TodayisWednesday,July20,2016

RepublicofthePhilippines
SUPREMECOURT
Manila
ENBANC
G.R.No.L17518October30,1922
FREDERICKC.FISHER,plaintiffappellant,
vs.
WENCESLAOTRINIDAD,CollectorofInternalRevenue,defendantappellee.
FisherandDeWittandAntonioM.Opissoforappellants.
ActingAttorneyGeneralTuasonforappellee.
JOHNSON,J.:
Theonlyquestionpresentedbythisappealis:Arethe"stockdividends"inthepresentcase"income"andtaxable
as such under the provisions of section 25 of Act No. 2833? While the appellant presents other important
questions,undertheviewwhichwehavetakenofthefactsandthelawapplicabletothepresentcase,wedeemit
unnecessarytodiscussthemnow.
Thedefendantdemurredtothepetitioninthelowercourt.Thefactsarethereforeadmitted.Theyaresimpleand
maybestatedasfollows:
Thatduringtheyear1919thePhilippineAmericanDrugCompanywasacorporationdulyorganizedandexisting
underthelawsofthePhilippineIslands,doingbusinessintheCityofManilathatheappellantwasastockholder
insaidcorporationthatsaidcorporation,asresultofthebusinessforthatyear,declareda"stockdividend"that
theproportionateshareofsaidstockdividedoftheappellantwasP24,800thatthestockdividendforthatamount
was issued to the appellant that thereafter, in the month of March, 1920, the appellant, upon demand of the
appellee,paidunderprotest,andvoluntarily,untotheappelleethesumofP889.91asincometaxonsaidstock
dividend. For the recovery of that sum (P889.91) the present action was instituted. The defendant demurred to
thepetitionuponthegroundthatitdidnotstatefactssufficienttoconstitutecauseofaction.Thedemurrerwas
sustainedandtheplaintiffappealed.
TosustainhisappealtheappellantcitesandreliesonsomedecisionsoftheSupremeCourtoftheUnitedStates
aswillasthedecisionsofthesupremecourtofsomeofthestatesoftheUnion,inwhichthequestionsbeforeus,
based upon similar statutes, was discussed. Among the most important decisions may be mentioned the
following:Townevs.Eisner,245U.S.,418Doylevs.MitchellBors.Co.,247U.S.,179Eisnervs.Macomber,252
U.S.,189DekovenvsAlsop,205Ill.,30963L.R.A.,587Kaufmanvs.CharlottesvilleWoolenMills,93Va.,673.
Ineachofsaidcasesaneffortwasmadetocollectan"incometax"upon"stockdividends"andineachcaseit
was held that "stock dividends" were capital and not an "income" and therefore not subject to the "income tax"
law.
The appellee admits the doctrine established in the case of Eisner vs. Macomber (252 U.S., 189) that a "stock
dividend"isnot"income"butarguesthatsaidActNo.2833,inimposingthetaxonthestockdividend,doesnot
violatetheprovisionsoftheJonesLaw.TheappelleefurtherarguesthatthestatuteoftheUnitedStatesproviding
fortaxuponstockdividendsisdifferentfromthestatuteofthePhilippineIslands,andthereforethedecisionofthe
SupremeCourtoftheUnitedStatesshouldnotbefollowedininterpretingthestatuteinforcehere.
For the purpose of ascertaining the difference in the said statutes ( (United States and Philippine Islands),
providingforanincometaxintheUnitedStatesaswellasthatinthePhilippineIslands,thetwostatutesarehere
quotedforthepurposeofdeterminingthedifference,ifany,inthelanguageofthetwostatutes.
Chapter463ofanActofCongressofSeptember8,1916,initstitle1providesforthecollectionofan"income
tax."Section2ofsaidActattemptstodefinewhatisanincome.Thedefinitionfollows:
That the term "dividends" as used in this title shall be held to mean any distribution made or ordered to

made by a corporation, . . . which stock dividend shall be considered income, to the amount of its cash
value.
ActNo.2833ofthePhilippineLegislatureisanActestablishing"anincometax."Section25ofsaidActattempts
todefinetheapplicationoftheincometax.Thedefinitionfollows:
The term "dividends" as used in this Law shall be held to mean any distribution made or ordered to be
madebyacorporation,...outofitsearningsorprofitsaccruedsinceMarchfirst,nineteenhundredand
thirteen,andpayabletoitsshareholders,whetherincashorinstockofthecorporation,....Stockdividend
shallbeconsideredincome,totheamountoftheearningsorprofitsdistributed.
It will be noted from a reading of the provisions of the two laws above quoted that the writer of the law of the
Philippine Islands must have had before him the statute of the United States. No important argument can be
basedupontheslightdifferentinthewordingofthetwosections.
It is further argued by the appellee that there are no constitutional limitations upon the power of the Philippine
LegislaturesuchasexistintheUnitedStates,andinsupportofthatcontention,hecitesanumberofdecisions.
ThereisnoquestionthatthePhilippineLegislaturemayprovideforthepaymentofanincometax,butitcannot,
undertheguiseofanincometax,collectataxonpropertywhichisnotan"income."ThePhilippineLegislature
can not impose a tax upon "property" under a law which provides for a tax upon "income" only. The Philippine
Legislature has no power to provide a tax upon "automobiles" only, and under that law collect a tax upon a
carretonorbullcart.Constitutionallimitations,thatistosay,astatuteexpresslyadoptedforonepurposecannot,
withoutamendment,beappliedtoanotherpurposewhichisentirelydistinctanddifferent.Astatuteprovidingfor
anincometaxcannotbeconstruedtocoverpropertywhichisnot,infactincome.TheLegislaturecannot,bya
statutorydeclaration,changetherealnatureofataxwhichitimposes.Alawwhichimposesanimportanttaxon
riceonlycannotbeconstruedtoanimposeanimportationtaxoncorn.
It is true that the statute in question provides for an income tax and contains a further provision that "stock
dividends"shallbeconsideredincomeandarethereforesubjecttoincometaxprovidedforinsaidlaw.If"stock
dividends"arenot"income"thenthelawpermitsataxuponsomethingnotwithinthepurposeandintentofthe
law.
It becomes necessary in this connection to ascertain what is an "income in order that we may be able to
determine whether "stock dividends" are "income" in the sense that the word is used in the statute. Perhaps it
wouldbemorelogicaltodeterminefirstwhatare"stockdividends"inorderthatwemaymoreclearlyunderstand
their relation to "income." Generally speaking, stock dividends represent undistributed increase in the capital of
corporations or firms, joint stock companies, etc., etc., for a particular period. They are used to show the
increased interest or proportional shares in the capital of each stockholder. In other words, the inventory of the
propertyofthecorporation,etc.,forparticularperiodshowsanincreaseinitscapital,sothatthestocktheretofore
issued does not show the real value of the stockholder's interest, and additional stock is issued showing the
increaseintheactualcapital,orproperty,orassetsofthecorporation,etc.
To illustrate: A and B form a corporation with an authorized capital of P10,000 for the purpose of opening and
conductingadrugstore,withassetsofthevalueofP2,000,andeachcontributesP1,000.Theirentireassetsare
investedindrugsandputupontheshelvesintheirplaceofbusiness.Theycommencebusinesswithoutacentin
thetreasury.Everydollarcontributedisinvested.SharesofstocktotheamountofP1,000areissuedtoeachof
the incorporators, which represent the actual investment and entire assets of the corporation. Business for the
firstyearisgood.Merchandiseissold,andpurchased,tomeetthedemandsofthegrowingtrade.Attheendof
thefirstyearaninventoryoftheassetsofthecorporationismade,anditisthenascertainedthattheassetsor
capitalofthecorporationonhandamounttoP4,000,withnodebts,andstillnotacentinthetreasury.Allofthe
receipts during the year have been reinvested in the business. Neither of the stockholders have withdrawn a
pennyfromthebusinessduringtheyear.Everypesoreceivedforthesaleofmerchandisewasimmediatelyused
inthepurchaseofnewstocknewsupplies.Atthecloseoftheyearthereisnotacentavointhetreasury,with
whicheitherAorBcouldbuyacupofcoffeeorapairofshoesforhisfamily.Atthebeginningoftheyearthey
were P2,000, and at the end of the year they were P4,000, and neither of the stockholders have received a
centavo from the business during the year. At the close of the year, when it is discovered that the assets are
P4,000andnotP2,000,insteadofsellingtheextramerchandiseonhandandtherebyreducingthebusinesstoits
originalcapital,theyagreeamongthemselvestoincreasethecapitaltheyagreeamongthemselvestoincrease
thecapitalissuedandforthatpurposeissueadditionalstockintheformof"stockdividends"oradditionalstockof
P1,000each,whichrepresentstheactualincreaseofthesharesofinterestinthebusiness.Atthebeginningof
theyeareachstockholderheldonehalfinterestinthecapital.Atthecloseoftheyear,andaftertheissueofthe
said stock dividends, they each still have onehalf interest in the business. The capital of the corporation
increasedduringtheyear,buthaseitherofthemreceivedanincome?Itisnotdenied,forthepurposeofordinary
taxation,thatthetaxablepropertyofthecorporationatthebeginningoftheyearwasP2,000,thatatthecloseof
theyearitwasP4,000,andthatthetaxrollsshouldbechangedinaccordancewiththechangedconditionsinthe
business.Inotherwords,theordinarytaxshouldbeincreasedbyP2,000.

Anotherillustration:CandDorganizedacorporationforagriculturalpurposeswithanauthorizedcapitalstockof
P20,000 each contributing P5,000. With that capital they purchased a farm and, with it, one hundred head of
cattle.Everypesocontributedisinvested.Thereisnomoneyinthetreasury.Muchtimeandlaborwasexpanded
duringtheyearbythestockholdersonthefarminthewayofimprovements.Neitherreceivedacentavoduring
theyearfromthefarmorthecattle.Atthebeginningoftheyeartheassetsofthecorporation,includingthefarm
andthecattle,wereP10,000,andatthecloseoftheyearandinventoryofthepropertyofthecorporationismade
anditisthenfoundthattheyhavethesamefarmwithitsimprovementsandtwohundredheadofcattlebynatural
increase.Attheendoftheyearitisalsodiscoveredthat,byreasonofbusinesschanges,thefarmandthecattle
bothhaveincreasedinvalue,andthatthevalueofthecorporatepropertyisnowP20,000insteadofP10,000asit
was at the beginning of the year. The incorporators instead of reducing the property to its original capital, by
selling off a part of its, issue to themselves "stock dividends" to represent the proportional value or interest of
each of the stockholders in the increased capital at the close of the year. There is still not a centavo in the
treasuryandneitherhaswithdrawnapesofromthebusinessduringtheyear.Nopartofthefarmorcattlehas
beensoldandnotasinglepesowasreceivedoutoftherentsorprofitsofthecapitalofthecorporationbythe
stockholders.
Anotherillustration:A,anindividualfarmer,buysafarmwithonehundredheadofcattleforthesumofP10,000.
Attheendofthefirstyear,byreasonofbusinessconditionsandtheincreaseofthevalueofbothrealestateand
personal property, it is discovered that the value of the farm and the cattle is P20,000. A, during the year, has
receivednothingfromthefarmorthecattle.Hisbooksatthebeginningoftheyearshowthathehadpropertyof
thevalueofP10,000.HisbooksatthecloseoftheyearshowthathehaspropertyofthevalueofP20,000.Ais
notacorporation.Theassetsofhisbusinessarenotshownthereforebycertificatesofstock.Hisbooks,however,
showthatthevalueofhispropertyhasincreasedduringtheyearbyP10,000,underanytheoryofbusinessor
law, be regarded as an "income" upon which the farmer can be required to pay an income tax? Is there any
differenceinlawintheconditionofAinthisillustrationandtheconditionofAandBintheimmediatelypreceding
illustration? Can the increase of the value of the property in either case be regarded as an "income" and be
subjectedtothepaymentoftheincometaxunderthelaw?
Eachoftheforegoingillustrations,itisasserted,isanalogoustothecasebeforeusand,inviewofthatfact,letus
ascertainhowlexicographersandthecourtshavedefinedan"income."TheNewStandardDictionary,editionof
1915, defines an income as "the amount of money coming to a person or corporation within a specified time
whetheraspaymentorcorporationwithinaspecifiedtimewhetheraspaymentforservices,interest,orprofitfrom
investment." Webster's International Dictionary defines an income as "the receipt, salary especially, the annual
receiptsofaprivatepersonoracorporationfromproperty."Bouvier,inhislawdictionary,saysthatan"income"in
thefederalconstitutionandincometaxact,isusedinitscommonorordinarymeaningandnotinitstechnical,or
economicsense.(146NorthwesternReporter,812)Mr.Black,inhislawdictionary,says"Anincomeisthereturn
inmoneyfromone'sbusiness,labor,orcapitalinvestedgains,profitorprivaterevenue.""Anincometaxisatax
ontheyearlyprofitsarisingfromproperty,professions,trades,andoffices."
The Supreme Court of the United States, in the case o Gray vs. Darlington (82 U.S., 653), said in speaking of
incomethatmereadvanceinvalueinnosenseconstitutesthe"income"specifiedintherevenuelawas"income"
of the owner for the year in which the sale of the property was made. Such advance constitutes and can be
treatedmerelyasanincreaseofcapital.(InreGraham'sEstate,198Pa.,216AppealofBraun,105Pa.,414.)
Mr.JusticeHughes,laterAssociateJusticeoftheSupremeCourtoftheUnitedStatesandnowSecretaryofState
of the United States, in his argument before the Supreme Court of the United States in the case of Towne vs.
Eisner, supra, defined an "income" in an income tax law, unless it is otherwise specified, to mean cash or its
equivalent.Itdoesnotmeanchosesinactionorunrealizedincrementsinthevalueoftheproperty,andcitesin
supportofthedefinition,thedefinitiongivenbytheSupremeCourtinthecaseofGrayvs.Darlington,supra.
In the case of Towne vs. Eisner, supra, Mr. Justice Holmes, speaking for the court, said: "Notwithstanding the
thoughtfuldiscussionthatthecasereceivedbelow,wecannotdoubtthatthedividendwascapitalaswellforthe
purposesoftheIncomeTaxLaw....'Astockdividendreallytakesnothingfromthepropertyofthecorporation,
and adds nothing to the interests of the shareholders. Its property is not diminished and their interest are not
increased....Theproportionalinterestofeachshareholderremainsthesame....'Inshort,thecorporationisno
poorer and the stockholder is no richer then they were before." (Gibbons vs. Mahon, 136 U.S., 549, 559, 560
LoganCountyvs.U.S.,169U.S.,255,261).
InthecaseofDoylevs.MitchellBros.Co.(247U.S.,179,Mr.JusticePitney,speakingforthecourt,saidthatthe
actemploystheterm"income"initsnaturalandobvioussense,asimportingsomethingdistinctfromprincipalor
capitalandconveyingtheideaofgainorincreasearisingfromcorporateactivity.
Mr. Justice Pitney, in the case of Eisner vs. Macomber (252 U.S., 189), again speaking for the court said: "An
income may be defined as the gain derived from capital, from labor, or from both combined, provided it be
understoodtoincludeprofitgainedthroughasaleorconversionofcapitalassets."
For bookkeeping purposes, when stock dividends are declared, the corporation or company acknowledges a

liability,inform,tothestockholders,equivalenttotheaggregateparvalueoftheirstock,evidencedbya"capital
stock account." If profits have been made by the corporation during a particular period and not divided, they
createadditionalbookkeepingliabilitiesundertheheadof"profitandloss,""undividedprofits,""surplusaccount,"
etc., or the like. None of these, however, gives to the stockholders as a body, much less to any one of them,
either a claim against the going concern or corporation, for any particular sum of money, or a right to any
particularportionoftheasset,oranysharessellsoruntilthedirectorsconcludethatdividendsshallbemadea
part of the company's assets segregated from the common fund for that purpose. The dividend normally is
payableinmoneyandwhensopaid,thenonlydoesthestockholderrealizeaprofitorgain,whichbecomeshis
separate property, and thus derive an income from the capital that he has invested. Until that, is done the
increasedassetsbelongtothecorporationandnottotheindividualstockholders.
Whenacorporationorcompanyissues"stockdividends"itshowsthatthecompany'saccumulatedprofitshave
been capitalized, instead of distributed to the stockholders or retained as surplus available for distribution, in
moneyorinkind,shouldopportunityoffer.Farfrombeingarealizationofprofitsofthestockholder,ittendsrather
topostponesaidrealization,inthatthefundrepresentedbythenewstockhasbeentransferredfromsurplusto
assets,andnolongerisavailableforactualdistribution.Theessentialandcontrollingfactisthatthestockholder
hasreceivednothingoutofthecompany'sassetsforhisseparateuseandbenefitonthecontrary,everydollarof
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,andsubjecttobusinessriskswhichmayresultinwipingoutoftheentireinvestment.Havingregardto
theverytruthofthematter,tosubstanceandnottoform,thestockholderbyvirtueofthestockdividendhasin
factreceivednothingthatanswersthedefinitionofan"income."(Eisnervs.Macomber,252U.S.,189,209,211.)
Thestockholderwhoreceivesastockdividendhasreceivednothingbutarepresentationofhisincreasedinterest
inthecapitalofthecorporation.Therehasbeennoseparationorsegregationofhisinterest.Allthepropertyor
capital of the corporation still belongs to the corporation. There has been no separation of the interest of the
stockholderfromthegeneralcapitalofthecorporation.Thestockholder,byvirtueofthestockdividend,hasno
separateorindividualcontrolovertheinterestrepresentedthereby,furtherthanhehadbeforethestockdividend
wasissued.Hecannotuseitforthereasonthatitisstillthepropertyofthecorporationandnotthepropertyof
the individual holder of stock dividend. A certificate of stock represented by the stock dividend is simply a
statementofhisproportionalinterestorparticipationinthecapitalofthecorporation.Forbookkeepingpurposes,
a corporation, by issuing stock dividend, acknowledges a liability in form to the stockholders, evidenced by a
capitalstockaccount.Thereceiptofastockdividendinnowayincreasesthemoneyreceivedofastockholder
norhiscashaccountatthecloseoftheyear.Itsimplyshowsthattherehasbeenanincreaseintheamountof
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,comingtoapersonorcorporationforservices,interest,orprofitfrominvestments.Wedonotbelieve
thattheLegislatureintendedthatamereincreaseinthevalueofthecapitalorassetsofacorporation,firm,or
individual,shouldbetaxedas"income."Suchpropertycanbereachedundertheordinaryfromoftaxation.
Mr. Justice Pitney, in the case of the Einer vs. Macomber, supra, said in discussing the difference between
"capital" and "income": "That the fundamental relation of 'capital' to 'income' has been much discussed by
economists,theformerbeinglikenedtothetreeortheland,thelattertothefruitorthecroptheformerdepicted
asareservoirsuppliedfromspringsthelatterastheoutletstream,tobemeasuredbyitsflowduringaperiodof
time."Itmaybearguedthatastockholdermightsellthestockdividendwhichhehadacquired.Ifhedoes,then
hehasreceived,infact,anincomeandsuchincome,likeanyotherprofitwhichherealizesfromthebusiness,is
anincomeandhemaybetaxedthereon.
Thereisacleardistinctionbetweenanextraordinarycashdividend,nomatterwhenearned,andstockdividends
declared,asinthepresentcase.Theoneisadisbursementtothestockholderofaccumulatedearnings,andthe
corporation at once parts irrevocably with all interest thereon. The other involves no disbursement by the
corporation.Itpartswithnothingtothestockholder.Thelatterreceives,notanactualdividend,butcertificateof
stock which simply evidences his interest in the entire capital, including such as by investment of accumulated
profitshasbeenaddedtotheoriginalcapital.Theyarenotincometohim,butrepresentadditionstothesourceof
hisincome,namely,hisinvestedcapital.(DeKovenvs.Alsop,205,Ill.,30963L.R.A.587).Suchapersonisinthe
same position, so far as his income is concerned, as the owner of young domestic animal, one year old at the
beginningoftheyear,whichisworthP50and,which,attheendoftheyear,andbyreasonofitsgrowth,isworth
P100. The value of his property has increased, but has had an income during the year? It is true that he had
taxable property at the beginning of the year of the value of P50, and the same taxable property at another
period,ofthevalueofP100,buthehashadnoincomeinthecommonacceptationofthatword.Theincreasein
thevalueofthepropertyshouldbetakenaccountofonthetaxduplicateforthepurposesofordinarytaxation,but
notasincomeforhehashadnone.
Thequestionwhetherstockdividendsareincome,orcapital,orassetshasfrequentlycomebeforethecourtsin

another form in cases of inheritance. A is a stockholder in a large corporation. He dies leaving a will by the
termsofwhichhegivetoBduringhislifetimethe"income"fromsaidstock,withafurtherprovisionthatCshall,at
B's death, become the owner of his share in the corporation. During B's life the corporation issues a stock
dividend.DoesthestockdividendbelongtoBasanincome,ordoesitfinallybelongtoCasapartofhissharein
thecapitalorassetsofthecorporation,whichhadbeenlefttohimasaremainderbyA?Whiletherehasbeen
some difference of opinion on that question, we believe that a great weight of authorities hold that the stock
dividendiscapitalorassetsbelongingtoCandnotanincomebelongingtoB.InthecaseofD'Oogevs.Leeds
(176Mass.,558,560)itwasheldthatstockdividendsinsuchcaseswereregardedascapitalandnotasincome
(Gibbonsvs.Mahon,136U.S.,549.)
InthecaseofGibbsonvs.Mahon,supra,Mr.JusticeGraysaid:"Thedistinctionbetweenthetitleofacorporation,
andtheinterestofitsmembersorstockholdersinthepropertyofthecorporation,isfamiliarandwellsettled.The
ownershipofthatpropertyisinthecorporation,andnotintheholdersofsharesofitsstock.Theinterestofeach
stockholder consists in the right to a proportionate part of the profits whenever dividends are declared by the
corporation, during its existence, under its charter, and to a like proportion of the property remaining, upon the
terminationordissolutionofthecorporation,afterpaymentofitsdebts."(Minotvs.Paine,99Mass.,101Greeff
vs.EquitableLifeAssuranceSociety,160N.Y.,19.)InthecaseofDekovenvs.Alsop(205Ill,309,63L.R.A.
587)Mr.JusticeWilkinsaid:"Adividendisdefinedasacorporateprofitsetaside,declared,andorderedbythe
directors to be paid to the stockholders on demand or at a fixed time. Until the dividend is declared, these
corporateprofitsbelongtothecorporation,nottothestockholders,andareliableforcorporateindebtedness.
Thereisacleardistinctionbetweenanextraordinarycashdividend,nomatterwhenearned,andstockdividends
declared. The one is a disbursement to the stockholders of accumulated earning, and the corporation at once
parts irrevocably with all interest thereon. The other involves no disbursement by the corporation. It parts with
nothingtothestockholders.Thelatterreceives,notanactualdividend,butcertificatesofstockwhichevidencein
anewproportionhisinterestintheentirecapital.Whenacashbecomestheabsolutepropertyofthestockholders
andcannotbereachedbythecreditorsofthecorporationintheabsenceoffraud.Astockdividendhowever,still
being the property of the corporation and not the stockholder, it 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
corporationissold,thenthestockholdercertainlycouldnotbechargedwithhavingreceivedanincomebyvirtue
oftheissuanceofthestockdividend.Untilthedividendisdeclaredandpaid,thecorporateprofitsstillbelongto
the corporation, not to the stockholders, and are liable for corporate indebtedness. The rule is well established
thatcashdividend,whetherlargeorsmall,areregardedas"income"andallstockdividends,ascapitalorassets
(CookonCorporation,Chapter32,secs.534,536Davisvs.Jackson,152Mass.,58Millsvs.Britton,64Conn.,
45Am.,andEng.Encycl.ofLaw,2ded.,p.738.)
Iftheownershipofthepropertyrepresentedbyastockdividendisstillinthecorporationandtointheholderof
suchstock,thenitisdifficulttounderstandhowitcanberegardedasincometothestockholderandnotasapart
ofthecapitalorassetsofthecorporation.(Gibbsonsvs.Mahon,supra.)thestockholderhasreceivednothingbut
arepresentationofaninterestinthepropertyofthecorporationand,asamatteroffact,hemayneverreceive
anything, depending upon the final outcome of the business of the corporation. The entire assets of the
corporation may be consumed by mismanagement, or eaten up by debts and obligations, in which case the
holder of the stock dividend will never have received an income from his investment in the corporation. A
corporation may be solvent and prosperous today and issue stock dividends in representation of its increased
assets,andtomorrowbeabsolutelyinsolventbyreasonofchangesinbusinessconditions,andinsuchacasethe
stockholderwouldhavereceivednothingfromhisinvestment.Insuchacase,iftheholderofthestockdividendis
requiredtopayanincometaxonthesame,theresultwouldbethathehaspaidataxuponanincomewhichhe
never received. Such a conclusion is absolutely contradictory to the idea of an income. An income subject to
taxationunderthelawmustbeanactualincomeandnotapromisedorprospectiveincome.
The appelle argues that there is nothing in section 25 of Act No 2833 which contravenes the provisions of the
Jones Law. That may be admitted. He further argues that the Act of Congress (U.S. Revenue Act of 1918)
expresslyauthorizedthePhilippineLegislaturestoprovideforanincometax.Thatfactmayalsobeadmitted.But
acarefulreadingofthatActwillshowthat,whileitpermittedataxuponincome,thesameprovidedthatincome
shallincludegains,profits,andincomederivedfromsalaries,wages,orcompensationforpersonalservices,as
well as from interest, rent, dividends, securities, etc. The appellee emphasizes the "income from dividends." Of
course,incomereceivedasdividendsistaxableasanincomebutanincomefrom"dividends"isaverydifferent
thing from receipt of a "stock dividend." One is an actual receipt of profits the other is a receipt of a
representationoftheincreasedvalueoftheassetsofcorporation.
Inalloftheforegoingargumentwehavenotoverlookedthedecisionsofafewofthecourtsindifferentpartsof
theworld,whichhavereachedadifferentconclusionfromtheonewhichwehavearrivedatinthepresentcase.
Inasmuch,however,asappealsmaybetakenfromthiscourttotheSupremeCourtoftheUnitedStates,wefeel
boundtofollowthesamedoctrineannouncedbythatcourt.
Having reached the conclusion, supported by the great weight of the authority, that "stock dividends" are not

"income,"thesamecannotbetaxesunderthatprovisionofActNo.2833whichprovidesforataxuponincome.
Under the guise of an income tax, property which is not an income cannot be taxed. When the assets of a
corporationhaveincreasedsoastojustifytheissuanceofastockdividend,theincreaseoftheassetsshouldbe
takenaccountoftheGovernmentintheordinarytaxduplicatesforthepurposesofassessmentandcollectionof
anadditionaltax.Foralloftheforegoingreasons,weareoftheopinion,andsodecide,thatthejudgmentofthe
lowercourtshouldberevoked,andwithoutanyfindingastocosts,itissoordered.
Araullo,C.J.Avancea,VillamorandRomualdez,JJ.,concur.
SeparateOpinions
STREET,J.,concurring:
I agree that the trial court erred in sustaining the demurrer, and the judgment must be reversed. Instead of
demurringthedefendantshouldhaveansweredandalleged,ifsuchbethecase,thatthestockdividendwhich
wasthesubjectoftaxationrepresentstheamountofearningsorprofitsdistributedbymeansoftheissuanceof
saidstockdividendandthecaseshouldhavebeentriedonthatquestionoffact.
Inthisconnectionitwillbenotedthatsection25(a)ofActNo.2833,ofthePhilippineLegislature,underwhichthis
taxwasimposed,doesnotlevyataxgenerallyonstockdividendstotheextendofthepartofthestocknoreven
totheextendofitsvalue,butdeclaresthatstockdividendsshallbeconsideredasincometotheamountofthe
earnings or profits distributed. Under provision, before the tax can be lawfully assessed and collected, it must
appearthathestockdividendrepresentsearningorprofitsdistributedandtheburdenofproofisontheCollector
ofInternalRevenuetoshowthis.
ThecaseofEisnervs.Macomber(252U.S.,18964L.ed.,521),hasbeencitedasauthorityfortheproposition
that it is incompetent for the Legislature to tax as income any property which by nature is really capital as a
stockdividendistheresaidtobe.InthatcasetheSupremeCourtoftheUnitedStatesheldthataCongressional
Act taxing stock dividends as income was repugnant to that provision of the Constitution of the United States
which required that direct taxes upon property shall be apportioned for collection among the several states
according to population and that the Sixteenth Amendment, in authorizing the imposition by Congress of taxes
uponincome,hadnotvestedCongresswiththepowertolevydirecttaxes,onpropertyundertheguiseofincome
taxes. But the resolution embodied in that decision was evidently reached because of the necessity of
harmonizingtwodifferentprovisionsoftheConstitutionoftheUnitedStates,asamended.Inthisjurisdictionour
Legislaturehasfullauthoritytolevybothtaxesonpropertyandincometaxesandthereisnoorganicprovision
hereinforcesimilartothatwhich,undertheConstitutionoftheUnitedStates,requiresdirecttaxesonpropertyto
beleviedinaparticularway.
It results, under the statute here in force, there being no constitutional restriction upon the action of the law
making body, that the case before us presents merely a question of statutory construction. That the problem
shouldbeviewedinthislight,inacasewherethereisnorestrictionuponthelegislativebody,ispointedourin
Eisnervs.Macomber,supra,whereinthecourseofhisopinionMr.JusticePitneyreferstothecasesoftheSwan
Brewery Co. vs. Rex ([1914] A. C. 231), and Tax Commissioner vs. Putnam (227 Mass., 522), as being
distinguished from Eisner vs. Macomber by the very circumstance that in those cases the law making body, or
bodieswereundernorestrictionastothemethodoflevyingtaxes.Suchisthesituationhere.
OSTRAND,J.,dissenting:
In its final analysis the opinion of the court rests principally, if not entirely on the decision of the United States
SupremeCourtinthecaseofEisnervs.Macomber(252U.S.,189),adecisionwhich,foratleasttworeasons,is
entirelyinapplicabletothepresentcase.
Inthefirstplace,thereisaradicaldifferencebetweenthedefinitionofataxablestockdividendgivenintheUnited
StatesIncomeTaxLawofSeptember8,1916,construedinthecaseofEisnervs.Macomber,andthatgivenin
ActNo.2833ofthePhilippineLegislature,theActwithwhichweareconcernedinthepresentcase.Theformer
provides that "stock dividend shall be considered income, to the amount of its cash value" the Philippine Act
provides that "Stock dividend shall be considered income, to the amount of the earnings or profits distributed."
TheUnitedStatestatutemadestockdividendsbaseduponanadvanceinthevalueofthepropertyorinvestment
taxable as income whether resulting from earning or not our statute make stock dividends taxable only to the
amount of the earning and profits distributed, and stock dividends based on the increment income and are not
taxable. Though the difference would seem sufficiently obvious, we will endeavor to make it still clearer by
borrowingoneoftheillustrationswithwhichtheopinionofthecourtisprovided.Thecourtsays:
A,anindividualfarmer,buysafarmwithonehundredheadofcattleforthesumofP10,000.Attheendof
the first year, by reason of business conditions and the increase of the value of both real estate and
personalproperty,itisdiscoveredthatthevalueofthefarmandthecattleisP20,000.A,duringtheyear
hasreceivednothingfromthefarmorthecattle.Hisbooksatthebeginningoftheyearshowthathehad

propertyofthevalueofP10,000.Hisbooksatthecloseoftheyearshowthathehaspropertyofthevalue
of P20,000. A is not a corporation. The assets of his business are not shown therefore by certificate of
stock.Hisbooks,however,showthatthevalueofhispropertyhasincreasedduringtheyearbyP10,000.
CantheP10,000,underanytheoryofbusinessorlaw,beregardedasan"income"uponwhichthefarmer
canberequiredtopayanincometax?IsthereanydifferenceinlawintheconditionsofAinthisillustration
andtheconditionsofAandBintheimmediatelyprecedingillustration?Cantheincreaseofthevalueofthe
property in either case be regarded as an 'income' and be subjected to the payment of the income tax
underthelaw?
I answer no. And while the increment if in the form of a stock dividend would have been regarded as income
undertheUnitedStatesstatuteandtaxesassuch,itisnotregardedasincomeandcannotbesotaxesunderour
statutebecauseitisnot based on earningsorprofits. That is precisely the difference between the two statutes
andthatisthereasontheillustrationisnotinpointinthiscase,thoughitwouldhavebeenentirelyappropriatein
theEisnervs.Macombercase.Itisalsooneofthereasonswhythatcaseisinapplicablehereandwhymostof
theargumentsinthemajorityopinionarebesidethemark.
But let us suppose that A had sold the products of the farm during the year for P10,000 over and above his
expense, and had invested the money in buildings and improvements on the farm, thus increasing its value to
P20,000.WhywouldnottheP10,000earnedduringtheyearandsoinvestedinimprovementsstillbeincomefor
theyear?AndwhywouldnotataxontheseearningsbeanincometaxunderthedefinitiongiveninBlack'sLaw
Dictionary,andquotedwithapprovalinthedecisionofthecourt,that"Anincometaxisataxontheyearlyprofits
arising from the property, professions, trades, and offices?" There can be but one answer. There is no reason
whatever why the gains derived from the sale of the products of the farm should not be regarded as income
whetherreinvestedinimprovementsuponthefarmornotandthereisnoreasonwayataxleviedthereoncannot
beconsideredanincometax.
Moreover, to constitute income, profits, or earnings need not necessarily be converted into cash. Black's Law
Dictionary says and I am again quoting from the decision of the court "An income is the return in money
fromone'sbusiness,labor,orcapitalinvestedgainsprofits,orprivaterevenue."Aswillbeseeninthesecondary
senseoftheword,incomeneednotconsistinmoneyuponthispointthereisnodivergenceofviewamongthe
lexicographers. If a farmer stores the gain produced upon his farm without selling, it may none the less be
regardedasincome.
IntheEisnervs.Macombercase,theUnitedStatessupremeCourtfeltboundtogivetheword"income"astrict
interpretation.Underarticle1,paragraph2,clause3,andparagraph9,clause4oftheoriginalConstitutionofthe
UnitedStates,CongresscouldnotimposedirecttaxeswithoutapportioningthemamongtheStatesaccordingto
population. As it was thought desirable to impose Federal taxes upon incomes and as a levy of such taxes by
appointment among the States in proportion to population would lead to an unequal distribution of the tax with
reference to the amount of taxable incomes, the Sixteenth Amendment was adopted and which provided that
"The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without
apportionmentamongtheseveralstates,andwithoutregardtoanycensusorenumeration."
TheUnitedStatesSupremeCourtthereforesaysintheEisnervs.Macombercase:
Aproperregardforitsgeneris,aswellasitsveryclearlanguage,requiresalsothatthisAmendmentshall
not be extended by loose construction, so as to repeal or modify, except as applied to income, those
provisionsoftheConstitutionthatrequireanapportionmentaccordingtopopulationfordirecttaxesupon
property,realandpersonal.Thislimitationstillhasanappropriateandimportantfunctions,andisnottobe
overriddenbyCongressordisregardedbythecourts.
Inorder,therefore,thattheclausescitedfromArticleIoftheconstitutionmayhaveproperforceandeffect,
save only as modified by the Amendment, and that the latter also may have proper effect, it becomes
essentialtodistinguishbetweenwhatisandwhatisnot"income,"asthetermisthereusedandtoapply
thedistinctionascasesarise,accordingtotruthandsubstance,withoutregardtoform.Congresscannot
byanydefinitionitmayadoptconcludethematter,sinceitcannotbylegislationaltertheConstitution,from
whichaloneitderivesitspowertolegislate,andwithinwhoselimitationsalonethatpowercanbelawfully
exercised.
That, in the absence of the peculiar restrictions placed by the Constitution upon taxing power of Congress, the
decisionofthecourtmighthavebeendifferentisclearlyindicatedbythefollowinglanguage:
Tworecentdecisions,proceedingfromcourtsofhighjurisdiction,arecitedinsupportofthepositionofthe
Government.
SeanBreweryCo.vs.Rex([1914]A.C.,231),aroseundertheDividendDutiesActofWesternAustralia,
whichprovidedthat"dividend"shouldinclude"everydividend,profit,advantage,orgainintendedtobepaid
or credited to or distributed among any members or director of any company," except etc. There was a

stock dividend, the new shares being alloted among the shareholders pro rata and the question was
whetherthiswasadistributionofadividendwithinthemeaningoftheact.TheJudicialCommitteeofthe
Privy Council sustained the dividend duty upon the ground that, although "in ordinary language the new
shareswouldnotbedistributionofadividend,"yetwithinthemeaningoftheact,suchnewsharewerean
"advantage" to the recipients. There being no constitutional restriction upon the action of the lawmaking
body,thecasepresentedmerelyaquestionofstatutoryconstruction,andmanifestlythedecisionisnota
precedent for the guidance of this court when acting under a duty to test an act of Congress by the
limitationsofawrittenConstitutionhavingsuperiorforce.
In Tax Commissioner vs. Putnam (1917], 227 Mass., 522), it was held that the 44th Amendment to the
constitution of Massachusetts, which conferred upon the legislature full power to tax incomes, "must be
interpreted as including every item which by any reasonable understanding can fairly be regarded as
income"(pp.526,531)andthatunderitastockdividendwastaxableasincome....Evidently,inorderto
giveasufficientlybroadsweeptothenewtaxingprovision,itwasdeemednecessarytotakethesymbolfor
thesubstance,accumulationfordistribution,capitalaccretionforitsoppositewhileacasewheremoneyis
paidintothehandofthestockholderwithanoptiontobuynewshareswithit,followedbyacceptanceofthe
option,wasregardedasidenticalinsubstancewithacasewherethestockholderreceivesnomoneyand
has no option. The Massachusetts court was not under an obligation, like the one which binds us, of
applyingaconstitutionalprovisionsthatstandinthewayofextendingitbyconstruction.
ThePhilippineLegislaturehasfullpowertolevytaxesbothoncapitalorpropertyandonincome,subjectonlyto
theprovisionsoftheOrganicActthat"theruleoftaxationshallbeuniform."Inprovidingfortheincometaxthe
Legislature is therefore entirely free to employ the term "income" in its widest sense and is in nowise limited or
hamperedbyorganiclimitationssuchasthoseimposeduponCongressbytheConstitutionoftheUnitedStates.
ThisisthesecondreasonwhytherulelaiddowninEisnervs.Macomberhasnoapplicationhere.
Themajorityopinionindiscussingthisquestion,says:
There is no question that the Philippine Legislature may provide for the payment of an income tax, but it
cannot,undertheguiseofanincometax,collectataxonpropertywhichisnotan"income."ThePhilippine
Legislaturecannotimposeataxupon"income"only.ThePhilippineLegislaturehasnopowertoprovidea
tax upon "automobiles," only, and under that law collect a tax upon a carretonor bull cart. Constitutional
limitations upon the power of the Legislature are not stronger than statutory limitations, that is to say, a
statute expressly adopted for one purpose cannot, without amendment, be applied to another purpose
whichisentirelydistinctanddifferent.Astatuteprovidingforanincometaxcannotbeconstruedtocover
propertywhichisnot,infact,income.TheLegislaturecannot,byastatutorydeclaration,changetherealof
anatureofataxwhichitimposes.Alawwhichimposesanimportationtaxonriceonlycannotbeconstrued
toimposeanimportationtaxoncorn.
These assertions while in the main true are, perhaps, a little to broadly stated much will depend on the
circumstancesofeachparticularcase.IftheLegislaturecannotdothethingsenumerateitmustbebyreasonof
thelimitationimposedbytheOrganicAct,"Thatnobillwhichmaybeenactedintolawshallembracemorethan
on subject, and that subject shall be expressed in the title of the bill." Similar provisions are contained in most
State Constitutions, their object being to prevent "logrolling" and the passing of undesirable measures without
their being brought properly to the attention of the legislators. Where the prevention of this mischief is not
involved, the courts have uniformly given such provisions a very liberal construction and there are few, if any,
caseswhereastatutehasbeendeclaredunconstitutionalfordealingwithseveralcognatesubjectsinthesame
Actandunderthesametitle.(LewisSutherlandonStatutoryConstruction,2ded.,pars109etseq.:Government
of the Philippine Island vs. Municipality of Binalonan and Roman Catholic Bishop of Nueva Segovia, 32, Phil.,
634).Certainlynoincometaxstatutewouldbedeclaredunconstitutionalonthatgroundfortreatingdividendsas
incomeandprovidingfortheirtaxationassuch.
Revertingtothequestionofthenatureofincome,itisarguedthatastockcertificatehasnointrinsicvalueand
that,therefore,evenitisbasedonearningsinsteadofincrementincapitalitcannotberegardedasincome.But
neither has a bank check or a time deposit certificate any intrinsic value, yet it may be negotiated, or sold, or
assigned and it represents a cash value. So also does a stock certificate. A lawyer might take his fee in stock
certificatesinsteadofinmoney.Woulditbeseriouslycontendedthathehadreceivednofeeandthathisefforts
hadbroughtnoincome?
1 a w p h !l.n e t

Some of the members of the court agree that stock dividends based on earnings or profits may be taxed as
income,buttaketheviewthatinanactionagainsttheCollectoroftheInternalRevenueforrecoveringbacktaxes
paid on nontaxable stock dividends, the plaintiff need not allege that the stock dividends are not base on
earningsorprofitsdistributed,butthatquestionofthetaxabilityornontaxabilityofthestockdividendsisamatter
ofdefenseandshouldbesetupbythedefendantbywayofanswer.
I think this view is erroneous. If some stock dividends are taxable and others are not, an allegation that stock
dividends in general have been taxed is not sufficient and does not state a cause of action. the presumption is

thatthetaxhasbeenlegallycollectedandtheburdenisupontheplaintiffbothtoallegeandprovefactsshowing
thatthecollectionisunlawfullyorirregular.(CodeofCivilProcedure,sec.334,subsec.14and31.)
Malcolm,J.,concurs.

JOHNS,J.,dissenting:
WehavestudiedandanalyzedwithcaretheableandexhaustivemajorityopinionwrittenbyMr.JusticeJohnson.
Inthefinalanalysis,thequestioninvolvediswhetherthewords"whichstockdividendshallbeconsideredincome,
to the amount of its cash value" are to be construed as meaning the same things as the words "stock dividend
shallbeconsideredincome,totheamountoftheearningsorprofitsdistributed,"asthemajorityopinionsays.The
first is an Act of Congress defining what is a stock dividend, and that the word dividend shall be construed as
incometotheamountofitscashvalue.Itisuponthatconstructionandthatdefinitionthatthemajorityopinionis
founded. That is the definition of the words as used in an Act of Congress. The other is an Act defining the
meaningofthewordsasusedinanActofCongress.TheotherisanActdefiningthemeaningofthewordsby
theLegislatureofthePhilippineIslands,anditsays:"Stockdividendshallbeconsideredincome,totheamountof
theearningsorprofitsdistributed."
It is true, as the majority opinion says, that in enacting the Income Tax Law of the Philippine Islands, the
LegislaturehadbeforeittheActofCongress.ButitisalsotruethatbytheActofthePhilippineLegislature"Stock
dividend shall be considered income, to the amount of the earnings or profits distributed." One law is founded
upontheactualcashvalueofthestockandtheotherisfoundedupondistributedearningsandprofits.
Muchissaidinthetextbooksandbythenumerousdecisionscitedinthemajorityopinionastothemeaningofthe
wordincome,andthedecisionintheUnitedStatesarefoundeduponthemeaningofthatword,asitisusedin
the Act of Congress, and to the effect that the word is to be construed in its usual and ordinary meaning. But
assumingthattobetrue,itmustalsobeconcededthattheLegislatureofthePhilippineIslandshasalegalright
todefinethemeaningoftheword"income"byalegislativeact,andwhenitsmeaningisdefinedbylegislativeact,
itisthedutyofthecourtstofollowthatdefinitionregardlessofwhetheritistheusualandordinarymeaningofthe
word,andthereinliesthedistinctionbetweenthetwoactsandthereasonwhytheauthoritiescitedinthemajority
opinionarenotinpoint.ActNo.2833ofthePhilippineLegislaturespecificallysaysthat"Stockdividendshallbe
consideredincome,totheamountoftheearningsorprofitsdistributed."TheActofCongressisfoundeduponthe
"cash value of the stock," and the Act in question is founded upon "the amount of the earnings or profits
distributed."
Hence, then, we have the meaning of the words defined in the legislative act, and it is very apparent that the
purposeandintentofthelegislativeactwastoavoidthemeaningandconstructionofsuchwordswhichisnow
given to them in the majority opinion. The Legislature had the power to define the meaning of the words, did
definethem,anditisthedutyofthecourtstofollowandadoptthemeaninganddefinitionofthewordsgivento
theminthelegislativeact.
As pointed out in the opinion of Mr. Justice Street, the constitutional limitations upon the legislative power for
taxationpurposes,whichexistintheUnitedStates,doesnotexistinthePhilippineIslands.Thereisnoorganic
lawheresimilartotheprovisionsoftheConstitutionoftheUnitedStateswhichrequiredirecttaxesonpropertyto
beleviedinaspecificway,inotherwords,therestrictionsandlimitationsplacedonthepowertolevyanincome
taxundertheConstitutionoftheUnitedStatesdonotexistinthePhilippineIslands.Hence,itmustfollowthatthe
authorities cited in the majority opinion are not in point the instant case. They are founded upon different
language,differentorganicpowers,differentconditions,andthedifferentmeaningofthesamewordsasdefined
in the different legislative acts. The Philippine Legislature had a legal right to define the meaning of the words
"dividend"and"income,"anditexpresslysays"Stockdividendshallbeconsideredincome,totheamountofthe
earnings or profits distributed." In the instant case, the earnings and profits of the corporation were distributed
among the existing stockholders of the company upon a pro rata basis, and they were made exclusively out of
"distributed earnings and profits." The declaring of the dividend was a matter in the sole discretion of the
stockholders,butwhensuchadividendismadefromandoutof"earningsorprofitsdistributed,"itthenbecomes
andisanincomewithinthemeaningofActNo.2833,andshouldbesubjecttoanincometax.
Forsuchreason,Idissent.
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