Fisher vs. Trinidad [G.R. No.

L-17518 October 30, 1922]

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. Fisher was a stockholder in said corporation. Said
corporation, as result of the business for that year,
declared a "stock dividend" and that the proportionate
share of said stock divided of Fisher was P24,800. Said
the stock dividend for that amount was issued to Fisher.
For this reason, Trinidad demanded payment of income
tax for the stock dividend received by Fisher. Fisher paid
under protest the sum of P889.91 as income taxon said
stock dividend. Fisher filed an action for the recovery of
P889.91. Trinidad demurred to the petition upon the
ground that it did not state facts sufficient to constitute
cause of action. The demurrer was sustained and Fisher
appealed. 

Issue: Whether or not the stock dividend was an income

and therefore taxable. 

Held: No. Generally speaking, stock dividends represent

undistributed increase in the capital of corporations or
firms, joint stock companies, etc., etc., for a particular
period. The inventory of the property of the corporation for
particular period shows an increase in its capital, so that
the stock theretofore issued does not show the real value
of the stockholder's interest, and additional stock is issued
showing the increase in the actual capital, or property, or
assets of the corporation. 
In the case of Gray vs. Darlington (82 U.S., 653), the US
Supreme Court held that mere advance in value does not
constitute the "income" specified in the revenue law as
"income" of the owner for the year in which the sale of the
property was made. Such advance constitutes and can be
treated merely as an increase of capital. 

In the case of Towne vs. Eisner, income was defined in

an income tax law to mean cash or its equivalent, unless it
is otherwise specified. It does not mean
unrealized increments in the value of the property. A
stock dividend really takes 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. The proportional interest of
each shareholder remains the same. In short, the
corporation is no poorer and the stockholder is no richer
then they were before. 

In the case of Doyle vs. Mitchell Bros. Co. (247 U.S., 179),

Mr. Justice Pitney, said that the term "income" in its
natural and obvious sense, imports something distinct
from principal or capital and conveying the idea of gain or
increase arising from corporate activity. 

In the case of Eisner vs. Macomber (252 U.S., 189),

income was defined as the gain derived from capital, from
labor, or from both combined, provided it be understood to
include profit gained through a sale or conversion of
capital assets. 
When a corporation or company issues "stock dividends" it
shows that the company's accumulated profits have been
capitalized, instead of distributed to the stockholders or
retained as surplus available for distribution, in money or
in kind, should opportunity offer. The essential and
controlling fact is that the stockholder has received nothing
out of the company's assets for his separate use and
benefit; on the contrary, every dollar of his original
investment, together with whatever accretions and
accumulations resulting from employment of his money
and that of the other stockholders in the business of the
company, still remains the property of the company, and
subject to business risks which may result in wiping out of
the entire investment. The stockholder by virtue of the
stock dividendhas in fact received nothing
that answers the definition of an "income." 

The stockholder who receives a stock dividend has

received nothing but a representation of his increased
interest in the capital of the corporation. There has been
no separation or segregation of his interest. All the
property or capital of the corporation still belongs to the
corporation. There has been no separation of the interest
of the stockholder from the general capital of the
corporation. The stockholder, by virtue of the
stock dividend, has no separate or individual control over
the interest represented thereby, further than he had
before the stock dividend was issued. He cannot use it for
the reason that it is still the property of the corporation and
not the property of the individual holder of stock dividend.
A certificate of stock represented by the stock dividend is
simply a statement of his proportional interest or
participation in the capital of the corporation. The receipt
of a stock dividend in no way increases the money
received of a stockholder 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 value of
the capital due to business, economic, or other reasons.
We believe that the Legislature, when it provided for an
"income tax," intended to tax only the "income" of
corporations, firms or individuals, as that term is generally
used in its common acceptation; that is that the income
means money received, coming to a person or corporation
for services, interest, or profit from investments. We do not
believe that the Legislature intended that a mere increase
in the value of the capital or assets of a corporation, firm,
or individual, should be taxed as "income." 

A stock dividend, still being the property of the corporation

and not the stockholder, 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 stockholder certainly could
not be charged with having received an income by virtue
of the issuance of the stock dividend. Until the dividend is
declared and paid, the corporate profits still belong to the
corporation, not to the stockholders, and are liable for
corporate indebtedness. The rule is well established that
cash dividend, whether large or small, are regarded as
"income" and all stockdividends, as capital or assets 

If the ownership of the property represented by a

stock dividend is still in the corporation and not in the
holder of such stock, then it is difficult to understand how it
can be regarded as income to the stockholder and not as
a part of the capital or assets of the corporation. If the
holder of the stock dividend is required to pay an income
tax on the same, the result would be that he has paid a tax
upon an income which he never received. Such a
conclusion is absolutely contradictory to the idea of an
income. 

As stock dividends are not "income," the same cannot be

considered taxes under that provision of Act No. 2833. For
all of the foregoing reasons, SC held that the judgment of
the lower court should be REVOKED.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-17518             October 30, 1922

FREDERICK C. FISHER, plaintiff-appellant,

vs.
WENCESLAO TRINIDAD, Collector of Internal Revenue, defendant-appellee.

Fisher and De Witt and Antonio M. Opisso for appellants.

Acting Attorney-General Tuason for appellee.
JOHNSON, J.:

The only question presented by this appeal is: Are the "stock dividends" in the present case
"income" and taxable as such under the provisions of section 25 of Act No. 2833? While the
appellant presents other important questions, under the view which we have taken of the facts
and the law applicable to the present case, we deem it unnecessary to discuss them now.

The defendant demurred to the petition in the lower court. The facts are therefore admitted. They
are simple and may be stated as follows:

That during the year 1919 the 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; that he appellant was a stockholder in said corporation; that said corporation, as result of
the business for that year, declared a "stock dividend"; that the proportionate share of said stock
divided of the appellant was P24,800; that the stock dividend for that amount was issued to the
appellant; that thereafter, in the month of March, 1920, the appellant, upon demand of the
appellee, paid under protest, and voluntarily, unto the appellee the sum of P889.91 as income tax
on said stock dividend. For the recovery of that sum (P889.91) the present action was instituted.
The defendant demurred to the petition upon the ground that it did not state facts sufficient to
constitute cause of action. The demurrer was sustained and the plaintiff appealed.

To sustain his appeal the appellant cites and relies on some decisions of the Supreme Court of
the United States as well as the decisions of the supreme court of some of the states of the Union,
in which the questions before us, based upon similar statutes, was discussed. Among the most
important decisions may be mentioned the following: Towne vs. Eisner, 245 U.S., 418; Doyle vs.
Mitchell Bors. Co., 247 U.S., 179; Eisner vs. Macomber, 252 U.S., 189; Dekoven vs Alsop, 205
Ill., 309; 63 L.R.A., 587; Kaufman vs. Charlottesville Woolen Mills, 93 Va., 673.

In each of said cases an effort was made to collect an "income tax" upon "stock dividends" and
in each case it was held that "stock dividends" were capital and not an "income" and
therefore not subject to the "income tax" law.

The appellee admits the doctrine established in the case of Eisner vs. Macomber (252 U.S., 189)
that a "stock dividend" is not "income" but argues that said Act No. 2833, in imposing the tax on
the stock dividend, does not violate the provisions of the Jones Law. The appellee further argues
that the statute of the United States providing for tax upon stock dividends is different from the
statute of the Philippine Islands, and therefore the decision of the Supreme Court of the United
States should not be followed in interpreting the statute in force here.

For the purpose of ascertaining the difference in the said statutes ( (United States and Philippine
Islands), providing for an income tax in the United States as well as that in the Philippine
Islands, the two statutes are here quoted for the purpose of determining the difference, if any, in
the language of the two statutes.
Chapter 463 of an Act of Congress of September 8, 1916, in its title 1 provides for the collection
of an "income tax." Section 2 of said Act attempts to define what is an income. The definition
follows:

That the term "dividends" as used in this title shall be held to mean any distribution made
or ordered to made by a corporation, . . . which stock dividend shall be considered
income, to the amount of its cash value.

Act No. 2833 of the Philippine Legislature is an Act establishing "an income tax." Section 25 of
said Act attempts to define the application of the income tax. The definition follows:

The term "dividends" as used in this Law shall be held to mean any distribution made or
ordered to be made by a corporation, . . . out of its earnings or profits accrued since
March first, nineteen hundred and thirteen, and payable to its shareholders, whether in
cash or in stock of the corporation, . . . . Stock dividend shall be considered income, to
the amount of the earnings or profits distributed.

It will be noted from a reading of the provisions of the two laws above quoted that the writer of
the law of the Philippine Islands must have had before him the statute of the United States. No
important argument can be based upon the slight different in the wording of the two sections.

It is further argued by the appellee that there are no constitutional limitations upon the power of
the Philippine Legislature such as exist in the United States, and in support of that contention, he
cites a number of decisions. There is no question that the Philippine Legislature may provide for
the payment of an income tax, but it cannot, under the guise of an income tax, collect a tax on
property which is not an "income." The Philippine Legislature can not impose a tax upon
"property" under a law which provides for a tax upon "income" only. The Philippine Legislature
has no power to provide a tax upon "automobiles" only, and under that law collect a tax upon a
carreton or bull cart. Constitutional limitations, that is to say, a statute expressly adopted for one
purpose cannot, without amendment, be applied to another purpose which is entirely distinct and
different. A statute providing for an income tax cannot be construed to cover property which is
not, in fact income. The Legislature cannot, by a statutory declaration, change the real nature of a
tax which it imposes. A law which imposes an important tax on rice only cannot be construed to
an impose an importation tax on corn.

It is true that the statute in question provides for an income tax and contains a further provision
that "stock dividends" shall be considered income and are therefore subject to income tax
provided for in said law. If "stock dividends" are not "income" then the law permits a tax upon
something not within the purpose and intent of the law.

It becomes necessary in this connection to ascertain what is an "income in order that we may be
able to determine whether "stock dividends" are "income" in the sense that the word is used in
the statute. Perhaps it would be more logical to determine first what are "stock dividends" in
order that we may more clearly understand their relation to "income." Generally speaking, stock
dividends represent undistributed increase in the capital of corporations or firms, joint stock
companies, etc., etc., for a particular period. They are used to show the increased interest or
proportional shares in the capital of each stockholder. In other words, the inventory of the
property of the corporation, etc., for particular period shows an increase in its capital, so that the
stock theretofore issued does not show the real value of the stockholder's interest, and additional
stock is issued showing the increase in the actual capital, or property, or assets of the
corporation, etc.

To illustrate: A and B form a corporation with an authorized capital of P10,000 for the purpose
of opening and conducting a drug store, with assets of the value of P2,000, and each contributes
P1,000. Their entire assets are invested in drugs and put upon the shelves in their place of
business. They commence business without a cent in the treasury. Every dollar contributed is
invested. Shares of stock to the amount of P1,000 are issued to each of the incorporators, which
represent the actual investment and entire assets of the corporation. Business for the first year is
good. Merchandise is sold, and purchased, to meet the demands of the growing trade. At the end
of the first year an inventory of the assets of the corporation is made, and it is then ascertained
that the assets or capital of the corporation on hand amount to P4,000, with no debts, and still not
a cent in the treasury. All of the receipts during the year have been reinvested in the business.
Neither of the stockholders have withdrawn a penny from the business during the year. Every
peso received for the sale of merchandise was immediately used in the purchase of new stock —
new supplies. At the close of the year there is not a centavo in the treasury, with which either A
or B could buy a cup of coffee or a pair of shoes for his family. At the beginning of the year they
were P2,000, and at the end of the year they were P4,000, and neither of the stockholders have
received a centavo from the business during the year. At the close of the year, when it is
discovered that the assets are P4,000 and not P2,000, instead of selling the extra merchandise on
hand and thereby reducing the business to its original capital, they agree among themselves to
increase the capital they agree among themselves to increase the capital issued and for that
purpose issue additional stock in the form of "stock dividends" or additional stock of P1,000
each, which represents the actual increase of the shares of interest in the business. At the
beginning of the year each stockholder held one-half interest in the capital. At the close of
the year, and after the issue of the said stock dividends, they each still have one-half
interest in the business. The capital of the corporation increased during the year, but has either
of them received an income? It is not denied, for the purpose of ordinary taxation, that the
taxable property of the corporation at the beginning of the year was P2,000, that at the close of
the year it was P4,000, and that the tax rolls should be changed in accordance with the changed
conditions in the business. In other words, the ordinary tax should be increased by P2,000.

Another illustration: C and D organized a corporation for agricultural purposes with an

authorized capital stock of P20,000 each contributing P5,000. With that capital they purchased a
farm and, with it, one hundred head of cattle. Every peso contributed is invested. There is no
money in the treasury. Much time and labor was expanded during the year by the stockholders
on the farm in the way of improvements. Neither received a centavo during the year from the
farm or the cattle. At the beginning of the year the assets of the corporation, including the farm
and the cattle, were P10,000, and at the close of the year and inventory of the property of the
corporation is made and it is then found that they have the same farm with its improvements and
two hundred head of cattle by natural increase. At the end of the year it is also discovered that,
by reason of business changes, the farm and the cattle both have increased in value, and that the
value of the corporate property is now P20,000 instead of P10,000 as it was at the beginning of
the year. The incorporators instead of reducing the property to its original capital, by selling off a
part of its, issue to themselves "stock dividends" to represent the proportional value or interest of
each of the stockholders in the increased capital at the close of the year. There is still not a
centavo in the treasury and neither has withdrawn a peso from the business during the year. No
part of the farm or cattle has been sold and not a single peso was received out of the rents or
profits of the capital of the corporation by the stockholders.

Another illustration: A, an individual farmer, buys a farm with one hundred head of cattle for the
sum of P10,000. At the end of the first year, by reason of business conditions and the increase of
the value of both real estate and personal property, it is discovered that the value of the farm and
the cattle is P20,000. A, during the year, has received nothing from the farm or the cattle. His
books at the beginning of the year show that he had property of the value of P10,000. His books
at the close of the year show that he has property of the value of P20,000. A is not a corporation.
The assets of his business are not shown therefore by certificates of stock. His books, however,
show that the value of his property has increased during the year by P10,000, under any theory of
business or law, be regarded as an "income" upon which the farmer can be required to pay an
income tax? Is there any difference in law in the condition of A in this illustration and the
condition of A and B in the immediately preceding illustration? Can the increase of the value of
the property in either case be regarded as an "income" and be subjected to the payment of the
income tax under the law?

Each of the foregoing illustrations, it is asserted, is analogous to the case before us and, in view
of that fact, let us ascertain how lexicographers and the courts have defined an "income." The
New Standard Dictionary, edition of 1915, defines an income as "the amount of money coming to
a person or corporation within a specified time whether as payment or corporation within a
specified time whether as payment for services, interest, or profit from investment." Webster's
International Dictionary defines an income as "the receipt, salary; especially, the annual receipts
of a private person or a corporation from property." Bouvier, in his law dictionary, says that an
"income" in the federal constitution and income tax act, is used in its common or ordinary
meaning and not in its technical, or economic sense. (146 Northwestern Reporter, 812) Mr.
Black, in his law dictionary, says "An income is the return in money from one's business, labor,
or capital invested; gains, profit or private revenue." "An income tax is a tax on the yearly profits
arising from property , professions, trades, and offices."

The Supreme Court of the United States, in the case o Gray vs. Darlington (82 U.S., 653), said in
speaking of income that mere advance in value in no sense constitutes the "income" specified in
the revenue law as "income" of the owner for the year in which the sale of the property was
made. Such advance constitutes and can be treated merely as an increase of capital. (In re
Graham's Estate, 198 Pa., 216; Appeal of Braun, 105 Pa., 414.)

Mr. Justice Hughes, later Associate Justice of the Supreme Court of the United States and now
Secretary of State of the United States, in his argument before the Supreme Court of the United
States in the case of Towne vs. Eisner, supra, defined an "income" in an income tax law, unless
it is otherwise specified, to mean cash or its equivalent. It does not mean choses in action or
unrealized increments in the value of the property, and cites in support of the definition, the
definition given by the Supreme Court in the case of Gray vs. Darlington, supra.
In the case of Towne vs. Eisner, supra, Mr. Justice Holmes, speaking for the court, said:
"Notwithstanding the thoughtful discussion that the case received below, we cannot doubt that
the dividend was capital as well for the purposes of the Income Tax Law. . . . 'A stock dividend
really takes 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. . . . The
proportional interest of each shareholder remains the same. . . .' In short, the corporation is no
poorer and the stockholder is no richer then they were before." (Gibbons vs. Mahon, 136 U.S.,
549, 559, 560; Logan County vs. U.S., 169 U.S., 255, 261).

In the case of Doyle vs. Mitchell Bros. Co. (247 U.S., 179, Mr. Justice Pitney, speaking for the
court, said that the act employs the term "income" in its natural and obvious sense, as importing
something distinct from principal or capital and conveying the idea of gain or increase arising
from corporate activity.

Mr. Justice Pitney, in the case of Eisner vs. Macomber (252 U.S., 189), again speaking for the
court said: "An income may be defined as the gain derived from capital, from labor, or from both
combined, provided it be understood to include profit gained through a sale or conversion of
capital assets."

For bookkeeping purposes, when stock dividends are declared, the corporation or company
acknowledges a liability, in form, to the stockholders, equivalent to the aggregate par value of
their stock, evidenced by a "capital stock account." If profits have been made by the corporation
during a particular period and not divided, they create additional bookkeeping liabilities under
the head of "profit and loss," "undivided profits," "surplus account," etc., or the like. None of
these, however, gives to the stockholders as a body, much less to any one of them, either a claim
against the going concern or corporation, for any particular sum of money, or a right to any
particular portion of the asset, or any shares sells or until the directors conclude that dividends
shall be made a part of the company's assets segregated from the common fund for that purpose.
The dividend normally is payable in money and when so paid, then only does the stockholder
realize a profit or gain, which becomes his separate property, and thus derive an income from
the capital that he has invested. Until that, is done the increased assets belong to the corporation
and not to the individual stockholders.

When a corporation or company issues "stock dividends" it shows that the company's
accumulated profits have been capitalized, instead of distributed to the stockholders or retained
as surplus available for distribution, in money or in kind, should opportunity offer. Far from
being a realization of profits of the stockholder, it tends rather to postpone said realization, in
that the fund represented by the new stock has been transferred from surplus to assets, and no
longer is available for actual distribution. The essential and controlling fact is that the
stockholder has received nothing out of the company's assets for his separate use and benefit; on
the contrary, every dollar of his original investment, together with whatever accretions and
accumulations resulting from employment of his money and that of the other stockholders in the
business of the company, still remains the property of the company, and subject to business risks
which may result in wiping out of the entire investment. Having regard to the very truth of the
matter, to substance and not to form, the stockholder by virtue of the stock dividend has in fact
received nothing that answers the definition of an "income." (Eisner vs. Macomber, 252 U.S.,
189, 209, 211.)

The stockholder who receives a stock dividend has received nothing but a representation of his
increased interest in the capital of the corporation. There has been no separation or segregation of
his interest. All the property or capital of the corporation still belongs to the corporation. There
has been no separation of the interest of the stockholder from the general capital of the
corporation. The stockholder, by virtue of the stock dividend, has no separate or individual
control over the interest represented thereby, further than he had before the stock dividend was
issued. He cannot use it for the reason that it is still the property of the corporation and not the
property of the individual holder of stock dividend. A certificate of stock represented by the
stock dividend is simply a statement of his proportional interest or participation in the capital of
the corporation. For bookkeeping purposes, a corporation, by issuing stock dividend,
acknowledges a liability in form to the stockholders, evidenced by a capital stock account. The
receipt of a stock dividend in no way increases the money received of a stockholder 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 value of the capital due to business, economic, or other
reasons. We believe that the Legislature, when it provided for an "income tax," intended to tax
only the "income" of corporations, firms or individuals, as that term is generally used in its
common acceptation; that is that the income means money received, coming to a person or
corporation for services, interest, or profit from investments. We do not believe that the
Legislature intended that a mere increase in the value of the capital or assets of a corporation,
firm, or individual, should be taxed as "income." Such property can be reached under the
ordinary from of taxation.

Mr. Justice Pitney, in the case of the Einer vs. Macomber, supra, said in discussing the
difference between "capital" and "income": "That the fundamental relation of 'capital' to 'income'
has been much discussed by economists, the former being likened to the tree or the land, the
latter to the fruit or the crop; the former depicted as a reservoir supplied from springs; the latter
as the outlet stream, to be measured by its flow during a period of time." It may be argued that a
stockholder might sell the stock dividend which he had acquired. If he does, then he has
received, in fact, an income and such income, like any other profit which he realizes from the
business, is an income and he may be taxed thereon.

There is a clear distinction between an extraordinary cash dividend, no matter when earned,
and stock dividends declared, as in the present case. The one is a disbursement to the
stockholder of accumulated earnings, and the corporation at once parts irrevocably with all
interest thereon. The other involves no disbursement by the corporation. It parts with nothing to
the stockholder. The latter receives, not an actual dividend, but certificate of stock which simply
evidences his interest in the entire capital, including such as by investment of accumulated
profits has been added to the original capital. They are not income to him, but represent additions
to the source of his income, namely, his invested capital. (DeKoven vs. Alsop, 205, Ill., 309; 63
L.R.A. 587). Such a person is in the same position, so far as his income is concerned, as the
owner of young domestic animal, one year old at the beginning of the year, which is worth P50
and, which, at the end of the year, and by reason of its growth, is worth P100. The value of his
property has increased, but has had an income during the year? It is true that he had taxable
property at the beginning of the year of the value of P50, and the same taxable property at
another period, of the value of P100, but he has had no income in the common acceptation of that
word. The increase in the value of the property should be taken account of on the tax duplicate
for the purposes of ordinary taxation, but not as income for he has had none.

The question whether stock dividends are income, or capital, or assets has frequently come
before the courts in another form — in cases of inheritance. A is a stockholder in a large
corporation. He dies leaving a will by the terms of which he give to B during his lifetime the
"income" from said stock, with a further provision that C shall, at B's death, become the owner of
his share in the corporation. During B's life the corporation issues a stock dividend. Does the
stock dividend belong to B as an income, or does it finally belong to C as a part of his share in
the capital or assets of the corporation, which had been left to him as a remainder by A? While
there has been some difference of opinion on that question, we believe that a great weight of
authorities hold that the stock dividend is capital or assets belonging to C and not an income
belonging to B. In the case of D'Ooge vs. Leeds (176 Mass., 558, 560) it was held that stock
dividends in such cases were regarded as capital and not as income (Gibbons vs. Mahon, 136
U.S., 549.)

In the case of Gibbson vs. Mahon, supra, Mr. Justice Gray said: "The distinction between the
title of a corporation, and the interest of its members or stockholders in the property of the
corporation, is familiar and well settled. The ownership of that property is in the corporation, and
not in the holders of shares of its stock. The interest of each stockholder consists in the right to a
proportionate part of the profits whenever dividends are declared by the corporation, during its
existence, under its charter, and to a like proportion of the property remaining, upon the
termination or dissolution of the corporation, after payment of its debts." (Minot vs. Paine, 99
Mass., 101; Greeff vs. Equitable Life Assurance Society, 160 N. Y., 19.) In the case of Dekoven
vs. Alsop (205 Ill ,309, 63 L. R. A. 587) Mr. Justice Wilkin said: "A dividend is defined as a
corporate profit set aside, declared, and ordered by the directors 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.

There is a clear distinction between an extraordinary cash dividend, no matter when earned, and
stock dividends declared. The one is a disbursement to the stockholders of accumulated earning,
and the corporation at once parts irrevocably with all interest thereon. The other involves no
disbursement by the corporation. It parts with nothing to the stockholders. The latter receives,
not an actual dividend, but certificates of stock which evidence in a new proportion his interest in
the entire capital. When a cash becomes the absolute property of the stockholders and cannot be
reached by the creditors of the corporation in the absence of fraud. A stock dividend however,
still being the property of the corporation and not the stockholder, it 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 stockholder certainly could not be
charged with having received an income by virtue of the issuance of the stock dividend. Until the
dividend is declared and paid, the corporate profits still belong to the corporation, not to the
stockholders, and are liable for corporate indebtedness. The rule is well established that cash
dividend, whether large or small, are regarded as "income" and all stock dividends, as capital or
assets (Cook on Corporation, Chapter 32, secs. 534, 536; Davis vs. Jackson, 152 Mass., 58; Mills
vs. Britton, 64 Conn., 4; 5 Am., and Eng. Encycl. of Law, 2d ed., p. 738.)

If the ownership of the property represented by a stock dividend is still in the corporation and to
in the holder of such stock, then it is difficult to understand how it can be regarded as income to
the stockholder and not as a part of the capital or assets of the corporation. (Gibbsons vs. Mahon,
supra.) the stockholder has received nothing but a representation of an interest in the property of
the corporation and, as a matter of fact, he may never receive anything, depending upon the final
outcome of the business of the corporation. The entire assets of the corporation may be
consumed by mismanagement, or eaten up by debts and obligations, in which case the holder of
the stock dividend will never have received an income from his investment in the corporation. A
corporation may be solvent and prosperous today and issue stock dividends in representation of
its increased assets, and tomorrow be absolutely insolvent by reason of changes in business
conditions, and in such a case the stockholder would have received nothing from his investment.
In such a case, if the holder of the stock dividend is required to pay an income tax on the same,
the result would be that he has paid a tax upon an income which he never received. Such a
conclusion is absolutely contradictory to the idea of an income. An income subject to taxation
under the law must be an actual income and not a promised or prospective income.

The appelle argues that there is nothing in section 25 of Act No 2833 which contravenes the
provisions of the Jones Law. That may be admitted. He further argues that the Act of Congress
(U.S. Revenue Act of 1918) expressly authorized the Philippine Legislatures to provide for an
income tax. That fact may also be admitted. But a careful reading of that Act will show that,
while it permitted a tax upon income, the same provided that income shall include gains, profits,
and income derived from salaries, wages, or compensation for personal services, as well as from
interest, rent, dividends, securities, etc. The appellee emphasizes the "income from dividends."
Of course, income received as dividends is taxable as an income but an income from
"dividends" is a very different thing from receipt of a "stock dividend." One is an actual
receipt of profits; the other is a receipt of a representation of the increased value of the
assets of corporation.

In all of the foregoing argument we have not overlooked the decisions of a few of the courts in
different parts of the world, which have reached a different conclusion from the one which we
have arrived at in the present case. Inasmuch, however, as appeals may be taken from this court
to the Supreme Court of the United States, we feel bound to follow the same doctrine announced
by that court.

Having reached the conclusion, supported by the great weight of the authority, that "stock
dividends" are not "income," the same cannot be taxes under that provision of Act No. 2833
which provides for a tax upon income. Under the guise of an income tax, property which is not
an income cannot be taxed. When the assets of a corporation have increased so as to justify the
issuance of a stock dividend, the increase of the assets should be taken account of the
Government in the ordinary tax duplicates for the purposes of assessment and collection of an
additional tax. For all of the foregoing reasons, we are of the opinion, and so decide, that the
judgment of the lower court should be revoked, and without any finding as to costs, it is so
ordered.
Araullo, C.J. Avanceña, Villamor and Romualdez, JJ., concur.

Separate Opinions

STREET, J., concurring:

I agree that the trial court erred in sustaining the demurrer, and the judgment must be reversed.
Instead of demurring the defendant should have answered and alleged, if such be the case, that
the stock dividend which was the subject of taxation represents the amount of earnings or profits
distributed by means of the issuance of said stock dividend; and the case should have been tried
on that question of fact.

In this connection it will be noted that section 25 (a) of Act No. 2833, of the Philippine
Legislature, under which this tax was imposed, does not levy a tax generally on stock dividends
to the extend of the part of the stock nor even to the extend of its value, but declares that stock
dividends shall be considered as income to the amount of the earnings or profits distributed.
Under provision, before the tax can be lawfully assessed and collected, it must appear that he
stock dividend represents earning or profits distributed; and the burden of proof is on the
Collector of Internal Revenue to show this.

The case of Eisner vs. Macomber (252 U.S., 189; 64 L. ed., 521), has been cited as authority for
the proposition that it is incompetent for the Legislature to tax as income any property which by
nature is really capital — as a stock dividend is there said to be. In that case the Supreme Court
of the United States held that a Congressional Act taxing stock dividends as income was
repugnant to that provision of the Constitution of the United States which required that direct
taxes upon property shall be apportioned for collection among the several states according to
population and that the Sixteenth Amendment, in authorizing the imposition by Congress of
taxes upon income, had not vested Congress with the power to levy direct taxes, on property
under the guise of income taxes. But the resolution embodied in that decision was evidently
reached because of the necessity of harmonizing two different provisions of the Constitution of
the United States, as amended. In this jurisdiction our Legislature has full authority to levy both
taxes on property and income taxes; and there is no organic provision here in force similar to that
which, under the Constitution of the United States, requires direct taxes on property to be levied
in a particular way.

It results, under the statute here in force, there being no constitutional restriction upon the action
of the law making body, that the case before us presents merely a question of statutory
construction. That the problem should be viewed in this light, in a case where there is no
restriction upon the legislative body, is pointed our in Eisner vs. Macomber, supra, where in the
course of his opinion Mr. Justice Pitney refers to the cases of the Swan Brewery Co. vs. Rex
([1914] A. C. 231), and Tax Commissioner vs. Putnam (227 Mass., 522), as being distinguished
from Eisner vs. Macomber by the very circumstance that in those cases the law making body, or
bodies were under no restriction as to the method of levying taxes. Such is the situation here.

OSTRAND, J., dissenting:

In its final analysis the opinion of the court rests principally, if not entirely on the decision of the
United States Supreme Court in the case of Eisner vs. Macomber (252 U.S., 189), a decision
which, for at least two reasons, is entirely inapplicable to the present case.

In the first place, there is a radical difference between the definition of a taxable stock dividend
given in the United States Income Tax Law of September 8, 1916, construed in the case of
Eisner vs. Macomber, and that given in Act No. 2833 of the Philippine Legislature, the Act with
which we are concerned in the present case. The former provides that "stock dividend shall be
considered income, to the amount of its cash value;" the Philippine Act provides that "Stock
dividend shall be considered income, to the amount of the earnings or profits distributed." The
United State statute made stock dividends based upon an advance in the value of the property or
investment taxable as income whether resulting from earning or not; our statute make stock
dividends taxable only to the amount of the earning and profits distributed, and stock dividends
based on the increment income and are not taxable. Though the difference would seem
sufficiently obvious, we will endeavor to make it still clearer by borrowing one of the
illustrations with which the opinion of the court is provided. The court says:

A, an individual farmer, buys a farm with one hundred head of cattle for the sum of
P10,000. At the end of the first year, by reason of business conditions and the increase of
the value of both real estate and personal property, it is discovered that the value of the
farm and the cattle is P20,000. A, during the year has received nothing from the farm or
the cattle. His books at the beginning of the year show that he had property of the value
of P10,000. His books at the close of the year show that he has property of the value of
P20,000. A is not a corporation. The assets of his business are not shown therefore by
certificate of stock. His books, however, show that the value of his property has increased
during the year by P10,000. Can the P10,000, under any theory of business or law, be
regarded as an "income" upon which the farmer can be required to pay an income tax? Is
there any difference in law in the conditions of A in this illustration and the conditions of
A and B in the immediately preceding illustration? Can the increase of the value of the
property in either case be regarded as an 'income' and be subjected to the payment of the
income tax under the law?

I answer no. And while the increment if in the form of a stock dividend would have been
regarded as income under the United States statute and taxes as such, it is not regarded as income
and cannot be so taxes under our statute because it is not based on earnings or profits. That is
precisely the difference between the two statutes and that is the reason the illustration is not in
point in this case, though it would have been entirely appropriate in the Eisner vs. Macomber
case. It is also one of the reasons why that case is inapplicable here and why most of the
arguments in the majority opinion are beside the mark.

But let us suppose that A had sold the products of the farm during the year for P10,000 over and
above his expense, and had invested the money in buildings and improvements on the farm, thus
increasing its value to P20,000. Why would not the P10,000 earned during the year and so
invested in improvements still be income for the year? And why would not a tax on these
earnings be an income tax under the definition given in Black's Law Dictionary, and quoted with
approval in the decision of the court, that "An income tax is a tax on the yearly profits arising
from the property, professions, trades, and offices?" There can be but one answer. There is no
reason whatever why the gains derived from the sale of the products of the farm should not be
regarded as income whether reinvested in improvements upon the farm or not and there is no
reason way a tax levied thereon cannot be considered an income tax.

Moreover, to constitute income, profits, or earnings need not necessarily be converted into cash.
Black's Law Dictionary says — and I am again quoting from the decision of the court — "An
income is the return in money from one's business, labor, or capital invested; gains profits, or
private revenue." As will be seen in the secondary sense of the word, income need not consist in
money; upon this point there is no divergence of view among the lexicographers. If a farmer
stores the gain produced upon his farm without selling, it may none the less be regarded as
income.

In the Eisner vs. Macomber case, the United States supreme Court felt bound to give the word
"income" a strict interpretation. Under article 1, paragraph 2, clause 3, and paragraph 9, clause 4
of the original Constitution of the United States, Congress could not impose direct taxes without
apportioning them among the States according to population. As it was thought desirable to
impose Federal taxes upon incomes and as a levy of such taxes by appointment among the States
in proportion to population would lead to an unequal distribution of the tax with reference to the
amount of taxable incomes, the Sixteenth Amendment was adopted and which provided that
"The Congress shall have power to lay and collect taxes on incomes, from whatever source
derived, without apportionment among the several states, and without regard to any census or
enumeration."

The United States Supreme Court therefore says in the Eisner vs. Macomber case:

A proper regard for its generis, as well as its very clear language, requires also that this
Amendment shall not be extended by loose construction, so as to repeal or modify, except
as applied to income, those provisions of the Constitution that require an apportionment
according to population for direct taxes upon property, real and personal. This limitation
still has an appropriate and important functions, and is not to be overridden by Congress
or disregarded by the courts.

In order, therefore, that the clauses cited from Article I of the constitution may have
proper force and effect, save only as modified by the Amendment, and that the latter also
may have proper effect, it becomes essential to distinguish between what is and what is
not "income," as the term is there used; and to apply the distinction as cases arise,
according to truth and substance, without regard to form. Congress cannot by any
definition it may adopt conclude the matter, since it cannot by legislation alter the
Constitution, from which alone it derives its power to legislate, and within whose
limitations alone that power can be lawfully exercised.

That, in the absence of the peculiar restrictions placed by the Constitution upon taxing power of
Congress, the decision of the court might have been different is clearly indicated by the
following language:
 Two recent decisions, proceeding from courts of high jurisdiction, are cited in support of
the position of the Government.

Sean Brewery Co. vs. Rex ([1914] A. C., 231), arose under the Dividend Duties Act of
Western Australia, which provided that "dividend" should include "every dividend,
profit, advantage, or gain intended to be paid or credited to or distributed among any
members or director of any company," except etc. There was a stock dividend, the new
shares being alloted among the shareholders pro rata; and the question was whether this
was a distribution of a dividend within the meaning of the act. The Judicial Committee of
the Privy Council sustained the dividend duty upon the ground that, although "in ordinary
language the new shares would not be distribution of a dividend," yet within the meaning
of the act, such new share were an "advantage" to the recipients. There being no
constitutional restriction upon the action of the lawmaking body, the case presented
merely a question of statutory construction, and manifestly the decision is not a
precedent for the guidance of this court when acting under a duty to test an act of
Congress by the limitations of a written Constitution having superior force.

In Tax Commissioner vs. Putnam (1917], 227 Mass., 522), it was held that the 44th
Amendment to the constitution of Massachusetts, which conferred upon the legislature
full power to tax incomes, "must be interpreted as including every item which by any
reasonable understanding can fairly be regarded as income" (pp. 526, 531); and that
under it a stock dividend was taxable as income. . . . Evidently, in order to give a
sufficiently broad sweep to the new taxing provision, it was deemed necessary to take the
symbol for the substance, accumulation for distribution, capital accretion for its opposite;
while a case where money is paid into the hand of the stockholder with an option to buy
new shares with it, followed by acceptance of the option, was regarded as identical in
substance with a case where the stockholder receives no money and has no option. The
Massachusetts court was not under an obligation, like the one which binds us, of
applying a constitutional provisions that stand in the way of extending it by construction.

The Philippine Legislature has full power to levy taxes both on capital or property and on
income, subject only to the provisions of the Organic Act that "the rule of taxation shall be
uniform." In providing for the income tax the Legislature is therefore entirely free to employ the
term "income" in its widest sense and is in nowise limited or hampered by organic limitations
such as those imposed upon Congress by the Constitution of the United States. This is the second
reason why the rule laid down in Eisner vs. Macomber has no application here.

The majority opinion in discussing this question, says:

There is no question that the Philippine Legislature may provide for the payment of an
income tax, but it cannot, under the guise of an income tax, collect a tax on property
which is not an "income." The Philippine Legislature cannot impose a tax upon "income"
only . The Philippine Legislature has no power to provide a tax upon "automobiles,"
only, and under that law collect a tax upon a carreton or bull cart. Constitutional
limitations upon the power of the Legislature are not stronger than statutory limitations,
that is to say, a statute expressly adopted for one purpose cannot, without amendment, be
 applied to another purpose which is entirely distinct and different. A statute providing for
an income tax cannot be construed to cover property which is not, in fact, income. The
Legislature cannot, by a statutory declaration, change the real of a nature of a tax which it
imposes. A law which imposes an importation tax on rice only cannot be construed to
impose an importation tax on corn.

These assertions while in the main true are, perhaps, a little to broadly stated; much will depend
on the circumstances of each particular case. If the Legislature cannot do the things enumerate it
must be by reason of the limitation imposed by the Organic Act, "That no bill which may be
enacted into law shall embrace more than on subject, and that subject shall be expressed in the
title of the bill." Similar provisions are contained in most State Constitutions, their object being
to prevent "log-rolling" and the passing of undesirable measures without their being brought
properly to the attention of the legislators. Where the prevention of this mischief is not involved,
the courts have uniformly given such provisions a very liberal construction and there are few, if
any, cases where a statute has been declared unconstitutional for dealing with several cognate
subjects in the same Act and under the same title. (Lewis Sutherland on Statutory Construction,
2d ed., pars 109 et seq.: Government of the Philippine Island vs. Municipality of Binalonan and
Roman Catholic Bishop of Nueva Segovia, 32, Phil., 634). Certainly no income tax statute would
be declared unconstitutional on that ground for treating dividends as income and providing for
their taxation as such.

Reverting to the question of the nature of income, it is argued that a stock certificate has no
intrinsic value and that, therefore, even it is based on earnings instead of increment in capital it
cannot be regarded as income. But neither has a bank check or a time deposit certificate any
intrinsic value, yet it may be negotiated, or sold, or assigned and it represents a cash value. So
also does a stock certificate. A lawyer might take his fee in stock certificates instead of in
money. Would it be seriously contended that he had received no fee and that his efforts had
brought no income?1awph!l.net

Some of the members of the court agree that stock dividends based on earnings or profits may be
taxed as income, but take the view that in an action against the Collector of the Internal Revenue
for recovering back taxes paid on non-taxable stock dividends, the plaintiff need not allege that
the stock dividends are not base on earnings or profits distributed, but that question of the
taxability or non-taxability of the stock dividends is a matter of defense and should be set up by
the defendant by way of answer.

I think this view is erroneous. If some stock dividends are taxable and others are not, an
allegation that stock dividends in general have been taxed is not sufficient and does not state a
cause of action. the presumption is that the tax has been legally collected and the burden is upon
the plaintiff both to allege and prove facts showing that the collection is unlawfully or irregular.
(Code of Civil Procedure, sec. 334, subsec. 14 and 31.)

Malcolm, J., concurs.

————
JOHNS, J., dissenting:

We have studied and analyzed with care the able and exhaustive majority opinion written by Mr.
Justice Johnson.

In the final analysis, the question involved is whether the words "which stock dividend shall be
considered income, to the amount of its cash value" are to be construed as meaning the same
things as the words "stock dividend shall be considered income, to the amount of the earnings or
profits distributed," as the majority opinion says. The first is an Act of Congress defining what is
a stock dividend, and that the word dividend shall be construed as income to the amount of its
cash value. It is upon that construction and that definition that the majority opinion is founded.
That is the definition of the words as used in an Act of Congress. The other is an Act defining the
meaning of the words as used in an Act of Congress. The other is an Act defining the meaning of
the words by the Legislature of the Philippine Islands, and it says: "Stock dividend shall be
considered income, to the amount of the earnings or profits distributed."

It is true, as the majority opinion says, that in enacting the Income Tax Law of the Philippine
Islands, the Legislature had before it the Act of Congress. But it is also true that by the Act of the
Philippine Legislature "Stock dividend shall be considered income, to the amount of the earnings
or profits distributed." One law is founded upon the actual cash value of the stock and the other
is founded upon distributed earnings and profits.

Much is said in the textbooks and by the numerous decisions cited in the majority opinion as to
the meaning of the word income, and the decision in the United States are founded upon the
meaning of that word, as it is used in the Act of Congress, and to the effect that the word is to be
construed in its usual and ordinary meaning. But assuming that to be true, it must also be
conceded that the Legislature of the Philippine Islands has a legal right to define the meaning of
the word "income" by a legislative act, and when its meaning is defined by legislative act, it is
the duty of the courts to follow that definition regardless of whether it is the usual and ordinary
meaning of the word, and therein lies the distinction between the two acts and the reason why the
authorities cited in the majority opinion are not in point. Act No. 2833 of the Philippine
Legislature specifically says that "Stock dividend shall be considered income, to the amount of
the earnings or profits distributed." The Act of Congress is founded upon the "cash value of the
stock," and the Act in question is founded upon "the amount of the earnings or profits
distributed."

Hence, then, we have the meaning of the words defined in the legislative act, and it is very
apparent that the purpose and intent of the legislative act was to avoid the meaning and
construction of such words which is now given to them in the majority opinion. The Legislature
had the power to define the meaning of the words, did define them, and it is the duty of the
courts to follow and adopt the meaning and definition of the words given to them in the
legislative act.

As pointed out in the opinion of Mr. Justice Street, the constitutional limitations upon the
legislative power for taxation purposes, which exist in the United States, does not exist in the
Philippine Islands. There is no organic law here similar to the provisions of the Constitution of
the United States which require direct taxes on property to be levied in a specific way, in other
words, the restrictions and limitations placed on the power to levy an income tax under the
Constitution of the United States do not exist in the Philippine Islands. Hence, it must follow that
the authorities cited in the majority opinion are not in point the instant case. They are founded
upon different language, different organic powers, different conditions, and the different
meaning of the same words as defined in the different legislative acts. The Philippine Legislature
had a legal right to define the meaning of the words "dividend" and "income," and it expressly
says "Stock dividend shall be considered income, to the amount of the earnings or profits
distributed." In the instant case, the earnings and profits of the corporation were distributed
among the existing stockholders of the company upon a pro rata basis, and they were made
exclusively out of "distributed earnings and profits." The declaring of the dividend was a matter
in the sole discretion of the stockholders, but when such a dividend is made from and out of
"earnings or profits distributed," it then becomes and is an income within the meaning of Act No.
2833, and should be subject to an income tax.

For such reason, I dissent.