Contents

Madrigal and Paterno vs Rafferty.................1

Digital Communications vs City Government\. 4
11

Banco de Oro vs Republic (2015 case separate file)

Dumaguete Coop vs CIR.........................11
CIR vs CA...........................................20
Testate Estate of Bachrach........................27

considered the income of Vicente Madrigal and the other

half of Susana Paterno. The general question had in the
meantime been submitted to the Attorney-General of the
Philippine Islands who in an opinion dated March 17, 1915,
held with the petitioner Madrigal. The revenue officers
being still unsatisfied, the correspondence together with
this opinion was forwarded to Washington for a decision by
the United States Treasury Department. The United States
Commissioner of Internal Revenue reversed the opinion of
the Attorney-General, and thus decided against the claim of
Madrigal.

Madrigal and Paterno vs Rafferty

G.R. No. L-12287

August 7, 1918

VICENTE MADRIGAL and his wife, SUSANA

PATERNO, plaintiffs-appellants,
vs.
JAMES J. RAFFERTY, Collector of Internal Revenue,
and VENANCIO CONCEPCION, Deputy Collector of
Internal Revenue, defendants-appellees.
Gregorio
Araneta
for
Assistant Attorney Round for appellees.

After payment under protest, and after the protest of

Madrigal had been decided adversely by the Collector of
Internal Revenue, action was begun by Vicente Madrigal
and his wife Susana Paterno in the Court of First Instance
of the city of Manila against Collector of Internal Revenue
and the Deputy Collector of Internal Revenue for the
recovery of the sum of P3,786.08, alleged to have been
wrongfully and illegally collected by the defendants from
the plaintiff, Vicente Madrigal, under the provisions of the
Act of Congress known as the Income Tax Law. The burden
of the complaint was that if the income tax for the year
1914 had been correctly and lawfully computed there
would have been due payable by each of the plaintiffs the
sum of P2,921.09, which taken together amounts of a total
of P5,842.18 instead of P9,668.21, erroneously and
unlawfully collected from the plaintiff Vicente Madrigal,
with the result that plaintiff Madrigal has paid as income
tax for the year 1914, P3,786.08, in excess of the sum
lawfully due and payable.

appellants.

MALCOLM, J.:
This appeal calls for consideration of the Income Tax Law,
a law of American origin, with reference to the Civil Code,
a law of Spanish origin.
STATEMENT OF THE CASE.
Vicente Madrigal and Susana Paterno were legally married
prior to January 1, 1914. The marriage was contracted
under the provisions of law concerning conjugal
partnerships (sociedad de gananciales). On February 25,
1915, Vicente Madrigal filed sworn declaration on the
prescribed form with the Collector of Internal Revenue,
showing, as his total net income for the year 1914, the sum
of P296,302.73. Subsequently Madrigal submitted the
claim that the said P296,302.73 did not represent his
income for the year 1914, but was in fact the income of the
conjugal partnership existing between himself and his wife
Susana Paterno, and that in computing and assessing the
additional income tax provided by the Act of Congress of
October 3, 1913, the income declared by Vicente Madrigal
should be divided into two equal parts, one-half to be

The answer of the defendants, together with an analysis of

the tax declaration, the pleadings, and the stipulation, sets
forth the basis of defendants' stand in the following way:
The income of Vicente Madrigal and his wife Susana
Paterno of the year 1914 was made up of three items: (1)
P362,407.67, the profits made by Vicente Madrigal in his
coal and shipping business; (2) P4,086.50, the profits made
by Susana Paterno in her embroidery business; (3)
P16,687.80, the profits made by Vicente Madrigal in a
pawnshop company. The sum of these three items is

P383,181.97, the gross income of Vicente Madrigal and

Susana Paterno for the year 1914. General deductions were
claimed and allowed in the sum of P86,879.24. The
resulting net income was P296,302.73. For the purpose of
assessing the normal tax of one per cent on the net income
there were allowed as specific deductions the following: (1)
P16,687.80, the tax upon which was to be paid at source,
and (2) P8,000, the specific exemption granted to Vicente
Madrigal and Susana Paterno, husband and wife. The
remainder, P271,614.93 was the sum upon which the
normal tax of one per cent was assessed. The normal tax
thus arrived at was P2,716.15.

services rendered by that capital by the payment of money

from it or any other benefit rendered by a fund of capital in
relation to such fund through a period of time is called an
income. Capital is wealth, while income is the service of
wealth. (See Fisher, "The Nature of Capital and Income.")
The Supreme Court of Georgia expresses the thought in the
following figurative language: "The fact is that property is
a tree, income is the fruit; labor is a tree, income the fruit;
capital is a tree, income the fruit." (Waring vs. City of
Savannah [1878], 60 Ga., 93.) A tax on income is not a tax
on property. "Income," as here used, can be defined as
"profits or gains." (London County Council vs. AttorneyGeneral [1901], A. C., 26; 70 L. J. K. B. N. S., 77; 83 L. T.
N. S., 605; 49 Week. Rep., 686; 4 Tax Cas., 265. See
further Foster's Income Tax, second edition [1915], Chapter
IV; Black on Income Taxes, second edition [1915], Chapter
VIII; Gibbons vs. Mahon [1890], 136 U.S., 549; and
Towne vs.Eisner, decided by the United States Supreme
Court, January 7, 1918.)

The dispute between the plaintiffs and the defendants

concerned the additional tax provided for in the Income Tax
Law. The trial court in an exhausted decision found in favor
of defendants, without costs.
ISSUES.

A regulation of the United States Treasury Department

relative to returns by the husband and wife not living apart,
contains the following:

The contentions of plaintiffs and appellants having to do

solely with the additional income tax, is that is should be
divided into two equal parts, because of the conjugal
partnership existing between them. The learned argument
of counsel is mostly based upon the provisions of the Civil
Code establishing the sociedad de gananciales. The counter
contentions of appellees are that the taxes imposed by the
Income Tax Law are as the name implies taxes upon
income tax and not upon capital and property; that the fact
that Madrigal was a married man, and his marriage
contracted under the provisions governing the conjugal
partnership, has no bearing on income considered as
income, and that the distinction must be drawn between the
ordinary form of commercial partnership and the conjugal
partnership of spouses resulting from the relation of
marriage.

The husband, as the head and legal representative of the

household and general custodian of its income, should
make and render the return of the aggregate income of
himself and wife, and for the purpose of levying the income
tax it is assumed that he can ascertain the total amount of
said income. If a wife has a separate estate managed by
herself as her own separate property, and receives an
income of more than $3,000, she may make return of her
own income, and if the husband has other net income,
making the aggregate of both incomes more than $4,000,
the wife's return should be attached to the return of her
husband, or his income should be included in her return, in
order that a deduction of $4,000 may be made from the
aggregate of both incomes. The tax in such case, however,
will be imposed only upon so much of the aggregate
income of both shall exceed $4,000. If either husband or
wife separately has an income equal to or in excess of
$3,000, a return of annual net income is required under the
law, and such return must include the income of both, and
in such case the return must be made even though the
combined income of both be less than $4,000. If the
aggregate net income of both exceeds $4,000, an annual
return of their combined incomes must be made in the
manner stated, although neither one separately has an
income of $3,000 per annum. They are jointly and
separately liable for such return and for the payment of the
tax. The single or married status of the person claiming the
specific exemption shall be determined as one of the time
of claiming such exemption which return is made,
otherwise the status at the close of the year."

DECISION.
From the point of view of test of faculty in taxation, no less
than five answers have been given the course of history.
The final stage has been the selection of income as the
norm of taxation. (See Seligman, "The Income Tax,"
Introduction.) The Income Tax Law of the United States,
extended to the Philippine Islands, is the result of an effect
on the part of the legislators to put into statutory form this
canon of taxation and of social reform. The aim has been to
mitigate the evils arising from inequalities of wealth by a
progressive scheme of taxation, which places the burden on
those best able to pay. To carry out this idea, public
considerations have demanded an exemption roughly
equivalent to the minimum of subsistence. With these
exceptions, the income tax is supposed to reach the
earnings of the entire non-governmental property of the
country. Such is the background of the Income Tax Law.

With these general observations relative to the Income Tax

Law in force in the Philippine Islands, we turn for a
moment to consider the provisions of the Civil Code
dealing with the conjugal partnership. Recently in two
elaborate decisions in which a long line of Spanish
authorities were cited, this court in speaking of the conjugal

Income as contrasted with capital or property is to be the

test. The essential difference between capital and income is
that capital is a fund; income is a flow. A fund of property
existing at an instant of time is called capital. A flow of

partnership, decided that "prior to the liquidation the

interest of the wife and in case of her death, of her heirs, is
an interest inchoate, a mere expectancy, which constitutes
neither a legal nor an equitable estate, and does not ripen
into title until there appears that there are assets in the
community as a result of the liquidation and settlement."
(Nable Jose vs. Nable Jose [1916], 15 Off. Gaz., 871;
Manuel and Laxamana vs. Losano [1918], 16 Off. Gaz.,
1265.)

W
a
s
h
i
n
g
t
o
n
.

Susana Paterno, wife of Vicente Madrigal, has an inchoate

right in the property of her husband Vicente Madrigal
during the life of the conjugal partnership. She has an
interest in the ultimate property rights and in the ultimate
ownership of property acquired as income after such
income has become capital. Susana Paterno has no absolute
right to one-half the income of the conjugal partnership.
Not being seized of a separate estate, Susana Paterno
cannot make a separate return in order to receive the benefit
of the exemption which would arise by reason of the
additional tax. As she has no estate and income, actually
and legally vested in her and entirely distinct from her
husband's property, the income cannot properly be
considered the separate income of the wife for the purposes
of the additional tax. Moreover, the Income Tax Law does
not look on the spouses as individual partners in an
ordinary partnership. The husband and wife are only
entitled to the exemption of P8,000 specifically granted by
the law. The higher schedules of the additional tax directed
at the incomes of the wealthy may not be partially defeated
by reliance on provisions in our Civil Code dealing with the
conjugal partnership and having no application to the
Income Tax Law. The aims and purposes of the Income Tax
Law must be given effect.

Income Tax.
FRANK
Chief, Bureau of
Department,
Washington, D. C.

Insular

MCINTYRE,
Affairs, War

SIR: This office is in receipt of your letter of June

22, 1915, transmitting copy of correspondence
"from the Philippine authorities relative to the
method of submission of income tax returns by
marred person."
You advise that "The Governor-General, in
forwarding the papers to the Bureau, advises that
the Insular Auditor has been authorized to
suspend action on the warrants in question until
an authoritative decision on the points raised can
be secured from the Treasury Department."
From the correspondence it appears that Gregorio
Araneta, married and living with his wife, had an
income of an amount sufficient to require the
imposition of the net income was properly
computed and then both income and deductions
and the specific exemption were divided in half
and two returns made, one return for each half in
the names respectively of the husband and wife,
so that under the returns as filed there would be
an escape from the additional tax; that Araneta
claims the returns are correct on the ground under
the Philippine law his wife is entitled to half of
his earnings; that Araneta has dominion over the
income and under the Philippine law, the right to
determine its use and disposition; that in this case
the wife has no "separate estate" within the
contemplation of the Act of October 3, 1913,
levying an income tax.

The point we are discussing has heretofore been considered

by the Attorney-General of the Philippine Islands and the
United States Treasury Department. The decision of the
latter overruling the opinion of the Attorney-General is as
follows:
T
R
E
A
S
U
R
Y
D
E
P
A
R
T
M
E
N
T
,

It appears further from the correspondence that

upon the foregoing explanation, tax was assessed
against the entire net income against Gregorio
Araneta; that the tax was paid and an application
for refund made, and that the application for
refund was rejected, whereupon the matter was
submitted to the Attorney-General of the Islands
who holds that the returns were correctly

rendered, and that the refund should be allowed;

and thereupon the question at issue is submitted
through the Governor-General of the Islands and
Bureau of Insular Affairs for the advisory opinion
of this office.

DAVID
Acting Commissioner.

By paragraph M of the statute, its provisions are

extended to the Philippine Islands, to be
administered as in the United States but by the
appropriate internal-revenue officers of the
Philippine Government. You are therefore
advised that upon the facts as stated, this office
holds that for the Federal Income Tax (Act of
October 3, 1913), the entire net income in this
case was taxable to Gregorio Araneta, both for
the normal and additional tax, and that the
application for refund was properly rejected.

A.

GATES.

In connection with the decision above quoted, it is well to

recall a few basic ideas. The Income Tax Law was drafted
by the Congress of the United States and has been by the
Congress extended to the Philippine Islands. Being thus a
law of American origin and being peculiarly intricate in its
provisions, the authoritative decision of the official who is
charged with enforcing it has peculiar force for the
Philippines. It has come to be a well-settled rule that great
weight should be given to the construction placed upon a
revenue law, whose meaning is doubtful, by the department
charged with its execution. (U.S. vs. Cerecedo Hermanos y
Cia. [1907], 209 U.S., 338; In re Allen [1903], 2 Phil., 630;
Government of the Philippine Islands vs. Municipality of
Binalonan, and Roman Catholic Bishop of Nueva Segovia
[1915], 32 Phil., 634.) We conclude that the judgment
should be as it is hereby affirmed with costs against
appellants. So ordered.

The separate estate of a married woman within

the contemplation of the Income Tax Law is that
which belongs to her solely and separate and
apart from her husband, and over which her
husband has no right in equity. It may consist of
lands or chattels.

Torres, Johnson, Carson, Street and Fisher, JJ., concur.

The statute and the regulations promulgated in

accordance therewith provide that each person of
lawful age (not excused from so doing) having a
net income of $3,000 or over for the taxable year
shall make a return showing the facts; that from
the net income so shown there shall be deducted
$3,000 where the person making the return is a
single person, or married and not living with
consort, and $1,000 additional where the person
making the return is married and living with
consort; but that where the husband and wife both
make returns (they living together), the amount of
deduction from the aggregate of their several
incomes shall not exceed $4,000.

Digital Communications vs City Government\

G.R. No. 156040
December 11, 2008
DIGITAL TELECOMMUNICATIONS PHILIPPINES,
INC., petitioner,
vs.
CITY GOVERNMENT OF BATANGAS represented by
HON. ANGELITO DONDON A. DIMACUHA,
Batangas City Mayor, MR. BENJAMIN S. PARGAS,
Batangas City Treasurer, and ATTY. TEODULFO A.
DEQUITO, Batangas City Legal Officer, respondents.

The only occasion for a wife making a return is

where she has income from a sole and separate
estate in excess of $3,000, but together they have
an income in excess of $4,000, in which the latter
event either the husband or wife may make the
return but not both. In all instances the income of
husband and wife whether from separate estates
or not, is taken as a whole for the purpose of the
normal tax. Where the wife has income from a
separate estate makes return made by her
husband, while the incomes are added together
for the purpose of the normal tax they are taken
separately for the purpose of the additional tax. In
this case, however, the wife has no separate
income within the contemplation of the Income
Tax Law.

DECISION
CARPIO, J.:
The Case
This is a petition for review on certiorari 1 assailing the
Regional Trial Courts Order2 dated 2 May 2002 in Civil
Case No. 5343 as well as the 19 November 2002 Order
denying the Motion for Reconsideration. In the assailed
orders, Branch 8 of the Regional Trial Court (RTC) of
Batangas City (RTC-Branch 8) reversed the 28 March 2001
Order3 issued by Branch 3 of RTC-Batangas City (RTCBranch 3). RTC-Branch 8 declared that under its legislative

Respectfully,

franchise, Digital Telecommunications Philippines, Inc.

(petitioner) is not exempt from paying real property tax
assessed by the Batangas City Government (respondent).

In 1999, respondent refused to issue a Mayors Permit to

petitioner without payment of its realty taxes.
On 22 June 1999, petitioner paid P68,890.39 under protest
as fees for the permit to operate, but respondent refused to
accept the payment unless petitioner also paid the realty
taxes.7

The Facts
On 17 February 1994, Republic Act No. 7678 (RA
7678)4 granted petitioner a 25-year franchise to install,
operate and maintain telecommunications systems
throughout the Philippines. Section 5 of RA 7678 reads:

On 2 July 1999, respondent threatened to close down

petitioners operations. Hence, on 3 July 1999, petitioner
instituted a complaint for prohibition and mandamus with
prayer for a temporary restraining order or writ of
preliminary injunction. This case was raffled to RTCBranch 3. On the same date, respondent served a Cease and
Desist Order on petitioner.8

Sec. 5. Tax Provisions. - The grantee shall be

liable to pay the same taxes on its real estate,
buildings, and personal property exclusive of
this franchise as other persons or corporations
are now or hereafter may be required by law
to pay. In addition thereto, the grantee shall pay
to the Bureau of Internal Revenue each year,
within thirty (30) days after the audit and
approval of the accounts, a franchise tax as may
be prescribed by law of all gross receipts of the
telephone
or
other
telecommunications
businesses transacted under this franchise by the
grantee; Provided, That the grantee shall continue
to be liable for income taxes payable under Title
II of the National Internal Revenue Code
pursuant to Section 2 of Executive Order No. 72
unless the latter enactment is amended or
repealed, in which case the amendment or repeal
shall be applicable thereto.

On 20 January 2000, during the pendency of the complaint,

petitioner paid its realty taxes of P2,043,265 under
protest.9 Petitioner resumed its business, rendering the other
issues raised in petitioners complaint moot. Consequently,
the only issue left for resolution is whether petitioner is
exempt from the realty tax under Section 5 of RA 7678.
The Ruling of RTC-Branch 3
On 28 March 2001, RTC-Branch 3 issued the following
Order:
WHEREFORE, premises considered, the Court
hereby declares that the real estate, buildings and
personal
property
of
plaintiff
Digital
Telecommunications Philippines, Inc. which are
used in the operation of its franchise are exempt
from payment of real property taxes, but those
not so used should be held liable thereto.10

The grantee shall file the return with and pay the
tax due thereon to the Commissioner of Internal
Revenue or his duly authorized representative in
accordance with the National Internal Revenue
Code and the return shall be subject to audit by
the Bureau of Internal Revenue. (Boldfacing and
underscoring supplied)

RTC-Branch 3 reasoned that the phrase "exclusive of this

franchise" in the first sentence of Section 5 of RA 7678
limits the real properties that are subject to realty tax only
to those which are not used in petitioners
telecommunications business. In short, petitioners real
properties used in its telecommunications business are not
subject to realty tax.11

Sometime in 1997, respondent issued a building permit for

the installation of petitioners telecommunications facilities
in Batangas City. After the installation of the facilities,
petitioner applied with the Mayors office of Batangas City
for a permit to operate. Because of a discrepancy in the
actual investment costs used in computing the prescribed
fees for the clearances and permits, petitioner was not able
to secure a Mayors Permit for the year 1998. Petitioner
was also advised to settle its unpaid realty taxes. However,
petitioner claimed exemption from the payment of realty
tax, citing the first sentence of Section 5 of RA 7678, the
Letter-Opinion of the Bureau of Local Government Finance
(BLGF) dated 8 April 1997,5 and the letter of the Office of
the President dated 12 March 1996.6

On 1 May 2001, respondent moved for reconsideration.

Before acting on the motion, the Presiding Judge of RTCBranch 3 voluntarily inhibited himself because the newlyelected mayor of Batangas City was his kumpadre.12The
case was re-raffled to RTC-Branch 8.
The Ruling of RTC-Branch 8

on 4 January 1999.15 The BLGF declared that "the real

properties of Digitel, which are used in the operation of its
franchise are x x x found to be exempt from the payment of
real property taxes beginning 1 January 1993. However, all
other properties of that company not used in connection
with the operation of its franchise shall remain taxable."16

On 2 May 2002, RTC-Branch 8 issued an Order which

reads:
WHEREFORE, the defendants Motion for
Reconsideration is hereby granted. The Order of
this Court dated March 21, 2001 is hereby set
aside and, in lieu thereof, judgment is hereby
rendered in favor of the defendants and against
the plaintiff:

Petitioner further argues that under the Local Government

Code, the realty tax is imposed on all lands, buildings,
machineries and other improvements attached to real
property. A franchise is an incorporeal being, a special
privilege granted by the legislature. Hence, to read the first
sentence of Section 5 of RA 7678 to mean that the
franchisee shall pay taxes on its real properties used in its
telecommunications business would render the phrase
"exclusive of this franchise" meaningless.

- DISMISSING the Amended Complaint;

- DECLARING that the plaintiff Digital
Telecommunications Philippines, Inc., under its
legislative franchise RA No. 7678, is not
exempted from the payment of real property tax
being collected by the defendant City of Batangas
and, accordingly,

Petitioner admits that the franchise granted under RA 7678

is a personal property, but the franchise is not the "personal
property" referred to in the first sentence of Section 5.
Petitioner asserts that the phrase "real estate, buildings, and
personal property" in the first sentence of Section 5 refers
solely to real properties and does not include personal
properties. Petitioner explains thus:

- ORDERING said plaintiff to pay the City of

Batangas real estate taxes in the amount of
Ph4,620,683.33 which was due as of January,
2000, as well as those due thereafter, plus
corresponding interest and penalties.13

For PTEs (public telecommunication entities),

these personal properties include the switches
which were installed in the exchange buildings as
well as the outside and inside plant equipment.
Initially, these telecommunications materials and
equipment were personal property in character.
But, having been installed and made operational
by being attached to the exchange building, they
are now converted into immovables or real
property. That being the case, the phrase "real
estate, buildings and personal property"
actually refer[s] to properties that are liable
for real estate tax. And, Congress having made
the qualification with the phrase "exclusive of
this franchise," only such real properties that are
not used in furtherance of the franchise are
subject to real property tax.17 (Emphasis supplied)

On 29 May 2002, petitioner moved for reconsideration. On

19 November 2002, RTC-Branch 8 denied petitioners
motion for reconsideration.
Hence, this petition.
The Issue
The sole issue for resolution is whether, under the first
sentence of Section 5 of RA 7678, petitioners real
properties used in its telecommunications business are
exempt from the realty tax.
Petitioners Contentions
Petitioner contends that its exemption from realty tax is
based on the first sentence of Section 5 of RA 7678.
Petitioner claims that the evident purpose of the phrase
"exclusive of this franchise" is to limit the real properties
that are subject to realty tax only to properties that are not
used
in
petitioners
telecommunications
business.14 Petitioner asserts that the phrase "exclusive of
this franchise" must not be construed as a useless
surplusage. Petitioner points out that its exemption from
realty tax was affirmed in two separate opinions, one
rendered by the Office of the President on 12 March 1996
and the other by the BLGF on 8 April 1997 and reaffirmed

Respondents Contentions
Respondent contends that the phrase "exclusive of this
franchise" does not mean that petitioner is exempt from the
realty tax on its real properties used in its
telecommunications business. The first sentence of Section
5 of RA 7678 makes petitioner "liable to pay the same taxes
for its real estate, buildings, and personal property
exclusive of this franchise as other persons or corporations
are or hereafter may be required by law to pay." This shows

the clear intent of Congress to tax petitioners real and

personal properties.18 Respondent asserts that the phrase
"exclusive of this franchise" is a qualification of the broad
declaration on the franchisees liability for taxes which is
the main thrust of the first sentence of Section 5.
Respondent points out that petitioner is paying taxes and
fees on all its motor vehicles, which are personal properties,
without distinction.19 Respondent also points out that
petitioner admits that the first sentence of Section 5 of RA
7678 is ambiguous with respect to the phrase "exclusive of
this franchise,"20 thus petitioner resorted to the rules on
statutory construction.21

The issue in this case involves the interpretation of the

phrase "exclusive of this franchise" in the first sentence of
Section 5 of RA 7678.
Section 5 of RA 7678 states:
Sec. 5. Tax Provisions. - The grantee shall be
liable to pay the same taxes on its real estate,
buildings, and personal property exclusive of
this franchise as other persons or corporations
are now or hereafter may be required by law
to pay. In addition thereto, the grantee shall pay
to the Bureau of Internal Revenue each year,
within thirty (30) days after the audit and
approval of the accounts, a franchise tax as may
be prescribed by law of all gross receipts of the
telephone
or
other
telecommunications
businesses transacted under this franchise by the
grantee; Provided, That the grantee shall continue
to be liable for income taxes payable under Title
II of the National Internal Revenue Code
pursuant to Section 2 of Executive Order No. 72
unless the latter enactment is amended or
repealed, in which case the amendment or repeal
shall be applicable thereto.

Respondent adds that the legislative franchises granted to

other telecommunications companies contain the same
phrase "exclusive of this franchise." This shows the intent
of Congress to make franchisees liable for the realty tax
rather than exempt them even if the real properties are used
in their telecommunications business.22
The Office of the Solicitor General (OSG), appearing for
respondent, contends that the first sentence of Section 5
provides for petitioners general liability to pay taxes and
does not provide for petitioners exemption from realty tax.
The OSG invokes the doctrine of last antecedent which is
an aid in statutory construction. The OSG argues that under
this doctrine, the qualifying word or phrase only restricts
the word or phrase to which the qualifying word or phrase
is immediately associated and not the word or phrase which
is distantly or remotely located. In the first sentence of
Section 5, the phrase "exclusive of this franchise" restricts
only the words "personal property" which immediately
precede the phrase "exclusive of this franchise." This
means that the franchise, an intangible personal property,
should be excluded from the personal properties that are
subject to taxes under the first sentence of Section 5. The
OSG adds that the use of the comma to separate "real
estate, buildings" from "personal property" exerts a
dominant influence in the application of the doctrine of last
antecedent. Further, the OSG reiterates that laws granting
exemption from tax are to be construed strictissimi
juris against the taxpayer and liberally in favor of the
taxing power.

The grantee shall file the return with and pay the
tax due thereon to the Commissioner of Internal
Revenue or his duly authorized representative in
accordance with the National Internal Revenue
Code and the return shall be subject to audit by
the Bureau of Internal Revenue. (Boldfacing and
underscoring supplied)
The first sentence of Section 5 of RA 7678 is the same
provision found in almost all legislative franchises in the
telecommunications industry dating back to 1905. 23 It is
also the same provision that appears in the legislative
franchises of other telecommunications companies like
Philippine Long Distance Telephone Company,24 Smart
Information
Technologies,
Inc.,25 and
Globe
26
Telecom. Since 1905, no telecommunications company
has claimed exemption from realty tax based on the phrase
"exclusive of this franchise," until petitioner filed the
present case on 3 July 1999.27

The Ruling of the Court

The petition has no merit.
Section
5
of
RA
7678
and does not exempt from realty tax

imposes

The first sentence of Section 5 clearly states that the

legislative franchisee shall be liable to pay the following
taxes: (1) "the same taxes on its real estate, buildings, and
personal property exclusive of this franchise as other
persons or corporations are now or hereafter may be
required by law to pay"; (2) "franchise tax as may be
prescribed by law of all gross receipts of the telephone or

taxes

other telecommunications businesses transacted under this

franchise";28 and (3) "income taxes payable under Title II of
the National Internal Revenue Code."

The first sentence of Section 5 imposes on the franchisee

the "same taxes" that non-franchisees are subject to with
respect to real and personal properties. The clear intent is to
put the franchisees and non-franchisees in parity in the
taxation of their real and personal properties. Since nonfranchisees have obviously no franchises, the franchise
must be excluded from the list of properties subject to tax
to maintain the parity between the franchisees and nonfranchisees. However, the franchisee is taxable separately
from its franchise. Thus, the second sentence of Section 5
imposes the "franchise tax" on gross receipts, which under
Republic Act No. 7716 has been replaced by the 10%
Valued Added Tax effective 1 January 1996.29

The crux of the controversy lies in the interpretation of the

phrase "exclusive of this franchise" in the first sentence of
Section 5. Petitioner interprets the phrase to mean that its
real properties that are used in its telecommunications
business shall not be subject to realty tax. Respondent
interprets the same phrase to mean that the term "personal
property" shall not include petitioners franchise, which is
an intangible personal property.
We rule that the phrase "exclusive of this franchise" simply
means that petitioners franchise shall not be subject to the
taxes imposed in the first sentence of Section 5. The first
sentence lists the properties that are subject to taxes, and
the list excludes the franchise. Thus, the first sentence
provides:

Section 5 can be divided into three parts. First is the first

sentence which imposes taxes on real and personal
properties, excluding one property, that is, the franchise.
This puts in parity the franchisees and non-franchisees in
the taxation of real and personal properties. Second is the
second sentence which imposes the franchise tax, which is
applicable solely to the franchisee. And third is the proviso
in the second sentence that imposes the income tax on the
franchisee, the same income tax payable by nonfranchisees.

The grantee shall be liable to pay the same taxes

on its real estate, buildings, and personal
propertyexclusive of this franchise as other
persons or corporations are now or hereafter may
be required by law to pay. (Emphasis supplied)

Petitioner claims that the first sentence refers only to real

properties, and that the phrase "exclusive of this franchise"
exempts petitioner from realty tax on its real properties
used in its telecommunications business. This claim has no
basis in the language of the law as written in the first
sentence of Section 5. First, the first sentence expressly
refers to taxes on "real estate" and on "personal property."
Clearly, the first sentence does not refer only to taxes on
real properties, but also to taxes on personal properties. The
trial court correctly observed that petitioner pays taxes on
its motor vehicles,30 which are personal properties, that are
used in its telecommunications business. 31 There is also the
documentary stamp tax on transactions involving real and
personal properties, which petitioner and other taxpayers
are liable for.32

A plain reading shows that the phrase "exclusive of this

franchise" is meant to exclude the legislative franchise
from the properties subject to taxes under the first sentence.
In effect, petitioners franchise, which is a personal
property, is not subject to the taxes imposed on properties
under the first sentence of Section 5.
However, petitioners gross receipts from its franchise are
subject to the "franchise tax" under the second sentence of
Section 5. Thus, the second sentence provides:
In addition thereto, the grantee shall pay to the
Bureau of Internal Revenue each year, within
thirty (30) days after the audit and approval of the
accounts, a franchise tax as may be prescribed
by law of all gross receipts of the telephone or
other telecommunications businesses transacted
under this franchise by the grantee; x x x
(Emphasis supplied)

A franchise granted by Congress to operate a private radio

station for the franchisees communications in deep-sea
fishing shows that the first sentence of Section 5 of RA
7678 does not refer to real properties alone. Section 6 of
Republic Act No. 3218 (RA 3218), entitled An Act
Granting Batas Riego De Dios A Franchise To Construct,
Maintain And Operate Private Radio Stations For Radio
Communications In Its Deep-Sea Fishing Industry,
provides:

In short, petitioners franchise is excluded from the

properties taxable under the first sentence of Section 5 but
the gross receipts from its franchise are expressly taxable
under the second sentence of the same Section.

SECTION 6. The grantee shall be liable (1) to

pay the same taxes on its real estate, building,

fishing boats and personal property, exclusive

of this franchise as other persons or corporations
are now, or hereafter may be required by law to
pay, and shall further be liable (2) to pay all other
taxes that may be imposed by the National
Internal Revenue Code by reason of this
franchise. (Emphasis supplied)

property subject to taxes, and the excluded personal

property is the franchise. Thus, the franchises of
telecommunications companies in Republic Act Nos.
4137,33 5692,34 5739,35 5785,36 5790,37 5791,38 5795,39 5810,
40
5847,415848,42 5856,43 5857,44 5913,45 5914,46 5929,47 593
48
7, 5958,49 5959,50 5974,51 5993,52 5994,53 6002,546006,55 60
07,56 6013,57 6024,58 6097,59 6510,60 6536,61 and
653062 contain the following common tax provision:

The inclusion of "fishing boats," personal properties that

can never be attached to a land or building so as to make
them real properties, demonstrates that Section 6 of RA
3218, like the first sentence of Section 5 of RA 7678, not
only applies to real properties but also to personal
properties.

The grantee shall be liable to pay the same

taxes, unless exempted therefrom, on its
business, real estate, buildings, and personal
property, exclusive of this franchise, as other
persons or corporations are now or hereafter may
be required by law to pay. (Emphasis supplied)

Second, there is no language in the first sentence of Section

5 expressly or even impliedly exempting petitioner from
the realty tax. The phrases "exemption from real estate
tax," "free from real estate tax" or "not subject to real estate
tax" do not appear in the first sentence. No matter how one
reads the first sentence, there is no grant of exemption,
express or implied, from realty tax. In fact, the first
sentence expressly imposes taxes on both real and personal
properties, excluding only the intangible personal property
that is the franchise.

The phrase "unless exempted therefrom" in the common

provision clearly clarifies that the phrase "exclusive of this
franchise" does not grant any tax exemption. To claim tax
exemption, there must be an express exemption from tax in
another provision of law. On the other hand, the deletion of
the phrase "unless exempted therefrom" from the common
provision does not give rise to any tax exemption.
Bayantel and Digitel Cases

A tax exemption cannot arise from vague inference. The

first sentence of Section 5 does not grant any express or
even implied exemption from realty tax. On the contrary,
the first sentence categorically states that the franchisee is
subject to the "same taxes currently imposed, and those
taxes that may be subsequently imposed, on other persons
or corporations," taxpayers that admittedly are all subject to
realty tax. The first sentence does not limit the imposition
of the "same taxes" to realty tax only but even to "those
taxes" that may in the future be imposed on other
taxpayers, which future taxes shall also be imposed on
petitioner. Thus, the first sentence of Section 5 imposes on
petitioner not only realty tax but also other taxes.

In City Government of Quezon City v. Bayan

Telecommunications, Inc.,63 this Courts Second Division
held that "all realties which are actually, directly and
exclusively used in the operation of its franchise are
exempted from any property tax." The Second Division
added that Bayantels franchise being national in character,
the "exemption" granted applies to all its real and personal
properties found anywhere within the Philippines. The
Second Division reasoned in this wise:
The legislative intent expressed in the phrase
exclusive of this franchise cannot be construed
other than distinguishing between two (2) sets of
properties, be they real or personal, owned by the
franchisee, namely, (a) those actually, directly
and exclusively used in its radio or
telecommunications business, and (b) those
properties which are not so used. It is worthy to
note that the properties subject of the present
controversy are only those which are admittedly
falling under the first category.

The phrase "personal property exclusive of this franchise"

merely means that "personal property" does not include the
franchise even if the franchise is an intangible personal
property. Stated differently, the first sentence of Section 5
provides that petitioner shall pay tax on its real properties
as well as on its personal properties but the franchise,
which is an intangible personal property, shall not be
deemed personal property.

To the mind of the Court, Section 14 of Rep. Act

No. 3259 effectively works to grant or delegate to
local governments of Congress inherent power to
tax the franchisees properties belonging to the
second group of properties indicated above, that

The historical usage of the phrase "exclusive of this

franchise" in franchise laws enacted by Congress
indubitably shows that the phrase is not a grant of tax
exemption, but an exclusion of one type of personal

is, all properties which, "exclusive of this

franchise," are not actually and directly used in
the pursuit of its franchise. As may be recalled,
the taxing power of local governments under both
the 1935 and the 1973 Constitutions solely
depended upon an enabling law. Absent such
enabling law, local government units were
without authority to impose and collect taxes on
real properties within their respective territorial
jurisdictions. While Section 14 of Rep. Act No.
3259 may be validly viewed as an implied
delegation of power to tax, the delegation under
that provision, as couched, is limited to
impositions over properties of the franchisee
which are not actually, directly and exclusively
used in the pursuit of its franchise. Necessarily,
other properties of Bayantel directly used in the
pursuit of its business are beyond the pale of the
delegated taxing power of local governments. In
a very real sense, therefore, real properties of
Bayantel, save those exclusive of its franchise,
are subject to realty taxes. Ultimately, therefore,
the inevitable result was that all realties which
are actually, directly and exclusively used in
the operation of its franchise are "exempted"
from any property tax. (Emphasis supplied)

delegated taxing power, all of the

franchisees x x x properties that are
actually, directly and exclusively used
in the pursuit of its franchise.
In view of the unequivocal intent of Congress to
exempt from real property tax those real
properties actually, directly and exclusively used
by petitioner DIGITEL in the pursuit of its
franchise, respondent Province of Pangasinan can
only levy real property tax on the remaining real
properties of the grantee located within its
territorial jurisdiction not part of the above-stated
classification. Said exemption, however, merely
applies from the time of the effectivity of
petitioner DIGITELs legislative franchise and
not a moment sooner.
Nowhere in the language of the first sentence of Section 5
of RA 7678 does it expressly or even impliedly provide that
petitioners real properties that are actually, directly and
exclusively used in its telecommunications business are
exempt from payment of realty tax. On the contrary, the
first sentence of Section 5 specifically states that the
petitioner, as the franchisee, shall pay the "same taxes on its
real estate, buildings, and personal property exclusive of
this franchise as other persons or corporations are now or
hereafter may be required by law to pay."

In Digital Telecommunications Philippines, Inc. (Digitel) v.

Province of Pangasinan,64 this Courts Third Division ruled
that Digitels real properties located within the territorial
jurisdiction of Pangasinan that are actually, directly and
exclusively used in its franchise are exempt from realty tax
under the first sentence of Section 5 of RA 7678. The Third
Division explained thus:

The heading of Section 5 is "Tax Provisions," not Tax

Exemptions. To reiterate, the phrase "exemption from real
estate tax" or other words conveying exemption from realty
tax do not appear in the first sentence of Section 5. The
phrase "exclusive of this franchise" in the first sentence of
Section 5 merely qualifies the phrase "personal property" to
exclude petitioners legislative franchise, which is an
intangible personal property. Petitioners franchise is
subject to tax in the second sentence of Section 5 which
imposes the "franchise tax." Thus, there is no grant of tax
exemption in the first sentence of Section 5.

The more pertinent issue to consider is whether

or not, by passing Republic Act No. 7678,
Congress intended to exempt petitioner
DIGITELs real properties actually, directly and
exclusively used by the grantee in its franchise.
The fact that Republic Act No. 7678 was a later
piece of legislation can be taken to mean that
Congress, knowing fully well that the Local
Government Code had already withdrawn
exemptions from real property taxes, chose to
restore such immunity even to a limited degree.
Accordingly:

The interpretation of the phrase "exclusive of this

franchise" in the Bayantel and Digitel cases goes against
the basic principle in construing tax exemptions. In PLDT
v. City of Davao,65 the Court held that "tax exemptions
should be granted only by clear and unequivocal provision
of law on the basis of language too plain to be mistaken.
They cannot be extended by mere implication or
inference."

The Court views this subsequent piece

of legislation as an express and real
intention on the part of Congress to
once again remove from the LGCs

Tax exemptions must be clear and unequivocal. A taxpayer

claiming a tax exemption must point to a specific provision
of law conferring on the taxpayer, in clear and plain terms,

10

exemption from a common burden. Any doubt whether a

tax exemption exists is resolved against the taxpayer.66

telecommunications companies that sought new franchises

from Congress, except the exemption from specific
tax.72 More importantly, the uniform tax provision in these
new franchises expressly states that the franchisee shall pay
not only all taxes, except specific tax, under the National
Internal Revenue Code, but also all taxes under "other
applicable laws,"73 one of which is the Local Government
Code which imposes the realty tax.74

RCPI case
In Radio Communications of the Philippines, Inc. (RCPI) v.
Provincial Assessor of South Cotabato,67the Courts First
Division held that RCPIs radio relay station tower, radio
station building, and machinery shed are real properties and
are subject to real property tax. The Court added that:

In fact, Section 12 of Republic Act No. 9180 (RA

9180),75 the legislative franchise of Digitel Mobile, a 100%owned subsidiary of petitioner, states that the franchisee, its
successors or assigns shall be subject to the payment of "all
taxes, duties, fees or charges and other impositions under
the National Internal Revenue Code of 1997, as
amended, and other applicable laws."76 Section 12 of RA
9180 provides:

RCPI cannot also invoke the equality of treatment

clause under Section 23 of Republic Act No.
7925. The franchises of Smart, Islacom,
TeleTech, Bell, Major Telecoms, Island
Country, and IslaTel,68 all expressly declare that
the franchisee shall pay the real estate tax, using
words similar to Section 14 of RA 2036, as
amended. The provisions of these subsequent
telecommunication franchises imposing the real
estate tax on franchisees only confirm that RCPI
is subject to the real estate tax. Otherwise, RCPI
will stick out like a sore thumb, being the only
telecommunications company exempt from the
real estate tax, in mockery of the spirit of equality
of treatment that RCPI is invoking, not to
mention the violation of the constitutional rule on
uniformity of taxation.

SECTION 12. Tax Provisions. \emdash The

grantee, its successors or assigns, shall be
subject to the payment of all taxes, duties, fees
or charges and other impositions under the
National Internal Revenue Code of 1997, as
amended, and other applicable laws: Provided,
That nothing herein shall be construed as
repealing any specific tax exemptions, incentives,
or privileges granted under any relevant law:
Provided, further, That all rights, privileges,
benefits and exemptions accorded to existing and
future telecommunications franchises shall
likewise be extended to the grantee.

It is an elementary rule in taxation that

exemptions are strictly construed against the
taxpayer and liberally in favor of the taxing
authority. It is the taxpayers duty to justify the
exemption by words too plain to be mistaken and
too categorical to be misinterpreted. (Emphasis
supplied)

The grantee shall file the return with the city or

province where its facility is located and pay the
income tax due thereon to the Commissioner of
Internal Revenue or his duly authorized
representatives in accordance with the National
Internal Revenue Code and the return shall be
subject to audit by the Bureau of Internal
Revenue. (Emphasis supplied)

In RCPI, the Court emphasized that telecommunications

companies which were granted legislative franchise are
liable to realty tax. The intent to grant realty tax exemption
cannot be discerned from Republic Act No. 405469and
neither from the legislative franchises of other
telecommunications companies. Tax exemptions granted to
one or more, but not to all, telecommunications companies
similarly situated will violate the constitutional rule on
uniformity of taxation.70
The
intent
of
Congress
legislative franchisees liable to tax

is

to

Thus, Digitel Mobile is subject to tax on its real estate and

personal properties, whether or not used in its
telecommunications business.
In Compagnie Financiere Sucres et Denrees v.
Commissioner of Internal Revenue,77 the Court ruled that
"the governing principle is that tax exemptions are to be
construed in strictissimi juris against the taxpayer and
liberally in favor of the taxing authority \endash he who
claims an exemption must be able to justify his claim by the
clearest grant of statute." A person claiming an exemption
has the burden of justifying the exemption by words too

make

In PLDT v. City of Davao,71 it was observed that after the

imposition of VAT on telecommunications companies,
Congress refused to grant any tax exemption to

11

plain to be mistaken and too categorical to be

misinterpreted. Tax exemptions are never presumed and the
burden lies with the taxpayer to clearly establish his right to
exemption.78

The clashing interests of the State and the taxpayers are

again pitted against each other. Two basic principles, the States
inherent power of taxation and its declared policy of fostering the

BLGF Opinions

creation and growth of cooperatives come into play. However, the

On 25 October 2004, the BLGF issued Memorandum
Circular No. 15-2004.79 This circular reversed the BLGFs
Letter-Opinion dated 8 April 1997 recognizing realty tax
exemption under the phrase "exclusive of this franchise."
This later circular states that the real properties owned by
Globe and Smart Telecommunications and all other
telecommunications companies similarly situated are
subject to the realty tax. The BLGF has reversed its opinion
on the realty tax exemption of telecommunications
companies. Hence, petitioners claim of tax exemption
based on BLGFs opinion does not hold water. Besides, the
BLGF has no authority to rule on claims for exemption
from the realty tax.80

one that embodies the spirit of the law and the true intent of the
legislature prevails.

This Petition for Review on Certiorari under Section

11 of Republic Act (RA) No. 9282,[1] in relation to Rule 45 of the
Rules of Court, seeks to set aside the December 18, 2007
Decision[2] of the Court of Tax Appeals (CTA), ordering petitioner
to pay deficiency withholding taxes on interest from savings and
time deposits of its members for taxable years 1999 and 2000,
pursuant to Section 24(B)(1) of the National Internal Revenue

WHEREFORE, we DENY the petition. We AFFIRM the

2 May 2002 and 19 November 2002 Orders of the Regional
Trial Court, Branch 8, Batangas City, in Civil Case No.
5343.

Code of 1997 (NIRC), as well as the delinquency interest of 20%

per annum under Section 249(C) of the same Code. It also assails
the April 11, 2008 Resolution[3] denying petitioners Motion for

SO ORDERED.

Reconsideration.

Factual Antecedents
Banco de Oro vs Republic (2015 case separate file)
Petitioner Dumaguete Cathedral Credit Cooperative
Dumaguete Coop vs CIR
DUMAGUETE CATHEDRAL
CREDIT COOPERATIVE
[DCCCO], Represented by
Felicidad L. Ruiz, its General
Manager,
Petitioner,
-versusCOMMISSIONER OF
INTERNAL REVENUE,
Respondent.
x------------------------------------------------------------------x

(DCCCO) is a credit cooperative duly registered with and

G.R. No.
182722
regulated
by the Cooperative Development Authority (CDA).[4] It
Present:
was established on February 17, 1968[5] with the following
objectives and purposes: (1) to increase the income and purchasing
CARPIO,
BRION,
power of the members; (2) to pool the resources of the members
DEL
ABAD,
by encouraging savings and promoting thrift to mobilize capital
PEREZ,
formation for development activities; and (3) to extend loans to
Promulgated:
members
for provident and productive purposes.[6] It has the power
January
22, 2010
(1) to draw, make, accept, endorse, guarantee, execute, and issue
promissory notes, mortgages, bills of exchange, drafts, warrants,
certificates and all kinds of obligations and instruments in

DECISION

connection with and in furtherance of its business operations; and

DEL CASTILLO, J.:

(2) to issue bonds, debentures, and other obligations; to contract

12

indebtedness; and to secure the same with a mortgage or deed of

janitorial services, commissions and legal & professional fees for

trust, or pledge or lien on any or all of its real and personal

the year 2000 in the amount of P119,889.37, excluding penalties

properties.[7]

and interest, and that it would avail of the Voluntary Assessment

and Abatement Program (VAAP) of the BIR under Revenue
Regulations No. 17-2002.[12]

On November 27, 2001, the Bureau of Internal

Revenue (BIR) Operations Group Deputy Commissioner, Lilian

On November 29, 2002, petitioner availed of the VAAP

B. Hefti, issued Letters of Authority Nos. 63222 and 63223,

and

paid

the
[13]

amounts

of P105,574.62

authorizing BIR Officers Tomas Rambuyon and Tarcisio Cubillan

and P143,867.24

of Revenue Region No. 12, Bacolod City, to examine petitioners

payments for the compensation, honorarium of the Board of

books of accounts and other accounting records for all internal

Directors, security and janitorial services, and legal and

revenue taxes for the taxable years 1999 and 2000.[8]

professional services, for the years 1999 and 2000, respectively.

Proceedings before the BIR Regional Office

corresponding to the withholding taxes on the

On April 24, 2003, petitioner received from the BIR

Regional Director, Sonia L. Flores, Letters of Demand Nos.

On June 26, 2002, petitioner received two Pre-

00027-2003 and 00026-2003, with attached Transcripts of

Assessment Notices for deficiency withholding taxes for taxable

Assessment and Audit Results/Assessment Notices, ordering

years 1999 and 2000 which were protested by petitioner on July

petitioner to pay the deficiency withholding taxes, inclusive of

[9]

23, 2002. Thereafter, on October 16, 2002, petitioner received

penalties, for the years 1999 and 2000 in the amounts

two other Pre-Assessment Notices for deficiency withholding

of P1,489,065.30 and P1,462,644.90, respectively.[14]

taxes also for taxable years 1999 and 2000. [10] The deficiency
withholding taxes cover the payments of the honorarium of the

Proceedings before the Commissioner of Internal Revenue

Board of Directors, security and janitorial services, legal and

professional fees, and interest on savings and time deposits of its

On May 9, 2003, petitioner protested the Letters of

members.

Demand and Assessment Notices with the Commissioner of

Internal Revenue (CIR).[15] However, the latter failed to act on the
On October 22, 2002, petitioner informed BIR

protest

within

the

prescribed

180-day

period. Hence,

Regional Director Sonia L. Flores that it would only pay the

on December 3, 2003, petitioner filed a Petition for Review before

deficiency withholding taxes corresponding to the honorarium of

the CTA, docketed as C.T.A. Case No. 6827.[16]

the Board of Directors, security and janitorial services, legal and

professional fees for the year 1999 in the amount of P87,977.86,

Proceedings before the CTA First Division

excluding penalties and interest.[11]

The case was raffled to the First Division of the CTA
In another letter dated November 8, 2002, petitioner

which rendered its Decision on February 6, 2007, disposing of the

also informed the BIR Assistant Regional Director, Rogelio B.

case in this wise:

Zambarrano, that it would pay the withholding taxes due on the

IN VIEW OF ALL THE

FOREGOING, the Petition for Review is

honorarium and per diems of the Board of Directors, security and

13

hereby
PARTIALLY
GRANTED.
Assessment Notice Nos. 00026-2003 and
00027-2003 are hereby MODIFIED and the
assessment for deficiency withholding taxes
on the honorarium and per diems of
petitioners Board of Directors, security and
janitorial services, commissions and legal
and professional fees are hereby
CANCELLED. However, the assessments
for deficiency withholding taxes on interests
are hereby AFFIRMED.

The CTA En Banc held that Section 57 of the NIRC

requires the withholding of tax at source. Pursuant thereto,
Revenue Regulations No. 2-98 was issued enumerating the
income payments subject to final withholding tax, among which is
interest from any peso bank deposit and yield, or any other
monetary benefit from deposit substitutes and from trust funds and
similar arrangements x x x. According to the CTA En Banc,

Accordingly,
petitioner
is
ORDERED TO PAY the respondent the
respective amounts of P1,280,145.89
and P1,357,881.14 representing deficiency
withholding taxes on interests from savings
and time deposits of its members for the
taxable years 1999 and 2000. In addition,
petitioner is ordered to pay the 20%
delinquency interest from May 26,
2003 until the amount of deficiency
withholding taxes are fully paid pursuant to
Section 249 (C) of the Tax Code.

petitioners business falls under the phrase similar arrangements; as

such, it should have withheld the corresponding 20% final tax on
the interest from the deposits of its members.

Issue

Hence, the present recourse, where petitioner raises the

issue of whether or not it is liable to pay the deficiency withholding

SO ORDERED.[17]

taxes on interest from savings and time deposits of its members for
Dissatisfied,

petitioner

moved

for

the taxable years 1999 and 2000, as well as the delinquency

partial

interest of 20% per annum.

reconsideration, but it was denied by the First Division in its

Resolution dated May 29, 2007.[18]

Petitioners Arguments
Proceedings before the CTA En Banc
Petitioner argues that Section 24(B)(1) of the NIRC
which reads in part, to wit:

On July 3, 2007, petitioner filed a Petition for Review

with the CTA En Banc,

[19]

interposing the lone issue of whether or

SECTION 24. Income Tax Rates.

not petitioner is liable to pay the deficiency withholding taxes on

xxxx

interest from savings and time deposits of its members for taxable

(B) Rate of Tax on Certain Passive Income:

years 1999 and 2000, and the consequent delinquency interest of

(1)
Interests,
Royalties, Prizes, and Other Winnings. A
final tax at the rate of twenty percent (20%)
is hereby imposed upon the amount of
interest from any currency bank deposit and
yield or any other monetary benefit from
deposit substitutes and from trust funds and
similar arrangements; x x x

20% per annum.[20]

Finding no reversible error in the Decision

dated February 6, 2007 and the Resolution dated May 29, 2007 of
the CTA First Division, the CTA En Banc denied the Petition for
Review[21] as well as petitioners Motion for Reconsideration.[22]

applies only to banks and not to cooperatives, since the phrase

similar arrangements is preceded by terms referring to banking
transactions that have deposit peculiarities. Petitioner thus posits

14

o
n
e
r
s

that the savings and time deposits of members of cooperatives are

not included in the enumeration, and thus not subject to the 20%
final tax. To bolster its position, petitioner cites BIR Ruling No.
551-888[23] and BIR Ruling [DA-591-2006][24] where the BIR

i
n
v
o
c
a
t
i
o
n

ruled that interests from deposits maintained by members of

cooperative are not subject to withholding tax under Section 24(B)
(1) of the NIRC. Petitioner further contends that pursuant to Article
XII, Section 15 of the Constitution[25] and Article 2 of Republic Act
No. 6938 (RA 6938) or the Cooperative Code of the Philippines,
[26]

cooperatives enjoy a preferential tax treatment which exempts

o
f

their members from the application of Section 24(B)(1) of the

NIRC.

B
I
R

Respondents Arguments

R
u
l
i
n
g

As a counter-argument, respondent invokes the legal

maxim Ubi lex non distinguit nec nos distinguere debemos (where
the law does not distinguish, the courts should not
distinguish). Respondent maintains that Section 24(B)(1) of the

N
o
.

NIRC applies to cooperatives as the phrase similar arrangements is

not limited to banks, but includes cooperatives that are depositaries

5
5
1
8
8
8
,

of their members. Regarding the exemption relied upon by

petitioner, respondent adverts to the jurisprudential rule that tax
exemptions are highly disfavored and construed strictissimi
juris against the taxpayer and liberally in favor of the taxing
power. In this connection, respondent likewise points out that the

r
e
i
t
e
r
a
t
e
d

deficiency tax assessments were issued against petitioner not as a

taxpayer but as a withholding agent.

Our Ruling

The petition has merit.

P
e
t
i
t
i

i
n
B
I

15

and non-members through credit scheme

both in cash and in kind.

R
u
l
i
n
g

Based on the foregoing representations, you

now request in effect a ruling as to whether
or not you are exempt from the following:
1.
2.

Payment of sales tax

Filing and payment of income
tax

[
D
A
5
9
1
2
0
0
6
]
,

3.

Withholding
taxes
from compensation of employees
and savings account and time deposits
of members. (Underscoring ours)

In reply, please be informed that Executive

Order No. 93 which took effect on March
10, 1987 withdrew all tax exemptions and
preferential privileges e.g., income tax and
sales tax, granted to cooperatives under P.D.
No. 175 which were previously withdrawn
by P.D. No. 1955 effective October 15, 1984
and restored by P.D. No. 2008 effective
January 8, 1986. However, implementation
of said Executive Order insofar as electric,
agricultural, irrigation and waterworks
cooperatives are concerned was suspended
until June 30, 1987. (Memorandum Order
No. 65 dated January 21, 1987 of the
President)Accordingly, your tax exemption
privilege expired as of June 30, 1987. Such
being the case, you are now subject to
income and sales taxes.

i
s
p
r
o
p
e
r
.

Moreover, under Section 72(a) of the Tax

Code, as amended, every employer making
payment of wages shall deduct and withhold
upon such wages a tax at the rates prescribed
by Section 21(a) in relation to section 71,
Chapter X, Title II, of the same Code as
amended by Batas Pambansa Blg. 135 and
implemented by Revenue Regulations No.
6-82 as amended. Accordingly, as an
employer you are required to withhold the
corresponding tax due from the
compensation of your employees.
Furthermore, under Section 50(a) of the Tax
Code, as amended, the tax imposed or
prescribed by Section 21(c) of the same
Code on specified items of income shall be
withheld by payor-corporation and/or
person and paid in the same manner and
subject to the same conditions as provided in
Section 51 of the Tax Code, as
amended. Such being the case, and since
interest from any Philippine currency bank
deposit and yield or any other monetary
benefit from deposit substitutes are paid by
banks, you are not the party required to
withhold the corresponding tax on the
aforesaid savings account and time deposits
of your members. (Underscoring ours)

On November 16, 1988, the BIR declared in BIR

Ruling No. 551-888 that cooperatives are not required to withhold
taxes on interest from savings and time deposits of their
members. The pertinent BIR Ruling reads:
November 16, 1988
BIR RULING NO. 551-888
24 369-88 551-888
Gentlemen:
This refers to your letter dated September 5,
1988 stating that you are a corporation
established under P.D. No. 175 and duly
registered with the Bureau of Cooperatives
Development as full fledged cooperative of
good standing with Certificate of
Registration No. FF 563-RR dated August
8, 1985; and that one of your objectives is to
provide and strengthen cooperative
endeavor and extend assistance to members

16

clearly states, without any qualification, that since interest from any

Very truly yours,

(SGD.) BIENVENIDO A. TAN, JR.
Commissioner

Philippine currency bank deposit and yield or any other monetary

benefit from deposit substitutes are paid by banks, cooperatives are
not required to withhold the corresponding tax on the interest from
savings and time deposits of their members. This interpretation

The CTA First Division, however, disregarded the

was reiterated in BIR Ruling [DA-591-2006] dated October 5,

above quoted ruling in determining whether petitioner is liable to

2006, which was issued by Assistant Commissioner James H.

pay the deficiency withholding taxes on interest from the deposits

Roldan upon the request of the cooperatives for a confirmatory

of its members. It ratiocinated in this wise:

ruling on several issues, among which is the alleged exemption of

interest income on members deposit (over and above the share

This Court does not agree. As

correctly pointed out by respondent in his
Memorandum, nothing in the above quoted
resolution will give the conclusion that
savings account and time deposits of
members of a cooperative are tax-exempt.
What is entirely clear is the opinion of the
Commissioner that the proper party to
withhold the corresponding taxes on certain
specified items of income is the payorcorporation and/or person. In the same way,
in the case of interests earned from
Philippine currency deposits made in a
bank, then it is the bank which is liable to
withhold
the
corresponding
taxes
considering that the bank is the payorcorporation. Thus, the ruling that a
cooperative is not the proper party to
withhold the corresponding taxes on the
aforementioned
accounts
is
correct. However, this ruling does not hold
true if the savings and time deposits are
being maintained in the cooperative, for in
this case, it is the cooperative which
becomes the payor-corporation, a separate
entity acting no more than an agent of the
government for the collection of taxes, liable
to withhold the corresponding taxes on the
interests earned. [27] (Underscoring ours)

capital holdings) from the 20% final withholding tax. In the said
ruling, the BIR opined that:
xxxx
3. Exemption of interest income on
members deposit (over and above the
share capital holdings) from the 20%
Final Withholding Tax.
The National Internal Revenue
Code states that a final tax at the rate of
twenty percent (20%) is hereby imposed
upon the amount of interest on currency
bank deposit and yield or any other
monetary benefit from the deposit
substitutes and from trust funds and similar
arrangement x x x for individuals under
Section 24(B)(1) and for domestic
corporations under Section 27(D)
(1). Considering the members deposits with
the cooperatives are not currency bank
deposits nor deposit substitutes, Section
24(B)(1) and Section 27(D)(1), therefore, do
not apply to members of cooperatives and to
deposits of primaries with federations,
respectively.

The CTA En Banc affirmed the above-quoted Decision

It bears stressing that interpretations of administrative

and found petitioners invocation of BIR Ruling No. 551-88

agencies in charge of enforcing a law are entitled to great weight

misplaced. According to the CTA En Banc, the BIR Ruling was

and consideration by the courts, unless such interpretations are in a

based on the premise that the savings and time deposits were

sharp conflict with the governing statute or the Constitution and

placed by the members of the cooperative in the bank.

[28]

other laws.[29] In this case, BIR Ruling No. 551-888 and BIR

Consequently, it ruled that the BIR Ruling does not apply when

the deposits are maintained in the cooperative such as the instant

Ruling [DA-591-2006] are in perfect harmony with the

case.

Constitution and the laws they seek to implement. Accordingly, the

interpretation in BIR Ruling No. 551-888 that cooperatives are not
We disagree.

required to withhold the corresponding tax on the interest from

There is nothing in the ruling to suggest that it applies

only when deposits are maintained in a bank. Rather, the ruling

17

t
m
e
n
t

savings and time deposits of their members, which was reiterated

in BIR Ruling [DA-591-2006], applies to the instant case.
M
e
m
b
e
r
s

p
u
r
s
u
a
n
t

o
f

t
o

c
o
o
p
e
r
a
t
i
v
e
s

R
A
6
9
3
8
,
a
s

d
e
s
e
r
v
e

a
m
e
n
d
e
d

b
y

p
r
e
f
e
r
e
n
t
i
a
l

R
A
9
5
2
0
.

Given that petitioner is a credit cooperative duly

t
a
x

registered with the Cooperative Development Authority (CDA),

Section 24(B)(1) of the NIRC must be read together with RA

t
r
e
a

6938, as amended by RA 9520.

18

Under Article 2 of RA 6938, as amended by RA 9520,

cooperatives, this should be construed to include the members,

it is a declared policy of the State to foster the creation and growth

pursuant to Article 126 of RA 6938, which provides:

of cooperatives as a practical vehicle for promoting self-reliance

ART.
126. Interpretation
and
Construction. In case of doubt as to the
meaning of any provision of this Code or the
regulations issued in pursuance thereof, the
same shall be resolved liberally in favor of
the cooperatives and their members.

and harnessing people power towards the attainment of economic

development and social justice. Thus, to encourage the formation
of cooperatives and to create an atmosphere conducive to their
growth and development, the State extends all forms of assistance
to them, one of which is providing cooperatives a preferential tax

We need not belabor that what is within the spirit is

treatment.

within the law even if it is not within the letter of the law because
the spirit prevails over the letter.[31] Apropos is the ruling in the case

The legislative intent to give cooperatives a preferential

of Alonzo v. Intermediate Appellate Court,[32] to wit:

tax treatment is apparent in Articles 61 and 62 of RA 6938, which

But as has also been aptly

observed, we test a law by its results; and
likewise, we may add, by its purposes. It is a
cardinal rule that, in seeking the meaning of
the law, the first concern of the judge should
be to discover in its provisions the intent of
the lawmaker. Unquestionably, the law
should never be interpreted in such a way as
to cause injustice as this is never within the
legislative intent. An indispensable part of
that intent, in fact, for we presume the good
motives of the legislature, is to render
justice.

read:
ART. 61. Tax Treatment of Cooperatives.
Duly registered cooperatives under this
Code which do not transact any business
with non-members or the general public
shall not be subject to any government taxes
and fees imposed under the Internal
Revenue Laws and other tax laws.
Cooperatives not falling under this article
shall be governed by the succeeding section.
ART. 62. Tax and Other Exemptions.
Cooperatives transacting business with both
members and nonmembers shall not be
subject to tax on their transactions to
members. Notwithstanding the provision of
any law or regulation to the contrary, such
cooperatives dealing with nonmembers shall
enjoy the following tax exemptions; x x x.

Thus, we interpret and apply the

law not independently of but in consonance
with justice. Law and justice are inseparable,
and we must keep them so. To be sure, there
are some laws that, while generally valid,
may seem arbitrary when applied in a
particular case because of its peculiar
circumstances. In such a situation, we are
not bound, because only of our nature and
functions, to apply them just the same, [is]
slavish obedience to their language. What
we do instead is find a balance between the
word and the will, that justice may be done
even as the law is obeyed.

This exemption extends to members of cooperatives. It

must be emphasized that cooperatives exist for the benefit of their
members. In fact, the primary objective of every cooperative is to
provide goods and services to its members to enable them to attain

As judges, we are not

automatons. We do not and must not
unfeelingly apply the law as it is worded,
yielding like robots to the literal command
without regard to its cause and consequence.
Courts are apt to err by sticking too closely
to the words of a law, so we are warned, by
Justice Holmes again, where these words
import a policy that goes beyond them.
While we admittedly may not legislate, we
nevertheless have the power to interpret the
law in such a way as to reflect the will of the

increased income, savings, investments, and productivity.

[30]

Therefore, limiting the application of the tax exemption to

cooperatives would go against the very purpose of a credit

cooperative. Extending

the

exemption

to

members

of

cooperatives, on the other hand, would be consistent with the intent

of the legislature. Thus, although the tax exemption only mentions

19

legislature. While we may not read into the

law a purpose that is not there, we
nevertheless have the right to read out of it
the reason for its enactment. In doing so, we
defer not to the letter that killeth but to the
spirit that vivifieth, to give effect to the
lawmakers will.

enjoy the following tax exemptions:

(Underscoring ours)
xxxx

This amendment in Article 61 of RA 9520, specifically providing

The spirit,
rather than the letter
of
a
statute
determines
its
construction, hence, a
statute must be read
according to its spirit
or intent. For what is
within the spirit is
within the statute
although it is not
within the letter
thereof, and
that
which is within the
letter but not within
the spirit is not within
the statute. Stated
differently, a
thing
which is within the
intent
of
the
lawmaker is as much
within the statute as if
within the letter; and
a thing which is
within the letter of the
statute is not within
the statute unless
within the intent of
the
lawmakers.
(Underscoring ours)

that members of cooperatives are not subject to final taxes on their

deposits, affirms the interpretation of the BIR that Section 24(B)(1)
of the NIRC does not apply to cooperatives and confirms that such
ruling carries out the legislative intent. Under the principle of
legislative

approval

of

administrative

interpretation

by

reenactment, the reenactment of a statute substantially unchanged

is persuasive indication of the adoption by Congress of a prior
executive construction.[33]
Moreover, no less than our Constitution guarantees the protection
of cooperatives. Section 15, Article XII of the Constitution
considers cooperatives as instruments for social justice and
economic development. At the same time, Section 10 of Article II
of the Constitution declares that it is a policy of the State to
promote social justice in all phases of national development. In
relation thereto, Section 2 of Article XIII of the Constitution states
that the promotion of social justice shall include the commitment
to create economic opportunities based on freedom of initiative
and self-reliance. Bearing in mind the foregoing provisions, we
find that an interpretation exempting the members of cooperatives

It is also worthy to note that the tax exemption in RA

from the imposition of the final tax under Section 24(B)(1) of the

6938 was retained in RA 9520. The only difference is that Article

NIRC is more in keeping with the letter and spirit of our

61 of RA 9520 (formerly Section 62 of RA 6938) now expressly

Constitution.

states that transactions of members with the cooperatives are not

All told, we hold that petitioner is not liable to pay the

subject to any taxes and fees. Thus:

assessed deficiency withholding taxes on interest from the savings

ART. 61. Tax and Other Exemptions.

Cooperatives transacting business with both
members and non-members shall not be
subjected to tax on their transactions with
members. In relation to this, the transactions
of members with the cooperative shall not
be subject to any taxes and fees, including
but not limited to final taxes on members
deposits
and
documentary
tax. Notwithstanding the provisions of any
law or regulation to the contrary, such
cooperatives dealing with nonmembers shall

and time deposits of its members, as well as the delinquency

interest of 20% per annum.
In closing, cooperatives, including their members,
deserve a preferential tax treatment because of the vital role they
play in the attainment of economic development and social
justice. Thus, although taxes are the lifeblood of the government,
the States power to tax must give way to foster the creation and

20

shares at a par value of P100/share. ANSCOR is wholly

owned and controlled by the family of Don Andres, who
are all non-resident aliens. 4 In 1937, Don Andres
subscribed to 4,963 shares of the 5,000 shares originally
issued. 5

growth of cooperatives. To borrow the words of Justice Isagani A.

Cruz: The power of taxation, while indispensable, is not absolute
and may be subordinated to the demands of social justice.[34]

WHEREFORE,

the

Petition

On September 12, 1945, ANSCOR's authorized capital

stock was increased to P2,500,000.00 divided into 25,000
common shares with the same par value of the additional
15,000 shares, only 10,000 was issued which were all
subscribed by Don Andres, after the other stockholders
waived in favor of the former their pre-emptive rights to
subscribe to the new issues. 6 This increased his
subscription to 14,963 common shares. 7 A month
later, 8 Don Andres transferred 1,250 shares each to his two
sons, Jose and Andres, Jr., as their initial investments in
ANSCOR. 9 Both sons are foreigners. 10

is

hereby GRANTED. The assailed December 18, 2007 Decision

of the Court of Tax Appeals and the April 11, 2008 Resolution
are REVERSED and SET

ASIDE. Accordingly,

the

assessments for deficiency withholding taxes on interest from the

savings and time deposits of petitioners members for the taxable
years 1999 and 2000 as well as the delinquency interest of 20%
per annum are hereby CANCELLED.

By 1947, ANSCOR declared stock dividends. Other stock

dividend declarations were made between 1949 and
December 20, 1963. 11 On December 30, 1964 Don Andres
died. As of that date, the records revealed that he has a total
shareholdings of 185,154 shares 12 50,495 of which are
original issues and the balance of 134.659 shares as stock
dividend declarations. 13Correspondingly, one-half of that
shareholdings or 92,577 14 shares were transferred to his
wife, Doa Carmen Soriano, as her conjugal share. The
other half formed part of his estate. 15

SO ORDERED.

CIR vs CA
G.R. No. 108576 January 20, 1999
COMMISSIONER
OF
INTERNAL
REVENUE, petitioner,
vs.
THE COURT OF APPEALS, COURT OF TAX
APPEALS and A. SORIANO CORP., respondents.

A day after Don Andres died, ANSCOR increased its

capital stock to P20M 16 and in 1966 further increased it to
P30M. 17 In the same year (December 1966), stock
dividends worth 46,290 and 46,287 shares were
respectively received by the Don Andres estate 18 and Doa
Carmen from ANSCOR. Hence, increasing their
accumulated
shareholdings
to
138,867
and
138,864 19 common shares each. 20

MARTINEZ, J.:
Petitioner Commissioner of Internal Revenue (CIR) seeks
the reversal of the decision of the Court of Appeals
(CA) 1 which affirmed the ruling of the Court of Tax
Appeals (CTA) 2 that private respondent A. Soriano
Corporation's (hereinafter ANSCOR) redemption and
exchange of the stocks of its foreign stockholders cannot be
considered as "essentially equivalent to a distribution of
taxable dividends" under, Section 83(b) of the 1939 Internal
Revenue Act. 3

On December 28, 1967, Doa Carmen requested a ruling

from the United States Internal Revenue Service (IRS),
inquiring if an exchange of common with preferred shares
may be considered as a tax avoidance scheme 21under
Section 367 of the 1954 U.S. Revenue Act. 22 By January 2,
1968, ANSCOR reclassified its existing 300,000 common
shares into 150,000 common and 150,000 preferred
shares. 23
In a letter-reply dated February 1968, the IRS opined that
the exchange is only a recapitalization scheme and not tax
avoidance. 24 Consequently, 25 on March 31, 1968 Doa
Carmen exchanged her whole 138,864 common shares for
138,860 of the newly reclassified preferred shares. The
estate of Don Andres in turn, exchanged 11,140 of its

The undisputed facts are as follows:

Sometime in the 1930s, Don Andres Soriano, a citizen and
resident of the United States, formed the corporation "A.
Soriano Y Cia", predecessor of ANSCOR, with a
P1,000,000.00 capitalization divided into 10,000 common

21

common shares, for the remaining 11,140 preferred shares,

thus reducing its (the estate) common shares to 127,727. 26

or redeems stock issued as a

dividend atsuch 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)

On June 30, 1968, pursuant to a Board Resolution,

ANSCOR redeemed 28,000 common shares from the Don
Andres' estate. By November 1968, the Board further
increased ANSCOR's capital stock to P75M divided into
150,000 preferred shares and 600,000 common
shares. 27 About a year later, ANSCOR again redeemed
80,000 common shares from the Don Andres'
estate, 28 further reducing the latter's common shareholdings
to 19,727. As stated in the Board Resolutions, ANSCOR's
business purpose for both redemptions of stocks is to
partially retire said stocks as treasury shares in order to
reduce the company's foreign exchange remittances in case
cash dividends are declared. 29

Specifically, the issue is whether ANSCOR's

redemption of stocks from its stockholder as well
as the exchange of common with preferred shares
can be considered as "essentially equivalent to
the distribution of taxable dividend" making the
proceeds thereof taxable under the provisions of
the above-quoted law.

In 1973, after examining ANSCOR's books of account and

records, Revenue examiners issued a report proposing that
ANSCOR be assessed for deficiency withholding tax-atsource, pursuant to Sections 53 and 54 of the 1939 Revenue
Code, 30 for the year 1968 and the second quarter of 1969
based on the transactions of exchange 31 and redemption of
stocks. 31The Bureau of Internal Revenue (BIR) made the
corresponding assessments despite the claim of ANSCOR
that it availed of the tax amnesty under Presidential Decree
(P.D.) 23 32 which were amended by P.D.'s 67 and
157. 33 However, petitioner ruled that the invoked decrees
do not cover Sections 53 and 54 in relation to Article 83(b)
of the 1939 Revenue Act under which ANSCOR was
assessed. 34ANSCOR's subsequent protest on the
assessments was denied in 1983 by petitioner. 35

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
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. 39

Subsequently, ANSCOR filed a petition for review with the

CTA assailing the tax assessments on the redemptions and
exchange of stocks. In its decision, the Tax Court reversed
petitioner's ruling, after finding sufficient evidence to
overcome the prima facie correctness of the questioned
assessments. 36 In a petition for review the CA as
mentioned, affirmed the ruling of the CTA. 37 Hence, this
petition.

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, 40 and to (b)
subsequently "filipinized" ownership of ANSCOR, as
allegedly, envisioned by Don Andres. 41 It likewise invoked
the amnesty provisions of P.D. 67.

The bone of contention is the interpretation and application

of Section 83(b) of the 1939 Revenue Act 38 which
provides:

We must emphasize that the application of Sec. 83(b)

depends on the special factual circumstances of each
case.42 The findings of facts of a special court (CTA)
exercising particular expertise on the subject of tax,
generally binds this Court, 43 considering that it is
substantially similar to the findings of the CA which is the
final arbiter of questions of facts. 44 The issue in this case
does not only deal with facts but whether the law applies to
a particular set of facts. Moreover, this Court is not

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

22

necessarily bound by the lower courts' conclusions of law

drawn from such facts. 45

In the operation of the withholding tax system, the

withholding agent is the payor, a separate entity acting no
more than an agent of the government for the collection of
the tax 48 in order to ensure its payments; 49 the payer is the
taxpayer he is the person subject to tax impose by
law; 50 and the payee is the taxing authority. 51 In other
words, the withholding agent is merely a tax collector, not a
taxpayer. Under the withholding system, however, the
agent-payor becomes a payee by fiction of law. His (agent)
liability is direct and independent from the
taxpayer, 52 because the income tax is still impose on and
due from the latter. The agent is not liable for the tax as no
wealth flowed into him he earned no income. The Tax
Code only makes the agent personally liable for the
tax 53arising from the breach of its legal duty to withhold as
distinguish from its duty to pay tax since:

AMNESTY:
We will deal first with the issue of tax amnesty. Section 1
of P.D. 67 46 provides:
1. In all cases of voluntary disclosures
of previously untaxed income and/or
wealth such as earnings, receipts, gifts,
bequests or any other acquisitions from
any source whatsoever which are
taxable under the National Internal
Revenue Code, as amended, realized
here or abroad by any taxpayer, natural
or judicial; the collection of all internal
revenue taxes including the increments
or penalties or account of non-payment
as well as all civil, criminal or
administrative liabilities arising from or
incident to such disclosures under the
National Internal Revenue Code, the
Revised Penal Code, the Anti-Graft and
Corrupt Practices Act, the Revised
Administrative Code, the Civil Service
laws and regulations, laws and
regulations on Immigration and
Deportation, or any other applicable
law or proclamation, are hereby
condoned and, in lieu thereof, a tax of
ten (10%) per centum on such
previously untaxed income or wealth, is
hereby imposed, subject to the
following
conditions:
(conditions
omitted) [Emphasis supplied].

the government's cause of action

against the withholding 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. 54
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. 55 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. Thus, to curtail tax evasion and give
tax evaders a chance to reform, 56 it was deemed
administratively feasible to grant tax amnesty in certain
instances. In addition, a "tax amnesty, much like a tax
exemption, is never favored nor presumed in law and if
granted by a statute, the term of the amnesty like that of a
tax exemption must be construed strictly against the
taxpayer and liberally in favor of the taxing authority. 57 The
rule on strictissimi juris equally applies. 58 So that, any
doubt in the application of an amnesty law/decree should be
resolved in favor of the taxing authority.

The decree condones "the collection of all

internal revenue taxes including the increments or
penalties or account of non-payment as well as all
civil, criminal or administrative liable arising
from or incident to" (voluntary) disclosures under
the NIRC of previously untaxed income and/or
wealth "realized here or abroad by any taxpayer,
natural or juridical."
May the withholding agent, in such capacity, be deemed a
taxpayer for it to avail of the amnesty? An income taxpayer
covers all persons who derive taxable income. 47 ANSCOR
was assessed by petitioner for deficiency withholding tax
under Section 53 and 54 of the 1939 Code. As such, it is
being held liable in its capacity as a withholding agent and
not its personality as a taxpayer.

Furthermore, ANSCOR's claim of

amnesty
cannot
prosper.
The
implementing rules of P.D. 370 which
expanded amnesty on previously

23

capital, 69 from labor or from both combined 70 so that to

tax a stock dividend would be to tax a capital increase
rather than the income. 71 In a loose sense, stock dividends
issued by the corporation, are considered unrealized gain,
and cannot be subjected to income tax until that gain has
been realized. Before the realization, stock dividends are
nothing but a representation of an interest in the corporate
properties. 72 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. 73 The determining factor for the
imposition of income tax is whether any gain or profit was
derived from a transaction. 74

untaxed income under P.D. 23 is very

explicit, to wit:
Sec. 4. Cases not covered by amnesty.
The following cases are not covered
by the amnesty subject of these
regulations:
xxx xxx xxx
(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

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).

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
General Rule
Sec. 83(b) of the 1939 NIRC was taken from the Section
115(g)(1) of the U.S. Revenue Code of 1928. 60 It laid down
the general rule known as the proportionate test 61 wherein
stock dividends once issued form part of the capital and,
thus, subject to income tax. 62 Specifically, the general rule
states that:

In a response to the ruling of the American Supreme Court

in the case of Eisner v. Macomber 75 (that pro ratastock
dividends are not taxable income), the exempting clause
above quoted was added because provision corporation
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 issuanceredemption amounts to a distribution of taxable cash
dividends which was lust delayed so as to escape the tax. It
becomes a convenient technical strategy to avoid the effects
of taxation.

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. 63 So that the mere issuance thereof is not yet
subject to income tax 64 as they are nothing but an
"enrichment through increase in value of capital
investment." 65 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." 66 Income in tax
law is "an amount of money coming to a person within a
specified time, whether as payment for services, interest, or
profit from investment." 67 It means cash or its
equivalent. 68 It is gain derived and severed from

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

24

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. 76 Thus,

regular dividends
and
the
corporation's past
record with respect
to the declaration of
dividends,

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. 77

3) the effect of the

distribution,
as
compared with the
declaration
of
regular dividend,
4) the lapse of time
between issuance
and redemption, 86

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. 78 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. 79Having
realized gain from that redemption, the income
earner cannot escape income tax. 80

5) the presence of a
substantial
surplus 87 and
a
generous supply of
cash which invites
suspicion as does a
meager policy in
relation both to
current
earnings
and
accumulated
surplus, 88

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. 81 So that, whether the
amount distributed in the redemption should be treated as
the equivalent of a "taxable dividend" is a question of
fact, 82 which is determinable on "the basis of the particular
facts of the transaction in question. 83 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. 84 On this aspect,
American courts developed certain recognized criteria,
which includes the following: 85

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 89 in exchange for
property, whether or not the acquired stock is cancelled,
retired or held in the treasury.90 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

1) the presence or
absence of real
business purpose,
2) the amount of
earnings and profits
available for the
declaration of a

25

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.

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. 100 Redemption cannot be used as a cloak to
distribute corporate earnings. 101 Otherwise, the apparent
intention to avoid tax becomes doubtful as the intention to
evade becomes manifest. It has been ruled that:
[A]n operation with no business or
corporate purpose is a mere devise
which put on the form of a corporate
reorganization as a disguise for
concealing its real character, and the
sole object and accomplishment of
which was the consummation of a
preconceived plan, not to reorganize a
business or any part of a business, but
to transfer a parcel of corporate shares
to a stockholder. 102

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 91 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 92such 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. 93 Once capital, it is always
capital. 94 That doctrine was intended for the protection of
corporate creditors. 95

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. The Court is not concerned with the
wisdom of these purposes but on their relevance to the
whole transaction which can be inferred from the outcome
thereof. Again, it is the "net effect rather than the motives
and plans of the taxpayer or his corporation" 104 that is the
fundamental guide in administering Sec. 83(b). This tax
provision is aimed at the result. 105 It also applies even if at
the time of the issuance of the stock dividend, there was no
intention to redeem it as a means of distributing profit or
avoiding tax on dividends. 106 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". 107 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.

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. 96 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. 97 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. 98 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. 99

26

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. 109

Although the existence of legitimate corporate purposes

may justify a corporation's acquisition of its own shares
under Section 41 of the Corporation Code, 115such 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. 116
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. Such
corporate plan was not stated in nor supported by any
Board Resolution but a mere afterthought interposed by the
counsel of ANSCOR. Being a separate entity, the
corporation can act only through its Board of
Directors. 117 The Board Resolutions authorizing the
redemptions state only one purpose reduction of foreign
exchange remittances in case cash dividends are declared.
Not even this purpose can be given credence. Records show
that despite the existence of enormous corporate profits no
cash dividend was ever declared by ANSCOR from 1945
until the BIR started making assessments in the early
1970's. Although a corporation under certain exceptions,
has the prerogative when to issue dividends, yet when no
cash dividends was issued for about three decades, this
circumstance negates the legitimacy of ANSCOR's alleged
purposes. Moreover, to issue stock dividends is to increase
the shareholdings of ANSCOR's foreign stockholders
contrary to its "filipinization" plan. This would also
increase rather than reduce their need for foreign exchange
remittances in case of cash dividend declaration,
considering that ANSCOR is a family corporation where
the majority shares at the time of redemptions were held by
Don Andres' foreign heirs.

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. 110 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.
Such argument would open the door for income earners not
to pay tax so long as the person from whom the income was
derived has legitimate business reasons. In other words, 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
Bureau of Internal Revenue (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", 111 or the "redeemed shares have
been issued by a corporation bona fide" 112 bears no
relevance in determining the non-taxability of the proceeds
of redemption ANSCOR, relying heavily and applying said
cases, argued that so long as the redemption is supported by
valid corporate purposes the proceeds are not subject to
tax. 113 The adoption by the courts below 114 of such
argument is misleading if not misplaced. 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.

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. Furthermore,
even if the said purposes support the redemption and justify
the issuance of stock dividends, the same has no bearing
whatsoever on the imposition of the tax herein assessed
because the proceeds of the redemption are deemed taxable
dividends since it was shown that income was generated
therefrom.

27

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 119 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.

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. 125
Reclassification of shares does not always bring any
substantial alteration in the subscriber's proportional
interest. But the exchange is different there would be a
shifting of the balance of stock features, like priority in
dividend declarations or absence of voting rights. Yet
neither the reclassification nor exchange per se, yields
realize income for tax purposes. A common stock
represents the residual ownership interest in the
corporation. It is a basic class of stock ordinarily and
usually issued without extraordinary rights or privileges
and entitles the shareholder to a pro rata division of
profits. 126 Preferred stocks are those which entitle the
shareholder to some priority on dividends and asset
distribution. 127

After considering the manner and the circumstances by

which the issuance and redemption of stock dividends were
made, 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 21 120 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.
EXCHANGE
OF
COMMON
PREFERRED SHARES 121

Both shares are part of the corporation's capital stock. Both

stockholders are no different from ordinary investors who
take on the same investment risks. Preferred and common
shareholders participate in the same venture, willing to
share
in
the
profits
and
losses
of
the
enterprise. 128 Moreover, under the doctrine of equality of
shares all stocks issued by the corporation are presumed
equal with the same privileges and liabilities, provided that
the Articles of Incorporation is silent on such
differences. 129

WITH

Exchange is an act of taking or giving one thing for another

involving 122 reciprocal
transfer 123 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. This is true in a trade
between two (2) persons as well as a trade between a
stockholder and a corporation. In general, this trade must be
parts of merger, transfer to controlled corporation,
corporate acquisitions or corporate reorganizations. No
taxable gain or loss may be recognized on exchange of
property, stock or securities related to reorganizations. 124

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. 130
WHEREFORE, premises considered, the decision of the
Court of Appeals is MODIFIED in that ANSCOR's

28

redemption of 82,752.5 stock dividends is herein

considered as essentially equivalent to a distribution of
taxable dividends for which it is LIABLE for the
withholding tax-at-source. The decision is AFFIRMED in
all other respects.

dividend on the said 108,000 shares. On June 10, 1948,

Mary McDonald Bachrach, as usufructuary or life tenant of
the estate, petitioned the lower court to authorize the
Peoples Bank and Trust Company as administrator of the
estate of E. M. Bachrach, to her the said 54,000 share of
stock dividend by endorsing and delivering to her the
corresponding certificate of stock, claiming that said
dividend, although paid out in the form of stock, is fruit or
income and therefore belonged to her as usufructuary or life
tenant. Sophie Siefert and Elisa Elianoff, legal heirs of the
deceased, opposed said petition on the ground that the stock
dividend in question was not income but formed part of the
capital and therefore belonged not to the usufructuary but to
the remainderman. And they have appealed from the order
granting the petition and overruling their objection.

SO ORDERED.

Testate Estate of Bachrach

G.R. No. L-2659
October 12, 1950
In the matter of the testate estate of Emil Maurice
Bachrach,
deceased.
MARY
McDONALD
BACHRACH,petitioner-appellee,
vs.
SOPHIE SEIFERT and ELISA ELIANOFF, oppositorsappellants.

While appellants admits that a cash dividend is an income,

they contend that a stock dividend is not, but merely
represents an addition to the invested capital. The so-called
Massachusetts rule, which prevails in certain jurisdictions
in the United States, supports appellants' contention . It
regards cash dividends, however large, as income, and
stock dividends, however made, as capital. (Minot vs.
Paine, 99 Mass., 101; 96 Am. Dec., 705.) It holds that a
stock dividend is not in any true sense any true sense any
dividend at all since it involves no division or severance
from the corporate assets of the dividend; that it does not
distribute property but simply dilutes the shares as they
existed before; and that it takes nothing from the property
of the corporation, and nothing to the interests of the
shareholders.

Ross, Selph, Carrascoso and Janda for appellants.

Delgado and Flores for appellee.

OZAETA, J.:
Is a stock dividend fruit or income, which belongs to the
usufructuary, or is it capital or part of the corpus of the
estate, which pertains to the remainderman? That is the
question raised in the appeal.
The deceased E. M. Bachrach, who left no forced heir
except his widow Mary McDonald Bachrach, in his last
will and testament made various legacies in cash and willed
the remainder of his estate as follows:

On the other hand, so called Pennsylvania rule, which

prevails in various other jurisdictions in the United States,
supports appellee's contention. This rule declares that all
earnings of the corporation made prior to the death of the
testator stockholder belong to the corpus of the estate, and
that all earnings, when declared as dividends in whatever
form, made during the lifetime of the usufructuary or life
tenant. (Earp's Appeal, 28 Pa., 368.)

Sixth: It is my will and do herewith bequeath and

devise to my beloved wife Mary McDonald
Bachrach for life all the fruits and usufruct of the
remainder of all my estate after payment of the
legacies, bequests, and gifts provided for above;
and she may enjoy said usufruct and use or spend
such fruits as she may in any manner wish.

. . . It is clear that testator intent the

remaindermen should have only the corpus of the
estate he left in trust, and that all dividends
should go the life tenants. It is true that profits
realized are not dividends until declared by the
proper officials of the corporation, but
distribution of profits, however made, in
dividends, and the form of the distribution is
immaterial. (In re Thompson's Estate, 262 Pa.,
278; 105 Atl. 273, 274.)

The will further provided that upon the death of Mary

McDonald Bachrach, one-half of the all his estate "shall be
divided share and share alike by and between my legal
heirs, to the exclusion of my brothers."
The estate of E. M. Bachrach, as owner of 108,000 shares
of stock of the Atok-Big Wedge Mining Co., Inc., received
from the latter 54,000 shares representing 50 per cent stock

29

In Hite vs. Hite (93 Ky., 257; 20 S. W., 778, 780), the Court
of Appeals of Kentucky, speaking thru its Chief Justice,
said:

16 of our Corporation Law, no corporation may make or

declare any dividend except from the surplus profits arising
from its business. Any dividend, therefore, whether cash or
stock, represents surplus profits. Article 471 of the Civil
Code provides that the usufructuary shall be entitled to
receive all the natural, industrial, and civil fruits of the
property in usufruct. And articles 474 and 475 provide as
follows:

. . . Where a dividend, although declared in stock,

is based upon the earnings of the company, it is in
reality, whether called by one name or another,
the income of the capital invested in it. It is but a
mode of distributing the profit. If it be not
income, what is it? If it is, then it is rightfully and
equitably the property of the life tenant. If it be
really profit, then he should have it, whether paid
in stock or money. A stock dividend proper is the
issue of new shares paid for by the transfer of a
sum equal to their par value from the profits and
loss account to that representing capital stock;
and really a corporation has no right to a
dividend, either in cash or stock, except from its
earnings; and a singular state of case it seems
to us, an unreasonable one is presented if the
company, although it rests with it whether it will
declare a dividend, can bind the courts as to the
proper ownership of it, and by the mode of
payment substitute its will for that of that of the
testator, and favor the life tenants or the
remainder-men, as it may desire. It cannot, in
reason, be considered that the testator
contemplated such a result. The law regards
substance, and not form, and such a rule might
result not only in a violation of the testator's
intention, but it would give the power to the
corporation to beggar the life tenants, who, in this
case, are the wife and children of the testator, for
the benefit of the remainder-men, who may
perhaps be unknown to the testator, being unborn
when the will was executed. We are unwilling to
adopt a rule which to us seems so arbitrary, and
devoid of reason and justice. If the dividend be in
fact a profit, although declared in stock, it should
be held to be income. It has been so held in
Pennsylvania and many other states, and we think
it the correct rule. Earp's Appeal, 28 Pa. St. 368;
Cook, Stocks & S. sec. 554. . . .

ART. 474. Civil fruits are deemed to accrue day

by day, and belong to the usufructuary in
proportion to the time the usufruct may last.
ART. 475. When a usufruct is created on the right
to receive an income or periodical revenue, either
in money or fruits, or the interest on bonds or
securities payable to bearer, each matured
payment shall be considered as the proceeds or
fruits such right.
When it consists of the enjoyment of the benefits
arising from an interest in an industrial or
commercial enterprise, the profits of which are
not distributed at fixed periods, such profits shall
have the same consideration.lawphil.net
In either case they shall be distributed as civil
fruits, and shall be applied in accordance with the
rules prescribed by the next preceding article.
The 108,000 shares of stock are part of the property in
usufruct. The 54,000 shares of stock dividend are civil
fruits of the original investment. They represent profits, and
the delivery of the certificate of stock covering said
dividend is equivalent to the payment of said profits. Said
shares may be sold independently of the original shares,
just as the offspring of a domestic animal may be sold
independently of its mother.
The order appealed from, being in accordance with the
above-quoted provisions of the Civil Code, his hereby
affirmed, with costs against the appellants.
Moran, C. J., Paras, Feria, Pablo, Bengzon, Tuason,
Montemayor and Reyes, JJ., concur.

We think the Pennsylvania rule is more in accord with our

statutory laws than the Massachusetts rule. Under section

30