CITY OF BAGUIO, PLAINTIFF-APPELLEE, VS. FERNANDO S. BUSUEGO, DEFENDANT-APPELLANT.

City of Baguio versus Busuego

The Case

This is a tax collection suit. The City of Baguio sued Fernando S. Busuego, an installment purchaser of a parcel of land with its building and improvements inside a housing project of the Government Service Insurance System, to collect unpaid realty taxes on that property. The purchaser resisted on a single theory: the seller, the Government Service Insurance System, is exempt from all taxes under its charter, and title had not yet passed to him, so no tax could be demanded of him. The case matters because it draws the line between the tax exemption of a government-owned corporation and the tax liability of the private person to whom it has granted the beneficial use of its property. It is the classic illustration of the rule that tax exemptions are construed strictly against the taxpayer and liberally in favor of the taxing authority.

Procedural History

The City of Baguio filed the collection suit in the City Court of Baguio. The parties submitted the case for consideration on a stipulation of facts. The city court rendered judgment in favor of the City of Baguio, ordering the defendant to pay the realty taxes with legal interest from the filing of the complaint. The defendant appealed to the Court of First Instance of Baguio. That court concluded that the contract between the parties was a perfected contract of sale, held that the defendant as owner was liable for the realty taxes, and ordered him to pay the same amount, with legal interest, deducting the amount he had already paid for the year 1963. The case then reached the Supreme Court on appeal, and the Supreme Court affirmed the decisions below.

Facts

On August 11, 1959, Fernando S. Busuego and the Government Service Insurance System, a government corporation, executed a Contract to Sell over a parcel of land and its building and improvements within a housing project of the System. Under the contract, the purchaser agreed to pay and shoulder all taxes and assessments on the lot and the building or improvements thereon, and the insurance, during the term of the contract. Possession was delivered to the purchaser, but title remained with the System until full payment of the purchase price, after which the System undertook to execute a final deed of absolute sale and deliver a Torrens title.

The purchase price was never fully paid, and the System retained title up to the time of the case. The property was consistently assessed by the City of Baguio in the name of the System. Under its charter, Commonwealth Act Number 186, the System and its property are exempt from all types and kinds of taxes. The purchaser voluntarily paid realty taxes for the year 1963 in the amount of 287 pesos and 80 centavos, then demanded a refund upon discovering the exemption. The unpaid realty taxes for the period from 1962 to 1966 amounted to 1,656 pesos. Demands were made on the purchaser, and he refused and failed to pay.

Before the courts, the purchaser argued that since title had not passed to him and ownership remained with the seller, and the owner-seller is exempt from taxes, no obligation to pay taxes could be assumed by him as purchaser. The courts below rejected this defense, and the case went up to the Supreme Court.

Issues

• Whether or not the installment purchaser is liable to pay realty taxes on the property from the time possession was transferred to him, although title remained with the exempt seller pending full payment of the purchase price.
• Whether or not the contractual stipulation obliging the purchaser to pay and shoulder all taxes and assessments on the property is valid and binding, notwithstanding the seller's tax exemption.
• Whether or not the tax exemption of the Government Service Insurance System extends to the property the beneficial use of which has been granted to a taxable person.

Applicable Provisions

Section 28, paragraph c, of Commonwealth Act Number 186, the charter of the Government Service Insurance System, provides:

Except as otherwise herein provided, the GSIS, all benefits granted under this Act, and its forms and documents required of the members shall be exempt from all types of taxes, documentary stamps, duties and contributions, fiscal or municipal, direct or indirect, established or to be established.

This is the exemption invoked by the purchaser, and the Court holds that it belongs to the System and does not pass to the private person granted the beneficial use of the property.

Section 40, paragraph a, of Presidential Decree Number 464, the Real Property Tax Code, provides:

Real property owned by the Republic of the Philippines or any of its political subdivisions and any government-owned corporation so exempt by its charter; Provided, however, That this exemption shall not apply to real property of the above-named entities the beneficial use of which has been granted, for consideration or otherwise, to a taxable person.

Although this decree did not yet exist when the taxes at issue were assessed, the Court uses it to shed light on the legislative intent behind the charter exemption, and under it the property is not exempt because its beneficial use was granted to a taxable person.

Ruling

On the first issue, the Court held the purchaser liable for the realty taxes from the time possession was transferred to him. The Court affirmed the result below even while noting that the Court of First Instance may have erred in calling the Contract to Sell a perfected contract of sale, since by its very terms title remained with the seller until completion of the stipulated payments. That error was not decisive. What was determinative was that the purchaser had the possession, use, and control of the property, and all the other attributes of ownership short of naked ownership, so that nothing was left to the System except its right to receive full payment of the purchase price.

On the second issue, the Court held the contractual stipulation valid and binding. The purchaser agreed to pay and shoulder all taxes and assessments on the property during the term of the contract, and having accepted that condition he is estopped to deny his liability. The Court said such a stipulation is valid and binding, absent any law to the contrary, and none was cited by the appellant.

On the third issue, the Court held that the exemption does not extend to the property in the hands of the purchaser. When the System sold the property and imposed the condition, the agency, although exempt from the payment of taxes, clearly indicated that the property became taxable upon its delivery to the purchaser. The Court stressed that the sole determinative factor for exemption from realty taxes is the use to which the property is devoted, and where use is the test, ownership is immaterial. The Court also gave great weight to the System's own interpretation, as the administrative agency charged with administering and enforcing its charter, that its immunity was not to be transmitted to a private person who becomes the beneficial owner and user of the property. The Court closed with the established rule in taxation that exemptions are held strictly against the taxpayer and liberally in favor of the taxing authority.

Doctrine

A tax exemption is personal to the entity on which the law confers it and is construed strictly against the taxpayer and liberally in favor of the taxing authority. Where the test of exemption from realty taxes is the use of the property, ownership is immaterial; the private person granted the beneficial use of exempt property is taxable on it. An installment purchaser who stipulates to pay and shoulder all taxes and assessments on the property during the term of the contract is bound by that stipulation and is estopped to deny liability, even though the seller who retained title is exempt. Under Section 40, paragraph a, of Presidential Decree Number 464, the exemption does not apply to real property of exempt entities the beneficial use of which has been granted, for consideration or otherwise, to a taxable person.

Disposition

The Supreme Court affirmed the appealed judgment holding the purchaser liable for the realty taxes, without pronouncement as to costs.

Remember This

The one line to memorize: the tax exemption of a government-owned corporation does not extend to the property whose beneficial use it has granted to a taxable person, for use and not ownership determines the exemption. Examiners use this case to test the strict construction of tax exemptions and the liability of installment purchasers of government-owned property for realty taxes.