COMMISSIONER OF INTERNAL REVENUE vs. THE COURT OF APPEALS, COURT OF TAX 0078 APPEALS and A. SORIANO CORP. G.R. No.
108576. January 20, 1999.
FACTS:
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Don Andres Soriano, a citizen and resident of the USA, formed the corporation "A Soriano Y Cia" and later became “ANSCOR”
The initial capitalization of the company was P1,000,000.00, divided into 10,000 common shares with a par value of P100 per s hare.
In 1937, Don Andres subscribed to 4,963 shares out of the 5,000 shares that were originally issued. This means that he acquired a
significant portion of the shares available at that time.
In 1945, ANSCOR made an increase in its authorized capital stock to P2,500,000.00 resulting in a total of 25,000 common share s with the
same par value. However, out of the additional shares authorized, only 10,000 were actually issued at that time. Don Andres subscribed to
all 10,000 of the issued shares.
Other stockholders initially had pre-emptive rights. However, other gave up their pre-emptive rights in favor of Don Andres. So, because of
this his subscription increased to 14,963 common shares (10k shares initial + 4963 increased)
Don Andres passed away. The day after Don Andres' death, ANSCOR increased its capital stock from an undisclosed amount to P20 million,
and kalaunan naging 30 million.
In the same year, ANSCOR distributed stock dividends worth 46,290 and 46,287 shares to Don Andres estate and Doña Carmen. Hence,
increasing their accumulated shareholdings to 138,867 and 138,864 common shares each.
Doña Carmen requested a ruling from the United States Internal Revenue Service, inquiring if an exchange of common with preferred
shares may be considered as a tax avoidance scheme.
ANSCOR made a change by reclassifying its existing 300,000 common shares into 150,000 common shares and 160,000 preferred shares.
Consequently, Doña Carmen exchanged her entire 138,864 common shares for 138,860 of the newly reclassified preferred shares. This
means she participated in the recapitalization by converting her common shares into a combination of common and preferred shares.
The estate of Don Andres also participated in the exchange by swapping 11,140 of its common shares for the remaining 11,140 p referred
shares. As a result, the estate's common shares were reduced to 127,727.
In 1973, after examining ANSCOR's books of account and records, Revenue Examiners issued a report proposing that ANSCOR be assessed
for deficiency withholding tax-at-source, pursuant to Secs 53 and 54 of the 1939 Revenue Code for the year 1968 and the second quarter of
1969 based on the transactions of exchange and redemption of stocks.
ANSCOR, dissatisfied with the tax assessments, filed a petition for review with the Court of Tax Appeals (CTA). The CTA, after examining the
evidence, reversed the ruling of the Bureau of Internal Revenue (BIR). The CTA found sufficient evidence to overcome the initial correctness of
the tax assessments
The Bureau of Internal Revenue appealed the CTA's decision to the Court of Appeals (CA). However, the CA affirmed the ruling of the CTA.
This means that the CA agreed with the CTA's decision to reverse the BIR's ruling, indicating that there was enough evidence to support
ANSCOR's position.
ISSUE:
whether the redemption of stocks and the exchange of common shares by ANSCOR should be treated as if the company is distributing taxable
dividends to its stockholders. This would mean that the stockholders would be required to pay taxes on the proceeds they receive from these actions
under the provisions Section 83 (B) of the 1939 Revenue Act.
HELD:
The Supreme Court modified the decision of the Court of Appeals in that the modification states that ANSCOR's redemption of 82,752.5 stock dividends
is considered essentially equivalent to the distribution of taxable dividends. As a result, ANSCOR is liable for the withholding tax-at-source on these
dividends. The Board Resolutions that authorized the redemptions had stated that the purpose was to reduce foreign exchange remittances in case cash
dividends were declared. However, the court did not give weight to this stated purpose in the case at hand.
The records presented in the case indicate that despite ANSCOR having significant corporate profits, no cash dividends were ever declared by the
company from 1945 until the Bureau of Internal Revenue (BIR) began making assessments in the early 1970s. This information played a role in the
court's decision, as it suggested a lack of cash dividend distributions despite the company's profitability. The court found that the alleged purpose of
reducing foreign exchange remittances was not credible.
Regarding the exchange of shares, the Court ruled that the exchange of common shares with preferred shares is not taxable. This is because the
exchange does not result in realized income for the subscriber but rather modifies the subscriber's rights and privileges. The court determined that this
modification of rights and privileges does not constitute a flow of wealth for tax purposes.
In summary, the Supreme Court modified the decision, considering the redemption of stock dividends as taxable dividends due to the lack of
cash dividends despite corporate profits. However, the exchange of shares from common to preferred shares was deemed not taxable as it
does not result in realized income.
Based on the findings of the Tax Court and the CA, the reclassification and exchange of shares in this case did not result in taxable income. The
transaction was considered a corporate paper transaction without any flow of wealth, and therefore no income tax was imposed.
The exchange of shares in this case does not generate taxable income. It is considered a modification of the subscriber's rights and privileges, rather
than a flow of wealth. The exchange of shares in this specific context is not treated as a taxable event, and the issue of taxation would be relevant only
when the individual completely disposes of their interest in the corporation.
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Case: Philip Turner v. Lorenzo Shipping Corporation, G.R. 157479, 2010.
DOCTRINE/S:
The right of appraisal under Section 81 of the Corporation Code grants a stockholder who dissents from certain corporate actions the right to
demand payment of the fair value of his or her shares. However, no payment shall be made to any dissenting stockholder unless the corporation has
unrestricted retained earnings in its books to cover the payment.
FACTS:
• The petitioners held shares of stock of the respondent, a domestic corporation engaged in cargo shipping activities. In June 1999, the respondent
decided to amend its articles of incorporation to remove the stockholders' pre-emptive rights to newly issued shares of stock. Feeling that the
corporate move would be prejudicial to their interest as stockholders, the petitioners voted against the amendment and demand ed payment of their
shares
• Because of the disagreement on the valuation of the shares, the parties constituted an appraisal committee which reported its valuation of P2.54/
share.
• Petitioners then demanded for payment in accordance with the valuation of the committed but the respondent refused the petiti oners' demand,
explaining that pursuant to the Corporation Code, the dissenting stockholders exercising their appraisal rights could be paid only w hen the
corporation had unrestricted retained earnings to cover the fair value of the shares, but that it had no retained earnings at the time of the petitioners'
demand, as borne out by its Financial Statements for Fiscal Year 1999
ISSUE/S:
WON dissenting stockholders can recover the value of their shareholdings?
HELD:
NO. It is true that a stockholder who dissents from certain corporate actions has the right to demand payment of the fair value of his or her shares.
This right, known as the right of appraisal, is expressly recognized in Section 81 of the Corporation Code. The right of appr aisal may be exercised
when there is a fundamental change in the charter or articles of incorporation substantially prejudicing the rights of the stockholders. It does not vest
unless objectionable corporate action is taken. It serves the purpose of enabling the dissenting stockholder to have his i nterests purchased and to
retire from the corporation. However, no payment shall be made to any dissenting stockholder unless the corporation has unres tricted retained
earnings in its books to cover the payment. In case the corporation has no available unrestricted retained earnings in its books, Section 83 of the
Corporation Code provides that if the dissenting stockholder is not paid the value of his shares within 30 days after the awa rd, his voting and
dividend rights shall immediately be restored.
The trust fund doctrine backstops the requirement of unrestricted retained earnings to fund the payment of the shares of stocks o f the withdrawing
stockholders. Under the doctrine, the capital stock, property, and other assets of a corporation are regarded as equity in trust for the payment of
corporate creditors, who are preferred in the distribution of corporate assets. The creditors of a corporation have the right to assume that the board
of directors will not use the assets of the corporation to purchase its own stock for as long as the corporation has outstanding debts and liabilities.
There can be no distribution of assets among the stockholders without first paying corporate debts. Thus, any disposition of corporate funds and
assets to the prejudice of creditors is null and void.
WHEREFORE, the petition for review on certiorari is DENIED for lack of merit. We AFFIRM the decision promulgated on March 4, 2003 in C.A.-G.R.
SP No. 74156
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Case: Florente vs. Florente, GR No. 174909, January 20, 2016
Facts: After the death of spouses Marcelino Sr. and Salome Florento, their son respondent (Rogelio) started managing the affairs of
People’s Broadcasting Services, Inc. The board of directors of People’s Broadcasting approved the Sycip Gorres Velayo and Co.'s
report, detailed the movements of latter’s shares to the former. Petitioner (Marcelino Jr.) group filed a complaint for declaration of
nullity of issuances, transfers, and sale of shares in People’s broadcasting. Respondent group filed their answer with compulsory
counterclaim. The RTC ruled in favor the respondent, stating that Marcelino Jr. group did not have cause of action against Rogelio,
group, and that the former is estopped that the former is estopped from questioning the assailed movement of shares of People's
Broadcasting. It also ruled that indispensable parties were not joined in the complaint. The CA affirmed RTC’s decision.
Issue: Whether or not the transfer of shares assailed by the Marcelino’ group should be nullified.
Held: No. The court explained that the determination of cause of action of Marcelino’s group shall clarify the parties who must be
included in their action and the procedural and substantive requirements they must satisfy if their action is to prosper. The remedies
that the Marcelino, Jr. Group seeks are for People's Broadcasting itself to avail. Ordinarily, these reliefs may be unavailing because
objecting stockholders such as those in the Marcelino, Jr. Group do not hold the controlling interest in People's Broadcasting. Thus,
the complaint is hereby dismissed as complainants have no cause of action.