Title: CIR vs. John L. Manning, GR No.

L-28398 August 06, 1975

Ponente:

Doctrine to Remember
A stock dividend, being one payable in capital stock, cannot be declared out of outstanding capital
stock, but only from retained earnings. A stock dividend always involves a transfer of surplus to capital
stock.
Stock dividend constitutes income if it gives the shareholder an interest different from that which his
former stockholdings represented. On the other hand, it does constitute income if the new shares confer
no different rights or interests than did the old shares.

Facts
 In 1952 MANTRASCO had an authorized capital stock of P2,500,000.00 divided into 25,000 common
shares; 24,700 of which was owned by Julius S. Reese, and the rest, at 100 shares each, by the
three respondents.
 Reese entered into a trust agreement whereby it is stated that upon Reese’s death, the company
would purchase back all of its shares. On October 19, 1954 Reese died.
 MANTRASCO repurchased the 24,700 shares. Thereafter, a resolution was passed authorizing that
the 24,700 shares be declared as stock dividends to be distributed to the stockholders.
 The BIR ordered an examination of MANTRASCO’s books and discovered that the 24,700 shares
declared as dividends were not disclosed by respondents as part of their taxable income for the year
1958.
 The BIR concluded that the distribution of the “asset or property of the corporation as may be gleaned
from the payment of cash for the redemption of said stock and distributing the same as stock
dividend. Hence, the CIR issued notices of assessment for deficiency income taxes to respondents.
 Respondents appealed before the CTA. CTA rendered judgment absolving the respondents from any
liability for receiving the questioned stock dividends on the ground that their respective 1/3 shares
remained the same before and after the declaration of stock dividends.
Issues Articles/Law Involved
Whether the respondents are liable for deficiency Section 73 NIRC – A stock dividend representing
income taxes on the stock dividends? the transfer of surplus (retained earnings) to capital
account (share capital) shall not be subject to
income tax. HOWEVER, if a corporation cancels or
redeems stock issued as a dividend such
redemption or cancellation amounts to a taxable
dividend.

Rulings
Yes.

Dividends mean any distribution made by a corporation to its shareholders out of its earnings or profits.
Stock dividends which represent transfer of surplus to capital account are not subject to income tax. But if
a corporation redeems or cancels stock issued so as to make a distribution, this is essentially equivalent
to the distribution of a taxable dividend, hence, taxable income.

The distinctions between a stock dividend which does not and one which does constitute taxable income
to the shareholders is that a stock dividend constitutes income if its gives the shareholder an interest
different from that which his former stockholdings represented. On the other hand, it does constitute
income if the new shares confer no different rights or interests than did the old shares.

Therefore, whenever the companies involved parted with a portion of their earnings to buy the
corporate holdings of Reese, they were making a distribution of such earnings to respondents.
These amounts are thus subject to income tax as a flow of cash benefits to respondents. Hence,
respondents are liable for deficiency income taxes.