COMMISSIONER OF INTERNAL REVENUE vs.

MANNING
L-28398 | Aug 6, 197 | !"#$#$%& '%( R"v$") | C*s#(% !"#$#$%&"(+ C%,,$ss$%&"( %' I&#"(&*R"v"&u" R"s.%&/"&#s+ 0%1& M*&&$&g, 2.3. M43%&*-/, E.E. S$,,%&s 5 CTA
6u$47 Su,,*(8+ Facts: Reese, the majority stockholder of Mantrasco, executed a trust agreement between him, Mantrasco, Ross, Selph, carrascoso & Janda law firm and the minority stockholders, Manning, McDonald and Simmons Said agreement was entered into because of Reese!s desire that Mantrasco and Mantrasoc!s " subsidiaries, Mantrasco #uam and $ort Motors, to continue under the management of Manning, McDonald and Simmons upon his %Reese& death 'hen Reese died, Mantrasco paid Reese!s estate the (alue of his shares 'hen said purchase price has been fully paid, the "),*++ shares, which were declared as di(idends, were proportionately distributed to Manning, McDonald and Simmons ,ecause of this, the ,-R issued assessments on Manning, McDonald and Simmons for deficiency income tax for ./01 Manning et al, opposed this assessment but the ,-R still found them liable Manning et al appealed to the 234, which absol(ed them from any liability Held: 3he manifest intention of the parties to the trust agreement was, in sum and substance, to treat the "),*++ shares of Reese as absolutely outstanding shares of Reese5s estate until they were fully paid Such being the true nature of the "),*++ shares, their declaration as treasury stock di(idend in ./01 was a complete nullity and plainly (iolati(e of public policy 4 stock di(idend, being one payable in capital stock, cannot be declared out of outstanding corporate stock, but only from retained earnings 4 stock di(idend always in(ol(es a transfer of surplus 6or profit7 to capital stock 4 stock di(idend is a con(ersion of surplus or undi(ided profits into capital stock, which is distributed to stockholders in lieu of a cash di(idend

F*4#s+ ./0" 8 Mantrasco had an authori9ed capital stock of $" 0M di(ided into "0,+++ common shares "),*++ of these shares are owned by Julius Reese while the rest, at .++ each, are owned by Manning, McDonald & Simmons :ebruary "/, ./01 8 a trust agreement was executed between Reese, Mantrasco, Ross, Selph, carrascoso & Janda law firm, Manning, McDonald and Simmons Said agreement was entered into because of Reese!s desire that Mantrasco and Mantrasoc!s "

subsidiaries, Mantrasco #uam and $ort Motors, to continue under the management of Manning, McDonald and Simmons upon his %Reese& death ;ctober ./, ./0) 8 Reese died <owe(er, the projected transfer of his shares in the name of Mantrasco could not be immediately effected for lack of sufficient funds to co(er the initial payment on the shares :ebruary ", ./00 8 after Mantrasco made a partial payment of Reese5s shares, the certificate for the "),*++ shares in Reese5s name was cancelled and a new certificate was issued in the name of Mantrasco 4lso, new certificate was endorsed to the law firm of Ross, Selph, 2arrascoso and Janda, as trustees for and in behalf of Mantrasco December "", ./01 8 a resolution was passed during a special meeting of Mantrasco stockholders =o(ember "0, ./>? 8 entire purchase price of Reese5s interest in Mantrasco was finally paid in full by Mantrasco May ), ./>) 8 trust agreement was terminated and the trustees deli(ered to Mantrasco all the shares which they were holding in trust September .), ./>" 8 ,-R ordered an examination of Mantrasco!s books 3his examination disclosed that@ . as of December ?., ./01 the "),*++ shares declared as di(idends had been proportionately distributed to Manning, McDonald & Simmons, representing a total book (alue or acAuisition cost of $*,/*?,>>+ " Manning, McDonald & Simmons failed to declare the said stock di(idends as part of their taxable income for the year ./01 3hus, 9IR ":*,$&"(s concluded that the /$s#($;u#$%& %' R""s"<s s1*("s *s s#%47 /$v$/"&/s )*s $& "''"4# * /$s#($;u#$%& %' #1" =*ss"# %( .(%."(#8 %' #1" 4%(.%(*#$%& *s ,*8 ;" g-"*&"/ '(%, #1" .*8,"&# %' 4*s1 '%( #1" ("/",.#$%& %' s*$/ s#%47 *&/ /$s#($;u#$&g #1" s*," *s s#%47 /$v$/"&/ B

4pril .), ./>0 8 2ommissioner of -nternal Re(enue issued notices of assessment for deficiency income taxes to Manning, McDonald & Simmons for the year ./01 Manning, McDonald & Simmons opposed said assessments ,-R still held them liable for these assessments Manning, McDonald & Simmons appealed to the 234 CTA@ *;s%-v"/ M*&&$&g, M43%&*-/ 5 S$,,%&s '(%, *&8 -$*;$-$#8 on the ground that #1"$( ("s."4#$v" 1>3 $&#"("s# $& M*&#(*s4% (",*$&"/ #1" s*," ;"'%(" *&/ *'#"( #1" /"4-*(*#$%& %' s#%47 /$v$/"&/s *&/ %&-8 #1" &u,;"( %' s1*("s 1"-/ ;8 "*41 %' #1", 41*&g"/ Issu"s+ . ';= the shares are treasury shares %NO& " ';= Manning, McDonald & Simmons should pay for deficiency income taxes %?ES& R*#$%+ . T("*su(8 s1*("s *(" s#%47s $ssu"/ *&/ 'u--8 .*$/ '%( *&/ ("-*4@u$("/ ;8 #1" 4%(.%(*#$%& "$#1"( ;8 .u(41*s", /%&*#$%&, '%('"$#u(" %( %#1"( ,"*&s 3reasury shares are therefore $ssu"/ s1*("s, ;u# ;"$&g $& #1" #("*su(8 #1"8 /% &%# 1*v" #1" s#*#us %' %u#s#*&/$&g s1*("s 2onseAuently, *-#1%ug1 * #("*su(8 s1*(", &%# 1*v$&g ;""& ("#$("/ ;8 #1" 4%(.%(*#$%& ("*4@u$($&g $#, ,*8 ;" ("-$ssu"/ %( s%-/ *g*$&, such s1*(", *s -%&g *s $# $s 1"-/ ;8 #1" 4%(.%(*#$%& *s * #("*su(8 s1*(", .*(#$4$.*#"s &"$#1"( $& /$v$/"&/s, because di(idends cannot be declared by the corporation to itself, &%( $& #1" ,""#$&gs %' #1" 4%(.%(*#$%& *s v%#$&g s#%47, for otherwise eAual distribution of (oting powers among stockholders will be effecti(ely lost and the directors will be able to perpetuate their control of the corporation, though it still represents a paid8for interest in the property of the corporation -n this case, su41 "ss"&#$*'"*#u("s %' * #("*su(8 s1*(" *("

-*47$&g $& #1" '%(,"( s1*("s %' R""s" 3he ,*&$'"s# $&#"&#$%& %' #1" .*(#$"s #% #1" #(us# *g("","&# was, in sum and substance, #% #("*# #1" 2A,7BB s1*("s %' R""s" *s *;s%-u#"-8 %u#s#*&/$&g s1*("s %' R""s"<s "s#*#" u&#$- #1"8 )"(" 'u--8 .*$/ Such being the true nature of the "),*++ shares, #1"$( /"4-*(*#$%& *s #("*su(8 s#%47 /$v$/"&/ $& 19 8 )*s * 4%,.-"#" &u--$#8 *&/ .-*$&-8 v$%-*#$v" %' .u;-$4 .%-$48 4 s#%47 /$v$/"&/, ;"$&g %&" .*8*;-" $& 4*.$#*s#%47, 4*&&%# ;" /"4-*("/ %u# %' %u#s#*&/$&g 4%(.%(*#" s#%47, ;u# %&-8 '(%, ("#*$&"/ "*(&$&gs Nature of a stock dividend 4 stock di(idend always in(ol(es a transfer of surplus 6or profit7 to capital stock 4 stock di(idend is a con(ersion of surplus or undi(ided profits into capital stock, which is distributed to stockholders in lieu of a cash di(idend " 3he u-#$,*#" .u(.%s" which the parties to the trust agreement aimed to reali9e is #% ,*7" M*&&$&g, M43%&*-/s 5 S$,,%&s #1" s%-" %)&"(s %' R""s"Cs $&#"("s# $& M*&#(*s4% by u#$-$D$&g #1" ."($%/$4 "*(&$&gs %' M*&#(*s4% *&/ $#s su;s$/$*($"s #% /$("4#-8 su;s$/$D" #1"$( .u(41*s" %' s*$/ $&#"("s#s and by ,*7$&g $# *.."*( #1*# #1"8 1*v" &%# ("4"$v"/ *&8 $&4%," '(%, #1%s" '$(,s when, in fact, by the formal declaration of non8existent stock di(idends in the treasury they secured to themsel(es the means to turn around as full owners of Reese!s shares Manning, McDonald & Simmons, using the trust instrument as a con(enient technical de(ice, bestowed unto themsel(es the full worth and (alue of Reese5s corporate holdings with the use of the (ery earnings of the companies

Such package de(ice, ob(iously not designed to carry out the usual stock di(idend purpose of corporate expansion rein(estment but exclusi(ely for expanding the capital base of Manning, McDonald & Simmons in Mantrasco, cannot be allowed to deflect their responsibilities toward our income tax laws A-- #1"s" *,%u&#s *(" su;E"4# #% $&4%," #*: *s ;"$&g * '-%) %' 4*s1 ;"&"'$#s #% M*&&$&g, M43%&*-/ 5 S$,,%&s

Commissioners assessment is erroneous 2ommissioner should not ha(e assessed the income tax on the total acAuisition cost of the alleged treasury stock di(idends in . lump sum 3he record shows that the earnings of Mantrasco o(er a period of years were used to gradually wipe out the holdings of Reese 2onseAuently, those earnings should be taxed for each of the corresponding years when payments were made to Reese!s estate on account of his "),*++ shares 3$s.%s$#$v"+ 234 judgment set aside 2ase remanded to the 234 for further proceedings for the recomputation of the income tax liabilities of Manning, McDonald & Simmons