordinary sale where the vendor sets the selling price, the compensation in expropriation is determined by the court. The Court used this distinction to justify factoring transfer taxes and fees into just compensation, as these costs are incidental to the forced transfer and must be borne to make the owner whole.

• "The crux of the controversy is hinged on the definition of 'consequential damages' in the context of an expropriation proceeding." — This passage frames the central legal question of the case, identifying the precise doctrinal issue the Court resolved.

• "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 [CGT] is a tax on passive income, it is the seller, or respondents in this case, who are liable to shoulder the tax." — This quotation, drawn from the Court's ruling in Spouses Salvador and adopted here, establishes that CGT in expropriation remains the seller's liability, clarifying the tax treatment of expropriation transfers under the National Internal Revenue Code.

• "Since just compensation requires that real, substantial, full and ample equivalent be given for the property taken, the loss incurred by the affected owner necessarily includes all incidental costs to facilitate the transfer of the expropriated property to the expropriating authority, including the CGT, other taxes and fees due on the forced sale." — This passage articulates the ratio decidendi for the Court's directive that the Republic shoulder CGT and transfer taxes as part of just compensation, grounding the ruling in the principle that just compensation must make the owner whole.

• Republic vs. Court of Appeals, 612 Phil. 965 (2009) — Cited as controlling authority for the definition of consequential damages in expropriation, establishing that such damages may be awarded only if the remaining portion not expropriated suffers impairment or decrease in value.

• Republic vs. Spouses Salvador, 810 Phil. 742 (2017) — Cited as directly on point (on all fours), involving the same expropriating authority, project, and handling court. The Court adopted its ruling that CGT may not be awarded as consequential damages, as the term is limited to impairment or decrease in value of the remaining portion, and that CGT remains the seller's liability as a tax on passive income.

• Hospicio de San Jose De Barili, Cebu City vs. Department of Agrarian Reform, 507 Phil. 585 (2005) — Cited in reference to the characterization of expropriation as a forced sale arising by compulsion of law rather than consensual agreement.

• Evergreen Manufacturing Corp. vs. Republic, 817 Phil. 1048 (2017) — Cited for the definition of just compensation as the full and fair equivalent of the property taken, with the true measure being the owner's loss rather than the taker's gain.

• Section 6, Rule 67, Rules of Court — Governs proceedings by commissioners in expropriation, providing that commissioners shall assess consequential damages to the property not taken and deduct consequential benefits, but in no case shall consequential benefits exceed consequential damages or the owner be deprived of the actual value of the property taken. The Court relied on this provision to define consequential damages as limited to the remaining portion not taken.

• Section 5, Republic Act No. 8974 — Sets forth standards for the assessment of the value of land subject to expropriation proceedings or negotiated sale, enumerating factors such as classification and use, developmental costs, value declared by owners, current selling price of similar lands, reasonable disturbance compensation, size, shape, location, tax declaration and zonal valuation, and such facts enabling affected owners to acquire similarly-situated lands. The Court cited this provision to support the proposition that the value of CGT and transfer taxes may be considered in determining just compensation.

• Sections 24(D) and 56(A)(3), National Internal Revenue Code — Treat the transfer of property through expropriation as a sale or exchange, with profit constituting capital gain. The Court referenced these provisions to establish that CGT is a tax on passive income imposed on the seller.

• Article 1458, Civil Code — Defines the contract of sale as one party obligating itself to transfer ownership and deliver a determinate thing, and the other to pay a price certain in money or its equivalent. The Court distinguished expropriation from an ordinary sale under this article, characterizing it instead as a forced sale.

Peralta, C.J. (Chairperson), Caguioa, J., Reyes, Jr., J., Lazaro-Javier, J., and Lopez, J. concurred. No separate concurring opinions were noted.