Hongkong & Shanghai Banking Corp vs Commissioner

FACTS: From 1912-191 inclusive, Pujalte & Co was engaged in the business of lumbering in Mindanao. The company removed from the forest and milled at it a total of 6,087.54 cubic meters of timber. The forest charges amounted to P8,328.93. Puljate & Co executed bonds in the aggregate sum of P2,000 to secure the payment of the forest charges due the government. Consequently, CIR permitted Pujalte & Co. to remove this timber from the public forests for shipment without prior payment of the forest charges. From the timber so removed by Pujalte & Co., railroad ties were manufactured. In February, 1915, the firm of Pujalte & Co. was indebted to the Hongkong and Shanghai Banking Corporation with a large sum of money. Being unable to pay its debt, the company assigned to the bank a large quantity of the railroad ties manufactured at its mills. The bank sold and disposed of these ties at various times until in May 1916, there remained with it some 2,000 railroads ties of the lot acquired.

The internal revenue charges on the forest products removed from the public forests by Pujalte & Co. not having been paid, on May 2, 1916, the Collector of Internal Revenue caused delinquency proceedings to be commenced and had issued a distress warrant. Later, on May 15, 1916, the CIR caused an additional distress levy to be made upon the 6,305 ties, which had been assigned by Pujalte & Co. to the Hongkong & Shanghai Banking Corporation. Proceeding in accordance with this action, the CIR seized the 2,000 ties in the possession of the bank. Until the date last mentioned, the bank had no notice of the tax.

ISSUE: Does the lien 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 had no notice of the existence of the lien?

RULING: NO. In order that the lien may follow the property into the hands of a third party, it is further essential that the latter should have notice, either actual or constructive. The reason is the benevolence of our Constitution which prohibits the taking of property without due process of law. Internal revenue laws are to be construed fairly for the government and justly for the citizen. They should receive a liberal construction to carry out the purposes of their enactment.

The plaintiff was not of course personally liable for any part of the internal revenue taxes due the Government from Pujalte & Co. On the date the railroad ties were transferred from Pujalte & Co. to the Hongkong & Shanghai Banking Corporation no demand for payment of the tax had been made. The bonds in favor of the Government were still presumably subsisting. No demand in fact was made until over a year later when distraint proceedings were initiated. When the Hongkong & Shanghai Banking Corporation purchased and acquired these 2,000 ties in February, 1915, there was nothing to show that Pujalte & Co. were delinquent tax payers. No public record could be consulted to protect the purchaser from loss by reason of the existence of a secret lien. A businessman of ordinary prudence could not be expected to foresee that the personal property which he had taken in satisfaction of a debt was burdened by a tax. On this date, because no demand had been made and because the plaintiff had no notice of the tax, there was no valid subsisting lien upon the ties.