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COMMISSIONER OF INTERNAL REVENUE, Petitioner, G.R. No. 108576 January 20, 1999 -versus-COURT OF APPEALS, COURT OF TAX APPEALS AND A. SORIANO CORPORATION, Respondents. MARTINEZ, J.:
Petitioner Commissioner of Internal Revenue (CIR) seeks the reversal of the Decision of the Court of Appeals (CA)[1] which affirmed the ruling of the Court of Tax Appeals (CTA)[2] that private respondent A. Soriano Corporation’s (hereinafter ANSCOR) redemption and exchange of the stocks of its foreign stockholders cannot be considered as essentially equivalent to a distribution of taxable dividends" under Section 83(b) of the 1939 Internal Revenue Act.[3] The undisputed facts are as follows:chanrobles virtual law library Sometime in the 1930's, Don Andres Soriano, a citizen and resident of the United States, formed the corporation "A. Soriano y Cia", predecessor of ANSCOR, with a P1,000,000.00 capitalization divided into 10,000 common shares at a par value of P100/share. ANSCOR is wholly owned and controlled by the family of Don Andres, who are all non-resident aliens.[4] In 1937, Don Andres subscribed to 4,963 shares of the 5,000 shares originally issued.[5] On September 12, 1945, ANSCOR’s authorized capital stock was increased to P2,500,000.00 divided into 25,000 common shares with the same par value. Of the additional 15,000 shares, only 10,000 was issued which were all subscribed by Don Andres, after the other stockholders waived in favor of the former their pre-emptive rights to subscribe to the new issues.[6] This increased his subscription to 14,963 common shares.[7] A month later,[8] Don Andres transferred 1,250 shares each to his two sons, Jose and Andres, Jr., as their initial investments in ANSCOR.[9] Both sons are foreigners.[10] By 1947, ANSCOR declared stock dividends. Other sock dividend declarations were made between 1949 and December 20, 1963.[11] On December 30, 1964 Don Andres died. As of that date, the records revealed that he has a total shareholdings of 185,154 shares[12] - 50,495 of which are original issues and the balance of 134,659 shares as stock dividend declarations.[13] Correspondingly, one-half of that shareholdings or 92,577[14] shares were transferred to his wife, Doña Carmen Soriano, as her conjugal share. The other half formed part of his estate.[15] A day after Don Andres died, ANSCOR increased its capital stock to P20M[16] and in 1966 further increased it to P30M.[17] In the same year (December 1966), stock dividends worth 46,290 and 46,287 shares were respectively received by the Don Andres estate[18] and Doña Carmen from ANSCOR. Hence, increasing their accumulated shareholdings to 138,867 and 138,864[19] common shares each.[20] On December 28, 1967, Doña Carmen requested a ruling from the United States Internal Revenue Service (IRS), inquiring if an exchange of common with preferred shares may be considered as tax avoidance scheme[21] under Section 367 of the 1954 U.S. Revenue Act.[22] By January 2, 1968, ANSCOR reclassified its existing 300,000 common shares into 150,000 common and 150,000 preferred shares.[23] In a letter-reply dated February 1968, the IRS opined that the exchange is only a recapitalization scheme and not tax avoidance.[24] Consequently,[25] on March 31, 1968 Doña Carmen exchanged her whole 138,864 common shares for 138,860 of the newly reclassified preferred shares. The estate of Don Andres in turn, exchanged 11,140 of its common shares for remaining 11,140 preferred shares, thus reducing its (the estate) common shares to 127,727.[26] On June 30, 1968, pursuant to a Board Resolution, ANSCOR redeemed 28,000 common shares from the Don Andres’ estate. By November 1968, the Board further increased ANSCOR’s capital stock to P75M divided into 150,000 preferred shares and 600,000 common shares.[27] About a year later, ANSCOR again redeemed 80,000 common shares from the Don Andres’ estate,[28] further reducing the latter’s common shareholdings to 19,727. As stated in the board Resolutions, ANSCOR’s business purpose for both redemptions of stocks is to partially retire said stocks as treasury shares in order to reduce the company’s foreign exchange remittances in case cash dividends are declared.[29] In 1973, after examining ANSCOR’s books of account and records, Revenue examiners issued a report proposing that ANSCOR be assessed for deficiency withholding tax-at-source, pursuant to Sections 53 and 54 of the 1939 Revenue Code,[30] for the year 1968 and the second quarter of 1969 based on the transactions of exchange and redemption of stocks.[31] The Bureau of Internal Revenue (BIR) made the corresponding assessments despite the claim of ANSCOR that it availed of the tax amnesty under Presiential Decree (P.D.) 23[32] which were amended by P.D.’s 67 and 157.[33] However, petitioner ruled that the invoked decrees do not cover Sections 53 and 54 in relation to Article 83(b) of the 1939 Revenue Act under which ANSCOR was assessed.[34] ANSCOR’s subsequent protest on the assessments was denied in 1983 by petitioner.[35] Subsequently, ANSCOR filed a petition for review with the CTA assailing the tax assessments on the redemptions and exchange of stocks. In its decision, the Tax Court reversed petitioner’s ruling, after finding sufficient evidence to overcome the prima facie correctness of the questioned assessments.[36] In a petition for review, the CA, as mentioned, affirmed the ruling of the CTA.[37] Hence, this petition.cralaw:red The bone of contention is the interpretation and application of Section 83(b) of the 1939 Revenue Act[38] which provides:chanrobles virtual law library
(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 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 pofits accumulated after March first, nineteen hundred and thirteen." (Italics supplied). Specifically, the issue is whether ANSCOR’s redemption of stocks from its stockholder as well as the exchange of common with preferred shares can be considered as "essentially equivalent to the distribution of taxable dividend," making the proceeds thereof taxable under the provisions of the above-quoted law. Petitioner contends that the exchange transaction is tantamount to "cancellation" under Section 83(b) making the proceeds thereof taxable. It also argues that the said Section applies to stock dividends which is the bulk of stocks that ANSCOR redeemed. Further, petitioner claims that under the "net effect test," the estate of Don Andres gained from the redemption. Accordingly, it was duty of ANSCOR to withhold the tax-at-source arising from the two transactions, pursuant to Sections 53 and 54 of the 1939 Revenue Act.[39] ANSCOR, however, avers that it has no duty to withhold any tax either from the Don Andres estate or from Doña Carmen based on the two transactions, because the same were done for legitimate business purposes which are (a) to reduce its foreign exchange remittances in the event the company would declare cash dividends,[40] and to (b) subsequently "filipinized" ownership of ANSCOR, as allegedly envisioned by Don Andres.[41] It likewise invoked the amnesty provisions of P.D. 67.cralaw:red We must emphasize that
the application of Sec. 83(b) depends on the special factual
circumstances
of each case.[42]
The findings of facts of a special court (CTA) exercising particular
expertise
on the subject of tax, generally binds this Court,[43]
considering that it is substantially similar to the findings of the CA
which is the final arbiter of questions of facts.[44]
The issue in this case does not only deal with facts but whether the
law
applies to a particular set of facts. Moreover, this Court is not
necessarily
bound by the lower courts’ conclusions of law drawn from such facts.[45]
We will deal first with the issue of tax amnesty. Section 1 of P.D. 67[46] provides:chanrobles virtual law library
May the withholding agent, in such capacity, be deemed a taxpayer for it to avail of the amnesty? An income taxpayer covers all persons who derive taxable income.[47] ANSCOR was assessed by petitioner for deficiency withholding tax under Sections 53 and 54 of the 1939 Code. As such, it is being held liable in its capacity as a withholding agent and not in its personality as a taxpayer.cralaw:red In the operation of the withholding tax system, the withholding agent is the payor, a separate entity acting no more than an agent of the government for the collection of the tax[48] in order to ensure its payments;[49] the payer is the taxpayer – he is the person subject to tax impose by law;[50] and the payee is the taxing authority.[51] In other words, the withholding agent is merely a tax collector, not a taxpayer. Under the withholding system, however, the agent-payor becomes a payee by fiction of law. His (agent) liability is direct and independent from the taxpayer,[52] because the income tax is still impose on and due from the latter. The agent is not liable for the tax as no wealth flowed into him – he earned no income. The Tax Code only makes the agent personally liable for the tax[53] arising from the breach of its legal duty to withhold as distinguish from its duty to pay tax since:chanrobles virtual law library
Codal provisions on withholding tax are mandatory and must be complied with by the withholding agent.[55] The taxpayer should not answer for the non-performance by the withholding agent of its legal duty to withhold unless there is collusion or bad faith. The former could not be deemed to have evaded the tax had the withholding agent performed its duty. This could be the situation for which the amnesty decree was intended. Thus, to curtail tax evasion and give tax evaders a chance to reform,[56] it was deemed administratively feasible to grant tax amnesty in certain instances. In addition, a "tax amnesty, much like a tax exemption, is never favored nor presumed in law and if granted by a statute, the terms of the amnesty like that of a tax exemption must be construed strictly against the taxpayer and liberally in favor of the taxing authority."[57] The rule on strictissimi juris equally applies.[58] So that, any doubt in the application of an amnesty law/decree should be resolved in favor of the taxing authority.cralaw:red Furthermore, ANSCOR’s claim of amnesty cannot prosper. The implementing rules of P.D. 370 which expanded amnesty on previously untaxed income under P.D. 23 is very explicit, to wit:chanrobles virtual law library
xxx xxx xxx (2) Tax liabilities with or without assessments, on withholding tax at source provided under Sections 53 and 54 of the National Internal Revenue Code, as amended;[59] ANSCOR was assessed under
Sections 53 and 54 of the 1939 Tax Code. Thus, by specific provision of
law, it is not covered by the amnesty.
Section 83(b) of the 1939 NIRC was taken from Section 115(g)(1) of the U.S. Revenue Code of 1928.[60] It laid down the general rule known as the ‘proportionate test’[61] wherein stock dividends once issued form part of the capital and, thus, subject to income tax.[62] Specifically, the general rule states that:chanrobles virtual law library "A stock dividend representing the transfer of surplus to capital account shall not be subject to tax." Having been derived from a foreign law, resort to the jurisprudence of its origin may shed light. Under the US Revenue Code, this provision originally referred to "stock dividends" only, without any exception. Stock dividends, strictly speaking, represent capital and do not constitute income to its recipient.[63] So that the mere issuance thereof is not yet subject to income tax[64] as they are nothing but an "enrichment through increase in value of capital investment."[65] As capital, the stock dividends postpone the realization of profits because the "fund represented by the new stock has been transferred from surplus to capital and no longer available for actual distribution."[66] 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."[67] It means cash or its equivalent.[68] It is gain derived and severed from capital,69 [ from labor or from both combined[70] - so that to tax a stock dividend would be to tax a capital increase rather than the income.[71] In a loose sense, stock dividends issued by the corporation, are considered unrealized gain, and cannot be subjected to income tax until that gain has been realized. Before the realization, stock dividends are nothing but a representation of an interest in the corporate properties.[72] As capital, it is not yet subject to income tax. It should be noted that capital and income are different. Capital is wealth or fund; whereas income is profit or gain or the flow of wealth.[73] The determining factor for the imposition of income tax is whether any gain or profit was derived from a transaction.[74] "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 it represents a distribution of earnings or profits accumulated after March first, nineteen hundred and thirteen." (Emphasis supplied). In a response to the ruling of the American Supreme Court in the case of Eisner v Macomber[75] (that pro rata stock dividends are not taxable income), the exempting clause above quoted was added because corporations found a loophole in the original provision. They resorted to devious means to circumvent the law and evade the tax. Corporate earnings would be distributed under the guise of its initial capitalization by declaring the stock dividends previously issued and later redeem said dividends by paying cash to the stockholder. This process of issuance-redemption amounts to a distribution of taxable cash dividends which was just delayed so as to escape the tax. It becomes a convenient technical strategy to avoid the effects of taxation.cralaw:red Thus, to plug the loophole – the exempting clause was added. It provides that the redemption or cancellation of stock dividends, depending on the "time" and "manner" it was made is "essentially equivalent to a distribution of taxable dividends," making the proceeds thereof "taxable income" "to the extent it represents profits". The exception was designed to prevent the issuance and cancellation or redemption of stock dividends, which is fundamentally not taxable, from being made use of as a device for the actual distribution of cash dividends, which is taxable.[76] Thus:chanrobles virtual law library
As qualified by the phrase "such time and in such manner," the exception was not intended to characterize as taxable dividend every distribution of earnings arising from the redemption of stock dividends.[81] So that, whether the amount distributed in the redemption should be treated as the equivalent of a "taxable dividend" is a question of fact,[82] which is determinable on "the basis of the particular facts of the transaction in question."[83] No decisive test can be used to determine the application of the exemption under Section 83(b) The use of the words "such manner" and "essentially equivalent" negative any idea that a weighted formula can resolve a crucial issue – Should the distribution be treated as taxable dividend.[84] On this aspect, American courts developed certain recognized criteria, which includes the following:[85]
2) the amount of earnings and profits available for the declaration of a regular dividend and the corporation’s past record with respect to the declaration of dividends, 3) the effect of the distribution as compared with the declaration of regular dividend, 4) the lapse of time between issuance and redemption,[86] 5) the presence of a substantial surplus[87] and a generous supply of cash which invites suspicion as does a meager policy in relation both to current earnings and accumulated surplus.[88] 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 equivalent to a distribution of taxable dividends." Of these, the most important is the third.cralaw:red Redemption is 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.[90] Essentially, the corporation gets back some of its stock, distributes cash or property to the shareholder in payment for the stock, and continues in business as before The redemption of stock dividends previously issued is used as a veil for the constructive distribution of cash dividends. In the instant case, there is no dispute that 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.cralaw:red It is not the stock dividends but the proceeds of its redemption that may be deemed as taxable dividends. Here, it is undisputed that at the time of the last reemption, the original common shares owned by the estate were only 25,247.5.[91] 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. Besides, in the absence of evidence to the contrary, the Tax Code presumes that every distribution of corporate property, in whole or in part, is made out of corporate profits,[92] such as stock dividends. The capital cannot be distributed in the form of redemption of stock dividends without violating the trust fund doctrine – wherein the capital stock, property and other assets of the corporation are regarded as equity in trust for the payment of the corporate creditors.[93] Once capital, it is always capital.[94] That doctrine was intended for the protection of corporate creditors.[95] With respect to the third requisite, ANSCOR redeemed stock dividends issued just 2 to 3 years earlier. The time alone that lapsed from the issuance to the redemption is not a sufficient indicator to determine taxability It is a must to consider the factual circumstances as to the manner of both the issuance and the redemption. The "time" element is a factor to show a device to evade tax and the scheme of cancelling or redeeming the same shares is a method usually adopted to accomplish the end sought.[96] Was this transaction used as a "continuing plan," "device" or "artifice" to evade payment of tax? It is necessary to determine the "net effect" of the transaction between the shareholder-income taxpayer and the acquring (redeeming) corporation.[97] The "net effect" test is not evidence or testimony to be considered; it is rather an interference to be drawn or a conclusion to be reached.[98] It is also important to know whether the issuance of stock dividends was dictated by legitimate business reasons, the presence of which might negate a tax evasion plan.[99] 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.[100] Redemption cannot be used as a cloak to distribute corporate earnings.[101] Otherwise, the apparent intention to avoid tax becoms doubtful as the intention to evade becomes manifest. It has been ruled that:chanrobles virtual law library
Depending on each case, the exempting provision of Sec. 83(b) of the 1939 Code may not be applicable if the redeemed shares were issued with bona fide business purpose,[103] which is judged after each and every step of the transaction have been considered and the whole transaction does not amount to a tax evasion scheme. ANSCOR invoked two reasons to justiy the redemptions – (1) the alleged "filipinization" program and (2) the reduction of foreign exchange remittances in case cash dividends are declared. The Court is not concerned with the wisdom of these purposes but on their relevance to the whole transaction which can be inferred from the outcome thereof. Again, it is the "net effect rather than the motives and plans of the taxpayer or his corporation"[104] that is the fundamental guide in administering Sec. 83(b). This tax provision is aimed at the result.[105] It also applies even if at the time of the issuance of the stock dividend, there was no intention to redeem it as a means of distributing profit or avoiding tax on dividends.[106] The existence of legitimate business purposes in support of the redemption of stock dividends is immaterial in income taxation. It has no relevance in determining "dividend equivalence."[107] Such purposes may be material only upon the issuance of the stock dividends. The test of taxability under the exempting clause, when it provides "such time and manner" as would make the redemption "essentially equivalent to the distribution of a taxable dividend", is whether the redemption resulted into a flow of wealth. If no wealth is realized from the redemption, there may not be a dividend equivalence treatment. In the metaphor of Eisner v. Macomber, income is not deemed "realize" until the fruit has fallen or been plucked from the tree.cralaw:red The three elements in the imposition of income tax are: (1) there must be gain or profit, (2) that the gain or profit is realized or received, actually or constructively,[108] and (3) it is not exempted by law or treaty from income tax. Any business purpose as to why or how the income was earned by the taxpayer is not a requirement. Income tax is assessed on income received from any property, activity or service that produces the income because the Tax Code stands as an indifferent neutral party on the matter of where income comes from.[109] As stated above, the test of taxability under the exempting clause of Section 83(b) is, whether income was realized through the redemption of stock dividends. The redemption converts into money the stock dividends which become a realized profit or gain and consequently, the stockholder’s separate property.[110] Profits derived from the capital invested cannot escape income tax. As realized income, the proceeds of the redeemed stock dividends can be reached by income taxation regardless of the existence of any business purpose for the redemption. Otherwise, to rule that the said proceeds are exempt from income tax when the redemption is supported by legitimate business reasons would defeat the very purpose of imposing tax on income. Such argument would open the door for income earners not to pay tax so long as the person from whom the income was derived has legitimate business reasons. In other words, the payment of tax under the exempting clause of Section 83(b) would be made to depend not on the income of the taxpayer but on the business purposes of a third party (the corporation herein) from whom the income was earned. This is absurd, illogical and impractical considering that the Bureau of Internal Revenue (BIR) would be pestered with instances in determining the legitimacy of business reasons that every income earner may interposed It is not administratively feasible and cannot therefore be allowed The ruling in the American cases cited and relied upon by ANSCOR that "the redeemed shares are the equivalent of dividend only if the shares were not issued for genuine business purposes"[111] or the "redeemed shares have been issued by a corporation bona fide"[112] bears no relevance in determining the non-taxability of the proceeds of redemption. ANSCOR, relying heavily and applying said cases, argued that so long as the redemption is supported by valid corporate purposes the proceeds are not subject to tax.[113] The adoption by the courts below[114]of such argument is misleading if not misplaced. A review of the cited American cases shows that the presence or absence of "genuine business purposes" may be material with respect to the issuance or declaration of stock dividends but not on its subsequent redemption. The issuance and the reemption of stocks are two different transactions. Although the existence of legitimate corporate purposes may justify a corporation’s acquisition of its own shares under Section 41 of the Corporation Code,[115] such purposes cannot excuse the stockholder from the effects of taxation arising from the redemption. If the issuance of stock dividends is part of a tax evasion plan and thus, without legitimate business reasons the redemption becomes suspicious which may call for the application of the exempting clause. The substance of the whole transaction, not its form, usually controls the tax consequences.[116] The two purposes invoked by ANSCOR under the facts of this case 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 Such corporate plan was not stated in nor supported by any Board Resolution but a mere afterthought interposed by the counsel of ANSCOR. Being a separate entity the corporation can act only through its Board of Directors.[117] The Board Resolutions authorizing the redemptions state only one purpose – reduction of foreign exchange remittances in case cash dividends are declared. Not even this purpose can be given credence. 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. Although a corporation under certain exceptions, has the prerogative when to issue dividends, yet when no cash dividends was issued for about three decades, this circumstances negates the legitimacy of ANSCOR’s alleged purposes.Moreover, to issue stock dividends is to increase the shareholdings of ANSCOR’s foreign stockholders contrary to its "filipinization" plan. This would also increase rather than reduce their need for foreign exchange remittances in case of cash dividend declaration considering that ANSCOR is a family corporation where the majority shares at the time of redemptions were held by Don Andres’ foreign heirs.cralaw:red Secondly, assuming arguendo, that those business purposes are legitimate, the same cannot be valid excuse for the imposition of tax. Otherwise, the taxpayer’s liability to pay income tax would be made to depend upon a third person who did not earn the income being taxed. Furthermore, even if the said purposes support the redemption and justify the issuance of stock dividends, the same has no bearing whatsoever on the imposition of the tax herein assessed because the proceeds of the redemption are deemed taxable dividends since it was shown that income was generated therefrom.cralaw:red Thirdly, 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 purchasers, i.e. those who buys the stock dividends after their issuance.[118] Such argument, however, bears no relevance in this case as no intervening buyer is involved. And even if there is an intervening buyer, it is necessary to look into the factual milieu of the case if income was realized from the transaction. Again, we reiterate that the dividend equivalence test depends on such "time and manner" of the transaction and its net effect. The undisclosed lien[119] may be unfair to a 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. The subsequent buyer who buys stock dividends is investing capital. It just so happen 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.cralaw:red 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 distribution of
taxable
dividends. As "taxable dividend" under Section 83(b), it is part of the
"entire income" subject to tax under Section 22 in relation to Section
21[120]
of the 1939 Code. Moreover, under Section 29(a) of said Code, dividends
are included in "gross income". As income, it is subject to income tax
which is required to be withheld at source. The 1997 Tax Code may have
altered the situation but it does not change this disposition.
Exchange is an act of
taking or giving one thing for another[122]
involving reciprocal transfer[123]
and is generally considered as a taxable transaction. The exchange of
common
stocks with preferred stocks, or preferred for common or a combination
of either for both, may not produce a recognized gain or loss, so long
as the provisions of Section 83(b) is not applicable This is true in a
trade between two (2) persons as well as a trade between a stockholder
and a corporation. In general, this trade must be parts of merger,
transfer
to controlled corporation, corporate acquisitions or corporate
reorganizations.
No taxable gain or loss may be recognized on exchange of property,
stock
or securities related to reorganizations.[124]
Reclassification of shares does not always bring any substantial alteration in the subscriber’s proportional interest. But the exchange is different – there would be a shifting of the balance of stock features, like priority in dividend declarations or absence of voting rights Yet neither the reclassification nor exchange per se, yields realize income for tax purposes. A common stock 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.[126] Preferred stocks are those which entitle the shareholder to some priority on dividends and asset distribution.[127] Both shares are part of the corporation’s capital stock. Both stockholders are no different from ordinary investors who take on the same investment risks. Preferred and common shareholders participate in the same venture, willing to share in the profits and losses of the enterprise.[128] Moreover, under the doctrine of equality of shares – all stocks issued by the corpration are presumed equal with the same privileges and liabilities, provided that the Articles of Incorporation is silent on such differences.[129] In this case, 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.[130] WHEREFORE, premises considered, the decision of the Court of Appeals is modified in that ANSCOR’s redemption of 82,752.5 stock dividends is herein considered as essentially equivalent to a distribution of taxable dividends for which it is LIABLE for the withholding tax-at-source. The decision is affirmed in all other respects.cralaw:red SO ORDERED.cralaw:red Davide, Jr., C.J.,
(Chairman), Melo, Kapunan, and Pardo, JJ., concur.
Endnotes: [1] Court of Appeals decision, promulgated on January 15, 1993, penned by Justice O. Herrera with Justices Montoya and Montenegro, concurring. The dispositive portion of which reads:chanroblesvirtuallawlibrary
"WHEREFORE,
finding no such abuse
or improvident exercise of authority or discretion, the decision of the
Court of Tax Appeals must be as it is hereby AFFIRMED" (Rollo, p. 121;
CA Decision, p. 18).
"WHEREFORE, premises considered, the presumption of prima facie correctness of the assessments issued by the respondent having been overcome by sufficient and convincing evidence presented by petitioner, the decision appealed from is hereby reversed.
"Without
pronouncement as to
costs."
(c) Return and payment. – Every person required to deduct and withhold any tax under this section shall make return thereof, in duplicate, on or before the fifteenth day of April of each year, and, on or before the time fixed by law for the payment of the tax, shall pay the amount withheld to the officer of the Government of the Philippines authorized to receive it. Every such person is made personally liable for such tax, and is indemnified against the claims and demands of any persons for the amount of any payments made in accordance with the povision of this section. (As amended by Sec. 9, Rep. Act No. 2343). (d) Income of recipient. – Income upon which any tax is required to be withheld at the source under this section shall be included in the return of the recipient of such income, but any amount of tax so withheld shall be credited against the amount of income tax as computed in such return and the amount, if any, by which the income tax collected at source exceeds the tax due on the return shall be refunded subject to the provisions of section 309.
Sec.
54. Payment of corporation
income tax at source. – In the case of foreign corporations subject to
taxation under this Title not engaged in trade or business within the
Philippines
and not having any office or place of business therein, there shall be
deducted and withheld at the source in the same manner and upon the
same
item as is provided in section fifty-three a tax equal to thirty per
centum
thereof, and such tax shall be returned and paid in the same manner and
subject to the same conditions as provided in that section. Provided,
however,
That no such deduction or withholding shall be required in the case of
reinsurance premiums ceded to foreign insurance corporations not
engaged
in trade or business in the Philippines and having no office or place
of
business in the Philippines and having no office or place of business
therein.
(As amended by Sec. 10. R.A. No. 2343, and Sec. 2. R.A. No. 3825).
"WHEREAS, it is the policy of the Government to give tax evaders a chance to reform and be a part of the New Society with a clean slate; "WHEREAS, tax evaders who wish to relent and are willing to reform may be reluctant to disclose their liability for income taxes because of the criminal and civil penalties attendant to tax evasion;
"xxx
xxx xxx"
1.) To eliminate fractional shares arising out of stock dividends; 2.) To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and
3.)
To pay dissenting or withdrawing
stockholders entitled to payment for their shares under the provisions
of this Code."
Sec.
21. Rates of tax on citizens
or residents. – There shall be levied, collected and paid annually upon
the entire income received in the preceding taxable year from all
sources
by every individual, a citizen or resident of the Philippines, a tax
equal
to the sum of the following x x x (as amended by R.A. 2343).
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