In the Philippines, when the government expropriates private property for public use, the property owner is entitled to just compensation. The Supreme Court clarified that while consequential damages, such as capital gains tax (CGT) and other transfer taxes, should not be separately awarded, the government must shoulder these costs to ensure the owner receives the full equivalent of their loss. This ruling aims to uphold the principle that just compensation should fully rehabilitate the affected owner, providing sufficient funds to acquire similarly situated lands and facilitate their resettlement.

When is a Loss Truly Whole? Expropriation, Taxes, and the Pursuit of Just Compensation

The case of Republic of the Philippines vs. Spouses Marcelino and Nenita Bunsay revolves around the government’s expropriation of a 100-square meter lot owned by the Spouses Bunsay for the C-5 Northern Link Road Project Phase 2. The Department of Public Works and Highways (DPWH) initiated the expropriation proceedings, and the Regional Trial Court (RTC) initially directed DPWH to pay consequential damages equivalent to the value of capital gains tax (CGT) and other transfer taxes necessary to transfer the property. This prompted DPWH to file a petition questioning the propriety of including CGT and transfer taxes as consequential damages.

The central legal question before the Supreme Court was whether the RTC erred in awarding consequential damages equivalent to the value of CGT and transfer taxes. To address this, the Court delved into the meaning of “consequential damages” within the context of expropriation proceedings as governed by Rule 67 of the Rules of Court. Section 6 of Rule 67 provides the framework for assessing damages and benefits in expropriation cases:

SEC. 6. Proceedings by commissioners.– Before entering upon the
performance of their duties, the commissioners shall take and
subscribe an oath that they will faithfully perform their duties as
commissioners, which oath shall be filed in court with the other
proceedings in the case. Evidence may be introduced by either party
before the commissioners who are authorized to administer oaths on
hearings before them, and the commissioners shall, unless the parties
consent to the contrary, after due notice to the parties to attend,
view and examine the property sought to be expropriated and its
surroundings, and may measure the same, after which either party may, by himself or
counsel, argue the case. The commissioners shall assess the
consequential damages to the property not taken and deduct from such
consequential damages the consequential benefits to be derived by the
owner from the public use or purpose of the property taken, the
operation of its franchise by the corporation or the carrying on of the
business of the corporation or person taking the property. But in no
case shall the consequential benefits assessed exceed the consequential
damages assessed, or the owner be deprived of the actual value of his
property so taken.

The Supreme Court referenced Republic v. Court of Appeals, clarifying that consequential damages arise when the remaining portion of the property, not subject to expropriation, experiences impairment or a decrease in value as a result of the expropriation. Therefore, the Court emphasized that in cases where the entire property is expropriated, there is no basis for awarding consequential damages, as there is no remaining portion to consider.

Building on this principle, the Court noted that even if a portion of the property remained, the award of consequential damages constituting the value of CGT and transfer taxes would still be improper without evidence demonstrating that the remaining portion suffered impairment or decreased value. The Court cited Republic v. Spouses Salvador, a similar case, to reinforce this point.

In Spouses Salvador, the Court explicitly stated, “We likewise rule that the RTC committed a serious error when it directed the Republic to pay respondents consequential damages equivalent to the value of the capital gains tax and other taxes necessary for the transfer of the subject property.” The Court reiterated that just compensation should equate to the full and fair equivalent of the expropriated property, measuring the owner’s loss rather than the taker’s gain.

The Court explained that transferring property through expropriation is akin to a sale or exchange, triggering capital gains tax. However, CGT is a tax on passive income, making the seller (the property owner) liable for the tax. Therefore, designating DPWH to pay CGT through consequential damages was incorrect. To illustrate, the Bureau of Internal Revenue (BIR) requires DPWH to act as a withholding agent, deducting 6% for final withholding tax during real property expropriation for infrastructure endeavors.

However, the Supreme Court also clarified that precluding courts from considering the value of CGT and other transfer taxes in determining just compensation would be incorrect. The Court referenced Section 5 of Republic Act No. (RA) 8974, which outlines standards for assessing the value of land subject to expropriation, including the value declared by the owners and the current selling price of similar lands.

The Supreme Court distinguished expropriation from an ordinary sale under Article 1458 of the Civil Code, characterizing it as a forced sale arising from legal compulsion rather than mutual agreement. In expropriation, just compensation aims to provide the affected owner with the fair and full equivalent of their loss, ensuring that they are made whole. This principle is enshrined in Section 6, Rule 67 of the Rules of Court, which mandates that the owner shall not be deprived of the actual value of their property.

The Court emphasized that just compensation must encompass all incidental costs associated with transferring the expropriated property, including CGT, taxes, and fees. These costs should be considered when determining just compensation, mirroring how they factor into the selling price in regular transactions. In this case, the compensation received by Spouses Bunsay only accounted for the zonal value and replacement costs, excluding CGT and transfer taxes.

Ultimately, while striking down the award of consequential damages for CGT and transfer taxes, the Court directed the Republic to shoulder these taxes as part of just compensation. The goal was to preserve the compensation awarded to Spouses Bunsay, ensuring that they were fully rehabilitated and made whole as a result of the expropriation. Thus, the compensation should be sufficient to make the affected owner whole.

FAQs

What was the key issue in this case?	The main issue was whether the Regional Trial Court erred in awarding consequential damages equivalent to the value of capital gains tax (CGT) and other transfer taxes in favor of the Spouses Bunsay during an expropriation proceeding.
What are consequential damages in the context of expropriation?	Consequential damages refer to the impairment or decrease in value of the remaining portion of a property not taken during expropriation. They are awarded to compensate the owner for losses suffered due to the partial taking of their land.
Who is responsible for paying the capital gains tax (CGT) in an expropriation case?	The Supreme Court clarified that CGT is a tax on passive income, making the seller (the property owner) primarily liable for the tax. However, the Court directed the government to shoulder this expense as part of the just compensation to ensure the owner is fully compensated.
What does “just compensation” mean in expropriation cases?	“Just compensation” is defined as the full and fair equivalent of the loss incurred by the affected property owner due to the expropriation. It aims to make the owner whole by providing sufficient funds to acquire similarly situated lands and rehabilitate themselves.
Why was the award of consequential damages struck down in this case?	The award of consequential damages was struck down because the entire property was expropriated, leaving no remaining portion to suffer impairment or decrease in value. Consequential damages are only applicable when a portion of the property remains with the owner.
How does RA 8974 affect the determination of just compensation?	RA 8974 outlines standards for assessing the value of land subject to expropriation, including factors like the value declared by the owners, the current selling price of similar lands, and other relevant facts. These standards help ensure that the compensation is fair and equitable.
What is the difference between expropriation and an ordinary sale?	Expropriation is a forced sale arising from legal compulsion, where the government takes private property for public use. Unlike an ordinary sale, the property owner does not voluntarily agree to the transaction, and the compensation is determined by the court.
What was the final ruling of the Supreme Court in this case?	The Supreme Court granted the petition, deleting the award of consequential damages equivalent to the value of CGT and other transfer taxes. However, the Court directed the government to shoulder these taxes as part of the just compensation due to the property owners.

In conclusion, the Supreme Court’s decision in Republic vs. Spouses Bunsay clarifies the scope of consequential damages in expropriation cases while emphasizing the importance of ensuring that property owners receive just compensation that truly makes them whole. By directing the government to shoulder CGT and other transfer taxes, the Court reinforces the principle that compensation should be sufficient to rehabilitate affected owners and enable them to acquire similar properties.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Republic of the Philippines vs. Spouses Marcelino Bunsay and Nenita Bunsay, G.R. No. 205473, December 10, 2019