CIR v LINCOLN PHILIPPINE LIFE

G.R. No. 119176, March 19, 2002

 While tax avoidance schemes and arrangements are not prohibited, tax laws cannot
be circumvented in order to evade the payment of just taxes.

Facts:
Lincoln Philippine Life Insurance Co., Inc., (Lincoln PLICI), a domestic corporation, is
engaged in life insurance business. Prior to 1984, Lincoln PLICI issued a special kind of life
insurance policy known as the “Junior Estate Builder Policy,” which provides for an
automatic increase in the amount of life insurance coverage upon attainment of a certain
age by the insured without the need of issuing a new policy. The clause was to take effect in
1984. Documentary stamp taxes (DST) due on the policy were paid only on the initial sum
assured.

In 1984, Lincoln PLICI also issued 50,000 shares of stock dividends. DST were paid based
only on the par value and not on the book value.

CIR issued deficiency DST assessment for the year 1984 corresponding to: (1) the amount
of automatic increase of the sum assured on the policy issued, and (2) the book value in
excess of the par value of the stock dividends.

Lincoln PLICI filed a petition in the CTA seeking the cancellation of the assessments. CTA
granted the petition. CIR appealed to the CA. CA affirmed CTA’s decision insofar as it
nullified the assessment on the insurance policy but reversed the same with regard to the
assessment on the stock dividends.

Both CIR and Lincoln PLICI appealed to the Supreme Court when the motion for
reconsideration was denied.

CIR claims that the “automatic increase clause” in the subject insurance policy is separate
and distinct from the main agreement, and that the original policy was essentially re-issued
when the additional obligation was assumed upon effectivity of the “automatic increase
clause” in 1984; hence, a deficiency assessment based on the additional insurance not
covered in the main policy is in order.

Issue:
Whether Lincoln PLICI is liable to pay a deficiency assessment based on the “automatic
increase clause” in the insurance policy.

Ruling:
Yes. The deficiency of DST imposed on private respondent is definitely not on the amount
of the original insurance coverage, but on the increase of the amount insured upon the
effectivity of the “Junior Estate Builder Policy.”
It should be emphasized that while tax avoidance schemes and arrangements are not
prohibited, tax laws cannot be circumvented in order to evade the payment of just taxes. In
the case at bar, to claim that the increase in the amount insured (by virtue of the automatic
increase clause incorporated into the policy at the time of issuance) should not be included
in the computation of the DST due on the policy would be a clear evasion of the law
requiring that the tax be computed on the basis of the amount insured by the policy.

Petition is given due course. CA decision is set aside insofar as it affirmed the decision of
the CTA nullifying the deficiency stamp tax assessment petitioner imposed on private
respondent.