CIR v Manning

Topic: Passive Income: Dividends

FACTS:

Reese, the majority stockholder (with 24,700 out of the 25,000 common shares) of MANTRASCO,
executed a trust agreement between him and three minority stockholders, namely Manning, McDonald,
and Simmons, each of whom owned 100 common shares.

Reese wanted MANTRASCO to remain under the management of the three minority stockholders even
after his death, hence the trust agreement.

Upon Reese's death, MANTRASCO paid his estate the value of his shares. Subsequently, Reese's shares
were declared as dividends and were proportionately distributed to Manning, McDonald, and Simmons.
No income tax was paid by any of them.

The BIR later assessed the three with deficiency income tax, as well as fraud penalties and interest
charges, saying that the distribution of Reese's shares as stock dividends was in effect a distribution of
the assets or property of the corporation, which should have been taxable.

The CTA reversed the BIR assessment, saying that the respective 1/3 interest in MANTRASCO of
Manning, McDonald, and Simmons 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.

RULING:

The SC ruled otherwise and held that the declaration of Reese's shares as dividends was null and void,
and that the subject transaction was in fact subject to the payment of income tax. As such, the Court
remanded the case to the CTA for the recomputation of income tax liabilities of Manning, McDonald,
and Simmons.

DOCTRINE:

A dividend is any distribution made by a corporation to its shareholders, whether in money or in other
property, out of its earnings or profits. A stock dividend is a conversion of surplus or undivided profits
into capital stock, which is distributed to stockholders in lieu of a cash dividend.

Under the National Internal Revenue Code, income tax is assessed on income received from any
property, activity or service that produces income. The Tax Code stands as an indifferent, neutral
party on the matter of where the income comes from.