Internal Revenue Tax Case of Sotero S. Garcia

March 16, 1959 BIR RULING NO. 153-59 Returned to the Regional Director, Regional District No. 4, Quezon City, the within papers relative to the internal revenue tax case of Sotero S. Garcia, involving the amounts of P26,602.04 representing fixed and percentage taxes and P2,000.00 as compromise penalties for the year 1951. Opinion is requested on the question of preference between a registered tax lien and a registered chattel mortgage. The records disclosed that on December 2, 1955, a chattel mortgage over a building with adobe wall was executed by Sotero S. Garcia in favor of Paquito Quiambao. This building was erected on the land owned by the Balintawak Estate, Inc. This mortgage was duly registered in the chattel mortgage registry on December 12, 1955. On January 15, 1958, for failure to pay the amount of P26,602.04 representing fixed and percentage taxes, the government forfeited the above-mentioned property. On July 16, 1958, a notice of tax lien and the declaration of forfeiture were caused to be registered in the Registry of Deeds of Rizal Province. The resolution of this case hinges on the determination of the nature and effect of the chattel mortgage executed by Sotero S. Garcia in favor of Paquito Quiambao on the building erected on the land of the Balintawak Estate, Inc. For if we were to hold that the chattel mortgage was properly constituted, then the claim of the government is subordinate to the mortgagee. A building, by its nature, is an immovable property. (Art. 415, New Civil Code). Certainly, a building cannot be divested of its character of realty by the fact that the land on which it is constructed belongs to another. (Associate Insurance & Surety Co, Inc. vs. Isabel Iya et al. G.R. L-10837, May 30, 1958) Moreover, and in view of the absence of any specific provision to the contrary, a building is an immovable property irrespective of whether or not said structure and the land on which it is adhered to belong to the same owner." (Lopez vs. Orosa, G.R. No. L-10817, February 28, 1958). Consequently, the chattel mortgage constituted on the building is clearly invalid and a nullity for the reason that only personal property can be the subject of chattel mortgage. While it may be true that the document of chattel mortgage was duly registered in the Chattel Mortgage Registry of Rizal, "this act produced no effect whatsoever for where the interest conveyed is in the nature of a real property, the registration thereof in the registry of chattels is merely a futile act." (See Leung Yee vs. Strong Machinery Co., 37 Phils. 644) LLpr In passing, it is worth to state that a demarcation line must be drawn between chattel mortgages constituted before and after the effectivity of the New Civil Code on August 30, 1950 (Lara v. Del Rosario). For prior to the New Civil Code, the jurisdiction held that building built on the land of another maybe treated by the parties as personalities for purposes of chattel mortgage. (Evangelista v. Abad, (C.A.) 36 O.G. Tomines v. San Juan, 45 O.G. 2935, see also Standard Oil Co. of New York vs. Jaramillo, 44 Phil. 630, Davao Sawmill Co., vs. Castillo, 61 Phil. 709). And the registration thereof in the chattel mortgage registry is valid and binding not only between the parties but also against third persons. The principle, however, enunciated in the above cited cases of Associated Insurance & Surety Co., Inc. vs. Isabel Iya et al. and Lopez vs. Orosa does not revoke the prior jurisprudence on the matter but merely established a new dictum to apply on cases occurring after the effectivity of the New Civil Code. In view of the foregoing, it is advised that the government's claim is preferred over and above the claim of the mortgagee. The difficulty and inconvenience encountered in enforcing the right of the government could have been avoided had that Office followed strictly the procedure prescribed in Sections 318-325 of the Tax Code as amplified by General Circulars Nos. V-235 and 242. It should be noted that the warrant of distraint and levy was issued on November 3, 1955 but was not immediately executed. Accordingly, he is advised to proceed with the sale of the property under forfeiture. He is further advised that hereafter the procedure prescribed by Section 318-325 of the Tax Code as amplified by General Circular Nos. V-235 and 242 should be strictly followed. (SGD.) JOSE ARAAS Commissioner of Internal Revenue