Bataan
Topic: Dividend Income; Stock
# Case Title: 34. Frederick Fisher vs. Wenceslao Trinidad, Collector of Internal
Revenue; GR No. L–17518; October 30, 1922.
Legal Doctrine: A careful reading of Sec. 25 of Act 2833 will show that, while it
permitted a tax upon income, the same provided that income shall include gains,
profits, and income derived from salaries, wages, or compensation for personal
services, as well as from interest, rent, dividends, securities, etc. Of course, income
received as dividends is taxable as an income but an income from "dividends" is a
very different thing from 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 corporation.
Facts: That during the year 1919 the 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; that the appellant was a stockholder in said
corporation; that said corporation, as result of the business for that year, declared
a "stock dividend"; that the proportionate share of said stock divided of the
appellant was P24,800; that the stock dividend for that amount was issued to the
appellant; that thereafter, in the month of March, 1920, the appellant, upon
demand of the appellee, paid under protest, and voluntarily, unto the appellee the
sum of P889.91 as income tax on said stock dividend. For the recovery of that
P889.91, the present action was instituted. The defendant demurred to the petition
upon the ground that it did not state facts sufficient to constitute cause of action.
The demurrer was sustained and the plaintiff appealed.
Issue: Are the "stock dividends" in the present case, an "income" and taxable as
such under the provisions of section 25 of Act No. 2833?
Ruling of the Court: No, the "stock dividends" in the present case, is not an
"income" and not taxable as such under the provisions of section 25 of Act No.
2833.
Sec. 25 of Act 2833 states that the term "dividends" as used in this Law shall be held
to mean any distribution made or ordered to be made by a corporation, out of its
earnings or profits accrued since March 1, 1913, and payable to its shareholders,
whether in cash or in stock of the corporation, Stock dividend shall be considered
income, to the amount of the earnings or profits distributed.
But a careful reading of that Act will show that, while it permitted a tax upon
income, the same provided that income shall include gains, profits, and income
derived from salaries, wages, or compensation for personal services, as well as
from interest, rent, dividends, securities, etc. Of course, income received as
dividends is taxable as an income but an income from "dividends" is a very different
thing from 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
corporation. Here, appellant received a stock dividend. Hence, the stock dividend is
not an income and not taxable.
Disposition: Having reached the conclusion, supported by the great weight of the
authority, that "stock dividends" are not "income," the same cannot be taxes 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. When the
assets of a corporation have increased so as to justify the issuance of a stock
dividend, the increase of the assets should be taken account of the Government in
the ordinary tax duplicates for the purposes of assessment and collection of an
additional tax. For all of the foregoing reasons, we are of the opinion, and so
decide, that the judgment of the lower court should be revoked, and without any
finding as to costs, it is so ordered.