Title
Delos Santos vs. Commissioner of Internal Revenue
Case
G.R. No. 222548
Decision Date
Jun 22, 2022
Delos Santos challenged Revenue Memorandum Circular No. 65-2012, which imposed taxes on condominium dues, claiming it violated due process and exceeded authority. The Supreme Court dismissed the case as moot after declaring the Circular invalid in a prior ruling.
revenue memorandum circular
association dues
condominium corporations

Case Summary (G.R. No. 108581)

Petition, Material Dates, and the Challenged Issuance

The Circular was issued on October 31, 2012 by then Commissioner of Internal Revenue Kim S. Jacinto-Henares. It declared that amounts paid as association dues or similar charges by members and tenants of a condominium corporation form part of the corporation’s gross income subject to income tax. It also abandoned the earlier interpretation that these dues were merely funds held in trust. It further stated that these association dues and similar charges are subject to VAT because they constitute income payments or compensation for the “beneficial services” the condominium corporation provides to its members and tenants.

On November 26, 2015, Classica informed unit owners and tenants that its Board of Trustees would no longer shoulder VAT on association dues starting January 3, 2016. On January 4, 2016, Classica sent Delos Santos a billing statement that included the additional VAT allegedly imposed by the Circular, and he paid his association dues on January 21, 2016. He then filed a Rule 65 Petition directly before this Court, challenging the Circular’s validity.

Petitioner’s Standing and Substantive Grounds

Delos Santos invoked judicial review by asserting that he had legal standing because his payment of VAT on association dues to Classica resulted in direct injury. He argued that the Circular produced a continuing adverse monetary effect, satisfying the actual case or controversy requirement.

Substantively, he contended that the Circular violated substantive due process. He argued that there was no legal or judicial basis for the issuance, and he further alleged a continued breach of the President’s duty to ensure faithful execution of laws because the President allegedly failed to correct the Commissioner’s issuance. He also maintained that the issue was capable of repetition yet evading review, noting that nothing would prevent similar regulations from being issued again.

He further argued that the Circular conflicted with provisions of the National Internal Revenue Code of 1997. He specifically claimed that Section 105 did not apply to condominium owners’ or tenants’ payment of association dues. In his view, the owners did not buy, transfer, or lease goods or services from the condominium corporation, and the dues were only contributions for maintenance costs. He asserted that the condominium corporation did not acquire ownership over the dues and merely held them in a fiduciary capacity for periodic maintenance. He also argued that the condominium corporation earns no income from association dues and that the income, if any, belongs to others such as employees or separate sellers of services and commodities. From these premises, he concluded that the Circular was invalid subordinate legislation, insofar as it modified the National Internal Revenue Code provisions on VAT and related tax concepts.

He added that VAT is a tax on consumption and that unit owners did not consume anything from association dues. He likewise argued that, because the Circular imposed a tax, it should be strictly construed against the taxing authority. He urged that the Circular should therefore be struck down.

Procedural Steps and the Parties’ Positions on Remedy and Validity

After the Petition was filed, this Court required the Commissioner of Internal Revenue to file a comment on April 6, 2016. In lieu of a comment, the Office of the Solicitor General filed a Manifestation and Motion and asked that the Commissioner be directed to file its comment, while joining Delos Santos in urging that the Circular be declared void. Although the Office of Solicitor General argued that the Petition should have been dismissed because certiorari was not the proper remedy to assail the Circular, it still aligned with petitioner in urging reconsideration. It opined that association dues exceeding maintenance and administrative expenses should only form part of gross income, emphasizing a theory of fiduciary collection and a trust-like relationship between the condominium corporation and its owners or tenants.

This Court noted and granted the Solicitor General’s manifestation and required the Commissioner to file a comment. The Court later required the Commissioner to show cause for failing to file the comment by January 26, 2017. On October 9, 2017, the Commissioner filed its compliance and motion, and on November 8, 2017, it filed its comment. The Commissioner argued that a Rule 65 certiorari Petition was not proper because the Circular was issued pursuant to the Commissioner’s quasi-legislative powers, and therefore the Petition should have proceeded in the manner applicable to declaratory relief and through the proper forum. It also asserted that petitioner should have first questioned the Circular before the Secretary of Finance. On the merits, the Commissioner defended the Circular, contending that condominium management constituted a beneficial service and that payment in exchange for management was included in the condominium corporation’s gross income. It also maintained that it had the authority to interpret the National Internal Revenue Code provisions on income tax and VAT, and that the Circular was only a clarification and correction of earlier rulings.

After the Commissioner’s comment, this Court required petitioner to file a reply. On March 28, 2018, Delos Santos replied. He argued that Rule 65 certiorari had been recognized as a permissive remedy to challenge a legally infirm administrative issuance. He reiterated that the Commissioner allegedly failed to observe due process by implementing the Circular without prior notice and hearing. He also invoked the Tax Reform for Acceleration and Inclusion (TRAIN) Law, pointing to a provision expressly exempting “association dues, membership fees, and other assessments and charges collected by homeowners associations and condominium corporations” from VAT. He argued that, by virtue of that enactment, the Circular was automatically revoked. He urged the Court to still consider the case even if mooted because of asserted needs to curb the effects of erroneously collected VAT, to clarify the nature of activities subject to VAT, and to prevent future issuance of similar regulations.

Supervening Ruling in Related Declarations and the Mootness Doctrine

While the Petition remained pending, this Court noted an earlier development. On January 15, 2020, the First Division promulgated G.R. Nos. 215801 and 218924 in Bureau of Internal Revenue v. First E-Bank Tower Condominium Corp. Those cases involved a declaration of the invalidity of the Revised Memorandum Circular No. 65-2012, and the Court held that the Commissioner gravely abused its authority in issuing the Revised Circular. The Court reasoned that the issuance did not merely interpret or clarify longstanding rules; it changed them. In the later case under review, this Court stated that it likewise declared that the Commissioner gravely abused his discretion in issuing the Circular and for declaring that association dues, membership fees, and other assessments or charges were subject to income tax, VAT, and withholding tax.

This Court also reiterated the doctrinal statements drawn from Yamane v. BA Lepanto Condominium Corporation, emphasizing that a condominium corporation is not engaged in trade or business, and association dues are intended not for profit but for the maintenance of the condominium project. It stressed that the collection of association dues and similar charges is for the benefit of condominium owners, forming a pool to meet maintenance, repair, improvement, reconstruction, and administrative expenses. Because the nature and purpose of condominium corporations negate the “carte blanche” application of VAT provisions, this Court concluded that the Circular unduly expanded and modified provisions of the National Internal Revenue Code. It noted that the relevant gross income enumeration did not include such charges, and that the VAT provisions on sales, barter, exchanges of goods, rendition of services, and use or lease of properties did not arise from condominium association dues by their nature. Thus, t

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