G.R. No.

L-17518 October 30, 1922

FREDERICK C. FISHER, plaintiff-appellant,

vs.
WENCESLAO TRINIDAD, Collector of Internal Revenue, defendant-appellee.

Fisher and De Witt and Antonio M. Opisso for appellants.

Acting Attorney-General Tuason for appellee.

JOHNSON, J.:

The only question presented by this appeal is: Are the "stock dividends" in the present case
"income" and taxable as such under the provisions of section 25 of Act No. 2833? While the
appellant presents other important questions, under the view which we have taken of the facts and
the law applicable to the present case, we deem it unnecessary to discuss them now.

The defendant demurred to the petition in the lower court. The facts are therefore admitted. They are
simple and may be stated as follows:

That during the year 1919 the Philippine American Drug Company was a corporation duly organized
and existing under the laws of the Philippine Islands, doing business in the City of Manila; that he
appellant was a stockholder in said corporation; that said corporation, as result of the business for
that year, declared a "stock dividend"; that the proportionate share of said stock divided of the
appellant was P24,800; that the stock dividend for that amount was issued to the appellant; that
thereafter, in the month of March, 1920, the appellant, upon demand of the appellee, paid under
protest, and voluntarily, unto the appellee the sum of P889.91 as income tax on said stock dividend.
For the recovery of that sum (P889.91) the present action was instituted. The defendant demurred to
the petition upon the ground that it did not state facts sufficient to constitute cause of action. The
demurrer was sustained and the plaintiff appealed.

To sustain his appeal the appellant cites and relies on some decisions of the Supreme Court of the
United States as will as the decisions of the supreme court of some of the states of the Union, in
which the questions before us, based upon similar statutes, was discussed. Among the most
important decisions may be mentioned the following: Towne vs. Eisner, 245 U.S., 418; Doyle vs.
Mitchell Bors. Co., 247 U.S., 179; Eisner vs. Macomber, 252 U.S., 189; Dekoven vs Alsop, 205 Ill.,
309; 63 L.R.A., 587; Kaufman vs. Charlottesville Woolen Mills, 93 Va., 673.

In each of said cases an effort was made to collect an "income tax" upon "stock dividends" and in
each case it was held that "stock dividends" were capital and not an "income" and therefore not
subject to the "income tax" law.

The appellee admits the doctrine established in the case of Eisner vs. Macomber (252 U.S., 189)
that a "stock dividend" is not "income" but argues that said Act No. 2833, in imposing the tax on the
stock dividend, does not violate the provisions of the Jones Law. The appellee further argues that
the statute of the United States providing for tax upon stock dividends is different from the statute of
the Philippine Islands, and therefore the decision of the Supreme Court of the United States should
not be followed in interpreting the statute in force here.

For the purpose of ascertaining the difference in the said statutes ( (United States and Philippine
Islands), providing for an income tax in the United States as well as that in the Philippine Islands, the
two statutes are here quoted for the purpose of determining the difference, if any, in the language of
the two statutes.
Chapter 463 of an Act of Congress of September 8, 1916, in its title 1 provides for the collection of
an "income tax." Section 2 of said Act attempts to define what is an income. The definition follows:

That the term "dividends" as used in this title shall be held to mean any distribution made or
ordered to made by a corporation, . . . which stock dividend shall be considered income, to
the amount of its cash value.

Act No. 2833 of the Philippine Legislature is an Act establishing "an income tax." Section 25 of said
Act attempts to define the application of the income tax. The definition follows:

The term "dividends" as used in this Law shall be held to mean any distribution made or
ordered to be made by a corporation, . . . out of its earnings or profits accrued since March
first, nineteen hundred and thirteen, and payable to its shareholders, whether in cash or in
stock of the corporation, . . . . Stock dividend shall be considered income, to the amount of
the earnings or profits distributed.

It will be noted from a reading of the provisions of the two laws above quoted that the writer of the
law of the Philippine Islands must have had before him the statute of the United States. No important
argument can be based upon the slight different in the wording of the two sections.

It is further argued by the appellee that there are no constitutional limitations upon the power of the
Philippine Legislature such as exist in the United States, and in support of that contention, he cites a
number of decisions. There is no question that the Philippine Legislature may provide for the
payment of an income tax, but it cannot, under the guise of an income tax, collect a tax on property
which is not an "income." The Philippine Legislature can not impose a tax upon "property" under a
law which provides for a tax upon "income" only. The Philippine Legislature has no power to provide
a tax upon "automobiles" only, and under that law collect a tax upon a carreton or bull cart.
Constitutional limitations, that is to say, a statute expressly adopted for one purpose cannot, without
amendment, be applied to another purpose which is entirely distinct and different. A statute providing
for an income tax cannot be construed to cover property which is not, in fact income. The Legislature
cannot, by a statutory declaration, change the real nature of a tax which it imposes. A law which
imposes an important tax on rice only cannot be construed to an impose an importation tax on corn.

It is true that the statute in question provides for an income tax and contains a further provision that
"stock dividends" shall be considered income and are therefore subject to income tax provided for in
said law. If "stock dividends" are not "income" then the law permits a tax upon something not within
the purpose and intent of the law.

It becomes necessary in this connection to ascertain what is an "income in order that we may be
able to determine whether "stock dividends" are "income" in the sense that the word is used in the
statute. Perhaps it would be more logical to determine first what are "stock dividends" in order that
we may more clearly understand their relation to "income." Generally speaking, stock dividends
represent undistributed increase in the capital of corporations or firms, joint stock companies, etc.,
etc., for a particular period. They are used to show the increased interest or proportional shares in
the capital of each stockholder. In other words, the inventory of the property of the corporation, etc.,
for particular period shows an increase in its capital, so that the stock theretofore issued does not
show the real value of the stockholder's interest, and additional stock is issued showing the increase
in the actual capital, or property, or assets of the corporation, etc.

To illustrate: A and B form a corporation with an authorized capital of P10,000 for the purpose of
opening and conducting a drug store, with assets of the value of P2,000, and each contributes
P1,000. Their entire assets are invested in drugs and put upon the shelves in their place of business.
They commence business without a cent in the treasury. Every dollar contributed is invested. Shares
of stock to the amount of P1,000 are issued to each of the incorporators, which represent the actual
investment and entire assets of the corporation. Business for the first year is good. Merchandise is
sold, and purchased, to meet the demands of the growing trade. At the end of the first year an
inventory of the assets of the corporation is made, and it is then ascertained that the assets or
capital of the corporation on hand amount to P4,000, with no debts, and still not a cent in the
treasury. All of the receipts during the year have been reinvested in the business. Neither of the
stockholders have withdrawn a penny from the business during the year. Every peso received for the
sale of merchandise was immediately used in the purchase of new stock — new supplies. At the
close of the year there is not a centavo in the treasury, with which either A or B could buy a cup of
coffee or a pair of shoes for his family. At the beginning of the year they were P2,000, and at the end
of the year they were P4,000, and neither of the stockholders have received a centavo from the
business during the year. At the close of the year, when it is discovered that the assets are P4,000
and not P2,000, instead of selling the extra merchandise on hand and thereby reducing the business
to its original capital, they agree among themselves to increase the capital they agree among
themselves to increase the capital issued and for that purpose issue additional stock in the form of
"stock dividends" or additional stock of P1,000 each, which represents the actual increase of the
shares of interest in the business. At the beginning of the year each stockholder held one-half
interest in the capital. At the close of the year, and after the issue of the said stock dividends, they
each still have one-half interest in the business. The capital of the corporation increased during the
year, but has either of them received an income? It is not denied, for the purpose of ordinary
taxation, that the taxable property of the corporation at the beginning of the year was P2,000, that at
the close of the year it was P4,000, and that the tax rolls should be changed in accordance with the
changed conditions in the business. In other words, the ordinary tax should be increased by P2,000.

Another illustration: C and D organized a corporation for agricultural purposes with an authorized
capital stock of P20,000 each contributing P5,000. With that capital they purchased a farm and, with
it, one hundred head of cattle. Every peso contributed is invested. There is no money in the treasury.
Much time and labor was expanded during the year by the stockholders on the farm in the way of
improvements. Neither received a centavo during the year from the farm or the cattle. At the
beginning of the year the assets of the corporation, including the farm and the cattle, were P10,000,
and at the close of the year and inventory of the property of the corporation is made and it is then
found that they have the same farm with its improvements and two hundred head of cattle by natural
increase. At the end of the year it is also discovered that, by reason of business changes, the farm
and the cattle both have increased in value, and that the value of the corporate property is now
P20,000 instead of P10,000 as it was at the beginning of the year. The incorporators instead of
reducing the property to its original capital, by selling off a part of its, issue to themselves "stock
dividends" to represent the proportional value or interest of each of the stockholders in the increased
capital at the close of the year. There is still not a centavo in the treasury and neither has withdrawn
a peso from the business during the year. No part of the farm or cattle has been sold and not a
single peso was received out of the rents or profits of the capital of the corporation by the
stockholders.

Another illustration: A, an individual farmer, buys a farm with one hundred head of cattle for the sum
of P10,000. At the end of the first year, by reason of business conditions and the increase of the
value of both real estate and personal property, it is discovered that the value of the farm and the
cattle is P20,000. A, during the year, has received nothing from the farm or the cattle. His books at
the beginning of the year show that he had property of the value of P10,000. His books at the close
of the year show that he has property of the value of P20,000. A is not a corporation. The assets of
his business are not shown therefore by certificates of stock. His books, however, show that the
value of his property has increased during the year by P10,000, under any theory of business or law,
be regarded as an "income" upon which the farmer can be required to pay an income tax? Is there
any difference in law in the condition of A in this illustration and the condition of A and B in the
immediately preceding illustration? Can the increase of the value of the property in either case be
regarded as an "income" and be subjected to the payment of the income tax under the law?

Each of the foregoing illustrations, it is asserted, is analogous to the case before us and, in view of
that fact, let us ascertain how lexicographers and the courts have defined an "income." The New
Standard Dictionary, edition of 1915, defines an income as "the amount of money coming to a
person or corporation within a specified time whether as payment or corporation within a specified
time whether as payment for services, interest, or profit from investment." Webster's International
Dictionary defines an income as "the receipt, salary; especially, the annual receipts of a private
person or a corporation from property." Bouvier, in his law dictionary, says that an "income" in the
federal constitution and income tax act, is used in its common or ordinary meaning and not in its
technical, or economic sense. (146 Northwestern Reporter, 812) Mr. Black, in his law dictionary,
says "An income is the return in money from one's business, labor, or capital invested; gains, profit
or private revenue." "An income tax is a tax on the yearly profits arising from property , professions,
trades, and offices."

The Supreme Court of the United States, in the case o Gray vs. Darlington (82 U.S., 653), said in
speaking of income that mere advance in value in no sense constitutes the "income" specified in the
revenue law as "income" of the owner for the year in which the sale of the property was made. Such
advance constitutes and can be treated merely as an increase of capital. (In re Graham's Estate,
198 Pa., 216; Appeal of Braun, 105 Pa., 414.)

Mr. Justice Hughes, later Associate Justice of the Supreme Court of the United States and now
Secretary of State of the United States, in his argument before the Supreme Court of the United
States in the case of Towne vs. Eisner, supra, defined an "income" in an income tax law, unless it is
otherwise specified, to mean cash or its equivalent. It does not mean choses in action or unrealized
increments in the value of the property, and cites in support of the definition, the definition given by
the Supreme Court in the case of Gray vs. Darlington, supra.

In the case of Towne vs. Eisner, supra, Mr. Justice Holmes, speaking for the court, said:
"Notwithstanding the thoughtful discussion that the case received below, we cannot doubt that the
dividend was capital as well for the purposes of the Income Tax Law. . . . 'A stock dividend really
takes nothing from the property of the corporation, and adds nothing to the interests of the
shareholders. Its property is not diminished and their interest are not increased. . . . The proportional
interest of each shareholder remains the same. . . .' In short, the corporation is no poorer and the
stockholder is no richer then they were before." (Gibbons vs. Mahon, 136 U.S., 549, 559, 560; Logan
County vs. U.S., 169 U.S., 255, 261).

In the case of Doyle vs. Mitchell Bros. Co. (247 U.S., 179, Mr. Justice Pitney, speaking for the court,
said that the act employs the term "income" in its natural and obvious sense, as importing something
distinct from principal or capital and conveying the idea of gain or increase arising from corporate
activity.

Mr. Justice Pitney, in the case of Eisner vs. Macomber (252 U.S., 189), again speaking for the court
said: "An income may be defined as the gain derived from capital, from labor, or from both
combined, provided it be understood to include profit gained through a sale or conversion of capital
assets."

For bookkeeping purposes, when stock dividends are declared, the corporation or company
acknowledges a liability, in form, to the stockholders, equivalent to the aggregate par value of their
stock, evidenced by a "capital stock account." If profits have been made by the corporation during a
particular period and not divided, they create additional bookkeeping liabilities under the head of
"profit and loss," "undivided profits," "surplus account," etc., or the like. None of these, however,
gives to the stockholders as a body, much less to any one of them, either a claim against the going
concern or corporation, for any particular sum of money, or a right to any particular portion of the
asset, or any shares sells or until the directors conclude that dividends shall be made a part of the
company's assets segregated from the common fund for that purpose. The dividend normally is
payable in money and when so paid, then only does the stockholder realize a profit or gain, which
becomes his separate property, and thus derive an income from the capital that he has invested.
Until that, is done the increased assets belong to the corporation and not to the individual
stockholders.

When a corporation or company issues "stock dividends" it shows that the company's accumulated
profits have been capitalized, instead of distributed to the stockholders or retained as surplus
available for distribution, in money or in kind, should opportunity offer. Far from being a realization of
profits of the stockholder, it tends rather to postpone said realization, in that the fund represented by
the new stock has been transferred from surplus to assets, and no longer is available for actual
distribution. The essential and controlling fact is that the stockholder has received nothing out of the
company's assets for his separate use and benefit; on the contrary, every dollar of his original
investment, together with whatever accretions and accumulations resulting from employment of his
money and that of the other stockholders in the business of the company, still remains the property
of the company, and subject to business risks which may result in wiping out of the entire
investment. Having regard to the very truth of the matter, to substance and not to form, the
stockholder by virtue of the stock dividend has in fact received nothing that answers the definition of
an "income." (Eisner vs. Macomber, 252 U.S., 189, 209, 211.)

The stockholder who receives a stock dividend has received nothing but a representation of his
increased interest in the capital of the corporation. There has been no separation or segregation of
his interest. All the property or capital of the corporation still belongs to the corporation. There has
been no separation of the interest of the stockholder from the general capital of the corporation. The
stockholder, by virtue of the stock dividend, has no separate or individual control over the interest
represented thereby, further than he had before the stock dividend was issued. He cannot use it for
the reason that it is still the property of the corporation and not the property of the individual holder of
stock dividend. A certificate of stock represented by the stock dividend is simply a statement of his
proportional interest or participation in the capital of the corporation. For bookkeeping purposes, a
corporation, by issuing stock dividend, acknowledges a liability in form to the stockholders,
evidenced by a capital stock account. The receipt of a stock dividend in no way increases the money
received of a stockholder nor his cash account at the close of the year. It simply shows that there
has been an increase in the amount of the capital of the corporation during the particular period,
which may be due to an increased business or to a natural increase of the value of the capital due to
business, economic, or other reasons. We believe that the Legislature, when it provided for an
"income tax," intended to tax only the "income" of corporations, firms or individuals, as that term is
generally used in its common acceptation; that is that the income means money received, coming to
a person or corporation for services, interest, or profit from investments. We do not believe that the
Legislature intended that a mere increase in the value of the capital or assets of a corporation, firm,
or individual, should be taxed as "income." Such property can be reached under the ordinary from of
taxation.

Mr. Justice Pitney, in the case of the Einer vs. Macomber, supra, said in discussing the difference
between "capital" and "income": "That the fundamental relation of 'capital' to 'income' has been much
discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the
crop; the former depicted as a reservoir supplied from springs; the latter as the outlet stream, to be
measured by its flow during a period of time." It may be argued that a stockholder might sell the
stock dividend which he had acquired. If he does, then he has received, in fact, an income and such
income, like any other profit which he realizes from the business, is an income and he may be taxed
thereon.

There is a clear distinction between an extraordinary cash dividend, no matter when earned, and
stock dividends declared, as in the present case. The one is a disbursement to the stockholder of
accumulated earnings, and the corporation at once parts irrevocably with all interest thereon. The
other involves no disbursement by the corporation. It parts with nothing to the stockholder. The latter
receives, not an actual dividend, but certificate of stock which simply evidences his interest in the
entire capital, including such as by investment of accumulated profits has been added to the original
capital. They are not income to him, but represent additions to the source of his income, namely, his
invested capital. (DeKoven vs. Alsop, 205, Ill., 309; 63 L.R.A. 587). Such a person is in the same
position, so far as his income is concerned, as the owner of young domestic animal, one year old at
the beginning of the year, which is worth P50 and, which, at the end of the year, and by reason of its
growth, is worth P100. The value of his property has increased, but has had an income during the
year? It is true that he had taxable property at the beginning of the year of the value of P50, and the
same taxable property at another period, of the value of P100, but he has had no income in the
common acceptation of that word. The increase in the value of the property should be taken account
of on the tax duplicate for the purposes of ordinary taxation, but not as income for he has had none.

The question whether stock dividends are income, or capital, or assets has frequently come before
the courts in another form — in cases of inheritance. A is a stockholder in a large corporation. He
dies leaving a will by the terms of which he give to B during his lifetime the "income" from said stock,
with a further provision that C shall, at B's death, become the owner of his share in the corporation.
During B's life the corporation issues a stock dividend. Does the stock dividend belong to B as an
income, or does it finally belong to C as a part of his share in the capital or assets of the corporation,
which had been left to him as a remainder by A? While there has been some difference of opinion on
that question, we believe that a great weight of authorities hold that the stock dividend is capital or
assets belonging to C and not an income belonging to B. In the case of D'Ooge vs. Leeds (176
Mass., 558, 560) it was held that stock dividends in such cases were regarded as capital and not
as income (Gibbons vs. Mahon, 136 U.S., 549.)

In the case of Gibbson vs. Mahon, supra, Mr. Justice Gray said: "The distinction between the title of
a corporation, and the interest of its members or stockholders in the property of the corporation, is
familiar and well settled. The ownership of that property is in the corporation, and not in the holders
of shares of its stock. The interest of each stockholder consists in the right to a proportionate part of
the profits whenever dividends are declared by the corporation, during its existence, under its
charter, and to a like proportion of the property remaining, upon the termination or dissolution of the
corporation, after payment of its debts." (Minot vs. Paine, 99 Mass., 101; Greeff vs. Equitable Life
Assurance Society, 160 N. Y., 19.) In the case of Dekoven vs. Alsop (205 Ill ,309, 63 L. R. A. 587)
Mr. Justice Wilkin said: "A dividend is defined as a corporate profit set aside, declared, and ordered
by the directors to be paid to the stockholders on demand or at a fixed time. Until the dividend is
declared, these corporate profits belong to the corporation, not to the stockholders, and are liable for
corporate indebtedness.

There is a clear distinction between an extraordinary cash dividend, no matter when earned, and
stock dividends declared. The one is a disbursement to the stockholders of accumulated earning,
and the corporation at once parts irrevocably with all interest thereon. The other involves no
disbursement by the corporation. It parts with nothing to the stockholders. The latter receives, not an
actual dividend, but certificates of stock which evidence in a new proportion his interest in the entire
capital. When a cash becomes the absolute property of the stockholders and cannot be reached by
the creditors of the corporation in the absence of fraud. A stock dividend however, still being the
property of the corporation and not the stockholder, it may be reached by an execution against the
corporation, and sold as a part of the property of the corporation. In such a case, if all the property of
the corporation is sold, then the stockholder certainly could not be charged with having received an
income by virtue of the issuance of the stock dividend. Until the dividend is declared and paid, the
corporate profits still belong to the corporation, not to the stockholders, and are liable for corporate
indebtedness. The rule is well established that cash dividend, whether large or small, are regarded
as "income" and all stock dividends, as capital or assets (Cook on Corporation, Chapter 32, secs.
534, 536; Davis vs. Jackson, 152 Mass., 58; Mills vs. Britton, 64 Conn., 4; 5 Am., and Eng. Encycl.
of Law, 2d ed., p. 738.)

If the ownership of the property represented by a stock dividend is still in the corporation and to in
the holder of such stock, then it is difficult to understand how it can be regarded as income to the
stockholder and not as a part of the capital or assets of the corporation. (Gibbsons vs.
Mahon, supra.) the stockholder has received nothing but a representation of an interest in the
property of the corporation and, as a matter of fact, he may never receive anything, depending upon
the final outcome of the business of the corporation. The entire assets of the corporation may be
consumed by mismanagement, or eaten up by debts and obligations, in which case the holder of the
stock dividend will never have received an income from his investment in the corporation. A
corporation may be solvent and prosperous today and issue stock dividends in representation of its
increased assets, and tomorrow be absolutely insolvent by reason of changes in business
conditions, and in such a case the stockholder would have received nothing from his investment. In
such a case, if the holder of the stock dividend is required to pay an income tax on the same, the
result would be that he has paid a tax upon an income which he never received. Such a conclusion
is absolutely contradictory to the idea of an income. An income subject to taxation under the law
must be an actual income and not a promised or prospective income.

The appelle argues that there is nothing in section 25 of Act No 2833 which contravenes the
provisions of the Jones Law. That may be admitted. He further argues that the Act of Congress (U.S.
Revenue Act of 1918) expressly authorized the Philippine Legislatures to provide for an income tax.
That fact may also be admitted. But a careful reading of that Act will show that, while it permitted a
tax upon income, the same provided that income shall include gains, profits, and income derived
from salaries, wages, or compensation for personal services, as well as from interest, rent,
dividends, securities, etc. The appellee emphasizes the "income from dividends." Of course, income
received as dividends is taxable as an income but an income from "dividends" is a very different
thing from receipt of a "stock dividend." One is an actual receipt of profits; the other is a receipt of a
representation of the increased value of the assets of corporation.

In all of the foregoing argument we have not overlooked the decisions of a few of the courts in
different parts of the world, which have reached a different conclusion from the one which we have
arrived at in the present case. Inasmuch, however, as appeals may be taken from this court to the
Supreme Court of the United States, we feel bound to follow the same doctrine announced by that
court.

Having reached the conclusion, supported by the great weight of the authority, that "stock dividends"
are not "income," the same cannot be taxes under that provision of Act No. 2833 which provides for
a tax upon income. Under the guise of an income tax, property which is not an income cannot be
taxed. When the assets of a corporation have increased so as to justify the issuance of a stock
dividend, the increase of the assets should be taken account of the Government in the ordinary tax
duplicates for the purposes of assessment and collection of an additional tax. For all of the foregoing
reasons, we are of the opinion, and so decide, that the judgment of the lower court should be
revoked, and without any finding as to costs, it is so ordered.

Araullo, C.J. Avanceña, Villamor and Romualdez, JJ., concur.

Separate Opinions

STREET, J., concurring:

I agree that the trial court erred in sustaining the demurrer, and the judgment must be reversed.
Instead of demurring the defendant should have answered and alleged, if such be the case, that the
stock dividend which was the subject of taxation represents the amount of earnings or profits
distributed by means of the issuance of said stock dividend; and the case should have been tried on
that question of fact.

In this connection it will be noted that section 25 (a) of Act No. 2833, of the Philippine Legislature,
under which this tax was imposed, does not levy a tax generally on stock dividends to the extend of
the part of the stock nor even to the extend of its value, but declares that stock dividends shall be
considered as income to the amount of the earnings or profits distributed. Under provision, before
the tax can be lawfully assessed and collected, it must appear that he stock dividend represents
earning or profits distributed; and the burden of proof is on the Collector of Internal Revenue to show
this.

The case of Eisner vs. Macomber (252 U.S., 189; 64 L. ed., 521), has been cited as authority for the
proposition that it is incompetent for the Legislature to tax as income any property which by nature is
really capital — as a stock dividend is there said to be. In that case the Supreme Court of the United
States held that a Congressional Act taxing stock dividends as income was repugnant to that
provision of the Constitution of the United States which required that direct taxes upon property shall
be apportioned for collection among the several states according to population and that the
Sixteenth Amendment, in authorizing the imposition by Congress of taxes upon income, had not
vested Congress with the power to levy direct taxes, on property under the guise of income taxes.
But the resolution embodied in that decision was evidently reached because of the necessity of
harmonizing two different provisions of the Constitution of the United States, as amended. In this
jurisdiction our Legislature has full authority to levy both taxes on property and income taxes; and
there is no organic provision here in force similar to that which, under the Constitution of the United
States, requires direct taxes on property to be levied in a particular way.

It results, under the statute here in force, there being no constitutional restriction upon the action of
the law making body, that the case before us presents merely a question of statutory construction.
That the problem should be viewed in this light, in a case where there is no restriction upon the
legislative body, is pointed our in Eisner vs. Macomber, supra, where in the course of his opinion Mr.
Justice Pitney refers to the cases of the Swan Brewery Co. vs. Rex ([1914] A. C. 231), and Tax
Commissioner vs. Putnam (227 Mass., 522), as being distinguished from Eisner vs. Macomber by
the very circumstance that in those cases the law making body, or bodies were under no restriction
as to the method of levying taxes. Such is the situation here.

OSTRAND, J., dissenting:

In its final analysis the opinion of the court rests principally, if not entirely on the decision of the
United States Supreme Court in the case of Eisner vs. Macomber (252 U.S., 189), a decision which,
for at least two reasons, is entirely inapplicable to the present case.

In the first place, there is a radical difference between the definition of a taxable stock dividend given
in the United States Income Tax Law of September 8, 1916, construed in the case of Eisner vs.
Macomber, and that given in Act No. 2833 of the Philippine Legislature, the Act with which we are
concerned in the present case. The former provides that "stock dividend shall be considered income,
to the amount of its cash value;" the Philippine Act provides that "Stock dividend shall be considered
income, to the amount of the earnings or profits distributed." The United State statute made stock
dividends based upon an advance in the value of the property or investment taxable as income
whether resulting from earning or not; our statute make stock dividends taxable only to the amount
of the earning and profits distributed, and stock dividends based on the increment income and are
not taxable. Though the difference would seem sufficiently obvious, we will endeavor to make it still
clearer by borrowing one of the illustrations with which the opinion of the court is provided. The court
says:

A, an individual farmer, buys a farm with one hundred head of cattle for the sum of P10,000.
At the end of the first year, by reason of business conditions and the increase of the value of
both real estate and personal property, it is discovered that the value of the farm and the
cattle is P20,000. A, during the year has received nothing from the farm or the cattle. His
books at the beginning of the year show that he had property of the value of P10,000. His
books at the close of the year show that he has property of the value of P20,000. A is not a
corporation. The assets of his business are not shown therefore by certificate of stock. His
books, however, show that the value of his property has increased during the year by
P10,000. Can the P10,000, under any theory of business or law, be regarded as an "income"
upon which the farmer can be required to pay an income tax? Is there any difference in law
in the conditions of A in this illustration and the conditions of A and B in the immediately
preceding illustration? Can the increase of the value of the property in either case be
regarded as an 'income' and be subjected to the payment of the income tax under the law?

I answer no. And while the increment if in the form of a stock dividend would have been regarded as
income under the United States statute and taxes as such, it is not regarded as income and cannot
be so taxes under our statute because it is not based on earnings or profits. That is precisely the
difference between the two statutes and that is the reason the illustration is not in point in this case,
though it would have been entirely appropriate in the Eisner vs. Macomber case. It is also one of the
reasons why that case is inapplicable here and why most of the arguments in the majority opinion
are beside the mark.

But let us suppose that A had sold the products of the farm during the year for P10,000 over and
above his expense, and had invested the money in buildings and improvements on the farm, thus
increasing its value to P20,000. Why would not the P10,000 earned during the year and so invested
in improvements still be income for the year? And why would not a tax on these earnings be an
income tax under the definition given in Black's Law Dictionary, and quoted with approval in the
decision of the court, that "An income tax is a tax on the yearly profits arising from the property,
professions, trades, and offices?" There can be but one answer. There is no reason whatever why
the gains derived from the sale of the products of the farm should not be regarded as income
whether reinvested in improvements upon the farm or not and there is no reason way a tax levied
thereon cannot be considered an income tax.

Moreover, to constitute income, profits, or earnings need not necessarily be converted into cash.
Black's Law Dictionary says — and I am again quoting from the decision of the court — "An income
is the return in money from one's business, labor, or capital invested; gains profits, or private
revenue." As will be seen in the secondary sense of the word, income need not consist in money;
upon this point there is no divergence of view among the lexicographers. If a farmer stores the gain
produced upon his farm without selling, it may none the less be regarded as income.

In the Eisner vs. Macomber case, the United States supreme Court felt bound to give the word
"income" a strict interpretation. Under article 1, paragraph 2, clause 3, and paragraph 9, clause 4 of
the original Constitution of the United States, Congress could not impose direct taxes without
apportioning them among the States according to population. As it was thought desirable to impose
Federal taxes upon incomes and as a levy of such taxes by appointment among the States in
proportion to population would lead to an unequal distribution of the tax with reference to the amount
of taxable incomes, the Sixteenth Amendment was adopted and which provided that "The Congress
shall have power to lay and collect taxes on incomes, from whatever source derived, without
apportionment among the several states, and without regard to any census or enumeration."

The United States Supreme Court therefore says in the Eisner vs. Macomber case:

A proper regard for its generis, as well as its very clear language, requires also that this
Amendment shall not be extended by loose construction, so as to repeal or modify, except
as applied to income, those provisions of the Constitution that require an apportionment
according to population for direct taxes upon property, real and personal. This limitation still
has an appropriate and important functions, and is not to be overridden by Congress or
disregarded by the courts.

In order, therefore, that the clauses cited from Article I of the constitution may have proper
force and effect, save only as modified by the Amendment, and that the latter also may have
proper effect, it becomes essential to distinguish between what is and what is not "income,"
as the term is there used; and to apply the distinction as cases arise, according to truth and
substance, without regard to form. Congress cannot by any definition it may adopt conclude
the matter, since it cannot by legislation alter the Constitution, from which alone it derives its
power to legislate, and within whose limitations alone that power can be lawfully exercised.

That, in the absence of the peculiar restrictions placed by the Constitution upon taxing power of
Congress, the decision of the court might have been different is clearly indicated by the following
language:

Two recent decisions, proceeding from courts of high jurisdiction, are cited in support of the
position of the Government.

Sean Brewery Co. vs. Rex ([1914] A. C., 231), arose under the Dividend Duties Act of
Western Australia, which provided that "dividend" should include "every dividend, profit,
advantage, or gain intended to be paid or credited to or distributed among any members or
director of any company," except etc. There was a stock dividend, the new shares being
alloted among the shareholders pro rata; and the question was whether this was a
distribution of a dividend within the meaning of the act. The Judicial Committee of the Privy
Council sustained the dividend duty upon the ground that, although "in ordinary language the
new shares would not be distribution of a dividend," yet within the meaning of the act, such
new share were an "advantage" to the recipients. There being no constitutional restriction
upon the action of the lawmaking body, the case presented merely a question of statutory
construction, and manifestly the decision is not a precedent for the guidance of this court
when acting under a duty to test an act of Congress by the limitations of a written
Constitution having superior force.

In Tax Commissioner vs. Putnam (1917], 227 Mass., 522), it was held that the 44th
Amendment to the constitution of Massachusetts, which conferred upon the legislature full
power to tax incomes, "must be interpreted as including every item which by any reasonable
understanding can fairly be regarded as income" (pp. 526, 531); and that under it a stock
dividend was taxable as income. . . . Evidently, in order to give a sufficiently broad sweep to
the new taxing provision, it was deemed necessary to take the symbol for the substance,
accumulation for distribution, capital accretion for its opposite; while a case where money is
paid into the hand of the stockholder with an option to buy new shares with it, followed by
 acceptance of the option, was regarded as identical in substance with a case where the
stockholder receives no money and has no option. The Massachusetts court was not under
an obligation, like the one which binds us, of applying a constitutional provisions that stand in
the way of extending it by construction.

The Philippine Legislature has full power to levy taxes both on capital or property and on income,
subject only to the provisions of the Organic Act that "the rule of taxation shall be uniform." In
providing for the income tax the Legislature is therefore entirely free to employ the term "income" in
its widest sense and is in nowise limited or hampered by organic limitations such as those imposed
upon Congress by the Constitution of the United States. This is the second reason why the rule laid
down in Eisner vs. Macomber has no application here.

The majority opinion in discussing this question, says:

There is no question that the Philippine Legislature may provide for the payment of an
income tax, but it cannot, under the guise of an income tax, collect a tax on property which is
not an "income." The Philippine Legislature cannot impose a tax upon "income" only . The
Philippine Legislature has no power to provide a tax upon "automobiles," only, and under
that law collect a tax upon a carreton or bull cart. Constitutional limitations upon the power of
the Legislature are not stronger than statutory limitations, that is to say, a statute expressly
adopted for one purpose cannot, without amendment, be applied to another purpose which is
entirely distinct and different. A statute providing for an income tax cannot be construed to
cover property which is not, in fact, income. The Legislature cannot, by a statutory
declaration, change the real of a nature of a tax which it imposes. A law which imposes an
importation tax on rice only cannot be construed to impose an importation tax on corn.

These assertions while in the main true are, perhaps, a little to broadly stated; much will depend on
the circumstances of each particular case. If the Legislature cannot do the things enumerate it must
be by reason of the limitation imposed by the Organic Act, "That no bill which may be enacted into
law shall embrace more than on subject, and that subject shall be expressed in the title of the bill."
Similar provisions are contained in most State Constitutions, their object being to prevent "log-rolling"
and the passing of undesirable measures without their being brought properly to the attention of the
legislators. Where the prevention of this mischief is not involved, the courts have uniformly given
such provisions a very liberal construction and there are few, if any, cases where a statute has been
declared unconstitutional for dealing with several cognate subjects in the same Act and under the
same title. (Lewis Sutherland on Statutory Construction, 2d ed., pars 109 et seq.: Government of the
Philippine Island vs. Municipality of Binalonan and Roman Catholic Bishop of Nueva Segovia, 32,
Phil., 634). Certainly no income tax statute would be declared unconstitutional on that ground for
treating dividends as income and providing for their taxation as such.

Reverting to the question of the nature of income, it is argued that a stock certificate has no intrinsic
value and that, therefore, even it is based on earnings instead of increment in capital it cannot be
regarded as income. But neither has a bank check or a time deposit certificate any intrinsic value,
yet it may be negotiated, or sold, or assigned and it represents a cash value. So also does a stock
certificate. A lawyer might take his fee in stock certificates instead of in money. Would it be seriously
contended that he had received no fee and that his efforts had brought no income? 1awph !l.net

Some of the members of the court agree that stock dividends based on earnings or profits may be
taxed as income, but take the view that in an action against the Collector of the Internal Revenue for
recovering back taxes paid on non-taxable stock dividends, the plaintiff need not allege that the
stock dividends are not base on earnings or profits distributed, but that question of the taxability or
non-taxability of the stock dividends is a matter of defense and should be set up by the defendant by
way of answer.

I think this view is erroneous. If some stock dividends are taxable and others are not, an allegation
that stock dividends in general have been taxed is not sufficient and does not state a cause of
action. the presumption is that the tax has been legally collected and the burden is upon the plaintiff
both to allege and prove facts showing that the collection is unlawfully or irregular. (Code of Civil
Procedure, sec. 334, subsec. 14 and 31.)

Malcolm, J., concurs.

————

JOHNS, J., dissenting:

We have studied and analyzed with care the able and exhaustive majority opinion written by Mr.
Justice Johnson.

In the final analysis, the question involved is whether the words "which stock dividend shall be
considered income, to the amount of its cash value" are to be construed as meaning the same things
as the words "stock dividend shall be considered income, to the amount of the earnings or profits
distributed," as the majority opinion says. The first is an Act of Congress defining what is a stock
dividend, and that the word dividend shall be construed as income to the amount of its cash value. It
is upon that construction and that definition that the majority opinion is founded. That is the definition
of the words as used in an Act of Congress. The other is an Act defining the meaning of the words
as used in an Act of Congress. The other is an Act defining the meaning of the words by the
Legislature of the Philippine Islands, and it says: "Stock dividend shall be considered income, to the
amount of the earnings or profits distributed."

It is true, as the majority opinion says, that in enacting the Income Tax Law of the Philippine Islands,
the Legislature had before it the Act of Congress. But it is also true that by the Act of the Philippine
Legislature "Stock dividend shall be considered income, to the amount of the earnings or profits
distributed." One law is founded upon the actual cash value of the stock and the other is founded
upon distributed earnings and profits.

Much is said in the textbooks and by the numerous decisions cited in the majority opinion as to the
meaning of the word income, and the decision in the United States are founded upon the meaning of
that word, as it is used in the Act of Congress, and to the effect that the word is to be construed in its
usual and ordinary meaning. But assuming that to be true, it must also be conceded that the
Legislature of the Philippine Islands has a legal right to define the meaning of the word "income" by a
legislative act, and when its meaning is defined by legislative act, it is the duty of the courts to follow
that definition regardless of whether it is the usual and ordinary meaning of the word, and therein lies
the distinction between the two acts and the reason why the authorities cited in the majority opinion
are not in point. Act No. 2833 of the Philippine Legislature specifically says that "Stock dividend shall
be considered income, to the amount of the earnings or profits distributed." The Act of Congress is
founded upon the "cash value of the stock," and the Act in question is founded upon "the amount of
the earnings or profits distributed."

Hence, then, we have the meaning of the words defined in the legislative act, and it is very apparent
that the purpose and intent of the legislative act was to avoid the meaning and construction of such
words which is now given to them in the majority opinion. The Legislature had the power to define
the meaning of the words, did define them, and it is the duty of the courts to follow and adopt the
meaning and definition of the words given to them in the legislative act.

As pointed out in the opinion of Mr. Justice Street, the constitutional limitations upon the legislative
power for taxation purposes, which exist in the United States, does not exist in the Philippine
Islands. There is no organic law here similar to the provisions of the Constitution of the United States
which require direct taxes on property to be levied in a specific way, in other words, the restrictions
and limitations placed on the power to levy an income tax under the Constitution of the United States
do not exist in the Philippine Islands. Hence, it must follow that the authorities cited in the majority
opinion are not in point the instant case. They are founded upon different language, different organic
powers, different conditions, and the different meaning of the same words as defined in the different
legislative acts. The Philippine Legislature had a legal right to define the meaning of the words
"dividend" and "income," and it expressly says "Stock dividend shall be considered income, to the
amount of the earnings or profits distributed." In the instant case, the earnings and profits of the
corporation were distributed among the existing stockholders of the company upon a pro rata basis,
and they were made exclusively out of "distributed earnings and profits." The declaring of the
dividend was a matter in the sole discretion of the stockholders, but when such a dividend is made
from and out of "earnings or profits distributed," it then becomes and is an income within the
meaning of Act No. 2833, and should be subject to an income tax.

For such reason, I dissent.

G.R. No. L-12287 August 7, 1918

VICENTE MADRIGAL and his wife, SUSANA PATERNO, plaintiffs-appellants,

vs.
JAMES J. RAFFERTY, Collector of Internal Revenue, and VENANCIO CONCEPCION, Deputy
Collector of Internal Revenue, defendants-appellees.

Gregorio Araneta for appellants.

Assistant Attorney Round for appellees.

MALCOLM, J.:

This appeal calls for consideration of the Income Tax Law, a law of American origin, with reference
to the Civil Code, a law of Spanish origin.

STATEMENT OF THE CASE.

Vicente Madrigal and Susana Paterno were legally married prior to January 1, 1914. The marriage
was contracted under the provisions of law concerning conjugal partnerships (sociedad de
gananciales). On February 25, 1915, Vicente Madrigal filed sworn declaration on the prescribed form
with the Collector of Internal Revenue, showing, as his total net income for the year 1914, the sum of
P296,302.73. Subsequently Madrigal submitted the claim that the said P296,302.73 did not
represent his income for the year 1914, but was in fact the income of the conjugal partnership
existing between himself and his wife Susana Paterno, and that in computing and assessing the
additional income tax provided by the Act of Congress of October 3, 1913, the income declared by
Vicente Madrigal should be divided into two equal parts, one-half to be considered the income of
Vicente Madrigal and the other half of Susana Paterno. The general question had in the meantime
been submitted to the Attorney-General of the Philippine Islands who in an opinion dated March 17,
1915, held with the petitioner Madrigal. The revenue officers being still unsatisfied, the
correspondence together with this opinion was forwarded to Washington for a decision by the United
States Treasury Department. The United States Commissioner of Internal Revenue reversed the
opinion of the Attorney-General, and thus decided against the claim of Madrigal.

After payment under protest, and after the protest of Madrigal had been decided adversely by the
Collector of Internal Revenue, action was begun by Vicente Madrigal and his wife Susana Paterno in
the Court of First Instance of the city of Manila against Collector of Internal Revenue and the Deputy
Collector of Internal Revenue for the recovery of the sum of P3,786.08, alleged to have been
wrongfully and illegally collected by the defendants from the plaintiff, Vicente Madrigal, under the
provisions of the Act of Congress known as the Income Tax Law. The burden of the complaint was
that if the income tax for the year 1914 had been correctly and lawfully computed there would have
been due payable by each of the plaintiffs the sum of P2,921.09, which taken together amounts of a
total of P5,842.18 instead of P9,668.21, erroneously and unlawfully collected from the plaintiff
Vicente Madrigal, with the result that plaintiff Madrigal has paid as income tax for the year 1914,
P3,786.08, in excess of the sum lawfully due and payable.

The answer of the defendants, together with an analysis of the tax declaration, the pleadings, and
the stipulation, sets forth the basis of defendants' stand in the following way: The income of Vicente
Madrigal and his wife Susana Paterno of the year 1914 was made up of three items: (1)
P362,407.67, the profits made by Vicente Madrigal in his coal and shipping business; (2) P4,086.50,
the profits made by Susana Paterno in her embroidery business; (3) P16,687.80, the profits made by
Vicente Madrigal in a pawnshop company. The sum of these three items is P383,181.97, the gross
income of Vicente Madrigal and Susana Paterno for the year 1914. General deductions were
claimed and allowed in the sum of P86,879.24. The resulting net income was P296,302.73. For the
purpose of assessing the normal tax of one per cent on the net income there were allowed as
specific deductions the following: (1) P16,687.80, the tax upon which was to be paid at source, and
(2) P8,000, the specific exemption granted to Vicente Madrigal and Susana Paterno, husband and
wife. The remainder, P271,614.93 was the sum upon which the normal tax of one per cent was
assessed. The normal tax thus arrived at was P2,716.15.

The dispute between the plaintiffs and the defendants concerned the additional tax provided for in
the Income Tax Law. The trial court in an exhausted decision found in favor of defendants, without
costs.

ISSUES.

The contentions of plaintiffs and appellants having to do solely with the additional income tax, is that
is should be divided into two equal parts, because of the conjugal partnership existing between
them. The learned argument of counsel is mostly based upon the provisions of the Civil Code
establishing the sociedad de gananciales. The counter contentions of appellees are that the taxes
imposed by the Income Tax Law are as the name implies taxes upon income tax and not upon
capital and property; that the fact that Madrigal was a married man, and his marriage contracted
under the provisions governing the conjugal partnership, has no bearing on income considered as
income, and that the distinction must be drawn between the ordinary form of commercial partnership
and the conjugal partnership of spouses resulting from the relation of marriage.

DECISION.

From the point of view of test of faculty in taxation, no less than five answers have been given the
course of history. The final stage has been the selection of income as the norm of taxation.
(See Seligman, "The Income Tax," Introduction.) The Income Tax Law of the United States,
extended to the Philippine Islands, is the result of an effect on the part of the legislators to put into
statutory form this canon of taxation and of social reform. The aim has been to mitigate the evils
arising from inequalities of wealth by a progressive scheme of taxation, which places the burden on
those best able to pay. To carry out this idea, public considerations have demanded an exemption
roughly equivalent to the minimum of subsistence. With these exceptions, the income tax is
supposed to reach the earnings of the entire non-governmental property of the country. Such is the
background of the Income Tax Law.

Income as contrasted with capital or property is to be the test. The essential difference between
capital and income is that capital is a fund; income is a flow. A fund of property existing at an instant
of time is called capital. A flow of services rendered by that capital by the payment of money from it
or any other benefit rendered by a fund of capital in relation to such fund through a period of time is
called an income. Capital is wealth, while income is the service of wealth. (See Fisher, "The Nature
of Capital and Income.") The Supreme Court of Georgia expresses the thought in the following
figurative language: "The fact is that property is a tree, income is the fruit; labor is a tree, income the
fruit; capital is a tree, income the fruit." (Waring vs. City of Savannah [1878], 60 Ga., 93.) A tax on
income is not a tax on property. "Income," as here used, can be defined as "profits or gains."
(London County Council vs. Attorney-General [1901], A. C., 26; 70 L. J. K. B. N. S., 77; 83 L. T. N.
S., 605; 49 Week. Rep., 686; 4 Tax Cas., 265. See further Foster's Income Tax, second edition
[1915], Chapter IV; Black on Income Taxes, second edition [1915], Chapter VIII; Gibbons vs. Mahon
[1890], 136 U.S., 549; and Towne vs. Eisner, decided by the United States Supreme Court, January
7, 1918.)
A regulation of the United States Treasury Department relative to returns by the husband and wife
not living apart, contains the following:

The husband, as the head and legal representative of the household and general custodian of its
income, should make and render the return of the aggregate income of himself and wife, and for the
purpose of levying the income tax it is assumed that he can ascertain the total amount of said
income. If a wife has a separate estate managed by herself as her own separate property, and
receives an income of more than $3,000, she may make return of her own income, and if the
husband has other net income, making the aggregate of both incomes more than $4,000, the wife's
return should be attached to the return of her husband, or his income should be included in her
return, in order that a deduction of $4,000 may be made from the aggregate of both incomes. The
tax in such case, however, will be imposed only upon so much of the aggregate income of both shall
exceed $4,000. If either husband or wife separately has an income equal to or in excess of $3,000, a
return of annual net income is required under the law, and such return must include the income of
both, and in such case the return must be made even though the combined income of both be less
than $4,000. If the aggregate net income of both exceeds $4,000, an annual return of their combined
incomes must be made in the manner stated, although neither one separately has an income of
$3,000 per annum. They are jointly and separately liable for such return and for the payment of the
tax. The single or married status of the person claiming the specific exemption shall be determined
as one of the time of claiming such exemption which return is made, otherwise the status at the
close of the year."

With these general observations relative to the Income Tax Law in force in the Philippine Islands, we
turn for a moment to consider the provisions of the Civil Code dealing with the conjugal partnership.
Recently in two elaborate decisions in which a long line of Spanish authorities were cited, this court
in speaking of the conjugal partnership, decided that "prior to the liquidation the interest of the wife
and in case of her death, of her heirs, is an interest inchoate, a mere expectancy, which constitutes
neither a legal nor an equitable estate, and does not ripen into title until there appears that there are
assets in the community as a result of the liquidation and settlement." (Nable Jose vs. Nable Jose
[1916], 15 Off. Gaz., 871; Manuel and Laxamana vs. Losano [1918], 16 Off. Gaz., 1265.)

Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the property of her husband
Vicente Madrigal during the life of the conjugal partnership. She has an interest in the ultimate
property rights and in the ultimate ownership of property acquired as income after such income has
become capital. Susana Paterno has no absolute right to one-half the income of the conjugal
partnership. Not being seized of a separate estate, Susana Paterno cannot make a separate return
in order to receive the benefit of the exemption which would arise by reason of the additional tax. As
she has no estate and income, actually and legally vested in her and entirely distinct from her
husband's property, the income cannot properly be considered the separate income of the wife for
the purposes of the additional tax. Moreover, the Income Tax Law does not look on the spouses as
individual partners in an ordinary partnership. The husband and wife are only entitled to the
exemption of P8,000 specifically granted by the law. The higher schedules of the additional tax
directed at the incomes of the wealthy may not be partially defeated by reliance on provisions in our
Civil Code dealing with the conjugal partnership and having no application to the Income Tax Law.
The aims and purposes of the Income Tax Law must be given effect.

The point we are discussing has heretofore been considered by the Attorney-General of the
Philippine Islands and the United States Treasury Department. The decision of the latter overruling
the opinion of the Attorney-General is as follows:

TREASURY DEPARTMENT, Washington.

Income Tax.

FRANK MCINTYRE,
Chief, Bureau of Insular Affairs, War Department,
Washington, D. C.

SIR: This office is in receipt of your letter of June 22, 1915, transmitting copy of
correspondence "from the Philippine authorities relative to the method of submission of
income tax returns by marred person."

You advise that "The Governor-General, in forwarding the papers to the Bureau, advises that
the Insular Auditor has been authorized to suspend action on the warrants in question until
an authoritative decision on the points raised can be secured from the Treasury
Department."

From the correspondence it appears that Gregorio Araneta, married and living with his wife,
had an income of an amount sufficient to require the imposition of the net income was
properly computed and then both income and deductions and the specific exemption were
divided in half and two returns made, one return for each half in the names respectively of
the husband and wife, so that under the returns as filed there would be an escape from the
additional tax; that Araneta claims the returns are correct on the ground under the Philippine
law his wife is entitled to half of his earnings; that Araneta has dominion over the income and
under the Philippine law, the right to determine its use and disposition; that in this case the
wife has no "separate estate" within the contemplation of the Act of October 3, 1913, levying
an income tax.

It appears further from the correspondence that upon the foregoing explanation, tax was
assessed against the entire net income against Gregorio Araneta; that the tax was paid and
an application for refund made, and that the application for refund was rejected, whereupon
the matter was submitted to the Attorney-General of the Islands who holds that the returns
were correctly rendered, and that the refund should be allowed; and thereupon the question
at issue is submitted through the Governor-General of the Islands and Bureau of Insular
Affairs for the advisory opinion of this office.

By paragraph M of the statute, its provisions are extended to the Philippine Islands, to be
administered as in the United States but by the appropriate internal-revenue officers of the
Philippine Government. You are therefore advised that upon the facts as stated, this office
holds that for the Federal Income Tax (Act of October 3, 1913), the entire net income in this
case was taxable to Gregorio Araneta, both for the normal and additional tax, and that the
application for refund was properly rejected.

The separate estate of a married woman within the contemplation of the Income Tax Law is
that which belongs to her solely and separate and apart from her husband, and over which
her husband has no right in equity. It may consist of lands or chattels.

The statute and the regulations promulgated in accordance therewith provide that each
person of lawful age (not excused from so doing) having a net income of $3,000 or over for
the taxable year shall make a return showing the facts; that from the net income so shown
there shall be deducted $3,000 where the person making the return is a single person, or
married and not living with consort, and $1,000 additional where the person making the
return is married and living with consort; but that where the husband and wife both make
 returns (they living together), the amount of deduction from the aggregate of their several
incomes shall not exceed $4,000.

The only occasion for a wife making a return is where she has income from a sole and
separate estate in excess of $3,000, but together they have an income in excess of $4,000,
in which the latter event either the husband or wife may make the return but not both. In all
instances the income of husband and wife whether from separate estates or not, is taken as
a whole for the purpose of the normal tax. Where the wife has income from a separate estate
makes return made by her husband, while the incomes are added together for the purpose of
the normal tax they are taken separately for the purpose of the additional tax. In this case,
however, the wife has no separate income within the contemplation of the Income Tax Law.

Respectfully,

DAVID A. GATES.
Acting Commissioner.

In connection with the decision above quoted, it is well to recall a few basic ideas. The Income Tax
Law was drafted by the Congress of the United States and has been by the Congress extended to
the Philippine Islands. Being thus a law of American origin and being peculiarly intricate in its
provisions, the authoritative decision of the official who is charged with enforcing it has peculiar force
for the Philippines. It has come to be a well-settled rule that great weight should be given to the
construction placed upon a revenue law, whose meaning is doubtful, by the department charged
with its execution. (U.S. vs. Cerecedo Hermanos y Cia. [1907], 209 U.S., 338; In re Allen [1903], 2
Phil., 630; Government of the Philippine Islands vs. Municipality of Binalonan, and Roman Catholic
Bishop of Nueva Segovia [1915], 32 Phil., 634.) We conclude that the judgment should be as it is
hereby affirmed with costs against appellants. So ordered.

Torres, Johnson, Carson, Street and Fisher, JJ., concur.

G.R. No. L-19392 April 14, 1965

ALEXANDER HOWDEN & CO., LTD., H. G. CHESTER & OTHERS, ET AL., petitioners,
vs.
THE COLLECTOR (NOW COMMISSIONER) Of INTERNAL REVENUE, respondent.

Sycip, Salazar, Luna and Associates and Lichauco, Picazo and Agcaoili for petitioners.
Office of the Solicitor General for respondent.

BENGZON, J.P., J.:

In 1950 the Commonwealth Insurance Co., a domestic corporation, entered into reinsurance
contracts with 32 British insurance companies not engaged in trade or business in the Philippines,
whereby the former agreed to cede to them a portion of the premiums on insurances on fire, marine
and other risks it has underwritten in the Philippines. Alexander Howden & Co., Ltd., also a British
corporation not engaged in business in this country, represented the aforesaid British insurance
companies. The reinsurance contracts were prepared and signed by the foreign reinsurers in
England and sent to Manila where Commonwealth Insurance Co. signed them.

Pursuant to the aforesaid contracts, Commonwealth Insurance Co., in 1951, remitted P798,297.47
to Alexander Howden & Co., Ltd., as reinsurance premiums. In behalf of Alexander Howden & Co.,
Ltd., Commonwealth Insurance Co. filed in April 1952 an income tax return declaring the sum of
P798,297.47, with accrued interest thereon in the amount of P4,985.77, as Alexander Howden &
Co., Ltd.'s gross income for calendar year 1951. It also paid the Bureau of Internal Revenue
P66,112.00 income tax thereon.

On May 12, 1954, within the two-year period provided for by law, Alexander Howden & Co., Ltd. filed
with the Bureau of Internal Revenue a claim for refund of the P66,112.00, later reduced to
P65,115.00, because Alexander Howden & Co., Ltd. agreed to the payment of P977.00 as income
tax on the P4,985.77 accrued interest. A ruling of the Commissioner of Internal Revenue, dated
December 8, 1953, was invoked, stating that it exempted from withholding tax reinsurance premiums
received from domestic insurance companies by foreign insurance companies not authorized to do
business in the Philippines. Subsequently, Alexander Howden & Co., Ltd. instituted an action in the
Court of First Instance of Manila for the recovery of the aforesaid amount claimed. Pursuant to
Section 22 of Republic Act 1125 the case was certified to the Court of Tax Appeals. On November
24, 1961 the Tax Court denied the claim.

Plaintiffs have appealed, thereby squarely raising the following issues: (1) Are portions of premiums
earned from insurances locally underwritten by a domestic corporation, ceded to and received by
non-resident foreign reinsurance companies, thru a non-resident foreign insurance broker, pursuant
to reinsurance contracts signed by the reinsurers abroad but signed by the domestic corporation in
the Philippines, subject to income tax or not? (2) If subject thereto, may or may not the income tax
on reinsurance premiums be withheld pursuant to Sections 53 and 54 of the National Internal
Revenue Code?

Section 24 of the National Internal Revenue Code subjects to tax a non-resident foreign
corporation's income from sources within the Philippines. The first issue therefore hinges on whether
or not the reinsurance premiums in question came from sources within the Philippines.

Appellants would impress upon this Court that the reinsurance premiums came from sources outside
the Philippines, for these reasons: (1) The contracts of reinsurance, out of which the reinsurance
premiums were earned, were prepared and signed abroad, so that their situs lies outside the
Philippines; (2) The reinsurers, not being engaged in business in the Philippines, received the
reinsurance premiums as income from their business conducted in England and, as such, taxable in
England; and, (3) Section 37 of the Tax Code, enumerating what are income from sources within the
Philippines, does not include reinsurance premiums.

The source of an income is the property, activity or service that produced the income. 1 The
reinsurance premiums remitted to appellants by virtue of the reinsurance contracts, accordingly, had
for their source the undertaking to indemnify Commonwealth Insurance Co. against liability. Said
undertaking is the activity that produced the reinsurance premiums, and the same took place in the
Philippines. In the first place, the reinsured, the liabilities insured and the risks originally underwritten
by Commonwealth Insurance Co., upon which the reinsurance premiums and indemnity were based,
were all situated in the Philippines. Secondly, contrary to appellants' view, the reinsurance contracts
were perfected in the Philippines, for Commonwealth Insurance Co. signed them last in Manila. The
American cases cited are inapplicable to this case because in all of them the reinsurance contracts
were signed outside the jurisdiction of the taxing State. And, thirdly, the parties to the reinsurance
contracts in question evidently intended Philippine law to govern. Article 11 thereof provided for
arbitration in Manila, according to the laws of the Philippines, of any dispute arising between the
parties in regard to the interpretation of said contracts or rights in respect of any transaction
involved. Furthermore, the contracts provided for the use of Philippine currency as the medium of
exchange and for the payment of Philippine taxes.

Appellants should not confuse activity that creates income with business in the course of which an
income is realized. An activity may consist of a single act; while business implies continuity of
transactions. 2 An income may be earned by a corporation in the Philippines although such
corporation conducts all its businesses abroad. Precisely, Section 24 of the Tax Code does not
require a foreign corporation to be engaged in business in the Philippines in order for its income from
sources within the Philippines to be taxable. It subjects foreign corporations not doing business in
the Philippines to tax for income from sources within the Philippines. If by source of income is meant
the business of the taxpayer, foreign corporations not engaged in business in the Philippines would
be exempt from taxation on their income from sources within the Philippines.

Furthermore, as used in our income tax law, "income" refers to the flow of wealth. 3 Such flow, in the
instant case, proceeded from the Philippines. Such income enjoyed the protection of the Philippine
Government. As wealth flowing from within the taxing jurisdiction of the Philippines and in
consideration for protection accorded it by the Philippines, said income should properly share the
burden of maintaining the government.

Appellants further contend that reinsurance premiums not being among those mentioned in Section
37 of the Tax Code as income from sources within the Philippines, the same should not be treated
as such. Section 37, however, is not an all-inclusive enumeration. It states that "the following items
of gross income shall be treated as gross income from sources within the Philippines." It does not
state or imply that an income not listed therein is necessarily from sources outside the Philippines.

As to appellants' contention that reinsurance premiums constitute "gross receipts" instead of "gross
income", not subject to income tax, suffice it to say that, as correctly observed by the Court of Tax
Appeals, "gross receipts" of amounts that do not constitute return of capital, such as reinsurance
premiums, are part of the gross income of a taxpayer. At any rate, the tax actually collected in this
case was computed not on the basis of gross premium receipts but on the net premium income, that
is, after deducting general expenses, payment of policies and taxes.

The reinsurance premiums in question being taxable, we turn to the issue whether or not they are
subject to withholding tax under Section 54 in relation to Section 53 of the Tax Code.
Subsection (b) of Section 53 subjects to withholding tax the following: interest, dividends, rents,
salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or
determinable annual or periodical gains, profits, and income of any non-resident alien individual not
engaged in trade or business within the Philippines and not having any office or place of business
therein. Section 54, by reference, applies this provision to foreign corporations not engaged in trade
or business in the Philippines.

Appellants maintain that reinsurance premiums are not "premiums" at all as contemplated by
Subsection (b) of Section 53; that they are not within the scope of "other fixed or determinable
annual or periodical gains, profits, and income"; that, therefore, they are not items of income subject
to withholding tax.

It is urged for the applicant that no opposition has been registered against his petition on the issues
above-discussed. Absence of opposition, however, does not preclude the scanning of the whole
record by the appellate court, with a view to preventing the conferment of citizenship to persons not
fully qualified therefor (Lee Ng Len vs. Republic, G.R. No. L-20151, March 31, 1965). The applicant's
complaint of unfairness could have some weight if the objections on appeal had been on points not
previously passed upon. But the deficiencies here in question are not new but well-known, having
been ruled upon repeatedly by this Court, and we see no excuse for failing to take them into
account.1äwp hï1. ñët

The argument of appellants is that "premiums", as used in Section 53 (b), is preceded by "rents,
salaries, wages" and followed by "annuities, compensations, remunerations" which connote
periodical income payable to the recipient on account of some investment or for personal services
rendered. "Premiums" should, therefore, in appellants' view, be given a meaning kindred to the other
terms in the enumeration and be understood in its broadest sense as "a reward or recompense for
some act done; a bonus; compensation for the use of money; a price for a loan; a sum in addition to
interest."

We disagree with the foregoing proposition. Since Section 53 subjects to withholding tax various
specified income, among them, "premiums", the generic connotation of each and every word or
phrase composing the enumeration in Subsection (b) thereof is income. Perforce, the word
"premiums", which is neither qualified nor defined by the law itself, should mean income and should
include all premiums constituting income, whether they be insurance or reinsurance premiums.

Assuming that reinsurance premiums are not within the word "premiums" in Section 53, still they
may be classified as determinable and periodical income under the same provision of law. Section
199 of the Income Tax Regulations defines fixed, determinable, annual and periodical income:

Income is fixed when it is to be paid in amounts definitely pre-determined. On the other hand,
it is determinable whenever there is a basis of calculation by which the amount to be paid
may be ascertained.

The income need not be paid annually if it is paid periodically; that is to say, from time to
time, whether or not at regular intervals. That the length of time during which the payments
are to be made may be increased or diminished in accordance with someone's will or with
the happening of an event does not make the payments any the less determinable or
periodical. ...

Reinsurance premiums, therefore, are determinable and periodical income: determinable, because
they can be calculated accurately on the basis of the reinsurance contracts; periodical, inasmuch as
they were earned and remitted from time to time.
Appellants' claim for refund, as stated, invoked a ruling of the Commissioner of Internal Revenue
dated December 8, 1953. Appellants' brief also cited rulings of the same official, dated October 13,
1953, February 7, 1955 and February 8, 1955, as well as the decision of the defunct Board of Tax
Appeals in the case of Franklin Baker Co., 4 thereby attempting to show that the prevailing
administrative interpretation of Sections 53 and 54 of the Tax Code exempted from withholding tax
reinsurance premiums ceded to non-resident foreign insurance companies. It is asserted that since
Sections 53 and 54 were "substantially re-enacted" by Republic Acts 1065 (approved June 12,
1954), 1291 (approved June 15, 1955), 1505 (approved June 16, 1956) and 2343 (approved June
20, 1959) when the said administrative rulings prevailed, the rulings should be given the force of law
under the principle of legislative approval by re-enactment.

The principle of legislative approval by re-enactment may briefly be stated thus: Where a statute is
susceptible of the meaning placed upon it by a ruling of the government agency charged with its
enforcement and the Legislature thereafter re-enacts the provisions without substantial change, such
action is to some extent confirmatory that the ruling carries out the legislative purpose. 5

The aforestated principle, however, is not applicable to this case. Firstly, Sections 53 and 54 were
never reenacted. Republic Acts 1065, 1291, 1505 and 2343 were merely amendments in respect to
the rate of tax imposed in Sections 53 and 54. Secondly, the administrative rulings of the
Commissioner of Internal Revenue relied upon by the taxpayers were only contained in letters to
taxpayers and never published, so that the Legislature is not presumed to know said rulings. Thirdly,
in the case on which appellants rely, Interprovincial Autobus Co., Inc. vs. Collector of Internal
Revenue, L-6741, January 31, 1956, what was declared to have acquired the force or effect of law
was a regulation promulgated to implement a law; whereas, in this case, what appellants would seek
to have the force of law are opinions on queries submitted.

It may not be amiss to note that in 1963, after the Tax Court rendered judgment in this case,
Congress enacted Republic Act 3825, as an amendment to Sections 24 and 54 of the Tax Code,
exempting from income taxes and withholding tax, reinsurance premiums received by foreign
corporations not engaged in business in the Philippines. Republic Act 3825 in effect took out from
Sections 24 and 54 something which formed a part of the subject matter therein, 6 thereby affirming
the taxability of reinsurance premiums prior to the aforestated amendment.

Finally, appellant would argue that Judge Augusto M. Luciano, who penned the decision appealed
from, was disqualified to sit in this case since he had appeared as counsel for the Commissioner of
Internal Revenue and, as such, answered plaintiff's complaint before the Court of First Instance of
Manila.

The Rules of Court provides that no judge shall sit in any case in which he has been counsel without
the written consent of all the parties in interest, signed by them and entered upon the record. The
party objecting to the judge's competency may file, in writing, with such judge his objection stating
therein the grounds for it. The judge shall thereupon proceed with the trial or withdraw therefrom, but
his action shall be made in writing and made part of the record. 7

Appellants, instead of asking for Judge Luciano's disqualification by raising their objection in the
Court of Tax Appeals, are content to raise it for the first time before this Court. Such being the case
they may not now be heard to complain on this point, when Judge Luciano has given his opinion on
the merits of the case. A litigant cannot be permitted to speculate upon the action of the court and
raise an objection of this nature after decision has been rendered. 8

WHEREFORE, the judgment appealed from is hereby affirmed with costs against appellants. It is so
ordered.
Lawrence v. State Tax Commission of
Mississippi, 286 U.S. 276 (1932)
Syllabus

U.S. Supreme Court

Lawrence v. State Tax Commission of Mississippi, 286 U.S. 276 (1932)

Lawrence v. State Tax Commission of Mississippi

No. 580

Argued April 18, 1932

Decided May 16, 1932

286 U.S. 276

APPEAL FROM THE SUPREME COURT OF MISSISSIPPI

1. A state has constitutional power to tax its own citizens on their net incomes, though
derived wholly from activities carried on by them outside of the state. P. 286 U. S. 281.

2. Domicile, in itself, establishes a basis for taxation. P. 286 U. S. 279.

3. Whether the tax in question is called an excise by the state court or a property tax is
not material in this case, since this Court, in passing on its constitutionality, is
concerned only with its practical operation. P. 286 U. S. 280.

4. A constitutional question properly raised in a state court may not be evaded by a

decision on a nonfederal ground that is unsubstantial and illusory. P. 286 U. S. 281.

U.S. Supreme Court

Lawrence v. State Tax Commission of Mississippi, 286 U.S. 276 (1932)Lawrence v.
State Tax Commission of Mississippi
No. 580
Argued April 18, 1932
Decided May 16, 1932
286 U.S. 276
APPEAL FROM THE SUPREME COURT OF MISSISSIPPI
1. A state has constitutional power to tax its own citizens on their net incomes, though
derived wholly from activities carried on by them outside of the state. P. 286 U. S. 281.
2. Domicile, in itself, establishes a basis for taxation. P. 286 U. S. 279.
3. Whether the tax in question is called an excise by the state court or a property tax is
not material in this case, since this Court, in passing on its constitutionality, is
concerned only with its practical operation. P. 286 U. S. 280.
4. A constitutional question properly raised in a state court may not be evaded by a
decision on a nonfederal ground that is unsubstantial and illusory. P. 286 U. S. 281.
5. Where the discrimination resulting from a statute creating exemptions from a tax is
inconsistent with the equal protection clause of the Fourteenth Amendment, the
constitutional rights of those not within the exception are infringed when they are taxed
and the others are not assessed, and a refusal of the state court to decide the
constitutional question, when properly before it, is as much a denial of those rights as
an erroneous decision of it would be. P. 286 U. S. 282.
6. A state tax on income resulting from activities outside of the state cannot be adjudged
to violate the equal protection clause of the Fourteenth Amendment merely because it
applies to individuals, but not to domestic corporations, though in competition with the
individuals, in the absence of any showing of relevant local conditions and of how the
provisions in question are related to the others by which a permissible divergency of
state policy with respect to the taxation of individuals and corporations may be effected.
P. 286 U. S. 283.
7. The fact that the state has adopted generally a policy of avoiding double taxation of
the same economic interest in corporate income
Page 286 U. S. 277
by taxing either the income of the corporation or the dividends of its stockholders, but
not both, may afford a rational basis for excepting domestic corporations from a tax on
income derived from extra-state activities which is imposed on individuals. P. 286 U. S.
284.
8. The equal protection clause does not require the state to maintain a rigid rule of equal
taxation, to resort to close distinctions, or to maintain a precise scientific uniformity, and
possible differences in tax burdens not shown to be substantial, or which are based on
discrimination not shown to be arbitrary or capricious, do not fall within constitutional
prohibitions. Id.
162 Miss. 338, 137 So. 503, affirmed.
Appeal from a judgment upholding a state tax in an action to set aside the assessment.
Page 286 U. S. 278
MR. JUSTICE STONE delivered the opinion of the Court.
This is an appeal under § 237 of the Judicial Code from a decree of the Supreme Court
of Mississippi, 137 So. 503, upholding the Mississippi income tax law (chapter 132,
Miss.Laws of 1924, as amended in 1928, chapter 124, 2 Miss.Code Ann.1930, p. 2136),
which, as applied
Page 286 U. S. 279
to appellant, is assailed as infringing the Fourteenth Amendment of the Federal
Constitution. Sections 5027 and 5033 of the statute impose an annual tax on the net
income of corporations and individuals. But paragraph (b) of § 5033, added by the act of
1928 (Laws Miss.1928, Ex.Sess., c. 32), provides: "The term gross income, does not
include . . . (11) Income of a domestic corporation when earned from sources without
this state. . . ."
Appellant, a citizen and resident of Mississippi, brought the present suit to set aside the
assessment of a tax upon so much of his net income for 1929 as arose from the
construction by him of public highways in the state of Tennessee. The taxing statute
was challenged on the ground that, insofar as it imposes a tax on income derived wholly
from activities carried on outside the state, it deprived appellant of property without due
process of law, and that, in exempting corporations, which were his competitors, from a
tax on income derived from like activities carried on outside the state, it denied to him
the equal protection of the laws.
The obligation of one domiciled within a state to pay taxes there arises from the
unilateral action of the state government in the exercise of the most plenary of
sovereign powers, that to raise revenue to defray the expenses of government and to
distribute its burdens equably among those who enjoy its benefits. Hence, domicile, in
itself, establishes a basis for taxation. Enjoyment of the privileges of residence within
the state, and the attendant right to invoke the protection of its laws, are inseparable
from the responsibility for sharing the costs of government. See Fidelity & Columbia
Trust Co. v. Louisville, 245 U. S. 54, 245 U. S. 58; Maguire v. Trefry, 253 U. S. 12, 253
U. S. 14, 253 U. S. 17; Kirtland v. Hotchkiss, 100 U. S. 491, 100 U. S. 498; Shaffer v.
Carter, 252 U. S. 37, 252 U. S. 50. The Federal Constitution imposes on the states no
particular modes of taxation, and, apart from the specific grant to the federal
government of the exclusive
Page 286 U. S. 280
power to levy certain limited classes of taxes and to regulate interstate and foreign
commerce, it leaves the states unrestricted in their power to tax those domiciled within
them so long as the tax imposed is upon property within the state or on privileges
enjoyed there, and is not so palpably arbitrary or unreasonable as to infringe the
Fourteenth Amendment. Kirtland v. Hotchkiss, supra.
Taxation at the place of domicile of tangibles located elsewhere has been thought to be
beyond the jurisdiction of the state, Union Refrigerator Transit Co. v. Kentucky, 199 U.
S. 194; Frick v. Pennsylvania, 268 U. S. 473, 268 U. S. 488-489, but considerations
applicable to ownership of physical objects located outside the taxing jurisdiction, which
have led to that conclusion, are obviously inapplicable to the taxation of intangibles at
the place of domicile or of privileges which may be enjoyed there. See Foreign Held
Bond Case, 15 Wall. 300, 82 U. S. 319; Frick v. Pennsylvania, supra, p. 268 U. S. 494.
And the taxation of both by the state of the domicile has been uniformly upheld. Kirtland
v. Hotchkiss, supra; Fidelity & Columbia Trust Co. v. Louisville, supra; Blodgett v.
Silberman, 277 U. S. 1; Maguire v. Trefry, supra; compare Farmers' Loan & Trust Co. v.
Minnesota, 280 U. S. 204; First National Bank of Boston v. Maine, 284 U. S. 312.
The present tax has been defined by the Supreme Court of Mississippi as an excise,
and not a property tax, Hattiesburg Grocery Co. v. Robertson, 126 Miss. 34, 88 So.
4; Knox v. Gulf, M. & N. R. Co., 138 Miss. 70, 104 So. 689, but, in passing on its
constitutionality, we are concerned only with its practical operation, not its definition or
the precise form of descriptive words which may be applied to it. See Educational Films
Corp. v. Ward, 282 U. S. 379, 282 U. S. 3870; Pacific Co., Ltd. v. Johnson, 285 U. S.
480; Shaffer v. Carter, supra, pp. 252 U. S. 54-55.
It is enough, so far as the constitutional power of the state to levy it is concerned, that
the tax is imposed
Page 286 U. S. 281
by Mississippi on its own citizens with reference to the receipt and enjoyment of income
derived from the conduct of business, regardless of the place where it is carried on. The
tax, which is apportioned to the ability of the taxpayer to bear it, is founded upon the
protection afforded to the recipient of the income by the state, in his person, in his right
to receive the income, and in his enjoyment of it when received. These are rights and
privileges incident to his domicile in the state, and, to them, the economic interest
realized by the receipt of income or represented by the power to control it bears a direct
legal relationship. It would be anomalous to say that, although Mississippi may tax the
obligation to pay appellant for his services rendered in Tennessee, see Fidelity &
Columbia Trust Co. v. Louisville, supra.; Farmers' Loan & Trust Co. v. Minnesota,
supra, still, it could not tax the receipt of income upon payment of that same obligation.
We can find no basis for holding that taxation of the income at the domicile of the
recipient is either within the purview of the rule now established that tangibles located
outside the state of the owner are not subject to taxation within it, or is in any respect so
arbitrary or unreasonable as to place it outside the constitutional power of taxation
reserved to the state. Maguire v. Trefry, supra; see Fidelity & Columbia Trust Co. v.
Louisville, supra.
The Supreme Court of Mississippi found it unnecessary to pass upon the validity of so
much of the statute, added by the amendment of 1928, as exempted domestic
corporations from the tax on income derived from activities outside the state. It said that,
if the amendment were valid, appellant could not complain; if invalid, he would still be
subject to the tax, since the act which it amended, § 11, c. 132, Laws of 1924, would
then remain in full force, and under it individuals and domestic corporations are taxed
alike. Knox v. Gulf, M. & N. R. Co., supra.
Page 286 U. S. 282
But the Constitution, which guarantees rights and immunities to the citizen, likewise
insures to him the privilege of having those rights and immunities judicially declared and
protected when such judicial action is properly invoked. Even though the claimed
constitutional protection be denied on nonfederal grounds, it is the province of this Court
to inquire whether the decision of the state court rests upon a fair or substantial basis. If
unsubstantial, constitutional obligations may not be thus avoided. See Ward v. Love
County, 253 U. S. 17, 253 U. S. 22; Enterprise Irrigation District v. Canal Co., 243 U. S.
157, 243 U. S. 164; Fox River Paper Co. v. Railroad Commission, 274 U. S. 651, 274 U.
S. 655. Upon one of the alternative assumptions made by the court, that the
amendment is discriminatory, appellant's constitutional rights were infringed when the
tax was levied upon him, and state officers acting under the amendment refrained from
assessing the like tax upon his corporate competitors. See Iowa-Des Moines National
Bank v. Bennett, 284 U. S. 239, 284 U. S. 246. If the Constitution exacts a uniform
application of this tax on appellant and his competitors, his constitutional rights are
denied as well by the refusal of the state court to decide the question as by an
erroneous decision of it, see Greene v. Louisville & Interurban R. Co., 244 U. S.
499, 244 U. S. 508, 512 et seq.; Smith v. Cahoon, 283 U. S. 553, 283 U. S. 564, for, in
either case, the inequality complained of is left undisturbed by the state court whose
jurisdiction to remove it was rightly invoked. The burden does not rest on him to test
again the validity of the amendment by some procedure to compel his competitors to
pay the tax under the earlier statute. Iowa-Des Moines National Bank v. Bennett,
supra, p. 284 U. S. 247. See Cumberland Coal Co. v. Board of Revision, 284 U. S. 23.
We therefore conclude that the purported nonfederal ground put forward by the state
court for its refusal to decide the constitutional question was unsubstantial and
Page 286 U. S. 283
illusory, and that the appellant may invoke the jurisdiction of this Court to decide the
question.
The statute relieves domestic corporations from the tax only insofar as their income is
derived from activities carried on outside the state. The appellant is thus compelled to
pay a tax from which his competitors, if domestic corporations, are relieved, and this, it
is urged, is so plainly arbitrary as to infringe the equal protection clause.
But, as there is no constitutional requirement that a system of taxation should be
uniform as applied to individuals and corporations, regardless of the circumstances in
which it operates, acceptance of this contention would relieve the appellant from the
burden which rests on him to overcome the presumption of facts supporting
constitutionality, which attaches to all legislative acts, and would require as to assume
that there is no state of facts reasonably to be conceived which could afford a rational
basis for distinguishing, for taxation purposes, between income of individuals and that of
domestic corporations, derived from business carried on without the state. Lindsley v.
Natural Carbonic Gas Co., 220 U. S. 61, 220 U. S. 78-79; Rast v. Van Deman & Lewis
Co., 240 U. S. 342, 240 U. S. 357; O'Gorman & Young, Inc. v. Hartford Fire Ins.
Co., 282 U. S. 251, 282 U. S. 257-258.
What the local conditions are in Mississippi and its neighboring states with respect to
businesses like the present, carried on across state lines by individuals and
corporations, does not appear. How the statutory provisions now in question are related
to others by which a permissible divergence in state policy with respect to the taxation
of corporations and of individuals may be effected is not shown. See General American
Tank Car Corp. v. Day, 270 U. S. 367, 270 U. S. 373; Interstate Busses Corp. v.
Blodgett, 276 U. S. 245, 276 U. S. 251; Farmers' & Mechanics' Savings Bank v.
Minnesota, 232 U. S. 516, 232 U. S. 529 et seq. We cannot say that investigation in
these fields would not disclose
Page 286 U. S. 284
a basis for the legislation which would lead reasonable men to conclude that there is
just ground for the difference here made. The existence, unchallenged, of differences
between the taxation of incomes of individuals and of corporations in every federal
revenue act since the adoption of the Sixteenth Amendment demonstrates that there
may be.
Apart from other considerations which may have led to the present legislation as an
integral part of the state system of taxation of the income of corporations, one which
affords a rational basis for the distinction made, is the fact that the state has adopted
generally a policy of avoiding double taxation of the same economic interest in
corporate income by taxing either the income of the corporation or the dividends of its
stockholders, but not both. See §§ 5033(a), 5033(b)(11), 5033(b)(8). In the case of
corporate income and dividends attributable to business done outside the state and
received by stockholders of domestic corporations, the stockholders are taxed, and not
the corporation. That was held in Franklin v. Carter, 51 F.2d 345, to be a sufficient
ground for upholding a statute of Oklahoma, assailed as denying the equal protection of
the laws, which had substantially the same features as the present statute. See also
Conner v. State, 82 N.H. 126, 132, 130 A. 357. The question presented thus differs from
any raised in Quaker City Cab Co. v. Pennsylvania, 277 U. S. 389, and Royster Guano
Co. v. Virginia, 253 U. S. 412. Compare White River Lumber Co. v. Arkansas, 279 U. S.
692.
The equal protection clause does not require the state to maintain a rigid rule of equal
taxation, to resort to close distinctions, or to maintain a precise scientific uniformity, and
possible differences in tax burdens not shown to be substantial or which are based on
discriminations not shown to be arbitrary or capricious, do not fall within constitutional
prohibitions. Ohio Oil Co. v. Conway, 281
Page 286 U. S. 285
U.S. 146, 281 U. S. 159; Southwestern Oil Co. v. Texas, 217 U. S. 114, 217 U. S.
121; Brown-Forman Co. v. Kentucky, 217 U. S. 563, 217 U. S. 573; State Board of Tax
Commissioners v. Jackson, 283 U. S. 527, 283 U. S. 537.
Affirmed.
MR. JUSTICE VAN DEVANTER dissents from so much of the opinion as concerns the
equal protection clause of the Fourteenth Amendment.

G.R. No. L-9878 December 24, 1914

THE UNITED STATES, plaintiff-appellee,

vs.
FRANK TUPASI MOLINA, defendant-appellant.

Julio Borbon Villamor for appellant.

Office of the Solicitor-General Corpus for appellee.
JOHNSON, J.:

On the 6th day of February, 1914, the prosecuting attorney of the Province of Ilocos Sur filed a
complaint against the defendant charging him with the crime of perjury, alleged to have been
committed as follows:

The said Frank Tupasi Molina, the above-named defendant, did on September 10, 1912, in
the municipality of Tayum of the Province of Ilocos Sur, P. I., for the purpose of gaining
admission, as in fact he did, owing to the deceit he practiced, as will be hereinafter related, to
the examinations for the municipal police service in the Province of Ilocos Sur, which were
held in the municipality of Vigan, said province, on or about January 18, 1913, willfully,
unlawfully, and criminally take a false oath by affirming and asserting in an oath that he knew
to be false, in an examination application which he himself filled out and signed, that prior to
the said date, to wit, September 10, 1912, he had never been indicted, tried, or sentenced for
the violation of any law, ordinance, or regulation in any court, when he knew at the time he
took that oath and signed his examination application, as he knows at the present time, that
he had been twice indicted for disturbing the public peace, and for injurias graves, and
sentenced to pay a fine and undergo imprisonment therefor, by the justice of the peace court
of Tayum and the Court of First Instance of Ilocos Sur. 1awphil. net

The defendant made the false declaration previously mentioned after he had sworn before
Lucas Magno, notary public, authorized by law to administer oaths, that he would state the
truth; and said false declaration made under the oath taken by the defendant, as above
stated, concerned a fact of such importance that without it he would not have been admitted
to said examinations prescribed for the municipal police service. In violation of the law. (Sec.
3, Act No. 1697.)

After hearing the evidence adduced during the trial of the cause, the Honorable Francisco
Santamaria, judge, found the defendant guilty of the crime charged, and sentenced him to be
imprisoned for a period of two months and to pay a fine of P100, in case of insolvency to suffer
subsidiary imprisonment in accordance with the provisions of the law, and to pay the costs. The
defendant was further sentenced to be disqualified from holding any public office or from giving
testimony in any court in the Philippine Islands until such time as the sentence against him is
reversed. From that sentence the defendant appealed to this court and made the following
assignments of error:

1. The trial court erred in holding section 3 of Act No. 1697 to be applicable in this case.

2. The trial court manifestly erred in sentencing the appellant for violation of section 3 of Act
No. 1697, when the prosecution did not present any evidence demonstrating that he had
willfully and corruptly sworn or taken an oath.

3. The trial court erred in not sustaining the defense set up by the appellant Tupasi with
reference to the construction he placed upon the fifth question of Exhibit A of the
prosecution.

4. The trial court erred also in holding that the words "which he does not believe to be true,"
used in Act No. 1697, are equivalent to the term "knowingly," used in section 31 of Act No.
1761.

5. The trial court erred in not acquitting the defendant.

It appears from the record that on the 10th day of September, 1912, the defendant signed a petition
to be permitted to take the examination for the position of municipal policeman. Said petition was
signed by the defendant and sworn to by him before a notary public. Said petition contained a
number of questions which the applicant was required to answer. Among other questions we find
that No. 5 was as follows:

Have you ever been indicted, tried, or sentenced in any court for violation of any law,
ordinance, or regulations, or have you ever been tried or sentenced for violation of
regulations of the Army, Navy, of the Constabulary, in any court martial of the Army or of the
Constabulary, or in any other court?

To said question the defendant answered: "No, sir; I cannot remember any."

During the trial of the cause the prosecuting attorney presented Exhibits B, C, and D.

Exhibit B shows that one Francisco Tupasi and others, on the 8th day of February, 1911, had been
arrested by an order of the justice of the peace of the municipality of Tayum, Province of Ilocos Sur,
and charged with disturbing the public peace, were found guilty, and sentenced, on the 20th day of
February, 1911, to be imprisoned for a period of fifteen days, and each to pay a fine of 25 pesetas,
and to pay the costs.

Exhibit C shows that Francisco Tupasi, on the 18th day of May, 1911, had been arrested and taken
before the justice of the peace of the municipality of Tayum, Province of Ilocos Sur, charged with the
crime of "injurias graves," and was sentenced on the 22d day of May, 1911, to be imprisoned for a
period of fifteen days and to pay a fine of 75 pesetas and the costs.

Exhibit D is the certificate of the clerk of the Court of First Instance of the Province of Ilocos Sur and
shows that the Honorable Dionisio Chanco, on the 26th day of April, 1911, in an appealed case for
disturbing the public peace, sentenced the said Francisco Tupasi and others to pay a fine of
60 pesetas, in case of insolvency to suffer subsidiary imprisonment, and to pay the costs.

Exhibit A was the sworn petition presented by the defendant for permission to take the examination.
Said petition was signed by Frank Tupasi y Molina. It was shown during the trial of the cause, by the
admission of the defendant himself, that he was the same person accused and sentenced in Exhibits
B, C, and D. It was argued that the defendant signed said application in the name of "Frank Tupasi y
Molina" when he had theretofore been known as "Francisco Tupasi," for the purpose of avoiding
identity. The defendant said that "Francisco" was the same as "Frank" and that he had adopted the
name of "Frank" instead of "Francisco." The answers to the questions in said application were made
in English.

With reference to the first assignment of error, that the lower court committed an error in applying
section 3 of Act No. 1697 to the facts in the present case, it may be said that said article provides
that:

Any person who, having taken an oath before a competent tribunal, officer, or person, in any
case in which a law of the Philippine Islands authorizes an oath to be administered, that he
will testify, declare, depose, or certify truly, or that any written testimony, declaration,
deposition or certificate by him subscribed is true, willfully and contrary to such oath states or
subscribes any material matter which he does not believe to be true, is guilty or perjury, and
shall be punished, etc.
Act No. 2169 of the Philippine Legislature, which is an Act to provide for the reorganization,
government, and inspection of municipal police of the municipalities or provinces and subprovinces
organized under Act No. 83, provides for the reorganization of the municipal police of the
municipalities or provinces and subprovinces organized under Act No. 83.

Said Act further provides that, subject to the approval of the Secretary of Commerce and Police, the
Director of Constabulary shall prepare general regulations for the good government, discipline, and
inspection of the municipal police, "compliance wherewith shall be obligatory for all members of the
organization."

Said Act further provides for an examining board for the municipal police. It further provides that,
subject to the approval of the Secretary of Commerce and Police, the Director of Constabulary shall
prepare an examination manual, prescribing, at the same time, suitable rules for the conduct of the
examination.

Said Act (No. 2169) also provides for the time and place for holding said examinations.

Section 9 of said Act provides that: "To be eligible for examination, a candidate shall have the
following requirements: . . . (6) Have no criminal record."

In accordance with the requirements of said law, the Director of Constabulary prepared an
examination manual, prescribing at the same time rules for conducting examinations, which
examination manual was approved by the Secretary of Commerce and Police, and thereby was
given the force of law. Said manual prescribed a form in blank, known as "Municipal Form No. 11,"
which form each applicant was required to fill, in order to be permitted to take said examination. Said
application required the applicant to swear to the facts stated therein. We have, therefore, a law
which authorizes the administration of an oath in the present case.

Of course, the regulations adopted under legislative authority by a particular department must be in
harmony with the provisions of the law, and for the sole purpose of carrying into effect its general
provisions. By such regulations, of course, the law itself can not be extended. So long, however, as
the regulations relate solely to carrying into effect the provisions of the law, they are valid. A violation
of a regulation prescribed by an executive officer of the Government in conformity with and based
upon a statute authorizing such regulation, constitutes an offense and renders the offender liable to
punishment in accordance with the provisions of law. (United States vs. Bailey, 9 Pet., 238, 252,
254, 256; Caha vs. United States, 152 U. S., 211, 218; United States vs. Eaton, 144 U. S., 677.)

In the very nature of things in many cases it becomes impracticable for the legislative department of
the Government to provide general regulations for the various and varying details for the
management of a particular department of the Government. It therefore becomes convenient for the
legislative department of the Government, by law, in a most general way, to provide for the conduct,
control, and management of the work of the particular department of the Government; to authorize
certain persons, in charge of the management, control, and direction of the particular department, to
adopt certain rules and regulations providing for the detail of the management and control of such
department. Such regulations have uniformly been held to have the force of law, whenever they are
found to be in consonance and in harmony with the general purposes and objects of the law. Many
illustrations might be given. For instance, the Civil Service Board is given authority to examine
applicants for various positions within the Government service. The law generally provides the
conditions in a most general way, authorizing the chief of such Bureau to provide rules and
regulations for the management of the conduct of examinations, etc. The law provides that the
Collector of Customs shall examine persons who become applicant to act as captains of ships for
the coastwise trade, providing at the same time that the Collector of Customs shall establish rules
and regulations for such examinations. Such regulations, once established and found to be in
conformity with the general purposes of the law, are just as binding upon all of the parties, as if the
regulations had been written in the original law itself. (United States vs. Grimaud, 220 U. S., 506;
Williamson vs. United States, 207 U. S., 425; United States vs. United Verde Copper Co., 196 U. S.,
207.)1aw phil.n et

By reference to Exhibit A, the application made and sworn to by the defendant, we find that the oath
was taken before a notary public, a person qualified to administer an oath, in accordance with the
provisions of law.

The defendant, in support of his first assignment of error, argues that the purpose of Act No. 1697
was not intended to cover cases like the present. He argues that said Act was an
Act only authorizing the appointment of commissioners, to make official investigations, fixing their
powers, for the payment of witness fees, and for the punishment of perjury in official investigations.
The same question was presented to this court in the case of United States vs. Concepcion (13 Phil.
Rep., 424). In that case the court decided against the contention of the defendant in the present
case. It is true that the title of said Act (No. 1697) does not seem to indicate that said law contained
a provision punishing the crime of perjury generally. Reading the title alone, it would seem to be a
law punishing the crime of perjury in particular cases. The law (Act No. 1697) is a general law. It is
not a private or local law. In the United States the constitutions in the different States generally
provide that the title of a law shall indicate the general purpose of the law. There seems to be no
provision in the Philippine Islands that the title of a general law shall contain a statement of the
subject matter of the law. Section 5 of the Act of Congress of July 1, 1902, provides:

That no private or local bill which may be enacted into law shall embrace more than one
subject, and that subject shall be expressed in the title of the bill.

We held in the case of United States vs. Concepcion, supra, that said Act of Congress did not apply
to general laws, and that said section 3 was a provision punishing the crime of perjury generally. (U.
S. vs. De Chaves, 14 Phil. Rep., 565; U. S. vs. Estraña, 16 Phil. Rep., 520; U. S. vs. Fonseca, 20
Phil. Rep., 191.)

In the case of United States vs. Dumlao (R. G., No. 8721, not reported) this court held the defendant
guilty of the crime of perjury, under facts exactly analogous to those in this case, under the
provisions of section 3 of Act No. 1697. We find no reason, either in law or in the argument of the
appellant in the present case, to modify or reverse our conclusions in that case (No. 8721).

With reference to the second assignment of error, the appellant alleged that the lower court
committed an error in finding that he had committed the crime of perjury voluntarily and corruptly.
There is nothing in the record which shows that he did not present to the proper authorities Exhibit A
voluntarily. It is difficult to understand, in view of the fact that the defendant had theretofore been
convicted of two different offenses and in one of them by two courts, how he could, within a few
months thereafter, make a sworn statement that he "did not have a criminal record," unless he
answered said question No. 5 in the manner indicated in said application for the express purpose of
deceiving the authority to which said application was presented.

With reference to the third assignment of error, it may be said that the language of question No. 5
seems to be perfectly clear. The defendant admitted that he could read and understand Spanish. It
is to be noted that at the very beginning of said application there are three paragraphs devoted to
instructions to the applicant, which he should have read and no doubt did. Said instructions were
sufficient to indicate to the defendant that if there were any questions which he did not fully
understand, he should have acquired a full understanding of the same before answering them. If
there was any fault in understanding said question No. 5, it was wholly due to his own negligence.

With reference to the fourth assignment of error, the appellant contends that the lower court
committed an error in holding that the phrase "which he does not believe to be true," found in section
3 of Act No. 1697, is equivalent to the word "knowingly," used in other laws. The lower court cited the
case of U. S. vs. Tin Masa (17 Phil. Rep., 463) in support of his conclusion. Said section 3, in effect,
provides that any person who takes an oath before a competent tribunal, officer or person, in any
case in which a law of the Philippine Islands authorizes an oath, that he will testify, etc., or that any
written testimony, declaration, etc., by him subscribed is true, and thereafter willfully and contrary to
such oath states or subscribes any material matter, "which he does not believe to be true," is guilty
of perjury. Under said section, three things are necessary, in order to constitute the crime of perjury:

1. The person must have taken an oath, in a case where the law authorizes an oath, before a
competent person, or a person authorized to administer an oath;

2. That the person who has taken the oath will testify, declare, dispose, or certify truly, or that any
written testimony, declaration, deposition or certificate by him subscribed is true;

3. That he willfully and contrary to such oath states or subscribes any material matter, "which he
does not believe to be true."

It is difficult to understand how a person can state, under oath, that a fact is true or subscribe a
document, asserting that the same is true, which he does not believe to be true. If, under his oath,
he declares that said facts are true, we must conclude that he believed that they were true. If, as a
matter of fact, they were not true, and he had full knowledge of the fact that they were not true, then
his declaration that they were true would certainly be a sworn statement that a certain fact was true
which he did not believe to be true and, therefore, he must have made a false statement knowingly.
Without attempting to show or assert that the phrase "which he does not believe to be true" is
equivalent to the word "knowingly," as the lower court held, we are of the opinion that whoever
makes a statement or subscribes a document, under the circumstances mentioned in said section 3,
which is false and which he, at the time he makes the same does not believe to be true, is guilty of
the crime of perjury. In other words, under the circumstances mentioned in said section, if one
swears positively that a fact is true, which he does not believe to be true, and it turns out that it is
false, he is guilty of the crime of perjury. No one should swear positively that a fact is true or
subscribe a document asserting that the facts stated therein are true, unless he at least believes that
they are true at the time he takes such oath or subscribes such document. It can scarcely be
believed that the defendant in the present case believed that the answer to said question No. 5 was
true. He must have signed or answered said question not only believing that it was not true, but, as a
matter of fact, signed the same knowing that the answer was false.

With reference to the fifth assignment of error, we are of the opinion that the evidence adduced
during the trial of the cause clearly shows that the defendant is guilty of the crime charged and
therefore the sentence of the lower court should be and is hereby affirmed with costs.

Arellano, C.J., Torres, Carson and Araullo, JJ., concur.

Separate Opinions

MORELAND, J., dissenting:

I dissent. The case of United States vs. George (228 U. S., 14), is decisive of this, holding that an
indictment for perjury can not be based on an affidavit not authorized or required by any law of the
United States. There is no law of the Philippine Islands which authorizes or requires the affidavit
which is the basis of the charge of perjury in this case. (U. S. vs. Panlilio, 28 Phil. Rep., 608.)

#Separate Opinions

MORELAND, J., dissenting:

I dissent. The case of United States vs. George (228 U. S., 14), is decisive of this, holding that an
indictment for perjury can not be based on an affidavit not authorized or required by any law of the
United States. There is no law of the Philippine Islands which authorizes or requires the affidavit
which is the basis of the charge of perjury in this case. (U. S. vs. Panlilio, 28 Phil. Rep., 608.)

[G.R. Nos. 39840 & 39841. December 23, 1933.]

THE PEOPLE OF THE PHILIPPINE ISLANDS, Plaintiff-Appellee, v. GABRIEL

HERNANDEZ, Defendant-Appellant.

Baldomero M. Lapak for Appellant.

Solicitor-General Hilado for Appellee.

 SYLLABUS

1. OBSTRUCTING JUSTICE; RESISTANCE TO AN AGENT OF A PERSON IN

AUTHORITY; FALSE IMPRISONMENT; ARBITRARY DETENTION; PROVINCIAL
SHERIFF. — The alleged offense of resistance to an agent of a person in authority, with which
the defendant is charged, consisted in his having prevented the provincial sheriff from carrying
away his piano and chairs from his house by holding him by the arm with hand while with the
other he wrested the chair which the said sheriff was trying to hand over to one of the several
laborers standing by for his orders below or at the foot of the stairs of the appellant’s house. The
alleged offense of arbitrary detention with which he was also charged consisted in his having
ordered the chief of police to arrest said sheriff, depriving him of his liberty at least from 6 to
8.45 o’clock in the evening.

2. ID.; ID.; ID.; ID.; ID.; ATTACHMENT OF PROPERTY BY THE SHERIFF. — There is no
question that a sheriff may attach the property of a judgment or execution debtor if he is clothed
with the necessary authority under a judicial writ, as provided for in section 453 of Act No. 190.
However, it should not be construed to mean that, having discretion in choosing the property to
be attached, he should necessarily attach such properties as are held in high esteem by the
execution debtor, particularly when the latter places other properties at his disposal, the value of
which is greatly in excess of the amount of the judgment under execution.

3. ID.; ID.; ID.; ID.; ID.; ID. — The afore-cited provision does not forbid the execution debtor,
in case he has sufficient properties to answer for the payment of the judgment, to point out to the
sheriff which of such properties should be attached and sold to satisfy the judgment with the
proceeds thereof. On the contrary, it may be inferred from the provisions of section 457 of the
aforesaid Act that there would be no irregularly committed under such procedure.

4. ID.; ID.; ID.; ID.; ID.; ID.; COMPLIANCE WITH AN OBLIGATION OR ENFORCEMENT
OF A RIGHT. — When an obligation may be complied with or a right enforced in one way or
another without detriment to the person charged with such compliance or enforcement, there is
no need of so doing to the annoyance and humiliation of the persons concerned. As much as
possible, one should find some means of harmonizing compliance with such duty and
enforcement of such right with the rights and obligations of others.

DECISION

DIAZ, J.:

After the appellant had been tried in criminal cases Nos. 839 and 844 of the Court of
First Instance of Camarines Norte, for resistance to agents of persons in authority and
arbitrary detention, respectively, he was convicted and sentenced to three (3) years,
six (6) months and one (1) day of prision correccional with the corresponding accessory
penalties and to pay a fine of five hundred pesos (P500) with subsidiary imprisonment
in case of insolvency, with the costs, in the first case, and to one (1) year and one (1)
day of prision correccional with the corresponding accessory penalties and likewise to
pay the costs of the suit, in the latter. From both judgments he appealed to this court
for a review thereof.

The information filed by the provincial fiscal of Camarines Norte against the appellant in
the aforesaid two cases reads as follows: jg c:ch an rob les.c om.p h

"That on or about the 27th day of August, 1932, in the municipality of Daet, Province of
Camarines Norte, Philippine Islands, after the complainant, as the duly appointed
provincial sheriff of Camarines Norte, had informed the said defendant of the existence
of a writ of execution issued by the court against him in connection with civil case No.
775 entitled ’The Collector of Internal Revenue v. Gabriel Hernandez’, and after
showing him the writ in question and on the occasion that said complaint, then acting in
the performance of his duties, proceeded to attach the personal property belonging to
him, the said defendant, taking advantage of his public position as provincial governor
of Camarines Norte and abusing the same, by means of force and threat, resisted,
refused and tenaciously opposed compliance with the aforesaid order of the court to be
enforced by said complainant, and in order to accomplish such resistance the said
defendant ordered the chief of police of Daet to detain and lock up the complainant,
which was so done in effect.

"Contrary to law, and with the concurrence of the first aggravating circumstance
specified in article 14 of the Penal Code, that is, the taking advantage by the offender
of his public position." (Case No. 839.)

"That on or about the 27th day of August, 1932, in the municipality of Daet, Province of
Camarines Norte, Philippine Islands, on the occasion that the offended party, Amador E.
Gomez, as provincial sheriff of Camarines Norte, appeared at the house of the
defendant, Gabriel Hernandez, to proceed with the attachment of the personal property
belonging to the latter and his wife, by virtue of a writ of execution issued by the court
in civil case No. 775, entitled ’The Collector of Internal Revenue v. Gabriel Hernandez’,
the said defendant Gabriel Hernandez, who was then governor of Camarines Norte, and
Marcos Panotes, who was chief of police of the municipality of Daet, taking advantage
of their respective public positions and abusing the same, voluntarily, illegally and
criminally, without any legal motive or right whatsoever, detained, locked up and
deprived the said offended party of his liberty against his will, for a period of time less
than three days.

"Contrary to law, and with the concurrence of the first aggravating circumstance
(specified in article 14 of the Penal Code), that is, the taking advantage by the offender
Hernandez of his public position." (Case No. 844.)

The appellant bases his appeal on the ground that the trial court committed the
following alleged errors:jg c:ch an rob les.com .p h

"1. That in the statement of facts appearing in the decision appealed from, only the
evidence of the provincial sheriff was taken into consideration;

"2. In declaring in its findings of fact that the defendant ’energetically ordered the said
chief of police to arrest the provincial sheriff on his responsibility as provincial governor
of Camarines Norte’;

"3. In not holding it as a proven and undisputed fact that the provincial sheriff and the
defendant were and still are political enemies and that the provincial sheriff harbored a
personal grudge against him;

"4. In not permitting the witnesses for the defense Marcosa Pimentel and Emilio Zaleta
to testify in corroboration of the defendant’s testimony to the effect that when the
provincial sheriff forced his way into the house for the second time, the door thereof
was locked, and in holding that the door in question was open;

"5. In having given more credit to the testimony of the provincial sheriff and his deputy
Jose Rada, and in discrediting the testimony of the defendant and his witnesses;

"6. In holding that the defendant resisted by means of force and intimidation;

"7. In holding that the defendant by a single act committed the offenses of resistance
to agents of persons in authority and arbitrary detention, and in sentencing him to
three (3) years, six (6) months and twenty-one (21) days for the first, and to one (1)
year and one (1) day for the second;

"8. In not dismissing these cases and absolving the defendant; and

"9. In denying the defendant’s motion for reconsideration and a new trial." cral aw virt u a1 aw lib rary

By agreement of the prosecution and the defense, the two cases in question, and case
No. 840, for the usurpation of judicial functions, which latter case resulted in the
acquittal of the defendant therein, who is the appellant herein, were tried together.

Before presentation of evidence by the fiscal, the appellant spontaneously made the
following admission, to wit: That he, his wife Marcosa Pimentel were defendants in civil
case No. 775 instituted by the Collector of Internal Revenue in the justice of the peace
court of Daet, Camarines Norte; that judgment was rendered therein sentencing the
three of them to pay to the then plaintiff the sum of two hundred twenty-three pesos
and twenty-six centavos (P223.26); that said judgment became final and executory on
February 23, 1931; that the corresponding writ of execution was issued by the justice
of peace court of Daet; that he (the appellant) was and still is the provincial governor of
Camarines Norte since October 16, 1931; that from February 13, 1932, to December
14th of the same year, Amador E. Gomez was the provincial sheriff thereof without
having been suspended from such office; that Jose Rada was the deputy sheriff of
Camarines Norte during the same period of time; that on August 29, 1932, he (the
appellant) filed a complaint for trespass to dwelling against the said Amador E. Gomez
in the justice of the peace court.
Immediately thereafter, the fiscal proceeded to present his evidence without any
objection on the part of the Appellant.

It appears from a careful examination of the evidence of record that on August 20,
1932, the provincial treasurer of Camarines Norte, acting under instructions from the
Collector of Internal Revenue, asked for and obtained from the justice of the peace of
Daet the writ of execution Exhibit B which was delivered to the provincial sheriff
Amador E. Gomez for execution.

As a preliminary step in the execution of the writ in question, the aforesaid provincial
sheriff, on August 24, 1932, sent his deputy Jose Rada to the office of the appellant,
who was then the governor of Camarines Norte, to demand payment of the amount
specified in the judgment rendered against him, his wife and Angel Pimentel, and to
show him the writ of execution of the judgment in question. The appellant told the said
deputy sheriff that he had no money with which to pay it at that moment but he
promised to do so within thirty days. He noted this at the foot of the said writ Exhibit B.

Inasmuch as this proposition of the appellant was not satisfactorily to him, the
provincial Amador E. Gomez again sent his deputy on August 26, 1932, to inform the
appellant that it was necessary for the latter to satisfy the judgment, otherwise his
personal property would be attached in accordance with the requirement of the said
writ. The appellant then proposed that the sheriff attach the stripping machine outfit
which he had on his hacienda, a motor-propelled sail boat and a banca belonging to
him, all of which had cost him more than one thousand fifty pesos but which he
appraised at only six hundred forty pesos on that occasion, which sum was double the
amount of the judgment in question. To that effect, he delivered to the deputy sheriff a
list of said properties, Exhibit 1. Neither did this new proposition of the appellant satisfy
the provincial sheriff. For the third time, he sent his deputy to the said appellant’s office
to tell him that the attachment of the personal property which he had in his house
would necessarily take place.

In order to avoid the proposed attachment of his aforesaid personal property, the
appellant addressed the letter Exhibit E to the sheriff entreating him in the meantime to
suspend execution of the judgment in question, at least until he had received an
answer to the telegram which he had sent to the Collector of Internal Revenue. He in
fact sent a telegram to the aforesaid official requesting suspension of the execution,
binding himself to pay the amount of the judgment with his salary as provincial
governor. In reply thereto, said official, in the telegram Exhibit V, advised the appellant
to file a petition to that effect with the justice of the peace court, saying that he would
agree to the proposed arrangement if the official concerned granted his petition.
Notwithstanding this, the deputy sheriff, acting under the provincial sheriff’s orders,
appeared at the appellant’s house with several policemen between 2 and 3 o’clock on
the afternoon of August 27, 1932, and again informed the said appellant of his intention
to attach his personal property, particularly the piano and chairs which he had in his
house, if he did not pay the amount of the afore-mentioned judgment. Believing the
presence of so many policemen in his house as unnecessary, the appellant ordered
those who accompanied the deputy sheriff to go back and attend to their own duties,
addressing the letter Exhibit C to their chief thereby ordering him not to provide the
sheriff with policemen.

Upon being informed by his deputy of the appellant’s attitude, the sheriff went to the
lieutenant of the Constabulary at Daet, and later to Captain Legaspi of the said
organization — who happened to be in the barrio of Dogongan at that time — to ask for
soldiers to help him enforce the writ of execution. Not having obtained any help, either
from the former officer who told him that nothing would happen to the deputy sheriff in
view of the fact that the persons involved were educated, or from the latter who
requested him to put his petition in writing and furthermore to certify that the police
force was unable to provide him with the necessary aid, he applied to the municipal
president for police assistance. He was given three men with whom the deputy sheriff,
under orders from the said provincial sheriff, again returned to the appellant’s house for
the same purpose. When the deputy sheriff again failed in his attempt and the
appellant ordered the policemen to retire for the second time, the provincial sheriff
himself, accompanied by the chief of police, went to the former’s house, first passing by
and communicating with the principal president Francisco Carranceja and Froilan
Pimentel, who filed the complaint and who was at the said house at that time. When he
arrived at the appellant’s house, he again insisted in proceeding with the attachment.
Said appellant once more reiterated his request not to attach the personal property in
his house but those specified in Exhibit 1, adding that he would be willing to surrender
other property in case the proceeds of the sale thereof were insufficient to satisfy the
judgment. Joining the conversation, the appellant’s wife told the said provincial sheriff
that, if he so desired, he could sell the shelves under her house, besides the property
offered by her husband, except her piano and chairs. Unable to control her temper
under the impression that her piano and chairs were to be seized by the provincial
sheriff, the said wife of the appellant made more or less insulting remarks to the sheriff.
In order that things might not come to the worst and to avoid his wife meddling in said
affair, the appellant invited the said sheriff downstairs for the purpose of coming to an
understanding with him out of his wife’s presence. Once there, the appellant showed
the telegram of the Collector of Internal Revenue, Exhibit V, to the sheriff to convince
him that his request for the suspension of the execution was reasonable. However, the
provincial sheriff said that he did not acknowledge the telegram in question and that,
any way, he considered it his duty to proceed with the execution. He likewise stated
that he did not agree with the proposition to attach only the appellant’s stripping
machine outfit and his boats for the reason that they were four kilometers away from
the town, and, furthermore, because he believed that in case they were sold at public
auction, he would not obtain a good price for them. Neither did he agree with the other
proposition to the effect that the latter be allowed to pay his debt with his salary, even
if he were given a formal authority to collect the same. While the two were discussing
the matter, the appellant’s wife or another person, who was upstairs, barred the door,
perhaps to prevent the piano and the chairs from being carried away.

Instead of quieting down in view of the reasoning given by the appellant, the provincial
sheriff curtly asked the latter whether he could guaranty his personal safety. Having
been answered in the negative, he then went upstairs, in spite of the appellant’s
warning not to do so for the reason that the door was barred. After forcing open the
door by breaking the bar thereof, he seized one of the chairs, which was within reach of
his hand, to begin what he believed, according to him, was a legitimate exercise of his
functions as sheriff in the enforcement of a writ of execution. In view of the provincial
sheriff’s actions, the appellant approached and held him by the arm with one hand
while with the other he wrested the chair said sheriff wanted to deliver by force to one
of the several laborers who were standing by for his orders, under the house. While
these developments were taking place, and even prior thereto, that is, from 2 o’clock
on the afternoon of that day, August 27, 1932, many people gathered about the
appellant’s house to see and witness how the governor’s property was to be attached
inasmuch as the news had spread that the sheriff Amador E. Gomez would go there
that afternoon to do so. Many persons, young and old, on the street near the
appellant’s house said that the sheriff intended to attach the property of the latter and
take his piano and chairs. This spectacle was accentuated by the presence of several
policemen.

When the provincial sheriff went up to the house to force open the door, as stated, the
appellant called the chief of police, who was on the street, and ordered him to arrest
the sheriff on the alleged ground that the latter was committing an act of trespass to
dwelling. Said officer of the law made the arrest not only because he was ordered to do
so by his superior, but also because he really believed that the sheriff was committing
an abuse in the house in question by carrying away a chair by force.

The appellant’s proposition to the effect that he be permitted to pay the amount of the
judgment in question with his salary as governor, was accepted by the Collector of
Internal Revenue, and pursuant to such understanding, he actually paid it on October 4
and November 1, 1932, there having been no necessity, therefore, of resorting to the
process of execution.

After the provincial sheriff has been placed under arrest by the chief of police, he was
brought to the latter’s office at about 6 o’clock that afternoon. He was permitted to
drop in at the house of the justice of the peace to find out whether he could be released
under bond. Inasmuch as the said justice of the peace stated that he could not fix the
amount of the bond unless an information was filed against him, it was not possible for
the sheriff to file any bond. When the appellant was informed thereof in a letter, Exhibit
B, addressed to him by the chief of police, he replied by means of Exhibit C, as
follows:
jg c:ch an rob les.com.p h

"Sir: Replying to your query regarding the person in detention, I again reiterate what I
have already stated to the effect that you may provisionally release him inasmuch as
we shall not be able to file an information against him tonight, nor tomorrow being
Sunday. As far as I am concerned I have no objection to placing him at liberty under
instructions to appear on Monday morning." cralaw virt u a1 aw lib rary

This letter Exhibit C was sent to the chief of police at about 7 o’clock that same evening
but, for one reason or another, the sheriff did not leave the former’s office until 8.45
o’clock that night.
From the foregoing, which is a summary of the pertinent facts connected with the two
cases under consideration, it will be seen that the alleged offense of resistance to an
agent of a person in authority, with which the defendant is charged, consisted in is
having the provincial sheriff from carrying away his piano and chairs from his house by
holding him by the arm with one hand while the other he wrested the chair which the
said sheriff was trying to deliver to one of the several laborers standing by for his
debtors below or at the foot of the stairs of the appellant’s house. The alleged offense
of arbitrary detention with which he was likewise charged consisted in his having
ordered the chief of police to arrest said sheriff, depriving him of his liberty at least
from 6 to 8.45 o’clock in the evening.

Under other circumstances, the appellant’s act in trying to prevent the sheriff from
carrying away his piano and chairs, in the manner above stated, would constitute a
slight offense of resistance to an agent of a person in authority, but under the
circumstances which led to the commission thereof, it cannot be considered as such.
There is no question that a sheriff may attach the property of a judgment or execution
debtor if he is clothed with the necessary authority under a judicial writ, as provided for
in section 453 of Act No. 190. However, it should not be construed to mean that,
having discretion in choosing the property to be attached, he should necessarily levy
upon such property as is valued by the execution debtor, particularly when the latter
places other property at his disposal, as was done herein, the value of which is greatly
in excess of the amount of the judgment under execution. The aforesaid provision does
not forbid the execution debtor, in case he has sufficient property to answer for the
payment of the judgment, to point out to the sheriff which of such property should be
attached and sold to satisfy the judgment with the proceeds thereof. On the contrary, it
may be inferred from the provisions of section 457 of the aforesaid Act that there would
be no irregularity committed by such procedure. It should be noted that, after
describing the manner in which the personal property of the execution debtor should be
sold at public auction, the last sentence of the afore-cited section reads as follows:
jg c:ch an rob les.com .p h

"The judgment debtor, if present at the sale, may direct the order in which property,
real or personal shall be sold, when such property consists of several known lots or
parcels of articles which can be sold to advantage separately, and the officer must
follow such directions."
cralaw v irt u a1 aw lib rar y

If this is permissible, and it is being followed in all cases, why may not the same be
done in the case of an attachment when there are several properties that may be
attached and, furthermore, their value is sufficient to answer for the amount of the
judgment?

The provincial sheriff really acted arbitrarily and with malice, and even more than that,
with unnecessary severity and abuse. The time requested by the appellant for the
suspension of his action was only a little more than one day, which was the intervening
period of time between Saturday night, when the incidents which gave rise to the two
criminal processes under consideration occurred, and the following Monday, when,
pursuant to the suggestion of the Collector of Internal Revenue, his judgment creditor
of which suggestion said sheriff was fully aware, he would be able to apply to the
justice of the peace court which issued the writ, for even a temporary suspension of the
writ in question, inasmuch as said judgment creditor was agreeable thereto. The
amount involved therein was only two hundred twenty-three pesos and twenty-six
centavos. Neither was it a case in which an insolvent person was concerned for the
appellant was not insolvent because he had other property aside from the offered by
him under Exhibit 1 and the shelves which he had under his house, which shelves must
be considered valuable on the ground that the prosecution did not prove the contrary.
Furthermore, he had his salary as governor, which he also offered in payment of his
obligation, even to the extent of expressing his willingness to execute the necessary
power of attorney so that the sheriff could collect and apply it to satisfy the judgment
which he was endeavoring to execute. The truth is that the sheriff saw an opportunity
to get even with the appellant who defeated him in the preceding elections and to
avenge the affront which the latter offered him in tenaciously opposing his appointment
as provincial sheriff. These facts place the latter’s testimony in disrepute, making it
entirely unworthy of credit, inasmuch as it had been given the lie by the appellant
himself and by the other witness for the defense. It is rue that his testimony was
corroborated in some points by that of the deputy sheriff Jose Rada and of the
municipal president of Daet Francisco Carranceja, but the former is a subordinate of the
said provincial sheriff and it is to be expected that he would side with the latter; and,
with respect to the other witness, according to the testimony of the sheriff himself, he
was manhandled, to avoid quoting his offensive words, by the appellant years before.
Furthermore, both of them are the appellant’s political rivals.

When an obligation may be complied with or a right enforced in one way or another
without detriment to the person charged with such compliance or enforcement, there is
no need of so doing to the annoyance and humiliation of the persons concerned. As
much as possible, one should find some means of harmonizing compliance with such
duty and enforcement of such right with the right and obligations of others.

In view of the foregoing proven facts, we are of the opinion that the provincial sheriff
exceeded his authority in the performance of his duties as such, and the rule in such
cases is that the victim of the abuse has a legitimate right to defend himself. (People v.
Chan Fook, 42 Phil., 230.) The appellant did nothing more than act in that sense and
therefore he cannot be guilty of resistance. His was an act of legitimate self-defense.

With respect to the alleged arbitrary detention, the evidence of the prosecution is not
convincing. The preponderance of the evidence shows that the provincial sheriff really
forced open the door of the upper story of the appellant’s house in spite of having been
warned not to go upstairs because said door was barred. Under such circumstances his
arrest by the chief of police, upon petition of the appellant, was not entirely without
justification on the ground that the latter, as well as the said chief of police, believed
that he was committing an abusive act. The arrest of the said sheriff should be
considered as a mere incident of the defense availed of by the appellant to protect his
rights.

Wherefore, we are of the opinion and so hold that the appellant is not guilty of the
offenses with which he was charged in the two cases in question. Therefore, the
judgment of the trial court appealed from are hereby reversed, and the defendant is
hereby acquitted of the offenses of resistance to an agent of a person in authority and
arbitrary detention of which he was convicted under the aforesaid two case, with the
costs of both instances de oficio. So ordered.

Street, Abad Santos, Vickers, and Butte, JJ., concur.

G.R. No. L-11988 April 4, 1918

JACINTO MOLINA, plaintiff-appellee,

vs.
JAMES J. RAFFERTY, Collector of Internal Revenue, defendant-appellant.

Acting Attorney-General Paredes for appellant.

Araneta & Zaragoza for appellee.
FISHER, J.:

After the publication of the decision announced under the date of February 1st., 1918, 1 counsel for
appellee presented a petition for a rehearing. This petition was granted and oral argument of the
motion was permitted. Two of the members of the court, as constituted at the time of the argument
on the motion for a rehearing, were not present when the case was first submitted and did not
participate in the original decision.

Upon the facts, as correctly stated in the original majority decision, a majority of the members of the
court as now constituted is in favor of setting aside the original decision and affirming the judgment
of the trial court.

Plaintiff contends that the fish produced by him are to be regarded as an "agricultural product" within
the meaning of that term as used in paragraph (c) of section 41 of Act No. 2339 (now section 1460
of the Administrative Code of 1917), in forced when the disputed tax was levied, and that he is
therefore exempt from the percentage tax on merchants' sales established by section 40 of Act No.
2339, as amended.

The provision upon which the plaintiff relies reads as follows:

In computing the tax above imposed transactions in the following commodities shall be
excluded: . . . (c) Agricultural products when sold by the producer or owner of the land where
grown, whether in their original state or not. (Act No. 2339, sec. 41.)

The same exemption, with a slight change in wording, is now embodied in section 1460 of the
Administrative Code, of 1917.

The question of law presented by this appeal, as we view, is not whether fish in general constitute an
agricultural products, but whether fish produced as were those upon which the tax in question was
levied are an agricultural product.

As stated by judged Cooley in his great work on taxation:

The underlying principle of all construction is that the intent of the legislature should be
sought in the words employed to express it, and that when found it should be made to
govern, . . . . If the words of the law seem to be of doubtful import, it may then perhaps
become necessary to look beyond them in order to ascertain what was in the legislative mind
at the time the law was enacted; what the circumstances were, under which the action was
taken; what evil, if any, was meant to be redressed; . . . . And where the law has
contemporaneously been put into operation, and in doing so a construction has necessarily
been put upon it, this construction, especially if followed for some considerable period, is
entitled to great respect, as being very probably a true expression of the legislative purpose,
and is not lightly to be overruled, although it is not conclusive. (Cooley on Taxation [Vol. 1]
3d. Ed., p. 450.)

The first inquiry, therefore, must relate to the purpose of the Legislative had in mind in establishing
the exemption contained in the clause now under consideration. It seems reasonable to assume that
it was due to the belief on the part of the law making body that by exempting agricultural products
from this tax the farming industry would be favored and the development of the resources of the
country encouraged. It is a fact, of which we take judicial cognizance, that there are immense tracts
of public land in this country, at present wholly unproductive, which might be made fruitful by
cultivation, and that large sums of money go abroad every year for the purchase of food substances
which might be grown here. Every dollar's worth of food which the farmer produces and sells in
these Islands adds directly to the wealth of the country. On the other hand, in the process of
distribution of commodities to the ultimate consumer, no direct increase in value results solely from
their transfer from one person to another in the course of commercial transactions. It is fairly to be
inferred from the statute that the object and purpose of the Legislature was, in general terms, to levy
the tax in question, significantly termed the "merchant's tax," upon all persons engaged in making a
profit upon goods produced by others, but to exempt from the tax all persons directly producing
goods from the land. In order to accomplish this purpose the Legislature, instead of attempting an
enumeration of exempted products, has grouped them all under the general designation of
"agricultural products."

It seems to require no argument to demonstrate that it is just as much to the public interest to
encourage the artificial propagation and growth of fish as of corn, pork, milk or any other food
substance. If the artificial production of fish is held not to be included within the exemption of the
statute this conclusion must be based upon the inadequacy of the language used by the Legislature
to express its purpose, rather than the assumption that it was actually intended to exclude producers
of artificially grown fish from the benefits conferred upon producers of other substances brought into
the store of national wealth by the arts of husbandry and animal industry.

While we have no doubt that the land occupied by the ponds in which the fish in question are grown
is agricultural land within the meaning of the Acts of Congress and of the Philippine Commission
under consideration in the case of Map vs. Insular Government (10 Phil. Rep., 175) and others cited
in the original majority opinion, it does not seem to us that this conclusion solves the problem. A man
might cultivate the surface of a tract of land patented to him under the mining law, but the products
of such soil would not for that reason, we apprehend, be any the less "agricultural products."
Conversely, the admission that the land upon which these fishponds are constructed is not to be
classified as mineral or forest land, does not lead of necessity to the conclusion that everything
produced upon them is for that reason alone to be deemed an "agricultural product" within the
meaning of the statute under consideration.

"Agriculture" is an English word made upon of Latin words "ager," a field, and "cultura," cultivation. It
is defined by Webster's New International Dictionary as meaning in its broader sense, "The science
and art of the production of plants and animal useful to man . . ."

In Dillard vs. Webb (55 Ala., 468) it is held that the words "agriculture" includes "the rearing, feeding
and managing of live stock." The same view was expressed in the case of Binzel vs. Grogan (67
Wis., 147).

Webster defines "product" to be "anything that is produced, whether as the result of generation,
growth, labor, or thought ... ," while "grow" is defined in the Century Dictionary as meaning "to cause
to grow; cultivate; produce, raise . . .."

While it is true that in a narrow and restricted sense agricultural products are limited to vegetable
substances directly resulting from the tillage of the soil, it is evident from the definitions quoted that
the term also includes animal which derived their sustenance from vegetable growths, and are
therefore indirectly the product of the land. Thus it has been held that "The product of the dairy and
the product of the poultry yard, while it does not come directly out of the soil is necessarily
connected with the soil . . . and is therefore farm produce. (District of Columbia vs. Oyster, 15 D. C.,
285.)

In the case of Mayor vs. Davis (6 Watts & Sergeant [Penn. Rep.], 269) the court said:
 Swine horses, meat cattle, sheep, manure, cordwood, hay, vegetables, fruits, eggs, milk,
butter, lard . . . are strictly produce of the farm . . .

Without attempting to further multiply examples, we think it may safely be asserted that courts and
lexicographers are in accord in holding that the term "agricultural products" is not limited in its
meaning to vegetable growth, but includes everything which serves to satisfy human needs which is
grown upon the land, whether it pertain to the vegetable kingdom, or to the animal kingdom. It is true
that there is no decision which as yet has held that the fish grown in ponds are an agricultural
product, but that is no reason why we should not so hold if we find that such fish fall within the scope
of the meaning of the term. Of necessity, the products of land tend constantly to multiply in number
and variety, as population increases and new demands spring up. In California there are farms
devoted to the growth of frogs for the market. In many places in North America foxes and other
animals usually found wild are reared in confinement for their fur. In Japan land is devoted to the
culture of the silkworm and the growth of the plants necessary for the food of those insects. Bees are
everywhere kept for the wax and honey into which the land is made to produce by those engaged in
these occupations are "agricultural products" in the same sense in which poultry, eggs, and butter
have been held to be agricultural products.

Now, if the purpose of agriculture, in the broader sense of the term, is to obtain from the land the
products to which it is best adapted and through which it will yield the greatest return upon the
expenditure of a given amount of labor and capital, can it not be said that it is just as much an
agricultural process to enclose a given area of land with dykes, flood it with water, grow aquatic
plants in it, and feed fish with the plants so produced as to fence in it and allow poultry to feed upon
the plants naturally or artificially grown upon the surface? In the last analysis the result is the same
— a given area of land produces a certain amount of food. In the one case it is the flesh of poultry, in
the other the flesh of fish. It has been agreed between the parties that an important article of diet
consumed by fish grown in a pond consists of certain marine plants which grow from roots which
affix themselves to the bottom of the pond. In a real sense, therefore, the fish are just as truly a
product of the land as are poultry or swine, living upon its vegetable growths, aquatic or terrestrial.
Thus, land may truly be said to produce fish, although it is true that the producer is not a fisherman.
Neither is one who grows foxes for their pelts a hunter. As contended by counsel, the inquiry is not
whether fish in general constitute an agricultural product, but whether fish artificially grown and fed in
confinement are to be so regarded. Honey produced by one who devotes his land to apiculture might
be so regarded, even if we were to admit that wild honey gathered in the forest is not. Pigeons kept
in domestication and fed by the owner would fall within the definition. Wild pigeons obtained by a
hunter would not. Firewood gathered in a natural forest is not an agricultural product, but firewood
cut from bacauan trees planted for that purpose has been held to be such a product, and its
producer exempt from the merchant's tax. (Mercado vs. Collector of Internal Revenue, 32 Phil. Rep.,
271.) Other comparisons might be made, many of which will be found in the opinion in which two of
the members of the court expressed their dissent from the original majority opinion, but enough have
been given to make our position clear.

During the many hears that the statute before us has been in existence, since it first appeared,
substantially in its present form, in section 142 of Act No. 1189, passed in 1904, no attempt has
been made, until this case arose, to construe it as not applying to fish grown in ponds, and much
weight should be given to this long continued administrative interpretation. The opinion of the
Attorney-General, cited by Justice Malcolm, will be found on examination to have no bearing upon
the present inquiry, as in that case question was, not whether fish grown and fed in ponds were
agricultural products, but whether ". . . fishermen, shell and pearl gatherers . . ." were liable to the
occupation tax. There is nothing in the opinion to indicate that the word "fishermen" was used to
mean men growing fish in ponds, and it must, therefore, be assumed that it was used in its proper
grammatical sense to designate persons engaged in catching fish not artificially produced.
The decision in the case of The United States vs. Laxa (36 Phil. Rep., 670) is not controlling, as the
reasoning upon which it is based was not concurred in by four members of the court. Furthermore,
the Laxa case might be distinguished from the one now under consideration, were it necessary to do
so, in that it has been stipulated in this case that fish cultivated in ponds subsist largely upon aquatic
plants which grow from roots which attach themselves to the bottom of the pond, and are therefore
in a real sense a product of the land, while in the Laxa case the evidence was that they subsisted
solely upon free floating algae.

We are therefore of the opinion, and so hold, that the decision heretofore rendered herein must be
set aside, and the judgment of the lower court affirmed. So ordered.

Arellano, C.J., Torres and Johnson, JJ., concur.

Araullo, J., dissents.

Separate Opinions

STREET, J., concurring:

At the original hearing, I became quite firmly convinced, as I supposed, that the product of a fishery
maintained in the manner shown in this case ought not to be considered an agricultural products,
within the meaning of the provision of the Internal Revenue Law which exempts agricultural products
from the merchant's tax. Upon fuller reflection, and further consideration of the arguments advanced
at the rehearing in favor of the other contention, I have come to the conclusion that I was wrong. I
therefore take this opportunity to recede from my former position and to express my conformity with
the opinion which now becomes the opinion of the majority of the court.

My conformity with the opinion first written was based on the conviction that the term "agricultural
products," as used in this statute, had reference to articles produced by purely agricultural
processes, more especially by the tillage of the fields. As I now view the case, this conception of the
meaning of agricultural is too narrow. It must be admitted that poultry, eggs, pigs, and other ordinary
produce of farm and country are agricultural products within the meaning of the statute; and no
sufficient reason is discernible for excluding fish produced under the conditions revealed in this case.

CARSON, J., dissenting:

I dissent.

As I understand them, the contentions of counsel in support of the motion for a rehearing and
reconsideration are substantially identical with those adduced in briefs and the oral arguments when
the case was originally submitted.

I have heard nothing which would lead me to modify my views or my vote when the case was
decided and the decision promulgated.
MALCOLM, J., dissenting:

This case well illustrates how on the same facts, the same law, and the same authorities, judges can
arrive at diametrically opposed conclusions.

Take the facts. They are stipulated. The only difference is that possibly unconsciously, in order to
fortify the conclusion, the decision of the majority on reconsideration would stress the point that an
important article of diet consumed by fish grown in a pond consists of certain marine plants which
grow from roots which affix themselves to the bottom of the pond, while the original decision as well
as the decision in the Laxa case,1 possibly also in order to fortify their conclusions, would stress the
scientific fact that the food of the bangus includes marine plants, that these algae are of seven
classes, that one of these plants is rooted, that some of the others are very loosely attached to the
ground but not rooted, and that generally the algae float on the water.

Or take the law. The section in dispute is made up of a few simple words. In reality, the meaning of
the phrase, "agricultural products," is only to be ascertained. The primary duty of the court is, of
course, to ascertain legislative intention. But here again the two decisions radically differ. The
decision of the majority on reconsideration in a laudable endeavor to encourage commercial
development would make this the purpose of the law and would follow this idea consistently to the
end. On the other hand, the original decision would start with the same presumption but finding that
to so construe the law would result in judicial amendment must then necessarily reach a different
result; if the Legislature had intended to exempt all classes of domestic products which would
include fish, it would undoubtedly have done so in plain language.

Or take the authorities. The Supreme Court of Georgia (Davis vs. Mayor [1879], 64 Ga., 128) would
confine "agricultural products" to the yield of the soil, as corn, wheat, rye, hay, etc. Possibly this court
was right. The supreme courts Alabama and Wisconsin would go further and would include as"
agricultural products" the rearing, feeding, and management of live stock. In this construction, these
courts may have been right for, as one example, it is merely a matter of comparative profit to the
farmer whether he markets his corn in the ear or on the hoof in the shape of swine. The Supreme
Court of Pennsylvania (Mayor vs. Davis [1843], 6 W. S., 269) would go still further and would include
as "agricultural products" swine, horses, meat, cattle, sheep, manure, cord, wood, hay, poultry
vegetables, fruit, eggs, milk, butter, and lard, that is, domestic animals and products of the farm.
Possibly, this court was right. And now the Supreme Court of the Philippine Islands in granting the
motion for reconsideration would go even further and would include in the term "agricultural
products," frogs, foxes, bees, pigeons, silkworms, silk, honey, and fish. Possibly, this court is right.
Try as I may, for I am gratified to have this decision of the court, I cannot bring myself to this view.
Without giving way to the temptation to use ironical and facetious language because of this result, let
me merely make the observation that where the limit will reached is beyond my poor mind to
comprehend. Another court could very well instead of prolonging the examples ad infinitum merely
judicially repeal the word "agricultural" and include everything which would fall under the word
"products."

My views and those of three other members of the court are fully set out in the first decision.
Restatement or reargument will avail nothing. Suffice it to say that the argument on motion for
reconsideration and the decision of the majority have failed to convince me that fish — or to accede
to the critical suggestion of the majority — that fish produced as were those upon which the tax in
question was levied, are an agricultural product. The administrative ruling of the Attorney-General,
the decision of this court in United States vs. Laxa ([1917], 36 Phil., 670), and the original decision in
the instant case should not be overturned by granting this motion.

G.R. No. 48231 p June 30, 1947

WISE & CO., INC., ET AL., plaintiffs-appellants,

vs.
BIBIANO L. MEER, Collector of Internal Revenue, defendant-appellee.
Ross, Selph, Carrascoso and Janda for appellants.
Office of the Solicitor General for appellee.

HILADO, J.:

This is an appeal by Wise & Co., Inc. and its co-plaintiff from the judgment of the Court of First
Instance of Manila in civil case No. 56200 of said court, absolving the defendant Collector of Internal
Revenue from the complaint without costs. The complaint was for recovery of certain amounts
therein specified, which had been paid by said plaintiffs under written protest to said defendant, who
had previously assessed said amounts against the respective plaintiffs by way of deficiency income
taxes for the year 1937, as detailed under paragraph 6 of defendant's special defense (Record of
Appeal, pp. 7-10). Appellants made eight assignments of error, to wit:

The trial court erred in finding:

I. That the Manila Wine Merchants, Ltd., a Hongkong corporation, was in liquidation
beginning June 1, 1937, and that all dividends declared and paid thereafter were
distributions of all its assets in complete liquidation.

II. That all distributions made by the Hongkong corporation after June 1, 1937, were subject
to both normal tax and surtax.

III. That income received by one corporation from another was taxable under the Income Tax
Law, and that Wise & Co., Inc., was taxable on the distribution of its share of the same net
profits on which the Hongkong Company had already paid Philippine tax, despite the clear
provisions of section 10 of the Income Tax Law then in effect.

IV. That the non-resident individual stockholder appellants were subject to both normal and
additional tax on the distributions received despite the clear provisions of section 5 (b) of the
Income Tax Law then in effect.

V. That section 25 (a) of the Income Tax Law makes distributions in liquidation of a foreign
corporation, dissolution proceedings of which were conducted in a foreign country, taxable
income to a non-resident individual stockholder.

VI. That section 199 of the Income Tax regulations, providing that in a distribution by a
corporation in complete liquidation of its assets the gain realized by a stockholder, whether
individual or corporate, is taxable as a dividend, is ineffective.

VII. That the deficiency assessment was properly collected.

VIII. That the refunds claimed by plaintiffs were not in order, and in rendering judgment
absolving the Collector of Internal Revenue from making such refunds.

The facts have been stipulated in writing, as quoted verbatim in the decision of the trial court thus:

That the allegations of paragraphs I and II of the complaint are true and correct.

II
That during the year 1937, plaintiffs, except Mr. E.M.G. Strickland (who, as husband of the
plaintiff Mrs. E.M.G. Strickland, is only a nominal party herein), were stockholders of Manila
Wine Merchants, Ltd., a foreign corporation duly authorized to do business in the Philippines.

III

That on May 27, 1937, the Board of Directors of Manila Wine Merchants, Ltd., (hereinafter
referred to as the Hongkong Company), recommended to the stockholders of the company
that they adopt the resolutions necessary to enable the company to sell its business and
assets to Manila Wine Merchants, Inc., a Philippine corporation formed on May 27, 1937,
(hereinafter referred to as the Manila Company), for the sum of P400,000 Philippine
currency; that this sale was duly authorized by the stockholders of the Hongkong Company
at a meeting held on July 22, 1937; that the contract of sale between the two companies was
executed on the same date, a copy of the contract being attached hereto as Schedule "A";
and that the final resolutions completing the said sale and transferring the business and
assets of the Hongkong Company to the Manila Company were adopted on August 3, 1937,
on which date the Manila Company were adopted on August 3, 1937, on which date the
Manila Company paid the Hongkong company the P400,000 purchase price.

IV

That pursuant to a resolution by its Board of Directors purporting to declare a dividend, the
Hongkong Company made a distribution from its earnings for the year 1937 to its
stockholders, plaintiffs receiving the following:

Declared and paid

June 8, 1937

Wise & Co., Inc. P7,677.82

Mr. J.F. 2,554.86

MacGregor

Mr. N.C. 2,369.48

MacGregor

Mr. C.J. Lafrentz 529.51

Mrs. E.M.G. 2,369.48

Strickland

Mrs. M.J.G. Mullins 2,369.48

P17,870.63

That the Hongkong Company has paid Philippine income tax on the entire earnings from
which the said distributions were paid.

That after deducting the said dividend of June 8, 1937, the surplus of the Hongkong
Company resulting from the active conduct of its business was P74,182.12. That as a result
of the sale of its business and assets to the Manila Company, the surplus of the Hongkong
Company was increased to a total of P270,116.59.

That pursuant to resolutions of its Board of Directors, and of its shareholders, purporting to
declare dividends, copies of which are attached hereto as Schedules "B" and "B-1", the
Hongkong Company distributed this surplus to its stockholders, plaintiffs receiving the
following sums on the following dates:

Declared Declared
July 22, 1937 July 22, 1937
Paid Paid
August 4, October 28,
1937 1937
Wise & Co., Inc. P113,851.85 P 2,198.24
Mr. J.F. MacGregor 37,885.20 731.48
Mr. N.C. MacGregor 35,137.03 678.42
Mr. C.J. Lafrentz 7,851.86 151.61
Mrs. E.M.G. Strickland 35,137.03 678.42
Mrs. M.J.G. Mullins 35,137.03 678.42
P265,000.00 P 5,116.59

That Philippine income tax had been paid by the Hongkong Company on the said surplus
from which the said distributions were made.

VI

That on August 19, 1937, at a special general meeting of the shareholders of the Hongkong
Company, the stockholders by proper resolution directed that the company be voluntarily
liquidated and its capital distributed among the stockholders; that the stockholders at such
meeting appointed a liquidator duly paid off the remaining debts of the Hongkong Company
and distributed its capital among the stockholders including plaintiffs; that the liquidator duly
filed his accounting on January 12, 1938, and in accordance with the provisions of Hongkong
Law, the Hongkong Company was duly dissolved at the expiration of three moths from that
date.

VII

That plaintiffs duly filed Philippine income tax returns. That defendant subsequently made
the following deficiency assessments against plaintiffs:

WISE & COMPANY, INC.

Net income as per return P87,649.67
Add: Deductions disallowed — Loss on
shares of
pstock in the Manila Wine
Merchants, Ltd.
presulting from the liquidation of
said firm 44,515.00
Income not declared:
Return of capital P51,185.00
Share of surplus 123,727.88
Total liquidating dividends
received P174,912.88
Less value of shares as per books 95,700.00
Profits realized on shares of stock
in the
Manila Wine Merchants Ltd.
resulting
from the liquidation of the said
firm P79,212.88
Accrued income tax as per return 5,258.98
Total P216,636.53
Deduct accrued income tax 12,262.45
Net income as per investigation 204,374.08

6 per cent Normal tax 12,262.45

Less amount already paid 6,307.92
Balance still due and collectible 7,003.47
J. F. MACGREGOR
Net income as per return P47,479.44
Deduct: Ordinary dividends 6,307.92
Net income as per investigation subject
to
normal tax:
Return of capital P17,032,25
Share of surplus 41,171.52
Total liquidating dividends
received P58,203.77
Less cost of shares 17,032.25
Profit realized on shares of stock
in the Manila Wine Merchants.,
Ltd.
Resulting from the liquidation of
said firm P41,171.52
Normal tax at 3 per cent 1,235.15
Additional tax due 549.59
Total normal and additional taxes 1,784.74
Less: Amount already paid 549.59
Balance still due and collectible 1,235.15
N. C. MACGREGOR
Net income as per return P44,177.06
Deduct: Ordinary dividends 5,992.11
Net income as per investigation subject
to
normal tax:
 Return of capital P15,796.75
Share of surplus 38,184.95
Total liquidating dividends
received. P53,981.70
Less cost of shares 15,796.75
Profit realized on shares of stock
in the
Manila Wine Merchants, Ltd.
Resulting
from the liquidation of the said
firm P38,184.95
Normal tax at 3 per cent 1,145.55
Additional tax due 483.54
Total normal and additional taxes 1,629.09
Less amount already paid 483.55
Balance still due and collectible 1,145.54
C. J. LAFRENTZ
Net income as per return P9,778.18
Deduct: Ordinary dividends 1,245.20
Net income as per investigation subject
to
normal tax:
Return of capital P3,530.00
Share of surplus 8,532.98
Total liquidating dividends
received P12,062.98
Less cost of shares 3,530.00

Profit realized on shares of stock

in the
Manila Wine Merchants, Ltd.
Resulting
from the liquidation of the said
firm P8,532.98
3 per cent normal tax due and
collectible 255.99
MRS. E. M. G. STRICKLAND
Net income as per return P44,057.06
Deduct: Ordinary dividends 5,872.11
Net income as per investigation subject
to
normal tax:
Return of capital P15,796.75
Share of surplus 38,184.95
Total liquidating dividends
received
Less cost of shares P53,981.70 15,796.75
 Profit realized on shares of stock
in the
Manila Wine Merchants, Ltd.
Resulting
from the liquidation of the said
firm P38,184.95
Normal tax at 3 per cent 1,145.55
Additional tax due 481.14
Total normal and additional taxes 1,626.69
Balance still due and collectible 1,145.54
MRS. M. J. G. MULLINS
Net income per return P44,057.06
Deduct: Ordinary dividends 5,872.11
Net income as per investigation subject
to
normal tax:
Return of capital P15,796.75
Share of surplus 38,184.95
Total liquidating dividends
received P53,981.70
Less cost of shares 15,796.75
Profit realized on shares of stock
in the
Manila Wine Merchants, Ltd.
Resulting
from the liquidation of the said
firm P38,184.95
Normal tax at 3 per cent 1,145.55
Additional tax due 481.14
Total normal and additional taxes 1,626.69
Less amount already paid 481.15
Balance still due and collectible P1,145.54

VIII

That said plaintiffs duly paid the said amounts demanded by defendant under written protest,
which was overruled in due course; that the plaintiffs have since July 1, 1939 requested from
defendant a refund of the said amounts which defendant has refused and still refuses to
refund.

IX

That this stipulation is equally the work of both parties and shall be fairly interpreted to give
effect to their intention that this case shall be decided solely upon points of law.

X
 The parties incorporate the Corporation Law and Companies Act of Hongkong and the
applicable decisions made thereunder, into this stipulation by reference, and either party may
at any stage in the proceedings in this case cite applicable sections of the law and the
authorities decided thereunder as though the same had been duly proved in evidence.

XI

That the parties hereto reserve the right to submit other and further evidence at the trial of
this case. (Record on Appeal, pp. 19-26.)

1. The first assignment of error. — Appellants maintain that the amounts received by them and on
which the taxes in question were assessed and collected were ordinary dividends; while upon the
other hand, appellee contends that they were liquidating dividends. If the first proposition is correct,
this assignment would be well-taken, otherwise, the decision of the court upon the point must be
upheld.

It appears that on May 27, 1937, the Board of Directors of the Manila Wine Merchants, Ltd.
(hereafter called the Hongkong Co.), recommended to the stockholders of said company "that the
Company should be wound up voluntarily by the members and the business sold as a going concern
to a new company incorporated under the laws of the Philippine Islands under the style of "The
Manila Wine Merchants, Inc." (Annex A defendant's answer, Record on Appeal, p. 12), and that they
adopt the resolutions necessary to enable the company to sell its business and assets to said new
company (hereafter called the Manila Company), organized on that same date, for the price of
P400,000, Philippine currency; that the sale was duly authorized by the stockholders of the
Hongkong Co. at a meeting held on July 22, 1937; and that the contract of sale between the two
companies was executed on the same day, as appears from the copy of the contract, Schedule A of
the Stipulation of Facts (par. III, Stipulation of Facts, Record on Appeal, pp. 19-20). It will be noted
that the Board of Directors of the Hongkong Co., in recommending the sale, specifically mentioned
"a new Company incorporated under the laws of the Philippine Islands under the style of "The Manila
Wine Merchants, Inc." as the purchaser, which fact shows that at the time of the recommendation
the Manila Company had already been formed, although on the very same day; and this and the
further fact that it was really the latter corporation that became the purchaser should clearly point to
the conclusion that the Manila Company was organized for the express purpose of succeeding the
Hongkong Co. The stipulated facts would admit of no saner interpretation.

While it is true that the contract of sale was signed on July 22, 1937, it contains in its paragraph 4 of
the express provision that the transfer "will take effect as on and from the first day of June, One
thousand nine hundred and thirty-seven, and until completion thereof, the Company shall stand
possessed of the property hereby agreed to be transferred and shall carry on its business in trust for
the Corporation" (Schedule A of Stipulation of Facts, Record on Appeal, p. 15). "The Company" was
the Hongkong Company and "the Corporation" was the Manila Company. For "the Company" to
carry on business in trust for the "Corporation," it was necessary for the latter to be the owner of the
business. It is plain that the parties considered the sale as made as on and from June 1, 1937 — for
the purposes of said sale and transfer, both parties agreed that the deed of July 22, 1937, was to
retroact to the first day of the preceding month.

The cited provision could not have served any other purpose than to consider the sale as made as of
June 1, 1937. If it had not been for this purpose, if the intention had been that the sale was to be
effective upon the date of the written contract or subsequently, said provision would certainly never
have been written, for how could the transfer or sale take effect as of June 1, 1937, if it were to be
considered as made at a later date?
The first distribution made after June 1, 1937, of what plaintiffs call ordinary dividends but what
defendant denominates liquidating dividends was declared and paid on June 8, 1937 (Stipulation,
Paragraph IV, Record on Appeal, p. 20). It will be recalled that the recommendation of the Board of
Directors of the Hongkong Company, at their meeting on May 27, 1937, was first of all "that the
company should be wound up voluntarily by the members"(Record on Appeal, p.12), and in
pursuance of that purpose, it was further recommended that the Company's business be sold as a
going concern to the Manila Company (ibid). Complying with the Companies Ordinance 1932 for
companies registered in Hongkong for the voluntary winding up by members, a Declaration of
Solvency was drawn up duly signed before the British Consul-General in Manila by the same
directors, and said declaration was returned to Hongkong for filing with the Registrar of Companies
(ibid.) Both recommendations were in due course approved and ratified. The later execution of the
formal deed of sale and the successive distributions of the amounts in question among the
stockholders of the Hongkong Company were obviously other steps in its complete liquidation. And
they leave no room for doubt in the mind of the court that said distributions were not in the ordinary
course of business and with intent to maintain the corporation as a going concern — in which case
they would have been distributions of ordinary dividends — but after the liquidation of the business
had been decided upon, which makes them payments for the surrender and relinquishment of the
stockholders' interest in the corporation, or so-called liquidating dividends.

More than with the distribution of June 8, 1937, is this true with those declared on July 22, 1937, and
paid on August 4 and October 28, 1937, respectively (Stipulation of Facts, par. 5, Record on Appeal,
p. 21). The distributions thus declared on July 22, 1937, and paid on August 4 and October 28,
1937, were from the surplus of the Hongkong Company resulting from the active conduct of its
business and amounting to P74,182.12, which surplus was augmented to a total of P270,116.59 as
a result of the sale of its business and assets to the Manila Company (ibid.). In both Schedules B
and B-1 of the Stipulation of Facts (Record on appeal, pp. 16-18), being minutes of directors'
meetings of the Hongkong Co., where authorization and instruction were given to declare and pay in
the form of "dividends" to the shareholders the amounts in question, it was specifically provided that
the surplus to be so distributed be that resulting after providing for return of
capital and necessary or various expenses, as shown in the balance sheet prepared as of June 1,
1937, and in the reconstructed balance sheet of the same date presented by the company's
auditors, it having been resolved in Schedule B-1 that "any balance remaining to be distributed when
final liquidator's account has been rendered and paid" (Record on Appeal, p. 18; emphasis
supplied). It thus becomes more evident that those distributions were to be made in the course or as
a result of the Hongkong Company's liquidation and that said liquidation was to
be complete and final. And although the various resolutions above-mentioned speak of distributions
of dividends when referring to those already alluded to, "a distribution does not necessarily become
a dividend by reason of the fact that it is called a dividend by the distributing corporation." (Holmes
Federal Taxes, 6th edition, 774.)

The ordinary connotation of liquidating dividend involves the distribution of assets by a

corporation to its stockholders upon dissolution. (Klein, Federal Income Taxation, 253-254.)

But it is contended by plaintiffs that as of August 4, 1937, the Hongkong Company "had taken no
steps toward dissolution or liquidation and still retained on hand liquid assets in excess of its
capitalization." They also assert that it was only on August 19, 1937, that said company took the first
corporate steps toward liquidation (Appellant's Brief, pp. 9-10). The fact, however, is that since July
22, 1937, when the formal deed of sale of all the properties, assets, and business of the Hongkong
Company to the Manila Company was made, it was expressly stipulated that the sale or transfer
shall take effect as of June 1, 1937. As already indicated, the transfer of what was sold, like the sale
itself, was, by the mutual agreement of the parties, considered as made on and from that date, and
that, if thereafter and until final completion of the transfer, the Hongkong Company continued to run
the business, it did so in trust for the new owner, the Manila Company. In the case of Canal-
Commercial T. & S. Bk. vs. Comm'r (63 Fed. [2d], 619, 620) it was held that:

. . . The determining element therefore is whether the distribution was in the ordinary course
of business and with intent to maintain the corporation as a going concern, or after deciding
to quit with intent to liquidate the business. Proceedings actually begun to dissolve the
corporation or formal action taken to liquidate it are but evidentiary and not
indispensable. Tootle vs. Commissioner (C.C.A. 58 F. [2d, 576.) The fact that the distribution
is wholly from surplus and not from capital, and therefore lawful as a dividend is only
evidence. In Hellmich vs. Hellman, and Tootle vs. Commissioner, supra, the distribution was
wholly from profits yet held to be one in liquidation . . . (Emphasis Supplied.)

In the case at bar, when in the deed of July 22, 1937, by authority of its stockholders, the Hongkong
Company thru its authorized representative declared and agreed that the aforesaid sale and transfer
shall take effect as of June 1, 1937, and distribution from its assets to those same stockholders
made after June 1, 1937, altho before July 22, 1937, must have been considered by them as
liquidating dividends; for how could they consistently deem all the business and assets of the
corporation sold as of June 1, 1937, and still say that said corporation, as a going
concern, distributed ordinary dividends to them thereafter?

In Holmby Corporation vs. Comm'r (83 Fed. [2d], 548-550), the court said:

. . . the fact that the distributions were called "dividends" and were made, in part, from
earnings and profits, and that some of them were made before liquidation or dissolution
proceedings were commenced, is not controlling. . . . The determining element is whether
the distributions were in the ordinary course of business and with intent to maintain the
corporation as a going concern, or after deciding to quit and with intent to liquidate the
business . . .. (Emphasis supplied.)

The directors or representatives of the Hongkong Company or the Manila Company, or both, could
of course not convert into ordinary dividends what in law and in reality were not such. As aptly stated
by Chief Justice Shaw in Comm. vs. Hunt (38 Am. Dec., 354-355),

The law is not to be hoodwinked by colorable pretenses. It looks at truth and reality through
whatever disguise they may assume.

The amounts thus distributed among the plaintiffs were not in the nature of a recurring return on
stock — in fact, they surrendered and relinquished their stock in return for said distributions, thus
ceasing to be stockholders of the Hongkong Company, which in turn ceased to exist in its own right
as a going concern during its more or less brief administration of the business as trustee for the
Manila Company, and finally disappeared even as such trustee.

The distinction between a distribution in liquidation and an ordinary dividend is factual; the
result in each case depending on the particular circumstances of the case and the intent of
the parties. If the distribution is in the nature of a recurring return on stock it is an ordinary
dividend. However, if the corporation is really winding up its business or recapitalizing and
narrowing its activities, the distribution may properly be treated as in complete or partial
liquidation and as payment by the corporation to the stockholder for his stock. The
corporation is, in the latter instances, wiping out all parts of the stockholders' interest in the
company . . .. (Montgomery, Federal Income Tax Handbook [1938-1939], 258; emphasis
supplied.)
It is our considered opinion that we are not dealing here with "the legal right of a taxpayer to
decrease the amount of what otherwise will be his taxes, or altogether avoid them, by means which
the law permits" (St. Louis Union Co. vs. U.S., 82 Fed. [2d], 61), but with a situation where we have
to apply in favor of the government the principle that the "liability for taxes cannot be evaded by a
transaction constituting a colorable subterfuge" (61 C.J., 173), it being clear that the distributions
under consideration were not ordinary dividends and were taxable in the manner, form and amounts
decreed by the court below.

2. The second assignment of error. — In disposing of the first assignment of error, we held that the
distributions in the instant case were not ordinary dividends but payments for surrendered or
relinquished stock in a corporation in complete liquidation, sometimes called liquidating dividends.
The question is whether such amounts were taxable income. The Income Tax Law, Act No. 2833
section 25 (a), as amended by section 4 of Act. No. 3761, inter alia stipulated:

Where a corporation, partnership, association, joint-account, or insurance company

distributes all of its assets in complete liquidation or dissolution, the gain realized or loss
sustained by the stockholder, whether individual or corporation, is a taxable income or a
deductible loss as the case may be. (Emphasis supplied.)

Partial source of the foregoing provision was section 201 (c) of the U.S. Revenue Act of 1918,
approved February 24, 1919, providing:

Amounts distributed in the liquidation of a corporation shall be treated as payments in

exchange for the stock or share, and any gain or profit realized thereby shall be taxed to the
distributee as other gains or profits.

It is a familiar rule of statutory construction that the judicial construction attached to the sources of
statutes adopted in a jurisdiction are of authoritative value in the interpretation of such local laws.
The Supreme Court of the United States has had occasion to construe certain pertinent parts of the
Federal Revenue Act above-mentioned on February 20, 1928, when it decided the case of
Hellmich vs. Hellman (276 U.S., 233; 72 Law. ed., 544). The case involved the recovery of additional
income taxes assessed against the plaintiffs under protest. And its determination hinged around the
construction of parts of said act after which those of our own law now under discussion were
patterned. Justice Sanford said:

The question here is whether the gains realized by stockholders from the amounts
distributed in the liquidation of the assets of a dissolved corporation, out of its earnings or
profits accumulated since February 28, 1913, were taxable to them as other "gains or
profits", or whether the amounts so distributed were "dividends" exempt from the normal tax.

Section 201 (a) of the act defined the term "dividend" as "any distribution made by a
corporation . . . to its shareholders . . . whether in cash or in other property .. out of its
earnings or profits accumulated since February 28, 1913 . . .." Section 201 (c) provided that
"amounts distributed in the liquidation of a corporation shall be treated as payments in
exchange for stock or shares, and any gain or profit realized thereby shall be taxed to the
distributee as other gains or profits."

Our law at the time of the transactions in question, in providing that where a corporation, etc.
distributes all its assets in complete liquidation or dissolution, the gain realized or loss sustained by
the stockholder is a taxable income or a deductible loss as the case may be, in effect treated such
distributions as payments in exchange for the stock or share. Thus, in making the deficiency
assessments under consideration, the Collector, among other items, made proper deduction of the
"value of shares" or "cost of shares" in the case of each individual plaintiff, assessing the tax only on
the resulting "profit realized" (Stipulation, par. VII, Record on Appeal, pp. 22-25); and of course in
case the value or cost of the shares should exceed the distribution received by the stockholder, the
resulting difference will be treated as a "deductible loss."

In the same case the Supreme Court of the United States made the following quotation, which is
here relevant, from Treasury Regulations 45, article 1548:

. . . So-called liquidation or dissolution dividends are not dividends within the meaning of the
statute, and amounts so distributed, whether or not including any surplus earned since
February 28, 1913, are to be regarded as payments for the stock of the dissolved
corporation. Any excess so received over the cost of his stock to the stockholder, or over its
fair market value as of March 1, 1913, if acquired prior thereto, is a taxable profit. A
distribution in liquidation of the assets and business of a corporation, which is a return to the
stockholders of the value of his stock upon a surrender of his interest in the corporation, is
distinguishable from a dividend paid by a going corporation out of current earnings or
accumulated surplus when declared by the directors in their discretion, which is in the nature
of a recurrent return upon the stock. (72 Law. ed., 546.)

The Income Tax Law of the Philippines in force at the time defined the term "dividend" in section 25
(a), as amended, as "any distribution made by a corporation . . . out of its earnings or profits
accumulated since March 1, 1913, and payable to its shareholders whether in cash or other
property." This definition is substantially the same as that given to the same term by the U.S.
Revenue Act of 1918 quoted by Justice Sanford in the passage above inserted.

Plaintiffs contend that defendant's position would result in double taxation. A similar contention has
been adversely disposed of against the taxpayer in the Hellmich case in these words:

The gains realized by the stockholders from the distribution of the assets in liquidation were
subject to the normal tax in like manner as if they had sold their stock to third persons. The
objection that this results in double taxation of the accumulated earnings and profits is no
more available in the one case than it would have been in the other. See Merchants' Loan &
T. Co. vs. Smietanki, 255 U.S., 509; 65 Law. ed., 751; 15 A.L.R., 1305; 41 Sup. Ct. Rep.,
386; Goodrich vs. Edwards, 255 U.S. 527; 65 Law. ed., 758; 41 Sup. Ct. Rep., 390. When,
as here, Congress clearly expressed its intention, the statute must be sustained even though
double taxation results. See Patton vs. Brady , 184 U.S., 608; 46 Law ed., 713; 22 Sup. Ct.
Rep., 493; Cream of Wheat Co. vs. Grand Forks County, 253 U.S., 325, 330; 64 Law. ed.,
931, 934; 40 Sup. Ct. Rep., 558. (Hellmich vs. Hellman, supra; 72 Law. ed., 547.)

It should be borne in mind that plaintiffs received the distributions in question in exchange for the
surrender and relinquishment by them of their stock in the Hongkong Company which was dissolved
and in process of complete liquidation. That money in the hands of the corporation formed a part of
its income and was properly taxable to it under the then existing Income Tax Law. When the
corporation was dissolved and in process of complete liquidation and its shareholders surrendered
their stock to it and it paid the sums in question to them in exchange, a transaction took place, which
was no different in its essence from a sale of the same stock to a third party who paid therefor. In
either case the shareholder who received the consideration for the stock earned that much money
as income of his own, which again was properly taxable to him under the same Income Tax Law. In
the case of the sale to a third person, it is not perceived how the objection of double taxation could
have been successfully raised. Neither can we conceive how it could be available where, as in this
case, the stock was transferred back to the dissolved corporation.
3. The third assignment of error. — In view of what has been said in our consideration of the second
assignment of error, the third can be briefly disposed of. Having held that the distributions involved
herein were not ordinary dividends but payments for stock surrendered and relinquished by the
shareholders to the dissolved corporation, or so-called liquidating dividends, we have the road clear
to declaring that under section 25 (a) of the former Income Tax Law, as amended, said distributions
were taxable alike to Wise and Co., Inc. and to the other plaintiffs. We hold that both the proviso of
section 10 (a) of said Income Tax Law and section 198 of Regulations No. 81 refer to ordinary
dividends, not to distributions made in complete liquidation or dissolution of a corporation which
result in the realization of a gain as specifically contemplated in section 25 (a) of the same law, as
amended, which as aforesaid expressly provides for the taxability of such gain as income, whether
the stockholder happens to be an individual or a corporation. By analogy, we can cite the following
additional passages from the Hellmich case:

The controlling question is whether the amounts distributed to the stockholders out of the
earnings and profits accumulated by the corporation since February 28, 1913, were to be
treated under section 201 (a) as "dividends," which were exempt from the normal tax; or
under section 201 (c) as payments made by the corporation in exchange for its stock, which
were taxable "as other gains or profits.

It is true that if section 201 (a) stood alone its broad definition of the term "dividend" would
apparently include distributions made to stockholders in the liquidation of a corporation — although
this term, as generally understood and used, refers to the recurrent return upon stock paid to
stockholders by a going corporation in the ordinary course of business, which does not reduce their
stockholdings and leaves them in a position to enjoy future returns upon the same stock. (See
Lynch vs. Hornby, 247 U.S., 339, 344-346; and Langstaff vs. Lucas [D. C.], 9 Fed. [2d], 691, 694.)

However, when section 201 (a) and section 201 (c) are read together, under the long-
established rule that the intention of the lawmakers is to be deduced from a view of every
material part of the statute (Kohlsaat vs. Murphy, 96 U.S., 153, 159; 24 Law. ed., 846), we
think it clear that the general definition of a dividend in section 201 (a) was not intended to
apply to distributions made to stockholders in the liquidation of a corporation, but that it was
intended that such distributions should be governed by section 201 (c), which, dealing
specifically with such liquidation, provided that the amounts distributed should "be treated as
payments in exchange for stock," and that any gain realized thereby should be taxed to the
stockholders "as other gains or profits." This brings the two sections into entire harmony and
gives to each its natural meaning and due effect. . . . (Hellmich vs. Hellman, supra; emphasis
supplied.)

4. The fourth assignment of error. — Under this assignment it is contended by the non-resident
individual stockholder appellants that they were not subject to the normal tax as regards the
distributions received by them and involved in the instant case. They "reported these distributions as
dividends from profits on which Philippine income tax had been paid . . .." (Appellants' brief, p. 21.)
They assert that the distributions were subject only to the additional tax; whereas the Collector
contends that they were subject to both the normal and the additional tax. After what has been said
above, it hardly needs stating that the manner and form of reporting these distributions employed by
said appellants could not, under the Law, change their real nature as payments for surrendered
stock, or so-called liquidating dividends, provided for in section 25 (a) of the then Income Tax Law.
Such distributions under the law were subject to both the normal and the additional tax provided for.

. . . Loosely speaking, the distribution to the stockholders of a corporation's assets, upon

liquidation, might be termed a dividend; but this is not what is generally meant and
understood by that word. As generally understood and used, a dividend is a return upon the
 stock of its stockholders, paid to them by a going corporation without reducing their
stockholdings, leaving them in a position to enjoy future returns upon the same stock . . .. In
other words, it is earnings paid to him by the corporation upon his invested capital therein,
without wiping out his capital. On the other hand, when a solvent corporation dissolves and
liquidates, it distributes to its stockholders not only any earnings it may have on hand, but it
also pays to them their invested capital, namely, the amount which they had paid in for their
stocks, thus wiping out their interest in the company . . .. (Langstaff vs. Lucas, 9 Fed. [2d],
691, 694.)

5. The fifth assignment of error. — This assignment is made in behalf of those appellants who were
non-resident alien individuals, and for them it is in effect said that if the distributions received by
them were to be considered as a sale of their stock to the Hongkong Company, the profit realized by
them does not constitute income from Philippine sources and is not subject to Philippine taxes,
"since all steps in the carrying out of this so-called sale took place outside the Philippines."
(Appellants' brief, p. 26.) We do not think this contention is tenable under the facts and
circumstances of record. The Hongkong Company was at the time of the sale of its business in the
Philippines, and the Manila Company was a domestic corporation domiciled and doing business also
in the Philippines. Schedule A of the Stipulation of Facts (Record on Appeal, p. 13) declares, among
other things, that the Hongkong Company was incorporated for the purpose of carrying on in the
Philippine Islands the business of wine, beer, and spirit merchants and the other objects set out in its
memorandum of association. Hence, its earnings, profits, and assets, including those from whose
proceeds the distributions in question were made, the major part of which consisted in the purchase
price of the business, had been earned and acquired in the Philippines. From aught that appears in
the record it is clear that said distributions were income "from Philippine sources."

6. The sixth assignment of error. — Section 199 of Regulations No. 81, deleting immaterial parts,
reads:

SEC. 199. Distributions in liquidation. — In all cases where a corporation . . . distributes all of
its property or assets in complete liquidation or dissolution, the gain realized from the
transaction by the stockholder . . . is taxable as a dividend to the extent that it is paid out of
earnings or profits of the corporation . . .. If the amount received by the stockholder in
liquidation is less than the cost or other basis of the stock, a deductible loss is sustained.

This regulation would seem to support the contention that the distributions in question, at least those
proceeding from sources other than the earnings or profits of the dissolved corporation, were not
taxable. Placing the above-quoted section of Regulations No. 81 side by side with section 25 (a) of
the amended Income Tax Law then in force, we notice that while the regulation limits the taxability of
the gain realized by the stockholder "to the extent that it is paid out of earnings or profits of the
corporation, "section 25 (a) of the law, far from so limiting its taxability, provides that the gain thus
realized, is a "taxable income" — under the law so long as a gain is realized, it will be taxable
income whether the distribution comes from the earnings or profits of the corporation or from the
sale of all of its assets in general, so long as the distribution is made "in complete liquidation or
dissolution". The regulation makes the gain taxable as a dividend, while the law makes it a taxable
income. An inevitable conflict between the two provisions seems to exist, and in such a case, of
course, the law prevails.

Treasury Department cannot impose or exempt from income taxes, and regulations
purporting to exempt from taxation income specifically taxes would be void.

xxx xxx xxx

 Any erroneous interpretation of revenue act by regulation of Treasury Department would not
estop government from asserting tax on income, though taxpayer had been misled by such
interpretation, and by it induced to expose property to taxation. (Langstaff vs. Lucas, 9 Fed.
[2d], 691.)

7 and 8. The seventh and eight assignments of error. — In view of what has been said above, these
two assignments need no separate treatment.

For the foregoing consideration, the judgment appealed from will be affirmed with the costs of both
instances against the appellants. So ordered.

Moran, C.J., Paras, Feria, Pablo, Perfecto, Bengzon, Briones, Hontiveros, Padilla, and Tuason,
JJ., concur.

——————

RESOLUTION ON MOTION FOR RECONSIDERATION

HILADO, J.:

Plaintiffs and appellants have filed a motion for reconsideration dated July 10, 1947. After carefully
considering said motion, which makes particular reference to appellants' fifth assignment of error,
the Court does not consider the arguments therein adduced tenable. Stripped to their bare
essentials, the movants' contentions are summarized in the following propositions found on pages 3-
4 of their motto, to wit:

Since appellants J.F. MacGregor, N.C. MacGregor, C.J. Lafrentz, E.M.G. Strickland, and
Mrs. M.J.G. Mullins were all non-resident aliens and since the court has held that the
transaction in this case amounted to a sale or exchange of their shares in a foreign
corporation, which sale or exchange took place entirely outside of the Philippine Islands, it
follows that they have not derived income from the Philippine sources and are not subject to
the taxes which have been collected from them by defendant.

xxx xxx xxx

. . . On the other hand if the income results from the sale or exchange of the shares in
question then the non-resident alien stockholders who converted their shares abroad have
received no income from Philippine sources and are not subject to any tax whatsoever on
their profits from the transaction.
Leaving aside the other portions of the above-quoted propositions as sufficiently covered in the
court's decision, let us direct attention to those parts thereof wherein it is pretended that the
transaction took place "entirely outside the Philippine Islands" or "abroad."

In the minutes, Schedule B of the stipulation of facts (Rec. on Appeal, pp. 16-17), it appears that on
July 22, 1937, an extraordinary meeting of shareholders of the Manila Wine Merchants, Ltd. was
held and in said meeting, among other things, it was resolved that the Directors of said company "be
authorized and instructed to declare and pay in the form of dividend to the shareholders the amount
of any surplus existing after the above-referred to sale has been consummated. This surplus, after
providing for return of capital and necessary expense, as shown in the Balance Sheet prepared as of
June 1, 1937, after giving effect to the sale transaction above-referred to, amounts to approximately
P270,000." While Schedule B does not state the place where the meeting was held, Schedule B-1 of
the same stipulation of facts (Record on Appeal, pp. 17-18) furnishes us the information that it was
held in Manila. Schedule B-1 in this connection says:

Sale of Company: In accordance with resolution passed at an Extraordinary Meeting of

Shareholders held in Manila (underscoring supplied) on July 22, 1937, at 3 o'clock, the
Directors of the Manila Wine Merchants Ltd., were authorized to sell the Company as a going
concern in accordance with sale agreement presented at the Meeting.

Later in the same Schedule B-1 we find that the declaration of dividends authorized in the previous
meeting, as stated in the minutes Schedule B, was made by the Board of Directors of the same
Manila Wine Merchants, Ltd., of whose meeting on that same date, July 22, 1937, Schedule B-1
constitutes the minutes. The pertinent parts to the minutes of said meeting read as follows:

Dividend: The second matter before the Meeting was the question of declaring a dividend to
enable a distribution in cash to be made, the dividend to be the entire amount standing at
surplus after providing for return of capital and various expenses in accordance with
reconstructed balance sheet as at June 1, 1937 presented by our auditors.

xxx xxx xxx

Resolved that as after the Manila Wine Merchants Ltd. has been sold for the stipulated sum
of P400,000 and money received, there will be after providing for return of capital, payment
of income tax and other charges, a sum of approximately P270,000 standing at surplus
account, a dividend is now hereby declared in amount covering the entire balance remaining
at surplus account after the concern has been wound up, and we hereby authorize the
distribution of P265,000 as and when funds are available, any balance remaining to be
distributed when final Liquidator's account has been rendered and paid."

Again, while the minutes Schedule B-1 do not reveal the place where that board meeting was held,
the fact stated therein that it was held on July 22,1937, the self-same date of the extraordinary
meeting of shareholders referred to in the minutes Schedule B, at 3 o'clock (presumably p.m.), as
recorded in Schedule B-1, clearly shows that the said board meeting was held also in Manila, and
not in Hongkong or elsewhere abroad, for J.F. Macgregor and E. Heybrook, both of whom appear in
both Schedules B and B-1 to have participated in both meetings, could not, so far as the record
discloses, very well be in Manila and Hongkong or elsewhere abroad on that same date. There is no
showing, nor is it even pretended that these two gentlemen after the meeting held in Manila on July
22, 1937, at 3 o'clock, took an airplane or other mode of conveyance, as fast or faster, and hurried to
Hongkong or elsewhere abroad and attended the other meeting that very same day. Indeed, that
both meetings must have been held in Manila would seem to be the only natural and logical
supposition from the fact that the Manila Wine Merchants, Ltd., was admittedly conducting its
business in said city and the Philippines in general (Schedule A, Rec. on Appeal, p. 13). It seems
clear, therefore, that the dividends in question were declared in the Philippine Islands.

What was the legal effect of that declaration? Paragraph V of the stipulation of facts (Rec. on
Appeal, pp. 20-21) states that, pursuant to these resolutions, "the Hongkong Company (the same
Manila Wine Merchants, Ltd.) distributed this surplus to its stockholders,
plaintiffs receiving (underscoring supplied) the following sums on the following dates" (then follow
plaintiffs' names with the respective amounts in Philippine pesos received by them on the dates
stated). It is not stated that they received their dividends in Hongkong or other foreign money. And in
their own brief (p. 25) they say that the payments or distributions thus received by them, as a result
of the liquidation and sale of said company, "were included as gross income in their Philippine
income tax returns". This fact further tends to show that those payments or distributions were
received in the Philippine Islands, either by plaintiffs personally or through their proxies or agents.
Besides, in paragraph V of the stipulation of facts (Rec. on Appeal, p. 21) it appears that the
dividends or distributions pertaining to these individual plaintiffs as well as that pertaining to their co-
plaintiff Wise and Co., Inc., were paid on the same dates, namely, August 24, 1937, and October 28,
1937; and it being undisputed that Wise and Co., Inc. was domiciled and had its principal office in
Manila (complaint, par. I, Rec. on Appeal, p.2), in which city it was presumably paid, it would seem
obvious that the concomitant payments thus made to the other plaintiffs were likewise effected in the
same place, whether the individual plaintiffs acted personally or through proxies or agents. It should
also be remembered that while the "registered office" of the Manila Wine Merchants, Ltd. was
situated in the colony of Hongkong (Schedule A, Rec. on Appeal, p. 13), the fact is that the only
business for which it was incorporated was the wine, beer, and spirit business, which had been and
was being conducted exclusively within the Philippine Islands, and from the record we deduce that it
had also office in Manila where, so far as the record discloses, the payments were made. Finally, the
fact that payment was made in Philippine pesos would strongly corroborate the conclusion that it
was made in this country — if it had been made in Hongkong or elsewhere abroad, the reasonable
assumption is that it would have been made in Hongkong dollars or in the currency of such other
place abroad.

. . . However, where a corporation has not only declared a dividend but has specifically
appropriated and set apart from its other assets a fund out of which the dividend is to be
paid, such action constitutes the assets to set apart a trust fund in the hands of the
corporation for the payment of the stockholders to the exclusion of other creditors. . . . (18
C.J.S., p. 1115; emphasis supplied.)

As between successive owners of shares of stock in a corporation, the general rule is that
dividends belong to the persons who are the owners of the stock at the time they are
declared, without regard to the time during which the dividends were earned, and this is true
although the dividends are made payable at a future date. (18 C.J.S., 119, sec. 470 [a];
emphasis supplied.)

There is no controversy about the legal proposition that dividends declared belong to the
owner of the stock at the time the dividend is declared. (Livingstone County Bank vs. First
State Bank, 136 Ky., 546, 554, cited in footnote 36, p. 818, 14 C.J.; emphasis supplied.)

The moment the dividend is declared, it becomes then separate and distinct from the stock
and the dividend falls to him who is proprietor of the stock of which it was theretofore
incident.

The doctrine is that a dividend is considered parcel of the mass of corporate property until
declared and therefore incident to and parcel of the stock up to the time it is declared; and
 before its declaration, will pass with the sale or devise of the stock. Whosoever owns the
stock prior to the declaration of a dividend, owns the dividend also. (McLaren vs. Crescent
Planning Mill Co., 117 Mo. A., 40, 47, cited in note 36, p. 818, 14 C.J.; emphasis supplied.)

In De Koven vs. Alsop (205 Ill., 309; 63 L.R.A., 587), the court said:

A dividend is defined as "a corporate profit set aside, declared, and ordered by the directors
to be paid to the stockholders on demand or at a fixed time. Until the dividend is
declared, these corporate profits belong to the corporation, not to the stockholders, and are
liable for corporate indebtedness." (Emphasis supplied.)

We are fully satisfied from the facts and data furnished here by the parties themselves that the
dividends in question were paid to plaintiffs, personally or thru their proxies or agents, in the
Philippines. But aside from this, from the moment they were declared and a definite fund specified
for their payment (all surplus remaining "after providing for return of capital and various expenses")
— and all of this was done in the Philippines — to all legal intents and purposes they earned those
dividends in this country. From the record we deduce that the funds and assets of the Manila Wine
Merchants, Ltd., from which those dividends proceeded, were in the Philippines where its business
was located. So far as the record discloses, its liquidation was effected in terms of Philippine pesos,
indicating that it was made here. And this in turn would lead to the deduction that the funds and
assets liquidated were here.

Motion denied. So ordered.