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Fisher vs. Trinidad [G.R. No.

L-17518 October 30, 1922]

Facts: Philippine American Drug Company was a corporation duly
organized and existing under the laws of the Philippine Islands, doing
business in the City of Manila. Fisher was a stockholder in said corporation.
Said corporation, as result of the business for that year, declared a
"stock dividend" and that the proportionate share of said stock divided of
Fisher was P24,800. Said the stock dividendfor that amount was issued to
Fisher. For this reason, Trinidad demanded payment of income tax for the
stock dividend received by Fisher. Fisher paid under protest the sum of
P889.91 as income taxon said stock dividend. Fisher filed an action for the
recovery of P889.91. Trinidad demurred to the petition upon the ground that
it did not state facts sufficient to constitute cause of action. The demurrer
was sustained and Fisher appealed.
Issue: Whether or not the stock dividend was an income and therefore
Held: No. Generally speaking, stock dividends represent undistributed
increase in the capital of corporations or firms, joint stock companies, etc.,
etc., for a particular period. The inventory of the property of the corporation
for particular period shows an increase in its capital, so that the stock
theretofore issued does not show the real value of the stockholder's
interest, and additional stock is issued showing the increase in the actual
capital, or property, or assets of the corporation.
In the case of Gray vs. Darlington (82 U.S., 653), the US Supreme Court
held that mere advance in value does not constitute the "income" specified
in the revenue law as "income" of the owner for the year in which the sale
of the property was made. Such advance constitutes and can be treated
merely as an increase of capital.

In the case of Towne vs. Eisner, income was defined in an income tax law
to mean cash or its equivalent, unless it is otherwise specified. It does not
mean unrealized increments in the value of the property. A
stock dividend really takes nothing from the property of the corporation, and
adds nothing to the interests of the shareholders. Its property is not
diminished and their interest are not increased. The proportional interest of
each shareholder remains the same. In short, the corporation is no poorer
and the stockholder is no richer then they were before.
In the case of Doyle vs. Mitchell Bros. Co. (247 U.S., 179), Mr. Justice
Pitney, said that the term "income" in its natural and obvious sense, imports
something distinct from principal or capital and conveying the idea of gain
or increase arising from corporate activity.
In the case of Eisner vs. Macomber (252 U.S., 189), income was defined
as the gain derived from capital, from labor, or from both combined,
provided it be understood to include profit gained through a sale or
conversion of capital assets.
When a corporation or company issues "stock dividends" it shows that the
company's accumulated profits have been capitalized, instead of distributed
to the stockholders or retained as surplus available for distribution, in
money or in kind, should opportunity offer. The essential and controlling fact
is that the stockholder has received nothing out of the company's assets for
his separate use and benefit; on the contrary, every dollar of his
original investment, together with whatever accretions and accumulations
resulting from employment of his money and that of the other stockholders
in the business of the company, still remains the property of the company,
and subject to business risks which may result in wiping out of the
entire investment. The stockholder by virtue of the stock dividendhas in fact
received nothing that answers the definition of an "income."

The stockholder who receives a stock dividend has received nothing but a
representation of his increased interest in the capital of the corporation.
There has been no separation or segregation of his interest. All the
property or capital of the corporation still belongs to the corporation. There
has been no separation of the interest of the stockholder from the general
capital of the corporation. The stockholder, by virtue of the stock dividend,
has no separate or individual control over the interest represented thereby,
further than he had before the stock dividend was issued. He cannot use it
for the reason that it is still the property of the corporation and not the
property of the individual holder of stock dividend. A certificate of stock
represented by the stock dividend is simply a statement of his proportional
interest or participation in the capital of the corporation. The receipt of a
stock dividend in no way increases the money received of a stockholder
nor his cash account at the close of the year. It simply shows that there has
been an increase in the amount of the capital of the corporation during the
particular period, which may be due to an increased business or to a
natural increase of the value of the capital due to business, economic, or
other reasons. We believe that the Legislature, when it provided for an
"income tax," intended to tax only the "income" of corporations, firms or
individuals, as that term is generally used in its common acceptation; that is
that the income means money received, coming to a person or corporation
for services, interest, or profit frominvestments. We do not believe that the
Legislature intended that a mere increase in the value of the capital or
assets of a corporation, firm, or individual, should be taxed as "income."
A stock dividend, still being the property of the corporation and not the
stockholder, may be reached by an execution against the corporation, and
sold as a part of the property of the corporation. In such a case, if all the
property of the corporation is sold, then the stockholder certainly could not
be charged with having received an income by virtue of the issuance of the
stock dividend. Until thedividend is declared and paid, the corporate profits
still belong to the corporation, not to the stockholders, and are liable for
corporate indebtedness. The rule is well established that cash dividend,

whether large or small, are regarded as "income" and all stockdividends, as

capital or assets
If the ownership of the property represented by a stock dividend is still in
the corporation and not in the holder of such stock, then it is difficult to
understand how it can be regarded as income to the stockholder and not as
a part of the capital or assets of the corporation. If the holder of the
stock dividend is required to pay anincome tax on the same, the result
would be that he has paid a tax upon an income which he never received.
Such a conclusion is absolutely contradictory to the idea of an income.
As stock dividends are not "income," the same cannot be considered taxes
under that provision of Act No. 2833. For all of the foregoing reasons, SC
held that the judgment of the lower court should be REVOKED.

Madrigal vs. Rafferty

Facts: Vicente Madrigal and Susana Paterno were legally married prior to
1914, contracted under
concerning conjugal partnerships.
sworndeclaration with the CIR showing that his total net income for the year
1914 was P296,302.73. Subsequently Madrigal submitted the claim that
the said P296,302.73 did not represent his income for the year 1914, but
was in fact the income of the conjugal partnership existing between himself
and his wife Susana Paterno, and that in computing and assessing the
additional income tax provided by the Act of Congress of October 3, 1913,
the income declared by Vicente Madrigal should be divided into two equal
parts, one-half to be considered the income of Vicente Madrigal and the
After payment under protest, and after the protest of Madrigal had been
decided adversely by the CIR, action was begun by Madrigal and his wife
Paterno in the CFI of Manila against Collector of Internal Revenue and the

Deputy Collector of Internal Revenue. CFI decided against Madrigal and

Appellees contend that the taxes imposed by the Income Tax Law are as
the name implies taxes upon income tax and not upon capital and property;
that the fact that Madrigal was a married man, and his
marriage contracted under
the conjugalpartnership, has no bearing on income considered as income,
and that the distinction must be drawn between the ordinary form of
commercial partnership and the conjugal partnership of spouses resulting
Issue: Whether or not the additional income tax should be divided into two
the conjugal partnership
Held: Income as contrasted with capital or property is to be the test.The
essential difference between capital and income is that capital is a fund;
income is a flow. A fund of property existing at an instant of time is called
capital. A flow of services rendered by that capital by the payment of money
from it or any other benefit rendered by a fund of capital in relation to such
fund through a period of time is called an income. Capital is wealth, while
Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the
property of her husband Vicente Madrigal during the life of
theconjugal partnership. She has an interest in the ultimate property rights
and in the ultimate ownership of property acquired as income after such
income has become capital. Susana Paterno has no absolute right to onehalf the income of the conjugal partnership. Not being seized of a separate
estate, Susana Paterno cannot make a separate return in order to receive
the benefit of the exemption which would arise by reason of the additional
tax. As she has no estate and income, actually and legally vested in her
and entirely distinct from her husband's property, the income cannot

properly be considered the separate income of the wife for the purposes of
the additional tax. Moreover, the Income Tax Law does not look on the
spouses as individual partners in an ordinary partnership. The husband and
wife are only entitled to the exemption of P8,000 specifically granted by the
law. The higher schedules of the additional tax directed at the incomes of
the wealthy may not be partially defeated by reliance on provisions in our
Civil Code dealing with the conjugal partnership and having
no application to theIncome Tax Law. The aims and purposes of the Income
Tax Law must be given effect.

Conwi, vs. CTA and CIR

Facts: Petitioners are employees of Procter and Gamble (Philippine
Manufacturing Corporation, subsidiary of Procter & Gamble, a
foreign corporation).During the years 1970 and 1971, petitioners were
assigned to other subsidiaries of Procter & Gamble outside the Philippines,
for which petitioners were paid US dollars as compensation.
Petitioners filed their ITRs for 1970 and 1971, computing tax due by
applying the dollar-to-peso conversion based on the floating rate under BIR
Ruling No. 70-027. In 1973, petitioners filed amened ITRs for 1970 and
1971, this time using the par value of the peso as basis. This resulted in the
alleged overpayments, refund and/or tax credit, for which claims for refund
were filed.
CTA held that the proper conversion rate for the purpose of reporting and
paying the Philippine income tax on the dollar earnings of petitioners are
the rates prescribed under Revenue Memorandum Circulars Nos. 7-71 and
41-71. The refund claims were denied.
(1) Whether or not petitioners' dollar earnings are receipts derived
from foreign exchange transactions; NO.

(2) Whether or not the proper rate of conversion of petitioners' dollar

earnings for tax purposes in the prevailing free market rate of exchange
and not the par value of the peso; YES.
Held: For the proper resolution of income tax cases, income may be
defined as an amount of money coming to a person or corporationwithin a
specified time, whether as payment for services, interest or profit from
investment. Unless otherwise specified, it means cash or its equivalent.
Income can also be though of as flow of the fruits of one's labor.
Petitioners are correct as to their claim that their dollar earnings are
not receipts derived from foreign exchange transactions. For aforeign
exchange transaction is simply that a transaction inforeign
exchange, foreign exchange being "the conversion of an amount of money
or currency of one country into an equivalent amount of money or currency
of another." When petitioners were assigned to the foreign subsidiaries of
Procter & Gamble, they were earning in their assigned nation's currency
and were ALSO spending in said currency. There was no conversion,
therefore, from one currency to another.
The dollar earnings of petitioners are the fruits of their labors in the foreign
subsidiaries of Procter & Gamble. It was a definite amount of money which
came to them within a specified period of time of two years as payment for
their services.
And in the implementation for the proper enforcement of the National
Internal Revenue Code, Section 338 thereof empowers the Secretary of
Finance to "promulgate all needful rules andregulations" to effectively
enforce its provisions pursuant to this authority, Revenue Memorandum
Circular Nos. 7-71 and 41-71 were issued to prescribed a uniform rate of
exchange from US dollars to Philippine pesos for INTERNAL REVENUE
TAX PURPOSES for the years 1970 and 1971, respectively. Said revenue

circulars were a valid exercise of the authority given to the Secretary of

Finance by the Legislature which enacted the Internal Revenue Code. And
these are presumed to be a valid interpretation of said code until revoked
by the Secretary of Finance himself.
Petitioners are citizens of the Philippines, and their income, within or
without, and in these cases wholly without, are subject to income tax. Sec.
21, NIRC, as amended, does not brook any exemption.