(Article published in the June 3, 2002 issue of TODAY, Business Section)"The life of the law has not been logic" says Oliver Wendell Holmes in his work "The Common Law" and the way Lincoln Philippine Life Insurance Company, Inc. (now Jardine-CMG Life Insurance Company, Inc) fared with its 1984 documentary stamp tax assessments shows how right Holmes was.
If one were to take the name of the tax seriously, rules on the stamp duty on documents imposed by Title VII of the Tax Code should all proceed from one fact, namely, the document. In that case, Lincoln should have won both its arguments with the Bureau of Internal Revenue. But, no, it came to pass, it won one and lost the other.
In 1984, Lincoln issued two types of documents that attracted the documentary stamp tax: one was to declare stock dividends on its shares of stock that had a par value of P100 per share; the other was to issue a policy known as "The Junior Estate Builder Policy".
The revelant provisions
of the tax code on stock dividends required payment of the documentary stamp tax "on
the actual value represented by each share". Since the share were par value shares,
i.e. shares where there is a value stated on the certificate, Lincoln logically based its
computation of the tax due on the par value of each share, namely, P100 per share.
Also, the tax code required payment of stamp due on life insurance policies on "the amount insured by any such policy". The Junior Estate Builder policys unique feature was an automatic increase in the amount of insurance coverage when the insured reaches a certain age, without need for the issuance of a new policy. It thus had an original amount of coverage stated on the policy and a schedule of increases of the coverage if and when the insured reaches a certain age. It was thus geared to the yuppies, just out of school. In the beginning, they have little, if not none at all, financial responsibilities as they begin their careers. Then, they get married, have children, get into home mortgages as they grow older. Their need for life insurance increases and the increases in the policy are presumably in sinc with their increase in financial obligations. Since the attainment of the ages that would trigger the increase in coverage is uncertain, Lincoln based its computation of the documentary stamp tax on the original amount, taking that as "the amount insured" by the policy.
The Commissioner of Internal Revenue (certainly not René Bañez who was then a fledgling just beginning to realize how much he had learned from his tax professor) insisted that the book value, not the par value, should have been the basis of the tax. Since the book value of the company was higher than the par value, it assessed the company deficiency documentary stamp tax. With respect to the Junior Estate Builder Policy, the Commissioner contended that the increases were part of the amount insured. In both cases, the Bureau understandably took the position that yielded the government more revenues.
The Court of Tax Appeals agreed with Lincoln. On appeal by the Commissioner, the Court of Appeals upheld the deficiency assessment on the Junior Estate Builder and reversed the one on the stock dividends. Both parties appealed, of course, to the Supreme Court which took the case on stock dividends under case G. R. No. 11843 and decided on it on July 23, 1998 and the case on the Junior Estate Builder Policy under case G.R. No. 110176, decided only recently on March 19, 2002.
The Supreme Court held, in G.R. 11643, that the tax on the stock dividends, on account of the intent of the law (as worded when the transaction was done) to tax the privilege of issuing stock certificates, was to be based on par value, i.e. "actual value" meant par value. But, it also indicated, that with the change in the wording of the law, the "actual value" presently means book value. Nothing to do anymore with what the document says.
In the Junior Estate Builder case, G.R. 119176, the Supreme Court held that the stamp duty must be based on the original and the automatic increases, the total being the "amount insured". Never mind that the insured, at the time he takes the policy, whether or not he will live to enjoy the increase in his coverage.
The Lincoln cases is not the only instance when the logic of the documentary stamp tax has gone awry. Everyone (except Congress that seems to be dragging its feet on the matter) is convinced that the documentary stamp tax is one of the major obstacles to the development of a robust secondary market in our country for debt-instruments. Yet, because it is a tax that is so easy to collect from those who can hardly escape it, it remains a fixture in our tax system. But if experience, as proclaimed by Holmes, is the life of the law, our experience with the DST should move us to abolish it once and for all.