by Gena Terre

FREDERICK C. FISHER v. WENCESLAO TRINIDAD, GR No. 17518, 1922-10-30

Facts:

Philippine American Drug Company was a corporation- duly organized and existing under the laws of the Philippine Islands, doing business in the city of Manila... ppellant was a stoekohlder in said corporation; that said corporation, as a... result of the business for that year, declared a "stock dividend;... proportionate share of said stock dividend of the appellant was P24,800... the appellant,... upon demand of the appellee, paid, under protest, and involuntarily, unto the appellee the sum of P889.91 as income tax on said stock dividend.

recovery of that sum (P889.91) the present action was instituted... appellant cites and relies on some decisions of the Supreme Court of the United States

In each of said cases an effort was made to collect an "income tax" upon "stock dividends" and in each case it was held that "stock dividends" were capital and not an "income" and therefore not subject to the "income tax" Jaw.

The appellee admits the doctrine established in the case of Eisner vs. Macomber (252 U. S., 189), that a "stock dividend" is not "income" but argues that said Act No. 2833, in imposing the tax on the stock dividend, does not violate the provisions of the Jones Law.

further argues that the statute of the United States providing for tax upon stock dividends is different from the statute of the Philippine Islands, and therefore the decision of the Supreme Court of the United States should not be followed in interpreting the statute... in force here.

It will be rioted from a reading of the provisions of the two laws above quoted that the writer of the law of the Philippine Islands must have had before him the statute of the United States. No important argument can be based upon the slight difference in the wording of the two... sections.

There is no question that the Philippine

Legislature may provide for the payment of an income tax, but it cannot, under the guise of an income tax, collect a tax on property which is not an "income." The Philippine Legislature cannot impose a tax upon "property" under a law which provides for a tax upon "income" only.

The Philippine Legislature has no power to provide a tax upon "automobiles" only, and under that law collect a tax upon a carreton or bull cart.

A statute providing for an income tax cannot be construed to cover property which is not, in fact, income. The Legislature cannot, by a... statutory declaration, change the real nature of a tax which it imposes. A law which imposes an importation tax on rice only cannot be construed to impose an importation tax on corn.

Issues:

Are the "stock dividends" in the present case "income" and taxable as such under the provisions of section 25 of Act No. 2833 ?

Ruling:

stock dividends represent undistributed increase in the capital of corporations or firms, joint stock companies, etc., etc., for a particular period.

used to show the... increased interest or proportional share in the capital of each stockholder.

the inventory of the property of the corporation, etc., for a particular period shows an increase in its capital, so that the stock theretofore issued does not show the real value of the... stockholder's interest, and additional stock is issued showing the increase in the actual capital, or property, or assets of the corporation, etc.

The New Standard Dictionary, edition of 1915, defines an income as "the amount of... money coming to a person or corporation within a specified time whether as payment for services, interest, or profit from investment."

Webster's International Dictionary defines an income as "the receipts, salary; especially, the annual receipts of a private person or a... corporation from property."

Bouvier, in his law dictionary, says that an "income" in the federal constitution and income tax act, is used in its common or ordinary meaning and not in its technical or economic sense.

Mr. Black, in his law... dictionary, says: "An income is the return in money from one's business, labor, or capital invested ; gains, profit, or private revenue." "An income tax is a tax on the yearly profits arising from property, professions, trades, and offices."

Gray vs. Darlington (82 U. S., 63), said in speaking of income that mere advance in value in no sense constitutes the "income"

Such advance constitutes and can be treated merely as an increase of capital.

Mr. Justice Hughes

"income" in an income... tax law, unless it is otherwise specified, to mean cash or its equivalent. It does not mean choses in action or unrealized increments in the value of the property

Towne vs. Eisner, supra, Mr, Justice Holmes

'A... stock dividend really takes nothing from the property of the corporation, and adds nothing to the interests of the shareholders. Its property is not diminished and their interests are not increased. * * * The proportional interest of each shareholder remains the same. * * *' In... short, the corporation is no poorer and the stockholder is no richer than they were before.

Mr. Justice Pitney

Eisner vs. Macomber

"An income may be defined as the gain derived from capital, from labor, or from both combined, provided it be understood to include profit gained through a sale... or conversion of capital assets.

when stock dividends are declared, the corporation or company acknowledges a liability, in form, to the stockholders

If profits have been made by the... corporation... they create additional bookkeeping liabilities under the head of "profit and loss,"

None of these, however, gives to the stockholders as a body, much less to any... one of them, either a claim against the going concern or corporation, for any particular sum of money, or a right to any particular portion of the asset, or any share unless or until the directors conclude that dividends shall be made and a part of the company's assets... segregated from the common fund for that purpose.

The dividend normally is payable in money and when so paid, then only does the stockholder realize a profit or gain, which becomes his separate property, and thus derive an income from the capital that he has invested. Until that... is done the increased assets belong to the corporation and not to the individual stockholders.

When a corporation or company issues "stock dividends" it shows that the company's accumulated profits have been capitalized, instead of distributed to the stockholders or retained as surplus available for distribution, in money or in kind, should opportunity offer.

it tends rather to postpone said realization, in that the fund represented by the new stock has been transferred from surplus to assets, and no longer is available for actual distribution.

The essential and controlling fact is... that the stockholder has received nothing out of the company's assets for his separate use and benefit

The stockholder who receives a stock dividend has received nothing but a representation of his increased interest in the capital of the corporation.

There has been no separation or segregation of his interest.

All the property or capital of the corporation still belongs to... the corporation.

no separation of the interest of the stockholder from the general capital of the corporation

The stockholder, by virtue of the stock dividend, has no separate or individual control over the interest represented thereby, further than he had before... the stock dividend was issued

He cannot use it for the reason that it is still the property of the corporation

A certificate of stock represented by the stock dividend is simply a statement of his proportional... interest or participation in the capital of the corporation.

We believe that the Legislature, when it provided for an "income tax," intended to tax only the "income" of corporations, firms, or individuals, as that term is generally used in its common acceptation;... that the income means money received, coming to a person or corporation for services, interest, or profit from investments.

We do not believe that the Legislature intended that a mere increase in the value of the capital or assets of a corporation, firm, or individual,... should be taxed as "income."

Mr. Justice Pitney, in the case of Eisner vs. Macomber

"That the fudamental relation of 'capital' to 'income' has been much discussed by economists, the former being likened to the tree or the... land, the latter to the fruit or the crop... the former depicted as a reservoir supplied from springs; the latter as the outlet stream, to be measured by its flow during a period of time."

There is a clear distinction between an extraordinary cash dividend, no matter when earned, and stock dividends declared, as in the present case.

The one is a disbursement to the stockholder of accumulated earnings, and the corporation at once parts irrevocably with all... interest thereon. The other involves no disbursement by the corporation. It parts with nothing to the stockholder.

The latter receives, not an actual dividend, but certificate of stock which simply evidences his interest in the entire capital, including such as by investment of... accumulated profits has been added to the original capital.

They are not income to him, but represent additions1 to the source of his income, namely, his invested capital.

Gibbons vs. Mahon

The ownership of that property is in... the corporation, and not in the holders of shares of its stock.

DeKoven vs. Alsop

Mr. Justice Wilkin said: "A dividend is defined as 'a corporate profit set aside, declared, and ordered by the directors to be paid to the stockholders on demand or at a fixed time. Until the dividend is... declared, these corporate

  profits belong to the corporation, not to the stockholders, and are liable for corporate indebtedness.'"

When a cash dividend is declared and paid to the... stockholders, such cash becomes the absolute property of the stockholders and cannot be reached by the creditors of the corporation in the absence of fraud. A stock dividend, however, still being the property of the corporation, and not of the stockholder, it may be reached by... an execution against the corporation, and sold as a part of the property of the corporation

The rule is well established that cash dividends, whether large or small, are regarded as "income"... and all stock dividends, as capital or assets.

if the holder of the stock... dividend is required to pay an income tax on the same, the result would be that he has paid a tax upon an income which he never received. Such a conclusion is absolutely contradictory to the idea of an income. An income subject to taxation under the law must be an actual income... and not a promised or prospective income.

The appellee emphasizes the "income from dividends." Of course, income received as dividends is taxable as an income, but an income from "dividends" is a very different thing from a receipt of a "stock dividend." One is... an actual receipt of profits; the other is a receipt of a representation of the increased value of the assets of a corporation.

Yuck imperyalismo

In- asmuch, however, as appeals may be taken... from this court to the Supreme Court of the United States, we feel bound to follow the same doctrine announced by that court.

"stock dividends" are not "income," the same cannot be taxed under that provision of Act No, 2833 which provides for a tax upon income.

Under the guise of an income tax, property which is not an... income cannot be taxed.

Principles:

We believe that the Legislature, when it provided for an "income tax," intended to tax only the "income" of corporations, firms, or individuals, as that term is generally used in its common acceptation; that... is, that the income means money received, coming to a person or corporation for services, interest, or profit from investments. We do not believe that the Legislature intended that a mere increase in the value of the capital or assets of a corporation, firm, or individual,... should be taxed as "income."

"That the fudamental relation of 'capital' to 'income' has been much discussed by economists, the former being likened to the tree or the... land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs; the latter as the outlet stream, to be measured by its flow during a period of time."

When a cash dividend is declared and paid to the... stockholders, such cash becomes the absolute property of the stockholders and cannot be reached by the creditors of the corporation in the absence of fraud. A stock dividend, however, still being the property of the corporation, and not of the stockholder, it may be reached by... an execution against the corporation, and sold as a part of the property of the corporation.

The rule is well established that cash dividends, whether large or small, are regarded as "income"... and all stock dividends, as capital or assets.

if the holder of the stock... dividend is required to pay an income tax on the same, the result would be that he has paid a tax upon an income which he never received. Such a conclusion is absolutely contradictory to the idea of an income. An income subject to taxation under the law must be an actual income... and not a promised or prospective income.

The appellee emphasizes the "income from dividends." Of course, income received as dividends is taxable as an income, but an income from "dividends" is a very different thing from a receipt of a "stock dividend." One is... an actual receipt of profits; the other is a receipt of a representation of the increased value of the assets of a corporation.

"stock dividends" are not "income," the same cannot be taxed under that provision of Act No, 2833 which provides for a tax upon income. Under the guise of an income tax, property which is not an... income cannot be taxed.