Wise v. Meer

said amounts which defendant has refused and
Wise & Co., Inc. v. Meer GR NO: 48231 (1947) still refuses to refund.
FACTS: That during the year 1937, plaintiffs, CONTENTIONS:

except Mr. E.M.G. Strickland (who, as husband CIR-The amounts received by Wise & Co et al
of the plaintiff Mrs. E.M.G. Strickland, is only a from the HK Company were liquidating
nominal party herein), were stockholders of dividends (thus, subject to normal tax)
Manila Wine Merchants, Ltd., a foreign
corporation duly authorized to do business in the Wise & Co et al say- The amounts were ordinary
Philippines. dividends
That on May 27, 1937, the Board of Directors of ISSUES:

Manila Wine Merchants, Ltd., (hereinafter
referred to as the Hongkong Company), 1. WON the amounts received by Wise &
recommended to the stockholders of the Co et al from the HK Company on which
company that they adopt the resolutions the taxes were assessed were ordinary
necessary to enable the company to sell its dividends or liquidating
business and assets to Manila Wine Merchants, dividends (LIQUIDATING DIVIDENDS)
Inc., a Philippine corporation formed on May 27,
1937, (hereinafter referred to as the Manila 2. WON such liquidating dividends are
Company), for the sum of P400,000; taxable income (YES)
HK Company made a distribution of its earnings

for the year 1937 to its stockholders (Dividends RULING:
declared and paid on June 8, 1937). HK 1. The amounts received by the
Company paid Philippine income tax on the stockholders were liquidating
entire earnings from which the said distributions dividends.
were paid.
The parties agreed in the deed of sale that the
After the June 8 distribution, HK Company had : sale and transfer shall take effect as of June 1,
P74, 182 – surplus resulting from the active 1937. Thus, the distribution of assets to the
conduct of business stockholders made after that date must have
P270, 116 – total increased surplus as a result been considered by them as liquidating
of the sale of the business and assets dividends. The said distributions were NOT in
the ordinary course of business and with intent
The stockholders by proper resolution directed to maintain the corporation as a going concern
that the company be voluntarily liquidated and (in which case they would be ordinary dividends)
its capital distributed among the stockholders; BUT they were made after the liquidated of the
that the stockholders at such meeting appointed business had been decided upon, which makes
a liquidator duly paid off the remaining debts of them payments for the surrender and
the Hongkong Company and distributed its relinquishment of the stockholder’s interest in
capital among the stockholders including the corporation, or liquidating dividends.
plaintiffs; that the liquidator duly filed his Ordinary connotation of liquidating dividend
accounting on January 12, 1938, and in involves the distribution of assets by a
accordance with the provisions of Hongkong corporation to its stockholders upon dissolution.
Law, the Hongkong Company was duly
dissolved at the expiration of three moths from •Wise & Co et al (stockholders) say: It was only
that date. on August 19, 1937, that the HK Company took
the first corporate steps towards liquidation.
That plaintiff duly filed Philippine income tax
returns. That defendant subsequently made the RULING: It was expressly stipulated in the
deficiency assessments. That said plaintiffs duly formal deed of sale (see underlined portion in
paid the said amounts demanded by defendant facts) that the sale or transfer shall take effect
under written protest, which was overruled in on June 1, 1937. After that date, and until
due course; that the plaintiffs have since July 1, completion of the transfer, the HK Company
1939 requested from defendant a refund of the
continued to run the business in trust for the new
owner, the Manila Company. •That money in the hands of the corporation
•The determining element is whether the formed a part of its income and was properly
distribution was in the ordinary course of taxable to it under the Income Tax Law.
business and with intent to maintain the
corporation as a going concern, or after deciding •When the corporation was dissolved and in
to quit with intent to liquidate the business. process of complete liquidation and its
•The fact that the distributions were called shareholders surrendered their stock to it and it
‘dividends’ and were made, in part, from paid the sums in question to them in exchange,
earnings and profits, and that some of them a transaction took place.
were made before liquidation or dissolution
proceedings were commenced, is NOT •The shareholder who received the
controlling. consideration for the stock earned that much
money as income of his own, which again was
Liquidating dividend v Ordinary dividend properly taxable to him under the Income Tax
Law.
• The distinction between a distribution
in liquidation and an ordinary dividend is factual; The profits earned by the stockholders are
the result in each case depending on the income from Philippine sources, and thus
particular circumstances of the case and the subject to Philippine tax
intent of the parties.
• If the distribution is in the nature of a Stockholders say: the profit realized by them
recurring return on stock it is an ordinary does not constitute income from Philippine
dividend. sources and is not subject to Philippine taxes
• However, if the corporation is really since all steps in the carrying out of this so-
winding up its business or recapitalizing and called sale took place outside the Philippines
narrowing its activities, the distribution may
properly be treated as in complete or partial SC:
liquidation and as payment by the corporation to •The HK Company was at the time of the sale of
the stockholder for his stock. The corporation is, its business in the Philippines, and the Manila
in the latter instances, wiping out all parts of the Company was a domestic corporation domiciled
stockholders' interest in the company . . .. “ and doing business also in the Philippines.
•The HK Company was incorporated for the
2. Such liquidating dividends are purpose of carrying on business in the
taxable income Philippines which is the business of wine, beer,
and spirit merchants and the other objects set
•Income tax law states that: “Where a out in its memorandum of association.
corporation, partnership, association, joint-
account, or insurance company distributes all of •Hence, its earnings, profits, and assets,
its assets in complete liquidation or dissolution, including those from whose proceeds the
the gain realized or loss sustained by the distributions in question were made, the major
stockholder, whether individual or corporation, is part of which consisted in the purchase price of
a taxable income or a deductible loss as the thebusiness, had been earned and acquired in
case may be.” the Philippines.
•Amounts distributed in the liquidation of a •As such, it is clear that said distributions were
corporation shall be treated as payments in income "from Philippine sources."
exchange for the stock or share, and any gain or
profit realized thereby shall be taxed to the Judgment affirmed.
distributee as other gains or profits.
DISPOSITIVE PORTION: For the foregoing
•The stockholders received the distributions in consideration, the judgment appealed from will
question in exchange for the surrender and be affirmed with the costs of both instances
relinquishment by them of their stock in the HK against the appellants. So ordered.
Company which was dissolved and in process of
complete liquidation.

Wise v. Meer

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said amounts which defendant has refused and

FACTS: That during the year 1937, plaintiffs, CONTENTIONS:

That on May 27, 1937, the Board of Directors of ISSUES:

HK Company made a distribution of its earnings

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