CIR vs FIRST EXPRESS PAWNSHOP COMPANY INC.

G.R. Nos. 172045-46 June 16, 2009

Facts:

On 28 December 2001, petitioner, through Acting Regional Director Ruperto P. Somera of

Revenue Region 6 Manila, issued the following assessment notices against First Express Pawnshop
Company, Inc. :

a. Assessment No. 31-1-98 for deficiency income tax of P20,712.58 with compromise
penalty of P3,000;

b. Assessment No. 31-14-000053-98 for deficiency value-added tax (VAT) of P601,220.18

with compromise penalty of P16,000;

c. Assessment No. 31-14-000053-98 for deficiency documentary stamp tax (DST)

of P12,328.45 on deposit on subscription with compromise penalty of P2,000; and

d. Assessment No. 31-1-000053-98 for deficiency DST of P62,128.87 on pawn tickets with
compromise penalty of P8,500.

Respondent received the assessment notices on 3 January 2002. On 1 February 2002,

respondent filed its written protest on the above assessments and attached the GIS (General
Information Sheet) and Balance Sheet as of 31 December 1998.

In a letter dated 12 March 2002, petitioner requested respondent to present proof of payment
of DST on subscription. In a letter-reply on March 31, 1999, respondent stated that it could not
produce any proof of DST payment because it was not required to pay DST under the law considering
that the deposit on subscription was an advance made by its stockholders for future subscription, and
no stock certificates were issued.

Since petitioner did not act on the protest during the 180-day period, respondent filed a petition
before the CTA on 28 August 2002.
 On 24 March 2006, the CTA En Banc promulgated a Decision affirming respondents liability to
pay the VAT and ordering it to pay DST on its pawnshop tickets. However, the CTA En Banc found that
respondents deposit on subscription was not subject to DST.

Aggrieved by the CTA En Bancs Decision which ruled that respondents deposit on subscription
was not subject to DST, petitioner elevated the case to the Supreme Court.

Issue:

1. Whether or not respondent is liable to pay P12,328.45 as DST on deposit on subscription

of capital stock.

2. Whether or not the CTA erred on a question of law in disregarding the rule on finality of
assessments prescribed under Section 228 of the Tax Code.

Law Applicable:

1. On applicability of DST on deposit on subscription of capital stock:

 Section 175 of NIRC. Stamp Tax on Original Issue of Shares of Stock.

On every original issue, whether on organization, reorganization or for any lawful purpose,
of shares of stock by any association, company or corporation, there shall be collected a
documentary stamp tax of Two pesos (P2.00) on each Two hundred pesos (P200), or fractional
part thereof, of the par value, of such shares of stock: Provided, That in the case of the original
issue of shares of stock without par value the amount of the documentary stamp tax herein
prescribed shall be based upon the actual consideration for the issuance of such shares of
stock: Provided, further, That in the case of stock dividends, on the actual value represented
by each share.

 Section 176. Stamp Tax on Sales, Agreements to Sell, Memoranda of Sales, Deliveries or Transfer
of Due-bills, Certificates of Obligation, or Shares or Certificates of Stock.
 On all sales, or agreements to sell, or memoranda of sales, or deliveries, or transfer of
due-bills, certificates of obligation, or shares or certificates of stock in any association,
company or corporation, or transfer of such securities by assignment in blank, or by delivery,
or by any paper or agreement, or memorandum or other evidences of transfer or sale whether
entitling the holder in any manner to the benefit of such due-bills, certificates of obligation or
stock, or to secure the future payment of money, or for the future transfer of any due-bill,
certificate of obligation or stock, there shall be collected a documentary stamp tax of One
peso and fifty centavos (P1.50) on each Two hundred pesos (P200), or fractional part thereof,
of the par value of such due-bill, certificate of obligation or stock: Provided, That only one tax
shall be collected on each sale or transfer of stock or securities from one person to another,
regardless of whether or not a certificate of stock or obligation is issued, indorsed, or delivered
in pursuance of such sale or transfer: And provided, further, That in the case of stock without
par value the amount of the documentary stamp tax herein prescribed shall be equivalent to
twenty-five percent (25%) of the documentary stamp tax paid upon the original issue of said
stock.

 Revenue Memorandum Order No. 08-98 (RMO 08-98) provides the guidelines on the corporate
stock documentary stamp tax program:

1. All existing corporations shall file the Corporation Stock DST Declaration, and the DST Return,
if applicable when DST is still due on the subscribed share issued by the corporation, on or
before the tenth day of the month following publication of this Order.

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3. All existing corporations with authorization for increased capital stock shall file their
Corporate Stock DST Declaration, together with the DST Return, if applicable when DST is due
on subscriptions made after the authorization, on or before the tenth day of the month
following the date of authorization.

2. On the Finality of Assessment as Prescribed under Section 228 of the Tax Code

 Section 228 of the Tax Code provides:

SEC. 228. Protesting of Assessment. - When the Commissioner or his duly authorized
representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his
findings: Provided, however, That a preassessment notice shall not be required in the following
cases:

(a) When the finding for any deficiency tax is the result of mathematical error in the
computation of the tax as appearing on the face of the return; or
 (b) When a discrepancy has been determined between the tax withheld and the amount
actually remitted by the withholding agent; or

(c) When a taxpayer who opted to claim a refund or tax credit of excess creditable
withholding tax for a taxable period was determined to have carried over and automatically
applied the same amount claimed against the estimated tax liabilities for the taxable
quarter or quarters of the succeeding taxable year; or

(d) When the excise tax due on excisable articles has not been paid; or

(e) When an article locally purchased or imported by an exempt person, such as, but not
limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded
or transferred to non-exempt persons.

The taxpayer shall be informed in writing of the law and the facts on which the assessment is
made; otherwise, the assessment shall be void.

Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be
required to respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly
authorized representative shall issue an assessment based on his findings.

Such assessment may be protested administratively by filing a request for reconsideration or

reinvestigation within thirty (30) days from receipt of the assessment in such form and manner
as may be prescribed by implementing rules and regulations. Within sixty (60) days from filing of
the protest, all relevant supporting documents shall have been submitted; otherwise, the
assessment shall become final.

If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180)
days from submission of documents, the taxpayer adversely affected by the decision or inaction
may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision,
or from the lapse of the one hundred eighty (180)-day period; otherwise, the decision shall
become final, executory and demandable.

Arguments:

Petitioner: Petitioner contends that the CTA erred in disregarding the rule on the finality of
assessments prescribed under Section 228 of the Tax Code. Petitioner asserts that even if respondent
filed a protest, it did not offer evidence to prove its claim that the deposit on subscription was an
advance made by respondents stockholders. Petitioner alleges that respondents failure to submit
supporting documents within 60 days from the filing of its protest as required under Section 228 of
the Tax Code caused the assessment of P12,328.45 for deposit on subscription to become final and
unassailable.

Respondent: Respondent argues that deposit on future subscription is not subject to DST under
Section 175 of the Tax Code. Furthermore, respondent contends that by presenting its GIS and
financial statements, it had already sufficiently proved that the amount sought to be taxed is deposit
on future subscription, which is not subject to DST. Respondent claims that it cannot be required to
submit proof of DST payment on subscription because such payment is non-existent. Thus, the
burden of proving that there was an agreement to subscribe and that certificates of stock were issued
for the deposit on subscription rests on petitioner and his examiners.

Ruling:

1. Respondent is NOT liable to pay DST. Based on evidence, there was no agreement to
subscribe to the unissued shares. Here, the deposit on stock subscription refers to an amount of
money received by the corporation as a deposit with the possibility of applying the same as payment
for the future issuance of capital stock. In Commissioner of Internal Revenue v. Construction
Resources of Asia, Inc., Court held:

We are firmly convinced that the Government stands to lose nothing in imposing the
documentary stamp tax only on those stock certificates duly issued, or wherein the
stockholders can freely exercise the attributes of ownership and with value at the time they
are originally issued. As regards those certificates of stocks temporarily subject to suspensive
conditions they shall be liable for said tax only when released from said conditions, for then
and only then shall they truly acquire any practical value for their owners.

The deposit on stock subscription is merely an amount of money received by a corporation with
a view of applying the same as payment for additional issuance of shares in the future, an event
which may or may not happen. The person making a deposit on stock subscription does not have the
standing of a stockholder and he is not entitled to dividends, voting rights or other prerogatives
andattributes of a stockholder. Hence, respondent is not liable for the payment of DST on its deposit
on subscription for the reason that there is yet no subscription that creates rights and obligations
between the subscriber and the corporation.

2. Court rejects petitioners view that the assessment has become final and unappealable. It
cannot be said that respondent failed to submit relevant supporting documents that would render
the assessment final because when respondent submitted its protest, respondent attached the GIS
and Balance Sheet. Further, petitioner cannot insist on the submission of proof of DST payment
because such document does not exist as respondent claims that it is not liable to pay, and has not
paid, the DST on the deposit on subscription. The BIR can only inform the taxpayer to submit
additional documents. The BIR cannot demand what type of supporting documents should be
submitted. Otherwise, a taxpayer will be at the mercy of the BIR, which may require the production of
documents that a taxpayer cannot submit.
 Respondent has complied with the requisites in disputing an assessment pursuant to Section
228 of the Tax Code. Hence, the tax assessment cannot be considered as final, executory and
demandable.