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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.
Facts:

1m capitalization (10,000 common shares at a par value of 100php/share)


Don Andres subscribed to 4,963 shares of the 5,000 originally issued.
Increased to
2.5m capital stock (25,000 common shares at a par value of 100php/share)
10,000 were only issued from the 15,000 additional shares. All of which was
subscribed by DA
Due to the above, Don Andres had 14,963 common shares
DA transferred 1,250 shares each to sons Jose and Andres Jr., leaving DA with
12,463 shares
DA died leaving 185,154 shares (50,945 original issues and 134,659 shares
as stock dividend declarations.)
92,577 shares were transferred to DAs wife, Carmen Soriano (DC), as her
Conjugal share. The other half to the estate
ANSCOR increased its capital stock to P20M and subsequently to P30M
Stock Dividends worth 46,290 and 46,287 shares were respectively received
by DA estate and Carmen from ANSCOR. Increasing their accumulated
shareholdings to 138,867 and 138,864 common shares each
On the matter on whether or not an exchange of common with preferred
share may be considered as a tax avoidance scheme, the IRS opined that the
exchange is only a recapitalization scheme and not tax avoidance.
DC exchanged her whole 138, 864 common shares for 138,860 preferred
shares, Estate of DA exchanged 11,140 common shares for the remaining
11,140 preferred shares, reducing the estate common shares to 127,727
ANSCOR redeemed 28,000 common shares from DAs estate. First
redemption from DAs estate
ANSCORs capital stock was increased to P75M divided into 150,000 preferred
shares and 600,000 common shares.
ANSCOR, again redeemed 80,000 common shares from the DAs estate
Second redemption from DAs Estate
It decreased DAs estate common shareholdings to 19,727.
ANSCOR was assessed for deficiency withholding tax-at-source
BIR proceeded with the assessment notwithstanding the claim of ANSCOR
that it availed of the tax amnesty under PD 23 which were amended by PDs
67 and 157. CIR ruled that the invoked decrees do not cover Sections 53 and
54 in relation to Sec 83(b) which ANSCOR was assessed.

Issue: W/N ANSCORs 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 Sec 83(b)

Held:
On Amnesty
First, PD 67, from which ANSCOR based its claim on tax amnesty, was extended to
taxpayers. ANSCOR, being assessed not as a taxpayer but rather as a withholding
agent cannot claim amnesty from said Presidential Decree.
In the operation of the withholding tax system, the withholding
agency is the payor, a separate entity acting no more than an agent of
the government for the collection of the tax. x x x The withholding
agent is merely a tax collector, not a taxpayer. x x x 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 arising
from the breach of its legal duty to withhold as distinguish from its
duty to pay tax since:
The governments cause of action against the withholding is not
for the collection of income tax, but for the enforcement of the
withholding provision of Sec 53 of the Tax Code, compliance with
which is imposed on the withholding agent and not upon the
taxpayer.
On Tax on Stock Dividends
General Rule: A stock dividend representing the transfer of surplus to capital
account shall not be subject to tax.
Rationale: Stock dividends represent capital and do not constitute income to its
recipient. As capital, it is not yet subject to income tax.
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.
The redemption or cancellation of stock dividends, depending on the time and
manner it was made, is essentially equivalent to a distribution of tax dividends,
making the proceeds thereof taxable income to the extent it represents profits.
The proceeds of redemption of stock dividends are essentially distribution of cash
dividends, which when paid becomes the absolute property of the stockholder.
Having realized gain from that redemption, the income earner cannot escape
income tax.
On Redemption and Cancellation

For the exempting clause 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.
a) There is no question that there was redemption
b) The redeemed shares are from stock dividend declarations other than initial
capital investment, the proceeds of the redemption is additional wealth for it
is not merely a return of capital but a gain thereon.
c) The existence of a legitimate business purposes in support of the redemption
of stock dividends is immaterial in income taxation. The test pf taxability in
the exempting clause 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.
3 Elements in the imposition of income tax
1.) There must be gain or/and profit, 2.) gain or profit is realized or received,
actually or constructively, 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.
The test of taxability under the exempting clause of Sec 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 stockholders separate property. Profits derived from the capital
invested cannot escape income tax.
The court concluded that the proceeds of the redemption of stock dividends are
essentially considered equivalent to a distribution of taxable dividends. As such, it is
part of the entire income subject to tax. Dividends are included in gross income.
As income, ut is subject to income tax which is required to be withheld at source.

Sec. 83. Distribution of dividends or assets by corporations.


(b) Stock dividends A stock dividend representing the transfer of surplus to
capital account shall not be subject to tax. However, if a corporation cancels or
redeems stock issued as a dividend at such time and in such manner as to make the
distribution and cancellation or redemption, in whole or in part, essentially
equivalent to the distribution of a taxable dividend, the amount so distributed in
redemption or cancellation of the stock shall be considered as taxable income to the
extent it represents a distribution of earnings or profits accumulated after March
first, nineteen hundred and thirteen. (Emphasis supplied)
Proportionate Test
Stock dividends once issued form part of the capital and, thus, subject to income
tax.
Original Issues
Securities issued when a company is first incorporated.

Stock dividend
A stock dividend of a corporation is a dividend paid in shares of stock instead of
cash, and is properly payable only out of surplus profits.
So a stock dividend is actually two things: 1) a dividend, and 2) the enforced use of
the dividend money to purchase additional shares of stock at par
Nielson & Co., v Lepanto Consolidated Mining Co., L-21601
Issued Shares
Issued shares are the authorized shares sold to and held by the shareholders of a
company, regardless of whether they are insiders, institutional investors or the
general public, as shown in the companys annual report. Investopedia
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.
Preferred Shares
Those which entitle the shareholder to some priority on dividends and asset
distribution.
Share subscription
Purchase of the shares of a firm by an entity (subscriber) who becomes a
shareholder upon its inclusion in the shareholders register.
Redemption
A repurchase, a reacquisition of stock by a corporation which issued the stock in
exchange for property, whether or not the acquired stock is cancelled, retired or
held in the treasury.
The shares bought back in a redemption are considered a fixed-income security that
is expected to be bought back by the issuer.
Capital Stock
All shares representing ownership of a business, including preferred stock and
common stock. Amount fixed by charter to be subscribed and paid in or secured to
be paid in by shareholders. Blacks Law Dictionary