G.R. No. 96016 October 17, 1991 he is not receiving it as salary. What he applies for is a "commutation of leave credits.

" It is an
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE COURT OF APPEALS and EFREN P.
CASTANEDA, respondents.
Leovigildo Monasterial for private respondent.
PADILLA, J.:
The issue to be resolved in this petition for review on certiorari is whether or not terminal leave pay received
by a government official or employee on the occasion of his compulsory retirement from the government
service is subject to withholding (income) tax.
We resolve the issue in the negative.
Private respondent Efren P. Castaneda retired from the government service as Revenue Attache in the
Philippine Embassy in London, England, on 10 December 1982 under the provisions of Section 12 (c) of
Commonwealth Act 186, as amended. Upon retirement, he received, among other benefits, terminal leave
pay from which petitioner Commissioner of Internal Revenue withheld P12,557.13 allegedly representing
income tax thereon.
accumulation of credits intended for old age or separation from service. . . .
The Court has already ruled that the terminal leave pay received by a government official or employee is not
subject to withholding (income) tax. In the recent case of Jesus N. Borromeo vs. The Hon. Civil Service
Commission, et al., G.R. No. 96032, 31 July 1991, the Court explained the rationale behind the employee's
entitlement to an exemption from withholding (income) tax on his terminal leave pay as follows:
. . . commutation of leave credits, more commonly known as terminal leave, is applied for by an officer
or employee who retires, resigns or is separated from the service through no fault of his own. (Manual
on Leave Administration Course for Effectiveness published by the Civil Service Commission, pages
16-17). In the exercise of sound personnel policy, the Government encourages unused leaves to be
accumulated. The Government recognizes that for most public servants, retirement pay is always
less than generous if not meager and scrimpy. A modest nest egg which the senior citizen may look
forward to is thus avoided. Terminal leave payments are given not only at the same time but also for
the same policy considerations governing retirement benefits.
In fine, not being part of the gross salary or income of a government official or employee but a retirement
benefit, terminal leave pay is not subject to income tax.
ACCORDINGLY, the petition for review is hereby DENIED.

Castaneda filed a formal written claim with petitioner for a refund of the P12,557.13, contending that the cash
equivalent of his terminal leave is exempt from income tax. To comply with the two-year prescriptive period
within which claims for refund may be filed, Castaneda filed on 16 July 1984 with the Court of Tax Appeals a
Petition for Review, seeking the refund of income tax withheld from his terminal leave pay.

The Court of Tax Appeals found for private respondent Castaneda and ordered the Commissioner of Internal
Revenue to refund Castaneda the sum of P12,557.13 withheld as income tax. (,Annex "C", petition).

Petitioner appealed the above-mentioned Court of Tax Appeals decision to this Court, which was docketed as
G.R. No. 80320. In turn, we referred the case to the Court of Appeals for resolution. The case was docketed
in the Court of Appeals as CA-G.R. SP No. 20482.

On 26 September 1990, the Court of Appeals dismissed the petition for review and affirmed the decision of
the Court of Tax Appeals. Hence, the present recourse by the Commissioner of Internal Revenue.

The Solicitor General, acting on behalf of the Commissioner of Internal Revenue, contends that the terminal
leave pay is income derived from employer-employee relationship, citing in support of his stand Section 28 of
the National Internal Revenue Code; that as part of the compensation for services rendered, terminal leave
pay is actually part of gross income of the recipient. Thus —

. . . It (terminal leave pay) cannot be viewed as salary for purposes which would reduce it. . . . there
can thus be no "commutation of salary" when a government retiree applies for terminal leave because
G.R. No. 109289 October 3, 1994 The Court has given due course to both petitions. The parties, in compliance with the Court's directive, have
filed their respective memoranda.
RUFINO R. TAN, petitioner, vs. RAMON R. DEL ROSARIO, JR., as SECRETARY OF FINANCE & JOSE U.
ONG, as COMMISSIONER OF INTERNAL REVENUE, respondents. G.R. No. 109289

G.R. No. 109446 October 3, 1994
CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES, CARLO A. CARAG, MANUELITO O.
CABALLES, ELPIDIO C. JAMORA, JR. and BENJAMIN A. SOMERA, JR., petitioners, vs. RAMON R. DEL
ROSARIO, in his capacity as SECRETARY OF FINANCE and JOSE U. ONG, in his capacity as
COMMISSIONER OF INTERNAL REVENUE, respondents.
Rufino R. Tan for and in his own behalf. Carag, Caballes, Jamora & Zomera Law Offices for petitioners in G.R.
109446.
Petitioner contends that the title of House Bill No. 34314, progenitor of Republic Act No. 7496, is a misnomer
or, at least, deficient for being merely entitled, "Simplified Net Income Taxation Scheme for the Self-Employed
and Professionals Engaged in the Practice of their Profession" (Petition in G.R. No. 109289).
The full text of the title actually reads:
An Act Adopting the Simplified Net Income Taxation Scheme For The Self-Employed and
Professionals Engaged In The Practice of Their Profession, Amending Sections 21 and 29
of the National Internal Revenue Code, as Amended.

VITUG, J.: The pertinent provisions of Sections 21 and 29, so referred to, of the National Internal Revenue Code, as now
amended, provide:
These two consolidated special civil actions for prohibition challenge, in G.R. No. 109289, the constitutionality
of Republic Act No. 7496, also commonly known as the Simplified Net Income Taxation Scheme ("SNIT"), Sec. 21. Tax on citizens or residents. —
amending certain provisions of the National Internal Revenue Code and, in G.R. No. 109446, the validity of
Section 6, Revenue Regulations No. 2-93, promulgated by public respondents pursuant to said law. xxx xxx xxx

Petitioners claim to be taxpayers adversely affected by the continued implementation of the amendatory
legislation.
In G.R. No. 109289, it is asserted that the enactment of Republic Act No. 7496 violates the following provisions
of the Constitution:
Article VI, Section 26(1) — Every bill passed by the Congress shall embrace only one
subject which shall be expressed in the title thereof.
(f) Simplified Net Income Tax for the Self-Employed and/or Professionals Engaged in the
Practice of Profession. — A tax is hereby imposed upon the taxable net income as
determined in Section 27 received during each taxable year from all sources, other than
income covered by paragraphs (b), (c), (d) and (e) of this section by every individual whether
a citizen of the Philippines or an alien residing in the Philippines who is self-employed or
practices his profession herein, determined in accordance with the following schedule:
Not over P10,000 3%

Article VI, Section 28(1) — The rule of taxation shall be uniform and equitable. The Over P10,000 P300 + 9%
Congress shall evolve a progressive system of taxation. but not over P30,000 of excess over P10,000

Article III, Section 1 — No person shall be deprived of . . . property without due process of Over P30,000 P2,100 + 15%
law, nor shall any person be denied the equal protection of the laws. but not over P120,00 of excess over P30,000

In G.R. No. 109446, petitioners, assailing Section 6 of Revenue Regulations No. 2-93, argue that public Over P120,000 P15,600 + 20%
respondents have exceeded their rule-making authority in applying SNIT to general professional partnerships. but not over P350,000 of excess over P120,000

The Solicitor General espouses the position taken by public respondents. Over P350,000 P61,600 + 30%
of excess over P350,000
 Sec. 29. Deductions from gross income. — In computing taxable income subject to tax
under Sections 21(a), 24(a), (b) and (c); and 25 (a)(1), there shall be allowed as deductions
the items specified in paragraphs (a) to (i) of this section: Provided, however, That in
computing taxable income subject to tax under Section 21 (f) in the case of individuals
engaged in business or practice of profession, only the following direct costs shall be
allowed as deductions:
(a) Raw materials, supplies and direct labor;
(b) Salaries of employees directly engaged in activities in the course of or pursuant to the
business or practice of their profession;
(c) Telecommunications, electricity, fuel, light and water;
(d) Business rentals;
(e) Depreciation;
(f) Contributions made to the Government and accredited relief organizations for the
rehabilitation of calamity stricken areas declared by the President; and
(g) Interest paid or accrued within a taxable year on loans contracted from accredited
financial institutions which must be proven to have been incurred in connection with the
conduct of a taxpayer's profession, trade or business.
For individuals whose cost of goods sold and direct costs are difficult to determine, a
maximum of forty per cent (40%) of their gross receipts shall be allowed as deductions to
answer for business or professional expenses as the case may be.
On the basis of the above language of the law, it would be difficult to accept petitioner's view that the
amendatory law should be considered as having now adopted a gross income, instead of as having still
retained the net income, taxation scheme. The allowance for deductible items, it is true, may have significantly
been reduced by the questioned law in comparison with that which has prevailed prior to the amendment;
limiting, however, allowable deductions from gross income is neither discordant with, nor opposed to, the net
income tax concept. The fact of the matter is still that various deductions, which are by no means
inconsequential, continue to be well provided under the new law.
Article VI, Section 26(1), of the Constitution has been envisioned so as (a) to prevent log-rolling legislation
intended to unite the members of the legislature who favor any one of unrelated subjects in support of the
whole act, (b) to avoid surprises or even fraud upon the legislature, and (c) to fairly apprise the people, through
such publications of its proceedings as are usually made, of the subjects of legislation. The above objectives
1
of the fundamental law appear to us to have been sufficiently met. Anything else would be to require a virtual
compendium of the law which could not have been the intendment of the constitutional mandate.
Petitioner intimates that Republic Act No. 7496 desecrates the constitutional requirement that taxation "shall
be uniform and equitable" in that the law would now attempt to tax single proprietorships and professionals
differently from the manner it imposes the tax on corporations and partnerships. The contention clearly forgets,
however, that such a system of income taxation has long been the prevailing rule even prior to Republic Act
No. 7496.
Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects or objects
of taxation, similarly situated, are to be treated alike both in privileges and liabilities (Juan Luna Subdivision
vs. Sarmiento, 91 Phil. 371). Uniformity does not forfend classification as long as: (1) the standards that are
used therefor are substantial and not arbitrary, (2) the categorization is germane to achieve the legislative
purpose, (3) the law applies, all things being equal, to both present and future conditions, and (4) the
classification applies equally well to all those belonging to the same class (Pepsi Cola vs. City of Butuan, 24
SCRA 3; Basco vs. PAGCOR, 197 SCRA 52).
What may instead be perceived to be apparent from the amendatory law is the legislative intent to increasingly
shift the income tax system towards the schedular approach in the income taxation of individual taxpayers
2
and to maintain, by and large, the present global treatment on taxable corporations. We certainly do not view
3
this classification to be arbitrary and inappropriate.
Petitioner gives a fairly extensive discussion on the merits of the law, illustrating, in the process, what he
believes to be an imbalance between the tax liabilities of those covered by the amendatory law and those who
are not. With the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent
(rate), coverage (subjects) and situs (place) of taxation. This court cannot freely delve into those matters
which, by constitutional fiat, rightly rest on legislative judgment. Of course, where a tax measure becomes so
unconscionable and unjust as to amount to confiscation of property, courts will not hesitate to strike it down,
for, despite all its plenitude, the power to tax cannot override constitutional proscriptions. This stage, however,
has not been demonstrated to have been reached within any appreciable distance in this controversy before
us.
Having arrived at this conclusion, the plea of petitioner to have the law declared unconstitutional for being
violative of due process must perforce fail. The due process clause may correctly be invoked only when there
is a clear contravention of inherent or constitutional limitations in the exercise of the tax power. No such
transgression is so evident to us.
G.R. No. 109446
The several propositions advanced by petitioners revolve around the question of whether or not public
respondents have exceeded their authority in promulgating Section 6, Revenue Regulations No. 2-93, to carry
out Republic Act No. 7496.
The questioned regulation reads:
Sec. 6. General Professional Partnership — The general professional partnership (GPP)
and the partners comprising the GPP are covered by R. A. No. 7496. Thus, in determining
the net profit of the partnership, only the direct costs mentioned in said law are to be
 deducted from partnership income. Also, the expenses paid or incurred by partners in their
individual capacities in the practice of their profession which are not reimbursed or paid by
the partnership but are not considered as direct cost, are not deductible from his gross
income.
The real objection of petitioners is focused on the administrative interpretation of public respondents that would
apply SNIT to partners in general professional partnerships. Petitioners cite the pertinent deliberations in
Congress during its enactment of Republic Act No. 7496, also quoted by the Honorable Hernando B. Perez,
minority floor leader of the House of Representatives, in the latter's privilege speech by way of commenting
on the questioned implementing regulation of public respondents following the effectivity of the law, thusly:
MR. ALBANO, Now Mr. Speaker, I would like to get the correct impression
of this bill. Do we speak here of individuals who are earning, I mean, who
earn through business enterprises and therefore, should file an income
tax return?
MR. PEREZ. That is correct, Mr. Speaker. This does not apply to
corporations. It applies only to individuals.
(See Deliberations on H. B. No. 34314, August 6, 1991, 6:15 P.M.; Emphasis ours).
Other deliberations support this position, to wit:
MR. ABAYA . . . Now, Mr. Speaker, did I hear the Gentleman from
Batangas say that this bill is intended to increase collections as far as
individuals are concerned and to make collection of taxes equitable?
MR. PEREZ. That is correct, Mr. Speaker.
(Id. at 6:40 P.M.; Emphasis ours).
In fact, in the sponsorship speech of Senator Mamintal Tamano on the Senate version of
the SNITS, it is categorically stated, thus:
This bill, Mr. President, is not applicable to business corporations or to
partnerships; it is only with respect to individuals and professionals.
(Emphasis ours)
The Court, first of all, should like to correct the apparent misconception that general professional partnerships
are subject to the payment of income tax or that there is a difference in the tax treatment between individuals
engaged in business or in the practice of their respective professions and partners in general professional
partnerships. The fact of the matter is that a general professional partnership, unlike an ordinary business
partnership (which is treated as a corporation for income tax purposes and so subject to the corporate income
tax), is not itself an income taxpayer. The income tax is imposed not on the professional partnership, which is
tax exempt, but on the partners themselves in their individual capacity computed on their distributive shares
of partnership profits. Section 23 of the Tax Code, which has not been amended at all by Republic Act 7496,
is explicit:
Sec. 23. Tax liability of members of general professional partnerships. — (a) Persons
exercising a common profession in general partnership shall be liable for income tax only in
their individual capacity, and the share in the net profits of the general professional
partnership to which any taxable partner would be entitled whether distributed or otherwise,
shall be returned for taxation and the tax paid in accordance with the provisions of this Title.
(b) In determining his distributive share in the net income of the partnership, each partner
—
(1) Shall take into account separately his distributive share of the
partnership's income, gain, loss, deduction, or credit to the extent
provided by the pertinent provisions of this Code, and
(2) Shall be deemed to have elected the itemized deductions, unless he
declares his distributive share of the gross income undiminished by his
share of the deductions.
There is, then and now, no distinction in income tax liability between a person who practices his profession
alone or individually and one who does it through partnership (whether registered or not) with others in the
exercise of a common profession. Indeed, outside of the gross compensation income tax and the final tax on
passive investment income, under the present income tax system all individuals deriving income from any
source whatsoever are treated in almost invariably the same manner and under a common set of rules.
We can well appreciate the concern taken by petitioners if perhaps we were to consider Republic Act No. 7496
as an entirely independent, not merely as an amendatory, piece of legislation. The view can easily become
myopic, however, when the law is understood, as it should be, as only forming part of, and subject to, the
whole income tax concept and precepts long obtaining under the National Internal Revenue Code. To
elaborate a little, the phrase "income taxpayers" is an all embracing term used in the Tax Code, and it
practically covers all persons who derive taxable income. The law, in levying the tax, adopts the most
comprehensive tax situs of nationality and residence of the taxpayer (that renders citizens, regardless of
residence, and resident aliens subject to income tax liability on their income from all sources) and of the
generally accepted and internationally recognized income taxable base (that can subject non-resident aliens
and foreign corporations to income tax on their income from Philippine sources). In the process, the Code
classifies taxpayers into four main groups, namely: (1) Individuals, (2) Corporations, (3) Estates under Judicial
Settlement and (4) Irrevocable Trusts (irrevocable both as to corpus and as to income).
Partnerships are, under the Code, either "taxable partnerships" or "exempt partnerships." Ordinarily,
partnerships, no matter how created or organized, are subject to income tax (and thus alluded to as "taxable
partnerships") which, for purposes of the above categorization, are by law assimilated to be within the context
of, and so legally contemplated as, corporations. Except for few variances, such as in the application of the
"constructive receipt rule" in the derivation of income, the income tax approach is alike to both juridical persons.
Obviously, SNIT is not intended or envisioned, as so correctly pointed out in the discussions in Congress
during its deliberations on Republic Act 7496, aforequoted, to cover corporations and partnerships which are
independently subject to the payment of income tax.

"Exempt partnerships," upon the other hand, are not similarly identified as corporations nor even considered
as independent taxable entities for income tax purposes. A general professional partnership is such an
example. Here, the partners themselves, not the partnership (although it is still obligated to file an income tax
4

return [mainly for administration and data]), are liable for the payment of income tax in their individual capacity
computed on their respective and distributive shares of profits. In the determination of the tax liability, a partner
does so as an individual, and there is no choice on the matter. In fine, under the Tax Code on income taxation,
the general professional partnership is deemed to be no more than a mere mechanism or a flow-through entity
in the generation of income by, and the ultimate distribution of such income to, respectively, each of the
individual partners.

Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the above standing rule as now
so modified by Republic Act No. 7496 on basically the extent of allowable deductions applicable
to all individual income taxpayers on their non-compensation income. There is no evident intention of the law,
either before or after the amendatory legislation, to place in an unequal footing or in significant variance the
income tax treatment of professionals who practice their respective professions individually and of those who
do it through a general professional partnership.

WHEREFORE, the petitions are DISMISSED. No special pronouncement on costs.

SO ORDERED.
G.R. No. 152685 December 4, 2007
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, petitioner, vs. NATIONAL
TELECOMMUNICATIONS COMMISSION, JOSEPH A.SANTIAGO, in his capacity as NTC Commissioner,
and EDGARDO CABARRIOS, in his capacity as Chief, CCAD, respondents.
RESOLUTION
VELASCO, JR., J.:
Before us is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court. It assails the February
12, 2001 Decision2 of the Court of Appeals (CA) in CA-G.R. SP No. 61033, which dismissed petitioner’s special
civil action for certiorari and prohibition, and the March 21, 2002 Resolution3 of the CA denying petitioner’s
motion for reconsideration. The petition raises the sole issue on whether the appellate court erred in holding
that the assessments of the National Telecommunications Commission (NTC) were contrary to our Decision
in G.R. No. 127937 entitled NTC v. Honorable Court of Appeals. 4
This case pertains to Section 40 (e)5 of the Public Service Act6 (PSA), as amended on March 15, 1984,
pursuant to Batas Pambansa Blg. 325, which authorized the NTC to collect from public telecommunications
companies Supervision and Regulation Fees (SRF) of PhP 0.50 for every PhP 100 or a fraction of the capital
and stock subscribed or paid for of a stock corporation, partnership or single proprietorship of the capital
invested, or of the property and equipment, whichever is higher.
Under Section 40 (e) of the PSA, the NTC sent SRF assessments to petitioner Philippine Long Distance
Telephone Company (PLDT) starting sometime in 1988. The SRF assessments were based on the market
value of the outstanding capital stock, including stock dividends, of PLDT. PLDT protested the assessments
contending that the SRF ought to be based on the par value of its outstanding capital stock. Its protest was
denied by the NTC and likewise, its motion for reconsideration.
PLDT appealed before the CA. The CA modified the disposition of the NTC by holding that the SRF should
be assessed at par value of the outstanding capital stock of PLDT, excluding stock dividends.
With the denial of the NTC’s partial reconsideration of the CA Decision, the issue of the basis for the
assessment of the SRF was brought before this Court under G.R. No. 127937 wherein we ruled that the SRF
should be based neither on the par value nor the market value of the outstanding capital stock but on the value
of the stocks subscribed or paid including the premiums paid therefor, that is, the amount that the corporation
receives, inclusive of the premiums if any, in consideration of the original issuance of the shares. We added
that in the case of stock dividends, it is the amount that the corporation transfers from its surplus profit account
to its capital account, that is, the amount the stock dividends represent is equivalent to the value paid for its
original issuance.
PLDT wanted our July 28, 1999 Decision in G.R. No. 127937 clarified. It posited that the SRF should be based
on the par value in consonance with our holding in Philippine Long Distance Telephone Company v. Public
Service Commission,7 and that the premiums on issued shares should not be included in the valuation of the
outstanding capital stock. Through our November 15, 1999 Resolution in G.R. No. 127937, we elucidated that
our July 28, 1999 decision was not in conflict with our ruling in Philippine Long Distance Telephone
Company since we never enunciated in the said case that the phrase "capital stock subscribed or paid" must
be determined at par value. We reiterated that the term "capital stock subscribed or paid" is the amount that
the corporation receives, inclusive of the premiums, if any, in consideration of the original issuance of the
shares.
Thereafter, to comply with our disposition in G.R. No. 127937, for the reassessment of the SRF based on the
value of the stocks subscribed or paid including the premiums paid for the stocks, if any, the NTC sent the
assailed assessments of February 10, 20008 and September 5, 20009 to PLDT which included the value of
stock dividends issued by PLDT. The assailed assessments were based on the schedule of capital stock
submitted by PLDT.
PLDT now contends that our disposition in G.R. No. 127937 excluded stock dividends from the SRF coverage,
while the NTC asserts the contrary. Also, PLDT questions the assessments for violating our disposition in G.R.
No. 127937 since these assessments were identical to the previous assessments from 1988 which were
questioned by PLDT in G.R. No. 127937 for being based on the market value of its outstanding capital stock.
PLDT wrote a letter protesting the assailed February 10, 2000 assessment which was not acted upon by the
NTC. Instead, the NTC sent a second assailed assessment on September 5, 2000. Thus, in an attempt to
clarify and resolve this issue, PLDT filed a Motion for Clarification of Enforcement of the Decision dated 28
July 1999 in G.R. No. 127937 which this Court simply noted for the case had already become final and
executory.
Thus, on October 2, 2000, PLDT instituted the special civil action for certiorari and prohibition docketed as
CA-G.R. SP No. 6103310 before the CA. To maintain the status quo and to defer the enforcement of the
assailed assessments and subsequent assessments, on October 3, 2000, the CA issued a Temporary
Restraining Order. On December 4, 2000, a writ of preliminary injunction was granted.
Subsequently, on February 12, 2001, the CA rendered the assailed Decision dismissing the petition. The
dispositive portion reads:
WHEREFORE, the petition is DISMISSED for lack of merit, and the writ of preliminary injunction
heretofore issued is DISSOLVED.11
PLDT’s motion for reconsideration was denied by the CA’s Special Division of Five on March 21, 2002.
Hence, the instant petition for review, raising the core issue:
THE COURT OF APPEALS ERRED IN HOLDING THAT THE DISPUTED NTC ASSESSMENTS
WERE NOT CONTRARY TO THE PURISIMA DECISION.12
The petition is bereft of merit.
PLDT argues that in our Decision in G.R. No. 127937 we have excluded from the coverage of the SRF the
capital stocks issued as stock dividends. Petitioner argues that G.R. No. 127937 clearly delineates between
capital subscribed and stock dividends to the effect that the latter are not included in the concept of capital
stock subscribed because subscribers or shareholders do not pay for their subscriptions as no amount is
received by the corporation in consideration of such issuances since these are effected as mere book entries,
that is, the transfer from the retained earnings account to the capital or stock account. To bolster its position,
PLDT repeatedly used the phrase "actual payments" received by a corporation as a consideration for
issuances of shares which do not apply to stock dividends.
We are not persuaded.
Crucial in point is our disquisition in G.R. No. 127937 entitled National Telecommunications Commission v.
Honorable Court of Appeals, which we quote:
The term "capital" and other terms used to describe the capital structure of a corporation are of
universal acceptance and their usages have long been established in jurisprudence. Briefly, capital
refers to the value of the property or assets of a corporation. The capital subscribed is the total
amount of the capital that persons (subscribers or shareholders) have agreed to take and pay
for, which need not necessarily by, and can be more than, the par value of the shares. In fine, it is
the amount that the corporation receives, inclusive of the premiums if any, in consideration
of the original issuance of the shares. In the case of stock dividends, it is the amount that the
corporation transfers from its surplus profit account to its capital account. It is the same
amount that can be loosely termed as the "trust fund" of the corporation. The "Trust Fund" doctrine
considers this subscribed capital as a trust fund for the payment of the debts of the corporation, to
which the creditors may look for satisfaction. Until the liquidation of the corporation, no part of the
subscribed capital may be returned or released to the stockholder (except in the redemption of
redeemable shares) without violating this principle. Thus, dividends must never impair the subscribed
capital; subscription commitments cannot be condoned or remitted; nor can the corporation buy its
own shares using the subscribed capital as the considerations therefor.13 (Emphasis supplied.)
Two concepts can be gleaned from the above. First, what constitutes capital stock that is subject to the SRF.
Second, such capital stock is equated to the "trust fund" of a corporation held in trust as security for satisfaction
to creditors in case of corporate liquidation.
The first asks if stock dividends are part of the outstanding capital stocks of a corporation insofar as it is subject
to the SRF. They are. The first issue we have to tackle is, are all the stock dividends that are part of the
outstanding capital stock of PLDT subject to the SRF? Yes, they are.
PLDT’s contention, that stock dividends are not similarly situated as the subscribed capital stock because the
subscribers or shareholders do not pay for their issuances as no amount was received by the corporation in
consideration of such issuances since these are effected as a mere book entry, is erroneous.
Dividends, regardless of the form these are declared, that is, cash, property or stocks, are valued at the amount
of the declared dividend taken from the unrestricted retained earnings of a corporation. Thus, the value of the
declaration in the case of a stock dividend is the actual value of the original issuance of said stocks. In G.R.
No. 127937 we said that "in the case of stock dividends, it is the amount that the corporation transfers from its
surplus profit account to its capital account" or "it is the amount that the corporation receives in consideration
of the original issuance of the shares." It is "the distribution of current or accumulated earnings to the
shareholders of a corporation pro rata based on the number of shares owned."14 Such distribution in whatever
form is valued at the declared amount or monetary equivalent.
Thus, it cannot be said that no consideration is involved in the issuance of stock dividends. In fact, the
declaration of stock dividends is akin to a forced purchase of stocks. By declaring stock dividends, a
corporation ploughs back a portion or its entire unrestricted retained earnings either to its working capital or
for capital asset acquisition or investments. It is simplistic to say that the corporation did not receive any actual
payment for these. When the dividend is distributed, it ceases to be a property of the corporation as the entire
or portion of its unrestricted retained earnings is distributed pro rata to corporate shareholders.
When stock dividends are distributed, the amount declared ceases to belong to the corporation but is
distributed among the shareholders. Consequently, the unrestricted retained earnings of the corporation are
diminished by the amount of the declared dividend while the stockholders’ equity is increased. Furthermore,
the actual payment is the cash value from the unrestricted retained earnings that each shareholder foregoes
for additional stocks/shares which he would otherwise receive as required by the Corporation Code to be given
to the stockholders subject to the availability and conditioned on a certain level of retained earnings.15 Elsewise
put, where the unrestricted retained earnings of a corporation are more than 100% of the paid-in capital stock,
the corporate Board of Directors is mandated to declare dividends which the shareholders will receive in cash
unless otherwise declared as property or stock dividends, which in the latter case the stockholders are forced
to forego cash in lieu of property or stocks.
In essence, therefore, the stockholders by receiving stock dividends are forced to exchange the monetary
value of their dividend for capital stock, and the monetary value they forego is considered the actual payment
for the original issuance of the stocks given as dividends. Therefore, stock dividends acquired by shareholders
for the monetary value they forego are under the coverage of the SRF and the basis for the latter is such
monetary value as declared by the board of directors.
On the second issue, do the assailed NTC assessments violate the ruling in G.R. No. 127937? PLDT contends
that these did since the assessments are identical to the previous assessments from 1988 which were
questioned by PLDT in the seminal G.R. No. 127937 for being based on the market value of its outstanding
capital stock.
A cursory review of the assessments made by the NTC prior to our July 28, 1999 Decision in G.R. No. 127937
and the assailed assessments of February 10, 2000 and September 5, 2000 does show that the assessments
are substantially identical. In our July 28, 1999 Decision in G.R. No. 127937, we noted, and similarly true in
the petition before us, that, "The actual capital paid or the amount of capital stock paid and for which PLDT
received actual payments were not disclosed or extant in the records before the Court."16
Hence, as before, we cannot factually determine whether the assailed assessments substantially followed our
Decision in G.R. No. 127937. It is apparent that the assessments are identical and that the NTC in the earlier
case asserted that the SRF be based on the market value of the capital stock, yet it assessed it to PLDT.
However, a closer look at the assailed assessments of February 13, 2000 and September 5, 2000 would show
that the NTC based its assessment on the schedule of capital stock submitted by PLDT. PLDT did not dispute
this; it only disputed the level of assessment which was the same as before.
Now, where should the NTC base its assessment? It is incumbent upon PLDT to furnish the NTC the actual
payment made on the subscription of its capital stock in order for the NTC to assess the proper SRF. Logically,
the NTC would base its SRF assessment of PLDT from PLDT data.

PLDT should not bewail that the assailed assessments are substantially the same assessments it protested
in G.R. No. 127937. After all, it had not shown the actual figures of the amount of premiums and subscriptions
it had received for the original issuances of its capital stock. While indeed it submitted a table of the
comparative assessments made by the NTC to this Court, PLDT has not furnished the NTC nor this Court the
correct figures of the actual payments made for its capital stock.

We are not unaware that in accounting practice, the journal entries for transactions are recorded in historical
value or cost. Thus, the purchase of properties or assets is recorded at acquisition cost. The same is true with
liabilities and equity transactions where the actual loan and the amount paid for the subscription are recorded
at the actual payment, including the premiums paid for the subscription of capital stock.

Moreover, it is common practice that the values of the accounts recorded at historical value or cost are not
increased or decreased due to market forces. In the case of properties, the appreciation in values is generally
not recorded as income nor the increase in the corresponding asset because the increase or decrease is not
yet realized until the property is actually sold. The same is true with the capital account. The market value may
be much higher than the actual payment of the par value and premium of capital stock. Still, the books of
account will not reflect such increase; and vice-versa, any decrease of the value of stocks is likewise not
reflected in the books of account. Thus, given the general practice that book entries of the premiums and
subscriptions for capital stock are the actual value for the original issuance of stocks, then the NTC was correct
to follow the schedule of capital stocks submitted by PLDT.

Moreover, the "Trust Fund" doctrine, the second concept this Court elucidated in G.R. No. 127937 and quoted
above, bolsters the correctness of the assessments made by the NTC. As a fund in trust for creditors in case
of liquidation, the actual value of the subscriptions and the value of stock dividends distributed may not be
decreased or increased by the fluctuating market value of the stocks. Thus, absent any showing by PLDT of
the actual payment it received for the original issuance of its capital stock, the assessments made by the NTC,
based on the schedule of outstanding capital stock of PLDT recorded at historical value payments made, is
deemed correct.

Anent stock dividends, the value transferred from the unrestricted retained earnings of PLDT to the capital
stock account pursuant to the issuance of stock dividends is the proper basis for the assessment of the SRF,
which the NTC correctly assessed.

WHEREFORE, we DENY the petition for lack of merit, and AFFIRM the February 12, 2001 Decision and
March 21, 2002 Resolution in CA-G.R. SP No. 61033. Costs against petitioner.

SO ORDERED.
G.R. No. 108576 January 20, 1999
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE COURT OF APPEALS, COURT OF TAX
APPEALS and A. SORIANO CORP., respondents.
MARTINEZ, J.:
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, Doña 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 Doña Carmen from ANSCOR. Hence, increasing their
accumulated shareholdings to 138,867 and 138,864 19 common shares each. 20
On December 28, 1967, Doña 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 Doña 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
Doña 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
AMNESTY:
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.
 TAX ON STOCK DIVIDENDS
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, 88
 REDEMPTION AND CANCELLATION
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. 102
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
disposition.
EXCHANGE OF COMMON WITH PREFERRED SHARES 121
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 Doña Carmen's shares
were exchanged for the whole 150.000 preferred shares. Thereafter, both the Don Andres estate and Doña
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.

SO ORDERED.
G.R. No. L-28398. August 6, 1975
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. JOHN L. MANNING, W.D. McDONALD, E.E.
SIMMONS and THE COURT OF TAX APPEALS, Respondents.
Solicitor General Antonio P. Barredo, Solicitor Lolita O. Gal-lang and Special Attorney Virgilio J. Saldajena
for Petitioner. Manuel O. Chan for Private Respondents.
SYNOPSIS Under a trust agreement, Julius Reese who owned 24,700 shares of the 25,000 common shares
of MANTRASCO, and the three private respondents who owned the rest, at 100 shares each, deposited all
their shares with the Trustees. The trust agreement provided that upon Reese’s death MANTRASCO shall
purchase Reese’s shares. The trust agreement was executed in view of Reese’s desire that upon his death
the Company would continue under the management of respondents. Upon Reese’s death and partial
payment by the company of Reeses’s share, a new certificate was issued in the name of MANTRASCO, and
the certificate indorsed to the Trustees. Subsequently, the stockholders reverted the 24,700 shares in the
Treasury to the capital account of the company as stock dividends to be distributed to the stockholders. When
the entire purchase price of Reese’s interest in the company was paid in full by the latter, the trust agreement
was terminated, and the shares held in trust were delivered to the company.
The Bureau of Internal Revenue concluded that the distribution of the 24,700 shares of Reese as stock
dividends was in effect a distribution of the "assets or property of the corporation." It therefore assessed
respondents for deficiency income taxes as well as for fraud penalty and interest charges. The Court of Tax
Appeals absolved respondent from any liability for receiving the questioned stock dividends on the ground that
their respective one-third interest in the Company remained the same before and after the declaration of the
stock dividends and only the number of shares held by each of them had changed.
On a petition for review, the Supreme Court held that the newly acquired shares were not treasury shares;
their declaration as treasury stock dividends was a complete nullity and that the assessment by the
Commissioner of fraud penalty and the imposition of interest charges pursuant to the provision of the Tax
Code were made in accordance with law.
Judgment of the Court of Tax Appeals se aside.
SYLLABUS
1. PRIVATE CORPORATIONS; SHARES OF STOCKS; TREASURY; SHARES. — Treasury shares are
stocks issued and fully paid for and re-acquired by the corporation either by purchase, donation, forfeiture or
other means. They are therefore issued shares, but being in the treasury they do not have the status of
outstanding shares. Consequently, although a treasury share, not having been retired by the corporation re-
acquiring it, may be re-issued or sold again, such share, as long as it is held by the corporation as a treasury
share, participates neither in dividends, because dividends cannot be declared by the corporation to itself, nor
in the meetings of the corporations as voting stock, for otherwise equal distribution of voting powers among
stockholders will be effectively lost and the directors will be able to perpetuate their control of the corporation
though it still represent a paid — for interest in the property of the corporation.
2. ID.; ID.; ID.; DECLARATION OF QUESTIONED SHARES AS TREASURY STOCK DIVIDENDS, A
NULLITY. — Where the manifest intention of the parties to the trust agreement was, in sum and substance,
to treat the shares of a deceased stockholder as absolutely outstanding shares of said stockholder’s estate
until they were fully paid. the declaration of said shares as treasury stock dividend was a complete nullity and
plainly violative of public policy.
3. ID.; ID.; STOCK DIVIDEND PAYABLE ONLY FROM RETAINED EARNINGS. — A stock dividend, being
one payable in capital stock, cannot be declared out of outstanding corporate stock, but only from retained
earnings.
4. ID.; ID.; PURCHASE OF HOLDING RESULTING IN DISTRIBUTION OF EARNINGS TAXABLE. — Where
by the use of a trust instrument as a convenient technical device, respondents bestowed unto themselves the
full worth and value of a deceased stockholder’s corporate holding acquired with the very earnings of the
companies, such package device which obviously is not designed to carry out the usual stock dividend
purpose of corporate expansion reinvestment, e.g., the acquisition of additional facilities and other capital
budget items, but exclusively for expanding the capital base of the surviving stockholders in the company,
cannot be allowed to deflect the latter’s responsibilities toward our income tax laws. The conclusion is
ineluctable that whenever the company parted with a portion of its earnings "to buy" the corporate holdings of
the deceased stockholders, it was in ultimate effect and result making a distribution of such earnings to the
surviving stockholders. All these amounts are consequently subject to income tax as being, in truth and in fact,
a flow of cash benefits to the surviving stockholders.
5. ID.; ID.; ID.; COMMISSIONER ASSESSMENT BASED ON THE TOTAL ACQUISITION COST OF THE
ALLEGED TREASURY STOCK DIVIDENDS, ERROR. — Where the surviving stockholders, by resolution,
partitioned among themselves, as treasury stock dividends, the deceased stockholder’s interest, and earnings
of the corporation over a period of years were used to gradually wipe out the holdings therein of said deceased
stockholder, the earnings (which in effect have been distributed to the surviving stockholders when they
appropriated among themselves the deceased stockholder’s interest), should be taxed for each of the
corresponding years when payments were made to the deceased’s estate on account of his shares. In other
words, the Tax Commissioner may not asses the surviving stockholders, for income tax purposes, the total
acquisition cost of the alleged treasury stock dividends in one lump sum. However, with regard to payment
made with the corporation’s earnings before the passage of the resolution declaring as stock dividends the
deceased stockholder’s interest (while indeed those earnings were utilized in those years to gradually pay off
the value of the deceased stockholder’s holdings), the surviving stockholders should be liable (in the absence
of evidence that prior to the passage of the stockholder’s resolution the contributed of each of the surviving
stockholder rose corresponding), for income tax purposes, to the extent of the aggregate amount paid by the
corporation (prior to such resolution) to buy off the deceased stockholder’s shares. The reason is that it was
only by virtue of the authority contained in said resolution that the surviving stockholders actually, albeit
illegally, appropriated and petitioned among themselves the stockholders equity representing the deceased
stockholder’s interest.
6. TAXATION; INCOME TAX; ASSESSMENT OF FRAUD PENALTY AND IMPOSITION OF INTEREST
CHARGES IN ACCORDANCE WITH LAW DESPITE NULLITY OF RESOLUTION AUTHORIZING
DISTRIBUTION OF EARNINGS. — The fact that the resolution authorizing the distribution of earnings is null
and void is of no moment. Under the National Internal Revenue Code, income tax is assessed on income
received from any property, activity or service that produces income. The Tax Code stands as an indifferent,
neutral party on the matter of where the income comes from. The action taken by the Commissioner of
assessing fraud penalty and imposing interest charges pursuant to the provisions of the Tax Code is in
accordance with law.
CASTRO, J.:
This is a petition for review of the decision of the Court of Tax Appeals, in CTA case 1626, which set aside the
income tax assessments issued by the Commissioner of Internal Revenue against John L. Manning, W.D.
McDonald and E.E. Simmons (hereinafter referred to as the respondents), for alleged undeclared stock
dividends received in 1958 from the Manila Trading and Supply Co. (hereinafter referred to as the
MANTRASCO) valued at P7,973,660.
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 (therein referred to as OWNER), MANTRASCO (therein referred to as COMPANY), the law
firm of Ross, Selph, Carrascoso and Janda (therein referred to as TRUSTEES), and the respondents (therein
referred to as MANAGERS).
The trust agreement pertinently provides as follows:
"1. Upon the execution of this agreement the OWNER shall deposit with the TRUSTEES, duly endorsed and
ready for transfer Twenty-Four Thousand Seven Hundred (24,700) shares of the capital stock of the
COMPANY, these shares being all shares of the capital stock of the COMPANIES belonging to him . . .
"2. Upon the execution of this Agreement the MANAGERS shall deposit with the TRUSTEES, duly endorsed
and ready for transfer, all shares of the capital stock of the COMPANIES belonging to any of them.
"3. (a) The OWNER and the MANAGERS, and each of them, agree that if any of them shall at any time during
the life of this trust acquire any additional shares of stock of any of the COMPANIES, or of any successor
company, or any shares in substitution, exchange or replacement of the shares subject to this agreement,
they shall forthwith endorse and deposit such shares with the TRUSTEES hereunder and such additional or
other shares shall become subject to this agreement; shares deposited by the OWNER and shares received
by the TRUSTEES as stock dividends on, or in substitution, exchange or replacement of, such shares so
deposited under this agreement being MANAGERS’ SHARES.
"(b) All shares deposited under paragraphs 1, 2 and 3(a) hereof shall, during the life of the OWNER, remain
in the name of and shall be voted by the respective parties making the deposit ...
"4. (a) Upon the death of the OWNER and the receipt by the TRUSTEES of the initial payment from the
company purchasing the OWNER’S SHARES, the TRUSTEES shall cause the OWNER’S SHARES to be
transferred into the name of such company and such company shall thereupon transfer such shares into the
name of the TRUSTEES and the TRUSTEES shall hold such shares until payment for all such shares shall
have been made by the company as provided in this agreement.
x x x determine that such increase or decrease would be necessary to carry out the intention of the parties that the
"(c) The TRUSTEES shall vote all stock standing in their name or the name of their nominees at all meetings
and shall be in all respects entitled to all the rights as owners of said shares, subject, however, to the provisions
of this agreement of trust.
"(d) Any and all dividends paid on said shares after the death of the OWNER shall be subject to the provisions
of this agreement.
x x x
"5. (b) It is expressly agreed and understood, however, that the declaration of dividends and amount of
earnings transferred to surplus shall be subject to the approval of the TRUSTEES and the TRUSTEES shall
participate to such extent in the affairs of the COMPANIES as they deem necessary to insure the carrying out
of this agreement and the discharge of the obligations of the COMPANIES and each of them and of the
MANAGERS hereunder.
"(c) The TRUSTEES shall designate one or more directors of each of the COMPANIES as they shall consider
advisable and corresponding shares shall be transferred to such directors to qualify them to act.
x x x
"8. (a) Upon the death of the OWNER, the COMPANIES or any one or more of them shall purchase the
OWNER’S SHARES; it being the intent that any of the COMPANIES shall purchase all or a proportionate part
of the OWNER’S SHARES . . .
"(b) The purchase price of such shares shall be the book value of such share computed in United States
dollars . . .
x x x
"(d) All dividends paid on stock that had been OWNER’S SHARES, from the time of the transfer of such shares
by one or more of the COMPANIES to the TRUSTEES as provided in Article 4 until payment in full for such
OWNER’S SHARES shall have been made by each of the COMPANIES which shall have purchased the
same, shall be credited as payments on account of the purchase price of such shares and shall be a
prepayment on account of the next due installment or installments of such purchase price.
x x x
"12. The TRUSTEES may from time to time increase or decrease the unpaid balance of the purchase price of
the shares being purchased by any COMPANY or COMPANIES should they in their exclusive discretion
Estate and heirs of the OWNER shall receive the fair value of the shares deposited in Trust as such value
existed at the date of the death of the OWNER.
. ."13. Should the said COMPANIES or any of them be unable or unwilling to comply with their obligations
hereunder when due, the TRUSTEES may terminate this agreement and dispose of all the shares of stock
deposited hereunder, whether or not payment shall have been made for part of such stock, applying the
proceeds of such sale or disposition to the unpaid balance of the purchase price:
"(a) If, upon any such sale or disposition of the stock, the TRUSTEES shall receive an amount in excess of
the unpaid balance of the purchase price agreed to be paid by the COMPANIES for the OWNER’S SHARES
such excess, after deducting all expenses, charges and taxes, shall be paid to the then MANAGERS.
x x x hereby approved and confirmed."
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 December 22, 1958, at a special meeting of MANTRASCO stockholders, the following resolution was
passed:
"RESOLVED, that the 24,700 shares in the Treasury be reverted back to the capital account of the company
as a stock dividend to be distributed to shareholders of record at the close of business on December 22, 1958,
in accordance with the action of the Board of Directors at its meeting on December 19, 1958 which action is
library
c

On November 25, 1963 the entire purchase price of Reese’s interest in MANTRASCO was finally paid in full
"17. Until the delivery to him of the shares purchased by him, no MANAGER, shall sell, assign, mortgage, by the latter, On May 4, 1964 the trust agreement was terminated and the trustees delivered to MANTRASCO
pledge, transfer or in anywise encumber or hypothecate such shares or his interest in this agreement. all the shares which they were holding in trust.

x x x Meanwhile, on September 14, 1962, an examination of MANTRASCO’s books was ordered by the Bureau of
Internal Revenue. The 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
"19. After the death of the OWNER and during the period of this trust the COMPANIES shall pay no dividends acquisition cost of P7,973,660; (b) the respondents failed to declare the said stock dividends as part of their
except as may be authorized by the TRUSTEES. Dividends on MANAGER’S SHARES shall, so long as they taxable income for the year 1958; and (c) from 1956 to 1961 the following amounts were paid by MANTRASCO
shall not be in default under this agreement, be paid over by the TRUSTEES to the MANAGERS. Dividends to Reese’s estate by virtue of the trust agreement, to wit:
chanr ob1 es virt ual 1aw library

on OWNER’S SHARES shall be applied in liquidation of the COMPANIES’ liabilities hereunder as provided in
Article 8(d). Amounts

x x x Year Liabilities Paid

1956 P5,830,587.86 P 2,143,073.00

"26. The TRUSTEES may, after the death of the OWNER and during the life of this trust, vote any and all
shares held in trust, at any general and special meeting of stockholders for all purposes, including but not 1957 5,317,137.86 513,450.00
limited to wholly or partially liquidating or reducing the capital of any COMPANY or COMPANIES, authorizing
the sale of any or all assets, and election of directors . . . 1958 4,824,059.28 493,078.58

1959 4,319,420.14 504,639.14

x x x
1960 3,849,720.14 469,700.00
"28. The COMPANIES and each of them undertake and agree by proper corporate act to reduce their
capitalization, sell or encumber their assets, amend their articles of incorporation, reorganize, liquidate, 1961 3,811,387.69 38,332.45
dissolve and do all other things the TRUSTEES in their discretion determine to be necessary to enable them
to comply with their obligations hereunder and the TRUSTEES are hereby irrevocably authorized to vote all
shares of the COMPANIES and each of them at any general or special meeting for the accomplishment of
such purposes. . . .”
virtua 1aw library
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
On October 19, 1954 Reese died. The projected transfer of his shares in the name of MANTRASCO could the payment of cash for the redemption of said stock and distributing the same as stock dividend." On April
not, however, be immediately effected for lack of sufficient funds to cover initial payment on the shares. 14, 1965 the Commissioner of Internal Revenue issued notices of assessment for deficiency income taxes to
the respondents for the year 1958, as follows:
On February 2, 1955, after MANTRASCO made a partial payment of Reese’s shares, the certificate for the
chanrob1es

virtual 1 aw library

24,700 shares in Reese’s name was cancelled and a new certificate was issued in the name of MANTRASCO.
J.L. Manning W.D. McDonald E.E. Simmons
Deficiency Income Tax P1,416,469.00 P1,442,719.00 P1,450,434.00
Add 50% surcharge* 723,234.50 721,359.507 25,217.00
1/2% monthly interest from
6-20-59 to 6-20-62 260,364.42 259,689.42 261,078.12
———— ———— ————
TOTAL AMOUNT DUE & COLLECTIBLE P2,430,067.92 P2,423,767.92 2,436,729.12
The respondents unsuccessfully challenged the foregoing 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.
Hence, the present recourse.
All the parties rely upon the same provisions of the Tax Code and internal revenue regulations to bolster their
respective positions. These are:
virtual 1aw lib rar y
chanrob 1es
A. National Internal Revenue Code
"SEC. 83. Distribution of dividends or assets by corporations — (a) Definition of Dividends — The term
‘dividends’ when used in this Title means any distribution made by a corporation to its shareholders out of its
earnings or profits accrued since March first, nineteen hundred and thirteen, and payable to its shareholders,
whether in money or in other property.
"Where a corporation distributes all of its assets in complete liquidation or dissolution the gain realized or loss
sustained by the stockholder, whether individual or corporate, is a taxable income or deductible loss, as the
case may be.
"(b) Stock dividend. — 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 that it represents a distribution of earnings or
profits accumulated after March first, nineteen hundred and thirteen.”
virtua 1aw
B. B.I.R. Regulations
"SEC. 251. Dividends paid in property. — Dividends paid in securities or other property (other than its own
stock), in which the earnings of the corporation have been invested, are income to the recipients to the amount
of the full market value of such property when receivable by individual stockholders . . .
"SEC. 252. Stock dividend. — A stock dividend which represents the transfer of surplus to capital account is
not subject to income tax. However, a dividend in stock may constitute taxable income to the recipients thereof
notwithstanding the fact that the officers or directors of the corporation (as defined in section 84) choose to
call such distribution as a stock dividend. The distinction between a stock dividend which does not, and one
which does, constitute income taxable to the shareholders is the distinction between a stock dividend which
works no change in the corporate entity, the same interest in the same corporation being represented after
the distribution by more shares of precisely the same character, and a stock dividend where there either has
been change of corporate identity or a change in the nature of the shares issued as dividends whereby the
proportional interest of the shareholder after the distribution is essentially different from the former interest. A
stock dividend constitutes income if it gives the shareholder an interest different from that which his former
stockholdings represented. A stock dividend does not constitute income if the new shares confer no different
rights or interests than did the old — the new certificate plus the old representing the same proportionate
interest in the net assets of the corporation as did the old.”
a1aw library
The parties differ, however, on the taxability of the "treasury" stock dividends received by the respondents.
The respondents anchor their argument on the same basis as the Court of Tax Appeals; whereas the
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 after the said declaration.
In submitting their respective contentions, it is the assumption of both parties that the 24,700 shares declared
as stock dividends were treasury shares. We are however convinced, after a careful study of the trust
agreement, that the said shares were not, on December 22, 1958 or at any time before or after that date,
treasury shares. The reasons are quite plain.
Although authorities may differ on the exact legal and accounting status of so-called "treasury shares," 1 they
are more or less in agreement that treasury shares are stocks issued and fully paid for and re-acquired by the
corporation either by purchase, donation, forfeiture or other means. 2 Treasury shares are therefore issued
shares, but being in the treasury they do not have the status of outstanding shares. 3 Consequently, although
a treasury share, not having been retired by the corporation re-acquiring it, may be re-issued or sold again,
such share, as long as it is held by the corporation as a treasury share, participates neither in dividends,
because dividends cannot be declared by the corporation to itself, 4 nor in the meetings of the corporation as
voting stock, for otherwise equal distribution of voting powers among stockholders will be effectively lost and
the directors will be able to perpetuate their control of the corporation, 5 though it still represents a paid-for
interest in the property of the corporation. 6 The foregoing essential features of a treasury stock are lacking in
the questioned shares. Thus,
(a) under paragraph 4(c) of the trust agreement, the trustees were authorized to vote all stock standing in their
library
names at all meetings and to exercise all rights "as owners of said shares" — this authority is reiterated in
paragraphs 26 and 28 of the trust agreement;
(b) under paragraph 4(d), "Any and all dividends paid on said shares after the death of the OWNER shall be
subject to the provisions of this agreement;"

(c) under paragraph 5(b), the amount of retained earnings to be declared as dividends was made subject to
the approval of the trustees of the 24,700 shares;
(d) under paragraph 5(c), the choice of corporate directors was delegated exclusively to the trustees who were
also given the authority to transfer qualifying shares to such directors; and
(e) under paragraph 19, MANTRASCO and its two subsidiaries were expressly prohibited from paying
"dividends except as may be authorized by the TRUSTEES;" in the same paragraph mention was also made
of "dividends on OWNER’S SHARES" which shall be applied to the liquidation of the liabilities of the three
companies for the price of Reese’s shares.
The manifest intention of the parties to the trust agreement was, in sum and substance, to treat the 24,700
shares of Reese as absolutely outstanding shares of Reese’s estate until they were fully paid. Such being the
true nature of the 24,700 shares, their declaration as treasury stock dividend in 1958 was a complete nullity
and plainly violative of public policy. A stock dividend, being one payable in capital stock, cannot be declared
out of outstanding corporate stock, but only from retained earnings:
these amounts are consequently subject to income tax as being, in truth and in fact, a flow of cash benefits to
the respondents.
We are of the opinion, however, that the Commissioner erred in assessing the respondents the total acquisition
cost (P7,973,660) of the alleged treasury stock dividends in one lump sum. The record shows that the earnings
of MANTRASCO over a period of years were used to gradually wipe out the holdings therein of Reese.
Consequently, those earnings, which we hold, under the facts disclosed in the case at bar, as in effect having
been distributed to the respondents, should be taxed for each of the corresponding years when payments
were made to Reese’s estate on account of his 24,700 shares. With regard to payments made with
MANTRASCO earnings in 1958 and the years before, while indeed those earnings were utilized in those years
to gradually pay off the value of Reese’s holdings in MANTRASCO, there is no evidence from which it can be
inferred that prior to the passage of the stockholders’ resolution of December 22, 1958 the contributed equity
of each of the respondents rose correspondingly. It was only by virtue of the authority contained in the said
resolution that the respondents actually, albeit illegally, appropriated and partitioned among themselves the
stockholders’ equity representing Reese’s interests in MANTRASCO. As those payments accrued in favor of
the respondents in 1958 they are and should be liable, for income tax purposes, to the extent of the aggregate
amount paid, from 1955 to 1958, by MANTRASCO to buy off Reese’s shares.

Of pointed relevance is this useful discussion of the nature of a stock dividend: The fact that the resolution authorizing the distribution of the said earnings is null and void is of no moment.
Under the National Internal Revenue Code, income tax is assessed on income received from any property,
"‘A stock dividend always involves a transfer of surplus (or profit) to capital stock.’ Graham and Katz, activity or service that produces income. 9 The Tax Code stands as an indifferent, neutral party on the matter
Accounting in Law Practice, 2d ed. 1938, No. 70. As the court said in United States v. Siegel, 8 Cir., 1931, 52 of where the income comes from.
F 2d 63, 65, 78 ALR 672: ‘A stock dividend is a conversion of surplus or undivided profits into capital stock,
which is distributed to stockholders in lieu of a cash dividend.’ Congress itself has defined the term ‘dividend’ Subject to the foregoing qualifications, we find the action taken by the Commissioner in all other respects —
in No. 115(a) of the Act as meaning any distribution made by a corporation to its shareholders, whether in that is, the assessment of a fraud penalty and imposition of interest charges pursuant to the provisions of the
money or in other property, out of its earnings or profits. In Eisner v. Macomber, 1920, 252 US 189, 40 S Ct Tax Code — to be in accordance with law.
189, 64 L Ed 521, 9 ALR 1570, 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 ACCORDINGLY, the judgment of the Court of Tax Appeals absolving the respondents from any deficiency
definite portion of the corporate earnings as part of the permanent capital resources of the corporation by the income tax liability is set aside, and this case is hereby remanded to the Court of Tax Appeals for further
device of capitalizing the same, and the issuance to the stockholders of additional shares of stock representing proceedings. More specifically, the Court of Tax Appeals shall recompute the income tax liabilities of the
the profits so capitalized.”
virtua 1aw library
respondents in accordance with this decision and with the Tax Code, and thereafter pronounce and enter
judgment accordingly. No costs.
The declaration by the respondents and Reese’s trustees of MANTRASCO’s alleged treasury stock dividends
in favor of the former, brings, however, into clear focus the ultimate purpose which the parties to the trust
instrument aimed to realize: to make the respondents the sole owners of Reese’s interest in MANTRASCO by
utilizing the periodic earnings of that company and its subsidiaries to directly subsidize their purchase of the
said interests, and by making it appear outwardly, through the formal declaration of non-existent stock
dividends in the treasury, that they have not received any income from those firms when, in fact, by that
declaration they secured to themselves the means to turn around as full owners of Reese’s shares. In other
words, the respondents, using the trust instrument as a convenient technical device, bestowed unto
themselves the full worth and value of Reese’s corporate holdings with the use of the very earnings of the
companies. Such package device, obviously not designed to carry out the usual stock dividend purpose of
corporate expansion reinvestment, e.g. the acquisition of additional facilities and other capital budget items,
but exclusively for expanding the capital base of the respondents in MANTRASCO, cannot be allowed to
deflect the respondents’ responsibilities toward our income tax laws. 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, they were in ultimate effect and result making a distribution of such earnings to the respondents. All