PERCY TAXIN| GROSS INCOME 1

CIR vs CA, CTA and A. SORIANO CORP

FACTS: Don Andres Soriano (American), founder of A. Soriano Corp.
(ASC) had a total shareholdings of 185,154 shares. Broken down, the
shares comprise of 50,495 shares which were of original issue when
the corporation was founded and 134,659 shares as stock dividend
declarations. So in 1964 when Soriano died, half of the shares he held
went to his wife as her conjugal share (wifes legitime) and the
other half (92,577 shares, which is further broken down to 25,247.5
original issue shares and 82,752.5 stock dividend shares) went to the
estate. For sometime after his death, his estate still continued to
receive stock dividends from ASC until it grew to at least 108,000
shares.
In 1968, ASC through its Board issued a resolution for the redemption
of shares from Sorianos estate purportedly for the planned
Filipinization of ASC. Eventually, 108,000 shares were redeemed
from the Soriano Estate. In 1973, a tax audit was conducted.
Eventually, the Commissioner of Internal Revenue (CIR) issued an
assessment against ASC for deficiency withholding tax-at-source. The
CIR explained that when the redemption was made, the estate
profited (because ASC would have to pay the estate to redeem), and
so ASC would have withheld tax payments from the Soriano Estate
yet it remitted no such withheld tax to the government.
ASC averred that it is not duty bound to withhold tax from the estate
because it redeemed the said shares for purposes of Filipinization
of ASC and also to reduce its remittance abroad.
ISSUE: Whether or not ASCs arguments are tenable.
HELD: No. The reason behind the redemption is not material. The
proceeds from a redemption is taxable and ASC is duty bound to
withhold the tax at source. The Soriano Estate definitely profited from
the redemption and such profit is taxable, and again, ASC had the
duty to withhold the tax. There was a total of 108,000 shares
redeemed from the estate. 25,247.5 of that was original issue from
the capital of ASC. The rest (82,752.5) of the shares are deemed to
have been from stock dividend shares. Sale of stock dividends is
taxable. It is also to be noted that in the absence of evidence to the
contrary, the Tax Code presumes that every distribution of corporate
property, in whole or in part, is made out of corporate profits such as
stock dividends.
It cannot be argued that all the 108,000 shares were distributed from
the capital of ASC and that the latter is merely redeeming them as
such. The capital cannot be distributed in the form of redemption of
stock dividends without violating the trust fund doctrine wherein
the capital stock, property and other assets of the corporation are
regarded as equity in trust for the payment of the corporate
creditors. Once capital, it is always capital. That doctrine was
intended for the protection of corporate creditors.

The three elements in the imposition of income tax are: (1) there
must be gain or and profit, (2) that the gain or profit is realized or
received, actually or constructively,
108
and (3) it is not exempted by
law or treaty from income tax. Any business purpose as to why or
how the income was earned by the taxpayer is not a requirement.
Income tax is assessed on income received from any property, activity
or service that produces the income because the Tax Code stands as
an indifferent neutral party on the matter of where income comes
from.
109

As stated above, the test of taxability under the exempting clause of
Section 83(b) is, whether income was realized through the
PERCY TAXIN| GROSS INCOME 2

redemption of stock dividends. The redemption converts into money
the stock dividends which become a realized profit or gain and
consequently, the stockholders separate property.
110
Profits derived
from the capital invested cannot escape income tax. As realized
income, the proceeds of the redeemed stock dividends can be
reached by income taxation regardless of the existence of any
business purpose for the redemption. Otherwise, to rule that the said
proceeds are exempt from income tax when the redemption is
supported by legitimate business reasons would defeat the very
purpose of imposing tax on income. Such argument would open the
door for income earners not to pay tax so long as the person from
whom the income was derived has legitimate business reasons. In
other words, the payment of tax under the exempting clause of
Section 83(b) would be made to depend not on the income of the
taxpayer, but on the business purposes of a third party (the
corporation herein) from whom the income was earned. This is
absurd, illogical and impractical considering that the Bureau of
Internal Revenue (BIR) would be pestered with instances in
determining the legitimacy of business reasons that every income
earner may interposed. It is not administratively feasible and cannot
therefore be allowed.


CIR vs MANNING
COMMISSIONER OF INTERNAL REVENUE vs. MANNING
L-28398 | Aug 6, 1975 | Petition for Review | Castro
Petitioner: Commissioner of Internal Revenue
Respondents: John Manning, W.D. McDonald, E.E. Simmons & CTA

Quick Summary:
Facts: Reese, the majority stockholder of Mantrasco, executed a trust
agreement between him, Mantrasco, Ross, Selph, carrascoso & Janda
law firm and the minority stockholders, Manning, McDonald and
Simmons. Said agreement was entered into because of Reeses desire
that Mantrasco and Mantrasocs 2 subsidiaries, Mantrasco Guam and
Port Motors, to continue under the management of Manning,
McDonald and Simmons upon his [Reese] death. When Reese died,
Mantrasco paid Reeses estate the value of his shares. When said
purchase price has been fully paid, the 24,700 shares, which were
declared as dividends, were proportionately distributed to Manning,
McDonald and Simmons. Because of this, the BIR issued assessments
on Manning, McDonald and Simmons for deficiency income tax for
1958. Manning et al, opposed this assessment but the BIR still found
them liable. Manning et al. appealed to the CTA, which absolved
them from any liability.
Held: The manifest intention of the parties to the trust agreement
was, in sum and substance, to treat the 24,700 shares of Reese as
absolutely outstanding shares of Reese's estate until they were fully
paid. Such being the true nature of the 24,700 shares, their
declaration as treasury stock dividend in 1958 was a complete nullity
and plainly violative of public policy. A stock dividend, being one
payable in capital stock, cannot be declared out of outstanding
corporate stock, but only from retained earnings.
A stock dividend always involves a transfer of surplus (or profit) to
capital stock. A stock dividend is a conversion of surplus or undivided
profits into capital stock, which is distributed to stockholders in lieu of
a cash dividend.

Facts:
1952 - Mantrasco had an authorized capital stock of P2.5M
divided into 25,000 common shares. 24,700 of these shares
are owned by Julius Reese while the rest, at 100 each, are
owned by Manning, McDonald & Simmons.
PERCY TAXIN| GROSS INCOME 3

February 29, 1958 - a trust agreement was executed between
Reese, Mantrasco, Ross, Selph, carrascoso & Janda law firm,
Manning, McDonald and Simmons. Said agreement was
entered into because of Reeses desire that Mantrasco and
Mantrasocs 2 subsidiaries, Mantrasco Guam and Port Motors,
to continue under the management of Manning, McDonald
and Simmons upon his [Reese] death.
October 19, 1954 - Reese died. However, the projected
transfer of his shares in the name of Mantrasco could not be
immediately effected for lack of sufficient funds to cover the
initial payment on the shares.
February 2, 1955 - after Mantrasco made a partial payment of
Reese's shares, the certificate for the 24,700 shares in Reese's
name was cancelled and a new certificate was issued in the
name of Mantrasco. Also, new certificate was endorsed to the
law firm of Ross, Selph, Carrascoso and Janda, as trustees for
and in behalf of Mantrasco.
December 22, 1958 - a resolution was passed during a special
meeting of Mantrasco stockholders.
November 25, 1963 - entire purchase price of Reese's interest
in Mantrasco was finally paid in full by Mantrasco.
May 4, 1964 - trust agreement was terminated and the
trustees delivered to Mantrasco all the shares which they
were holding in trust.
September 14, 1962 - BIR ordered an examination of
Mantrascos books. This examination disclosed that:
1. as of December 31, 1958 the 24,700 shares declared as
dividends had been proportionately distributed to
Manning, McDonald & Simmons, representing a total book
value or acquisition cost of P7,973,660
2. Manning, McDonald & Simmons failed to declare the said
stock dividends as part of their taxable income for the year
1958
Thus, BIR examiners concluded that the distribution of
Reese's shares as stock dividends was in effect a distribution
of the "asset or property of the corporation as may be
gleaned from the payment of cash for the redemption of said
stock and distributing the same as stock dividend."
April 14, 1965 - Commissioner of Internal Revenue issued
notices of assessment for deficiency income taxes to Manning,
McDonald & Simmons for the year 1958.
Manning, McDonald & Simmons opposed said assessments.
BIR still held them liable for these assessments.
Manning, McDonald & Simmons appealed to the CTA.
CTA: absolved Manning, McDonald & Simmons from any
liability on the ground that their respective 1/3 interest in
Mantrasco remained the same before and after the
declaration of stock dividends and only the number of shares
held by each of them changed.
Issues:
1. WON the shares are treasury shares [NO]
2. WON Manning, McDonald & Simmons should pay for
deficiency income taxes [YES]
Ratio:
1. Treasury shares are stocks issued and fully paid for and re-
acquired by the corporation either by purchase, donation,
forfeiture or other means. Treasury shares are therefore
issued shares, but being in the treasury they do not have the
status of outstanding shares. Consequently, although a
treasury share, not having been retired by the corporation
re-acquiring it, may be re-issued or sold again, such share, as
long as it is held by the corporation as a treasury share,
participates neither in dividends, because dividends cannot
be declared by the corporation to itself, nor in the meetings
of the corporation as voting stock, for otherwise equal
distribution of voting powers among stockholders will be
effectively lost and the directors will be able to perpetuate
their control of the corporation, though it still represents a
paid-for interest in the property of the corporation.
PERCY TAXIN| GROSS INCOME 4

In this case, such essential features of a treasury share
are lacking in the former shares of Reese.
The manifest intention of the parties to the trust
agreement was, in sum and substance, to treat the 24,700
shares of Reese as absolutely outstanding shares of
Reese's estate until they were fully paid. Such being the
true nature of the 24,700 shares, their declaration as
treasury stock dividend in 1958 was a complete nullity
and plainly violative of public policy. A stock dividend,
being one payable in capital stock, cannot be declared
out of outstanding corporate stock, but only from
retained earnings.

Nature of a stock dividend
A stock dividend always involves a transfer of surplus (or
profit) to capital stock.
A stock dividend is a conversion of surplus or undivided
profits into capital stock, which is distributed to
stockholders in lieu of a cash dividend.

2. The ultimate purpose which the parties to the trust
agreement aimed to realize is to make Manning, McDonalds
& Simmons the sole owners of Reeses interest in Mantrasco
by utilizing the periodic earnings of Mantrasco and its
subsidiaries to directly subsidize their purchase of said
interests and by making it appear that they have not
received any income from those firms when, in fact, by the
formal declaration of non-existent stock dividends in the
treasury they secured to themselves the means to turn around
as full owners of Reeses shares.
Manning, McDonald & Simmons, using the trust
instrument as a convenient technical device, bestowed
unto themselves the full worth and value of Reese's
corporate holdings with the use of the very earnings of the
companies.
Such package device, obviously not designed to carry out
the usual stock dividend purpose of corporate expansion
reinvestment but exclusively for expanding the capital
base of Manning, McDonald & Simmons in Mantrasco,
cannot be allowed to deflect their responsibilities toward
our income tax laws.
All these amounts are subject to income tax as being a
flow of cash benefits to Manning, McDonald & Simmons.

Commissioners assessment is erroneous
Commissioner should not have assessed the income tax on
the total acquisition cost of the alleged treasury stock
dividends in 1 lump sum.
The record shows that the earnings of Mantrasco over a
period of years were used to gradually wipe out the
holdings of Reese.
Consequently, those earnings should be taxed for each of
the corresponding years when payments were made to
Reeses estate on account of his 24,700 shares.

Dispositive: CTA judgment set aside. Case remanded to the CTA for
further proceedings for the recomputation of the income tax
liabilities of Manning, McDonald & Simmons.

WISE & CO. Inc. vs MEER
Facts: On June 1, 1937, Manila Wine Merchants, Ltd., a Hongkong
company, was liquidated and its capital stock was distributed to its
stockholders, one of which is the petitioner. As part of its liquidation,
the corporation was sold to Manila Wine Merchants., Inc. for
Php400,000. The said earnings, declared as dividends, were
distributed to its stockholders. The Hongkong company then paid the
income tax for the entire earnings. As a result of the sale of its
business and assets, a surplus was realized by the Hongkong company
PERCY TAXIN| GROSS INCOME 5

after deducting the dividends. This surplus was also distributed to its
stockholders. The Hongkong company also paid the income tax for
the said surplus. The petitioners then filed their respective income tax
returns. The respondent Commissioner, then, made a deficiency
assessment charging the individual stockholders for taxes on the
shares distributed to them despite the fact that income tax was
already paid by the Hongkong company. The petitioners paid the
assessed amount in protest. The lower courts ruled in favor of the
Commissioner of Internal Revenue, hence, this action.

Issue(s):
1. Whether the amount received by the petitioners were
ordinary dividends or liquidating dividends.
2. Whether such dividends were taxable or not.
3. Whether or not the profits realized by the non-resident
alien individual appellants constitute income from the Philippines
considering that the sale took place outside the Philippines.

Held:
1. The dividends are liquidating dividends or payments for
surrendered or relinquished stock in a corporation in complete
liquidation. It was stipulated in the deed of sale that the sale and
transfer of the corporation shall take effect on June 1, 1937 while
distribution took place on June 8. They could not consistently deem
all the business and assets of the corporation sold as of June 1, 1937,
and still say that said corporation, as a going concern, distributed
ordinary dividends to them thereafter.
2. Yes. Petitioners received the said distributions in exchange for the
surrender and relinquishment by them of their stock in the liquidated
corporation. That money in the hands of the corporation formed a
part of its income and was properly taxable to it under the Income
Tax Law. When the corporation was dissolved in the process of
complete liquidation and its shareholders surrendered their stock to
it and it paid the sums in question to them in exchange, a transaction
took place. The shareholder who received the consideration for the
stock earned received that money as income of his own, which again
was properly taxable to him under the Income Tax Law.
3. The contention of the petitioners that the earnings cannot be
considered as income from the Philippines because the sale was
made outside the Philippines and is not subject to Philippine tax law is
untenable. At the time of the sale, the Hongkong company was
engage in its business in the Philippines. Its successor was a domestic
corporation and doing business also in the Philippines. It must be
taken into consideration that the Hongkong company was
incorporated for the purpose of carrying business in the Philippine
Islands. Hence, its earnings, profits and assets, including those from
whose proceeds the distribution was made, had been earned and
acquired in the Philippines. It is clear that the distributions in
questions were income from Philippine sources, hence, taxable
under Philippine law.