Tax2 - Dec 10

7/21/2019 Tax2 - Dec 10

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Republic of the PhilippinesSUPREME COURTManila

EN BANC

G.R. No. L- !"# Octobe$ % & %#"'

(n the )atte$ of the testate estate of E)il Mau$ice Bach$ach& *ecease*. MAR+Mc,ONAL, BAC RAC & petitione$-appellee&

s.SOP (E SE(/ERT an* EL(SA EL(ANO//& opposito$s-appellants.

Ross& Selph& Ca$$ascoso an* 0an*a fo$ appellants.,el1a*o an* /lo$es fo$ appellee.

O2AETA& 0.3

(s a stoc4 *i i*en* f$uit o$ inco)e& 5hich belon1s to the usuf$uctua$6& o$ is it capitalo$ pa$t of the co$pus of the estate& 5hich pe$tains to the $e)ain*e$)an7 That is the8uestion $aise* in the appeal.

The *ecease* E. M. Bach$ach& 5ho left no fo$ce* hei$ e9cept his 5i*o5 Ma$6Mc,onal* Bach$ach& in his last 5ill an* testa)ent )a*e a$ious le1acies in cashan* 5ille* the $e)ain*e$ of his estate as follo5s3

Si9th3 (t is )6 5ill an* *o he$e5ith be8ueath an* *e ise to )6 belo e* 5ife Ma$6Mc,onal* Bach$ach fo$ life all the f$uits an* usuf$uct of the $e)ain*e$ of all )6estate afte$ pa6)ent of the le1acies& be8uests& an* 1ifts p$o i*e* fo$ abo e: an*she )a6 en;o6 sai* usuf$uct an* use o$ spen* such f$uits as she )a6 in an6 )anne$5ish.

The 5ill fu$the$ p$o i*e* that upon the *eath of Ma$6 Mc,onal* Bach$ach& one-halfof the all his estate <shall be *i i*e* sha$e an* sha$e ali4e b6 an* bet5een )6 le1alhei$s& to the e9clusion of )6 b$othe$s.<

The estate of E. M. Bach$ach& as o5ne$ of %'=&''' sha$es of stoc4 of the Ato4-Bi1>e*1e Minin1 Co.& (nc.& $ecei e* f$o) the latte$ "?&''' sha$es $ep$esentin1 "' pe$cent stoc4 *i i*en* on the sai* %'=&''' sha$es. On 0une %'& %#?=& Ma$6 Mc,onal*Bach$ach& as usuf$uctua$6 o$ life tenant of the estate& petitione* the lo5e$ cou$t toautho$i@e the Peoples Ban4 an* T$ust Co)pan6 as a*)inist$ato$ of the estate of E.M. Bach$ach& to he$ the sai* "?&''' sha$e of stoc4 *i i*en* b6 en*o$sin1 an**eli e$in1 to he$ the co$$espon*in1 ce$ti cate of stoc4& clai)in1 that sai* *i i*en*&althou1h pai* out in the fo$) of stoc4& is f$uit o$ inco)e an* the$efo$e belon1e* tohe$ as usuf$uctua$6 o$ life tenant. Sophie Siefe$t an* Elisa Eliano & le1al hei$s of the*ecease*& oppose* sai* petition on the 1$oun* that the stoc4 *i i*en* in 8uestion5as not inco)e but fo$)e* pa$t of the capital an* the$efo$e belon1e* not to the

7/21/2019 Tax2 - Dec 10


usuf$uctua$6 but to the $e)ain*e$)an. An* the6 ha e appeale* f$o) the o$*e$1$antin1 the petition an* o e$$ulin1 thei$ ob;ection.

>hile appellants a*)its that a cash *i i*en* is an inco)e& the6 conten* that astoc4 *i i*en* is not& but )e$el6 $ep$esents an a**ition to the in este* capital. Theso-calle* Massachusetts $ule& 5hich p$e ails in ce$tain ;u$is*ictions in the Unite*States& suppo$ts appellants contention . (t $e1a$*s cash *i i*en*s& ho5e e$ la$1e&as inco)e& an* stoc4 *i i*en*s& ho5e e$ )a*e& as capital. DMinot s. Paine& ##Mass.& %'%: #! A). ,ec.& '".F (t hol*s that a stoc4 *i i*en* is not in an6 t$ue sensean6 t$ue sense an6 *i i*en* at all since it in ol es no *i ision o$ se e$ance f$o) theco$po$ate assets of the *i i*en*: that it *oes not *ist$ibute p$ope$t6 but si)pl6*ilutes the sha$es as the6 e9iste* befo$e: an* that it ta4es nothin1 f$o) thep$ope$t6 of the co$po$ation& an* nothin1 to the inte$ests of the sha$ehol*e$s.

On the othe$ han*& so calle* Penns6l ania $ule& 5hich p$e ails in a$ious othe$ ;u$is*ictions in the Unite* States& suppo$ts appellee s contention. This $ule *ecla$esthat all ea$nin1s of the co$po$ation )a*e p$io$ to the *eath of the testato$stoc4hol*e$ belon1 to the co$pus of the estate& an* that all ea$nin1s& 5hen *ecla$e*as *i i*en*s in 5hate e$ fo$)& )a*e *u$in1 the lifeti)e of the usuf$uctua$6 o$ lifetenant. DEa$p s Appeal& = Pa.& !=.F

. . . (t is clea$ that testato$ intent the $e)ain*e$)en shoul* ha e onl6 the co$pus ofthe estate he left in t$ust& an* that all *i i*en*s shoul* 1o the life tenants. (t is t$uethat p$o ts $eali@e* a$e not *i i*en*s until *ecla$e* b6 the p$ope$ oHcials of theco$po$ation& but *ist$ibution of p$o ts& ho5e e$ )a*e& in *i i*en*s& an* the fo$) ofthe *ist$ibution is i))ate$ial. D(n $e Tho)pson s Estate& ! Pa.& =: %'" Atl. &

?.F

(n ite s. ite D# I6.& " : ' S. >.& =& ='F& the Cou$t of Appeals of Ientuc46&spea4in1 th$u its Chief 0ustice& sai*3

. . . >he$e a *i i*en*& althou1h *ecla$e* in stoc4& is base* upon the ea$nin1s of theco)pan6& it is in $ealit6& 5hethe$ calle* b6 one na)e o$ anothe$& the inco)e of thecapital in este* in it. (t is but a )o*e of *ist$ibutin1 the p$o t. (f it be not inco)e&5hat is it7 (f it is& then it is $i1htfull6 an* e8uitabl6 the p$ope$t6 of the life tenant. (fit be $eall6 p$o t& then he shoul* ha e it& 5hethe$ pai* in stoc4 o$ )one6. A stoc4*i i*en* p$ope$ is the issue of ne5 sha$es pai* fo$ b6 the t$ansfe$ of a su) e8ual tothei$ pa$ alue f$o) the p$o ts an* loss account to that $ep$esentin1 capital stoc4:an* $eall6 a co$po$ation has no $i1ht to a *i i*en*& eithe$ in cash o$ stoc4& e9ceptf$o) its ea$nin1s: an* a sin1ula$ state of case J it see)s to us& an un$easonableone J is p$esente* if the co)pan6& althou1h it $ests 5ith it 5hethe$ it 5ill *ecla$e a*i i*en*& can bin* the cou$ts as to the p$ope$ o5ne$ship of it& an* b6 the )o*e ofpa6)ent substitute its 5ill fo$ that of that of the testato$& an* fa o$ the life tenantso$ the $e)ain*e$-)en& as it )a6 *esi$e. (t cannot& in $eason& be consi*e$e* that thetestato$ conte)plate* such a $esult. The la5 $e1a$*s substance& an* not fo$)& an*such a $ule )i1ht $esult not onl6 in a iolation of the testato$ s intention& but it5oul* 1i e the po5e$ to the co$po$ation to be11a$ the life tenants& 5ho& in thiscase& a$e the 5ife an* chil*$en of the testato$& fo$ the bene t of the $e)ain*e$-)en&5ho )a6 pe$haps be un4no5n to the testato$& bein1 unbo$n 5hen the 5ill 5ase9ecute*. >e a$e un5illin1 to a*opt a $ule 5hich to us see)s so a$bit$a$6& an*

7/21/2019 Tax2 - Dec 10


*e oi* of $eason an* ;ustice. (f the *i i*en* be in fact a p$o t& althou1h *ecla$e* instoc4& it shoul* be hel* to be inco)e. (t has been so hel* in Penns6l ania an* )an6othe$ states& an* 5e thin4 it the co$$ect $ule. Ea$p s Appeal& = Pa. St. !=: Coo4&Stoc4s K S. sec. ""?. . . .

>e thin4 the Penns6l ania $ule is )o$e in acco$* 5ith ou$ statuto$6 la5s than theMassachusetts $ule. Un*e$ section %! of ou$ Co$po$ation La5& no co$po$ation )a6)a4e o$ *ecla$e an6 *i i*en* e9cept f$o) the su$plus p$o ts a$isin1 f$o) itsbusiness. An6 *i i*en*& the$efo$e& 5hethe$ cash o$ stoc4& $ep$esents su$plus p$o ts.A$ticle ? % of the Ci il Co*e p$o i*es that the usuf$uctua$6 shall be entitle* to$ecei e all the natu$al& in*ust$ial& an* ci il f$uits of the p$ope$t6 in usuf$uct. An*a$ticles ? ? an* ? " p$o i*e as follo5s3

ART. ? ?. Ci il f$uits a$e *ee)e* to acc$ue *a6 b6 *a6& an* belon1 to theusuf$uctua$6 in p$opo$tion to the ti)e the usuf$uct )a6 last.

ART. ? ". >hen a usuf$uct is c$eate* on the $i1ht to $ecei e an inco)e o$ pe$io*ical$e enue& eithe$ in )one6 o$ f$uits& o$ the inte$est on bon*s o$ secu$ities pa6able tobea$e$& each )atu$e* pa6)ent shall be consi*e$e* as the p$ocee*s o$ f$uits such$i1ht.

>hen it consists of the en;o6)ent of the bene ts a$isin1 f$o) an inte$est in anin*ust$ial o$ co))e$cial ente$p$ise& the p$o ts of 5hich a$e not *ist$ibute* at 9e*pe$io*s& such p$o ts shall ha e the sa)e consi*e$ation.la5phil.net

(n eithe$ case the6 shall be *ist$ibute* as ci il f$uits& an* shall be applie* inacco$*ance 5ith the $ules p$esc$ibe* b6 the ne9t p$ece*in1 a$ticle.

The %'=&''' sha$es of stoc4 a$e pa$t of the p$ope$t6 in usuf$uct. The "?&''' sha$esof stoc4 *i i*en* a$e ci il f$uits of the o$i1inal in est)ent. The6 $ep$esent p$o ts&an* the *eli e$6 of the ce$ti cate of stoc4 co e$in1 sai* *i i*en* is e8ui alent tothe pa6)ent of sai* p$o ts. Sai* sha$es )a6 be sol* in*epen*entl6 of the o$i1inalsha$es& ;ust as the o sp$in1 of a *o)estic ani)al )a6 be sol* in*epen*entl6 of its)othe$.

The o$*e$ appeale* f$o)& bein1 in acco$*ance 5ith the abo e-8uote* p$o isions ofthe Ci il Co*e& his he$eb6 aH$)e*& 5ith costs a1ainst the appellants.

Mo$an& C. 0.& Pa$as& /e$ia& Pablo& Ben1@on& Tuason& Monte)a6o$ an* Re6es& 00.&concu$.


EN BANC

G.R. No. ?= % p 0une '& %#?

7/21/2019 Tax2 - Dec 10


>(SE K CO.& (NC.& ET AL.& plainti s-appellants&s.

B(B(ANO L. MEER& Collecto$ of (nte$nal Re enue& *efen*ant-appellee.

Ross& Selph& Ca$$ascoso an* 0an*a fo$ appellants.OHce of the Solicito$ Gene$al fo$ appellee.

(LA,O& 0.3

This is an appeal b6 >ise K Co.& (nc. an* its co-plainti f$o) the ;u*1)ent of theCou$t of /i$st (nstance of Manila in ci il case No. "! '' of sai* cou$t& absol in1 the*efen*ant Collecto$ of (nte$nal Re enue f$o) the co)plaint 5ithout costs. Theco)plaint 5as fo$ $eco e$6 of ce$tain a)ounts the$ein speci e*& 5hich ha* beenpai* b6 sai* plainti s un*e$ 5$itten p$otest to sai* *efen*ant& 5ho ha* p$e iousl6assesse* sai* a)ounts a1ainst the $especti e plainti s b6 5a6 of *e cienc6 inco)eta9es fo$ the 6ea$ %# & as *etaile* un*e$ pa$a1$aph ! of *efen*ant s special*efense DReco$* of Appeal& pp. -%'F. Appellants )a*e ei1ht assi1n)ents of e$$o$&to 5it3

The t$ial cou$t e$$e* in n*in13

(. That the Manila >ine Me$chants& Lt*.& a on14on1 co$po$ation& 5as in li8ui*ationbe1innin1 0une %& %# & an* that all *i i*en*s *ecla$e* an* pai* the$eafte$ 5e$e*ist$ibutions of all its assets in co)plete li8ui*ation.

((. That all *ist$ibutions )a*e b6 the on14on1 co$po$ation afte$ 0une %& %# & 5e$esub;ect to both no$)al ta9 an* su$ta9.

(((. That inco)e $ecei e* b6 one co$po$ation f$o) anothe$ 5as ta9able un*e$ the(nco)e Ta9 La5& an* that >ise K Co.& (nc.& 5as ta9able on the *ist$ibution of itssha$e of the sa)e net p$o ts on 5hich the on14on1 Co)pan6 ha* al$ea*6 pai*Philippine ta9& *espite the clea$ p$o isions of section %' of the (nco)e Ta9 La5 thenin e ect.

( . That the non-$esi*ent in*i i*ual stoc4hol*e$ appellants 5e$e sub;ect to bothno$)al an* a**itional ta9 on the *ist$ibutions $ecei e* *espite the clea$ p$o isionsof section " DbF of the (nco)e Ta9 La5 then in e ect.

. That section " DaF of the (nco)e Ta9 La5 )a4es *ist$ibutions in li8ui*ation of afo$ei1n co$po$ation& *issolution p$ocee*in1s of 5hich 5e$e con*ucte* in a fo$ei1ncount$6& ta9able inco)e to a non-$esi*ent in*i i*ual stoc4hol*e$.

(. That section %## of the (nco)e Ta9 $e1ulations& p$o i*in1 that in a *ist$ibution b6a co$po$ation in co)plete li8ui*ation of its assets the 1ain $eali@e* b6 a stoc4hol*e$&5hethe$ in*i i*ual o$ co$po$ate& is ta9able as a *i i*en*& is ine ecti e.

((. That the *e cienc6 assess)ent 5as p$ope$l6 collecte*.

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(((. That the $efun*s clai)e* b6 plainti s 5e$e not in o$*e$& an* in $en*e$in1 ;u*1)ent absol in1 the Collecto$ of (nte$nal Re enue f$o) )a4in1 such $efun*s.

The facts ha e been stipulate* in 5$itin1& as 8uote* e$bati) in the *ecision of thet$ial cou$t thus3

(

That the alle1ations of pa$a1$aphs ( an* (( of the co)plaint a$e t$ue an* co$$ect.

((

That *u$in1 the 6ea$ %# & plainti s& e9cept M$. E.M.G. St$ic4lan* D5ho& as husban*of the plainti M$s. E.M.G. St$ic4lan*& is onl6 a no)inal pa$t6 he$einF& 5e$estoc4hol*e$s of Manila >ine Me$chants& Lt*.& a fo$ei1n co$po$ation *ul6 autho$i@e*to *o business in the Philippines.

(((

That on Ma6 & %# & the Boa$* of ,i$ecto$s of Manila >ine Me$chants& Lt*.&Dhe$einafte$ $efe$$e* to as the on14on1 Co)pan6F& $eco))en*e* to thestoc4hol*e$s of the co)pan6 that the6 a*opt the $esolutions necessa$6 to enablethe co)pan6 to sell its business an* assets to Manila >ine Me$chants& (nc.& aPhilippine co$po$ation fo$)e* on Ma6 & %# & Dhe$einafte$ $efe$$e* to as theManila Co)pan6F& fo$ the su) of P?''&''' Philippine cu$$enc6: that this sale 5as*ul6 autho$i@e* b6 the stoc4hol*e$s of the on14on1 Co)pan6 at a )eetin1 hel* on

0ul6 & %# : that the cont$act of sale bet5een the t5o co)panies 5as e9ecute*on the sa)e *ate& a cop6 of the cont$act bein1 attache* he$eto as Sche*ule <A<:an* that the nal $esolutions co)pletin1 the sai* sale an* t$ansfe$$in1 the businessan* assets of the on14on1 Co)pan6 to the Manila Co)pan6 5e$e a*opte* onAu1ust & %# & on 5hich *ate the Manila Co)pan6 5e$e a*opte* on Au1ust &%# & on 5hich *ate the Manila Co)pan6 pai* the on14on1 co)pan6 theP?''&''' pu$chase p$ice.

(

That pu$suant to a $esolution b6 its Boa$* of ,i$ecto$s pu$po$tin1 to *ecla$e a*i i*en*& the on14on1 Co)pan6 )a*e a *ist$ibution f$o) its ea$nin1s fo$ the 6ea$%# to its stoc4hol*e$s& plainti s $ecei in1 the follo5in13

,ecla$e* an* pai* 0une =& %#

>ise K Co.& (nc.

P &! .=

M$. 0./. MacG$e1o$

&""?.=!

7/21/2019 Tax2 - Dec 10


M$. N.C. MacG$e1o$

& !#.?=

M$. C.0. Laf$ent@

" #."%

M$s. E.M.G. St$ic4lan*

& !#.?=

M$s. M.0.G. Mullins

& !#.?=

P% &= '.!

That the on14on1 Co)pan6 has pai* Philippine inco)e ta9 on the enti$e ea$nin1sf$o) 5hich the sai* *ist$ibutions 5e$e pai*.

That afte$ *e*uctin1 the sai* *i i*en* of 0une =& %# & the su$plus of the on14on1Co)pan6 $esultin1 f$o) the acti e con*uct of its business 5as P ?&%= .% . That asa $esult of the sale of its business an* assets to the Manila Co)pan6& the su$plus ofthe on14on1 Co)pan6 5as inc$ease* to a total of P '&%%!."#.

That pu$suant to $esolutions of its Boa$* of ,i$ecto$s& an* of its sha$ehol*e$s&pu$po$tin1 to *ecla$e *i i*en*s& copies of 5hich a$e attache* he$eto as Sche*ules<B< an* <B-%<& the on14on1 Co)pan6 *ist$ibute* this su$plus to its stoc4hol*e$s&plainti s $ecei in1 the follo5in1 su)s on the follo5in1 *ates3

,ecla$e* 0ul6 & %#Pai*Au1ust ?& %#

,ecla$e* 0ul6 & %#Pai*Octobe$ =& %#

>ise K Co.& (nc.

P%% &="%.="

P &%#=. ?

7/21/2019 Tax2 - Dec 10


M$. 0./. MacG$e1o$

&==". '

%.?=

M$. N.C. MacG$e1o$

"&% .'

! =.?

M$. C.0. Laf$ent@

&="%.=!

%"%.!%

M$s. E.M.G. St$ic4lan*

"&% .'

! =.?

M$s. M.0.G. Mullins

"&% .'

! =.?

P !"&'''.''

P "&%%!."#

That Philippine inco)e ta9 ha* been pai* b6 the on14on1 Co)pan6 on the sai*su$plus f$o) 5hich the sai* *ist$ibutions 5e$e )a*e.

(

That on Au1ust %#& %# & at a special 1ene$al )eetin1 of the sha$ehol*e$s of theon14on1 Co)pan6& the stoc4hol*e$s b6 p$ope$ $esolution *i$ecte* that the

co)pan6 be olunta$il6 li8ui*ate* an* its capital *ist$ibute* a)on1 thestoc4hol*e$s: that the stoc4hol*e$s at such )eetin1 appointe* a li8ui*ato$ *ul6 pai*o the $e)ainin1 *ebts of the on14on1 Co)pan6 an* *ist$ibute* its capital a)on1the stoc4hol*e$s inclu*in1 plainti s: that the li8ui*ato$ *ul6 le* his accountin1 on

0anua$6 % & %# =& an* in acco$*ance 5ith the p$o isions of on14on1 La5& theon14on1 Co)pan6 5as *ul6 *issol e* at the e9pi$ation of th$ee )oths f$o) that

*ate.

((

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That plainti s *ul6 le* Philippine inco)e ta9 $etu$ns. That *efen*ant subse8uentl6)a*e the follo5in1 *e cienc6 assess)ents a1ainst plainti s3

>(SE K COMPAN+& (NC.

Net inco)e as pe$ $etu$n

P= &!?#.!

A**3 ,e*uctions *isallo5e* J Loss on sha$es ofpstoc4 in the Manila >ine Me$chants& Lt*.

p$esultin1 f$o) the li8ui*ation of sai* $)

??&"%".''

(nco)e not *ecla$e*3 Retu$n of capital Sha$e of su$plus

P"%&%=".''% & .==

Total li8ui*atin1 *i i*en*s $ecei e* Less alue of sha$es as pe$ boo4s

P% ?&#% .==#"& ''.''

P$o ts $eali@e* on sha$es of stoc4 in the Manila >ine Me$chants Lt*. $esultin1 f$o) the li8ui*ation of the sai* $)

P #& % .==

Acc$ue* inco)e ta9 as pe$ $etu$n

"& "=.#=

Total

P %!&! !."

,e*uct acc$ue* inco)e ta9

% & ! .?"

Net inco)e as pe$ in esti1ation

7/21/2019 Tax2 - Dec 10


'?& ?.'=

! pe$ cent No$)al ta9

% & ! .?"

Less a)ount al$ea*6 pai*

!& ' .#

Balance still *ue an* collectible

&'' .?

0. /. MACGREGOR


P? &? #.??

,e*uct3 O$*ina$6 *i i*en*s

!& ' .#

Net inco)e as pe$ in esti1ation sub;ect to no$)al ta93 Retu$n of capital Sha$e of su$plus

P% &' & "?%&% %."

Total li8ui*atin1 *i i*en*s $ecei e*

P"=& ' .

Less cost of sha$es

% &' . "

P$o t $eali@e* on sha$es of stoc4 in the Manila >ine Me$chants.& Lt*. Resultin1 f$o) the li8ui*ation of sai* $)

P?%&% %."

No$)al ta9 at pe$ cent

%& ".%"

7/21/2019 Tax2 - Dec 10


A**itional ta9 *ue

"?#."#

Total no$)al an* a**itional ta9es

%& =?. ?

Less3 A)ount al$ea*6 pai*

"?#."#


%& ".%"

N. C. MACGREGOR


P??&% .'!


"&## .%%

Net inco)e as pe$ in esti1ation sub;ect to no$)al ta93

Retu$n of capital Sha$e of su$plus

P%"& #!. "=&%=?.#"

Total li8ui*atin1 *i i*en*s $ecei e*. Less cost of sha$es

P" &#=%. '%"& #!. "

P$o t $eali@e* on sha$es of stoc4 in the Manila >ine Me$chants& Lt*. Resultin1 f$o) the li8ui*ation of the sai* $)

P =&%=?.#"


7/21/2019 Tax2 - Dec 10


%&%?".""

A**itional ta9 *ue

?= ."?


%&! #.'#


?= .""


%&%?"."?

C. 0. LA/RENT2


P#& =.%=


%& ?". '



P &" '.'' =&" .#=

Total li8ui*atin1 *i i*en*s $ecei e* Less cost of sha$es

P% &'! .#= &" '.''


P=&" .#=

pe$ cent no$)al ta9 *ue an* collectible

7/21/2019 Tax2 - Dec 10


"".##

MRS. E. M. G. STR(CILAN,


P??&'" .'!


"&= .%%



P%"& #!. "=&%=?.#"


P" &#=%. ' %"& #!. "


P =&%=?.#"


%&%?".""

A**itional ta9 *ue

?=%.%?


%&! !.!#


%&%?"."?

MRS. M. 0. G. MULL(NS

7/21/2019 Tax2 - Dec 10


Net inco)e pe$ $etu$n

P??&'" .'!


"&= .%%



P%"& #!. "=&%=?.#"


P" &#=%. '%"& #!. "


P =&%=?.#"


%&%?".""

A**itional ta9 *ue

?=%.%?


%&! !.!#


?=%.%"


P%&%?"."?

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(((

That sai* plainti s *ul6 pai* the sai* a)ounts *e)an*e* b6 *efen*ant un*e$5$itten p$otest& 5hich 5as o e$$ule* in *ue cou$se: that the plainti s ha e since 0ul6%& %# # $e8ueste* f$o) *efen*ant a $efun* of the sai* a)ounts 5hich *efen*anthas $efuse* an* still $efuses to $efun*.

(

That this stipulation is e8uall6 the 5o$4 of both pa$ties an* shall be fai$l6inte$p$ete* to 1i e e ect to thei$ intention that this case shall be *eci*e* solel6upon points of la5.

The pa$ties inco$po$ate the Co$po$ation La5 an* Co)panies Act of on14on1 an*the applicable *ecisions )a*e the$eun*e$& into this stipulation b6 $efe$ence& an*eithe$ pa$t6 )a6 at an6 sta1e in the p$ocee*in1s in this case cite applicablesections of the la5 an* the autho$ities *eci*e* the$eun*e$ as thou1h the sa)e ha*been *ul6 p$o e* in e i*ence.

(

That the pa$ties he$eto $ese$ e the $i1ht to sub)it othe$ an* fu$the$ e i*ence at thet$ial of this case. DReco$* on Appeal& pp. %#- !.F

%. The $st assi1n)ent of e$$o$. J Appellants )aintain that the a)ounts $ecei e*b6 the) an* on 5hich the ta9es in 8uestion 5e$e assesse* an* collecte* 5e$eo$*ina$6 *i i*en*s: 5hile upon the othe$ han*& appellee conten*s that the6 5e$eli8ui*atin1 *i i*en*s. (f the $st p$oposition is co$$ect& this assi1n)ent 5oul* be5ell-ta4en& othe$5ise& the *ecision of the cou$t upon the point )ust be uphel*.

(t appea$s that on Ma6 & %# & the Boa$* of ,i$ecto$s of the Manila >ineMe$chants& Lt*. Dhe$eafte$ calle* the on14on1 Co.F& $eco))en*e* to thestoc4hol*e$s of sai* co)pan6 <that the Co)pan6 shoul* be 5oun* up olunta$il6 b6the )e)be$s an* the business sol* as a 1oin1 conce$n to a ne5 co)pan6inco$po$ate* un*e$ the la5s of the Philippine (slan*s un*e$ the st6le of <The Manila>ine Me$chants& (nc.< DAnne9 A *efen*ant s ans5e$& Reco$* on Appeal& p. % F& an*that the6 a*opt the $esolutions necessa$6 to enable the co)pan6 to sell its businessan* assets to sai* ne5 co)pan6 Dhe$eafte$ calle* the Manila Co)pan6F& o$1ani@e*on that sa)e *ate& fo$ the p$ice of P?''&'''& Philippine cu$$enc6: that the sale 5as*ul6 autho$i@e* b6 the stoc4hol*e$s of the on14on1 Co. at a )eetin1 hel* on 0ul6

& %# : an* that the cont$act of sale bet5een the t5o co)panies 5as e9ecute*on the sa)e *a6& as appea$s f$o) the cop6 of the cont$act& Sche*ule A of theStipulation of /acts Dpa$. (((& Stipulation of /acts& Reco$* on Appeal& pp. %#- 'F. (t 5illbe note* that the Boa$* of ,i$ecto$s of the on14on1 Co.& in $eco))en*in1 thesale& speci call6 )entione* <a ne5 Co)pan6 inco$po$ate* un*e$ the la5s of thePhilippine (slan*s un*e$ the st6le of <The Manila >ine Me$chants& (nc.< as thepu$chase$& 5hich fact sho5s that at the ti)e of the $eco))en*ation the ManilaCo)pan6 ha* al$ea*6 been fo$)e*& althou1h on the e$6 sa)e *a6: an* this an*

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the fu$the$ fact that it 5as $eall6 the latte$ co$po$ation that beca)e the pu$chase$shoul* clea$l6 point to the conclusion that the Manila Co)pan6 5as o$1ani@e* fo$the e9p$ess pu$pose of succee*in1 the on14on1 Co. The stipulate* facts 5oul*a*)it of no sane$ inte$p$etation.

>hile it is t$ue that the cont$act of sale 5as si1ne* on 0ul6 & %# & it contains inits pa$a1$aph ? of the e9p$ess p$o ision that the t$ansfe$ <5ill ta4e e ect as on an*f$o) the $st *a6 of 0une& One thousan* nine hun*$e* an* thi$t6-se en& an* untilco)pletion the$eof& the Co)pan6 shall stan* possesse* of the p$ope$t6 he$eb6a1$ee* to be t$ansfe$$e* an* shall ca$$6 on its business in t$ust fo$ the Co$po$ation<DSche*ule A of Stipulation of /acts& Reco$* on Appeal& p. %"F. <The Co)pan6< 5asthe on14on1 Co)pan6 an* <the Co$po$ation< 5as the Manila Co)pan6. /o$ <theCo)pan6< to ca$$6 on business in t$ust fo$ the <Co$po$ation&< it 5as necessa$6 fo$the latte$ to be the o5ne$ of the business. (t is plain that the pa$ties consi*e$e* thesale as )a*e as on an* f$o) 0une %& %# J fo$ the pu$poses of sai* sale an*t$ansfe$& both pa$ties a1$ee* that the *ee* of 0ul6 & %# & 5as to $et$oact to the

$st *a6 of the p$ece*in1 )onth.

The cite* p$o ision coul* not ha e se$ e* an6 othe$ pu$pose than to consi*e$ thesale as )a*e as of 0une %& %# . (f it ha* not been fo$ this pu$pose& if the intentionha* been that the sale 5as to be e ecti e upon the *ate of the 5$itten cont$act o$subse8uentl6& sai* p$o ision 5oul* ce$tainl6 ne e$ ha e been 5$itten& fo$ ho5 coul*the t$ansfe$ o$ sale ta4e e ect as of 0une %& %# & if it 5e$e to be consi*e$e* as)a*e at a late$ *ate7

The $st *ist$ibution )a*e afte$ 0une %& %# & of 5hat plainti s call o$*ina$6*i i*en*s but 5hat *efen*ant *eno)inates li8ui*atin1 *i i*en*s 5as *ecla$e* an*pai* on 0une =& %# DStipulation& Pa$a1$aph ( & Reco$* on Appeal& p. 'F. (t 5ill be$ecalle* that the $eco))en*ation of the Boa$* of ,i$ecto$s of the on14on1Co)pan6& at thei$ )eetin1 on Ma6 & %# & 5as $st of all <that the co)pan6shoul* be 5oun* up olunta$il6 b6 the )e)be$s<DReco$* on Appeal& p.% F& an* inpu$suance of that pu$pose& it 5as fu$the$ $eco))en*e* that the Co)pan6 sbusiness be sol* as a 1oin1 conce$n to the Manila Co)pan6 Dibi*F. Co)pl6in1 5iththe Co)panies O$*inance %# fo$ co)panies $e1iste$e* in on14on1 fo$ the

olunta$6 5in*in1 up b6 )e)be$s& a ,ecla$ation of Sol enc6 5as *$a5n up *ul6si1ne* befo$e the B$itish Consul-Gene$al in Manila b6 the sa)e *i$ecto$s& an* sai**ecla$ation 5as $etu$ne* to on14on1 fo$ lin1 5ith the Re1ist$a$ of Co)paniesDibi*.F Both $eco))en*ations 5e$e in *ue cou$se app$o e* an* $ati e*. The late$e9ecution of the fo$)al *ee* of sale an* the successi e *ist$ibutions of the a)ountsin 8uestion a)on1 the stoc4hol*e$s of the on14on1 Co)pan6 5e$e ob iousl6 othe$steps in its co)plete li8ui*ation. An* the6 lea e no $oo) fo$ *oubt in the )in* ofthe cou$t that sai* *ist$ibutions 5e$e not in the o$*ina$6 cou$se of business an* 5ithintent to )aintain the co$po$ation as a 1oin1 conce$n J in 5hich case the6 5oul*ha e been *ist$ibutions of o$*ina$6 *i i*en*s J but afte$ the li8ui*ation of thebusiness ha* been *eci*e* upon& 5hich )a4es the) pa6)ents fo$ the su$$en*e$an* $elin8uish)ent of the stoc4hol*e$s inte$est in the co$po$ation& o$ so-calle*li8ui*atin1 *i i*en*s.

Mo$e than 5ith the *ist$ibution of 0une =& %# & is this t$ue 5ith those *ecla$e* on 0ul6 & %# & an* pai* on Au1ust ? an* Octobe$ =& %# & $especti el6 DStipulation

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of /acts& pa$. "& Reco$* on Appeal& p. %F. The *ist$ibutions thus *ecla$e* on 0ul6 &%# & an* pai* on Au1ust ? an* Octobe$ =& %# & 5e$e f$o) the su$plus of the

on14on1 Co)pan6 $esultin1 f$o) the acti e con*uct of its business an* a)ountin1to P ?&%= .% & 5hich su$plus 5as au1)ente* to a total of P '&%%!."# as a $esult of the sale of its business an* assets to the Manila Co)pan6 Dibi*.F. (n both Sche*ulesB an* B-% of the Stipulation of /acts DReco$* on appeal& pp. %!-%=F& bein1 )inutes of *i$ecto$s )eetin1s of the on14on1 Co.& 5he$e autho$i@ation an* inst$uction 5e$e1i en to *ecla$e an* pa6 in the fo$) of <*i i*en*s< to the sha$ehol*e$s the a)ountsin 8uestion& it 5as speci call6 p$o i*e* that the su$plus to be so *ist$ibute* be that$esultin1 afte$ p$o i*in1 fo$ $etu$n of capital an* necessa$6 o$ a$ious e9penses& assho5n in the balance sheet p$epa$e* as of 0une %& %# & an* in the $econst$ucte*balance sheet of the sa)e *ate p$esente* b6 the co)pan6 s au*ito$s& it ha in1been $esol e* in Sche*ule B-% that <an6 balance $e)ainin1 to be *ist$ibute* 5hen

nal li8ui*ato$ s account has been $en*e$e* an* pai*< DReco$* on Appeal& p. %=:e)phasis supplie*F. (t thus beco)es )o$e e i*ent that those *ist$ibutions 5e$e tobe )a*e in the cou$se o$ as a $esult of the on14on1 Co)pan6 s li8ui*ation an*that sai* li8ui*ation 5as to be co)plete an* nal. An* althou1h the a$ious$esolutions abo e-)entione* spea4 of *ist$ibutions of *i i*en*s 5hen $efe$$in1 tothose al$ea*6 allu*e* to& <a *ist$ibution *oes not necessa$il6 beco)e a *i i*en* b6$eason of the fact that it is calle* a *i i*en* b6 the *ist$ibutin1 co$po$ation.<D ol)es /e*e$al Ta9es& !th e*ition& ?.F

The o$*ina$6 connotation of li8ui*atin1 *i i*en* in ol es the *ist$ibution of assetsb6 a co$po$ation to its stoc4hol*e$s upon *issolution. DIlein& /e*e$al (nco)e

Ta9ation& " - "?.F

But it is conten*e* b6 plainti s that as of Au1ust ?& %# & the on14on1 Co)pan6<ha* ta4en no steps to5a$* *issolution o$ li8ui*ation an* still $etaine* on han*li8ui* assets in e9cess of its capitali@ation.< The6 also asse$t that it 5as onl6 onAu1ust %#& %# & that sai* co)pan6 too4 the $st co$po$ate steps to5a$* li8ui*ationDAppellant s B$ief& pp. #-%'F. The fact& ho5e e$& is that since 0ul6 & %# & 5hen thefo$)al *ee* of sale of all the p$ope$ties& assets& an* business of the on14on1Co)pan6 to the Manila Co)pan6 5as )a*e& it 5as e9p$essl6 stipulate* that thesale o$ t$ansfe$ shall ta4e e ect as of 0une %& %# . As al$ea*6 in*icate*& thet$ansfe$ of 5hat 5as sol*& li4e the sale itself& 5as& b6 the )utual a1$ee)ent of thepa$ties& consi*e$e* as )a*e on an* f$o) that *ate& an* that& if the$eafte$ an* until

nal co)pletion of the t$ansfe$& the on14on1 Co)pan6 continue* to $un thebusiness& it *i* so in t$ust fo$ the ne5 o5ne$& the Manila Co)pan6. (n the case ofCanal-Co))e$cial T. K S. B4. s. Co)) $ D! /e*. * & !%#& ! 'F it 5as hel* that3

. . . The *ete$)inin1 ele)ent the$efo$e is 5hethe$ the *ist$ibution 5as in theo$*ina$6 cou$se of business an* 5ith intent to )aintain the co$po$ation as a 1oin1conce$n& o$ afte$ *eci*in1 to 8uit 5ith intent to li8ui*ate the business. P$ocee*in1sactuall6 be1un to *issol e the co$po$ation o$ fo$)al action ta4en to li8ui*ate it a$ebut e i*entia$6 an* not in*ispensable. Tootle s. Co))issione$ DC.C.A. "= /. *&" !.F The fact that the *ist$ibution is 5holl6 f$o) su$plus an* not f$o) capital& an*the$efo$e la5ful as a *i i*en* is onl6 e i*ence. (n ell)ich s. ell)an& an* Tootle

s. Co))issione$& sup$a& the *ist$ibution 5as 5holl6 f$o) p$o ts 6et hel* to be onein li8ui*ation . . . DE)phasis Supplie*.F

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(n the case at ba$& 5hen in the *ee* of 0ul6 & %# & b6 autho$it6 of itsstoc4hol*e$s& the on14on1 Co)pan6 th$u its autho$i@e* $ep$esentati e *ecla$e*an* a1$ee* that the afo$esai* sale an* t$ansfe$ shall ta4e e ect as of 0une %& %# &an* *ist$ibution f$o) its assets to those sa)e stoc4hol*e$s )a*e afte$ 0une %& %# &altho befo$e 0ul6 & %# & )ust ha e been consi*e$e* b6 the) as li8ui*atin1*i i*en*s: fo$ ho5 coul* the6 consistentl6 *ee) all the business an* assets of theco$po$ation sol* as of 0une %& %# & an* still sa6 that sai* co$po$ation& as a 1oin1conce$n& *ist$ibute* o$*ina$6 *i i*en*s to the) the$eafte$7

(n ol)b6 Co$po$ation s. Co)) $ D= /e*. * & "?=-""'F& the cou$t sai*3

. . . the fact that the *ist$ibutions 5e$e calle* <*i i*en*s< an* 5e$e )a*e& in pa$t&f$o) ea$nin1s an* p$o ts& an* that so)e of the) 5e$e )a*e befo$e li8ui*ation o$*issolution p$ocee*in1s 5e$e co))ence*& is not cont$ollin1. . . . The *ete$)inin1ele)ent is 5hethe$ the *ist$ibutions 5e$e in the o$*ina$6 cou$se of business an*5ith intent to )aintain the co$po$ation as a 1oin1 conce$n& o$ afte$ *eci*in1 to 8uitan* 5ith intent to li8ui*ate the business . . .. DE)phasis supplie*.F

The *i$ecto$s o$ $ep$esentati es of the on14on1 Co)pan6 o$ the Manila Co)pan6&o$ both& coul* of cou$se not con e$t into o$*ina$6 *i i*en*s 5hat in la5 an* in$ealit6 5e$e not such. As aptl6 state* b6 Chief 0ustice Sha5 in Co)). s. unt D =A). ,ec.& "?- ""F&

The la5 is not to be hoo*5in4e* b6 colo$able p$etenses. (t loo4s at t$uth an* $ealit6th$ou1h 5hate e$ *is1uise the6 )a6 assu)e.

The a)ounts thus *ist$ibute* a)on1 the plainti s 5e$e not in the natu$e of a$ecu$$in1 $etu$n on stoc4 J in fact& the6 su$$en*e$e* an* $elin8uishe* thei$ stoc4 in$etu$n fo$ sai* *ist$ibutions& thus ceasin1 to be stoc4hol*e$s of the on14on1Co)pan6& 5hich in tu$n cease* to e9ist in its o5n $i1ht as a 1oin1 conce$n *u$in1 its)o$e o$ less b$ief a*)inist$ation of the business as t$ustee fo$ the Manila Co)pan6&an* nall6 *isappea$e* e en as such t$ustee.

The *istinction bet5een a *ist$ibution in li8ui*ation an* an o$*ina$6 *i i*en* isfactual: the $esult in each case *epen*in1 on the pa$ticula$ ci$cu)stances of thecase an* the intent of the pa$ties. (f the *ist$ibution is in the natu$e of a $ecu$$in1$etu$n on stoc4 it is an o$*ina$6 *i i*en*. o5e e$& if the co$po$ation is $eall65in*in1 up its business o$ $ecapitali@in1 an* na$$o5in1 its acti ities& the *ist$ibution)a6 p$ope$l6 be t$eate* as in co)plete o$ pa$tial li8ui*ation an* as pa6)ent b6 theco$po$ation to the stoc4hol*e$ fo$ his stoc4. The co$po$ation is& in the latte$instances& 5ipin1 out all pa$ts of the stoc4hol*e$s inte$est in the co)pan6 . . ..DMont1o)e$6& /e*e$al (nco)e Ta9 an*boo4 %# =-%# # & "=: e)phasis supplie*.F

(t is ou$ consi*e$e* opinion that 5e a$e not *ealin1 he$e 5ith <the le1al $i1ht of ata9pa6e$ to *ec$ease the a)ount of 5hat othe$5ise 5ill be his ta9es& o$ alto1ethe$a oi* the)& b6 )eans 5hich the la5 pe$)its< DSt. Louis Union Co. s. U.S.& = /e*.

* & !%F& but 5ith a situation 5he$e 5e ha e to appl6 in fa o$ of the 1o e$n)entthe p$inciple that the <liabilit6 fo$ ta9es cannot be e a*e* b6 a t$ansactionconstitutin1 a colo$able subte$fu1e< D!% C.0.& % F& it bein1 clea$ that the

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*ist$ibutions un*e$ consi*e$ation 5e$e not o$*ina$6 *i i*en*s an* 5e$e ta9able inthe )anne$& fo$) an* a)ounts *ec$ee* b6 the cou$t belo5.

. The secon* assi1n)ent of e$$o$. J (n *isposin1 of the $st assi1n)ent of e$$o$&5e hel* that the *ist$ibutions in the instant case 5e$e not o$*ina$6 *i i*en*s butpa6)ents fo$ su$$en*e$e* o$ $elin8uishe* stoc4 in a co$po$ation in co)pleteli8ui*ation& so)eti)es calle* li8ui*atin1 *i i*en*s. The 8uestion is 5hethe$ sucha)ounts 5e$e ta9able inco)e. The (nco)e Ta9 La5& Act No. = section " DaF& asa)en*e* b6 section ? of Act. No. !%& inte$ alia stipulate*3

>he$e a co$po$ation& pa$tne$ship& association& ;oint-account& o$ insu$ance co)pan6*ist$ibutes all of its assets in co)plete li8ui*ation o$ *issolution& the 1ain $eali@e* o$loss sustaine* b6 the stoc4hol*e$& 5hethe$ in*i i*ual o$ co$po$ation& is a ta9ableinco)e o$ a *e*uctible loss as the case )a6 be. DE)phasis supplie*.F

Pa$tial sou$ce of the fo$e1oin1 p$o ision 5as section '% DcF of the U.S. Re enue Actof %#%=& app$o e* /eb$ua$6 ?& %#%#& p$o i*in13

A)ounts *ist$ibute* in the li8ui*ation of a co$po$ation shall be t$eate* as pa6)entsin e9chan1e fo$ the stoc4 o$ sha$e& an* an6 1ain o$ p$o t $eali@e* the$eb6 shall beta9e* to the *ist$ibutee as othe$ 1ains o$ p$o ts.

(t is a fa)ilia$ $ule of statuto$6 const$uction that the ;u*icial const$uction attache*to the sou$ces of statutes a*opte* in a ;u$is*iction a$e of autho$itati e alue in theinte$p$etation of such local la5s. The Sup$e)e Cou$t of the Unite* States has ha*occasion to const$ue ce$tain pe$tinent pa$ts of the /e*e$al Re enue Act abo e-)entione* on /eb$ua$6 '& %# =& 5hen it *eci*e* the case of ell)ich s. ell)anD ! U.S.& : La5. e*.& "??F. The case in ol e* the $eco e$6 of a**itionalinco)e ta9es assesse* a1ainst the plainti s un*e$ p$otest. An* its *ete$)inationhin1e* a$oun* the const$uction of pa$ts of sai* act afte$ 5hich those of ou$ o5n la5no5 un*e$ *iscussion 5e$e patte$ne*. 0ustice Sanfo$* sai*3

The 8uestion he$e is 5hethe$ the 1ains $eali@e* b6 stoc4hol*e$s f$o) the a)ounts*ist$ibute* in the li8ui*ation of the assets of a *issol e* co$po$ation& out of itsea$nin1s o$ p$o ts accu)ulate* since /eb$ua$6 =& %#% & 5e$e ta9able to the) asothe$ <1ains o$ p$o ts<& o$ 5hethe$ the a)ounts so *ist$ibute* 5e$e <*i i*en*s<e9e)pt f$o) the no$)al ta9.

Section '% DaF of the act *e ne* the te$) <*i i*en*< as <an6 *ist$ibution )a*e b6a co$po$ation . . . to its sha$ehol*e$s . . . 5hethe$ in cash o$ in othe$ p$ope$t6 .. outof its ea$nin1s o$ p$o ts accu)ulate* since /eb$ua$6 =& %#% . . ..< Section '% DcFp$o i*e* that <a)ounts *ist$ibute* in the li8ui*ation of a co$po$ation shall bet$eate* as pa6)ents in e9chan1e fo$ stoc4 o$ sha$es& an* an6 1ain o$ p$o t $eali@e*the$eb6 shall be ta9e* to the *ist$ibutee as othe$ 1ains o$ p$o ts.<

Ou$ la5 at the ti)e of the t$ansactions in 8uestion& in p$o i*in1 that 5he$e aco$po$ation& etc. *ist$ibutes all its assets in co)plete li8ui*ation o$ *issolution& the1ain $eali@e* o$ loss sustaine* b6 the stoc4hol*e$ is a ta9able inco)e o$ a*e*uctible loss as the case )a6 be& in e ect t$eate* such *ist$ibutions as pa6)entsin e9chan1e fo$ the stoc4 o$ sha$e. Thus& in )a4in1 the *e cienc6 assess)ents

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un*e$ consi*e$ation& the Collecto$& a)on1 othe$ ite)s& )a*e p$ope$ *e*uction ofthe < alue of sha$es< o$ <cost of sha$es< in the case of each in*i i*ual plainti &assessin1 the ta9 onl6 on the $esultin1 <p$o t $eali@e*< DStipulation& pa$. ((& Reco$*on Appeal& pp. - "F: an* of cou$se in case the alue o$ cost of the sha$es shoul*e9cee* the *ist$ibution $ecei e* b6 the stoc4hol*e$& the $esultin1 *i e$ence 5ill bet$eate* as a <*e*uctible loss.<

(n the sa)e case the Sup$e)e Cou$t of the Unite* States )a*e the follo5in18uotation& 5hich is he$e $ele ant& f$o) T$easu$6 Re1ulations ?"& a$ticle %"?=3

. . . So-calle* li8ui*ation o$ *issolution *i i*en*s a$e not *i i*en*s 5ithin the)eanin1 of the statute& an* a)ounts so *ist$ibute*& 5hethe$ o$ not inclu*in1 an6su$plus ea$ne* since /eb$ua$6 =& %#% & a$e to be $e1a$*e* as pa6)ents fo$ thestoc4 of the *issol e* co$po$ation. An6 e9cess so $ecei e* o e$ the cost of his stoc4to the stoc4hol*e$& o$ o e$ its fai$ )a$4et alue as of Ma$ch %& %#% & if ac8ui$e*p$io$ the$eto& is a ta9able p$o t. A *ist$ibution in li8ui*ation of the assets an*business of a co$po$ation& 5hich is a $etu$n to the stoc4hol*e$s of the alue of hisstoc4 upon a su$$en*e$ of his inte$est in the co$po$ation& is *istin1uishable f$o) a*i i*en* pai* b6 a 1oin1 co$po$ation out of cu$$ent ea$nin1s o$ accu)ulate* su$plus5hen *ecla$e* b6 the *i$ecto$s in thei$ *isc$etion& 5hich is in the natu$e of a$ecu$$ent $etu$n upon the stoc4. D La5. e*.& "?!.F

The (nco)e Ta9 La5 of the Philippines in fo$ce at the ti)e *e ne* the te$)<*i i*en*< in section " DaF& as a)en*e*& as <an6 *ist$ibution )a*e b6 aco$po$ation . . . out of its ea$nin1s o$ p$o ts accu)ulate* since Ma$ch %& %#% & an*pa6able to its sha$ehol*e$s 5hethe$ in cash o$ othe$ p$ope$t6.< This *e nition issubstantiall6 the sa)e as that 1i en to the sa)e te$) b6 the U.S. Re enue Act of%#%= 8uote* b6 0ustice Sanfo$* in the passa1e abo e inse$te*.

Plainti s conten* that *efen*ant s position 5oul* $esult in *ouble ta9ation. A si)ila$contention has been a* e$sel6 *ispose* of a1ainst the ta9pa6e$ in the ell)ichcase in these 5o$*s3

The 1ains $eali@e* b6 the stoc4hol*e$s f$o) the *ist$ibution of the assets inli8ui*ation 5e$e sub;ect to the no$)al ta9 in li4e )anne$ as if the6 ha* sol* thei$stoc4 to thi$* pe$sons. The ob;ection that this $esults in *ouble ta9ation of theaccu)ulate* ea$nin1s an* p$o ts is no )o$e a ailable in the one case than it 5oul*ha e been in the othe$. See Me$chants Loan K T. Co. s. S)ietan4i& "" U.S.& "'#:!" La5. e*.& "%: %" A.L.R.& % '": ?% Sup. Ct. Rep.& =!: Goo*$ich s. E*5a$*s& ""U.S. " : !" La5. e*.& "=: ?% Sup. Ct. Rep.& #'. >hen& as he$e& Con1$ess clea$l6e9p$esse* its intention& the statute )ust be sustaine* e en thou1h *ouble ta9ation$esults. See Patton s. B$a*6 & %=? U.S.& !'=: ?! La5 e*.& % : Sup. Ct. Rep.& ?# :C$ea) of >heat Co. s. G$an* /o$4s Count6& " U.S.& "& ': !? La5. e*.& # %&# ?: ?' Sup. Ct. Rep.& ""=. D ell)ich s. ell)an& sup$a: La5. e*.& "? .F

(t shoul* be bo$ne in )in* that plainti s $ecei e* the *ist$ibutions in 8uestion ine9chan1e fo$ the su$$en*e$ an* $elin8uish)ent b6 the) of thei$ stoc4 in the

on14on1 Co)pan6 5hich 5as *issol e* an* in p$ocess of co)plete li8ui*ation. That )one6 in the han*s of the co$po$ation fo$)e* a pa$t of its inco)e an* 5asp$ope$l6 ta9able to it un*e$ the then e9istin1 (nco)e Ta9 La5. >hen the co$po$ation

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5as *issol e* an* in p$ocess of co)plete li8ui*ation an* its sha$ehol*e$ssu$$en*e$e* thei$ stoc4 to it an* it pai* the su)s in 8uestion to the) in e9chan1e& at$ansaction too4 place& 5hich 5as no *i e$ent in its essence f$o) a sale of the sa)estoc4 to a thi$* pa$t6 5ho pai* the$efo$. (n eithe$ case the sha$ehol*e$ 5ho $ecei e*the consi*e$ation fo$ the stoc4 ea$ne* that )uch )one6 as inco)e of his o5n&5hich a1ain 5as p$ope$l6 ta9able to hi) un*e$ the sa)e (nco)e Ta9 La5. (n thecase of the sale to a thi$* pe$son& it is not pe$cei e* ho5 the ob;ection of *oubleta9ation coul* ha e been successfull6 $aise*. Neithe$ can 5e concei e ho5 it coul*be a ailable 5he$e& as in this case& the stoc4 5as t$ansfe$$e* bac4 to the *issol e*co$po$ation.

. The thi$* assi1n)ent of e$$o$. J (n ie5 of 5hat has been sai* in ou$consi*e$ation of the secon* assi1n)ent of e$$o$& the thi$* can be b$ie 6 *ispose* of.

a in1 hel* that the *ist$ibutions in ol e* he$ein 5e$e not o$*ina$6 *i i*en*s butpa6)ents fo$ stoc4 su$$en*e$e* an* $elin8uishe* b6 the sha$ehol*e$s to the*issol e* co$po$ation& o$ so-calle* li8ui*atin1 *i i*en*s& 5e ha e the $oa* clea$ to*ecla$in1 that un*e$ section " DaF of the fo$)e$ (nco)e Ta9 La5& as a)en*e*& sai**ist$ibutions 5e$e ta9able ali4e to >ise an* Co.& (nc. an* to the othe$ plainti s. >ehol* that both the p$o iso of section %' DaF of sai* (nco)e Ta9 La5 an* section %#=of Re1ulations No. =% $efe$ to o$*ina$6 *i i*en*s& not to *ist$ibutions )a*e inco)plete li8ui*ation o$ *issolution of a co$po$ation 5hich $esult in the $eali@ation ofa 1ain as speci call6 conte)plate* in section " DaF of the sa)e la5& as a)en*e*&5hich as afo$esai* e9p$essl6 p$o i*es fo$ the ta9abilit6 of such 1ain as inco)e&5hethe$ the stoc4hol*e$ happens to be an in*i i*ual o$ a co$po$ation. B6 analo16&5e can cite the follo5in1 a**itional passa1es f$o) the ell)ich case3

The cont$ollin1 8uestion is 5hethe$ the a)ounts *ist$ibute* to the stoc4hol*e$s outof the ea$nin1s an* p$o ts accu)ulate* b6 the co$po$ation since /eb$ua$6 =& %#% &5e$e to be t$eate* un*e$ section '% DaF as <*i i*en*s&< 5hich 5e$e e9e)pt f$o)the no$)al ta9: o$ un*e$ section '% DcF as pa6)ents )a*e b6 the co$po$ation ine9chan1e fo$ its stoc4& 5hich 5e$e ta9able <as othe$ 1ains o$ p$o ts.

(t is t$ue that if section '% DaF stoo* alone its b$oa* *e nition of the te$)<*i i*en*< 5oul* appa$entl6 inclu*e *ist$ibutions )a*e to stoc4hol*e$s in theli8ui*ation of a co$po$ation J althou1h this te$)& as 1ene$all6 un*e$stoo* an* use*&$efe$s to the $ecu$$ent $etu$n upon stoc4 pai* to stoc4hol*e$s b6 a 1oin1 co$po$ationin the o$*ina$6 cou$se of business& 5hich *oes not $e*uce thei$ stoc4hol*in1s an*lea es the) in a position to en;o6 futu$e $etu$ns upon the sa)e stoc4. DSee L6nch

s. o$nb6& ? U.S.& #& ??- ?!: an* Lan1sta s. Lucas ,. C. & # /e*. * & !#%&!#?.F

o5e e$& 5hen section '% DaF an* section '% DcF a$e $ea* to1ethe$& un*e$ thelon1-establishe* $ule that the intention of the la5)a4e$s is to be *e*uce* f$o) a

ie5 of e e$6 )ate$ial pa$t of the statute DIohlsaat s. Mu$ph6& #! U.S.& %" & %"#:? La5. e*.& =?!F& 5e thin4 it clea$ that the 1ene$al *e nition of a *i i*en* in

section '% DaF 5as not inten*e* to appl6 to *ist$ibutions )a*e to stoc4hol*e$s inthe li8ui*ation of a co$po$ation& but that it 5as inten*e* that such *ist$ibutionsshoul* be 1o e$ne* b6 section '% DcF& 5hich& *ealin1 speci call6 5ith suchli8ui*ation& p$o i*e* that the a)ounts *ist$ibute* shoul* <be t$eate* as pa6)entsin e9chan1e fo$ stoc4&< an* that an6 1ain $eali@e* the$eb6 shoul* be ta9e* to the

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stoc4hol*e$s <as othe$ 1ains o$ p$o ts.< This b$in1s the t5o sections into enti$eha$)on6 an* 1i es to each its natu$al )eanin1 an* *ue e ect. . . . D ell)ich s.

ell)an& sup$a: e)phasis supplie*.F

?. The fou$th assi1n)ent of e$$o$. J Un*e$ this assi1n)ent it is conten*e* b6 thenon-$esi*ent in*i i*ual stoc4hol*e$ appellants that the6 5e$e not sub;ect to theno$)al ta9 as $e1a$*s the *ist$ibutions $ecei e* b6 the) an* in ol e* in the instantcase. The6 <$epo$te* these *ist$ibutions as *i i*en*s f$o) p$o ts on 5hichPhilippine inco)e ta9 ha* been pai* . . ..< DAppellants b$ief& p. %.F The6 asse$t thatthe *ist$ibutions 5e$e sub;ect onl6 to the a**itional ta9: 5he$eas the Collecto$conten*s that the6 5e$e sub;ect to both the no$)al an* the a**itional ta9. Afte$5hat has been sai* abo e& it ha$*l6 nee*s statin1 that the )anne$ an* fo$) of$epo$tin1 these *ist$ibutions e)plo6e* b6 sai* appellants coul* not& un*e$ the La5&chan1e thei$ $eal natu$e as pa6)ents fo$ su$$en*e$e* stoc4& o$ so-calle* li8ui*atin1*i i*en*s& p$o i*e* fo$ in section " DaF of the then (nco)e Ta9 La5. Such*ist$ibutions un*e$ the la5 5e$e sub;ect to both the no$)al an* the a**itional ta9p$o i*e* fo$.

. . . Loosel6 spea4in1& the *ist$ibution to the stoc4hol*e$s of a co$po$ation s assets&upon li8ui*ation& )i1ht be te$)e* a *i i*en*: but this is not 5hat is 1ene$all6)eant an* un*e$stoo* b6 that 5o$*. As 1ene$all6 un*e$stoo* an* use*& a *i i*en*is a $etu$n upon the stoc4 of its stoc4hol*e$s& pai* to the) b6 a 1oin1 co$po$ation5ithout $e*ucin1 thei$ stoc4hol*in1s& lea in1 the) in a position to en;o6 futu$e$etu$ns upon the sa)e stoc4 . . .. (n othe$ 5o$*s& it is ea$nin1s pai* to hi) b6 theco$po$ation upon his in este* capital the$ein& 5ithout 5ipin1 out his capital. On theothe$ han*& 5hen a sol ent co$po$ation *issol es an* li8ui*ates& it *ist$ibutes to itsstoc4hol*e$s not onl6 an6 ea$nin1s it )a6 ha e on han*& but it also pa6s to the)thei$ in este* capital& na)el6& the a)ount 5hich the6 ha* pai* in fo$ thei$ stoc4s&thus 5ipin1 out thei$ inte$est in the co)pan6 . . .. DLan1sta s. Lucas& # /e*. * &!#%& !#?.F

". The fth assi1n)ent of e$$o$. J This assi1n)ent is )a*e in behalf of thoseappellants 5ho 5e$e non-$esi*ent alien in*i i*uals& an* fo$ the) it is in e ect sai*that if the *ist$ibutions $ecei e* b6 the) 5e$e to be consi*e$e* as a sale of thei$stoc4 to the on14on1 Co)pan6& the p$o t $eali@e* b6 the) *oes not constituteinco)e f$o) Philippine sou$ces an* is not sub;ect to Philippine ta9es& <since allsteps in the ca$$6in1 out of this so-calle* sale too4 place outsi*e the Philippines.<DAppellants b$ief& p. !.F >e *o not thin4 this contention is tenable un*e$ the factsan* ci$cu)stances of $eco$*. The on14on1 Co)pan6 5as at the ti)e of the sale ofits business in the Philippines& an* the Manila Co)pan6 5as a *o)estic co$po$ation*o)icile* an* *oin1 business also in the Philippines. Sche*ule A of the Stipulation of /acts DReco$* on Appeal& p. % F *ecla$es& a)on1 othe$ thin1s& that the on14on1Co)pan6 5as inco$po$ate* fo$ the pu$pose of ca$$6in1 on in the Philippine (slan*sthe business of 5ine& bee$& an* spi$it )e$chants an* the othe$ ob;ects set out in its)e)o$an*u) of association. ence& its ea$nin1s& p$o ts& an* assets& inclu*in1those f$o) 5hose p$ocee*s the *ist$ibutions in 8uestion 5e$e )a*e& the )a;o$ pa$tof 5hich consiste* in the pu$chase p$ice of the business& ha* been ea$ne* an*ac8ui$e* in the Philippines. /$o) au1ht that appea$s in the $eco$* it is clea$ thatsai* *ist$ibutions 5e$e inco)e <f$o) Philippine sou$ces.<

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!. The si9th assi1n)ent of e$$o$. J Section %## of Re1ulations No. =%& *eletin1i))ate$ial pa$ts& $ea*s3

SEC. %##. ,ist$ibutions in li8ui*ation. J (n all cases 5he$e a co$po$ation . . .*ist$ibutes all of its p$ope$t6 o$ assets in co)plete li8ui*ation o$ *issolution& the1ain $eali@e* f$o) the t$ansaction b6 the stoc4hol*e$ . . . is ta9able as a *i i*en* tothe e9tent that it is pai* out of ea$nin1s o$ p$o ts of the co$po$ation . . .. (f thea)ount $ecei e* b6 the stoc4hol*e$ in li8ui*ation is less than the cost o$ othe$ basisof the stoc4& a *e*uctible loss is sustaine*.

This $e1ulation 5oul* see) to suppo$t the contention that the *ist$ibutions in8uestion& at least those p$ocee*in1 f$o) sou$ces othe$ than the ea$nin1s o$ p$o tsof the *issol e* co$po$ation& 5e$e not ta9able. Placin1 the abo e-8uote* section ofRe1ulations No. =% si*e b6 si*e 5ith section " DaF of the a)en*e* (nco)e Ta9 La5then in fo$ce& 5e notice that 5hile the $e1ulation li)its the ta9abilit6 of the 1ain$eali@e* b6 the stoc4hol*e$ <to the e9tent that it is pai* out of ea$nin1s o$ p$o ts ofthe co$po$ation& <section " DaF of the la5& fa$ f$o) so li)itin1 its ta9abilit6&p$o i*es that the 1ain thus $eali@e*& is a <ta9able inco)e< J un*e$ the la5 so lon1as a 1ain is $eali@e*& it 5ill be ta9able inco)e 5hethe$ the *ist$ibution co)es f$o)the ea$nin1s o$ p$o ts of the co$po$ation o$ f$o) the sale of all of its assets in1ene$al& so lon1 as the *ist$ibution is )a*e <in co)plete li8ui*ation o$ *issolution<.

The $e1ulation )a4es the 1ain ta9able as a *i i*en*& 5hile the la5 )a4es it ata9able inco)e. An ine itable con ict bet5een the t5o p$o isions see)s to e9ist&an* in such a case& of cou$se& the la5 p$e ails.

T$easu$6 ,epa$t)ent cannot i)pose o$ e9e)pt f$o) inco)e ta9es& an* $e1ulationspu$po$tin1 to e9e)pt f$o) ta9ation inco)e speci call6 ta9es 5oul* be oi*.

9 9 9 9 9 9 9 9 9

An6 e$$oneous inte$p$etation of $e enue act b6 $e1ulation of T$easu$6 ,epa$t)ent5oul* not estop 1o e$n)ent f$o) asse$tin1 ta9 on inco)e& thou1h ta9pa6e$ ha*been )isle* b6 such inte$p$etation& an* b6 it in*uce* to e9pose p$ope$t6 tota9ation. DLan1sta s. Lucas& # /e*. * & !#%.F

an* =. The se enth an* ei1ht assi1n)ents of e$$o$. J (n ie5 of 5hat has beensai* abo e& these t5o assi1n)ents nee* no sepa$ate t$eat)ent.

/o$ the fo$e1oin1 consi*e$ation& the ;u*1)ent appeale* f$o) 5ill be aH$)e* 5iththe costs of both instances a1ainst the appellants. So o$*e$e*.

Mo$an& C.0.& Pa$as& /e$ia& Pablo& Pe$fecto& Ben1@on& B$iones& onti e$os& Pa*illa& an* Tuason& 00.& concu$.

JJJJJJ

RESOLUT(ON ON MOT(ON /OR RECONS(,ERAT(ON

0ul6 =& %#?

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(LA,O& 0.3

Plainti s an* appellants ha e le* a )otion fo$ $econsi*e$ation *ate* 0ul6 %'& %#? .Afte$ ca$efull6 consi*e$in1 sai* )otion& 5hich )a4es pa$ticula$ $efe$ence toappellants fth assi1n)ent of e$$o$& the Cou$t *oes not consi*e$ the a$1u)entsthe$ein a**uce* tenable. St$ippe* to thei$ ba$e essentials& the )o ants contentionsa$e su))a$i@e* in the follo5in1 p$opositions foun* on pa1es -? of thei$ )otto& to5it3

Since appellants 0./. MacG$e1o$& N.C. MacG$e1o$& C.0. Laf$ent@& E.M.G. St$ic4lan*&an* M$s. M.0.G. Mullins 5e$e all non-$esi*ent aliens an* since the cou$t has hel* thatthe t$ansaction in this case a)ounte* to a sale o$ e9chan1e of thei$ sha$es in afo$ei1n co$po$ation& 5hich sale o$ e9chan1e too4 place enti$el6 outsi*e of thePhilippine (slan*s& it follo5s that the6 ha e not *e$i e* inco)e f$o) the Philippinesou$ces an* a$e not sub;ect to the ta9es 5hich ha e been collecte* f$o) the) b6*efen*ant.

9 9 9 9 9 9 9 9 9

. . . On the othe$ han* if the inco)e $esults f$o) the sale o$ e9chan1e of the sha$esin 8uestion then the non-$esi*ent alien stoc4hol*e$s 5ho con e$te* thei$ sha$esab$oa* ha e $ecei e* no inco)e f$o) Philippine sou$ces an* a$e not sub;ect to an6ta9 5hatsoe e$ on thei$ p$o ts f$o) the t$ansaction.

Lea in1 asi*e the othe$ po$tions of the abo e-8uote* p$opositions as suHcientl6co e$e* in the cou$t s *ecision& let us *i$ect attention to those pa$ts the$eof 5he$einit is p$eten*e* that the t$ansaction too4 place <enti$el6 outsi*e the Philippine(slan*s< o$ <ab$oa*.<

(n the )inutes& Sche*ule B of the stipulation of facts DRec. on Appeal& pp. %!-% F& itappea$s that on 0ul6 & %# & an e9t$ao$*ina$6 )eetin1 of sha$ehol*e$s of theManila >ine Me$chants& Lt*. 5as hel* an* in sai* )eetin1& a)on1 othe$ thin1s& it5as $esol e* that the ,i$ecto$s of sai* co)pan6 <be autho$i@e* an* inst$ucte* to*ecla$e an* pa6 in the fo$) of *i i*en* to the sha$ehol*e$s the a)ount of an6su$plus e9istin1 afte$ the abo e-$efe$$e* to sale has been consu))ate*. Thissu$plus& afte$ p$o i*in1 fo$ $etu$n of capital an* necessa$6 e9pense& as sho5n in theBalance Sheet p$epa$e* as of 0une %& %# & afte$ 1i in1 e ect to the salet$ansaction abo e-$efe$$e* to& a)ounts to app$o9i)atel6 P '&'''.< >hile Sche*uleB *oes not state the place 5he$e the )eetin1 5as hel*& Sche*ule B-% of the sa)estipulation of facts DReco$* on Appeal& pp. % -%=F fu$nishes us the info$)ation that it5as hel* in Manila. Sche*ule B-% in this connection sa6s3

Sale of Co)pan63 (n acco$*ance 5ith $esolution passe* at an E9t$ao$*ina$6 Meetin1of Sha$ehol*e$s hel* in Manila Dun*e$sco$in1 supplie*F on 0ul6 & %# & at o cloc4&the ,i$ecto$s of the Manila >ine Me$chants Lt*.& 5e$e autho$i@e* to sell theCo)pan6 as a 1oin1 conce$n in acco$*ance 5ith sale a1$ee)ent p$esente* at theMeetin1.

Late$ in the sa)e Sche*ule B-% 5e n* that the *ecla$ation of *i i*en*s autho$i@e*in the p$e ious )eetin1& as state* in the )inutes Sche*ule B& 5as )a*e b6 the

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Boa$* of ,i$ecto$s of the sa)e Manila >ine Me$chants& Lt*.& of 5hose )eetin1 onthat sa)e *ate& 0ul6 & %# & Sche*ule B-% constitutes the )inutes. The pe$tinentpa$ts to the )inutes of sai* )eetin1 $ea* as follo5s3

,i i*en*3 The secon* )atte$ befo$e the Meetin1 5as the 8uestion of *ecla$in1 a*i i*en* to enable a *ist$ibution in cash to be )a*e& the *i i*en* to be the enti$ea)ount stan*in1 at su$plus afte$ p$o i*in1 fo$ $etu$n of capital an* a$iouse9penses in acco$*ance 5ith $econst$ucte* balance sheet as at 0une %& %#p$esente* b6 ou$ au*ito$s.

9 9 9 9 9 9 9 9 9

Resol e* that as afte$ the Manila >ine Me$chants Lt*. has been sol* fo$ thestipulate* su) of P?''&''' an* )one6 $ecei e*& the$e 5ill be afte$ p$o i*in1 fo$$etu$n of capital& pa6)ent of inco)e ta9 an* othe$ cha$1es& a su) of app$o9i)atel6P '&''' stan*in1 at su$plus account& a *i i*en* is no5 he$eb6 *ecla$e* in a)ountco e$in1 the enti$e balance $e)ainin1 at su$plus account afte$ the conce$n hasbeen 5oun* up& an* 5e he$eb6 autho$i@e the *ist$ibution of P !"&''' as an* 5henfun*s a$e a ailable& an6 balance $e)ainin1 to be *ist$ibute* 5hen nal Li8ui*ato$ saccount has been $en*e$e* an* pai*.<

A1ain& 5hile the )inutes Sche*ule B-% *o not $e eal the place 5he$e that boa$*)eetin1 5as hel*& the fact state* the$ein that it 5as hel* on 0ul6 &%# & the self-sa)e *ate of the e9t$ao$*ina$6 )eetin1 of sha$ehol*e$s $efe$$e* to in the )inutesSche*ule B& at o cloc4 Dp$esu)abl6 p.).F& as $eco$*e* in Sche*ule B-%& clea$l6sho5s that the sai* boa$* )eetin1 5as hel* also in Manila& an* not in on14on1 o$else5he$e ab$oa*& fo$ 0./. Mac1$e1o$ an* E. e6b$oo4& both of 5ho) appea$ in bothSche*ules B an* B-% to ha e pa$ticipate* in both )eetin1s& coul* not& so fa$ as the$eco$* *iscloses& e$6 5ell be in Manila an* on14on1 o$ else5he$e ab$oa* on thatsa)e *ate. The$e is no sho5in1& no$ is it e en p$eten*e* that these t5o 1entle)enafte$ the )eetin1 hel* in Manila on 0ul6 & %# & at o cloc4& too4 an ai$plane o$othe$ )o*e of con e6ance& as fast o$ faste$& an* hu$$ie* to on14on1 o$ else5he$eab$oa* an* atten*e* the othe$ )eetin1 that e$6 sa)e *a6. (n*ee*& that both)eetin1s )ust ha e been hel* in Manila 5oul* see) to be the onl6 natu$al an*lo1ical supposition f$o) the fact that the Manila >ine Me$chants& Lt*.& 5asa*)itte*l6 con*uctin1 its business in sai* cit6 an* the Philippines in 1ene$alDSche*ule A& Rec. on Appeal& p. % F. (t see)s clea$& the$efo$e& that the *i i*en*s in8uestion 5e$e *ecla$e* in the Philippine (slan*s.

>hat 5as the le1al e ect of that *ecla$ation7 Pa$a1$aph of the stipulation of factsDRec. on Appeal& pp. '- %F states that& pu$suant to these $esolutions& <the

on14on1 Co)pan6 Dthe sa)e Manila >ine Me$chants& Lt*.F *ist$ibute* this su$plusto its stoc4hol*e$s& plainti s $ecei in1 Dun*e$sco$in1 supplie*F the follo5in1 su)son the follo5in1 *ates< Dthen follo5 plainti s na)es 5ith the $especti e a)ounts inPhilippine pesos $ecei e* b6 the) on the *ates state*F. (t is not state* that the6$ecei e* thei$ *i i*en*s in on14on1 o$ othe$ fo$ei1n )one6. An* in thei$ o5n b$iefDp. "F the6 sa6 that the pa6)ents o$ *ist$ibutions thus $ecei e* b6 the)& as a$esult of the li8ui*ation an* sale of sai* co)pan6& <5e$e inclu*e* as 1$oss inco)ein thei$ Philippine inco)e ta9 $etu$ns<. This fact fu$the$ ten*s to sho5 that thosepa6)ents o$ *ist$ibutions 5e$e $ecei e* in the Philippine (slan*s& eithe$ b6 plainti s

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pe$sonall6 o$ th$ou1h thei$ p$o9ies o$ a1ents. Besi*es& in pa$a1$aph of thestipulation of facts DRec. on Appeal& p. %F it appea$s that the *i i*en*s o$*ist$ibutions pe$tainin1 to these in*i i*ual plainti s as 5ell as that pe$tainin1 tothei$ co-plainti >ise an* Co.& (nc.& 5e$e pai* on the sa)e *ates& na)el6& Au1ust

?& %# & an* Octobe$ =& %# : an* it bein1 un*ispute* that >ise an* Co.& (nc. 5as*o)icile* an* ha* its p$incipal oHce in Manila Dco)plaint& pa$. (& Rec. on Appeal&p. F& in 5hich cit6 it 5as p$esu)abl6 pai*& it 5oul* see) ob ious that theconco)itant pa6)ents thus )a*e to the othe$ plainti s 5e$e li4e5ise e ecte* inthe sa)e place& 5hethe$ the in*i i*ual plainti s acte* pe$sonall6 o$ th$ou1h p$o9ieso$ a1ents. (t shoul* also be $e)e)be$e* that 5hile the <$e1iste$e* oHce< of theManila >ine Me$chants& Lt*. 5as situate* in the colon6 of on14on1 DSche*ule A&Rec. on Appeal& p. % F& the fact is that the onl6 business fo$ 5hich it 5asinco$po$ate* 5as the 5ine& bee$& an* spi$it business& 5hich ha* been an* 5as bein1con*ucte* e9clusi el6 5ithin the Philippine (slan*s& an* f$o) the $eco$* 5e *e*ucethat it ha* also oHce in Manila 5he$e& so fa$ as the $eco$* *iscloses& the pa6)ents5e$e )a*e. /inall6& the fact that pa6)ent 5as )a*e in Philippine pesos 5oul*st$on1l6 co$$obo$ate the conclusion that it 5as )a*e in this count$6 J if it ha* been)a*e in on14on1 o$ else5he$e ab$oa*& the $easonable assu)ption is that it 5oul*ha e been )a*e in on14on1 *olla$s o$ in the cu$$enc6 of such othe$ place ab$oa*.

. . . o5e e$& 5he$e a co$po$ation has not onl6 *ecla$e* a *i i*en* but hasspeci call6 app$op$iate* an* set apa$t f$o) its othe$ assets a fun* out of 5hich the*i i*en* is to be pai*& such action constitutes the assets to set apa$t a t$ust fun* inthe han*s of the co$po$ation fo$ the pa6)ent of the stoc4hol*e$s to the e9clusion of othe$ c$e*ito$s. . . . D%= C.0.S.& p. %%%": e)phasis supplie*.F

As bet5een successi e o5ne$s of sha$es of stoc4 in a co$po$ation& the 1ene$al $uleis that *i i*en*s belon1 to the pe$sons 5ho a$e the o5ne$s of the stoc4 at the ti)ethe6 a$e *ecla$e*& 5ithout $e1a$* to the ti)e *u$in1 5hich the *i i*en*s 5e$eea$ne*& an* this is t$ue althou1h the *i i*en*s a$e )a*e pa6able at a futu$e *ate.D%= C.0.S.& %%#& sec. ? ' a : e)phasis supplie*.F

The$e is no cont$o e$s6 about the le1al p$oposition that *i i*en*s *ecla$e* belon1to the o5ne$ of the stoc4 at the ti)e the *i i*en* is *ecla$e*. DLi in1stone Count6Ban4 s. /i$st State Ban4& % ! I6.& "?!& ""?& cite* in footnote !& p. =%=& %? C.0.:e)phasis supplie*.F

The )o)ent the *i i*en* is *ecla$e*& it beco)es then sepa$ate an* *istinct f$o)the stoc4 an* the *i i*en* falls to hi) 5ho is p$op$ieto$ of the stoc4 of 5hich it 5asthe$etofo$e inci*ent.

The *oct$ine is that a *i i*en* is consi*e$e* pa$cel of the )ass of co$po$atep$ope$t6 until *ecla$e* an* the$efo$e inci*ent to an* pa$cel of the stoc4 up to theti)e it is *ecla$e*: an* befo$e its *ecla$ation& 5ill pass 5ith the sale o$ *e ise of thestoc4. >hosoe e$ o5ns the stoc4 p$io$ to the *ecla$ation of a *i i*en*& o5ns the*i i*en* also. DMcLa$en s. C$escent Plannin1 Mill Co.& %% Mo. A.& ?'& ? & cite* innote !& p. =%=& %? C.0.: e)phasis supplie*.F

(n ,e Io en s. Alsop D '" (ll.& '#: ! L.R.A.& "= F& the cou$t sai*3

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A *i i*en* is *e ne* as <a co$po$ate p$o t set asi*e& *ecla$e*& an* o$*e$e* b6 the*i$ecto$s to be pai* to the stoc4hol*e$s on *e)an* o$ at a 9e* ti)e. Until the*i i*en* is *ecla$e*& these co$po$ate p$o ts belon1 to the co$po$ation& not to thestoc4hol*e$s& an* a$e liable fo$ co$po$ate in*ebte*ness.< DE)phasis supplie*.F

>e a$e full6 satis e* f$o) the facts an* *ata fu$nishe* he$e b6 the pa$tiesthe)sel es that the *i i*en*s in 8uestion 5e$e pai* to plainti s& pe$sonall6 o$ th$uthei$ p$o9ies o$ a1ents& in the Philippines. But asi*e f$o) this& f$o) the )o)entthe6 5e$e *ecla$e* an* a *e nite fun* speci e* fo$ thei$ pa6)ent Dall su$plus$e)ainin1 <afte$ p$o i*in1 fo$ $etu$n of capital an* a$ious e9penses<F J an* all ofthis 5as *one in the Philippines J to all le1al intents an* pu$poses the6 ea$ne*those *i i*en*s in this count$6. /$o) the $eco$* 5e *e*uce that the fun*s an*assets of the Manila >ine Me$chants& Lt*.& f$o) 5hich those *i i*en*s p$ocee*e*&5e$e in the Philippines 5he$e its business 5as locate*. So fa$ as the $eco$**iscloses& its li8ui*ation 5as e ecte* in te$)s of Philippine pesos& in*icatin1 that it5as )a*e he$e. An* this in tu$n 5oul* lea* to the *e*uction that the fun*s an*assets li8ui*ate* 5e$e he$e.

Motion *enie*. So o$*e$e*.

Mo$an& C.0.& Pa$as& /e$ia& Pablo& Pe$fecto& Ben1@on& B$iones& onti e$os& Pa*illa& an* Tuason& 00.& concu$.

C(R s CA an* So$iano'% SCRA %" Q Business O$1ani@ation Q Co$po$ation La5 Q T$ust /un* ,oct$ine

/ACTS3 ,on An*$es So$iano DA)e$icanF& foun*e$ of A. So$iano Co$p. DASCF ha* atotal sha$ehol*in1s of %="&%"? sha$es. B$o4en *o5n& the sha$es co)p$ise of "'&?#"

sha$es 5hich 5e$e of o$i1inal issue 5hen the co$po$ation 5as foun*e* an* % ?&!"#sha$es as stoc4 *i i*en* *ecla$ations. So in %#!? 5hen So$iano *ie*& half of thesha$es he hel* 5ent to his 5ife as he$ con;u1al sha$e D5ife s le1iti)e F an* theothe$ half D# &" sha$es& 5hich is fu$the$ b$o4en *o5n to "& ? ." o$i1inal issuesha$es an* = & " ." stoc4 *i i*en* sha$esF 5ent to the estate. /o$ so)eti)e afte$his *eath& his estate still continue* to $ecei e stoc4 *i i*en*s f$o) ASC until it 1$e5to at least %'=&''' sha$es.

(n %#!=& ASC th$ou1h its Boa$* issue* a $esolution fo$ the $e*e)ption of sha$es f$o)So$iano s estate pu$po$te*l6 fo$ the planne* /ilipini@ation of ASC. E entuall6&%'=&''' sha$es 5e$e $e*ee)e* f$o) the So$iano Estate. (n %# & a ta9 au*it 5ascon*ucte*. E entuall6& the Co))issione$ of (nte$nal Re enue DC(RF issue* an

assess)ent a1ainst ASC fo$ *e cienc6 5ithhol*in1 ta9-at-sou$ce. The C(R e9plaine*that 5hen the $e*e)ption 5as )a*e& the estate p$o te* Dbecause ASC 5oul* ha eto pa6 the estate to $e*ee)F& an* so ASC 5oul* ha e 5ithhel* ta9 pa6)ents f$o)the So$iano Estate 6et it $e)itte* no such 5ithhel* ta9 to the 1o e$n)ent.

ASC a e$$e* that it is not *ut6 boun* to 5ithhol* ta9 f$o) the estate because it$e*ee)e* the sai* sha$es fo$ pu$poses of /ilipini@ation of ASC an* also to $e*uceits $e)ittance ab$oa*.

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(SSUE3 >hethe$ o$ not ASC s a$1u)ents a$e tenable.

EL,3 No. The $eason behin* the $e*e)ption is not )ate$ial. The p$ocee*s f$o) a$e*e)ption is ta9able an* ASC is *ut6 boun* to 5ithhol* the ta9 at sou$ce. TheSo$iano Estate *e nitel6 p$o te* f$o) the $e*e)ption an* such p$o t is ta9able&an* a1ain& ASC ha* the *ut6 to 5ithhol* the ta9. The$e 5as a total of %'=&'''sha$es $e*ee)e* f$o) the estate. "& ? ." of that 5as o$i1inal issue f$o) thecapital of ASC. The $est D= & " ."F of the sha$es a$e *ee)e* to ha e been f$o)stoc4 *i i*en* sha$es. Sale of stoc4 *i i*en*s is ta9able. (t is also to be note* thatin the absence of e i*ence to the cont$a$6& the Ta9 Co*e p$esu)es that e e$6*ist$ibution of co$po$ate p$ope$t6& in 5hole o$ in pa$t& is )a*e out of co$po$atep$o ts such as stoc4 *i i*en*s.

(t cannot be a$1ue* that all the %'=&''' sha$es 5e$e *ist$ibute* f$o) the capital ofASC an* that the latte$ is )e$el6 $e*ee)in1 the) as such. The capital cannot be*ist$ibute* in the fo$) of $e*e)ption of stoc4 *i i*en*s 5ithout iolatin1 the t$ustfun* *oct$ine J 5he$ein the capital stoc4& p$ope$t6 an* othe$ assets of theco$po$ation a$e $e1a$*e* as e8uit6 in t$ust fo$ the pa6)ent of the co$po$atec$e*ito$s. Once capital& it is al5a6s capital. That *oct$ine 5as inten*e* fo$ thep$otection of co$po$ate c$e*ito$s.

/(RST ,( (S(ONG.R. No. %'=" !. 0anua$6 '& %###

COMM(SS(ONER O/ (NTERNAL RE ENUE& petitione$& s. T E COURT O/ APPEALS&COURT O/ TA APPEALS an* A. SOR(ANO CORP.& $espon*ents., E C ( S ( O NMART(NE2& 0.3

Petitione$ Co))issione$ of (nte$nal Re enue DC(RF see4s the $e e$sal of the *ecisionof the Cou$t of Appeals DCAF % 5hich aH$)e* the $ulin1 of the Cou$t of Ta9 AppealsDCTAF that p$i ate $espon*ent A. So$iano Co$po$ations Dhe$einafte$ ANSCORF$e*e)ption an* e9chan1e of the stoc4s of its fo$ei1n stoc4hol*e$s cannot beconsi*e$e* as essentiall6 e8ui alent to a *ist$ibution of ta9able *i i*en*s un*e$Section = DbF of the %# # (nte$nal Re enue Act

The un*ispute* facts a$e as follo5s3

So)eti)e in the %# 's& ,on An*$es So$iano& a citi@en an* $esi*ent of the Unite*States& fo$)e* the co$po$ation A. So$iano + Cia& p$e*ecesso$ of ANSCOR& 5ith a

P%&'''&'''.'' capitali@ation *i i*e* into %'&''' co))on sha$es at a pa$ alue ofP%'' sha$e. ANSCOR is 5holl6 o5ne* an* cont$olle* b6 the fa)il6 of ,on An*$es&5ho a$e all non-$esi*ent aliens. ? (n %# & ,on An*$es subsc$ibe* to ?&#! sha$esof the "&''' sha$es o$i1inall6 issue*. "

On Septe)be$ % & %#?"& ANSCORs autho$i@e* capital stoc4 5as inc$ease* toP &"''&'''.'' *i i*e* into "&''' co))on sha$es 5ith the sa)e pa$ alue. Of thea**itional %"&''' sha$es& onl6 %'&''' 5as issue* 5hich 5e$e all subsc$ibe* b6 ,onAn*$es& afte$ the othe$ stoc4hol*e$s 5ai e* in fa o$ of the fo$)e$ thei$ p$e-e)pti e

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$i1hts to subsc$ibe to the ne5 issues. ! This inc$ease* his subsc$iption to %?&#!co))on sha$es. A )onth late$& = ,on An*$es t$ansfe$$e* %& "' sha$es each tohis t5o sons& 0ose an* An*$es& 0$.& as thei$ initial in est)ents in ANSCOR. # Bothsons a$e fo$ei1ne$s. %'

B6 %#? & ANSCOR *ecla$e* stoc4 *i i*en*s. Othe$ stoc4 *i i*en* *ecla$ations 5e$e)a*e bet5een %#?# an* ,ece)be$ '& %#! . %% On ,ece)be$ '& %#!? ,onAn*$es *ie*. As of that *ate& the $eco$*s $e eale* that he has a total sha$ehol*in1sof %="&%"? sha$es % - "'&?#" of 5hich a$e o$i1inal issues an* the balance of% ?&!"# sha$es as stoc4 *i i*en* *ecla$ations. % Co$$espon*in1l6& one-half of thatsha$ehol*in1s o$ # &" %? sha$es 5e$e t$ansfe$$e* to his 5ife& ,oa Ca$)enSo$iano& as he$ con;u1al sha$e. The othe$ half fo$)e* pa$t of his estate. %"

A *a6 afte$ ,on An*$es *ie*& ANSCOR inc$ease* its capital stoc4 to P 'M %! an* in%#!! fu$the$ inc$ease* it to P 'M. % (n the sa)e 6ea$ D,ece)be$ %#!!F& stoc4*i i*en*s 5o$th ?!& #' an* ?!& = sha$es 5e$e $especti el6 $ecei e* b6 the ,onAn*$es estate %= an* ,oa Ca$)en f$o) ANSCOR. ence& inc$easin1 thei$accu)ulate* sha$ehol*in1s to % =&=! an* % =&=!? %# co))on sha$es each. '

On ,ece)be$ =& %#! & ,oa Ca$)en $e8ueste* a $ulin1 f$o) the Unite* States(nte$nal Re enue Se$ ice D(RSF& in8ui$in1 if an e9chan1e of co))on 5ith p$efe$$e*sha$es )a6 be consi*e$e* as a ta9 a oi*ance sche)e % un*e$ Section ! of the%#"? U.S. Re enue Act. B6 0anua$6 & %#!=& ANSCOR $eclassi e* its e9istin1

''&''' co))on sha$es into %"'&''' co))on an* %"'&''' p$efe$$e* sha$es.

(n a lette$-$epl6 *ate* /eb$ua$6 %#!=& the (RS opine* that the e9chan1e is onl6 a$ecapitali@ation sche)e an* not ta9 a oi*ance. ? Conse8uentl6& " on Ma$ch %&%#!= ,oa Ca$)en e9chan1e* he$ 5hole % =&=!? co))on sha$es fo$ % =&=!' of thene5l6 $eclassi e* p$efe$$e* sha$es. The estate of ,on An*$es in tu$n& e9chan1e*%%&%?' of its co))on sha$es fo$ the $e)ainin1 %%&%?' p$efe$$e* sha$es& thus$e*ucin1 its Dthe estateF co))on sha$es to % & . !

On 0une '& %#!=& pu$suant to a Boa$* Resolution& ANSCOR $e*ee)e* =&'''co))on sha$es f$o) the ,on An*$es estate. B6 No e)be$ %#!=& the Boa$* fu$the$inc$ease* ANSCORs capital stoc4 to P "M *i i*e* into %"'&''' p$efe$$e* sha$es an*!''&''' co))on sha$es. About a 6ea$ late$& ANSCOR a1ain $e*ee)e* ='&'''co))on sha$es f$o) the ,on An*$es estate& = fu$the$ $e*ucin1 the latte$sco))on sha$ehol*in1s to %#& . As state* in the boa$* Resolutions& ANSCORsbusiness pu$pose fo$ both $e*e)ptions of stoc4s is to pa$tiall6 $eti$e sai* stoc4s ast$easu$6 sha$es in o$*e$ to $e*uce the co)pan6s fo$ei1n e9chan1e $e)ittances incase cash *i i*en*s a$e *ecla$e*. #

(n %# & afte$ e9a)inin1 ANSCORs boo4s of account an* $eco$*s& Re enuee9a)ine$s issue* a $epo$t p$oposin1 that ANSCOR be assesse* fo$ *e cienc65ithhol*in1 ta9-at-sou$ce& pu$suant to Sections " an* "? of the %# # Re enueCo*e& ' fo$ the 6ea$ %#!= an* the secon* 8ua$te$ of %#!# base* on thet$ansactions of e9chan1e an* $e*e)ption of stoc4s. % The Bu$eau of (nte$nalRe enue DB(RF )a*e the co$$espon*in1 assess)ents *espite the clai) of ANSCORthat it a aile* of the ta9 a)nest6 un*e$ P$esi*ential ,ec$ee DP.,.F 5hich5e$e a)en*e* b6 P.,.s ! an* %" . o5e e$& petitione$ $ule* that the in o4e*

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*ec$ees *o not co e$ Sections " an* "? in $elation to A$ticle = DbF of the %# #Re enue Act un*e$ 5hich ANSCOR 5as assesse*. ? ANSCORs subse8uent p$oteston the assess)ents 5as *enie* in %#= b6 petitione$. "

Subse8uentl6& ANSCOR le* a petition fo$ $e ie5 5ith the CTA assailin1 the ta9assess)ents on the $e*e)ptions an* e9chan1e of stoc4s. (n its *ecision& the Ta9Cou$t $e e$se* petitione$s $ulin1& afte$ n*in1 suHcient e i*ence to o e$co)e thep$i)a facie co$$ectness of the 8uestione* assess)ents. ! (n a petition fo$ $e ie5&the CA& as )entione*& aH$)e* the $ulin1 of the CTA. ence& this petition.

The bone of contention is the inte$p$etation an* application of Section = DbF of the%# # Re enue Act = 5hich p$o i*es3

Sec. = . ,ist$ibution of *i i*en*s o$ assets b6 co$po$ations.

DbF Stoc4 *i i*en*s A stoc4 *i i*en* $ep$esentin1 the t$ansfe$ of su$plus to capitalaccount shall not be sub;ect to ta9. o5e e$& if a co$po$ation cancels o$ $e*ee)sstoc4 issue* as a *i i*en* at such ti)e an* in such )anne$ as to )a4e the*ist$ibution an* cancellation o$ $e*e)ption& in 5hole o$ in pa$t& essentiall6e8ui alent to the *ist$ibution of a ta9able *i i*en*& the a)ount so *ist$ibute* in$e*e)ption o$ cancellation of the stoc4 shall be consi*e$e* as ta9able inco)e to thee9tent it $ep$esents a *ist$ibution of ea$nin1s o$ p$o ts accu)ulate* afte$ Ma$ch

$st& nineteen hun*$e* an* thi$teen. D(talics supplie*F.

Speci call6& the issue is 5hethe$ ANSCORs $e*e)ption of stoc4s f$o) itsstoc4hol*e$ as 5ell as the e9chan1e of co))on 5ith p$efe$$e* sha$es can beconsi*e$e* as essentiall6 e8ui alent to the *ist$ibution of ta9able *i i*en*& )a4in1the p$ocee*s the$eof ta9able un*e$ the p$o isions of the abo e-8uote* la5.

Petitione$ conten*s that the e9chan1e t$ansaction is tanta)ount to cancellationun*e$ Section = DbF )a4in1 the p$ocee*s the$eof ta9able. (t also a$1ues that thesai* Section applies to stoc4 *i i*en*s 5hich is the bul4 of stoc4s that ANSCOR$e*ee)e*. /u$the$& petitione$ clai)s that un*e$ the net e ect test& the estate of,on An*$es 1aine* f$o) the $e*e)ption. Acco$*in1l6& it 5as the *ut6 of ANSCOR to5ithhol* the ta9-at-sou$ce a$isin1 f$o) the t5o t$ansactions& pu$suant to Section "an* "? of the %# # Re enue Act. #

ANSCOR& ho5e e$& a e$s that it has no *ut6 to 5ithhol* an6 ta9 eithe$ f$o) the ,onAn*$es estate o$ f$o) ,oa Ca$)en base* on the t5o t$ansactions& because thesa)e 5e$e *one fo$ le1iti)ate business pu$poses 5hich a$e DaF to $e*uce its fo$ei1ne9chan1e $e)ittances in the e ent the co)pan6 5oul* *ecla$e cash *i i*en*s& ?'an* to DbF subse8uentl6 lipini@e* o5ne$ship of ANSCOR& as alle1e*l6 en isione* b6,on An*$es. ?% (t li4e5ise in o4e* the a)nest6 p$o isions of P.,. ! .

>e )ust e)phasi@e that the application of Sec. = DbF *epen*s on the specialfactual ci$cu)stances of each case. ? The n*in1s of facts of a special cou$t DCTAFe9e$cisin1 pa$ticula$ e9pe$tise on the sub;ect of ta9& 1ene$all6 bin*s this Cou$t& ?consi*e$in1 that it is substantiall6 si)ila$ to the n*in1s of the CA 5hich is the nala$bite$ of 8uestions of facts. ?? The issue in this case *oes not onl6 *eal 5ith facts

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but 5hethe$ the la5 applies to a pa$ticula$ set of facts. Mo$eo e$& this Cou$t is notnecessa$il6 boun* b6 the lo5e$ cou$ts conclusions of la5 *$a5n f$o) such facts. ?"

AMNEST+3

>e 5ill *eal $st 5ith the issue of ta9 a)nest6. Section % of P.,. ! ?! p$o i*es3

(. (n all cases of olunta$6 *isclosu$es of p$e iousl6 unta9e* inco)e an* o$ 5ealthsuch as ea$nin1s& $eceipts& 1ifts& be8uests o$ an6 othe$ ac8uisitions f$o) an6 sou$ce5hatsoe e$ 5hich a$e ta9able un*e$ the National (nte$nal Re enue Co*e& asa)en*e*& $eali@e* he$e o$ ab$oa* b6 an6 ta9pa6e$& natu$al o$ ;u$i*ical: thecollection of all inte$nal $e enue ta9es inclu*in1 the inc$e)ents o$ penalties o$account of non-pa6)ent as 5ell as all ci il& c$i)inal o$ a*)inist$ati e liabilitiesa$isin1 f$o) o$ inci*ent to such *isclosu$es un*e$ the National (nte$nal Re enueCo*e& the Re ise* Penal Co*e& the Anti-G$aft an* Co$$upt P$actices Act& the Re ise*A*)inist$ati e Co*e& the Ci il Se$ ice la5s an* $e1ulations& la5s an* $e1ulations on())i1$ation an* ,epo$tation& o$ an6 othe$ applicable la5 o$ p$ocla)ation& a$ehe$eb6 con*one* an*& in lieu the$eof& a ta9 of ten D%'VF pe$ centu) on suchp$e iousl6 unta9e* inco)e o$ 5ealth is he$eb6 i)pose*& sub;ect to the follo5in1con*itions3 Dcon*itions o)itte*F E)phasis supplie* .

The *ec$ee con*ones the collection of all inte$nal $e enue ta9es inclu*in1 theinc$e)ents o$ penalties o$ account of non-pa6)ent as 5ell as all ci il& c$i)inal o$a*)inist$ati e liabilities a$isin1 f$o) o$ inci*ent to D olunta$6F *isclosu$es un*e$ theN(RC of p$e iousl6 unta9e* inco)e an* o$ 5ealth $eali@e* he$e o$ ab$oa* b6 an6ta9pa6e$& natu$al o$ ;u$i*ical.

Ma6 the 5ithhol*in1 a1ent& in such capacit6& be *ee)e* a ta9pa6e$ fo$ it to a ail ofthe a)nest67 An inco)e ta9pa6e$ co e$s all pe$sons 5ho *e$i e ta9able inco)e.

? ANSCOR 5as assesse* b6 petitione$ fo$ *e cienc6 5ithhol*in1 ta9 un*e$Section " an* "? of the %# # Co*e. As such& it is bein1 hel* liable in its capacit6 asa 5ithhol*in1 a1ent an* not in its pe$sonalit6 as a ta9pa6e$.

(n the ope$ation of the 5ithhol*in1 ta9 s6ste)& the 5ithhol*in1 a1ent is the pa6o$& asepa$ate entit6 actin1 no )o$e than an a1ent of the 1o e$n)ent fo$ the collectionof the ta9 ?= in o$*e$ to ensu$e its pa6)ents: ?# the pa6e$ is the ta9pa6e$ he isthe pe$son sub;ect to ta9 i)pose b6 la5: "' an* the pa6ee is the ta9in1 autho$it6.

"% (n othe$ 5o$*s& the 5ithhol*in1 a1ent is )e$el6 a ta9 collecto$& not a ta9pa6e$.Un*e$ the 5ithhol*in1 s6ste)& ho5e e$& the a1ent-pa6o$ beco)es a pa6ee b6

ction of la5. is Da1entF liabilit6 is *i$ect an* in*epen*ent f$o) the ta9pa6e$& "because the inco)e ta9 is still i)pose on an* *ue f$o) the latte$. The a1ent is notliable fo$ the ta9 as no 5ealth o5e* into hi) he ea$ne* no inco)e. The Ta9 Co*eonl6 )a4es the a1ent pe$sonall6 liable fo$ the ta9 " DcF %# # Ta9 Co*e& asa)en*e* b6 R.A. No. ? 5hich p$o i*es in pa$t that 999 E e$6 such pe$son is)a*e pe$sonall6 liable fo$ such ta9 999." a$isin1 f$o) the b$each of its le1al *ut6to 5ithhol* as *istin1uish f$o) its *ut6 to pa6 ta9 since3

the 1o e$n)ents cause of action a1ainst the 5ithhol*in1 a1ent is not fo$ thecollection of inco)e ta9& but fo$ the enfo$ce)ent of the 5ithhol*in1 p$o ision of

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Section " of the Ta9 Co*e& co)pliance 5ith 5hich is i)pose* on the 5ithhol*in1a1ent an* not upon the ta9pa6e$. "?

Not bein1 a ta9pa6e$& a 5ithhol*in1 a1ent& li4e ANSCOR in this t$ansaction& is notp$otecte* b6 the a)nest6 un*e$ the *ec$ee.

Co*al p$o isions on 5ithhol*in1 ta9 a$e )an*ato$6 an* )ust be co)plie* 5ith b6the 5ithhol*in1 a1ent. "" The ta9pa6e$ shoul* not ans5e$ fo$ the non-pe$fo$)anceb6 the 5ithhol*in1 a1ent of its le1al *ut6 to 5ithhol* unless the$e is collusion o$ ba*faith. The fo$)e$ coul* not be *ee)e* to ha e e a*e* the ta9 ha* the 5ithhol*in1a1ent pe$fo$)e* its *ut6. This coul* be the situation fo$ 5hich the a)nest6 *ec$ee5as inten*e*. Thus& to cu$tail ta9 e asion an* 1i e ta9 e a*e$s a chance to $efo$)&

"! it 5as *ee)e* a*)inist$ati el6 feasible to 1$ant ta9 a)nest6 in ce$taininstances. (n a**ition& a ta9 a)nest6& )uch li4e a ta9 e9e)ption& is ne e$ fa o$e*no$ p$esu)e* in la5 an* if 1$ante* b6 a statute& the te$)s of the a)nest6 li4e thatof a ta9 e9e)ption )ust be const$ue* st$ictl6 a1ainst the ta9pa6e$ an* libe$all6 infa o$ of the ta9in1 autho$it6. " The $ule on st$ictissi)i ;u$is e8uall6 applies. "= Sothat& an6 *oubt in the application of an a)nest6 la5 *ec$ee shoul* be $esol e* infa o$ of the ta9in1 autho$it6.

/u$the$)o$e& ANSCORs clai) of a)nest6 cannot p$ospe$. The i)ple)entin1 $ules ofP.,. ' 5hich e9pan*e* a)nest6 on p$e iousl6 unta9e* inco)e un*e$ P.,. is

e$6 e9plicit& to 5it3

Section ?. Cases not co e$e* b6 a)nest6. The follo5in1 cases a$e not co e$e* b6the a)nest6 sub;ect of these $e1ulations3

999 999 999

D F Ta9 liabilities 5ith o$ 5ithout assess)ents& on 5ithhol*in1 ta9 at sou$ce p$o i*e*un*e$ Sections " an* "? of the National (nte$nal Re enue Co*e& as a)en*e*: "#

ANSCOR 5as assesse* un*e$ Sections " an* "? of the %# # Ta9 Co*e. Thus& b6speci c p$o ision of la5& it is not co e$e* b6 the a)nest6.

TA ON STOCI ,( (,EN,SGene$al Rule

Section = DbF of the %# # N(RC 5as ta4en f$o) Section %%"D1FD%F of the U.S.Re enue Co*e of %# =. !' (t lai* *o5n the 1ene$al $ule 4no5n as the p$opo$tionatetest !% 5he$ein stoc4 *i i*en*s once issue* fo$) pa$t of the capital an*& thus⊂ect to inco)e ta9. ! Speci call6& the 1ene$al $ule states that3

A stoc4 *i i*en* $ep$esentin1 the t$ansfe$ of su$plus to capital account shall not besub;ect to ta9.

a in1 been *e$i e* f$o) a fo$ei1n la5& $eso$t to the ;u$isp$u*ence of its o$i1in )a6she* li1ht. Un*e$ the US Re enue Co*e& this p$o ision o$i1inall6 $efe$$e* to stoc4*i i*en*s onl6& 5ithout an6 e9ception. Stoc4 *i i*en*s& st$ictl6 spea4in1& $ep$esentcapital an* *o not constitute inco)e to its $ecipient. ! So that the )e$e issuance

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the$eof is not 6et sub;ect to inco)e ta9 !? as the6 a$e nothin1 but an en$ich)entth$ou1h inc$ease in alue of capital in est)ent. !" As capital& the stoc4 *i i*en*spostpone the $eali@ation of p$o ts because the fun* $ep$esente* b6 the ne5 stoc4has been t$ansfe$$e* f$o) su$plus to capital an* no lon1e$ a ailable fo$ actual*ist$ibution. !! (nco)e in ta9 la5 is an a)ount of )one6 co)in1 to a pe$son 5ithina speci e* ti)e& 5hethe$ as pa6)ent fo$ se$ ices& inte$est& o$ p$o t f$o)in est)ent. ! (t )eans cash o$ its e8ui alent. != (t is 1ain *e$i e* an* se e$e*f$o) capital& !# f$o) labo$ o$ f$o) both co)bine* ' - so that to ta9 a stoc4*i i*en* 5oul* be to ta9 a capital inc$ease $athe$ than the inco)e. % (n a loosesense& stoc4 *i i*en*s issue* b6 the co$po$ation& a$e consi*e$e* un$eali@e* 1ain&an* cannot be sub;ecte* to inco)e ta9 until that 1ain has been $eali@e*. Befo$e the$eali@ation& stoc4 *i i*en*s a$e nothin1 but a $ep$esentation of an inte$est in theco$po$ate p$ope$ties. As capital& it is not 6et sub;ect to inco)e ta9. (t shoul* benote* that capital an* inco)e a$e *i e$ent. Capital is 5ealth o$ fun*: 5he$easinco)e is p$o t o$ 1ain o$ the o5 of 5ealth. The *ete$)inin1 facto$ fo$ thei)position of inco)e ta9 is 5hethe$ an6 1ain o$ p$o t 5as *e$i e* f$o) at$ansaction. ?

The E9ception

o5e e$& if a co$po$ation cancels o$ $e*ee)s stoc4 issue* as a *i i*en* at suchti)e an* in such )anne$ as to )a4e the *ist$ibution an* cancellation o$$e*e)ption& in 5hole o$ in pa$t& essentiall6 e8ui alent to the *ist$ibution of ata9able *i i*en*& the a)ount so *ist$ibute* in $e*e)ption o$ cancellation of thestoc4 shall be consi*e$e* as ta9able inco)e to the e9tent it $ep$esents a*ist$ibution of ea$nin1s o$ p$o ts accu)ulate* afte$ Ma$ch $st& nineteen hun*$e*an* thi$teen. DE)phasis supplie*F.

(n a $esponse to the $ulin1 of the A)e$ican Sup$e)e Cou$t in the case of Eisne$ .Maco)be$ " Dthat p$o $ata stoc4 *i i*en*s a$e not ta9able inco)eF& thee9e)ptin1 clause abo e 8uote* 5as a**e* because co$po$ations foun* a loopholein the o$i1inal p$o ision. The6 $eso$te* to *e ious )eans to ci$cu) ent the la5 an*e a*e the ta9. Co$po$ate ea$nin1s 5oul* be *ist$ibute* un*e$ the 1uise of its initialcapitali@ation b6 *ecla$in1 the stoc4 *i i*en*s p$e iousl6 issue* an* late$ $e*ee)sai* *i i*en*s b6 pa6in1 cash to the stoc4hol*e$. This p$ocess of issuance-$e*e)ption a)ounts to a *ist$ibution of ta9able cash *i i*en*s 5hich 5as ;ust*ela6e* so as to escape the ta9. (t beco)es a con enient technical st$ate16 toa oi* the e ects of ta9ation.

Thus& to plu1 the loophole the e9e)ptin1 clause 5as a**e*. (t p$o i*es that the$e*e)ption o$ cancellation of stoc4 *i i*en*s& *epen*in1 on the ti)e an* )anne$ it5as )a*e is essentiall6 e8ui alent to a *ist$ibution of ta9able *i i*en*s& )a4in1the p$ocee*s the$eof ta9able inco)e to the e9tent it $ep$esents p$o ts. Thee9ception 5as *esi1ne* to p$e ent the issuance an* cancellation o$ $e*e)ption ofstoc4 *i i*en*s& 5hich is fun*a)entall6 not ta9able& f$o) bein1 )a*e use of as a*e ice fo$ the actual *ist$ibution of cash *i i*en*s& 5hich is ta9able. ! Thus&

the p$o ision ha* the ob ious pu$pose of p$e entin1 a co$po$ation f$o) a oi*in1*i i*en* ta9 t$eat)ent b6 *ist$ibutin1 ea$nin1s to its sha$ehol*e$s in t5o

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t$ansactions a p$o $ata stoc4 *i i*en* follo5e* b6 a p$o $ata $e*e)ption that 5oul*ha e the sa)e econo)ic conse8uences as a si)ple *i i*en*.

Althou1h $e*e)ption an* cancellation a$e 1ene$all6 consi*e$e* capital t$ansactions&as such& the6 a$e not sub;ect to ta9. o5e e$& it *oes not necessa$il6 )ean that asha$ehol*e$ )a6 not $eali@e a ta9able 1ain f$o) such t$ansactions. = Si)pl6 put&*epen*in1 on the ci$cu)stances& the p$ocee*s of $e*e)ption of stoc4 *i i*en*s a$eessentiall6 *ist$ibution of cash *i i*en*s& 5hich 5hen pai* beco)es the absolutep$ope$t6 of the stoc4hol*e$. The$eafte$& the latte$ beco)es the e9clusi e o5ne$the$eof an* can e9e$cise the f$ee*o) of choice # a in1 $eali@e* 1ain f$o) that$e*e)ption& the inco)e ea$ne$ cannot escape inco)e ta9. ='

As 8uali e* b6 the ph$ase such ti)e an* in such )anne$& the e9ception 5as notinten*e* to cha$acte$i@e as ta9able *i i*en* e e$6 *ist$ibution of ea$nin1s a$isin1f$o) the $e*e)ption of stoc4 *i i*en*s. =% So that& 5hethe$ the a)ount*ist$ibute* in the $e*e)ption shoul* be t$eate* as the e8ui alent of a ta9able*i i*en* is a 8uestion of fact& = 5hich is *ete$)inable on the basis of thepa$ticula$ facts of the t$ansaction in 8uestion. = No *ecisi e test can be use* to*ete$)ine the application of the e9e)ption un*e$ Section = DbF The use of the5o$*s such )anne$ an* essentiall6 e8ui alent ne1ati e an6 i*ea that a 5ei1hte*fo$)ula can $esol e a c$ucial issue Shoul* the *ist$ibution be t$eate* as ta9able*i i*en*. =? On this aspect& A)e$ican cou$ts *e elope* ce$tain $eco1ni@e* c$ite$ia&5hich inclu*es the follo5in13 ="

%F the p$esence o$ absence of $eal business pu$pose&F the a)ount of ea$nin1s an* p$o ts a ailable fo$ the *ecla$ation of a $e1ula$

*i i*en* an* the co$po$ations past $eco$* 5ith $espect to the *ecla$ation of*i i*en*s&

F the e ect of the *ist$ibution as co)pa$e* 5ith the *ecla$ation of $e1ula$*i i*en*&?F the lapse of ti)e bet5een issuance an* $e*e)ption& =!"F the p$esence of a substantial su$plus = an* a 1ene$ous suppl6 of cash 5hichin ites suspicion as *oes a )ea1e$ polic6 in $elation both to cu$$ent ea$nin1s an*accu)ulate* su$plus. ==RE,EMPT(ON AN, CANCELLAT(ON

/o$ the e9e)ptin1 clause of Section = DbF to appl6& it is in*ispensable that3 DaF the$eis $e*e)ption o$ cancellation: DbF the t$ansaction in ol es stoc4 *i i*en*s an* DcFthe ti)e an* )anne$ of the t$ansaction )a4es it essentiall6 e8ui alent to a*ist$ibution of ta9able *i i*en*s. Of these& the )ost i)po$tant is the thi$*.

Re*e)ption is $epu$chase& a $eac8uisition of stoc4 b6 a co$po$ation 5hich issue*the stoc4 =# in e9chan1e fo$ p$ope$t6& 5hethe$ o$ not the ac8ui$e* stoc4 iscancelle*& $eti$e* o$ hel* in the t$easu$6. #' Essentiall6& the co$po$ation 1ets bac4so)e of its stoc4& *ist$ibutes cash o$ p$ope$t6 to the sha$ehol*e$ in pa6)ent fo$ thestoc4& an* continues in business as befo$e. The $e*e)ption of stoc4 *i i*en*sp$e iousl6 issue* is use* as a eil fo$ the const$ucti e *ist$ibution of cash *i i*en*s.(n the instant case& the$e is no *ispute that ANSCOR $e*ee)e* sha$es of stoc4sf$o) a stoc4hol*e$ D,on An*$esF t5ice D =&''' an* ='&''' co))on sha$esF. But5he$e *i* the sha$es $e*ee)e* co)e f$o)7 (f its sou$ce is the o$i1inal capital

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subsc$iptions upon establish)ent of the co$po$ation o$ f$o) initial capitalin est)ent in an e9istin1 ente$p$ise& its $e*e)ption to the concu$$ent alue ofac8uisition )a6 not in ite the application of Sec. = DbF un*e$ the %# # Ta9 Co*e& asit is not inco)e but a )e$e $etu$n of capital. On the cont$a$6& if the $e*ee)e*sha$es a$e f$o) stoc4 *i i*en* *ecla$ations othe$ than as initial capital in est)ent&the p$ocee*s of the $e*e)ption is a**itional 5ealth& fo$ it is not )e$el6 a $etu$n ofcapital but a 1ain the$eon.

(t is not the stoc4 *i i*en*s but the p$ocee*s of its $e*e)ption that )a6 be *ee)e*as ta9able *i i*en*s. e$e& it is un*ispute* that at the ti)e of the last $e*e)ption&the o$i1inal co))on sha$es o5ne* b6 the estate 5e$e onl6 "& ? .". #% This)eans that f$o) the total of %'=&''' sha$es $e*ee)e* f$o) the estate& the balanceof = & " ." D%'=&''' less "& ? ."F )ust ha e co)e f$o) stoc4 *i i*en*s. Besi*es&in the absence of e i*ence to the cont$a$6& the Ta9 Co*e p$esu)es that e e$6*ist$ibution of co$po$ate p$ope$t6& in 5hole o$ in pa$t& is )a*e out of co$po$atep$o ts& # such as stoc4 *i i*en*s. The capital cannot be *ist$ibute* in the fo$) of$e*e)ption of stoc4 *i i*en*s 5ithout iolatin1 the t$ust fun* *oct$ine 5he$ein thecapital stoc4& p$ope$t6 an* othe$ assets of the co$po$ation a$e $e1a$*e* as e8uit6 int$ust fo$ the pa6)ent of the co$po$ate c$e*ito$s. # Once capital& it is al5a6scapital. #? That *oct$ine 5as inten*e* fo$ the p$otection of co$po$ate c$e*ito$s. #"

>ith $espect to the thi$* $e8uisite& ANSCOR $e*ee)e* stoc4 *i i*en*s issue* ;ust to 6ea$s ea$lie$. The ti)e alone that lapse* f$o) the issuance to the $e*e)ption isnot a suHcient in*icato$ to *ete$)ine ta9abilit6. (t is a )ust to consi*e$ the factualci$cu)stances as to the )anne$ of both the issuance an* the $e*e)ption. The ti)eele)ent is a facto$ to sho5 a *e ice to e a*e ta9 an* the sche)e of cancellin1 o$$e*ee)in1 the sa)e sha$es is a )etho* usuall6 a*opte* to acco)plish the en*sou1ht. #! >as this t$ansaction use* as a continuin1 plan& *e ice o$ a$ti ce toe a*e pa6)ent of ta97 (t is necessa$6 to *ete$)ine the net e ect of the t$ansactionbet5een the sha$ehol*e$-inco)e ta9pa6e$ an* the ac8ui$in1 D$e*ee)in1Fco$po$ation. # The net e ect test is not e i*ence o$ testi)on6 to be consi*e$e*: itis $athe$ an infe$ence to be *$a5n o$ a conclusion to be $eache*. #= (t is alsoi)po$tant to 4no5 5hethe$ the issuance of stoc4 *i i*en*s 5as *ictate* b6le1iti)ate business $easons& the p$esence of 5hich )i1ht ne1ate a ta9 e asion plan.

##

The issuance of stoc4 *i i*en*s an* its subse8uent $e*e)ption )ust be sepa$ate&*istinct& an* not $elate*& fo$ the $e*e)ption to be consi*e$e* a le1iti)ate ta9sche)e. %'' Re*e)ption cannot be use* as a cloa4 to *ist$ibute co$po$ateea$nin1s. %'% Othe$5ise& the appa$ent intention to a oi* ta9 beco)es *oubtful asthe intention to e a*e beco)es )anifest. (t has been $ule* that3

A n ope$ation 5ith no business o$ co$po$ate pu$pose is a )e$e *e ise 5hich put onthe fo$) of a co$po$ate $eo$1ani@ation as a *is1uise fo$ concealin1 its $ealcha$acte$& an* the sole ob;ect an* acco)plish)ent of 5hich 5as the consu))ationof a p$econcei e* plan& not to $eo$1ani@e a business o$ an6 pa$t of a business& butto t$ansfe$ a pa$cel of co$po$ate sha$es to a stoc4hol*e$. %'

,epen*in1 on each case& the e9e)ptin1 p$o ision of Sec. = DbF of the %# # Co*e)a6 not be applicable if the $e*ee)e* sha$es 5e$e issue* 5ith bona *e business

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pu$pose& %' 5hich is ;u*1e* afte$ each an* e e$6 step of the t$ansaction ha ebeen consi*e$e* an* the 5hole t$ansaction *oes not a)ount to a ta9 e asionsche)e.

ANSCOR in o4e* t5o $easons to ;ustif6 the $e*e)ptions D%F the alle1e* lipini@ationp$o1$a) an* D F the $e*uction of fo$ei1n e9chan1e $e)ittances in case cash*i i*en*s a$e *ecla$e*. The Cou$t is not conce$ne* 5ith the 5is*o) of thesepu$poses but on thei$ $ele ance to the 5hole t$ansaction 5hich can be infe$$e* f$o)the outco)e the$eof. A1ain& it is the net e ect $athe$ than the )oti es an* plans ofthe ta9pa6e$ o$ his co$po$ation %'? that is the fun*a)ental 1ui*e in a*)iniste$in1Sec. = DbF. This ta9 p$o ision is ai)e* at the $esult. %'" (t also applies e en if atthe ti)e of the issuance of the stoc4 *i i*en*& the$e 5as no intention to $e*ee) itas a )eans of *ist$ibutin1 p$o t o$ a oi*in1 ta9 on *i i*en*s. %'! The e9istence ofle1iti)ate business pu$poses in suppo$t of the $e*e)ption of stoc4 *i i*en*s isi))ate$ial in inco)e ta9ation. (t has no $ele ance in *ete$)inin1 *i i*en*e8ui alence. %' Such pu$poses )a6 be )ate$ial onl6 upon the issuance of thestoc4 *i i*en*s. The test of ta9abilit6 un*e$ the e9e)ptin1 clause& 5hen it p$o i*essuch ti)e an* )anne$ as 5oul* )a4e the $e*e)ption essentiall6 e8ui alent to the*ist$ibution of a ta9able *i i*en*& is 5hethe$ the $e*e)ption $esulte* into a o5 of5ealth. (f no 5ealth is $eali@e* f$o) the $e*e)ption& the$e )a6 not be a *i i*en*e8ui alence t$eat)ent. (n the )etapho$ of Eisne$ . Maco)be$& inco)e is not*ee)e* $eali@e until the f$uit has fallen o$ been pluc4e* f$o) the t$ee.

The th$ee ele)ents in the i)position of inco)e ta9 a$e3 D%F the$e )ust be 1ain o$p$o t& D F that the 1ain o$ p$o t is $eali@e* o$ $ecei e*& actuall6 o$ const$ucti el6&

%'= an* D F it is not e9e)pte* b6 la5 o$ t$eat6 f$o) inco)e ta9. An6 businesspu$pose as to 5h6 o$ ho5 the inco)e 5as ea$ne* b6 the ta9pa6e$ is not a$e8ui$e)ent. (nco)e ta9 is assesse* on inco)e $ecei e* f$o) an6 p$ope$t6& acti it6o$ se$ ice that p$o*uces the inco)e because the Ta9 Co*e stan*s as an in*i e$entneut$al pa$t6 on the )atte$ of 5he$e inco)e co)es f$o). %'#

As state* abo e& the test of ta9abilit6 un*e$ the e9e)ptin1 clause of Section = DbFis& 5hethe$ inco)e 5as $eali@e* th$ou1h the $e*e)ption of stoc4 *i i*en*s. The$e*e)ption con e$ts into )one6 the stoc4 *i i*en*s 5hich beco)e a $eali@e* p$o to$ 1ain an* conse8uentl6& the stoc4hol*e$s sepa$ate p$ope$t6. %%' P$o ts *e$i e*f$o) the capital in este* cannot escape inco)e ta9. As $eali@e* inco)e& thep$ocee*s of the $e*ee)e* stoc4 *i i*en*s can be $eache* b6 inco)e ta9ation$e1a$*less of the e9istence of an6 business pu$pose fo$ the $e*e)ption. Othe$5ise&to $ule that the sai* p$ocee*s a$e e9e)pt f$o) inco)e ta9 5hen the $e*e)ption issuppo$te* b6 le1iti)ate business $easons 5oul* *efeat the e$6 pu$pose ofi)posin1 ta9 on inco)e. Such a$1u)ent 5oul* open the *oo$ fo$ inco)e ea$ne$snot to pa6 ta9 so lon1 as the pe$son f$o) 5ho) the inco)e 5as *e$i e* hasle1iti)ate business $easons. (n othe$ 5o$*s& the pa6)ent of ta9 un*e$ thee9e)ptin1 clause of Section = DbF 5oul* be )a*e to *epen* not on the inco)e ofthe ta9pa6e$ but on the business pu$poses of a thi$* pa$t6 Dthe co$po$ation he$einFf$o) 5ho) the inco)e 5as ea$ne*. This is absu$*& illo1ical an* i)p$acticalconsi*e$in1 that the Bu$eau of (nte$nal Re enue DB(RF 5oul* be peste$e* 5ithinstances in *ete$)inin1 the le1iti)ac6 of business $easons that e e$6 inco)eea$ne$ )a6 inte$pose*. (t is not a*)inist$ati el6 feasible an* cannot the$efo$e beallo5e*.

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The $ulin1 in the A)e$ican cases cite* an* $elie* upon b6 ANSCOR that the$e*ee)e* sha$es a$e the e8ui alent of *i i*en* onl6 if the sha$es 5e$e not issue*fo$ 1enuine business pu$poses %%% o$ the $e*ee)e* sha$es ha e been issue* b6 aco$po$ation bona *e %% bea$s no $ele ance in *ete$)inin1 the non-ta9abilit6 ofthe p$ocee*s of $e*e)ption. ANSCOR& $el6in1 hea il6 an* appl6in1 sai* cases&a$1ue* that so lon1 as the $e*e)ption is suppo$te* b6 ali* co$po$ate pu$poses thep$ocee*s a$e not sub;ect to ta9. %% The a*option b6 the cou$ts belo5 %%? ofsuch a$1u)ent is )islea*in1 if not )isplace*. A $e ie5 of the cite* A)e$ican casessho5s that the p$esence o$ absence of 1enuine business pu$poses )a6 be )ate$ial5ith $espect to the issuance o$ *ecla$ation of stoc4 *i i*en*s but not on itssubse8uent $e*e)ption. The issuance an* the $e*e)ption of stoc4s a$e t5o*i e$ent t$ansactions. Althou1h the e9istence of le1iti)ate co$po$ate pu$poses )a6

;ustif6 a co$po$ations ac8uisition of its o5n sha$es un*e$ Section ?% of theCo$po$ation Co*e& %%" such pu$poses cannot e9cuse the stoc4hol*e$ f$o) thee ects of ta9ation a$isin1 f$o) the $e*e)ption. (f the issuance of stoc4 *i i*en*s ispa$t of a ta9 e asion plan an* thus& 5ithout le1iti)ate business $easons the$e*e)ption beco)es suspicious 5hich )a6 call fo$ the application of the e9e)ptin1clause. The substance of the 5hole t$ansaction& not its fo$)& usuall6 cont$ols the ta9conse8uences. %%!

The t5o pu$poses in o4e* b6 ANSCOR un*e$ the facts of this case a$e no e9cuse fo$its ta9 liabilit6. /i$st& the alle1e* lipini@ation plan cannot be consi*e$e* le1iti)ateas it 5as not i)ple)ente* until the B(R sta$te* )a4in1 assess)ents on thep$ocee*s of the $e*e)ption. Such co$po$ate plan 5as not state* in no$ suppo$te* b6an6 Boa$* Resolution but a )e$e afte$thou1ht inte$pose* b6 the counsel ofANSCOR. Bein1 a sepa$ate entit6& the co$po$ation can act onl6 th$ou1h its Boa$* of,i$ecto$s. %% The Boa$* Resolutions autho$i@in1 the $e*e)ptions state onl6 onepu$pose $e*uction of fo$ei1n e9chan1e $e)ittances in case cash *i i*en*s a$e*ecla$e*. Not e en this pu$pose can be 1i en c$e*ence. Reco$*s sho5 that *espitethe e9istence of eno$)ous co$po$ate p$o ts no cash *i i*en* 5as e e$ *ecla$e* b6ANSCOR f$o) %#?" until the B(R sta$te* )a4in1 assess)ents in the ea$l6 %# 's.Althou1h a co$po$ation un*e$ ce$tain e9ceptions& has the p$e$o1ati e 5hen to issue*i i*en*s& 6et 5hen no cash *i i*en*s 5as issue* fo$ about th$ee *eca*es& thisci$cu)stance ne1ates the le1iti)ac6 of ANSCORs alle1e* pu$poses. Mo$eo e$& toissue stoc4 *i i*en*s is to inc$ease the sha$ehol*in1s of ANSCORs fo$ei1nstoc4hol*e$s cont$a$6 to its lipini@ation plan. This 5oul* also inc$ease $athe$ than$e*uce thei$ nee* fo$ fo$ei1n e9chan1e $e)ittances in case of cash *i i*en**ecla$ation& consi*e$in1 that ANSCOR is a fa)il6 co$po$ation 5he$e the )a;o$it6sha$es at the ti)e of $e*e)ptions 5e$e hel* b6 ,on An*$es fo$ei1n hei$s.

Secon*l6& assu)in1 a$1uen*o& that those business pu$poses a$e le1iti)ate& thesa)e cannot be a ali* e9cuse fo$ the i)position of ta9. Othe$5ise& the ta9pa6e$sliabilit6 to pa6 inco)e ta9 5oul* be )a*e to *epen* upon a thi$* pe$son 5ho *i*not ea$n the inco)e bein1 ta9e*. /u$the$)o$e& e en if the sai* pu$poses suppo$tthe $e*e)ption an* ;ustif6 the issuance of stoc4 *i i*en*s& the sa)e has no bea$in15hatsoe e$ on the i)position of the ta9 he$ein assesse* because the p$ocee*s ofthe $e*e)ption a$e *ee)e* ta9able *i i*en*s since it 5as sho5n that inco)e 5as1ene$ate* the$ef$o).

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Thi$*l6& ANSCOR a$1ue* that to t$eat as ta9able *i i*en* the p$ocee*s of the$e*ee)e* stoc4 *i i*en*s 5oul* be to i)pose on such stoc4 an un*isclose* lienan* 5oul* be e9t$e)el6 unfai$ to inte$ enin1 pu$chase$s& i.e. those 5ho bu6s thestoc4 *i i*en*s afte$ thei$ issuance. %%= Such a$1u)ent& ho5e e$& bea$s no$ele ance in this case as no inte$ enin1 bu6e$ is in ol e*. An* e en if the$e is aninte$ enin1 bu6e$& it is necessa$6 to loo4 into the factual )ilieu of the case ifinco)e 5as $eali@e* f$o) the t$ansaction. A1ain& 5e $eite$ate that the *i i*en*e8ui alence test *epen*s on such ti)e an* )anne$ of the t$ansaction an* its nete ect. The un*isclose* lien %%# )a6 be unfai$ to a subse8uent stoc4 bu6e$ 5hohas no capital inte$est in the co)pan6. But the unfai$ness )a6 not be t$ue to ano$i1inal subsc$ibe$ li4e ,on An*$es& 5ho hol*s stoc4 *i i*en*s as 1ains f$o) hisin est)ents. The subse8uent bu6e$ 5ho bu6s stoc4 *i i*en*s is in estin1 capital. (t

;ust so happen that 5hat he bou1ht is stoc4 *i i*en*s. The e ect of its Dstoc4*i i*en*sF $e*e)ption f$o) that subse8uent bu6e$ is )e$el6 to $etu$n his capitalsubsc$iption& 5hich is inco)e if $e*ee)e* f$o) the o$i1inal subsc$ibe$.

Afte$ consi*e$in1 the )anne$ an* the ci$cu)stances b6 5hich the issuance an*$e*e)ption of stoc4 *i i*en*s 5e$e )a*e& the$e is no othe$ conclusion but that thep$ocee*s the$eof a$e essentiall6 consi*e$e* e8ui alent to a *ist$ibution of ta9able*i i*en*s. As ta9able *i i*en* un*e$ Section = DbF& it is pa$t of the enti$e inco)esub;ect to ta9 un*e$ Section in $elation to Section % % ' of the %# # Co*e.Mo$eo e$& un*e$ Section #DaF of sai* Co*e& *i i*en*s a$e inclu*e* in 1$oss inco)e.As inco)e& it is sub;ect to inco)e ta9 5hich is $e8ui$e* to be 5ithhel* at sou$ce.

The %## Ta9 Co*e )a6 ha e alte$e* the situation but it *oes not chan1e this*isposition.

E C ANGE O/ COMMON >(T PRE/ERRE, S ARES % %

E9chan1e is an act of ta4in1 o$ 1i in1 one thin1 fo$ anothe$ % in ol in1$ecip$ocal t$ansfe$ % an* is 1ene$all6 consi*e$e* as a ta9able t$ansaction. Thee9chan1e of co))on stoc4s 5ith p$efe$$e* stoc4s& o$ p$efe$$e* fo$ co))on o$ aco)bination of eithe$ fo$ both& )a6 not p$o*uce a $eco1ni@e* 1ain o$ loss& so lon1as the p$o isions of Section = DbF is not applicable. This is t$ue in a t$a*e bet5eent5o D F pe$sons as 5ell as a t$a*e bet5een a stoc4hol*e$ an* a co$po$ation. (n1ene$al& this t$a*e )ust be pa$ts of )e$1e$& t$ansfe$ to cont$olle* co$po$ation&co$po$ate ac8uisitions o$ co$po$ate $eo$1ani@ations. No ta9able 1ain o$ loss )a6 be$eco1ni@e* on e9chan1e of p$ope$t6& stoc4 o$ secu$ities $elate* to $eo$1ani@ations.

% ?

Both the Ta9 Cou$t an* the Cou$t of Appeals foun* that ANSCOR $eclassi e* itssha$es into co))on an* p$efe$$e*& an* that pa$ts of the co))on sha$es of the ,onAn*$es estate an* all of ,oa Ca$)ens sha$es 5e$e e9chan1e* fo$ the 5hole %"'&''' p$efe$$e* sha$es. The$eafte$& both the ,on An*$es estate an* ,oa Ca$)en$e)aine* as co$po$ate subsc$ibe$s e9cept that thei$ subsc$iptions no5 inclu*ep$efe$$e* sha$es. The$e 5as no chan1e in thei$ p$opo$tional inte$est afte$ thee9chan1e. The$e 5as no cash o5. Both stoc4s ha* the sa)e pa$ alue. Un*e$ thefacts he$ein& an6 *i e$ence in thei$ )a$4et alue 5oul* be i))ate$ial at the ti)e of e9chan1e because no inco)e is 6et $eali@e* it 5as a )e$e co$po$ate pape$t$ansaction. (t 5oul* ha e been *i e$ent& if the e9chan1e t$ansaction $esulte* into a

o5 of 5ealth& in 5hich case inco)e ta9 )a6 be i)pose*. % "

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Reclassi cation of sha$es *oes not al5a6s b$in1 an6 substantial alte$ation in thesubsc$ibe$s p$opo$tional inte$est. But the e9chan1e is *i e$ent the$e 5oul* be ashiftin1 of the balance of stoc4 featu$es& li4e p$io$it6 in *i i*en* *ecla$ations o$absence of otin1 $i1hts. +et neithe$ the $eclassi cation no$ e9chan1e pe$ se& 6iel*s$eali@e inco)e fo$ ta9 pu$poses. A co))on stoc4 $ep$esents the $esi*ual o5ne$shipinte$est in the co$po$ation. (t is a basic class of stoc4 o$*ina$il6 an* usuall6 issue*5ithout e9t$ao$*ina$6 $i1hts o$ p$i ile1es an* entitles the sha$ehol*e$ to a p$o $ata*i ision of p$o ts. % ! P$efe$$e* stoc4s a$e those 5hich entitle the sha$ehol*e$ toso)e p$io$it6 on *i i*en*s an* asset *ist$ibution. %

Both sha$es a$e pa$t of the co$po$ations capital stoc4. Both stoc4hol*e$s a$e no*i e$ent f$o) o$*ina$6 in esto$s 5ho ta4e on the sa)e in est)ent $is4s. P$efe$$e*an* co))on sha$ehol*e$s pa$ticipate in the sa)e entu$e& 5illin1 to sha$e in thep$o ts an* losses of the ente$p$ise. % = Mo$eo e$& un*e$ the *oct$ine of e8ualit6 of sha$es all stoc4s issue* b6 the co$po$ation a$e p$esu)e* e8ual 5ith the sa)ep$i ile1es an* liabilities& p$o i*e* that the A$ticles of (nco$po$ation is silent on such*i e$ences. % # (n this case& the e9chan1e of sha$es& 5ithout )o$e& p$o*uces no$eali@e* inco)e to the subsc$ibe$. The$e is onl6 a )o*i cation of the subsc$ibe$s$i1hts an* p$i ile1es - 5hich is not a o5 of 5ealth fo$ ta9 pu$poses. The issue ofta9able *i i*en* )a6 a$ise onl6 once a subsc$ibe$ *isposes of his enti$e inte$est an*not 5hen the$e is still )aintenance of p$op$ieta$6 inte$est. % '

> ERE/ORE& p$e)ises consi*e$e*& the *ecision of the Cou$t of Appeals is MO,(/(E,in that ANSCORs $e*e)ption of = & " ." stoc4 *i i*en*s is he$ein consi*e$e* asessentiall6 e8ui alent to a *ist$ibution of ta9able *i i*en*s fo$ 5hich it is L(ABLE fo$the 5ithhol*in1 ta9-at-sou$ce. The *ecision is A//(RME, in all othe$ $espects.

SO OR,ERE,.

,a i*e& 0$.& C.0.& DChai$)anF& Melo& Iapunan& an* Pa$*o& 00.& concu$.

T (R, ,( (S(ONG.R. No. %% ! ". 0anua$6 "& %###

A/(SCO (NSURANCE CORPORAT(ON: CCC (NSURANCE CORPORAT(ON: C ARTER(NSURANCE CO.& (NC.: C(BELES (NSURANCE CORPORAT(ON: COMMON>EALT(NSURANCE COMPAN+: CONSOL(,ATE, (NSURANCE CO.& (NC.: ,E ELOPMENT(NSURANCE K SURET+ CORPORAT(ON: ,OMEST(C (NSURANCE COMPAN+ O/ T EP (L(PP(NES: EASTERN ASSURANCE COMPAN+ K SURET+ CORP.: EMP(RE (NSURANCE

COMPAN+: EWU(TABLE (NSURANCE CORPORAT(ON: /E,ERAL (NSURANCECORPORAT(ON (NC.: /GU (NSURANCE CORPORAT(ON: /(,EL(T+ K SURET+ COMPAN+O/ T E P (LS.& (NC.: /(L(P(NO MERC ANTS (NSURANCE CO.& (NC.: GO ERNMENTSER (CE (NSURANCE S+STEM: MALA+AN (NSURANCE CO.& (NC.: MALA+AN 2UR(C(NSURANCE CO.& (NC.: MERCANT(LE (NSURANCE CO.& (NC.: METROPOL(TAN(NSURANCE COMPAN+: METRO-TA(S O (NSURANCE CORPORAT(ON: NE> 2EALAN,(NSURANCE CO.& LT,.: PAN-MALA+AN (NSURANCE CORPORAT(ON: PARAMOUNT(NSURANCE CORPORAT(ON: PEOPLES TRANS-EAST AS(A (NSURANCE CORPORAT(ON:PERLA COMPAN(A ,E SEGUROS& (NC.: P (L(PP(NE BR(T(S ASSURANCE CO.& (NC.:

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P (L(PP(NE /(RST (NSURANCE CO.& (NC.: P(ONEER (NSURANCE K SURET+ CORP.:P(ONEER (NTERCONT(NENTAL (NSURANCE CORPORAT(ON: PRO (,ENT (NSURANCECOMPAN+ O/ T E P (L(PP(NES: P+RAM(, (NSURANCE CO.& (NC.: REL(ANCE SURET+ K(NSURANCE COMPAN+: R(2AL SURET+ K (NSURANCE COMPAN+: SANP(RO(NSURANCE CORPORAT(ON: SEABOAR,-EASTERN (NSURANCE CO.& (NC.: SOL(,GUARANT+& (NC.: SOUT SEA SURET+ K (NSURANCE CO.& (NC.: STATE BON,(NG K(NSURANCE CO.& (NC.: SUMMA (NSURANCE CORPORAT(ON: TABACALERA (NSURANCECO.& (NC.all assesse* as POOL O/ MAC (NER+ (NSURERS& petitione$s& s. COURT O/APPEALS& COURT O/ TA APPEALS an* COMM(SS(ONER O/ (NTERNAL RE ENUE&$espon*ents., E C ( S ( O NPANGAN(BAN& 0.3

Pu$suant to $einsu$ance t$eaties& a nu)be$ of local insu$ance $)s fo$)e*the)sel es into a pool in o$*e$ to facilitate the han*lin1 of business cont$acte* 5itha non$esi*ent fo$ei1n $einsu$ance co)pan6. Ma6 the clea$in1 house o$ insu$ancepool so fo$)e* be *ee)e* a pa$tne$ship o$ an association that is ta9able as aco$po$ation un*e$ the National (nte$nal Re enue Co*e DN(RCF7 Shoul* the pools$e)ittances to the )e)be$ co)panies an* to the sai* fo$ei1n $) be ta9able as*i i*en*s7 Un*e$ the facts of this case& has the 1o e$n)ents $i1ht to assess an*collect sai* ta9 p$esc$ibe*7

The Case

These a$e the )ain 8uestions $aise* in the Petition fo$ Re ie5 on Ce$tio$a$i befo$eus& assailin1 the Octobe$ %%& %## ,ecision % of the Cou$t of Appeals in CA-GR SP

#"' & 5hich *is)isse* petitione$s appeal of the Octobe$ %#& %## ,ecision ofthe Cou$t of Ta9 Appeals ? DCTAF 5hich ha* p$e iousl6 sustaine* petitione$s liabilit6fo$ *e cienc6 inco)e ta9& inte$est an* 5ithhol*in1 ta9. The Cou$t of Appeals $ule*3

> ERE/ORE& the petition is ,(SM(SSE,& 5ith costs a1ainst petitione$s. "

The petition also challen1es the No e)be$ %"& %## Cou$t of Appeals DCAFResolution ! *en6in1 $econsi*e$ation.

The /acts

The antece*ent facts& as foun* b6 the Cou$t of Appeals& a$e as follo5s3

The petitione$s a$e ?% non-life insu$ance co$po$ations& o$1ani@e* an* e9istin1 un*e$the la5s of the Philippines. Upon issuance b6 the) of E$ection& Machine$6B$ea4*o5n& Boile$ E9plosion an* Cont$acto$s All Ris4 insu$ance policies& thepetitione$s on Au1ust %& %#!" ente$e* into a Wuota Sha$e Reinsu$ance T$eat6 an* aSu$plus Reinsu$ance T$eat6 5ith the Munchene$ Ruc4 e$siche$un1s-GesselschaftDhe$eafte$ calle* MunichF& a non-$esi*ent fo$ei1n insu$ance co$po$ation. The$einsu$ance t$eaties $e8ui$e* petitione$s to fo$) a p ool. Acco$*in1l6& a poolco)pose* of the petitione$s 5as fo$)e* on the sa)e *a6.

On Ap$il %?& %# !& the pool of )achine$6 insu$e$s sub)itte* a nancial state)entan* le* an (nfo$)ation Retu$n of O$1ani@ation E9e)pt f$o) (nco)e Ta9 fo$ the

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6ea$ en*in1 in %# "& on the basis of 5hich it 5as assesse* b6 the Co))issione$ of(nte$nal Re enue *e cienc6 co$po$ate ta9es in the a)ount of P%&=? & .!'& an*5ithhol*in1 ta9es in the a)ount of P%& !=& ##. # an* P=#&? =.!= on *i i*en*s pai*to Munich an* to the petitione$s& $especti el6. These assess)ents 5e$e p$oteste* b6the petitione$s th$ou1h its au*ito$s S6cip& Go$$es& ela6o an* Co.

On 0anua$6 & %#=!& the Co))issione$ of (nte$nal Re enue *enie* the p$otest an*o$*e$e* the petitione$s& assesse* as Pool of Machine$6 (nsu$e$s& to pa6 *e cienc6inco)e ta9& inte$est& an* 5ith h ol*in1 ta9& ite)i@e* as follo5s3

Net inco)e pe$ info$)ation$etu$n P & & '.''

XXXXXXXXXXX(nco)e ta9 *ue the$eon P%& #=&'='.''A**3 %?V (nt. f$. ? %" !to ? %" # "?"&%# .!'

TOTAL AMOUNT ,UE K P%&=? & .!'COLLECT(BLE XXXXXXXXXXX

,i i*en* pai* to MunichReinsu$ance Co)pan6 P & =&?% .''XXXXXXXXXXX

"V 5ithhol*in1 ta9 atsou$ce *ue the$eon P%& '?&#??. 'A**3 "V su$cha$1e !& !.'"%?V inte$est f$o)% " ! to % " # % &'%#.%?Co)p$o)ise penalt6-non- lin1 of $etu$n ''.''late pa6)ent ''.''

TOTAL AMOUNT ,UE K P%& !=& ##. #COLLECT(BLE XXXXXXXXXXX

,i i*en* pai* to Pool Me)be$s P !""&! !.''XXXXXXXXXXX

%'V 5ithhol*in1 ta9 atsou$ce *ue the$eon P !"&"! .!'A**3 "V su$cha$1e %!& #'.#'%?V inte$est f$o)% " ! to % " # !&==?.%=Co)p$o)ise penalt6-non- lin1 of $etu$n ''.''late pa6)ent ''.''

TOTAL AMOUNT ,UE K P =#&? =.!=COLLECT(BLE XXXXXXXXXXX =

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The CA $ule* in the )ain that the pool of )achine$6 insu$e$s 5as a pa$tne$shipta9able as a co$po$ation& an* that the latte$s collection of p$e)iu)s on behalf of its)e)be$s& the ce*in1 co)panies& 5as ta9able inco)e. (t a**e* that p$esc$iption *i*not ba$ the Bu$eau of (nte$nal Re enue DB(RF f$o) collectin1 the ta9es *ue& becausethe ta9pa6e$ cannot be locate* at the a**$ess 1i en in the info$)ation $etu$n le*.

ence& this Petition fo$ Re ie5 befo$e us. #

The (ssues

Befo$e this Cou$t& petitione$s $aise the follo5in1 issues3

%.>hethe$ o$ not the Clea$in1 ouse& actin1 as a )e$e a1ent an* pe$fo$)in1 st$ictl6a*)inist$ati e functions& an* 5hich *i* not insu$e o$ assu)e an6 $is4 in its o5nna)e& 5as a pa$tne$ship o$ association sub;ect to ta9 as a co$po$ation:

.>hethe$ o$ not the $e)ittances to petitione$s an* MUN(C RE of thei$ $especti esha$es of $einsu$ance p$e)iu)s& pe$tainin1 to thei$ in*i i*ual an* sepa$atecont$acts of $einsu$ance& 5e$e *i i*en*s sub;ect to ta9: an*

.>hethe$ o$ not the $espon*ent Co))issione$s $i1ht to assess the Clea$in1 ouseha* al$ea*6 p$esc$ibe*. %'

The Cou$ts Rulin1

The petition is *e oi* of )e$it. >e sustain the $ulin1 of the Cou$t of Appeals that thepool is ta9able as a co$po$ation& an* that the 1o e$n)ents $i1ht to assess an*collect the ta9es ha* not p$esc$ibe*.

/i$st (ssue3Pool Ta9able as a Co$po$ation

Petitione$s conten* that the Cou$t of Appeals e$$e* in n*in1 that the pool o$clea$in1 house 5as an info$)al pa$tne$ship& 5hich 5as ta9able as a co$po$ationun*e$ the N(RC. The6 point out that the $einsu$ance policies 5e$e 5$itten b6 the)in*i i*uall6 an* sepa$atel6& an* that thei$ liabilit6 5as li)ite* to the e9tent of thei$allocate* sha$e in the o$i1inal $is4s thus $einsu$e*. %% ence& the pool *i* not acto$ ea$n inco)e as a $einsu$e$. % (ts $ole 5as li)ite* to its p$incipal function ofallocatin1 an* *ist$ibutin1 the $is4DsF a$isin1 f$o) the o$i1inal insu$ance a)on1 thesi1nato$ies to the t$eat6 o$ the )e)be$s of the pool base* on thei$ abilit6 to abso$bthe $is4DsF ce*e* : as 5ell as the pe$fo$)ance of inci*ental functions& such as$eco$*s& )aintenance& collection an* custo*6 of fun*s& etc. %

Petitione$s belie the e9istence of a pa$tne$ship in this case& because D%F the6& the$einsu$e$s& *i* not sha$e the sa)e $is4 o$ soli*a$6 liabilit6: %? D F the$e 5as noco))on fun*: %" D F the e9ecuti e boa$* of the pool *i* not e9e$cise cont$ol an*)ana1e)ent of its fun*s& unli4e the boa$* of *i$ecto$s of a co$po$ation: %! an* D?Fthe pool o$ clea$in1 house 5as not an* coul* not possibl6 ha e en1a1e* in thebusiness of $einsu$ance f$o) 5hich it coul* ha e *e$i e* inco)e fo$ itself. %

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The Cou$t is not pe$sua*e*. The opinion o$ $ulin1 of the Co))ission of (nte$nalRe enue& the a1enc6 tas4e* 5ith the enfo$ce)ent of ta9 la5s& is acco$*e* )uch5ei1ht an* e en nalit6& 5hen the$e is no sho5in1 that it is patentl6 5$on1& %=pa$ticula$l6 in this case 5he$e the n*in1s an* conclusions of the inte$nal $e enueco))issione$ 5e$e subse8uentl6 aH$)e* b6 the CTA& a speciali@e* bo*6 c$eate*fo$ the e9clusi e pu$pose of $e ie5in1 ta9 cases& an* the Cou$t of Appeals. %#(n*ee*&

( t has been the lon1 stan*in1 polic6 an* p$actice of this Cou$t to $espect theconclusions of 8uasi-;u*icial a1encies& such as the Cou$t of Ta9 Appeals 5hich& b6the natu$e of its functions& is *e*icate* e9clusi el6 to the stu*6 an* consi*e$ation of ta9 p$oble)s an* has necessa$il6 *e elope* an e9pe$tise on the sub;ect& unlessthe$e has been an abuse o$ i)p$o i*ent e9e$cise of its autho$it6. '

This Cou$t $ules that the Cou$t of Appeals& in aH$)in1 the CTA 5hich ha* p$e iousl6sustaine* the inte$nal $e enue co))issione$& co))itte* no $e e$sible e$$o$.Section ? of the N(RC& as 5o$*e* in the 6ea$ en*in1 %# "& p$o i*es3

SEC. ?. Rate of ta9 on co$po$ations. -- DaF Ta9 on *o)estic co$po$ations. -- A ta9 ishe$eb6 i)pose* upon the ta9able net inco)e $ecei e* *u$in1 each ta9able 6ea$f$o) all sou$ces b6 e e$6 co$po$ation o$1ani@e* in& o$ e9istin1 un*e$ the la5s of thePhilippines& no )atte$ ho5 c$eate* o$ o$1ani@e*& but not inclu*in1 *ul6 $e1iste$e*1ene$al co-pa$tne$ship Dco)paias colecti asF& 1ene$al p$ofessional pa$tne$ships&p$i ate e*ucational institutions& an* buil*in1 an* loan associations 999.

(nelu*ibl6& the Philippine le1islatu$e inclu*e* in the concept of co$po$ations thoseentities that $ese)ble* the) such as un$e1iste$e* pa$tne$ships an* associations.Pa$entheticall6& the NLRCs inclusion of such entities in the ta9 on co$po$ations 5as)a*e e en clea$e$ b6 the Ta9 Refo$) Act of %## & % 5hich a)en*e* the Ta9Co*e. Pe$tinent p$o isions of the ne5 la5 $ea* as follo5s3

SEC. . Rates of (nco)e Ta9 on ,o)estic Co$po$ations. --

DAF (n Gene$al. -- E9cept as othe$5ise p$o i*e* in this Co*e& an inco)e ta9 of thi$t6-e pe$cent D "VF is he$eb6 i)pose* upon the ta9able inco)e *e$i e* *u$in1 each

ta9able 6ea$ f$o) all sou$ces 5ithin an* 5ithout the Philippines b6 e e$6co$po$ation& as *e ne* in Section DBF of this Co*e& an* ta9able un*e$ this Title asa co$po$ation 999.

SEC. . -- ,e nition. -- >hen use* in this Title3

999 999 999

DBF The te$) co$po$ation shall inclu*e pa$tne$ships& no )atte$ ho5 c$eate* o$o$1ani@e*& ;oint-stoc4 co)panies& ;oint accounts Dcuentas en pa$ticipacionF&associations& o$ insu$ance co)panies& but *oes not inclu*e 1ene$al p$ofessionalpa$tne$ships o$ a ;oint entu$e o$ conso$tiu) fo$)e* fo$ the pu$pose ofun*e$ta4in1 const$uction p$o;ects o$ en1a1in1 in pet$oleu)& coal& 1eothe$)al an*othe$ ene$16 ope$ations pu$suant to an ope$atin1 o$ conso$tiu) a1$ee)ent un*e$ ase$ ice cont$act 5ithout the Go e$n)ent. Gene$al p$ofessional pa$tne$ships a$e

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pa$tne$ships fo$)e* b6 pe$sons fo$ the sole pu$pose of e9e$cisin1 thei$ co))onp$ofession& no pa$t of the inco)e of 5hich is *e$i e* f$o) en1a1in1 in an6 t$a*e o$business.

999 999 999.<

Thus& the Cou$t in E an1elista . Collecto$ of (nte$nal Re enue hel* that Section? co e$e* these un$e1iste$e* pa$tne$ships an* e en associations o$ ;oint accounts&

5hich ha* no le1al pe$sonalities apa$t f$o) thei$ in*i i*ual )e)be$s. The Cou$tof Appeals astutel6 applie* E an1elista3 ?

999 Acco$*in1l6& a pool of in*i i*ual $eal p$ope$t6 o5ne$s *ealin1 in $eal estatebusiness 5as consi*e$e* a co$po$ation fo$ pu$poses of the ta9 in sec. ? of the Ta9Co*e in E an1elista . Collecto$ of (nte$nal Re enue& sup$a. The Sup$e)e Cou$t sai*3

The te$) pa$tne$ship inclu*es a s6n*icate& 1$oup& pool& ;oint entu$e o$ othe$uninco$po$ate* o$1ani@ation& th$ou1h o$ b6 )eans of 5hich an6 business& nancialope$ation& o$ entu$e is ca$$ie* on. Y Y Y D= Me$tens La5 of /e*e$al (nco)e Ta9ation&p. "! Note ! F

A$ticle % ! of the Ci il Co*e $eco1ni@es the c$eation of a cont$act of pa$tne$ship5hen t5o o$ )o$e pe$sons bin* the)sel es to cont$ibute )one6& p$ope$t6& o$in*ust$6 to a co))on fun*& 5ith the intention of *i i*in1 the p$o ts a)on1the)sel es. " (ts $e8uisites a$e3 D%F )utual cont$ibution to a co))on stoc4& an*D F a ;oint inte$est in the p$o ts. ! (n othe$ 5o$*s& a pa$tne$ship is fo$)e* 5henpe$sons cont$act to *e ote to a co))on pu$pose eithe$ )one6& p$ope$t6& o$ labo$5ith the intention of *i i*in1 the p$o ts bet5een the)sel es. Mean5hile& anassociation i)plies associates 5ho ente$ into a ;oint ente$p$ise 9 9 9 fo$ thet$ansaction of business. =

(n the case befo$e us& the ce*in1 co)panies ente$e* into a Pool A1$ee)ent # o$an association ' that 5oul* han*le all the insu$ance businesses co e$e* un*e$thei$ 8uota-sha$e $einsu$ance t$eat6 % an* su$plus $einsu$ance t$eat6 5ithMunich. The follo5in1 un)ista4abl6 in*icates a pa$tne$ship o$ an associationco e$e* b6 Section ? of the N(RC3

D%F The pool has a co))on fun*& consistin1 of )one6 an* othe$ aluables that a$e*eposite* in the na)e an* c$e*it of the pool. This co))on fun* pa6s fo$ thea*)inist$ation an* ope$ation e9penses of the pool. ?

D F The pool functions th$ou1h an e9ecuti e boa$*& 5hich $ese)bles the boa$* of*i$ecto$s of a co$po$ation& co)pose* of one $ep$esentati e fo$ each of the ce*in1co)panies. "

D F T$ue& the pool itself is not a $einsu$e$ an* *oes not issue an6 insu$ance polic6:ho5e e$& its 5o$4 is in*ispensable& bene cial an* econo)icall6 useful to thebusiness of the ce*in1 co)panies an* Munich& because 5ithout it the6 5oul* notha e $ecei e* thei$ p$e)iu)s. The ce*in1 co)panies sha$e in the business ce*e*to the pool an* in the e9penses acco$*in1 to a Rules of ,ist$ibution anne9e* to the

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Pool A1$ee)ent. ! P$o t )oti e o$ business is& the$efo$e& the p$i)o$*ial $eason fo$the pools fo$)ation. As aptl6 foun* b6 the CTA3

999 The fact that the pool *oes not $etain an6 p$o t o$ inco)e *oes not oblite$atean antece*ent fact& that of the pool bein1 use* in the t$ansaction of business fo$p$o t. (t is appa$ent& an* petitione$s a*)it& that thei$ association o$ coaction 5asin*ispensable to the t$ansaction of the business. 9 9 9 (f to1ethe$ the6 ha econ*ucte* business& p$o t )ust ha e been the ob;ect as& in*ee*& p$o t 5as ea$ne*.

Thou1h the p$o t 5as appo$tione* a)on1 the )e)be$s& this is onl6 a )atte$ ofconse8uence& as it i)plies that p$o t actuall6 $esulte*.

The petitione$s $eliance on Pascual . Co))issione$ = is )isplace*& because thefacts obtainin1 the$ein a$e not on all fou$s 5ith the p$esent case. (n Pascual& the$e5as no un$e1iste$e* pa$tne$ship& but )e$el6 a co-o5ne$ship 5hich too4 up onl6 t5oisolate* t$ansactions. # The Cou$t of Appeals *i* not e$$ in appl6in1 E an1elista&5hich in ol e* a pa$tne$ship that en1a1e* in a se$ies of t$ansactions spannin1)o$e than ten 6ea$s& as in the case befo$e us.

Secon* (ssue3Pools Re)ittances A$e Ta9able

Petitione$s fu$the$ conten* that the $e)ittances of the pool to the ce*in1 co)paniesan* Munich a$e not *i i*en*s sub;ect to ta9. The6 insist that ta9in1 such$e)ittances cont$a ene Sections ? DbF D(F an* ! of the %# N(RC an* 5oul* betanta)ount to an ille1al *ouble ta9ation& as it 5oul* $esult in ta9in1 the sa)ep$e)iu) inco)e t5ice in the han*s of the sa)e ta9pa6e$. ?' Mo$eo e$& petitione$sa$1ue that since Munich 5as not a si1nato$6 to the Pool A1$ee)ent& the $e)ittancesit $ecei e* f$o) the pool cannot be *ee)e* *i i*en*s. ?% The6 a** that e en ifsuch $e)ittances 5e$e t$eate* as *i i*en*s& the6 5oul* ha e been e9e)pt un*e$the p$e iousl6 )entione* sections of the %# N(RC& ? as 5ell as A$ticle ofpa$a1$aph % ? an* A$ticle " of pa$a1$aph " ?? of the RP->est Ge$)an Ta9 T$eat6.

?"

Petitione$s a$e clutchin1 at st$a5s. ,ouble ta9ation )eans ta9in1 the sa)e p$ope$t6t5ice 5hen it shoul* be ta9e* onl6 once. That is& 999 ta9in1 the sa)e pe$son t5iceb6 the sa)e ;u$is*iction fo$ the sa)e thin1. ?! (n the instant case& the pool is ata9able entit6 *istinct f$o) the in*i i*ual co$po$ate entities of the ce*in1co)panies. The ta9 on its inco)e is ob iousl6 *i e$ent f$o) the ta9 on the*i i*en*s $ecei e* b6 the sai* co)panies. Clea$l6& the$e is no *ouble ta9ation he$e.

The ta9 e9e)ptions clai)e* b6 petitione$s cannot be 1$ante*& since thei$entitle)ent the$eto $e)ains unp$o en an* unsubstantiate*. (t is a9io)atic in thela5 of ta9ation that ta9es a$e the lifebloo* of the nation. ence& e9e)ptionsthe$ef$o) a$e hi1hl6 *isfa o$e* in la5 an* he 5ho clai)s ta9 e9e)ption )ust beable to ;ustif6 his clai) o$ $i1ht. ? Petitione$s ha e faile* to *ischa$1e this bu$*enof p$oof. The sections of the %# N(RC 5hich the6 cite a$e inapplicable& becausethese 5e$e not 6et in e ect 5hen the inco)e 5as ea$ne* an* 5hen the sub;ectinfo$)ation $etu$n fo$ the 6ea$ en*in1 %# " 5as le*.

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Refe$$in1 to the %# " e$sion of the counte$pa$t sections of the N(RC& the Cou$t stillcannot ;ustif6 the e9e)ptions clai)e*. Section "" p$o i*es that no ta9 shall 999 bepai* upon $einsu$ance b6 an6 co)pan6 that has al$ea*6 pai* the ta9 999. Thiscannot be applie* to the p$esent case because& as p$e iousl6 *iscusse*& the pool isa ta9able entit6 *istinct f$o) the ce*in1 co)panies: the$efo$e& the latte$ cannotin*i i*uall6 clai) the inco)e ta9 pai* b6 the fo$)e$ as thei$ o5n.

On the othe$ han*& Section ? DbF D%F ?= pe$tains to ta9 on fo$ei1n co$po$ations:hence& it cannot be clai)e* b6 the ce*in1 co)panies 5hich a$e *o)esticco$po$ations. No$ can Munich& a fo$ei1n co$po$ation& be 1$ante* e9e)ption base*solel6 on this p$o ision of the Ta9 Co*e& because the sa)e subsection speci call6ta9es *i i*en*s& the t6pe of $e)ittances fo$5a$*e* to it b6 the pool. Althou1h not asi1nato$6 to the Pool A1$ee)ent& Munich is patentl6 an associate of the ce*in1co)panies in the entit6 fo$)e*& pu$suant to thei$ $einsu$ance t$eaties 5hich$e8ui$e* the c$eation of sai* pool.

Un*e$ its pool a$$an1e)ent 5ith the ce*in1 co)panies& Munich sha$e* in thei$inco)e an* loss. This is )anifest f$o) a $ea*in1 of A$ticles ?# an* %' "' of theWuota Sha$e Reinsu$ance T$eat6 an* A$ticles "% an* %' " of the Su$plusReinsu$ance T$eat6. The fo$e1oin1 inte$p$etation of Section ? DbF D%F is in line 5iththe *oct$ine that a ta9 e9e)ption )ust be const$ue* st$ictissi)i ;u$is& an* thestatuto$6 e9e)ption clai)e* )ust be e9p$esse* in a lan1ua1e too plain to be)ista4en. "

/inall6& the petitione$s clai) that Munich is ta9-e9e)pt base* on the RP->estGe$)an Ta9 T$eat6 is li4e5ise unpe$suasi e& because the inte$nal $e enueco))issione$ assesse* the pool fo$ co$po$ate ta9es on the basis of the info$)ation$etu$n it ha* sub)itte* fo$ the 6ea$ en*in1 %# "& a ta9able 6ea$ 5hen sai* t$eat65as not 6et in e ect. "? Althou1h petitione$s o)itte* in thei$ plea*in1s the *ate ofe ecti it6 of the t$eat6& the Cou$t ta4es ;u*icial notice that it too4 e ect onl6 late$&on ,ece)be$ %?& %#=?. ""

Thi$* (ssue3 P$esc$iption

Petitione$s also a$1ue that the 1o e$n)ents $i1ht to assess an* collect the sub;ectta9 ha* p$esc$ibe*. The6 clai) that the sub;ect info$)ation $etu$n 5as le* b6 thepool on Ap$il %?& %# !. On the basis of this $etu$n& the B(R telephone* petitione$s onNo e)be$ %%& %#=%& to 1i e the) notice of its lette$ of assess)ent *ate* Ma$ch &%#=%. Thus& the petitione$s conten* that the e-6ea$ statute of li)itations thenp$o i*e* in the N(RC ha* al$ea*6 lapse*& an* that the inte$nal $e enueco))issione$ 5as al$ea*6 ba$$e* b6 p$esc$iption f$o) )a4in1 an assess)ent. "!

>e cannot sustain the petitione$s. The CA an* the CTA cate1o$icall6 foun* that thep$esc$ipti e pe$io* 5as tolle* un*e$ then Section of the N(RC& " because theta9pa6e$ cannot be locate* at the a**$ess 1i en in the info$)ation $etu$n le* an*fo$ 5hich $eason the$e 5as *ela6 in sen*in1 the assess)ent. "= (n*ee*& 5hethe$the 1o e$n)ents $i1ht to collect an* assess the ta9 has p$esc$ibe* in ol es facts5hich ha e been $ule* upon b6 the lo5e$ cou$ts. (t is a9io)atic that in the absenceof a clea$ sho5in1 of palpable e$$o$ o$ 1$a e abuse of *isc$etion& as in this case& thisCou$t )ust not o e$tu$n the factual n*in1s of the CA an* the CTA.

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/u$the$)o$e& petitione$s a*)itte* in thei$ Motion fo$ Reconsi*e$ation befo$e theCou$t of Appeals that the pool chan1e* its a**$ess& fo$ the6 state* that the poolsinfo$)ation $etu$n le* in %#=' in*icate* the$ein its p$esent a**$ess. The Cou$t

n*s that this falls sho$t of the $e8ui$e)ent of Section of the N(RC fo$ thesuspension of the p$esc$ipti e pe$io*. The la5 clea$l6 states that the sai* pe$io* 5illbe suspen*e* onl6 if the ta9pa6e$ info$)s the Co))issione$ of (nte$nal Re enue ofan6 chan1e in the a**$ess.

> ERE/ORE& the petition is ,EN(E,. The Resolutions of the Cou$t of Appeals *ate*Octobe$ %%& %## an* No e)be$ %"& %## a$e he$eb6 A//(RME,. Costs a1ainstpetitione$s.

SO OR,ERE,.

Ro)e$o& DChai$)anF& itu1& Pu$isi)a& an* Gon@a1a-Re6es& 00.& concu$.


EN BANC

G.R. No. L-% ? ! 0anua$6 #& %#!'

COLLECTOR O/ (NTERNAL RE ENUE& petitione$&s.

ANGLO CAL(/ORN(A NAT(ONAL BANI DCROCIER-ANGLO NAT(ONAL BANIF& as

T$easu$e$ fo$ CALAMBA SUGAR ESTATE& (NC.& $espon*ent.Assistant Solicito$ Gene$al 0ose P. Ale;an*$o an* Special Atto$ne6 Lib$a*a *elRosa$io-Nati i*a* fo$ petitione$.O@aeta& Gibbs an* O@aeta fo$ $espon*ent.

RE+ES& 0.B.L.& 0.3

Respon*ent Cala)ba Su1a$ Estate& (nc.& he$ein $ep$esente* b6 its t$ustee& the An1loCalifo$nia National Ban4& is a fo$ei1n co$po$ation o$1ani@e* an* e9istin1 un*e$ thela5s of the State of Califo$nia& U.S.A.& *ul6 license* Don Ma6 =& %#?!F to *o businessin the Philippines. (t has consistentl6 le* its inco)e ta9 $etu$ns he$e th$ou1h its

$esi*ent atto$ne6-in-fact. On Ma6 %?& %#"!& the petitione$s Collecto$ of (nte$nalRe enue the co$po$ation of an assess)ent fo$ alle1e* *e cienc6 inco)e ta9es fo$the 6ea$s %#" & %#"? an* %#"" in the $especti e a)ounts of P% =&="".''&P% %& "#.'' an* P # &?"#.''& suppose*l6 base* upon capital a1ain *e$i e* f$o)the $espon*ent s sale to the Pasu)il Plante$s& (nc.& of P "'&''' sha$es of the capitalstoc4 of the Pa)pan1a Su1a$ Mills Da *o)estic co$po$ationF an* of a p$o)isso$6note& *ate* 0anua$6 %& %#"'& e9ecute* b6 the Pa)pan1a Su1a$ Mills in the su) ofZ"''&'''.''. (n an appeal b6 the $espon*ent f$o) the $ulin1 of the Collecto$& theCou$t of Ta9 Appeals $e e$se* sai* $ulin1 an* absol e* the $espon*ent fo$) liabilit6.

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This is an appeal b6 the Collecto$ f$o) that *ecision.

The pa$ties stipulate* that DaF the ne1otiations lea*in1 to the e9ecution an*conclusion of the a1$ee)ent of sale& *ate* 0anua$6 %!& %#" & bet5een the$espon*ent co$po$ation an* the Pasu)il Plante$s& (nc.& too4 place in San /$ancico&Califo$nia: DbF the pa6)ent on account of the sale 5e$e )a*e b6 the Pasu)ilPlante$s& (nc.& at the sa)e fo$ei1n cit6: an* DcF the sale 5as )a*e un*e$ an* inacco$*ance 5ith the la5s of that State. /$o) the e i*ence p$esente*& it alsoappea$s that on ,ece)be$ %!& %#""& the Secu$ities an* E9chan1e Co))issioncancelle* $espon*ent s license to t$ansact business in the Philippines& an* on,ece)be$ '& %#""& the co$po$ation 5as *issol e* in acco$*ance 5ith the Califo$niala5.

The sole issue is 5hethe$ the capital 1ains obtaine* f$o) the sale constitute*inco)e f$o) sou$ces 5ithin o$ 5ithout the Philippines. (t 5as the opinion of the Ta9Cou$t that the6 5e$e inco)e *e$i e* f$o) ab$oa*& an* not sub;ect to inco)e ta9.

(t is ha$*l6 *isputable that althou1h sha$es of stoc4 of a co$po$ation $ep$esente8uities )a6 consist of $eal as 5ell as pe$sonal p$ope$ties the$ein& the6 a$econsi*e$e* un*e$ applicable la5 an* ;u$isp$u*ence as intan1ible pe$sonal p$ope$tiesDsee A$t. ?% & Ci il Co*e of the Philippines: Sec. "& Act No. %?"#F. Section ? ofthe National (nte$nal Re enue Co*es le ies inco)e ta9es on fo$ei1n co$po$ationsonl6 on inco)e *e$i e* f$o) sou$ces 5ithin the Philippines: an* 5ith $espect tocapital 1ains on the sale of pe$sonal p$ope$ties& section DeF of the sa)e Ta9 Co*e*ee)s the place of sale as also that place o$ sou$ce of the capital 1ain3

... Gains& p$o t& an* inco)e *e$i e* f$o) the pu$chase of pe$sonal 5ithin an* itssale 5ithout the Philippines o$ f$o) the pu$chase o$ pe$sonal p$ope$t6 5ithout an*its sale 5ithin the Philippines& shall be t$eate* as *e$i e* enti$el6 f$o) sou$ces5ithin the count$6 in 5hich sol*. DE)phasis supplie*F

Const$uin1 the sa)e p$o ision of la5 D5hich is section %%# DeF of the %# ? Act&U.S.(.R.C.F& Unites States cou$ts a$e in acco$* in *isallo5in1 the i)position of inco)eta9es b6 its 1o e$n)ent on capital 1ains 5he$e the sale ta4es place outsi*e itste$$ito$ial ;u$is*iction. (t is li4e5ise the p$e ailin1 ie5 that in asce$tainin1 the placeof sale& the *ete$)ination of 5hen an* 5he$e title to the 1oo*s passes f$o) theselle$ to the bu6e$ is *ecisi e DEast Coast Oil Co. s. Co)).& % B.T.A. "==& a * ="/. * & ce$. *en- ## U.S. !'=& =% L. E*. ??#& " S. Ct. ?: also ,isconto-Gaesellc$aft s. U.S. Steel Co$po$ation& ! U.S. : Co)pania Gene$al *e Tabacos*e /ilipinas s. Collecto$& # U.S. '!& L. E*. '?& ?# S. Ct. '?F.

(n this case& it is a*)itte* that the ne1otiation& pe$fection an* consu))ation of thecont$act of sale 5e$e all *one in Califo$nia& U.S.A. (t follo5s that title to the sha$es of stoc4 passe* f$o) the en*o$ to the en*ee at sai* place& f$o) 5hich ti)e theinci*ents of o5ne$ship este* on the bu6e$.

The Collecto$ a$1ues that the sit us of sha$es of stoc4 of a co$po$ation is consi*e$e*to be at the *o)ici*e of the latte$& as hel* in so)e cases cite* b6 hi): but in theinstant p$oble)& 5e a$e not conce$ne* 5ith the i)position of ta9es upon the sha$es

7/21/2019 Tax2 - Dec 10


the)sel es& but on a sale e ecte* ab$oa* that $esulte* in capital 1ains& fo$ 5hichthe$e is a speci c p$o ision of la5 DSec. e N.(.R.C.F. As state* b6 the Ta9 Cou$t&the$e is a *istinction bet5een the situs of pe$sonal p$ope$ties an* the situs of theinco)e *e$i e* f$o) the sale o$ e9chan1e of such p$ope$ties.

As to the contention that section " of the Co$po$ation La5 DAct No. %?"#F $e8ui$esthe t$ansfe$ to be note* an* ente$e* not in ali*ate the t$ansfe$ bet5een the pa$tiesno$ is it essential to est title upon the en*ee. The capital 1ains& no5 sou1ht to beta9e*& a$ose f$o) the se e$ance of 1ain& f$o) the in est)ent occasione* b6 thet$ansfe$ of title ab$oa* an* not on account of an6 $e1ist$ation that )i1ht be e ecte*late$.

>he$efo$e& the ;u*1)ent un*e$ ie5 is he$eb6 aH$)e*. No costs.

Pa$as& C.0.& Ben1@on& Pa*illa& Monte)a6o$& Bautista An1elo& Lab$a*o$& Concepcion&En*encia& Ba$$e$a& an* Gutie$$e@ ,a i*& 00.& concu$.

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Tax2 - Dec 10