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I. Introduction computing taxable income for the taxable period in which falls the date of his death,
A. Income Tax Systems amounts accrued up to the date of his death if not otherwise properly includible in
1. Global Tax System respect of such period or a prior period.
2. Schedular Tax System SEC. 46. Change of Accounting Period. - If a taxpayer, other than an individual,
3. Semi-schedular or semi-global Tax System changes his accounting period from fiscal year to calendar year, from calendar year
B. Features of the PH Income Tax Law to fiscal year, or from one fiscal year to another, the net income shall, with the
1. Direct Tax approval of the Commissioner, be computed on the basis of such new accounting
2. Progressive Tax period, subject to the provisions of Section 47.
3. Comprehensive SEC. 47. Final or Adjustment Returns for a Period of Less than Twelve (12)
4. Semi-schedular or semi-global Tax System Months. -
C. Criteria in imposing PH Income Tax (A) Returns for Short Period Resulting from Change of Accounting Period. - If a
1. Citizenship principle taxpayer, other than an individual, with the approval of the Commissioner, changes
2. Residence principle the basis of computing net income from fiscal year to calendar year, a separate final
3. Source principle or adjustment return shall be made for the period between the close of the last fiscal
D. Types of PH Income Tax year for which return was made and the following December 31. If the change is
E. Taxable Period from calendar year to fiscal year, a separate final or adjustment return shall be made
1. Calendar Year (22P, NIRC) for the period between the close of the last calendar year for which return was made
2. Fiscal Year (22Q, 43, 44, 46, NIRC) and the date designated as the close of the fiscal year. If the change is from one
3. Short Period (Sec. 47, NIRC) fiscal year to another fiscal year, a separate final or adjustment return shall be made
for the period between the close of the former fiscal year and the date designated as
NIRC the close of the new fiscal year.
(B) Income Computed on Basis of Short Period. - Where a separate final or
TITLE II adjustment return is made under Subsection (A) on account of a change in the
TAX ON INCOME accounting period, and in all other cases where a separate final or adjustment return
(As Last Amended by RA No. 10653) [5] is required or permitted by rules and regulations prescribed by the Secretary of
CHAPTER I- DEFINITIONS Finance, upon recommendation of the Commissioner, to be made for a fractional
SEC. 22. Definitions. - When used in this Title: part of a year, then the income shall be computed on the basis of the period for
(P) The term 'taxable year' means the calendar year, or the fiscal year ending during which separate final or adjustment return is made.
such calendar year, upon the basis of which the net income is computed under this
Title. 'Taxable year' includes, in the case of a return made for a fractional part of a II. Concept of Income
year under the provisions of this Title or under rules and regulations prescribed by A. Income Tax Defined
the Secretary of Finance, upon recommendation of the commissioner, the period for
which such return is made. 1. Madrigal v Rafferty
(Q) The term 'fiscal year' means an accounting period of twelve (12) months ending 2. Fisher v Trinidad
on the last day of any month other than December.
CHAPTER VIII EN BANC
ACCOUNTING PERIODS AND METHODS OF ACCOUNTING G.R. No. L-12287 August 7, 1918
SEC. 43. General Rule. - The taxable income shall be computed upon the basis of VICENTE MADRIGAL and his wife, SUSANA PATERNO, plaintiffs-appellants,
the taxpayer's annual accounting period (fiscal year or calendar year, as the case vs.
may be) in accordance with the method of accounting regularly employed in keeping JAMES J. RAFFERTY, Collector of Internal Revenue, and VENANCIO
the books of such taxpayer, but if no such method of accounting has been so CONCEPCION, Deputy Collector of Internal Revenue, defendants-appellees.
employed, or if the method employed does not clearly reflect the income, the Gregorio Araneta for appellants.
computation shall be made in accordance with such method as in the opinion of the Assistant Attorney Round for appellees.
Commissioner clearly reflects the income. If the taxpayer's annual accounting period MALCOLM, J.:
is other than a fiscal year, as defined in Section 22(Q), or if the taxpayer has no This appeal calls for consideration of the Income Tax Law, a law of American origin,
annual accounting period, or does not keep books, or if the taxpayer is an individual, with reference to the Civil Code, a law of Spanish origin.
the taxable income shall be computed on the basis of the calendar year. STATEMENT OF THE CASE.
SEC. 44. Period in which Items of Gross Income Included.- The amount of all Vicente Madrigal and Susana Paterno were legally married prior to January 1, 1914.
items of gross income shall be included in the gross income for the taxable year in The marriage was contracted under the provisions of law concerning conjugal
which received by the taxpayer, unless, under methods of accounting permitted partnerships (sociedad de gananciales). On February 25, 1915, Vicente Madrigal filed
under Section 43, any such amounts are to be properly accounted for as of a sworn declaration on the prescribed form with the Collector of Internal Revenue,
different period. In the case of the death of a taxpayer, there shall be included in showing, as his total net income for the year 1914, the sum of P296,302.73.
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Subsequently Madrigal submitted the claim that the said P296,302.73 did not represent governing the conjugal partnership, has no bearing on income considered as income,
his income for the year 1914, but was in fact the income of the conjugal partnership and that the distinction must be drawn between the ordinary form of commercial
existing between himself and his wife Susana Paterno, and that in computing and partnership and the conjugal partnership of spouses resulting from the relation of
assessing the additional income tax provided by the Act of Congress of October 3, marriage.
1913, the income declared by Vicente Madrigal should be divided into two equal parts, DECISION.
one-half to be considered the income of Vicente Madrigal and the other half of Susana From the point of view of test of faculty in taxation, no less than five answers have been
Paterno. The general question had in the meantime been submitted to the Attorney- given the course of history. The final stage has been the selection of income as the
General of the Philippine Islands who in an opinion dated March 17, 1915, held with the norm of taxation. (See Seligman, "The Income Tax," Introduction.) The Income Tax Law
petitioner Madrigal. The revenue officers being still unsatisfied, the correspondence of the United States, extended to the Philippine Islands, is the result of an effect on the
together with this opinion was forwarded to Washington for a decision by the United part of the legislators to put into statutory form this canon of taxation and of social
States Treasury Department. The United States Commissioner of Internal Revenue reform. The aim has been to mitigate the evils arising from inequalities of wealth by a
reversed the opinion of the Attorney-General, and thus decided against the claim of progressive scheme of taxation, which places the burden on those best able to pay. To
Madrigal. carry out this idea, public considerations have demanded an exemption roughly
After payment under protest, and after the protest of Madrigal had been decided equivalent to the minimum of subsistence. With these exceptions, the income tax is
adversely by the Collector of Internal Revenue, action was begun by Vicente Madrigal supposed to reach the earnings of the entire non-governmental property of the country.
and his wife Susana Paterno in the Court of First Instance of the city of Manila against Such is the background of the Income Tax Law.
Collector of Internal Revenue and the Deputy Collector of Internal Revenue for the Income as contrasted with capital or property is to be the test. The essential difference
recovery of the sum of P3,786.08, alleged to have been wrongfully and illegally between capital and income is that capital is a fund; income is a flow. A fund of property
collected by the defendants from the plaintiff, Vicente Madrigal, under the provisions of existing at an instant of time is called capital. A flow of services rendered by that capital
the Act of Congress known as the Income Tax Law. The burden of the complaint was by the payment of money from it or any other benefit rendered by a fund of capital in
that if the income tax for the year 1914 had been correctly and lawfully computed there relation to such fund through a period of time is called an income. Capital is wealth,
would have been due payable by each of the plaintiffs the sum of P2,921.09, which while income is the service of wealth. (See Fisher, "The Nature of Capital and Income.")
taken together amounts of a total of P5,842.18 instead of P9,668.21, erroneously and The Supreme Court of Georgia expresses the thought in the following figurative
unlawfully collected from the plaintiff Vicente Madrigal, with the result that plaintiff language: "The fact is that property is a tree, income is the fruit; labor is a tree, income
Madrigal has paid as income tax for the year 1914, P3,786.08, in excess of the sum the fruit; capital is a tree, income the fruit." (Waring vs. City of Savannah [1878], 60 Ga.,
lawfully due and payable. 93.) A tax on income is not a tax on property. "Income," as here used, can be defined
The answer of the defendants, together with an analysis of the tax declaration, the as "profits or gains." (London County Council vs. Attorney-General [1901], A. C., 26; 70
pleadings, and the stipulation, sets forth the basis of defendants' stand in the following L. J. K. B. N. S., 77; 83 L. T. N. S., 605; 49 Week. Rep., 686; 4 Tax Cas., 265. See
way: The income of Vicente Madrigal and his wife Susana Paterno of the year 1914 further Foster's Income Tax, second edition [1915], Chapter IV; Black on Income Taxes,
was made up of three items: (1) P362,407.67, the profits made by Vicente Madrigal in second edition [1915], Chapter VIII; Gibbons vs. Mahon [1890], 136 U.S., 549; and
his coal and shipping business; (2) P4,086.50, the profits made by Susana Paterno in Towne vs. Eisner, decided by the United States Supreme Court, January 7, 1918.)
her embroidery business; (3) P16,687.80, the profits made by Vicente Madrigal in a A regulation of the United States Treasury Department relative to returns by the
pawnshop company. The sum of these three items is P383,181.97, the gross income of husband and wife not living apart, contains the following:
Vicente Madrigal and Susana Paterno for the year 1914. General deductions were The husband, as the head and legal representative of the household and general
claimed and allowed in the sum of P86,879.24. The resulting net income was custodian of its income, should make and render the return of the aggregate income of
P296,302.73. For the purpose of assessing the normal tax of one per cent on the net himself and wife, and for the purpose of levying the income tax it is assumed that he
income there were allowed as specific deductions the following: (1) P16,687.80, the tax can ascertain the total amount of said income. If a wife has a separate estate managed
upon which was to be paid at source, and (2) P8,000, the specific exemption granted to by herself as her own separate property, and receives an income of more than $3,000,
Vicente Madrigal and Susana Paterno, husband and wife. The remainder, P271,614.93 she may make return of her own income, and if the husband has other net income,
was the sum upon which the normal tax of one per cent was assessed. The normal tax making the aggregate of both incomes more than $4,000, the wife's return should be
thus arrived at was P2,716.15. attached to the return of her husband, or his income should be included in her return, in
The dispute between the plaintiffs and the defendants concerned the additional tax order that a deduction of $4,000 may be made from the aggregate of both incomes. The
provided for in the Income Tax Law. The trial court in an exhausted decision found in tax in such case, however, will be imposed only upon so much of the aggregate income
favor of defendants, without costs. of both shall exceed $4,000. If either husband or wife separately has an income equal
ISSUES. to or in excess of $3,000, a return of annual net income is required under the law, and
The contentions of plaintiffs and appellants having to do solely with the additional such return must include the income of both, and in such case the return must be made
income tax, is that is should be divided into two equal parts, because of the conjugal even though the combined income of both be less than $4,000. If the aggregate net
partnership existing between them. The learned argument of counsel is mostly based income of both exceeds $4,000, an annual return of their combined incomes must be
upon the provisions of the Civil Code establishing the sociedad de gananciales. The made in the manner stated, although neither one separately has an income of $3,000
counter contentions of appellees are that the taxes imposed by the Income Tax Law are per annum. They are jointly and separately liable for such return and for the payment of
as the name implies taxes upon income tax and not upon capital and property; that the the tax. The single or married status of the person claiming the specific exemption shall
fact that Madrigal was a married man, and his marriage contracted under the provisions
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be determined as one of the time of claiming such exemption which return is made, dominion over the income and under the Philippine law, the right to determine
otherwise the status at the close of the year." its use and disposition; that in this case the wife has no "separate estate"
With these general observations relative to the Income Tax Law in force in the within the contemplation of the Act of October 3, 1913, levying an income tax.
Philippine Islands, we turn for a moment to consider the provisions of the Civil Code It appears further from the correspondence that upon the foregoing
dealing with the conjugal partnership. Recently in two elaborate decisions in which a explanation, tax was assessed against the entire net income against Gregorio
long line of Spanish authorities were cited, this court in speaking of the conjugal Araneta; that the tax was paid and an application for refund made, and that the
partnership, decided that "prior to the liquidation the interest of the wife and in case of application for refund was rejected, whereupon the matter was submitted to
her death, of her heirs, is an interest inchoate, a mere expectancy, which constitutes the Attorney-General of the Islands who holds that the returns were correctly
neither a legal nor an equitable estate, and does not ripen into title until there appears rendered, and that the refund should be allowed; and thereupon the question
that there are assets in the community as a result of the liquidation and settlement." at issue is submitted through the Governor-General of the Islands and Bureau
(Nable Jose vs. Nable Jose [1916], 15 Off. Gaz., 871; Manuel and of Insular Affairs for the advisory opinion of this office.
Laxamana vs. Losano [1918], 16 Off. Gaz., 1265.) By paragraph M of the statute, its provisions are extended to the Philippine
Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the property of her Islands, to be administered as in the United States but by the appropriate
husband Vicente Madrigal during the life of the conjugal partnership. She has an internal-revenue officers of the Philippine Government. You are therefore
interest in the ultimate property rights and in the ultimate ownership of property advised that upon the facts as stated, this office holds that for the Federal
acquired as income after such income has become capital. Susana Paterno has no Income Tax (Act of October 3, 1913), the entire net income in this case was
absolute right to one-half the income of the conjugal partnership. Not being seized of a taxable to Gregorio Araneta, both for the normal and additional tax, and that
separate estate, Susana Paterno cannot make a separate return in order to receive the the application for refund was properly rejected.
benefit of the exemption which would arise by reason of the additional tax. As she has The separate estate of a married woman within the contemplation of the
no estate and income, actually and legally vested in her and entirely distinct from her Income Tax Law is that which belongs to her solely and separate and apart
husband's property, the income cannot properly be considered the separate income of from her husband, and over which her husband has no right in equity. It may
the wife for the purposes of the additional tax. Moreover, the Income Tax Law does not consist of lands or chattels.
look on the spouses as individual partners in an ordinary partnership. The husband and The statute and the regulations promulgated in accordance therewith provide
wife are only entitled to the exemption of P8,000 specifically granted by the law. The that each person of lawful age (not excused from so doing) having a net
higher schedules of the additional tax directed at the incomes of the wealthy may not be income of $3,000 or over for the taxable year shall make a return showing the
partially defeated by reliance on provisions in our Civil Code dealing with the conjugal facts; that from the net income so shown there shall be deducted $3,000
partnership and having no application to the Income Tax Law. The aims and purposes where the person making the return is a single person, or married and not
of the Income Tax Law must be given effect. living with consort, and $1,000 additional where the person making the return
The point we are discussing has heretofore been considered by the Attorney-General of is married and living with consort; but that where the husband and wife both
the Philippine Islands and the United States Treasury Department. The decision of the make returns (they living together), the amount of deduction from the
latter overruling the opinion of the Attorney-General is as follows: aggregate of their several incomes shall not exceed $4,000.
TREASURY The only occasion for a wife making a return is where she has income from a
DEPARTMENT, Washington. sole and separate estate in excess of $3,000, but together they have an
Income Tax. income in excess of $4,000, in which the latter event either the husband or
FRANK MCINTYRE, wife may make the return but not both. In all instances the income of husband
Chief, Bureau of Insular Affairs, War Department, and wife whether from separate estates or not, is taken as a whole for the
Washington, D. C. purpose of the normal tax. Where the wife has income from a separate estate
SIR: This office is in receipt of your letter of June 22, 1915, transmitting copy makes return made by her husband, while the incomes are added together for
of correspondence "from the Philippine authorities relative to the method of the purpose of the normal tax they are taken separately for the purpose of the
submission of income tax returns by marred person." additional tax. In this case, however, the wife has no separate income within
You advise that "The Governor-General, in forwarding the papers to the the contemplation of the Income Tax Law.
Bureau, advises that the Insular Auditor has been authorized to suspend Respectfully,
action on the warrants in question until an authoritative decision on the points DAVID A. GATES.
raised can be secured from the Treasury Department." Acting Commissioner.
From the correspondence it appears that Gregorio Araneta, married and living
with his wife, had an income of an amount sufficient to require the imposition In connection with the decision above quoted, it is well to recall a few basic ideas. The
of the net income was properly computed and then both income and Income Tax Law was drafted by the Congress of the United States and has been by the
deductions and the specific exemption were divided in half and two returns Congress extended to the Philippine Islands. Being thus a law of American origin and
made, one return for each half in the names respectively of the husband and being peculiarly intricate in its provisions, the authoritative decision of the official who is
wife, so that under the returns as filed there would be an escape from the charged with enforcing it has peculiar force for the Philippines. It has come to be a well-
additional tax; that Araneta claims the returns are correct on the ground under settled rule that great weight should be given to the construction placed upon a revenue
the Philippine law his wife is entitled to half of his earnings; that Araneta has law, whose meaning is doubtful, by the department charged with its execution.
(U.S. vs. Cerecedo Hermanos y Cia. [1907], 209 U.S., 338; In re Allen [1903], 2 Phil.,
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630; Government of the Philippine Islands vs. Municipality of Binalonan, and Roman Chapter 463 of an Act of Congress of September 8, 1916, in its title 1 provides for the
Catholic Bishop of Nueva Segovia [1915], 32 Phil., 634.) We conclude that the collection of an "income tax." Section 2 of said Act attempts to define what is an
judgment should be as it is hereby affirmed with costs against appellants. So ordered. income. The definition follows:
Torres, Johnson, Carson, Street and Fisher, JJ., concur. That the term "dividends" as used in this title shall be held to mean any
distribution made or ordered to made by a corporation, . . . which stock
EN BANC dividend shall be considered income, to the amount of its cash value.
G.R. No. L-17518 October 30, 1922 Act No. 2833 of the Philippine Legislature is an Act establishing "an income tax."
FREDERICK C. FISHER, plaintiff-appellant, Section 25 of said Act attempts to define the application of the income tax. The
vs. definition follows:
WENCESLAO TRINIDAD, Collector of Internal Revenue, defendant-appellee. The term "dividends" as used in this Law shall be held to mean any distribution
Fisher and De Witt and Antonio M. Opisso for appellants. made or ordered to be made by a corporation, . . . out of its earnings or profits
Acting Attorney-General Tuason for appellee. accrued since March first, nineteen hundred and thirteen, and payable to its
JOHNSON, J.: shareholders, whether in cash or in stock of the corporation, . . . . Stock
The only question presented by this appeal is: Are the "stock dividends" in the present dividend shall be considered income, to the amount of the earnings or profits
case "income" and taxable as such under the provisions of section 25 of Act No. 2833? distributed.
While the appellant presents other important questions, under the view which we have It will be noted from a reading of the provisions of the two laws above quoted that the
taken of the facts and the law applicable to the present case, we deem it unnecessary writer of the law of the Philippine Islands must have had before him the statute of the
to discuss them now. United States. No important argument can be based upon the slight different in the
The defendant demurred to the petition in the lower court. The facts are therefore wording of the two sections.
admitted. They are simple and may be stated as follows: It is further argued by the appellee that there are no constitutional limitations upon the
That during the year 1919 the Philippine American Drug Company was a corporation power of the Philippine Legislature such as exist in the United States, and in support of
duly organized and existing under the laws of the Philippine Islands, doing business in that contention, he cites a number of decisions. There is no question that the Philippine
the City of Manila; that he appellant was a stockholder in said corporation; that said Legislature may provide for the payment of an income tax, but it cannot, under the
corporation, as result of the business for that year, declared a "stock dividend"; that the guise of an income tax, collect a tax on property which is not an "income." The
proportionate share of said stock divided of the appellant was P24,800; that the stock Philippine Legislature can not impose a tax upon "property" under a law which provides
dividend for that amount was issued to the appellant; that thereafter, in the month of for a tax upon "income" only. The Philippine Legislature has no power to provide a tax
March, 1920, the appellant, upon demand of the appellee, paid under protest, and upon "automobiles" only, and under that law collect a tax upon a carretonor bull cart.
voluntarily, unto the appellee the sum of P889.91 as income tax on said stock dividend. Constitutional limitations, that is to say, a statute expressly adopted for one purpose
For the recovery of that sum (P889.91) the present action was instituted. The defendant cannot, without amendment, be applied to another purpose which is entirely distinct and
demurred to the petition upon the ground that it did not state facts sufficient to constitute different. A statute providing for an income tax cannot be construed to cover property
cause of action. The demurrer was sustained and the plaintiff appealed. which is not, in fact income. The Legislature cannot, by a statutory declaration, change
To sustain his appeal the appellant cites and relies on some decisions of the Supreme the real nature of a tax which it imposes. A law which imposes an important tax on rice
Court of the United States as will as the decisions of the supreme court of some of the only cannot be construed to an impose an importation tax on corn.
states of the Union, in which the questions before us, based upon similar statutes, was It is true that the statute in question provides for an income tax and contains a further
discussed. Among the most important decisions may be mentioned the following: provision that "stock dividends" shall be considered income and are therefore subject to
Towne vs. Eisner, 245 U.S., 418; Doyle vs. Mitchell Bors. Co., 247 U.S., 179; Eisner vs. income tax provided for in said law. If "stock dividends" are not "income" then the law
Macomber, 252 U.S., 189; Dekoven vs Alsop, 205 Ill., 309; 63 L.R.A., 587; Kaufman vs. permits a tax upon something not within the purpose and intent of the law.
Charlottesville Woolen Mills, 93 Va., 673. It becomes necessary in this connection to ascertain what is an "income in order that
In each of said cases an effort was made to collect an "income tax" upon "stock we may be able to determine whether "stock dividends" are "income" in the sense that
dividends" and in each case it was held that "stock dividends" were capital and not an the word is used in the statute. Perhaps it would be more logical to determine first what
"income" and therefore not subject to the "income tax" law. are "stock dividends" in order that we may more clearly understand their relation to
The appellee admits the doctrine established in the case of Eisner vs. Macomber (252 "income." Generally speaking, stock dividends represent undistributed increase in the
U.S., 189) that a "stock dividend" is not "income" but argues that said Act No. 2833, in capital of corporations or firms, joint stock companies, etc., etc., for a particular period.
imposing the tax on the stock dividend, does not violate the provisions of the Jones They are used to show the increased interest or proportional shares in the capital of
Law. The appellee further argues that the statute of the United States providing for tax each stockholder. In other words, the inventory of the property of the corporation, etc.,
upon stock dividends is different from the statute of the Philippine Islands, and therefore for particular period shows an increase in its capital, so that the stock theretofore issued
the decision of the Supreme Court of the United States should not be followed in does not show the real value of the stockholder's interest, and additional stock is issued
interpreting the statute in force here. showing the increase in the actual capital, or property, or assets of the corporation, etc.
For the purpose of ascertaining the difference in the said statutes ( (United States and To illustrate: A and B form a corporation with an authorized capital of P10,000 for the
Philippine Islands), providing for an income tax in the United States as well as that in purpose of opening and conducting a drug store, with assets of the value of P2,000,
the Philippine Islands, the two statutes are here quoted for the purpose of determining and each contributes P1,000. Their entire assets are invested in drugs and put upon the
the difference, if any, in the language of the two statutes. shelves in their place of business. They commence business without a cent in the
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treasury. Every dollar contributed is invested. Shares of stock to the amount of P1,000 has property of the value of P20,000. A is not a corporation. The assets of his business
are issued to each of the incorporators, which represent the actual investment and are not shown therefore by certificates of stock. His books, however, show that the
entire assets of the corporation. Business for the first year is good. Merchandise is sold, value of his property has increased during the year by P10,000, under any theory of
and purchased, to meet the demands of the growing trade. At the end of the first year business or law, be regarded as an "income" upon which the farmer can be required to
an inventory of the assets of the corporation is made, and it is then ascertained that the pay an income tax? Is there any difference in law in the condition of A in this illustration
assets or capital of the corporation on hand amount to P4,000, with no debts, and still and the condition of A and B in the immediately preceding illustration? Can the increase
not a cent in the treasury. All of the receipts during the year have been reinvested in the of the value of the property in either case be regarded as an "income" and be subjected
business. Neither of the stockholders have withdrawn a penny from the business during to the payment of the income tax under the law?
the year. Every peso received for the sale of merchandise was immediately used in the Each of the foregoing illustrations, it is asserted, is analogous to the case before us
purchase of new stock — new supplies. At the close of the year there is not a centavo and, in view of that fact, let us ascertain how lexicographers and the courts have
in the treasury, with which either A or B could buy a cup of coffee or a pair of shoes for defined an "income." The New Standard Dictionary, edition of 1915, defines an income
his family. At the beginning of the year they were P2,000, and at the end of the year as "the amount of money coming to a person or corporation within a specified time
they were P4,000, and neither of the stockholders have received a centavo from the whether as payment or corporation within a specified time whether as payment for
business during the year. At the close of the year, when it is discovered that the assets services, interest, or profit from investment." Webster's International Dictionary defines
are P4,000 and not P2,000, instead of selling the extra merchandise on hand and an income as "the receipt, salary; especially, the annual receipts of a private person or
thereby reducing the business to its original capital, they agree among themselves to a corporation from property." Bouvier, in his law dictionary, says that an "income" in the
increase the capital they agree among themselves to increase the capital issued and for federal constitution and income tax act, is used in its common or ordinary meaning and
that purpose issue additional stock in the form of "stock dividends" or additional stock of not in its technical, or economic sense. (146 Northwestern Reporter, 812) Mr. Black, in
P1,000 each, which represents the actual increase of the shares of interest in the his law dictionary, says "An income is the return in money from one's business, labor, or
business. At the beginning of the year each stockholder held one-half interest in the capital invested; gains, profit or private revenue." "An income tax is a tax on the yearly
capital. At the close of the year, and after the issue of the said stock dividends, they profits arising from property , professions, trades, and offices."
each still have one-half interest in the business. The capital of the corporation increased The Supreme Court of the United States, in the case o Gray vs. Darlington (82 U.S.,
during the year, but has either of them received an income? It is not denied, for the 653), said in speaking of income that mere advance in value in no sense constitutes the
purpose of ordinary taxation, that the taxable property of the corporation at the "income" specified in the revenue law as "income" of the owner for the year in which the
beginning of the year was P2,000, that at the close of the year it was P4,000, and that sale of the property was made. Such advance constitutes and can be treated merely as
the tax rolls should be changed in accordance with the changed conditions in the an increase of capital. (In re Graham's Estate, 198 Pa., 216; Appeal of Braun, 105 Pa.,
business. In other words, the ordinary tax should be increased by P2,000. 414.)
Another illustration: C and D organized a corporation for agricultural purposes with an Mr. Justice Hughes, later Associate Justice of the Supreme Court of the United States
authorized capital stock of P20,000 each contributing P5,000. With that capital they and now Secretary of State of the United States, in his argument before the Supreme
purchased a farm and, with it, one hundred head of cattle. Every peso contributed is Court of the United States in the case of Towne vs. Eisner, supra, defined an "income"
invested. There is no money in the treasury. Much time and labor was expanded during in an income tax law, unless it is otherwise specified, to mean cash or its equivalent. It
the year by the stockholders on the farm in the way of improvements. Neither received does not mean choses in action or unrealized increments in the value of the property,
a centavo during the year from the farm or the cattle. At the beginning of the year the and cites in support of the definition, the definition given by the Supreme Court in the
assets of the corporation, including the farm and the cattle, were P10,000, and at the case of Gray vs. Darlington, supra.
close of the year and inventory of the property of the corporation is made and it is then In the case of Towne vs. Eisner, supra, Mr. Justice Holmes, speaking for the court,
found that they have the same farm with its improvements and two hundred head of said: "Notwithstanding the thoughtful discussion that the case received below, we
cattle by natural increase. At the end of the year it is also discovered that, by reason of cannot doubt that the dividend was capital as well for the purposes of the Income Tax
business changes, the farm and the cattle both have increased in value, and that the Law. . . . 'A stock dividend really takes nothing from the property of the corporation, and
value of the corporate property is now P20,000 instead of P10,000 as it was at the adds nothing to the interests of the shareholders. Its property is not diminished and their
beginning of the year. The incorporators instead of reducing the property to its original interest are not increased. . . . The proportional interest of each shareholder remains
capital, by selling off a part of its, issue to themselves "stock dividends" to represent the the same. . . .' In short, the corporation is no poorer and the stockholder is no richer
proportional value or interest of each of the stockholders in the increased capital at the then they were before." (Gibbons vs. Mahon, 136 U.S., 549, 559, 560; Logan County
close of the year. There is still not a centavo in the treasury and neither has withdrawn vs. U.S., 169 U.S., 255, 261).
a peso from the business during the year. No part of the farm or cattle has been sold In the case of Doyle vs. Mitchell Bros. Co. (247 U.S., 179, Mr. Justice Pitney, speaking
and not a single peso was received out of the rents or profits of the capital of the for the court, said that the act employs the term "income" in its natural and obvious
corporation by the stockholders. sense, as importing something distinct from principal or capital and conveying the idea
Another illustration: A, an individual farmer, buys a farm with one hundred head of cattle of gain or increase arising from corporate activity.
for the sum of P10,000. At the end of the first year, by reason of business conditions Mr. Justice Pitney, in the case of Eisner vs. Macomber (252 U.S., 189), again speaking
and the increase of the value of both real estate and personal property, it is discovered for the court said: "An income may be defined as the gain derived from capital, from
that the value of the farm and the cattle is P20,000. A, during the year, has received labor, or from both combined, provided it be understood to include profit gained through
nothing from the farm or the cattle. His books at the beginning of the year show that he a sale or conversion of capital assets."
had property of the value of P10,000. His books at the close of the year show that he
6

For bookkeeping purposes, when stock dividends are declared, the corporation or corporation, firm, or individual, should be taxed as "income." Such property can be
company acknowledges a liability, in form, to the stockholders, equivalent to the reached under the ordinary from of taxation.
aggregate par value of their stock, evidenced by a "capital stock account." If profits Mr. Justice Pitney, in the case of the Einer vs. Macomber, supra, said in discussing the
have been made by the corporation during a particular period and not divided, they difference between "capital" and "income": "That the fundamental relation of 'capital' to
create additional bookkeeping liabilities under the head of "profit and loss," "undivided 'income' has been much discussed by economists, the former being likened to the tree
profits," "surplus account," etc., or the like. None of these, however, gives to the or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied
stockholders as a body, much less to any one of them, either a claim against the going from springs; the latter as the outlet stream, to be measured by its flow during a period
concern or corporation, for any particular sum of money, or a right to any particular of time." It may be argued that a stockholder might sell the stock dividend which he had
portion of the asset, or any shares sells or until the directors conclude that dividends acquired. If he does, then he has received, in fact, an income and such income, like any
shall be made a part of the company's assets segregated from the common fund for other profit which he realizes from the business, is an income and he may be taxed
that purpose. The dividend normally is payable in money and when so paid, then thereon.
only does the stockholder realize a profit or gain, which becomes his separate There is a clear distinction between an extraordinary cash dividend, no matter when
property, and thus derive an income from the capital that he has invested. Until that, is earned, and stock dividends declared, as in the present case. The one is a
done the increased assets belong to the corporation and not to the individual disbursement to the stockholder of accumulated earnings, and the corporation at once
stockholders. parts irrevocably with all interest thereon. The other involves no disbursement by the
When a corporation or company issues "stock dividends" it shows that the company's corporation. It parts with nothing to the stockholder. The latter receives, not an actual
accumulated profits have been capitalized, instead of distributed to the stockholders or dividend, but certificate of stock which simply evidences his interest in the entire capital,
retained as surplus available for distribution, in money or in kind, should opportunity including such as by investment of accumulated profits has been added to the original
offer. Far from being a realization of profits of the stockholder, it tends rather to capital. They are not income to him, but represent additions to the source of his income,
postpone said realization, in that the fund represented by the new stock has been namely, his invested capital. (DeKoven vs. Alsop, 205, Ill., 309; 63 L.R.A. 587). Such a
transferred from surplus to assets, and no longer is available for actual distribution. The person is in the same position, so far as his income is concerned, as the owner of
essential and controlling fact is that the stockholder has received nothing out of the young domestic animal, one year old at the beginning of the year, which is worth P50
company's assets for his separate use and benefit; on the contrary, every dollar of his and, which, at the end of the year, and by reason of its growth, is worth P100. The
original investment, together with whatever accretions and accumulations resulting from value of his property has increased, but has had an income during the year? It is true
employment of his money and that of the other stockholders in the business of the that he had taxable property at the beginning of the year of the value of P50, and the
company, still remains the property of the company, and subject to business risks which same taxable property at another period, of the value of P100, but he has had no
may result in wiping out of the entire investment. Having regard to the very truth of the income in the common acceptation of that word. The increase in the value of the
matter, to substance and not to form, the stockholder by virtue of the stock dividend has property should be taken account of on the tax duplicate for the purposes of ordinary
in fact received nothing that answers the definition of an "income." (Eisner vs. taxation, but not as income for he has had none.
Macomber, 252 U.S., 189, 209, 211.) The question whether stock dividends are income, or capital, or assets has frequently
The stockholder who receives a stock dividend has received nothing but a come before the courts in another form — in cases of inheritance. A is a stockholder in
representation of his increased interest in the capital of the corporation. There has been a large corporation. He dies leaving a will by the terms of which he give to B during his
no separation or segregation of his interest. All the property or capital of the corporation lifetime the "income" from said stock, with a further provision that C shall, at B's death,
still belongs to the corporation. There has been no separation of the interest of the become the owner of his share in the corporation. During B's life the corporation issues
stockholder from the general capital of the corporation. The stockholder, by virtue of the a stock dividend. Does the stock dividend belong to B as an income, or does it finally
stock dividend, has no separate or individual control over the interest represented belong to C as a part of his share in the capital or assets of the corporation, which had
thereby, further than he had before the stock dividend was issued. He cannot use it for been left to him as a remainder by A? While there has been some difference of opinion
the reason that it is still the property of the corporation and not the property of the on that question, we believe that a great weight of authorities hold that the stock
individual holder of stock dividend. A certificate of stock represented by the stock dividend is capital or assets belonging to C and not an income belonging to B. In the
dividend is simply a statement of his proportional interest or participation in the capital case of D'Ooge vs. Leeds (176 Mass., 558, 560) it was held that stock dividends in
of the corporation. For bookkeeping purposes, a corporation, by issuing stock dividend, such cases were regarded as capital and not as income (Gibbons vs. Mahon, 136 U.S.,
acknowledges a liability in form to the stockholders, evidenced by a capital stock 549.)
account. The receipt of a stock dividend in no way increases the money received of a In the case of Gibbson vs. Mahon, supra, Mr. Justice Gray said: "The distinction
stockholder nor his cash account at the close of the year. It simply shows that there has between the title of a corporation, and the interest of its members or stockholders in the
been an increase in the amount of the capital of the corporation during the particular property of the corporation, is familiar and well settled. The ownership of that property is
period, which may be due to an increased business or to a natural increase of the value in the corporation, and not in the holders of shares of its stock. The interest of each
of the capital due to business, economic, or other reasons. We believe that the stockholder consists in the right to a proportionate part of the profits whenever
Legislature, when it provided for an "income tax," intended to tax only the "income" of dividends are declared by the corporation, during its existence, under its charter, and to
corporations, firms or individuals, as that term is generally used in its common a like proportion of the property remaining, upon the termination or dissolution of the
acceptation; that is that the income means money received, coming to a person or corporation, after payment of its debts." (Minot vs. Paine, 99 Mass., 101; Greeff vs.
corporation for services, interest, or profit from investments. We do not believe that the Equitable Life Assurance Society, 160 N. Y., 19.) In the case of Dekoven vs. Alsop (205
Legislature intended that a mere increase in the value of the capital or assets of a Ill ,309, 63 L. R. A. 587) Mr. Justice Wilkin said: "A dividend is defined as a corporate
7

profit set aside, declared, and ordered by the directors to be paid to the stockholders on In all of the foregoing argument we have not overlooked the decisions of a few of the
demand or at a fixed time. Until the dividend is declared, these corporate profits belong courts in different parts of the world, which have reached a different conclusion from the
to the corporation, not to the stockholders, and are liable for corporate indebtedness. one which we have arrived at in the present case. Inasmuch, however, as appeals may
There is a clear distinction between an extraordinary cash dividend, no matter when be taken from this court to the Supreme Court of the United States, we feel bound to
earned, and stock dividends declared. The one is a disbursement to the stockholders of follow the same doctrine announced by that court.
accumulated earning, and the corporation at once parts irrevocably with all interest Having reached the conclusion, supported by the great weight of the authority, that
thereon. The other involves no disbursement by the corporation. It parts with nothing to "stock dividends" are not "income," the same cannot be taxes under that provision of
the stockholders. The latter receives, not an actual dividend, but certificates of stock Act No. 2833 which provides for a tax upon income. Under the guise of an income tax,
which evidence in a new proportion his interest in the entire capital. When a cash property which is not an income cannot be taxed. When the assets of a corporation
becomes the absolute property of the stockholders and cannot be reached by the have increased so as to justify the issuance of a stock dividend, the increase of the
creditors of the corporation in the absence of fraud. A stock dividend however, still assets should be taken account of the Government in the ordinary tax duplicates for the
being the property of the corporation and not the stockholder, it may be reached by an purposes of assessment and collection of an additional tax. For all of the foregoing
execution against the corporation, and sold as a part of the property of the corporation. reasons, we are of the opinion, and so decide, that the judgment of the lower court
In such a case, if all the property of the corporation is sold, then the stockholder should be revoked, and without any finding as to costs, it is so ordered.
certainly could not be charged with having received an income by virtue of the issuance Araullo, C.J. Avanceña, Villamor and Romualdez, JJ., concur.
of the stock dividend. Until the dividend is declared and paid, the corporate profits still
belong to the corporation, not to the stockholders, and are liable for corporate B. When is income taxable?
indebtedness. The rule is well established that cash dividend, whether large or small, 1. Existence of income
are regarded as "income" and all stock dividends, as capital or assets (Cook on 2. Realization of income
Corporation, Chapter 32, secs. 534, 536; Davis vs. Jackson, 152 Mass., 58; Mills vs. a. Tests of realization (Fisher v Trinidad, ibid)
Britton, 64 Conn., 4; 5 Am., and Eng. Encycl. of Law, 2d ed., p. 738.) b. Actual v constructive receipt
If the ownership of the property represented by a stock dividend is still in the
corporation and to in the holder of such stock, then it is difficult to understand how it can 3. Limpan v CIR
be regarded as income to the stockholder and not as a part of the capital or assets of 4. Republic v dela Rama
the corporation. (Gibbsons vs. Mahon, supra.) the stockholder has received nothing but
a representation of an interest in the property of the corporation and, as a matter of fact, EN BANC
he may never receive anything, depending upon the final outcome of the business of G.R. No. L-21570 July 26, 1966
the corporation. The entire assets of the corporation may be consumed by LIMPAN INVESTMENT CORPORATION, petitioner,
mismanagement, or eaten up by debts and obligations, in which case the holder of the vs.
stock dividend will never have received an income from his investment in the COMMISSIONER OF INTERNAL REVENUE, ET AL., respondents.
corporation. A corporation may be solvent and prosperous today and issue stock Vicente L. San Luis for petitioner.
dividends in representation of its increased assets, and tomorrow be absolutely Office of the Solicitor General A. A. Alafriz, Assistant Solicitor General F. B. Rosete,
insolvent by reason of changes in business conditions, and in such a case the Solicitor A. B. Afurong and Atty. V. G. Saldajeno for respondents.
stockholder would have received nothing from his investment. In such a case, if the REYES, J.B.L., J.:
holder of the stock dividend is required to pay an income tax on the same, the result Appeal interposed by petitioner Limpan Investment Corporation against a decision of
would be that he has paid a tax upon an income which he never received. Such a the Court of Tax Appeals, in its CTA Case No. 699, holding and ordering it (petitioner)
conclusion is absolutely contradictory to the idea of an income. An income subject to to pay respondent Commissioner of Internal Revenue the sums of P7,338.00 and
taxation under the law must be an actual income and not a promised or prospective P30,502.50, representing deficiency income taxes, plus 50% surcharge and 1%
income. monthly interest from June 30, 1959 to the date of payment, with cost.
The appelle argues that there is nothing in section 25 of Act No 2833 which The facts of this case are:
contravenes the provisions of the Jones Law. That may be admitted. He further argues Petitioner, a domestic corporation duly registered since June 21, 1955, is engaged in
that the Act of Congress (U.S. Revenue Act of 1918) expressly authorized the the business of leasing real properties. It commenced actual business operations on
Philippine Legislatures to provide for an income tax. That fact may also be admitted. July 1, 1955. Its principal stockholders are the spouses Isabelo P. Lim and Purificacion
But a careful reading of that Act will show that, while it permitted a tax upon income, the Ceñiza de Lim, who own and control ninety-nine per cent (99%) of its total paid-up
same provided that income shall include gains, profits, and income derived from capital. Its president and chairman of the board is the same Isabelo P. Lim.1äwphï1.ñët
salaries, wages, or compensation for personal services, as well as from interest, rent, Its real properties consist of several lots and buildings, mostly situated in Manila and in
dividends, securities, etc. The appellee emphasizes the "income from dividends." Of Pasay City, all of which were acquired from said Isabelo P. Lim and his mother, Vicente
course, income received as dividends is taxable as an income but an income from Pantangco Vda. de Lim.
"dividends" is a very different thing from receipt of a "stock dividend." One is an actual Petitioner corporation duly filed its 1956 and 1957 income tax returns, reporting therein
receipt of profits; the other is a receipt of a representation of the increased value of the net incomes of P3,287.81 and P11,098.36, respectively, for which it paid the
assets of corporation. corresponding taxes therefor in the sums of P657.00 and P2,220.00.
8

Sometime in 1958 and 1959, the examiners of the Bureau of Internal Revenue assessment of respondent Commissioner of Internal Revenue. It disclaimed having
conducted an investigation of petitioner's 1956 and 1957 income tax returns and, in the received or collected the amount of P20,199.00, as unreported rental income for 1956,
course thereof, they discovered and ascertained that petitioner had underdeclared its or any part thereof, reasoning out that 'the previous owners of the leased building has
rental incomes by P20,199.00 and P81,690.00 during these taxable years and had (have) to collect part of the total rentals in 1956 to apply to their payment of rental in the
claimed excessive depreciation of its buildings in the sums of P4,260.00 and land in the amount of P21,630.00" (par. 11, petition). It also denied having received or
P16,336.00 covering the same period. On the basis of these findings, respondent collected the amount of P81,690.00, as unreported rental income for 1957, or any part
Commissioner of Internal Revenue issued its letter-assessment and demand for thereof, explaining that part of said amount totalling P31,380.00 was not declared as
payment of deficiency income tax and surcharge against petitioner corporation, income in its 1957 tax return because its president, Isabelo P. Lim, who collected and
computed as follows: received P13,500.00 from certain tenants, did not turn the same over to petitioner
90-AR-C-348-58/56 corporation in said year but did so only in 1959; that a certain tenant (Go Tong)
deposited in court his rentals amounting to P10,800.00, over which the corporation had
Net income per audited return P 3,287.81 no actual or constructive control; and that a sub-tenant paid P4,200.00 which ought not
be declared as rental income.
Add: Unallowable deductions: Petitioner likewise alleged in its petition that the rates of depreciation applied by
Undeclared Rental Receipt respondent Commissioner of its buildings in the above assessment are unfair and
inaccurate.
(Sched. A) . . . . . . . . . . . . . . . . . . . . P20,199.00 Sole witness for petitioner corporation in the Tax Court was its Secretary-Treasurer,
Vicente G. Solis, who admitted that it had omitted to report the sum of P12,100.00 as
Excess Depreciation (Sched. B) . . . . . . . . . . . . . . . . .
P24,459.00 rental income in its 1956 tax return and also the sum of P29,350.00 as rental income in
4,260.00
its 1957 tax return. However, with respect to the difference between this omitted income
Net income per investigation P27,746.00 (P12,100.00) and the sum (P20,199.00) found by respondent Commissioner as
undeclared in 1956, petitioner corporation, through the same witness (Solis), tried to
Tax due thereon P5,549.00 establish that it did not collect or receive the same because, in view of the refusal of
Less: Amount already assessed 657.00 some tenants to recognize the new owner, Isabelo P. Lim and Vicenta Pantangco Vda.
de Lim, the former owners, on one hand, and the same Isabelo P. Lim, as president of
Balance P4,892.00 petitioner corporation, on the other, had verbally agreed in 1956 to turn over to
petitioner corporation six per cent (6%) of the value of all its properties, computed at
Add: 50% Surcharge 2,446.00 P21,630.00, in exchange for whatever rentals the Lims may collect from the tenants.
DEFICIENCY TAX DUE P7,338.00 And, with respect to the difference between the admittedly undeclared sum of
P29,350.00 and that found by respondent Commissioner as unreported rental income,
90-AR-C-1196-58/57 (P81,690.00) in 1957, the same witness Solis also tried to establish that petitioner
corporation did not receive or collect the same but that its president, Isabelo P. Lim,
Net income per audited return P11,098.00
collected part thereof and may have reported the same in his own personal income tax
Add: Unallowable deductions: return; that same Isabelo P. Lim collected P13,500.00, which he turned over to
petitioner in 1959 only; that a certain tenant (Go Tong deposited in court his rentals
Undeclared Rental Receipt (Sched. A) . . . . . . . . P81,690.00 (P10,800.00), over which the corporation had no actual or constructive control and
Excess Depreciation (Sched. B) . . . . . . . . . . . . . . . 16,338.00 P98,028.00 which were withdrawn only in 1958; and that a sub-tenant paid P4,200.00 which ought
not be declared as rental income in 1957.
Net income per investigation P109,126.00 With regard to the depreciation which respondent disallowed and deducted from the
returns filed by petitioner, the same witness tried to establish that some of its buildings
Tax due thereon P22,555.00 are old and out of style; hence, they are entitled to higher rates of depreciation than
Less: Amount already assessed 2,220.00 those adopted by respondent in his assessment.
Isabelo P. Lim was not presented as witness to corroborate the above testimony of
Balance 20,335.00 Vicente G. Solis.
On the other hand, Plaridel M. Mingoa, one of the BIR examiners who personally
Add: 50% Surcharge 10,167.50 conducted the investigation of the 1956 and 1957 income tax returns of petitioner
DEFICIENCY TAX DUE P30,502.50 corporation, testified for the respondent that he personally interviewed the tenants
of petitioner and found that these tenants had been regularly paying their rentals
Petitioner corporation requested respondent Commissioner of Internal Revenue to to the collectors of either petitioner or its president, Isabelo P. Lim, but these payments
reconsider the above assessment but the latter denied said request and reiterated its were not declared in the corresponding returns; and that in applying rates of
original assessment and demand, plus 5% surcharge and the 1% monthly interest from depreciation to petitioner's buildings, he adopted Bulletin "F" of the U.S. Federal Internal
June 30, 1959 to the date of payment; hence, the corporation filed its petition for review Revenue Service.
before the Tax Appeals court, questioning the correctness and validity of the above
9

On the basis of the evidence, the Tax Court upheld respondent Commissioner's Court pronounced as having strong persuasive effect in this jurisdiction, for having been
assessment and demand for deficiency income tax which, as above stated in the the result of scientific studies and observation for a long period in the United States,
beginning of this opinion, petitioner has appealed to this Court. after whose Income Tax Law ours is patterned (M. Zamora vs. Collector of internal
Petitioner corporation pursues, the same theory advocated in the court below and Revenue & Collector of Internal Revenue vs. M. Zamora; E. Zamora vs. Collector of
assigns the following alleged errors of the trial court in its brief, to wit: Internal Revenue and Collector of Internal Revenue vs. E. Zamora, Nos. L-15280, L-
I. The respondent Court erred in holding that the petitioner had an unreported 15290, L-15289 and L-15281, May 31, 1963), the foregoing error is devoid of merit.
rental income of P20,199.00 for the year 1956. Wherefore, the appealed decision should be, as it is hereby, affirmed. With costs
II. The respondent Court erred in holding that the petitioner had an unreported against petitioner-appellant, Limpan Investment Corporation.
rental income of P81,690.00 for the year 1957. Concepcion, C.J., Barrera, Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar, Sanchez
III. The respondent Court erred in holding that the depreciation in the amount and Castro, JJ., concur.
of P20,598.00 claimed by petitioner for the years 1956 and 1957 was EN BANC
excessive. G.R. No. L-21108 November 29, 1966
and prays that the appealed decision be reversed. REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,
This appeal is manifestly unmeritorious. Petitioner having admitted, through its own vs.
witness (Vicente G. Solis), that it had undeclared more than one-half (1/2) of the LEONOR DE LA RAMA, ET AL., respondents-appellees.
amount (P12,100.00 out of P20,199.00) found by the BIR examiners as unreported Office of the Solicitor General for plaintiff-appellant.
rental income for the year 1956 and more than one-third (1/3) of the amount Meer, Meer and Meer for respondents-appellees.
(P29,350.00 out of P81,690.00) ascertained by the same examiners as unreported ZALDIVAR, J.:
rental income for the year 1957, contrary to its original claim to the revenue authorities, This is an appeal from the decision of the Court of First Instance of Manila, dated
it was incumbent upon it to establish the remainder of its pretensions by clear and December 23, 1961, in its Civil Case No. 46494, dismissing the complaint of the
convincing evidence, that in the case is lacking. Republic of the Philippines against the heirs of the late Esteban de la Rama from the
With respect to the balance, which petitioner denied having unreported in the disputed collection of P56,032.50 as deficiency income tax, inclusive of 50% surcharge, for the
tax returns, the excuse that Isabelo P. Lim and Vicenta Pantangco Vda. de Lim retained year 1950.
ownership of the lands and only later transferred or disposed of the ownership of the The estate of the late Esteban de la Rama was the subject of Special Proceedings No.
buildings existing thereon to petitioner corporation, so as to justify the alleged verbal 401 of the Court of First Instance of Iloilo. The executor-administrator, Eliseo Hervas,
agreement whereby they would turn over to petitioner corporation six percent (6%) of filed on March 12, 1951, income tax returns of the estate corresponding to the taxable
the value of its properties to be applied to the rentals of the land and in exchange for year 1950, declaring a net income of P22,796.59, on the basis of which the amount of
whatever rentals they may collect from the tenants who refused to recognize the new P3,919.00 was assessed and was paid by the estate as income tax. The Bureau of
owner or vendee of the buildings, is not only unusual but uncorroborated by the alleged Internal Revenue later claimed that it had found out that there had been received by the
transferors, or by any document or unbiased evidence. Hence, the first assigned error is estate in 1950 from the De la Rama Steamship Company, Inc. cash dividends
without merit. amounting to P86,800.00, which amount was not declared in the income tax return of
As to the second assigned error, petitioner's denial and explanation of the non-receipt the estate for the year 1950. The Bureau of Internal Revenue then, on March 7, 1956,
of the remaining unreported income for 1957 is not substantiated by satisfactory made an assessment as deficiency income tax against the estate in the sum of
corroboration. As above noted, Isabelo P. Lim was not presented as witness to confirm P56,032.50 of which amount P37,355.00 was the deficiency and P18,677.50 was the
accountant Solis nor was his 1957 personal income tax return submitted in court to 50% surcharge.
establish that the rental income which he allegedly collected and received in 1957 were The Collector of Internal Revenue wrote a letter, dated February 29, 1956, to Mrs.
reported therein. Lourdes de la Rama-Osmeña informing her of the deficiency income tax and asking
The withdrawal in 1958 of the deposits in court pertaining to the 1957 rental income is payment thereof. On March 13, 1956 the latter's counsel wrote to the Collector
no sufficient justification for the non-declaration of said income in 1957, since the acknowledging receipt of the assessment but contended that Lourdes de la Rama-
deposit was resorted to due to the refusal of petitioner to accept the same, and was not Osmeña had no authority to represent the estate, and that the assessment should be
the fault of its tenants; hence, petitioner is deemed to have constructively received such sent to Leonor de la Rama who was pointed to by said counsel as the administratrix of
rentals in 1957. The payment by the sub-tenant in 1957 should have been reported as the estate of her late father. On the basis of this information the Deputy Collector of
rental income in said year, since it is income just the same regardless of its source. Internal Revenue, on November 22, 1956, sent a letter to Leonor de la Rama as
On the third assigned error, suffice it to state that this Court has already held that administratrix of the estate, asking payment. The tax, as assessed, not having been
"depreciation is a question of fact and is not measured by theoretical yardstick, but paid, the Deputy Commissioner of Internal Revenue, on September 7, 1959, wrote
should be determined by a consideration of actual facts", and the findings of the Tax another letter to Mrs. Lourdes de la Rama-Osmeña demanding, through her, upon the
Court in this respect should not be disturbed when not shown to be arbitrary or in abuse heirs, the payment of the deficiency income tax within the period of thirty days from
of discretion (Commissioner of Internal Revenue vs. Priscila Estate, Inc., et al., L- receipt thereof. The counsel of Lourdes de la Rama-Osmeña, in a letter dated
18282, May 29, 1964), and petitioner has not shown any arbitrariness or abuse of September 25, 1959, insisted that the letter should be sent to Leonor de la Rama. The
discretion in the part of the Tax Court in finding that petitioner claimed excessive Deputy Commissioner of Internal Revenue wrote to Leonor de la Rama another letter,
depreciation in its returns. It appearing that the Tax Court applied rates of depreciation dated February 11, 1960, demanding, through her as administratrix, upon the heirs of
in accordance with Bulletin "F" of the U.S. Federal Internal Revenue Service, which this Esteban de la Rama, the payment of the sum of P56,032.50, as deficiency income tax
10

including the 50% surcharge, to the City Treasurer of Pasay City within thirty days from Against the account due from Hijos de I. de la
receipt thereof. Rama, Inc., of which Don Esteban de la Rama
The deficiency income tax not having been paid, the Republic of the Philippines filed on was the principal owner P61,544.76
March 6, 1961 with the Court of First Instance of Manila a complaint against the heirs of
Esteban de la Rama, seeking to collect from each heir his/her proportionate share in Total P86,800.00
the income tax liability of the estate. An amended complaint dated August 31, 1961, The plaintiff-appellant maintains that this crediting of accounts in the books of the
was admitted by the court. company constituted a constructive receipt by the estate or the heirs of Esteban de la
The defendants-appellees, Lourdes de la Rama-Osmeña, Leonor de la Rama, Rama of the dividends, and this dividend was an income of the estate and was,
Estefania de la Rama-Pirovano, Dolores de la Rama-Lopez, Charles Miller, and Aniceta therefore, taxable.
de la Rama-Sian, thru counsel, filed their respective answers, the gist of their It is not disputed that the dividends in question were not actually paid either to the
allegations and/or defenses being (1) that no cash dividends of P86,800.00 had been estate, or to the heirs, of the late Esteban de la Rama. The question to be resolved is
paid to the estate; (2) that the administration of the estate had been extended by the whether or not the said application of the dividends to the personal accounts of the
probate court precisely for the purpose of collecting said dividends; (3) that Leonor dela deceased Esteban de la Rama constituted constructive payment to, and hence,
Rama had never been administratrix of the estate; (4) that the executor of the estate, constructively received by, the estate or the heirs. If the debts to which the dividends
Eliseo Hervas, had never been given notice of the assessment, and consequently the were applied really existed, and were legally demandable and chargeable against the
assessment had never become final; and (5) that the collection of the alleged deficiency deceased, there was constructive receipt of the dividends; if there were no such debts,
income tax had prescribed. Fausto F. Gonzales, Jr., one of the defendants, not having then there was no constructive receipt.
filed an answer, was declared in default. The first debt, as above indicated, had been contested by the executor-administrator of
From the evidence introduced at the trial, both oral and documentary, the lower court the estate. It does not even appear that the De la Rama Steamship Co., Inc. had ever
found that the dividends of P86,800.00 declared by the De la Rama Steamship Co. in filed a claim against the estate in connection with that indebtedness. The existence and
favor of the late Esteban de la Rama were applied to the obligation of the estate to the the validity of the debt is, therefore, in dispute, and there was no proof adduced to show
company declaring the dividends; that Leonor de la Rama was not the administratrix of the existence and validity of the debt.
the estate, but it was the late Eliseo Hervas who was the executor-administrator; that The second debt to which the dividends were partly applied were accounts "due from
the administration of the estate was extended for the purpose of recovering for the Hijos de I. de la Rama, Inc." The alleged debtor here was an entity separate and distinct
estate said dividends from the De la Rama Steamship Co., Inc.; and that the question of from the deceased. If that was so, its debts could not be charged against the deceased,
whether the deceased Esteban de la Rama was a debtor to the entity known as the even if the deceased was the principal owner thereof, in the absence of proof of
Hijos de I. de la Rama, which was also indebted to the De la Rama Steamship Co., Inc., substitution of debtor. There is no evidence in the instant case that the late Esteban de
was not a settled one. la Rama substituted the "Hijos de I. de la Rama" as debtor to the De la Rama
After trial, the lower court rendered its decision, dated December 23, 1961, dismissing Steamship Co., Inc.; nor was there evidence that the estate of the late Esteban de la
the complaint. The Republic of the Philippines appealed from said decision to the Court Rama owned the "Hijos de I. de la Rama, Inc.," this fact being, as found by the lower
of Appeals, but the appeal was later certified to this Court because only questions of court, not a settled question because the same was denied by the administrator.
law are involved. Under the National Internal Revenue Code, income tax is assessed on income that has
Plaintiff-appellant contends that the trial court erred (1) in holding that there was no been received. Thus, Section 21 of the Code requires that the income must be received
basis for the assessment upon the ground that it was not proved that the income in by an individual before a tax can be levied thereon.
question was received by the estate of Esteban de la Rama or by his heirs; (2) in not Sec. 21. Rates of tax on citizens or residents.—There shall be levied,
holding that the income was constructively received by the estate of the late Esteban de collected, and paid annually upon the entire net income received in the
la Rama; (3) in not holding that the heirs and legatees of the late Esteban de la Rama preceding taxable year from all sources by every individual, a citizen or
were liable for the payment of the deficiency income tax; (4) in not holding that the resident of the Philippines, . . .
assessment involved in the case had long become final; (5) in not holding that the Section 56 also requires receipt of income by an estate before an income tax can be
service of the notice of assessment on Lourdes de la Rama-Osmeña and Leonor de la assessed thereon. It provides:
Rama was proper and valid; and (6) in not holding that said court had no jurisdiction to Sec. 56. Imposition of tax.—(a) Application of tax.—The taxes imposed by this
take cognizance of appellees' defense that the assessment in question was erroneous. Title upon individuals shall apply to the income of estates or of any kind of
Plaintiff-appellant argues that the deficiency income tax in this case was assessed in property held in trust, including —
the sum of P86,800.00 representing cash dividends declared in ]1950 by the De la xxx xxx xxx
Rama Steamship Co., Inc. in favor of the late Esteban de la Rama and was applied as (3) Income received by estates of deceased persons during the period of
payment of the latter's account with the former. The application of payment appears in administration or settlement of the estate; . . .
the books of said creditor company as follows: Hence, if income has not been received, no income tax can be assessed thereon.
Against accounts receivable due from Esteban Inasmuch as, the income was not received either by the estate, or by the heirs, neither
de la Rama P25,255.24 the estate nor the heir can be liable for the payment of income tax therefor.
The trial court, therefore, did not err when it held in its decision that:
After a study of the proofs, the Court is constrained to sustain the position of
the defendants on the fundamental issue that there could have been no
11

correct and real basis for the assessment or that there is no proof that the El albacea-administrador hace constar, sin embargo, que quedan por cobrar
income in question had been received; it was not actually delivered unto the ciertos dividendos declarados y devengados por las acciones del finado
Estate since it was retained by the De la Rama Steamship Co., Inc.; which Esteban de la Rama en The De la Rama Steamship Co., Inc., que los
applied said dividends to certain accounts receivable due from the deceased funcionarios de dicha corporacion . . . no han pagado aun . . . y que por tales
allegedly, Exh. A-1; now if truly there had been such indebtedness owing from motivos habria necesidad de prolongar la administracion, solamente para que
the deceased unto said De la Rama Steamship Co., Inc., the Court will agree esta continue atendiendo con autorizacion, a tales menesteres.
with plaintiff that the offsetting of the dividends against such indebtedness xxx xxx xxx
amounted to constructive delivery; but here has not been presented any proof Se ordena el cierre de la Administracion; pero se provee, sin embargo, la
to that effect, i.e., that there was such an indebtedness due from deceased; on extension de la misma, solamente para el proposito de iniciar y proseguir
the contrary what the evidence shows is that the former administrator of the hasta su terminacion una accion contra The De la Rama Steamship Co., Inc.
Estate had challenged the validity of said indebtedness, Exh. D, motion of 4 para el cobro de dividendos declarados por dicha corporacion en Diciembre
June, 1951; that being the case, there is no clear showing that income in the 31, 1950 sobre las 869 acciones del finado Esteban de la Rama en la misma .
form of said dividends had really been received, which is the verb used in ...
Section 21 of the Internal Revenue Code, by the Estate whether actually or Y finalmente, queda relevado el Administrador Sr. Eliseo Hervas de toda
constructively; and the income tax being collected by the Government on responsibilidad en relacion con su administracion, excepto en lo que respecta
income received, the Government's position is here without a clear basis; the al cobro de dividendos . . . .
position becomes worse when it be considered that it is not even the Estate The estate was still under the administration of Eliseo Hervas as regards the collection
that is being sued but the heirs themselves, who admittedly had not received of said dividends. The administrator was the representative of the estate, whose duty it
any of said dividends themselves; the fiction of transfer of ownership by was to pay and discharge all debts and charges on the estate and to perform all orders
succession from the death of the decedent will have to give way to actual fact of the court by him to be performed (Rule 71, Section 1), and to pay the taxes and
that the dividends have not been adjudicated at all to the heirs up to now at assessments due to the Government or any branch or subdivision thereof (Section 7,
least so far as the evidence shows. This being the conclusion of the Court, Rule 89, Old Rules of Court). The tax must be collected from the estate of the
there will be no need to discuss the question of whether the action has or has deceased, and it is the administrator who is under obligation to pay such claim (Estate
not prescribed. of Claude E. Haygood.) (Collector of Internal Revenue v. Haygood, 65 Phil. 520). The
The factual findings of the trial court, as stated in the above-quoted portion of the notice of assessment, therefore, should have been sent to the administrator. In this
decision, are decisive in the determination of the legal issues in this case. case, notice was first sent to Lourdes de la Rama-Osmeña on February 29, 1956, and
Appellant cites the case of Herbert v. Commissioner of Internal Revenue, 81 F. (2d) 912 later to Leonor de la Rama on November 27, 1956, neither of whom had authority to
as authority that the crediting of dividends against accounts constitutes payment and represent the estate. As the lower court said in its decision: "Leonor de la Rama was
constructive receipt of the dividends. The citation of authority misses the point in issue. not the administratrix of the estate of the late Esteban de la Rama and as such the
In that case the existence of the indebtedness of Leon S. Herbert to the corporation that demand unto her, Exh. Def. 8, p. 112, was not a correct demand before November 27,
declared the dividends and against which indebtedness the dividends were applied, 1956, because the real administrator was the late Eliseo Hervas; . . . ." (p. 45, Record
was never put in issue, and was admitted. In the instant case, the existence of the on Appeal) The notice was not sent to the taxpayer for the purpose of giving effect to
obligations has been disputed and, as the trial court found, has not been proved. It the assessment, and said notice could not produce any effect. In the case of Bautista
having been shown in the instant case that there was no basis for the assessment of and Corrales Tan v. Collector of Internal Revenue, L-12259, May 27, 1959, this Court
the income tax, the assessment itself and the sending of notices regarding the had occasion to state that "the assessment is deemed made when the notice to this
assessment would neither have basis, and so that assessment and the notices effect is released, mailed or sent to the taxpayer for the purpose of giving effect to said
produced no legal effect that would warrant the collection of the tax. assessment." It appearing that the person liable for the payment of the tax did not
The appellant also contends that the assessment had become final, because the receive the assessment, the assessment could not become final and executory (R. A.
decision of the Collector of Internal Revenue was sent in a letter dated February 11, 1125, Section 11).
1960 and addressed to the heirs of the late Esteban de la Rama, through Leonor de la Plaintiff-appellant also contends that the lower court could not take cognizance of the
Rama as administratrix of the estate, and was not disputed or contested by way of defense that the assessment was erroneous, this being a matter that is within the
appeal within thirty days from receipt thereof to the Court of Tax Appeals. This exclusive jurisdiction of the Court of Tax Appeals. This contention has no merit.
contention is untenable. The lower court found that Leonor de la Rama was not the According to Republic Act 1125, the Court of Tax Appeals has exclusive jurisdiction to
administratrix of the estate of Esteban de la Rama. The alleged deficiency income tax review by appeal decisions of the Collector of Internal Revenue in cases involving
for 1950 was chargeable against the estate of the deceased Esteban de la Rama. On disputed assessments, and the disputed assessment must be appealed by the person
December 5, 1955, when the letter of notice for the assessment of the deficiency adversely affected by the decision within thirty days after the receipt of the decision. In
income tax was first sent to Leonor de la Rama (See Annex "A" of Answer of defendant the instant case, the person adversely affected should have been the administrator of
Lourdes de la Rama-Osmeña, pp. 16-17, Record on Appeal, the administration the estate, and the notice of the assessment should have been sent to him. The
proceedings, in Special Proceedings No. 401 of the Court of First Instance of Iloilo, administrator had not received the notice of assessment, and he could not appeal the
were still open with respect to the controverted matter regarding the cash dividends assessment to the Court of Tax Appeals within 30 days from notice. Hence the
upon which the deficiency assessment was levied. This is clear from the order dated assessment did not fall within the exclusive jurisdiction of the Court of Tax Appeals.
June 21, 1951 (Exhibit "E") of the Court of First Instance of Iloilo which in part provides:
12

IN VIEW OF THE FOREGOING, the decision appealed from should be, as it is hereby, deducted from such gross income all expenditures made during the taxable year on
affirmed, without costs. account of the contract, account being taken of the material and supplies on hand at
Concepcion, C.J., Reyes, J.B.L., Barrera, Dizon, Regala, Makalintal, Bengzon, J.P., the beginning and end of the taxable period for use in connection with the work
Sanchez and Castro, JJ.,concur. under the contract but not yet so applied. If upon completion of a contract, it is found
3. Recognition of income that the taxable [net] income arising thereunder has not been clearly reflected for any
4. Methods of accounting for taxable income and deductible year or years, the Commissioner may permit or require an amended return.
expenses SEC. 49. Installment Basis. -
a. Cash v accrual method of accounting (43,44,45, NIRC; (A) Sales of Dealers in Personal Property. - Under rules and regulations
51,52,53 RR No. 2) prescribed by the Secretary of Finance, upon recommendation of the Commissioner,
b. Installment v deferred payment v percentage of a person who regularly sells or otherwise disposes of personal property on the
completion (in long term contracts) (49,48, NIRC; 44, RR2) installment plan may return as income therefrom in any taxable year that proportion
c. Distinction between tax accounting and financial of the installment payments actually received in that year, which the gross profit
accounting realized or to be realized when payment is completed, bears to the total contract
price.
NIRC (B) Sales of Realty and Casual Sales of Personality. - In the case (1) of a casual
sale or other casual disposition of personal property (other than property of a kind
CHAPTER VIII which would properly be included in the inventory of the taxpayer if on hand at the
ACCOUNTING PERIODS AND METHODS OF ACCOUNTING close of the taxable year), for a price exceeding One thousand pesos (P1,000), or (2)
SEC. 43. General Rule. - The taxable income shall be computed upon the basis of of a sale or other disposition of real property, if in either case the initial payments do
the taxpayer's annual accounting period (fiscal year or calendar year, as the case not exceed twenty-five percent (25%) of the selling price, the income may, under the
may be) in accordance with the method of accounting regularly employed in keeping rules and regulations prescribed by the Secretary of Finance, upon recommendation
the books of such taxpayer, but if no such method of accounting has been so of the Commissioner, be returned on the basis and in the manner above prescribed
employed, or if the method employed does not clearly reflect the income, the in this Section. As used in this Section, the term 'initial payments' means the
computation shall be made in accordance with such method as in the opinion of the payments received in cash or property other than evidences of indebtedness of the
Commissioner clearly reflects the income. If the taxpayer's annual accounting period purchaser during the taxable period in which the sale or other disposition is made.
is other than a fiscal year, as defined in Section 22(Q), or if the taxpayer has no (C) Sales of Real Property Considered as Capital Asset by Individuals. - An
annual accounting period, or does not keep books, or if the taxpayer is an individual, individual who sells or disposes of real property, considered as capital asset, and is
the taxable income shall be computed on the basis of the calendar year. otherwise qualified to report the gain therefrom under Subsection (B) may pay the
SEC. 44. Period in which Items of Gross Income Included.- The amount of all capital gains tax in installments under rules and regulations to be promulgated by the
items of gross income shall be included in the gross income for the taxable year in Secretary of Finance, upon recommendation of the Commissioner.
which received by the taxpayer, unless, under methods of accounting permitted (D) Change from Accrual to Installment Basis. - If a taxpayer entitled to the
under Section 43, any such amounts are to be properly accounted for as of a benefits of Subsection (A) elects for any taxable year to report his taxable income on
different period. In the case of the death of a taxpayer, there shall be included in the installment basis, then in computing his income for the year of change or any
computing taxable income for the taxable period in which falls the date of his death, subsequent year, amounts actually received during any such year on account of
amounts accrued up to the date of his death if not otherwise properly includible in sales or other dispositions of property made in any prior year shall not be excluded.
respect of such period or a prior period. Revenue Regulation No. 2
SEC. 45. Period for which Deductions and Credits Taken. - The deductions
provided for in this Title shall be taken for the taxable year in which 'paid or accrued' SECTION 44. Long term contracts. — Income from long-term contracts is taxable for
or 'paid or incurred', dependent upon the method of accounting upon the basis of the period in which the income is determined, such determination depending upon
which the net income is computed, unless in order to clearly reflect the income, the the nature and terms of the particular contract. As used herein the term "long-term"
deductions should be taken as of a different period. In the case of the death of a contracts means building, installation, or construction contracts covering a period in
taxpayer, there shall be allowed as deductions for the taxable period in which falls excess of one year. Persons whose income is derived in whole or in par from such
the date of his death, amounts accrued up to the date of his death if not otherwise contracts may, as to such income, prepare their returns upon the following bases:
properly allowable in respect of such period or a prior period. (a) Gross income derived from such contracts may be reported upon the basis of
SEC. 48. Accounting for Long-term Contracts. - Income from long-term contracts percentage of
shall be reported for tax purposes in the manner as provided in this Section. As used completion. In such case there should accompany the return certificate of architects,
herein, the term 'long-term contracts' means building, installation or construction or engineers showing the percentage of completion during the taxable year of the
contracts covering a period in excess of one (1) year. Persons whose gross income entire work performed under contract. There should be deducted from such gross
is derived in whole or in part from such contracts shall report such income upon the income all expenditures made during the taxable year on account of the contract,
basis of percentage of completion. The return should be accompanied by a return account being taken of the material and supplies on hand at the beginning and end
certificate of architects or engineers showing the percentage of completion during of the taxable period for use in connection with the work under the contract but not
the taxable year of the entire work performed under contract. There should be yet so applied. If upon completion of a contract, it is found that the taxable net
13

income arising thereunder has not been clearly reflected for any year or years, the of cashing depositors' checks, is income to the depositor when credited. An amount
Commissioner of Internal Revenue may permit or require an amended return. credited to shareholders of a building and loan association, when such credit passes
(b) Gross income may be reported in the taxable year in which the contract is finally without restriction to the shareholder, has taxable status as income for the year of
completed and accepted if the taxpayer elects as a consistent practice to so treat the credit. When the amount of such accumulations has not become available to the
such income, provided such method clearly reflects the net income. If this method is shareholder until the maturity of a share, the amount of any share in excess of the
adopted there should be deducted from gross income all expenditures during the life aggregate amount paid in by the shareholder is income for the year of maturity of the
of the contract which are properly allocated thereto, taking into consideration any share.
material and supplies charged to the work under the contract but remaining on hand
at the time of the completion. C. Tests in determining income
Where a taxpayer has filed his return in accordance with the method of accounting 1. Realization Test (+Fisher v Trinidad, ibid)
regularly
employed by him in keeping his books and such method clearly reflects the income, 5. Eisner v Macomber
he will not be required to change to either of the methods above set forth. If a
taxpayer desires to change his method of accounting in accordance with paragraphs U.S. Supreme Court
(a) and (b) above, a statement showing the composition of all items appearing upon Eisner v. Macomber, 252 U.S. 189 (1920)
his balance sheet and used in connection with the method of accounting formerly Eisner v. Macomber
employed by him, should accompany his return. No. 318
SECTION 51. When income is to be reported. — Gains, profits, and income are to Argued April 16, 1919
be included in the gross income for the taxable year in which they are received by Restored to docket for reargument May 19, 1919
the taxpayer, unless they are included when they accrue to him in accordance with Reargued October 17, 20, 1919
the approved method of accounting followed by him. If a person sues in one year on Decided March 8, 1920
a pecuniary claim or for property, and money or property is recovered on a judgment 252 U.S. 189
therefore in a later year, income is realized in that year, assuming that the money or ERROR TO THE DISTRICT COURT OF THE UNITED STATES
property would have been income in the earlier year if then received. This is true of a FOR THE SOUTHERN DISTRICT OF NEW YORK
recovery for patent infringement. Bad debts or accounts charged off subsequent to Syllabus
March 1, 1913, because of the fact that they were determined to be worthless, which Congress was not empowered by the Sixteenth Amendment to tax, as income of the
are subsequently recovered, whether or not by suit, constitute income for the year in stockholder, without apportionment, a stock dividend made lawfully and in good faith
which recovered, regardless of the date when amounts were charged off. against profits accumulated by the corporation since March 1, 1913. P. 252 U. S.
201. Towne v. Eisner, 245 U. S. 418.
SECTION 52. Income constructively received. — Income which is credited to the The Revenue Act of September 8, 1916, c. 463, 39 Stat. 756, plainly evinces the
account of or set apart for a taxpayer and which may be drawn upon by him at any purpose of Congress to impose such taxes, and is to that extent in conflict with Art. I, §
time is subject to tax for the year during which so credited or set apart, although not 2, cl. 3, and Art. I, § 9, cl. 4, of the Constitution. Pp. 252 U. S. 199, 252 U. S. 217.
then actually reduced to possession. To constitute receipt in such a case the income These provisions of the Constitution necessarily limit the extension, by construction, of
must be credited to the taxpayer without any substantial limitation or restriction as to the Sixteenth Amendment. P. 252 U. S. 205.
the time or manner of payment or condition upon which payment is to be made. A What is or is not "income" within the meaning of the Amendment must be determined in
book entry, if made, should indicate an absolute transfer from one account to each case according to truth and substance, without regard to form. P. 252 U. S. 206.
another. If the income is not credited, but is set apart, such income must be Income may be defined as the gain derived from capital, from labor, or from both
unqualifiedly subject to the demand of the taxpayer. Where a corporation combined, including profit gained through sale or conversion of capital. P. 252 U. S.
contingently credits its employees with bonus stock, but the stock is not available to 207.
such employees until some future date, the mere crediting on the books of the Mere growth or increment of value in a capital investment is not income; income is
corporation does not constitute receipt. essentially a gain or profit, in itself, of exchangeable value, proceeding from capital,
severed from it, and derived or received by the taxpayer for his separate use, benefit,
SECTION 53. Examples of constructive receipt. — When interest coupons have and disposal. Id.
matured and are payable, but have not been cashed, such interest payment though A stock dividend, evincing merely a transfer of an accumulated surplus to the capital
not collected when due and payable, is nevertheless available to the taxpayer and account of the corporation, takes nothing from the property of the corporation and adds
should therefore be included in his gross income for the year during which the nothing to that of the shareholder; a tax on such dividends is a tax an capital increase,
coupons matured. This is true if the coupons are exchanged for other property and not on income, and, to be valid under the Constitution, such taxes must be
instead of eventually being cashed. Defaulted coupons are income for the year in apportioned according to population in the several states. P. 252 U. S. 208.
which paid. The distributive share of the profits of a partner in a general co- Affirmed.
partnership duly registered is regarded as received by him, although not distributed. Page 252 U. S. 190
Interest credited on savings bank deposits, even though the bank nominally has a The case is stated in the opinion.
rule, seldom or never enforced, that it may require so many days' notice in advance Page 252 U. S. 199
14

MR. JUSTICE PITNEY delivered the opinion of the Court. from any source whatever." Suit having been brought by a stockholder to recover the
This case presents the question whether, by virtue of the Sixteenth Amendment, tax assessed against him by reason of the dividend, the district court sustained a
Congress has the power to tax, as income of the stockholder and without demurrer to the complaint. 242 F. 702. The court treated the construction of the act as
apportionment, a stock dividend made lawfully and in good faith against profits inseparable from the interpretation of the Sixteenth Amendment; and, having referred
accumulated by the corporation since March 1, 1913. to Pollock v. Farmers' Loan & Trust Co., 158 U. S. 601, and quoted the Amendment,
It arises under the Revenue Act of September 8, 1916, 39 Stat. 756 et seq., which, in proceeded very properly to say (p. 704):
our opinion (notwithstanding a contention of the government that will be "It is manifest that the stock dividend in question cannot be reached by the Income Tax
Page 252 U. S. 200 Act and could not, even though Congress expressly declared it to be taxable as income,
noticed), plainly evinces the purpose of Congress to tax stock dividends as income. * unless it is in fact income."
The facts, in outline, are as follows: It declined, however, to accede to the contention that, in Gibbons v. Mahon, 136 U. S.
On January 1, 1916, the Standard Oil Company of California, a corporation of that 549, "stock dividends" had received a definition sufficiently clear to be controlling,
state, out of an authorized capital stock of $100,000,000, had shares of stock treated the language of this Court in that case as obiter dictum in respect of the matter
outstanding, par value $100 each, amounting in round figures to $50,000,000. In then before it (p. 706), and examined the question as res nova, with the result stated.
addition, it had surplus and undivided profits invested in plant, property, and business When the case came here, after overruling a motion to dismiss made by the
and required for the purposes of the corporation, amounting to about $45,000,000, of government upon the ground that the only question involved was the construction of the
which about $20,000,000 had been earned prior to March 1, 1913, the balance statute, and not its constitutionality, we dealt upon the merits with the question of
thereafter. In January, 1916, in order to readjust the capitalization, the board of construction only, but disposed of it upon consideration of the essential nature of a
directors decided to issue additional shares sufficient to constitute a stock dividend of stock dividend disregarding the fact that the one in question was based upon surplus
50 percent of the outstanding stock, and to transfer from surplus account to capital earnings that accrued before the Sixteenth Amendment took effect. Not only so, but we
stock account an amount equivalent to such issue. Appropriate resolutions were rejected the reasoning of the district court, saying (245 U.S. 245 U. S. 426):
adopted, an amount equivalent to the par value of the proposed new stock was "Notwithstanding the thoughtful discussion that the case received below we cannot
transferred accordingly, and the new stock duly issued against it and divided among the doubt that the dividend was capital as well for the purposes of the Income Tax Law as
stockholders. for distribution between tenant for life and remainderman. What was said by this Court
Defendant in error, being the owner of 2,200 shares of the old stock, received upon the latter question is equally true for the former."
certificates for 1, 100 additional "A stock dividend really takes nothing from the property of the corporation, and adds
Page 252 U. S. 201 nothing to the
shares, of which 18.07 percent, or 198.77 shares, par value $19,877, were treated as Page 252 U. S. 203
representing surplus earned between March 1, 1913, and January 1, 1916. She was interests of the shareholders. Its property is not diminished, and their interests are not
called upon to pay, and did pay under protest, a tax imposed under the Revenue Act of increased. . . . The proportional interest of each shareholder remains the same. The
1916, based upon a supposed income of $19,877 because of the new shares, and, an only change is in the evidence which represents that interest, the new shares and the
appeal to the Commissioner of Internal Revenue having been disallowed, she brought original shares together representing the same proportional interest that the original
action against the Collector to recover the tax. In her complaint, she alleged the above shares represented before the issue of the new ones."
facts and contended that, in imposing such a tax the Revenue Act of 1916 violated "Gibbons v. Mahon, 136 U. S. 549, 136 U. S. 559-560. In short, the corporation is no
article 1, § 2, cl. 3, and Article I, § 9, cl. 4, of the Constitution of the United States, poorer and the stockholder is no richer than they were before. Logan County v. United
requiring direct taxes to be apportioned according to population, and that the stock States, 169 U. S. 255, 169 U. S. 261. If the plaintiff gained any small advantage by the
dividend was not income within the meaning of the Sixteenth Amendment. A general change, it certainly was not an advantage of $417,450, the sum upon which he was
demurrer to the complaint was overruled upon the authority of Towne v. Eisner, 245 U. taxed. . . . What has happened is that the plaintiff's old certificates have been split up in
S. 418, and, defendant having failed to plead further, final judgment went against him. effect and have diminished in value to the extent of the value of the new."
To review it, the present writ of error is prosecuted. This language aptly answered not only the reasoning of the district court, but the
The case was argued at the last term, and reargued at the present term, both orally and argument of the Solicitor General in this Court, which discussed the essential nature of
by additional briefs. a stock dividend. And if, for the reasons thus expressed, such a dividend is not to be
We are constrained to hold that the judgment of the district court must be affirmed, first, regarded as "income" or "dividends" within the meaning of the Act of 1913, we are
because the question at issue is controlled by Towne v. Eisner, supra; secondly, unable to see how it can be brought within the meaning of "incomes" in the Sixteenth
because a reexamination of the question with the additional light thrown upon it by Amendment, it being very clear that Congress intended in that act to exert its power to
elaborate arguments has confirmed the view that the underlying ground of that decision the extent permitted by the amendment. In Towne v. Eisner, it was not contended that
is sound, that it disposes of the question here presented, and that other fundamental any construction of the statute could make it narrower than the constitutional grant;
considerations lead to the same result. rather the contrary.
In Towne v. Eisner, the question was whether a stock dividend made in 1914 against The fact that the dividend was charged against profits earned before the Act of 1913
surplus earned prior to January 1, 1913, was taxable against the stockholder under the took effect, even before the amendment was adopted, was neither relied upon nor
Act of October 3, 1913, c. 16, 38 Stat. 114, 166, which provided (§ B, p. 167) that net alluded to in our consideration of the merits in that case. Not only so, but had we
income should include "dividends," and also "gains or profits and income derived considered that a stock dividend constituted income in any true sense, it would have
Page 252 U. S. 202 been held taxable under the Act of 1913 notwithstanding it was
15

Page 252 U. S. 204 "The Congress shall have power to lay and collect taxes on incomes, from whatever
based upon profits earned before the amendment. We ruled at the same term, in Lynch source derived, without apportionment among
v. Hornby, 247 U. S. 339, that a cash dividend extraordinary in amount, and in Peabody Page 252 U. S. 206
v. Eisner, 247 U. S. 347, that a dividend paid in stock of another company, were taxable the several states and without regard to any census or enumeration."
as income although based upon earnings that accrued before adoption of the As repeatedly held, this did not extend the taxing power to new subjects, but merely
amendment. In the former case, concerning "corporate profits that accumulated before removed the necessity which otherwise might exist for an apportionment among the
the act took effect," we declared (pp. 247 U. S. 343-344): states of taxes laid on income. Brushaber v. Union Pacific R. Co., 240 U. S. 1, 240 U.
"Just as we deem the legislative intent manifest to tax the stockholder with respect to S. 17-19; Stanton v. Baltic Mining Co., 240 U. S. 103, 240 U. S. 112 et seq.; Peck & Co.
such accumulations only if and when, and to the extent that, his interest in them comes v. Lowe, 247 U. S. 165, 247 U. S. 172-173.
to fruition as income, that is, in dividends declared, so we can perceive no constitutional A proper regard for its genesis, as well as its very clear language, requires also that this
obstacle that stands in the way of carrying out this intent when dividends are declared amendment shall not be extended by loose construction, so as to repeal or modify,
out of a preexisting surplus. . . . Congress was at liberty under the amendment to tax as except as applied to income, those provisions of the Constitution that require an
income, without apportionment, everything that became income, in the ordinary sense apportionment according to population for direct taxes upon property, real and personal.
of the word, after the adoption of the amendment, including dividends received in the This limitation still has an appropriate and important function, and is not to be
ordinary course by a stockholder from a corporation, even though they were overridden by Congress or disregarded by the courts.
extraordinary in amount and might appear upon analysis to be a mere realization in In order, therefore, that the clauses cited from Article I of the Constitution may have
possession of an inchoate and contingent interest that the stockholder had in a surplus proper force and effect, save only as modified by the amendment, and that the latter
of corporate assets previously existing." also may have proper effect, it becomes essential to distinguish between what is and
In Peabody v. Eisner, 247 U. S. 349, 247 U. S. 350, we observed that the decision of what is not "income," as the term is there used, and to apply the distinction, as cases
the district court in Towne v. Eisner had been reversed arise, according to truth and substance, without regard to form. Congress cannot by any
"only upon the ground that it related to a stock dividend which in fact took nothing from definition it may adopt conclude the matter, since it cannot by legislation alter the
the property of the corporation and added nothing to the interest of the shareholder, but Constitution, from which alone it derives its power to legislate, and within whose
merely changed the evidence which represented that interest," limitations alone that power can be lawfully exercised.
and we distinguished the Peabody case from the Towne case upon the ground that "the The fundamental relation of "capital" to "income" has been much discussed by
dividend of Baltimore & Ohio shares was not a stock dividend but a distribution in economists, the former being likened to the tree or the land, the latter to the fruit or the
specie of a portion of the assets of the Union Pacific." crop; the former depicted as a reservoir supplied from springs, the latter as the outlet
Therefore, Towne v. Eisner cannot be regarded as turning stream, to be measured by its flow during a period of time. For the present purpose, we
Page 252 U. S. 205 require only a clear definition of the term "income,"
upon the point that the surplus accrued to the company before the act took effect and Page 252 U. S. 207
before adoption of the amendment. And what we have quoted from the opinion in that as used in common speech, in order to determine its meaning in the amendment, and,
case cannot be regarded as obiter dictum, it having furnished the entire basis for the having formed also a correct judgment as to the nature of a stock dividend, we shall find
conclusion reached. We adhere to the view then expressed, and might rest the present it easy to decide the matter at issue.
case there not because that case in terms decided the constitutional question, for it did After examining dictionaries in common use (Bouv. L.D.; Standard Dict.; Webster's
not, but because the conclusion there reached as to the essential nature of a stock Internat. Dict.; Century Dict.), we find little to add to the succinct definition adopted in
dividend necessarily prevents its being regarded as income in any true sense. two cases arising under the Corporation Tax Act of 1909 (Stratton's Independence v.
Nevertheless, in view of the importance of the matter, and the fact that Congress in the Howbert, 231 U. S. 399, 231 U. S. 415; Doyle v. Mitchell Bros. Co., 247 U. S. 179, 247
Revenue Act of 1916 declared (39 Stat. 757) that a "stock dividend shall be considered U. S. 185), "Income may be defined as the gain derived from capital, from labor, or from
income, to the amount of its cash value," we will deal at length with the constitutional both combined," provided it be understood to include profit gained through a sale or
question, incidentally testing the soundness of our previous conclusion. conversion of capital assets, to which it was applied in the Doyle case, pp. 247 U. S.
The Sixteenth Amendment must be construed in connection with the taxing clauses of 183-185.
the original Constitution and the effect attributed to them before the amendment was Brief as it is, it indicates the characteristic and distinguishing attribute of income
adopted. In Pollock v. Farmers' Loan & Trust Co., 158 U. S. 601, under the Act of essential for a correct solution of the present controversy. The government, although
August 27, 1894, c. 349, § 27, 28 Stat. 509, 553, it was held that taxes upon rents and basing its argument upon the definition as quoted, placed chief emphasis upon the
profits of real estate and upon returns from investments of personal property were in word "gain," which was extended to include a variety of meanings; while the
effect direct taxes upon the property from which such income arose, imposed by reason significance of the next three words was either overlooked or misconceived. "Derived
of ownership, and that Congress could not impose such taxes without apportioning from capital;" "the gain derived from capital," etc. Here, we have the essential
them among the states according to population, as required by Article I, § 2, cl. 3, and § matter: not a gain accruing to capital; not a growth or increment of value in the
9, cl. 4, of the original Constitution. investment; but a gain, a profit, something of exchangeable value, proceeding from the
Afterwards, and evidently in recognition of the limitation upon the taxing power of property, severed from the capital, however invested or employed, and coming in, being
Congress thus determined, the Sixteenth Amendment was adopted, in words lucidly "derived" -- that is, received or drawn by the recipient (the taxpayer) for
expressing the object to be accomplished: his separate use, benefit and disposal -- that is income derived from property. Nothing
else answers the description.
16

The same fundamental conception is clearly set forth in the Sixteenth Amendment -- of the year's profits is in property capable of division, the remainder having been
"incomes, fromwhatever source derived" -- the essential thought being expressed absorbed in the acquisition of increased plant,
Page 252 U. S. 208 Page 252 U. S. 210
with a conciseness and lucidity entirely in harmony with the form and style of the equipment, stock in trade, or accounts receivable, or in decrease of outstanding
Constitution. liabilities. When only a part is available for dividends, the balance of the year's profits is
Can a stock dividend, considering its essential character, be brought within the carried to the credit of undivided profits, or surplus, or some other account having like
definition? To answer this, regard must be had to the nature of a corporation and the significance. If thereafter the company finds itself in funds beyond current needs, it may
stockholder's relation to it. We refer, of course, to a corporation such as the one in the declare dividends out of such surplus or undivided profits; otherwise it may go on for
case at bar, organized for profit, and having a capital stock divided into shares to which years conducting a successful business, but requiring more and more working capital
a nominal or par value is attributed. because of the extension of its operations, and therefore unable to declare dividends
Certainly the interest of the stockholder is a capital interest, and his certificates of stock approximating the amount of its profits. Thus, the surplus may increase until it equals or
are but the evidence of it. They state the number of shares to which he is entitled and even exceeds the par value of the outstanding capital stock. This may be adjusted upon
indicate their par value and how the stock may be transferred. They show that he or his the books in the mode adopted in the case at bar -- by declaring a "stock dividend."
assignors, immediate or remote, have contributed capital to the enterprise, that he is This, however, is no more than a book adjustment, in essence -- not a dividend, but
entitled to a corresponding interest proportionate to the whole, entitled to have the rather the opposite; no part of the assets of the company is separated from the common
property and business of the company devoted during the corporate existence to fund, nothing distributed except paper certificates that evidence an antecedent increase
attainment of the common objects, entitled to vote at stockholders' meetings, to receive in the value of the stockholder's capital interest resulting from an accumulation of profits
dividends out of the corporation's profits if and when declared, and, in the event of by the company, but profits so far absorbed in the business as to render it impracticable
liquidation, to receive a proportionate share of the net assets, if any, remaining after to separate them for withdrawal and distribution. In order to make the adjustment, a
paying creditors. Short of liquidation, or until dividend declared, he has no right to charge is made against surplus account with corresponding credit to capital stock
withdraw any part of either capital or profits from the common enterprise; on the account, equal to the proposed "dividend;" the new stock is issued against this and the
contrary, his interest pertains not to any part, divisible or indivisible, but to the entire certificates delivered to the existing stockholders in proportion to their previous
assets, business, and affairs of the company. Nor is it the interest of an owner in the holdings. This, however, is merely bookkeeping that does not affect the aggregate
assets themselves, since the corporation has full title, legal and equitable, to the whole. assets of the corporation or its outstanding liabilities; it affects only the form, not the
The stockholder has the right to have the assets employed in the enterprise, with the essence, of the "liability" acknowledged by the corporation to its own shareholders, and
incidental rights mentioned; but, as stockholder, he has no right to withdraw, only the this through a readjustment of accounts on one side of the balance sheet only,
right to persist, subject to the risks of the enterprise, and looking only to dividends for increasing "capital stock" at the expense of
his return. If he desires to dissociate himself Page 252 U. S. 211
Page 252 U. S. 209 "surplus"; it does not alter the preexisting proportionate interest of any stockholder or
from the company, he can do so only by disposing of his stock. increase the intrinsic value of his holding or of the aggregate holdings of the other
For bookkeeping purposes, the company acknowledges a liability in form to the stockholders as they stood before. The new certificates simply increase the number of
stockholders equivalent to the aggregate par value of their stock, evidenced by a the shares, with consequent dilution of the value of each share.
"capital stock account." If profits have been made and not divided, they create A "stock dividend" shows that the company's accumulated profits have been
additional bookkeeping liabilities under the head of "profit and loss," "undivided profits," capitalized, instead of distributed to the stockholders or retained as surplus available for
"surplus account," or the like. None of these, however, gives to the stockholders as a distribution in money or in kind should opportunity offer. Far from being a realization of
body, much less to any one of them, either a claim against the going concern for any profits of the stockholder, it tends rather to postpone such realization, in that the fund
particular sum of money or a right to any particular portion of the assets or any share in represented by the new stock has been transferred from surplus to capital, and no
them unless or until the directors conclude that dividends shall be made and a part of longer is available for actual distribution.
the company's assets segregated from the common fund for the purpose. The dividend The essential and controlling fact is that the stockholder has received nothing out of the
normally is payable in money, under exceptional circumstances in some other divisible company's assets for his separate use and benefit; on the contrary, every dollar of his
property, and when so paid, then only (excluding, of course, a possible advantageous original investment, together with whatever accretions and accumulations have resulted
sale of his stock or winding-up of the company) does the stockholder realize a profit or from employment of his money and that of the other stockholders in the business of the
gain which becomes his separate property, and thus derive income from the capital that company, still remains the property of the company, and subject to business risks which
he or his predecessor has invested. may result in wiping out the entire investment. Having regard to the very truth of the
In the present case, the corporation had surplus and undivided profits invested in plant, matter, to substance and not to form, he has received nothing that answers the
property, and business, and required for the purposes of the corporation, amounting to definition of income within the meaning of the Sixteenth Amendment.
about $45,000,000, in addition to outstanding capital stock of $50,000,000. In this, the Being concerned only with the true character and effect of such a dividend when
case is not extraordinary. The profits of a corporation, as they appear upon the balance lawfully made, we lay aside the question whether, in a particular case, a stock dividend
sheet at the end of the year, need not be in the form of money on hand in excess of may be authorized by the local law governing the corporation, or whether the
what is required to meet current liabilities and finance current operations of the capitalization of profits may be the result of correct judgment and proper business policy
company. Often, especially in a growing business, only a part, sometimes a small part, on the part of its management, and a due regard for the interests of the stockholders.
And we are considering the taxability of bona fide stock dividends only.
17

Page 252 U. S. 212 we cannot disregard the essential truth disclosed, ignore the substantial difference
We are clear that not only does a stock dividend really take nothing from the property of between corporation and stockholder, treat the entire organization as unreal, look upon
the corporation and add nothing to that of the shareholder, but that the antecedent stockholders as partners when they are not such, treat them as having in equity a right
accumulation of profits evidenced thereby, while indicating that the shareholder is the to a partition of the corporate assets when they have none, and indulge the fiction that
richer because of an increase of his capital, at the same time shows he has not realized they have received and realized a share of the profits of the company which in truth
or received any income in the transaction. they have neither received nor realized. We must treat the corporation as a substantial
It is said that a stockholder may sell the new shares acquired in the stock dividend, and entity separate from the stockholder not only because such is the practical fact, but
so he may, if he can find a buyer. It is equally true that, if he does sell, and in doing so because it is only by recognizing such separateness that any dividend -- even one paid
realizes a profit, such profit, like any other, is income, and, so far as it may have arisen in money or property -- can be regarded as income of the stockholder. Did we regard
since the Sixteenth Amendment, is taxable by Congress without apportionment. The corporation and stockholders as altogether identical, there would be no income except
same would be true were he to sell some of his original shares at a profit. But if a as the corporation acquired it, and while this would be taxable against the corporation
shareholder sells dividend stock, he necessarily disposes of a part of his capital as income under appropriate provisions of law, the individual stockholders could not be
interest, just as if he should sell a part of his old stock, either before or after the separately and additionally taxed with respect to their several shares even when
dividend. What he retains no longer entitles him to the same proportion of future divided, since, if there were entire identity between them and the company, they could
dividends as before the sale. His part in the control of the company likewise is not be regarded as receiving anything from it, any more than if one's money were to be
diminished. Thus, if one holding $60,000 out of a total $100,000 of the capital stock of a removed from one pocket to another.
corporation should receive in common with other stockholders a 50 percent stock Conceding that the mere issue of a stock dividend makes the recipient no richer than
dividend, and should sell his part, he thereby would be reduced from a majority to a before, the government nevertheless contends that the new certificates measure the
minority stockholder, having six-fifteenths instead of six-tenths of the total stock extent to which the gains accumulated by the corporation have made him the richer.
outstanding. A corresponding and proportionate decrease in capital interest and in There are two insuperable difficulties with this. In the first place, it would depend upon
voting power would befall a minority holder should he sell dividend stock, it being in the how long he had held the stock whether the stock dividend indicated the extent to which
nature of things impossible for one to dispose of any part of such an issue without a he had been enriched by the operations of the company; unless he had held it
proportionate disturbance of the distribution of the entire capital stock and a like throughout such operations, the measure would not hold true. Secondly, and more
diminution of the seller's comparative voting power -- that "right preservative of rights" in important for present purposes, enrichment through increase in value
the control of a corporation. Page 252 U. S. 215
Page 252 U. S. 213 of capital investment is not income in any proper meaning of the term.
Yet, without selling, the shareholder, unless possessed of other resources, has not the The complaint contains averments respecting the market prices of stock such as
wherewithal to pay an income tax upon the dividend stock. Nothing could more clearly plaintiff held, based upon sales before and after the stock dividend, tending to show that
show that to tax a stock dividend is to tax a capital increase, and not income, than this the receipt of the additional shares did not substantially change the market value of her
demonstration that, in the nature of things, it requires conversion of capital in order to entire holdings. This tends to show that, in this instance, market quotations reflected
pay the tax. intrinsic values -- a thing they do not always do. But we regard the market prices of the
Throughout the argument of the government, in a variety of forms, runs the fundamental securities as an unsafe criterion in an inquiry such as the present, when the question
error already mentioned -- a failure to appraise correctly the force of the term "income" must be not what will the thing sell for, but what is it in truth and in essence.
as used in the Sixteenth Amendment, or at least to give practical effect to it. Thus, the It is said there is no difference in principle between a simple stock dividend and a case
government contends that the tax "is levied on income derived from corporate where stockholders use money received as cash dividends to purchase additional stock
earnings," when in truth the stockholder has "derived" nothing except paper certificates, contemporaneously issued by the corporation. But an actual cash dividend, with a real
which, so far as they have any effect, deny him present participation in such earnings. It option to the stockholder either to keep the money for his own or to reinvest it in new
contends that the tax may be laid when earnings "are received by the stockholder," shares, would be as far removed as possible from a true stock dividend, such as the
whereas he has received none; that the profits are "distributed by means of a stock one we have under consideration, where nothing of value is taken from the company's
dividend," although a stock dividend distributes no profits; that, under the Act of 1916, assets and transferred to the individual ownership of the several stockholders and
"the tax is on the stockholder's share in corporate earnings," when in truth a stockholder thereby subjected to their disposal.
has no such share, and receives none in a stock dividend; that "the profits are The government's reliance upon the supposed analogy between a dividend of the
segregated from his former capital, and he has a separate certificate representing his corporation's own shares and one made by distributing shares owned by it in the stock
invested profits or gains," whereas there has been no segregation of profits, nor has he of another company calls for no comment beyond the statement that the latter
any separate certificate representing a personal gain, since the certificates, new and distributes assets of the company among the shareholders, while the former does not,
old, are alike in what they represent -- a capital interest in the entire concerns of the and for no citation of authority except Peabody v. Eisner, 247 U. S. 347, 247 U. S. 349-
corporation. 350.
We have no doubt of the power or duty of a court to look through the form of the Two recent decisions, proceeding from courts of high jurisdiction, are cited in support of
corporation and determine the question of the stockholder's right in order to ascertain the position of the government.
whether he has received income taxable by Congress without apportionment. But, Page 252 U. S. 216
looking through the form, Swan Brewery Co., Ltd. v. Rex, [1914] A.C. 231, arose under the Dividend Duties Act of
Page 252 U. S. 214 Western Australia, which provided that "dividend" should include "every dividend, profit,
18

advantage, or gain intended to be paid or credited to or distributed among any gains, profits, or income of any person, entitled to the same, whether divided or
members or directors of any company," except, etc. There was a stock dividend, the otherwise."
new shares being allotted among the shareholders pro rata, and the question was The court held an individual taxable upon his proportion of the earnings of a corporation
whether this was a distribution of a dividend within the meaning of the act. The Judicial although not declared as dividends and although invested in assets not in their nature
Committee of the Privy Council sustained the dividend duty upon the ground that, divisible. Conceding that the stockholder for certain purposes had no title prior to
although "in ordinary language the new shares would not be called a dividend, nor dividend declared, the court nevertheless said (p. 79 U. S. 18):
would the allotment of them be a distribution of a dividend," yet, within the meaning of "Grant all that, still it is true that the owner of a share of stock in a corporation holds the
the act, such new shares were an "advantage" to the recipients. There being no share with all its incidents, and that among those incidents is the right to receive all
constitutional restriction upon the action of the lawmaking body, the case presented future dividends -- that is, his proportional share of all profits not then divided. Profits
merely a question of statutory construction, and manifestly the decision is not a are incident to the share to which the owner at once becomes entitled provided he
precedent for the guidance of this Court when acting under a duty to test an act of remains a member of the corporation until a dividend is made. Regarded as an incident
Congress by the limitations of a written Constitution having superior force. to the shares, undivided profits are property of the shareholder, and as such are the
In Tax Commissioner v. Putnam, (1917) 227 Mass. 522, it was held that the Forty- proper subject of sale, gift, or devise. Undivided profits invested in real estate,
Fourth amendment to the Constitution of Massachusetts, which conferred upon the machinery, or raw material for the purpose of being manufactured are investments in
legislature full power to tax incomes, "must be interpreted as including every item which which the stockholders are interested, and when such profits are actually appropriated
by any reasonable understanding can fairly be regarded as income" (pp. 526, 531), and to the payment of the debts of the corporation, they serve to increase the market value
that under it, a stock dividend was taxable as income, the court saying (p. 535): of the shares, whether held by the original subscribers or by assignees."
"In essence, the thing which has been done is to distribute a symbol representing an Insofar as this seems to uphold the right of Congress to tax without apportionment a
accumulation of profits, which, instead of being paid out in cash, is invested in the stockholder's interest in accumulated earnings prior to dividend declared, it must be
business, thus augmenting its durable assets. In this aspect of the case, the substance regarded as overruled by Pollock v. Farmers' Loan & Trust Co., 158 U. S. 601, 158 U.
of the transaction is no different from what it would be if a cash dividend had been S. 627-628, 158 U. S. 637. Conceding Collector v. Hubbard was inconsistent with the
declared with the privilege of subscription to an equivalent amount of new shares. " doctrine of that case, because it sustained a direct tax upon property not apportioned
Page 252 U. S. 217 Page 252 U. S. 219
We cannot accept this reasoning. Evidently, in order to give a sufficiently broad sweep among the states, the government nevertheless insists that the sixteenth Amendment
to the new taxing provision, it was deemed necessary to take the symbol for the removed this obstacle, so that now the Hubbard case is authority for the power of
substance, accumulation for distribution, capital accretion for its opposite, while a case Congress to levy a tax on the stockholder's share in the accumulated profits of the
where money is paid into the hand of the stockholder with an option to buy new shares corporation even before division by the declaration of a dividend of any kind. Manifestly
with it, followed by acceptance of the option, was regarded as identical in substance this argument must be rejected, since the amendment applies to income only, and what
with a case where the stockholder receives no money and has no option. The is called the stockholder's share in the accumulated profits of the company is capital,
Massachusetts court was not under an obligation, like the one which binds us, of not income. As we have pointed out, a stockholder has no individual share in
applying a constitutional amendment in the light of other constitutional provisions that accumulated profits, nor in any particular part of the assets of the corporation, prior to
stand in the way of extending it by construction. dividend declared.
Upon the second argument, the government, recognizing the force of the decision Thus, from every point of view, we are brought irresistibly to the conclusion that neither
in Towne v. Eisner, supra,and virtually abandoning the contention that a stock dividend under the Sixteenth Amendment nor otherwise has Congress power to tax without
increases the interest of the stockholder or otherwise enriches him, insisted as an apportionment a true stock dividend made lawfully and in good faith, or the
alternative that, by the true construction of the Act of 1916, the tax is imposed not upon accumulated profits behind it, as income of the stockholder. The Revenue Act of 1916,
the stock dividend, but rather upon the stockholder's share of the undivided profits insofar as it imposes a tax upon the stockholder because of such dividend, contravenes
previously accumulated by the corporation, the tax being levied as a matter of the provisions of Article I, § 2, cl. 3, and Article I, § 9, cl. 4, of the Constitution, and to
convenience at the time such profits become manifest through the stock dividend. If so this extent is invalid notwithstanding the Sixteenth Amendment.
construed, would the act be constitutional? Judgment affirmed.
That Congress has power to tax shareholders upon their property interests in the stock
of corporations is beyond question, and that such interests might be valued in view of 2. Claim of right doctrine or doctrine of ownership, command, or
the condition of the company, including its accumulated and undivided profits, is equally control
clear. But that this would be taxation of property because of ownership, and hence 3. Economic benefit test/Doctrine of proprietary interest
would require apportionment under the provisions of the Constitution, is settled beyond 4. Severance test
peradventure by previous decisions of this Court. 5. All events test
The government relies upon Collector v. Hubbard, (1870) III. Kinds of Taxpayers
Page 252 U. S. 218 A. Individual taxpayers
12 Wall. 1, which arose under § 117 of the Act of June 30, 1864, c. 173, 13 Stat. 223, 1. Citizens
282, providing that a. Resident citizens (RC) (23A, 24A1a, NIRC)
"The gains and profits of all companies, whether incorporated or partnership, other than b. Non-resident citizens (NRC) (22E, 23C, 24A1b, NIRC)
the companies specified in that section, shall be included in estimating the annual
19

CHAPTER II (4) A citizen who has been previously considered as nonresident citizen and who
GENERAL PRINCIPLES arrives in the Philippines at any time during the taxable year to reside permanently in
SEC. 23. General Principles of Income Taxation in the Philippines. - Except the Philippines shall likewise be treated as a nonresident citizen for the taxable year
when otherwise provided in this Code: in which he arrives in the Philippines with respect to his income derived from sources
(A) A citizen of the Philippines residing therein is taxable on all income derived from abroad until the date of his arrival in the Philippines.
sources within and without the Philippines; (5) The taxpayer shall submit proof to the Commissioner to show his intention of
(B) A nonresident citizen is taxable only on income derived from sources within the leaving the Philippines to reside permanently abroad or to return to and reside in the
Philippines; Philippines as the case may be for purpose of this Section.
(C) An individual citizen of the Philippines who is working and deriving income from
abroad as an overseas contract worker is taxable only on income derived from 2. Aliens
sources within the Philippines: Provided, That a seaman who is a citizen of the a. Resident aliens (RA) (22F, NIRC)
Philippines and who receives compensation for services rendered abroad as a b. Non-resident aliens (NRA)
member of the complement of a vessel engaged exclusively in international trade i. NRA engaged in trade or business in the PH
shall be treated as an overseas contract worker; (NRA-ETB) (180-day Test) (25A1, NIRC)
(D) An alien individual, whether a resident or not of the Philippines, is taxable only ii. NRA not engaged in trade or business in the PH
on income derived from sources within the Philippines; (NRA-NETB) (25B, NIRC)
(E) A domestic corporation is taxable on all income derived from sources within and c. Special class of individual employees
without the Philippines; and i. Aliens employed by RHQs, AHQs, ROHQs of
(F) A foreign corporation, whether engaged or not in trade or business in the MNC’s (22DD, 22EE, 25C, NIRC; RR11-2010)
Philippines, is taxable only on income derived from sources within the Philippines. ii. Aliens employed by OBUs (25D, NIRC)
CHAPTER III iii. Aliens employed by petroleum service
TAX ON INDIVIDUALS contractors, subcontractors (25, NIRC)
SEC. 24. Income Tax Rates. -
(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of NIRC
the Philippines.-
(1) An income tax is hereby imposed: TITLE II
TAX ON INCOME
(a) On the taxable income defined in Section 31 of this Code, other than income (As Last Amended by RA No. 10653) [5]
subject to tax under Subsections (B), (C) and (D) of this Section, derived for each CHAPTER I- DEFINITIONS
taxable year from all sources within and without the Philippines be every individual SEC. 22. Definitions. - When used in this Title:
citizen of the Philippines residing therein; (F) The term 'resident alien' means an individual whose residence is within the
(b) On the taxable income defined in Section 31 of this Code, other than income Philippines and who is not a citizen thereof.
subject to tax under Subsections (B), (C) and (D) of this Section, derived for each (DD) The term 'regional or area headquarters' shall mean a branch established in
taxable year from all sources within the Philippines by an individual citizen of the the Philippines by multinational companies and which headquarters do not earn or
Philippines who is residing outside of the Philippines including overseas contract derive income from the Philippines and which act as supervisory, communications
workers referred to in Subsection(C) of Section 23 hereof; and and coordinating center for their affiliates, subsidiaries, or branches in the Asia-
Pacific Region and other foreign markets.
TITLE II (EE) The term 'regional operating headquarters' shall mean a branch established
TAX ON INCOME in the Philippines by multinational companies which are engaged in any of the
(As Last Amended by RA No. 10653) [5] following services: general administration and planning; business planning and
CHAPTER I- DEFINITIONS coordination; sourcing and procurement of raw materials and components; corporate
SEC. 22. Definitions. - When used in this Title: finance advisory services; marketing control and sales promotion; training and
(E) The term 'nonresident citizen' means; personnel management; logistic services; research and development services and
(1) A citizen of the Philippines who establishes to the satisfaction of the product development; technical support and maintenance; data processing and
Commissioner the fact of his physical presence abroad with a definite intention to communications; and business development.
reside therein. SEC. 25. Tax on Nonresident Alien Individual. -
(2) A citizen of the Philippines who leaves the Philippines during the taxable year to (A) Nonresident Alien Engaged in trade or Business Within the Philippines. -
reside abroad, either as an immigrant or for employment on a permanent basis. (1) In General. - A nonresident alien individual engaged in trade or business in the
(3) A citizen of the Philippines who works and derives income from abroad and Philippines shall be subject to an income tax in the same manner as an individual
whose employment thereat requires him to be physically present abroad most of the citizen and a resident alien individual, on taxable income received from all sources
time during the taxable year. within the Philippines. A nonresident alien individual who shall come to the
Philippines and stay therein for an aggregate period of more than one hundred
20

eighty (180) days during any calendar year shall be deemed a 'nonresident alien collected and paid for each taxable year upon the gross income received by every
doing business in the Philippines'. Section 22 (G) of this Code notwithstanding. alien individual employed by regional or area headquarters and regional operating
(2) Cash and/or Property Dividends from a Domestic Corporation or Joint headquarters established in the Philippines by multinational companies as salaries,
Stock Company, or Insurance or Mutual Fund Company or Regional Operating wages, annuities, compensation, remuneration and other emoluments, such as
Headquarter or Multinational Company, or Share in the Distributable Net honoraria and allowances, from such regional or area headquarters and regional
Income of a Partnership (Except a General Professional Partnership), Joint operating headquarters, a tax equal to fifteen percent (15%) of such gross income:
Account, Joint Venture Taxable as a Corporation or Association., Interests, Provided, however, That the same tax treatment shall apply to Filipinos employed
Royalties, Prizes, and Other Winnings. - Cash and/or property dividends from a and occupying the same position as those of aliens employed by these multinational
domestic corporation, or from a joint stock company, or from an insurance or mutual companies. For purposes of this Chapter, the term 'multinational company' means
fund company or from a regional operating headquarter of multinational company, or a foreign firm or entity engaged in international trade with affiliates or subsidiaries or
the share of a nonresident alien individual in the distributable net income after tax of branch offices in the Asia-Pacific Region and other foreign markets.
a partnership (except a general professional partnership) of which he is a partner, or (D) Alien Individual Employed by Offshore Banking Units. - There shall be
the share of a nonresident alien individual in the net income after tax of an levied, collected and paid for each taxable year upon the gross income received by
association, a joint account, or a joint venture taxable as a corporation of which he is every alien individual employed by offshore banking units established in the
a member or a co-venturer; interests; royalties (in any form); and prizes (except Philippines as salaries, wages, annuities, compensation, remuneration and other
prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to emoluments, such as honoraria and allowances, from such off-shore banking units, a
tax under Subsection (B)(1) of Section 24) and other winnings (except Philippine tax equal to fifteen percent (15%) of such gross income: Provided, however, That the
Charity Sweepstakes and Lotto winnings); shall be subject to an income tax of same tax treatment shall apply to Filipinos employed and occupying the same
twenty percent (20%) on the total amount thereof: Provided, however, that royalties positions as those of aliens employed by these offshore banking units.
on books as well as other literary works, and royalties on musical compositions shall (E) Alien Individual Employed by Petroleum Service Contractor and
be subject to a final tax of ten percent (10%) on the total amount thereof: Provided, Subcontractor. [14] - An Alien individual who is a permanent resident of a foreign
further, That cinematographic films and similar works shall be subject to the tax country but who is employed and assigned in the Philippines by a foreign service
provided under Section 28 of this Code: Provided, furthermore, That interest income contractor or by a foreign service subcontractor engaged in petroleum operations in
from long-term deposit or investment in the form of savings, common or individual the Philippines shall be liable to a tax of fifteen percent (15%) of the salaries, wages,
trust funds, deposit substitutes, investment management accounts and other annuities, compensation, remuneration and other emoluments, such as honoraria
investments evidenced by certificates in such form prescribed by the Bangko Sentral and allowances, received from such contractor or subcontractor: Provided, however,
ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: That the same tax treatment shall apply to a Filipino employed and occupying the
Provided, finally, that should the holder of the certificate pre-terminate the deposit or same position as an alien employed by petroleum service contractor and
investment before the fifth (5th) year, a final tax shall be imposed on the entire subcontractor.
income and shall be deducted and withheld by the depository bank from the Any income earned from all other sources within the Philippines by the alien
proceeds of the long-term deposit or investment certificate based on the remaining employees referred to under Subsections (C), (D) and (E) hereof shall be subject to
maturity thereof: the pertinent income tax, as the case may be, imposed under this Code.
Four (4) years to less than five (5) years - 5%; RR 11-2010 PDF
Three (3) years to less than four (4) years - 12%; and
Less than three (3) years - 20%.
(3) Capital Gains. - Capital gains realized from sale, barter or exchange of shares of 3. Estates and Trusts (60-66, NIRC)
stock in domestic corporations not traded through the local stock exchange, and real
properties shall be subject to the tax prescribed under Subsections (C) and (D) of CHAPTER X
Section 24. ESTATES AND TRUSTS
(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the SEC. 60. Imposition of Tax. -
Philippines. - There shall be levied, collected and paid for each taxable year upon (A) Application of Tax. - The tax imposed by this Title upon individuals shall apply
the entire income received from all sources within the Philippines by every to the income of estates or of any kind of property held in trust, including:
nonresident alien individual not engaged in trade or business within the Philippines (1) Income accumulated in trust for the benefit of unborn or unascertained person or
as interest, cash and/or property dividends, rents, salaries, wages, premiums, persons with contingent interests, and income accumulated or held for future
annuities, compensation, remuneration, emoluments, or other fixed or determinable distribution under the terms of the will or trust;
annual or periodic or casual gains, profits, and income, and capital gains, a tax equal (2) Income which is to be distributed currently by the fiduciary to the beneficiaries,
to twenty-five percent (25%) of such income. Capital gains realized by a nonresident and income collected by a guardian of an infant which is to be held or distributed as
alien individual not engaged in trade or business in the Philippines from the sale of the court may direct;
shares of stock in any domestic corporation and real property shall be subject to the (3) Income received by estates of deceased persons during the period of
income tax prescribed under Subsections (C) and (D) of Section 24. administration or settlement of the estate; and
(C) Alien Individual Employed by Regional or Area Headquarters and Regional (4) Income which, in the discretion of the fiduciary, may be either distributed to the
Operating Headquarters of Multinational Companies. - There shall be levied, beneficiaries or accumulated.
21

(B) Exception. - The tax imposed by this Title shall not apply to employee's trust conjunction with any person not having a substantial adverse interest in the
which forms part of a pension, stock bonus or profit-sharing plan of an employer for disposition of such part of the corpus or the income therefrom, or (2) in any person
the benefit of some or all of his employees (1) if contributions are made to the trust not having a substantial adverse interest in the disposition of such part of the corpus
by such employer, or employees, or both for the purpose of distributing to such or the income therefrom, the income of such part of the trust shall be included in
employees the earnings and principal of the fund accumulated by the trust in computing the taxable income of the grantor.
accordance with such plan, and (2) if under the trust instrument it is impossible, at SEC. 64. Income for Benefit of Grantor. -
any time prior to the satisfaction of all liabilities with respect to employees under the (A) Where any part of the income of a trust (1) is, or in the discretion of the grantor or
trust, for any part of the corpus or income to be (within the taxable year or thereafter) of any person not having a substantial adverse interest in the disposition of such part
used for, or diverted to, purposes other than for the exclusive benefit of his of the income may be held or accumulated for future distribution to the grantor, or (2)
employees: Provided, That any amount actually distributed to any employee or may, or in the discretion of the grantor or of any person not having a substantial
distributee shall be taxable to him in the year in which so distributed to the extent adverse interest in the disposition of such part of the income, be distributed to the
that it exceeds the amount contributed by such employee or distributee. grantor, or (3) is, or in the discretion of the grantor or of any person not having a
(C) Computation and Payment. - substantial adverse interest in the disposition of such part of the income may be
(1) In General. - The tax shall be computed upon the taxable income of the estate or applied to the payment of premiums upon policies of insurance on the life of the
trust and shall be paid by the fiduciary, except as provided in Section 63 (relating to grantor, such part of the income of the trust shall be included in computing the
revocable trusts) and Section 64 (relating to income for the benefit of the grantor). taxable income of the grantor. `
(2) Consolidation of Income of Two or More Trusts. - Where, in the case of two or (B) As used in this Section, the term 'in the discretion of the grantor' means in the
more trusts, the creator of the trust in each instance is the same person, and the discretion of the grantor, either alone or in conjunction with any person not having a
beneficiary in each instance is the same, the taxable income of all the trusts shall be substantial adverse interest in the disposition of the part of the income in question.
consolidated and the tax provided in this Section computed on such consolidated SEC. 65. Fiduciary Returns. - Guardians, trustees, executors, administrators,
income, and such proportion of said tax shall be assessed and collected from each receivers, conservators and all persons or corporations, acting in any fiduciary
trustee which the taxable income of the trust administered by him bears to the capacity, shall render, in duplicate, a return of the income of the person, trust or
consolidated income of the several trusts. estate for whom or which they act, and be subject to all the provisions of this Title,
SEC. 61. Taxable Income. - The taxable income of the estate or trust shall be which apply to individuals in case such person, estate or trust has a gross income of
computed in the same manner and on the same basis as in the case of an individual, Twenty thousand pesos (P20,000) [40] or over during the taxable year. Such fiduciary
except that: or person filing the return for him or it, shall take oath that he has sufficient
(A) There shall be allowed as a deduction in computing the taxable income of the knowledge of the affairs of such person, trust or estate to enable him to make such
estate or trust the amount of the income of the estate or trust for the taxable year return and that the same is, to the best of his knowledge and belief, true and correct,
which is to be distributed currently by the fiduciary to the beneficiaries, and the and be subject to all the provisions of this Title which apply to individuals: Provided,
amount of the income collected by a guardian of an infant which is to be held or That a return made by or for one or two or more joint fiduciaries filed in the province
distributed as the court may direct, but the amount so allowed as a deduction shall where such fiduciaries reside; under such rules and regulations as the Secretary of
be included in computing the taxable income of the beneficiaries, whether distributed Finance, upon recommendation of the Commissioner, shall prescribe, shall be a
to them or not. Any amount allowed as a deduction under this Subsection shall not sufficient compliance with the requirements of this Section.
be allowed as a deduction under Subsection (B) of this Section in the same or any SEC. 66. Fiduciaries Indemnified Against Claims for Taxes Paid. - Trustees,
succeeding taxable year. executors, administrators and other fiduciaries are indemnified against the claims or
(B) In the case of income received by estates of deceased persons during the period demands of every beneficiary for all payments of taxes which they shall be required
of administration or settlement of the estate, and in the case of income which, in the to make under the provisions of this Title, and they shall have credit for the amount
discretion of the fiduciary, may be either distributed to the beneficiary or of such payments against the beneficiary or principal in any accounting which they
accumulated, there shall be allowed as an additional deduction in computing the make as such trustees or other fiduciaries.
taxable income of the estate or trust the amount of the income of the estate or trust
for its taxable year, which is properly paid or credited during such year to any 4. Co-ownerships
legatee, heir or beneficiary but the amount so allowed as a deduction shall be 5. General professional partnerships (26, NIRC)
included in computing the taxable income of the legatee, heir or beneficiary.
(C) In the case of a trust administered in a foreign country, the deductions mentioned SEC. 26. Tax Liability of Members of General Professional Partnerships. - A
in Subsections (A) and (B) of this Section shall not be allowed: Provided, That the general professional partnership as such shall not be subject to the income tax
amount of any income included in the return of said trust shall not be included in imposed under this Chapter. Persons engaging in business as partners in a general
computing the income of the beneficiaries. professional partnership shall be liable for income tax only in their separate and
SEC. 62. Exemption Allowed to Estates and Trusts. - For the purpose of the tax individual capacities.
provided for in this Title, there shall be allowed an exemption of Twenty thousand For purposes of computing the distributive share of the partners, the net income of
pesos (P20,000) [39] from the income of the estate or trust. the partnership shall be computed in the same manner as a corporation.
SEC. 63. Revocable trusts. - Where at any time the power to revest in the grantor Each partner shall report as gross income his distributive share, actually or
title to any part of the corpus of the trust is vested (1) in the grantor either alone or in constructively received, in the net income of the partnership.
22

(D) Net Income of a Partnership Deemed Constructively Received by


B. Corporations Partners. - The taxable income declared by a partnership for a taxable year which is
1. Domestic corporation, defined (22B, 22C, NIRC) subject to tax under Section 27 (A) of this Code, after deducting the corporate
2. Taxable partnership or business partnership (73D, NIRC) income tax imposed therein, shall be deemed to have been actually or constructively
3. Joint venture received by the partners in the same taxable year and shall be taxed to them in their
a. Exempt JV (RR 10-2012) individual capacity, whether actually distributed or not.
b. Taxable JV RR 10-2012 PDF
4. Foreign corporations
a. Resident foreign corporations (RFC) (22H, NIRC)
b. Non-residential foreign corporation (22I, NIRC)
c. Subsidiary v branch of a foreign corporation

TITLE II
TAX ON INCOME
(As Last Amended by RA No. 10653) [5]
CHAPTER I- DEFINITIONS
SEC. 22. Definitions. - When used in this Title:
(A) The term 'person' means an individual, a trust, estate or corporation.
(B) The term 'corporation' shall include partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentas en participacion),
association, or insurance companies, but does not include general professional
partnerships and a joint venture or consortium formed for the purpose of undertaking
construction projects or engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating consortium agreement under a service contract
with the Government. 'General professional partnerships' are partnerships formed
by persons for the sole purpose of exercising their common profession, no part of the
income of which is derived from engaging in any trade or business.
(C) The term 'domestic', when applied to a corporation, means created or organized
in the Philippines or under its laws.
(H) The term 'resident foreign corporation' applies to a foreign corporation
engaged in trade or business within the Philippines.
(I) The term 'nonresident foreign corporation' applies to a foreign corporation not
engaged in trade or business within the Philippines.
SEC. 73. Distribution of Dividends or Assets by Corporations. -
(A) Definition of Dividends. - The term 'dividends' when used in this Title means
any distribution made by a corporation to its shareholders out of its earnings or
profits and payable to its shareholders, whether in money or in other property.
Where a corporation distributes all of its assets in complete liquidation or dissolution,
the gain realized or loss sustained by the stockholder, whether individual or
corporate, is a taxable income or a deductible loss, as the case may be.
(B) Stock Dividend. - A stock dividend representing the transfer of surplus to capital
account shall not be subject to tax. However, if a corporation cancels or redeems
stock issued as a dividend at such time and in such manner as to make the
distribution and cancellation or redemption, in whole or in part, essentially equivalent
to the distribution of a taxable dividend, the amount so distributed in redemption or
cancellation of the stock shall be considered as taxable income to the extent that it
represents a distribution of earnings or profits.
(C) Dividends Distributed are Deemed Made from Most Recently Accumulated
Profits. - Any distribution made to the shareholders or members of a corporation
shall be deemed to have been made from the most recently accumulated profits or
surplus, and shall constitute a part of the annual income of the distributee for the
year in which received.