Definition of Terms:

Corporation
- The term "corporation" shall include partnerships, no matter how created or organized, joint-stock
companies, joint accounts (cuentas en participacion), association, or insurance companies, but
does not include general professional partnerships and a joint venture or consortium formed for the
purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other
energy operations pursuant to an operating consortium agreement under a service contract with
the Government. "General professional partnerships" are partnerships formed by persons for the
sole purpose of exercising their common profession, no part of the income of which is derived from
engaging in any trade or business. (Section 22, NIRC)
Dividend
- refers to corporate profits allocated, lawfully declared and ordered by the directors to be
paid to the stockholders on demand or at a fixed time (SEC Memorandum Circular 11,
Series of 2008)
- may be declared out of a corporations unrestricted retained earnings which shall be
payable in cash, in property, or in stock to all stockholders on the basis of outstanding
stock held by them. The amount of retained earnings available for declaration as dividends
may be determined pursuant to regulations issued by the SEC. The approval of the board
of directors is generally sufficient to approve the distribution of dividends, except in the
case of stock dividends which requires the approval of stockholders representing not less
than 2/3 of the outstanding capital stock at a regular or special meeting duly called for the
purpose.
- represents the share in the net earnings distribution of a stockholders who own shares of
stocks of a company. It could be in the form of cash, property, company's own shares or
stock dividends and liquidating dividends upon liquidation and dissolution. It is basically
sourced from the unrestricted or free retained earnings of the company made available
through an action of the Board of Directors.
- Taxability of cash and/or property dividends would normally depend on the classification of
the company and the recipient stockholders.
o Company for determining tax on dividends may be classified as either a domestic
corporation or as a foreign corporation.
o Stockholders may be classified as either an individual or a corporation, and the
latter may further be classified as a domestic corporation, resident foreign, and
non-resident foreign corporation.
o Determining the classification would depend on the state where the same is
organized or constituted and existing. Domestic corporations are those organized
and existing under the laws of the Philippines. Those organized and existing under
the laws other than the Philippines are referred to as foreign corporation. Foreign
corporations doing business in the Philippines are normally classified as resident
foreign corporation, otherwise, the same shall be referred to as a non-resident
foreign corporation.
- that stock dividends are property and not income, and hence that the tax here in
question is a property and not an income tax (Rubio vs. CIR)

Purposes of Taxing Corporate Dividends:

to raise capital to hasten the industrialization of our developing economy;
to raise the needed capital through equity investment and at the same time to broaden the base of
equity ownership of existing corporations;
to restructure our tax system on investment income by realigning the taxation of dividend income
and interest income
Application
Taxation of Corporate Dividends
Dividends distributed by a DOMESTIC corporation to the following stockholders are taxed as
follows:
* Individuals, whether Filipinos or not, is subject to 10%;
* Domestic corporations exempt (final withholding tax);
* Resident foreign corporation - EXEMPT from income tax; and
* Non-resident foreign corporation - 15% subject to the rule on tax-sparing credit and/or Tax Treaty
rules
On the other hand, dividends distributed by a FOREIGN corporation to the following stockholders
are taxes as follows:
* Filipinos residing in Philippines is subject to 5-32% normal income tax;
* Filipinos not a resident of the Philippines is EXEMPT from income tax;
* Domestic corporations subject to 30% corporate income tax;
* Resident foreign corporation is EXEMPT from income tax; and
* Non-resident foreign corporation is EXEMPT from income tax.
Stock dividends are, as a rule EXEMPT from income tax as there is no flow of wealth to the
stockholder before and after the stock dividend. The increase in the number of shares as a result of
the stock dividend is not necessary income until after such shares are actually sold. However, if
such stock dividend distribution would constitute as an income distribution (e.g. increase in the
equity percentage of a stockholder), then, the same shall be taxed in the same manner above
MALACAANG
Manila
PRESIDENTIAL DECREE No. 1800
PROVIDING FOR THE TAXATION OF CERTAIN PASSIVE INCOME
WHEREAS, there is a need to raise capital to hasten the industrialization of our developing
economy;
WHEREAS, it is a more desirable policy to raise the needed capital through equity investment and
at the same time to broaden the base of equity ownership of existing corporations;
WHEREAS, there is a need to restructure our tax system on investment income by realigning the
taxation of dividend income and interest income;

WHEREAS, there is a need to simplify the collection of taxes on all types of investment income
through a withholding tax system.
NOW, THEREFORE, I, FERDINAND E. MARCOS, by virtue of the powers vested in me by the
Constitution do hereby decree and order:
Section 1. Section 21 of the National Internal Revenue Code is hereby amended by adding a new
paragraph to read as follows:
"Sec. 21. Rates of tax on citizens or residents.
xxx

xxx

xxx

Dividends received by an individual who is a citizen or resident of the Philippines from a domestic
corporation, shall be subject to a final tax at the rate of fifteen (15%) per cent on the total amount
thereof, which shall be collected and paid as provided in Sections 53 and 54 of this Code;
Section 2. Section 24, paragraph (c) of the National Internal Revenue Code is hereby amended to
read as follows:
xxx

xxx

xxx

(c) Rate of tax on certain dividends. Dividends received by a domestic or resident foreign
corporation from a domestic corporation liable to tax under this Code
(1) Shall be subject to a final tax of 10% on the total amount thereof, which shall be
collected and paid as provided in Sections 53 and 54 of this Code: Provided, That if the
recipient of such dividend is exempt from income taxation, no tax shall be imposed and
that if the recipient is enjoying preferential income tax treatment, the preferential tax rates
so provided shall apply;
(2) Shall not be included in the determination of the gross income of the recipient
corporation: Provided, however, That interest paid or incurred on indebtedness abroad by
a domestic or resident foreign corporation, which indebtedness was incurred to provide
funds for investment in a domestic corporation shall be allowed as a deduction from the
intercorporate dividends before computing the 10% final tax. Any excess of the interest
herein allowed as a deduction from intercorporate dividends may be deducted from the
other gross income of the recipient corporation, subject to the provisions of Section 30 (b)
of this Code.
The above deduction of interest from intercorporate dividends shall be allowed only if the recipient
domestic or resident foreign corporation submits an authenticated copy of the foreign loan
agreement stipulating the end-use of the loan proceeds and such other information as may be
required for its determination.
Section 3. Sub-paragraph (b) (8) of Section 29 of the same Code is hereby amended by adding
subparagraph (b) (8) (E) to read as follows:
Section 29. Gross income.

xxx

xxx

xxx

(E) Dividends received from a domestic corporation subjected to the final tax under Sections 21
and 24 of this Code.
Section 4. Section 53, paragraph (c) of the National Internal Revenue Code is hereby amended to
read as follows:
xxx

xxx

xxx

(c) Withholding tax on royalties. Royalties (except payments of any kind to mining claim-owners or
lessees of mining rights pursuant to any kind of agreement) received by individuals residing in the
Philippines and domestic and/or resident foreign corporations from any person whether natural or
juridical shall be subject to withholding tax at source at the rate of fifteen (15%) per cent thereof.
The tax shall be withheld by the payor-corporation and/or person and paid in the same manner and
subject to the same conditions as provided in Section 54 of the National Internal Revenue Code:
Provided, however, That the tax withheld under this sub-paragraph shall be credited against the
income tax liability of the recipient taxpayer for the taxable year.
Section 5. Section 53, paragraph (d) of the National Internal Revenue Code is hereby amended to
read as follows:
(d) Withholding tax on dividends. The tax imposed by Sections 21 and 24(c) of this Code on
dividends shall be withheld by the payor-corporation and paid in the same manner and subject to
the same conditions as provided in Section 54 of this Code.
Section 6. Effectivity. This Decree shall take effect on passive income earned beginning January 1,
1981.
G.R. No. 30855
January 20, 1930
C. PEREZ RUBIO, plaintiff-appellee,
vs.
COLLECTOR OF INTERNAL REVENUE, defendant-appellant.
MALCOLM, J.:
Uncomplicated by question of fact, the appeal in this case against submits for decision the legal
question of whether a stock dividend may lawfully be taxed as income of the stockholder.
The original Income Tax Law for the Philippines was the Revenue Act of September 8,
1916, which was expressly extended to the Philippines by the Congress of the United
States (12 Public Laws, pp. 251 et seq.). In section 2 (a) of this law, it was provided that
the term "dividends" shall be held to mean "any distribution made or ordered to be made
by a corporation, joint-stock company, association, or insurance company, out of its
earnings or profits accrued since March first, nineteen hundred and thirteen, and payable
to its shareholders, whether in cash or in stock of the corporation, joint-stock company,
association, or insurance company, which stock dividend shall be considered income, to
the amount of its cash value." The Congress altered its policy with reference to the
Philippines in the War Revenue Act of October 3, 1917, section 5, the Revenue Act of
February 24, 1919, section 261, and the Revenue Act of November 23, 1921, section 261,
by delegating its power to the Philippine Legislature (40 U.S. Stat. at L., pp. 300, 1057; 42

U.S. Stat. at L., p. 227). The last mentioned Act included the provision "That in . . . the
Philippine Islands the income tax shall be levied, assessed, collected, and paid as
provided by law prior to the passage of this Act. The . . . Philippine Legislature shall have
power by due enactment to amend, alter, modify, or repeal the income tax laws in force in .
. . the Philippine Islands, . . . .
In pursuance of express authority, the Philippine Legislature enacted an Income Tax Law on March
7, 1919, by placing Act No. 2833 on the statute books. The law levied a flat rate on the incomes of
corporations and a graduated rate on the incomes of individuals. Among other things, it provided
that "the taxable net income of a person shall include gains, profits, and income derived from"
various sources including "dividends . . . or gains, profits and income derived from any source
whatever" (sec. 2 [a]). Then in section 25 (a) of the law, the Legislature included the following: "The
term "dividends'" as used in this Law shall be held to mean any distribution made or ordered to be
made by a corporation, joint-stock company, association, or insurance company, out of its earnings
or profits accrued since March first, nineteen hundred and thirteen, and payable to its
shareholders, whether in cash or in stock of the corporation, joint-stock company, association, or
insurance company. Stock dividend shall be considered income, to the amount of the earnings or
profits distributed. (Emphasis inserted.)
The Corporation Law, as ratified by the Congress, authorizes a corporation to issue stock for
"profits earned by it but not distributed among its stockholders or members." (Sec. 16, as amended
by Act No. 3518, sec. 9.) On the other hand, section 28 of the Philippine Organic Act, the Act of
Congress of August 29, 1916, provides "That all franchises or rights granted under this Act . . . shall
forbid the declaring of stock or bond dividends." A further limitation of a general nature is that found
in section 3, paragraph 16, of the Organic Act, to the effect "That the rule of taxation in said Islands
shall be uniform."
There arose in connection with the Revenue Act of September 8, 1916, which, it will be recalled,
was the Act of Congress extended to the Philippine Islands, the case of Eisner vs. Macomber
([1920], 252 U. S., 189). It was held in the Supreme Court of the United States by a vote of five to
four that Congress was given no power by the Income Tax Amendment to the Federal Constitution
to tax, without apportionment, as income of stockholder in a corporation, a stock dividend made
lawfully and in good faith against accumulated profits earned by the corporation since the adoption
of such amendment. Thereafter in the Philippines, the case of Fisher vs. Trinidad ([1922], 43
Phil., 973) considered the question of whether stock dividends are taxable as income under
the provisions of the local law, Act No. 2833. It was held by a divided court that stock
dividends cannot be so taxed. Subsequently, the cases of Warner, Barnes & Co. vs. Posadas,
No. 24037, and Menzi vs. Posadas, No. 23499, 1 involving much the same question, were
submitted. In the meantime, the make-up of the Supreme Court having changed and one member
being disqualified, there resulted an evenly divided court. Eventually the two cases were shifted to
the First Division, and there, with one dissent, stock dividends were once more held not subject to
the income tax. These cases were taken to the United States Supreme court on writs of certiorari,
and in that court it was said that the respondents suggest no ground on which the judgments of the
lower court can be sustained, and accordingly the judgments were reversed. (Posadas vs. Warner,
Barnes & Co.; Posadas vs. Menzi [1929], 278 U. S., 588.)
While the two cases above-mentioned were under consideration in the United States Supreme
Court, four new cases involving an identical question were initiated in the Court of First Instance of
Manila. All of them had to do with the receipt by four individuals of stock dividends from the Luzon
Stevedoring Co., Inc., and with the levy on these stock dividends by the Collector of Internal

Revenue of the corresponding income tax. The decisions in the lower court naturally respected the
decisions of this court, and so gave judgments in favor of the respective plaintiffs. On appeal, the
submission of the four cases was suspended, awaiting the pronouncements of the United States
Supreme Court in the Warner, Barners & Co., and Menzi cases. The higher court having spoken in
those cases, the instant case and its companion cases are ready for decision.
Plainly, our first duty is to determine if the decisions of the Supreme Court of the United States in
the Warner, Barnes & Co. and Menzi cases are conclusive of the case at bar.
In the Warner, Barnes & Co. case, the higher court had to deal with a corporation which was
subject to a flat tax rate under the Income Tax Law. It was definitely held (1) that the provision of
the Philippine statute was "substantially like that . . . which was held invalid in Eisner vs.
Macomber;" (2) that the decision in Eisner vs. Macomber was not controlling; (3) that, as to
corporations, "the rule of uniformity was not transgressed;" (4) that the title of the Philippine Income
Tax Law was sufficient; and (5) that, although a stock dividend is a "form of property," nevertheless
the Philippine Legislature may lay a tax upon the advantage resulting to recipients from the
allotment of stock dividends. The court, through Justice Butler, in part, said:
The petitioner admits that, strictly speaking, a stock divident is not income. But he insists,
and respondent concedes, that, in the absence of constitutional restriction, such dividends
may be taxed. And the parties agree that the tax in question is within the scope and intent
of the statute.
xxx
xxx
xxx
Fisher vs. Trinidad merely decided that "stock dividends" are not taxable as "income"
under the act. Petitioner does not combat that view or claim that such distributions do
constitute income. The Philippine Legislature has power to lay a tax in respect of the
advantage resulting to recipients from the allotment and delivery of such dividend shares.
(Swan Brewing Co. vs. Rex [1914], A. C., 231--P.C.) Respondent rightly concedes that,
there being no constitutional restriction, such dividends may be taxed and that the statute
discloses a purpose to tax them. The decision of this court in Eisner vs. Macomber rested
on constitutional provisions not applicable to the Philippine Islands.
In the Menzi case, the court had before it an individual who had received a dividend in stock. This
court had held that, as stock dividends do not constitute income, the tax is on property and that
therefore the specified graduated rates violate the rule of uniformity. The higher court dismissed the
point with this observation: "But the record does not disclose the rate at which the tax was
assessed or show any facts to support the suggestion that the required equality was lacking. In
other respects, this case is the same as No.251."
The decision in Eisner vs. Macomber, supra, and the decision in Warner, Barnes & Co. vs.
Posadas, supra, contain sign posts consisting of references to other decisions which clearly point
the way. Swan Brewing Co. vs. Rex ([1914], A.C., 231) is mentioned in both cases. This was a
case which arose in Australia and subsequently came before the Privy Council, which held that a
stock dividend representing accumulated profits was taxable like an ordinary cash dividend. The
United States Supreme Court refers to the English case in Eisner vs. Macomber by saying "There
being no constitutional restriction upon the action of the law making body, the case presented
merely a question of statutory construction." In the Warner, Barnes & Co., decision the case of
Swan Brewing Co. vs. Rex,supra, is cited in support of the statement that the Philippine Legislature
possesses power to tax stock dividends.
Another case, which was discussed in Eisner vs. Macomber, supra, was that of Tax Commissioner
vs. Putnam ([1917], 227 mass., 522), in which the Supreme Court of Massachusetts held that a

stock dividend was taxable as income. Discussing this case, the United States Supreme Court
stated: "The Massachusetts court was not under an obligation, like the one which binds us, of
applying a constitutional amendment in the light of other constitutional provisions that stand in the
way of extending it by construction."
In Massachusetts, it may be parenthetically, it was subsequently necessary for the legislative body
to declare that stock dividends are exempted from the income tax in order to surmount the obstacle
raised by the decision of the State Court. (See Lanning vs. Trefry [1924], 142 N. E., 829.) New York
had the same experience for after the Supreme Court had held stock dividends to be taxable under
the local law, pending consideration by the Court of Appeals, the New York Legislature amended
the law by providing that stock dividends when received by a shareholder shall not be subject to
tax. (See People vs. Gilchrist [1925], 211 N.Y.S.,679; People vs. Gilchrist [1926], 243 N. Y., 173;
Equitable Trust Co. vs. Prentice [1928], 250 N.T., 1.)
It cannot be gainsaid that the Philippine Islands in its tax status is closely akin to the status of
Australia and of a state in the American Union. Proceeding within the confines of express and
general authority, the Philippine Legislature deemed it wise to classify stock dividends as income.
Except for the alleged breach of the uniformity rule, merely a question of statutory construction is
accordingly involved. Such question of statutory construction disappears, however, since the
Philippine Legislature has as plainly and unquivocally envinced the purpose to tax stock dividends
as language is able to express itself.
What has been said by the United States Supreme Court would appear to relieve us from all
necessity of discussing appellee's first proposition, that stock dividends are property and not
income, and hence that the tax here in question is a property and not an income tax.
Whatever the true quality of stock dividends may be, the local Legislature has made its own
definition of income, and has included in that definition stock dividends. The Legislature had that
right. It is the sole judge of the propriety of taxation and of the subjects of taxation. The legislative
classification should be respected. For the purposes of the law, there is no sound basis for
distinguishing stock dividends from cash dividends. (Note Opinion of the Justices [1915], 77 N.H.,
611; Glasgow vs. Towse [1869], 43 Mo. 479.)
As to appellee's second proposition, it is hardly incumbent upon the court to conisder seriously the
arguments centering on the want of uniformity of the Income Tax Law as affecting stock dividends,
in view of the attitude taken by the United States Supreme Court in the Warner, Barnes & Co. and
Menzi cases. Indeed the challenge goes further than stock dividends for it impugns the whole
scheme of graduated taxes on incomes. But the United States Supreme Court has held the 1913
statute constitutional, overruling, among other things, objections to its constitutionality because the
rate of the tax was progressive (Brushaber vs. Union Pacific Railroad Co. [1915], 240 U.S.,1).
Obviously, an income tax is a tax at an arbitrary rate. Inequalities in taxation are inevitable, but
such inequalities in the operation of a tax law will not invalidate it. In the Philippine Income Tax Law,
all persons are treated alike as far as they are similarity circumstanced. Should the graduated
income tax levied on the stock dividend of an individual be found to violate the uniformity rule, the
result would be that the stock dividend would not be liable to the tax when received by an
individual, but would be when received by a corporation. Such an anomalous distinction was never
intended and cannot be sustained. Concede that a stock dividend is strictly speaking not income,
and still we fail to discern any failure in uniformity.
The decisions in the Warner, Barnes & Co. and Menzi cases govern the case at bar. The Menzi
case is exactly the Rubio case. The pleadings, the facts, and the applicable legal provisions are
identical. If Menzi was subject to the tax, Rubio and others similarly situated must likewise be

subject to the tax. Like in the Menzi case, the record does not show any facts to support the
suggestion that the required equality was lacking. We propose to enforce the law as it stands.
Judgment will be reversed and the complaint will be dismissed, without costs in either instance.
Street, Villamor, Ostrand, Johns, Romualdez and Villa-Real, JJ., concur.
Johnson, J., dissents.
G.R. No. L-17518

October 30, 1922

FREDERICK C. FISHER, plaintiff-appellant,

vs.
WENCESLAO TRINIDAD, Collector of Internal Revenue, defendant-appellee.
JOHNSON, J.:
The only question presented by this appeal is: Are the "stock dividends" in the present case
"income" and taxable as such under the provisions of section 25 of Act No. 2833? While the
appellant presents other important questions, under the view which we have taken of the facts and
the law applicable to the present case, we deem it unnecessary to discuss them now.
The defendant demurred to the petition in the lower court. The facts are therefore admitted. They
are simple and may be stated as follows:
That during the year 1919 the Philippine American Drug Company was a corporation duly
organized and existing under the laws of the Philippine Islands, doing business in the City of
Manila; that he appellant was a stockholder in said corporation; that said corporation, as result of
the business for that year, declared a "stock dividend"; that the proportionate share of said stock
divided of the appellant was P24,800; that the stock dividend for that amount was issued to the
appellant; that thereafter, in the month of March, 1920, the appellant, upon demand of the appellee,
paid under protest, and voluntarily, unto the appellee the sum of P889.91 as income tax on said
stock dividend. For the recovery of that sum (P889.91) the present action was instituted. The
defendant demurred to the petition upon the ground that it did not state facts sufficient to constitute
cause of action. The demurrer was sustained and the plaintiff appealed.
To sustain his appeal the appellant cites and relies on some decisions of the Supreme Court of the
United States as will as the decisions of the supreme court of some of the states of the Union, in
which the questions before us, based upon similar statutes, was discussed. Among the most
important decisions may be mentioned the following: Towne vs. Eisner, 245 U.S., 418; Doyle vs.
Mitchell Bors. Co., 247 U.S., 179; Eisner vs. Macomber, 252 U.S., 189; Dekoven vs Alsop, 205 Ill.,
309; 63 L.R.A., 587; Kaufman vs. Charlottesville Woolen Mills, 93 Va., 673.
In each of said cases an effort was made to collect an "income tax" upon "stock dividends" and in
each case it was held that "stock dividends" were capital and not an "income" and therefore not
subject to the "income tax" law.

The appellee admits the doctrine established in the case of Eisner vs. Macomber (252 U.S., 189)
that a "stock dividend" is not "income" but argues that said Act No. 2833, in imposing the tax on the
stock dividend, does not violate the provisions of the Jones Law. The appellee further argues that
the statute of the United States providing for tax upon stock dividends is different from the statute
of the Philippine Islands, and therefore the decision of the Supreme Court of the United States
should not be followed in interpreting the statute in force here.
For the purpose of ascertaining the difference in the said statutes ( (United States and Philippine
Islands), providing for an income tax in the United States as well as that in the Philippine Islands,
the two statutes are here quoted for the purpose of determining the difference, if any, in the
language of the two statutes.
Chapter 463 of an Act of Congress of September 8, 1916, in its title 1 provides for the collection of
an "income tax." Section 2 of said Act attempts to define what is an income. The definition follows:
That the term "dividends" as used in this title shall be held to mean any distribution made
or ordered to made by a corporation, . . . which stock dividend shall be considered income,
to the amount of its cash value.
Act No. 2833 of the Philippine Legislature is an Act establishing "an income tax." Section 25 of said
Act attempts to define the application of the income tax. The definition follows:
The term "dividends" as used in this Law shall be held to mean any distribution made or
ordered to be made by a corporation, . . . out of its earnings or profits accrued since March
first, nineteen hundred and thirteen, and payable to its shareholders, whether in cash or in
stock of the corporation, . . . . Stock dividend shall be considered income, to the amount of
the earnings or profits distributed.
It will be noted from a reading of the provisions of the two laws above quoted that the writer of the
law of the Philippine Islands must have had before him the statute of the United States. No
important argument can be based upon the slight different in the wording of the two sections.
It is further argued by the appellee that there are no constitutional limitations upon the power of the
Philippine Legislature such as exist in the United States, and in support of that contention, he cites
a number of decisions. There is no question that the Philippine Legislature may provide for the
payment of an income tax, but it cannot, under the guise of an income tax, collect a tax on property
which is not an "income." The Philippine Legislature can not impose a tax upon "property" under a
law which provides for a tax upon "income" only. The Philippine Legislature has no power to
provide a tax upon "automobiles" only, and under that law collect a tax upon a carreton or bull cart.
Constitutional limitations, that is to say, a statute expressly adopted for one purpose cannot,
without amendment, be applied to another purpose which is entirely distinct and different. A statute
providing for an income tax cannot be construed to cover property which is not, in fact income. The
Legislature cannot, by a statutory declaration, change the real nature of a tax which it imposes. A
law which imposes an important tax on rice only cannot be construed to an impose an importation
tax on corn.

It is true that the statute in question provides for an income tax and contains a further provision that
"stock dividends" shall be considered income and are therefore subject to income tax provided for
in said law. If "stock dividends" are not "income" then the law permits a tax upon something not
within the purpose and intent of the law.
It becomes necessary in this connection to ascertain what is an "income in order that we may be
able to determine whether "stock dividends" are "income" in the sense that the word is used in the
statute. Perhaps it would be more logical to determine first what are "stock dividends" in order that
we may more clearly understand their relation to "income." Generally speaking, stock dividends
represent undistributed increase in the capital of corporations or firms, joint stock companies, etc.,
etc., for a particular period. They are used to show the increased interest or proportional shares in
the capital of each stockholder. In other words, the inventory of the property of the corporation, etc.,
for particular period shows an increase in its capital, so that the stock theretofore issued does not
show the real value of the stockholder's interest, and additional stock is issued showing the
increase in the actual capital, or property, or assets of the corporation, etc.
To illustrate: A and B form a corporation with an authorized capital of P10,000 for the purpose of
opening and conducting a drug store, with assets of the value of P2,000, and each contributes
P1,000. Their entire assets are invested in drugs and put upon the shelves in their place of
business. They commence business without a cent in the treasury. Every dollar contributed is
invested. Shares of stock to the amount of P1,000 are issued to each of the incorporators, which
represent the actual investment and entire assets of the corporation. Business for the first year is
good. Merchandise is sold, and purchased, to meet the demands of the growing trade. At the end
of the first year an inventory of the assets of the corporation is made, and it is then ascertained that
the assets or capital of the corporation on hand amount to P4,000, with no debts, and still not a
cent in the treasury. All of the receipts during the year have been reinvested in the business.
Neither of the stockholders have withdrawn a penny from the business during the year. Every peso
received for the sale of merchandise was immediately used in the purchase of new stock new
supplies. At the close of the year there is not a centavo in the treasury, with which either A or B
could buy a cup of coffee or a pair of shoes for his family. At the beginning of the year they were
P2,000, and at the end of the year they were P4,000, and neither of the stockholders have
received a centavo from the business during the year. At the close of the year, when it is
discovered that the assets are P4,000 and not P2,000, instead of selling the extra merchandise on
hand and thereby reducing the business to its original capital, they agree among themselves to
increase the capital they agree among themselves to increase the capital issued and for that
purpose issue additional stock in the form of "stock dividends" or additional stock of P1,000 each,
which represents the actual increase of the shares of interest in the business. At the beginning of
the year each stockholder held one-half interest in the capital. At the close of the year, and after the
issue of the said stock dividends, they each still have one-half interest in the business. The capital
of the corporation increased during the year, but has either of them received an income? It is not
denied, for the purpose of ordinary taxation, that the taxable property of the corporation at the
beginning of the year was P2,000, that at the close of the year it was P4,000, and that the tax rolls
should be changed in accordance with the changed conditions in the business. In other words, the
ordinary tax should be increased by P2,000.

Another illustration: C and D organized a corporation for agricultural purposes with an authorized
capital stock of P20,000 each contributing P5,000. With that capital they purchased a farm and,
with it, one hundred head of cattle. Every peso contributed is invested. There is no money in the
treasury. Much time and labor was expanded during the year by the stockholders on the farm in the
way of improvements. Neither received a centavo during the year from the farm or the cattle. At the
beginning of the year the assets of the corporation, including the farm and the cattle, were
P10,000, and at the close of the year and inventory of the property of the corporation is made and
it is then found that they have the same farm with its improvements and two hundred head of cattle
by natural increase. At the end of the year it is also discovered that, by reason of business
changes, the farm and the cattle both have increased in value, and that the value of the corporate
property is now P20,000 instead of P10,000 as it was at the beginning of the year. The
incorporators instead of reducing the property to its original capital, by selling off a part of its, issue
to themselves "stock dividends" to represent the proportional value or interest of each of the
stockholders in the increased capital at the close of the year. There is still not a centavo in the
treasury and neither has withdrawn a peso from the business during the year. No part of the farm
or cattle has been sold and not a single peso was received out of the rents or profits of the capital
of the corporation by the stockholders.
Another illustration: A, an individual farmer, buys a farm with one hundred head of cattle for the
sum of P10,000. At the end of the first year, by reason of business conditions and the increase of
the value of both real estate and personal property, it is discovered that the value of the farm and
the cattle is P20,000. A, during the year, has received nothing from the farm or the cattle. His books
at the beginning of the year show that he had property of the value of P10,000. His books at the
close of the year show that he has property of the value of P20,000. A is not a corporation. The
assets of his business are not shown therefore by certificates of stock. His books, however, show
that the value of his property has increased during the year by P10,000, under any theory of
business or law, be regarded as an "income" upon which the farmer can be required to pay an
income tax? Is there any difference in law in the condition of A in this illustration and the condition
of A and B in the immediately preceding illustration? Can the increase of the value of the property
in either case be regarded as an "income" and be subjected to the payment of the income tax
under the law?
Each of the foregoing illustrations, it is asserted, is analogous to the case before us and, in view of
that fact, let us ascertain how lexicographers and the courts have defined an "income." The New
Standard Dictionary, edition of 1915, defines an income as "the amount of money coming to a
person or corporation within a specified time whether as payment or corporation within a specified
time whether as payment for services, interest, or profit from investment." Webster's International
Dictionary defines an income as "the receipt, salary; especially, the annual receipts of a private
person or a corporation from property." Bouvier, in his law dictionary, says that an "income" in the
federal constitution and income tax act, is used in its common or ordinary meaning and not in its
technical, or economic sense. (146 Northwestern Reporter, 812) Mr. Black, in his law dictionary,
says "An income is the return in money from one's business, labor, or capital invested; gains, profit
or private revenue." "An income tax is a tax on the yearly profits arising from property , professions,
trades, and offices."

The Supreme Court of the United States, in the case o Gray vs. Darlington (82 U.S., 653), said in
speaking of income that mere advance in value in no sense constitutes the "income" specified in
the revenue law as "income" of the owner for the year in which the sale of the property was made.
Such advance constitutes and can be treated merely as an increase of capital. (In re Graham's
Estate, 198 Pa., 216; Appeal of Braun, 105 Pa., 414.)
Mr. Justice Hughes, later Associate Justice of the Supreme Court of the United States and now
Secretary of State of the United States, in his argument before the Supreme Court of the United
States in the case of Towne vs. Eisner,supra, defined an "income" in an income tax law, unless it is
otherwise specified, to mean cash or its equivalent. It does not mean choses in action
or unrealized increments in the value of the property, and cites in support of the definition, the
definition given by the Supreme Court in the case of Gray vs. Darlington, supra.
In the case of Towne vs. Eisner, supra, Mr. Justice Holmes, speaking for the court, said:
"Notwithstanding the thoughtful discussion that the case received below, we cannot doubt that the
dividend was capital as well for the purposes of the Income Tax Law. . . . 'A stock dividend really
takes nothing from the property of the corporation, and adds nothing to the interests of the
shareholders. Its property is not diminished and their interest are not increased. . . . The
proportional interest of each shareholder remains the same. . . .' In short, the corporation is no
poorer and the stockholder is no richer then they were before." (Gibbons vs. Mahon, 136 U.S., 549,
559, 560; Logan County vs. U.S., 169 U.S., 255, 261).
In the case of Doyle vs. Mitchell Bros. Co. (247 U.S., 179, Mr. Justice Pitney, speaking for the
court, said that the act employs the term "income" in its natural and obvious sense, as importing
something distinct from principal or capital and conveying the idea of gain or increase arising from
corporate activity.
Mr. Justice Pitney, in the case of Eisner vs. Macomber (252 U.S., 189), again speaking for the court
said: "An income may be defined as the gain derived from capital, from labor, or from both
combined, provided it be understood to include profit gained through a sale or conversion of capital
assets."
For bookkeeping purposes, when stock dividends are declared, the corporation or company
acknowledges a liability, in form, to the stockholders, equivalent to the aggregate par value of their
stock, evidenced by a "capital stock account." If profits have been made by the corporation during
a particular period and not divided, they create additional bookkeeping liabilities under the head of
"profit and loss," "undivided profits," "surplus account," etc., or the like. None of these, however,
gives to the stockholders as a body, much less to any one of them, either a claim against the going
concern or corporation, for any particular sum of money, or a right to any particular portion of the
asset, or any shares sells or until the directors conclude that dividends shall be made a part of the
company's assets segregated from the common fund for that purpose. The dividend normally is
payable in money and when so paid, then only does the stockholder realize a profit or gain, which
becomes his separate property, and thus derive an income from the capital that he has invested.
Until that, is done the increased assets belong to the corporation and not to the individual
stockholders.

When a corporation or company issues "stock dividends" it shows that the company's accumulated
profits have been capitalized, instead of distributed to the stockholders or retained as surplus
available for distribution, in money or in kind, should opportunity offer. Far from being a realization
of profits of the stockholder, it tends rather to postpone said realization, in that the fund represented
by the new stock has been transferred from surplus to assets, and no longer is available for actual
distribution. The essential and controlling fact is that the stockholder has received nothing out of
the company's assets for his separate use and benefit; on the contrary, every dollar of his original
investment, together with whatever accretions and accumulations resulting from employment of his
money and that of the other stockholders in the business of the company, still remains the property
of the company, and subject to business risks which may result in wiping out of the entire
investment. Having regard to the very truth of the matter, to substance and not to form, the
stockholder by virtue of the stock dividend has in fact received nothing that answers the definition
of an "income." (Eisner vs. Macomber, 252 U.S., 189, 209, 211.)
The stockholder who receives a stock dividend has received nothing but a representation of
his increased interest in the capital of the corporation. There has been no separation or
segregation of his interest. All the property or capital of the corporation still belongs to the
corporation. There has been no separation of the interest of the stockholder from the
general capital of the corporation. The stockholder, by virtue of the stock dividend, has no
separate or individual control over the interest represented thereby, further than he had
before the stock dividend was issued. He cannot use it for the reason that it is still the
property of the corporation and not the property of the individual holder of stock dividend. A
certificate of stock represented by the stock dividend is simply a statement of his
proportional interest or participation in the capital of the corporation. For bookkeeping
purposes, a corporation, by issuing stock dividend, acknowledges a liability in form to the
stockholders, evidenced by a capital stock account. The receipt of a stock dividend in no way
increases the money received of a stockholder nor his cash account at the close of the year. It
simply shows that there has been an increase in the amount of the capital of the corporation during
the particular period, which may be due to an increased business or to a natural increase of the
value of the capital due to business, economic, or other reasons. We believe that the Legislature,
when it provided for an "income tax," intended to tax only the "income" of corporations, firms or
individuals, as that term is generally used in its common acceptation; that is that the income means
money received, coming to a person or corporation for services, interest, or profit from
investments. We do not believe that the Legislature intended that a mere increase in the value of
the capital or assets of a corporation, firm, or individual, should be taxed as "income." Such
property can be reached under the ordinary from of taxation.
Mr. Justice Pitney, in the case of the Einer vs. Macomber, supra, said in discussing the difference
between "capital" and "income": "That the fundamental relation of 'capital' to 'income' has been
much discussed by economists, the former being likened to the tree or the land, the latter to the
fruit or the crop; the former depicted as a reservoir supplied from springs; the latter as the outlet
stream, to be measured by its flow during a period of time." It may be argued that a stockholder
might sell the stock dividend which he had acquired. If he does, then he has received, in fact, an
income and such income, like any other profit which he realizes from the business, is an income
and he may be taxed thereon.

There is a clear distinction between an extraordinary cash dividend, no matter when earned, and
stock dividends declared, as in the present case. The one is a disbursement to the stockholder of
accumulated earnings, and the corporation at once parts irrevocably with all interest thereon. The
other involves no disbursement by the corporation. It parts with nothing to the stockholder. The
latter receives, not an actual dividend, but certificate of stock which simply evidences his interest in
the entire capital, including such as by investment of accumulated profits has been added to the
original capital. They are not income to him, but represent additions to the source of his income,
namely, his invested capital. (DeKoven vs. Alsop, 205, Ill., 309; 63 L.R.A. 587). Such a person is in
the same position, so far as his income is concerned, as the owner of young domestic animal, one
year old at the beginning of the year, which is worth P50 and, which, at the end of the year, and by
reason of its growth, is worth P100. The value of his property has increased, but has had an
income during the year? It is true that he had taxable property at the beginning of the year of the
value of P50, and the same taxable property at another period, of the value of P100, but he has
had no income in the common acceptation of that word. The increase in the value of the property
should be taken account of on the tax duplicate for the purposes of ordinary taxation, but not as
income for he has had none.
The question whether stock dividends are income, or capital, or assets has frequently come before
the courts in another form in cases of inheritance. A is a stockholder in a large corporation. He
dies leaving a will by the terms of which he give to B during his lifetime the "income" from said
stock, with a further provision that C shall, at B's death, become the owner of his share in the
corporation. During B's life the corporation issues a stock dividend. Does the stock dividend belong
to B as an income, or does it finally belong to C as a part of his share in the capital or assets of the
corporation, which had been left to him as a remainder by A? While there has been some
difference of opinion on that question, we believe that a great weight of authorities hold that the
stock dividend is capital or assets belonging to C and not an income belonging to B. In the case of
D'Ooge vs. Leeds (176 Mass., 558, 560) it was held that stock dividends in such cases were
regarded as capital and not as income (Gibbons vs. Mahon, 136 U.S., 549.)
In the case of Gibbson vs. Mahon, supra, Mr. Justice Gray said: "The distinction between the title of
a corporation, and the interest of its members or stockholders in the property of the corporation, is
familiar and well settled. The ownership of that property is in the corporation, and not in the holders
of shares of its stock. The interest of each stockholder consists in the right to a proportionate part
of the profits whenever dividends are declared by the corporation, during its existence, under its
charter, and to a like proportion of the property remaining, upon the termination or dissolution of the
corporation, after payment of its debts." (Minot vs. Paine, 99 Mass., 101; Greeff vs. Equitable Life
Assurance Society, 160 N. Y., 19.) In the case of Dekoven vs. Alsop (205 Ill ,309, 63 L. R. A. 587)
Mr. Justice Wilkin said: "A dividend is defined as a corporate profit set aside, declared, and ordered
by the directors to be paid to the stockholders on demand or at a fixed time. Until the dividend is
declared, these corporate profits belong to the corporation, not to the stockholders, and are liable
for corporate indebtedness.
There is a clear distinction between an extraordinary cash dividend, no matter when earned, and
stock dividends declared. The one is a disbursement to the stockholders of accumulated earning,
and the corporation at once parts irrevocably with all interest thereon. The other involves no
disbursement by the corporation. It parts with nothing to the stockholders. The latter receives, not

an actual dividend, but certificates of stock which evidence in a new proportion his interest in the
entire capital. When a cash becomes the absolute property of the stockholders and cannot be
reached by the creditors of the corporation in the absence of fraud. A stock dividend however, still
being the property of the corporation and not the stockholder, it may be reached by an execution
against the corporation, and sold as a part of the property of the corporation. In such a case, if all
the property of the corporation is sold, then the stockholder certainly could not be charged with
having received an income by virtue of the issuance of the stock dividend. Until the dividend is
declared and paid, the corporate profits still belong to the corporation, not to the stockholders, and
are liable for corporate indebtedness. The rule is well established that cash dividend, whether large
or small, are regarded as "income" and all stock dividends, as capital or assets (Cook on
Corporation, Chapter 32, secs. 534, 536; Davis vs. Jackson, 152 Mass., 58; Mills vs. Britton, 64
Conn., 4; 5 Am., and Eng. Encycl. of Law, 2d ed., p. 738.)
If the ownership of the property represented by a stock dividend is still in the corporation and to in
the holder of such stock, then it is difficult to understand how it can be regarded as income to the
stockholder and not as a part of the capital or assets of the corporation. (Gibbsons vs.
Mahon, supra.) the stockholder has received nothing but a representation of an interest in the
property of the corporation and, as a matter of fact, he may never receive anything, depending
upon the final outcome of the business of the corporation. The entire assets of the corporation may
be consumed by mismanagement, or eaten up by debts and obligations, in which case the holder
of the stock dividend will never have received an income from his investment in the corporation. A
corporation may be solvent and prosperous today and issue stock dividends in representation of its
increased assets, and tomorrow be absolutely insolvent by reason of changes in business
conditions, and in such a case the stockholder would have received nothing from his investment. In
such a case, if the holder of the stock dividend is required to pay an income tax on the same, the
result would be that he has paid a tax upon an income which he never received. Such a conclusion
is absolutely contradictory to the idea of an income. An income subject to taxation under the law
must be an actual income and not a promised or prospective income.
The appelle argues that there is nothing in section 25 of Act No 2833 which contravenes the
provisions of the Jones Law. That may be admitted. He further argues that the Act of Congress
(U.S. Revenue Act of 1918) expressly authorized the Philippine Legislatures to provide for an
income tax. That fact may also be admitted. But a careful reading of that Act will show that, while it
permitted a tax upon income, the same provided that income shall include gains, profits, and
income derived from salaries, wages, or compensation for personal services, as well as from
interest, rent, dividends, securities, etc. The appellee emphasizes the "income from dividends." Of
course, income received as dividends is taxable as an income but an income from "dividends" is a
very different thing from receipt of a "stock dividend." One is an actual receipt of profits; the other is
a receipt of a representation of the increased value of the assets of corporation.
In all of the foregoing argument we have not overlooked the decisions of a few of the courts in
different parts of the world, which have reached a different conclusion from the one which we have
arrived at in the present case. Inasmuch, however, as appeals may be taken from this court to the
Supreme Court of the United States, we feel bound to follow the same doctrine announced by that
court.

Having reached the conclusion, supported by the great weight of the authority, that "stock
dividends" are not "income," the same cannot be taxes under that provision of Act No. 2833
which provides for a tax upon income. Under the guise of an income tax, property which is
not an income cannot be taxed. When the assets of a corporation have increased so as to
justify the issuance of a stock dividend, the increase of the assets should be taken account
of the Government in the ordinary tax duplicates for the purposes of assessment and
collection of an additional tax. For all of the foregoing reasons, we are of the opinion, and so
decide, that the judgment of the lower court should be revoked, and without any finding as to costs,
it is so ordered.
Araullo, C.J. Avancea, Villamor and Romualdez, JJ., concur.