Fisher v. Collector of Internal Revenue
REITERATIONFacts
The Antecedents: Frederick C. Fisher was a stockholder in the Philippine American Drug Company. In 1919, the company declared a stock dividend, and Fisher's proportionate share amounted to P24,800. Fisher paid an income tax of P889.91 on this stock dividend under protest. Procedural History: Fisher instituted an action to recover the P889.91 paid as income tax. The defendant, the Collector of Internal Revenue, demurred to the petition, arguing it did not state sufficient facts to constitute a cause of action. The demurrer was sustained by the lower court. The Petition: Fisher appealed the lower court's decision, arguing that stock dividends are not income and thus not taxable as such under Act No. 2833.
Issue(s)
Whether stock dividends are considered "income" and taxable as such under section 25 of Act No. 2833. Whether the Philippine Legislature can tax property that is not income under the guise of an income tax.
Ruling
The Supreme Court reversed the lower court's decision, holding that stock dividends are not income and therefore not subject to income tax under Act No. 2833. The Court ordered the revocation of the lower court's judgment.
Ratio Decidendi
On the issue of whether stock dividends are "income" and taxable under Act No. 2833: The Court held that stock dividends are not income. Drawing from definitions of income and established jurisprudence, particularly from the United States Supreme Court, the Court explained that income represents a gain derived from capital or labor, or the profit arising from property, professions, trades, and offices. Stock dividends, on the other hand, represent an increase in the capital of the corporation and an increased proportional share of the stockholder in the corporation's assets, but they do not represent a realization of profit by the stockholder. The property and assets of the corporation remain its own, and the stockholder has not received anything out of the company's assets for his separate use and benefit. The increased assets belong to the corporation, not to the individual stockholders, until actual distribution. Therefore, taxing stock dividends as income would be taxing property that is not, in fact, income. On the issue of whether the Philippine Legislature can tax property that is not income under the guise of an income tax: The Court affirmed that while the Philippine Legislature may provide for an income tax, it cannot, under the guise of an income tax, collect a tax on property that is not income. The Court emphasized that a statute adopted for one purpose cannot be applied to another entirely distinct purpose. A law providing for an income tax cannot be construed to cover property which is not income. The Legislature cannot change the real nature of a tax by a statutory declaration; it cannot impose an income tax and then tax property that is not income. The Court reiterated that stock dividends are capital or assets, not income, and thus cannot be subjected to an income tax.
Main Doctrine
Stock dividends are considered capital and not income, and therefore are not subject to income tax under Act No. 2833, as the increase in corporate assets represented by stock dividends does not constitute a realization of profit by the stockholder until actual distribution.