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Commissioner of Internal Revenue v.

Manning, 66 SCRA 14
Under a trust agreement, Julius Reese who owned 24,700 shares of the 25,000 common shares of
MANTRASCO, and the three private respondents who owned the rest, at 100 shares each,
deposited all their shares with the Trustees. The trust agreement provided that upon Reese’s death
MANTRASCO shall purchase Reese’s shares. The trust agreement was executed in view of Reese’s
desire that upon his death the Company would continue under the management of respondents.
Upon Reese’s death and partial payment by the company of Reeses’s share, a new certificate
was issued in the name of MANTRASCO, and the certificate indorsed to the Trustees. Subsequently,
the stockholders reverted the 24,700 shares in the Treasury to the capital account of the company
as stock dividends to be distributed to the stockholders. When the entire purchase price of Reese’s
interest in the company was paid in full by the latter, the trust agreement was terminated, and the
shares held in trust were delivered to the company.

Issue: WON the newly acquired shares were treasury shares.

Held: No. Their declaration as treasury stock dividends was a complete nullity and that the
assessment by the Commissioner of fraud penalty and the imposition of interest charges pursuant
to the provision of the Tax Code were made in accordance with law.
Treasury shares are stocks issued and fully paid for and re-acquired by the corporation either by
purchase, donation, forfeiture or other means. They 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 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 corporations 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 represent a paid — for interest in the property of the corporation.