The Supreme Court has ruled that government agencies are exempt from posting a surety bond when seeking to suspend real property tax collections, reinforcing the presumption that the Republic of the Philippines is always solvent and capable of meeting its obligations. This decision clarifies that requiring a government entity to post a bond is essentially requiring the state to do so, which is unnecessary. The ruling ensures that government agencies are not unduly burdened with financial requirements when contesting tax assessments, streamlining their ability to protect public assets.

Tacloban City vs. Privatization and Management Office: When is a Government Agency Exempt from Posting a Surety Bond?

This case revolves around a real property tax dispute involving the Leyte Park Hotel, Inc. (LPHI), co-owned by the Privatization and Management Office (PMO), the Province of Leyte, and the Philippine Tourism Authority (PTA). The LPHI facilities were leased to Unimaster Conglomeration, Inc. (UCI). The City Government of Tacloban demanded UCI pay the real property taxes. When the taxes remained unpaid, the City filed a collection suit against LPHI and UCI, later including the Province of Leyte, the PTA, and the PMO as additional defendants. The PMO argued that UCI should be liable for the taxes under the Local Government Code. The central legal question is whether the PMO, as a government agency, is exempt from posting a surety bond as a condition for suspending the collection of real property tax.

The Court of Tax Appeals (CTA) initially granted the PMO’s motion to suspend the tax collection and cancel warrants of levy, but required the posting of a surety bond equivalent to one and one-half times the amount sought. The PMO then sought exemption from posting the bond, arguing that government agencies should not be required to file bonds due to the state’s presumed solvency. The CTA declared this motion moot because the PTA had already posted a surety bond. The PMO’s subsequent motion for reconsideration was denied, leading to the Supreme Court petition.

Section 9 of Republic Act (R.A.) No. 9282, which amended Section 11 of R.A. No. 1125, addresses appeals to the CTA. It states that appeals do not automatically suspend tax collection, levy, or sale of property. However, it includes a crucial provision:

SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. x x x

Provided, however, That when in the opinion of the Court the collection by the aforementioned government agencies may jeopardize the interest of the Government and/or the taxpayer[,] the Court[, at] any stage of the proceeding may suspend the said collection and require the taxpayer either to deposit the amount claimed or to file a surety bond for not more than double the amount with the Court.

This provision allows the CTA to suspend tax collection if it believes the collection could jeopardize the government’s or the taxpayer’s interests, requiring either a deposit or a surety bond. The purpose of these conditions is to secure the payment of deficiency taxes if the case is decided against the taxpayer. The PMO argued that, as a government agency, it should be exempt from this requirement. Citing the case of The Collector of Internal Revenue v. Reyes, the PMO emphasized that the state’s solvency eliminates the need for a bond. The Supreme Court agreed, reinforcing the principle that the government need not provide security for its obligations.

In The Collector of Internal Revenue v. Reyes, the Court justified the dispensation of the bond requirement, stating:

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.

This reasoning underscores that when the tax collection methods are unlawful, the bond requirement becomes illogical. This principle was further reinforced in Spouses Pacquiao v. Court of Tax Appeals, which held that courts can dispense with the bond requirement when the tax collector’s methods are not legally sanctioned. In this case, the City’s method of collecting real property taxes contravened existing law and jurisprudence because the warrant of levy threatened to sell property of public dominion at public auction.

The PMO rightfully sought to suspend the collection to prevent the sale of property co-owned by government entities. Section 234(a) of the 1991 Local Government Code (R.A. No. 7160) exempts government-owned real property from real property taxes unless its beneficial use is granted to a taxable person. While UCI, as the lessee, has beneficial use, the attempt to levy and auction the property was an improper method of collection. The Supreme Court has consistently held that property of public dominion is outside the commerce of man and cannot be sold at auction or levied upon.

Article 420 of the Civil Code defines properties of public dominion:

Art. 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges constructed by the State, banks, shores, roadsteads, and others of similar character;

(2) Those which belong to the State, without being for public use, and are intended for some public service or for the development of the national wealth.

Because the LPHI is a property of public dominion, it cannot be auctioned off, even if there are unpaid real property taxes. The City of Tacloban must pursue other legal means to collect the taxes from UCI, the taxable beneficial user, without selling the property.

As reiterated in Philippine Fisheries Development Authority v. Court of Appeals, while portions of government property leased to private entities may be subject to real property taxes, the property itself cannot be sold at public auction to satisfy tax delinquencies. The requirement of a surety bond is to ensure the payment of tax if the case is decided against the taxpayer. However, the Republic of the Philippines, being presumed solvent, need not provide such security. Therefore, the PMO, as a government agency, is exempt from the bond requirement. Since the PMO had already filed a surety bond, the Court ordered its release.

FAQs

What was the key issue in this case?	The key issue was whether the Privatization and Management Office (PMO), as a government agency, should be required to post a surety bond as a condition for suspending the collection of real property taxes.
What did the Court rule regarding the surety bond?	The Supreme Court ruled that government agencies are exempt from posting a surety bond, as the Republic of the Philippines is presumed solvent and capable of meeting its obligations.
Why was the City of Tacloban’s method of tax collection challenged?	The City’s method was challenged because it involved issuing a warrant of levy against property of public dominion, which cannot legally be sold at public auction.
Who is liable for the real property taxes in this case?	UCI, the private entity leasing the Leyte Park Hotel, is liable for the real property taxes due to its beneficial use of the property.
What is the significance of Article 420 of the Civil Code in this case?	Article 420 defines properties of public dominion, which are owned by the State and intended for public service or development of national wealth, and thus cannot be subject to public auction.
What is the effect of this ruling on other government agencies?	This ruling sets a precedent that other government agencies are also exempt from posting surety bonds in similar cases involving real property tax disputes.
What should the City of Tacloban do to collect the unpaid taxes?	The City must pursue other legal means to collect the taxes from UCI, the taxable beneficial user, without selling the property at public auction.
What was the basis for the Court’s decision to release the GSIS Surety Bond filed by the PMO?	The Court ordered the release of the bond because the PMO, as a government agency, was exempt from the bond requirement, making the previously filed bond unnecessary.

This decision provides clarity on the obligations of government agencies in real property tax disputes, ensuring they are not unduly burdened by requirements that contradict their inherent solvency. It also reinforces the protection of properties of public dominion from improper tax collection methods.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Privatization and Management Office v. Court of Tax Appeals, G.R. No. 211839, March 18, 2019