FIRST DIVISION
[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.
D E C I S I O N
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:
Sometime in the 1930s, 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 stock 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 a
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 the
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 Presidential 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.
The bone of contention is the
interpretation and application of Section 83(b) of the 1939 Revenue Act[38] 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 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 Section 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.
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]
AMNESTY:
We will deal first with the issue
of tax amnesty. Section 1 of P.D. 67[46] provides:
“I. 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 Anti-Graft 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? An income
taxpayer covers all persons who derive taxable income.[47] ANSCOR was assessed by petitioner for deficiency
withholding tax under Section 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 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] (c) 1939 Tax Code, as
amended by R.A. No. 2343 which provides in part that “xxx Every such person is
made personally liable for such tax xxx.”53
arising from the breach of its legal duty to withhold as distinguish 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.”[54]
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 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.
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:
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.
TAX ON
STOCK DIVIDENDS
General Rule
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:
“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]
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 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.
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,
“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 dividend.”[77]
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.[78] 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[79] Having realized gain from that redemption, the income
earner cannot escape income tax.[80]
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]
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,[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]
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 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.
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.[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 acquiring (redeeming)
corporation.[97] 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.[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
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.”[102]
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
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”[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.
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 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,[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
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 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.
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
OF COMMON WITH PREFERRED SHARES[121]
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]
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 exchange transaction resulted
into a flow of wealth, in which case income tax may be imposed.[125]
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 corporation 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.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Melo, Kapunan, and Pardo, JJ., concur.
[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.
[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 15,471common 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).
[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 distinguish from tax evasion.
[22] Rollo,
p. 68.
[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.
[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 payments made in accordance with the provision 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).
[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. 23dated
October 16, 1972 is entitled “Proclaiming a Tax Amnesty Subject to Certain
Exceptions.”
[34] Rollo,
p. 72.
[35] Rollo,
p. 24.
[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.
[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.
[45] See Manila
Bay Club Corp. v. CA, 62 SCAD 435; 315 Phil. 807 (1995); Pilar Development
Corporation v. IAC, 146 SCRA 215 (1986).
[46] Promulgated November 24,
1972.