In Security Bank Corporation v. Commissioner of Internal Revenue, the Supreme Court affirmed that sales of securities under repurchase agreements are subject to documentary stamp tax (DST) under Section 176 of the National Internal Revenue Code (NIRC). This ruling clarifies that DST applies to all sales of securities, regardless of whether they involve repurchase agreements, and that a compromise agreement concerning DST on promissory notes does not extend to DST on sales of securities. This decision reinforces the government’s authority to collect DST on securities transactions, thereby impacting financial institutions and other entities engaged in such sales.

Taxing Times: Unraveling Documentary Stamp Tax on Security Sales

The case revolves around a deficiency documentary stamp tax (DST) assessment issued by the Bureau of Internal Revenue (BIR) against Security Bank Corporation (SBC) for its 1983 sales of securities under repurchase agreements. SBC contested the assessment, arguing that these transactions should not be subject to DST. The central legal question is whether the sale of securities under repurchase agreements falls under the provisions of the National Internal Revenue Code (NIRC) that levy DST on sales of securities, and whether a prior compromise agreement between SBC and the BIR regarding DST on promissory notes covered the DST on these sales of securities.

The facts of the case are straightforward. In 1987, SBC received a pre-assessment notice from the BIR for deficiency DST related to its 1983 transactions. This notice included DST on both promissory notes and sales of securities under repurchase agreements. SBC protested, arguing that its promissory notes were non-negotiable and therefore not subject to DST, and that the sale of securities under repurchase agreements was also exempt from DST. However, instead of responding to SBC’s protest, the BIR issued an assessment letter reiterating the deficiency. Subsequently, SBC entered into a compromise agreement with the BIR concerning the DST assessment on non-negotiable promissory notes, paying P641,743.23 in full settlement. Despite this, the BIR later demanded payment of P3,287,399.20 as DST on securities sold under repurchase agreements in 1983.

SBC argued that the BIR’s assessment lacked factual and legal bases, stating that sales of securities with repurchase agreements are covered under Section 180 (formerly Section 229) of the NIRC, which are not subject to DST imposed by Section 176 (formerly Section 225) of the NIRC. However, the Supreme Court disagreed. The Court referred to Section 173 of the NIRC, which states that stamp taxes are levied upon documents, instruments, and papers, including sales and transfers of the obligation, right, or property incident thereto. The Court also cited the former Section 225 (now Section 176) of the NIRC, which explicitly covers sales of securities:

SEC. 225. Stamp tax on sales, agreements to sell, memorandum of sales, deliveries or transfer of bonds, due-bills, certificates of obligations, or shares or certificates of stocks – On all sales, or agreements to sell or memorandum of sales, or deliveries, or transfer of bonds, 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 bond, due-bills, certificates of obligation or stock, or to secure the future payment of money, or for the future transfer of any bond, due-bill, certificates of obligation or stock, there shall be collected a documentary stamp tax of twenty-five centavos on each two hundred pesos, or fractional part thereof, of the par value of such bond, due-bill, certificates of obligation or stock…

The Court emphasized that the law clearly states that all sales of securities are taxable, without any distinction as to the nature or type of the sale. It rejected SBC’s argument that the sales of securities fell under Section 180 of the Tax Code, noting that the revenue memorandum circulars and BIR ruling cited by SBC were issued after 1983 and could not override the clear language of the Tax Code. The Supreme Court also noted that it is bound by the factual findings of the Court of Tax Appeals (CTA), which had not ruled that the subject securities fell under Section 180 instead of Section 176 of the NIRC. The Supreme Court has consistently recognized the expertise of the CTA in tax matters, as highlighted in Commissioner of Internal Revenue v. Court of Appeals:

x x x the Court of Tax Appeals is a highly specialized body specifically created for the purpose of reviewing tax cases. Through its expertise, it is undeniably competent to determine the issue of whether. x x x Consequently, as a matter of principle, this Court will not set aside the conclusion reached by the Court of Tax Appeals which is, by the very nature of its function, dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the subject unless there has been an abuse or improvident exercise of authority.

Addressing the second issue, the Court held that the compromise agreement between SBC and the BIR did not cover the DST assessment on sales of securities with repurchase agreements. The agreement explicitly pertained only to the assessment relating to non-negotiable promissory notes issued prior to October 15, 1984. Section VI of the agreement further clarified the exclusions, stating that issues not involving DST on promissory notes were not included or affected by the compromise. The DST assessment on sales of securities, arising from the act of “selling” securities, is distinct from the DST on promissory notes, which arises from the act of “issuing” promissory notes. The Court rejected the notion that securities and promissory notes were the same for the purposes of the compromise agreement. The Court further noted that the term “promissory note” has a specific meaning under the negotiable instruments law, which does not include “securities.”

Finally, the Court addressed SBC’s argument that the BIR had accepted its offer to settle the entire DST deficiency assessment for 1983, including the DST assessment for securities with repurchase agreements. The Court ruled that any such acceptance or approval by BIR officials was not valid because it was not made by the BIR Commissioner, who has the sole authority to compromise taxes under Section 204 of the NIRC. There was no evidence that the BIR Commissioner had delegated this authority to the revenue officials who purportedly accepted and approved SBC’s offer. Therefore, the Court held that the actions of these officials were ultra vires and did not bind the BIR.

FAQs

What was the key issue in this case?	The key issue was whether the sale of securities under repurchase agreements is subject to documentary stamp tax (DST) and whether a prior compromise agreement covered this tax. The Supreme Court ruled that DST applies and that the compromise agreement did not cover it.
What is documentary stamp tax (DST)?	Documentary stamp tax is a tax levied on various documents, instruments, and papers, as specified by the National Internal Revenue Code (NIRC). It is imposed on transactions such as sales, agreements, and transfers of obligations or rights.
What does Section 176 of the NIRC cover?	Section 176 (formerly Section 225) of the NIRC covers stamp tax on sales, agreements to sell, or transfers of bonds, due-bills, certificates of obligation, or shares or certificates of stock. It imposes a DST on these transactions based on the par value of the securities.
Did the compromise agreement cover DST on sales of securities?	No, the Supreme Court determined that the compromise agreement only covered assessments related to non-negotiable promissory notes issued prior to October 15, 1984. It did not include or affect DST on sales of securities with repurchase agreements.
Who has the authority to compromise taxes?	Under Section 204 of the NIRC, the Commissioner of Internal Revenue has the sole power and authority to compromise taxes. Any agreement made by other officials without proper delegation is considered invalid.
What was Security Bank’s argument?	Security Bank argued that the sales of securities under repurchase agreements should fall under Section 180 (formerly Section 229) of the NIRC, which does not impose DST. They also claimed the compromise agreement covered the DST on these sales.
Why did the Supreme Court disagree with Security Bank?	The Supreme Court disagreed because Section 176 of the NIRC clearly states that all sales of securities are taxable. The Court also found that the compromise agreement specifically excluded DST on sales of securities.
What is the significance of the Court of Tax Appeals (CTA) in this case?	The Supreme Court deferred to the expertise of the CTA, which is a specialized body for reviewing tax cases. The CTA’s findings that the securities did not fall under Section 180 were upheld by the Supreme Court.

The Supreme Court’s decision in Security Bank Corporation v. Commissioner of Internal Revenue reaffirms the principle that all sales of securities are subject to documentary stamp tax, regardless of whether they are under repurchase agreements. It also clarifies that compromise agreements must be strictly construed and apply only to the specific matters expressly included within their terms. This ruling ensures the government’s ability to collect DST on a broad range of securities transactions, impacting financial institutions and other entities engaged in such sales.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Security Bank Corporation v. CIR, G.R. No. 130838, August 22, 2006