CIR VS CA 301 SCRA 152 (1999)

301 SCRA 152 Business Organization Corporation Law Trust Fund

Doctrine
Don Andres Soriano (American), founder of A. Soriano Corp. (ASC) had a total
shareholdings of 185,154 shares. Broken down, the shares comprise of 50,495
shares which were of original issue when the corporation was founded and
134,659 shares as stock dividend declarations. So in 1964 when Soriano died,
half of the shares he held went to his wife as her conjugal share (wifes
legitime) and the other half (92,577 shares, which is further broken down to
25,247.5 original issue shares and 82,752.5 stock dividend shares) went to
the estate. For sometime after his death, his estate still continued to receive
stock dividends from ASC until it grew to at least 108,000 shares.
In 1968, ASC through its Board issued a resolution for the redemption of
shares from Sorianos estate purportedly for the planned Filipinization of
ASC. Eventually, 108,000 shares were redeemed from the Soriano Estate. In
1973, a tax audit was conducted. Eventually, the Commissioner of Internal
Revenue (CIR) issued an assessment against ASC for deficiency withholding
tax-at-source. The CIR explained that when the redemption was made, the
estate profited (because ASC would have to pay the estate to redeem), and so
ASC would have withheld tax payments from the Soriano Estate yet it
remitted no such withheld tax to the government.
ASC averred that it is not duty bound to withhold tax from the estate because
it redeemed the said shares for purposes of Filipinization of ASC and also to
reduce its remittance abroad.
ISSUE: Whether or not ASCs arguments are tenable.
HELD: No. The reason behind the redemption is not material. The proceeds
from a redemption is taxable and ASC is duty bound to withhold the
tax at source. The Soriano Estate definitely profited from the redemption and
such profit is taxable, and again, ASC had the duty to withhold the tax. There
was a total of 108,000 shares redeemed from the estate. 25,247.5 of that was
original issue from the capital of ASC. The rest (82,752.5) of the shares are
deemed to have been from stock dividend shares. Sale of stock dividends
is taxable. It is also to be noted that in the absence of evidence to the
contrary, the Tax Code presumes that every distribution of corporate

property, in whole or in part, is made out of corporate

profits such as stock dividends.
It cannot be argued that all the 108,000 shares were distributed from the
capital of ASC and that the latter is merely redeeming them as such. The
capital cannot be distributed in the form of redemption of stock
dividends without violating the trust fund doctrine wherein the
capital stock, property and other assets of the corporation are
regarded as equity in trust for the payment of the corporate
creditors. Once capital, it is always capital. That doctrine was intended for
the protection of corporate creditors