CIR v CA, CTA, & ANSCOR  1966 – ANSCOR further increased its capital stock to P30M
Property Dividend | 20 Jan 1999 | Martinez, J.  Dec 1966 – Don Mariano's estate and Doña Soriano respectively received
SUMMARY:
Don Andres Mariano formed A Soriano y Cia Corporation, ANSCOR's predecessor.
Upon initial capitalization, Don Mariano subscribed to the shares originally issued.
Thereafter, several stock dividends were declared to its shareholders, including Don
Mariano and his wife, Doña Soriano. Subsequently to Don Mariano's death, the
corporation exchanged some of the shares of Don Mariano's estate and Doña Soriano.
ANSCOR then later redeemed some of the shares allegedly to retire the shares as
treasury bonds, Filipinize the corporation and reduce its foreign exchange
remittances in case of cash dividend declarations. BIR then later assessed ANSCOR
for deficiency of withholding tax-at-source for these exchanges and redemptions. SC
held that only the proceeds of the redemption of some of the shares are taxable
income.
DOCTRINE:
Redemption of a stock dividend is taxable when the following concur:
(a) there is redemption; (b) the transaction involves stock dividends and (c) the
"time and manner" of the transaction makes it "essentially equivalent to a distribution
of taxable dividends."
The proceeds of the redemption of a stock dividend is taxable when income is
realized through the redemption of stock regardless of the redeeming corporation's
purpose for the redemption.
FACTS:
 1930s – Don Andres Mariano, a US citizen and resident, formed A Soriano
y Cia corporation, ANSCOR'S predecessor with a P1M capitalization
divided into 10,000 common shares, with par value of P100/share.
 ANSCOR – Wholly owned and controlled by Don Mariano's family, who
are all non- resident aliens
 1937 – Don Mariano subscribed to 4,963 shares out of 5,000 shares
originally issued
 12 Sep 1945 – ANSCOR's authorized capital stock was increased to P2.5M
divided into 25,000 common shares with par value of P100/share for the
additional 15,000 shares. Only 10,000 shares were issued, all subscribed by
Don Mariano, whose subscription was at 14,963 common shares
 Oct 1945 – Don Mariano transferred 1,250 shares each to his two foreigner
sons, Jose and Andres, Jr. as their respective initial investments
 1947 up to 20 Dec 1963 – ANSCOR made several stock dividend
declarations
 30 Dec 1964 – Don Mariano died with 185,165 shares, of which 50,495 are
original issues and the balance of 134,659 shares as stock dividend
declarations. Of Don Mariano's shareholdings, ½ (92,577) were transferred
to Doña Carmen Soriano, his widow, as her conjugal share. The other half
formed part of Don Mariano's estate.
 31 Dec 1964 – ANSCOR increased its capital stock to P20M
46,290 and 46,287 shares, which increased their accumulated shareholdings
to 138,867 and 138,864 common shares each
 31 Mar 1968 - Doña Soriano exchanged her whole 138,864 common shares
for 138,860 of the newly reclassified preferred shares. Don Mariano's
estate likewise exchanged 11,140 of its common shares for the remaining
11,140 preferred shares, which reduced the estate's common shares to
127,727. These exchanges were made pursuant to the advice of the US IRS
that such exchanges are only recapitalizations schemes and are not tax
avoidance.
 30 Jun 1968 – ANSCOR redeemed 28,000 common shares from Don
Mariano's estate.
 Nov 1968 – Board increased ANSCOR's capital stock to P75M divided into
150,000 preferred shares and 600,000 common shares.
 1969 – ANSCOR redeemed 80,000 common shares from Don Mariano's
estate, which reduced the latter's common shareholdings to 19,727.
According to the Board Resolutions, the redemptions were made to
partially retire said stocks as treasury shares in order to reduce the
company's foreign exchange remittances in case dividends were declared.
 1973- Revenue examiners issued a report proposing that ANSCOR be
assessed for deficiency withholding tax-at-source pursuant to Sections 53-
54 of the 1939 Revenue Code for the year 1968 and the second quarter of
1969 based on the transactions of exchange and redemption of stocks
 ANSCOR filed a petition for review with the CTA
 CTA reversed CIR's ruling and held that there is sufficient evidence to
overcome the prima facie correctness of the assessments. CA affirmed the
CTA's decision.
 CIR's Arguments:
o Exchange of common shares to preferred shares is tantamount to
cancellation under Sec. 38 (b), thus making the proceeds taxable.
o Sec. 38(b) applies to the stock dividends ANSCOR redeemed.
o Under the Net Effect Test, Don Mariano's estate gained from the
redemption, the proceeds of which should be taxable
o PDs do not cover ANSCOR as the basis of the assessment (i.e.
Sections 53- 54 in relation to Art. 83 (b), 1939 Revenue Code) was
specifically exempted by the same PDs relied upon
 ANSCOR's Arguments:
o It had no duty to withhold any tax as the transactions were done
for legitimate business purposes: (1) reduce its foreign exchange
remittances in the event the company would declare cash
dividends and (2) subsequently Filipinize the ownership of
ANSCOR
o It had availed of the tax amnesty under PD23, amended by PDs 67
and 157.
o To treat as taxabale dividend the proceeds of the redeemed stock
dividends would be to impose on such stock an undisclosed lien
and would be extremely unfair to those who buys the stock
 dividends after their issuance
ISSUE/S & RATIO:
1. WON ANSCOR's redemption of stocks from its stockholders can be
considered as essentially equivalent to the distribution of taxable dividend,
thus making its proceeds taxable—YES
 GR: A stock dividend representing the transfer of surplus to capital account
shall not be subject to tax as it is merely an enrichment through increase in
value of capital investment. It postpones the realization of profits. Without a
realization of profits, no flow of wealth can be considered as taxable income.
 EXC: 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 after 1 Mar 1918
o Ratio for exception: Corporations resorted to devious means to
circumvent the law and evade the tax by distributing corporate
earnings under the guise of its initial capitalization by declaring the
stock dividends previously issued and later redeem the same by
paying cash to the stockholder. This amounts to a distribution of
taxable cash dividends which was just delayed to escape the tax.
 Indicators as to whether a redemption or cancellation is essentially
equivalent to the distribution of a taxable dividend:
1) Presence/absence of real business purpose
2) Amount of earnings and profits available for the declaration of
regular dividends and the corporation's past record with respect to
the declaration of dividends
3) Effect of distribution as compared with the declaration of a regular
dividend
4) Lapse of time between issuance and redemption
5) Presence of a substantial surplus and a generous supply of cash
which invites suspicion as does a meager policy in relation both to
current earnings and accumulated surplus
 Elements for Exception to Operationalize:
1) There is a redemption or cancellation;
 Redemption: Repurchase/reacquisition of stock by a
corporation which issued the stock in exchange for
property.
 Often used as a veil for the constructive distribution of
cash dividends
2) Transaction involves stock dividends
3) The time and manner of the transaction makes it essentially
equivalent to a distribution of taxable dividends
 Time: A factor to show that the scheme of
canceling/redeeming the shares is a method adopted to
evade tax
 Consider whether the issuance of stock
dividends/redeemed shares was dictated by legitimate
reasons/bona fide business purpose, the presence of
which might negate a tax evasion plan
 Consider the net effect of the transaction between the
shareholder-income tax payer and the acquiring or
redeeming corporation
 Issuance of stock dividends and its subsequent
redemption must separate, distinct and not related for the
redemption to be considered a legitimate tax scheme
 An operation with no business or corporate purpose is a
mere devise which put on the form of a corporate
reorganization as a disguise for concealing its real
character, and the sole object and accomplishment of
which was the consummation of a preconceived plan, not
to reorganize a business or any part of a business, but to
transfer a parcel of corporate shares to a stockholder.
AS APPLIED IN THE CASE:
 A total of 108,000 shares has been redeemed from Don Mariano.
 Of the redeemed shares, only 25,247.50 came from the original capital
subscriptions upon establishment of ANSCOR → Mere return of capital and
is thus not taxable. The remaining redeemed shares (82,752.50) must have
come from stock dividends.
o Tax Code presumes that that every distribution of corporate
property, in whole or in part, is made out of corporate profits, such
as stock dividends.
 Time and manner of issuance and redemption is suspect and there is an
essentially equivalent distribution of taxable dividends
o Time of issuance and redemption was roughly only 2-3 years
o ANSCORP claim that there are legitimate purposes for the
redemption of the stocks is immaterial as what is considered is the
purpose of the issuance of the shares
o Alleged Filipinization of the corporation was a mere afterthought
as no Board Resolution was issued on the said subject.
Corporations, as juridical entities, can only act through its directors
and officers. There being no acts by such directors or officers of an
attempt at Filipinization aside from the bare allegation that it is
planning to Filipinize ANSCORP, no such act can be attributed to
the corporation. Furthermore, the fact that it had issued stock
dividends increased the shareholdings of its foreign shareholder,
negating their alleged intent to Filipinize ANSCORP.
o The alleged claim that the redemption is for the purposes of
reducing foreign exchange remittances in case cash dividends are
declared cannot be given credence. Despite ANSCOR's enormous
corporate profits, no cash dividends were declared from 1945 until
BIR made its assessements in 1970s. In addition, the issuances of
stock dividends to its foreign shareholders increased their need for
foreign exchange remittances in case of cash dividend declaration
instead of decreasing it.
 o Income realized through the redemption of stock dividends is value pursuant to the doctrine of equality of shares3
taxable regardless of the purposes of the corporation in the
redemption. Tax liability of a taxpayer cannot be made to depend RULING: The decision of the Court of Appeals is MODIFIED in that ANSCOR's
upon a third person who did not earn the income being taxed. redemption of 82,752.5 stock dividends is herein considered as essentially equivalent
 Alleged unfairness to an intervening buyer has no relevance because there to a distribution of taxable dividends for which it is LIABLE for the withholding tax-
is no intervening buyer in this case. The undisclosed lien may be unfair to a at-source. The decision is AFFIRMED in all other respects.
subsequent stock buyer who has no capital interest in the company. But the
unfairness may not be true to an original subscriber like Don Andres, who
holds stock dividends as gains from his investments.
o The subsequent buyer who buys stock dividends is investing
capital. It just so happened that what he bought is stock dividends.
The effect of its (stock dividends) redemption from that subsequent
buyer is merely to return his capital subscription, which is income
if redeemed from the original subscriber.

2. WON ANSCOR's exchange of common1 with preferred2 shares can be

considered as essentially equivalent to the distribution of taxable dividend,
thus making its proceeds taxable—NO

 Exchange: The act of taking or giving one thing for another involving
reciprocal transfer
 GR: Exchange is a taxable transaction
 EXC: Exchange of common stocks with preferred stocks or preferred for
common stocks or a combination of both may not always produce a
recognized gain, in which case, it is not taxable

AS APPLIED IN THE CASE:

 No change in the proportional shares of Don Mariano's estate or Doña
Soriano as a result of the exchange
 No cash flow as a result of the exchange. The par value of the common and
preferred shares exchanged were the same.
 Any difference in their market value of the shares is immaterial at the time
of the exchange as there is no income realized yet.
 Exchange brings about a shifting of the balance of stock features, like
priority in dividend declarations or absence of voting rights. But there is no
realized income for tax purposes.
 The exchange of shares, without more, produces no realized income to the
subscriber. There is only a modification of the subscriber's rights and
privileges — which is not a flow of wealth for tax purposes. The issue of
taxable dividend may arise only once a subscriber disposes of his entire
interest and not when there is still maintenance of proprietary interest
 Common stocks and preferred stocks exchanged are considered of equal

1
Represents the residual ownership interest in the corporation. It is a basic class of stock ordinarily and
usually issued without extraordinary rights or privileges and entitles the shareholder to a pro rata division of
profits. 3
All stocks issued by the corporation are presumed equal with the same privileges and liabilities, provided
2
Those which entitle the shareholder to some priority on dividends and asset distribution. that the Articles of Incorporation is silent on such differences.