Fisher v.

Trinidad

(Definition of Income Tax, Realization Test of Determining Income)

Fisher was a stockholder in Phil-Am Drug Company. The company declared a stock
dividend with Fishers share of the dividend amounting to P24,800. Collector of
Internal Revenue Trinidad demanded P889 income tax on said dividend, which
Fisher protested against but voluntarily paid. Issue: WON stock dividends can be
classified as income and taxable under Act No. 2833 providing for tax upon
income?
Held: No, the receipt of stock dividends merely represents an increase in value of
the assets of a corporation. The court defines stock dividends as increase in
capital of corps, firms, partnerships, etc for a particular period. They represent
the increase in the proportional share of each stockholder in the companys
capital. It is not a distribution of the corps profits to the stockholder. It only
increases the stockholders SOURCE of income (capital), but does not increase
income itself.
Issue: Definition of income tax
Held: Act No. 2833 taxed any distribution by a corporation out of its earnings or
profits. From the various definitions of income tax cited, an income tax is a tax on
the yearly profits arising from property, salary, private revenue, capital invested,
and all other sources of income. What is taxed is the profit, not the source.
Issue: When is income realized (Test of Realization)Held: Stock dividend in this
case is not taxable for income because the stockholder has received nothing out
of the company's assets for his separate use

and benefit. Instead, hisoriginal investment along with whatever gains which
resultedfrom the use of his and other stockholders money remainsproperty of the
company. The fact that it is not yet his meansthe capital is still subject to
business risks that can wipe out hisentire investment. All he has received is a
stock certificateindicating the increase in his capital in the company.Thus we can
say that income has been realized when therehas been a separation of the
interest of the stockholder fromthe general capital of the corporation. This
separation of interest happens when the company declares a cash dividendon the
shares of shareholders.