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Commisioner v.

Manning (Disguised Dividend) FACTS: MANTRASCO had 25,000 common shares, wherein24,700 of which was owned by Reese. The rest of the shareswere owned by private respondents. A trust agreement wasexecuted between them, the manifest intention of which was tomake respondents the sole owners of Reese’s interest inMANTRASCO upon his death.When Reese died, MANTRASCO made partial payment of Reese’s shares and a new certificate was issued in the favor of MANTRASCO.Thereafter, MANTRASCO’s stockholders issued aResolution declaring that the 24,700 be reverted to the capitalaccount of the company as a stock dividend to be distributed torespondent. Eventually, all the shares were paid anddistributed to private respondents.BIR claims that the distribution of Reese’s share asstock dividend was in effect a distribution of the “asset or property” of the corporation as may be gleamed from thepayment of cash for the redemption of said stock and upondistribution of the same to respondents; hence, taxable asincome of respondents. On the other hand, respondents claimthat their respective shares remained the same before andafter the declaration of the stock dividends and only thenumber of shares held by them had changed, therefore, theyare not liable for taxes.Both parties were on the assumption that the stockdividends were treasury shares. HELD: They were not treasury shares. Treasury shares arestocks issued and fully paid for and reacquired by the samecorporation either by purchase, donation, forfeiture or other means. Although they are issued shares, they do not have thestatus of outstanding shares being in the treasury. Such share,as long as it is held by the corporation as such, participatesneither as dividends, because dividends cannot be declared bythe corporation to itself, nor in the meetings of the corporationas a voting stock, for otherwise equal voting powers amongstockholders will be effectively lost and the directors will beable to perpetuate their control of the corporation. Theseessential features of a treasury stock are lacking in thequestioned shares.The intention of the parties to the trust agreement wasto treat the 24,700 shares of Reese as absolutely outstandingshares of Reese’s estate until they were fully paid. Such beingtheir nature, their declaration as treasury stock was a completenullity, being violative of public policy. A stock dividend, beingone payable in capital stock, cannot be declared out of outstanding corporate stock, but only from retained earnings.When the companies involved parted of their earningsto “buy” the corporate holdings of Reese, they were in ultimateeffect making a distribution of such earnings to therespondents. All these amounts are subject to income tax.

COMMISSIONER VS.MANNING FACTS: Manila Trading and Supply Co. (MANTRASCO) had an authorized capital stock of P2.5 million divided into 25,000 common shares: 24,700 were owned by Reese and the rest at 100 shares each by the Respondents. Reese entered into a trust agreement whereby it is stated that upon Reese’s death, the company would purchase back all of its shares. Reese died. MANTRASCO repurchased the 24,700 shares. Thereafter, a resolution was passed authorizing that the 24,700 shares be declared as stock dividends to be distributed to the stockholders. The BIR ordered an examination of MANTRASCO’s books and discovered that

The distinctions between a stock dividend which does not and one which does constitute taxable income to the shareholders is that a stock dividend constitutes income if its gives the shareholder an interest different from that which his former stockholdings represented. this petition by the CIR ISSUE: Whether the respondents are liable for deficiency income taxes on the stock dividends? HELD: Dividends means any distribution made by a corporation to its shareholders out of its earnings or profits. whenever the companies involved parted with a portion of their earnings to bnuy the corporate holdings of Reese. this is essentially equivalent to the distribution of a taxable dividend the amount so distributed in the redemption considered as taxable income. Hence. it does constitute income if the new shares confer no different rights or interests than did the old shares. Respondents appealed to the CTA. the CIR issued notices of assessment for deficiency income taxes to respondents. Stock dividends which represent transfer of surplus to capital account is not subject to income tax. they were making a distribution of such earnings to respondents. Hence. Hence. The CTA ruled in their favor. These amounts are thus subject to income tax as a flow of cash benefits to respondents.the 24. Therefore. But if a corporation redeems stock issued so as to make a distribution.700 shares declared as dividends were not disclosed by respondents as part of their taxable income for the year 1958. . On the other hand. Respondents protested but the CIR denied.

.respondents are liable for deficiency income taxes.