Professional Documents
Culture Documents
As for the payment of the membership dues and fees, the Don Andres Soriano (American), founder of A. Soriano
Court finds that this is not considered a fringe benefit that Corp. (ASC) had a total shareholdings of 185,154 shares.
is subject to FBT and which holds PAGCOR liable for Broken down, the shares comprise of 50,495 shares which
final withholding tax. According to PAGCOR, the were of original issue when the corporation was founded
membership dues and fees are: and 134,659 shares as stock dividend declarations. So in
1964 when Soriano died, half of the shares he held went
57. x x x expenses borne by [respondent] to cover various to his wife as her conjugal share (wife’s “legitime”) and
memberships in social, athletic clubs and similar the other half (92,577 shares, which is further broken
organizations. x x x down to 25,247.5 original issue shares and 82,752.5 stock
58. Respondent's nature of business is casino operations dividend shares) went to the estate. For sometime after his
and it derives business from its customers who play at the death, his estate still continued to receive stock dividends
casinos. In furtherance of its business, PAGCOR usually from ASC until it grew to at least 108,000 shares.
attends its VIP customers, amenities such as playing In 1968, ASC through its Board issued a resolution for the
rights to golf clubs. The membership of PAGCOR to redemption of shares from Soriano’s estate purportedly
these golf clubs and other organizations are intended to for the planned “Filipinization” of ASC. Eventually,
benefit respondent's customers and not its employees. 108,000 shares were redeemed from the Soriano Estate.
Aside from this, the membership is under the name of In 1973, a tax audit was conducted. Eventually, the
PAGCOR, and as such, cannot be considered as fringe Commissioner of Internal Revenue (CIR) issued an
benefits because it is the customers and not the employees assessment against ASC for deficiency withholding tax-
of PAGCOR who benefit from such memberships.48 at-source. The CIR explained that when the redemption
was made, the estate profited (because ASC would have Peoples Bank and Trust Company, as administrator of the
to pay the estate to redeem), and so ASC would have estate of E. M. Bachrach, to transfer to her the said 54,000
withheld tax payments from the Soriano Estate yet it shares of stock dividend by indorsing and delivering to
remitted no such withheld tax to the government. her the corresponding certificate of stock, claiming that
said dividend, although paid out in the form of stock, is
ASC averred that it is not duty bound to withhold tax from
fruit or income and therefore belonged to her as
the estate because it redeemed the said shares for purposes
usufructuary or life tenant. Sophie Siefert and Elisa
of “Filipinization” of ASC and also to reduce its
Elianoff, legal heirs of the deceased, opposed said petition
remittance abroad.
on the ground that the stock dividend in question was not
ISSUE: Whether or not ASC’s arguments are tenable. income but formed part of the capital and therefore
belonged not to the usufructuary but to the remainderman.
HELD: No. The reason behind the redemption is not While appellants admit that a cash dividend is an income,
material. The proceeds from a redemption is taxable and they contend that a stock dividend is not, but merely
ASC is duty bound to withhold the tax at source. The represents an addition to the invested capital.
Soriano Estate definitely profited from the redemption
and such profit is taxable, and again, ASC had the duty to Issue:
withhold the tax. There was a total of 108,000 shares
Whether or not a dividend is an income and whether it
redeemed from the estate. 25,247.5 of that was original
should go to the usufructuary.
issue from the capital of ASC. The rest (82,752.5) of the
shares are deemed to have been from stock dividend Held:
shares. Sale of stock dividends is taxable. It is also to be
The usufructuary shall be entitled to receive all the
noted that in the absence of evidence to the contrary, the
natural, industrial, and civil fruits of the property in
Tax Code presumes that every distribution of corporate
usufruct. The 108,000 shares of stock are part of the
property, in whole or in part, is made out of corporate
property in usufruct. The 54,000 shares of stock dividend
profits such as stock dividends.
are civil fruits of the original investment. They represent
It cannot be argued that all the 108,000 shares were profits, and the delivery of the certificate of stock
distributed from the capital of ASC and that the latter is covering said dividend is equivalent to the payment of
merely redeeming them as such. The capital cannot be said profits. Said shares may be sold independently of the
distributed in the form of redemption of stock dividends original shares, just as the offspring of a domestic animal
without violating the trust fund doctrine — wherein the may be sold independently of its mother. If the dividend
capital stock, property and other assets of the corporation be in fact a profit, although declared in stock, it should be
are regarded as equity in trust for the payment of the held to be income. A dividend, whether in the form of
corporate creditors. Once capital, it is always capital. That cash or stock, is income and, consequently, should go to
doctrine was intended for the protection of corporate the usufructuary, taking into consideration that a stock
creditors. dividend as well as a cash dividend can be declared only
out of profits of the corporation, for if it were declared out
of the capital it would be a serious violation of the law.
BACHRACH VS. SIEFERT (XPN TO RULE THAT
Under the Massachusetts rule, a stock dividend is
STOCK DIVIDENDS ARE NOT TAXABLE AS THEY
considered part of the capital and belongs to the
ARE STIL UNREALIZED GAIN)
remainderman; while under the Pennsylvania rule, all
Facts: earnings of a corporation, when declared as dividends in
whatever form, made during the lifetime of the
The deceased E. M. Bachrach, who left no forced heir usufructuary, belong to the latter. The Pennsylvania rule
except his widow Mary McDonald Bachrach, in his last is more in accord with our statutory laws than the
will and testament made various legacies in cash and Massachusetts rule.
willed the remainder of his estate. The estate of E. M.
Bachrach, as owner of 108,000 shares of stock of the
Atok-Big Wedge Mining Co., Inc., received from the
latter 54,000 shares representing 50 per cent stock
dividend on the said 108,000 shares. On June 10, 1948,
Mary McDonald Bachrach, as usufructuary or life tenant
of the estate, petitioned the lower court to authorize the
COMMISSIONER VS MANNING (XPN TO RULE *CIR VS GOODYEAR PHILS. INC.
THAT STOCK DIVIDENDS ARE NOT TAXABLE AS
Respondent Goodyear PH redeemed the preferred shares
THEY ARE STIL UNREALIZED GAIN)
held by Goodyear Tire and Rubber Company (Goodyear
FACTS: US), a corporation incorporated in the United States. The
preferred shares were redeemed at a price equivalent to its
Manila Trading and Supply Co. (MANTRASCO) had an
aggregate par value plus accrued and unpaid dividends.
authorized capital stock of P2.5 million divided into
Before the payment of the redemption price, Goodyear
25,000 common shares: 24,700 were owned by Reese and
PH and Goodyear US jointly filed a Tax Treaty Relief
the rest at 100 shares each by the Respondents. Reese
Application (TTRA) with the Bureau of Internal Revenue
entered into a trust agreement whereby it is stated that
(BIR) claiming tax exemption of the gain derived from
upon Reese’s death, the company would purchase back all
the redemption, pursuant to the Treaty.
of its shares. Reese died. MANTRASCO repurchased the
24,700 shares. Thereafter, a resolution was passed However, notwithstanding the TTRA, by taking a
authorizing that the 24,700 shares be declared as stock conservative position, Goodyear PH withheld and
dividends to be distributed to the stockholders. The BIR remitted to the BIR a 15% FWHT2 on dividends based on
ordered an examination of MANTRASCO’s books and the difference between the redemption price and the
discovered that the 24,700 shares declared as dividends aggregate par value of the shares redeemed.
were not disclosed by respondents as part of their taxable
Goodyear PH filed a claim for refund of the 15% FWHT
income for the year 1958. Hence, the CIR issued notices
with the BIR. Goodyear PH then filed a Petition for
of assessment for deficiency income taxes to respondents.
Review with the CTA.
Respondents protested but the CIR denied. Respondents
appealed to the CTA. The CTA ruled in their favor. The Commissioner of Internal Revenue argued, among
Hence, this petition by the CIR other issues, that the excess of the redemption price over
the par value of the shares should be taxable as dividend,
ISSUE:
subject to the 15% FWHT.
Whether the respondents are liable for deficiency income
The CTA ruled that, as a general matter, when preferred
taxes on the stock dividends?
shares are redeemed and classified as treasury shares, the
HELD: Dividends means any distribution made by a net capital gain on the redemption is subject to the 5%-
corporation to its shareholders out of its earnings or 10% CGT.3 For foreign corporations, such as Goodyear
profits. Stock dividends which represent transfer of US, the capital gain from sale of shares of stock not traded
surplus to capital account is not subject to income tax. But in the stock exchange, that are reclassified as treasury
if a corporation redeems stock issued so as to make a shares, is subject to the 5%-10% CGT, pursuant to Section
distribution, this is essentially equivalent to the 28(B)(5)(c) of the Tax Code, but subject to the provisions
distribution of a taxable dividend the amount so of the Treaty. Article 14 of the Treaty provides for
distributed in the redemption considered as taxable exclusive resident country taxation on gains from the sale
income. of shares of stock of a Philippine company, provided the
Philippine corporation's assets do not consist principally
The distinctions between a stock dividend which does not
of real property interest located in the Philippines. This
and one which does constitute taxable income to the
criterion was met by Goodyear PH. Accordingly the net
shareholders is that a stock dividend constitutes income if
capital gain derived by Goodyear US from the redemption
its gives the shareholder an interest different from that
of its shares is exempt from the CGT.
which his former stockholdings represented. On the other
hand, it does constitute income if the new shares confer The CTA ruled that the net capital gain (or the component
no different rights or interests than did the old shares. of the redemption price equivalent to the “accrued and
Therefore, whenever the companies involved parted with unpaid dividends”) cannot be treated as dividend subject
a portion of their earnings to bnuy the corporate holdings to the 15% FWHT, since an ordinary dividend is a
of Reese, they were making a distribution of such distribution in the nature of a recurring return of stock,
earnings to respondents. These amounts are thus subject made in the ordinary course of business and with intent to
to income tax as a flow of cash benefits to respondents. maintain the corporation as a going concern. On the other
Hence, respondents are liable for deficiency income hand, a distribution made when the corporation is winding
taxes. up its business or recapitalizing and narrowing its
activities may be treated as a complete or partial
liquidation and as payment for the stockholder's stock. In After the June 8 distribution, HK Company had :
those cases, the excess of the purchase price over the
P74, 182 – surplus resulting from the active conduct of
original acquisition cost of the shares should be
business
considered as a capital gain and subject to ordinary
income tax rates. P270, 116 – total increased surplus as a result of the sale
of the business and assets
Goodyear US's net capital gain could not be classified as
dividends since it did not come from the corporation's The stockholders by proper resolution directed that the
unrestricted retained earnings or profits and did not company be voluntarily liquidated and its capital
represent a recurring return on the shares redeemed. distributed among the stockholders; that the stockholders
Without the redemption, Goodyear US would not have at such meeting appointed a liquidator duly paid off the
derived the net capital gain. remaining debts of the Hongkong Company and
distributed its capital among the stockholders including
The CTA elaborated further that the only instance where
plaintiffs; that the liquidator duly filed his accounting on
the gain derived from redemption may be treated as a
January 12, 1938, and in accordance with the provisions
dividend is the case of redemption of stock dividends,
of Hongkong Law, the Hongkong Company was duly
whether pursuant to a partial or complete liquidation.
dissolved at the expiration of three moths from that date.
Accordingly, if a corporation cancels or redeems stock
issued as a dividend at such time and in such manner as That plaintiffs duly filed Philippine income tax returns.
to make the distribution and cancellation or redemption, That defendant subsequently made the deficiency
in whole or in part, essentially equivalent to the assessments. That said plaintiffs duly paid the said
distribution of a taxable dividend, the amount so amounts demanded by defendant under written protest,
distributed in redemption or cancellation of the stock will which was overruled in due course; that the plaintiffs have
be considered as taxable income to the extent of earnings since July 1, 1939 requested from defendant a refund of
or profits. the said amounts which defendant has refused and still
refuses to refund.
CONTENTIONS:
WISE & CO., INC VS. MEER
CIR-The amounts received by Wise & Co et al from the
FACTS:
HK Company were liquidating dividends (thus, subject to
That during the year 1937, plaintiffs, except Mr. E.M.G. normal tax)
Strickland (who, as husband of the plaintiff Mrs. E.M.G.
Wise & Co et al say- The amounts were ordinary
Strickland, is only a nominal party herein), were
dividends
stockholders of Manila Wine Merchants, Ltd., a foreign
corporation duly authorized to do business in the
Philippines.
ISSUES:
That on May 27, 1937, the Board of Directors of Manila
Wine Merchants, Ltd., (hereinafter referred to as the a)W/N the amounts received by Wise & Co et al from the
Hongkong Company), recommended to the stockholders HK Company on which the taxes were assessed were
of the company that they adopt the resolutions necessary ordinary dividends or liquidating
to enable the company to sell its business and assets to dividends (LIQUIDATING DIVIDENDS)
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; b)W/N such liquidating dividends are taxable income
(YES)
In the case, Hoskins fails to pass the test. CTA was correct
3) The bonuses were paid despite the fact that it had
in holding that the payment of the company to Mr.
suffered net losses for 3 years. Furthermore the
Hoskins of the sum P99,977.91 as 50% share of
corporation cannot use the excuse that it is 'salary paid' to
supervision fees received by the company was
an employee because the CIR does not question the basic
inordinately large and could not be treated as an ordinary
salaries paid by petitioner to the officers and employees,
and necessary expenses allowed for deduction.
but disallowed only the bonuses paid to petitioner's top
officers at the end of the taxable years in question.
CIR VS GENERAL FOODS The Commissioner maintains that the subject advertising
expense was not ordinary on the ground that it failed the
Facts: two conditions set by U.S. jurisprudence: first,
Respondent corporation General Foods (Phils), which is “reasonableness” of the amount incurred and second, the
engaged in the manufacture of “Tang”, “Calumet” and amount incurred must not be a capital outlay to create
“Kool-Aid”, filed its income tax return for the fiscal year “goodwill” for the product and/or private respondent’s
ending February 1985 and claimed as deduction, among business. Otherwise, the expense must be considered a
other business expenses, P9,461,246 for media capital expenditure to be spread out over a reasonable
advertising for “Tang”. time.
The Commissioner disallowed 50% of the deduction There is yet to be a clear-cut criteria or fixed test for
claimed and assessed deficiency income taxes of determining the reasonableness of an advertising expense.
P2,635,141.42 against General Foods, prompting the There being no hard and fast rule on the matter, the right
latter to file an MR which was denied. to a deduction depends on a number of factors such as but
not limited to: the type and size of business in which the
taxpayer is engaged; the volume and amount of its net
earnings; the nature of the expenditure itself; the intention
of the taxpayer and the general economic conditions. It is
the interplay of these, among other factors and properly
weighed, that will yield a proper evaluation.
The Court finds the subject expense for the advertisement
of a single product to be inordinately large. Therefore,
even if it is necessary, it cannot be considered an ordinary
expense deductible under then Section 29 (a) (1) (A) of
the NIRC.
Advertising is generally of two kinds: (1) advertising to
stimulate the current sale of merchandise or use of
services and (2) advertising designed to stimulate
the future sale of merchandise or use of services. The
second type involves expenditures incurred, in whole or
in part, to create or maintain some form of goodwill for
the taxpayer’s trade or business or for the industry or
profession of which the taxpayer is a member. If the
expenditures are for the advertising of the first kind, then,
except as to the question of the reasonableness of amount,
there is no doubt such expenditures are deductible as
business expenses. If, however, the expenditures are for
advertising of the second kind, then normally they should
be spread out over a reasonable period of time.
The company’s media advertising expense for the
promotion of a single product is doubtlessly unreasonable
considering it comprises almost one-half of the
company’s entire claim for marketing expenses for that
year under review. Petition granted, judgment reversed
and set aside.