Digested Cases in Taxation (on Assessment, Levy and Distraint, and Statute of Limitations)

CIR vs. CA, Atlas Consolidated242 SCRA 289GR No. 104151 March 10, 1995"Assessments are prima facie presumed correct and made in good faith. So that, in the absence of proof of any irregularities in the performance of official duties, an assessment will not be disturbed." FACTS: The Commissioner of Internal Revenue served two notices and demand for payment of the respective deficiency ad valorem and buiness taxes for taxable years 1975 and 1976 against the respondent Atlas Consolidated Mining and Development Corporation (ACMDC). The latter protested both assessments but the same were denied, hence it filed two separate petitions for review in the Court of Tax Appeals. The CTA rendered a consolidated decision holding, inter alia, that ACMDC was not liable for deficiency ad valorem taxes on copper and silver for 1975 and 1976 thereby effectively sustaining the theory of ACMDC that in computing the ad valorem tax on copper mineral, the refining and smelting charges should be deducted, in addition to freight and insurance charges. However, the tax court held ACMDC liable for the amount consisting of 25% surcharge for late payment of the ad valorem tax and late filing of notice of removal of silver, gold and pyrite extracted during certain periods, and for alleged deficiency manufacturer's sales tax and such contractor's tax for leasing out of its personal properties. ACDMC elevated the matter to the Supreme Court claiming that the leasing out was a mere isolated transaction, hence should not be subjected to contractor's tax. ISSUE: Is the claim of the private respondent, with respect to the contractor's tax, impressed with merit? HELD: No. It is being held that ACMDC was not a manufacturer subject to the percentage tax imposed by Section 186 of the tax code. However such conclusion cannot be made with respect to the contractor's tax being imposed on ACMDC. It cannot validly claim that the leasing out of its personal properties was merely an isolated transaction. Its book of accounts shows that several distinct payments were made for the use of its personal properties such as its plane, motor boat and dump truck. The series of transactions engaged in by ACMDC for the lease of its aforesaid properties could also be deduced from the fact that during the period there were profits earned and reported therefor. The allegation of ACMDC that it did not realize any profit from the leasing out of its said personal properties, since its income therefrom covered only the costs of operation such as salaries and fuel, is not supported by any documentary or substantial evidence. Assessments are prima facie presumed correct and made in good faith. Contrary to the theory of ACMDC, it is the taxpayer and not the BIR who has the duty of proving otherwise. It is an elementary rule that in the absence of proof of any irregularities in the performance of official duties, an assessment will not be disturbed. All presumptions are in favor of tax assessments. Verily, failure to present proof of error in assessments will justify judicial affirmance of said assessment.

REPUBLIC vs. CA, and NIELSON & CO.,INC.149 SCRA 351GR No. L-38540 April 30, 1987"The follow-up letter reiterating demand for payment could be considered a notice of assessment in itself if duly received by the taxpayer."

FACTS: The petitioner sought the review on certiorari of the decision of the respondent Court of Appeals reversing the decision of the then Court of First Instance of Manila which ordered private respondent Nielson & Co., Inc. to pay the Government the amount of P11,496.00 as ad valorem tax, occupation fees, additional residence tax and 25% surcharge for late payment, for the years 1949 to 1952. Petitioner claims that the demand letter of 16 July 1955 showed an imprint indicating that the original thereof was released and mailed on 4 August 1955 by the Chief, Records Section of the Bureau of Internal Revenue, and that the original letter was not returned to said Bureau; thus, said demand letter must be considered to have been received by the private respondent. According to petitioner, if service is made by ordinary mail, unless the actual date of receipt is shown, service is deemed complete and effective upon the expiration of five (5) days after mailing. As the letter of demand dated 16 July 1955 was actually mailed to private respondent, there arises the presumption that the letter was received by private respondent in the absence of evidence to the contrary. More so, where private respondent did not offer any evidence, except the self-serving testimony of its witness, that it had not received the original copy of the demand letter dated 16 July 1955. ISSUE: Was notice of assessment or demand properly served to the respondent? Should the receipt by the respondent of the succeeding follow-up demand notices be construed as receipt of the original demand? HELD: As to the first issue, no. As correctly observed by the respondent court in its appealed decision, while the contention of petitioner is correct that a mailed letter is deemed received by the addressee in the ordinary course of mail, still this is merely a disputable presumption, subject to controversion, and a direct denial of the receipt thereof shifts the burden upon the party favored by the presumption to prove that the mailed letter was indeed received by the addressee. Since petitioner has not adduced proof that private respondent had in fact received the demand letter of 16 July 1955, it can not be assumed that private respondent received said letter. As to the second issue, Yes. Records show that petitioner wrote private respondent a follow-up letter dated 19 September 1956, reiterating its demand for the payment of taxes as originally demanded in petitioner's letter dated 16 July 1955. This follow-up letter is considered a notice of assessment in itself which was duly received by private respondent in accordance with its own admission. And consequently, under Section 7 of Republic Act No. 1125, the assessment is appealable to the Court of Tax Appeals within thirty (30) days from receipt of the letter. The taxpayer's failure to appeal in due time, as in the case at bar, makes the assessment in question final, executory and demandable. Thus, private respondent is now barred from disputing the correctness of the assessment or from invoking any defense that would reopen the question of its liability on the merits.

COLLECTOR OF INTERNAL REVENUE vs. VDA. DE CODIÑERA102 PHIL 1165GR No. L-9675, September 28, 1957"The property levied by a competent court may, with the consent thereof, be distrained, subject to the prior lien of the attachment creditor." FACTS: The Collector of Internal Revenue sent a warrant of distraint and levy against the properties of Restituto Codiñera for collection of certain deficiency specific tax. However, it could not be effected in view of the attachment of the said properties of the CFI-Manila of another case. After seven years, the Collector of Internal Revenue issued a warrant of distraint and levy commanding the City Treasurer of Cebu City to distrain

the goods, chattels, or effects and other personal property of whatever character, and levy upon the real property and interest in or rights to real property of the estate of the deceased. The heirs of the deceased filed the action with the CTA barring the government to collect said deficiency on the ground of prescription therefore praying to declare null and void, and of no legal force and effect the warrant of distraint and levy which the respondent issued on March 7, 1955. ISSUE: Does the attachment made by a court in a civil case over certain properties of a taxpayer bar the government from enforcing a warrant of distraint and levy over the aforesaid properties in order to collect the taxes due? HELD: No. There may be a valid reason for non-distraint of the property which was due to the attachment of the CFI-Manila in another case. However, such property levied by a competent court may, with the consent thereof, be subsequently distrained, subject to the prior lien of the attachment creditor. The attachment merely deprives the Collector of Internal Revenue the power to divest the Court of its jurisdiction over said property but it does not impair such rights as the Government may have for the collection of taxes.

MAMBULAO LUMBER CO. vs. REPUBLIC132 SCRA 1GR No. L-37061, September 5, 1984"Forest charges are internal revenue taxes and the BIR has the sole power and duty to collect them. Thus, an assessment made by the Bureau of Forestry cannot be considered an assessment made by the BIR." FACTS: The Bureau of Forestry sent a demand letter dated January 15, 1949 to Mambulao Lumber Co. demanding for the payment of forest charges and surcharges. Mambulao protested the assessment. On August 29,1958, the BIR likewise wrote a letter to the company demanding payment, which subsequently requested reinvestigation. The BIR gave the company twenty (20) days from receipt within which to submit the results of its verification of payments. For failure to comply and failure to pay its tax liability despite demands, CIR filed a complaint for collection with CFI-Manila on August 25, 1961. The CFI-Manila and Court of Appeals decided against Mambulao ordering it to pay the tax liability. Petitioner argued that the collection is barred by the statute of limitations under Sections 332 of the NIRC. As stated, the collection should be made within the five (5) year period. From 1949 (date when the Bureau of Forestry assessed and demand payment as forestry charges and surcharges) up to 1961 (date of filing of complaint), it is already more than five years. ISSUE: Has the period of filing of collection complaint prescribed? HELD: No. The action for collection is not barred by prescription. The basis of the complaint filed on August 1961 was the demand letter made by the CIR on August 29, 1958 and not the demand letter of the Bureau of Forestry on January 1949. So that the reckoning date of the 5-year period should be from the date of the BIR letter and not that of the Bureau of Forestry. This must be so because forest charges are internal revenue taxes and the BIR has the sole power and duty to collect them.

REPUBLIC vs. ARANETA2 SCRA 144GR No. L-14142, May 30, 1961"Where the tax obligation is secured by a bond, the prescriptive period for the action for the forfeiture of the bond is governed by the Civil Code."

FACTS: The Solicitor General, in behalf of the Republic of the Philippines, filed before CFI of Manila an action against the defendant Araneta, as principals, and Manila Surety, as surety, to recover the internal revenue taxes including surcharges, the payment of which was guaranteed by a bond executed when the first extrajudicial demand for payment was made. The appellant-taxpayers contend that the appellee's cause of action has prescribed, because the action for recovery of internal revenue taxes and surcharge due brought on 22 February 1957, was not commenced within the period of five years after the assessment dated 15 May 1948 had been made, as provided for in Section 331 of the Tax Code. ISSUE: Has the action to recover the taxes due from the taxpayer and the surety already prescribed? HELD: No. The appellant-taxpayers cannot invoke prescription under the provisions of Section 331 of the NIRC because the government is suing on the bond executed and filed by them to guarantee payment in 6 monthly installments of the tax liability due from 1946 to 1948, which is a separate and distinct obligation of the parties thereto. The action to enforce the obligation on the bond executed on March 18, 1949, having been filed in court on February 22, 1957, was within the 10-year prescriptive period to enforce a written contractual obligation, as set by the Civil Code. MARCOS II vs. CA273 SCRA 47GR No. 120880, June 5, 1997"The approval of the court sitting in probate is not a mandatory requirement in the collection of estate taxes.""In case of failure to file a return, the tax may be assessed at anytime within 10 years after the omission." FACTS: Bongbong Marcos sought for the reversal of the ruling of the Court of Appeals to grant CIR's petition to levy the properties of the late Pres. Marcos to cover the payment of his tax delinquencies during the period of his exile in the US. The Marcos family was assessed by the BIR after it failed to file estate tax returns. However the assessment were not protested administratively by Mrs. Marcos and the heirs of the late president so that they became final and unappealable after the period for filing of opposition has prescribed. Marcos contends that the properties could not be levied to cover the tax dues because they are still pending probate with the court, and settlement of tax deficiencies could not be had, unless there is an order by the probate court or until the probate proceedings are terminated. Petitioner also pointed out that applying Memorandum Circular No. 38-68, the BIR's Notices of Levy on the Marcos properties were issued beyond the allowed period, and are therefore null and void. ISSUE: Are the contentions of Bongbong Marcos correct? HELD: No. The deficiency income tax assessments and estate tax assessment are already final and unappealable -and-the subsequent levy of real properties is a tax remedy resorted to by the government, sanctioned by Section 213 and 218 of the National Internal Revenue Code. This summary tax remedy is distinct and separate from the other tax remedies (such as Judicial Civil actions and Criminal actions), and is not affected or precluded by the pendency of any other tax remedies instituted by the government. The approval of the court, sitting in probate, or as a settlement tribunal over the deceased's estate is not a mandatory requirement in the collection of estate taxes. On the contrary, under Section 87 of the NIRC, it is the probate or settlement

court which is bidden not to authorize the executor or judicial administrator of the decedent's estate to deliver any distributive share to any party interested in the estate, unless it is shown a Certification by the Commissioner of Internal Revenue that the estate taxes have been paid. This provision disproves the petitioner's contention that it is the probate court which approves the assessment and collection of the estate tax. On the issue of prescription, the omission to file an estate tax return, and the subsequent failure to contest or appeal the assessment made by the BIR is fatal to the petitioner's cause, as under Sec.223 of the NIRC, in case of failure to file a return, the tax may be assessed at anytime within 10 years after the omission, and any tax so assessed may be collected by levy upon real property within 3 years (now 5 years) following the assessment of the tax. Since the estate tax assessment had become final and unappealable by the petitioner's default as regards protesting the validity of the said assessment, there is no reason why the BIR cannot continue with the collection of the said tax.

REPUBLIC vs. HIZON320 SCRA 574GR No. 130430, December 13, 1999"A request for reconsideration of the tax assessment does not effectively suspend the running of the precriptive period if the same is filed after the assessment had become final and unappealable." FACTS: On July 18, 1986, the BIR issued to respondent Salud V. Hizon a deficiency income tax assessment covering the fiscal year 1981-1982. Respondent not having contested the assessment, petitioner BIR, on January 12, 1989, served warrants of distraint and levy to collect the tax deficiency. However, for reasons not known, it did not proceed to dispose of the attached properties. More than three years later, the respondent wrote the BIR requesting a reconsideration of her tax deficiency assessment. The BIR, in a letter dated August 11, 1994, denied the request. On January 1, 1997, it filed a case with the RTC to collect the tax deficiency. Hizon moved to dismiss the case on two grounds: (1) that the complaint was not filed upon authority of the BIR Commissioner as required by Sec. 221 of the NIRC, and (2) that the action had already prescribed. Over petitioner's objection, the trial court granted the motion and dismissed the complaint. BIR on the other hand contends that respondent's request for reinvestigation of her tax deficiency assessment on November 1992 effectively suspended the running of the period of prescription. ISSUE: Has the action for collection of the tax prescribed? HELD: Yes. Sec. 229 of the NIRC mandates that a request for reconsideration must be made within 30 days from the taxpayer's receipt of the tax deficiency assessment, otherwise the assessment becomes final, unappealable and, therefore, demandable. The notice of assessment for respondent's tax deficiency was issued by petitioner on July 18, 1986. On the other hand, respondent made her request for reconsideration thereof only on November 3, 1992, without stating when she received the notice of tax assessment. Hence, her request for reconsideration did not suspend the running of the prescriptive period provided under Sec. 223(c). Although the Commissioner acted on her request by eventually denying it on August 11, 1994, this is of no moment and does not detract from the fact that the assessment had long become demandable.

CIR vs. VILLA22 SCRA 3GR No. L-23988, January 2, 1968

"What may be the subject of a judicial review is the decision of the Commissioner on the protest against assessment, not the assessment itself." FACTS: The spouses Villa filed joint income tax returns for the years 1951 to 1956. The BIR issued assessments for deficiency of income tax for the said years. Without contesting the said assessments with the CIR, they filed a petition for review with the CTA. The CTA took cognizance of the of the appeal and rendered favorable judgment to the spouses. The CIR appealed to the SC questioning the jurisdiction of the CTA. ISSUE: Is an appeal to the CTA proper in this case? Is the CTA vested with jurisdiction? HELD: No. The rule is that where a taxpayer questions an assessment and asks the Collector to reconsider or cancel the same because he (the taxpayer) believes he is not liable therefor, the assessment becomes a "disputed assessment" that the Collector must decide, and the taxpayer can appeal to the Court of Tax Appeals only upon receipt of the decision of the Collector on the disputed assessment. Since in the instant case the taxpayer appealed the assessment of the Commissioner of Internal Revenue without previously contesting the same, the appeal was premature and the Court of Tax Appeals had no jurisdiction to entertain said appeal. For, as stated, the jurisdiction of the Tax Court is to review by appeal decisions of Internal Revenue on disputed assessments. The Tax Court is a court of special jurisdiction. As such, it can take cognizance only of such matters as are clearly within its jurisdiction.

UNGAB vs. CUSI97 SCRA 877GR No. L-41919-24 May 30, 1980“An assessment of a deficiency is not necessary to a criminal prosecution for wilful attempt to defeat and evade the income tax."

FACTS: The BIR filed six criminal charges against Quirico Ungab, a banana saplings producer, for allegedly evading payment of taxes and other violations of the NIRC. Ungab, subsequently filed a motion to quash on the ground that (1) the information are null and void for want of authority on the part of the State Prosecutor to initiate and prosecute the said cases; and (2)that the trial court has no jurisdiction to take cognizance of the case in view of his pending protest against the assessment made by the BIR examiner. The trial court denied the motion prompting the petitioner to file a petition for certiorari and prohibition with preliminary injunction and restraining order to annul and set aside the information filed.

ISSUE: Is the contention that the criminal prosecution is premature since the CIR has not yet resolved the protest against the tax assessment tenable?

HELD: No. The contention is without merit. What is involved here is not the collection of taxes where the assessment of the Commissioner of Internal Revenue may be reviewed by the Court of Tax Appeals, but a criminal prosecution for violations of the National Internal Revenue Code which is within the cognizance of courts of first instance. While there can be no civil action to enforce collection before the assessment procedures provided in the Code have been followed, there is no requirement for the precise computation and assessment of the tax before there can be a criminal prosecution under the Code. An assessment of a deficiency is not necessary to a criminal prosecution for wilful attempt to defeat and evade the income tax. A crime is complete when the violator has knowingly and wilfully filed a fraudulent return with intent to evade and defeat

the tax. The perpetration of the crime is grounded upon knowledge on the part of the taxpayer that he has made an inaccurate return, and the government's failure to discover the error and promptly to assess has no connections with the commission of the crime.

CIR vs. PASCOR309 SCRA 402GR No. 128315 June 29, 1999 "An assessment is not necessary before a criminal charge can be filed."

FACTS: The BIR examined the books of account of Pascor Realty and Devt Corp for years 1986, 1987 and 1988, from which a tax liability of 10.5 Million Pesos was found. Based on the recommendations of the examiners, the CIR filed an information with the DOJ for tax evasion against the officers of Pascor. Upon receipt of the subpoena, the latter filed an urgent request for reconsideration/reinvestigation with the CIR, which was immediately denied upon the ground that no formal assessment has yet been issued by the Commisioner. Pascor elevated the CIR's decision to the CTA on a petition for review. The CIR filed a Motion to Dismiss on the ground of lack of jurisdiction of CTA as there was no formal assessment made against the respondents. The CTA dismissed the motion, hence this petition.

ISSUE: Is a formal assessment necessary in the filing of a criminal complaint?

HELD: No. Section 222 of the NIRC states that an assessment is not necessary before a criminal charge can be filed. This is the general rule. Private respondents failed to show that they are entitled to an exception. Moreover, the criminal charge need only be supported by a prima facie showing of failure to file a required return. This fact need not be proven by an assessment. The issuance of an assessment must be distinguished from the filing of a complaint. Before an assessment is issued, there is, by practice, a pre-assessment notice sent to the taxpayer. The taxpayer is then given a chance to submit position papers and documents to prove that the assessment is unwarranted. If the commissioner is unsatisfied, an assessment signed by him or her is then sent to the taxpayer informing the latter specifically and clearly that an assessment has been made against him or her. In contrast, the criminal charge need not go through all these. The criminal charge is filed directly with the DOJ. Thereafter, the taxpayer is notified that a criminal case had been filed against him, not that the commissioner has issued an assessment. It must be stressed that a criminal complaint is instituted not to demand payment, but to penalize the taxpayer for violation of the Tax Code.

CIR V NLRC GR No. 74965, November 3, 1994Facts: On January 12, 1984, the CIR demanded payment from private respondent Maritime Company of the Philippines of deficiency common carrier’s tax, fixed tax, 6% commercial broker’s tax, documentary stamp tax, income tax and withholding tax totaling P17,284,882.45. The assessment became final and executory, and with private respondent’s failure to pay the tax liabilities, the CIR issued warrants of distraint of personal property and levy of real property which were duly served on January 23, 1985. On April 16, 1985, a “receipt of goods, articles and things” was executed covering, among others, 6 barges as proof of constructive distraint of property but the same was not signed by any representative of private respondent because of the refusal of the persons actually in possession of the barges.

It appeared that 4 of the barges constructively distrained were also levied upon by a deputy sheriff of Manila on July 20, 1985

and sold at public auction to satisfy a judgment for unpaid wages and other benefits of employees of private respondent.

Issue: Who has a preferential lien over the barges, the Government or the company’s employees?

Held: The court held that it is the government which has preferential lien over the barges under Articles 2241 and 2247 of the Civil Code. Accordingly, the preferential lien of employees for unpaid wages under Article 110 of the Labor Code applies only to bankruptcy cases where the employer is under liquidation due to bankruptcy.

The NIRC provides for the collection of delinquent taxes by any of the following remedies: a) distraint of personal property or levy of real property of the delinquent taxpayer; b) civil or criminal action.

The court upheld the validity of distraint of the barges against the levy on execution and the claim of the Government predicated on a tax lien is superior to the claim of a private litigant predicated on a judgment. The tax lien attaches not only from the service of the warrant of distraint of personal property but from the time the tax became due and payable. Besides, the distraint on the subject properties of Maritime Company of the Philippines as well as the notice of their seizure were made by petitioner, through the CIR, a long before the writ of execution was issued by RTC-Manila, Branch 31. There is no question then that at the time the writ of execution was issued, the two (2) barges, MCP-1 and MCP-4, were no longer properties of the Maritime Company of the Philippines. The power of the court in execution of judgment extends only to properties unquestionably belonging to the judgment debtor. Execution sales affect the rights of the judgment debtor only, and the purchaser in auction sale requires only such rights as the judgment debtor had tat the time of the sale. It is also well settled that the sheriff is not authorized to attach or levy on property not belonging to the judgment debtor.

UNGAB vs. CUSI97 SCRA 877GR No. L-41919-24 May 30, 1980“An assessment of a deficiency is not necessary to a criminal prosecution for wilful attempt to defeat and evade the income tax."

FACTS: The BIR filed six criminal charges against Quirico Ungab, a banana saplings producer, for allegedly evading payment of taxes and other violations of the NIRC. Ungab, subsequently filed a motion to quash on the ground that (1) the information are null and void for want of authority on the part of the State Prosecutor to initiate and prosecute the said cases; and (2)that the trial court has no jurisdiction to take cognizance of the case in view of his pending protest against the assessment made by the BIR examiner. The trial court denied the motion prompting the petitioner to file a petition for certiorari and prohibition with preliminary injunction and restraining order to annul and set aside the information filed.

ISSUE: Is the contention that the criminal prosecution is premature since the CIR has not yet resolved the protest against the tax assessment tenable?

HELD: No. The contention is without merit. What is involved here is not the collection of taxes where the assessment of the Commissioner of Internal Revenue may be reviewed by the Court of Tax Appeals, but a criminal prosecution for violations of the National Internal Revenue Code which is within the cognizance of courts of first instance. While there can be no civil action to enforce collection before the assessment procedures provided in the Code have been followed, there is no

requirement for the precise computation and assessment of the tax before there can be a criminal prosecution under the Code. An assessment of a deficiency is not necessary to a criminal prosecution for wilful attempt to defeat and evade the income tax. A crime is complete when the violator has knowingly and wilfully filed a fraudulent return with intent to evade and defeat the tax. The perpetration of the crime is grounded upon knowledge on the part of the taxpayer that he has made an inaccurate return, and the government's failure to discover the error and promptly to assess has no connections with the commission of the crime.

CIR vs. PASCOR309 SCRA 402GR No. 128315 June 29, 1999 "An assessment is not necessary before a criminal charge can be filed."

FACTS: The BIR examined the books of account of Pascor Realty and Devt Corp for years 1986, 1987 and 1988, from which a tax liability of 10.5 Million Pesos was found. Based on the recommendations of the examiners, the CIR filed an information with the DOJ for tax evasion against the officers of Pascor. Upon receipt of the subpoena, the latter filed an urgent request for reconsideration/reinvestigation with the CIR, which was immediately denied upon the ground that no formal assessment has yet been issued by the Commisioner. Pascor elevated the CIR's decision to the CTA on a petition for review. The CIR filed a Motion to Dismiss on the ground of lack of jurisdiction of CTA as there was no formal assessment made against the respondents. The CTA dismissed the motion, hence this petition.

ISSUE: Is a formal assessment necessary in the filing of a criminal complaint?

HELD: No. Section 222 of the NIRC states that an assessment is not necessary before a criminal charge can be filed. This is the general rule. Private respondents failed to show that they are entitled to an exception. Moreover, the criminal charge need only be supported by a prima facie showing of failure to file a required return. This fact need not be proven by an assessment. The issuance of an assessment must be distinguished from the filing of a complaint. Before an assessment is issued, there is, by practice, a pre-assessment notice sent to the taxpayer. The taxpayer is then given a chance to submit position papers and documents to prove that the assessment is unwarranted. If the commissioner is unsatisfied, an assessment signed by him or her is then sent to the taxpayer informing the latter specifically and clearly that an assessment has been made against him or her. In contrast, the criminal charge need not go through all these. The criminal charge is filed directly with the DOJ. Thereafter, the taxpayer is notified that a criminal case had been filed against him, not that the commissioner has issued an assessment. It must be stressed that a criminal complaint is instituted not to demand payment, but to penalize the taxpayer for violation of the Tax Code.

CIR V NLRC GR No. 74965, November 3, 1994Facts: On January 12, 1984, the CIR demanded payment from private respondent Maritime Company of the Philippines of deficiency common carrier’s tax, fixed tax, 6% commercial broker’s tax, documentary stamp tax, income tax and withholding tax totaling P17,284,882.45. The assessment became final and executory, and with private respondent’s failure to pay the tax liabilities, the CIR issued warrants of distraint of personal property and levy of real property which were duly served on January 23, 1985. On April 16, 1985, a “receipt of goods, articles and things” was executed covering, among others, 6 barges as proof of constructive distraint of

property but the same was not signed by any representative of private respondent because of the refusal of the persons actually in possession of the barges.

It appeared that 4 of the barges constructively distrained were also levied upon by a deputy sheriff of Manila on July 20, 1985 and sold at public auction to satisfy a judgment for unpaid wages and other benefits of employees of private respondent.

Issue: Who has a preferential lien over the barges, the Government or the company’s employees?

Held: The court held that it is the government which has preferential lien over the barges under Articles 2241 and 2247 of the Civil Code. Accordingly, the preferential lien of employees for unpaid wages under Article 110 of the Labor Code applies only to bankruptcy cases where the employer is under liquidation due to bankruptcy.

The NIRC provides for the collection of delinquent taxes by any of the following remedies: a) distraint of personal property or levy of real property of the delinquent taxpayer; b) civil or criminal action.

The court upheld the validity of distraint of the barges against the levy on execution and the claim of the Government predicated on a tax lien is superior to the claim of a private litigant predicated on a judgment. The tax lien attaches not only from the service of the warrant of distraint of personal property but from the time the tax became due and payable. Besides, the distraint on the subject properties of Maritime Company of the Philippines as well as the notice of their seizure were made by petitioner, through the CIR, a long before the writ of execution was issued by RTC-Manila, Branch 31. There is no question then that at the time the writ of execution was issued, the two (2) barges, MCP-1 and MCP-4, were no longer properties of the Maritime Company of the Philippines. The power of the court in execution of judgment extends only to properties unquestionably belonging to the judgment debtor. Execution sales affect the rights of the judgment debtor only, and the purchaser in auction sale requires only such rights as the judgment debtor had tat the time of the sale. It is also well settled that the sheriff is not authorized to attach or levy on property not belonging to the judgment debtor.