Commissioner of Internal Revenue vs. Court of Appeals

10/19/21, 11:18 PM SUPREME COURT REPORTS ANNOTATED VOLUME 301
VOL. 301, JANUARY 19, 1999 151

Echegaray vs. Secretary of Justice
152 SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Court of Appeals
*
G.R. No. 108576. January 20, 1999.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE

COURT OF APPEALS, COURT OF TAX APPEALS and A.
SORIANO CORP., respondents.
Taxation; Courts; Court of Tax Appeals; The findings of facts of a

special court (CTA) exercising particular expertise on the subject of tax,
generally binds the Supreme Court.—We must emphasize that the
application of Sec. 83(b) depends on the special factual circumstances of
each case. The findings of facts of a special court (CTA) exercising
particular expertise on the subject of tax, generally binds this Court,
considering that it is substantially similar to the findings of the CA which is
the final arbiter of questions of facts. 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.
Same; Withholding Tax System; Tax Amnesty; A person assessed for
deficiency withholding tax under Sections 53 and 54 of the 1939 Tax Code is
being held liable in its capacity as a withholding agent and not in its
personality as a taxpayer.—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. 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.
Same; Same; Same; The withholding agent is merely a tax collector,
not a taxpayer and is not protected by the amnesty under Presidential
Decree 67.—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 in order to ensure its payments; the
payer is the taxpayer—he is the person subject to tax impose by law; and the
payee is the taxing authority. In other words, the withholding agent is
https://central.com.ph/sfsreader/session/0000017c992795874bc63903000d00d40059004a/t/?o=False 1/35
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, because the
________________
* FIRST DIVISION.
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VOL. 301, JANUARY 20, 1999 153
income tax is still imposed 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 arising from the
breach of its legal duty to withhold as distinguished from its duty to pay tax
since: “the government’s cause of action against the withholding agent is not
for the collection of income tax, but for the enforcement of the withholding
provision of Section 53 of the Tax Code, compliance with which is imposed
on the withholding agent and not upon the taxpayer.” Not being a taxpayer,
a withholding agent, like ANSCOR in this transaction, is not protected by
the amnesty under the decree.
Same; Same; Same; Statutory Construction; 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.—Codal provisions on withholding tax are mandatory and must be
complied with by the withholding agent. 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, 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.” The rule on strictissimi juris
equally applies. So that, any doubt in the application of an amnesty
law/decree should be resolved in favor of the taxing authority.
Same; Corporation Law; Stock Dividends; Stock dividends, strictly
speaking, represent capital and do not constitute income to its recipient—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.—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. So that the mere issuance thereof is not
yet subject to
154
income tax as they are nothing but an “enrichment through increase in value
of capital investment.” 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.” 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.” It means cash or its equivalent. It is gain derived and
severed from capital, from labor or from both combined—so that to tax a
stock dividend would be to tax a capital increase rather than the income. 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. 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. The determining factor for the imposition of income tax is
whether any gain or profit was derived from a transaction.
Same; Same; Same; 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, who,
having realized gain from that redemption, cannot escape income tax.—
Although redemption and cancellation are generally considered capital
transactions, as such, they are not subject to tax. However, it does not
necessarily mean that a shareholder may not realize a taxable gain from
such transactions. Simply put, 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. Thereafter, the latter becomes the exclusive owner thereof and
can exercise the freedom of choice. Having realized gain from that
redemption, the income earner cannot escape income tax.
Same; Same; Same; Criteria in Determining Whether Amount
Distributed in the Redemption of Stock Dividends Should be Treated as
Equivalent of “Taxable Dividend.”—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. So that, whether the amount distributed in the
redemption should be treated as the equivalent of a “taxable dividend” is a
question of fact, which is
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determinable on “the basis of the particular facts of the transaction in

question.” 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. On this aspect, American courts developed certain recognized
criteria, which includes the following: 1) the presence or absence of real
business purpose, 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, 5) the 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.
Same; Same; Same; Requisites for Application of Exempting Clause of
Section 83(b) of the 1939 Tax Code.—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.
Same; Same; Same; Words and Phrases; “Redemption of Stocks,”
Explained.—Redemption is repurchase, a reacquisition of stock by a
corporation which issued the stock 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, 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,
156
the proceeds of the redemption is additional wealth, for it is not merely a

return of capital but a gain thereon.
Same; Same; Same; Same; Trust Fund Doctrine; 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,
such as stock dividends; Under the trust fund doctrine, the capital stock,
property and other assets of the corporation are regarded as equity in trust
for the payment of the corporate creditors.—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 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.
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, 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. Once capital, it is always capital. That doctrine was
intended for the protection of corporate creditors.
Same; Same; Same; Same; Net Effect Test; The time alone that lapsed
from the issuance to the redemption is not a sufficient indicator to determine
taxability—it is necessary to determine the “net effect” of the transaction
between the shareholder-income taxpayer and the acquiring (redeeming)
corporation; The “net effect” test is not evidence or testimony to be
considered—it is rather an inference to be drawn or a conclusion to be
reached.—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. 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 share-holder-income taxpayer and the acquiring
(redeeming) corporation.
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The “net effect” test is not evidence or testimony to be considered; it is

rather an inference to be drawn or a conclusion to be reached. 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.
Same; Same; Same; 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.—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. Otherwise, the
apparent intention to avoid tax becomes doubtful as the intention to evade
becomes manifest. It has been ruled that: “[A]n 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.”
Same; Same; Same; It is the “net effect rather than the motives and
plans of the taxpayer or his corporation” that is the fundamental guide in
administering Sec. 83(b).—ANSCOR invoked two reasons to justify 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” that is the fundamental guide in administering
Sec. 83(b). This tax provision is aimed at the result. 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.
Same; Same; Same; 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.”—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.”
158
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 “realized” until the
fruit has fallen or been plucked from the tree.
Same; Same; Same; Elements in the Imposition of Income Tax.—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, 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.
Same; Same; Same; The issuance and the redemption of stocks are two
different transactions; The substance of the whole transaction, not its form,
usually controls the tax consequences.—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,” or the “redeemed shares have been issued by a
corporation bona fide” 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. The adoption by the courts
below 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 redemption 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, such purposes cannot excuse the stock-holder 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
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clause. The substance of the whole transaction, not its form, usually controls
the tax consequences.
Same; Same; Same; 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 circumstance negates the legitimacy of
the corporation’s alleged purposes of authorizing redemption to reduce
foreign exchange remittance in case cash dividends are declared.—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 circumstance negates the
legitimacy of ANSCOR’s alleged purposes.
Same; Same; Same; A “taxable dividend” under Section 83(b) is part
of the “entire income” subject to tax under Section 22 in relation to Section
21 of the 1939 Tax Code.—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 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.
Same; Same; Common and Preferred Stocks; 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.— Exchange is an act of taking
or giving one thing for another involving reciprocal transfer 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
160
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.
Same; Same; Same; Words and Phrases; Doctrine of Equality of
Shares; A common stock represents the residual ownership interest in the
corporation, 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; Preferred stocks are those which entitle the shareholder
to some priority on dividends and asset distribution; Under the doctrine of
equality of shares, all stocks issued by the corporation are presumed equal
with the same privileges and liabilities, provided that the Articles of
Incorporation is silent on such differences.—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. Preferred stocks are those
which entitle the shareholder to some priority on dividends and asset
distribution. 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.
Moreover, under the doctrine of equality of shares—all stocks issued by the
corporation are presumed equal with the same privileges and liabilities,
provided that the Articles of Incorporation is silent on such differences.
PETITION for review on certiorari of a decision of the Court of

Appeals.
The facts are stated in the opinion of the Court.

The Solicitor General for petitioner.
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VOL. 301, JANUARY 20, 1999 161

M.L. Gadioma Law Office for private respondent.
MARTINEZ, J.:
Petitioner Commissioner of Internal Revenue (CIR) seeks the

1
reversal of the decision of the Court of Appeals (CA) which
2
affirmed the ruling of the Court of Tax Appeals (CTA) 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
3
Act.
The undisputed facts are as follows:
Sometime in the 1930s, Don Andres Soriano, a citizen and
resident of the United States, formed the corporation “A.
______________
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:
“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).
2 Decision in CTA Case No. 3710, dated July 4, 1991 penned by Associate Judge
Roaquin with Judges A. Reyes and E. Acosta, concurring. (Annex “A”; Rollo, pp. 61-
101, CTA Decision, p. 41). The dispositive portion of which reads:
“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.”
3 Commonwealth Act 466, as amended, otherwise known as the Tax Code of 1939.
Section 83(b) was renumbered to Sec. 66(b) by P.D. 1158, as amended, also known as
the 1977 NIRC (took effect June 3, 1977) with further codification under the NIRC of
1986 (Sec. 42, P.D. 1994). Said provision was later renumbered to Sec. 73(b) by R.A.
8424 or the “Tax Reform Act of 1997” (took effect January 1, 1998) which provides
exactly the same rule.
162

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
4
4
of Don Andres, who are all non-resident aliens. In 1937, Don
Andres subscribed to 4,963 shares of the 5,000 shares originally
5
issued.
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
6
to subscribe to the new 7issues. This increased
8
his subscription to
14,963 common shares. A month later, Don Andres transferred
1,250 shares each to his two sons, Jose and Andres, Jr., as their
9 10
initial investments in ANSCOR. Both sons are foreigners. By
1947, ANSCOR declared stock dividends. Other stock dividend
11
declarations were made between 1949 and December 20, 1963. On
December 30, 1964 Don Andres died. As of that date, the records
revealed that he has a total shareholdings of
_______________
4 CTA Decision, p. 2; Rollo, p. 62.

5 The total original subscription of Don Andres was 4,971 shares including the 8
shares of his 4 nominees with 2 shares each. (Rollo, p. 63).
6 Ibid.
7 According to the CA, the total shareholdings of Don Andres after the new shares
were issued is 15,471 common shares. (Rollo, p. 105).
8 Petitioner claims the transfer was made on October 27, 1947. (Memorandum of
Petitioner, p. 3).
9 Rollo, pp. 63-64.
10 Petition, filed March 10, 1993, p. 5; Rollo, p. 13; Petitioner’s Memorandum, p.
3.
11 A 100% stock dividend was declared in 1947; 12,590 in 1949; 15,108 in 1950
(Rollo, p. 64).
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VOL. 301, JANUARY 20, 1999 163

12
185,154 shares —50,495 of which are original issues and the 13
balance of 134,659 shares as stock dividend declarations.
14
Correspondingly, one-half of that shareholdings or 92,577 shares
were transferred to his wife, Doña Carmen Soriano,
15
as her conjugal
share. The other half formed part of his estate.
A day after Don Andres died, ANSCOR increased its capital
16 17
stock to P20M and in 1966 further increased it to P30M. In the
same year (December 1966), stock dividends worth 46,290 and
18
46,287 shares were respectively received by the Don Andres estate
and Doña Carmen from ANSCOR. Hence, increasing their
19
19
accumulated20 shareholdings to 138,867 and 138,864 common
shares each.
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 a
21
tax avoidance scheme under Section 367 of the 1954 U.S. Revenue
22
Act. By January 2, 1968, ANSCOR
_____________
12 This figure includes the qualifying shares of the nominees of Don Andres.
13 Rollo, p. 65.
14 Rollo, pp. 15, 65.
15 Special Proceedings for the settlement of the estate of Don Andres was filed
before the then Court of First Instance (CFI) of Rizal and was terminated on
November, 1974. (Rollo, pp. 66-67).
16 Rollo, pp. 66, 105.
17 Rollo, pp. 67, 105.
18 Reference to the “Don Andres Estate” is only for the purpose of identity of the
personalities involved.
19 Rollo, pp. 68, 106.
20 The CA ruled that the shareholdings of both the Don Andres estate and Doña
Carmen each consisted of 22,756 original common shares and the rest as accumulated
stock dividends (Rollo, p. 106). However, upon the death of Don Andres, his estate
supposedly received 25,247.5 common shares which is one-half of the 50,495 original
common shares.
21 Tax avoidance as distinguished from tax evasion.
22 Rollo, p. 68.
164

reclassified its existing 300,000 common shares into 150,000

23
common and 150,000 preferred shares.
In a letter-reply dated February 1968, the IRS opined that the
24
exchange is only a recapitalization scheme and not tax avoidance.
25
Consequently, 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 the remaining 11,140 preferred
26
shares, thus reducing its (the estate) common shares to 127,727.
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
27
common shares. About a year later, ANSCOR again redeemed
28
28
80,000 common shares from the Don Andres’ estate, 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
29
remittances in case cash dividends are declared.
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,
_____________
23 Annex “G,” Folder I, CTA Records, pp. 89-90; Rollo, pp. 69, 106.
24 Rollo, pp. 68, 69.
25 ANSCOR’s Articles of Incorporation was amended by reclassifying a certain
number of the common shares as preferred shares. (CTA Decision, p. 9; Rollo, p. 69).
26 Rollo, pp. 69, 106.
27 Rollo, p. 70.
28 Rollo, pp. 70-71, 106.
29 Rollo, p. 70.
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VOL. 301, JANUARY 20, 1999 165

30
pursuant to Sections 53 and 54 of the 1939 Revenue Code, for the
year 1968 and the second quarter of 1969 based on the
______________
30 Sec. 53. Withholding of tax at source.—x x x (b) Nonresident aliens.—All

persons, corporations and general copartnerships (compañias colectivas), in whatever
capacity acting, including lessees or mortgagors of real or personal property, trustees
acting in any trust capacity, executors, administrators, receivers, conservators,
fiduciaries, employers, and all officers and employees of the Government of the
Philippines having the control, receipt, custody, disposal, or payment of interest,
dividends, rents, salaries, wages, premiums, annuities, compensation, remunerations,
emoluments, or other fixed or determinable annual or periodical gains, profits, and
income of any non-resident alien individual, not engaged in trade or business within
the Philippines and not having any office or place of business therein, shall (except in
the cases provided for in subsection [a] of this section) deduct and withhold from
such annual or periodical gains, profits, and income a tax equal to twenty per centum
thereof; Provided, That no such deduction or withholding shall be required in the case
of dividends paid by a foreign corporation unless (1) such corporation is engaged in
trade or business within the Philippines and (2) more than eighty-five per centum of
the gross income of such corporation for the three-year period ending with the close
of its taxable year preceding the declaration of such dividends (or for such part of
such period as the corporation has been in existence) was derived from sources within
the Philippines as determined under the provisions of section thirty-seven: Provided,
further, That the Commissioner of Internal Revenue may authorize such tax to be
deducted and withheld from the interest upon any securities the owners of which are
not known to the withholding agent. (As amended by Sec. 9, Rep. Act No. 2343).
(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 payment made in accordance with the provision of this section. (As
amended by Sec. 9, Rep. Act No. 2343).
166

31
transactions of exchange and redemption of stocks. The Bureau of
Internal Revenue (BIR) made the corresponding assessments despite
the claim of ANSCOR that it availed of the tax amnesty under
32
Presidential
33
Decree (P.D.) 23 which were amended by P.D.’s 67
and 157. However, petitioner ruled that the invoked decrees do not
cover Sections 53 and 54 in relation to Article 83(b) of the 1939
34
Revenue Act under which ANSCOR was assessed. ANSCOR’s
subsequent protest on the assessments was denied in 1983 by
35
petitioner.
_____________
(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
items 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).
31 For the 1968 and the 1969 deficiency withholding tax, private respondent was
assessed P3,428,613.90 and P2,950,000.00, respectively or for a total of
P6,378,613.50. Certain documents from the records shows that the 1969 assessments
were reduced. (Folder I CTA records in Case No. 3710, p. 289; Rollo, pp. 71-72,
106.)
32 Rollo, pp. 72, 107.
33 P.D. 23 dated October 16, 1972 is entitled “Proclaiming a Tax Amnesty Subject
to Certain Exceptions.”
34 Rollo, p. 72.
35 Rollo, p. 24.
167
VOL. 301, JANUARY 20, 1999 167

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
36
correctness of the questioned assessments. In a petition for review,
37
the CA, as mentioned, affirmed the ruling of the CTA. Hence, this
petition.
The bone of contention is the interpretation and application of
38
Section 83(b) of the 1939 Revenue Act which provides:
“Sec. 83. 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 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.” (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
________________
36 CTA Decision, p. 41; Rollo, p. 101.

37 CA Decision, p. 18; Rollo, p. 121.
38 The original provision was retained in R.A. 8424 except that the reference to the
year was deleted.
168

ANSCOR redeemed. Further, petitioner claims that under the “net

effect test,” the estate of Don Andres gained from the redemption.
Accordingly, it was the duty of ANSCOR to withhold the tax-at-
source arising from the two transactions, pursuant to Sections 53 and
39
54 of the 1939 Revenue Act.
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
40
dividends, and to (b) subsequently “filipinized” ownership of
41
ANSCOR, as allegedly envisioned by Don Andres. It likewise
invoked the amnesty provisions of P.D. 67.
We must emphasize that the application of Sec. 83(b) depends on
42
the special factual circumstances of each case. The findings of facts
of a special court (CTA) exercising particular expertise on the
43
subject of tax, generally binds this Court, considering that it is
substantially similar to the findings of the CA which is the final
44
arbiter of questions of facts. The issue in this case does not only
deal with facts but whether the law applies to a particular set of
facts. Moreover, this
_______________
39 Petitioner’s Reply, pp. 2, 10.

40 Board of Directors Resolutions dated June 15, 1968 and October 30, 1969 (BIR
Records, Folder III, pp. 12-13; 7-8).
41 Comment, pp. 13-14; Rejoinder, pp. 4-5.
42 Gloninger v. Commissioner, 339 F2d 211; Blotch v. U.S., 261 F Supp 597, 386
F2d 839; John P. Elton v. Commissioner, 47 B.T.A. 111.
43 Philippine Refining Company v. CA, 326 Phil. 680 (1996); Commissioner of
Internal Revenue v. CA, 312 Phil. 337; Commissioner of Internal Revenue v.
Philippine American Life Insurance Co., 244 SCRA 446 (1995); CIR v.
Administratrix of the Estate of Echarri, 67 Phil. 502.
44 Binalay v. Manalo, 195 SCRA 374, 380 citing Sese v. IAC, 152 SCRA 585.
169
VOL. 301, JANUARY 20, 1999 169

Court is not necessarily bound by the lower courts’ conclusions of

45
law drawn from such facts.
AMNESTY:
We46 will deal first with the issue of tax amnesty. Section 1 of P.D.
67 provides:
“1. In all cases of voluntary disclosures of previously untaxed income and/or

wealth such as earnings, receipts, gifts, bequests or any other acquisitions
from any source whatsoever which are taxable under the National Internal
Revenue Code, as amended, realized here or abroad by any taxpayer,
natural or juridical; the collection of all internal revenue taxes including the
increments or penalties or account of non-payment as well as all civil,
criminal or administrative liabilities arising from or incident to such
disclosures under the National Internal Revenue Code, the Revised Penal
Code, the AntiGraft and Corrupt Practices Act, the Revised Administrative
Code, the Civil Service laws and regulations, laws and regulations on
Immigration and Deportation, or any other applicable law or proclamation,
are hereby condoned and, in lieu thereof, a tax of ten (10%) per centum on
such previously untaxed income or wealth is hereby imposed, subject to the
following conditions: (conditions omitted) [Emphasis supplied].
The decree condones “the collection of all internal revenue taxes

including the increments or penalties or account of non-payment as
well as all civil, criminal or administrative liabilities arising from or
incident to” (voluntary) disclosures under the NIRC of previously
untaxed income and/or wealth “realized here or abroad by any
taxpayer, natural or juridical.”
May the withholding agent, in such capacity, be deemed a
taxpayer for it to avail of the amnesty?47 An income taxpayer covers
all persons who derive taxable income. ANSCOR was
______________
45 See Manila Bay Club Corp. v. CA, 245 SCRA 715 (1995); 315 Phil. 807 (1995);
Pilar Development Corporation v. IAC, 146 SCRA 215 (1986).
46 Promulgated November 24, 1972.
47 Tan v. Del Rosario, 237 SCRA 324 (1994).
170

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.
In the operation of the withholding tax system, the withholding
agent is the payor, a separate entity acting no more than an agent of
48
the government for the collection of the tax in order to ensure its
49
payments; the payer
50
is the taxpayer—he is the person subject
51
to tax
imposed by law; and the payee is the taxing authority. 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
52
independent from the taxpayer, because the income tax is still
imposed 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
53
Code only makes the agent personally liable for the tax arising
from the breach of its legal duty to withhold as distinguished from
its duty to pay tax since:
“the government’s cause of action against the withholding agent is not for
the collection of income tax, but for the enforcement of the withholding
provision of Section 53 of the Tax Code, compliance with
________________
48 Phil Guaranty Co., Inc. v. C.I.R., 15 SCRA 1 (1965).

49 Bank of America v. CA, 234 SCRA 302 (1994).
50 Sec. 20(n), 1986 Tax Code.
51 The pronouncement of the Court in the case of Bank of America,
supra, that the payee is the taxpayer should not be confused with the payee
in the case at bar. Therein, the payee referred to is the foreign entity
recipient of profit remitted by a local company. Herein, the payee referred to
is the party who received money as tax.
52 Commissioner of Internal Revenue v. Procter and Gamble, 204 SCRA
377 (1991).
53 Phil Guaranty v. CIR, supra. See also Sec. 53 (c) 1939 Tax Code, as
amended by R.A. No. 2343 which provides in part that ‘‘x x x. Every such
person is made personally liable for such tax x x x.”
171
VOL. 301, JANUARY 20, 1999 171

54
which is imposed on the withholding agent and not upon the tax-payer.”
Not being a taxpayer, a withholding agent, like ANSCOR in this

transaction, is not protected by the amnesty under the decree.
Codal provisions on withholding tax are mandatory and must be

55
complied with by the withholding agent. 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
56
tax evaders a chance to reform, 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
57
and liberally in favor of the taxing authority.’’ The rule on
strictissimi juris equally
_____________
54 See Commissioner of Internal Revenue v. Malayan Insurance, 129 Phil. 165,

170 (1967) citing Jai Alai v. Republic, L-17462, May 29, 1967; 1967B PHILD 460.
55 Ibid.
56 The Whereas clauses of P.D. No. 23 provides in part:
“x x x x x x x x x
“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;
“x x x x x x x x x.”
57 People v. Castañeda, Jr., 165 SCRA 327, 341 (1988) citing E. Rodriguez, Inc. v.
The Collector of Internal Revenue,139 Phil. 354 (1969) and Commissioner of Internal
Revenue v. A.D. Guerrero, 128 Phil. 197 (1967).
172

58
applies. So that, any doubt in the application of an amnesty
law/decree should be resolved in favor of the taxing authority.
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:
“Section 4. Cases not covered by amnesty.—The following cases are not

covered by the amnesty subject of these regulations:
x x x x x x x x x
(2) Tax liabilities with or without assessments, on withholding tax at

source provided under Sections 53 and 54 of the National Internal Revenue
59
Code, as amended;
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.
TAX ON STOCK DIVIDENDS
General Rule
Section 83(b) of the 1939 NIRC was taken from Section 115(g)(1)
60
of the U.S. Revenue Code of 1928. It laid down the general rule
61
known as the ‘proportionate test’ wherein stock dividends once
62
issued form part of the capital and, thus, subject to income tax.
Specifically, the general rule states that:
______________
58 E. Rodriguez, Inc. v. Collector of Internal Revenue, supra; Province of Tarlac

vs. Alcantara, 216 SCRA 790; See also La Carlota Sugar Central v. Jimenez, 112
Phil. 232 (1961) cited in Phil. Guaranty v. CIR, supra.
59 Section 4 of Revenue Regulations No. 2-74, dated January 14, 1974, (70 O.G.
1472, February 25, 1974).
60 Later known as the U.S. Revenue Code of 1939.
61 Michie’s Federal Tax Handbook, 1967 ed., p. 196.
62 Under Section 21(c)(2) of the 1986 NIRC, as amended, dividends are subject to
a tax of either 0% as of January 1, 1989 or to the schedule under Section 22(a)(2) or
not subject to tax under Sec-
173
VOL. 301, JANUARY 20, 1999 173

“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
63
do not constitute income to its recipient. So that the mere issuance
64
thereof is not yet subject to income tax as they are nothing but65
an
“enrichment through increase in value of capital investment.” 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

66
distribution.” Income in tax law is “an amount of money coming to
a person within a specified time, whether as payment for services,
67
interest, or profit from investment.” It means cash or its
68 69
equivalent. It is gain derived and severed from capital, from labor
70
or from both combined —so that to
______________
tion 24(e)(4) and 24(a)(6)D. Under the Tax Reform Act of 1997, dividends are
subject to a final tax.
63 Posados v. Warner, 279 US 340, 73 L ed 729 (1929); See also Eisner v.
Macomber, 64 L ed 521 at 525, and Towne v. Eisner, 245 US 418; Gibbons v. Mahon,
136 U.S. 549, 560, 34 L ed 525, 527.
64 Fisher v. Trinidad, 43 Phil. 973, 974.
65 Towne v. Eisner, supra.
66 Fisher v. Trinidad, supra; Eisner v. Macomber, supra at 530.
67 Conwi v. CTA, 213 SCRA 83 (1992); Fisher v. Trinidad, supra.
68 Ibid.
69 The “gain derived from capital” is “not a gain accruing to capital, nor a growth
or increment of value in the investment, but a gain, a profit, something of
exchangeable value proceeding from the property, severed or drawn by the claimant
for separate use, benefit and disposal.” U.S. v. Phellis, 257 US 156, 42 S Ct 63, 65, 66
L ed 180; Taft v. Bowers, 278 US 470, 49 S Ct 199 cited in Matic, Jr., Income
Taxation in the Philippines, 1979 ed. p. 93.
70 Doyle v. Mitchell Brothers Co., 247 US 179, 38 S. Ct. 467 citing Stratton’s
Independence v. Howbert, 231 U.S. 399, 415, 34 S. Ct. 136, 58 L ed 385.
174

tax a stock dividend would be to tax a capital increase rather than

71
the income. 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
72
interest in the corporate properties. 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
73
or the flow of wealth. The determining factor for the imposition of
income tax is whether any gain or profit was derived from a
74
transaction.
The Exception
“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

75
case of Eisner v. Macomber (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 capitaliza-
_________________
71 Towne v. Eisner, supra.

72 Eisner v. Macomber, 252 US 189 cited in Fisher v. Trinidad, supra.
73 See Fisher, “The Nature and Capital of Income,” cited in Cesar Rey, The Tax
Code Annotated, 1958 ed., p. 32 and 1964 ed. p. 42; Madrigal, et al. v. Rafferty, et al.,
38 Phil. 414. See also Section 36, Old Income tax Regulations.
74 CIR v. Administratrix of the Estate of Echerri, 67 Phil. 502.
75 252 U.S. 189, 64 L ed 521, 40 S Ct 189, 9 ALR 1570 (1920).
175
VOL. 301, JANUARY 20, 1999 175

tion 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.
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
76
the actual distribution of cash dividends, which is taxable. Thus,
“the provision had the obvious purpose of preventing a corporation from

avoiding dividend tax treatment by distributing earnings to its shareholders
in two transactions—a pro rata stock dividend followed by a pro rata
redemption—that would have the same economic consequences as a simple
77
dividend.”
Although redemption and cancellation are generally considered

capital transactions, as such, they are not subject to tax. However, it
does not necessarily mean that a shareholder may not realize a
78
taxable gain from such transactions. Simply put, 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. Thereafter, the latter
becomes the exclusive owner thereof and can exercise the freedom
79
of choice. Having
_______________
76 CIR v. Brown, 293 U.S. 570.

77 United States v. Davis, 397 U.S. 301, 25 L ed 2d 323, 328, 90 S Ct 1041 (1970).
78 105 A.L.R. 774-775.
79 Eisner v. Macomber, supra, 524 citing Davis v. Jackson, 25 N.E. 21.
176

realized gain from that redemption, the income earner cannot escape
80
income tax.
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
81
dividends. So that, whether the amount distributed in the
redemption should be treated as the equivalent of a “taxable
82
dividend” is a question of fact, which is determinable on “the basis
83
of the particular facts of the transaction in question.” 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
84
dividend. On this aspect, American courts developed certain
85
recognized criteria, which includes the following:
1) the presence or absence of real business purpose,

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,
the effect of the distribution as compared with the

3)
declaration of regular dividend,
86
4) the lapse of time between issuance and redemption,
_____________
80 Wise v. Meer, 78 Phil. 655; Ogan v. Meer, 83 Phil. 844.

81 Helvering v. Griffiths, 318 U.S. 371.
82 Hirsch v. CIR, 124 F2d 24; Commissioner v. Babson, 70 F2d 304; Randolph v.
Commissioner, 76 F2d 472; Commissioner v. Champion, 78 F2d 513; Brown v.
Commissioner, 79 F2d 73; McGuire v. Commissioner, 84 F2d 432.
83 Bains v. United States, 289 F2d 644, 646 (1961); See also Ferro v. Comm., 242
F2d 838; Callan Court Co. v. Cobb, 274 F2d 532.
84 Flanagan v. Helvering, 116 F2d 937.
85 Himmel v. Comm., 338 F2d 815; Blount v. Comm., 425 F2d 921; Comm. v.
Berenbaum, 369 F2d 337.
86 Adler v. Comm., 77 F2d 733; Robinson v. Comm., 69 F2d 972.
177
VOL. 301, JANUARY 20, 1999 177

87
5) the 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
88
surplus.
REDEMPTION AND CANCELLATION
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.
Redemption is repurchase, a reacquisition of stock by a
89
corporation which issued the stock in exchange for property,
whether or not the acquired stock is cancelled, retired or held in the
90
treasury. 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 redemp-
______________
87 Brown v. Comm., 79 F2d 73; Hyman v. Helvering, 71 F2d 342.

88 Levin v. Comm., 385 F2d 521.
89 West Tax Law Dictionary, 1993 ed., p. 691; Seda v. CIR, 82 T.C. 484 (1984).
90 33A Am Jur 2d, Federal Taxation (1995) Par. 4852; Income Tax Techniques,
J.K. Lasser Institute, vol. IV, Chapter 11, 11.02.
178

tion is additional wealth, for it is not merely a return of capital but a

gain thereon.
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 redemption, the original common shares
91
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. Besides, in the absence of evidence to the contrary, the
Tax Code presumes that every distribution of corporate property, in
92
whole or in part, is made out of corporate profits, 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
93 94
corporate creditors. Once capital, it is always capital. That
95
doctrine was intended for the protection of corporate creditors.
____________
91 This figure represents Don Andres’ conjugal share. (Memorandum for private
respondent, p. 19).
92 Sec. 83(c) [1939 NIRC] later Sec. 66(c) [1977 NIRC, as amended] and now
Sec. 73(c) [1997 Tax Code] provides that: “Dividends distributed are deemed made
from most recently accumulated profits.—Any distribution made to the shareholders
or members of a corporation in the year nineteen hundred and thirty-nine or
subsequent tax years, 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: x x x.”; See also Hyman v. Helvering, 71
F2d 342, 344.
93 Boman Environmental Development Corporation v. CA, 167 SCRA 540 (1985);
Under Section 43 of the New Corporation Code (B.P. 68), corporations can declare
dividends out of the “unrestricted retained earnings” and under Section 122 thereof, it
cannot distribute any of its assets or property except upon lawful distribution and after
all debts and liabilities settled.
94 Hyman v. Helvering, supra.
95 Steinberg v. Velasco, 52 Phil. 953 (1925); Phil. Trust Co. v. Rivera, 44 Phil. 469
(1923).
179
VOL. 301, JANUARY 20, 1999 179

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
96
shares is a method usually adopted to accomplish the end sought.
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
97
taxpayer and the acquiring (redeeming) corporation. The “net
effect” test is not evidence or testimony to be considered; it is rather
98
an inference to be drawn or a conclusion to be reached. It is also
important to know whether the issuance of stock dividends was
dictated by legitimate business reasons, the presence of which might
99
negate a tax evasion plan.
The issuance of stock dividends and its subsequent redemption
must be separate, distinct, and not related, for the redemption to be
100
considered a legitimate tax scheme. Redemption cannot be used as
101
a cloak to distribute corporate earnings. Otherwise, the apparent
intention to avoid tax becomes doubtful as the intention to evade
becomes manifest. It has been ruled that:
___________________
96 Ibid.
97 See Phelps v. Commissioner, 247 F 2d 156, 158-159.
98 Bradbury v. Comm., 298 F2d 111; Bloch v. U.S., 386 F2d 839.
99 Asmussen v. CIR, 36 B.T.A. (F) 878; See also Neff v. U.S., 301 F2d 330; Cohen
v. U.S., 192 F Supp 216; Herman v. Comm., 283 F2d 227; Kessner v. Comm., 248 F2d
943; Comm. V. Pope, 239 F2d 881; U.S. v. Fewel, 255 F2d 396.
100 Bryan v. CIR, 20 B.T.A. (F) 73.
101 CIR v. Cordingley, 78 F2d 118.
180

“[A]n 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
102
shares to a stockholder.”
Depending on each case, the exempting provision of Sec. 83(b) of

the 1939 Code may not be applicable if the redeemed shares were
103
issued with bona fide business purpose, 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 justify 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
104
and plans of the taxpayer or his corporation” that is the
fundamental guide in administering Sec. 83(b). This tax provision is
105
aimed at the result. It also applies even if at the time of the
issuance of the stock dividend, there was no intention to redeem it as
106
a means of distributing profit or avoiding tax on dividends. 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
______________
102 Helvering v. Gregory, 293 U.S. 465 cited in Commissioner of Internal Revenue
v. Rufino, 148 SCRA 42, 50 (1987).
103 Patty v. Helvering, 98 F2d 717.
104 Bloch v. U.S., 261 F Supp. 597, 386 F2d 839; Boyle v. Comm., 187 F2d 557;
Commissioner v. Estate of Bedford, 325 U.S. 283, 89 L ed 1611, 65 S Ct 1157; See
also the cases of Hirsch, Flanagan and Davis, supra.
105 Hirsch v. Commissioner, supra; Hill v. Commissioner, supra.
106 McGuire v. Commissioner, 84 F2d 431; Brown, Jr. v. Commissioner, 79 F2d
73; Hill v. Commissioner, 66 F2d 45.
181
VOL. 301, JANUARY 20, 1999 181

107
equivalence.” 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
“realized” until the fruit has fallen or been plucked from the tree.
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
108
received, actually or constructively, 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
109
comes from.
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
110
consequently, the stockholder’s separate property. 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
_______________
107 Northup v. U.S., 240 F 2d 304, 307; See also McGinty v. Commissioner, 325 F
2d 820, 821-822; U.S. v. Davis, 397 U.S. 301 (1990).
108 Some authorities add that the gain or profit must not only be realized but must
also be recognized. (33A Am Jur 2d, Federal Taxation [1995] par. 10000).
109 Commissioner of Internal Revenue v. Manning, 66 SCRA 14.
110 Eisner v. Macomber, supra, at 529.
182

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 interpose. 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
111
only if the shares were not issued for genuine business purposes,”
or the “redeemed shares have been issued by a corporation bona
112
fide” 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
113
valid corporate purposes the proceeds are not subject to tax. The
114
adoption by the courts below 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 redemption of
stocks are two different transactions. Although the existence of
legitimate corporate
________________
111 De Nobili Cigar Co. v. Commissioner, 143 F 2d 436.

112 Patty v. Helvering, 98 F 2d 717.
113 Comment, pp. 14-16; Rollo, pp. 127-129; Rejoinder, p. 4; Rollo, p. 195.
114 CTA Decision, pp. 31-32; Rollo, pp. 91-92; CA Decision, pp. 11-13; Rollo, pp.
114-116.
183
VOL. 301, JANUARY 20, 1999 183

purposes may justify a corporation's acquisition of its own shares

115
under Section 41 of the Corporation Code, 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

116
its form, usually controls the tax consequences.
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
117
corporation can act only through its Board of Directors. The Board
Resolutions authorizing the redemptions state only one purpose—
reduction of foreign exchange remittances in case cash dividends are
declared. Not
_____________
115 Batas Pambansa Blg. 68, Section 41 provides: “Power to acquire own shares.
—A stock corporation shall have the power to purchase or acquire its own shares for
a legitimate corporate purpose or purposes, including but not limited to the following;
Provided: That the corporation has unrestricted retained earnings in its books to cover
the shares to be purchased or acquired:
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.”
116 Michie, Federal Tax Handbook, p. 101.

117 Section 23 of B.P. 68, also known as the Corporation Code of the Philippines.
184

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
circumstance 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.
Secondly, assuming arguendo, that those business purposes are
legitimate, the same cannot be a 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.
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 buy the stock dividends after
118
their issuance. 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
_______________
118 Rollo, p. 113.
185
VOL. 301, JANUARY 20, 1999 185

119
lien 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.
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
120
income” subject to tax under Section 22 in relation to Section 21
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.
______________
119 “To make the stock dividend taxable is to impose an undisclosed lien and
would be unfair to intervening purchasers.” (Commissioner v. Cordingley, 78 F2d
118).
120 Sec. 22. Tax on nonresident alien individual.—(a) Nonresident alien engaged
in trade or business within the Philippines.—There shall be levied, collected and paid
for each taxable year upon the entire income received from all sources within the
Philippines by every nonresident alien individual engaged in trade or business within
the Philippines the tax imposed by Section 21. (as amended by R.As. 2343 & 3841).
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)
186

121
EXCHANGE OF COMMON WITH PREFERRED SHARES
122
Exchange is an act of taking or giving one thing for another
123
involving reciprocal transfer 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
124
reorganizations.
Both the Tax Court and the Court of Appeals found that
ANSCOR reclassified its shares into common and preferred, and that
parts of the common shares of the Don Andres estate and all of
Doña Carmen’s shares were exchanged for the whole 150,000
preferred shares. Thereafter, both the Don Andres estate and Doña
Carmen remained as corporate subscribers except that their
subscriptions now include preferred shares. There was no change in
their proportional interest after the exchange. There was no cash
flow. Both stocks had the same par value. Under the facts herein, any
difference in their market value would be immaterial at the time of
exchange because no income is yet realized—it was a mere
corporate paper transaction. It would have been different, if the
________________
121 See 1986 and 1997 Tax Code where exchange of stocks is subject to a capital
gains tax.
122 US v. Paire, 31 F. Supp. 898, 900; Kessler v. US, 124 F2d 152, 154.
123 Horwick v. CIR, 133 F2d 732, 737.
124 McDonald Restaurant v. CIR, 688 F2d 520, (1982); West Tax Law Dictionary,
1993 ed., Minn., West Publishing Co., pp. 676, 780.
187
VOL. 301, JANUARY 20, 1999 187

exchange transaction resulted into a flow of wealth, in which case

125
income tax may be imposed.
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
126
profits. Preferred stocks are those which entitle the shareholder to
127
some priority on dividends and asset distribution.
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
128
losses of the enterprise. Moreover, under the doctrine of equality
of shares—all stocks issued by the corporation are presumed equal
with the same privileges and liabilities, provided that the Articles of
129
Incorporation is silent on such differences.
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
________________
125 Under the 1997 Tax Code, exchange of stocks is subject to capital gains tax.
126 13 Am. Jur. 318; Fletcher cited in Agbayani, Commercial Law, Vol. 3 (1979
ed.), p. 89.
127 In re Silberkraus, 229 NY Supp., 735.
128 2 Fletcher Cyc. Corp., p. 831 citing Best v. Oklahoma Mill Co., 14 Okla 135
Par 1005.
129 Sec. 5, par. 1, last sentence of Act 1459 [Old Corporation Law] now Sec. 6 of
B.P. 68 requires that the distinguishing features be stated also in the Certificate of
Stock.
188

dividend may arise only once a subscriber disposes of his entire

interest and not when there is still maintenance of proprietary
130
interest.
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.
SO ORDERED.
Davide, Jr. (C.J., Chairman), Melo, Kapunan and Pardo,

JJ., concur.
Judgment modified.
Notes.—Almost invariably in an ad valorem tax, as well as in

income tax, estate and gift taxes, and the value added tax, the tax
paid or withheld is not deducted from the tax base. (Bank of America
NT & SA vs. Court of Appeals, 234 SCRA 302 [1994])
As a general rule, the power to tax is an incident of sovereignty
and is unlimited in its range, acknowledging in its very nature no
limits, so that security against its abuse is to be found only in the
responsibility of the legislature which imposes the tax on the
constituency who are to pay it. (Mactan Cebu International Airport
Authority vs. Marcos, 261 SCRA 667 [1996])
——o0o——
______________
130 McDonald v. CIR, supra.
189
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10/19/21, 11:18 PM SUPREME COURT REPORTS ANNOTATED VOLUME 301

VOL. 301, JANUARY 19, 1999 151

152 SUPREME COURT REPORTS ANNOTATED

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE

Taxation; Courts; Court of Tax Appeals; The findings of facts of a

merely a tax collector, not a taxpayer. Under the withholding system,

VOL. 301, JANUARY 20, 1999 153