ii. Distraint (Actual and Constructive) and Levy

Distraint

Involves the seizure by the government of personal property, tangible or intangible, to enforce payment of taxes; followed by the public sale of such property, if the taxpayer fails to pay the taxes voluntarily.

A remedy whereby the collection of delinquent taxes is enforced on the goods, chattels, or effects and other personal property of whatever character of the taxpayer. (NIRC, Sec. 205[a])¹

Kinds of Distraint

• Actual Distraint – resorted to when there is actual delinquency in tax payment (NIRC, Sec. 207[A])²

It consists in the actual seizure of the personal property of the taxpayer. If tax due is in excess of PhP 1 million, the CIR or his duly authorized representative will commence the proceeding; otherwise, for tax due of PhP 1 million or less, it shall be the Revenue District Officer.

• Constructive Distraint (NIRC, Sec. 206)³ – a preventive remedy which aims at forestalling a possible dissipation of the taxpayer’s assets when delinquency sets in – hence, no actual delinquency in payment is necessary.

Effecting Constructive Distraint

Constructive distraint of personal property shall be effected by requiring the taxpayer or any person having possession or control of such property:

• To sign a receipt covering the property distrained; and
• To obligate himself to preserve the same intact and unaltered and not to dispose of the same in any manner whatever, without the express authority of the CIR. (NIRC, Sec. 206)

Instances when the CIR can place property of a taxpayer under constructive distraint:

• Taxpayer is retiring from any business subject to tax;
• Taxpayer is intending to leave the Philippines;
• Taxpayer is intending to remove his property from the Philippines;
• Taxpayer is intending to hide or conceal his property; or
• Taxpayer is intending to perform any act tending to obstruct the proceedings for collecting the tax due or which may be due from him.

Purchase by the Government at Sale Upon Distraint

When the amount bid for the property under distraint is not equal to the amount of the tax; or is very much less than the actual market value of the articles offered for sale, The Commissioner or his deputy may purchase the same in behalf of the national Government for the amount of taxes, penalties and costs due thereon. Property so purchased may be resold and the net proceeds there from shall be remitted to the National Treasury and accounted for as internal revenue. (NIRC, Sec. 212)⁴

Procedure for distraint and garnishment

• Report on the distraint
• By the distraining officer – submitted to the Revenue District Officer and the Revenue Regional Director within 10 days from receipt of the warrant
• by the Revenue Regional Director – a consolidated report shall be prepared and submitted as may be required by the CIR

The order of distraint may be lifted by the CIR or his duly authorized representative. (NIRC, Sec. 207[A])⁵

• Service of warrant of distraint
• Goods, chattels, effects, or other personal property

The officer serving the warrant of distraint shall make or cause to be made an account of the goods, chattels, effects, or other personal property distrained, a signed copy of which shall be left either with the owner or person from whose possession the property was taken, or at the dwelling or place of business of such person and with someone of suitable age and discretion;

Together with a statement of the sum demanded and note of the time and place of sale

• Stocks and other securities

A copy of the warrant of distraint shall be served upon the taxpayer AND upon the president, manager, treasurer or other responsible officer of the issuing corporation

• Debts and credits

A copy of the warrant of distraint shall be left with the person owing the debts or having in his possession such credits or his agent

• Bank accounts

A copy of the warrant of garnishment shall be served upon the taxpayer AND upon the president, manager, treasurer or other responsible officer of the bank. The bank shall turn over to the CIR so much of the bank accounts as may be sufficient to satisfy the claim of the government (NIRC, Sec. 208)⁶

• Posting of notice
• Notice shall specify the time and place of sale and the articles distrained.
• The posting shall be made in not less than 2 public places in the city or municipality where the distraint is made, one of which shall be the office of the mayor of such cityor municipality. (NIRC, Sec. 209)⁷

Sale of Property Distrained and Disposition of Proceeds

The time of sale shall not be less than 20 days after notice/posting.

At the time and place fixed in such notice, the said revenue officer shall sell the goods, chattels, or effects, or other personal property, including stocks and other securities so distrained, at public auction, to the highest bidder for cash, or with the approval of the Commissioner, through duly licensed commodity or stock exchanges.

In the case of Stocks and other securities, the officer making the sale shall execute a bill of sale which he shall deliver to the buyer, and a copy thereof furnished the corporation, company or association which issued the stocks or other securities.

Within 5 days after the sale, a return by the distraining/levying officer of the proceedings shall be entered upon the records of the relevant BIR officers. In case the proceeds of the sale exceed the claim and cost of sale, the excess shall be turned over to the owner of the property. (NIRC, Sec. 209)⁸

Report of Sale to the BIR

Within 2 days after the sale, the officer making the same shall make a report of the proceedings in writing to the CIR and shall preserve a copy of the report as an official record. (NIRC, Sec. 211)⁹

Further Distraint (not always applicable)

The remedy by distraint/levy may be repeated if necessary until the full amount due, including all expenses, is collected. (NIRC, Sec. 217)¹⁰

Summary Remedy of Distraint is Available Pending Appeal

The BIR may issue a Warrant of Distraint and Levy to enforce collection while the TP is appealing the decision denying the protest to the CTA. An appeal to the CTA does not by itself suspend the payment, levy, distraint and/or sale of any property of the taxpayer for the satisfaction of his tax liability; however, if the CTA finds that collection may jeopardize the interests of the Government and/or the taxpayer, it may suspend collection and require the taxpayer to deposit the amount claimed or file a surety bond for not more than double that amount (R.A. No. 1125, as amended by R.A. No. 9282, Sec. 11)¹¹

Levy

Involves the seizure by the government of real property to enforce payment of taxes; followed by the public sale of such property, if the taxpayer fails to pay the taxes voluntarily

Real property may be levied upon before, simultaneously or after the distraint of personal property. (NIRC, Sec. 207[B]¹²)

Procedure for Levy:

• Issuance of warrant of levy

The CIR or his dulyauthorized representativeshallprepare a duly authenticated certificate showing:

• The name of the taxpayer
• the amount of tax and penalty due from him; and
• a description of the property levied upon.

The order of levy may be lifted by the CIR or his duly authorized representative. (NIRC, Sec. 207[B])¹³

• Service of warrant of levy

The certificate shall be served upon:

• the delinquent taxpayer, or
• if he be absent from the Philippines, to his agent or the manager of his business to which the liability arose, or
• if there be none, to the occupant of the property in question;

It is mailed to or served upon the Register of Deeds of the province or city where the property is located.

• Advertisement and sale

Advertisement shall be made within 20 days after the levy, and for a period of at least 30 days. It shall be effected by:

• Posting a notice at the main entrance of the municipal building or the city hall and in public and conspicuous place in the barrio or district where the property is located; and
• By publication once a week for 3 consecutive weeks in newspaper of general circulation in the municipality or city where the property is located.

Within 5 days after the sale, a return by the distraining/levying officer of the proceedings shall be entered upon the records of the relevant BIR officers. In case the proceeds of the sale exceed the claim and cost of sale, the excess shall be turned over to the owner of the property. (NIRC, Sec. 213)¹⁴

• Redemption of property sold

At any time before the day fixed for the sale, the taxpayer may discontinue all proceedings by paying the amount due. (NIRC, Sec. 213)¹⁵

Otherwise, within 1 year from the date of sale, the taxpayer or any one for him may redeem the property.

• Breakdown of amount to be paid shall be:
• Taxes, penalties and interest computed from the date of delinquency to the date of sale; and
• Interest on the purchaser’s purchase price at the rate of 15% per annum from the date of purchase to the date of redemption.

The owner shall not be deprived of the possession of the property and shall be entitled to the rents and other income thereof until the expiration of the redemption period. (NIRC, Sec. 214)¹⁶

• Final deed of sale to the purchaser

If the property is not redeemed, a final deed of sale shall be issued to the purchaser.

• Further levy

The remedy by distraint/levy may be repeated if necessary until the full amount due, including all expenses, is collected. (NIRC, Sec. 217)¹⁷