Commissioner of Internal Revenue v. Del Rosar

FIFTEENTH DIVISION [CA-G.R. SP No. 37402. August 28, 1997.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . RAMON R. DEL ROSARIO , respondent . D E C I S I O N REYES , R.T. , J p : WHAT is the basis in computing the tax on capital gains from sales of listed shares of stock the nature of the shares of stocks or the manner by which these stocks are traded? The question is posed in this petition for review filed by the Commissioner of Internal Revenue, seeking the reversal of a decision 1 of the Court of Tax Appeals (CTA) ordering the Commissioner to refund or issue tax credit in favor of Ramon del Rosario, Jr. The dispositive portion of the assailed decision reads: "WHEREFORE, in view of the foregoing the petition for review is GRANTED. Respondent is hereby ordered to refund or issue a tax credit in favor of petitioner, Ramon del Rosario, Jr., in the amount of P2,502,568.25, representing overpaid capital gains tax involving stock transactions sold outside of the stock exchange for the year 1990." 2 The antecedent facts as found by the CTA are as follows: On March 28, 1990, Ramon del Rosario, Jr., as assignor, executed a Deed of Assignment in favor of Benguet Corporation (Assignee) whereby the assignor transferred in favor of the assignee a total of 138,750 outstanding shares in AB Capital and Investment Corporation (ABCIC for brevity) in exchange for 644,917 newly-issued Class "A" Benguet shares at P38.52 per share (average closing price in the stock market from March 8 to 14, 1990) or a transfer value of P24,842,216.25. The acquisition cost of 138,750 ABCIC shares was P88.50 per share or P12,279,375.00. By reason of the transfer, the ABCIC shares were valued at P179,043 per share (P24,842,216.25/138,750 ABCIC shares) or a total of P24,842,216.25. As a result of the stock swap agreement, del Rosario realized a capital gain in the amount of P12,562,841.25 (i.e., P24,842,216.25 less P12,279,375.00). Thus, on April 27, 1990, del Rosario paid the Bureau of Internal Revenue the corresponding capital gains tax in the amount of P2,502,568.25, pursuant to Section 21(d)(1) of the National Internal Revenue Code (NIRC). Subsequently, Benguet Corporation declared a 25% stock dividend to all stockholders of record as of June 15, 1990. Accordingly, del Rosario's share in Benguet was increased by 161,229 shares (25% of 644,917). Thus, after the stock dividend declaration, del Rosario has a total of 806,146 Benguet shares with an adjusted cost of P30.816 per shares (i.e., P24,842,216.25 divided by 806,146 shares). On December 21, 1990 del Rosario sold outside the stock exchange a total of 755,731 Class "A" Benguet shares to Mr. Leonardo T. Siguion Reyna for P11.00 per share, or a total consideration of P8,313,041.00. Since the adjusted cost of the shares sold amounted to P23,288,606.50 (755,731 shares @ P30.816 P11.00 per share), del Rosario allegedly incurred a loss in the amount of P14,975,565.50 (755,731 shares @ [P30.816 P11.00/share]). A Final Consolidated Tax Return on Stock Transactions (Shares of Stocks Not Traded Thru the Stock Exchange) was filed by del Rosario on January 22, 1991, covering all his stock transactions outside of the stock exchange for the year 1990. In said return, del Rosario reported a net capital loss of P3,956,200.85 and a refundable capital gains tax of P2,502,568.25, corresponding to the payment made on the stock swap transaction with Benguet Corporation on March 28, 1990. Subsequently, del Rosario filed on February 6, 1991 a claim for refund/application for tax credit certificates with the Bureau of Internal Revenue in the amount of P2,502,568.85. 3 To date, the Bureau has not acted on such claim for refund or tax credit. In order to tell the prescriptive period for filing a judicial claim for refund, del Rosario petitioned the CTA to order the Commissioner of the Bureau of Internal Revenue to refund to del Rosario the amount of P2,502,568.25 for 1990 as a result of the exchange of shares for AB Capital and Investment Corp. (formerly AMSCOR) with Benguet shares. As earlier indicated, the CTA granted del Rosario's petition. The BIR Commissioner's motion for reconsideration was denied, hence this petition with the following assignment of errors: 1. The Court of Tax Appeals (CTA) rule that Section 21 (d) (1) of the Tax Code governs the sale of del Rosario's listed Benguet shares of stock outside of the stock exchange, notwithstanding that the sale of listed shares, whether through the facilities of the local stock exchange or not, clearly falls within the purview of Section 21 (d) (2) of the same Code. 2. The CTA ruled that respondent del Rosario, is entitled to a tax refund or the issuance of tax credit certificate in the amount of P2,502,568.25 notwithstanding the lack of factual and legal basis. The provisions of the NIRC pertinent to the controversy are the following: Section 21. Tax on citizens or residents . (d) Capital gains from sales of shares of stock . The provisions of Section 33(b) notwithstanding, capital gains realized from the sale, exchange or other disposition of shares of stocks in any domestic corporation shall be taxed as follows: (1) Net capital gain as defined in Section 33(a) realized during each taxable year from the sale, exchange or other disposition of shares of stock not traded through a local stock exchange: Not over P100,000 10% Over P100,000 20% (2) Capital gains presumed to have been realized from the sale, exchange or disposition of shares of stock listed and traded through a local stock exchange: of 1% based on the gross selling price of the share or shares of stock. (emphasis ours) Section 21(d)(1) refers to the SCHEDULAR RATE of 10% and 20% based on the net capital gains. Section 21(d)(2) refers to the FINAL RATE of of 1% of the gross selling price. Two stock transactions of Ramon del Rosario, Jr. in 1990 are involved here, to wit: (1) a swap of his unlisted ABCIC shares of stocks with listed Benguet shares of stocks wherein he paid the Bureau of Internal Revenue the corresponding capital gains tax in the amount of P2,502,568.25, pursuant to Section 21 (d) (1) of the Tax Code; and (2) the subsequent sale of a portion of respondent del Rosario, Jr.'s Benguet listed shares of stocks outside of the stock exchange wherein he allegedly incurred a capital loss of P14,975,565.50. The application of Section 21(d)(1) of the Tax Code with respect to the first transaction is not disputed. What petitioner disputes are the application of Section 21(d)(1), instead of Section 21(d)(2) of the same Code, with respect to the second transaction and the offset of the alleged net capital loss on the second transaction against the capital gains on the first transaction resulting to an alleged net capital loss of P2,502,568.25 or an alleged overpayment of capital gains tax in the amount of P2,502,568.85 since the capital loss of P14,975,565.50 realized from the sale of his listed Benguet shares had alleged wiped out the capital gains of P12,583,841.21 realized in an earlier stock swap of his unlisted ABCIC shares with the listed Benguet shares. In upholding del Rosario's entitlement to a refund or tax credit, the CTA ruled that Section 21(d)(1) of the Tax Code governs the sale of the listed shares of stock on December 21, 1990 outside the facilities of the stock exchanges, explaining that "The nature of the shares of stocks (whether listed or not) is not material for the purpose of applying Section 21(d)(1) of the schedular rate of tax. What is material is the manner by which these shares are traded." 4 The Commissioner contends that Section 21(d)(2) of the Tax Code aforequoted governs the sale of listed shares of stocks although they were traded outside the facilities of the stock exchange, not Section 21(d)(1) of the same Code. We hold that the CTA ruling accords with the law Section 21(d)(1) pertains to the tax on stocks not traded through the stock exchange and Section 21(d)(2), to stocks traded through the stock exchange. There should be the concurrence of the "listing" of the shares as well as its "trading" through the facilities of the exchanges in order for the tax of of 1% under Section 21(d)(2) to be applicable. The word "traded" is not a mere qualification for the "listed" shares of stock, as the petitioner maintains. A cursory reading of subsections 1 and 2 sharply gives the distinction which accounts for the different tax rates; the first refers to those not traded and the second, to those traded. The language of the twin provisions are clear and unambiguous. They should be accorded their literal meaning. They ought to be applied without unnecessary, much less, strained or expanded interpretation. They are plain and readily understandable. The scheduler rate of 10% and 20% based on the net capital gains realized from sale of shares of stocks [Section 21(d)(1)] applies to those not traded through the local stock exchange . Where the language of a statute is clear and unambiguous, the law is applied according to its express terms and interpretation would be resorted to only where a literal interpretation would be either impossible or absurd of would lead to an injustice. 5 As the CTA aptly explained, quoting from a previous similar ruling: "While it is true that only those shares which are listed may be traded in the local stock exchange, it does not necessarily follow that listed shares may only be traded in the local stock exchange. They may be sold outside the local stock exchange. We agree with the petitioner that the 'listing' and actual 'trading' must occur in order for Section 21(d)(2) to apply. Please note that the said provision of law both mentions 'listed' and 'traded' joined together by the injuncture word 'and', meaning concurrence. If the shares of stock are listed but sold outside the local stock exchange. Section 21(d)(1) should apply. What is controlling is whether or not the shares of stock are traded in the local stock exchange. This is the common denominator in both provisions of law." 6 The literal interpretation that the tax of of 1% of the gross selling price under Section 21(d)(2) applies exclusively to shares listed and traded through the stock exchanges finds support in Revenue Regulations No. 2-82 7 which distinguishes between "shares which are traded through the stock exchanges" and "shares which are not traded through the stock exchanges but listed in one or more stock exchanges." This distinction clarifies the meaning of the words used in Section 21(d)(1) and (2) of the NIRC and affirms the view that listed shares may be sold outside of the stock exchanges, and thus, if not traded through the stock exchange, it is subject to capital gains tax at the rate of 10% and 20%. WHEREFORE, the petition for review is DISMISSED and the assailed decision AFFIRMED. No pronouncement as to costs. SO ORDERED. Martin, Jr . and Tuquero, JJ . , concur. Footnotes 1. CTA Case No. 4796 entitled Ramon R. del Rosario Jr. v. Commissioner of Internal Revenue, promulgated December 1, 1994, Annex "C", Rollo , pp. 62-69. 2. Page 7 of Decision, Rollo , p. 68. 3. CTA Decision, pp. 1-3, Rollo , pp. 62-64. 4. Francisco A. Dizon v. Commissioner of Internal Revenue, CTA Case No. 4798, November 17, 1993. 5. Cabanas v. Pilapil, 58 SCRA 94 (1974); Ramirez v. CA, 248 SCRA 599 (1995). 6. Ibazeta vs. Commissioner of Internal Revenue, CTA Case No. 4797, August 8, 1994. 7. Promulgated by the BIR in March 1982 pursuant to BP # 221 which imposed for the first time the tax of of 1% based on the gross selling price of the shares. This Revenue Regulations was not affected by the omnibus amendments to the NIRC brought about by the promulgation of EO No. 37 on July 31, 1986. Prior to the promulgation of EO 37 (and the introduction of the phrase "presumed gain" in the NIRC), the final tax rate of of 1% was already based on the gross selling price of the shares/sold. BIR itself invoked RR # 2-82 in some of its rulings from 1988 to 1990, as proof of the continued enforceability of RR # 2-82 even after the promulgation of EO 37 (BIR Ruling Nos. 141-88, 145-89, 193-89, 046-90 and 163-90).