CIR VS.

CA AND SORIANO case digest

Don Andres Soriano (American), founder of A. Soriano Corp. (ASC) had a total shareholdings
of 185,154 shares. Broken down, the shares comprise of 50,495 shares which were of original
issue when the corporation was founded and 134,659 shares as stock dividend declarations. So
in 1964 when Soriano died, half of the shares he held went to his wife as her conjugal share
(wifes legitime) and the other half (92,577 shares, which is further broken down to
25,247.5 original issue shares and 82,752.5 stock dividend shares) went to the estate. For
sometime after his death, his estate still continued to receive stock dividends from ASC until it
grew to at least 108,000 shares.
In 1968, ASC through its Board issued a resolution for the redemption of shares from
Sorianos estate purportedly for the planned Filipinization of ASC. Eventually, 108,000
shares were redeemed from the Soriano Estate. In 1973, a tax audit was conducted.
Eventually, the Commissioner of Internal Revenue (CIR) issued an assessment against ASC
for deficiency withholding tax-at-source. The CIR explained that when the redemption was
made, the estate profited (because ASC would have to pay the estate to redeem), and so ASC
would have withheld tax payments from the Soriano Estate yet it remitted no such withheld
tax to the government.
ASC averred that it is not duty bound to withhold tax from the estate because it redeemed the
said shares for purposes of Filipinization of ASC and also to reduce its remittance abroad.
ISSUE: Whether or not ASCs arguments are tenable.
HELD: No. The reason behind the redemption is not material. The proceeds from a
redemption is taxable and ASC is duty bound to withhold the tax at source. The Soriano Estate
definitely profited from the redemption and such profit is taxable, and again, ASC had the
duty to withhold the tax. There was a total of 108,000 shares redeemed from the estate.
25,247.5 of that was original issue from the capital of ASC. The rest (82,752.5) of the shares
are deemed to have been from stock dividend shares. Sale of stock dividends is taxable. It is
also to be noted that 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.
It cannot be argued that all the 108,000 shares were distributed from the capital of ASC and
that the latter is merely redeeming them as such. 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.