CIR v.

CA
301 SCRA 152 (TRUST FUND DOCTRINE)

FACTS: 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-atsource. 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.