G.R. No. L-17325 and L-16594; April 26, 1962
Republic of the Philippines, plaintiff-appellee, vs. Xavier Gun Trading and Luzon Surety Co., Inc., defendants, Luzon Surety Co., Inc., defendants-appellant. / Republic of the Philippines, plaintiff-appellant, vs. Tomas Dorego, et al., defendants-appellees.

FACTS

In G.R. No. L-17325, the Republic sued Xavier Gun Trading and its surety, Luzon Surety Co., for forfeiture of two tax payment bonds executed on June 5, 1952, guaranteeing payment of delinquent sales taxes. The bonds stipulated payment within six months. Despite demands, the amounts remained unpaid, prompting the Republic to file a collection suit on May 23, 1958. The surety raised prescription, arguing the five-year limitation under the Tax Code barred the action filed more than five years after the original tax assessments.
In G.R. No. L-16594, the Republic sued Tomas Dorego and his sureties on a bond executed on June 16, 1951, guaranteeing payment of percentage taxes in installments. Only the first installment was paid. The Republic filed a collection suit on March 25, 1959. The lower court dismissed the complaint, holding the five-year prescriptive period for collecting the principal tax obligation had lapsed by June 20, 1956, thereby extinguishing the accessory surety obligation as well. The Republic appealed, contending the action was on the bond itself.

ISSUE

Whether an action for the forfeiture of a surety bond, executed to guarantee payment of internal revenue taxes, prescribes in five years under the National Internal Revenue Code or in ten years under the Civil Code.

RULING

The Supreme Court ruled that the ten-year prescriptive period under Article 1144 of the Civil Code governs actions upon a written contract, such as the surety bonds in question. The Court rejected the application of the five-year period in Section 332(c) of the National Internal Revenue Code, as that provision specifically pertains to the collection of the tax itself by the government. The action filed was not for the direct collection of the assessed tax but for the enforcement of the separate contractual obligation arising from the bonds. The bonds created a distinct, written agreement where the principal and surety bound themselves jointly and severally to pay a fixed sum.
The Court further held that, even assuming the five-year period applied, the execution of the bonds constituted a written acknowledgment of the debt under Article 1155 of the Civil Code, which effectively interrupted the running of the prescriptive period. The bonds contained a promise to pay the tax liabilities, and the taxpayers’ failure to pay kept the bonds in full force, thereby suspending the limitation period. Consequently, in L-17325, the judgment against the surety was affirmed. In L-16594, the order of dismissal was reversed, and the case was remanded for trial on the merits.