Philacor Credit Corporation vs. Commissioner of Internal Revenue

An assignee or transferee of promissory notes is not liable for deficiency DST on the issuance of the notes where it did not make, sign, issue, accept, or transfer them, and the assignment of promissory notes is not subject to DST under Section 180 of the 1986 Tax Code.

Philacor Credit Corporation is a domestic corporation engaged in retail financing, under which a prospective appliance buyer may purchase appliances on installment from an appliance dealer; after credit approval, the buyer executes a unilateral promissory note in favor of the dealer, and the dealer assigns the note to Philacor. The 1986 Tax Code imposed DST on promissory notes under Section 180, and the controversy required determining whether that tax reached the issuance and assignment of the notes in Philacor’s retail financing arrangement.

Philacor, the retail financing company whose books were examined, purchased promissory notes from appliance dealers after appliance buyers executed those notes in favor of the dealers. Pursuant to Letter of Authority No. 17107 dated July 6, 1974, Revenue Officer Celestino Mejia examined Philacor’s books of accounts and other accounting records for the fiscal year August 1, 1992 to July 31, 1993. Philacor received tentative computations of deficiency taxes for that year, and its Finance Manager, Leticia Pangan, contested the tentative computations totaling P20,037,013.83 through a letter dated April 17, 1995.

On May 16, 1995, Mejia sent Philacor a letter revising the preliminary assessments to a deficiency income tax of P9,832,098.22, a deficiency percentage tax of P866,287.60, and a deficiency documentary stamp tax of P3,368,169.45, for a total of P14,066,555.27. Philacor then received Pre-Assessment Notices, all dated July 18, 1996, covering the alleged deficiency income, percentage, and DST, including increments. On February 3, 1998, Philacor received demand letters and the corresponding assessment notices, all dated January 28, 1998, assessing deficiency income tax of P12,888,085.09, deficiency percentage tax of P1,185,977.07, and deficiency DST of P3,368,196.45, for a total of P17,442,231.61, inclusive of increments.

On March 4, 1998, Philacor protested the PANs with a request for reconsideration and reinvestigation. It alleged that the deficiency income tax was erroneously computed because the BIR failed to consider reversing entries of revenue accounts and income adjustments such as repossessions, write-offs, and legal accounts; that the BIR similarly failed to consider reversing entries of repossessions, legal accounts, and write-offs in computing the percentage tax, so the total income reported was not equal to actual receipts from customers; and that, as for the deficiency DST, the accredited appliance dealers were required by law to affix documentary stamps on all promissory notes purchased until the enactment of Republic Act No. 7660, which took effect on January 15, 1994. The following day, Philacor filed a supplemental protest arguing that the assessments were void for failure to state the law and the facts on which they were based.

On September 30, 1998, Philacor filed a petition for review before the CTA Division, docketed as C.T.A. Case No. 5674. In the proceedings before the CTA, Philacor failed to prove that the DST on its promissory notes had been paid for the issuance and assignment, and the subject promissory notes did not bear documentary stamps. The CTA also observed that Philacor marked as Annex “J” a standard pro forma promissory note used in all similar transactions; the same document contained the issuance of the notes in favor of the appliance dealer and their assignments to Philacor, and the notes were transferred to Philacor by the appliance dealer on the same date that the appliance buyer issued them.

• “Using” under Regulations No. 26: Petitioner argued that the word “using” in Regulations No. 26 does not appear in Sections 173 and 180 of the Tax Code, so the regulation went beyond the law.
• “Accepting” under Section 173: Petitioner argued that “accepting” in Section 173 does not apply to promissory notes.
• Assignment/Transfer of Promissory Notes: Petitioner argued that the CTA en banc extended “assignment” and “transferring” in Section 173 to promissory notes; Sections 176, 178, and 198 expressly impose DST on transfer or assignment of certain documents, showing legislative intent that only those specified assignments or transfers are taxable.
• BIR Ruling No. 139-97: Petitioner argued that BIR Ruling No. 139-97 ruled that the assignment of a loan, which Section 180 treats in the same breath as a promissory note, is not subject to DST.

• DST as Tax on Exercise of Privilege: Respondent argued that DST is levied on the exercise of privileges through the execution of specific instruments, or the privilege to enter into a transaction, and therefore should be imposed on every exercise of the privilege to enter into a transaction.
• Liability under Regulations No. 26: Respondent maintained that Philacor is liable for DST because Section 42 of Regulations No. 26 makes any person transferring or using a promissory note responsible for the tax.

• Liability for DST on Issuance: Whether Philacor, as assignee or transferee that received or accepted the promissory notes, is primarily liable for deficiency DST on the issuance of the promissory notes under Section 173 and Section 180 of the 1986 Tax Code, including under Section 42 of Regulations No. 26 as a person “using” the notes.
• DST on Assignment of Promissory Notes: Whether the assignment or transfer of promissory notes to Philacor is subject to DST under Section 180 of the 1986 Tax Code.

• Liability for DST on Issuance: No. Philacor did not make, sign, issue, accept, or transfer the notes; “acceptance” applies to bills of exchange, not promissory notes, and Section 42 of Regulations No. 26 cannot expand the statutory list of persons liable.
• DST on Assignment of Promissory Notes: No. Section 180 taxes the issuance and renewal of promissory notes, not their assignment or transfer; the law expressly taxes assignment or transfer only for specified instruments under Sections 176, 178, and 198.

• Liability for DST on Issuance: Section 180 clearly taxes promissory notes, but the question is who is liable. Section 173, as quoted from the 1997 NIRC, lists the persons primarily liable: the person making, signing, issuing, accepting, or transferring the taxable document; if that party is exempt, the non-exempt other party is liable. Philacor did not make, sign, issue, accept, or transfer the promissory notes. The appliance buyers made, signed, and issued the notes, while the appliance dealer transferred them to Philacor, which received or “accepted” them only in the ordinary sense. “Acceptance” is not applicable to promissory notes but only to bills of exchange under Section 132 of the Negotiable Instruments Law; a 1955 BIR ruling also gave “accepting” a narrow meaning. Section 42 of Regulations No. 26 uses “can,” which is permissive, and cannot be read to make any person “using” a promissory note liable regardless of whether that person is a party named by law. Implementing rules cannot amend the law, as held in Commissioner of Internal Revenue vs. Placer Dome Technical Services (Phils.), Inc. Although US stamp tax laws are broader, Congress did not adopt that coverage, and expanding it would be judicial legislation. The SC also refused to consider external facts—Philacor’s credit approval, the pro forma note, and the same-date transfer—because DST liability is determined from the document itself.
• DST on Assignment of Promissory Notes: The CIR’s theory that DST is imposed on every exercise of the privilege to enter into a transaction has no support in Section 180. The law follows a pattern of expressly taxing transfer or assignment only for specified documents: Section 176 for due bills, certificates of obligation, or shares of stock; Section 178 for certificates of profits; and Section 198 for mortgages, leases, or policies of insurance. Section 198 does not include assignment or transfer of evidences of indebtedness; it taxes renewal, not a mere transfer or assignment. A renewal involves an increase in the amount of indebtedness or an extension of the period, not a mere change in the person of the payee. BIR Ruling No. 139-97 and Revenue Regulations No. 13-2004 support the rule that the assignment of a loan not for renewal or continuance is not subject to DST, and that DST on debt instruments is imposed only on the original issue, not on a secondary sale. These issuances apply as interpretations of the same rule on promissory notes. Finally, tax laws are construed strictly against the State and liberally in favor of the taxpayer.

• Document-based determination of DST liability — Liability for DST and the amount due are determined from the document itself, through its form and face, and cannot be affected by proof of facts outside it. The SC refused to use Philacor’s credit approval, the pro forma nature of the note, or the same-date transfer to make Philacor a party to the issuance.
• “Acceptance” in DST law is limited to bills of exchange — Under Section 173, an acceptor is primarily liable, but acceptance under Section 132 of the Negotiable Instruments Law refers to bills of exchange. A transferee’s receipt of promissory notes is not acceptance, so Philacor was not liable for DST on issuance.
• Implementing regulations cannot expand the statute — Section 42 of Regulations No. 26 cannot make any “user” of a promissory note liable beyond the persons named in the Tax Code; an implementing rule cannot amend, supplant, or modify the law.
• No DST on assignment of promissory notes — Section 180 taxes the issuance and renewal of promissory notes, not their assignment or transfer. Express DST on assignment or transfer appears only for specified instruments under Sections 176, 178, and 198.
• Strict construction of tax laws — Doubts in tax laws are construed strictly against the State and liberally in favor of the taxpayer; DST should not be presumed beyond what the law expressly and clearly declares. The SC applied this to reject the CIR’s broad “exercise of privilege” theory.

• “The persons primarily liable for the payment of the DST are the person (1) making; (2) signing; (3) issuing; (4) accepting; or (5) transferring the taxable documents, instruments or papers.” — The SC identifies the statutory list of persons primarily liable and uses it to exclude Philacor from liability on the issuance of the notes.
• “‘Acceptance,’ however, is an act that is not even applicable to promissory notes, but only to bills of exchange.” — The SC rejects the CTA’s basis for holding Philacor liable as an accepting party.
• “Implementing rules and regulations cannot amend a law for they are intended to carry out, not supplant or modify, the law.” — The SC uses this rule to reject an expansive reading of Section 42 of Regulations No. 26.
• “The settled rule is that in case of doubt, tax laws must be construed strictly against the State and liberally in favor of the taxpayer.” — The SC applies this canon to hold that the assignment of promissory notes is not subject to DST.

• Commissioner of Internal Revenue vs. Placer Dome Technical Services (Phils.), Inc., G.R. No. 164365, June 8, 2007, 524 SCRA 271, 276 — Cited for the rule that implementing rules and regulations cannot amend the law they implement.
• Lincoln Philippine Life Insurance Corp. vs. CA, 354 Phil. 896, 904 (1998) — Cited for the rule that tax laws are construed strictly against the State and liberally in favor of the taxpayer.
• U.S. vs. Isham, 84 U.S. 496 (1873) — Cited, through de Leon, for the doctrine that DST liability and amount are determined from the document itself.
• Danville Building Ass’n vs. Pickering, 294 F. 117 (D.C.) — Cited with Isham for the same document-based determination of DST liability.
• State of Florida Department of Revenue vs. Miami National Bank, 374 So. 2d 1 (1979) — Cited on the distinction between a renewal and a mere transfer or assignment.

• Section 180, 1986 Tax Code (Presidential Decree No. 1158, as amended) — Imposes DST on promissory notes, whether negotiable or non-negotiable, and on each renewal; the SC held it does not tax the assignment or transfer of promissory notes.
• Section 180, 1997 NIRC, as amended by Republic Act No. 9243 — The SC compared it with the 1986 provision and noted that the part on promissory notes remained the same: it taxes issuance and renewal, not assignment or transfer.
• Section 173, 1997 NIRC (quoted in the decision) — Names the persons primarily liable for DST as the person making, signing, issuing, accepting, or transferring the taxable document; if that party is exempt, the non-exempt other party is liable. The SC used this list to exclude Philacor.
• Section 42, Regulations No. 26 — Provides that the person who signs or issues a promissory note and any person transferring or using a promissory note can be held responsible for DST; the SC read “can” as permissive and limited it to persons named by law, not any user.
• Section 132, Negotiable Instruments Law — Defines acceptance as the drawee’s written assent to the drawer’s order in a bill of exchange; the SC used it to hold that “acceptance” does not apply to promissory notes.
• Sections 176, 178, and 198, 1986 Tax Code — Expressly impose DST on transfer or assignment of specified documents; Section 198 covers assignment or transfer of mortgages, leases, or insurance policies, not evidences of indebtedness. The SC used this pattern to reject DST on assignment of promissory notes.