Reyes vs. Almanzor

Real properties subject to restrictive rent control legislation that freezes rentals and prohibits ejectment must be assessed for taxation purposes using the Income Approach rather than the Comparable Sales Approach to ensure compliance with constitutional mandates of uniform, equitable, and non-confiscatory taxation, and to prevent tax burdens from exceeding the actual income derived from the properties.

The case arose during the martial law period following the enactment of Republic Act No. 6359 and Presidential Decree No. 20, which imposed absolute rent freezes on dwelling units or lands leased for residential purposes where monthly rentals did not exceed P300, and indefinitely suspended provisions of the Civil Code allowing ejectment upon lease expiration. These measures effectively froze the income stream of affected property owners while the City Assessor continued to value their properties based on the market values of unrestricted comparable sales, resulting in tax assessments that allegedly exceeded total annual rental income.

• Petitioners J.B.L. Reyes, Edmundo Reyes, and Milagros Reyes own parcels of land located in the Tondo and Sta. Cruz Districts of Manila, which are leased and entirely occupied as dwelling sites by tenants paying monthly rentals not exceeding three hundred pesos (P300.00) as of July 1971.
• On July 14, 1971, Congress enacted Republic Act No. 6359 prohibiting for one year any increase in monthly rentals of dwelling units or lands where rentals did not exceed P300.00 per month, allowing only a 10% increase thereafter, and suspending paragraph (1) of Article 1673 of the Civil Code regarding ejectment of lessees for two years.
• On October 12, 1972, Presidential Decree No. 20 amended Republic Act No. 6359 by making the prohibition on rental increases absolute and indefinitely suspending the ejectment provisions of the Civil Code, thereby precluding petitioners from raising rents or ejecting tenants and freezing their annual income.
• In 1973, the City Assessor of Manila re-classified and reassessed the subject properties based on the schedule of market values reviewed by the Secretary of Finance, resulting in increased tax rates that petitioners claimed exceeded their total annual rental income derived under the frozen rents.
• Petitioners filed a Memorandum of Disagreement with the Board of Tax Assessment Appeals, arguing that the reassessments were excessive, unwarranted, inequitable, confiscatory, and unconstitutional, and contending that the Income Approach should have been used instead of the Comparable Sales Approach adopted by the Assessor.
• The Board of Tax Assessment Appeals upheld the assessments on March 29, 1976, finding them in accordance with the approved base schedule of market values and noting that petitioners failed to submit concrete evidence to overcome the presumptive regularity of the assessments.
• On appeal to the Central Board of Assessment Appeals, petitioners submitted summaries of yearly rentals showing income derived from the properties while the City Assessor submitted three deeds of sale of properties in the same vicinity as evidence of comparable market values.
• The Board of Hearing Commissioners conducted an ocular inspection with representatives of the City Assessor prior to the hearing, finding that certain parcels were below street level and affected by tides, though neither the owners nor their representatives were present despite proper notice.
• The Central Board of Assessment Appeals rendered its decision on June 10, 1977, affirming the valuation and assessment of certain lots covered by specific Tax Declaration Numbers and modifying the decision for other lots by allowing a 20% reduction in their respective market values, but maintaining the assessment level of 30% and the Comparable Sales Approach; a motion for reconsideration was subsequently denied.

• The adoption of the Comparable Sales Approach was erroneous and unlawful because Presidential Decree No. 20 restrictions rendered the subject properties virtually unsaleable with no willing buyers, making sales data of unrestricted properties incomparable and irrelevant to the actual market value of the restricted properties.
• The Income Approach was the only realistic, fair, and constitutionally compliant method of valuation because the rent control restrictions drastically reduced the economic value of the properties, and the resulting assessments using the Comparable Sales Approach produced annual real estate taxes that admittedly exceeded the total yearly rentals paid by tenants.
• The assessments violated constitutional mandates of equitable and uniform taxation under Article VIII, Section 17(1) of the 1973 Constitution because they failed to account for the government-imposed rental restrictions, effectively penalizing petitioners for conditions beyond their control and threatening forfeiture of their properties through confiscatory taxation.
• The restrictions were not temporary distressed conditions as claimed by respondents, having been in force for approximately twenty years with no end in sight, and the properties affected by rent control could not by any reasonable standard be equated with unrestricted residential properties for valuation purposes.

• The Comparable Sales Approach based on actual market transactions provides uniform and credible standards for mass appraisal of properties, and is generally preferred over the Income Approach when income is affected by price controls because controlled rental income does not reflect the true market value in the open market.
• The restrictions imposed by Presidential Decree No. 20 represent temporary distressed conditions that should not be factored into the valuation methodology, and the assessments were made in strict accordance with the base schedule of market values and building unit values as approved by the Secretary of Finance.
• The presumption of regularity attending the official acts of the City Assessor supports the validity of the classification and assessments, which petitioners failed to overcome with concrete evidence showing that the assessments were not in accordance with the approved schedules.
• The income approach is properly rejected in cases of rent control because the artificially controlled rents do not project the true market value of the properties in the open market, and assessors must use methods that reflect actual market conditions rather than artificial restrictions.

• Procedural Issues: N/A
• Substantive Issues: Whether the Central Board of Assessment Appeals committed reversible error in adopting the Comparable Sales Approach instead of the Income Approach for assessing properties covered by rent control laws; and whether the resulting assessments were unconstitutional for being confiscatory and inequitable in violation of the due process clause and the constitutional mandate for uniform, equitable, and progressive taxation.

• Procedural: N/A
• Substantive: The Supreme Court granted the petition, reversed the assailed decisions of the Central Board of Assessment Appeals and the Board of Assessment Appeals of Manila, and ordered the respondent Board of Assessment Appeals of Manila and the City Assessor of Manila to make a new assessment using the Income Approach method. The Court held that the Comparable Sales Approach was inappropriate and inequitable because properties covered by Presidential Decree No. 20, which imposed absolute rent freezes and ejectment prohibitions, had naturally much lesser market values than unrestricted properties and were generally unsaleable to willing buyers in the open market. The Court ruled that using sales data from unrestricted comparable properties violated the constitutional mandates of uniform and equitable taxation under Article VIII, Section 17(1) of the 1973 Constitution, as well as the fundamental principle under the Real Property Tax Code (Presidential Decree No. 464) requiring appraisal at current and fair market value that reflects all circumstances affecting value. The Court found the assessments confiscatory and a violation of due process because the annual taxes exceeded the annual rental income derived from the properties, and emphasized that the government could not simultaneously burden petitioners with rental freezing laws under the principle of social justice and then penalize them with excessive taxes leading to forfeiture of their properties.

• Uniformity, Equitability, and Progressivity in Taxation — Uniformity requires that all taxable articles or property of the same class be taxed at the same rate; equitability requires that the tax burden fall on those better able to pay; and progressivity requires that tax rates increase depending on the resources of the person affected. The Court applied this doctrine to require that assessment methods account for restrictive legislation that artificially depresses property value and income, holding that failure to do so results in inequitable and confiscatory taxation that violates the 1973 Constitution.
• The Power to Tax is Not the Power to Destroy — Citing Justice Holmes' refutation of Chief Justice Marshall's dictum, the Court held that while taxation is an attribute of sovereignty and the strongest power of government, it is limited by the due process and equal protection clauses of the Constitution and cannot be exercised in a manner that is arbitrary, unreasonable, or confiscatory such as to effectively destroy property rights.
• Current and Fair Market Value Principle — Under the Real Property Tax Code (Presidential Decree No. 464), real property must be appraised at its current and fair market value, which necessarily requires consideration of all factors affecting value including restrictive laws that limit income and disposition, rendering the Comparable Sales Approach invalid when applied to properties with severely depressed marketability due to rent control.

• "By no strength of the imagination can the market value of properties covered by P.D. No. 20 be equated with the market value of properties not so covered. The former has naturally a much lesser market value in view of the rental restrictions."
• "It stands to reason that petitioners who are burdened by the government by its Rental Freezing Laws (then R.A. No. 6359 and P.D. 20) under the principle of social justice should not now be penalized by the same government by the imposition of excessive taxes petitioners can ill afford and eventually result in the forfeiture of their properties."
• "The power to tax is not the power to destroy while this Court sits. So it is in the Philippines."
• "Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. However, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself."

• Army & Navy Club, Manila v. Wenceslao Trinidad, G.R. No. 19297, 44 Phil. 383 (1923) — Cited for the principle that assessors, in finding the value of property, must consider all circumstances and elements of value and exercise prudent discretion in reaching conclusions, rejecting rigid adherence to a single valuation method when the circumstances of the property warrant a different approach.
• Churchill v. Concepcion, 34 Phil. 969 (1916) — Cited for the definition of uniformity in taxation as the principle requiring that all taxable articles or kinds of property of the same class shall be taxed at the same rate.
• Sison, Jr. v. Ancheta, 130 SCRA 655 (1984) — Cited for the limitations on the power to tax imposed by the due process and equal protection clauses of the Constitution, and for the proposition that taxation must not be arbitrary or confiscatory and must operate equally and uniformly on all persons under similar circumstances.
• Commissioner of Internal Revenue v. Algue, Inc., 158 SCRA 9 (1988) — Cited for the principle that while taxes are the lifeblood of government, they must be collected in accordance with law to prevent arbitrariness that negates the very reason for government itself.

• Article VIII, Section 17(1) of the 1973 Constitution — Mandated that the rule of taxation must be uniform, equitable, and progressive; the Court noted this was a new requirement not present in the 1935 Constitution, requiring assessment methods to account for ability to pay and fair valuation that reflects true economic conditions.
• Article 1673 of the Civil Code — The provision regarding ejectment of lessees upon expiration of the legal period of lease was suspended by Republic Act No. 6359 and Presidential Decree No. 20, affecting the income-generating capacity and marketability of the subject properties by preventing petitioners from recovering possession.
• Republic Act No. 6359 — The initial rent control law prohibiting rental increases for dwelling units or lands with rents of P300 or less per month, allowing only limited increases thereafter, and temporarily suspending ejectment rights.
• Presidential Decree No. 20 — Amended Republic Act No. 6359 to make the rent freeze absolute and indefinite, and to indefinitely suspend ejectment provisions except for leases with definite periods, thereby permanently restricting the petitioners' income and property rights.
• Presidential Decree No. 464 (Real Property Tax Code) — Established the fundamental principle that real property must be appraised at its current and fair market value, which the Court interpreted as requiring consideration of rent control restrictions that necessarily affect such value.