WISE AND CO., INC. VS MEER G.R. NO.

48231 JUNE 30, 1947

PONENTE: HILADO, J. CASE DIGEST BY: LUZADIO, LOURY MAE M.

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 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 Phi lippine sources, hence, taxable under Philippine law.