PART V Although interest on certain Government bonds and other similar obligations is not
taxable when received by a corporation, upon amalgamation with the other funds
DIVIDEND INCOME (Section 73, 250-256, RR 2)
Section 73. Distribution of Dividends or Assets by Corporations. –
(A) Definition of Dividends. – The term ‘dividends’ when used in this Title means
any distribution made by a corporation to its shareholders out of its earnings or
profits and payable to its shareholders, whether in money or in other property.
Where a corporation distributes all of its assets in complete liquidation or
dissolution, the gain realized or loss sustained by the stockholder, whether
individual or corporate, is a taxable income or a deductible loss, as the case may
be.
(B) Stock Dividend. – A stock dividend representing the transfer of surplus to
capital account shall not be subject to tax. However, if a corporation cancels or
redeems stock issued as a dividend at such time and in such manner as to make
the distribution and cancellation or redemption, in whole or in part, essentially
equivalent to the distribution of a taxable dividend, the amount so distributed in
redemption or cancellation of the stock shall be considered as taxable income to
the extent that it represents a distribution of earnings or profits
(C) Dividends Distributed are Deemed Made from Most Recently
Accumulated Profits. – Any distribution made to the shareholders or members of
a corporation shall be deemed to have been made from the most recently
accumulated profits or surplus, and shall constitute a part of the annual income of
the distributee for the year in which received.
(D) Net Income of a Partnership Deemed Constructively Received by
Partners. – The taxable income declared by a partnership for a taxable year which
is subject to tax under Section 27 (A) of this Code, after deducting the corporate
income tax imposed therein, shall be deemed to have been actually or
constructively received by the partners in the same taxable year and shall be taxed
to them in their individual capacity, whether actually distributed or not.
Section 250. Dividends. – Dividends, for the purpose of the law, comprise any
distribution whether in cash or other property, in the ordinary course of business,
even though extraordinary in amount made by a domestic or resident foreign
corporation, joint-stock company, partnership, joint account, association, or
insurance company to the shareholders or members out of its earnings or profits
accumulated since March 1, 1913.
of the corporation, such income loses its identity and when distributed to
shareholders, is taxable, the same extent as other dividends.
A taxable distribution made by a corporation to individual stockholders or members
shall be included in the gross income of the distributees when the cash or other
property is unqualifiedly made subject to their demand. Dividends, in cash or other
property received by an individual, are subject to tax in his hands in the same
manner as other income.
Dividends, whether in cash or other property received by a domestic or resident
foreign corporation from a domestic corporation are taxable only to the extent of
25 per cent thereof in accordance with Section 24 of the Code. Dividends received
by a domestic corporation from a foreign corporation, whether resident or
nonresident, are taxable to the extent that they constitute income from sources
within the Philippines, as provided in section 37 (a) (2) (b) of the Code. Dividends
paid by the domestic corporation to a nonresident foreign corporation are taxable
in full.
Section 251. Dividends paid in property. - Dividends paid in securities or other
property (other than its own stock), in which the earnings of a corporation have
been invested, are income to the recipients to the amount of the all market value of
such property when receivable by individual stockholders. When receivable by
corporations, the amount of such dividends includible for purposes of the tax on
corporations are specified in section 24 of the Code. (See also section 250 of
these regulations). A dividend paid in stock of another corporation is not a stock
dividend. even though the stock distributed was acquired through the transfer by
the corporation declaring the dividends of property to the corporation the stock of
hich is distributed as a dividend. Where a corporation declares a dividend payable
in a stock of another corporation, setting aside the stock to be so distributed and
notifying the stockholders of its action, the income arising to the recipient of such
stock is its market value at the time the dividend becomes payable. Scrip dividends
are subject to tax in the year in which the warrants are issued.
Section 252. Stock dividends. - A stock dividend which represents the transfer of
surplus to capital account is not subject to income tax. However, a dividend in
stock may constitute taxable income to the recipient thereof notwithstanding the
fact that the officers or director of the corporation (as defined in section 84) choose
to call such distribution as a stock dividend. The distinction between a stock
dividend which does not, and one which does, constitute income taxable to the
shareholder is the distinction between a stock dividend which works no change in
the corporate entity, the same interest In the same corporation being represented
after the distribution by more shares of precisely the same character and a stock
dividend where there either has been a Change of corporate identity or a change in
the nature of the shares issued as dividends whereby the proportional interest of
the shareholders after the distribution is essentially different from his former
interest. A stock dividend constitutes income if it gives the shareholder an interest
different from that which his former stock holdings represented. A stock dividend
does not constitute income if the new shares confer no different rights or interest
than did the old - the new certificates plus the old representing the same
proportionate interest in the net asset of the corporation as did the old.
Section 253. Sale of stock received as dividends. - Stock issued by a
corporation, as a dividend, does not constitute taxable income to a stockholder in
such corporation, but gain may be derived or loss sustained by the stockholder,
whether individual or corporate, from the sale of such stock, which gain or loss will
be treated as arising from the sale or exchange of a capital asset. (See section 34
of the Code.) The amount of gain derived or loss sustained from the sale of such
stock, or from the sale of the stock with respect to which it is issued, shall be
determined in accordance with the following rules:
a) Where the stock issued as dividend is as or substantially the same
character or preference as the stock upon which the stock dividend is
paid, the cost of each share (or when acquired prior to March, 1, 1913,
the fair market value as of such date) will be the quotient of the cost (or
such fair market value) of the old shares of stock divided by the total
number of the old and new shares.
b) Where the stock issued as a dividend is in whole or in part of a character
or preference materially different from the stock upon which the stock
dividend is paid, the cost (and when acquired prior to March 1,1913, the
fair market value as of such date) of the old shares of stock shall be
divided between such old stock and the new stock, in proportion, as
nearly as may be, to the respective value of each class of stock old and
new at the time the new shares of stock are issued, and the cost (or when
acquired prior to March 1, 1913, the fair market value as of such date) of
each share of stock will be the quotient of the cost (or such fair market
value as of March 1, 1913) of the class to which such share belongs
divided by the number of shares in that class.
c) (c) Where the stock with respect to which a stock dividend is issued was
purchased at different times and at different prices and the identity of the
lots cannot be determined, any sale of the original stock, will be charged
to the earliest purchases, of such stock, and any sale of dividend stock
issued with respect to such stock will be presumed to have been made
from the stock issued with respect to the earliest purchased stock, to the
amount of the dividend chargeable to such stock.
d) Where the stock with respect to which a stock dividend is declared was
purchased at different times and at different prices, and the dividend stock
issued with respect to such stock cannot be identified as having been
issued with respect to any particular lot of such stock, then any sale of
such dividend stock will be presumed to have been made from the stock
issued with respect to the earliest purchased stock, to the amount of the
stock dividend chargeable to such stock.
Section 254. Declaration and subsequent redemption of a stock dividend. - A
true stock dividend is not subject to tax on its receipt inthe hands of the recipient.
Nevertheless, if a corporation, after the distribution of a stock dividend, proceeds to
cancel or redeem its stock at such time and in such manner as to make the
distribution and cancellation or redemption essentially equivalent to the distribution
of a taxable dividend, the amount received in redemption or cancellation of the
stock shall be treated as a taxable dividend to the extent of the earnings or profits
accumulated by such corporation since March 1, 1913
Section 255. Sources of distribution. – For the purpose of income taxation every
distribution made by a corporation is made out of earnings or profits to the extent
thereof and from the most recently accumulated earnings or profits. In determining
the source of a distribution, consideration should be given first, to the earnings or
profits of the taxable year; second, to the earnings or profits, accumulated since
February 28, 1913, only in the case where, and to the extent that, the distribution
made during the taxable year are not regarded as out of the earnings or profits of
the taxable year and all the earnings or profits accumulated since February 28,
1913, have been distributed; and, fourth, to sources other than earnings or profits
only after the earnings or profits have been distributed.
Section 256. Distribution in liquidation. - In all case's where a corporation (as
defined in section 84) distributes all of its property or assets in complete liquidation
or dissolution, the gain realized from the transaction by the stockholder, whether
individual or corporate, is taxable to the extent recognized in section 34 (b) of the
Code. For this purpose, the term “complete liquidation” includes anyone of a series
of distributions made by a corporation in complete cancellation or redemption of an
of its stocks in accordance with a bona fide plan of liquidation under which the
transfer of all the assets under liquidation is to be completed within a reasonable
time from the date of the first distribution, usually not to exceed one year from the
time of such first distribution. If the amount received by the stockholder in
liquidation is less than the cost or other basis of the stock, the loss in the
transaction is deductible to the extent allowed in section 34(c) of the Code.’

NOTES FROM INGLES:
DIVIDENDS are any distribution whether in case in other property in the
ordinary course of business even if extraordinary in amount, made by:
a) Domestic corp or resident foreign corp
b) Joint stock corp
c) Partnership
d) Joint account
e) Association
f) Insurance company
 To the shareholders or membes out of its earnings or profits.
 When the corporation receive dividends, which are tax-free ( like
intercorporate dividends), it becomes taxable as dividends when it
distributes the same to its shareholders.
GENERAL RULE:
 Cash and property dividends are taxable
 Stock dividends are not taxable
PROPERTY DIVIDENDS ( or securities other than its own stock): taxable
Section 251, RR 2-1940)
 These are considered income in the amount of the full market
value as when received by the stockholder
 They are taxed 10% (or 20% if NRAEB)
 If it was paid in stock of another corporation, it is not considered a
stock dividend. It is still considered property dividend
 The valuation is the market value at the time the dividend
becomes payable. (For the shares of stock of another corporation
given as dividends, it is the market value when the shares of stock
are received)
STOCK DIVIDENDS ARE NOT TAXABLE ( Section 252, RR 2-1940)
Except: when the stock dividend causes change in the corporate identity or a
change in the nature of the shares issued whereby the proportional interest of
the stockholders after the distribution is essentially different from his former
interest
 A stock dividend constitutes income if it gives the shareholder an
interest different from that which his former stock represented.
 When a stockholder receives a stock dividend which is taxable
income, he measure of income is the fair market value of the
shares of stock received.
SALE OF STOCK RECEIVED AS DIVIDENDS ( Section 253, RR 2-1940)
 Once the recipient sells the stock dividend, h may realize gain or
loss, the gain or loss is treated as arising from the sale or
exchange of a capital asset.
STOCK DECLARATION AND SUBSEQUENT REDEMPTION ( section 254
RR 2-1940)
 If after the stock dividend declaration, a corporation cancels or redeems the
same in such time and manner as to make the distribution/redemption
essentially equivalent to a distribution of a taxable dividend, the amount
received shall be considered as a taxable dividend. (10% final tax for
individuals)
 Why do corporation do this?
 So that the shareholder will avoid paying tax. Remember , stock
dividends are not taxable, but cash dividends are subject to 10%
final tax for individuals. So corporations declare stock dividends,
and then redeem them ( by giving their shareholders cash) to go
around the tax. But because of the law, their subsequent
redemptions are not taxable
 Hence, when the corp cancels or redeems stock issued as a
dividend at such time and in such manner as to make the
distribution and cancellation or redemption., in whole or in part,
essentially equivalent to the distribution of a taxable dividend, the
amount so distributed in redemption or cancellation of the stock
shall be considered as taxable income to the extent that it
represents as distribution of earnings or profits.
LIQUIDATING DIVIDENDS: TAXABLE ( Section 256 RR 2-1940)
 When a corporation distributes all its properties or assets in complete
liquidation, the gain realized from this is taxable.
 Computation is based on Section 39(b) or (c) of the tax code.
 When a corporation distributes all of its assets in complete dissolution and
liquidation, there is no dividend income to the shareholder receiving the
liquidating dividend. There is instead, a sale or exchange of property. Any
gain realized or loss sustained by the stockholder, whether individual or
corporate, is taxable income or deductible loss, as the case may be.
 When a corporation was dissolved and in process of complete liquidation
 and its shareholders surrender their stock to it and it paid the sums in
question to them in exchange, a transaction took place, which was no
different in its essence from sale of the same stock to a 3 rd party who paid
therefore.
 In other words, the gain or loss one incurs when a corp liquidates goes into
your ordinary income.
 12-month 50%/100% of gains threshold applies
 That the difference between redeemed shares ( taxed at 10%) and
liquidating shares ( schedular rate for individuals, or 30% for resident
corporations)
 For trading company that is in the process of liquidation, and
whose shareholders are to receive liquidating dividends in excess
of their investment, the gain is taxable ( on the side of the
shareholders) because the shareholders will realize capital gain or
loss
 Such gain is the difference between the FMV of the liquidating
dividends and the adjusted cost to the stockholders of their
respective shareholdings.
 If the shareholder held his shares for more than 12 months, only
50% of the capital gains is taxable
 If less than 12 month, the entire 100% of the capital gains is
taxable.
 On the side of liquidating corporation, it is not liable for income tax
on either the transfer of its assets to its stockholders, or on its
receipt of the shares surrendered by its stockholders. ( BIR Ruling
039-02)
Dividend
 represents a distribution of the profits by a corporations
1. KINDS OF DIVIDENDS RECOGNIZED IN LAW
a) CASH - when taxable, the measure of income is the amount of money
received
b) PROPERTY - when taxable, the measure of income is the FMV of the
property received.
A dividend paid in shares of stocks of another corporation, or in treasury
stocks, is a property dividend.
(BIR Ruling 108-93, May 7, 1993)
FACTS: SEA COMMERCIAL COMPANY, INC. (SEACOM), is a domestic
corporation with an authorized capital stock of Thirty Million Pesos
(P30,000,000.00), divided into Thirty Thousand (30,000) Preferred shares of stock
and Two Hundred Seventy Thousand (270,000) Common shares of stock, all with
a par value of One Hundred Pesos (P100.00) per share, of which One Hundred
Fifty Five Thousand Three Hundred Two (150,302) Common shares of stock are
issued and outstanding as of 31 December 1991; and that as of 31 December
1991, it had a total stockholder's equity in the amount of Thirty Four Million Seven
Hundred Nine Thousand Five Hundred Five Pesos (P34,709,505.00), which
include unrestricted retained earnings in the amount of Nineteen Million Four
Hundred Sixty Nine Thousand Four Hundred Forty One Pesos (P19,469,441.00);
that on 15 June 1992, the Corporation declared all of its unrestricted retained
earnings as of 31 December 1991 as dividends in favor of stockholders of record
as of 15 June 1992, payable on or before 15 April 1993, that said dividends shall
be distributed in the form of cash in the amount of Seven Million Five Hundred
Twenty Thousand Three and 08/100 Pesos (P7,520,003.08), and the following
properties with a total book value of Eleven Million Nine Hundred Forty Nine
Thousand Four Hundred Thirty Seven and 92/100 Pesos (P11,949,437.92). The
aforementioned
real and personal properties are capital assets of the Corporation, which are not
used and not intended to be used by the Corporation in its ordinary course of
business; that the properties declared as dividends were recorded in the books of
the Corporation at their book values; that the total book value of the property
dividends is equivalent only to Twenty-Five and 80/100 percent (25.8%) of
SEACOM'S assets for the year ended 31 December 1991; and that the
Corporation continues to do business and its stockholders have no intention of
liquidating the corporation after the declaration of property dividends.
RULING: The property dividend shall be recorded at the book value in the books of
both the issuing corporation and the recipient stockholder. The BIR Ruling No.
21(c)(2)-028-89-130-89 applying Sections 250 and 251 of Revenue Regulations
No. 2 stating that dividends paid in securities or other property (other than its own
stock) in which the earnings of a corporation have been invested are income to the
recipient to the amount of the full market value of such property when receivable
by individual stockholders has already been modified having been rendered
obsolete by Executive Order No. 37 (effective August 1, 1986) subjecting to
income tax at 0% effective January 1, 1989, dividends received from a domestic
corporation and the share of an individual partner in a partnership subject to tax
under Section 24(a) of the Tax Code (BIR Ruling No. 276-91 December 26, 1991)
The proposed property dividend which shall be received By the stockholders
of SEACOM shall be subject to a final withholding tax of zero (0%) percent,
and the receiving stockholders shall not be subject to any income or capital
gains tax arising from their receipt of these properties as property dividend.
(Section 21(c)(2) of the Tax Code, as amended by Executive Order No. 37).
However, certificates authorizing transfer of real estate properties without payment
of the capital gains tax shall be secured from the Revenue District Officer of the
Revenue District where the property is located before said properties are
transferred in the name of the recipient stockholders (BIR Ruling No. 028-89 dated
February 22, 1989). Similarly, certificates authorizing transfer of shares of stock
without payment of the capital gains tax shall be secured from the Revenue District
Officer of the Revenue District where the principal place of office of the corporation
declaring the dividends is located. It shall be the ministerial duty of the Revenue
District Officer to issue said certificates.
SEACOM shall not be subject to any income or capital gains tax on the difference
between the fair market value and the book value of the real estate properties
declared and distributed as property dividends. This is because there is no realized
gain considering the fact that the value used at the time of distribution is the book
value.
Upon subsequent sale or other disposition of the property received as dividends by
the stockholders, the basis of such shall also be its book value at the time of the
dividend distribution.
The amount of the documentary stamp tax on the Deeds of Conveyance to be
executed between SEACOM and the recipient stockholders covering the real
estate properties declared as property dividends shall be based on the book value
of said real estate properties. The documentary stamp tax that shall be collected
shall beat the rate of ten (10) pesos for every one thousand pesos (P1,000.00), or
fractional part thereof, of the book value of the real properties declared as
dividends (Section 196, Tax Code). On the other hand, the documentary stamp tax
on the Deeds of Conveyance to be executed between SEACOM and the recipient
stockholders
covering the shares of stock to be declared as property dividends shall be based
on the par value of the shares of stocks, at the rate of fifty centavos (P0.50) for
each two hundred pesos (P200.00), or fractional part thereof, of the value of the
shares of stock declared as property dividends (Section 176, Tax Code). In both
cases, the documentary stamp tax shall be due and payable on the day of
execution of the Deeds of Conveyance (Section 173, Tax Code).
c. Stock
i. Comm. vs. Manning GR No. L-28398, August 6, 1975, 66 SCRA 14
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.
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.
Where by the use of a trust instrument as a convenient technical device,
respondents bestowed unto themselves the full worth and value of a deceased
stockholder's corporate holding acquired with the very earnings of the companies,
such package device which obviously is not designed to carry out the usual stock
dividend purpose of corporate expansion reinvestment, e.g., the acquisition of
additional facilities and other capital budget items, but exclusively for expanding
the capital base of the surviving stockholders in the company, cannot be allowed to
deflect the latter's responsibilities toward our income tax laws. The conclusion is
ineluctable that whenever the company parted with a portion of its earnings "to
buy" the corporate holdings of the deceased stockholders, it was in ultimate effect
and result making a distribution of such earnings to the surviving stockholders. All
these amounts are consequently subject to income tax as being, in truth and in
fact, a flow of cash benefits to the surviving stockholders.

Where the surviving stockholders, by resolution, partitioned among themselves, as
treasury stock dividends, the deceased stockholder's interest, and earnings of the
corporation over a period of years were used to gradually wipe out the holdings
therein of said deceased stockholder, the earnings (which in effect have been
distributed to the surviving stockholders when they appropriated among
themselves the deceased stockholder's interest), should be taxed for each of the
corresponding years when payments were made to the deceased's estate on
account of his shares. In other words, the Tax Commissioner may not asses the
surviving stockholders, for income tax purposes, the total acquisition cost of the
alleged treasury stock dividends in one lump sum. However, with regard to
payment made with the corporation's earnings before the passage of the resolution
declaring as stock dividends the deceased stockholder's interest (while indeed
those earnings were utilized in those years to gradually pay off the value of the
deceased stockholder's holdings), the surviving stockholders should be liable (in
the absence of evidence that prior to the passage of the stockholder's resolution
the contributed of each of the surviving stockholder rose corresponding), for
income tax purposes, to the extent of the aggregate amount paid by the
corporation (prior to such resolution) to buy off the deceased stockholder's shares.
The reason is that it was only by virtue of the
authority contained in said resolution that the surviving stockholders actually, albeit
illegally, appropriated and petitioned among themselves the stockholders equity
representing the deceased stockholder's interest.
ii. Fischer vs. Trinidad, 43 Phil 973
Are the "stock dividends" in the present case "income" and taxable?
A dividend is defined as a corporate profit set aside, declared, and
ordered by the directors to be paid to the stockholders on demand or
at a fixed time. Until the dividend is declared, the corporate profits
belong to the corporation and not to the stockholders, and are liable
for the payment of the debts of the corporation.
A stock dividend, when declared, is merely a certificate of stock which evidences
the interest of the stockholder in the increased capital of the corporation. There is a
clear distinction between a cash dividend and a stock dividend. The one is a
disbursement to the stockholder of accumulated earnings, and the corporation
parts irrevocably with all interest therein; the other involves no disbursement by the
corporation; the corporation parts with nothing to its stockholder. When a cash
dividend is declared and paid to stockholders, such cash becomes the absolute
property of the stockholders and cannot be reached by the creditors of corporation
in the absence of fraud. The property represented by a stock dividend, however,
still being the property of corporation, and not of 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 of the property of the corporation is sold under
execution, then the stockholders certainly could not be charged with having
received an income by virtue of the issuance of the stock dividend. If the ownership
of the property represented by a stock dividend is still in the corporation and not in
the holder of such stock, certainly such stock cannot be regarded as income to the
stockholder.
The stockholder has received nothing but a representation of an interest in the
property of the corporation and, as a matter of fact, he may never receive anything,
depending upon the final outcome of the business of the corporation.
HELD: "Stock dividends" are not "income," the same cannot be taxed
under that provision of Act No. 2833 which provides for a tax upon
income. Under the guise of an income tax, property which is not an
income cannot be taxed.
2. Measure of Income in Cash and Property Dividend
3. Stock Dividend
a. When Taxable – if it gives the shareholder an interest different from that
which his former stock represented
Measure of Income: FMV of the shares of stocks received
b. When Not Taxable - if the new shares confer no different interest or
rights than
the old
Adjusted Cost per Share: where the stock received as dividend is all of
substantially the same character or preference as the stock upon which the stock
dividend is paid, the cost of each share shall be equal to the cost of the old shares
divided by the total number of the old and new shares. The new basis per share
upon any subsequent sale of the shares.
4. Liquidating “Dividend”
a. BIR Ruling 322-87, October 19, 1987
October 19, 1987 BIR RULING NO. 322-87
Gentlemen : This refers to your letter dated July 23, 1987 stating that your
company is a trading concern and at present it is in the process of liquidation; and
that your individual stockholders will receive their liquidating dividends in excess of
their investment.
 In reply, I have the honor to inform you that since the individual
stockholders of your company will receive upon its complete liquidation all its
assets as liquidating dividends, they will thereby realize capital gain or loss. The
gain, if any, derived by the individual stockholders consisting of the difference
between the fair market value of the liquidating dividends and the adjusted cost to
the stockholders of their respective shareholdings in the said corporation (Sec. 83
(a), Sec. 256, Income Tax Regulations) shall be subject to income tax at the rates
prescribed under Section 21(a) of the Tax Code, as amended by Executive Order
No. 37.
Moreover, pursuant to Section 34(b) of the Tax Code, as amended by
Executive Order No. 37, only 50% of the aforementioned capital gain is reportable
for income tax purposes if the shares were held by the individual stockholders for
more than twelve months and 100% of the capital gains if the shares were held for
less than twelve months.
Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner
c. Wise & Co., Incorporated vs. Meer GR No. L-48321, June 30, 1947
A distribution does not necessarily become a dividend by reason of the fact
that it is called a dividend by the distributing corporation. "The ordinary connotation
of liquidating dividend involves the distribution of assets by a corporation to its
stockholders upon dissolution." The determining element therefore is whether the
distribution was in the ordinary course of business and with intent to maintain the
corporation as a going concern, or after deciding to quit with intent to liquidate the
business. Proceedings actually begun to dissolve the corporation or formal action
taken to liquidate it are but evidentiary and not indispensable.
"The distinction between a distribution in liquidation and an ordinary dividend
is factual; the result in each case depending on the particular circumstances of the
case and the intent of the parties. If the distribution is in the nature of a recurring
return on stock it is an ordinary dividend. However, if the corporation is really
winding up its business or recapitalizing and narrowing its activities, the distribution
may properly be treated as in complete or partial liquidation and as payment by the
corporation to the stockholder for his stock. The corporation is, in the latter
instances, wiping out all or Part of the
stockholders' interest in the company . . ."
Gains resulting from distributions made in complete liquidation or
dissolution of a corporation as specifically contemplated in section 25 (a) of the
former Income Tax Law, are taxable as income, whether the stockholder happens
to be an individual or a corporation. Section 25 (a) of the law, far from limiting the
taxability, provides that the gain thus realized is a "taxable income" — under the
law so long as a gain is realized, it will be a taxable income whether the distribution
comes from the earnings or profits of the corporation or from the sale of all of its
assets in general, so long as the distribution is made "in complete liquidation or
dissolution."
FACTS:
That during the year 1937, plaintiffs, except Mr. E.M.G. Strickland (who, as
husband of the plaintiff Mrs. E.M.G. Strickland, is only a nominal party herein),
were stockholders of Manila Wine Merchants, Ltd., a foreign corporation duly
authorized to do business in the Philippines.
That on May 27, 1937, the Board of Directors of Manila Wine Merchants, Ltd.,
(hereinafter referred to as the Hongkong Company), recommended to the
stockholders of the company that they adopt the resolutions necessary to enable
the company to sell its business and assets to Manila Wine Merchants, Inc., a
Philippine corporation formed on May 27, 1937, (hereinafter referred to as the
Manila Company), for the sum of P400,000;
HK Company made a distribution of its earnings for the year 1937 to its
stockholders (Dividends declared and paid on June 8, 1937). HK Company paid
Philippine income tax on the entire earnings from which the said distributions were
paid.
After the June 8 distribution, HK Company had :
P74, 182 – surplus resulting from the active conduct of business
P270, 116 – total increased surplus as a result of the sale of the business and
assets
The stockholders by proper resolution directed that the company be voluntarily
liquidated and its capital distributed among the stockholders; that the stockholders
at such meeting appointed a liquidator duly paid off the remaining debts of the
Hongkong Company and distributed its capital among the stockholders including
plaintiffs; that the liquidator duly filed his accounting on January 12, 1938, and in
accordance with the provisions of Hongkong Law, the Hongkong Company was
duly dissolved at the expiration of three moths from that date.
That plaintiffs duly filed Philippine income tax returns. That defendant subsequently
made the deficiency assessments. That said plaintiffs duly paid the said amounts
demanded by defendant under written protest, which was overruled in due course;
that the plaintiffs have since July 1, 1939 requested from defendant a refund of the
said amounts which defendant has refused and still refuses to refund.
CONTENTIONS:
CIR-The amounts received by Wise & Co et al from the HK Company were
liquidating dividends (thus, subject to normal tax)
Wise & Co et al say- The amounts were ordinary dividends

ISSUES:
a)W/N the amounts received by Wise & Co et al from the HK Company on which
the taxes were assessed were ordinary dividends or liquidating dividends
(LIQUIDATING DIVIDENDS)
b)W/N such liquidating dividends are taxable income (YES)
RATIO:
a)The amounts received by the stockholders were liquidating dividends
•The parties agreed in the deed of sale that the sale and transfer shall take effect
as of June 1, 1937. Thus, the distribution of assets to the stockholders made after
that date must have been considered by them as liquidating dividends.
•The said distributions were NOT in the ordinary course of business and with intent
to maintain the corporation as a going concern (in which case they would be
ordinary dividends) BUT they were made after the liquidated of the business had
been decided upon, which makes them payments for the surrender and
relinquishment of the stockholder’s interest in the corporation, or liquidating
dividends.
•Ordinary connotation of liquidating dividend involves the distribution of assets by a
corporation to its stockholders upon dissolution.
•Wise & Co et al (stockholders) say: It was only on August 19, 1937, that the HK
Company took the first corporate steps towards liquidation.
•SC: It was expressly stipulated in the formal deed of sale (see underlined portion
in facts) that the sale or transfer shall take effect on June 1, 1937. After that date,
and until completion of the transfer, the HK Company continued to run the
business in trust for the new owner, the Manila Company.
•The determining element is whether the distribution was in the ordinary course of
business and with intent to maintain the corporation as a going concern, or after
deciding to quit with intent to liquidate the business.
•The fact that the distributions were called ‘dividends’ and were made, in part, from
earnings and profits, and that some of them were made before liquidation or
dissolution proceedings were commenced, is NOT controlling.
Liquidating dividend v Ordinary dividend
• The distinction between a distribution in liquidation and an ordinary
dividend is factual; the result in each case depending on the particular
circumstances of the case and the intent of the parties.
• If the distribution is in the nature of a recurring return on stock it is an
ordinary dividend.
• However, if the corporation is really winding up its business or
recapitalizing and narrowing its activities, the distribution may properly be treated
as in complete or partial liquidation and as payment by the corporation to the
stockholder for his stock. The corporation is, in the latter instances, wiping out all
parts of the stockholders' interest in the company . . .. “
b) Such liquidating dividends are taxable income
•Income tax law states that: “Where a corporation, partnership, association, joint-
account, or insurance company distributes all of its assets in complete liquidation
or dissolution, the gain realized or loss sustained by the stockholder, whether
individual or corporation, is a taxable income or a deductible loss as the case may
be.”
•Amounts distributed in the liquidation of a corporation shall be treated as
payments in exchange for the stock or share, and any gain or profit realized
thereby shall be taxed to the distributee as other gains or profits.
•The stockholders received the distributions in question in exchange for the
surrender and relinquishment by them of their stock in the HK Company which was
dissolved and in process of complete liquidation.
•That money in the hands of the corporation formed a part of its income and was
properly taxable to it under the Income Tax Law.
•When the corporation was dissolved and in process of complete liquidation and its
shareholders surrendered their stock to it and it paid the sums in question to them
in exchange, a transaction took place.
•The shareholder who received the consideration for the stock earned that much
money as income of his own, which again was properly taxable to him under the
Income Tax Law.
The profits earned by the stockholders are income from Philippine sources, and
thus subject to Philippine tax
Stockholders say: the profit realized by them does not constitute income from
Philippine sources and is not subject to Philippine taxes since all steps in the
carrying out of this so-called sale took place outside the Philippines
SC:
•The HK Company was at the time of the sale of its business in the Philippines,
and the Manila Company was a domestic corporation domiciled and doing
business also in the Philippines.
•The HK Company was incorporated for the purpose of carrying on business in the
Philippines which is the business of wine, beer, and spirit merchants and the other
objects set out in its memorandum of association.
•Hence, its earnings, profits, and assets, including those from whose proceeds the
distributions in question were made, the major part of which consisted in the
purchase price of thebusiness, had been earned and acquired in the Philippines.
•As such, it is clear that said distributions were income "from Philippine sources."
Judgment affirmed.
DISPOSITIVE PORTION: For the foregoing consideration, the judgment appealed
from will be affirmed with the costs of both instances against the appellants. So
ordered.
4. “Essentially Equivalent to Distribution of Taxable Dividends”
d. CIR vs. CA & CTA & Anscor, GR No. 108576, January 20, 1999
FACTS:
Don Andres Soriano formed ANSCOR, a corporation. 1947 - ANSCOR declared
stock dividends.1964 - Don Andres died. Shares were transferred to Dona
Carmen, his wife. 1966 - stock dividends worth 46, 290 and 46,287 shares were
respectively received by the estate and Dona Carmen from ANSCOR. 1968 -
ANSCOR redeemed 28000 common shares from the estate. 1967 - ANSCOR
redeemed 80,000 common shares from the estate. 1973 - BIR assessed ANSCOR
for deficiency withholding tax-at-source, despite ANSCOR's claim that it availed of
a tax amnesty under PD 23. ANSCOR filed a petition for review with the CTA
assailing the tax assessments on the redemptions and exchange of stocks. CTA
reversed the CIR, and the CA affirmed the CTA's ruling.
ISSUE: W/N ANSCOR's redemption of stocks from its stockholder Don Andres,
can be considered as "essentially equivalent to the distribution of taxable dividend"
making the proceeds taxable.
HELD: YES.
1. Tax exemption. The Court held that ANSCOR was not covered by the amnesty it
is claiming.
2. Tax dividends. Section 83(b) of the 1939 Revenue Act. Distribution of dividends
or assets by corporations. — (b) Stock dividends — A stock dividend representing
the transfer of surplus to capital account shall not be subject to tax. However, if a
corporation cancels or redeems stock issued as a dividend atsuch time and in such
manner as to make the distribution and cancellation or redemption, in whole or in
part, essentially equivalent to the distribution of a taxable dividend, the amount so
distributed in redemption or cancellation of the stock shall be considered as
taxable income to the extent it represents a distribution of earnings or profits
accumulated after March first, nineteen hundred and thirteen.
Redemption - repurchase, a reacquisition of stock by a corporation which
issued the stock 89 in exchange for property, whether or not the acquired stock is
cancelled, retired or held in the treasury. Essentially, the corporation gets back
some of its stock, distributes cash or property to the shareholder in payment for the
stock, The application of Sec. 83(b) depends on the special factual circumstances
of each case.
General rule: A stock dividend representing the transfer of surplus to
capital account shall not be subject to tax.
Exception: If a corporation cancels or redeems stock issued as a
dividend at such time and in such manner as to make the distribution and
cancellation or redemption, in whole or in part, essentially equivalent to the
distribution of a taxable dividend, the amount so distributed in redemption or
cancellation of the stock shall be considered as taxable income to the extent it
represents a distribution of earnings or profits accumulated.
Stock dividends, strictly speaking, represent capital and do not constitute
income to its recipient. The mere issuance is not yet subject to income tax as they
are nothing but an "enrichment through increase in value of capital investment." It
postpones profits because stocks as capital is no longer available for actual
distribution (aka sale).
Income in tax law is "an amount of money coming to a person within a
specified time, whether as payment for services, interest, or profit from
investment."
Depending on the circumstances, the proceeds of redemption of stock
dividends are essentially distribution of cash dividends, which when paid becomes
the absolute property of the stockholder. Having realized gain from that
redemption, the income earner cannot escape income tax.
For the exempting clause of Section, 83(b) to apply, it is indispensable
that:
(a) there is redemption or cancellation;
(b) the transaction involves stock dividends and
 (c) the "time and manner" of the transaction makes it "essentially distribution of taxable dividends. As "taxable dividend" under Section 83(b), it is
equivalent to a distribution of taxable dividends." part of the "entire income" subject to tax.
Of these, the most important is the third.

3. Application to this case. ANSCOR redeemed shares of stocks from a

stockholder (Don Andres) twice (28,000 and 80,000 common shares). But where
did the shares redeemed come from?
If its source is the original capital subscriptions upon establishment of the
corporation or from initial capital investment in an existing enterprise, its
redemption to the concurrent value of acquisition may not invite the application of
Sec. 83(b) under the 1939 Tax Code, as it is not income but a mere return of
capital. On the contrary, if the redeemed shares are from stock dividend
declarations other than as initial capital investment, the proceeds of the redemption
is additional wealth, for it is not merely a return of capital but a gain thereon.
But here, it is undisputed that at the time of the last redemption, the
original common shares owned by the estate were only 25,247.5. This means that
from the total of 108,000 shares redeemed from the estate, the balance of
82,752.5 (108,000 less 25,247.5) must have come from stock dividends.
As to the 3rd element, the stock dividends that were redeemed were
issued just 2 to 3 years earlier. The issuance of stock dividends and its subsequent
redemption must be separate, distinct, and not related, for the redemption to be
considered a legitimate tax scheme. Redemption cannot be used as a cloak to
distribute corporate earnings.
The three elements in the imposition of income tax are: (1) there must be
gain or and profit, (2) that the gain or profit is realized or received, actually or
constructively, and (3) it is not exempted by law or treaty from income tax.
The test of taxability under the exempting clause of Section 83(b) is,
whether income was realized through the redemption of stock dividends.
The two purposes invoked by ANSCOR are no excuse for its tax liability.
First, the alleged "filipinization" plan cannot be considered legitimate as it was not
implemented until the BIR started making assessments on the proceeds of the
redemption. Records show that despite the existence of enormous corporate
profits no cash dividend was ever declared by ANSCOR from 1945 until the BIR
started making assessments in the early 1970's. This circumstance negates the
legitimacy of ANSCOR's alleged purposes.
ANSCOR argued that to treat as "taxable dividend" the proceeds of the
redeemed stock dividends would be to impose on such stock an undisclosed lien
and would be extremely unfair to intervening purchase. Such argument, however,
bears no relevance in this case as no intervening buyer is involved.
After considering the manner and the circumstances by which the
issuance and redemption of stock dividends were made, there is no other
conclusion but that the proceeds thereof are essentially considered equivalent to a