TAX Week 8 Digests

6.
Improperly Accumulated Earnings Tax
CYANAMID PHILIPPINES, INC., petitioner, vs. THE COURT OF APPEALS, THE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE,respondent. Date: Jan. 20, 2000 QUISUMBING, J.: Petitioner, Cyanamid Philippines, Inc., a corporation organized under Philippine laws, is a wholly owned subsidiary of American Cyanamid Co. based in Maine, USA. It is engaged in the manufacture of pharmaceutical products and chemicals, a wholesaler of imported finished goods, and an importer/indentor. February 7, 198 - CIR sent an assessment letter to Cyanamid and demanded the payment of deficiency income tax of P119,817.00 for taxable year 1981 Net income disclosed by the return as audited Add: Discrepancies: Professional fees/yr. per investigation Total Adjustment Net income per Investigation Less: Personal and additional exemptions Amount subject to tax Income tax due thereon . . . 25% Surtax Less: Amount already assessed BALANCE monthly interest from Compromise penalties TOTAL AMOUNT DUE 3,774,867.50 119,817.003 1,389,639.00 2,385,231.50 14,727,687.00 3,237,495.00 5,161,788.00 75,709.00 44,108.00 17018 261,877.00 110,399.37 152,477.00 14,727,687.00 14,575,210.00
Cyamid protested the assessments particularly, (1) the 25% Surtax Assessment of P3,774,867.50; (2) 1981 Deficiency Income Assessment of P119,817.00; and 1981 Deficiency Percentage Assessment of P8,846.72. Petitioner, it through external accountant SGV claimed, among others, that the surtax for the undue accumulation of earnings was not proper because the said profits were retained to increase petitioner's working capital and it would be used for reasonable business needs of the company. Petitioner contended that it availed of the tax amnesty under Executive Order No. 41, hence enjoyed amnesty from civil and criminal prosecution granted by the law. CIR refused to allow the cancellation of the assessment notices
Petitioner claimed that CIR's assessment representing the 25% surtax on its accumulated earnings for the year 1981 had no legal basis because: (a) petitioner accumulated its earnings and profits for reasonable business requirements to meet working capital needs and retirement of indebtedness; (b) petitioner is a wholly owned subsidiary of American Cyanamid Company, a corporation organized under the laws of the State of Maine, USA, whose shares of stock are listed and traded in New York Stock Exchange. This being the case, no individual shareholder income taxes by petitioner's accumulation of earnings and profits, instead of distribution of the same. CTA denied petition. CA affirmed CTA Issue: WHETHER THE RESPONDENT COURT ERRED IN HOLDING THAT THE CYANAMID IS LIABLE FOR THE ACCUMULATED EARNINGS TAX FOR THE YEAR 1981. Held: YES. CA and CTA affirmed Sec. 25 of the old National Internal Revenue Code of 1977 states: Sec. 25. Additional tax on corporation improperly accumulating profits or surplus (a) Imposition of tax. If any corporation is formed or availed of for the purpose of preventing the imposition of the tax upon its shareholders or members or the shareholders or members of another corporation, through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, there is levied and assessed against such corporation, for each taxable year, a tax equal to twenty-five per-centum of the
TAXATION 1 LAFORTEZA WEEK 8: d2014
Petitioner appealed to the CTA. During the pendency of the case, however, both parties agreed to compromise the 1981 deficiency income tax assessment of P119,817.00. Petitioner paidP26,577 as compromise. But, surtax on improperly accumulated profits remained unresolved.
undistributed portion of its accumulated profits or surplus which shall be in addition to the tax imposed by section twenty-four, and shall be computed, collected and paid in the same manner and subject to the same provisions of law, including penalties, as that tax. (b) Prima facie evidence. The fact that any corporation is mere holding company shall be prima facieevidence of a purpose to avoid the tax upon its shareholders or members. Similar presumption will lie in the case of an investment company where at any time during the taxable year more than fifty per centum in value of its outstanding stock is owned, directly or indirectly, by one person. (c) Evidence determinative of purpose. The fact that the earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the tax upon its shareholders or members unless the corporation, by clear preponderance of evidence, shall prove the contrary. (d) Exception. The provisions of this sections shall not apply to banks, nonbank financial intermediaries, corporation organized primarily, and authorized by the Central Bank of the Philippines to hold shares of stock of banks, insurance companies, whether domestic or foreign. The provision discouraged tax avoidance through corporate surplus accumulation. When corporations do not declare dividends, income taxes are not paid on the undeclared dividends received by the shareholders. The tax on improper accumulation of surplus is essentially a penalty tax designed to compel corporations to distribute earnings so that the said earnings by shareholders could, in turn, be taxed. A review of American taxation history on accumulated earnings tax will show that the application of the accumulated earnings tax to publicly held corporations has been problematic. Initially, the Tax Court and the Court of Claims held that the accumulated earnings tax applies to publicly held corporations. Then, the Ninth Circuit Court of Appeals ruled in GolcondaMining v. Commissioner that the accumulated earnings tax could only apply to closely held corporations. Despite Golconda, the Internal Revenue Service asserted that the tax could be imposed on widely held corporations including those not controlled by a few shareholders or groups of shareholders. The Service indicated it would not follow the Ninth Circuit regarding publicly held corporations. In 1984, American legislation nullified the Ninth Circuit's Golconda ruling and made it clear that the accumulated earnings tax is not limited to closely held corporations. Golconda is no longer a reliable precedent. The amendatory provision of Section 25 of the 1977 NIRC, which was PD 1739, enumerated the corporations exempt from the imposition of improperly accumulated tax: (a) banks; (b) non-bank financial intermediaries; (c) insurance companies; and (d) corporations organized primarily and authorized by the Central Bank of the Philippines to hold shares of stocks of banks. Petitioner does not fall among those exempt classes. Besides, the rule on enumeration is that the express mention of one person, thing, act, or consequence is construed to exclude all others. Laws granting exemption from tax are
construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is the exception. The burden of proof rests upon the party claiming exemption to prove that it is, in fact, covered by the exemption so claimed, a burden which petitioner here has failed to discharge. Another point raised by the petitioner in objecting to the assessment, is that increase of working capital by a corporation justifies accumulating income. Petitioner asserts that respondent court erred in concluding that Cyanamid need not infuse additional working capital reserve because it had considerable liquid funds based on the 2.21:1 ratio of current assets to current liabilities. Petitioner relies on the so-called "Bardahl" formula, which allowed retention, as working capital reserve, sufficient amounts of liquid assets to carry the company through one operating cycle. The "Bardahl" formula was developed to measure corporate liquidity. The formula requires an examination of whether the taxpayer has sufficient liquid assets to pay all of its current liabilities and any extraordinary expenses reasonably anticipated, plus enough to operate the business during one operating cycle. Operating cycle is the period of time it takes to convert cash into raw materials, raw materials into inventory, and inventory into sales, including the time it takes to collect payment for the sales. Petitioner contends, Cyanamid needed at least P33,763,624.00 pesos as working capital. As of 1981, its liquid asset was only P25,776,991.00. Thus, petitioner asserts that Cyanamid had a working capital deficit of P7,986,633.00. Therefore, the P9,540,926.00 accumulated income as of 1981 may be validly accumulated to increase the petitioner's working capital for the succeeding year. We note, however, that the companies where the "Bardahl" formula was applied, had operating cycles much shorter than that of petitioner. As stressed by American authorities, although the "Bardahl" formula is well-established and routinely applied by the courts, it is not a precise rule. It is used only for administrative convenience. Petitioner's application of the "Bardahl" formula merely creates a false illusion of exactitude. Other formulas are also used, e.g. the ratio of current assets to current liabilities and the adoption of the industry standard. The ratio of current assets to current liabilities is used to determine the sufficiency of working capital. Ideally, the working capital should equal the current liabilities and there must be 2 units of current assets for every unit of current liability, hence the so-called "2 to 1" rule. As of 1981 the working capital of Cyanamid was P25,776,991.00, or more than twice its current liabilities. That current ratio of Cyanamid, therefore, projects adequacy in working capital. Said working capital was expected to increase further when more funds were generated from the succeeding year's sales. Available income covered expenses or indebtedness for that year, and there appeared no reason to expect an impending "working capital deficit" which could have necessitated an increase in working capital, as rationalized by petitioner. If the CIR determined that the corporation avoided the tax on shareholders by permitting earnings or profits to accumulate, and the taxpayer contested such a determination, the burden of proving the determination wrong, together with the
corresponding burden of first going forward with evidence, is on the taxpayer. This applies even if the corporation is not a mere holding or investment company and does not have an unreasonable accumulation of earnings or profits.27 In order to determine whether profits are accumulated for the reasonable needs to avoid the surtax upon shareholders, it must be shown that the controlling intention of the taxpayer is manifest at the time of accumulation, not intentions declared subsequently, which are mere afterthoughts. Furthermore, the accumulated profits must be used within a reasonable time after the close of the taxable year. In the instant case, petitioner did not establish, by clear and convincing evidence, that such accumulation of profit was for the immediate needs of the business. In the present case, the Tax Court opted to determine the working capital sufficiency by using the ratio between current assets to current liabilities. The working capital needs of a business depend upon nature of the business, its credit policies, the amount of inventories, the rate of the turnover, the amount of accounts receivable, the collection rate, the availability of credit to the business, and similar factors. Petitioner, by adhering to the "Bardahl" formula, failed to impress the tax court with the required definiteness envisioned by the statute. We agree with the tax court that the burden of proof to establish that the profits accumulated were not beyond the reasonable needs of the company, remained on the taxpayer. This Court will not set aside lightly the conclusion reached by the Court of Tax Appeals which, by the very nature of its function, is dedicated exclusively to the consideration of tax problems and has necessarily developed an expertise on the subject, unless there has been an abuse or improvident exercise of authority. Unless rebutted, all presumptions generally are indulged in favor of the correctness of the CIR's assessment against the taxpayer. With petitioner's failure to prove the CIR incorrect, clearly and conclusively, this Court is constrained to uphold the correctness of tax court's ruling as affirmed by the Court of Appeals. Petition Denied Bellosillo, Mendoza, Buena and De Leon, Jr., JJ., concur. -Justin D. EXEMPT ENTITIES 2. Co-ownership OBILLOS v. CIR and CTA (Oct 29, 1985) DOCTRINE: Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived". There must be an unmistakable intention to form a partnership or joint venture. NATURE: Instant Appeal
PONENTE: Aquino FACTS: 1. March 2, 1973. Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots located at Greenhills, San Juan, Rizal. The next day he transferred his rights to his four children, the petitioners, to enable them to build their residences. The company sold the two lots to petitioners for P178,708.12 on March 13. Presumably, the Torrens titles issued to them would show that they were coowners of the two lots. In 1974, or after having held the two lots for more than a year, the petitioners resold them to the Walled City Securities Corporation and Olga Cruz Canda for the total sum of P313,050. They derived from the sale a total profit of P134,341.88 or P33,584 for each of them. They treated the profit as a capital gain and paid an income tax on one-half thereof or of P16,792. In April, 1980, or one day before the expiration of the five-year prescriptive period, the Commissioner of Internal Revenue required the four petitioners to pay corporate income tax on the total profit of P134,336 in addition to individual income tax on their shares thereof . He assessed P37,018 as corporate income tax, P18,509 as 50% fraud surcharge and P15,547.56 as 42% accumulated interest, or a total of P71,074.56. a. He also considered the share of the profits of each petitioner in the sum of P33,584 as a " taxable in full (not a mere capital gain of which is taxable) and required them to pay deficiency income taxes aggregating P56,707.20 including the 50% fraud surcharge and the accumulated interest.
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3.
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In sum, the petitioners were held liable for deficiency income taxes and penalties totalling P127,781.76 on their profit of P134,336, in addition to the tax on capital gains already paid by them. a. The Commissioner acted on the theory that the four petitioners had formed an unregistered partnership or joint venture within the meaning of sections 24(a) and 84(b) of the Tax Code. The petitioners contested the assessments. Two Judges of the Tax Court sustained the same. Judge Roaquin dissented. Hence, the instant appeal. WON petitioners formed a partnership or joint venture. NO
6. ISSUE: 1.
RATIO: Petitioners did not form a partnership or joint venture 1. NO INTENTION TO FORM PARTNERSHIP To regard the petitioners as having formed a taxable unregistered partnership under Art. 1767 NCCsimply because they allegedly contributed money to buy the two lots,
resold the same and divided the profit among themselveswould result in oppressive taxation. As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and simple. To consider them as partners would obliterate the distinction between a co-ownership and a partnership. The petitioners were not engaged in any joint venture by reason of that isolated transaction. Their original purpose was to divide the lots for residential purposes. If later on they found it not feasible to build their residences on the lots because of the high cost of construction, then they had no choice but to resell the same to dissolve the co-ownership. The division of the profit was merely incidental to the dissolution of the co-ownership which was in the nature of things a temporary state. It had to be terminated sooner or later. Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived". There must be an unmistakable intention to form a partnership or joint venture. See Gatchalian vs. Collector of Internal Revenue where 15 persons contributed small amounts to purchase a two-peso sweepstakes ticket with the agreement that they would divide the prize The ticket won the third prize of P50,000. The 15 persons were held liable for income tax as an unregistered partnership. The instant case is distinguishable from the cases where the parties engaged in joint ventures for profit. 2. ALL CO-OWNERSHIPS ARE NOT AUTOMATICALLY DEEMED UNREGISTERED PARTNERSHIPS
3.
WHEN CO-OWNERSHIP MAY BECOME AN UNREGISTERED PARTNERSHIP
Where after an extrajudicial settlement the co-heirs used the inheritance or the incomes derived therefrom as a common fund to produce profits for themselves, it was held that they were taxable as an unregistered partnership. In the following cases, the SC held that petitioners had an unregistered partnership: Reyes vs. Commissioner of Internal Revenue: where father and son purchased a lot and building, entrusted the administration of the building to an administrator and divided equally the net income, Evangelista vs. Collector of Internal Revenue: where the three Evangelista sisters bought four pieces of real property which they leased to various tenants and derived rentals therefrom. In the instant case, what the Commissioner should have investigated was whether the father donated the two lots to the petitioners and whether he paid the donor's tax (See Art. 1448, Civil Code). We are not prejudging this matter. It might have already prescribed. DISPOSITION: WHEREFORE, the judgment of the Tax Court is reversed and set aside. The assessments are cancelled. No costs. VOTING: 2nd Division. 4 concur. 1 on leave -Jenin 3. Section 30, NIRC THE COLLECTOR OF INTERNAL REVENUE v V. G. SINCO EDUCATIONAL CORPORATION (October 23, 1956) Doctrine: 1. 2. Whatever payment is made to those who work for a school or college as a remuneration for their services is not considered as distribution of profit as would make the school one conducted for profit. Appellee charges tuition fees and other fees for the different services it renders to the students and in fact it is its only source of income, but such fact does not in itself make the school a profit-making enterprise that would place it beyond the purview of the law. The amount of fees charged by a school x x x is not conclusive of the purposes of the institution.
The Commissioner has even based its ruling on the following CTA Decisions: Co-Ownership who own properties which produce income should not automatically be considered partners of an unregistered partnership, or a corporation, within the purview of the income tax law. To hold otherwise, would be to subject the income of all co-ownerships of inherited properties to the tax on corporations, inasmuch as if a property does not produce an income at all, it is not subject to any kind of income tax, whether the income tax on individuals or the income tax on corporation. De Leon v. CIR, CTA case See Longa v. Aranas, CTA case: The Longa heirs inherited the 'hacienda' in question pro-indiviso from their deceased parents; they did not contribute or invest additional ' capital to increase or expand the inherited properties; they merely continued dedicating the property to the use to which it had been put by their forebears; they individually reported in their tax returns their corresponding shares in the income and expenses of the 'hacienda', and they continued for many years the status of co-ownership in order, as conceded by respondent, 'to preserve its value and to continue the existing contractual relations.
3.
Ponente: BAUTISTA ANGELO, J Nature: petition for review on certiorari of a decision of the CTA. Facts: Vicente G. Sinco established and operated an educational institution known as Foundation College of Dumaguete On September 21, 1951, the V. G. Sinco
1.
Educational Institution was organized. This corporation was non-stock and was capitalized by V. G. Sinco and members of his immediate family. This corporation continued the operations of Foundation College of Dumaguete. The Collector of Internal Revenue assessed against the college an income tax for the years 1950 and 1951 in the aggregate sum of P5,364.77, which was paid by the college. Two years thereafter, the corporation commenced an action in the Court of First Instance of Negros Oriental for the refund of this amount alleging that it is exempt from income tax under section 27 (e) of the National Internal Revenue Code. CTA decided in favor of Sinco. Part of the net income accumulated by the Appellee inured to the benefit of V. G. Sinco, president and founder of the corporation, and therefore the Appellee is not entitled to the exemption prescribed by the law. a. Looking at the balance sheets of the school, Appellant claims that a great portion of the net profits realized by the corporation was channeled and redounded to the personal benefit of V. G. Sinco, who was its founder and president. b. Another benefit that accrued to Sinco is represented by the several amounts which appear payable to the Community Publishers, Inc. because, being the biggest stockholder of this entity, the money to be paid by the Appellee to that entity as appearing in the above quoted entries would redound to the personal benefit of Sinco.
latter to enable it to comply with the requirements of the law and to fill its needs for educational purposes. This clarification made by Sinco stand undisputed. Main Issue: It is indeed too sweeping if not unfair to conclude that part of the income of the Appellee as an institution inured to the benefit of one of its stockholders simply because part of the income was carried in its books as accumulated salaries of its president and teacher. Much less can it be said that the payments made by the college to the Community Publishers, Inc. redounded to the personal benefit of Sinco simply because he is one of its stockholders. The fact is that, as it has been established, the Appellee is a non-profit institution and since its organization it has never distributed any dividend or profit to its stockholders. Of course, part of its income went to the payment of its teachers or professors and to the other expenses of the college incident to an educational institution but none of the income has ever been channeled to the benefit of any individual stockholder. The authorities are clear to the effect that whatever payment is made to those who work for a school or college as a remuneration for their services is not considered as distribution of profit as would make the school one conducted for profit. Mayor and Common Council of Borough of Princeton vs. State Board of Taxes & Assessments, et al., 115 Atl., 342: school is not conducted for profit merely because moderate salaries were paid to the principal and to the teachers. Of course, it is not denied that the Appellee charges tuition fees and other fees for the different services it renders to the students and in fact it is its only source of income, but such fact does not in itself make the school a profit-making enterprise that would place it beyond the purview of the law. Jesus Sacred Heart College vs. Collector of Internal Revenue, 95 Phil., 16: Needless to say, every responsible organization must be so run as to, at least, insure its existence, by operating within the limits of its own resources, especially its regular income. In other words, it should always strive, whenever possible, to have a surplus. Again, the amount of fees charged by a school, college or university depends, ultimately, upon the policy and a given administration, at a particular time. It is not conclusive of the purposes of the institution. Otherwise, such purpose would vary with the particular persons in charge of the administration of the organization. CIR Argues: Appellee is not entitled to the exemption of the law because of the use made by it of part of its income in acquiring additional buildings and equipment, saying that the property of the corporation may be sold at any time and the profits thereof divided among the stockholders or members. This claim is too speculative. It has been held by several authorities that the mere provision for the distribution of its assets to the stockholders upon dissolution does not remove the right of an educational institution from tax exemption. In U. S. vs. Picwick Electric Membership Corp., 158 F. 2d 272, 277, it was held The fact that the members may receive some benefit on dissolution upon distribution of the assets is a contingency too remote to have any material bearing upon the question where the association is admittedly not a scheme to avoid taxation and its good faith and honesty or purpose is not challenged.
Petitioners:
Respondent: 1. It is exempt from the payment of the income tax because it is organized and maintained exclusively for the educational purposes and no part of its net income inures to the benefit of any private individual.
Issues: Sub-issue: Is VG Sinco an educational institution in which part of its income inures to the benefit of one of its stockholders? Main Issue: Is VG Sinco Corp liable for income tax? Held & Ratio: Sub-issue: No. Dean Sinco made the following clarification:chanroblesvirtuallawlibrary He acted as president of the Foundation College and as chairman of its Board of Directors; chan roblesvirtualawlibraryin 1949 he served as its teacher for a time; chan roblesvirtualawlibrarythe accountant of the college suggested that a certain amount be set aside as his salary for purposes of orderly and practical accounting; chan roblesvirtualawlibrarybut notwithstanding this suggestion, he never collected his salary for which reason it was carried in the books as accrued expenses. With regard to the account of the Community Publishers, Inc., Sinco said that this is a distinct and separate corporation although he is one of its stockholders. The account represents payment for services rendered by this entity to the college. These are two different entities and whatever relation there is between the two is that the former merely extends help to the
Dispositive: Decision appealed from affirmed. Vote: Paras, C.J., Padilla, Montemayor, Labrador, Concepcion, Reyes, J. B. L., Endencia and Felix, JJ., concur. -Wiggy G. ITEMS OF GROSS INCOME i. Convenience-of-the-employer rule Henderson v. Collector of Internal Revenue Sandra H. INTEREST INCOME 3. Imputed interest on inter-company loans/Advances Commissioner of Internal Revenu vs. Filinvest Development Corporation (July 19, 2011) Ponente: Perez RATIO: There must be proof of the actual or, at the very least, probable receipt or realization by the controlled taxpayer of the item of gross income sought to be distributed, apportioned or allocated by the CIR. FACTS: [simple enough] 1. Filinvest Development Corporation (FDC) owned 80% of the outstanding shares of Filinvest Alabang, Inc. (FAI) and is also a holding company which owned 67.82% of the outstanding shares of Filinvest Land, Inc. (FLI) a. FDC and FAI entered into a DEED OF EXCHANGE with FLI where FDC and FAI both transferred in favor of FLI parcels of land in exchange for shares of stock of FLI. The result of this was FDC owned 61.03% of FLIs shares of stock, FAI owned 9.96% and the rest were owned by others. b. c. Later, FLI requested a ruling from the BIR to the effect that no gain or loss should be recognized in the aforesaid transfer of real properties. BIR found that the exchange was among those contemplated under Section 34(c)(2) of the NIRC, which provides that: b. 3. b. 2.
No gain or loss shall be recognized if property is transferred to a corporation by a person in exchange for a stock in such corporation of which as a result of such exchange said person, alone or together with others, not exceeding four (4) persons, gains control of said corporation. Between 1996 and 1997, FDC also extended cash advances in favor of its affiliates. a. On 15 November 1996, FDC also entered into a Shareholders Agreement with Reco Herrera PTE Ltd. (RHPL) for the formation of a Singapore-based joint venture company called Filinvest Asia Corporation (FAC). With their equity participation in FAC respectively pegged at 60% and 40% in the Shareholders Agreement, FDC subscribed to P500.7 million worth of shares in said joint venture company to RHPLs subscription worth P433.8 million. c. Having paid its subscription by executing a Deed of Assignment transferring to FAC a portion of its rights and interest in the Project worth P500.7 million, FDC eventually reported a net loss of P190,695,061.00 in its Annual Income Tax Return for the taxable year 1996. On 3 January 2000, FDC received from the BIR a Formal Notice of Demand to pay deficiency income and documentary stamp taxes, plus interests and compromise penalties. a. The foregoing deficiency taxes were assessed on the taxable gain supposedly realized by FDC from the Deed of Exchange it executed with FAI and FLI, on the dilution resulting from the Shareholders Agreement FDC executed with RHPL as well as the arms-length interest rate and documentary stamp taxes imposable on the advances FDC extended to its affiliates. FAI similarly received from the BIR a Formal Letter of Demand for deficiency income taxes in the sum of P1,477,494,638.23 for the
year 1997, which was also assessed on the taxable gain purportedly realized by FAI from the Deed of Exchange it executed with FDC and FLI. c. FDC and FAI filed their respective requests for b. reconsideration/protest, on the ground that the deficiency income and documentary stamp taxes assessed by the BIR were bereft of factual and legal basis 4. In view of the failure of petitioner Commissioner of Internal Revenue (CIR) to resolve their request for reconsideration/protest within the aforesaid period, FDC and FAI filed on 17 October 2000 a petition for review with the Court of Tax Appeals (CTA) pursuant to Section 228 of the 1997 NIRC. a. The petition alleged: i. that as previously opined in BIR Ruling No. S-34-046-97, no taxable gain should have been assessed from the subject Deed of Exchange since FDC and FAI collectively gained further control of FLI as a consequence of the exchange; ii. that correlative to the CIR's lack of authority to impute theoretical interests on the cash advances FDC extended in favor of its affiliates, the rule is settled that interests cannot be demanded in the absence of a stipulation to the effect; iii. that not being promissory notes or certificates of obligations, the instructional letters as well as the cash and journal vouchers evidencing said cash advances were not subject to documentary stamp taxes; and, iv. that no income tax may be imposed on the prospective gain from the supposed appreciation of FDC's shareholdings in FAC. 5. CIR filed its answer, claiming that the transfer of property in question should not be considered tax free since, with the resultant diminution of its shares in FLI, FDC did not gain further control of said corporation. a. CIR invoked Section 43 of the old NIRC which, as implemented by Revenue Regulations No. 2, Section 179 (b) and (c), gave him "the a. 7. b. a. 6. c.
power to allocate, distribute or apportion income or deductions between or among such organizations, trades or business in order to prevent evasion of taxes." The CIR justified the imposition of documentary stamp taxes on the instructional letters as well as cash and journal vouchers for said cash advances on the strength of Section 180 of the NIRC and Revenue Regulations No. 9-94 which provide that loan transactions are subject to said tax irrespective of whether or not they are evidenced by a formal agreement or by mere office memo. dilution of its shares in FAC as a result of its Shareholders' Agreement with RHPL. CTA went on to render the Decision dated 10 September 2002 which, with the exception of the deficiency income tax on the interest income FDC supposedly realized from the advances it extended in favor of its affiliates, cancelled the rest of deficiency income and documentary stamp taxes assessed against FDC and FAI for the years 1996 and 1997. CTA also ruled that the increase in the value of FDC's shares in FAC did not result in economic advantage in the absence of actual sale or conversion thereof. While likewise finding that the documents evidencing the cash advances FDC extended to its affiliates cannot be considered as loan agreements that are subject to documentary stamp tax, the CTA enunciated, however, that the CIR was justified in assessing undeclared interests on the same cash advances pursuant to his authority under Section 43 of the NIRC in order to forestall tax evasion. FDC filed on 5 November 2002 the petition for review. Calling attention to the fact that the cash advances it extended to its affiliates were interest-free in the absence of the express stipulation on interest required under Article 1956 of the Civil Code, FDC questioned the imposition of an arm's-length interest rate
The CIR also argued that FDC realized taxable gain arising from the
thereon on the ground, among others, that the CIR's authority under Section 43 of the NIRC: i. does not include the power to impute imaginary interest on said transactions; ii. is directed only against controlled taxpayers and not against mother or holding corporations; and, iii. can only be invoked in cases of understatement of taxable net income or evident tax evasion. b. Upholding FDC's position, CA reversed and set aside the CTA decision and entered a new one annulling the assessment imposing deficiency income tax on FDC 8. CIR also filed the petition for review docketed before the CA, arguing that the CTA reversibly erred in cancelling the assessment notices. The petition was, however, denied due course and dismissed for lack of merit in the herein assailed decision dated 26 January 2005. a. CIR then filed for petition for review on certiorari of the 16 December 2003 decision in and the 26 January 2005 decision, which were respectively docketed as G.R. Nos. 163653 and 167689. These two petitions were then consolidated. b. In G.R. No. 163653, the CIR urges the grant of its petition on the following ground: i. CA erred in holding that the cash advances extended by respondent to it affiliates were not subject to income tax. c. In G.R. No. 167689, on the other hand, petitioner proffers the following issues for resolution: i. CA committed grave abuse of discretion in holding that the exchange of share of stock for property among FDC, FAI and FLI met all the requirements for non-recognition of taxable gain under Section 32(c)(2) of the old NIRC, now Section 40 (C)(2)(c) of the current NIRC. ii. CA erred in holding that the letters of instruction or cash vouchers extended by FDC to its affiliates are not deemed loan agreements subject to documentary stamp taxes under Section 180 of NIRC 2. c. b. a. 1.
iii. CA erred in holding that the gain on dilution as a result of the increase in the value of FDCs shareholdings in FAC is not taxable.
RATIO: [whadafuqisdissheet] [WHAT IS NEEDED IN CLASS] In G.R. No. 163653, the CIR argues that the CA erred in reversing the CTAs finding that theoretical interests can be imputed that, for said purpose, FDC resorted to interest-bearing fund borrowings from commercial banks. Since considerable interest expenses were deducted by FDC when said funds were borrowed, CIR theorizes that interest income should likewise be declared when the same funds were sourced for the advances FDC extended to its affiliates. Invoking Section 43 of the 1993 NIRC in relation to Section 179(b) of Revenue Regulation No. 2, the CIR maintains that it is vested with the power to allocate, distribute or apportion income or deductions between or among controlled organizations, trades or businesses even in the absence of fraud, since said power is intended to prevent evasion of taxes or clearly to reflect the income of any such organizations, trades or businesses. CIR asseverates that the CA should have accorded weight and respect to the findings of the CTA which, as the specialized court dedicated to the study and consideration of tax matters, can take judicial notice of US income tax laws and regulations. Section 43 of the 1993 NIRC provides that: In any case of two or more organizations, trades or businesses (whether or not incorporated and whether or not organized in the Philippines) owned or controlled directly or indirectly by the same interests, the Commissioner of Internal Revenue is authorized to distribute, apportion or allocate gross income or
on the advances FDC extended to its affiliates in 1996 and 1997 considering
deductions between or among such organization, trade or business, if he determines that such distribution, b. apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such organization, trade or business. a. As may be gleaned from the definitions of the terms controlled and "controlled taxpayer" under paragraphs (a) (3) and (4) of Sec. 179(b) of Revenue Regulation No. 2, it would appear that FDC and its affiliates come within the purview of Section 43 of the 1993 NIRC. b. Aside from owning significant portions of the shares of stock of FLI, FAI, DSCC and FCI, the fact that FDC extended substantial sums of money as cash advances to its said affiliates for the purpose of providing them financial assistance for their operational and capital expenditures seemingly indicate that the situation sought to be addressed by the subject provision exists. c. From the tenor of paragraph (c) of Section 179 of Revenue Regulation No. 2, it may also be seen that the CIR's power to distribute, apportion or allocate gross income or deductions between or among controlled taxpayers may be likewise exercised whether or not fraud inheres in the transaction/s under scrutiny. d. For as long as the controlled taxpayer's taxable income is not reflective of that which it would have realized had it been dealing at arm's length with an uncontrolled taxpayer, the CIR can make the necessary rectifications in order to prevent evasion of taxes. 3. SC finds that the CIR's powers of distribution, apportionment or allocation of gross income and deductions under Section 43 of the 1993 NIRC and Section 179 of Revenue Regulation No. 2 does not include the power to impute "theoretical interests" to the controlled taxpayer's transactions. a. Pursuant to Section 28 of the 1993 NIRC, after all, the term gross income is understood to mean all income from whatever source derived, including, but not limited to the following items: compensation for services, including fees, commissions, and similar items; gross income derived from business; gains derived from c. b. a. 4. c.
dealings
in
property;
interest;
rents;
royalties; dividends;
annuities; prizes and winnings; pensions; and partners distributive share of the gross income of general professional partnership. While it has been held that the phrase "from whatever source derived" indicates a legislative policy to include all income not expressly exempted within the class of taxable income under our laws, the term "income" has been variously interpreted to mean "cash received or its equivalent", "the amount of money coming to a person within a specific time" or "something distinct from principal Otherwise stated, there must be proof of the actual or, at the very least, probable receipt or realization by the controlled taxpayer of the item of gross income sought to be distributed, apportioned or allocated by the CIR. A perusal of the record yielded no evidence of actual or possible showing that the advances FDC extended to its affiliates had resulted to the interests subsequently assessed by the CIR. For all its harping upon the supposed fact that FDC had resorted to borrowings from commercial banks, the CIR had adduced no concrete proof that said funds were, indeed, the source of the advances the former provided its affiliates. While admitting that FDC obtained interest-bearing loans from commercial banks, Susan Macabelda - FDC's Funds Management Department Manager who was the sole witness presented before the CTA - clarified that the subject advances were sourced from the corporation's rights offering in 1995 as well as the sale of its investment in Bonifacio Land in 1997. More significantly, said witness testified that said advances: (a) were extended to give FLI, FAI, DSCC and FCI financial assistance for their operational and capital expenditures; and, (b) were all temporarily in nature since they were repaid within the duration of one week to three months and were evidenced by mere journal entries, cash vouchers and instructional letters.
or capital."
5.
Even if we were, therefore, to accord precipitate credulity to the CIR's bare assertion that FDC had deducted substantial interest expense from its gross income, there would still be no factual basis for the imputation of theoretical interests on the subject advances and assess deficiency income taxes thereon. a. More so, when it is borne in mind that, pursuant to Article 1956 of the Civil Code of the Philippines, no interest shall be due unless it has been expressly stipulated in writing. b. Considering that taxes, being burdens, are not to be presumed beyond what the applicable statute expressly and clearly declares, the rule is likewise settled that tax statutes must be construed strictly against the government and liberally in favor of the taxpayer. c. Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication. d. While it is true that taxes are the lifeblood of the government, it has been held that their assessment and collection should be in accordance with law as any arbitrariness will negate the very reason for government itself. b. a. Acting on the 13 January 1997 request filed by FLI, the BIR had, in fact, acknowledged the concurrence of the foregoing requisites in the Deed of Exchange the former executed with FDC and FAI by issuing BIR Ruling No. S-34-046-97. With the BIR's reiteration of said ruling upon the request for clarification filed by FLI, there is also no dispute that said transferee and transferors subsequently complied with the requirements provided for the non-recognition of gain or loss from the exchange of property for tax, as provided under Section 34 (c) (2) of the 1993 NIRC. 7. As even admitted in the 14 February 2001 Stipulation of Facts submitted by the parties, the requisites for the non-recognition of gain or loss under the foregoing provision are as follows: (a) the transferee is a corporation; (b) the transferee exchanges its shares of stock for property/ies of the transferor; (c) the transfer is made by a person, acting alone or together with others, not exceeding four persons; and, (d) as a result of the exchange the transferor, alone or together with others, not exceeding four, gains control of the transferee.
6.
[EXTRANEOUS SHIZZ] In G.R. No. 167689, we also find a dearth of merit in the CIR's insistence on the imposition of deficiency income taxes on the transfer FDC and FAI effected in exchange for the shares of stock of FLI. With respect to the Deed of Exchange executed between FDC, FAI and FLI, Section 34 (c) (2) of the 1993 NIRC pertinently provides as follows: a. Sec. 34. Determination of amount of and recognition of gain or loss.xxxx (c) Exception x x x x No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for shares of stock in such corporation of which as a result of such exchange said person, alone or together with others, not exceeding four persons, gains control of said corporation; Provided, That stocks issued for services shall not be considered as issued in return of property. b. For said purpose, the CIR calls attention to the fact that, prior to the exchange, FDC owned 2,537,358,000 or 67.42% of FLI's 3,763,535,000 outstanding capital stock. Upon the issuance of 443,094,000 additional FLI shares as a consequence of the exchange and with only 42,217,000 thereof accruing in favor of FDC for a total of 2,579,575,000 shares, said corporations controlling interest was supposedly reduced to 61%.03 c. when reckoned from the transferee's aggregate 4,226,629,000 outstanding shares. Without owning a share from FLI's initial 3,763,535,000 outstanding shares, on the other hand, FAI's acquisition of 8. Then as now, the CIR argues that taxable gain should be recognized for the exchange considering that FDC's controlling interest in FLI was actually decreased as a result thereof.
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420,877,000 FLI shares as a result of the exchange purportedly resulted in its control of only 9.96% of said transferee corporation's 4,226,629,000 outstanding shares. d. On the principle that the transaction did not qualify as a tax-free exchange under Section 34 (c) (2) of the 1993 NIRC, the CIR asseverates that taxable gain in the sum of P263,386,921.00 should be recognized on the part of FDC and in the sum of P3,088,711,367.00 on the part of 9. FAI.[57] c. b.
the 420,877,000 shares issued to its said co-transferor which, by itself, represents 7.968% of the outstanding shares of FLI. Considered alongside FDC's 61.03% control of FLI as a consequence of the 29 November 1996 Deed of Transfer, said 7.968% add up to an aggregate of 68.998% of said transferee corporation's outstanding shares of stock which is evidently still greater than the 67.42% FDC initially held prior to the exchange. This much was admitted by the parties in the 14 February 2001 Stipulation of Facts, Documents and Issues they submitted to the
categorical language of Section 34 (c) (2) of the 1993 NIRC which provides that gain or loss will not be recognized in case the exchange of property for stocks results in the control of the transferee by the transferor, alone or with other transferors not exceeding four persons. a. Rather than isolating the same as proposed by the CIR, FDC's 2,579,575,000 shares or 61.03% control of FLI's 4,226,629,000 outstanding shares should, therefore, be appreciated in combination with the 420,877,000 new shares issued to FAI which represents 9.96% control of said transferee corporation. b. Together FDC's 2,579,575,000 shares (61.03%) and FAI's 420,877,000 shares (9.96%) clearly add up to 3,000,452,000 shares or 70.99% of FLI's 4,226,629,000 shares. c. Since the term "control" is clearly defined as "ownership of stocks in a corporation possessing at least fifty-one percent of the total voting power of classes of stocks entitled to one vote" under Section 34 (c) (6) [c] of the 1993 NIRC, the exchange of property for stocks between FDC FAI and FLI clearly qualify as a tax-free transaction under paragraph 34 (c) (2) of the same provision. 10. It also appears that the supposed reduction of FDC's shares in FLI posited by the CIR is more apparent than real. a. As the uncontested owner of 80% of the outstanding shares of FAI, it cannot be gainsaid that FDC ideally controls the same percentage of
d.
Inasmuch as the combined ownership of FDC and FAI of FLI's outstanding capital stock adds up to a total of 70.99%, it stands to reason that neither of said transferors can be held liable for deficiency income taxes the CIR assessed on the supposed gain which resulted from the subject transfer.
11. On the other hand, insofar as documentary stamp taxes on loan agreements and promissory notes are concerned, Section 180 of the NIRC provides follows: Sec. 180. Stamp tax on all loan agreements, promissory notes, bills of exchange, drafts, instruments and securities issued by the government or any of its instrumentalities, certificates of deposit bearing interest and others not payable on sight or demand. On all loan agreements signed abroad wherein the object of the contract is located or used in the Philippines; bill of exchange (between points within the Philippines), drafts, instruments and securities issued by the Government or any of its instrumentalities or certificates of deposits drawing interest, or orders for the payment of any sum of money otherwise than at sight or on demand, or on all promissory notes, whether negotiable or non-negotiable, except bank notes issued for circulation, and on each renewal of any such note, there shall be collected a documentary stamp tax of Thirty centavos (P0.30) on each two hundred pesos, or fractional part thereof, of the face value of any such agreement, bill of exchange, draft, certificate of deposit or note: Provided, That only one documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan, whichever will yield a higher tax: Provided however, That loan agreements or promissory notes the aggregate of which does not exceed Two hundred fifty thousand pesos
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The paucity of merit in the CIR's position is, however, evident from the
CTA.
(P250,000.00) executed by an individual for his purchase on installment for his personal use or that of his family and not for business, resale, barter or hire of a house, lot, motor vehicle, appliance or furniture shall be exempt from the payment of documentary stamp tax provided under this Section. a. When read in conjunction with Section 173 of the 1993 NIRC, the foregoing provision concededly applies to "(a)ll loan agreements, whether made or signed in the Philippines, or abroad when the obligation or right arises from Philippine sources or the property or object of the contract is located or used in the Philippines." b. The terms 'Loan Agreement" under Section 180 and "Mortgage' under Section 195, both of the Tax Code, as amended, generally refer to distinct and separate instruments. A loan agreement shall be taxed under Section 180, while a deed of mortgage shall be taxed under Section 195. 12. Applying the aforesaid provisions to the case at bench, we find that the instructional letters as well as the journal and cash vouchers evidencing the advances FDC extended to its affiliates in 1996 and 1997 qualified as loan agreements upon which documentary stamp taxes may be imposed. a. In keeping with the caveat attendant to every BIR Ruling to the effect that it is valid only if the facts claimed by the taxpayer are correct, we find that the CA reversibly erred in utilizing BIR Ruling No. 11698, dated 30 July 1998 which, strictly speaking, could be invoked only by ASB Development Corporation, the taxpayer who sought the same. In said ruling, the CIR opined that documents like those evidencing the advances FDC extended to its affiliates are not subject to documentary stamp tax. b. CIR argued that the foregoing ruling was later modified in BIR Ruling No. 108-99 dated 15 July 1999, which opined that inter-office memos evidencing lendings or borrowings extended by a corporation to its affiliates are akin to promissory notes, hence, subject to documentary stamp taxes. c. In brushing aside the foregoing argument, however, the CA applied Section 246 of the 1993 NIRC from which proceeds the settled
principle that rulings, circulars, rules and regulations promulgated by the BIR have no retroactive application if to so apply them would be prejudicial to the taxpayers. d. Admittedly, this rule does not apply: (a) where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the Bureau of Internal Revenue; (b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or (c) where the taxpayer acted in bad faith. from the CIR, however, FDC cannot invoke the foregoing principle on non-retroactivity of BIR rulings. 13. Viewed in the light of the foregoing considerations, we find that both the CTA and the CA erred in invalidating the assessments issued by the CIR for the deficiency documentary stamp taxes due on the instructional letters as well as the journal and cash vouchers evidencing the advances FDC extended to its affiliates in 1996 and 1997. a. In Assessment Notice No. SP-DST-96-00020-2000, the CIR correctly assessed the sum of P6,400,693.62 for documentary stamp tax, P3,999,793.44 in interests and P25,000.00 as compromise penalty, for a total of P10,425,487.06. Alongside the sum of P4,050,599.62 for documentary stamp tax, the CIR similarly assessed P1,721,099.78 in interests and P25,000.00 as compromise penalty in Assessment Notice No. SP-DST-97-00021-2000 or a total of P5,796,699.40. b. The imposition of deficiency interest is justified under Sec. 249 (a) and (b) of the NIRC which authorizes the assessment of the same at the rate of twenty percent (20%), or such higher rate as may be prescribed by regulations, from the date prescribed for the payment of the unpaid amount of tax until full payment. c. The imposition of the compromise penalty is, in turn, warranted under Sec. 250 of the NIRC which prescribes the imposition thereof in case of each failure to file an information or return, statement or
12
e.
Not being the taxpayer who, in the first instance, sought a ruling
list, or keep any record or supply any information required on the date prescribed therefor. 14. To our mind, no reversible error can, finally, be imputed against both the CTA and the CA for invalidating the Assessment Notice issued by the CIR for the deficiency income taxes FDC is supposed to have incurred as a consequence of the dilution of its shares in FAC. a. Alongside the principle that tax revenues are not intended to be liberally construed, the rule is settled that the findings and conclusions of the CTA are accorded great respect and are generally upheld by this Court, unless there is a clear showing of a reversible error or an improvident exercise of authority. b. Absent showing of such error here, we find no strong and cogent reasons to depart from said rule with respect to the CTA's finding that no deficiency income tax can be assessed on the gain on the supposed dilution and/or increase in the value of FDC's shareholdings in FAC which the CIR, at any rate, failed to establish. c. Bearing in mind the meaning of "gross income" as above discussed, it cannot be gainsaid, even then, that a mere increase or appreciation in the value of said shares cannot be considered income for taxation purposes. d. Since a mere advance in the value of the property of a person or corporation in no sense constitute the income specified in the revenue law, it has been held in the early case of Fisher vs. Trinidad,[74] that it constitutes and can be treated merely as an increase of capital. e. Hence, the CIR has no factual and legal basis in assessing income tax on the increase in the value of FDC's shareholdings in FAC until the same is actually sold at a profit.
a.
Accordingly, Assessment Notices Nos. SP-DST-96-00020-2000 and SPDST-97-00021-2000 issued for deficiency documentary stamp taxes due on the instructional letters as well as journal and cash vouchers evidencing the advances FDC extended to its affiliates are declared valid.
b.
The cancellation of Assessment Notices Nos. SP-INC-96-00018-2000, SPINC-97-00019-2000 and SP-INC-97-0027-2000 issued for deficiency income assessed on (a) the arms-length interest from said advances; (b) the gain from FDCs Deed of Exchange with FAI and FLI; and (c) with RHPL is, however, upheld.
[Love note: I am so, so sorry for how its almost as long as Rapunzels hair.] -Jan J. DIVIDEND INCOME 1. Kinds of dividends recognized in law c. Stock COMMISSIONER OF INTERNAL REVENUE vs. MANNING (August 6, 1975) DOCTRINE: - 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. NATURE: Petition for Review PONENTE: Castro FACTS: 1. 2. 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. February 29, 1958 - a trust agreement (see pp. 17-20 of the original) 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.
WHEREFORE, premises considered, the CIR's petition for review on certiorari in G.R. No. 163653 is DENIED for lack of merit and the CAs 16 December 2003 Decision in G.R. No. 72992 is AFFIRMED in toto. The CIRs petition in G.R. No. 167689 is PARTIALLY GRANTED and the CAs 26 January 2005 Decision in CA-G.R. SP No. 74510 is MODIFIED.
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income from the dilution resulting from FDCs Shareholders Agreement
3.
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. 4. 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. 5. December 22, 1958 - a resolution was passed during a special meeting of Mantrasco stockholders. 6. November 25, 1963 - entire purchase price of Reese's interest in Mantrasco was finally paid in full by Mantrasco. 7. May 4, 1964 - trust agreement was terminated and the trustees delivered to Mantrasco all the shares which they were holding in trust. 8. September 14, 1962 - BIR ordered an examination of Mantrascos books. This examination disclosed that:1.as of December 31, 1958 the 24,700shares declared as dividends had been proportionately distributed to Manning, McDonald & Simmons, representing a total book value or acquisition cost of P7,973,6602.Manning, McDonald & Simmons failed to declare the said stock dividends as part of their taxable income for the year 1958 9. 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." 10. April 14, 1965 - Commissioner of Internal Revenue issued notices of assessment for deficiency income taxes to Manning, McDonald & Simmons for the year 1958. 11. Manning, McDonald & Simmons opposed said assessments. BIR still held them liable for these assessments. Manning, McDonald & Simmons appealed to the CTA. 12. 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 2. WON Manning, McDonald & Simmons should pay for deficiency income taxes[ HELD/RATIO/RULING: 1. NO CONTENTION OF THE COMMISSIONER: The full value of the shares redeemed from Reese by MANTRASCO which were subsequently distributed tp tje respondents as stock dividends in 1958 should be taxed as income of the respondents for that year, the said distribution being in effect a distribution in cash. The respondents interests were only .4% prior to the declaration of the stock dividends in 1958, but rose to 33 1/3% each after the said declaration. DEFENSE OF RESPONDENTS/CTAS RULING:
Stock dividends declared are not taxable because 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. COURTS RULING The assumption of both the parties that the shares, previously owned by Reese which was subsequently paid for by the company after his death and there after distributed as stock dividends to the respondents, were treasury shares. However, upon careful study, the said shares were not treasury shares. 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. In this case, such essential features of a treasury share are lacking in the former shares of Reese: (see enumeration in p. 4 but in essence the court just pointed out the next bullet) 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. YES
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 notreceived 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.
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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. On the other hand, 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. DISPOSITION: CTA judgment set aside. Caseremanded to the CTA for further proceedings for the recomputation of the income tax liabilities of Manning, McDonald & Simmons VOTE: FIRST DIVISION; Makasiar, Esguerra, Munoz Palma, and Martin concur. ADDITIONAL NOTES: Digest taken from the interwebz but edited some parts. I didnt want to copy this digest I just couldnt find a copy of the original on line and Im so tinatamad to retype everything so I just used this digest. So sorry! -David FISHER v. TRINIDAD (October 30, 1922) DOCTRINE: 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. 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. The SC does 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. NATURE: Appeal PONENTE: Johnson FACTS: 1. That during the year 1919 the Philippine American Drug Company was a corporation that appellant was a stockholder of 2. 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; 3. 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.
4.
For the recovery of that sum (P889.91) the present action was instituted.
ISSUES: Are the "stock dividends" in the present case "income" and taxable as such under the provisions of section 25 of Act No. 2833? HELD: NO. 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. PETITIONERS CONTENTIONS: - Cited US CASES which held that: "stock dividends" were capital and not an "income" and therefore not subject to the "income tax" law COLLECTORS CONTENTIONS: - 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 - 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 - There are no constitutional limitations upon the power of the Philippine Legislature such as exist in the United States COURTS RULING: (Sorry medyo Doctrine vomit sya) RE: Difference in US Statute and Act. No. 2833 - 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. RE: Constitutional Limitations upon power to impose income taxes - 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. - 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. - 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. RE: WON Stock dividends are considered income which may be subjected to income tax STOCK DIVIDENDS DEFINED: - ILLUSTRATION: (Its easier to understand by way of this illustration) A and B form a corporation with an authorized capital of P10,000 for the purpose of opening and
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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. 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. Every peso received for the sale of merchandise was immediately used in the purchase of new stock new supplies. 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, 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. - 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. - 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. INCOME DEFINED: - Mr. Black: "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." - Mr. Justice Hughes, in the case of Towne vs. Eisner, 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 - "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."
STOCK DIVIDEND NOT INCOME - '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." - 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. - 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. - WHEN IS STOCK DIVIDEND TAXABLE FOR INCOME TAX 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. - CASH DIVIDEND v. STOCK DIVIDEND: 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. 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 - 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
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it can be regarded as income to the stockholder and not as a part of the capital or assets of 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. DISPOSITION: 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. 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. VOTE: EN BANC; Araullo, C.J. Avancea, Villamor and Romualdez, JJ.,Street, concur. Ostrand, Malcolm, Johns, dissent. CONCURRING/DISSENTING OPINION: (There are concurring and dissenting opinions. But, I wont be including them just because Maam usually doesnt ask for separate opinions (other than the fact that I havent read it. ) -Kester (originally made by David) 4. Liquidating dividend Wise and Co v. Meer (June 30, 1947) FACTS Plaintiffs are stockholders of the company, Manila Wine Merchants Ltd. (Hongkong Comp), a foreign corporation duly authorized to do business in the Philippines. May 27, 1937 Board of Directors of MWM recommended that they adopt resolutions to enable the company to sell its business and assets to Manila Wine Merchants, Inc (Manila Comp.) for the sum of P400,000. The sale was duly authorized by the stockholders of HK Comp and the contract of sale was executed between the two companies on the same date. HK Company made a distribution of its earnings for the year 1937 to its stockholders (Dividends declared and paid on June 8, 1937) HK Company paid Philippine income tax on the entire earnings from which the said distributions were paid. After the June 8 distribution, HK Company had : o P74, 182 surplus resulting from the active conduct of business o P270, 116 total increased surplus as a result of the sale of the business and assets August 19, 1937 special general meeting of the shareholders of the HK Company, the stockholders directed that the company be voluntarily liquidated
and its capital distributed among the stockholders ; the liquidator, among others, distributed the capital among the stockholders. Plaintiffs, as stockholders duly filed Philippine income tax returns. The complaint was for recovery of certain amount paid by the plaintiffs under written protest having been assessed of deficiency income taxes.
ISSUE WON the amounts received by the plaintiffs on which the taxes in question were assessed and collected were ORDINARY DIVIDENDS or LIQUIDATING DIVIDENDS. They were LIQUIDATING DIVIDENDS When the deed of sale by authority of its stockholders, the HK Company through its authorized representative declared and agreed tat the aforesaid sale and transfer shall take effect as of June 1, 1937 and distribution from its assets to those same stockholders made after June 1, 1937 although before before July 22, 1937, must have been considered by them as liquidating dividends. [Holmby Corp v. Commr] . . . the fact that the distributions were called "dividends" and were made, in part, from earnings and profits, and thatsome of them were made before liquidation or dissolution proceedings were commenced, is not controlling. . . . The determining element is whether the distributions were in the ordinary course of business and with intent to maintain the corporation as a going concern, or after deciding to quit and with intent to liquidate the business . . .. The amounts thus distributed among the plaintiffs were not in the nature of a recurring return on stock in fact, they surrendered and relinquished their stock in return for said distributions, thus ceasing to be stockholders of the Hongkong Company, which in turn ceased to exist in its own right as a going concern during its more or less brief administration of the business as trustee for the Manila Company, and finally disappeared even as such trustee. The distinction between a distribution in liquidation and an ordinary dividend is factual; the result in each case depending on the particular circumstances of the case and the intent of the parties. If the distribution is in the nature of a recurring return on stock it is an ordinary dividend. However, if the corporation is really winding up its businessor recapitalizing and narrowing its activities, the distribution may properly be treated as in complete or partial liquidation and as payment by the corporation to the stockholder for his stock. The corporation is, in the latter instances, wiping out all parts of the stockholders' interest in the company . . ..
Are such liquidating dividends taxable income? Income tax law states that : Where a corporation, partnership, association, joint-account, or insurancecompany 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.
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Appellants received the distributions in question in exchange for the surrender and relinquishment by them of their stock in the HK Company 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 theIncome Tax Law. When the corporation was dissolved and in process of complete liquidation and itsshareholders surrendered their stock to it and it paid the sums in question to them in exchange, atransaction 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.
The HK Company was at the time of the sale of its business in thePhilippines, and the Manila Company was a domestic corporation domiciled and doing business also in thePhilippines. The HK Company was incorporated for the purpose of carrying on business in the Philippines which is 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 thebusiness, had been earned and acquired in the Philippines. As such, it is clear that said distributions wereincome "from Philippine sources."
Nature: petition for review on certiorari decision of CA affirming CTA, saying ANSCORS redemption and exchange of stocks of its foreign stockholders cannot be considered as essentially equivalent to a distribution of taxable dividends under Sec. 83b of Internal Revenue Act. (CA and CTA held not taxable) Ponente: Martinez
[NOTE: Hi guys, I also referred to another digest online because the case was a bit confusing ] -Mae Commissioner of Internal Revenue v. Court of Appeals (January 20, 1999) Kind of tax: income tax on stock dividends Doctrine: General Rule: A stock dividend representing the transfer of surplus to capital account shall not be subject to tax. The Exception: However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent it represents a distribution of earnings or profits accumulated after March first, nineteen hundred and thirteen. (text of the law, Sec 83b) (In this instance, the issuance of stock dividends and subsequent redemption by the corporation of the stocks it issued is held by the Court to be just like declaring cash dividends, which is a taxable income for the stockholder.)
Facts: 1. In 1930, Don Andres Soriano, a US citizen, founded A. Soriano Y Cia. (ANSCOR) with a P1M capitalization divided into 10,000 common shares at a par value of P100/share. ANSCOR is wholly owned and controlled by the family of Don Andres, who are all nonresident aliens. In 1937, Don Andres subscribed to 4,963 of the 5,000 shares originally issued. 2. In 1945, ANSCORs authorized capital stock was increased to P2.5M divided into 25,000 common shares with the same par value. Of the additional 15,000 shares, only 10,000 were issued. Don Andres subscribed to all these shares, making his subscription 14,943 common shares. A month later, Don Andres transferred 1,250 shares each to his 2 sons, as their initial investments in ANSCOR. 3. 1947, 1949 and 1963, ANSCOR declared stock dividends. On December 30, 1964, Don Andres died. At the time, Don Andres had a total shareholding of 185,154 shares of which 50,495 were original issues while others were stock dividend declarations. One half of the shares went to Doa Carmen, as conjugal share of Don Andres wife. The other formed part of his estate. A day after Don Andres died, ANSCOR increased its capital stock to P20M and in 1966, increased it to P30M. Also in 1966, stock dividends worth 46,290 and 46,287 were respectively received by Don Andres estate and Doa Carmen, respectively.
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WON as a non-resident alien individual, the distributions received by the appellants were to be considered as a sale of their stock to the HK Company, the profit realized by them does not constitute income from Philippine sources and is not subject to Philippine taxes (all the steps in carrying out the sale took place outside the Ph)
This process of issuance-redemption amounts to a distribution of taxable cash dividends which was just delayed so as to escape the tax. It becomes a convenient technical strategy to avoid the effects of taxation. Thus, to plug the loophole the exempting clause was added. It provides that the redemption or cancellation of stock dividends, depending on the "time" and "manner" it was made, is essentially equivalent to a distribution of taxable dividends," making the proceeds thereof "taxable income" "to the extent it represents profits". The exception was designed to prevent the issuance and cancellation or redemption of stock dividends, which is fundamentally not taxable, from being made use of as a device for the actual distribution of cash dividends, which is taxable. Thus, the provision had the obvious purpose of preventing a corporation from avoiding dividend tax treatment by distributing earnings to its shareholders in two transactions a pro rata stock dividend followed by a pro rata redemption that would have the same economic consequences as a simple dividend. Although redemption and cancellation are generally considered capital transactions, as such. they are not subject to tax. However, it does not necessarily mean that a shareholder may not realize a taxable gain from such transactions. Simply put, depending on the circumstances, the proceeds of redemption of stock dividends are essentially distribution of cash dividends, which when paid becomes the absolute property of the stockholder. Thereafter, the latter becomes the exclusive owner thereof and can exercise the freedom of choice. Having realized gain from that redemption, the income earner cannot escape income tax.
4. In 1967, Doa Carmen requested a ruling from US IRS inquiring if an exchange of common with preferred shares may be considered as a tax avoidance scheme. 1968, ANSCOR reclassified its existing 300,000 common shares into 150,000 common and 150,000 preferred shares. IRS replied in February 1968 that exchange is only recapitalization scheme and not tax avoidance. Consequently, Doa Carmen exchanged her whole 138,864 common shares for 138,860 of preferred shares. Estate exchanged 11,140 of its common shares for preferred, making its common shares 127,727. 5. June 30, 1968, pursuant to a Board Resolution, redeemed 28,000 common shares from Estate. November 1968, Board further increased its capital stock to P75M divided into 150,000 preferred shares and 600,000 common shares. A year later, ANSCOR again redeemed 80,000 common shares from Estate, reducing the estates common shares to 19,727. As stated in Board Resolution, business purpose for the redemptions is to partially retire said stocks as treasury shares in order to reduce the companys foreign exchange remittances in case cash dividends are declared. 6. In 1973, after examining ANSCORs books, Revenue exa miners issued a report proposing that ANSCOR be assessed for deficiency withholding tax-at-source, pursuant to Secs. 53 and 54 of Revenue Code for 1968 and 1969 based on the transactions of exchange and redemption of stocks. BIR made the assessment despite ANSCORs claim that it availed of tax amnesty. ANSCORs protest was denied by CIR in 1983. It then filed a case in CTA assailing the tax assessments pm the redemptions and exchange of stocks. CTA reversed CIR. 4. Upon appeal to CA, CA affirmed CTA. Hence this appeal. Issue: Whether ANSCORs redemption of stocks from its stockholders as well as its exchange of common with preferred stocks can be considered as essentially equivalent to the distribution of taxable dividend making the proceeds thereof taxable under Sec 83b1. Held: YES on redemption. No on exchange. (Redemption taxable. Exchange is not.) RATIO: 1. Petitioner contends that the exchange transaction a tantamount to "cancellation" under Section 83(b) making the proceeds thereof taxable. It also argues that the Section applies to stock dividends which is the bulk of stocks that ANSCOR redeemed. Further, petitioner claims that under the "net effect test," the estate of Don Andres gained from
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the redemption. Accordingly, it was the duty of ANSCOR to withhold the tax-at-source arising from the two transactions, pursuant to Section 53 and 54 of the 1939 Revenue Act. ANSCOR, however, avers that it has no duty to withhold any tax either from the Don Andres estate or from Doa Carmen based on the two transactions, because the same were done for legitimate business purposes which are (a) to reduce its foreign exchange remittances in the event the company would declare cash dividends, and to (b) subsequently "filipinize" ownership of ANSCOR, as allegedly, envisioned by Don Andres. It likewise invoked the amnesty provisions of P.D. 67. Court: We must emphasize that the application of Sec. 83(b) depends on the special factual circumstances of each case. ON AMNESTY (not relevant): the amnesty ANSCOR availed of does not apply because basically, the law granting amnesty says so and ANSCOR is not the taxpayer but is only the withholding agent in this transaction sought to be taxed. It is the income of the shareholder on the dividends that the BIR is seeking to tax. ANSCOR here is being held liable in its capacity as withholding agent and not as taxpayer. The government's cause of action against the withholding agent is not for the collection of income tax, but for the enforcement of the withholding provision of Section 53 of the Tax Code, compliance with which is imposed on the withholding agent and not upon the taxpayer.Not being a taxpayer, a withholding agent, like ANSCOR in this transaction is not protected by the amnesty under the decree. Codal provisions on withholding tax are mandatory and must be complied with by the withholding agent. The taxpayer should not answer for the non-performance by the withholding agent of its legal duty to withhold unless there is collusion or bad faith. The former could not be deemed to have evaded the tax had the withholding agent performed its duty. This could be the situation for which the amnesty decree was intended. Law is also clear: Sec. 4. Cases not covered by amnesty. The following cases are not covered by the amnesty subject of these regulations: (2) Tax liabilities with or without assessments, on withholding tax at source provided under Section 53 and 54 of the National Internal Revenue Code, as amended; 59 ANSCOR was assessed under Sections 53 and 54 of the 1939 Tax Code. Thus, by specific provision of law, it is not covered by the amnesty. TAX ON STOCK DIVIDENDS (relevant) General Rule: A stock dividend representing the transfer of surplus to capital account shall not be subject to tax. Having been derived from a foreign law, resort to the jurisprudence of its origin may shed light. Under the US Revenue Code, this provision originally referred to "stock dividends" only, without any exception. Stock dividends, strictly speaking, represent capital and do not constitute income to its recipient. So that the mere issuance thereof is not yet subject to income tax as they are nothing but an "enrichment through increase in value of capital investment." As capital, the stock dividends postpone the realization of profits because the "fund represented by the new stock has been transferred from surplus to capital and no longer available for actual distribution." Income in tax law is "an
Sec. 83. Distribution of dividends or assets by corporations. (b) Stock dividends A stock dividend representing the transfer of surplus to capital account shall not be subject to tax. However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent it represents a distribution of earnings or profits accumulated after March first, nineteen hundred and thirteen. (Emphasis supplied)
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amount of money coming to a person within a specified time, whether as payment for services, interest, or profit from investment." It means cash or its equivalent. It is gain derived and severed from capital, from Before the realization, stock dividends are nothing but a representation of an interest in the corporate properties. As capital, it is not yet subject to income tax. It should be noted that capital and income are different. Capital is wealth or fund; whereas income is profit or gain or the flow of wealth. The determining factor for the imposition of income tax is whether any gain or profit was derived from a transaction. The Exception: However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent it represents a distribution of earnings or profits accumulated after March first, nineteen hundred and thirteen. (Emphasis supplied). In a response to the ruling of the American Supreme Court in the case of Eisner v. Macomber (that pro ratastock dividends are not taxable income), the exempting clause above quoted was added because corporations found a loophole in the original provision. They resorted to devious means to circumvent the law and evade the tax. Corporate earnings would be distributed under the guise of its initial capitalization by declaring the stock dividends previously issued and later redeem said dividends by paying cash to the stockholder. This process of issuance-redemption amounts to a distribution of taxable cash dividends which was just delayed so as to escape the tax. It becomes a convenient technical strategy to avoid the effects of taxation. Thus, to plug the loophole the exempting clause was added. It provides that the redemption or cancellation of stock dividends, depending on the "time" and "manner" it was made, is essentially equivalent to a distribution of taxable dividends," making the proceeds thereof "taxable income" "to the extent it represents profits". The exception was designed to prevent the issuance and cancellation or redemption of stock dividends, which is fundamentally not taxable, from being made use of as a device for the actual distribution of cash dividends, which is taxable. Thus, the provision had the obvious purpose of preventing a corporation from avoiding dividend tax treatment by distributing earnings to its shareholders in two transactions a pro rata stock dividend followed by a pro rata redemption that would have the same economic consequences as a simple dividend. Although redemption and cancellation are generally considered capital transactions, as such. they are not subject to tax. However, it does not necessarily mean that a shareholder may not realize a taxable gain from such transactions. Simply put, depending on the circumstances, the proceeds of redemption of stock dividends are essentially distribution of cash dividends, which when paid becomes the absolute property of the stockholder. Thereafter, the latter becomes the exclusive owner thereof and can exercise the freedom of choice. Having realized gain from that redemption, the income earner cannot escape income tax. As qualified by the phrase "such time and in such manner," the exception was not intended to characterize as taxable dividend every distribution of earnings arising from the redemption of stock dividend. So that, whether the amount distributed in the redemption should be treated as the equivalent of a "taxable dividend" is a question of
fact, which is determinable on "the basis of the particular facts of the transaction in question. No decisive test can be used to determine the application of the exemption under Section 83(b). The use of the words "such manner" and "essentially equivalent" negative any idea that a weighted formula can resolve a crucial issue Should the distribution be treated as taxable dividend. On this aspect, American courts developed certain recognized criteria, which includes the following: 1) the presence or absence of real business purpose, 2) the amount of earnings and profits available for the declaration of a regular dividends and the corporation's past record with respect to the declaration of dividends, 3) the effect of the distribution, as compared with the declaration of regular dividend, 4) the lapse of time between issuance and redemption, 5) the presence of a substantial surplus and a generous supply of cash which invites suspicion as does a meager policy in relation both to current earnings and accumulated surplus, REDEMPTION AND CANCELLATION For the exempting clause of Section, 83(b) to apply, it is indispensable that: (a) there is redemption or cancellation; (b) the transaction involves stock dividends and (c) the "time and manner" of the transaction makes it "essentially equivalent to a distribution of taxable dividends." Of these, the most important is the third. Redemption is repurchase, a reacquisition of stock by a corporation which issued the stock in exchange for property, whether or not the acquired stock is cancelled, retired or held in the treasury. Essentially, the corporation gets back some of its stock, distributes cash or property to the shareholder in payment for the stock, and continues in business as before. The redemption of stock dividends previously issued is used as a veil for the constructive distribution of cash dividends. In the instant case, there is no dispute that ANSCOR redeemed shares of stocks from a stockholder (Don Andres) twice (28,000 and 80,000 common shares). But where did the shares redeemed come from? If its source is the original capital subscriptions upon establishment of the corporation or from initial capital investment in an existing enterprise, its redemption to the concurrent value of acquisition may not invite the application of Sec. 83(b) under the 1939 Tax Code, as it is not income but a mere return of capital. On the contrary, if the redeemed shares are from stock dividend declarations other than as initial capital investment, the proceeds of the redemption is additional wealth, for it is not merely a return of capital but a gain thereon. It is not the stock dividends but the proceeds of its redemption that may be deemed as taxable dividends. Here, it is undisputed that at the time of the last redemption, the original common shares owned by the estate were only 25,247.5 This means that from the total of 108,000 shares redeemed from the estate, the balance of 82,752.5 (108,000 less 25,247.5) must have come from stock dividends. Besides, 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. 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.
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With respect to the third requisite, ANSCOR redeemed stock dividends issued just 2 to 3 years earlier. The time alone that lapsed from the issuance to the redemption is not a sufficient indicator to determine taxability. It is a must to consider the factual circumstances as to the manner of both the issuance and the redemption. The "time" element is a factor to show a device to evade tax and the scheme of cancelling or redeeming the same shares is a method usually adopted to accomplish the end sought. Was this transaction used as a "continuing plan," "device" or "artifice" to evade payment of tax? It is necessary to determine the "net effect" of the transaction between the shareholder-income taxpayer and the acquiring (redeeming) corporation. The "net effect" test is not evidence or testimony to be considered; it is rather an inference to be drawn or a conclusion to be reached. It is also important to know whether the issuance of stock dividends was dictated by legitimate business reasons, the presence of which might negate a tax evasion plan. The issuance of stock dividends and its subsequent redemption must be separate, distinct, and not related, for the redemption to be considered a legitimate tax scheme. Redemption cannot be used as a cloak to distribute corporate earnings. Otherwise, the apparent intention to avoid tax becomes doubtful as the intention to evade becomes manifest. Depending on each case, the exempting provision of Sec. 83(b) of the 1939 Code may not be applicable if the redeemed shares were issued with bona fide business purpose, 103 which is judged after each and every step of the transaction have been considered and the whole transaction does not amount to a tax evasion scheme. ANSCOR invoked two reasons to justify the redemptions (1) the alleged "filipinization" program and (2) the reduction of foreign exchange remittances in case cash dividends are declared. Again, it is the "net effect rather than the motives and plans of the taxpayer or his corporation" that is the fundamental guide in administering Sec. 83(b). This tax provision is aimed at the result. The existence of legitimate business purposes in support of the redemption of stock dividends is immaterial in income taxation. It has no relevance in determining "dividend equivalence". Such purposes may be material only upon the issuance of the stock dividends. The test of taxability under the exempting clause, when it provides "such time and manner" as would make the redemption "essentially equivalent to the distribution of a taxable dividend", is whether the redemption resulted into a flow of wealth. If no wealth is realized from the redemption, there may not be a dividend equivalence treatment. In the metaphor of Eisner v. Macomber, income is not deemed "realize" until the fruit has fallen or been plucked from the tree. 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. As stated above, the test of taxability under the exempting clause of Section 83(b) is, whether income was realized through the redemption of stock dividends. The
redemption converts into money the stock dividends which become a realized profit or gain and consequently, the stockholder's separate property. 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. 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 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. The ruling in the American cases cited and relied upon by ANSCOR that "the redeemed shares are the equivalent of dividend only if the shares were not issued for genuine business purposes", or the "redeemed shares have been issued by a corporation bona fide bears no relevance in determining the non-taxability of the proceeds of redemption. A review of the cited American cases shows that the presence or absence of "genuine business purposes" may be material with respect to the issuance or declaration of stock dividends but not on its subsequent redemption. The issuance and the redemption of stocks are two different transactions. Although the existence of legitimate corporate purposes may justify a corporation's acquisition of its own shares under Section 41 of the Corporation Code, such purposes cannot excuse the stockholder from the effects of taxation arising from the redemption. If the issuance of stock dividends is part of a tax evasion plan and thus, without legitimate business reasons, the redemption becomes suspicious which exempting clause. The substance of the whole transaction, not its form, usually controls the tax consequences. The two purposes invoked by ANSCOR, under the facts of this case are no excuse for its tax liability. First, the alleged "filipinization" plan cannot be considered legitimate as it was not implemented until the BIR started making assessments on the proceeds of the redemption. Secondly, assuming arguendo, that those business purposes are legitimate, the same cannot be a valid excuse for the imposition of tax. Otherwise, the taxpayer's liability to pay income tax would be made to depend upon a third person who did not earn the income being taxed. Thirdly, ANSCOR argued that to treat as "taxable dividend" the proceeds of the redeemed stock dividends would be to impose on such stock an undisclosed lien and would be extremely unfair to intervening purchase,i.e. those who buys the stock dividends after their issuance. 118 Such argument, however, bears no relevance in this case as no intervening buyer is involved. And even if there is an intervening buyer, it is necessary to look into the factual milieu of the case if income was realized from the transaction. Again, we reiterate that the dividend equivalence test depends on such "time and manner" of the transaction and its net effect. The undisclosed lien may be unfair to a subsequent stock buyer who has no capital interest in the company. But the unfairness may not be true to an original subscriber like Don Andres, who holds stock dividends as gains from his investments. The subsequent buyer who buys stock dividends is investing capital. It just so happen that what he bought is stock dividends. The effect of its (stock dividends) redemption from that subsequent buyer is merely to return his capital subscription, which is income if redeemed from the original subscriber.
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There is no other conclusion but that the proceeds thereof are essentially considered equivalent to a distribution of taxable dividends. As "taxable dividend" under Section 83(b), it is part of the "entire income" subject to tax under Section 22 in relation to Section 21 of the 1939 Code. Moreover, under Section 29(a) of said Code, dividends are included in "gross income". As income, it is subject to income tax which is required to be withheld at source. The 1997 Tax Code may have altered the situation but it does not change this disposition. 2. EXCHANGE OF COMMON WITH PREFERRED SHARES Exchange is an act of taking or giving one thing for another involving reciprocal transfer and is generally considered as a taxable transaction. The exchange of common stocks with preferred stocks, or preferred for common or a combination of either for both, may not produce a recognized gain or loss, so long as the provisions of Section 83(b) is not applicable. Both the Tax Court and the Court of Appeals found that ANSCOR reclassified its shares into common and preferred, and that parts of the common shares of the Don Andres estate and all of Doa Carmen's shares were exchanged for the whole 150.000 preferred shares. Thereafter, both the Don Andres estate and Doa Carmen remained as corporate subscribers except that their subscriptions now include preferred shares. There was no change in their proportional interest after the exchange. There was no cash flow. Both stocks had the same par value. Under the facts herein, any difference in their market value would be immaterial at the time of exchange because no income is yet realized it was a mere corporate paper transaction. It would have been different, if the exchange transaction resulted into a flow of wealth, in which case income tax may be imposed. In this case, the exchange of shares, without more, produces no realized income to the subscriber. There is only a modification of the subscriber's rights and privileges which is not a flow of wealth for tax purposes. The issue of taxable dividend may arise only once a subscriber disposes of his entire interest and not when there is still maintenance of proprietary interest. Davide, Jr., C.J., Melo, Kapunan and Pardo, JJ., concur. DISPOSITIVE: CA decision modified in that ANSCORs redemption is considered equivalent to distribution of taxable dividends for which it is LIABLE for the withholding tax-at-source. Affirmed in all other respect. VOTES: 1st Division; Davide, Melo, Kapunan and Pardo concur. -Ann Sorry if its so long. The case itself is hard to understand so its better to read the explanations about stock issuance and redemption. K. INCOME FROM ANY SOURCE WHATSOEVER
6. Income from any source whatsoever GUTTIERREZ v. CTA (May 31, 1957) DOCTRINE: The acquisition by the Government of private properties through the exercise of the power of eminent domain, said properties being JUSTLY compensated, is embraced within the meaning of the term "sale" "disposition of property", and the proceeds from said transaction clearly fall within the definition of gross income laid down by Section 29 of the Tax Code of the Philippines. NATURE: Consolidated appeals PONENTE: Felix, J. FACTS: 1. Maria Morales was the registered owner of an agricultural land in Mabalacat, Pampanga. Her husband is Blas Gutierrez. 2. The Republic of the Philippines instituted condemnation proceedings for the purpose of expropriating the lands owned by Maria Morales and others needed for the expansion of the Clark Field Air Base. At the commencement of the action, the Republic of the Philippines, therein plaintiff deposited with the CFI the sum of P156,960, which was provisionally fixed as the value of the lands sought to be expropriated, in order that it could take immediate possession of the same. 3. On January 27, 1949, upon order of the Court, the sum of P34,580 was paid by the Provincial treasurer to Morales out of the original deposit of P156,960. 4. After trial, CFI Pampanga fixed as just compensation P2,500 per hectare for some of the lots and P3,000 per hectare for the others, based on the reports of the Commission on Appraisal. In virtue of said decision, defendant Maria Morales was to receive the amount of P94, 305. The Court however disapproved Morales claims for consequential damages considering them amply compensated by the price awarded to their said properties. 5. To avoid further litigation, the different parties to the case entered into a compromise agreement on modifying in part the decision rendered by the Court in the sense of fixing the compensation for all the lands, without distinction, at P2,500 per hectare. But this reduction of the price to P2,500 Morales lot. Sometime in 1950, the spouses Blas Gutierrez and Maria Morales received the sum of P59.785.75 presenting the balance remaining in their favor after deducting the amount of P34,580 already withdrawn from the compensation to them. 6. In a notice of assessment dated January 28, 1953, the Collector of Internal Revenue demanded of the petitioners the payment of P8,481 as alleged deficiency income tax for the year 1950, inclusive of surcharges and penalties. 7. On March 5, 1953, petitioner ask for reconsideration of assessment contending that a. the compensation paid to the spouses by the Government for their property was not "income derived from sale, dealing or disposition of property" referred to by section 29 of the Tax Code and therefore not taxable;
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8.
The taking of property by condemnation and the, payment of just compensation therefore is a "sale" or "exchange" and profits from that transaction is capital gain (David S. Brown vs. Comm, Com. Int. Revenue vs. Kieselbach, Lapham vs. U.S and Kneipp vs. U.S It appears then that the acquisition by the Government of private properties through the exercise of the power of eminent domain, said properties being JUSTLY compensated, is embraced within the meaning of the term "sale" "disposition of property", and the proceeds from said transaction clearly fall within the definition of gross income laid down by Section 29 of the Tax Code of the Philippines. II. COMPENSATION NOT EXEMPT UNDER THE TREATY Petitioners-appellants also averred that granting that the compensation thus received is "income", same is exempted under Section 29-(b)-6 of the Tax Code, which provides for income exempt under any treaty obligation binding upon the government. Petiioners maintain that since the expropriation proceeding necessary for the expansion of the Clark Field Air Base was instituted by the Philippine Government as part of its obligation under the Military Bases Agreement, the compensation accruing therefrom must necessarily fall under the exemption provided for by Section 29-(b)-6 of the Tax Code. We find this stand untenable, for the same Military Bases Agreement cited by appellants contains provisions which negate this view. Under the treaty, it is unmistakable that although the condemnation or expropriation of properties was provided for, the exemption from tax of the compensation to be paid for the expropriation of privately owned lands located in the Philippines was not given any attention, and the internal revenue exemptions specifically taken care of by said Agreement applies only to members of the U.S. Armed Forces serving in the Philippines and U.S. nationals working in these Islands in connection with the construction, maintenance, operation and defense of said bases. III. ASSESSMENT NOT BARRED BY PRESCRIPTION. Although it is true that by order of the Court of First Instance of Pampanga, the amount of P34,580 out of the original deposit made by the Government was withdrawn in favor of appellants on January 27, 1949, the same cannot be considered as income for 1950 when the balance of P59,785.75 was actually received. Before that date (1950), appellant taxpayers were still the owners of their whole property that
9.
ISSUE/S: 1. WON compensation for government expropriation is part of gross income. YES 2. WON taxation is barred under the income exempted under treaty provision of the Tax Code. NO. 3. WON assessment is barred by prescription. NO 4. WON compensation constitutes profit. YES 5. WON fraud attended the filing of the return. NO RATIO: I. Compensation for Expropriation is taxable The pertinent provisions of the National Internal Revenue Code applicable to the instant cases are the following: SEC. 29. GROSS INCOME. (a) General definition. "Gross income" includes sales or dealings in property, whether real or personal, growing out of ownership or use of or interest in such property. SEC. 37. INCOME FROM SOURCES WITHIN THE PHILIPPINES. (a) Gross income from sources within the Philippines. The following items of gross income shall be treated as gross income from sources within the Philippines: xxx xxx xxx
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Granting that condemnation of private properties is embraced within the meaning of the word "sale" or "dealing", the compensation received by the taxpayers must be considered as income for 1948 and not for 1950 since the amount deposited and paid in 1948 represented more than 25 per cent of the total compensation awarded by the court; c. that the compensation in question should be exempted because it is income exempted under treaty d. that the assessment was made after the lapse of the 3-year prescriptive period provided for in section 51-(d) of the Tax Code; e. that the spouses Blas Gutierrez and Maria Morales did not realize any profit in said transaction as there were improvements on the land already made and that the purchasing value of the peso at the time of the expropriation proceeding had depreciated if compared to the value of the pre-war peso; This request was denied by the Collector of Internal Revenue. In fact, a warrant of distraint and levy was issued and a notice of tax lien was duly registered with the Register of Deeds. Taxpayers appealed to the Court of Tax Appeals, citing the same grounds. CTA: the gain derived by the petitioners from the expropriation of their property constituted taxable income and as such was capital gain; and that said gain was taxable in 1950 when it realized. Furthermore, evidence did not warrant the imposition of the 50 per cent surcharge because the petitioners acted in good faith and without intent to defraud the Government when they failed to include in their gross income the proceeds they received from the expropriated property. CTA modified the assessment made by respondent. Both parties appealed.
b.
xxx
(5) SALE OF REAL PROPERTY. Gains, profits, and income from the sale of real property located in the Philippines; xxx xxx
There is no question that the property expropriated being located in the Philippines, compensation or income derived therefrom ordinarily has to be considered as income from sources within the Philippines and subject to the taxing jurisdiction of the Philippines. Petitioners contend that because the expropriation is forced, it should be distinguished from sale as provided for in the Tax Code. However, a uthorities in the United States on the matter sustain the view expressed by the Collector of Internal Revenue, for it is held that:
was subject of condemnation proceedings and said amount of P34,580 was not paid to, but merely deposited in court and withdrawn by them. Therefore, the payment of the value of Maria Morales' Lot 724-C was actually made by the Republic of the Philippines in 1950 and it has to be credited as income for 1950 for it was then when title over said property passed to the Republic of the Philippines. Notwithstanding possession acquired by the expropriator, title does not actually pass to him until payment of the amount adjudged by the Court and the registration of the judgment with the Register of Deeds. Now, if said amount should have been reported as income for 1950 in the return that must have been filed on or before March 1, 1951, the assessment made by the Collector on January 28, 1953, is still within the 3-year prescriptive period provided for by Section 51-d and could, therefore, be collected either by the administrative methods of distraint and levy or by judicial action EXPROPRIATION PROCEEDINGS LESS FMVALUE EQUALS CAPITAL GAIN As to appellant taxpayers' proposition that the profit, derived from the expropriation merely nominal and not subject to income tax, Section 35 of the Tax Code reads as follows: SEC. 35. DETERMINATION OF GAIN OR LOSS FROM THE SALE OR OTHER DISPOSITION OF PROPERTY. xxx xxx xxx (b) In the case of property acquired on or after March first, nineteen hundred and thirteen, the cost thereof if such property was acquired by purchase or the fair market price or value as of the date of the acquisition if the same was acquired by gratuitous title. xxx xxx xxx The records show that the property in question was adjudicated to Maria Morales by order of the Court of First Instance of Pampanga on March 23, 1929, and in accordance with the aforequoted section of the National Internal Revenue Code, only the fair market price or value of the property as of the date of the acquisition thereof should be considered in determining the gain or loss sustained by the property owner when the property was disposed, without taking into account the purchasing power of the currency used in the transaction. The records placed the value of the said property at the time of its acquisition by appellant Maria Morales P28,291.73 and it is a fact that same was compensated with P94,305.75 when it was expropriated. The resulting difference is surely a capital gain and should be correspondingly taxed. V. NO FRAUD WAS COMMITTED BY PETITIONERS As to the only question raised by appellant Collector of Internal Revenue assailing CTAs order, on the ground that the taxpayers' income tax return for 1950 is false and/or fraudulent, it should be noted that the Court of Tax Appeals found that the evidence did not warrant the imposition of said surcharge because the petitioners therein acted in good faith and without intent to defraud the Government. The question of fraud being a question of fact and the lower court having made the finding that "the evidence of this case does not warrant the imposition of the 50 per cent surcharge", We are constrained to refrain from giving any consideration to the question IV.
raised by the Solicitor General, for it is already settled in this jurisdiction that in passing upon petitions to review decisions of the Court of Tax Appeals, We have to confine ourselves to questions of law. DISPOSITION: WHEREFORE, the decision appealed from by both parties is hereby affirmed, without pronouncement as to costs. It is so ordered. VOTING: Paras, C.J., Montemayor, Reyes, A., Bautista Angelo, Concepcion, Reyes, J.B.L. and Endencia, JJ., concur. NOTES: Sorry for the length, too many issues. I included them all just to be safe. -Jenin
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