MADRIGAL v.

RAFFERTY Malcolm, 1918 JASON JIMENEZ Facts: Vicente Madrigal and Susana Paterno were legally married prior to Jan. 1, 1914. The marriage was contracted under the provisions of law concerning conjugal partnerships (sociedad de gananciales). In Feb. 1915, Vicente filed sworn declaration with the Collector of Internal Revenue (CIR), showing, as his total net income for the year 1914, the sum of P296,302.73. Subsequently he claimed that said P296,302.73 did not represent his income for the year 1914, but was in fact the income of the conjugal partnership. According to Vicente, in computing the additional income tax provided by the Act of Congress of Oct. 3, 1913, the income declared by Vicente should be divided into 2 equal parts ( to Vicente and to Susana). The Attorney-General of the Philippines opined in favor of Vicente. The US Commissioner of Internal Revenue reversed the opinion of the Attorney-General. Vicente paid under protest. Vicente and Susana filed an action in the CFI Manila against CIR and the Deputy CIR for the recovery of the sum of P3,786.08, alleged to have been wrongfully collected by the defendants from Vicente under the provisions of the Income Tax Law. Vicente and Susana contend that the additional income tax should be divided into 2 equal parts, because of the conjugal partnership existing between them. The counter contention of CIR is that the taxes imposed by the Income Tax Law are as the name implies taxes upon income tax and not upon capital and property. Issue: WON the additional income tax should be divided into two equal parts because of the conjugal partnership

Held/Ratio: No. 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. A tax on income is not a tax on property. Income,as here used, can be defined as "profits or gains." Susana has an inchoate right in the property of her husband Vicente 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 has no absolute right to the income of the conjugal partnership. Not being seized of a separate estate, Susana 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. FISHER V. TRINIDAD (1922) PONENTE: Johnson, J.

BRYAN MAGA FACTS: Frederick Fisher was a stockholder of the Philippine American Drug Company. In 1919, said company declared a stock dividend, on the basis of which Fisher received a proportionate share amounting to PhP24,800.00. In March 1920, Wenceslao Trinidad, the Collector of Internal Revenue, demanded from Fisher the payment of PhP889.91 as income tax on the said stock dividend. Fisher subsequently complied, under protest. Hence, this action to recover the same. The lower court thereafter sustained Trinidads demurrer. As such, Fisher appealed to the Supreme Court. He cited various American cases holding that "stock dividends" were capital and not "income, as such, they are not subject to the income tax law. ISSUE: Whether stock dividends are considered income and, hence, taxable under the Income Tax Law (Act No. 2833)? DECISION: No. Stock dividends are not income; as such, the same cannot be taxed under the Income Tax Law. HELD/RATIO: It is cash dividend which is subject to income tax and not stock dividend. The former is a disbursement to the stockholders of accumulated earning, and the corporation at once parts with it, and all interests thereon, irrevocably. The latter involves no disbursement by the corporation; hence, does not refer not to an actual dividend, but certificates of stock which shows the increased interest or the new proportion of ones interest in the entire capital. Cash dividend therefore becomes the absolute property of the stockholders and cannot be reached by the creditors of the corporation in the absence of fraud. In such case only does the stockholder realize a profit or gain, which becomes his separate property. A stock dividend, however, still being the property of the corporation and not the stockholder,

may be reached by an execution against the corporation, and sold as a part of the property of the corporation. 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 therefore 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.) Moreover, dictionaries and American jurisprudence, interpret income, in light of tax laws, as cash or its equivalent and a stock dividend cannot be said to be an income but merely as an increase of capital or assets. The Legislature, on the other hand, 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. Further, 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. 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 must be an actual income and not a promised or prospective income. Income received as 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 the corporation.

LIMPAN INVESTMENT CORPORATION, vs. COMMISSIONER OF INTERNAL REVENUE, ET AL CLAINE AVELINO DOCTRINE: Income constructively received is taxable. Appeal by Limpan Investment against CTA holding and ordering it to pay CIR the sums of P7,338.00 and P30,502.50, representing deficiency income taxes, plus 50% surcharge and 1% monthly interest from June 30, 1959 to the date of payment, with cost. FACTS 1. LIMPAN engaged in real property leasing consist of several lots and buildings, mostly situated in Manila and in Pasay City, all of which were acquired from said Isabelo P. Lim and his mother, Vicente Pantangco Vda. de Lim. 2. Isabelo P. Lim and Purificacion Ceiza de Lim, who own and control ninety-nine per cent (99%) of its total paid-up capital 3. BIR in 1958 and 1959 conducted an investigation of petitioner's 1956 and 1957 income tax returns and, found that LIMPAN underdeclared its rental incomes by P20,199.00 and P81,690.00 during these taxable years and had claimed excessive depreciation of its buildings in the sums of P4,260.00 and P16,336.00 covering the same period. 4. CIR issued its letter-assessment and demand for payment of deficiency income tax and surcharge against petitioner corporation, computed as follows: 90-AR-C-348-58/56 Net income per audited return P 3,287.81

Add: Unallowable deductions: Undeclared Rental Receipt (Sched. A) . . . . . . . . . . . . . . . . . . . . P20,199.00 Excess Depreciation (Sched. B) . . . . . . . . . . . . . . . . . 4,260.00 Net income per investigation Tax due thereon Less: Amount already assessed Balance Add: 50% Surcharge DEFICIENCY TAX DUE 90-AR-C-1196-58/57 Net income per audited return Add: Unallowable deductions: Undeclared Rental Receipt (Sched. A) . . . . . . . . P81,690.00 Excess Depreciation (Sched. B) . . . . . . . . . . . . . . . 16,338.00 Net income per investigation Tax due thereon Less: Amount already assessed Balance P98,028.0 0 P109,126. 00 P22,555.0 0 2,220.00 20,335.00 P11,098.0 0 P24,459.0 0 P27,746.0 0 P5,549.00 657.00 P4,892.00 2,446.00 P7,338.00

Add: 50% Surcharge DEFICIENCY TAX DUE Corporation requested CIR to reconsider the above assessment but the latter denied said request and reiterated its original assessment

10,167.50 P30,502.5 0

thereof and may have reported the same in his own personal income tax return. But, the ITR was not presented in court to support the such claim! To add, Plaridel M. Mingoa, one of the BIR examiners who personally conducted the investigation of the 1956 and 1957 income tax returns of petitioner corporation, testified for the respondent that he personally interviewed the tenants of petitioner and found that these tenants had been regularly paying their rentals to the collectors of either petitioner or its president, Isabelo P. Lim, but these payments were not declared in the corresponding returns Furthermore, the withdrawal in 1958 of the deposits of tenant Go Tong of his rent of P10,800.00 over which the corporation had no actual or constructive control and which were is no sufficient justification for the non-declaration of said income in 1957, since the deposit was resorted to due to the refusal of petitioner to accept the same, and was not the fault of its tenants; hence, petitioner is deemed to have constructively received such rentals in 1957. On depreciation, this court has said that "depreciation is a question of fact and is not measured by theoretical yardstick, but should be determined by a consideration of actual facts", and the findings of the Tax Court in this respect should not be disturbed when not shown to be arbitrary or in abuse of discretion It appearing that the Tax Court applied rates of depreciation in accordance with Bulletin "F" of the U.S. Federal Internal Revenue Service, which this Court pronounced as having strong persuasive effect

ISSUE: WON LIMPAN underdeclared its income tax? Yes WON income alleged to be constructively received is taxable? Yes HELD/ RATIO Income constructively received is taxable. Receipt of income need not be actual to be taxed. Thru Secretary Treasurer Solis, LIMPAN admitted it underdeclared PHP12,000. However BIRs finding that it should be 20, 199, LIMPAN claimed that the difference was supposed to be paid to LIMPAN by the spouses, the original owner of the land by turning over 6% of the property value. This is due to the refusal of the tenants to recognize the corporation LIMPAN as the new owner. The court here however said that it was incumbent upon LIMPAN to establish the remainder of its pretensions by clear and convincing evidence, that in the case is lacking. Solis also admittedly underdeclared P29,350.00 in 1957 while BIR found that said amount should be 81,690.00. Solis in defense also tried to establish that LIMPAN did not receive or collect the same but that its president, Isabelo P. Lim, collected part

in this jurisdiction, for having been the result of scientific studies and observation for a long period in the United States, after whose Income Tax Law ours is patterned

The Revenue Act of 1916 provision subjecting stock dividends to tax was held unconstitutional. If a stock dividend is not considered income, it cannot be subject to income tax under the 16th Amendment. In applying the 16th Amendment, it is important to distinguish between capital and income, as only income is subject to income tax. Capital and Income are different. Capital is like the tree and income is the fruit. Income is defined as the gain derived from capital or from labor, or both. It is a gain severed from the capital and received by the taxpayer. Dividends are usually payable in money, and when so paid, then only does the stockholder realize a profit or gain, which becomes his separate property, deriving income from the capital that he invested in the corporation. On the other hand, s stock dividend really takes nothing from the property of the corporation, and adds nothing to the interest of the shareholders. The corporation is no poorer and the stockholder is no richer than they were before. When a stock dividend is issued, no part of the assets of the company is separated from the common fund. Nothing is distributed except paper certificates that evidence an increase in the value of the shareholders capital interest. A stock dividend does not alter the preexisting proportionate interest of any stockholder or increase the intrinsic value of his holding as they stood before. The new certificates simply increase the number of the shares! A "stock dividend" shows that the company's accumulated profits have been capitalized, instead of distributed to the

EISNER v MACOMBER (US case) Topic: Tests in determining income: Realization Test FACTS: 1. Mrs. Macomber owned 2,200 shares in Standard Oil Company of California. 2. In January, 1916, the company declared a stock dividend to readjust capitalization. Meaning, It transferred surplus to capital stock account. 3. Mrs. Macomber received an additional 1,100 shares of stock. 4. Of these shares, 198.77 shares, par value $19,877, was treated as taxable income under the Revenue Act of 1916, which provided that a stock dividend was considered income to the amount of its cash value. 5. Mrs. Macomber paid under protest and brought an action against the Collector of Internal Revenue. She argued that a stock dividend in not income, therefore, the stock dividends she received should not have been taxed. 6. The District Court held that the stock dividend was not income. ISSUE: WON Stock Dividends are considered income. HELD: NO. Stock dividends are not considered income. It is considered as capital. RATIO: A stock dividend is not income.

stockholders or retained as surplus available for distribution in money. Far from being a realization of profits of the stockholder, it tends rather to postpone such realization, in that the fund represented by the new stock has been transferred from surplus to capital, and no longer is available for actual distribution. The essential fact is that the stockholder has received nothing out of the companys assets for his separate use and benefit; on the contrary, every dollar of his original investment, together with whatever accumulations have resulted from employment of his money (and that of the other stockholders), still remains the property of the company, and subject to business risks which may result in wiping out the entire investment. Therefore, to tax a stock dividend is to tax a capital increase, and not income. By: Agee Romero

Henderson asked for reconsideration of the assessment. BIR denied and hence, taxpayers filed in the CTA a petition to review the decision of the CIR. The CTA held that the ratable value to him of the quarters furnished constitutes part of taxable income, that since the taxpayers did not receive any benefit from the travelling expense allowance as the trip was a business one, the same could not be considered income, and even if it was considered as such, it is not subject to tax as it was deductible as travel expense. The CTA ordered the CIR to refund the taxpayers. Hence, this petition. ISSUE: Whether the allowances for rental of the apartment furnished by the husband-taxpayer's employer-corporation, including utilities such as light, water, telephone, etc. and the allowance for travel expenses given by his employercorporation to his wife in 1952 part of taxable income? HELD: "Gross income" includes gains, profits, and income derived from salaries, wages, or compensation for personal service of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rents dividend, securities, or the transaction of any business carried on for gain or profit, or gains, profits, and income derived from any source whatever. The evidence substantially supports the findings of the Court of Tax Appeals. The quarters, therefore, exceeded their personal needs. But the exigencies of the husband-taxpayer's high executive position, not to mention social standing, demanded and compelled them to live in a more spacious and pretentious quarters like the ones they had occupied. Although entertaining and putting up houseguests and guests of the

COLLECTOR VS. HENDERSON ANNIE SIBAYAN FACTS: The spouses Arthur Henderson and Marie B. Henderson filed with the BIR returns of annual net income for the years 1948 to 1952. In due time the Henderson received from the BIR assessment notices and paid the amounts assessed. In 1953, after investigation and verification, the BIR reassessed the taxpayers' income for the years 1948 to 1952 and demanded payment of the deficiency taxes. In the foregoing assessments, the BIR considered as part of their taxable income the taxpayerhusband's allowances for rental, residential expenses, subsistence, water, electricity and telephone; bonus paid to him; withholding tax and entrance fee to the Marikina gun and Country Club paid by his employer for his account; and travelling allowance of his wife.

husband-taxpayer's employer-corporation were not his predominant occupation as president, yet he and his wife had to entertain and put up houseguests in their apartments. That is why his employercorporation had to grant him allowances for rental and utilities in addition to his annual basic salary to take care of those extra expenses for rental and utilities in excess of their personal needs. Hence, the fact that the taxpayers had to live or did not have to live in the apartments chosen by the husband-taxpayer's employercorporation is of no moment, for no part of the allowances in question redounded to their personal benefit or was retained by them. Nevertheless, as correctly held by the Court of Tax Appeals, the taxpayers are entitled only to a ratable value of the allowances in question, and only the amount of P4,800 annually, the reasonable amount they would have spent for house rental and utilities such as light, water, telephone, etc., should be the amount subject to tax, and the excess considered as expenses of the corporation. Likewise, the findings of the CTA that the wifetaxpayer had to make the trip to New York at the behest of her husband's employercorporation to help in drawing up the plans and specifications of a proposed building, is also supported by the evidence. No part of the allowance for travelling expenses redounded to the benefit of the taxpayers. Neither was a part thereof retained by them. The fact that she had herself operated on for tumors while in New York was but incidental to her stay there and she must have merely taken advantage of her presence in that city to undergo the operation. Hence, the CIR is ordered to refund the taxpayers. (Note: What is the taxable income here? Gross income! The Court held basically upheld the CTA in (1) only the ratable value of the allowances

for housing shall form part of the income as the apartment is used for his business functions as well and (2) the trip allowances does not form part of income as they are for business purposes. Frederick Fisher v. Wenceslao Trinidad (Collector of Internal Revenue) Oct 30, 1922 Gr L-17518 Doctrine: Stock dividends not "income" in taxation. Facts: Philippine American Drug Company is a domestic corporation. Fisher was a stockholder. The corporation declared a stock dividend of P24,800. It was taxed as income. Fisher paid under protest. The Collector demurred on the ground that the complaint did not state a cause of action. Demurrer was sustained, Fisher now on appeal. Issue: Are stock dividends "income" thus taxable? Held: Stock dividends are NOT income thus NOT taxable. Tax the asset increase of the corporation, but not as income against the shareholder. Ratio: Stock dividends represent increase in the capital of the corporation. It is issued to more accurately represent the value of the shareholder's interest in the corporation when it's assets increase in value. Keyword: capitalization. Income, as used in taxation, means return in money from one's business, labor, or capital invested. Note: MONEY. Stock dividends do not come in the form of money. (Other similar definitions provided, this is the shortest.) (Note: many American cases were cited in this case, but I will include the one citing Holmes as Sir Carag asked a quote from him before)

"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)." Dispositive: petition granted in favor of Fisher the stockholder.