CIR v. CA, CTA and A.

Soriano
GR No. 108576, 20 January 1999

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-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 + RULING

Whether or not ASCs arguments are tenable.

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.

Yuchengco v. Commissioner of Internal Revenue

CTA Case No. 3429, 6 January 1988

FACTS

The deficiency income tac liability of Yuchengco arose from the disallowance by the CIR of
certain deductions he claimed from his income tax return and the addition of incomes
he allegedly earned in the same year.

ISSUE + RULING

1. Whether the advances taken by Yuchengco from Pan Malayan Management

Investment Corporation and ET Yuchengco, Inc. are disguised dividends;

NO, The advances made by Yuchengco from PMMIC in the amount of P 1,890,000.00 were not
bona fide loans but were in reality, informal dividends, taxable as income to Yuchengco.

Yuchengco and his family owned 99.99% of the total outstanding shares of PMMIC. In the year
1974, he received the total of P 1,890,000.00 at regular intervals during the year. Yuchengcos
contention that such amount are loans, since he paid them of by assigning his shares in a
certain Mico Equities, to PMMIC is unavailing. The mere efect of such assignment is the
ofsetting of the loans but such is not enough evidence that the amount was a bona fide loan.
Moreover, there is no evidence that Yuchengco gave a note or any containing fixed terms for
repayment, or that he paid interest, or that he gave any security for such loans. The burden of
proving that such amount was a loan is upon Yuchengco, and he failed to prove such.
However, as to the advances from ET Yuchengco, petitioner was able to prove through the
accounts payable ledger of ET Yuchengco Inc that the amount of P126,000 which he advanced
are indeed loans and that he has the intent to repay.

2. Whether dividend income from Rizal Commercial Banking Corporation are taxable
income

YES, The court found that Yuchengco was only a nominal holder of some of the shares, that
although the shares were in his name, he was merely holding such shares in trust for the
corporations and that all dividends were paid to these corporations which declared and paid the
taxes due thereon. Certifications were issued as evidence of Yuchengcos nominal holdings.
However the certifications only accounted for part of the shares in Yuchengcos name (only 16,
102 shares out of 38,106) which he held in trust for various corporations. The court held that the
dividend income pertaining to the remaining shares should be taxable income to him for the year

Philippine Telephone v. CIR

No. 35667, 30 October 1933

FACTS

The plaintif, a domestic corporation organized in accordance with the laws now in force, with its
main office in the City of Manila, brought an action against the Collector of Internal Revenue to
recover the sum of P30,421.65, which had been collected from it as income tax corresponding
to the years 1927, 1928 and 1929 on the total sum of P1,014,055, which was paid and delivered
by said appellant to the foreign corporations, Philippine Islands Telephone & Telegraph
Company and Telephone Investment Corporation, in the form of dividends distributed by it in
said years, and as shares dividends corresponding to the aforesaid foreign corporations as
stockholders.

ISSUE + RULING
Whether dividends of a domestic corporation which are paid and delivered in cash to
foreign corporations as stockholders are subject to income tax.

YES, In the light of the provisions of sections 9 (par. b) and 13 (par. /) of Act No. 2833, as
amended, there is no question that the dividends of a domestic corporation, which are paid and
delivered in cash to foreign corporations as stockholders, are subject to income tax.

If stock dividends are subject to income tax a fortiori the dividends paid and delivered in cash to
stockholders should be subject thereto.

The law has not exempted from payment of the income tax the dividends paid and delivered to
stockholders because they have ceased to be the property of the corporation and have become
the property of the stockholders. It was not evidently the intention of the Philippine Commission
to extend such privilege to parties other than the original holders of the franchise and their
grantee.

It is a well known principle that the States of the Union possess full authority to collect an
income tax from individuals and corporations, in the absence of any constitutional prohibition,
and that the exemptions are to be given strict interpretation. The Philippine Legislature has the
same authority and may levy taxes on income in the absence of any prohibition or limitation in
the Organic Law, and the same rule of construction must be adopted. In the instant case the
exemption is evidently limited, and we find no justification for extending it to dividends received
by the stockholders of a corporation after they have become their exclusive property.

The foregoing considerations, made in connection with the merits of the appellant's complaint,
may be reiterated and applied with equal force to the appellee's counterclaims. The dividends in
question, at the time they were paid and delivered by the appellant, as well as when they were
received by it, were subject to the payment of income tax, and we are convinced that the court
a, quo correctly applied the law on the point at issue.