COMMISSIONER OF INTERNAL REVENUE vs.

MANNING
L-28398 | Aug 6, 1975 | Petition for Review |
Castro
Petitioner: Commissioner
of
Internal
Revenue
Respondents:
John
Manning,
W.D.
McDonald, E.E. Simmons & CTA
Quick Summary:
Facts: Reese, the majority stockholder of Mantrasco,
executed a trust agreement between him, Mantrasco, Ross,
Selph, carrascoso & Janda law firm and the minority
stockholders, Manning, McDonald and Simmons. Said
agreement was entered into because of Reeses desire that
Mantrasco and Mantrasocs 2 subsidiaries, Mantrasco Guam
and Port Motors, to continue under the management of
Manning, McDonald and Simmons upon his [Reese] death.
When Reese died, Mantrasco paid Reeses estate the value of
his shares. When said purchase price has been fully paid, the
24,700 shares, which were declared as dividends, were
proportionately distributed to Manning, McDonald and
Simmons. Because of this, the BIR issued assessments on
Manning, McDonald and Simmons for deficiency income tax
for 1958. Manning et al, opposed this assessment but the BIR
still found them liable. Manning et al. appealed to the CTA,
which absolved them from any liability.
Held: The manifest intention of the parties to the trust
agreement was, in sum and substance, to treat the 24,700
shares of Reese as absolutely outstanding shares of Reese's
estate until they were fully paid. Such being the true nature of
the 24,700 shares, their declaration as treasury stock
dividend in 1958 was a complete nullity and plainly violative
of public policy. A stock dividend, being one payable in capital
stock, cannot be declared out of outstanding corporate stock,
but only from retained earnings.
A stock dividend always involves a transfer of surplus (or
profit) to capital stock. A stock dividend is a conversion of
surplus or undivided profits into capital stock, which is
distributed to stockholders in lieu of a cash dividend.

Facts:
1952 - Mantrasco had an authorized
capital stock of P2.5M divided into 25,000
common shares. 24,700 of these shares
are owned by Julius Reese while the rest,
at 100 each, are owned by Manning,
McDonald & Simmons.
February 29, 1958 - a trust agreement was
executed between Reese, Mantrasco,
Ross, Selph, carrascoso & Janda law firm,
Manning, McDonald and Simmons. Said
agreement was entered into because of
Reeses desire that Mantrasco and
Mantrasocs 2 subsidiaries, Mantrasco
Guam and Port Motors, to continue under
the management of Manning, McDonald
and Simmons upon his [Reese] death.
October 19, 1954 - Reese died. However,
the projected transfer of his shares in the
name of Mantrasco could not be
immediately effected for lack of sufficient
funds to cover the initial payment on the
shares.
February 2, 1955 - after Mantrasco made a
partial payment of Reese's shares, the
certificate for the 24,700 shares in Reese's

name was cancelled and a new certificate

was issued in the name of Mantrasco.
Also, new certificate was endorsed to the
law firm of Ross, Selph, Carrascoso and
Janda, as trustees for and in behalf of
Mantrasco.
December 22, 1958 - a resolution was
passed during a special meeting of
Mantrasco stockholders.
November 25, 1963 - entire purchase
price of Reese's interest in Mantrasco was
finally paid in full by Mantrasco.
May 4, 1964 - trust agreement was
terminated and the trustees delivered to
Mantrasco all the shares which they were
holding in trust.
September 14, 1962 - BIR ordered an
examination of Mantrascos books. This
examination disclosed that:
1. as of December 31, 1958 the 24,700
shares declared as dividends had been
proportionately distributed to Manning,
McDonald & Simmons, representing a
total book value or acquisition cost of
P7,973,660
2. Manning, McDonald & Simmons failed
to declare the said stock dividends as
part of their taxable income for the
year 1958
Thus, BIR examiners concluded that the
distribution of Reese's shares as
stock dividends was in effect a
distribution of the "asset or property
of the corporation as may be gleaned
from the payment of cash for the
redemption
of
said
stock
and
distributing the same as stock
dividend."
April 14, 1965 - Commissioner of Internal
Revenue issued notices of assessment for
deficiency income taxes to Manning,
McDonald & Simmons for the year 1958.
Manning, McDonald & Simmons opposed
said assessments. BIR still held them
liable for these assessments.
Manning, McDonald & Simmons appealed
to the CTA.
CTA: absolved Manning, McDonald &
Simmons from any liability on the
ground that their respective 1/3
interest in Mantrasco remained the
same before and after the declaration
of stock dividends and only the
number of shares held by each of
them changed.
Issues:
1. WON the shares are treasury shares [NO]
2. WON Manning, McDonald & Simmons
should pay for deficiency income taxes
[YES]
Ratio:

1. Treasury shares are stocks issued and

fully paid for and re-acquired by the
corporation
either
by
purchase,
donation, forfeiture or other means.
Treasury shares are therefore issued
shares, but being in the treasury they
do not have the status of outstanding
shares.
Consequently,
although
a
treasury share, not having been
retired
by
the
corporation
reacquiring it, may be re-issued or sold
again, such share, as long as it is held
by the corporation as a treasury
share,
participates
neither
in
dividends, because dividends cannot be
declared by the corporation to itself, nor
in the meetings of the corporation as
voting stock, for otherwise equal
distribution of voting powers among
stockholders will be effectively lost and
the directors will be able to perpetuate
their control of the corporation, though it
still represents a paid-for interest in the
property of the corporation.
In this case, such essential features
of a treasury share are lacking in
the former shares of Reese.
The manifest intention of the
parties to the trust agreement
was, in sum and substance, to treat
the 24,700 shares of Reese as
absolutely outstanding shares of
Reese's estate until they were
fully paid. Such being the true nature
of
the
24,700
shares,
their
declaration as treasury stock
dividend in 1958 was a complete
nullity and plainly violative of
public policy. A stock dividend,
being one payable in capital stock,
cannot
be
declared
out
of
outstanding corporate stock, but
only from retained earnings.
Nature of a stock dividend
A stock dividend always involves a
transfer of surplus (or profit) to capital
stock.
A stock dividend is a conversion of
surplus or undivided profits into capital
stock,
which
is
distributed
to
stockholders in lieu of a cash dividend.
2. The ultimate purpose which the parties
to the trust agreement aimed to realize is
to make Manning, McDonalds &
Simmons the sole owners of Reeses
interest in Mantrasco by utilizing the
periodic earnings of Mantrasco and
its subsidiaries to directly subsidize
their purchase of said interests and by

making it appear that they have not

received any income from those firms
when, in fact, by the formal declaration of
non-existent stock dividends in the
treasury they secured to themselves the
means to turn around as full owners of
Reeses shares.
Manning, McDonald & Simmons, using

the trust instrument as a convenient

technical device, bestowed unto
themselves the full worth and value of
Reese's corporate holdings with the use
of the very earnings of the companies.
Such package device, obviously not
designed to carry out the usual stock
dividend purpose of corporate expansion
reinvestment but exclusively for
expanding the capital base of Manning,
McDonald & Simmons in Mantrasco,
cannot be allowed to deflect their
responsibilities toward our income tax
laws.
All these amounts are subject to
income tax as being a flow of cash
benefits to Manning, McDonald &
Simmons.

Commissioners
assessment
is
erroneous
Commissioner
should
not
have
assessed the income tax on the total
acquisition cost of the alleged treasury
stock dividends in 1 lump sum.
The record shows that the earnings of
Mantrasco over a period of years were
used to gradually wipe out the
holdings of Reese.
Consequently, those earnings should
be taxed for each of the corresponding
years when payments were made to
Reeses estate on account of his
24,700 shares.
Dispositive: CTA judgment set aside. Case
remanded to the CTA for further proceedings for
the recomputation of the income tax liabilities of
Manning, McDonald & Simmons.