Wednesday, March 21, 2012

Fisher vs. Trinidad [G.R. No. L-17518 October 30, 1922]

Facts: Philippine American Drug Company was a corporation duly organized and existing under the laws of the Philippine Islands, doing business in the City of Manila. Fisher was a stockholder in said corporation. Said corporation, as result of the business for that year, declared a "stock dividend" and that the proportionate share of said stock divided of Fisher was P24,800. Said the stock dividend for that amount was issued to Fisher. For this reason, Trinidad demanded payment of income tax for the stock dividend received by Fisher. Fisher paid under protest the sum of P889.91 as income tax on said stock dividend. Fisher filed an action for the recovery of P889.91. Trinidad demurred to the petition upon the ground that it did not state facts sufficient to constitute cause of action. The demurrer was sustained and Fisher appealed. 

Issue: Whether or not the stock dividend was an income and therefore taxable. 

Held: No. Generally speaking, stock dividends represent undistributed increase in the capital of corporations or firms, joint stock companies, etc., etc., for a particular period. The inventory of the property of the corporation for particular period shows an increase in its capital, so that the stock theretofore issued does not show the real value of the stockholder's interest, and additional stock is issued showing the increase in the actual capital, or property, or assets of the corporation. 

In the case of Gray vs. Darlington (82 U.S., 653), the US Supreme Court held that mere advance in value does not constitute the "income" specified in the revenue law as "income" of the owner for the year in which the sale of the property was made. Such advance constitutes and can be treated merely as an increase of capital. 

In the case of Towne vs. Eisner, income was defined in an income tax law to mean cash or its equivalent, unless it is otherwise specified. It does not mean unrealized increments in the value of the property. A stock dividend really takes nothing from the property of the corporation, and adds nothing to the interests of the shareholders. Its property is not diminished and their interest are not increased. The proportional interest of each shareholder remains the same. In short, the corporation is no poorer and the stockholder is no richer then they were before. 

In the case of Doyle vs. Mitchell Bros. Co. (247 U.S., 179), Mr. Justice Pitney, said that the term "income" in its natural and obvious sense, imports something distinct from principal or capital and conveying the idea of gain or increase arising from corporate activity. 

In the case of Eisner vs. Macomber (252 U.S., 189), income was defined as the gain derived from capital, from labor, or from both combined, provided it be understood to include profit gained through a sale or conversion of capital assets. 

When a corporation or company issues "stock dividends" it shows that the company's accumulated profits have been capitalized, instead of distributed to the stockholders or retained as surplus available for distribution, in money or in kind, should opportunity offer. The essential and controlling fact is that the stockholder has received nothing out of the company's assets for his separate use and benefit; on the contrary, every dollar of his original investment, together with whatever accretions and accumulations resulting from employment of his money and that of the other stockholders in the business of the company, still remains the property of the company, and subject to business risks which may result in wiping out of the entire investment. The stockholder by virtue of the stock dividend has in fact received nothing that answers the definition of an "income." 

The stockholder who receives a stock dividend has received nothing but a representation of his increased interest in the capital of the corporation. There has been no separation or segregation of his interest. All the property or capital of the corporation still belongs to the corporation. There has been no separation of the interest of the stockholder from the general capital of the corporation. The stockholder, by virtue of the stock dividend, has no separate or individual control over the interest represented thereby, further than he had before the stock dividend was issued. He cannot use it for the reason that it is still the property of the corporation and not the property of the individual holder of stock dividend. A certificate of stock represented by the stock dividend is simply a statement of his proportional interest or participation in the capital of the corporation. The receipt of a stock dividend in no way increases the money received of a stockholder nor his cash account at the close of the year. It simply shows that there has been an increase in the amount of the capital of the corporation during the particular period, which may be due to an increased business or to a natural increase of the value of the capital due to business, economic, or other reasons. We believe that the Legislature, when it provided for an "income tax," intended to tax only the "income" of corporations, firms or individuals, as that term is generally used in its common acceptation; that is that the income means money received, coming to a person or corporation for services, interest, or profit from investments. We do not believe that the Legislature intended that a mere increase in the value of the capital or assets of a corporation, firm, or individual, should be taxed as "income." 

A stock dividend, still being the property of the corporation and not the stockholder, may be reached by an execution against the corporation, and sold as a part of the property of the corporation. In such a case, if all the property of the corporation is sold, then the stockholder certainly could not be charged with having received an income by virtue of the issuance of the stock dividend. Until the dividend is declared and paid, the corporate profits still belong to the corporation, not to the stockholders, and are liable for corporate indebtedness. The rule is well established that cash dividend, whether large or small, are regarded as "income" and all stock dividends, as capital or assets 

If the ownership of the property represented by a stock dividend is still in the corporation and not in the holder of such stock, then it is difficult to understand how it can be regarded as income to the stockholder and not as a part of the capital or assets of the corporation. If the holder of the stock dividend is required to pay an income tax on the same, the result would be that he has paid a tax upon an income which he never received. Such a conclusion is absolutely contradictory to the idea of an income. 

As stock dividends are not "income," the same cannot be considered taxes under that provision of Act No. 2833. For all of the foregoing reasons, SC held that the judgment of the lower court should be REVOKED.

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