Frederick Fisher v.

Wenceslao Trinidad, Collector of Internal Revenue Generally speaking, stock dividends represent undistributed increase in the capital
30 October 1922 of corporations or firms, joint stock companies, etc. for a particular period. The
J. Johnson | En Banc stockholder who receives a stock dividend has received nothing but a
representation of his increased interest in the capital of the corporation. All the
Doctrine; realization test: If the ownership of the property represented by a stock property or capital of the corporation still belongs to the corporation. There has
dividend is still in the corporation , it is not regarded as income to the stockholder been no separation of the interest of the stockholder from the general capital of
but still a part of the capital or assets of the corporation. the corporation. The stockholder, by virtue of the stock dividend, has no separate
if the holder of the stock dividend is required to pay an income tax on the same, or individual control over the interest represented thereby, further than he had
the result would be that he has paid a tax upon an income which he never before the stock dividend was issued. He cannot use it for the reason that it is still
received. Such a conclusion is absolutely contradictory to the idea of an income. the property of the corporation and not the property of the individual holder of
An income subject to taxation under the law must be an actual income and not a stock dividend. A certificate of stock represented by the stock dividend is simply a
promised or prospective income. statement of his proportional interest or participation in the capital of the
corporation.,
SUMMARY: The Philippine American Drug Company declared stock dividend for the
year of 1919. This stock dividend was taxed P889.91 as income tax. Thus, Fisher (a For bookkeeping purposes, a corporation, by issuing stock dividend, acknowledges a
stockholder) filed for recovery of such amount. The Court ruled that stock dividends liability in form to the stockholders, evidenced by a capital stock account. The
are not income. The Legislature, when it provided for an "income tax," intended to receipt of a stock dividend in no way increases the money received of a stockholder
tax only the "income" of corporations, firms or individuals, as that term is generally nor his cash account at the close of the year. It simply shows that there has been an
used in its common acceptation; that is that the income means money received, increase in the amount of the capital of the corporation during the particular
coming to a person or corporation for services, interest, or profit from investments. period, which may be due to an increased business or to a natural increase of the
value of the capital due to business, economic, or other reasons.
Facts:
Frederick Fisher was a stockholder of Philippine American Drug Company. As a The Court held that the Legislature, when it provided for an "income tax," intended
result of the business in 1919, the corporation declared a stock dividend. The to tax only the "income" of corporations, firms or individuals, as that term is
proportionate share of Fisher of said stock dividend was P24,800 for which he was generally used in its common acceptation; that is that the income means money
subsequently taxed by the respondent Collector of Internal Revenue for the sum of received, coming to a person or corporation for services, interest, or profit from
P889.91 as income tax. Fisher paid under protest and subsequently filed an action investments. The Court did not believe that the Legislature intended that a mere
for recovery of the P889.91. Trinidad demurred to the petition on the ground that it increase in the value of the capital or assets of a corporation, firm, or individual,
did not state facts sufficient to constitute a cause of action, which was sustained by should be taxed as "income."
the trial, court hence this appeal.
Under the guise of an income tax, property which is not an income cannot be taxed.
Issue: W/N “stock dividends” are “income” taxable under Sec. 25 of the Income Tax When the assets of a corporation have increased so as to justify the issuance of a
Law (Act No. 2833). NO, "stock dividends" are not "income," thus the same cannot stock dividend, the increase of the assets should be taken account of the
be taxed under provision of Act No. 2833 which provides for a tax upon income. Government in the ordinary tax duplicates for the purposes of assessment and
collection of an additional tax.
Ratio:
It is true that the Act No. 2833 provides for an income tax and contains a provision
that "stock dividends" shall be considered income and are therefore subject to
income tax. However, the Court said that if "stock dividends" are not "income" then
the law permits a tax upon something not within the purpose and intent of the law
thus the necessity of determining what are “stock dividends” in order to understand
their relation to "income."