COMMISSIONER OF INTERNAL REVENUE vs. JOHN L. MANNING et al. August 06, 1975; G.R. No.
L-28398 CASTRO, J: The essence of a stock dividend was the segregation out of surplus account of a definite portion of the corporate earnings as part of the permanent capital resources of the corporation by the device of capitalizing the same, and the issuance to the stockholders of additional shares of stock representing the profits so capitalized." FACTS: In 1952 the MANTRASCO had an authorized capital stock of P2,500,000 divided into 25,000 common shares; 24,700 of these were owned by Julius S. Reese, and the rest, at 100 shares each, by the three respondents. On February 29, 1952, in view of Reese's desire that upon his death MANTRASCO and its two subsidiaries, MANTRASCO (Guam), Inc. and the Port Motors, Inc., would continue under the management of the respondents, a trust agreement on his and the respondents' interests in MANTRASCO was executed by and among Reese , MANTRASCO , the law firm of Ross, Selph, Carrascoso and Janda , and the respondents. On October 19, 1954 Reese died. The projected transfer of his shares in the name of MANTRASCO could not, however, be immediately effected for lack of sufficient funds to cover initial payment on the shares. On February 2, 1955, after MANTRASCO made a partial payment of Reese's shares, the certificate for the 24,700 shares in Reese's name was cancelled and a new certificate was issued in the name of MANTRASCO. On the same date, and in the meantime that Reese's interest had not been fully paid, the new certificate was endorsed to the law firm of Ross, Selph, Carrascoso and Janda, as trustees for and in behalf of MANTRASCO. On November 25, 1963 the entire purchase price of Reese's interest in MANTRASCO was finally paid in full by the latter, On May 4, 1964 the trust agreement was terminated and the trustees delivered to MANTRASCO all the shares which they were holding in trust. Bureau of Internal Revenue examination disclosed that (a) as of December 31, 1958 the 24,700 shares declared as dividends had been proportionately distributed to the respondents, representing a total book value or acquisition cost of P7,973,660; (b) the respondents failed to declare the said stock dividends as part of their taxable income for the year 1958. On the basis of their examination, the BIR examiners concluded that the distribution of Reese's shares as stock dividends was in effect a distribution of the "asset or property of the corporation as may be gleaned from the payment of cash for the redemption of said stock and distributing the same as stock dividend." On April 14, 1965 the Commissioner of Internal Revenue issued notices of assessment for deficiency income taxes to the respondents for the year 1958 The respondents unsuccessfully challenged the assessments and, failing to secure a favorable reconsideration, appealed to the Court of Tax Appeals. On October 30, 1967 the CTA rendered judgment absolving the respondents from any liability for receiving the questioned stock dividends on the ground that their respective one-third interest in MANTRASCO remained the same before and after the declaration of stock dividends and only the number of shares held by each of them had changed. Commissioner maintains that the full value (P7,973,660) of the shares redeemed from Reese by MANTRASCO which were subsequently distributed to the respondents as stock dividends in 1958 should be taxed as income of the respondents for that year, the said distribution being in effect a distribution of cash. The respondents' interests in MANTRASCO, he further argues, were only .4% prior to the declaration of the stock dividends in 1958, but rose to 33 1/3% each
The foregoing essential features of a treasury stock are lacking in the questioned shares. but only from retained earnings: "'A stock dividend always involves a transfer of surplus (or profit) to capital stock. In Eisner v. Such package device. No. Siegel. 2d ed. not having been retired by the corporation re-acquiring it. 78 ALR 672: 'A stock dividend is a conversion of surplus or undivided profits into capital stock. whether in money or in other property.. The conclusion is thus ineluctable that whenever the companies involved herein parted with a portion of their earnings "to buy" the corporate holdings of Reese. All these amounts are consequently subject to income tax as being. ISSUE: Are the shares in question treasury shares? Discuss nature of treasury shares and stock dividends. a flow of cash benefits to the respondents. 115(a) of the Act as meaning any distribution made by a corporation to its shareholders. their declaration as treasury stock dividend in 1958 was a complete nullity and plainly violative of public policy. 8 Cir. they were in ultimate effect and result making a distribution of such earnings to the respondents. HELD: Treasury shares are stocks issued and fully paid for and re-acquired by the corporation either by purchase. 252 US 189. out of its earnings or profits. obviously not designed to carry out the usual stock dividend purpose of corporate expansion reinvestment. forfeiture or other means. Consequently. 64 L Ed 521. although a treasury share. though it still represents a paid-for interest in the property of the corporation. 1931. may be reissued or sold again. in truth and in fact. e. participates neither in dividends. but exclusively for expanding the capital base of the respondents in MANTRASCO. in sum and substance. 9 ALR 1570. to treat the 24. A stock dividend. and the issuance to the stockholders of additional shares of stock representing the profits so capitalized. but being in the treasury they do not have the status of outstanding shares. as long as it is held by the corporation as a treasury share. for otherwise equal distribution of voting powers among stockholders will be effectively lost and the directors will be able to perpetuate their control of the corporation. 52 F 2d 63. In submitting their respective contentions.700 shares declared as stock dividends were treasury shares. such share. Macomber. 1938. which is distributed to stockholders in lieu of a cash dividend. using the trust instrument as a convenient technical device.700 shares of Reese as absolutely outstanding shares of Reese's estate until they were fully paid.700 shares.
. 65. being one payable in capital stock. bestowed unto themselves the full worth and value of Reese's corporate holdings with the use of the very earnings of the companies.g. 70. Such being the true nature of the 24. cannot be declared out of outstanding corporate stock. both the prevailing and the dissenting opinions recognized that within the meaning of the revenue acts the essence of a stock dividend was the segregation out of surplus account of a definite portion of the corporate earnings as part of the permanent capital resources of the corporation by the device of capitalizing the same." The respondents. The manifest intention of the parties to the trust agreement was. cannot be allowed to deflect the respondents' responsibilities toward our income tax laws. donation. Treasury shares are therefore issued shares. nor in the meetings of the corporation as voting stock. the acquisition of additional facilities and other capital budget items. 1920. because dividends cannot be declared by the corporation to itself. 40 S Ct 189. Accounting in Law Practice. As the court said in United States vs.' Congress itself has defined the term 'dividend' in No.' Graham and Katz.after the said declaration. it is the assumption of both parties that the 24.