LUZ YAMANE (petitioner) v BA LEPANTO CONDOMINIUM CORPORATION (respondent) October 25 2005 | Tinga, J. | Leigh Local Taxation SUPERFACTS!

The city treasurer imposed taxes on Lepanto, a corporation that owned a condominium, saying that because Lepanto collected assessments for operating expenses for the common areas of the condominium, Lepanto was actually engaged in business. The SC ruled that Lepanto was not organized for profit. The fees it was collecting from the condominium unit owners redound to the owners themselves because the fees collected are being used for the maintenance of the condo. Further, it appears that the assessment issued by the city treasurer did not state the legal basis for the tax being imposed on Lepanto it merely states that Makati is authorized to collect business taxes under the LGC, but no other reference specific reference to specific laws were cited.

FACTS: BA Lepanto Condominium Corporation (Lepanto) owns title over BA-Lepanto Condominium, and is authorized by its by-laws to collect regular assessments from its members for operating expenses, capital expenditures on common areas, and other special assessements. In 1998, it received a tax assessment in the amount of P1,601,013.77 from Luz Yamane, the City Treasurer of Makati, for business taxes for the years 1995-1997. The notice of assessment was silent as to the statutory basis of the business taxes assessed. Lepanto protested the assessment, saying that:

The Assessment has no basis as the Corporation is not liable for business taxes and surcharges and interest thereon, under the Makati [Revenue] Code or even under the [Local Government] Code (LGC). The Makati [Revenue] Code and the LGC do not contain any provisions on which the Assessment could be based. One might argue that Sec. 3A.02(m) of the Makati [Revenue] Code imposes business tax on owners or operators of any business not specified in the said code. We submit, however, that this is not applicable to the Corporation as it is not an owner or operator of any business in the contemplation of the Makati [Revenue] Code and even the LGC.

Proceeding from the premise that its tax liability arose from Section 3A.02(m) of the Makati Revenue Code, Lepanto argued that under both the Makati Code and the LGC, business is defined as trade or commercial activity regularly engaged in as a means of livelihood or with a view to profit. It was submitted that Lepanto, as a condominium corporation, was organized not for profit, but to hold title over the common areas of the Condominium, to manage the Condominium for the unit owners, and to hold title to the parcels of land on which the Condominium was located. Neither was Lepanto authorized, under its AOI or by-laws to engage in profit-making activities. The assessments it did collect from the unit owners were for capital expenditures and operating expenses. Yamane denied the protest, insisting that the assessments were made in view of profit-making, as the assessments which were collected improved the value of the condominiums, which in turn would increase the chances of getting higher prices. Lepanto then appealed the denial to the RTC of Makati. RTC Makati affirmed the decision of Yamane, saying that Lepantos activities fell under the definition of business under Sec. 13(b) of the LGC, and thus subject to local business taxation. Lepanto then filed a petition for review under Rule 42 with the Court of Appeals. The Court of Appeals reversed the RTC, ruling that Lepanto was not engaged in profit. CA also said that the very statutory concept of a condominium corporation showed that it was not a juridical entity intended to make profit, as its sole purpose was to hold title to the common areas in the condominium and to maintain the condominium. Yamane: Lepanto is engaged in business. The dues collected are used for the beautification and maintenance of the Condominium, resulting in full appreciative living values for the condominium units which would command better market prices should they be sold in the future. Moreover, the rationale for business taxes is not on the profit earned by the business, but the privilege to engage in business. - Also, on a procedural note: Lepanto filed the wrong mode of appeal before the CA when it filed its petition for review under rule 42. The RTC decision was rendered in the courts exercise of original jurisdiction. Thus, with Lepanto pursuing an erroneous mode of appeal, the RTC decision became final and executory. RULING: petition DENIED

PROCEDURAL ISSUE: Does the RTC, in deciding an appeal taken from a denial of a protest by a local treasurer under Section 195 of the LGC, exercise original jurisdiction or appellate jurisdiction? ORIGINAL, but court still affirmed the jurisdiction exercised of the CA in this case. There are 2 conflicting views on this issue: 1) Position of CA: RTC, in reviewing denials of protests by local treasurers, exercises appellate jurisdiction. This is anchored on the language of Sec. 195 of the LGC which states that the remedy of the taxpayer whose protest is denied by the local treasurer is to appeal with the court of competent jurisdiction. The LGC however does not elaborate on how such appeal should be undertaken. 2) Position of City Treasurer: jurisdiction exercised is original in character. Court affirmed the position of the City Treasurer. The LGC does not expressly confer appellate jurisdiction on the part of RTCs from the denial of a tax protest by a local treasurer. On the other hand, Section 22 of BP 129 expressly delineates the appellate jurisdiction of the RTCs, confining appellate jurisdiction to cases decided by Metropolitan, Municipal, and Municipal Circuit Trial Courts. BP 129 does not confer appellate jurisdiction on RTCs over rulings made by non-judicial entities. HOWEVER, this pronouncement is subject to two qualifications. - First, in this case there are significant reasons for the Court to overlook the procedural error and ultimately uphold the adjudication of the jurisdiction exercised by the CA. - Second, the doctrinal weight of the pronouncement is confined to cases and controversies that emerged prior to the enactment of RA 9282 (effective April 2004), the law which expanded the jurisdiction of the Court of Tax Appeals (CTA). Under RA 9282, the CTA, not CA, exercises exclusive appellate jurisdiction to review on appeal decisions, orders or resolutions of the RTCs in local tax cases whether originally decided or resolved by them in the exercise of their original or appellate jurisdiction. RA 9282 thus would not apply here because the case arose prior to the effectivity of the law. Moreover, procedural rules must not be enforced blindly. SUBSTANTIVE ISSUE: Can a local government unit, under the Local Government code, impel a condominium corporation to pay business taxes? NO 1) The power of local government units to impose taxes within its territorial jurisdiction derives from the Constitution itself, which recognizes the power of these units to create its own sources of revenue and to levy taxes, fees, and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Thes e guideline are contained in the Local Government Code of 1991, which provides for instances when and how local government units may impose taxes. The significant limitations are enumerated primarily in Section 133 of the Code, which include among others, a prohibition on the imposition of income taxes except when levied on banks and other financial institutions. None of the other general limitations under Section 133 find application to the case at bar. It is in Art. II, Title II, Book II of the Code, governing municipal taxes, where the provisions on business taxation relevant to this petition may be found. Sec. 143 enumerates types of business on which municipalities and cities may impose taxes. These include manufacturers, wholesalers, distributors, dealers of any article of commerce of whatever nature; those engaged in the export or commerce of essential commodities; contractors and other independent contractors; banks and financial institutions; and peddlers engaged in the sale of any merchandise or article of commerce. The coverage of business taxation particular to the City of Makati is provided by the Makati Revenue Code (Revenue Code). Article A, Chapter III of the Revenue Code governs business taxes in Makati, and it is quite specific as to the businesses which are covered by business taxes. The initial inquiry is what provision of the Makati Revenue Code does the City Treasurer rely on to make Lepanto liable for business taxes. Even at this point, there already stands a problem with the City Treasurers

cause of action. At no point has the City Treasurer stated in all the records as to what is the statutory basis under the Makati Revenue Code for the levying of the business tax on Lepanto. The notice of assessment, which stands as the first instance the taxpayer is officially made aware of the pending tax liability, should be sufficiently informative to apprise the taxpayer the legal basis of the tax. Sec. 195 of the LGC does not go as far as to require that the notice of assessment specifically cite the provision of the ordinance involved but it does require that it state the nature of the tax, fee or charge, the amount of deficiency, surcharges, interests and penalties. In this case, the notice of assessment sent to Lepanto did state that the assessment was for business taxes, as well as the amount of the assessment. There may have been prima facie compliance with the requirement under Sec. 195. However, the Revenue Code provides multiple provisions on business taxes. Hence, we could appreciate the Corporations confusion, as expressed in its protest, as to the exact legal basis for the tax. Reference to the local tax ordinance is vital, for the power of local government units to impose local taxes is exercised through the appropriate ordinance enacted by the sanggunian, and not by the LGC alone. What determines tax liability is the tax ordinance, the Local Government Code being the enabling law for the local legislative body. Moreover, a careful examination of the Revenue Code shows that while Section 3A.02(m) 1 seems designed as a catch-all provision, Section 3A.02(f), which provides for a different tax rate from that of the former provision, may be construed to be of similar import. While Section 3A.02(f) is quite exhaustive in enumerating the class of businesses taxed under the provision, the listing, while it does not include condominium-related enterprises, ends with etc. Certainly, we cannot be disposed to uphold any tax imposition that derives its authority from enigmatic and uncertain words such as etc. Yet we cannot even say with definiteness whether the tax imposed on the Corporation in this case is based on that provision. (in other words: walang basis, the court is just citing these to see if the tax imposed could fall under any of these provisions). The City Treasurer has been silent all through out as to the exact basis for the tax imposition which she wishes that this Court uphold. 2) Local tax on businesses is authorized under Sec. 143 of the LGC. The word business is defined under Section 131(d) of the Code as trade or commercial activity regularly engaged in as a means of livelihood or with a view to profit. This definition is importance since Sec. 143 allows local government units to impose local taxes on businesses other than those specified under the provision. It is thus imperative that in order that Lepanto may be subjected to business taxes, its activities must fall within the definition of business. And to hold that they do is to ignore the very statutory nature of a condominium corporation. The creation of the condominium corporation is sanctioned by RA. 4726 (Condominium Act). Under the law, a condominium is an interest in real property consisting of a separate interest in a unit in a residential, industrial or commercial building and an undivided interest in common, directly or indirectly, in the land on which it is located and in other common areas of the building. To enable the orderly administration over these common areas which are jointly owned by the various unit owners, the Condominium Act permits the creation of a condominium corporation, which is specially formed for the purpose of holding title to the common area, in which the holders of separate interests shall automatically be members or shareholders, to the exclusion of others, in proportion to the appurtenant interest of their respective units. Thus, it may be authorized in the deed of restrictions to make reasonable assessments to meet authorized expenditures, each condominium unit to be assessed separately for its share of such expenses in proportion (unless otherwise provided) to its owners fractional interest in any common areas. It is the collectio n of these assessments from unit owners that form the basis of the City Treasurers claim that the Corporation is doing business. The Condominium Act imposes several limitations on the condominium corporation. Under Sec. 10 of the law, the corporate purposes of a condominium corporation are limited to the holding of the common areas, either
(m) On owners or operators of any business not specified above shall pay the tax at the rate of two percent (2%) for 1993, two and one-half percent (2 %) for 1994 and 1995, and three percent (3%) for 1996 and the years thereafter of the gross receipts during the preceding year.
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in ownership or any other interest in real property recognized by law; the management of the project; and such other purposes as may be necessary, incidental or convenient to the accomplishment of such purpose. Further, the same provision prohibits the AOI or by-laws of the condominium corporation from containing any provisions which are contrary to the provisions of the Condominium Act. None of these corporate purposes are geared towards obtaining a livelihood profit. In the present case, the amounts collected are not intended for the incurrence of profit by Lepanto or its members, but to shoulder the necessary expenses that arise from the maintenance of the Condominium Project. The Court cites with approval the two counterpoints raised by CA in rejecting the contention of the city treasurer that the assessments amounted to profits for Lepanto. First, if any profit is obtained by the sale of the units, it accrues not to the corporation but to the unit owner. Second, if the unit owner does obtain profit from the sale of the corporation, the owner is already required to pay capital gains tax on the appreciated value of the condominium unit. Moreover, by the rationale of the city treasurer, every Makati City car owner may be considered as being engaged in business, since the repairs or improvements on the car may be deemed oriented towards appreciating the value of the car upon resale. There is an evident distinction between persons who spend on repairs and improvements on their personal and real property for the purpose of increasing its resale value, and those who defray such expenses for the purpose of preserving the property. Besides, we shudder at the thought of upholding tax liability on the basis of the standard of full appreciative living values, a phrase that defies statutory explication, commonsensical meaning, the English language, or even definition from Google (lol). The exercise of the power of taxation constitutes a deprivation of property under the due process clause, and the taxpayers right to due process is violated when arbitrary or oppressive methods are used in assessing and collecting taxes. The City Treasurer also contends that the fact that Lepanto is engaged in business is evinced by the AOI, which specifically empowers Lepanto to acquire, own, hold, enjoy, lease, operate and maintain, and to convey, sell, transfer mortgage or otherwise dispose of real or personal property. What the City Treasurer fails to add is that every corporation organized under the Corporation Code is so specifically empowered, under Sec. 36(7) of the Corporation Code. Again, whatever capacity the Corporation may have pursuant to its power to exercise acts of ownership over personal and real property is limited by its stated corporate purposes, which are by themselves further limited by the Condominium Act. A condominium corporation, while enjoying such powers of ownership, is prohibited by law from transacting its properties for the purpose of gainful profit. Accordingly, we hold that condominium corporations are generally exempt from local business taxation under the LGC, irrespective of any local ordinance that seeks to declare otherwise. Still, we can note a possible exception to the rule. It is not unthinkable that the unit owners of a condominium would band together to engage in activities for profit under the shelter of the condominium corporation. Such activity would be prohibited under the Condominium Act, but if the fact is established, we see no reason why the condominium corporation may be made liable by the local government unit for business taxes. Still, the City Treasurer has not posited the claim that Lepanto is engaged in business activities beyond the statutory purposes of a condominium corporation. The assessment is based solely on the Lepantos collection of assessments from unit owners, such assessments being utilized to defray the necessary expenses for the Condominium Project and the common areas. Hence, the assailed tax assessment has no basis under the LGC or the Makati Revenue Code, and the insistence of the city in its collection of the void tax constitutes an attempt at deprivation of property without due process of law.