Fisher vs.

Trinidad

43 Phil. 973 [1922]

FACTS: Frederick Fisher was a stockholder of  Philippine American Drug Company, a domestic
corporation. For the year 1919 he declared a stock dividend in the amount of P24,800 for which
he was subsequently taxed by the respondent Collector of Internal Revenue for the sum of
P889.91 as income tax. Fisher paid under protest and brought action for recovery. Trinidad
demurred which was sustained hence this appeal.

ISSUE: WON stock dividends are income taxable as such under Sec. 25 of Act No. 2833 [the
Income Tax Law]

HELD: Following Eisner vs. Macomber and other US cases, the Court held that stock dividends
are income taxable under the Income Tax Law. They justified the applicability of the ruling by
saying that there is but slight difference in the wording of the two laws1 which defined dividends
as part of taxable income. The receipt of stock dividends merely represents an increase in value
of the assets of a corporation.

The court defines stock dividends as increase in capital of corps, firms, partnerships, etc. for a
particular period. They represent the increase in the proportional share of each stockholder in
the company’s capital. It is not a distribution of the corporations profits to the stockholder. It only
increases the stockholder’s source of income (capital), but does not increase income itself.

On definition of income tax: Act No. 2833 taxed any distribution by a corporation out of its
earnings or prof its. From the various definitions of income tax cited, an income tax is a tax on
the yearly profits arising from property, salary, private revenue, capital invested, and all other
sources of income. What is taxed is the prof it, not the source. 1 Act of Congress (1916): 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: 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 ear  . . . out of its earnings or   profits accrued xxx  , w het her in cash or in stock of
the corporation, . . . . Stock dividend shall be considered income, to the amount of  the earnings
or profits distributed.

When income is realized (Test of Realization): Stock dividend in this case is not taxable for
income because the stockholder has received nothing out of the company's assets for his
separate use and benefit. Instead, his original investment along with whatever gains which
resulted from the use of his and other stockholder’s money remains property of  the company.
The fact that it is not yet his means the capital is still subject to business risks that can wipe out
his entire investment. All he has received is a stock certificate indicating the increase in his
capital in the company. Thus we can say that income has been realized when there has been a
separation of the interest of the stockholder from the general capital of the corporation. This
separation of interest happens when the company declares a cash dividend on the shares of
shareholders.