Fisher v Trinidad (1922) | Johnson, J.

FACTS: Frederick Fisher was a stockholder of Philippine American Drug Company, a domestic corporation. For the year 1919 he declared a stock dividend in the amount of P24,800 for which he was subsequently taxed by the respondent Collector of Internal Revenue for the sum of P889.91 as income tax. Fisher paid under protest and brought action for recovery. Trinidad demurred which was sustained hence this appeal. ISSUE: WON stock dividends are income taxable as such under Sec. 25 of Act No. 2833 [the Income Tax Law]. (NO). HELD/RATIO: Following Eisner vs. Macomber and other US cases, the Court held that stock dividends are income taxable under the Income Tax Law. They justified the applicability of the ruling by saying that there is but 1 slight difference in the wording of the two laws which defined dividends as part of taxable income. The receipt of stock dividends merely represents an increase in value of the assets of a corporation. The court defines stock dividends as increase in capital of corps, firms, partnerships, etc for a particular period. They represent the increase in the proportional share of each stockholder in the company s capital. It is not a distribution of the corporation s profits to the stockholder. It only increases the stockholder s SOURCE of income (capital), but does not increase income itself. On definition of income tax: Act No. 2833 taxed any distribution by a corporation out of its earnings or profits. From the various definitions of income tax cited, an income tax is a tax on the yearly profits arising from property, salary, private revenue, capital invested, and all other sources of income. What is taxed is the profit, not the source.
Act of Congress (1916): 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 dividend shall be considered income, to the amount of its cash value. Act No. 2833 of the Philippine Legislature: The term "dividends" as used in this Law shall be held to mean any distribution made or ordered to be made by a corporation, . . . out of its earnings or profits accrued xxx, whether in cash or in stock of the corporation, . . . . Stock dividend shall be considered income, to the amount of the earnings or profits distributed.
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When income is realized (Test of Realization): Stock dividend in this case is not taxable for income because the stockholder has received nothing out of the company's assets for his separate use and benefit. Instead, his original investment along with whatever gains which resulted from the use of his and other stockholder s money remains property of the company. The fact that it is not yet his means the capital is still subject to business risks that can wipe out his entire investment. All he has received is a stock certificate indicating the increase in his capital in the company. Thus we can say that income has been realized when there has been a separation of the interest of the stockholder from the general capital of the corporation. This separation of interest happens when the company declares a cash dividend on the shares of shareholders.
STREET, J., concurring: I agree that the trial court erred in sustaining the demurrer, and the judgment must be reversed. Instead of demurring the defendant should have answered and alleged, if such be the case, that the stock dividend which was the subject of taxation represents the amount of earnings or profits distributed by means of the issuance of said stock dividend; and the case should have been tried on that question of fact. It must be noted that section 25 (a) of Act No. 2833, under which this tax was imposed, does not levy a tax generally on stock dividends to the extent of the part of the stock nor even to the extent of its value, but declares that stock dividends shall be considered as income to the amount of the earnings or profits distributed. Under provision, before the tax can be lawfully assessed and collected, it must appear that he stock dividend represents earning or profits distributed; and the burden of proof is on the Collector of Internal Revenue to show this. OSTRAND, J., dissenting: Eisner vs. Macomber, for which the majority largely based its decision is entirely inapplicable to this case. (1) There is a radical difference between the definition of a taxable stock dividend given in the US Income Tax Law, construed in the case of Eisner vs. Macomber, and that given in Act No. 2833 of the Philippine Legislature, the Act with which we are concerned in the present case. The former provides that "stock dividend shall be considered income, to the amount of its cash value;" the Philippine Act provides that "Stock dividend shall be considered income, to the amount of the earnings or profits distributed." The US statute made stock dividends based upon an advance in the value of the property or investment taxable as income whether resulting from earning or not; our statute make stock dividends taxable only to the amount of the earning and profits distributed, and stock dividends based on the increment income and

are not taxable. Moreover, to constitute income, profits, or earnings need not necessarily be converted into cash. (2) Unlike US Congress who is hampered by an organic law, the Philippine Legislature has full power to levy taxes both on capital or property and on income. JOHNS, J., dissenting: The legislature of the Philippine Islands has a legal right to define the meaning of the words "dividend" and "income," by a legislative act and it expressly says "Stock dividend shall be considered income, to the amount of the earnings or profits distributed"; and when its meaning is defined by legislative act, it is the duty of the courts to follow that definition.