TOPIC: Dividends

WISE & CO., INC., ET. AL., vs. MEER

FACTS: Wise & Co., Inc. et. al (Plaintiff-appellants) were stockholders of Manila Wine Merchants, Ltd., a
foreign corporation duly authorized to do business in the Philippines. The Board of Directors of Manila
Wine Merchants, Ltd., (HK Co.), recommended to the stockholders that they adopt resolutions necessary
to sell its business and assets to Manila Wine Merchants, Inc., a Philippine corporation, (PH Co.), for the
sum of P400,000. The HK Co. made a distribution from its earnings for the year 1937 to its stockholders.
As a result of the sale of its business and assets to PH Co., a surplus was realized and the HK Co.
distributed this surplus to the shareholders (Appellants included).
Philippine income tax had been paid by HK Co. on the said surplus from which the said distributions were
made. At a special general meeting of the shareholders of the HK Co., the stockholders by resolution
directed that the company be voluntarily liquidated and its capital distributed among the stockholders. The
Appellants duly filed Income Tax Returns, on which the defendant, Meer (CIR) made deficiency
assessments. Plantiffs paid under written protest and sought recovery. CFI ruled in favor of CIR hence
the appeal.

SC HELD: CFI judgment affirmed. (Subsequent Motion for Reconsideration by Wise, et. al. denied)

ISSUES and RULINGS:

1.) Appellants contend that the amounts received by them and on which the taxes in question were
assessed and collected were ordinary dividends; CIR contends that they were liquidating dividends.
SC: The distributions under consideration were not ordinary dividends. Therefore, they are taxable as
liquidating dividends. It was stipulated in the deed of sale that the sale and transfer of the HK Co. shall
take effect on June 1, 1937. 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.) Are such liquidating dividends taxable income?

SC: Income tax law states that “Where a corporation, partnership, association, joint-account, or insurance
company distributes all of its assets in complete liquidation or dissolution, the gain realized or loss
sustained by the stockholder, whether individual or corporation, is a taxable income or a deductible loss
as the case may be.”
Appellants received the distributions in question in exchange for the surrender and relinquishment by
them of their stock in the HK Co. which was dissolved and in process of complete liquidation. 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 and in 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 that much
money as income of his own, which again was properly taxable to him under the Income Tax Law.

3.) Non-resident alien individual appellants contend that if the distributions received by them were to be
considered as a sale of their stock to the HK Co., the profit realized by them does not constitute income
from Philippine sources and is not subject to Philippine taxes, "since all steps in the carrying out of this
so-called sale took place outside the Philippines."
SC: This contention is untenable. The HK Co. was at the time of the sale of its business in the
Philippines, and the PH Co. was a domestic corporation domiciled and doing business also in the
Philippines. The HK Co. was incorporated for the purpose of carrying on  in the Philippine Islands  the
business of wine, beer, and spirit merchants and the other objects set out in its memorandum of
association. Hence, its earnings, profits, and assets, including those from whose proceeds the
distributions in question were made, the major part of which consisted in the purchase price of the
business, had been earned and acquired in the Philippines. As such, it is clear that said distributions were
income "from Philippine sources."