(Wise & Co., Inc. v. Meer, G.R. No.

48231, June 30, 1947)

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

[G.R. No. 48231. June 30, 1947.]

WISE & CO., INC., ET AL., plaintiffs-appellants, vs. BIBIANO L.

MEER, Collector of Internal Revenue, defendant-appellee.

Ross, Selph, Carrascoso & Janda for appellants.

The Solicitor General for appellee.

SYLLABUS

1. TAXATION; INCOME TAX; LIQUIDATING DIVIDENDS;

DISTRIBUTION NOT A DIVIDEND, THOUGH SO-CALLED. Although the
various resolutions mentioned in the decision speak of distributions of
dividends when referring to those alluded to therein, ' a distribution does
not necessarily become a dividend by reason of the fact that it is called a
dividend by the distributing corporation."
2. ID.; ID.; ID.; CONNOTATION OF. "The ordinary connotation of
liquidating dividend involves the distribution of assets by a corporation to its
stockholders upon dissolution." (Klein, Federal Income Taxation, 253-254.)
3. ID.; ID.; ID.; ID. The determining element therefore is whether
the distribution was in the ordinary course of business and with intent to
maintain the corporation as a going concern, or after deciding to quit with
intent to liquidate the business. Proceedings actually begun to dissolve the
corporation or formal action taken to liquidate it are but evidentiary and not
indispensable.
 4. ID.; ID.; ID.; ID.; DISTINGUISHED FROM ORDINARY DIVIDEND.
"The distinction between a distribution in liquidation and an ordinary
dividend is factual; the result in each case depending on the particular
circumstances of the case and the intent of the parties. If the distribution is
in the nature of a recurring return on stock it is an ordinary dividend.
However, if the corporation is really winding up its business or recapitalizing
and narrowing its activities, the distribution may properly be treated as in
complete or partial liquidation and as payment by the corporation to the
stockholder for his stock. The corporation is, in the latter instances, wiping
out all or Part of the stockholders' interest in the company . . ."
5. ID.; ID.; ID.; TAXABILITY OF. Payments for surrendered or
relinquished stock in a corporation in complete liquidation, sometimes
called liquidating dividends, are taxable income under the Income Tax Law.
Act No. 2833, section 25 (a), as amended by section 4 of Act No. 3761.
6. ID; ID.; ID.; ID.; STATUTORY CONSTRUCTION; CONSTRUCTION IN
SOURCE OF LOCAL LAW AUTHORITATIVE. The judicial construction
attached to the sources of statutes adopted in a jurisdiction are of
authoritative value in the interpretation of such local laws.
7. ID.; ID.; ID.; ID.; NO DOUBLE TAXATION. "The gains realized by
the stockholders from the distribution of the assets in liquidation were
subject to the normal tax in like manner as if they had sold their stock to
third persons. The objection that this results in double taxation of the
accumulated earnings and profits is no more available in the one case than
it would have been in the other."
8. ID.; ID.; ID.; ID.; INDIVIDUAL OR CORPORATION LIABLE TO TAX.
Gains resulting from distributions made in complete liquidation or
dissolution of a corporation as specifically contemplated in section 25 (a) of
the former Income Tax Law, are taxable as income, whether the stockholder
happens to be an individual or a corporation.
9. ID.; ID.; ID.; SUBJECT TO NORMAL AND ADDITIONAL TAX.
Payments for surrendered stock, or so-called liquidating dividends, provided
for in section 25 (a) of the former Income Tax Law were subject to both the
normal and the additional tax.
10. ID.; ID.; ID.; GAIN 'TAXABLE IRRESPECTIVE OF SOURCE OF
DISTRIBUTION. Section 25 (a) of the law, far from limiting the taxability,
provides that the gain thus realized is a "taxable income" under the law
so long as a gain is realized, it will be a taxable income whether the
distribution comes from the earnings or profits of the corporation or from
 the sale of all of its assets in general, so long as the distribution is made "in
complete liquidation or dissolution."
11. ID.; ID.; ID.; STATUTORY CONSTRUCTION; LAW PREVAILS OVER
REGULATION. In case of conflict between a law and an administrative
regulation, the law prevails.
12. CORPORATIONS; DIVIDENDS; OWNERSHIP OF. "As between
successive owners of shares of stock in a corporation, the general rule is
that dividends belong to the persons who are the owners of the stock at the
time they are declared, without regard to the time during which the
dividends were earned, and this is true although the dividends are made
payable at a future date." (18 C. J. S., 1119, sec. 470 [~].)
13. ID.; ID.; ID.; PLACE WHERE EARNED; CASE AT BAR. The facts
and data furnished here by the parties satisfactorily show that the
dividends in question were paid to plaintiffs, personally or thru their proxies
or agents, in the Philippines. But aside from this, from the moment they
were declared and a definite fund specified for their payment (all surplus
remaining "after providing for return of capital and various expenses")
and all of this was done in the Philippines to all legal intents and
purposes they earned those dividends in this country. From the record it can
be deduced that the funds and assets of the Manila Wine Merchants, Ltd.,
from which those dividends proceeded, were in the Philippines where its
business was located. So far as the record discloses, its liquidation was
effected in terms of Philippine pesos, indicating that it was made here. And
this in turn would lead to the deduction that the funds and assets
liquidated were here.

DECISION

HILADO, J p:

This is an appeal by Wise & Co., Inc. and its co-plaintiffs from the
judgment of the Court of First Instance of Manila in civil case No. 56200 of
said court, absolving the defendant Collector of Internal Revenue from the
complaint without costs. The complaint was for recovery of certain amounts
therein specified, which had been paid by said plaintiffs under written
protest to said defendant, who had previously assessed said amounts
against the respective plaintiffs by way of deficiency income taxes for the
year 1937, as detailed under paragraph 6 of defendant's special defense
(Record of Appeal, pp. 7-10). Appellants made eight assignments of error, to
wit:
"The trial court erred in finding:
"I. That the Manila Wine Merchants, Ltd., a Hongkong
corporation, was in liquidation beginning June 1, 1937, and that
all dividends declared and paid thereafter were distributions of all
of its assets in complete liquidation.
"II. That all distributions made by the Hongkong
corporation after June 1, 1937, were subject to both normal tax
and surtax.
"III. That income received by one corporation from another
was taxable under the Income Tax Law, and that Wise & Co., Inc.,
was taxable on the distribution of its share of the same net
profits on which the Hongkong Company had already paid
Philippine tax despite the clear provisions of section 10 of the
Income Tax Law then in effect.
"IV. That the non-resident individual stockholder appellants
we subject to both normal and additional tax on the distributions
received despite the clear provisions of section 5 (b) of the Income
Tax Law then in effect.
"V. That section 25 (a) of the Income Tax Law makes
distributions in liquidation of a foreign corporation, dissolution
proceedings of which were conducted in a foreign country,
taxable income to a non-resident individual stockholder.
"VI. That section 199 of the Income Tax regulations,
providing that in a distribution by a corporation in complete
liquidation of it assets the gain realized by a stockholder, whether
individual or corporate, is taxable as a dividend, is ineffective.
"VII. That the deficiency assessment was properly collected.
"VIII. That the refunds claimed by plaintiffs were not in
order and in rendering judgment absolving the Collector of
Internal Revenue from making such refunds."
The facts have been stipulated in writing, as quote verbatim
in the decision of the trial court thus:
I
 "That the allegations of paragraphs I and II of the complain
are true and correct.
II
"That during the year 1937, plaintiffs, except Mr. E. M.
Strickland (who, as husband of the plaintiff Mrs. E. M. G.
Strickland, is only a nominal party herein), were stockholders of
Manila Wine Merchants, Ltd., a foreign corporation duly
authorized to d business in the Philippines.
IIII
"That on May 27, 1937, the Board of Directors of Manila
Win Merchants, Ltd., (hereinafter referred to as the Hongkong
Company), recommended to the stockholders of the company that
the adopt the resolutions necessary to enable the company to sell
it business and assets to Manila Wine Merchants, Inc., a
Philippine corporation formed on May 27, 1937, (hereinafter
referred to a the Manila Company), for the sum of P400,000,
Philippine currency; that this sale was duly authorized by the
stockholders of the Hongkong Company at a meeting held on July
22, 1937; that the contract of sale between the two companies
was executed on the same date, a copy of the contract being
attached hereto as Schedule 'A'; and that the final resolutions
completing the said sale and transferring the business and assets
of the Hongkong Company to the Manila Company were adopted
on August 3, 1937, on which date e Manila Company paid the
Hongkong Company the P400,000 purchase price.
IV
"That pursuant to a resolution by its Board of Directors
purporting to declare a dividend, the Hongkong Company made a
distribution from its earnings for the year 1937 to its
stockholders, Plaintiffs receiving the following:

Declared and paid

June 8, 1937
 Wise & Co., Inc. P7,677.82

Mr. J. F. MacGregor 2,554.86

Mr. N. C. MacGregor 2,369.48

Mr. C. J. Lafrentz 529.51

Mrs. E. M. G. Strickland 2,369.48

Mrs. M. J. G. Mullins 2,369.48

P17,870.63

"That the Hongkong Company has paid Philippine income

tax on the entire earnings from which the said distributions were
paid.
IV
"That after deducting the said dividend of June 8, 1937,
the surplus of the Hongkong Company resulting from the active
conduct of its business was P74,182.12. That as a result of the
sale of its business and assets to the Manila Company, the
surplus of the Hongkong Company was increased to a total of
P270,116.59.

"That pursuant to resolutions of its Board of Directors, and

of its shareholders, purporting to declare dividends, copies of
which are attached hereto as Schedules 'B' and 'B-1', the
Hongkong Company ,distributed this surplus to its stockholders,
plaintiffs receiving the following sums on the following dates:

Declared Declared

July 22, 1937 July 22, 1937

 Paid Paid

August 4, October 28,

1937 1937

Wise & Co., Inc P113,861.85 P2,198.24

Mr. J. F. MacGregor 37,885.20 731.48

Mr. N. C. MacGregor 36,137.03 678.42

Mr. C. J. Lafrentz 7,851.86 151.61

Mrs. E. M. G. Strickland 35,137.03 678.42

Mrs. M. J. G. Mullins 35,137.03 678.42

P265,000.00 P5,116.59

"That Philippine income tax had been paid by the

Hongkong Company on the said surplus from which the said
distributions were made.
IV
"That on August 19, 1937, at a special general meeting of
the shareholders of the Hongkong Company, the stockholders by
power resolution directed that the company be voluntarily
liquidated and its capital distributed among the stockholders;
that the stockholder at such meeting appointed a liquidator to
wind up the Hongkong Company's affairs; that the said liquidator
duly paid off the remaining debts of the Hongkong Company and
distributed its capital among the stockholders including
plaintiffs; that the liquidator duly filed his accounting on
January 12, 1938, and in accordance with the provisions of
Hongkong Law, the Hongkong Company was duly dissolved at the
expiration of three months from that date.
VII
"That plaintiffs duly filed Philippine income tax returns.
That defendant subsequently made the following deficiency
assessments against plaintiffs:
WISE & COMPANY, INC.

Net income as per return P87,649.67

Add: Deductions disallowed

Loss on shares of stock in the Manila

Wine Merchants, Ltd. resulting from

the liquidation of said firm 44,515.00

Income not declared:

Return of capital P51,185.00

Share of surplus 123,727.88

Total liquidating dividends received P174,912.88

Less value of shares as per books 95,700.00

Profits realized on shares of stock in

the Manila Wine Merchants, Ltd. re-

sulting from the liquidation of the

said firm P79,212

Accrued income tax as per return 5,258.98

Total P216,636.53

Deduct accrued income tax 12,262.45

Net income as per investigation 204,374.0

6 per cent Normal tax 12,262.45

Less amount already paid 5,258.98

Balance still due and collectible 7,003.47

J. F. MACGREGOR

Net income as per return P47,479 44

Deduct: Ordinary dividends 6,307.92

Net income as per investigation subject to

normal tax:

Return of capital P17,032.26

Share of surplus 41,171.52

Total liquidating dividends received P58,203.77

Less cost of shares 17,032.25



Profit realized on shares of stock in the

Manila Wine Merchants, Ltd. result-

ing from the liquidation of said firm P41,171.52

Normal tax at 3 per cent 1,235.15

Additional tax due 549.59

Total normal and additional taxes 1,784.74

Less: Amount already paid 549.59

Balance still due and collectible 1,235.15

N. C. MACGREGOR

Net income as per return P44,177.06

Deduct: Ordinary dividends 5,992.11

Net income as per investigation subject to

normal tax:

Return of capital P15,796.76

Share of surplus 38,184.95



Total liquidating dividends received P53,981.70

Less cost of shares 15,796.76

Profit realized on shares of stock in the

Manila Wine Merchants, Ltd. result-

ing from the liquidation of the said firm P38,184.96

Normal tax at 3 per cent 1,145.56

Additional tax due 483.54

Total normal and additional taxes 1,629.09

Less amount already paid 483.55

Balance still due and collectible 1,145.20

C. J. LAFRENTZ

Net income as per return P9,778.18

Deduct: Ordinary dividends 1,245.20

Net income as per investigation subject to

normal tax:
Return of capital P3,630.00

Share of surplus 8,532.98

Total liquidating dividends received. P12,062.98

Less cost of shares 3,530.00

Profits realized on shares of stock in the

Manila Wine Merchants, Ltd. result-

ing from the liquidation of the said firm P8,532.98

3 per cent normal tax due and collectible 255.99

MRS. E. M. G. STRICKLAND

Net income as per return P44,067.06

Deduct: Ordinary dividends 5,872.11

Net income as per investigation subject to

normal tax:

Return of capital P15,796.75

Share of surplus 38,184.95

Total liquidating dividends received P53,981.70

Less cost of shares 15,796.75

Profit realized on shares of stock in the

Manila Wine Merchants, Itd. result-

ing from the liquidation of said firm P38,184.95

Normal tax at 3 per cent 1,145.55

Additional tax due 481.14

Total normal and additional taxes 1,626.69

Balance still due and collectible 1,145.54

MRS. M. J. G. MULLINS

Net income as per return P44,057.06

Deduct: Ordinary dividends 5,872.11

Net income as per investigation subject

to normal tax:

Return of capital P15,79675

Share of surplus 38,184.95



Total liquidating dividends received P53,981.70

Less cost of shares 15,796.75

Profit realized on shares of stock in the

Manila Wine Merchants Ltd. result-

ing from the liquidation of said firm P38,184.96

Normal tax at 3 per cent 1,145.55

Additional tax due 481.14

Total normal and additional taxes 1,626.69

Less amount already paid 481.15

Balance still due and collectible P1,145.54

VIII
"That said plaintiffs duly paid the said amounts demanded
by defendant under written protest, which was overruled in due
course; that the plaintiffs have since July 1, 1939 requested from
defendant a refund of the said amounts which defendant has
refused and still refuses to refund.
IX
 "That this stipulation is equally the work of both parties
and shall be fairly interpreted to give effect to their intention that
this case shall be decided solely upon points of law.
X
"The parties incorporate the Corporation Law and
Companies Act of Hongkong, and the applicable decisions made
thereunder, into this stipulation by reference, and either party
may at any stage in the proceedings in this case cite applicable
sections of the law and the authorities decided thereunder as
though the same had been duly proved in evidence.
XI
"That the parties hereto reserve the right to submit other
and further evidence at the trial of this case." (Record on Appeal,
pp. 19-26.)
1. The first assignment of error. Appellants maintain that the
amounts received by them and on which the taxes in question were
assessed and collected were ordinary dividends; while upon the other hand,
appellee contends that they were liquidating dividends. If the first
proposition is correct, this assignment would be well taken, otherwise, the
decision of the court upon the point must be upheld.
It appears that on May 27, 1937, the Board of Directors of the Manila
Wine Merchants, Ltd. (hereafter called the Hongkong Co.), recommended to
the stockholders of said company "that the Company should be wound up
voluntarily by the members and the business sold as a going concern to a
new Company incorporated under the laws of the Philippine Islands under
the style of 'The Manila Wine Merchants, Inc.' " (Annex A defendant's
answer, Record on Appeal, p. 12), and that they adopt the resolutions
necessary to enable the company to sell its business and assets to said new
company (hereafter called the Manila Company), organized on that same
date, for the price of P400,000, Philippine currency; that the sale was duly
authorized by the stockholders of the Hongkong Co. at a meeting held on
July 22, 1937; and that the contract of sale between the two companies was
executed on the same day, as appears from the copy of the contract,
Schedule A of the Stipulation of Facts (par. III, Stipulation of Facts, Record
on Appeal, pp. 19-20). It will be noted that the Board of Directors of the
Hongkong Co., in recommending the sale, specifically mentioned "a new
Company incorporated under the laws of the Philippine Islands under the
style of 'The Manila Wine Merchants, Inc.' " as the purchaser, which fact
shows that at the time of the recommendation, the Manila Company had
already been formed, although on the very same day; and this and the
further fact that it was really the latter corporation that became the
purchaser should clearly point to the conclusion that the Manila Company
was organized for the express purpose of succeeding the Hongkong Co. The
stipulated facts would admit of no saner interpretation.
While it is true that the contract of sale was signed on y 22, 1937, it
contains in its paragraph 4 of the express vision that the transfer "will take
effect as on and from first day of June, One thousand nine hundred and
thirty-seven, and until completion thereof, the Company all stand possessed
of the property hereby agreed to be transferred and shall carry on its
business in trust for the Corporation (Schedule A of Stipulation of Facts,
Record Appeal, p. 15). "The Company" was the Hongkong Company and "the
Corporation" was the Manila Company. For "the Company" to carry on the
business in trust for the Corporation," it was necessary for the latter to be
the owner of the business. It is plain that the parties considered the sale as
made as on and from June 1, 1937 for e purposes of said sale and
transfer, both parties agreed at the deed of July 22, 1937, was to retroact to
the first y of the preceding month.
The cited provision could not have served any other purpose than to
consider the sale as made as of June 1, 1937. it had not been for this
purpose, if the intention had been that the sale was to be effective upon the
date of the written contract or subsequently, said provision would certainly
never have been written, for how could the transfer sale take effect as of
June 1, 1937, if it were to be considered as made at a later date ?
The first distribution made after June 1, 1937, of what plaintiffs call
ordinary dividends but what defendant denominates liquidating dividends
was declared and paid on June 8, 1937 (Stipulation, Paragraph IV, Record
on Appeal, p. 20). It will be recalled that the recommendation the Board of
Directors of the Hongkong Company, at their meeting on May 27, 1937, was
first of all "that the company should be wound up voluntarily by the
members (Record on Appeal, p. 12), and in pursuance of that purpose, it
was further recommended that the Company's business be sold as a going
concern to the Manila Company (ibid.). Complying with the Companies
Ordinance 1932 for companies registered in Hongkong for the voluntary
winding up by members, a Declaration of Solvency was drawn up duly
signed before the British Consul-General in Manila by the same directors,
and said declaration was returned to Hongkong for filing with the Registrar
of Companies (ibid.) Both recommendation were in due course approved and
ratified. The later execution of the formal deed of sale and the successive
distributions of the amounts in question among the stockholder of the
Hongkong Company were obviously other steps in its complete liquidation.
And they leave no room for doubt in the mind of the Court that said
distributions were not in the ordinary course of business and with intent t
maintain the corporation as a going concern in which case they would
have been distributions of ordinary dividend but after the liquidation of
the business had been decide upon, which makes them payments for the
surrender an relinquishment of the stockholders' interest in the corporation,
or so-called liquidating dividends.

More than with the distribution of June 8, 1937, is this true with
those declared on July 22, 1937, and paid on Au gust 4 and October 28,
1937, respectively (Stipulation o Facts, par. 5, Record on Appeal, p. 21) . The
distributions thus declared on July 22, 1937, and paid on August and
October 28, 1937, were from the surplus of the Hongkong Company
resulting from the active conduct of it business and amounting to
P74,182.12, which surplus was augmented to a total of P270,116.59 as a
result of the sale of its business and assets to the Manila Company (ibid.) In
both Schedules B and B-1 of the Stipulation of Fact (Record on Appeal, pp.
16-18), being minutes of directors meetings of the Hongkong Co., where
authorization and instruction were given to declare and pay in the form of
"dividends" to the shareholders the amounts in question, it was specifically
provided that the surplus to be so distributed be that resulting after
providing for return of capital and necessary or various expenses, as shown
in the balance sheet prepared as of June 1, 1937, and in the reconstructed
balance sheet of the same date presented by company's auditors, it having
been resolved in Schedule B-l that "any balance remaining to be distributed
when al liquidator's account has been rendered and paid" record on Appeal,
p. 18; emphasis supplied). It thus comes more evident that those
distributions were to be made in the course or as a result of the Hongkong
Company's liquidation and that said liquidation was to be complete and final.
And although the various resolutions have mentioned speak of distributions
of dividends when referring to those already alluded to, "a distribution does
not necessarily become a dividend by reason of the fact that it is called a
dividend by the distributing corporation." [Holmes Federal Taxes, 6th
edition, 774.)
 The ordinary connotation of liquidating dividend involves the
distribution of assets by a corporation to its stockholders upon
dissolution."(Klein, Federal Income Taxation, 253-254.)
But it is contended by plaintiffs that as of August 4, 1937, the
Hongkong Company "had taken no steps toward dissolution or liquidation
and still retained on hand liquid assets in excess of its capitalization." They
also assert 'that it was only on August 19, 1937, that said company took the
first corporate steps toward liquidation (Appellants' Brief, pp. 9-10). The
fact, however, is that since July 22, 1937, when the formal deed of sale of all
the properties, assets, and business of the Hongkong Company to the
Manila Company was made, it was expressly stipulated that the sale or
transfer shall take effect as of June 1, 1937. As already indicated, the
transfer of what was sold, like the sale itself, was, by the mutual agreement
of the parties, considered as made on and from that date, and that, if
thereafter and until final completion of the transfer, the Hongkong Company
continued to run the business, it did so in trust for the new owner, the
Manila Company. In the case of Canal-Commercial T. & S. Bk. vs. Comm'r
(63 Fed. [2d], 619, 620) it was held that:
" . . . The determining element therefore is whether the
distribution was in the ordinary course of business and with
intent to maintain the corporation as a going concern, or after
deciding to quit with intent to liquidate the business. Proceedings
actually begun to dissolve the corporation or formal action taken to
liquidate it are but evidentiary and not indispensable. Tootle vs.
Commissioner (C. C. A. 58 F. [2d], 576.) The fact that the
distribution is wholly from surplus and not from capital, and
therefore lawful as a dividend is only evidence. In Hellmich vs.
Hellman, and Tootle vs. Commissioner, supra, the distribution
was wholly from profits yet held to be one in liquidation . . ."
(Emphasis supplied.)
In the case at bar, when in the deed of July 22, 1937, by authority of
its stockholders, the Hongkong Company thru its authorized representative
declared and agreed that the aforesaid sale and transfer shall take effect as
of June 1, 1937, and distribution from its assets to those same stockholders
made after June 1, 1937, although before July 22, 1937, must have been
considered by them as liquidating dividends; for how could they consistently
deem all the business and assets of the corporation sold as of June 1, 1937,
and still say that said corporation, as a going concern, distributed ordinary
dividends to them thereafter?
 In Holmby Corporation vs. Comm'r (83 Fed. [2d], 648-550), the court
said:
" . . . The fact that the distributions were called 'dividends'
and were made, in part, from earnings and profits, and that some
of them were made before liquidation or dissolution proceedings
were commenced, is not controlling. . . The determining element is
whether the distributions were in the ordinary course of business
and with intent to maintain the corporation as a going concern,
or after deciding to quit and with intent to liquidate the
business . . . " (Emphasis supplied.)
The directors or representatives of the Hongkong Company or the
Manila Company, or both, could of course not convert into ordinary
dividends what in law and in reality re not such. As aptly stated by Chief
Justice Shaw in Comm. vs. Hunt (38 Am. Dec., 354-355),
"The law is not to be hoodwinked by colorable pretenses. It
looks truth and reality through whatever disguise they may
assume."
The amounts thus distributed among the plaintiffs were not in the
nature of a recurring return on stock in fact, they surrendered and
relinquished their stock in return for id distributions, thus ceasing to be
stockholders of the Hongkong Company, which in turn ceased to exist in its
own right as a going concern during its more or less brief administration of
the business as trustee for the Manila Company, and finally disappeared
even as such trustee.
"The distinction between a distribution in liquidation and
an ordinary dividend is factual; the result in each case depending
on the particular circumstances of the case and the intent of the
parties. If the distribution is in the nature of a recurring return
on stock it is an ordinary dividend. However, if the corporation is
really winding up its business or recapitalizing and narrowing its
activities, the distribution may properly be treated as in complete
or partial liquidation and as payment by the corporation to the
stockholder for his stock. The corporation is, in the latter
instances, wiping out all parts of the stockholders' interest in the
company . . .(Montgomery, Federal Income Tax Handbook [1938-
1939], 258; emphasis supplied.)
It is our considered opinion that we are not dealing here with "the
legal right of a tax-payer to decrease the amount of what otherwise will be
his taxes, or altogether avoid them, by means which the law permits" (St.
Louis Union Co. U. S., 82 Fed. [2], 61), but with a situation where we have
to apply in favor of the government the principle that the "liability for taxes
cannot be evaded by a transaction constituting a colorable subterfuge" (61
C. J., 173), it being clear that the distributions under consideration were
not ordinary dividends and were taxable in the manner form and amounts
decreed by the court below.
2. The second assignment of error. In disposing of the first
assignment of error, we held that the distribution in the instant case were
not ordinary dividends but payments for surrendered or relinquished stock
in a corporation in complete liquidation, sometimes called liquidating
dividends. The question is whether such amounts were taxable income. The
income Tax Law, Act No. 2833, section 25 (a), as amended by section 4 of
Act No. 3761, inter alia stipulated:
"Where a corporation, partnership, association, joint
account, or insurance company distributes all of its assets in
complete liquidation or dissolution, the gain realized or loss
sustained by the stockholder, whether individual or corporation,
is a taxable income or a deductible loss as the case may be."
(Emphasis supplied.)
Partial source of the foregoing provision was section 201 (c) of the U.
S. Revenue Act of 1918, approved February 24, 1919, providing:
"Amounts distributed in the liquidation of a corporation
shall be treated as payments in exchange for the stock or share,
and any gain or profit realized thereby shall be taxed to the
distributee as other gains or profits."
It is a familiar rule of statutory construction that the judicial
construction attached to the sources of statutes adopted in a jurisdiction
are of authoritative value in the interpretation of such local laws. The
Supreme Court of the United States has had occasion to construe certain
pertinent parts of the Federal Revenue Act above mentioned on February
20, 1928, when it decided the case of Hellmich vs. Hellman (276 U. S., 233;
72 Law. ed., 544). The case involved the recovery of additional income taxes
assessed against the plaintiffs under the Federal Revenue Act of 1918, and
paid under protest. And its determination hinged around the construction of
parts of said act after which those of our own law now under discussion
were patterned. Justice Sanford said:
 "The question here is whether the gains realived by
stockholders from the amounts distributed in the liquidation of
the assets of a dissolved corporation, out of its earnings or profits
accumulated since February 28, 1913, were taxable to them as
other 'gains or profits', whether the amounts so distributed were
'dividends' exempt from normal tax.
Section 201 (a) of the act defined the term 'dividend' as 'any
distribution made by a corporation . . . to its shareholders . . .
whether in cash or in other property . . . out of its earnings or
profits accumulated since February 28, 1913 . . . Section 201 (c)
provided that 'amounts distributed in the liquidation corporation
shall be treated as payments in exchange for stock or shares, and
any gain or profit realized thereby shall be taxed to distributee as
other gains or profits.' "
Our law at the time of the transactions in question, in providing that
where a corporation, etc. distributes all its assets in complete liquidation or
dissolution, the gain realized or loss sustained by the stockholder is a
taxable income or a deductible loss as the case may be, in effect treated
such distributions as payments in exchange for the stock or share. Thus, in
making the deficiency assessments under consideration, the Collector,
among other items, made roper deduction of the "value of shares" or "cost of
shares" the case of each individual plaintiff, assessing the tax only on the
resulting "profit realized" (Stipulation, par. ,VII, Record on Appeal, pp. 22-
25); and of course in case the value or cost of the shares should exceed the
distribution received by the stockholder, the resulting difference will be
treated as a "deductible loss."

In the same case the Supreme Court of the United States made the
following quotation, which is here relevant, from Treasury Regulations 45,
article 1548:
. . . So-called liquidation or dissolution dividends are not
dividends within the meaning of the statute, and amounts so
distributed, whether or not including any surplus earned since
February 28, 1913, are to be regarded as payments for the stock
of the dissolved corporation. Any excess so received over the cost
of his stock to the stockholder, or over its fair market value as of
March 1, 1913, if acquired prior thereto, is a taxable profit. A
distribution in liquidation of the assets and business of a
 corporation, which is a return to the stockholders of the value of
his stock upon a surrender of his interest in the corporation, is
distinguishable from a dividend paid by a going corporation out
of current earnings or accumulated surplus when declared by the
directors in their discretion, which is in the nature of a recurrent
return upon the stock." (72 Law. ed., 546.)
The Income Tax Law of the Philippines in force at the time defined the
term "dividend" in section 25 (a), as amended, as "any distribution made by
a corporation . . . out of its earnings or profits accumulated since March 1,
1913, and payable to its shareholders whether in cash or other property."
This definition is substantially the same as that given to the same term by
the U. S. Revenue Act of 1918 quoted by Justice Sanford in the passage
above-inserted.
Plaintiffs contend that defendant's position would result in double
taxation. A similar contention has been adversely disposed of against the
taxpayer in the Hellmich case in these words:
"The gains realized by the stockholders from the
distribution of the assets in liquidation were subject to the
normal tax in like manner as if they had sold their stock to third
persons. The objection that this results in double taxation of the
accumulated earnings and profits is no more available in the one
case than it would have been in the other. See Merchants' Loan &
T. Co. vs. Smietanki, 255 U. S., 509; 65 Law. ed., 751; 15 A. L. R.,
1305; 41 Sup. Ct. Rep., 386; Goodrich vs. Edwards, 255 U. S.
527; 65 Law. ed., 758; 41 Sup Ct. Rep., 390. When, as here,
Congress has clearly expressed its intention, the statute must be
sustained even though double taxation results. See Patton vs.
Brady, 184 U. S., 608; 46 Law. ed., 713; 22 Sup. Ct. Rep., 493;
Cream of Wheat Co. vs. Grand Forks County, 253 U. S., 325, 330;
64 Law. ed., 931, 934; 40 Sup. Ct. Rep., 558." (Hellmich vs.
Hellman, supra; 72 Law. ed., 547.)
It should be borne in mind that plaintiffs received the distributions in
question in exchange for the surrender and relinquishment by them of their
stock in the Hongkong Company which was dissolved and in process of
complete liquidation. That money in the hands of the corporation formed a
part of its income and was properly taxable to it under the then existing
Income Tax Law. When the corporation was dissolved and in process of
complete liquidation and its shareholders surrendered their stock to it and it
paid the sums in question to them in exchange, a transaction took place,
which was no different in its essence from a sale of the same stock to a third
party who paid therefor. In either case the shareholder who received the
consideration for the stock earned that much money as income of his own,
which again was properly taxable to him under the same Income Tax Law. In
the case of the sale to a third person, it is not perceived how the objection of
double taxation could have been successfully raised. Neither can we
conceive how it could be available where, as in this case, the stock was
transferred back to the dissolved .corporation.
3. The third assignment of error. In view of what has been said in
our consideration of the second assignment of error, the third can be briefly
disposed of. Having held that the distributions involved herein were not
ordinary dividends but payments for stock surrendered and relinquished by
the shareholders to the dissolved corporation, or so-called liquidating
dividends, we have the road clear to declaring that under section 25 (a) of
the former Income Tax Law, as amended, said distributions were taxable
alike to Wise and Co., Inc. and to the other plaintiffs. We hold that both the
proviso of section 10 (a) of said Income Tax Law and section 198 of
Regulations No. 81 refer to ordinary dividends, not to distributions made in
complete liquidation or dissolution of a corporation which result in the
realization of a gain as specifically contemplated in section 25 (a) ,of the
same law, as amended, which as aforesaid expressly provides for the
taxability of such gain as income, whether the stockholder happens to be an
individual or a corporation. By analogy, we can cite the following additional
passages from the Hellmich case:
"The controlling question is whether the amounts
distributed to the stockholders out of the earnings and profits
accumulated by the corporation since February 28, 1913, were to
be treated under section 201 (a) as 'dividends,' which were
exempt from the normal tax; or, under section 201 (c) as
payments made by the corporation in exchange for its stock,
which were taxable 'as other gains or profits.'
"It is true that if section 201 (a) stood alone its broad
definition of the term 'dividend' would apparently include
distributions made to stockholders in the liquidation of a
corporation although this term, as generally understood and
used, refers to the recurrent return upon stock paid to
stockholders by a going corporation in the ordinary course of
business, which does not reduce their stock holdings and leaves
them in a position to enjoy future returns upon the same stock.
 (See. Lynch vs. Hornby, 247 U. S., 339, 344-346; and Langstaff
vs. Lucas [D. C.], 9 Fed. [2d], 691, 694.)
"However, when section 201 (a) and section 201 (c) are read
together, under the long-established rule that the intention of the
lawmakers is to be deduced from a view of every material part of
the statute (Kohlsaat vs. Murphy, 96 U. S., 153, 159; 24 Law. ed.,
846), we think it clear that the general definition of a dividend in
section 201 (a) was not intended to apply to distributions made to
stockholders in the liquidation of a corporation, but that it was
intended that such distributions should be governed by section
201 (c), which, dealing specifically with such liquidation, provided
that the amounts distributed should 'be treated as payments in
exchange for stock, and that any gain realized thereby should be
taxed to the stockholders' as other gains or profits.' This brings the
two sections into entire harmony, and gives to each. its natural
meaning and due effect. . . ." (Hellmich vs. Hellman, supra;
emphasis supplied.)
4. The fourth assignment of error. Under this assignment it is
contended by the non-resident individual stockholder appellants that they
were not subject to the normal tax as regards the distributions received by
them and involved in the instant case. They "reported these distributions as
dividends from profits on which Philippine income tax had been paid . . . "
(Appellants' brief, p. 21.) They assert that the distributions were subject
only to the additional tax; whereas the Collector contends that they were
subject to both the normal and the additional tax. After what has been said
above, it hardly needs stating that the manner and form of reporting these
distributions employed by said appellants could not, under the law, change
their real nature as payments for surrendered stock, or so-called liquidating
dividends, provided for in section 25 (a) of the then Income Tax Law. Such
distributions under that law were subject to both the normal and the
additional tax therein provided for.
. . . Loosely speaking, the distribution to the stockholders
of a corporation's assets, upon liquidation, might be termed a
dividend; but this is not what is generally meant and understood
by that word. As generally understood and used, a dividend is a
return upon the stock of its stockholders, paid to them by a going
corporation without reducing their stockholdings, leaving them in
a position to enjoy future returns upon the same stock . . . In
other words, it is earnings paid to him by the corporation upon
 his invested capital therein, without wiping out his capital. On
the other hand, when a solvent corporation dissolves and
liquidates, it distributes to its stockholders, not only any earnings
it may have on hand, but it also pays to them their invested
capital, namely, the amount which they had paid in for their
stocks, thus wiping out their interest in the company . . . "
(Langstaff vs. Lucas, 9 Fed. [2d], 691, 694.
5. The fifth assignment of error. This assignment is made in behalf
of those appellants who were non-resident alien individuals, and for them it
is in effect said that if the distributions received by them were to be
considered as a sale of their stock to the Hongkong Company, the profit
realized by them does not constitute income from Philippine sources and is
not subject to Philippine taxes, "since all steps in the carrying out of this so-
called sale took place outside the Philippines." (Appellants' brief, p. 26.) We
do not think this contention is tenable under the facts and circumstances of
record. The Hongkong Company was at the time of the sale of its business to
the Manila Company as of June 1, 1937, doing business in the Philippines,
and the Manila Company was a domestic corporation domiciled and doing
business also in the Philippines. Schedule A of the Stipulation of Facts
(Record on Appeal, p. 13) declares, among other things, that the Hongkong
Company was incorporated for the purpose of carrying on in the Philippine
Islands the business of wine, beer, and spirit merchants and the other
objects set out in its memorandum of association. Hence, its earnings,
profits, and assets, including those from whose proceeds the distributions
in question were made, the major part of which consisted in the purchase
price of the business, had been earned and acquired in the Philippines.
From aught that appears in the reco it is clear that said distributions were
income "from Philippine sources."

6. The sixth assignment of error. Section 199 of Regulations No. 81,

deleting immaterial parts, reads:
"SEC. 199. Distributions in liquidation. In all cases where
a corporation . . . distributes all of its property or assets in
complete liquidation or dissolution, the gain realized from the
transaction the stockholder . . . is taxable as a dividend to the
extent that it is paid out of earnings or profits of the corporation .
. . the amount received by the stockholder in liquidation is less
the cost or other basis of the stock, a deductible loss is
sustained."
 This regulation would seem to support the contention the
distributions in question, at least those proceeding from sources other than
the earnings or profits of the dissolve corporation, were not taxable. Placing
the above-quote section of Regulations No. 81 side by side with section (a) of
the amended Income Tax Law then in force n notice that while the
regulation limits the taxability of the gain realized by the stockholder "to the
extent that It is paid out of earnings or profits of the corporation," section
25 (a) of the law, far from so limiting its taxability, provides that the gain
thus realized is a "taxable income" under the law so long as a gain is
realized, it will be taxable income whether the distribution comes from the
earnings or profits of the corporation or from the sale of all of its assets in
general, so long as the distribution is mad ''in complete liquidation or
dissolution". The regulation makes the gain taxable as a dividend, while the
law made it a taxable income. An inevitable conflict between the two
provisions seems to exist, and in such a case, of course, the law prevails.
"Treasury Department cannot impose or exempt from
income taxes. and regulations purporting to exempt from taxation
income specifically taxed would be void.
xxx xxx xxx
"Any erroneous interpretation of revenue act by regulation
of Treasury Department would not estop government from
asserting tax on an income, though taxpayer had been misled by
such interpretation, and by it induced to expose property to
taxation. ' (Langstaff vs. Lucas, 9 Fed. [2d], 691.)
7 and 8. The seventh and eighth assignments of error. view of what
has been said above, these two assignments need no separate treatment.
For the foregoing considerations, the judgment appealed from will be
affirmed with the costs of both instances against e appellants. So ordered.
Moran, C.J., Paras, Feria, Pablo, Perfecto, Bengzon, Briones, Hontiveros,
Padilla and Tuason, JJ., concur.
RESOLUTION ON MOTION FOR RECONSIDERATION
July 28, 1947
HILADO, J .:
Plaintiffs and appellants have filed a motion for reconsideration dated
July 10, 1947. After carefully considerating said motion, which makes
particular reference to appellants fifth assignment of error, the court does
not consider the arguments therein adduced tenable. Stripped to their bare
essentials, the movants' contentions are summarized in the following
propositions found on page 3-4 of their motion, to wit:
"Since appellants J.F. MacGregor, N. C. MacGregor, C. J.
Lafrentz, E. M. G. Strickland, and Mrs. M.J. G. Mullins were all
nonresident aliens and since the court has held that the
transaction in this case amounted to a sale or exchange of their
shares in a foreign corporation, which sale or exchange took place
entirely outside of the Philippine Island, it follows that they have
not derived income from Philippines sources and are not subject
to the taxes which have been collected from them by defendant.
xxx xxx xxx
. . . On the other hand if the income results from the sale
or exchange of the shares in question then the non-resident alien
stockholders who converted their shares abroad have receive no
income from the Philippine sources and are not subject to any tax
whatsoever on their profits from the transaction."
Leaving aside the other portions of the above-quoted propositions as
sufficiently covered in the Courts decision, let us direct attention to those
parts thereof wherein it is pretended that the transaction took place
"entirely outside the Philippine Island" or "abroad."
In the minutes, Schedule B of the stipulation of facts (Rec. on Appeal,
pp. 16-17), it appears that on July 22, 1937, an extraordinary meeting of
shareholders of the Manila Wine Merchants, Ltd. was held and in said
meeting amount other things, it was resolved that the Directors of said
Company "be authorized and instructed to declare and pay in the form of
dividend to the shareholders the amount of any surplus existing after the
above-referred to sale has been consummated. This surplus, after providing
for return of capital and necessary expenses, as shown in the Balance Sheet
prepared as of June 1, 1937, after giving effect to the sale transaction
above-referred to, amounts to approximately P270,000." While Schedule B
does not state the place where the meeting was held, Schedule B-1 of the
same stipulation of facts (Record on Appeal, pp. 17-18) furnishes us the
information that it was held in Manila Schedule B-1 in this connection says:
"Sale of Company: In accordance with resolution passed at
any Extraordinary Meeting of Shareholders held in Manila
(underscoring supplied) on July 22, 1937, at 3 o'clock, the
Directors of the Manila Wine Merchants Ltd., were authorized to
 sell the Company as a going concern in accordance with sale
agreement presented at the Meeting."
Later in the same Schedule B-1 we find that the declaration of
dividends authorized in the previous meeting as stated in the minutes
Schedule B, was made by the Board of Directors of the same Manila Wine
Merchants, Ltd., of whose meeting on that same date, July 22, 1937,
Schedule B-1 constitutes the minutes. The pertinent parts of the minutes of
said meeting read as follows:
"Dividend: The second matter before the Meeting was the
question of declaring a dividend to enable a distribution in cases
to be made, the dividend to be entire amount standing at surplus
after providing for return of capital and various expenses in
accordance with reconstructed balance sheet as at June 1, 1937
presented by our auditors.
xxx xxx xxx
"Resolved that as after the Manila Wine Merchants Ltd. has
been sold for the stipulated sum of P400,000 and money
received, there will be after providing for return of capital,
payment of income tax and other charges, a sum of
approximately P270,000 standing at surplus account, a dividend
is now hereby declared in amount covering the entire balance
remaining at surplus account after the concern has been wound
up, and we hereby authorize the distribution of P265,000 as and
when funds are available, any balance remaining to be
distributed when final Liquidators account has been rendered
and paid."
Again, while the minutes Schedule B-1 do not reveals the place where
that board meeting was held, the fact stated therein that it was held on July
22, 1937, the self-same date of the holding of the extraordinary meeting of
shareholders referred to in the minutes Schedule B, at 3 o'clock
(presumably p.m.), as recorded in Schedule B-1, clearly shows that the said
board meeting was held also in Manila, and not in Hongkong or elsewhere
abroad, for J.F. MacGregor and E. Heybrook, both of whom appear in both
Schedules B and B-1 to have participated in both meetings, could not, so far
as the record discloses, very well be in Manila and Hongkong or elsewhere
abroad on the same date. There is no showing nor is it even pretended that
these two gentlemen after the meeting held in Manila on July 22, 1937, at 3
o'clock, took an airplane or other mode of conveyance, as fast or faster, and
hurried to Hongkong or elsewhere abroad and attended the other meeting
that very same day. Indeed, that both meetings must have been held in
manila would seem to be only natural and logical supposition from that the
fact that the Manila Wine Merchants, Ltd., was admittedly conducting its
business in said city and the Philippines is general (Schedule A, Rec. on
Appeal, p. 13). It seems clear, therefore, that the dividends in question were
declared in the Philippine Islands.
What was the legal effect of the declaration? Paragraph V of the
stipulation of facts (Rec. on Appeal, pp. 20-21) states that, pursuant to
these resolutions, "the Hongkong Company (the same Manila Wine
Merchants, Ltd.) distributed this surplus to its stockholders, plaintiffs
receiving (underscoring supplied) the following sums on the following dates"
(then follow plaintiffs names with the respective amounts in Philippine
pesos received by them on the dates stated). It is not stated that they
received their dividends in Hongkong or other foreign money. And in their
own brief (p. 25) they say that the payments or distributions thus received
by them, as a result of the liquidation and sale of said company, "were
included as gross income their Philippine income tax returns". This facts
further tends to show that those payments or distributions were received in
the Philippine Island, either by plaintiffs personally or through their proxies
or agents. Besides, in paragraph V of the stipulation of facts (Rec. on
Appeal, p. 21) it appears that the dividends or distributions pertaining to
their co-plaintiff Wise and Co., Inc., were paid on the same dates, namely,
August 24, 1937, and October 28, 1937; and it being undisputed that Wise
and Co., Inc. was domiciled and had its principal office of Manila
(complaint, par. I, Rec. on Appeal, p. 2) in which city it was presumably
paid, it would seem obvious that the concomitant payments thus made to
the other plaintiffs were likewise effected in the same place, whether the
individual plaintiffs acted personally or through proxies or agents. It should
also be remembered that while the "registered office" of the Manila Wine
Merchants, Ltd. was stuated in the colony of Hongkong (Schedule A, Rec. on
Appeal, p. 13), the fact is that the only business for which it was
incorporated was the wine, beer, and spirit business, which the Philippine
Islands, and form the record we deduce that it had also an office in manila
where, so far as the record discloses, the payments were made. Finally, the
fact that payments was made in the Philippine pesos would strongly
corrobarate the conclusion that it was made in this country if it had been
made in Hongkong or elsewhere abroad, the reasonable assumption is that
it would have been made in Hongkong dollars or in the currency of such
other place abroad.
 " . . . However, where a corporation has not only declared a
dividend but has specifically appropriated and set apart from its
other assets a fund out of which the dividend is to be paid, such
action constitutes the assets to set apart a trust fund in the
hands of the corporation for the payment of the stockholders to
the exclusion of other creditors. . . (18 C.J.S., p. 1115; emphasis
supplied.)
"As between successive owners of shares of stock in a
corporation, the general rule is that dividends belong to the
persons who are the owners of the stock at the time they are
declared, without regard to the time during which the dividends
were earned, and this is true although the dividends are made
payable at a future date." (18 C.J.S., 119, sec. 470 [a]; emphasis
supplied.)
"There is no controversy about the legal proposition that
dividends declared belong to the owner of the stock at the time
the dividend is declared." (Livingstone Country Bank vs. First
State Bank, 136 Ky., 546, 554, cited in footnote 36, p.818, 14
C.J.; emphasis supplied.)
"The moment the dividend is declared, it becomes then
separate and distinct from the stock and the dividend falls to him
who is proprietor of the stock of which it was therefore incident.
"The doctrine is that a dividend is considered parcel of the
mass of corporate property until declared and therefore incident
to and parcel of the stock up to the time it is declared; and before
its declaration, will pass with the sale or devise of the stock.
whosoever owns the stock prior to the declaration of a dividend,
owns the dividend also." (MsLaren vs. Cresent Planning Mill Co.,
117 Mo. A., 40, 47, cited in note 36, p. 818, 14 C.J.; emphasis
supplied.)
In De Koven vs. Alsop (201 Ill., 309; 63 L.R.A., 587), the court said:
"A dividend is defined as a corporate profit set aside,
declared and ordered by the directions to be paid to the
stockholders on demand or at a fixed time. Until the dividend is
declared, these corporate profits belong to the corporation, not to
the stockholders, and are liable for corporate indebtedness."
(Emphasis supplied.)
 We are fully satisfied from the facts and data furnished here by the
parties themselves that the dividends in question were paid to plaintiffs,
personally or thru their proxies or agents, in the Philippines. But aside from
this, from the moment they were declared and a definite fund specified for
their payment (all surplus remaining "after providings for return of capital
and various expenses") and all of this was done in the Philippines to all
legal intents and purposes they earned those dividends in this country.
From the records we deduce that the funds and assets of the Manila wine
Merchants, Ltd., from which those dividends proceeded, were in the
Philippine pesos, indicating that it was made here. And this in turn would
lead to the deduction that the funds and assets liquidated were here.
Motion denied. So ordered.
Moran, C.J., Paras, Feria, Pablo, Perfecto, Bengzon, Briones, Hontiveros,
Padilla and Tuason, JJ., concur.