Under a trust agreement, Julius Reese who owned 24,700 shares of the 25,000 common shares of

MANTRASCO, and the three private respondents who owned the rest, at 100 shares each, deposited all
their shares with the Trustees. The trust agreement provided that upon Reese’s death MANTRASCO
shall purchase Reese’s shares. The trust agreement was executed in view of Reese’s desire that upon his
death the Company would continue under the management of respondents. Upon Reese’s death and
partial payment by the company of Reeses’s share, a new certificate was issued in the name of
MANTRASCO, and the certificate indorsed to the Trustees. Subsequently, the stockholders reverted the
24,700 shares in the Treasury to the capital account of the company as stock dividends to be distributed
to the stockholders. When the entire purchase price of Reese’s interest in the company was paid in full
by the latter, the trust agreement was terminated, and the shares held in trust were delivered to the
company.

The Bureau of Internal Revenue concluded that the distribution of the 24,700 shares of Reese as stock
dividends was in effect a distribution of the "assets or property of the corporation." It therefore
assessed respondents for deficiency income taxes as well as for fraud penalty and interest charges. The
Court of Tax Appeals absolved respondent from any liability for receiving the questioned stock dividends
on the ground that their respective one-third interest in the Company remained the same before and
after the declaration of the stock dividends and only the number of shares held by each of them had
changed.

On a petition for review, the Supreme Court held that the newly acquired shares were not treasury
shares; their declaration as treasury stock dividends was a complete nullity and that the assessment by
the Commissioner of fraud penalty and the imposition of interest charges pursuant to the provision of
the Tax Code were made in accordance with law.
Judgment of the Court of Tax Appeals se aside.