Commissioner of Internal Revenue v Court of Appeals, 301 SCRA 152

(1999)

Facts:

Don Andres Soriano (American), founder of A. Soriano Corp. (ASC)

had a total shareholdings of 185,154 shares. Broken down, the shares
comprise of 50,495 shares which were of original issue when the
corporation was founded and 134,659 shares as stock dividend
declarations. So in 1964 when Soriano died, half of the shares he held
went to his wife as her conjugal share (wife’s “legitime”) and the other half
(92,577 shares, which is further broken down to 25,247.5 original issue
shares and 82,752.5 stock dividend shares) went to the estate. For
sometime after his death, his estate still continued to receive stock
dividends from ASC until it grew to at least 108,000 shares.

In 1968, ASC through its Board issued a resolution for the redemption
of shares from Soriano’s estate purportedly for the planned “Filipinization”
of ASC. Eventually, 108,000 shares were redeemed from the Soriano
Estate. In 1973, a tax audit was conducted. Eventually, the Commissioner
of Internal Revenue (CIR) issued an assessment against ASC for
deficiency withholding tax-at-source. The CIR explained that when the
redemption was made, the estate profited (because ASC would have to
pay the estate to redeem), and so ASC would have withheld tax payments
from the Soriano Estate yet it remitted no such withheld tax to the
government.

ASC averred that it is not duty bound to withhold tax from the estate
because it redeemed the said shares for purposes of “Filipinization” of ASC
and also to reduce its remittance abroad.

Issue:

(1) what is the difference of common and preferred stocks

(2) What is redemption of stocks

Held:

1st Issue:

Reclassification of shares does not always bring any substantial

alteration in the subscriber's proportional interest. But the exchange is
different — there would be a shifting of the balance of stock features, like
priority in dividend declarations or absence of voting rights. Yet neither the
reclassification nor exchange per se, yields realize income for tax
purposes. A common stock represents the residual ownership interest in
the corporation. It is a basic class of stock ordinarily and usually issued
without extraordinary rights or privileges and entitles the shareholder to
a pro rata division of profits. Preferred stocks are those which entitle the
shareholder to some priority on dividends and asset distribution.

Both shares are part of the corporation's capital stock. Both

stockholders are no different from ordinary investors who take on the same
investment risks. Preferred and common shareholders participate in the
same venture, willing to share in the profits and losses of the
enterprise. Moreover, under the doctrine of equality of shares — all stocks
issued by the corporation are presumed equal with the same privileges and
liabilities, provided that the Articles of Incorporation is silent on such
differences.

2ND Issue:

Redemption is repurchase, a reacquisition of stock by a corporation

which issued the stock 89 in exchange for property, whether or not the
acquired stock is cancelled, retired or held in the treasury. 90Essentially, the
corporation gets back some of its stock, distributes cash or property to the
shareholder in payment for the stock, and continues in business as before.
The redemption of stock dividends previously issued is used as a veil for
the constructive distribution of cash dividends. In the instant case, there is
no dispute that ANSCOR redeemed shares of stocks from a stockholder
(Don Andres) twice (28,000 and 80,000 common shares). But where did
the shares redeemed come from? If its source is the original capital
subscriptions upon establishment of the corporation or from initial capital
investment in an existing enterprise, its redemption to the concurrent value
of acquisition may not invite the application of Sec. 83(b) under the 1939
Tax Code, as it is not income but a mere return of capital. On the contrary,
if the redeemed shares are from stock dividend declarations other than as
initial capital investment, the proceeds of the redemption is additional
wealth, for it is not merely a return of capital but a gain thereon.
 Commissioner of Internal Revenue v Lincoln Philippines Life
Insurance Co, 379 SCRA 423 (2002)

Facts:

Private respondent Lincoln Philippine Life Insurance Co., Inc., (now

Jardine-CMA Life Insurance Company, Inc.) is a domestic corporation
registered with the Securities and Exchange Commission and engaged in
life insurance business. private respondent issued a special kind of life
insurance policy known as the "Junior Estate Builder Policy," the
distinguishing feature of which is a clause providing for an automatic
increase in the amount of life insurance coverage upon attainment of a
certain age by the insured without the need of issuing a new policy. The
clause was to take effect in the year 1984. Documentary stamp taxes due
on the policy were paid by petitioner only on the initial sum assured.

Private respondent also issued 50,000 shares of stock dividends with

a par value of P100.00 per share or a total par value of P5,000,000.00. The
actual value of said shares, represented by its book value, was
P19,307,500.00. Documentary stamp taxes were paid based only on the
par value of P5,000,000.00 and not on the book value.

Petitioner issued deficiency documentary stamps tax assessment for

the year 1984 in the amounts of (a) P464,898.75, corresponding to the
amount of automatic increase of the sum assured on the policy issued by
respondent, and (b) P78,991.25 corresponding to the book value in excess
of the par value of the stock dividends.

Private respondent questioned the deficiency assessments and

sought their cancellation in a petition filed in the Court of Tax Appeals. The
Court of Tax Appeals found no valid basis for the deficiency tax
assessment on the stock dividends, as well as on the insurance policy.

Issue:

When is the payment of Documentary Stamp taxes made.

Held:

The payment of documentary stamp taxes is done at the time the act
is done or transaction had and the tax base for the computation of
documentary stamp taxes on life insurance policies under Section 183 is
the amount fixed in policy, unless the interest of a person insured is
susceptible of exact pecuniary measurement. the amount fixed in the policy
is the figure written on its face and whatever increases will take effect in the
future by reason of the "automatic increase clause" embodied in the policy
without the need of another contract.

The subject insurance policy at the time it was issued contained an

"automatic increase clause." Although the clause was to take effect only in
1984, it was written into the policy at the time of its issuance. The
distinctive feature of the "junior estate builder policy" called the "automatic
increase clause" already formed part and parcel of the insurance contract,
hence, there was no need for an execution of a separate agreement for the
increase in the coverage that took effect in 1984 when the assured reached
a certain age.

It is clear from Section 173 that the payment of documentary stamp taxes is
done at the time the act is done or transaction had and the tax base for the
computation of documentary stamp taxes on life insurance policies under
Section 183 is the amount fixed in policy, unless the interest of a person
insured is susceptible of exact pecuniary measurement. What then is the
amount fixed in the policy? Logically, we believe that the amount fixed in
the policy is the figure written on its face and whatever increases will take
effect in the future by reason of the "automatic increase clause" embodied
in the policy without the need of another contract.
 Republic Planters Bank v Agana, 269 SCRA 1 [1997]

Facts:

On 18 September 1961, the Robes-Francisco Realty & Development

Corporation (RFRDC) secured a loan from the Republic Planters Bank in
the amount of P120,000.00. As part of the proceeds of the loan, preferred
shares of stocks were issued to RFRDC through its officers then, Adalia F.
Robes and one Carlos F. Robes. In other words, instead of giving the legal
tender totaling to the full amount of the loan, which is P120,000.00, the
Bank lent such amount partially in the form of money and partially in the
form of stock certificates numbered 3204 and 3205, each for 400 shares
with a par value of P10.00 per share, or for P4,000.00 each, for a total of
P8,000.00. Said stock certificates were in the name of Adalia F. Robes and
Carlos F. Robes, who subsequently, however, endorsed his shares in favor
of Adalia F. Robes.

Said certificates of stock bear the following terms and conditions:

"The Preferred Stock shall have the following rights, preferences,
qualifications and limitations, to wit: 1. Of the right to receive a quarterly
dividend of 1%, cumulative and participating. xxx 2. That such preferred
shares may be redeemed, by the system of drawing lots, at any time after 2
years from the date of issue at the option of the Corporation." On 31
January 1979, RFRDC and Robes proceeded against the Bank and filed a
complaint anchored on their alleged rights to collect dividends under the
preferred shares in question and to have the bank redeem the same under
the terms and conditions of the stock certificates. The bank filed a Motion to
Dismiss 3 private respondents' Complaint on the following grounds: (1) that
the trial court had no jurisdiction over the subject-matter of the action; (2)
that the action was unenforceable under substantive law; and (3) that the
action was barred by the statute of limitations and/or laches. The bank's
Motion to Dismiss was denied by the trial court in an order dated 16 March
1979. The bank then filed its Answer on 2 May 1979. Thereafter, the trial
court gave the parties 10 days from 30 July 1979 to submit their respective
memoranda after the submission of which the case would be deemed
submitted for resolution. On 7 September 1979, the trial court rendered the
decision in favor of RFRDC and Robes; ordering the bank to pay RFRDC
and Robes the face value of the stock certificates as redemption price, plus
1% quarterly interest thereon until full payment. The bank filed the petition
for certiorari with the Supreme Court, essentially on pure questions of law.

Issue:

What is a Redeemable Share

Held:

Redeemable shares, on the other hand, are shares usually preferred,

which by their terms are redeemable at a fixed date, or at the option of
either issuing corporation, or the stockholder, or both at a certain
redemption price.17 A redemption by the corporation of its stock is, in a
sense, a repurchase of it for cancellation. 18 The present Code allows
redemption of shares even if there are no unrestricted retained earnings on
the books of the corporation. This is a new provision which in effect
qualifies the general rule that the corporation cannot purchase its own
shares except out of current retained earnings. 19 However, while
redeemable shares may be redeemed regardless of the existence of
unrestricted retained earnings, this is subject to the condition that the
corporation has, after such redemption, assets in its books to cover debts
and liabilities inclusive of capital stock. Redemption, therefore, may not be
made where the corporation is insolvent or if such redemption will cause
insolvency or inability of the corporation to meet its debts as they mature.