CIR vs. CA

CIR vs. CA

   April 25, 2018       FJ

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COMMISSIONER OF INTERNAL REVENUE vs. THE COURT OF APPEALS, COURT OF TAX APPEALS and A. SORIANO CORP.

G.R. No. 108576. January 20, 1999.

FACTS:

Don Andres Soriano, a citizen and resident of the USA formed in the 1930's the corporation "A Soriano Y Cia," predecessor of ANSCOR. On December 30, 1964 Don Andres died.

A day after Don Andres died, ANSCOR increased its capital stock to P20M and in 1966 further increased it to P30M. In the same year, stock dividends worth 46,290 and 46,287 shares were respectively received by the Don Andres estate and Doña Carmen from ANSCOR. Hence, increasing their accumulated shareholdings to 138,867 and 138,864 common shares each.

On June 30, 1968, pursuant to a Board Resolution, ANSCOR redeemed 28,000 common shares from 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. About a year later ANSCOR again redeemed 80,000 common shares from Don Andres' estate, further reducing the latter's common shareholdings.

ANSCOR's business purpose for both redemptions of stock 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. 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 Secs 53 and 54 of the 1939 Revenue Code for the year 1968 and the second quarter of 1969 based on the transactions of exchange and redemption of stocks.

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 CTA reversed the BIR's ruling after finding sufficient evidence to overcome the prima facie correctness of the questioned assessments. In a petition for review, the CA affirmed the ruling of the CTA.

ISSUE:

Whether ANSCOR's redemption of stocks from its stockholders as well as the exchange of common shares can be considered as equivalent to the distribution of taxable dividend making the proceeds thereof taxable under the provisions Section 83 (B) of the 1939 Revenue Act.

HELD:

 The Supreme Court modified the decision of the Court of Appeals 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. While the Board Resolutions authorizing the redemptions state only one purpose — reduction of foreign exchange remittances in case cash dividends are declared. Said purpose was not given credence by the court in case at bar. Records show that despite the existence of enormous corporate profits no cash dividends were 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 are issued for about three decades, this circumstance negate the legitimacy of ANSCOR's alleged purposes. With regard to the exchange of shares, the Court ruled that the exchange of common with preferred shares is not taxable because it produces no realized income to the subscriber but only a modification of the subscriber's rights and privileges which is not a flow of wealth for tax purposes.

Both the Tax Court and the CA 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. 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. 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.