This case involves a trust agreement between the majority stockholder of MANTRASCO, Reese, and three minority stockholders, Manning, McDonald, and Simmons. Upon Reese's death, his shares were to be purchased by the company per the trust agreement. Years later, Reese's shares were invalidly declared as stock dividends and distributed to the three minority stockholders. The Supreme Court ruled the dividend declaration was void but the transaction was still subject to income tax, as the minority stockholders had effectively received income in the form of Reese's shares. The case was remanded to recompute the tax liability.
This case involves a trust agreement between the majority stockholder of MANTRASCO, Reese, and three minority stockholders, Manning, McDonald, and Simmons. Upon Reese's death, his shares were to be purchased by the company per the trust agreement. Years later, Reese's shares were invalidly declared as stock dividends and distributed to the three minority stockholders. The Supreme Court ruled the dividend declaration was void but the transaction was still subject to income tax, as the minority stockholders had effectively received income in the form of Reese's shares. The case was remanded to recompute the tax liability.
This case involves a trust agreement between the majority stockholder of MANTRASCO, Reese, and three minority stockholders, Manning, McDonald, and Simmons. Upon Reese's death, his shares were to be purchased by the company per the trust agreement. Years later, Reese's shares were invalidly declared as stock dividends and distributed to the three minority stockholders. The Supreme Court ruled the dividend declaration was void but the transaction was still subject to income tax, as the minority stockholders had effectively received income in the form of Reese's shares. The case was remanded to recompute the tax liability.
COURT OF TAX APPEALS August 6, 1975 | Castro, J. | Passive Income: Dividends Digester: Jeff Batac SUMMARY: Reese, the majority stockholder (with 24,700 out of the 25,000 common shares) of MANTRASCO, executed a trust agreement between him and three minority stockholders, namely Manning, McDonald, and Simmons, each of whom owned 100 common shares. Reese wanted MANTRASCO to remain under the management of the three minority stockholders even after his death, hence the trust agreement. Upon Reese's death, MANTRASCO paid his estate the value of his shares. Subsequently, Reese's shares were declared as dividends and were proportionately distributed to Manning, McDonald, and Simmons. No income tax was paid by any of them. The BIR later assessed the three with deficiency income tax, as well as fraud penalties and interest charges, saying that the distribution of Reese's shares as stock dividends was in effect a distribution of the assets or property of the corporation, which should have been taxable. The CTA reversed the BIR assessment, saying that the respective 1/3 interest in MANTRASCO of Manning, McDonald, and Simmons remained the same before and after the declaration of the stock dividends and only the number of shares held by each of them had changed. The SC ruled otherwise and held that the declaration of Reese's shares as dividends was null and void, and that the subject transaction was in fact subject to the payment of income tax. As such, the Court remanded the case to the CTA for the recomputation of income tax liabilities of Manning, McDonald, and Simmons. DOCTRINE: A dividend is any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits. A stock dividend is a conversion of surplus or undivided profits into capital stock, which is distributed to stockholders in lieu of a cash dividend. Under the National Internal Revenue Code, income tax is assessed on income received from any property, activity or service that produces income. The Tax Code stands as an indifferent, neutral party on the matter of where the income comes from. FACTS:
Part I. THE TRUST AGREEMENT
In 1952, the Manila Trading and Supply Co. (MANTRASCO) had an authorized capital stock of P2.5M divided into 25,000 common shares; 24,700 of these were owned by Julius S. Reese, and the rest, at 100 shares each, by John Manning, W.D. McDonald, and E.E. Simmons (otherwise known as the "managers"). In the same year, prompted by his desire to keep MANTRASCO and its two subsidiaries under the management of the managers even after his death, Reese executed a trust agreement between him, MANTRASCO, the managers, and the law firm Ross, Selph, Carrascoso and Janda. The trust agreement provided that after Reese's death, MANTRASCO shall purchase Reese's shares. Reese passed away in 1954. A year later, the certificate for his 24,700 shares was cancelled and a new certificate was issued in the name of MANTRASCO. But since the company did not have sufficient money yet for the payment of said shares, the certificate was endorsed to the law firm Ross, Selph, Carrascoso and Janda as trustees for and in behalf of MANTRASCO. In 1958, at a special meeting of MANTRASCO stockholders, it was resolved that the 24,700 shares be reverted back to the capital account of the company as a stock dividend to be distributed to the shareholders. In 1963, MANTRASCO was finally able to pay the value of the 24,700 shares in full. So in 1964, the trust agreement was terminated and the law firm delivered to MANTRASCO all the shares which they were holding in trust. Part. II. DEFICIENCY TAX ASSESSMENT In 1962, the BIR ordered the examination of MANTRASCO's books. The examination disclosed that: o as of December 31, 1958, the 24,700 shares declared as dividends had been proportionately distributed to the the three managers, representing a total book value or acquisition cost of P7,973,660; o that the three managers failed to declare the said stock dividends as part of their taxable income for the year 1958; and o that from 1956 to 1961, MANTRASCO paid in increments to Reese's estate the value of the 24,700 shares he used to own.
On the basis of their examination, the BIR examiners
concluded that the distribution of Reeses shares as stock dividends was in effect a distribution of the "asset or property of the corporation as may be gleaned from the payment of cash for the redemption of said stock and distributing the same as stock dividend." According to Sec. 83 of the NIRC, "Where a corporation distributes all of its assets in complete liquidation or dissolution the gain realized or loss sustained by the stockholder, whether individual or corporate, is a taxable income or deductible loss, as the case may be." So on April 14, 1965, the Commissioner of Internal Revenue issued notices of assessment for deficiency income taxes to the three managers (herein respondents) for the year 1958. The three managers challenged the said assessment, arguing that regardless of the distribution of the dividends, their respective 1/3 interest in the company remained the same. They cited Sec. 252 of the BIR Regulations as basis for non-payment of income tax: "A stock dividend constitutes income if it gives the shareholder an interest different from that which his former stockholdings represented. A stock dividend does not constitute income if the new shares confer no different rights or interests than did the old." Still, the CIR dismissed their complaint. On appeal, the CTA reversed CIR's tax assessment and absolved the three managers from any tax liability. The CTA held that the respective 1/3 interest in MANTRASCO of the three managers remained the same before and after the declaration of stock dividends and only the number of shares held by each of them had changed. Hence, the instant petition by the CIR.
RULING: Petition granted. CTA ruling reversed. Case remanded
to the CTA for the recomputation of the tax liability of the three managers. Whether the declaration of Reese's shares as treasury stock dividends is valid. NO. Reese's shares cannot be declared as treasury stock dividends, mainly because they were not treasury shares to begin with. (See NOTES for the essential features of treasury shares.) In fact, the essential features of treasury shares were lacking in Reese's shares. (See NOTES why Reese's shares are not treasury shares.)
The manifest intention of the parties to the trust agreement
was to treat the 24,700 shares of Reese as absolutely outstanding shares of Reeses estate until they were fully paid. Such being the true nature of the 24,700 shares, their declaration as treasury stock dividend in 1958 was a complete nullity and plainly violative of public policy. A stock dividend, being one payable in capital stock, cannot be declared out of outstanding corporate stock, but only from retained earnings.
Whether the distribution of the dividends proportionately to
the three managers is subject to income tax, notwithstanding the invalidity of the declaration of Reeses shares as dividends. YES. The real purpose of the declaration of Reese's shares as dividends is to make the managers the sole owners of Reeses interest in MANTRASCO by utilizing the periodic earnings of that company and its subsidiaries to directly subsidize their purchase of the said interests, and by making it appear outwardly, through the formal declaration of non-existent stock dividends in the treasury, that they have not received any income from those firms when, in fact, by that declaration they secured to themselves the means to turn around as full owners of Reeses shares. In other words, the managers, using the trust instrument as a convenient technical device, bestowed unto themselves the full worth and value of Reeses corporate holdings with the use of the very earnings of the companies. Such package device cannot be allowed to deflect the threee managers' responsibilities toward income tax laws. Whenever MANTRASCO parted with a portion of its earnings "to buy" the corporate holdings of Reese, it was in effect making a distribution of such earnings to the managers. All these amounts are consequently subject to income tax as being, in truth and in fact, a flow of cash benefits to the managers. Regardless of the invalidity of the board resolution declaring Reese's shares as dividends, the subject transaction remains subject to tax. Under the NIRC, income tax is assessed on income received from any property, activity or service that produces income. The Tax Code stands as an indifferent, neutral party on the matter of where the income comes from. But the case still needs to be remanded to the CTA because the CIR made an error in the computation of the managers' tax liabilities by assessing the managers the total acquisition cost
(P7,973,660) of the alleged treasury stock dividends in one
lump sum.. Records show that that the earnings of MANTRASCO over a period of years were used to gradually wipe out the holdings of Reese. Consequently, those earnings should be taxed for each of the corresponding years when payments were made to Reeses estate on account of his 24,700 shares. NOTES: Essential features of treasury shares: o Treasury shares are stocks issued and fully paid for and reacquired by the corporation either by purchase, donation, forfeiture or other means. o Treasury shares are therefore issued shares, but being in the treasury they do not have the status of outstanding shares. o Consequently, although a treasury share, not having been retired by the corporation re-acquiring it, may be re-issued or sold again, such share, as long as it is held by the corporation as a treasury share, participates neither in dividends, because dividends cannot be declared by the corporation to itself, nor in the meetings of the corporation as voting stock, for otherwise equal distribution of voting powers among stockholders will be effectively lost and the
directors will be able to perpetuate their control of the
corporation, though it still represents a paid-for interest in the property of the corporation. Why Reese's shares are not treasury shares: o under paragraph 4(c) of the trust agreement, the trustees were authorized to vote all stock standing in their names at all meetings and to exercise all rights "as owners of said shares" this authority is reiterated in paragraphs 26 and 28 of the trust agreement; o under paragraph 4(d), "Any and all dividends paid on said shares after the death of the OWNER shall be subject to the provisions of this agreement;" o under paragraph 5(b), the amount of retained earnings to be declared as dividends was made subject to the approval of the trustees of the 24,700 shares; o under paragraph 5(c), the choice of corporate directors was delegated exclusively to the trustees who were also given the authority to transfer qualifying shares to such directors; and o under paragraph 19, MANTRASCO and its two subsidiaries were expressly prohibited from paying "dividends except as may be authorized by the TRUSTEES;" in the same paragraph mention was also made of "dividends on OWNERS SHARES" which shall be applied to the liquidation of the liabilities of the three companies for the price of Reeses shares.
MSCI-NACUSIP Local Chapter, Petitioner, vs. NATIONAL WAGES and Productivity Commission and Monomer Sugar CENTRAL, INC., Respondents. G.R. No. 125198. March 3, 1997 Facts