This document discusses a case regarding income tax assessments issued by the Commissioner of Internal Revenue against John Manning, W.D. McDonald, and E.E. Simmons for alleged undeclared stock dividends received in 1958 from Manila Trading and Supply Co. (Mantrasco).
The key facts are that majority stockholder Julius Reese executed a trust agreement to ensure that upon his death, Mantrasco would continue being managed by Manning, McDonald, and Simmons. After Reese's death, Mantrasco paid his estate for his shares over several years. In 1958, the shares were declared as stock dividends and distributed to Manning, McDonald, and Simmons. However, the Commissioner assessed them for unpaid income taxes on the
This document discusses a case regarding income tax assessments issued by the Commissioner of Internal Revenue against John Manning, W.D. McDonald, and E.E. Simmons for alleged undeclared stock dividends received in 1958 from Manila Trading and Supply Co. (Mantrasco).
The key facts are that majority stockholder Julius Reese executed a trust agreement to ensure that upon his death, Mantrasco would continue being managed by Manning, McDonald, and Simmons. After Reese's death, Mantrasco paid his estate for his shares over several years. In 1958, the shares were declared as stock dividends and distributed to Manning, McDonald, and Simmons. However, the Commissioner assessed them for unpaid income taxes on the
This document discusses a case regarding income tax assessments issued by the Commissioner of Internal Revenue against John Manning, W.D. McDonald, and E.E. Simmons for alleged undeclared stock dividends received in 1958 from Manila Trading and Supply Co. (Mantrasco).
The key facts are that majority stockholder Julius Reese executed a trust agreement to ensure that upon his death, Mantrasco would continue being managed by Manning, McDonald, and Simmons. After Reese's death, Mantrasco paid his estate for his shares over several years. In 1958, the shares were declared as stock dividends and distributed to Manning, McDonald, and Simmons. However, the Commissioner assessed them for unpaid income taxes on the
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