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Batas Pambansa Bilang 68

Consequences of separate personality

A. Property

1. Saw vs. Court of Appeals, G.R. No. 90580, April 8, 1991, 195 SCRA 740

B. Obligations

2. Vasquez v. De Borja, G.R. No. L-48930, February 23, 1944, 74 Phil. 560

Piercing the Veil of Corporate Entity

3. Cruz v. Dalisay, A.M. No. R-181-P, July 31, 1987, 152 SCRA 485

4. Philippine Veterans Investment Development Corporation v. Court of

Appeals, G.R. No. 85266, January 30, 1990, 181 SCRA 669

Ultra Vires acts

5. Atrium Management Corporation v. Court of Appeals, G.R. No. 109491,

February 28, 2001, 353 SCRA 23

Business Judgment Rule

6. Philippine Stock Exchange, Inc. v. Court of Appeals, G.R. No. 125469,

October 27, 1997, 281 SCRA 232

Trust Fund Doctrine

7. Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 108576,

January 20, 1999, 301 SCRA 152
Republic of the Philippines


G.R. No. 90580 April 8, 1991

HON. COURT OF APPEALS, HON. BERNARDO P. PARDO, Presiding Judge of Branch 43,

Benito O. Ching, Jr. for petitioners.

William R. Vetor for Equitable Banking Corp.

Pineda, Uy & Janolo for Freeman, Inc. and Saw Chiao.

CRUZ, J.:p

A collection suit with preliminary attachment was filed by Equitable Banking Corporation
against Freeman, Inc. and Saw Chiao Lian, its President and General Manager. The petitioners
moved to intervene, alleging that (1) the loan transactions between Saw Chiao Lian and
Equitable Banking Corp. were not approved by the stockholders representing at least 2/3 of
corporate capital; (2) Saw Chiao Lian had no authority to contract such loans; and (3) there was
collusion between the officials of Freeman, Inc. and Equitable Banking Corp. in securing the
loans. The motion to intervene was denied, and the petitioners appealed to the Court of Appeals.

Meanwhile, Equitable and Saw Chiao Lian entered into a compromise agreement which they
submitted to and was approved by the lower court. But because it was not complied with,
Equitable secured a writ of execution, and two lots owned by Freeman, Inc. were levied upon
and sold at public auction to Freeman Management and Development Corp.

The Court of Appeals 1 sustained the denial of the petitioners' motion for intervention, holding
that "the compromise agreement between Freeman, Inc., through its President, and Equitable
Banking Corp. will not necessarily prejudice petitioners whose rights to corporate assets are at
most inchoate, prior to the dissolution of Freeman, Inc. . . . And intervention under Sec. 2, Rule
12 of the Revised Rules of Court is proper only when one's right is actual, material, direct and
immediate and not simply contingent or expectant."

It also ruled against the petitioners' argument that because they had already filed a notice of
appeal, the trial judge had lost jurisdiction over the case and could no longer issue the writ of

The petitioners are now before this Court, contending that:

1. The Honorable Court of Appeals erred in holding that the petitioners cannot intervene in
Civil Case No. 88-44404 because their rights as stockholders of Freeman are merely inchoate
and not actual, material, direct and immediate prior to the dissolution of the corporation;

2. The Honorable Court of Appeals erred in holding that the appeal of the petitioners in said
Civil Case No. 88-44404 was confined only to the order denying their motion to intervene and
did not divest the trial court of its jurisdiction over the whole case.

The petitioners base their right to intervene for the protection of their interests as stockholders on
Everett v. Asia Banking Corp. 2 where it was held:

The well-known rule that shareholders cannot ordinarily sue in equity to redress wrongs done to
the corporation, but that the action must be brought by the Board of Directors, . . . has its
exceptions. (If the corporation [were] under the complete control of the principal defendants, . . .
it is obvious that a demand upon the Board of Directors to institute action and prosecute the same
effectively would have been useless, and the law does not require litigants to perform useless

Equitable demurs, contending that the collection suit against Freeman, Inc, and Saw Chiao Lian
is essentially in personam and, as an action against defendants in their personal capacities, will
not prejudice the petitioners as stockholders of the corporation. The Everett case is not applicable
because it involved an action filed by the minority stockholders where the board of directors
refused to bring an action in behalf of the corporation. In the case at bar, it was Freeman, Inc.
that was being sued by the creditor bank.

Equitable also argues that the subject matter of the intervention falls properly within the original
and exclusive jurisdiction of the Securities and Exchange Commission under P.D. No. 902-A. In
fact, at the time the motion for intervention was filed, there was pending between Freeman, Inc.
and the petitioners SEC Case No. 03577 entitled "Dissolution, Accounting, Cancellation of
Certificate of Registration with Restraining Order or Preliminary Injunction and Appointment of
Receiver." It also avers in its Comment that the intervention of the petitioners could have only
caused delay and prejudice to the principal parties.

On the second assignment of error, Equitable maintains that the petitioners' appeal could only
apply to the denial of their motion for intervention and not to the main case because their
personality as party litigants had not been recognized by the trial court.
After examining the issues and arguments of the parties, the Court finds that the respondent court
committed no reversible error in sustaining the denial by the trial court of the petitioners' motion
for intervention.

In the case of Magsaysay-Labrador v. Court of Appeals, 3 we ruled as follows:

Viewed in the light of Section 2, Rule 12 of the Revised Rules of Court, this Court affirms the
respondent court's holding that petitioners herein have no legal interest in the subject matter in
litigation so as to entitle them to intervene in the proceedings below. In the case of Batama
Farmers' Cooperative Marketing Association, Inc. v. Rosal, we held: "As clearly stated in Section
2 of Rule 12 of the Rules of Court, to be permitted to intervene in a pending action, the party
must have a legal interest in the matter in litigation, or in the success of either of the parties or an
interest against both, or he must be so situated as to be adversely affected by a distribution or
other disposition of the property in the custody of the court or an officer thereof."

To allow intervention, [a] it must be shown that the movant has legal interest in the matter in
litigation, or otherwise qualified; and [b] consideration must be given as to whether the
adjudication of the rights of the original parties may be delayed or prejudiced, or whether the
intervenor's rights may be protected in a separate proceeding or not. Both requirements must
concur as the first is not more important than the second.

The interest which entitles a person to intervene in a suit between other parties must be in the
matter in litigation and of such direct and immediate character that the intervenor will either gain
or lose by the direct legal operation and effect of the judgment. Otherwise, if persons not parties
of the action could be allowed to intervene, proceedings will become unnecessarily complicated,
expensive and interminable. And this is not the policy of the law.

The words "an interest in the subject" mean a direct interest in the cause of action as pleaded, and
which would put the intervenor in a legal position to litigate a fact alleged in the complaint,
without the establishment of which plaintiff could not recover.

Here, the interest, if it exists at all, of petitioners-movants is indirect, contingent, remote,

conjectural, consequential and collateral. At the very least, their interest is purely inchoate, or in
sheer expectancy of a right in the management of the corporation and to share in the profits
thereof and in the properties and assets thereof on dissolution, after payment of the corporate
debts and obligations.

While a share of stock represents a proportionate or aliquot interest in the property of the
corporation, it does not vest the owner thereof with any legal right or title to any of the property,
his interest in the corporate property being equitable or beneficial in nature. Shareholders are in
no legal sense the owners of corporate property, which is owned by the corporation as a distinct
legal person.

On the second assignment of error, the respondent court correctly noted that the notice of appeal
was filed by the petitioners on October 24, 1988, upon the denial of their motion to intervene,
and the writ of execution was issued by the lower court on January 30, 1989. The petitioners'
appeal could not have concerned the "whole" case (referring to the decision) because the
petitioners "did not appeal the decision as indeed they cannot because they are not parties to the
case despite their being stockholders of respondent Freeman, Inc." They could only appeal the
denial of their motion for intervention as they were never recognized by the trial court as party
litigants in the main case.

Intervention is "an act or proceeding by which a third person is permitted to become a party to an
action or proceeding between other persons, and which results merely in the addition of a new
party or parties to an original action, for the purpose of hearing and determining at the same time
all conflicting claims which may be made to the subject matter in litigation. 4 It is not an
independent proceeding, but an ancillary and supplemental one which, in the nature of things,
unless otherwise provided for by the statute or Rules of Court, must be in subordination to the
main proceeding. 5 It may be laid down as a general rule that an intervenor is limited to the field
of litigation open to the original parties. 6

In the case at bar, there is no more principal action to be resolved as a writ of execution had
already been issued by the lower court and the claim of Equitable had already been satisfied. The
decision of the lower court had already become final and in fact had already been enforced.
There is therefore no more principal proceeding in which the petitioners may intervene.

As we held in the case of Barangay Matictic v. Elbinias: 7

An intervention has been regarded, as merely "collateral or accessory or ancillary to the principal
action and not an independent proceedings; and interlocutory proceeding dependent on and
subsidiary to, the case between the original parties." (Fransisco, Rules of Court, Vol. 1, p. 721).
With the final dismissal of the original action, the complaint in intervention can no longer be
acted upon. In the case of Clareza v. Resales, 2 SCRA 455, 457-458, it was stated that:

That right of the intervenor should merely be in aid of the right of the original party, like the
plaintiffs in this case. As this right of the plaintiffs had ceased to exist, there is nothing to aid or
fight for. So the right of intervention has ceased to exist.

Consequently, it will be illogical and of no useful purpose to grant or even consider further
herein petitioner's prayer for the issuance of a writ of mandamus to compel the lower court to
allow and admit the petitioner's complaint in intervention. The dismissal of the expropriation
case has no less the inherent effect of also dismissing the motion for intervention which is but the
unavoidable consequence.

The Court observes that even with the denial of the petitioners' motion to intervene, nothing is
really lost to them. The denial did not necessarily prejudice them as their rights are being
litigated in the case now before the Securities and Exchange Commission and may be fully
asserted and protected in that separate proceeding.

WHEREFORE, the petition is DENIED, with costs against the petitioners. It is so ordered.

Narvasa, Gancayco, Grio-Aquino and Medialdea, JJ., concur.


1 J.A.R. Melo, J., ponente, with Benipayo and Dayrit, JJ., concurring.

2 49 Phil. 512.

3 180 SCRA 266.

4 Francisco, Rules of Court, Vol. 1, 1973 ed., p. 719; Republic v. Sandiganbayan, 184
SCRA 382; Government Service Insurance System (GSIS) v. Court of Appeals, 169 SCRA 244.

5 Republic v. Sandiganbayan, 182 SCRA 911; Garcia v. David, 67 Phil. 279.

6 Fransisco, supra, note 4, p. 721, citing 39 Am. Jur. 950.

7 148 SCRA 83.

Republic of the Philippines


G.R. No. L-48930 February 23, 1944

ANTONIO VAZQUEZ, petitioner,



G.R. No. L-48931 February 23, 1944


ANTONIO VAZQUEZ, respondent.


This action was commenced in the Court of First Instance of Manila by Francisco de Borja
against Antonio Vazquez and Fernando Busuego to recover from them jointly and severally the
total sum of P4,702.70 upon three alleged causes of action, to wit: First, that in or about the
month of January, 1932, the defendants jointly and severally obligated themselves to sell to the
plaintiff 4,000 cavans of palay at P2.10 per cavan, to be delivered during the month of February,
1932, the said defendants having subsequently received from the plaintiff in virtue of said
agreement the sum of P8,400; that the defendants delivered to the plaintiff during the months of
February, March, and April, 1932, only 2,488 cavans of palay of the value of P5,224.80 and
refused to deliver the balance of 1,512 cavans of the value of P3,175.20 notwithstanding
repeated demands. Second, that because of defendants' refusal to deliver to the plaintiff the said
1,512 cavans of palay within the period above mentioned, the plaintiff suffered damages in the
sum of P1,000. And, third, that on account of the agreement above mentioned the plaintiff
delivered to the defendants 4,000 empty sacks, of which they returned to the plaintiff only 2,490
and refused to deliver to the plaintiff the balance of 1,510 sacks or to pay their value amounting
to P377.50; and that on account of such refusal the plaintiff suffered damages in the sum of

The defendant Antonio Vazquez answered the complaint, denying having entered into the
contract mentioned in the first cause of action in his own individual and personal capacity, either
solely or together with his codefendant Fernando Busuego, and alleging that the agreement for
the purchase of 4,000 cavans of palay and the payment of the price of P8,400 were made by the
plaintiff with and to the Natividad-Vasquez Sabani Development Co., Inc., a corporation
organized and existing under the laws of the Philippines, of which the defendant Antonio
Vazquez was the acting manager at the time the transaction took place. By way of counterclaim,
the said defendant alleged that he suffered damages in the sum of P1,000 on account of the filing
of this action against him by the plaintiff with full knowledge that the said defendant had nothing
to do whatever with any and all of the transactions mentioned in the complaint in his own
individual and personal capacity.

The trial court rendered judgment ordering the defendant Antonio Vazquez to pay to the plaintiff
the sum of P3,175.20 plus the sum of P377.50, with legal interest on both sums, and absolving
the defendant Fernando Busuego (treasurer of the corporation) from the complaint and the
plaintiff from the defendant Antonio Vazquez' counterclaim. Upon appeal to the Court of
Appeals, the latter modified that judgment by reducing it to the total sum of P3,314.78, with
legal interest thereon and the costs. But by a subsequent resolution upon the defendant's motion
for reconsideration, the Court of Appeals set aside its judgment and ordered that the case be
remanded to the court of origin for further proceedings. The defendant Vazquez, not being
agreeable to that result, filed the present petition for certiorari (G.R. No. 48930) to review and
reverse the judgment of the Court of Appeals; and the plaintiff Francisco de Borja, excepting to
the resolution of the Court of Appeals whereby its original judgment was set aside and the case
was ordered remanded to the court of origin for further proceedings, filed a cross-petition for
certiorari (G.R. No. 48931) to maintain the original judgment of the Court of Appeals.

The original decision of the Court of Appeals and its subsequent resolutions on reconsideration
read as follows:

Es hecho no controvertido que el 25 de Febrero de 1932, el demandado-apelante vendio al

demandante 4,000 cavanes de palay al precio de P2.10 el cavan, de los cuales, dicho demandante
solamente recibio 2,583 cavanes; y que asimismo recibio para su envase 4,000 sacos vacios. Esta
provbado que de dichos 4,000 sacos vacios solamente se entregaron, 2,583 quedando en poder
del demandado el resto, y cuyo valor es el de P0.24 cada uno. Presentada la demanda contra los
demandados Antonio Vazquez y Fernando Busuego para el pago de la cantidad de P4,702.70, con
sus intereses legales desde el 1.o de marzo de 1932 hasta su completo pago y las costas, el
Juzgado de Primera Instancia de Manila el asunto condenando a Antonio Vazquez a pagar al
demandante la cantidad de P3,175.20, mas la cantidad de P377.50, con sus intereses legales,
absolviendo al demandado Fernando Busuego de la demanda y al demandante de la
reconvencion de los demandados, sin especial pronunciamiento en cuanto a las costas. De dicha
decision apelo el demandado Antonio Vazquez, apuntado como principal error el de que el habia
sido condenado personalmente, y no la corporacion por el representada.

Segun la preponderancia de las pruebas, la venta hecha por Antonio Vazquez a favor de
Francisco de Borja de los 4,000 cavanes de palay fue en su capacidad de Presidente interino y
Manager de la corporacion Natividad-Vazquez Sabani Development Co., Inc. Asi resulta del
Exh. 1, que es la copia al carbon del recibo otorgado por el demandado Vazquez, y cuyo original
lo habia perdido el demandante, segun el. Asi tambien consta en los libros de la corporacion
arriba mencionada, puesto que en los mismos se ha asentado tanto la entrada de los P8,400,
precio del palay, como su envio al gobierno en pago de los alquileres de la Hacienda Sabani. Asi
mismo lo admitio Francisco de Borja al abogado Sr. Jacinto Tomacruz, posterior presidente de la
corporacion sucesora en el arrendamiento de la Sabani Estate, cuando el solicito sus buenos
oficios para el cobro del precio del palay no entregado. Asi igualmente lo declaro el que hizo
entrega de parte del palay a Borja, Felipe Veneracion, cuyo testimonio no ha sido refutado. Y asi
se deduce de la misma demanda, cuando se incluyo en ella a Fernando Busuego, tesorero de la
Natividad-Vazquez Sabani Development Co., Inc.

Siendo esto asi, la principal responsable debe ser la Natividad-Vazquez Sabani Development Co.,
Inc., que quedo insolvente y dejo de existir. El Juez sentenciador declaro, sin embargo, al
demandado Vazquez responsable del pago de la cantidad reclamada por su negligencia al vender
los referidos 4,000 cavanes de palay sin averiguar antes si o no dicha cantidad existia en las
bodegas de la corporacion.

Resulta del Exh. 8 que despues de la venta de los 4,000 cavanes de palay a Francisco de Borja, el
mismo demandado vendio a Kwong Ah Phoy 1,500 cavanes al precio de P2.00 el cavan, y
decimos 'despues' porque esta ultima venta aparece asentada despues de la primera. Segun esto,
el apelante no solamente obro con negligencia, sino interviniendo culpa de su parte, por lo que de
acuerdo con los arts. 1102, 1103 y 1902 del Codigo Civil, el debe ser responsable
subsidiariamente del pago de la cantidad objecto de la demanda.

En meritos de todo lo expuesto, se confirma la decision apelada con la modificacion de que el

apelante debe pagar al apelado la suma de P2,295.70 como valor de los 1,417 cavanes de palay
que dejo de entregar al demandante, mas la suma de P339.08 como importe de los 1,417 sacos
vacios, que dejo de devolver, a razon de P0.24 el saco, total P3,314.78, con sus intereses legales
desde la interposicion de la demanda y las costas de ambas instancias.

Vista la mocion de reconsideracion de nuestra decision de fecha 13 de Octubre de 1942, y

alegandose en la misma que cuando el apelante vendio los 1,500 cavanes de palay a Ah Phoy, la
corporacion todavia tenia bastante existencia de dicho grano, y no estando dicho extremo
suficientemente discutido y probado, y pudiendo variar el resultado del asunto, dejamos sin
efecto nuestra citada decision, y ordenamos la devolucion de la causa al Juzgado de origen para
que reciba pruebas al efecto y dicte despues la decision correspondiente.

Upon consideration of the motion of the attorney for the plaintiff-appellee in case CA-G.R. No.
8676, Francisco de Borja vs. Antonio Vasquez et al., praying, for the reasons therein given, that
the resolution of December 22, 1942, be reconsidered: Considering that said resolution
remanding the case to the lower court is for the benefit of the plaintiff-appellee to afford him
opportunity to refute the contention of the defendant-appellant Antonio Vazquez, motion denied.

The action is on a contract, and the only issue pleaded and tried is whether the plaintiff entered
into the contract with the defendant Antonio Vazquez in his personal capacity or as manager of
the Natividad-Vazquez Sabani Development Co., Inc. The Court of Appeals found that according
to the preponderance of the evidence "the sale made by Antonio Vazquez in favor of Francisco de
Borja of 4,000 cavans of palay was in his capacity as acting president and manager of the
corporation Natividad-Vazquez Sabani Development Co., Inc." That finding of fact is final and,
it resolving the only issue involved, should be determinative of the result.

The Court of Appeals doubly erred in ordering that the cause be remanded to the court of origin
for further trial to determine whether the corporation had sufficient stock of palay at the time
appellant sold, 1500 cavans of palay to Kwong Ah Phoy. First, if that point was material to the
issue, it should have been proven during the trial; and the statement of the court that it had not
been sufficiently discussed and proven was no justification for ordering a new trial, which, by the
way, neither party had solicited but against which, on the contrary, both parties now vehemently
protest. Second, the point is, in any event, beside the issue, and this we shall now discuss in
connection with the original judgment of the Court of Appeals which the plaintiff cross-petitioner
seeks to maintain.

The action being on a contract, and it appearing from the preponderance of the evidence that the
party liable on the contract is the Natividad-Vazquez Sabani Development Co., Inc. which is not
a party herein, the complaint should have been dismissed. Counsel for the plaintiff, in his brief as
respondent, argues that altho by the preponderance of the evidence the trial court and the Court
of Appeals found that Vazquez celebrated the contract in his capacity as acting president of the
corporation and altho it was the latter, thru Vazquez, with which the plaintiff had contracted and
which, thru Vazquez, had received the sum of P8,400 from Borja, and altho that was true from
the point of view of a legal fiction, "ello no impede que tambien sea verdad lo alegado en la
demanda de que la misma persona de Vasquez fue la que contrato con Borja y que la misma
persona de Vasquez fue quien recibio la suma de P8,400." But such argument is invalid and
insufficient to show that the president of the corporation is personally liable on the contract duly
and lawfully entered into by him in its behalf.

It is well known that a corporation is an artificial being invested by law with a personality of its
own, separate and distinct from that of its stockholders and from that of its officers who manage
and run its affairs. The mere fact that its personality is owing to a legal fiction and that it
necessarily has to act thru its agents, does not make the latter personally liable on a contract duly
entered into, or for an act lawfully performed, by them for an in its behalf. The legal fiction by
which the personality of a corporation is created is a practical reality and necessity. Without it no
corporate entities may exists and no corporate business may be transacted. Such legal fiction
may be disregarded only when an attempt is made to use it as a cloak to hide an unlawful or
fraudulent purpose. No such thing has been alleged or proven in this case. It has not been alleged
nor even intimated that Vazquez personally benefited by the contract of sale in question and that
he is merely invoking the legal fiction to avoid personal liability. Neither is it contended that he
entered into said contract for the corporation in bad faith and with intent to defraud the plaintiff.
We find no legal and factual basis upon which to hold him liable on the contract either
principally or subsidiarily.

The trial court found him guilty of negligence in the performance of the contract and held him
personally liable on that account. On the other hand, the Court of Appeals found that he "no
solamente obro con negligencia, sino interveniendo culpa de su parte, por lo que de acuerdo con
los arts. 1102, 1103 y 1902 del Codigo Civil, el debe ser responsable subsidiariamente del pago
de la cantidad objeto de la demanda." We think both the trial court and the Court of Appeals
erred in law in so holding. They have manifestly failed to distinguish a contractual from an
extracontractual obligation, or an obligation arising from contract from an obligation arising
from culpa aquiliana. The fault and negligence referred to in articles 1101-1104 of the Civil Code
are those incidental to the fulfillment or nonfullfillment of a contractual obligation; while the
fault or negligence referred to in article 1902 is the culpa aquiliana of the civil law, homologous
but not identical to tort of the common law, which gives rise to an obligation independently of
any contract. (Cf. Manila R.R. Co. vs. Cia. Trasatlantica, 38 Phil., 875, 887-890; Cangco vs.
Manila R.R. Co., 38 Phil. 768.) The fact that the corporation, acting thru Vazquez as its manager,
was guilty of negligence in the fulfillment of the contract, did not make Vazquez principally or
even subsidiarily liable for such negligence. Since it was the corporation's contract, its
nonfulfillment, whether due to negligence or fault or to any other cause, made the corporation
and not its agent liable.

On the other hand if independently of the contract Vazquez by his fault or negligence cause
damaged to the plaintiff, he would be liable to the latter under article 1902 of the Civil Code. But
then the plaintiff's cause of action should be based on culpa aquiliana and not on the contract
alleged in his complaint herein; and Vazquez' liability would be principal and not merely
subsidiary, as the Court of Appeals has erroneously held. No such cause of action was alleged in
the complaint or tried by express or implied consent of the parties by virtue of section 4 of Rule
17. Hence the trial court had no jurisdiction over the issue and could not adjudicate upon it
(Reyes vs. Diaz, G.R. No. 48754.) Consequently it was error for the Court of Appeals to remand
the case to the trial court to try and decide such issue.

It only remains for us to consider petitioner's second assignment of error referring to the lower
courts' refusal to entertain his counterclaim for damages against the respondent Borja arising
from the bringing of this action. The lower courts having sustained plaintiff's action. The finding
of the Court of Appeals that according to the preponderance of the evidence the defendant
Vazquez celebrated the contract not in his personal capacity but as acting president and manager
of the corporation, does not warrant his contention that the suit against him is malicious and
tortious; and since we have to decide defendant's counterclaim upon the facts found by the Court
of Appeals, we find no sufficient basis upon which to sustain said counterclaim. Indeed, we feel
that a a matter of moral justice we ought to state here that the indignant attitude adopted by the
defendant towards the plaintiff for having brought this action against him is in our estimation not
wholly right. Altho from the legal point of view he was not personally liable for the fulfillment of
the contract entered into by him on behalf of the corporation of which he was the acting
president and manager, we think it was his moral duty towards the party with whom he
contracted in said capacity to see to it that the corporation represented by him fulfilled the
contract by delivering the palay it had sold, the price of which it had already received. Recreant
to such duty as a moral person, he has no legitimate cause for indignation. We feel that under the
circumstances he not only has no cause of action against the plaintiff for damages but is not even
entitled to costs.

The judgment of the Court of Appeals is reversed, and the complaint is hereby dismissed,
without any finding as to costs.

Yulo, C.J., Moran, Horrilleno and Bocobo, JJ., concur.

Republic of the Philippines


Adm. Matter No. R-181-P July 31, 1987

ADELIO C. CRUZ, complainant,

QUITERIO L. DALISAY, Deputy Sheriff, RTC, Manila, respondents.



In a sworn complaint dated July 23, 1984, Adelio C. Cruz charged Quiterio L. Dalisay, Senior
Deputy Sheriff of Manila, with "malfeasance in office, corrupt practices and serious
irregularities" allegedly committed as follows:

1. Respondent sheriff attached and/or levied the money belonging to complainant Cruz
when he was not himself the judgment debtor in the final judgment of NLRC NCR Case No. 8-
12389-91 sought to be enforced but rather the company known as "Qualitrans Limousine
Service, Inc.," a duly registered corporation; and,

2. Respondent likewise caused the service of the alias writ of execution upon complainant
who is a resident of Pasay City, despite knowledge that his territorial jurisdiction covers Manila
only and does not extend to Pasay City.

In his Comments, respondent Dalisay explained that when he garnished complainant's cash
deposit at the Philtrust bank, he was merely performing a ministerial duty. While it is true that
said writ was addressed to Qualitrans Limousine Service, Inc., yet it is also a fact that
complainant had executed an affidavit before the Pasay City assistant fiscal stating that he is the
owner/president of said corporation and, because of that declaration, the counsel for the plaintiff
in the labor case advised him to serve notice of garnishment on the Philtrust bank.

On November 12, 1984, this case was referred to the Executive Judge of the Regional Trial Court
of Manila for investigation, report and recommendation.

Prior to the termination of the proceedings, however, complainant executed an affidavit of

desistance stating that he is no longer interested in prosecuting the case against respondent
Dalisay and that it was just a "misunderstanding" between them. Upon respondent's motion, the
Executive Judge issued an order dated May 29, 1986 recommending the dismissal of the case.
It has been held that the desistance of complainant does not preclude the taking of disciplinary
action against respondent. Neither does it dissuade the Court from imposing the appropriate
corrective sanction. One who holds a public position, especially an office directly connected with
the administration of justice and the execution of judgments, must at all times be free from the
appearance of impropriety.1

We hold that respondent's actuation in enforcing a judgment against complainant who is not the
judgment debtor in the case calls for disciplinary action. Considering the ministerial nature of his
duty in enforcing writs of execution, what is incumbent upon him is to ensure that only that
portion of a decision ordained or decreed in the dispositive part should be the subject of
execution.2 No more, no less. That the title of the case specifically names complainant as one of
the respondents is of no moment as execution must conform to that directed in the dispositive
portion and not in the title of the case.

The tenor of the NLRC judgment and the implementing writ is clear enough. It directed
Qualitrans Limousine Service, Inc. to reinstate the discharged employees and pay them full
backwages. Respondent, however, chose to "pierce the veil of corporate entity" usurping a power
belonging to the court and assumed improvidently that since the complainant is the
owner/president of Qualitrans Limousine Service, Inc., they are one and the same. It is a well-
settled doctrine both in law and in equity that as a legal entity, a corporation has a personality
distinct and separate from its individual stockholders or members. The mere fact that one is
president of a corporation does not render the property he owns or possesses the property of the
corporation, since the president, as individual, and the corporation are separate entities.3

Anent the charge that respondent exceeded his territorial jurisdiction, suffice it to say that the
writ of execution sought to be implemented was dated July 9, 1984, or prior to the issuance of
Administrative Circular No. 12 which restrains a sheriff from enforcing a court writ outside his
territorial jurisdiction without first notifying in writing and seeking the assistance of the sheriff
of the place where execution shall take place.

ACCORDINGLY, we find Respondent Deputy Sheriff Quiterio L. Dalisay NEGLIGENT in the

enforcement of the writ of execution in NLRC Case-No. 8-12389-91, and a fine equivalent to
three [3] months salary is hereby imposed with a stern warning that the commission of the same
or similar offense in the future will merit a heavier penalty. Let a copy of this Resolution be filed
in the personal record of the respondent.


Gutierrez, Jr., Feliciano, Bidin and Cortes, JJ., concur.

1 Antonio vs. Diaz, Adm. Matter No. p-1568, December 28, 1979, 94 SCRA 890, 893.
2 Pelejo vs, Court of Appeals, G.R. No. 60800, August 31, 1982, 116 SCRA 406.
3 Sulo ng Bayan, Inc. vs. Araneta, Inc., No. L-31061, August 17, 1976, 72 SCRA 347, 354-355.
Republic of the Philippines


G.R. No. 85266 January 30, 1990



The Government Corporate Counsel for petitioner.

Ricardo P.C. Castro, Jr. for private respondent.


The concept of piercing the veil of corporate fiction is a mystique to many people, especially the
layman. But it is not as esoteric as all that as this case will demonstrate.

This case arose when Violeta M. Borres, private respondent herein, was injured in an accident
that was later held by the trial and respondent courts to be due to the negligence of Phividec
Railways, Inc. (PRI). 1 The accident occurred on March 29, 1979. On May 25, 1979, petitioner
Philippine Veterans Investment Development Corporation (PHIVIDEC) sold all its rights and
interests in the PRI to the Philippine Sugar Commission (PHILSUCOM). Two days later,
PHILSUCOM caused the creation of a wholly-owned subsidiary, the Panay Railways, Inc., to
operate the railway assets acquired from PHIVIDEC. On January 21, 1980, Borres filed a
complaint for damages against PRI and Panay Railways Inc. (Panay ), 2 whereupon the latter
filed with leave of court a third-party complaint against the herein petitioner. 3 It alleged that
upon the sale to PHILSUCOM of PRI, the corporate name of PRI was changed to Panay
Railways, Inc. It disclaimed liability on the ground that in the Agreement concluded between
PHIVIDEC and PHILSUCOM, it was provided that:

D. With the exception of the Liabilities and Contracts specified in Annexes 4 and 5 of the
preceding paragraph, PHIVIDEC hereby holds PHILSUCOM harmless from and against any
action, claim or liability that may arise out of or result from acts or omissions, contracts or
transactions prior to the turn-over.

After trial, Judge Ricardo M. Ilarde of the Regional Trial Court of Iloilo held Phividec Railways,
Inc. negligent and so liable to the plaintiff for damages. It also held that as PRI was a wholly-
owned subsidiary of PHIVIDEC, the latter should answer for PRI's liability. The decision was
affirmed on appeal by the respondent court, 4 which is now faulted for grave abuse of discretion
in this petition.
The sole issue raised in this petition is the ruling of the Court of Appeals that:

Thus, the piercing of the veil of corporate fiction is called for in the case at bar. When PRI was
sold by PHIVIDEC to PHILSUCOM on May 25, 1979, the legal fiction of PRI as a separate
corporate entity from PHIVIDEC disappeared pursuant to and in view of the representations and
warranties contained in the agreement of sale between PHIVIDEC and PHILSUCOM,
particularly the stipulation already quoted above, by virtue of which PHIVIDEC held
PHILSUCOM harmless from any claim or liability arising out of any act or transaction "prior to
the turn-over." By virtue of this provision, PHIVIDEC had expressly assumed liability for any
claim arising before the turn-over of PRI to PHILSUCOM. And since the accident in question
took place before said turn-over and since after said turn-over PRI ceased to exist (in the sense
that its railways operations were taken over by PHILSUCOM thru the Panay RW) the only
logical conclusion is that PHIVIDEC should be solely liable for the damages to the plaintiff in
the case at bar. Indeed, applying the Koppel precedent just cited, PHIVIDEC cannot hide behind
the veil of corporate fiction in order to evade this liability, nor could the veil of corporate fiction
be made a shield to confuse claimants such as plaintiff-appellee.

It is the position of the petitioner that PHIVIDEC and PRI are entirely distinct and separate
corporations although the latter is its subsidiary. The transfer of the shares of stock of PRI to
PHILSUCOM did not divest PRI of its juridical personality or of its capacity to direct its own
affairs and conduct its own business under the control of its own board of directors. By the same
token, it is answerable for its own obligations, which cannot be passed on to the petitioner as its
own liability. To support this stand, the petitioner invokes the case of E.J. Nell v. Pacific Farms, 5
which, however, it has not accurately quoted.

We must sustain the respondents.

In Koppel v. Yatco, 6 the Court, citing Fletcher, declared that the veil of corporate fiction may be
pierced when it is used to defeat public convenience, justify wrong, protect fraud, or defend
crime. 7 It added that when the corporation is the mere alter ego or business conduit of a person
it may be disregarded, "to prevent injustice, or the distortion or hiding of the truth, or to let in a
just defense." 8

The rule is that:

Where it appears that two business enterprises are owned, conducted and controlled by the same
parties, both law and equity will, when necessary to protect the rights of third persons, disregard
the legal fiction that two corporations are distinct entities, and treat them as identical. 9

In Yutivo Sons Hardware Co. v. Court of Tax Appeals, 10 this Court held:

It is an elementary and fundamental principle of corporation law that a corporation is an entity

separate and distinct from its stockholders and from other corporations to which it may be
connected. However, "when the notion of legal entity is used to defeat public convenience,
justify wrong, protect fraud or defend crime," the law will regard the corporation as an
association of persons, or in the case of two corporations merge them into one. ... Another rule is
that, when the corporation is the "mere alter ego or business conduit of a person, it may be

In Commissioner of Internal Revenue v. Norton and Harrison Co., 11 this Court likewise ruled
that where a corporation is merely an adjunct, business conduit or alter ego of another
corporation the fiction of separate and distinct corporate entities should be disregarded.

In fact, contrary to the suggestion in the petition, what the Court said in the Nell Case was:

Generally where one corporation sells or otherwise transfers all of its assets to another
corporation, the latter is not liable for the debts and liabilities of the transferor, except: (1) where
the purchaser expressly or impliedly agrees to assume such debts; (2) where the transaction
amounts to a consolidation or merger of the corporations; (3) where the purchasing corporation is
merely a continuation of the selling corporation; and (4) where the transaction is entered into
fraudulently in order to escape liability for such debts.

Moreover, as correctly pointed out by the respondent court:

Besides, PHIVIDEC'S act of selling PRI to PHILSUCOM shows that PHVIDEC had complete
control of PRI's business. This circumstance renders applicable the rule cited by third-party
plaintiff-appellee (Costan v. Manila Electric, 24 F 2nd 383) that if a parent- holding company
(PHIVIDEC in the present case) assumes complete control of the operations of its subsidiary's
business, the separate corporate existence of the subsidiary must be disregarded, such that the
holding company will be responsible for the negligence of the employees of the subsidiary as if it
were the holding company's own employees.

It is clear from the evidence of record that by virtue of the agreement between PHIVIDEC and
PHILSUCOM, particularly the stipulation exempting the latter from any "claim or liability
arising out of any act or transaction" prior to the turn-over, PHIVIDEC had expressly assumed
liability for any claim against PRI. Since the accident happened before that agreement and PRI
ceased to exist after the turn-over, it should follow that PHIVIDEC cannot evade its liability for
the injuries sustained by the private respondent.

A contrary conclusion would leave the private respondent without any recourse for her legitimate
claim. In the interest of justice and equity, and to prevent the veil of corporate fiction from
denying her the reparation to which she is entitled, that veil must be pierced and PHIVIDEC and
PRI regarded as one and the same entity.

WHEREFORE, the challenged decision is AFFIRMED and the petition is DENIED, with costs
against the petitioner. It is so ordered.

Narvasa, Gancayco, Grio-Aquino and Medialdea, JJ., concur.


1 Rollo, pp. 25-34; 56-64.

2 Ibid., pp. 40-44.

3 Id., pp. 37-39.

4 Lombos-De la Fuente, J., with Martinez and Pe, JJ., concurring.

5 15 SCRA 415.

6 77 Phil. 496.

7 Ibid., p. 505, citing 1 Fletcher, Cyclopedia of Corporation; Permanent Ed., pp. 135-136.

8 Fletcher, pp. 139-140.

9 Abney v. Belmont Country Club Properties, Inc. 279 Pac., 829.

10 1 SCRA 160.

11 11 SCRA 714.
Republic of the Philippines


G.R. No. 109491 February 28, 2001




G.R. No. 121794 February 28, 2001

LOURDES M. DE LEON, petitioner,

CORPORATION, respondents.


What is before the Court are separate appeals from the decision of the Court of Appeals,1 ruling
that Hi-Cement Corporation is not liable for four checks amounting to P2 million issued to E.T.
Henry and Co. and discounted to Atrium Management Corporation.

On January 3, 1983, Atrium Management Corporation filed with the Regional Trial Court,
Manila an action for collection of the proceeds of four postdated checks in the total amount of P2
million. Hi-Cement Corporation through its corporate signatories, petitioner Lourdes M. de
Leon,2 treasurer, and the late Antonio de las Alas, Chairman, issued checks in favor of E.T.
Henry and Co. Inc., as payee. E.T. Henry and Co., Inc., in turn, endorsed the four checks to
petitioner Atrium Management Corporation for valuable consideration. Upon presentment for
payment, the drawee bank dishonored all four checks for the common reason "payment stopped".
Atrium, thus, instituted this action after its demand for payment of the value of the checks was

After due proceedings, on July 20, 1989, the trial court rendered a decision ordering Lourdes M.
de Leon, her husband Rafael de Leon, E.T. Henry and Co., Inc. and Hi-Cement Corporation to
pay petitioner Atrium, jointly and severally, the amount of P2 million corresponding to the value
of the four checks, plus interest and attorney's fees.4

On appeal to the Court of Appeals, on March 17, 1993, the Court of Appeals promulgated its
decision modifying the decision of the trial court, absolving Hi-Cement Corporation from
liability and dismissing the complaint as against it. The appellate court ruled that: (1) Lourdes M.
de Leon was not authorized to issue the subject checks in favor of E.T. Henry, Inc.; (2) The
issuance of the subject checks by Lourdes M. de Leon and the late Antonio de las Alas
constituted ultra vires acts; and (3) The subject checks were not issued for valuable

At the trial, Atrium presented as its witness Carlos C. Syquia who testified that in February 1981,
Enrique Tan of E.T. Henry approached Atrium for financial assistance, offering to discount four
RCBC checks in the total amount of P2 million, issued by Hi-Cement in favor of E.T. Henry.
Atrium agreed to discount the checks, provided it be allowed to confirm with Hi-Cement the fact
that the checks represented payment for petroleum products which E.T. Henry delivered to Hi-
Cement. Carlos C. Syquia identified two letters, dated February 6, 1981 and February 9, 1981
issued by Hi-Cement through Lourdes M. de Leon, as treasurer, confirming the issuance of the
four checks in favor of E.T. Henry in payment for petroleum products.6

Respondent Hi-Cement presented as witness Ms. Erlinda Yap who testified that she was once a
secretary to the treasurer of Hi-Cement, Lourdes M. de Leon, and as such she was familiar with
the four RCBC checks as the postdated checks issued by Hi-Cement to E.T. Henry upon
instructions of Ms. de Leon. She testified that E.T. Henry offered to give Hi-Cement a loan
which the subject checks would secure as collateral.7

On July 20, 1989, the Regional Trial Court, Manila, Branch 09 rendered a decision, the
dispositive portion of which reads:

"WHEREFORE, in view of the foregoing considerations, and plaintiff having proved its cause of
action by preponderance of evidence, judgment is hereby rendered ordering all the defendants
except defendant Antonio de las Alas to pay plaintiff jointly and severally the amount of TWO
MILLION (P2,000,000.00) PESOS with the legal rate of interest from the filling of the
complaint until fully paid, plus the sum of TWENTY THOUSAND (P20,000.00) PESOS as and
for attorney's fees and the cost of suit."

All other claims are, for lack of merit dismissed.


In due time, both Lourdes M. de Leon and Hi-Cement appealed to the Court of Appeals.9

Lourdes M. de Leon submitted that the trial court erred in ruling that she was solidarilly liable
with Hi-Cement for the amount of the check. Also, that the trial court erred in ruling that Atrium
was an ordinary holder, not a holder in due course of the rediscounted checks.10

Hi-Cement on its part submitted that the trial court erred in ruling that even if Hi-Cement did not
authorize the issuance of the checks, it could still be held liable for the checks. And assuming
that the checks were issued with its authorization, the same was without any consideration,
which is a defense against a holder in due course and that the liability shall be borne alone by
E.T. Henry.11
On March 17, 1993, the Court of Appeals promulgated its decision modifying the ruling of the
trial court, the dispositive portion of which reads:

"Judgement is hereby rendered:

(1) dismissing the plaintiff's complaint as against defendants Hi-Cement Corporation and
Antonio De las Alas;

(2) ordering the defendants E.T. Henry and Co., Inc. and Lourdes M. de Leon, jointly and
severally to pay the plaintiff the sum of TWO MILLION PESOS (P2,000,000.00) with interest at
the legal rate from the filling of the complaint until fully paid, plus P20,000.00 for attorney's

(3) Ordering the plaintiff and defendants E.T. Henry and Co., Inc. and Lourdes M. de Leon,
jointly and severally to pay defendant Hi-Cement Corporation, the sum of P20,000.00 as and for
attorney's fees.

With cost in this instance against the appellee Atrium Management Corporation and appellant
Lourdes Victoria M. de Leon.

So ordered."12

Hence, the recourse to this Court.13

The issues raised are the following:

In G. R. No. 109491 (Atrium, petitioner):

1. Whether the issuance of the questioned checks was an ultra vires act;

2. Whether Atrium was not a holder in due course and for value; and

3. Whether the Court of Appeals erred in dismissing the case against Hi-Cement and ordering it
to pay P20,000.00 as attorney's fees.14

In G. R. No. 121794 (de Leon, petitioner):

1. Whether the Court of Appeals erred in holding petitioner personally liable for the Hi-Cement
checks issued to E.T. Henry;

2. Whether the Court of Appeals erred in ruling that Atrium is a holder in due course;

3. Whether the Court of Appeals erred in ruling that petitioner Lourdes M. de Leon as signatory
of the checks was personally liable for the value of the checks, which were declared to be issued
without consideration;
4. Whether the Court of Appeals erred in ordering petitioner to pay Hi-Cement attorney's fees
and costs.15

We affirm the decision of the Court of Appeals.

We first resolve the issue of whether the issuance of the checks was an ultra vires act. The record
reveals that Hi-Cement Corporation issued the four (4) checks to extend financial assistance to
E.T. Henry, not as payment of the balance of the P30 million pesos cost of hydro oil delivered by
E.T. Henry to Hi-Cement. Why else would petitioner de Leon ask for counterpart checks from
E.T. Henry if the checks were in payment for hydro oil delivered by E.T. Henry to Hi-Cement?

Hi-Cement, however, maintains that the checks were not issued for consideration and that
Lourdes and E.T. Henry engaged in a "kiting operation" to raise funds for E.T. Henry, who
admittedly was in need of financial assistance. The Court finds that there was no sufficient
evidence to show that such is the case. Lourdes M. de Leon is the treasurer of the corporation
and is authorized to sign checks for the corporation. At the time of the issuance of the checks,
there were sufficient funds in the bank to cover payment of the amount of P2 million pesos.

It is, however, our view that there is basis to rule that the act of issuing the checks was well
within the ambit of a valid corporate act, for it was for securing a loan to finance the activities of
the corporation, hence, not an ultra vires act.

"An ultra vires act is one committed outside the object for which a corporation is created as
defined by the law of its organization and therefore beyond the power conferred upon it by
law"16 The term "ultra vires" is "distinguished from an illegal act for the former is merely
voidable which may be enforced by performance, ratification, or estoppel, while the latter is void
and cannot be validated."17

The next question to determine is whether Lourdes M. de Leon and Antonio de las Alas were
personally liable for the checks issued as corporate officers and authorized signatories of the

"Personal liability of a corporate director, trustee or officer along (although not necessarily) with
the corporation may so validly attach, as a rule, only when:

"1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross
negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the
corporation, its stockholders or other persons;

"2. He consents to the issuance of watered down stocks or who, having knowledge thereof, does
not forthwith file with the corporate secretary his written objection thereto;

"3. He agrees to hold himself personally and solidarily liable with the corporation; or

"4. He is made, by a specific provision of law, to personally answer for his corporate action."18
In the case at bar, Lourdes M. de Leon and Antonio de las Alas as treasurer and Chairman of Hi-
Cement were authorized to issue the checks. However, Ms. de Leon was negligent when she
signed the confirmation letter requested by Mr. Yap of Atrium and Mr. Henry of E.T. Henry for
the rediscounting of the crossed checks issued in favor of E.T. Henry. She was aware that the
checks were strictly endorsed for deposit only to the payee's account and not to be further
negotiated. What is more, the confirmation letter contained a clause that was not true, that is,
"that the checks issued to E.T. Henry were in payment of Hydro oil bought by Hi-Cement from
E.T. Henry". Her negligence resulted in damage to the corporation. Hence, Ms. de Leon may be
held personally liable therefor.1wphi1.nt

The next issue is whether or not petitioner Atrium was a holder of the checks in due course. The
Negotiable Instruments Law, Section 52 defines a holder in due course, thus:

"A holder in due course is a holder who has taken the instrument under the following conditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without notice that it had been
previously dishonored, if such was the fact;

(c) That he took it in good faith and for value;

(d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument
or defect in the title of the person negotiating it."

In the instant case, the checks were crossed checks and specifically indorsed for deposit to
payee's account only. From the beginning, Atrium was aware of the fact that the checks were all
for deposit only to payee's account, meaning E.T. Henry. Clearly, then, Atrium could not be
considered a holder in due course.

However, it does not follow as a legal proposition that simply because petitioner Atrium was not
a holder in due course for having taken the instruments in question with notice that the same was
for deposit only to the account of payee E.T. Henry that it was altogether precluded from
recovering on the instrument. The Negotiable Instruments Law does not provide that a holder not
in due course can not recover on the instrument.19

The disadvantage of Atrium in not being a holder in due course is that the negotiable instrument
is subject to defenses as if it were non-negotiable.20 One such defense is absence or failure of

We need not rule on the other issues raised, as they merely follow as a consequence of the
foregoing resolutions.

WHEREFORE, the petitions are hereby DENIED. The decision and resolution of the Court of
Appeals in CA-G. R. CV No. 26686, are hereby AFFIRMED in toto.
No costs.


Davide, Jr., Puno, Kapunan, and Ynares-Santiago, JJ., concur.


1 In CA-G. R. CV No. 26686, promulgated on March 17, 1973, Francisco, C., J., ponente,
Ramirez and Gutierrez, JJ., concurring.

2 In G. R. No. 121794.

3 Consolidated Memorandum, G. R. No. 121794, Rollo, pp. 191-226, at pp. 192-193.

4 Original Record, Decision, Judge Edilberto G. Sandoval, presiding, pp. 356-362.

5 Petition, Annex "C", in G. R. No. 109491, Rollo, pp. 319-339 and Petition, Annex "A", in G.
R. No. 121794, Rollo, pp. 30-49.

6 TSN, September 30, 1985, pp. 6-19.

7 TSN, January 29, 1988, pp. 15-16.

8 Original Record, Decision, Judge Edilberto G. Sandoval, presiding, pp. 356-362.

9 Ibid., Notice of Appeal, Lourdes, p. 366, and Notice of Appeal Hi-Cement, p. 365.

10 CA Rollo, Defendant-Appellant Lourdes M. De Leon's Brief, pp. 10-10N.

11 Ibid., Defendant Appellant's Brief, pp. 23C-23II.

12 CA Rollo, Decision, pp. 78-99, Francisco, C., J., ponente, Ramirez and Gutierrez, JJ.,

13 G. R. No. 109491, Petition filed on April 13, 1993, Rollo, pp. 3-18; G. R. No. 121794,
Petition filed on October 20, 1995, Rollo, pp. 10-28. On January 31, 2000, we gave due course to
the petition. G. R. No. 109491, Rollo, pp. 244-245; G. R. No. 121794, Rollo, pp. 152-153.

14 Petition, G. R. No. 1109491, Rollo, pp. 10-16.

15 Petition, G. R. No. 121794, Rollo, p. 16.

16 Republic v. Acoje Mining Co., Inc., 117 Phil. 379, 383 [1963]; Corporation Code Sec. 45.
17 Republic v. Acoje Mining Co., Inc., supra, Note 16, at pp. 383-384.

18 FCY Construction Group, Inc. v. Court of Appeals, G. R. No. 123358, February 1, 2000,
citing Tramat Mercantile, Inc. v. Court of Appeals, 238 SCRA 14, 18-19 [1994]; Equitable
Banking Corporation v. NLRC, 339 Phil. 541, 566 (1997).

19 Chan Wan v. Tan Kim and Chen So, 109 Phil. 706 (1960).

20 State Investment House v. Intermediate Appellate Court, 175 SCRA 310, 317 (1989).

21 Negotiable Instruments Law, Sec. 28.

Republic of the Philippines


G.R. No. 125469 October 27, 1997


and PUERTO AZUL LAND, INC., respondents.


The Securities and Exchange Commission is the government agency, under the direct general
supervision of the Office of the President, 1 with the immense task of enforcing the Revised
Securities Act, and all other duties assigned to it by pertinent laws. Among its inumerable
functions, and one of the most important, is the supervision of all corporations, partnerships or
associations, who are grantees of primary franchise and/or a license or permit issued by the
government to operate in the Philippines. 2 Just how far this regulatory authority extends,
particularly, with regard to the Petitioner Philippine Stock Exchange, Inc. is the issue in the case
at bar.

In this Petition for Review on Certiorari, petitioner assails the resolution of the respondent Court
of Appeals, dated June 27, 1996, which affirmed the decision of the Securities and Exchange
Commission ordering the petitioner Philippine Stock Exchange, Inc. to allow the private
respondent Puerto Azul Land, Inc. to be listed in its stock market, thus paving the way for the
public offering of PALI's shares.

The facts of the case are undisputed, and are hereby restated in sum.

The Puerto Azul Land, Inc. (PALI), a domestic real estate corporation, had sought to offer its
shares to the public in order to raise funds allegedly to develop its properties and pay its loans
with several banking institutions. In January, 1995, PALI was issued a Permit to Sell its shares to
the public by the Securities and Exchange Commission (SEC). To facilitate the trading of its
shares among investors, PALI sought to course the trading of its shares through the Philippine
Stock Exchange, Inc. (PSE), for which purpose it filed with the said stock exchange an
application to list its shares, with supporting documents attached.

On February 8, 1996, the Listing Committee of the PSE, upon a perusal of PALI's application,
recommended to the PSE's Board of Governors the approval of PALI's listing application.
On February 14, 1996, before it could act upon PALI's application, the Board of Governors of the
PSE received a letter from the heirs of Ferdinand E. Marcos, claiming that the late President
Marcos was the legal and beneficial owner of certain properties forming part of the Puerto Azul
Beach Hotel and Resort Complex which PALI claims to be among its assets and that the Ternate
Development Corporation, which is among the stockholders of PALI, likewise appears to have
been held and continue to be held in trust by one Rebecco Panlilio for then President Marcos and
now, effectively for his estate, and requested PALI's application to be deferred. PALI was
requested to comment upon the said letter.

PALI's answer stated that the properties forming part of the Puerto Azul Beach Hotel and Resort
Complex were not claimed by PALI as its assets. On the contrary, the resort is actually owned by
Fantasia Filipina Resort, Inc. and the Puerto Azul Country Club, entities distinct from PALI.
Furthermore, the Ternate Development Corporation owns only 1.20% of PALI. The Marcoses
responded that their claim is not confined to the facilities forming part of the Puerto Azul Hotel
and Resort Complex, thereby implying that they are also asserting legal and beneficial ownership
of other properties titled under the name of PALI.

On February 20, 1996, the PSE wrote Chairman Magtanggol Gunigundo of the Presidential
Commission on Good Government (PCGG) requesting for comments on the letters of the PALI
and the Marcoses. On March 4, 1996, the PSE was informed that the Marcoses received a
Temporary Restraining Order on the same date, enjoining the Marcoses from, among others,
"further impeding, obstructing, delaying or interfering in any manner by or any means with the
consideration, processing and approval by the PSE of the initial public offering of PALI." The
TRO was issued by Judge Martin S. Villarama, Executive Judge of the RTC of Pasig City in
Civil Case No. 65561, pending in Branch 69 thereof.

In its regular meeting held on March 27, 1996, the Board of Governors of the PSE reached its
decision to reject PALI's application, citing the existence of serious claims, issues and
circumstances surrounding PALI's ownership over its assets that adversely affect the suitability
of listing PALI's shares in the stock exchange.

On April 11, 1996, PALI wrote a letter to the SEC addressed to the then Acting Chairman,
Perfecto R. Yasay, Jr., bringing to the SEC's attention the action taken by the PSE in the
application of PALI for the listing of its shares with the PSE, and requesting that the SEC, in the
exercise of its supervisory and regulatory powers over stock exchanges under Section 6(j) of P.D.
No. 902-A, review the PSE's action on PALI's listing application and institute such measures as
are just and proper under the circumstances.

On the same date, or on April 11, 1996, the SEC wrote to the PSE, attaching thereto the letter of
PALI and directing the PSE to file its comments thereto within five days from its receipt and for
its authorized representative to appear for an "inquiry" on the matter. On April 22, 1996, the PSE
submitted a letter to the SEC containing its comments to the April 11, 1996 letter of PALI.

On April 24, 1996, the SEC rendered its Order, reversing the PSE's decision. The dispositive
portion of the said order reads:
WHEREFORE, premises considered, and invoking the Commissioner's authority and jurisdiction
under Section 3 of the Revised Securities Act, in conjunction with Section 3, 6(j) and 6(m) of
Presidential Decree No. 902-A, the decision of the Board of Governors of the Philippine Stock
Exchange denying the listing of shares of Puerto Azul Land, Inc., is hereby set aside, and the
PSE is hereby ordered to immediately cause the listing of the PALI shares in the Exchange,
without prejudice to its authority to require PALI to disclose such other material information it
deems necessary for the protection of the investigating public.

This Order shall take effect immediately.


PSE filed a motion for reconsideration of the said order on April 29, 1996, which was, however
denied by the Commission in its May 9, 1996 Order which states:

WHEREFORE, premises considered, the Commission finds no compelling reason to reconsider

its order dated April 24, 1996, and in the light of recent developments on the adverse claim
against the PALI properties, PSE should require PALI to submit full disclosure of material facts
and information to protect the investing public. In this regard, PALI is hereby ordered to amend
its registration statements filed with the Commission to incorporate the full disclosure of these
material facts and information.

Dissatisfied with this ruling, the PSE filed with the Court of Appeals on May 17, 1996 a Petition
for Review (with Application for Writ of Preliminary Injunction and Temporary Restraining
Order), assailing the above mentioned orders of the SEC, submitting the following as errors of
the SEC:






On June 4, 1996, PALI filed its Comment to the Petition for Review and subsequently, a
Comment and Motion to Dismiss. On June 10, 1996, PSE fled its Reply to Comment and
Opposition to Motion to Dismiss.

On June 27, 1996, the Court of Appeals promulgated its Resolution dismissing the PSE's Petition
for Review. Hence, this Petition by the PSE.

The appellate court had ruled that the SEC had both jurisdiction and authority to look into the
decision of the petitioner PSE, pursuant to Section 3 3 of the Revised Securities Act in relation to
Section 6(j) and 6(m) 4 of P.D. No. 902-A, and Section 38(b) 5 of the Revised Securities Act,
and for the purpose of ensuring fair administration of the exchange. Both as a corporation and as
a stock exchange, the petitioner is subject to public respondent's jurisdiction, regulation and
control. Accepting the argument that the public respondent has the authority merely to supervise
or regulate, would amount to serious consequences, considering that the petitioner is a stock
exchange whose business is impressed with public interest. Abuse is not remote if the public
respondent is left without any system of control. If the securities act vested the public respondent
with jurisdiction and control over all corporations; the power to authorize the establishment of
stock exchanges; the right to supervise and regulate the same; and the power to alter and
supplement rules of the exchange in the listing or delisting of securities, then the law certainly
granted to the public respondent the plenary authority over the petitioner; and the power of
review necessarily comes within its authority.

All in all, the court held that PALI complied with all the requirements for public listing,
affirming the SEC's ruling to the effect that:

. . . the Philippine Stock Exchange has acted in an arbitrary and abusive manner in disapproving
the application of PALI for listing of its shares in the face of the following considerations:

1. PALI has clearly and admittedly complied with the Listing Rules and full disclosure
requirements of the Exchange;

2. In applying its clear and reasonable standards on the suitability for listing of shares, PSE
has failed to justify why it acted differently on the application of PALI, as compared to the IPOs
of other companies similarly situated that were allowed listing in the Exchange;

3. It appears that the claims and issues on the title to PALI's properties were even less
serious than the claims against the assets of the other companies in that, the assertions of the
Marcoses that they are owners of the disputed properties were not substantiated enough to
overcome the strength of a title to properties issued under the Torrens System as evidence of
ownership thereof;

4. No action has been filed in any court of competent jurisdiction seeking to nullify PALI's
ownership over the disputed properties, neither has the government instituted recovery
proceedings against these properties. Yet the import of PSE's decision in denying PALI's
application is that it would be PALI, not the Marcoses, that must go to court to prove the legality
of its ownership on these properties before its shares can be listed.
In addition, the argument that the PALI properties belong to the Military/Naval Reservation does
not inspire belief. The point is, the PALI properties are now titled. A property losses its public
character the moment it is covered by a title. As a matter of fact, the titles have long been settled
by a final judgment; and the final decree having been registered, they can no longer be re-opened
considering that the one year period has already passed. Lastly, the determination of what
standard to apply in allowing PALI's application for listing, whether the discretion method or the
system of public disclosure adhered to by the SEC, should be addressed to the Securities
Commission, it being the government agency that exercises both supervisory and regulatory
authority over all corporations.

On August 15, 19961 the PSE, after it was granted an extension, filed the instant Petition for
Review on Certiorari, taking exception to the rulings of the SEC and the Court of Appeals.
Respondent PALI filed its Comment to the petition on October 17, 1996. On the same date, the
PCGG filed a Motion for Leave to file a Petition for Intervention. This was followed up by the
PCGG's Petition for Intervention on October 21, 1996. A supplemental Comment was filed by
PALI on October 25, 1997. The Office of the Solicitor General, representing the SEC and the
Court of Appeals, likewise filed its Comment on December 26, 1996. In answer to the PCGG's
motion for leave to file petition for intervention, PALI filed its Comment thereto on January 17,
1997, whereas the PSE filed its own Comment on January 20, 1997.

On February 25, 1996, the PSE filed its Consolidated Reply to the comments of respondent PALI
(October 17, 1996) and the Solicitor General (December 26, 1996). On May 16, 1997, PALI filed
its Rejoinder to the said consolidated reply of PSE.

PSE submits that the Court of Appeals erred in ruling that the SEC had authority to order the
PSE to list the shares of PALI in the stock exchange. Under presidential decree No. 902-A, the
powers of the SEC over stock exchanges are more limited as compared to its authority over
ordinary corporations. In connection with this, the powers of the SEC over stock exchanges
under the Revised Securities Act are specifically enumerated, and these do not include the power
to reverse the decisions of the stock exchange. Authorities are in abundance even in the United
States, from which the country's security policies are patterned, to the effect of giving the
Securities Commission less control over stock exchanges, which in turn are given more lee-way
in making the decision whether or not to allow corporations to offer their stock to the public
through the stock exchange. This is in accord with the "business judgment rule" whereby the
SEC and the courts are barred from intruding into business judgments of corporations, when the
same are made in good faith. the said rule precludes the reversal of the decision of the PSE to
deny PALI's listing application, absent a showing of bad faith on the part of the PSE. Under the
listing rules of the PSE, to which PALI had previously agreed to comply, the PSE retains the
discretion to accept or reject applications for listing. Thus, even if an issuer has complied with
the PSE listing rules and requirements, PSE retains the discretion to accept or reject the issuer's
listing application if the PSE determines that the listing shall not serve the interests of the
investing public.

Moreover, PSE argues that the SEC has no jurisdiction over sequestered corporations, nor with
corporations whose properties are under sequestration. A reading of Republic of the Philippines
vs. Sadiganbayan, G.R. No. 105205, 240 SCRA 376, would reveal that the properties of PALI,
which were derived from the Ternate Development Corporation (TDC) and the Monte del Sol
Development Corporation (MSDC). are under sequestration by the PCGG, and subject of
forfeiture proceedings in the Sandiganbayan. This ruling of the Court is the "law of the case"
between the Republic and TDC and MSDC. It categorically declares that the assets of these
corporations were sequestered by the PCGG on March 10, 1986 and April 4, 1988.

It is, likewise, intimated that the Court of Appeals' sanction that PALI's ownership over its
properties can no longer be questioned, since certificates of title have been issued to PALI and
more than one year has since lapsed, is erroneous and ignores well settled jurisprudence on land
titles. That a certificate of title issued under the Torrens System is a conclusive evidence of
ownership is not an absolute rule and admits certain exceptions. It is fundamental that forest
lands or military reservations are non-alienable. Thus, when a title covers a forest reserve or a
government reservation, such title is void.

PSE, likewise, assails the SEC's and the Court of Appeals reliance on the alleged policy of "full
disclosure" to uphold the listing of PALI's shares with the PSE, in the absence of a clear mandate
for the effectivity of such policy. As it is, the case records reveal the truth that PALI did not
comply with the listing rules and disclosure requirements. In fact, PALI's documents supporting
its application contained misrepresentations and misleading statements, and concealed material
information. The matter of sequestration of PALI's properties and the fact that the same form part
of military/naval/forest reservations were not reflected in PALI's application.

It is undeniable that the petitioner PSE is not an ordinary corporation, in that although it is
clothed with the markings of a corporate entity, it functions as the primary channel through
which the vessels of capital trade ply. The PSE's relevance to the continued operation and
filtration of the securities transactions in the country gives it a distinct color of importance such
that government intervention in its affairs becomes justified, if not necessarily. Indeed, as the
only operational stock exchange in the country today, the PSE enjoys a monopoly of securities
transactions, and as such, it yields an immense influence upon the country's economy.

Due to this special nature of stock exchanges, the country's lawmakers has seen it wise to give
special treatment to the administration and regulation of stock exchanges. 6

These provisions, read together with the general grant of jurisdiction, and right of supervision
and control over all corporations under Sec. 3 of P.D. 902-A, give the SEC the special mandate
to be vigilant in the supervision of the affairs of stock exchanges so that the interests of the
investing public may be fully safeguard.

Section 3 of Presidential Decree 902-A, standing alone, is enough authority to uphold the SEC's
challenged control authority over the petitioner PSE even as it provides that "the Commission
shall have absolute jurisdiction, supervision, and control over all corporations, partnerships or
associations, who are the grantees of primary franchises and/or a license or permit issued by the
government to operate in the Philippines. . ." The SEC's regulatory authority over private
corporations encompasses a wide margin of areas, touching nearly all of a corporation's
concerns. This authority springs from the fact that a corporation owes its existence to the
concession of its corporate franchise from the state.

The SEC's power to look into the subject ruling of the PSE, therefore, may be implied from or be
considered as necessary or incidental to the carrying out of the SEC's express power to insure fair
dealing in securities traded upon a stock exchange or to ensure the fair administration of such
exchange. 7 It is, likewise, observed that the principal function of the SEC is the supervision and
control over corporations, partnerships and associations with the end in view that investment in
these entities may be encouraged and protected, and their activities for the promotion of
economic development. 8

Thus, it was in the alleged exercise of this authority that the SEC reversed the decision of the
PSE to deny the application for listing in the stock exchange of the private respondent PALI. The
SEC's action was affirmed by the Court of Appeals.

We affirm that the SEC is the entity with the primary say as to whether or not securities,
including shares of stock of a corporation, may be traded or not in the stock exchange. This is in
line with the SEC's mission to ensure proper compliance with the laws, such as the Revised
Securities Act and to regulate the sale and disposition of securities in the country. 9 As the
appellate court explains:

Paramount policy also supports the authority of the public respondent to review petitioner's
denial of the listing. Being a stock exchange, the petitioner performs a function that is vital to the
national economy, as the business is affected with public interest. As a matter of fact, it has often
been said that the economy moves on the basis of the rise and fall of stocks being traded. By its
economic power, the petitioner certainly can dictate which and how many users are allowed to
sell securities thru the facilities of a stock exchange, if allowed to interpret its own rules liberally
as it may please. Petitioner can either allow or deny the entry to the market of securities. To
repeat, the monopoly, unless accompanied by control, becomes subject to abuse; hence,
considering public interest, then it should be subject to government regulation.

The role of the SEC in our national economy cannot be minimized. The legislature, through the
Revised Securities Act, Presidential Decree No. 902-A, and other pertinent laws, has entrusted to
it the serious responsibility of enforcing all laws affecting corporations and other forms of
associations not otherwise vested in some other government office. 10

This is not to say, however, that the PSE's management prerogatives are under the absolute
control of the SEC. The PSE is, alter all, a corporation authorized by its corporate franchise to
engage in its proposed and duly approved business. One of the PSE's main concerns, as such, is
still the generation of profit for its stockholders. Moreover, the PSE has all the rights pertaining
to corporations, including the right to sue and be sued, to hold property in its own name, to enter
(or not to enter) into contracts with third persons, and to perform all other legal acts within its
allocated express or implied powers.

A corporation is but an association of individuals, allowed to transact under an assumed

corporate name, and with a distinct legal personality. In organizing itself as a collective body, it
waives no constitutional immunities and perquisites appropriate to such a body. 11 As to its
corporate and management decisions, therefore, the state will generally not interfere with the
same. Questions of policy and of management are left to the honest decision of the officers and
directors of a corporation, and the courts are without authority to substitute their judgment for the
judgment of the board of directors. The board is the business manager of the corporation, and so
long as it acts in good faith, its orders are not reviewable by the courts. 12

Thus, notwithstanding the regulatory power of the SEC over the PSE, and the resultant authority
to reverse the PSE's decision in matters of application for listing in the market, the SEC may
exercise such power only if the PSE's judgment is attended by bad faith. In Board of Liquidators
vs. Kalaw, 13 it was held that bad faith does not simply connote bad judgment or negligence. It
imports a dishonest purpose or some moral obliquity and conscious doing of wrong. It means a
breach of a known duty through some motive or interest of ill will, partaking of the nature of

In reaching its decision to deny the application for listing of PALI, the PSE considered important
facts, which, in the general scheme, brings to serious question the qualification of PALI to sell its
shares to the public through the stock exchange. During the time for receiving objections to the
application, the PSE heard from the representative of the late President Ferdinand E. Marcos and
his family who claim the properties of the private respondent to be part of the Marcos estate. In
time, the PCGG confirmed this claim. In fact, an order of sequestration has been issued covering
the properties of PALI, and suit for reconveyance to the state has been filed in the Sandiganbayan
Court. How the properties were effectively transferred, despite the sequestration order, from the
TDC and MSDC to Rebecco Panlilio, and to the private respondent PALI, in only a short span of
time, are not yet explained to the Court, but it is clear that such circumstances give rise to serious
doubt as to the integrity of PALI as a stock issuer. The petitioner was in the right when it refused
application of PALI, for a contrary ruling was not to the best interest of the general public. The
purpose of the Revised Securities Act, after all, is to give adequate and effective protection to the
investing public against fraudulent representations, or false promises, and the imposition of
worthless ventures. 14

It is to be observed that the U.S. Securities Act emphasized its avowed protection to acts
detrimental to legitimate business, thus:

The Securities Act, often referred to as the "truth in securities" Act, was designed not only to
provide investors with adequate information upon which to base their decisions to buy and sell
securities, but also to protect legitimate business seeking to obtain capital through honest
presentation against competition from crooked promoters and to prevent fraud in the sale of
securities. (Tenth Annual Report, U.S. Securities & Exchange Commission, p. 14).

As has been pointed out, the effects of such an act are chiefly (1) prevention of excesses and
fraudulent transactions, merely by requirement of that their details be revealed; (2) placing the
market during the early stages of the offering of a security a body of information, which
operating indirectly through investment services and expert investors, will tend to produce a
more accurate appraisal of a security, . . . Thus, the Commission may refuse to permit a
registration statement to become effective if it appears on its face to be incomplete or inaccurate
in any material respect, and empower the Commission to issue a stop order suspending the
effectiveness of any registration statement which is found to include any untrue statement of a
material fact or to omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading. (Idem).

Also, as the primary market for securities, the PSE has established its name and goodwill, and it
has the right to protect such goodwill by maintaining a reasonable standard of propriety in the
entities who choose to transact through its facilities. It was reasonable for the PSE, therefore, to
exercise its judgment in the manner it deems appropriate for its business identity, as long as no
rights are trampled upon, and public welfare is safeguarded.

In this connection, it is proper to observe that the concept of government absolutism is a thing of
the past, and should remain so.

The observation that the title of PALI over its properties is absolute and can no longer be assailed
is of no moment. At this juncture, there is the claim that the properties were owned by TDC and
MSDC and were transferred in violation of sequestration orders, to Rebecco Panlilio and later on
to PALI, besides the claim of the Marcoses that such properties belong to the Marcos estate, and
were held only in trust by Rebecco Panlilio. It is also alleged by the petitioner that these
properties belong to naval and forest reserves, and therefore beyond private dominion. If any of
these claims is established to be true, the certificates of title over the subject properties now held
by PALI map be disregarded, as it is an established rule that a registration of a certificate of title
does not confer ownership over the properties described therein to the person named as owner.
The inscription in the registry, to be effective, must be made in good faith. The defense of
indefeasibility of a Torrens Title does not extend to a transferee who takes the certificate of title
with notice of a flaw.

In any case, for the purpose of determining whether PSE acted correctly in refusing the
application of PALI, the true ownership of the properties of PALI need not be determined as an
absolute fact. What is material is that the uncertainty of the properties' ownership and alienability
exists, and this puts to question the qualification of PALI's public offering. In sum, the Court
finds that the SEC had acted arbitrarily in arrogating unto itself the discretion of approving the
application for listing in the PSE of the private respondent PALI, since this is a matter addressed
to the sound discretion of the PSE, a corporation entity, whose business judgments are respected
in the absence of bad faith.

The question as to what policy is, or should be relied upon in approving the registration and sale
of securities in the SEC is not for the Court to determine, but is left to the sound discretion of the
Securities and Exchange Commission. In mandating the SEC to administer the Revised
Securities Act, and in performing its other functions under pertinent laws, the Revised Securities
Act, under Section 3 thereof, gives the SEC the power to promulgate such rules and regulations
as it may consider appropriate in the public interest for the enforcement of the said laws. The
second paragraph of Section 4 of the said law, on the other hand, provides that no security, unless
exempt by law, shall be issued, endorsed, sold, transferred or in any other manner conveyed to
the public, unless registered in accordance with the rules and regulations that shall be
promulgated in the public interest and for the protection of investors by the Commission.
Presidential Decree No. 902-A, on the other hand, provides that the SEC, as regulatory agency,
has supervision and control over all corporations and over the securities market as a whole, and
as such, is given ample authority in determining appropriate policies. Pursuant to this regulatory
authority, the SEC has manifested that it has adopted the policy of "full material disclosure"
where all companies, listed or applying for listing, are required to divulge truthfully and
accurately, all material information about themselves and the securities they sell, for the
protection of the investing public, and under pain of administrative, criminal and civil sanctions.
In connection with this, a fact is deemed material if it tends to induce or otherwise effect the sale
or purchase of its securities. 15 While the employment of this policy is recognized and
sanctioned by the laws, nonetheless, the Revised Securities Act sets substantial and procedural
standards which a proposed issuer of securities must satisfy. 16 Pertinently, Section 9 of the
Revised Securities Act sets forth the possible Grounds for the Rejection of the registration of a

The Commission may reject a registration statement and refuse to issue a permit to sell the
securities included in such registration statement if it finds that

(1) The registration statement is on its face incomplete or inaccurate in any material respect
or includes any untrue statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not misleading; or

(2) The issuer or registrant

(i) is not solvent or not in sound financial condition;

(ii) has violated or has not complied with the provisions of this Act, or the rules promulgated
pursuant thereto, or any order of the Commission;

(iii) has failed to comply with any of the applicable requirements and conditions that the
Commission may, in the public interest and for the protection of investors, impose before the
security can be registered;

(iv) has been engaged or is engaged or is about to engage in fraudulent transaction;

(v) is in any way dishonest or is not of good repute; or

(vi) does not conduct its business in accordance with law or is engaged in a business that is
illegal or contrary to government rules and regulations.

(3) The enterprise or the business of the issuer is not shown to be sound or to be based on
sound business principles;

(4) An officer, member of the board of directors, or principal stockholder of the issuer is
disqualified to be such officer, director or principal stockholder; or
(5) The issuer or registrant has not shown to the satisfaction of the Commission that the sale
of its security would not work to the prejudice of the public interest or as a fraud upon the
purchasers or investors. (Emphasis Ours)

A reading of the foregoing grounds reveals the intention of the lawmakers to make the
registration and issuance of securities dependent, to a certain extent, on the merits of the
securities themselves, and of the issuer, to be determined by the Securities and Exchange
Commission. This measure was meant to protect the interests of the investing public against
fraudulent and worthless securities, and the SEC is mandated by law to safeguard these interests,
following the policies and rules therefore provided. The absolute reliance on the full disclosure
method in the registration of securities is, therefore, untenable. As it is, the Court finds that the
private respondent PALI, on at least two points (nos. 1 and 5) has failed to support the propriety
of the issue of its shares with unfailing clarity, thereby lending support to the conclusion that the
PSE acted correctly in refusing the listing of PALI in its stock exchange. This does not discount
the effectivity of whatever method the SEC, in the exercise of its vested authority, chooses in
setting the standard for public offerings of corporations wishing to do so. However, the SEC
must recognize and implement the mandate of the law, particularly the Revised Securities Act,
the provisions of which cannot be amended or supplanted by mere administrative issuance.

In resume, the Court finds that the PSE has acted with justified circumspection, discounting,
therefore, any imputation of arbitrariness and whimsical animation on its part. Its action in
refusing to allow the listing of PALI in the stock exchange is justified by the law and by the
circumstances attendant to this case.

ACCORDINGLY, in view of the foregoing considerations, the Court hereby GRANTS the
Petition for Review on Certiorari. The Decisions of the Court of Appeals and the Securities and
Exchange Commission dated July 27, 1996 and April 24, 1996 respectively, are hereby
REVERSED and SET ASIDE, and a new Judgment is hereby ENTERED, affirming the decision
of the Philippine Stock Exchange to deny the application for listing of the private respondent
Puerto Azul Land, Inc.


Regalado and Puno, JJ., concur.

Mendoza, J., concurs in the result.


1 Section 1, Presidential Decree No. 902-A.

2 Section 3, Ibid.

3 Sec. 3. Administrative Agency. This Act shall be administered by the (Securities and
Exchange) Commission which shall continue to have the organization, powers, and functions
provided by Presidential Decree Numbered 902-A, 1653, 1758, and 1799 and Executive Order
No. 708. The Commission shall, except as otherwise expressly provided, have the power to
promulgate such rules and regulations as it may consider appropriate in the public interest for the
enforcement of the provisions hereof.

4 Sec. 6. In order to effectively exercise such jurisdiction, the (Securities and Exchange)
Commission shall possess the following powers:

xxx xxx xxx

(j) To authorize the establishment and operation of stock exchanges, commodity exchanges
and such other similar organizations and to supervise and regulale the same; including the
authority to determine their number, size and location, in the light of national or regional
requirements for such activities with the view to promote, conserve or rationalize investment;

xxx xxx xxx

(m) To exercise such other powers as may be provided by law as well as those which may be
implied from, or which are necessary or incidental to the carrying out of, the express powers
granted to the Commission or to achieve the objectives and purposes of this Decree.

5 Sec. 38. Powers with respect to exchanges and securities. (a) . . .

(b) The Commission is further authorized, if after making appropriate request in writing to a
securities exchange that such exchange effect on its own behalf specified changes in the rules
and practices and, after appropriate notice and opportunity for hearing, it determines that such
exchange has not made the changes so requested, and that such changes are necessary or
appropriate for the protection of investors or to insure fair dealing in securities traded upon such
exchange, by rules or regulations or by order, to alter or supplement the rules of such exchange
(insofar as necessary or appropriate to effect such changes) in respect of such matters as

(1) Safeguards in respect of the financial responsibility of members and adequate provision
against the evasion of financial responsibility through the use of corporate forms or special

(2) The limitation or prohibition of the registration or trading in any security within a
specified period after the issuance or primary distribution thereof;

(3) The listing or striking from listing of any security;

(4) Hours of trading;

(5) The manner, method, and place of soliciting business;

(6) Fictitious accounts;

(7) The time and method of making settlements, payments, and deliveries, and of closing

(8) he reporting of transactions on the exchange upon tickets maintained by or with the
consent of the exchange, including the method of reporting short sales, stopped sales, sales of
securities of issuers in default, bankruptcy or receivership, and sales involving other special

(9) The fixing of reasonable rates of commission, interests, listing, and other charges;

(10) Minimum units of trading;

(11) Odd-lot purchases and sales; and

(12) Minimum deposits on margin accounts.

6 See Sec. 6(j), PD. 902-A; Sec. 8, Revised Securities Act.

7 Section 6(m), Presidential Decree No. 902-A.

8 Abad vs. CFI of Pangasinan, Branch VIII, et. al., G.R. Nos. 58507-08, February 26, 1992,
206 SCRA 567.

9 Securities and Exchange Commission vs Court of Appeals, G.R. Nos. 106425 & 106431-
32, July 21,1995, 246 SCRA 738.

10 Pineda vs. Lantin, No. L-15350, November 30, 1962, 6 SCRA 757.

11 Bache & Co. (Phil.), Inc. vs. Hon. Judge Ruiz, et al., No. L-32409, February 27, 1971, 37
SCRA 823.

12 Sales vs. Securities and Exchange Commission, G.R. No. 54330, January 13, 1989, 169
SCRA 109.

13 No. L-18805, August 14, 1967, 20 SCRA 987.

14 Makati Stock Exchange, Inc. vs. Securities and Exchange Commission, No. L-23004,
June 30, 1965, 14 SCRA 620.

15 See SEC Rules Requiring Disclosure of Material Facts by Corporations Whose Securities
are Listed in Any Stock Exchange or Registered/Licensed under the Revised Securities Act.
(Approved by the SEC Chairman on February 8, 1973, and published in the Bulletin Today on
February 19, 1973).

16 See Sections 4, 8, 9, 10, and 11, Revised Securities Act.

Republic of the Philippines


G.R. No. 108576 January 20, 1999




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

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 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

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

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. 13
Correspondingly, 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

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

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 21 under 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 common shares, for the remaining 11,140
preferred shares, thus reducing its (the estate) common shares to 127,727. 26

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

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-at-source, 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. 31 The 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. 34 ANSCOR's subsequent protest on the assessments
was denied in 1983 by petitioner. 35

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.
The bone of contention is the interpretation and application of Section 83(b) of the 1939
Revenue Act 38 which provides:

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)

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.

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

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.

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 necessarily bound by the lower courts' conclusions of law
drawn from such facts. 45


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 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.

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 53 arising from the breach of its legal duty to withhold as distinguish
from its duty to pay tax since:

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.

Furthermore, ANSCOR's claim of amnesty cannot prosper. The implementing rules of P.D. 370
which expanded amnesty on previously 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

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.


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:

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 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

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).

In a response to the ruling of the American Supreme Court in the case of Eisner v. Macomber 75
(that pro rata stock 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 issuance-
redemption 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.

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 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,

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

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

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

1) the presence or absence of real business purpose,

2) the amount of earnings and profits available for the declaration of a regular dividends and
the corporation's past record with respect to the declaration of dividends,

3) the effect of the distribution, as compared with the declaration of regular dividend,

4) the lapse of time between issuance and redemption, 86

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,


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 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.

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 92 such 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

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

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.

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.

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

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. Although the existence of legitimate
corporate purposes may justify a corporation's acquisition of its own shares under Section 41 of
the Corporation Code, 115 such 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.

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.

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.

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


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

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

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
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 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.


Davide, Jr., C.J., Melo, Kapunan and Pardo, JJ., concur.

1 Court of Appeals decision, promulgated on January 15, 1993, penned by Justice O.
Herrera with Justices Montoya and Montenegro, concurring. The dispositive portion of which

WHEREFORE, finding no such abuse or improvident exercise of authority or discretion, the

decision of the Court of Tax Appeals must be as it is hereby AFFIRMED. (Rollo, p. 121; CA
Decision, p. 18)

2 Decision in CTA Case No. 3710, dated July 4, 1991 penned by Associate Judge Roaquin
with Judges A. Reyes and E. Acosta, concurring. (Annex "A"; Rollo, pp. 61-101, CTA Decision,
p. 41). The dispositive portion of which reads:

WHEREFORE, premises considered, the presumption of prima facie correctness of the

assessments issued by the respondent having been overcome by sufficient and convincing
evidence presented by petitioner, the decision appealed from is hereby reversed.

Without pronouncement as to costs.

3 Commonwealth Act 466, as amended, otherwise known as the Tax Code of 1939, Section
83(b) was renumbered to Sec. 66(b) by P.D. 1158, as amended, also known as the 1977 NIRC
(took effect June 3, 1977) with further codification under the NIRC of 1986 (Sec. 42, P.D. 1994).
Said provision was later renumbered to Sec. 73(b) by R.A. 8424 or the "Tax Reform Act of
1997" (took effect January 1, 1998) which provides exactly the same rule.

4 CTA Decision, p. 2; Rollo, p. 62.

5 The total original subscription of Don Andres was 4,971 shares including the 8 shares of
his 4 nominees with 2 shares each. (Rollo, p. 63).

6 Ibid.
7 According to the CA, the total shareholdings of Don Andres after the new shares were
issued is 15,471 common shares. (Rollo, p. 105).

8 Petitioner claims the transfer was made on October 27, 1947. (Memorandum of
Petitioner, p. 3).

9 Rollo, pp. 63-64.

10 Petition, filed March 10, 1993, p. 5; Rollo, p. 13; Petitioner's Memorandum, p. 3.

11 A 100% dividend was declared in 1947; 12,590 in 1949; 15,108 in 1950 (Rollo, p. 64).

12 This figure includes the qualifying shares of the nominees of Don Andres.

13 Rollo, p. 65.

14 Rollo, pp. 15,65.

15 Special Proceedings for the settlement of the estate of Don Andres was filed before the
then Court of First Instance (CFI) of Rizal and was terminated on November, 1974, (Rollo, pp.

16 Rollo, pp. 66, 105.

17 Rollo, pp. 67, 105.

18 Reference to the "Don Andres Estate" is only for the purpose of identity of the
personalities involved.

19 Rollo, pp. 68, 106.

20 The CA ruled that the shareholdings of both the Don Andres estate and Doa Carmen
each consisted of 22,756 original common shares and the rest as accumulated stock dividends
(Rollo, p. 106). However, upon the death of Don Andres, his estate supposedly received 25,247.5
common shares which is one-half of the 50,495 original common shares.

21 Tax avoidance as distinguish from tax evasion.

22 Rollo, p. 68.

23 Annex "G", Folder I, CTA Records, pp. 89-90; Rollo, pp. 69, 106.

24 Rollo, pp. 68-69.

25 ANSCOR's Articles of Incorporation was amended by reclassifying a certain number of

the common shares as preferred shares. (CTA Decision, p. 9; Rollo, p. 69).
26 Rollo, pp. 69, 106.

27 Rollo, p. 70.

28 Rollo, pp. 70-71, 106.

29 Rollo, p. 70.

30 Sec. 53. Withholding of tax at source. . . . (b) Nonresident aliens. All persons,
corporations and general copartnerships (compaias colectivas), in whatever capacity acting,
including lessees or mortgagors of real or personal property, trustees acting in any trust capacity,
executors, administrators, receivers, conservators, fiduciaries, employers, and all officers and
employees of the Government of the Philippines having the control, receipt, custody, disposal, or
payment of interested, dividends, rents, salaries, wages, premiums, annuities, compensation,
remunerations, emoluments, other fixed or determinable annual or periodical gains, profits, and
income of any non-resident alien individual, not engaged in trade or business within the
Philippines and not having any office or place of business therein, shall (except in the cases
provided for in subsection (a) of this section) deduct and withhold from such annual or periodical
gains, profits, and income a tax equal to twenty per centum thereof: Provided, That no such
deduction or withholding shall be required in the case of dividends paid by a foreign corporation
unless (1) such corporation is engaged in trade or business within the Philippines and (2) more
than eighty-five per centum of the gross income of such corporation for the three-year period
ending with the close of its taxable year preceding the declaration of such dividends (or for such
part of such period as the corporation has been in existence) was derived from sources within the
Philippines as determined under the provisions of section thirty-seven: Provided, further, That
the Commissioner of Internal Revenue may authorize such tax to be deducted and withheld from
the interest upon any securities the owners of which are not known to the withholding agent. (As
amended by Sec. 9 Rep. Act No. 2343).

(c) Return and payment. Every person required to deduct and withhold any tax under this
section shall make the return thereof, in duplicate, on or before the fifteenth day of April of each
year, and, on or before the time fixed by law for the payment of the tax, shall pay the amount
withheld to the officer of the Government of the Philippines authorized to receive it. Every such
person is made personally liable for such tax, and is indemnified against the claims and demands
of any persons for the amount of any payments made in accordance with the provision of this
section. (As amended by Sec. 9, Rep. Act No. 2343).1wphi1.nt

(d) Income of recipient. Income upon which any tax is required to be withheld at the
source under this section shall be included in the return of the recipient of such income, but any
amount of tax so withheld shall be credited against the amount of income tax as computed in
such return and the amount, if any, by which the income tax collected at source exceeds the tax
due on the return shall be refunded subject to the provision of section 309.

Sec. 54. Payment of corporation income tax at source. In the case of foreign
corporations subject to taxation under this Title not engaged in trade or business within the
Philippines and not having any office or place of business therein, there shall be deducted and
withheld at the source in the same manner and upon the same items as is provided in section
fifty-three a tax equal to thirty per centum thereof, and such tax shall be returned and paid in the
same manner and subject to the same conditions as provided in that section; Provided, however,
That no such deduction or withholding shall be required in the case of reinsurance premiums
ceded to foreign insurance corporations not engaged in trade or business in the Philippines and
having no office or place of business in the Philippines and having no officer or place of business
therein. (As amended by Sec. 10, R.A. No. 2343, and Sec. 2, R.A. No. 3825).

31 For the 1968 and the 1969 deficiency withholding tax, private respondent was assessed
P3,428,613.90 and P2,950,000.00, respectively or for a total of P6,378,613.50. Certain
documents from the records shows that the 1969 assessments were reduced. (Folder I, CTA
records in case no. 3710, p. 289; Rollo, pp. 71-72, 106.)

32 Rollo, pp. 72, 107.

33 P.D. 23 dated October 16, 1972 is entitled "Proclaiming a Tax Amnesty Subject to Certain

34 Rollo, p. 72.

35 Rollo, p. 24.

36 CTA Decision, p. 41; Rollo, p. 101.

37 CA Decision, p. 18; Rollo, p. 121.

38 The original provision was retained in R.A. 8424 except that the reference to the year was

39 Petitioner's Reply, pp. 2, 10.

40 Board of Directors Resolutions dated June 15, 1968 and October 30, 1969 (BIR Records,
Folder III, PP. 12-13; 7-8).

41 Comment, pp. 13-14; Rejoinder, pp. 4-5.

42 Gloninger v. Commissioner, 339 F2d 211; Blotch v. U.S. 261 F. Supp. 597, 386 F2d 839;
John P. Elton v. Commissioner, 47 B.T.A. 111.

43 Philippine Refining Company v. CA, 326 Phil. 680, (1996); Commissioner of Internal
Revenue v. CA 312 Phil., 337; Commissioner of Internal Revenue v. Philippine American Life
Insurance Co., 244 SCRA 446 (1995); CIR v. Administratix of the Estate of Echarri, 67 Phil.

44 Binalay v. Manalo, 195 SCRA 374, 380 citing Sese v. IAC, 152 SCRA 585.
45 See Manila Bay Club Corp. v. CA , 62 SCAD 435; 315 Phil. 807 (1995); Pilar
Development Corporation v. IAC, 146 SCRA 215 (1986).

46 Promulgated November 24, 1972.

47 Tan v. Del Rosario, 55 SCAD 831 (1994).

48 Phil. Guaranty Co., Inc. v. C.I.R., 15 SCRA 1 (1965).

49 Bank of America v. CA, 53 SCAD 406, 413 (1994).

50 Sec. 20(n), 1986 Tax Code.

51 The pronouncement of the Court in the case of Bank of America, supra that the payee is
the taxpayer should not be confused with the payee in the case at bar. Therein, the payee referred
to is the foreign entity recipient of profit remitted by a local company. Herein, the payee referred
to is the party who received money as tax.

52 Commissioner of Internal Revenue v. Procter and Gamble, 204 SCRA 377 (1991).

53 Phil. Guaranty v. CIR, supra. See also Sec. 53 (c) 1939 Tax Code, as amended by R.A.
No. 2343 which provided in part that ". . . . Every such person is made personally, liable for such
tax . . . ."

54 See Commissioner of Internal Revenue v. Malayan Insurance, 129 Phil. 165, 170 (1967)
citing Jai Alai v. Republic, L-17462, May 29, 1967; 1967 B PHILD 460.

55 Ibid.

56 The Whereas clauses of P.D. No. 23 provides in part:

xxx xxx xxx

WHEREAS, it is the policy of the Government to give tax evaders a chance to reform and be a
part of the New Society with a clean slate;

WHEREAS, tax evaders who wish to relent and are willing to reform may be reluctant to
disclose their liability for income taxes because of the criminal and civil penalties attendant to
tax evasion;

xxx xxx xxx

57 People v. Castaeda, Jr., 165 SCRA 327, 341 (1988) citing E. Rodriguez Inc. v. The
Collector of Internal Revenue, 139 Phil. 354 (1969) and Commissioner of Internal Revenue v.
A.D. Guerrero, 128 Phil. 197 (1967).
58 E. Rodriguez Inc. v. Collector of Internal Revenue, supra,: Province of Tarlac vs.
Alcantara, 216 SCRA 790; See also La Carlota Sugar Central v. Jimenez, 112 Phil. 232 (1961)
cited in Phil. Guaranty v. CIR, supra.

59 Sec. 4 of Revenue Regulations No. 2-74, dated January 14, 1974 (70, O.G. 1472,
February 25, 1974).

60 Later known as the U.S. Revenue Code of 1939.

61 Michie's Federal Tax Handbook, 1967 ed., p. 196.

62 Under Section 21(c)(2) of the 1986 NIRC, as amended, dividends are subject to a tax of
either 0% as of January 1, 1989 or to the schedule under Section 22(a)(2) or not subject to tax
under Section 24(e)(4) and 24(a)(6)D. Under the Tax Reform Act of 1997, dividends are subject
to a final tax.

63 Pasados v. Warner, 279 US 340, 73 L ed 729 (1929); See also Eisner v. Macomber, 64 L
ed 521 at 525, and Towne v. Eisner, 245 US 418, Gibbons v. Mahon, 136 U.S. 549, 560, 34 L ed
525, 527.

64 Fisher v. Trinidad, 43 Phil. 973, 974.

65 Towne v. Eisner.

66 Fisher v. Trinidad, supra.; Eisner v. Macomber, supra at 530.

67 Conwi v. CTA, 213 SCRA 83 (1992); Fisher v. Trinidad, supra.

68 Ibid.

69 The "gain derived from capital" is "not a gain accruing to capital, nor a growth or
increment of value in the investment, but a gain, a profit, something of exchangeable value
proceeding from the property, severed or drawn by the claimant for separate use, benefit and
disposal." U.S. v. Phellis, 257 US 156, 42 S Ct 63, 65, 66 L ed 180; Taft v. Bowers, 278 US 470,
49 S Ct 199 cited in Matic, Jr., Income Taxation in the Philippines, 1970 ed. P. 93.

70 Doyle v. Mitchell Brothers Co., 247 US 179, 38 S. Ct. 467 citing Stratton's Independence
v. Howbert, 231 U.S. 399, 415, 34 S. Ct. 136, 58 L ed 385.

71 Towne v. Eisner, supra.

72 Eisner v. Macomber, 252 US 189 cited in Fisher v. Trinidad, supra.

73 See Fisher, "The Nature and Capital of Income", cited in Cesar Rey, The Tax Code
Annotated, 1958 ed., p. 32 and 1964 ed. P. 42; Madrigal, et. al., v. Rafferty, et. al., 38 Phil. 414,
See also Section 36, Old Income tax Regulations.

74 CIR v. Administratix of the Estate of Echerri, 67 Phil. 502.

75 252 U.S. 189, 64 L ed 521, 40 S Ct 189 ALR 9 ALR 1570 (1920).

76 CIR v. Brown, 293 U.S. 570.

77 United States v. Davis, 397 U.S. 301, 25 L ed 2d 323, 328, 90 S Ct 1041 (1970).

78 105 A.L.R. 774-775.

79 Eisner v. Macomber, supra., 524 citing Davis v. Jackson, 25 N.E. 21.

80 Wise v. Meer, 78 Phil. 655; Ogan v. Meer, 83 Phil. 844.

81 Helvering v. Griffiths, 318 U.S. 371.

82 Hirsch v. CIR, 124 F2d 24; Commissioner v. Babson, 70 F2d 304; Randolph v.
Commissioner, 76 F2d 472; Commissioner v. Champion, 78 F2d 513; Brown v. Commissioner,
79 F2d 73; McGuire v. Commissioner, 84 F2d 432.

83 Bains v. United States, 289 F2d 644, 646 (1961); See also Ferro v. Comm., 242 F2d 838;
Callan Court Co. v. Cobb, 274 F2d 532.

84 Flanagan v. Helvering, 116 F2d 937.

85 Himmel v. Comm., 338 F2d 815; Blount v. Comm., 425 F2d 921; Comm. v. Berenbaum,
369 F2d 337.

86 Adler v. Comm., 77 F2d 733; Robinson v. Comm., 69 F2d 972.

87 Brown v. Comm., 79 F2d 73; Hyman v. Helvering, 71 F2d 342.

88 Levin v. Comm., 385 F2d 521.

89 West Tax Law Dictionary, 1993 ed., p. 691; Seda v. CIR, 82 T.C. 484 (1984).

90 33A Am Jur 2d, Federal Taxation (1995) Par. 4852; Income Tax Techniques, J.K. Lasser
Institute, vol. IV, Chapter 11, 11, 02.

91 This figure represents Don Andres' conjugal share. (Memorandum for private respondent,
p. 19).
92 Sec. 83 (c) [1939 NIRC] later Sec. 66(c) [1977 NIRC, as amended] and now Sec. 73 (c)
[1997 Tax Code] provides that; "Dividends distributed are deemed made from most recently
accumulated profits. Any distribution made to the shareholders or members of a corporation
in the year nineteen hundred and thirty-nine or subsequent tax years, shall be deemed to have
been made from the most recently accumulated profits or surplus, and shall constitute a part of
the annual income of the distributee for the year in which received: . . . ."; See also Hyman v.
Helvering, 71 F2d 342, 344.

93 Boman Environmental Development Corporation v. CA, 167 SCRA 540 (1985); Under
Section 43 of the New Corporation Code (B.P. 68), corporations can declare dividends out of the
"unrestricted retained earnings" and under Section 122 thereof, it cannot distribute any of its
assets or property except upon lawful distribution and after all debts and liabilities settled.

94 Hyman v. Helvering, supra.

95 Steinberg v. Velasco, 52 Phil. 953 (1925); Phil. Trust Co. v. Rivera, 44 Phil. 469 (1923).

96 Ibid.

97 See Phelps v. Commissioner, 247 F 2d 156, 158-159.

98 Bradbury v. Comm., 298 F2d 111; Bloch v. U.S., 386 F2d 839.

99 Asmussen v. CIR, 36 B.T.A. (F) 878; See also Neff v. U.S., 301 F2d 330; Cohen v. U.S. ,
192 F Supp. 216; Herman v. Comm., 283 F2d 227; Kessner v. Comm., 248 F2d 943; Comm. v.
Pope, 239 F2d 881; U.S. v. Fewel, 255 F2d 496.

100 Bryan v. CIR, 20 B.T.A. (F) 73.

101 CIR v. Cordingley, 78 F2d 118.

102 Helvering v. Gregory, 293 U.S. 465 cited in Commissioner of Internal Revenue v. Rufino,
148 SCRA 42, 50 (1987).

103 Patty v. Helvering, 98 F2d 717.

104 Bloch v. U.S., 261 F Supp. 597, 386 F2d 839; Boyle v. Comm., 187 F2d 557;
Commissioner v. Estate of Bedford, 325 U.S. 283, 89 L ed 1611, 65 S Ct 1157; See also the cases
of Hirsch, Flanagan and Davis, supra.

105 Hirsch v. Commissioner, supra; Hill v. Commissioner, supra.

106 McGuire v. Commissioner, 84 F2d 431; Brown, Jr., v. Commissioner, 79 F2d 73; Hill v.
Commissioner, 66 F2d 45.
107 Northup v. U.S., 240 F 2d 304, 307; See also McGinty v. Commissioner, 325 F2d 820,
821-822; U.S. v. Davis, 397 U.S. 301 (1990).

108 Some authorities add that the gain or profit must not only realized but must also
recognized. (33A Am Jur 2d, Federal Taxation [1995] par. 10000).

109 Commissioner of Internal Revenue v. Manning, 66 SCRA 14.

110 Eisner v. Macomber, supra, at 529.

111 De Nobili Cigar Co. v. Commissioner, 143 F 2d 436.

112 Patty v. Helvering, 98 F 2d 717.

113 Comment, pp. 14-16; Rollo, pp. 127-129; Rejoinder, p. 4; Rollo, p. 195.

114 CTA Decision, pp. 31-32; Rollo, pp. 91-92; CA Decision, pp. 11-13; Rollo, pp. 114-116.

115 Batas Pambansa Blg. 68, Section 41 provides: "Powers to acquire own shares. A stock
corporation shall have the power to purchase or acquire its own shares for a legitimate corporate
purpose or purposes, including but not limited to the following; Provided that the corporation has
unrestricted retained earnings in its books to cover the shares to be purchased or acquired:

1.) To eliminate fractional shares arising out of the stock dividends;

2.) To collect or compromise an indebtedness to the corporation, arising out of unpaid

subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and

3.) To pay dissenting or withdrawing stockholders entitled to payment for their shares under
then provisions of this Code.

116 Michie, Federal Tax Handbook, p. 101.

117 Sec. 23 of B.P. 68, also know as the Corporation Code of the Philippines.

118 Rollo, p. 113.

119 To make the stock dividend taxable is to impose an undisclosed lien and would be unfair
to intervening purchasers. (Commissioner v. Cordingley, 78 F2d 118).

120 Sec. 22. Tax on nonresident alien individual. (a) Nonresident alien engaged in
trade or business within the Philippines. There shall be levied, collected and paid for each
taxable year upon the entire income received from all sources within the Philippines by every
nonresident alien individual engaged in trade or business within the Philippines the tax imposed
by Section 21. (as amended by R.As. 2343 & 3841).
Sec. 21. Rates of tax on citizens or residents. There shall be levied, collected and paid
annually upon the entire income received in the preceding taxable year from all sources by every
individual, a citizen or resident of the Philippines, a tax equal to the sum of the following: . . . .
(as amended by R.A. 2343)

121 See 1986 and 1997 Tax Code where exchange of stocks is subject to a capital gains tax.

122 US v. Paire, 31 F. Supp. 898, 900; Kessler v. US, 124 F2d 152, 154.

123 Horwick v. CIR, 133 F2d 732, 737.

124 McDonald Restaurant v. CIR, 688 F2d 520, (1982); West Tax Law Dictionary, 1993 ed.,
Minn., West Publishing Co., pp. 676, 780.

125 Under the 1997 Tax Code, exchange of stocks is subject to capital gains tax.

126 13 Am. Jur. 318; Fletcher cited in Agbayani, Commercial Law, Vol. 3 (1979 ed.), p. 89.

127 In re Siberkraus, 229 NY Supp., 735.

128 2 Fletcher Cyc. Corp., p. 831 citing Best v. Oklahoma Mill Co., 14 Okla 135 Par 1005.

129 Sec. 5 par. 1, last sentence of Act 1459 [Old Corporation Law] now Sec. 6 of B.P. 68
requires that the distinguishing features be stated also in the Certificate of Stock.

130 McDonald v. CIR, supra.