Fisher v Trinidad (1922) | Johnson, J.
When income is realized (Test of Realization): Stock
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]. (NO).
HELD/RATIO:
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
corporation’s 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
profits. 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 profit, not the source.
1 with which we are concerned in the present case. The
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 earnings or
profits accrued xxx, whether in cash or in stock of the corporation,
. . . . Stock dividend shall be considered income, to the amount of
the earnings or profits distributed.
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.
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.
It must be noted that section 25 (a) of Act No. 2833, under
which this tax was imposed, does not levy a tax generally
on stock dividends to the extent of the part of the stock
nor even to the extent 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.
OSTRAND, J., dissenting: Eisner vs. Macomber, for which
the majority largely based its decision is entirely
inapplicable to this case.
(1) There is a radical difference between the definition of a
taxable stock dividend given in the US Income Tax Law,
construed in the case of Eisner vs. Macomber, and that
given in Act No. 2833 of the Philippine Legislature, the Act
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 US 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. Moreover, to constitute income, profits,
or earnings need not necessarily be converted into cash.

(2) Unlike US Congress who is hampered by an organic law,

the Philippine Legislature has full power to levy taxes both
on capital or property and on income.

JOHNS, J., dissenting: The legislature of the Philippine

Islands has a legal right to define the meaning of the words
"dividend" and "income," by a legislative act and it
expressly says "Stock dividend shall be considered income,
to the amount of the earnings or profits distributed"; and
when its meaning is defined by legislative act, it is the duty
of the courts to follow that definition.

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