When income is realized (Test of Realization): Stock
dividend in this case is not taxable for income FACTS: Frederick Fisher was a stockholder of because the stockholder has received nothing out Philippine American Drug Company, a domestic of the company's assets for his separate use and corporation. For the year 1919 he declared a “stock benefit. Instead, his original investment along with dividend” in the amount of P24,800 for which he whatever gains which resulted from the use of his was subsequently taxed by the respondent Collector and other stockholder’s money remains property of of Internal Revenue for the sum of P889.91 as the company. The fact that it is not yet his means income tax. Fisher paid under protest and brought the capital is still subject to business risks that can action for recovery. Trinidad demurred which was wipe out his entire investment. All he has received is sustained hence this appeal. a stock certificate indicating the increase in his capital in the company. Thus we can say that income ISSUE: WON “stock dividends”are “income” taxable has been realized when there has been a separation as such under Sec. 25 of Act No. 2833 [the Income of the interest of the stockholder from the general Tax Law]. (NO). capital of the corporation. This separation of interest happens when the company declares a cash HELD/RATIO: dividend on the shares of shareholders. Following Eisner vs. Macomber and other US cases, the Court held that “stock dividends”are “income” STREET, J., concurring: I agree that the trial court erred in taxable under the Income Tax Law. They justified the sustaining the demurrer, and the judgment must be applicability of the ruling by saying that there is but reversed. Instead of demurring the defendant should have slight difference in the wording of the two laws1 answered and alleged, if such be the case, that the stock dividend which was the subject of taxation represents the which defined “dividends” as part of taxable income. amount of earnings or profits distributed by means of the issuance of said stock dividend; and the case should have The receipt of stock dividends merely represents an been tried on that question of fact. increase in value of the assets of a corporation. The court defines stock dividends as “increase in capital It must be noted that section 25 (a) of Act No. 2833, under of corps, firms, partnerships, etc for a particular which this tax was imposed, does not levy a tax generally period.” They represent the increase in the on stock dividends to the extent of the part of the stock proportional share of each stockholder in the nor even to the extent of its value, but declares that stock company’s capital. It is not a distribution of the dividends shall be considered as income to the amount of the earnings or profits distributed. Under provision, before corporation’s profits to the stockholder. It only the tax can be lawfully assessed and collected, it must increases the stockholder’s SOURCE of income appear that he stock dividend represents earning or profits (capital), but does not increase income itself. distributed; and the burden of proof is on the Collector of Internal Revenue to show this. On definition of income tax: Act No. 2833 taxed any distribution by a corporation out of its earnings or OSTRAND, J., dissenting: Eisner vs. Macomber, for which profits. From the various definitions of income tax the majority largely based its decision is entirely cited, an income tax is a tax on the yearly profits inapplicable to this case. arising from property, salary, private revenue, (1) There is a radical difference between the definition of a capital invested, and all other sources of income. taxable stock dividend given in the US Income Tax Law, What is taxed is the profit, not the source. construed in the case of Eisner vs. Macomber, and that given in Act No. 2833 of the Philippine Legislature, the Act 1 with which we are concerned in the present case. The Act of Congress (1916): That the term "dividends" as used in this title shall be held to mean any distribution made or ordered to former provides that "stock dividend shall be considered made by a corporation, . . . which stock dividend shall be income, to the amount of its cash value;" the Philippine considered income, to the amount of its cash value. Act provides that "Stock dividend shall be considered income, to the amount of the earnings or profits Act No. 2833 of the Philippine Legislature: The term "dividends" distributed." The US statute made stock dividends based as used in this Law shall be held to mean any distribution made or ordered to be made by a corporation, . . . out of its earnings or upon an advance in the value of the property or profits accrued xxx, whether in cash or in stock of the corporation, investment taxable as income whether resulting from . . . . Stock dividend shall be considered income, to the amount of earning or not; our statute make stock dividends taxable the earnings or profits distributed. only to the amount of the earning and profits distributed, and stock dividends based on the increment income and are not taxable. Moreover, to constitute income, profits, or earnings need not necessarily be converted into cash.
(2) Unlike US Congress who is hampered by an organic law,
the Philippine Legislature has full power to levy taxes both on capital or property and on income.
JOHNS, J., dissenting: The legislature of the Philippine
Islands has a legal right to define the meaning of the words "dividend" and "income," by a legislative act and it expressly says "Stock dividend shall be considered income, to the amount of the earnings or profits distributed"; and when its meaning is defined by legislative act, it is the duty of the courts to follow that definition.