Fisher v.

Trinidad

Facts: Philippine American Drug Company was a corporation duly organized and existing under the laws of the Philippine Islands, doing business in the City of Manila. isher was a stoc!holder in said corporation. "aid corporation, as result of the business for that year, declared a #stoc! di$idend# and that the proportionate share of said stoc! di$ided of isher was P%&,'((. "aid the stoc! di$idend for that amount was issued to isher. or this reason, )rinidad demanded payment of income tax for the stoc! di$idend recei$ed by isher. isher paid under protest the sum of P''*.*+ as income tax on said stoc! di$idend. isher filed an action for the reco$ery of P''*.*+. )rinidad demurred to the petition upon the ground that it did not state facts sufficient to constitute cause of action. )he demurrer was sustained and isher appealed. Issue: ,hether or not the stoc! di$idend was an income and therefore taxable. Held: -o. .enerally spea!ing, stoc! di$idends represent undistributed increase in the capital of corporations or firms, /oint stoc! companies, etc., etc., for a particular period. )he in$entory of the property of the corporation for particular period shows an increase in its capital, so that the stoc! theretofore issued does not show the real $alue of the stoc!holder0s interest, and additional stoc! is issued showing the increase in the actual capital, or property, or assets of the corporation.

In the case of .ray $s. Darlington 1'% 2."., 3456, the 2" "upreme Court held that mere ad$ance in $alue does not constitute the #income# specified in the re$enue law as #income# of the owner for the year in which the sale of the property was made. "uch ad$ance constitutes and can be treated merely as an increase of capital. In the case of )owne $s. 7isner, income was defined in an income tax law to mean cash or its e8ui$alent, unless it is otherwise specified. It does not mean unrealized increments in the $alue of the property. A stoc! di$idend really ta!es nothing from the property of the corporation, and adds nothing to the interests of the shareholders. Its property is not diminished and their interest are not increased. )he proportional interest of each shareholder remains the same. In short, the corporation is no poorer and the stoc!holder is no richer then they were before. In the case of Doyle $s. Mitchell 9ros. Co. 1%&: 2."., +:*6, Mr. ;ustice Pitney, said that the term #income# in its natural and ob$ious sense, imports something distinct from principal or capital and con$eying the idea of gain or increase arising from corporate acti$ity. In the case of 7isner $s. Macomber 1%4% 2."., +'*6, income was defined as the gain deri$ed from capital, from labor, or from both combined, pro$ided it be understood to include profit gained through a sale or con$ersion of capital assets.

,hen a corporation or company issues #stoc! di$idends# it shows that the company0s accumulated profits ha$e been capitalized, instead of distributed to the stoc!holders or retained as surplus a$ailable for distribution, in money or in !ind, should opportunity offer. )he essential and controlling fact is that the stoc!holder has recei$ed nothing out of the company0s assets for his separate use and benefit< on the contrary, e$ery dollar of his original in$estment, together with whate$er accretions and accumulations resulting from employment of his money and that of the other stoc!holders in the business of the company, still remains the property of the company, and sub/ect to business ris!s which may result in wiping out of the entire in$estment. )he stoc!holder by $irtue of the stoc! di$idend has in fact recei$ed nothing that answers the definition of an #income.# )he stoc!holder who recei$es a stoc! di$idend has recei$ed nothing but a representation of his increased interest in the capital of the corporation. )here has been no separation or segregation of his interest. All the property or capital of the corporation still belongs to the corporation. )here has been no separation of the interest of the stoc!holder from the general capital of the corporation. )he stoc!holder, by $irtue of the stoc! di$idend, has no separate or indi$idual control o$er the interest represented thereby, further than he had before the stoc! di$idend was issued. =e cannot use it for the reason that it is still the property of the corporation and not the property of the indi$idual holder of stoc! di$idend. A certificate of stoc! represented by the stoc! di$idend is

simply a statement of his proportional interest or participation in the capital of the corporation. )he receipt of a stoc! di$idend in no way increases the money recei$ed of a stoc!holder nor his cash account at the close of the year. It simply shows that there has been an increase in the amount of the capital of the corporation during the particular period, which may be due to an increased business or to a natural increase of the $alue of the capital due to business, economic, or other reasons. ,e belie$e that the >egislature, when it pro$ided for an #income tax,# intended to tax only the #income# of corporations, firms or indi$iduals, as that term is generally used in its common acceptation< that is that the income means money recei$ed, coming to a person or corporation for ser$ices, interest, or profit from in$estments. ,e do not belie$e that the >egislature intended that a mere increase in the $alue of the capital or assets of a corporation, firm, or indi$idual, should be taxed as #income.# A stoc! di$idend, still being the property of the corporation and not the stoc!holder, may be reached by an execution against the corporation, and sold as a part of the property of the corporation. In such a case, if all the property of the corporation is sold, then the stoc!holder certainly could not be charged with ha$ing recei$ed an income by $irtue of the issuance of the stoc! di$idend. 2ntil the di$idend is declared and paid, the corporate profits still belong to the corporation, not to the stoc!holders, and are liable for corporate indebtedness. )he rule is well established that cash di$idend, whether large or small, are regarded as #income# and all stoc! di$idends, as capital or assets

If the ownership of the property represented by a stoc! di$idend is still in the corporation and not in the holder of such stoc!, then it is difficult to understand how it can be regarded as income to the stoc!holder and not as a part of the capital or assets of the corporation. If the holder of the stoc! di$idend is re8uired to pay anincome tax on the same, the result would be that he has paid a tax upon an income which he ne$er recei$ed. "uch a conclusion is absolutely contradictory to the idea of an income. As stoc! di$idends are not #income,# the same cannot be considered taxes under that pro$ision of Act -o. %'55. or all of the foregoing reasons, "C held that the /udgment of the lower court should be ?7@AB7D.