Concept of Income

1. Fisher vs. Trinidad; GR no. L-17518; 30 October 1922

2. CONCI V. CTA; GR NO. 48532; 31 AUGUST 1992
3. EISNER V. MACOMBER; 252 U.S.. 189 (1920)
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Fisher vs. Trinidad; GR no. L-17518; 30 October 1922
FACTS:
Frederick C. Fisher is a stockholder in Philippine American Drug Company (PADC). PADC declared a
"stock dividend”, his proportionate share of stock dividend was P24,800. Thereafter, income tax was
demanded on said stock dividend.
ISSUE: WON stock dividends are income and taxable as such
RULING: NO. "Stock dividends" are not "income." Stock dividends represent undistributed increase in
the capital of corporations or firms. Until the dividend is declared and paid, the corporate profits still
belong to the corporation, not to the stockholders.
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FACTS:
That during the year 1919 the Philippine American Drug Company was a corporation duly organized and
existing under the laws of the Philippine Islands, doing business in the City of Manila; that he appellant
was a stockholder in said corporation; that said corporation, as result of the business for that year,
declared a "stock dividend"; that the proportionate share of said stock divided of the appellant was
P24,800; that the stock dividend for that amount was issued to the appellant; that thereafter, in the month
of March, 1920, the appellant, upon demand of the appellee, paid under protest, and voluntarily, unto the
appellee the sum of P889.91 as income tax on said stock dividend. For the recovery of that sum (P889.91)
the present action was instituted. The defendant demurred to the petition upon the ground that it did not
state facts sufficient to constitute cause of action. The demurrer was sustained and the plaintiff appealed.

ISSUE: Whether or not the income received as dividends is taxable as an income?

HELD: No. Generally speaking, stock dividends represent undistributed increase in the capital of
corporations or firms, joint stock companies, etc., etc., for a particular period. They are used to show the
increased interest or proportional shares in the capital of each stockholder. In other words, the inventory
of the property of the corporation, etc., for particular period shows an increase in its capital, so that the
stock theretofore issued does not show the real value of the stockholder's interest, and additional stock is
issued showing the increase in the actual capital, or property, or assets of the corporation, etc.
Until the dividend is declared and paid, the corporate profits still belong to the corporation, not to the
stockholders, and are liable for corporate indebtedness. The rule is well established that cash dividend,
whether large or small, are regarded as "income" and all stock dividends, as capital or assets.
Having reached the conclusion, supported by the great weight of the authority, that "stock dividends" are
not "income," the same cannot be taxes under that provision of Act No. 2833 which provides for a tax
upon income. Under the guise of an income tax, property which is not an income cannot be taxed. When
the assets of a corporation have increased so as to justify the issuance of a stock dividend, the increase of
the assets should be taken account of the Government in the ordinary tax duplicates for the purposes of
assessment and collection of an additional tax

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CONWI V. CTA; GR NO. 48532; 31 AUGUST 1992 (CONWI NOT CONCI)
FACTS: Petitioners are employees of Procter and Gamble. They claim for tax refunds on their income
taxes which they claim to have been erroneously or illegally paid or collected.
ISSUE: WON proper rate of conversion of petitioners' dollar earnings for tax purposes is the
prevailing free market rate of exchange and not the par value of the peso
RULING: No. The par value of the peso is the proper rate. Revenue Memorandum Circular Nos. 7-
71 and 41-71 were issued to prescribed a uniform rate of exchange from US dollars to Philippine pesos
for INTERNAL REVENUE TAX PURPOSES for the years 1970 and 1971, respectively. Petitioners
forget that they are citizens of the Philippines, and their income, within or without, and in these cases
wholly without, are subject to income tax. Sec. 21, NIRC, as amended, does not brook any exemption.
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Facts:
Petitioners are employees of Procter and Gamble (Philippine Manufacturing Corporation, subsidiary of
Procter & Gamble, a foreign corporation).During the years 1970 and 1971, petitioners were assigned to
other subsidiaries of Procter & Gamble outside the Philippines, for which petitioners were paid US
dollars as compensation.
Petitioners filed their ITRs for 1970 and 1971, computing tax due by applying the dollar-to-peso
conversion based on the floating rate under BIR Ruling No. 70-027. In 1973, petitioners filed amened
ITRs for 1970 and 1971, this time using the par value of the peso as basis. This resulted in the alleged
overpayments, refund and/or tax credit, for which claims for refund were filed.

CTA held that the proper conversion rate for the purpose of reporting and paying the Philippine income
tax on the dollar earnings of petitioners are the rates prescribed under Revenue Memorandum Circulars
Nos. 7-71 and 41-71. The refund claims were denied.

Issue:

(1) WON petitioners' dollar earnings are receipts derived from foreign exchange transactions.

(2) WON proper rate of conversion of petitioners' dollar earnings for tax purposes in the prevailing
free market rate of exchange and not the par value of the peso
Ruling:

Income may be defined as an amount of money coming to a person or corporation within a specified time,
whether as payment for services, interest or profit from investment. Unless otherwise specified, it means
cash or its equivalent. 4 Income can also be though of as flow of the fruits of one's labor. 5

(1)Petitioners are correct as to their claim that their dollar earnings are not receipts derived from foreign
exchange transactions. For a foreign exchange transaction is simply that — a transaction in foreign
exchange, foreign exchange being "the conversion of an amount of money or currency of one country into
an equivalent amount of money or currency of another." 6 When petitioners were assigned to the foreign
subsidiaries of Procter & Gamble, they were earning in their assigned nation's currency and were ALSO
spending in said currency. There was no conversion, therefore, from one currency to another.

(2)Petitioners claim that since the dollar earnings do not fall within the classification of foreign exchange
transactions, there occurred no actual inward remittances, and, therefore, they are not included in the
coverage of Central Bank Circular No. 289 which provides for the specific instances when the par value
of the peso shall not be the conversion rate used. They conclude that their earnings should be
converted for income tax purposes using the par value of the Philippine peso.

Respondent Commissioner argues that CB Circular No. 289 speaks of receipts for export products,
receipts of sale of foreign exchange or foreign borrowings and investments but not income tax. He also
claims that he had to use the prevailing free market rate of exchange in these cases because of the need to
ascertain the true and correct amount of income in Philippine peso of dollar earners for Philippine income
tax purposes.

A careful reading of said CB Circular No. 289  shows that the subject matters involved therein are export
products, invisibles, receipts of foreign exchange, foreign exchange payments, new foreign borrowing an
investments — nothing by way of income tax payments. Thus, petitioners are in error by concluding that
since C.B. Circular No. 289 does not apply to them, the par value of the peso should be the guiding rate
used for income tax purposes.

The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of Procter &
Gamble. It was a definite amount of money which came to them within a specified period of time of two
years as payment for their services.

Sec. 21. Rates of tax on citizens or residents. — A tax is hereby imposed upon the taxable net income
received during each taxable year from all sources by every individual, whether a citizen of the
Philippines residing therein or abroad or an alien residing in the Philippines, determined in accordance
with the following schedule:

Pursuant to this authority, Revenue Memorandum Circular Nos. 7-71 10 and 41-71 11 were issued to
prescribed a uniform rate of exchange from US dollars to Philippine pesos for INTERNAL REVENUE
TAX PURPOSES for the years 1970 and 1971, respectively.

Petitioners argue that since there were no remittances and acceptances of their salaries and wages in US
dollars into the Philippines, they are exempt from the coverage of such circulars. Petitioners forget that
they are citizens of the Philippines, and their income, within or without, and in these cases wholly
without, are subject to income tax. Sec. 21, NIRC, as amended, does not brook any exemption.

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EISNER V. MACOMBER; 252 U.S.. 189 (1920)

FACTS: Plaintiff stockholder received certificates for additional shares issued by the corporation as stock
dividends. Defendant United States treated those shares as income, and plaintiff paid a tax under protest
on the same.

ISSUE: WON the contested taxation without apportionment of plaintiff's stock dividend violative of

Article 1 of the United States Constitution? ( WON stock dividend are subject to income tax)

RULING: Yes. A stock dividend, evincing merely a transfer of an accumulated surplus to the capital
account of the corporation, takes nothing from the property of the corporation and adds nothing to that of
the shareholder; a tax on such dividends is a tax an capital increase, and not on income, and, to be valid
under the Constitution, such taxes must be apportioned according to population in the several states.

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EISNER V. MACOMBER; 252 U.S.. 189 (1920)

Congress was not empowered by the Sixteenth Amendment to tax, as income of the stockholder, without
apportionment, a stock dividend made lawfully and in good faith against profits accumulated by the
corporation since March 1, 1913. P. 252 U. S. 201. Towne v. Eisner, 245 U. S. 418.

The Revenue Act of September 8, 1916, c. 463, 39 Stat. 756, plainly evinces the purpose of Congress to
impose such taxes, and is to that extent in conflict with Art. I, § 2, cl. 3, and Art. I, § 9, cl. 4, of the
Constitution. Pp. 252 U. S. 199, 252 U. S. 217.

These provisions of the Constitution necessarily limit the extension, by construction, of the Sixteenth
Amendment. P. 252 U. S. 205.

What is or is not "income" within the meaning of the Amendment must be determined in each case
according to truth and substance, without regard to form. P. 252 U. S. 206.

Income may be defined as the gain derived from capital, from labor, or from both combined, including
profit gained through sale or conversion of capital. P. 252 U. S. 207.

Mere growth or increment of value in a capital investment is not income; income is essentially a gain or
profit, in itself, of exchangeable value, proceeding from capital, severed from it, and derived or received
by the taxpayer for his separate use, benefit, and disposal. Id.

A stock dividend, evincing merely a transfer of an accumulated surplus to the capital account of the
corporation, takes nothing from the property of the corporation and adds nothing to that of the
shareholder; a tax on such dividends is a tax an capital increase, and not on income, and, to be valid under
the Constitution, such taxes must be apportioned according to population in the several states. P. 252 U.
S. 208.

Affirmed.