Frederick Fisher v.
Wenceslao Trinidad, Collector of Internal Revenue Generally speaking, stock dividends represent undistributed increase in the capital
30 October 1922
J. Johnson | En Banc
Doctrine; realization test: If the ownership of the property represented by a stock
dividend is still in the corporation , it is not regarded as income to the stockholder
but still a part of the capital or assets of the corporation.
if the holder of the stock dividend is required to pay an income 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.
An income subject to taxation under the law must be an actual income and not a
promised or prospective income.
SUMMARY: The Philippine American Drug Company declared stock dividend for the
year of 1919. This stock dividend was taxed P889.91 as income tax. Thus, Fisher (a
stockholder) filed for recovery of such amount. The Court ruled that stock dividends
are not income. 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 from investments.
Facts:
Frederick Fisher was a stockholder of Philippine American Drug Company. As a
result of the business in 1919, the corporation declared a stock dividend. The
proportionate share of Fisher of said stock dividend was 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 subsequently filed an action
for recovery of the P889.91. Trinidad demurred to the petition on the ground that it
did not state facts sufficient to constitute a cause of action, which was sustained by
the trial, court hence this appeal.
Issue: W/N “stock dividends” are “income” taxable under Sec. 25 of the Income Tax
Law (Act No. 2833). NO, "stock dividends" are not "income," thus the same cannot
be taxed under provision of Act No. 2833 which provides for a tax upon income.
Ratio:
It is true that the Act No. 2833 provides for an income tax and contains a provision
that "stock dividends" shall be considered income and are therefore subject to
income tax. However, the Court said that if "stock dividends" are not "income" then
the law permits a tax upon something not within the purpose and intent of the law
thus the necessity of determining what are “stock dividends” in order to understand
their relation to "income."
of corporations or firms, joint stock companies, etc. for a particular period. The
stockholder who receives a stock dividend has received nothing but a
representation of his increased interest in the capital of the corporation. 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.,
For bookkeeping purposes, a corporation, by issuing stock dividend, acknowledges a
liability in form to the stockholders, evidenced by a capital stock account. 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.
The Court held 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 from
investments. The Court did 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."
Under the guise of an income tax, property which is not an income cannot be taxed.
When the assets of a corporation have increased so as to justify the issuance of a
stock dividend, the increase of the assets should be taken account of the
Government in the ordinary tax duplicates for the purposes of assessment and
collection of an additional tax.