REPUBLIC OF THE PHILIPPINES AND THE COLLECTOR OF INTERNAL REVENUE, PLAINTIFFS AND APPELLANTS, VS. DEMETRIO MANJARES AND MANILA SURETY & FIDELITY CO. INC., DEFENDANTS AND APPELLEES.

Republic of the Philippines versus Manjares

The Case

This is a civil action brought by the Republic of the Philippines, through the Collector of Internal Revenue, against Demetrio Manjares and the Manila Surety and Fidelity Company, Incorporated, to recover the amount of a surety bond. The bond was executed to guarantee the payment, on installments, of internal revenue taxes that Manjares had failed to pay. The case matters because it draws a sharp line between a disputed tax assessment, which belongs to the Court of Tax Appeals, and an action to enforce a bond, which belongs to the regular courts. It is a favorite of examiners testing jurisdiction and prescription.

Procedural History

The Republic filed its complaint in the Justice of the Peace Court of Laoag, Ilocos Norte, in May 1955. That court rendered judgment in favor of the Republic, ordering both defendants to pay the amount of the bond jointly and severally, with legal interest from November 30, 1950, and the costs.

Both defendants appealed to the Court of First Instance of Ilocos Norte. The Manila Surety was declared in default, and its answer was expunged from the records. The trial court then issued an order remanding the case to the Court of Tax Appeals, on the view that it involved a disputed assessment of internal revenue taxes. On the Republic's motion for reconsideration, the trial court set that order aside and set the case for hearing on the merits. Later, upon Manjares's motion, the trial court again ordered the case certified and forwarded to the Court of Tax Appeals, invoking Section 22 in relation to Section 7, paragraph 1, of Republic Act Number 1125. The Provincial Fiscal's motion for reconsideration was denied, and the State took exception.

The case reached the Supreme Court on appeal from that order, with the State contending that the trial court erred in holding that it had no jurisdiction and in remanding the case to the Court of Tax Appeals.

Facts

In connection with the operation of his business from 1946 to 1949, Demetrio Manjares failed to pay taxes due to the Government, which as of August 1, 1949 had been computed at 1,920 pesos and 73 centavos. The Collector of Internal Revenue sent demand letters in August and October 1949, but Manjares ignored them. On October 6, 1950, the Collector issued a Warrant of Distraint and Levy upon Manjares's personal properties. The Municipal Treasurer of Laoag seized the properties and announced their public auction sale.

To prevent the sale, Manjares offered to execute a bond. On November 15, 1950, Manjares as principal and the Manila Surety and Fidelity Company, Incorporated as surety executed a bond in favor of the Philippine Government for the full sum of 1,920 pesos and 73 centavos, payable in five installments from November 30, 1950 to March 31, 1951. The bond provided that upon failure to pay the obligation or any installment, the entire amount would become due and demandable. The Collector approved the bond, and the seized properties were returned to Manjares.

From the approval of the bond until May 9, 1955, the defendants paid not a single centavo despite repeated demands. On May 9, 1955, the Assistant Provincial Fiscal of Ilocos Norte filed the complaint for recovery of the amount of the bond. Manjares answered, raising special defenses questioning how the taxes were incurred and invoking laches or prescription.

Issues

• Whether or not the Court of First Instance had jurisdiction over the action to recover on the bond, or whether the case fell within the exclusive appellate jurisdiction of the Court of Tax Appeals.
• Whether or not the action was barred by prescription, considering that the complaint was filed more than four years after the bond was executed.

Applicable Provisions

Section 7 of Republic Act Number 1125 defines the jurisdiction of the Court of Tax Appeals:

Section 7. Jurisdiction. The Court of Tax Appeals shall exercise exclusive appellate jurisdiction to review by appeal, as herein provided. (1) Decisions of the Collector of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under the National Internal Revenue Code or other law or part of law administered by the Bureau of Internal Revenue.

This provision limits the Tax Court to reviewing decisions of the Collector in disputed assessment cases, which this action is not.

Section 22 of the same law governs the remand of pending cases:

Section 22. Pending cases to be remanded to Court. All cases involving disputed assessments on Internal Revenue taxes or customs duties pending determination before the Court of First Instance shall be certified and remanded by the respective clerk of court to the Court of Tax Appeals for final disposition thereof.

This provision applies only to cases pending on June 16, 1954, when the law took effect, and only to disputed assessments.

Article 1144 of the Civil Code supplies the period for actions upon a written contract:

Upon a written contract, the action must be brought within ten years.

This governs the timeliness of the action, not the shorter periods of the Tax Code.

Ruling

On the first issue, the Court held that the Court of Tax Appeals has no jurisdiction over the case. No case involving a disputed assessment was pending in the Court of First Instance on June 16, 1954, when Republic Act Number 1125 took effect. More fundamentally, the case no longer referred to a disputed assessment but to the fulfillment of the terms of a bond. With the execution of the bond, the appellee had undertaken an entirely new obligation. The Court quoted with approval the rule that the new liability was voluntary and contractual, in form a direct and primary obligation not to pay a tax but to pay a fixed sum. The Court concluded that an action for the enforcement or performance of the obligations created by a bond should be presented in the regular courts.

On the second issue, the Court held that the statute of limitations under the Tax Code does not govern, but the Civil Code does. An action upon a written contract prescribes in ten years. The bond was executed on November 15, 1950, and the complaint was filed in the Justice of the Peace court in May 1955, well within the ten-year period. The defense of prescription therefore has no merit.

Doctrine

First, the Court of Tax Appeals has exclusive appellate jurisdiction only over decisions of the Collector of Internal Revenue in cases involving disputed assessments, refunds, and related matters. An action to enforce a surety bond executed to guarantee the payment of taxes is not a disputed assessment case. The bond creates a new and distinct contractual obligation, and actions to enforce it belong to the regular courts.

Second, Section 22 of Republic Act Number 1125 remands to the Tax Court only cases involving disputed assessments that were pending in the Court of First Instance on June 16, 1954. It does not reach cases filed or converted into bond-enforcement actions afterward.

Third, an action upon a written contract prescribes in ten years under Article 1144 of the Civil Code. The shorter prescriptive periods of the Tax Code do not apply to a bond that embodies a separate contractual undertaking.

Disposition

The Supreme Court set aside the order remanding the case to the Court of Tax Appeals and entered another returning the case to the court of origin for appropriate proceedings, without costs. The Republic prevailed on the jurisdictional question.

Remember This

The one line to memorize: a bond executed to answer for taxes creates a new and distinct contractual obligation, enforceable in the regular courts and governed by the ten-year prescriptive period for written contracts. Examiners use this case to test the boundary between the Court of Tax Appeals and the regular courts, and to test prescription in bond-enforcement actions.