CIR vs CA and A.

Soriano Corp

Don Andres Soriano (American), founder of A. Soriano Corp. (ASC) had a total shareholdings
of 185,154 shares. Broken down, the shares comprise of 50,495 shares which were of original
issue when the corporation was founded and 134,659 shares as stock dividend declarations. So
in 1964 when Soriano died, half of the shares he held went to his wife as her conjugal share
(wifes legitime) and the other half (92,577 shares, which is further broken down to 25,247.5
original issue shares and 82,752.5 stock dividend shares) went to the estate. For sometime after
his death, his estate still continued to receive stock dividends from ASC until it grew to at least
108,000 shares.
In 1968, ASC through its Board issued a resolution for the redemption of shares from Sorianos
estate purportedly for the planned Filipinization of ASC. Eventually, 108,000 shares were
redeemed from the Soriano Estate. In 1973, a tax audit was conducted. Eventually, the
Commissioner of Internal Revenue (CIR) issued an assessment against ASC for deficiency
withholding tax-at-source. The CIR explained that when the redemption was made, the estate
profited (because ASC would have to pay the estate to redeem), and so ASC would have
withheld tax payments from the Soriano Estate yet it remitted no such withheld tax to the
government.
ASC averred that it is not duty bound to withhold tax from the estate because it redeemed the
said shares for purposes of Filipinization of ASC and also to reduce its remittance abroad.
ISSUE: Whether or not ASCs arguments are tenable.
HELD: No. The reason behind the redemption is not material. The proceeds from a redemption
is taxable and ASC is duty bound to withhold the tax at source. The Soriano Estate definitely
profited from the redemption and such profit is taxable, and again, ASC had the duty to
withhold the tax. There was a total of 108,000 shares redeemed from the estate. 25,247.5 of that
was original issue from the capital of ASC. The rest (82,752.5) of the shares are deemed to have
been from stock dividend shares. Sale of stock dividends is taxable. It is also to be noted that in
the absence of evidence to the contrary, the Tax Code presumes that every distribution of
corporate property, in whole or in part, is made out of corporate profits such as stock dividends.
It cannot be argued that all the 108,000 shares were distributed from the capital of ASC and that
the latter is merely redeeming them as such. The capital cannot be distributed in the form of
redemption of stock dividends without violating the trust fund doctrine wherein the capital
stock, property and other assets of the corporation are regarded as equity in trust for the
payment of the corporate creditors. Once capital, it is always capital. That doctrine was intended
for the protection of corporate creditors.