CIR v. CA, CTA & Soriano Corp., G.R. No. 108576, January 20, 1999.

FACTS:
The Commissioner of Internal Revenue (CIR) filed a petition seeking the reversal of the Court of
Appeals' decision, which affirmed the ruling of the Court of Tax Appeals (CTA). The CTA had
determined that the redemption and exchange of stocks by A. Soriano Corporation (ANSCOR)
could not be considered as "essentially equivalent to a distribution of taxable dividends" under
Section 83(b) of the 1939 Internal Revenue Act.

The undisputed facts of the case are as follows:

1. Don Andres Soriano formed ANSCOR in the 1930s, with a capitalization of P1,000,000
divided into 10,000 common shares. ANSCOR is owned and controlled by the non-
resident alien family of Don Andres.
2. Over the years, stock dividends were declared by ANSCOR, increasing the shareholdings
of the shareholders.

3. In 1964, Don Andres passed away, leaving a total of 185,154 shares, with half
transferred to his wife, Doña Carmen Soriano, and the other half forming part of his
estate.

4. In December 1966, ANSCOR reclassified its existing 300,000 common shares into
150,000 common and 150,000 preferred shares.

5. In 1968, Doña Carmen exchanged her common shares for preferred shares, and the
estate of Don Andres exchanged some of its common shares for preferred shares.

6. ANSCOR redeemed a portion of the common shares from the estate in 1968 and later
increased its capital stock.

Based on these facts, the CIR assessed ANSCOR for deficiency withholding tax-at-source for the
transactions of stock redemption and exchange. ANSCOR protested the assessments, claiming
that it availed of tax amnesty under Presidential Decree (P.D.) 23. However, the CIR ruled that
the decrees invoked by ANSCOR did not cover the specific provisions under which ANSCOR was
assessed.

ANSCOR filed a petition with the CTA, which reversed the CIR's ruling, finding sufficient
evidence to overcome the prima facie correctness of the assessments. The CA subsequently
affirmed the CTA's ruling, leading to the CIR's petition for reversal.

ISSUE:
 Whether the proceeds from the redemption of stock dividends and the exchange of
common shares with preferred shares are taxable under Section 83(b) of the 1939
Revenue Act.
RULING:

The Court held that the proceeds from the redemption of stock dividends are
considered essentially equivalent to a distribution of taxable dividends and are subject
to income tax.
The Court stated that the exemption under Section 83(b) of the 1939 Revenue Act
applies only to stock dividends representing the transfer of surplus to capital account,
not to the proceeds of their redemption.
The Court found that the redemption of stock dividends resulted in a flow of wealth and
constituted realized income, which is subject to income tax.
The Court also ruled that the exchange of common shares with preferred shares,
without a flow of wealth, does not result in realized income and is not taxable. The
taxpayer simply exchanged one form of ownership (common shares) for another
(preferred shares) without any additional financial benefit
The Court emphasized that the application of Section 83(b) depends on the particular
facts and circumstances of each case.
The Court concluded that ANSCOR is liable for the withholding tax-at-source on the
proceeds from the redemption of stock dividends.
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According to the case, the three elements in the imposition of tax income are:

1. There must be a gain or profit: In order for income to be taxed, there must be an
increase in wealth or economic benefit.
2. The gain must be realized: The gain or profit must be realized or actualized, meaning it
has been received or recognized in some way.

3. The gain must be taxable (not exempted by law or treaty from income tax.): The gain
must fall within the scope of taxable income as defined by the tax laws of the
jurisdiction.

These three elements are typically considered when determining whether income is subject to
taxation.

In this case, the court ruling regarding the redemption of stock dividends is that the
proceeds of the redemption are essentially considered equivalent to a distribution of
taxable dividends. The court found that the redemption resulted in a flow of wealth,
which is one of the elements in the imposition of tax income. Therefore, the court
ruled that the proceeds of the redemption are subject to income tax.

Regarding the exchange of common shares with preferred shares, the court ruling is
that the exchange, without more, does not produce a recognized gain or loss for tax
purposes. The court found that the exchange did not result in a flow of wealth and
there was no realized income from the transaction. Therefore, the court ruled that
the exchange of common shares with preferred shares does not meet the
requirements for taxable income.