SOCIAL SECURITY SYSTEM, PETITIONER, VS. CITY OF BACOLOD AND MIGUEL REYNALDO AS CITY TREASURER OF BACOLOD CITY, RESPONDENTS.

Social Security System versus City of Bacolod

The Case

This is a petition for review of a decision of the Court of First Instance of Negros Occidental sustaining the forfeiture of certain real properties of the Social Security System in favor of the City of Bacolod for delinquency in the payment of real estate taxes. The Social Security System, a government agency created under Republic Act No. 1161, sued the City of Bacolod and its city treasurer to nullify the forfeiture proceedings, claiming that its properties are exempt from realty taxes. The case matters because it settles a question every local taxation examinee must answer: whether property owned by the government, though devoted to proprietary or private purposes, is exempt from real estate taxes. The Court answers yes, and in doing so abandons the old distinction between constituent and ministrant functions for purposes of the exemption.

Procedural History

The Social Security System first protested the forfeiture by a letter to the City Mayor of Bacolod, through the city treasurer, asking for reconsideration on the ground that it is a government-owned and controlled corporation exempt from real estate taxes. When the city treasurer took no action, the System filed an action in the Court of First Instance of Negros Occidental for nullification of the forfeiture proceedings, and the trial court issued a writ of preliminary injunction upon the posting of a cash bond. After due hearing, the trial court dismissed the complaint, holding that the System does not fall under Section 29 of the Charter of the City of Bacolod and that no law exempts it from taxes. The System then brought the case to the Supreme Court by petition for review. The Supreme Court set aside the decision of the trial court.

Facts

The Social Security System is a government agency created under Republic Act No. 1161, whose primary function is to develop, establish gradually and perfect a social security system suitable to the needs of the people throughout the Philippines, and to provide protection against the hazards of disability, sickness, old age, and death. In pursuance of its operations, it maintains regional offices, one of which is the five-storey building known as the SSS Building in Bacolod City, occupying four parcels of land. In 1970, those lands and building were assessed for taxation at 1,744,840 pesos.

For failure to pay the realty taxes for the years 1968, 1969 and 1970, which including penalties amounted to 104,956 pesos and 6 centavos, the City of Bacolod sometime in early 1970 levied upon the lands and building, and on April 3, 1970, it declared the properties forfeited in its favor. The System protested by letter dated July 27, 1970 to the City Mayor, through the city treasurer, seeking reconsideration on the ground that being a government-owned and controlled corporation it is exempt from payment of real estate taxes.

When no action was taken by the city treasurer, the System filed an action in the Court of First Instance of Negros Occidental for nullification of the forfeiture proceedings, and sought a writ of preliminary injunction to restrain the city from consolidating its ownership over the forfeited properties. The writ was issued upon the posting of a cash bond of 105,000 pesos. After hearing, the trial court ruled that the properties were not exempt from real property tax because the System does not fall under Section 29 of the Charter of Bacolod, and that no law exempts it from taxes, so it should be taxed like any other corporation under Section 27 of the City Charter. It dismissed the complaint with costs.

Issues

• Whether or not the properties of the Social Security System in Bacolod City are exempt from real estate taxes under Section 29 of the Charter of the City of Bacolod.
• Whether or not the distinction between constituent and ministrant functions, as laid down in NACOCO versus Bacani, is relevant to the question of exemption of government-owned property from realty taxes.

Applicable Provisions

Section 29 of Commonwealth Act No. 326, the Charter of the City of Bacolod, provides:

SECTION 29. Exemption from taxation. - Lands and buildings owned by the United States of America, the Commonwealth of the Philippines, the City of Bacolod, the Province of Occidental Negros, and cemeteries, churches and their adjacent parsonages and convents, and lands, buildings and improvements used exclusively for religious, charitable, scientific or educational purposes, and not for profit, shall be exempt from taxation; but such exemptions shall not extend to lands or buildings held for investment, though the income therefrom be devoted to religious, charitable, scientific or educational purposes.

This is the provision under which the System claims exemption, and the Court holds that it contains no qualification as to the purpose for which government-owned lands and buildings are used.

Section 1 of Republic Act No. 104 provides:

All corporations, agencies, or instrumentalities owned or controlled by the government shall pay such duties, taxes, fees and other charges upon their transaction, business, industry, sale, or income as are imposed by law upon individuals, associations or corporations engaged in any taxable business, industry, or activity except on goods or commodities imported or purchased and sold or distributed for relief purposes as may be determined by President of the Philippines.

This provision imposes liability for legal fees on government-owned corporations, but the Court holds it does not govern the question of realty tax exemption of government-owned property.

Section 16 of Presidential Decree No. 24, amending the Social Security Act of 1954, provides:

SEC. 16. Exemption from tax, legal process, and lien. - All laws to the contrary notwithstanding, the SSS and all its assets, all contributions collected and all accruals thereto and income therefrom as well as all benefit payments and all papers or documents which may be required in connection with the operation or execution of this Act shall be exempt from any tax, assessment, fee, charge or customs or import duty; and all benefit payments made by the SSS shall likewise be exempt from all kinds of taxes, fees or charges, and shall not be liable to attachment, garnishments, levy or seizure by or under any legal or equitable process whatsoever, either before or after receipt by the person or persons entitled thereto, except to pay any debt of the covered employee to the SSS.

This provision, the Court notes, has already removed all doubts as to the exemption of the System from taxation.

Ruling

On the first issue, the Court ruled in favor of the Social Security System. The trial court had restricted the exemption in Section 29 of the Charter of Bacolod to government agencies exercising governmental or sovereign functions, relying on NACOCO versus Bacani and on the earlier ruling that the System performs proprietary functions. The Court held that the subject of inquiry is not whether a government corporation exercising ministrant or proprietary functions is exempt from legal fees, but whether the properties in question, concededly owned by the government, are exempt from realty taxes. It emphasized that Section 29 contains no qualification whatsoever in providing for the exemption of lands and buildings owned by the Commonwealth or Republic of the Philippines. When the legislature exempted government-owned lands and buildings from realty taxes, it intended a broad and comprehensive application of that mandate, regardless of whether the property is devoted to a governmental or a proprietary purpose.

On the second issue, the Court held that the distinction between constituent and ministrant functions has no relevance to the issue. What is decisive is that the properties possessed by the System, albeit devoted to a private or proprietary purpose, are in fact owned by the government of the Philippines. As such they are exempt from realty taxes. The Court stated the governing principle: when public property is involved, exemption is the rule and taxation is the exception. It also noted that Presidential Decree No. 24 has removed all doubts as to the exemption of the System from taxation.

Doctrine

First, lands and buildings owned by the Republic of the Philippines are exempt from real estate taxes under a charter provision that exempts such property without qualification, regardless of whether the property is devoted to a governmental or a proprietary purpose. The exemption is viewed from the standpoint of ownership, not of use.

Second, the constituent and ministrant distinction in NACOCO versus Bacani does not apply to the question of realty tax exemption of government-owned property. What controls is government ownership of the property, not the nature of the functions of the entity holding it.

Third, when public property is involved, exemption is the rule and taxation is the exception. A tax on government property would merely take money from one pocket to put it in another, and would not serve the purpose of taxation.

Fourth, Section 16 of Presidential Decree No. 24 expressly exempts the Social Security System and all its assets from any tax, assessment, fee or charge.

Disposition

The Supreme Court granted the petition, set aside the decision of the Court of First Instance of Negros Occidental, and cancelled the surety bond filed by the Social Security System.

Remember This

Memorize the line: when public property is involved, exemption is the rule and taxation is the exception, and the exemption of government-owned lands and buildings does not depend on whether they are used for governmental or proprietary purposes. Examiners use this case to test the realty tax exemption of government-owned property and to show that the constituent and ministrant distinction has been abandoned for that purpose.