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301 SCRA 152 Business Organization Corporation Law Trust Fund Doctrine

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.