Wise & Co., Inc. v. Meer GR NO: 48231 (1947)

FACTS:

That during the year 1937, plaintiffs, except Mr. E.M.G. 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 do business in the Philippines.

That on May 27, 1937, the Board of Directors of Manila Wine Merchants, Ltd., (hereinafter referred to as the Hongkong Company), recommended to the stockholders of the company that they adopt the resolutions necessary to enable the company to sell its business and assets to Manila Wine Merchants, Inc., a Philippine corporation formed on May 27, 1937, (hereinafter referred to as the Manila Company), for the sum of P400,000;

HK Company made a distribution of its earnings for the year 1937 to its stockholders (Dividends declared and paid on June 8, 1937). HK Company paid Philippine income tax on the entire earnings from which the said distributions were paid.

After the June 8 distribution, HK Company had :

P74, 182 – surplus resulting from the active conduct of business

P270, 116 – total increased surplus as a result of the sale of the business and assets

The stockholders by proper resolution directed that the company be voluntarily liquidated and its capital distributed among the stockholders; that the stockholders at such meeting appointed a 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 moths from that date.

That plaintiffs duly filed Philippine income tax returns. That defendant subsequently made the deficiency assessments. 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.

CONTENTIONS:

CIR-The amounts received by Wise & Co et al from the HK Company were liquidating dividends (thus, subject to normal tax)

Wise & Co et al say- The amounts were ordinary dividends

ISSUES:

a)W/N the amounts received by Wise & Co et al from the HK Company on which the taxes were assessed were ordinary dividends or liquidating dividends  (LIQUIDATING DIVIDENDS)

b)W/N such liquidating dividends are taxable income (YES)

RATIO:

a)The amounts received by the stockholders were liquidating dividends

•The parties agreed in the deed of sale that the sale and transfer shall take effect as of June 1, 1937. Thus, the distribution of assets to the stockholders made after that date must have been considered by them as liquidating dividends.

•The said distributions were NOT in the ordinary course of business and with intent to maintain the corporation as a going concern (in which case they would be ordinary dividends) BUT they were made after the liquidated of the business had been decided upon, which makes them payments for the surrender and relinquishment of the stockholder’s interest in the corporation, or liquidating dividends.

•Ordinary connotation of liquidating dividend involves the distribution of assets by a corporation to its stockholders upon dissolution.

•Wise & Co et al (stockholders) say: It was only on August 19, 1937, that the HK Company took the first corporate steps towards liquidation.

•SC: It was expressly stipulated in the formal deed of sale (see underlined portion in facts) that the sale or transfer shall take effect on June 1, 1937. After that date, and until completion of the transfer, the HK Company continued to run the business in trust for the new owner, the Manila Company.

•The determining element 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.

•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.

Liquidating dividend v 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 parts of the stockholders' interest in the company . . .. “

b) Such liquidating dividends are taxable income

•Income tax law states that: “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.”

•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.

•The stockholders received the distributions in question in exchange for the surrender and relinquishment by them of their stock in the HK 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 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.

•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 Income Tax Law.

The profits earned by the stockholders are income from Philippine sources, and thus subject to Philippine tax

Stockholders say: 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

SC:

•The HK Company was at the time of the sale of its business in the Philippines, and the Manila Company was a domestic corporation domiciled and doing business also in the Philippines.

•The HK Company was incorporated for the purpose of carrying on business in the Philippines which is 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 thebusiness, had been earned and acquired in the Philippines.

•As such, it is clear that said distributions were income "from Philippine sources."

Judgment affirmed.

DISPOSITIVE PORTION: For the foregoing consideration, the judgment appealed from will be affirmed with the costs of both instances against the appellants. So ordered.

Resolution on Motion for Reconsideration: SC affirms its earlier ruling.