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HSBC v. Rafferty: Tax Lien Ruling

HSBC owned 2000 railroad ties that were previously owned by Pujalte & Co. Pujalte & Co. owed forest charges taxes to the BIR but was allowed to remove timber from public forests after posting a bond. Over a year later, after some timber was made into railroad ties and transferred to HSBC, the BIR tried to collect the unpaid taxes from HSBC. The Supreme Court ruled that the tax lien does not follow transferred property into the hands of an innocent third party, like HSBC, who had no notice of the lien or unpaid taxes at the time of acquiring the property. For a lien to apply to a third party, there must be notice, either actual or constructive, of the

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455 views2 pages

HSBC v. Rafferty: Tax Lien Ruling

HSBC owned 2000 railroad ties that were previously owned by Pujalte & Co. Pujalte & Co. owed forest charges taxes to the BIR but was allowed to remove timber from public forests after posting a bond. Over a year later, after some timber was made into railroad ties and transferred to HSBC, the BIR tried to collect the unpaid taxes from HSBC. The Supreme Court ruled that the tax lien does not follow transferred property into the hands of an innocent third party, like HSBC, who had no notice of the lien or unpaid taxes at the time of acquiring the property. For a lien to apply to a third party, there must be notice, either actual or constructive, of the

Uploaded by

estvanguardia
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
  • Legal Case Analysis: Hongkong & Shanghai Banking Corp. v. Rafferty

Hongkong & Shanghai Banking Corporation v.

Rafferty
G.R. No. L-13188, November 15, 1918
39 SCRA 145

FACTS:
Petitioner HSBC is the owner of 2,000 railroad ties it had acquired from the
firm of Pujalte & Co. which the latter assigned to it after it was unable to pay a
large sum of money it then owed to HSBC. 

The firm of Pujalte & Co. is engaged in the business of timber, and it was
shown that prior to the assignment of the railroad ties to HSBC it owed to the
BIR forest charges, one of the taxes enumerated in the NIRC, amounting to
P8328.93.  It executed a bond of P2000 to secure the payment of the forest
charges and was allowed to remove the timber from the public forests.

More than a year later, when some of the timber were already made into
railroad ties and transferred to third parties like HSBC, the Collector instituted
collection proceedings agains Pujalte.  To enforce collection, the CIR went
after thee property of Pujalte & Co. including that which were already in the
possession of HSBC, who at the time it acquired  the property had no notice
of the lien nor of the delinquent tax due from Pujalte.

ISSUE: Whether or not the CIR can still enforce the lien?

Held: No, the lien does not follow the property subject to the tax into the hands
of a third party when at the time of transfer, no demand for payment had been
made and when the purchaser then had no notice of the existence of  the lien.

Under the general rule of the Civil law, possession of movables is not
necessary to the validity of a lien, whether created by contract or by act of law.
Such lien will attach upon movable property even in the hands of a bona fide
purchaser without notice.  Under the law of taxation however, the tax lien does
not establish itself upon property which has been transferred to an innocent
purchaser prior to demand. A demand is necessary to create and bring the
lien into operation. 

Furthermore, in order that the lien may follow the property into the hands of a
third party, it is essential that the latter should have notice, either actual or
constructive.  The reason behind this is the benevolence of our Constitution
which prohibits the taking of property without due process of law.  The policy
of the law is against upholding secret liens and charges against property of
innocent purchasers or encumbrances for value.  At the time HSBC acquired
the property there was nothing to show that Pujalte & Co. were deliquent tax
payers nor were there any public records that may be consulted to protect it
from loss by reason of the existence of a secret lien.

Minor issue on the right of HSBC to recover interest from the undue
enforcement of the lien: The reckoning date for the computation of interest
should be the date when the taxpayer lost the income from the funds by
payment under protest. In this case, it is not from the filing of the complaint for
collection but on the date HSBC was deprived of the property.

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