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COMMISSIONER OF INTERNAL REVENUE vs.

MANNING a new certificate was issued in the name of


L-28398 | Aug 6, 1975 | Petition for Review | Castro Mantrasco. Also, new certificate was endorsed to
Petitioner: Commissioner of Internal Revenue the law firm of Ross, Selph, Carrascoso and Janda,
Respondents: John Manning, W.D. McDonald, E.E. as trustees for and in behalf of Mantrasco.
Simmons & CTA December 22, 1958 - a resolution was passed
This is a petition for review of the decision of the Court of during a special meeting of Mantrasco
Tax Appeals, in CTA case 1626, which set aside the stockholders.
income tax assessments issued by the Commissioner of November 25, 1963 - entire purchase price of
Internal Revenue against John L. Manning, W.D. McDonald
Reese's interest in Mantrasco was finally paid in
and E.E. Simmons (hereinafter referred to as the
respondents), for alleged undeclared stock dividends full by Mantrasco.
received in 1958 from the Manila Trading and Supply Co. May 4, 1964 - trust agreement was terminated and
(hereinafter referred to as the MANTRASCO) valued at the trustees delivered to Mantrasco all the shares
P7,973,660. which they were holding in trust.
September 14, 1962 - BIR ordered an examination
of Mantrascos books. This examination disclosed
Quick Summary: that:
Facts: Reese, the majority stockholder of Mantrasco, executed a trust
agreement between him, Mantrasco, Ross, Selph, carrascoso & Janda law
1. as of December 31, 1958 the 24,700 shares
firm and the minority stockholders, Manning, McDonald and Simmons. declared as dividends had been
Said agreement was entered into because of Reeses desire that proportionately distributed to Manning,
Mantrasco and Mantrasocs 2 subsidiaries, Mantrasco Guam and Port McDonald & Simmons, representing a total
Motors, to continue under the management of Manning, McDonald and
Simmons upon his [Reese] death. When Reese died, Mantrasco paid
book value or acquisition cost of P7,973,660
Reeses estate the value of his shares. When said purchase price has been 2. Manning, McDonald & Simmons failed to
fully paid, the 24,700 shares, which were declared as dividends, were declare the said stock dividends as part of
proportionately distributed to Manning, McDonald and Simmons. Because their taxable income for the year 1958
of this, the BIR issued assessments on Manning, McDonald and Simmons
for deficiency income tax for 1958. Manning et al, opposed this
Thus, BIR examiners concluded that the
assessment but the BIR still found them liable. Manning et al. appealed to distribution of Reese's shares as stock
the CTA, which absolved them from any liability. dividends was in effect a distribution of the
Held: The manifest intention of the parties to the trust agreement was, in "asset or property of the corporation as may be
sum and substance, to treat the 24,700 shares of Reese as absolutely
gleaned from the payment of cash for the
outstanding shares of Reese's estate until they were fully paid. Such being
the true nature of the 24,700 shares, their declaration as treasury stock redemption of said stock and distributing the
dividend in 1958 was a complete nullity and plainly violative of public same as stock dividend."
policy. A stock dividend, being one payable in capital stock, cannot be April 14, 1965 - Commissioner of Internal
declared out of outstanding corporate stock, but only from retained
Revenue issued notices of assessment for
earnings.
A stock dividend always involves a transfer of surplus (or profit) to capital deficiency income taxes to Manning, McDonald &
stock. A stock dividend is a conversion of surplus or undivided profits into Simmons for the year 1958.
capital stock, which is distributed to stockholders in lieu of a cash Manning, McDonald & Simmons opposed said
dividend. assessments. BIR still held them liable for these
assessments.
Facts: Manning, McDonald & Simmons appealed to the
1952 - Mantrasco had an authorized capital stock CTA.
of P2.5M divided into 25,000 common shares. CTA: absolved Manning, McDonald & Simmons
24,700 of these shares are owned by Julius Reese from any liability on the ground that their
while the rest, at 100 each, are owned by Manning, respective 1/3 interest in Mantrasco remained
McDonald & Simmons. the same before and after the declaration of
February 29, 1958 - a trust agreement was stock dividends and only the number of shares
executed between Reese, Mantrasco, Ross, Selph, held by each of them changed.
carrascoso & Janda law firm, Manning, McDonald Issues:
and Simmons. Said agreement was entered into 1. WON the shares are treasury shares [NO]
because of Reeses desire that Mantrasco and 2. WON Manning, McDonald & Simmons should pay
Mantrasocs 2 subsidiaries, Mantrasco Guam and for deficiency income taxes [YES]
Port Motors, to continue under the management of Ratio:
Manning, McDonald and Simmons upon his 1. Treasury shares are stocks issued and fully
[Reese] death. paid for and re-acquired by the corporation
October 19, 1954 - Reese died. However, the either by purchase, donation, forfeiture or
projected transfer of his shares in the name of other means. Treasury shares are therefore
Mantrasco could not be immediately effected for issued shares, but being in the treasury they
lack of sufficient funds to cover the initial payment do not have the status of outstanding shares.
on the shares. Consequently, although a treasury share, not
February 2, 1955 - after Mantrasco made a partial having been retired by the corporation re-
payment of Reese's shares, the certificate for the acquiring it, may be re-issued or sold again,
24,700 shares in Reese's name was cancelled and such share, as long as it is held by the
corporation as a treasury share, participates responsibilities toward our income tax
neither in dividends, because dividends cannot laws.
be declared by the corporation to itself, nor in All these amounts are subject to income
the meetings of the corporation as voting tax as being a flow of cash benefits to
stock, for otherwise equal distribution of voting Manning, McDonald & Simmons.
powers among stockholders will be effectively lost
and the directors will be able to perpetuate their Commissioners assessment is erroneous
control of the corporation, though it still Commissioner should not have assessed the
represents a paid-for interest in the property of income tax on the total acquisition cost of the
the corporation. alleged treasury stock dividends in 1 lump
In this case, such essential features of a sum.
treasury share are lacking in the former The record shows that the earnings of
shares of Reese. Mantrasco over a period of years were used to
The manifest intention of the parties to the gradually wipe out the holdings of Reese.
trust agreement was, in sum and substance, Consequently, those earnings should be taxed
to treat the 24,700 shares of Reese as for each of the corresponding years when
absolutely outstanding shares of Reese's payments were made to Reeses estate on
estate until they were fully paid. Such being account of his 24,700 shares.
the true nature of the 24,700 shares, their
declaration as treasury stock dividend in Dispositive: CTA judgment set aside. Case remanded to the
1958 was a complete nullity and plainly CTA for further proceedings for the recomputation of the
violative of public policy. A stock dividend, income tax liabilities of Manning, McDonald & Simmons.
being one payable in capital stock, cannot
be declared out of outstanding corporate
stock, but only from retained earnings.

Nature of a stock dividend


A stock dividend always involves a transfer of
surplus (or profit) to capital stock.
A stock dividend is a conversion of surplus or
undivided profits into capital stock, which is
distributed to stockholders in lieu of a cash
dividend.

2. The ultimate purpose which the parties to the


trust agreement aimed to realize is to make
Manning, McDonalds & Simmons the sole
owners of Reeses interest in Mantrasco by
utilizing the periodic earnings of Mantrasco
and its subsidiaries to directly subsidize their
purchase of said interests and by making it
appear that they have not received any income
from those firms when, in fact, by the formal
declaration of non-existent stock dividends in the
treasury they secured to themselves the means to
turn around as full owners of Reeses shares.
Manning, McDonald & Simmons, using the
trust instrument as a convenient
technical device, bestowed unto
themselves the full worth and value of
Reese's corporate holdings with the use
of the very earnings of the companies.
Such package device, obviously not
designed to carry out the usual stock
dividend purpose of corporate expansion
reinvestment but exclusively for
expanding the capital base of Manning,
McDonald & Simmons in Mantrasco,
cannot be allowed to deflect their

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