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COMMISIONER OF INTERNAL REVENUE VS CA 301 SCRA 152

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


a total shareholdings of 185,154 shares. Broken down, the shares
comprise of 50,495 shares which were of original issue when the
corporation was founded and 134,659 shares as stock dividend
declarations. So in 1964 when Soriano died, half of the shares he held
went to his wife as her conjugal share (wifes legitime) and the other
half (92,577 shares, which is further broken down to 25,247.5 original
issue shares and 82,752.5 stock dividend shares) went to the estate.
For sometime after his death, his estate still continued to receive stock
dividends from ASC until it grew to at least 108,000 shares.
In 1968, ASC through its Board issued a resolution for the redemption
of shares from Sorianos estate purportedly for the planned
Filipinization of ASC. Eventually, 108,000 shares were redeemed
from the Soriano Estate. In 1973, a tax audit was conducted.
Eventually, the Commissioner of Internal Revenue (CIR) issued an
assessment against ASC for deficiency withholding tax-at-source. The
CIR explained that when the redemption was made, the estate profited
(because ASC would have to pay the estate to redeem), and so ASC
would have withheld tax payments from the Soriano Estate yet it
remitted no such withheld tax to the government.
ASC averred that it is not duty bound to withhold tax from the estate
because it redeemed the said shares for purposes of Filipinization of
ASC and also to reduce its remittance abroad.
ISSUE: Whether or not ASCs arguments are tenable.
HELD: No. The reason behind the redemption is not material. The
proceeds from a redemption is taxable and ASC is duty bound to
withhold the tax at source. The Soriano Estate definitely profited from
the redemption and such profit is taxable, and again, ASC had the duty
to withhold the tax. There was a total of 108,000 shares redeemed
from the estate. 25,247.5 of that was original issue from the capital of
ASC. The rest (82,752.5) of the shares are deemed to have been from
stock dividend shares. Sale of stock dividends is taxable. It is also to be
noted that in the absence of evidence to the contrary, the Tax Code
presumes that every distribution of corporate property, in whole or in
part, is made out of corporate profits such as stock dividends.
It cannot be argued that all the 108,000 shares were distributed from
the capital of ASC and that the latter is merely redeeming them as
such. The capital cannot be distributed in the form of redemption of
stock dividends without violating the trust fund doctrine wherein the
capital stock, property and other assets of the corporation are regarded
as equity in trust for the payment of the corporate creditors. Once
capital, it is always capital. That doctrine was intended for the
protection of corporate creditors.
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